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Posts Tagged ‘irs’

I’ve made no secret in this space of my unabashed admiration for Howard Stern. Long a polarizing figure, whether you love or hate Stern, I would strongly encourage you to consider what he’s been tasked with over the last thirty years: waking up each morning and providing four hours of largely commercial-free entertainment for millions of listeners as they endure their soul-crushing daily commute.

Throughout Stern’s run atop the radio world, one thing has remained constant: he is more than happy to allow those same listeners to provide their own content, as he’ll routinely afford large swaths of air time to his loyal cadre of callers. It’s part of what makes the show unique: as opposed to the sports radio world — where callers are quickly ushered off so as not to take up too much valuable air time before the next break — Stern will engage callers for as long as necessary to extract entertainment value. And those listeners reward Stern for their momentary taste of stardom with undying loyalty.

Stern Show producers are likely on the lookout for new and interesting callers. And perhaps they thought they found just that on May 19, 2015, when “Jimmy from Long Island ” called into the show. But taking that call was one Stern may come to regret.

Continue reading on Forbes.com.

 

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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If you’ve worked in the tax preparation world for any measure of time, you’ve assuredly run into the following conundrum:

My client is a member in an LLC. Is his/her share of the LLC’s income subject to self-employment income?

At that point, you went one of two directions:

  1. Opened up your tax research software/hard copy Code/Google machine, or
  2. Said “screw it, I’ll exclude it,” and went on with your life. (Ed note: this is the option you took).

Continue reading on Forbes.com.

 

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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We have all heard the term milestone payment in the life science field. Generally, milestone payments are made under a collaboration agreement upon the completion of a successful stage of research. These payments are generally deductible for financial accounting purposes. However, these payments are generally capitalized and amortized in the eyes of the Internal Revenue Service.

The Internal Revenue Code generally allows a deduction for all ordinary and necessary expenses paid or incurred during a taxable year on carrying on a trade or business. However, expenditures that create or develop an asset with a useful life beyond the taxable year must be capitalized rather than expensed in the year paid.

The Internal Revenue Service believes that milestone payments relate to the acquisition or creation of intangibles and thus should be capitalized and amortized. They are generally amortizable over the life of the agreement, the remaining life of the patent or 15 years.

Authored by Stephen Talkowsky

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A new chapter was added to the ongoing dispute as to whether student athletes should be compensated for (i) the part they play in helping their respective schools generate millions of dollars in revenue from ticket sales and the use of their individual player likenesses, and (ii) the predominant amount of time that is spent as an athlete as opposed to a student.  It is a deeper issue than simply framing it as “pay for play”, but that discussion is one for another day …

What is important for our purposes is that the National Labor Relations Board (“NLRB” or the “Board”) recently ruled Northwestern University’s scholarship football players (differentiated from walk-on players) are “employees” under the National Labor Relations Act (the “Act”), and as such, have the right to unionize for collective bargaining purposes.

The Board’s ruling will be appealed, so the practical application of this unionization right and the resulting sub-issues from the decision will be delayed as of this writing.  However, there are theoretical tax matters that will play a part in the debate, and that could emerge if student-athletes are in-fact deemed “employees”.  Furthermore, the reasoning that the NLRB used to reach its conclusion that student-athletes are “employees” may also be the basis for which student-athletes would be taxed.

Without going into extensive detail, the NLRB determined that the Northwestern football players receive the substantial economic benefit of a scholarship in exchange for performing football-related services, under what amounts to be a contract-for-hire.  Additionally, the Board made note of the extensive amount of control that the football coaching staff and University have over the players, and that if team rules are broken, scholarships can be revoked:

  • NCAA rules prohibit players from receiving additional compensation or otherwise profit from their athletic ability and/or reputation, so scholarship players are dependent on their scholarships to pay for basic necessitates, including food and shelter;
  • Players devote 40-60 hours per week for football, depending on whether it is in-season versus the off-season, despite the NCAA’s prescribed limitation of 20 hours per week once the academic  year begins;
  • Coaches control living arrangements, outside employment, the ability to drive personal vehicles, travel arrangements off-campus, social media, use of alcohol or drugs, and gambling;
  • Players also are sometimes unable to take courses in certain academic quarters because they conflict with scheduled team practices.

At this point it is not entirely clear what student-athletes would be taxed on because if the decision is ultimately affirmed, there could be conflicting definitions and concepts in the tax code with respect to “gross income”, “compensation for services” and “qualified scholarships.”

For income tax purposes, “gross income” means all income from whatever source it is derived, and this includes compensation for services.  Until now student-athletes have not been considered employees, which is essentially why their scholarship (or parts of) have not previously been taxed.  But the NLRB went to great lengths to detail how the Northwestern football players currently receive compensation for playing football (the reason it saw fit to classify them as employees).  On that same basis, the IRS would likely take the position that the granted scholarships are compensation for services, and are thus taxable income to the student-athletes.  Whether the current statutory language would have to be amended or exclusions would have to be created to properly allow for this taxation is a secondary issue.

Yet there are other benefits the Northwestern football players have cited which they feel would outweigh the negative impact of taxes they might incur.  If the decision is upheld, players might be able to qualify for workers’ compensation benefits as a result of injuries suffered on the field.  Moreover, instead of coaches having unilateral control over the schedules and rules players must abide by at the risk of losing scholarships, the union the players could form would bargain with the university over “working conditions”.  This would be similar to the way in which the NFL and MLB players’ unions bargain for benefits of their respective players.

However, rights that are bargained for by this theoretical union could lead to further questions for the university.  For example, if players successfully bargained for health benefits, Title IX (which demands equal treatment of male and female athletes) might require equivalent benefits to all of the other athletic programs on campus.  Conversely, bargained-for benefits such as safer football helmets or equipment would not necessitate comparable action on the part of the school.

The NLRB ruling in the Northwestern case is restricted to private universities, meaning efforts by student-athletes of state schools would be governed by each state’s laws on unions of public employees.  However, this decision is an initial step in what will be a lengthy process that ultimately could re-shape the National Collegiate Athletics Association (“NCAA”) … and tax issues will most certainly have a substantial impact along the way.

CJ Stroh, Esq.

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While the debate format that has ruined sports entertainment [ESPN: All Yelling, All the Time!]  obsesses over the inane and inherently unanswerable question of, “Has Kevin Durant surpassed LeBron?” the Oklahoma City Thunder forward and aspiring first-time MVP has managed to keep his attention right where it belongs: on his tax returns.

News came out this week that Durant – who has been lighting up the NBA at a 31.5 points-per-game clip this season – is suing his accountant for perpetrating some untoward shenanigans on Durant’s tax returns.

The suit alleges that California-based accountant Joel Lynn Elliot deducted expenses for Durant’s personal travel and personal chef on the five-time All-Star’s tax returns. This, of course, is a big no-no, because Section 262 of the Internal Revenue Code provides that “no deduction shall be allowed for any personal, living or family expenses.” Unless, of course, the personal expenses are specifically allowable for policy reasons, such as the deduction for mortgage interest and real estate taxes.

The IRS soon came calling, and Durant will now have to amend his returns, pay the back taxes, and, very likely, interest and penalties. As a result, he is looking to recover $600,000 from Elliot. Interestingly enough, should Durant recover that amount from his CPA, the settlement payment would itself be taxable, because the tax law was written by a crazy person.

Durant’s first mistake, of course, was hiring a tax preparer  who goes by three names, as people who do so are generally only fit to serve as famous assassins, serial killers, or country music singers. That’s just science.

Follow along on twitter @Nittigrittytax

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Like me, Richard Cohen is a CPA who hails from the Garden State. Unlike me, Richard Cohen just lost millions of dollars at the hands of an apathetic IRS.

Cohen’s wife served as an executrix for an estate which held uncashed dividend checks from a public corporation. Due to some shenanigans, Cohen started to suspect that the corporation was retaining the proceeds from these uncashed dividend checks without including the amounts in taxable income.

In pursuit of hard evidence, Cohen requested information from the State comptroller under the Freedom of Information Law, and also reviewed allegations in pleadings from a civil case against the corporation. Cohen’s findings only buoyed his belief that the corporation was up to no good; with the amount of improperly retained unclaimed assets possibly reaching into the hundreds of millions.

At that point, Cohen filed a whistleblower claim with the IRS on Form 211, Application for Award for Original Information. As you may or may not know, Section 7623 provides that an individual who provides information that leads the IRS to pursue an administrative or judicial action against a taxpayer is entitled to receive an award equal to a percentage of the tax dollars collected by the IRS. [Ed note: pick the right taxpayer, and you can get paid $100 million, even if you’re a convicted criminal].

Despite the fact that Cohen felt the IRS had a strong case against the corporation, a mere two weeks after he filed his application he was notified by the IRS that no action was commenced and no tax dollars recovered from the corporation; thus, Cohen was not entitled to an award.

Understandably frustrated, Cohen sued the IRS, presenting the Tax Court with an issue of first impression: Could the court force the IRS to pursue a case against the corporation, so that Cohen would be eligible for a future whistleblower award?

Interpreting the statute literally, the Tax Court held against Cohen and declined to compel the IRS to reopen the whistleblower case. In reaching its decision, the court noted that Section 7623 requires a condition precedent to the issuance of a whistleblower award: the IRS must first commence an administrative or judicial action against the accused taxpayer, and tax dollars must ultimately be collected.

In this case, because the IRS did not see fit to pursue the corporation for its alleged unclaimed assets, no award could be given. Equally as important, the Tax Court established a precedent for future whistleblower decision by concluding that it lacked the authority to direct the IRS to pursue a case; rather, it’s jurisdiction was limited to determining whether an award should be given after a case has been pursued and tax revenue collected.

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Under the tax law, taxpayers are afforded favorable treatment when instead of selling appreciated property, they “exchange” it for other property; the idea being that the taxpayer has not cashed out its investment in the property, but rather simply changed the form of the investment.

Specifically, Section 1031(a) of the Code provides that “no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.”

Stated simply, a taxpayer recognizes no gain if instead of selling appreciated property, they exchange it for property that is “like kind.” And this, as you can imagine, is where issues arise. What is “like kind” property? The regulations offer scant guidance:

Section 1.1031(a)-1(b) of the regulations provides that the words “like kind” have reference to the nature or character of the property and not to its grade or quality. The fact that any real estate involved is improved or unimproved is not material, for that fact relates only to the grade or quality of the property and not to its kind or class.

This much is clear, however: This like-kind requirement precludes a taxpayer from exchanging real property for personal property, or vice versa.

As a result, over the years numerous court cases have sought to answer the question of whether Property A was “like kind” to Property B by looking to state law classifications. For example, in Commissioner v. Crichton[i], the 5th Circuit determined that a mineral right was real property under Louisiana state law and thus of like kind to other real property. Similarly, in Peabody Natural Resources Co. v. Commissioner[ii], the Tax Court determined that under New Mexico law, coal supply contracts constituted real property interests and were of like kind to the relinquished gold mine.

These decisions have led some practitioners to question whether state law classifications are in fact determinative in concluding whether two properties are of like kind. Last Friday, in PLR 201238027, the IRS clarified that state law classifications, while relevant, are not determinative of whether properties are of like kind. Rather, all facts and circumstances should be considered.

In the Ruling, the IRS presented four scenarios. In each of the four scenarios, similar properties were exchanged for one another. Under state law, however, the properties were classified differently. For example, in Case 1, a natural gas pipeline in State A (constructed along a right of way on real property) that was classified as personal property in State A was exchanged for a State B natural gas pipeline that was  constructed along a right of way on real property and that was classified as real property in State B. (The right of ways associated with the exchanged pipelines in State A and State B are also exchanged.)

The IRS declined to base its decision as to the like kind nature of the properties solely on their respective state law classifications. Instead, the Service looked to certain informative sections of the Code to glean how they classified property as personal or real, specifically, Sections 48, 263A, and 1245:

For example, § 1.263A-8(c)(1) of the regulations provides, in part, that real property includes land, unsevered natural products of land, buildings, and inherently permanent structures. Section 1.263A-8(c)(3) describes “inherently permanent structures” as including “property that is affixed to real property and that will ordinarily remain affixed for an indefinite period of time, such as swimming pools, roads, bridges, tunnels . . . telephone poles, power generation and transmission facilities, permanently installed telecommunications cables, broadcasting towers, oil and gas pipelines, derricks and storage equipment. . . .”

Section 1.48-1(c) of the regulations provides in part, that for purposes of § 1.48-1, the term “tangible personal property” means any tangible property except land and improvements, including structural components of such buildings or structures. It further provides that “production machinery, printing presses, transportation and office equipment. . . contained in or attached to a building constitutes tangible personal property for purposes of the credit allowed by section 38.”  

Finally, § 1245(a)(3) provides that “§ 1245 property” is any property which is or has been subject to depreciation under § 167 and which is either personal property or other tangible property used as an integral part of certain activities, including manufacturing.  

Acknowledging that relying solely on state law classifications could yield absurd results – for example, in Case 1 where identical pipelines are exchanged but their respective states classify them as personal and real property, respectively, treating the properties as not being like kind would make little sense — the IRS concluded the basic nature and character of the property involved should override the state law treatment.

Applying these concepts to Case 1, since both pipelines were inherently permanent structures that were affixed to real property that will remain for an indefinite period of time, they both qualified as real property under the definition found at Regulation Section 1.263A-8(c)(1). Thus, the exchange of one pipe line for the other qualified as a like kind exchange under the meaning of Section 1031.


[i] 122 F.2d 181 (5th Cir. 1941).

[ii] 126 T.C. 261 (2006).

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