IRS Problem

Business auto tax write off opportunity

April 29, 2008 | Mike Habib, EA

Enhanced tax breaks make it an especially good time to buy business autos

Mike Habib, EA
myIRSTaxRelief.com Thanks to economic woes in general and financial trouble for auto manufacturers in particular, it’s a good time to shop for a new vehicle, if you can afford to do so. Thanks to bonus first year depreciation deductions under the Economic Stimulus Act of 2008, it’s an even better time to buy if the vehicle is going to be used for business. This Practice Alert takes a close look at the enhanced first year write-offs that are available to new business autos, light trucks or vans that are placed in service this year.

Bonus depreciation basics. In general, for property placed in service after Dec. 31, 2007, in tax years ending after that date, taxpayers get an additional depreciation deduction in the placed-in-service year equal to 50% of the adjusted basis of “qualified property.” (Code Sec. 168(k)(1)) This is property that meets all of these conditions:

It is property falling within one of four statutory categories, the most important of which is property to which MACRS applies with a recovery period of 20 years or less. (Code Sec. 168(k)(2)(A))
The original use of the property commences with the taxpayer after Dec. 31, 2007. Original use is the first use to which the property is put, whether or not that use corresponds to the taxpayer’s use of the property. (Code Sec. 168(k)(2)(A))
The property is acquired by the taxpayer (a) after Dec. 31, 2007, and before Jan. 1, 2009, but only if no binding written contract for the acquisition is in effect before Jan. 1, 2008, or (b) pursuant to a binding written contract which was entered into after Dec. 31, 2007, and before Jan. 1, 2009. (Code Sec. 168(k)(2)(A)(iii))
The property is placed in service after Dec. 31, 2007, and before Jan. 1, 2009 (the placed-in-service date is extended for one year for certain property with a recovery period of ten years or longer and certain transportation property). (Code Sec. 168(k)(2)(B), Code Sec. 168(k)(2)(C))

If all of the Code Sec. 168(k) requirements are met, bonus first-year depreciation automatically applies to qualified property, unless the taxpayer “elects out” under Code Sec. 168(k)(2)(C)(iii).

Under pre-Stimulus Act regs that taxpayers may rely on pending further guidance, the bonus depreciation allowance is found by multiplying the qualifying property’s unadjusted depreciable basis by 50%. (Reg. § 1.168(k)-1(d)(1)(A)) The unadjusted depreciable basis is basis for gain or loss purposes, before depreciation, amortization, or depletion, less a number of adjustments, including a reduction in basis for personal use (i.e., use other than for trade or business or investment purposes), and a reduction for any portion of the property expensed under Code Sec. 179. (Reg. § 1.168(k)-1(a)(2)(iii))

Innocent spouse tax relief and tax problem resolution

April 23, 2008 | Mike Habib, EA

Tax Court properly denied separate filer equitable innocent spouse relief – Christensen, (CA 9 4/21/2008) 101 AFTR 2d ¶ 2008-705

Mike Habib, EA

MyIRSTaxRelief.com

Joint Venture Self-employment tax matters

April 22, 2008 | Mike Habib, EA

Qualified joint venture’s rental real estate income isn’t subject to self-employment tax – Chief Counsel Advice 200816030

Mike Habib, EA
myIRSTaxRelief.com In Chief Counsel Advice (CCA), IRS has concluded that the qualified joint venture election under Code Sec. 761(f) doesn’t cause self-employment tax to be imposed on income from a rental real estate business that would otherwise be excluded. Dividends and capital gains are similarly excluded. The qualified joint venture election, which was recently added by the Small Business and Work Opportunity Act of 2007 (Small Business Act), allows eligible married co-owners to avoid filing partnership returns and both spouses to receive credit for social security and Medicare coverage purposes.

Background on qualified joint ventures. The Small Business Act provision generally allows a qualified joint venture whose only members are a husband and wife filing a joint return not to be treated as a partnership for Federal tax purposes. (Code Sec. 761(f)) A qualified joint venture is a joint venture involving the conduct of a trade or business, if:

(1) the only members of the joint venture are a husband and wife,
(2) both spouses materially participate in the trade or business, and
(3) both spouses elect to have the provision apply. (Code Sec. 761(f)(2))

The meaning of material participation is the same as under the passive activity loss rules in Code Sec. 469(h) and its regs.

Intellectual property payment deferral tax problem resolution

April 21, 2008 | Mike Habib, EA

The IRS OKs deferral of income from intellectual property payments

Mike Habib, EA

myIRSTaxRelief.com

Fiduciary Estate Trust Tax Resolution – Irrevocable Grantor Trust

April 21, 2008 | Mike Habib, EA

Grantor’s power to substitute trust property didn’t trigger inclusion in estate – Rev Rul 2008-22, 2008-16 IRB 796

Mike Habib, EA
myIRSTaxRelief.com A new revenue ruling concludes that the corpus of an irrevocable trust that a grantor created during life is not includible in his gross estate under Code Sec. 2036 or Code Sec. 2038 on account of the grantor having retained the power, exercisable in a nonfiduciary capacity, to acquire property held by the trust by substituting other property of equivalent value.

Observation: This ruling is good news for anyone who wants to set up a defective grantor trust – a trust intentionally structured so that the grantor, rather than the trust or its beneficiaries, will be taxed on the trust’s income without the trust being included in the grantor’s estate. Under Code Sec. 675(4), a grantor’s power to substitute property causes trust income to be taxed to the grantor and is commonly used to create a defective grantor trust. The new ruling gives this technique a big boost by making it clear that such a power of substitution won’t cause inclusion in the grantors’ estate.

Background. Under Code Sec. 2036, a decedent’s gross estate includes transfers under which he retained the possession or enjoyment of, or the right to the income from, the transferred property. The decedent need not have a legally enforceable right, but there must be an agreement, either expressed or implied, that the decedent will retain the benefit. Under Code Sec. 2038 , a decedent’s gross estate includes a lifetime transfer if the enjoyment of the transferred property was subject at his death to any change through the exercise by him of a power to alter, amend, revoke or terminate. This includes any power affecting the time or manner of enjoyment of property or its income. Inclusion is not required under Code Sec. 2036 or Code Sec. 2038 if the transfer was a bona fide sale for full and adequate consideration.

Facts. In Year 1, Danny, a U.S. citizen, established and funded an irrevocable inter vivos trust (Trust) for the benefit of his descendants. Danny is barred from serving as Trustee. Danny has the power, exercisable at any time, to acquire any property held in Trust by substituting other property of equivalent value. The power is exercisable by Danny in a nonfiduciary capacity, without the approval or consent of any person acting in a fiduciary capacity. To exercise the power of substitution, he must certify in writing that the substituted property and the trust property for which it is substituted are of equivalent value.

Farmers tax problems – Farmers Tax Relief Help

April 21, 2008 | Mike Habib, EA

Offsets in Senate Finance’s farm bill include Schedule F loss limits, optional self-employment tax, and information reporting

Mike Habib, EA

MyIRSTaxRelief.com

On April 18, the Senate Finance Committee conferees on the farm bill announced $2.4 billion of reforms/offsets – “double the reforms in the House or Senate bills alone” – that could be used to fully offset the farm bill. These reforms/offsets (along with a slight decrease in the ethanol tax credit) would include:

Federal tax lien – IRS proposed priority

April 18, 2008 | Mike Habib, EA

IRS proposed regs would update federal tax lien priority provisions for holders of security interests

Preamble to Prop Reg 04/16/2008, Prop Reg § 301.6323(b)-1, Prop Reg § 301.6323(c)-2, Prop Reg § 301.6323(f)-1, Prop Reg § 301.6323(g)-1

Mike Habib, EA

IRS enforcement in tax collection and tax audit activity is on the rise

April 18, 2008 | Mike Habib, EA

IRS Oversight Board Annual Report 2007 is now available – see more details below Mike Habib, EA
myIRSTaxRelief.com As you can see from the report below, the IRS places “<span as their TOP priority, that will involve enforcement of their collection activity of back taxes owed, and enforcement of their tax audit activity. The IRS must strive to achieve the standard of “great” performance and settle for nothing less, the IRS Oversight Board said in its latest annual report. The board called for “breakthrough” agency performances in four areas – taxpayer service, enforcement, human capital and information technology. For example, to enhance customer service, IRS must continually assess taxpayer needs and implement education and outreach services tailored to the needs of specific taxpayer groups, the board said. IRS also must apply the results of its research efforts to improve its enforcement activity. In addition, the agency must address the loss of unique skills and institutional knowledge that results from the normal retirement rate of some 4,000 employees annually. “The board has challenged the IRS to rise to an unprecedented level of performance in all parts of its mission,” said Paul Cherecwich, chairman of the board. “It will not be easy and there are no givens. But the board firmly believes that today’s IRS is up to the task and the end results will be worth the journey and the hard work.” The annual report can be found at http://www.ustreas.gov/irsob/reports/2008/IRSOB_Annual-Report_2007.pdf

If You Missed the Tax Filing Deadline, There is Help Available

April 17, 2008 | Mike Habib, EA

You missed the tax deadline April 15th, so now what?

Mike Habib, EA

myIRSTaxRelief.com

Protective refund claim – possible tax recovery

April 16, 2008 | Mike Habib, EA

No refund suit is allowed in the absence of a timely claim filed with IRS

U.S. v. Clintwood Elkorn Mining Co., (S Ct 4/15/2008) 101 AFTR 2d ¶ 2008696

Mike Habib, EA
myIRSTaxRelief.com

The Supreme Court, reversing the Court of Appeals for the Federal Circuit, has held that the plain language of Code Sec. 7422(a) and Code Sec. 6511 requires a taxpayer seeking a refund of a tax assessed in violation of the Export Clause of the U.S. Constitution, just as for any other unlawfully assessed tax, to file a timely administrative refund claim with IRS before bringing suit against the Government.