Wednesday, June 29, 2011
Robin and Terry Tying the Knot ?
If you want the details of Robin and Terry's nuptials, you'll have to go to my new blog on Forbes. I still haven't gotten the call from Ellen, but it can't be long now. I will keep posting on this site, but at a reduced frequency as I focus on the Forbes platform. Please check it out.
Gifts of California Real Estate - Who's Gonna Know ?
IN RE: DOES, Cite as 107 AFTR 2d 2011-XXXX, 05/20/2011
I remember the first tax course I ever took. It was at Qunisigamond Community College. The instructor was an attorney and he told a story about a client coming on a large pile of cash in his deceased father's house. The clients attitude was "Who's gonna know ?". I forget the rest of the story except that is didn't have a happy ending. As technology improves, there will be more and more ways that they are "gonna know". The IRS lost this skirmish, but it should be a heads up to people who have made transfers of real estate for less than full consideration.
The essence of the case is pretty well summed up in the John Does who are being defended:
United States taxpayers, who during any part of the period January 1, 2005, through December 31, 2010, transferred real property in the State of California for little or no consideration subject to California Propositions 58 or 193, which information is in the possession of the State of California Board of Equalization, sent to BOE by the 58 California counties pursuant to Propositions 58 and 193.
The IRS has recently realized “a pattern of taxpayers failing to file Forms 709” for real property transfers between non-spouse related parties. The IRS has thus launched a “Compliance Initiative” to investigate those taxpayers who have failed to file Forms 709. As a part of this Compliance Initiative, the government has sought to capture data from states and counties regarding real property transfers taking place between non-spouse family members for little or no consideration during the period of January 1, 2005, through December 31, 2010.
Increases in California property taxes are limited to 2% per year unless there is a transfer of the property. If the transfer is to a child or a grandchild it does not count and will not trigger a reassessment. In order to qualify for this treatment you need to file a form either BOE-58-G or BOE-58-AH, which you can get from your assessors office. Sometimes it can be downloaded. The existence of these forms is pretty convenient for the IRS because they think that maybe if you filed one of them then maybe you should have filed Form 709, which also can be downloaded, but I suggest that you might want to use a professional.
California has argued that their privacy laws prevent them from just turning the forms over to the IRS. It all gets kind of lawerly from here. The short answer is that the Court has initially refused to enforce the John Doe summons against the state because the IRS has not shown that it can't gather the information in some other way. The denial is without prejudice so they may be back.
The lawyerly stuff actually sounds pretty interesting :
It bears mention here as well, however, that, should the United States choose to renew its Petition, this Court has serious concerns about the fact that the United States seeks to utilize the power of a federal court to sanction the issuance of a John Doe Summons upon a state. Indeed, the Court's own review of the case law has revealed no other circumstances on par with the United States' current request. As such, prior to resubmitting the Petition, the United States is cautioned that it must address, inter alia, the following issues:
(1)) Whether a state is a “person” as that word is used in 26 U.S.C. §§ 7602(a) and 7609(f);
(2)) Whether a state's sovereign immunity precludes issuance of a John Doe Summons;
(3)) Whether, assuming a state is subject to the Court's power to issue a John Doe Summons, the United States must exhaust all administrative remedies prior to proceeding in federal court; and
(4)) Whether the United States should be required to attempt to pursue any and all state court remedies prior to seeking relief in federal court.
The Government is strongly advised to be thorough in any future briefing since it will be asking this Court to make a decision ex parte without the benefit of any similar briefing from the state.
The practical take away to me though is that it might be a good idea to see if you kinda of sorta forgot to file the gift tax return because you were so busy with those complicated forms the assessor wanted. Before long, one way or the other, I think they are "gonna know".
I remember the first tax course I ever took. It was at Qunisigamond Community College. The instructor was an attorney and he told a story about a client coming on a large pile of cash in his deceased father's house. The clients attitude was "Who's gonna know ?". I forget the rest of the story except that is didn't have a happy ending. As technology improves, there will be more and more ways that they are "gonna know". The IRS lost this skirmish, but it should be a heads up to people who have made transfers of real estate for less than full consideration.The essence of the case is pretty well summed up in the John Does who are being defended:
United States taxpayers, who during any part of the period January 1, 2005, through December 31, 2010, transferred real property in the State of California for little or no consideration subject to California Propositions 58 or 193, which information is in the possession of the State of California Board of Equalization, sent to BOE by the 58 California counties pursuant to Propositions 58 and 193.
The IRS has recently realized “a pattern of taxpayers failing to file Forms 709” for real property transfers between non-spouse related parties. The IRS has thus launched a “Compliance Initiative” to investigate those taxpayers who have failed to file Forms 709. As a part of this Compliance Initiative, the government has sought to capture data from states and counties regarding real property transfers taking place between non-spouse family members for little or no consideration during the period of January 1, 2005, through December 31, 2010.
Increases in California property taxes are limited to 2% per year unless there is a transfer of the property. If the transfer is to a child or a grandchild it does not count and will not trigger a reassessment. In order to qualify for this treatment you need to file a form either BOE-58-G or BOE-58-AH, which you can get from your assessors office. Sometimes it can be downloaded. The existence of these forms is pretty convenient for the IRS because they think that maybe if you filed one of them then maybe you should have filed Form 709, which also can be downloaded, but I suggest that you might want to use a professional.
California has argued that their privacy laws prevent them from just turning the forms over to the IRS. It all gets kind of lawerly from here. The short answer is that the Court has initially refused to enforce the John Doe summons against the state because the IRS has not shown that it can't gather the information in some other way. The denial is without prejudice so they may be back.
The lawyerly stuff actually sounds pretty interesting :
It bears mention here as well, however, that, should the United States choose to renew its Petition, this Court has serious concerns about the fact that the United States seeks to utilize the power of a federal court to sanction the issuance of a John Doe Summons upon a state. Indeed, the Court's own review of the case law has revealed no other circumstances on par with the United States' current request. As such, prior to resubmitting the Petition, the United States is cautioned that it must address, inter alia, the following issues:
(1)) Whether a state is a “person” as that word is used in 26 U.S.C. §§ 7602(a) and 7609(f);
(2)) Whether a state's sovereign immunity precludes issuance of a John Doe Summons;
(3)) Whether, assuming a state is subject to the Court's power to issue a John Doe Summons, the United States must exhaust all administrative remedies prior to proceeding in federal court; and
(4)) Whether the United States should be required to attempt to pursue any and all state court remedies prior to seeking relief in federal court.
The Government is strongly advised to be thorough in any future briefing since it will be asking this Court to make a decision ex parte without the benefit of any similar briefing from the state.
The practical take away to me though is that it might be a good idea to see if you kinda of sorta forgot to file the gift tax return because you were so busy with those complicated forms the assessor wanted. Before long, one way or the other, I think they are "gonna know".
Monday, June 27, 2011
Let That Whistle Blow
CCA 201117033
The IRS is very careful about disclosing confidential information but if you insist that they correspond with you in prison, it's on you that the warden gets to see your tax troubles. Chances are you are not a prime candidate for identity theft.
Subject: RE: ———————-You could continue to send mail to his home address, since it obviously is forwarded to his current “residence.” You could also ask him, in a letter, where he would prefer that you send mail to him. If he lists his current abode, then send it there. We can assume that he knows that some, if not all, of his mail is opened by the authorities. There would be no disclosure violation for using the address that he requests. ————————
COLEBROOK?EL v. IRS, Cite as 107 AFTR 2d 2011-XXXX
The Plaintiff, Noble Roderick Colebrook–El, alleges that Defendants, Internal Revenue Service's (“IRS”) and its agents, Debra Hurst and Beth Jones's, attempt to collect his federal tax debt violated his Constitutional rights, the Moroccan Treaty, and several other Acts of Congress. The factual allegations contained in the Complaint, titled “Affidavit and Petition and Injunction and Order of Protection,” are at times indiscernible and largely irrelevant to the issues in this case. Plaintiff appears to allege that the IRS, a federal “corporate” agency, lacks the requisite statutory authority to collect taxes from him due to his status as a United States citizen who is a Moor of Cherokee descent. Plaintiff owes $19,566.36 in unpaid taxes. Plaintiff seeks to enjoin the IRS from collecting the taxes owed, to have any and all levies lifted, and to be reimbursed for all court costs associated with this action.
It's always interesting to learn something new. I thought that this protester was totally off the wall claiming tax exemption as a "Moor of Cherokee descent". Silly me. There is actually is such a group of people. They are descendants of African Americans held as slaves by the Cherokees. There is a fairly recent controversy about whether members of the group should be considered tribal members. Here is something on that. So this guy is no further off the wall than most protesters and sheds some light on a neglected area of American history. He still has to pay taxes, though.
Murray S. Friedland v. Commissioner, TC Memo 2011-90 This is one of those cases that is interesting for the cautionary tale included in the story behind the story. Mr. Friedland was appealing his denial of a Whistleblower award.
Petitioner, a CPA, submitted a Form 211, Application for Award for Original Information (whistleblower claim), to respondent's Whistleblower Office (Whistleblower Office) in September 2009 concerning alleged violations of the Internal Revenue Code. He alleged that Lawjoy Realty Corporation (Lawjoy) and 601 West 149th Street, Inc. (West 149th), both C corporations, failed to pay millions in Federal corporate income taxes by impermissibly treating real property sales as stock sales in a corporate liquidation. He asserts that the structure of the sales was a sham and solely motivated to evade income taxes. Petitioner appears to have been a shareholder of both Lawjoy and West 149th.
This adds a new wrinkle to tax planning. Mr, Friedland was presumably a minority shareholder in these companies, since some of the tax burden would somehow come out of his share. It happens that Mr. Friedland was unsuccessful, but the IRS did recently award 4.5 million to an accountant who turned in his employer. I find the whole concept extremely distasteful but I think that in planning transactions that are at all aggressive it would be wise to keep out of the loop anyone who is not ethically bound to non-disclosure.
Bruce A. Brown, et ux. v. Commissioner, TC Memo 2011-83
This is another sad life insurance story. Although life insurance is often thought of in the context of estate taxes, it is really not different than any other asset when it comes to transfer taxes. Good planning will structure it so that it is not owned by the decedent keeping the build up in value out of her estate. Any appreciating asset owned outside an estate produces the same benefit. The connection to estate taxes is that the policy provides liquidity at just the right moment. Life insurance is a tax favored vehicle for income tax purposes though. Any build-up in value is tax deferred and proceeds payable by reason of the death of the insured are not taxable income. People figure out ways to use life insurance policies to create income tax problems for themselves though. Usually it has to do with policy loans. This was one of those cases.
In total Mr. Brown paid $44,205 in premiums: $11,999 by check, $28,532 by loans, and $3,674 by dividends.
Northwestern's Computation of Taxable Gain
Northwestern sent Mr. Brown a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. The Form 1099-R showed a gross distribution of $37,365.06 and a taxable amount of $29,093.30. The Form 1099-R described the $37,365.06 as “loans repaid at surrender” and described the $29,093.30 as “taxable amt. at surrender”.
According to Northwestern's calculations, the $29,093.30 taxable amount was equal to the policy's cash value of $37,365.06 minus what it called “net cost” of $8,271.76. Net cost was calculated as “total premiums” (the premiums paid by loans, $28,532; by checks, $11,999; and by dividends, $3,674) minus what Northwestern called “total dividends” (in which Northwestern included the $2,986.94 dividend payment to Mr. Brown in 2004, the $31,063.30 received by Mr. Brown on surrender of the paid-up additional insurance in 2004, and the $1,883 dividend payment to Mr. Brown in 2005).
Mr. Brown prepared the Browns' return, which did not report any income from terminating the life insurance contract. Before filing the return, he consulted Mrs. Brown about the Form 1099-R. They believed that Northwestern based its report that Mr. Brown had a $29,093.30 taxable gain on the theory that a debtor has a taxable gain when a creditor cancels a debt. They believed Northwestern was incorrect because Northwestern had not forgiven Mr. Brown's debt. Having concluded that Northwestern analyzed the termination of the policy incorrectly, the Browns made no further attempt to determine the proper tax treatment of the transaction.
Incidentally the Browns are both attorneys and Mrs. Brown has an LLM in taxation.
As I read the case the numbers get a little confusing. It seems pretty clear that the Browns never actually received any money. The problem was the interest:
The policy allowed Mr. Brown to borrow from Northwestern against the policy's cash value. The policy labeled these loans “premium loan[s]” if they were applied to policy premiums or “policy loan[s]” if they were used for anything else. Both types of loans accrued interest at an annual effective rate of 8 percent. If unpaid, the interest was capitalized, meaning Northwestern added accrued interest to principal. ........
By 1997 the annual interest accrual exceeded the premium; by 2002, it was twice the premium.
The interest which was being paid with policy loans did not add to basis. It was a non-deductible expense. That is how you can use an insurance policy to manufacture phantom taxable income for your self. As a counterfactual to this scenario it would be interesting to look at what it would have cost the Browns to have had a term life insurance policy of $100,000 for 23 years (Actually in the later years their net death benefit would have been less than $70,000). My guess is that it would have been a bit less than the $12,000 of actual cash outlay they had on this policy. Maybe half. And there would have been no phantom income when they decided the policy wasn't needed anymore.
To add insult to injury, the Brown's got hit with an accuracy related penalty.
The IRS is very careful about disclosing confidential information but if you insist that they correspond with you in prison, it's on you that the warden gets to see your tax troubles. Chances are you are not a prime candidate for identity theft.
Subject: RE: ———————-You could continue to send mail to his home address, since it obviously is forwarded to his current “residence.” You could also ask him, in a letter, where he would prefer that you send mail to him. If he lists his current abode, then send it there. We can assume that he knows that some, if not all, of his mail is opened by the authorities. There would be no disclosure violation for using the address that he requests. ————————
COLEBROOK?EL v. IRS, Cite as 107 AFTR 2d 2011-XXXX
The Plaintiff, Noble Roderick Colebrook–El, alleges that Defendants, Internal Revenue Service's (“IRS”) and its agents, Debra Hurst and Beth Jones's, attempt to collect his federal tax debt violated his Constitutional rights, the Moroccan Treaty, and several other Acts of Congress. The factual allegations contained in the Complaint, titled “Affidavit and Petition and Injunction and Order of Protection,” are at times indiscernible and largely irrelevant to the issues in this case. Plaintiff appears to allege that the IRS, a federal “corporate” agency, lacks the requisite statutory authority to collect taxes from him due to his status as a United States citizen who is a Moor of Cherokee descent. Plaintiff owes $19,566.36 in unpaid taxes. Plaintiff seeks to enjoin the IRS from collecting the taxes owed, to have any and all levies lifted, and to be reimbursed for all court costs associated with this action.
It's always interesting to learn something new. I thought that this protester was totally off the wall claiming tax exemption as a "Moor of Cherokee descent". Silly me. There is actually is such a group of people. They are descendants of African Americans held as slaves by the Cherokees. There is a fairly recent controversy about whether members of the group should be considered tribal members. Here is something on that. So this guy is no further off the wall than most protesters and sheds some light on a neglected area of American history. He still has to pay taxes, though.
Murray S. Friedland v. Commissioner, TC Memo 2011-90 This is one of those cases that is interesting for the cautionary tale included in the story behind the story. Mr. Friedland was appealing his denial of a Whistleblower award.
Petitioner, a CPA, submitted a Form 211, Application for Award for Original Information (whistleblower claim), to respondent's Whistleblower Office (Whistleblower Office) in September 2009 concerning alleged violations of the Internal Revenue Code. He alleged that Lawjoy Realty Corporation (Lawjoy) and 601 West 149th Street, Inc. (West 149th), both C corporations, failed to pay millions in Federal corporate income taxes by impermissibly treating real property sales as stock sales in a corporate liquidation. He asserts that the structure of the sales was a sham and solely motivated to evade income taxes. Petitioner appears to have been a shareholder of both Lawjoy and West 149th.
This adds a new wrinkle to tax planning. Mr, Friedland was presumably a minority shareholder in these companies, since some of the tax burden would somehow come out of his share. It happens that Mr. Friedland was unsuccessful, but the IRS did recently award 4.5 million to an accountant who turned in his employer. I find the whole concept extremely distasteful but I think that in planning transactions that are at all aggressive it would be wise to keep out of the loop anyone who is not ethically bound to non-disclosure.
Bruce A. Brown, et ux. v. Commissioner, TC Memo 2011-83
This is another sad life insurance story. Although life insurance is often thought of in the context of estate taxes, it is really not different than any other asset when it comes to transfer taxes. Good planning will structure it so that it is not owned by the decedent keeping the build up in value out of her estate. Any appreciating asset owned outside an estate produces the same benefit. The connection to estate taxes is that the policy provides liquidity at just the right moment. Life insurance is a tax favored vehicle for income tax purposes though. Any build-up in value is tax deferred and proceeds payable by reason of the death of the insured are not taxable income. People figure out ways to use life insurance policies to create income tax problems for themselves though. Usually it has to do with policy loans. This was one of those cases.
In total Mr. Brown paid $44,205 in premiums: $11,999 by check, $28,532 by loans, and $3,674 by dividends.
Northwestern's Computation of Taxable Gain
Northwestern sent Mr. Brown a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. The Form 1099-R showed a gross distribution of $37,365.06 and a taxable amount of $29,093.30. The Form 1099-R described the $37,365.06 as “loans repaid at surrender” and described the $29,093.30 as “taxable amt. at surrender”.
According to Northwestern's calculations, the $29,093.30 taxable amount was equal to the policy's cash value of $37,365.06 minus what it called “net cost” of $8,271.76. Net cost was calculated as “total premiums” (the premiums paid by loans, $28,532; by checks, $11,999; and by dividends, $3,674) minus what Northwestern called “total dividends” (in which Northwestern included the $2,986.94 dividend payment to Mr. Brown in 2004, the $31,063.30 received by Mr. Brown on surrender of the paid-up additional insurance in 2004, and the $1,883 dividend payment to Mr. Brown in 2005).
Mr. Brown prepared the Browns' return, which did not report any income from terminating the life insurance contract. Before filing the return, he consulted Mrs. Brown about the Form 1099-R. They believed that Northwestern based its report that Mr. Brown had a $29,093.30 taxable gain on the theory that a debtor has a taxable gain when a creditor cancels a debt. They believed Northwestern was incorrect because Northwestern had not forgiven Mr. Brown's debt. Having concluded that Northwestern analyzed the termination of the policy incorrectly, the Browns made no further attempt to determine the proper tax treatment of the transaction.
Incidentally the Browns are both attorneys and Mrs. Brown has an LLM in taxation.
As I read the case the numbers get a little confusing. It seems pretty clear that the Browns never actually received any money. The problem was the interest:
The policy allowed Mr. Brown to borrow from Northwestern against the policy's cash value. The policy labeled these loans “premium loan[s]” if they were applied to policy premiums or “policy loan[s]” if they were used for anything else. Both types of loans accrued interest at an annual effective rate of 8 percent. If unpaid, the interest was capitalized, meaning Northwestern added accrued interest to principal. ........
By 1997 the annual interest accrual exceeded the premium; by 2002, it was twice the premium.
The interest which was being paid with policy loans did not add to basis. It was a non-deductible expense. That is how you can use an insurance policy to manufacture phantom taxable income for your self. As a counterfactual to this scenario it would be interesting to look at what it would have cost the Browns to have had a term life insurance policy of $100,000 for 23 years (Actually in the later years their net death benefit would have been less than $70,000). My guess is that it would have been a bit less than the $12,000 of actual cash outlay they had on this policy. Maybe half. And there would have been no phantom income when they decided the policy wasn't needed anymore.
To add insult to injury, the Brown's got hit with an accuracy related penalty.
Friday, June 24, 2011
Unfair Lending
CCA 201112008
Being as attached to double entry as any other accountant, I understand the theory behind making cancellation of indebtedness taxable income. Somebody writes off a loan receivable. If the debtor does not pick up income that big balance sheet in the sky will be out of balance creating severe perturbances in the space time continuum. Still I put it in the same category as the auditors putting a going concern qualification on financial statements. It's kicking somebody when they are down.
There is relief from cancellation of indebtedness income. It does not apply if you are in bankruptcy of if you are insolvent to the extent of your insolvency. It always seemed to me that there should be a presumption of insolvency when there is debt discharge, but nobody ever asks me.
This ruling is a bit of good news for some people who might otherwise be facing debt discharge income. It concerns victims of predatory lending practices :
Payments made by co. to settle allegations of unfair lending practices weren't gross income to borrowers under IRC Sec(s). 61(a)(12) where settlement had effect of equitably reforming loans by adjusting principal amount to amounts that borrowers would have obtained in absence of unfair lending practices, and where trustee's payments to loan holders and/or servicers didn't result in accession of wealth to borrowers.
Company provided funding to Bank to finance Loans to Borrowers. Borrowers used the proceeds of Loans to finance Assets, and the Assets secured Borrowers' obligations under the Loans. State investigated the activities of Company in financing the Loans and alleged that Company had engaged in unfair lending practices under State law. To avoid further investigation and possible legal action by State, Company entered into Settlement with State.
The Settlement states that Company enabled Bank to make unfair Loans with principal amounts in excess of the principal amount that Borrowers would have obtained in the absence of the unfair lending practices. The Company agreed to pay $x to an independent trustee of a settlement fund. The trustee will make payments to a Loan holder and/or servicer of a Borrower's Loan to reduce the amount a Borrower will repay on a Loan.
The Settlement has the effect of equitably reforming the Loans by adjusting the principal amounts to the amounts that the Borrowers would have obtained in the absence of the unfair lending practices. The trustee's payments to the Loan holders and/or servicers do not result in an accession to wealth to Borrowers. Consequently, the payments are not gross income to Borrowers under § 61 of the Internal Revenue Code (including § 61(a)(12)) and are not subject to information reporting requirements under § 6041 or § 6050P.
So if the state regulators finally caught up with the tin men who got your aunt to sign a $50,000 note to put $10,000 worth of siding on her house, she doesn't have to worry about picking up income.
Being as attached to double entry as any other accountant, I understand the theory behind making cancellation of indebtedness taxable income. Somebody writes off a loan receivable. If the debtor does not pick up income that big balance sheet in the sky will be out of balance creating severe perturbances in the space time continuum. Still I put it in the same category as the auditors putting a going concern qualification on financial statements. It's kicking somebody when they are down.
There is relief from cancellation of indebtedness income. It does not apply if you are in bankruptcy of if you are insolvent to the extent of your insolvency. It always seemed to me that there should be a presumption of insolvency when there is debt discharge, but nobody ever asks me.
This ruling is a bit of good news for some people who might otherwise be facing debt discharge income. It concerns victims of predatory lending practices :
Payments made by co. to settle allegations of unfair lending practices weren't gross income to borrowers under IRC Sec(s). 61(a)(12) where settlement had effect of equitably reforming loans by adjusting principal amount to amounts that borrowers would have obtained in absence of unfair lending practices, and where trustee's payments to loan holders and/or servicers didn't result in accession of wealth to borrowers.
Company provided funding to Bank to finance Loans to Borrowers. Borrowers used the proceeds of Loans to finance Assets, and the Assets secured Borrowers' obligations under the Loans. State investigated the activities of Company in financing the Loans and alleged that Company had engaged in unfair lending practices under State law. To avoid further investigation and possible legal action by State, Company entered into Settlement with State.
The Settlement states that Company enabled Bank to make unfair Loans with principal amounts in excess of the principal amount that Borrowers would have obtained in the absence of the unfair lending practices. The Company agreed to pay $x to an independent trustee of a settlement fund. The trustee will make payments to a Loan holder and/or servicer of a Borrower's Loan to reduce the amount a Borrower will repay on a Loan.
The Settlement has the effect of equitably reforming the Loans by adjusting the principal amounts to the amounts that the Borrowers would have obtained in the absence of the unfair lending practices. The trustee's payments to the Loan holders and/or servicers do not result in an accession to wealth to Borrowers. Consequently, the payments are not gross income to Borrowers under § 61 of the Internal Revenue Code (including § 61(a)(12)) and are not subject to information reporting requirements under § 6041 or § 6050P.
So if the state regulators finally caught up with the tin men who got your aunt to sign a $50,000 note to put $10,000 worth of siding on her house, she doesn't have to worry about picking up income.
Wednesday, June 22, 2011
From the Boston Tax Institute
Boston Tax Alert 2011-33,2011-34, 2011-35,2011-36
I'm late putting up the Boston Tax Alert due to my long weekend on the West Coast to attend the board meeting of Just Detention International
Lu Gauthier of The Boston Tax Institute has given me permission to republish his newsletter. The BTI newsletter is a regular feature of this blog now going up every Tuesday. Be sure to check out the BTI catalog for great CPE value.
Our thanks to Lisa J. Delaney, Esq., one of the drafters of the new Homestead law, for the following email!
The new Homestead Statute provides even greater lien protection for homeowners. Just like the former statute, owners of a primary owner-occupied home may protect up to $500,000 in their accrued equity by declaring and recording a Declaration of Homestead the Registry of Deeds.
The new statute defines and expands homeowners to include properties held in trust or in a life estate. The statute also adds condominiums, co-operative apartments, trailers and 2-4 multi-family dwellings as qualifying homes.
The new statute removes several ambiguities or outdated modes. Now, Homestead is declared by both spouses who are homeowners and removes the archaic construction of one spouse signing for the marriage. Spouses who validly reside separately may hold concurrent Homestead in the two homes at the combined $500,000 exemption amount. No longer will Homestead terminate simply because a divorced owner remarries. And, all new spouses will have the benefit of their spouse's earlier declarations. Deeds within a family will preserve the homestead without requiring any special language or recitation in the deed. And, all homeowners may record multiple declarations for the same home without fear they may unknowingly terminate their exemption rights.
Our thanks to David Klemm, Esq. for the following email!
The IRS ruled in CCA 201011009 that an accrual method taxpayer reporting advance payments on the deferral method under Rev. Proc 2004-34 in accordance with its applicable financial statements must obtain consent before using its new financial statement method of accounting for tax purposes. The taxpayer recognized advance payments in income under its book method of accounting on a pro rata basis over the first 10 months of the 15-month period during which it performed services. The taxpayer's financial auditors determined that the taxpayer's book method of accounting for advance payments improperly overstated revenues. Therefore, the taxpayer changed it book method for advance payments in order to recognize the advance payments in income in its applicable financial statements on a pro rata basis over the entire 15-month period during which the taxpayer performs services. In the first year that the taxpayer began reporting advance payments over the 15-month period for its applicable financial statements it also reported the advance payments in the same manner for tax purposes. The taxpayer restated its financial statements for the prior two years. The IRS was not persuaded by the taxpayer's argument that since it had already received consent to use the deferral method using its applicable financial statement that it was not a change in method of accounting when it changed its book method for computing advance payments in its applicable financial statements. The IRS ruled that the taxpayer changed the timing of including an item in income in the current tax year from the timing of including that item in income in the previous taxable years. Accordingly, the IRS held that the taxpayer must file an application to change its method of accounting in order to obtain consent to use the new book method for tax purposes which would permit application of §481 to account for any omission of gross income resulting from the change in book method.
The final regulations (TD 9527) modifying Circular 230 are available on the Federal Register site at:
http://www.ofr.gov/OFRUpload/OFRData/2011-13666_PI.pdf
The official publication date will be June 3.
Our thanks to Patricia Ann Metzer, Attorney for the following email!
The Tax Code's deferred compensation provisions raise complex interpretative issues. The IRS pronouncements highlight the strong relationship between two of these provisions - 457 and 409A. Last year, the IRS came out with guidance (Rev. Rul. 2010-27) on unforeseeable emergency - one circumstance under which payments can be made to participants under eligible 457(b) plans before their severance from employment. Under the given conditions, an unforeseeable emergency is stated to include significant water damage to your home not covered by insurance, and funeral expenses for an adult child. The IRS adds that the same standards will apply to determine whether a distribution due to an unforeseeable emergency is permitted under a 409A nonqualified deferred compensation plan.
The approach is consistent with that taken by the IRS in 2007, when it said that concepts similar to those developed under 409A would apply to determine whether an arrangement providing severance benefits is not subject to 457, and when a benefit (not provided under an eligible 457 plan) is currently taxable because it is not subject to a substantial risk of forfeiture.
The upcoming seminar on 409A/Non-Qualified Deferred Compensation will deal with both 409A and the other Tax Code provisions you need to know about when it comes to deferred compensation. Items to be addressed include how mistakes in 409A drafting can be corrected on a timely basis without, in some cases, a toll charge. IRS correction procedures were most recently announced in Notice 2010-80.
.
I'm late putting up the Boston Tax Alert due to my long weekend on the West Coast to attend the board meeting of Just Detention International
Lu Gauthier of The Boston Tax Institute has given me permission to republish his newsletter. The BTI newsletter is a regular feature of this blog now going up every Tuesday. Be sure to check out the BTI catalog for great CPE value.
Our thanks to Lisa J. Delaney, Esq., one of the drafters of the new Homestead law, for the following email!
The new Homestead Statute provides even greater lien protection for homeowners. Just like the former statute, owners of a primary owner-occupied home may protect up to $500,000 in their accrued equity by declaring and recording a Declaration of Homestead the Registry of Deeds.
The new statute defines and expands homeowners to include properties held in trust or in a life estate. The statute also adds condominiums, co-operative apartments, trailers and 2-4 multi-family dwellings as qualifying homes.
The new statute removes several ambiguities or outdated modes. Now, Homestead is declared by both spouses who are homeowners and removes the archaic construction of one spouse signing for the marriage. Spouses who validly reside separately may hold concurrent Homestead in the two homes at the combined $500,000 exemption amount. No longer will Homestead terminate simply because a divorced owner remarries. And, all new spouses will have the benefit of their spouse's earlier declarations. Deeds within a family will preserve the homestead without requiring any special language or recitation in the deed. And, all homeowners may record multiple declarations for the same home without fear they may unknowingly terminate their exemption rights.
Our thanks to David Klemm, Esq. for the following email!
The IRS ruled in CCA 201011009 that an accrual method taxpayer reporting advance payments on the deferral method under Rev. Proc 2004-34 in accordance with its applicable financial statements must obtain consent before using its new financial statement method of accounting for tax purposes. The taxpayer recognized advance payments in income under its book method of accounting on a pro rata basis over the first 10 months of the 15-month period during which it performed services. The taxpayer's financial auditors determined that the taxpayer's book method of accounting for advance payments improperly overstated revenues. Therefore, the taxpayer changed it book method for advance payments in order to recognize the advance payments in income in its applicable financial statements on a pro rata basis over the entire 15-month period during which the taxpayer performs services. In the first year that the taxpayer began reporting advance payments over the 15-month period for its applicable financial statements it also reported the advance payments in the same manner for tax purposes. The taxpayer restated its financial statements for the prior two years. The IRS was not persuaded by the taxpayer's argument that since it had already received consent to use the deferral method using its applicable financial statement that it was not a change in method of accounting when it changed its book method for computing advance payments in its applicable financial statements. The IRS ruled that the taxpayer changed the timing of including an item in income in the current tax year from the timing of including that item in income in the previous taxable years. Accordingly, the IRS held that the taxpayer must file an application to change its method of accounting in order to obtain consent to use the new book method for tax purposes which would permit application of §481 to account for any omission of gross income resulting from the change in book method.
The final regulations (TD 9527) modifying Circular 230 are available on the Federal Register site at:
http://www.ofr.gov/OFRUpload/OFRData/2011-13666_PI.pdf
The official publication date will be June 3.
Our thanks to Patricia Ann Metzer, Attorney for the following email!
The Tax Code's deferred compensation provisions raise complex interpretative issues. The IRS pronouncements highlight the strong relationship between two of these provisions - 457 and 409A. Last year, the IRS came out with guidance (Rev. Rul. 2010-27) on unforeseeable emergency - one circumstance under which payments can be made to participants under eligible 457(b) plans before their severance from employment. Under the given conditions, an unforeseeable emergency is stated to include significant water damage to your home not covered by insurance, and funeral expenses for an adult child. The IRS adds that the same standards will apply to determine whether a distribution due to an unforeseeable emergency is permitted under a 409A nonqualified deferred compensation plan.
The approach is consistent with that taken by the IRS in 2007, when it said that concepts similar to those developed under 409A would apply to determine whether an arrangement providing severance benefits is not subject to 457, and when a benefit (not provided under an eligible 457 plan) is currently taxable because it is not subject to a substantial risk of forfeiture.
The upcoming seminar on 409A/Non-Qualified Deferred Compensation will deal with both 409A and the other Tax Code provisions you need to know about when it comes to deferred compensation. Items to be addressed include how mistakes in 409A drafting can be corrected on a timely basis without, in some cases, a toll charge. IRS correction procedures were most recently announced in Notice 2010-80.
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IRS Disses Doggie Diplomas and Other Developments
FISHER v. U.S., Cite as 107 AFTR 2d 2011-XXXX, 04/19/2011
There has already been a partial decision in this case which I mentioned in a previous post. The government got summary judgement on whether a restrictions on transferability discount would apply to a single asset family limited partnership. Apparently that was not the end of the story. After all there are still discounts for lack of marketability (even if they let you sell the damn thing nobody would want to buy it anyway) and minority interest. This particular decision, which is also not the end of the story is about evidence. The taxpayers want to bring into evidence what the IRS was originally willing to allow. The IRS doesn't think that relevant.
The present Motion in Limine seeks to preclude Plaintiff from introducing evidence of the minority interest and lack of marketability discounts used by the IRS in arriving at the February 13, 2006 assessments. See generally dkt. no. 101. The United States contends that because this case involves a de novo review of the fair market value of the property at issue, the calculations of the IRS at the administrative stage are irrelevant. Id. at 4. Plaintiff contends that evidence should be allowed in rebuttal if Mark Mitchell, CPA (“Mitchell”), the United States' expert, testifies that the minority discount should be seven percent rather than the nineteen percent purportedly used by the IRS in the February 13, 2006 assessment. Dkt. No. 105 at 3.
In this case, introduction of evidence of the minority interest discount used by the IRS in the February 13, 2006 assessment is irrelevant. The issue is what the correct minority interest discount is, not what it was previously determined to be. Accord. Janis, 428 U.S. at 440; see also R.E. Dietz Corp. v. United States, 939 F.2d 1, 4 [68 AFTR 2d 91-5238] (2d Cir. 1991) (“The factual and legal analysis employed by the Commissioner is of no consequence to the district court.”). The previously used minority interest discount has no baring on factfinder's de novo determination of the property's fair market value. Because evidence of the previously used minority interest discount is irrelevant, it must be excluded.
This reminds me a little of the Levy case. They were starting with a 30% discount and took it to a jury which allowed them 0%. (It was also a refund case so being stuck with the 30% was actually as bad as it could get.) In that case the taxpayers were trying to keep out the amount the family actually ultimately received.
Private Letter Ruling 201117036
This was an organization formed to provide credit counselling services that was denied exempt status.
Based on the information you provided in your application and supporting documentation, you are not operated for exempt purposes under section 501(c)(3) of the Code. An organization cannot be recognized as exempt under section 501(c)(3) unless it shows that it is both organized and operated exclusively for charitable, educational, or other exempt purpose. You failed to meet the operational test of section 1.501(c)(3)-1(a)(1) and section 1.501(c)(3)-1(c)(1) of the Regulations because you are organized for substantial private and commercial purposes, and operate in the same manner as a private commercial entity.
To qualify under IRC section 501(c)(3), an organization cannot have a non-exempt purpose that is more than insubstantial. Your primary activity is the provision of pre-bankruptcy certification and post-bankruptcy counseling for fees. You devote most of your time and activities to selling bankruptcy certifications to the general public under the guise of financial counseling. You have not shown that you are operated exclusively to educate individuals for the purpose of improving or developing their capabilities. Rather, the fact that no educational materials will be provided unless the client registers for a counseling session is an indication of operation for a primarily business purpose. Your primary focus is to expand your client base and to issue bankruptcy certificates as quickly as possible in order to generate revenue. Analogous to the organization described in Better Business Bureau of Washington D.C., Inc. v. United States supra, your activities appear to have an underlying commercial motive that distinguishes your educational activities from that carried out by a university or educational institution.
If you want to be recognized as a charity maybe you could kind of like do something charitable.
Private Letter Ruling 201117035
Here the IRS shows its narrow speciesism. Among the possible purposes that qualify for exemption is "education". It turns out, though, that it has to be human beings who are being educated. Doggy University (the name I made up for the anonymous ORG in this ruling) does not qualify.
ORG holds dog obedience training classes, and awards the dogs a degree after completion of the course and also award, them prizes at the shows events. While the owners received some instruction as to the training of the dogs, it is the dog that is primary object of the training.
The nature of obedience training requires that the owner of the dog appear at the classes so that the dog is trained to respond to his owner's commands. While the owner receives some instruction in how to give commands to his dog, it is the dog that is the primary object of the training. The dog is also the primary object of the subsequent training in sporting and show events. Therefore, the organization's training program for dogs is not within the meaning of educational as defined in the regulations.
Dog training in the manner you describe is not exempt purposes as described in IRC section 501(c)(3), because the organization's training program for dogs as well as its dog shows is not within the meaning of educational as defined in the regulations . In fact, you primarily serve the private interests of the dog owners and thus not operated exclusively for 501(c)(3) purposes.
Private Letter Ruling 201117011
Taxpayer was granted 120-day extension from date this letter was issued, to make election under Code Sec. 469(c)(7)(A); to treat all of his interests in rental real estate as single rental real estate activity effective stated year.
Rental activities are "per se" passive. There is an exception for people in real estate trades or businesses if they meet certain requirements. They still have to materially participate in the properties. Absent the election to aggregate the material participation standard can be challenging when there are multiple properties. Taxpayers who have failed to make the election can sometimes get relief with a late election as the taxpayer in this ruling did.
There has already been a partial decision in this case which I mentioned in a previous post. The government got summary judgement on whether a restrictions on transferability discount would apply to a single asset family limited partnership. Apparently that was not the end of the story. After all there are still discounts for lack of marketability (even if they let you sell the damn thing nobody would want to buy it anyway) and minority interest. This particular decision, which is also not the end of the story is about evidence. The taxpayers want to bring into evidence what the IRS was originally willing to allow. The IRS doesn't think that relevant.
The present Motion in Limine seeks to preclude Plaintiff from introducing evidence of the minority interest and lack of marketability discounts used by the IRS in arriving at the February 13, 2006 assessments. See generally dkt. no. 101. The United States contends that because this case involves a de novo review of the fair market value of the property at issue, the calculations of the IRS at the administrative stage are irrelevant. Id. at 4. Plaintiff contends that evidence should be allowed in rebuttal if Mark Mitchell, CPA (“Mitchell”), the United States' expert, testifies that the minority discount should be seven percent rather than the nineteen percent purportedly used by the IRS in the February 13, 2006 assessment. Dkt. No. 105 at 3.
In this case, introduction of evidence of the minority interest discount used by the IRS in the February 13, 2006 assessment is irrelevant. The issue is what the correct minority interest discount is, not what it was previously determined to be. Accord. Janis, 428 U.S. at 440; see also R.E. Dietz Corp. v. United States, 939 F.2d 1, 4 [68 AFTR 2d 91-5238] (2d Cir. 1991) (“The factual and legal analysis employed by the Commissioner is of no consequence to the district court.”). The previously used minority interest discount has no baring on factfinder's de novo determination of the property's fair market value. Because evidence of the previously used minority interest discount is irrelevant, it must be excluded.
This reminds me a little of the Levy case. They were starting with a 30% discount and took it to a jury which allowed them 0%. (It was also a refund case so being stuck with the 30% was actually as bad as it could get.) In that case the taxpayers were trying to keep out the amount the family actually ultimately received.
Private Letter Ruling 201117036
This was an organization formed to provide credit counselling services that was denied exempt status.
Based on the information you provided in your application and supporting documentation, you are not operated for exempt purposes under section 501(c)(3) of the Code. An organization cannot be recognized as exempt under section 501(c)(3) unless it shows that it is both organized and operated exclusively for charitable, educational, or other exempt purpose. You failed to meet the operational test of section 1.501(c)(3)-1(a)(1) and section 1.501(c)(3)-1(c)(1) of the Regulations because you are organized for substantial private and commercial purposes, and operate in the same manner as a private commercial entity.
To qualify under IRC section 501(c)(3), an organization cannot have a non-exempt purpose that is more than insubstantial. Your primary activity is the provision of pre-bankruptcy certification and post-bankruptcy counseling for fees. You devote most of your time and activities to selling bankruptcy certifications to the general public under the guise of financial counseling. You have not shown that you are operated exclusively to educate individuals for the purpose of improving or developing their capabilities. Rather, the fact that no educational materials will be provided unless the client registers for a counseling session is an indication of operation for a primarily business purpose. Your primary focus is to expand your client base and to issue bankruptcy certificates as quickly as possible in order to generate revenue. Analogous to the organization described in Better Business Bureau of Washington D.C., Inc. v. United States supra, your activities appear to have an underlying commercial motive that distinguishes your educational activities from that carried out by a university or educational institution.
If you want to be recognized as a charity maybe you could kind of like do something charitable.
Private Letter Ruling 201117035
Here the IRS shows its narrow speciesism. Among the possible purposes that qualify for exemption is "education". It turns out, though, that it has to be human beings who are being educated. Doggy University (the name I made up for the anonymous ORG in this ruling) does not qualify.
ORG holds dog obedience training classes, and awards the dogs a degree after completion of the course and also award, them prizes at the shows events. While the owners received some instruction as to the training of the dogs, it is the dog that is primary object of the training.
The nature of obedience training requires that the owner of the dog appear at the classes so that the dog is trained to respond to his owner's commands. While the owner receives some instruction in how to give commands to his dog, it is the dog that is the primary object of the training. The dog is also the primary object of the subsequent training in sporting and show events. Therefore, the organization's training program for dogs is not within the meaning of educational as defined in the regulations.
Dog training in the manner you describe is not exempt purposes as described in IRC section 501(c)(3), because the organization's training program for dogs as well as its dog shows is not within the meaning of educational as defined in the regulations . In fact, you primarily serve the private interests of the dog owners and thus not operated exclusively for 501(c)(3) purposes.
Private Letter Ruling 201117011
Taxpayer was granted 120-day extension from date this letter was issued, to make election under Code Sec. 469(c)(7)(A); to treat all of his interests in rental real estate as single rental real estate activity effective stated year.
Rental activities are "per se" passive. There is an exception for people in real estate trades or businesses if they meet certain requirements. They still have to materially participate in the properties. Absent the election to aggregate the material participation standard can be challenging when there are multiple properties. Taxpayers who have failed to make the election can sometimes get relief with a late election as the taxpayer in this ruling did.
Monday, June 20, 2011
Tax Rate of 131% ? - It Can Happen
Kevin L. Sherar, et ux. v. Commissioner, TC Summary Opinion 2011-44
I didn't know there was a way for somebody to be taxed 131% on income received, but Mrs. Sherar's attorney managed to find a way. Linda Sherar was collecting workman's compensation insurance. Her attorney advised her that she also qualified for Social Security disability payments. She applied for them. She received a check for $3,796.38. Not a lot of money, but if it was laying on the street I would bend over to pick it up. The reason that she didn't get much in Social Security disability is because her benefit was offset by the workman's compensation. Here is where it gets ugly. Workman's compensation payments are excluded from income. Social Security payments are only partially excluded (85% included 15% excluded). The 85% is applied to the entire benefit including the portion that was offset by workman's compensation. So when the IRS looked at this they increased Mrs. Sherar's tax by $4,988. The Court felt kind of bad for her, but couldn't do anything about it:
We acknowledge that Mrs. Sherar applied for Social Security benefits on the advice of counsel. We also acknowledge that if Mrs. Sherar had not applied for Social Security benefits, then her workers' compensation benefits would not have been subject to Federal income tax. See secs. 104(a)(1), 86(d)(3). Under the circumstances we can appreciate petitioners' dismay. Nevertheless, as the Supreme Court of the United States has instructed, we are duty bound to apply the law as written by Congress to the facts as they occurred and not as they might have occurred.
Freddie Stromatt, et ux. v. Commissioner, TC Summary Opinion 2011-42
I almost didn't bother with this one, but it is a fairly nice hobby loss case that was won by the taxpayers. The IRS made an issue out of them putting that they were raising beef cattle on their Schedule F in the preliminary year when they just sold hay, but they did well on most of the factors.
In 1999 petitioners purchased an approximately 15-acre parcel of land near Dickson, Tennessee. Petitioner Edith Stromatt (Mrs. Stromatt) had retired before the land was purchased, and petitioner Freddie Stromatt (Mr. Stromatt) retired shortly thereafter.
In 2000 petitioners constructed a two-bedroom, one-bath house of approximately 792 square feet on the property. Mrs. Stromatt's father lived in the house from 2000 until his death in 2006. Petitioners did not live in the house or elsewhere on the property during the years at issue (2002-2004).
During 2000 and 2001 petitioners cleared the acreage, which had been untended for approximately 25 years and was overgrown with brush and trees, to prepare it for use as pasture, including the production of hay. Mr. Stromatt and Mrs. Stromatt's father operated the tractor and Bush Hog used for clearing the land, including pulling tree stumps. During 2001 and 2002 petitioners installed fencing and fertilized. This work was also performed by Mr. Stromatt and Mrs. Stromatt's father.
Petitioners harvested their first hay in 2001 and continued producing hay during the years at issue, harvesting it with rented equipment. Mr. Stromatt and Mrs. Stromatt's father performed this labor. Petitioners sold the hay, and these sales constituted the only income generated from the farming activity during the years at issue.
Petitioners first purchased cattle in 2005, acquiring six pregnant heifers. By the end of 2005 petitioners owned 17 head of cattle.
Mrs. Stromatt's father provided advice to petitioners on farming, including the number of cattle that could be supported on 15 acres of land.
Mrs. Stromatt's father was an experienced farmer, and Mrs. Stromatt grew up on a farm.
There were also substantiation issues which they probably should have settled at the agent level, but the Court was satisfied on that score also.
After weighing the regulatory factors and all other facts and circumstances, we conclude that petitioners engaged in their farming activity with an actual and honest profit objective. They and family members expended substantial amounts of physical labor to reclaim and fence land in an effort to establish a viable cattle operation. They did so at a pace that was not unreasonable in the circumstances, and they offset some losses by initially selling hay. They obtained knowledgeable advice. Their loss history was both brief (as of the close of the last year in issue) and not atypical for reclaiming land and establishing a cattle operation. The enterprise did not offer significant recreational opportunities
Jonathan C. Ladue, et ux. v. Commissioner, TC Summary Opinion 2011-41
This is about whether a deputy sheriff was subject to self-employment tax on pay that he received for "off duty services". I've always heard this type of thing referred to as "pay details". There is some support for the position that the deputy is functioning as an employee while on the assignment:
During 2007, petitioner was employed as a deputy sheriff by the Jacksonville Sheriff's Office (JSO). JSO permits deputies to provide off-duty services for entities other than JSO. JSO's General Order LIII. 10 (JSO General Order) contains detailed provisions that an officer must follow to obtain and maintain off-duty work.
Entities desiring to hire JSO deputies for off-duty services must submit an application to the Secondary Employment Unit of JSO. A JSO job scheduler acts as a liaison between JSO and the entity by completing the jobsite schedule for JSO employees working for a particular entity, “ensuring employee attendance is adhered to, and resolving employee/employer conflict when appropriate.” Entities that hire deputies for off-duty services are required to pay an administrative fee to JSO for each hour of off-duty service provided by each officer. Working while off duty is strictly voluntary; JSO deputies are not required to perform off-duty services.
The JSO General Order determines the off-duty minimum pay rate, limits the maximum monthly hours of off-duty work, and requires JSO deputies to wear their uniforms and monitor their police radios when providing off-duty law enforcement-related services. Deputies providing off-duty services are also subject to recall to regular duty by JSO. While working off duty, deputies are governed by all JSO policies, procedures, and directives, and the JSO Watch Commander may suspend a deputy's off-duty work if the work or the officer does not meet policy requirements
That was not enough for the Tax Court, though.
After considering these factors, as discussed below, we conclude that petitioner was not an employee of JSO but performed his off-duty services as an independent contractor.
First, petitioner's off-duty services were performed for, and were directly beneficial to, the third-party entity. See Milian v. Commissioner, supra (stating that performance of services by the employee for the employer is implicit in an employee relationship); March v. Commissioner, T.C. Memo. 1981-339 [¶81,339 PH Memo TC]. “Any benefit *** [the department] received by an increased police presence at petitioner's off-duty assignments was incidental and similar in nature to the benefit to a police department when officers increase the police presence in a community by driving their police cruisers home.”
A second factor of an employer-employee relationship is the ability to select and discharge at will. March v. Commissioner, supra. The mere approval from JSO to work off-duty jobs and the ability to suspend if department policies were not adhered to do not amount to the ability to hire and fire with regard to the off-duty positions.
Third, the source and method of payment may also help establish whether an employer-employee relationship exists. March v. Commissioner, supra. All of the third-party entities for which petitioner provided off-duty services operated separately from the city of Jacksonville and JSO; the third-party entities paid petitioner directly and treated him as an independent contractor, issuing him Forms 1099. The city of Jacksonville did not include off-duty pay in petitioner's Form W-2.
Slight changes in the way the pay details are structured would probably produce a different result.
CCA 201115022
If you think your joint account holder might be someone who is apt to be levied, it's time to get a separate account.
For purposes of determining ability to pay, ownership is presumed to be in equal shares unless the taxpayer demonstrates otherwise. See IRM 5.8.5.5. In the levy context, the Supreme Court held in the National Bank of Commerce case that where under state law the taxpayer has the unrestricted right to withdraw funds from a jointly held account a levy attaches to the entire account. The levy, however, is provisional and subject to a later claim by a codepositor that the money in fact belongs to him or her.
I didn't know there was a way for somebody to be taxed 131% on income received, but Mrs. Sherar's attorney managed to find a way. Linda Sherar was collecting workman's compensation insurance. Her attorney advised her that she also qualified for Social Security disability payments. She applied for them. She received a check for $3,796.38. Not a lot of money, but if it was laying on the street I would bend over to pick it up. The reason that she didn't get much in Social Security disability is because her benefit was offset by the workman's compensation. Here is where it gets ugly. Workman's compensation payments are excluded from income. Social Security payments are only partially excluded (85% included 15% excluded). The 85% is applied to the entire benefit including the portion that was offset by workman's compensation. So when the IRS looked at this they increased Mrs. Sherar's tax by $4,988. The Court felt kind of bad for her, but couldn't do anything about it:
We acknowledge that Mrs. Sherar applied for Social Security benefits on the advice of counsel. We also acknowledge that if Mrs. Sherar had not applied for Social Security benefits, then her workers' compensation benefits would not have been subject to Federal income tax. See secs. 104(a)(1), 86(d)(3). Under the circumstances we can appreciate petitioners' dismay. Nevertheless, as the Supreme Court of the United States has instructed, we are duty bound to apply the law as written by Congress to the facts as they occurred and not as they might have occurred.
Freddie Stromatt, et ux. v. Commissioner, TC Summary Opinion 2011-42
I almost didn't bother with this one, but it is a fairly nice hobby loss case that was won by the taxpayers. The IRS made an issue out of them putting that they were raising beef cattle on their Schedule F in the preliminary year when they just sold hay, but they did well on most of the factors.
In 1999 petitioners purchased an approximately 15-acre parcel of land near Dickson, Tennessee. Petitioner Edith Stromatt (Mrs. Stromatt) had retired before the land was purchased, and petitioner Freddie Stromatt (Mr. Stromatt) retired shortly thereafter.
In 2000 petitioners constructed a two-bedroom, one-bath house of approximately 792 square feet on the property. Mrs. Stromatt's father lived in the house from 2000 until his death in 2006. Petitioners did not live in the house or elsewhere on the property during the years at issue (2002-2004).
During 2000 and 2001 petitioners cleared the acreage, which had been untended for approximately 25 years and was overgrown with brush and trees, to prepare it for use as pasture, including the production of hay. Mr. Stromatt and Mrs. Stromatt's father operated the tractor and Bush Hog used for clearing the land, including pulling tree stumps. During 2001 and 2002 petitioners installed fencing and fertilized. This work was also performed by Mr. Stromatt and Mrs. Stromatt's father.
Petitioners harvested their first hay in 2001 and continued producing hay during the years at issue, harvesting it with rented equipment. Mr. Stromatt and Mrs. Stromatt's father performed this labor. Petitioners sold the hay, and these sales constituted the only income generated from the farming activity during the years at issue.
Petitioners first purchased cattle in 2005, acquiring six pregnant heifers. By the end of 2005 petitioners owned 17 head of cattle.
Mrs. Stromatt's father provided advice to petitioners on farming, including the number of cattle that could be supported on 15 acres of land.
Mrs. Stromatt's father was an experienced farmer, and Mrs. Stromatt grew up on a farm.
There were also substantiation issues which they probably should have settled at the agent level, but the Court was satisfied on that score also.
After weighing the regulatory factors and all other facts and circumstances, we conclude that petitioners engaged in their farming activity with an actual and honest profit objective. They and family members expended substantial amounts of physical labor to reclaim and fence land in an effort to establish a viable cattle operation. They did so at a pace that was not unreasonable in the circumstances, and they offset some losses by initially selling hay. They obtained knowledgeable advice. Their loss history was both brief (as of the close of the last year in issue) and not atypical for reclaiming land and establishing a cattle operation. The enterprise did not offer significant recreational opportunities
Jonathan C. Ladue, et ux. v. Commissioner, TC Summary Opinion 2011-41
This is about whether a deputy sheriff was subject to self-employment tax on pay that he received for "off duty services". I've always heard this type of thing referred to as "pay details". There is some support for the position that the deputy is functioning as an employee while on the assignment:
During 2007, petitioner was employed as a deputy sheriff by the Jacksonville Sheriff's Office (JSO). JSO permits deputies to provide off-duty services for entities other than JSO. JSO's General Order LIII. 10 (JSO General Order) contains detailed provisions that an officer must follow to obtain and maintain off-duty work.
Entities desiring to hire JSO deputies for off-duty services must submit an application to the Secondary Employment Unit of JSO. A JSO job scheduler acts as a liaison between JSO and the entity by completing the jobsite schedule for JSO employees working for a particular entity, “ensuring employee attendance is adhered to, and resolving employee/employer conflict when appropriate.” Entities that hire deputies for off-duty services are required to pay an administrative fee to JSO for each hour of off-duty service provided by each officer. Working while off duty is strictly voluntary; JSO deputies are not required to perform off-duty services.
The JSO General Order determines the off-duty minimum pay rate, limits the maximum monthly hours of off-duty work, and requires JSO deputies to wear their uniforms and monitor their police radios when providing off-duty law enforcement-related services. Deputies providing off-duty services are also subject to recall to regular duty by JSO. While working off duty, deputies are governed by all JSO policies, procedures, and directives, and the JSO Watch Commander may suspend a deputy's off-duty work if the work or the officer does not meet policy requirements
That was not enough for the Tax Court, though.
After considering these factors, as discussed below, we conclude that petitioner was not an employee of JSO but performed his off-duty services as an independent contractor.
First, petitioner's off-duty services were performed for, and were directly beneficial to, the third-party entity. See Milian v. Commissioner, supra (stating that performance of services by the employee for the employer is implicit in an employee relationship); March v. Commissioner, T.C. Memo. 1981-339 [¶81,339 PH Memo TC]. “Any benefit *** [the department] received by an increased police presence at petitioner's off-duty assignments was incidental and similar in nature to the benefit to a police department when officers increase the police presence in a community by driving their police cruisers home.”
A second factor of an employer-employee relationship is the ability to select and discharge at will. March v. Commissioner, supra. The mere approval from JSO to work off-duty jobs and the ability to suspend if department policies were not adhered to do not amount to the ability to hire and fire with regard to the off-duty positions.
Third, the source and method of payment may also help establish whether an employer-employee relationship exists. March v. Commissioner, supra. All of the third-party entities for which petitioner provided off-duty services operated separately from the city of Jacksonville and JSO; the third-party entities paid petitioner directly and treated him as an independent contractor, issuing him Forms 1099. The city of Jacksonville did not include off-duty pay in petitioner's Form W-2.
Slight changes in the way the pay details are structured would probably produce a different result.
CCA 201115022
If you think your joint account holder might be someone who is apt to be levied, it's time to get a separate account.
For purposes of determining ability to pay, ownership is presumed to be in equal shares unless the taxpayer demonstrates otherwise. See IRM 5.8.5.5. In the levy context, the Supreme Court held in the National Bank of Commerce case that where under state law the taxpayer has the unrestricted right to withdraw funds from a jointly held account a levy attaches to the entire account. The levy, however, is provisional and subject to a later claim by a codepositor that the money in fact belongs to him or her.
Friday, June 17, 2011
Divorce Attornies Need to Watch Their Language
Betty L Klebanoff v. Commissioner, TC Summary Opinion 2011-46
I've been going back and forth whether to make much of this one or not. Taxpayer entered into a business venture, whether as a partner or not is a little unclear. They received a $51,000 "draw" against profits that never materialized. When her return was due it wasn't clear what she was supposed to report so she didn't report anything. Then they gave her a K-1 which said she had received a guaranteed payment. The venture had by then fizzled. Soon after the IRS audited her. Her position was that the $51,000 was not reportable. IRS said it was ordinary income subject to SE tax.
The Tax Court ended up with short term capital gain - distribution from a partnership in excess of basis. Not only was there no SE tax, there was also no penalty, which I think was on the generous side :
Petitioner was aware that she received $51,000 in payments from Mirus during 2007. She did not understand the legal or technical ramifications of those payments. She made attempts to contact Mirus and Messrs. Buck and Colson, but she did not receive any response regarding the $51,000 in payments. Petitioner did not receive any notification from Mirus before her 2007 income tax return was due and was filed. At the time her 2007 income tax return was due and being filed in 2008, petitioner's lawyer was engaged in negotiations in an attempt to work out some settlement of her interest in Mirus. There was uncertainty about whether petitioner would receive additional amounts from Mirus and/or Messrs. Buck and Colson and as to the nature of the payments already received. Petitioner decided to wait and file an amended return for 2007 after she was able to better address the taxability of the $51,000 in payments.
The events that culminated in the filing of the first Mirus partnership return and petitioner's income tax return were followed in relatively short order by respondent's audit of petitioner's return and the issuance of a notice of deficiency. Petitioner consulted tax professionals who advised her and caused her to file an amended partnership return for Mirus reflecting that the $51,000 in payment was a draw and that Hospice and Rock were the partners of Mirus.
It was therefore reasonable for petitioner to take the position that the $51,000 was not taxable in her 2007 tax year. Under those circumstances, petitioner's actions were reasonable and she is not liable for an accuracy-related penalty.
I really don't see a defensible argument for not reporting the $51,000 somehow or other, but it was a confusing mess, so I'm glad she got a break on the penalty.
Tuwana J. Anthony v. Commissioner, TC Summary Opinion 2011-50
If you have a business that involves selling various items, inventory is likely to enter into your tax computations. You can't just deduct what you spent on the stuff from what you got paid for stuff in each year. You have to consider stuff that is bought in one year and sold in a different year. If you are talking about big items you might specifically identify them, but if its a lot of small stuff you need to take a short cut. The short cut is this. To figure your cost of goods sold you take the amount that you spent on stuff during the year ("purchases") and add the cost of stuff you had on hand at the beginning of the year "opening inventory". That is your cost of goods available for sale. To get your "cost of goods sold" (which is the number that you get to reduce your income by) you need to subtract the cost of stuff you didn't sell, "ending inventory". Getting that number can be a bit of production. It's one thing if you have an auto dealership with paper work on each vehicle from the factory. If you have a retail store with all sorts of little tchotchkes it can be more of a production. One way to approach it is to list out all the items with their selling prices and then reduce the total by your mark-up.
Ms. Anthony apparently forgot that last step. She was audited for 2004 and was able to convince the Tax Court that her ending inventory was overvalued because it was at retail selling price.
During settlement negotiations in docket No. 5791-07S, petitioner affirmatively raised, inter alia, the issue of whether the $41,097 reported ending inventory on petitioner's 2004 Federal income tax return should have been reported as $20,548. Specifically, petitioner took the position that she erroneously reported her 2004 ending inventory using her retail selling price—rather than her cost—for the inventory.
The 2004 case was settled in 2009. There was a little problem though. The incorrect 2004 closing inventory was used as the 2005 opening inventory. This could have been a gotcha on the IRS, since the statute was closed on 2005, but that is not the way it worked out:
In Tuwana J. Anthony v. Commissioner, Docket No. 5791- "07S”, based on representations made by you, the Tax Court made a determination that your ending inventory for 2004 was $20,548, instead of $41,097 as reported by you. Under section 1311, the same adjustment is required to be made to your beginning inventory for 2005. *** This results in an increase to your [2005] income of [$20,549]. On the basis of the above inventory adjustment and other adjustments that petitioner and respondent agreed to, respondent determined a $5,516 deficiency in petitioner's 2005 Federal income tax. Although the section 6501 3-year period of limitations for 2005 had expired at the time respondent issued the notice of deficiency on January 7, 2010, respondent relied on the mitigation provisions of sections 1311 through 1314 to issue the notice of deficiency to petitioner.
On the basis of the foregoing, we find that all requirements of the applicable mitigation provisions have been met and that respondent properly relied thereon in issuing petitioner the notice of deficiency for 2005. Petitioner's opening inventory for 2005 is reduced from $41,097 to $20,548 consistent with the adjustment made to her 2004 ending inventory.
Jose B. Magno, et al. v. Commissioner, TC Summary Opinion 2011-43
This was another case about the real estate trade or business exception to the passive activity loss rules. The taxpayer hadn't made the aggregation election and his testimony about time spent was not persuasive:
During the audit stage of this proceeding, Mr. Magno told respondent's revenue agent that he worked approximately 25 to 30 hours per week on his financial planning and services business. That conversation was documented in the revenue agent's notes, and the revenue agent testified credibly to its contents at trial. At trial, however, Mr. Magno testified that he worked principally as a financial consultant from January through August 2005. He also testified that he became a full-time manager of the first and second residences in 2006 and 2007 and that he reduced the number of hours which he devoted to his financial consulting services business to “about” 500 hours per year.
We credit the testimony of respondent's revenue agent and therefore conclude that Mr. Magno must have worked more than 1,250 hours during each subject year in real property trades or businesses to qualify as a real estate professional under section 469(c)(7)(B)(i). 6 Mr. Magno was not able to corroborate with written documentation his assertions that more than one-half of the personal services he performed in trades or businesses during the subject years were performed in real property trades or businesses. Accordingly, we find that Mr. Magno has not proven that he meets the requirements of section 469(c)(7)(B)(i).
I'm starting to find these cases a little tedious, but I'm going to continue to report on them.
Timothy O. Micek v. Commissioner, TC Summary Opinion 2011-45
In 1999 petitioner and Ms. Micek orally agreed that petitioner would help support Ms. Micek by paying her $1,250 every 2 weeks. To memorialize this agreement, on November 10, 1999, petitioner signed a spousal support affidavit, stating that he promised to pay Ms. Micek $1,250 biweekly via direct deposit. A notary public of the State of New Jersey notarized the spousal support affidavit. Throughout the years at issue, petitioner made payments to Ms. Micek pursuant to the spousal support affidavit.
While petitioner was making payments, he was diagnosed with multiple sclerosis and was forced to stop working. As a result, in 2003 petitioner stopped making the required payments. On April 21, 2003, petitioner's attorney received a letter from Ms. Micek's attorney inquiring why petitioner had terminated the “alimony/expense payments”.
The issue before us is whether the spousal support affidavit qualifies as a written separation instrument as defined by section 71(b)(2). The spousal support affidavit is a written instrument, signed by petitioner, promising to pay Ms. Micek $1,250 every 2 weeks. As discussed above, a separation instrument does not require a specific medium or form and does not have to be signed by both husband and wife. Further, even though Ms. Micek did not sign the spousal support affidavit, petitioner testified that he reached an oral agreement with Ms. Micek with respect to support payments during their separation. This meeting of the minds not only is memorialized by the spousal support affidavit, but also is supported by the letter from Ms. Micek's attorney received by petitioner's attorney on April 21, 2003, describing the payments she had been receiving from petitioner as alimony payments. Accordingly, the spousal support affidavit qualifies as a written separation instrument as defined by section 71(b)(2), and petitioner is entitled to his claimed alimony deductions for the years at issue.
It looks like the IRS may have been whipsawed by this decision. If not I would not like to be in the shoes of Ms. Micek's attorney since his use of the word "alimony" was an important element in the decision. He should have been aware of whether his client was reporting the payments as taxable income.
I've been going back and forth whether to make much of this one or not. Taxpayer entered into a business venture, whether as a partner or not is a little unclear. They received a $51,000 "draw" against profits that never materialized. When her return was due it wasn't clear what she was supposed to report so she didn't report anything. Then they gave her a K-1 which said she had received a guaranteed payment. The venture had by then fizzled. Soon after the IRS audited her. Her position was that the $51,000 was not reportable. IRS said it was ordinary income subject to SE tax.
The Tax Court ended up with short term capital gain - distribution from a partnership in excess of basis. Not only was there no SE tax, there was also no penalty, which I think was on the generous side :
Petitioner was aware that she received $51,000 in payments from Mirus during 2007. She did not understand the legal or technical ramifications of those payments. She made attempts to contact Mirus and Messrs. Buck and Colson, but she did not receive any response regarding the $51,000 in payments. Petitioner did not receive any notification from Mirus before her 2007 income tax return was due and was filed. At the time her 2007 income tax return was due and being filed in 2008, petitioner's lawyer was engaged in negotiations in an attempt to work out some settlement of her interest in Mirus. There was uncertainty about whether petitioner would receive additional amounts from Mirus and/or Messrs. Buck and Colson and as to the nature of the payments already received. Petitioner decided to wait and file an amended return for 2007 after she was able to better address the taxability of the $51,000 in payments.
The events that culminated in the filing of the first Mirus partnership return and petitioner's income tax return were followed in relatively short order by respondent's audit of petitioner's return and the issuance of a notice of deficiency. Petitioner consulted tax professionals who advised her and caused her to file an amended partnership return for Mirus reflecting that the $51,000 in payment was a draw and that Hospice and Rock were the partners of Mirus.
It was therefore reasonable for petitioner to take the position that the $51,000 was not taxable in her 2007 tax year. Under those circumstances, petitioner's actions were reasonable and she is not liable for an accuracy-related penalty.
I really don't see a defensible argument for not reporting the $51,000 somehow or other, but it was a confusing mess, so I'm glad she got a break on the penalty.
Tuwana J. Anthony v. Commissioner, TC Summary Opinion 2011-50
If you have a business that involves selling various items, inventory is likely to enter into your tax computations. You can't just deduct what you spent on the stuff from what you got paid for stuff in each year. You have to consider stuff that is bought in one year and sold in a different year. If you are talking about big items you might specifically identify them, but if its a lot of small stuff you need to take a short cut. The short cut is this. To figure your cost of goods sold you take the amount that you spent on stuff during the year ("purchases") and add the cost of stuff you had on hand at the beginning of the year "opening inventory". That is your cost of goods available for sale. To get your "cost of goods sold" (which is the number that you get to reduce your income by) you need to subtract the cost of stuff you didn't sell, "ending inventory". Getting that number can be a bit of production. It's one thing if you have an auto dealership with paper work on each vehicle from the factory. If you have a retail store with all sorts of little tchotchkes it can be more of a production. One way to approach it is to list out all the items with their selling prices and then reduce the total by your mark-up.
Ms. Anthony apparently forgot that last step. She was audited for 2004 and was able to convince the Tax Court that her ending inventory was overvalued because it was at retail selling price.
During settlement negotiations in docket No. 5791-07S, petitioner affirmatively raised, inter alia, the issue of whether the $41,097 reported ending inventory on petitioner's 2004 Federal income tax return should have been reported as $20,548. Specifically, petitioner took the position that she erroneously reported her 2004 ending inventory using her retail selling price—rather than her cost—for the inventory.
The 2004 case was settled in 2009. There was a little problem though. The incorrect 2004 closing inventory was used as the 2005 opening inventory. This could have been a gotcha on the IRS, since the statute was closed on 2005, but that is not the way it worked out:
In Tuwana J. Anthony v. Commissioner, Docket No. 5791- "07S”, based on representations made by you, the Tax Court made a determination that your ending inventory for 2004 was $20,548, instead of $41,097 as reported by you. Under section 1311, the same adjustment is required to be made to your beginning inventory for 2005. *** This results in an increase to your [2005] income of [$20,549]. On the basis of the above inventory adjustment and other adjustments that petitioner and respondent agreed to, respondent determined a $5,516 deficiency in petitioner's 2005 Federal income tax. Although the section 6501 3-year period of limitations for 2005 had expired at the time respondent issued the notice of deficiency on January 7, 2010, respondent relied on the mitigation provisions of sections 1311 through 1314 to issue the notice of deficiency to petitioner.
On the basis of the foregoing, we find that all requirements of the applicable mitigation provisions have been met and that respondent properly relied thereon in issuing petitioner the notice of deficiency for 2005. Petitioner's opening inventory for 2005 is reduced from $41,097 to $20,548 consistent with the adjustment made to her 2004 ending inventory.
Jose B. Magno, et al. v. Commissioner, TC Summary Opinion 2011-43
This was another case about the real estate trade or business exception to the passive activity loss rules. The taxpayer hadn't made the aggregation election and his testimony about time spent was not persuasive:
During the audit stage of this proceeding, Mr. Magno told respondent's revenue agent that he worked approximately 25 to 30 hours per week on his financial planning and services business. That conversation was documented in the revenue agent's notes, and the revenue agent testified credibly to its contents at trial. At trial, however, Mr. Magno testified that he worked principally as a financial consultant from January through August 2005. He also testified that he became a full-time manager of the first and second residences in 2006 and 2007 and that he reduced the number of hours which he devoted to his financial consulting services business to “about” 500 hours per year.
We credit the testimony of respondent's revenue agent and therefore conclude that Mr. Magno must have worked more than 1,250 hours during each subject year in real property trades or businesses to qualify as a real estate professional under section 469(c)(7)(B)(i). 6 Mr. Magno was not able to corroborate with written documentation his assertions that more than one-half of the personal services he performed in trades or businesses during the subject years were performed in real property trades or businesses. Accordingly, we find that Mr. Magno has not proven that he meets the requirements of section 469(c)(7)(B)(i).
I'm starting to find these cases a little tedious, but I'm going to continue to report on them.
Timothy O. Micek v. Commissioner, TC Summary Opinion 2011-45
In 1999 petitioner and Ms. Micek orally agreed that petitioner would help support Ms. Micek by paying her $1,250 every 2 weeks. To memorialize this agreement, on November 10, 1999, petitioner signed a spousal support affidavit, stating that he promised to pay Ms. Micek $1,250 biweekly via direct deposit. A notary public of the State of New Jersey notarized the spousal support affidavit. Throughout the years at issue, petitioner made payments to Ms. Micek pursuant to the spousal support affidavit.
While petitioner was making payments, he was diagnosed with multiple sclerosis and was forced to stop working. As a result, in 2003 petitioner stopped making the required payments. On April 21, 2003, petitioner's attorney received a letter from Ms. Micek's attorney inquiring why petitioner had terminated the “alimony/expense payments”.
The issue before us is whether the spousal support affidavit qualifies as a written separation instrument as defined by section 71(b)(2). The spousal support affidavit is a written instrument, signed by petitioner, promising to pay Ms. Micek $1,250 every 2 weeks. As discussed above, a separation instrument does not require a specific medium or form and does not have to be signed by both husband and wife. Further, even though Ms. Micek did not sign the spousal support affidavit, petitioner testified that he reached an oral agreement with Ms. Micek with respect to support payments during their separation. This meeting of the minds not only is memorialized by the spousal support affidavit, but also is supported by the letter from Ms. Micek's attorney received by petitioner's attorney on April 21, 2003, describing the payments she had been receiving from petitioner as alimony payments. Accordingly, the spousal support affidavit qualifies as a written separation instrument as defined by section 71(b)(2), and petitioner is entitled to his claimed alimony deductions for the years at issue.
It looks like the IRS may have been whipsawed by this decision. If not I would not like to be in the shoes of Ms. Micek's attorney since his use of the word "alimony" was an important element in the decision. He should have been aware of whether his client was reporting the payments as taxable income.
Wednesday, June 15, 2011
Selling Soap as a Hobby - Amway IBO's in Tax Court
Roger S. Campbell, et ux. v. Commissioner, TC Memo 2011-42 The Amway distributorship system is well known to respondent and this Court
Friscia Construction, Inc., et al. v. Commissioner, TC Memo 2000-192
I included the Campbell case in one of my group posts. It concerned someone whose Amway activities were considered a hobby by the Tax Court denying them deductions for losses. That portion of the post was picked up by someone who calls himself Joecool and posted on his blog under the title "Do IBO's have a clue about business?". I found that there are quite a few blogs dedicated to pointing out the downside of the Amway experience including Married To An Ambot by Anna Banana :
My story of what its like to be married to an Amway cult follower. I expose the lies that our upline told and what happens at Amway meetings and functions. I leave the explanations of why Amway is a poor business opportunity or the tool scam to other bloggers. This blog mainly exists to curse out my former upline, aka the cult leaders, and to let everyone know what kind of idiots I had to put up with. Feel free to join in or live vicariously.
Come on Anna, stop holding back. Tell us how you really feel.
So I got motivated to look at what was in the database I prowl for my little tax jewels had on Amway. As the above quote from Friscia Construction indicates, there is quite a bit. "The Court" is the Tax Court. "Respondent" is the IRS (In all Tax Court cases the taxpayer is "The Petitioner" and IRS is "The Respondent"). Friscia Construction is unusual among the cases I found. It is about the IRS challenging the deductions of a profitable Amway distributor.
Although originally focused on soap, Amway sells a variety of household products through its multi-level marketing system. In case you have never been invited to an Amway presentation or, more likely, didn't go when you were invited, the emphasis is not so much on the products or even selling the products. It's about getting other people to sell the product, who in turn get other people and so on with you sitting at the top of your pyramid (only they make it real clear its not a pyramid).
Bloggers like Joecool and Anna Banana claim that there are very few people who make money at it. Those that do probably don't make as much as they claim, since those in the "upline" need to paint a glowing picture to motivate the "downline" IBO's (Independent Business Owners). Further, the bloggers claim that most of the soap and other stuff is actually bought by the IBO's themselves. Finally, the "upline Diamonds" make most of their money from selling "tools" (i.e. motivational tapes and the like) to the downline.
The other attraction of Amway to some people is that it might allow them to deduct as business expenses things like cars, part of their home or entertainment that they would have spent anyway. That's probably the aspect of Amway that the IRS finds most interesting. Joecool did a post on how some IBO's think of their income tax refunds (generated by Amway losses sheltering other income) as profit.
To me the most interesting thing that I found in my search is this excerpt from the Internal Revenue Manual for examiners who are doing information requests:
.4.4.3.39 — Amway Corporation
[Last Revised: 12-10-2007]
(1) Amway Corporation has waived the hand delivery requirements of 26 USC §7603 and will accept summonses by personal service, mail, or overnight service at Amway Corporation, 7575 E. Fulton, Ada, MI 49355, Attn.: Director, Legal Division. Direct distributors who further qualify for profit sharing bonuses receive the non-cash part of that bonus through a mutual fund account administered by Amway Mutual Fund, Inc., 7575 E. Fulton, Ada, MI 49355, which requires a separate summons
Now I am subject to the AICPA Statements of Standards on Tax Practice, which among other things forbids me from giving clients advice based on what I believe the audit selection process of a taxing authority is. I wouldn't do it anyway, because I think most people who give that type of advice are guessing. Even if you happen to be one of my clients, I'm speaking to you purely as a reader here when I give you this advice:
You don't tug on Superman's cape
You don't spit into the wind
You don't pull the mask off that old Lone Ranger
And you don't take no Schedule C losses from an arrangement with a company that IRS examiners have on speed-dial.
I found 23 cases of IBO's who fought the IRS in Court. (A couple appealed, but I only counted them once)They pretty much all lost. In these type of cases there are really three ways you are denied deductions. The first is substantiation. You didn't prove it. Next is that the expenses are not really ordinary and necessary expenses of the business. When you are talking about cars and business use of the home, those two issues can get blurred together. The third is that there really isn't any business there. Taxpayers fight the IRS and win on that issue frequently even a Vietnamese couple whose "business" was playing slot machines using the principles of Feng Shui. Amway IBO's who take on the IRS on the Section 183 "hobby loss" issue almost always lose.
One of the most common themes is that IBO's seek advice generally only from their "uplines", who of course are not disinterested. They also do not seem to put any energy into trying to control their expenses. I'm going to give you a little snippet from each of the cases and comment a bit on some of them.
LOPEZ v. COMM., Cite as 94 AFTR 2d 2004-7075
Jorge N. Lopez, et ux. v. Commissioner , TC Memo 2003-142
Tax Court properly determined that engineer and wife weren't entitled to business deduction for expenses incurred in connection with their Amway products distribution activity because they didn't engage in activity for profit: although taxpayers showed proof of profit motive, such wasn't sufficient to override govt.'s evidence that included their failure to keep businesslike records, their failure to alter unprofitable methods, their non-dependence on activity income, and their use of activity to socialize with friends and family.
In their own Amway activities, which began in 1996, the Lopezes sold products at cost to both their downline distributors and their customers, which practice eliminated retail sales as a source of gross income. They chose instead to focus their efforts on developing a network of downline distributors to generate performance bonuses. Relying on Amway brochures, the Lopezes concluded that they would need to achieve and maintain a monthly point value of 4,000 for their Amway activities to be profitable. In 1998 and 1999, the Lopezes' point value did not exceed 372 points in any month.
The only advice they sought for their Amway activities was from upline distributors, and when they received unsolicited advice from their accountant, they disregarded it. During the years in question, Mr. Lopez was employed full-time as a petroleum engineer, and Mrs. Lopez was a homemaker.
The tax court ultimately was not persuaded that the Lopezes' primary motive for conducting their Amway activities was for income or profit. It found that the conduct of their Amway activity “virtually precluded any possibility of realizing a profit.” The Lopezes' lack of a business plan for recouping losses and achieving profitable levels of activity indicated the absence of a profit motive. In the face of four consecutive years of losses, the Lopezes still did not change their approach to increase the likelihood of earning a profit. The tax court further found that the Lopezes did not conduct market research to help them assess the potential profitability of their activities. It also noted that, although the Lopezes had no prior business experience, they accepted the advice of upline distributors rather than seeking advice from unbiased, independent business sources.
Since the Mr and Mrs Lopez appealed, they got to lose twice.
OGDEN v. COMM., Cite as 87 AFTR 2d 2001-1299
Michael A. Ogden, et ux. v. Commissioner, TC Memo 1999-397
Contrary to the Ogdens' contention, evidence of profit is not determinative of whether a profit motive exists. See id. at 876 (no single tax regulation factor, nor the existence of a majority of factors, is determinative of whether a profit motive exists). There is overwhelming evidence in the record that, if believed, supports a conclusion that the Ogdens maintained their Amway activity for deductions, personal pleasure and to offset wages. The tax court did not abuse its discretion in denying the motion for reconsideration.
Amway does not have a quota for sales, its products do not have to be sold above cost, and its distributors are not required to sponsor downline distributors. An Amway brochure, The Amway Business Review, states that the potential for earning income increases as the number of distributors in a sponsor's group grows and as sales increase. Distributors devote as little or as much of their time to Amway activities as they desire. The eight page Amway Business Review in large blocks on four of its pages highlights the fact that “The Average Monthly Gross Income for “Active” Distributors was $88.”
We believe Amway distributors may be biased when discussing Amway because they have a natural desire to advance the organization and/or obtain income from a downliner.
ELLIOTT v. COMMISSIONER, 90 TC 960
Deductions denied for business expenses and depreciation connected with Amway distributorship. Activities were conducted in unbusinesslike manner, taxpayers maintained full-time jobs, and little distinction was made between Amway activities and personal social activities. Also, IRS properly imposed penalties for failure to timely file and negligent or intentional disregard of rules.
A further indication of the unbusinesslike fashion in which petitioners conducted their Amway activity was the thin line dividing business activities from personal and [pg. 973]recreational activities. Petitioners offered scant evidence that their Amway activity required them to do anything other than to maintain an active social life. Although they occasionally attended seminars, most of their activity involved giving parties and taking people out to restaurants. While there is no requirement that profit-oriented work be onerous and unpleasant, the evidence presented by petitioners does not indicate activity motivated by a profit objective. On the contrary, the evidence shows that petitioners made some small modifications in their routine social life, kept cursory notes about their activities, and claimed deductions for the cost of nearly everything they owned or did. On this record, we find as a fact that petitioners' activities were motivated by a desire to avoid tax rather than a desire to generate income.
Roger S. Campbell, et ux. v. Commissioner, TC Memo 2011-42
Activities not for profit—profit objective—distributorship and direct marketing activities. Code Sec. 183 deduction limits applied to expenses pro se married real estate and construction business operators claimed in connection with Amway distributorship activity that they engaged in without requisite profit objective. Lack of profit objective was shown by facts that taxpayers commingled expenses, had no idea if they were making profit for any given year until they filed that year's return, didn't keep complete records, and otherwise didn't conduct activity in businesslike manner. It was also telling that taxpayers didn't have experience in this type of activity, didn't seek out independent advice, used activity losses to offset their real estate and construction business income, and stated that they would continue with activity regardless of whether it ever turned profit. Countervailing facts that they spent significant time on activity and increased gross receipts during years at issue weren't dispositive considering overall record.
Kenneth J. Nissley, et ux. v. Commissioner, TC Memo 2000-178
Activities not for profit—Amway distributorship. Husband and wife/CPAs didn't engage in Amway distributorship activity for profit: taxpayers incurred substantial losses for 8 consecutive years; and didn't conduct activity in business-like manner where they kept separate bank account and records to “guarantee” deductions
Kenneth C. Theisen, et ux. v. Commissioner, TC Memo 1997-539
Full-time IRS agent and travel agent-wife didn't operate Amway distributorship for profit, so weren't entitled to deductions from activity: taxpayers didn't conduct activity in business-like manner where they didn't have business plan, perform break-even analysis or have budget; admitted that benefits included ability to buy discounted products for personal use; testified that distributorship was for financial gain and personal purchases were more than purchases acquired for resale; reported losses for 5 consecutive years; couldn't explain how or when distributorship would become profitable or why auto and telephone expenses increased without corresponding revenue increase; kept income and expense ledger for substantiation purposes only; and intentionally excluded cost of motivational tapes from costs of goods sold to avoid disclosing negative gross income on returns
Generally, no. The way the plan is written is, you're taught to purchase things from yourself for yourself, and you get other people — say, Look. Just change your buying habits. Don't go to HEB. Don't go to Eckerd's. Don't go to Sam's. You get access to all these products. Change your buying habits. Buy things for yourself
Petitioner also conceded that petitioners' personal purchases were more than the purchases they acquired for resale to other customers or downline distributors. Specifically, petitioner admitted that in 1992 he bought $4,500 of products for personal use and $3,262 of products for other purposes. For 1993, he conceded he bought $10,729 of products for personal use and $4,991 of products for other purposes.
Bryan J. Brennan, et ux. v. Commissioner, TC Memo 1997-60
1. Litigation costs—substantial justification for IRS position—distributorship conducted for profit. Taxpayers were denied litigation costs with respect to underlying case challenging IRS's disallowance of their business deductions: IRS was substantially justified in its position that taxpayer didn't conduct household product distributorship with requisite profit objective under Code Sec. 183 . Taxpayers had losses for 7 consecutive years, yet earned substantial income from other sources for 2 of those years, and didn't provide IRS with business plan or profit projection; and similar distributorship-related activities had been found to contain elements of personal pleasure. Also, IRS's concession of the issue within 5 months of filing answer and 2 months of receiving additional information was reasonable.
This is a case of the taxpayer actually settling favorably with the IRS. They were, however, not able to recoup attorneys fees.
William B. Hart, et ux. v. Commissioner, TC Memo 1995-55
Taxpayers weren't entitled to deduct business loss related to Amway distributorship: taxpayers didn't engage in activity for profit. Expenses of distributorship activity related mainly to social functions: taxpayers attended seminars in Colorado and California, and monthly dinners with their “network”; taxpayer-husband took guest who was interested in finding out more about distributorship on fishing trip; and “supplies” expense included groceries bought while taxpayers were away delivering products or visiting clients. Court rejected argument that activity was conducted in businesslike manner because taxpayers kept records, sought expert counseling, and devoted time and effort to distributorship: they didn't utilize records in way to help them make profit; they didn't seek advice on how to cut back on expenses; many of expenses claimed had significant elements of personal pleasure; and due to distributorship's low receipts it appeared that taxpayers used their time spending money on entertainment rather than focusing on earning profit.
Negligence penalty was upheld: despite Tax Court's warning in prior case that taxpayers couldn't translate their Amway business into deduction for personal aspects of their lives, taxpayers again attempted to deduct clearly personal expenses in guise of distributorship activity, which they had failed to show was being operated for profit. But taxpayers weren't liable for penalty for filing late return: recent death of taxpayers' son was reasonable cause for delay in filing return; and there was no willful neglect.
Petitioners do not appear to have heeded our warning, and respondent was not as charitable this time. Again petitioners have attempted to deduct clearly personal expenses in the guise of an Amway activity that they failed to show was being operated for a profit. We sustain respondent on this issue.
Thomas P. Poast, TC Memo 1994-399
IRS proved that taxpayers, full-time automobile workers, lacked requisite profit objective in carrying on their Amway distributorship activity. Taxpayers failed to conduct activity in businesslike manner: taxpayers maintained incomplete sales records, used solely to help to substantiate claimed deductions; they failed to isolate business expenses from personal expenses; and taxpayers kept no realistic and reasonable budget despite incurring substantial net losses in all prior years. Further, taxpayers' claim that they sought expert counseling regarding business techniques was rejected: taxpayers abandoned "ineffective" techniques without performing cost/benefit analysis of techniques; and techniques received from "upliners" (who had financial stake in taxpayers' sales) were never seriously utilized. Also, much of the time taxpayers spent on Amway activity involved substantial pleasurable personal aspects.
Shortly before becoming involved with their Amway activity, petitioners attended a seminar conducted by an insurance agent, Donald Fletcher, who conducted similar seminars nationwide. Fletcher promoted his life insurance product, while suggesting to the participants of the seminars that the premiums be funded by tax savings generated by deducting largely personal expenses through a home based business like Amway. Fletcher offered to prepare participants' tax returns and provide representation in audits for a cost of $125.
We find not only that the techniques were not seriously utilized, but also that, for the most part, petitioners' advisers were not experts as much as they were upliners with a financial stake in petitioners' retail and downline sales. Neither petitioners nor their advisers appeared to be even vaguely interested in the importance of cutting back their expenses.
Gerald Eugene Swaffar, TC Memo 1992-180
IRS failed to prove that taxpayer's Amway activities weren't carried on for profit. Deductions for expenses related to Amway activities were allowed only to extent conceded by IRS: taxpayers failed to substantiate expenses in excess of that amount. Penalties for negligence and substantial understatement were imposed
At trial, respondent contended for the first time that petitioner's Amway activities were not engaged in with the requisite profit objective under section 183. Such new matter requires that the burden of proof be placed on respondent. See Rule 142(a). Respondent further contends that, assuming the Amway activity was entered into with a bona fide profit objective, petitioner has failed to establish that the above expenditures were incurred and were ordinary and necessary in carrying on a trade or business, pursuant to section 1.
An analysis of petitioner's Amway activities requires this Court to conclude, without analyzing in depth all nine factors, that respondent has not carried her burden of showing that petitioner did not engage in the Amway activity with an actual and honest objective to make a profit. We emphasize that we do not affirmatively conclude that petitioners had a profit objective, but only that respondent has failed to prove that petitioners lacked such an objective.
Sometimes it is better to be lucky than good. If in its deficiency notice the IRS asserts that you didn't have a profit motive, it is up to you to prove that you did. In this case, the IRS raised the issue later, which shifted the burden of proof. The IRS couldn't prove that they didn't have a profit motive.
Gerald W. Jordan, TC Memo 1991-50
Amway distributor was allowed to deduct expenses for travel, incentive prizes, and seminars: expenses were ordinary and necessary. Deductions were allowed in part for meal and car expenses, and were denied for gift expenses, because taxpayer didn't fully substantiate claims.
Another win for an IBO. Hooray. Too bad they didn't do a better job on substantiation.
Joseph M. Ransom, TC Memo 1990-381
Taxpayer wasn't engaged in Amway distribution activity with profit objective. Factors tending to indicate lack of profit motive were: absence of separate checking account; failure to cut costs or recruit new distributors; and substantial income from other sources (with attempted Amway deductions that would have almost eliminated tax he would otherwise owe on that income).
Peter S. Rubin, TC Memo 1989-290
Deductions attributable to Amway distributorship activities were disallowed to extent they exceeded gross income from those activities, which weren't engaged in for profit: taxpayers kept records in cursory and sloppy manner, and they engaged in distributorship activities to claim tax deductions for personal expenditures and to purchase Amway products at sizeable discounts for their own use.
Dewitt Talmadge Ferrell, Jr., TC Memo 1987-102
Losses claimed by airline pilot and housewife were limited where their business activities, involving selling of Amway products, sundials, and posters, weren't engaged in with profit objective, but rather were conducted primarily to generate tax deductions and credits for personal expenses. Revenues were of secondary importance to taxpayers who had no sales expertise and made no effort to obtain any, didn't maintain reliable records, and devoted little effort to sales. Burden of proof was on taxpayers since they didn't show that business ever reported profit before years in issue; Sec. 183(d) presumption didn't apply.
J.H. Schroeder, TC Memo 1986-583
As to the Amway distributorship fee, petitioner failed to show that he conducted his Amway affairs in connection with a trade or business or an activity engaged in for profit. Petitioner made no sales of Amway products and had no income from his Amway operations during 1981. He failed to possess the requisite profit objective, since he admittedly became a distributor solely for the purpose of being able to purchase items at discount prices by virtue of his status as a "dealer". See section 183.
Harry Mitchell Goldstein, TC Memo 1986-339
Taxpayers' Amway activities weren't trade or business and weren't engaged in for profit but were undertaken primarily to obtain tax deductions and credits; business expenses, investment credit, and child care credit denied. Taxpayers' (husband and wife) activities weren't carried on in businesslike manner, they both had full-time jobs, and they had very little success in obtaining other distributors or selling products. Taxpayers had become Amway distributors and claimed losses based on business deductions and credits.
Q. How many sales did you make in 1980?
A. Sales—1980—Probably not even $5 worth, because we did not get any new people coming in, you see. We just mostly went in for ourselves and then get the other people coming in with us.
Q. So it is your testimony that your total income from Amway in 1979 and 1980 was less than $5?
A. Yes.
Q. Are you still in the Amway business?
A. Yes. We like the products and you can't get them any other way.
John Alcala, TC Memo 1984-664
On this record, there arises the strong suspicion that petitioners became Amway distributors primarily for the purpose of providing themselves with Amway merchandise which they could not otherwise obtain, while, at the same time, providing themselves with considerable tax deductions. Compare Barcus v. Commissioner, T.C. Memo. 1973-138 We make no such finding herein, but we do hold that petitioners have failed to carry their necessary burden of proof to establish that they entered into a bona fide business enterprise with the intention and objective of making a profit. McCormick v. Commissioner, T.C. Memo. 1969-261
Randall B. Ollett, et ux. v. Commissioner, TC Summary Opinion 2004-103
In addition to the travel-related expenses, petitioners also had expenses of $3,571 in 1999 and $710 in 2000 for professional books and other materials that were part of Amway's “training program”. These books were recommended by petitioners' upline network and may be described as general self-motivation books. Petitioners also purchased various audio tapes that included stories told by other Amway distributors of how they built successful networks.
As noted above, petitioners' revenue from the Amway activity for the years in issue was minimal, and even that amount was attributable in part to petitioners' purchases of household goods for their own personal use. When asked about how they intended to turn their losses into profits, Mr. Ollett responded: “The only way I can solve it is to talk to more people. And there, in essence, is the challenge that I have, which is finding those people”.
Petitioners did not have any sales experience prior to becoming Amway distributors. Petitioners relied exclusively on their upline distributors, who stood to benefit from petitioners' participation, for advice and training. They did not seek independent business advice at the beginning of their Amway activity to assess their potential for success, and they did not seek independent business advice for turning around years of operating losses. Petitioners' failure to seek independent business advice strongly suggests that petitioners did not carry on the Amway distributorship in a businesslike manner.
Joe Guadagno, et ux. v. Commissioner, TC Summary Opinion 2003-88
Included with petitioners' timely filed return for each year is a Schedule C, Profit or Loss From Business. Each return was prepared by a certified public account who also was an Amway distributor. Petitioners' Schedules C for 1996 and 1997 list their principal business as “Amway”. For 1998, petitioners' Schedule C lists their principal business as “DistConsumerProduct”. Petitioners reported net losses of $26,264, $24,047, and $19,810 on their Schedules C for 1996, 1997, and 1998, respectively.
Before becoming Amway distributors, petitioners had neither experience with Amway nor experience in running a business. Nevertheless, they did not seek independent business advice at the outset, and they did not seek independent business advice afterwards even though losses were sustained year after year. Instead, they relied upon other Amway distributors whose advice is more accurately characterized as personal motivational advice than strategic business advice.
Larry Minnick, et ux. v. Commissioner, TC Summary Opinion 2002-147
As previously stated, more weight must be given to objective facts indicating a profit objective than to petitioners' statement of intent. Dreicer v. Commissioner, supra. After considering the objective factors detailed above, we find especially relevant the manner in which petitioners carried on the Amway activity and petitioners' history of losses and lack of profits. We find from these and the other objective facts in the record that petitioners did not have an actual and honest intent to profit from the Amway activity in 1996 and 1997.
Broadrick R. Moore, et al. v. Commissioner, TC Summary Opinion 2001-173
Considering the record in its entirety, we are satisfied that petitioners did not have the actual, honest, and bona fide objective of making a profit. It appears that they became Amway distributors simply to deduct expenses for items of a personal nature
Karl Meyer, et ux. v. Commissioner, TC Summary Opinion 2001-157
The Amway “pyramid” incentive system is promoted by Amway in the form of the “9-4-2 plan”. Under the “9-4-2 plan”, each Amway distributor is encouraged to personally recruit 9 “downline” distributors, each of whom in turn is encouraged to recruit at least 4 “downline” distributors, each of whom in turn is encouraged to recruit at least 2 “downline” distributors (for a total of 117 “downline” distributors in the initial distributor's organization). The “9-4-2 plan” is promoted as the theoretical break-even point for a distributorship, assuming that (1) the distributor and each “downline” distributor within the distributor's organization purchases $200 of Amway products per month and that (2) the distributor does not have expenses exceeding $2,000 per month. At least in theory, the potential for profit is enhanced as each of the 117 “downline” distributors in the distributor's network successfully implements the “9-4-2 plan”.
The Amway “9-4-2 plan” does not provide meaningful guidance to distributors regarding how expenses incurred in pursuing an Amway activity may be reduced
Despite their lack of experience with either Amway or an Amway type activity, petitioners never sought meaningful counsel from disinterested third parties. Rather, petitioners relied principally on advice from “upline” distributors and other interested Amway individuals
James R. Landrum, et ux. v. Commissioner, TC Summary Opinion 2001-112
Prior to the years in issue, petitioners had three separate experiences with Amway, beginning in 1974. Mr. Landrum was a corporal in the Marine Corps and was stationed in Hawaii in 1974. His Amway activity consisted of purchasing cases of wax from an Amway distributor at wholesale, selling “a case or two a month to [his] friends,” and keeping the difference between the wholesale and retail prices. He ceased his activities with Amway in 1976 when he was transferred from Hawaii and then released from active duty with the Marine Corps. After their marriage in 1977, petitioners participated in an Amway distributorship. Their experience with Amway was unprofitable, and they terminated it after 2 years. Petitioners became involved with Amway a third time in 1985, while Mr. Landrum was employed at Goodyear. Although petitioners had about 50 persons reporting to them, directly or indirectly, in the pyramid structure of Amway, there were insufficient sales for profit. Petitioners' third Amway venture lasted approximately 2 years, and again, petitioners terminated the activity for lack of profit. In late 1995, petitioners were introduced to Amway a fourth time by friends of Mrs. Landrum. This fourth Amway experience is the subject of the present controversy.
Mr. Landrum estimated that the person who established a successful 6-4-2 grouping would receive $1,800 to $2,200 in monthly commissions and then might proceed to gain even greater benefits as a “direct distributor” who might then triple his organization and receive an “Emerald bonus” and then expand to have six legs and a “Diamond organization”. According to Mr. Landrum, Amway distributors with an emerald organization make $75,000 to $100,000 annually, and those with a diamond organization make $125,000 to $250,000 yearly, “And it goes up from there” as he put it.
Conclusion:
23 cases on the same issue is a goodly number, but of course they are over a long period of time. It's clearly not a random sample. If you are say the 20th case like this either you didn't do your homework or you are really stubborn. The other thing that biases this is that the IRS picks the worst cases to contest. Before you get a "90 day letter", which is what allows you to go to Tax Court, you can have an independent appeal in the IRS. Once you file to go to Tax Court, the case will get kicked back to appeals to see if they can settle. At that point appeals can consider "hazards of litigation". So there are probably many people who got decent settlements from the IRS. Of course there are also many who just wrote a check to close out the audit. All in all, though, if the reason you want to start a business is so that you can deduct money you spend anyway (Something I advise you not to do), Amway is probably one of the worst things that you could pick. It's worse than horse breeding, which the IRS seems to have a particular antipathy for, but the Tax Court often allows.
Interestingly, I did not find any cases of people who were using other types of tax shelters to shelter their Amway income. Also, if the Amway dream is really true, you would think I would find a case like that of Peter Morton, who was being challenged on deducting his jet expenses, only with the taxpayer being a Quintuple Diamond Super Duper Amway guy. At the Amway meeting I went to they said that they were glad not everybody took advantage of the Amway opportunity, since they needed pilots for their planes and the like.
All in all, I would say that while not determinative, the record in the tax court is supportive of Joecool and Anna Bannana. At least, there are some more stories for them.
Ignore Those Bad Idea Bears-IRA Not a Good Bridge Loan Source
Private Letter Ruling 201118025
Private Letter Ruling 201116044
Private Letter Ruling 201116040
Private Letter Ruling 201117046
My friend suggested we get a series of tickets to plays at Hanover Theater. I don't regret it, but I have to say I was a little disappointed. My idea of what a play is was more or less fixed while I was in high school. I had the good fortune to attend Xavier High School in Manhattan and we had a fantastic English teacher Brian Moroney who would get us discount tickets to plays. It was quality stuff, but not first run Broadway stuff - off-Broadway, Lincoln Center etc. So I always think of plays as kind of deep and profound and maybe a little depressing. When I reflect on it, I sometimes wonder what the point of bringing a bunch of Irish Catholic kids to see Long Days Journey into Night was. Half of us could just go visiting to find that kind of alcoholic dysfunction and the other half could just stay home. Turns out that Hanover at least in this series was all musicals all the time. I like musicals as well as the next guy although maybe not quite as much as The Wandering Tax Pro, but I'm still aching to see something like Hedda Gabler. Maybe next year. Which is not to say you can't get something worthwhile out of musicals, even an extremely silly one like Avenue Q.
In Avenue Q the characters are people, Muppet like creatures and people walking around with Muppet like characters. Among the latter were "the bad idea bears". They kept telling the main character to do foolish things like spending all his money on beer. They weren't giving much financial advice, but if they thought of it I'm sure one of their suggestions would have been to use your IRA for a bridge loan. Most people think its a bad idea to take money out of your IRA before you are 59 1/2 (I'm counting the days by the way) and even then if you don't need it. What if you have a temporary need for money though ?
Here is what the bad idea bears have to say on the subject. If you withdraw money from your IRA you have sixty days to roll it over into another IRA. So if you need some money for a short period like five or six or seven weeks just take it from your IRA and put it into another IRA before the sixty days are up. Besides if the IRS is pretty forgiving if you somehow foul up and go past the sixty days. They give favorable rulings on that all the time.
I mean just recently there were two rulings where people were allowed to make late rollovers PLR 201116040 and PLR 201116044. Some crook stole the money so the taxpayers got more time to make the rollovers. So if something goes wrong maybe you can just say you thought it was 90 days like the lady in PLR 201117046. Oh, that didn't work did it ? That lady was denied relief.
Well what about the fellow in PLR 201118025, who was trying to help out his mom. If anybody deserves relief it is him. I mean check out the story:
Taxpayer A represents that when his elderly mother, Individual B, developed mobility limitations which made it unsafe for her to remain in her two-story residence, Taxpayer A's siblings developed a plan which, in pertinent part, involved Taxpayer A and his siblings pooling their money to add to the sale proceeds of the first residence in order for Individual B to make a cash purchase of suitable housing. Individual B would then enter into reverse-mortgage financing of the new residence and receive a lump-sum cash payment which she would use to repay Taxpayer A and the others. Taxpayer A would then redeposit Amount N into IRA X.
On Date 1, Taxpayer A received a distribution of Amount N from IRA X. On Date 2, seven days after Date 1, Amount N was applied to the above described purchase. Also, on Date 2, Bank D began processing the reverse mortgage. Taxpayer A represents that Bank D gave assurances that the mortgage process, including payment to Individual B, would be completed within a time frame which would have allowed Taxpayer A to meet the 60-day period for rolling over Amount N into IRA X, however, numerous delays by Bank D resulted in the mortgage not having been processed as of the 60th day after the distribution of Amount N from IRA X.
Taxpayer A represents that upon completion of the processing of the reverse mortgage, Taxpayer A was reimbursed in full and immediately mailed an amount equal to Amount N, to Financial Institution C with instructions to redeposit Amount N into IRA X. On Date 3, Amount N was redeposited into IRA X, however, as explained above, the 60-day period for rolling over Amount N into an IRA had already expired.
Bad idea- Bank D may have screwed up, but Bank D wasn't involved in the IRA either outgoing or incoming:
Taxpayer A has stated that error by Bank D is responsible for his failure to make a timely rollover of Amount N, however, when Amount N was presented to Bank D, Taxpayer A did not intend that Bank D transact any financial matter relating to an IRA. Rather, Amount N was withdrawn from IRA X at Financial Institution C and was presented to Bank D for the purpose of contributing Amount N, on a temporary basis, toward the purchase price of a suitable residence for Individual B. In essence, Taxpayer A made a short term loan when he withdrew Amount N from IRA X and while he had the intent at the time of withdrawal to redeposit Amount N into IRA X prior to the expiration of the 60-day rollover period, he assumed the risk that Amount N might not be returned to him timely.
The ruling would have been better if they had said that the residence involved was on Avenue Q, but you can't have everything.
Private Letter Ruling 201116044
Private Letter Ruling 201116040
Private Letter Ruling 201117046
My friend suggested we get a series of tickets to plays at Hanover Theater. I don't regret it, but I have to say I was a little disappointed. My idea of what a play is was more or less fixed while I was in high school. I had the good fortune to attend Xavier High School in Manhattan and we had a fantastic English teacher Brian Moroney who would get us discount tickets to plays. It was quality stuff, but not first run Broadway stuff - off-Broadway, Lincoln Center etc. So I always think of plays as kind of deep and profound and maybe a little depressing. When I reflect on it, I sometimes wonder what the point of bringing a bunch of Irish Catholic kids to see Long Days Journey into Night was. Half of us could just go visiting to find that kind of alcoholic dysfunction and the other half could just stay home. Turns out that Hanover at least in this series was all musicals all the time. I like musicals as well as the next guy although maybe not quite as much as The Wandering Tax Pro, but I'm still aching to see something like Hedda Gabler. Maybe next year. Which is not to say you can't get something worthwhile out of musicals, even an extremely silly one like Avenue Q.
In Avenue Q the characters are people, Muppet like creatures and people walking around with Muppet like characters. Among the latter were "the bad idea bears". They kept telling the main character to do foolish things like spending all his money on beer. They weren't giving much financial advice, but if they thought of it I'm sure one of their suggestions would have been to use your IRA for a bridge loan. Most people think its a bad idea to take money out of your IRA before you are 59 1/2 (I'm counting the days by the way) and even then if you don't need it. What if you have a temporary need for money though ?
Here is what the bad idea bears have to say on the subject. If you withdraw money from your IRA you have sixty days to roll it over into another IRA. So if you need some money for a short period like five or six or seven weeks just take it from your IRA and put it into another IRA before the sixty days are up. Besides if the IRS is pretty forgiving if you somehow foul up and go past the sixty days. They give favorable rulings on that all the time.
I mean just recently there were two rulings where people were allowed to make late rollovers PLR 201116040 and PLR 201116044. Some crook stole the money so the taxpayers got more time to make the rollovers. So if something goes wrong maybe you can just say you thought it was 90 days like the lady in PLR 201117046. Oh, that didn't work did it ? That lady was denied relief.
Well what about the fellow in PLR 201118025, who was trying to help out his mom. If anybody deserves relief it is him. I mean check out the story:
Taxpayer A represents that when his elderly mother, Individual B, developed mobility limitations which made it unsafe for her to remain in her two-story residence, Taxpayer A's siblings developed a plan which, in pertinent part, involved Taxpayer A and his siblings pooling their money to add to the sale proceeds of the first residence in order for Individual B to make a cash purchase of suitable housing. Individual B would then enter into reverse-mortgage financing of the new residence and receive a lump-sum cash payment which she would use to repay Taxpayer A and the others. Taxpayer A would then redeposit Amount N into IRA X.
On Date 1, Taxpayer A received a distribution of Amount N from IRA X. On Date 2, seven days after Date 1, Amount N was applied to the above described purchase. Also, on Date 2, Bank D began processing the reverse mortgage. Taxpayer A represents that Bank D gave assurances that the mortgage process, including payment to Individual B, would be completed within a time frame which would have allowed Taxpayer A to meet the 60-day period for rolling over Amount N into IRA X, however, numerous delays by Bank D resulted in the mortgage not having been processed as of the 60th day after the distribution of Amount N from IRA X.
Taxpayer A represents that upon completion of the processing of the reverse mortgage, Taxpayer A was reimbursed in full and immediately mailed an amount equal to Amount N, to Financial Institution C with instructions to redeposit Amount N into IRA X. On Date 3, Amount N was redeposited into IRA X, however, as explained above, the 60-day period for rolling over Amount N into an IRA had already expired.
Bad idea- Bank D may have screwed up, but Bank D wasn't involved in the IRA either outgoing or incoming:
Taxpayer A has stated that error by Bank D is responsible for his failure to make a timely rollover of Amount N, however, when Amount N was presented to Bank D, Taxpayer A did not intend that Bank D transact any financial matter relating to an IRA. Rather, Amount N was withdrawn from IRA X at Financial Institution C and was presented to Bank D for the purpose of contributing Amount N, on a temporary basis, toward the purchase price of a suitable residence for Individual B. In essence, Taxpayer A made a short term loan when he withdrew Amount N from IRA X and while he had the intent at the time of withdrawal to redeposit Amount N into IRA X prior to the expiration of the 60-day rollover period, he assumed the risk that Amount N might not be returned to him timely.
The ruling would have been better if they had said that the residence involved was on Avenue Q, but you can't have everything.
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