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Requirements For NOL Carryforward Utilization Surviving Scrutiny in IRS Examination

Joe and Mary operate a closely held business that generates a net operating loss in 2005 and 2007. The net operating loss from 2005 and 2007 are carried forward and are used to offset business income on Joe and Mary’s 2015 tax return. Joe and Mary’s 2015 tax return is selected by the IRS for examination. The first IRS information document request (“IDR”) includes a request for a copy of the 2005 and 2007 tax return, along with substantiation for the 2005 and 2007 loses. Do Joe and Mary have to comply with this request? General Statute of Limitations Generally, the statute of limitations for a tax return is three years from the date of filing the return or the date the tax return is [...]

November 20th, 2017|

U.S.-Israeli Dual Citizen Denied Foreign Earned Income Exclusion Because “Tax Home” Is In U.S.

In Hirsch v. Commissioner (here) the Tax Court held that the taxpayer’s “tax home” for purposes of  the foreign earned income exclusion (I.R.C. section 911) was in the New York metropolitan area, despite the fact that the taxpayer resided in Israel, because regulatory restrictions on his professional practice limited his ability to communicate with clients while working in Israel. As a result, the taxpayer, a duel U.S.-Israeli citizen, was not able to utilize the foreign earned income exclusion on his personal U.S. federal income tax return. Tax Home and Foreign Earned Income Exclusion Generally, the foreign earned income exclusion provides U.S. expatriates with an opportunity to exclude foreign earned income from federal income tax while living abroad.[1] The exclusion has several statutory requirements, one [...]

March 15th, 2017|

Tax Court Rejects Taxpayer’s Reasonable Cause Argument Regarding Automatic Penalties from Failure to File Forms 5471

Flume v. Commissioner (here) revolved around one noteworthy issue: did the taxpayer’s reliance on the advice of his tax return preparer spare the taxpayer from $110,000 in penalties for the taxpayer’s failure to report foreign investments on Form 5471? The taxpayer argued that he relied on the expertise of his tax return preparer to guide him to prepare the necessary forms. The IRS argued that the taxpayer could not escape penalties because the taxpayer failed to advise the tax return preparer of his foreign investments. Brief Summary of Facts The taxpayer is a U.S. expat living in Mexico and owned a majority interest in a Belizean corporation and a Mexican corporation.[1]  From 2001 to 2008 the taxpayer did not tell [...]

March 10th, 2017|

Goldsmith v. Commissioner: Can An Owner of A Personal Service Based S Corporation Take Distributions Without Also Taking a Salary?

In Goldsmith v. Commissioner, T.C. Memo. 2017-20 (link) the Tax Court held that the payments from the shareholder’s S corporation were not wages. The Tax Court reasoned that the payments to the taxpayer constituted a non-taxable return of capital. The court reached this conclusion even though the taxpayer did not draw a salary for the years in question. Background: The taxpayer was an attorney that left the relative safety of a stable law firm to establish his own practice. The law firm was established as an S corporation, which had up to 4 associates at one point. The taxpayer experienced some early success, but his practice was ultimately unprofitable. As a result, the taxpayer got behind on his payroll taxes obligations. To make ends meet, [...]

February 18th, 2017|

Shaffran v. Commissioner: Tax Court Rejects IRS’s “De Facto Officer” Argument in TFRP Case

The taxpayer in Shaffran v Commissioner, T.C. Memo. 2017-35 (link) was not an owner, officer, or employee of a restaurant that got behind in its federal payroll taxes. Yet, the IRS still attempted to assert the Trust Fund Recovery Penalty ("TFRP") against the taxpayer under the theory that he was a “de facto officer”. How does one become a "de facto officer" for purposes of TFRP investigation? The IRS argued that he became a de factor officer by signing four checks and writing out several others for the business’s manager’s signature. This is despite the fact that the taxpayer did not have check signing authority and he was not an owner, officer, or employee of the business. Fortunately, the Tax Court rejected this argument and [...]

February 16th, 2017|

Tax Court: CalPERS Pension Plan Not an “Asset” for Section 108 Insolvency Calculation

Takeaway: When calculating insolvency for purposes of the insolvency exclusion of cancellation of indebtedness income, a pension plan may or may not be considered an “asset”.  The determination depends on whether the taxpayer has an ability to utilize the equity in the pension plan (e.g., through a lump-sum distribution, loan, sale, etc.) as a means for paying a tax liability from the cancellation of indebtedness. In Schieber v. Commissioner, T.C. Memo. 2017-32 (link), the Tax Court held that the taxpayer did not have to include the value of his pension plan with CalPERS as an asset in calculating insolvency under § 108(b) because the taxpayer’s interest in the pension plan could not be used to immediately pay the income tax on canceled debt income. Law [...]

February 9th, 2017|

Maryland’s Sales Tax Holiday for Qualifying Energy Star Appliances Returns For 2017

From Saturday, February 18, through Monday, February 20 (i.e., Presidents’ Day Weekend), consumers will not pay the state’s 6% sales tax on qualifying ENERGY STAR appliances.  In order to be exempt the item must both be a “qualifying item” and bear the Energy Star label. Per the Comptroller’s website (link), the following types of products bearing the Energy Star label will qualify: Air conditioners, Washers and dryers, Furnaces, Heat pumps, Boilers, Solar water heaters (tax-exempt at all times now), Standard size refrigerators, Dehumidifiers, Programmable thermostats, Compact fluorescent light bulbs, and Light-emitting diode (LED) light bulbs. The Comptroller’s flyer states that the following items are NOT included: Wine and dorm-sized refrigerators, microwaves, dishwashers, stoves, windows, and doors and other building materials. [...]

February 2nd, 2017|

Basis in Partnership Interest: Is your word good enough to support a loss deduction?

In Namen v. Commissioner[1], the taxpayer was a podiatrist in private practice. He was one of 6 members of an LLC that operated a surgical center, which closed in 2009. For federal income tax purposes, the LLC was treated as a partnership. The taxpayer claimed a loss on his personal 2009 income tax return from his interest in the LLC, but the IRS denied the deduction on the grounds that the taxpayer lacked inadequate basis in his partnership interest. The Tax Court provided this background: Section 704(d) limits the deductibility of a partner’s distributive share of partnership losses. Those losses are deductible only to the extent of the adjusted basis of a partner’s interest in the partnership. Id.; Sennett v. [...]

January 31st, 2017|

Form is Critical: IRS Cuts Down Broker’s FICA S Corp Planning

Takeaway: While S corporations can be an effective means to reduce FICA taxes, the form of the arrangement must be consistent with the taxpayer’s intended reporting position(s). The S corporation, not the S corporation’s employee-shareholder, must be in control of the receipt of income in order shift income from the shareholder’s personal income tax return to an S corporation. After the fact tax planning to shift income to an S corporation by utilizing Schedule C with “reported on” or nominally including income reported to the shareholder on Form 1099 but zeroing out the income out with a deduction or expense could easily fail if challenged by IRS. Background The taxpayer in Fleischer v. Commissioner[1] is a financial consultant, who develops investment portfolios for clients. The taxpayer [...]

January 24th, 2017|

IRS Releases Notice 2015-82, Increases De Minimis Safe Harbor Limit

On Tuesday November 24, 2015, the IRS released Notice 2015-82 (the “Notice”). The Notice increased the de minimis safe harbor limit, for businesses without “applicable financial statements”, from $500 to $2,500. As a result of the Notice, many small businesses will now be able to expense certain items that would have otherwise been depreciated over a number of years. The de minimis safe harbor is an annual election that merely establishes a minimum threshold below which all qualifying amounts are considered deductible. The final tangible property regulations, including the de minimis safe harbor limit, applies to tax years beginning on or after January 1, 2014. Prior to the release of the Notice, the initial limit was only $500. The new $2,500 limit in the Notice [...]

November 25th, 2015|