There is no Place Like Home (or is There?)

Have you ever said something like “I can’t wait to go home?”  If so, you may not know what the term “home” means.  According to the IRS, the term “home” means the taxpayer’s “principal place of business.”  I am guessing that very few (if any) taxpayers consider their place of business their home. Our federal Tax Code…Continue readingThere is no Place Like Home (or is There?)

Real Estate Purchase Price Reduction

The term “income” is broad. It includes just about any money or gain that a person receives. There are exceptions, however. Take the purchase price reduction. Assume Party A sells property to Party B for $100. Party A will likely have a gain on the sale. The gain is income and may trigger income tax.…Continue readingReal Estate Purchase Price Reduction

Can One Spouse Cause IRS to void Other’s Alimony Deduction?

If a divorce decree says that a payment to an ex-spouse, does that mean that it is alimony the ex-spouse has to report as income for Federal income tax purposes?  And if not, can the ex-spouse who receives the payment request a ruling from the IRS to say that the payment was not taxable to…Continue readingCan One Spouse Cause IRS to void Other’s Alimony Deduction?

Non-Profit No More

The IRS Can Sometimes Take A Hardline With Taxpayers For example, the IRS often takes a hard line with taxpayers in instances where the taxpayer is a non-profit and it fails to timely file a tax return. In these cases the IRS will has the power to revoke the taxpayer’s non-profit status, but in many…Continue readingNon-Profit No More

Taxation of Employee Donated Sick Leave

Employees often want to donate paid sick-leave time to deserving co-workers who find themselves in a pinch. The IRS recently released another ruling, PLR 200720017, that identifies a few of the planning considerations in donating sick-leave to co-workers. The federal tax consequences of donating paid sick-leave depends on whether the donation is made through the…Continue readingTaxation of Employee Donated Sick Leave

Prepayment: to Deduct in Year 1 or Year 2?

Say you are an accrual method taxpayer and you hire someone to provide a service to you in year one, the service is to be provided to you over a twelve month period, and you prepay the person for this yet to be provided service. When can you claim a deduction for this prepayment? The…Continue readingPrepayment: to Deduct in Year 1 or Year 2?

Bankruptcy Filing Does Not Prevent Innocent Spouse Relief

Can one spouse prevent the other spouse from  obtaining innocent spouse relief by filing bankruptcy?  The court addressed this question in Kovitch v. Commissioner, 128 T.C. 9 (2007). The Facts & Procedural History The Kovitch’s were divorced. The IRS then issued a notice of deficiency to both spouses for their joint tax liability. Only the wife…Continue readingBankruptcy Filing Does Not Prevent Innocent Spouse Relief

IRS Says When a Grape is No Longer a Grape

We all know that (most) wines come from grapes, but many of us might not know exactly when grapes turn into wine for federal income tax purposes. According to the IRS (in Chief Counsel Advice Memorandum 200713023), grapes turn into wine when a taxpayer begins crushing the grapes. This IRS Memorandum highlights a few of…Continue readingIRS Says When a Grape is No Longer a Grape

Yet Another Lottery-Related Tax Question

Here is yet another lottery-related tax question: Does a state lottery have to withhold tax from lotto winnings if a single taxpayer wins more than one lottery prize from the same lotto ticket where the total winnings exceed $5,000, but the individual winnings do not exceed $5,000? In PLR 132947-06-2007, the IRS recently held that…Continue readingYet Another Lottery-Related Tax Question

Sale of Lottery Payments, Capital or Ordinary?

While lottery winnings may be subject to tax at ordinary tax rates, what about the sale of the right to receive annual lottery payouts?  The court addressed this in Prebola v. Commissioner, T.C. Memo 2006-240. Facts & Procedural History The taxpayer won $17.5 million from the lottery.  She selected the annual installment option, which would pay out…Continue readingSale of Lottery Payments, Capital or Ordinary?

Section 104 Survives Non-Murphy Constitutional Challenge

The now famous Murphy decision has left some uncertainties with regard to whether compensation for a personal injuries that are unrelated to lost wages or earnings are taxable. There can be little doubt that the IRS will ask the Supreme Court to settle the issue if the IRS is not successful in the coming Murphy…Continue readingSection 104 Survives Non-Murphy Constitutional Challenge

IRS Estate Tax Liens: Helpful or Harmful?

It can take years, if not decades, to resolve property disputes resulting after someone dies. The IRS is often not a direct party to these disputes, but it usually has an interest in what happens to the property.  The IRS uses the general unfiled estate tax lien to protect its interest in a decedent’s assets.  While…Continue readingIRS Estate Tax Liens: Helpful or Harmful?

Civil Restitution Tax Assessment Satisfied by Criminal Restitution Payment

According to the IRS’ tax attorneys, the “The court misconstrued the facts of the case.” That is the conclusion reached by the IRS Office of Chief Counsel in Chief Counsel Notice 2007-008. The case that the IRS attorney refers to is Creel v. Commissioner, 419 F.3d 1135 (2005). The Creel Case In the Creel case…Continue readingCivil Restitution Tax Assessment Satisfied by Criminal Restitution Payment

Referrals/Leads Group is Not a Tax Exempt Entity

In Private Letter Ruling 200709070 the IRS recently held that Exceptional Organizations, a standard referrals/leads group, did not qualify as a tax exempt “business league.” This ruling presents a good opportunity to review a few of the requirements to qualify as a tax-exempt “business league.” A “business league” is an association of persons having a…Continue readingReferrals/Leads Group is Not a Tax Exempt Entity

Health Reimbursement Arrangements: Employer-Provided Medical Coverage

The business enterprise presents taxpayers with numerous tax planning opportunities. Many of these tax planning opportunities include pulling money out of the entity in a way that benefits both the business and its owners and employees on an after-tax basis. As with employer-provided education benefits, employers may be able to minimize their tax obligations by…Continue readingHealth Reimbursement Arrangements: Employer-Provided Medical Coverage

Tournament Poker Accorded Same Tax Treatment as Live-Action Poker

Today, in Tschetschot v. Commissioner, the tax court ruled that taxpayers where not entitled to treat tax losses from tournament poker different than tax losses from live-action poker. Facts & Procedural History In Tschetschot, the taxpayer had earned $49 thousand dollars from her day job and $11 thousand dollars from gambling. The taxpayer claimed a…Continue readingTournament Poker Accorded Same Tax Treatment as Live-Action Poker

The Hobby Loss Rules: Planning for Unprofitable Businesses

Ordinary and necessary expenses incurred in operating a business are deductible against Federal income tax.  This is even true for side gigs or moonlighting work.  The IRS frequently challenges these deductions if the activity does not produce a profit.  The recent Jones v. Commissioner, T.C. Summary Opinion 2007-21, court case provides an opportunity to consider these rules.…Continue readingThe Hobby Loss Rules: Planning for Unprofitable Businesses

Tax Basis Planning for Inherited Property

The gain from the sale property is subject to income tax.  Gain is generally the sales price minus tax basis, and tax basis is generally the cost or investment into the property.  When a person owns property at death and the property passes to the heirs, the heirs get a tax basis equal to the…Continue readingTax Basis Planning for Inherited Property

Reconsidering Murphy: Restorative Payments vs. Return of Human Capital

Last year’s Murphy v. United States decision was one of the most controversial tax cases in recent history. Unlike many other tax attorneys, I am not sure that I agree that the Murphy case was wrongly decided. One reason for this is that, in thinking about Murphy, I find it difficult to reconcile why “restorative…Continue readingReconsidering Murphy: Restorative Payments vs. Return of Human Capital

IRS Clarifies Real Estate Broker Filing Requirement – Again

The IRS has released Revenue Procedure 2007-12, which clarifies what “assurances” real estate brokers must obtain from persons who sell their principal residence. Real estate brokers are generally required to provide a Form 1099-S to a person selling or exchanging real estate. This form helps the IRS track the seller’s proceeds from the sale, to…Continue readingIRS Clarifies Real Estate Broker Filing Requirement – Again

Tax Free IRA Rollovers as Short-Term Loans: Two Examples of What Not to Do

Taxpayers often withdraw funds from their IRAs to cover short-term expenses with the hope that they can put the funds back in their IRA within the 60 day window for making a tax-free IRA rollover. When taxpayers miss this 60 day window, they are forced to ask the IRS to waive the 60 day time…Continue readingTax Free IRA Rollovers as Short-Term Loans: Two Examples of What Not to Do

What is a “Foreign Country” for Income Tax Purposes?

Our tax laws allow individual taxpayers to exclude income earned in certain foreign countries.  This begs the question as to whether a taxpayer working outside of the U.S. is in a foreign country if he is working in an area that is not governed by the equivalent of what we think of as a government. …Continue readingWhat is a “Foreign Country” for Income Tax Purposes?

Taxation of Employer Provided Education: A Look At Section 127 Plans

During a recent conversation that I had with another tax blogger, I commented about how many taxpayers fail to take advantage of Section 127 plans. This comment came up in a very brief mention of how Congress recently frustrated the tax plan of many parents who are saving for their children’s college education, by extending…Continue readingTaxation of Employer Provided Education: A Look At Section 127 Plans

Taxing Online Video Game Earnings

I came across this very interesting article about taxing online video game transactions. This type of issue does show the flaw or challenge presented by a tax system that is dependent upon the concept of “income” and the problem is likely to become a much more serious problem for the US Treasury. It is now…Continue readingTaxing Online Video Game Earnings

Planning for and Documenting Covenant Not To Compete Allocation

The recent Becker v. Commissioner, 92 T.C.M. 481 (2006), case shows why it is important for taxpayers to plan and document transactions at or near the time that the transactions take place. This is particularly true for larger dollar transactions. The transaction in the Becker case involved the sale of a family-owned business and a…Continue readingPlanning for and Documenting Covenant Not To Compete Allocation

Should the IRS be Able to Rewrite Tax Laws that it Doesn’t Agree With?

Estate of Gerson shows how the IRS uses its ability to promulgate regulations and how the IRS positions cases for litigation in an effort to create pro-IRS tax laws. Facts & Procedural On Gerson’s Case Gerson is a generation skipping transfer tax case. Mr. Gerson created a revocable trust that became irrevocable upon his demise.…Continue readingShould the IRS be Able to Rewrite Tax Laws that it Doesn’t Agree With?

The Section 44 Small Business Disabled Access Credit

The Section 44 small business disabled individuals tax credit provides a tax incentive to comply with the Americans With Disability Act of 1990 (“ADA”).  There is very little guidance for the tax credit.  The recent Arevalo v. Commissioner, No.?05-61129 (5th Cir. 2006), case provides an opportunity to consider this tax credit. Facts & Procedural History Arevalo “invested”…Continue readingThe Section 44 Small Business Disabled Access Credit

An Example of How Our Tax Laws Favor the Wealthy

In my tax practice, I have noticed that the tax laws for issues that face my wealthy clients are often much more friendly than the tax laws for issues that face my not so wealthy clients. The most recent Vines v. Commissioner case and the Cowan v. Commissioner cases provide examples. Facts & Procedural On…Continue readingAn Example of How Our Tax Laws Favor the Wealthy

Part-Time Employee Not Entitled to Deduction for IRA Contribution

Taxpayers who participate in their employer’s retirement plan are not able to deduct contributions the taxpayer makes to their IRA retirement account. This is also true for taxpayers who are entitled to participate in their employer’s retirement plan, but choose not do so. In Colombell v. Commissioner, T.C. 2006-184, the court considered whether an employee…Continue readingPart-Time Employee Not Entitled to Deduction for IRA Contribution

French Exempt Low Wage Employees from Payroll Taxes: Could it Work in the US?

It is always interesting to hear about how other countries address tax issues. Like the United States, the French government collected higher than expected tax revenues last year. Where the United States government opted to keep the tax revenues, the French government has proposed to use the tax revenues to exempt minimum wage employees who…Continue readingFrench Exempt Low Wage Employees from Payroll Taxes: Could it Work in the US?

Deducting Investment Advisor Fees Paid by Trusts

There has been a split in the various circuit courts of appeals regarding the deductibility of investment advisor fees paid by trusts. The Second Circuit Court of Appeals, in William Rudkin Testamentary Trust v. Commissioner of Internal Revenue, recently held that investment advisor fees paid by trusts are limited by the Section 67 two percent…Continue readingDeducting Investment Advisor Fees Paid by Trusts

Ex-Spouse’s Defense for Tax Discharged in Bankruptcy

What if an ex-spouse who is jointly liable for the tax waits until after the other ex-spouse’s bankruptcy discharge and argues that the taxes were not discharged in bankruptcy as the tax return was invalid?  The court addressed this in Kuhl v. United States, No.?05-6570-BK (2nd. Cir. 2006).   Facts & Procedural History Ms. Kuhl owed the IRS…Continue readingEx-Spouse’s Defense for Tax Discharged in Bankruptcy

Compensatory Damages May Not be Taxable: Let the Tax Refunds Begin

This is one of those fascinating cases. Despite the long line of case law, the US Court of Appeals for the District Circuit, in Murphy v. Internal Revenue Service, has held that Section 104(a)(2) is unconstitutional. Facts & Procedural In Muphy’s Case Murphy was awarded compensatory damages for emotional distress and loss of reputation. Murphy…Continue readingCompensatory Damages May Not be Taxable: Let the Tax Refunds Begin

Taxes & Limited Liability Companies

The Limited Liability Company or LLC is a legal entity formed with the state. Once formed, taxpayers have the ability to determine how the LLC is taxed for Federal income tax purposes. This presents a number of issues that have to be considered for LLC owners. Income Taxes & LLCs The IRS regards a single…Continue readingTaxes & Limited Liability Companies

Estate Tax Valuation vs. Income Tax Valuation

The question in Janis v. Commissioner is whether a taxpayer can claim that property has a low value for estate tax purposes and then turn around and claim that the property has a high value for income tax purposes. The Ninth Circuit said “no,” but the answer could have been different under slightly different facts.…Continue readingEstate Tax Valuation vs. Income Tax Valuation

More on IRA Beneficary Designation Planning Opportunities

It is probably safe to say that most IRA owners really don’t put much thought into who they designate as their IRA beneficiary, but even IRA owners who do may very well have not done their planning correctly. This is especially true in that the IRA beneficiary designation rules are so complex. With traditional IRAs…Continue readingMore on IRA Beneficary Designation Planning Opportunities

Tax on Military Benefits for Disabled Soldiers

Few would argue that soldiers and military personnel, especially veterans, should be afforded certain privileges. In American society as of late these benefits have included free or reduced cost education, health benefits, and in some cases, retirement benefits. Yet, the courts, and ultimately Congress, have been less giving with regard to the tax treatment of…Continue readingTax on Military Benefits for Disabled Soldiers

Tax Treatment of Settlement Agreements (Again)

The classification of settlement payments for purposes of federal income taxes continues to be a problem for taxpayers and for their legal advisers. The Ninth Circuit, in Rivera v. Baker West, Inc., recently upheld a lower court’s determination that an employer correctly withheld federal taxes from a settlement agreement paid to a former employee. FACTS…Continue readingTax Treatment of Settlement Agreements (Again)

Estate Plans in Uncertain Times

With 2006 fast approaching I can’t help but pause to think about our estate and gift tax regime. The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 changed the rules of the game. Following the enactment of EGTRRA estate planners and tax attorneys went to work defining and clarifying how estate plans should…Continue readingEstate Plans in Uncertain Times

Entrepreneur Rollover Stock Purchase Plans

Financing a business start-up can be a challenge. Most traditional lenders require that a business be operational for at least a year before they will provide small business loans. Moreover, venture capitalists are quick to reject most start-up proposals and if the venture capitalist is willing to fund the start-up they typically demand a significant…Continue readingEntrepreneur Rollover Stock Purchase Plans

Basic Estate Administration and Taxes: Elections & Timing

This post is written to remind non-tax attorneys who administer estates of a few basic tax issues that must be considered in administering estates. From a tax perspective, estate administration is all about making elections and timing distributions, income and expenses. IRC 441 The first group of elections involves selecting tax years. IRC § 441…Continue readingBasic Estate Administration and Taxes: Elections & Timing

Sometimes It is Best Not to NIMCRUT

The best laid tax plans often go awry as tax laws and life circumstances change. In other cases tax plans go awry because they were improperly conceived. I have been encountering a number of NIMCRUTs that should not have been undertaken. The NIMCRUT, otherwise known as the net income with makeup charitable remainder unitrust, is…Continue readingSometimes It is Best Not to NIMCRUT

Taxes & Gay and Lesbian Marital Rights

Various states have enacted laws to stop recent attempts by gay and lesbian groups to achieve full marital equality.  While these laws address marital rights, they do not address rights when it comes to fair treatment for Federal income tax purposes.   The Dispute: Filing Status What would a challenge to fair treatment for Federal income…Continue readingTaxes & Gay and Lesbian Marital Rights

Trust as the IRA Beneficiary

I continue to hear a number of financial planners, accountants and even attorneys say, “Don’t name a trust as the beneficiary of an IRA. ” The rationale is that naming individuals as the IRA beneficiary is preferable because the individual can take the IRA distributions over the course of the beneficiaries lifetime; whereas, a trust…Continue readingTrust as the IRA Beneficiary

The (D)Evolution of our Tax Law

Our tax laws seem to evolve (devolve?) over time. This evolution seems to follow a pretty predictable pattern. I will use Action on Decision 2005-001, which is an interesting decision in and of itself, to describe this process. In this AOD the IRS announces that it will not follow the Ninth Circuit Court of Appeal…Continue readingThe (D)Evolution of our Tax Law

Taxation of Settlement Agreements for Plaintiffs Attorneys

Settlement awards can be structured in a number of different ways.  This presents a number of tax planning opportunities.  But for the typical settlement award, the tax consequences are somewhat standard. Including the Settlement in Income One of the tax issues for settlement awards is whether the award can be excluded from the clients income. …Continue readingTaxation of Settlement Agreements for Plaintiffs Attorneys

Estate & Trust Attorneys Will Increasingly be Subject to Malpractice Actions Brought by Beneficiaries

It is now well established that a plaintiff s attorney should be subject to malpractice liability for not proposing a structured settlement annuity versus a lump sum payment to their injured clients and for not seeking the advice and assistance of a competent financial adviser in the process. The principles underlying this type of malpractice…Continue readingEstate & Trust Attorneys Will Increasingly be Subject to Malpractice Actions Brought by Beneficiaries

Taxpayer: It’s All About Valuation; IRS: We’re Damned if We Do

Many tax practitioners agree that valuing property for tax purposes is the most important issue that they face. Yet valuation issues are often murky and amorphous. In most cases valuation disputes are resolved in favor of the party that has the most convincing valuation expert. In other cases valuation disputes are resolved on even less…Continue readingTaxpayer: It’s All About Valuation; IRS: We’re Damned if We Do

Lessons Learned from Colorado’s Taxpayer Bill of Rights

Taxpayers’ Bills of Rights (TABORs) prevent state governments from increasing taxes or spending revenue growth without first obtaining voter approval. Several states are poised to adopt state TABORs in the near future. The State of Colorado adopted a TABOR in 1992. There are a number of lessons that other states can learn from Colorado’s TABOR…Continue readingLessons Learned from Colorado’s Taxpayer Bill of Rights