Tuesday, October 23, 2012

Circuit Split: Are Severance Payments Subject to FICA?

BNA reported today that the government filed a petition Oct. 18 for rehearing en banc in the closely watched Quality Stores case involving the taxability of severance payments (United States v. Quality Stores Inc. (In re Quality Stores Inc.), 6th Cir., No. 10-1563, petition for rehearing filed 10/18/12).
The Sixth Circuit held Sept. 7 that payments a company made to employees as part of the company's severance program were not subject to tax under the Federal Insurance Contributions Act (FICA) .
In upholding the rulings of the bankruptcy court and the district court, the appeals court expressly rejected the Federal Circuit's holding in CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008) that the payments were dismissal pay subject to tax.
The government noted in its petition for rehearing that the case “involves a question of exceptional importance” because of the conflict with the CSX case. The government also said that the total amount of FICA refund claims with IRS is more than $1 billion.
The petition for rehearing is available at http://op.bna.com/dt.nsf/r?Open=vmar-8zbt5v.

Check back for updates! 

Thursday, October 18, 2012

Don't Trust the IRS!

BNA reported yesterday that the Internal Revenue Service failed to inform more than 1 million taxpayers who qualified in 2010 for relief from tax penalties totaling about $181 million of their right to ask for relief, the Treasury Inspector General for Tax Administration said in a report issued Oct. 17.
IRS penalizes those who fail to file tax returns or fail to timely pay the full tax shown on any tax return. However, it may waive the fines for taxpayers who have demonstrated full compliance over the prior three years, but only if the taxpayers request penalty relief, TIGTA said. 

The agency watchdog found that IRS does not widely publicize the opportunity to request this waiver, and that taxpayers or preparers must have knowledge of IRS processes to ask for them. 

It said the unfairness in administering penalty waivers for those who know to ask for them could jeopardize taxpayers' confidence in the tax system. 

Text of the report, Penalty Abatement Procedures Should Be Applied Consistently to All Taxpayers and Should Encourage Voluntary Compliance (2012-40-113), is at http://www.treasury.gov/tigta/auditreports/2012reports/201240113fr.pdf.

Friday, July 27, 2012


North Carolina recently postponed the effective date of a new law that prohibits the department (as well as units of local government and the state treasurer) from employing an agent or auditor who is compensated in whole or in part by North Carolina for services rendered on a contingent fee basis or any other basis related to the amount of tax, interest, or penalty assessed against or collected.  This is amazing as Circular 230 specifically prohibits any tax practitioner from being compensated in a contingent manner based upon the amount of tax, and every person contracted by North Carolina on a contingent basis could be sanctioned for an ethical violation.  For the savvy tax controversy practitioner, I would be reminding the auditor of Circular 230’s ethical mandate.   

Wednesday, June 13, 2012

Discharging Student Debt: It’s Possible if You Have Asperger’s.

A former law student has won a bid in bankruptcy court to discharge nearly $340,000 in education debt because her diagnosis of Asperger Syndrome rendered her unable to hold a job and repay her loans.  The U.S. Bankruptcy Court for the District of Maryland on May 17 found that Carol Todd, who attended the University of Baltimore School of Law, met the difficult burden of showing that she would suffer undue hardship if forced to repay her debt. 

Todd, who was 63 at the time of her student loan discharge trial in Nov. 2010, received a GED at 39 and began pursuing higher education.  She received an associate degree at Villa Julie College, now Stevenson University, and a bachelor's degree at the College of Notre Dame of Maryland, now Notre Dame of Maryland University.  At Towson University, she obtained two master's degrees.  She then enrolled at the University of Baltimore School of Law and Regent University, and took classes online at an unaccredited school.  But after all of that, Todd was never able to keep a steady job.

She filed for Chapter 7 bankruptcy in 2009, when she owed $339,361 to three student loan creditors.  Due to a controversial amendment to U.S. bankruptcy law in 2005, it is very difficult for filers to discharge their unpaid student loans in bankruptcy court.  There are, however, some exceptions.  The most powerful exception to this law is the so-called “undue hardship” exception. 

If a filer can prove to the judge that he or she would not be able to repay student loans due to an undue hardship, then the student loans may be discharged.  This standard, however, can often be hard to meet.  Indeed, Todd’s attorney stated one can “hardly find a student loan case where the debts are discharged.” 

To check out the Court’s opinion, see:  Todd v. Access Group, Inc., Adv. Pro. 10-00091-RAG (D. Md.).

Tuesday, June 12, 2012

DOMA & Tax: No Estate Tax for Same Sex Couples

A federal judge in Manhattan struck down a portion of the Defense of Marriage Act in a case involving estate taxes.  U.S. District Judge Barbara Jones ruled that the provision denying equal federal benefits to gay married couples violates the equal protection clause of the U.S. Constitution.  (Windsor v. United States, S.D.N.Y., No. 10-cv-08435-BSJ -JCF)

The suit was filed by Edith Windsor of New York, who was assessed more than $363,000 in federal estate taxes because the federal government did not recognize her Canadian marriage to Thea Spyer, who died in 2009.  Spyer left all of her property to Windsor, including the apartment they shared.  Spyer's estate normally would have passed to her spouse without any estate tax, but DOMA prevents recognition of same-sex marriages, resulting in the assessment.

In granting summary judgment in favor of Ms. Windsor, the Court held that the surviving spouse of a same-sex marriage should have not been assessed estate taxes by the Internal Revenue Service because the definition of “spouse” in Section Three of the Defense of Marriage Act is unconstitutional.  

This is the fifth in a string of recent federal court opinions striking down Section Three of DOMA, and the first in its application to federal taxation. 

Friday, May 18, 2012

Facebook IPO Triggers Tax Questions

The $16 billion tax deduction Facebook will receive when it goes public by using stock options prompted Sen. Carl Levin (D-Mich.) to make another push for a law eliminating such deductions.
Reiterating the need for the Ending Excessive Corporate Deductions for Stock Options Act (S. 1375), Levin said Facebook's pre-public offering filings show that the company will no longer be paying taxes because of the stock options it is providing founders and executives.

Facebook plans to capitalize on its massive deductions to create a "net operating loss" -- a legal corporate bookkeeping maneuver under which companies may use past financial losses to offset future taxable income -- to reduce its taxes for years to come, Levin said in attacking what he described as a gigantic tax loophole. 

“Despite trumpeting … revenue increases to investors, Facebook is planning at the same time to tell Uncle Sam it has no taxable income, offsetting its revenues with stock option tax deductions,” Levin said in a statement.  “Facebook's $16 billion stock option tax deduction is so huge, it will enable Facebook to claim a $500 million refund of taxes paid over the prior two years and wipe out this year's tax bill.”

Check back for updates regarding Senator Levin's bill.