The IRS has provided a safe harbor that applies to the treatment of indebtedness secured by 100 percent of the ownership interest in a disregarded entity that holds real property.
The safe harbor will treat such indebtedness as indebtedness secured by real property for purposes of the income exclusion available under the cancellation of indebtedness rules.
Generally, a solvent taxpayer – other than a C corporation – whose qualified real property business indebtedness is discharged outside of a bankruptcy proceeding can elect to exclude some or all of the discharged amount from income. The excluded amount must be applied to reduce the basis of the taxpayer’s depreciable real property.
Qualified real property business indebtedness (QRPBI) is indebtedness that:
➤ Is incurred or assumed in connection with real property used in a trade or business and secured by such real property;
➤ Is considered “qualified acquisition indebtedness” if incurred or assumed by the taxpayer after 1992; and
➤ The taxpayer elects to treat as QRPBI.
QRPBI also includes indebtedness incurred to refinance qualified real property business indebtedness – but only to the extent it does not exceed the amount of the indebtedness being refinanced.
Revenue Procedure 2014-20 provides a safe harbor under which the IRS will treat indebtedness secured by 100 percent of the ownership interest in a disregarded entity holding real property as indebtedness secured by real property. If the indebtedness meets the other requirements, it will be QRPBI. Accordingly, any income from the discharge of indebtedness is eligible for the exclusion and basis reduction rules.
To qualify for the safe harbor, all of the following must be met:
Failure to meet the requirements of this safe harbor does not preclude the taxpayer from arguing, based on facts and circumstances, that its debt nonetheless qualifies for exclusion/basis reduction.
The safe harbor is effective for elections made on or after Feb. 5, 2014. ■
©2014 CPAmerica International
The Tax Court concluded in a recent case that a developer of a planned residential community did not have to recognize income under the completed contract method of accounting until the common improvements were completed.
Shea Homes and its related entities developed large planned residential communities. Shea contended that final completion and acceptance under the completed contract method of accounting did not occur until the last road was paved and the final performance bond required by state and municipal law was released.
The IRS contended that the subject matter of Shea’s contracts consisted only of the houses and the lots upon which the houses were built. Under its interpretation, the contract for each home met the final completion and acceptance test upon the close of escrow for the sale of each home. The IRS also contended that contracts entered into and closed within the same tax year were not long-term contracts eligible for the completed contract method of accounting.
The court determined that Shea was permitted to use the completed contract method of accounting. Further, the court held that the subject matter of the contracts consisted of the home and the larger development, including amenities and other common improvements (Shea Homes, Inc. v. Commissioner, 142 TC No. 3, Feb. 12, 2014).
The court reasoned that the primary subject matter of the contracts included the house, the lot, improvements to the lot and common improvements to the development.
The amenities of the development were of great importance to, and a crucial aspect of, the taxpayers’ sales effort, the attainment of governmental approval of the development and the buyers’ purchase decision. Accordingly, the amenities were an essential element of the home purchase and sale contract.
©2014 CPAmerica International
The IRS has concluded that amounts that a manufacturer paid to retailers to offset the cost of constructing display areas for the manufacturer’s products did not have to be capitalized.
Under the facts presented in Chief Counsel Advice (CCA) 201405014, the manufacturer enters into an agreement to pay the retailers to maintain retail space that conforms to the manufacturer’s design requirements. The agreement provides that the retailers must repay the manufacturer if, within 15 years, the retailer no longer conforms to the requirements of the display area, no longer sells and maintains a full line of the manufacturer’s products or no longer provides servicing. The agreement does not obligate the retailers to purchase any specific quantity of products.
The CCA concluded that the manufacturer did not have to capitalize its payments to the retailer because the manufacturer did not own the retail space and the payments did not create or enhance a separate and distinct intangible asset.
The retailers were required to sell and maintain a full line of products and to provide servicing on site. However, the retailers were not required to purchase any specific amount of products during the term of the agreement, and the price of the product was not fixed. The manufacturer did not have the right to provide any specific quantity of products to the retailers.
© 2014 CPAmerica International
Most of us would be happy if the IRS never knew who we are or where we live.
But sometimes it’s a good idea to keep the government informed.
If you or one of your dependents had a name change last year, you should notify the Social Security Administration (SSA) before you file your federal income tax return. Otherwise, the name on your tax return will not match SSA records, which will likely result in a letter from the IRS inquiring about the mismatch.
If you overpaid your taxes, your refund could be delayed until the discrepancy is resolved.
Be sure to contact SSA if:
Your return must list the Social Security number of every dependent. If you have not obtained a Social Security number for a newborn child, you should process the necessary paperwork before you file your 2013 return.
You can effect a name change by filing Form SS-5, Application for a Social Security Card, with the SSA. It is also a good idea to let the IRS know about a change in address by filing Form 8822, Change of Address.
For individual, gift, estate or generation-skipping transfer tax returns, file Form 8822 or Form 8822-B, Change of Address or Responsible Party – Business, for your business. Note that Form 8822-B should be filed no later than 60 days after a change or by March 1 if the change occurred in 2013 and was not previously reported to the IRS.
As you may be aware, for the last few years the Internal Revenue Service has been strongly urging taxpayers to file their income tax returns electronically. Tax return preparers have been required to IRS e-file individual income tax returns since 2012, with certain allowable exceptions. One of those exceptions is that the taxpayer can opt-out of e-filing and choose to file on paper. Although you may have a reason for not wanting to e-file, for the 122 million taxpayers who did e-file last year there are actually several good reasons for doing so.
E-file is actually the best way to file an accurate and complete return since tax software is designed to do the math and help you avoid mistakes. E-filing means the IRS does not have to re-type your tax return at their service center, which means less chance that the IRS will make a mistake when processing your return. When e-filing you will receive a confirmation that the IRS has received your tax return. This is proof that the IRS received your tax return and has started processing it. E-file also meets strict security guidelines and uses the best encryption technology. Since the start of the e-file program, the IRS has safety and securely processed more than 1.2 billion e-file individual tax returns.
If you would like to receive your refund earlier, e-filing is definitely the way to go. Because there is nothing to mail and your return is less likely to contain errors, e-filed returns have a shorter turnaround time. Most IRS refunds were issued in less than 21 days. An even faster way to get your refund is to combine e-filing with direct deposit into your bank account.
With the e-file program you have several different payment options available. If you owe taxes, you can e-file and set an automatic payment date on or before the April 15th due date. You can pay by check, money order, debit card or credit card. You can also transfer funds electronically from your bank account.
E-file is easy. You can e-file your federal return through IRS Free File at IRS.gov. You can also use commercially available software or simply ask your tax preparer to e-file your return.
Try it. You’ll like it.
Watching the Winter Olympics in Russia makes me wonder if they will ever grace Reno/Tahoe in my lifetime. It has been over 50 years since Squaw Valley hosted the Olympics and I wasn’t alive to see that. Tahoe certainly has the snow, even in this drought. The storm from early February would have been a saving grace for the Olympics that are staged in February. I hear of Sochi being in the 60s and I compare it to Reno as we have been basking in 60 degree temperatures as of late. Sochi’s Olympics events are being held as low as 2,000 ft, far lower than the lowest Tahoe elevation of slightly over 6,000 and if you ask me, less awe inspiring. Sochi’s highest elevation for their downhill skiing is also considerably lower than many of Tahoe’s peaks.
I also contemplate the enormous cost that Russia is spending to put on the Olympics. I keep hearing a figure in excess of $40 billion and that sounds ridiculous. The last Olympics in the United States, in Salt Lake City, cost under $5 billion and that included the huge cost of building a light rail that was funded by the government. So not only would I like the pride of Tahoe hosting a Winter Olympics, but I would also like the federal government to build a rail system to alleviate the traffic, or at least widen highway 89 to Squaw Valley.
On Monday, February 10, the IRS announced that it is delaying the shared-responsibility requirement under Sec. 4980H of the Affordable Care Act (also known as Obamacare) for employers who have 50 to 99 full-time equivalent employees in 2014. These employers will now have until 2016 to offer health care coverage to their employees. However, these employers will still be required to report on their workers and health care coverage in 2015. The penalty had already been postponed last summer (its original effective date was 2014).
To be eligible for the delay, employers must not reduce their workforce or hours of service in order to qualify and they must maintain their previously offered health coverage. This change was part of final regulations issued Monday by the IRS that also made a number of improvements in response to the proposed regulations issued back in 2012.
For instance, the final regulations ensure that volunteers such as firefighters and emergency responders do not count as full-time employees. Also, for employers with 100 or more full-time equivalent employees, the regulations phase in the percentage of full-time workers to whom such employers need to offer minimum essential coverage. The percentage is 70% in 2015 and 95% in 2016 and beyond. Employers with 100 or more full-time equivalent employees that do not meet these percentages will be required make an employer shared-responsibility payment for 2015. The final regulations also contain transition guidance for noncalendar-year plans. There was no change for small businesses with fewer than 40 employees, which is about 96% of all employers; they are still not required to provide coverage or fill out any forms under the Affordable Care Act.
The Tax Court agreed with the IRS in a recent case that the one-rollover-per-year rule applies to all of a person’s IRAs, not to each of his IRAs separately. What is curious is that the IRS’s position in this case and the court’s holding are contrary to an IRS publication and at least one private letter ruling.
During 2008, Alvan Bobrow requested and received a distribution from his traditional IRA. Later, he received a distribution from his rollover IRA. Within 60 days of each distribution, Alvan replaced the funds in the IRA accounts.
The Tax Court ruled in favor of the IRS, saying that the distribution from the rollover IRA was taxable because Alvan failed the one-rollover-per-year rule. The court said that the plain language of the tax code limits the frequency of nontaxable rollovers a taxpayer may elect. By its terms, the one-year limitation is not specific to any single IRA maintained by an individual but instead applies to all IRAs maintained by a taxpayer. The court also upheld the IRS’s assessment of the accuracy-related penalty (Alvan J. and Elisa Bobrow v. Commissioner, TC Memo 2014-21, Jan. 28, 2014).
The IRS position and the court’s holding are at odds with the IRS position in IRS Publication 590, Individual Retirement Arrangements, and in Private Letter Ruling 8731041.
“Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover,” according to Publication 590.
Publication 590 contains the following example:
Illustration: A taxpayer we’ll call Chris has two traditional IRAs (IRA-1 and IRA-2). On Date 1, Chris makes a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). Chris cannot, within one year of Date 1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA. However, Chris can make a tax-free rollover from IRA-2 into any other traditional IRA because Chris has not, within the last year, rolled over, tax free, any distribution from or made a tax-free rollover to IRA-2.
Neither the courts nor the IRS are bound by positions stated in IRS publications or tax form instructions. And only the taxpayer who receives a private letter ruling may rely on the conclusions expressed in it. The court in Bobrow did not address IRS Publication 590 or the private letter ruling.
©2014 CPAmerica International
The IRS must follow a corporation’s designation of voluntary payments toward the income tax liabilities of its owner/employees, according to a recent Tax Court ruling.
However, because the payments did not represent taxes withheld at the source, the IRS was allowed to levy on the assets of the owner/employees to collect applicable interest and penalties. Likewise, the corporation remained liable for interest and penalties attributable to its failure to remit taxes on a timely basis (James R. Dixon, et. ux. v. Commissioner, 141 TC No. 3, Sept. 3, 2013 and James R. Dixon, et. ux. v. Commissioner, TC Memo 2013-207, Sept. 3, 2013).
James and Sharon Dixon served as officers and employees of Tryco. After a number of successful years, Tryco stopped filing and remitting employment taxes, and the Dixons stopped filing individual income tax returns.
Later, the Dixons were criminally prosecuted for failure to file individual income tax returns. As part of a settlement, they agreed to make restitution to the IRS for taxes in the amount of $61,021.
The Dixons contributed this amount to Tryco, and Tryco submitted it to the IRS, accompanied by a letter stating that the payment represented Tryco’s withholding taxes to be applied to the withheld income taxes of the Dixons.
When accountants prepared the individual income tax returns for the Dixons’ missing years, they determined that the couple owed an additional $30,202 in taxes. The Dixons contributed this additional amount to Tryco, and the corporation in turn submitted it to the IRS with a letter similar to the earlier one.
On the advice of legal counsel, the Dixons chose not to pay their individual income tax liabilities directly, believing that the indirect payments through Tryco would reduce both the portion of the company’s withholding tax liability attributable to themselves and their own income tax liabilities. They also hoped to avoid interest and penalties because the tax law treats withholding at the source as paid in the year of the withholding irrespective of the employer’s date of remittance.
The IRS initially credited Tryco’s payments to the Dixons’ income tax liabilities, which settled their tax obligations but not the related interest and penalties. Later, the IRS reversed itself and applied the payments to Tryco’s general unpaid employment tax liabilities.
The IRS then issued a notice to the Dixons of intent to levy on their assets in satisfaction of their now unpaid income tax liabilities. The Dixons petitioned the Tax Court.
The Dixons contended first that they were entitled to a withholding credit for the amounts submitted by Tryco on their behalf. Second, they asserted that the IRS was obligated to honor Tryco’s designation of the payments as withheld income taxes and to credit the amounts toward the Dixons’ income tax liabilities.
The IRS argued that its policy of honoring designations of voluntary payments does not extend to designations of delinquent employment tax by one party toward the income tax liability of another.
The Tax Court concluded that the funds submitted by Tryco to the IRS were not withheld at the source and, accordingly, the Dixons were not entitled to a credit against their individual income tax liabilities. Regarding the Dixons’ second argument, the majority determined that the IRS was obligated to follow its published administrative position regarding designations of voluntary payments.
The IRS was therefore directed to credit the $91,223 payments to the Dixons’ account, discharging their income tax obligations. The IRS was allowed, however, to levy on the Dixons’ assets to collect applicable interest and penalties. Tryco likewise remained liable for interest and penalties.
©2014 CPAmerica International
Qualified estates get automatic extension for portability election
“Most relatively simple estates … do not require the filing of an estate tax return,” according to the IRS. For decedents dying in 2013 or 2014, estates valued at less than $5,250,000 (2013) or $5,340,000 (2014) are excluded from estate tax.
When a person dies owning assets less than the applicable exclusion amount, the executor of the estate can elect to transfer the unused portion to the surviving spouse. This so-called “portability election” has been available since 2011.
However, the election must be made on a timely filed estate tax return. Therefore, the election would not be effective for an estate that did not file a return because the value of the assets in the estate was below the filing threshold.
Now, if estates of decedents who died before Jan. 1, 2014, and fall below the dollar threshold for having to file an estate tax return want to elect to take the portability exclusion, they can get an automatic extension to make that election, according to a recent IRS revenue procedure.
Under Revenue Procedure 2014-18, the estate of a decedent who is survived by a spouse is permitted to make a portability election, allowing the surviving spouse to apply the decedent’s unused exclusion amount to the surviving spouse’s own transfers during life and at death. The amount received by the surviving spouse is called the deceased spousal unused exclusion, or DSUE, amount.
The executor of the estate of the deceased spouse must elect portability of the DSUE amount on a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, which must include a computation of the unused exclusion amount. A portability election is effective only if made on a Form 706 filed no later than nine months after the decedent’s date of death or by the last day of the period covered by an extension – if an extension for filing has been obtained.
When an estate is filing an estate tax return only to make a portability election, the new revenue procedure provides an automatic extension of the Form 706 filing deadline.
To qualify for the automatic extension, the following requirements must be met:
1. The taxpayer must be the executor of the estate of a decedent who:
2. The taxpayer must not be required to file an estate tax return as determined based on the value of the gross estate and adjusted taxable gifts.
3. The taxpayer must not have timely filed an estate tax return.
4. A person permitted to make the election on behalf of a decedent must file a complete and properly prepared Form 706 on or before Dec. 31, 2014.
5. The person filing the Form 706 on behalf of the decedent’s estate must state at the top of the form that the return is “FILED PURSUANT TO REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER Code Sec. 2010(c)(5)(A).
©2014 CPAmerica International