Larry's Tax Law

Earlier this week, United States Tax Court Judge Richard T. Morrison ruled, in the case of Emmanuel A. Santos v. Commissioner, T.C. Memo 2016-100 (May 17, 2016), that the government will not pay the cost of a taxpayer obtaining a law degree.

Case Background

This is a pro se case. While the record was not very clear, the taxpayer, Emmanuel A. Santos, claimed he earned a degree in accounting from Indiana University in 1988. Thereafter, he began a career as a tax return preparer. In 1996, he obtained a master’s degree in taxation. Eventually, Mr. Santos expanded his tax return preparer practice to include accounting and financial planning services.

As reported in my November 2014 blog post, President Obama’s administration wants to limit taxpayers’ ability to defer income under IRC § 1031. In response to former House Ways and Means Committee Chairman David Camp’s proposed Tax Reform Act of 2014, which would have eliminated IRC § 1031 altogether, the Obama administration proposed to retain the code section, but limit deferral with regard to real property exchanges to $1 million per taxpayer each tax year. Personal property exchanges, under the President’s proposal, would go unscathed.

In 2015, President Obama expanded his proposal relative to IRC § 1031 to limit personal property exchanges by excluding certain types of property from the definition of “like kind.” The excluded personal property included items such as collectibles and art. The President’s proposed $1 million real property exchange limitation was left intact.

Every year, around the April 15 individual tax return filing deadline, a story appears in the press highlighting the tax woes of famous people.  The Government undoubtedly issues these press releases to encourage taxpayers to comply with their tax filing and tax payment obligations.  The list of famous people who have been the subject of this news over the years is lengthy.  It includes:  Abbott & Costello, Spiro Agnew, Chuck Berry, Richard Pryor, Martha Stewart, Darryl Strawberry, Nicholas Cage, Heidi Fleiss, Pete Rose, Wesley Snipes and Willie Nelson.

As reported in my November 2015 blog post, in accordance with Internal Revenue Code (“Code”) Section 280E, taxpayers (for purposes of computing federal taxable income) are prohibited from deducting expenses related to the production, processing or sale of illegal drugs, including marijuana.

A Bit of Welcome Relief?

Measure 91, officially called the Control, Regulation, and Taxation of Marijuana and Industrial Hemp Act, passed by Oregon voters, appears to have alleviated some of the impact of Code Section 280E as it relates to Oregon taxable income. Specifically:

As reported in my November 2013 blog post, for tax years beginning in 2015 or later, under ORS 316.043, applicable non-passive income attributable to certain partnerships and S corporations may be taxed using reduced tax rates.  The reduced tax rates are as follows:

• • 7 percent for taxable income of $250,000 or less;

• • 7.2 percent for taxable income greater than $250,000 but less than or equal to $500,000;

• • 7.6 percent for taxable income greater than $500,000 but less than or equal to $1,000,000;

• • 8 percent for taxable income greater than $1,000,000 but less than or equal to $2,500,000;

• • 9 percent for taxable income greater than $2,500,000 but less than or equal to $5,000,000; and

• • 9.9 percent for taxable income greater than $5,000,000.

The Department of the Treasury estimates the annual federal “tax gap” (the difference between what taxpayers should have paid and what they actually paid on a timely basis) exceeds $450 billion. IR-2012-4 (January 6, 2012).  This figure correlates with a voluntary tax compliance rate of just shy of 86 percent.

Studies conducted by the National Research Program (“NRP”) conclude that the $450 billion “tax gap” is comprised of three components, namely non-filing of tax returns ($28 billion), underreporting of income ($376 billion) and underpayment of taxes ($46 billion).

Dear Readers:

It is hard to believe that 2015 is almost at an end.  Although this year has gone by quickly, it has proven to be an interesting year in the world of tax law.  During the past twelve months, we have explored numerous tax topics and developments, including tax extender legislation, IRS budget cuts, leadership changes at OPR, IRC Section 1031 exchanges, tax reform, taxation of cannabis, and offshore voluntary disclosure programs.

I feel especially blessed this year.  The support that I have received from the legal, tax and accounting professions has been overwhelming.  In June, the Oregon State Bar bestowed upon me the Taxation Section Award of Merit.  Then, in September, I was elected to the American College of Tax Counsel.  Without your help, these accolades would not have been attainable.  Thank you.

Late this afternoon, President Obama signed into law the tax extenders legislation referenced in my blog earlier today.  Hopefully, we can now complete our client year-end tax planning.

The Protecting Americans from Tax Hikes Act of 2015 Passes Both the U.S. House of Representatives and the U.S. Senate

Late in the day on December 15, 2015, the U.S. House of Representatives passed the Protecting Americans from Tax Hikes Act of 2015 (the “Act”). The Act, which represents a $622 billion tax package, revives many taxpayer-friendly provisions of the Code that expired a year ago.

The Act passed the House with a vote of 318 to 109. Voting in favor of the Act were 77 Democrats and 241 Republicans.

The Act moved to the U.S. Senate, where it was presented along with a comprehensive spending bill. As expected, the Senate voted in favor of the legislation today by a vote of 65 to 33. Consequently, the Act moves from Congress to the desk of President Obama. Most commentators expect that he will promptly sign the Act into law, as his administration has shown strong support.

The Chief Financial Officer’s Act of 1990 (“1990 Act”) was signed into law by President George H.W. Bush on November 15, 1990.  One of the major goals of the 1990 Act was to improve the financial management and to gain better control over the financial aspects of government operations.  One provision of the 1990 Act in this regard established a requirement that the government’s financial statements be audited.  Interestingly, we had not seen comprehensive legislation with this focus since the Budget and Accounting Procedures Act of 1950 was enacted by lawmakers.

As a result of the 1990 Act, the Government Accountability Office (“GAO”) annually audits the financial statements of the Internal Revenue Service (“IRS”).  The general objectives of the audit are two-fold:  (i) to determine whether the IRS’s financial statements are fairly presented; and (ii) to determine whether the IRS is maintaining effective internal controls over financial reporting.