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Final IRS regulations make permanent, and expand the scope of, proposed regulations that allow the use of truncated, or shortened, taxpayer identification numbers on payee statements and certain other documents.
A truncated taxpayer identification number (TTIN) displays only the last four digits of a taxpayer identifying number and uses asterisks or X’s for the first five digits.
Because of concerns about identity theft, the IRS has run a pilot program allowing filers of certain information returns to truncate an individual payee’s Social Security number (SSN) or other nine-digit identifying number on paper payee statements if the filers met certain requirements. The pilot program was not available for any information return filed with the IRS, any payee statement furnished electronically, or any payee statement that was not in the Form 1098, Form 1099 or Form 5498 series.
Last year, the IRS published proposed reliance regulations that established the TTIN and set forth guidelines for its use. The scope of the proposed regulations mirrored that of the pilot program with one exception: The proposed regulations permitted use of a TTIN on electronic payee statements in addition to paper payee statements.
The IRS has now issued final regulations that expand the circumstances under which taxpayers may use TTINs. Specifically, the final regulations permit truncation of an employer identification number (EIN).
The final regulations permit use of a truncated taxpayer identification number on any federal tax-related payee statement or other document required to be furnished to another person except:
➤ Where prohibited by statute, regulation or other guidance published in the Internal Revenue Bulletin, form or instructions;
➤ Where a statute, regulation, other guidance published in the Internal Revenue Bulletin, instructions or form specifically requires use of a Social Security number, individual tax identification number, adoption identification number or employer identification number; or
➤ On any return or statement required to be filed with, or furnished to, the IRS.
A person may not truncate its own taxpayer identification number on any tax form, statement or other document that taxpayer furnishes to another person. For example, an employer may not truncate its EIN on a Form W-2, Wage and Tax Statement, that the employer furnishes to an employee.
The final regulations became effective July 15, 2014. The amendments to the specific information reporting regulations are effective for payee statements due after Dec. 31, 2014.
©2014 CPAmerica International
A business owner who advanced funds to a new employee was not entitled to deduct as a business bad debt either the funds that he knowingly advanced or the funds that the employee misappropriated from the business, the Tax Court determined recently.
Ronald Dickinson was a self-employed consultant. He hired Terry DuPont, a former employee, to work for him again in a new consulting business. Dickinson was aware that DuPont had financial obligations to his former spouse and to his children and was experiencing financial problems as a result.
Dickinson sent DuPont a letter stating, essentially, that he would informally lend him money until DuPont was generating his own commissions. Ultimately, Dickinson wrote several checks to DuPont.
There was no promissory note or similar document evidencing the loans or stating that DuPont was obligated to repay. Dickinson neither charged interest nor provided a fixed repayment schedule, and DuPont did not offer any collateral.
After DuPont started working for Dickinson, he withdrew funds that he was not authorized to withdraw from one or more bank accounts over which he and Dickinson had signatory authority. DuPont also deposited certain funds that he was not authorized to deposit into one or more of his own bank accounts.
Dickinson later filed a complaint against DuPont in the state court alleging that DuPont had requested, and Dickinson had advanced to DuPont, funds totaling approximately $33,000 as loans that DuPont was obligated to repay. In his answer and counterclaim, DuPont admitted that Dickinson “did on occasion write checks payable” to DuPont but disputed the amount. DuPont also admitted that the funds were advanced at his request and constituted loans that he was obligated to repay.
The lawsuit was ultimately dismissed by the state court.
Dickinson claimed a business bad debt deduction of $32,550. He attached a letter to the return with his description of what had occurred. The IRS disallowed the deduction because Dickinson failed to show “that any amount was incurred for a bona fide debt which became worthless during the year.”
The Tax Court agreed with the IRS that Dickenson failed to prove that the arrangement constituted a bona fide loan, noting among other things the absence of any objective characteristics of a loan, such as interest or a debt instrument. The court also found that Dickenson did not have a reasonable expectation of recovering any portion of the funds at the time they were advanced because of DuPont’s known financial problems (Ronald R. and Shirley F. Dickenson v. Commissioner, TC Memo 2014-136, July 10, 2014).
©2014 CPAmerica International
A new partnership formed because of a “technical termination” must continue amortizing any startup and organizational expenses over the remaining portion of the amortization period adopted by the terminating partnership, according to final regulations issued by the IRS.
A “technical termination” occurs if a partnership is terminated by a sale or an exchange of a 50-percent-or-greater interest. The partnership is deemed to contribute all of its assets and liabilities to a new partnership in exchange for an interest in the new partnership.
Immediately afterwards, the terminated partnership – in liquidation of that partnership – is deemed to distribute interests in the new partnership to the purchasing partner and other remaining partners in proportion to their respective interests in the terminated partnership.
The final regulations apply to technical terminations occurring on or after Dec. 9, 2013.
A partnership is considered to terminate only if:
➤ No part of any business, financial operation or venture of the partnership continues to be carried on by any of its partners in a partnership; or
➤ There is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits within a 12-month period.
The IRS has become aware that some taxpayers were taking the position that a technical termination entitled a partnership to deduct unamortized startup and organizational expenses. The IRS believes this result is contrary to congressional intent.
Under the final regulations, a new partnership formed as a result of a sale or an exchange of 50 percent or more of the total interest in partnership capital and profits within a 12-month period must continue amortizing the startup and organization expenses over the remaining portion of the amortization period adopted by the terminating partnership.
©2014 CPAmerica International
Most husbands and wives name their spouse as the primary beneficiary of their IRA. What does a surviving spouse need to consider as the beneficiary?
Like any other beneficiary of a decedent’s IRA, a surviving spouse can receive a distribution as a beneficiary. But a surviving spouse who is the sole beneficiary of the decedent’s IRA has two additional favorable options that are not available to other beneficiaries.
The surviving spouse may:
➤ Elect to treat the decedent’s IRA as the surviving spouse’s own IRA; or
➤ Roll over the decedent’s IRA into an IRA established in the spouse’s name.
In either case, the surviving spouse is treated as if he or she had funded the IRA.
Making the spousal election or rollover has three major advantages:
1. Required distributions may be delayed. With the rollover or the election, required distributions must begin no later than April 1 of the year following the year in which the surviving spouse attains age 70½.
By comparison, if the IRA remains in the decedent’s name and the decedent’s death occurred:
➤ Before lifetime distributions commenced, then lifetime distributions to the spouse generally must begin by the later of (1) Dec. 31 of the year following the year in which the decedent died, or (2) Dec. 31 of the year in which the decedent would have attained age 70½ had he or she lived.
➤ After required distributions began, payouts to the spouse-beneficiary must begin in the year following the IRA owner’s death.
Thus, a surviving spouse who is younger than the decedent can defer the start of the payout period by making the rollover or electing to treat the decedent’s IRA as the spouse’s own IRA.
2. Distribution period may be extended. Normally, a beneficiary’s required minimum distribution (RMD) is based on that beneficiary’s single life expectancy. With a spousal rollover or an election, the IRA is treated as if the surviving spouse had funded it. In that case, the spouse can take RMDs using the favorable Uniform Lifetime Table, which is based on the joint life expectancy of the spouse and a hypothetical 10-years-younger beneficiary. Note that a separate lifetime distribution table applies if the spouse was more than 10 years younger than the IRA owner.
3. Surviving spouse can name own beneficiaries. By naming new, younger beneficiaries after the rollover or the election, the surviving spouse may be able to extend the IRA payout period. Otherwise, when the surviving spouse dies, the balance remaining in the first decedent’s IRA will be distributed over what remains of the payout period that applied when the surviving spouse began receiving RMDs.
There is a potential tax issue for surviving spouses who are under age 59½. Once the spouse elects to roll over the decedent’s IRA into the spouse’s own IRA, pre-age-59½ withdrawals from that IRA generally will be subject to the 10 percent early distribution penalty tax on top of regular income taxes – unless an exception applies.
To avoid this problem, the surviving spouse could keep the entire IRA balance in the decedent’s name until the spouse reaches age 59½. Any withdrawals before that age will be penalty-tax-free. The regulations provide that a surviving spouse-beneficiary’s election can be made “any time after the individual’s date of death.”
©2014 CPAmerica International
The IRS has issued final regulations on the tax credit available to certain small-business employers that offer health insurance coverage to their employees (TD 9672).
An eligible small employer (ESE) is an employer that has no more than 25 full-time equivalent employees (FTEs) employed during its tax year and whose employees have annual full-time equivalent wages that average no more than $50,800 for 2014.
However, the full credit is available only to an employer that has 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of not more than $25,400 for 2014. Beginning in 2014, the maximum credit increases to 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers.
To be eligible for the credit, the eligible small employers must pay premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace or qualify for an exception to this requirement. The credit is available to eligible employers for two consecutive taxable years.
In addition, credit eligibility depends on the employer’s covering at least 50 percent of the cost of employee-only (not family or dependent) healthcare coverage for each employee. Coverage must be purchased through the SHOP Marketplace, or the ESE must qualify for an exception to this requirement.
©2014 CPAmerica International
A business exercising an option to buy property that it was already leasing may deduct a portion of the amount tendered in the transaction as a lease termination payment, the Court of Appeals for the Sixth Circuit ruled, affirming an earlier district court decision.
The court rejected the IRS’s argument that the entire amount had to be capitalized as part of the purchase price of the property (ABC Beverage Corporation v. U.S., CA 6, June 13, 2014).
In 1987, Corporate Property Associates (the landlord) leased a building to ABC Beverage Corporation. The initial lease period lasted 25 years and provided for five successive five-year renewal options.
The lease contained a clause allowing ABC the option to purchase the property. On Dec. 10, 1996, ABC notified the landlord that it was exercising its purchase option. However, the parties could not agree on the purchase price.
Three appraisals obtained by ABC determined a fair market value (FMV) of $2.75 million. The landlord’s appraisals indicated a FMV of $14.1 million, including the value of the unexpired lease.
The parties remained at an impasse. On Oct. 2, 1997, the landlord notified ABC that it was exercising its remedies under the lease and requested that ABC make an offer to purchase the property.
In January 1999, the parties entered into an agreement in which they agreed that the FMV of the property would be no less than $9 million and no greater than $11.5 million. Later in 1999, they agreed on a purchase price of $11 million.
On its 1997 tax return, ABC claimed a deduction for $6.25 million as a lease termination expense and capitalized the property for $2.75 million. ABC apparently based the deduction on its calculation that the minimum it would have to pay to acquire the property was $9 million. Using the minimum purchase price and subtracting the appraisals it had obtained for the property, ABC concluded that the cost of buying out the lease was $6.25 million.
In 2005, the IRS assessed an income tax deficiency against ABC. The dispute over the lease termination payment deduction wound up in district court.
In the original district court proceeding, the IRS argued that ABC could not claim any of the cost of terminating the leasehold as a business expense. Alternatively, it argued that, if a deduction was allowable, the proper year for the deduction was 1999, not 1997.
The district court held that ABC was entitled to claim as a business expense the cost associated with buying out an onerous lease. However, it put off deciding on the proper year for the deduction. In a subsequent proceeding, a jury agreed that 1997 was the proper year for the deduction.
Now the Sixth Circuit has agreed with the district court. In reaching its conclusion, the court upheld its earlier decision in Cleveland Allerton Hotel v. Commissioner and rejected the Tax Court’s decision in Union Carbide Foreign Sales Corp. v. Commissioner. The ABC Beverage case may not be the last word on this topic.
©2014 CPAmerica International
The IRS has provided the annual inflation-adjusted contribution, deductible and out-of-pocket expense limits for 2015 for health savings accounts.
The following limitations on contributions for calendar year 2015 were announced in Revenue Procedure 2014-30:
➤ $3,350 for an individual with self-only coverage
➤ $6,650 for an individual with family coverage under a high-deductible health plan
Each of these amounts is increased by $1,000 if the eligible individual is age 55 or older.
Also for calendar year 2015, a high-deductible health plan is a health plan with an annual deductible that is not less than $1,300 for self-only coverage or $2,600 for family coverage. The annual out-of-pocket expenses (deductibles, co-payments and other amounts, but not premiums) under the high-deductible plan should not exceed $6,450 for self-only coverage or $12,900 for family coverage.
Eligible individuals may make deductible contributions to a health savings account, subject to statutory limits.
Employers as well as other persons, including family members, also may contribute on behalf of an eligible individual. Employer contributions generally are treated as employer-provided coverage for medical expenses under an accident or health plan and are excludable from income.
In general, a person is an eligible individual if he is covered under a high-deductible health plan and is not covered under any other health plan that is not a high-deductible plan – unless the other coverage is permitted insurance, such as for worker’s compensation, a specified disease or illness, or insurance providing a fixed payment for hospitalization.
©2014 CPAmerica International
S corporations facing increased Medicare taxes may want to take advantage of a planning opportunity.
Business owners might be able to reduce or eliminate the increased Medicare taxes that went into effect last year. This opportunity may be available to them if they own a business operating as an S corporation and their total income exceeds certain threshold amounts.
Since 2013, the Medicare tax on compensation and self-employment income has been increased from 2.9 percent to 3.8 percent. The 0.9 percent increase applies to the extent compensation or self-employment income specified is more than $250,000 for married individuals filing jointly and $200,000 for single individuals.
Since these threshold amounts are not indexed for inflation, an increasing number of taxpayers will be subject to the tax in 2014 and future years.
Accompanying the Medicare tax on earned income, a 3.8 percent Medicare tax that applies to net investment income (NII) also became effective in 2013. With few exceptions, most income is covered by one, but not both, of these taxes.
The net investment income tax applies to the lesser of NII or modified adjusted gross income over the specified threshold amounts.
NII is the sum of passive income – generally, interest, dividends, annuities, rents, royalties, capital gains and certain income from a passive trade or business – less applicable deductions. Trade or business income is included in NII only if the business activity is a passive activity or involves trading in financial instruments or commodities.
The net investment income tax applies to the entire distributive share of S corporation income allocable to a shareholder to the extent the income is derived from activity that is passive (or from trading in financial instruments or commodities) or represents the corporation’s investment income.
However, shareholders who materially participate in the business of the S corporation avoid the NII tax on their entire distributive share of the S corporation’s business income.
If the shareholder is also an employee of the S corporation, the employee-shareholder is subject to employment taxes – including the Medicare tax on earned income at the new higher rate – on compensation for services that the shareholder provides to the S corporation. However, the self-employment tax does not apply to an S corporation shareholder’s distributive share of the corporation’s income.
If you are a shareholder-employee actively involved in a business operated by an S corporation, you can minimize earnings subject to the higher Medicare taxes by keeping your salary low and taking most of your profits through yourdistributive share of the corporation’s profits. The trick is to make sure your salary is a reasonable amount for the services you provide.
With the increase in taxes on earned income, the IRS has an added incentive to challenge the allocation of S corporation payments between salary and distributions. If the IRS determines that your salary is too low, a portion of the distribution might be recharacterized as wages.
©2014 CPAmerica International
The IRS is increasing the penalties on U.S. taxpayers who attempt to hide assets overseas, while lowering or eliminating penalties for those who unintentionally failed to disclose offshore accounts.
The IRS has announced in Information Release 2014-73 major changes to its Offshore Voluntary Compliance Program (OVDP). The changes include:
1. Modifications to the 2012 OVDP
2. An expansion of the “streamlined” filing compliance procedures announced in 2012
There are a number of reporting requirements for taxpayers with foreign accounts. Affected individuals must fill out and attach Schedule B with their tax returns. Schedule B asks about the existence of foreign accounts.
Some taxpayers have to fill out Form 8938, Statement of Foreign Financial Assets. Other filing requirements apply to foreign trusts.
In addition, taxpayers with foreign accounts whose aggregate value exceeds $10,000 must file a Form 114, Report of Foreign Bank and Financial Accounts (FBAR), electronically through the Financial Crimes Enforcement Network’s BSA E-Filing System. Failure to comply with applicable reporting requirements can result in civil and criminal penalties.
On July 1, 2014, a new information reporting regime instituted by the Foreign Accounts Tax Compliance Act went into effect. Thousands of foreign financial institutions will begin to report to the IRS the foreign accounts held by U.S. persons.
Under the 2014 OVDP, taxpayers who do not meet certain deadlines will be subject to a 50 percent penalty under one of the following circumstances:
Taxpayers already in the 2012 OVDP may be able to take advantage of certain of the new procedures.
The expanded streamlined procedures are intended for U.S. taxpayers whose failure to disclose their offshore assets was not willful. Key expansions in the streamlined procedures will accommodate a wider group of individuals living outside the United States and, for the first time, certain U.S. residents who have unreported foreign financial accounts.
If you are already in the 2012 OVDP, you should consult your tax adviser to determine whether you qualify for the new streamlined program. If you live outside of the United States and qualify, there are no penalties.
If you live in the United States and qualify, there is a maximum penalty of 5 percent – down from the previous 27.5 percent.
The fact that the IRS even raised a recent tax issue and took it to the Tax Court demonstrates the care that must be taken by family-owned business owners not to inadvertently run afoul of complex tax laws.
The court ruled that, when three brothers formed a corporation to conduct a trucking operation after their father’s wholly owned corporation ceased operations, there was no taxable transfer of goodwill from the father’s corporation to his sons (Bross Trucking, Inc. v. Commissioner, TC Memo 2014-107, June 5, 2014).
Here is what happened.
Chester Bross owned 100 percent of Bross Trucking, Inc. The corporation provided trucking services, and 90-95 percent of its customers were companies owned by members of the Bross family. Bross did not have an employment contract with Bross Trucking, and he never signed a noncompete agreement. The company leased its trucks from CB Equipment, another Bross family-owned entity.
After Bross Trucking came under investigation by federal and state regulatory agencies for safety issues, Bross decided to cease trucking operations. Bross Trucking remained in existence as a viable entity, complete with insurance and its original trucking authority. The corporation had cash assets and over $250,000 of other assets, including accounts receivable, which it continued to collect.
Bross’s three sons, who were not previously involved with Bross Trucking, started their own trucking business – LWK Trucking. About 50 percent of LWK’s employees were former employees of Bross Trucking. LWK executed a lease with CB Equipment allowing LWK to use equipment that had previously been leased to Bross Trucking.
LWK provided a broader range of services than Bross Trucking, including doing truck repairs and providing GPS devices.
LWK obtained its own licenses, regulatory authorizations, suppliers and customers. In other words, nothing was transferred from Bross Trucking to LWK Trucking.
The IRS assessed tax and penalties based on the following:
1. Bross Trucking distributed appreciated intangible assets to its sole shareholder, Chester Bross, and
2. Bross made gifts of those assets to his sons.
The IRS said that the intangible assets included:
➤ An established revenue stream
➤ A developed customer base
➤ Transparency of the continuing operations between the entities
➤ An established work force, including independent contractors
➤ Continuing supplier relationships
Although the IRS did not call the intangible assets “goodwill,” the Tax Court did.
The court ruled that Bross Trucking’s goodwill was primarily owned by Bross
personally, and the company did not transfer any corporate goodwill to Bross. Thus, there was no taxable distribution to Bross and no gift from Bross to his sons.
The court reasoned as follows:
➜ The court concluded that the sole attribute of goodwill displayed by Bross Trucking was an in-place work force, and it was therefore the only attribute that the corporation could have distributed to Bross.
➜ Nearly all the goodwill used by Bross Trucking was Bross’s personal asset. A company does not have any corporate goodwill when all of the goodwill is attributable solely to the personal ability of an employee.
➜ Bross never transferred his personal goodwill to Bross Trucking.
➜ No intangible assets were transferred from Bross Trucking to LDW.
➜ Bross Trucking did not distribute any cash assets and retained all the necessary licenses and insurance to continue business.
Further, Bross remained associated with Bross Trucking and was not involved in operating or owning LWK Trucking. He was free to compete against LWK Trucking and use every cultivated relationship to do so.
The IRS’s willingness to litigate the Bross Trucking case opens the door to the possibility that the agency may find a future case with a better set of facts. These facts might allow it to convince a court that the corporation should recognize gain on the distribution of goodwill, the shareholder should recognize dividend income on the receipt of the goodwill, and the transfer of the goodwill to the next generation is a taxable gift.
©2014 CPAmerica International
