Vince Nardone: Tax and Controversy

Gifts of Partnership Interests Did Not Qualify for the Annual Gift Tax Exclusion

Guest Author: M. Pilar Puerto, Esq., Columbus, Ohio

 

 

In Walter M. Price v. Commissioner, TC Memo 2010-2, the Tax Court held that gifts of partnership interests were not eligible for the annual gift tax exclusion because they were gifts of future interests. The court characterized the gifts of partnership interests as gifts of future interests because those interests were subject to various restrictions that prevented the donees from having the present right to the use, possession, or enjoyment of those interests. 

 

Under the Internal Revenue Code (the “Code”), donors of gifts can take advantage of an annual gift tax exclusion of $13,000 (as indexed for 2010) per donee so long as the gift is that of a present interest.  See Code § 2503(b).  For a gift to qualify as a present interest, the donor must confer upon the donee an unrestricted and noncontingent right to the immediate right to the use, possession, or enjoyment of the property or income from the property, such that the donee derives a present and substantial economic benefit from the property. See Treas. Reg. § 25.2503-3(a) and (b); Hackl v. Commissioner, 118 T.C. 279, 293 (2002).

 

In Walter, the partnership agreement had various restrictions that prevented the children donees from deriving a present and substantial economic benefit from the partnership interests gifted by their parents.  The two major restrictions that the court focused on were: (i) the inability to sell the partnership interest to third parties without the consent of all partners; and (ii) distributions of income from the partnership being subject to the discretion of the general partner.  Thus, the donees were unable to presently realize a substantial financial or economic benefit from the partnership interests and the court held they were gifts of future interests not eligible for the gift tax exclusion.

 

When forming a limited liability company or a partnership, if one anticipates gifting these interests, it is important to plan ahead to allow the owners to take advantage of the annual gift tax exclusion. For example, there could be fewer restrictions given in the partnership or operating agreement to allow the donees to have a present and unrestricted right to use, possession, or enjoyment of these interests.  This, however, may come with a price of having less control over the ownership and sale of these interests.  Another idea would be to have a provision in the agreement similar to that of a Crummey power in a trust, which would allow the donee a limited right to demand the income or principal from the business.

 

Attached please find Walter M. Price v. Commissioner, TC Memo 2010-2. Download Walter vs. Commissioner

Internal Revenue Service Announces New Format for Notices

Tax Attorney Vince Nardone discusses a recent Internal Revenue Service release:

Have you previously received an IRS notice that was dated two weeks after the date your received it?  Have you ever received an IRS notice that references a subject matter that does not pertain to you as a taxpayer or simply does not make any sense at all?  My point here is that the IRS has a lot of room for improvement when it comes to their notices.  Well, in Internal Revenue Service news release 2010-3, the IRS has announced new a format for certain notices.  I am skeptical at this point that there will be much improvement.  But, I hope for us tax professionals and our clients that I am wrong and hope that the revised notices are a step in the right direction.  See the newest notices by clicking on the link below or by copying and pasting the link into your web browser.  Also, the complete copy of the IRS news release is attached as a pdf for you to review.

http://www.irs.gov/individuals/article/0,,id=96199,00.html

Download Temp - IRS news release for new notice format

New Rules in Place for Paid Tax-Return Preparers - IRS Announces

Vince Nardone of Nardone Law Group, LLC discusses the IRS’ recent news release 2010-1, dealing with paid tax-return preparers. 

According to IR 2010-1, the Internal Revenue Service kicked off the 2010 tax filing season today by issuing the results of a landmark six-month study that proposes new registration, testing and continuing education of tax return preparers. See the attached study in pdf format.  According to the IRS, with more than 80 percent of American households using a tax preparer or tax software to help them prepare and file their taxes, higher standards for the tax preparer community will significantly enhance protections and service for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term.

To bring immediate help to taxpayers this filing season, the IRS also announced a sweeping new effort to reach tax return preparers with enforcement and education. As part of the outreach effort, the IRS is providing tips to taxpayers to ensure they are working with a reputable tax return preparer.

The IRS goes on to say that based on the results of the Return Preparer Review, the IRS recommended a number of steps that it plans to implement for future filing seasons, including:

· Requiring all paid tax return preparers who must sign a federal tax return to register with the IRS and obtain a preparer tax identification number (PTIN). These preparers will be subject to a limited tax compliance check to ensure they have filed federal personal, employment and business tax returns and that the tax due on those returns has been paid.

· Requiring competency tests for all paid tax return preparers except attorneys, certified public accountants (CPAs) and enrolled agents who are active and in good standing with their respective licensing agencies.

· Requiring ongoing continuing professional education for all paid tax return preparers except attorneys, CPAs, enrolled agents and others who are already subject to continuing education requirements.

· Extending the ethical rules found in Treasury Department Circular 230 -- which currently only apply to attorneys, CPAs and enrolled agents who practice before the IRS -- to all paid preparers. This expansion would allow the IRS to suspend or otherwise discipline tax return preparers who engage in unethical or disreputable conduct.

The registering and testing of tax return preparers has been on the radar screen of the IRS for some time.  It will be interesting to see the impact it has on the tax return preparer community, and the potential influx of cases into the IRS Office of Professional Responsibility.

Download Tax Return Preparer Study - IRS

NOL Carry Back Rules in the Worker, Homeownership, and Business Assistance Act of 2009

Guest Author: M. Pilar Puerto, Esq., Columbus, Ohio

The ''Worker, Homeownership, and Business Assistance Act of 2009'' (the “Act”), signed into law on Nov. 6, 2009 as P.L. 111-92  now expands the 5-year carryback's availability to include most businesses, not just eligible small businesses (ESBs), and extends the 5-year carryback of net operating losses (“NOL”) to 2009 NOLs.  The Act also provides greater flexibility to ESBs who made elections pursuant to the American Recovery and Reinvestment Act of 2009 (the “2009 Recovery Act”), which  allowed only ESBs to elect to carry back NOLs from tax year 2008 for up to 5 years.

In general, NOLs may be carried back two years and forward 20 years. The Act now allows most businesses to increase the carryback period for applicable NOLs from 2 to 3, 4, or 5 years. See Code Sec. 172(b)(1)(H)(i)(I).  The Act imposes a 50-percent income limitation on NOL offsets in the fifth preceding tax year. But, this limitation does not apply to ESB’s that elected to carry back 2008 NOLs under the 2009 Recovery Act; however, the limitation will apply if those businesses have 2009 NOLs.  Also, the election may be made for only one tax year. See Code Sec. 172(b)(1)(H)(iii)(I).  But, again an ESB that made an election pursuant to the 2009 Recovery Act may make an election for 2 tax years instead of just 1. See Code Sec. 172(b)(1)(H)(v)(I). Finally, the Act affects the alternative minimum tax (AMT) by suspending the 90-percent income limitation on the use of NOLs for determining AMT for an extended carryback year.

For further details see the attached Worker, Homeownership, and Business Assistance Act of 2009 H.R. 3548.Download HR 3548

The Internal Revenue Service Enforcement Statistics for the 2009 Fiscal year

Tax Lawyer Vince Nardone discusses recent publication of the Internal Revenue Service’s enforcement statistics.

Based on a limited review of the IRS 2009 fiscal year enforcement statistics, the IRS's enforcement actions in fiscal year 2009 increased significantly over 2008.  But, the enforcement revenue collected shows a significant decline from the previous two years, according to information previously released by the IRS.  This is no surprise of course.  Based on the current economic climate, you would expect the IRS activity to increase but less money to come in because of the money simply not being available.  That is, the Taxpayer simply do not have any money.

As to the specific statistics, in fiscal year 2009, IRS levies totaled 3,478,181, liens totaled 965,618, and seizures totaled 581. In fiscal year 2008, there were 2,631,038 levies, 768,168 liens, and 610 seizures. The IRS also garnered $48.9 billion through enforcement actions in fiscal year 2009—with $26.9 billion through collection, $17.4 billion through examination, and $4.6 billion through document matching. In fiscal year 2008, the agency collected a total of $56.4 billion and, in fiscal year 2007, the amount collected was $59.2 billion. As to exams, for those with income between $200,000 and $999,999, 2.89% of returns were examined.  For those earning $1 million or more, 6.42% of returns were examined.  A total of 9,951,648 business returns (small and large corporation returns, and Subchapter S and partnership pass through returns) were filed and 58,144 were examined for a coverage rate of 0.58%.  The coverage rate for corporations with assets under $10 million was 0.85%, for corporations with assets of at least $10 million it was 14.55%, for Subchapter S corporations (Form 1120-S) it was 0.40%, and for partnership returns (Form 1065) it was 0.38%.

Please see the attached statistics for more information.

Download Collection Enforcement Results - Fiscal year 2009

Update on Estate Taxes

Guest Author Pilar Puerto discusses Estate Taxes:

 

On December 3, 2009, the house approved H.R. 4154, which would make the current estate, gift, and generation skipping transfer (GST) tax laws permanent.  As background, under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the estatetax was scheduled to be gradually phased out by increasing the applicable exemption amount each year up to $3.5 million in 2009 and then repealing in 2010. It is now the end of 2009 and unless Congress passes another act, in 2011 the estate tax provisions will revert to pre-2001 law. This would mean decreasing the unified credit exemption amount for estate tax purposes from the current $3.5 million to $1 million. But, lately there has been much debate and action in Congress for the passing of an estate tax bill.  And, up to this point there has been much speculation and uncertainty as to what the estate tax laws would look like.  But, now with the house’s approval of H.R. 4154 we have a better picture of what the future holds.

 

H.R. 4154 would make permanent the current unified credit effective exemption amount of $3.5 million for estate tax purposes to apply to estates of decedents dying during 2010 and later years. As to gift taxes, the unified credit effective exemption amount would remain at $1 million. And, the highest estateand gift tax rate would be 45%. The GST tax exemption would equal the unified credit effective exemption amount for estate tax purposes and be determined using the highest estate and gift tax rate. 

Considering the high exemption amounts, H.R. 4154 would make it so that only a small percentage of Americans need to worry about paying federal estate tax.  In general, estates are only subject to federal estate tax if they exceed the applicable exclusion amount. For example, under 2009 law only if a decedent’s taxable estate is over $3.5 million—after taking into consideration the unlimited marital deduction—will the decedent’s estate be subject to federal estate tax. Since H.R. 4154 would maintain the applicable exemption amount at $3.5 million, only the most fortunate of Americans need to be concerned about the estate tax.

 

There have been discussions among policy makers, however, on the effects that the estate tax may have on small family businesses, in particular farms.  The argument among these policy makers is that since most of the value of these family businesses is held in illiquid assets, these businesses would be forced to liquidate vital assets just to pay the federal estate tax. But, these concerns are not applicable to most family businesses. A recent report by the Congressional Research Service (CRS) shows that only a small fraction of estates with small or family business interests have paid the estate tax—about 3.5% for businesses in general, and 5% for farmers, compared to 2% for all estates.  CRS also reports that less than ½ of 1% of family-owned businesses that are subject to the estate tax “do not have readily available resources to pay the tax.” Therefore, even if there is a considerable burden on small businesses, this burden only applies to small percentage of these businesses. (RL33070 - Estate Taxes and Family Businesses: Economic Issues)

In sum, it looks like the future will continue to be the same as it is today.  That is, we will have high unified credit exemption amounts that will in turn exclude most estates from having to pay estate tax.  In turn, many will not need to worry about utilizing complicated devices in their estate plan for purposes minimizing the impact of the estate tax on their estates.

See the CRS study attached and the bill.Download Estate Tax - December 2009

Download Legislation - CRS Report

Internal Revenue Service, Office of Professional Responsibility Announces Recent Disciplinary Action

On December 18, 2009, the Internal Revenue Service, Office of Professional Responsibility (OPR), announced recent disciplinary sanctions involving attorneys, certified public accountants, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and appraisers.  These individuals are subject to the regulations governing practice before the Internal Revenue Service, which are set out in Title 31, Code of Federal Regulations, Part 10, and which are published in pamphlet form as Treasury Department Circular No. 230. The regulations prescribe the duties and restrictions relating to such practice and prescribe the disciplinary sanctions for violating the regulations.

I have attached the actual announcement below.  Each and every time these announcements come out they should be a reminder to tax professionals that we must not cross the line.  We as tax professionals owe a duty to both our clients and the government to ensure that we follow the law.  I am certainly not suggesting that we advocate for less tax favorable positions, or give in to certain Internal Revenue Service positions that seem unreasonable or simply not supported by the law.  Rather, I follow the rule that we must interpret and apply the law in a reasonable and good faith manner that allows for the most tax efficient position a taxpayer may take, while avoiding any potential of civil tax penalties.  Over the years, unfortunately, there are certain professionals that simply go too far.

See the announcement below. Download December 2009 - OPR announcement's

Internal Revenue Service Appoints New CI Chief

The Internal Revenue Service named Victor Song, a 28-year veteran of IRS, as the new chief for IRS Criminal Investigation (CI). He will assume his position in January and will replace Eileen Mayer, who is retiring in January. Song is currently CI deputy chief. CI is the agency's law enforcement arm and investigates and assists in the prosecution of criminal tax evasion, money laundering and narcotics-related financial crime cases.

See the entire news release attached below.Download CI - IRS names new chief for CI

Internal Revenue Service Announces Disciplinary Sanctions Against Tax Professionals

In 2009-83, 2009-46 IRB 647, the Internal Revenue Service Office of Professional Responsibility announces recent disciplinary sanctions involving attorneys, certified public accountants, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and appraisers. These individuals are subject to the regulations governing practice before the Internal Revenue Service, which are set out in Title 31, Code of Federal Regulations, Part 10, and which are published in pamphlet form as Treasury Department Circular No. 230.  The regulations prescribe the duties and restrictions relating to such practice and prescribe the disciplinary sanctions for violating the regulations.

These announcements should be a reminder to tax professionals of the importance of following the rule of law and ensuring that you do not cross the line.  I always advocate for my clients and want to aggressively pursue tax savings opportunities.  But, as tax professionals, you have to be aware of where tax planning or avoidance ends and where tax evasion begins.

Please see the attached Announcement 2009-83 for the details of the various disciplinary proceedings against professionals that crossed the line. 

Download Announcement 2009-83, Vince Nardone, Tax Attorney

Columbus Tax Attorney Vince Nardone Discusses the Worker, Homeownership, and Business Assistance Act of 2009.

On November 6th, Obama signed H.R. 3548, the ''Worker, Homeownership, and Business Assistance Act of 2009'' (the Act) into law (P.L. 111-92).  The signing came just one day after the House passed it and two days after the Senate did. In typical Democratic fashion, Obama calls it the business assistance act; however, it is less than favorable.  As an example, the Act stiffens penalties for partnerships and S corporations.

Under the old law, civil penalties apply for failure to file a partnership and S corporation returns. The penalty is $89 times the number of partners or shareholders for each month (or fraction of a month) that the failure continues, up to a maximum of 12 months for returns required to be filed after December 31, 2008.   Under the Act, however, the base amount on which a penalty is computed for a failure with respect to filing either a partnership or S corporation return for a tax year beginning after Dec. 31, 2009, is increased to $195 per partner or shareholder.  According to RIA Checkpoint, “Over the fiscal period 2011 to 2019, this provision is projected to raise $642 million (partnership penalties) and $587 million (S corporation penalties).

Please see the full Act attached.Download Legislation - Worker's, Homeownership Tax Act - November 2009

Work-Product Doctrine and Tax Accrual Workpapers - IRS Prevails

Columbus, Ohio tax attorney, Vince Nardone, discusses the recent decision of U.S. v. Textron Inc., 577 F.3d 21, (1^st Circuit August 13, 2009). 

The question for the court was whether the attorney-work-product doctrine shields from an IRS summons tax-accrual workpapers prepared by lawyers and others in Textron's Tax Department to support Textron's calculation of tax reserves for its audited corporate financial statements.  As we all know now from the earlier decisions, Textron is a major aerospace and defense conglomerate, with well over a hundred subsidiaries, whose consolidated tax return is audited by the IRS on a regular basis.  Textron refused to produce its tax-accrual workpapers, asserting that they were privileged and that the summons was issued for an improper purpose.  The IRS ultimately filed an action in federal district court to enforce the summons.

On August 28, 2007, the district court held that Textron’s tax-accrual workpapers were protected by the work-product doctrine because the taxpayer would not have prepared them—but for—the fact that Textron anticipated the possibility of litigation with the IRS.  On January 1, 2009, the First Circuit, affirming the district court, held that Textron’s tax-accrual workpapers were protected by the work-product doctrine.  But, the court set aside the district court’s ultimate determination that the work-product doctrine was not waived, and sent the case back to the district court to reassess the question of whether disclosure of the auditor’s workpapers would reveal the information contained in Textron’s workpapers.  On rehearing, enbanc, the court reversed its own decision and concluded that Textron’s workpapers, which were prepared to support financial filings and gain auditor approval, were not protected by the work-product privilege.

The case ultimate stands for the proposition that tax-accrual workpapers prepared by lawyers and others in a corporate taxpayer's tax department to support a taxpayer's calculation of tax reserves for its audited corporate financial statements are independently required by statutory and audit requirements.  And thus, the attorney-work-product doctrine does not shield work papers from an Internal Revenue Service summons, where immediate motive for preparing the work papers is to fix the amount of tax reserve on a taxpayer's books and to obtain a clean financial opinion from its auditor.  It is not enough to trigger work-product protection that the document's subject matter relates to a subject that might conceivably be litigated.  Rather, the work-product doctrine protects materials prepared for any litigation or trial as long as they were prepared by or for party to subsequent litigation.  The court reasoned that the work product privilege is centrally aimed at protecting the litigation process, specifically; work done by counsel to help him in litigating a case.  It is not a privilege designed to help a lawyer prepare corporate documents or other materials prepared in the ordinary course of business.  See the attached case for further analysis and reasoning of the court.

Download Textron - October 19, 2009

Gifts of Partnership Interests Did Not Qualify for the Annual Gift Tax Exclusion

Guest Author: M. Pilar Puerto, Esq., Columbus, Ohio

 

 

In Walter M. Price v. Commissioner, TC Memo 2010-2, the Tax Court held that gifts of partnership interests were not eligible for the annual gift tax exclusion because they were gifts of future interests. The court characterized the gifts of partnership interests as gifts of future interests because those interests were subject to various restrictions that prevented the donees from having the present right to the use, possession, or enjoyment of those interests. 

 

Under the Internal Revenue Code (the “Code”), donors of gifts can take advantage of an annual gift tax exclusion of $13,000 (as indexed for 2010) per donee so long as the gift is that of a present interest.  See Code § 2503(b).  For a gift to qualify as a present interest, the donor must confer upon the donee an unrestricted and noncontingent right to the immediate right to the use, possession, or enjoyment of the property or income from the property, such that the donee derives a present and substantial economic benefit from the property. See Treas. Reg. § 25.2503-3(a) and (b); Hackl v. Commissioner, 118 T.C. 279, 293 (2002).

 

In Walter, the partnership agreement had various restrictions that prevented the children donees from deriving a present and substantial economic benefit from the partnership interests gifted by their parents.  The two major restrictions that the court focused on were: (i) the inability to sell the partnership interest to third parties without the consent of all partners; and (ii) distributions of income from the partnership being subject to the discretion of the general partner.  Thus, the donees were unable to presently realize a substantial financial or economic benefit from the partnership interests and the court held they were gifts of future interests not eligible for the gift tax exclusion.

 

When forming a limited liability company or a partnership, if one anticipates gifting these interests, it is important to plan ahead to allow the owners to take advantage of the annual gift tax exclusion. For example, there could be fewer restrictions given in the partnership or operating agreement to allow the donees to have a present and unrestricted right to use, possession, or enjoyment of these interests.  This, however, may come with a price of having less control over the ownership and sale of these interests.  Another idea would be to have a provision in the agreement similar to that of a Crummey power in a trust, which would allow the donee a limited right to demand the income or principal from the business.

 

Attached please find Walter M. Price v. Commissioner, TC Memo 2010-2. Download Walter vs. Commissioner

Internal Revenue Service Announces New Format for Notices

Tax Attorney Vince Nardone discusses a recent Internal Revenue Service release:

Have you previously received an IRS notice that was dated two weeks after the date your received it?  Have you ever received an IRS notice that references a subject matter that does not pertain to you as a taxpayer or simply does not make any sense at all?  My point here is that the IRS has a lot of room for improvement when it comes to their notices.  Well, in Internal Revenue Service news release 2010-3, the IRS has announced new a format for certain notices.  I am skeptical at this point that there will be much improvement.  But, I hope for us tax professionals and our clients that I am wrong and hope that the revised notices are a step in the right direction.  See the newest notices by clicking on the link below or by copying and pasting the link into your web browser.  Also, the complete copy of the IRS news release is attached as a pdf for you to review.

http://www.irs.gov/individuals/article/0,,id=96199,00.html

Download Temp - IRS news release for new notice format

New Rules in Place for Paid Tax-Return Preparers - IRS Announces

Vince Nardone of Nardone Law Group, LLC discusses the IRS’ recent news release 2010-1, dealing with paid tax-return preparers. 

According to IR 2010-1, the Internal Revenue Service kicked off the 2010 tax filing season today by issuing the results of a landmark six-month study that proposes new registration, testing and continuing education of tax return preparers. See the attached study in pdf format.  According to the IRS, with more than 80 percent of American households using a tax preparer or tax software to help them prepare and file their taxes, higher standards for the tax preparer community will significantly enhance protections and service for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term.

To bring immediate help to taxpayers this filing season, the IRS also announced a sweeping new effort to reach tax return preparers with enforcement and education. As part of the outreach effort, the IRS is providing tips to taxpayers to ensure they are working with a reputable tax return preparer.

The IRS goes on to say that based on the results of the Return Preparer Review, the IRS recommended a number of steps that it plans to implement for future filing seasons, including:

· Requiring all paid tax return preparers who must sign a federal tax return to register with the IRS and obtain a preparer tax identification number (PTIN). These preparers will be subject to a limited tax compliance check to ensure they have filed federal personal, employment and business tax returns and that the tax due on those returns has been paid.

· Requiring competency tests for all paid tax return preparers except attorneys, certified public accountants (CPAs) and enrolled agents who are active and in good standing with their respective licensing agencies.

· Requiring ongoing continuing professional education for all paid tax return preparers except attorneys, CPAs, enrolled agents and others who are already subject to continuing education requirements.

· Extending the ethical rules found in Treasury Department Circular 230 -- which currently only apply to attorneys, CPAs and enrolled agents who practice before the IRS -- to all paid preparers. This expansion would allow the IRS to suspend or otherwise discipline tax return preparers who engage in unethical or disreputable conduct.

The registering and testing of tax return preparers has been on the radar screen of the IRS for some time.  It will be interesting to see the impact it has on the tax return preparer community, and the potential influx of cases into the IRS Office of Professional Responsibility.

Download Tax Return Preparer Study - IRS

NOL Carry Back Rules in the Worker, Homeownership, and Business Assistance Act of 2009

Guest Author: M. Pilar Puerto, Esq., Columbus, Ohio

The ''Worker, Homeownership, and Business Assistance Act of 2009'' (the “Act”), signed into law on Nov. 6, 2009 as P.L. 111-92  now expands the 5-year carryback's availability to include most businesses, not just eligible small businesses (ESBs), and extends the 5-year carryback of net operating losses (“NOL”) to 2009 NOLs.  The Act also provides greater flexibility to ESBs who made elections pursuant to the American Recovery and Reinvestment Act of 2009 (the “2009 Recovery Act”), which  allowed only ESBs to elect to carry back NOLs from tax year 2008 for up to 5 years.

In general, NOLs may be carried back two years and forward 20 years. The Act now allows most businesses to increase the carryback period for applicable NOLs from 2 to 3, 4, or 5 years. See Code Sec. 172(b)(1)(H)(i)(I).  The Act imposes a 50-percent income limitation on NOL offsets in the fifth preceding tax year. But, this limitation does not apply to ESB’s that elected to carry back 2008 NOLs under the 2009 Recovery Act; however, the limitation will apply if those businesses have 2009 NOLs.  Also, the election may be made for only one tax year. See Code Sec. 172(b)(1)(H)(iii)(I).  But, again an ESB that made an election pursuant to the 2009 Recovery Act may make an election for 2 tax years instead of just 1. See Code Sec. 172(b)(1)(H)(v)(I). Finally, the Act affects the alternative minimum tax (AMT) by suspending the 90-percent income limitation on the use of NOLs for determining AMT for an extended carryback year.

For further details see the attached Worker, Homeownership, and Business Assistance Act of 2009 H.R. 3548.Download HR 3548

The Internal Revenue Service Enforcement Statistics for the 2009 Fiscal year

Tax Lawyer Vince Nardone discusses recent publication of the Internal Revenue Service’s enforcement statistics.

Based on a limited review of the IRS 2009 fiscal year enforcement statistics, the IRS's enforcement actions in fiscal year 2009 increased significantly over 2008.  But, the enforcement revenue collected shows a significant decline from the previous two years, according to information previously released by the IRS.  This is no surprise of course.  Based on the current economic climate, you would expect the IRS activity to increase but less money to come in because of the money simply not being available.  That is, the Taxpayer simply do not have any money.

As to the specific statistics, in fiscal year 2009, IRS levies totaled 3,478,181, liens totaled 965,618, and seizures totaled 581. In fiscal year 2008, there were 2,631,038 levies, 768,168 liens, and 610 seizures. The IRS also garnered $48.9 billion through enforcement actions in fiscal year 2009—with $26.9 billion through collection, $17.4 billion through examination, and $4.6 billion through document matching. In fiscal year 2008, the agency collected a total of $56.4 billion and, in fiscal year 2007, the amount collected was $59.2 billion. As to exams, for those with income between $200,000 and $999,999, 2.89% of returns were examined.  For those earning $1 million or more, 6.42% of returns were examined.  A total of 9,951,648 business returns (small and large corporation returns, and Subchapter S and partnership pass through returns) were filed and 58,144 were examined for a coverage rate of 0.58%.  The coverage rate for corporations with assets under $10 million was 0.85%, for corporations with assets of at least $10 million it was 14.55%, for Subchapter S corporations (Form 1120-S) it was 0.40%, and for partnership returns (Form 1065) it was 0.38%.

Please see the attached statistics for more information.

Download Collection Enforcement Results - Fiscal year 2009

Update on Estate Taxes

Guest Author Pilar Puerto discusses Estate Taxes:

 

On December 3, 2009, the house approved H.R. 4154, which would make the current estate, gift, and generation skipping transfer (GST) tax laws permanent.  As background, under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the estatetax was scheduled to be gradually phased out by increasing the applicable exemption amount each year up to $3.5 million in 2009 and then repealing in 2010. It is now the end of 2009 and unless Congress passes another act, in 2011 the estate tax provisions will revert to pre-2001 law. This would mean decreasing the unified credit exemption amount for estate tax purposes from the current $3.5 million to $1 million. But, lately there has been much debate and action in Congress for the passing of an estate tax bill.  And, up to this point there has been much speculation and uncertainty as to what the estate tax laws would look like.  But, now with the house’s approval of H.R. 4154 we have a better picture of what the future holds.

 

H.R. 4154 would make permanent the current unified credit effective exemption amount of $3.5 million for estate tax purposes to apply to estates of decedents dying during 2010 and later years. As to gift taxes, the unified credit effective exemption amount would remain at $1 million. And, the highest estateand gift tax rate would be 45%. The GST tax exemption would equal the unified credit effective exemption amount for estate tax purposes and be determined using the highest estate and gift tax rate. 

Considering the high exemption amounts, H.R. 4154 would make it so that only a small percentage of Americans need to worry about paying federal estate tax.  In general, estates are only subject to federal estate tax if they exceed the applicable exclusion amount. For example, under 2009 law only if a decedent’s taxable estate is over $3.5 million—after taking into consideration the unlimited marital deduction—will the decedent’s estate be subject to federal estate tax. Since H.R. 4154 would maintain the applicable exemption amount at $3.5 million, only the most fortunate of Americans need to be concerned about the estate tax.

 

There have been discussions among policy makers, however, on the effects that the estate tax may have on small family businesses, in particular farms.  The argument among these policy makers is that since most of the value of these family businesses is held in illiquid assets, these businesses would be forced to liquidate vital assets just to pay the federal estate tax. But, these concerns are not applicable to most family businesses. A recent report by the Congressional Research Service (CRS) shows that only a small fraction of estates with small or family business interests have paid the estate tax—about 3.5% for businesses in general, and 5% for farmers, compared to 2% for all estates.  CRS also reports that less than ½ of 1% of family-owned businesses that are subject to the estate tax “do not have readily available resources to pay the tax.” Therefore, even if there is a considerable burden on small businesses, this burden only applies to small percentage of these businesses. (RL33070 - Estate Taxes and Family Businesses: Economic Issues)

In sum, it looks like the future will continue to be the same as it is today.  That is, we will have high unified credit exemption amounts that will in turn exclude most estates from having to pay estate tax.  In turn, many will not need to worry about utilizing complicated devices in their estate plan for purposes minimizing the impact of the estate tax on their estates.

See the CRS study attached and the bill.Download Estate Tax - December 2009

Download Legislation - CRS Report

Internal Revenue Service, Office of Professional Responsibility Announces Recent Disciplinary Action

On December 18, 2009, the Internal Revenue Service, Office of Professional Responsibility (OPR), announced recent disciplinary sanctions involving attorneys, certified public accountants, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and appraisers.  These individuals are subject to the regulations governing practice before the Internal Revenue Service, which are set out in Title 31, Code of Federal Regulations, Part 10, and which are published in pamphlet form as Treasury Department Circular No. 230. The regulations prescribe the duties and restrictions relating to such practice and prescribe the disciplinary sanctions for violating the regulations.

I have attached the actual announcement below.  Each and every time these announcements come out they should be a reminder to tax professionals that we must not cross the line.  We as tax professionals owe a duty to both our clients and the government to ensure that we follow the law.  I am certainly not suggesting that we advocate for less tax favorable positions, or give in to certain Internal Revenue Service positions that seem unreasonable or simply not supported by the law.  Rather, I follow the rule that we must interpret and apply the law in a reasonable and good faith manner that allows for the most tax efficient position a taxpayer may take, while avoiding any potential of civil tax penalties.  Over the years, unfortunately, there are certain professionals that simply go too far.

See the announcement below. Download December 2009 - OPR announcement's

Internal Revenue Service Appoints New CI Chief

The Internal Revenue Service named Victor Song, a 28-year veteran of IRS, as the new chief for IRS Criminal Investigation (CI). He will assume his position in January and will replace Eileen Mayer, who is retiring in January. Song is currently CI deputy chief. CI is the agency's law enforcement arm and investigates and assists in the prosecution of criminal tax evasion, money laundering and narcotics-related financial crime cases.

See the entire news release attached below.Download CI - IRS names new chief for CI

Internal Revenue Service Announces Disciplinary Sanctions Against Tax Professionals

In 2009-83, 2009-46 IRB 647, the Internal Revenue Service Office of Professional Responsibility announces recent disciplinary sanctions involving attorneys, certified public accountants, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and appraisers. These individuals are subject to the regulations governing practice before the Internal Revenue Service, which are set out in Title 31, Code of Federal Regulations, Part 10, and which are published in pamphlet form as Treasury Department Circular No. 230.  The regulations prescribe the duties and restrictions relating to such practice and prescribe the disciplinary sanctions for violating the regulations.

These announcements should be a reminder to tax professionals of the importance of following the rule of law and ensuring that you do not cross the line.  I always advocate for my clients and want to aggressively pursue tax savings opportunities.  But, as tax professionals, you have to be aware of where tax planning or avoidance ends and where tax evasion begins.

Please see the attached Announcement 2009-83 for the details of the various disciplinary proceedings against professionals that crossed the line. 

Download Announcement 2009-83, Vince Nardone, Tax Attorney

Columbus Tax Attorney Vince Nardone Discusses the Worker, Homeownership, and Business Assistance Act of 2009.

On November 6th, Obama signed H.R. 3548, the ''Worker, Homeownership, and Business Assistance Act of 2009'' (the Act) into law (P.L. 111-92).  The signing came just one day after the House passed it and two days after the Senate did. In typical Democratic fashion, Obama calls it the business assistance act; however, it is less than favorable.  As an example, the Act stiffens penalties for partnerships and S corporations.

Under the old law, civil penalties apply for failure to file a partnership and S corporation returns. The penalty is $89 times the number of partners or shareholders for each month (or fraction of a month) that the failure continues, up to a maximum of 12 months for returns required to be filed after December 31, 2008.   Under the Act, however, the base amount on which a penalty is computed for a failure with respect to filing either a partnership or S corporation return for a tax year beginning after Dec. 31, 2009, is increased to $195 per partner or shareholder.  According to RIA Checkpoint, “Over the fiscal period 2011 to 2019, this provision is projected to raise $642 million (partnership penalties) and $587 million (S corporation penalties).

Please see the full Act attached.Download Legislation - Worker's, Homeownership Tax Act - November 2009

Work-Product Doctrine and Tax Accrual Workpapers - IRS Prevails

Columbus, Ohio tax attorney, Vince Nardone, discusses the recent decision of U.S. v. Textron Inc., 577 F.3d 21, (1^st Circuit August 13, 2009). 

The question for the court was whether the attorney-work-product doctrine shields from an IRS summons tax-accrual workpapers prepared by lawyers and others in Textron's Tax Department to support Textron's calculation of tax reserves for its audited corporate financial statements.  As we all know now from the earlier decisions, Textron is a major aerospace and defense conglomerate, with well over a hundred subsidiaries, whose consolidated tax return is audited by the IRS on a regular basis.  Textron refused to produce its tax-accrual workpapers, asserting that they were privileged and that the summons was issued for an improper purpose.  The IRS ultimately filed an action in federal district court to enforce the summons.

On August 28, 2007, the district court held that Textron’s tax-accrual workpapers were protected by the work-product doctrine because the taxpayer would not have prepared them—but for—the fact that Textron anticipated the possibility of litigation with the IRS.  On January 1, 2009, the First Circuit, affirming the district court, held that Textron’s tax-accrual workpapers were protected by the work-product doctrine.  But, the court set aside the district court’s ultimate determination that the work-product doctrine was not waived, and sent the case back to the district court to reassess the question of whether disclosure of the auditor’s workpapers would reveal the information contained in Textron’s workpapers.  On rehearing, enbanc, the court reversed its own decision and concluded that Textron’s workpapers, which were prepared to support financial filings and gain auditor approval, were not protected by the work-product privilege.

The case ultimate stands for the proposition that tax-accrual workpapers prepared by lawyers and others in a corporate taxpayer's tax department to support a taxpayer's calculation of tax reserves for its audited corporate financial statements are independently required by statutory and audit requirements.  And thus, the attorney-work-product doctrine does not shield work papers from an Internal Revenue Service summons, where immediate motive for preparing the work papers is to fix the amount of tax reserve on a taxpayer's books and to obtain a clean financial opinion from its auditor.  It is not enough to trigger work-product protection that the document's subject matter relates to a subject that might conceivably be litigated.  Rather, the work-product doctrine protects materials prepared for any litigation or trial as long as they were prepared by or for party to subsequent litigation.  The court reasoned that the work product privilege is centrally aimed at protecting the litigation process, specifically; work done by counsel to help him in litigating a case.  It is not a privilege designed to help a lawyer prepare corporate documents or other materials prepared in the ordinary course of business.  See the attached case for further analysis and reasoning of the court.

Download Textron - October 19, 2009