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If you would like to subscribe to The Tax Report, please send a check for $75 to The Center For Financial, Legal and Tax Planning, Inc. 4501 W. De Young Street, Suite 200, Marion, IL 62959. Volume 33 No. 6 Originally Printed Spring 2011
Bonus Depreciation
Bonus depreciation has been increased to 100% for
capital investments placed in service after September 8, 2010 through
December 31, 2011. The extra
relief is provided through
The Tax Relief, Unemployment Insurance
Reauthorization and Job Creation Act of 2010,
more commonly know as an extension of the “Bush Tax Cuts”.
Bonus depreciation was increased from 50% to 100%.
In 2012, bonus depreciation will return to 50%.
The new law also extends Section 179 deduction maximum amounts
and phase-out thresholds through 2012.
(Treasury Report, October
29, 2010) Editor’s Comment: The new law gives business owners an excellent opportunity to invest in new equipment for their businesses while enjoying the tax benefits in the current year.
The U.S. Tax Court has held that Spa
Workers were independent contractors and not employees.
The workers in question in this case were massage therapists,
cosmetologists, and nail technicians employed at a spa.
The spa did not pay the workers any type of salary and charged
them a weekly rental fee for their space equal to a flat amount or 25%
of the workers’ gross revenues.
The workers set their own hours and prices.
The spa did not treat them as employees; there was no W-2
statement provided and no employment tax paid.
The Court looked at factors supporting both sides.
Factors supporting employee status were that the spa booked
appointments, provided some training, and held funds until the workers
were paid weekly. Also, the
workers mainly provided services on the spa’s premises.
Factors showing the workers were independent were more convincing
to the court. These included
the fact that workers paid for their own expenses and bore all risk of
loss, the workers were paid on a straight commission basis, and they
could refuse any client.
Another factor was that the spa did not control how the workers
performed the services nor did it control their schedules.
(Mayfield therapy Center, TC Memo. 2010-239)
Editor’s Comment:
Cases concerning the status of persons
performing work for a company have increased lately.
Abuses and avoidance of employment taxes are significant
problems. Employers are
required to pay payroll taxes for employees that are not required for
independent contractors.
However, as the case above shows, it is not strictly a decision the
employer must make. There
are many factors that need to be considered in determining whether a
person is classified as an employee or as an independent contractor.
If the factors lean towards employee status and a company has
been classifying its workers as independent contractors, the company
could potentially be liable for back taxes.
Consolidated Groups
The IRS Chief Counsel has denied
deductions for patronage dividends paid by a cooperative to members of a
consolidated group. The
taxpayer in the case owned several corporations and partnerships that
met the rules of filing as a consolidated group.
The group members, on recommendation from a promoter, formed the
cooperative outside of the group.
The cooperative only consisted of members within the group.
Several partnerships were overlapped between the group and the
cooperative which prevented the cooperative from joining the tax filing
of the group. Rules
concerning cooperatives allow dividends to be paid in one year and be
claimed as income by the payee in the next year.
However, IRS regulations have an anti-abuse rule which prevents
members of a consolidated group from deferring income.
The Chief Counsel gave several reasons why the anti-abuse rule
applied. These included the
promoter’s stressing the tax savings, the taxpayer lacking legitimate
non-tax business reasons for forming the cooperative, and the absence of
any unrelated patrons in the cooperative.
(CCA 201044003)
Editor’s Comment:
This was an idea that might have worked
and saved the taxpayer some taxes had the taxpayer had other business
reasons to form the cooperative.
Also allowing non-consolidated group members to join the
cooperative probably would have had a positive effect on the ruling for
the taxpayer. However, as
this case illustrates, not all “promoters” are correct when they
encourage a particular program.
Charitable Donations
A deduction for a residence donated to a
fire department for a controlled burn has been denied by the Tax Court.
The Tax Court ruled the taxpayers received a benefit in the form
of demolition services that exceeded the fair market value of the house
donated. In the case, the
taxpayers bought a piece of property with a 96 year old house on it for
$600,000. They planned to
destroy the old house and build a new one.
When they discovered the demolition would cost between $10,000
and $15,000, the taxpayers decided to donate the house to the local fire
department for a controlled burn.
Controlled burns are used as training exercises for the fire
fighters. The taxpayers
claimed an appraised value of $76,000 as a charitable contribution
deduction, which was disallowed by the IRS.
The Tax Court recognized that the law allows a deduction only to
the extent the value of property donated exceeds any benefit received.
The benefit received in this case was the value of the demolition
which was at least $10,000.
The Tax Court did not agree with the appraised value of the house at
$76,000. The Tax Court found
the appraisal did not take into account several restrictions that made
the house virtually worthless or at least not worth more than the
benefit received.
(Rolfs, 135 TC No. 24)
Editor’s Comment:
The law used in the ruling here is
correct and sensible and reasonable people should not have any issue
with it. Unfortunately, the
problem here for the taxpayer was that the value of the house was a
factual issue, and one that is subjective, and open to opinion.
In the Tax Court’s opinion, the house was not worth what the
taxpayer claimed. We should
remember that tax deductions are not the only reason to make charitable
donations. In this case, the
taxpayers still saved the cost of demolition and hopefully the
firefighters gained some valuable experience.
Innocent Spouse Relief
The Tax Court has ruled that a spouse
was entitled to innocent spouse relief from a tax liability.
During the marriage, the husband was physically and verbally
abused. For the last ten
months of their marriage, they lived apart.
At the heart of the matter, the wife did not allow the husband to
view company records; and, he did not gain any benefit from the cash
flow of his wife’s business.
The wife was assessed a large tax liability.
Being the couple was married at that time, the husband was
responsible for the liability as all other married couples are.
However, the court held the husband was an “innocent
spouse”.(Schultz, TC Dec 58,369(M)
Editor’s Comment:
Most marriages are based
upon respect and love for one another and couples exist in relative
harmony with each other. On
the other hand, many marriages are not happy ones.
When this happens both spouses need to look out for their own
interests including their financial and tax interests.
A spouse, in tax situations, can and likely will be your worst
enemy.
Some spouses try to remain ignorant of the situations within
their spouse’s company. This
is a bad approach for anyone to take.
When the IRS assesses taxes, it is hard to get out of the
obligation. This taxpayer
was fortunate in so far as he avoided the liability because of the
mutual relationship.
The IRS has issued guidance on the small
employer health insurance credit.
Under the new healthcare law, employers with less than 10
employees, where the average earnings are less than $25,000 per year,
are eligible to receive a 35% tax credit.
The credit is phased out as the number of full time employees
increases to 25 and the average wage increases to $50,000.
Because many businesses in this category are closely-held,
private companies, many spouses are involved.
The latest guidance provides that spousal employees and family
members are excluded from the calculation of full time employees and
compensation limits. (Notice 2010-82)
Editor’s Comment:
There
are many issues that are going to be ironed out over the next 10 years
regarding the sweeping healthcare law.
While the law offers credits and assistance to employees, and
employers, it is beneficial to know where you stand.
Mandatory Electronic Payments
The IRS has issued guidance regarding
employer federal tax deposits to be made by electronic funds transfer.
Normally, comments by the public would be taken to buffer issues
that would come about and the IRS would make changes as necessary to the
regulation. This time,
comments were not taken regarding security and privacy and the fact that
some firms do not own computers.
The IRS’s stance is that security is adequate and firms not
owning computers can make the transaction with a telephone call.
The old coupon system through banks will be phased out in the
near future and this new electronic system will go forward. (TD 9507,
Notice 2010-87)
Editor’s Comment:
It is important to deposit
withholding taxes on a timely basis.
Many small employers hold off on making employee deposits because
withholding amounts are an easy (but hazardous) source of cash.
Hopefully, the new electronic system will prevent employers from
using withheld amounts to fund operations or to spend in another
fashion.
Real Estate
In a Tax Court case, a couples’ sale of
real estate lots resulted in ordinary business gain instead of capital
gains. The transactions were
conducted in the ordinary course of business and were not investment
transactions. The couple was
also subject to self employment tax on their earnings.
Furthermore, itemized deductions and dependency exemptions were
limited because their income exceeded the threshold limits.
The failure to file penalty was imposed as well.
(Garrison, TC CCH 58,401M)
Editor’s Comment:
Not
accounting properly for profits and reporting is a disastrous recipe for
any one. Tax accounting must
be done by a competent professional, guessing should not be engaged in.
The IRS is in the process of cracking down on those preparers who
make “common errors”. If
your accountant is investigated by the IRS, you too may also find
yourself subject to investigation.
Seeking competent professional help will actually save you money!
Trust Modification
In an IRS Letter Ruling, the IRS ruled
that a trust modification did not lead to any portion of the trust being
includible in a beneficiary’s estate.
Two trusts were set up in tandem for beneficiaries with near
identical language. The
beneficiaries were given standard 5% powers allowing them to withdraw or
assign 5% of the trust principle.
The two trusts were merged into one trust to aid administration,
yet keeping beneficiaries with the same rights.
The taxpayer requested a letter ruling and the IRS stated that
beneficial interests, rights, and expectancies did not change
substantially; the tax consequence would not follow. (IRS Letter Ruling
201042004)
Editor’s Comment:
Trust work should only be
performed by a professional who knows the rules inside and out.
Had this counsel not known the limits and tax law, the tax
consequences could have been nearly one third of the amount of the
trusts. Always work with a tax professional for optimal results in these
matters.
Inflation Adjust Amounts
In a Revenue Procedure, the Inflation
Adjusted Amounts have been announced for 2011.
The annual exclusion for gifts in 2011 remains at $13,000.
Furthermore, the first $136,000 of gifts to noncitizen spouses is
not includible in the donors’ annual amount of taxable gifts.
For special use valuation, such as farms, the new amount is now
$1,020,000. The dollar amount relevant to the available 2% interest rate
for financing taxes due is raised up from $1,340,000 to $1,360,000.
(Rev. Proc. 2010-40)
Editor’s Comment:
While not newsworthy per se,
the Internal Revenue Code (as complicated as it is) tries to provide
special protections to those in need.
Farmers transferring land at death can use special use the
valuation amount making the tax burden for the estate less.
Using a 2% interest rate on taxes that are due is also beneficial
for the first part of the taxable estate as well.
Jury’s Valuation Upheld
In a Circuit Appellate Court, a jury’s
valuation was upheld because there was no reversible error.
The Court considered the fact that negotiations were conducted,
the list and final price of the property, and expert and lay testimony
regarding the valuation presented.
The taxpayer’s counsel made every attempt to discredit the
evidence in the case, yet failed to prove a different value.
Therefore, the Court affirmed the lower court’s finding. (M. Levy
Exr., CA-5, 2010-2 USTC
Editor’s Comment:
The taxpayer in this case
had excellent representation.
The attorney used every avenue and area of evidence and yet
failed to convince a jury otherwise of the property value.
Attorney Sanctioned
In a probate case, an attorney was
sanctioned by the US Tax Court for intentional delays.
The case started in 1996.
During the time of probate, the attorney (who was eventually
sanctioned) made every attempt to delay the proceeding as long as
possible while having beneficial use of the assets.
The Tax Court then demanded rule to show cause for the delay, yet
the attorney did not even show up at the hearing.
The Court ruled on the case.
Among the evidence cited was the attorney’s college education,
legal education, legal experience, and admission to the US Tax Court.
All of this added to this knowledge and ability to delay the
probate proceedings and the Tax Court to his favor.
Held: Sanction imposed. (M. Allison. Est., CA-4 2010-2 USTC
60,609)
Editor’s Comment:
Delaying the IRS is easy for
those who know how the system works.
Think: dog chasing its tail.
While this is easy, it is 1) Not ethical and 2) Results in
sanctions. It is best to
conduct a proper probate of appropriate length to represent the
beneficiaries and then pay the taxes due or make other arrangements.
If you would like to subscribe to The Tax Report, please send a check for $75 to The Center For Financial, Legal and Tax Planning, Inc. 4501 W. De Young Street, Suite 200, Marion, IL 62959. |