Tax research

CONGRESS EYES INTERNET TAXESWASHINGTON, D.C. - Two bills circulating on Capitol Hill are looking at different ways to generate tax revenue from the Internet.

Blues singer Robert Cray is singing the blues about his accountants, and taking them to court. Cray filed a suit in Los Angeles Superior Court against Chapnick, Smuckler & Associates, and its principals Jerry Chapnick and Keith Smuckler, according to CBS. He accuses the firm of cheating him, his wife, and their company, charging them with fraud, negligence, and breach of contract and fiduciary duty. The Crays claim the firm did not inform them it was drawing up to $235,000 from their credit line. They say Chapnick, Smuckler also did not check on whether the Crays were entitled to a $55,000 refund in taxes they paid in the United Kingdom. In addition, the Crays blame the firm for a $2,000 penalty on unpaid property taxes. After they engaged the firm around the end of 2001, the Crays learned the firm was not licensed to operate in the state of California. They sacked the firm in August 2006.

The U.S. Department of Justice has filed suit against Mary Powell, a tax preparer in East St. Louis, Ill., and is seeking an injunction to shut down her service.

The IRS has certified that some models in Mazda’s 2008 line of hybrid cars qualify for the Alternative Motor Vehicle Credit.

Little Rock, Ark. - Arkansas accounting giant Moore Stephens Frost has acquired a North Carolina firm, Lynch and Howard.

Think you've come up with a perfect tax strategy for your high-end clients? Before you go ahead with it, you might want to check if it's been patented. You're liable to be sued for patent infringement if someone else thought of it first.It all started in 1998, when a federal appeals court ruled that business methods could be patented. Since then, more than 60 tax-strategy patents have been granted, and 86 more are pending. And the first infringement suit has been filed over the SOGRAT patent.

One way to judge which are the most significant provisions in the Small Business and Work Opportunity Tax Act of 2007 - signed by President Bush on May 25, 2007, as part of a larger bill focused on war funding - is to look at which provisions are projected to cost the most or to raise the most revenue.The tax breaks included in this legislation are fully paid for with revenue increases. The main premise behind the legislation is that small business should receive some tax breaks to help offset the cost of being required to pay workers more due to the minimum wage increase. It would be a rare small business that finds that the cost of increasing the minimum wage for its workers is fully offset by the tax breaks included in the legislation.

Option One Mortgage, the beleaguered subprime lending unit of tax-prep giant H&R Block, has mired its parent company deeper into financial malaise, losing a $1 billion warehouse credit line from Lehman Bros. Holdings. In a federal filing, Lehman indicated that it did not renew the credit line after it expired late last month. The mortgage unit was one of the primary drivers behind the company posting a year-end loss of $434 million. Block has agreed to sell the arm to private equity concern Cerberus Capital Management, a deal that is supposed to close October 31. Cerberus stipulated that the division needs $8 billion of borrowing capacity in order for the sale to proceed. Block said that despite the non-renewal from Lehman, the company had the requisite borrowing capacity.

A Greenville, S.C. federal judge has permanently barred Robert Barnwell Clarkson and his "Patriot Network" from promoting tax fraud schemes, the Justice Department announced. The court found that Clarkson falsely instructed Patriot Network members that they need not file federal income tax returns, and helped members obstruct Internal Revenue Service efforts to collect taxes. In seeking the permanent injunction, the Justice Department submitted Clarkson's Untaxing Packet, which he sold for $300. The packet contained form letters that he falsely claimed would exempt purchases from federal tax laws. Papers filed in the case showed that Clarkson boasted that he "untaxed" more than 8,000 people over 30 years. The court detailed Clarkson's efforts at interfering with tax collection, including his instruction to transfer property to nominees and to sue IRS agents who attempt to collect taxes. Clarkson, a disbarred attorney from Anderson, S.C., has twice been convicted of federal tax-related crimes. The court ordered Clarkson to give copies of the injunction to people who bought his products and to post the injunction on the Patriot Network Web site.

The Internal Revenue Service has redesigned Form 8857, Request for Innocent Spouse Relief, to help reduce follow up questions and taxpayer burden. The form will ask more questions initially, but collecting critical information early in the process will allow faster processing of the request. The IRS says that the new design will eliminate an estimated 30,000 follow-up letters annually, resulting in a reduced burden and quicker answer for taxpayers and less cost for the government. When a taxpayer files a joint return, both spouses are jointly and individually responsible for the tax. If one taxpayer believes that only his or her spouse or former spouse should be responsible for the tax, the taxpayer can request innocent spouse relief. The redesigned form will be easier to understand and to complete and will help educate taxpayers about the process. Previously, the questionnaire was separate from the form.

Fewer taxpayers took advantage of the Internal Revenue Service's free electronic tax-filing service in 2007 than in previous years, according to a new audit report by the Treasury Inspector General for Tax Administration. In 2005, a record 5.12 million taxpayers used the Free File Program. That number fell to 3.9 million in 2006, in large part due to a new requirement that limited eligibility for the program to taxpayers with an adjusted gross income of about $50,000 a year or less. In testimony before the House Ways and Means Committee's Oversight Subcommittee last year, Inspector General J. Russell George expressed concern about the eligibility limitations, which he said, could contribute to a significant slowing of the growth in electronic filing. Although no further adjustments were made to the program in 2007, as of April 14, auditors found that only 3.3 million taxpayers filed returns using the free service -- a decline of 4.7 percent below the same period last year. "It is imperative that the IRS carefully examine the reasons this free service is not being used by more taxpayers," George said. "The IRS must review its marketing strategy to better target taxpayers who file paper returns even though they are eligible for this program. Equally important, the IRS must ensure that the software it promotes on its Web site provides taxpayers with accurately calculated tax returns," he said. The decline in the Free File Program comes at a time when the IRS is under pressure to increase the number of taxpayers who file electronically. In 1998, Congress established a goal for the IRS to have 80 percent of all federal tax and information returns filed electronically by the end of 2007. The Free File Program was one of several initiatives designed to help meet that goal, which is unlikely to be fulfilled this year.

The IRS has publicized a new draft version of Form 1118, "Foreign Tax Credit - Corporations," used by U.S. corporations to compute the foreign tax credit for taxes paid or accrued to foreign countries or U.S. possessions. "They adjusted the form to accommodate changes made by the 2004 American Jobs Creation Act," said Selva Ozelli, a New York-based CPA and international tax attorney. Under the act, the number of separate foreign income categories has been reduced from eight to two, and U.S. source income is re-characterized as foreign source income in cases where a taxpayer's foreign tax credit limitation has been reduced in an earlier year due to an overall domestic loss. "The most important change is that they've added a column to help taxpayers determine U.S. income that could be recharacterized due to recapture of overall domestic losses," said Ozelli. "This column will also help them in tracking their balances of overall domestic losses," she said.

Former Securities and Exchange Chairman Richard Breeden, whose hedge fund holds roughly 2 percent of the shares of H&R Block, is seeking a seat on the board of the tax-prep giant. Breeden, who now heads Breeden Capital Management LLC, will be on the company's proxy ballot along with two others during a September election. Block has an 11-member board. In the wake of posting a year-end loss of $434 million, investor pressure has mounted to force management to sell the company.

Internal Revenue Service chief counsel Donald L. Korb has named Stephen Kesselman to become deputy chief counsel, operations, succeeding IRS veteran Donald T. Rocen. Kesselman is currently serving as counsel in the IRS' Small Business/Self-Employed Division. Rocen, who has held a number of posts in the Office of the Chief Counsel for 15 years, will leave the service July 27 for the Washington law firm of Miller & Chevalier. Lon B. Smith, associate chief counsel of financial products and institutions, will now become national counsel to the chief counsel for special projects. He has served in the Office of Chief Counsel for 30 years.

The Internal Revenue Service ruled that a partial termination of a qualified plan occurred where 23 percent of a plan's participants were no longer active due to the closing of one of the employer's four locations. Therefore, all plan participants were fully vested. Under Code Section 411(d)(3), a plan is required to provide that, upon its partial termination, the rights of all affected employees to benefits up to the date of the termination must be non-forfeitable. Under the regs, the IRS uses a facts and circumstances test to determine whether a partial termination has occurred. The IRS ruled that if the turnover rate is 20 percent or more, there is a presumption that a partial termination of the plan has occurred. The IRS determined the turnover rate by dividing the number of participating employees who had an employer-initiated severance from employment during the applicable period - in this case, the plan year - by the sum of all of the participating employees at the start of the applicable period and the employees who became participants during the applicable period. The 20 percent threshold merely creates a presumption, according to the IRS. Facts and circumstances indicating that the turnover rate for an applicable period is routine, and not the result of a shutdown as in this instance, favor a finding that there is no partial termination. The IRS also noted that a partial termination of a qualified plan can also occur for reasons other than turnover. For instance, a partial termination can occur due to plan amendments that adversely affect the rights of employees to vest in benefits under the plan, plan amendments that exclude a group of employees who have previously been covered by the plan, or the reduction or cessation of future benefit accruals resulting in a potential reversion to the employer.

The Supreme Court has agreed to decide whether an exception in the Internal Revenue Code allows a trustee to deduct the full amount of fees paid to an investment advisor. The case of Knight v. Commissioner of Internal Revenue, U.S., No. 06-1286, centers on trustee Michael J. Knight, who paid an investment advisor to manage the assets of a trust. When the trust filed its tax return, Knight sought to deduct the full amount of the fees under 26 U.S.C. Section 67(e)(1). However, the IRS said the fees are subject to the 2 percent rule. The U.S. Tax Court agreed with the IRS, as did the U.S. Court of Appeals for the Second Circuit, which ruled against Knight in October. But Knight argued the fees fall under an exception to the general rule because they were paid in connection with the administration of the trust, and because they would not have been paid unless the assets were held in trust. In May, both the New York Bankers Association and the American Bankers Association May 22 filed a brief in support of the trustee, urging the U.S. Supreme Court to hear the case.

Tax and news publisher BNA has named Robert P. Ambrosini to the post of vice president and chief financial officer. Ambrosini, who officially began with BNA June 18, has held CFO posts at such organizations as Black Entertainment Television and Texfi Industries. He also was senior vice president finance and accounting for the National Geographic Channel. Ambrosini also serves on the board of the Washington Hospital Center Foundation.

Prosecutors are urging a U.S. district Judge to dismiss indictments against 13 of executives of Big Four firm KPMG on charges of marketing illegal tax shelters. According to The Wall Street Journal U.S. District Judge Lewis A. Kaplan had previously ruled that the government had overreached in its years-long investigation, violating the defendants' constitutional rights to counsel and due process. In a June 22 filing in federal court in Manhattan, prosecutors said that Kaplan's decision showed that there was a fundamental flaw in the proceedings and that he must dismiss the indictments. As a result, 13 of the 18 defendants may now never stand trial, including the accounting giant's former vice chairman, Jeffrey Stein, the highest-ranking executive named in the indictment. However, legal experts opined the petition was a strategy to allow allowing prosecutors to appeal Kaplan's ruling, a maneuver that may yet allow prosecutors to resume the proceedings against all 18 of the defendants. The indictments were initially handed down in 2005 accusing the defendants of selling fraudulent tax shelters from 1996 through 2002, that cost the government some $2.5 billion in revenues. In striking an agreement to escape a potentially fatal criminal indictment that could have shuttered the firm, KPMG agreed to pay a $456 million fine to the federal government and spend the next 16 months on probation overseen by a federal monitor. The firm also agreed to close its tax business for high-net-worth individuals. Kaplan has scheduled a hearing July 2. A decision regarding the government's argument, as well as the motions to dismiss the indictments, could be issued this summer.

Taxes have overtaken health care as the leading concern for small business owners, according to the latest Small Business Research Board study. Taxes were the leading concern of business owners during the second quarter of 2007, replacing health care, which previously was cited as being the single greatest issue impacting small businesses. Some 770 small business owners in the U.S. who responded to the nationwide poll, co-sponsored by International Profit Associates, indicated that taxes were tops among key concerns of small business owners followed closely by overall economic conditions and energy/fuel costs. Health care was fifth on the list of concerns. The quarterly poll of small business owners and managers also indicated that taxes were the leading concern in two of the four U.S.. regions -- ranking number one in the South/Southeast and in the Western states. Taxes were ranked second in the Midwest and fourth in the Northeast. Meanwhile, economic conditions were identified as the leading concern by business owners in the both the Northeast and Midwest. However, neither energy and fuel nor health care finished in the top five in the Western U.S., where taxes and economic conditions were followed by foreign competition, the cost of materials and finding quality employees as the leading concerns.

The Joint Committee on Taxation has issued a report on the individual alternative minimum tax in advance of a Senate Finance Committee hearing scheduled for Wed., June 27. The JCT report listed several selected reform options, which include: indexing or increasing the exemption amounts; allowing the deduction for personal exemptions and standard deductions to be used when computing the AMT; permitting state and local taxes against the AMT; reducing the minimum tax rates; eliminating the phase-out of the minimum tax exemption; allowing nonrefundable personal credits to offset the minimum tax after 2006; and repealing the AMT. The report is available at: http://www.house.gov/jct/x-38-07.pdf.