It is hard to believe only three months remain in my term as chair of the Tax Section. It has been a rewarding experience, and I look forward to continuing to serve our section over the remainder of the 2016-2017 bar year.
The past few months have been busy for the section. In November, we held our second Tax Section Council meeting of the year at the Elon School of Law in Greensboro. In conjunction with that meeting, we held our annual meeting with IRS representatives jointly with members of the Tax Committee of the North Carolina Association of Certified Public Accountants (NCACPA). The meeting gave attendees an opportunity to learn about IRS Field Collections initiatives aimed at increasing employment tax compliance and current areas of focus of Taxpayer Advocate Services.
Section 212(3) of the Code provides in pertinent part: “In case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in connection with the determination, collection, or refund of any tax.”
The reach of the above provision is very broad. The deduction is available whether the taxing authority is the United States, a state, a municipality or a foreign country. “Any tax” is all encompassing and includes income, estate, gift, excise, property, sales and use, and any other taxes. As stated in Treas. Reg. § 1.212(l): “Thus, expenses paid or incurred by a taxpayer for tax counsel or expenses paid or incurred in connection with the preparation of his tax returns or in connection with any proceedings involved in determining the extent of tax liability or in contesting his tax liability are deductible.” Such expenses or professional fees include, among others, the preparation costs of a request for a private letter ruling or appraisal fees to determine the amount of a casualty loss deduction or a charitable contribution deduction. Thus, it does not have to be a contested tax situation to qualify – the expense only needs to arise “in connection with the determination of any tax.” See Carpenter v. United States, 338 F.2d 366 (Ct. Cl. 1964) (where taxpayer incurred legal expenses in ascertaining that substantial support payments to his former wife constituted taxable alimony to her and therefore were deductible by him). Also, it does not matter whether the taxpayer is successful in contesting the purported tax liability; he can lose the controversy with the taxing authority and still deduct the related expenses.
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This is the first of two installments of this article. The second installment will appear soon on the Tax Section’s blog.
I. Audit Statistics; What Are Your Chances of Being Audited?
In early 2016, the IRS published its 2015 Internal Revenue Service Data Book (IR-2016-52), which contains audit statistics for the fiscal year ending September 30, 2015. Here are the audit statistics for returns filed in calendar year 2014 (“CY 2014”):
As I write this, the inaugural post for our section’s blog, much of eastern North Carolina is beginning the long process of recovering from the heavy rains brought by Hurricane Matthew. Early maps depicting alternate possible paths for the storm reflected the uncertainty that is characteristic of hurricanes—lines of various colors veering in different directions with only a slightly discernible pattern. Uncertainty has been a theme in 2016 in many respects, including economically and, with the November elections looming, politically.
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Late last year, Congress enacted Section 506, which requires any organization seeking to operate as a tax-exempt social welfare organization pursuant to Section 501(c)(4) to register with the IRS within 60 days of formation. Failure to do so exposes the organization to a penalty of $20 per day, up to a maximum of $5,000. Late filings may, however, be excused for reasonable cause.
The new section was adopted as part of the Protecting Americans from Tax Hikes Act (“PATH Act”), which the President signed into law on Dec. 18, 2015. Public Law 114-113, Dec. 18, 2015. It applies only to social welfare organizations established after Dec. 18, 2015 and social welfare organizations formed before that date if they have not previously filed (i) an application with the IRS (Form 1024) requesting a formal determination of tax-exemption under Code Section 501(c)(4) or (ii) at least one annual report on IRS Forms 990, 990-EZ, or Form 990-N.
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North Carolina Property Tax Commission Case No. 13 PTC 822 (March 20, 2015) North Carolina Court of Appeals 786 S.E.2d 816 (N.C.App. 2016)
County tax assessors sometimes contend a commercial or industrial property is a “special purpose” property and, on that basis, determine there is no market evidence that bears on the ad valorem value of the property. Such a position often leads the assessor to value the property without use of a comparable sales approach, resulting in values substantially in excess of actual market sales. How can a property owner successfully challenge a county tax office’s classification of commercial or industrial property as a special purpose property and win the resulting valuation challenge? A recent decision from the North Carolina Court of Appeals provides a detailed look at one successful effort.
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