Texas | TaxConnections

10 Feb 2021

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:

Written by Zachary Montgomery | Posted in Freeman Law • Substitute Tax Return Penalties • Texas

09 Feb 2021

Recent Tax Court Conservation Easement Decision Demonstrates Continued IRS Enforcement Efforts And Penalty Defenses

The Tax Court’s recent decision in Sells shows that the IRS is continuing to aggressively pursue conservation easement deductions where it believes the transaction is overly aggressive. However, the case also demonstrates potential defenses against proposed penalties.

Sells v. Comm’r, T.C. Memo. 2021-12, January 28, 2021 | Holmes, J. | Dkt. Nos. 6267-12, 6801-12, 6835-12, 6836-12, 6837-12, 6838-12, 19246-12, 13553-13

Opinion

Short Summary: In August 2002, Burnish Bush Farms, LLC was formed with eight members—each a 12.5% owner. Later, Mr. and Mrs. Moses sold mountainous land to Burnish Bush for $1.4 million. In 2003, Burnish Bush deeded a conservation easement on the acres that it owned to Chattoawah Open Land Trust, Inc. The conservation deed contained various provisions, including an extinguishment-proceeds clause.

Written by Jason Freeman | Posted in Conservation Easement • Freeman Law • Texas

03 Feb 2021

How To Successfully Request IRS Penalty Relief

Federal tax penalties have always been an IRS priority. But, perhaps more so today than three decades ago. For example, in 1987, the IRS reported that it had assessed penalties of approximately $14 billion. Compare that figure with fiscal year 2019—a year in which the IRS assessed over $40 billion in penalties. The number of penalty assessments (and corresponding government revenue) against taxpayers is only expected to grow in the near future.

IRS priority alone, however, has not been the sole cause of the staggering rise in penalties. Indeed, congressional action has only buttressed this phenomenon. In 1955, the Internal Revenue Code (the “Code”) housed approximately 14 penalties. Today, the number of penalties hovers closer to 150. Put simply, the IRS has an arsenal of various statutory provisions to use and penalize unwanted taxpayer conduct, from the late filing of a return or information return to the late payment of tax or even the negligent filing of a return.

Written by Matthew Roberts | Posted in Freeman Law • Request IRS Relief • Texas

26 Jan 2021

IRS Updated Revenue Procedure For Reducing Or Avoiding Understatement Penalties And Tax Return Preparer Penalties

Recently, the IRS issued Revenue Procedure 2020-54, which updated Revenue Procedure 2019-42. Specifically, this new Revenue Procedure identifies circumstances under which the taxpayer makes an adequate disclosure on a taxpayer’s income tax return regarding an item or position for the purpose of reducing the understatement of income tax under section 6662(d) of the Internal Revenue Code (relating to the substantial understatement aspect of the accuracy-related penalty), and for the purpose of avoiding the tax return preparer penalty under section 6694(a) (relating to understatements due to unreasonable positions) with respect to income tax returns.

To give some context, the IRS may charge a 20% addition to tax for any “substantial understatement of tax” under section 6662. Generally, a substantial understatement of tax exists if the amount of the understatement exceeds the greater of (i) 10% of the amount of tax required to be shown on the return for the tax year or (ii) $5,000. I.R.C. § 6662(d)(1)(A). An “understatement” is the excess of (i) the amount of the tax required to be shown on a return for the tax year, over (ii) the amount of the tax imposed which is shown on the return, reduced by any rebate (within the meaning of I.R.C. § 6211(b)(2)). I.R.C. § 6662(d)(2)(A). Special rules for determining understatements apply to corporations and individuals utilizing § 199A QBI deductions. See I.R.C. § (d)(1)(B), (d)(1)(C).

Written by Ryan Dean | Posted in Freeman Law • Tax Return Preparer Penalties • Texas

22 Jan 2021

Tax Court Denies Award In Recent Whistleblower Tax Case

Kennedy v. Comm’r, T.C. Memo. 2021-3 | January 12, 2021 | Copeland, E. | Dkt. No. 5687-17W

Opinion

Short Summary: Petitioner appealed, pursuant to § 7623(b)(4), three determinations of the Whistleblower Office (WBO) of the Internal Revenue Service (IRS) that declined to make awards to him. Petitioner filed a single whistleblower claim, but the WBO split it into three distinct claims. Petitioner’s whistleblower claim alleged that three taxpayers and related subsidiaries owed $150,103,245 in unpaid excise taxes, penalties, and interest. The IRS processed the claims, and it took no action against two of the taxpayers, and no change resulted from the examination of the third taxpayer. Petitioner challenged the WBO’s determinations. The Tax Court held that the WBO did not abuse its discretion in declining any awards to Petitioner.

Key Issue: Whether the WBO abused its discretion in declining to award the Petitioner any amount under his whistleblower claims when it took no action against two taxpayers and issued no changes after the examination of the third taxpayer.

Written by Jason Freeman | Posted in Texas • Whistleblower Tax Case

07 Jan 2021

Starting A Business In Texas: Choice Of Entity

Business owners in the State of Texas face a lot of tough decisions. Perhaps the most significant of these decisions is the choice of entity the business will utilize while conducting its operations. Similar to many other states, the State of Texas offers its business owners and entrepreneurs several options. This Insight provides a summary of the tax and non-tax implications of each potential entity.

Sole Proprietorship.

It may surprise you to learn that starting a business in Texas sometimes does not require any formal organization paperwork at all. For example, a business owner or entrepreneur may begin conducting business in Texas under his or her own name.[i]

Written by Matthew Roberts | Posted in Choice Of Entity • Start New Business • Texas

06 Jan 2021

A Second Class Of Stock May Not Jeopardize Your S Election

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.[1] For example, a majority of the corporation’s shareholders may elect to voluntarily revoke the election.[2] 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.[3]

Written by Zachary Montgomery | Posted in Freeman Law • S Election • Texas

30 Dec 2020

State and Local Tax Nexus

This article is the first of a three-part series regarding the State and Local Tax consequences of doing business in multiple states. Part 1 will discuss Nexus, Part 2 will discuss Voluntary Disclosures, and Part 3 will discuss the Audit Process.

What is Nexus? In order for a state to impose an income, franchise, or gross receipts tax on a taxpayer or require a taxpayer to collect and remit sales and use taxes, the taxpayer must have nexus with the state. Nexus is some type of connection with the state. Such connection could be a physical presence in the state, an economic presence in the state (i.e., taking advantage of the market in the state (such as an intangible asset)) or some type of factor presence in the state (certain dollar amount of sales into a state).

Are there different nexus standards for Income, Franchise and Gross Receipts taxes and Sales and Use taxes? Yes.

Written by George Rendziperis, J.D. | Posted in State And Local Tax Nexus • Texas

29 Dec 2020

Theft Loss Deduction – The “Discovery Year”

A recent Tax Court case has highlighted the importance for individual taxpayers in determining the “discovery year” for the purpose of taking a theft loss deduction. In Giambrone v. Commissioner, the Tax Court held that the taxpayers were not entitled to a theft loss deduction because they did not claim the deduction in the year they discovered the illegal scheme giving rise to the deduction. See Giambrone v. Commissioner, TC Memo 2020-145 (10/19/2020).

Pursuant to I.R.C. § 165(c), an individual taxpayer can deduct an uncompensated loss—even one not connected with a trade or business or a transaction entered into for profit—if such loss arises from a theft. Generally, a theft loss is treated as sustained during the tax year in which the taxpayer discovers such loss. See I.R.C. § 165(e).

Written by Ryan Dean | Posted in Freeman Law • Texas • Theft Loss Tax Deduction

16 Dec 2020

A Primer On The Tax Implications of Settlements And Judgments

Your client just settled—or better yet, won a judgment. What are the tax consequences? Admittedly, the tax impact of resolving a dispute is often little more than an afterthought. But a client’s net after-tax recovery can vary drastically depending on the applicable tax rules. An attorney armed with an understanding of the relevant tax issues has an advantage over opposing counsel who lacks such insight.

Basic Tax Principles

Judgments and settlements are, in theory, taxed in the same manner. It is, therefore, generally irrelevant—from a tax perspective, at least—whether a dispute is resolved by a judgment or settlement.

Written by Jason Freeman | Posted in Freeman Law • Settlements And Judgements Taxability • Texas

08 Dec 2020

Will A Spendthrift Trust Protect Against IRS Collection Actions?

The use of a spendthrift provision in a trust instrument is common. Generally, spendthrift provisions prohibit a third-party creditor from reaching a beneficiary’s interest in income and/or corpus of the trust until the trustee distributes such interest outright to the beneficiary. Because spendthrift provisions are creatures of state law, a common question is whether such protection extends to the IRS as a third-party creditor? This Insight discusses this topic more below.

The Federal Tax Lien.

A federal tax lien arises when a taxpayer owes tax and fails to pay such tax. Under the Internal Revenue Code, it also arises on the date the tax was assessed and continues until the tax is either paid or becomes unenforceable due to lapse of time. See I.R.C. § 6322.

Written by Matthew Roberts | Posted in Freeman Law • Spendthrift Trust • Texas

01 Dec 2020

Tax Treaties: United States And Australia

Quick Summary. Located “down under” in the Southern Hemisphere and covering the Indian and Pacific Oceans, Australia consists of a mainland continent, the island of Tasmania, and several smaller islands. Australia comprises six states and 10 territories, with its capital at Canberra. Australia boasts the world’s 14th-largest economy and one of the highest per-capita incomes in the world.

Australia is a parliamentary, federal constitutional monarchy. Its system of government combines elements of the systems of the United Kingdom and the United States. Its constitution provides for a bicameral Parliament, with a Senate and House of Representatives, as well as a monarch. Its executive branch, the Federal Executive Council, is comprised of a prime minister and other ministers. In addition, its judicial branch is headed by the High Court of Australia.

Australia is a member of the United Nations, G20, OECD, and World Trade Organization.

Written by Jason Freeman | Posted in Controlled Foreign Corporation • Tax Treaties: United States And Australia • Texas