Articles Tagged with “Tax Planning”

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In Announcement 2011-64, the Internal Revenue Service (“IRS” ), which provided taxpayers with a chance to change the status of their workers from independent contractors to employees for future tax periods. If the program was elected by a taxpayer, then the IRS would apply minimal tax liability to the employer for the past nonemployee treatment of its workers. This effective tool went into effect in September 2011, and has been used by a number of small businesses throughout Florida and nationwide. Further, Announcement 2012-45 has announced that the program would run until the end of the month, June 2013.
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Between the years of 1993 and 1997, whistle blowers brought forth ten cases accusing medical groups of conspiring to defraud Medicare. Normally, a case like this doesn’t grab my attention; however, as a Florida tax attorney, this medical case caught my eye. I was not interested in whether the claims were false, if the medical companies scammed Medicare, or what other potentially unprofessional practices the group engaged in. Rather, from a tax perspective, I was curious if the settlement payment was tax deductible.

Section 162, Internal Revenue Code (“I.R.C.”) allows a deduction for expenses of a business that are necessary and ordinary. Generally, a settlement claim paid by a business can be properly deducted on its federal tax return. See, Comm’r v. Pacific Mills, 207 F. 2d 177, 180 (1st Cir. 1953). However, under section 162(f), I.R.C., if an expense or payment is a fine or similar payment paid to the government, then the expense is not deductible. This makes sense in that the IRS does not want to grant tax incentives to companies for paying fines and the like. Thus, the question in this case is whether a settlement relating to Medicare fraud is a fine or similar payment.
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Our practice receives many calls dealing with collection due process hearings. The hearing is an opportunity for a Taxpayer to contest a tax assessment by the IRS. Recently, on April 18, 2013, the Tax Court issued a Memo (an opinion) regarding a collection due process hearing sought by two individuals. This memo serves as another reminder as to why it is often advantageous to get an experienced tax attorney involved when dealing with the state taxing agency or the IRS.

In this case, Kenneth Taggart, the Taxpayer and a Pennsylvania resident, worked as a real estate appraiser and broker. He owned two S-Corps, through which he conducted his businesses, and four rental properties. In September of 2007, the Petitioner timely filed his a zero 2006 Federal Income Tax Return, and then mailed an amended 2006 return in 2008 showing income of just over $100,000. Filing a zero return can be a useful tool to start the ticking of the statute of limitations even if the return shows 0. In addition, the Taxpayer filed a return for $133,000 in 2008 but failed to include the proper tax payment. The IRS ultimately assessed him $31,000 in tax due plus penalties and interest of about $2,000 as it is able to do under section 6651, IRC.

In 2009, an offer in compromise was received from the Taxpayer, which was rejected in early 2010 because the offer was less than reasonable in the IRS’ view. The Taxpayer missed its 30-day appeal period but was afforded an opportunity to resubmit a new offer in compromise in March 2010. Before the appeal period had run, the IRS filed a notice of tax lien accompanied with a Notice of Federal Tax Lien Filing and Your Right to a Hearing under IRC 6320. The Taxpayer submitted Form 12153 to challenge the premature Tax Lien filing. Following a conference and several correspondences with the IRS, the Taxpayer lost the challenge and his offers in compromise were denied.
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Due to the rising cost and high taxes of cigarettes throughout the country, individuals and businesses are coming up with creative ways to avoid the tax on cigarettes and tobacco. From clubs, to specialty stores, and even peoples’ homes, establishments that allow smokers to make their own cigarettes are on the rise. Companies such as RYO have installed thousands of machines throughout the nation in an effort to combat the rising costs of cigarettes, which are over $66 per carton in some states. The machines can reduce costs to as low as $20 per carton in some states, which has resulted in an industry that has quadrupled in size over the past few years. What is often overlooked by many of these do-it-yourself stores is whether allowing customers to partake in cigarette making morphs them into a cigarette manufacturer. In most states, becoming a cigarette manufacturer can impose strict and expensive license requirements as well as burdensome state taxes.

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For example, in January, 2013, a nonprofit club in Michigan acquired a cigarette making machine. The club purchased the machine as a convenience for its members in a non-commercial setting. Concerned as to whether this practice turned the company into a “manufacturer” of tobacco products under Michigan law, the company requested a Letter Ruling, specifically LR 2013-1, Michigan Department of Treasury, January 31, 2013. The club took it a step further and asked whether the club member operating the cigarette machine would also be a manufacturer.

Under Michigan law, MCL 205422(m)(ii), any person who operates or allows another to operate a “cigarette making machine” for the purpose of generating a cigarette is a “manufacturer.” The defined “cigarette making machine,” means a machine or device that 1) is capable of being loaded with tobacco, cigarette papers or tubes, or any other component related to a cigarette, 2) is designed to produce a cigarette, 3) is commercial grade, and 4) is powered by something other than human power. Applying this nice narrow and concise definition, the state determined that the machines used were the dreaded “cigarette making machine.”

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It is no secret that professional golf can be extremely lucrative for its star players. Not only do the tour golfers make substantial income from the golf tournaments in which they do well, but they can also make exponentially more money from endorsement or royalty deals. As all sports, especially professional golf, gain international popularity, how income is allocated becomes increasingly important. If a professional golfer makes the majority of his money in the United States, but lives in a foreign country, how much of the income should be attributable to his activities here in the United States?

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Specifically, the Spanish born and aptly named “El Nino,” entered into an endorsement agreement with TaylorMade. Under the seven year agreement that commenced in 2002, TaylorMade received the rights to use the Swiss resident’s likeness, image, signature, voice, and any other symbol to promote its products. El Nino had to also exclusively wear and use TaylorMade golf products and “associated brands,” which were Adidas and Maxfli. Regardless of your personal beliefs TaylorMade apparently signed the young golf star because it believed he would add a “cool, athletic, and competitive” element to the TaylorMade brand, which would appeal to the “fun” side of young golfers. The tour pro had to wear the brand on and off the golf course, play in at least 20 professional golf events per year, and had to fulfill several other obligations of TaylorMade.

Although the deal seemed one sided, it wasn’t all bad for El Nino. In 2003 through 2005 his base royalty fees from TaylorMade were $7 million. From 2005 on, his income was performance driven and would range from $3 million (if he finished ranked below 21st) to $9 million (if he finished ranked #1). In addition, he could earn bonuses depending on the events he won in a given year. For the golf fans out there, there was also an apparent disagreement between the then rising star and TaylorMade that led to several contract amendments because the golf pro refused to use the MaxFli ball.
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Many individuals and businesses receive notices from the IRS in one form or another. The individual, owner, or agent of the business often calls our office asking what they can do to contest an IRS letter. This article was written to give a brief overview of the IRS procedure from first notice to Tax Court.
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The first contact with the IRS is often in the form of an audit notice. The letter is required to identify the type of tax the IRS is auditing and the period for which the taxpayer is being audited. Upon the completion of the audit, the IRS issues a proposed adjustment. The taxpayer has two obvious options at this point; it can either agree or disagree. If the taxpayer agrees the IRS requires the execution of a Form 870. If the taxpayer disagrees with the findings the IRS will issue what is known as a 30 day letter.

If and when the 30 day letter is issued, the taxpayer’s options become more convoluted. If the taxpayer appeals the 30 day letter within 30 days, then the case is sent to the IRS appeals office. This is an important step taken by the taxpayer because, unlike the at the audit level, this is the first time the IRS can consider the hazards of litigation in its settlement negotiations. If the matter is worked out in Appeals at this stage, then Form 870 AD is executed by the IRS and the taxpayer. If the matter is not settled within Appeals or the taxpayer simply ignores the 30-day letter from the start, then after 30 days a 90-day letter issued.
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A recent Virginia ruling brings up a topic that comes up in our state and local tax practice constantly. If a contractor in State X purchases materials and uses the material in a real property contract in State or Country Y, does the contactor owe use tax on purchases in State X? The answer in most states is yes. Is this fair? Or, even further, is this constitutional?

This scenario was brought to light in a Virginia Letter Ruling, No 12-207, issued on December 13, 2012. In the ruling, the unfortunate requestor was a dealer in Virginia and sold materials to a customer who constructs US embassies overseas. The material purchases are shipped to the dealer’s consolidating receiving point (CRP) in Virginia. The materials are temporarily stored and prepared for overseas shipment.

The ruling started by addressing a Virginia construction company that improves real estate and furnishes tangible personal property to become real estate outside of Virginia. Like most states, Virginia takes the position that, in that scenario, the dealer is the end user of the TPP and owes use tax. However, Virginia has an exemption for contractors who purchase TPP “used solely in another state or in a foreign country.” Specifically, the contractor can obtain a certificate of exemption if certain criteria are met. Further, the Virginia Department of Revenue went out of its way to remind contractors that a resale exemption does not work in this scenario because the contractor is the end user of real property and is not a reseller of TPP.

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Everyone has seen the clever IPhone commercials, which promote its applications (“Apps”) and states the famous phrase “there’s an app for that!” Some sources even boast that as of the end of 2012, there were some 750,000 apps available on the Iphone App Store. From useful apps like ESPN, Shazam, and Urbanspoon, to useless apps like Have2P Restroom Locator, Can I Drive Yet, and How to Text A Girl, there truly might be an app for everyone. There are even Apps like Bargain Bin which locates apps that are on sale.

App.jpgAttempting to cash in, many people and businesses have attempted to create their own apps to eventually sell to Apple. While most just think about hitting it big, the state and local tax attorney in me wonders where the sale of an app is taking place and if this type of transaction is subject to sales tax. Continue reading

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This week in February, 2013, the legendary Jerry Buss lost his battle with cancer. Sports fans, like myself, view Dr. Buss’s accomplishments unmatched in the sports world. For the uniformed, Dr. Buss owned several sports franchises in Los Angeles, most notably the L.A. Lakers of the NBA. During his tenure, Dr. Buss maintained high profile superstars in Los Angeles such as Kareem Abdul-Jabbar, Magic Johnson, Shaquille O’Neal, and Kobe Bryant. Further, his prized Lakers won an unfathomable 10 NBA Championships since his purchase of the franchise in 1979 for a then-record $67.5 million.

As a sports fan and a Laker fan, Dr. Buss will be sorely missed. However, as an estate planning professional, Dr. Buss has continued to teach us lessons even from the grave.

By way of background for the uninformed, talks of the fiscal cliff and the expiration of the estate tax exemptions and estate tax rates dominated the tax community at the end of 2012. Many estate tax professionals anticipated the estate tax exemption to be reduced from $5 million down to $1 million or $3 million at the absolute max. In addition, many estate planners believed the estate tax rate would increase from 35% back to the high 55% tax rates. In preparation for this dramatic change, many Americans worth more than $1 million frantically acted to take advantage of the gift tax to get their estates below the believed $1 million or $3 million threshold.
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Anytime I go out to eat or to a fast food restaurant, my mind automatically thinks in terms of ways a company can save wasteful state tax dollars in its operation. Whether I am at a restaurant that hands out silverware, a fast-food chain that offers plastic silverware, or a restaurant that gives away items, the use tax issues can likely be avoided if the company practiced careful sales and use tax planning techniques.

Over the past few years, a couple of cases in Alabama showcase the ongoing dilemma. The first case involved Logan’s Roadhouse. Many of us have been to a Logan’s across the country and enjoy the ability to eat peanuts and throw the shells all over the floor. But how many of us, aside from me, actually analyze the sales and use tax implications of this practice? Peanut Shells.jpgAre the peanuts being purchased by Logan’s and resold to its customers? Or is Logan’s purchasing the peanuts for its own use as a giveaway to its customers?

In a similar case, Kelly’s Food Concepts (KFC, Popeye’s, and Church’s Chicken) illustrates a common restaurant problem that has been litigated since the creation of the sales tax. Are items purchased by a restaurant such as napkins, utensils, straws, stirrers, trays, kitchen supplies, ketchup, salt and pepper, toilet paper, and other items on the table, for the restaurants use or resold to the customer for its use?

Without immediately diving into the cases, it seems appropriate to explain a common problem faced by the state and local tax professional. Most states (45) have a state sales tax regime. The sales tax attempts to tax consumption by adding a tax to the end-user of tangible personal property (“TPP”). While each state various as to exactly what is and is not taxable, every state that I am aware of has a sale for resale exemption. That means that when a business purchases something it does not pay tax but rather charges tax to its customer when the item is resold. Conversely, the business is the end user on items it purchases for its own use (items not for resale) and it owes a use tax on those items. While it seems obvious whether an item is an exempt sale for resale, as shown by a couple simple examples above, this inquiry can become quite complicated.

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