No Taxpayer Refunds: Supreme Court Rules that Severance Payments Are Subject to FICA

If you have followed this blog, we have been writing on 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 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) .  This decision was appealed, and the Supreme Court decided to resolve the issue because of the Circuit split.

Unfortunately, on March 25, 2014, the Supreme Court ruled that severance payments (or SUB payments) were subject to FICA tax and withholding.  Even the Supreme Court did not take pity on those who were, are or will be severed from their employment.

Manufacturing Exception to Subpart F Income Is Extended to Products that Are Grown.

In Private Letter Ruling 201340010, the IRS extended the manufacturing exception for Subpart F income and applied the exception to products that are grown.  The PLR specifically discusses the planted, harvesting and selling of corps by a controlled foreign corporations ("CFC"). Logical extensions of this ruling would be livestock or aqua-culture because the product is "grown."  

If anyone ever wanted to own a vineyard in Argentina, this may be news you were waiting for. 

Tax Court Rules One Taxpayer's Activity Was Too 'Passive'

The U.S. Tax Court held on July 16th that taxpayer Guillermo Merino Jr. did not qualify as a real estate professional because of his lack of involvement with his properties. Merino was trying to claim losses on seven of his out-of-state properties located in Colorado and Nevada. Because he used a management company to perform all of the tasks associated with the Colorado property it was subject to the passive activity limitation under tax code Section 469. Merino also hired an assistant to handle the tasks associated with his six other properties in Nevada. As such, the Tax Court classified his lack of activity and involvement with each property as passive as defined in the tax code. It was Merino's burden to prove that he spent at least 750 hours during the 2007 tax year performing services in relation to his properties. It was also necessary to establish that these services accounted for over half the time he spent performing services in any trade or business. Because of his outsourcing in regards to managing the properties, collecting rent, etc., the Court held that Guillermo did not qualify as a real estate professional. Word to the wise: make sure you are putting in your allotted 750 hours!

Using the Words "Ponzi Scheme"

The words "ponzi scheme" are words that cannot be said loosely without thought. The consequences of calling a business or entity a ponzi scheme should be carefully considered first. Attorney Kathy Bazoian Phelps co-author of the book, "The Ponzi Book" explains that depending on certain contributing factors to how the words are said, some can get away with it and some cannot. In Phelp's blog post linked below she describes two separate cases that involved the words ponzi scheme being used by two different government agencies. In SEC v. Small Business Capital Corp. Mark Feathers for SBCC claimed that the SEC violated his First Amendment rights by using fighting words such as "ponzi-like". The court denied his motion saying that the words do not "...inflict injury or tend to incite an immediate breach of the peace." In the Emerging Money Corp. v. United States, EMC claimed that the IRS contacted EMC's clients and told them that their business is a "ponzi scheme" and that they were involved in "sham transactions". The IRS was found in the wrong for for their assertion that EMC's program was a ponzi scheme. Check out Phelps blog below for more information.

http://theponzibook.blogspot.com/2013/01/alleged-ponzi-scheme-perpetrators-speak.html

IRS Tax Exempt Application Scandal

The IRS has been under a lot of fire recently due to how they handled certain tax exempt applications from advocacy groups such as the tea party groups. This is all said to have happened between 2010 and 2012 and the IRS claims they were separating and organizing 501(c)(4) applications to produce a better work flow. The applications that had the most difficult time were the ones containing "tea party" or "patriot" in their names. Some applicants were asked questions that were not customary and inappropriate, their applications fell through the cracks, or they received a much longer response time than other applicants.  Despite the IRS' opposite counterclaim of not selecting and organizing the applications in a political or partisan rationale, the head of Exempt Organizations at the IRS has made a public apology. The IRS says they fixed the situation last year and have adopted new procedures to prevent such thing from happening again. Since this situation has been uncovered it has not been handled lightly, the head of the IRS, Steven Miller was forced to resign on May 15th and today marks the first hearing of a series of Congressional Hearings on the IRS scandal. Stay tuned for news and updates as we follow the hearings. 

IRS Feeling the Effects from Government Budget Cuts

Government spending cuts are now having an effect on the chances of you getting audited. The cut which is known as the “sequester” is said to eliminate $600 million from the IRS’s budget this year. What does that mean? And how does that affect me? The cut will cause IRS employees to go on temporary unpaid leave for up to seven days starting May 24^th and continuing throughout the pay periods. Fewer agents on hand to assist taxpayer’s wants/needs mean it may be harder to get the help you want. Due to the cut IRS employees will have less time to work on audits, meaning they will not be able to do as many audits as they did years prior. This does not mean you are in the safe house, just because the IRS won’t be starting as many new audits as before they will most likely pay extra attention to the ones they do focus on. 

New IRS Guidance on Principal Residence Foreclosures from tax Liens

The IRS has issued new guidance for foreclosures that have to do with a taxpayers principal home. Before the IRS can seek suit to foreclose on a personal principal property there are certain administrative cures that will be looked at first as well as if the taxpayer has any hardship issues, all these will be assessed before seeking a suit. These administrative cures help provide a more detailed look at the policies and procedures for suits. The guidance includes two options for the process of collecting the taxpayers principal residence. The first option is a  obtaining a  court order through proceeding that would allow for the administrative seizure of a principal residence under tax code Section 6334(e)(1). The second option is a suit to foreclose on the principal residence from the tax lien under Section 7403, but all administrative cures and hardships need to be examined beforehand. Most of these administrative cures include contacting the tax payer with the lien and advising them on the issue, the options they have and obtain and other other neccessary information.