IRS to Provide Guidance for Marijuana Retailers

The IRS Office of Professional Responsibility plans to release guidance in the first quarter of 2015 for practitioners working with marijuana retailers in states where the business is legal. The practitioners are pushing for the IRS to issue guidance clarifying that a tax professional will not be considered unethical, targeted for audit or be considered in violation of Circular 230 rules solely for preparing a return for a marijuana business. Although some states now allow the sale of marijuana, those sales are still illegal under federal law.  Because the sale of marijuana is an illegal activity under federal law, the cost of goods sold will be an issue as drug dealers are never allowed to claim a cost of goods sold.  In addition, there are related issues such as deductions dependent on whether the sale of marijuana is a trade or business of cultivating or sale, or whether it's a subsidiary trade or business that just happens to have a connection.  Indeed, if the IRS does not allow COGS or Section 162 deductions, the tax bills could be a major hurdle.

Long Waits for IRS Practitioners

The average time it will take for tax practitioners to get through to the Internal Revenue Service on their dedicated practitioner phone line in 2015 is projected to be 52 minutes, National Taxpayer Advocate Nina Olson said on November 4, 2014.  Ironically, the IRS calls the dedicated line the "Tax Practitioner Priority Hotline."  There's nothing "priority" or "hot" about that 52 wait and could be slower than the DMV.

A Step Forward for Captive Insurance - Securitas Holdings

In the matter of Securitas Holdings, Inc. v. Commissioner,  T.C. Memo. 2014-225 issued today by the the U.S. Tax Court, the Court found that Securitas had established a bona fide captive insurance arrangement among its U.S. companies and was entitled to interest expense and premium deductions.  As with all true insurance companies (which most captive arrangements are if done for business purposes), the  captive arrangement shifted risks, distributed risks, and constituted "insurance" in order to make the premiums deductible.  

Indeed, if a captive insurance company is applicable to your holding company structures, the tax and premium benefits may be substantial.  This Office is happy to answer any questions that you may have concerning captive insurance arrangements.

The opinion of the Court can be found at this link:
http://ustaxcourt.gov/InOpTodays/SecuritasHoldings,Inc.Memo.Buch.TCM.WPD.pdf

Social Security Taxable Maximum Increased to $118,500

The maximum amount of earnings subject to Social Security tax will rise to $118,500 in 2015, from the current $117,000, the Social Security Administration announced today.

OVDP: Definition of Willful Left Broad

Jennifer Best of the IRS stated that the IRS has deliberately refrained from offering a lot of examples about what constitutes willful failure to disclose offshore assets.  Taxpayers are only allowed to use the Internal Revenue Service's streamlined offshore voluntary disclosure program when they have failed to report foreign income or foreign financial accounts or assets, if they can certify that their failure to do so was non-willful.  Every taxpayer has a unique set of circumstances, therefore, definition of the term of "Willful" was intentionally left broad.

Dow Chemical Loses Appeal on Royalty and Depreciation Expenses

The Fifth Circuit ruled today on appeal that Dow Chemical was not entitled to royalty and depreciation expenses related to two partnerships that were designed by Gold Sachs.  The Court had found that the transactions related to the partnerships were shams or tax shelters.  The total tax benefit that was lost by Dow was approximately $2.0 billion.  The Appeals court remanded it back to the District Court to determine whether the substantial valuation and gross valuation misstatement penalties were appropriate.  

S Corporation Conversion from C Corporation Tax Benefit Made Permanent

On June 12th, the House agreed to make permanent an expired tax provision that allows an S corporation after it converts from a C corporation to recognize the built in gains over a five (5) year period from the conversion date.  Without this provision, S corporations had to wait 10 years before it could sell its business assets in order to avoid the built in gain tax.

IRS Issues Taxpayer Bill of Rights

Yesterday, the Internal Revenue Service released the Taxpayer Bill of Rights setting forth 10 rights of taxpayers that are contain in various parts of the Internal Revenue Code.

• The right to be informed.

• The right to quality service.

• The right to pay no more than the correct amount of tax.

• The right to challenge the IRS's position and be heard.

• The right to appeal an IRS decision in an independent forum.

• The right to finality.

• The right to privacy.

• The right to confidentiality.

• The right to retain representation.

• The right to a fair and just tax system.

Waiver of Privilege:Sharing Information with Deal Team in Tax Planning

In Schaeffler v. U.S., the taxpayer filed a motion to quash the U.S.'s request to discover information that was shared between lawyers, financiers and accountants under the attorney work product doctrine.

In short, the taxpayer owned a limited partnership that was funded by a consortium of banks to purchase a target company.  Shortly, after the target company was acquired, the share price dropped significantly, and the taxpayer, the banks and the partnership were required to restructure.  As part of the restructuring, the parties entered into an Attorney Client Privilege Agreement ("ACPA") and retained EY and Dentons US, LLP to assist with the restructuring.  The U.S. sought via summons all documents shared under the ACPA.

First, the Court ruled that, although the banks had an large interest in the partnership's tax treatment, there was no common interest, so the common interest rule did not apply.  In order for the common interest rule to apply, there must be: (1) a common legal, rather than commercial, interest, and (2) the disclosures were made in the course of that common legal goal.  The Court held that the banks' interest was primarily commercial in that they were interested in how much they would have to finance to pay the tax burden.  As such, their interest was commercial, not legal, and there was no attorney-client privilege.

The Court also rejected the work product argument as applied to EY in that the restructuring plan formed by EY was not in anticipation of litigation.  The Court used the standard of whether EY would have created the document containing the opinion in a similar form even if litigation or an audit had not been anticipated.  The Court found that EY would have had a legal duty to create similar memorandum under a similar form.  The Court reasoned that Circular 230 and Treas. Reg. 1.6694-2(b) require tax practitioners in providing tax advice to base their opinions on all legal issues and risks regardless of anticipated litigation or audit. As such, EY was legally bound to provide a similar analysis even if an audit was not anticipated.

In this Office's opinion, the Court's opinion makes any tax advice from a non-lawyer to a client non-privileged because the tax practitioner must consider legal arguments and risks in formulating an opinion under Circular 230 and the regulations.  Clients would be well advised to use law firms in place of accountancy firms in analyzing the risks of business transactions.

See Schaeffler v. U.S., 1:13-cv-4864 (SDNY May 28, 2014)

Credit Suisse Is Charged by DOJ

The U.S. filed charges today against Credit Suisse in Virginia for conspiring to help American taxpayers evade  taxes through the use of secret offshore accounts.  The charges were filed as an information indictment that means the defendant agreed to the form of the information indictment pre-filing.  Practically speaking, because an information was filed, it indicates that Credit Suisse and the U.S. have already negotiated a plea agreement; however, it is still subject to the Court accepting the plea and then entering a form of sentence/punishment. 

Jury Soon to Determine "Willfulness" in FBAR Case

In the case of United States v. Zwerner, a federal jury will determine whether a taxpayer acted willful in the failure to file FBAR reports.  Seldom has this issue been litigated, and not recently.  For international practitioners, this shall be a closely watched outcome.  

Expired Research & Development Tax Credit Clips Google's Profit

For a large company, tax rates and applicable credits can have a major impact on profitability.  The expired research and development tax credit that Google lost shaved 2% off its profitability.  For a company with billions in revenue and profits, 2% is not insubstantial.  Proper tax planning and knowing your business's tax planning is a must.

wsjhttp://online.wsj.com/news/articles/SB10001424052702304626304579509523971197320?KEYWORDS=google+taxes&mg=reno64-wsj

Funding ESOPs with S Corp Profits

Below is a link to an interest article from the WSJ that discusses a corporate structure to use S Corp profits to fund ESOPs.  Obviously, the ESOP that wholly owns a profitable S Corp can provide a large funding opportunity for an owner's retirement. Planners need to watch the Austin v. Comm'r case development closely and pay attention Rev. Ruling 2004-4 to avoid potential challenges.

http://online.wsj.com/news/articles/SB10001424052702304419104579324851519855352?mg=reno64-wsj

Taxpayer Don't Forget to Report Foreign Financial Assets and Accounts:

With the tax return filing deadline fast approaching, taxpayers should not forget to report any foreign income or financial assets on their tax returns.  Foreign dividends and interest must be disclosed on by checking the box on your Schedule B, and foreign income from trusts and gifts should be disclosed on the Form 3520.  Even certain foreign assets totaling greater than $50,000.00 that are income producing or not must be disclosed on the Form 8938, Statement of Foreign Assets. Many tax return preparers in the past failed to ask clients if they had foreign income and assets, and such mistakes are less common with the prevalent media of the IRS's collection efforts against foreign assets.  However, don't get unwittingly caught because the penalties for non-reporting are stiff.

Moreover, FBAR disclosures must be made this June 30th electronically to the U.S. Treasury through the following website: http://bsaefiling.fincen.treas.gov/main.html.  It is not much comfort that the website is entitled, "Financial Crimes Enforcement Network."

If you have questions about foreign income or asset issues, feel free to contact us.

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. 

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.