TaxConnections

 
 

Access Leading Tax Experts And Technology
In Our Global Digital Marketplace

Please enter your input in search

Archive for Matthew Roberts

Are Settlement Payments For Emotional Distress Taxable?

Are Settlement Payments For Emotional Distress Taxable?

The proper federal tax treatment for any given settlement payment is something of an enigma.  Generally, federal courts (and thus, the IRS) respect the terms of a settlement agreement if the terms are clear and the parties expressly allocate the settlement payment or payments to one or more of the underlying claims or causes of action at issue.  But, if one or more of these requirements are not present, federal courts are left searching through other evidence in an attempt to determine the payor’s intent, which, absent an express allocation, generally governs the tax characterization of the payment.

The terms of a settlement agreement may become significant in the context of settlement payments received in lieu of damages for personal physical injuries and/or physical sickness.  Under Section 104(a)(2) of the Code, these payments are not taxable.  However, Section 104(a) specifically provides that settlement payments received in lieu of damages for emotional distress are taxable.  So, what is the difference and how can a taxpayer ensure that any settlement payments received are properly treated as non-taxable under Section 104(a)(2)?

Read more

Reliance On A Third Party As A Defense In Section 7202 Payroll Cases

Reliance On A Third Party As A Defense In Section 7202 Payroll Cases

Section 7202 of the Code makes it a felony for any person to willfully fail to collect and pay over payroll taxes to the IRS.  Put simply, a taxpayer may be subject to jail time if the government merely proves that the taxpayer:  (1) was responsible for paying over payroll taxes; and (2) willfully failed to do so.

In many cases, business owners have difficulties rebutting the government’s contention that they are responsible persons. Thus, the issue of whether the business owner was willful in his conduct becomes a crucial issue.

Late last year, the Department of Justice (DOJ) issued a press release regarding the criminal indictment of Mr. Thrush, a business owner in the State of Michigan.  According to the press release and the allegations in the indictment, Mr. Thrush failed to pay $238,223 in payroll taxes over a two year period.  Moreover, Mr. Thrush allegedly failed to file income tax returns for three years related to his business income.  That case has proceeded towards trial.  See U.S. v. Thrush, No. 1:20-cr-20365 (E.D. Mich.).

Read more

The IRS’ Lawsuits, Awards, And Settlements Audit Techniques Guide

IRS Audit Technique Guide

Some time ago, the IRS issued an Audit Techniques Guide on the taxation of lawsuits, awards, and settlements.  As many tax practitioners can attest, there are a multitude of tax issues involving any one of these issues.  In any event, and although the Audit Technique Guide (“Audit Guide”) is somewhat dated, it is still worth a read to get a quick review of the issues an IRS auditor will focus on when these types of issues have been identified in an IRS examination.

Introduction.

Section 104(a)(2) of the Code provides the tax treatment rules for amounts received “on account of personal physical injuries or physical sickness.”  Generally, if a lawsuit or settlement amount fits within Section 104(a)(2), the payment is not taxable.  However, the Audit Guide cautions IRS examiners that Section 104(a)(2) only applies to individuals because federal courts have concluded that a business entity cannot suffer a personal injury within the meaning of Section 104(a)(2).

Read more

Supreme Court Hands Tax Advisor Big Win in CIC Services, LLC v. IRS

Supreme Court Hands Tax Advisor Big Win in CIC Services, LLC v. IRS

Federal tax cases against the IRS can be difficult.  Even procedurally so.  Under the pay-first, litigate-later rule, taxpayers are generally required, prior to filing suit against the United States:  (1) to full pay the disputed tax, penalties, and interest at issue; and (2) then file an administrative claim for refund with the IRS.  Only after these two prerequisites are met may a taxpayer file and maintain a lawsuit in federal court against the United States (or its instrumentalities, such as the IRS).

Another common bar to a federal lawsuit regarding federal tax matters—which works in conjunction with the pay-first, litigate-later rule—is the Anti-Injunction Act (“AIA”).  The AIA—located in the Internal Revenue Code (the “Code”)—provides, with limited exceptions, that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom the tax was assessed.”  In layman’s terms, if a taxpayer fails to follow the pay-first, litigate-later rule and likewise does not fall within a limited exception of the AIA, the taxpayer’s lawsuit will often be tossed out because the federal court lacks subject-matter jurisdiction over the claim or claims.

Read more

Recent Tax Court Case: Unassessed Taxes Are Not Discharged In Bankruptcy

Recent Tax Court Case: Unassessed Taxes Are Not Discharged In Bankruptcy

A recent Tax Court opinion demonstrates the complexities involved when a taxpayer attempts to discharge tax liabilities through bankruptcy proceedings.  The case emphasizes the need for an attorney knowledgeable in both tax and bankruptcy cases to ensure that the the best, most-viable tax arguments are put forward in the proceedings.

A brief outline of the case is set forth below:

Barnes v. Comm’r, T.C. Memo. 2021-49 | May 4, 2021 | Lauber, J. | Dkt. No. 6330-19L

Short Summary:  The taxpayers challenged a proposed deficiency in the Tax Court related to their 2003 tax year.  Prior to the Tax Court issuing an opinion, the taxpayers filed a voluntary chapter 11 petition in the U.S. Bankruptcy Court for the District of Columbia.  The IRS participated in the bankruptcy proceedings and filed a proof of claim for tax deficiencies—however, the 2003 tax year was not included.

Read more

King of Pop, Michael Jackson’s Estate Wins Big At Tax Court

The King of Pop, Michael Jackson’s, Estate Wins Big At Tax Court

Two things are virtually certain in life:  death and taxes.  But, one more should be added to the list where the two converge—an IRS audit.  Indeed, this scenario played out all too well for the “King of Pop,” Michael Jackson’s, estate as shown in the United States Tax Court’s recent 271-page memorandum opinion.  See Estate of Jackson v. Comm’r, T.C. Memo. 2021-48.

Although the lengthy opinion boiled down to general valuation and estate tax principles, it was noteworthy for several reasons.  First, the Tax Court explicitly found that the IRS’ expert had perjured himself during trial, resulting in a significant discounting of his offered opinions to the court. Second, the Tax Court was called upon to value significant intangible assets of Mr. Jackson at the time of his death, including his image and likeness.  Third, the opinion offers additional insights into how estates, unlike individuals, bear the burden of showing non-compliance with Section 6751(b) of the Code.  Each of these are discussed more fully below.

Read more

Split-Dollar Life Insurance Arrangements And The Tax Code

Split-Dollar Life Insurance Arrangements And The Tax Code

A recent Tax Court decision in De Los Santos v. Commissioner illustrates the complexity of split-dollar life insurance arrangements.  Taxpayers who participate in these or other types of life insurance arrangements should consult knowledgeable tax counsel to ensure that arrangement is reported properly on all applicable tax returns.

In 2003, the Treasury Department issued final regulations addressing the taxation of split-dollar life insurance arrangements. Split-dollar life insurance arrangements of the sort involved in this case fall into one of two categories—“compensatory arrangements” or “shareholder arrangements.”  Reg. § 1.61-22(b)(2)(ii), (iii).  In both types, the “owner” of the life insurance contract pays the premiums, and the “non-owner” has a current interest in the policy.

Read more

Does The IRS’ First Time Abatement Rule Apply To Tax-Exempt Organizations?

Does The IRS’ First Time Abatement Rule Apply To Tax-Exempt Organizations?

The Section 6652(c) Penalty

Section 6033(a)(1) of the Internal Revenue Code (the “Code”) generally requires “every organization exempt from taxation under section 501(a) . . . [to] file an annual return.”  For tax-exempt organizations, the annual return is IRS Form 990, Return of Organization Exempt From Income Tax, Form 990-EZ, Short Form Return of Organization Exempt from Federal Income Tax, or IRS Form 990-N, Annual Electronic Filing Requirement for Small Exempt Organizations.  If the organization fails to file a timely and accurate return with the IRS, the IRS is permitted to impose a civil penalty against the organization under Section 6652(c) of the Code.

The daily rate of the civil penalty in addition to the maximum penalty that can be imposed generally depends on the size of the tax-exempt organization.  For returns required to be filed in 2020, smaller organizations can be assessed civil penalties of up to $20 per day not to exceed the lesser of $10,500 or 5% of the gross receipts of the organization.  But, for larger organizations—i.e., those with gross receipts exceeding $1,067,000—the daily rate of the civil penalty can increase to $105 per day up to a maximum of $54,000.

Read more

What Is The Proper Characterization Of A Foreign Entity For Federal Tax Purposes: Chief Counsel Memo. 2021-002 Offers Some Clues

What Is The Proper Characterization Of A Foreign Entity For Federal Tax Purposes: Chief Counsel Memo. 2021-002 Offers

To Elect or Not to Elect?

Treasury Regulations provide default rules for the proper tax characterization of both domestic and foreign entities.[i] Generally, a business entity that is not classified as a corporation under certain prescribed rules (referred to as “eligible entities”) can elect their tax characterization for federal tax purposes.[ii]

For example, an eligible entity (domestic or foreign) with two members can generally elect to be characterized as either a corporation or a partnership for federal tax purposes.  Conversely, an eligible entity with only one owner can elect to be characterized as either a corporation or a disregarded entity.

Tax Consequences of not Making an Election

Read more

Federal Court Concludes That FBAR Penalties Are Not Subject To The Flora Rule

Federal Court Concludes That FBAR Penalties Are Not Subject To The Flora Rule

It has been more than 60 years since the Supreme Court held that, under 28 U.S.C. § 1346(a)(1), taxpayers seeking to file federal tax claims against the government in federal court must pay the full amount of tax prior to filing suit.  See Flora v. U.S., 362 U.S. 145, 177 (1960).  As a result, many taxpayers with large tax assessments often find it more difficult to obtain judicial review of IRS actions, particularly where important procedural rights are lost due to inaction.

But, by its own terms, 28 U.S.C. § 1346(a)(1) only applies to “internal-revenue taxes” and claims related to “internal-revenue laws.”  Clearly, federal income taxes and penalties within Title 26 of the United States Code (i.e., the “I.R.C.”) may fall within these definitions.  However, do other statutory provisions outside the I.R.C. also fall within the purview of 28 U.S.C. § 1346(a)(1) and the Flora rule?

Read more

Be Careful What You Tell The IRS: Federal Appeals Court Upholds Criminal Obstruction Charge

Be Careful What You Tell The IRS: Federal Appeals Court Upholds Criminal Obstruction Charge

Section 7212 makes it unlawful for any person to attempt to interfere with the administration of the laws of the Internal Revenue Code.  For example, that provision makes it unlawful for any person to make certain threats against an Internal Revenue Service (IRS) employee.  Moreover, the “omnibus clause” of Section 7212 prohibits corrupt acts designed to obstruct or impede the due administration of the Internal Revenue Code.  Those who violate Section 7212 may face felony charges with up to a maximum of three years in prison.

In many cases, the question in Section 7212 cases is what conduct constitutes “obstruction”?  The recent decision in U.S. v. Avery, No. 19-2429, 2021 WL 1157846 (6th Cir. Mar. 26, 2021) provides some additional color on the scope of such language and is the topic of this Insight.

U.S. v. Avery.

Background

Read more

IRS Practice Unit Focuses On Sale Of A Partnership Interest

IRS Practice Unit Focuses On Sale Of A Partnership Interest

It is a little known secret that IRS Large Business & International (“LB&I”) issues “Practice Units” from time to time. Often, these Practice Units are worth a read because they “are developed through internal collaboration and serve as both job aids and training materials . . . [to IRS examiners] on tax issues.”  A list of former Practice Units can be found here.

Recently, on March 12, 2021, IRS LB&I issued a 50-page Practice Unit on the “Sale of a Partnership Interest.”  This Insight discusses that Practice Unit.

General Concepts.

Subchapter K of the Internal Revenue Code (“Code”) houses the partnership tax rules.  Under these complex rules, a partnership is generally not a taxable entity—rather, the items from the partnership flow through and are reported by the partners on their respective income tax returns.  In this manner, a partnership is not treated as a separate entity but instead is treated more as an aggregate of its partners.  For federal tax purposes, this is known as the “aggregate theory” of partnership taxation.

Read more