Tuesday, April 26, 2011

Money Matters: LWC on the Radio!

          Check out Lindsey's first radio show on Money Matters, which originally aired in February of this year, hosted by Rick Durkee on Saturday mornings on Charleston News Radio 94.3 FM. 

Check out Lindsey's second show, which aired in March of 2011:

Check out Lindsey's most recent show, which aired in April:

Update: U.S. Tax Court Sides with Fourth Circuit on Statute of Limitations Circuit Court Split

           On April 5th, we gave you the gritty details on the Fourth Circuit’s side of the Circuit Court split when it comes to the issue of the statute of limitations and the overstatement of basis.  Yesterday, the United States Tax Court handed down its ruling in Carpenter Family Investments, LLC v. Commissioner of Internal Revenue which serves another blow to the IRS. 

            Like the Fourth Circuit, the Tax Court ruled that the general three year statute of limitations for assessing tax applies when a taxpayer is determined to have overstated his basis.  The facts in this case centers on the sale of shares of stock by an Oregon-based partnership.  In 2000, the partnership sold certain shares of stock and reported a modest gain of just over $6,000.00.  The partners timely filed its 2000 joint income tax return and properly reported the gain from the sale of stock.  In October 2008, the IRS issued a final partnership administrative adjustment (FPAA) asserting that the partnership had participated in transactions that artificially stepped-up the inside basis, resulting in an omission from gross income pursuant to Sections 6229 and 6501 of the Internal Revenue Code and application of the extended six-year statute of limitations for assessing the unpaid tax.  According to the IRS, the partnership adjustment was timely.  The taxpayers begged to differ. 

             The Tax Court ruled in favor of the partnership and found that Colony v. Commissioner, the 1958 Supreme Court case, controlled.  The Tax Court also relied on the Ninth Circuit’s interpretation of Colony in Bakersfield Energy Partners, L.P. v. Commissioner, decided in 2009.  See  568 F.3d 767.   In the U.S. Tax Court and Ninth Circuit Court of Appeals, the standard three year statute of limitations applies to the assessment of tax when a taxpayer is found to have understated basis. 

            Based on the Circuit discrepancies in interpreting the statute and case law, we may soon see a petition for certiorari granted by the U.S. Supreme Court.  We will continue to keep you updated.

Thursday, April 21, 2011

Apples and Oranges: The IRS Targets the Misclassification of Contractors.

As reported in the ABA Journal, the Internal Revenue Service will randomly audit 6,000 businesses over the next three years to determine whether they misclassified workers as independent contractors when they should be treated as employees for tax purposes.  When properly classified, using independent contractors as opposed to employees allows businesses to escape unemployment, Social Security and Medicare taxes and overtime pay.

            These benefits may not outweigh the risk.  If a business is caught misclassifying workers, they will be subject to taxes, interest and penalties after a lengthy and expensive audit.  Determining whether a worker is an employee or independent contractor for tax purposes is a fact intensive inquiry involving the weighing of (count ‘em) twenty factors.  Some factors may be more important than others in the context of the services the individual is performing.  Because there is no cut and dry test, the audit process can get heated. 

            What triggers a potential IRS audit of your business?  Issuing the same individual a W-2 and a Form 1099.  The most common scenario occurs when   retiring employees cuts back on hours and, as a consequence, are changed to contractor status.  While this is not against the rules per se, be careful—if your new independent contractor is performing the same exact job and holds the same duties and responsibilities as they did during their “employment,” the classification could be challenged. 

            A great way to protect yourself is to put it in writing.  Draft up an independent contractors agreement setting forth your contractor’s duties and detailing policies and procedures.  This way you will have a concrete agreement to show the IRS when they knock on your door.  

            If you have questions on whether your workers may be classified as employees rather than independent contractors, talk to your tax attorney, financial adviser or Certified Public Accountant.

Money Matters: LWC on the Radio!

To check out the New York Times article on why people pay taxes, visit: 


Wednesday, April 6, 2011

The Best Part of Being Rich? The Audit.

            According to the IRS’ recently released statistics, the percentage of taxpayers who were audited in 2010 increased in every category of AGI above $500,000 compared to a year earlier.  The most dramatic increase came in the $10M income bracket, of which 18% of individual earners of $10M or more suffered through audits in 2010 compared to only 11% in 2009.  For individuals earning between $500,000 and $1M, audits increased from 2.8% to 3.4%.

            While the total number of audits skyrocketed in recent years, at least 70% of all individual examinations by the IRS are conducted through correspondence rather than an agent. Some audits, however, involve detailed scrutiny and can run some taxpayers upwards of tens of thousands of dollars in CPA and legal defense fees. 

            The increase in affluent audits could be a result of IRS Commissioner Doug Shulman’s “wealth squad”, formally known as the IRS’ Global High Wealth Industry group, created in 2009.  Coupled with the formation of the wealth squad was an IRS announcement providing limited amnesty for taxpayers with hidden offshore accounts. 

            How can you head off a possible audit?  Consider over-disclosure.  Speak with your CPA about providing more than the minimum-required information when disclosing a potentially audit-triggering transaction.  

Tuesday, April 5, 2011

And the Fighting Continues: Fourth Circuit Ruling Deepens Circuit Court Split

            In February of this year, the Fourth Circuit reversed the District Court for the Eastern District of North Carolina and held that a partnership’s overstatement of its basis did not constitute an “omission” subject to the six-year statute of limitations for assessment.  Based on a United States Supreme Court case decided in 1958, (when the country used a different tax code) the Fourth Circuit found that an adjustment made in 2006 for a 1999 tax return was untimely.  The Fourth Circuit now joins the Federal and Ninth Circuits in so holding. 

            The case, Home Concrete & Supply, LLC v. U.S., involves two shareholders of a corporation who sought financial planning advice to reduce any tax liability generated by the sale of the business.  The taxpayers formed an LLC and inflated the outside basis in the partnership by contributing short sale proceeds of Treasury Bonds.  Assets from the corporation were transferred to the LLC and, after another few transactions, the business ended up reporting a modest $69K gain from the sale of the business.    

            The components of the transaction were reported to the IRS on its 1999 tax return.  The IRS failed to initiate its investigation until June 2003, and a Final Partnership Administrative Adjustment (FPAA) was issued on September 7, 2006, which decreased the taxpayers’ reported outside bases in the LLC to zero, resulting in a substantial increase in taxable income.   The IRS argued that the partnership was formed solely for the purpose of tax avoidance by artificially overstating the basis of the partnership interest. The entity made its tax deposit and filed a refund suit in the Eastern District of North Carolina pursuant to the argument that the six-year statute of limitations does not apply to an overstatement of basis.

            The IRS argued that the six-year statute of limitations applies because Home Concrete “omitted from gross income an amount properly includable therein” which exceeded 25% of the amount of gross income stated in Home Concrete’s 1999 tax return, which triggers the extended statute of limitations under I.R.C. §6501(e)(1)(A). 

            The District Court issued partial summary judgment in favor of the IRS, stating that when a taxpayer overstates basis and, as a result, leaves an amount out of gross income, the taxpayer “omits from gross income an amount properly includable therein” as required under I.R.C. §6501(e)(1)(A).  The taxpayers appealed. 

            The Fourth Circuit found that Colony, Inc. v. Commissioner, a Supreme Court case decided in 1958, was controlling.  In Colony, the IRS alleged that a taxpayer understated the gross profits on the sales of certain lots of land as a result of having overstated the basis of the lots.  It argued that its assessments were timely under I.R.C. §275, the predecessor to Section 6501.  In 1954, Congress recodified former Section 275 at Section 6501(e)(1)(A) and added several subjections.  Save for the additions, the language of the two remains the same.  The Colony Court found that the application of the extended statute of limitations found in Section 275 is limited to situations in which specific receipts or accruals of income items are left out of the computation of gross income.  An understatement of gross profits based on the overstatement of basis does not fit within this narrow class and therefore, the six-year statute of limitations does not apply. 

            The Fourth Circuit followed Colony accordingly.  It found that Section 651(e)(1)(A)’s special extended statute of limitations applies solely to situations where a taxpayer omits or fails to report some income receipt or accrual in his computation of gross income.  It does not apply to general errors in computation that may arise from other causes.  The Fourth Circuit joined the Federal and Ninth Circuits in holding that an overstatement in basis does not result in an omission from reported gross income. 

            This holding comes in stark contrast to the January 2011 holding of the Seventh Circuit in Beard v. Commissioner.  In Beard, the Seventh Circuit held that the six-year statute of limitations does apply to an overstatement of basis, reversing the lower court.  The Seventh Circuit joins the Fifth Circuit in so holding.  See Phinney v. Chambers, 392 F.2d 680 (5th Cir. 1968), cert. denied, 391 U.S. 935. 

            The Fourth Circuit’s holding provides some transactional flexibility for individuals and businesses who intend on selling businesses or property.  We will continue to follow the circuit court rulings on this issue and keep you updated with new information as it become available.