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Archive for September, 2011

Hating your neighbor is as American as Mom, apple pie, and frivolous litigation. God knows I can’t stand mine.

No matter what I do, he’s got to find a way to one-up me. I come home with a new car, he buys a nicer one. I get the yard landscaped,  he adds a koi pond. I have a son, he has a good-looking son. And on it goes….

Since the advent of caller ID rendered unsolicited bulk pizza deliveries a thing of the past, guys like me have been desperately seeking a way to passive-agressively exact revenge on the guy next door. Well, if your neighbor has made known his disdain for paying taxes, the IRS has a way for you to hit him where it hurts, while lining your pockets in the process. From the Wall Street Journal:  

How to Turn in Your Neighbor to the IRS

If tax cheating sticks in your craw, the Internal Revenue Service has a deal for you: Turn in a lawbreaker and collect some of the proceeds.

The bigger the amount recouped, the bigger your take. The agency has two whistleblower programs: The small-awards program is for cases involving less than $2 million of tax, and the award can be as high as 15%, though it often is less. The large-awards program is more generous: For cases involving $2 million or more of tax, the reward can go as high as 30%.

Since then, according to just-released data, the agency has had 1,328 qualified submissions involving nearly 10,000 alleged tax cheats under the large-awards program.

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(Ed note: Ok, I’ll admit it…that clumsy title was just a way for me to sneak the name “Butkus” into a post). Funny stuff.

What follows is a deconstruction of the Tax Court’s decision last week in Miller v. Commissioner,[i] a case involving a purported real estate professional that we here at Double Taxation feel has some important implications. Bear with us.

A few weeks ago, we took a look at Harnett v Commissioner, another in the long line of cases analyzing whether a taxpayer qualifies as a ”real estate professional” under Section 469(c)(7). Our analysis focused on the progress the Tax Court has seemingly made in applying the “750 hour test,” one of the two tests a taxpayer must satisfy in order to meet the definition of a real estate professional, thus removing the taxpayer’s rental activities from de facto passive classification.

As a reminder, the two tests are:

  • More than one-half of the personal services performed in trades or businesses by the taxpayer during the year must be performed in real property trades or businesses in which the taxpayer materially participates.
  • The taxpayer performs more than 750 hours of services during the tax year in real property trades or businesses in which the taxpayer materially participates.

With regards to the 750 hour requirement, we stated in our analysis of Harnett that the Tax Court had erred in previous decisions[ii] by requiring a taxpayer who failed to elect to aggregate his rental activities to spend more than 750 hours in each rental activity.

What follows is the Tax Court’s rationale for its decision in Jahina:

Because petitioners did not properly elect to treat the rental properties as a single activity, they cannot group them. As an additional consequence of the failure to elect, Mrs. Jahina must qualify as a real estate professional with respect to each property separately in order to avoid a determination that the rental activities were per se passive…Thus, to hold in petitioners’ favor, the Court must find: (1) That more than one-half of Mrs. Jahina’s personal services during the taxable year were performed in each rental property activity in which a loss deduction is claimed, and (2) that Mrs. Jahina performed more than 750 hours of services during the taxable year on each of the claimed properties.

The evidence fails to establish that Mrs. Jahina was a real estate professional with respect to each of the rental properties considered separately.The requirements of section 469(c)(7)(B) were not met with respect to any of the rental properties individually. During all of 1996 and until August 1997, Mrs. Jahina had a full-time job with a standard work requirement of 1,800 hours per year. During the latter months of 1997, she had a part-time job. She did not work on any one of these properties more than she worked on her wage jobs. Further, she did not satisfy the 750-hour statutory minimum for any one of them.

Now, we’ve never agreed with that approach. To the contrary, we believe that even when a taxpayer fails to make the election to aggregate rental properties, they should only be required to satisfy the 750-hour test on an aggregate basis through a two-step process: 1) First identifying the activities in which the taxpayer materially participates, and 2) Aggregating the hours spent on those activities to see if they  exceed 750.

We were particularly encouraged by Harnett, because the Tax Court seemed to embrace this line of thinking. In determining whether Harnett was a real estate professional, the Tax Court combined the hours spent by the taxpayer on only those properties in which  the taxpayer materially participated, without making mention of an election to aggregate the activities.

This brings us to the Tax Court’s decision this week in Miller v. Commissioner, another real estate professional case, and one which provides further evidence that the failure to elect to aggregate activities is not fatal to the taxpayer.

In Miller, the taxpayer was a boat pilot and the owner of six rental properties. Miller deducted the losses from his rental activities without limitation, taking the position that he was a real estate professional. Miller, however, failed to elect to aggregate his six rental properties.

Using the rationale from the Jahina decision, the Tax Court would have required Miller to 1) spend more time on each of his rental properties than he spent on his full-time gig as a boat pilot, and 2) spend more than 750 hours on each of the six properties in order to qualify as a real estate professional. But that’s not how things went down.

The court quickly determined that Miller met the first (more than half) requirement of the real estate professional test, stating

We find that Mr. Miller has established that he spent more than 750 hours performing significant construction work as a contractor and on his rental real estate activities. We find that Mr. Miller spent more time on his construction work and rental properties than he did piloting vessels in the years at issue. Having found that Mr. Miller is a qualified real estate professional, we now consider whether petitioners materially participated in their rental activities. For this purpose, each interest in rental real estate is treated as a separate rental real estate activity unless the qualifying taxpayer makes an election to treat all interests as a single activity. Petitioners did not make such an election.

This quote is fascinating for at least four reasons:

1. Clearly, the Tax Court did not take the same approach as it did in Jahina, where when the taxpayer failed to elect to aggregate its rental activities, the court  required “that more than one-half of Mrs. Jahina’s personal services during the taxable year were performed in each rental property activity in which a loss deduction is claimed.”

In Miller, the court simply added up the hours spent on the taxpayer’s real estate activities and compared it to his hours spent piloting his boat, and concluded that he spent more time on the former. More importantly, it did this without Miller having made an election to aggregate his rental activities, an approach I believe is in line with the intent of the law, if not the specific language.

 2. If all the court was doing in the quoted paragraph was determining if Miller spent more than half his time on real estate activities for the year, why did it state that Miller spent more than 750 hours on his activities? This seems irrelevant if the court was not analyzing the 750-hour test yet, which it wasn’t (or at least shouldn’t have been).

 3. How can the court proclaim they “found that Mr. Miller is a qualified real estate professional” without first determining if Miller spent 750 hours on the rental activities in which he materially participated? Doesn’t Section 469(c)(7) require a taxpayer to meet both prongs of the test to meet the definition of a real estate professional?

 4. Doesn’t the first (more than half) test require that the taxpayer spend more than half his time on rental activities in which he materially participated? It would follow, then, that the court would have to determine if Miller materially participated in his activities before it could hold that he met the more than half test. For example, what if Miller spent more than half of his year working on his rental activities, but did not actually meet the material  participation test for any of the activities? Wouldn’t he fail the more than half test?

So many questions, but let’s move on…

The Tax Court next set out to determine whether Miller materially participated in his six separate rental activities. The court looked to the 100-hour test of Treas. Reg. §1.469-5T[iii] and  held that Miller met the test for two of his properties but not the remaining four.

This is where things get even more interesting. The court stated:

We hold that petitioners materially participated in the [two rental properties] and the deductions attributable to those activities are not subject to limitation under section 469. Petitioners have not shown, however, that they participated in [the other four rental properties] for over 100 hours per year for the relevant years. We sustain respondent’s disallowance of losses with respect to the [four rental properties].

Deconstructing Miller further, this paragraph is particularly meaningful in two ways:

1. Noticeably absent from the court’s analysis is any mention of whether Miller spent more than 750 hours on the two rental properties in which he materially participated. Should this just be assumed? We know he materially participated in those two activities, but did he spend more than 750 hours in the activities, either combined (as we would argue) or separately (as Jahina held), as Section 468(c)(7) requires?

Now, the court mentioned in its earlier quote that Miller spent more than 750 hours on his rental activities, but they didn’t isolate that only to those activities in which he materially participated. It’s almost like the Tax Court has gone to the opposite extreme: instead of requiring the taxpayer to spend more than 750 hours on each property if an election to aggregate activities is not made, it appears in Miller the court simply looked to whether the taxpayer spent 750 hours total on his rental activities, and then allowed deductions for only those activities in which Miller materially participated, the reverse of the steps we infer from our reading of the Code.

2. Knowing now that Miller only materially participated in two of the six rental properties, did his hours spent on those two properties exceed his hours spent on his boat piloting activities, thus passing the “more than half test?” Isn’t that is what’s required under the first test of Section 469(c)(7).

If you’re confused by this…well, you’re not alone. Clearly, we don’t understand much about Miller, even after a thorough deconstruction. But one thing we do know is that the taxpayer failed to elect to aggregate his six rental activities, and the court still held that he was a real estate professional with regards to two of the activities, requiring only that he materially participate in the activities, not that he spend 750 hours in each activity. This is a step in the right direction to satisfying the intent of the real estate professional rules: to remove de facto passive status from those that spend the majority of their time materially participating in real estate activities.


[i] T.C. Memo 2001-219

[ii] Most notably in Jahina v. Commissioner, T.C. Summary 2002-150 (2002).

[iii] Requiring the taxpayer to spend more than 100 hours on an activity with no other taxpayer spending more time on the activity.

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Below are the tax provisions found in the President’s proposed “American Jobs Act,” or as most people are calling it, “That thing that almost interrupted football.”

I wish I could add some insightful and poignant commentary along the lines of  “The payroll tax incentives are a red herring meant to distract small business owners from the fact that the banking institution continues to show an unwillingness to lend,” but frankly, I would have no idea what the hell I’m talking about.  Everything I know about politics and the inner workings of the government I learned from Chris Rock and Bernie Mac in “Head of State.”

So to keep things simple, I’ll let the readers digest the tax proposals and provide the bipartisan bluster.

first things first, the President is proposing three tax cuts to provide immediate incentives to hire and invest:

Cutting the Payroll Tax Cut in Half for the First $5 Million in Wages:  This provision would cut the payroll tax in half to 3.1% for employers on the first $5 million in wages, providing broad tax relief to all businesses but targeting it to the 98 percent of firms with wages below this level.

Temporarily Eliminating Employer Payroll Taxes on Wages for New Workers or Raises for Existing Workers:  The President is proposing a full holiday on the 6.2% payroll tax firms pay for any growth in their payroll up to $50 million above the prior year, whether driven by new hires, increased wages or both. .

Extending 100% Expensing into 2012: The President is proposing to extend 100 percent expensing, the largest temporary investment incentive in history, allowing all firms – large and small – to take an immediate deduction on investments in new plants and equipment. (Ed note: unfortunately the whole point of the bonus depreciation rules back  in 2001 was to make taxpayers go “Oooh, I better buy all this equipment this year before the tax break expires, thereby stiumulating the economy. After ten years of the same incentive, I would argue that taxpayers have grown numb to the idea of bonus depreciation and won’t feel overwhelmingly compelled to go spend money on capital improvements.)

There’s also some hiring incentives in the plan…

Tax Credits and Career Readiness Efforts to Support Veterans’ Hiring:The President is proposing a Returning Heroes Tax Credit of up to $5,600 for hiring unemployed veterans who have been looking for a job for more than six months, and a Wounded Warriors Tax Credit of up to $9,600 for hiring unemployed workers with service-connected disabilities who have been looking for a job for more than six months, while creating a new task force to maximize career readiness of service members.

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We originally blogged about the Retief Goosen Tax Court case the day it happened back in June:

https://double-taxation.com/2011/06/10/tax-court-settles-case-involving-professional-golfer-offers-lesson-in-sourcing-of-endorsement-income/

We knew the case was noteworthy, as it established a much-needed precedent for determining the character and source of the worldwide endorsement income earned by international athletes and entertainers. We didn’t know that our blog post would turn into a quote in a Bloomberg article on the case:

http://www.bloomberg.com/news/2011-06-16/golfer-goosen-s-tax-court-case-tests-principle-that-image-is-everything.html

And we certainly didn’t know suspect at that time that the implications of Goosen would continue to garner notice, eventually necessitating a complete analysis in the September issue of the Tax Adviser:

http://www.aicpa.org/publications/taxadviser/2011/september/pages/taxtrends_sep2011.aspx

We hope you enjoy.

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As CPAs, we tend to believe that in the tax world, there’s nothing new under the sun. When dealing with an issue for the first time, our default thinking is that at some point, somewhere, the IRS or the courts must have addressed our specific fact pattern and provided just the authority we’re looking for. 

All too often, however, that’s not the case. The Code and Regulations are an ever-changing collection of cross-references, nuanced requirements, and exceptions to exceptions,  making it impossible for the governing bodies to interpret and rule on every possible scenario.

As testament to this contention, look no further than Broz v. Commissioner, 137 T.C. 5, (9.1.11), decided yesterday by the Tax Court. In Broz, the court examined two issues one would have thought would have long since been settled, but in reality were decided for the first time:

1. Does a taxpayer’s pledge of stock in related S corporation A as security for amounts borrowed by related S corporation B give the shareholder of B at-risk basis under Section 465?

2. Is a taxpayer permitted to begin amortizing a Section 197 intangible on the date of acquisition, or only upon the conduct of an active trade or business?

Facts in Broz:

Robert Broz (Broz) worked in the cellular industry. In 1991, he organized RFB, an S corporation, to acquire FCC licenses permitting him to provide cellular service to rural areas. Broz sought to expand his business, but RFB’s lenders required that Broz form new entities that would only acquire FCC licenses and hold the amounts borrowed from the lenders or RFB.

To accommodate his lenders, Broz formed Alpine, another S corporation. Alpine bid on FCC licenses for rural areas that were given away via lottery. The licenses were financed by the FCC, so Alpine routinely had amounts owing to the FCC for the balance due on acquired licenses. Alpine serviced the FCC debt by borrowing amounts from RFB. At no point did Alpine actually operate a cellular network; that activity was isolated to RFB. RFB would use Alpine’s licenses, however, to provide digital services in areas RFB’s analog licenses already covered. As a result, Alpine did not generate its own income from its ownership of the FCC licenses; rather, RFB generated the income and allocated a portion of its income and related expenses to Alpine.

Alpine claimed amortization deductions on its acquired FCC licenses beginning on the acquisition date.

As noted above, Alpine’s business was financed through advances from RFB which in turn were borrowed by RFB from an unrelated lender. While Broz never personally guaranteed the third-party loans, he did pledge his RFB stock as collateral securing the loan.

Issues:

1. Does the pledge of RFB stock as collateral for the third-party loans give Broz at-risk basis in Alpine?

2. Was Alpine engaged in an active trade or business? If not, was Alpine’s amortization of its FCC licenses as of their acquisition date proper?

Tax Court:

At-risk Rules:

The at-risk rules ensure that a taxpayer deducts losses only to the extent he or she is economically or actually at risk for the investment. The amount at risk includes cash contributions and certain amounts borrowed with respect to the activity for which the taxpayer is personally liable for repayment. Pledges of personal property as security for borrowed amounts are also included in the at-risk amount. Sec. 465(b)(2)(B). The taxpayer is not at risk, however, for any pledge of property used in the business.

The Tax Court disagreed with Broz’ contention that the RFB stock was not used in the Alpine business. Broz argued that because stock represents an ownership interest in the business that can be sold or transferred without affecting corporate assets, it is inherently separate and distinct from the activities of a corporation. Thus, Broz contended, the pledge of stock of a related corporation should allow Broz to be treated as at-risk.

In reaching its decision, the court looked to the language of Section 465, which provides that pledged property must be “unrelated to the business” if it is to be included in the taxpayer’s at-risk amount. See sec. 465(b)(2)(A) and (B). Because the Alpine entities were formed to expand RFB’s existing cellular networks, and because Alpine’s only income and expense was allocated to it from RFB, the RFB stock was related to Alpine, and did not provide Broz with at-risk basis in Alpine.

Amortization of FCC Licenses:

In the most surprising aspect of the decision (more on that later), the Tax Court held that Alpine was not conducting an active trade or business. Citing prior case-law, the Tax Court noted that a trade or business does not begin until the business has begun to function and has performed the activities for which it was organized. More germane to Broz, the court also provided that “the determination of whether an entity is engaged in a trade or business must be made by viewing the entity in a stand-alone capacity and not in conjunction with other entities.”

Viewing Alpine as a stand-alone entity, the Tax Court held that it was not engaged in an active trade or business. Even though Alpine held two FCC licenses, there was no evidence that Alpine ever operated an on-air network. Instead, the on-air networks were operated by RFB, and RFB’s trade or business could not be attributed to Alpine.

Examining the language of Section 197, the court then determined that Alpine was not entitled to begin amortizing its FCC licenses, as Section 197 defines an intangible asset covered by that section as one held “in connection with the conduct of a trade or business.” As a result, Alpine could not begin amortizing the FCC licenses upon acquisition; rather, Alpine could only begin amortizing the licenses upon conducting a trade or business, which it had not done.

Reactions:

I found two aspects of Broz to be particularly noteworthy. First, while examining the Section 465 issue established a much-needed precedent, I am not certain why the Tax Court bothered to determine if Broz was at-risk for his investment in Alpine, as the court had already determined that Broz had no stock or debt basis in Alpine, as stock basis had been reduced to zero and Alpine was funded by loans from RFB, not directly from Broz, as is required under Section 1366. If  Broz were held to be at-risk for the pledge of the RFB stock as collateral for the Alpine loans , would that have somehow given Broz debt basis in Alpine, even though the Alpine borrowings were not loaned directly from Broz, as required? Unfortunately, the court did not clarify.

I also found it surprising that the court was unwilling to attribute RFB’s activities to Alpine for purposes of determining if Alpine was conducting its own active trade or business. It is not uncommon for taxpayers to isolate key assets — like an FCC license — in an entity for use by related entities. Clearly, RFB was utilizing the licenses owned by Alpine to operate its networks, and was even going so far as to allocate a portion of its income and expense to Alpine. This decision clearly issues a warning to other taxpayers that each individual entity that is part of an affiliated group must separately meet the requirement of conducting an “active trade or business.”

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Imagine you’re a hard-working CPA, trying to eke out a living in these troubled times. Ten years ago, you decided to go it alone, and set up your own accounting firm, a Personal Service Corporation (PSC) taxed as a “C” corporation.

As the sole shareholder and employee of your PSC, you’ve seen your blood, sweat, and tears single-handedly build your practice up from nothing to the thriving 1040 sweat-shop it is today. Along the way you’ve established countless client relationships and, as a result, a reputable name in the marketplace.

Your hard work hasn’t gone unnoticed, either. A rival CPA has recently approached you with an offer you simply can’t pass up: $1M to buy your practice. This is the day you’ve been anxiously awaiting for the past ten years, and you’ve got big plans for the money. Half of it you’ll spend on booze and fast women. The other half, you’ll waste.

Because your accounting practice doesn’t have much in the way of hard assets, the buyer is clearly purchasing the name and customer relationships; the “goodwill.” This begs the question…who owns the goodwill, the PSC, or you? After all, wasn’t it you who worked all those long hours and shook all those hands, not some faceless corporation?  

It doesn’t take long to see why someone in this situation would prefer to treat the goodwill as a personal, rather than corporate-level asset. Assume $800,000 of the $1.0M purchase price is allocated to goodwill. If the goodwill belongs to the PSC, the PSC will pay corporate-level tax on the $800,000, with no reduced capital gains rates available under the current corporate tax regime. To access the cash, the shareholder will have to either liquidate the corp or take the $800,000 out as a dividend, generating the despised double-taxation (free promotion for the blog!) common to C corporations.

If, however, the shareholder treats the goodwill as a personal asset, the $800,000 purchase price will be subject to the 15% long-term capital gain rate, with no second level of taxation. Not a bad deal when compared with the alternative.

For this reason, it is common for shareholders of PSCs, upon selling the business, to take the position that the goodwill is a personal asset. Sometimes it works. Sometimes it doesn’t. Today, in U.S. v. Howard, 108 AFTR.2d 2011- (8.29.11), it didn’t.

Here’s why…

Larry Howard was a dentist. He incorporated his wholly-0wned dentistry practice as a PSC in 1980. During that same year, he entered into an employment agreement and a covenant not to compete with the corporation. The covenant provided that Dr. Howard, as an employee, would not practice in the dentistry business within a 50-mile radius of his PSC for 3 years after the date on which held stock in the PSC. It is this agreement that would be Dr. Howard’s undoing.

In 2002, Dr. Howard’s PSC sold its assets to another dentist. As part of the agreement, $549K was allocated to goodwill, which the asset purchase agreement (APA) indicated was owned by Dr. Howard personally. As a result, on his 2002 individual tax return, Dr. Howard reported the portion of the proceeds allocated to goodwill as a long-term capital gain.

The IRS disagreed with Dr Howard’s position, arguing that the goodwill was a corporate asset, the sale of which was taxable to the corporation and the proceeds of which were taxable to Dr. Howard a second time upon the subsequent deemed distribution. The IRS took this position for one major reason:  Because Dr. Howard was an employee of the PSC with a covenant not to compete for three years after he no longer held stock in the PSC, the goodwill was a corporate asset.

The District Court, and subsequently the Ninth Circuit Appeals Court, sided with the IRS, holding that the goodwill was a corporate asset. In reaching its decision, the courts cited two prior cases which represent the leading authority on this issue, Martin Ice Cream Co. v Commissioner and Norwalk v C.I.R.

In Martin, the Tax Court established that “accrued goodwill can be attributed to an employee or to a company, depending on the employment relationship between the two.” The court added “goodwill of a corporation was an individual asset when the employer had not ‘obtained exclusive rights to either the employee’s future services or a continuing call on the business generated by the employee’s personal relationships.'” Thus, because Dr. Howard voluntarily entered into a covenant not to compete with his wholly-owned PSC, he effectively transferred his goodwill to the practice.

Similarly, in Norwalk the Tax Court determined that if an employee works for a corporation under contract and with a covenant not to compete with that corporation, then the corporation, and not the individual, owns the goodwill that is generated from the professional’s work. Even when a corporation is dependent upon a key employee — like in Dr. Howard’s dentistry practice — the employee may not own the goodwill if the employee enters into a covenant not to compete whereby the employee’s personal relationships with clients become property of the corporation.

Based on these two prior decisions, both the District Court and Ninth Circuit agreed that Dr. Howard doomed himself by entering into the covenant not to compete with his wholly-owned PSC. Both courts lended no credence to the language in the APA indicating that the goodwill was a personal asset belonging to Dr. Howard, as this would ignore the substance of the transaction, which was the sale of a corporate asset.

What Can We Learn? Martin Ice Cream established that the personal relationships of a shareholder-employee are not corporate assets when the employee has no employment contract with the corporation. Unfortunately for Dr. Howard, he had such an agreement. The decisions in Howard reinforce the already established position that only in the situation where a shareholder-employee has not entered into a covenant not to compete with his corporation-employer — thereby creating a valuable asset to the shareholder-employee that he can take elsewhere — can goodwill be treated as a personal asset rather than a corporate asset. For shareholder-employees of corporations in the service industry, this must be given careful consideration before entering into a covenant with the corporation.

 

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In summary: for taxpayers in designated NJ counties, business and individual returns with an extended due date of September 15th or October 15th are now due October 31st. If any taxpayers in these counties suffered a casualty loss, they may elect to deduct the casualty loss on their 2010, rather than 2011 tax return, to expedite the refund process.

From the IRS:

Victims of Hurricane Irene that began on Aug. 27, 2011 in parts of New Jersey may qualify for tax relief from the Internal Revenue Service.

The President has declared the following counties a federal disaster area: Bergen, Essex, Morris, Passaic and Somerset. Individuals who reside or have a business in these counties may qualify for tax relief.

The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Aug. 27, and on or before Oct. 31, have been postponed to Oct. 31, 2011. This includes corporations and other businesses that previously obtained an extension until Sept. 15 to file their 2010 returns, and individuals and businesses that received a similar extension until Oct. 17. It also includes the estimated tax payment for the third quarter, normally due Sept. 15.  

In addition, the IRS is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after Aug. 27, and on or before Sept. 12, as long as the deposits are made by Sept. 12, 2011.

If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the postponement period.

The IRS automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 1-866-562-5227 to request this tax relief.

Affected Taxpayers

Taxpayers considered to be affected taxpayers eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts are those taxpayers listed in Treas. Reg. § 301.7508A-1(d)(1), and include individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area, but whose records necessary to meet a deadline listed in Treas. Reg. § 301.7508A-1(c) are in the covered disaster area, are also entitled to relief. In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.

Grant of Relief

Under section 7508A, the IRS gives affected taxpayers until Oct. 31 to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date occurring on or after Aug. 27 and on or before Oct. 31.

Casualty Losses

Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors.
Affected taxpayers claiming the disaster loss on last year’s return should put the Disaster Designation “New Jersey/Hurricane Irene” at the top of the form so that the IRS can expedite the processing of the refund.

Other Relief

The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers. Taxpayers should put the assigned Disaster Designation in red ink at the top of Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS.

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