DOES NORTH CAROLINA KNOW THAT CIRCULAR 230 EXISTS?

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.   

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.).

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. 

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.

Take that IRS: U.S. Tax Court Blesses Wealth Transfer Technique

Last month, the U.S. Tax Court ruled in favor of wealthy, closely held business owners everywhere when it gave the OK for these owners to gift shares of their business with the least amount of tax possible.  Sounds like common sense, but the IRS always wants you to pay up.  Here’s the gist of Wandry v. Commissioner:

The Wandrys each gave units of their family-owned LLC, worth over $1 million, to their heirs in 2004.  To avoid paying tax, they specified the gifts should be equal to the dollar amount of their federal tax exemptions (at the time of the gift, the lifetime exemption was $1 million, and the annual exclusion was $11,000).  The hitch in these plans is always the valuation:  taxpayers must hire professional appraisers to give these units a proper value.  Usually, these valuations are rather low in order to give the taxpayers the maximum use of their exemptions.  However, the IRS has the power to challenge these valuations, and they often appraise these family-owned businesses at a much higher dollar amount.  For the Wandrys, the value rose about 20% when the IRS challenged the appraiser’s work. 

So if the IRS determines the value to be much higher, do you have to write the IRS a big fat check for tax on the amounts over the federal exclusions? Thanks to the Wandrys, the answer is no.  Because the Wandrys explicitly stated that the gift amounts were to be equal to the applicable federal exemptions, the Court found that those excess amounts were never actually gifted to their heirs.  Because there was no gift over the exemption amount, no tax was owed.  And the excess amount of the gift remains the property of the Wandrys.  Great result for smart tax planners, especially because the unified exemption for couples is now $10 million.  

 The trick is to make sure your documentation explicitly states that the gift amount is to be equal the applicable exemption.  If this language is missing, a court very well may rule that you intended for your gift to transfer, regardless of the ultimate valuation.

But you may need to act fast:  The IRS has time to appeal this Tax Court ruling to the Court of Appeals.  Because this ruling is so great for us taxpayers, it is likely the IRS will have the 10^th Circuit take another look.  Look for updates on this blog.   

Supreme Court Settles the Score: Circuit Ct Split Resolved

Following up on our series regarding the hot issue of an overstatement of bases and an extended statute of limitations, the U.S. Supreme Court disposed of nine cases April 30 addressing issues the court resolved in United States v. Home Concrete, denying certiorari to the rulings which reached the same conclusion as the high court or granting certiorari—and then vacating—those which did not.

 

In Home Concrete, the Supreme Court found its 1958 ruling in Colony Inc. v. Commissioner is still controlling, therefore an overstatement of basis resulting from a taxpayer's use of a Son-of-BOSS tax shelter does not trigger the extended six-year assessment period under Section 6501(e)(1)(A).  The decision resolved a circuit split on the issue.

 

Among the cases vacated by the Supreme Court were three of the most well-known appeals court cases addressing the issue: Salman Ranch Ltd. v. Commissioner, Intermountain Insurance Service of Vail LLC v. Commissioner, and Grapevine Imports Ltd. v. United States.