Tax Relief Blog

Once is enough as far as collection of the trust fund recovery penalty is concerned Chief Counsel Advice 200838027

The IRS has issued a new Chief Counsel Advice (CCA) on the trust fund recovery penalty. The IRS notes that the CCA may not be used or cited as precedent.

IRC §6672, imposes a penalty on any person who is required to collect, truthfully account for, and pay over withheld income and Social Security taxes who willfully fails to do so. The amount of the penalty is equal to the amount of the tax that was not collected and paid. The penalty is often referred to as the "trust fund recovery penalty" (TFRP). The penalty is imposed on a "responsible person." A "responsible person" is anyone within a corporation or partnership who has the duty to collect, account for, or pay over the tax. Depending on the facts of the case, a responsible person could be an officer, a director, an accountant, a comptroller, or even a payroll manager.

Facts. In this instance, a corporation failed to pay its employment taxes for a certain period of time. The IRS assessed the trust fund recovery penalty against two responsible persons. The corporation paid off the principal portion of the TFRP, but accrued interest was still outstanding. The corporation subsequently made a voluntary payment on its employment tax liability, and instructed the IRS to apply the payment to the interest portion of the TFRP. However, the corporation also had an outstanding employment tax liability that was unrelated to the TFRP. At issue was whether the IRS had to follow the corporation's instructions.

Law. Internal Revenue Manual (IRM) §1.2.14.1.3(2) states that the trust fund recovery penalty, including interest and penalties, should only be collected once (either from the business, or from one or more of its responsible persons). IRM §5.17.7.1.9(2) states that the TFRP assessment should be abated after a corporation pays the delinquent tax.

Ruling. The IRS ruled that the corporation was within its rights to request that the payment be applied to the interest portion of the TFRP. In issuing its ruling, the IRS noted that the corporation was making the payment voluntarily. The IRS said that it was unlikely that a court of law would reach a different conclusion since the IRM credits corporate trust fund payments to responsible persons.

The IRS also pointed out that case law supports its conclusion. In Botta. v. Scanlon, CA2, 11 AFTR 2d 908, 2/18/63, the U.S. Court of Appeals for the Second Circuit determined that the trust fund recovery penalty was simply a means to ensure that the tax was paid. In USLIFE Title Ins. Co. v. Harbison, CA5, 57 AFTR 2d 86-1017, 3/14/86, the U.S. Court of Appeals for the Fifth Circuit determined that although nothing in the language of IRC §6672 explicitly prevents the government from collecting and retaining from each responsible person full satisfaction of the TFRP (including interest), IRC §6672 authorizes the government to collect "only the same amount to which it was entitled by way of tax."

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Leader of $181 million payroll tax scheme admits guilt [United States v. Amodeo, DC FL, Case No. 6:08-cr-176-Orl-28GJK

Frank Amodeo, the former head of Mirabilis Ventures Inc., has pleaded guilty to federal charges that he and his co-conspirators knowingly failed to remit payroll taxes to the IRS totaling between $172 million and $181 million. (The government says it's $181 million. Amodeo agrees that it's at least $172 million.) The unremitted payroll taxes included $129 million in FICA and withholding taxes. According to a Department of Justice press release on Aug. 7, 2008, Amodeo and his co-conspirators controlled a web of one public and several private companies, including multiple employee leasing companies, also known as professional employer organizations (PEOs). The press release says that Amodeo conspired with his co-conspirators to absolve themselves, and the companies they controlled, of the responsibility for existing payroll tax liabilities, and to divert payroll tax funds paid by the PEO clients to the PEOs that Amodeo and his co-conspirators controlled.

In early 2005, Amodeo and others were in contact with the IRS regarding one of the company's tax liabilities. However, they withheld information about the company's tax liabilities until February 2006, by means that included the late filing of Forms 941. At the time, the company's payroll tax liabilities exceeded $100 million. In June of 2006, a co-conspirator advised the IRS that the payroll tax money not paid to the IRS was used to purchase two other companies. However, it turned out the money was used to purchase, among other things, several companies, cars, a plane, and real estate. In August 2006, Amodeo communicated a revised version of his account to the IRS, in an attempt to obstruct and impede the IRS's investigation, after being advised by a co-conspirator that it may expose them to prosecution for federal offenses. In August 2008, Amodeo was indicted on charges of conspiracy, failure to remit payroll taxes, wire fraud, and obstruction of an agency proceeding.

Under the plea deal, Amodeo could face up to 25 years imprisonment and a $1.25 million fine. However, it was Amodeo who pleaded guilty, and not Mirabilis Ventures Inc. In May of 2008, the company filed for bankruptcy protection and it has other creditors besides the federal government. It is yet to be determined whether the government will be able to recover any of the unpaid taxes from the company.

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TIGTA review finds small number of cases where IRS employees harassed taxpayers while attempting to collect taxes [Audit Report No. 2008-10-162]:

In 2007, there were five cases involving Fair Tax Collection Practices (FTCP) violations for which an IRS employee received administrative disciplinary action, according to a recent audit by the Treasury Inspector General for Tax Administration (TIGTA).

In addition, auditors identified an unspecified number of cases that should have been coded as FTCP violations but instead were coded with other designations. As described in the audit, the FTCP prohibits IRS employees from using abusive or harassing behavior toward taxpayers when attempting to collect taxes. An employee who violates the FTCP may be subject to disciplinary action.

As a result of the violations cited in the audit, the employees involved received disciplinary actions including admonishment, suspension, probation/separation, and removal, TIGTA said.

No civil actions resulted in the agency paying monetary settlements to taxpayers because of an FTCP violation, the audit noted. It can be found at http://www.treas.gov/tigta/auditreports/2008reports/200810162fr.pdf

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Year end planning moves that optimize enhanced election to expense business property Thanks to the Stimulus Act of 2008, most small businesses, and even moderate-sized businesses that don't have huge capital equipment needs, may be able to claim a full Code Sec. 179 expensing deduction for the cost of business machinery and equipment purchased in tax years beginning in 2008. The results: reduced effective costs for the assets, fewer assets to track for depreciation purposes, and no alternative minimum tax adjustment for property expensed under Code Sec. 179. For unincorporated taxpayers (or those operating through a pass-through) there are other benefits: By using the expensing election to lower adjusted gross income (AGI), the taxpayers may be able to benefit from itemized deductions or personal exemptions (or other tax breaks) that otherwise would be limited or phased-out because of the taxpayer's AGI. This article details the unique year-end tax planning opportunities that are possible because of the generous expensing limits in effect for tax years beginning in 2008.

Boosted expensing limits. For tax years beginning in 2008, the Stimulus Act of 2008 has increased the Code Sec. 179 expensing election to $250,000. Plus, under the Act, the expensing amount is reduced only when $800,000 of expensing-eligible property is placed in service. Absent a law change, the amount that may be expensed under Code Sec. 179 for tax years beginning in 2009 will be $133,000, and the expensing limit will be reduced when more than $530,000 of expensing-eligible property is placed in service.

Observation: Under the expensing election, a taxpayer can deduct costs immediately, rather than depreciating them over several years. And, unlike depreciation subject to the mid-quarter or half-year conventions, a full expensing deduction is allowed regardless of when in the tax year the qualifying property is placed in service. For example, property placed in service on the last day of the tax year may qualify for full expensing. As a result, where possible, taxpayers should factor the annual expensing limit into their annual equipment-purchase plans.

Boosted amounts for specialized property. The maximum regular Code Sec. 179 expense election amount is increased by $35,000 for:

• "qualified zone property," placed in service generally before 2010, of an enterprise zone business; (Code Sec. 1397A(a)(1)); and
• "qualified renewal property" acquired by purchase generally before 2010, in a renewal community. (Code Sec. 1400J)

For qualified GO Zone property, the regular expensing allowance is increased by the lesser of (1) $100,000, or (2) the cost of qualified Code Sec. 179 Gulf Opportunity (GO) Zone property placed in service during the tax year. In addition, the regular phaseout level for the amount of expensing-eligible property placed in service during the year is increased by the lesser of (1) $600,000, or (2) the cost of qualified Code Sec. 179 GO Zone property placed in service during the tax year.

Observation: GO Zone property generally doesn't qualify for the expensing allowance increase unless placed in service before 2008. However, this deadline has been extended one year for property used in certain highly damaged areas. Thus, such property gets the increase if placed in service before 2009.

Observation: An omnibus relief bill that the Senate is slated to consider on Sept. 23 would allow businesses that are hit by federally-declared disasters to expense up to $800,000 of qualifying expenditures made in the disaster area (for qualified disasters occurring after 2007 and before 2012 (2013 for nonresidential real property and residential rental property). The level of investment at which expensing begins to phase out would be increased to $1.4 million of qualifying purchases.

The deduction is limited to taxable income from any of the taxpayer's active trades or businesses. This means that the taxable income limitation doesn't bar an expense deduction just because the particular business in which the property is used doesn't produce any net income. So long as the taxpayer has aggregate net income from all his trades or businesses, the deduction is allowed. Any amount that cannot be deducted because of the taxable income limitation can be carried forward to later years until it is fully deducted.

Observation: Wages, salaries, tips and other compensation earned by employees count for purposes of the taxable income limitation. As a result, an employee who carries on a sideline business may be able to fully expense, say, the cost of a new computer even though its cost exceeds his net income from the sideline business (assuming the business is engaged in for profit).

Recommendation: Any amount that can't be deducted because of the taxable income limitation is carried over to later years. As a result, taxpayers should consider making the expense election even in a year where no immediate tax benefit is derived from the election. This way the taxpayer's right to carry it forward to other years is preserved. Without the election, the taxpayer can recover the cost of the investment only through depreciation deductions.

For tax years beginning in 2008, the maximum amount that can be expensed under Code Sec. 179 is reduced dollar-for-dollar for eligible property placed in service during the tax year in excess of $800,000 (absent Congressional action, this dollar limit will fall to $530,000 in 2008 according to RIA calculations); see discussion above for phase-out rules that apply to special types of property.

Illustration (3): In 2008, calendar year XYZ Corp buys and places in service $825,000 of expensing-eligible property. Because it has exceeded the investment ceiling amount, XYZ may expense only $225,000 of its 2008 purchases [$250,000 − ($825,000 −$800,000)] and must depreciate the $600,000 balance of its purchases over a period of years.

Recommendation: Taxpayers should try to avoid buying and placing in service more than the ceiling amount of expensing-eligible property during the year, if it's possible from the business standpoint to defer additional purchases.

Caution: Unused expensing deductions due to excess investments in expensing-eligible property can't be carried forward.

Recommendation: To maximize the tax benefit to be gained through expensing, a taxpayer should make the expensing election for eligible property with the longest recovery period.

The election to expense business property placed in service in 2008 is made on the taxpayer's 2008 return and is claimed on Form 4562. For any tax year beginning after 2007 and before 2011, a taxpayer may make a Code Sec. 179 election without IRS consent on an amended federal tax return for that tax year. (Rev Proc 2008-54) However, the Code Sec. 179 expensing election, and any specification contained in the election, may be revoked by the taxpayer for any property for any tax year beginning before Jan. 1, 2011. A taxpayer can revoke the expensing election on an amended return without IRS consent. But once made, the revocation is irrevocable. (Code Sec. 179(c)(2))

Texas Hurricane Ike Victims Qualify for IRS Disaster Relief

IR-2008-107, Sept. 18, 2008

WASHINGTON -- Texas taxpayers who were adversely affected by Hurricane Ike qualify for tax relief from the Internal Revenue Service, including the postponement of tax filing and payment deadlines until Jan. 5, 2009.

Following the hurricane's landfall on Saturday, Sept. 13, the federal government declared the following Texas counties a presidential disaster area qualifying for individual assistance: Angelina, Austin, Brazoria, Chambers, Cherokee, Fort Bend, Galveston, Grimes, Hardin, Harris, Houston, Jasper, Jefferson, Liberty, Madison, Matagorda, Montgomery, Nacogdoches, Newton, Orange, Polk, Sabine, San Augustine, San Jacinto, Trinity, Tyler, Walker, Waller and Washington.

"We are giving taxpayers in these hard-hit areas until early next year to file their returns and make payments," IRS Commissioner Doug Shulman said. "All Americans have concerns for those affected by this devastating hurricane, and our hope is that this extra time will allow people to stay focused on the rebuilding and clean-up effort."

Specifically, the relief postpones until Jan. 5, 2009, certain deadlines for taxpayers who reside or have a business in the disaster area. The postponement applies to return filing, tax payment and certain other time-sensitive acts due on or after Sept. 7, 2008, and before Jan. 5, 2009 -- including individual estimated tax returns and corporate tax returns that were due Sept. 15, and extended individual returns due Oct. 15.

In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after Sept. 7 and before Sept. 22, 2008, as long as the deposits are made on or before Sept. 22.

The relief extends an initial seven-day postponement of tax filing and payment deadlines for Ike victims that was announced Sept. 12.

IRS computer systems automatically identify taxpayers located in the covered disaster area and apply automatic filing and payment relief. Affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 1-866-562-5227 to request tax relief.

If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, from Sept. 7, 2008, to Jan. 5, 2009.

Covered Disaster Area

The counties listed above constitute a covered disaster area for purposes of Treas. Reg. § 301.7508A-1(d)(2) and are entitled to the relief detailed below.

Affected Taxpayers

Taxpayers considered to be affected taxpayers eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts are listed in Treas. Reg. § 301.7508A-1(d)(1), and include individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area -- but whose books, records, or tax professionals' offices are in the covered disaster area -- are also entitled to relief. In addition, all relief workers affiliated with a recognized government or charitable organization assisting in the relief activities in the covered disaster area are eligible.

Grant of Relief

Under section 7508A, the IRS gives affected taxpayers until Jan. 5,2009, to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership and S corporation returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns) or to make tax payments, including estimated tax payments, that have either an original or extended due date occurring on or after Sept. 7, 2008, and before Jan. 5, 2009.

The IRS also gives affected taxpayers until Jan. 5, 2009, to perform other time-sensitive actions described in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2007-56, 2007-34 I.R.B. 388 (August 20, 2007) that are due on or after Sept. 7,2008, and before Jan. 5, 2009. This includes the filing of Form 5500 series returns, in the manner described in section 8 of Rev. Proc. 2007-56. The relief described in section 17 of Rev. Proc. 2007-56, pertaining to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the Form W-2, 1098, 1099 series, or to Forms 1042-S or 8027. Penalties for failure to file timely information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. The IRS, however, will abate penalties for failure to make timely employment and excise deposits, due on or after Sept. 7, 2008, and before Sept. 22, 2008, provided the taxpayer makes these deposits on or before Sept. 22, 2008.

Casualty Losses

Affected taxpayers in a presidentially declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year's return could result in a greater tax saving, depending on other income factors.

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements but they must first subtract $100 for each casualty event and then subtract 10 percent of their adjusted gross income from their total casualty losses for the year. For details on figuring a casualty loss deduction, see IRS Publication 547, Casualties, Disasters and Thefts.Affected taxpayers claiming the disaster loss on last year's return should put the Disaster Designation "Texas/Hurricane Ike" at the top of the form so that the IRS can expedite the processing of the refund.

Other Relief

The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers. Taxpayers should put the assigned Disaster Designation in red ink at the top of Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS.

Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster affects them so that the IRS can provide appropriate consideration to their case.

Taxpayers may download forms and publications from IRS.gov, the official IRS Web site, or order them by calling 1-800-TAX-FORM (1-800-829-3676). The IRS toll-free number for general tax questions is 1-800-829-1040.

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IRS explains how to collect from sole member of LLC law firm Chief Counsel Advice 200836002

In Chief Counsel Advice (CCA), IRS has concluded that a levy served on a limited liability company (LLC) will attach to property or rights to property belonging to the LLC's sole owner. He practiced law and received income from the LLC from contingent fee agreements between the LLC and clients. The CCA further concluded that if payments being made to the sole owner are in the nature of salary or wages, IRS may be able to serve a continuing wage levy on the LLC to reach the payments.

Background. IRS can enforce a lien created by Code Sec. 6321 in two ways. It can bring a foreclosure action under Code Sec. 7403 or it can levy on the taxpayer's property under Code Sec. 6331. Unlike a foreclosure action, the levy is a provisional, administrative procedure, and it generally reaches only property possessed and obligations existing at the time of the levy--the "fixed and determinable" requirement. (Code Sec. 6331(b), Reg. § 301.6331-1(a)(1)) However, an exception to this rule under Code Sec. 6331(e) authorizes a continuing levy on salary or wages.

In U.S. v. Jefferson-Pilot Life Ins. Co., (CA4 1995) 75 AFTR 2d 95-1529, the Fourth Circuit held that Code Sec. 6331(e) 's continuing levy provision applied to commissions payable to an independent contractor insurance salesman. In Moskowitz, Passman & Edelman, (DC NY 10/09/2007) 100 AFTR 2d 2007-6358, a district court held that amounts paid and payable to a member law firm, organized as a partnership, were subject to a continuing levy.

Facts. Taxpayer, an attorney who practices law, had his business organized as an LLC under State A law. He was the sole owner of the LLC. He owed taxes for multiple tax years, and IRS filed Notices of Federal Tax Lien (NFTL) for several of those years. however, the limitation period on collection under Code Sec. 6502 had expired for some of the earlier liabilities.

The only potential asset that IRS identified as available to satisfy his liabilities was the income paid to him by the LLC generated by the LLC's sporadic stream of accounts receivable from personal injury contingent fee agreements. These agreements were between the LLC and the clients who need legal services. A client would agree to pay the LLC immediately on completion of his case 33% of the total gross recovery realized by settlement, or 40% if the case did not settle within three weeks before trial. The contingent fee agreements didn't generate receipts with any pattern of regularity. Rather, money flows into the LLC when Taxpayer was successful in a lawsuit. Taxpayer won a few cases per year, and the amount of his law practice gross was deposited in the LLC's bank account. Taxpayer reported his income for federal tax purposes as net profits from the operation of a business (Schedule C). He also incurred self-employment tax. Taxpayer refused to cooperate with IRS Collections and wouldn't agree to satisfy his tax liabilities voluntarily through an installment agreement or otherwise.

IRS's Collections requested assistance in the most effective way to collect Taxpayer's outstanding tax liability.

Observation: The CCA noted that Collections correctly observed that absent an alter-ego relationship, IRS couldn't levy on the LLC's assets to satisfy the single-owner's debts. Seizing Taxpayer's interest in the LLC was not considered a viable option because there were no other owners interested in purchasing it.

The CCA found that, as a matter of federal law, a notice of levy served on the LLC would obligate it to turn over the income to which Taxpayer was entitled to receive as a consequence of rendering legal services. In order for the LLC to be obligated to turn over property or monies to IRS, it must be in possession of Taxpayer's property or be obligated to Taxpayer at the time of levy. Courts have held that the "fixed and determinable" requirement in Reg. § 301.6331-1(a)(1) is satisfied when the events which give rise to the obligation have occurred, and the amount of the obligation is capable of being determined in the future. (U.S. v. Hemmen, (CA9 4/07/1995) 75 AFTR 2d 95-1646, CPS Electric, Ltd v. U.S., (DC NY 2002) 89 AFTR 2d 2002-2319 , U.S. v. Antonio, (D. Haw. 1991) 71A AFTR 2d 93-4578) Under the rationale of these and other cases, the CCA found that the LLC's obligation to Taxpayer was "fixed and determinable" when the LLC receives a contingent fee following successful litigation and after setting aside a reserve for overhead expenses.

The CCA noted that IRS didn't take the position that future payments that may be made under an existing contingent fee agreement were fixed and determinable as to Taxpayer because the contingent fee agreement was between the LLC and the client, not between Taxpayer and the client. State A law provided: "Property transferred to or otherwise acquired by a limited liability company is the property of the company and is not the property of the members individually." Under this provision and the courts' interpretation of , the LLC, not Taxpayer, held the right to be paid from successful lawsuits or settlements under the contingent fee contracts.

Although IRS can serve a Notice of Levy (Form 668-A) on the LLC to seize the property belonging to Taxpayer or obligations owed to Taxpayer, it also may--on conducting further factual development--be able to serve a Notice of Levy on Wages, Salary, and Other Income (Form 668-W). The CCA concluded that based on Jefferson-Pilot and Moskowitz, the payments Taxpayer received from the LLC as his net profits may be subject to Code Sec. 6331(e) 's continuing wage levy provision. These two courts based their decision on the fact that the remunerations were paid out to the delinquent taxpayers on a recurring basis. There is a possibility that with further information IRS can characterize the profits Taxpayer receives from the LLC as income subject to a continuing wage or salary levy.

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IRS provides WHFIT penalty relief for 2008 and WHMT reporting relief for 2007 Notice 2008-77, 2008-40 IRB

In a Notice, IRS has informed trustees and middlemen of widely held fixed investment trusts (WHFITs) that it will not assert penalties under Reg. § 1.671-5(m) (dealing with WHFIT reporting rules) for calendar year 2008. In addition, it informed trustees and middlemen of widely held mortgage trusts (WHMTs) that, pending future published guidance, certain modifications of mortgages held by a WHMT that has entered into a guarantee arrangement aren't required to be reported under the WHFIT reporting rules.

Background. A WHFIT is an arrangement classified as a trust under Reg. § 301.7701-4(c), provided that: (1) the trust is a U.S. person; (2) the beneficial owners of the trust are treated as owners (under subpart E, part I, subchapter J, chapter 1 of the Code); and (3) at least one interest in the trust is held by a middleman. (Reg. § 1.671-5(b)(22)) A WHMT is a WHFIT, the assets of which consist only of mortgages, regular interests in a real estate mortgage investment company (REMIC), interests in another WHMT, reasonably required reserve funds, amounts received for these assets, and during a brief initial funding period, cash and short-term contracts to purchase these assets. (Reg. § 1.671-5(b)(23))

Reg. § 1.671-5(n) provides that the WHFIT reporting rules are applicable Jan. 1, 2007. T.D. 9308, 12/26/2006, informed trustees and middlemen that IRS wouldn't impose any penalties that would otherwise apply as a result of a failure to comply with the WHFIT reporting rules for the 2007 calendar year in cases where the trustee or middleman was unable to change its information reporting systems to comply with the WHFIT reporting rules (see Federal Taxes Weekly Alert 01/04/2007).

Penalty relief. Notice 2008-77 informs middlemen and trustees of WHFITs that IRS will not assert penalties as a result of a failure to comply with the WHFIT reporting rules with respect to calendar year 2008. Although WHFIT trustees and middlemen have taken steps to implement the WHFIT reporting rules, IRS has learned that additional time is needed to update the computer and information systems of trustees and middlemen to fully comply with them. Commentators have requested and IRS has granted this relief.

Reporting exception. IRS has also determined that pending the publication of future guidance certain modifications that are made to mortgage loans held by a WHMT don't have to be reported in cases where a guarantee arrangement compensates the trust or all the trust interest holders for any shortfalls that would otherwise be experienced as a result of the modification. Any future guidance eliminating or modifying this exception will allow trustees and middlemen reasonable time to alter their computer and information reporting systems to comply with the change. IRS requests comments on this reporting exception.

Specifically, Notice 2008-77 excepts from reporting under Reg. § 1.671-5(c)(2)(iv) any modification made to mortgage loans held by a WHMT if all of the following conditions are met:

(1) The WHMT directly holds mortgage loans that are secured by real property; (2) The WHMT modifies a mortgage loan under circumstances that do not cause the trust to be classified other than as a trust as a result of the modification (for example, because the modification doesn't result in there being a power to vary the investment under Reg. § 301.7701-4(c));

(3) The WHMT has entered into a guarantee arrangement that requires the guarantor to pay to the WHMT any shortfalls in payments from the mortgage loans held by the WHMT (including as a result of a modification) to the extent that mortgage loan payments are insufficient to make required distributions to trust interest holders under the governing documents of the WHMT; and

(4) The modification and the guarantee arrangement, taken together, are such that the stated interest rate and the aggregate amount of the principal payments paid with respect to every trust interest of the WHMT is not altered by the modification.

IRS OKs use of one property to engineer a reverse and forward like-kind swap Chief Counsel Advice 200836024

In Chief Counsel Advice (CCA), IRS has given its blessing to the use of one property to engineer both a completed reverse like kind exchange and an attempted forward like kind exchange. The forward exchange was necessary because the value of the relinquished property far exceeded the value of the replacement property that the taxpayer received. Because the forward exchange couldn't be completed within the statutory time limits, however, the taxpayer wound up paying tax on the net cash it received.

Observation: The new CCA is noteworthy because it shows how far the like-kind exchange rules can be stretched, with IRS's approval, to accommodate complex conditions.

Background. In general, no gain or loss is recognized on the exchange of property held for productive use in a trade or business or for investment if the property is exchanged solely for property of a like kind which is held either for productive use in a trade or business or for investment. (Code Sec. 1031) Like-kind treatment is barred if the property to be received is not identified (e.g., by being specified in the contract) on or before 45 days after the transfer, or isn't received within 180 days after the transfer or by the due date (with extensions) of the return for the year of transfer if earlier. (Code Sec. 1031(a)(3))

Qualified intermediaries (QIs) may be used to structure like-kind exchanges using qualified exchange accommodation arrangements (QEAAs). (Reg. § 1.1031(k)-1(g)(4)) Under established rulings policy, IRS will treat an exchange accommodation titleholder () as the beneficial owner of property for federal income tax purposes if the property is held in a qualified exchange accommodation arrangement (QEAA).

A like-kind exchange can be set up in "forward" or "reverse" mode:

• In a "forward" (or regular) deferred like-kind exchange using a QI, the taxpayer transfers the relinquished property to the QI, who will sell the property to a buyer. The QI then takes the proceeds of the sale of the relinquished property, buys the replacement property, and transfers the replacement property to the taxpayer.
• In a "reverse" deferred like-kind exchange, the replacement property is acquired first by the QI (typically using money borrowed from the taxpayer). The taxpayer then identifies relinquished property and transfers it to the QI, who sells it to an outside buyer. Finally, the QI transfers the replacement property to the taxpayer.

Rev Proc 2000-37, 2002-2 CB 308, tailors the 45-day and 180-day statutory periods to the specific situation of QEAAs holding title to property involved in a multiparty exchange.

Facts. A taxpayer we'll call Hotels, Inc., wanted to acquire a building in Phoenix, Arizona. However, instead of buying it, Hotels wanted to engineer the acquisition as an exchange for one of the buildings it owned elsewhere. To that end, Hotels entered into a QEAA with EAT, an affiliate of QI. The deal called for EAT to facilitate a parking arrangement and acquire the Phoenix property in a like-kind exchange. EAT agreed to take title to the Phoenix property through a wholly-owned single member limited liability company called RPLLC. Hotels loaned RPLLC funds to buy the Phoenix property, for which RPLLC gave Hotels a promissory note obligating EAT to repay the loan to Hotels if the latter subsequently acquired the Phoenix property from EAT.

The following transactions took place:

• On Date 1, RPLLC acquired the Phoenix property from Seller, financing the $21 million purchase price by assuming an existing $12 million mortgage on the property and borrowing the $9 million balance from Hotels.
• On Date 2, thirty-three days after the acquisition of the Phoenix property by EAT through RPLLC, Hotels identified in writing to EAT three like-kind properties it owned to potentially serve as relinquished property for the Phoenix property. One of these properties was a building in Houston.
• On Date 3, Hotels entered into a written exchange agreement with QI to facilitate the exchange of the Houston building. Hotels assigned to QI the right to receive the net sales proceeds for the Houston building from the company interested in buying it (Buyer).
• On Date 4, QI, acting on behalf of Hotels, transferred the Houston building to Buyer for a total purchase price of $50 million. The net sales proceeds of $41 million (i.e., $50 million less a $9 million mortgage) were deposited with QI. Also on Date 4, which was 180 days from the acquisition of the Phoenix building by EAT, QI directed EAT to transfer the Phoenix building to Hotels as replacement property for the Houston building for a total of $9 million from the sale of the Houston building and an assumption of a mortgage of $12 million. EAT transferred its 100% membership interest in RPLLC to Hotels, thereby transferring the Houston property to Hotels. In addition, Hotels received $9 million in repayment of EAT's obligation under the note.
• On Date 5, which was 42 days after the sale of the Houston property, Hotels identified in writing to QI three additional properties, which were intended by Hotels to be additional replacement properties for the exchange of the Houston property. However, although Hotels had a bona fide intent to enter into a deferred exchange on Date 4, it failed to acquire any other replacement property in the 180-day period subsequent to Date 4.

Hotels later received the remaining proceeds from the sale of the Houston building from QI. Since the attempted deferred exchange transaction spanned two separate tax years, Taxpayer reported the remaining $32 million gain from the sale of the Houston building in the tax year that included the date it received the remaining proceeds in accordance with the installment sale rules of Code Sec. 453 and Reg. § 1.1031(k)-1(j)(2).

Observation: Although the CCA doesn't explain the derivation of the "remaining $32 million gain," it's apparently the $41 million cash from the sale of the Houston building net of the $9 million cash used to buy the Phoenix building.

Observation: Under Code Sec. 453(a) and Code Sec. 453(b)(1), the installment sale rules must (unless the taxpayer elects out) be used to report gain on the disposition of nondealer property where at least one payment is to be received after the close of the tax year in which the disposition occurs. The installment method may be elected even though no payments are received in the year of sale. Here, although Hotels wound up paying tax on the "cash boot" it received because the forward exchange failed, it nonetheless wound up deferring that tax to a year following the year in which the Houston building was disposed of.

Potential problem. The examiner looking at Hotels' transactions thought that they violated Congressional intent because (1) there could be up to 360 days between the day on which replacement property is parked with an exchange titleholder at the inception of the reverse exchange and the day the deferred exchange is completed, and (2) Hotels is entitled to two separate 45 day identification periods for the forward and reverse exchanges. The argument, in essence, was that the transactions were contrary to the identification and replacement provisions in Code Sec. 1031(a)(3).

Transactions pass muster. The CCA pointed out that Hotels planned on making two exchanges, not one. A taxpayer has 45 days to identify replacement property in a deferred exchange and 45 days to identify relinquished property once replacement property is parked. Hotels satisfied the identification requirement in both instances. Moreover, a taxpayer may park property with an EAT for 180 days or less. Also, in a deferred exchange, a taxpayer must close its exchange by acquiring replacement property within the exchange period, which is the earlier of 180 days after the date on which the taxpayer transfers the property relinquished in the exchange, or the due date (determined with regard to extension) for the taxpayer's return for the tax year in which the transfer of the relinquished property occurs. The CCA said Hotels stayed within all of these guidelines.

The CCA conceded that neither Code Sec. 1031 and its regs, nor Rev Proc 2002-37 expressly allow the same relinquished property to be used in both a reverse exchange and a forward deferred exchange. However, it concluded that nothing in these authorities prohibits this coupling in the use of the same relinquished property. Also, taxpayers using the revenue procedure are not constrained to exclusively acquire as replacement property only the property parked with the EAT. It also pointed to a long history of the courts giving significant latitude in structuring like-kind exchanges under Code Sec. 1031.

As a result, the CCA concluded that if the statutory and regulatory guidelines were followed (i.e., time limitations, the avoidance of constructive receipt, etc.) and if Hotels stayed within IRS's administrative guidelines, the gain it realized on the reverse exchange is deferred under Code Sec. 1031 and the gain on the intended deferred exchange is to be recognized in the tax year that includes the date that Hotels received the remaining proceeds from the sale of the Houston property, in accordance with Reg. § 1.1031(k)-1(j)(2)(ii).

For 1031 tax deferred exchange audit, or 1031 tax deferred IRS problem CLICK HERE.

Like many of us, you've probably dreamed of turning a hobby or avocation into a regular business. You won't have any unusual tax headaches if your new business is profitable. However, if the new enterprise consistently generates losses (deductions exceed income), IRS may step in and say it's a hobby--an activity not engaged in for profit--rather than a business.

What are the practical consequences? Under the so-called hobby loss rules, you'll be able to claim those deductions that are available whether or not the enterprise is engaged in for profit (such as state and local property taxes). However, your deductions for business-type expenses (such as rent or advertising) will be limited to the excess of your gross income from the hobby over those expenses that are deductible whether or not the enterprise is engaged in for profit. Deductible hobby expenses are claimed on Schedule A of Form 1040 as miscellaneous itemized deductions subject to a 2%-of-AGI "floor." By contrast, if the new enterprise isn't affected by the hobby loss rules, all otherwise allowable expenses would be deductible on Schedule C, even if they exceeded income from the enterprise.

There are two ways to avoid the hobby loss rules. The first way is to show a profit in at least three out of five consecutive years (two out of seven years for breeding, training, showing, or racing horses). The second way is to run the venture in such a way as to show that you intend to turn it into a profit-maker, rather than operate it as a mere hobby. The IRS regs themselves say that the hobby loss rules won't apply if the facts and circumstances show that you have a profit-making objective.

How can you prove that you have a profit-making objective? In general, you can do so by running the new venture in a businesslike manner. More specifically, IRS and the courts will look to the following factors: how you run the activity; your expertise in the area (and your advisers' expertise); the time and effort you expend in the enterprise; whether there's an expectation that the assets used in the activity will rise in value; your success in carrying on other similar or dissimilar activities; your history of income or loss in the activity; the amount of occasional profits (if any) that are earned; your financial status; and whether the activity involves elements of personal pleasure or recreation.

The classic "hobby loss" situation involves a successful businessperson or professional who starts something like a dog-breeding business, or a farm. But IRS's long arm also can reach out to more prosaic situations, such as businesspeople who start what appears to be a bona-fide sideline business.

Please call our offices to get more details on whether a venture of yours may be affected by the hobby loss rules, and what you should do right now to avoid a tax challenge.

California tax collectors to visit small businesses

As per Los Angeles Times

The effort is part of a new program to catch scofflaws. Investigators will be checking for seller's permits, business licenses and evidence that firms are collecting and paying enough sales and use tax

By Cyndia Zwahlen Special to The Times

The tax man cometh -- right to your door, if you operate a business in a target ZIP Code.

Next week, the first of 8,000 small retailers and other businesses targeted can expect state workers to come calling as part of a new program by California tax collectors to catch scofflaws.

The investigators from the state Board of Equalization will be checking for seller's permits, business licenses and evidence that the businesses are collecting and paying enough sales tax and the often-overlooked use tax.

The campaign is the start of a three-year program that state officials say will eventually reel in $223 million in previously uncollected taxes.

"There is a $2-billion difference between taxes owed and taxes paid," said Randie Henry, deputy director for the agency's sales and use tax department.

"This effort will help us to address that gap by making the landscape fair for those businesses that do comply with the law and are registered and appropriately pay their taxes," she said.

Based on the results of a pilot program, Henry expects that 3% of the businesses inspected won't have their required seller's permits, which are supposed to be posted in a public spot, and won't have paid required taxes.

The initial targeted ZIP Codes in Southern California are: Perris, 92570; Santa Ana, 92701; Torrance, 90505; and Van Nuys, 91406. Businesses farther north, in parts of Emeryville, Sacramento and San Jose also will receive the 20-minute visits.

The new program to boost compliance is getting off to a slower start than anticipated because of the state budget stalemate. Until money is released to fully fund the effort, the size of the program's seven teams will be limited. Instead of 12 state workers each, eight of whom were to be in the field, there will be smaller teams with about three field workers each, said Erin Little, the department's assistant chief of field services in Southern California.

Follow-up efforts also may take longer until the program is fully staffed, said Anita Gore, spokeswoman for the Sacramento-based board, which collects certain business taxes and fees, as well as property taxes. The board doesn't handle individual or corporate income tax.

They're ready at Second Time Around, a consignment shop that has operated in the Torrance 90505 ZIP Code for 32 years, said owner Susan Carmer. She was puzzled when she received the letter from the board but decided to check to make sure her seller's permit was still in its glass case and that her business license was at hand.

She said she'd never considered that some retailers might not register or pay their share of sales tax.

Still, Carmer is concerned about any potential for disruption to her business that a visit from a state worker might cause.

"Sometimes you just can't get away. You've got clothes coming in the back door and selling out the front," Carmer said.

By today, an additional 8,500 storefront businesses probably will have received letters from the state agency notifying them of the next round of inspections due to start in three to four weeks.

Those missives went out Thursday to businesses with sales permits registered in four ZIP Codes: Lake Elsinore, 92530; San Jose, 95111; Santa Ana, 92705; and Torrance, 90504.

Retail businesses that aren't registered with the state probably didn't get the letter but may receive an in-person visit as workers, known as specialists, go door-to-door in the selected areas.

Henry emphasized that specialists were not auditors. If a company is suspected of owing taxes, it will be referred for a follow-up.

Seller's permits are free. Businesses that need one, including retailers and service businesses that sell or lease taxable items, can find an application online at www.boe.ca.gov.

Businesses that sell or lease items have to collect the 7.25% state sales tax, as well as any sales tax imposed by local cities or counties, and turn it over to the Board of Equalization. The board then pays the city's and county's shares to those local governments.

Most retailers follow the rules. Many service businesses that also sell items don't know that they too are required to have a seller's permit and to collect and pay sales taxes.

"All of us can understand the person who has a service business that has small incidentals they sell" not being aware of the need for a permit, Henry said. "But people actually selling tangible property, collecting taxes from their customers and not sending it in, those are the people we hope to fine," she said.

In a typical visit, specialists will introduce themselves, check for required permits, such as a seller's permit, business license and permit to sell cigarettes or tobacco, if applicable.

They will check that their records match the business address, telephone, owner name and the like.

They will eyeball the physical operation to see whether it matches the picture given by the firm's sales tax returns.

"One of the things about a visual visit is you can see, does what they are reporting make sense based on what we see happening in the store," Gore said.

The specialists also will explain the relevant state business tax and fee requirements and hand out seller's permit applications.

Follow-ups will be scheduled for businesses that aren't in compliance.

Firms will not be fined for the lack of a seller's permit unless they refuse to comply, Little said. The state can fine a business owner as much as $1,000 and impose a one-year jail term for noncompliance.

The inspectors also will be visiting sellers at fairs and swap meets, including the Pomona Swap Meet, to check for valid seller's permits, while the owners of such ventures will be contacted so they can inform their vendors.

The average noncompliant business in the pilot program had been operating without paying taxes for almost two years, Henry said. The average overdue tax bill was $10,000.

The workers will also hand out a brochure that briefly explains the program as well as how to file a complaint if a business owner has concerns about the process or the state worker's behavior.

The Board of Equalization held a meeting in Culver City last month and in Sacramento in July to notify business owners, trade groups and city officials.

The agency is sending letters to city officials and offering brochures and posters to business groups in an effort to get the word out.

Don't be caught unaware.

Get Sales Tax Help TODAY! We resolve BOE tax issues.

LLC may receive continuous wage levy on owner

Chief Counsel Advice 200835030

A new IRS Chief Counsel Advice (CCA) says that a limited liability company (LLC) may be required to honor a continuous wage levy on salary and wage payments to its sole owner. [Note: The CCA may not be used or cited as precedent.]

Facts. The taxpayer is a single owner of an LLC. The LLC provides daycare services to a county within the State of Ohio pursuant to a written contract. The county contracts with the LLC, rather than the entity's owner, for daycare services. The contract requires the daycare service provider to submit invoices for child daycare services rendered to the county within 30 days of the close of a designated billing period. The county pays the invoices within 30 days of receipt. The contract characterizes the LLC's owner as a self-employed independent contractor. The only potential asset source available to satisfy the single owner's income tax liability is the income received from the LLC under the contract with the county.

Continuous wage levy. Individuals with steady jobs who fail to pay their federal income taxes may have their wages and other income seized by the IRS. These garnishments are called tax levies and are administered by the IRS under its tax collection authority. A levy generally extends only to property possessed and obligations existing at the time levy is made. However, the IRS provides an exception to this rule under IRC §6331(e) for a continuous levy on salary and wages. The levy on salary or wages that is payable, or is to be received by a taxpayer, is continuous from the date the levy is first made until the levy is released under IRC §6343.

What are salary and wages? IRC §6331(e) does not specify the types of remuneration that are covered by the term "salary or wages." However, the IRS has determined that the term "salary or wages" includes compensation for services paid in the form of fees, commissions, bonuses, and similar items. In addition, the federal courts have determined that "salary or wages" include the following payments: compensation due to state and municipal employees, severance pay paid by an employer to its former employee, Social Security payments, and future wages and fees.

Court rulings. In U.S. v. Jefferson-Pilot Life Insurance Co., CA4, 75 AFTR 2d 95-1529, 3/15/95, the U.S. Court of Appeals for the Fourth Circuit reviewed the Government's action to enforce a continuous levy against an insurance company that paid commissions to an insurance salesman who was an independent contractor. The insurance company argued that the IRS only had the authority to serve it with a one-time levy because it was not the taxpayer's employer. The Fourth Circuit ruled that the words "salary or wages payable to or received by a taxpayer" in IRC §6331(e) are not so restrictive as to exclude the possibility that Congress intended them to apply to a commission paid to an independent contractor. In United States v. Moskowitz, Passman, & Edelman, DC NY, 100 AFTR 2d 2007-6358, a federal district court held that amounts paid and payable to a member of a law firm, which was organized as a partnership, were subject to a continuing levy.

IRS ruling. The IRS cited Jefferson-Pilot and Moskowitz, and ruled that the payments the single owner received from the LLC as a share of the net profits may be subject to a continuing wage levy under IRC §6331(e).

Tax help for wage levy and wage garnishment is AVAILABLE HERE.

Victims of Hurricane Gustav in Louisiana qualify for tax relief IR 2008-100

http://www.irs.gov/newsroom/article/0,,id=186409,00.html

An IRS news release says victims of Hurricane Gustav in the 34 parishes of Louisiana designated as presidential disaster areas have until Jan. 5, 2009, to make tax payments and file returns that would otherwise be due between Sept. 1, 2008, and Jan. 5, 2009. For example, the postponement applies to individual estimated tax payments and corporate extended Form 1120 returns due on Sept. 15, 2008, and individual extended Form 1040 returns due Oct. 15, 2008. Certain other time-sensitive acts also are postponed.

All disaster areas accumulated for 2008. This article updates and accumulates all the declared disaster areas for 2008. It summarizes the relief that's available and includes up-to-date disaster area designations and extended filing and deposit dates for all counties and states affected by storms, floods and other disasters in 2008.

Who gets relief? Only taxpayers considered to be affected taxpayers are eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts. Affected taxpayers are those listed in Reg. § 301.7508A-1(d)(1) and thus include:

• any individual whose principal residence, and any business entity whose principal place of business, is located in the counties designated as disaster areas;
• any individual who is a relief worker assisting in a covered disaster area, regardless of whether he is affiliated with recognized government or philanthropic organizations;
• any individual whose principal residence, and any business entity whose principal place of business, is not located in a covered disaster area, but whose records necessary to meet a filing or payment deadline are maintained in a covered disaster area, or whose tax professional/practitioner is located in a covered disaster area;
• any estate or trust that has tax records necessary to meet a filing or payment deadline in a covered disaster area; and
• any spouse of an affected taxpayer, solely with regard to a joint return of the husband and wife.

IRS also gives affected taxpayers until the extended date to perform other time-sensitive actions described in Reg. § 301.7508A-1(c)(1) and Rev Proc 2007-56, 2007-34 IRB 388, that are due to be performed on or after the onset date of the disaster, and on or before the extended date. This relief also includes the filing of Form 5500 series returns, in the way described in Rev Proc 2007-56, Sec. 8 . Additionally, the relief described in Rev Proc 2007-56, Sec. 17 , relating to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 or 5498 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. IRS, however, will abate penalties for failure to make timely employment and excise deposits, due on or after the onset date of the disaster, and on or before the deposit delayed date (specified by county, below), provided the taxpayer made these deposits by the deposit delayed date.

Affected counties and dates for storms, floods and other disasters in 2008 are as follows:

Arkansas: The following are presidential disaster areas qualifying for individual assistance: Arkansas, Benton, Cleburne, Conway, Crittenden, Grant, Lonoke, Mississippi, Phillips, Pulaski, Saline and Van Buren counties. For these Arkansas counties, the onset date of the disaster was May 2, 2008, the extended date is July 21, 2008, and the deposit delayed date was May 19, 2008.

Colorado: The following are presidential disaster areas qualifying for individual assistance: Larimer and Weld counties. For these Colorado counties, the onset date of the disaster was May 22, 2008, the extended date is July 25, 2008, and the deposit delayed date was June 6, 2008.

Florida: The following are presidential disaster areas qualifying for individual assistance on account of Tropical Storm Fay: Brevard, Duval, Hendry, Lee, Leon, Okeechobee, Seminole, St. Lucie, Volusia and Wakulla counties. For these Florida counties, the onset date of the disaster was Aug. 18, 2008, the extended date is Nov. 17, 2008, and the deposit delayed date was Sept. 2, 2008.

Georgia: The following are presidential disaster areas qualifying for individual assistance: Bibb, Carroll, Douglas, Emanuel, Jefferson, Jenkins, Johnson, Laurens, McIntosh and Twiggs counties. For these Georgia counties, the onset date of the disaster was May 11, 2008, the extended date is July 22, 2008, and the deposit delayed date was May 27, 2008.

Illinois: The following are presidential disaster areas qualifying for individual assistance: Adams, Clark, Coles, Crawford, Cumberland, Douglas, Edgar, Hancock, Henderson, Jasper, Lake, Lawrence, Mercer and Winnebago counties. For these Illinois counties, the onset date of the May disaster was June 1, 2008, the extended date was Aug. 25, 2008, and the deposit delayed date was June 16, 2008.

Indiana: The following are presidential disaster areas qualifying for individual assistance on account of severe storms and tornadoes beginning on May 30: Adams, Bartholomew, Brown, Clay, Daviess, Dearborn, Decatur, Gibson, Grant, Greene, Hamilton, Hancock, Hendricks, Henry, Huntington, Jackson, Jefferson, Jennings, Johnson, Knox, Lawrence, Marion, Monroe, Morgan, Owen, Parke, Pike, Posey, Putnam, Randolph, Ripley, Rush, Shelby, Sullivan, Tippecanoe, Vermillion, Vigo, Washington and Wayne counties. For these Indiana counties, the onset date of the May disaster was May 30, 2008, the extended date was Aug. 7, 2008, and the deposit delayed date was June 16, 2008.

The following are presidential disaster areas qualifying for individual assistance on account of severe storms and tornadoes on January 7: Allen, Benton, Carroll, Cass, DeKalb, Elkhart, Fulton, Huntington, Jasper, Kosciusko, Lake, Laporte, Marshall, Newton, Noble, Pulaski, St. Joseph, Starke, Tippecanoe, White and Whitley counties.

For the Indiana counties declared to be disaster areas on account of the January storms and tornadoes, the onset date of the disaster was January 7, 2008, the extended date was March 31, 2008, and the deposit delayed date was January 22, 2008.

Iowa: The following are presidential disaster areas qualifying for individual assistance: Adams, Allamakee, Benton, Black Hawk, Boone, Bremer, Buchanan, Butler, Cedar, Cerro Gordo, Chicksaw, Clayton, Crawford, Delaware, Des Moines, Fayette, Floyd, Franklin, Freemont, Hamilton, Hancock, Hardin, Harrison, Jasper, Johnson, Jones, Kossuth, Lee, Linn, Louisa, Madison, Mahaska, Marion, Marshall, Mills, Monona, Muscatine, Page, Polk, Scott, Story, Tama, Union, Wapello, Warren, Webster, Winneshiek and Wright counties. For these Iowa counties, the onset date of the disaster is May 25, 2008, the extended date was July 28, 2008, and the deposit delayed date was June 9, 2008.

Louisiana: The following are presidential disaster areas qualifying for individual assistance on account of Hurricane Gustav: Acadia, Allen, Ascension, Assumption, Avoyelles, Beauregard, Cameron, East Baton Rouge, East Feliciana, Evangeline, Iberia, Iberville, Jefferson, Jefferson Davis, Lafayette, Lafourche, Livingston, Orleans, Plaquemines, Pointe Coupee, Rapides, Sabine, St. Bernard, St. Charles, St. James, St. John the Baptist, St. Landry, St. Martin, St. Mary, Terrebonne, Vermilion, Vernon, West Baton Rouge and West Feliciana parishes. For these Louisiana parishes, the onset date of the disaster is Sept. 1, 2008, the extended date is Jan. 5, 2009, and the deposit delayed date is Sept. 16, 2008.

Maine: The following are presidential disaster areas qualifying for individual assistance: Aroostook and Penobscot counties. For these Maine counties, the onset date of the disaster was April 28, the extended date was July 8, and the deposit delayed date was May 13, 2008.

Missouri: The following are presidential disaster areas qualifying for individual assistance on account of the June storms and flooding: Clark, Lewis, Lincoln, Marion, Pike, Ralls and St. Charlies counties. For these Missouri counties, the onset date of the disaster was June 1, 2008, the extended date was August 29, 2008, and the deposit delayed date was June 16, 2008.

The following are presidential disaster areas qualifying for individual assistance on account of the May storms and tornados: Barry, Jasper and Newton counties. For these Missouri counties, the onset date of the disaster was May 10, 2008, the extended date was July 22, 2008, and the deposit delayed date was May 27, 2008.

Mississippi: The following are presidential disaster areas qualifying for individual assistance: Bolivar, Warren, Washington and Wilkinson counties. For these Mississippi counties, the onset date of the disaster was March 20, 2008, the extended date was July 7, 2008, and the deposit delayed date was April 4, 2008.

Nebraska: The following are presidential disaster areas qualifying for individual assistance: Buffalo, Butler, Colfax, Dawson, Douglas, Gage, Hamilton, Jefferson, Kearney, Platte, Richardson, Sarpy and Saunders counties. For these Nebraska counties, the onset date of the disaster was May 22, 2008, the extended date was Aug. 19, 2008, and the deposit delayed date was June 6, 2008.

Oklahoma: The following are presidential disaster areas qualifying for individual assistance: Craig, Latimer, Ottawa and Pittsburg counties. For these Oklahoma counties, the onset date of the disaster was May 10, 2008, the extended date was July 14, 2008, and the deposit delayed date was May 27, 2008.

Texas: The following are presidential disaster areas qualifying for individual assistance on account of Hurricane Dolly: Cameron, Hildalgo and Willacy counties. For these Texas counties, the onset date of the disaster was July 22, 2008, the extended date was Sept. 22, 2008, and the deposit delayed date was Aug. 6, 2008.

West Virginia: The following are presidential disaster areas qualifying for individual assistance: Barbour, Doddridge, Gilmer, Harrison, Jackson, Jefferson, Marion, Taylor, Tucker, Tyler and Wetzel counties. For these West Virginia counties, the onset date of the disaster was June 3, 2008, the extended date was Aug. 18, 2008, and the deposit delayed date was June 23, 2008.

Wisconsin: The following are presidential disaster areas qualifying for individual assistance: Adams, Calumet, Crawford, Columbia, Dane, Dodge, Fond du Lac, Grant, Green, Green Lake, Iowa, Jefferson, Juneau, Kenosha, La Crosse, Manitowoc, Marquette, Milwaukee, Ozaukee, Racine, Richland, Rock, Sauk, Sheboygan, Vernon, Walworth, Washington, Waukesha and Winnebago counties. For these Wisconsin counties, the onset date of the disaster was June 5, 2008, the extended date was Aug. 18, 2008, and the deposit delayed date was June 5, 2008.

Claiming disaster loss on previous year's return. A taxpayer that sustains a loss attributable to a disaster occurring in a Presidential disaster area may elect to deduct that loss on his return for the tax year immediately preceding the tax year in which the disaster occurred. (Code Sec. 165(i)) Generally, a taxpayer must make this election by filing a return, an amended return, or a refund claim on or before the later of (i) the due date of his income tax return (determined without regard to any filing extension) for the tax year in which the disaster actually occurred, or (ii) the due date of his tax return (determined with regard to any filing extension) for the immediately preceding tax year. The election is irrevocable 90 days after it is made. (Reg. § 1.165-11(e)) Thus, taxpayers in affected counties designated as disaster areas in 2008 can elect to claim a 2008 disaster loss on their 2007 returns, instead of on their 2008 returns.

Observation: Claiming the disaster loss for the year before the loss occurred saves taxes immediately, without having to wait until the end of the year in which the loss was sustained. In some cases, the deduction may result in a net operating loss, which could result in a refund from an earlier year to which it is carried. On the other hand, deducting the loss in the year the loss actually occurred may result in bigger tax savings if the taxpayer is in a higher bracket in that year.

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Employer not required to obtain worker status determination before withholding taxes

Nino v. Ford Motor Company, DC MI, 102 AFTR 2d ¶2008-5215, Dkt. No. 07-13545, 8/8/08

A federal district court has dismissed an employee's pro se ("for self"; non-attorney) complaint that he should not have had withholding deducted until his employer obtained a worker status determination from the IRS.

The employee had been claiming to be exempt on his Form W-4 when the IRS instructed his employer to disregard the W-4 and begin withholding from him as if he were a single person with no deductions. The employee argued that his employer was "statutorily required to secure a determination of Worker Status for Purpose of Income Tax Withholding" before it could begin the tax withholding process. The employee's sole support for this premise was the existence of Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

The court dismissed the complaint, based on the Form SS-8 instructions, which note that completion of the form is not mandatory. Page 5 of the instructions state that "neither employers nor workers are required to request a status determination, but if you choose to do so, you must provide the information requested on this form." The court pointed out that withholding federal income tax and making payments to the IRS are mandatory duties for employers under IRC §3102(a) and IRC §3402(a).

The court also noted that when a plaintiff "is challenging federal income tax withholding, his exclusive remedy for a tax refund is an action against the United States." The plaintiff who was the subject of this ruling chose to sue his employer, rather than the United States. He therefore would not have been entitled to any relief even if his argument had been valid.

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Court rebuffs IRS and allows deduction for lease termination payment

ABC Beverage Corporation & Subsidiaries v. U.S., (DC MI 8/27/2008) 102 AFTR 2d ¶ 2008-5231

A district court has allowed a party that exercised an option to buy property that it was leasing to deduct a portion of the amount tendered in the transaction as a lease termination payment. In so doing, the court rejected IRS's argument that full amount tendered had to be capitalized as part of the purchase price. The record, however, was insufficient for the court to determine the proper year for taking the deduction.

Facts. In '87, Corporate Property Associates (Landlord) entered into a lease with Tandem Holdings, Inc. for property located at 555 McDonnell Boulevard (McDonnell Property) in Hazelwood, Missouri. The initial lease period lasted 300 months and provided for five successive five-year renewal options. Through a series of corporate and stock transactions, one of the subsidiaries of the taxpayer ABC Beverage Corporation acquired the lease in '95. The lease included a provision for calculating the amount of rent owed each month.

The lease also contained a clause allowing the tenant the option to purchase the McDonnell Property with the purchase price calculated under a formula in the lease. On Dec. 10, '96, the then tenant notified Landlord it was exercising its right to purchase the property. However, even with the formula, the parties couldn't agree on the purchase price. The parties remained at an impasse and on Oct. 2, '97, Landlord notified ABC that it considered ABC in default under the lease for failure to pay the full amount of rent owed. Landlord exercised its remedies under the lease and requested ABC to make an offer to purchase the property. A day later, Landlord filed suit in state court over the amount of rent due. While the action was pending, the parties entered into an agreement in January '99 in which they agreed the fair market value of the property would be no less than $9 million and no greater than $11.5 million. Later in '99, they agreed on a purchase price of $11 million.

On its '97 tax return, ABC claimed a deduction for $6,250,000 as a lease termination expense and capitalized the McDonnell Property for $2,750,000. These figures were based on a $9 million minimum purchase price. On Nov. 17, 2005, IRS assessed an income tax deficiency of over $2.4 million against ABC. The dispute over the lease termination payment deduction wound up in district court where each party sought summary judgment.

Background. Code Sec. 167(c)(2) provides that where property is acquired subject to a lease, no basis is allocated to the leasehold interest.

Parties' arguments. IRS argued that Code Sec. 167(c)(2) prohibits any allocation of the purchase price of the property to the leasehold interest. As a result, IRS concluded that ABC could not claim any of the cost of terminating the leasehold as a business expense. Alternatively, it argued that if a deduction is allowable, the proper year for the deduction is '99 not '97.

Court allows deduction. The court determined that Code Sec. 167(c)(2) did not apply. It noted that the property in question was subject to a lease before ABC acquired it with ABC as lessee. Therefore, when ABC acquired the property, the leasehold merged with the larger estate and the property was no longer subject to a lease. The contract included evidence that the parties intended title to merge upon the purchase of the property by the lessee.

The court further explained its reasoning as follows. Whether property is acquired by the lessee of that property or by a third party makes a significant difference in terms of both the rights acquired and the tax consequences of the acquisition. IRS argued that, under Code Sec. 167(c)(2), it should not make any difference who acquires the property. But the Court noted that if leased property is sold by the owner to a third party, the third party acquires a reversion, but no concurrent right to possession. The tax consequences of the third party's acquisition are outlined under Code Sec. 167(c)(2). However, when the lessee of the property acquires the property, the lease and the reversion merge and there is no lease burdening the estate. Consequently, Code Sec. 167(c)(2) would not apply because the property is not subject to a lease.

Observation: The Tax Court, in Union Carbide Foreign Sales Corp., (2000) 115 TC 423, reached an opposite conclusion with respect to the application of Code Sec. 167(c)(2) when a tenant pays a lease termination fee in conjunction with the purchase of the property it leased (see Federal Taxes Weekly Alert 11/16/2000). Specifically, in that case, the taxpayer purchased a ship in order to terminate a burdensome lease on it. In a case of first impression, the Tax Court held that the taxpayer could not allocate a portion of the cost of acquiring the vessel to the termination of the lease because Code Sec. 167(c)(2) required the entire cost to be allocated to the basis of the vessel. The district court acknowledged the Tax Court decision but respectfully disagreed with its reasoning and conclusions.

Record not sufficient to determine year for taking the deduction. IRS also argued that the economic performance requirement of Code Sec. 461(h) was not satisfied until the seller transferred title to the property in '99, and therefore the deduction was not proper until '99. ABC claimed that liability was established six months after it notified Landlord in December '96 it was exercising its right to purchase the property. The court said that, viewing the evidence in a light most favorable to ABC, there was a genuine issue of material fact when the amount of liability was established with reasonable accuracy.

Bottom line. Under Sixth Circuit precedent, the Court held that ABC was entitled to claim a deduction for the portion of the purchase price that could be attributed to buying out the excessive lease. ABC established the fair market value of the property, that the lease was excessive, and that the amount it paid to acquire the property over the fair market value of the property was attributable to buying out the onerous lease. However, a genuine issue of material fact precluded summary judgment on when the deduction could be taken. The proper deduction year would have to be determined in an additional proceeding.

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