Larry's Tax Law

On January 15, 2014, the House, by a vote of 359-67, passed an appropriations bill to fund our federal government through September 30, 2014.  The next day, January 16, 2014, the Senate passed the bill by a vote of 72-26.  The bill will now make its way to President Obama for signature.

 Once signed by President Obama, the bill, commonly known as the “Consolidated Appropriations Act, 2014,” will become law (the “Act”).  The Act spans 1,524 pages and contains some interesting provisions.  Title I of Division E of the Act focuses on the Department of Treasury. 

The Act provides the IRS with a 2014 budget of $11.3 billion.  This represents a budget decrease of $526 million or 4.4% from its 2013 budget. 

The $11.3 billion budget is primarily allocated among four areas:

On December 17, 2013, the US Tax Court issued its opinion in Chaganti v. Commissioner, TC Memo 2013-285.  The interesting issue before the court was whether the taxpayer, an attorney, was allowed under Section 162 of the Code to deduct amounts he was personally ordered to pay a trial court and opposing counsel in a case in which he was representing a client. 

Mr. Chaganti was initially ordered to pay a “fine” of $262, representing the charges of opposing counsel and his court reporter, for his role in his client’s failure to appear for a deposition.  When he did not pay the fine, the court held Mr. Chaganti in contempt and ordered immediate payment (with a daily penalty for late-payment).  About a month later, Mr. Chaganti finally paid the fine (without the late payment penalty). Throughout the case, he engaged in behavior the judge labeled as “unnecessarily protracting and contentious.”  The court eventually ruled against Mr. Chaganti’s client in the case.  The other attorney asked the court for sanctions against Mr. Chaganti (not Mr. Chaganti’s client) as a result of his “bad faith, unreasonable, and vexatious multiplication of the proceedings.”  The judge ultimately ordered Mr. Chaganti to pay opposing counsel around $18,000 (to compensate for the additional attorney fees incurred due to his actions) and to pay the court around $2,300 for paying the original penalty late.

On December 10, 2013, the US District Court for the District of New Jersey ended a long and drawn out saga between the IRS, and John and Francis Purciello.  The court’s decision (assuming the government does not appeal) should provide the Purciellos with much needed finality and a sense of vindication to end 2013.

The Purciellos filed their joint 2000 tax return, showing a refund due of about $42,000.  Although they contacted the IRS on several occasions, in writing and by telephone, inquiring about the refund, the Service failed to provide any response.  In late 2002, out of the blue, the IRS notifies the Purciellos that the refund was being applied to civil penalties assessed against Mr. Purciello for tax year 1998.  What civil penalties cried the Purciellos?  

Apparently, on April 3, 2002, the Service assessed Mr. Purciello with trust fund penalties for two quarters of 1998 relating to a company he had worked for in a strictly sales capacity.  The penalties, in the aggregate, amounted to more than $168,000.

Over the next two years, the Purciellos went back and forth with the IRS attempting to resolve the matter.  While they eventually received a small refund, the bulk of their claim appeared to be unsuccessful.  Consequently, the Purciellos were forced to file a claim for refund in the US District Court for the District of New Jersey. 

In the case of John D. Moore, et al. v. Commissioner, TC Memo 2013-249 (October 30, 2013), the US Tax Court was presented with the saga of John Moore.

Mr. Moore was a CPA.  He left the world of public accounting to embark on a career in a new industry.  In 1992, he became the Operations Manager of the Dallas, Texas Peterbilt truck distributor.  By 1995, Mr. Moore had climbed the corporate ladder and was appointed president of the company.

In 1992, the company granted Mr. Moore an option, good through December 31, 1999, to purchase five percent (5%) of the shares of the company, an S corporation.  In 1997, the company merged with another company.  As a result of the merger, Mr. Gary Baker entered the picture.  Mr. Baker ended up with 1,477,859 shares of the merged entity.  On December 30, 1999, Mr. Moore entered into an agreement to purchase all of Mr. Baker’s shares for $5,842,606.  The next day, on December 31, 1999, Mr. Moore timely exercised his option and purchased 500,000 shares of the company for $212,334.

As part of the purchase of the Baker shares, Mr. Moore signed a promissory note for the full purchase price of an amount just shy of $6,000,000.  It was all due and payable on May 5, 2000.  After signing the note, however, the parties revised it so that $3,000,000 would be due on June 14, 2000, and the balance would be paid in three equal annual installments.

In Peter Knappe v. U.S., 713 F3d 1164 (9^th Cir., April 4, 2013), the United States Court of Appeals for the Ninth Circuit was presented with the question whether reliance upon a tax professional may excuse the late filing of a tax return.

Peter Knappe was the personal representative of the Estate of Ingborg Pattee.  He was also trustee of her testamentary trust.

Mrs. Pattee died in 2005, leaving a large estate.  Mr. Knappe was her long-time friend.  Although he had business experience, Mr. Knappe had no experience serving as a personal representative or preparing estate tax returns.  So, he engaged the services of Mr. Francis Burns, CPA.  Burns had been his company’s outside accountant for several years.  Mr. Knapp was always satisfied with his work.

Burns told Knappe that a Form 706 for the estate of would need to be filed by August 30, 2006.  Knappe had trouble obtaining the needed appraisals on or before the filing deadline.  Burns advised Knappe that he could obtain an extension of one (1) year for both the filing and the payment of the taxes due.

Burns filed a Form 4786, seeking both an extension for filing and for payment of the taxes due. The extension sought was one year.

As we know, the filing extension, unless the personal representative is out of the country, is only six (6) months.  The payment extension, however, in the discretion of the Service, may be up to one year.  Burns, however, believed both extensions were automatically one (1) year.  OOPS!

The United States Sixth Circuit Court of Appeals was actually presented earlier this year with the “$64,000 Question.”  In Robert W. Stocker, II and Laurel A. Stocker v. U.S., 111 AFTR 2d 2013-556 (705 F3d 225) (6^th Cir., January 17, 2013), the court examined what sort of evidence a taxpayer must introduce in order to support the timely filing of a tax return in which a $64,000 refund was claimed.

In this case, Bob and Laurel Stocker filed an amended 2003 return, seeking a $64,000 refund.  The Service denied the claim on the ground that they did not file the return within the 3-year statutory period.

The Stockers filed suit in District Court.  The court quickly dismissed the case for lack of subject matter jurisdiction—the Stockers could not establish the jurisdictional prerequisite of timely filing the return by methods recognized by the Service or the courts.

The taxpayers argued that testimony and circumstantial evidence may support the timely filing requirement.  Mr. Stocker and his office manager, Karrin Fennell, testified that the return was timely deposited at a United States post office, postage prepaid.  They forgot, however, to attach the registered mail customer return receipt.  The taxpayers were, however, able to produce evidence that the Department of Revenue timely received the amended return.  So, they argued the IRS must have likewise received the federal return on time.  Unfortunately, the IRS’ records showed the return was postmarked 4 days after its due date.

Thank you for your support and friendship.  I wish you a wonderful holiday season and terrific 2014.

- Larry

Earlier this year, the First Circuit United States Court of Appeals issued its decision in United States v. Albania Deleon, 704 F.3d 189 (1st Cir., January 11, 2013).   This case illustrates that worker misclassification may, in addition to the imposition of taxes and civil penalties, lead to criminal sanctions, including imprisonment.

Albania Deleon owned and operated two businesses:  an asbestos abatement training school (“ECT”) and a temporary employment agency (“MSI”).  This case focuses on Ms. Deleon and MSI.  MSI supplied temporary workers to asbestos abatement contractors. 

MSI maintained two separate payrolls for its workforce.  One payroll reported a minority of the workers as employees, proper withholding of payroll and income taxes was done, and Form W-2s were issued to the employees.  MSI reported in writing to both its customers (including governmental entities) and the occupational safety division of local government that it was responsible for and was complying with all employee withholding tax obligations. 

The second payroll, which encompassed most of MSI’s workers, treated the workers as independent contractors—no withholding was done.  Rather, IRS Form 1099s were issued to the workers.  MSI told its accountants that these workers were independent contractors.  Evidence in the trial record indicated Ms. Deleon had absolutely no factual basis for that conclusion.

In late 2006, as a result of an anonymous tip to the government that MSI was violating immigration laws and was involved in fraudulent payroll activity, state and federal investigators raided the offices of both companies.  Based upon the information gathered in the raid, including computer records, the IRS concluded MSI had fraudulently avoided paying over $1,000,000 in payroll taxes.

In the circumstance where substantially all of the assets of a closely-held C corporation are being sold, the shareholder of the seller may desire to receive part of the purchase price directly from the buyer for his or her personal goodwill. The result is beneficial to both the buyer and the selling shareholder. The buyer gets to amortize the amount paid for the goodwill ratably over fifteen (15) years, and the shareholder enjoys two tax advantages, namely he or she gets capital gain treatment on the amount received for the goodwill and he or she avoids the corporate level tax. This approach works provided certain facts exist:

• • The selling shareholder has created personal goodwill;

• • The selling shareholder has the ability to take the personal goodwill with him or her to another company and has the ability to compete with the corporation;

• • There is no contractual arrangement limiting the selling shareholder’s ability to use the personal goodwill in the pursuit of work for a business competitor or the ability to sell it to a business competitor; and

• • The amount of the sale proceeds allocated to the personal goodwill is reasonable.

The Timely Filing Requirement Imposed by Oregon DOR in Order for Taxpayers to be Able to use the "Prior Year Tax Safe Harbor" Stricken by the Oregon Tax Court 

On September 13, 2013, in Finley v. Oregon Department of Revenue, the Oregon Tax Court granted taxpayer’s Motion for Summary Judgment, and held Oregon Administrative Rule 150-316.587(8)-(A) is invalid to the extent it requires taxpayers to have timely filed their prior year’s Oregon income tax return to be eligible for the “Prior Year Tax Safe Harbor.”

I represented the taxpayer in this matter.  The facts were straightforward.  The tax years at issue were 2008 and 2009.  The taxpayer was a resident of Oregon during these years.

For tax year 2008, the taxpayer paid his taxes in a timely manner.  Unfortunately, he filed his Oregon individual income tax return late. 

For tax year 2009, the taxpayer had a substantial increase in his income due to a capital gain-generating transaction.  To avoid an estimated tax payment penalty, on December 31, 2009, thinking he qualified for the “Prior Year Tax Safe Harbor,” he made an Oregon estimated tax payment of 100% of his 2008 Oregon income tax liability.  Then, he timely filed his 2009 Oregon income tax return, and he paid the additional taxes shown due on the return.  Thereafter, the Oregon Department of Revenue sent the taxpayer a nice letter, thanking him for his generous tax payment, but requesting he pay an additional large sum, representing an estimated tax (late payment) penalty.  Not being able to resolve the matter with the Department, we filed a complaint in the Oregon Tax Court.  The case was ultimately heard by Judge Henry Breithaupt in the Regular Division of the Oregon Tax Court.