NINTH CIRCUIT HOLDS SUBORDINATION OF MORTGAGE ON PROPERTY IS REQUIRED BEFORE DONATION TO TAKE A CHARITABLE DEDUCTION FOR A CONSERVATION EASEMENT DONATION –  Krista Hartwell

In Minnick v. Commissioner, the Ninth Circuit held that deductions for conservation easement donations are permissible only if any mortgage on the property was subordinated to the easement at the time of the gift. [1]

Must Donate Entire Interest in the Property. Reg. 1.170A-15(a) states that charitable contribution deductions under Section 170 are generally not allowed for a charitable contribution of any interest in property that “consists of less than the donor’s entire interest in the property…” [2] An exception is available under section 170(f)(3)(B)(iii) “for the value of a qualified conservation contribution” if the requirements of Regulation 1.170A-14 are met. [3] A qualified conservation contribution is the “contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes,” and the conservation purpose must be “protected in perpetuity.” [4] Regulation 1.170A-14 defines “qualified real property interest,” [5] “qualified organization,” [6] “conservation purposes,” [7] “exclusively for conservation purposes,” [8] and “enforceable in perpetuity.” [9]

The “enforceable in perpetuity” provision of the 1.170A-14 regulations was at issue in Minnick because there was a mortgage on the donated property at the time of donation. Regulation 1.170A-14(g)(2) “Protection of a conservation purpose in case of a donation of property subject to a mortgage,” states: “In the case of conservation contributions made after February 13, 1986, no deducion [sic] will be permitted under this section for an interest in property which is subject to a mortgage unless the mortgagee subordinates its rights in the property to the right of the qualified organization to enforce the conservation purposes of the gift in perpetuity. For conservation contributions made prior to February 14, 1986, the requirement of section 170 (h)(5)(A) [26 USCS § 170 (h)(5)(A)] is satisfied in the case of mortgaged property (with respect to which the mortgagee has not subordinated its rights) only if the donor can demonstrate that the conservation purpose is protected in perpetuity without subordination of the mortgagee’s rights.” [10].

In Minnick, the taxpayers took out a loan secured by an undeveloped plot of land for the purpose of developing the land. The following year, the taxpayers increased the loan amount twice. Two days after receiving final approval to develop the land, the taxpayers donated a conservation easement to Land Trust of Treasure Valley on parts of the land that would not be developed. Although the easement agreement contained warranties that the land was not subject to a mortgage, it was in fact subject to a mortgage at the time of donation, and the taxpayers did not inform the lender of the easement at the of the easement donation. The taxpayers hired an appraiser who appraised the value of the conservation easement at $941,000 and the taxpayers claimed a charitable deduction of $389,517 on their then current year return. They carried forward the remainder of the deduction on their tax returns for the two following tax years.

Subordination of the Mortgage. The IRS issued a Notice of Deficiency for the two carry forward years on the ground that “documentation of fair market value was not provided.” The taxpayers filed a Tax Court petition, and shortly before trial they contacted the lender bank to request a subordination of the mortgage to the easement. After an appraisal and some negotiation, the taxpayers and the bank entered into a subordination agreement. At the same time as the taxpayers entered into the subordination agreement, the IRS argued in its pre-trial memorandum that the taxpayers were not entitled to deduct the conservation easement as a gift because the mortgagee did not subordinate its rights in the property to the rights of the qualified organization to the enforce the conservation purposes of the gift in perpetuity.

Mortgage Must be Subordinated at the Time of the Donation to be Deductible. Before the Tax Court ruled in the taxpayers’ case (but after trial concluded), the Tax Court decided Mitchell v. Commissioner, which held that mortgages must be subordinated at the time of the donation in order to be deductible under Regulation section 1.170A-14(g)(2). [11] The taxpayers in Mitchell moved for reconsideration, which the Tax Court denied. The taxpayers in Mitchell then filed an appeal in the Tenth Circuit and the Tenth Circuit affirmed the Tax Court’s decision. [12] The Ninth Circuit in Minnick followed the Tenth Circuit’s holding in Mitchell that Regulation section 1.170A-14(g)(2) requires that the mortgage be subordinated at the time of the gift for the gift to be deductible.

The Ninth Circuit also found that the mortgage must be subordinated at the time of the gift based on the plain language of Regulation section 1.170A-14(g)(2), reasoning that a strict construction of the language “makes clear that subordination is a prerequisite to allowing a deduction.” The Ninth Circuit also reasoned that even if ambiguity existed in the statutory language, the Court defers to the IRS’s interpretation of Treasury Regulations under Auer v. Robbins, 519 U.S. 452 (1997), so long as it is not “plainly erroneous or inconsistent with the regulation” to do so. The Court noted that the IRS had consistently argued before the Tax Court and Tenth Circuit that the regulation requires subordination at the time of the gift, and that the IRS’s interpretation of the regulation is not plainly erroneous or inconsistent with the regulation. The Ninth Circuit also reasoned, “an easement can hardly be said to be protected “in perpetuity” if it is subject to extinguishment at essentially any time by a mortgage holder who was not a party to, and indeed (as here) may not even have been aware of, the agreement between the Taxpayers and a conservation trust.”

The Ninth Circuit held that in order for the donation of a conservation easement to be protected “in perpetuity” any prior mortgage on the land must be subordinated at the time of the gift.”

KRISTA HARTWELL – For more information please contact Krista Hartwell at Hartwell@taxlitigator.com or 310.281.3200. Ms. Hartwell is a tax lawyer at Hochman, Salkin, Rettig, Toscher & Perez, P.C. and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at http://www.taxlitigator.com.

[1] Minnick v. Comm’r, 2015 U.S. App. LEXIS 14097 (9 h Cir. 2015).

[2] 26 CFR § 1.170A-14(a).

[3] 26 USC § 170(f)(3)(B)(iii); 26 CFR § 1.170A-14(a).

[4] 26 CFR § 1.170A-14(a).

[5] 26 CFR § 1.170A-14(b).

[6] 26 CFR § 1.170A-14(c).

[7] 26 CFR § 1.170A-14(d).

[8] 26 CFR § 1.170A-14(e).

[9] 26 CFR § 1.170A-14(f).

[10] 26 CFR § 1.170A-14(g)(2).

[11] Mitchell v. Comm’r, 138 T.C. No. 16 (2012), vacated on denial of reconsideration by Mitchell v. Comm’r, 106 T.C.M. 215 (2013).

[12] Mitchell v. Comm’r, 775 F.3d 1243 (10th Cir. 2015).

Posted by: Taxlitigator.com | August 21, 2015

IRS Enhances Employment Tax Enforcement Efforts! by MICHEL R. STEIN

The IRS has significantly increased their employment tax enforcement efforts and just released a Fact Sheet (FS-2015-21) explaining how employers can properly determine whether workers should be classified as employees or independent contractors. A wrong decision can result in potentially significant civil penalties or in the event of an intentional mis-classification, those involved might be subjected to the criminal prosecution. 

Employers generally must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to employees. Employers generally don’t have to withhold or pay any taxes on payments to independent contractors. Before determining how to treat payments for services, employers must determine whether individuals providing the services are employees or independent contractors. IRS Fact Sheet 2015-21 provides information on making that determination and what to do about misclassified workers.  

Determining Whether the Individuals Providing Services are Employees or Independent Contractors. Under pressure from Congress, the Internal Revenue Service (IRS) has been aggressively attempting to reduce the tax gap – the annual shortfall between taxes owed and taxes paid.   In the past, employment taxes has been identified by IRS and other federal agencies as contributing $54 billion to the approximate $290 billion tax gap. Accordingly, the classification of workers as either employees or independent contractors is gaining attention.             

Past studies by the IRS revealed that millions of workers were being misclassified as independent contractors, and the IRS estimates that employers who misclassify employees as independent contractors are costing the government billions of dollars a year in lost income taxes. Most often, the problem is not intentional misclassification, but uncertainty about how to classify workers. 

Whether a worker is deemed an independent contractor or employee is fundamental to the Internal Revenue Code.  It has been said that roughly 60 percent, or more, of all federal tax revenue comes through the employment tax system.  When taxes are withheld from an employee, compliance rates are generally at their highest. Compliance rates are reduced (even when Forms 1099 are filed) where no withholding is required.

For federal tax purposes, there are only two job classifications in the American workplace.  A worker is either an employee of the service-recipient or an independent contractor (i.e., self-employed) – and either worker classification can be a valid and appropriate business choice.  The distinction between independent contractors and employees arose at common law to limit a service-recipient’s vicarious liability for the misconduct of the person rendering the service.   The extent to which the service-recipient had a right to control the details of the service activities was highly relevant to the question of whether the service-recipient ought to be legally liable for those activities. 

For Federal tax purposes a worker is classified as either an employee or an independent contractor in one of three ways: 

            (1)       Common Law Factors.  In general, the common law relationship of employer and employee exists if the person for whom the services are performed has the right to control and direct the worker who performs the service, not only as to the result to be accomplished, but also as to the details and means by which the result is accomplished.  Rev. Rul. 87-41 sets forth twenty common law factors or elements that are relevant in determining whether the relationship of employer and employee exists, but no clear test is provided.   More recently, the IRS has identified three categories of evidence that may be relevant in determining whether the requisite control exists under the common-law test and has grouped illustrative factors under three categories: (1) Behavioral control; (2) Financial control; and (3) Relationship of the parties.  The IRS emphasized that factors in addition to the 20 factors identified in 1987 may be relevant, that the weight of the factors may vary based on the circumstances, that relevant factors may change over time, and that all facts must be examined.   

            (2)       Statutory Employees and Non-Employees.  Certain workers are classified as employees or non-employees by statute.  For example, pursuant to Internal Revenue Code Section 3401(c), for income tax withholding purposes the term “employee” includes an officer of a corporation. 

            (3)       “Safe Harbor” Independent Contractors.  Congress has created a “safe harbor” within which a worker is treated as an independent contractor if the service-recipient meets specific requirements and has a “reasonable basis” for not treating the worker as an employee.

California Employment Taxes and the EDD. In California, the Employment Development Department (EDD), like the IRS, generally applies a common law test to determine whether a worker is an employee or an independent contractor.  In addition, some workers are considered statutory employees or non-employees for certain purposes.  There is, however, no California “safe harbor” for treating a worker as an independent contractor. 

Increased IRS Focus. Taxpayers can expect increased IRS focus in the area of employment tax enforcement.  Following the three year National Research Program (NRP) to study the statistically valid information for computing the Employment Tax Gap and to determine compliance characteristics, the IRS can now focus on the most noncompliant employment tax areas.  Legislative changes may also be on the horizon to combat perceived historic non-compliance and to offer clearer guidance in the area, that in effect has been on hold for more than 30 years after passage of the Section 530 of the Revenue Act of 1970.   Non-tax reasons also exist for increased Government attention.  Employees who are misclassified as independent contractors may not have access to certain employer-provided benefits, such as health insurance coverage and pension plans.     

Section 530 Employment Tax Relief. According to the Fact Sheet, if a business classifies an employee as an independent contractor and they have no reasonable basis for doing so, they may be held liable for employment taxes for that worker and certain relief provisions will not apply.  If a business has a reasonable basis for not treating a worker as an employee, they may be relieved from having to pay employment taxes for that worker. See Publication 1976, Section 530 Employment Tax Relief Requirements (PDF) for more information. 

Voluntary Classification Settlement Program (VCSP). To the Government’s credit, the IRS allows for a fair and appropriate mechanism to correct past non-compliance in this area. The Voluntary Classification Settlement Program (VCSP) is an optional program that provides taxpayers with an opportunity to reclassify their workers as employees for future tax periods for employment tax purposes with partial relief from federal employment taxes for eligible taxpayers that agree to prospectively treat their workers (or a class or group of workers) as employees. To participate in this voluntary program, the taxpayer must meet certain eligibility requirements, apply to participate in the VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS. 

Conclusion. The proper classification of workers can be a difficult task for businesses and the IRS alike.   One thing is for certain, however, in this current environment the public should expect increased IRS enforcement if workers have been improperly classified as independent contractors rather than employees. 

MICHEL R. STEIN – For more information please contact Michel Stein – Stein@taxlitigator.com  Mr. Stein is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C. and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Mr. Stein has significant experience in matters involving federal and state worker classification issues and in matters involving previously undeclared interests in foreign financial accounts and assets, the IRS Offshore Voluntary Compliance Program (OVDP) and the IRS Streamlined Filing Compliance Procedures. Additional information is available at www.taxlitigator.com

 

 

Posted by: Taxlitigator.com | August 9, 2015

Medical Marijuana and the IRS by JONATHAN KALINISKI

Medical marijuana is now legal in 23 states and recreational marijuana is legal in four plus the District of Columbia. It is decriminalized in a few more states and low-THC medical marijuana is legal in still others. Marijuana is only illegal in 10 states. In 1991, 78% of Americans believed marijuana should be illegal. Attitudes have dramatically changed, and a 2014 Pew survey showed that 54% support legalization. Business appears to be booming, but for tax purposes those in the marijuana industry are not treated like ordinary businesses. Despite state laws allowing marijuana, it remains illegal on a federal level but is obligated to pay federal income tax on its taxable income because I.R.C. §61(a) does not differentiate between income derived from legal sources and income derived from illegal sources.

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. In 1982, however, in response to a defeat in Edmondson v. Commission[1], Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. Dispensaries and other businesses trafficking in marijuana have to report all of their income, yet cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most.

All is not lost, as a marijuana business can deduct its cost of goods sold (COGS). Costs of goods sold are the direct costs attributable to the production of goods. For a marijuana reseller this includes the cost of marijuana itself and transportation used in acquiring marijuana to give two examples. As such, income in the context of a reseller or producer means gross income, not gross receipts. In general, the taxpayer first determines gross income by subtracting COGS from gross receipts, and then determines taxable income by subtracting all ordinary and necessary business expenses [e.g., I.R.C. §162] from gross income.

In January, the IRS issued guidance clarifying how marijuana businesses determine COGS.[2] The take away is that although the cost of marijuana might be included, the inventory rules under I.R.C. §263A force the capitalization of certain costs such as purchasing, handling and storage. Throwing all types of expenses in costs of goods sold may raise caution in an audit, where the IRS is also likely to question gross receipts given the significant amounts of cash received and reluctance of banks to do business with many in the marijuana industry.

It is important to note that dispensaries that operate a separate wellness business can likely deduct the ordinary and necessary expenses related to the wellness operation. In the seminal CHAMP case[3], the taxpayer, aside from operating a dispensary, had a separate business providing caregiving services. The dispensary operation was not-for-profit and over 70% of the employees worked exclusively in caregiving. Contrast that case with Olive v. Commissioner, where the taxpayer’s deductions were disallowed because the Court held that its dispensing of marijuana and its providing of services and activities shared a close and inseparable organizational and economic relationship.[4]

Those who choose to proceed, should do so with caution since the existence or non-existence of specific facts can significantly impact the ultimate tax-related determination . . .

JONATHAN KALINISKI – For more information please contact Jonathan Kalinski at kalinski@taxlitigator.com. Mr. Kalinski is a former trial attorney with the IRS Office of Chief Counsel litigating Tax Court cases and advising IRS Revenue Agents and Revenue Officers on a variety of complex tax matters. Jonathan received his LL.M. in taxation from New York University and served as an Attorney-Adviser to the United States Tax Court. He is a tax attorney at Hochman, Salkin, Rettig, Toscher & Perez, P.C. and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at http://www.taxlitigator.com.

[1] Edmonson v. Commissioner, T.C. Memo. 1981-623.

[2] IRS Memorandum 201504011. http://www.irs.gov/pub/irs-wd/201504011.pdf

[3] Californians Helping to Alleviate Med. Problems, Inc. v. Commissioner (CHAMP), 128 T.C. 173 (2007).

[4] Olive v. Commissioner, 139 T.C. 19, 41-42 (2012).

Posted by: Taxlitigator.com | August 7, 2015

NEW IRS FBAR Reference Guide !

A NEW IRS Reference Guide on the Report of Foreign Bank and Financial Accounts is now available to provide assistance to U.S. persons who have the obligation to file the FBAR and to the tax professionals who prepare and electronically file FBAR reports on behalf of their clients. The Guide also supports IRS examiners in their efforts to administer the various IRS FBAR examination and penalty programs.

U.S. Persons who have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, exceeding certain thresholds, may be required by the Bank Secrecy Act to report the account each year to the Department of Treasury by electronically filing a Financial Crimes Enforcement Network (FinCEN) 114, Report of Foreign Bank and Financial Accounts (FBAR).

The NEW IRS FBAR Reference Guide (11 pages) is available at:

http://www.irs.gov/pub/irs-utl/IRS_FBAR_Reference_Guide.pdf

IRS Offshore Voluntary Disclosure Program. On January 9, 2012, the IRS reopened its Offshore Voluntary Disclosure Program following continued interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. This program offers people with unreported taxable income from offshore financial accounts or other foreign assets an opportunity to fulfill their tax and information reporting obligations, including the FBAR. Although the program does not have a closing date, the IRS may end the program at any time.

Streamlined Filing Compliance Procedures. On September 1, 2012, the IRS implemented new streamlined filing compliance procedures that were available only to non-resident U.S. taxpayers who failed to file required U.S. income tax returns. Taxpayer submissions were subject to different degrees of review based on the amount of tax due and the taxpayer’s response to a risk questionnaire.

On June 18, 2014, the IRS announced the expansion of these procedures. The expanded procedures are available to a wider population of U.S. taxpayers living outside the country and, for the first time, certain U.S. taxpayers residing in the United States; reference IR-2014-73. For eligible U.S. taxpayers residing outside the United States, all penalties will be waived. For eligible U.S. taxpayers residing in the United States, the only penalty will be a miscellaneous offshore penalty equal to five percent of the foreign financial assets that gave rise to the tax compliance issue. For more information, go to Streamlined Filing Compliance Procedures.

Delinquent FBAR Submission Procedures. Taxpayers who have not filed a required FBAR and are not under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about a delinquent FBAR, should file any delinquent FBARs according to the FBAR instructions and include a statement explaining why the filing is late. All FBARs are required to be filed electronically through FinCEN’s BSA E-Filing System. Select a reason for filing late on the cover page of the electronic form or enter a customized explanation using the ‘Other’ option. If unable to file electronically you may contact FinCEN’s Regulatory Helpline at 800-949-2732 or 703-905-3975 (if calling from outside the United States) to determine acceptable alternatives to electronic filing.

The IRS will not impose a penalty for the failure to file the delinquent FBARs if income from the foreign financial accounts reported on the delinquent FBARs is properly reported and taxes are paid on your U.S. tax return, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.

FBAR Assistance.

Help in completing the FBAR is available Monday through Friday, 8 a.m. to 4:30 p.m. Eastern Time, at 866-270-0733 (toll-free inside the U.S.) or 313-234-6146 (not toll-free, for callers outside the U.S.). Questions regarding the FBAR can be sent to FBARquestions@irs.gov.

Help with electronic filing questions is available at BSAEFilingHelp@fincen.gov or through the BSA E-Filing Help Desk at 866-346-9478. The E-Filing Help Desk is available Monday through Friday from 8 a.m. to 6 p.m. Eastern Time.

For answers to questions regarding BSA regulations, or to discuss acceptable alternatives to electronic filing, contact FinCEN’s Regulatory Helpline at 800-949-2732; or if calling from outside the United States at 703-905-3975.

For further information, see http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Report-of-Foreign-Bank-and-Financial-Accounts-FBAR

In BASR Partnership, William F. Pettinati, Sr., Tax Matters Partner v. United States, No. 2014-5037 (Fed. Cir. July 29, 2015), the Court of Appeals for the Federal Circuit held that the statute of limitations period is suspended under Internal Revenue Code (“IRC”) Section 6501(c)(1) only when the IRS establishes that the taxpayer acted with the intent to evade tax — the intent of a third party, including a tax advisor, cannot extend the statute of limitations. The Federal Circuit’s holding in BASR Partnership is contrary to the earlier holding of the Tax Court in Allen v. Commissioner, 128 T.C. 37 (2007), which had held that fraud by a tax preparer can hold open the statute of limitations for a tax return. The Federal Circuit declined to follow Allen, finding the Tax Court’s reasoning to be unpersuasive.[i]

Statute of Limitations on Assessment. IRC Section 6501(a) provides that generally, the IRS is prohibited from assessing additional tax more than three years after a return is filed.[ii] However, there is an exception to this rule in the case of a fraudulent return. Among other exceptions, Section 6501(c)(1) provides that in the case of a “false or fraudulent return with the intent to evade tax, the tax may be assessed…at any time.”[iii] Section 6501(c) does not expressly specify whose intent is relevant for purposes of extending the statute of limitations.

Impact on S/L of Fraud by Others. In BASR Partnership, although the government had conceded that the three-year statute of limitations had expired, the government argued instead that the fraudulent intent of the taxpayer’s attorney, who had recommended and advised the taxpayer regarding the transactions at issue in the case, caused the statute of limitations to be open pursuant to Section 6501(c)(1).[iv] The taxpayer in BASR Partnership filed a motion for summary judgment at the trial court level on the grounds that the statute of limitations had expired, which the Court of Federal Claims granted.

In affirming the Claims Court’s holding, the Court of Appeals analyzed the overall statutory scheme of the Code, the case law, and the statute’s historical roots in concluding that it is only the intent of the taxpayer that triggers the suspension of the statute of limitations for fraud. The court rejected the government’s argument that the focus should be on the fraudulent nature of the return, explaining that the government’s argument “misses the mark” because a return becomes fraudulent only when someone acting with the intent to defraud makes a false entry on the return.[v] The court held that although the statute is silent on whose return is relevant, when viewed in the context of the statutory scheme as a whole, the other provisions in the Code strongly suggest that the “intent to evade tax” inquiry is confined to the taxpayer’s intent. In particular, the court noted that Section 7454(a) specifies that “’[i]n any proceeding involving the issue whether the petitioner has been guilty of fraud with intent to evade tax,’ the IRS bears the burden of proving the element of fraud.”[vi] Based on this, the court concluded that when pursuing fraudulent conduct, Congress considered the fraudulent intent of only the taxpayer, not of a third-party who advised or assisted the taxpayer.

The court also considered Section 6663(a), which imposes a 75 percent penalty on understatements due to fraud. Although Section 6663(a) is also silent as to whose intent is relevant, the government had conceded that the penalty under Section 6663(a) applies only when the taxpayer intends to evade tax, not when the fraud was committed by a third party. The court did not find any basis for distinguishing the meaning of “intent to evade tax” in Section 6663(a) from Section 6501(c)(1) and explained that the Government’s broad interpretation of Section 6501(c)(1) could have unintended and unfortunate consequences if applied to other code provisions.[vii]

Examining the historical roots of section 6501(c)(1), the court explained that in the Revenue Act of 1918, both the penalty provision and the statute of limitations provision relating to fraud appeared as subsections under the same Code section.[viii] Section 250(b) of the Revenue Act of 1918 imposed a penalty when an underpayment was due to the fraud of the taxpayer, and section 250(d) provided for the suspension of the statute of limitations for fraudulent returns. Because Section 250(b) made clear that no penalties would apply if the understatement was not due to the fault of the taxpayer, the reference to fraud in Section 250(b) must have pertained only to the fraud of the taxpayer. Two subsections later, the provision extending the statute of limitations borrowed the same “false or fraudulent with intent to evade tax” language from Section 250(b).

Based on the mirroring language and the Supreme Court’s rule that a word is presumed to have the same meaning in all subsections of the same statute, the Court of Appeals for the Federal Circuit concluded that “it becomes abundantly clear that the focal point of § 250 is the intent of the taxpayer.”[ix] Although those subsections were later recodified into separate statutory sections, the court concluded that nothing in the recodification and reorganization process altered the meaning of these terms.[x]

In considering the case law that has touched on this issue, the Court of Appeals declined to follow the Tax Court’s holding in Allen v. Commissioner, concluding that “we do not find the reasoning of the Tax Court persuasive.”[xi] The government also argued that a Second Circuit case supported its interpretation; however, the court explained that the government’s reliance was misplaced because in the Second Circuit case, the court did not actually address the question of whether the tax preparer’s intent was sufficient to trigger the suspended statute of limitations.[xii] Finally, the court noted that the IRS’ position on this issue had changed in recent years, citing a Field Service Advisory issued in 2001 in which the IRS concluded that “the fraudulent intent of the return preparer is insufficient to make section 6501(c)(1) applicable.”[xiii]

BASR – Fraud by Taxpayer Required to Extend S/L. Based on this analysis, the court concluded that the “language, structure, and history of the Code leads us to the conclusion that the Claims Court properly interpreted § 6501(c)(1) as limiting the IRS to the three-year limitations period unless the taxpayer possessed the intent to evade tax.”[xiv]

LACEY STRACHAN – For more information please contact Lacey Strachan at Strachan@taxlitigator.com. Ms. Strachan is a tax attorney at Hochman, Salkin, Rettig, Toscher & Perez, P.C. and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at http://www.taxlitigator.com.

[i] BASR Partnership, William F. Pettinati, Sr., Tax Matters Partner v. United States, No. 2014-5037 (Fed. Cir. July 29, 2015) at *16.

[ii] IRC § 6501(a) states, in pertinent part: “Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed)….”

[iii] Section 6501(c) sets forth 11 exceptions to the 3-year statute of limitations.

[iv] In BASR Partnership, the taxpayer’s attorney had pleaded guilty to conspiracy and tax evasion charges relating to his design and implementation of numerous fraudulent tax shelters. Id. at *7 n.2.

[v] Id. at *11.

[vi] Id. at *12 – *14.

[vii] Id. at *14-*15. As an example, the court explained that such an interpretation would prevent taxpayers in this situation from being able to receive an extension for payment of a tax deficiency under Section 6161, which prohibits the IRS from granting an extension to taxpayers when the tax deficiency in question is due to, in pertinent part, fraud with intent to evade tax. Id. at *15 – *16.

[viii] Id. at *20 – *22.

[ix] Id. at *22.

[x] Id.

[xi] Id. at *16 – *18.

[xii] Id. at *18 – *19.

[xiii] Id. at *19.

[xiv] Id. at *24.

On July 31, President Obama signed into law H.R. 3236, the “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015[1],” which, among other issues, modifies the due dates for several common tax returns, overrules the Supreme Court’s Home Concrete decision, requires that additional information be reported on mortgage information statements, and requires consistent basis reporting between estates and beneficiaries.

NEW FBAR FILING DUE DATES – For returns for taxable years beginning after December 31, 2015, the due date for FinCEN Form 114 is changed from June 30 to April 15, and taxpayers will be allowed a six-month extension to October 15. For any taxpayer required to file an FBAR for the first time, any penalty for failure to timely request for, or file, an extension, may be waived by the IRS.

PARTNERSHIP RETURN DUE DATES – Returns of partnerships under Code section 6031 and returns of S corporations under Code §§ 6012 and 6037 made on the basis of the calendar year shall be filed on or before the 15th day of March following the close of the calendar year, and such returns made on the basis of a fiscal year shall be filed on or before the 15th day of the third month following the close of the fiscal year. Accordingly, for partnership returns, the new due date is March 15 (for calendar-year partnerships) and the 15th day of the third month following the close of the fiscal year (for fiscal-year partnerships). Currently, these returns are due on April 15, for calendar-year partnerships. The act directs the IRS to allow a maximum filing extension of six months for Forms 1065, U.S. Return of Partnership Income.

C CORPORATION RETURN DUE DATES – For C corporations, the new return due date is the 15th day of the fourth month following the close of the corporation’s year (April 15 for calendar-year corporations) – these returns are currently due on the 15th day of the third month following the close of the corporation’s year.[2]

C corporations will be allowed an automatic 6-month extension to file, except that calendar-year corporations would get a five-month extension until 2026 and corporations with a June 30 year end would get a seven-month extension until 2026. The new filing due dates will apply to returns for tax years beginning after December 31, 2015. However, for C corporations with fiscal years ending on June 30, the new filing due dates will not apply until tax years beginning after December 31, 2025 (yes, 2025).

VARIOUS EXTENSIONS OF TIME TO FILE – For returns for taxable years beginning after December 31, 2015, the IRS is to modify its regulations to allow a maximum extension of:

  • 5 1/2 months ending on September 30 for calendar year taxpayers on Form 1041, U.S. Income Tax Return for Estates and Trusts;
  • 3 1/2 months ending on November 15 for calendar year plans on Form 5500, Annual Return/Report of Employee Benefit Plan;
  • 6 months ending on November 15 for calendar year filers on Form 990, Return of Organization Exempt From Income Tax;
  • an automatic 6-month period beginning on the due date for filing the return (without regard to any extensions) on Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code;
  • an automatic 6-month period beginning on the due date for filing the return (without regard to any extensions) Form 5227, Split-Interest Trust Information Return;
  • an automatic 6-month period beginning on the due date for filing the return (without regard to any extensions) on Form 6069, Return of Excise Tax on Excess Contributions to Black Lung Benefit Trust Under Section 4953 and Computation of Section 192 Deduction; and
  • an automatic 6-month period beginning on the due date for filing the return (without regard to any extensions) on Form 8870, Information Return for Transfers Associated With Certain Personal Benefit Contracts; and
  • the due date for Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, will be April 15 for calendar-year filers, with a maximum six-month extension. The due date of Form 3520–A, Annual Information Return of a Foreign Trust with a United States Owner, shall be the 15th day of the 3d month after the close of the trust’s taxable year, with a maximum six-month extension.

STATE CONFORMITY – California and various other states will not automatically conform to any of these due date changes, so separate legislation will be required if they are going to change and conform to the due dates for these returns.

MODIFICATION OF MORTGAGE REPORTING REQUIREMENTS ON RETURNS RELATING TO MORTGAGE INTEREST RECEIVED IN TRADE OR BUSINESS FROM INDIVIDUALS- Code § 6050H(b)(2) is amended to require new information on the mortgage information statements that are required to be sent to individuals who pay more than $600 in mortgage interest in a year. These statements will now be required to report the outstanding principal on the mortgage at the beginning of the calendar year, the address of the property securing the mortgage, and the mortgage origination date. This change applies to returns required to be made, and statements required to be furnished, after December 31, 2016.

CONSISTENT BASIS REPORTING BETWEEN ESTATE AND BENEFICIARIES – Code § 1014 is amended to provide that anyone inheriting property from a decedent cannot treat the property as having a higher basis than the basis reported by the estate for estate tax purposes.

New Code § 6035 requires executors of estates that are required to file an estate tax return to furnish statement identifying the value of each interest in such property as reported on the estate tax return to the IRS and to each person acquiring any interest in property included in the decedent’s gross estate for Federal estate tax purposes. These statements will identify the value of each interest in property acquired from the estate as reported on the estate tax return.

These statements must be filed on or before than the earlier of (i) the date which is 30 days after the date on which the return under Code § 6018 was required to be filed (including extensions, if any), or (ii) the date which is 30 days after the date such return is filed. These new reporting provisions apply to property with respect to which an estate tax return is filed after the date of enactment (July 31, 2015).

CLARIFICATION OF 6-YEAR STATUTE OF LIMITATIONS IN CASE OF OVERSTATEMENT OF BASIS – OVERRULING HOME CONCRETE – In Home Concrete & Supply, LLC, 132 S. Ct. 1836 (2012), the Supreme Court held that the extended six-year statute of limitation under Code § 6501(e)(1)(A), which applies when a taxpayer “omits from gross income an amount properly includible” in excess of 25% of gross income, does not apply when a taxpayer overstates its basis in property it has sold. In response to Home Concrete, Code § 6501(e)(1)(B) has been amended to add: “An understatement of gross income by reason of an overstatement of unrecovered cost or other basis is an omission from gross income.” The change applies to returns filed after the date of enactment (July 31, 2015) as well as previously filed returns for which the applicable statute of limitations remains open under Code § 6501.

[1] “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015,” H.R.3236 (enacted July 31, 2015). See https://www.congress.gov/bill/114th-congress/house-bill/3236/text#toc-HCFC1B5C758A944DE807AC0FC688A702A

[2] S corporation returns will continue to be due on the 15 day of the third month following the close of the taxable year (March 15 for calendar-year S corporations)

Posted by: Taxlitigator.com | July 29, 2015

Determining “Reasonable Cause” for Non-Willful FBAR Violations

Taxpayers who do not need to use the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who:

  • have not filed one or more required international information returns,
  • have reasonable cause for not timely filing the information returns,
  • are not under a civil examination or a criminal investigation by the IRS, and
  • have not already been contacted by the IRS about the delinquent information returns

should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file.

Describe your situation in the reasonable cause statement

As part of the reasonable cause statement, taxpayers must also certify that any entity for which the information returns are being filed was not engaged in tax evasion.  If a reasonable cause statement is not attached to each delinquent information return filed, penalties may be assessed in accordance with existing procedures.

  • All delinquent international information returns other than Forms 3520 and 3520-A should be attached to an amended return and filed according to the applicable instructions for the amended return.
  • All delinquent Forms 3520 and 3520-A should be filed according to the applicable instructions for those forms.
  • A reasonable cause statement must be attached to each delinquent information return filed for which reasonable cause is being requested.

Information returns filed with amended returns will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.

http://www.irs.gov/Individuals/International-Taxpayers/Delinquent-International-Information-Return-Submission-Procedures

Posted by: Taxlitigator.com | July 18, 2015

IRS Advises re Delinquent FBAR Submission Procedures

Taxpayers who do not need to use either the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who:

  • have not filed a required Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114, previously Form TD F 90-22.1),
  • are not under a civil examination or a criminal investigation by the IRS, and
  • have not already been contacted by the IRS about the delinquent FBARs

should file the delinquent FBARs according to the FBAR instructions.

Follow these steps to resolve delinquent FBARS

  • Review the instructions
  • Include a statement explaining why you are filing the FBARs late
  • File all FBARs electronically at FinCEN
  • On the cover page of the electronic form, select a reason for filing late
  • If you are unable to file electronically, contact FinCEN’s Regulatory Help line at 1-800-949-2732 or 1-703-905-3975 (if calling from outside the United States) to determine possible alternatives to electronic filing.

The IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.

FBARs will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.

http://www.irs.gov/Individuals/International-Taxpayers/Delinquent-FBAR-Submission-Procedures

Posted by: Taxlitigator.com | July 15, 2015

PRACTICAL ADVICE FOR AN IRS EXAMINATION

    • Maintain timely, clear communications with the examining agent and the client – confirm statements in writing.
    • Know your case and your client – verify information provided by your client. Establish relevant facts, evaluate reasonableness of assumptions or representations, apply relevant legal authorities in arriving at a conclusion supported by the law and the facts.
    • Advise the taxpayer re potential penalties.
    • As a general rule, taxpayers should not meet directly with agents.
    • Maintain copies of all documents provided.
    • Do your due diligence – reasonably verify factual statements by the taxpayer, especially those claims that upon reflection seem too good to be true.
    • Be aware of the benefits afforded by filing a Qualified Amended Return – see Treas. Reg. § 6664-2(c)(3). Timely filed amended return may reduce or eliminate accuracy-related penalties – but no automatic impact on civil fraud penalty.
    • Remain professional with the appearance of cooperation at all times. An audit need not be an adversarial process.
    • Be aware of relevant privileges, especially the accountant-client privilege (IRC Section 7525). Avoid inadvertent waivers of any privilege.
    • Be cautious but reasonable in extending the statute of limitations.
    • Never file original returns with the examining agent.
    • Taxpayer & return preparer interviews – Can you obtain written questions in advance? Timing – if the interview must occur, attempt to coordinate it near end of the audit. Place – request a location where the taxpayer is most comfortable.
    • Maintain notes of all calls and contacts with the examining agent. When possible, confirm statements in writing. Definitely confirm commitments to provide information by a certain date in writing and meet the commitment.
    • Control client expectations – Maintain an objective view of the relevant facts.
    • Conclude the examination ASAP.
    • Prepare, prepare, and then prepare some more . . .

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