Tax Ruling Protects Transfers of Family Businesses

 
The recent US Tax Court ruling in Wandry v Commissioner, T.C. Memo. 2012-88, March 26, 2012 of Internal Revenue implies that a gift of a share in the business is always tax-free if it is specified to fall within the gift tax exemption, even if the IRS later challenges the business valuation.

The taxpayers were advised that they could institute a tax-free gift-giving plan through transfers of Wandry LP partnership interests by using their annual gift tax exclusions of $11,000 per donee under section 2503(b) and additional gifts in excess of their annual exclusion of up to $1 million for each petitioner under section 2505(a) (Federal gift tax exclusions). Petitioners’tax attorney was also a certified public accountant (C.P.A.) with 9 years of practice in public accounting and 19 years of practicing law.

 On January 1, 2004, petitioners executed separate assignments and memorandums of gifts (gift documents). Each gift document provides:

I hereby assign and transfer as gifts, effective as of January 1, 2004, a sufficient number of my Units as a Member of Norseman Capital, LLC, a Colorado limited liability company, so that the fair market value of such Units for federal gift tax purposes shall be as follows: 

Name Gift                                                                Amount

Kenneth D. Wandry                                                   $261,000

Cynthia A. Wandry                                                    $261,000

Jason K. Wandry                                                        $261,000

Jared S. Wandry                                                         $261,000

Grandchild A                                                              $11,000

Grandchild B                                                              $11,000

Grandchild C                                                              $11,000

Grandchild D                                                              $11,000

Grandchild E                                                              $11,000

Tatal                                                                           $1,099,000

Although the number of Units gifted is fixed on the date of the gift, that number is based on the fair market value of the gifted Units, which cannot be known on the date of the gift but must be determined after such date based on all relevant information as of that date.

Respondent argues that petitioners are liable for the tax imposed by section 2501 because they transferred completed gifts of fixed percentage interests to the donees and the gifts exceed petitioners’ Federal gift tax exclusions.  

Respondent presents three arguments to support this conclusion:
 

(1) the gift descriptions, as part of the gift tax returns, are admissions that petitioners transferred fixed Norseman percentage interests to the donees;

 

(2) Norseman’s capital accounts control the nature of the gifts, and Norseman’s capital accounts were adjusted to reflect the gift descriptions; and

 

(3) the gift documents themselves transferred fixed Norseman
                                                       percentage interests to the donees.

 

Respondent further argues that the adjustment clause does not save petitioners from the tax imposed by section 2501 because it creates a condition subsequent to completed gifts and is void for Federal tax purposes as contrary to public policy. See Commissioner v. Procter, 142 F.2d 824, 827-828 (4th Cir. 1944), rev’g a Memorandum Opinion of this Court.  

Respondent’s final argument raises an old issue that has evolved through a series of cases where the Commissioner has challenged a taxpayer’s attempt to use a formula to transfer assets with uncertain value at the time of the transfer.

Here, under the terms of the gift documents, the donees were always entitled to receive predefined Norseman percentage interests,5 which the gift documents essentially expressed as a mathematical formula. For each of petitioners’ children, this formula was expressed as:

 x = $261,000 FMV of Norseman

Similarly, for petitioners’ grandchildren this formula was expressed as:

 

x = $11,000 FMV of Norseman

The Court, in reaching its holdings, has considered all arguments made, and, to the extent not mentioned, concludes that they are moot, irrelevant, or without merit.

To reflect the foregoing, Decisions will be entered for petitioners.

Tax Problem Got You Down?

Contact the Tax Lawyers at Marini & Associates, P.A. for a FREE Tax Consultation at www.TaxAid.us or www.TaxLaw.ms or Toll Free at 888-8TaxAid (888 882-9243).

 

 

 

 

Sales Tax Liabilty can Land you in Jail? Who Should Worry?

 

In our October 22nd blog post, Hotel Owner Faces 15 Years in Jail For Sales Tax Theft, we wrote about a Florida restaurant owner who was arrested for collecting and not remitting sales tax. He was charged with a felony and if convicted could receive 30 years.

It is not just the State of Florida cracking down but a number of states that are looking to fund their budget shortfalls!

The next consideration is whether individuals can also be held responsible for unpaid Sale Taxes?

It depends on what state we are talking about, the type of business entity, the status of the entity, whether or not the tax was actually collected or not, and in many instances knowledge of the failure to collect or pay.

It also depends on whether you can be considered a “responsible person.”  An  example of how broad this definition is can is reflected  in the state of New York's position that the law enables auditors to hold any partner or any LLC member responsible for sales tax, regardless of whether that person was involved in the business.

• Under the Tax Law, a responsible person includes any partner of a partnership or member of a limited liability company regardless of whether the partner or member is under a duty to act on behalf of the business.
• The Tax Law imposes joint and several personal liability for the payment of sales tax on responsible persons of a business with an outstanding sales tax liability.
• As such, the Department can use a responsible person’s personal assets to satisfy the sales tax liability of the business even if the business is a corporation or a limited liability company.

However, On April 14, 2011, the New York Department of Taxation & Finance (the "Department") issued a new policy under which certain limited partners and limited liability company members will be provided relief from per se personal liability as a responsible person under the New York sales and use tax law (the "Tax Law"). TSB-M-11(6)S.

The policy was effective March 9, 2011. The Department’s new policy provides relief for a limited partner of a limited partnership and a limited liability company member with less than a 50% interest who can demonstrate that he or she was not under a duty to act in complying with the Tax Law on behalf of the limited partnership or limited liability company. In addition, the limited partner or limited liability company member must cooperate with the Department in providing information regarding the business. A person who qualifies for relief will not be responsible for any penalty owed by the business, and such an individual’s sales tax liability will be limited to his or her percentage of ownership or share of profits and losses in the business.
You should also be aware that personal and business bankruptcies generally do not discharge sales tax liabilities.

In most all states or taxing jurisdictions, (with California being one large notable exception), these are not taxes on "you", but money the business collects from others (customers or employees) on behalf of the State. They are trust funds....they not only won't ever be discharged....they carry direct, pierce any corporate shield, to the officers and involved parties, responsibility.

What about non-employee return preparers; what exposure do they have?  Many states consider this group as a potential responsible person. 

 

Have a Sales Tax Problem?

Contact the Tax Lawyers at Marini & Associates, P.A. for a FREE Tax Consultation at www.TaxAid.us or www.TaxLaw.ms or Toll Free at 888-8TaxAid (888 882-9243).


 

IRS Announces More Flexible Offer-in-Compromise Terms to Help a Greater Number of Struggling Taxpayers!

 

Due to the exceptional economic downturn that the country has experienced, the number of struggling taxpayers who are unable to pay in full the taxes they owe has increased dramatically.  


One of the methods available to such distressed taxpayers is to enter into what is known as an Offer in Compromise (“OIC”) with the Internal Revenue Service (“IRS”). If the offer is ultimately agreed to by the taxpayer and the IRS, the amount agreed upon which is less than the total outstanding debt, once paid, would be deemed to be a 100% satisfaction of the outstanding liability. In order to have an OIC considered, the taxpayer must be able to demonstrate one of three things: 

1. Doubt as to collectibility of the total of the amount of tax outstanding — i.e, doubt exists that you could pay the full amount of the tax owed;

2. Doubt as to the legal liability to pay— ie., doubt exists that the assessed tax is correct; or

3. Effective tax administration — i.e., the tax is correct and can be collected, but exceptional circumstances exist. The taxpayer must be able to show that collection of the tax would create an economic hardship or would be unfair and inequitable. 

For this post we will discuss only the “doubt as to collectibility” reason for submitting an OIC, since this is the most prevalent type of case for which an OIC is submitted.
 
In most such cases, the taxpayer requests and Offer based on the fact that they did not have the funds available to them to satisfy the tax liability in full and it would be extremely difficult and create a hardship to use the available funds to pay the tax liability and likely result in the inability to pay their living expenses.  

Historically the percentage of OICs that were ultimately finalized and accepted was about 25%.
 
Recently however, the number of OIC’s that have been accepted by the IRS has increased from roughly 25% to 33% of the OIC’s submitted,
 
On May 21, 2012 the IRS announced in IR-2012-53 an expansion of its “Fresh Start” initiative by offering more flexible terms to its OIC Program.
  

The greater number of successful OIC’s appears to result from a major change in the financial analysis used by the IRS to determine if the taxpayers qualify for an OIC. The IRS recognized that many taxpayers are still struggling to pay their bills, so the agency is working to put in place common-sense changes to the OIC program to more closely reflect real world situations.
 

"This phase of Fresh Start will assist some taxpayers who have faced the most financial hardship in recent years," said IRS Commissioner Doug Shulman. "It is part of our multiyear effort to help taxpayers who are struggling to make ends meet."

Today’s announcement focuses on the financial analysis used to determine which taxpayers qualify for an OIC. This announcement also enables some taxpayers to resolve their tax problems in as little as two years compared to four or five years in the past.
In certain circumstances, the changes announced today include:

 
• Revising the calculation for the taxpayer’s future income.
• Allowing taxpayers to repay their student loans.
• Allowing taxpayers to pay state and local delinquent taxes.
• Expanding the Allowable Living Expense allowance category and amount.

The IRS recognizes that many taxpayers are still struggling to pay their bills so the agency has been working to put in place common-sense changes to the OIC program to more closely reflect real-world situations.

When the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income for offers paid in five or fewer months, down from four years, and two years of future income for offers paid in six to 24 months, down from five years.

All offers must be fully paid within 24 months of the date the offer is accepted. The Form 656-B, Offer in Compromise Booklet, and Form 656, Offer in Compromise, has been revised to reflect the changes.

Other changes to the program include narrowed parameters and clarification of when a dissipated asset will be included in the calculation of reasonable collection potential. In addition, equity in income producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses.It has been our experience that these new standards are actually being applied by the IRS in determining the amount of an OIC, particularly in the area of doubt as to collectability.

Taxpayers who are Struggling Financially, have outstanding Federal Tax Liabilities and would like to make an OIC should contact the Tax Lawyers at Marini & Associates, P.A. for a FREE Tax Consultation at www.TaxAid.us or www.TaxLaw.ms or Toll Free at 888-8TaxAid (888 882-9243).

Swiss Banks Shun Yanks

When Scott Schmith finally got his Swiss passport last month, it was time for him to take a drastic step: hand back his American one. 

Among the reasons was a pending U.S. regulation aimed at tracking down tax cheats that is making life difficult for some Americans abroad. These expatriates say that foreign banks, which have expressed concern about compliance costs and potential penalties for failing to report on their American clients, are turning away their business.

John E. Roudabush, an American who lives near Lausanne, Switzerland, couldn't get a mortgage from Swiss banks.

The new law, expected to be phased in over several years, requires foreign banks to identify Americans among their clients and to provide their financial information to the Internal Revenue Service. Just one person overlooked could mean a penalty equivalent to 30% of a bank's U.S. income.

The measure, known as the Foreign Account Tax Compliance Act, or Fatca, applies globally. Swiss banks are particularly nervous. The U.S. has alleged that 11 Swiss banks helped Americans avoid paying taxes.

Most banks in Switzerland have little appetite to deal with such risk and are ushering American clients out or limiting the range of products offered to them.

"It was the straw that broke the camel's back," says Mr. Schmith of the consequences of the Fatca regulation. In June, the 50-year-old photographer received a certified letter from Swissbankers Prepaid Services saying the firm was terminating the relationship because of his American citizenship. The company, which is owned by several Swiss banks, asked Mr. Schmith for an address to send his account balance.



Thomas Beck, chief executive of Swissbankers, confirms that the company canceled accounts with U.S. clients because of the administrative costs of complying with the law for the relatively small number and sizes of accounts.

"Two months later, I got my Swiss citizenship, and I decided to renounce," says Mr. Schmith. "I have nothing to hide, but my heart is here, my business is here, and my life is here." On October 9, he went to the U.S. embassy in Bern and gave back his passport.

Banks world-wide have largely accepted the inevitability of Fatca, but they remain concerned about the complexity of the new rules, the difficulties and costs associated with ensuring compliance and the fact that important details aren't clear yet even though some rules related to the law take effect next year.

To be sure, Americans aren't absolved of their tax obligations if they renounce their citizenship.

For the renunciation to become official, the taxpayer has to certify that he or she has been in full tax compliance for five years and perhaps pay an exit tax. If a taxpayer lies, the IRS can declare the expatriation invalid and proceed against him or her.

Professional photographer Scott Schmith decided to turn in his American passport after a Swiss company told him it was closing his bank account.

In Switzerland, banks are scouring their client lists and dividing clients into Americans, possible Americans and those who aren't. Those who fall into the first two categories stand a good chance of receiving a letter from their bank, asking them politely to take their business elsewhere.

A handful of banks that includes UBS AG, Vontobel Holding AG of Zurich and Geneva-based private bank Pictet & Cie are capitalizing on the plight of Americans living overseas, as they have registered subsidiaries with the U.S. Securities and Exchange Commission specifically to offer investment services to American clients who live outside the U.S., though such services are offered only to very wealthy clients.

If you have Unreported Income from Switzerland or Other Foreign Banks, contact the Tax Lawyers at Marini & Associates, P.A. for a FREE Tax Consultation at www.TaxAid.us orwww.TaxLaw.ms or Toll Free at 888-8TaxAid (888 882-9243).


Source:

The Wall Street Journal

IRS Collection Notices to Taxpayers in the OVDP program?

The IRS is sending out a slew of collection notices to taxpayers who paid 100% of all taxes, 100% of all interest, and 100% of all penalties. Why is this happening?

If you owe money to the IRS, the first collection notice the IRS sends is known as a CP503. This letter is sent from something known as ACS (Automated Collection System). This letter tells you have a balance due with the IRS and you better pay within 30 days or make arrangements to pay it off in full. If you fall to respond, the IRS ACS will then send you a CP504. This letter will say “Notice of Levy.” It tells you you better respond in 30 days or else. If you do not respond ACS (or a revenue officer, if your case has been so assigned) will send you something known as a Final Notice of Intent to Levy. If you do not respond with a request for a Collection Due Process hearing, the IRS is no free to levy and garnish your wages, bank accounts, accounts receivables and even retirement accounts.

The IRS Offshore Voluntary Disclosure Program (OVDP) Process.

Thousands of US taxpayers have failed to report their worldwide taxable income from bank accounts overseas. Many of them were not aware that the IRS has universal tax jurisdiction, and some people were intentionally hiding income in order to evade taxes. Whatever the reason, the IRS has wanted to give taxpayers a chance to ‘come clean,’ and report those accounts using the offshore voluntary disclosure program (there is a standard 2012 OVDP and a more recent “streamlined OVDP”)(“OVDI” is used interchangeably with OVDP, herein).  

The OVDP process requires taxpayers to file all amended returns, and as long as they are able, to pay all additional taxes and penalties along with interest, along with auguring for lower penalties if necessary ad possible appeals and litigation.  

So the taxpayer sends the amended returns, payments and the entire OVDP package to the OVDP unit. There, they code in the amended return and process payment. Once filed the taxpayer waits for a closing agreement to close out of the case while the IRS is auditing the amended returns.

So why are clients who paid their bills in full getting collection notices?

The OVDP unit is properly adjusting the taxable income on the taxpayers account transcript. Yet, the OVDP process includes no such mechanism for altering ACS to reflect that this is no normal case. The OVDP records the tax, 20% accuracy penalty and 27.5 FBAR penalty pursuant to the program;they do not reflect the proper tax, penalties and interest provided under the Internal Revenue Code and furthermore payment are also not being reflected. This results in the computer reflecting a balance due. Since the Automated Collections Systems is, automated, a balance due always means a CP503 — that first collection letter.

So what is the proper response?

In these cases, it is difficult to find anyone in the OVDP unit to take care of the matter ask there is not any one particular agent assigned yet. So our response to this process has been to write to ACS to inform them that the taxpayer in is in the OVDP attaching a letter indicated the acceptance into the program.

Because we have not seen any Notice of Levy (CP504) issued yet (again the CP503 is issued after a CP503), we believe so far that out response has been adequate to stop these IRS collection letters.

You can also consider contacting the taxpayer Advocate's office to report your individual clients problem and/or is systemic problem with the IRS .

Where your client receives a Final Notice of Intent to Levy, you can requestg a Collection Due Process hearing. At a collection due process hearing we can get face-to-face with a real IRS appeals officer and explain that enforced collections is totally inappropriate. Of course, having to use the Appeals Division of the IRS to stop the IRS from collecting taxes when no tax is due, is not exactly an efficient allocation of resources.

Need to make a Voluntary Disclosure of Your Offshore Bank Account?

 

Contact the Tax Lawyers at Marini & Associates, P.A. for a FREE Tax Consultation at www.TaxAid.us or www.TaxLaw.ms or Toll Free at 888-8TaxAid (888 882-9243). 

 

 

Source: 

Anthony E. Parent, Esq.

 

 

Denial of Whistleblower Award Not Subject to Review - U.S. Tax Court.

On an issue of first impression, the U.S. Tax Court held that the whistleblower statute does not provide relief to a taxpayer who has been denied an award where the Internal Revenue Service did not initiate an administrative or judicial action and collecting proceeding (Cohen v. Commissioner, T.C., No.26925-11W, 139 T.C. No. 12, 10/9/12).  

RaymondCohen was a certified public accountant. He provided the IRS whistleblower information that petitioner believed to be actionable on Form 211, concerning information that he believed showed that a public corporation was holding unclaimed proceeds from uncashed dividend checks and unredeemed bonds and not reporting the unclaimed property to the state comptroller as required by State Law and that the more than $700 million in unclaimed assets represented unreported income for Federal Income Tax purposes. 

The IRS notified Mr. Cohen that the matter had been assigned to his Whistleblower Office in Ogden, Utah. The Whistleblower Office evaluated the claim to determine whether an investigation was warranted and an award was appropriate. A few weeks later the Whistleblower Office informed Mr. Cohen that he was not eligible for an award because no proceeds were collected.  

Mr. Cohen requested the Whistleblower Office to reconsider the claim. The Whistleblower Office reiterated the denial, noting that the claim was based on publicly available information. Mr. Cohen filed a petition to this Tax Court to review thai denial.

If you have Tax Problem, contact the Tax Lawyers at Marini & Associates, P.A. for a FREE Tax Consultation at www.TaxAid.us or www.TaxLaw.ms or Toll Free at 888-8TaxAid (888 882-9243).

 

Lap Dancing Is Taxable ... Now That's Revenue!

 

The State of New York's highest court, the Court of Appeal, has decided, but only by a 4-3 majority, that the admission charges and private lap dance performance fees that Nite Moves, a strip club in Albany, collects from its patrons are not exempt from sales taxes.
In their judgment, the Court majority pointed out that New York State collects taxes from a wide variety of entertainment and amusement venues. In particular, the tax code imposes a sales tax on "any admission charge" in excess of ten cents for the use of "any place of amusement in the state," defined as "any place where any facilities for entertainment, amusement, or sports are provided".

An exemption is, however, created to exclude from taxation the admission charges for "dramatic or musical arts performances … with the evident purpose of promoting cultural and artistic performances."

In this case under discussion, the strip club petitioner claimed that the state legislature intended, under the exemption, to give the adult entertainment business a tax break because the exotic dances that are featured at its premises qualify as dramatic or musical arts performances, rather than as more generalized amusement or entertainment activities that fall within the tax.

However, the majority of the judges disagreed with the petitioner and agreed with the New York State Tax Appeals Tribunal, finding that the club had failed to prove that its fees constituted admission charges for performances that were dance routines qualifying as choreographed performances, on a par with ballet or the musicals on Broadway.

It was not irrational, it was said, for the Tribunal to conclude that a club presenting performances by women gyrating on a pole to music, however artistic or athletic their practiced moves are, are not qualifying performances entitled to exempt status. To do so, the Court concluded, would "allow the exemption to swallow the general tax, since many other forms of entertainment not specifically listed in the tax regulation would claim their performances contain tax-exempt rehearsed, planned or choreographed activity."

However, the dissenting judges looked at the ruling of the Tribunal, which the majority upheld, as making a distinction between "highbrow dance and lowbrow dance" that is not to be found in the governing regulation and therefore "raises significant constitutional problems".

The dissenting judgment agreed with the club in pointing out that, in the regulation, "choreography" includes all "dance routines" - it does not matter what kind of dancing is being done.

 

"Thus, the only question in the case is whether the admission charges that the State seeks to tax were paid for dance performances," it stated. "There is not the slightest doubt that they were. The people who paid these admission charges paid to see women dancing. It does not matter if the dance was artistic or crude, boring or erotic. Under New York's tax law, a dance is a dance."
It has been suggested that the case will now proceed all the way to the United States Supreme Court.

 State Tax Problems?

Contact the Tax Lawyers at Marini & Associates, P.A.
for a FREE Tax Consultation at www.TaxAid.us or
www.TaxLaw.ms or Toll Free at 888-8TaxAid (888 882-9243).




Source:

AP