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Specializing in IRS and NYS Tax Representation. Workers Compensation Audits, Payroll, Sales and Income Tax representation for Businesses, Individuals, Restaurants and Construction Companies. Civil and Criminal Workers Comp Audit representation includes: NYSIF Examinations, Premium Disputes, Employee Misclassification, Underreporting, Unreported Income, and Failure to Keep Accurate Payroll Records.

Wednesday, January 29, 2020

Gov. Cuomo Lowers Boom on White Middle Class Families. Anti-White Tax Bias and the Elimination of STAR Benefits

State to Eliminate STAR Benefits for Homeowners That Fail to Pay Property Taxes
Localities to Report Tax Delinquents to Department of Taxation and Finance

Governor Andrew M. Cuomo today announced a proposal in the FY 2021 Executive Budget to deny School Tax Relief Program benefits to delinquent property owners. The measure would eliminate STAR benefits for homeowners that do not pay their property taxes. It would also require localities to report tax delinquents to the Department of Taxation and Finance so that a STAR credit or exemption can be withheld. Homeowners will be excluded from the STAR program until past-due property taxes are paid.

"These benefits are meant to help responsible taxpayers pay their school tax bill, and if someone is not paying their fair share, they should not be entitled to STAR - period,said Governor Cuomo.  

"By closing this loophole, New York will crack down on bad actors and help ensure these benefits go toward the hardworking taxpayers who deserve them

(which is Sanskrit for non-whites and other undocumented aliens) 

Commissioner of Taxation and Finance Michael Schmidt said, "Only those homeowners who pay their property tax bills should receive the STAR benefit. Governor Cuomo's proposal will help ensure that STAR only goes to those who deserve it, promoting property tax compliance and creating a fairer system for homeowners across the State."

In 2013, Governor Cuomo enacted reforms to the STAR program to crack down on delinquent taxpayers, including barring property owners who made a material misstatement on a STAR exemption application from receiving the exemption for six years. In 2015, the State Department of Taxation and Finance was authorized to recoup STAR benefits from property owners who unlawfully received those state benefits in past years, a power that previously resided with local assessors only.

The STAR program provides $3.4 billion in relief from school property taxes. It includes the Basic STAR credit benefit for homeowners with incomes of $500,000 or less, the Basic STAR exemption benefit for homeowners with incomes of $250,000 or less, and the Enhanced STAR benefit for seniors with incomes of $88,050 or less.

Monday, January 27, 2020


Sometimes we get so used to norms of practice that we forget the legal text governing that practice.  Last week the Tax Court taught that text is still important.  In David J. Chadwick v. Commissioner, 154 T.C. No 5. (Jan. 21, 2020) (Judge Lauber), the Court held that the IRS must comply with §6751(b)’ssupervisory approval requirements before assessing the §6672 Trust Fund Recovery Penalty.  That is because the text of §6751(b) says those requirements apply to any “penalty” and the text of §6672 permits the IRS to assess a “penalty.”
Some may laugh!  Some may snort “It’s so simple!”  But, truly I tell you, nothing is simple when you combine the Tax Code and lawyers.  While the lesson may seem simple, it’s more nuanced than you may realize.  And even though this is a reviewed opinion, it may be of surprisingly limited reach.  Details below the fold.
In Chadwick, the Tax Court continued its clean-up of the various legal issues created by its reinterpretation of §6751(b) in Graev v. Commissioner, 149 T.C. 485 (2017).  Readers will recall that §6751(b) requires supervisory approval of tax penalties at some point before those penalties are assessed.  About three weeks ago the Court decided that the required supervisory approval needed to be done before the IRS formally notified the taxpayer “that the Examination Division had completed its work and...had made a definite decision to assert penalties.”  Belair Woods, LLC v. Commissioner, 154 T.C. No. 1 at p. 16.  I blogged the case here Chadwick attempts to brings closure to another question created by Graev: whether assessments made under the authority of §6672 were “penalties” subject to §6751(b)’s supervisory approval requirement.  For reasons I explain below, that attempt may be futile.
The Law
“Trust Fund Taxes” are those taxes that are paid by the taxpayer to an intermediary who, after collecting the tax, is then supposed to forward it to the government.  These are known as "trust fund" taxes because  §7501(a) says that the money so collected is held in trust for the United States until it is paid over. 
Two of the most important trust fund taxes are collected by employers from their employees.  Section 3402(a) makes every employer responsible for withholding their employees' income taxes. Section 3102(a) imposes a withholding requirement for the employees’ share of social security taxes.  Employers are supposed to remit these withheld taxes on an ongoing basis and to account for the payments and withholding once each quarter on Form 941.
If the employer fails to properly pay over these withheld amounts to the government, then the Treasury suffers a loss, because §31(a) gives employees a credit for taxes withheld regardless of whether the money actually reaches the government's coffers.  I call this the “duh” credit because even though the government may not have received the money, you can just hear the employee saying, “well, duh, my employer withheld it.  It’s not my fault my employer failed to actually pay it!” 
Section 6672 is a penalty designed and administered to help ensure payment of trust fund taxes. It provides that if any “person required to collect, truthfully account for, and pay over any tax imposed by this title...willfully fails to collect such tax, or truthfully account for and pay over such tax" then that person is “liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.”  The term “person” in the statute can include a corporate employer as well as individuals within the company who have sufficient control such that they should be held responsible for ensuring proper payment.  The short-hand term for such individuals is “responsible persons.” 
Though called a "penalty," the Service has a long established policy of using §6672 only as an additional tool to collect unpaid trust fund taxes.  In Policy Statement 5-14 (formerly P-5-60) the IRS says: “The withheld income and employment taxes or collected excise taxes will be collected only once, whether from the business, or from one or more of its responsible persons.”  This policy reads the statute’s purpose as recovering trust fund taxes that ought to have been paid, and not as imposing additional penalties on the responsible persons.  Thus, the IRS will cross-apply any payment of a trust fund tax against the accounts of all who have been assessed for purpose of collecting that trust fund tax.  See IRM 5.7.7 for the various payment application rules.
Over the decades, courts have acknowledged that this IRS policy is a valid legal interpretation of §6672.  This has sometimes worked to the government’s benefit and sometimes to its detriment.  Let’s look at one example of each.
On the one hand, the government has benefited in bankruptcy law.  Responsible persons would ask courts to enjoin collection of the TFRP until after the bankruptcy trustee made payments on the unpaid trust fund taxes through a liquidation or a plan of reorganization.  Responsible persons argued that because the penalty could only apply to unpaidtrust fund taxes, the IRS had to wait out the employer’s bankruptcy to see how much remained unpaid after distribution of the bankruptcy assets.  With multiple variations, the theme remained this: §6672 was a penalty, so the IRS should not be able to penalize a responsible person when there is, ultimately, no violation because the taxes get paid. 
Courts overwhelmingly rejected these kinds of arguments.  These courts held that §6672 was not really a penalty and that the IRS policy to treat the TFRP as an alternative source of collection accurately reflected the Congressional purpose behind the text of §6672.  For a really good example, go read In Re: Ribs-R-Us, 828 F.2d 199 (3rd Cir. 1987).  Here’s how the Ribs-R-Us court summed up its review of the case law: “These cases serve to reaffirm the continued vitality of section 6672 and the policy to protect government revenue that underlay its enactment, even in the context of a Chapter 11 reorganization.” Id. at 204. Thus, the IRS could collect the unpaid taxes from any available source at any time because the IRS was simply collecting the unpaid taxes once, with any payment from one source reducing the exposure of the other sources.  Id.  If you want even more detail on this exciting Bankruptcy-Code-Meets-Tax-Code fun, see Bryan Camp, Avoiding the Ex Post Facto Slippery Slope of Deer Park, 3 Am. Bankr. Inst. Law Rev. 329 (1995).
On the other hand, the government was hoist by its own petard in Lauckner v. United States, No. 93-1594, 1994 WL 837464 (D.N.J. May 4, 1994) (sorry, but I could not find a free link to the opinion).  There, the IRS assessed the TFRP against a taxpayer for over $1 million in unpaid trust fund taxes and did so three years and one day after the date the corporate Forms 941 which reported the unpaid taxes had been filed. 
The taxpayer argued that “it has long been settled that the § 6672 penalty is a collection device for the recovery of an employer’s delinquent trust fund employment taxes.”  Since it was NOT a penalty, but just an alternative source of payment for the trust fund taxes, the 3-year limitation period in §6501(a) applied. 
The government argued that gosh, yeah, it had indeedy long interpreted the statute as just a collection device to collect trust fund taxes, but gee willikers, it was not, actually, an assessment of the unpaid taxes reported on Form 941.  It was, by gosh, a separate liability, a penalty!  It required “willful” behavior and no one reports on Form 941 the “willful” failure to pay over the trust fund taxes!  The fact that §6672 could only be assessed when a responsible person “willfully” failed to withhold, account for, or turn over trust fund taxes meant that the employer’s returns would never report the “penalty.” Hence, those returns could not trigger the limitations period of §6501(a) because the period is only triggered when “the return” reporting the taxes was filed.
The district court (later affirmed by the Third Circuit in an unreported opinion you can find here) agreed with the taxpayer.  The gravamen of the district court’s reasoning was that the Service’s long-standing policy had, over the course of time, become embedded as the legal interpretation of the statute.  Here’s the court’s summation of its reasoning:
“It seems clear from this review of the case law that courts have long taken the view that a §6672 liability is “separate and distinct” only in the sense that it provides a collection device whereby the IRS may recover an employer's delinquent trust fund taxes from a “responsible person” at its discretion. Based on this reading, courts have imposed a low standard of “willful” behavior necessary to trigger the §6672 obligation. Although this reading may not be compelled by the wording of the tax code, it seems clear that courts have based the lower standard of conduct necessary to trigger §6672 liability on their understanding, unchallenged until now, that §6672 functions only as a collection device, not as a truly “separate and distinct” penalty."  (emphasis added)
Therefore, the court concluded, filing 941 returns that reported trust fund taxes triggered not only the 3-year limitation for assessing the taxes required to be reported on that return, but also triggered a 3-year limitation period for the IRS to assess a §6672 liability against any responsible person. 
As these two examples show, even though the text of §6672 says it is a “penalty,” both the IRS and the courts have long interpreted the statute as being something else: a separate and distinct tax liability imposed on responsible persons to help collect unpaid trust fund taxes. 
It is not surprising, then, that the IRS Office of Chief Counsel has taken the position that the IRS need not comply with §6751(b) when assessing the TFRP.  In June 2018 it released Chief Counsel Notice 2018-006 where it instructs attorneys to argue that in §6672 situations, the Service need not comply with supervisory approval requirement.  So far, one district court has agreed with the IRS.  United States v. Rozbruch, 28 F. Supp. 3d 256 (S.D.N.Y. 2014).
It is also not surprising that the Tax Court---a court which normally has little experience with §6672---would take the very straightforward reading of the statute and reject the government’s position.  Let’s look at the case because it is interesting how the taxpayer here was able to bring up the issue in the first place.
Mr. Chadwick was the sole member of two companies, each of which failed to pay employment taxes with respect to its employees’ wages.  The matter went to collection and each company’s failure was handled by a different revenue officer (ROs).  Each RO decided that Mr. Chadwick was liable for the TFRP.  Each RO completed the proper internal paperwork (Form 4183) and each RO’s supervisor signed off on the paperwork.  Before 1998, the IRS could have then simply assessed the penalty.  However, in 1998 Congress added §6672(b) which says that before it can assess, the IRS must offer the taxpayer an opportunity to protest the proposed assessment in Appeals.  Here, the Letter 1153 was sent out the same day that each RO’s supervisor signed off on the Form 4183.  Mr. Chadwick did not go to Appeals and so the IRS assessed the penalties. 
Typically, taxpayers in Mr. Chadwick’s situation will pay one quarter’s employment tax for one employee and then, after the IRS denies a claim for refund, will file a refund suit.  Typically, the government will counter-claim for the balance.  Therefore, disputes about §6672 typically get heard by federal district courts and not the Tax Court.  That is why the only precedent directly on point was Rozbruch, a district court case.
Mr. Chadwick did not follow the typical procedure.  Instead of going the refund route, Mr. Chadwick chose the CDP route.  He hired a representative, went to Appeals, and tried to pursue collection alternatives.  Ultimately he failed, and the Settlement Officer (SO) issued a Notice of Determination to proceed with collection.  Actually, it is not clear that Mr. Chadwick really made a choice as much as just reacted to circumstance.  Judge Lauber notes that after filing his Tax Court petition in response to the CDP Notice, Mr. Chadwick went into radio silence and gave the Court nothing more to work with. 
Regardless of Mr. Chadwick’s failure to pursue the case, the Tax Court was obliged to review the SO’s decision.  That is because the SO was supposed to confirm “that the requirements of any applicable law or administrative procedure have been met.” §6330(c)(1)  So that’s how we get to the issue.  If §6751(b) was “applicable law” then the SO had to have verified that the IRS had obeyed its command. 
Judge Lauber took a very strong textualist approach to resolving the question.  First, he notes that the text of §6751(b) says “no penalty under this title shall be assessed” unless the IRS satisfies the supervisory approval requirement.  Section 6672, in turn, uses the word “penalty” right there in the text of the statute.  While §6751(c) carves out some exceptions to the supervisory requirement, none encompass §6672. 
Second, beyond text, Judge Lauber finds that the statutory context of §6672 supports reading it as a penalty.  Heck, it’s in Chapter 68, Subchapter B which is titled “Assessable Penalties.”  He writes: “It would be anomalous, in the absence of any textual justification, to exempt section 6672 penalties from the scope of these rules.” 
Third, Judge Lauber points out that even though the IRS treats the TFRP as a collection tool, the willfulness requirement makes it a penalty.  “Like penalties for failure to file returns and failre to disclose information, TFRPs are imposed as a sanction for failing to do something.  From the standpoint of the person sanctioned, they are ‘penalties’ both as denominated by the Cod and in the ordinary sense of the word.”
Three Comments
First, as to the basic question presented by the case, Judge Lauber’s interpretation is supported by more than textualist analysis.  To begin with the Service has actually used the TFRP as a true penalty in the past.  See e.g. United States v. Mr. Hamburg Bronx Corporation, 228 F. Supp. 115 (S.D.N.Y. 1964).  Yes, that case is really, really, old.  And the Service has a pretty strong set of procedures to cross-credit the various responsible persons when any one of them makes a payment.  But that just brings up another set of precedents supporting Judge Lauber’s reading:  the Service to this day reserves the right to refuse to make the cross-credit.  See e.g. Monday v. United States, 421 F.2d 1210 (7th Cir. 1970)("Here too, the separate nature of the tax liabilities imposed upon the Mondays precludes their assertion of any satisfaction of the Company's liability for withholding taxes as a satisfaction of their individual liability under Section 6672.").  And the Service certainly makes each responsible person remain liable for accrued but unpaid interest.  SeeIRM  Thus, the Service’s very emphasis on the separate nature of the TFRP liability from the underlying liability for withholding and paying over (the §3401 liability) preserves its ability to impose the liability over and above the underlying trust fund liability it seeks to collect.
Second, this decision may not be anywhere near the last word on the issue presented in it, despite being a reviewed opinion with no dissents.  One reason is that Judge Lauber’s interpretation might be dicta.  That is, after deciding that §6751(b) applies to §6672 assessments, Judge Lauber goes on to find that the IRS obtained the required supervisory approval under the Belair Woods rule.  In future cases, the IRS could argue that the demonstrated compliance moots the initial question.  A holding is that which is necessary to the disposition of the case.  Dicta is that which is not necessary to the disposition of a case.  Here, because of Belair Woods, the IRS could argue that it was not necessary to the disposition of this case for the Court to find that §6672 is subject to §6751(b).  So while Judge Lauber’s reasoning is instructive, it is not binding.  Think about it: you cannot issue a ruling adverse to a party and then deny that party the opportunity to appeal.  If the Court had also found the IRS out of compliance with §6751, then the ruling would be a holding.  But the IRS won the case, so it cannot appeal Judge Lauber’s embedded adverse interpretation.  Put another way, because Judge Lauber found that the IRS complied with §6751, he really did not need to decide whether the compliance was required or not.  I doubt this argument has much traction within the Tax Court itself.  But it may have traction outside the Tax Court and that leads to a second reason for skepticism about Chadwick's impact.
Another reason why Chadwick may be more flash than bang is that most decisions regarding the TFRP are made in federal district courts, not the Tax Court.  Tax Court holdings are not binding on federal district courts and judges there may be more receptive to the Service’s non-trivial arguments for why §6672 is not subject to the §6751(b) supervisory approval requirement.  In short, Chadwick may not have legs to carry taxpayers in federal district courts.  Of course, to the extent that is true, savvy practitioners might now advise their clients to forgo the refund route and instead bite their nails in hopes of catching the CDP butterfly during its short 30-day lifespan!
My third observation is that Chadwick may be more molehill than mountain.  I do not see it affecting the settled interpretation of §6672 as not being a true penalty outside the narrow question presented in Chadwick: whether the term "penalty" in §6751(b) applies to TFRP determinations.  I do not think it will hurt the IRS in bankruptcy situations (the Ribs-R-Us line of cases) nor do I see it providing any basis for the IRS to resuscitate its losing position that the TFRP has no limitation period, the issue it lost in Lauckner.  In fact, now that the Tax Court has drawn the line in Belair Woods, it certainly would not surprise me to see the IRS accept the ruling in Chadwick.  As far as I can tell, obeying the ruling requires no changes in TFRP assessment procedures (I always worry that I’m overlooking something and I rely on the kindness of readers to point out when that happens).
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law

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Friday, January 24, 2020

Does the IRS Treat Makers Unfairly? Distinguishing between a Business or Hobby

Taxpayers can only deduct hobby expenses up to the amount of hobby income. 

If hobby expenses are more than its income, taxpayers have a loss from the activity. 

A hobby loss can’t be deducted from other income.

Nine Fabled Factors 

1. Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.

2. Whether the time and effort you put into the activity indicate you intend to make it profitable.

3. Whether you depend on income from the activity for your livelihood.

4. Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).

5. Whether you change your methods of operation in an attempt to improve profitability.

6. Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.

7. Whether you were successful in making a profit in similar activities in the past.

8. Whether the activity makes a profit in some years and how much profit it makes.

9. Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

WARNING: IRS Auditors and Examiners play fast and loose with the rules. If you’re a maker and are being audited, contact Selig & Associates for a free legally privileged consultation. 

IRS Small Business Week Tax Tip 2017-04, May 3, 2017
Millions of people enjoy hobbies that are also a source of income. From catering to cupcake baking, crafting homemade jewelry to glass blowing -- no matter what a person’s passion, the Internal Revenue Service offers some tips on hobbies.
Taxpayers must report on their tax return the income earned from hobbies. The rules for how to report the income and expenses depend on whether the activity is a hobby or a business. There are special rules and limits for deductions taxpayers can claim for hobbies. Here are five tax tips to consider:
  1. Is it a Business or a Hobby?  A key feature of a business is that people do it to make a profit. People engage in a hobby for sport or recreation, not to make a profit. For more about ‘not-for-profit’ rules, see Publication 535, Business Expenses.
  2. Allowable Hobby Deductions.  Within certain limits, taxpayers can usually deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is appropriate for the activity.
  3. Limits on Hobby Expenses.  Generally, taxpayers can only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than its income, taxpayers have a loss from the activity. However, a hobby loss can’t be deducted from other income.
  4. How to Deduct Hobby Expenses.  Taxpayers must itemize deductions on their tax return to deduct hobby expenses. Expenses may fall into three types of deductions, and special rules apply to each type. See Publication 535 for the rules about how to claim them on Schedule A, Itemized Deductions.

IRS Offers in Compromise “FOOLS RUSH IN”

If accepted, an IRS Offer in Compromise will let you to settle your tax debts for less than you actually owe. Sounds good? Of course it does! And if you’re in trouble with the IRS (or more apropos, if you just don’t want to pay one-hundred cents on the dollar) those nonstop radio and television commercials can get pretty tempting. 

So with a swelling tsunami of false hope and enthusiasm PT Barnum smiles and a sucker is born. You pick up the telephone and call an out-of-state company, and like two ships that collide in the night, two fraudsters find each other. In other words, you sell an unseen salesman your bill of goods - and he reciprocates by selling you on a bogus Offer in Compromise

Never mind that it won’t work, you forge foolishly ahead telling yourself that “it’s worth a try” and other silly sentiments. Conversely, if you’re serious about an offer in compromise, you should find out if you even qualify – Say what? That’s right Sunshine. There are certain “carved in stone” requirements that you must satisfy prior to filing an offer in compromise. And all of this information is readily available on the IRS’s website (as is an online pre-qualification test to determine if you’re even eligible or just wasting everyone’s time).    

At Selig & Associates, we do things differently. That is to say, we meet with each and every client personally. We’re committed to helping our clients, says Attorney Bradley Dorin. And unlike those out of state companies, our fees are reasonable, agreed David Selig. If you’re in trouble with the IRS or New York State, call Selig & Associates to schedule a FREE face-to-face, legally privileged consultation. 

Wednesday, January 22, 2020

Nominees and the Alter Ego Doctrine: IRS ENFORCEMENT

The doctrine by which a court of law holds individual shareholders liable for a corporation’s debts if the corporation is deemed to be nothing more than an “alter ego” of the corporation’s owners.
“In a nutshell, the nominee and alter ego theory holds that when a taxpayer retains the benefit, use, or control of transferred assets, the IRS may seize those assets – and quite literally, put the financial boots to you!” says David Selig of Selig and Associates.
FYI Fraud is not a necessary element for the application of the alter ego doctrine. Ragan v. Ragan v. Tri-County Excavating, Inc., 62 F.3d at 508 (Under Pennsylvania law, “no finding of fraud or illegality is required before the corporate veil may be pierced, but rather the corporate entity may be disregarded ‘whenever it is necessary to avoid injustice.’”) (citations omitted) (non-tax case); DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 684 (4th Cir. 1976) (non-tax case) (“[P]roof of plain fraud is not a necessary element in a finding to disregard the corporate entity.”) (citing, among other cases, Anderson v. Abbott, 321 U.S. 349, 362 (1944); National Marine Service, Inc. v. C.J. Thibodeaux & Co., 501 F.2d 940, 942 (5th Cir. 1974)). The Eighth Circuit in Scherping, supra, also noted that “proof of strict common law fraud was not required” to apply the reverse piercing branch of the alter ego doctrine, and affirmed the district court’s holding that the trusts were “sham entities created on behalf of and used by the taxpayers to evade payment of their federal income tax liabilities.” 187 F.3d at 802 (citations omitted).
Courts that have been called upon to apply the alter ego doctrine in tax cases use objective factors in determining whether an alter ego relationship exists. See, e.g., Century Hotels v. United States, 952 F.2d 107, 110 n.5 (5th Cir. 1992) (listing numerous objective factors to be considered in alter ego case, including: (1) whether taxpayer expended personal funds for property titled in the name of the entity; (2) whether taxpayer enjoyed the benefit and use of the property; (3) whether a close family relationship existed between taxpayer and title holder of property; (4) whether taxpayer exercised dominion and control over the property; (5) whether the entity maintained its own books and records, including bank accounts; (6) whether funds are transferred between taxpayer and the entity showing commingling of assets; and (7) whether the entity has its own separate existence and identity); Horton Dairy, Inc. v. United States, 986 F.2d 286, 289 (8th Cir. 1993); Loving Saviour Church v. United States, 728 F.2d at 1086 (church was alter ego of taxpayers where taxpayers treated church assets as their own in that their residence, business and farmland comprised church property; insurance was in taxpayer’s name; taxpayer was the minister and trustee and was in control of the church; church funds used to pay personal expenses of taxpayer; close family relationship between church officers and taxpayer; taxpayers transferred property to church for little or no consideration; taxpayers supported by church funds); F.P.P. Enters. v. United States, 830 F.2d at 118 (listing objective factors); Zahra Spiritual Trust v. United States, 910 F.2d at 245; Lemaster v. United States, 891 F.2d 115, 117-119 (6th Cir. 1989); Grant Investment Fund v. IRS, 1993 WL 269617 (9th Cir. 1993); Towe Antique Ford Foundation v. IRS, 791 F. Supp. 1450, 1453 (D. Mont. 1992) (listing objective factors to be considered), aff’d, 999 F.2d 1387 (9th Cir. 1993).
The alter ego doctrine has been applied by numerous courts to a variety of relationships that exist between a taxpayer and a corporation, partnership, trust, proprietorship or individual. See, e.g., Ross Controls, Inc. v. United States, 164 B.R. 721 (successor corporations were alter egos of defunct corporate taxpayer); Today’s Child Learning Center, Inc. v. United States, 40 F. Supp.2d 268, 273-274 (E.D. Pa. 1998) (second corporation was alter ego of taxpayer); United States v. Scherping, 187 F.3d at 801-804 (trusts were alter egos for taxpayers); F.P.P. Enterprises v. United States, 830 F.2d 114, 116-117 (8th Cir. 1987) (trusts were alter egos of taxpayers where the residence was conveyed by the taxpayers to the trust and the taxpayers continued to treat the residence as their own by (1) continuing to live in the residence, and (2) paying the insurance, taxes and mortgage on the residence); United States v. Geissler, 1993 WL 625535 (D. Idaho 1993) (trust was nominee/alter ego of taxpayers where: (1) taxpayers, as trustees maintain an absolute position of trust; (2) taxpayers need not consult anyone else in making decisions for the trust; (3) there is no provision imposing a fiduciary responsibility on trustee; (4) there was no evidence of any consideration for transfer of property from taxpayers to trust; (5) and taxpayers continue to enjoy the benefits of the transferred property); United States v. Gerads, 1993 WL 114411 (D. Minn. 1993) (Trust was alter ego of taxpayers), aff’d, 999 F.2d 1255 (8th Cir. 1993), cert. denied, 510 U.S. 1193 (1994)); Loving Saviour Church v. the United States, 556 F. Supp. at 691-692 (D. S.D.), aff’d, 728 F.2d 1085 (8th Cir.) (unincorporated association, Church, was alter ego of taxpayers); Grant Investment Fund v. IRS, 1 F.3d 1246 (Table), 1993 WL 269617 (9th Cir. 1993) (partnership was an alter ego of taxpayer where: (1) taxpayer manages entity and has complete control over it; (2) taxpayer uses his own assets and partnership assets interchangeably to pay debts; (3) investors in partnership are related to or controlled by taxpayer; (4) partnership made loans to taxpayer, such loans were approved by taxpayer as manager of partnership and taxpayer did not repay the loans; and (5) taxpayer used partnership to discharge personal obligations and for personal gain); Lemaster v. United States, 891 F.2d 115, 117-119 (6th Cir. 1989) (son held to be the alter ego of the taxpayer-father where: taxpayer’s business ceased; a new business was started in the name of taxpayer’s son; new business acquired assets of defunct business; new business was conducted in son’s name, but taxpayer was given power of attorney and controlled the new business).
Furthermore, if the alter ego or a nominee relationship otherwise exists between a taxpayer and another party or entity, the timing of when the tax liabilities arose is legally irrelevant. Stated differently, the timing of the creation of the trust or entity that is found to be an alter ego or nominee has no legal significance. See G.M. Leasing Corp. v. The United States, 429 U.S. at 350-351 (property of taxpayer’s nominee or alter ego is subject to tax lien and levy); In re Richards, 231 B.R. at 578; United States v. Landsberger, 1997 WL 792506 at * 5 (D. Ariz. 1997) (timing of creation of trust has “no import” if it is being used to avoid creditors) (citing G.M. Leasing, supra; F.P.P. Enters. v. United States, 830 F.2d at 118), aff’d, 172 F.3d 60 (9th Cir. 1999); accord United States v. Williams, 581 F. Supp. 756 (N.D. Ga.) (taxpayer’s nominee (his mother) took a title in real property before tax liabilities arose; however because the taxpayer was the true owner of the property, tax lien (which arose after the property was purchased) attached and could be foreclosed on taxpayer’s interest therein); cf. Keefer v. Commissioner, 1993 WL 221066 (Tax Ct. 1993) (trust was a sham even though tax liabilities arose after the creation of trust).
At Selig and Associates, all tax representation is provided by a Federal Tax Practitioner and Licensed Attorney. To schedule a FREE face-to-face consultation, contact Selig & Associates directly at (212) 974-3435. Offices at: 147 West 35th Street, Suite 1602, New York, NY 10001.

Tuesday, January 21, 2020

Tax Consequences associated with Debt Forgiveness – Nothing New Under the Sun

Let’s travel back in time, 35 Hundred years ago, and I’ll take you to the fertile Crescent, between the Tigris and Euphrates where King Hammurabi, has written his famous law code, which addresses, among other things, debt forgiveness. Specifically, the 48th provision of the Code of Hammurabi says, “If any one owe a debt for a loan, and a storm prostrates the grain, or the harvest fail, or the grain does not growth for lack of water, in that year he need not give his creditor any grain, he washes his debt-tablet in water and pays no rent for this year.” Well, Hammurabi, be damned, because in 1955 the Supreme Court of the United States held, that Congress in enacting income taxation statutes that comprehend "gains or profits and income derived from any source whatever," intended to tax all gain except that which was specifically exempted. In a nutshell, the court ruled that income is not limited to "the gain derived from capital, from labor, or from labor and capital combined." Or in layman’s parlance, debt forgiveness is taxable! And the seminal tax court case for tax law aficionados is Commissioner v. Glenshaw Glass Co.Accordingly, when an overextended homeowner is underwater, she’s left to drown. 

What is Cancellation of Debt?

If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

Canceled Debt – Is It Taxable or Not?

A debt includes any indebtedness whether you are personally liable or liable only to the extent of the property securing the debt. Cancellation of all or part of a debt that is secured by property may occur because of a foreclosure, a repossession, a voluntary return of the property to the lender, abandonment of the property, or a principal residence loan modification.

In general, if your debt is canceled, forgiven, or discharged you will receive a Form 1099-CCancellation of Debt, and must include the canceled amount in gross income unless you meet an exclusion or exception. If you receive a Form 1099-C but the creditor is continuing to try to collect the debt, the creditor may not have canceled the debt. You should verify with the creditor your specific situation; you might not have cancellation of debt or taxable income.

In general, you must report any taxable amount of a canceled debt for which you are liable as ordinary income from the cancellation of debt, on Form 1040U.S. Individual Income Tax Return, or Form 1040NRU.S. Nonresident Alien Income Tax Return, and associated schedules, as advised in Publication 4681Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). You must report the taxable amount of a taxable canceled debt whether or not you receive a Form 1099-C.

Caution:If property secured your debt and the lender takes that property in full or partial satisfaction of your debt, you are treated as having sold that property and may have a taxable gain or loss.The gain or loss on such a deemed sale of your property is an issue separate from whether any cancellation of debt income associated with that same property is includable in gross income. See Publication 544Sales and Other Dispositions of Assets, and Publication 523Selling Your Homefor detailed information on reporting gain or loss from repossession, foreclosure or abandonment of property.

Canceled debts that meet the requirements for any of the following exceptions or exclusions are not taxable.

Debt Cancellations or Reductions that Qualify for EXCEPTION to Inclusion in Gross Income:

Amounts specifically excluded from income by law such as gifts, bequests, devises or inheritances

Cancellation of certain qualified student loans

Canceled debt, that if it were paid by a cash basis taxpayer, would be deductible

A qualified purchase price reduction given by a seller

Any Pay-for-Performance Success Payments that reduce the principal balance of your home mortgage under the Home Affordable Modification Program

Canceled Debt that Qualifies for EXCLUSION from Gross Income:

1   Debt canceled in a Title 11 bankruptcy case
2   Debt canceled during insolvency
3   Cancellation of qualified farm indebtedness
4   Cancellation of qualified real property business indebtedness
5   Cancellation of qualified principal residence indebtedness
The exclusion for qualified principal residence indebtedness provides tax relief on canceled debt for many homeowners involved in the mortgage foreclosure crisis currently affecting much of the United States. The exclusion allows taxpayers to exclude up to $2,000,000 ($1,000,000 if married filing separately) of canceled qualified principal residence indebtedness.

Generally, if you exclude canceled debt from income under one of the exclusions listed above, you must reduce certain tax attributes (certain credits, losses, basis of assets, etc.), within limits, by the amount excluded. You must file Form 982Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the amount qualifying for exclusion and any corresponding reduction of those tax attributes. For cancellation of qualified principal residence indebtedness that you exclude from income, you must only reduce your basis in your principal residence.

If you received a Form 1099-C and the information is incorrect, contact the lender to make corrections. Refer to Publication 4681Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals), for more detailed information regarding taxability of canceled debt, how to report it, and related exceptions and exclusions. Publication 525Taxable and Nontaxable Income, contains additional information. If you received a Form 1099-A(PDF), Acquisition or Abandonment of Secured Property, review Topic 432for more information.

The importance of filing tax returns

Some people say they work best under pressure and choose to procrastinate on important tasks like filing taxes. Then there are those who simply forget to file by the April 15 deadline – or deliberately avoid doing so.

Everyone makes mistakes, especially when under the stress of gathering documentation, crunching numbers and lowering tax liabilities as much as legally possible. However, avoiding your annual tax returnobligations can result in costly consequences that extend beyond your bank account. 

Late penalties

Considering the importance of filing your tax return, it's fair to expect some degree of penalty for failing to file your taxes. If you are expecting an income tax refund, chances are you won't get the same level of scolding from the Internal Revenue Service that others who owe money can expect to receive.

However, if you fall among the people who owe the government money, it's time to shake a leg and get your tax return in as soon as possible.

The penalty for filing late takes effect immediately following the April 15 deadline and will typically equal 5 percent of the unpaid taxes you owe for every month you delay filing your return, up to a 25 percent cap.

A less hefty penalty of  0.5 to 1 percent of your unpaid taxes per month applies to taxpayers who file by the deadline, but owe taxes and don't pay up. Even if you can't afford your taxes now, it's best to at the very least file your tax return on time. 

Those who both file late andfail to pay for the taxes they owe are charged a maximum penalty of 5 percent of their unpaid taxes for every month the bill is late.

Delayed reimbursement
With spring vacations around the corner, you'll likely want to keep all the money you can. Those who wait beyond the eleventh hour to file taxes and claim their refunds may not only get dinged with a late-filing penalty, but holding up refunds does an equal disservice.

Ever hear people preach about not giving Uncle Sam an "interest-free loan?" By failing to file your taxes, you're only prolonging this financial injustice against your wallet. Essentially, you’re giving up the ability to save or invest that money at a higher return.

Forfeiture of tax refund

Just because you don't owe the IRS money doesn't mean you can keep your refund on hold indefinitely. When you're owed a reimbursement from the government, its in no rush to pay you back. In fact, Uncle Sam will give you three long years after the tax year for which you filed to claim your back tax refund. After this generous window, however, the IRS will consider your unclaimed refund a generous "donation," and you'll be out of your rightful cash.

4. Substitute for return
Individuals who fail to submit their tax return by the deadline (or extension deadline, if applicable) aren't in the clear yet. In fact, the IRS will attempt to contact delinquent tax filers repeatedly and remind them to file their tax returns.

If their efforts fail, the IRS reserves the right to file a substitute for return on behalf of the filer. The form calculates the amount of taxes owed based on taxable income, plus any applicable penalties. Payments made to self-employed individuals are also used in SRF computations, as are dividends paid on investments.

But a substitute for return isn't necessarily conducted in filers' best interest. This course of action does not take into account tax credits and deductionsthat may reduce your taxable income, which means you may be overpaying on your taxes in the end.

If you receive a bill from the IRS indicating that it performed an SRF, you can still file your tax return to claim your deductions and expenses. The IRS usually will make the appropriate corrections.

How to find out what’s been reported 

Before completing your tax return, you might consider obtaining a transcript from the Internal Revenue Service showing all of your wages and income reported to the agency.  You never want to omit income reported to the Internal Revenue Service on your tax return.  Not only will you receive a letter from the IRS several months later requesting additional taxes to be paid, but you will be charged interest and penalties on the amounts omitted.  If you do not know already, the interest and penalties charged by the Internal Revenue Service can be very significant over time, as much as the original tax liability, if not more.  Even more importantly, the omission of income on your tax return might prompt an audit of your tax return by the IRS, a prospect never welcomed by any taxpayer.

Sometimes tax preparers will request a transcript on your behalf in order to confirm that all amounts are complete and agree with what has been received by the IRS, especially if your files appear to be missing documents or are in a state of disarray.   There is always the possibility that you failed to receive 1099 or W-2 forms—particularly if you have changed your address recently—or more likely that you lost or misplaced them.  Consequently, it may be prudent to determine what has been reported to the IRS.  If a tax form has been incorrectly submitted, you can then request that the issuer prepare a corrected 1099 or W-2 and submit it to you and the Internal Revenue Service or Social Security Administration, depending on the type of form.

In order for your tax preparer to request your transcripts, you will need to authorize him or her by filling out and signing a Power of Attorney authorization, Form 2848.  I customarily fax these forms over to the IRS as soon as possible, since it sometimes takes a considerable time for the IRS to process them.  It is advisable to include the past three years on the Power of Attorney (POA) form, in the event of any future need to amend prior years tax returns.

If you request a transcript and desire it to be faxed immediately, you will need to have a separate phone line for your fax machine, since the IRS requires you to be physically present at the fax machine to acknowledge its receipt; otherwise, the IRS will not immediately fax the transcript to you, but will schedule a fax of your transcript sometime within the next 48 hours.  Moreover, unless you speak to a live customer service representative, the IRS's automated telephone menu will process your transcript by mail, which may take anywhere from 10 to 30 days to receive.  So be certain to speak to a live agent and specifically request an immediate faxing if time is of the essence, which ordinarily it is when it comes to preparing a last minute tax return.

To assist you in preparing your tax return, you should request the Wage and Income Transcript, which includes data from Form W-2, Form 1099 series, Form 1098, and Form 5498 series received by the Internal Revenue Service over the past 10 years.  

If you need other information, such as the estimated tax payments that you made, penalties and interest assessed against you or paid by you, interest received from the IRS, adjustments made by the IRS on returns filed, your balance of outstanding tax liabilities, or if extensions or returns were received by the IRS, then you would request an Account Transcript.  Account Transcripts are available for most tax returns for the current processing year and the three prior years.

If you lost a copy of your prior year’s tax return and need it in order to prepare this year’s tax return or to meet the requirements for lending institutions for mortgage verification purposes, you can request a Tax Return Transcript.  The Tax Return Transcript shows most line items contained on the return as it was originally filed, including any accompanying forms and schedules. However, it does not reflect changes made to the account after a return is processed.  

IMPORTANTWhy request a Tax Return Transcript and not a copy of your originally filed tax return from the IRS?  Transcripts can be requested over the phone and received by fax, allowing for immediate receipt if necessary.  And there is no charge for a transcript.  On the other hand, an exact copy of a previously filed and processed tax return and all attachments requires the mailing of Form 4506 along with a payment of $57 for each tax return requested.  While Tax Return Transcripts are only available for the current year and previous three years, copies of tax returns are available for seven years after their filing dates.

A new kind of transcript evolving largely in response to considerable amended return fraud reported by lending and credit institutions is the Record of Account Transcript.  In essence it is a combination of the tax return and tax account transcripts containing the line items on a tax return transcript plus any adjustments. As noted above, the tax return transcript shows items as originally filed without reflecting any changes afterwards, while the tax account transcript shows those changes without including items as reported on the original return.  The Record of Account displays both the originally filed and amended values all on one transcript.  Like the Account and Tax Return Transcripts, it is available for the current year and three prior tax years. 

Be prepared to wait over an hour before you reach someone on the phone at the IRS to take your transcript request as well as to be interrogated by a drill sergeant, confirming your identity.  Besides your name, address, social security number, and date of birth, the IRS will request your filing status of your last submitted tax return and other information; so have last year's tax return on hand.

In addition, if you are filing a joint return and you need a transcript of your spouse's information, he or she will need to speak directly to the IRS agent on the phone to request such information.  Because of the tightening of privacy rules, unless your spouse is present with you, the IRS will not fax your spouse's information without his or her direct confirmation of identity on the phone with you.

When the IRS representative questions you on the phone, be sure that only youanswer his or her questions.  If the agent hears your spouse in the background providing answers to the questions, your call may be terminated on the grounds that you are impersonating the taxpayer.  So muzzle your spouse and be prepared, careful, and vigilant until your request for your individual transcript has been approved and processed by the IRS agent.  Then hand the telephone receiver over to your spouse to request his or her own transcript.

If you do not wish to subject yourself to such an interrogation, wait on the phone for over an hour, or use the automated request line to request a transcript, you can process Form 4506-T Request for Transcript of Tax Return and mail it to the IRS office indicated for your location.  Although the form’s title specifies a transcript for a tax return, you can request all four different transcripts previously discussed on this tax form.  There is no charge for the transcript and you should receive it in 10 business days from the time the Internal Revenue Service receives your request, so allow up to 30 calendar days to receive the transcript.

The Internal Revenue Service has a wealth of information on you in its computerized database.  You may request this information by processing transcript requests either by telephone or mail.  If you need information to prepare a tax return or make a payment, request a transcript over the phone and request that the information be faxed to you.  Be certain to request the appropriate transcript, since there are currently four different kinds, depending upon the information you require.  If you are in doubt as to which transcript you need, you might consider requesting all four, since there is no cost and it is always better to be safe than sorry, especially with the IRS.

Tax Representation, Consulting and Strategic Tax Planning

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The Sovereign Citizen Movement (is coming back like a bad penny)

Individuals and groups who identify with the Sovereign Citizen Movement claim that the Federal Government is operating outside its jurisdict...