Source: http://riles52.blogspot.com/2011/01/
Timestamp: 2017-10-21 01:10:32
Document Index: 361870228

Matched Legal Cases: ['§ 168', '§ 280', '§ 280', '§ 168', '§ 168', '§ 280', '§ 501', '§ 501']

John M. Sanders v. Commissioner, TC Memo 2010-279
I've mentioned in a previous post that life insurance has some marvelous income tax benefits. The build-up in value is tax deferred and becomes income tax free if it is paid by reason of the death of the insured. Life insurance salesmen will sometimes claim it saves estate taxes. This is a bit of a fallacy. The estate tax savings come from having the insurance owned outside the decedent's estate. Any appreciating asset would produce the same benefit. Life insurance does have the merit of providing liquidity exactly when it is needed in some estate plans. It all kind of makes me feel bad for Mr. Sanders who managed to figure out a way to manufacture taxable income for himself without the cash to pay the taxes.
Petitioner testified that he disagrees with the taxable amount shown on the Form 1099-R because he “just did the math basically in my head” and he thinks New York Life's “mathematics are way off.”
The Tax Court didn't find much merit in his argument.
These vague contentions do not rise to the level of a “reasonable dispute” so as to impose any burden of production on respondent pursuant to section 6201(d). In any event, stipulated documentation of petitioner's premium and loan history with New York Life corroborates the information reported on the Form 1099-R.
I have a lot of sympathy for Mr. Sanders. He paid $10,117 to an insurance company. He drew out $7,136. It appears coincidental that the amounts are so close, but he ended up being taxed on the entire withdrawal plus $39. Of course he had the peace of mind that somebody would be getting $25,000 less the outstanding loan balance in the event of his death. According to standard valuation tables that comfort would be worth less than $25 a year until Mr. Sanders was in his forties. We can't tell from the case how old he was when he started the policy so I don't think I will go any further with that part of the analysis.
Between 1990 and 2004 petitioner borrowed $7,136 against the policy. Insofar as he recalls, he used the proceeds for personal purposes.
So the interest that he wasn't paying was "personal interest" and not deductible. When he constructively paid it with a deemed distribution of the cash surrender value of his policy, there was not an offsetting deduction. He had taxable income because he didn't pay the interest he incurred for borrowing his own money. Go figure. This was probably not the outcome that Mr. Sanders expected when he started dutifully paying his $31 per month while we were all worrying about the hostages and cursing the Ayatollah. I hope somebody from New York Life expressed some sympathy.
Posted by Peter Reilly at 6:00 AM 5 comments: Links to this post
This guide gives concise, step by step instructions for starting a group home. The demand for group homes far exceeds the supply in a lot of areas in the US. Because of the aging baby boomers, demand is likely to continue to grow as government and individuals look for cost effective alternatives to assisted living and retirement homes.
Regardless of that, this CCA caught my eye. These are just excerpts from it, but they get the main point across pretty well.
House used to operate adult home care business that cares full-time for adults who can't live on their own qualifies as IRC Sec(s). 168(e)(2) residential rental property, and consequently owners should determine depreciation for portion of house leased as dwelling units by its customers of adult home care business, but not portion of house that is owner-occupied, using a 27.5-year recovery period or 40-year recovery period if alternative depreciation system of IRC Sec(s). 168(g) applies.
In the facts in this advice, the rental units are bedroom apartments used to provide living accommodations within a building, and are not units in an establishment more than one-half of the units in which are used on a transient basis. Therefore, the rental units are dwelling units for purposes of § 168(e)(2). All units and associated common areas in the building, including the portions occupied by the taxpayers, are dwelling units, and no portion of the building is rented or used for commercial purposes outside of the taxpayers' adult home care business. Consequently, 100 percent of the gross rental income from the building is rental income from dwelling units, even after taking into account the use of the dwelling unit by the taxpayers. In applying the 80-percent test in this case, the $2,000.00 per month allocated to the services that the taxpayers provide for their residents does not constitute gross rental income from the building because the services (24 hour supervision and care for the residents, laundry service, maid service, transportation) are other than those usually or customarily rendered in connection with the mere rental of rooms 1. Thus, in this case, the building is residential rental property. case), it is unimportant whether a particular cost for services is included in rental income or not, as 100 percent of gross rental income from the building is necessarily rental income from dwelling units.
This Chief Counsel Advice does not address whether § 280A limits the taxpayers' deductions for the use of a portion of their residence for business purposes.
In addition, the term “dwelling unit” is defined differently under § 280A(f)(1) than under § 168(e)(2)(A)(ii)(I). The conclusions in this Chief Counsel Advice concerning whether the bedroom apartments used in the taxpayers' business are dwelling units are limited to the analysis under § 168, and no inference should be drawn from this Chief Counsel Advice that these bedroom apartments are dwelling units for purposes of § 280A.
Upkeep of the house and landscaping are services customarily rendered in connection of the rental of rooms, and a portion of the monthly $2000 charge must be allocated to these services and included in both gross rental income from the building and rental income from dwelling units. The exclusion of charges for services other than those usually or customarily rendered in connection with the mere rental of rooms is relevant in the application of the 80 percent test only in the case of a building or structure containing both rental dwelling units and commercial rental space other than dwelling units. In the case of a building or structure comprised solely of dwelling units and associated areas (such as the instant
Labels: depreciation, real estate
ID: CCA_2010121214444350
Release Date: 1/21/2011 Office: —————
UILC: 6325.00-00
From: ———————————- Sent: Sunday, December 12, 2010 2:44:46 PM To: ———————————- Cc: ———————————- Subject: RE: opinion
It's not really the same situation although the result is the same - i.e., they should not include the payment in computing the Service's interest in the property. The October IG [interim guidance] memo deals with carve-outs to junior lienholders from money that would otherwise go to the senior lienholders. The relocation assistance is not part of the sale proceeds, it's just a payment made directly to the taxpayer and, as such, is not part of the taxpayer's interest in the real property to be discharged from the lien. A new IG memo on this will be coming out soon.
If you have a short sale that is being hung, you may have to wait for the "new IG memo" to percolate through collection, but it might be worth referring to the Chief Counsel Advice. If this ends up being helpful, I'd appreciate you posting a comment on this blog.
Posted by Peter Reilly at 12:55 PM No comments: Links to this post
Labels: collections, HAFA, liens, short sales
RA-1. There appears to much overlap in the activities of the two entities. In reviewing the expenses of the organization, it appears that expenses for the for-profit entity were paid by the non-profit entity. There were a great deal of checks paid and referenced to the Intensive OutPatient Program (TOP) which is a program of the CO-1.
There were several rental properties located in City, City, City and City which were acquired and owned by RA-1, members of his family and an employee of the organization. The employee was a Counselor of ORG and it was stated that RA-1 and Counselor, Counselor acquired the real estate together. According to RA-1, these properties were bought, maintained and used for the purpose for providing housing services to the clients of ORG.
The organization was unable to substantiate amount reported on its Form 990. In particular, it reported grants to individuals, but was unable to provide records showing who received grants, how much was received by each individual or how the recipients were determined. The organization was unable to provide client records which would detail services provided. Amounts paid to workers were often paid to relatives of RA-1 and no verification of work done for the exempt organization were provided.
The organization did not establish that the rent paid by ORG for the rental properties owned by RA-1 and his relatives was a fair market value rate. Furthermore, there were no documentation which detailed out who occupied the rental properties, how much was paid for rent and the time period of occupancy.
There were other indications of a lack of internal control. Accountant had a difficult time providing documents that were clear and understandable. There were a great deal of commingling of the revenue and expenses with the for-profit entity, as well as, expenses that could not be substantiated. .
There were Board of Directors listed on the Form 990, however, during the initial interview. VP stated "there were no Board of Directors officially, however decisions regarding the organization were made by himself and RA-1. According to him, the reason for this was that people didn't want to make time to participate.
So it could have all worked out if we were just a little more civic minded. I have to say that if you are a young CPA and somebody asks you to volunteer to be treasurer of something like this, run for the hills.
Private Letter Ruling 201050036
A real life example of a qualified 501(c)(10) organization is The Grand Lodge of Ancient Free and Accepted Mason of North Carolina. The get the benefit of being featured here by the luck of the draw in my poking around in GuideStar. I have little doubt that they are an example of the right way to qualify for 501(c)(10) status.
Since DIR-1 inception with the ORG she has been able to sell liquor by the drink because of his organization's exemption from Federal income tax under IRC 501(c)(10).
During our interview on July 30, 20XX I asked DIR-1 why she joined the ORG, and her response was, "it allowed us to obtain a liquor license."
"The neighborhood tavern has been owned and operated by my family since 19XX DIR-1 took over the family business in 19XX." DIR-1 never transferred ownership of the building or any other assets to the parent organization. Instead, she pays the ORG Headquarters $ per year to lease the building and its contents.
ORG consists of 32 members, and all of them were asked to join by DIR-1. There are no requirements for membership, and there's only one class of membership. To become a member, each individual pays $, then fills out a card, providing such information as their address and phone number, and in return, the parent organization sends them an identification card indicating what post the member belongs to and the name of the member. New cards are issued every year. Upon becoming a member of ORG the individual receives their first drink for free, and ct off each additional drink. In July, dues are collected and remitted to the parent, ORG #1 in City, State. Additional members are recruited by current members or word of mouth.
The ruling has a fairly extensive discussion of how much of a fraternal bond is required for the organization to qualify. Part of the discussion goes as follows:
In National Union v. Marlow, 374 F. 775, 778 (1896): the court summed up the nature of a fraternal beneficiary society as follows: ".... a fraternal-beneficial society ... would be one whose members have adopted the same, or a very similar calling, avocation, or profession or who are working in union to accomplish some worthy object, and who for that reason have banded themselves together as an association or society to aid and assist one another, and to promote the common cause. The term "fraternal" can properly be applied to such an association, for the reason that the pursuit of a common object, calling or profession usually has a tendency to create a brotherly feeling among those who are thus engaged. As a general rule, such associations have been formed for the purpose of promoting the social, moral, and intellectual welfare of the members of such associations and their families, as well as for advancing their interests in other ways and in other respects...
The IRS found that ORG was not quite up to snuff:
ORG does not meet the requirements of an organization described in IRC section 501(c) (10). Members of ORG do not have a common fraternal bond. The members do not adopt the same or very similar calling, avocation, profession, or are working in unison to accomplish any worthy objective or common cause. ORG has not been operating for religious, charitable, scientific, literary, educational and fraternal purposes, nor has ORG devoted its net earnings exclusively to religious, charitable, scientific, literary, educational, and fraternal purposes. ORG is operating in a commercial manner which is not an exempt activity described under Internal Revenue Code section 501(c) (10).
In this circumstance, Merle Haggard not withstanding, barroom buddies are not the best kind.
Your Bylaws state that to accomplish your purpose, "each family must fulfill their financial requirements and work their assigned number of hours at each fundraiser." Fundraising activities are held throughout the year, on almost a quarterly basis. Non-compliance results in a fee charge of $
Your Bylaws further provide that membership is open to "those persons who are parents or guardians of gymnasts who are members of the competitive teams and pre-teams at Gym" (the "members" or "member-parents"). The children of two of your directors participate in Gym and receive financial assistance from you to the extent they participate in fundraising activities.
In your application for exemption, you indicate that Gym is a for-profit organization. According to your Bylaws, the owner of Gym (the "owner") takes part in all meetings and "has a say" in your decision making. You are required to inform the owner of all pending major decisions, and the owner may be invited to submit input.
If a gymnast's family does not raise enough funds through the various fundraising activities to cover the costs of its portion of the block fees, the family must pay the difference in cash or not participate in the Gym competitive program. If payment is not received promptly, the gymnast is not allowed to compete at the following meet. You are entitled to any surplus funds on a gymnast's block fee account if the gymnast leaves the competitive program before the end of the competition season. Any surplus funds are used at your members' discretion.
In addition to the private benefit conferred to your member-parents through your fundraising activities, the equipment you own and loan to Gym for no charge results in more than incidental private benefit to the gym and its owner, because the for-profit gym gets the benefit of the use of the equipment for free. Purchasing such equipment for use by a non-exempt entity is not an exempt purpose.
Your primary purpose is raising funds to offset the costs of participation in the competitive program of Gym, a for-profit organization, for children of your member-parents. Members are credited with funds raised based upon participation in fundraising events. If members do not raise sufficient funds through fundraising activities, the parents pay the balance of the fees required for their child to participate in Gym's competitive program. You state that you do not provide financial or any other assistance to gymnasts outside of the Gym's competitive program.
Because of the direct financial benefits that your member-parents receive, your activities violate the prohibition against inurement, thereby preventing you from qualifying for exemption as an organization described in section 501(c)(3) of the Code. The requirement that each parent-member participate in your fundraising activities in direct proportion to the benefits they expect to receive causes a direct benefit to flow to these member-parents. Consequently, your earnings are being used to pay for benefits to specific individuals rather than to a charitable class, which allows your earnings to inure to the benefit of specific insiders, namely the parents of Gym's participants.
In addition, the owner of Gym sits on your board of directors and is also considered an insider. You have purchased equipment that is used for no charge by Gym, a commercial business. This transfer of your financial resources to the owners of Gym is in violation of the inurement proscription and is also sufficient to defeat exemption under section 501(c)(3) of the Code.
This bunch applying for exempt status could motivate me to launch a jeremiad about selfish narcissism but what do you expect from people who think subjectively judging kids running around and jumping constitutes a sport ?
Labels: Exempt Organizations, Section 501(c)(3)
Posted by Peter Reilly at 6:00 AM 6 comments: Links to this post
I wonder if there were circle and arrows and a paragraph on the back of each one explaining what it was.
Posted by Peter Reilly at 7:00 AM No comments: Links to this post
In consultation with the Collection experts in Counsel, below is the answer to your question concerning whether the IRS can require a taxpayer to pay the IRS the amount of relocation expenses as a condition of discharge. Recently, the Treasury Department introduced the Home Affordable Foreclosure Alternatives (HAFA) program. The HAFA program took effect on April 5, 2010. Borrowers who participate in a HAFA transaction are eligible for $3,000 in relocation assistance. If the senior lender provides the taxpayer with the $3,000 relocation assistance required under the HAFA program, the IRS cannot require the taxpayer to turn the $3,000 over in exchange for the lien discharge. The HAFA program payment is a payment directly made to the taxpayer to assist in relocation. As such, the relocation payment has no bearing upon the taxpayer's equity in the property under a discharge analysis. Rather, this is just a payment to the taxpayer. Furthermore, under the terms of this program, since this is a required payment as a condition of participation in the program, it would likely be treated as an ordinary expense of sale to be allowed priority despite being reached by the federal tax lien. If a lender provides relocation assistance because the lender believes it makes good business sense and not because it is required under HAFA, the legal answer is the same. The IRS cannot require the taxpayer to pay the IRS the amount of the relocation expenses as a condition of discharge.
I don't know how we are ever going to solve the deficit if the Chief Counsel keeps giving away the store like this.
Posted by Peter Reilly at 2:44 PM 6 comments: Links to this post
Posted by Peter Reilly at 6:30 AM No comments: Links to this post
Labels: long distance excise
Section 6222 requires the partners to report the amount and allocation of liabilities consistent with the partnership return unless they file a Notice of Inconsistent Treatment on Form 8082. In the absence of such a filing we are permitted to make an assessment without issuing a FPAA. I.R.C. 6222(c). They filed no such notice here so we do not need to conduct a TEFRA proceeding to make the assessment. Since outside basis is an affected item requiring partner-level determinations, however, we would have to issue an affected item notice of deficiency in order to assess a distribution in excess of basis. In the stat notice proceeding they could arguably rely on Roberts v. Commissioner, 94 T.C. 853, 860 (1990) to allege that the partnership books and records reflect the nonrecourse debt in issue, their reporting is consistent with the actual partnership books and records, and that the Schedule K-1 issued to them was incorrect. Cf. Treas. Reg. 301.6222(b)-3 (incorrect schedule provided to partner).
Private Letter Ruling 201048025, 12/03/2010
Code Sec. 1031(f); won't make benefits of Code Sec. 1031(a); unavailable to corp. under described circumstances provided that taxpayer, related party, and any affiliate undertaking exchange hold their respective replacement property for two years following their respective acquisition of replacement property.
This was a fairly convoluted set of facts. It involves a sequence of related party exchanges. I think the point of it was that since there was no ultimate cash out, nobody was getting away with anything. I'd appreciate any comments that anybody else who has studied this ruling might have.
Lori A. Malchow-Bartlett v. Commissioner, TC Memo 2010-271
Taxpayer was denied deduction for use of home for day care, because she was not properly licensed :
Under section 280A(c)(4)(A), a taxpayer may be allowed business expense deductions relating to use of a residence to conduct child day care services. However, the deductions are allowed only where the taxpayer has obtained, or has applied for and has pending, a license to conduct child daycare services under applicable State law or is exempt from obtaining a license therefor under applicable State law. Sec. 280A(c)(4)(B).
The court concluded that taxpayer acted in good faith so no penalties were assessed.
U.S. v. BEDFORD, Cite as 106 AFTR 2d 2010-7271, 12/09/2010
This case is really outside my area of interest. It is a criminal appeal. The thing that got him in trouble was kind of interesting though.
Mohamed M. Magan v. Commissioner, TC Summary Opinion 2010-173
In January 2007, petitioner moved from the State of Minnesota to the State of California in order to be closer to his sister and her family. Throughout 2007 petitioner's sister was married and lived with her husband and five children in a single- family home. Petitioner's sister was a stay-at-home mom and her husband was a full-time student who only started working in late 2007.
From January to August 2007, petitioner worked nights. Although petitioner did not live with his sister and her family during this time, he would spend much of his time at their home helping with childcare and doing the family's errands. In addition to assisting with childcare and errands, petitioner also provided his sister's family with financial assistance.
In August 2007, petitioner obtained a job located far away from where his sister and her family lived. For the remainder of 2007, petitioner was unable to help his sister with child care and errands, but he continued to provide financial assistance.
Petitioner claims that he is entitled to dependency exemption deductions for his two nieces because he provided financial assistance, as well as help with child care and the family's errands. We commend petitioner for contributing to the support of his sister's family. However, he has not demonstrated that he and his nieces shared the same principal place of abode for any portion, much less for more than one-half, of the taxable year in issue.
Labels: dependency deduction, family limited partnerships, liabilities, Section 1031
STAHL v. U.S., Cite as 106 AFTR 2d 2010-7154, 11/29/2010
There are certain sections of the Internal Revenue Code that have worked their way into our language. There is even a joke where somebody says that thanks to the market collapse they now have a 201(k). I have this inquiring mind that reasons that if there is a 501(c)(3), which everybody knows about there must also be 501(c)(1) and 501(c)(2) and who knows maybe even 501(c)(4). Believe it or not it actually goes up to 29 (Co-op health issuers) and includes 501(c)(23) - Any veterans association organized before 1880, the principal purpose of which is to provide insurance and other benefits to veterans or their dependents. I guess the Grand Army of the Republic was still a force to be reckoned with in 1913. Even better it keeps going past (c). The Stahl case is about a 501(d) organization :
(d) Religious and apostolic organizations.
The following organizations are referred to in subsection (a) : Religious or apostolic associations or corporations, if such associations or corporations have a common treasury or community treasury, even if such associations or corporations engage in business for the common benefit of the members, but only if the members thereof include (at the time of filing their returns) in their gross income their entire pro rata shares, whether distributed or not, of the taxable income of the association or corporation for such year. Any amount so included in the gross income of a member shall be treated as a dividend received.
501(d) organization file form 1065 and the members are taxed on their share of the profits. They are not, however, considered partnerships subject to the TEFRA audit rules. John Stahl is a member and president of the Stahl Hutterian Brethren .
SHB was organized to enable its members to live in accordance with the tenets of the Hutterite tradition. The Hutterite tradition is rooted in sixteenth century Germany. In accordance with their religious beliefs, SHB members live in a colony, and currently the SHB colony includes about 65 members. They are all part of the extended Stahl family, which includes eight brothers, two sisters, their spouses, and their children.
Hutterites disavow individual property ownership, so SHB does not pay a salary to any of its members. Moreover, the members do not contribute to or collect Social Security benefits. All of SHB's property is maintained by it and is used for the benefit of its members. SHB provides for the members' personal needs, such as food, shelter, clothing, and medical care.
According to the bylaws of SHB, any member may be expelled. Expulsion may occur for a variety of reasons, including: the member's refusing to obey SHB's rules; the member's “failing to give and devote all his or her time, labor, services, earnings and energies” to SHB; and the member's “failing to do and perform the work, labor, acts, and things required of him or her.” If a member is expelled, he forfeits all interest in SHB's property and leaves with nothing but the clothes on his back.
Stahl brought this action for the purpose of obtaining an income tax refund because, he asserts, corporate level income should have been reduced for tax purposes before it was passed through to him. He insists that the cost of meals and medical expenses of SHB's employees was an ordinary and necessary business expense. The government argued to the district court that none of the Hutterite members, including Stahl, are employees for tax purposes and that should end the inquiry. The district court agreed with the government, and this appeal followed.
On balance, the individual Hutterites, who work for the SHB business, should be seen as common law employees of SHB insofar as they perform the work of that business. They are permanent workers on SHB's grounds and SHB can both insist that they perform their assigned tasks at the proper times and can direct the detail of that performance. Despite the fact that SHB and those members who work for it have a myriad of interconnected relationships, one of those relationships is operation of and working in a business. That connection is most like the relationship between an employer and employee, and should be so treated for tax purposes.
It must be nice being a judge in the appelate court. The implications of the members being employees are far reaching but :
SHB is a Hutterian corporation, which like others of its kind, is treated as a 26 U.S.C. § 501(d) entity. By its very nature, it is not exactly like an ordinary business corporation; nor is it like the more common 26 U.S.C. § 501(c)(3) organizations. Nonetheless, we see no reason to hold that its Hutterite workers are not employed by the SHB business when, as here, they essentially meet the definition of common law employees, even if they have many other relationships among themselves and with SHB. Thus, the district court erred when it held to the contrary and granted summary judgment to the government. “Employment” is the sole issue before us, and we will not divagate into others; we leave those to the district court in the first instance.
My spell checker doesn't thing "divagate" is a word and I don't know what it means, but it seems like a cool word, so I'm leaving it there.
Posted by Peter Reilly at 7:00 AM 2 comments: Links to this post