In previous blogs, Freeman Law discussed recent federal cases related to 31 U.S.C. § 5321—specifically, whether Section 5321 authorizes the IRS to impose multiple non-willful penalties for the untimely filing of a single accurate FBAR that includes multiple foreign accounts. In United States v. Bittner, the District Court for the Eastern District of Texas held for the taxpayer (i.e., non-willful FBAR penalties should be assessed on a per-reporting basis, not a per-account basis). For more information, see the following Insight Blogs: The Largest Non-Willful FBAR Penalty Case Ever? and Court Strikes Down Largest Non-Willful FBAR Penalty Ever. Now, that case is currently pending with the Fifth Circuit Court of Appeals.
Archive for Zachary Montgomery
There have been numerous constitutional challenges of U.S. tax laws since the Sixteenth Amendment was passed in 1913. As the Internal Revenue Code has grown over the years so have the court battles. A recent challenge involves Section 7345. According to that code provision, taxpayers who have “seriously delinquent tax debt” may have their U.S. passports denied, revoked, or limited. In a recent decision issued by a U.S. district court, the court found that Section 7345 was (and is), in fact, constitutional.
Section 7345, Generally
On December 4, 2015, former President Obama signed the Fixing America’s Surface Transportation Act (the “FAST Act”). In an effort to promote tax compliance, Section 7345 was enacted by Section 32101 of the FAST Act.According to Section 7345, if the Secretary of Treasury receives certification by the Commissioner of the Internal Revenue Service that an individual taxpayer has a seriously delinquent tax debt, the Secretary of Treasury shall transmit such certification to the Secretary of State for action with respect to the denial, revocation, or limitation of the individual’s passport.
According to 2019 data, the Internal Revenue Service recognized approximately 1.9 million tax-exempt organizations in the United States. Of this population, more than 263,000 of the organizations were identified as either churches or religious organizations. This likely accounts for why the Internal Revenue Service received nearly 1.6 million tax-exempt returns in 2019. Unfortunately, tax-exempt organizations, including charities and religious organizations, may perpetrate fraud and abuse federal tax laws. The Treasury Inspector General for Tax Administration (“TIGTA”) recently performed an audit to assess the effectiveness of the Internal Revenue Service’s efforts to ensure the compliance of tax-exempt organizations.
Section 501 and the EO Function Examinations Unit
In a previous blog, I provided an overview of Section 3582(c) with respect to the modification of prison terms. In addition, I looked at two recent cases (United States v. Higa [Hawaii] & United States v. McGrath [Ohio]) that dealt with defendants who cited the COVID-19 pandemic in their respective motions for compassionate release. For more information on those cases, see the following Insight Blog: But, Your Honor, There’s A Coronavirus Pandemic – Higa & McGrath.
Now, another recent criminal case provides another data point with respect to defendants serving prison time related to tax crimes who file a motion for compassion release under Section 3582(c)(1)(A) and invoke the COVID-19 pandemic. This time the district court is located in Pennsylvania. And, this time the district court denied the defendant’s motion.
Compassionate Release, Generally
While Texas was being pelted by snow and freezing temperatures and rolling blackouts, I decided to catch up on a little light reading related to tax crimes. Who doesn’t like good reading material when the house is pitch black and all you have is the glow from your phone’s display to light up the page? Nevertheless, I came across two recent court decisions—one in Hawaii, one in Ohio—whereby each defendant was serving prison time related to tax crimes and each defendant filed a motion for compassionate release under Section 3582(c)(1)(A) and each defendant invoked the COVID-19 pandemic. Two cases with similar backgrounds/fact situations are always interesting for comparison purposes. In this case, one court granted the defendant’s motion, while the other court denied the defendant’s motion.
Modification of Prison Terms, Generally
Comedian Jerry Seinfeld one said, “The IRS! They’re like the Mafia, they can take anything they want!” It’s a sentiment probably shared by most U.S. citizens—much to the chagrin of taxpayers. As many now, the Internal Revenue Service is not limited in simply administering the Internal Revenue Code or collecting taxes from individuals. The Service’s power reaches farther than that. Its power also includes filing substitute tax returns on behalf of taxpayers—a veritable correction called upon when a voluntary tax system is not so voluntary. Additionally, the IRS also has the power to assess additions to tax and penalties in various circumstances. As the Ninth Circuit recently affirmed, the IRS has the power to assess such additions to tax and penalties on substitute tax returns it files on behalf of taxpayers.
Section 6651 Penalties, Generally
Generally, the Internal Revenue Service may assess certain additions to tax for failure to file tax returns or failure to pay taxes. Section 6651 prescribes the various situations and penalty amounts that is may assess as follows:
Since the COVID-19 pandemic hit the United States in early 2020, relief efforts have taken many forms—personal services, legislative efforts, volunteer hours, and even charitable contributions. Yes, when both people and corporations were in the midst of struggles, individuals and companies still made contributions throughout society. Although one hopes charitable contributions are not made for the primary reason of obtaining tax deductions, it is an added benefit that both individual and corporate taxpayers can enjoy under the Internal Revenue Code. That tax benefit was recently enhanced by federal legislation in December 2020 for corporate taxpayers. However, is the “enhancement” as helpful or sweeping as it seems?
Corporate Charitable Contributions, Generally
Generally, corporations cannot deduct charitable contributions that exceed 10 percent of their taxable income for a given tax year. Section 170 of the Internal Revenue Code provides, in part, the following: “The total deductions under subsection (a) for any taxable year (other than for contributions to which subparagraph (B) or (C) applies) shall not exceed 10 percent of the taxpayer’s taxable income.”
For purposes of Section 170(b), “taxable income” is computed without regard to the following:
Many taxpayers have been affected by the COVID-19 pandemic. In the business sector, many small business taxpayers were forced to seek loans under the Paycheck Protection Program (“PPP”) in an effort to navigate the crisis’ effect on their businesses and employees. Moreover, taxpayers can literally trip over the amount of guidance, legislation, and information circulating (and changing) in the ether with respect to the use and forgiveness of their PPP loans. The largely unanswered question has been this—how will the various tax agencies treat PPP loans that are forgiven and/or the expenses paid or incurred as a result of the PPP loans? While taxpayers may have more clarity from the federal government, it is still unclear how Texas will answer that question.
PPP Tax Consequences at the Federal Level
Former British Prime Minister Winston Churchill once said, “Plans are of little importance, but planning is essential.” Perhaps that quote is a tad strong to apply generally to corporate reorganizations under Section 368 of the Internal Revenue Code. Plans, after all, are very important—if not essential—in the context of corporate reorganizations. However, based on a recent Private Letter Ruling, the Internal Revenue Service (“IRS”) noted that the “plan of reorganization” requirement for an “F” reorganization was not undermined by a subsequent change to the plan midstream. Effectively, in this instance, a change to the plan was “of little importance.”
Corporate Reorganizations, Generally
Generally, corporate reorganizations are defined under Section 368(a)(1)(A)-(G) and may take many different forms.An “A” reorganization, for example, is defined as a plain statutory merger or consolidation. An “E” reorganization is defined as a recapitalization. These corporate reorganizations must generally meet certain requirements to potentially qualify for tax-free treatment:
Various 501(c)(3) organizations may pursue charitable activities or operate to pursue altruistic purposes. However, what if such activities or purposes do not fall within the Internal Revenue Code’s requirements for charitable organizations? Besides jeopardizing the ability of donor taxpayers to deduct contributions, the organizations may find that they are taxable and have certain filing requirements other than annual Form 990 filings. In a recent Private Letter Ruling, the Internal Revenue Service highlighted that “charitable” organizations, such as hockey organizations, that ultimately take care of their own members may not be so charitable for tax purposes.
501(c)(3) Organizations, Generally
Generally, charitable organizations must meet certain requirements to be exempt for federal tax purposes. First, the organization must operate for limited purposes (e.g., religious, charitable, scientific, testing for public safety, literary, or educational purposes). Second, individuals must not privately benefit from the net earnings of the organization. Finally, the organization must not engage in substantial propaganda or lobbying activities, and the organization must not participate in (or intervene in) any political campaign for or against a political candidate.
Virtual currency has been around for a number of years now, and yet many still believe virtual currency transactions provide a level of anonymity and privacy not afforded by other types of monetary transactions. That simply isn’t true. With the right tools and understanding, it is possible to uncover the identities of virtual currency users. Moreover, virtual currency has led to the evolution of financial regulations, tax regulations, and legal regulations. In July, the Fifth Circuit dealt with whether Bitcoin users had certain Fourth Amendment protections from unreasonable searches and seizures. In short, they do not.
Bitcoin Transactions, Generally
Virtual currencies may take many forms, but the “Bitcoin” is perhaps the most well-known. Furthermore, Bitcoin transactions function in a very specific way. Bitcoin users maintain an “address,” which is a string of alphanumeric characters, much like a bank account number. A company or organization may form multiple addresses and combine them into a separate, centralized address, known as a “cluster.”
On Christmas Eve, while Santa was packing up his sleigh, the Internal Revenue Service (“IRS”) released a Private Letter Ruling related to S election status. As noted in a previous Insight Blog, corporations may jeopardize their S election by failing to timely submit Form 2553, failing to obtain spousal consent, or, in this case, creating a second class of stock. Here, however, despite the creation of a second class of stock, the IRS determined that the termination of the taxpayer’s S election was inadvertent and, therefore, still valid.
S Election Terminations, Generally
Generally, a small business corporation may terminate its S election in a number of manners. For example, a majority of the corporation’s shareholders may elect to voluntarily revoke the election. Further, a corporation may cease to be a small business corporation (e.g., having more than 100 shareholders) or the corporation’s passive investment income may exceed 25 percent of gross receipts for three consecutive taxable years and the corporation has accumulated earnings and profits.