Friday, April 27, 2012

Supreme Court Tells IRS 3 Years To Audit Is PLENTY! (Continued)

Home Concrete & Supply, LLC, (Sup Ct4/25/2012) 109 AFTR 2d 2012-661

The Supreme Court, resolving a split among various Circuit Courts and the Tax Court, has determined that an overstatement of basis isn't an omission of gross income for purposes of Code Sec. 6501(e)(1)(A)'s 6-year limitations period. The Court found that the '58 Colony decision, in which the Court construed the nearly identical language of Code Sec. 6501(e)(1)(A)'s predecessor statute as referring only to items left out, controlled the outcome of this case.
Background.Code Sec. 6501(a) generally provides that a valid assessment of income tax liability may not be made more than 3 years after the later of the date the tax return was filed or the due date of the tax return. However, under Code Sec. 6501(e)(1)(A), a 6-year period of limitations applies when a taxpayer "omits from gross income" an amount that's greater than 25% of the amount of gross income stated in the return. Code Sec. 6501(e)(1)(B)(i) (which was an amendment in the '54 Code to the predecessor of Code Sec. 6501(e)) provides that "in the case of a trade or business, the term "gross income" means the total of the amounts received or accrued from the sale of goods or services (if such amounts are required to be shown on the return) prior to the diminution by the cost of such sales or services."

The Supreme Court, interpreting the predecessor statute to Code Sec. 6501(e)(1)(A), held that the extended period of limitations applies to situations where specific income receipts have been "left out" in the computation of gross income, and not something put in and overstated. (Colony, Inc. v. Com., (1958, S Ct) 1 AFTR 2d 1894, 357 US 28).

IRS issued final regs in December of 2010 under which an understated amount of gross income resulting from an overstatement of unrecovered cost or other basis is an omission of gross income for purposes of the 6-year period for assessing tax and the minimum period for assessment of tax attributable to partnership items (Reg. § 301.6501(e)-1(e)). The final regs adopt the position IRS had held in temporary regs. IRS disagrees with the courts that hold that the Supreme Court's reading of the predecessor to Code Sec. 6501(e) in Colony applies to Code Sec. 6501(e)(1)(A). IRS takes the position that when Congress enacted the '54 Code, it effectively limited what ultimately became the holding in Colony to cases subject to the '39 Code. Moreover, under Code Sec. 6501(e)(1) of the '54 Code, which remains in effect under the '86 Code, when outside of the trade or business context, the definition of "gross income" in Code Sec. 61 applies. So, the regs provide that any overstatement of basis that results in an understatement of gross income under Code Sec. 61(a) is an omission from gross income under Code Sec. 6501(e)(1)(A).

In a 5-4 decision, with Justice Breyer writing for the majority (which included Chief Justice Roberts and Justices Thomas, Alito, and Scalia), the Supreme Court affirmed the Fourth Circuit and found that Code Sec. 6501(e)(1)(A) doesn't apply to an overstatement of basis. The Court stated that its conclusion "follows directly from this Court's earlier decision in Colony." 

The majority found that the language of the provision at issue in Colony was substantially identical to Code Sec. 6501(e)(1)(A). In Colony, the Court found that the plain language of the term "omits" refers only to something which is left out. Although a basis overstatement can have the same ultimate effect of understating a taxpayer's income, it doesn't constitute an omission. The Colony Court also observed that the legislative history of the provision at issue in that case only demonstrated an intent to create an exception to the usual 3-year period in cases involving failures to report income receipts and accruals, where IRS is at a disadvantage because the return doesn't indicate the existence of the omitted item(s), and not to extend the period in every instance where income is understated.

According to the majority, to hold otherwise would effectively overrule Colony. The Court noted that principles of stare decisis are especially compelling in cases involving statutory interpretation because Congress is free to legislate a different result.

With regard to Reg. § 301.6501(e)-1, IRS argued that a prior judicial construction "trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute" (Nat'l Cable & Telecomms. Ass'n v. Brand X Internet Servs., (2005) 545 U.S. 967), and that the Colony court itself said of the provision at issue that "it cannot be said that the language is unambiguous." Therefore, argued IRS, Colony couldn't control, and the operative issue is whether the reg is a "permissible construction of the statute" under Chevron.

However, the Court stated that Colony's prior interpretation of the statute effectively foreclosed IRS's contrary construction in Reg. § 301.6501(e)-1 , noting that the "linguistic ambiguity" observed by the Colony court 30 years before Chevron didn't necessarily warrant a post-Chevron conclusion that Congress has delegated "gap-filling power" to IRS. On the contrary, the Colony decision indicated overall that the Court didn't believe that the statute left such a gap.

In the end, because the reg was a reasonable interpretation of Code Sec. 6501(e)(1)(A), and because the Court's Colony decision construed a predecessor version of the provision, the dissent determined that the reg should control in this case.

The Court's decision will likely have an adverse impact on IRS's efforts to collect taxes in other Son-of-BOSS and similar tax shelter cases.

However, the IRS may now seek a law change in response to this loss.

IRS Contemplates Guidance Clarifying Rescission Doctrine, Alexander Says

The Internal Revenue Service continues to contemplate the contents of a possible guidance project to assist taxpayers when applying the rescission doctrine after the Service ruled in January that it will no longer offer additional interpretations of the doctrine, IRS Associate Chief Counsel (Corporate) William D. Alexander said.

Currently taxpayers have only a 32- year-old revenue ruling and a 1940 federal case, Penn v. Robertson, to rely on for guidance when interpreting the doctrine, which aims to allow counterparties essentially to undo contractual stipulations under certain circumstances.
In January, IRS issued Rev. Proc. 2012-3, which stated the agency would no longer issue private letter rulings or determination rulings regarding the issue.

“For the moment, you're on your own but you do have the revenue ruling,” Alexander said April 19 at a mergers and acquisitions tax conference sponsored by the New York City Bar and the Penn State Dickinson School of Law.

“What I can tell you for the moment is that revenue ruling is our published position.”
When asked how long taxpayers will have to wait until guidance on the doctrine is issued, Alexander said, “I don't think it will be too long.”

Refund claim, filed by a Ponzi scheme victim, was modification of earlier one and therefore not untimely

In Chief Counsel Advice (CCA) 201216033, IRS has concluded that a Form 843 (Claim for Refund and Request for Abatement) filed by a Ponzi scheme victim was a permissible amendment to her timely filed Form 1040X rather than a new, untimely claim for refund for tax year 2003.

Background.Code Sec. 6402 authorizes IRS to make credits or refunds. Refunds may not be allowed or made after the expiration of the properly applicable statutory period of limitation unless, before the expiration of such period, a claim for the refund has been filed by the taxpayer. (Reg. § 301.6402-2(a)(1))

Under Code Sec. 6511(a), a claim for credit or refund of an overpayment must be filed within three years from the time the return was filed or two years from the time the tax was paid, whichever period expires later. No credit or refund is allowed if a claim is not filed within these time limits. (Code Sec. 6511(b))

Facts. Beginning in 2003 and continuing until sometime in early 2006, a taxpayer, invested a sum of money with a businessman. For tax year 2003, she received a Form 1099-INT, reporting interest income, and reported it on her 2003 Form 1040 filed on Apr. 15, 2004.

In 2006, Terry learned the businessman had been embezzling funds and the investment was a Ponzi scheme. She filed Form 1040X for 2003, eliminating the interest income, as she had never actually received any interest income. As a result, she timely claimed a refund for 2003.

After Terry recovered a portion of the amount she invested, she claimed the remaining amount as a theft loss on Form 1040 for tax year 2006.

IRS disallowed the refund for 2003, explaining in Letter 906 that any loss arising from theft is treated as sustained in the year in which the taxpayer discovers the loss.

Subsequently, more than three years after she filed her 2003 return, Terry filed Form 843 for tax year 2003, again requesting a refund for that year on the theory that the interest income originally reported was fictitious and the money she actually received was a return of capital. Time passed and she contacted IRS to ascertain the status of the Form 843. IRS responded that it was still doing research. She never heard anything further from IRS.

Claim was an amendment. The CCA observed that Terry's Form 843 for tax year 2003 did not require investigation of new matters. The Form 843 and the Form 1040X claimed the same basis for a refund-that she had zero interest income rather than the interest income initially reported on her Form 1040. The facts upon which the Form 843 was based would have been ascertained by IRS in determining the merits of the Form 1040X if IRS had evaluated the precise grounds in the Form 1040X rather than concluding that Terry was trying to recoup her entire loss from the investment scheme.

In addition, although IRS acted on the Form 1040X by issuing a notice of claim disallowance for 2003, that was not "final action" because IRS overlooked the grounds stated in the Form 1040X. Terry was not seeking to claim the amount of her loss from the investment scheme when she filed Form 1040X. Rather, she was seeking a refund as a result of improperly including a fictitious amount of interest income on her original return for tax year 2003. Consequently, Terry's Form 843 should be viewed as a permissible amendment to the timely filed Form 1040X, and therefore her refund for tax year 2003 is not time-barred.

Supreme Court Tells IRS 3 Years To Audit Is PLENTY!

Forbes - Even the IRS has limits. If you’ve ever been audited by the IRS, you may think going back three years is bad enough. The tax code generally allows the IRS to audit three years back, and six in some cases. The U.S. Supreme Court in U.S. v. Home Concrete & Supply, LLC has dramatically cut back on IRS reaches into six year territory. It’s a positively stunning result.

The main rule is that the IRS time to audit runs three years after filing or due date. However, the IRS gets double time for a “substantial understatement of income”—where you omit 25% or more. The debate is over what it means to omit 25% or more of your gross income. 

Example: You sell a piece of property for $3M, claiming that your basis (what you have invested in the property) was $1.5M. In fact, your basis was only $500,000. The effect of your basis overstatement was that you paid tax on $1.5M of gain when you should have paid tax on $2.5M. Your basis over-statement probably means a six-year statute applies.

The Supreme Court agreed to decide if the IRS can go back six years or only three. See Home Concrete & Supply v. U.S. Our highest court hears few tax cases, and this decision is huge. The Supreme Court had good reason to resolve the scuffle given this messy split.

IRS won so six-year statute of limitations applied:

·   Seventh Circuit: Beard v. Comm’r

·   Federal Circuit: Grapevine Imports v. U.S.

·   Tenth Circuit: Salman Ranch v. Comm’r

·   D.C. Circuit: Intermountain Ins. Serv. of Vail LLC v. Comm’r

IRS lost so was limited to three years:

·   Fourth Circuit: Home Concrete & Supply v. U.S.

·   Fifth Circuit: Burks v. U.S. and Equipment Holding Co. LLC v. Comm’r

·   Ninth Circuit: Bakersfield Energy Partners v. Comm’r

The Home Concrete & Supply case was a tax shelter case—where sometimes the usual rules are somehow bent to try to undo something that seems beyond the pale. For that reason, some observers thought the Supreme Court might try to find a way to allow the IRS to go for six years in a tax shelter case, even though the home sale basis example above might be limited to three years. Nope, the High Court stuck to three years.

The taxpayer win in Home Concrete & Supply will have a huge trickle down effect too, not just impacting these cases.

The IRS was hoping to collect this huge amount in about 30 related cases involving “Son of Boss” tax shelters. For taxpayers everwhere, this case just may mean a little more security.

Another FBAR conviction

On April 20, 2012, in a huge win for the government, a jury found Attorney Rick Matsa of Ohio guilty of one count of willfully failing to file a Report of Foreign Bank and Financial Accounts (FBAR).

The Justice Department and Internal Revenue Service (IRS) announced on April 20, 2012 that attorney Aristotle “Rick” R. Matsa, of Worthington, Ohio, was convicted of numerous tax fraud and obstruction of justice related offenses, including witness tampering and making a false statement.
In addition, Rick Matsa and his mother, Loula Z. Matsa, were convicted of conspiracy to obstruct justice, commit perjury, and make false statements, following a five-week trial in Columbus, Ohio, before the Honorable Edmund A. Sargus Jr.
Attorney Matsa faces a potential sentence of 108 years imprisonment and a fine of up to $3.25 million.  In addition, mother Loula Matsa faces a potential sentence of five years imprisonment, a fine of $250,000 Read this article to learn how to get FBAR help to avoid this tragedy happening to you.
If you’re a U.S. citizen, or if you have permanent residence status (a ‘green card’) or visa, you must declare any income earned in the U.S. or abroad on your annual IRS tax filing. This includes investment income, bank account interest, and any other asset that generates income.

If you you’ve failed to report income and filing an FBAR , you can be prosecuted for federal tax evasion – a felony – which as Attorney Matsa and his mother found out, is a felony which carries huge jail time and staggering fines.

The IRS’s focus and attention is all about offshore accounts. From criminal to audits, the IRS is training and hiring huge amounts of new staff to crack down on people they feel are breaking the law.

 Department of Justice's take on this conviction:

“Today’s verdict shows that attorneys and other professionals who violate the tax laws or who attempt to obstruct justice will be held accountable for their actions,” said Assistant Attorney General for the Tax Division Kathryn Keneally. “Those who illegally attempt to hide their income and assets from the IRS through fraudulent trusts or offshore bank accounts will be prosecuted and punished.”

“Those Americans who file accurate, honest and timely tax returns can be assured that the government will hold accountable those who don’t,” said Rick A. Raven, Acting Chief, IRS Criminal Investigation.”

The experienced Tax Attorneys at Marini and Associates, PA can help you resolve your FBAR Problems!

We want our clients to make the best decision when they are presented with uncomfortable facts in this highly-aggressive FBAR enforcement climate.

We’ve helped clients understand how to weigh advantages of the 2012 Offshore Voluntary Disclosure Initiative (OVDI) and calculate risks when confronted with other choices such as “quiet” or “soft” disclosure and expatriation, along with the risk of doing nothing. 

It has never been more important to get FBAR help than it is now!

For FBAR HELP contact the Tax Attorneys at Marini and Associates PA, at our website or call usToll Free at (888) 882-9243 (888 8TAXAID).

Wednesday, April 25, 2012

States review more Federal Tax Returns looking for Additional Revenue.

The Internal Revenue Service made almost 9 billion disclosures of tax returns or return information in calendar year 2011 to Congress, federal agencies, and other entities allowed to receive the information in accordance with the tax code, the Joint Committee on Taxation said April 24.
The total number of disclosures was higher than the 7.03 billion made in 2010, but significantly above the 7.59 billion in 2009 and the 5.42 billion in 2008, according to the JCT's annual disclosure report (JCX-38-12).

Disclosures to individual states represented the highest number of disclosures, at 6.91 billion. Information was released to state tax officials to administer state tax laws.

A copy of the JCT report Disclosure Report For Public Inspection Pursuant To Internal Revenue Code Section 6103(P)(3)(C) for Calendar Year 2011.

Tuesday, April 24, 2012

Sentencing Error In Employment Tax Trust Fund Case

The U.S. Court of Appeals for the Third Circuit affirmed a couple's conviction April 23 on charges of failing to pay over $500,000 in employment taxes collected from the employees of their business, but rejected the trial court's sentence enhancements for abusing a position of trust (United States v. DeMuro, 3d Cir., No. 11-1887, 4/23/12). 

James and Theresa DeMuro owned TAD Associates LLC, a New Jersey engineering and surveying company. Between 2002 and 2008, the company failed to pay over to the Internal Revenue Service more than $500,000 in taxes that it withheld from employee paychecks.

The DeMuros were convicted in the U.S. District Court for the District of New Jersey of 21 counts of failure to account and pay over employment taxes, and each was sentenced to 51 months in prison.

Without the two-level enhancement for abuse of a position of trust, the DeMuros’ offense levels would be 22 and their Guidelines ranges would be 41 to 51 months. The Government argues that because this range is the same as the range ultimately used by the District Court, and because the sentences imposed were within this range, the sentencing error was harmless.

The fact that the sentenced imposed falls within the correct range does not alone establish harmless error. Moreover, the Government’s argument ignores the fact that the District Court found the Guidelines range to be inappropriate and varied downwards.

There is absolutely no basis in the record for us to conclude that the District Court would not have made a similar variance if the abuse of a position of trust enhancement had not applied.

We thus cannot conclude that the error here was harmless. We therefore vacate the DeMuros’ sentences and remand for resentencing.

TAX GAP - Sources of Noncompliance and Strategies to Reduce It

Noncompliance cannot be attributed to a single source, but is found with a variety of taxes and categories of taxpayers, a Government Accountability Office (GAO) official said in congressional testimony on April 19. (GAO-12-651T).

While individual income tax accounts comprise the largest segment of the tax gap, corporate income tax and employment tax are also "significant," said James White, director of strategic issues for GAO.

In addition, misreporting by individuals-involving business income, non-business income, deductions and credits-is noteworthy, he said. "Much of this misreporting can be attributed to sole proprietors underreporting receipts or over-reporting expenses," White said. "Unlike wage and some investment income, sole proprietors' income is not subject to withholding and only a portion is reported to IRS by third parties," he added.

The gross tax gap is the difference between the estimated amount taxpayers owe and the amount they voluntarily and timely pay for a tax year. It was $450 billion for tax year 2006. The net tax gap, which takes into account revenue collected through enforcement actions and late payments, was $385 billion. Multiple approaches must be taken to reduce the tax gap, White said, including the following: enhancing information reporting by third parties to IRS; ensuring high-quality services to taxpayers; devoting additional resources to enforcement; expanding compliance checks before IRS issues refunds; leveraging external resources, such as paid tax return preparers and whistleblowers; modernizing information systems; and simplifying the Code. For more of White's testimony.

IRS must overcome "institutional impediments" to effectively deal with the tax gap, J. Russell George, the Treasury inspector general for tax administration, said in testimony before a panel of the House Oversight and Government Reform Committee on April 19.

George found problems with IRS's estimate that it would eventually collect, via enforced and other late payments, an estimated $65 billion due for tax year 2006 when the estimated gross tax gap was $450 billion. "Both types of payments were estimated using IRS data of prior revenue and late payments received," he said. "However, the IRS does not have good data on the amounts that are paid late without enforcement efforts, and amounts to be collected in future years were estimated using data on payment patterns from earlier years." For more of George's testimony.

UBS head calls tax flap ‘Economic War'.

Switzerland’s tax disputes with the United States and some European nations are “an economic war’’ putting 20,000 jobs at risk, the CEO of Swiss banking giant UBS AG has been quoted as saying. 

Switzerland has recently tried to shed its image as a tax haven, signing deals with the United States, Germany and Britain to provide greater assistance to foreign tax authorities seeking information on their citizens’ accounts in the Alpine nation.

But the tax agreements have drawn fire from Switzerland’s nationalist People’s Party, which won more than a quarter of the vote in last year’s general election, with some lawmakers saying they will try to block the treaties through referendums.

Sergio Ermotti, who was appointed CEO of Switzerland’s largest bank in November in the wake of a trading scandal, says Switzerland now is “stuck in the middle of economic warfare’’ and its opponents’ goal is to weaken UBS and the next biggest bank, Credit Suisse, according to Zurich Sunday newspaper SonntagsZeitung.

The banks’ rivals seek a share of their combined foreign assets of 2.2 trillion Swiss francs ($2.42 trillion), forcing UBS to cut costs and imperiling 20,000 jobs, Ermotti also was quoted in the Sunday paper as saying.

Monday, April 23, 2012

Final Regulations on Treatment of Gain With Stock in Foreign Corporations Issued by IRS

The Internal Revenue Service released final regulations (T.D. 9585) April 23 on the treatment of gain recognized with stock in certain foreign corporations upon distributions.

The new rules finalize proposed regulations (REG-147636-08) issued in February 2009 that cross referenced final and temporary regulations (T.D. 9444) involving tax code Sections 367(a) and 367(b) to certain transfers of stock to foreign corporations under Section 304.

The final regulations remove the temporary regulations and provide that gain recognized under Section 301(c)(3) on the receipt of a distribution of property from a foreign corporation with respect to its stock will be treated for purposes of Section 1248(a) as gain from the sale or exchange of the stock of such corporation.

A. Modified Application of Section 367(a) to Deemed Section 351 Exchanges

Consistent with the final 2006 regulations, the temporary regulations under section 367(a) generally provide that if, pursuant to section 304(a)(1), a United States person is treated as transferring stock of a domestic or foreign corporation to a foreign corporation in exchange for stock of such foreign corporation in a deemed section 351 exchange, the deemed section 351 exchange is not a transfer to a foreign corporation subject to section 367(a). However, if the distribution received by the United States person in redemption of the foreign acquiring corporation stock received in the deemed section 351 exchange is subject to section 301 (by reason of section 302(d)), the temporary regulations provide an exception to the general rule if the distribution is applied against and reduces (in whole or in part), pursuant to section 301(c)(2), the basis of stock of the foreign acquiring corporation held by the United States person other than the stock deemed issued to the United States person in the deemed section 351 exchange. In such a case, the United States person shall recognize gain under section 367(a)(1) equal to the amount by which the gain realized by the United States person with respect to the transferred stock in the deemed section 351 exchange exceeds the amount of the distribution received by the United States person in redemption of the foreign acquiring corporation stock that is treated as a dividend under section 301(c)(1) and included in gross income by the United States person. Thus, in the hypothetical transaction described above, if any amount of the distribution received by P in redemption of the F2 stock was applied against the basis of the F2 stock held by P before (and after) the transaction, then under the temporary regulations P would recognize $100x gain under section 367(a)(1) in connection with its transfer of the F1 stock to F2 in the deemed section 351 exchange.

The exceptions to the application of section 367(a)(1) for transfers of stock provided in §1.367(a)-3 are not available to transfers covered by the temporary regulations. For example, a United States person cannot avoid gain recognition under the temporary regulations by entering into a gain recognition agreement under §§1.367(a)-3(b)(1)(ii) and 1.367(a)-8 with respect to the deemed section 351 exchange.

The temporary regulations provide rules to coordinate the recognition of gain under the temporary regulations and the corresponding increase to the basis of the stock of the foreign acquiring corporation received by the United States person in the transaction. Under such rules the increase to the basis of the stock of the foreign acquiring corporation by reason of gain recognized by the United States person under the temporary regulations would be taken into account before determining the consequences of the redemption of the shares of the foreign acquiring corporation. For example, in the hypothetical transaction described above, the basis of the F2 stock deemed received by P in exchange for the F1 stock would be increased to $100x under section 358 before determining the consequences of the redemption of such stock under section 301. The gain recognized by P will be treated as recognized with respect to the F1 stock transferred in the deemed section 351 exchange in proportion to the gain realized with respect to the F1 stock.

B. Modified Application of Section 367(b) to Deemed Section 351 Exchanges

The temporary regulations make similar revisions to the final 2006 regulations under section 367(b). Specifically, the temporary regulations provide that §1.367(b)-4(b) shall apply to a deemed section 351 exchange to the extent the distribution received by the exchanging shareholder in redemption of the stock deemed issued by the foreign acquiring corporation is applied against and reduces, pursuant to section 301(c)(2), the adjusted basis of stock of the foreign acquiring corporation held by the exchanging shareholder before the transaction.
The temporary regulations provide rules to determine the amount of an income inclusion that is attributable to the shares of stock of the foreign acquired corporation transferred in the deemed section 351 exchange when the income inclusion required under the regulations is less than the aggregate section 1248 amount attributable to all of the shares of stock transferred in the deemed section 351 exchange.

C. Treatment of Gain Recognized under Section 301(c)(3) for Purposes of Section 1248(a)

The temporary regulations under section 1248(a) provide that gain recognized under section 301(c)(3) on the receipt of a distribution of property from a foreign corporation shall be treated, for purposes of section 1248(a), as gain from the sale or exchange of the stock of such corporation. The temporary regulations preserve the policies underlying section 367(b), are consistent with the premise of the final 2006 regulations, and ensure that the earnings and profits of lower-tier foreign subsidiaries described in section 1248(c)(2) are taken into account.

D. Effective Dates

The temporary regulations apply to transfers or distributions occurring on or after February 10, 2009.

The final regulations (T.D. 9585) publish April 24 in the Federal Register.

Text of T.D. 9585 is at Owes New Mexico $534,000 in Sales Taxes

A nationally known online bookseller must pay more than a half million dollars in taxes for books, music and movies bought by customers in New Mexico, the state Court of Appeals has ruled in a dispute over the state's power to tax corporate chains and Internet shopping.
The court's decision came Wednesday in a case involving an out-of-state online business, Barnes&, LLC, which was part of the corporate family of bookseller Barnes & Noble Inc.

The online retailer was assessed gross receipts taxes in 2006 of $534,563 for sales from 1998 to 2005. The company protested and a state agency hearing officer agreed with the company that it wasn't required to collect and pay the tax because it had no presence in the state or what is known as a "substantial nexus" with New Mexico.
The online retailer was organized under Delaware laws and it had no employees or offices in the state. However, a separate Barnes and Noble company operates three bookstores in New Mexico, with the first of those started in Albuquerque in 1996 and the most recent in Las Cruces in 2003.

Traditionally, online retailers have been required to collect taxes on sales to customers in New Mexico if the company has a physical store, a warehouse or other facilities in the state.
The Department of Taxation and Revenue contended that activities at the in-state stores, including gift cards that could be redeemed online and a membership plan that offered online discounts, created the necessary connection to New Mexico to require the Internet retailer to collect and pay the state's tax. Books purchased online also could be returned for credit at the Barnes & Noble stores in New Mexico.

The Court of Appeals said those activities alone weren't enough to justify taxing the online sales, but it concluded the "in-state use of the Barnes & Noble's trademarks was sufficient to meet the constitutional standard" to permit the New Mexico tax.
Because the trademarks were licensed to the online retailer and the company with in-state stores, Barnes & Noble "was in effect telling customers to consider taxpayers (the online retailer) and booksellers to be one and the same," the court said.

"The goodwill developed both directly, by in-store activities promoting taxpayer's website, and indirectly, by consumers' increased awareness of Barnes & Noble due to the presence of in-state stores, helped to establish and maintain a market in New Mexico for taxpayer," the court said.
Attorneys for Barnes & Noble did not immediately return telephone and email messages on Thursday seeking comment on the court ruling and whether their client plans to appeal the decision to the state Supreme Court.

Text of the opinion is available at

Friday, April 20, 2012

Foreign accounts in Miami to be disclosed....

Tax rule would force banks to disclose identities of foreigners who make US deposits.
Over the objections of Florida lawmakers, the U.S. Treasury Department has issued a new rule that will force banks to disclose the identity of foreigners who deposit their money in America.

The regulation - which represents a major shift in policy - goes into effect next January and has alarmed the entire Florida congressional delegation, which is concerned the requirement will prompt foreigners to move their money to countries that require less disclosure.

"This is going to have a devastating impact on Florida and Florida banks," said U.S. Sen. Marco Rubio, R-Fla., who has filed legislation, along with U.S. Rep. Bill Posey, R-Fla., to block the rule.

Large Taxpayers still on IRS Radar Near-Term.

The Internal Revenue Service will continue to have a presence with the nation's largest taxpayers despite its plans for a gradual move away from a model where examination coverage is often determined by a taxpayer's size, IRS Large Business & International Commissioner Heather Maloy said April 18.

Her comments came while discussing the vision for a new audit process that eventually may shift some resources away from Coordinated Industry Case (CIC) taxpayers, first unveiled by IRS Deputy Commissioner for Service and Enforcement Steven Miller at the end of March.

“We will always have some type of presence among companies with the highest assets and the highest income. We are going to have to ensure the compliance of this population,” Maloy said on a webcast sponsored by PricewaterhouseCoopers LLP, Washington, D.C.

In response to questions from Kevin Brown, a principal in PwC's tax controversy and dispute resolution practice, she said, “I don't think CIC taxpayers should expect in the near term that there won't be any type of IRS presence.”

The Supreme Court Declined Review of Former Corporate Officer's Liability for Sec. 6672 Penalties - Excise Taxes.

The Supreme Court has declined to review a decision of the Fifth Circuit that the president/CEO of a defunct airline was a responsible person who willfully failed to remit excise taxes. The Fifth Circuit rejected the taxpayer's claims that he relied on counsel in paying other creditors before IRS and that a post-9/11 law extending the date of payment excused payment altogether.

Background. Under Code Sec. 6672(a), if an employer fails to properly pay over certain taxes, including transportation excise taxes, IRS can seek to collect a trust fund recovery penalty equal to 100% of the unpaid taxes from a "responsible person," i.e., a person who: (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility. In determining whether there is "willfulness" for purposes of Code Sec. 6672(a), the courts have focused on whether a taxpayer had knowledge about the non-payment of the payroll taxes, or showed reckless disregard with respect to whether the payments were being made.

Facts. Michael Conway founded and operated National Airlines, Inc. (National), and was National's chief executive officer (CEO), president, and chairman of its board of directors during the tax periods at issue (quarters ending Sept. 30, 2000; Sept. 30, 2001; and Dec. 31, 2001). National began flying passengers in '99, but was under bankruptcy protection by December of 2000 and ceased operations at the end of 2001. When National stopped doing business, it had reported but failed to pay transportation excise taxes for the tax periods at issue of $1,832,501.01, $3,497,448.32, and $4,803,626.85, respectively.

Evidence showed that Conway knew of the unpaid excise taxes for the third quarter of 2000, at the latest, when National declared bankruptcy. Further, he knew of the unpaid taxes from 2001, at the latest, on Sept. 22, 2001, when Congress passed the Air Transportation Safety and System Stabilization Act (the Act) giving airlines a deferral of time within which to pay their excise taxes.

Conway was an authorized check signer on each of National's checking accounts, ran National's day-to-day operations, continued to receive his salary (the highest in the company) after knowing of the unpaid taxes, and personally paid, authorized, or acquiesced in the payment of millions of dollars to non-IRS creditors. Evidence further showed that he had the authority to determine which bills were paid. Conway admitted that the excise taxes collected by National weren't segregated into separate bank accounts.

In National's bankruptcy, IRS filed an administrative claim for over $11 million, most of which reflected the unpaid excise taxes from 2001. National never objected to the claim. The Chapter 7 trustee allowed IRS's claim in its entirety.

On or around Mar. 14, 2003, IRS notified Conway of its intent to assess trust fund recovery penalties against him, which he timely appealed on May 9. IRS rejected his appeal and made its assessments against Conway under Code Sec. 6672 on Mar. 28, 2006.

Conway argued that the Act converted the unpaid excise taxes from trust funds to short-term loans, effectively making the government a partner with the airlines, and that he didn't pay the excise taxes based on counsel's advice. He also argued that he wasn't a responsible person, and that he didn't act willfully.

District Court sides with IRS. The district court found that the facts clearly showed that Conway was liable as a matter of law-he was the chief individual responsible for the overall business of National, he was its CEO and president, he was an authorized check signer, and he could hire and fire employees-and rejected his argument that he relied on counsel as "conclusory and disingenuous." It further found that he acted willfully, as shown by evidence that he authorized payments to creditors other than IRS after learning of the unpaid taxes, and rejected his argument that National's bankruptcy created an encumbrance on the available funds that prevented him from making payments to IRS.

The court also considered, and ultimately rejected, his argument that the Act excused payment of the excise taxes, finding that there was no indication that Congress intended to do anything more than defer their payment. The Act and accompanying IRS guidance unambiguously provided for an extension of time to pay, and not forgiveness of, the excise taxes.

Appellate Court decision. The Court of Appeals for the Fifth Circuit affirmed the district court's decision, agreeing that Conway was a responsible person (both before and during National's bankruptcy) who willfully failed to pay taxes.

Conway argued that he had reasonable cause for his failure to pay taxes, based on (i) reliance on the advice of counsel, (ii) the Act, (iii) the lack of unencumbered funds to pay the taxes, and (iv) his belief that National had fully paid the excise taxes. However, the Fifth Circuit easily rejected his arguments. The only advice of counsel in the record was the CFO's advice that National close its current bank accounts and open new ones as a debtor in possession, which fell far short of establishing reasonable cause. The Act didn't, as Conway argued, authorize National to use the withheld taxes as working capital. Further, he failed to show that the funds paid to non-IRS creditors had legal priority over the unpaid excise taxes, and any good faith belief by Conway that the taxes would be paid was insufficient to defeat willfulness.

No further review. On Apr. 16, 2012, the Supreme Court refused to review the decision of the Fifth Circuit in Conway.



Florida is not known for having many manufacturing or fabricating companies, but every single manufacturer / fabricator that we have is extremely valuable to the local and state economy, and particularly to our precarious job market. The state of Florida is regularly trying to attract more manufacturing companies by offering numerous tax incentives.

So it will likely surprise you that the Florida Department of Revenue has taken a very aggressive position that is likely to drive manufacturing and fabricating companies away from our great state (or possibly out of business all together).

Does your company (or your client's company) manufacture or fabricate tangible personal property which is then installed as real property improvements, such as cabinets, elevators, screened porches, fabricated steel, bleachers, custom stairs, solar panels, or other similar items?

Do some of these products get installed into realty outside the state of Florida?

If so, then you should prepare for a tax shock.

Thursday, April 19, 2012

Ex-BDO Seidman Partner Favato Gets 18 Months for Tax Crimes

Stephen A. Favato, a former partner at New York-based auditor BDO Seidman LLP, was sentenced to 18 months in prison for two tax crimes related to helping a client falsify his returns.
Favato was sentenced in federal court in Newark, New Jersey, where a jury convicted him in August 2010 of one count of obstructing the administration of Internal Revenue Service laws and one count of aiding the preparation of a false tax return. He faced as many as three years in prison on each count. He was acquitted on one count of tax evasion.

Prosecutors showed jurors that Favato, formerly a partner in BDO Seidman’s office in Woodbridge, New Jersey, advised client Daniel Funsch to include false items on joint tax returns in 2002, 2003 and 2004, according to a statement by the Justice Department and Internal Revenue Service. Favato gave advice that“enabled Funsch to fraudulently deduct his personal yacht expenses as business expenses,” according to the statement.

Funsch, chief executive officer of Intarome Fragrance & Flavor Corp. in Norwood, New Jersey, pleaded guilty in 2006 to conspiracy and tax evasion, court records show. Funsch testified as a prosecution witness against Favato.

Favato’s attorney, Alan Zegas, didn’t immediately return a call seeking comment.
After Favato’s indictment in April 2009, he was placed on a leave of absence, BDO Seidman spokesman Jerry Walsh said in an e-mailed statement at the time of his conviction. A month later, his partnership interest was terminated, Walsh said.

The case is U.S. v. Favato, 09-cr-237, U.S. District Court, District of New Jersey (Newark).


Tuesday, April 17, 2012

IRS Issues Final Rules on Reporting Interest Paid to Nonresident Aliens

The Internal Revenue Service issued final rules April 17 on the reporting requirements for interest on deposits maintained at U.S. offices of certain financial institutions and paid to nonresident aliens.

The regulation (T.D. 9584) will affect commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies that pay interest on deposits.

The regulation applies to payments of interest made on or after January 1, 2013. It becomes effective April 19, the date it is published in the Federal Register.

Software Has Enabled The Tax Code's Slide Into Madness

Ecerpts from Forbes

It occurs to me that our current insanely complex tax rules are made possible by technology. Yes, computer software makes filing easier (both for professionals and civilians). But that may be the problem.

The relative ease of filing, made possible by programs such as Intuit’s TurboTax, also makes it easier for Congress to write incomprehensible tax law.

Have you ever read, for example, Form 6251, the paperwork millions of middle-class households must complete just to figure out whether or not they owe the dreaded Alternative Minimum Tax? The IRS instructions for the form are 12 pages long.

In truth, if voters actually had to navigate this gibberish, we’d have a revolution that would make the tea party look like the League of Women Voters. But we don’t. In 2009, 92 percent of us got help, either from a third-party preparer or tax software, the IRS estimates.

In this way, technology both inoculates us from much of the complexity of tax filing and reduces compliance costs. But, more importantly, it immunizes the politicians from the consequences of their decisions that lead to this madness.

Tax complexity isn’t just about the number of forms and their incomprehensible instructions, no criticism intended towards the folks at the IRS who write them. They do the best they can, given the loony law Congress hands them.

The real price of complexity is the very opaqueness of the Tax Code itself. Because we don’t understand the law, we are convinced we are paying more than we owe and that everyone else is paying less.

Yet, tax software allows politicians to add ever more complexity, which we accept with little complaint. Think about the Buffett Rule endorsed by President Obama. The version debated in the Senate this week would create yet another minimum tax that would result in even more complex forms. But, of course, the households making $1 million or more who’d owe this tax would likely never see the forms. They’d just pay the accountant.

Happy tax day.

Monday, April 16, 2012

Best International Tax Structure for a U.S. Business

Most foreign countries require a local corporation to run a business.

But there is a problem. The IRS denies the foreign tax credit and a deduction of a business loss to the privately owned businesses. Without the foreign tax credit, you will pay tax twice on the same profit. First in the foreign country and again in the USA.

England, Scotland, most of Europe, China and Mexico are restrictive in letting a foreign business into their country. America is not this way because states’ rights. These countries require you to incorporate in their country.

Back in 1996, the IRS issued the “check the box’ regulations which allow some foreign entities to elect to be treated like a domestic LLC. If the election is made, then the entities are disregarded if there is only one owner. With more than one owner they are partnerships. If elected before business begins, this is a good tax structure, but not the best legal structure for asset protection (in the United States).

However, most foreign corporation used in Europe, Asia and Latin America are often not eligible of the check the box election. These are known as “Per Se” corporations. Here is the cause of the double taxation, loss of tax losses and loss of the foreign tax credit.

The American business must file the complex Form 5471 reporting the controlled foreign corporation subpart F income. Few CPA’s are experts in this field. So, you may need a consultant, like me. The solution is to find a method to allow the foreign corporation to elect Sub Chapter S and file a simple Form 1120S and not the Form 5471.

These foreign corporations cannot elect Sub Chapter S. Thus, the foreign tax credit is trapped inside the corporate shell.

The Department of the Treasury now allows a dual resident corporation. Your foreign corporation can also be a domestic sub chapter S corporation. The complex Form 5471 is replaced by the simplifier Form 1120-S (the return for a subchapter S corporation).