Tax Attorney: New regulations under IRC 6404 - suspension of penalties and interest
T.D. 9333 June 21, 2007
Code Sec. 6404(g)- reportable transactions
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[ TD 9333]
RIN 1545-BG64
Application of Section 6404(g) of the Internal Revenue Code Suspension
Provisions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains temporary regulations under section 6404(g)(2)(E) of the Internal Revenue Code on the suspension of any interest, penalty, addition to tax, or additional amount with respect to listed transactions or undisclosed reportable transactions. The temporary regulations reflect changes to the law made by the Internal Revenue Service Restructuring and Reform Act of 1998, the American Jobs Creation Act of 2004, the Gulf Opportunity Zone Act of 2005, and the Tax Relief and Health Care Act of 2006. The temporary regulations provide guidance to individual taxpayers who have participated in listed transactions or undisclosed reportable transactions. The text of the temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section in this issue of the Federal Register.
DATES: Effective Date: These regulations are effective on June 21, 2007.
Applicability Date: These regulations apply to interest relating to listed transactions and undisclosed reportable transactions accruing before, on, or after October 3, 2004.
FOR FURTHER INFORMATION CONTACT: Stuart Spielman, (202) 622-7950 (not a toll-free call).
SUPPLEMENTARY INFORMATION:
Background
This document amends the Procedure and Administration Regulations (26 CFR part 301) by adding rules under section 6404(g) relating to the suspension of interest, penalties, additions to tax, or additional amounts with respect to listed transactions or undisclosed reportable transactions. Section 3305 of the Internal Revenue Service Restructuring and Reform Act of 1998, Public Law 105-206 (112 Stat. 685, 743) (RRA 98), added section 6404(g) to the Code, effective for taxable years ending after July 22, 1998. Section 6404(g) generally suspends interest and certain penalties if the IRS does not contact a taxpayer regarding possible adjustments to the taxpayer's liability within a specified period of time. Section 903(c) of the American Jobs Creation Act of 2004, Public Law 108-357 (118 Stat. 1418, 1652) (AJCA), excepted from the general interest suspension rules any interest, penalty, addition to tax, or additional amount with respect to a listed transaction or an undisclosed reportable transaction, effective for interest accruing after October 3, 2004. Section 303 of the Gulf Opportunity Zone Act of 2005, Public Law 109-135 (119 Stat. 2577, 2608-09) (GOZA), modified the effective date of the exception from the suspension rules for certain listed and reportable transactions. Section 426(b) of the Tax Relief and Health Care Act of 2006, Public Law 109-432 (120 Stat. 2922, 2975), provided a technical correction regarding the authority to exercise the "reasonably and in good faith" exception to the effective date rules. Section 8242 of the Small Business and Work Opportunity Tax Act of 2007, Public Law 110-28 (121 Stat. 112, 200), extended the current eighteen-month period within which the IRS can, without suspension of interest, contact a taxpayer regarding possible adjustments to the taxpayer's liability to thirty-six months, effective for notices provided after November 25, 2007.
Explanation of Provisions
If an individual taxpayer files a Federal income tax return on or before the due date for that return (including extensions), and if the IRS does not timely provide a notice to that taxpayer specifically stating the taxpayer's liability and the basis for that liability, then the IRS must suspend any interest, penalty, addition to tax, or additional amount with respect to any failure relating to the return that is computed by reference to the period of time the failure continues and that is properly allocable to the suspension period. A notice is timely if provided before the close of the eighteen-month period (thirty-six month period, in the case of notices provided after November 25, 2007) beginning on the later of the date on which the return is filed or the due date of the return without regard to extensions. The suspension period begins on the day after the close of the eighteen-month period (or thirty-six month period) and ends twenty-one days after the IRS provides the notice. This suspension rule applies separately with respect to each item or adjustment. If, on or after December 21, 2005, a taxpayer provides to the IRS an amended return or other signed written document showing an additional tax liability, then the eighteen-month period (or thirty-six month period) does not begin to run with respect to the items that gave rise to the additional tax liability until that return or other signed written document is provided to the IRS.
The general rule for suspension does not apply to any interest, penalty, addition to tax, or additional amount relating to any reportable transaction with respect to which the requirement of section 6664(d)(2)(A) is not met or a listed transaction as defined in section 6707A(c). This exception applies to interest accruing after October 3, 2004. With respect to interest relating to listed transactions or undisclosed reportable transactions accruing on or before October 3, 2004, the general rule for suspension applies only to (1) a participant in a settlement initiative, (2) a taxpayer acting reasonably and in good faith, or (3) a closed transaction. A participant in a settlement initiative is a taxpayer who, as of January 23, 2006, was participating in a settlement initiative described in IRS Announcement 2005-80, 2005-2 CB 967 (see §601.601(d)(2)(ii)(b)); or had entered into a settlement agreement under Announcement 2005-80 or any other prior or contemporaneous settlement initiative either formally published or directly communicated to taxpayers known to have participated in a tax shelter promotion. A taxpayer acting reasonably and in good faith is a taxpayer who the IRS determines has acted reasonably and in good faith, taking into account all the facts and circumstances surrounding a transaction. A transaction is a "closed transaction" if, as of December 14, 2005, the assessment of all federal income taxes for the taxable year in which the tax liability to which the interest relates is prevented by the operation of any law or rule of law. A transaction is also a closed transaction if a closing agreement under section 7121 has been entered into with respect to the tax liability arising in connection with the transaction.
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. A regulatory assessment is therefore not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 USC chapter 5) does not apply to these regulations. For applicability of the Regulatory Flexibility Act (5 USC chapter 6), please refer to the cross-reference notice of proposed rulemaking published elsewhere in this issue of the Federal Register. Pursuant to section 7805(f) of the Internal Revenue Code, these regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.
Drafting Information
The principal author of these regulations is Stuart Spielman of the Office of Associate Chief Counsel (Procedure and Administration).
List of Subjects in 26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Penalties, Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR Part 301 is amended as follows:
PART 301 PROCEDURE AND ADMINISTRATION
Paragraph 1. The authority citation for part 301 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.6404-0T is added to read as follows:
§301.6404-0T Table of contents (temporary).
This section lists the paragraphs contained in §301.6404-4T.
§301.6404-4T Listed transactions and undisclosed reportable transactions (temporary).
(a) [Reserved].
(b)(1) through (b)(4) [Reserved].
(5) Listed transactions and undisclosed reportable transactions.
(i) In general.
(ii) Effective dates.
(iii) Special rule for certain listed or undisclosed reportable transactions.
(A) Participant in a settlement initiative.
(1) Participant in a settlement initiative who as of January 23, 2006, had not reached agreement with the IRS.
(2) Participant in a settlement initiative who, as of January 23, 2006, had reached agreement with the IRS.
(B) Taxpayer acting in good faith.
(1) In general.
(2) Presumption.
(3) Examples.
(C) Closed transactions.
Par. 3. Section 301.6404-4T is added to read as follows:
§301.6404-4T Listed transactions and undisclosed reportable transactions (temporary).
(a) [Reserved].
(b)(1) through (4) [Reserved].
(5) Listed transactions and undisclosed reportable transactions --(i) In general. The general rule of suspension under section 6404(g)(1) does not apply to any interest, penalty, addition to tax, or additional amount with respect to any listed transaction as defined in section 6707A(c) or any undisclosed reportable transaction. For purposes of this section, an undisclosed reportable transaction is a reportable transaction described in the regulations under section 6011 that is not adequately disclosed under those regulations and that is not a listed transaction. Whether a transaction is a listed transaction or an undisclosed reportable transaction is determined as of the date the IRS provides notice to the taxpayer regarding that transaction that specifically states the taxpayer's liability and the basis for that liability.
(ii) Effective/applicability dates. (A) These regulations apply to interest relating to listed transactions and undisclosed reportable transactions accruing before, on, or after October 3, 2004.
(B) The applicability of these regulations expires on or before June 21, 2010.
(iii) Special rule for certain listed or undisclosed reportable transactions. With respect to interest relating to listed transactions and undisclosed reportable transactions accruing on or before October 3, 2004, the exception to the general rule of interest suspension will not apply to a taxpayer who is a participant in a settlement initiative with respect to that transaction, to any transaction in which the taxpayer has acted reasonably and in good faith, or to a closed transaction. For purposes of this special rule, a "participant in a settlement initiative," a "taxpayer acting in good faith," and a "closed transaction" have the following meanings:
(A) Participant in a settlement initiative --(1) Participant in a settlement initiative who, as of January 23, 2006, had not reached agreement with the IRS. A participant in a settlement initiative includes a taxpayer who, as of January 23, 2006, was participating in a settlement initiative described in Internal Revenue Service Announcement 2005-80, 2005-2 CB 967. See §601.601(d)(2)(ii)(b) of this chapter. A taxpayer participates in the initiative by complying with Section 5 of the Announcement. A taxpayer is not a participant in a settlement initiative if, after January 23, 2006, the taxpayer withdraws from or terminates participation in the initiative, or the IRS determines that a settlement agreement will not be reached under the initiative within a reasonable period of time.
(2) Participant in a settlement initiative who, as of January 23, 2006, had reached agreement with the IRS. A participant in a settlement initiative is a taxpayer who, as of January 23, 2006, had entered into a settlement agreement under Announcement 2005-80 or any other prior or contemporaneous settlement initiative either offered through published guidance or, if the initiative was not formally published, direct contact with taxpayers known to have participated in a tax shelter promotion.
(B) Taxpayer acting in good faith --(1) In general. The IRS may suspend interest relating to a listed transaction or an undisclosed reportable transaction accruing on or before October 3, 2004, if the taxpayer has acted reasonably and in good faith. The IRS' determination of whether a taxpayer has acted reasonably and in good faith will take into account all the facts and circumstances surrounding the transaction. The facts and circumstances include, but are not limited to, whether the taxpayer disclosed the transaction and the taxpayer's course of conduct after being identified as participating in the transaction, including the taxpayer's response to opportunities afforded to the taxpayer to settle the transaction, and whether the taxpayer engaged in unreasonable delay at any stage of the matter.
(2) Presumption. If a taxpayer and the IRS promptly enter into a settlement agreement with respect to a transaction on terms proposed by the IRS or, in the event of atypical facts and circumstances, on terms more favorable to the taxpayer, and the taxpayer has complied with the terms of that agreement without unreasonable delay, the taxpayer will be presumed to have acted reasonably and in good faith except in rare and unusual circumstances. Rare and unusual circumstances must involve specific actions involving harm to tax administration. Even if a taxpayer does not qualify for the presumption described in this paragraph (b)(5)(iii)(B)(2), the taxpayer may still be granted interest suspension under the general facts and circumstances test set forth in paragraph (b)(5)(iii)(B)(1) of this section.
(3) Examples. The following examples illustrate the rules the IRS uses in determining whether a taxpayer has acted reasonably and in good faith.
Example 1. The taxpayer participated in a listed transaction. The IRS, in a letter sent directly to the taxpayer in July 2005, proposed a settlement of the transaction. The taxpayer informed the IRS of his interest in the settlement within the prescribed time period. The revenue agent assigned to the taxpayer's case was not able to calculate the taxpayer's liability under the settlement or tender a closing agreement to the taxpayer until March 2006. The taxpayer promptly executed the closing agreement and returned it to the IRS with a proposal for arrangements to pay the agreed-upon liability. The IRS agreed with the proposed arrangements for full payment. For purposes of the application of section 6404(g)(2)(E), the taxpayer has acted reasonably and in good faith. Interest accruing on or before October 3, 2004, relating to the transaction in which the taxpayer participated will be suspended.
Example 2. The facts are the same as in Example 1, except that the letter was sent by the IRS in February 2006, and the closing agreement was tendered to the taxpayer in April 2006. For purposes of the application of section 6404(g)(2)(E), the taxpayer has acted reasonably and in good faith. Interest accruing on or before October 3, 2004, relating to the transaction in which the taxpayer participated will be suspended.
Example 3. The taxpayer participated in a listed transaction. In response to an offer of settlement extended by the IRS in August 2005, the taxpayer informed the IRS of her interest in entering into a closing agreement on the terms proposed by the IRS. The revenue agent assigned to the transaction calculated the taxpayer's liability under the settlement and tendered a closing agreement to the taxpayer in November 2005. The taxpayer executed the closing agreement but failed to make any arrangement for payment of the agreed-upon liability stated in the closing agreement. Taking into account all the facts and circumstances surrounding the transaction, the taxpayer did not act reasonably and in good faith. Interest accruing on or before October 3, 2004, relating to the transaction in which the taxpayer participated will not be suspended.
Example 4. The taxpayer participated in a listed transaction. In a letter sent by the IRS directly to the taxpayer in July 2005, the IRS extended an offer of settlement. The July 2005 letter informed the taxpayer that, absent atypical facts and circumstances, the taxpayer should not expect resolution of the tax issues on more favorable terms than proposed in the letter. The taxpayer declined the proposed settlement terms of the letter and proceeded to Appeals to present what the taxpayer claimed were atypical facts and circumstances. The administrative file did not contain sufficient information bearing on atypical facts and circumstances, and the taxpayer failed to provide additional information when requested by Appeals to explain how the transaction originally proposed to the taxpayer differed in structure or types of tax benefits claimed, from the transaction as implemented by the taxpayer. Appeals determined that the taxpayer's facts and circumstances were not significantly different from those of other taxpayers who participated in that listed transaction and thus, were not atypical. In September 2006, the taxpayer and Appeals entered into a closing agreement on terms consistent with those originally proposed in the July 2005 letter. The taxpayer has complied with the terms of that closing agreement. For purposes of the application of section 6404(g)(2)(E), this taxpayer is not presumed to have acted reasonably and in good faith; instead, the IRS will apply the general rule to determine whether to suspend interest accruing on or before October 3, 2004, relating to the transaction in which the taxpayer participated.
Example 5. The facts are the same as in Example 4, except that Appeals agrees that atypical facts were present that warrant additional concessions by the government. A settlement is reached on terms more favorable to the taxpayer than those proposed in the July 2005 letter. For purposes of the application of section 6404(g)(2)(E), this taxpayer is presumed to have acted reasonably and in good faith, and absent evidence of rare or unusual circumstances harmful to tax administration, is eligible for suspension of interest accruing on or before October 3, 2004, relating to the transaction in which the taxpayer participated.
(C) Closed transactions. A transaction is considered closed for purposes of this clause if, as of December 14, 2005, the assessment of all federal income taxes for the taxable year in which the tax liability to which the interest relates is prevented by the operation of any law or rule of law, or a closing agreement under section 7121 has been entered into with respect to the tax liability arising in connection with the transaction.
(c) [Reserved].
Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
Approved: June 15, 2007.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
Monday, August 13, 2007
Friday, August 10, 2007
Back Taxes: Withdrawn IRC 6330 due process request cannot be reinstated
Craig I. Smith v. Commissioner.Dkt. No. 4675-06L , TC Memo. 2007-221, August 9, 2007.
Appealable, barring stipulation to the contrary, to CA-6. -1 entitled petitioners to a section 6330 for both taxable years.2 We hereinafter refer to these March 2004 requests collectively as petitioners' first request for a 3 Thereafter, on April 2, 2004, respondent sent petitioners a letter in response to petitioners' first request for a 4 By signing the form, each petitioner acknowledged:
I've received a resolution with the Internal Revenue Service regarding the tax and tax period that my hearing request concerned and I'm satisfied that I no longer need a hearing with Appeals. Therefore, I withdraw my request for a Collection due Process (CDP) Hearing under * * * IRC Sections 6320 and IRC Section 6320 or 5 In addition, petitioners failed to make estimated tax payments relating to tax years after 2001 and 2002 as required by the terms of the installment agreement. Consequently, respondent terminated the agreement and demanded payment in full of petitioners' uncollected tax liabilities for 2001 and 2002. On December 13, 2004, respondent mailed petitioners a Notice CP 523, Notice of Intent to Levy --You Defaulted On Your Installment Agreement, for 2001. On the same day, respondent mailed a similar notice to petitioners for 2002. We hereinafter refer to these notices collectively as the second notice of levy. Each letter stated:
This is a formal notice of our intent to terminate your installment agreement 30 days from the date of this notice. You defaulted on your agreement because you didn't make your payments as agreed. The agreement states that we may terminate your agreement and collect the entire amount of your tax liability if you don't meet all the conditions. This is your notice, as required by Internal Revenue
Petitioners ignored the December 13, 2004, notices of intent to levy, believing the notices would be followed by other "final" notices of intent to levy before any levies would actually be executed. However, without further notice, in May of 2005 respondent levied on petitioners' bank account. Petitioners thereupon requested, by means of Form 12153,6 a hearing for each year under section 6330 hearing. Respondent released the levy on petitioners' bank account on May 12, 2005.
Respondent determined that petitioners' second request for a
Discussion
Section 6331(d) provides that the levy authorized in Section 6330 elaborates on Sec. 6330(a)(3)(B) and (b)(1). A request for a collection hearing must be made within the 30-day period commencing on the day after the date of the Sec. 6330(a)(3)(B), (2); sec. 301.6330-1(b)(1), Proced. & Admin. Regs. section 6330 notice only once for the taxable period to which the unpaid tax relates. Once the Secretary issues a notice of intent to levy and notice of right to a section 6330 hearing. Sec. 301.6330-1(b)(2), Q&A-B2, Proced. & Admin. Regs.7
If a Sec. 6330(b)(1), (c)(1). The taxpayer is entitled to one hearing with respect to "the taxable period to which the unpaid tax specified in * * * [the levy notice] relates." Sec. 6330(c)(2)(A).
At the conclusion of the hearing, the Appeals officer must determine whether and how to proceed with collection and take into account: (i) The relevant issues raised by the taxpayer, (ii) challenges to the underlying tax liability by the taxpayer, where permitted, and (iii) whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer that the collection action be no more intrusive than necessary. section 6330(d)(1), within 30 days of the issuance of a notice of determination, the taxpayer may appeal the determination to this Court if we have jurisdiction over the underlying tax liability.
Section 301.6330-1(i)(1), Proced. & Admin. Regs., provides that where a taxpayer does not timely request a section 6330 hearing. Sec. 301.6330-1(i)(1), Proced. & Admin. Regs. The Appeals officer generally follows the same procedures at an equivalent hearing which he or she would have followed had the equivalent hearing been a section 6330 hearing may constitute a "determination" for purposes of Section 6159 authorizes the Secretary to enter into installment agreements and to terminate an installment agreement where the taxpayer fails to timely pay any installment when it is due or to pay any other tax liability when it is due. Sec. 6159(b)(5). The Secretary is required to establish procedures for an independent administrative review of termination of installment agreements for taxpayers who request such review. Sec. 6331(k)(2)(D); sec. 301.6331-4(a)(1), Proced. & Admin. Regs. However, where a taxpayer receives a Letter 1058, but does not timely request a hearing, a second notice of intent to levy sent after termination of an installment agreement does not entitle the taxpayer to a hearing under section 6330 hearing. There is no doubt that petitioners' second request for a 8
Petitioners' claim that this Court has jurisdiction centers on the continuing validity, in their view, of their first request for a section 6330 hearing only because they had obtained an installment agreement with respondent; once respondent had terminated the installment agreement (unjustifiably so, according to petitioners), petitioners' first request for a section 6330 hearing but were instead given an equivalent hearing, respondent's decision letter (issued as a consequence of the equivalent hearing) was a "determination" for purposes of section 6330 hearing), which respondent duly conducted. Thus, respondent asserts, the equivalent hearing gave rise to a decision letter, which is not a "determination" under section 6330 hearing constitutes an exception to the general rule requiring a hearing in response to a timely request. Such a hearing is, in turn, a prerequisite for the Secretary's issuance of a notice of determination. There is no statutory authority for the proposition that a withdrawn request for a section 6330 hearing) that would lead to that outcome. Indeed, in their withdrawal request, petitioners explicitly agreed to give up their right to seek judicial review of the notice of determination that would have been issued by the Appeals Office.9 Even though no section 6330 hearing is designed to accomplish, a payment alternative in the form of an installment agreement.
Because petitioners withdrew their request for a section 6330 hearing in Orum v. Commissioner, supra at 11.
While admitting that their November 2004 payment was not timely and that they failed to make estimated tax payments as required by the installment agreement, petitioners contend that respondent unjustifiably terminated the installment agreement. Petitioners do not allege that the termination of the installment agreement was the result of clerical error, misdirected mail, or the like. They do not dispute that they received the statutory notices to which they were entitled, were afforded an equivalent hearing in response to their second (untimely) request for a section 6330 hearing, and respondent was not required to issue a notice of determination. Respondent's decision letter was not a determination for purposes of 10
To reflect the foregoing,
An appropriate order of dismissal for lack of jurisdiction will be entered.1 Unless otherwise indicated, all section references are to the Internal Revenue Code as amended.2 The request for a sec. 6330 hearing for 2001 was made on Mar. 24, 2004. In the Mar. 24 request, petitioners requested that the hearings for both taxable years be consolidated.3 The installment agreement preceded petitioners' request for a sec. 6330 hearing for 2001 even though they had already entered into an installment agreement for 2001 "to preserve my hearing rights."4 The Apr. 6, 2004, Form 12256 pertained to 2002. Petitioners stipulated that they also executed a Form 12256 for 2001.5 Respondent received and recorded the November payment on Dec. 6, 2004. The record does not disclose any further payments made by petitioners.6 The Commissioner's Form 12153 instructs taxpayers to "Use this form to request a hearing with the IRS Office of Appeals only when you receive a Notice of Federal Tax Lien Filing & Your Right To A Hearing Under IRC 6320, a Final Notice --Notice Of Intent to Levy & Your Notice Of a Right To A Hearing, or a Notice of Jeopardy Levy and Right of Appeal." The parties treated petitioners' May 11, 2005, request for a hearing as a request for a 7 Sec. 301.6330-1(b)(2), Q&A-B2, Proced. & Admin. Regs., provides:Q-B2. Is the taxpayer entitled to a CDP hearing when the IRS, more than 30 days after issuance of a CDP Notice under section 6330, only the first pre-levy or post-levy CDP Notice with respect to the unpaid tax and tax periods entitles the taxpayer to request a CDP hearing. If the taxpayer does not timely request a CDP hearing with Appeals following that first notification, the taxpayer foregoes the right to a CDP hearing with Appeals and judicial review of Appeals' determination with respect to levies relating to that tax and tax period. The IRS generally provides additional notices or reminders (reminder notifications) to the taxpayer of its intent to levy when no collection action has occurred within 180 days of a proposed levy. Under such circumstances, a taxpayer may request an equivalent hearing as described in paragraph (i) of this section.8 Petitioners, expecting to receive yet another, "final", notice before collection by levy, ignored the second notice of intent to levy. They did so at their peril, because no further notice was in fact required for the Secretary to proceed with collection by levy. The Secretary is required to issue a sec. 6330 hearing. See Orum v. Commissioner, 123 T.C. 1, 11 (2004), affd. 412 F.3d 819 (7th Cir. 2005); sec. 301.6330-1(b)(2), Q&A-B4, Proced. & Admin. Regs.9 See Aguirre v. Commissioner, 117 T.C. 324 (2001), where we granted summary judgment against taxpayers who signed Form 4549, Income Tax Examination Changes, in which they waived the right to contest their tax liability in this Court and consented to the immediate assessment and collection of tax.10 In view of our holding that we lack jurisdiction, we need not address the issue of whether, as petitioners argued at trial and on brief, respondent abused his discretion in proceeding with collection by levy. However, for the sake of completeness, we note that we do not find petitioners' position persuasive.
Craig I. Smith v. Commissioner.Dkt. No. 4675-06L , TC Memo. 2007-221, August 9, 2007.
Appealable, barring stipulation to the contrary, to CA-6. -1 entitled petitioners to a section 6330 for both taxable years.2 We hereinafter refer to these March 2004 requests collectively as petitioners' first request for a 3 Thereafter, on April 2, 2004, respondent sent petitioners a letter in response to petitioners' first request for a 4 By signing the form, each petitioner acknowledged:
I've received a resolution with the Internal Revenue Service regarding the tax and tax period that my hearing request concerned and I'm satisfied that I no longer need a hearing with Appeals. Therefore, I withdraw my request for a Collection due Process (CDP) Hearing under * * * IRC Sections 6320 and IRC Section 6320 or 5 In addition, petitioners failed to make estimated tax payments relating to tax years after 2001 and 2002 as required by the terms of the installment agreement. Consequently, respondent terminated the agreement and demanded payment in full of petitioners' uncollected tax liabilities for 2001 and 2002. On December 13, 2004, respondent mailed petitioners a Notice CP 523, Notice of Intent to Levy --You Defaulted On Your Installment Agreement, for 2001. On the same day, respondent mailed a similar notice to petitioners for 2002. We hereinafter refer to these notices collectively as the second notice of levy. Each letter stated:
This is a formal notice of our intent to terminate your installment agreement 30 days from the date of this notice. You defaulted on your agreement because you didn't make your payments as agreed. The agreement states that we may terminate your agreement and collect the entire amount of your tax liability if you don't meet all the conditions. This is your notice, as required by Internal Revenue
Petitioners ignored the December 13, 2004, notices of intent to levy, believing the notices would be followed by other "final" notices of intent to levy before any levies would actually be executed. However, without further notice, in May of 2005 respondent levied on petitioners' bank account. Petitioners thereupon requested, by means of Form 12153,
Respondent determined that petitioners' second request for a
Discussion
Section 6331(d) provides that the levy authorized in Section 6330 elaborates on Sec. 6330(a)(3)(B) and (b)(1). A request for a collection hearing must be made within the 30-day period commencing on the day after the date of the Sec. 6330(a)(3)(B), (2); sec. 301.6330-1(b)(1), Proced. & Admin. Regs. section 6330 notice only once for the taxable period to which the unpaid tax relates. Once the Secretary issues a notice of intent to levy and notice of right to a section 6330 hearing. Sec. 301.6330-1(b)(2), Q&A-B2, Proced. & Admin. Regs.7
If a Sec. 6330(b)(1), (c)(1). The taxpayer is entitled to one hearing with respect to "the taxable period to which the unpaid tax specified in * * * [the levy notice] relates." Sec. 6330(c)(2)(A).
At the conclusion of the hearing, the Appeals officer must determine whether and how to proceed with collection and take into account: (i) The relevant issues raised by the taxpayer, (ii) challenges to the underlying tax liability by the taxpayer, where permitted, and (iii) whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer that the collection action be no more intrusive than necessary. section 6330(d)(1), within 30 days of the issuance of a notice of determination, the taxpayer may appeal the determination to this Court if we have jurisdiction over the underlying tax liability.
Section 301.6330-1(i)(1), Proced. & Admin. Regs., provides that where a taxpayer does not timely request a section 6330 hearing. Sec. 301.6330-1(i)(1), Proced. & Admin. Regs. The Appeals officer generally follows the same procedures at an equivalent hearing which he or she would have followed had the equivalent hearing been a section 6330 hearing may constitute a "determination" for purposes of Section 6159 authorizes the Secretary to enter into installment agreements and to terminate an installment agreement where the taxpayer fails to timely pay any installment when it is due or to pay any other tax liability when it is due. Sec. 6159(b)(5). The Secretary is required to establish procedures for an independent administrative review of termination of installment agreements for taxpayers who request such review. Sec. 6331(k)(2)(D); sec. 301.6331-4(a)(1), Proced. & Admin. Regs. However, where a taxpayer receives a Letter 1058, but does not timely request a hearing, a second notice of intent to levy sent after termination of an installment agreement does not entitle the taxpayer to a hearing under section 6330 hearing. There is no doubt that petitioners' second request for a 8
Petitioners' claim that this Court has jurisdiction centers on the continuing validity, in their view, of their first request for a section 6330 hearing only because they had obtained an installment agreement with respondent; once respondent had terminated the installment agreement (unjustifiably so, according to petitioners), petitioners' first request for a section 6330 hearing but were instead given an equivalent hearing, respondent's decision letter (issued as a consequence of the equivalent hearing) was a "determination" for purposes of section 6330 hearing), which respondent duly conducted. Thus, respondent asserts, the equivalent hearing gave rise to a decision letter, which is not a "determination" under section 6330 hearing constitutes an exception to the general rule requiring a hearing in response to a timely request. Such a hearing is, in turn, a prerequisite for the Secretary's issuance of a notice of determination. There is no statutory authority for the proposition that a withdrawn request for a section 6330 hearing) that would lead to that outcome. Indeed, in their withdrawal request, petitioners explicitly agreed to give up their right to seek judicial review of the notice of determination that would have been issued by the Appeals Office.9 Even though no section 6330 hearing is designed to accomplish, a payment alternative in the form of an installment agreement.
Because petitioners withdrew their request for a section 6330 hearing in Orum v. Commissioner, supra at 11.
While admitting that their November 2004 payment was not timely and that they failed to make estimated tax payments as required by the installment agreement, petitioners contend that respondent unjustifiably terminated the installment agreement. Petitioners do not allege that the termination of the installment agreement was the result of clerical error, misdirected mail, or the like. They do not dispute that they received the statutory notices to which they were entitled, were afforded an equivalent hearing in response to their second (untimely) request for a section 6330 hearing, and respondent was not required to issue a notice of determination. Respondent's decision letter was not a determination for purposes of 10
To reflect the foregoing,
An appropriate order of dismissal for lack of jurisdiction will be entered.1 Unless otherwise indicated, all section references are to the Internal Revenue Code as amended.2 The request for a sec. 6330 hearing for 2001 was made on Mar. 24, 2004. In the Mar. 24 request, petitioners requested that the hearings for both taxable years be consolidated.3 The installment agreement preceded petitioners' request for a sec. 6330 hearing for 2001 even though they had already entered into an installment agreement for 2001 "to preserve my hearing rights."4 The Apr. 6, 2004, Form 12256 pertained to 2002. Petitioners stipulated that they also executed a Form 12256 for 2001.5 Respondent received and recorded the November payment on Dec. 6, 2004. The record does not disclose any further payments made by petitioners.6 The Commissioner's Form 12153 instructs taxpayers to "Use this form to request a hearing with the IRS Office of Appeals only when you receive a Notice of Federal Tax Lien Filing & Your Right To A Hearing Under IRC 6320, a Final Notice --Notice Of Intent to Levy & Your Notice Of a Right To A Hearing, or a Notice of Jeopardy Levy and Right of Appeal." The parties treated petitioners' May 11, 2005, request for a hearing as a request for a 7 Sec. 301.6330-1(b)(2), Q&A-B2, Proced. & Admin. Regs., provides:Q-B2. Is the taxpayer entitled to a CDP hearing when the IRS, more than 30 days after issuance of a CDP Notice under section 6330, only the first pre-levy or post-levy CDP Notice with respect to the unpaid tax and tax periods entitles the taxpayer to request a CDP hearing. If the taxpayer does not timely request a CDP hearing with Appeals following that first notification, the taxpayer foregoes the right to a CDP hearing with Appeals and judicial review of Appeals' determination with respect to levies relating to that tax and tax period. The IRS generally provides additional notices or reminders (reminder notifications) to the taxpayer of its intent to levy when no collection action has occurred within 180 days of a proposed levy. Under such circumstances, a taxpayer may request an equivalent hearing as described in paragraph (i) of this section.8 Petitioners, expecting to receive yet another, "final", notice before collection by levy, ignored the second notice of intent to levy. They did so at their peril, because no further notice was in fact required for the Secretary to proceed with collection by levy. The Secretary is required to issue a sec. 6330 hearing. See Orum v. Commissioner, 123 T.C. 1, 11 (2004), affd. 412 F.3d 819 (7th Cir. 2005); sec. 301.6330-1(b)(2), Q&A-B4, Proced. & Admin. Regs.9 See Aguirre v. Commissioner, 117 T.C. 324 (2001), where we granted summary judgment against taxpayers who signed Form 4549, Income Tax Examination Changes, in which they waived the right to contest their tax liability in this Court and consented to the immediate assessment and collection of tax.10 In view of our holding that we lack jurisdiction, we need not address the issue of whether, as petitioners argued at trial and on brief, respondent abused his discretion in proceeding with collection by levy. However, for the sake of completeness, we note that we do not find petitioners' position persuasive.
Alvin S. Brown, Esq.
Tax attorney
703.425.1400
To provide IRS "transparency," you can upload your IRS experiences to www.irsforum.org
Thursday, August 9, 2007
Tax Help: Innocent Spouse Relief Granted
--A wife who filed joint individual income tax returns with her husband was not liable for deficiencies on those returns under the "innocent spouse" provisions of Code Sec. 6015. The wife had satisfied the requirements of Code Sec. 6015(b) and was, therefore, entitled to innocent spouse relief. The tax items giving rise to the deficiency were properly attributable to her husband, the taxpayer did not know or have reason to know of the understatement when she signed the returns for the years of the deficiencies, and it would have been inequitable to hold the taxpayer liable for the tax deficiencies under the facts and circumstances of the case.
Rhonda K. Juell, a.k.a. Rhonda K. Juell-Podlak, Petitioner, and Glenn M. Evans, Intervenor v. Commissioner., Dkt. No. 9631-06 , TC Memo. 2007-219, August 8, 2007.
MEMORANDUM FINDINGS OF FACT AND OPINION
The issue for decision is whether petitioner Rhonda Juell is entitled to relief from joint and several liability under section 6015(b), (c), or (f) with respect to the entire amount of each of the above tax deficiencies determined by respondent. Intervenor Glenn Evans (Glenn) objects to petitioner's right to any relief under section 6015.
OPINION
Generally, taxpayers filing joint Federal income tax returns are jointly and severally liable for all taxes due. Sec. 6013(d)(3). However, relief from joint liability may be available in circumstances described in section 6015(b), (c), and (f).
Petitioner claims that she is entitled to additional relief from joint liability under section 6015(b), (c), and (f), beyond the two-thirds relief already granted by respondent.
A taxpayer spouse who meets certain qualifications may elect relief under section 6015(b). Generally, to qualify for relief under section 6015(b)(1), the electing spouse must establish that:
(A) A joint return was filed;
(B) there is an understatement of tax on the return which is attributable to the erroneous items of the nonelecting spouse;
(C) in signing the return, the electing spouse did not know, and had no reason to know, that there was such an understatement;
(D) taking into account all the facts and circumstances, it is inequitable to hold the electing spouse liable for the deficiency in tax for the taxable year attributable to the understatement; and
(E) a timely election has been made.
Respondent does not dispute that petitioner meets the requirements of subparagraphs (A) and (E) of section 6015(b)(1), but respondent contends that petitioner has not satisfied the requirements of subparagraphs (B), (C), and (D).
Section 6015(b)(1)(B): Attributable to Nonelecting Spouse
When determining whether an erroneous item is attributable to a nonelecting spouse, we look not only to how ownership is nominally held between the spouses but also to each spouse's level of participation in the activity which gave rise to the erroneous item.
Joint ownership, by itself, is not determinative of whether the erroneous item is attributable to one or both spouses. See Rowe v. Commissioner, T.C. Memo. 2001-325; Buchine v. Commissioner, T.C. Memo. 1992-36, affd. 20 F.3d 173 (5th Cir. 1994). A key factor is whether and to what extent the electing spouse voluntarily participated in the investment which gave rise to the erroneous item.
Generally, an electing spouse who voluntarily agrees to enter into an investment and who actively participates in it is precluded from attributing the entire investment to the nonelecting spouse. See Abelein v. Commissioner, T.C. Memo. 2004-274; Capehart v. Commissioner, T.C. Memo. 2004-268, affd. 204 Fed. Appx. 618 (9th Cir. 2006); Bartak v. Commissioner, T.C. Memo. 2004-83, affd. 158 Fed. Appx. 43 (9th Cir. 2005); Ellison v. Commissioner, T.C. Memo. 2004-57; Doyel v. Commissioner, T.C. Memo. 2004-35.
However, if the electing spouse is not an active participant, the electing spouse may qualify for relief even though being named as a shareholder or partner. See McKnight v. Commissioner, T.C. Memo. 2006-155 (in the context of section 6015(c) and (f)); Rowe v. Commissioner, supra; Buchine v. Commissioner, supra.
In Bartak v. Commissioner, supra, Ellison v. Commissioner, supra, and Doyel v. Commissioner, supra, the electing spouses each agreed to invest in the investments which gave rise to the erroneous items and did so jointly with their spouses by using funds from joint bank accounts. Further, the electing spouses considered the investments to be their own, as well as their husbands', and were denied relief because the erroneous items were not entirely attributable to their husbands.
Similarly, in Abelein v. Commissioner, supra, and Capehart v. Commissioner, supra, the electing spouses not only used funds from joint accounts to invest, but also met and toured with persons associated with the business activities, contacted them on occasion, and received and read materials relating to them.
In contrast, in McKnight v. Commissioner, supra, Rowe v. Commissioner, supra, and Buchine v. Commissioner, supra, because they did not participate in the business activity, the electing spouses were granted relief despite being named as shareholders or partners. In Rowe the electing spouse did not make or participate in any decision relating to the activity, did not sign any checks relating to the activity, and was not otherwise involved in the activity. In Buchine , the electing spouse's name appeared as shareholder and partner, but she had no knowledge of being named on the Schedule K-1, and she only attended one promotional meeting.
In McKnight v. Commissioner, supra, erroneous items were attributed entirely to the nonelecting spouse, even though the electing spouse signed organizational documents relating to the investment and was listed as a director. We noted that the spouse signed the documents at her husband's insistence, after assurances from him that he was sole owner of the business and without awareness on her part of the legal significance.
On the facts before us, petitioner more closely resembles the spouses who were granted relief in Rowe v. Commissioner, supra, and Buchine v. Commissioner, supra. Petitioner participated in the Hoyt partnerships in name only. Petitioner repeatedly objected to Glenn's involvement in the Hoyt partnerships. Petitioner never agreed to invest in the Hoyt partnerships, and petitioner signed Hoyt documents solely because of Glenn's representations and insistence and without being aware of the legal significance thereof.
At no time did petitioner invest any of her funds in the Hoyt partnerships. Petitioner did not attend any meetings, make any contact, or read any promotional materials. Glenn made all payments to the Hoyt partnerships from his separate accounts, accounts to which petitioner had no access. Mail relating to the Hoyt partnerships was left unopened for Glenn.
Respondent argues that introductory language in the closing agreement petitioner entered into with respondent constitutes an admission by petitioner that she was a partner in and agreed to the investment in the Hoyt partnerships. To the contrary, that particular language simply associates the Hoyt partnerships with the tax deficiencies and does not constitute an admission as to the level of petitioner's involvement in the Hoyt partnerships. See Zaentz v. Commissioner, 90 T.C. 753, 762 (1988).
Because the understatements are attributable entirely to Glenn, petitioner satisfies section 6015(b)(1)(B).
Section 6015(b)(1)(C): Know or Reason To Know2
A spouse seeking relief from joint liability under section 6015(b) must not have known or had reason to know at the time of signing a joint tax return that there was an understatement of tax on a return. Sec. 6015(b)(1)(C). In deduction cases, the United States Court of Appeals for the Eighth Circuit has adopted the standard set forth in Price v. Commissioner, 887 F.2d 959, 963-965 (9th Cir. 1989). See Erdahl v. Commissioner, 930 F.2d 585, 589 (8th Cir. 1991), revg. T.C. Memo. 1990-101.3
Under the Price standard, the Court inquires as to whether "'a reasonably prudent taxpayer under the circumstances of the spouse at the time of signing the return could be expected to know that the tax liability stated was erroneous or that further investigation was warranted.'" Id. at 590 (quoting Stevens v. Commissioner, 872 F.2d 1499, 1505 (11th Cir. 1989), affg. T.C. Memo. 1988-63).
Even if a spouse is not aware of sufficient facts to give her reason to know of the substantial understatement, she nevertheless may know enough facts to put her on notice that an understatement exists. Price v. Commissioner, supra at 965. The question to ask is whether "a reasonably prudent taxpayer in her position [would] be led to question the legitimacy of the deduction." Guth v. Commissioner, 897 F.2d 441, 445 (9th Cir. 1990) (citing Price v. Commissioner, supra at 975) (emphasis removed), affg. T.C. Memo. 1987-522).
A spouse electing relief may satisfy the duty to inquire by questioning the deductions and receiving assurances as to their legitimacy. Erdahl v. Commissioner, supra at 590 n.7. These assurances may come from the electing spouse's husband. See Price v. Commissioner, supra at 966 (duty of inquiry satisfied where spouse questioned husband about large deductions who assured her that the returns were prepared by a C.P.A.); Foley v. Commissioner, T.C. Memo. 1995-16 (spouse satisfied duty of inquiry by asking husband about tax shelter deductions, hearing that she should not worry because he invested in tax shelters and because return preparer had signed return); Estate of Killian v. Commissioner, T.C. Memo. 1987-365 (spouse took reasonable steps to determine the accuracy of the return by questioning husband about sham losses, who assured her that the losses were due to an investment recommended by a C.P.A. who prepared the return).
The factors established in Price v. Commissioner, supra, as to whether the electing spouse had reason to know or a duty to inquire include the spouse's level of education, the spouse's involvement in family financial affairs, the evasiveness or deceit of the culpable spouse, and any unusual or lavish expenditures inconsistent with the family's ordinary standard of living. Erdahl v. Commissioner, supra at 591 (quoting Guth v. Commissioner, supra at 444).
On the facts before us, we find that petitioner did not know and did not have reason to know of the understatements on the tax returns when she signed them. Petitioner satisfied her duty of inquiry by questioning her husband and receiving strong and repeated assurances from him.
All four factors discussed in Price v. Commissioner, supra, weigh in favor of granting petitioner relief. Petitioner had no experience academically or practically regarding business, taxes, or investments and has worked as an elementary school teacher. Petitioner's involvement in the family financial affairs was limited to paying routine bills out of the joint account. Glenn was deceptive in that he told petitioner she had to file joint Federal income tax returns with him and that the Hoyt partnerships would be his responsibility. Finally, there occurred no unusual or lavish family expenditures that would have notified petitioner of the understatement.
Respondent contends that the size of the deductions on the tax returns was sufficient to instill in petitioner a duty to inquire. Even if such a duty arose, petitioner satisfied the duty of inquiry by confronting Glenn each year and questioning the Hoyt partnership-related items.
Because petitioner did not know or have a reason to know that the deductions were erroneous, and because she satisfied her duty of inquiry, petitioner satisfies section 6015(b)(1)(C).
Section 6015(b)(1)(D): Inequity
Whether it would be inequitable to hold a spouse liable for a tax deficiency is determined by "taking into account all the facts and circumstances." Sec. 6015(b)(1)(D).4 The two most often cited factors to be considered are: (1) Whether there has been a significant benefit to the spouse claiming relief, and (2) whether the failure to report the correct tax liability on the joint return results from concealment, overreaching, or any other wrongdoing on the part of the other spouse. Alt v. Commissioner, 119 T.C. 306, 314 (2002), affd. 101 Fed. Appx. 34 (6th Cir. 2004). We also consider factors utilized in determining "inequity" in the context of section 6015(f).5 Normal support is not considered a significant benefit. Estate of Krock v. Commissioner, 93 T.C. 672, 678 (1989). Where the electing spouse's standard of living remains constant, significant benefit may still be found if the tax savings are "immensely beneficial". Jonson v. Commissioner, 118 T.C. 106, 119-120 (2002), affd. 353 F.3d 1181 (10th Cir. 2003).
Because, as stated previously, petitioner's standard of living remained constant throughout the years in issue and because the claimed tax refunds and savings were not needed or used to support petitioner but were returned to the Hoyt partnerships by Glenn, petitioner received no benefit as a result of the erroneously claimed Hoyt partnership-related tax benefits.
Respondent contends that petitioner could have received a significant benefit from the refunds even though they were reinvested and cites Capehart v. Commissioner, T.C. Memo. 2004-268 (spouse benefited from receiving refund despite reinvestment in Hoyt partnerships).
The determinative fact, however, is not that a refund was received but who benefited from it. In particular, we have held that, where a refund was used to benefit an electing spouse in a manner beyond normal support or where an electing spouse chooses to invest a refund in business activities, a significant benefit was received. See Abelein v. Commissioner, T.C. Memo. 2004-274 (spouse and her husband reinvested portions of refund into a business activity); Pierce v. Commissioner, T.C. Memo. 2003-188 (spouse used refund to contribute capital and lend funds to an investment); French v. Commissioner, T.C. Memo. 1996-38 (spouse used refund to jointly purchase several certificates of deposit in large denominations); Schlosser v. Commissioner, T.C. Memo. 1992-233 (spouse used refund for investments and to pay off debts), affd. without published opinion 2 F.3d 404 (11th Cir. 1993).
If, however, a tax refund is used only by a nonelecting spouse for his or her own investment, the electing spouse would not necessarily have received a significant benefit. See Hillman v. Commissioner, T.C. Memo. 1993-151 (nonelecting spouse used refund to buy himself a Porsche automobile and a Rolex watch and to invest in a motion picture); Estate of Killian v. Commissioner, T.C. Memo. 1987-365 (nonelecting spouse used refund to pay off his personal loans and to invest in a limited partnership).
Petitioner resembles the innocent spouses in Hillman and Killian, in that the funds were not used to benefit her in any way but were funneled into Glenn's investments in the Hoyt partnerships.
Because petitioner received little to no benefit from the erroneously claimed Hoyt partnership-related tax benefits, we find that this factor weighs heavily in favor of granting petitioner relief.
The second prominent factor --namely, concealment or wrongdoing by the nonrequesting spouse, also weighs in petitioner's favor. As stated, Glenn repeatedly told petitioner that they were required to file joint Federal income tax returns, that the Hoyt partnerships were his investments, and that he would be responsible for them. This factor, combined with other factors, demonstrates that it would be inequitable to hold petitioner liable. We note that petitioner is divorced from Glenn, that none of the erroneous deductions is attributable to her, that she did not know and had no reason to know of the substantial understatements, that she satisfied her duty of inquiry, and that she has subsequently made a good faith effort to comply with the tax laws.
The facts that weigh against granting relief, such as petitioner's lack of financial hardship, are insufficient to deny petitioner relief. Petitioner satisfies section 6015(b)(1)(D).
Section 6015(c) and (f)
Because petitioner qualifies under section 6015(b) for relief from joint liability with regard to 100 percent of the tax deficiencies relating to the Hoyt partnership investments, we need not address petitioner's eligibility for relief under subsections (c) and (f) of section 6015.
To reflect the foregoing,
Decision will be entered for petitioner.
1 For a detailed description of the Hoyt partnerships see Bulger v. Commissioner, T.C. Memo. 2005-147.
2 "The requirement in sec. 6015(b)(1)(C) * * * is virtually identical to the same requirement of former sec. 6013(e)(1)(C); therefore, cases interpreting former sec. 6013(e) remain instructive to our analysis." Doyel v. Commissioner, T.C. Memo. 2004-35.
3 Because an appeal in this case would lie in the U.S. Court of Appeals for the Eighth Circuit, we follow Eighth Circuit law. See Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir. 1971).
4 "The requirement in sec. 6015(b)(1)(D) * * * is virtually identical to the same requirement of former sec. 6013(e)(1)(D); therefore cases interpreting former sec. 6013(e) remain instructive to our analysis." Doyel v. Commissioner, T.C. Memo. 2004-35.
5 Rev. Proc. 2000-15, sec. 4.03, 2000-1 C.B. 447, 448-449, lists nonexclusive factors to be considered in determining whether it is inequitable to hold the electing spouse liable for all or part of a deficiency under sec. 6015(f).
Alvin S. Brown, Esq.
Tax attorney
703.425.1400
www.irstaxattorney.com
To provide IRS transparency, upload your IRS experience to www.irsforum.org
Tax Attorney: Charitable Deduction New Rules
You must itemize on IRS Form 1040, Schedule A.
Here are a few tips to ensure your contributions pay off on your tax return:
You cannot deduct contributions made to specific individuals, political organizations and candidates. Nor can you deduct the value of your time or services and the cost of raffles, bingo or other games of chance.
To be deductible, contributions must be made to qualified organizations.
Only contributions actually made during the tax year are deductible.
If your contributions entitle you to merchandise, goods or services, including admission to a charity ball, banquet, theatrical performance or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.
Donations of stock or other property are usually valued at the fair market value of the property.
To be deductible, clothing and household items donated after August 17, 2006, generally must be in good used condition or better.
Special rules apply to donations of vehicles.
For a charitable contribution of $250 or more, you can claim a deduction only if you obtain a written acknowledgment from the qualified organization.
If you claim a deduction on your return of more than $500 for all contributed property, you must attach IRS Form 8283, Noncash Charitable Contributions, to your return.
Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which requires an appraisal by a qualified appraiser.
Alvin S. Brown
Tax attorney
703.425.1400
www.irstaxattorney.com
You must itemize on IRS Form 1040, Schedule A.
Here are a few tips to ensure your contributions pay off on your tax return:
You cannot deduct contributions made to specific individuals, political organizations and candidates. Nor can you deduct the value of your time or services and the cost of raffles, bingo or other games of chance.
To be deductible, contributions must be made to qualified organizations.
Only contributions actually made during the tax year are deductible.
If your contributions entitle you to merchandise, goods or services, including admission to a charity ball, banquet, theatrical performance or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.
Donations of stock or other property are usually valued at the fair market value of the property.
To be deductible, clothing and household items donated after August 17, 2006, generally must be in good used condition or better.
Special rules apply to donations of vehicles.
For a charitable contribution of $250 or more, you can claim a deduction only if you obtain a written acknowledgment from the qualified organization.
If you claim a deduction on your return of more than $500 for all contributed property, you must attach IRS Form 8283, Noncash Charitable Contributions, to your return.
Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which requires an appraisal by a qualified appraiser.
Alvin S. Brown
Tax attorney
703.425.1400
www.irstaxattorney.com
Wednesday, August 8, 2007
Back Taxes: Taxable Social Security disability benefits
An IRS tax auditor and his wife could not exclude Social Security disability benefits from their gross income. Although the wife had been injured at work, her Social Security disability benefits could not be treated as nontaxable workmen's compensation benefits because they were provided under the Social Security Act. The Social Security Act is not considered to be a statute in the nature of workmen's compensation because it provides for disability benefits for an injury regardless of whether the injury occurred in the course of employment. See Code Sec. 165(c)
with respect to an uncollected damage award for personal injuries that the wife sustained outside of her job.
The loss was not incurred in a trade or business or in a transaction entered into for profit. Further, the taxpayers could not claim a casualty loss deduction because they did not establish any tax basis in the judgment. Code Sec. 6662 penalty was sustained against a married couple. The penalty was appropriate in light of the husband's work as an IRS auditor and the relatively straightforward adjustments at issue. --
Theodore Major Green and Jacqueline Green v. Commissioner.Dkt. No. 5216-06 , TC Memo. 2007-217, August 7, 2007.[
MEMORANDUM OPINION
SWIFT, Judge: This matter is before us on respondent's motion for summary judgment under Rule 121.
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for 2003, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The issues for decision are: (1) Whether taxable Social Security benefits petitioner Jacqueline Green received in 2003 should be treated as nontaxable workmen's compensation benefits; and (2) whether petitioners may deduct from 2003 income $11,068 relating to a $166,013 damage award judgment that Jacqueline Green never received and that has now been discharged in bankruptcy.
Hereinafter, references to petitioner in the singular are to petitioner Jacqueline Green.
Background
At the time the petition was filed, petitioners resided in Moorpark, California. From 1985 to September 19, 2005, Mr. Green worked as a tax auditor for respondent.Petitioner's Social Security Benefits
Prior to November 12, 1989, petitioner worked on a General Motors assembly line.
In November of 1989 petitioner was injured while shopping for groceries. This was unrelated to her employment at General Motors Corporation (General Motors). The injury was caused by a shopping cart under the control of another person. Injuries petitioner sustained therefrom apparently prevented petitioner from further assembly line work at General Motors. Petitioner continued to work for General Motors but as a decal assembler.
On November 7, 1990, petitioner filed a lawsuit for personal injury damages against the person who was pushing the shopping cart.
On or about August 27, 1991, petitioner was involved in another accident, this time while at work at General Motors, as a result of which petitioner sustained additional injuries. Petitioner's injuries required surgery and left her unable to work.
On August 6, 1992, petitioner filed a claim for Social Security disability benefits, and on December 17, 1993, petitioner began receiving Social Security disability benefits.
In addition to her claim for Social Security disability benefits, petitioner filed a claim for California workmen's compensation benefits. The record does not reflect that petitioner ever received any benefits under her workmen's compensation claim.
On November 12, 1996, petitioner obtained a $166,013 default judgment for personal injury damages against the person who was pushing the shopping cart that injured petitioner in 1989.
On or about March 14, 1997, in a bankruptcy proceeding, the person against whom petitioner obtained the default judgment was discharged of liability to pay the $166,013 judgment petitioner had obtained, and petitioner never collected anything on the judgment. Petitioner never included any portion of the $166,013 judgment in taxable income, and the record does not establish that petitioner had any tax basis in the uncollected judgment.
On their 1997 joint Federal income tax return filed with respondent, petitioners reported as taxable $5,789 of the Social Security benefits petitioner received in 1997, and petitioners claimed a $11,068 casualty loss deduction relating to the above $166,013 uncollected judgment. Petitioners also attached to their 1997 tax return a statement that they intended to deduct the balance of the $154,946 uncollected judgment over the course of the next 15 years --$11,068 in each year --as a loss carryforward.
When no material fact remains at issue, we may grant summary judgment as a matter of law. Rule 121(b); Fla. Country Clubs, Inc. v. Commissioner, 122 T.C. 73, 75-76 (2004), affd. on other grounds 404 F.3d 1291 (11th Cir. 2005). Because of the parties' admissions and deemed admissions as to material facts, no material fact remains at issue.Social Security Benefits
Generally, taxpayers who file a joint return and receive Social Security benefits and whose modified adjusted gross income plus half of Social Security benefits received in a year exceeds $32,000 are to include in taxable income a portion of the Social Security benefits received in a year. Sec. 86(d)(1); Joseph v. Commissioner, T.C. Memo. 2003-19.
Benefits received under a workmen's compensation statute or other statute authorizing benefits in the nature of workmen's compensation may not be included in income.
The Social Security Act provides for disability benefits for an injury regardless of whether the injury occurred in the course of employment. See 42 U.S.C. sec. 423(d)(1)(A) (2000).
Petitioner's Social Security disability benefits received in 2003 were provided to petitioner under the Social Security Act. Because the Social Security Act is not a statute in the nature of workmen's compensation, petitioners must include in gross income for 2003 $11,227 of the $13,208 in Social Security disability benefits that petitioner received in 2003, as per the calculation provided under Section 165(c) provides a deduction from income for taxpayers who incur an uncompensated loss relating to a trade or business, to a transaction entered into for profit, or to a casualty resulting in an uncompensated loss of property.
Petitioner's $166,013 uncollected judgment involving the shopping cart was personal in nature and had no connection with petitioner's trade or business or with a transaction entered into for profit.
Petitioner was not premitted acasualty loss deduction under Secs. 165(b), 1016; secs. 1.1011-1, 1-1012-1(a), Income Tax Regs.
The above tax basis limitation set forth in the regulations prevents petitioners herein from obtaining a casualty loss deduction relating to petitioner's uncollected judgment. Petitioner did not include any portion of the $166,013 uncollected judgment in income and did not establish any tax basis therein.Under Sec. 6662(c).
Alvin S. Brown
Tax attorney
703.425.1400
www.irstaxattorney.com
To provide IRS "transparency" upload your IRS experiences to www.irsforum.org, without disclosing your identity.
An IRS tax auditor and his wife could not exclude Social Security disability benefits from their gross income. Although the wife had been injured at work, her Social Security disability benefits could not be treated as nontaxable workmen's compensation benefits because they were provided under the Social Security Act. The Social Security Act is not considered to be a statute in the nature of workmen's compensation because it provides for disability benefits for an injury regardless of whether the injury occurred in the course of employment. See Code Sec. 165(c)
with respect to an uncollected damage award for personal injuries that the wife sustained outside of her job.
The loss was not incurred in a trade or business or in a transaction entered into for profit. Further, the taxpayers could not claim a casualty loss deduction because they did not establish any tax basis in the judgment. Code Sec. 6662 penalty was sustained against a married couple. The penalty was appropriate in light of the husband's work as an IRS auditor and the relatively straightforward adjustments at issue. --
Theodore Major Green and Jacqueline Green v. Commissioner.Dkt. No. 5216-06 , TC Memo. 2007-217, August 7, 2007.[
MEMORANDUM OPINION
SWIFT, Judge: This matter is before us on respondent's motion for summary judgment under Rule 121.
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for 2003, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The issues for decision are: (1) Whether taxable Social Security benefits petitioner Jacqueline Green received in 2003 should be treated as nontaxable workmen's compensation benefits; and (2) whether petitioners may deduct from 2003 income $11,068 relating to a $166,013 damage award judgment that Jacqueline Green never received and that has now been discharged in bankruptcy.
Hereinafter, references to petitioner in the singular are to petitioner Jacqueline Green.
Background
At the time the petition was filed, petitioners resided in Moorpark, California. From 1985 to September 19, 2005, Mr. Green worked as a tax auditor for respondent.Petitioner's Social Security Benefits
Prior to November 12, 1989, petitioner worked on a General Motors assembly line.
In November of 1989 petitioner was injured while shopping for groceries. This was unrelated to her employment at General Motors Corporation (General Motors). The injury was caused by a shopping cart under the control of another person. Injuries petitioner sustained therefrom apparently prevented petitioner from further assembly line work at General Motors. Petitioner continued to work for General Motors but as a decal assembler.
On November 7, 1990, petitioner filed a lawsuit for personal injury damages against the person who was pushing the shopping cart.
On or about August 27, 1991, petitioner was involved in another accident, this time while at work at General Motors, as a result of which petitioner sustained additional injuries. Petitioner's injuries required surgery and left her unable to work.
On August 6, 1992, petitioner filed a claim for Social Security disability benefits, and on December 17, 1993, petitioner began receiving Social Security disability benefits.
In addition to her claim for Social Security disability benefits, petitioner filed a claim for California workmen's compensation benefits. The record does not reflect that petitioner ever received any benefits under her workmen's compensation claim.
On November 12, 1996, petitioner obtained a $166,013 default judgment for personal injury damages against the person who was pushing the shopping cart that injured petitioner in 1989.
On or about March 14, 1997, in a bankruptcy proceeding, the person against whom petitioner obtained the default judgment was discharged of liability to pay the $166,013 judgment petitioner had obtained, and petitioner never collected anything on the judgment. Petitioner never included any portion of the $166,013 judgment in taxable income, and the record does not establish that petitioner had any tax basis in the uncollected judgment.
On their 1997 joint Federal income tax return filed with respondent, petitioners reported as taxable $5,789 of the Social Security benefits petitioner received in 1997, and petitioners claimed a $11,068 casualty loss deduction relating to the above $166,013 uncollected judgment. Petitioners also attached to their 1997 tax return a statement that they intended to deduct the balance of the $154,946 uncollected judgment over the course of the next 15 years --$11,068 in each year --as a loss carryforward.
When no material fact remains at issue, we may grant summary judgment as a matter of law. Rule 121(b); Fla. Country Clubs, Inc. v. Commissioner, 122 T.C. 73, 75-76 (2004), affd. on other grounds 404 F.3d 1291 (11th Cir. 2005). Because of the parties' admissions and deemed admissions as to material facts, no material fact remains at issue.Social Security Benefits
Generally, taxpayers who file a joint return and receive Social Security benefits and whose modified adjusted gross income plus half of Social Security benefits received in a year exceeds $32,000 are to include in taxable income a portion of the Social Security benefits received in a year. Sec. 86(d)(1); Joseph v. Commissioner, T.C. Memo. 2003-19.
Benefits received under a workmen's compensation statute or other statute authorizing benefits in the nature of workmen's compensation may not be included in income.
Petitioner's Social Security disability benefits received in 2003 were provided to petitioner under the Social Security Act. Because the Social Security Act is not a statute in the nature of workmen's compensation, petitioners must include in gross income for 2003 $11,227 of the $13,208 in Social Security disability benefits that petitioner received in 2003, as per the calculation provided under Section 165(c) provides a deduction from income for taxpayers who incur an uncompensated loss relating to a trade or business, to a transaction entered into for profit, or to a casualty resulting in an uncompensated loss of property.
Petitioner's $166,013 uncollected judgment involving the shopping cart was personal in nature and had no connection with petitioner's trade or business or with a transaction entered into for profit.
Petitioner was not premitted a
The above tax basis limitation set forth in the regulations prevents petitioners herein from obtaining a casualty loss deduction relating to petitioner's uncollected judgment. Petitioner did not include any portion of the $166,013 uncollected judgment in income and did not establish any tax basis therein.
Alvin S. Brown
Tax attorney
703.425.1400
www.irstaxattorney.com
To provide IRS "transparency" upload your IRS experiences to www.irsforum.org, without disclosing your identity.
Tuesday, August 7, 2007
Tax Help: No alimony from oral agreement
An individual improperly deducted amounts paid to his ex-wife as alimony. Although the taxpayer and his ex-wife had an oral agreement, no written agreement or decree was in effect for the tax year at issue. A draft settlement agreement was never signed by either party and the fact that his ex-wife acknowledged receiving the payments did not satisfy the writing requirement.
PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
Randall L. Sindelir, pro se. Tamara L. Kotzker, for respondent.
ARMEN, Special Trial Judge: This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed.1 Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case.
Respondent determined a deficiency in petitioner's Federal income tax for 2002 of $6,704. The deficiency stemmed from the disallowance of a deduction for alimony payments and the related adjustment of petitioner's itemized deductions. The sole issue for decision is whether petitioner properly deducted $18,000 paid to his ex-wife in 2002 as alimony. For the reasons discussed below, we sustain respondent's determination.
Background
Some of the facts have been stipulated, and they are so found. We incorporate by reference the parties' stipulation of facts and accompanying exhibits.
At the time the petition was filed, Randall L. Sindelir (petitioner) resided in Montana.
Petitioner and his former spouse, Diana Sindelir (ex-wife), were married in February 1978. After separating sometime in late 2001, they filed a joint petition for the dissolution of their marriage in January 2002.2 When the couple separated, they had an oral agreement that petitioner would pay his ex-wife $1,500 per month in temporary maintenance. Petitioner did so.
In August 2002, the couple engaged in court-ordered mediation as part of the divorce proceedings. At the mediation, a written separation agreement was drafted, stating that petitioner was to pay his ex-wife $2,000 per month in maintenance. This separation agreement was never signed or executed by the parties, and petitioner continued to pay his ex-wife $1,500 per month.
The divorce became final in January 2003. In considering maintenance obligations, the District Court for Larimer County refused to enforce the draft separation agreement. Petitioner argued during the course of the final divorce proceeding that the separation agreement was not binding. The court agreed with petitioner and found that although an agreement between petitioner and his ex-wife may have been reduced to writing, it was not enforceable as it was not signed or executed by the parties.
Petitioner claimed an alimony deduction in the amount of $18,000 for the amounts he paid to his ex-wife in 2002.3 Respondent disallowed the deduction, and a deficiency resulted.
Discussion4
Section 71(a) provides the general rule that alimony payments are included in the gross income of the payee spouse; section 215(a) provides the complementary general rule that alimony payments are tax deductible by the payor spouse in "an amount equal to the alimony or separate maintenance payments paid during such individual's taxable year."
The term "alimony" means any alimony as defined in section 71, which provides in relevant part:
SEC. 71(b). Alimony or Separate Maintenance Payments Defined. --For purposes of this section --
(1) In general. --The term "alimony or separate maintenance payment" means any payment in cash if --
(A) such payment is received by (or on behalf of) a spouse under a divorce or separation instrument,
(B) the divorce or separation instrument does not designate such payment as a payment which is not includible in gross income * * * and not allowable as a deduction under section 215,
(C) in the case of an individual legally separated from his spouse under a decree of divorce or of separate maintenance, the payee spouse and the payor spouse are not members of the same household at the time such payment is made, and
(D) there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment (in cash or property) as a substitute for such payments after the death of the payee spouse.
The issue here is solely whether petitioner's payments to his ex-wife in 2002 satisfied the requirement that the payments be made under a divorce or separation instrument. See sec. 71(b)(1)(A).
Section 71(b)(2) provides that a "divorce or separation instrument" means:
(A) decree of divorce or separate maintenance or a written instrument incident to such a decree,
(B) a written separation agreement, or
(C) a decree (not described in subparagraph (A)) requiring a spouse to make payments for the support or maintenance of the other spouse.
Although petitioner and his ex-wife had an oral agreement, no written agreement or decree was in effect for the taxable year at issue.
Courts have leniently interpreted the writing requirement. See, e.g., Leventhal v. Commissioner, T.C. Memo. 2000-92 (finding that letters signed by both the taxpayer's attorney and the ex-wife's attorney clearly setting forth the terms of maintenance payments was a "separation agreement"); Osterbauer v. Commissioner, T.C. Memo. 1982-266 (determining that a letter sent by the wife's representative to the taxpayer memorializing the terms of their oral agreement constituted a written instrument). But courts have also routinely held that there must be some actual writing in effect. See, e.g., Herring v. Commissioner, 66 T.C. 308, 311 (1976) (holding that payments made under an oral agreement were not alimony). The draft settlement agreement was never in effect, and the fact that petitioner's ex-wife acknowledges receiving the payments made by petitioner does not satisfy the writing requirement. See, e.g., Leventhal v. Commissioner, supra.
Although we appreciate the difficult position that petitioner has found himself in, particularly since it seems clear that the intention of the oral agreement in effect between petitioner and his ex-wife had been to have the $1,500 monthly payments serve as "alimony", deductions are a matter of legislative grace and must meet all applicable statutory requirements. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). To be deductible as alimony under section 71, a payment must be made pursuant to some kind of written agreement, and the oral agreement in effect here is insufficient to satisfy that requirement. See sec. 71(b)(1)(A). Accordingly, we hold that petitioner's payments made to his ex-wife in 2002 were not properly deductible as alimony.
To reflect our disposition of the disputed issue,
Decision will be entered for respondent.
1 Unless otherwise indicated, all subsequent section references are to the Internal Revenue Code in effect for 2002.
2 As the couple was living in Colorado at the time, the separation and divorce proceedings were supervised by the District Court for Larimer County.
3 Petitioner wrote checks to his ex-wife totaling $15,440.88 in 2002, testifying at trial that the difference between the amount claimed and the checks written was for expenses paid on her behalf. As we ultimately hold that the entire $18,000 is not deductible as alimony, we need not decide whether petitioner properly substantiated the additional amounts paid.
4 The issue for decision under these facts is essentially legal in nature; therefore, we decide the instant case without regard to the burden of proof.
Alvin S. Brown, Esq.
Tax attorney
703.425.1400
www.irstaxattorney.com
To provide IRS transparency, upload your IRS experiences to www.irsforum.org
An individual improperly deducted amounts paid to his ex-wife as alimony. Although the taxpayer and his ex-wife had an oral agreement, no written agreement or decree was in effect for the tax year at issue. A draft settlement agreement was never signed by either party and the fact that his ex-wife acknowledged receiving the payments did not satisfy the writing requirement.
PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
Randall L. Sindelir, pro se. Tamara L. Kotzker, for respondent.
ARMEN, Special Trial Judge: This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed.1 Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case.
Respondent determined a deficiency in petitioner's Federal income tax for 2002 of $6,704. The deficiency stemmed from the disallowance of a deduction for alimony payments and the related adjustment of petitioner's itemized deductions. The sole issue for decision is whether petitioner properly deducted $18,000 paid to his ex-wife in 2002 as alimony. For the reasons discussed below, we sustain respondent's determination.
Background
Some of the facts have been stipulated, and they are so found. We incorporate by reference the parties' stipulation of facts and accompanying exhibits.
At the time the petition was filed, Randall L. Sindelir (petitioner) resided in Montana.
Petitioner and his former spouse, Diana Sindelir (ex-wife), were married in February 1978. After separating sometime in late 2001, they filed a joint petition for the dissolution of their marriage in January 2002.2 When the couple separated, they had an oral agreement that petitioner would pay his ex-wife $1,500 per month in temporary maintenance. Petitioner did so.
In August 2002, the couple engaged in court-ordered mediation as part of the divorce proceedings. At the mediation, a written separation agreement was drafted, stating that petitioner was to pay his ex-wife $2,000 per month in maintenance. This separation agreement was never signed or executed by the parties, and petitioner continued to pay his ex-wife $1,500 per month.
The divorce became final in January 2003. In considering maintenance obligations, the District Court for Larimer County refused to enforce the draft separation agreement. Petitioner argued during the course of the final divorce proceeding that the separation agreement was not binding. The court agreed with petitioner and found that although an agreement between petitioner and his ex-wife may have been reduced to writing, it was not enforceable as it was not signed or executed by the parties.
Petitioner claimed an alimony deduction in the amount of $18,000 for the amounts he paid to his ex-wife in 2002.3 Respondent disallowed the deduction, and a deficiency resulted.
Discussion4
Section 71(a) provides the general rule that alimony payments are included in the gross income of the payee spouse; section 215(a) provides the complementary general rule that alimony payments are tax deductible by the payor spouse in "an amount equal to the alimony or separate maintenance payments paid during such individual's taxable year."
The term "alimony" means any alimony as defined in section 71, which provides in relevant part:
SEC. 71(b). Alimony or Separate Maintenance Payments Defined. --For purposes of this section --
(1) In general. --The term "alimony or separate maintenance payment" means any payment in cash if --
(A) such payment is received by (or on behalf of) a spouse under a divorce or separation instrument,
(B) the divorce or separation instrument does not designate such payment as a payment which is not includible in gross income * * * and not allowable as a deduction under section 215,
(C) in the case of an individual legally separated from his spouse under a decree of divorce or of separate maintenance, the payee spouse and the payor spouse are not members of the same household at the time such payment is made, and
(D) there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment (in cash or property) as a substitute for such payments after the death of the payee spouse.
The issue here is solely whether petitioner's payments to his ex-wife in 2002 satisfied the requirement that the payments be made under a divorce or separation instrument. See sec. 71(b)(1)(A).
Section 71(b)(2) provides that a "divorce or separation instrument" means:
(A) decree of divorce or separate maintenance or a written instrument incident to such a decree,
(B) a written separation agreement, or
(C) a decree (not described in subparagraph (A)) requiring a spouse to make payments for the support or maintenance of the other spouse.
Although petitioner and his ex-wife had an oral agreement, no written agreement or decree was in effect for the taxable year at issue.
Courts have leniently interpreted the writing requirement. See, e.g., Leventhal v. Commissioner, T.C. Memo. 2000-92 (finding that letters signed by both the taxpayer's attorney and the ex-wife's attorney clearly setting forth the terms of maintenance payments was a "separation agreement"); Osterbauer v. Commissioner, T.C. Memo. 1982-266 (determining that a letter sent by the wife's representative to the taxpayer memorializing the terms of their oral agreement constituted a written instrument). But courts have also routinely held that there must be some actual writing in effect. See, e.g., Herring v. Commissioner, 66 T.C. 308, 311 (1976) (holding that payments made under an oral agreement were not alimony). The draft settlement agreement was never in effect, and the fact that petitioner's ex-wife acknowledges receiving the payments made by petitioner does not satisfy the writing requirement. See, e.g., Leventhal v. Commissioner, supra.
Although we appreciate the difficult position that petitioner has found himself in, particularly since it seems clear that the intention of the oral agreement in effect between petitioner and his ex-wife had been to have the $1,500 monthly payments serve as "alimony", deductions are a matter of legislative grace and must meet all applicable statutory requirements. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). To be deductible as alimony under section 71, a payment must be made pursuant to some kind of written agreement, and the oral agreement in effect here is insufficient to satisfy that requirement. See sec. 71(b)(1)(A). Accordingly, we hold that petitioner's payments made to his ex-wife in 2002 were not properly deductible as alimony.
To reflect our disposition of the disputed issue,
Decision will be entered for respondent.
1 Unless otherwise indicated, all subsequent section references are to the Internal Revenue Code in effect for 2002.
2 As the couple was living in Colorado at the time, the separation and divorce proceedings were supervised by the District Court for Larimer County.
3 Petitioner wrote checks to his ex-wife totaling $15,440.88 in 2002, testifying at trial that the difference between the amount claimed and the checks written was for expenses paid on her behalf. As we ultimately hold that the entire $18,000 is not deductible as alimony, we need not decide whether petitioner properly substantiated the additional amounts paid.
4 The issue for decision under these facts is essentially legal in nature; therefore, we decide the instant case without regard to the burden of proof.
Alvin S. Brown, Esq.
Tax attorney
703.425.1400
www.irstaxattorney.com
To provide IRS transparency, upload your IRS experiences to www.irsforum.org
Monday, August 6, 2007
Tax Attorney: Business Expense or Hobby?
Fishing, Gardening, Golf, Sewing, Woodworking, Horsemanship, Scrap Booking, Stamp and Coin Collecting, etc. This is a very large audit issue. In the end, the IRS will make a judgement on whether the expense is eigher a business expense or a hobby. Strong advocacy by a competent tax attorney is necessary for these issues. The IRS tends to be adverse in these cases without aggressive advocacy and knowledge of the law.
Your favorite activity may make pofit every year or so, but there be tax implications that surprise you.
What is a hobby? Hobbies, also called not-for-profit activities, are those activities that are not pursued for profit. What is a business? Generally, your activity is considered a business if it is carried on with the reasonable expectation of earning a profit.
If you are not sure whether you are running a business or simply enjoying a hobby, here are some of the factors you should consider:
• Do you run the activity in a businesslike manner?
• Does the time and effort you put into the activity indicate an intention to make a profit?
• Do you depend on income from the activity?
• If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
• Have you changed methods of operation to improve profitability?
• Do you or your advisors have the knowledge needed to carry on the activity as a successful business?
• Have you made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Can you expect to make a profit in the future from the appreciation of assets used in the activity?
An activity is usually considered a business if it makes a profit during at least three of the last five tax years, including the current year.
An exception is breeding, showing, training or racing horses. Such activity is presumed to be a business if it makes a profit during at least two of the last seven years.
If you are conducting a trade or business you may deduct your ordinary and necessary expenses. An ordinary expense is an expense that is common and accepted in your trade or business. A necessary expense is one that is appropriate for your business.
Losses from a not-for-profit activity (hobby) may not be used to offset other income. It is possible to claim some deductions for hobby activities as itemized deductions on your Form 1040 income tax return. However, there are special rules and limits to the deductions you can claim, and those deductions may not exceed the gross income from your hobby.
A good resource is IRS ication 535, Business Expenses
Alvin S. Brown, Esq.
Tax attorney
703.425.1400
http://www.irstaxattorney.com/
For those with IRS experiences, you can upload those experiences at http://www.irsforum.org/ in order to provide IRS "transparency."
Fishing, Gardening, Golf, Sewing, Woodworking, Horsemanship, Scrap Booking, Stamp and Coin Collecting, etc. This is a very large audit issue. In the end, the IRS will make a judgement on whether the expense is eigher a business expense or a hobby. Strong advocacy by a competent tax attorney is necessary for these issues. The IRS tends to be adverse in these cases without aggressive advocacy and knowledge of the law.
Your favorite activity may make pofit every year or so, but there be tax implications that surprise you.
What is a hobby? Hobbies, also called not-for-profit activities, are those activities that are not pursued for profit. What is a business? Generally, your activity is considered a business if it is carried on with the reasonable expectation of earning a profit.
If you are not sure whether you are running a business or simply enjoying a hobby, here are some of the factors you should consider:
• Do you run the activity in a businesslike manner?
• Does the time and effort you put into the activity indicate an intention to make a profit?
• Do you depend on income from the activity?
• If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
• Have you changed methods of operation to improve profitability?
• Do you or your advisors have the knowledge needed to carry on the activity as a successful business?
• Have you made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Can you expect to make a profit in the future from the appreciation of assets used in the activity?
An activity is usually considered a business if it makes a profit during at least three of the last five tax years, including the current year.
An exception is breeding, showing, training or racing horses. Such activity is presumed to be a business if it makes a profit during at least two of the last seven years.
If you are conducting a trade or business you may deduct your ordinary and necessary expenses. An ordinary expense is an expense that is common and accepted in your trade or business. A necessary expense is one that is appropriate for your business.
Losses from a not-for-profit activity (hobby) may not be used to offset other income. It is possible to claim some deductions for hobby activities as itemized deductions on your Form 1040 income tax return. However, there are special rules and limits to the deductions you can claim, and those deductions may not exceed the gross income from your hobby.
A good resource is IRS ication 535, Business Expenses
Alvin S. Brown, Esq.
Tax attorney
703.425.1400
http://www.irstaxattorney.com/
For those with IRS experiences, you can upload those experiences at http://www.irsforum.org/ in order to provide IRS "transparency."
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