Section 6501 provides the statute of limitations for the IRS to assess additional tax. Equally important is Section 6502, which provides the statute of collections (sometimes referred to as the collection statute expiration date or “CSED”). The statute of collections generally provides the IRS must collect a tax within 10 years of assessment.
The CSED permits a tax to be collected by levy or a court proceeding only if the levy is made or the proceeding had begun before the CSED. Section 6502(b) provides the date on which a levy is made is the date the notice of seizure is provided to the taxpayer as required by Section 6335(a). As to a seizure that is made by court order, the proceeding begins upon the filing of the IRS’s suit against the taxpayer. The statute of collections does not expire after the proceeding is concluded until the tax is satisfied or the judgment becomes unenforceable. Thus, the CSED cannot be used to defeat the IRS’s right to collect a judgment entered by a court.
Section 529 provides for the creation of qualified tuition programs, better known as 529 Plans. These programs are tax-advantaged investment vehicles through which parents can save for their family’s tuition needs. 529 Plans are required by Section 529(b)(1) to be established and maintained by a state or agency or instrumentality thereof or by eligible educational institutions. Most 529 Plans are established and maintained by a state. Many states have more than one 529 Plan. Some states provide state income tax deductions for residents who contribute funds to the state’s 529 Plan.
If the requirements of Section 529 are met, no distribution or earnings under a 529 Plan are included in the gross income of either the designated beneficiary or the contributor of the plan. Thus, 529 Plans are excellent vehicles for building tax-free educational savings. Contributions to a 529 Plan are treated as a completed gift to the beneficiary on that date of the gift. Moreover, Section 529(c)(2)(B) allows for front-loading of gifts to a 529 Plan of five years of annual exclusion gifts, which are treated as if made ratably over the five-year period commencing with the year of the gift. The current annual exclusion is $17,000 per person. That means an individual can gift up to $85,000 to a 529 Plan in year 1, and a married couple can gift up to $170,000 in year one. The goal of the provision is to allow greater than annual exclusion gifts up-front to provide adequate time for investments to grow tax-free prior to the student needing funds. Finally, 529 Plan assets are not included in the gross estate of an individual except where amounts are distributed on account of the death of a beneficiary or where a donor makes an up-front five-year gift and dies before the end of the five-year period. In such case, the gross estate of the donor includes the portion of the contributions allocable to periods after the death of the donor.
When originally enacted, Section 529 allowed for tax-free distributions only where such distributions were for a qualified higher education expense, which was limited to college or university-related expenses. However, the 2017 Tax Cuts and Jobs Act expanded qualified higher education expenses to include elementary and secondary school tuition. However, Section 529(e)(3) provides an annual $10,000 limit on distributions made for elementary and secondary school education tuition. Qualified higher education expense also includes distributions to make payments on educational loans. However, there is a $10,000 total limit on such distributions.
Often there is a need to change the designated beneficiary of a 529 Plan because either the original designated beneficiary completed her education, chose not to pursue qualifying education, or otherwise did not fully utilize the funds invested in the 529 Plan. Changing the designated beneficiary of a 529 Plan is not a taxable gift provided the new beneficiary is of the same or higher generation as the old beneficiary (as determined in accordance with Section 2651), and the new designated beneficiary is a member of the family of the previous beneficiary. Member of a family is defined broadly to include spouses, children, brothers and sisters, parents, nieces and nephews, uncles and aunts, in-laws, and first cousins.
John G. Hodnette is an attorney with Johnston, Allison & Hord in Charlotte.
I. Shareholders of Bankrupt S Corporation Failed to Abandon Their Stock; Yaguda v. Commissioner, TC Summary Opinion 2022-21.
Mr. and Mrs. Yaguda owned stock of EFI, Inc., an S Corporation. In 2008, a creditor forced EFI into involuntary bankruptcy. Later that year, EFI’s case was converted to a voluntary Chapter 11 bankruptcy proceeding. In addition, during 2008, Mr. Yaguda’s ownership interest in EFI was transferred to a receivership created by the California Superior Court as a result of criminal proceedings initiated by California against Mr. Yaguda.
During 2015, EFI began selling its assets to raise funds for payment to its creditors. EFI issued a Form K-1 for 2015 reporting Mr. and Mrs. Yaguda had over $97,000 of distributive pass-through income. However, when Mr. and Mrs. Yaguda filed their income tax return, they failed to include any pass-through amounts from EFI on the basis they did not derive any personal benefit from the business activities of EFI during the year, since all of the liquidating sales proceeds went to the payment of EFI’s creditors.
A payment for an option to purchase property is not a taxable event to either party upon the grant of the option. See Virginia Iron Coal & Coke Co. v. Commissioner, 99 F.2d 919 (1938); Rev. Rul. 58-234; and Fed. Home Loan Mortg. Corp v. Commissioner, 125 T.C. 248 (2005). That is because it is unknown whether the option will ultimately be exercised. In general, as discussed in Virginia Iron Coal, the tax system generally operates on a yearly basis. However, in some circumstances, that is not possible, such as where an option payment is received in year 1 for an option to purchase property in year 2. It is unknown in year 1 whether the option will ultimately be exercised. Therefore, it is impossible to determine in year 1 how the payment should be treated. The transaction is treated as open until it is resolved.
https://ncbarblogprod.wpengine.com/wp-content/uploads/2018/06/Blog-Header-1-1030x530.png00TAXhttps://ncbarblogprod.wpengine.com/wp-content/uploads/2018/06/Blog-Header-1-1030x530.pngTAX2023-04-06 13:14:202023-04-06 13:14:20Taxation of Options to Purchase Property
Section 6104(d)(1)(B) provides a right to taxpayers to request the application for tax exemption and annual informational returns for the last three years of any organization described in Section 501(c) or (d) and exempt from taxation under Sections 501(a) or 527(a). That covers both public charities and private foundations exempt under Section 501(c)(3), as well as other types of tax-exempt organizations.
Reg. § 301.6104(d)-1(d)(2) provides such tax-exempt entities must honor a written request for the documents required to be provided under Section 6104(d) provided the request (a) is addressed to, and delivered by mail, electronic mail, facsimile, or provide delivery service to a principal, regional, or district office of the organization, and (b) sets forth the address to which the copy of the documents should be sent. The charity, pursuant to Reg. § 301.6104(d)-1(d)(3), may require a reasonable fee for providing such copies. Pursuant to Reg. § 301.6104(d)-1(d)(2)(ii)(A), the charity must send the documents within 30 days of the date it receives the request or, if the charity requires payment in advance for the costs associated, 30 days from the date it receives such payment. If the individual making the request consents, the tax-exempt organization may provide the requested document exclusively by electronic mail.
Section 1377(a)(1) generally provides each shareholder of an S corporation is allocated income or loss of the corporation by (a) assigning an equal portion of each item of income or loss to each day of the year, and (b) dividing that portion pro rata among the shares outstanding on that day. For example, if there is $365 of taxable income for the year, $1 of income is allocated to each day. That $1 is allocated among the shareholders pro rata based on stock ownership on that day.
https://ncbarblogprod.wpengine.com/wp-content/uploads/2018/06/Blog-Header-1-1030x530.png00TAXhttps://ncbarblogprod.wpengine.com/wp-content/uploads/2018/06/Blog-Header-1-1030x530.pngTAX2023-02-28 09:44:122023-02-28 09:44:12Section 1377(a)(2) Elections for S Corporations
Section 401(a)(9) requires annual minimum distributions from traditional IRAs beginning in the year the owner of the account attains age 72 or, if later, the year in which the person retires. These minimum distributions trigger income taxes at ordinary income rates where otherwise the recipient may wish not to receive distributions. Fortunately, for those who are charitably minded, the Code provides a mechanism whereby retired individuals can support charities of their choice and also minimize the income taxes caused by required minimum distributions.
This is the last of three installments of this article.
I. Bookkeeper Falls Victim to Section 6672 Trust Fund Recovery Penalty; Kazmi, TC Memo 2022-13.
In Kazmi, a bookkeeper was found liable for the Section 6672 trust fund recovery penalty. The facts of this case are particularly sad.
The bookkeeper, Mr. Kazmi, worked part-time at an hourly rate for an urgent care medical practice. He had no ownership interest in the practice, nor was he an officer or director. Mr. Kazmi was not listed as an authorized signatory on any of his employer’s bank accounts. He did not have any check signing authority nor any authority to direct payments to the employer’s creditors. Unfortunately, Mr. Kazmi did handle all payroll functions. Because he transmitted payroll tax returns and made federal tax deposits for his employer when he was aware withheld taxes had not been remitted to the IRS, he was responsible for the trust fund recovery penalty.
The Tax Cuts and Jobs Act of 2017 capped the deduction available to individual taxpayers under Section 164 to $10,000 for 2017 through 2025. That deduction includes state income taxes, real property taxes, and personal property taxes. To benefit taxpayers who own partnerships or S corporations, many states have enacted elective pass-through entity (“PTE”) taxes that allow the entity to pay the owners’ state income taxes at the entity level. That is significant because Congress explicitly stated the $10,000 limitation does not apply to pass-through entities.
https://ncbarblogprod.wpengine.com/wp-content/uploads/2018/06/Blog-Header-1-1030x530.png00TAXhttps://ncbarblogprod.wpengine.com/wp-content/uploads/2018/06/Blog-Header-1-1030x530.pngTAX2022-12-14 10:47:572022-12-14 10:47:57New North Carolina PTE Tax Can Reduce Federal Income Taxes
This is the second of three installments of this article.
I. Contemporaneous Written Acknowledgment Rules for Charitable Contributions of Aircraft and Vehicles; Izen vs. Commissioner (5th Cir. 2022).
Mr. Izen donated a 50% interest in an aircraft to a charitable organization. The Fifth Circuit Court of Appeals upheld the earlier decision of the Tax Court denying any charitable contribution deduction because the purported contemporaneous written acknowledgment (“CWA”) letter failed the strict requirements of Section 170(f)(8)(B). There are specific substantiation requirements when the subject of the gift is a vehicle or an airplane with a value in excess of $500. Under Section 170(f)(12)(B), the CWA from the donee organization must include the name and taxpayer identification number of the donor.
By 
By