Thursday, December 29, 2016

Massachusetts / Rhode Island NATP Chapter Annual State Update Seminar - January 5th 2017 - ONE WEEK AWAY!!!

Massachusetts / Rhode Island NATP Chapter Annual State Update Seminar - January 5th 2017


Join the Massachusetts / Rhode Island NATP Chapter on Thursday, January 5th, 2017 for our Annual State Update Seminar. This all day event will be held at the Sturbridge Host in Sturbridge MA. Registration details are below, and are handled online directly by National NATP. A link to the registration website is listed below. Please take a look at the details on our speakers and topics provided in this great update opportunity including continental breakfast, snacks, lunch, vendors and great networking opportunities PLUS even 2 CE Credit Hours. Remember, if you sign up for this event at the October 25th 2016 event, you get 50% off of your registration!!
  • Register online with credit card.
  • For more information or to register by phone, fax or mail, use this form.
  • After January 6, please register at the door with the form above.


Topics:

What You Need To Know Regarding FBAR & Form 8938 presented by William Delaney, EA of MA/RI NATP Chapter.



Massachusetts State Tax Update including Launch of MASSTAXCONNECT for Personal Income presented by Brian Lynch, Dana Ackerman & Gilbert Gonzalez of Massachusetts Department of Revenue.


Rhode Island State Tax Update presented by Scott Lewis of Rhode Island Division of Taxation.


New York State Tax Update presented by Kathryn Keane of New York NATP Chapter.


Federal Tax Update presented by Kathryn Keane of New York NATP Chapter. (2 Hours of CE Credits)

Featured Speaker - Kathryn M. Keane, EA.

Kathryn is a principal of Macanta, a small tax and related services practice located in Brooklyn, NY, serving over 850 individual clients and 50 businesses. In December 2006, Kathryn completed two three-year terms on the National Board of Directors of NATP and was twice awarded Chapter Person of the Year for 2002 and 2008 for her volunteer service to the community at large as well as to NATP. In addition to serving as an Education Committee member for NY NATP, she currently serves as Chair of the IRS Tri-Boro Practitioner Liaison Committee. Kathryn is a frequent speaker for NATP Chapters. She has also presented for VASEA, NCCPAC (Nassau-Suffolk County Chapter) and local chapters of NYSSCPA. Kathryn has a B.S. degree from Brooklyn College.

Friday, December 23, 2016

What is a Legitimate Seller of Marijuana To Do?

William Delaney, EA
Westwood, MA
Revisiting an Earlier Article Published on www.massrinatp.org

Jason R. Beck operated medical marijuana businesses in California, where it is legal (see below) to do so.  On January 11, 2007, Beck’s West Hollywood, CA business location was raided by the federal Drug Enforcement Administration (DEA).  While Mr. Beck’s operation was permitted under state law, it operated in violation of federal law.  Among other things, the DEA allegedly seized $600,000 of what would be classified in that industry as inventory, plus cash.

On his 2007 Schedule C, Mr. Beck reported $1,700,000 in gross receipts; $1,429,614 in cost of goods sold (COGS); and $194,094 in expenses.  His COGS total included the $600,000 seized by DEA.  All income and expense amounts were provided to the preparer by the taxpayer, through his attorney.  The tax preparer neither prepared any books and records nor questioned any of the taxpayer provided information.  Upon audit, it was determined that the taxpayer “…routinely destroyed most documents pertaining to the operation of both dispensaries.”  So, on the issue of substantiation, three strikes against the taxpayer.

However, the larger issue was whether anything could be deducted if documentation had been provided and someone did a decent job with the books and records.  The federal determination was that the taxpayer’s trade or business “…consists of trafficking in controlled substances…which is prohibited by Federal law.”  IRC Sec. 280E disallows deductions and/or credits “…if such trade or business…consists of trafficking in controlled substances…”  So, on the issue of allowable deductions, three strikes against the taxpayer regardless of whether or not he maintained adequate business records.

Does that mean report all of your income but don’t try to take any deductions?  What about COGS?  According to the Court in Jason R. Beck v. Comm., TC Memo 2015-149 (8/10/2015), “COGS is an offset to gross receipts in determining business income,” therefore the Court would allow COGS to the extent that it could be documented.  The Court determined that the $600,000 included in COGS as an adjustment for the value of seized inventory could not be documented, so it was disallowed.  Does that mean it would have been allowed if documented?  Well, not really.  To quote once again from the Beck decision:  “Actually, if petitioner (Beck) had provided substantiation, the seized marijuana would still not be allowable as COGS BECAUSE THE MARIJUANA WAS CONFISCATED and not sold.” (emphasis added)  Heads we win; tails you lose!

The case is silent as to what would happen if the DEA “disposed” of the marijuana by some legal means.  Would that mean that taxpayer Beck now has a $600,000 COGS deduction?  Somehow, I doubt it but I would not blame him for trying.

Now that MA has ‘legalized’ the sale and use of marijuana, what does that really mean?  Marijuana is still an illegal controlled substance under federal law.  A state law permitting its use and sale in MA does not make it legal to do so.  Federal law is supreme.  Federally chartered banks and credit unions in MA cannot do business with dealers in an illegal controlled substance; most state chartered banks will shy away for the same reason.  If Oregon is any guideline, marijuana sellers often must deal almost entirely in cash and pay their bills (including taxes) in cash.  A few state chartered financial institutions provide payroll related services, including the deposit of taxes, but cannot offer a full range of financial services (such as credit cards) without running into federal prohibitions, such as being denied federal wire transfer services.

Transmitting and/or transporting funds derived from the distribution of a controlled substance, such as marijuana, is illegal under federal law according to a statement made in court by a representative of the Federal Reserve Bank of Kansas City, citing 18 U.S.C. Sec. 1960 – See The Fourth Corner Credit Union (CO) v. Federal Reserve Bank of Kansas City, Civil Action No. 1:15-cv-01633-RBJ-NYW (9/10/2015).

Now comes the IRS Office of Chief Counsel in a memo dealing with an excise tax levied on medical marijuana by the State of Washington.  (CCM 201531016 – 7/31/15).  The memorandum cites IRC Sec. 280E and its disallowal of either a deduction or a credit when the trade or business involves “trafficking in controlled substances.”  So, what is the taxpayer to do---pay the excise tax (not an insignificant amount) and shut up---no deduction or credit allowed?  The memorandum also cites IRC Sec.164(a) which sets forth the general rule for allowing taxes as a deduction.  This would appear to offer no hope, given the wording of Sec. 280E.  However, Sec. 164(a) does state that “…any tax (not described in the first sentence of this section) which is paid or accrued by the taxpayer in connection with an acquisition or disposition of property shall be treated as part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition.”  Does this provide the taxpayer with a ray of hope?  Read on…

The memo then states that “We interpret the State of Washington marijuana excise tax to be a tax paid or accrued in connection with the disposition of property by a trade or business.  Accordingly, pursuant to Sec. 164(a), a taxpayer who paid the marijuana excise tax should treat the expenditure as a reduction in the amount realized on the sale of the property…this excise tax is neither a deduction from gross income nor a tax credit.  Consequently, Sec. 280E does not preclude a taxpayer from accounting for this excise tax as a reduction in the amount realized on the sale of the property.”

So, it’s a reduction of the gross sales price and the taxpayer would report the net amount as gross income.  A win for the taxpayer.  One would presume that if MA were to enact a similar tax (as provided for in the new “legal” MA statute), it could be treated in a similar manner on the federal income tax return.

Tuesday, December 20, 2016

Overnight Room Rate at the Sturbridge Host



For those attending our Annual Meeting & Seminar on Thursday January 5th, you may wish to stay overnight the Wednesday prior to our state tax update at the Sturbridge host Hotel & Conference Center. The Host is offering a special group rate.  To take advantage of this special rate one should make their reservation by calling the Host Hotel Reservation line at 508-347-7393 and indicate your attendance at the NATP seminar at their conference center.  Should there be any questions one can call the Host Hotel Customer Service at 508-995-0900

Massachusetts / Rhode Island NATP Chapter Annual State Update Seminar - January 5th 2017

Massachusetts / Rhode Island NATP Chapter Annual State Update Seminar - January 5th 2017


Join the Massachusetts / Rhode Island NATP Chapter on Thursday, January 5th, 2017 for our Annual State Update Seminar. This all day event will be held at the Sturbridge Host in Sturbridge MA. Registration details are below, and are handled online directly by National NATP. A link to the registration website is listed below. Please take a look at the details on our speakers and topics provided in this great update opportunity including continental breakfast, snacks, lunch, vendors and great networking opportunities PLUS even 2 CE Credit Hours. Remember, if you sign up for this event at the October 25th 2016 event, you get 50% off of your registration!!
  • Register online with credit card.
  • For more information or to register by phone, fax or mail, use this form.
  • After January 6, please register at the door with the form above.


Topics:

What You Need To Know Regarding FBAR & Form 8938 presented by William Delaney, EA of MA/RI NATP Chapter.



Massachusetts State Tax Update including Launch of MASSTAXCONNECT for Personal Income presented by Brian Lynch, Dana Ackerman & Gilbert Gonzalez of Massachusetts Department of Revenue.


Rhode Island State Tax Update presented by Scott Lewis of Rhode Island Division of Taxation.


New York State Tax Update presented by Kathryn Keane of New York NATP Chapter.


Federal Tax Update presented by Kathryn Keane of New York NATP Chapter. (2 Hours of CE Credits)

Featured Speaker - Kathryn M. Keane, EA.

Kathryn is a principal of Macanta, a small tax and related services practice located in Brooklyn, NY, serving over 850 individual clients and 50 businesses. In December 2006, Kathryn completed two three-year terms on the National Board of Directors of NATP and was twice awarded Chapter Person of the Year for 2002 and 2008 for her volunteer service to the community at large as well as to NATP. In addition to serving as an Education Committee member for NY NATP, she currently serves as Chair of the IRS Tri-Boro Practitioner Liaison Committee. Kathryn is a frequent speaker for NATP Chapters. She has also presented for VASEA, NCCPAC (Nassau-Suffolk County Chapter) and local chapters of NYSSCPA. Kathryn has a B.S. degree from Brooklyn College.

Friday, December 16, 2016

May Massachusetts Impose an Estate Tax on Out-Of-State Real Property?

William Delaney, EA
Westwood, MA
The United States Supreme Court has long held that states cannot tax out-of-state real property since doing so would violate the due process clause of the constitution.  See, for example, Union Refrigerator Transit Co. V. Kentucky, 199 U.S. 194 (11/13/1905) wherein the Court said, in syllabus, “The power of taxation is exercised upon the assumption of an equivalent rendered in the protection of the property and person of the taxpayer, and if such equivalent cannot possibly be rendered because the property taxed is wholly beyond the jurisdiction of the taxing power, the taxation thereof within the domicil(e) of the owner amounts to a taking of property without due process of law.” (emphasis added)

Now comes the Estate of Anita D. Curtis, and its personal representative, F. Davis Dassori, who argue that the Curtis estate was unlawfully taxed by Massachusetts on the value of real property located in France.  See F. Davis Dassori v. Commissioner of Revenue, Middlesex County (MA) Probate and Family Court, Docket No. M114E0042GC (6/30/2016).  During her lifetime, Anita Curtis owned real property (an apartment) located in France titled in the name of an societe civile immobiliere (referred to as the SCI).  The SCI was found to be the MA equivalent of a nominee trust (“A nominee trust is a form of ownership of real estate which is in considerable use in Massachusetts as a title-holding device” – footnote #2, page 4 of the decision).

Not long after her death, the SCI sold the property.  Anita’s heirs paid a French inheritance tax on the transaction of approximately 300,000 (pounds) or $400,000 (U.S.).  Under French law, this was a sale of real property.

The Curtis estate filed a MA estate tax return, included the value of the French property in the gross estate, and paid an estate tax of $204,218 on an estate valued at $3,465,841.  Subsequently, the estate filed an abatement request for $176,881 which represented the proportionate estate tax on the real property located in France.  The abatement was denied by the Commonwealth.  Concurrent with the abatement request, the estate also prepared and filed an amended MA estate tax return which valued the French real estate at -0- for estate tax purposes and attached a statement – “The said property should not be subject to Massachusetts estate tax.”

Dassori, as personal representative of the Curtis estate, then filed in the Middlesex County Probate and Family Court a Motion for Summary Judgment contesting the imposition of “estate taxes on real property with a situs outside the state.”

Initially, the Commonwealth responded by pointing to the pro-forma Federal Form 706 which is attached to and made part of the MA estate tax return and argued that the Internal Revenue Code as of December 31, 2000 (which is used by piggy-back states such as MA in the computation of the state tax on estates) “…taxes the entire gross estate of an American citizen wherever situated.”  “Taxes paid to foreign countries are not included on line 3 of part 2 of the M-706.”   However, the Commonwealth subsequently abandoned that argument, for reasons not provided in the memorandum of decision, by conceding that out-of-state real property is not subject to MA estate tax (thereby accepting the Plaintiff’s argument based on the due process clause of the U.S. constitution) by arguing “that Anita’s estate held an interest in intangible personal property, not real estate.”   (emphasis added) [See Discussion, page 3].

The Court looked to whether there was a genuine issue of material fact (especially the issue of personal property v. real property).  The Commonwealth offered an affidavit which consisted of the U.S. – France Estate Tax Treaty and its Protocol, including a U.S. Treasury explanation.  The Court, however, found nothing in these documents to support a finding that the French real property was actually personal property under either French or U.S. law.  “Based on this Court’s review, the Court find(s) that there is no conflict under Massachusetts or French law.  Under Massachusetts law, the Apartment within the SCI is real estate.  While the SCI that holds the Apartment is not recognized in Massachusetts, it is similar to a nominee trust, which is recognized.  Nominee trusts are used to hold legal title to real estate.”

The Court, therefore, found for the Curtis estate and allowed the abatement request in full.

What to take from this decision?  It appears that MA has conceded that out-of-state real property cannot be reached and taxed on a MA estate tax return (whether or not it is subject to tax in another state).  The Commonwealth shifted gears and argued that this was personal property (which is subject to tax) because of the SCI ownership (i.e., we can’t reach it as real property but we can reach it if it is personal property).

The Court concluded that an SCI is the mirror image of a nominee trust in MA (which is recognized as formed to hold title to real property, not personal property). How would it now be possible for the Commonwealth to reverse itself and reassert that the estate tax does reach out-of-state real property.  It has already abandoned that argument. The fact that this is a decision rendered by a single Associate Justice of the Court would not seem to be critical because it was not jammed down the Commonwealth’s throat by the Court; the Commonwealth lost on the issue of whether or not an SCI should effectively be a disregarded entity for estate tax purposes.
What to do when preparing a MA estate tax return?  The pro-forma Federal 706 will include the out-of-state property value; federal law allows taxation on worldwide income/assets.  On the MA return, I would recommend preparing a statement for Part 1, line 1 (total gross estate) to remove out-of-state real property.  Likewise, on line 2 the credit for state death taxes should be recalculated after removing out-of-state real property.  Ignore Part 2 and carry the recalculated Mass. Estate tax to Part 4, line 1.

Issue:  Should the Part 1, line 2 recalculation be based on a pro-forma federal 706 after deleting the out-of-state real property or should there be a proportionate recalculation based on a ratio.  The proportionate method favors the Commonwealth.  My preference would be the result which favors the taxpayer.

At the bottom of page 2 of the M-706, I recommend inserting this statement:

Prepared in accordance with the Dassori decision – MA Probate and Family Court,      Middlesex Division, Docket #M114E0042GC (6/30/2016).

Monday, December 12, 2016

IRS E-Services Changes

E-Services is an opportunity for tax professionals and representatives to obtain information from IRS regarding taxpayers’ accounts, documents, tax returns, and other tax matters.  It has also been a place where limited questions can be asked of IRS and the reply sent to a secure email box inside E-Services.

Unfortunately the cybercriminals, including crooked tax professionals, have been able to get into E-Services and obtain information to use for ill gotten gain.  Many of these criminals have entered E-Services by using stolen ID information.   As a result of this, IRS is taking steps to try to limit E-Services to those who can verify they are indeed the tax professional or representative.

IRS is strengthening the identity authentication process for several IRS.gov self-help tools including E-Services.  The term given to these changes is Secure Access.  Letters have started going out from IRS to those that have used E-Services within the past year.  When you get your letter, you will have approximately 30 days to authenticate your true identity.  (The target date was originally October 24, 2016, but IRS had to finish working out the kinks and is now ready.)

An EXISTING user is directed to log in to E-Services update the account information through the Secure Access process which includes identity proofing, financial verification, and mobile phone verification.  Once the authentication process has been completed, an activation code will be generated and sent to the mobile phone via text. Don’t forget you only have 30 days to authenticate your identity.  If an existing user does not complete the authentication process within the required time frame, the user will be removed from E-services and will have to register as a new user.

NEW E-Service users will be required to have specific information in order to complete the Secure Access Authentication process.  More specific information can be found at www.irs.gov by going to E-Services (found under the Tax Professionals tab in the top right hand corner of the page).

Thursday, December 8, 2016

IRS Interest Rates for First Quarter Announced

Revenue Ruling 2016-28 announces interest rates for the quarter beginning January 1, 2017. The
rates are as follows:


  • 4% for overpayments (3% in the case of a corporation).
  • 4% for underpayments.
  • 6% for large corporate underpayments.
  • 1.5% for the portion of a corporate overpayment exceeding $10,000.