| about the Author |
 Johanne has over 27 years of professional experience and serves as a Senior Tax Manager in the Denver office of HEIN & ASSOCIATES LLP. She specializes in assisting both public and private companies with state and local tax compliance including income/franchise tax, sales/use tax, and property tax. She also provides assistance with federal and international compliance and audits, as well as accounting methods, consolidated return issues, R&D tax credits, and current and deferred taxes (FAS 109). In addition, Johanne is experienced with tax outsourcing and large C corporation compliance, as well as S corporation and partnership transactions.
Johanne has developed a focus in the technology, manufacturing, distribution, transportation, and entertainment industries. She also taught as an adjunct professor in the graduate tax program at the University of Central Florida. Prior to joining HEIN & ASSOCIATES LLP, Johanne was a Senior Tax Manager with Ennis, Pellum and Associates and with Ernst & Young LLP. She received her bachelors degree in accounting from Suffolk University and her masters of taxation from Bentley College.
Johanne can be reached at 303.298.9600 or jhakey@heincpa.com.
|
Additional Newsletters
www.heincpa.com
|
|
Recent IRS Developments
By Johanne Hakey, CPA, Senior Tax Manager
As the tax law becomes increasingly complex and individuals and businesses plan to reduce taxes as much as possible, the Internal Revenue Service (IRS) tries to stay one step ahead. Following are some recent IRS developments and activities.
- Use of Cell Phones. Last summer, the IRS requested comments on ways to satisfy record keeping requirements for employer-provided cell phones. They noted that there had been a law on the books for nearly 20 years that required employees who use company-provided cell phones for personal use to include the value of the personal use in income. However, the law had never been followed or enforced because of the paperwork required by both employers and employees to account for personal calls and work calls.
In the notice, the IRS set forth three possibilities for solving the cell phone problem. The first would simply divide usage of the phone 75%/25% between business and personal use. Thus, 25% of the charge would be treated as taxable income to the employee. Under the second possibility, if an employer receives proof from an employee that he/she has a personal cell phone to use for personal calls while working, then none of the charges for the employer-provided phone would be taxable. The third option would allow employers to use statistical sampling to determine the average use of employer-provided cell phones for personal calls and then to apportion the costs accordingly.
Shortly after publication of the notice, the IRS Commissioner stated, "The passage of time, advances in technology, and the nature of communication in the modern workplace have rendered this law obsolete." This view was echoed by others in the administration. The issue remains on the table since the 1989 law is still on the books but, for now, you can feel safe in continuing to ignore it – a very unusual position in the tax law.
- Employee versus Independent Contractor. The issue of whether an individual is an employee or an independent contractor is a hot topic for income tax purposes. If the individual is categorized as an employee, the employer will be required to pay the employer’s share of payroll taxes and withhold income taxes. If the individual is an independent contractor, these burdens do not fall upon the payor, and the worker must pay his own FICA and other taxes. This has historically been an area of dispute between the government and many small and mid-sized businesses.
In a recent notice, the IRS posted a document on its website providing answers to questions that may arise after it determines that an individual is an employee rather than an independent contractor. The questions deal with such issues as: Has the employee filed a tax return? Has the employee reported the Form 1099 income from the work? Have the FICA taxes been paid? And, does the employee need to file an amended return? The notice addresses a number of other important issues as well.
- Ponzi Scheme Developments. Thousands of individuals have been victimized this year by a number of huge Ponzi schemes. While the Madoff scheme dwarfs all of them, the economic downturn has brought others to the forefront because Ponzi operators do not have the cash to pay old investors with cash from new investors.
Shortly after Madoff pled guilty in the spring of 2009, the IRS issued detailed guidance for victims of Madoff-type investment schemes. The rules set forth safe harbors that a qualified investor could use to determine the proper time and amount of his/her individual loss and its deductibility. Under these rules, qualified investors in the schemes include individuals, partnerships, LLCs and certain other persons.
Questions have arisen, however, concerning indirect investors. An IRS Information Letter observes that most hedge funds are organized as partnerships. Like other losses, the theft or Ponzi losses a partnership incurs are determined at the entity or partnership level, and losses flow out of the partnership on Schedule K-1, so indirect investors of this type are covered by the general rules concerning direct investors. With respect to IRAs and other tax-deferred vehicles, the IRS guidance indicates that the individual owning the IRA is not eligible for the safe-harbor loss benefit unless the individual has tax basis in the IRA by making after-tax contributions to the IRA.
- Goodwill and Section 1031. Persons who would like to exchange business assets and defer gain on the exchange have long been aware of the IRS’ restrictive view of which assets may be eligible for tax-free exchange treatment. While the general rule of Code Section 1031 defers gain or loss recognition when property held for productive use in a trade or business is exchanged for like-kind property, the IRS has historically taken the position that goodwill is never like-kind property eligible for the tax favored treatment.
In two rulings, the IRS adopted what may best be described as an "expansive" definition of goodwill for tax-free exchange purposes. This definition characterizes certain intangibles, other than goodwill or going concern value — e.g., trademarks, trade names, advertiser accounts, subscriber lists and mastheads — as goodwill, thereby making those assets automatically ineligible for tax-free exchange treatment. The rulings state that these items are so closely related to goodwill, they could not be distinguished from goodwill.
However, in a recent Chief Counsel Advice (CCA), the IRS reversed course completely. In an unusual move, the CCA said that intangibles such as trademarks, trade names, mastheads and customer-based intangibles that can be separately described and valued apart from goodwill, qualify as like-kind property under Section 1031. Moreover, the CCA said that, except in rare cases, the foregoing listed items can be valued separately from goodwill. This represents a "new" category of assets that may qualify for tax-free treatment.
- Season Ticket Rights. In a recent memorandum, the IRS concluded that it cannot seize and sell a taxpayer’s nontransferable right to renew season tickets for a future season because it was not property or a right to property under state law. However, an IRS levy could reach the taxpayer’s deposit paid in exercising the renewable ticket rights.
In this particular memorandum, the individual at issue held 16 season tickets. The tickets had two components: (1) the tickets for the particular season and, (2) the ability to renew for later seasons. The ticket holder was charged a deposit per seat each season as a personal seat license. The issue for analysis was whether either of these components constituted "property." If they were property, the IRS could seize them.
The IRS had to look to several bankruptcy cases to resolve this issue. Bankruptcy courts have held that a renewal right is merely a revocable license and not a property right that can be sold. Most teams have substantial restrictions on the transfer of season ticket renewals by the holders. The IRS memorandum says that if the restrictions on the transfer of season tickets are not substantial, then the right might be a property interest that can be seized.
Other articles in this newsletter:
Your Audit Risk
Legislative Possibilities
|
1st Quarter, 2010
