News and miscellaneous legal topics – 2004

IRS News Release IR-2004-139, November 17, 2004 announces that beginning January 1, 2005, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be: 11/28/04

  • 40.5 cents a mile for all business miles driven, up from 37.5 cents a mile in 2004;
  • 15 cents a mile when computing deductible medical or moving expenses, up from 14 cents a mile in 2004; and
  • 14 cents a mile when giving services to a charitable organization.

The IRS announced on October 25, 2004 that a revised Form 656 package, taxpayer application for an offer in compromise, is now available. 10/29/04

The IRS warns taxpayers to be careful of promoter claims to settle tax delinquencies cheaply 10/29/04

Some promoters are inappropriately advising indebted taxpayers to file an Offer in Compromise (OIC) application with the IRS. This bad advice costs taxpayers money and time.

The 2005 wage base for determining the maximum amount of earnings subject to the Social Security (OASDI) tax will increase $2,100 to $90,000 10/21/04

up from $87,900. The other Social Security tax for Hospital Insurance (HI, or Medicare tax), which has no wage cap. Monthly Social Security and Supplemental Security Income benefits cost of living adjustment (COLA) is 2.7% for 2005. The nanny tax on cash remuneration paid by an employer for domestic service in the employer’s private home is not FICA wages if the amount paid during the year is less than $1,400 (this is the same amount for 2003 and 2004). SSA News Release, October 19, 2004.

Classroom Expense Deduction Gets New Lease On Life 10/21/04

under the recently enacted Working Families Tax Relief Act of 2004 (H.R. 1308), which extended the popular $250 annual tax break retroactively back to January 1, 2004 and forward through 2005, permitting teachers and other education professionals will be able to deduct up to $250 in unreimbursed out of pocket classroom expenses for two more years. Educators must keep receipts for paper, printer cartridges, crayons, and other qualifying classroom supplies for 2004 tax preparation. Qualifying classroom expenses include paper, pens, printer cartridges, scissors, glue, and other items. Expenditures above $250 may be deductible if the taxpayer itemizes his or her return and the expenses are deductible as miscellaneous itemized deductions, subject to the two-percent of adjusted gross income floor. Qualifying taxpayers must work at least 900 hours during the year as a teacher, principal, counselor, aide, or instructor. In addition, eligible taxpayers must be engaged in elementary or secondary education. Public and private K-12 schools qualify. Some states have created similar deductions.

IRS lien attached to bankruptcy debtor’s spouse’s 50% interest in tenancy by entirety property for unpaid FICA taxes for which he was solely liable. 10/15/04

The debtor’s argument that the value of the property should have been based on life expectancy was rejected. While normally the property ceases to be held in a tenancy by the entirety, the taxpayer takes the entire property in fee simple, and the federal tax lien attaches to the entire property in the bankruptcy context, the extent of the IRS’s lien must be determined prior to confirmation of a plan, and if the proposed Plan of Reorganization is confirmed, and the debtor complies with its provisions, the IRS’s lien would be limited to the extent determined during the confirmation process, even if the non-liable spouse were to later predecease debtor.

EU public LLC added to check-the-box list 10/15/04

The IRS and Treasury announced will amend the check-the-box regs to accommodate the addition of a new type of European Union business entity, a public limited liability company (public LLC), to the list of entities treated as corporations under Code Sec. 7701.

Congress passed the American Jobs Creation Act of 2004 on October 11, 2004, containing mainly business-orientated tax breaks, but also important tax incentives and changes for individuals. 10/15/04

The Working Families Tax Relief Act of 2004 was passed by Congress on September 23. 9/30/04

For the fourth time in four years Congress has enacted some big tax cuts. How much you’ll save in taxes depends on your filing status, family circumstances and business situation, and how you maximize benefits through careful planning. This letter will help you identify which parts of the new $146 billion tax cut package can benefit you. Timely tax planning can enhance these benefits.

Missouri Sales Tax Holiday: 7/15/04

Beginning 8/13/04 and ending 8/15/04, sales of the following are exempt from sales tax: clothing and footwear costing $100 or less, school supplies costing $50 or less, computer software costing $200 or less, and personal computers costing $2,000 or less. (S.B. 11, Laws 2003; Mo. Rev. Stat. § 144.049)

States seek to counter Geoffrey 6/24/04

Under the “Geoffrey Tax Loophole,” named after the familiar giraffe mascot of Toys “R” Us (Geoffrey owns the rights to the chain’s mascot, a giraffe by the same name along with trademarks and other properties used by the stores), a local store pays a certain percentage of its profits to an out-of-state sister company that holds rights to the use of trademarks and other intangibles. The payment is recorded as a business expense and the store does not pay state income tax on it. In the 1992 Quill decision (a sales tax dispute over out-of-state catalogue sales) the U.S. Supreme Court ruled that states cannot tax out-of-state corporations unless they have a physical presence in the state. Corporations say the use of a trademark owned by an out-of-state company does not meet the Supreme Court’s standard, but states say the ruling applied only to sales taxes and not income taxes, and are arguing economic presence instead of physical presence is sufficient.

The Social Security Administration will eliminate magnetic tapes and cartridges 6/24/04

From the June 16, 2004 Federal Register notice: “The Social Security Administration will eliminate magnetic tapes and cartridges beginning with tax year (TY) 2005 W-2 reports (due to SSA in calendar year 2006) … wage reports shall be filed electronically by employers or third-party preparers using the Social Security Administration’s Business Services Online (BSO).

Section 2 of the Tax Corrections Bill of 2003 (H.R. 3654, Sen 1984), entitled “Amendments Related to the Jobs and Growth Tax Relief Reconciliation Act of 2003,” makes several changes. 2/21/04

  • The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA)required taxpayers must hold stocks or mutual fund shares for at least 61 days of a 120-day period starting 60 days before the stock trades without its dividend (“ex-dividend” date) and ending 59 days after the ex-dividend date. H.R. 3654 would extend the 120-day period 1 more day enabling investors buying stocks the day before the ex-dividend date to qualify for the lower tax rates. The bill also extends the 180-day holding period for preferred stocks one more day to 181 days.
  • Partnerships, S corps, and estates with fiscal years beginning in 2002 can pass through dividends paid out to the pass-through entity after December 31, 2002 to partners and shareholders at the new lower rate. Dividends must be received from domestic corporations or qualifying foreign corporations.
  • Net capital gain for determination of the amount taxed at the 25 percent rate is made without regard to qualified dividend income.
  • The extraordinary dividend rule applies to trusts and estates as well as individuals.
  • The IRS announced on its web site in IR-2004-22, Announcement 2004-11 and on its web site that it will treat Section 2 of H.R. 3654, Sen 1984 as law even though not yet passed, allowing more taxpayers to take advantage of lower dividend tax rates on their 2003 tax returns without having to wait for passage.
  • Caution: printed versions of 2003 forms and instructions do not reflect the IRS’s change in position; online versions will be revised to reflect the pending tax corrections bill by the end of February.

Taxpayer entitlement to attorneyfees as prevailing party 2/21/04

In Florida Country Clubs, Inc. v. Comm., 122 T.C. No. 3 (2004), the IRS sent taxpayers a 30-day letter proposing to increase the income reported on its 1993 and 1994 returns. After review of the report District Counsel rejected the reviewer’s proposal and advised her to obtain taxpayers’ agreement to extend the statutory period of limitations for assessment, to allow time to further explore the facts of the case. Taxpayers consented to extend the statutory period of limitations until June 30, 1999. The issue was settled without finding any deficiency. Because the IRS did not send taxpayers any notice of deficiency, nor did respondent issue the reviewer’s proposal to petitioners it had taken no position so as to qualify for an award of administrative costs as “prevailing party” under sec. 7430(c)(7).

Missouri has introduced, but has not yet been enacted, legislation to comply with the streamlined sales and use tax agreement

Missouri S.B. 830, reported to Senate Ways and Means Committee on January 12, 2004. The stated effective date is August 28, 2004. 2/21/04 last action was hearing before Ways and Means Committee on 3/30/04 1/30/05

The Current Bill Summary (from the House). SB 830 – This act brings Missouri sales and use tax laws into compliance with the streamlined sales and use tax agreement. Compliance involves modifying many sections throughout the law, based upon meeting the following criteria:

  1. The sourcing of sales must be changed to be based on receipt. This means that current law is modified, where necessary, to consider the point of sale, and thus the applicable tax rate, to be the point of receipt of the product;
  2. When a city annexes property, the change to the tax rate will take place on the first day of the second calendar quarter after the Director of Revenue receives notice of the boundary change;
  3. The same provisions as in (2) shall apply to rate changes;
  4. All sales taxes must be administered at the state level if they are not already;
  5. All state and local sales taxes must have the same base. This means that exemptions at the state and local level must be identical;
  6. Certain definitions, including a definitions for “delivery charges”, “food” “lease or rental”, “purchase price”, “sales price”, “tangible personal property” and other modified definitions, must be adopted from the streamlined sales and use tax agreement;
  7. The Department of Revenue can require electronic filing and payment of the sales and use tax;
  8. Registration for out of state sellers is simplified and no bond is required;
  9. No caps or thresholds may exist on the collection of sales or use taxes; and
  10. Out of state sellers must be offered uniform, simplified, electronic filing.

Missouri legislation introduced on determining if costs for intangibles paid to a related out-of-state entity by an in-state corporation may be deducted 2/21/04

The Missouri House passed a bill, not yet enacted, establishing a procedure to determining if expenses and costs for intangibles (e.g., trade mark and patent royalties) paid to a related out-of-state entity by an in-state corporation for intangibles may be deducted in computing income subject to Missouri corporate income tax.

loans had no economic substance 2/21/04

In Oren v. Comm., ___ F3d. ___, 2002 WL 1587216, (8th Cir. 2004), the 8th Circuit agreed with the Tax Court that Oren’s loans to HL and HS had no economic substance and, thus, were not real economic outlays, even though Oren and his corporations observed all of the formalities necessary to create legal obligations.

The Tax Court holds in 2 cases that acceptance of offer in compromise is a binding settlement and forecloses raising further issues 2/21/04

  • The Court in Johnson refused to allow taxpayers to reduce their qualified offer to settle1989, 1991, and 1992 tax years before the Court by net operating losses (NOLs) sustained in the 1988, 1990, 1993, finding the offer settled all issues.
  • The Court in Dutton found no a mutual mistake of fact allowing revocation of the offer where the IRS sent a letter erroneously indicating taxpayer would receive a refund in connection with granting taxpayer’s request for innocent spouse relief for 1986 and 1987 (refunds are not allowed) followed by IRS denial of the request for innocent spouse relief after acceptance of an offer in compromise for 1986, 1987 and 1993 through 1999. The erroneous letter was sent after taxpayer submitted an offer, and the error was corrected in subsequent communications with taxpayer’s representative before the offer was accepted.

The Internal Revenue Service launched a new section on IRS.gov containing important information about abusive schemes involving employee retirement plans, intended to warn promoters and plan professionals about the consequences of participating in such schemes. 2/19/04

The Treasury Department and the Internal Revenue Service have issued guidance to shut down abusive transactions involving specially designed life insurance policies in retirement plans, section 412(i) plans. The guidance designates certain arrangements as listed transactions for tax-shelter reporting purposes. 2/19/04

Revenue Ruling 2004-17 holds that taxpayers may not claim IRC 1341 treatment for expenses of environmental remediation. 2/19/04

IRS issued a warning to taxpayers on February 6, 2004 about return preparer fraud 2/19/04

The IRS issued a warning to taxpayers on February 6, 2004 about return preparer fraud involving the preparation and filing of false income tax returns by preparers who claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions on returns prepared for their clients.

The Internal Revenue Service issued a consumer alert on February 6, 2004 2/19/04

advising taxpayers to beware of claims by promoters that tax debts can be settled for pennies on the dollar through the Offer in Compromise Program. Some promoters are inappropriately advising indebted taxpayers to file an Offer in Compromise (OIC) application with the IRS. This bad advice costs taxpayers money and time.