This is the second of two installments of this article. Read the first installment on the Tax Section blog here.
I. No Tax Basis Increase for Loan Guaranties Even After the S Corporation Loan Is Called in Full.
An S corporation shareholder may deduct his/her pro rata share of any losses sustained by the corporation, but those loss deductions are limited to the sum of (a) the shareholder’s adjusted tax basis in the stock, and (b) any corporate indebtedness actually owed to the shareholder. IRC § 1366(d)(1).
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On Wednesday, March 7, the Tax Section Council met at the Mecklenburg County Bar Center in Charlotte, and so I wanted to give everyone an update on some of the things happening in our Section.
First and foremost, Kevin May and his CLE Committee have organized an outstanding CLE agenda for the 17th Annual North Carolina/South Carolina/Georgia Tax Section Workshop to be held May 25-27 in Kiawah Island, S.C. Below you will see a summary of the program agenda.
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This is the first of two installments of this article. Read the second installment here.
I. Audit Statistics; What Are Your Chances of Being Audited?
The 2016 Internal Revenue Service Data Book (IR-2017-69) contains audit statistics for the fiscal year ending September 30, 2016. Here are the audit statistics for returns filed for calendar year 2015 (“CY 2015”):
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Below are selected planning points regarding recent tax changes. This summary does not discuss which provisions are temporary and which are permanent.
A. Bunching Into One Year Charitable Contributions That Would Otherwise Be Made Over Several Years
The new tax law raises the standard deduction to $24,000 for married couples filing jointly. Only $10,000 of state income taxes and property taxes may be deducted. Many expenses that were previously deductible, including investment management expenses and employee expenses, are no longer deductible. Many individuals will now use the $24,000 standard deduction rather than itemizing deductions. Such a taxpayer will, in effect, lose the deductibility of charitable contributions. Some taxpayers may be able to mitigate that by making in a single year charitable contributions they would normally make over several years. Such a taxpayer may have itemized deductions exceeding $24,000 in the year in which charitable contributions are bunched.
Please provide comments about the issues below to Herman Spence at [email protected]. I will summarize the responses and post them on the Tax Section blog. I will not mention any individual’s response and will not provide the names of responders.
North Carolina Stamp Taxes
Background. GS § 105-228.29 provides the stamp tax does not apply if no consideration in property or money is paid by the transferee to the transferor. In an Attorney General’s opinion issued in 1973, a husband and wife were the sole shareholders of the corporation to which they conveyed a tract of land without consideration. The Attorney General determined stamp taxes were not due but emphasized there would be a contrary result if shares of stock were issued in consideration of the transfer of the property.
Transfer of real estate to an LLC upon the formation of the LLC. To avoid the issuance of an LLC interest upon the contribution of property and to avoid the implication of the 1973 Attorney General’s opinion, do you first organize the LLC and issue LLC interests and later separately contribute property to the LLC without consideration?
Conveyance of property to LLC in anticipation of sale. Is it reasonable to take the position no stamp taxes are due if property is transferred to a newly formed LLC shortly before the sale of the property, and the transaction is restructured as a sale of the LLC interests? If it is unreasonable to convey the property to an LLC immediately before the sale of the LLC interests, is it reasonable to contribute the property to the LLC when the sale of the property is expected but there is not yet a sales contract?
It was great seeing many of you over Memorial Day weekend at the North Carolina/South Carolina/Georgia Tax Update program in Kiawah. A special thanks to Isaac Bradley for all the hard work in putting that program together.
As some of you may already know, we have reserved the East Beach Conference Center for next year’s Annual Meeting in Kiawah again over Memorial Day weekend. We hope you will start making plans to join us in Kiawah that weekend. For those of you already planning to attend, we would ask that you encourage other co-workers and colleagues to make plans to attend as well.
Also, Kevin May of Graves May in Wilmington has agreed to chair this CLE Committee. I know he would appreciate suggestions for speakers or topics.
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This is the second of two installments of this article. The first installment was posted on the Tax Section blog on Jan. 16, 2017.
I. Hobby Losses: Horse Breeder Had For-Profit Activity.
The 7th Circuit Court of Appeals reversed the Tax Court and held Mr. Roberts engaged in his horse training activity “for profit.” Roberts v. Commissioner, 117 AFTR 2d 2016-629. The IRS disallowed certain horse breeding activity losses for 2005 through 2008. In reviewing all of the relevant facts, the Tax Court determined although Mr. Roberts did not engage in the activity for profit during the first two years, he was engaged in horse related activities for profit under Section 183 for the last two tax years.
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A well-timed bankruptcy can be a powerful arrow in the quiver of a taxpayer with burdensome tax debt. Many lawyers and tax professionals are not aware a taxpayer’s personal liability for individual income tax debt can be discharged in bankruptcy, if the answer to each of the following five questions is YES:
Have more than three years passed since the tax return giving rise to the tax liability was due, including applicable extensions? 11 U.S.C. §507(a)(8). Individual income taxes for the period ending 12/31/13 are thus the most recent taxes that could be discharged, as of May 2017 (but not until October 2017 if the taxpayer obtained an extension of time in which to file the return). Certain taxpayer actions can toll and thus extend this three-year period. For example, a prior bankruptcy tolls this three-year period for the length of the automatic stay plus 90 days; a request for a collection due process hearing (“a CDP request”) tolls the three-year period for the time the hearing is pending during the three-year period, plus 90 days. See language immediately following 11 U.S.C. §507(a)(8)(G).
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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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