Tax Court Holds Attorney-client Privilege may be Forfeited When Taxpayers Assert Good Faith Defense under Section 6662.

AD Investment 2000 Fund LLC et al. v. Commissioner; 142 T.C. No. 13, Filed April 16, 2014

“By putting the LLCs’ legal knowledge and understanding into contention in order to establish a good-faith and state-of-mind defenses, Ps forfeit the LLCs’ privilege protecting attorney-client communications relevant to the content and the formation of their legal knowledge, understanding, and beliefs; an order directing production will be issued.”

Link: http://www.ustaxcourt.gov/UstcDockInq/DocumentViewer.aspx?IndexID=6252752

 

 

 

IRS Rules that Retirement Plans Must Apply to Same-Sex Spouses from June 26, 2013.

Application of the Windsor Decision and Rev. Rul. 2013-17 to Qualified Retirement Plans: Notice 2014-19, 2014-17 IRB 1

“III. QUESTIONS AND ANSWERS

GENERAL RULES

Q-1. How does the Windsor decision affect the application of the Federal tax rules to qualified retirement plans?

A-1. In the Windsor decision, the Supreme Court held that section 3 of DOMA (which applied for purposes of determining an individual’s marital status under Federal law) is unconstitutional. In the absence of section 3 of DOMA, any retirement plan qualification rule that applies because a participant is married must be applied with respect to a participant who is married to an individual of the same sex. For example, a participant in a plan subject to the rules of section 401(a)(11) who is married to a same-sex spouse cannot waive a QJSA without obtaining spousal consent pursuant to section 417.

Q-2. As of what date are qualified retirement plans required to be operated in a manner that reflects the outcome of Windsor and the guidance in Rev. Rul. 2013-17?

A-2. Qualified retirement plan operations must reflect the outcome of Windsor as of June 26, 2013. A retirement plan will not be treated as failing to meet the requirements of section 401(a) merely because it did not recognize the same-sex spouse of a participant as a spouse before June 26, 2013. For Federal tax purposes, effective as of September 16, 2013, Rev. Rul. 2013-17 (i) adopts a general rule recognizing a marriage of same-sex individuals that is validly entered into in a state whose laws authorize the marriage of two individuals of the same sex, even if the individuals are domiciled in a state that does not recognize the validity of same-sex marriages, and (ii) provides that individuals (whether part of an opposite-sex or same-sex couple) who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as a marriage under the laws of that state are not treated as married. Accordingly, a retirement plan will not be treated as failing to meet the requirements of section 401(a) merely because the plan, prior to September 16, 2013, recognized the same-sex spouse of a participant only if the participant was domiciled in a state that recognized same-sex marriages. See Q&A-8 for the deadline to adopt plan amendments pursuant to this notice.

Q-3. May a qualified retirement plan be amended to reflect the outcome of Windsor as of a date earlier than June 26, 2013, and, if so, may the amendment reflect the outcome of Windsor for only certain purposes?

A-3. A qualified retirement plan will not lose its qualified status due to an amendment to reflect the outcome of Windsor for some or all purposes as of a date prior to June 26, 2013, if the amendment complies with applicable qualification requirements (such as section 401(a)(4)). Recognizing same-sex spouses for all purposes under a plan prior to June 26, 2013, however, may trigger requirements that are difficult to implement retroactively (such as the ownership attribution rules) and may create unintended consequences. Provided that applicable qualification requirements are otherwise satisfied, a plan sponsor’s choice of a date before June 26, 2013, and the purposes for which the plan amendments recognize same-sex spouses before June 26, 2013, do not affect the qualified status of the plan. For example, for the period before June 26, 2013, a plan sponsor may choose to amend its plan to reflect the outcome of Windsor solely with respect to the QJSA and QPSA requirements of section 401(a)(11) and, for those purposes, solely with respect to participants with annuity starting dates or dates of death on or after a specified date.

PLAN AMENDMENTS

Q-4. For purposes of satisfying the Federal tax rules relating to qualified retirement plans, must a qualified retirement plan be amended to reflect the outcome of Windsor and the guidance in Rev. Rul. 2013-17 and this notice?

A-4. Whether a plan must be amended to reflect the outcome of Windsor and the guidance in Rev. Rul. 2013-17 and this notice depends on the terms of the specific plan, as described in Q&A-5 through Q&A-7 of this notice.

Q-5. Must a plan sponsor amend a qualified retirement plan if its terms with respect to the requirements of section 401(a) define a marital relationship by reference to section 3 of DOMA or if the plan’s terms are otherwise inconsistent with the outcome of Windsor or the guidance in Rev. Rul. 2013-17 or this notice?

A-5. If a plan’s terms with respect to the requirements of section 401(a) define a marital relationship by reference to section 3 of DOMA or are otherwise inconsistent with the outcome of Windsor or the guidance in Rev. Rul. 2013-17 or this notice, then an amendment to the plan that reflects the outcome of Windsor and the guidance in Rev. Rul. 2013-17 and this notice is required by the date specified in Q&A-8 of this notice.

Q-6. If a qualified retirement plan’s terms are not inconsistent with the outcome of Windsor and the guidance in Rev. Rul. 2013-17 and this notice (for example, the term “spouse,” “legally married spouse” or “spouse under Federal law” is used in the plan without any distinction between a same-sex spouse and an opposite-sex spouse), must the plan be amended to reflect the change in meaning or interpretation of those terms to include same-sex spouses?

A-6. If a plan’s terms are not inconsistent with the outcome of Windsor and the guidance in Rev. Rul. 2013-17 and this notice, an amendment generally would not be required. If no amendment to such a plan is made, the plan nonetheless must be operated in accordance with the provisions of Q&A-2 of this notice. (Though not required, a clarifying amendment may be useful for purposes of plan administration.)

Q-7. If a plan sponsor chooses to apply the rules with respect to married participants in qualified retirement plans in a manner that reflects the outcome of Windsor for a period before June 26, 2013, is an amendment to the plan required?

A-7. Yes, if a plan sponsor chooses to apply the rules in a manner that reflects the outcome of Windsor for a period before June 26, 2013, an amendment to the plan that specifies the date as of which, and the purposes for which, the rules are applied in this manner is required. The deadline for this amendment is the date specified in Q&A-8 of this notice.

Q-8. What is the deadline to adopt a plan amendment pursuant to this notice?

A-8. The deadline to adopt a plan amendment pursuant to this notice is the later of (i) the otherwise applicable deadline under section 5.05 of Rev. Proc. 2007-44, or its successor, or (ii) December 31, 2014. Moreover, in the case of a governmental plan, any amendment made pursuant to this notice need not be adopted before the close of the first regular legislative session of the legislative body with the authority to amend the plan that ends after December 31, 2014.

Link: http://www.irs.gov/pub/irs-drop/n-14-19.pdf

U.S. Bankruptcy Court Holds Debtor’s Obligation to Repay First-time Home Buyer Tax Credit Was Nondischargeable Tax

(In re: Dawn Bryan, Debtor(s).)

UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

A.P. No. 13-1151

MEMORANDUM ON MOTION FOR SUMMARY JUDGMENT

“Before her Chapter 7 bankruptcy in 2010, debtor Dawn Bryan took a first time home buyer tax credit pursuant to the Housing Recovery Act of 2008 (HERA). The provisions of HERA include a tax credit for first time home buyers. However, the law requires the taxpayer to repay the credit over time. In the years after her bankruptcy, the Internal Revenue Service has reduced the amount of her tax refund by her repayment obligation. In this adversary proceeding, Bryan argues that the tax credit was in essence a loan, and her obligation to repay it was discharged by her bankruptcy. She therefore argues that the reduction of her tax refunds was unlawful. The Government has moved for summary judgment.

As one commentator has noted, the first time home buyer tax credit “contains one last limitation, one that eliminates much of the benefit to taxpayers who use the credit: recapture. For the next fifteen taxable years after the taxpayer uses the [first time home buyer] credit, 6.67 percent of the amount of the credit shall be imposed as a tax on the taxpayer.”[Footnotes omitted, emphasis added]. Comment, “No Tax for ‘Phantom Income’: How Congress Failed to Encourage Responsible Housing Consumption with its Recent Tax Legislation,” 85 Chi.-Kent L. Rev. 345, 363 (2010).

The crucial fact is that Congress imposed the obligation to repay the credit as a tax. This obligation is codified in 26 U.S.C. § 36(f)(1), which provides that if a home buyer takes the first time home buyer tax credit, “the tax imposed by this chapter shall be increased by 6 2/3 percent of the amount of such credit for each taxable year in the recapture period.” Thus, while the new home buyer tax credit is “like a loan” in the sense that it has to be repaid, the obligation to repay is imposed as an increased tax rather than a general obligation. It is therefore not dischargeable pursuant to § 523(a)(1)(A) of the Bankruptcy Code.

For the foregoing reasons, the Government’s motion for summary judgment will be granted. It shall submit a form of judgment providing that Bryan take nothing by her complaint and declaring that Bryan’s obligation to repay the new home buyer tax credit is a nondischargeable tax.”

DATED: February 27, 2014

IRS Dirty Dozen of Tax Related Scams for 2014

IR-2014-16, February 19, 2014

“The Internal Revenue Service today issued its annual “Dirty Dozen” list of tax scams, reminding taxpayers to use caution during tax season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud.”

They are:

1. Identity Theft

2. Telephone scams including:

  • •Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
  • •Scammers may be able to recite the last four digits of a victim’s Social Security Number.
  • •Scammers “spoof” or imitate the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • •Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • •Victims hear background noise of other calls being conducted to mimic a call site.

3.Phishing

4. False Promises of “Free Money” from Inflated Refunds

5. Return Preparer Fraud

6. Hiding Income Offshore

7. Impersonation of Charitable Organizations:

  • •To help disaster victims, donate to recognized charities.
  • •Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible.
  • •Don’t give out personal financial information, such as Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money.
  • •Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.

8. False Income, Expenses or Exemptions

9. Frivolous Arguments

10. Falsely Claiming Zero Wages or Using False Form 1099

11. Abusive Tax Structures

12. Misuse of Trusts

Link: http://www.irs.gov/uac/Newsroom/IRS-Releases-the-%E2%80%9CDirty-Dozen%E2%80%9D-Tax-Scams-for-2014;-Identity-Theft,-Phone-Scams-Lead-List

Repayment of Education Expenses not Deductible

Tripp Dargie et al. v. United States; No. 13-5608 (6th Cir.), Decided and Filed: February 5, 2014

“In 1993, Dr. Dargie enrolled as a student at the University of Tennessee College of Medicine (UT). In 1994, he entered into a Conditional Award Agreement (“the Agreement”) with UT and MTMC that provided that MTMC would pay Dr. Dargie’s tuition, fees, and other reasonable expenses for attending UT. After graduation and the completion of his residency, Dr. Dargie was required to repay MTMC’s grant by either (1) working as a doctor in the medically underserved community of Murfreesboro, Tennessee, for four years or (2) repaying “two (2) times the uncredited amount of all conditional award payments” he received or a lesser amount agreed to by UT. During Dr. Dargie’s time in medical school, MTMC paid UT $73,000 on Dr. Dargie’s behalf as part of the Agreement.

***

Dr. Dargie asserts that the $121,440 amount he sent UT in 2002 was a “damages payment” for breaching the Agreement with MTMC to work in Murfreesboro after his medical training.1 Consequently, he argues the payment was an ordinary and necessary business expense permitted under I.R.C. § 162(a) because it enabled him to pursue his for-profit medical practice in a different area of the state. The government contends that the payment to UT does not qualify as a deduction because educational expenses that allow an individual to meet the minimum requirements for practicing a given profession are personal.

***

In this case, Dr. Dargie does not dispute that MTMC paid for his medical education and that education enabled him to meet the prerequisites for working as a physician. Moreover, U.S. Treasury regulations specifically categorize as nondeductible “expenditures made by an individual for education which is required of him in order to meet the minimum educational requirements for qualification in his employment or other trade or business.” Treas. Reg. § 1.162-5(b)(2); see Keane v. Comm’r, 75 T.C.M. (CCH) 2046, 1998 WL 126857, at *3 (1998) (holding that “[e]ducational expenses incurred to allow [a] taxpayer to meet the minimum educational requirements for his job qualification are considered personal expenses.”); see also Taubman v. Comm’r, 60 T.C. 814, 819 (1973) (holding that law school tuition expenses are nondeductible under I.R.C. § 162 because they allow a taxpayer to qualify in a new trade or business). Dr. Dargie cites no court decision that upholds a business deduction in a circumstance similar to his”

Section 152(c)(1)(B) and (D) “Same Principal Place of Abode” and “Support” Requirements

Curtis Jay Richardson et ux. v. Commissioner; T.C. Summ. Op. 2014-9, Filed January 30, 2014

“The State of California removed petitioners’ four children from their home in 2006, and the children did not live with petitioners at any time during 2008 or 2009.

***

All four of the dependency exemption deductions were claimed with respect to petitioners’ biological children. Petitioners, however, have not shown that any of the children resided with them during any part of 2008 or 2009. Similarly, petitioners have not made any showing with respect to support of the children.

The Court concludes that none of petitioners’ children is a “qualifying child” as defined by section 152(c) and as a result, petitioners are not entitled to dependency exemption deductions for any of their children for 2008 or 2009.”

Link:http://www.ustaxcourt.gov/UstcDockInq/DocumentViewer.aspx?IndexID=6198338