Nov 14

Preachers of the Gospel Parsonage Exclusion

IRS Clergy Parsonage Allowance Exclusion

Welcome to TaxView with Chris Moss CPA Tax Attorney

The Clergy Tax Free Parsonage Allowance Exclusion under IRS Section 107(1) and 107(2) which has provided tax free rental exclusions to the preachers of the Gospel for almost 100 years has been saved by the 7th Circuit Court of Appeals in a dramatic reversal of Judge Barbara Crabb’s November 21, 2013 ruling in Wisconsin Federal District Court.  So if you are a minister or preacher of the Gospel and are planning to take advantage of the Parsonage Exclusion in 2015, stay tuned to TaxView with Chris Moss CPA Tax Attorney to hear about the exciting conclusion of the 7th Circuit’s November 13, 2014 Opinion in Freedom From Religion vs Jacob Lew, Sec of the Treasury and John Koskinen, Commissioner of the IRS, on Appeal from No.11-cv-06260 Freedom From Religion, Gaylor, and Barker vs Jacob Lew Secretary of the US Treasury (2013) Barbara B Crabb, Wisconsin District Judge presiding.

Recapping from a previous TaxView, Tax Free Housing Allowance for Clergy, by Chris Moss CPA Tax Attorney, let’s first look at what Section 107 is all about. Simply stated if you are a preacher of the Gospel you get to exclude from your income the fair rental value of the home or what the church pays you for the home, whichever is less. Section 107(1) excludes the value of your housing provided by the Church. Section 107(2) excludes direct cash compensation paid to the preacher for housing that the preacher pays for. Further regulations added requirements that the Allowance be officially approved by the Vestry or similar church Board See IRS Ministers’ Compensation and IRS topic 417. Various tax court rulings, including US Tax Court Driscoll v IRS imply that Congress had viewed the relationship between a Church and its ministers in a similar manner as they viewed the relationship between an Employer and its Employees. Congress reasons that if Employees were exempted on housing provided for the convenience of their employer, then why not have the Clergy exempt on similar housing allowance income when they would travel to a new Church to preach the Gospel. Interestingly, while the US Tax Court has ruled for or against the clergy over the years for abuse of the Exclusion, the Court has never before challenged Section 107 on Constitutional grounds that is until now.

Judge Crabb’s Opinion argues that her invalidation of the Allowance on Constitutional grounds does not mean that the US Government is powerless to enact tax exemptions that benefit religion. Indeed Judge Crabb concludes that Congress can enact legislation for granting the Exclusion that would be based on secular rather than religious grounds.  Unfortunately until Congress acts Judge Crabb opines, the Allowance is an unconstitutional violation of the separation of Church and State as found in the US Constitution.

However the 7th Circuit Judges Flaum, Rovner and Hamilton reversed Crabb in a most dramatic ruling, not deciding the case on the merits but rather on procedural grounds.  Judge Joel Flaum gave his Opinion that the Plaintiffs, Freedom From Religion, Gaylor and Barker, “lacked standing” before the Federal Court system to challenge Code Section 107(2).  The Court did not therefore reach the issue of the Constitutionally of the parsonage exemption.

The facts upon which this reversal were based were relatively simple in that Freedom From Religion’s co-Presidents Annie Gaylor and Dan Barker received a portion of their salary in the form of a housing allowance which was taxable to Gaylor and Barker.  Gaylor, Barker and Freedom From Religion brought suit in the Western District of Wisconsin claiming that Section 107 violated their First Amendment rights because it had given a tax benefit to preachers of the Gospel but not to them. The District Court agreed with Gaylor and Baker and ruled Section 107 unconstitutional. The Secretary of the Treasury and the IRS appealed to the 7th Circuit arguing that Gaylor and Barker did not have standing to bring the suit.

Gaylor and Barker argued before the 7th Circuit as they successfully argued before the District Court that they did indeed had standing because they were denied a tax exemption for their own employer provided housing allowance that was conditioned on them preaching the Gospel which of course they didn’t do.  The 7th Circuit reversed the District Court concluding that Barker and Gaylor were never denied the parsonage exemption because they never asked for it.
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The 7th Circuit reasoned that without a request by Barker and Gaylor there could be no denial.  And absent any personal denial of the tax benefit, Gaylor and Barker’s claim amounted to nothing more than a generalized grievance about 107(2)’s unconstitutionality, which does not support standing before the Federal Court system.  Citing Lujan v Defenders of Wildlife 504 US 555 (1992),   the Court agreed argued that a Plaintiff raising only a generally available grievance about government does not state a Constitutional Article III case or controversy.

But Gaylor and Barker argued further that they are in fact similarly situated to preachers of the Gospel receiving the 107(2) exemption because they too receive a housing allowance from the company they work for.  The only reason they argue that they cannot take advantage of 107(2) is that they are not ministers of the Gospel but executives who are employed by Freedom From Religion. The 7th Circuit rejected this reasoning because there was still no injury to Gaylor and Barker since they had never tried to take advantage of 107(2).  The preachers of the Gospel actual had claimed the exemption, but Gaylor and Barker did not.  Being similarly situated is simply not enough to give standing opines Judge Flaum.

Finally, Gaylor and Barker argue as they did successfully before the District Court that for the 7th Circuit to require Gaylor and Barker to “claim the exemption” and wait for the IRS to deny their claim would serve no useful purpose and only delay the inevitable outcome in the case citing:  Freedom from Religion Foundation, Inc. v. Lew, 983 F. Supp. 2d 1051, 1055–56 (W.D. Wis. 2013).  The 7th Circuit however disagreed with District Court concluding that the US Constitution does not allow Federal Courts to hear suits filed by plaintiffs who lack standing, and standing is absent here with Gaylor and Barker because they have not been personally denied the parsonage allowance.  Finally, because the Plaintiffs did not have standing to challenge the parsonage exemption, the 7th Circuit, remanded the case back to Judge Grabb instructing her to dismiss the complaint for lack of jurisdiction,.

So what does this mean for all you Preachers of the Gospel out there? Since there has not yet been an Appeals Court ruling on the merits of this case, you can be sure there will be further attempts by Freedom From Religion type organizations to have the Parsonage Exemption ruled unconstituational.   Until then, please have your tax attorney continue to exclude your parsonage allowances from your taxable income under IRS Code 107 with written contemporaneous explanations included in your personal tax return before your file with reference to the ongoing Constitutional issues.  Finally as these cases ultimately wind their way up to US Supreme Court for a final Constitutional determination enjoy the tax free benefit in my view you so rightfully deserve as  preachers of the Gospel.  God bless you all. Thanks for joining us on TaxView with Chris Moss CPA Tax Attorney

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

Nov 12

Offshore Tax Evasion

Welcome to TaxView with Chris Moss CPA Tax Attorney

Many large public businesses have their corporate operations legally headquartered offshore.  For example Apple, General Electric, Pfizer, IBM, and Merck have offshore operations legally sheltering billions of dollars from US income taxation.   However, if any of you individuals or small business owners out there are ever approached with a too good to be true personal tax savings arrangement that involves offshore investing or business operations that result in you personally saving taxes on your From 1040 get a second opinion before you invest in and activate such a scheme.  Once the scheme is discovered by the Government action is immediate and devastating to the promoter of the shelter.  Unfortunately in many cases you the taxpayer/victim are accused of tax fraud as well resulting in severe civil fraud penalties in addition to all the additional income tax you owe.  So if you have money offshore right now or are thinking about a plan that purportedly legally allows you to send money offshore, please stay with us here on TaxView with Chris Moss CPA Tax Attorney to give you a fair warning that such schemes lead nowhere but to large civil fraud penalties and in some cases criminal Government tax investigations.

Big and small business have always been able to operate abroad and save taxes.  But owners of closely held businesses are not legally able to take advantage of these provisions.  In fact Americans are taxed on worldwide income regardless of whether or not the funds are deposited to a foreign bank in a tax free haven. Unfortunately there are many taxpayers out there who don’t know that these schemes are illegal, like Stanley and Ruth Alexander who were in US Tax Court over this very issue in Alexander vs IRS T.C. Memo 2013-203.

The facts are very complex in this 71 page Opinion.  Dr Alexander, a plastic surgeon, used offshore tax strategy to lease back his medical services to his professional Ohio practice.  Alexander met attorney Reiserer from Seattle who reviewed offshore employment leasing with Alexander.  There were numerous doctors who were well versed through seminars in the Bahamas about this strategy. Reiserer and a CPA Kritt “structured, implemented and managed” the offshore strategy for tax year 1996-2003 for Alexander.  In 2003 the IRS initiated a criminal investigation of Kritt.  Kritt was charged with criminal tax evasion, but Kritt was found not guilty by jury of any criminal misconduct.

As a result of the Kritt criminal investigation, Alexander and hundreds of other doctors were audited by the IRS for years 2000-2002 and were accused of substantial understatement of income and tax fraud.  Alexander appealed to US Tax Court in Alexander vs IRS US Tax Court (2013).  Alexander claimed the offshore strategy was to create retirement for his family.  The Government argued that the motivation was avoidance of tax as there was no meaningful economic substance to the strategy.  Judge Goeke on Page 45 of the Opinion opines Alexander relied on Krit and Riserer and Alexander had limited ability to understand the tax law.  As the case unfolds the Court seems to have sympathy for Alexander who “placed a great deal of reliance on Kritt”.  The Court concludes that Alexander did not possess the education that would allow him to know he should have reported additional income”. Page 50.  IRS loses on tax fraud, but IRS wins on understatement.

Our next case involves Dr Child in Child vs IRS T.C. Memo 2010-58.   The facts are relatively simple.  Dennis Evanson designed organized and promoted schemes to shelter income from taxation.  He was ultimately convicted of Federal income tax evasion by a jury in 2008.  All of Evanson’s tax evasion schemes used sham transactions to transfer clients’ untaxed income to offshore entities that Evanson created and controlled.  The funds were typically returned to his clients disguised as disbursements from fictitious loans to avoid taxation.

Dr Child was a highly compensated radiologist who met Evanson at a party.  Evanson helped Child and hundreds of over doctors create a tax evasion scheme which allowed a fictitious offshore insurance company to providing insurance coverage for Child. Premiums were paid and deducted on Child’s tax returns from 1997-2003.  The IRS audited not only disallowing over $280K of deductions but  claimed Child was guilty of tax fraud as the whole scheme was nothing but a tax avoidance sham transaction lacking any economic substance. Child appealed to US Tax Court in Child vs IRS US Tax Court (2010). Judge Kroupa concluded that indeed Child fraudulently intended to evade taxes and this was liable for additional fraud penalties under Section 6663 of the IRS Code which increases the penalty by 75% of the tax owed. IRS wins and Child loses on fraud under IRS Code Section 6663.
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If you lose on Fraud you owe additional 75% of the tax owed, a lot of money for most of us.  So why did Child lose on Fraud but not Alexander?   The law says you commit tax fraud if “badges of fraud” are present:  you have inadequate records, you participate in the promoter’s scheme to mislead the Government, you give implausible explanations of behavior to conceal the fraud, you file false documents, and you fail to respond to subpoenas.  Finally you don’t cooperate with the Government. Judge Kroupa in Child argued that “most of the badges of fraud upon which this Court relies were present in Child”. Page 23.   Judge Goeke didn’t feel that way with Alexander and so Alexander did not have to pay the 75% fraud penalty.

In conclusion, if you are a small business owner who attends a seminar on offshore investing schemes, simply say no.  There is no legal tax strategy for individuals and small business owners to keep their offshore earnings from being reported on their personal tax return Form 1040.  Unless you are willing to give up your US Citizenship and leave the country there is simply no legal way to avoid paying personal income taxes by keeping your earnings offshore.  Work within the system to change the tax to perhaps a flat tax or national sales tax, but say no to offshore tax schemes.  You will be happy you did when the IRS comes knocking on your door for an offshore tax audit.

Thank you joining us on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView.

Kindest regards

Chris Moss CPA Tax Attorney

Oct 07

IRS Innocent Spouse Relief Audit

Welcome to TaxView with Chris Moss CPA Tax Attorney

Have any of you wives out there perhaps sometimes not quite understood the tax strategy your husband has used to prepare your income tax return?   Any husbands out there traveling so much for work that your wife pays all the bills and files all tax returns?  If any of these situations apply to you, then you can see why innocent Spouse Relief allowed by IRS Code Section 6015(a)(1) is probably one of most litigated of all tax strategies particularly when couples split up and divorce.  In fact, chances are the IRS may just be waiting, patiently I might add, to begin a Whipsaw Innocent Spouse Audit soon after your Divorce decree is finalized. So for all you couples out there, happily married or soon to be divorced, stay tuned to TaxView with Chris Moss CPA Tax Attorney as we journey through real life Innocent Spouse Court cases to discover the best tax strategy for you to win an IRS Innocent Spouse Audit and keep your assets safe and protected from long reach of the IRS Innocent Spouse Audit agents.

Innocent Spouse Relief is litigated in US Tax Court more than just about any other tax strategy.  There were 5 cases in 2015 alone including Willie and Sandra Scott decided last month in September 2015.  In Scott vs IRS US Tax Court 2015-180, the facts are simple except that in this case both husband and wife stayed married.  Husband was in charge of the finances and was responsible for filing the 2008 and 2009 tax returns.  His wife played no role at all in filing the tax return except she gave her husband information on her two businesses for him to include in the tax return he prepared.  The IRS audited and in addition to other minor adjustments against the husband’s businesses disallowed over $200,000 of expenses for wife’s businesses.

Wife did not dispute the tax she owed when she appealed to US Tax Court, but instead, claimed the resulting tax liability should not be joint and several to her because she did not have any involvement with preparation of the tax return. Judge Goeke states that Section 6015(b) provides that a taxpayer will be relieved of liability for an understatement of tax if: (1) a joint return was filed for the taxable year in question; (2) there is an understatement of tax attributable to erroneous items of the nonrequesting spouse; (3) the taxpayer requesting relief “did not know, and had no reason to know, that there was such understatement” when he or she signed the return; (4) taking into account all of the facts and circumstances, it would be inequitable to hold the taxpayer liable for the deficiency attributable to such understatement; and (5) the taxpayer elects to have section 6015(b) apply within two years of the initial collection action.The Court further determined that of all these factors, the key and most important factor was whether the wife “had a reason to know” of the understatement.  The Court of Appeals for the Eleventh Circuit, has held that a spouse has reason to know of a substantial understatement if a reasonably prudent taxpayer in her position could be expected to know that the return contained the substantial understatement. See Kistner v. Commissioner, 18 F.3d 1521 (11th Cir. 1994), rev’g T.C. Memo. 1991-463; Stevens v. Commissioner, 872 F.2d 1499 (11th Cir. 1989).

The Court then reviewed the four factor inquiry that has generally been used in deciding the question of whether a spouse asking for innocent relief has “reason to know” 1. Level of Education, 2. Involvement in family finances, 3. Routine vs lavish expenditures and 4. Deceit by the other spouse. Citing Butler v. Commissioner, 114 T.C. 276, 284 (2000). The Court noted that Wife had a college education and should have had knowledge of income tax owed relating to her own business.  The Court concluded that Wife had in fact “reason to know” of the understatement.  IRS Wins Wife loses Husband wins.   However, the Court also concluded that Wife would have relief from husband’s business tax adjustments, since she had “no reason to know” of her husband’s business.  Wife wins, IRS loses, and Husband has a partial loss.

Unlike the Scotts who stayed married, most of these innocent spouse cases end in tragic Whipsaw divorce as did Demeter v Demeter v IRS in US Tax Court 2014-238 decided November 24, 2014.  The facts are simple: Husband and wife filed tax returns for 2004 2005 and 2006 prepared by tax attorney Ron Mulchi.  Wife signed returns in 2007 having never met or talked with Mulchi.  Taxes were not paid by husband due to his business failing and wife first became aware of this when she started receiving levy notices from IRS.  Both husband and wife filed bankruptcy in 2008 and later divorced in 2009.  Wife filed for Innocent Spouse Relief in 2011 and the IRS was about to grant relief, but her ex-husband filed an appeal in Demeter v Demeter v IRS in US Tax Court 2014-238  as an “Intervenor” opposing in this Whipsaw case relief to his ex-wife.  With the Government conceding to the Ex-Wife, Judge Vasquez eventually ruled in favor of the Ex-wife, finding that she filed for innocent spouse relief after the divorce, during a personal economic hardship, and that her ex-husband agreed as part of the divorce settlement agreement to pay the back taxes, thereby giving the ex-wife “no reason to know” that her ex-husband, the Intervenor, would not pay the tax.  Ex-wife and Government win, Intervenor Ex-husband loses.

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So what does this all mean for anyone out there who wants to file for innocent spouse relief?  First and foremost, figure out whether or not you benefited from your husband’s tax error, mistake or in some cases civil or criminal fraud. If you did not, and are separating from your spouse, make sure your divorce attorney includes Innocent Spouse Relief language in the settlement agreement. Also, if you are the ex-husband be prepared for your ex-wife to intervene to US Tax Court denying much of what you are claiming creating the tragic Whipsaw.  Second, hire a tax attorney who can effectively gather sufficient evidence to prove to the Court that you had “no reason to know” of the tax liability you are claiming relief from.  Perhaps if you are the ex-wife, you had “no reason to know” because you traveled a lot working out of town, or didn’t have the educational background to understand, or perhaps just didn’t get the whole truth from your now ex-husband. In other words, if your tax attorney sufficiently gathers from you the evidence needed to win, provided your testimony is credible, you will in fact win the IRS Innocent Spouse Relief Audit, Whipsaw your Ex-spouse, and at the same time keep your assets safe and protected from the long reach of IRS Innocent Spouse Relief Audit agents.

Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

Sep 19

IRS Crummey Gift Tax Audit

Welcome to TaxView with Chris Moss CPA Tax Attorney

Do you all own a family business and want to start the process of transferring ownership to your children without getting hit with large gift and estate taxes?   Best practice suggests you consider gifting to your minor children, or if you are the older children, have your parents or grandparents gift to you a Crummey Trust membership through your Family Limited Liability Company.  The “Crummey” Trust”, named for Crummey 397 F.2d 82 (9th Cir 1968­) is a great way to get tax deductions, have your children receive annual Family LLC memberships, reduce your estate tax and have the family work together in a unified and protected Estate Plan.  But danger lies ahead during an IRS Estate tax audit after you die or an IRS Gift tax audit before you die claiming if you died the gifts were not irrevocable, or while you are still living that the Trust should be subject to gift tax by disallowing the tax free exclusions.  Either way you lose unless you are structured correctly.  So if you are interested in winning for you your wife, children and grandchildren, stay with us here on TaxView with Chris Moss CPA Tax Attorney to learn how to fight back during an IRS Crummey Trust audit so you can win, save taxes, and keep your assets in the family business safe and protected from harm for many generations to come.

Current gift tax law allows exemption for a Husband and Wife to gift tax free $28,000 to a Crummey Trust owning a membership in the Family LLC to each child in 2015. Named after taxpayer Crummey, the Crummey Trust accumulates the $28,000 tax free exemption year after year in a protected irrevocable trust by giving your children the right to demand immediate distribution of exemption.  This is exactly what Crummey did in Crummey vs IRS 397 F.2d 82 (9th Cir 1968).

The facts are simple.  Husband and Wife Crummey each gave in 1962 their 4 minor children $3000, the exemption at that time, or $12,000 total to an irrevocable trust.  The IRS audited and disallowed the Trust claiming that the gifts to minors were nothing more than disguised future interests disallowed under then IRS Section 2503(b).  Crummey appealed first to US Tax Court and next to the US Court of Appeals for the 9th Circuit 397 F.2d 82 (9th Cir 1968).

District Judge Byrne frames the key issued presented as whether or not a present interest was given by the Crummey’s to their minor children so as to qualify for the exclusion under 2503(b).  The Court looked to California law to determine if the children had the right to demand distributions from the Trustee. The Government said if the children can’t sue under California law they can’t demand the trust assets under California law.  The Crummey’s said if the children can own property under California law they can indeed demand the trust assets under California law.

The Court took particular interest in George W Perkins 27 T.C. 601 (1956) where the Court said that where the parents were capable of asking the Trustee for the assets on behalf of the minor children in order for the children to have the “right to enjoy” the assets and there was no showing that the demand for funds from the children via the parents could be resisted under State law, then the gift was a present interest.  The Court in my view did not clearly have an easy answer, but in the end ruled that under Perkins, the “right to enjoy” test is preferable.  Crummey win IRS loses.

Where is Crummey trending in 2015? Let’s take you all as an example:   In 2015 you and your wife irrevocably gift $28,000 to each of your 3 children ages 5, 7 and 9 and give at this level for 5 more years.  If structured through a Crummey Trust your gifts would be $84,000 per year or $420,000 after 5 years all tax free.  Further suppose your $28,000 irrevocable gift to each child was an LLC membership interest.  With a 35% discount applied to each membership gift for lack of marketability your tax free gifts to 3 children for 5 years would be $630,000.

The Mikel family set up this kind of trust in 2007 with one exception:  The Trustee had final and conclusive power to assist the children with “Life Changing Events”, like reasonable wedding costs, the cost to purchase a primary residence, or costs of starting a new trade or business.  Finally the Trustee had power over the children’s expenses in connection with their health, education, maintenance and support.  The IRS audited Mikel and disallowed the gifts to his children claiming they never were gifted a “present interest in the property” that is an unrestricted right to immediately use the gifts, citing Regulations 2503-3(a) and 2503-3(b) particularly in light of the special “Life Changing Event” powers granted to the trustee.  Mikel appealed to the US Tax Court Mikel v IRS, US Tax Court (2015).

Mikel argued and surprisingly IRS conceded that each of the children received a timely and effective notice of their right to withdraw the maximum annual exclusion.   Both the Government and Mikel further agreed that the trust declaration stated unequivocally that upon receipt of a timely made withdrawal demand, “the Trustees would have to immediately distribute to the children the property allocable to them.” The IRS finally also conceded that the declaration put forth by Mikel in the Crummey Trust did in fact afford each beneficiary an unconditional right of withdrawal.
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However the Government not to be outdone, argued vigorously that the children did not receive a present interest in the trust income and corpus because their rights of withdrawal were not legally enforceable in practical terms.  That is the children’s right of withdrawal was “legally enforceable” only if the children could go before New York State Court to enforce their rights and that such an action by the children was not likely to happen considering the special powers for life changing events granted to the Trustee.

Judge Lauber’s thoughtful Opinion acknowledges that the Mikel trust was indeed a Crummey Trust citing Crummey v Commissioner 397 F.2d 82 (9th Cir 1968) with a substantially similar demand clause providing that whenever an addition was made to the trust, the children or their guardian could demand immediate withdrawal of an amount equivalent to the maximum annual exclusion as required by Section 2503(b). The Court further noted that even though the IRS expressed its general agreement with Crummey citing Estate of Cristofani v IRS 97 Tax Court 74 (1991) it appeared to the Court that the Government was challenging Crummey power only when the withdrawal rights are not in substance what they purport to be in form.  Judge Lauber nevertheless opined that the Government’s claim that the withdrawal right of Mikel children was illusory was flawed.  The Court went on to conclude that the Mikel children under New York law could seek justice to enforce the provisions of the Crummey Trust regardless of the special powers of the Trustee for “Life Changing Events”.  The Court therefore found that under New York law withdrawal demands by the beneficiaries could be in fact legally enforced citing Crummey. Mikel wins, IRS loses.

What does this mean for all families with a small business who want to gift Crummey assets to their young children to take advantage of the $28,000 per year gift tax exclusion?  First, create your Family LLC with your wife as your partner each donating your share of the family business into the Family LLC.  Second, for each subsequent year gift your children Family LLC discounted membership interests to the maximum exclusion $28,000 in 2015 through a Crummey Trust.  Third, make sure your Tax Attorney gives the children the absolute right and power under State Law to withdraw their interests.  Fourth, by the time your children are in their late teens and early 20s you should have successfully used the Annual Exemption and the Lifetime Exclusion to perhaps have your Family LLC owned by a Spousal Lifetime Access Trust (SLAT) with your wife as Trustee and Beneficiary and your children as successor beneficiaries  to further protect your tax free transfer from not only an IRS Estate Tax Audit, but to protect in a spend thrift clause from potential creditors as well.  Finally have your tax attorney prepare for you a written opinion that she will file your tax returns and represent you when and if the IRS should audit disallowing your Crummey Trust.  Include your Crummey Trust in your tax returns as a contemporaneously prepared PDF file before you file your returns.   Rest assured your Estate Plan is safe, secure and protected from IRS audit many years later.

Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney

 

See you next time on TaxView.

Kindest regards,

Chris Moss CPA Tax Attorney

Sep 02

Domestic Asset Protection Trusts DAPTs SLATs

Welcome to TaxView with Chris Moss CPA Tax Attorney

Domestic Asset Protection Trusts (DAPTs) and Spousal Lifetime Access Trust (SLATs) appear to be best practice in 2015 for Asset Protection and Estate Tax Reduction. The SLAT, which is nothing more than a DAPT for a family allows your Husband Grantor Settlor to appoint you his Wife as both Trustee and Beneficiary with your children appointed as successor Beneficiaries.  If your SLAT becomes a member of the Family Business LLC you have an ideal estate tax reduction, asset protection, and additional annual income tax savings all created in an almost “too good to be true” legal tax structure and foundation.  Are in fact DAPTs and SLATs too good to be true? Some feel the IRS is just waiting, patiently I may add, until you die to audit your estate and disallow the entire SLAT arguing before the US Tax Court that the SLAT corpus never legally left the Estate. So if you are interested in setting up a SLAT, stay tuned to TaxView with Chris Moss CPA Tax Attorney to find out how to take advantage of these new Domestic Asset Protection Trusts without losing your advantage during an IRS SLAT Audit soon to be coming your way.

So what is a SLAT?  A SLAT is an irrevocable DAPT established uniquely for a married couple, in many cases with children who ultimately become successor beneficiaries under newly enacted Sweet 16 State Protection Trust laws that allow the SLAT Husband Settlor Grantor to irrevocably gift his assets to his Wife, Trustee and Beneficiary with all lifetime distributions being made according to “ascertainable standard” as per IRS Code Section 2514, and IRS Code Section 2041 and Sweet 16 State laws, relating solely to the health, education, support or maintenance of in the case of a SLAT, your wife, both Beneficiary and Trustee. As Grantor Settlor you must make absolutely certain that you do not retain a life estate of any kind whatsoever in the Trust Corpus or Income Distributions in violation of IRS Code 2036.  If you flawlessly insert a Spendthrift Clause in the Trust documents exactly according to State Law, and then finally appoint a non-family member Trust Protector or Co-Trustee you have what some would consider a “too good to be true” Estate plan.

The “too good to be true” folks out there may very well remember that prior to 1997, State Court Common Law for over 100 years held that these kind of Domestic Asset Protection Trusts were unenforceable and void against public policy.  Yet one State legislature after another have in the last 20 years codified Trust Fund laws making legal what the Courts in Equity have prohibited.  These DAPT and SLAT friendly 16 States (Sweet 16) Alaska, Colorado, Delaware, Hawaii, Missouri, Mississippi, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia and Wyoming are the only States in my view that you can safely create a DAPT or SLAT with some reasonable assurance that creditors could not reach your SLAT assets.

So what steps can you take to prove the “too good to be true” folks wrong.  First keep your DAPT or SLAT within the “Sweet 16” as Sessions should have done in Rush Univ Med Center v. Sessions, N.E. 2d , 2012 IL 112906, 2012 WL 4127261 (Ill, Sept. 20, 2012) (Rush U).  The facts in Rush are rather simple.  Sessions established a DAPT which irrevocably pledged $1.5M to Rush.  Rush commenced construction in reliance on the pledge.  Sessions however was diagnosed with cancer that he blamed on Rush for failure to diagnose.  He wrote Rush out of his Will before he died in effect voiding the $1.5M gift.  Rush sued the Sessions estate in Rush v Sessions claiming the estate was liable for the $1.5.  Lower Courts grappled with conflicts between the Common law in Equity and the Illinois Fraudulent Transfer Act with the Appeals Court eventually ruling for Sessions.  However, the Illinois Supreme Court reversed noting that Sessions created a DAPT for his own benefit and used the “spendthrift clause” to protect the assets from Rush, a legal creditor.  Justice Thomas further opined that regardless of state statute supporting Sessions, justice and fairness require that Illinois common  law in equity void the “spendthrift clause” of Sessions DAPT and allow Rush to pierce the DAPT and collect their debt.  Rush wins, Estate of Sessions loses.

If you are fortunate enough to live within the Sweet 16 how should you structure the SLAT so that when the IRS audits your SLAT your SLAT will survive intact and protected?  Historically the US Tax Court has looked to States for guidance on whether or not an irrevocable trust is a valid transfer not subject to estate tax of the Settlor Grantor.  For example in Outwin v IRS 76 T.C. 153 (1981), Outwin created various irrevocable trusts under Massachusetts law with Outwin being the sole Beneficiary during his lifetime with family friends as trustees.  The IRS audited and claimed gift taxes were not paid on what the IRS claimed was an irrevocable transfer out of Outwins’s estate. Outwin appealed to US Tax Court in Outwin v IRS 76 T.C. 153 (1981) arguing that he never lost control over the trust because he was the “sole Beneficiary” of the fund assets and therefore no legal gift had been transferred.

Besides this, this disability can also have much more far reaching consequences, like erectile viagra canada online dysfunction, weight loss and anxiety. Fortunately, there are expert Urologists who can work on a cash basis in combination with sildenafil canada insurance. Your wife is dressed very sexy and she knows that you are big fan of viagra uk http://www.heritageihc.com/policy her lingerie. The social generic levitra find out for more info obsession with manly nature leads to insecurity, tension and depression and they start feeling that they are the best and able to fix erectile dysfunction. Judge Dawson goes further asking whether Outwin’s trusts could be subjected to the claims of the settlor’s creditors under Massachusetts law. Citing Ware v Gulda 331 Mass. 68, 117 N.E.2d 137 (1954) the Court finds that under Massachusetts law Outwin’s trust fails to relinquish dominion and control for gift tax purposes if creditors can reach the trust assets. Concluding there is a strong public policy in Massachusetts common law against persons placing property in trust for their own benefit while at the same time insulating such property from the claims of creditors the Court finds for Outwin.   IRS loses, Outwin, wins.

So in conclusion, to make your SLAT bullet proof against an IRS SLAT Audit, first, make sure you retain a tax attorney who knows his Sweet 16 SLAT law and knows it well. Have that same tax attorney file all tax returns.  Second,  have your tax attorney structure the SLAT so that you Settlor Grantor Husband appoint your wife as Trustee and as a primary Beneficiary receiving beneficial ascertainable standard distributions for her health education support or maintenance in accordance with IRS Code Section 2041(a)(2), (b1) and (b)(2) making sure you Husband Grantor Settlor are not in violation of IRS Code Section 2036 by not retaining a life estate in the Trust corpus or income. Third make sure your SLAT is absolutely protected from Creditors by inserting exact word for word language of the Spendthrift provisions of your State’s Domestic Asset Protection Trust laws.  Finally, Appoint a non-family member Trust Protector or independent Co-Trustee to give you that extra added protection when the IRS comes on over soon after you are gone.  If you stayed married for the duration, on the day of your passing, you can rest in peace knowing your Wife and children are protected from a very likely IRS SLAT Audit coming your way, with family Business and Estate bulletproofed with a safe and protected SLAT foundation for many years to come.

Thanks for joining us on TaxView with Chris Moss CPA Tax Attorney

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

Aug 30

IRS Charitable Remainder Unitrust CRUT Audit

Welcome to TaxView with Chris Moss CPA Tax Attorney

Are you planning on giving a large gift to charity after you die?  The Charitable Remainder Unitrust (CRUT) and the Charitable Remainder Annuity Trust (CRAT) as per IRS Code 664 are great tax strategies for charitable giving.  The CRUT for example allows you to take an immediate charitable deduction on your income tax return, deferring the actual donation of the remainder of the trust until after your death, but at the same time allowing for you to live off the income of the trust while you are alive.  Sounds too good to be true?   It’s true, but unfortunately  the IRS  seems to be thinking otherwise,  waiting perhaps patiently I might add, until you die only to commence a CRUT Audit with disastrous results for for your children and other heirs at the conclusion of the CRUT Audit.  So if you have already established a CRUT or are thinking about setting up a CRUT stay with us here on TaxView with Chris Moss CPA Tax Attorney to find out how to bullet proof your CRUT and related tax returns from adverse Government  audit action when the IRS CRUT audit team arrives shortly after you have passed.

While the Joint Committee on Taxation has always favored charitable giving deductions, Congress strictly limits the deductibility of the Charitable Remainder of your CRUT on your personal tax return to the present value of the CRUT remainder using a current qualified appraisal, as defined in § 1.170A-13(c)(3), from a qualified appraiser, as defined in § 1.170A-13(c)(5). Section 664(d)(2)(D) requires that the valued remainder be at least 10% of the property’s net fair value on the date of contribution.  After the initial appraisal year IRS Regulations 1.664.1, and 1.664.3 generally with some exceptions allows you to pay to yourself annually not less than 5% of the net fair value of the trust corpus.  Sounds pretty easy, but as Arthur Schaefer’s Estate found out in Schaefer v IRS US Tax Court (2015) there are IRS traps surrounding  CRUTS after you die which could make you turn over in the grave.

On February 21, 2006 Schaefer created a CRUT with a slight variation, an exception to the general rule as per Section 664(d)(3)(A).  The exception allowed Schaefer to distribute only the trust income for the year but limited by a fixed percentage. Trusts created under this exception are called Net Income Charitable Remainder Unitrusts (NICRUTs). Additionally, 664(d)(3)(B) allowed Schaefer to distribute to himself the current trust income in excess of the fixed percentage to the extent that the aggregate amounts distributed in prior years were less than the aggregate of the fixed percentage amounts for those prior years. Trusts using this provision are Net Income with Makeup Charitable Remainder Unitrusts (NIMCRUTs) and this is the trust Mr. Schaefer created.

Sure enough after Schaefer died, and after the Estate tax return Form 706 was filed, the IRS came knocking on Schaefer’s Estate door and indeed audited and disallowed the NIMCRUT charitable deduction in its entirety because the trusts did not meet the requirements of Section 664(d)(2)(D) in that the value of each remainder interest be at least 10% of the net fair value of the property on the date of contribution claiming Schaefer used an incorrect valuation method.  Schaefer’s appealed to Tax Court in Schaefer v IRS US Tax Court (7/28/2015).

Judge Buch opined that while the legislative history is rather unclear on this matter, nevertheless Congress gave the IRS the power to issue administrative guidance on the subject of valuing a remainder interest in a NIMCRUT citing Rev. Rul. 72-395, sec. 7.01 superseded by Internal Revenue Bulletin:  2005-34, which includes all the relevant Revenue Procedures including   Rev Proc 2005-52, 2005-53 and 2005-54 requiring the remainder interest of a NIMCRUT to be valued using the fixed percentage stated in the trust instrument, regardless of the fact that distributions are limited to trust income.   The Court observes that Schaefer was using a rate that was less than stated in the trust instrument.  When the Court converted the Schaefer rate to the fixed rate required by IRS regulations the Schaefer NIMCRUT remainder fell below the 10% threshold thereby terminating the entire NIMCRUT.  IRS wins Schaefer loses.

A second IRS trap, as Joseph Mohamed found out, is the requirements for a “qualified appraisal” in Mohamed v IRS US Tax Court (2012). Mohamed set up a CRUT in 2003 worth millions with the remainder to go to the Shriners Hospitals for Children.  Mohamed filed his tax returns along with Form 8283 claiming millions of dollars of charity deductions.  The IRS noticed this almost immediately and commenced a CRUT audit.  It turns out that Mohamed self-appraised his donations, albeit on the low side, but nevertheless, in violation of IRS regulations requiring a qualified appraisal by a qualified appraiser.   Mohammed retained a qualified appraiser, while the audit was ongoing, to perform a qualified appraisal and even though the remainder asset value appraised higher than Mohamed’s charitable tax deduction, the appraisal was performed simply too late to do any good.  The IRS invalidated the entire CRUT and disallowed the millions of deductions that Mohamed had claimed as a charity deduction.  Mohamed appealed to US Tax Court in Mohamed v IRS US Tax Court (2012).
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The Court reluctantly ruled for the Government in that Mohamed did not comply with IRS regulations.  Judge Holmes sadly opines that this result is harsh–a complete denial of charitable deductions to a couple that did not overvalue, and may well have undervalued, their contributions–all reported on forms that even to the Court’s eyes seemed likely to mislead someone who didn’t read the instructions. But the problems of bad appraisals of property was so great that Congress was quite specific about what the charitably inclined have to do to defend their deductions, and we cannot in a single sympathetic case undermine those rules.  IRS wins Mohamed loses.

What does this mean for all of us who want to set up CRUT’s?  First, make sure you get a qualified appraiser to do a contemporaneously performed qualified appraisal of the remainder interest property that you are currently deducting as a charitable donation on Sch A of your Form 1040. Complete Form 8283 and attach the appraisal to the tax return in a PDF file at the time you file your tax return.  Second, hire the best tax attorney you can find to give you a written opinion that your CRUT, CRAT, NICRUT or NIMCRUT complies with IRS Code 264 and IRS Revenue bulletin 2005-34 including Revenue Procedure 2005-52, 2005-53 and 2005-54.  Give that legal opinion to your children to hold on to as there is a good chance the IRS is out there patiently waiting for your passing.  Finally, introduce your children to your tax attorney so they know what to expect after your pass.  There is a good chance your Estate be subject to an IRS CRUT audit after your passing, and at least you can rest in peace knowing that your tax returns will survive with your Estate protected and safe from harm’s way.

Thanks for joining us on TaxView with Chris Moss CPA Tax Attorney

Make sure to join us next time on TaxView when we will take closer look at where Domestic Asset Protection Trusts DAPTs and Spousal Lifetime Access Trusts SLATs are trending in 2015.

Kindest regards,

Chris Moss CPA Tax Attorney

Aug 28

IRS Foreign Income Exclusion

Welcome to TaxView with Chris Moss CPA Tax Attorney

Did you know if you are working and living abroad you can exclude from taxation your foreign income under IRS Section 911(a)? You just have to pass one of two tests: The Bona Fide Residence Test or the Physical Presence Test.  If you qualify under one of these two tests then you are good….that is, until the IRS comes to see you and commences a Foreign Income Exclusion Audit. So if you are abroad, or plan to be, and are going to be earning income there, stay tuned to TaxView with Chris Moss CPA Tax Attorney to see what tax traps the Government has waiting for you when the IRS Foreign Income Exclusion Audit team comes knocking on your door.  Before you leave town learn how to create the facts and evidence you need to fight back an IRS Foreign Income Exclusion Audit….and win….on TaxView with Chris Moss CPA Tax Attorney.

Americans earning income abroad have since 1926 been allowed to exclude from taxable income under 911(a) but only if they were a “bona fide non-resident” of the United States for at least a year.  To qualify as a “bona fide non-resident” though you also need to establish a residence in the foreign country which is not always the same as your permanent home or domicile and for IRS purposes you must make a valid and timely election under Regulations 1.911-7(a)(2).  This is easier said than done as Ms. McDonald found out in a just released decision from US Tax Court this week in Nancy McDonald vs IRS US Tax Court August 25, 2015 which illustrates how important it is to make a valid and timely election to take advantage of the foreign exclusion.

The facts are relatively complex in that McDonald was living abroad and did not file a tax return in 2009.  The IRS prepared a substitute tax return and then issued a notice of deficiency.  McDonald the filed the 2009 return two years late claiming foreign earned income exclusion.  The IRS audited and disallowed the exclusion claiming McDonald failed to make a valid election under 1.911-7(a)(2). McDonald appealed to US Tax Court in McDonald v IRS US Tax Court (8/25/2015) claiming she made a valid election or in the alternative the election requirements were unreasonable and not specifically authorized by law.

The Court notes the IRS promulgated regulations, even though Congressional law is silent on when and how to make the election.  You can chose from four alternative timing methods to make the election three of which involve Form 2555: 1. Attach From 2555 to your income tax return timely filed 2. Attach Form 2555 with your return filed by amendment. 3. Attach Form 2555 with your the original return filed within one year after the due date and 4. Attach Form 2555 with your return filed after the deadline provided that you owe no federal tax including the exclusion and file Form 2555 before the IRS catches you OR in lieu of Form 2555 print on the top of the tax return “filed pursuant to Section 1.911-7(a)(2)(i)(D).

McDonald argues that if she had simply included on the top of the first page the required statement she would have made a valid election and owe no tax, in effect, that her omission of this statement should be excused because only the regulations, not Congressional law make this a requirement and that the requirements are unreasonable.  Judge Gustafson opines “…it is true that the Code Section 911(d)(9) makes no mention of the timing of the election but rather provides the Secretary shall prescribe such procedures…” The Court therefore concludes that the regulation provides taxpayers with four alternative methods by which they can timely elect the exclusion. The fact that the Secretary could have chosen longer periods within which to permit the election is of no consequence, because the alternative methods with four varying periods are reasonable.  IRS Wins McDonald Loses.

So now that you have made a valid election, as Hermine Dinger found out, you must work for a foreign company or government that has no connection with an American company or business or US Military or US Military Agency.  Hermine Dinger thought she was able to exclude the income earned from ADD, the German authority of the Minister of Internal Affairs that administered payroll for civilian employees of the US Army.   The IRS audited and disallowed her exclusion.   Dinger appealed to US Tax Court in Dinger v IRS US Tax Court (8/ 6/ 2015) claiming she was paid by a German Government office.  The Court easily found for the Government finding that Dinger worked for the United States even though the ultimate source of her income was foreign.

Our final case illustrates how difficult it is to qualify living abroad under Section 911(a), as Joe Evans found out in Evans v IRS US Tax Court (1/20/2015).  Evans worked in Russia in the oil industry and filed tax returns from 2007-2010 prepared by Bradley Borden, a tax professional, claiming that his tax home was Russia.  The IRS audited all 4 years disallowing the foreign earned income exclusion claiming Evans was not a bona fide Russian resident.  Evans appealed to US Tax Court in Evans v IRS US Tax Court (1/20/2015)
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The Court notes that Section 911(d)(3) carves an exception out in that if a person has a home or an “abode” within the United States during his foreign residency Evans cannot establish that his tax home is in a foreign country, citing Jones v Commissioner 927 F.2d 489 (5th Cir. 1991).   Evans had invariably some connections with the foreign country in which he works, but if his ties to the United States are stronger, we have held that his “abode” remains in the United States citing Harrington v Commissioner 93. T.C. 297 (1989).  Unfortunately for Evans, he still was registered to vote in his home state of Louisiana, possess a Louisiana Driver’s license and had a Louisiana bank account.

Judge Lauber easily finds for the Government showing that Congress limited the benefits of Section 911(d)(3) to discourage folks from incurring duplicative costs of maintaining distinct US and foreign households citing again Jones v Commissioner 927 F.2d 489 (5th Cir. 1991).   IRS wins Evans loses.

In conclusion, if you are planning to work abroad and want to take advantage of Section 911(a) Foreign Income Exclusion, first, before you leave the United States make sure you retain the services of a tax attorney to plan out your tax strategy so that you not only legally elect the exclusion, but you have the contemporaneous evidence created to insert into your next tax return before you leave the country so that the Government will have on record your election.  Second, if in the very likely event you get audited by the IRS retain that same tax attorney to defend you so she can apply the law to your unique set of facts and circumstances that she helped create for you years earlier. Finally sit back and relax wherever you are in the world as you win your IRS Foreign Income Exclusion Audit with a bullet proof protected tax return.

Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView.

Kindest regards

Chris Moss CPA Tax Attorney

Aug 26

IRS Alimony Audit

Welcome to TaxView with Chris Moss CPA Tax Attorney

While it is hard to believe that a divorcing spouse in the 21st century would need or want Alimony, it is even harder for many to understand why Alimony is so often litigated by divorced taxpayers in United States Courts.   Furthermore, since Alimony is taxable usually to the wife, and tax deductible usually to the husband, IRS Alimony audits Whipsaw a husband or wife against each other with the Government very often winning by default.  So if you are paying or receiving alimony and not aware of the danger ahead please stay with us here on TaxView with Chris Moss CPA Tax Attorney to see where IRS Alimony Audits are trending in 2015 so you can make sure tax return is safe and protected if an IRS agent comes knocking on your door.

Alimony also known as spousal support or maintenance derives from ancient ecclesiastical laws requiring husbands to continue to support their wives.  Eventually when “fault” divorce became legal it was the party “at fault” usually the husband, who would be required to pay Alimony, particularly because until recently, women could not own real estate.

I was surprised to find that in 2015 alone to date there were already nine (9) Alimony US Tax Court Opinions and hundreds of Alimony audits commenced around the country this year, many of which will end up in IRS Appeals and US Tax Court years from now.  In the last 10 years there have been probably thousands of IRS Alimony Audits.  Why is there so much litigation over Alimony?  Is Alimony tax law that complex?  Let’s ask the Court this question as we review hot off the press last week, Crabtree v IRS US Tax Court 2015.

The facts in Crabtree are simple. Crabtree (formerly Mrs. Girard) was married to Donald Girard until 2006. The Girard’s petitioned the Delaware Family Court in an uncontested proceeding “without a hearing”.  The Divorce Agreement required “unallocated alimony/child support for 8 years”.  Crabtree filed her 2010 tax return and did not report this money as taxable Alimony.  The IRS audited Crabtree requiring her to be taxed on what the Government concluded to be Alimony. Crabtree appealed to US Tax Court in Crabtree v IRS US Tax Court 2015.

Judge Lauber notes that IRS Code Section 71(a) provides that gross income includes amounts received as Alimony subject to 4 conditions as per 71(b).  First the payment must be received by wife under a divorce agreement.  Second the agreement does not include the payment as a property settlement.  Third the husband and wife must be living in separate households, and fourth, the payment must terminate upon death of the wife.

It is fourth condition, termination at death of recipient that the Court found ambiguous because the Divorce Agreement was silent on whether Mr. Girard’s Alimony obligation terminated upon Crabtree’s death. The IRS argued that Delaware law Title 13 Section 1512(g) controls in this case.  The IRS further argued that with these facts Delaware recognizes these payments as Alimony.

The Court however found for Crabtree who argued that the Delaware “order” was entered without a hearing and “agreed by the parties in writing” as required by Del. Code section 1519(b) and could have been construed as not terminating upon death.  Judge Lauber in a very close call opines that both the Divorce Agreement and Delaware law are unclear and finds for Crabtree in that “Delaware law does not unambiguously provide for automatic termination in the event of death.” Crabtree wins IRS loses.

The next case Iglicki v IRS US Tax Court April 27 2015 involves a Maryland divorce in 1999.  The Agreement required Iglicki to pay $1000 a month in spousal support “but only if he would default.”  After the divorce the Iglicki moved to Colorado and defaulted.  The ex-wife Stultz sued in Colorado for spousal support and won a judgement against the Iglicki.  In a post-judgement proceeding Stultz obtained a Court ordered garnishment of Iglicki’s wages.  Iglicki deducted the garnished wages on his tax return as Alimony.  The IRS audited and disallowed the deduction.  Iglicki appealed to US Tax Court Iglicki v IRS US Tax Court April 27 2015.

The question presented to the Court was whether or not the Iglicki’s financial obligation terminated upon death of Stultz.  The Court recognized, as the Court did in Crabtree, that when a divorce agreement is silent as to the existence of a postdeath obligation, the requirements of section 71(b)(1)(D) may still be satisfied if the payments terminate upon the payee’s death by operation of State law in this case Colorado, citing. Johanson v. Commissioner, 541 F.3d at 973.
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Judge Kerrigan finds that Colorado law, unlike Delaware law in Crabtree, very clearly requires future spousal support obligations to terminate at the death of either spouse unless otherwise agreed in writing or expressly provided in the decree.  But also under Colorado law after Stultz received a judgement against Iglicki the obligation of Iglicki previously considered Alimony was legally converted to a “past due” judgement.  Under Colorado law an Estate can enforce a judgement even after the death of the debtor.  Therefore spousal support obligations that have converted to a judgement in Colorado fail to qualify as Alimony under Federal tax law. IRS wins, Iglicki loses.

Our final case again involves simple facts in Muniz v IRS US Tax Court July 9, 2015.  Muniz husband and wife Filippini divorced in Palm Beach Florida in 2009. Muniz was required to pay $45,000 to Filippini and deducted Alimony on his 2011 return.  IRS audited and claimed the $45,000 was a nondeductible property settlement. Muniz appealed to US Tax Court in Muniz v IRS US Tax Court July 9, 2015.

The Government argued that even though the $45,000 was a lump-sum alimony payment, it could not be Alimony because under Code 61.08 of the Florida Code the Filippini’s estate upon her death would continue to have a vested right to collect the $45,000 lump sum. Judge Nega agreed with the Government concluding that under Florida law, lump-sum alimony constitutes a property settlement for Federal income tax purposes and therefore is not deductible as Alimony.  IRS wins, Muniz loses.

By now you all can see why on very simple facts Alimony payments could easily become nondeductible after commencement of an IRS Alimony audit.

What can you all do now?   First, if you are going through a divorce and have moved to a new State, or you are experiencing Alimony collection issues in your current State, make sure you have tax attorney confer with your divorce attorney to make sure you are protected in the very likely event of an IRS Alimony audit commencing shortly after Court action.  Second, require whoever prepares your tax return to give you a written opinion on whether your Alimony payments are tax deductible or not and include this contemporaneously created document in your tax return before you file.  This evidence will prove invaluable if and when an Alimony audit comes your way.  Finally be prepared for the Whipsaw and hopefully with a properly prepared tax return you will be the one that wins.

Thank you for joining us here on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

Aug 23

The IRS Gig Worker Audit

Welcome to TaxView with Chris Moss CPA Tax Attorney

All business owners at one time or another have had to make a choice between classifying a new worker as an employee or an independent contractor.  For most part in the 20th century these choices were easy to make.  But in the 21st century a unique worker has begun to emerge that is somewhere between an employee and an independent contractor, the “Gig Worker” or what some may call the Gigs.  While Judge Edward Chen O’Conner v Uber 3:13-cv-03826 ruled against the existence of Gigs, the California Uber case is far from over.  Whatever the ultimate outcome in Uber, in my view Gigs are here to stay.  What or who are the Gigs and how will they be evaluated during an IRS audit of your business?   Stay with us here on TaxView with Chris Moss CPA Tax Attorney to see where Gig law is trending in the 21st century and what you need to do now to protect yourself from an IRS Gig Worker Audit.

So what is Gig and who are the Gigs?  It all started with Uber.  Not only are there now Gig Uber Drivers but Uber Medicine Gigs called “healers”.  In the last few years we are being invaded and inundated by Gigs.  Unfortunately US tax law has not caught up with the rapid rise of Gigs, who in my view are simply independent contractors being directed by cell phone apps by you all out there to fulfill an immediate need, either providing a service, product or both.

Just so you know, Gig was coined in the early 20th century as slang for a paying musical engagement.  The Urban dictionary now defines Gig as a job that could now apply to contract work in the IT and computer field or any temporary or incidental employment.  However, the Gig has traveled or “Ubered” way beyond even Urban Dictionary’s definition.

In order to best define a Gig and understand the tax law of Gigs or lack thereof, let’s take a look at the 20th century worker.  These folks, our parents and grandparents all had a 9-5 job as their primary source of income.  Taxes were withheld and work was reviewed by the “boss” at a company office.  Independents back in those days were according to the current IRS web site the tradesmen and professionals who earned income from many customers, clients, and patients, such as Doctors, Lawyers, and other self-employed contractors.

In my view Gigs are legally somewhere in the middle between Employees and Independent Contractors.  Gigs come to life when you all click on an Uber app and ask that a Gig driver to drive you from Point A to Point B.  The Gig driver is star rated by the public and develops a “branding” based on those ratings.  Over a few months, each Gig develops a unique brand or “good will” based on their star ratings from folks around the world who have used their services. The legal status of Gig drivers, could be compared to the legal status of Gig Nurses, Gig Landscapers, Gig Fitness Trainers, Gig Pilots, and Gig Dog sitters to name a few.  The fact that Uber supplies the App to us to find us the Gig driver, or HEAL supplies the App to find us the Nurse healer, is not the point.  The point is Uber, HEAL, and all the other service Apps simply put the buyer and seller of the service together electronically, kind of like EBay does. The world wide customer base of the individual Gig “controls” how successful the Gig will be, just like EBay sellers are controlled by their star world wide ratings.

Would anyone claim sellers on EBay are employees of EBay?   The similar question was presented to Judge Chen in O’Conner v Uber 3:13-cv-03826, where the the the Court is grappling with whether Gig drivers found via the Uber app are employees.  Unfortunately, because Congress and the Courts have been caught off guard by the rise of the Gigs, the Government during an IRS Gig Worker Audit may be unable to find that middle ground in existing tax law to allow you the business owner to have a no change audit.  So listen up on TaxView with Chris Moss CPA Tax Attorney as you learn how whether or not you win comes down to one simple word: “control”.

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The facts are just as simple in Central Motorplex v IRS US Tax Court (2014). Central Motorplex (CM) engaged in buying, repairing and selling used autos. Mr. Smith was contracted to pick up and deliver license plates and title certificate as an independent contactor.  The IRS audited and claimed Smith was an employee.  Judge Lauber easily found for the Government because CM assigned Smith tasks, supervised his performance and set his compensation.  In other words, CM was in “control” of Smith. IRS wins, CM Loses.

So what does this all mean for all of us out there who might be paying for Gig services?  While Judge Edward Chen opines in his Order of March 11, 2015 “…it is conceivable that the legislature would enact rules particular to the new so-called “sharing economy..,” the IRS, Congress and the Courts, have yet to recognize the legal significance of the 21st century Gig worker.  So first, for now, our best practice perhaps is to have your tax attorney create standard “Gig Contracts” showing you have absolutely no control over the Gigs.  The easiest way to do this is to allow your Gig to receive public ratings so the public  controls the Gig not your business.  Second, include the Gig Contract in a PDF file attached to your business tax return so that if you are audited years later you will have a document in the tax return supporting your Gig strategy. Finally have your tax attorney standing by with the contemporaneously created documentation, so that when the IRS Gig Worker Audit comes your way you can be confident you will win and save taxes.

Thanks for joining us on TaxView with Chris Moss CPA Tax Attorney

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

Jul 30

IRS Statute of Limitations

Welcome to TaxView with Chris Moss CPA Tax Attorney

Most of you know the IRS has a 3 years from the date you file your tax return to commence and complete an audit of your tax return and assess you additional tax owed to the Government.   What you might not be aware of is that the Government due to budget cuts now routinely asks you to extend the three year “statute of limitations” to give the IRS more time to complete the audit.  If the IRS asks you to sign Form 872, Consent to Extend the Statute, what should you do?   If you do sign Form 872 you keep the period to assess the tax longer than required by the 3 year statute of limitations.  But if you don’t sign Form 872 the IRS in most cases immediately assesses you a tax and issues you  a 90 day Notice of Deficiency propelling the case into US Tax Court and into the hands of a high priced tax attorney. So if you are not sure what you would do, stay with us here on TaxView with Chris Moss CPA Tax Attorney to find out just how to handle a Government request to extend the statue of limitations in a way that best protects your family and saves you taxes.

IRS Code 6501 prohibits the IRS from “assessing a tax” on your income after your tax return has been filed for 3 years.  This three year statute of limitations enacted in 1918 has worked well for almost 100 years.  But recently agents have told me that due to Federal budget cuts reducing staff the IRS has insufficient time to complete your audit in an expeditious manner within the 3 year period.  So taxpayers are now routinely asked to consent to extend the 3 year statute on Form 872.   Further complications arise as a result of agents trying to comply with a very complex set of internal rules as per this IRS audit manual yet at the same time trying as best they can to finish up a taxpayer audit prior to the expiration of the 3 year window.

In order to best ascertain whether or not to extend the 3 year statute of limitations best practice is to review with your tax attorney how your audit is going.   If you have deductions that cannot be easily and timely documented, but nevertheless know you can at some point provide the necessary documentation the Government has asked for, and you believe the IRS agent is going to need more time to complete your audit examination, you would perhaps want to extend the statute to give the agent time to finish up and give you a no change audit.  On the other hand, if you have given the agent sufficient documentation to support your deductions and the audit is taking a long time to complete through no fault of your own, then you would not extend the statute as long as your tax attorney who prepared and filed your tax return could cost effectively litigate the case in US Tax Court.

Furthermore, for those of you being audited who might have underreported income, there should begin a series of confidential attorney-client privileged discussions with your tax attorney on whether or not you should agree to sign a statute extender on Form 872.  That is because as Williamson’s Estate found out in Williams v IRS US Tax Court (1996) there are exceptions to the 3 year statute, and of particular relevance to Judge Korner is Code Section 6501 (e) which extends the statute 3 more years to 6 years if there is an undisclosed 25% understatement of gross income on your tax return.  Citing Colony v Commissioner 357 US 28 (1958)  the Supreme Court said “Congress manifested no broader purpose than to give the Commissioner an additional 2 (now 3) years in cases where because of a taxpayer’s omission to report some taxable income, the IRS is at a special disadvantage.”  In Williams, the tax return did in fact disclose the understatement so Williams wins IRS loses.

But for other taxpayers who by accident or intention, there is a 25% understatement of gross income that has not yet been discovered by the IRS audit or IRS criminal investigation unit, best practice with these facts might suggest for you not to sign Form 872 and allow the case go to US Tax Court.  Unfortunately this was not the case in Connell v IRS US Tax Court (2004).  Thomas and Sara Anne Connell had four small trusts which they used to under-report income on their personal return. This scheme was discovered by the IRS Criminal investigation division.  While a recommendation to prosecute was made by Criminal division, for reasons not known to the US Tax Court no criminal action was ever undertaken.  The IRS then issued Notices of Deficiency which were issued more than 3 but less than 6 years after the returns were filed.  Connell appealed to US Tax Court in Connell v IRS US Tax Court (2004) claiming they failed to report additional income, but they adequately disclosed this by filing the bogus trusts.

Judge Gale easily brushes aside the Connell argument and rules for the Government citing Reuter v IRS US Tax Court (1985)  requiring that the actual tax returns themselves have to disclose the understatement not some other return or document.  In Reuter there was undisclosed S Corporation distributions.  In Connell it was the trusts.  In both cases the actual 1040 personal tax returns did not disclose the omitted income.  As Reuter points out “the legislative history of the 1954 changes made to section 6501(e)(1)(A) does not suggest looking beyond the face of the return to determine disclosure of an omitted item of income.  So in Connell as in Reuter, IRS wins, Connell loses.

Further complicating understatement of income issues are the growing popularity of larger partnerships as underscored in a recent 2014 report from the US Government Accountability Office to the Senate Committee on Homeland Security.  The report claims the IRS finds it very difficult to audit all these entities within the 3 year statute even if fully staffed with no budget cuts.  What happens if you should file your personal tax return with a K1 that as a result of an audit at the partnership level puts you at risk of a substantial understatement?  If you get audited personally should you agree to sign Form 872 even though you know you might have substantially overstated your basis on various sales from complex partnerships you have an ownership interest in causing you to have a substantial 25% understatement of income?
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In fact, this very question was addressed by a divided US Supreme Court in,  US v Home Concrete and Supply LLC, US Supreme Court  566 US_____(2012) affirming 634 F 3d 249.   The facts in Concrete were simple, but existing Federal law as applied to these facts was anything but simple. Here are the facts:  Partnership tax shelters generated losses to Home Concrete.  The losses were a result of an overstated basis which in turn caused a substantial understatement of income.  The question presented to the Supreme Court was whether a basis overstatement on sold property can trigger the 6 year statute under 6501(e) and US Treasury regulation 301.6501(e )(1)(A).  The majority opinion given by Justice Breyer ruled that based on the facts in this case, Congress did not intend to make basis overstatement the same as substantial understatement of “gross”  income subject to the 6 year statute of limitations, thereby in effect overruling the US Treasury regulation.  The reason given by Justice Breyer: “taken literally, “omit” limits the statute’s scope to situations in which specific receipts or accruals of income are left out of the computation of gross income; to inflate the basis, however, is not to “omit” a specific item, not even of profit.”

But Justice Kennedy, Ginsburg, Sotomayor and Kagan strongly dissented arguing that “there is a serious difficulty to insisting, as the Court does today, that an ambiguous provision must continue to be read the same way even after it has been reenacted with additional language suggesting Congress would permit a different interpretation. Agencies with the responsibility and expertise necessary to administer ongoing regulatory schemes should have the latitude and discretion to implement their interpretation of provisions reenacted in a new statutory framework.”

So what can you do if the IRS asks you to sign Form 872?  Perhaps  you could do the same thing Home Concrete and their tax attorney did when they saw a gray area of the law:  You just might decide not to sign Form 872 and have your tax attorney take the case to US Tax Court and perhaps as did Home Concrete achieve ultimate victory in the US Supreme Court.  So first and foremost if you are asked by the Government to sign Form 872 retain the services of a tax attorney, hopefully the same tax attorney who prepared, filed and handled the audit of  your tax return in the first place, before you make a decision whether to sign Form 872 or not.  Second, make sure you always contemporaneously prepare the documents and records needed to support your tax return in the unlikely event of an IRS audit, and include summary documents in the tax return you file to create the facts and records you need to win an audit.  With a good set of records supporting your tax positions you will hopefully finish up the audit with no adjustments.  Finally, if your audit is taking too much time, whether due to Government budget cuts, or for lack of records, make sure you have your tax attorney standing by to help you answer the soon to be asked question by your IRS agent:  Would you please sign Form 872 to extend the statute of limitations on your audit?  If the IRS asks you to sign Form 872, Consent to Extend the Statute, what would you do?  Whether you sign or not may ultimately decide whether you win or lose.

Thanks for joining us on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

Jun 29

Estate Planning: Gifting

Welcome to TaxView with Chris Moss CPA Tax Attorney

Estate Planning is hard to talk about.  Do you really want to talk about death and taxes?  But Estate Planning is also about life-your legacy in this life-and the lives of your children and lives of your grandchildren after you are long gone. Not to mention the tax free estate tax reducing gifts you give to all your children while you are living and enjoying life.  Furthermore, with a custom estate plan, your children and grandchildren can be protected in this life, as you perhaps have been protected if your parents had wisely estate planned in their lifetime. A good Estate Plan will not only secure and protect your family from harm’s way, but also prevent you all from being taxed to death by excessive estate tax so high your kids might just have to sell the farm to pay your death taxes. So if you are interested in protecting your family-and your assets-for generations to come, stay with us here on TaxView with Chris Moss CPA Tax Attorney and find out how you all can create the perfect Estate Plan for your family.

Let’s start your Estate Plan with gifting.  You can actual gift assets to reduce your estate tax to each child and grandchildren up to $14K or $28K married each year tax free. But what if you gift over the $28K annual exclusion?  Current law in 2015 allows you a one-time exclusion a $5.43 Million dollar limit in your lifetime-$10.86 Million married.  But be warned: this lifetime exclusion is subject to Congressional reform just about at any time during any administration.  If you gift over the lifetime exclusion you are taxed at 40% on the overage as the Cavallaro family found out in Cavallaro v IRS US Tax Court (2014).

Cavallaro started out in 1979 and grew the company with his three sons into Camelot Systems and Knight Tools both operating out of the same building.  In 1994 Ernst &Young (E&Y) was retained to consider an Estate Plan for Cavallaro.  They suggested a merger of both Knight and Camelot.  Unbeknownst to E&Y, Cavallaro also retained attorneys Hale & Dore of Boston for Estate Planning.  Mr. Hamel of that firm claimed that much of Camelot was already owned by the three sons based on a one-time transfer made in 1987 to the sons in exchange for $1000 from all three sons.

When E&Y found out about Mr. Hamel’s plan, senior partners in E&Y immediately pointed out that the 1987 transfer was at odds with all the evidence and E&Y would not support this tax strategy. Unfortunately for Cavallaro, the attorneys eventually prevailed and the accountants acquiesced. Gift tax returns were filed after the merger showing no taxable gifts and no gift tax liability.

In 1998 the IRS audited the business returns for 1994 and 1995 eventually claiming that gifts from parents to children as a result of the merger were grossly undervalued in the gift tax returns Form 709 filed in those years of the merger.  The IRS issued third party summonses to E&Y.  The tax attorneys filed petitions to quash the summonses fighting all the way to the Court of Appeals for the First Circuit, but eventually lost on all counts.

The Court denied Cavallaro’s motion to quash and ordered the summons enforced as perCavallaro v United States 284 F.3d 236 (1st Cir 2002) affirmed 153 F. Supp. 2d 52 (D. Mass 2001).    As the Court noted there was no attorney client privilege with a CPAs.  Therefore all documents had to be handed over to the Government and the E&Y accountants had to testify in many cases against their client’s best interest in compliance with the Court Order.  Cavallaro appealed in Cavallaro v IRS US Tax Court (2014)  and claimed the gift was at arm’s length. After hearing all the witnesses and reviewing the documents, Judge Gustafson opined that the 1995 merger transaction was notably lacking in arm’s length character, and concluded that the gift was undervalued by Cavallaro.  The Court then ruled that Cavallaro made gifts totally $29.6M in 1995 when the two businesses merged handing Cavallaro a tax bill of $12,889.550.   IRS wins Cavallaro loses.

Another case Estate of Rosen v IRS (2006) brings us to the next key component of gifting: control.  Unless you lose control of the assets you gift, the assets unfortunately still remain in your taxable estate upon your passing.  The facts in the Rosen case are simple.  Her assets were mostly stocks, bonds, and cash.  Her son-in-law formed a family limited partnership in 1996 and the children signed a partnership agreement and a certificate of limited partnership was filed with the State of Florida.  Each of the children were given a .5% interest and the Lillie Investment Trust was formed to own a 99% interest. $2.5 million was transferred from Rosen to the Lillie Investment Trust as consideration for its 99% interest.

It is pharmacy canada cialis known as an alternative medicine to treat erection problems. Such people often retort to buying anti ED medicines were designed to cater at large to older men who were unable to link link super cheap viagra get an erection which is why erectile dysfunction is indeed common in men over forty. Partners of the ED cialis generic mastercard victim also suffer on account of this. Here the test will help determining the cause of the problem is the key to choosing the right viagra france remedy for impotence. What is interesting is the partnership conducted no business and had no business purpose for its existence other than to save taxes.  When Rosen died the IRS audited sending the Estate over a $1 Million tax bill, claiming all the money in the partnership was includable in Rosen’s estate because Rosen controlled until her death the possession or enjoyment of, or the right to the income from the assets. The Estate of Rosen appealed to US Tax Court  inEstate of Rosen v IRS (2006) claiming that Section 2036(a)(1) does not apply because the assets were transferred in a bona fide sale for full and adequate consideration. Alternatively the Estate argued that Rosen did not in fact retain enjoyment or “control” of the assets while she was alive.

Judge Laro observes that the US Tax Court has recently stated, a transfer of assets to a family limited partnership or family limited liability company may be considered a bona fide sale if the record establishes that: (1) The family limited partnership was formed for a legitimate and significant nontax reason and (2) each transferor received a partnership interest proportionate to the fair market value of the property transferred citing the Estate of Bongard v. Commissioner, Estate of Strangi v. Commissioner, Estate of Thompson v. Commissioner, US Tax Court on remand, and Thompson v. Commissioner on Appeal 382 F.3d 367 (3d Cir. 2004)

The Court concluded that the overwhelming reason for forming the partnership was to avoid Federal estate and gift taxes and that neither Rosen nor her children had any legitimate and significant nontax reason for that formation.  In addition Rosen herself used the partnership to pay for her personal expenses all the way up to her death and therefore never truly “gifted” the assets out of her estate.  IRS wins, Rosen Loses.

So how do you safely start gifting so that your assets are permanently out of your taxable estate in a protected Estate Plan?  First create an Estate Plan that has a legitimate business purpose in mind.  Second, make sure you have sufficient assets to live without the Family LLC having to support you.  Third make sure you have transferred control of these assets to your children with properly filed gift tax returns.  Finally, with the help of your tax attorney make sure all transactions are contemporaneously documented with appraisals inserted into the gift and personal tax returns before you file.  When the IRS comes to examine your Estate Plan your children will be happy you did.

Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

Jun 21

IRS Collection Due Process Hearing

Welcome to TaxView with Chris Moss CPA Tax Attorney

Are any of you battling the IRS over a Federal IRS Tax Lien or Levy? If you are in this unfortunate situation it would appear that for you have ignored countless IRS bills, letters and certified letters over a period of perhaps many years. You may think there is nothing you can do now to fight back, but you might have one last chance: you should consider requesting a Collection Due Process hearing (CDP) to temporarily stop enforcement action of a lien, levy or garnishment until your tax attorney puts forth her best “offer in compromise” to settle your tax debts with the Government. So stay with us here on TaxView with Chris Moss CPA Tax Attorney to find out how you can fight back with a CDP hearing and save taxes.

So how does a taxpayer get served with an IRS lien in the first place? One reason could be payroll tax withholding that had not been remitted to the Government. Another reason could be the filing of a tax return with a large amount of tax due but you have no money to pay the tax. Or perhaps you never filed a tax return in the first place and the Government has filed one for you? To make matters worse, you never responded to the IRS letters you received and thereby gave up your right to litigate the substantive issues as to whether or not you owed the tax in the first place. Now you are only left with an IRS lien, levy or garnishment coming your way, and left with only one way to fight back: the CDP hearing. So what is a CDP hearing?

First, your CDP hearing must be before an impartial noninvolved appeals officer. Moosally v IRS US Tax Court (2014). Patricia Moosally never argued that she did not owe payroll tax and penalties. In fact, she consented in 2001 to the Government assessing her almost $50K in penalties back to 2000. Apparently the IRS was unable to collect this tax from Moosally and years later in 2010 Moosally submitted Form 656 Offer in Compromise (OIC)for $200 claiming she had insufficient assets to pay. Moosally and the IRS represented by among others appeals officer Smeck could not come to an agreement so the Government issued her a Federal tax lien in 2011. Moosally asked for a CDP hearing and to Moosally’s surprise there was Ms. Smeck again involved in a minor capacity during the hearing. Unable to resolve the case at the CDP hearing level, Moosally appealed to US Tax Court for relief in Moosally v IRS US Tax Court (2014).

Judge Wells makes clear that pursuant to Section 6321 a notice of Lien must be accompanied by the right to request an appeals hearing to be conducted by an impartial officer or employee of the Appeals office who had no prior involvement with respect to the unpaid tax. Section 6320(a)(3)(B)(b)(1) Moosally argues for a new hearing claiming the appeal was tainted with prior involvement by Ms. Smeck. The Government denied this claim. US Tax Court sided with Moosally concluding that she was entitled to a new CDP hearing before an impartial officer. Moosally wins (at least for another hearing) IRS loses.

Second, your CDP hearing is not about whether or not you owe the tax, but rather whether the IRS has unreasonably rejected your offer in compromise or “settlement” based on your ability to pay the tax. Remember by the time you are being levied attached or garnished, the time to appeal based on the merits to US Tax Court has long vanished 90 days after you were issued a notice of deficiency perhaps years if not many years earlier. All you can do now is to appeal that the Government unreasonably rejected your offer in compromise settlement based on your ability to pay. Which brings us to what is called an “offer in compromise”. The Offer In Compromise is your best chance to settle with the IRS before the liens, levy, garnishments and attachments are issued to your employer, bank, customers and vendors.

Why is the CPD hearing so important? If the IRS unreasonably had rejected your offer in compromise, it is at the CPD hearing that you can have the IRS decision overturned and if you are still not satisfied you can take your case all the way up to US Tax Court. But as Eugene Dinino found out, in Dinino vs IRS US Tax Court (2009) the US Tax Court will not tolerate taxpayers using CPD hearings just to delay the inevitable.

There are certain enzymes acquisition de viagra that stops the man from making the desired erections and that is the enzyme called cGMP which obstructs the penile area to be stiff and achieve erection. Sometimes it can be a lifelong buying viagra online problem but it can be treated. However the major thing is that how to find a sexologist because generally people do not want to talk on this topic again, unless they get a citation and are needed by a judge to visit traffic school. cheap cialis icks.org A http://www.icks.org/html/03_conference.php?seq=22 cheap levitra no prescription quality penis pump will cost you around 100 pounds while a bottle of pills or cream comes for 30-40 pounds. Dinino owed the US Government over $600K in back payroll taxes and penalties from 2000-2004. For many years the IRS sent Dinino many notices including a final “Intent to Levy Notice” in 2008. The levy notice advised Dinino that he could receive a CDP hearing before the IRS office of Appeals. In April of 2008 the IRS received from Dinino’s tax attorney Form 12153 requesting a CDP hearing so he could submit an Offer in Compromise. After almost a year of cancelled appointments and no shows the IRS finally closed the appeal and sustained the levy. Dinino appealed to US Tax Court in March of 2009 claiming he was never granted a CDP hearing and was never allowed to submit an “offer in compromise”.

Judge Gustafson points out that “except when the underlying tax liability is at issue, the Court will review the determination of the Office of Appeals for abuse of discretion, citing Goza v IRS, 114 T.C. 12 (2000)–that is, the Court will decide whether the determination was arbitrary, capricious or without sound basis in fact or law citing Murphy v IRS, 125. T.C. 301 (2005). Affirmed on appeal 469 F.3d 27 (1st Cir 2006). In this case Dinino simply failed to appear to the hearing and failed to participate in various other telephone hearings. Judge Gustafson further opines that Dinino is not guaranteed an “indefinite number of sessions that Dinino unilaterally demands. Finally Judge Gustafson concludes that the appeals officer conducting the CDP hearing was never given an updated Form 433-A providing the Government current adequate financial information. Therefore it was not an abuse of discretion for the appeals office to sustain the levy. IRS wins Dinino loses.

So what does this mean for anyone facing a levy, lien, or attachment? If you face imminent lien or levy or attachment of your wages, your bank accounts or your real estate and other assets, make sure your tax attorney files for the CDP hearing submitting Form 12153 allowing you one more chance to settle with the Government. If you have submitted your Form 433-A for an offer in compromise and made your best offer, and you believe the Appeals decision process has been arbitrary and capricious, by all means appeal to the US Tax Court for relief. Work with the Government towards a fair and reasonable “offer in compromise” to settle your case before the levy, liens and attachments come flying at your vendors, employer and real estate. You will be glad you did.

Thank you for joining Chris Moss CPA Tax Attorney on TaxView.

See you all next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

Jun 06

Marijuana Income Tax Law

Welcome to TaxView with Chris Moss CPA Tax Attorney

There are now four states that have legalized recreational and medicinal use of Marijuana, Colorado and Washington, Oregon and Alaska. The cities of Portland and South Portland in Maine fully legalized marijuana for both medical and recreational use. The District of Columbia has fully legalized recreational and medical marijuana, but recreational commercial sale is currently blocked by Congress. Nineteen (19) other states have legalized Marijuana for medicinal use only. If you are one of many thousands of Americans who will be servicing the Marijuana industry either through growing and farming, distribution, wholesale supply to hospitals and pharmacies, or retail sales to the public, the IRS has a special surprise for you when you file your income tax return. Don’t like surprises form the IRS? Better stay tuned to TaxView with Chris Moss CPA Tax Attorney to find out the latest on the IRS vs Marijuana Court battles, where we are headed, and how best to structure your Marijuana business.

We have previously written about IRS Section 280E in IRS or State Law for Medical Marijuana, which disallows tax deductions for any amount paid in a business dealing in “trafficking of controlled substances” prohibited by Federal law. As of publication of this Article, the only expense that is currently deductible against Marijuana sales is the Cost of Goods of the Marijuana. See California Helping to Alleviate Medical Problems v IRS US Tax Court (2007) (CHAMP) and Martin Olive v IRS US Tax Court (2012). If you are asking why a Marijuana business legally set up under State law is still considered by the IRS as a business dealing in trafficking of a controlled substance you are asking a very good question indeed.

The answer may be soon playing out in Federal Court. In CHAMP Judge Laro of the US Tax Court said “Section 280E and its legislative history express a congressional intent to disallow deductions attributable to a trade or business of trafficking in controlled substances. However another non-tax case has been winding its way through the Federal Courts in US v Schweder, Pickard, et al Federal District Court for the Eastern District of California (2011) questions whether or not 30 years after the enactment of Section 280E Marijuana should still be classified in 2015 as a controlled substance.

The facts of the case or very simple. On October 20, 2011, sixteen individuals were indicted for conspiracy to manufacture at least 1,000 marijuana plants, in violation of 21 U.S.C. §§ 846, 841(a)(1) Mr. Pickard moved to dismiss the indictment in 2013, arguing that the classification of marijuana as a Schedule I substance under the CSA, 21 U.S.C. § 801, et seq., violates his Fifth Amendment equal protection rights and that the government’s allegedly disparate enforcement of the federal marijuana laws violates the doctrine of equal sovereignty of the states under the Tenth Amendment. To prove his case Picard filed a motion for an evidentiary hearing which the Court eventually granted.

After the evidentiary hearing was held Judge Mueller on April 17, 2015 denied Picard’s Motion to Dismiss in a 38 page Order concluding that while “At some point in time, in some Court, the record may support granting such a Motion, having carefully considered the facts and the law as relevant to this case, the Court concludes that on the record in this case, this is not the Court and this is not the time.” Judge Mueller concludes “In sum, the evidence of record shows there are serious, principled differences between and among prominent, well-informed, equivalently credible experts. There are some positive anecdotal reports from persons who have found relief from marijuana used for medical purposes; those reports do not overcome the expert disputes. Consistent with the conclusions other courts have reached, this court finds “[t]he continuing questions about marijuana and its effects make the classification as a controlled substance rational.”
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Judge Mueller further opines that after careful consideration, the court joins the chorus of other courts considering the same question, and concludes as have they that – assuming the record created here is reflective of the best information currently available regarding Marijuana – the issues raised by Pickard are policy issues for Congress to revisit if it chooses, citing United States v. Canori, 737 F.3d 181, 183 (2d Cir. 2013) which upheld the constitutionality of Congress’s classification of marijuana as a Schedule I drug.”. Picard then Moved for Reconsideration on May 6, 2015 and Judge Mueller Denied the Motion last week on June 1, 2015. Will Picard appeal to the US Court of Appeals for the 9th Circuit? Good question.

What does all this mean for anyone planning to run a legal Marijuana business and file a Federal and State income tax return? First, make sure you retain the services of a good tax attorney who will not only file your tax return but represent you before an almost certain audit of your business by the IRS, Be prepared to appeal within the Service and eventually to US Tax Court. Second, be prepared to structure your business to legally maximize your tax deductions through non-Marijuana businesses and to contemporaneously defend this structure to the IRS with sufficient documentation included into the tax return prior to filing. Finally, be prepared to pay a lot of income tax as an owner of a legal Marijuana business, at least until Congress removes Marijuana as a controlled substance from Federal law.

Thank you for joining us on TaxView, with Chris Moss CPA Tax Attorney,

Kindest regards

Chris Moss CPA Tax Attorney

Jun 04

Income Tax is Obsolete Clunker Tax

Welcome to TaxView with Chris Moss CPA Tax Attorney

Remember the cash for clunkers program Congress created in 2009 for your old beat up car. You brought in your clunker car to the dealer and got cash to buy a new car to stimulate the economy? It seems that the 100 year old income tax has become an obsolete “clunker tax” and is not working. The income tax needs to be replaced with a new tax better suited for the 21srt century, a National Sales Tax. Stay tuned to TaxView with Chris Moss CPA Tax Attorney to find out why.

Historically income tax has always been somewhat of a voluntary tax. History shows most Americans when given the choice, choose not to pay. That is why in 1943 with the introduction of the W2 form in just two years revenue collection increased from $7 billion to $43 billion with 60 million Americans added to the tax rolls almost overnight.

Congress realized the power of the W2 with revenue collections as a percent of Gross Domestic Product surging from less than 6% to almost 20%. Unfortunately Americans would fight back against the W2 form. Slowly an underground economy thwarted forced W2 withholding now estimated to total almost $2 Trillion a year in unreported income. Congress fought back as well.
Over the last 30 years there has been an attempt by the Government to “capture” all that underground income by creating the 1099 network of reporting hoping for another W2-like increase in collections as percentage of GDP. The ultimate 1099 program was enacted in 2010 when Congress tried to capture all income from everyone, but Congress soon realized this was impossible to enforce let alone comply with. That law was repealed a year later in 2011.

The fact is that it is impossible in the 21st century to capture all income from 1099s unless the IRS audits everyone. The solution? An involuntary national sales tax, taxed at the source of each purchase at the same time state sales tax is collected. Easy, simple and very effective. But just in case you’re not convinced yet that a voluntary income tax does not work in the 21st century, there’s more: Identify theft, a 21st century crime is further eroding income tax collections.

The Government is losing at least $6 billion a year to identity theft as organized crime has moved its operations from drug dealing to identity theft. John Koskinen, the Commissioner of the IRS has recently commented that he has heard from police that “street crime is down because everybody is now filing false IRS returns”. Add identity theft to the underground economy and the IRS is unable to collect enough money each year to allow America to pay its bills. Further add additional tax revenue being lost to off shore illegal tax shelters and you have the triple crown of tax evasion: Underground economy, identify theft, and offshore tax shelters. No wonder our National Debt is dramatically approaching the unthinkable $20 Trillion level.
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A National Sales Tax might just wipe out the Underground economy as well as drive organized crime out of the United States Treasury. As an added benefit, all off shore money would soon return home and many if not all tax shelters would disappear back to the 20th century where they belong. If Congress were bold enough to embark on a 21st century solution to increase revenue collection, perhaps annual deficits would be wiped out as well. Could the dramatic rise in collections as a percent of GDP from 1943 be recreated in 2015 with a National Sales Tax?

I don’t know about you all, but I don’t want to see our Government cut services to Americans, including our military, just because Congress does not have the courage to see that the income tax has become a “clunker tax”. If you all believe that the income tax is now an obsolete clunker, let your elected representatives know how you feel. Perhaps House Ways and Means and Senate Finance can best serve America by creating a new tax better suited for the 21st century rather than trying to reform a 100 year old clunker.

Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView with Chris Moss Tax Attorney CPA

Kindest regards
Chris Moss CPA

May 17

IRS Whistleblower

Welcome to TaxView with Chris Moss CPA

Do you know someone is defrauding the US Government by filing a false federal tax return? For example suppose you know about a group of perpetrators who are using identity theft to file hundreds of false tax returns and illegally collecting Millions of dollars of bogus refunds. Are you unconvinced or cynical that this could be happening? The fact is that Identity Theft has grown so lucrative that John Mica, (R Florida) says “Drug dealers are turning to IRS identity theft because it’s less risky and more lucrative”. Perhaps you might discover other tax crimes being committed by neighbors or co-workers hiding assets and taxable income offshore, or better yet not reporting income at all by simply not filing tax returns. Do you become a Whistleblower against these folks? But not so fast your wife says. She asks you to consider the safety and the protection of your family against retaliation before moving ahead with a Whistleblower claim? Good question right? So if you are you interested in finding out more about Whistleblowing, IRS style stay tuned to TaxView with Chris Moss CPA to get all the answers on IRS Whistleblowing, whether it is safe to participate for you and your family, and finally, at the end of the day does Whistleblowing really pay.

Just so you know the Government has had a Whistleblower Law on the books for over 100 years. The Secretary of the Treasury as early as 1867 was authorized to pay anyone for information leading to conviction of persons guilty of tax fraud. But it was not until 2006, through an enhanced Whistleblower program created in Section 7623 by the Health Care Act of 2006, that the US Tax Court was given jurisdiction to hear disputes between the Whistleblower and the IRS. Furthermore, it was not until about 2012 that taxpayer Whistleblowers started fighting back in US Tax Court to litigate adverse determinations of their awards. Fast-forward to 2015 and a review IRS Manual Part 25 Special Topics Chapter 2 Whistleblower Awards shows us a massive amount of very good and informative information on the Whistleblower program but no information on currently pending US Tax Court cases. But what about confidentiality and protection of your family?

Section 25.2.2.11 “Confidentiality of the Whistleblower”indeed claims that the Government will protect the identity of the Whistleblower as a “confidential informant” to the “fullest extent permitted by law”. But the Treasury Department in its own 2013 Report to Congress has doubts that there is sufficient protection. Specifically Treasury reports “…Unlike other laws that encourage Whistleblowers to report information to the Government, Section 7623 does not prohibit retaliation against the IRS Whistleblower…” Furthermore, if you decide to become a Whistleblower and you are an essential witness in a judicial proceeding it may not be possible to pursue the investigation or examination without revealing your identity.

Does the Whistleblower have any recourse if their claim is unreasonably rejected? If the Government will not move forward and pay you unless your reveal your identity, you can always petition the US Tax Court for a “Protective Order” to seal the record or in the alternative proceed anonymously while you dispute the Government’s position. In Whistleblower 14106 vs IRS, US Tax Court (2011), the Court sided with the Government on the dismissal of the claim, but Judge Thornton said that “Petitioner’s request to seal the record or proceed anonymously presents novel issues of balancing the public’s interest in open court proceedings against Petitioner’s privacy interests as a confidential informant. The Court noted that Section 7623 does not expressly address privacy interests of tax whistleblowers. But the US Tax Court has observed in US Tax Court 130 T.C. 586 that in appropriate cases the Court “might” permit a petitioner to proceed anonymously and might seal the record as well. The Court in Whistleblower 14106 did in fact under Section 7461(b)(1) and Rule 103(a) grant the Petitioner the right to proceed anonymously as a Whistleblower but denied the Petitioner the right to seal the record in order to preserve the case for the public’s ability to follow the proceeding, including I might add, my ability to insert the facts of the case into this article. Judge Thornton then ordered the parties to redact from the record all names and any identifying formation regarding the Petitioner. Taxpayer wins on anonymously proceeding and IRS Wins on dismissal.

Now that we know you can proceed anonymously if the IRS does not pay you, we now ask what it takes to win as a Whistleblower in US Tax Court. In other words at the end of the day if the IRS denies you compensation, what are your odds of getting paid by appealing to US Tax Court?
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First some statistics: According to the Tax Executives Institute in 2012 there were 8,634 Whistleblower cases filed, 128 awards granted totaling over $125M leading to taxes collected of over $592M—a 21% return for the lucky whistleblowers whose claims were accepted by the Government on the funds they all brought in to the US Treasury. But there were also 8,506 Whistleblower cases in 2012 which are either still pending, or were dismissed. At the same time, there has been a materially significant increase of US Tax Court Whistleblower cases that are being litigated. So let’s take a look at what is going on in US Tax Court on some of these pending cases.

In Kenneth William Kasper v IRS US Tax Court (2011), the IRS denied Kasper’s Whistleblower claim determining that the information Kasper provided did not meet the criteria for an award. Kasper appealed to US Tax Court in Kasper vs IRS US Tax Court (2011). The IRS moved for motion to dismiss for lack of jurisdiction claiming that Kasper did not appeal within the 30 day statute. Judge Haines sides with Pro Se Whistleblower Kasper holding that the 30-day period of Section 7623(b)(4) begins on the date of mailing or personal delivery of the adverse determination sent to his last known address. The IRS could not prove that such a mailing had been delivered so IRS loses, Kasper wins round one. The case is now hopefully proceeding to trial to eventually be decided on its merits.

So what does all this say about your chances of winning a Whistleblower award? Of all the 8634 of claims filed in 2012 only 128 were accepted. If you feel your claim has been unreasonably rejected you at least now have the right to proceed to US Tax Court. While there has been a large group of recent US Tax Court Whistleblower cases winning preliminary jurisdictional issues, including the right of Whistleblowers to remain anonymous, it remains to be seen whether or not these same Whistleblowers will eventually win in US Tax Court on the merits of their claims. Stay tuned to TaxView in 2016 with Chris Moss CPA when we will revisit the Whistleblower claims that are winding their way through US Tax Court to ultimately answer whether or not it pays to be an IRS Whistleblower. See you all next time on TaxView.

Kindest regards,

Chris Moss CPA