2016 Individual Federal Tax Update (Full Day ourse)media01.commpartners.com/WK CCH/02_09_17/REVISED... · Washington, D.., the ahamas, Italy, Greece, Turkey and anada. He has authored

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2016 Individual Federal Tax Update (Full-Day Course)

Presented by

Bradley Burnett, J.D., LL.M. (Taxation)

February 9, 2017

http://www.cchwebinars.com/


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Attendance Validations

2016 Individual Federal Tax Update

(Full-Day Course)

February 9, 2017

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9 : 0 0 a m – 9 : 0 5 a m Moderator opening comments

9:05 am – 10:50 am

Content Session #1 – (100 minutes)

Includes 5 minute break and

10 minute Question and Answer Session

1 0 : 5 0 a m – 1 1 : 0 0 a m 10 Minute Break

11:00 am – 12:35 pm


Includes 10 minute Question and Answer Session

1 2 : 3 5 p m – 1 : 0 5 p m Lunch Break

1 : 0 5 p m – 2 : 5 5 p m


Includes 5 minute break and

10 minute Question and Answer Session

2 : 5 5 p m – 3 : 0 5 p m 10 Minute Break

3 : 0 5 p m – 4 : 3 5 p m


Includes 10 minute Question and Answer Session

4 : 3 5 p m – 4 : 4 0 p m Moderator closing comments

Course Agenda


(Full-Day Course)

February 9, 2017

All times are Central Time Zone


About Our Speaker


Bradley Burnett, J.D., LL.M., is a practicing tax attorney, licensed in Colorado, with 34 years of tax

practice experience. His practice emphasis is on tax planning and tax controversy resolution. Prior to

establishing his own law firm in 1990, he practiced tax accounting with national and local CPA firms,

worked as a trust officer for a Denver bank, and managed the tax department as partner in a medium-

sized Denver law firm. After receiving his undergraduate degree in accounting and law degree (J.D.),

he earned a Master of Laws (LL.M.) in Taxation from the University of Denver School of Law Graduate

Tax Program.

Mr. Burnett has delivered more than 3,000 presentations on U.S. tax law throughout all 50 states,

Washington, D.C., the Bahamas, Italy, Greece, Turkey and Canada. He has authored texts of 35 CPE

courses. Mr. Burnett served as adjunct professor at the University of Denver School of Law Graduate

Tax Program, where he pioneered an employment tax course and taught IRS practice and procedure.

He has appeared on television answering tax questions for call-in viewers of Denver NBC affiliate KUSA

Channel 9. Brad received the Illinois Society of CPAs Instructor Excellence Award for teaching in

Chicago and five times has been the top rated, most requested instructor for CPA Society annual tax

conferences.


© 2017 CCH and its affiliates. All Rights Reserved 2700 Lake Cook Road, Riverwoods, IL 60015– 3867 1-800-248-3248

February 2017

UPCOMING WEBINARS

Thank you for attending today’s CCH Webinar!

Please check out additional programs at www.cchwebinars.com

Fri 10 Preparing Form 1041: Part I Steven G. Siegel, J.D., LL.M. (Taxation)

Fri 10 Preparing Form 1041: Part II Steven G. Siegel, J.D., LL.M. (Taxation)

Mon 13 Real Estate Transactions: Capital Gains Tax Issues Eric P. Wallace, CPA

Tue 14 Capital Account Maintenance Rules under Section 704(b)

James R. Hamill, Ph.D., CPA

Wed 15 Excel: 10 Amazing Tips Jeff Lenning, CPA, CITP

Thu 16 Charitable Remainder Trusts and Preparing Form 5227

Steven G. Siegel, J.D., LL.M. (Taxation)

Thu 16 Partnership Taxation Concepts and Planning

Strategies (Full-Day Course)

James R. Hamill,

Ph.D., CPA

Mon 20 Farm Income Tax Returns: Preparation Refresher Christopher W. Hesse, CPA

http://www.cchwebinars.com


February 2017

UPCOMING WEBINARS



Tue 21 Understanding Internal-Use Software and the Research Tax Credit

David L. Click, J.D., LL.M. and John Deininger, J.D., LL.M.

Wed 22 Form 990 Exempt Org Update Jane Searing, CPA, M.S. Taxation

Thu 23 Foreign Trusts and Completing Forms 3520 and 3520-A

Carolyn Turnbull, CPA, M.S.T.

Fri 24 FBAR/FinCEN 114 Update for Filing Season Eric L. Green, Esq.

Fri 24 S Corp Taxation Concepts and Planning Strategies (Full-Day Course)

James R. Hamill,

Ph.D., CPA

Mon 27 2017 Filing Season and the Affordable Care Act Annette Nellen, CPA,

CGMA, Esq.

Tue 28 S Corp Reasonable Compensation for

Shareholder Employees

Eric P. Wallace, CPA



March 2017

UPCOMING WEBINARS



Wed 1 FATCA—How to Comply with Minimal Withholding, Tax and Penalty Impact

Miles Hutchinson, CGMA

Wed 1 Private Foundation Update and Form 990-PF Jane Searing, CPA, M.S. Taxation

Thu 2 New York Residency Rules: Tax Issues and Audits Timothy P. Noonan, Esq.

Mon 6 Trust Instruments: What Tax Preparers Must Know

Robert S. Keebler, CPA/PFS, M.S.T., AEP

Tue 7 Excel: What’s the Deal with PivotTables Jeff Lenning, CPA, CITP

Tue 7 Social Security, Medicare and Medicaid: Advising Clients on Critical Issues

Steven G. Siegel, J.D., LL.M. (Taxation)

Wed 8 Multistate Income Tax for Passthrough Entities Michael Bannasch, CPA, M.S.T.

Thu 9 Construction Industry: Tax Update and Tax Accounting Method Changes

Eric P. Wallace, CPA



March 2017

UPCOMING WEBINARS



Mon 20 Excel: 3 Common Practices that Shouldn’t Be Jeff Lenning, CPA, CITP

Tue 21 State Income Tax Apportionment Rules – Market-Based Sourcing and Other Developments

Michael Bannasch, CPA, M.S.T.

Wed 22 Basics of Sales and Use Tax and Common Controversies

Michael Bannasch, CPA, M.S.T.

Mon 27 New Lease Accounting Standard: How Will Clients and Businesses Be Affected?

Alan W. Anderson, CPA

Tue 28 Unclaimed Property: Handling Audit and Compliance Issues

Joseph N. Endres, J.D.

Thu 30 State Tax Nexus Fundamentals Michael Bannasch, CPA, M.S.T.


PRESENTATION

This presentation and these materials are designed to provide accurate and authoritative information in regard to

the subject matter covered. This presentation and these materials are provided solely as a teaching tool, with the

understanding that the publisher and instructor are not engaged in rendering legal, accounting, or other

professional service and that they are not offering such advice in this presentation and these accompanying

materials.

Practitioners should always determine and incorporate all of the material facts and circumstances that apply to a

particular situation and conduct the necessary research to determine whether any new statutory or regulatory

requirements are relevant and should be applied. If legal advice or other expert assistance is required, the service

of a competent professional person should be sought.

CCH® Webinars 2016 Individual Federal Tax Update



(Full-Day Course)

2 2016 Individual Federal Tax Update

2016 Federal Individual Tax Update Highlight Reel

• 2 new legislative acts (so far) in 2016

• 5 new legislative acts in 2015

Including Path Act (Extender Bill)

• Treas. regs, court cases and IRS rulings, notices and announcements galore

• Indexing for inflation

Some in 2015, more in 2016 for substantive law provisions, but aggressive new indexing for penalties



2016 Federal Tax Legislation

• 2016 Federal Tax Legislation

1. U.S. Olympians Act

2. FAA Extension, Safety and Security Act of 2016

3. Lame Duck Extender Bill (Will there be one?)



• Olympians don’t have to pay tax on medals or prize money anymore (United States Appreciation for Olympians and Paralympians Act, HR 5946, P.L. 114-239) (New IRC §74(b))

Olympians

• $25,000 per gold, $15,000 per silver and $10,000 per bronze medal

Paralympians

• $5,000 per gold, $3,000 per silver and $2,000 per bronze medal




• Olympians don’t have to pay tax on medals or prize money anymore

Not taxable after 2015 on such earnings if athlete’s AGI does not exceed $1 million ($500,000 for MFS)

• 2016 Rio

Michael Phelps 5 gold, 1 silver = $140,000 How much for endorsements?

• 2016 Rio

Ryan Lochte 1 gold medal = $25,000 Dancing With The Stars (8 weeks) = $230,000


Polling Question #1

Is Michael Phelps’ $140,000 received for winning a 2016 Rio Olympic gold medal federal income taxable?

Probably, because he likely makes more than a million dollars a year on endorsements

No, because Ryan Lochte likely doesn’t have to pay tax on his $25,000

No, because Ryan Lochte made more money on Dancing With the Stars than Phelps did on medals



FAA Extension, Safety and Security Act of 2016

• Extended through Sept 2017

19.3¢/gal tax noncommercial aviation gasoline

21.8¢/gal excise noncommercial aviation kerosene

$4.00/p domestic segment tax for 1 takeoff/landing

7.5% tax on base ticket

$17.80/p international for flights begin or end in U.S.

$8.90/p for flight begins or ends in Alaska or Hawaii

6.25% tax on transporting property by air


Lame Duck 2016 Extender Legislation?

• 30 provisions set to expire at end of 2016

• Most notably

Mortgage insurance premium deduction

Home debt forgiveness exclusion

Accelerated depreciation race horses / race tracks

Credits for non-wind & non-solar property §§45, 48

Technical corrections to existing law



Possible 2016 or Later Legislation

• Mobile Workforce State Income Tax Simplification Act

Would bar states from taxing earnings of nonresident employees who stay less than 30 days

• Retirement Enhancement Savings Act of 2016

Expands ability of small employers to band together with multi-employer plans and makes other retirement related changes



• 5 new legislative acts in 2015 containing federal tax provisions, including

PATH Act (Extender Bill)

2015 Bipartisan Budget Act

2015 Highway Transportation Act

2015 Trade Package Legislation

FAST Act



PATH Act Individual Tax Provisions

• Tuition Deduction (Extended through 12/31/16)

• American Opportunity Tax Credit (Made permanent) (Beginning for 2016, EIN of educational institution must be reported)

• Deduction for sales tax (in lieu of income tax) (Made permanent)


Polling Question #2

Does the $250 above-the-line teacher deduction include spending for professional development expenses?

No, it just includes spending for books and supplies such as kleenex boxes

Yes, because the PATH Act made such spending eligible




• Deduction for mortgage insurance premium as mortgage interest (Extended through 12/31/16)

• $250 teacher deduction for supplies (Made permanent) (For 2016 and later, indexed for inflation (stays $250 in 2017) and expanded to include professional development expenses)



• IRA transfers to charity for 70 ½ or older (Made permanent) (Make sure receipts are properly worded)

• Expanded contributions of real property for qualified conservation charitable deduction (Made permanent)

• Exclusion for personal residence cancellation of debt income (Extended through 12/31/16)




• $500 credit for nonbusiness energy property (Extended through 12/31/16) (Energy Star requirements updated)

• Enhanced child tax credit (Made permanent)

• Enhanced earned income tax credit (Made permanent)


2015 Highway Funding Bill

• HSA (Health Savings Account) eligibility not affected by receipt of armed service (or VA) benefits

• If individual purchases “high deductible insurance”, such individual (or his (her) employer) may contribute to a tax deductible, tax deferred HSA account

• Health insurance employer mandate penalty

Recipients of Tricare (or VA) health care benefits NOT counted in testing for 50 (full time) employee threshold



Highway Funding Bill (P.L. 114-41) Basis Mania

• New IRC §1014(f)

Heirs must use the estate tax value of assets received from an estate as their income tax basis

• New IRC §6035

Executors must report estate tax value (basis) of assets to IRS and heirs (on Form 8971 and Schedule A)

• Revised IRC §6501

6 year (up from 3 years) statute of limitations (on assessment) expanded to apply where overstatement of asset basis is equivalent of omitting > 25% of gross income on income tax return


Zero Basis Rule

• If required Form 706 is never filed, the basis of assets required to be reported will be zero for heirs

• If asset improperly omitted from required 706 and statute of limitations expired, omitted property’s basis is zero for heirs

• If asset improperly omitted from required 706 and statute still open, estate may report asset on amended 706 (heir gets basis in amount of final estate tax value)



Zero Basis Rule Did IRS Go Too Far?

• Zero basis rule

If required Form 706 is never filed (or filed too late), basis of assets will be zero for heirs

• Did IRS have have authority to dream up this rule in the regs?

• Legislative regs, under Chevron (US S Ct, 467 U.S. at 844 (1984)), will likely be upheld unless arbitrary, capricious or manifestly contrary to the statute

• It will take litigators 10 years to sort it out


Troubleshooting the Zero Basis Rule

• Protective 706 filings for estates whose value appears to be just below the filing threshold look better than ever

After 3 years (assuming no fraud or other), IRS cannot say “asset was not reported, therefore basis is zero”

• Protective 706 filings may slice against you, however, if you file, but omit an asset and the S/L expires on you

Why? Basis of omitted asset will indeed be zero

• It’s too late to file 706 and bail yourself out



Troubleshooting the Zero Basis Rule

• On the other hand, if no 706 is filed, you can file it late and avoid the zero basis rule. Reg. §1.1014–10(e) Example 3 (ii)

May be tough to accomplish years later

Good luck finding a reliable estate inventory and other reliable info as documents disappear and memories fade


New IRC §6035 Basis Reporting

• New IRC §6035

Executors must report estate tax value (basis) of assets to IRS and heirs

• How to report?

Via new IRS Form 8971 (and accompanying Schedule A)



Form 8971 and Schedule A

• Form 8971 reports basis to IRS and beneficiaries

All required Schedule As accompany 8971 filing

• Schedule A reports estate tax value of property to beneficiary

• Compliance point

Beneficiaries should retain Schedule A to avoid later reporting inconsistent basis (and resulting accuracy penalty)


Pre-Election Tax Proposals



Tax Reform

“The difference between death and taxes is death doesn’t get worse every time Congress meets.”

-- Will Rogers


Post-Election Tax Proposals

Democrat Republican Donald Trump

Corporate Tax Rate Possibly agree to cut if repatriation tax proceeds go to U.S. infrastructure improvements

20% 15%

Corp Repatriation Tax Rate

? 8.75% for cash; 3.75% for other

10%

Proceeds of repatriation tax

Fund U.S. infrastructure improvements

Offset broader corporate tax rate cuts

?

U.S. infrastructure improvements

Funded by Corp repatriation tax

? $1 trillion infrastructure renewal plan w/ $137 billion tax credits for private investment in projects

Future of international Corp tax

? Territorial system (taxing only economic activity in U.S.) (no more tax on overseas income)

End deferral (companies m/ pay tax annually on all overseas earnings)






Democrats Republicans Donald Trump

Ordinary Income Rates

Status quo (7 brackets up to 39.6%)

12%, 25% and 33% 12%, 25% and 33%

Capital Gains Rates

?

Half excluded (thus, rates of 6%, 12.5% and 16.5%) (Interest income treated same)

Status quo (0%, 15% and 20%)

NII (Net Investment Income) Tax

Status quo (3.8% tax) Repeal Repeal

Carried interest (portion of investment returns paid to fund managers)

? ? (Status quo is capital gains rate)

Ordinary income

Standard Deduction Status quo (joint $12,300, single $6,300)

$24,000 joint, $18,000 single parents, $12,000 other singles

$30,000 joint, $15,000 single

Itemized Deductions ? Keep only mortgage and charitable deductions

Keep only mortgage and charitable deductions. Cap at $200,000 married, $100,000 single

Estate and Gift Taxes Status quo Repeal Repeal



Polling Question #3

For this coming tax season, the due date for Form 1040 has changed

A. True, because Congress messed everything up and changed the law

B. False, because Congress did not change the law and IRS did not change the due date

C. True, because the due date for the FBAR report will be different

D. False, becaTrue, because Congress messed everything up and changed the law


Form 1040 Due Dates

• Form 1040 due dates do not change

• Remains due on April 15 (or next business day if 04/15 lands on Saturday, Sunday or legal holiday)

• Remains June 15 if out of country on April 15

• Extended due date remains October 15 (or next business day if October 15 lands on Saturday, Sunday or legal holiday)



FBAR (FinCen 114) Due Dates

FBAR

Current

Law

New Law Net Change Effective Date

FBAR

Return

(FinCen

114)

June 30 April 15 2 ½ months

less

Tax years

beginning after

2015

FBAR

Extension

None Up to 6

months

Up to 6

months

more

Tax years

beginning after

2015


Income Tax Return Due Dates

Income Tax Return Due Dates

Entity Type Current Law New Law Net Change Effective Date

S Corp 15th day of 3rd month

15th day of 3rd month

No change No change

Partnership 15th day of 4th month


Accelerated 1 month

Returns for tax years beginning after 12/31/15

C Corp (non 06/30 year

end)


15th day of 4th month

Delayed 1 month

Returns for tax years beginning after 12/31/15


end)


15th day of 3rd month*

(* 15th day of 4th month after

2025)

No change (except for *) (* 15th day of

4th month after 2025)

* No change, until returns for tax years

beginning after 12/31/25



Tax Return Extension Due Dates

Income Tax Return Extension Due Dates

Tax Return Type

Current Law New Law Net Change Effective Date

S Corp 6 months 6 months No change No change

Partnership 5 months 6 months 1 month more Returns for tax years beginning after 12/31/15


end)

6 months 5 months 1 month less Returns for tax years beginning after 12/31/15


end)

6 months 6 months* (* 5 months after 2025)

No change * (* until tax years

beginning after 2025, then 1 month less)

* No change, until returns for tax years

beginning after 12/31/25


Late Filing Minimum Penalty Increase

• §6051 Increase in Floor of Late Filing Minimum Penalty from $135 to $205 (or, if Less, the Amount of Tax Due) for Certain Returns More Than 60 Days Late (for returns required to be filed after 12/31/15)

• For certain returns filed more than 60 days late, minimum penalty has increased (from $135 to) $205 or the amount of tax owed, whichever is smaller

• Amount changes to $210 for 2017



Late Filing Minimum Penalty Increase

• §6051 Increase in floor of late filing minimum penalty from $135 to $205 (or, if less, amount of tax due) for > 60 days late for (2015 returns and later)

1. Form 990-T

2. Forms 1040, 1040A, 1040NR, 1040NR-EZ

3. Form 1041

4. Form 1120, 1120-H, 1120S


W-2 and 1099-MISC Due Dates

• Change to Due Date of Forms W-2s and 1099- MISC for 2016 Year (Filed in 2017) – All Forms Due by January 31 No Matter What

Effective for forms filed on or after January 1, 2016, Forms W–2 and Forms 1099-MISC for non-employee compensation must be filed by January 31

Must be filed by January 31 EVEN IF FILED ELECTRONICALLY

Bye bye to February 28 and March 31



2015 Trade Package Legislation

• Delinquent information reporting penalties dramatically increase

Applies to Forms 1099, W-2, 1095 (Health Care Reporting), 1098, K-1s, etc.

Example of penalty

• $530 (twice) for intentional disregard of requirement to file each Form 1099 ($530 x 2 = $1,060 for each delinquent 1099)

If in doubt, fill it out

• If in doubt, send it out

─ `ON TIME !!


Delinquent Information Report Penalty

Increased Delinquent Information Report Penalty

§6721 Penalty Before 2016 After 2015

Fixed w/in 30 days $30 $50

Fixed > 30 days, but < Aug 1 $60 $100

Fixed Aug 1 or later $100 $250

Intentional disregard $250 $530

Penalty may be applied twice (doubled) if return not supplied both to payee and government



Identity Theft and Tax Fraud

• Expect refunds to be dramatically slowed by IRS and states

• 2016 W-2s & 1099s m/ be filed by employer by 01/31/17

• Lower your chances of ID theft by filing fast

• Huge risk factor is social media with too much “kiss and tell” about name, place of employment, spouse, kids, etc.

Easy picking for organized crime and other criminals

• Phishing scams up 40% for 2015 1040s already


Polling Question #4

What do people who post on social media (e.g., Facebook) volumes of highly revealing information do for organized crime and others who want to steal their identity from them?

Kiss and tell

Make things more confusing by posting what they had for dinner

Discourage identity thieves from stealing personal info by posting hundreds of pictures of grandchildren that all look the same



2017 Inflation Adjusted Amounts

Top Rate Bracket 39.6% §1 (Rev. Proc. 2016-55)

MFJ and SS Over $470,700

HH Over $444,550

Single Over $418,400

MFS Over $235,350

Estates and Trusts Over $12,500



• Exemption Amounts for Alternative Minimum Tax §55(d)(1) (Rev. Proc. 2016-55)

Joint Returns or Surviving Spouses $84,500

Unmarried Individuals (other than Surviving Spouses) $54,300

Married Individuals Filing Separate Returns $42,250

Estates and Trusts $24,100




• Elementary and Secondary School Teacher Expenses

§62(a)(2)(D) Books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used by eligible educator in classroom = $250

• (Rev. Proc. 2016-55)



• Standard Deduction §63(c)(2) (Rev. Proc. 2016-55)

Married Individuals Filing Joint Returns and Surviving Spouses $12,700

Heads of Households $9,350

Unmarried Individuals (other than Surviving Spouses and Heads of Households) $6,350

Married Individuals Filing Separate Returns $6,350




• Standard Deduction for Aged and Blind §63(f) (Rev. Proc. 2016-55)

Standard deduction for aged or blind = $1,250

Additional standard deduction amount is increased to $1,550 if individual is also unmarried and not a surviving spouse



• Personal Exemption §68(b) (Rev. Proc. 2016-55)

Personal exemption = $4,050

• Phase out range Begin End

MFJ or SS $313,800 $436,300

HH $287,650 $410,150

Single (not SS or HH) $261,500 $384,000

MFS $156,900 $218,150




• Beginning threshold for phase out of itemized deductions §68(b) (Rev. Proc. 2016-55)

Joint return or a surviving spouse $313,800

Head of household $287,650

Individual who is not married and who is not a surviving spouse or head of household $261,500

Married individual filing a separate return $156,900



• Cafeteria Plan Health Flex Spending Contribution (by Employee) §125(i) (Rev. Proc. 2016-55)

Limit on voluntary employee salary reductions for contributions to health flexible spending arrangements is $2,600




• Qualified Transportation Fringe Benefit Exclusion §132(f)(2)(A), (B) (Rev. Proc. 2016-55)

Transportation in commuter highway vehicle and any transit pass = $255/mo.

Qualified parking = $255/mo.



• Adoption Assistance Exclusion §137(a)(2), (b)(1)

Adoption of child with special needs = $13,570

Other adoptions = $13,570

• Adoption Credit

Maximum credit allowed for qualified adoption expenses = $13,570 §23(b)(1) (Rev. Proc. 2016-55)




• Deductible long term care insurance premiums §213(d)(10) (Rev. Proc. 2016-55)

Age Limit on Deduction

40 or < 410

> 40, but < 50 $770

> 50, but < 60 1,530

> 60, but < 70 4,090

> 70 5,110



• Foreign earned income exclusion §911(b)(2)(D)(i) (Rev. Proc. 2016-55)

• Maximum foreign earned income exclusion = $102,100




• §179 Expense Election Limitations §179(b)(1), (2) (Rev. Proc. 2016-55)

Aggregate cost of §179 property elected as an expense cannot exceed $510,000

$510,000 limitation is reduced (but not below zero) by amount of cost of §179 property placed in service during taxable year beginning in 2017 exceeds $2,030,000



• Basic exclusion amount §2010 (Rev. Proc. 2016-55)

• Basic exclusion amount for determining unified credit against estate tax = $5,490,000




• Annual gift tax exemption §2503 (Rev. Proc. 2016-55)

$14,000 of gifts to any person (other than gifts of future interests in property) are not included in the total amount of taxable gifts made during that year


Polling Question #5

Even if IRS liens and levies a taxpayer, the good news is the taxpayer can still keep a cow, a couple of chickens, a gun and a laptop

A. True B. False




• Value of property exempt from IRS levy under §6334(a)(2), (3) (Rev. Proc. 2016-55)

Fuel, provisions, furniture, and other household personal effects, as well as arms for personal use, livestock, and poultry) cannot exceed $9,200

Books and tools necessary for the trade, business, or profession of the taxpayer cannot exceed $4,600



• Filing late penalty § 6651(a) (Rev. Proc. 2016-55)

Additional tax for failure to file a tax return within 60 days of the due date of such return (determined with regard to any extensions of time for filing) shall not be less than the lesser of $210 or 100 percent of the amount required to shown as tax on such returns




• Attorney Fee Awards §7430(c)(1)(B)(iii) (Rev. Proc. 2016-55)

Attorney fee award limitation = $200 per hour


Social Security Wage Base

• $118,500 for 2015

• $118,500 for 2016 (same as 2015)

• $127,200 for 2017



3 Categories of Rich

• Super Rich $415,050 / $466,950

Highest brackets (39.6% OI and 20% LTCG)

• Medium Rich $259,400 / $311,300

Phase-out personal exemptions and itemized deductions

• Poor Rich $200,000 / $250,000

3.8% NII tax


Capital Gains and Qualifying Dividends

• 0%, 15%, 20% long term capital gain rates

0% rate if in 15% OI bracket (2016 up to $36,900 single, $73,800 MFJ)

20% rate if in 39.6% OI bracket (2016 > $415,050 single, >$466,950 MFJ)

• Plus 3.8%, AMT, effective tax rate increases for phaseout of PEP (personal exemption) and PEASE (itemized deductions) = 30% rate

• Gift appreciated stock to low income family



Form 1099-B Basis Reporting

• Form 1099-B reports

Gross proceeds of sale of securities; and

Basis of securities if securities purchased after 12/31/10

• Basis reporting required for stocks, bonds, debt instruments and options

Beware basis reporting (or lack thereof) by brokerage houses for stock options


How 1099-B Basis is Calculated

• Default method

First, shares where acquisition date unknown

FIFO (first in, first out) for all others

• Specific identification allowed

• LIFO (last in, first out), HIFO (highest in, first out) or any other method allowed

• Method must be communicated to broker before transaction settles



IRS Exam Stats / Rates by Entity FY 2014

Returns Filed Returns Audited

% Audited

Small Corp 1,812,140 17,257 0.95%

Large Corp 64,261 7,858 12.2%

S Corporation 4,518,765 16,317 0.4%

Partnership 3,649,385 15,779 0.4%

Individual 145,236,429 1,242,479 0.85%


IRS Exam Stats / Rates by Entity FY 2014

% of Total Returns Filed % of Returns Audited

No AGI 1.83% 5.26%

$1 - $24,999 39.08% 0.93%

$25,000 - $49,000 23.32% 0.54%

$50,000 - $74,999 13.12% 0.53%

$75,000 - $99,999 8.33% 0.52%

$100,000 - $199,999 10.70% 0.65%

$200,000 - $499,999 2.87% 1.75%

$500,000 - $999,999 0.48% 3.62%

$1,000,000 – $4,999,999 0.24% 6.21%

$5,000,000 - $9,999,999 0.02% 10.53%

$10,000,000+ 0.01% 16.22%



IRS Exam Rates – Individuals FY 2011 - 2014

FY 2011 FY 2012 FY 2013 FY 2014

Total Returns Filed Prior CY

140,837,499 143,399,737 145,819,388 145,236,429

Total Audits Conducted

1,564,690 1,481,966 1,404,931 1,242,479

Percentage Audited

1.11% 1.03% 0.96% 0.85%


Foreign Earned Income Exclusion / Housing

• $100,800 in 2015

• $101,300 in 2016

• $102,100 in 2017

• Housing Exclusion – Ranges $16,128 (2015), $16,208 (2016), $16,336 (2017)



Polling Question #6

Which of the following statements is the most correct regarding the foreign earned income exclusion (FEIE)?

A. If you file your 1040 late, it’s not that big of a deal because IRS cannot use late filing as grounds for denying the FEIE

B. Filing late is unpatriotic and un-American

C. Filing a 1040 can lead to loss of the FEIE


Foreign Earned Income Exclusion

• No §911 exclusion on delinquent return if IRS contacts taxpayer and raises issue first (Nancy McDonald, 2015-169 (08/25/15))



Foreign Earned Income Exclusion

• §911 Income earned by bona fide resident in foreign country (23% of total) excluded

It’s Not Always an “All or Nothing” Gig (Wendell and Angelica M. Wilson v. Comm., TCS 2016-19 (04/25/16))

23% of mariner’s income earned in foreign ports

77% in int’l water (not a foreign country) or U.S. port

No accuracy penalty

• It’s reasonable to rely, without known incident, on the same preparer for 20 years

• Especially after the “all clear” in an IRS audit on the same issue


Foreign Bank and Financial Accounts

• FinCen Form 114 (FBAR) must be filed

• Filed electronically

• For 2015, due by June 30 (no extensions)

• For 2016 and later, due by April 15 (6 month extension possible)

72



FBAR Must Be Filed By

• Persons with either

Ownership of or signature authority over foreign bank account

Authority over = ability to withdraw

Presumably applies to POAs (powers of attorney)

Account(s) must exceed $10,000 U.S. on any one day

• Use conversion rate as of last day of year

• IRS publishes year end conversion rates


Foreign Bank and Financial Accounts

• Much of the available guidance comes from instructions to Form (FinCen 114) and other Treasury and/or IRS guidance



FBAR Maximum Account Value

• $10,000 U.S. Currency

• Aggregate = take highest balance of each foreign bank account owned during year, add them up

• Example

Each of 3 accts $7,000 each = $21,000 Each must be reported on FBAR (make own example)

• It’s not any one account exceeds $10,000 U.S.


FBAR

• Mechanics

Account by account, put foreign bank account statement on the table

• Isolate the highest balance on each statement each month

• Do this for each account

• Isolate highest balance for year (in the foreign denomination)

• Bank statement must fairly reflect account’s balance

• Use exchange rate on last day of year



FBAR

• Exchange rate in effect as of last day of tax year

Easy to find IRS conversion rates

• Google “IRS foreign currency conversion rates”

Published on IRS webpage (for 2015) at

https://www.irs.gov/businesses/small-businesses-self-employed/treasury-reporting-rates-of-exchange-as-of-december-31-2015


FBAR

• Example

Exchange Rates for Converting Foreign Currencies into U.S. Dollars

Exchange rate at end of May could be very different than exchange rate at end of year

On 05/31/15, 1 euro = 90.94¢ U.S. (0.9094 rate)

On 12/31/15, 1 euro = 91.90¢ U.S. (0.9190 rate)

Thanks, Greece!!



FBAR

• Practice aid

Build your own spreadsheet

For each account, isolate highest balance for the year (from all bank statements for the year)

Compute overall total (combine highest balance from each account into a taxpayer-wide total)

Apply exchange rate published by IRS for the yearIf combined highest balance exceeds $10,000, file FBAR


FBAR

• Example

Freddie owns a 50% interest in ABC Partnership (foreign)

• ABC Partnership owns a bank account

Freddie need not investigate value of ABC’s bank account balance and report it on Freddie’s FBAR

Why not? Freddie does not control the partnership

• He does not own more than half of it



FBAR

• Example: Freddie owns a > 50% interest in ABC Partnership (foreign)

ABC Partnership owns a bank account

Freddie must investigate value of ABC’s bank account balance and report it on Freddie’s FBAR

Why? Because he controls (owns more than half of) the entity


Form 1040, Schedule B Questions

• 7a At any time during 2015, did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account or brokerage account) located in a foreign country?

• If “Yes,” are you required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), to report that financial interest or signature authority?

• 7b If you are required to file FinCEN Form 114, enter the name of the foreign country where the financial account is located ▶ ____________________



FBAR

• Put these exact questions in your tax organizer

• 1st Q only asks if have account

• Death nell for whether IRS asserts willfulness penalty


FBAR

• No reasonable cause grounds for abatement of non-willful FBAR penalty where did not truthfully answer 2 questions on Form 1040, Schedule B (James Moore v. U.S., WD WA (Case No. C13-2063RAJ) (04/01/15))

Moore had solely controlled Bahamian C corp with $300,000 + balance

• Since he controlled the corp, he had FBAR filing requirement

No reasonable cause

• He ignored FBAR reporting requirements and wasn’t straight on 1040



Foreign Bank Account

• Account physically located in England (though the bank is a U.S. bank) is a foreign account

• Account physically located in Chicago, IL (though the bank is a Canadian bank) is NOT a foreign account

• Key

At what location (branch) is the account is set up?

• If “signature card” outside of U.S. soil, it is a foreign account


Polling Question #7

Which of the following is true regarding the FBAR reporting rules and online gambling accounts?

A. Online gaming accounts are never FBAR reportable

B. All online gaming accounts are FBAR reportable

C. Some, but not all, online gaming accounts are FBAR reportable

D. If someone is audacious enough to gamble on line, they should probably get a free pass from worrying about the FBAR reporting rules



Foreign Bank Account

• Online gaming account is a foreign bank account if titled off of U.S. soil (Jon Hom DC CA (06/04/14) case)

• But, in Jon Hom 9th Cir. (07/26/16) appeal, only clearing account (like a Paypal account) is reportable bank account, not accounts merely holding gambling money


FBAR Must Be Filed By

• Persons with either

Ownership of or signature authority over foreign bank account

Authority over = ability to withdraw

Account(s) must exceed $10,000 U.S. on any one day

• Use conversion rate as of last day of year



Polling Question #8

Are any foreign financial assets, beyond merely bank accounts, reportable on a FinCen 114 (FBAR)?

A. No, only foreign bank accounts are reportable on the FBAR. That is why the form is named the “Foreign Bank Account Report”

B. Yes


FBAR Reports “Financial Accounts”

• Financial accounts

1. Bank (e.g., savings and checking) accounts, time deposits

2. Securities accounts (e.g., brokerage accts)

3. Commodities future or options accounts

4. Insurance policy with cash value

5. Mutual funds or similar pooled funds

6. Online poker accounts

7. Any other accounts maintained in a foreign financial institution (or person providing services of fin institution)



FBAR Penalty for Non-Compliance

• Non-willful failure

Up to $10,000

Penalty won’t apply if show “reasonable cause”

• Willful failure

Greater of $100,000 or 50% of highest account balance

• Criminal penalties may also apply

• Overseas Voluntary Disclosure Program (OVDP) may keep you out of jail, but no guarantees


Tax Practitioner Protocols

• Best to make client sign engagement letter w/ discussion of foreign financial asset rules

• Best to make client fill out tax organizer -or- sign statement saying they’ve told you all

• Best to find out from malpractice carrier what protocol to follow (and follow it) to make sure carrier will cover you in event of trouble



Form 8938 Learning Objectives

• Form 8938

What is it?

• Purpose of 8938 reporting

• 8938 reporting (filing) requirements

• Form 1040 reporting requirements (re: 8938)

• Who must file (and who need not) file 8938

• Assets reported (and not reported) on 8938

• Penalties for failure to file 8938

• Tax practitioner protocols


FATCA Reporting (Form 8938)

• IRS Form 8938 must be filed if

1. Financial accounts;

2. Stock or securities; and/or

3. Contracts, interests (or other financial instruments), plus

Aggregate balances exceed Form 8938 filing threshold



Form 8938 Filing Thresholds

Form 8938 Filing Thresholds

Not Living Abroad

Unmarried (or MFS) MFJ

Last day of year Total value assets > $50,000

Total value assets > $75,000

Any time during year



Living Abroad

Unmarried (or MFS) MFJ

Last day of year Total value assets > $200,000


Any time during year




Polling Question #9

Is there any way a Costa Rica townhouse could legitimately find its way onto Form 8938?

A. No, because Costa Rica is officially part of the United States

B. No, because townhouses are not financial assets

C. Yes, because nothing in the federal tax law is as simple as “yes or no”



Is Real Estate Reported on Form 8938?

• Real estate itself not reportable

• If real estate held in entity, then interest in entity reportable

• Example

Costa Rica townhouse (Real estate itself not reportable

However, since real estate held by LLC, interest in LLC (a “security”) is reportable


8938 Broader Range than FBAR

• 8938 covers broader range of assets, including assets held offshore, but not in financial acct

• Examples

1. Foreign stock or securities not held in financial account (e.g., book-entry shares or dividend reinvestment plan shares);

2. Foreign partnership interest (e.g., foreign hedge fund or foreign private equity fund)



Some Assets Are FBAR, But Not 8938, Reportable

• FBAR covers a few assets the 8938 misses, for example:

1. Financial accounts in a foreign branch of a U.S. bank or U.S. financial institution

2. Bank accounts over which a person has signature authority, even if the account is owned by or belongs to someone else


8938 and FBAR Duplicative

• Form 8939 reporting is highly duplicative with FBAR reporting

• But, both are due anyway



Form 8938 Penalties

• Penalty for failure to comply

1. $10,000 for failure to disclose, plus

2. Additional $10,000 for each 30 days of non-filing, beginning 90 days after taxpayer receives IRS notice for failure to disclose

Maximum penalty: $60,000

• Criminal penalties may also apply

• FBAR penalties can be much higher ($3 million in one recent case)


Form 8938 Filing Method, Date

• Form 8938 is filed with, and is due at the same time as, Form 1040

• Statute of limitations troubles

If don’t attach 8938 to 1040, IRS may take position statute of limitations (S/L) for assessment never begins to run on 1040



Statute of Limitations Troubles

• Statute of limitations troubles

If don’t attach 8938 to 1040, IRS takes position statute of limitations (S/L) for income tax assessment never begins to run on 1040

If 8938 attached and foreign asset basis overstated by > $5,000, income tax S/L for assessment 6 years

If don’t report foreign asset on Form 706 (Estate Tax Return), IRS takes position S/L for assessment never begins to run on 706


FBAR vs. Form 8938

FBAR Form 8938

Who Must File? 1. U.S. persons - Includes U.S. citizens, resident aliens, trusts, estates and domestic entities 2. With an interest in foreign financial account(s) 3. Who meet reporting threshold

1. Specified individuals - Includes U.S citizens, resident aliens and certain non-resident aliens 2. With an interest in specified foreign financial asset(s) 3. Who meet reporting threshold



FBAR vs. Form 8938

FBAR Form 8938

Does U.S. include U.S. territories?

Yes, resident aliens of U.S territories and U.S. territory entities subject to FBAR reporting

No


FBAR vs. Form 8938

FBAR Form 8938 Reporting Threshold (Total Value of Assets) - Taxpayers Living in U.S.

Aggregate value of financial accounts exceeds $10,000 at any time during calendar year - If 2 or more accounts combined over $10,000, all accounts reported

- Unmarried (or MFS): Total value assets > $50,000 last day year -or- > $75,000 any time during year MFJ: Total value assets > $100,000 last day year, -or- > $150,000 any time during year



FBAR vs. Form 8938

FBAR Form 8938

Reporting Threshold (Total Value of Assets) - Taxpayers Living Outside U.S

Aggregate value of financial accounts exceeds $10,000 at any time during calendar year - If 2 or more accounts combined over $10,000, all accounts reported

Unmarried taxpayer (or MFS): Total value assets > $200,000 last day year –or- > $300,000 any time during year MFJ: Total value assets > $400,000 last day year –or- > $600,000 any time during year


FBAR vs. Form 8938

FBAR Form 8938

When do you have an interest in an account or asset? - Ownership

Financial interest = 1. Owner of record or holder of legal title; 2. Owner of record or holder of legal title is your agent or representative; 3. Own sufficient interest in entity that is owner of record or holder of legal title

Income, gains, losses, deductions, credits, gross proceeds or distributions from holding or disposing of account or asset must be reported, included, or otherwise reflected on income tax return



FBAR vs. Form 8938

FBAR Form 8938

When do you have an interest in an account or asset? – Signature authority

Signature authority = Authority to control disposition of assets in account by direct communication with financial institution maintaining account (FBAR Instructions)

Income, gains, losses, deductions, credits, gross proceeds or distributions from holding or disposing of account or asset required to be reported, included, or otherwise reflected on income tax return


FBAR vs. Form 8938

FBAR Form 8938 What is Reported? Maximum value of

financial accounts maintained by a financial institution physically located in a foreign country

Maximum value of specified foreign financial assets, which include financial accounts with foreign financial institutions and certain other foreign non-account investment assets



FBAR vs. Form 8938

FBAR Form 8938

How are maximum account or asset values determined and reported?

- Use periodic account statements to determine highest value of account during year - Convert to U.S. dollars using end of calendar year exchange rate - Report in U.S. dollars

- Fair market value in U.S. dollars (in accord with Form 8938 Instructions) for each account and asset reported - Convert to U.S. dollars at end of tax year exchange rate - Report in U.S. dollars


FBAR vs. Form 8938

FBAR Form 8938

When Due? - 2015 (and prior): Must be received by Treasury by June 30 (no extensions) - 2016 and later: Due by April 15 (6 month extension possible)

Form 8938 is attached to Form 1040 - Due on Form 1040 due date, including extensions



FBAR vs. Form 8938

FBAR Form 8938

Where to File? File electronically through FinCENs BSA E-Filing System. - Not filed with 1040

File Form 1040 - Follow instructions for filing 1040 - Form 8938 and Instructions can be found at www.irs.gov/form8938


FBAR vs. Form 8938

FBAR Form 8938

Penalties - Non-willful = Up to $10,000 - Willful = Up to greater of $100,000 or 50% of account balances - Criminal penalties may also apply

- Up to $10,000 for failure to disclose - Additional $10,000 for each 30 days after IRS notice - Penalty capped at$60,000 - Criminal penalties may also apply

https://apps.irs.gov/app/scripts/exit.jsp?dest=http://bsaefiling.fincen.treas.gov/main.html



https://www.irs.gov/uac/form-8938-statement-of-foreign-financial-assets



FBAR vs. Form 8938

Types of Foreign Assets / Whether Reportable

FBAR 8938

Financial (deposit and custodial) accounts held at foreign financial institutions

Yes Yes


FBAR vs. Form 8938


FBAR 8938

Foreign stock or securities held in financial account foreign financial institution

Account itself subject to reporting - Contents of account not separately reported

Account itself subject to reporting - Contents of the account not separately reported



FBAR vs. Form 8938


FBAR 8938

Foreign stock or securities not held in a financial account

No Yes


FBAR vs. Form 8938


FBAR 8938

Foreign partnership interests

No Yes

Indirect interests in foreign financial assets through an entity

Yes, if sufficient ownership or beneficial interest (i.e., a > than 50% interest) in entity Form 8938 instructions

further detail

No



FBAR vs. Form 8938


FBAR 8938

Foreign mutual funds Yes Yes

Domestic mutual fund investing in foreign stocks and securities

No No


FBAR vs. Form 8938


FBAR 8938

Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor

Yes, as to foreign

accounts

Yes, as to both foreign accounts and foreign non-

account investment assets



FBAR vs. Form 8938


FBAR 8938

Foreign-issued life insurance or annuity contract with a cash-value

Yes Yes

Foreign hedge funds and foreign private equity funds

No Yes


FBAR vs. Form 8938


FBAR 8938

Foreign real estate held directly

No No

Foreign real estate held through a foreign entity

No, but foreign entity itself is specified foreign financial asset

- Its maximum value includes

value of real estate

No



FBAR vs. Form 8938


FBAR 8938

Foreign currency held directly

No No

Precious Metals held directly

No No

Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles

No No


FBAR vs. Form 8938


FBAR 8938

‘Social Security’- type program benefits provided by a foreign government

No No



FBAR vs. Form 8938


FBAR 8938

Foreign Pension Funds* Yes Yes

* What is also very special is the foreign pension may also need

to be reported on Form 3520


Lookout, Lookout !!

• Do not overlook

Employee ability to sign on foreign business account

Foreign retirement savings accounts

Inherited foreign accounts

Accounts owned by recent immigrants to U.S.

• If in doubt, fill it out

If in doubt, send it out

• On time!!



Foreign Trust Reporting

• Foreign trusts and/or individuals associated with them may need to file

Form 3520;

Form 3520-A; or

Both Forms 3520 and 3520-A


Polling Question #10

A time share interest in a condo in Cabo San Lucas held in a Mexican Land Trust is reportable on IRS Form 3520

A. Yes, because you shouldn’t have bought that time share to begin with and this is part of your punishment

B. No, because IRS issued a ruling exempting such an arrangement from 3520 reporting



Foreign Trust Reporting

• Need the Mexican Land Trust (so-called “fideicomiso”) (e.g., Cabo San Lucas time share) file Form 3520, Form 3520-A or both?

IRS: No. Rev Rul 2013-14, 2013-26 IRB 1267 (06/24/13))


Gross Income

• §§61, 1402(e) Vow of poverty did not shield minister from income and SE taxes on support received from his church

Reliance on Rev. Rul. 77-290 misplaced

Result

• Tax bill totaling $150,000 over four years (Ronald W. White v. Comm., TCM 2016-167 (09/12/16))

It’s income when you have dominion and control over funds

Money for Ronald’s services flowing directly to the church would have been ok

• His problem = money flowed from church to him



Ministers and SE Tax

• (Ronald W. White (cont.))

If you’re a minister and don’t timely waive out of the SE tax, then it sticks like glue


Ministers and SE Tax

• §1402 Minister Not Liable for SE Tax

IRS approved her Form 4361 exempting her from SE tax in 1994

She prevailed in two IRS exams proving such

Then lost 4361 in a flood

She wins in tax court

No SE tax in 2000 and 2002 on grounds IRS agreed in two prior exams (Susan Corso v. Comm., TCS 2014-3 (01/09/14))

• Moral

Save your important forms in more than one place (these days, must scan and save in the cloud)



Parsonage Allowance for Ministers

• §107 Re-Tooled and Re-Loaded lawsuit challenges Parsonage Allowance Exclusion on constitutional grounds (Freedom From Religion Foundation, et al (Annie Laurie Gaylor, et al), v. Lew, Case No. 16-CV- 215 (D.C. W.D. WI 04/06/16))

Moral

• If you’re a minister claiming parsonage allowance, file your return fast

Parsonage allowance’s days may be numbered


Elder Abuse Tax Effects

• §§61, 102

Is it a loan? Is it a gift?

Affection, respect, admiration, charity or like impulses?

• No. It’s elder abuse (Angelina Alhadi, pro se, v. Comm., TCM 2016-74 (04/21/16))

Dementia and gross lack of gentle and considerate care were clues

What is the difference between a “gift” or “undue influence” in eldercare?

There is no detached and disinterested generosity in the presence of coercion or undue influence



Elder Abuse Tax Effects

• (Angelina Alhadi (cont.))

• Income from alleged elder care (even if extorted from vulnerable elderly person) is income taxable and SE taxable

• What is tax effect to Dr. Marsh (the person who was embezzled from)?

Theft loss

• Deductible in the year discovered


Cancellation of Debt Income

• §§61(a)(12), 108(b) bank account overdraft not recovered by bank was cancellation of indebtedness (COD) income (Keith A. Newman, Jr. v. Comm., TCM 2016-125 (06/28/16))

Student loans tipped balance to make taxpayer insolvent, so COD income not taxable

But his tax attributes still get swatted down on Form 982




• (Newman (cont.)) Debt deemed discharged the moment it becomes clear it

will never be repaid

”Identifiable event” fixes the loss with certainty, may be taken into consideration

• §1.6050P-1(b)(2) provides exclusive list of eight “identifiable events” under which debt is discharged for info reporting purposes (including the expiration of a 36-month nonpayment testing period)

Bookkeeping entry by a creditor does not result in COD income

The issuance of a Form 1099-C is an identifiable event, but it is not dispositive of an intent to cancel indebtedness



• (Newman (cont.))

36 month rule resulted in rebuttable presumption identifiable event occurred

Regs. create presumption and, sometimes, reality

Bye-bye 36 month rule (IRS axed it, but Treas. considering bringing it back)

Insolvency = Liabilities exceeding fair market value (FMV) of assets at moment immediately before discharge



Medical Expense Substantiation

• Zetina Renner (TCM 2015-102 (06/02/15))

Note from doctor must relate medical condition to prescribed remedy

Substantiation must be specific to patient, diagnosed condition, prescribed remedy


Interest Tracing Rules

• §72(e)(5), 163(h) Unpaid policy loan taxable upon cancellation of life insurance contract (Kenneth L. and Larita K. Mallory v. Comm., TCM 2016-110 (06/06/16))

Amount taxable is principal and interest forgiven which exceeds investment in policy

Interest on loan forgiven not deductible either (but might have been If taxpayer could have fought his way out of a wet paper bag)



Interest Tracing Rules

• Tracing home equity line of credit (HELOC) interest requires substantiation of amount traced to business (Vincent Ocampo, 2015-150 (08/15/16))

• Interest tracing rules show up currently in Court!!

• Must show what money got spent on once it plops into business account!!


Dependency Exemptions

• §§151, 152

Non-custodial parent cannot write off his children when Form 8332 conspicuously absent from his tax return

It is as simple as that (Richard A. Eichinger and Diana Suarez, pro sese, v. Comm., TCS 2016-18 (04/21/16))




• §152 AWOL mother not entitled to dependency exemption

School records tipped the balance to show her son lived with his father and grandmother (Tiffany Marie McSweeney v. Comm., TCS 2016-51 (08/31/16))

Court unable to resolve dispute based on witness’ conflicting testimony and demeanor

Form 8332 attached would have saved her bacon, but no such luck



• §§152, 24 Written declaration that non custodial parent could claim dependency exemption not unconditional

Requirement that dad keep up with child support cost him (William Lester Kennedy, Jr., pro se, v. Comm., TCS 2016-61 (09/26/16))

Form 8332 would have bailed him out



American Opportunity Tax Credit

• 100% of first $2,000, 25% of next $2,000 §25A(i)

• American Opportunity Credit (AOTC) = Credit of

“100 percent of so much of the qualified tuition and related expenses paid by the taxpayer during the taxable year * * * as does not exceed $2,000”, plus

“25 percent of such expenses so paid as exceeds $2,000 but does not exceed $4,000”

Maximum amount of the credit = $2,500 per year



• §25A(i) Virginia woman entitled to American Opportunity Credit after her college “Kind of dropped the ball” on Form 1098-T (Angela A. Terrell, pro se, v. Comm., TCM 2016-85 (05/02/16))

• She proved she spent dough and credit was legit

• It doesn’t matter what’s on the 1098-T if the taxpayer gets it right




• §25 American Opportunity Tax Credit disallowed in 2012 for tuition paid on 12/18/11 (Lucas Matthew McCarville, v. Comm., TCS 2016-14 (04/04/14))

Cash method usually your friend, but not this time

3 month rule doesn’t flip around

Cash method timing doesn’t bend



• (McCarville (cont.))

AOTC cash payments must be made for academic period beginning in same year

• Exception

3 month rule

• For prepayment of tuition (and related expenses) for an academic period which begins within first 3 months following such year

• If you pay January (of year 2) tuition in the prior December (of year 1), you claim the AOTC in year 1, not in year 2

• You can only deduct it in the year you pay it



College Credits and Deduction

• IRS Announcement 2016-17

Limited Penalty Relief for Filers of Form 1098-T, Tuition Statement

• IRS will not impose penalties under §§6721 or 6722 on eligible educational institutions with respect to Forms 1098-T required to be filed and furnished for the 2016 calendar year under §6050S if institution reports aggregate amount billed for qualified tuition and related expenses on Form 1098-T

• Form 1098-T is fatally flawed

Will IRS fix it? When?



• §25A Cohan rule used to estimate tuition paid for AOTC purposes (Djamal Mameri, pro se vs. Comm., TCS 2016-47 (08/24/16))

Tax Court going berserk w/ Cohan Rule lately

On strength of his testimony and letter from prof that he attended school, $350 for tuition allowed under Cohan

AOTC Credit allowed for $350 tuition payment despite lack of cancelled check or credit card receipt

Cost of computer not allowed for AOTC because not required by college



§529 Plans

• §529 Distributions from §529 Plan taxable income unless proceeds used for education (Dora Marie Martinez and Carlos Garcia v. Comm., TCM 2016-182 (09/28/16))

Submitting proof too late is submitting no proof at all

She who sleeps on her rights loses them



Which of the following statements is the best statement?

A. A withdrawal from a 529 plan to purchase a computer is income tax free regardless of whether the school requires a computer for enrollment

B. Dell laptops last a lot longer than do Macs

C. The purchase of a computer is eligible for the American Opportunity Tax Credit regardless of whether the school requires a computer for enrollment



§529 Plans

• §529(e)(3) “Qualified Higher Education Expenses”

1. Tuition, fees, books, supplies, and equipment required for enrollment or attendance;

2. Special needs services for special needs student;

3. Expenses for the purchase of computer (need not be required) or peripheral equipment, computer software or internet access and related services, if used primarily by student; and

4. Qual. room and board for student at least half time


Due Diligence for EITC, ACTC and AOTC

• PATH Act Expands Due Diligence Requirements (beyond Earned Income Tax Credit (EITC)) to Refundable Child Tax Credit (ACTC) and American Opportunity Tax Credit (AOTC) for 2016 returns filed in 2017

Applicability of penalty broadened and penalty amount increased

Penalty $510 for 2016



EITC Fraud Prevention Enforcement

• IRS issuing injunctions against problem Earned Income Tax Credit (EITC) preparers

IRS continues to pursue EITC due diligence injunctions to prohibit a problem preparer from further preparing federal income tax returns


Alimony

• §§71, 451 $5,568,200 Received in divorce settlement ruled taxable alimony (Maria G. Leslie v. Comm., TCM 2016-171 (09/14/16))

California Law, in absence of clarity in Marital Settlement Agreement, supplied provision that payments would cease upon recipient’s death

Waive out of California Law not exercised



Constructive Receipt

• (Maria Leslie (cont.)) - Did Maria constructively receive payment in 2009 when she did not know about it and could not access it?

No

• Income is income when actually or constructively received

• Knowledge of receipt of funds is necessary for constructive receipt

• Even if h/ knowledge of funds, m/ have power to get them

• If your agent receives money for you, then you receive it

Even so, Leslie’s adverse ex husband was not her agent


Theft Loss

• §165(c) Theft loss arises for money which disappeared to African diamond scam when is theft loss deductible?

In year of discovery, unless there is claim for recovery (Maria G. Leslie v. Comm., TCM 2016- 171 (09/14/16))

• To extent theft loss exceeds income, it becomes NOL



Abatement of Late Filing Penalty

• §6651 Abatement of Late Filing Penalty?

No (Maria G. Leslie v. Comm., TCM 2016-171 (09/14/16))

Maria suffered from major depression, schizoaffective disorder and dependent-personality disorder, planned her own death, took psychotropic Drugs (Including Effexor XR, Abilify, Cymbalta and Prozac) and under continuing psychological evals

No abatement of late file penalty because she had ability to and did manage rentals for money to live on during time of late filing


Abatement of Late Filing Penalty

• (Maria Leslie (cont.))

Incapacity from mental illness can be reasonable cause, but mental disorder must render one incapable of exercising ordinary business care and prudence during time of failure to file



Discrimination Lawsuit

• §§104(a), 62(c) Proceeds received for New York car salesman repeatedly harassed by coworkers (because of his National Origin) Taxable (Abraham J. George v. Comm., TCM 2016-156 (08/22/16))

§62(a)(20)

• Above-the-line deduction for attorney fees and court costs for action involving a claim of unlawful discrimination

§62(e)

• “Unlawful discrimination” = unlawful employment discrimination on account of race, color, religion, sex or national origin


Home Mortgage Interest Deduction

• §163(h) Nevada man who claimed he was “Domestic Partner” of homeowner girlfriend not entitled to interest deduction (James David Jackson, pro se, v. Comm., TCS 2016-33 (07/05/16)

• Submitted no credible proof he made payments or was equitable owner of residence

• But, he could have done it right




• (James Jackson (cont.))

Interest paid by equitable owner is deductible

No proof of money transfer to Julie

James proved neither mortgage payments nor equitable ownership

State law might have bailed James out


Tests for Equitable (Benefits and Burdens) of Ownership

• Whether taxpayer

1. Has right to possess property and to enjoy its use, rents, or profits;

2. Has a duty to maintain property;

3. Is responsible for insuring property;

4. Bears property’s risk of loss;



Tests for Equitable (Benefits and Burdens) of Ownership

5. Is obligated to pay the property’s taxes, assessments, or charges;

6. Has right to improve property without owner’s consent; and

7. Has right to obtain legal title at any time by paying balance of purchase price



• (James Jackson (cont.))

What approach w/ h/ worked better for James to garner his interest deduction?

1. Written document showing equitable ownership and corresponding burdens and obligations

2. Proof of actual money flow from James to Julie

3. Use of bank account to reflect flow of funds

4. Paying broader variety of bills on house than just interest

5. Julie’s direct testimony in court to shore up proof



Transfers from IRAs to Charities

• Must be a trustee transfer

Rollovers don’t cut it

• Do not retrieve check from trustee and hand deliver it to trustees

• Substantiation

Separate receipt (contemporaneous acknowledgement) needed for

1. Deductible donations; and

2. Transfers from charity


Charitable Contributions

• §170 No charitable contribution for easement contributed by Kansas City Golf Course (RP Golf, LLC v. Comm., TCM 2016-80 (04/28/16))

Subordination of mortgage not in writing at time of contribution of easement

Gift must be “in perpetuity”

Case also shows how single member LLC disregarded in charitable contribution context (protects donee charity from potential environmental liability)




• §170 Charitable contribution deduction for easement disallowed

Conservation Purpose Not Protected in Perpetuity (Douglas G. Carroll, III and Deirdre M. Smith v. Comm., 146 TC No. 13 (04/27/16))

If conservation purpose extinguished, charity only got a share of extinguishment proceeds



• §170 Virginia woman claiming $57,000 in noncash charitable contributions for 9 trips to Goodwill didn’t get far

Her approach schools us how not to be (Betty Jean Spencer v. Comm., TCS 2016-62 (09/26/16))

Betty botched Form 8283

Oops, she had inherited some stuff she said she bought

Tax Court did not like that Goodwill did not complete the receipts

Betty did not prove she made contributions or what their value was



Home Office Deduction

• §280A Home office deduction for remote employee hits small bucket of pay dirt (Michael D. and Jo B. Hastings v. Comm., TCM 2016-61 (04/05/16))

Meat, potatoes and brown gravy home office deductions are alive and well

Taxpayer’s $393 deduction for unreimbursed home office utilities upheld

10’ x 12’ room was 6% of home’s square footage


Home Office Deduction

• §162 50% Home office use renders 50% of $18,000 legal expenses deductible for dispute with Homeowner’s Association (Denise Celeste McMillan, pro se v. Comm., TCM 2015-109 (06/11/15))

Lawsuit was over dogs running wild, barking dogs and dog poop

Above-the-line deduction for big ticket spending makes home office look pretty good



Telephone Expenses

• (Hastings (cont.))

Jo Hastings also sought a deduction for their home telephone service, for which she provided substantiation

• §262(b), however, disallows a deduction for the first landline in a personal residence


Internet Services

• Compare

If Jo’s phone line was bundled with a bundled cable package, recent cases have provided generous allocations to the deductible business use of the internet portion of such services.

• Ronald G. Ezell, Jr., pro se, v. Comm., TCS 2015-52 (08/25/15) (80% of bundled fee deductible)

• James E. Kaminski, pro se, v. Comm., TCS 2015-7 (02/03/15) (75% of bundled fee deductible)

• Lauren Elizabeth Miller v. Comm., TCS 2014-74 (07/28/14) (70% of bundled fee deductible)



“Source Rule” for AMT Credit

• §§53, 421 MTC (AMT) Credit generated by husband (prior to marriage) not available to spouse after his death (Nadine L. Vichich v. Comm., 146 TC No. 12 (04/21/16))

The “source” rule sorted out in all its glory

Joint filing does not convert 2 spouses into 1 single taxpayer

Joint filing does not permit either spouse to inherit or otherwise retain (after marriage ends) a tax benefit originally conferred upon the other spouse


Reimbursement of Expenses

• §§127, §162 Failure to seek reimbursement from employer for reimbursable educational expenses yields tax benefits for no one (Michael D. and Jo B. Hastings v. Comm., TCM 2016-61 (04/05/16))

Employer cannot deduct or exclude

Employee cannot deduct

She who sleeps on her rights loses them




(Hastings (cont.))

Unreimbursed employee business expenses generally deductible if in connection with performance of services and proximately related

No deduction where employee fails to seek reimbursement

Employee has burden to show expense is not reimbursable



• Recommended tax practice protocols

1. Tax organizer (and preparer in client interview) should ask whether each item sought to be deducted as an employee business expense was reimbursable by employer and whether reimbursement was sought

2. Employee should obtain a copy of employer’s expense reimbursement plan (keep copy in 1040 prep file)



ACA Individual Shared Responsibility Payment

• Calculating individual shared responsibility payment (IRS HCTT-2016-40 “Here’s the 4-1-1 on calculating individual shared responsibility payment”)

ACA requires each taxpayer (and each member of a taxpayer’s family) to have minimum essential coverage, qualify for an insurance coverage exemption or make an individual shared responsibility payment penalty for each month without coverage or an exemption


Capitalize vs. Repair

• §§263(a), 212 Texan did not prove amounts spent on investment property were for currently deductible repairs

But, was she better off capitalizing? (Mandie Bradford Gaston, pro se v. Comm., TCS 2016-41 (08/15/16))




(Gaston (cont.)) When asked specifically what these expenditures were for, Mandie stated

“Holes in walls were closed, bricks were replaced on the outside of the house, doors were replaced, cabinets were replaced because there were no doors on those, bathroom tubs, toilets.”



• (Gaston (cont.)) No evidence introduced as to condition of property before expenditures incurred

Mandie did not provide any testimony regarding the condition of her investment property before she had incurred the reported repairs expenses

Rather than providing a full explanation and detailing specifically what she spent $20,852 on, she stated

“I mean, I can’t go down all the list. You have the receipts that told you

the things that I purchased.”

Receipts lacked proper context and clarity




(Gaston (cont.)) Current deduction for ordinary and necessary expenses paid for management, conservation or maintenance of investment property

No current deduction for capital expenditures

Repairs do not prolong life of property, increase its value or make it adaptable to a different use

Tax Court did not buy vague, uncorroborated and self-serving testimony

Court

• Expenditures were to prepare investment property to sell


Capitalize or Expense De Minimus Safe Harbor

• $5,000 per invoice may be expensed if business has applicable financial statements (AFS)

• $500 per invoice may be expensed for business without AFS (before 2016)

• $2,500 per invoice may be expensed for business without AFS (2016 and later)

• Higher amounts allowed if do not distort income, written de minimus policy (with such higher amount) in place at taxpayer level and election made on tax return



PAL Real Estate Professional

• §469 Real estate professional

Less than perfect time records sail right through (Joseph D. and Darcy C. Moon v. Comm., TCS 2016-23 (05/23/16))

Material participation proven in absence of contemporaneous time log

Court bought later prepared logs amplified by taxpayer testimony at trial - IRS messed up

• Did not raise issue in pleadings

• Raised issue later at trial

─ Result: Burden of proof on IRS

─ IRS failed

─ Logs upheld


PAL Real Estate Professional

• Ohio Woman Granted PAL Real Estate Professional Relief (Beth M. Hailstock, TCM 2016-146 (08/08/16))

Though no §469(c)(7) election and no aggregation election

Pathetic, missing financial records did not even trip her up

No time records kept

On strength of her “no outside employment” and credible testimony, court awards “facts and circumstances” material participation

Does arguing this case make us penalty free when we sign a tax return with a less than perfect underlying fact pattern?




Which of the following statements is true regarding stock received from the demutualization of an insurance company?

A. There is no controversy about the fact a shareholder receives basis when a mutual insurance company demutualizes

B. There is a split among the federal circuit courts as to whether a shareholder receives basis when a mutual insurance company demutualizes

C. Taking the position a taxpayer has basis in stock received when an insurance company demutualizes is akin to a Hail Mary pass in football


Demutualization

• 9th Circuit Rules No Basis Received by Policyholder in Demutualization of Mutual Insurance Company (Timothy D. Reuben v. U.S., 9th Cir. No. 13-55240 (01/05/16))

• Fisher Logic Rejected to Confirm Split Among Circuits



Promissory Notes

• Shareholders borrow now from your corporations

If interest rates go up, servicing note will cost more

• Perhaps interest rates will be heading up soon, after recent historic lows

• For shareholders of closely held corporations who are looking to borrow (or renew notes) from their companies, now may be the time to act


Promissory Notes

• Avoiding recharacterization

In closely held corporation/shareholder context, the §7872 rules don't apply if

1. Loan balance between parties in aggregate on any day does not exceed $10,000 (de minimis exception) §7872(c)(3)

2. Loan bears interest at a rate at least equal to the AFR §7872(e), §7872(f)



Capital Gains vs. Ordinary Income

• §1235 Royalty payments received taxed as ordinary income, not capital gains

“All substantial rights” to relevant underlying technology not transferred away

Income tax price tag of retaining rights = $5.8 Million (Spiridon Spireas and Amalia Kassapidis-Spireas v. Comm., TCM 2016-163 (08/24/16))


Individual Retirement Accounts

• Annual Contribution Limits to IRAs for 2016 and 2017

Traditional IRA and Roth IRS Contribution Limits $5,500 (for 2016 and 2017)

Traditional or Roth IRA Contribution Limit for age 50 or over $6,500 (for 2016 and 2017)



Transfers from IRAs to Charities

• IRA transfers to charity for 70 ½ or older (Made permanent) (Make sure receipts are properly worded)

• Must be trustee transfer

Rollovers don’t cut it

Do not retrieve check from trustee and hand deliver it to charity

• Substantiation

• Separate receipt (contemporaneous acknowledgement) needed for

1. Deductible donations; and

2. Transfers from charity



• §219 No contribution to IRA and related deduction allowed in absence of “Taxable Compensation”

A distribution from another IRA does not taxable compensation make (Mary E. Barie and Thomas R. Barie, pro sese, v. Comm., TCM 2016-160 (08/23/16))




IRA contribution and deduction limited to “taxable compensation” §219(a)

Taxable compensation includes earned income, but not deferred comp or dividend or interest income

The standard is “taxable compensation”, not “earned income”


What Is a Self Directed IRA (Plan)?

• Self directed plan = plan made available by a provider which allows alternative investments for retirement savings

• i.e., plan through which provider offers ability to hold asset types in which plan owner wants to invest

For non-self directed plans, investment options typically include only stocks, bonds, mutual funds, bank products and cash

Self directed plans make available a significantly broader range of alternative investments



Self Directed Asset Options

• Private Equity (closely held stock, closely held LLC or closely held partnership interests)

• Real Estate

• Loans

• Precious metals (certain gold, silver, platinum, palladium) (but not all)

• Other (options, brokerage account, timber, growing crops, oil and gas, horses, oil and gas partnerships, intellectual property, etc.)

• Custodians may contractually restrict type of assets


Self Directed Account Mechanics

• Open account with provider that allows you to choose your own investment

• Contribute funds

• Choose investment

• Direct the provider to acquire investment

• Provider must hold (keep custody of) assets, handle all financial transactions, pay bills, keep records, issue reports to owner, cause tax return (if required) to be filed, file annual Form 5498, etc.



Unrelated Business Income Tax (UBIT)

• Is UBIT illegal?

No.

A prohibited transaction?

• No. It’s just a tax

• Being unfamiliar results in fear

• The question

Are you better off (engaging in transaction that results in UBIT) after paying the tax (i.e., have higher IRA net worth) than you would be had you not engaged in the transaction?

• If better off, go for it.

So what if you pay some tax? You’re better off


Self Directed Plan May Face UBIT Tax

• UBIT tax may apply if

Plan engages in certain business activities or purchases assets with borrowed funds

• If plan has more value after tax is paid (compared to if the activity producing the tax had not been engaged in), plan is better off

Example

• IRA buys apartment building w/ 40% down, 60% borrowed

• Initially, 60% of net rental income taxed. % taxed drops as debt paid down

• Later, sell building at handsome profit

• Only part of gain on sale taxed

• Look at then existing debt ratio for allocation of amount taxable vs. amount not taxable




Paying UBTI inside an IRA is always a horrible thing

A. True

B. False


Self Directed IRA IRS Reporting

• Form 5498 annual reporting required

Annual valuation by category: Form 5498, Boxes 15a & 15b

• Box 15b codes

A—Closely held stock

B—Closely held short- or long-term debt

C—Closely held ownership interest in a limited liability company

D—Real estate

E—Closely held ownership interest in a partnership, trust, or similar entity

F—Closely held option contract or similar product

G—Other asset that does not have a readily available FMV

H—More than two types of assets (listed in A through G) are held in this IRA



Prohibited Transactions IRC §4975

• Disqualified persons cannot “self deal” with the plan

• Disqualified person - Fiduciary of plan (owner (you) and advisors) - Person providing services to the plan - Employer of any participant in the plan - Employee organization if member covered by plan

• Includes descendants (down-line) and their spouses, ascendants (up-line)

• Includes spouse of owner





A sister of an IRA account owner is a disqualified person for prohibited transaction purposes

A. True

B. False




Prohibited Transactions Disqualified Person

• Joseph R. Rollins, pro se, v. Comm., TCM 2004-260 (11/15/04)

Rollins caused 401(k) plan of his 100% owned Corp to lend money to each of 3 companies he owned minority (10% or >) interests in

His 100% owned Corp was fiduciary (sole trustee and administrator) of 401(k) plan. He also acted on behalf of borrowers for the loans.

Each of loans was “prohibited transaction” §4975(c)(1)(D)


Prohibited Transactions Disqualified Person

• (Rollins (cont.))

Rollins was disqualified person liable for $208,400 excise tax(es) under §4975(a), (b) and $11,000 penalty for failure to file Form 5330 excise tax return

Plan ceased to be qualified plan (as of January 1 of year of first loan)




• Selling something you own to the plan (e.g., sell or supply part to refrigerator)

• Buying from the plan (e.g., purchasing rental property from plan)

• Lending money or extending credit to the plan (Peek, 142 TC 216 (05/09/13)) (Thiessen, 146 TC 7 (03/29/16))



• Providing services to the plan (Ellis, TCM 2013-245, affirmed 8th Cir (04/14/15)) (e.g., doing books for IRA or business owned by IRA)

• Getting paid by the plan (Ellis, TCM 2013-245, affirmed 8th Cir (04/14/15))

• Personal use of (or benefit from) plan assets (Kellerman, DC AR (09/14/15))

• Use of assets by plan fiduciary (e.g., cannot rent building owned by plan)



Prohibited Transactions Intent of IRC §4975

• Disqualified persons cannot self deal with the plan

• Purpose of §4975 = to prevent taxpayers involved in a plan from using the plan to engage in transactions for their own account that could place plan assets and income at risk of loss before retirement (Ellis, TCM 2013-245, affirmed 8th Cir (04/14/15))


Prohibited Transactions Where the Rubber Hits the Road

• The enumerated transactions set forth in §4975 are meant to exhibit per se examples of this kind of self-dealing (Leib, 88 TC 1474 (1987))

• Distinction

What does it say I can’t do vs. What is it saying (It doesn’t say you can)



Prohibited Transactions Where the Rubber Hits the Road

• Many prohibited transaction failures result from “fine line walking”, technical interpretations attempting to slide by §4975

• The courts don’t buy such attempts

Result = lambs led to slaughter

• Problem

Each new court case rules on only one issue of many in the case’s fact pattern

• Makes things look simpler than they are


Prohibited Transaction No Means No

• The fact that a transaction would qualify as a prudent investment when judged under the highest fiduciary standards is of no consequence (Ellis, TCM 2013-245, affirmed 8th Cir (04/14/15))

• It doesn’t matter how great the deal is, whether it is at arm’s length, etc.

• The fact is if the action is a prohibited transaction, you can’t do it



What You Can and Cannot Do

• Here is what you can do

Contribute to plan, withdraw from plan, choose what plan invests in

• Here is what you cannot do

Anything else


Consequences of Prohibited Transaction

• IRA ceases to be IRA as of first day of taxable year in which prohibited transaction takes place

• All assets deemed distributed in taxable event as of first day of such taxable year

• Income taxable event results and premature withdrawal penalty may apply

• Gross income from deemed distribution is recognized in amount of account’s value as of first day of such taxable year

• IRA is killed deader than a doornail and stays that way



Consequences of Prohibited Transaction

• Plan ceases to be a plan as of 1st day of year in which prohibited transaction takes place

• Excise tax triggered

• Excise tax return (Form 5330) due

• 6 year statute of limitations (for assessment) for not disclosing prohibited transaction on 1040 (Thiessen, 146 TC 7 (03/29/16))



The consequences of a prohibited transaction are not much more than a hand slap on the wrist

A. True

B. False



ROBS Transactions Steps to Create

1. Individual creates new corporation (purpose = to sponsor a qualified retirement plan)

2. New corp creates qualified retirement plan (such plan allows participants to invest their whole plan account balance in new corp's stock)

3. Individual becomes employee of new corp, enrolls in plan


ROBS Transactions Steps to Create

4. Individual rolls over (or trustee transfers) funds from his IRA (or previous employer's qualified plan) into new corp’s qualified plan

5. Individual directs that his account balance (in qualified plan) purchase stock of new corp

6. Transferred funds (now inside new corp) begin a business enterprise



IRAs and Asset Protection

• Prohibited transaction leads to taxable event, resulting IRS bill and creditors’ feast (Kellerman, DC AR (09/14/15))

IRA bought land

Half of such land ended up in LLC owned by IRA owner and his spouse

This maneuver was not reported as a distribution

IRA owner pretended land operated in partnership w/ LLC and his IRA

Result

• IRA owner (and spouse) benefited personally. Thus, prohibited transaction


IRAs and Asset Protection

• Cross collateralization agreement with Merrill Lynch did not automatically destroy IRA (Trigger a prohibited transaction), But it came close

Sixth circuit reverses bankruptcy court and district court

Predator was bankruptcy trustee (Daley, (6th Cir) (06/17/13))



Creditor Protection for Inherited IRAs

• Inherited IRAs not protected in Federal Bankruptcy case (Clark, US S Ct (06/12/14))

• But spouse beneficiary can change name (on account inherited from deceased spouse) to himself or herself and gain protection



An IRA you inherit from your momma is subject to creditors’ reach in a federal bankruptcy case

A. True

B. False



Self Directed IRAs and Distributions

• IRA owner had “claim of right” in payment by SEP IRA, so taxable distribution resulted (Vandenbosch, TCM 2016-29 (04/24/16))

SEP IRA agreed to lend $125,000 to a third party

$125,000 drawn from SEP IRA, put in owner’s personal account (without restriction), then transferred to borrower

A taxpayer who receives an amount under a claim of right, without restrictions as to its disposition, has received income for tax purposes, even though the taxpayer may still be liable to restore its


Self Directed IRAs and Distributions

• IRA owner’s direction to IRA custodian to purchase stock did not result in taxable distribution (McGaugh, TCM 2016-28 (02/24/16))

• IRA owner requested Merrill Lynch (ML) to buy FPFC (privately held stock)

ML refused

• Instead, IRA owner asked ML to wire $50,000 directly to FPFC

ML did so

ML said FPFC stock certificate not received until > 60 days later

• Tax Court

No funds passed through IRA owner’s hands (even if stock certificate landed in his hands later)

• IRA owner was mere conduit with “no claim of right” to distributed funds



IRAs and Contribution Limits

• Annual contribution limit for IRAs = $5,500 ($6,500 if age 65)

• Tax Court shoots down attempts to use corps to skirt IRA contribution limits

Arrangement between corps to artificially allocate value to Roth IRA (Polowniak, TCM 2016-31 (02/25/16))

Scheme to overfund Roth IRA via DISC commissions (Summa Holdings Inc., TCM 2015-119 (06/29/15))


IRA Rollover One Per Taxpayer (Not Per Account) Per Year

• One rollover per taxpayer per year (Bobrow, TCM 2014-121)

• IRS Announcement 2014-15: One rollover per year rule starts in 2015

• Trustee transfers have no “one year” limitation



Blown IRA Rollover Relief

• IRS will waive blown rollover if good taxpayer excuse (taxpayer must apply for IRS Private Letter Ruling (PLR) and pay up to $3,000 user fee)

• If don’t go for IRS PLR relief, forget relief in Tax Court (Thomas Wesley, TCS 2014-18)



What is the best approach for a blown IRA rollover?

A. Find some proverbial sand and hide your head in it

B. Go for a ruling, blame someone else and have them pay the user fee



Estate Tax Amounts 2010 – 2017

• Basic Exclusion Amount*

(2016) $5,450,000 (2017) $5,490,000

* DSUE may be added to basic exclusion amount


Annual Gift Tax Exclusion

• Annual Gift Tax Exclusion

For 2016 (and 2017), annual gift tax exclusion = $14,000



Gift Tax and §529 Plans

• §§529, 2503 §529 Plan five year forward averaging would have been oh so sweet

But, you can kiss it goodbye when you don’t check the right box on the gift tax return (Estate of Edward G. Beyer v. Comm., TCM 2016-183 (09/29/16))

One set of gift tax returns not filed at all

Another set filed, but “§529 plan forward averaging box” not checked and explanation not attached

How to make the election? Follow Form 709 instructions


Closing Letters

• For estate tax returns filed after 06/01/15, estate tax closing letters issued by IRS only on request by taxpayer

IRS: Wait 4 months after estate tax return filed to request closing letter

IRS: Expect closing letter 4 to 6 months after return is filed, unless return chosen for exam

• Estates owing tax should almost routinely request closing letter before making estate distributions



IRS Transcripts in Lieu of Closing Letters

• IRS urges

Get transcript from IRS’ Transcript Delivery System (TDS) in lieu of closing letter

• Practitioner concern

A code (an entry by IRS) on an estate tax return transcript does not carry same weight as a closing letter

• “Transaction code 421 (with explanation “Closed examination of tax return”)” indicates Form 706 accepted as filed and exam complete

• If transaction code 421 not present, return remains under IRS review


Estate Planning Practice Trends

1. Only 0.14% of (2 of every thousand) Americans who die each year owe any federal estate tax

2. Estate taxes no longer drive most clients to plan

3. Cannot ignore GST tax

• Without proper allocation of GST exemption ($5 million indexed), many trusts will be subject to GST tax at death of beneficiary

4. Increased relative importance of income taxes

• Achieving basis step up now most important




5. Routine use of traditional credit shelter trusts / marital deduction planning “out” (except for wealthy)

6. Portability now much more predominant

7. Transfer planning remains important for wealthy

8. Document that you gave client all reasonable choices / client made fully informed choice

9. Grab discounts while you can

10. Beware making lifetime gifts of low basis assets



11. Undo prior planning – Fixing stale or broken trusts

• If client will not face estate tax and does not want to lose basis step up at each spouse’s death (or beneficiary’s death), may not want to go through with prior planning

• How to “undo” prior planning?

─ Don’t fund bypass trust

─ Cause previously transferred low-basis assets to be included back in donor’s gross estate




• Undo prior discount planning

• Undo life insurance trusts

• Causing inclusion of asset in beneficiary’s estate

• Fix a “stale” irrevocable trust

• Dwindle a “stale” irrevocable trust and build a new one over time



12. Basis adjustment planning

• Posturing to leave flexibility open to cause trust assets to be included in gross estate of settlor (or trust beneficiary) if settlor (or beneficiary) has excess estate exemption

• Generates step up in basis at settlor or beneficiary’s death without generating estate tax

13. Planning with trusts to achieve non-tax objectives (long term management, creditor protection and divorce protection)

14. Estate and trust distribution planning for income tax purposes

15. Planning to minimize state estate taxes



Returns Filed / Audit Stats

• Estate tax returns (Forms 706)

51,736 returns filed in 2001

5,158 returns filed in 2014 (<10% of 2001 level)

Today, 20% to 30% of estate tax returns examined

• Gift tax returns (Forms 709)

220,000 returns filed each year (years before 2012)

371,747 returns filed in 2014 (169% of prior level)

Today, just below 1% of gift tax returns examined


Hot Issues on IRS’ Radar Screen

1. Installment sales to grantor trusts (major gift tax issue is value of property sold)

2. Family limited partnerships and LLCs (most litigated issue is whether assets contributed to FLLP/FLLC should be included in estate under §2036) (gift of “present interest” also scrutinized)

3. Formula transfers with defined value clauses (IRS is challenging validity)

4. Challenges to promissory notes (IRS attacks interest rate, sufficiency of collateral, and loan vs. gift)



Family Settlement Agreements

• Settlement agreement did not result in taxable gift (Estate of Edward Redstone, 145 TC 11 (10/26/15))

Litigation was settled over dispute of ownership of 100 shares of stock (in predecessor company to Viacom) held by Edward Redstone

Dispute centered around disagreement between Edward and his father, Mickey, (president of company) who insisted part of Edward’s shares were held in oral trust fbo Edward’s children (Edward’s father’s grandchildren)

Edward sued company to recover 100 shares of stock held in his name. Edward’s children not parties to suit



• Edward Redstone (cont.)

• Settlement reached

Edward was paid $5 million for 66 2/3 shares; 33 1/3 shares went into trust for Edward’s 2 children; and Edward resigned from company and trusteeship of all family trusts

• Transactions occurred in 1971 – 1972

IRS caught wind of it all in 2010. Edward died in 2011.

• In 2013, IRS assessed Edward’s estate $737,625 in gift tax, $368,813 fraud penalty (or $36,881 negligence, in alternative) and $184,406 for failure to file a gift tax return





• Tax Court

No taxable gift

• A gift results from a transfer for less than adequate and full consideration

§2512(b)

• Exception (i.e., no gift if)

Sale, exchange, or other transfer of property made in the ordinary course of business (bona fide, at arm's length and free from any donative intent) is made for adequate and full consideration in money or money's worth

• Reg. §25.2512-8




• Courts have long held that a transfer in settlement of bona fide claims is for “full and adequate consideration” in the “ordinary course of business” (and, therefore, not a gift)





Absence of donative intent

• Edward was estranged from his father

• Edward and his father had legitimate grievances against one another

• Edward did not intend to give anything to his children

• It was not a “collusive attempt to make the transaction appear to be something it was not”




• Bottom line

Settlement made in the ordinary course of business for an adequate and full consideration and without donative intent – Thus, not a taxable gift

• Question

Why didn’t IRS go after Edward’s father, Mickey, for the gift tax?




• Sumner Redstone, TCM 2015-237 (12/09/15)

• Sumner is Edward’s brother

• Sumner similarly had 100 shares of company stock

• 3 weeks after settlement between Edward and company signed (2 days after parties filed stipulation with court and court issued final decree incorporating terms of settlement agreement), Sumner engaged in similar transactions



• Sumner Redstone (cont.)

Sumner got $5 million from company for 66 2/3 shares and transferred remaining 33 1/3 shares to revocable trusts fbo his children

Sumner was not required to do so under terms of Edward’s settlement or any other legal action

Sumner said he did so to please his father




• Sumner Redstone (cont.)

• Tax Court

No claim against Sumner, no arm’s length negotiations, no consideration received in exchange for his transfer

Thus, Sumner made taxable gifts

$737,625 in gift tax, but no fraud, negligence or failure to file penalties (because Sumner sought advice from tax counsel who advised no taxable gift would result from transactions)



• Summary Estate of Edward Redstone and Sumner Redstone cases

• The irony of it all Edward and Sumner had a bitter dispute between themselves

going Sumner hired someone in the company to take over Edward’s

duties Edward eventually left This contributed to the discord between Edward and his father,

leading to litigation.

• Result Sumner pays $700,000+ in gift tax Edward pays none.

• This is the case of the dead brother’s revenge!!




• Sumner Redstone displays that gift tax threat in family settlement context is real

• Threat includes

Gift tax

Fraud (or negligence) penalty

Failure to file penalty

Statute of limitations never expires



• Planning in executing family settlements

Satisfy as many of these criteria as you can

1. Genuine controversy exists

2. Parties represented by and acted upon the advice of counsel

3. Parties engaged in adversarial negotiations

4. Value of property involved substantial

5. Settlement motivated by parties’ desire to avoid uncertainty and expense of litigation

6. Settlement finalized under judicial supervision and incorporated in a judicial decree



Unbundling for Estates and Trusts

• For Form 1041 fiduciary income tax purposes, §67(a) limits misc. deductions to 2% of AGI, except that

Deductions for costs incurred to administer the trust or estate which would not have been incurred if the property were not held in the trust or estate are allowed in full

• In other words

Unique costs (those only incurred by reason of the trust or estate being a trust or estate) are 100% deductible

Non-unique costs (all other admin costs) are limited in deductibility by a 2% of AGI floor Knight, U.S. S Ct (1981)



• Final regs re

2% floor effective for any tax year of any trust or estate beginning on or after 01/01/15

Thus, the final regs apply to 2015 Forms 1041 filed in 2016 (and all later year returns)

In the past, many estates and trusts who received bundled fees wholly deducted them (i.e., did not bother to unbundle them)

• Unbundle = Allocate between wholly deductible costs and costs subject to 2% floor




• If bundled fee is not computed hourly, only the portion attributable to investment advice is subject to 2% floor

• Factors to be considered in unbundling allocation

1. % of value of corpus subject to investment advice

2. Whether 3rd party advisor would have charged comparable fee for similar advisory services

3. Amount of fiduciary’s attention devoted to investment advice vs. other fiduciary functions

• Reg. §1.67-4(c)(4)


2% Floor and Estates or Trusts

• Now that final regs require unbundling, trusts and estates who pay direct investment advisor fees are at a tax disadvantage

• Consider instead

Invest in a mutual fund (with a comparable rate of return)

• The investment expense of a mutual fund is netted out before taxable income of the fund is determined

• Thus, no 2% floor on investment expenses applies




• For misc. deductions, 2% of AGI floor no doubt hurts

• But worse

Misc. deductions are added back (i.e., not deductible) for AMT purposes

• Ouch!!



• If 2% limit applies, effect is to increase DNI

Beneficiaries w/ DNI carryout get hit harder

• Solution

Trust distributions reduce DNI and, thus, AGI



Income Distribution Planning

• Trusts and estates hit highest income tax brackets (39.6% income tax and 3.8% NII tax) in 2016 at $12,401 (Individuals at $466,950 MFJ, $415,050 Single or HH)

Often, it’s best to distribute income to beneficiaries in lower income tax brackets outside the trust

Beware

• Trust in state w/ no income tax distributing to beneficiary in state w/ state income tax (may trigger state income tax)


Income Distribution Planning

• More aggressive tax brackets for trusts and estates puts pressure on trustee or executor to invest differently, seek to “break the trust” for a different arrangement, or distribute

Consider broadening the authority of the fiduciary to distribute to avoid higher taxes by adding language (if needed) to trust agreement to allow taxes to be considered as a factor to enable distribution



Material Participation by Trusts

• Whether a trust or estate’s income is passive or non-passive matters for

Passive activity loss purposes (to determine if losses are currently deductible or disallowed)

3.8% net investment income (NII) purposes (to determine if income is passive and, thus, NII taxable)

• If material participation test(s) met, income and losses not passive



• How to determine whether trust or estate materially participates?

• Mattie K. Carter Trust, 256 F.Supp2d 536 (N.D. Texas 2003) Material participation determined by reference to all persons who conducted business on trust’s behalf, including employees and trustee

• IRS response

TAM 200733023 rejects Mattie K. Carter Trust reasoning.

• TAM 201317010 (activities of co-trustee who was also president of business not counted in determining trust’s material participation)




• Frank Aragona Trust, 142 TC 165 (03/27/14)

Activities of 3 of the 6 co-trustees as employees of manager of the business are counted in determining material participation of trust

• Court looked to Michigan law

─ Trustees not resolved of fiduciary duties of loyalty by conducting activities through a separate entity controlled by the trust

• A trust can be a real estate professional



• IRS plans a reg project to address the issue (not expected to be taxpayer friendly)

See 2017 Treasury Priority Guidance Plan

• IRS is reportedly being a stinker in IRS exams in arguing that for multiple trusts, each trust must independently meet material participation tests




• Trustee selection issues

Activities of trustee, not beneficiary, are relevant for determining material participation of trust

If trust has multiple co-trustees, whether activities of one or more co-trustees is sufficient is unclear

Choose trustee who is also active in the business

Consider using directed trustees and appoint a materially participating director with respect to business issues

For institutional trustees, argue the time of all of employees of trustee can be considered


Depreciation of Luxury Autos

• Lesser of $3,160 (for 2016) or 20% of basis *

* Plus $8,000 bonus depreciation ($6,400 in 2018, $4,800 in 2019, $0 thereafter)

Bonus depreciation only available if vehicle is new

If not 100% business use, above amounts are reduced



NOL Carryforwards

• §172 NOLs from operation of S Corp disallowed because not proven (Mark D. Jasperson v. Comm., CA 11(08/31/16), aff’g TCM 2015-186 (09/22/15))

NOL Schedule Not Attached to 1040

Backup proof would have been considered had it been submitted

How many people attach an NOL carry forward schedule to their return anyway?


IRS’ Attack on Airplanes

• §183 Leasing airplane to closely held corp at a loss tripped up by hobby loss rule (David H. Hoffman and Jerrilynn Hoffman v. Comm., TCM 2016-69 (04/19/16))

• After main leasing customer bit the dust, individual lessor could have hopped out of airplane lease, but did not



Hobby Loss

• §183(a) African hair braider in business for profit despite perennial losses

“Wrong Place, Wrong Time” Doesn’t Negate Intent to Make Profit (Amy Ndiaye Delia, pro se v. Comm., TCM 2016-71 (04/20/16))


Travel Expenses

• §162 Vehicle for transportation to and from worksite and meal expenses not deductible (Mario Joseph Collidi, Jr. and Elizabeth Louise Collodi, pro sese, v. Comm., TCS 2016-57 (09/19/16))

• Not temporary when away for period not defined as less than one year

• Employer and employee got slain



Federal Standard Mileage Rates

Federal Standard Mileage Rates

2015 2016

Medical / Moving 23¢ 19¢

Charitable 14¢ 14¢

Business 57.5¢ 54¢


Vehicle Expenses

• §162 Bolt salesperson denied additional business mileage deduction when carfax report on his jeep disputed his mileage log’s beginning of year odometer reading (John R. and Mary M. Galbraith, pro se, v. Comm., TCM 2016-168 (09/12/16))

The Car Fox says get the Carfax



Failure to Seek Reimbursement

• §§127, §162 Failure to seek reimbursement from employer for reimbursable educational expenses yields tax benefits for no one

Employer cannot deduct or exclude

Employee cannot deduct

She who sleeps on her rights loses them (Michael D. and Jo B. Hastings, TCM 2016-61 (04/05/16))


2016-2017 Lodging and Meals Per Diems

• Employer may reimburse employee for away from home travel under either actual cost method or per diem method

• Per Diem CONUS Method

Look up rates by location - $141 and up

• Simplified High Low Method

$189 / $282

• Meals Only Method

$51 / $54 / $59 / $64 / $69 / $74



Lodging and Meal Mobile App

• (Lodging and meal per diem) mobile app now available for

iphone Android Blackberry

• For rates and apps, see GSA website www.gsa.gov


Ordinary Income vs. Capital Gain

• Ordinary income (in lieu of capital gain) treatment for sale of property developed some then bulk sold (Boree, 11th Cir. (09/12/16))

• Taxpayer fully developed plan to subdivide, then began selling lots

• Sold most of it bulk later after Florida county imposed obligation to build $4.4 million road

• 11th Circuit rejected “investment intent at time of sale” argument

Focused rather on totality of development activity leading up to the changed circumstances

• Cf: Phelan (TCM 2004-206) Prior development activity not fatal

http://www.gsa.gov/



Ordinary Income vs. Capital Gain

• Cf: Phelan (TCM 2004-206) Development activity prior to bulk sale not enough to yield dealer status

Development of Colorado Springs property had not yet crossed the line into “dealer intent” at time of bulk sale

Each development project owned by same owners placed into separate and distinct LLC

Development activity outside boundaries of one LLC not “deemed” (held against) such


PAL Material Participation

1. 500 hours (Stephan Tolin (TCM 2014-65))

2. Do substantially all the work (Michel Moreno (DC LA 05/19/14))

3. >100 hours and no one else does more (Larry Kline TCM 2015-144))

4. SPA (significant participation activity = at least 100 hours in each, combined exceeds 500 hours) (Jose Lamas (TCM 2015-59))



PAL Proving Material Participation

• Cell phone (billing statement) call records

• Emails

• Travel itineraries and receipts

• Credit card charges

• Affidavits from customers

• Other documentary evidence



Cell phone call records (billing statements and usage logs) could never in a hundred years help prove material participation for passive activity loss purposes

A. True

B. False



PAL Proving Material Participation

• Real estate professional status upheld despite lack of contemporaneous time log (Moon, TCS 2016-23 (05/23/16))

Material participation proven in spite of absence of contemporaneous time log

Court bought later prepared logs amplified by taxpayer testimony at trial


Passive Activity Loss Proving Material Participation • §469 Ohio woman is real estate professional who may fully

deduct all rental losses currently (Beth M. Hailstock v. Comm., TCM 2016-146 (08/08/16))

Failure to aggregate properties and file §469(c)(7) Election not fatal

• It’s a miracle

Qualifies as material participating under seldom, if ever, successful “facts and circumstances” test

Passive loss case of the century

• Does it help us sign return of our client who is less than perfect?



PAL Material Participation and Trusts

• Look to trustee for material participation (Mattie K. Carter Trust (256 F. Supp. 536 DC ND Texas (2003)) (Frank Aragona Trust, 142 TC 165 (03/27/14))

Must pick trustee who actually runs the business!!

Don’t let the estate planner, without thought of income tax implications, throw you under the bus on this one!!

IRS plans “unfriendly to taxpayer” reg project in 2017 Treasury Guidance Plan


3.8% NII Tax Formula

• 3.8% tax on lesser of

1. 1. NII -or-

2. 2. MAGI in excess of floor

• $200,000 for single and HH;

• $250,000 MFJ and SS; or

• $125,000 MFS



Two Ways to Avoid NII Tax

• Two ways to avoid 3.8% NII tax

1. Fly below the radar: Income below AGI threshold

2. Income not NII


Ideas to Reduce 3.8% NII Tax

• Ideas to Reduce 3.8% Tax on Net Investment Income (NII)

1. Reduce NII by Maximizing

2. Reduce NII by Minimizing

3. Reduce Passive Income (and, thus, NII)

4. Keep AGI Below Threshold Amount



Ideas to Reduce 3.8% NII Tax

• Reduce NII by Minimizing

1. Passive activity income

2. Limited partnership (passive) income

3. Gains on sale of passive property

4. Rental real estate income (convert to ordinary course trade or business of renting)

5. Rental income from personal (non-real) property

6. Income from businesses with no material participation

7. Undistributable NII taxable income in a trust


SE Tax and Leasing Ag Land

• No SE Tax on CRP Payments Received by Non-Farming Farm Ground Owner (Rollin J. and Maureen B. Morehouse v. Comm., 8th Cir. No. 13-3110 (10/10/14))

• Taxpayer loss in Wuebker distinguishable

Wuebkers were active farmers

• 8th Circuit follows Rev. Rul. 60-32

• Although not binding on this court, "when a Revenue Ruling reflects a longstanding and reasonable interpretation of the agency's regulations, the Ruling attracts substantial judicial deference."



Ag Tax

• S. 2774

Agriculture students encourage, acknowledge, reward, nurture act (Introduced by Sen. Moran, Jerry [R-KS] on 04/11/2016, referred to Senate Finance Committee on 04/11/16)

Bill, if eventually passed, would exclude from the gross income of a student farmer up to $5,000 of the gain from the sale or exchange of personal property (including livestock, crops, etc.)


Effect of IRS Budget Cuts

• IRS, reeling under budget cuts, is out of control

IRS staffing at bare bones level

• IRS’ computers continue to generate matching notices at an escalating pace, yet IRS does not have manpower to answer taxpayer responses to IRS’ notices

Example

• Form 1095-A matching defies common sense

Go to Taxpayer Assistance Service (via Form 911)




What is the best way to ensure you can keep your passport for international travel?

A. Pay your taxes

B. If you owe more than $50,000 to IRS, get an installment agreement and faithfully make all required payments

C. Pay your child support on time

D. All of the above

E. None of the above


FAST ACT (To Pay for Highways)

• Passport revoked (or not issued) if taxpayer

Owes to IRS $50,000 or more in tax, penalty, interest, etc.; and

Not under installment agreement

• IRS to hire many new, aggressive outside (and inside) tax debt collectors

• Moral of the story

Get an IRS installment agreement and keep it



Tax Procedure

• §§6320(c), 6330(d)(1) Can you go to tax court even if no petition filed within 90 days?

Yes

• Challenge the existence or amount of underlying liability evidenced by a federal tax lien (Richard A. Eichinger and Diana Suarez, pro sese, v. Comm., TCS 2016-18 (04/21/16))


Private Delivery Services

• IRS Notice 2016-30 updates list of approved Private Delivery Services which satisfy “date of mailing = date of filing” rule

• FedEx Ground and UPS Ground conspicuously absent from list

• Better get electronic receipt to prove date of “mailing”

• By comparison, U.S. Certified Mail still works (extremely well) to satisfy “date of mailing = date of filing” rule



Private Delivery Services

• §§6213(a), 7502 Utilizing UPS ground (vs. Approved Faster UPS Service) costs Michigan man $41,000 in taxes (Eric Lamart Sanders, pro se, v. Comm., TCS 2014-47 (05/12/14))

No Tax Court jurisdiction where petition, though UPS’d on 90th day, received after 90th day

Saving $12.30 cost him $41,000

• Ouch



UPS Ground can save you big bucks in shipping cost and still qualify for IRS’ “timely mailing = timely filing rule

A. True

B. False

C. Mostly true, but a little bit false

D. Mostly false, but a little bit true



Innocent Spouse Relief

• §6015(f) Innocent spouse equitable relief awarded to Louisiana widower to abate late filing and late payment penalties

His late wife failed to mail return to IRS three years before and he didn’t know It (Joseph Patrick Boyle, pro se, v. Comm., TCM 2016-87 (05/02/16))

Tax Court overturns two IRS Rev. Proc. 2013-34

Principles re: equitable relief

• No innocent spouse relief on your own tax

• No innocent spouse relief on penalties


Installment Agreement User Fee Changes

• User fee increases to $120 for an installment agreement

Reduced to $52 for a direct debit installment agreement (an agreement whereby the taxpayer authorizes IRS to request monthly electronic transfer of funds from taxpayer's bank account to IRS)

$43 notwithstanding the method of payment if low-income taxpayer

• Preamble to Prop Reg (08/19/2016); Prop Reg §300.1, Prop Reg §300.2; IR 2016-108



Payment of Taxes

• Give me a slurpee and I want to pay my taxes (IR-2016-56 “IRS Offers New Cash Payment Option”)

Individuals can now make a payment without the need of a bank account or credit card at over 7,000 7-Eleven stores nationwide

7-Eleven provides a receipt after accepting the cash and the payment usually posts to the taxpayer’s account within two business days

$1,000 payment limit per day and $3.99 fee per payment


IRS Funding Cuts

• House of passes appropriations bill with bloody severe cuts in IRS funding – Obama threatens veto

Provides $10.9 billion for IRS

Reflects a budget cut of $236 million below FY 2016

$1.281 billion less than President Obama's request

Below the 2008 funding level



Identity Theft and Related Fraud

• Scammers demand itunes cards to pay tardy federal taxes

A recent scam involves people receiving calls from IRS employees demanding payment of past due federal taxes using iTunes gift cards

• Rumor has it the calls were at their peak during spring break and summer break

Other scams recite threats to elderly of going to jail


IRS and Firearms

• Wall Street Journal 06/17/16 “Why does the IRS need guns?” reports that IRS special agents are now equipped with AR-15 military style rifles

Be careful about hitting the button underneath the table



Safeguarding Tax Data

• IRS Pub 4557 (Rev. 10-2015)

Safeguarding Taxpayer Data (A Guide for Your Business)

IRS guide on how tax preparer can safeguard confidential client information from identity thieves

Checklists for

• Administrative activities, facilities security, personnel security, information systems security, computer systems security, media security, certifying information systems, reporting breach incidents, applicable laws, standards and best practices


Disaster Planning

• IRS advises taxpayers to prepare for hurricanes, floods and other natural disasters (IR- 2016-128)

Create electronic copies of key documents

If originals are on paper, scan into electronic format

Keep duplicate set of key documents including bank statements, tax returns, identifications and insurance policies in a safe place such as a waterproof container and away from the original set



ITINs

• §6109 ITIN expiration dates tweaked by IRS (§6109, IRS general ITIN information

https://www.irs.gov/individuals/general-itin- information, Form W-7 Instructions)

IRS issues ITINs to foreign nationals and others who have federal tax reporting or filing requirements and do not qualify for SSNs


ITINs

• Examples of taxpayers in need of an ITIN

1. Nonresident alien required to file a U.S. tax return;

2. U.S. resident alien (based on days present in the U.S.) filing a U.S. tax return;

3. Dependent or spouse of a U.S. citizen/resident alien;

4. Dependent or spouse of a nonresident alien visa holder; and

5. Non-resident alien individual not eligible for a SSN required to file a U.S. tax return only to claim a refund of tax under U.S. tax treaty

https://www.irs.gov/individuals/general-itin-






Due Process Collection Hearing

• §§6672, 6320, 6330 no challenge of merits of underlying tax liability via due process collection hearing allowed if had previous opportunity to dispute tax liability but botched it

Failure to exercise first round of IRS appeal rights cooks your goose (Dwayne Smith, pro se, v. Comm., TCM 2016-186 (10/04/16))

Failure to exercise first round of IRS Appeal rights cooks your goose


OIC Reasonable Collection Potential

• §6330 IRS appeals did not improperly reject OIC

Dissipated assets, though no longer available, used against Taxpayer

Amount of future income to be used against taxpayer also explored

And what is chutzpah anyway? (John N. Alphson v. Comm., TCM 2016-84 (05/02/16))

• Reasonable collection potential includes money wasted by taxpayer



OIC Reasonable Collection Potential

• §6330(d)(1) IRS properly rejected OIC (Offer In Compromise)

Reasonable Collection Potential Was Triple the Amount Offered (David Strong v. Comm., TCM 2016-70 (04/19/16))

Taxpayer did not prove liquidation of its accounts receivable would be detrimental to its survival

Even though taxpayer conducted business through single member LLC (SMLLC), IRS could still collect unpaid income tax from him personally


Treasury Offset Program

• §§6402(d)(1), 6330 no CDP hearing relief available to block “Treasury Offset Program” seizure of IRS refund

Disgruntled debtor barking up the wrong tree (Gary I. Terry, pro se, v. Comm., TCM 2016-88 (05/03/16))



Treasury Offset Program (TOP)

• Treasury Offset Program phone #

800-304-3107

• A debtor may call the number to find out if any debt he owes is “lying in wait” to be offset

• Example

Jimmy Jon owes Colorado past due income taxes

Colorado must pay a fee to the feds for the privilege of having federal tax refunds offset to pay Colorado income tax delinquencies

Jimmy Jon can call the “800” number shown above to find out whether the feds are lying in wait to grab his federal income tax refund to send to Colorado


TOP Program Debts Collectible

TOP Program Debts Collectible

a. Federal student loans;

b. Federal mortgage loans;

c. Federal small business loans;

d. Federal salary or benefit overpayments;

e. Fines or penalties assessed by federal agencies;

f. Income tax debts owed to states; and

g. Overdue child support payments owed to custodial parents



Interest Abatement

• §6404 Court of appeals 7 reverses tax court on interest abatement

Differs on interpretation of “unfair” IRS action (Charles W. King, (CA 7 7/20/2016))


Interest Abatement

• §6404(e) No abatement of interest where illinois couple being audited drug the audit out for a long time (Terry E. and Georgia R. Hornbacker v. Comm., TCM 2016-65 (04/14/16))

Interest abatement not available unless unreasonable error or delay by IRS in performing a ministerial or managerial act



Late Pay Penalty Abatement

• §6651(a)(2) Waiting on accountant to repair incorrectly prepared tax return

Grounds to Abate Failure to Pay Penalty? Nope (Allen B. Miller v. Comm., TCM 2016-73 (04/21/16))

• So, what was the poor client supposed to do?

• Don’t wait to make tax payment even if return filed later


Keep Backup Copy of Tax Records

• §§7491, 6662 and 6651 Sole proprietor liable for income tax, accuracy penalty and late filing penalty even though his accountant/attorney stole his money and business records (James E. Philbrick, pro se, v. Comm., TCM 2016-64 (04/13/16))

Burden of proof on taxpayer

He did not prove he had good records before they were stolen



Change of Address

• §§6212, 6213(a), 7502 Failure to notify irs of change of address aces Texan out of ability to challenge tax deficiency in tax court

Details Do Matter (William Thomas Taylor, pro se, v. Comm., TCM 2016-81 (04/28/16))

Need to change address both with IRS and U.S. Post Office


Second Chance at Court Review

• §§6320(c), 6330(d)(1) Can you go to tax court even if no petition filed within 90 days?

Yes

• Challenge the Existence or Amount of Underlying Liability Evidenced By a Federal Tax Lien (Richard A. Eichinger and Diana Suarez, pro sese, v. Comm., TCS 2016-18 (04/21/16))



Change of Address

• Businesses change address with IRS by filing Form 8822-B via provable delivery

• Businesses change “responsible person” with IRS by filing Form 8822-B via provable delivery

• Change address with U.S. Post Office by completing process online

Keep proof of it


A Final Thought

“You must pay taxes. But there’s no law that says you gotta leave a tip.”

Morgan Stanley advertisement



Question and Answer Session

Conclusion



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Thank You for Attending Today’s Program


2017 Filing Season and the Affordable Care Act Monday, February 27, 2017

Presented by

Annette Nellen, CPA, CGMA, Esq.

Featured Upcoming Program

Documents

2016 Individual Federal Tax Update (Full Day ourse)media01.commpartners.com/WK CCH/02_09_17/REVISED... · Washington, D.., the ahamas, Italy, Greece, Turkey and anada. He has authored