Tax Relief Blog

IRS tax levy wage garnishment bank levy

April 30, 2008 | Mike Habib, EA

TIGTA issues statutory review of IRS compliance with legal guidelines when issuing levies [ Audit Report No. 2008-30-097 ]:

During the process of issuing levies, IRS has been complying with legal guidelines regarding proper notification and the protection of taxpayer rights, the Treasury Inspector General for Tax Administration (TIGTA) reported in a recent audit.

The agency is required to notify taxpayers a minimum of 30 calendar days before initiating any levy action to give taxpayers the chance to appeal the proposed levy. Since prior audits found that IRS had implemented tighter controls related to systemically generated levies, the latest annual audit on the subject focused on the issuance of manual levies.

Auditors looked at 30 Integrated Collection System and 30 Automated Collection System manual levies issued between July 1, 2006, and June 30, 2007. Analysis of these levies “showed revenue officers and customer service representatives continued to properly inform taxpayers of their rights at least 30 calendar days prior to issuing the levies,” TIGTA said.

Offshore payroll tax problems

April 30, 2008 | Mike Habib, EA

Houses passes legislation that would make sure certain government contractors pay employment taxes – Foreign shell companies payroll tax problems

Mike Habib, EA
myIRSTaxRelief.com

The House of Representatives has passed legislation [H.R. 5719, Sec. 18, 4/15/08] proposed by Representatives Brad Ellsworth (D-Ind.) and Rahm Emanuel (D-Ill.) that seeks to end the practice of U.S. government contractors setting up shell companies in foreign jurisdictions to avoid paying payroll taxes. Under current law, US companies are required to pay Social Security and Medicare taxes for their American workers overseas. But some firms have been able to get around that requirement by hiring workers through offshore shell companies or foreign subsidiaries.

The legislation would amend the Internal Revenue Code and the Social Security Act to treat foreign subsidiaries of U.S. companies performing services under contract with the U.S. government as American employers for Social Security and Medicare tax purposes. The legislation would require any foreign company that is at least 50% owned by a U.S. federal contractor to pay payroll taxes for its American employees.

The bill was inspired by recent news that defense contractor KBR Inc. had avoided paying Social Security and Medicare taxes by creating shell companies in the Cayman Islands. A similar provision is being sponsored in the Senate by Senators John Kerry (D-Mass.) and Barack Obama (D-Ill.).

Tax shelter tax problem resolution

April 29, 2008 | Mike Habib, EA

District court allows $60 million of income to be offset by Son-of-Boss shelter

Sala v. U.S. (DC Co 4/22/08) 101 AFTR 2d ¶ 2008720

Mike Habib, EA
myIRSTaxRelief.com A district court has allowed an individual to offset $60 million of compensation income with losses from a Son-of-Boss transaction.

Facts. Carlos E. Sala had income in 2000 of more than $60 million. However, he claimed a tax loss that essentially nullified his tax burden. Sala achieved the loss through his involvement in a foreign currency options investment transaction known as Deerhurst. He claimed that the $60 million loss resulted from a series of steps that made use of an S corporation (Solid Currencies, Inc.) and an investment in a partnership (Deerhurst Investors, GP). These steps were orchestrated under a then-existing tax rule that disregarded short options as liabilities for purposes of establishing partnership basis. Under this rule, liabilities created by short options were considered too contingent to affect a partner’s basis in the partnership.

IRS challenged this transaction, which is commonly known as a Son-of-Boss shelter, on various grounds. The district court faced these key issues:

(1) whether the transactions creating Sala’s 2000 tax loss were sham transactions;
(2) whether Sala had a profit motive for entering into the transactions creating his 2000 tax loss;
(3) whether the transactions creating Sala’s 2000 tax loss, as executed, allowed the tax loss; and
(4) whether any allowable tax loss was rendered retroactively disallowed by Reg. § 1.752-6.

Retailer tax problem resolution

April 29, 2008 | Mike Habib, EA

Payments made by retailer in connection with sales promotion weren’t taxable – PLR 200816027

Mike Habib, EA

myIRSTaxRelief.com

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.

Heavy Highway Vehicle Use Tax Collection

April 22, 2008 | Mike Habib, EA

TIGTA audit reviews effectiveness of IRS processing of Heavy Highway Vehicle Use Tax Return [Audit Report No. 2008-40-089]: The

IRS should encourage more states to participate in its Alternative Proof of Payment Program for the collection of the Heavy Highway Vehicle Use Tax (also known as the Heavy Vehicle Use Tax), the Treasury Inspector General for Tax Administration (TIGTA) said in a recent audit.

The tax is a federal highway use tax paid annually on vehicles with a taxable gross weight of 55,000 or more pounds, designed to carry a load over public highways, and expected to be used more than 5,000 miles (more than 7,500 miles for agricultural uses). Typically, after a taxpayer files Form 2290 (Heavy Highway Vehicle Use Tax Return) and pays the tax, IRS stamps the Schedule of Heavy Highway Vehicles (Schedule I) of the form to show payment was received and returns it to the taxpayer for use as proof of payment for vehicle registration.

The Alternative Proof of Payment Program is based on an agreement between IRS and a state department of motor vehicles that allows taxpayers to simultaneously file Form 2290, pay the tax, and register their vehicles.

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.