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Respecting Corporate Formation: Rochlani v Commissioner

Overview How can a corporation have a loss for tax purposes if it does not have any bank accounts, credits cards, or other lines of credit and it does not keep any books or records? The taxpayers in Rochlani v Commissioner found out the hard way.[1] Business Formation and Operations In 2006, Mr. Rochlani (the “Taxpayer”) started Ultimate Presale, which was a business that bought and resold sporting, concert, and other tickets.  Without the Taxpayer’s knowledge, his son--a minor at the time--used an online legal service to incorporate Ultimate Presales under Michigan law. As a result of the incorporation, the state sent the Taxpayer documentation on his new corporation. Although the taxpayer had not initiated the process, he did not seek to stop or unwind [...]

November 23rd, 2015|

Easy, Partner: Becoming a Tax Partnership by Adding a New Member to a Single Member LLC

This post is a primer on the federal income tax effects of adding a new member to a limited liability company (“LLC”) that goes from a single member limited liability company (“SMLLC”) to a two member LLC.  These effects include the conversion of the LLC being treated as a disregarded entity (“DRE”) to a partnership for federal income tax purposes. I will also highlight some related issues that will be discussed in subsequent posts. Sample Fact Pattern: Assume that in 2013 Clint contributes $35,000 in cash to a newly formed LLC to operate a small service business.[1] As a result of the contribution, the LLC only has one member (i.e., a single member LLC; SMLLC). With the contributed cash, the LLC then purchases office equipment [...]

July 27th, 2015|

Counting Travel Time for Real Estate Professional Test? Leyh v. Commissioner

Overview In Leyh v. Commissioner[1], the Tax Court held that the taxpayer’s time incurred while traveling from her home to rental properties to perform a variety of tasks with respect to 12 rental activities counted towards the test of whether the taxpayer was a real estate professional.[2] As a result, the taxpayer was considered a real estate professional, which excepted her rental activities from the per se passive activity treatment for rental activities of non-real estate professionals.[3] Give the relatively small number of cases on whether travel time can be counted for real estate professional test, Leyh is a favorable case for taxpayers and it provides some guidance on how taxpayers may be able to withstand similar IRS challenges.[4] Facts: Taxpayer’s Real Estate Related Activities [...]

May 23rd, 2015|

Bacon v. Commissioner: Beware, Forms 1099-C Are Not Always Accurate

Overview The Tax Court determined that the extinguishment of the taxpayer’s debt took place in a closed tax year, even though FEMA issued a 1099-C[1] in an open tax year. As a result, the Tax Court held that the IRS was barred by the statute of limitations from assessing the taxpayer for the federal income tax on cancellation of indebtedness income (“COD income”). Takeaway Determining the timing and amount, if any, of COD income can be a very complex analysis.[2] Institutions, including banks and federal agencies, issuing Form 1099-C do not always get the analysis right. As a result, if you receive a Form 1099-C, you should have a discussion with your tax adviser to make sure that the amount and timing of the COD [...]

March 11th, 2015|

DMA v. Brohl: US Supreme Court Holds In Favor of DMA

Overview On Tuesday March 3, 2015, the Supreme Court handed down a unanimous decision in favor of the Direct Marketing Association, (“DMA”) in DMA v. Brohl (575 U.S. ____ )(March 3, 2015) and remanded the case back to the Tenth Circuit for further consideration. Although the decision did not come as a surprise, dicta in Justice Kennedy’s concurring opinion called into question the Supreme Court’s 23-year old holding in Quill Corp. v. North Dakota. Takeaway The Supreme Court’s holding likely suggests that the Tax Injunction Act (“TIA”) is not a bar to federal jurisdiction for certain challenges to state’s pre-assessment, information-reporting statutes, even if challenge would inhibit state tax assessments. DMA v. Brohl Procedural Posture The DMA brought suit against the Colorado Department of Revenue [...]

March 10th, 2015|
  • Vacation Home

When is a Building Placed in Service: Stine LLC v. USA

Is it possible to begin depreciating a building before the building opens its doors to customers? Although it seems unintuitive, the answer is yes. In the case of Stine LLC v. USA [1], a Louisiana federal district court held that the taxpayer’s retail building had been “placed in service” despite the fact that the retail stores had not yet open for business.  As a result, the taxpayer’s buildings were judged to be “placed in service” prior to 12/31/2008 and the taxpayer could therefore claim a deduction for 50% “Go Zone” incentive depreciation.[2]  General rule Generally, assets are “placed in service” when asset is in a “condition or state of readiness and availability for a specifically assigned function, whether in a trade or business, in the [...]

March 2nd, 2015|

IRS Memo Explains that Not All LLCs Are Exempt from Section 6041

Brief Background All persons engaged in a trade or business who, in the course of that trade or business, make payments of $600 or more to another person are required to report the payments to the IRS under section 6041 (e.g., Form 1099-MISC).[1] There are, however, exemptions under Treasury regulations.[2] Notably, returns of information are not required under section 6041 for payments made to a "corporation described in § 1.6049-4(c)(1)(ii)(A)."[3] Sometime individuals get confused and believe that LLC stands for “limited liability corporation.” As a result, they believe that LLCs are therefore exempt from information reporting. Recent Guidance On Friday November 21, 2014, the IRS released ILM 201447025, which succinctly clarifies that limited liability companies (LLCs) that have not elected to be classified as a [...]

November 23rd, 2014|
  • Vacation Home

Tax Court Analyzes How to Count Travel Days for Purposes of Section 280A

Takeaway from Van Malssen v. Commissioner: In Van Malssen v. Commissioner, the Tax Court concluded that, for purposes of section 280A, travel days will only escape classification as personal use days if the principal purpose of the trip as a whole is to perform repairs and maintenance.[1] Overview of Facts in Van Malssen The taxpayers purchased a vacation condominium in South Carolina in 2007 and spent a significant amount of time from 2008 through 2010 remodeling and repairing the property. Since the vacation property was 350 miles from the taxpayers’ home, the taxpayers took a number of overnight trips to the vacation property. Some of the trips were exclusively business related (i.e., to repair and remodel the property). However, some of the trips were solely for personal [...]

November 22nd, 2014|

IRS Released Field Advice Memorandum on Ording of ATNOL and WHBAA ATNOLs

On October 17, 2014, the IRS released a field memorandum, FAA 20144201F, that discusses the ordering rule to be applied for the application of alternative tax net operating losses ("ATNOLs") deduction to offset corporate alternative minimum taxable income ("AMTI") when the taxpayer has made The Worker, Homeownership, and Business Assistance Act of 2009 – Section 13 5-year Net Operating Loss (NOL) Carryback ("WHBAA election") with respect to either 2008 or 2009 NOLs. Generally Oldest NOLs are Used to Offset a Max of 90% of AMTI Generally, NOLs are deducted against current income in order of the year in which the NOL is generated. Thus, a taxpayer's oldest NOLs are utilized first.  This same rule is generally applied to ATNOLs offseting AMTI. However, the use of ATNOLs is generally capped [...]

October 20th, 2014|

8th Circuit Reverses Tax Court and Holds CRP Payments Not Subject to SECA

On Friday October 10, 2014, the U.S. Court of Appeals for the 8th Circuit overturned the Tax Court’s decision in Morehouse v. Commissioner and held, in a two-to-one decision, that CRP payments made to non-farmers constitute rentals from real estate for purposes of § 1402(a)(1) and are excluded from the self-employment tax (“SECA”).[1] What is the CRP? Established in 1985 under the Regan Administration, the Conservation Reserve Program (CRP) is a voluntary conservation program for land that has been used for farming or ranching. The long-term goal of the program is to re-establish valuable land cover to help improve water quality, prevent soil erosion, and reduce loss of wildlife habitat. The CRP offers owners of environmentally sensitive land the option to enter into a 10 [...]

October 14th, 2014|