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Massachusetts DOR Issues Guidelines on 2010 Sales Tax Holiday

Monday, August 9th, 2010 by Moore McLaughlin

The Massachusetts Department of Revenue provided guidelines on the 2010 sales tax holiday for August 14 and 15, 2010, during which most purchases made by individuals for personal use will not be subject to Massachusetts sales or use taxes. During these two days, nonbusiness retail sales of tangible personal property costing $2,500 or less are exempt from sales and use taxes subject to certain exclusions. All motor vehicles, motorboats, meals, telecommunications services, gas, steam, tobacco products, and any single item costing over $2,500 do not qualify for the sales tax holiday exemption and remain subject to tax. ( Massachusetts Technical Information Release 10-10, 08/05/2010 .)

Qualifying purchases. The sales tax exemption applies to sales of tangible personal property for personal use only. Purchases exempt from sales tax are also exempt from use tax. Therefore, eligible items of tangible personal property purchased on the Massachusetts sales tax holiday from out-of-state retailers for use in Massachusetts are exempt from Massachusetts use tax. Alcoholic beverages sold for off-premises consumption by liquor or package stores qualify for the 2010 sales tax holiday.

Nonexempt sales. The sales tax holiday does not apply to sales of motorboats, meals, telecommunications services, gas, steam, electricity, tobacco products, any single item costing in excess of $2,500, and all sales of motor vehicles. Layaway sales do not qualify for the exemption even if the last required payment or payments necessary to complete the transaction are made on August 14 or 15, 2010. Sales of the excluded items remain taxable.

Specific rules. The Department provided specific rules to be applied by retailers in administering the Massachusetts sales tax holiday exemption.

Threshold: Generally, sales or use tax is due on the entire sales price of a single item worth more than $2,500. The sales price is not reduced by the threshold amount. However, since there is no sales tax on any article of clothing worth less than $175, only the increment of the sales price of the article of clothing over $175 is subject to tax.

Multiple items on one invoice: Separate invoices do not have to be prepared when a customer purchases multiple items during the sales tax holiday. As long as each item is priced $2,500 or less, there is no upper limit on the tax-free amount each customer may purchase.

Bundled transactions: When several items are offered for sale at a single price, the entire package is exempt if the sales price of the package is $2,500 or less. Items that are priced separately and are to be sold separately qualify for the sales tax holiday exemption if the price of each item is $2,500 or less.

Coupons and discounts: If a store coupon or discount reduces the sales price of an article, the discounted sales price determines whether the sales price is within the sales tax holiday threshold. If the purchaser bought both an eligible property and a taxable property and the coupon or discount applies to the total amount paid by the purchaser, the seller allocates the discount on a pro rata basis to each article sold.

Exchanges: In case of an even exchange, no tax is due even if the exchange is made after the sales tax holiday.

Special orders: Special order items are eligible for the sales tax holiday exemption provided they are ordered and paid in full on the sales tax holiday weekend and the cost of each item is $2,500 or less even if the items are delivered at a later date. A prior special order purchase with a deposit made before August 14, 2010 will not qualify for the sales tax holiday exemption even if the customer pays the entire remaining balance due on August 14 or 15, 2010.

Rain checks: Eligible property bought with the use of a rain check during the sales tax holiday weekend qualifies for the exemption regardless of when the rain check was issued. Issuance of a rain check during the sales tax holiday weekend will not qualify otherwise eligible property for the sales tax holiday exemption if the property is actually purchased after the sales tax holiday.

Rentals: Generally, rentals for 30 days or less of eligible tangible personal property are eligible for the sales tax holiday even if the rental period covers days before or after the holiday provided payment in full is made during the sales tax holiday weekend.

Rebates: A rebate is generally treated as a cash discount and is excluded from the sales price. So, the discounted sales price determines whether the sales price is within the sales tax holiday threshold, and tax must be charged on the full purchase price if it is over $2,500. If the customer receives a rebate after the sale by mailing a coupon to the manufacturer, the full purchase price of the property determines whether the sales price is within the sales tax holiday price threshold and tax must be charged on the full purchase price if it is over $2,500. If the customer receives a cash discount from the vendor upon the purchase of tangible property and a manufacturer’s rebate after the sale, only the cash discount given by the vendor is excluded from the sales price for purposes of the sales tax holiday exemption.

Internet sales: An eligible property ordered over the Internet is exempt if it is ordered and paid for on August 14 or 15, 2010, Eastern Daylight Time, even if the property is delivered after the sales tax holiday period.

Splitting items normally sold together: Articles normally sold as a single unit cannot be priced separately and sold as individual items in order to qualify for the sales tax holiday exemption.

Returns: Under the law, sales tax may only be refunded if returns are made within 90 days of the sale. During the 90-day period after August 14 or 15, 2010, a retailer may not credit a retail customer who returns an item that could have qualified for the sales tax holiday exemption, unless the customer provides a receipt or invoice showing the tax was paid or the seller’s records show that tax was paid.

Erroneously collected taxes: Customers who were erroneously charged sales tax for an exempt purchase may obtain a tax refund from the vendor. The vendor that has remitted erroneously collected tax to the Department may file an abatement application within three years with satisfactory evidence that the vendor credited or refunded the tax to the purchaser.

Responsibilities of retailers. All Massachusetts businesses normally making taxable sales of tangible personal property on August 14 and 15, 2010 and out-of-state retailers registered to collect Massachusetts sales and use taxes must participate in the sales tax holiday. Any sales or use tax erroneously collected by a retailer during the sales tax holiday must be remitted to the Department. Retailers must keep normal business records showing the date of sale, items purchased and selling price. Purchasers paying for tangible personal property with business credit cards or checks must be charged tax on the items purchased. Normal business records showing the date of sale, items purchased, and selling price must be kept by the retailer/vendor. However, a separate certification of nonbusiness use from the purchaser will not be required for the 2010 Sales Tax Holiday regardless of the amount of the otherwise qualifying purchase.

Penalties. Retailers that back-date sales occurring after August 15, 2010 or that forward-date sales that occurred before August 14, 2010 in order to make them appear to qualify for the sales tax holiday may be subject to the tax evasion penalties of Mass. Gen. L. § 73 , including a felony conviction, a fine of not more than $100,000 or $500,000 in the case of a corporation, or by imprisonment for not more than five years, or both, and may also be required to pay the costs of prosecution.

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Posted in Current Events, IRS and state tax collections, Tax Current Events and News, Tax planning

Transfer of home to closely held shareholders was constructive dividend—penalties imposed

Monday, August 9th, 2010 by Moore McLaughlin

A new Tax Court decision illustrates the need for closely held corporations to be wary of constructive dividends when dealing with their owners. In RVJ Cezar Corporation et al, TC Memo 2010 –173 a closely held construction company’s transfer of a home to its shareholders resulted in dividend/capital gain income to them, and taxable gain to the corporation. What’s more, both the shareholders and the corporation were held liable for accuracy related penalties.

Background. A dividend is a distribution of property from a corporation to its shareholders out of the corporation’s earnings and profits. (IRC Section 316(a)) The amount of the distribution equals the fair market value of the distributed property on the distribution date. (IRC Sections 301(b)(1) and (3)) For dividends received before 2011, qualified dividend income is taxed at the same rates as long-term capital gain. (IRC Section 1(h)(11)) After 2010, unless Congress changes the rules, dividend income will be taxed as ordinary income. The amount of a distribution that exceeds earnings and profits, and is therefore not a dividend, is taxable capital gain to the recipient. (IRC Section 301(c)(3)) Under long-established case law, dividends may be formally declared or they may be constructive. A constructive dividend arises when a corporation confers a benefit on a shareholder by distributing available earnings and profits without expectation of repayment.

A corporation that distributes appreciated property to a shareholder recognizes gain as if the property were sold to the shareholder at its fair market value. (IRC Section 311(b)(1)) Gain is recognized to the extent that the property’s fair market value exceeds the corporation’s adjusted basis in the property.

Taxpayers are liable for an accuracy-related penalty for any portion of an underpayment of income tax attributable to negligence or disregard of rules and regulations, unless they establish that there was reasonable cause for the underpayment and that they acted in good faith. (IRC Section 6662(a), IRC Section 6662(b)(1), IRC Section 6664(c)(1)) Under IRC Section 6662(b), an accuracy related applies for a substantial understatement of income tax, i.e., the amount of the understatement exceeds the greater of 10% of the tax required to be shown on the return, or $10,000.

Facts. Mr and Mrs. Cezar were the sole shareholders of RVJ Cezar Corporation, which built “spec” houses that it sold to the public. They paid $500 for their stock. Mr. Cezar, a general contractor, was the sole employee of the corporation. In 2001, Cezar Corp paid $150,000 for a lot, financing part of the purchase price with a mortgage, and spent $502,000 building an amenity-rich home approximately twice the size of its usual spec homes. Cezar Corp was listed as the sole owner of the spec home on the blueprints, permit, and notice of completion. Some of the construction materials were paid with a credit card issued in both Mr. Cezar’s name and Cezar Corp, and the Cezars were unable to document most of the labor costs of building the home.

The home was finished in 2004 and was offered for sale, but there were no takers. That year, Cezar Corp transferred the lot and improvements to the Cezars by quitclaim deed; they assumed the outstanding mortgage of $57,227. At the time of the transfer the lot and improvements had a total fair market value of $920,000. The transfer of ownership report filed with the Assessor’s Office did not indicate that the property interest transferred to the Cezars was a partial interest. The Cezars did not report the receipt of the lot or the improvements on their return for 2004, nor did the corporation report the distribution of the lot and the improvements on its return for 2004.

On audit, IRS determined that the distribution of the lot and the improvements was a constructive dividend from the corporation. It determined that the Cezars received a qualified dividend up to the amount of the corporation’s earnings and profits, and treated the balance of the distribution, less their $500 initial capital contribution, as long-term capital gain. IRS also determined that both the Cezars and their corporation were liable for the accuracy related penalty.

Tax Court sides with IRS. The Cezars conceded that they received the lot as a constructive dividend from the corporation. However, they argued that the improvements were not a constructive dividend because they owned the improvements by having paid for the construction materials and having done all the work to construct the improvements. The Tax Court agreed with IRS’s assessment that improvements are built on land that one owns or else there would be an agreement identifying the rights and responsibilities of the parties. The Cezars failed to show that there was an agreement between them and the corporation that would have allowed them to construct a home on the corporation’s property. Their ownership argument also was directly contradicted by Mr. Cezar’s statements during the audit that the lot and the improvements were both corporate assets. Moreover, there was no credible evidence to support the Cezars’ claim that they owned the improvements by paying the construction costs and personally completing the labor. The only records the Cezars produced to establish that they paid the construction costs were insufficient. Furthermore, the corporation was the sole owner of the lot as well as the improvements from the start of construction until the distribution to the Cezars. The corporation received property tax bills for both the lot and the improvements and did not protest that it had been billed for improvements that it did not own. The Tax Court also find it compelling that the corporation, which was in the business of building and selling homes, offered the lot and the improvements for sale without obtaining any transfer of interest from the Cezars. No prospective buyer would buy only the improvements and not the lot or vice versa. The Tax Court also noted that no other spec home that the corporation sold before or since was owned by the Cezars individually. Rather, all the homes and lots were owned and offered for sale by the corporation.

As a result, the Tax Court found that the Cezars did not establish that they owned the improvements, and sustained IRS’s determination that the Cezars must include the distribution of the lot and the improvements in gross income as a constructive dividend from the corporation. The Tax Court also found that treatment of the home as a constructive dividend to the Cezars caused the corporation to recognize taxable income to the extent that the fair market value of the lot and improvement exceeded its adjusted basis.

The Tax Court also hit the Cezars with an accuracy related penalty for the underpayment of income tax attributable to negligence or disregard of rules and regulations. It also hit Cezar Corp with an accuracy related penalty for substantial understatement of its income tax.

With proper planning, this tax and the penalties could have been avoided.  The tax attorneys at McLaughlin & Quinn, LLC regularly provide planning for taxpayers in situations such as the one faced by the Cezars.  For more information, contact F. Moore McLaughlin, IV, Esq., CPA by e-mail at MMcLaughlin@McLaughlinQuinn.com or by phone at 401-421-5115 ext. 212.

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Posted in Asset Protection Planning, IRS and state tax collections, Tax Current Events and News, Tax planning

President Obama admits his new healthcare program is a tax

Saturday, July 17th, 2010 by Moore McLaughlin

President Obama and the Democrat leaders flat out denied that their mandate for Americans to buy health insurance was actually a new tax.  In recently filed court briefs, President Obama has finally admitted that his new plan is actually a tax on the American people.  Very interesting reading.  Click here for a NY Times article. 

Stay tuned for word about more and even larger tax increases.  The tax attorneys at McLaughlin & Quinn, LLC will be working even harder to help you preserve your hard-earned dollars.  Call founding partner, F. Moore McLaughlin, IV, CPA, Esq. for more information at 401-421-5115 ext. 212 or reach him by e-mail at MMcLaughlin@McLaughlinQuinn.com.

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Posted in Asset Protection Planning, Current Events, Estate Planning, IRS and state tax collections, Tax Current Events and News, Tax planning

Massachusetts Enacts 2011 Budget Act

Tuesday, July 6th, 2010 by Moore McLaughlin
Massachusetts

Massachusetts

On June 30, 2010, Governor Deval Patrick signed the 2011 budget act (H4800), which includes credit transparency provisions, extends the historic rehabilitation tax credit, and provides administrative provisions to facilitate collection. The bill takes effect July 1, 2010, unless otherwise stated.

Credit transparency. Effective January 1, 2011, the head of the administrative agency of each tax credit program must submit, on or before May 15 each year, a report to the Commissioner on each tax credit program authorized for the previous calendar year. Tax credits required to be disclosed include the historic preservation tax credit, dairy farm tax credit, USFDA user fees credit, film tax credit, life sciences investment tax credit, low-income housing tax credit, medical device tax credit, refundable research credit, credit under the economic development incentive program, and any transferable or refundable credits under the corporate and personal income tax laws established after January 1, 2011. The report will contain: (1) the identity of each taxpayer receiving an authorized tax credit and from which tax credit program the credit was received; (2) the amount of the authorized tax credit awarded and issued for each taxpayer and each project, if applicable; and (3) the date that the authorized tax credit was awarded and issued for each taxpayer and each project. The report will be a public record. The report will cover only credits awarded or claimed after January 1, 2011. For purposes of the report, the taxpayer is the initial recipient of an authorized tax credit.

Historic rehabilitation tax credit. The historic rehabilitation tax credit is extended for a 12-year period up to December 31, 2017. Under current law the Commissioner, in consultation with the Massachusetts Historical Commission, is authorize to annually grant a historic rehabilitation tax credit in an amount not to exceed $50 million per year to qualified taxpayers for the 6-year period beginning January 1, 2006, and ending December 31, 2011.

Determination of partner’s distributive share. The budget act also includes a provision clarifying how a partner’s distributive share of an item of income, loss, deduction or credit from a partnership is determined. It provides that a partner’s distributive share is determined in accordance with the partner’s interest in the partnership, determined by taking into account all facts and circumstances, such as, if the allocation to a partner under the agreement of income, gain, loss, deduction or credit had no substantial economic effect or the partnership agreement does not provide as to the partnership’s distributive share of income, gain, loss, deduction or credit. It also provides that the determination of a partner’s distributive share must take into account rules and principles developed under the Internal Revenue Code and any regulations promulgated thereunder, and adjusted as required or appropriate to properly reflect income and other tax items for Massachusetts tax purposes.

Pass-through entity provision. The budget act includes provisions involving unified audit procedures for pass-through entities. It requires members or indirect owners of a pass-through entity to report items of income, expense or credit derived from the pass-through entity in a manner consistent with reporting of the pass-through entity, except to the extent that a taxpayer, member or indirect owner makes a declaration of inconsistency with its original return. The Commissioner is mandated to establish by regulation unified audit procedures.

Penalty provisions. The budget act amends the additional tax liability provision in cases when the federal government determines a difference from the amount previously reported in the taxable income of a person or the federal credit to which such person may be entitled or in cases when the tax due any other state, U.S. territory or the Dominion of Canada or any of its provinces, on account of any item of Massachusetts gross income of a Massachusetts resident, is finally determined by that jurisdiction to be less than the tax previously reported, and such tax was the basis for a credit claimed by the Massachusetts resident. It provides that failure to report such difference under both circumstances is subject to a penalty of 10% of the additional tax found due. Prior law provided that the penalty is $100 or 10% of the additional tax found due, whichever sum is smaller. A new provision provides that a person who fails to pay to the Commissioner any cigarette excise required to be paid will be personally and individually liable. “Person” includes, but not limited to, an officer or employee of a corporation or a member or employee of a partnership or limited liability company who, as such officer, employee or member, is under a duty to pay over the cigarette excise tax.

Installment and deferred payment sales. The budget act also provides a new provision requiring interest to be paid on some deferred tax liabilities generated from the use of installment sales applicable for tax years beginning on or after January 1, 2010 with respect to installment obligations as of the close of the tax year.

Sales tax provision. The budget act repeals the sales tax provision making it unlawful for any vendor to advertise or hold out or state to the public or any customer that the vendor will assume or absorb the tax or that it will not be added to the selling price of the property or services sold or, if added, it will be refunded.

For more information on these new provisions, contact tax attorney and CPA Moore McLaughlin at MMcLaughlin@McLaughlinQuinn.com or by phone at 401-421-5115 ext. 212.

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Posted in Asset Protection Planning, Current Events, Financial workout, IRS and state tax collections, Tax Current Events and News, Tax planning

Massachusetts Court Dismisses Constitutional Challenge to Capital Gains Abatement Act

Monday, June 7th, 2010 by Moore McLaughlin

Massachusetts Supreme Judical CourtThe Massachusetts Supreme Judicial Court held that the Superior Court properly dismissed a taxpayer’s action for declaratory relief because the taxpayer failed to exhaust administrative remedies. The taxpayer challenged the constitutionality of the legislature’s action not to pay interest on refunds of the unconstitutional capital gains taxes. The remedies provided by the act were not seriously inadequate. Unless the administrative remedy is seriously inadequate it should not be displaced by an action for a declaration. (DeMoranville v. Commissioner of Revenue, Mass. Supreme Judicial Ct., Dkt. No. SJC-10460, 06/03/2010.)

Background. In Peterson v. Commissioner of Revenue (Mass. Sup. Jud. Ct., 2004) 806 NE2d 784 (Peterson I), the Massachusetts Supreme Judicial Court held that §32 of L. 2002, c. 186 (2002 act), which set a higher capital gains tax rate effective May 1, 2002, violated the uniformity requirement of Art. 44 of the Amendments to the Massachusetts Constitution because it applied different tax rates to capital gains obtained within the same tax year. In response to Peterson I, the Massachusetts Legislature enacted L. 2004, c. 149 (2004 act) establishing the effective date of the new capital gains tax rate to January 1, 2002 and directing that the Commissioner not adjust the tax liability for capital gains realized between January 1, 2002 and April 30, 2003 for any taxpayer who already paid capital gains taxes at the prior rates. In Peterson v. Commissioner of Revenue (Mass. Sup. Jud. Ct., 2005) 825 NE2d 1029 (Peterson II), the Massachusetts Supreme Judicial Court struck out §413 of the 2004 act as unconstitutional but severable from the section setting January 1 2002 as the effective date of the higher capital gains rate. The legislature again responded by enacting L. 2005, c. 163 (abatement act), which changed the effective date of the new tax rate from January 1, 2002 to January 1, 2003 and addressed the remedy for those taxpayers who had paid long-term capital gains taxes at the higher rate in 2002. It provided that any taxpayers who overpaid capital gains taxes may apply for an abatement pursuant to the administrative procedures generally set for tax abatements and the Commissioner is to abate such overpayments in four equal installments without interest. This provided the exclusive basis for relief stemming from overpayment of the capital gains taxes in 2002.

Action for declaratory relief. In 2002, the taxpayer sold his business and paid capital gains taxes that he would not have been required to pay prior to the 2002 act, which provided that long-term capital gains realized on or after May 1, 2002 were taxed as ordinary income at 5.3%, a rate higher than gains realized before that date. Following the enactment of the abatement act, the taxpayer applied for abatement and received four installments of the refund without interest. On March 18, 2008, the taxpayer filed an action for declaratory relief asserting that the legislature’s determination that no interest was to be paid on the refund of the unconstitutional capital gains taxes is unconstitutional and that he has not been fully compensated for his payment of the wrongful taxes. The taxpayer alleges that his action for declaratory relief is proper because pursuit of administrative remedies would have been futile since neither the Commissioner nor the Board has the authority to declare a statute unconstitutional. His action for declaratory relief was dismissed and he appealed.

Failure to exhaust administrative remedies. The Massachusetts Supreme Judicial Court held that the Superior Court properly dismissed the taxpayer’s declaratory action for failure to exhaust administrative remedies which are deemed exclusive by the abatement act. Even if the Board could not have declared the abatement act facially unconstitutional, it could have declared the statute unconstitutional or illegal as applied to the taxpayer, and could have awarded him interest. Accordingly, the administrative remedies provided by the abatement act were not seriously inadequate. Unless the administrative remedy is seriously inadequate it should not be displaced by an action for a declaration. The Massachusetts Supreme Judicial Court further held that the judge did not abuse her discretion, noting that she concluded that the issues were not sufficiently recurrent or of sufficient public importance to merit declaratory relief in the light of the adequate administrative remedies proscribed and made exclusive by the legislature.

For more information on this or other recent Massachusetts cases, contact tax attorney Moore McLaughlin at 401-421-5115 ext 212 or by e-mail at MMcLaughlin@McLaughlinQuinn.com.

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Posted in Current Events, IRS and state tax collections, Tax Current Events and News, Tax planning

Tax consequences of debt discharge income

Sunday, February 14th, 2010 by Moore McLaughlin

Many financially distressed borrowers may have had some or all of their debts cancelled or forgiven by their lender last year. As tax time approaches, these individuals may not realize that they may have to report the canceled debt as income on their 2009 tax returns. McLaughlin & Quinn, LLC partners Moore McLaughlin, Esq., CPA and Thomas P. Quinn, Esq. are apprising existing and prospective clients of how discharged debts can trigger income unless one of numerous exceptions or exclusions applies.  Note that even if there is not an exception or exclusion in a given case, the taxable amount can be reduced if the amount reported from the lender can be shown to be incorrect.

In these troubled economic times, many financially distressed borrowers may have had some or all of their debt cancelled or forgiven by their lender last year. While such relief was no doubt welcome to people who received it, what they may not have realized is that debt forgiveness may have tax consequences. Specifically, debt forgiven in 2009 may have to be included as income on your 2009 return. However, not all canceled debts trigger taxable income. And, even if there is no exception or exclusion in a particular case, that may not be the last word. The tax bite may be reduced or eliminated if you can show that the amount reported by the lender is incorrect.Cancellation of debt

General rule. The tax laws specifically include income from the discharge of indebtedness in gross income. However, there are several exceptions to this rule. In addition, there are numerous exclusions from gross income for certain types of forgiven debts.

Exceptions. If the cancellation of debt by a private lender, such as a relative or friend, is intended as a gift, there is no income. Likewise, a debt cancelled by a private lender’s Last Will and Testament triggers no income to the borrower.

There is also an exception for certain student loans. For example, doctors, nurses, and teachers agreeing to serve in rural or low income areas in exchange for cancellation of their student loans will not have income from the cancellation if they meet certain conditions.

Also keep in mind that there is no income from cancellation of deductible debt. For example, if a lender cancels home mortgage interest that could have been claimed as an itemized deduction on Schedule A of Form 1040, there is no tax problem to contend with.

Price adjustment. There is no income if an individual purchases property and the seller later reduces the price. The purchaser’s basis (yardstick for measuring gain or loss on a later sale) in the property, however, is reduced by the amount of the purchase price adjustment.

Exclusions. In addition to the above exceptions, there are exclusions from the general rule for reporting canceled debt as income for:

  • discharge of debt through bankruptcy,
  • discharge of debt of an insolvent taxpayer,
  • discharge of qualified farm debt,
  • discharge of qualified real property business debt, and
  • discharge of qualified principal residence debt.

These exclusions are quite complicated and a detailed discussion of them is beyond the scope of this post. However, it is worth pointing out that the qualified principal residence debt exclusion applies where individuals restructure their acquisition debt on a principal residence, lose their principal residence in a foreclosure, or sell a principal residence in a short sale (where the sales proceeds are insufficient to pay off the mortgage and the lender cancels the balance). Also, the exclusions require certain tax attributes to be reduced and must be reported to the IRS on its Form 982.

Repurchased business debt. Income from certain repurchased business debt can be stretched out over several years. Although all of the deferred debt discharge income will eventually be recognized, you benefit from the deferral of tax to later years.

Form 1099-C, Cancellation of Debt. A taxpayer should receive a Form 1099-C from a federal government agency, financial institution, or credit union that forgives a debt of $600 or more. The amount of the canceled debt is shown in box 2. Any forgiven interest included in the amount of canceled debt in box 2 will also be shown in box 3. As noted above, if the interest would otherwise be deductible, it does not have to be included in income.

An individual who does not agree with the amount shown on Form 1099-C should contact the lender in writing and request it to issue a corrected Form 1099-C showing the proper amount of canceled debt. Even if the lender refuses to issue a corrected report, there still may be recourse if you have adequate documentation to show that the lender incorrectly reported the amount canceled.

If you had a debt forgiven last year, we can determine how it may affect your 2009 taxes, make sure you gain maximum advantage from any exception or exclusion that may apply, and guide you through various choices that may be available to you, depending on the specific circumstances of your situation. We also may be able to help you to resolve any discrepancy concerning the amount reported by the lender.

Contact Moore McLaughlin, Esq, CPA by e-mail at mmclaughlin@mclaughlinquinn.com or Thomas P. Quinn, Esq. by e-mail at tquinn@mclaughlinquinn.com, or either of them by phone at 401-421-5115.

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Posted in Asset Protection Planning, Bankruptcy, Financial workout, IRS and state tax collections, Tax Current Events and News, Tax planning

The Truth About Frivolous Tax Arguments

Wednesday, February 10th, 2010 by Moore McLaughlin

Don't go to jailThe IRS has issued a detailed, 80-page document discussing and rebutting many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws. An accompanying news release reminds taxpayers that the penalty for frivolous tax returns is $5,000, and applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position that IRS identifies as frivolous. The tax attorneys at McLaughlin & Quinn, LLC frequently see taxpayers try to raise these arguments.  Partners Moore McLaughlin, Esq., CPA and Thomas P. Quinn, Esq. generally convince them to be realistic and deal with the IRS in a forthright manner.

The IRS’s “The Truth About Frivolous Tax Arguments” responds to some of the more common frivolous “legal” arguments about the federal tax system. Each contention is briefly explained, followed by a discussion of the legal authority that rejects the contention.

The document covers these broad categories of frivolous arguments: 

  • Various contentions that: the federal income tax system is voluntary; terms in the Code such as taxable income, gross income and “the taxpayer” are improperly defined; and payment of taxes is unconstitutional. Other arguments in the category have fictional legal bases, for example, that IRS is not an agency of the U.S., or that taxpayers are entitled to the refund of social security taxes paid over their lifetime. 

 

  • Frivolous arguments in collection due process cases, including various contentions that assessments are invalid, or that the statutory notice of deficiency, notice of federal tax lien or statutory notice and demand is invalid.

 

  • Contentions that the Tax Court is not authorized to decide legal issues, or that IRS personnel do not have the authority to seize property in satisfaction of unpaid taxes, or that IRS employees lack credentials.

 

A final section of the IRS’s frivolous tax arguments document explains in detail the penalties that courts may impose on those who pursue tax cases on frivolous grounds, and cites scores of cases rejecting various frivolous arguments and imposing penalties.

For a copy of this complete report, contact Moore McLaughlin, Esq., CPA by e-mail at mmclaughlin@mclaughlinquinn.com.

If you or someone you know owes taxes and needs help dealing with the IRS or state taxing authority, please contact Thomas P. Quinn, Esq. by e-mail at tquinn@mclaughlinquinn.com or Moore McLaughlin, Esq., CPA by e-mail at mmclaughlin@mclaughlinquinn.com or either of them by phone at 401-421-5115.

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Posted in Current Events, IRS and state tax collections, Tax Current Events and News, Tax planning

IRS Commissioner Doesn’t Prepare His Own taxes – Too Complicated

Sunday, January 24th, 2010 by Moore McLaughlin

Douglas ShulmanThe Commissioner of the IRS, Douglas Shulman, recently admitted that the tax code is too complex for even the commissioner of the IRS.  Click here for full story.  I have long been a proponent of the flat tax as a way to ensure a higher degree of compliance.  The tax attorneys at McLaughlin & Quinn, LLC represent taxpayers before the IRS and state taxing authorities on a daily basis.  Many times, any errors that are found come from an honest misunderstanding of the tax code.  Often, the IRS proposes changes based on uncertain areas of the law, where no one is really sure what the right answer is.

Until Congress decides to stop its social engineering experiments, and picking winners (homeowners, ethanol) and losers (renters), Tom, Frank and I will have plenty of work.  In my opinion, the tax code should be used solely for raising revenue, not for dictating to people how to live their lives.

In the meantime, taxpayers, such as the IRS Commissioner, will have to rely on paid professionals.

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Posted in Current Events, IRS and state tax collections, Tax Current Events and News, Tax planning

Taxman may be your “Friend”

Wednesday, September 30th, 2009 by Moore McLaughlin

According to a recent article in the Wall Street Journal, state revenue agents have been looking at MySpace and Facebook postings to catch tax scofflaws.  Click here for the full article.

For example, in Minnesota the tax authorities found a tax evader after he announced on his MySpace page that he was returning to his home MySpacetown to work and mentioned his new employer.  Genius!

Agents in Nebraska caught a DJ after announcing one of his gigs.  Brilliant!

California caught wind of a rigger of sails through an on-line thread to collect a 4-figure sum.  Outstanding!Facebook

Personally, I love these stories.  Can’t get enough of them.  Of course, I also watch all of the “Caught in the Act” and “World’s Dumbest Criminals” episodes I can.

Back in the real world, Tom Quinn and I help people with their IRS, Rhode Island and Massachusetts tax problems on a daily basis.  If you owe the IRS, Rhode Island or Massachusetts taxes, contact us at 401-421-5115 or by e-mail at mmclaughlin@mclaughlinquinn.com or tquinn@mclaughlinquinn.com for more information on how we can help you.

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Posted in Current Events, Financial workout, IRS and state tax collections, Tax Current Events and News

Who’s running Rhode Island?

Friday, August 28th, 2009 by Moore McLaughlin

Gov. Don CarcieriThe national news outlets have picked up on the story about Rhode Island Governor Donald Carcieri’s plan to shut down the state government for 12 days by furloughing certain “non-essential” state workers in an effort to cut state expenses.  Click here and here and here.  Thankfully Rhode Island is required to balance its budget every year (unlike the Federal government) otherwise who knows what would happen.  However, even with this balanced-budget requirement, our tiny little state still seems unable to properly manage its finances.

According to the Wall Street Journal, the Democrats in the Rhode Island legislature increased spending this year by 12% while requiring the Governor to cut spending by around $68 million.  The Governor is utilizing these furloughs as part of his plan to cut spending.  Naturally, the state employees unions have vowed to fight this furlough, and they may win.  Click here for the full Wall Street Journal article.

Whether or not the unions prevail, tax experts are concerned about the impact on taxes in the Ocean State.  The Governor and the Legislature already raised the tax rate on long-term capital gains from 1.67% to 9.9%.  Given their reluctance to actually cut spending or to take any sort of business-friendly measures which would increase the base upon which the state income tax is calculated, the Legislature may see no other option than to increase the tax rate (directly or indirectly) on income.  They could, of course, increase other tax rates, such as the sales and use tax, or broaden the sales and use tax base (e.g. to include services).  The Legislature and the Governor already imposed a new tax on Amazon.com and other on-line retailers.  We are still waiting to see how much additional tax revenue the state will receive after several on-line retailers withdrew from Rhode Island.

The tax attorneys at McLaughlin & Quinn, LLC are keeping an eye open and an ear to the ground monitoring any rumors or discussions of changes to the Rhode Island tax laws.  As soon as we hear anything, we will post an entry to the M&Q Blog or send out an e-mail alert.  If you are interested in receiving our e-mail newsletters and alerts, please contact Michaela Costa by e-mail at mcosta@mclaughlinquinn.com and ask to be added to our list.

In the meantime, business owners, investors and everyone else in Rhode Island will just keep operating under the current rules, while wondering who’s running Rhode Island.

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Posted in IRS and state tax collections, Tax Current Events and News, Tax planning

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