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Giant Eagle took a nose dive in a recent case before the Tax Court.
The huge supermarket and gas station chain wanted to claim a tax deduction for unredeemed discounts issued through its “Fuelperks!”campaign.
Fuelperks! offered customers discounted gas and diesel fuel from its GetGo gas stations when they presented a card while buying goods and services from Giant Eagle. All the fuel discounts were aggregated and used to reduce the price of fuel at the time of redemption. Any excess discounts could be held over on a loyalty card until they expired, which was three months from the last day of the month in which they were earned.
The chain store deducted the estimated costs of redeeming a portion of the issued Fuelperks! that were unexpired and unredeemed at the end of each tax year.
The Tax Court found against Giant Eagle because the unredeemed discounts did not satisfy the “all events” test since the liability for the discounts became fixed when the discounts were redeemed, not when they were earned.
The court said that an accrual basis taxpayer may receive a deduction in the year the expense is incurred under the all-events test when all three of the following requirements are satisfied:
1. All events have occurred that establish the fact of the liability.
2. The amount of the liability can be determined with reasonable accuracy.
3. Economic performance has occurred with respect to the liability.
In its Memoranda decision, the court said Giant Eagle failed the first requirement because all events had not occurred to establish the supermarket’s liability for unredeemed discounts (T.C. Memo, 2014-146, 108 T.C.M. 67).
©2014 CPAmerica International
Social Security has two funds: one for “old age and survivors” and the other for disability insurance.
The retirement fund is going strong and is funded through 2033, according to the recently released annual report of the U.S. Treasury.
But the disability insurance fund is depleting quickly. By 2016, there are projected to be enough funds to cover only 80 percent of scheduled payments. Legislation will be needed to address the imbalance, the report said.
The disability insurance fund provides income support for workers who have become disabled and cannot work to support themselves and their families. Nearly 9 million Americans receive disability insurance. The average monthly benefit is $1,129.
When the disability insurance program began in 1966, about 1 percent of the population received disability insurance benefits.
Today, nearly 5 percent of the working-age population receives benefits, in part due to such demographic factors as the aging of the Baby Boom generation, the increase in women’s long-term employment, which qualifies more of them for disability, and the declining job opportunities for older workers during recent years.
The fund has also become the target of widespread abuse as some workers are suspected of exaggerating the extent and length of their injuries to collect disability payments.
Social Security is funded through payroll taxes collected by the Federal Insurance Contributions Act (FICA) and the Self Employment Contributions Act (SECA).
The money is placed into two trust funds:
1. The Old-Age and Survivors Insurance (OASI) Trust Fund
2. The Disability Insurance (DI) Trust Fund
These funds hold the accumulated assets and disburse benefit checks. The trust funds hold securities issued by the federal government, including marketable Treasury bonds and special issues.
The 2033 projection for depletion of the old-age and survivors fund is the same this year as it was last year.
After 2033, the dedicated payroll tax will be sufficient to fund three-quarters of scheduled payments until 2088 with annual income coming into the fund. Legislation would need to be enacted by that time to restore long-term solvency.
In 1982, the OASI trust fund was nearly depleted. Congress enacted emergency legislation that allowed borrowing from other federal trust funds, and no beneficiary was shortchanged. Legislation was later enacted to strengthen the OASI fund.
The borrowed amounts were repaid with interest within four years, the Social Security Administration reported.
Medicare also has enough funds through 2030, the report said.
The Medicare Insurance Trust Fund will have sufficient funds to cover its obligations until 2030, 13 years later than was projected prior to the Affordable Care Act. After 2030, 85 percent will be covered, declining slowly to about 75 percent by 2050, the report said.
Part B of Supplementary Medical Insurance, which pays doctors’ bills and other outpatient expenses, and Part D, which covers prescription drug coverage, are both projected to be financed into the indefinite future because current law automatically provides financing each year to meet the next year’s expected costs, according to the Treasury.
But as the population ages and healthcare costs rise, costs are projected to grow steadily from 1.9 percent of GDP in 2013 to 3.3 percent in 2035 to 4.5 percent by 2088. Roughly three-fourths of these costs will be financed from general revenues, and about one-quarter from premiums paid by beneficiaries, the Treasury report said.
©2014 CPAmerica International
If you’re getting married – or divorced – and you or your spouse is insured through the Health Insurance Marketplace, you need to inform the Marketplace of your change of status.
This is especially important if you receive premium assistance through advance payments of the premium tax credit through a Health Insurance Marketplace.
Other changes in circumstances that you should report to the Marketplace include:
Informing the Marketplace about any changes in your status enables the Marketplace to ensure that you have the right coverage for you and your family as well as to adjust the amount of advance credit payments that the government sends to your health insurer.
By reporting the changes, you can prevent having too much or not enough premium assistance paid to reduce your monthly health insurance premiums.
Getting too little could mean missing out on monthly premium assistance that you deserve. Or, receiving too much premium assistance could mean you will owe money or get a smaller refund when you file your taxes.
A change in status can also affect eligibility for coverage through your employer or your spouse’s employer because that will affect your eligibility for the premium tax credit.
Some life events – such as marriage – give you and your spouse the opportunity to sign up for health care during a special enrollment period. That means that if one or both of you are uninsured, you may be able to get coverage now.
The special enrollment period for Marketplace coverage is typically open for 60 days from the date of the life event.
For more information, see www.irs.gov/uac/Affordable-Care-Act-Tax-Provisions-Home. IRS Publication 5152 contains information about reporting changes in circumstances to the Marketplace
©2014 CPAmerica International
Can you imagine waiting for your tax refund – and it never arrives?
Not because you don’t deserve it or the IRS didn’t send it, but because your tax preparer substituted his bank routing number for yours after you signed the form.
And then, worse news, the IRS doesn’t reimburse you for your loss.
That scenario has happened to hundreds of taxpayers who made the mistake of trusting unscrupulous, uncredentialed preparers.
But preparer fraud victims are at the back of the line when it comes to getting a refund from an IRS barraged with hundreds of thousands of identity theft cases it is processing.
In fact, the IRS has generally declined to issue refunds to victims of preparer fraud at all, according to National Taxpayer Advocate Nina Olson.
“The IRS has consistently dragged its heels, making one excuse after another, because providing relief to these victims just is not a high enough priority, or more disturbingly, because the IRS simply does not want to provide relief,” says Olson in the report she submitted to Congress and the IRS entitled “Areas of Focus, Return Preparer Fraud: A Sad Story.”
Between 2000 and 2011, the IRS Office of Chief Counsel issued four opinions and other guidance authorizing the IRS to issue replacement refunds to the victims of tax preparer fraud.
But no refunds have been issued by the IRS, Olson said.
Some victims have been waiting since 2008 to be reimbursed, the advocate’s office reports.
One section of the new Taxpayer Bill of Rights adopted recently by the IRS states, “Taxpayers have the right to expect appropriate action will be taken against employees, return preparers and others who wrongfully use or disclose taxpayer return information.
“Nowhere has the IRS failed to abide by the Taxpayer Bill of Rights more than with respect to the issue of return preparer refund fraud,” Olson said.
Olson’s report said IRS Commissioner John A. Koskinen decided in March that the IRS would issue refunds to victims who have filed police reports and met certain other substantiation requirements. To date, the IRS hasn’t implemented that decision or given a date for victims to expect refunds, Olson said.
To help prevent future fraud, Olson reiterated her longstanding recommendation that a meaningful preparer standards program must contain four components:
A Pennsylvania professor was fined $10,000 by the Tax Court on July 31 for repeated frivolous arguments about deductions on his tax returns.
Alvin Kanofsky, a physics professor at Lehigh University since 1967, was continuing to protest a federal tax lien for unpaid taxes for 1996, 1997, 1998 and 2000.
Kanofsky was ordered to pay the taxes in a 2006 Tax Court Memorandum decision, which was reaffirmed on appeal in 2008. He reappeared again before the court in the subsequent levy case in 2010. Three attempts by Kanofsky to have the case heard by the Supreme Court were denied. In February of this year, the IRS requested a summary judgment because payment hadn’t been received and asked for a penalty to be imposed.
The unpaid taxes concerned Schedule C deductions that Kanofsky claimed had offset any tax liability for the years in question. The tax deficiency in this case totaled over $41,000, not including penalties.
At issue was a building he owned near Lehigh University, which he said he used for business purposes. Expenses he claimed included building repairs, mortgages and interest. He said all of his materials in the building had to be cleared out because he “ran into a worldwide scam.”
Many of the documents Kanofsky tried to show the court to support his claim were not admitted because of IRS objections. His appeals were based on what he called the Tax Court and IRS unfairly “suppressing” important information in the case. Kanofsky said that he and his late brother were whistleblowers in a number of instances of fraud and that he has been subjected to retaliation because of the whistleblowing.
Earlier Kanofsky had filed suit related to taxes due for 2006 and 2007, of $26,033 and $45,433 respectively, which the U.S. Court of Appeals for the Third Circuit in 2013 agreed were owed to the IRS. The court held that “neither the Tax Court nor the IRS improperly obstructed petitioner’s presentation of evidence” and “allegations of fraud and corruption and his assertion of ‘whistleblower’ status were irrelevant to the merits of his case.”
“He did not explain to the Tax Court, and does not explain now, how events as disparate as the Sandusky prosecution or alleged corruption related to the Barnes Foundation have any bearing on his tax liability,” the Court of Appeals further stated.
In its summary decision on July 31, 2014, the Tax Court said, “Petitioner is no stranger to this court. He was warned in prior proceedings that his conduct could subject him to a penalty if he continued to repeat arguments he made in earlier cases.
“He has returned for a fourth time to this court, once again raising his arguments about fraud, corruption and whistleblowing activities. … He has repeatedly asserted irrelevant and meritless arguments. He designed his petition to delay the collection of the income taxes he owes.”In rendering its decision, the Tax Court said it has unequivocally warned taxpayers about abusing procedural protections by pursuing frivolous actions for the purpose of delaying payment.
“Petitioner is a well-educated individual who admits that he understood cautions and warnings given by the court, yet he continues to reiterate the same irrelevant and groundless arguments. He has wasted the time and resources of both the [IRS] and the court.”
The court warned Kanofsky that additional penalties would be applied if he continued to raise “irrelevant, frivolous and groundless arguments or institutes or maintains further proceedings in this court to delay the payment of federal income tax lawfully assessed against him” (Alvin Sheldon Kanofsky v. Commissioner, T.C. Memo 2014-153, July 31, 2014).
©2014 CPAmericaInternational
U.S. income tax is basically pay as you go. As you earn income during the year, you’re expected to pay your taxes on it – or you’ll be penalized.
You may pay taxes in basically two ways:
➤ Through withholding from your paycheck
➤ By making estimated payments if your withheld tax is insufficient
Those needing to make estimated payments are self-employed individuals who run their own businesses or professionals in business for themselves, as well as investors and retirees who receive interest or gains, among others.
For 2014, estimated tax deadlines for individuals are April 15, June 15 and Sept. 15, 2014, and Jan. 15, 2015. The January payment may be skipped without penalty if you file your 2014 tax return and pay all taxes due by Feb. 2, 2015.
If you do not pay enough tax throughout the year, penalties may apply. But with proper planning, the penalties are avoidable.
You won’t be penalized if you owe less than $1,000 in taxes after subtracting withholding and credits. You also won’t be penalized if you pay at least 90 percent of the tax you owe for the current year, or 100 percent of the tax shown on your tax return from the prior year.
If adjusted gross income for 2013 was more than $150,000 for married taxpayers, 110 percent of the 2013 tax liability must be paid for 2014, or there will be a penalty.
There are special rules for farmers and fishermen. If two-thirds of income comes from farming or fishing, only 66 2/3 percent of the current-year tax owed is payable in one installment due Jan. 15.
In general, your estimated tax payments should be made in four equal amounts to avoid a penalty. But if your income is received unevenly during the year, annualizing your payments and making unequal payments may enable you to eliminate or lower your penalty.
If it appears that you will be subject to an underpayment penalty, you may be able to reduce or eliminate the penalty by initiating or increasing your quarterly estimated tax payments or by adjusting your withholdings.
A quirk in the penalty rules treats withheld taxes – even those withheld late in the year – as if they had been taken evenly throughout the year. So, if you’re employed, instructing your employer to withhold more from your pay can even eliminate penalties that accrued earlier in the year.
While most people want to avoid unnecessary penalties, it is seldom a good idea to pay more than the law requires or to pay your taxes earlier than necessary. Why let the government hold your money only to return it to you next year as a tax refund – with no interest?
Your goal should be to pay just enough to avoid an underpayment penalty but not so much as to create a large refund. Consult with your tax adviser to optimize your tax payments to avoid penalties.
©2014 CPAmerica International
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
