Steve Hamilton is a Tampa native and a graduate of the University of South Florida and the University of Missouri. He now lives in northern Kentucky. A career CPA, Steve has extensive experience involving all aspects of tax practice, including sophisticated income tax planning and handling of tax controversy matters for closely-held businesses and high-income individuals.
Thursday, December 25, 2014
Merry Christmas
Joseph (Humphrey Bogart): "I’m going to buy them their Christmas turkey."
Albert (Aldo Ray): "Buy? Do you really mean ‘buy'?"
Joseph: "Yes, buy! In the Spirit of Christmas. The hard part’s going to be stealing the money to pay for it.
From "We're No Angels" (1955)
Friday, December 19, 2014
Spotting A (Tax) Dependent
Let’s talk
about claiming someone as a dependent.
There are several
tax “breaks” that require you to have a dependent, for example:
·
Head
of household (HoH) filing status
·
A
dependent exemption
·
Child
credit
·
Child
care credit
·
Education
credit
·
Earned
income credit
Some of
these breaks go only so far. The head of household (HoH) filing status, for
example, can get you to zero tax, but it cannot “create” a tax refund. You have
to have tax withholdings before HoH can get you a refund; even then, you are getting
your own money back. Not so with the child credit or the earned income credit,
however. Meet all the triggers and the
EIC can refund you over $6,000, irrespective of whether you have any
withholdings or not. It is a transfer payment from the government.
So what is
required to claim someone as a tax dependent?
There are
two overall categories of dependents. The first is your own child (or
stepchild, adopted child, or descendants of the same) and is referred to as a “qualifying
child.” This is the workhorse test: think a child at home with his/her parents.
There are
five requirements for a “qualifying child”:
- Are they related to you?
- Are they under age 19 or – if a full-time student – under age 24?
- Do they live with you for more than half the year?
- Do you support them financially?
- Are you the only person claiming the child?
Any other
type of dependent is a referred to as a “qualifying relative.” The requirements
are as follows:
- Do they live with you for more than half the year?
- Do they make less than $3,950?
- Do you support them financially?
- Are you the only person claiming the child?
The term “qualifying
relative” is misleading, by the way. The person does not need to be related to
you at all. For example, a girlfriend could be my dependent – assuming that all
the other requirements were met AND my wife allowed me to have a girlfriend.
Did you
notice the age thing? A qualifying child ends at age 24 (unless we are talking
permanent disability, which is a different rule). Past age 23 and the child is
your dependent under the qualifying relative rules.
Which also
means that an income test kicks-in. That after-age-23 child would not qualify
as a dependent if he/she earned more than $3,950 for the year. This can be a
cruel surprise at tax time for parents whose kids have moved back.
That answer,
by the way, is the same for an over-18-under-24 child who does not go on to
college.
Let’s take a
little quiz on dependents. We will use the Tax Court case of James Edward Roberts v Commissioner. Here
are selected facts:
- In January, 2012 Roberts’ daughter became homeless.
- She had two young kids.
- She was pregnant with the third.
Roberts was a
decent soul, and worked out a deal with a Ms. Moody, whereby he and the two
children (very soon three) moved in with her. He agreed to pay 75% of the rent
and utilities. He also agreed to pay 100% of the meals.
Then he did
something unexpected. He wrote down the agreement, and both he and Ms. Moody
signed and dated it.
Roberts and
his (now three) grandchildren lived in the apartment from January until
October, 2012. His daughter also lived there on-and-off. When she was not
there, Ms. Moody helped take care of the kids.
When Roberts filed his 2012 tax return, he
claimed the following:
(1) Head of household
(2) Dependent exemption for three
grandchildren
(3) Child credit
(4) Earned income credit
The IRS
bounced his return, and they wound up in Tax Court.
The IRS had
an issue whether the kids were his dependents.
What do you
think?
Let’s walk through
it.
·
The
kids are related (grandchildren) to Roberts. CHECK
·
The
kids are young. CHECK
·
They
lived with him from January through October, which is more than half the year.
CHECK
·
He
paid 75% of the rent and utilities and 100% of the food. Sounds to me like that
would be over half the support for the kids. CHECK
·
The
Court tells us that their mom did not claim them. CHECK
Seems that
Roberts met all the requirements to claim the grandchildren as dependents for
2012. Why did the IRS press on this?
I don’t
know, and the Court did not explain why. I can guess, though.
I see a
person who…
·
moved
·
put
three dependents on his return who were not there the prior year
·
was
not living with the kids by the time the IRS contacted him
·
lived
in an apartment with someone who (perhaps, who knows) might have been his
girlfriend. This would raise the issue of who actually paid the expenses for
rent, utilities and food – you know, the same expenses that Roberts needed to
show that he supported the kids.
Roberts won
his day in Court.
I suspect
that written – and contemporaneously signed - agreement with Ms. Moody carried
a lot of weight with the Court.
I allow that
the IRS had cause to look at this return. After that, however, they should have
left Mr. Roberts alone. The IRS made a mistake
on this one.
Monday, December 15, 2014
The New Israeli Trust Tax
Have you
settled (that is, funded) a trust with an Israeli beneficiary?
I have not,
but many have.
If this is
you: heads up. The tax rules have changed, and they have changed from the Israeli
side, not the U.S.
Until this
year, Israel has not taxed a trust set up by a foreign
person, even if there were Israeli beneficiaries. It also did not bother to tax
the beneficiaries themselves. This was a sweet deal.
The deal
changed this year. The Israel Tax Authority (ITA) now says that many trusts previously exempt will henceforth be taxable.
Israel is
looking for a beneficiary trust, meaning that all settlors are foreign persons
and at least one beneficiary is a resident Israeli.
EXAMPLE: The grandparents live in Cincinnati; the son moves
to Israel, marries and has children; the grandparents fund a grandchildren’s
trust.
A
beneficiary trust can be either
·
A
“relatives trust,” meaning the settlor is still alive and related (as defined)
to the beneficiary
·
A
“non-relatives trust,” meaning the settlor is not alive or not related (as
defined) to the beneficiary
EXAMPLE: The grandparents in the above trust pass away.
The tax will
work as follows:
·
A
relatives trust
o
Pay
tax currently at 25% on the portion allocable to Israeli beneficiaries, or
o
Delay
the tax until distributed to an Israeli beneficiary, at which time the tax will
be 30%.
·
A
non-relatives trust
o
Pay
tax on income allocable to Israeli beneficiaries at regular tax rates (meaning up
to 52%)
If one does
nothing by the end of 2014, a relatives trust is presumed to have elected the “pay currently”
regime.
The ITA has
indicated verbally that any U.S. tax paid will be accepted as a tax credit
against the Israeli tax, whether the tax was paid by the settlor (think grantor
trust), the trust itself or the beneficiary.
The
retroactive part of the tax goes back to 2006, and the ITA is allowing two ways
for beneficiary trusts to settle up:
·
The
trust can pay a portion of its regular tax liability, depending upon the influence
on the trust by the Israeli beneficiary.
·
The
trust can pay tax on the value of the trust as of December 31, 2013.
Again, the
rules have changed, and – if this is you –
please contact your attorney or other advisor immediately.
Labels:
beneficiary,
credit,
distribution,
foreign,
Israel,
ITA,
new,
relative,
resident,
tax,
trust
Friday, December 12, 2014
Jurate Antioco's Nightmare On IRS Street
Ms. Jurate Antioco
lived in Martha’s Vineyard, where she owned a bed and breakfast with her
husband. The B&B was their home. In 2006 they divorced (after 27 years) and
sold the B&B for almost $2 million. They used some of the money to pay off
marital debt, but over $1 million went to her after she was unable to finish a
Section 1031 exchange within the permitted time.
After
approximately 1 year, she took the money and borrowed another $950,000 to buy a
multifamily in San Francisco. She moved into one unit, moved her 90-something-year-old
mother into another and rented the remaining three units as a source of income.
Ms. Antioco
made a mistake concerning her taxes, though. She thought that – perhaps because
the B&B had been her residence – that she would not owe any taxes. She fell
behind in filing her 2006 taxes but did better with 2007. Her accountant
informed her that she owed taxes on the sale for 2006. She was unprepared for
this, as she had put almost all her money in the multifamily. She filed the tax
returns, though.
The IRS of
course assessed tax, interest and penalties. It is what they do.
In April,
2009 the IRS sends her a notice of intent to levy. Ms. Antioco has all her
money tied up in the multifamily, so she filed for a collection due process (CDP)
hearing. She proposed paying $1,000 per
month until she could work out a loan. She explained that her mom was having
health issues, she was moving into caregiver mode, and anything more than
$1,000 at the moment would cause economic hardship. As a show of good faith,
she started paying $1,000 a month.
She
contacted other lenders about a loan, but she soon learned that she had a
problem. Even though she had considerable equity in the property, her current
lender had included a nuclear option in the mortgage giving them the right to
foreclose if another lien was put on the building
OBSERVATION: There is a very good reason to request a CDP, as
the IRS will routinely file a lien to secure its debt. This could have been
very bad for Ms. Antioco.
She goes
back to the primary lender, and they tell her that they are not interested in
loaning her any more money.
She has a
problem.
The IRS
sends her paperwork (Form 433-A) and schedules a hearing for September, 2009.
The IRS tells her that she simply has to try to borrow before they will
consider an installment plan. If she cannot, then proof of that must also be
submitted.
She finds
another lender and a better interest rate. The new lender will refinance but
not lend any new money. Still, a lower payment frees-up cash, so Ms. Antioco
decides to refinance. The new lender wants her to put her mom on the deed,
which she does by granting her mother a joint tenancy in the property.
She sends
her financial information (the Form 433-A), along with supporting bank documentation
and a copy of her most recent tax return, to the IRS. She hears nothing.
In November,
2009 she received a notice from the IRS stating that they were sustaining the
levy. The notice stated that she had requested a payment plan, but she had
failed to provide additional financial information. In addition the IRS
completely blew off her economic hardship argument.
Ms. Antioco
appealed to the Tax Court. She pointed out that she was never asked for additional
financial information, and –by the way – what happened to her economic hardship
request?
And then
something amazing happened: the IRS pulled the case, admitting to the Court
that the Appeals officer had never requested additional financial information
and had in fact abused her discretion.
The Court
sent the matter back to IRS Appeals, hoping that the system would work better
this time.
Uh, sure.
Enter Alan
Owyang. The first thing he did was call Ms. Antioco to schedule a face-to-face
meeting and review detailed questions. . Ms. Antioco explained that she would
call back later that day, as she wanted to collect her documents to help her
with the detailed questions. Owyang didn’t wait, and he kept calling her back that same day. At one point her accused
her of being “uncooperative’ and that she “put your money where your mouth is.”
He added that he had been a witness in her case.
Ms. Antioco
was so rattled that she hired an attorney. Sounds like a great idea to me.
Mr. Owyang
sent her a letter a few days later, saying that he thought Ms. Antioco had
added her mother to the deed to defraud the government and that he also thought
she could pay her taxes but “simply chose not to do so.” He asked for all kinds
of additional paperwork, but not curiously no new financial information – the
very reason the Tax Court sent the matter back to IRS Appeals.
Her attorney
submitted a bundle of information and requested another CDP hearing for April,
2011. He explained to Mr. Owyang that Ms. Antioco’s mother was declining and
would (likely) not survive a sale and move from the apartment building. All Ms.
Antioco wanted was time – to allow her mom to pass away or to finally get a new
loan – after which she would able to pay the balance of the tax. She was willing to pay under a
short-term installment plan until then.
Mr. Owyang
told the attorney that he would not grant an installment agreement because Ms.
Antioco had chosen to transfer the equity in the apartment building by adding
her mother to the deed. He could not see another reason for it.
·
Even
though he had a letter from the lender stating it wasn’t willing to lend any
more money. And to include her mom on the deed if she wanted to refinance.
He refused
to consider whether there was any “hardship.”
·
One
of the reasons it went back to the IRS to begin with.
He also
thought that all the talk about taking care of a 90-something-year-old mom was
a “diversionary argument” that he “would not consider.”
·
I
am stunned.
Mr. Owyang
also contacted the IRS Compliance Division. He said that the government’s
interest was in “jeopardy,” and he recommended that the IRS file a manual lien.
There were problems with the filing, and Mr. Owyang went out of his way to follow
up personally.
In May, 2011
Mr. Owyang filed a supplemental notice of determination, concluding that Ms.
Antioco had “fraudulently” transferred the building to her mother. He went all
Sherlock Holmes explaining how he had deduced that Ms. Antioco had committed
fraud, concealed the transfer, became insolvent because of it and was left
without any assets to pay the government. It was his judgement that she could
have gotten a loan if she really wanted one, and that Ms. Antioco was a “won’t
pay taxpayer” who was using her ailing mother as an “emotional diversion.”
This guy is
a few clowns short of a circus.
They are
back in Tax Court. The IRS this time sees nothing wrong with Mr. Owyang's
behavior. They did however acknowledge that Mr. Owyang never ran the numbers to
see if Ms. Antioco was insolvent, and that his determination of fraud was … “flawed.”
But Mr. Owyang
had not abused his discretion. No sir!! Not a smidgeon.
The IRS
wanted the Court to dismiss the case.
The Court instead
heard the case.
The Court went
through the steps, noting that the Commissioner can file liens to secure the
collection of an assessed tax. The IRS
however must follow procedures, such as notifying the taxpayer, granting a
collections appeal if the taxpayer requests one, and so on. The taxpayer had
proposed a payment alternative, and the IRS never completed its analysis of her
proposed payment plan. The IRS had also failed to consider her complaint of
economic hardship.
The IRS did
not follow procedure.
The Court
then reviewed Mr. Owyang’s behaviors and assertions, refuting each in turn. The
Court even pointed out that Ms. Antioco had paid down her tax debt by $88,000
by the time of trial, not exactly the conduct of someone looking to shirk and
run. The Court was not even sure what Mr. Owyang’s real reason was for his determination,
as his reasons were contradicted by documentation in file, not to mention
changing over time.
The Court decided
that Mr. Owyang had abused his discretion.
In February,
2013 the Court sent the case back to the IRS again, as the IRS never reviewed
whether the $1,000 was a reasonable payment plan.
Back to the
IRS. Introduce a new Appeals officer.
Ms. Antioco then
filed suit against the IRS for wrongful action – that is, over the behavior of Mr.
Owyang. This type of suit is very difficult to win. Ms. Antioco focused her
arguments on Mr. Owyang’s abusive behavior. The District Court determined that this
behavior occurred while Mr. Owyang was “reviewing” collection action and not
actually “conducting” collection, which barred liability under Section 7433.
OBSERVATION: No, he was “collecting.” What is a lien, if not
a collection action?
In June 2013
the IRS finally agreed to an installment payment plan.
In July,
2014 the IRS filed suit to reduce Ms. Antioco’s liability to judgment. Reducing
an assessment to judgment gives the IRS the ability to collect long after the
10-year statute of limitations.
Ms. Antioco filed
a motion to dismiss.
Her reason
for requesting dismissal? The tax Code itself. Code Section 6331(k)(3)(A) bars
the IRS from bringing a proceeding in court while an installment agreement is
in effect.
The IRS
realized it got caught and last month agreed to dismiss.
And that is
where we are as of this writing.
For a tax
pro, the Jurate Antioco cases have been interesting, as they highlight the
importance of following procedural steps when matters get testy with the IRS.
From a human perspective, however, this is a study of a government agency run
amok. How often does the IRS get spanked
twice by the Tax Court for abuse on the same case?
Ms. Antioco’s
mom, by the way, is now 97 years old and suffering from congestive heart
failure. Ms. Antioco is herself a senior citizen. May they both yet live for a
very long time.
Labels:
433,
abuse,
antioco,
collection,
court,
due,
economic,
hardship,
installment,
IRS,
jurate,
Owyang,
payment,
plan,
tax
Subscribe to:
Posts (Atom)