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Archive for Freeman Law

Taxes and Bankruptcy: Taxes In Bankruptcy Case

Greg Mitchell - Taxes And Bankruptcy

In re Minor; 127 AFTR 2d 2021-XXXX (DC CA); Case No. 2:20-cv-03626 (DC, C.D. CA)

This case involves taxes in a bankruptcy case that were priority taxes under the Bankruptcy Code.

The Debtor in this case filed for Chapter 7 bankruptcy in May, 2013 and received a discharge in May, 2015.  In March, 2018, the IRS filed an amended proof of claim in the bankruptcy case for almost $26 million for unpaid federal income taxes owed by Minor for tax years 2007, 2008, 2009, and 2011 (the “IRS Claim”).  The IRS Claim consisted of a secured claim of $24,857,210.48, a priority claim of $997,869.07, and an unsecured claim of $61,398.90.

The California Franchise Tax Board (“FTB”) also filed its own proof of claim, the details of which were not relevant for purposes of this case.  What was relevant was that the bankruptcy trustee did not have enough funds to pay both the IRS and the FTB claims in full.  Therefore, the bankruptcy trustee (“Trustee”), the IRS, and the FTB entered into a stipulation regarding the division of available funds (the “Stipulation”).

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Tax Court In Brief: Case On Substantiation Of Expenses, And The Applicability Of Self-Employment Tax For Income Reported

Tax Court In Brief: Case On Substantiation Of Expenses, And The Applicability Of Self-Employment Tax For Income Reported

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

The Week of March 8 – March 12, 2021

Clarence J. Mathews v. Comm’r, T.C. Memo 2021-28 March 9, 2021 | Wells, J. | Dkt. No. 11829-14

Short Summary:  The case discusses the substantiation of expenses, and the applicability of self-employment tax for income incorrectly reported on a taxpayer’s tax return.

During 2011, Mr. Mathews (the taxpayer) worked for a trucking company. He also was a Minister of the Beulah Missionary Baptist Church. On his tax return, he reported his wage and pension income, but also included a Schedule C, Profit or Loss and stated that his profession was that of a Minister, reporting income and expenses mostly related to car and truck, repairs and maintenance and meals & entertainment.

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Freeman Law: The Tax Court In Brief

Freeman Law: The Tax Court In Brief

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

The Week of March 1 – March 5, 2021

Brian D. Beland and Denae A. Beland | March 1, 2021 | Greaves | Dkt. No. 30241-15

Short Summary:  The Tax Court granted the taxpayers’ motion for partial summary judgment, on a finding that the IRS failed to secure timely written supervisory approval under section 6751(b)(1) of a civil fraud penalty under section 6663(a).

The taxpayer’s joint return was examined by the IRS following which the revenue agent had sent them a summons requiring their attendance at an in-person closing conference. The revenue agent provided the taxpayers with a completed, signed Form 4549, Income Tax Examination Changes, reflecting a Code Sec. 6663(a) civil fraud penalty. However, the taxpayers declined to consent to the assessment of the civil fraud penalty or sign Form 872, Consent to Extend the Time to Assess Tax, to extend the limitations period. Thereafter, the revenue agent obtained written approval from her immediate supervisor for the civil fraud penalty and sent the taxpayers a notice of deficiency determining the same.

Key Issue:  Whether petitioners civil fraud penalty was timely approved by the revenue agent’s supervisor?

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The Rahman Case Is A Cautionary Tale Of What Can Go Wrong Under The IRS Streamlined Filing Compliance Procedures

The Rahman Case Is A Cautionary Tale Of What Can Go Wrong Under The IRS Streamlined Filing Compliance Procedures

Introduction

The IRS recognizes that many taxpayers fail to timely and properly file income tax returns, information returns, and/or FBARs.  Sometimes these failures are honest mistakes; but, other times such failures may be due to willful conduct.

The distinction between willful and non-willful conduct is an important one for purposes of certain programs the IRS offers to non-compliant taxpayers, i.e., the Voluntary Disclosure Program and the Streamlined Filing Compliance Procedures (“Streamlined Procedures”).  Taxpayers who have engaged in willful conduct are not permitted into the Streamlined Procedures.  This is significant because the lookback period for prior years’ unpaid income tax and the amount of the penalty is generally lower under the Streamlined Procedures.[1]

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IRS Announces Tax Relief To Texans Due To Severe Winter Weather

IRS Announces Tax Relief To Texans Due to Severe Winter Weather

One of the most devastating major winter storms in the history of the State of Texas has finally passed.  Recognizing the significant emotional and financial toll the storm has taken on Texans, the IRS recently released an announcement indicating that residents and businesses in all 254 Texas counties may qualify for tax relief.  See TX-2021-02 (Feb. 22, 2021).  This Insight summarizes some of the more noteworthy relief provisions.

Postponement of Certain Tax Deadlines

Both the Internal Revenue Code and the governing regulations provide authority for the IRS to provide relief to those affected by a federally declared disaster.  Exercising this authority, the IRS has declared that certain taxpayers “that reside or have a business in all 254 Texas counties qualify for tax relief.”  These taxpayers include:

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Freeman Law: The Tax Court In Brief

Freeman Law: The Tax Court In Brief

The Week of February 22 – February 26, 2021

Llanos v. Commissioner | February 22, 2021 | Kerrigan, K. | Dkt. No. 8424-19L 

Short Summary:  IRS assessed § 6702 penalties against petitioner for filing frivolous returns. Eventually the IRS issued a Final Notice of Intent to Levy, to which the taxpayer timely request a CDP hearing. At the CDP hearing, the petitioner indicated that he had not received the required notices of deficiency for the civil penalties. Petitioner did not request any collection alternatives. The settlement officer upheld the levy action, and petitioner filed in tax court. Tax court held for the IRS.

Key Issue:  Whether petitioner made a “meaningful” challenge to the penalties so as to trigger a de novo review, and whether the levy action was appropriate.

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How Will States Deal With Budgetary Issues?

How Will States Deal With Budgetary Issues?

As we begin a new year, new issues arise for states. As states are dealing with budgets for the year, spending has increased and tax revenue have decreased. The COVID-19 pandemic has changed our lives, the way we work, shop and interact with others.

A few states are seeing their residents, like California, New York and New Jersey, all high tax jurisdictions, moving to and becoming permeant residents of Florida, Texas, and Nevada, all states with low taxes or no state tax on companies or individuals.

How will states deal with these budgetary issues?  Decrease spending? Increase tax rates? Expand the tax base? Tax out-of-state companies and Individuals?  Increase tax credits and incentives, to attract investment? My guess, all the above, except for decreases to spending.

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State And Local Tax: Controlling Interest Transfer Tax

State And Local Tax: Controlling Interest Transfer Tax

Do you own an entity that holds real estate?  Are you thinking about selling real estate?  Are you considering selling the real estate asset or selling the entity that owns the real estate?

Generally, a real estate transfer tax is imposed on documents that convey an interest in real estate from one person to another person. The transfer tax, generally, is imposed on the recordation of a deed and is based on the consideration paid or the fair market value of the property (the “Real Estate Transfer Tax”).

Taxpayers utilized loopholes to avoid paying the Real Estate Transfer Tax, by selling the entity that owns the real estate instead of selling the real estate itself.  Approximately 17 states have closed such loopholes.

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So You Made Money On GameStop, Now What? A Primer On Capital Gains

So You Made Money On GameStop, Now What? A Primer On Capital Gains

The GameStop stock saga will undoubtedly go down in history as one of the most mystifying market events Wall Street has ever seen. Indeed, the markets have seen a massive influx of new retail investors into the space. But many of these investors have not previously participated in the market.[1] As noted by CNBC:

There were 3.7 million downloads of Robinhood in January, according to app market intelligence firm SensorTower, even with the millennial-favored stock trading app’s unpopular decision to put trading restrictions on a handful of stocks during GameStop’s climb. After the GameStop drama in February, downloads are still tracking strongly with 1.8 million month-to-date.[2]

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Recent Tax Court Decision: Economic Substance And The Step Transaction Doctrine

Recent Tax Court Decision: Economic Substance And the Step Transaction Doctrine

A recent Tax Court case illustrates the reach of the economic substance doctrine and the step transaction doctrine.  For the benefit of our readers, we have briefed the case below:

Complex Media, Inc. v. Comm’r, T.C. Memo. 2021-14 | February 10, 2021 | Halpern, J. | Dkt. Nos. 13368-15 and 19898-17

Short Summary: Taxpayer-corporation (Corp.) acquired the assets of a business from a third-party partnership (P’ship).  In exchange for the transferred assets, Corp. issued approximately 5 million shares of common stock.  Immediately thereafter, Corp. redeemed 1.875 million of the common shares held by P’ship in exchange for $2.7 million in cash and Corp’s obligation to make an additional payment of $300,000 a year later.  P’ship paid the cash and assigned its right to the additional payment to one of its partners in redemption of that partner’s interest in P’ship.  Corp. claimed an increased basis of $3 million in intangible assets it acquired from P’ship and amortized that additional basis under I.R.C. § 197(a). The IRS disallowed the deductions under I.R.C. § 197(a).

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Why State And Local Tax Due Diligence Is Important

Why State And Local Tax Due Diligence Is Important

Why is State and Local Tax (SALT) due diligence important in mergers and acquisitions?  Someone else’s issues may be your headache and cost you a lot of money!

What is due diligence? Due diligence is the process of identifying and analyzing the risk associated with acquiring a business or selling a business. Tax risk, particularly state and local tax, is a key part of that analysis.

There are many different types of taxes that businesses should take into consideration when doing due diligence, such as property taxes; sales and use taxes; gross receipts taxes; income taxes; and franchise taxes.  Each of these tax types have unique rules and implications, and state and local jurisdictions apply those taxes in different ways. It can get complex quickly based on where a company is doing business.

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Substitute Return Penalties Are Valid – Llanos v. Commissioner

Substitute Return Penalties Are Valid—Llanos v. Commissioner

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:

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