Larry's Tax Law

While the IRS is back in business following the recent government shutdown, it may not receive your requests for private letter rulings with open arms.  Before requesting a private letter ruling, tax practitioners need to review the Service’s recent no-ruling revenue procedures, namely Revenue Procedure 2013-32 and Revenue Procedure 2013-3.

While the new no-ruling revenue procedures are broad in scope, it is possible the Service may still issue rulings in areas that otherwise appear to be no-ruling topics.  So, you should consider a pre-submission meeting or conversation with the IRS to determine whether a ruling may be available and/or to discuss how you should tailor a ruling request in light of these new revenue procedures.

There are rumors circulating in the media that taxpayer filing and payment obligations are currently on hold pending the Federal shutdown.  WRONG!

The IRS announced last week, despite its limited resources during the shutdown, taxpayer obligations continue.  These obligations must be met in a timely manner.  There will be no extensions arising from the shutdown.

Individuals and businesses are required to file returns, pay taxes, make estimate tax payments, and make tax deposits in a timely manner as required by applicable law.  The shutdown does not impact these obligations or the time frame in which to fulfill them.  It does, however, create a few hiccups for tax advisors and their clients, including:

To qualify as an S Corporation for the current tax year, a corporation must make an election: (1) at any time during the entity’s preceding tax year; or (2) at any time before the 15th day of the 3rd month of the current tax year.  If a corporation fails to make a timely election, it is considered a “late S election” and it will not qualify as an S Corporation for the intended tax year.

The consequences of a late S election or failing to file an S election can be severe.  First, the corporation will be taxed as a C Corporation and subject to corporate income taxes.  Second, the corporation may be subject to late filing and payment penalties, and interest on unpaid taxes.  Finally, if the corporation filed IRS Forms 1120S as if it were an S Corporation, then all prior tax years would be subject to IRS examination because the tax years remain open.

People are often surprised by the long reach of Internal Revenue Service (“Service” or “IRS”) liens.¹  Plains Capital Corporation (“Plains”) recently learned this lesson.  Plains lost a fight with the Service in a case before the United States District Court for the Eastern District of Texas.  It appealed to Fifth Circuit Court of Appeals.  Losing again, Plains proceeded with an appeal to the United States Supreme Court.  Unfortunately, on June 24, 2013, the highest court in the nation refused to hear Plain’s appeal.²  The saga is over for Plains, but the case should be a loud warning to others.

In 2002 and 2003, the Service assessed taxpayer Gregory Rand (“Rand”) for tax liabilities arising from 2000 and 2002.  It eventually filed notices of federal tax liens totaling over $3 million (“Tax Liens”).

In 2005, Rand obtained a $200,000 line of credit from Plains.  Plains was aware of the Tax Liens.  To secure its credit extension, however, it took possession of the title to Rand’s 2005 Ferrari.  Plains thought taking possession of the vehicle title would put it in front of the IRS.  Wrong!

In 2007, Rand agreed with the IRS that he would deliver the Ferrari to Boardwalk Motor Sports, Ltd (“Boardwalk”).  Boardwalk agreed to sell the vehicle on consignment.

The Service and Plains could not agree upon the priority of their respective liens.  So, the IRS served a notice of levy on Boardwalk and instructed Boardwalk to deliver the sale proceeds to it.  Later, an IRS agent instructed Boardwalk not to release the sale proceeds until the IRS and Plains reached agreement on lien priorities.  If it was unsure whether an agreement was reached, Boardwalk was instructed to go to the local court and file an interpleader action.

Introduction

Section 336(e)1 expressly delegates authority to Treasury to issue regulations, allowing taxpayers to elect to treat the sale, exchange or distribution of corporate stock as a deemed sale of the corporation’s underlying assets.  On May 15, 2013, Treasury finalized regulations under Section 336(e).

What is the 336(e) Election?

A Section 336(e) election allows certain taxpayers to treat the sale, exchange or distribution of corporate stock as an asset sale.  The benefit of an asset sale is obvious—the basis of the target corporation’s assets is stepped up to fair market value.

If an election is made, “old target” is treated as selling all of its assets to “new target.”  New target is treated as purchasing those assets, resulting in a step-up in basis of the assets.  Old target recognizes the gain or loss from the deemed asset sale immediately before the close of the stock transaction.

Section 336(e) is intended to provide taxpayers relief from multiple levels of tax on the same economic gain—economic gain attributable to the appreciation of assets held in corporate solution.  Such multiple levels of tax can result from the taxable transfer of appreciated corporate stock where the assets in corporate solution do not receive a corresponding step-up in basis.

As many employers have painfully learned, misclassifying employees as independent contractors can be an expensive mistake. Worker misclassification may become even more costly in 2014, when a new potential trap for the unwary will exist. If a non-complying employer gets caught in this new trap, it could be faced with significant monetary penalties.

Beginning in 2014, as a result of the Patient Protection and Affordable Care Act, employers who misclassify employees as independent contractors may be subject to an additional penalty regime. Section 4980H(a) of the Internal Revenue Code (the “Code”) imposes a penalty on “large employers” who fail to offer full-time employees health insurance with a minimum level of coverage. Because employers generally do not provide health care coverage to independent contractors, reclassification of an independent contractor to a full-time employee could trigger this penalty.

According to a Bureau of Labor Statistics study conducted almost 8 years ago, approximately 10.3 million workers in the United States, or 7.4% of the workforce, are classified as independent contractors. Today that number, despite recessionary times, is likely dramatically larger.

The federal government, based upon recent case studies including federal and state income tax and unemployment tax audits, recently concluded many workers classified as independent contractors are actually employees. Consequently, worker classification is currently a hot topic for the Internal Revenue Service, the state departments of revenue, and other federal, state and local agencies.

Government focus on worker classification is not a new phenomenon. Due to current economic and political pressures, however, it has risen to the forefront of governmental attention. During the last few years, federal, state and local agencies have dramatically increased audit activity, targeting worker misclassification.