Wednesday, November 30, 2011



Rev. Proc. 2011-58, 2011-50 IRB, 11/28/2011, IRC Sec(s).

Headnote:


Reference(s):

Full Text:

1. Purpose

This revenue procedure modifies the definition of a qualified loss in section 4.02 of   Rev. Proc. 2009-20, 2009-1 C.B. 749, to address certain situations in which the death of a lead figure (as described in section 4.01 of  Rev. Proc. 2009-20) has foreclosed the possibility of criminal charges. This revenue procedure also makes a conforming modification to the definition of discovery year in section 4.04 of   Rev. Proc. 2009-20.

2. Background

.01   Rev. Rul. 2009-9, 2009-1 C.B. 735, describes the proper income tax treatment for losses resulting from certain fraudulent investment arrangements, including so-called Ponzi schemes. .02   Rev. Proc. 2009-20 provides an optional safe harbor allowing certain investors to claim a theft loss deduction under   § 165 of the Internal Revenue Code for qualified losses from certain fraudulent investment schemes. Under section 4.02 of  Rev. Proc. 2009-20, a qualified loss is a loss from a specified fraudulent arrangement (defined in section 4.01) for which authorities have charged the lead figure by indictment, information, or criminal complaint with a crime that meets the definition of theft for purposes of   § 165. .03 Since publication of   Rev. Proc. 2009-20, the deaths of some lead figures in Ponzi schemes have foreclosed authorities' ability to charge them with criminal theft. Qualified investors in these cases are unable to meet the definition of a qualified loss in section 4.02 of   Rev. Proc. 2009-20 and therefore are precluded from using the optional safe harbor, solely because of the death of a lead figure. This revenue procedure expands the definition of qualified loss in   Rev. Proc. 2009-20 to address these cases.

.04 This revenue procedure also clarifies that the terms “ indictment,” “ information,” and “ criminal complaint” in section 4.02 of   Rev. Proc. 2009-20 have meanings similar to the use of those terms in the Federal Rules of Criminal Procedure.

3. Scope

This revenue procedure applies to qualified investors within the meaning of section 4.03 of   Rev. Proc. 2009-20.

4. Application

.01 Section 4.02 of   Rev. Proc. 2009-20 is modified to read as follows: .02 Qualified loss. A qualified loss is a loss resulting from a specified fraudulent arrangement in which, as a result of the conduct that caused the loss—

(1) A lead figure was charged by indictment or information (see, for example, Fed. R. Crim. P. 7) under state or federal law with the commission of fraud, embezzlement, or a similar crime that, if proven, would meet the definition of theft for purposes of   § 165 of the Internal Revenue Code and   § 1.165-8(d) of the Income Tax Regulations under the law of the jurisdiction in which the theft occurred, and the indictment or information has not been withdrawn or dismissed (other than because of the death of the lead figure);
(2) A lead figure was the subject of a state or federal criminal complaint (see, for example, Fed. R. Crim. P. 3) alleging the commission of a crime described in section 4.02(1) of this revenue procedure, the complaint has not been withdrawn or dismissed (other than because of the death of the lead figure), and either—
(a) The complaint alleged an admission by the lead figure, or the execution of an affidavit by that person admitting the crime; or
(b) A receiver or trustee was appointed with respect to the arrangement or assets of the arrangement were frozen; or
(3) A lead figure, or an associated entity involved in the specified fraudulent arrangement, was the subject of one or more civil complaints (see, for example, Fed. R. Civ. P. 3, 7) or similar documents (such as a notice or order instituting administrative proceedings or other document the Internal Revenue Service designates) that a state or federal governmental entity filed with a court or in an administrative agency enforcement proceeding, and—
(a) The civil complaint or similar documents together allege facts that comprise substantially all of the elements of a specified fraudulent arrangement, as described in section 4.01 of this revenue procedure, conducted by the lead figure;
(b) The death of the lead figure precludes a charge by indictment, information, or criminal complaint against that lead figure as described in section 4.02(1) or (2) of this revenue procedure; and
(c) A receiver or trustee was appointed with respect to the arrangement or assets of the arrangement were frozen. .02 Section 4.04 of   Rev. Proc. 2009-20 is modified to read as follows: .04 Discovery year. A qualified investor's discovery year is the investor's taxable year in which—
(1) The indictment, information, or complaint described in section 4.02(1) or (2) of this revenue procedure is filed; or
(2) The complaint or similar document described in section 4.02(3) of this revenue procedure is filed, or the death of the lead figure occurs, whichever is later.
4. Effective Date

This revenue procedure applies to losses for which the discovery year is a taxable year beginning after December 31, 2007.

5. Effect On Other Documents

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Thursday, November 24, 2011


Joyce A. Linzy v. Commissioner, TC Memo 2011-264 , Code Sec(s) 162.



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JOYCE ANN LINZY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.



Section 162(a) provides a deduction for certain business-related expenses. 9 In order to qualify for the deduction under section 162(a), “an item must (1) be `paid or incurred during the taxable year,' (2) be for `carrying on any trade or business,' (3) be an `expense,' (4) be a 'necessary' expense, and (5) be an 'ordinary' expense.” Commissioner v. Lincoln Sav. & Loan As[pg. 1795] sociation, 403 U.S. 345, 352 [27 AFTR 2d 71-1542] (1971); see also Commissioner v. Tellier, 383 U.S. 687, 689 [17 AFTR 2d 633] (1966) (the term “necessary” imposes “only the minimal requirement that the expense be 'appropriate and helpful' for `the development of the [taxpayer's] business” (quoting Welch v. Helvering, 290 U.S. 111, 113 [12 AFTR 1456] (1933))); Deputy v. du Pont, 308 U.S. 488, 495 [23 AFTR 808] (1940) (to qualify as “ordinary”, the expense must relate to a transaction “of common or frequent occurrence in the type of the business involved”). Whether an expense is ordinary is determined by time, place, and circumstances. Welch v. Helvering, supra at 113-114.



If a taxpayer establishes that he or she paid or incurred a deductible business expense but does not establish the amount of the expense, we may approximate the amount of the allowable deduction, bearing heavily against the taxpayer whose inexactitude is of his or her own making. Cohan v. Commissioner, 39 F.2d 540, 543-544 [8 AFTR 10552] (2d Cir. 1930). In order for the Court to estimate the amount of an expense, the Court must have some basis upon which an estimate may be made. Id. at 542-543. Without such basis, any allowance would amount to unguided largesse. Williams v. United States, 245 F.2d 559, 560-561 [51 AFTR 594] (5th Cir. 1957).



Petitioner presented canceled checks, bank account statements, receipts, and invoices purporting to substantiate various items claimed as business expense deductions. These records are not well organized and have not been submitted to the Court in a fashion that allows for easy association with the portions of deductions that remain in dispute. Nevertheless, we make what sense we can with what we have to work with and summarize our findings in the following paragraphs.



1. Contract Labor



In general, payments made or incurred by a trade or business for personal services rendered are ordinary and necessary business expenses and may be deducted under section 162. Sec. 1.162-7(a), Income Tax Regs. Petitioner claimed on her Schedule C a deduction of $34,880 for contract labor. Respondent disallowed the entire amount for lack of substantiation. None of the numerous receipts petitioner offered in support of her claimed contract labor expense were for contract labor. 10 However, some of the receipts were for valid business expenses properly deductible elsewhere on petitioner's Schedule C. We permit those expenses to be deducted and discuss them below in the appropriate expense category.



At trial petitioner attempted to claim a deduction for additional contract labor expenses. Petitioner introduced photocopies of checks and a few pages of someone's handwritten timesheet. The checks are photocopied such that the dates are missing or incomplete, and the full amount cannot be determined for one of the checks. These records are incomplete, and there is not enough information to permit a reasonable estimate. Accordingly, respondent's complete disallowance of petitioner's $34,880 deduction for contract labor is sustained.



2. Mortgage Interest



Petitioner claimed a deduction of $7,250 for mortgage interest related to her tax return business. Petitioner is permitted to deduct on her Schedule C only the mortgage interest associated with her tax return business. See sec. 162(a); Coffman v. Commissioner, T.C. Memo. 2000-7 [TC Memo 2000-7] (permitting mortgage interest relating to home office to be deducted on Schedule C). Petitioner paid $14,971 in mortgage interest for the building in 2007. One-third of the building was used for petitioner's tax return business. Thus, petitioner is entitled to deduct one-third of the mortgage interest, or $4,990, on her Schedule C.



3. Repairs and Maintenance



On her Schedule C petitioner claimed a deduction of $7,800 for repairs and maintenance. Respondent allowed only [pg. 1796] $5,963. 11 Petitioner introduced no evidence with respect to the portion of the repairs and maintenance expense respondent denied. Petitioner did, however, attempt to deduct $100 for repair work on unit one's security system as contract labor. This expense is properly deductible as a repairs and maintenance expense. Thus, in addition to the repairs and maintenance expense allowed in the notice of deficiency, petitioner is entitled to deduct an additional $100.



4. Utilities



Petitioner claimed a deduction of $4,000 on her Schedule C for utilities. Respondent allowed only $2,709. After reviewing the evidence we conclude that petitioner is entitled to deduct more than respondent allowed but less than what she claimed. To substantiate her utilities expense deduction, petitioner provided her monthly statements for gas, electricity, and security alarm service. 12



According to her gas and electric statements, in 2007 petitioner paid $2,787 for gas and $685 for electricity for unit one. Petitioner paid $27 per month for security alarm services for unit one, for a total of $324 paid during 2007.



Accordingly, petitioner is entitled to deduct $3,796 for utilities on her Schedule C. Thus, in addition to the utilities expense deduction allowed in the notice of deficiency, petitioner is entitled to deduct $1,087.



5. Depreciation



Petitioner listed no depreciation expense on her Schedule C. However, during 2007 petitioner purchased several depreciable items. She did not depreciate the costs of these items but instead claimed the costs as contract labor expenses. Petitioner must depreciate the property she purchased in 2007 for her tax return business if the property has a useful life greater than 1 year. See sec. 167; Bruns v. Commissioner, T.C. Memo. 2009-168 [TC Memo 2009-168] (requiring taxpayer to depreciate cost of CD player and furniture because they had expected useful life greater than 1 year). The following expenses must be depreciated: $850 for blinds (Eddie Z), $1,133 for vacuum (Oreck), $135 for desk (Staples), $260 for draw file (Staples), $4,803 for dining set (Wickes), and $633 for fence (Ramirez Iron Works).



The expenses petitioner incurred for siding and tuckpointing the building are capital expenditures. Capital expenditures include any amount paid for permanent improvements or betterments made to increase the value of any property. See sec. 263(a)(1). A taxpayer is not entitled to deduct a capital expenditure but may be allowed a depreciation deduction if the property is used in a trade or business or is held for the production of income. Secs. 263(a)(1), 167; see INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 83-84 [69 AFTR 2d 92-694] (1992). Petitioner must capitalize the $2,859 paid for siding (Grace Home Improvements) and the $1,467 paid for tuckpointing (Grace Home Improvements). Section 168(c) provides that the recovery period for nonresidential real property is 39 years. Petitioner has not suggested that any of the shorter recovery periods listed in section 168(c) applies. Improvements made to real property are depreciated using the same recovery period applicable to the underlying property as if the underlying property were placed in service at the time the improvements were made. Sec. 168(i)(6). Therefore, the amounts must be capitalized with a 39-year recovery period.



The parties shall determine in their Rule 155 computations the exact amount of the depreciation deduction to which petitioner is entitled.



B. Schedule E Mortgage Interest Deduction



Petitioner reported on her Schedule E rents received of $4,800 and expenses of $15,887 associated with her rental activ[pg. 1797] ity. 13 Petitioner claimed a deduction of $7,250 for mortgage interest, and respondent allowed only $2,102. Section 212 permits a deduction for all ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income and for the management, conservation, or maintenance of property held for the production of income. Therefore, petitioner is entitled to deduct the amount of the mortgage interest paid that relates to her rental activity. Petitioner used one-sixth of the building for her rental activity. Thus, in addition to the mortgage interest expense allowed in the notice of deficiency, petitioner is entitled to deduct $393 on her Schedule E. 14



C. Schedule A



As stated above, petitioner did not elect to itemize her deductions for 2007. At trial, however, petitioner stated that she would like to itemize her deductions so that she could deduct medical expenses paid and charitable contributions made in 2007. See Carter v. Commissioner, T.C. Memo. 1976-23 [¶76,023 PH Memo TC] (stating that the standard deduction election is “not an irrevocable one”). Petitioner claims that she paid $12,000 for medical expenses and made charitable contributions of $12,350. Respondent argues that petitioner is not entitled to the deductions for medical expenses and charitable contributions.



1. Medical Expense



Section 213(a) generally allows a deduction for expenses paid during a taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his or her spouse, or dependents, to the extent that such expense exceeds 7.5 percent of adjusted gross income. To substantiate medical expenses under section 213, the taxpayer must furnish the name and address of each person to whom payment was made and the amount and date of each such payment. See sec. 1.213-1(h), Income Tax Regs. Petitioner has not established that she made any uncompensated payments for medical expenses in 2007. Accordingly, petitioner is not entitled to deduct her claimed medical expenses.



2. Mortgage Interest Expense



Home mortgage interest is generally deductible under section 163(a), subject to the requirements of subsection (h). Therefore, petitioner is entitled to deduct the mortgage interest attributable to the portion of the building she used as her residence. Petitioner used the basement and most of the second floor as her personal residence. Thus, petitioner is entitled to deduct $7,486 for home mortgage interest. 15



3. Charitable Contribution



In general, a taxpayer is entitled to deduct charitable contributions made during the taxable year to or for the use of certain types of organizations. ,Sec. 170(a)(1), (c). A taxpayer is required to substantiate charitable contributions; records must be maintained. Sec. 6001; sec. 1.6001-1(a), Income Tax Regs. A contribution of cash in an amount less than $250 may be substantiated with a canceled check, a receipt, or other reliable evidence showing the name of the donee, the date of the contribution, and the amount of the contribution. Sec. 1.170A-13(a)(1), Income Tax Regs.



Contributions of cash or property of $250 or more require the donor to obtain contemporaneous written acknowledgment of the donation from the donee. 16Sec. 170(f)(8). At a minimum, the contemporaneous written acknowledgment must contain a description of any property contributed, a statement as to whether any goods or services were provided in consideration, and a description and good faith estimate of the value of any goods or services provided in consideration. Sec. 170(f)(8)(B). A written acknowledgment is contempora[pg. 1798] neous if it is obtained by the taxpayer on or before the earlier of (1) the date on which the taxpayer files a return for the taxable year in which the contribution was made, or (2) the due date (including extensions) for filing such return. Sec. 170(f)(8)(C). a. Lakeshore Public Television



Petitioner is entitled to deduct the $195 she contributed to Lakeshore Public Television. The cash contribution was for less than $250 and was substantiated by a receipt evidencing the name of the donee, the date of the contribution, and the amount of the contribution. See sec. 1.170A-13(a)(1), Income Tax. Regs. b. Schneider School



Petitioner is not entitled to a deduction for the $2,400 she contributed to Schneider School. The contribution must be substantiated by a contemporaneous written acknowledgment because it was for more than $250. Although petitioner received a receipt from the Chicago Public Schools, it does not qualify as a contemporaneous written acknowledgment because it does not state whether she received any goods or services in exchange for her contribution. See sec. 170(f)(8)(B)(ii). c. Faith Deliverance



Petitioner is not entitled to deduct the $7,500 she contributed to Faith Deliverance. Petitioner introduced a letter from the church dated January 19, 2010, and copies of several checks, each for more than $250 and made out to the church's pastor and his wife. The letter does not state whether petitioner received goods or services in exchange for contribution and was not received by the earlier of her return's filing date or its due date of April 15, 2008. See ,sec. 170(f)(8)(B)(ii), (C). Thus, there is no contemporaneous written acknowledgment from the donee that would permit petitioner to deduct the contributions. d. Progressive Ministries



Petitioner is entitled to deduct $375 of the $2,255 contributions she made to Progressive Ministries. To substantiate the Progressive Ministries contributions, petitioner introduced checks made out to Progressive Ministries and a 2007 tithing statement from Progressive Ministries dated January 19, 2010. Because petitioner did not receive the tithing statement by the earlier of her return's filing date or its due date of April 15, 2008, it is not a contemporaneous written acknowledgment. See id. Thus, petitioner does not have proper substantiation for the contributions of $250 or more. However, the tithing statement and canceled checks substantiate petitioner's contributions of less than $250. See sec. 1.170A-13(f)(1), Income Tax Regs. Thus, petitioner is entitled to deduct the following charitable contributions: $175 contributed on July 29, 2007; $100 contributed on September 9, 2007; and $100 contributed on November 25, 2007.



Accordingly, petitioner is entitled to deduct $570 for charitable contributions made during 2007. Petitioner's itemized deductions of $8,056 exceed her head of household standard deduction of $7,850, thus she can itemize her deductions.



II. Section 6662(a) Penalty



Pursuant to section 6662(a) and (b)(1) and (2), a taxpayer may be liable for a penalty of 20 percent of the portion of an underpayment of tax: (1) Due to negligence or disregard of rules or regulations or (2) attributable to a substantial understatement of income tax. “Negligence” is defined as any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code; this includes a failure to keep adequate books and records or to substantiate items properly. Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs. Negligence has also been defined as the failure to exercise due care or the failure to do what a reasonable person would do under the circumstances. See Allen v. Commissioner, 92 T.C. 1, 12 (1989), affd. 925 F.2d 348, 353 [67 AFTR 2d 91-543] (9th Cir. 1991); Neely v. Commissioner, 85 T.C. 934, 947 (1985). “Disregard” means any careless, reckless, or intentional disregard. Sec. 6662(c). “Understatement” means the excess of the amount of the tax required to be shown on the return over the amount of the tax imposed which is shown on the return, reduced by any rebate. Sec. 6662(d)(2)(A). A “substantial understatement” of income tax is defined as an understatement of tax that exceeds [pg. 1799] the greater of 10 percent of the tax required to be shown on the tax return or $5,000. Sec. 6662(d)(1)(A). The understatement is reduced to the extent that the taxpayer has: (1) Adequately disclosed his or her position and has a reasonable basis for such position, or (2) has substantial authority for the tax treatment of the item. Sec. 6662(d)(2)(B). The burden of production is on the Commissioner to produce evidence that it is appropriate to impose the relevant penalty. See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446 (2001).



Petitioner's records were insufficient to substantiate several of her claimed deductions, and she failed to keep adequate books and records. Furthermore, petitioner, a tax return preparer with more than 15 years' experience, improperly deducted the cost of numerous items instead of depreciating the items as required by law. Although petitioner credibly testified as to the business purpose for her claimed deductions, her underpayment was still attributable to her negligence. See Griggs v. Commissioner, T.C. Memo. 2008-234 [TC Memo 2008-234] (taxpayer, who credibly testified regarding profit motive of business ventures, was liable for accuracy-related penalty because he failed to substantiate most claimed deductions and failed to keep adequate books and records). Accordingly, respondent has met his burden of production. See Smith v. Commissioner, T.C. Memo. 1998-33 [1998 RIA TC Memo ¶98,033]; sec. 1.6662-3(b)(1), Income Tax Regs.



The accuracy-related penalty is not imposed with respect to any portion of the underpayment as to which the taxpayer shows that he or she acted with reasonable cause and in good faith. Sec. 6664(c)(1); Higbee v. Commissioner, supra at 448. Petitioner offered no evidence that she acted with reasonable cause and in good faith. Accordingly, we hold that petitioner is liable for a section 6662(a) accuracy-related penalty due to negligence or disregard of rules or regulations. 17



To reflect the foregoing,



Decision will be entered under Rule 155.



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1

   Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

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2

   All amounts are rounded to the nearest dollar.

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3

   Petitioner concedes that she failed to report gambling income of $2,500 on her Form 1040, U.S. Individual Income Tax Return, for 2007. Respondent concedes that the $12,960 of Social Security income petitioner received on behalf of her minor children was not taxable.

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4

   Petitioner claimed the standard deduction on her 2007 tax return. At trial petitioner stated that she would like to itemize her deductions.

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5

   Adjustments made to petitioner's self-employment tax, child tax credit, and earned income credit are computational and will be resolved by our holding herein.

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6

   Petitioner had been employed as an income tax return preparer since 1995 before she opened her own tax return business in 2004.

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7

   Unit one is the same size as unit two. Petitioner did not know the exact square footage of the building or each unit.

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8

   Respondent treated the rented room as one-sixth of the building for purposes of the mortgage interest deduction allowance. Petitioner did not object to this or establish that she rented a greater portion of the house. Thus, for all relevant purposes we treat petitioner as having rented one-sixth of the building.

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9

   On the other hand, sec. 262(a) generally disallows a deduction for personal, living, or family expenses.

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10

   For example, petitioner introduced receipts for blinds, carpet, repairs, and furniture.

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11

   Respondent allowed the following repair expenses: $2,100 to Hugo Gomez (carpet), $438 to Butler Home (doors), $60 to Complete Relief (heating repair), $57 to Wal-Mart (totes), $298 Anna's Linen (window treatment), $600 to Rossi Custom (lamps and tables), $2,360 to Rossi Custom (furniture), and $50 to Century Tile (measuring for carpet). Several of these expenses were expenses petitioner had claimed for contract labor.

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12

   The utilities were billed separately to each unit; thus, the utility bills for petitioner's tax return business are separate from the utility bills for her personal residence.

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13

   Respondent did not argue that petitioner failed to actively participate in her rental real estate activity and would therefore be unable to take advantage of the $25,000 offset for rental real estate activities under sec. 469(i).

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14

   This amount is more than what respondent allowed because respondent calculated the mortgage interest deduction using a mortgage interest expense of $12,608 but we found petitioner had $14,971 of mortgage interest expense for 2007.

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15

   Schedule A mortgage interest deduction = $14,971 (total mortgage interest) x 2/3 (portion of building used as personal residence) - $2,495 (mortgage interest attributable to rental business).

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16

   If a taxpayer makes separate contributions of less than $250 to a donee organization during a taxable year, they are not required to obtain contemporaneous wri


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Reasonable cause where an attorney  relied on an attorney



LIFTIN v. U.S., Cite as 108 AFTR 2d 2011-XXXX, 11/08/2011 THE ESTATE OF MORTON LIFTIN, JOHN LIFTIN, EXECUTOR, Plaintiff, v. THE UNITED STATES

In the United States Court of Federal Claims, Docket No.: No. 10-589 T, Date Decided: 11/08/2011.





       To avoid a penalty for late filing, the taxpayer must also prove that the late filing was not the result of willful neglect, or “conscious, intentional failure or reckless indifference.” Boyle, 469 U.S. at 245. Conscious or intentional indifference exists “when the taxpayer was aware of his duty to file a return within the due date, but failed to file the return under circumstances that do not justify such failure.” Campbell, 62 T.C.M. (CCH) 1514 [1991 TC Memo ¶91,615]. Reckless indifference is established “when the taxpayer was aware of the duty to file on time, but disregarded a known or obvious risk that the return might not be filed within the due date.” Id.



The Government argues that the Executor is “a prominent attorney and sophisticated businessman [who] should have known that the [E]state's failure to comply with the statutory filing deadline could lead to delinquency penalties.” Reply Br. of U.S. in Supp. of Its Mot. for J. on Pleadings (“Def.'s Reply”) 21 (docket entry 24, Apr. 15, 2011). However, whether the Executor should have known that the Estate's failure to timely file would result in a penalty is a question of fact that “may not be properly decided on a motion for judgment on the pleadings.” Halliday, 7 Cl. Ct. at 321.





CONCLUSION



The Government has failed to show that the Estate is entitled to no relief under the facts pleaded because the Estate has adequately alleged facts that, if proven, may well demonstrate that its failure to timely file was due to reasonable cause and was not the result of willful neglect. It is also not clear whether the penalty assessed was based solely on late filing.



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Thursday, November 17, 2011



Congress repeals 3% withholding rule for government contractors, boosts credit for hiring veterans
On November 16, Congress passed H.R. 674, the “3% Withholding Repeal and Job Creation Act” (the Act), and sent it to the President for his expected signature. As explained by this Special Study, the Act repeals Code Sec. 3402(t) 's controversial 3% withholding requirement on government contractor payments; amends the Code Sec. 51 work opportunity tax credit (WOTC) to give employers a bigger credit for hiring certain qualified veterans through Dec. 31, 2012; extends the Code Sec. 6331(h)(3) continuous 100% tax levy on “specified payments” to vendors for goods and services sold or leased to the federal government to include payments for property; and tightens eligibility for the refundable health-related tax credit under Code Sec. 36B .
 Only Title I of H.R. 674 (Three Percent Withholding Repeal and Job Creation Act), as first passed by the House of Representatives on October 28, survived after the Senate's amendment of the bill (which the House then accepted). The Senate on November 10, struck the rest of H.R. 674 as first passed by the House, and inserted Titles II (Vow to Hire Heroes), Title III (Other Provisions Relating to Federal Vendors), Title IV (Modification of Calculation of Modified Adjusted Gross Income For Determining Certain Healthcare Eligibility), and Title V (Budgetary Effects). The engrossed version of H.R. 674 as passed by the House and Senate is not yet ready. The legislative language of all five Titles of H.R. 674 is carried in the two documents that follow.

Repeal of 3% Withholding Rule for Government Contractors
Under pre-Act law, Code Sec. 3402(t) , which was added to the Code by the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA, P.L. 109-222 ), requires the Federal government and the government of every state, political subdivision of a state, and instrumentality of a state or state subdivision (including multi-state agencies) making certain payments to a person providing any property or services (e.g., payments to a government contractor) to deduct and withhold 3% from that payment.
Although the withholding requirement was originally set to apply to payments made after 2010, it was subsequently deferred to apply to payments made after 2011 by §1511 of the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5 ), then deferred again by final regs to apply to payments made after 2012).
In its explanation of H.R. 674 (H Rpt 112-253), the Ways and Means Committee cited the following reasons for repealing the Code Sec. 3402(t) withholding requirement:
... the withholding requirement would reduce cash flow to many cash-strapped employers that contract with governmental entities and undermine job creation;
... the “looming implementation” of the withholding requirement is contributing to the uncertainty facing employers during already uncertain economic times;
... the withholding requirement would impose substantial costs on Federal, State, and local governmental agencies required to withhold payments; and
... the withholding requirement could also cause small businesses contracting with governmental entities to adjust their prices in order to address the changes in their cash flows, potentially resulting in increased procurement costs at all levels of government.
New law. Act Sec. 102 repeals the Code Sec. 3402(t) withholding requirement, effective for payments made after 2011.
 Even though the withholding rule wasn't scheduled to apply until after 2012 under final regs, the repeal applies to payments made after 2011 because that was the statutory deferred date under ARRA.
Enhanced Work Opportunity Tax Credit (WOTC) for Hiring Qualified Veterans
Under pre-Act law, the work opportunity tax credit (WOTC) allows employers who hire members of certain targeted groups, including qualified veterans, to get a credit against income tax of a percentage of qualifying first-year wages up to $6,000 per employee ($12,000 for certain qualified veterans; and $3,000 for qualified summer youth employees). Generally, the percentage of qualifying wages is 40% of first-year wages, for a maximum WOTC of $2,400 (.4 × $6,000), or $4,800 for certain qualifying veterans (.4 × $12,000); it's 25% for employees who have completed at least 120, but less than 400, hours of service for the employer. Different rules apply for recipients of long-term family assistance.
The individual must begin work for the employer before Jan. 1, 2012 for the WOTC to apply.
Under pre-Act law, a qualified veteran is a veteran who is certified by the designated local agency as meeting either of two tests:
(1) The individual is a member of a family receiving assistance under a food stamp program under the Food Stamp Act of '77 for at least three months, all or part of which is during the 12-month period ending on the hiring date.
(2) The individual is entitled to compensation for a service-connected disability, and either:
(a) has a hiring date that isn't more than one year after having been discharged or released from active duty in the U.S. Armed Forces, or
(b) has aggregate periods of unemployment during the 1-year period ending on the hiring date that equal or exceed six months.
A “veteran” is an individual who is certified as having either served on active duty (other than for training) in the U.S. Armed Forces for more than 180 days, or must have been discharged or released from active duty in the U.S. Armed Forces for a service connected disability. However, individuals serving on active duty for more than 90 days (other than for training) must be further certified as not having served any of the active duty during the 60-day period ending on the hiring date.
A hired individual won't generate a WOTC unless one of the two following conditions is satisfied: (a) on or before the day he begins work, the employer has received a certification from the “designated local agency” that the individual is a member of a targeted group. The certification must be in writing and state that the individual is a member of a specific targeted group; (b) on or before the day the individual is offered employment, the employer completes a pre-screening notice for the individual and submits the notice (signed by the employer and the individual under penalties of perjury), not later than the 28th day after the individual begins work for the employer, to the designated local agency as part of a written request for a certification. If an employer uses the latter approach, it also must receive a certification from the agency that the individual is, in fact, a member of a targeted group before claiming the WOTC for hiring the individual.
Under pre-Act law, the WOTC is not available for tax-exempt employers.
New law. The Act extends the WOTC for hiring qualified veterans, broadens the classes of qualified veterans and increases the WOTC for hiring some of them, “fast-tracks” the qualification process for qualified veterans, and provides tax-exempt employers with a credit against payroll tax for hiring qualified veterans.
Extension of WOTC for hiring qualified veterans. Under the Act, employers will be able to claim the WOTC for qualified veterans who begin work for the employer before Jan 1, 2013. ( Code Sec. 51(c)(4) , as amended by Act Sec. 261(d))
 RIA observation: In other words, the WOTC gets a one-year lease on life, but only with respect to employers that hire qualified veterans.
Broadened categories of qualified veterans. Under the Act, effective for individuals who begin work for the employer after the enactment date, a qualified veteran is a veteran who is certified by the designated local agency as falling within one of the following four categories ( Code Sec. 51(d)(3)(A) , as amended by Act Sec. 261(b)):
(1) The individual is a member of a family receiving assistance under a food stamp program under the Food Stamp Act of '77 for at least three months, all or part of which is during the 12-month period ending on the hiring date. ( Code Sec. 51(d)(3)(A)(i) )
(2) The individual is entitled to compensation for a service-connected disability, and either:
(a) has a hiring date that isn't more than one year after having been discharged or released from active duty in the U.S. Armed Forces, or ( Code Sec. 51(d)(3)(A)(ii)(I) )
(b) has aggregate periods of unemployment during the 1-year period ending on the hiring date that equal or exceed six months. ( Code Sec. 51(d)(3)(A)(ii)(II) )
(3) The individual has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed four weeks (but less than six months). ( Code Sec. 51(d)(3)(A)(iii) )
(4) The individual has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed six months. ( Code Sec. 51(d)(3)(A)(iv)
 The Act adds the third and fourth categories of qualified veterans but leaves the first two categories unchanged.
Larger WOTC for hiring certain qualified veterans. Under the Act, effective for individuals who begin work for the employer after the enactment date, the maximum amount of qualifying first-year wages against which the WOTC may be claimed is:
(A) $12,000 for an individual who is a qualified veteran under Code Sec. 51(d)(3)(A)(ii)(I) , i.e., is entitled to compensation for a service-connected disability and has a hiring date that isn't more than one year after having been discharged or released from active duty in the U.S. Armed Forces.
 Thus, the maximum WOTC for hiring qualified disabled veterans in Category A is $4,800 (.4 × $12,000 maximum qualifying first-year wages).
 The maximum WOTC for hiring qualified veterans in this category is unchanged from pre-Act law.
(B) $24,000 for an individual who is a qualified veteran under Code Sec. 51(d)(3)(A)(ii)(II) , i.e., is entitled to compensation for a service-connected disability and has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed six months.
 Thus the maximum WOTC for hiring qualified disabled veterans in Category B is $9,600 (.4 × $24,000 maximum qualifying first-year wages).
(C) $14,000 for an individual who is a qualified veteran under Code Sec. 51(d)(3)(A)(iv) , i.e., has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed six months. ( Code Sec. 51(b)(3) , as amended by Act Sec. 261(a))
 Thus the maximum WOTC for hiring qualified veterans in Category C—i.e., longer-term unemployed veterans—is $5,600 (.4 × $14,000 maximum qualifying first-year wages).
 The maximum WOTC for hiring veterans who qualify under Code Sec. 51(d)(3)(A)(i) (i.e., food stamp recipients) stays unchanged at $2,400 (.4 × $6,000).
 The maximum WOTC for hiring veterans who qualify under the new category in Code Sec. 51(d)(3)(A)(iiii) (i.e., veterans who are unemployed for four weeks or more, but less than six months) is determined under the general rule for computing the credit, and is $2,400 (.4 × $6,000).
 The enhanced maximum amounts of qualifying wages also would seem to apply if the qualified veteran completes at least 120, but less than 400, hours of service for the employer during the one-year period beginning with his or her hire date. For these reduced hours, a reduced credit percentage (25%) applies under Code Sec. 51(i)(3)(A) .
 On Jan. 3, 2012, ABX Inc., hires Jack, a highly skilled computer programmer. Jack is a qualified veteran who is entitled to compensation for a service-connected disability, and had total periods of unemployment during the 1-year period ending on the Jan. 3, 2012 hiring date of six or more months. During 2012, the veteran only works 385 hours and is paid a total of $15,400. Under the Act, for 2012, ABX would seem to be eligible for a WOTC of $3,850 for hiring Jack (.25 × $15,400). If he were paid a total of $24,000, the WOTC for Jack would be $6,000 (.25 × $24,000).
Fast-tracked qualification process for qualified veterans. Under the Act, effective for individuals who begin work for the employer after the enactment date:
... A veteran will be treated as certified by the designated local agency as having aggregate periods of unemployment meeting the requirements of Code Sec. 51(d)(3)(A)(ii)(II) or Code Sec. 51(d)(3)(A)(iv) (see above), if he or she is certified by the local agency as being in receipt of unemployment compensation under State or Federal law for not less than six months during the 1-year period ending on the hiring date. ( Code Sec. 51(d)(13)(D)(i)(I) , as amended by Act Sec. 261(c))
... A veteran will be treated as certified by the designated local agency as having aggregate periods of unemployment meeting the requirements of Code Sec. 51(d)(3)(A)(iii) (see above), if he or she is certified by the local agency as being in receipt of unemployment compensation under State or Federal law for not less than four weeks (but less than six months) during the 1-year period ending on the hiring date. ( Code Sec. 51(d)(13)(D)(i)(II) , as amended by Act Sec. 261(c))
Additionally, IRS at its discretion may provide alternative methods for certification of a veteran who is a qualified veteran because of unemployment (i.e., is described in Code Sec. 51(d)(3)(A)(ii)(II) , Code Sec. 51(d)(3)(A)(iii) , or Code Sec. 51(d)(3)(A)(iv) ). ( Code Sec. 51(d)(13)(D)(ii) , as amended by Act Sec. 261(c))
Tax-exempt employers get a payroll-tax credit for hiring qualified veterans. Under the Act, effective for individuals who begin work for the employer after the enactment date, a tax-exempt employer (one described in Code Sec. 501(c) and exempt from tax under Code Sec. 501(a) ) may, subject to the limits described below, claim a credit for the WOTC it could claim for hiring qualified veterans if it were not tax-exempt. The credit is allowed against the OASDI (Social Security) tax that the exempt employer would otherwise have to pay on the wages of all its employees during the “applicable employment period” (with respect to any qualified veteran, the one-year period beginning with the day he or she goes to work for the tax-exempt organization). ( Code Sec. 52(c)(2) and Code Sec. 3111(e) , as amended by Act Sec. 261(e))
 The credit that a tax-exempt employer can claim applies to the four categories of qualified veterans under Code Sec. 51(d)(3)(see above). Thus, it applies to both the old categories of qualified veterans and the new categories created by the Act.
The credit for hiring qualified veterans, which can't exceed the OASDI tax otherwise payable for employment of all the tax-exempt's employees during the “applicable employment period,” is calculated as it would be under Code Sec. 51 , but with the following modifications:
·         The general credit percentage of qualifying first-year wages is 26% (instead of 40%).
·         The credit percentage of qualifying wages is 16.25% (instead of 25%) for a qualified veteran who has completed at least 120, but less than 400, hours of service for the employer.
·         The tax-exempt employer may only take into account wages paid to a qualified veteran for services in furtherance of the activities related to the purposes or function constituting the basis of the organization's exemption under Code Sec. 501 . ( Code Sec. 3111(e)(2) and Code Sec. 3111(e)(3) , as amended by Act Sec. 261(e)(2))
 In 2012, a tax-exempt organization dedicated to eradicating cancer hires Tricia, a disabled veteran, as a statistical analyst, and pays her $50,000 a year. Tricia was out of work for nine months before being hired by the organization (and thus is a qualified veteran under Code Sec. 51(d)(3)(A)(ii)(II) ). The organization can reduce its 2012 OASDI bill by $6,240 (.26 × $24,000).
Note that the Act also includes special rules related to the hiring of qualified veterans in U.S. possessions, including American Samoa, Guam, The Commonwealth of the Northern Mariana Islands, the Commonwealth of Puerto Rico, and the U.S. Virgin Islands. (Act Sec. 261(f))
100% Continuous Levy against Delinquent Federal Contractors Expanded to Include Payments for Property
IRS has the power to collect taxes by levy and distraint, meaning that, subject to certain exemptions, it may seize the property of a delinquent taxpayer, sell it, and apply the proceeds to pay unpaid taxes. ( Code Sec. 6331(a) )
Under Code Sec. 6331(h)(1) , IRS can “continuously levy” (i.e., from the date the levy is first made until it is released) up to 15% of certain “specified payments” to or received by a taxpayer. Specified payments include any federal payment for which eligibility isn't based on a payee's income and/or assets, worker's compensation payments, unemployment benefits, and other specified types of payments.
Under pre-Act law, IRS could, under Code Sec. 6331(h)(3) , continuously levy up to 100% of specified payments due to a vendor of goods or services sold or leased to the federal government.
New law. The Act provides that IRS can continuously levy up to 100% of specified payments due to a vendor of property in addition to payments for goods and services sold or leased to the federal government. This applies for levies issued after the enactment date. ( Code Sec. 6331(h)(3) , as amended by Act Sec. 301)
 A nearly identical provision was included in the Small Business Penalty Fairness Act of 2009, which passed the Senate by unanimous consent but never became law.
The Act also directs the Secretary of the Treasury, in consultation with the Director of the Office of Management and Budget and others, to conduct a study on how to reduce the amount of Federal tax owed but not paid by current and prospective Federal contractors (“delinquent contractors”). Among other things, the study should include an estimate of the amount of back taxes owed by, and recommendations on how to better identify, delinquent contractors. The study is to be submitted to House Ways and Means Committee, the Senate Committee on Finance, the House Committee on Oversight and Government Reform, and the Senate Committee on Homeland Security and Government Affairs, no later than 12 months after the enactment date. (Act Sec. 302)
Modified Adjusted Gross Income (MAGI) for Premium Assistance Credit Includes Exempt Social Security Income
For tax years ending after Dec. 31, 2013, there's a premium assistance tax credit under Code Sec. 36B , for eligible individuals and families who buy health insurance through an exchange. The premium assistance credit, which is refundable and payable in advance directly to the insurer, subsidizes the purchase of certain health insurance plans through an exchange. The premium assistance credit is available for individuals (single or joint filers) with household incomes between 100% and 400% of the Federal poverty level (FPL) for the family size involved who do not receive health insurance through an employer or a spouse's employer.
Household income is defined as the sum of: (1) the taxpayer's modified adjusted gross income (MAGI), plus (2) the aggregate MAGI of all other individuals taken into account in determining that taxpayer's family size (but only if those individuals must file a tax return for the tax year). Under pre-Act law, MAGI is adjusted gross income increased by: (1) any amount excluded by Code Sec. 911 (exclusion from gross income for citizens or residents living abroad), plus (2) any tax-exempt interest received or accrued during the tax year. (The Code Sec. 36B definition of MAGI is incorporated by reference for purposes of determining eligibility to participate in certain other healthcare-related programs.)
Under Code Sec. 86 , part or all of the Social Security income received by a taxpayer is excluded from income.
New law. The Act revises the Code Sec. 36B definition of MAGI to include the amount of the taxpayer's Social Security benefits that is excluded from gross income. Thus, for purposes of the premium assistance credit, MAGI is defined as adjusted gross income plus: (1) any amount excluded by Code Sec. 911(exclusion from gross income for citizens or residents living abroad); (2) any tax-exempt interest received or accrued during the tax year; and (3) the amount of Social Security benefits of the taxpayer that is excluded from gross income under Code Sec. 86 . ( Code Sec. 36B(d)(3)(B) , as amended by Act Sec. 401(a)) The revised definition is effective on the enactment date (Act Sec. 401(b)), but since the premium assistance credit won't apply until tax years ending after Dec. 31, 2013, the change applies for tax years ending after Dec. 31, 2013.


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