Archive for August, 2011

In McGowen v. Commissioner, T.C. Memo 2011-186, a financial analyst got the Clarence Thomas treatment from her boss::

From August to December 2004 Mrs.McGowen was harassed at work by Kevin Bulrice. (ed. note: that’s not Bulrice to the left, that’s Tom Brady on SNL)  Mr. Bulrice created an intimidating, hostile, and offensive work environment and, on one occasion, threw a binder at. McGowen.  McGowen reported these incidents to her superiors, but her superiors did not take action to prevent Mr. Bulrice from continuing to harass McGowen.  McGowen’s work conditions became intolerable and she began to develop symptoms of emotional distress (e.g., shaking, sweating, anxiety, sleeplessness, panic attacks, depression, etc.).

McGowen was terminated and eventually sued her employers, alleging sexual harassment, failure to prevent sexual harassment, disability discrimination, failure to prevent discrimination, intentional infliction of emotional distress, and other causes of action. McGowen requested “compensatory damages for emotional distress and other economic and non-economic losses”.

McGowen and her employer settled out of court. The settlement agreement provided that her employer would pay McGowen’s attorneys $39,750, and pay McGowen $42,625 for lost income and $42,625 “for physical injury caused by emotional distress.” 

On her 2007 tax return, McGowen reported the lost income payment as taxable income, but excluded the amount paid on account of emotional distress. The IRS disagreed, claiming the payment was not made on account of physical injury.

The Law: Section 104(a)(2) provides that gross income does not include the “amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness”. Section 104(a)(2) further provides that emotional distress shall not be treated as a physical injury or physical sickness, except to the extent that damages attributable to the emotional distress were used to pay for medical care, as described in section 213(d)(1)(A) or (B).

The Tax Court: The court sided with the IRS, explaining:

There is no evidence that the binder physically injured Mrs. McGowen or that Mrs. McGowen suffered other than the symptoms of emotional distress. Moreover, pursuant to the settlement agreement, Mrs. McGowen received damages on account of her emotional distress and not as a result of “a physical injury or physical sickness” as defined in section 104(a)

The Lesson: The best way to look at Section 104 is to consider the order of events: if a taxpayer suffers physical harm and as a result of the harm, also suffers emotional distress, all of the payments (other than punitive damages) should be excludable under Section 104. To the contrary, if the taxpayer suffers the emotional distress first, even  compensation for physical symptoms that arise out of the emotional distress, such as insomnia, headaches, or stomach disorders, are not excludable. Obviously, those lines can grow blurry as the “symptoms” arising out of the emotional distress become more severe, for example, the development of an eating disorder. In these situations, a careful facts and circumstances analysis is called for prior to making the determination what amount, if any, of settlement or judgment proceeds are excludable from income.


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I’m like Randall from Clerks, only the exact opposite: I like people, but I hate gatherings. Particularly dinner parties. Oh, how I hate dinner parties.

This is largely due to the fact that I’m awful at small talk, which in turn is largely due to the fact that I’m only well-versed on two things in life: sports and The Simpsons. And while this may make me a hit with the 14-21 year old demographic, most adults seem largely unimpressed with my ability to list 20 people who’ve worked alongside Homer at the Springfield Nuclear Power Plant.

No, the majority of my contemporaries prefer to talk about grown-up topics like mortgage rates and lawn care and the various pros and cons of the local school systems. Now, call me immature, but when I get stuck talking about any of this stuff, it makes my brain want to flee my body, sort of like this:

As my wife constantly reminds me, however, I am now a husband and a father, and by extension, a grown-up. I can no longer avoid uncomfortable conversations by stuffing my pockets with cocktail shrimp and waiting out a party in an upstairs guest bathroom. I’ve got to grin and bear it, which means I’ve got to be prepared.

And you should be too. Whether you’re socially challenged like me or not, as CPAs, new acquaintances expect us to be experts on all things finance. It matters little if you’ve spent your entire career preparing consolidated corporate tax returns, your neighbor Bill will inevitably look to you for advice on funding little William’s 529 plan.

That’s why I’ve put together the following FAQ. As you may have heard, our nation has been dealing with a bit of a debt problem. On Tuesday, legislation was passed as part of a “deficit reduction deal,” allowing the U.S. to narrowly avoid defaulting on its obligations and preventing us from becoming the largest province in the Chinese empire.

It’s only a matter of time before someone asks you what the deal is about the deal. So read on, and you can thank me after your next dinner party.

Wait…what happened?

The U.S. almost defaulted on its outstanding debt. The U.S. Treasury is no different then MC Hammer or Mike Tyson; it can’t cover its expenses strictly from the revenue it earns. As a result,  it looks to borrow.  However, the Treasury can only borrow money as long as the total debt doesn’t exceed a ceiling stated by law.  As of July 2011, the U.S. had maxed out its $14.3 trillion borrowing limit, meaning unless the President found some serious loose change under his couch cushions, we would have to either increase the debt limit or risk becoming unable to service our obligations, potentially leading to default.

So how did we avoid default?  

To change the debt ceiling, new legistlation must be passed. This was accomplished mere hours before default was likely, when lawmakers agreed to increase the amount the U.S. could borrow from its lenders, while simultaneously requiring the government to cut its spending in an effort to reduct the deficit. This may seem counterintuitive — akin, if you will,  to trying to curb your wife’s shopping habit by handing her a shiny new VISA but advising her to take it easy at Ann Taylor Loft —  but it accomplished the task of keeping us out of default.

How much additional cash can we borrow?

The legislation will raise the debt ceiling by $400 billion today, then another $500 billion in September. It will then be increased by another $1.2 trillion to $1.5 trillion. That’s a total debt ceiling increase of $2.4 trillion, or just enough to cover Albert Pujols next contract.

What kind of budget cuts are we facing? 

Much of the first $900 billion of spending cuts will likely come from our defense budget. So while we may become a more fiscally responsible nation,  in ten years there will be nothing to prevent the King of England from marching right through your front door and pushing you around. So there’s that to consider.

Where are the tax increases?

Despite an abundance of rhetoric over the past few months, the current proposal doesn’t account for any additional revenue raisers — tax or otherwise. Only reduced spending.

Can you really reduce a deficit by merely cutting spending and not raising additional revenue?

Sure you can, but as Chris Rock once said, you can also drive a car with your feet, but that don’t make it a good idea. It’s extremely likely that when the bipartisan committee assigned to reducing the deficit puts their heads together later this year, tax reform will be on the menu.

What kind of tax reform might we see?

In light of these recent developments, I would wager a guess that any reform may well be sweeping, the likes of which we haven’t seen since 1986. I just wouldn’t expect to see any major changes in 2011, since the bipartisan committee has a tight window to work with in meeting its November 2011 deadline for recommending additional deficit reduction strategies.

From a long-term standpoint, however, several proposals are currently on the table, including the following:

Obama’s Plan:

  • Includes an extension of the Bush tax cuts after 2012 for only those earning less than $200,000 ($250,000 for MFJ).
  • Eliminating tax breaks for big oil and corporate jets.
  • A permanent extension of the R&D credit.
  • Keeping the 3.8% Medicare contribution tax on certain unearned income after 2012.

These proposals keep with Obama’s theme of targeting the wealthy and demanding that they pay their “fair share.”

The Gang of Six Plan

White House Deficit Commission

  • Reducing tax rates, but eliminating or reducing many current tax incentives, including the deduction for home mortgage interest, accelerated depreciation, lower rates on capital gains and the earned income credit.
  • Individual rates would drop to a range from 8-23%, though dividends and capital gains would be taxed as ordinary income.
  • Eliminating the AMT.
  • Repealing the state and local tax itemized deduction and reducing the charitable contribution deduction.
  • A single corporate rate of 26% and elimination of the Section 199 deduction.

That should give you everything you need to handle any unsolicited questions with aplomb. You’ll notice I’ve only provided facts; no opinion. It’s been my experience that in a social setting, one should never offer their views on politics, religion, or just how overrated Lady Gaga is. It can never end well.

Instead, just drop some deficit reduction deal knowledge. You’ll be a bigger hit at parties than this dude. 

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What an age we live in. When I was 23, all the internet was good for was sending emails, arguing in chat rooms, and searching for nude photos of Gillian Anderson. Fast forward a little more than a decade, and now an aspiring tax professional can garner a top-notch education without leaving the comfort of their parent’s basement.  

According to my bio on the sidebar to the right, I am a proud alumnae  alumni alumnus of the University of Denver’s Graduate Tax Program. For a variety of reasons, attending the program was the single best decision I’ve made in my career. Just sayin’.

From the website:

Participating in GTP Online is restricted to students who live more than 50 miles from Denver. Unlimited access to a computer and a broadband Internet connection are required. All commonly available computer operating systems are supported, for both PCs and Macs, and no special software need be purchased.

To apply, use the Graduate Tax Program application for admission available on this website or in the GTP bulletin. Check the box for “GTP Online” or write “ONLINE” in large letters at the top of the first page of the application.

Tuition and course materials for GTP Online cost the same as for onsite students. Online students will incur some additional costs for shipping materials and paying exam proctors.

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History and Hollywood are rife with heartwarming stories illustrating the power of true love. Love, these tales teach us, can conquer all, allowing two people to triumph over seemingly insurmountable adversity with nothing more than the bond forged by their hearts.

 Churchill v. Commissioner, T.C. Memo 2011-182, is not one of those stories. 

John Churchill married Sharon Schwarz in 2001  “as a matter of convenience.” Seems he needed access to Sharon’s health insurance. In addition to a laundry list of legitimate medical maladies, Churchill was also allergic to paying his taxes; neglecting to pay his IRS bill from 1992 through 2004.

In 2006, the IRS came calling, looking to collect on $250,000 of unpaid debts. Churchill responded by proposing an Offer in Compromise, whereby a taxpayer asks the Commissioner to settle old tax debts for less than its full value on one of three grounds: doubt as to liability, doubt as to collectibility, or promotion of effective tax administration.

Churchill, who earned only $1,612 in 2005, offered the IRS $2,500 — or 1% of the amount due — to settle his entire debt.  The IRS countered with an offer of $122,808, which prompted Churchill to suffer his third heart attack, a feat worthy of a place at this table:

The disparity between the two offers was a result of each party’s differing approch towards computing Churchill’s “reasonable collection potential” (RCP). The RCP is computed by estimating the monthly future income of the taxpayer and extrapolating the result out over a period of months. If a taxpayer’s offer is less than the RCP, the IRS is instructed to reject the offer unless the taxpayer can prove he has special circumstances. Churchill used only his income to compute his RCP, while the IRS included Schwarz’ income.

In response,Churchill posed an interesting argument, pleading to the Tax Court that his spouse’s income should be ignored since their marriage was one only of convenience. And yes, I’m serious.

The Tax Court disagreed, noting that California — Churchill’s state of residence — is a community property state, and spouses are generally liable for each other’s debts, even if incurred before the marriage. Because Churchill was married at the time of the offer in compromise, the IRS was right to include Schwarz’ income.

Unfortunately Fortunately for Churchill, the offer in compromise process was too much for his soulmate to handle, and she uncerimoniously left him prior to the start of the trial. As a result, the Tax Court showed Churchill some sympathy, and sent him and the IRS back to compute a revised offer amount in light of his newfound single status.

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