Former President George W. Bush does not like his name associated with the words "tax cut." Nevertheless, in 2004 Bush signed a corporate tax bill which rewrote the corporate tax laws and gave businesses, farmers, and other groups $136 billion in new tax breaks. However, what Congress and the President giveth, the IRS has the upper hand in taking away.
According to a new study, "Corporate Shams," businesses rarely prevail in tax disputes with the IRS. Reviewing more than a century of public data, tax scholar authors Joshua Black and Nancy Staudt, calculated that in tax dispute cases before the Supreme Court, businesses prevailed only four out of ten times.
From 1909 through 2011, the Supreme Court heard 137 tax dispute cases where the IRS argued that corporations were involved in abusive tax-motivated transactions. The IRS won 61% of these cases. In cases where the IRS argued the tax deficiency was not due to abuse, but a misreading of the tax code, the IRS won in 68% of these cases. Many of the cases involved whether a tax transaction had a business purpose or economic substance.
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Top Los Angeles Tax Attorneys Bruce Givner and Owen Kaye focus on sophisticated income tax planning and compliance, tax litigation and procedure, and asset protection plans for individuals and businesses. Call Givner & Kaye at (310) 207-8008 today.
]]>Under Chief Counsel Memorandum (CCM) 201208026, the IRS has changed its position on using testamentary powers of appointment to avoid gift tax through the creation of incomplete gifts.
Two donors set up an irrevocable trust for their spouses, children, and other lineal descendants then transferred property into the trust. The trustee, the donor's adult child, had absolute and unreviewable discretion to administer the trust. However, the two donors kept testamentary limited powers of appointment.
CCM 201208026 determined whether the retention of testamentary powers of appointment by the two donors made the property transfers an incomplete gift.
Using a power of appointment to create an incomplete gift is a popular asset protection plan device as it allows a transfer of assets to an irrevocable trust without incurring a current gift tax. In turn this protects the assets from the donor's creditors.
If a donor transfers property and after the transfer has no power to determine how or to whom the property is disposed, a gift is complete. If the testamentary power of appointment allows the donor to retain the income and give the remainder to the beneficiaries, the gift is incomplete and a gift tax is due on the transferred property. Treas. Regs. § 25.2511-2(b).
Here, the two donors kept some testamentary powers of appointment. However, because the two donors did not retain the income, the CCM found Treas. Regs. § 25.2511-2(b) did not apply. The transfer was a completed gift and no gift tax was due.
Top Los Angeles Attorneys Bruce Givner and Owen Kaye focus on sophisticated asset protection plans, income tax planning and compliance, and tax litigation and procedure, for individuals and businesses. Call Givner & Kaye at (310) 207-8008.
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In determining if settlement proceeds from a lawsuit are taxable, the type of settlement - personal injury or nonphysical injury - must first be determined.
Lawsuits for nonphysical injury settlements include:
1. Employment Related Lawsuits - i.e. wrongful termination or breach of contract
2. Lost Profits
3. Discrimination - i.e. race, religion, gender, or disability
4. Business or Personal Defamation
5. Emotional distress (minus related medical costs not previously deducted)
After the type of settlement is determined, how the settlement proceeds are apportioned between compensatory damages, punitive damages, and interest must then be decided.
With a jury or court verdict, the type of settlement is generally based on the type of claim filed and the apportionment is generally detailed in the court order. Out of court settlements are more difficult. The Internal Revenue Service (IRS) will closely review any characterization and allocation that "does not reflect the economic substance of the settlement." Phoenix Coal Company, Inc. v. Commissioner (CA-2) 56-1 U.S.T.C. 9366, 231 F.2d 420 (2d Cir. 1956); Bagley v. Commissioner, 105 T.C. 396 (1995), aff'd, 121 F.3d 393 (8th Cir. 1997); and LeFleur v. Commissioner, T.C. Memo. 1997-312.
Settlement proceeds from a nonphysical injury claim are taxable, unless a personal injury caused the loss. Punitive damages and interest related to nonphysical injury awards are also taxable. Any payments for actual out of pocket medical costs not previously deducted, however, are not taxable.
On IRS Form 1040, taxable settlement proceeds are reported as "Other Income" and taxable interest is reported as "Interest Income.".
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Determining the taxability of lawsuit settlements is complex. Top Los Angeles Attorneys Bruce Givner and Owen Kaye focus on sophisticated income tax planning and compliance, tax litigation and procedure, and asset protection plans. Call Givner & Kaye at (310) 207-8008 today.
]]>The Internal Revenue Service (IRS) has provided interim guidance on how gift tax audits will now be conducted, effective December 1, 2012. IRS SBSE Memorandum, SBSE-04-1211-103.
1. Once any gift tax return is selected for audit, the examiner will be responsible for obtaining a transcript to determine if prior gift tax returns were filed and requesting a copy of all gift tax returns from the appropriate IRS Service Center.
2. If a Service Center cannot locate a copy of a gift tax return, the examiner may request the taxpayer to provide a copy of the missing return.
3. The examiner is responsible for verifying and protecting the statute of limitations for each gift tax return. Refer to SBSE-04-1211-101, Interim Guidance on Gift Tax Statute of Limitations in Estate and Gift Tax Examinations and IRM 25.6.23-3 pertaining to the substantial omission rules pursuant to IRC section 6501(e)(2).
4. During the audit, the examiner will likely probe for undisclosed gift transfers.
5. Gift tax examiners will now request the assistance of internal specialists, outside free appraisers, and paraprofessional support to examine gift tax returns, identify undisclosed gifts, and determine any potential tax deficiencies.
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Top Los Angeles Tax Litigators Bruce Givner and Owen Kaye focus on sophisticated income tax planning and compliance, tax litigation and procedure, and asset protection plans. Call Givner & Kaye at (310) 207-8008 today.
]]>Although taxpayers have been required to file the FBAR form for years, the new filing requirements for IRS Form 8938 are effective beginning in 2012.
The two Forms, Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), and the new IRS Form 8938, are similar, but have many differences causing taxpayers to struggle with how and when to report their foreign accounts and assets to the government.
IRS Form 8938 implements new tax code Section 6038D. This section of the Internal Revenue Code went into effect in 2012, under the Foreign Account Tax Compliance Act.
On the FBAR, taxpayers report their foreign financial accounts. IRS Form 8938 requires the reporting of a broad range of assets that could include hedge funds, equity funds, pension funds, and even indirectly held real estate.
Also, the two IRS Forms have different thresholds for filing and different penalties associated with failure to file or report assets or accounts.
For all your international tax planning matters, you must contact the expert tax attorneys and tax litigators of Givner & Kaye.
The penalties for failing to files these forms or filing incompletely or incorrectly can be very large. Do not risk it. Call the tax experts at Givner & Kaye today. (310) 207-8008
]]>This penalty can be avoided by filing returns and paying the full amount of tax shown by March 1, 2012. This relief is also being provided to fishermen.
MF Global filed for bankruptcy on October 31, 2011 after margin call shortcomings and the disappearance of more than $200 million in customer funds.
The IRS has been advised that there has been a delay in mailing Forms 1099, which will affect many farmers' ability to file their 2011 return by the March 1, 2012, deadline.
If a taxpayer has an underpayment of estimated tax, all or part of the penalty may be waived if the IRS determines the underpayment was due to an "unusual circumstance".
You can obtain a waiver of the estimated tax penalty by completing Form 2210-F - Underpayment of Estimated Tax by Farmers and Fisherman.
For attorney help disputing large IRS penalties contact the expert tax litigators at Givner & Kaye. (310) 207-8008
]]>Kangsheng Zhu and Lanping Zhang were husband and wife, both over the age of 50. Zhang was an active participant in her employer's qualified pension plan. Zhu was not covered by a qualified pension plan.
On their 2008 joint federal tax return, Zhu and Zhang claimed an $11 thousand deduction for IRA contributions, $6 thousand for Zhu, $5 thousand for Zhang. The IRS disallowed the $5 thousand deduction for Zhang since she was an active participant in a qualified pension plan and Zhu and Zhang's modified AGI was greater than the phase out ceiling amount.
In 2008, the applicable dollar amount for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return was $85 thousand. IRC Section 219(g)(3)(B)(i). Above $85 thousand, the allowable deductible amount of an IRA contribution phased out over a $20 thousand range. For taxpayers over the age of 50, the deductibility of IRA contributions was further limited. Deductions could not exceed the lesser of (1) the deductible amount or (2) an amount equal to the compensation includable in the taxpayer's gross income. See Sec. 219(b)(1), (5)(A) and (B).
Zhu and Zhang reported an adjusted gross income of $104,034,000. Zhang's IRA contribution phased out at $105,000 because Zhu and Zhang's modified AGI under section 219 exceeded that amount. See Rev. Proc. 2007-66, sec. 3.22, 2007-2 C.B. 970, 975.
If you need an Expert Tax Attorney or Expert Tax Litigator, contact Givner & Kaye at (310) 207-8008.
]]>Mr. Di Mundo incorporated Taproot Administrative Services, Inc. as a Subchapter S. One hundred percent of Taproot's shares were issued to a custodial Roth IRA which benefited Di Mundo.
Under the Tax Reform Act of 1976, Congress added certain trusts to the list of permissible Subchapter S shareholders. The list included grantor trusts, voting trusts, and certain small business trusts. In 1996, Congress added certain retirement plans and certain tax-exempt organizations to the list of permissible S corporation stock.
In 2003, Taproot reported income of $322 thousand, with deductions of $320 thousand. In 2007, the IRS determined that a Roth IRA does not qualify as an eligible shareholder of an S corporation. Taproot was deemed taxable as a C corporation, and a tax deficiency was issued for 2003.
Taproot filed a petition with the U.S. Tax Court arguing that the individual beneficiary of a custodial account also qualifying as a Roth IRA should be considered the shareholder for purposes of the S corporation eligibility rules. In the alternative, a Roth IRA should be treated as a grantor trust pursuant to the Taxpayer Relief Act of 1997. The Tax Court agreed with the IRS.
The Ninth Circuit held with the Tax Court that "no statute or regulation in effect during 2003 explicitly prohibited a traditional or Roth IRA from owning S corporation stock." Taproot Admin. Serv. v. Comm., 133 T.C. 202, 208 (2009). However, a trust that qualifies as an IRA is not a permitted shareholder of an S corporation. Revenue Ruling 92-73 Finally the Ninth Circuit noted that the Tax Court was correct in holding that if Taproot's arguments were accepted, Di Mundo would avoid virtually all taxation on his S corporation profits.
Accordingly, the decision of the United States Tax Court is affirmed.
If you need Expert Tax Planning, call Givner & Kaye at (310) 207-8008.
]]>In Cibotti v. Commissioner of the Internal Revenue, Mr. Cibotti was a 33.3% owner and mortgage loan officer for Liberty Mortgage. Liberty and Cibotti did not have a written employment agreement. Liberty did not pay Cibotti employee benefits. Liberty also did not provide Cibotti with an office, so Cibotti did much of his work from his home and at various locations. Liberty did not provide Cibotti with potential clients, but paid Cibotti a commission on his mortgage closings. Though he was and did not perform any services as an officer, Liberty made Cibotti the company's president. Cibotti v. Commissioner of Internal Revenue, T.C. Summary Opinion 2012-21 (March 6, 2012)
In 2007, Liberty issued Cibotti a Form W-2. Cibotti claimed the income as wages on his federal income tax return. Cibotti also claimed related business expenses, including auto expenses, on a Schedule C. After an audit, the IRS disallowed the Schedule C expenses and issued a notice of deficiency. The IRS ruled Cibotti was a common law employee of Liberty and his unreimbursed employee expenses were deductible on Schedule A, Itemized Deductions, subject to the 2% of adjusted gross income limitation and any applicable reduction due to the AMT.
The Tax Court held that Cibotti's status as president did not make him an employee of Liberty. An "officer who does not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration is considered not to be an employee of the corporation." Sec. 31.3121(d)-1(b), Employment Tax Regs.
Applying the criteria that are relevant in determining the substance of an employment relationship, the Tax Court also held that Cibotti and Liberty did not have an employer/employee relationship. NLRB v. United Ins. Co., 390 U.S. 254, 258-260 (1968)
1. Liberty did not control Cibotti's hours of business, total hours, route, office location, or methods of obtaining clients;
2. Cibotti was not guaranteed any compensation. He was paid a percentage of the proceeds from mortgage loans he closed; and
3. Cibotti did not receive any employee benefits.
That Cibotti, performed work that was part of Liberty's regular business, appeared to have a permanent working relationship with Liberty, and had taxes withheld from his commission was not sufficient to give him a status of employee.
The Tax Court held Cibotti was an independent contractor, entitled to deduct verified business expenses on a Schedule C, and not Schedule A.
If you need an Sophisticated Tax Litigator, call Beverly Hills Tax Attorneys Givner & Kaye at (310) 207-8008.
]]>Gross income is all income from whatever source derived, including (but not limited to) "compensation for services, including fees, commissions, fringe benefits, and similar items." I.R.C. § 61(a)(1). Gross income does not include the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as a lump sum or as periodic payments) on account of personal physical injuries or physical sickness. I.R.C. Section § 104(a)(2).
Neri's arbitration complaint did not ask for damages for personal physical injuries or sickness. However, though Neri's past and present physical condition was considered in determining whether Neri was unlawfully fired, the arbitrator did not specify that the award was for personal physical injuries or sickness.
The Tax Court upheld the IRS ruling including the award in gross income. Salvador F. Neri et ux. T.C. Memo. 2012-71
If you need an Aggressive Tax Litigator, call Givner & Kaye at (310) 207-8008.
]]>"Mere wealth will not trigger an audit," says Expert Tax Attorney Bruce Givner who works with many high-net worth clients in Beverly Hills, Bel Air, and Brentwood. "However, certain criteria could prompt a visit from the IRS Rich Squad."
1. $10 million in assets and/or income. In a 2009 speech, IRS Commissioner Douglas Shulman announced that initially, the IRS would look at individuals with tens of millions of dollars of assets or income. This includes individuals who receive large bonuses and retirement packages, or have significant investment assets.
2. Complex business and financial structures. Trusts, royalty and licensing agreements, real estate investments, privately-held companies, partnerships and other flow-through entities, revenue-based or equity-sharing arrangements, and private foundations are complex business and financial structures that may attract the Rich Squad's attention.
3. Assets or Residency outside the U.S. Wealthy Individuals with dual citizenship, assets or income from another country, or work or live in the U.S. temporarily are more at risk for a Wealth Audit. This includes celebrities, athletes, expats, and successful business owners.
Audits by the Rich Squad are complex and may result in serious tax deficiencies, interest, and civil and criminal penalties. Use a Tax Attorney familiar with complex tax planning and difficult audits for your income tax planning and tax audits. Call Givner & Kaye at (310) 207-8008.
]]>Mr. Neri was a maintenance worker. When his company terminated his employment in 2004, he sued his employer for lost wages and related employment benefits. The arbitrator agreed with Neri and awarded him $150 thousand, plus attorney's fees and costs. After deducting his fee and related costs, Neri's attorney sent Neri a check for $83 thousand. Neri and his wife did not report any part of the award, fees, or costs on their 2007 federal income tax return.
Gross income is all income from whatever source derived, including (but not limited to) "compensation for services, including fees, commissions, fringe benefits, and similar items." I.R.C. § 61(a)(1). Gross income does not include the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as a lump sum or as periodic payments) on account of personal physical injuries or physical sickness. I.R.C. Section § 104(a)(2).
Neri's arbitration complaint did not ask for damages for personal physical injuries or sickness. However, though Neri's past and present physical condition was considered in determining whether Neri was unlawfully fired, the arbitrator did not specify that the award was for personal physical injuries or sickness.
The Tax Court upheld the IRS ruling including the award in gross income. Salvador F. Neri et ux. T.C. Memo. 2012-71 If you need an Aggressive Tax Litigator, call Givner & Kaye at (310) 207-8008.
]]>The trusts came to own interests in a partnership. The grantor assigned his rights to the annuity payments to a new trust. The original trusts sold their interests to the new trust in exchange for termination of the annuity contract and for cash.
The IRS ruled that a transfer of partnership interests in exchange for the termination of the annuity contract, would be treated as an annuity payment equal to the present value of the future annuity payments. Since the termination of the annuity contract creates a gain for each trust, they must individually recognize the remaining gain.
For all complex trust issues and to engage in complex estate planning, contact the Expert Los Angeles Estate Planning Lawyers at Givner & Kaye today. (310) 207-8008
]]>If any part of a tax underpayment is due to fraud, the IRS can assess a 75% penalty to this portion of the underpayment. Negligence or ignorance of the law does not constitute fraud. IRC Section 6663.
The Tax Court found clear and convincing evidence that Mr. Robleto engaged in a pattern of conduct that constituted badges of fraud. Mr. Robleto failed to keep adequate records; concealed over $200 thousand cash in a house safe; had a side cash business of preparing tax returns; and neglected to tell his accountant about some of his income. Mr. Robleto also underreported his income for several years and was uncooperative during the IRS audit.
The Tax Court upheld the IRS, stating that "dealing in large amounts of cash and not keeping any records thereof often go hand in hand with intentional underreporting of income and taxes." The Ninth Circuit affirmed the Tax Court's decision. Robleto v Commissioner of Internal Revenue, 9th Circ. R. 36-3.
If you have been contacted by the IRS and need Expert Tax Litigation Attorneys, call Givner & Kaye at (310) 207-8008.
]]>In 2006, the loan balance was $2.7 million. Sophy paid interest of $94,698, while Voss paid $85,962. In 2007, the loan balance was $2.6 million. Sophy paid interest of $99,901, while Voss paid $76,635. In both 2006 and 2007, Sophy and Voss deducted the interest each paid on their individual Federal income tax return.
IRC Section 163 allows a 100% deduction for all interest paid or accrued on up to a $1.1 million mortgage/home equity loan on a qualified residence. Since the balance of their loans was over $1.1 million, Sophy and Voss each calculated their deduction using a $1.1 million limit. Applying their March 2009 Internal Revenue Service Chief Counsel Memo, the IRS ruled the interest deductions should be calculated on a per-residence and not a per-taxpayer basis. That the $1.1 million limitation had to be apportioned between Sophy and Voss based on the amount of interest each paid. Sophy and Voss appealed.
The Tax Court held that Congress meant the $1.1 limitation to apply by residence. Furthermore, that the Federal Defense of Marriage Act deprived same-sex couples from advantages married couples enjoy for federal tax purposes was not relevant.
The Tax Court upheld the IRS decision.
If you are interested in Expert Tax Planning or need an Aggressive Tax Litigator, call Givner & Kaye at (310) 207-8008.
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