A New Look at the Taxation of a Forfeited Deposit

William Delaney, EA
Westwood, MA

In CRI-Leslie, LLC v. Comm., 147 T.C. 8 (9/7/16) the Tax Court looked at the following fact pattern.  CRI (petitioner) executed a purchase and sale agreement with RPS, LLC to sell a hotel.  CRI received deposits from RPS in the total amount of $9,700,000, which were forfeited when the agreement “terminated in 2008 by its terms.”  The property did not transfer.

CRI reported the $9,700,000 as net long-term gain on its partnership 1065 tax return.  The IRS re-characterized the gain as subject to ordinary income tax and this interpretation of the Code was upheld by the Tax Court.

The parties stipulated to the Court that the hotel was “property used in a trade or business, as defined by section 1231(b)(1).  The parties further stipulated that “had CRI-Leslie sold the property in 2008 pursuant to the agreement’s terms, the gain from the sale would have resulted in net section 1231 gain…”  In a footnote, the Court noted that “Respondent (i.e. Comm. of  Revenue), however, does not stipulate that the $9,700,000 forfeited deposit is sec. 1231 gain.”

In Discussion, the Court noted that “Long-term capital gain..is ‘gain from the sale or exchange of a capital asset held for more than 1 year’.  Sec. 1222(3).”  Neither party disputes that statement.  Again, from the Discussion, “Under section 1221(a)(2) specifically, a capital asset is ‘property held by the taxpayer (whether or not connected with his trade or business), but does not include…property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business” (emphasis added).

Sec. 1234A.  Gain or losses from certain terminations (which is the controlling code section applicable to this case) reads as follows…

Gain or loss attributable to the cancellation, lapse, expiration or other termination of…

(1) a right or obligation…with respect to property which is (or on acquisition would be) a capital asset in the hands of the taxpayer…

Protect Yourself and Your Clients Information

IRS has been stressing protecting taxpayer’s information, including asking tax professionals to have procedures designed to help protect the information.  In October 2015, IRS released Publication 4557, Safeguarding Taxpayer Data, A Guide for Your Business.  This publication is trying to provide suggestions for all professionals who deal with taxpayers’ data.  Although the text of this publication is 18 pages and sounds too long to read quickly, the large print, many charts, and many graphics actually leave us with only a few pages of information and they make an easy read.

The information in this publication is not the law but nevertheless the publication gives excellent suggestions for all businesses that deal with taxpayers’ data.  Here are some of items mentioned.

Some “security controls” are obvious and others are not so obvious.  Some mentioned in the publication include:

1. Locking doors to restrict access to paper or electronic files,
2. Requiring passwords to restrict to access to computer files,
3. Encrypting electronically stored taxpayer data,
4. Keeping a backup of electronic data for recovery purposes,
5. Shedding paper containing taxpayer information before throwing it in the trash,
6. Do not email unencrypted sensitive personal information.

Some “critical steps” mentioned include:

1. Assure that taxpayer data, including data left on hardware and media, is never left unsecured,
2. Require strong passwords (numbers, symbols, upper & lower case letters) on all computers and tax software programs and require periodic password changes every 60-90 days,
3. Store taxpayer data in secure systems and encrypt information when transmitting across networks,
4. Ensure that email being sent or received, that contains taxpayer data, is encrypted and secure,
5. Make sure paper documents, computer disks, flash drives and other media are kept in secure location and restrict access to authorized users only,
6. Create security requirements for your entire staff regarding computer information systems, paper records, and use of taxpayer data,
7. Provide periodic training to update staff members on any changes and ensure compliance,
8. Protect your facilities from unauthorized access and potential dangers,
9. Create a plan on required steps to notify taxpayer should you be the victim of any data breach or theft,

Is It a Loan, A Contribution To Capital, or Shareholder Compensation?

William Delaney, EA
Westwood, MA

Your client “loans” money to his struggling business.  He may or may not receive repayments.  He does, however, pay personal bills out of the business checking account.  He can’t afford (or perhaps does not wish to) draw a paycheck.  Sound familiar?  We all struggle with the need to classify withdrawals.  Just what are they?
Loan repayments, advances to the shareholder, compensation which needs to be reported as payroll, or something else?

The Tax Court in Scott Singer Installations, Inc. v. Comm., T.C. Memo 2016-161 (8/24/16), has provided a very useful analysis of such activity by applying a concept which your editor constantly advocates---substance over form.  Read on…

In order to provide funds for his growing business (an S corporation), Mr. Singer established a personal home equity credit line in 2006; Within one year he had transferred $224,000 from that credit line to his corporation.  He also refinanced his home in 2006 (quite a trick---refinancing and equity indebtedness in the same year) and transferred $87,443 to his business.

A general business line of credit was established personally by Mr. Singer in 2008 and $115,000 was transferred to the business.  How you can established a “business” line of credit outside of the business, i.e. corporate, structure is not explained in the memorandum of facts, but it apparently happened.

Not to be outdone, Mr. Singer then borrowed $220,000 from his mother and her significant other (aka boyfriend) and transferred it to the business.  Altogether the transfers between 2006 and 2008 amounted to $646,443.  Perhaps our clients do not have the deep pocket resources of Mr. Singer, but we’ve seen the pattern of interwoven loans often enough.

During this “loan” period, the business was profitable.  However, by 2008 the business had gone into decline, so Mr. Singer relocated to Florida with high hopes for a business recovery.  Unfortunately, this did not happen.  Between 2009 and 2011, Mr. Singer poured money into the business to keep it afloat (sound familiar?).  He could not borrow commercially, but he could (and did) tap his mother and her boyfriend for another $513,099 which went into the business.

IRS and Security Summit Partners Warn of Fake Tax Bill Emails

WASHINGTON — The Internal Revenue Service and its Security Summit partners today issued an alert to taxpayers and tax professionals to be on guard against fake emails purporting to contain an IRS tax bill related to the Affordable Care Act.

The IRS has received numerous reports around the country of scammers sending a fraudulent version of CP2000 notices for tax year 2015. Generally, the scam involves an email that includes the fake CP2000 as an attachment. The issue has been reported to the Treasury Inspector General for Tax Administration for investigation.

The CP2000 is a notice commonly mailed to taxpayers through the United States Postal Service. It is never sent as part of an email to taxpayers. The indicators are:

• These notices are being sent electronically, even though the IRS does not initiate contact with taxpayers by email or through social media platforms;
• The CP 2000 notices appear to be issued from an Austin, Texas, address;
• The underreported issue is related to the Affordable Care Act (ACA) requesting information regarding 2014 coverage;
• The payment voucher lists the letter number as 105C.

The fraudulent CP2000 notice included a payment request that taxpayers mail a check made out to “I.R.S.” to the “Austin Processing Center” at a Post Office Box address. This is in addition to a “payment” link within the email itself.

IRS impersonation scams take many forms: threatening telephone calls, phishing emails and demanding letters. Learn more at Reporting Phishing and Online Scams.

Taxpayers or tax professionals who receive this scam email should forward it to phishing@irs.gov  and then delete it from their email account.

Taxpayers and tax professionals generally can do a keyword search on IRS.gov for any notice they receive. Taxpayers who receive a notice or letter can view explanations and images of common correspondence on IRS.gov at Understanding Your IRS Notice or Letter.

To determine if a CP2000 notice you received in the mail is real, see the Understanding Your CP2000 Notice, which includes an image of a real notice.

A CP2000 is generated by the IRS Automated Underreporter Program when income reported from third-party sources such as an employer does not match the income reported on the tax return. It provides extensive instructions to taxpayers about what to do if they agree or disagree that additional tax is owed.

It also requests that a check be made out to “United States Treasury” if the taxpayer agrees additional tax is owed. Or, if taxpayers are unable to pay, it provides instructions for payment options such as installment payments.

The IRS and its Security Summit partners – the state tax agencies and the private-sector tax industry – are conducting a campaign to raise awareness among taxpayer and tax professionals about increasing their security and becoming familiar with various tax-related scams. Learn more at Taxes. Security. Together. or Protect Your Clients; Protect Yourself.

Taxpayers and tax professional should always beware of any unsolicited email purported to be from the IRS or any unknown source. They should never open an attachment or click on a link within an email sent by sources they do not know.

2016 Annual Meeting & Seminar - 1 MONTH AWAY!!

2016 Annual Meeting & Seminar

Massachusetts / Rhode Island NATP Chapter Annual Meeting & Educational Seminar October 25th 2016

Join the Massachusetts / Rhode Island NATP Chapter on Tuesday, October 25th, 2016 for our Annual Meeting & Educational Seminar. This all day event will be held at the Holiday Inn in Mansfield, MA. Registration details are below, and is handled online by National. Take a look at the details on our speaker and topics provided in this great 8 CE Hour opportunity including continental breakfast, snacks, lunch, vendors and great networking opportunities. This seminar is limited to the First 100 Registrants!

• For online registration with credit card, click here.
• To register by phone, fax or mail, click for the registration form.
• After October 24th, please print the form (see link above) and register at the door.

Speaker - Cheryl A. Morse, EA

Cheryl Morse has been a tax practitioner since 1982 and an enrolled agent since 1996. She is a manager for Emerging Business Partners, Inc., which prepares over 1500 tax returns in three offices. Cheryl graduated Magna Cum Laude with a B.S. degree in accounting from Bentley College in Waltham, MA.  In addition to speaking for NATP, she works on taxpayer education through various community outreach speaking engagements. She currently represents the Northeast Region as Area 1 Chair of the Taxpayer Advocacy Panel, is a contributor to the development of the IRS EA Examination, and a contributing writer to Forbes.

Education Savings, Deductions, Credits and Tax Issues:

Education and Taxes; it is not as easy as 1-2-3.  This course clarifies who can or should claim the many education benefits, and how to make the most of all the available deductions, credits and savings plans.  Do you know why the "optimize" button on your software does not really work?  We review the education savings plans and point out some pitfalls regarding withdrawals.  We finish up with taxable education benefits and discuss when that might be a good thing. IRS #JSAQG-T-00021-16-I

Elder Issues, SS, IRA, Medical Expenses, Long Term Care, Life Insurance:  

We are all aging, preparer and our clients alike.  It is more important than ever that we understand the issues that affect the "age advantaged" population.     This session is packed with information regarding the various Social Security options including the new changes to "file and suspend", planning for retirement distributions and strategies for handling finances upon retirement.  We review the inevitable cost of medical expenses, including long term care contracts, and finish up with the tax implications of long term care and life insurance payments.  This session is intended as a resource in helping your clients plan for retirement or other life events. IRS #JSAQG-T-00022-16-I

Helping a Delinquent Taxpayer, POA, Notices, Audits, Collections, Penalty/Interest Relief:

As long as there is "death and taxes" there will be delinquent taxpayers.  The requirements of our profession have changed.  In this climate of identity theft helping our clients can be more difficult.  In this session, we discuss the best way to help a client, and how best to protect ourselves when dealing with someone who may be non-compliant in more than one area of his life.  We look at some of the more common notices, such as this year's 1095A Letter and how to get relief for our client. IRS #JSAQG-T-00023-16-I

IRS Notices, Responses, Avoidance:

Is there anything preparers can do to stop the flurry of notices some clients receive?  This part of our day continues with more looks into notices, what prompts them to be issued, and way to best avoid notices in the first place.  IRS #JSAQG-T-00024-16-I

Special Offer for the January 5, 2017 State Update Seminar

Sign up on October 25, 2016 and pay by November 8, 2016 for ½ Price 

Annual Chapter Nominations

Pursuant to Article VI, section 2 of The Bylaws of the Massachusetts/Rhode Island Chapter of National Association of Tax Professionals, we, the nominating committee, appointed by David Johnson, President and by the Board of Directors, hereby propose the following members to fill the expiring Director’s positions for the year ending December 31, 2016.

Region Term Name and Address
1 3 yr  Christine Miarecki - 9 Fuller Road Palmer MA 01069
2 3 yr  Ron Fisher - 180 Ivy Lane Whitinsville MA 01588
3 3 yr  William Delaney - 35 Reservoir Road Westwood MA 02090
4 3 yr  Sharon Cummings - 1040 Main Street Wareham MA 02576

Furthermore, please be aware that under Article IV, section 5 of The Bylaws,, notice of the election shall be provided to every member 30 days prior to the date set to announce the result of the director elections.  The notice of election may be sent by ordinary mail as either a separate mailing or within other content such as a regular newsletter or other communication.

The election will be held on Tuesday, October 25th, 2016 at the annual meeting to be held at the Holiday Inn, Mansfield, MA.

Respectfully submitted:
Nomination Committee Members:
June Massee, Chair
Joseph Serrecchia
Tracey Bell

IRS Increases Fees for Installment Agreements Effective January 1 2017

IRS has announced an increase in the user (processing) fees for Installment Plans and Offers in Compromise effective January 1, 2017.  Under OMB rules, IRS is supposed to charge user fees and is supposed to recover full cost.  The costs of providing the service is examined every two years and the fees revised as needed. The fees for installment agreements were last revised effective January 1, 2013.  The new fees for installment agreements are:

Regular installment agreement (submitted in person, over the phone, or by mail) - $225.

Regular agreements with direct debit - $107.

Online payment agreement - $149.

Direct debit online payment agreement - $31.

Restructured or reinstated agreement - $89.

Low-income rate - $43.  (All income levels qualify for the $31 rate mentioned above.)

The IRS News Release says IRS has typically charged less than the actual costs but was doing so in an effort to make the particular activity (installment agreements in this case) more accessible to more taxpayers.  Due to budget constraints IRS can no longer continue this practice of charging less than actual costs.

News Release 2016-108, August 19, 2016


This text has been shared with you courtesy of:  David & Mary Mellem, EAs & Ashwaubenon Tax Professionals, 920-496-1065 (920-496-9111).

Happy Labor Day From MA/RI NATP

How to Calculate the Basis For an Education Expense Tax Credit

William Delaney, EA
Westwood, MA

Take a look at Angela A. Terrell v. Comm., TC Memo 2016-85 (5/2/16), for an interesting read on what to do when the Form 1098-T (Tuition Statement) conflicts with reality.

In Terrell, the taxpayer financed her education largely with student loans (sound familiar?).  The University billed her account $2,460 for tuition on 11/23/10 (for the Spring 2011 semester).  Another billing for $1,230 was rendered on 1/10/11 (final Spring semester billing).  Taxpayer’s account was credited (student loan disbursements) on 1/20/11, and these billings were paid in full.

The University issued a Form 1098-T (tax year 2011).  There was no entry in box #1 (payments received for qualified tuition and related expenses).  Why does that not surprise you, dear reader?  Box #2 (amounts billed for qualified tuition and related expenses) had an entry for $1,180.  This consisted of $1,230 (billed on 1/10/11---see above); plus a $50 mandatory fee; minus a tuition credit of $100.

Taxpayer claimed an American Opportunity Credit of $2,500 on her 2011 tax return.  The IRS disallowed the credit and issued a CP3219A which stated:  “Your eligible educational institution did not verify the amount claimed on your tax return, in box 1 of Form 1098-T, Tuition Statement.  Please provide a signed explanation of the amounts paid to support the amount(s) claimed.”  Is there anyone reading this who has not had to deal with this issue?

The taxpayer petitioned the Tax Court and the Court said, in part…”A taxpayer may claim a credit for qualified tuition and related expenses defrayed with proceeds of a student loan, even if those proceeds are paid by the lender directly to the educational institution on the student’s behalf (emphasis added).  See Sec, 1.25A-5(b)(1), Income Tax Regs.  Loan proceeds disbursed directly to an educational institution are treated as being paid by the student on the date the institution credits the proceeds to the student’s account.”  [Sec. 1.25A-5(e)(3)].