Charitable Remainder Trust

Charitable remainder trust can be divided into separate trusts without adverse tax consequences

Rev Rul 2008-41, 2008-30 IRB

Mike Habib, EA

In the context of two fairly detailed factual situations, a new revenue ruling makes it clear that a charitable remainder trust (CRT) can be divided into two or more separate CRTs without adverse tax consequences. If properly effected, the separate trusts will continue to qualify as CRTs, the division won't be a sale, and no excise taxes will arise under Code Sec. 507(c), Code Sec. 4941 or Code Sec. 4945.

Background. In general, a charitable remainder trust (CRT) provides for a specified periodic distribution to one or more noncharitable beneficiaries for life or for a term of years with an irrevocable remainder interest held for the benefit of charity. A CRUT pays a unitrust amount at least annually to the beneficiaries as opposed to a charitable remainder annuity trust or CRAT, which pays a sum certain at least annually to the beneficiaries. (Code Sec. 664)

A CRT is exempt from income tax but is subject to tax on unrelated business taxable income. (Code Sec. 664(c))
Income, gift and estate tax deductions are allowed for the value of the charity's remainder interest in a CRT. (Code Sec. 170(f)(2), Code Sec. 2522(c)(2)(A), Code Sec. 2055(e)(2)(A)) To qualify as a CRT, numerous requirements must be met. They are spelled out in Code Sec. 664(d).

Situation 1 facts. A summary of the key facts in Situation 1 follows:
Trust qualifies as either a CRAT or CRUT. Under its terms, two or more individuals (recipients) are each entitled to an equal share of the annuity or unitrust amount, payable annually, during the recipient's lifetime, and upon the death of one recipient, each surviving recipient becomes entitled for life to an equal share of the deceased recipient's annuity or unitrust amount. Thus, the last surviving recipient becomes entitled to the entire annuity or unitrust amount for his or her life. Upon the death of the last surviving recipient, Trust's assets are to be distributed to one or more Code Sec. 170(c) charitable organizations (remainder beneficiaries).

The state court having jurisdiction over Trust has approved a pro rata division of Trust into as many separate and equal trusts as are necessary to provide one such separate trust for each recipient living at the time of the division, with each separate trust being intended to qualify as the same type of CRT.

The separate trusts may have different trustees. To carry out the division of Trust into separate trusts, each asset of Trust is divided equally among and transferred to the separate trusts. The recipients pay all the costs associated with the division of Trust into separate trusts.

Each of the separate trusts has the same governing provisions as Trust, except that: (i) immediately after the division of Trust, each separate trust has only one recipient, and each recipient is the annuity or unitrust recipient of only one of the separate trusts (that recipient's separate trust); (ii) each separate trust is administered and invested independently by its trustee(s); (iii) upon the death of the recipient, each asset of that recipient's separate trust is to be divided on a pro rata basis and transferred to the separate trusts of the surviving recipient(s), and the annuity amount payable to the recipient of each such separate CRAT is thereby increased by an equal share of the deceased recipient's annuity amount (the unitrust amount of each separate CRUT is similarly increased as a result of the augmentation of the CRUT's corpus, and each separate CRUT incorporates the requirements of Reg. § 1.664-3(b) with respect to the subsequent computation of the unitrust amount from that trust); and (iv) upon the death of the last surviving recipient, that recipient's separate trust (being the only separate trust remaining) terminates, and the assets are distributed to the remainder beneficiaries.

The remainder beneficiaries of Trust are the remainder beneficiaries of each of the separate trusts and are entitled to the same (total) remainder interest after the division of Trust as before.

Situation 2 facts. The facts are similar in Situation 2 except that the recipients are a married couple in the process of divorcing and on the death of the first recipient to die, the remainder of that separate trust goes to the charities. The trust assets do not first go to the survivor recipient as was the case before the division. Thus, the charity can wind up with more than under the original scenario but no increased charitable deduction is allowed.

Favorable rulings. IRS issued these favorable rulings with respect to both Situations 1 and 2:

(1) The pro rata division of a trust that qualifies as a CRT under Code Sec. 664(d) into two or more separate trusts does not cause the trust or any of the separate trusts to fail to qualify as a CRT under Code Sec. 664(d).

(2) The division is not a sale, exchange, or other disposition producing gain or loss, the basis under Code Sec. 1015 of each separate trust's share of each asset is the same share of the basis of that asset in the hands of the trust immediately before the division of the trust, and, under Code Sec. 1223, each separate trust's holding period for an asset transferred to it by the original trust includes the holding period of the asset as held by the original trust immediately before the division.

(3) The division does not terminate under Code Sec. 507(a)(1) the trust's status as a trust described in, and subject to, the private foundation provisions of Code Sec. 4947(a)(2) and does not result in the imposition of an excise tax under Code Sec. 507(c).

(4) The division does not constitute an act of self-dealing under Code Sec. 4941.

(5) The division does not constitute a taxable expenditure under Code Sec. 4945.

Opportunity Letter - Offshore Account

Judge: IRS can seek tax information from Swiss banking giant UBS in expanding investigation

Associated Press WorldStream via NewsEdge :

MIAMI_A federal judge agreed Tuesday to allow the IRS to serve legal papers on Swiss banking giant UBS AG in an expanding investigation into U.S. taxpayers who may have used overseas accounts to hide assets and avoid taxes.

The order from U.S. District Judge Joan Lenard came one day after the Justice Department requested authority for the IRS to issue "John Doe" summons to UBS. The summons are used in IRS tax fraud investigations when the identity of the people involved is not known.

Lenard said in a two-paragraph order that based on the government court filings, "there is a reasonable basis for believing such a group or class of persons may fail or may have failed to comply" with U.S. tax laws.

The summons will allow the IRS to obtain information about American taxpayers who have UBS accounts but did not file required forms detailing their taxable income.

"The order clears the way for the IRS to take the next steps against wealthy individuals who don't pay their taxes," said IRS Commissioner Doug Shulman in a written statement. "People with hidden foreign accounts can no long rest easy."

UBS has said it is cooperating with Swiss and U.S. investigations and will disclose records involving U.S. clients who might have broken tax laws.

U.S. taxpayers are required to report all foreign financial accounts if their total value exceeds $10,000 at any point during a given year, prosecutors said. Failure to report the accounts can result in a penalty of up to 50 percent of the amount in the accounts.

The Justice Department requested the summons after former UBS private banker Bradley Birkenfeld, 43, pleaded guilty in a Florida federal court to defrauding the IRS. Birkenfeld, who is cooperating with investigators, said in court that UBS has about $20 billion in assets in undeclared accounts for U.S. taxpayers.

Prosecutors said Birkenfeld and others helped California billionaire Igor Olenicoff hide $200 million in assets overseas. Olenicoff, who controls a real estate empire, pleaded guilty last year to tax charges and agreed to pay the IRS more than $52 million.

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Do you have an IRS offshore tax problem? Did you receive an "opportunity letter" from the IRS? CONTACT US Today to get tax resolution, we can represent you before the IRS.

Rules for claiming a dependent child

Final regs on dependent child of divorced or separated parents or parents who live apart T.D. 9408, 07/01/2008; Reg. § 1.152-4

Mike Habib, EA

IRS has issued final regs on the rules for claiming a child as a dependent by parents who are divorced, legally separated under a decree of separate maintenance or a written separation agreement, or who live apart at all times during the last 6 months of the calendar year. They are effective for tax years beginning after July 2, 2008, and reflect amendments under the Working Families Tax Relief Act of 2004 (WFTRA) and the Gulf Opportunity Zone Act of 2005 (GOZA).

Background. A taxpayer may deduct an exemption amount for a dependent, defined generally as a qualifying child or a qualifying relative. Code Sec. 152(e), as amended by § 404 of GOZA, carries rules for parents who (1) are divorced or legally separated under a decree of divorce or separate maintenance, (2) are separated under a written separation agreement, or (3) live apart at all times during the last 6 months of the calendar year. A child of parents described in (1), (2), or (3), is treated as the qualifying child or qualifying relative of the noncustodial parent if the child receives over one-half of his support during the calendar year from the child's parents, the child is in the custody of one or both of the child's parents for more than half of the calendar year, and:

• the custodial parent signs a written declaration that the custodial parent will not claim a child as a dependent for a tax year and the noncustodial parent attaches the declaration to the noncustodial parent's tax return (Code Sec. 152(e)(2); or
• a qualified pre-'85 instrument allocates the dependency exemption to the noncustodial parent and the noncustodial parent provides at least $600 for the support of the child during the calendar year. (Code Sec. 152(e)(3))

A custodial parent is the parent having custody for the greater portion of the calendar year and the noncustodial parent is the parent who is not the custodial parent. (Code Sec. 152(e)(4)) If a child is treated as the qualifying child or qualifying relative of the noncustodial parent under Code Sec. 152(e), then that parent may claim the child for purposes of the dependency deduction under Code Sec. 151 and the child tax credit under Code Sec. 24, if the other requirements of those provisions are met.

In May of 2007, IRS issued proposed regs on the rules for a dependent child of divorced or separated parents or parents who live apart. IRS has now adopted the proposed regs as final regs, with some modifications.

Final regs. The final regs update the prior final regs, deleting obsolete provisions, revising language to improve clarity, and incorporating provisions in Reg. § 1.152-4T, which is removed. They also provide guidance on issues that have arisen in the administration of Code Sec. 152(e).

Custodial parent. Like the proposed regs, the final regs define the custodial parent as the parent with whom the child resides for the greater number of nights during the calendar year (the counting nights rule). In response to commentators' concern that this rule doesn't address how the child's residence for a night is determined (e.g., by the child's physical location at a given time such as midnight, or by where the child sleeps) and for which year the night of Dec. 31 to Jan. 1 is counted, the final regs clarify that, for purposes of Code Sec. 152(e), a child resides for a night with a parent if the child sleeps (1) at the parent's residence (whether or not the parent is present); or (2) in the company of the parent when the child does not sleep at a parent's residence (for example, if the parent and child are on vacation). The time that a child goes to sleep is irrelevant. A night that extends over two tax years is allocated to the tax year when the night begins: for example, the night that begins on Dec. 31, 2008, is counted for tax year 2008. (Reg. § 1.152-4(d))

To remedy any ambiguity caused by the proposed regs' failure to define custody, the final regs provide that a child is in the custody of one or both parents for more than one-half of the calendar year if one or both parents have the right under state law to physical custody of the child for more than one-half of the calendar year. But, a child isn't in the custody of either parent for purposes of Code Sec. 152(e) when the child reaches the age of majority under state law. (Reg. § 1.152-4(c))

Release of the right to claim a child. Under Code Sec. 152(e)(2), a custodial parent may release a claim to an exemption for a child by signing a written declaration that he will not claim the child as a dependent. The final regs retain the rule in the proposed regs that a written declaration not on Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, (or successor form) must conform to the substance of Form 8332. The final regs further provide that a release not on a Form 8332 must be a document executed for the sole purpose of releasing the claim. A court order or decree or a separation agreement cannot serve as the written declaration. If a release of a claim to a child is for more than one year, the noncustodial parent must attach a copy of the written declaration (rather than the original, as required in the proposed regs) to the parent's return for the first tax year for which the release is effective. Copies must also be attached to returns for later years. (Reg. § 1.152-4(e))

Revocation of release of claim. Under both the final and proposed regs, a custodial parent who released the right to claim a child could revoke the release for future tax years by providing written notice of the revocation to the other parent. The final regs require that the parent revoking the release notify, or make reasonable attempts to notify, in writing, the other parent of the revocation. What is a reasonable attempt is determined under the facts and circumstances, but mailing a copy of the written revocation to the noncustodial parent at the last known address or at an address reasonably calculated to ensure receipt satisfies this requirement. A revocation can be made on Form 8332, or successor form designated by IRS. A revocation not on the designated form must conform to the substance of the form and be in a document executed for the sole purpose of revoking a release. A taxpayer revoking a release may attach a copy rather than an original to the taxpayer's return for the first tax year the revocation is effective, as well as for later years. (T.D. 9408, 07/01/2008, Reg. § 1.152-4(e)(3))

The final regs also clarify that a multiple year written declaration executed in a tax year beginning on or before July 2, 2008, that satisfies the requirements for the form of a written declaration in effect at the time the written declaration was executed is treated as satisfying the requirements for the form of a release under the final regs. However, the rules for revoking a release of a claim to an exemption apply without regard to whether a custodial parent executed the release in a tax year beginning on or before July 2, 2008; such a release executed may be revoked. (Reg. § 1.152-4(e)(5))

Property Seizure Compliance

TIGTA results of 2008 review IRS compliance with legal guidelines when conducting property seizures [Audit Report No. 2008-30-126]:

IRS has usually followed the numerous legal and internal guidelines that apply to seizures of taxpayers' property, the Treasury Inspector General for Tax Administration (TIGTA) said in a recent audit. TIGTA based its opinion on a review of a random sample of 50 of the 683 seizures conducted from July 1, 2006, through June 30, 2007.

Auditors identified 25 instances in which IRS did not comply with a particular Code requirement but, according to TIGTA, this represented an error rate of only about 1%. The problems identified in the audit included the following—10 instances in which expenses and proceeds resulting from the seizure weren't properly applied to the taxpayers' accounts; five instances in which the sales of seized properties weren't properly advertised; five instances in which the correct amounts of the liabilities for which the seizures were made weren't provided on the notices of seizures sent to the taxpayers; and five instances that were redacted from the publicly released version of the audit.

The audit is located at http://treas.gov/tigta/auditreports/2008reports/200830126fr.pdf .

Shareholder Constructive Distribution

Loan repayment to shareholder's spouse wasn't constructive distribution Beckley, 130 TC No. 18 (2008)

Mike Habib, EA

The Tax Court has ruled that payments made by a corporation to the wife of one of its shareholders represented repayment of money she advanced to a predecessor corporation. Despite the absence of a written loan agreement, the repayment wasn't a constructive distribution to the shareholder.

Facts in brief. In '88, Alan Beckley and Robert Ebert incorporated CT Inc., a software development company and each owned 50% of the company. CT often ran short of funds and in '88 through '99, it borrowed at least $106,834 from Alan's wife, Virginia. The corporation used the borrowed funds to develop a working model of Web-based video conferencing software. CT had financial problems and was dissolved in '98. In 2000, VDN, Inc., was incorporated to succeed to CT's business and to continued to develop business products. Alan was a shareholder in VDN. The working model of the video conferencing software developed by CT was transferred to VDN in 2000, but the latter did not execute a written loan assumption agreement with regard to CT's loan repayment obligation to Virginia. She did not make a claim against CT for repayment of the funds she lent to it, did not treat her loan to CT as a worthless loan, and did not claim an ownership interest in the working model.

In 2001, VDN paid Virginia $95,434. It treated $58,600 of that amount as interest which it reported on Form 1099–INT and the balance as repayment of principal. Virginia reported the interest portion of the payment on her return as interest. In 2002, VDN paid Virginia $70,000. Virginia treated the $70,000 as repayment of principal. On its returns for 2001 and 2002, VDN deducted the payments to Virginia as nonemployee compensation.

In 2003 Alan Beckley and Robert Ebert were terminated by VDN, and it made no further payments to Virginia.
When it audited the Beckleys' returns for 2001 and 2002, IRS didn't challenge their characterization of the amounts received from VDN, but asserted that one half of the amounts received by Virginia also were corporate distributions taxable as capital gain to Alan. IRS's theory was that VDN's payments to Virginia on her loan to CT were made without any legal obligation to do so and only on the basis of a personal moral obligation of Alan and Ebert to repay Virginia. Thus, it argued that VDN's payments represented constructive corporation distributions.

Amounts represented loan repayment. The Tax Court ruled that the facts didn't support IRS's theory that VDN's payments to Virginia were made to satisfy only personal moral obligations of Alan and of Ebert. Although VDN did not execute a written loan assumption agreement, it effectively purchased the working model from CT, assumed at least part of CT's obligation to repay Virginia's loan to CT, and thus, its payments to Virginia related to that original loan. Although there was no written agreement reflecting VDN's obligation to repay Virginia, its conduct in actually making payments to Virginia, which related to her loan to CT and to CT's transfer of the working model to VDN, established the loan repayment character of the payments. In addition, the Form 1099-INT that VDN mailed to Virginia and to IRS for 2001 reflected that $58,600 represented interest on a loan.

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Carbon Dioxide and the IRS?

Gain from selling carbon dioxide allowances didn't generate foreign personal holding company income PLR 200825009

Mike Habib, EA

IRS has privately ruled that gain from the sale of surplus carbon dioxide allowances didn't constitute foreign personal holding company income (FPHCI) under Code Sec. 954(c). It concluded that the emissions allowances were excepted because they were intangible property used in the controlled foreign corporations' trade or business.

Facts. Taxpayer indirectly owns through a chain of foreign subsidiaries an unspecified percentage of the vote and value of Corporation A. The remaining interest is owned by unrelated parties. Corporation A engages in Industry M in Country A, where it is organized.

Taxpayer also indirectly owns 100% of the vote and value of Partnership B, a Country B entity that is treated as a controlled foreign partnership under Code Sec. 6038(e) . An unspecified percentage of Partnership B is directly owned by Corporation C, a controlled foreign corporation (CFC) of Taxpayer, organized in Country A. The remaining interest of Partnership B is directly owned by a domestic subsidiary corporation of Taxpayer. Partnership B engages in Industry M and other industries in Country B.

Countries A and B are members of the European Union (EU), which has developed the Emissions Trading Scheme (ETS) to regulate the emissions of carbon dioxide or its equivalent within certain industries, including Industry M. Beginning on Jan. 1, 2008, the ETS was expanded to include regulation of 5 other greenhouse gases. Corporation A and Partnership B are subject to the ETS.

Under the ETS, member states may emit specified amounts, measured in units, of the regulated greenhouse gases. The emissions capacity of each member state is represented by an allocation of allowances to it. Corporation A and Partnership B received carbon dioxide allowances from Country A and Country B, respectively, in Year 1 and Year 2. A business must surrender its allocated allowances for any year to the relevant authority in amounts equal to its emissions for the year. To the extent the measured emissions of a business exceed its allowances, a fine is imposed. However, to the extent a business has excess allowances, it may sell any surplus to another person. Corporation A and Partnership B had surplus allowances in Year 1 and Year 2, which were sold to unrelated purchasers.

Carbon dioxide allowances are traded over the counter and on exchanges such as the European Climate Exchange, the European Energy Exchange and Nordpool.

Background. Under Code Sec. 951(a), a U.S. shareholder of a CFC must include in gross income its pro-rata share of the CFC's subpart F income for the tax year.

A U.S. shareholder is any U.S. person (as defined in Code Sec. 957(c)) who owns (under Code Sec. 958) 10% or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation. (Code Sec. 951(b))

A CFC is any foreign corporation if more than 50% of the total combined voting power of all classes of its stock or more than 50% of the total value of its stock is owned by U.S. shareholders on any day during the tax year of such foreign corporation. (Code Sec. 957(a))

Subpart F income includes foreign base company income. (Code Sec. 952(a))
Under Reg. § 1.952-1(g)(1), a CFC's distributive share of any item of income of a partnership is income that falls within a category of subpart F income, as defined in Code Sec. 952(a), to the extent the item of income would have been income in such category if received by the CFC directly.

Code Sec. 954(a) defines four categories of foreign base company income, including FPHCI.
Code Sec. 954(c)(1)(C) provides, in part, that FPHCI includes the excess of gains over losses from transactions in any commodity. Commodity, for this purpose, includes tangible personal property of a kind that is actively traded or with respect to which contractual interests are actively traded. (Reg. § 1.954-2(f)(2)(i)) There are, however, exceptions. For example, net commodities gain that is included in FPHC income for subpart F purposes does not include active business gains or losses from the sale of commodities, if substantially all of the CFC's commodities are property described in Code Sec. 1221(a)(1) (inventory), Code Sec. 1221(a)(2) (property used in a trade or business subject to depreciation), or Code Sec. 1221(a)(8) (supplies used or consumed by the CFC in its trade or business). (Code Sec. 954(c)(1)(C)(ii))

Code Sec. 954(c)(1)(B)(iii) provides that FPHCI includes the excess of gains over losses from the sale of property which does not give rise to any income. However, under Reg. § 1.954-2(e)(3)(iii), property that does not give rise to income excludes intangible property (under Code Sec. 936(h)(3)(B)) to the extent used or held for use in the CFC's trade or business.

Reg. § 1.954-2(a)(5) provides special rules for calculating FPHCI applicable to distributive shares of partnership income. Under Reg. § 1.954-2(a)(5)(ii)(A), the exclusion provided by Reg. § 1.954-2(e)(3) applies only if such exception would have applied to exclude the income from FPHCI if the CFC had earned the income directly, determined by taking into account only the activities of, and property owned by, the partnership and not the separate activities or property of the CFC or any other person.

Code Sec. 936(h)(3)(B)(iv) and Code Sec. 936(h)(3)(B)(vi) include in the definition of intangible property any franchise, license, or contract, or any similar item, which has substantial value independent of the services of any individual.

Reg. § 1.954-2(a)(2) provides coordination rules for overlapping categories under the FPHCI provisions. Under those rules, gain or loss from commodities transactions under Code Sec. 954(c)(1)(C) take priority over gain under Code Sec. 954(c)(1)(B).

Analysis. IRS said it was currently studying the question of whether carbon dioxide allowances should be viewed as commodities for purposes of Code Sec. 954(c)(1)(C). However, it stated that, solely for purposes of PLR 200825009, IRS believes it is appropriate at this point to analyze carbon dioxide allowances as property that does not give rise to income under Code Sec. 954(c)(1)(B)(iii). No inference is intended as to whether the allowances are properly considered commodities for purposes of Code Sec. 954 or any other Code section.

The ruling noted that Reg. § 1.954-2(e)(3)(iv) provides that intangible property is excluded from FPHCI to the extent used or held for use in the CFC's trade or business. But this is applied to CFC partners by taking into account only the activities of the partnership.

In this case, possession of carbon dioxide allowances is necessary to operate in Industry M. Because each allowance permits the holder to engage in a business activity otherwise unlawful, without penalty, the allocation of an allowance by a member state is the granting of an intangible property right to each business to emit carbon dioxide to a set limit. The value of the allowance is independent of the performance of services by any individual. Thus, for purposes of Code Sec. 954(c)(1)(B), the allowances are intangible property under Code Sec. 936(h)(3)(B). However, to qualify for the exclusion of Reg. § 1.954-2(e)(3)(iv), the intangible property of Corporation A and Partnership B must be used or held for use in Corporation A and Partnership B's trade or business.

Based on the facts presented, IRS concluded that Corporation A and Partnership B held the carbon dioxide allowances to offset emissions resulting from the operation of their businesses in Industry M. Thus, Corporation A and Partnership B held the emissions allowances for use in their trade or business. Therefore, the allowances are intangible property held for use in a trade or business within the meaning of Reg. § 1.954-2(e)(3)(iv) and gain from their sale is properly excluded from the definition of FPHCI found in Code Sec. 954(c)(1)(B)(iii) by Corporation A and Corporation C.

Bottom line. Gain from the sale of surplus carbon dioxide allowances by Corporation A and Partnership B does not constitute FPHCI within the meaning of Code Sec. 954(c) to Corporation A or Corporation C.

Tax man is coming soon

House Subcommittee Passes IRS Funding Bill

The House Appropriations Financial Services Subcommittee this week passed a bill that would appropriate $11.4 billion to IRS for FY 2009.

The bill would grant IRS budget authority to spend $5.1 billion on enforcement, $2.2 on taxpayer services, and $3.8 billion on operations.

The total is about $40 million more than the president's request for the agency. The bill will next be considered by the full House Appropriations Committee before it goes to the House floor.

Closing the Tax Gap: An estimated $290 billion in taxes owed go unpaid every year. The IRS Oversight Board noted in a recent report that “the tax gap is an injustice to compliant taxpayers who ultimately are bearing the financial burden of those who do not pay what they owe, whether intentionally or not.”
• Enforcement: $5.1 billion, $337 million above 2008 and matching the President’s request, to catch tax cheats through audits, collection efforts, and technology improvements.

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As you can see from the above, over $5,000,000,000 (Five Billion), allocated for IRS enforcement. Enforcement will encompass aggressive collection efforts for collecting back taxes, and additional tax audits to ensure compliance and catch tax cheats.

So, if you owe the IRS, contact us today to resolve your tax matter. Don't let the IRS punish you, you could settle your tax debt for less than you owe.

Business Economic Stimulus

Business Provisions of the Economic Stimulus Act of 2008

Mike Habib, EA

The Economic Stimulus Act of 2008 contains two provisions that provide tax benefits for businesses. The first provision increases the limit up to which a business can expense property purchased and placed in service during its 2008 tax year. The second provision provides an additional 50 percent special depreciation allowance for property acquired and placed in service during calendar year 2008.

Unlike the economic stimulus payments that millions of individuals have already received, the tax benefits for businesses are not automatic; businesses must act to take advantage of the new provisions by purchasing qualifying property.

The Joint Committee on Taxation estimates that businesses stand to lower their 2008 tax bills by roughly $45 billion as a result of the two business provisions in the Economic Stimulus Act of 2008; these provisions accelerate into 2008 the tax benefits that otherwise would not have been available until future years.

The following are some details about these two key tax benefits:

Section 179 Expensing

• In general, section 179 provides that, instead of depreciating property, a business with a sufficiently small amount of annual property purchases may choose to expense the cost of the property. For taxable years beginning in 2008, the Economic Stimulus Act increased the section 179 expensing limit allowing more property to be currently expensed.
• The Economic Stimulus Act increased the maximum section 179 expense deduction to $250,000 for qualified section 179 property that is placed in service in tax years that begin in 2008. This is a 95 percent increase from the previous limitation of $128,000.
• The Economic Stimulus Act also increased the total amount of qualifying property a taxpayer may purchase before the section 179 expensing limit begins to be reduced. Under the new law, the $250,000 deduction amount is reduced only when a business acquires more than $800,000 of qualifying property. Prior to changes made by the Economic Stimulus Act, the reduction began when a business acquired more than $510,000 of qualifying property.
• The new law does not alter the section 179 expense limit for sport utility vehicles, which remains at $25,000.
• More than 4.5 million small businesses claimed the section 179 expense deduction for tax year 2005, the most recent year for which this information is available. These businesses placed almost $44 billion of section 179 property in service in 2005 and claimed related deductions of approximately $41 billion (data derived from Depreciation and Amortization forms filed with Forms 1040).

Special Depreciation Allowance

• The Economic Stimulus Act also provided a 50 percent special depreciation allowance for property acquired and placed in service during 2008. Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property over several years. It is an annual allowance for the wear and tear, deterioration or obsolescence of the property.
• Under the new law, a taxpayer is entitled to depreciate 50 percent of the adjusted basis (after subtracting any section 179 deduction taken on that property) of qualified property during the year the property is placed in service. For example, if the taxpayer purchased and placed in service in 2008 a single piece of property at a cost of $450,000 that qualified for section 179 expensing and the 50 percent special depreciation allowance, $250,000 of the cost could be immediately expensed (under section 179 ) and the remaining $200,000 of adjusted basis would be available for the 50 percent special depreciation allowance. The taxpayer would also be permitted to take regular depreciation on the remaining $100,000 of adjusted basis during that year. This is similar to the special depreciation allowance that was previously available for certain property placed in service generally before Jan. 1, 2005, often referred to as “bonus depreciation.”
• The types of property that qualify for the 50 percent special depreciation allowance are section 168 property with a recovery period of 20 years or less, off-the-shelf computer software, water utility property and qualified leasehold improvement property.
• To qualify for the 50 percent special depreciation allowance, a taxpayer must meet all of the following tests:
• The taxpayer must have acquired the property after December 31, 2007, and before Jan. 1, 2009. If a binding contract to acquire the property existed before Jan. 1, 2008, the property does not qualify for the special depreciation allowance.
• The property must be placed in service before Jan. 1, 2009 (before Jan. 1, 2010, for certain transportation property and certain property with a long productions period).
• The original use of the property must begin with the taxpayer after Dec. 31, 2007. In other words, the property must be “new” property.
• Prior to the enactment of the Economic Stimulus Act the total depreciation amount (including the section 179 deduction) a business could deduct for a passenger automobile was $2,960. The Economic Stimulus Act increased this limitation by $8,000. Therefore, the maximum limit is increased to $10,960 for automobiles for which the special bonus depreciation allowance is claimed.
• Prior to the enactment of the Economic Stimulus Act, the total depreciation amount (including the section 179 deduction) a business could deduct for a truck or van used in a business and first placed in service in 2008 was $3,160. The Economic Stimulus Act increased this limitation by $8,000. The new maximum limit is increased to $11,160 for trucks and vans for which the special bonus depreciation is claimed.

The Economic Stimulus Act is the most recent legislation that provides depreciation tax benefits. Previously, the Job Creation and Worker Assistance Act of 2002 allowed an additional first-year depreciation deduction equal to 30 percent of the adjusted basis of qualified property for property acquired on or after Sept. 11, 2001, and generally placed in service before Jan. 1, 2005. The Jobs and Growth Tax Relief Reconciliation Act of 2003 provided an additional first-year depreciation deduction equal to 50 percent of the adjusted basis of qualified property for property acquired after May 5, 2003, and generally placed in service before Jan. 1, 2005.

For professional tax advice contact us today.

Disaster Victims Tax Relief

More disaster victims in Indiana, Iowa and Wisconsin qualify for tax relief IRS website [http://www.irs.gov/newsroom/article/0,,id=108362,00.html]

Mike Habib, EA

IRS has announced on its website that additional counties in Indiana, Iowa and Wisconsin have been declared disaster areas on account of recent severe storms, tornadoes and flooding. As a result, more victims of the disaster have additional time to make tax payments and file returns. Certain other time-sensitive acts also are postponed.

Who gets relief. Only taxpayers considered to be affected taxpayers are eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts. Affected taxpayers are those listed in Reg. § 301.7508A-1(d)(1) and thus include:

• any individual whose principal residence, and any business entity whose principal place of business, is located in the counties designated as disaster areas;
• any individual who is a relief worker assisting in a covered disaster area, regardless of whether he is affiliated with recognized government or philanthropic organizations;
• any individual whose principal residence, and any business entity whose principal place of business, is not located in a covered disaster area, but whose records necessary to meet a filing or payment deadline are maintained in a covered disaster area, or whose tax professional/practitioner is located in a covered disaster area;
• any estate or trust that has tax records necessary to meet a filing or payment deadline in a covered disaster area; and
• any spouse of an affected taxpayer, solely with regard to a joint return of the husband and wife.

What may be postponed. Under Code Sec. 7508A, IRS gives affected taxpayers until the extended date (specified by county, below) to file most tax returns (including individual, estate, trust, partnership, C corporation, and S corporation income tax 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 falling on or after the onset date of the disaster (specified by county, below), and on or before the extended date.

IRS also gives affected taxpayers until the extended date to perform other time-sensitive actions described in Reg. § 301.7508A-1(c)(1) and Rev Proc 2007-56, 2007-34 IRB 388, that are due to be performed on or after the onset date of the disaster, and on or before the extended date. This relief also includes the filing of Form 5500 series returns, in the way described in Rev Proc 2007-56, Sec. 8. Additionally, the relief described in Rev Proc 2007-56, Sec. 17, relating to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 or 5498 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. IRS, however, will abate penalties for failure to make timely employment and excise deposits, due on or after the onset date of the disaster, and on or before the information return delayed date (specified by county, below), provided the taxpayer made these deposits by the information return delayed date.

IRS will waive the failure to deposit penalties for employment and excise deposits due on or after the onset date of the disaster, and on or before the deposit delayed date (specified by county, below , as long as the deposits were made by the deposit delayed date.

Affected counties and dates for storms, floods and other disasters in 2008 are as follows:
Arkansas: The following are presidential disaster areas qualifying for individual assistance: Arkansas, Benton, Cleburne, Conway, Crittenden, Grant, Lonoke, Mississippi, Phillips, Pulaski, Saline and Van Buren counties.

For these Arkansas counties, the onset date of the disaster was May 2, 2008, the extended date is July 21, 2008, the information return delayed date was May 19, 2008, and the deposit delayed date was May 19, 2008.

Colorado: The following are presidential disaster areas qualifying for individual assistance: Larimer and Weld counties.

For these Colorado counties, the onset date of the disaster was May 22, 2008, the extended date is July 25, 2008, the information return delayed date was June 6, 2008, and the deposit delayed date was June 6, 2008.

Georgia: The following are presidential disaster areas qualifying for individual assistance: Bibb, Carroll, Douglas, Emanuel, Jefferson, Jenkins, Johnson, Laurens, McIntosh and Twiggs counties.

For these Georgia counties, the onset date of the disaster was May 11, 2008, the extended date is July 22, 2008, the information return delayed date was May 27, 2008, and the deposit delayed date was May 27, 2008.

Iowa: The following are presidential disaster areas qualifying for individual assistance: Adams, Allamakee, Benton, Black Hawk, Bremer, Buchanan, Butler, Cedar, Cerro Gordo, Chicksaw, Clayton, Crawford, Delaware, Des Moines, Fayette, Floyd, Freemont, Hardin, Harrison, Jasper, Johnson, Jones, Linn, Louisa, Mahaska, Marion, Mills, Monona, Muscatine, Page, Polk, Story, Tama, Union, Warren and Winneshiek counties.

For these Iowa counties, the onset date of the disaster is May 25, 2008, the extended date is July 28, 2008, the information return delayed date was June 9, 2008, and the deposit delayed date was June 9, 2008.

Indiana: The following are presidential disaster areas qualifying for individual assistance: Adams, Bartholomew, Brown, Clay, Daviess, Dearborn, Decaturm Greene, Hamilton, Hancock, Henry, Jackson, Jennings, Johnson, Knox, Marion, Monroe, Morgan, Owen, Parke, Putnam, Randolph, Rush, Shelby, Sullivan, Vermillion, Vigo and Wayne counties.

For these Indiana counties, the onset date of the disaster was May 30, 2008, the extended date is Aug. 7, 2008, the information return delayed date was June 16, 2008, and the deposit delayed date was June 16, 2008.

Maine: The following are presidential disaster areas qualifying for individual assistance: Aroostook and Penobscot counties.

For these Maine counties, the onset date of the disaster was April 28, the extended date is July 8, the information return delayed date was May 13, 2008, and the deposit delayed date was May 13, 2008.

Missouri: The following are presidential disaster areas qualifying for individual assistance: Barry, Jasper and Newton counties.

For these Missouri counties, the onset date of the disaster was May 10, 2008, the extended date is July 22, 2008, the information return delayed date was May 27, 2008, and the deposit delayed date was May 27, 2008.

Mississippi: The following are presidential disaster areas qualifying for individual assistance: Bolivar, Warren, Washington and Wilkinson counties.

For these Mississippi counties, the onset date of the disaster was March 20, 2008, the extended date is July 7, 2008, the information return delayed date was April 4, 2008, and the deposit delayed date was April 4, 2008.

Oklahoma: The following are presidential disaster areas qualifying for individual assistance: Craig, Latimer, Ottawa and Pittsburg counties.

For these Oklahoma counties, the onset date of the disaster was May 10, 2008, the extended date is July 14, 2008, the information return delayed date was May 27, 2008, and the deposit delayed date was May 27, 2008.

Wisconsin: The following are presidential disaster areas qualifying for individual assistance: Crawford, Columbia, Dodge, Green, Sauk, Milwaukee, Racine, Richland, Vernon, Washington, Waukesha and Winnebago counties.

For these Wisconsin counties, the onset date of the disaster was June 5, 2008, the extended date is Aug. 13, 2008, the information return delayed date is June 20, 2008, and the deposit delayed date is June 20, 2008.

Claiming disaster loss on previous year's return. A taxpayer that sustains a loss attributable to a disaster occurring in a Presidential disaster area may elect to deduct that loss on his return for the tax year immediately preceding the tax year in which the disaster occurred. (Code Sec. 165(i)) Generally, a taxpayer must make this election by filing a return, an amended return, or a refund claim on or before the later of (i) the due date of his income tax return (determined without regard to any filing extension) for the tax year in which the disaster actually occurred, or (ii) the due date of his tax return (determined with regard to any filing extension) for the immediately preceding tax year. The election is irrevocable 90 days after it is made. (Reg. § 1.165-11(e)) Because of the new disaster area designation, taxpayers in affected counties designated as disaster areas in 2008 can elect to claim a 2008 disaster loss on their 2007 returns, instead of on their 2008 returns.

Observation: Claiming the disaster loss for the year before the loss occurred saves taxes immediately, without having to wait until the end of the year in which the loss was sustained. In some cases, the deduction may result in a net operating loss, which could result in a refund from an earlier year to which it is carried. On the other hand, deducting the loss in the year the loss actually occurred may result in bigger tax savings if the taxpayer is in a higher bracket in that year.

CFC Controlled Foreign Corporation Tax Problem?

Regs crack down on tax avoidance repatriations of CFC earnings
Preamble to TD 9402, 06/23/2008; Reg. § 1.956-1T; Preamble to Prop Reg 06/23/2008; Prop Reg § 1.956-1

Mike Habib, EA

IRS has issued temporary and proposed regs to determine the basis of certain U.S. property acquired by a controlled foreign corporation (CFC) in certain nonrecognition transactions that are intended to repatriate earnings and profits of the CFC without income inclusion by the U.S. shareholders of the CFC under Code Sec. 951(a)(1)(B).

Background. IRS is aware that certain taxpayers are engaging in certain nonrecognition transactions in which a CFC acquires certain U.S. property (within the meaning of Code Sec. 956(c)) without resulting in an income inclusion to the U.S. shareholders of the CFC under Code Sec. 951(a)(1)(B).

Illustration: USP, a domestic corporation and the common parent of an affiliated group that files a consolidated tax return, owns 100% of the outstanding stock of US1 and US2, both domestic corporations that join USP in the filing of a consolidated tax return. US1 owns 100% of the stock of CFC, a controlled foreign corporation. US2 issues $100 million of its stock to CFC in exchange for $10 million of CFC stock and $90 million cash. USP takes the position that: (i) US2's transfer of its stock to CFC in exchange for $10 million of CFC stock and $90 million cash is an exchange to which Code Sec. 351 applies; (ii) US2 recognizes no gain on the receipt of $10 million of CFC stock and $90 million cash in exchange for its stock under Code Sec. 1032(a) ; (iii) CFC recognizes no gain on the issuance of its stock to US2 under Code Sec. 1032(a) ; (iv) CFC's basis in the US2 stock is zero under Code Sec. 362(a) ; and (v) US1 and US2 do not and will not have an income inclusion under Code Sec. 951(a)(1)(B) as a result of CFC holding the US2 stock (which constitutes U.S. property under Code Sec. 956(c) ). (Preamble to TD 9402, 06/23/2008)

IRS believes these transactions raise significant policy concerns because the transactions may have the effect of repatriating earnings and profits of a CFC without a corresponding dividend inclusion, or an income inclusion under Code Sec. 951(a)(1)(B) by reason of the CFC's investment in U.S. property.

Code Sec. 956 was enacted to require an income inclusion by U.S. shareholders of a CFC that invests certain earnings and profits in U.S. property on the ground that the investment is substantially the equivalent of a dividend being paid to them.

Under Code Sec. 951(a)(1)(B), each U.S. shareholder (as defined in Code Sec. 951(b)) of a CFC (as defined in Code Sec. 957(a)) must include in its gross income for its tax year in which or with which the tax year of the CFC ends, the amount determined under Code Sec. 956 with respect to such shareholder for such year (but only to the extent not excluded from gross income under Code Sec. 959(a)(2)).

Regs under Code Sec. 367(b) prevent the repatriation of a U.S. person's share of earnings and profits of a foreign corporation through what would otherwise be a nonrecognition transaction.

Under Code Sec. 362(a), for property acquired by a corporation in connection with a Code Sec. 351 transaction (relating to transfer of property to corporation controlled by transferor), the basis is the same as it would be in the hands of the transferor, increased by the amount of any gain recognized to the transferor on the transfer.

No gain or loss is recognized to a corporation on the receipt of money or other property in exchange for stock of that corporation. (Code Sec. 1032)

Temporary regs. When a CFC acquires stock or obligations of a domestic issuing corporation, that constitute U.S. property under Code Sec. 956(c), from such corporation pursuant to an exchange in which the CFC's basis in the property is determined under Code Sec. 362(a), the temporary regs apply. As a result, solely for Code Sec. 956 purposes, the temporary regs cause the CFC's basis in the property to be no less than the fair market value of the property transferred by the CFC in exchange for the property. For this purpose, “property” has the meaning set forth in Code Sec. 317(a), but includes any liability assumed by the CFC in connection with the exchange notwithstanding Code Sec. 357(a). (Reg. § 1.956-1T(e)(6))

The temporary regs also apply when property whose basis is determined under the regs is transferred to a related person (related person transferee), or by a related person transferee to another related person, pursuant to an exchange in which the related person transferee's basis in the property is determined, in whole or in part, by reference to the transferor's basis in the property. This rule is intended to prevent taxpayers from attempting to avoid the general rule of the temporary regs by subsequently transferring the property to a related person in another nonrecognition transaction. (Reg. § 1.956-1T(e)(6))

Basis determined under the temporary regs applies only for purposes of determining the amount of U.S. property acquired or held by a CFC under Code Sec. 956 , and accordingly the amount of a U.S. shareholder's income inclusion under Code Sec. 951(a)(1)(B) with respect to the CFC. (Reg. § 1.956-1T(e)(6))

The temporary regs apply only to determine the basis of U.S. property acquired by a CFC pursuant to an exchange that is within their scope. All other basis determinations are made under the rules in Reg. § 1.956-1(e)(1)(4). (Preamble to Prop Reg 06/23/2008)

Illustration: Applying the facts from Illustration (1), the results are as follow under the temporary regs. The US2 stock acquired by CFC in the exchange constitutes U.S. property under Reg. § 1.956-1T(e)(6)(ii) because CFC acquires the US2 stock from US2, the issuing corporation. Therefore, because CFC's basis in the US2 stock is determined under Code Sec. 362(a), then for purposes of Code Sec. 956, CFC's basis in the US2 stock is, under Reg. § 1.956-1T(e)(6)(iii) no less than $90 million, the fair market value of the property exchanged by CFC for the US2 stock (the $10 million of CFC stock issued in the exchange does not constitute property for purposes of Reg. § 1.956-1T(e)(6)(iii)). Under Reg. § 1.956-1T(e)(6)(iv), for purposes of Reg. § 1.956-2(d)(1)(i)(a), CFC is treated as acquiring its basis of no less than $90 million in the US2 stock at the time of its transfer of property to US2 in exchange for the US2 stock. The result would be the same if, instead of CFC transferring $90 million of cash to US2 in the exchange, CFC assumes a $90 million liability of US2. Reg. § 1.956-1T(e)(6)(vi), Example 1.

Effective date. The temporary regs apply to U.S. property acquired in exchanges occurring on or after June 24, 2008. No inference is intended as to the basis of U.S. property acquired by a CFC pursuant to a comparable transaction occurring before that date. IRS may, where appropriate, challenge such pre-June 24 transactions under applicable provisions or judicial doctrines. (Reg. § 1.956-1T(f), Preamble to TD 9402, 06/23/2008)

IRS increases mileage rate

Business standard mileage rate increases for last half of 2008 - other rates also rise

Mike Habib, EA

IRS has announced that the optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) will increase 8¢ from 50.5¢ to 58.5¢ per mile for business travel from July 1, 2008 to Dec. 31, 2008 to better reflect the real cost of operating an auto in this period of rapidly rising gas prices. The rate for using a car to get medical care or in connection with a move that qualifies for the moving expense will also increase 8¢ for the last half of 2008 from 19¢ to 27¢ per mile.

Observation: IRS's increase in the business standard mileage rate is undoubtedly a result of recent pressure brought to bear on IRS to take action to relieve taxpayers suffering from skyrocketing gas prices (see Newsstand e-mail 6/18/08). On June 11, 2008, Senator Norm Coleman (R-MN) sent a letter to IRS Commissioner Shulman, requesting that IRS increase the 2008 standard mileage rates to better reflect the high cost of travel. Coleman noted that in the past, in 2005, IRS raised the standard mileage rates for the last four months of the year, rather than waiting until year-end, due to a large increase in gas prices. Earlier, on June 6, 2008, National Treasury Employees Union (NTEU) President Colleen Kelley also wrote to Commissioner Shulman, on behalf of federal government employees, asking him to consider making a mid-year adjustment to the 2008 standard mileage rates.

Observation: The plight of taxpayers suffering from ever increasing gas prices has not been ignored by legislators. On May 19, 2008, Sen. Charles Schumer (D-NY) introduced a bill in the Senate, S. 3032, the “Reimburse Our American Drivers (ROAD) Act of 2008,” that would temporarily increase the standard mileage rate to 70¢ per mile on travel for business, medical, and moving expense-related purposes. Federal employees would also be allowed to use this rate. The rate would be in effect during all of 2008. The legislation has been referred to the Senate Finance Committee for consideration.

Observation: As the gas prices at the pump continue to rise at a record breaking pace, it is questionable whether the additional 8¢ per mile will provide significant relief to taxpayers, or turn out to be a matter of too little too late.

Background. The mileage allowance deduction replaces separate deductions for lease payments (or depreciation if the car is purchased), maintenance, repairs, tires, gas, oil, insurance and license and registration fees. The taxpayer may, however, still claim separate deductions for parking fees and tolls connected to business driving. (Rev Proc 2007-70, Sec. 5.04) IRS generally adjusts the standard mileage rate annually, based on a yearly study of the fixed and variable costs of operating an automobile.

Employers that require employees to supply their own autos may reimburse them at a rate that doesn't exceed the business mileage allowance for employment-connected business mileage, whether the autos are owned or leased. (Rev Proc 2007-70, Sec. 9.01) Additionally, an employee's personal use of lower-priced company autos may be valued at the optional mileage allowance if the conditions specified in Reg. § 1.61-21(e)(1) are met.

A separate rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction. (Rev Proc 2007-70, Sec. 7.02) The mileage rate for driving an auto for charitable use (14¢ per mile) is a statutory rate that's not adjusted for inflation. (Rev Proc 2007-70, Sec. 7.01)

When the new rates are effective. The revised standard mileage rates in Ann. 2008-63 apply to deductible transportation expenses paid or incurred for business, medical, or moving expense purposes on or after July 1, 2008, and to mileage allowances that are paid both (1) to an employee on or after July 1, 2008; and (2) with respect to transportation expenses paid or incurred by the employee on or after July 1, 2008.

However, the standard mileage rates in Rev Proc 2007-70, 2007-50 IRB 1162, continue to apply to deductible transportation expenses paid or incurred for business, medical, or moving expense purposes before July 1, 2008, and to mileage allowances paid: (1) to an employee before July 1, 2008, or (2) with respect to transportation expenses paid or incurred by the employee before July 1, 2008. All other provisions of Rev Proc 2007-70 remain in effect. (Ann. 2008-63)

As Seen On TV

TV ads and TV Tax Relief Commercials claiming "Pennies On The Dollar" Tax Settlements - As Seen On TV

Mike Habib, EA

Many Tax Relief and Tax Negotiation firms advertise on TV claiming that they can settle your tax debt for "pennies on the dollar". Now, you, as a taxpayer must be informed of what options you have and should research these firms at the Better Business Bureau www.BBB.org

Here is our Customer BEWARE REPORT on certain Tax Negotiation Companies that advertise on TV claiming "pennies on the dollar" tax settlements.

Customer…Beware!

How To Keep From Getting Ripped Off?

Many “Tax Negotiation” companies out there will absolutely rip you off. These unscrupulous firms will take your money regardless of whether they can help you or not. They'll lie to you and tell you they can get all the penalties and interest wiped out. They'll lie to you and tell you they'll settle with the IRS for "pennies on the dollar" when they know damn well you don't possibly qualify for the Offer in Compromise program.

How do they get away with this? Easy, most of the people you talk to at these unscrupulous firms are sales representatives. They have NO license to protect. You don't actually speak to the EA (Enrolled Agent), the CPA (Certified Public Accountant) or the attorney that these firms claim to have. Nope, you speak to some slimy unlicensed salesman. Some of these firms make up titles like Tax Resolution Specialist, or Tax Consultant. What a scam! In fact, many of these unscrupulous firms aren't tax firms or law firms at all, they’re just sales organizations!

We NEVER take on any client that we don't believe we can truly help. But, I absolutely guarantee you that 90% of the unscrupulous tax negotiation firms that advertise on TV and the internet would take any client and their money regardless of whether they could help them or not. And that stinks!

So, what should you do?

1) Always speak with the “licensed representative” who is on the Power of Attorney, that will actually represent you, usually the principal / owner of the firm,

2) Stay away from any firm/website that doesn't clearly give the names and bios of the licensed representative (Enrolled Agents, CPAs & Attorneys),

3) Ignore guarantees, promises and so-called testimonials. They're nothing more than meaningless hype; instead check the Better Business Bureau rating – A MUST!

4) Ask tough questions. If the answers don't make sense, don't hire the firm. What kind of tough questions? Are you an EA, CPA or attorney? When they say, "I'm a tax resolution specialist", ask them, is that a State or Federal license?

5) Finally, use your good common sense. You know when something isn't right. You work too hard for your money to give it away to some slime ball that makes promises you know he can't keep. Only deal with someone who is “Licensed” and who “Specialize” is Tax Resolution.

Don’t get ripped off! Do the right thing-hire a Licensed Representative!

Compliments of: Mike Habib, EA http://www.myirstaxrelief.com/

State Employment Tax Changes

Recap of recent state employment tax laws, developments, and changes taking effect in July

Several states and localities are making employment tax changes that take effect in July. In addition, several new employment tax laws and developments have occurred recently. Here are some of the highlights from the following states:

Alabama
Unemployment. Effective for benefit years beginning after July 5, 2008, a claimant must serve a one-week waiting period prior to receiving unemployment benefits. The maximum weekly benefit will also increase from $235 to $255 [L. 2008, H427].

California
Employment Taxes. A state of emergency was declared on June 12th in the following counties: Sacramento, San Joaquin, Stanislaus, Merced, Madera, Fresno, Kings, Tulare, and Kern, due to the drought. Affected employers may request up to a 60-day extension of time to file their state payroll reports and deposit state payroll taxes with the Employment Development Department (EDD). All requests will be evaluated on a case-by-case basis. For further information, contact the Taxpayer Assistance Center at (888) 745-3886 [EDD Announcement, 6/13/2008].

Wage and Hour. The California Court of Appeal has ruled that an employee who received a premium holiday pay rate for work performed on Labor Day, and who worked 12 hours on Labor Day and 60 hours during the week, was only entitled to overtime based on her regular pay rate. The employer is entitled to credit the time-and-a-half premium pay on holidays against otherwise earned overtime [ Advanced-Tech Security Services, Inc. v. Superior Court, Cal. Ct. App., Second App. Dist., Division Five, Dkt. No. B205186, 6/3/08].

Colorado
Unemployment. The Colorado Department of Labor & Employment (DLE) reminds employers to review adjustments to their account on line 15 of Form UITR-1, Unemployment Insurance Tax Report (Tax Report), before determining their tax payment for the quarter [DLE UI Quarterly News, 2nd Quarter 2008].

Connecticut
Employment Taxes. The state is setting up a joint task force on worker misclassification issues (i.e., employee vs. independent contractor) [L. 2008, H5113].

Unemployment. New registration requirements go into effect for professional employer organizations (PEOs), beginning in 2009 [L. 2008, H5113].

Wage Payment. Effective Oct 1, 2008, wage deductions are permitted for contributions that are attributable to automatic enrollment in IRC §401(k), 403(b), 408, 408A, or 457 retirement plans [L. 2008, S157].

District of Columbia
Time Off. Effective Nov. 13, 2008, all Washington, D.C. employers must provide paid leave for illness and absences associated with domestic violence, sexual abuse, or stalking of employees or their family members [D.C. Register, Vol. 55, No. 21, 005886, 5/23/08; DC Law 17-152, 5/13/08].

Idaho
Wage and Hour. Effective July 1, state employees who do not qualify for the executive exemption under Idaho law, or the administrative or professional exemption under federal law, and state employees not designated as exempt under any other complete exemption in federal law, are eligible for overtime compensation.

Illinois
Wage and Hour. The minimum wage rate will increase from $7.50 per hour to $7.75 per hour on July 1.
Iowa
Wage and Hour. Effective July 1, the following enterprises are exempt from Iowa minimum wage rules, regardless of whether sales are $300,000 or more: (1) enterprises engaged in the business of laundering, cleaning, or repairing clothing or fabrics; (2) enterprises engaged in construction or reconstruction; (3) hospitals and schools; and (4) public agencies.

Indiana
Wage Payment. A federal court has ruled that store managers who were no longer employed by a company were not entitled to unpaid bonuses, since one contingency for receiving the bonuses was continued employment. The bonuses did not qualify as wages under either Indiana wage payment or wage claim statutes because of the contingency [ Harney v. Speedway SuperAmerica, LLC, CA7, Dkt. No. 07-3488, 5/30/2008].

Withholding. Indiana law requires the withholding of adjusted gross income tax and local option income tax from a pension distribution, if the payee requests withholding. The withholding request must be made in writing and should include the payee's Indiana county of residence [Indiana Information Bulletin IT13, 06/01/2008].

Kansas
Withholding. Effective July 1, employers with an annual total withholding tax liability of over $45,000 (before July 1, over $100,000) may be required to remit taxes by electronic funds transfer [Kan. Stat. Ann. §75-5151, as amended by L. 2007, H2434, §13].

Unemployment. Wage reports, contributions returns, and payments due after June 30, 2008, must be filed electronically by employers with 250 or more employees, and third-party administrators with 250 or more client employees.

Kentucky
Wage and Hour. The minimum wage rate will increase from $5.85 per hour to $6.55 per hour on July 1.
Massachusetts
Wage and Hour. Effective July 13th, treble damages will be awarded for all wage and hour violations, even if there was no “willful misconduct” by the employer.

Maryland
Time Off. The Flexible Leave Act amends the state's family leave provisions, effective Oct. 1, 2008. The provision will apply to employers with 15 or more employees working in the state. Employers will not only be able to allow employees to take “leave with pay” for the birth or adoption of a child, but also to care for a spouse, child, or parent. “Leave with pay” includes sick leave, vacation time, and compensatory time. In cases where an employee earns more than one type of leave, the employee may elect the type and amount of paid leave to be used [L. 2008, H40].

Minnesota
Withholding. Effective beginning after Dec. 31, 2008, payments to independent contractors are subject to state backup withholding if they are subject to federal backup withholding. Previous legislation that required third-party bulk filers to withhold from independent contractors was deleted before the provision took effect [L. 2007, H3149].

Mississippi
New Hire Reporting. Beginning in July, certain employers, third-party employers, contractors, and subcontractors will be required to register and use the federal Department of Homeland Security E-Verify program for all new hires. Required compliance is phased in through July 2011, based on the number of employees.

Michigan
Wage and Hour. The minimum wage rate will increase from $7.15 per hour to $7.40 per hour on July 1.
Montana
Unemployment. Effective July 1, the administrative fund tax for governmental experience-rated employers is 0.09% of total wages.

Nevada
Employment Taxes. The Nevada Tax Commission has approved a tax amnesty program that calls for waiving interest and penalty on certain tax liabilities, including the modified business tax (on payroll). The program is scheduled to start on July 1, 2008, and end on Sept. 30, 2008. To be eligible for amnesty, a business or taxpayer must be in full compliance with state law and pay the entire tax due by the end of the amnesty period. The Nevada Department of Taxation is in the preliminary stages of developing specific guidelines and requirements for the program [ Nevada Press Release, 6/2/08].

Unemployment. Effective July 1, all unemployment tax payments of $10,000 or more (including interest and penalties) must be remitted electronically.

Wage and Hour. Effective July 1, the state minimum wage will increase to $5.85 per hour for employees who receive qualified health benefits, and to $6.85 per hour for all other employees.

New Jersey
Withholding. Employees are allowed to exclude certain employer-provided commuter transportation benefits from their taxable gross income, up to a maximum amount that is adjusted annually for inflation. The maximum amount for 2008 is $1,440, up from $1,410 for 2007. Amounts in excess of $1,440 must be included in an employee's gross wages on Form W-2 or other written statement [Div. Tax. Notice of Employee Commuter Transportation Benefit Limits, 06/02/2008].

Oklahoma
Withholding. A federal district court has suspended the enforcement of a statute that required contractors to withhold from workers who could not produce federal documents showing that they were authorized alien labor. The court found the Oklahoma law to be an attempt to regulate behavior, not to impose a new tax. The injunction continues until the merits of the case are finally decided [Chamber of Commerce of the U.S.A. v. Henry, DC OK, Dkt. No. CIV-8-109-C, 6/4/2008].

The governor has signed into law a tax amnesty bill. A taxpayer will be entitled to a waiver of penalty, interest, and other collection fees due on eligible taxes (including withholding taxes), if the taxpayer voluntarily files delinquent tax returns and pays the taxes due during the compliance initiative. The program is scheduled to take place from Sept. 15 until Nov. 14, 2008 [L. 2007, S2034 (c.395), §1].

Oregon
Time Off. The state Supreme Court has ruled that while employers are required to provide minimum rest breaks as per Or. Admin. R. § 839-020-0050(1)(b) , violations do not give rise to a wage claim for additional wages [Gafur v. Legacy Good Samaritan Hosp. & Med. Ctr., Or. Sup. Ct., Dkt. No. SC055175, 5/15/08].

Pennsylvania
Withholding. Effective July 1 through Dec. 31, 2008, Philadelphia tax rates are reduced to 3.98% for residents and 3.5392% for nonresidents. The tax rate that should be used is the rate in effect on the date that the taxable compensation is actually paid to the employee. For example, wage tax on a paycheck dated July 1, 2008, for wages paid for the period from June 16 to June 30, 2008, should be withheld at the rate in effect as of July 1, 2008 [Philadelphia Bill No. 080161, 05/22/2008; Important Notice: Wage Tax Rate Reduction, Philadelphia Dept. of Rev., 06/04/2008].

South Carolina
New Hire Reporting. New legislation requires all employers to verify the employment eligibility of new hires beginning as early as Jan. 1, 2009 [L. 2008, H4400].

Withholding. Effective June 4, 2008, withholding agents must withhold 7% state income tax on compensation paid to an individual that was reported on Form 1099, if the individual: (1) fails to provide a taxpayer identification or Social Security number; (2) fails to provide a correct taxpayer identification or Social Security number; or (3) provides an IRS-issued taxpayer identification number issued for nonresident aliens. There are exceptions to this rule [S.C. Code Ann. §12-8-595, as amended by L. 2008, H4400].

Texas
Unemployment. The state has begun mailing checks to experience-rated employers eligible to receive the surplus tax credit [TWC Tax Department Tip of the Month, June 2008].

Vermont
Withholding. Effective July 1, the state may grant EFT filers up to six additional days for payment (prior to that, four additional days).

Virginia
Withholding. The Virginia Supreme Court has ruled that the requirement in Va. Code Ann. § 58.1-1815 to “truthfully account for and pay over such tax” is violated by one who willfully fails either to “account for” or “pay over” the tax. Therefore, a criminal penalty could be assessed against a person who failed to pay his withholding tax obligation, even though he had truthfully accounted for the obligation [Gibson v. Cmwth. of Virginia, Va. Sup. Ct., Dkt. No. 072023, 6/6/2008 ].

West Virginia
Withholding. A business registration certificate may be revoked for repeated, willful refusal to remit state withholding taxes when due [West Virginia Administrative Decision 08-052 F, 06/08/2008].

Wage and Hour. The minimum wage rate will increase from $6.55 per hour to $7.25 per hour on July 1.
Wisconsin
Withholding. Wisconsin will follow federal rules that require “disregarded entities” to pay their own employment taxes and file their own employment tax reports, beginning with wages paid in 2009. As an “employer,” a disregarded entity must obtain a Wisconsin employer identification number [Wisconsin Dept. Rev. Tax Bulletin 156, 04/01/2008].

The state has issued a tax release that clarifies the circumstances under which “public speaking services” are subject to Wisconsin's nonresident entertainer prepayment law [Wisconsin Dept. Rev. Tax Bulletin 156, 04/01/2008].

Wyoming
Unemployment. Effective July 1, 2007, employers were required to submit “Wyoming Employee Wage Listings” as part of their quarterly reporting responsibilities. Beginning in 2009, the state may increase an employer's tax rate by a 2% penalty rate if the employer has failed to submit the wage listing [Wy. Quarterly Connection, 1st Qtr. 2008].