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Monday, January 28, 2013
IN RE: MEAD, Cite as 111 AFTR 2d 2013-XXXX, 01/04/2013
In re Larry Lill MEAD, Jr. and Helena Lynn Mead, Debtors.
Court Name: United States Bankruptcy Court, E.D. North Carolina, Wilmington Division,
Docket No.: No. 12-01222-8-JRL,
Date Decided: 01/04/2013.
United States Bankruptcy Court, E.D. North Carolina, Wilmington Division,
Judge: J. RICH LEONARD, Bankruptcy Judge.
This matter came before the court on the debtors' objection to proof of claim # 2, filed by the Internal Revenue Service. A hearing was held on the matter on December 12, 2012, in Wilmington, North Carolina. The issue in this case, a matter of first impression for this court, 1. is whether the Internal Revenue Service's filing of a proof of claim for the original amount of tax liability rather than the prepetition compromise amount violates the anti-discrimination provision of 11. U.S.C. § 525(a).
Larry and Helena Mead, the debtors, filed a voluntary petition under chapter 13 of the Bankruptcy Code on February 16, 2012. Prior to filing for bankruptcy protection, on December 28, 2010, the debtors made an offer in compromise to the Internal Revenue Service. The terms of the offer in compromise provided that the debtors would pay four thousand dollars to compromise their income tax liabilities plus any interest, penalties, additions to tax, and additional amounts required by law for the tax years of 1998 through 2009. Payment would be in four installments of one thousand dollars each. The first payment would be made one month after acceptance; the second payment would be made five months after acceptance; the third, nine months after acceptance; and the fourth would be made thirteen months after acceptance. In a letter dated October 13, 2011, the Internal Revenue Service accepted the offer in compromise. The Internal Revenue Service stated that the date of acceptance was the date on the letter. The acceptance of the offer in compromise occurred four months before the debtors filed their bankruptcy petition.
Shortly after the debtors filed for bankruptcy protection, on February 27, 2012, the Internal Revenue Service filed a proof of claim in the debtors' case. The claim included a secured claim in the amount of $21,033.15, which the Internal Revenue Service claims as a secured claim for the years of 2003 and 2004 and a general unsecured claim in the amount of $83,289.35. 2.
In their objection to the Internal Revenue Service's claim, the debtors argue that the amount of tax liability to be paid to the Internal Revenue Service in their chapter 13 plan should be $3,782.03. This amount reflects the four thousand dollar compromise less the first one thousand dollar payment which the debtors made pursuant to the compromise's terms, plus the 2010 priority claim not part of the compromise. The debtors were not in default under the terms of the compromise on the date of the filing of the bankruptcy petition. Therefore, the debtors contend, the total amount of tax liability for 1998 to 2009 must be the amount due under the compromise. To find otherwise, the debtors argue, would allow the Internal Revenue Service to disregard a prepetition compromise solely on the grounds that the taxpayers are now in bankruptcy, which would be a violation of the anti-discrimination provision of 11 U.S.C. § 525(a).
The Internal Revenue Service sees this as a case where the anti-discrimination provision is not at issue because the terms of the agreement provide for the avoidance of such a compromise when a taxpayer enters bankruptcy. Acknowledging that it accepted the debtors' offer in compromise covering the 1998 to 2009 tax years, the Internal Revenue Service argues that such compromises are voided when a taxpayer files for bankruptcy protection. Therefore, when the Internal Revenue Service filed its claim, it was not revoking a contract in a discriminatory manner, and was not triggering the anti-discrimination provision, because the contract provided that the pre-compromise amount could be claimed when the debtor entered bankruptcy.
To support this contention, the Internal Revenue Service refers to page 3, section 8 “Offer Terms” of IRS Form 656: “Offer in Compromise,” paragraph (h) which states:
The IRS will not remove the original amount of my tax debt from its records until I have met all terms and conditions of this offer. Penalty and interest will continue to accrue until all payment terms of the offer have been met. If I file bankruptcy before the terms are fully met, any claim the IRS files in the bankruptcy proceedings will be a tax claim. 3.
The Internal Revenue Service argues that this provision allows it to file a tax claim in the original amount of tax, penalty, and interest that would be due at the time of the bankruptcy filing as if no compromise had been entered. The Internal Revenue Service reaches this conclusion by reading the term “tax claim” in the above paragraph to mean the full amount owed prior to any compromise between the Internal Revenue Service and the taxpayer.
Section 7122 of the Internal Revenue Code authorizes the Secretary of the Treasury, or his delegate, to “compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense.” The Internal Revenue Manual states that the Internal Revenue Service's goal when accepting an offer in compromise is “to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the Government.” Internal Revenue Manual 18.104.22.168.3. The Internal Revenue Service's “acceptance of an offer to compromise will conclusively settle the liability of the taxpayer specified in the offer.” Treas. Reg. § 301.7122–1(e)(5). Neither party can reopen the case to determine the issue of liability except in cases where false information was supplied, the ability to pay or the assets of the taxpayer were concealed, or a mutual mistake sufficient to set aside or reform the agreement is discovered. Id.; Internal Revenue Manual 22.214.171.124. However, an accepted offer can reach a potential default status if the taxpayer fails to make timely payment of the amount due based on the terms of the offer or if the taxpayer has not adhered to the compliance provisions of the offer. Internal Revenue Manual 126.96.36.199. While the Internal Revenue Manual does not have the force of law that the Internal Revenue Code or the Treasury Regulations carry, the principles enunciated by the manual are simple contract principles.
The Bankruptcy Code prohibits governmental discrimination based solely on the fact that the debtor is in bankruptcy. The pertinent section of the Code provides:
[A] governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act [former 11 USC §§ 1 et seq.], or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.
11 U.S.C. § 525(a) (emphasis added). The legislative history evidences a congressional goal of prohibiting bankruptcy-based discrimination “that can seriously affect the debtors' livelihood or fresh start.” H.R.Rep. No. 95–595, at 367 (1977).
The question of whether the Internal Revenue Service's policy of not considering an offer in compromise made by a taxpayer already in bankruptcy violates § 525 has been addressed by several courts. The Bankruptcy Court of the Southern District of West Virginia found the policy of refusing to consider an offer in compromise submitted by a taxpayer in bankruptcy to be a violation of the anti-discrimination provision of the Bankruptcy Code. Mills v. United States (In reMills) , 240 B.R. 689 [84 AFTR 2d 99-5280] (Bankr.S.D.W.Va.1999). Finding that while the Internal Revenue Service could not be compelled to accept an offer in compromise, the court found that the refusal to even consider an offer solely because the debtor was in bankruptcy unlawfully discriminated against such debtor. Id. At 695–698. Other courts have found that the right to have an offer in compromise considered is not “a license, permit, charter, franchise, or similar grant” under § 525(a) and therefore the refusal to consider such an offer based on the fact that a taxpayer is a debtor in bankruptcy is not violative of § 525; however, these courts have directed the consideration of such offers through the court's broad equitable powers under 11 U.S.C. § 105(a). See Holmes v. United States (In re Holmes), 298 B.R. 477 [92 AFTR 2d 2003-6112] (Bankr.M.D.Ga.2003), aff'd sub nom. IRS v. Holmes, 309 B.R. 824 [93 AFTR 2d 2004-1648] (M.D.Ga.2004); Macher v. United States, 2003 WL 23169807 [92 AFTR 2d 2003-7437] (Bankr.W.D.Va. May 29, 2003)aff'd sub nom. United States v. Macher (In re Macher), 303 B.R. 798 [92 AFTR 2d 2003-7427] (W.D.Va.2003). Other courts have rejected both the § 525 and § 105 bases for compelling the consideration of an offer in compromise by a debtor. See In re Uzialko, 339 B.R. 579 [97 AFTR 2d 2006-1994] (Bankr.E.D.Pa.2006); 1900 M. Resturant Assocs., Inc., v. United States (In re 1900 M Resturant Assocs., Inc.), 319 B.R. 302 [95 AFTR 2d 2005-684] (Bankr.D.D.C.2005).
The case at hand is distinguishable on the facts from the above cases where the taxpayers were already debtors in bankruptcy at the time they made their offers in compromise to the Internal Revenue Service. In the case at hand, the debtors had made, and the Internal Revenue Service had accepted, the offer in compromise prior to the debtors filing for bankruptcy protection. Here, there was already a contractual agreement in place between the Internal Revenue Service and the debtors compromising the tax liability.
If courts have divided on the issue of whether the refusal to consider a postpetition offer in compromise violates the anti-discrimination provision of the Bankruptcy Code, the factual scenario in this case is a more persuasive instance to find unlawful discrimination by a governmental unit. Here, there was already a compromise in place and due solely to the debtors' subsequent bankruptcy filing, the Internal Revenue Service refused to honor that agreement. Although abrogation of contract rights is not explicitly listed in the prohibited discriminatory acts mentioned in § 525, the legislative history of the section makes it clear that the list is not meant to be exhaustive. H.R.Rep. No. 95–595, at 367 (1977) (“The enumeration of various forms of discrimination against former bankrupts is not intended to permit other forms of discrimination.”). Contract rights clearly come within the purview of § 525. See Exquisito Servs., Inc., v. United States (In re Exquisito Servs., Inc.), 823 F.2d 151 (5th Cir.1987) (government unit's refusal to renew food service contract due to debtor's bankruptcy was discrimination prohibited by § 525); In reSon–Shine Grading, Inc. , 27 B.R. 693 (Bankr.E.D.N.C.1983) (disqualification of debtor from bidding on government contracts solely because of debtor's status as a bankruptcy debtor violated § 525); Marine Electric Railway Prod. Div., Inc. v. New York City Transit Auth. (In re Marine Electric Railway Prod. Div., Inc.), 17 B.R. 845 (Bankr.E.D.N.Y.1982) (same);Coleman Am. Moving Servs., Inc. v. Tullos ( In reColeman Am. Moving Servs., Inc. , 8 B.R. 379 (Bankr.D.Kan.1980) (same).
The Internal Revenue Service characterizes the nature of events differently. Rather than a discriminatory revocation of an agreement, violative of § 525, the Internal Revenue Service posits that the agreement itself allowed the Internal Revenue Service to effectively modify the compromise and seek the original tax liability owed prior to the compromise. The agreement's conditions provide that if the debtors filed for bankruptcy before the terms and conditions of the compromise were completed, then the Internal Revenue Service could filed a tax claim in the bankruptcy proceeding. The Internal Revenue Service argues that “tax claim” read in conjunction with the rest of the conditions means the initial, pre-compromise tax liability. This court notes that “tax claim” could just as easily mean tax claim in the amount of what is owed under the compromise. If the Internal Revenue Service intended tax claim to mean tax claim in the amount of the original tax liability, the chosen language did not explicitly say so. Throughout the agreement the following terms are used: “the full amount of liability under this offer,” “the original amount of the liabilities,” and “the amount of liability.” Certainly the Internal Revenue Service had the vocabulary to state the condition with more clarity and precision.
The Internal Revenue Service concedes that the provision is ambiguous as it is uncertain and capable of multiple interpretations. When a court is called upon to interpret contract terms, general contract principles dictate that the contract should be interpreted in a way that avoids an illegal result. Huttenstine v. Mast, 537 F.Supp.2d 795, 801 (E.D.N.C.2008). An agreement which violates federal law is illegal and void.
Here, if the court was to credit the Internal Revenue Service's interpretation of the condition, the contract would run afoul of federal law. If tax claim meant pre-compromise amount then the condition that allowed the Internal Revenue Service to disregard the compromise and attempt to collect the entire amount simply because a taxpayer was now a debtor in a bankruptcy proceeding is itself a violation of the anti-discrimination provisions of § 525. This contract term allows the Internal Revenue Service to treat a debtor differently from a non-debtor taxpayer simply because the debtor is in bankruptcy. Given the option of either interpreting the contract terms to violate 11 U.S.C. § .525 or to conform with federal law, the choice is clear. The condition which provides that the Internal Revenue Service can file a tax claim in the event that the taxpayer files bankruptcy means that the Internal Revenue Service can file a tax claim in the amount owed under the compromise, not the original pre-compromise amount.
Congress intended to prohibit discrimination against a debtor in bankruptcy when the discrimination is based solely on the debtor's bankruptcy filing. Here, the Internal Revenue Service has promoted a contract interpretation where the treatment of a taxpayer's vested contract rights under a compromise differ depending solely on whether the taxpayer subsequently files for bankruptcy. If the taxpayer stays out of bankruptcy, the Internal Revenue Service can only collect the amount of the compromise. However, if the taxpayer enters bankruptcy after a compromise, the Internal Revenue Service can file a claim for the pre-compromise amount. This is a clear example of governmental discrimination against a person based solely on the fact that he is a debtor in bankruptcy. This court finds that this interpretation of the compromise agreement violates 11 U.S.C. § 525(a).
The logical interpretation, which would not render the contract void and illegal, is that if the taxpayer enters bankruptcy after the compromise has been entered but before all of the terms of the contract have been satisfied, i.e., the compromise has not yet been paid off, the Internal Revenue Service can file a proof of claim in the bankruptcy proceeding for the unpaid amount of the compromise. Accordingly, the debtors' objection to claim is GRANTED.
IT IS SO ORDERED.
In fact, the court has been unable to find any case that addresses the exact issue presented here.
The claim also included an unsecured priority claim in the amount of $20,136.23 based on the tax periods of 2010 and 2011. In their objection to the claim, the debtors stated that they have filed their federal 1040 tax return for 2011 and with $0.00 due for the 2011 tax year, the unsecured priority claim should be reduced to $782.03, the amount due for 2010. The Internal Revenue Service has received the 2011 return and will amend its claim to show no tax is owed for that year.
The debtors used form 656 (rev. March 2009). The language relied on by the Internal Revenue Service appears on the debtors' form 656 on page 2, section V, paragraph (i).
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Posted by www.irstaxattorney.com at 10:58 AM
Friday, January 25, 2013
In evaluating potential fraudulent transfers more generally, consideration may be given, among other factors, to any or all of the following:
((1)) Whether the transfer or obligation was to an insider.
((2)) Whether the debtor retained possession or control of the property transferred after the transfer.
((3)) Whether the transfer or obligation was disclosed or concealed.
((4)) Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.
((5)) Whether the transfer was of substantially all the debtor's assets.
((6)) Whether the debtor absconded.
((7)) Whether the debtor removed or concealed assets.
((8)) Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.
((9)) Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.
((10)) Whether the transfer occurred shortly before or shortly after a substantial debt was incurred.
((11)) Whether the debtor transferred the essential assets of the business to a lienholder who transferred the assets to an insider of the debtor.
ACACIA CORP MANAGEMENT, LLC v. U.S., Cite as 111 AFTR 2d 2013-XXXX, 01/04/2013
ACACIA CORPORATE MANAGEMENT, LLC, Michael Ioane, Plaintiffs, v. UNITED STATES, et al., Defendants.
Court Name: United States District Court, E.D. California,
Docket No.: No. CIV F-07-1129 AWI GSA,
Date Decided: 01/04/2013.
United States District Court, E.D. California,
ORDER RE: MOTION FOR SUMMARY JUDGMENT
Judge: ANTHONY W. ISHII, District Judge.
Vincent Steven and Louise Q. Booth (“Booths”) are a married couple who file joint tax returns. The Booths owned three parcels of property (the “Subject Properties”) in Bakersfield, CA. The Booths met Plaintiff Michael Scott Ioane (“Ioane”) and began taking his advice on how to reduce/evade their income tax liabilities. In 1996, the Booths transferred ownership of the Subject Properties to the Alpha Omega Trust and the Aligned Enterprises Trust; in 2002, they transferred ownership of the Subject Properties to the Bakersfield Properties and Trust Company (all three entities collectively the “Booth Trusts”). The beneficiaries of the Booth Trusts are the Booths' children.
In 1999, Defendant United States (“United States”) made tax assessments against the Booths for deficiencies in the tax years 1995–1997. The United States filed a tax lien in Kern County against the Booths (“2000 Tax Lien”). On December 5, 2005, the Booth Trusts transferred ownership of the Subject Properties to Plaintiff Acacia Corporate Management, LLC (“Acacia”) and Ioane, in an alleged attempt to put it out of the reach of the United States. On December 22, 2005, the United States filed a tax lien on the Subject Properties specifically (“2005 Tax Lien”) on the basis that Ioane and Acacia (collectively “Ioane Group”) are nominees/alter egos of the Booths.
On August 3, 2007, the Ioane Group filed this suit against the United States, the Booths, and the Booth Trusts, seeking to quiet title to the Subject Properties. Doc. 1. The Ioane Group then reached a “Quiet Title Pursuant to Binding Stipulated Settlement and Agreement Between the Parties Herein” (“Stipulated Settlement”), which the court approved. Doc. 10. In the Stipulated Settlement, the Ioane Group and the Booths agreed that the Subject Properties belonged to the Ioane Group and that the Subject Properties were not subject to any government liens at the time they were transferred. The United States was not a party to the Stipulated Settlement. The Ioane Group made a motion for final judgment based on the Stipulated Settlement; it was denied. Doc. 64. The Ioane Group then voluntarily dismissed all claims against the Booths and the Booth Trusts. Doc. 66. The only remaining parties in the case are the Ioane Group (plaintiffs) and the United States (defendant). This case was stayed pending related criminal proceedings.
On April 9, 2009, a grand jury in Sacramento indicted the Booths and Ioane on various criminal charges related to tax evasion (Criminal Case No. 09–0142 LJO). In the criminal case, the Booths reached a plea bargain with the United States: Steven Booth plead guilty to one count of conspiracy to defraud the United States, all other charges against him and Louise Booth were dismissed. The Booths cooperated with the United States's criminal prosecution of Ioane; Steven Booth testified against Ioane at his trial. On October 3, 2011, a jury found Ioane guilty of conspiracy to defraud the United States and presenting fictitious obligations intended to defraud on October 3, 2011. The stay in the present case was lifted on January 11, 2012. Doc. 129. Ioane has appealed the conviction, and the Ninth Circuit has indicated that there is “a “substantial question” of law or fact that is “fairly debatable,” and that “if that substantial question is determined favorably to defendant on appeal, that decision is likely to result in reversal or an order for a new trial of all counts on which imprisonment has been imposed.” “The appeal is ongoing. The present case is only one of several civil suits dealing with the event surrounding the Booths' tax evasion and alleged attempts to shield the Subject Properties from the United States's reach. Civ. Case Nos. 07–0620, 09–1689, and 12–0171. A motion to consolidate these cases was denied. Doc. 140.
The court ruled that the Stipulated Settlement was ineffective against the United States. Doc. 148. The Ioane Group made a motion to clarify, asking the court to specify the effect of the prior ruling. Doc. 149. The United States opposes the motion. Doc. 151. The Ioane Group then made a motion for summary judgment. Doc. 155. The United States opposes the motion, in part by seeking to dismiss the case for failing to join necessary parties. Doc. 160. Instead of filing a timely reply, the Ioane Group made a motion to stay the case. Doc. 162. Magistrate Judge Austin denied the motion. Doc. 170. The Ioane Group filed a late reply, in part to respond to the United States's request for dismissal. Doc. 167. The United States's request for dismissal was not noticed and does not comply with Local Rule 230. The court will not entertain the United States's improper motion. The Ioane Group's reply will not be considered.
II. Legal Standards
Summary judgment is appropriate when it is demonstrated that there exists no genuine issue as to any material fact, and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970); Fortyune v. American Multi–Cinema, Inc., 364 F.3d 1075, 1080 (9th Cir.2004). The party seeking summary judgment bears the initial burden of informing the court of the basis for its motion and of identifying the portions of the declarations (if any), pleadings, and discovery that demonstrate an absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Soremekun v. Thrifty Payless, Inc., 509 F.3d 978, 984 (9th Cir.2007). A fact is “material” if it might affect the outcome of the suit under the governing law. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248–49 (1986); Thrifty Oil Co. v. Bank of America Nat'l Trust & Savings Assn, 322 F.3d 1039, 1046 (9th Cir.2002). A dispute is “genuine” as to a material fact if there is sufficient evidence for a reasonable jury to return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Long v. County of Los Angeles, 442 F.3d 1178, 1185 (9th Cir.2006).
Where the moving party will have the burden of proof on an issue at trial, the movant must affirmatively demonstrate that no reasonable trier of fact could find other than for the movant.Soremekun v. Thrifty Payless, Inc. , 509 F.3d 978, 984 (9th Cir.2007). Where the nonmoving party will have the burden of proof on an issue at trial, the movant may prevail by presenting evidence that negates an essential element of the non-moving party's claim or by merely pointing out that there is an absence of evidence to support an essential element of the non-moving party's claim. See James River Ins. Co. v. Schenk, P.C., 519 F.3d 917, 925 (9th Cir.2008). If a moving party fails to carry its burden of production, then “the non-moving party has no obligation to produce anything, even if the non-moving party would have the ultimate burden of persuasion.” Nissan Fire & Marine Ins. Co. v. Fritz Companies, 210 F.3d 1099, 1102–03 (9th Cir.2000). If the moving party meets its initial burden, the burden then shifts to the opposing party to establish that a genuine issue as to any material fact actually exists. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). The opposing party cannot ““rest upon the mere allegations or denials of [its] pleading” but must instead produce evidence that “sets forth specific facts showing that there is a genuine issue for trial.””Estate of Tucker v. Interscope Records , 515 F.3d 1019, 1030 (9th Cir.2008).
The evidence of the opposing party is to be believed, and all reasonable inferences that may be drawn from the facts placed before the court must be drawn in favor of the opposing party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986); Stegall v. Citadel Broad, Inc., 350 F.3d 1061, 1065 (9th Cir.2003). Nevertheless, inferences are not drawn out of the air, and it is the opposing party's obligation to produce a factual predicate from which the inference may be drawn. See Juell v. Forest Pharms., Inc., 456 F.Supp.2d 1141, 1149 (E.D.Cal.2006); UMG Recordings, Inc. v. Sinnott, 300 F.Supp.2d 993, 997 (E.D.Cal.2004). “A genuine issue of material fact does not spring into being simply because a litigant claims that one exists or promises to produce admissible evidence at trial.” Del Carmen Guadalupe v.. Agosto, 299 F.3d 15, 23 (1st Cir.2002); seeGalen v. County of Los Angeles , 477 F.3d 652, 658 (9th Cir.2007); Bryant v. Adventist Health System/West, 289 F.3d 1162, 1167 (9th Cir.2002). Further, a “motion for summary judgment may not be defeated ... by evidence that is “merely colorable” or “is not significantly probative.” “Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249–50 (1986);Hardage v. CBS Broad. Inc. , 427 F.3d 1177, 1183 (9th Cir.2006). Additionally, the court has the discretion in appropriate circumstances to consider materials that are not properly brought to its attention, but the court is not required to examine the entire file for evidence establishing a genuine issue of material fact where the evidence is not set forth in the opposing papers with adequate references. See Southern Cal. Gas Co. v. City of Santa Ana, 336 F.3d 885, 889 (9th Cir.2003). If the non-moving party fails to produce evidence sufficient to create a genuine issue of material fact, the moving party is entitled to summary judgment. See Nissan Fire & Marine Ins. Co. v. Fritz Companies, 210 F.3d 1099, 1103 (9th Cir.2000).
III. Statement of Material Facts
1. On December 5, 2005 Acacia Corporate Management Purchased three parcels of real property from Bakersfield Properties and Trust Company for $900,000.
2. In 1996 Dr. Vincent Booth and Louise Booth transferred their interest in the subject properties to Alpha Omega Trust and Aligned Enterprises Trust. In 2000 they removed themselves as trustees of the Trust and appointed third parties. In 2002 all 2000 transfers were recorded with the Bakersfield County Recorder.
3. There were no IRS tax liens on the 3 parcels of land by the United States on December 5, 2005.
4. Dr. Vincent Steven Booth and Louise Booth had no interest in Bakersfield Properties and Trust Company.
5. The beneficiaries of the Bakersfield Properties and Trust Company are the minor children of the Booths: Matthew Booth, Samuel Booth, Grace Booth, and William Booth.
6. Acacia Corporate Management LLC is a Nevada LLC and the Booths have no interest in it. The Booths paid rent of $2,000 a month for their personal residence.
7. In 2007 the Booths entered into a court approved Stipulation with Plaintiffs to Quiet Title. No objection was made until 5 years later by United States when they moved for reconsideration. Their motion was denied.
Magistrate Judge Austin stated that “The only claim properly before the Court is a quiet title action, concerning whether the United States' federal tax liens against [the Booths] attach to [the Subject Properties]. Plaintiffs contend that both Michael Ioane and Acacia LLC have an ownership interest in the subject properties and that neither Acacia LLC nor Ioane is the alter-ego/nominee of the Booths....Plaintiffs further contend that the Booths have no beneficial interest in the subject properties and that no fraudulent transfer of the subject properties occurred....The United States further contends that the Booths are the beneficial owners of the subject properties and that [Acacia] holds only bare legal title to the subject properties. Acacia LLC is a nominee, alter-ego, and/or fraudulent transferee of the Booths.” Doc. 68, Scheduling Order, 2:9–24. The court finds this to be a fair summation of all the live issues in this case.
A. Stipulated Settlement
The Ioane Group seeks to use the Stipulated Settlement to establish their ownership in the Properties. In the prior order, the court stated, “The Stipulated Settlement was not given full effect since the Ioane Group voluntarily dismissed the Booths from the case without obtaining a final judgment against them....Notwithstanding the fact that the court approved the Stipulated Settlement, it was not given effect in this case because the Ioane Group abandoned its claims against the Booths. In that sense, there is no binding order to be reconsidered. To clarify, the Stipulated Settlement is ineffective and certainly does not bind the United States in any way.” Doc. 148, July 17, 2012 Order, 3:22–23 and 4:8–11. The Ioane Group now argues that “The Booth defendants herein have already entered into a Stipulated Agreement which was approved by the Court in 2007, quieting the title, which is now the law of the case.” Doc. 155, Brief, 4:17–20. That assertion is completely incorrect as the plain language of the July 17, 2012 Order clearly indicates. The Ioane Group cites to three cases for the proposition that settlement agreements are binding upon the parties, but the opinions reference final judgments and inapplicable California rules of civil procedure. SeeIorio v. Allianz Life Ins. Co. of N. Am., Inc. , 2011 U.S. Dist. LEXIS 21824, 2 (S.D.Cal. Mar. 3, 2011) (“final order” approving class action settlement);Connecticut Gen. Life Ins. Co., Litig. v. Connecticut , 1997 U.S. Dist. LEXIS 23955, 3 (C.D.Cal. Feb. 11, 1997) (“Final Order and Judgment” approving class action settlement); In re Marriage of Assemi, 7 Cal.4th 896, 905 (Cal.1994) (discussing Cal.Code Civ. Proc. § 664.6). The Ioane Group also asserts that “judicial decrees disposing of issues in active litigation cannot be treated as idle ceremonies without denigrating the judicial process” without noting that the opinion from which this language is drawn from included the critical caveat that “absent the evidence of collusion, judicial decrees disposing of issues ...” Wallace Clark & Co. v. Acheson Industries, Inc., 532 F.2d 846, 849 (2nd Cir.1976). As stated before, this court explicitly denied the Ioane Group's Fed. Rule Civ. Proc. 54(b) motion for final judgment under against the Booths based on the Stipulated Settlement. Doc. 64. Instead of completing the litigation on this issue, the Ioane Group then dismissed its claims against the Booths without prejudice. Doc. 66. The Booths have stated that agreeing to the Stipulated Settlement was part of their scheme to shield the Subject Properties from the IRS. The sequence of events in the case is consonant with this admission. Under these circumstances, the Stipulated Settlement has no effect.
B. Tax Liens
The Ioane Group asserts that “[Acacia] purchased three pieces of Property from Bakersfield Properties and Trust Company, on December 5, 2005. At [that] time there were no liens on the property by the IRS.” Doc. 155, Brief, 2:8–11. The United States disagrees, referring to the 2000 Tax Lien. Doc. 160, Opposition, 6:2–9 and 13:6–10. The United States filed a “Notice of Federal Tax Lien” with the County Recorder of Kern County, against the Booths for the amount of $1,855,733.72 on March 15, 2000, specifying that the lien applied to “all property and rights to property belonging to this taxpayer.” Doc. 160, Part 7, Ex. 6. Title 26 U.S.C. § 6321 does state that a federal tax lien applies to “all property and rights to property, whether real or personal, belonging to such person.” The Booths transferred the Subject Properties to the Booth Trusts in 1996. The United States asserts that the 2000 Tax Lien attached to the Subject Properties as the Booth Trusts were sham trusts. Doc. 160, Opposition, 12:3–12. The United States does not raise the issue of the 2005 Tax Lien.
C. Fraudulent Transfer
The United States argues the 1996 transfer of the Subject Properties from the Booths to the Booth Trusts were fraudulent. “A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows: (1) With actual intent to hinder, delay, or defraud any creditor of the debtor.” Cal. Civ.Code § 3439.04(a).
The Ninth Circuit has specifically held that “a debtor's admission, through guilty pleas and a plea agreement admissible under the Federal Rules of Evidence, that he operated a Ponzi scheme with the actual intent to defraud his creditors conclusively establishes the debtor's fraudulent intent under ... California Civil Code § 3439.04(a)(1), and precludes relitigation of that issue.” Santa Barbara Capital Mgmt. v. Neilson, 525 F.3d 805, 814 (9th Cir.2008) (criminal plea agreement admissible to establish intent to defraud in bankruptcy proceeding). In the criminal case, Steven Booth plead guilty on July 30, 2010 to one count of conspiracy to defraud the United States, 18 U.S.C. § 371. Crim. Case. No. 09–0142 LJO, Doc. 78. He specifically plead guilty to conspiring “to defraud the United States and the agency thereof by willfully attempting to evade or defeat any income tax or the payment thereof due in payable to the internal revenue service.” Crim. Case. No. 09–0142 LJO, Doc. 80, Transcript, 8:20–23. Steven Booth also provided a declaration that states he and his wife transferred the Subject Properties to the Booth Trusts in 1996 for “no consideration” with design to “distance the property from any collection efforts by the Internal Revenue Service.” Doc. 160, Part 2, Ex. 1, April 27, 2012 Steven Booth Declaration, 2:19–3:26.
These representations are at odds with the Booths' representation in the Stipulated Settlement and the Ioane Group argues that “Steven Booth feared that the United States would somehow be able to throw his wife Louise Booth in jail and so he made an agreement with the United States where he agreed to essentially say anything they want if he and his wife could avoid going to jail, true or not he was saying whatever the United States wanted.” Doc. 167, Reply, 6:11–16. “A conclusory, self-serving affidavit, lacking detailed facts and any supporting evidence, is insufficient to create a genuine issue of material fact.” FTC v. Publ'g Clearing House, Inc., 104 F.3d 1168, 1171 (9th Cir.1997), citations omitted. In this case, Steven Booth's evidence is not just a simple affidavit but a guilty plea to a criminal charge plus detailed testimony at Ioane's trial. See, e.g., Doc. 160, Part 3, Ex. 2, Transcript, 109:9–21. Further, his statements are not the only evidence that raises material questions of fact in this case.
Cal. Civ.Code § 3439.04(b). As stated above, Steven Booth asserts the transfers to the Booth Trusts were for “no consideration,” which speaks to factor eight. Doc. 160, Part 2, Ex. 1, April 27, 2012 Steven Booth Declaration, 2:19–3:26. The Booths failed to pay their income taxes starting in 1996 (for tax year 1995). The transfers took place in 1996, which implicates factor ten. At the time of the transfer, the Booths were the trustees of the Booth Trusts, which is relevant for factors one and two. Doc. 160, Part 2, Ex. 1, April 27, 2012 Steven Booth Declaration, 2:19–3:26. This evidence is sufficient to defeat the Ioane Group's motion for summary judgment by raising the possibility that the transfer of the Subject Properties to the Booth Trusts in 1996 were fraudulent, which would mean the 2000 Tax Lien attaches.
The Ioane Group's motion for summary judgment is DENIED.
IT IS SO ORDERED.
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Posted by www.irstaxattorney.com at 9:34 AM
Friday, January 18, 2013
Treasury Advances Efforts to Secure International Participation, Streamline Compliance, and Prepare for Implementation of the Foreign Account Tax Compliance Act
WASHINGTON – The U.S. Department of the Treasury and the Internal Revenue Service (IRS) today issued comprehensive final regulations implementing the information reporting and withholding tax provisions commonly known as the Foreign Account Tax Compliance Act (FATCA). Enacted by Congress in 2010, these provisions target non-compliance by U.S. taxpayers using foreign accounts. The issuance of the final regulations marks a key step in establishing a common intergovernmental approach to combating tax evasion.
These regulations provide additional certainty for financial institutions and government counterparts by finalizing the step-by-step process for U.S. account identification, information reporting, and withholding requirements for foreign financial institutions (FFIs), other foreign entities, and U.S. withholding agents.
"These regulations give the Administration a powerful set of tools to combat offshore tax evasion effectively and efficiently," said Deputy Secretary Neal Wolin. "The final rules mark a critical milestone in international cooperation on these issues, and they provide important clarity for foreign and U.S. financial institutions."
The final regulations issued today:
- Build on intergovernmental agreements that foster international cooperation. The Treasury Department has collaborated with foreign governments to develop and sign intergovernmental agreements that facilitate the effective and efficient implementation of FATCA by eliminating legal barriers to participation, reducing administrative burdens, and ensuring the participation of all non-exempt financial institutions in a partner jurisdiction. In order to reduce administrative burdens for financial institutions with operations in multiple jurisdictions, the final regulations coordinate the obligations for financial institutions under the regulations and the intergovernmental agreements.
- Phase in the timelines for due diligence, reporting and withholding and align them with the intergovernmental agreements. The final regulations phase in over an extended transition period to provide sufficient time for financial institutions to develop necessary systems. In addition, to avoid confusion and unnecessary duplicative procedures, the final regulations align the regulatory timelines with the timelines prescribed in the intergovernmental agreements.
- Expand and clarify the scope of payments not subject to withholding. To limit market disruption, reduce administrative burdens, and establish certainty, the final regulations provide relief from withholding with respect to certain grandfathered obligations and certain payments made by non-financial entities.
- Refine and clarify the treatment of investment entities. To better align the obligations under FATCA with the risks posed by certain entities, the final regulations: (1) expand and clarify the treatment of certain categories of low-risk institutions, such as governmental entities and retirement funds; (2) provide that certain investment entities may be subject to being reported on by the FFIs with which they hold accounts rather than being required to register as FFIs and report to the IRS; and (3) clarify the types of passive investment entities that must be identified and reported by financial institutions.
- Clarify the compliance and verification obligations of FFIs. The final regulations provide more streamlined registration and compliance procedures for groups of financial institutions, including commonly managed investment funds, and provide additional detail regarding FFIs’ obligations to verify their compliance under FATCA.
Progress on International Coordination, Including Model Intergovernmental Agreements
Since the proposed regulations were published on February 15, 2012, Treasury has collaborated with foreign governments to develop two alternative model intergovernmental agreements that facilitate the effective and efficient implementation of FATCA.
These models serve as the basis for concluding bilateral agreements with interested jurisdictions and help implement the law in a manner that removes domestic legal impediments to compliance, secures wide-spread participation by every non-exempt financial institution in the partner jurisdiction, fulfills FATCA’s policy objectives, and further reduces burdens on FFIs located in partner jurisdictions. Seven countries have already signed or initialed these agreements.
Today, Treasury announced for the first time that Norway has joined the United Kingdom, Mexico, Denmark, Ireland, Switzerland, and Spain as countries that have signed or initialed model agreements. Treasury is engaged with more than 50 countries and jurisdictions to curtail offshore tax evasion, and more signed agreements are expected to follow in the near future.
Additional Background on the Model Agreements
On July 26, 2012, Treasury published its first model intergovernmental agreement (Model 1 IGA). Instead of reporting to the IRS directly, FFIs in jurisdictions that have signed Model 1 IGAs report the information about U.S. accounts required by FACTA to their respective governments who then exchange this information with the IRS.
Treasury also developed a second model intergovernmental agreement (Model 2 IGA) published on November 14, 2012. A partner jurisdiction signing an agreement based on the Model 2 IGA agrees to direct its FFIs to register with the IRS and report the information about U.S. accounts required by FATCA directly to the IRS.
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Tax-Free Transfers to Charity Renewed For IRA Owners 70½ or Older; Rollovers This Month Can Still Count For 2012
IR-2013-6, Jan. 16, 2013
WASHINGTON — Certain owners of individual retirement arrangements
(IRAs) have a limited time to make tax-free transfers to eligible charities and
have them count for tax-year 2012, the Internal Revenue Service said today.
IRA owners age 70½ or older have until Thursday, Jan. 31, to make
a direct transfer, or alternatively, if they received IRA distributions during
December 2012, to contribute, in cash, part or all of the amounts received to
an eligible charity.
The American Taxpayer Relief Act of 2012, enacted Jan. 2, extended
for 2012 and 2013 the provision authorizing qualified charitable distributions
(QCDs) — otherwise taxable distributions from an IRA owned by someone, 70½ or
older, paid directly to an eligible charitable organization. Each year, the IRA
owner can exclude from gross income up to $100,000 of these QCDs. First
available in 2006, this provision had expired at the end of 2011.
The QCD option is available regardless of whether an eligible IRA
owner itemizes deductions onSchedule A. Transferred amounts are not
taxable and no deduction is available for the transfer. QCDs are counted in
determining whether the IRA owner has met his or her IRA required minimum distributions
for the year.
For tax year 2012 only, IRA owners can choose to report QCDs made
in January 2013 as if they occurred in 2012. In addition, IRA owners who
received IRA distributions during December 2012 can contribute, in cash, part
or all of the amounts distributed to eligible charities during January 2013 and
have them count as 2012 QCDs.
QCDs are reported on Form 1040 Line 15. The full amount of the
QCD is shown on Line 15a. Do not enter any of these amounts on Line 15b but
write “QCD” next to that line. Details are on IRS.gov.
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Thursday, January 17, 2013
Wednesday, January 16, 2013
Rev. Proc. 2013-13, 2013-6 IRB, 01/15/2013, IRC Sec(s).
This revenue procedure provides an optional safe harbor method that individual taxpayers may use to determine the amount of deductible expenses attributable to certain business use of a residence during the taxable year. This safe harbor method is an alternative to the calculation, allocation, and substantiation of actual expenses for purposes of satisfying the requirements of § 280A of the Internal Revenue Code. This revenue procedure is effective for taxable years beginning on or after January 1, 2013.
.01 Section 280A(a) generally disallows any deduction for expenses related to a dwelling unit that is used as a residence by the taxpayer during the taxable year. However, § 280A(c)(1) through (4) allow a deduction for expenses related to certain business or rental use of a dwelling unit, subject to the deduction limitation in § 280A(c)(5). .02 Section 280A(c)(1) permits a taxpayer to deduct expenses that are allocable to a portion of the dwelling unit that is exclusively used on a regular basis (A) as the taxpayer's principal place of business for any trade or business, (B) as a place to meet with the taxpayer's patients, clients, or customers in the normal course of the taxpayer's trade or business, or (C) in the case of a separate structure that is not attached to the dwelling unit, in connection with the taxpayer's trade or business. .03 Section 280A(c)(2) permits a taxpayer to deduct expenses that are allocable to space within the dwelling unit used on a regular basis for the storage of inventory or product samples held for use in the taxpayer's trade or business of selling products at retail or wholesale, if the dwelling unit is the sole fixed location of the trade or business. .04 Section 280A(c)(3) permits a taxpayer to deduct expenses that are attributable to the rental of the dwelling unit or a portion of the dwelling unit. .05 Section 280A(c)(4) permits a taxpayer to deduct expenses that are allocable to the portion of the dwelling unit used on a regular basis in the taxpayer's trade or business of providing day care for children, for individuals who have attained age 65, or for individuals who are physically or mentally incapable of caring for themselves. .06 Section 280A(c)(5) limits the deductibility of expenses that relate to a use of a dwelling unit described in § 280A(c)(1) through (4) to the gross income derived from that use for the taxable year reduced by (1) the deductions allocable to the use that are allowable for the taxable year whether or not the unit is used as described in § 280A(c)(1) through (4) (for example, deductions for qualified residence interest, property taxes, and casualty losses); and (2) the allowable trade or business expenses that are not allocable to the use of the dwelling unit for the taxable year (for example, advertising, wages, and supplies). .07 The Internal Revenue Service (Service) and the Treasury Department recognize that the calculation, allocation, and substantiation of allowable deductions attributable to the use of a portion of the taxpayer's residence for business purposes can be complex and burdensome for small business owners. Accordingly, the Service and the Treasury Department are providing this optional safe harbor method to reduce the administrative, recordkeeping, and compliance burdens of determining the allowable deduction for certain business use of a residence under § 280A. Under this safe harbor method, taxpayers determine their allowable deduction for business use of a residence by multiplying a prescribed rate by the square footage of the portion of the taxpayer's residence that is used for business purposes.
3. Scope And Definitions
.01 In general. This revenue procedure applies to a taxpayer who is an individual and who elects the safe harbor method provided by this revenue procedure to determine the deduction allowable under § 280A for the taxpayer's qualified business use of a home for the taxable year. .02 Qualified business use. For purposes of this revenue procedure, “ qualified business use” means (1) business use that satisfies the requirements of § 280A(c)(1), (2) business storage use that satisfies the requirements of § 280A(c)(2), or (3) day care services use that satisfies the requirements of § 280A(c)(4). .03 Home. For purposes of this revenue procedure, “ home” means a dwelling unit used by the taxpayer during the taxable year as a residence, as defined in § § 280A(d) and (f)(1), including a dwelling unit leased by a taxpayer. However, only a dwelling unit that is § 1250 property (generally depreciable real property) and MACRS property (generally defined in § 1.168(b)-1(a)(2) as tangible, depreciable property subject to § 168 that is placed in service after December 31, 1986) qualifies as a home for purposes of this revenue procedure.
.01 Computation of the safe harbor amount.
(1) A taxpayer determines the amount of deductible expenses for a qualified business use of the home for the taxable year under the safe harbor method by multiplying the allowable square footage by the prescribed rate.
(2) The allowable square footage is the portion of a home used in a qualified business use of the home, but not to exceed 300 square feet.
(3) The prescribed rate is $5.00. The Service and the Treasury Department may update this rate from time to time as warranted.
(4) This safe harbor method is an alternative to the calculation and allocation of actual expenses otherwise required by § 280A. Accordingly, except as provided in section 4.04 of this revenue procedure, a taxpayer electing the safe harbor method for a taxable year cannot deduct any actual expenses related to the qualified business use of that home for that taxable year. .02 Reimbursement or other expense allowance arrangement. The safe harbor method provided by this revenue procedure does not apply to an employee with a home office if the employee receives advances, allowances, or reimbursements for expenses related to the qualified business use of the employee's home under a reimbursement or other expense allowance arrangement (as defined in § 1.62-2) with his or her employer. .03 Year-by-year determination. A taxpayer may elect from taxable year to taxable year whether to use the safe harbor method or to calculate and substantiate actual expenses for purposes of § 280A. A taxpayer elects the safe harbor method by using the method to compute the deduction for the qualified business use of a home on his or her timely filed, original federal income tax return for the taxable year. An election for any taxable year, once made, is irrevocable. A change from using the safe harbor method in one year to actual expenses in a succeeding taxable year, or vice-versa, is not a change in method of accounting and does not require the consent of the Commissioner. .04 Otherwise allowable deductions related to the home. A taxpayer who itemizes deductions and uses the safe harbor method for a taxable year may deduct, to the extent allowed by the Code and regulations, any expense related to the home that is deductible without regard to whether there is a qualified business use of the home for that taxable year (for example, deductions for qualified residence interest, property taxes, and casualty losses). Taxpayers using the safe harbor method deduct these expenses as itemized deductions on Form 1040, Schedule A, and cannot deduct any portion of these expenses from the gross income derived from the qualified business use of the home, either for purposes of determining the net income derived from the business or for purposes of determining the gross income limitation provided in section 4.08(2) of this revenue procedure. However, taxpayers with a qualified business use of a home who also have a rental use of the same home under § 280A(c)(3) must allocate a portion of the expenses described in this section 4.04 to the rental use to the extent required under § 280A and any regulations thereunder. .05 Business deductions unrelated to qualified business use of a home. A taxpayer using the safe harbor method for a taxable year may deduct, to the extent allowed by the Code and regulations, any trade or business expenses unrelated to the qualified business use of the home for that taxable year (for example, expenses for advertising, wages, and supplies). .06 Depreciation for a taxable year in which the safe harbor method is used. A taxpayer using the safe harbor method for a taxable year cannot deduct any depreciation (including any additional first-year depreciation) or § 179 expense for the portion of the home that is used in a qualified business use of the home for that taxable year. The depreciation deduction allowable for that portion of the home for that taxable year is deemed to be zero. .07 Depreciation for a subsequent taxable year in which actual expenses are used.
(1) Use of optional depreciation table. If a taxpayer uses the safe harbor method for a taxable year and calculates and substantiates actual expenses for purposes of § 280A for any subsequent taxable year, the taxpayer must calculate the depreciation deduction allowable in the subsequent year for the portion of the home that is used in a qualified business use of the home by using the appropriate optional depreciation table applicable for the property, regardless of whether the taxpayer used an optional depreciation table for the property in its placed-in-service year. The optional depreciation tables for MACRS property are provided in the annual IRS Publication 946, How To Depreciate Property. For purposes of this section 4.07, the appropriate optional depreciation table is based on the depreciation system, depreciation method, recovery period, and convention applicable to the § 1250 property in its placed-in-service year.
(2) Computation of the depreciation deduction allowable. A taxpayer described in section 4.07(1) of this revenue procedure computes the allowable depreciation deduction for a subsequent year by multiplying the remaining adjusted depreciable basis (as determined under § 1.168(k)-1(d)(2)(i)) allocable to the portion of the home used in a qualified business use by the annual depreciation rate for the applicable year specified in the appropriate optional depreciation table. Furthermore, the applicable year is the year that corresponds with the current taxable year based on the placed-in-service year of the property. .08 Limitations.
(1) Taxpayers using this safe harbor method to compute their deduction must continue to satisfy all requirements of § 280A for determining their eligibility to claim a deduction. For example, a taxpayer may claim a deduction for a business use described in § 280A(c)(1) for a portion of a residence only if that portion is exclusively used on a regular basis for business purposes. As a further example, a taxpayer who is an employee may deduct expenses attributable to a business use of a residence described in § 280A(c)(1) only if that use is for the convenience of the taxpayer's employer.
(2) The amount of the deduction computed using the safe harbor method provided by this revenue procedure cannot exceed the gross income derived from the qualified business use of the home for the taxable year reduced by the business deductions described in section 4.05 of this revenue procedure (deductions unrelated to the qualified business use of a home). Any amount in excess of this gross income limitation is disallowed and may not be carried over and claimed as a deduction in any other taxable year.
(3) A taxpayer who uses the safe harbor method provided by this revenue procedure for a taxable year may not deduct in that taxable year any disallowed amount carried over from a prior taxable year during which the taxpayer calculated and substantiated actual expenses for purposes of § 280A. A taxpayer who calculated and substantiated actual expenses for purposes of § 280A in a prior taxable year and whose deduction was limited by the gross income limitation in § 280A(c)(5) may deduct the disallowed amount, subject to all other applicable restrictions, in the next succeeding taxable year in which the taxpayer calculates and substantiates actual expenses for purposes of § 280A.
(4) For purposes of determining the allowable square footage under section 4.01(2) of this revenue procedure, a taxpayer with a qualified business use of a home for a portion of the taxable year (for example, a seasonal business or a business that begins during the taxable year), or a taxpayer who changes the square footage for a qualified business use of a home during the taxable year (for example, an increase or decrease in the square footage), must determine the average of the monthly allowable square footage for the taxable year. In determining the average monthly allowable square footage, no more than 300 square feet may be taken into account for any one month, and a taxpayer shall only be treated as having a qualified business use of a home in a month in which the taxpayer had 15 or more days of a qualified business use of the home. For example, a taxpayer who files federal income tax returns on a calendar year basis, begins using 400 square feet of his or her home for a qualified business use on July 20, and continues that use until the end of the taxable year, has an average monthly allowable square footage of 125 square feet (300 square feet for each month August through December divided by the number of months in the taxable year ((300 + 300 + 300 + 300 + 300)/12)).
(5) Taxpayers sharing a home (for example, roommates or spouses, regardless of filing status), if otherwise eligible, may each use the safe harbor method provided by this revenue procedure, but not for a qualified business use of the same portion of the home. For example, a husband and wife, if otherwise eligible and regardless of filing status, may each use the safe harbor method for a qualified business use of the same home for up to 300 square feet of different portions of the home.
(6) A taxpayer who has more than one qualified business use of the same home for a taxable year and who elects the safe harbor method must use the safe harbor method for each qualified business use of the home. However, a taxpayer who has a qualified business use of a home and a rental use for purposes of § 280A(c)(3) of the same home cannot use the safe harbor method for the rental use. A taxpayer who has more than one qualified business use of the same home for a taxable year is limited to a maximum of 300 square feet. If a taxpayer who has more than one qualified business use of the same home for the taxable year uses more than 300 square feet, then the taxpayer must allocate the square footage among the qualified business uses of the home. The taxpayer may allocate the square footage in any reasonable manner, but the taxpayer may not allocate more square footage to a qualified business use of a home than is actually used in that qualified business use of the home.
(7) A taxpayer with qualified business uses of more than one home for a taxable year may use the safe harbor method for only one home for that taxable year. However, the taxpayer, if otherwise eligible, may calculate and substantiate actual expenses for purposes of § 280A for the business use of any other homes for that taxable year. .09 Examples. The following examples illustrate the application of sections 4.01 through 4.08 of this revenue procedure.
Example 1. A, a barber, is a sole proprietor who uses a room in his residence regularly and exclusively to meet with customers in the normal course of his trade or business throughout 2013. A determines that the room is 350 square feet and has a cost basis of $10,000. A placed the room in service in January 2013. A depreciates the room under § 168 as nonresidential real property using the optional depreciation table that corresponds with the general depreciation system, the straight-line method of depreciation, a 39-year recovery period, and the mid-month convention. During 2013, A earns $9,000 of gross income from the business and pays the following business expenses:
Supplies $1,500 Advertising 800 Professional fees 300 Magazines/Subscriptions 700 Postage 100 Total $3,400
A also pays the following expenses related to his home in 2013: Mortgage interest $10,000 Real property taxes 3,000 Homeowners' insurance 1,500 Utilities 2,400 Repairs 900 Total $17,800
For 2013, A elects the safe harbor method provided by this revenue procedure. As provided in section 4.01 of this revenue procedure, A determines the amount of his deduction for the qualified business use of his home is $1,500 (300 sq. ft. X $5.00). As provided in section 4.04 of this revenue procedure, A deducts his mortgage interest ($10,000), and real property taxes ($3,000) as itemized deductions on his federal income tax return (Schedule A of Form 1040). As provided in section 4.05 of this revenue procedure, A deducts his ordinary and necessary business expenses that are unrelated to the qualified business use of his home ($3,400) as trade or business expenses (Schedule C of Form 1040) to the extent otherwise allowed by the Code and regulations.
As provided in section 4.01(4) of this revenue procedure, A may not deduct any portion of the actual expenses related to the qualified business use of his home for 2013 (homeowners' insurance, utilities, and repairs). As provided in section 4.06 of this revenue procedure, A may not deduct any depreciation for the room on his federal income tax return for 2013, and the depreciation deduction allowable for the room for 2013 is deemed to be zero. Accordingly, A's adjusted depreciable basis in the room as of December 31, 2013, is $10,000. The gross income limitation in section 4.08(2) of this revenue procedure does not limit A 's deduction for the qualified business use of the home because the amount of the deduction, $1,500, does not exceed the gross income derived by A from the qualified business use of his home for the taxable year reduced by the business deductions described in section 4.05 of this revenue procedure, or $5,600 ($9,000 gross income - $3,400 of business deductions).
For 2014, A does not elect the safe harbor method and instead calculates and substantiates actual expenses for purposes of § 280A. Pursuant to section 4.07 of this revenue procedure, A must use the appropriate optional depreciation table for determining the depreciation deduction allowable for the room for 2014. The appropriate optional depreciation table provides that the depreciation rate for year two is 2.564%. Accordingly, A deducts depreciation for the room on his federal income tax return for 2014 in the amount of $256.40 ($10,000 X .02564). Consequently, A's adjusted depreciable basis in the room as of December 31, 2014, is reduced to $9,743.60 ($10,000 - $256.40).
Example 2. B, an architect, is a sole proprietor who uses a room in her residence regularly and exclusively to meet with clients in the normal course of her trade or business throughout 2013. B determines that the room is 300 square feet and has a cost basis of $10,000. B placed the room in service in January 2010. For 2010, 2011, and 2012, B depreciates the room as nonresidential real property under the general depreciation system of § 168(a), using the straight-line method of depreciation, a 39-year recovery period, and the mid-month convention, but does not use the optional depreciation table. The adjusted depreciable basis of the room as of December 31, 2012, is $9,241.45.
For 2013, B elects the safe harbor method provided by this revenue procedure. Pursuant to section 4.06 of this revenue procedure, B does not deduct any depreciation for the room on her federal income tax return for 2013, and the depreciation deduction allowable for the room for 2013 is deemed to be zero. Accordingly, B's adjusted depreciable basis in the room as of December 31, 2013, is $9,241.45.
For 2014, B resumes calculating and substantiating actual expenses for purposes of § 280A. Pursuant to section 4.07 of this revenue procedure, B must use the appropriate optional depreciation table for determining the depreciation deduction allowable for the room for 2014 because B used the safe harbor method provided by this revenue procedure for a prior taxable year. In 2014, the room has been placed in service by B for five years. The appropriate optional depreciation table provides that the depreciation rate for year five is 2.564%. Accordingly, B deducts depreciation for the room on her federal income tax return for 2014 in the amount of $256.40 ($10,000 X .02564). Consequently, B's adjusted depreciable basis in the room as of December 31, 2014, is reduced to $8,985.05 ($9,241.45 - $256.40).
5. Effect On Other Documents
Section 8.02 of Rev. Proc. 87-57, 1987-2 C.B. 687, is modified to read as follows: .02 The optional depreciation tables specify schedules of annual depreciation rates to be applied to the unadjusted basis (or, if applicable, to the remaining adjusted depreciable basis as determined under § 1.168(k)-1(d)(2)(i) of the Income Tax Regulations) of property in each taxable year. If a taxpayer uses a table to compute the annual depreciation allowance for any item of property, the taxpayer must use the table to compute the annual depreciation allowances for the entire recovery period of such property, except as otherwise expressly provided by the Code, the regulations under the Code, or other guidance published in the Internal Revenue Bulletin. Further, a taxpayer may not continue to use the table if there are any adjustments to the basis of the property for reasons other than (1) depreciation allowed or allowable, or (2) an addition or an improvement to such property that is subject to depreciation as a separate item of property. Use of the tables in this revenue procedure to compute depreciation allowances does not require the filing of any notice with the Internal Revenue Service.
Taxpayers use the appropriate table for any property based on the depreciation system, the applicable depreciation method, the applicable recovery period, and the applicable convention. The tables list the percentage depreciation rates to be applied to the unadjusted basis (or, if applicable, to the remaining adjusted depreciable basis as determined under § 1.168(k)-1(d)(2)(i)) of property in each taxable year.
In Tables 1-5, for the general depreciation system, the listed depreciation rates reflect the 200 percent declining balance method switching to the straight line method for property with applicable recovery periods of 3, 5, 7, or 10 years and the 150 percent declining balance method switching to the straight line method for property with applicable recovery periods of 15 or 20 years.
6. Effective Date
This revenue procedure is effective for taxable years beginning on or after January 1, 2013.
7. Request For Comments
The Service and the Treasury Department request comments on all aspects of this revenue procedure.
Comments should be submitted in writing on or before April 15, 2013, and should include a reference to Rev. Proc. 2013-13. Submissions should be sent to:
Internal Revenue Service
Attn: CC:PA:LPD:PR (Rev. Proc. 2013-13), Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044
Submissions also may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Rev. Proc. 2013-13), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, DC. Alternatively, comments may be submitted electronically directly to the IRS via the following e-mail address: Notice.email@example.com . Please include “ Rev. Proc. 2013-13” in the subject line of any electronic communication. All comments will be available for public inspection and copying.
8. Drafting Information
The principal author of this revenue procedure is Christopher W. Call of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this revenue procedure contact Christopher W. Call at (202) 622-4970 (not a toll-free call
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