Welcome to TaxView with Chris Moss CPA Tax Attorney

Tax return identity theft is on the rise and will reach an all time high in 2016. Criminals or the perpetrators plan to illegally obtain your name and Social Security number, create phony W-2s and related forms, and file a bogus tax return before you can file your legitimate return. Many of these crooks are organized criminals who have figured out that it is easier to rip you off by filing a bogus tax return than robbing a bank or hijacking a car. These 21st century thugs are ripping off the US Government as well. Uncle Sam is losing millions of dollars if not potentially billions a year in bogus tax refunds and you the taxpayer are out in the cold if you are one of the unlucky taxpayers who get their identity stolen. Do you want to learn some basic prevention steps to keep your tax return safe from identity theft this year.? So stay with us here on TaxView with Chris Moss CPA Tax Attorney to find out how to stop the perpetrators and protect and keep safe your tax return from identity theft in 2016.

The typical identity theft scheme is for the perpetrator to file an early tax return with your social security number and your name but a different address around February through March up to the first week in April. The bogus tax return always shows a refund from a bogus W2 for a company you don't work with an address you don't live at. The mailing address on the tax return could be a PO Box or an executive office suite or any rented house. Sometimes the address could be an abandoned or foreclosed property where there is an outside mailbox or a mail slot in the door with no occupants to get the mail.

Here is how the scheme works:  For manual checks, the refund check comes to the designated address and the mail is picked up by the perpetrator. The check is then either forged and cashed or deposited into a legitimate account but with a fictitious owner. There could be hundreds if not thousands of these refunds for hundreds of taxpayers from the same address to which the perpetrator has stolen identities from. Currently the IRS has absolutely no mechanism to detect such mass refund requests originating from the same address. For electronic refunds, bank accounts are opened and then closed immediately after thousands of bogus refunds have been deposited with the money wired abroad without a trace. While the Government eventually discovers the identify theft when the IRS computer system matches the bogus W2 to the company you supposedly work for, that matching process does not happen immediately when the tax return is filed, but perhaps sometimes months later.  By then the refund had already been issued and soon a few weeks later stolen by the perpetrator all prior to the IRS discovering the identify theft.

In addition the crooks know this crime must be a high volume scam to success. Criminals realize that many of their bogus tax returns will be delayed or questioned by the IRS. So when for example a few hundred of the refunds are received of the thousands of returns filed, the perpetrators close shop and move on. By the time the government investigates the crooks have moved on, new locations have been secured and the illegal operators get ready for the next year’s filing season to start the whole operation again.

How serious is tax return identity theft?  IRS Commissioner Koskinen during a prepared speech on November 19, 2015 in Washington DC noting that "increasingly, these crimes are being perpetrated by sophisticated, organized syndicates. They’ve been able to gather almost unimaginable amounts of personal data from sources outside the IRS. They use this data to file fraudulent federal and state tax income returns, and claim huge refunds."  More specifically, the inspector general of the IRS indicate that bogus tax filings are in the millions with billions of dollars potentially at stake. A new proposed bill “Stop Identity Theft Act of 2015” calls for the Attorney General to: (1) make use of all existing resources of the Department of Justice (DOJ), including task forces, to bring more perpetrators of tax return identity theft to justice; and (2) take into account the need to concentrate efforts in areas of the country where the crime is most frequently reported, to coordinate with state and local authorities to prosecute and prevent such crime, and to protect vulnerable groups from becoming victims or otherwise being used in the offense.

What can you do right now? In addition to the obvious, which is filing as early as possible to beat the perpetrator to filing first,  have your tax attorney continuously check on line with IRS Electronic Account Resolution (EAR) throughout tax season to make sure you are safe up to the moment you file your tax return. When your tax attorney will make her inquiry with the EAR portal prior to the tax return being filed, she will hopefully get a zero transcript indicated no tax return has yet been received by the Government. But beware if you file late and the response is like this one you will know there has been identify theft: Dear Tax Professional, Your office submitted a request for taxpayer information. We apologize for the inconvenience but we are not able to process your request at this time. Please have your client contact the Identity Protection Specialized Unit (IPSU) at 800-908-4490. Sincerely Yours Director, Electronic Products & Services Support.

What happens to you after your tax return has been filed by the identity theft perpetrator? While I hope you never have to call the Identify Theft Department of the IRS, once you get a hold of them you realize the road ahead is not going to be easy. You are required to complete Form 14039 Identity Theft Affidavit and submit copies of various documents like a passport and drivers license proving you are who you say you are. All documents and original tax return have to be submitted in a paper version and mailed either snail mail or overnight delivery. Processing takes up to six months or longer.

What can you do right now to prevent your 2015 tax return from being stolen from you when you file this Spring in 2016? First and most important, file early in 2015. There is no better way to stop identity theft than to file early. What if you have not received your K1s yet or other supporting documentation.  By all means have your tax attorney record the information direct from the issuers of the K1s by phone or emails. Create a fairly accurate record of what your K1 will show.  File early and true up any small immaterial differences the following year.  Disclose to the Government what you are doing in your tax returns prior to filing and explain you are filing early to avoid identity theft.

Second, if you move, please have your tax attorney notify the IRS of your new address. Call the government and make sure they have your new address on file before you file your tax return and explain that you are concerned about identify theft. Tell your CPA Attorney you are concerned about identify theft so your tax professional will check up on your account throughout the year. Never give your entire social security number to anyone on the phone. Vendors will be happy to have you call them back to verify who they are before you give them your social security number.

Perhaps sometime soon, the Government will refuse to refund any money to anyone based on a filed income tax return until the taxpayer’s identify is confirmed either by a follow up phone call or a special PIN# identification entered by email or text. This security identification process would significantly delay you all from receiving your refunds but would dramatically reduce the high volume of identify theft in 2016. When you compare the inconvenience of delayed refunds to the absolute nightmare of having your tax return hijacked by criminals I would choose the delay of having my identify confirmed. If you agree with this approach, ask your tax attorney to communicate with your elected officials about your concern with tax return identify theft. Together we can help the IRS fight back against tax return identity theft and help you all keep your tax returns secure from theft. 

Thanks for joining us on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView.  

Kindest regards from Chris Moss CPA Tax Attorney

IRS Charitable Deduction Audit

by Chris Moss CPA

Welcome to TaxView with Chris Moss CPA Tax Attorney

All taxpayers at one time or another have made tax deductible charitable donations under IRS Code 170. But would your charitable deduction hold up during an IRS Charitable Deduction Audit?  While Façade Easements were recently the focus of IRS Charitable Deduction Audits, the IRS still disallows Façade Easements as well as your normal routine cash and noncash donations during an IRS Charitable Deductions Audit. In fact, the IRS is just as likely to commence a regular and routine IRS Charitable Deductions Audit against you in many cases years after you file your tax return.  So if you have made a donation to your favorite charity and plan on deducting these donations on your 2015 income tax return in accordance with IRS Code 170, stay tuned to TaxView with Chris Moss CPA Tax Attorney to learn how to comply with Government regulations for legal record keeping of cash and non-cash charity donations, and see where IRS Charitable Deductions Audits are trending in 2016 so you can make sure you don’t lose an IRS Charitable Deduction Audit headed your way soon.

Regarding noncash donations to Purple Heart, Goodwill, Salvation Army and other similar organizations, the IRS seems to be just waiting to disallow all these deductions during an IRS Charitable Deduction Audit just as they did to Kenneth and Susan Kunkel in Kunkel v IRS US Tax Court 2015.  The Kunkels deducted on their 2011 Sch A tax return noncash charity donations of $37,315 comprised of household items, books, clothing, furniture, and toys donated to the Lutheran Church, Goodwill Industries, Purple Heart, and Vietnam Veterans. The Government not only disallowed the whole deduction in an IRS Charitable Deduction Audit claiming the Kunkels had lack of substantiation but also hit the Kunkels with an accuracy related penalty plus interest. The Kunkels fought back appealing to US Tax Court in Kunkel v IRS US Tax Court 2015. Indeed the Kunkels produced for the Court the receipts given to them by the various organizations and in my view very detailed spreadsheets of exactly what they had contributed but unfortunately this wasn’t good enough to overrule an IRS Charitable Deduction Audit.

Judge Lauber of the US Tax Court observed that Section 170 indeed allows the Kunkels to deduct their charity contribution, cash or noncash, made within the taxable year to a charitable organization.  However charity cash or noncash deductions are allowed only if the Kunkels can satisfy statutory and regulatory requirements of 170(a)(1) and Regulation 1.170A-13. Whether cash or noncash, if you make donation over $250 you must obtain a contemporaneous written acknowledgement from the charity. For a noncash donation that exceeds $500 then you are subject to even more rigorous substantiation requirements, and finally if the noncash donation is higher than $5000 you are subject to highest substantiation requirement including a qualified appraisal which must be included in the tax return prior to filing.

The Court also noted that similar items of property must be aggregated in determining whether the noncash gift exceeds the $500 and the $5000 thresholds as per Section 170(f)(11)(F).  While clothing, jewelry, furniture, electronic equipment, household appliances or kitchenware are considered separate categories the Government in an IRS Charitable Deduction Audit in many cases aggregates as much of your donation as they can into one category so that they can push you into the next more rigorous substantiation threshold.   Unfortunately for the Kunkels the Court aggregated their donations in 2011 to add up to $21,920 for clothing, $8000 for books, which subjected them to the $5000 threshold.  The rest of the donations were aggregated over the $500 category threshold. There was little that the Kunkels could do to dispute these groupings because their tax return lacked contemporaneous evidence within the tax return itself.

The Court went on to list the requirements of any contribution (cash or noncash) over $250.  There must be a “contemporaneous written acknowledgment of the contribution by the charitable organization citing Weyts v IRS T.C.Memo 2003-68. The charity also must give you a description of any property other than cash, and whether or not you received any goods or services back from the charity.  If you did receive some sort of goods or services back from the charity, then the charity must provide you a good faith estimate of the value of those goods and services.  Finally and most importantly the evidence that you receive in form of documentation from the charity must be “contemporaneous”. In other words the facts will have to show perhaps later that you had all your documentation in your possession by the date you filed your tax return.

For noncash donations, the documented facts are a much difficult to gather contemporaneously but nevertheless essential to you winning an IRS Charitable Deduction Audit.  As an example, Goodwill, Purple Heart and Salvation Army usually pick up clothes and other household goods direct from your doorstep, in many cases when you are not at home leaving a receipt hanging on your door handle. While the Court acknowledged that at times it might be difficult to obtain the required documentation, when property is left at a charity’s unattended drop site, the Court nevertheless placed on Kunkel the burden of obtaining the necessary documentation prior to them filing their tax return.

The Court then went on to address noncash contributions exceeding $500.  Citing Gaerttner v IRS  TC Memo 2012-43 Judge Lauber opined that the records Kunkel should have obtained  prior to filling their tax return were at minimum: 1. The date the Kunkels  acquired the property and how they acquired the property, 2. A description of the property, 3. The Cost of the property, 4, the Fair market value of the property at the date of contribution and  5, the method the Kunkels used in determining fair market value as per Section 170(f)(11)(B) and Regulation 1.170(A)-13(b)(2)(ii)(C) and (D).

The Court was not without compassion for the Kunkels charitable intent, and conceded that “no doubt the Kunkels did donate some property to charity in 2011.” But the Court concluded that the IRS Code imposes a series of increasingly rigorous substantiation requirements for larger gifts, especially when the consist of household property rather than cash and that the documentation required by law was simply not present in the Kunkels 2011 tax return that they filed with the Government.  Indeed, the Court also found the Kunkels negligent in filing a tax return without supporting documentation and hit them with a substantial Section 6662(a) penalty plus interest.  IRS wins, Kunkels lose.

So how can you win an IRS Charitable Deduction Audit if you have noncash donations in excess of $500? First, have your tax attorney include in your tax return the facts and evidence you need to win an IRS Charitable Deduction Audit.  Best practice for larger noncash donations would be insert the required documentation into tax return itself prior to filing to prove that the evidence was contemporaneously created. Second, do not make the donation if the charity cannot give you the IRS required information. If you don’t have the facts on your side simply don’t take the deduction.  Not only are you not going to win the audit without the facts and evidence contemporaneously documented in your tax return, but you will also get hit with a substantial negligence penalty plus interest. Finally, if the charity cannot give you the required documentation simply consider donating to another similar charity which perhaps can provide you the required government documentation to sustain an IRS Charitable Deduction Audit.  After you file your tax return with the required facts and evidence you can then sit back and relax, knowing that when the IRS Charitable Deduction Audit commences, perhaps years later, you are going to win big.

Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView.

Kindest regards and happy New Year 2016 from Chris Moss CPA Tax Attorney

Welcome to TaxView with Chris Moss CPA Tax Attorney

Are any of you battling the IRS over a Federal IRS Tax Lien or Levy?  If you are in this unfortunate situation it would appear that for you have ignored countless IRS bills, letters and certified letters over a period of perhaps many years. You may think there is nothing you can do now to fight back, but you might have one last chance: you should consider requesting a Collection Due Process hearing (CDP) to temporarily stop enforcement action of a lien, levy or garnishment until your tax attorney puts forth her best “offer in compromise” to settle your tax debts with the Government. So stay with us here on TaxView with Chris Moss CPA Tax Attorney to find out how you can fight back with a CDP hearing and save taxes..

So how does a taxpayer get served with an IRS lien in the first place?  One reason could be payroll tax withholding that had not been remitted to the Government.  Another reason could be the filing of a tax return with a large amount of tax due but you have no money to pay the tax.  Or perhaps you never filed a tax return in the first place and the Government has filed one for you?  To make matters worse, you never responded to the IRS letters you received and thereby gave up your right to litigate the substantive issues as to whether or not you owed the tax in the first place. Now you are only left with an IRS lien, levy or garnishment coming your way, and left with only one way to fight back: the CDP hearing.  So what is a CDP hearing?

First, your CDP hearing must be before an impartial noninvolved appeals officer.  Moosally v IRS US Tax Court (2014).  Patricia Moosally never argued that she did not owe payroll tax and penalties.  In fact, she consented in 2001 to the Government assessing her almost $50K in penalties back to 2000.  Apparently the IRS was unable to collect this tax from Moosally and years later in 2010 Moosally submitted Form 656 Offer in Compromise (OIC) for $200 claiming she had insufficient assets to pay.  Moosally and the IRS represented by among others appeals officer Smeck could not come to an agreement so the Government issued her a Federal tax lien in 2011.  Moosally asked for a CDP hearing and to Moosally’s surprise there was Ms. Smeck again involved in a minor capacity during the hearing.  Unable to resolve the case at the CDP hearing level, Moosally appealed to US Tax Court for relief in Moosally v IRS US Tax Court (2014).

Judge Wells makes clear that pursuant to Section 6321 a notice of Lien must be accompanied by the right to request an appeals hearing to be conducted by an impartial officer or employee of the Appeals office who had no prior involvement with respect to the unpaid tax.  Section 6320(a)(3)(B)(b)(1)   Moosally argues for a new hearing claiming the appeal was tainted with prior involvement by Ms. Smeck.  The Government denied this claim. US Tax Court sided with Moosally concluding that she was entitled to a new CDP hearing before an impartial officer.  Moosally wins (at least for another hearing) IRS loses.

Second, your CDP hearing is not about whether or not you owe the tax, but rather whether the IRS has unreasonably rejected your offer in compromise or “settlement” based on your ability to pay the tax.   Remember by the time you are being levied attached or garnished, the time to appeal based on the merits to US Tax Court has long vanished 90 days after you were issued a notice of deficiency perhaps years if not many years earlier.  All you can do now is to appeal that the Government unreasonably rejected your settlement offer based on your ability to pay.  Which brings us to what is called an “offer in compromise”.  It is your best chance to settle with the IRS before the liens, levy, garnishments and attachments are issued to your employer, bank, customers and vendors. 

Why is the CPD hearing so important?  If the IRS unreasonably had rejected your offer in compromise, it is at the CPD hearing that you can have the IRS decision overturned and if you are still not satisfied you can take your case all the way up to US Tax Court.  But as Eugene Dinino found out, In Dinino vs IRS US Tax Court (2009) the US Tax Court will not tolerate taxpayers using CPD hearings just to delay the inevitable.

Dinino owed the US Government over $600K in back payroll taxes and penalties from 2000-2004.  For many years the IRS sent Dinino many notices including a final “Intent to Levy Notice” in 2008.  The levy notice advised Dinino that he could receive a CDP hearing before the IRS office of Appeals.  In April of 2008 the IRS received from Dinino’s tax attorney Form 12153 requesting a CDP hearing so he could submit an Offer in Compromise.  After almost a year of cancelled appointments and no shows the IRS finally closed the appeal and sustained the levy.  Dinino appealed to US Tax Court in March of 2009 claiming he was never granted a CDP hearing and was never allowed to submit an “offer in compromise”.

Judge Gustafson points out that “except when the underlying tax liability is at issue, the Court will review the determination of the Office of Appeals for abuse of discretion, citing Goza v IRS, 114 T.C. 12 (2000)--that is, the Court will decide whether the determination was arbitrary, capricious or without sound basis in fact or law citing Murphy v IRS, 125. T.C. 301 (2005). Affirmed on appeal 469 F.3d 27 (1st Cir 2006).  In this case Dinino simply failed to appear to the hearing and failed to participate in various other telephone hearings.  Judge Gustafson further opines that Dinino is not guaranteed an “indefinite number of sessions that Dinino unilaterally demands.   Finally Judge Gustafson concludes that the appeals officer conducting the CDP hearing was never given an updated Form 433-A providing the Government current adequate financial information.  Therefore it was not an abuse of discretion for the appeals office to sustain the levy.  IRS wins Dinino loses.

So what does this mean for anyone facing a levy, lien, or attachment?  If you face imminent lien or levy or attachment of your wages, your bank accounts or your real estate and other assets, make sure your tax attorney files for the CDP hearing submitting Form 12153 allowing you one more chance to settle with the Government.  If you have submitted your Form 433-A for an offer in compromise and made your best offer, and you believe the Appeals decision process has been arbitrary and capricious, by all means appeal to the US Tax Court for relief.  Work with the Government towards a fair and reasonable “offer in compromise” to settle your case before the levy, liens and attachments come flying at your vendors, employer and real estate.  You will be glad you did.

Thank you for joining Chris Moss CPA Tax Attorney on TaxView.

See you all next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

IRS Innocent Spouse Relief Audit

by Chris Moss CPA

Welcome to TaxView with Chris Moss CPA Tax Attorney

Have any of you wives out there perhaps sometimes not quite understood the tax strategy your husband has used to prepare your income tax return?  Any husbands out there traveling so much for work that your wife pays all the bills and files all tax returns? If any of these situations apply to you, then you can see why innocent Spouse Relief allowed by IRS Code Section 6015(a)(1) is probably one of most litigated of all tax strategies particularly when couples split up and divorce. In fact, chances are the IRS may just be waiting, patiently I might add, to begin a Whipsaw Innocent Spouse Audit soon after your Divorce decree is finalized. So for all you couples out there, happily married or soon to be divorced, stay tuned to TaxView with Chris Moss CPA Tax Attorney as we journey through real life Innocent Spouse Court cases to discover the best tax strategy for you to win an IRS Innocent Spouse Audit and keep your assets safe and protected from long reach of the IRS Innocent Spouse Audit agents.

Innocent Spouse Relief is litigated in US Tax Court more than just about any other tax strategy.  There were 5 cases in 2015 alone including Willie and Sandra Scott decided last month in September 2015.  In Scott vs IRS US Tax Court 2015-180, the facts are simple except that in this case both husband and wife stayed married. Husband was in charge of the finances and was responsible for filing the 2008 and 2009 tax returns. His wife played no role at all in filing the tax return except she gave her husband information on her two businesses for him to include in the tax return he prepared. The IRS audited and in addition to other minor adjustments against the husband’s businesses disallowed over $200,000 of expenses for wife’s businesses.

Wife did not dispute the tax she owed when she appealed to US Tax Court, but instead, claimed the resulting tax liability should not be joint and several to her because she did not have any involvement with preparation of the tax return. Judge Goeke states that Section 6015(b) provides that a taxpayer will be relieved of liability for an understatement of tax if: (1) a joint return was filed for the taxable year in question; (2) there is an understatement of tax attributable to erroneous items of the nonrequesting spouse; (3) the taxpayer requesting relief “did not know, and had no reason to know, that there was such understatement” when he or she signed the return; (4) taking into account all of the facts and circumstances, it would be inequitable to hold the taxpayer liable for the deficiency attributable to such understatement; and (5) the taxpayer elects to have section 6015(b) apply within two years of the initial collection action.

The Court further determined that of all these factors, the key and most important factor was whether the wife “had a reason to know” of the understatement.  The Court of Appeals for the Eleventh Circuit, has held that a spouse has reason to know of a substantial understatement if a reasonably prudent taxpayer in her position could be expected to know that the return contained the substantial understatement. See Kistner v. Commissioner, 18 F.3d 1521 (11th Cir. 1994), rev’g T.C. Memo. 1991-463; Stevens v. Commissioner, 872 F.2d 1499 (11th Cir. 1989).

The Court then reviewed the four factor inquiry that has generally been used in deciding the question of whether a spouse asking for innocent relief has “reason to know” 1. Level of Education, 2. Involvement in family finances, 3. Routine vs lavish expenditures and 4. Deceit by the other spouse. Citing Butler v. Commissioner, 114 T.C. 276, 284 (2000). The Court noted that Wife had a college education and should have had knowledge of income tax owed relating to her own business.  The Court concluded that Wife had in fact “reason to know” of the understatement.  IRS Wins Wife loses Husband wins.   However, the Court also concluded that Wife would have relief from husband’s business tax adjustments, since she had “no reason to know” of her husband’s business.  Wife wins, IRS loses, and Husband has a partial loss.

Unlike the Scotts who stayed married, most of these innocent spouse cases end in tragic Whipsaw divorce as did Demeter v Demeter v IRS in US Tax Court 2014-238 decided November 24, 2014.  The facts are simple: Husband and wife filed tax returns for 2004 2005 and 2006 prepared by tax attorney Ron Mulchi.  Wife signed returns in 2007 having never met or talked with Mulchi.  Taxes were not paid by husband due to his business failing and wife first became aware of this when she started receiving levy notices from IRS.  Both husband and wife filed bankruptcy in 2008 and later divorced in 2009.  Wife filed for Innocent Spouse Relief in 2011 and the IRS was about to grant relief, but her ex-husband filed an appeal in Demeter v Demeter v IRS in US Tax Court 2014-238  as an “Intervenor” opposing in this Whipsaw case relief to his ex-wife.  With the Government conceding to the Ex-Wife, Judge Vasquez eventually ruled in favor of the Ex-wife, finding that she filed for innocent spouse relief after the divorce, during a personal economic hardship, and that her ex-husband agreed as part of the divorce settlement agreement to pay the back taxes, thereby giving the ex-wife “no reason to know” that her ex-husband, the Intervenor, would not pay the tax.  Ex-wife and Government win, Intervenor Ex-husband loses.

Our final case involves a husband fighting for innocent spouse relief in Richard vs IRS vs Ellis Intervenor US Tax Court 2011-144 decided on June 27, 2011.  The facts are fairly simple in that Husband and Wife filed a joint return in 2004 with the bulk of the taxable income attributed to the wife.  Not reported on this tax return was an early distribution from the wife’s retirement account.  The couple divorced in 2006.  Shortly after the divorce, the IRS audited their joint 2004 return and increased the tax due by the failure to report the retirement income distribution.  In 2007 ex-husband filed for innocent spouse relief for the early retirement distribution.  Now here comes the Whipsaw:  The ex-wife intervened claiming the ex-husband very well knew that they did not report the early retirement distribution on their 2004 tax return.  Chief Judge Colvin ultimately finds for the Ex-husband because he credibly testified that he was unaware of his Ex-wife Intervenor’s early distribution. This is in spite of the ex-wife Intervenor testifying that ex-husband and she discussed the early retirement distribution before and after she requested the funds.  Perhaps Judge Colvin heard “she said” but believed “he said” as ex-husband appears to have been more credible than ex-wife to the Court. Ex-husband wins, IRS loses, and Ex-wife loses.

So what does this all mean for anyone out there who wants to file for innocent spouse relief?  First and foremost, figure out whether or not you benefited from your husband’s tax error, mistake or in some cases civil or criminal fraud. If you did not, and are separating from your spouse, make sure your divorce attorney includes Innocent Spouse Relief language in the settlement agreement. Also, if you are the ex-husband be prepared for your ex-wife to intervene to US Tax Court denying much of what you are claiming creating the tragic Whipsaw.  Second, hire a tax attorney who can effectively gather sufficient evidence to prove to the Court that you had “no reason to know” of the tax liability you are claiming relief from.  Perhaps if you are the ex-wife, you had “no reason to know” because you traveled a lot working out of town, or didn’t have the educational background to understand, or perhaps just didn’t get the whole truth from your now ex-husband. In other words, if your tax attorney sufficiently gathers from you the evidence needed to win, provided your testimony is credible, you will in fact win the IRS Innocent Spouse Relief Audit, Whipsaw your Ex-spouse, and at the same time keep your assets safe and protected from the long reach of IRS Innocent Spouse Relief Audit agents.

Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

IRS Offset Tax Audit

by Chris Moss CPA

Welcome to TaxView with Chris Moss CPA Tax Attorney

Have any of you ever had your income tax refund from the IRS or your social security retirement income intercepted by the Government because you owed income tax or child support or were in default on your student loan?  Unfortunately for those Americans who owe taxes there are more offsets coming your way. Just weeks ago Congress passed H.R 22 Surface Transportation Reauthorization and Reform Act of 2015 which allows the Government to confiscate your Passport if you owe back income tax. Many feel the Government is overstepping its collection powers in restricting international travel as if you had been indicted in a criminal investigation and being ordered by a Federal Judge to surrender your passport so you don’t flee the country before trial.  So stay with us here in TaxView with Chris Moss CPA Tax Attorney to see where the IRS Offset Tax Audit is trending in 2015 and beyond and what you need to do now to protect yourself against an IRS Offset Tax Audit.

The Government Accountability Office (GAO) has been conducting ongoing studies called “High Risk Enforcement of the Tax Laws” for years, but the March 2011 study entitled Federal Tax Collection, “Potential for Using Passport Issuance to Increase Collection “appears to be the basis of Congressional legislation to revoke passports of folks who owe income tax.  The 21 page study claims that there were 224,000 individuals issued passports in 2008 who owed a total of $5.8 billion in unpaid Federal taxes.  The report concludes that because Federal law already allows linkage of debt collection to passport issuance in the area of Child Support Enforcement there is reason to believe the same linkage can be made to delinquent taxes.

From this GAO study a consensus in the Senate seemed to take hold that it was time to add passport confiscation for taxpayers who owe income tax to the Government. Who authored the provision in Senate Bill 1813 revoking or denying a passport to anyone who owes certain unpaid income taxes to the Federal Government?  A Forbes article claims Senator Harry Reid originally proposed the idea to Orin Hatch and links a Press Release from Senator Orin Hatch as the source.

Regardless of who inserted the provision, the bill cleared the Senate 65-34 on July 30, 2015 and passed in the House 363-64 on November 5, 2015 with the passport provision still intact. HR 22 Surface Transportation Reauthorization and Reform Act 2015 was then sent to Conference last week.  The bill left Conference and was approved by both Houses 359-65 in the House and 83-16 in the Senate on December 3 2015 and was sent to the White House for President Barack Obama's signature.  The President signed the bill this week and HR22 FAST Act is now law. Section 32101 of the bill Subtitle A Tax Provisions requires that Section 7345 will be added to the IRS Code, requiring the Secretary of the Treasury to transmit to the State Department in accordance with the Passport Act of 1926 a request the passport of any individual who has a seriously delinquent tax debt be revoked. More specifically, HR22 Fast Act reads in part "If the Secretary receives certification by the Commissioner of the Internal Revenue Service that any individual has a seriously delinquent tax debt in tan amount in excess of $50,000, the Secretary shall transmit such certification to the Secretary of State for action with respect to denial, revocation or limitation of a passport pursuant to Section 32101 Subtitle A of FAST Act HR22.

Some scholars are questioning the Constitutionality of revoking a passport for back taxes owed. A February 2015 Penn State Law Review article by Gancarlo Seratto points out that Passport revocation is usually reserved for criminals or individuals who pose national security risks. But as the GAP study points out there are certainly similar statutes as described in 22 CFR 51.60 which requires the State Department to deny the issuance of a passport to any applicant who has been certified by the Secretary of Health and Human Services to be in arrears of child support. For example, the Passport Denial Program (PDP) established by Federal law in 1997 requires that if you are owe more than $2500 in back child support your passport will be restricted and revoked.

So assuming the law is deemed Constitutional, if your passport can be revoked for back child support or back taxes, can your passport also be revoked for other Federal infractions.  While 31 USC 3716 specifically excludes and exempts Title IV delinquent unpaid student loans all other student loans backed by the Government are subject to offset. Indeed, as far back as 1983 the Senate Finance Committee Subcommittee on Oversight of the IRS had a hearing specifically addressingTax Refund Offset Program for Delinquents Student Loans.

One more point: What about taxpayers who have not filed tax returns? It appears that there is no provision in HR 22 for Americans who have joined the underground economy and have not filed income tax returns for many years. Perhaps an income tax nonfiler for 3 successive years should also lose his or her Passport?

In conclusion, regardless of whether you agree or disagree with expanding the Government offset program to Passports, there is no question that the ever expanding US Government offset program will keep growing its collection of enforcement tools against Americans who owe back taxes to the IRS. One may ask what could be next on the horizon of Government offset enforcement if you are a delinquent taxpayer. What about Professional licenses? Government Contracts?  Drivers Licenses?  Or simple Business Licenses?  What about denial of Federal Home Loan approved mortgages, low income housing or even Federal subsidized health care?

What can you do now?  The best advice is to hire the best tax advisors you can afford, pay your taxes in full and timely file your tax returns each year knowing with confidence that you can withstand any IRS Offset Tax Audit the Government throws your way.

Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

IRS Alimony Audit

by Chris Moss CPA

Welcome to TaxView with Chris Moss CPA Tax Attorney

While it is hard to believe that a divorcing spouse in the 21st century would need or want Alimony, it is even harder for many to understand why Alimony is so often litigated by divorced taxpayers in United States Courts. Furthermore, since Alimony is taxable usually to the wife, and tax deductible usually to the husband, IRS Alimony audits Whipsaw a husband or wife against each other with the Government very often winning by default.  So if you are paying or receiving alimony and not aware of the danger ahead please stay with us here on TaxView with Chris Moss CPA Tax Attorney to see where IRS Alimony Audits are trending in 2015 so you can make sure tax return is safe and protected if an IRS agent comes knocking on your door.

Alimony also known as spousal support or maintenance derives from ancient ecclesiastical laws requiring husbands to continue to support their wives.  Eventually when “fault” divorce became legal it was the party “at fault” usually the husband, who would be required to pay Alimony, particularly because until recently, women could not own real estate.

I was surprised to find that in 2015 alone to date there were already nine (9) Alimony US Tax Court Opinions and hundreds of Alimony audits commenced around the country this year, many of which will end up in IRS Appeals and US Tax Court years from now.  In the last 10 years there have been probably thousands of IRS Alimony Audits.  Why is there so much litigation over Alimony?  Is Alimony tax law that complex?  Let’s ask the Court this question as we review hot off the press last week, Crabtree v IRS US Tax Court 2015.

The facts in Crabtree are simple. Crabtree (formerly Mrs. Girard) was married to Donald Girard until 2006. The Girard’s petitioned the Delaware Family Court in an uncontested proceeding “without a hearing”.  The Divorce Agreement required “unallocated alimony/child support for 8 years”.  Crabtree filed her 2010 tax return and did not report this money as taxable Alimony.  The IRS audited Crabtree requiring her to be taxed on what the Government concluded to be Alimony. Crabtree appealed to US Tax Court in Crabtree v IRS US Tax Court 2015.

Judge Lauber notes that IRS Code Section 71(a) provides that gross income includes amounts received as Alimony subject to 4 conditions as per 71(b). First the payment must be received by wife under a divorce agreement. Second the agreement does not include the payment as a property settlement. Third the husband and wife must be living in separate households, and fourth, the payment must terminate upon death of the wife.

It is fourth condition, termination at death of recipient that the Court found ambiguous because the Divorce Agreement was silent on whether Mr. Girard’s Alimony obligation terminated upon Crabtree’s death. The IRS argued that Delaware law Title 13 Section 1512(g) controls in this case.  The IRS further argued that with these facts Delaware recognizes these payments as Alimony.

The Court however found for Crabtree who argued that the Delaware “order” was entered without a hearing and “agreed by the parties in writing” as required by Del. Code section 1519(b) and could have been construed as not terminating upon death.  Judge Lauber in a very close call opines that both the Divorce Agreement and Delaware law are unclear and finds for Crabtree in that “Delaware law does not unambiguously provide for automatic termination in the event of death.” Crabtree wins IRS loses.

The next case Iglicki v IRS US Tax Court April 27 2015 involves a Maryland divorce in 1999.  The Agreement required Iglicki to pay $1000 a month in spousal support “but only if he would default.”  After the divorce the Iglicki moved to Colorado and defaulted. The ex-wife Stultz sued in Colorado for spousal support and won a judgement against the Iglicki. In a post-judgement proceeding Stultz obtained a Court ordered garnishment of Iglicki’s wages. Iglicki deducted the garnished wages on his tax return as Alimony.  The IRS audited and disallowed the deduction. Iglicki appealed to US Tax Court Iglicki v IRS US Tax Court April 27 2015.

The question presented to the Court was whether or not the Iglicki’s financial obligation terminated upon death of Stultz. The Court recognized, as the Court did in Crabtree, that when a divorce agreement is silent as to the existence of a post-death obligation, the requirements of section 71(b)(1)(D) may still be satisfied if the payments terminate upon the payee’s death by operation of State law in this case Colorado, citing. Johanson v. Commissioner, 541 F.3d at 973.

Judge Kerrigan finds that Colorado law, unlike Delaware law in Crabtree, very clearly requires future spousal support obligations to terminate at the death of either spouse unless otherwise agreed in writing or expressly provided in the decree.  But also under Colorado law after Stultz received a judgement against Iglicki the obligation of Iglicki previously considered Alimony was legally converted to a “past due” judgement. Under Colorado law an Estate can enforce a judgement even after the death of the debtor.  Therefore spousal support obligations that have converted to a judgement in Colorado fail to qualify as Alimony under Federal tax law. IRS wins, Iglicki loses.

Our final case again involves simple facts in Muniz v IRS US Tax Court July 9, 2015.  Muniz husband and wife Filippini divorced in Palm Beach Florida in 2009. Muniz was required to pay $45,000 to Filippini and deducted Alimony on his 2011 return. IRS audited and claimed the $45,000 was a nondeductible property settlement. Muniz appealed to US Tax Court in Muniz v IRS US Tax Court July 9, 2015.

The Government argued that even though the $45,000 was a lump-sum alimony payment, it could not be Alimony because under Code 61.08 of the Florida Code the Filippini’s estate upon her death would continue to have a vested right to collect the $45,000 lump sum. Judge Nega agreed with the Government concluding that under Florida law, lump-sum alimony constitutes a property settlement for Federal income tax purposes and therefore is not deductible as Alimony.  IRS wins, Muniz loses.

By now you all can see why on very simple facts Alimony payments could easily become nondeductible after commencement of an IRS Alimony audit.

What can you all do now?  First, if you are going through a divorce and have moved to a new State, or you are experiencing Alimony collection issues in your current State, make sure you have tax attorney confer with your divorce attorney to make sure you are protected in the very likely event of an IRS Alimony audit commencing shortly after Court action.  Second, require whoever prepares your tax return to give you a written opinion on whether your Alimony payments are tax deductible or not and include this contemporaneously created document in your tax return before you file. This evidence will prove invaluable if and when an Alimony audit comes your way.  Finally be prepared for the Whipsaw and hopefully with a properly prepared tax return you will be the one that wins.

Thank you for joining us here on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

IRS Marijuana Tax Audit

by Chris Moss CPA

Welcome to TaxView with Chris Moss CPA Tax Attorney

There are 23 States and the District of Columbia that have legalized Marijuana for medicinal use, with Colorado, Washington, Oregon and Alaska allowing legal recreational use as well.  Previous articles on Marijuana Income Tax Law and IRS or State Law for Medical Marijuana need updating due to IRS Marijuana Tax Audits the Government is sending over to California and Colorado in early 2016 . If you are in the retail, wholesale, growing, or distribution side of the Marijuana industry, you are going to be faced with an almost certain annual IRS Marijuana Tax Audits of your 2015 business and personal tax returns, so stay with us here on TaxView with Chris Moss CPA Tax Attorney to learn how to best protect your Marijuana business from adverse Government action when the IRS Marijuana Tax Audit hits your business

IRS Code Section 280E allows no income tax deduction for any trade or business dealing in Federal scheduled controlled substances, and herein lies the problem for anyone connected with the Marijuana industry. Even if your State has legalized Marijuana, Government enforcement of Section 280 still results in draconian amounts of tax owed by business owners after an IRS Marijuana Tax Audit.  That is until California Helping to Alleviate Medical Problems known as  CHAMP decided to fight back. After Champ was audited by an IRS Marijuana Tax Audit in 2002, the Government determined that all of CHAMP’s expenses including its Costs of Good Sold, were nondeductible under Section 280E in connection with the trafficking of a controlled substance. CHAMP appealed to US Tax Court in CHAMP v IRS US Tax Court (2007).

The IRS argued that all of CHAMP expenses were in connection with the illegal sale of drugs and therefore all expenses were nondeductible under Section 280E. Judge Laro disagreed as to Cost of Goods Sold. Citing the Senate Finance Committee report, the Court found that Cost of Goods Sold would be exempt from 280E in order “to preclude possible challenges on constitutional grounds.” Senate Finance Report S. Rept. 97-494 (Vol. 1).  In addition the Court allowed expenses for nonrelated Marijuana ancillary services for counseling and caregiving because the books and records were adequately able to separate out those expenses.  Both CHAMP and IRS had partial wins.

Because CHAMP did not appeal there was no higher Court precedent until Martin Olive and his infamous California Vapor Room got hit with an IRS Marijuana Tax Audit for 2004 and 2005 disallowing all his expenses.  Olive appealed to US Tax Court in Olive v IRS US Tax Court (2012).  Judge Kroupa easily distinguishes Vapor Room from CHAMP in that CHAMP was a service organization with 72% of its employees working exclusively with caregiving.  The Vapor Room business model stresses solely the sale and consumption through vaporization of marijuana.  The Court finds for the Government concluding that Section 280E disallows all Vapor Room expenses except for Cost of Goods Sold.

Judge Kroupa of the US Tax Court found Olive’s testimony and the testimony of the other witnesses on the Cost of Goods Sold to be “rehearsed, insincere and unreliable” and also found that the ledgers were not accurate due to Olive transacting his entire business in cash. The Court noted that Vapor Room grossed at least $1.9M in 2004 and $3.3M in2005. The Court estimated Cost of Goods Sold at 75.16% of sales for 2005 based on expert testimony of Dr Gieringer that the Cost of Goods Sold of medical marijuana dispensaries ranged from 70-85% of sales resulting in a tax bill of over $1.1M for 2005 alone.

Martin Olive appealed in Olive v IRS (9th Cir California) relying again on CHAMP. The Court found Olive’s reliance on CHAMP was misplaced. CHAMP had not only of medical marijuana business, but also ran an extensive counseling and caregiving service. This is not the case in Vapor Room were the sole business of Olive was to engage in selling medical marijuana. The Court concluded that if Congress now thinks that the policy embodied in 280E is unwise as applied to medical marijuana sold in conformance with California law it can change the statute. This Court cannot. IRS wins Olive loses.

The latest Court ruling regarding Marijuana is again from California where in 2011 various individuals including Pickard were criminally indicted under 21 U.S.C. §§ 846, 841(a)(1) accused of illegally conspiring to grow 1,000 marijuana plants. Pickard moved to dismiss in 2013 on various Constitutional grounds asking for an evidentiary hearing which the Court eventually granted.  Judge Mueller on April 17, 2015 denied Picard’s Motion to Dismiss and denied his Motion for Reconsideration on June 1, 2015.

Judge Mueller after careful consideration of the expert witness testimony presented at the evidentiary hearing, joined the chorus of other courts considering the same question, and concluded the issues raised by Picard are policy issues for Congress to revisit if it chooses. Judge Mueller in a brilliant conclusion opines:  “At some point in time, in some Court, the record may support granting such a Motion, but after having carefully considered the facts and the law as relevant to this case, the Court concludes that on the record in this case, this is not the Court and this is not the time.  US Dept. of Justice Wins, Pickard and others all lose.  It appears that Pickard not appealed to the US Court of Appeals for the 9th Circuit at this time.

So as we head to 2016 there is one thing certain. Unless you are all properly prepared, the IRS Marijuana Tax Audit will be devastating to all in the Marijuana industry. What can you do now? First, the only hope of deducting expenses other than your Cost of Goods Sold is to on advice and approval of your Tax Attorney make sure those unrelated expenses are perfectly recorded through a separate LLC with QuickBooks or similar accounting software creating your books and records.  Make sure your tax experts separate out revenue from those activities allocated accordingly and all cash deposits should be clearly separated in separate bank accounts if they are unrelated to Marijuana sales. Second, again on advice and approval of your Tax Attorney record all cash sales and report all income. If you cannot secure a bank willing to do business with your Marijuana cash business then create again with consent of your Tax Attorney a Management LLC to accept the cash with the offset to management fees. Finally you will most certainly be subject to annual IRS Marijuana Tax Audits, so make sure when you file your tax return you have your Tax Attorney who prepares your return ready to represent you on the IRS Marijuana Tax Audit, all the way up to the US Tax Court and Federal Appeals Court if necessary. In conclusion, it appears until Congress changes the law, it is not going to be as easy as you all thought years ago, but at least you have now a fighting chance of at least partially winning  the battle against the IRS Marijuana Tax Audit sure to come your way soon.

Thanks for joining us on TaxView with Chris Moss CPA Tax Attorney

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

IRS Lease to Buy Audit

by Chris Moss CPA

Welcome to TaxView with Chris Moss CPA Tax Attorney

For any of you out there who have converted a commercial lease to a purchase your accountant has likely capitalized the cost to terminate the lease increasing your basis in the property buy out.  Most likely your business income tax return was also prepared based on these capitalized costs in accordance with IRS Code Section 167 or perhaps amortized underSection 197.  However, there is good news in recent Court rulings regarding Federal income tax rent deductions when you convert your lease to a purchase and pay large upfront lease termination fees that you can deduct in full in the year you paid those fees.  But watch out for the IRS Lease to Buy Audit sure to come your way requiring you to capitalize all those expenses in accordance with Code Section 167. So if you are leasing a building or warehouse with a lease to buy option in your future plans, and you want to take advantage of this new Court approved tax deduction when you exercise your lease to buy options, stay with us here on TaxView with Chris Moss CPA Tax Attorney to find out where lease to buy tax deductions are trending in 2015 and how to protect your expense in lieu of additional rent deductions from  being disallowed during an IRS Lease to Buy Audit.

IRS regulations require capitalization of all acquisition costs to purchase a building whether it be amortization underSection 197 Intangible, or depreciation under Section 167 and also require capitaliziation if the property you are purchasing is “subject to a lease”. So it would not surprise me if most accountants capitalize the cost of lease buy out conversion under IRS Code Section 167(c)(2).

But ABC Beverage Corporation which makes and distributes soft drinks and other non-alcoholic beverages at its bottling plant in Hazelwood, Missouri took a different approach.  On its 1997 tax return ABC claimed a business expense deduction of $6.25M which they claimed on their tax return was the buyout cost of the lease negotiated with the Landlord in lieu of additional rent over the term of the lease.  The Government audited ABC and commenced an IRS Lease to Buy Audit disallowing the enter $6.25M deduction sending ABC a bill for $2.5M in back taxes.  ABC paid the tax and then brought suit for refund in ABC Beverage vs United States 577 F Supp 2d 935 (WD Michigan 2008).

ABC’s argument to District Judge Paul Maloney was that their buy out was similar to 6th Circuit’s Opinion in Cleveland Allerton Hotel, Inc. v. Commissioner, 166 F.2d 805 (6th Cir. 1948).  In that case Cleveland had a lease with roughly 80 years left on the term. Cleveland purchased the building after negotiating a buy out with the Landlord and claimed a tax deduction as business rent expense claiming when the IRS audited that the deduction was not to purchase real estate but to be “relieve them of an important rental obligation” which could accurately be measured by the difference between the fair value of the real estate and what Cleveland paid to purchase the property.

The Government in Cleveland claimed under IRS Code Section 167 or in the alternative Section 197  the deduction should have been capitalized as part of the purchase price to acquire the property. But Circuit Judge Simons found for Cleveland opining that Cleveland is not a third person investor buying real estate, but rather had a liability in a lease it wished to extinguish and it simply paid liquidated damages to the Landlord for release from its long term lease not to buy the property but to allow the lease to be terminated. District Judge Maloney found for ABC as did Judge Simons rule for Cleveland, and the Government appealed to the 6th Circuit in ABC Beverage Corp. v. U.S., 113 AFTR 2d 2014-2536 (CA6 2014).

The Government’s main argument on appeal was that Section 167 required that property “subject to a lease” was required to be capitalized, further arguing that ABC should simply depreciate or amortize the deduction as required bySection 167 or Section 197.   The Government supported its position citing Woodward v Commissioner, 397 U.S. 572 (1970), Commissioner v Idaho Power Co., 418 U.S. 1 (1974), and INDOPCO, Inc. v Commissioner, 503 U.S. 79 (1992)and finally asking the 6th Circuit to overturn the out of date 65 year old Cleveland case.  But Circuit Judge Cole opines that the facts in all those cases are not controlling and therefore do not warrant the Court to overturn Cleveland.

Circuit Judge Cole after review of all the evidence found that the Cleveland and ABC expense was a cost to extinguish liability to the Landlord prior to the purchase of the property and Congress did not intend Section 167 to apply to these specific facts. Absent other indication from Congress, the Court ruled that property was not “acquired subject to a lease” if the purchase extinguished the lease.  ABC’s purchase was not acquired subject to a lease and therefore ABC wins, IRS loses.

OK now what does this say to all of you out there with lease to buy options?  First, your tax attorney needs to have the language inserted in the lease to buy option prior to executing your lease that any additional expense in lieu of continued rent will be tax deductible as what I would call additional rent to extinguish lease citing the ABC case law in the applicable lease paragraph allowing for the buy out to purchase the building.  Second, have your tax attorney include in your tax return his contemporaneously prepared opinion on why Section 167 does not apply to your specific facts and perhaps even include the applicable lease provision in the tax return prior to filing. Finally sit back and enjoy your new real estate purchase including your fully deductible additional rent to extinguish lease which has allowed you to substantially reduce your income tax.  You can now relax knowing you have contemporaneously created facts and Court rulings and Opinions supporting and bullet proofing your tax return to win the likely IRS Lease to Buy Audit coming your way soon.

Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

IRS Mortgage Interest Audit

by Chris Moss CPA


Welcome to TaxView with Chris Moss CPA Tax Attorney

Just about all of us at one point or another have deducted mortgage interest as an itemized deduction allowed under IRS Code Section 163 on Schedule A of your Form 1040 tax return. IRS Publication 936 and IRS Regulations 1.163 allow a married couple or single individual to deduct interest paid on debt no greater than $1.1M or $550K each filing separately. That is until Charles Sophy and Bruce Voss two unmarried joint owners of a home decided to file a tax return claiming $1.1 Million each or $2.2 Million total. So if you are not married and jointly own a home stay with us here on TaxView withChris Moss CPA Tax Attorney to find out how in 2015 it appears that you are now able to deduct interest paid on $2.2 Million and learn how to protect that deduction from an almost certain IRS Mortgage Interest Audit perhaps many years later.

In 2002 Charles Sophy and Bruce Voss purchased a house in Beverly Hills California as joint tenants financed by $2.2 Million in debt. They filed a federal income tax return in 2006 and 2007 with all interest on over $2M in debt deducted onSchedule A of their personal 1040 Tax return.  The IRS commenced an IRS Mortgage Interest Audit and disallowed all interest on debt over $1.1M. Sophy and Bruce appealed to US Tax Court in Sophy v IRS US Tax Court (2012).

Sophy and Voss argued to the Court that Section 163 limitations were applied per taxpayer with respect to co-owners who are not married and therefore they should be allowed interest on debt up to $2.2M.  The Government argued that whether married or unmarried you still live in one house and get to use only one $1.1M limitation. Judge Cohen therefore had to decide whether or not the statutory limitation of Section 163 was properly applied on a per-residence or per-taxpayer basis where residence co-owners were as in the case of Sophy and Voss not married.

The Court reviewed the legislative history of Section 163 and concluded that because married couples filing separate returns had to split the exemption in half, so should unmarried couples.  Sophy and Voss countered that Congress intended to create a special rule for married couples, the marriage penalty if you will, which should not apply to unmarried couples. Congress was silent on unmarried couples and therefore the marriage penalty should not apply to them. The Court ultimately found for the Government concluding that that nothing in the legislative history of Section 163 suggests that Congress had any other intention than to view mortgage debt on a per-residence basis.  Therefore the per-taxpayer basis used by Sophy and Voss was overruled by the Court with a win for the IRS.

Sophy and Voss then appealed to the US Court of Appeals for the 9th Circuit in Pasadena California filing on August 7, 2015, in Voss c. Commissioner 796 F.3d 1051 (9th Cir. 2015).  An Amici Curiae brief was filed by Shannon Minter and Christopher Stoll of the National Center for Lesbian Rights and Sophy and Voss were represented by Sideman & Bancroft LLP of San Francisco and Hone Maxwell LLP of San Francisco. The Government was represented by Assistant Attorney Generals Keneally, Cohen and Schumann from the US Dept. of Justice Tax Division in Washington DC

Sophy and Voss continued to argue that the US Tax Court should be overruled because Section 163 debt limits apply to unmarried co-owners on a per-taxpayer basis.  Circuit Judge Jay Bybee acknowledges that Section 163 is specific with respect to a married couple but notes the IRS Code does not specify whether in the case of residence co-owners who are not married the debt is limited per residence or per taxpayer.  The gap in the Code is the source of the present controversy Judge Bybee opines.

The Court argues that because Voss and Sophy were unmarried they were required to file separate single tax returns not joint or married filing separately returns.  Knowing that married couples file as one person, either jointly or separately, Congress on many other occasions has provided half-sized deductions for married couples filing separately including a capital gain limitation of $3000 for married, $1500 for married filing separately.

If Congress, the Court reasons, wanted to go further and ensure that two or more unmarried taxpayers were treated as a single taxpayer for purposes of Section 163, then Congress could have done that with specific language in the Code. The Court gave as an example Section 36 of the Code the First Time Homebuyer credit where unlike the mortgage debt interest limitation in Section 163, First Time Homebuyer credit Section 36 says “Married filing separately each can take $4000 of the total $8000 credit AND if two or more individuals who are not married purchase a principal residence, the amount of the credit can not exceed $8000”. The Court concluded that a per-taxpayer reading of the statute debt limit provisions is most consistent with Section 163 and Treasury regulation 1.163 as a whole. The Court therefore reversedSophy v IRS US Tax Court (2012) and remanded back to the US Tax Court the job of determining in a manner consistent with the 9th Circuit Opinion the proper amount of qualified residence interest under Section 163. Voss Sophy win, IRS loses.

But there’s more: Circuit Judge Ikuta writes a blistering dissenting Opinion claiming that the majority opinion allows unmarried taxpayers who buy expensive residences to deduct twice the amount of interest than married spouses would be allowed to deduct. The Dissent shows how over the years the IRS has promulgated numerous regulations and rulings showing how exactly unmarried taxpayers who jointly own a home can apportion the interest on the $1.1 M debt limitation of Section 163. Voss and Sophy’ s approach should be rejected because due respect and deference should be given the US Treasury interpretation of the statute citing Christensen v Harris 529 US 576 (2000). The Dissent called the Majority “an absurd” marriage penalty with the better solution being to defer to the IRS reasonable interpretation of the statute. Therefore Judge Ikuta concluded in his Dissent that he would affirm the US Tax Court below.

What does all this mean to any of you purchasing a home with debt of over $1.1M? First, in my view, even if you don’t live in the 9th Circuit, if you are unmarried in 2015 and co-own a home together with a larger mortgage than $1.1M make sure you consult with a tax attorney before you file your 2015 income tax return.  It sure looks at least for now until the other Circuits chime in that you will have a good chance of supporting an interest deduction on debt of up to $2.2 million.  Second, have your tax attorney include in your tax return Voss c. Commissioner 796 F.3d 1051 (9th Cir. 2015) to support your position. Finally until Congress amends Section 163 and the other Circuits chime in, you should expect an IRS Mortgage Interest Audit within perhaps years after you file your tax return. With proper preparation and planning you will have an excellent chance to win an IRS Mortgage Interest Audit as did Voss and Sophy. Thank you for joining us onTaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView

Happy Thanksgiving 2015 from

Chris Moss CPA Tax Attorney

Welcome to TaxView with Chris Moss CPA Tax Attorney

Do any you have some land that you are thinking about selling in 2015 for a large capital gain under IRS Section 1221 to perhaps be offset against some stock losses in your brokerage account? Seems easy enough. But unfortunately the Government looks closely at your land sales when the IRS in many cases years later commences a Capital Gain to Ordinary Income Audit disallowing all your capital gain and converting those gains to ordinary income under IRS Section 61. When the audit is over, the IRS agent then explains to you that you owe a great deal of tax, interest and penalty now that your brokerage capital losses cannot offset ordinary income.  So how do you protect your capital gain from converting to ordinary income when the IRS comes knocking on your door? Stay with us here on TaxView with Chris Moss CPA Tax Attorney to find out how to bulletproof your capital gain from an IRS Capital Gain to Ordinary Income Audit.

Selling land, real estate or stock always results in a capital gain right? Well not quite always as is currently trending in 2015 and as Greg and Melanie Boree discovered in Boree v IRS US Tax Court (2014). The facts are simple. Boree purchased 1,982 acres in Florida with a 1.8M loan from Perkins State Bank in 2002, plans were submitted to the County and various lots were sold during the next 5 years. However, in 2007 a new investor Adrian Development purchased 1067 acres for $9,600,000 from Boree.

Boree recorded all lot sales from 2005, 2006 and 2007 on his income tax form 1040 Schedule C as ordinary income but the sale in 2007 to Adrian as long term capital gain.  The IRS came visiting in 2011 and commenced a Capital Gain to Ordinary Income Audit, disallowing the entire capital gain resulting in a tax bill of almost $2M. Boree appealed to US Tax Court in Boree v IRS US Tax Court (2014).

Judge Foley cuts right to the core issue:  Was the $9.6M sale of land part of inventory of a business or was this sale unique, different from the other sales to be treated as a capital asset held for investment. The Court notes that sales of lots were made to customers in the normal course of business from 2002 to 2007 and were frequent and substantial with no distinction made in the books and records to treat the Adrian sale any differently, citing Slappey Drive Industrial Park v US 561 F.2d 572 (5th Cir 1977). Indeed the Court concluded there was no evidence presented contemporaneously by Boree in his 2007 tax return that the Adrian sale was being considered for tax purposes “segregated from the rest of the property” as property held for investment. IRS Wins Boree Loses.

Timothy and Deborah Phelan had a very different experience in Phelan v IRS US Tax Court (2004) when the IRS came knocking on their door for a Capital Gains to Ordinary income audit. The facts are very complex so I have simplified as best I could as follows: Phelan purchased 1050 acres in Colorado in 1994 with possible plans for development. There were various agreements with the County, municipal town and other developers but no sales to the public. In 1998, Phelan sold 45 acres were sold to Elite Development and Vision Development for $1.5M and recognized a 1998 capital gain on his personal tax return. The IRS commenced a Capital Gain to Ordinary Income Audit and converted the capital gain to Ordinary income claiming that Phelan was in the business of selling real estate. Phelan appealed to US Tax Court in Phelan v IRS US Tax Court (2004) claiming he had no employees nor did he engage in any business activities outside of holding and selling a limited number of parcels with the ultimate hope of appreciation of the value of the land.

Judge Gerber easily finds for Phelan because the facts showed that other than the 2 sales in 1998 there was no other activity. The Court concluded that during the 4 years that Phelan held the land, the property did in fact appreciate according to plan and the investment goals had indeed been achieved by Phelan. Phelan wins IRS Loses.

Our final case involves Frederic and Phyllis Allen who in 1999 sold 2.63 acres of undeveloped real estate in East Palo Alto to property developer Clarum Corporation. He reported the sale as an installment sale as per the sales agreement with Clarum and in 2004 Allen received the final installment of $63K from Clarum. Allen did not report this income on his 2004 tax return. On advice of tax professionals Allen amended his 2004 return in 2008 reporting the $63K as long term capital gain. The IRS audited Allen’s amended return and converted the capital gain to ordinary income after an IRS Capital Gain to Ordinary Income Audit. Allen bypassed US Tax Court by paying the tax and then suing for a refund in US Federal District Court for the Northern District of California in Allen v US No 3.2013cv02501.

Judge William Orrick opines that the evidence is compelling that Allen intended to develop the property when he purchased the property and that he undertook substantial efforts to develop the property during the time he owned it. Even Allen in his own deposition indicated to the Court that his original intent was to develop the property. While Allen then argues to the Court in that same deposition that his intent changed over time, the Court found that Allen presented no credible evidence to prove that his intent changed, citing Tibbals v US 362 F.2d 266 (Ct Cl 1966). The Tibbals Court held that a taxpayer’s purpose can change based on the facts the taxpayer presents to the Court but Judge Orrick in Allen concluded that because Allen provided no evidence that he had held the land for anything other than development the sale of the property therefore resulted in ordinary income. IRS Wins, Allen loses.

So for anyone out there planning to buy land, real estate or some other capital asset what can you do right now to protect your long term capital gain from ordinary income conversion when the IRS Capital Gain to Ordinary Income Audit commences years from now. First before you purchase your land have your tax attorney contemporaneously create the facts and evidence you will need to win an IRS Capital Gain to Ordinary Income Audit. Tibbal makes clear you need to prove to the Court that the purpose for which the property was acquired, the motive for selling it, the taxpayer's method of selling the land, taxpayer’s income from the sale of it compared with his other income, the extent of the improvements made to facilitate the sale of it, the frequency and continuity of sales, and the time and effort expended by taxpayer in promoting the sales in relation to his other activities all must be factually presented as evidence to the Court in order to win against an IRS Capital Gain to Ordinary Income Audit. Second, after you purchase your land, feel free to outsource development to developers creating written extemporaneous documentation of your intent to sell property to those developers at some point in time but only after the land appreciates in value. Finally make sure the same tax attorney who represented you on both the buy and sell side of the transaction prepares and files your tax return claiming capital gain treatment of the sale. When the IRS Capital Gain to Ordinary Income Audit commences years later your tax attorney will easily be able to present the facts to the Court you will need to win the audit, keep intact your long term Capital Gain, and prevent the Government from taxing you at much higher ordinary income rates.

Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView.

Kindest regards,

Chris Moss CPA Tax Attorney