Hobby Loss Rules of § 183 Preclude Deductions from Cattle Operation.

Raymond E. Gardner et ux. v. Commissioner; T.C. Memo. 2014-148, Filed July 28, 2014

In a long and detailed analysis of the taxpayer’s cattle operations the Tax Court found that the taxpayers did not have a profit motive and disallowed all deductions associated with their cattle operations under IRC § 183. As is typical in cases like the Court applied the nine factors described in Treasury Regulation § 1.183-2(b).

“Section 1.183-2(b), Income Tax Regs., contains a nonexclusive list of objective factors to be considered in deciding whether an activity is engaged in for profit. The factors are: (1) The manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or his advisors; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that assets used in activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer’s history of income or losses with respect to the activity; (7) the amount of occasional profits, if any, which are earned; (8) the financial status of the taxpayer; and (9) elements of personal pleasure or recreation. Sec. 1.183-2(b), Income Tax Regs. No single factor is determinative.”

The Court found that factors number 5 and 6 were neutral, the Commissioner prevailed on all other factors except for number 9. Of this factor the Court said, “[r]aising cattle generally lacks significant recreational aspects.”

Link: https://www.ustaxcourt.gov/UstcDockInq/DocumentViewer.aspx?IndexID=6334881

 

Same-sex Spouse Refund of Federal Income Taxes Paid on the Spousal Health Coverage

UIL: 106.00-00 June 27, 2014

In a letter to Congressman Welch the IRS provided guidance on how to apply for refunds associated with federal income taxes paid on the spousal health coverage:

Dear Congressman Welch:

I am responding to your inquiry dated January 22, 2014, on behalf of your constituent. She added health coverage for a same-sex spouse under her employer’s health plan in November 2013. The value of health coverage for the same-sex spouse was included in the constituent’s gross income on her Form W-2, Wage and Tax Statement, for 2013. The constituent asked how she can subtract the value of this spousal coverage when filing her 2013 tax return.

Accordingly, your constituent may be entitled to a refund of any federal income taxes paid on the value of spousal health coverage under the employer’s health plan, provided that the spouse is the constituent’s legal spouse under Revenue Ruling 2013-17.

***

Your inquiry states that the value of the spousal health coverage was reported as taxable wages to the constituent on Form W-2. To exclude such amounts, the constituent should take the following steps:

First, contact the employer and request a corrected Form W-2 that does not include the value of any excludable spousal health coverage in taxable wages.

If the employer issues a corrected Form W-2, your constituent can then use the amounts reported on the corrected Form W-2 when filing a tax return.

If the employer does not issue a corrected Form W-2, the constituent should file Form 1040, U.S. Individual Income Tax Return, using the original Form W-2 from the employer and should also attach Form 4852, Substitute for Form W-2, Wage and Tax Statement, or [for] Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., which I am enclosing with this letter. Your constituent should also take the following steps when completing Form 4852 and Form 1040:

On Form 4852, check the box indicating that the taxpayer received an incorrect Form W-2 for 2013.

Subtract the value of any excludable spousal health coverage from the taxable wages reported in Box 1 of Form W-2 and list this result on line 7(a) of Form 4852.

Subtract the value of any excludable spousal health coverage that was included in Medicare wages reported in Box 5 of Form W-2 and list this result on line 7(c) of Form 4852.

If your wages were subject to social security tax, as a general rule, list on line 7(b) of Form 4852 the lesser of $113,700 or the amount listed on line 7(c) of Form 4852. If your wages were not subject to social security tax, list on line 7(b) of Form 4852 the amount of social security wages reported in Box 3 of Form W-2.

Copy the amounts reported on Form W-2 to the appropriate places on lines 7(d) through (j) of Form 4852.

Complete line 9 of Form 4852 explaining that the amounts reported on Form W-2 included the value of excludable spousal health coverage and that these amounts have been excluded on Form 4852 as permitted by Rev. Rul. 2013-17 and Notice 2014-1. Also explain how the value of excludable spousal health coverage was determined (for instance, by referring to the amount reported as taxable health coverage on paystubs).

Complete line 10 of Form 4852 explaining all steps taken to request a corrected Form W-2 from the employer.

When completing Form 1040, use the amounts listed on Form 4852 instead of the amounts listed on Form W-2.

Sign and date Form 4852 and Form 1040.

Attach Form 4852 and Form W-2 to Form 1040 in accordance with the instructions for Form 4852.

LINK: http://www.irs.gov/pub/irs-wd/14-0012.pdf

New Form 1023-EZ for Most Small 501(c)(3) Organizations

IR-2014-77, July 1, 2014

“WASHINGTON — The Internal Revenue Service today introduced a new, shorter application form to help small charities apply for 501(c)(3) tax-exempt status more easily.

“This is a common-sense approach that will help reduce lengthy processing delays for small tax-exempt groups and ultimately larger organizations as well,” said IRS Commissioner John Koskinen. “The change cuts paperwork for these charitable groups and speeds application processing so they can focus on their important work.”

The new Form 1023-EZ, available today on IRS.gov, is three pages long, compared with the standard 26-page Form 1023. Most small organizations, including as many as 70 percent of all applicants, qualify to use the new streamlined form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.

***

The Form 1023-EZ must be filed using pay.gov, and a $400 user fee is due at the time the form is submitted. Further details on the new Form 1023-EZ application process can be found in Revenue Procedure 2014-40, posted today on IRS.gov.”

Comment: Many taxpayers belong to small non-profit organizations such as garden clubs, school auxiliaries, and the like. Failure to register as an exempt organization exposes individuals to tax liability for the income received by those organizations including dues and proceeds from fund-raisers. The new Form 1023-EZ will allow much easier compliance with the law of tax exempt organizations for those groups.

Link: http://www.irs.gov/uac/Newsroom/New-1023-EZ-Form-Makes-Applying-for-501c3Tax-Exempt-Status-Easier-Most-Charities-Qualify

 

 

S. 2347, the Multi-State Worker Tax Fairness Act of 2014, Sen. Richard Blumenthal, D-Conn., Would Restrict Application of States’ Income Tax Laws as Applied to Nonresident Workers.

May 14, 2014

SECTION 1. SHORT TITLE.

This Act may be cited as the “Multi-State Worker Tax Fairness Act of 2014″.

SEC. 2. LIMITATION ON STATE TAXATION OF COMPENSATION EARNED BY NONRESIDENT TELECOMMUTERS AND OTHER MULTI-STATE WORKERS.

(a) IN GENERAL. — Chapter 4 of title 4, United States Code, is amended by adding at the end the following:

Ҥ 127. Limitation on State taxation of compensation earned by nonresident telecommuters and other multi-State workers

“(a) IN GENERAL. — In applying its income tax laws to the compensation of a nonresident individual, a State may deem such nonresident individual to be present in or working in such State for any period of time only if such nonresident individual is physically present in such State for such period and such State may not impose nonresident income taxes on such compensation with respect to any period of time when such nonresident individual is physically present in another State.

“(b) DETERMINATION OF PHYSICAL PRESENCE. — For purposes of determining physical presence, no State may deem a nonresident individual to be present in or working in such State on the grounds that -

“(1) such nonresident individual is present at or working at home for convenience, or

“(2) such nonresident individual’s work at home or office at home fails any convenience of the employer test or any similar test.

Taxpayers Amway Deductions Denied Under Section 183 for Lack of Profit Motive

Samer Mikhail et ux. v. Commissioner; T.C. Summ. Op. 2014-40, Filed April 22, 2014

“The issues for decision are: (1) whether petitioners engaged in sales and recruiting activities for profit within the meaning of section 183, (2) if so, whether petitioners substantiated deductions they claimed for vehicle and travel expenses, and (3) whether petitioners are liable for an accuracy-related penalty under section 6662(a). To the extent not discussed herein, other adjustments are computational and flow from our decision in this case.”

Comment: This decision contains an excellent and detailed analysis by the court of the profit motive provisions of Treas. Regs. § 1.183-2(b).

Link: http://www.ustaxcourt.gov/UstcDockInq/DocumentViewer.aspx?IndexID=6258209

 

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