New Longer NOL Carrybacks

In a recent Rev. Proc., the IRS explained how businesses can elect the new optional longer net operating loss (NOL) carryback periods that have been provided by the Worker, Homeownership, and Business Assistance Act of 2009, which was signed into law on Nov. 6, 2009.  Before the new law, NOLs generally could be carried back two years and forward 20 years. However, under the new law all taxpayers (except TARP recipients) may elect to increase the carryback period for an applicable NOL to 3, 4, or 5 years from 2 years.  An applicable NOL means the taxpayer’s NOL for any tax year ending after Dec. 31, 2007, and beginning before Jan. 1, 2010.

A taxpayer may make the election by following the procedure described in either Rev. Proc. 2009-52 which explains how to elect on a federal income tax return for the tax year of the applicable NOL.  Once made, the extended carryback election is irrevocable.

No Penalties Affirmed in Son-of-BOSS Shelter

In a matter near and dear to this author’s heart (I argued on behalf of the taxpayer), the United States Court of Appeals for the Seventh Circuit affirmed the decision of the district court in the case of American Boat Co., et. al, v. the United States.  In its opinion the Court of Appeals rejected the government’s argument that any corporate planning involves tax benefits the attorney who structures the planning is inherently conflicted from opining on the tax attributes of the transaction.  The Court’s refusal to create such a bright line test is good news for all tax attorneys and their clients as such a test would have significantly increased fees and the cost of tax planning.

A.J. Rollins

IRS Extends Deadline for Disclosing Offshore Accounts

In a news release today, the IRS announced a “one-time” extension of the deadline for special voluntary disclosures by taxpayers with unreported income from offshore accounts.  These taxpayers now have until Oct. 15, 2009 to make the required disclosures.  Prior to the extension, taxpayers had only until September 23rd.  The IRS also announced that there will be no further extensions.

Deadlines approaching for Offshore Income Settlement Offer, Work Opportunity Tax Credit, and Cancellation of Debt Income

There are several key September deadlines that are fast approaching that may require taxpayers to act quickly. Those affected may profit greatly by taking timely action. For taxpayers that have money in offshore banks this may be a last chance to avoid criminal prosecution for failing to disclose the accounts. For employers hiring unemployed veterans or disconnected youth, this may be an opportunity to claim the work opportunity tax credit (WOTC). Finally, taxpayers can elect to defer certain cancellation of debt income (COD) without adhering to the formal election procedures for about another 60 days.

Over five months ago, the IRS announced a settlement program for those that voluntarily and timely disclose unreported offshore income. Those meeting the terms of the offer will have liability for back-taxes and interest for six years, and pay either an accuracy or delinquency penalty on all six years. They will also pay a penalty of 20% of the highest asset value of an account anytime in the past six years. Criminal prosecution is avoided by timely complying with the terms of the offer. The six month window to participate in the offer ends on September 23, 2009. The IRS has publicly warned that for those “who continue to hide their heads in the sand, the situation will only become more dire.”

The American Recovery and Reinvestment Act of 2009 added a new targeted group to the Code Section 51, tax credit, unemployed veterans and disconnected youth. The WOTC credit is 40% of an employee’s first-year wages up to $6,000. An employer who hires an unemployed veteran or disconnected youth before September 17, 2009 will be considered to satisfy the deadline if the employer submits the pre-screening notice to the designated local agency to request certification no later than Oct. 17, 2009.

Finally, cancellation of debt (COD) income from the reacquisition of business debt at a discount in 2009 and 2010 can be deferred until 2014, and then included in income ratably over five years. Under a transition rule, IRS will treat an election to do so as effective if a taxpayer files the election with its federal income tax return filed on or before September 16, 2009, using any reasonable procedure to make the election.

To discuss any of these matters give us a call.

What Is an LLC Unit?

A recent article in the journal “Business Entities” addressed the numerous issues that often lead to confusion when limited liability company owners consider the tax attributes of an LLC “unit”.  Some good points were raised that all LLC owners should be aware of and consider when the think about a sale of part or all of their interests.

 The reality is that under state law there is no such thing as an LLC unit, it is simply a device used by drafters of the operating agreement to make an entity more closely resemble a corporation.  But, unlike a share of stock, an LLC unit does not have a basis, a holding period or character for determining gain or loss.  Sales of LLC interests require an examination of capital accounts and the receivables of the LLC.

Don’t just assume that LLC units are treated the same as shares of stock.  If you are considering a sale of an interest in your LLC call one of our attorneys to make sure you don’t make any incorrect assumptions.

A.J. Rollins

Combating the Scourge of Tax Havens

“Combating the Scourge of Tax Havens” was the subject of a July 24 Congressional Research Service (CRS) report. According to the report, the problems associated with tax havens are more than a nuisance to the U.S. The report estimates indicate tax havens cost the U.S. approximately $100 billion each year in lost tax revenues. On May 4, President Obama announced various proposals for getting tough on tax havens. These included cracking down on the abuse of tax havens by individuals and devoting new resources for IRS enforcement to help close the international tax gap.

The most recent casualty in this crackdown was Jeffrey P. Chernick, of Stanfordville, N.Y. Mr. Chernick pleaded guilty on July 28 to willfully filing a false tax return in a case linked to UBS AG, a Swiss bank that involved the use of nominee entities, offshore credit cards and sham loans. Chernick accepted responsibility for concealing more than $8 million in Swiss bank accounts. The Justice Department press release on this matter is available at http://www.usdoj.gov/opa/pr/2009/July/09-tax-729.html

The voluntary disclosure period for disclosing undisclosed foreign accounts ends soon. Those who don’t make disclosures certainly face increased uncertainty and stepped up IRS enforcement.

Employer Owned Life Insurance Gets More Technical

The rules governing employer owned life insurance keep getting more complicated.  Recent changes to the tax laws have become effective and IRS Notice 2009-48 provides extensive guidance.  Basically, it is now necessary for an employer to comply with a technical series of notices and disclosures with the insured employee.  After June 15th a good faith attempt by a company to comply with the notice and disclosure requirements that fails to comply with all the technicalities of the Code and Regulations is ineffective.

But complying with the notice and disclosure requirements with your employees is not the end.  Effective for any tax year ending after November of 2008, it is necessary on an annual basis to disclose to the IRS on Form 8925 the details of your employer owned policies. 

Failure to satisfy the requirements of the notice and disclosure requirements can result in the inclusion of the death benefits from employer owned life insurance being included in the company’s taxable income.  Make sure your policies are in compliance.

 A.J. Rollins

Preparer Penalties – What To Do Now

October 15th is getting closer and many return preparers are unsure about the new burdens placed upon them by government. After several months of confusion, the Tax Extenders and Alternative Minimum Tax Relief Act of 2008 established the standard of care imposed on return preparers for undisclosed positions as “Substantial Authority” for the position. Substantial Authority is commonly interpreted as there being a 40% chance of success if examined.

The penalty imposed for preparing a return that lacks Substantial Authority is now $1,000 or half of the fees generated, whichever is greater.

Generally, the preparer’s penalty will not be imposed if the preparer reasonably believes the position is supported by substantial authority and the preparer acts in good faith. This standard is commonly supported by reliance on the advice of an attorney. If you are looking for guidance on the new standards or trying to determine if a position is supported by substantial authority give us a call. Our tax department has over 100 years of combined experience working in private practice and for the IRS.

A.J. Rollins

IRS to Ramp Up Federal Employment Tax Audits in November

Information has begun to leak out of the IRS about the development of a nationwide National Research Program (NRP) audit on employment taxes. During the project, the IRS will conduct detailed employment tax examinations of randomly selected taxpayers. The selection process for an NRP audit is determined based on a statistical sample. It doesn’t necessarily mean that an employer has incorrectly filed a return. The IRS has indicated that the selection process has already begun.

The program will last for three years and easily include more than 2,000 tax examinations during each of the three years. Although the IRS may look at any line on an employment tax return during the examination, it will primarily focus on the following issues: worker classification (employee vs. independent contractor); fringe benefits; officer’s compensation; and reimbursed expenses.

Now is the time to examine your employment tax practices. Having the proper documentation for your independent contractors is imperative and making sure that classification is proper on the front end can prevent expensive problems on the back end.

A.J. Rollins

To Draft a Contract or not Draft a Contract: That is the Question

After multiple negotiation sessions the deal has been struck and all that is left is to draft a contract. Who should draft the contract, isn’t it easier and cheaper to let the other party’s lawyer draft the contract and just have your attorney reveiw the draft. Answer: No.

The party who drafts a contract usually has an advantage in negotiations since they can frame the issues. Whenever I have to review another attorney’s agreement I spend most of my time figuring out what has been left out of the agreement. Its typically more cost effective for me to start with my own agreement that I already know very well. The review, process, moreover, usually results in a negotiation over the language in the contract. Many parties, especially landlord’s in lease negotiations, employ the strategy of making most contract provisions one sided with the expectation that the opposing party will just relent to the contract language as opposed to spending additional time negotiating it.

When you have a choice always readily agree to draft the contract instead of reviewing a contract drafting by the other side.

As always, your trusted source for practical legal advice.

Justin Daniels
www.wjrlaw.com