IRS Notice

Determination of Willfulness

August 26, 2008 | Mike Habib, EA

Ability to pay tax liability not relevant to determination of willfulness under Code Sec. 7202

U.S. v. Easterday (2008, CA9) 102 AFTR 2d ¶ 2008-5218

By a vote of two to one, a Ninth Circuit panel decision has upheld a district court’s ruling that a defendant’s ability to pay wasn’t relevant to the determination of whether he willfully failed to collect or pay over tax under Code Sec. 7202. In so doing, the Ninth Circuit effectively repudiated a decision it handed down over 30 years ago on the issue of willfulness.

Fuel Cell Credit

August 22, 2008 | Mike Habib, EA

IRS explains how to claim credit for qualified fuel cell and qualified microturbine property A new Notice carries interim guidance on the terms and conditions that must be met by taxpayers that want to claim the Code Sec. 48 credit for fuel cells and microturbines.

Background. A taxpayer may be eligible to claim (on Form 3468) a number of energy credits, including the following credits added by the Energy Policy Act of 2005 (P.L. 109-58). In each case, the percentage is applied to the basis of eligible energy property placed in service during the year:

30% for qualified fuel cell property, (Code Sec. 48(a)(2)(A)(i)(I)) i.e., a fuel cell power plant with a nameplate capacity of at least 0.5 kilowatt of electricity using an electrochemical process, and an electricity only generation efficiency of greater than 30%. The credit can’t exceed an amount equal to $500 for each 0.5 kilowatt of capacity. The credit isn’t available after 2008. (Code Sec. 48(c))
10% for qualified microturbine property, (Code Sec. 48(a)(2)(A)(ii), Code Sec. 48(a)(3)(A)(iv)) i.e., a stationary microturbine powerplant with a nameplate capacity of less than 2,000 kilowatts, and an electricity only generation efficiency of not less than 26% at International Standard Organization conditions. A credit for qualified microturbine property can’t exceed $200 for each kilowatt of the property’s capacity. The credit is not available after 2008. (Code Sec. 48(c)(2))

No credit is allowed for property unless it is depreciable or amortizable; its construction, reconstruction or erection is completed by the taxpayer or, if acquired by the taxpayer, its original use begins with the taxpayer; and it meets the official quality and performance standards in effect at the time of acquisition. (Code Sec. 48(a)(3))

Hiding Income Offshore?

August 21, 2008 | Mike Habib, EA

To disclose or not to disclose, that is the question.

Hiding Income Offshore is not the way to go.

Mike Habib, EA

Tax Return Preparer Fraud

August 21, 2008 | Mike Habib, EA

If It Seems Too Good to Be True, It Probably Is

Tax Return Preparer Fraud

Mike Habib, EA

Real Estate Gift Tax

August 18, 2008 | Mike Habib, EA

Tiered discount allowed in real estate FLP gift tax case In Astleford, a memorandum decision, the Tax Court permitted a taxpayer to apply a tiered discount in the context of a family limited partnership owning interests in real estate.

Facts. On 8/1/96, Mrs. Astleford formed the Astleford Family Limited Partnership (“AFLP”) to facilitate the continued ownership, development, and management of various real estate investments and partnership interests she owned and to facilitate gifts that she intended to make to her three adult children. On the same day, Mrs. Astleford transferred to AFLP ownership of an elder care facility. Also on the same day, Mrs. Astleford gave each of her three children a 30% limited partner interest in AFLP and retained for herself a 10% general partner interest.

On 12/1/97, Mrs. Astleford made additional capital contributions to AFLP by transferring to AFLP a 50% interest in Pine Bend Development Co. (“Pine Bend”), a general partnership, and her interest in 14 other real estate properties. The Pine Bend general partnership agreement did not contain any provisions relating to the transfers of interests in Pine Bend or whether such transferred interests would be general partner or assignee interests. Pine Bend owned 3,000 acres of land of which 1,187 acres consisted of agricultural farmland (“Rosemount property”).

Cost of Goods Deductibility

August 18, 2008 | Mike Habib, EA

Deduction for cost of goods sold limited to negotiated discount price IRS concluded in this ILM that the step transaction doctrine applied to the repayment to companies of the difference between the full list price of merchandise and the negotiated discount price, and therefore the companies’ deduction for cost of goods sold (COGS) was limited to the negotiated price.

Facts. U.S. companies paid the full list price for merchandise and were reimbursed for the difference between the full list price and the negotiated discount price.

IRS analysis. The Service concluded that this transaction met all three tests applied by the courts in determining whether the step transaction doctrine should be invoked:

Mortgage Interest Deductibility

August 18, 2008 | Mike Habib, EA

Beneficial owners can deduct home mortgage interest and taxes The Tax Court held that taxpayers were entitled to deduct mortgage interest and real estate taxes they paid on property owned by their son, because they were the beneficial owners of the property.

The taxpayers resided at the property for all of 2003. During that time, title to the property was in the name of their son, as was the mortgage on the property. Their son had obtained a mortgage loan and took title to the house to procure it for the taxpayers who were unable to secure a loan because of financial difficulties. The son did not live on the property, and the taxpayers paid for all maintenance of, and taxes on, the property. Mortgage payments from 2001 until the time of the trial were made through Camrock General Engineering, Co. Camrock was the taxpayers’ company; one taxpayer was its registered agent and the other its president. After the taxpayers moved from the residence, they served as landlords; they rented the property to a tenant and performed all services related to that tenancy

The taxpayers claimed on their 2003 federal income tax return deductions for home mortgage interest and real estate taxes of $3,522 and $3,194, respectively, on the residence property. The IRS contended that because the taxpayers had no legal obligation to make the mortgage payments and did not hold title to the property, they were not entitled to deduct the mortgage payments. The Service further argued that the taxpayers did not make the mortgage payments; the payments were made by Camrock.

US Malta Tax Treaty

August 13, 2008 | Mike Habib, EA

USA & Malta sign new income tax treaty

[U.S. Treasury Press Release, 8/8/08]:

The U.S. Treasury Department has announced that a new income tax treaty between the United States and Malta was signed on Aug. 8, 2008 . The treaty will have withholding tax ramifications for U.S. citizens working in Malta and citizens of Malta working in the United States. The treaty has 29 articles. Article 2 states that the treaty applies to federal income taxes under the Internal Revenue Code, but excludes Social Security and unemployment taxes. Article 14 covers income from employment. Generally, income earned by a U.S. or Malta resident is exempt from income tax in the other treaty country if the resident was not in that country for more than 183 days of the taxable year.

IRS Targets Foreign Income

August 12, 2008 | Mike Habib, EA

IRS targets U.S. source income paid to foreign persons IRM 4.10.21, U.S. Withholding Agent Examinations – Form 1042

Mike Habib, EA

IRS has issued a new Internal Revenue Manual () section, IRM 4.10.21, U.S. Withholding Agent Examinations – Form 1042, on reporting and withholding requirements for U.S. source income that’s paid to foreign persons.

Specialized tax breaks for the farming industry

June 4, 2008 | Mike Habib, EA

Tax provisions directly affecting farmers in the Heartland, Habitat, Harvest, and Horticulture Act of 2008

The recently enacted “Heartland, Habitat, Harvest, and Horticulture Act of 2008” (the 2008 Farm Act) contains a package of tax changes including specialized tax breaks for the farming industry (along with a crackdown on farm losses) and new and modified credits related to the production of certain fuels, among other things. Here’s a summary of the key tax provisions in the 2008 Farm Act that directly affect farmers:

Conservation reserve payments made after 2007 are not subject to self-employment tax if received by an individual who is getting Social Security retirement or disability payments.
The favorable tax treatment of capital gain property donated for qualified conservation is extended for two years (through 2009).
A new deduction is allowed for endangered species recovery expenses incurred after 2008.
A new tax credit is created for the development of cellulosic biofuels, which are biofuels produced from agricultural waste, wood chips, switch grass and other non-food feedstocks. This credit, available for fuel produced after 2008 and through 2012, is a nonrefundable income tax credit for each gallon of qualified cellulosic fuel production of the producer for the tax year. The amount of the credit per gallon is $1.01, except for cellulosic biofuel that is alcohol. For cellulosic biofuel that is alcohol, the $1.01 credit amount is reduced by (1) the credit amount applicable for such alcohol under the alcohol mixture credit in effect at the time cellulosic biofuel is produced, and (2) in the case of cellulosic biofuel that is ethanol, the credit amount for small ethanol producers as in effect at the time the cellulosic biofuel fuel is produced.
The 51¢ per-gallon incentive for ethanol is reduced to 45¢ per gallon for calendar year 2009 and thereafter. This reduction is subject to an exception geared to ethanol production.
A new tax credit is created for agricultural chemicals security. The new law provides retailers of agricultural products and chemicals and manufacturers, formulators, or distributors of certain pesticides a business tax credit for 30% of costs for the protection of such chemicals or pesticides. Such protection costs include employee security training and background checks, installation of security equipment, and computer network safeguards. The credit has a $2 million annual limit and a per facility limitation of $100,000 (reduced by credits received for the five prior tax years). This credit is effective for expenses paid or incurred after May 22, 2008, and before Jan. 1, 2013.
Qualifying mutual ditch, reservoir, or irrigation company stock may be eligible for Code Sec. 1031 treatment. This provision is effective for exchanges after May 22, 2008.
Temporary assistance to victims of the 2007 Kansas tornado disaster is provided, including increased ability to deduct personal losses, increased business expense deductions, and help for affected businesses that continued to pay their employees after the disaster struck.
The amount of farming losses (other than those losses arising because of fire, storm losses, etc.) that a taxpayer may use to reduce other non-farming business income is limited for certain taxpayers. For tax years beginning after 2009, the farming loss of a non-C corporation taxpayer for any tax year in which any applicable subsidies are received will be limited to the greater of (1) $300,000 ($150,000 in the case of a married person filing a separate return), or (2) the taxpayer’s total net farm income for the prior five tax years. Applicable subsidies are (a) any direct or counter-cyclical payments under title I of the Heartland, Habitat, Harvest, and Horticulture Act of 2008 (or any payment elected in lieu of any such payment), or (b) any Commodity Credit Corporation (CCC) loan. Total net farm income is an aggregation of all income and loss from farming businesses for the prior five tax years.
For tax years beginning after 2007, the farm optional method and nonfarm optional method for computing net earnings from self-employment are modified so that electing taxpayers may pay more in optional self-employment taxes and thus become eligible for Social Security benefits.
The CCC is required to always provide IRS and the farmer with information returns showing the amount of market gain the farmer realizes when he or she repays a CCC market assistance loan.

Limitation on farming losses in the Heartland, Habitat, Harvest, and Horticulture Act of 2008

The recently enacted “Heartland, Habitat, Harvest, and Horticulture Act of 2008” (the 2008 Farm Act) contains a package of tax incentives to promote conservation investment in farm country. Those incentives are paid for, in part, by a new limitation on farming losses for certain taxpayers. In essence, the new law limits agricultural losses that can be claimed to the greater of $300,000 ($150,000 for a married person filing separately) or the net farm income for the previous five years if the taxpayer receives any 2008 Farm Act commodity payments or Commodity Credit Corporation loans. Here is a closer look at this new limitation.

Except for passive activity rules in Code Sec. 469, the amount of farming losses that a taxpayer may claim is not limited under pre-2008 Farm Act law. The new provision, which is effective for tax years beginning after December 31, 2009, alters that situation by limiting the amount of farming losses that a taxpayer, other than a C corporation, may use to offset non-farm business income. The limitation amount is the greater of $300,000 ($150,000 in the case of a married person filing a separate return) or the total net farm income the taxpayer has received over the last five years. For example, assume a taxpayer has $300,000 of net farm income and $700,000 of non-farm income in 2010, and $1 million of net farm income in each tax year 2011 to 2014. In 2015, he incurs a $7 million farming loss. Under the new provision, his farming loss in 2015 is limited to the greater of (1) $300,000 or (2) $4.3 million (total net farm income for the prior five tax years). The $4.3 million of the farming loss allowed in 2015 may be carried back to the prior five tax years.

Losses that are limited in a particular year may be carried forward to subsequent years.
For partnerships and S corporations, the limit is applied at the partner or shareholder level. Farming losses arising by reason of fire, storm, or other casualty, or by reason of disease or drought, are disregarded for purposes of calculating the new limitation.