July 30, 2007

Initiation To Understanding IRS Guidance

When I was employed at a tax lawyer at the Office of Chief Counsel in Washington, D.C., I was involved in tax litigation. It was left to others to take the specifics of laws enacted by Congress and translate them into detailed regulations, rules and procedures.

Seven of the most common forms of guidance regarding IRS tax administration are explained briefly here.

Private Letter Ruling

A private letter ruling or PLR is issued in response to a written request submitted by a taxpayer and is binding on the IRS if the taxpayer fully and accurately described the proposed transaction in the request and carries out the transaction as described. PLRs are generally made public after all information has been removed that could identify the taxpayer to whom it was issued. A PLR is a written statement issued to a taxpayer that interprets and applies tax laws to the taxpayer's specific set of facts. A PLR is issued to establish with certainty the federal tax consequences of a particular transaction before the transaction is consummated or before the taxpayer's return is filed. A PLR may not be relied on as precedent by other taxpayers or IRS personnel.

Revenue Ruling

Revenue rulings are published in the Internal Revenue Bulletin for the information of and guidance to taxpayers, IRS personnel and tax professionals. A revenue ruling is the conclusion of the IRS on how the law is applied to a specific set of facts and is an official interpretation by the IRS of the Internal Revenue Code, related statutes, tax treaties and regulations. For example, a revenue ruling may hold that taxpayers can deduct certain automobile expenses.

Revenue Procedure

A revenue procedure is also published in the Internal Revenue Bulletin for the information of and guidance to taxpayers, IRS personnel and tax professionals. A revenue procedure is an official statement of a procedure that affects the rights or duties of taxpayers or other members of the public under the Internal Revenue Code, related statutes, tax treaties and regulations and that should be a matter of public knowledge. While a revenue ruling generally states an IRS position, a revenue procedure provides return filing or other instructions concerning an IRS position. For example, a revenue procedure might specify how automobile expenses should be computed by those entitled to the deduction by applying a certain mileage rate in lieu of calculating actual operating expenses.

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July 26, 2007

Make Designated 100 Percent Penalty Tax Payments

How does the Internal Revenue Service apply partial payments made by a California business entity (or any other State entity) before January 1, 2003 on its Form 941 employer tax liability where the Trust Fund Recovery Penalty (“TFRP”) liability has been assessed and the Letter 1153 (DO) has been sent to the responsible person before June 19, 2000?

Partial payments made by businesses in Los Angeles County, Santa Barbara County, Ventura County or Orange County, California to the IRS without written direction to designate payments to the trust fund portion for the most recent tax period will be applied by the Service “in the order of priority that the Service determines will serve its best interest.” (emphasis added).

Generally, the order of priority that the IRS determines will serve its best interest means that undesignated payments are applied first to the liability with the shortest or most imminent statute of limitations for collections, then to the liability with the next shortest statue and so on and so forth. The tax period or liability with the shortest collection statute is not always the earliest or oldest tax period or liability.

A voluntary partial payment made by a California business entity before January 1, 2003 on its Form 941 employer tax liability, where the TFRP liability has been assessed and the Letter 1153 (DO) has been sent to the responsible person before June 19, 2000, will be applied pursuant to the taxpayer’s written instructions.

A partial involuntary and/or undesignated payment made under the same circumstances will be applied first to the non-trust fund portion of tax, then to assessed lien fees and collection costs, then assessed penalties, then assessed interest, then accrued penalties and accrued interest, and then finally to the trust fund portion of the tax.

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July 14, 2007

IRS Summertime Tax Tip

Gambling winnings are fully taxable and must be reported on your tax return. All gambling winnings must be reported regardless of whether any portion is subject to withholding. In addition, you may be required to pay an estimated tax on your gambling winnings. For information on tax withholding on gambling income, refer to Publication 505, Tax Withholding and Estimated Tax. The IRS has a terrific article on gambling income which you can read in the IRS Newsroom.

When the unpaid tax on gambling winnings is a serious tax collection problem, call tax attorney Mitchell A. Port at 310.559.5259.

July 13, 2007

Protecting A New Business From Creditors' (the IRS) Claims

In an IRS Office of Chief Counsel Release 200036045, dated May 16, 2000, two issues were raised:

First: Whether the terms of a trust prevent the attachment of the federal tax lien.

Second: What collection device, if any, should be used to collect from the taxpayer's interest in the trust.

The Chief Counsel’s Release arrived at two conclusions:

First: The taxpayer has a property interest in the trust subject to the federal tax lien, despite the spendthrift, discretionary, and remainder interest provisions. The Internal Revenue Service believed that this property interest is limited to the payments to be made as provided for by the trust.

Second: A suit to foreclose the federal tax lien would be the collection action, if any, that the Internal Revenue Service would recommend.

The Chief Counsel’s Release draws a distinction between fully discretionary trusts and those requiring payments for support: “Where a trust gives the trustee uncontrolled, absolute discretion with respect to the distributions, if any, made to a beneficiary, the beneficiary has no basis to compel the trustee to make a distribution. Therefore, he does not have any interest which is subject to the federal tax lien. On the other hand, a beneficiary does have a right to property subject to the federal tax lien where, under state law, he can force the trustee to act, as is the case with a support trust.”

Strategic Planning Lessons Learned:

First: A trust created by parents or other third parties can help to protect business assets from creditors and estate taxation.

Second: Giving a trust beneficiary the power to withdraw assets for his or her support makes the trust assets subject to an IRS lien for outstanding taxes.

If you want to discuss your own situation with a California tax attorney, call Mitchell A. Port at (310) 559-5259.

July 9, 2007

Innocent Spouse Relief Made Easier

Attention all California taxpayers in Los Angeles County, Ventura County, Santa Barbara County and Orange County: The Internal Revenue Service announced the other day that it redesigned Form 8857, Request for Innocent Spouse Relief. The intent behind the redesign is to help reduce follow-up questions and reduce the burden on taxpayers. Perhaps your tax problem can be resolved by qualifying for innocent spouse relief. Please review my post made last Valentine's Day, February 14th, entitled "California Taxpayers - Innocent Spouse Relief" for a more thorough discussion on this hot topic.

The form will ask more questions initially. The IRS believes that by collecting critical information early in the process, that will mean faster processing of the request. Previously, Form 12510, Questionnaire for the Requesting Spouse, was separate from Form 8857. The redesign will combine and streamline the two forms. As the IRS believes with most forms it redesigns, this redesigned form will be easier to understand and complete and will help educate us about the process.

The new design will eliminate an estimated 30,000 follow-up letters annually. This will result in reduced burden, quicker responses to taxpayers and less cost to the government. The revisions were based on suggestions from an IRS process improvement team.

When you and your spouse file a joint return, both of you are jointly and individually responsible for the tax. Innocent Spouse relief provides an opportunity for one of you to be relieved from the joint debt under certain circumstances. If you believe that only your spouse or former spouse should be responsible for the tax, you can request relief from the tax liability.

Speak to a qualified California tax attorney about how you might qualify for this relief. Call Mitchell A. Port at (310) 559-5259.

July 7, 2007

Nevada Corporations: Do They Live Up To Their Reputation?

California business lawyers and California promoters claimed Nevada corporations provide great asset protection benefits. Until this year, these asset protection claims (some of which I have heard from Los Angeles business transaction attorneys I know) regarding Nevada corporations were far from the truth, unfortunately. On July 1, 2007, all of this changed. Under a new Nevada statute, for any corporation that has two to seventy-five shareholders, the statute provides that a creditor's sole remedy is a "charging order."

Before SB 252, some proponents of Nevada corporations alleged that since shareholder information is not public and Nevada does not report to other states, that a creditor is less likely to discover your assets through an asset search with a Nevada corporation.

It is true that, if title is not in your individual name, a Nevada corporation or any revocable trust for that matter provide at least a small degree of asset protection. However, almost all creditors proceed to discovery regardless of whether an initial asset review revealed a debtor's assets. During discovery, you will truthfully disclose your ownership interest in a Nevada Corporation or revocable trust.

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