Deadline Changes for 2016 Tax Returns and 2016 FBAR

August 2nd, 2015

Congress passed and President Obama signed the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 in late July. That law’s primary function has nothing to do with tax; however, it will have a major impact on entity tax returns for 2016 and for the 2016 FBARs:

  • Partnership tax returns will be due on March 15th, not April 15th (for calendar year partnerships);
  • C Corporation tax returns will be due on April 15th, not March 15th (for calendar year C Corporations);
  • S Corporation tax returns remain due on March 15th (unchanged); and
  • FBARs (FINCEN Form 114) will be due on April 15th, not June 30th.  An extension for six months will be available (until October 15th).

The most important change for my practice is the FBAR. Here’s the exact change in the law:

The due date of FinCEN Report 114 (relating to Report of Foreign Bank and Financial Accounts) shall be April 15 with a maximum extension for a 6-month period ending on October 15 and with provision for an extension under rules similar to the rules in Treas. Reg. section 1.6081–5. For any taxpayer required to file such Form for the first time, any penalty for failure to timely request for, or file, an extension, may be waived by the Secretary.

It is unclear whether a separate extension for the FBAR will need to be filed. The reference to Treasury Regulation 1.6081-5 is for the automatic two-month extension of time to file for those residing outside the United States, so it appears those who do so reside will have a June 15th deadline for filing the FBAR (with a four-month extension available until October 15th).

There are several other deadline changes in the law, but they all are for 2015 returns due in 2016 (not 2014 returns due in 2015). Also, because Friday, April 15, 2016 is Emancipation Day in the District of Columbia the deadline for tax returns will be extended to Monday, April 18, 2016. However, it is likely the deadline for FBARs will not be extended from April 15, 2016. The deadline for FBARs is a receipt deadline, not a postmark deadline, as is not extended if the deadline falls on a weekend or holiday. My strong suspicion is that this change in deadline could be a huge FUBAR given the three day extension for tax returns in 2016. We will have to see if common sense exists within FINCEN or if bureaucratic regulatory procedures take precedence (which is what I suspect will happen).

Judge Threatens IRS, Justice Department; IRS Closely Monitored Tax-Exempt Applications; IRS Responses to Exempt Organizations Were Designed to Stop Inquiries to Congress

July 29th, 2015

Yes, I’m still on vacation. But twin developments in the IRS scandal force me to post. Yesterday, the IRS released documents to Judicial Watch regarding the IRS scandal. Judicial Watch had sued the IRS under the Freedom of Information Act (FOIA) to obtain the documents.

I need to be brief (I am on vacation), so I’ll just include the summary page:

“These recovered Lois Lerner emails had to be dragged out of the Obama IRS, which is still resisting a federal court order requiring disclosure of Lerner’s ‘lost’ emails,” said Judicial Watch President Tom Fitton. “This material shows that the IRS’ cover-up began years ago. We now have smoking-gun proof that top officials in the Obama IRS unlawfully harassed taxpayers just to keep them from complaining to Congress about IRS’ targeting and abuse. No wonder the Obama IRS has had such little interest in preserving or finding Lois Lerner’s emails.”

Yes, the IRS lied to Congress. There’s no other way of putting it. And to me it seems more and more likely that someone in the Administration ordered the targeting.

Today was a scheduled “status hearing” in Judicial Watch’s FOIA lawsuit. Judge Sullivan was not happy with the IRS. He issued the following order:

At the July 29, 2015 status hearing, the Government agreed that the Court’s July 1, 2015 oral order from the bench was clear and enforceable. Nonetheless, the Government reasoned it inappropriate to file a motion for reconsideration until a written order was issued. As expressed at the hearing, the Government’s reasoning is nonsensical. Officers of the Court who fail to comply with Court orders will be held in contempt. Also, in the event of non-compliance with future Court orders, the Commissioner of the IRS and others shall be directed to show cause as to why they should not be held in contempt of Court. The Court’s July 1, 2015 ruling from the bench stands: (1) the Government shall produce relevant documents every Monday; (2) the Government’s document production shall be accompanied by a status report that indicates (a) whether TIGTA has turned over any new documents to the IRS, (b) if so, the number of documents, and (c) a timeframe for the IRSs production of those documents. Signed by Judge Emmet G. Sullivan on July 29, 2015.

Judge Sullivan is definitely annoyed with the IRS and the Department of Justice’s conduct in this case. I’ll again note Judicial Watch’s summary as it really says it all:

“In a dramatic court hearing today, Judge Sullivan made it clear he would personally hold accountable the IRS Commissioner Koskinen and Justice Department attorneys for any further contempt of his court orders in Judicial Watch FOIA lawsuit,” said Judicial Watch President Tom Fitton. “The missing and-then-not missing Lois Lerner saga is a stark example of the Obama administration’s contempt for a federal court and the rule of law. That Obama administration officials would risk jail rather than disclose these Lerner documents shows that the IRS scandal has just gotten a whole lot worse.”

I now return to my regularly scheduled vacation.


July 25th, 2015

It’s time for my annual vacation. If something earth-shattering in the tax world happens while I’m relaxing, I’ll take time out to post on it. Otherwise, enjoy the fine bloggers listed in the blogroll on the right.

I’ll be back on Tuesday, August 4th.

Judicial Watch: IRS Used Donor Lists to Target Audits

July 25th, 2015

Remember the IRS Scandal? Well, the nuggets continue to drip out. On Friday, Judicial Watch announced that “New Documents Show IRS Used Donor Lists to Target Audits.” Here’s an excerpt:

But then, in February 2011, at least five donors of an unnamed organization were audited.

The documents show that Crossroads GPS, associated with Republican Karl Rove, was specifically referenced by IRS officials in the context of applying the gift tax. Seemingly in response to the Crossroads focus, on April 20, IRS attorney Lorraine Gardner emails a 501(c)(4) donor list to former Branch Chief in the IRS’ Office of the Chief Counsel James Hogan. Later, this information is apparently shared with IRS Estate Gift and Policy Manager Lisa Piehl while Gardner seeks “information about any of the donors.”

Needless to say, the IRS is supposed to ignore politics. Given an unnamed IRS official stating, “The U.S. Chamber of Commerce is a 501(c)(6) organization and may find itself under high scrutiny. One can only hope[,]” the reality is different.

Since the IRS and the Obama Administration is stonewalling Congress in telling what happened, what is Congress to do but cut the IRS’s budget. Frankly, it’s the only action they can do. I don’t like the choice, but it’s the only option available. If and when the IRS and the Obama Administration open up, hopefully the IRS’s budget will be increased but until then the taxpaying public (including tax professionals) is paying the price for the Obama Administration’s obfuscation.

FTB Disables “MyFTB” Registrations Until 2016

July 24th, 2015

California’s Franchise Tax Board announced yesterday that they disabled registration for “MyFTB,” the online interactive FTB system, until 2016.

Beginning July 23, 2015, we disabled the ability to register for a MyFTB account while we enhance the registration process. This also impacts the ability to register for CalFile and Web Pay for Businesses. We will reactivate online registration in January 2016 when we launch our enhanced version of MyFTB…

The following services do not require registration and are still available to practitioners or their clients:

  • Check refund status.
  • Web Pay for Individuals (non-registered version).
  • Pay by credit card.
  • Apply for an installment agreement.
  • Use Live Chat.
  • Calculate their tax.
  • Take Head of Household self test.
  • Ask a tax question by e-mail.
  • Get an e-mail reminder to file/make estimate payments.
  • Use subscription services.
  • Access MYCOD account.
  • Report tax fraud.
  • Get an entity status letter.
  • File 199N e-post card.

If you are not already registered with MyFTB, you will need to call the FTB in order to obtain your information.

Fail, Caesar! Update

July 23rd, 2015

Yesterday US Bankruptcy Judge Benjamin Goldgar ruled that various lawsuits against Caesars Entertainment can go forward. Caesars Entertainment Operating Company (CEOC) is already in bankruptcy; this ruling increases the chances that Caesars Entertainment Corporation (CEC) follows CEOC into Chapter 11.

“‘There is now the potential that this bankruptcy can get very litigious, complex and long,’ said David Tawill, president of the Maglan Capital hedge fund.”

So what does this mean? First, I don’t think there’s potential that the bankruptcy will get very litigious, complex and long; rather, there’s near certainty that it will. I earlier wrote that the bankruptcy would take “a long time” to resolve; I think that’s certain.

Additionally, that the other lawsuits are going forward is bad news for the current owners of CEC. Imho, they were hoping that they could create a “bad” company, get rid of a ton of debt, and emerge from Chapter 11 with something of value. That’s now less than an even bet.

Instead, the lawsuits are likely telling the truth: That CEOC was created as a way of shuffling assets. This means it is now more likely than not that the rest of Caesars will end up in Chapter 11.

That would put a stop to the lawsuits. It would also mean the current majority owners of CEC (Apollo Global Management and TPG Capital) will see the value of their investment go towards $0. It could also mean that some of the current assets of Caesars will end up being sold. The big problem with Caesars is their debt load. Bankruptcy will get rid of the debt, and many of the underlying assets have substantial value.

One last certainty: The lawyers involved will be making plenty of money.

They’ll Know It in Dubuque

July 19th, 2015

Perhaps someone will understand the reference in the title (it’s to one of my favorite novels). But this is a tale from Dubuque, Iowa about a scheme gone bad.

James Spaulding was the director of the Clarke University Bookstore; he and Thomas DeFelice came up with the perfect crime. Well, since you’re reading about it here it at least started off that way….

They created a phony book company; that company then invoiced the Clarke bookstore for books that hadn’t been sold to them (but that were approved by Mr. Spaulding). The fraud was over $300,000. Compounding Mr. Spaulding’s troubles he lied to a federal grand jury.

They both pleaded guilty: Mr. Spaulding of two counts of filing false tax returns and one of mail fraud while Mr. DeFelice pled to one count of filing false tax returns. Mr. Spaulding earlier received 57 months at ClubFed; Mr. DeFelice received 12 months at ClubFed.

As to the reference
, it’s to the Pulitzer Prize winning novel Advise and Consent. If you haven’t read this novel of Washington politics, I highly recommend it. As to why “They’ll Know It in Dubuque” is a reference to Advise and Consent, you will just have to read the novel to find out.

Yes, Illegal Income Is Taxable

July 19th, 2015

If you commit fraud do you have to report the illegal income on your tax return? Absolutely! Illegal income is just as taxable as legal income. Al Capone went to prison not for the murders and other crimes he committed but for tax evasion.

William Richmond of Atkinson, New Hampshire learned that lesson. He held a durable power of attorney and used that to allegedly commit fraud. This past week he pleaded guilty to tax evasion (but not the underlying fraud); he failed to report the illegal income on his tax returns. As part of his plea he will be required to make restitution to the couple he stole from. He may also be heading to ClubFed.

Where There’s Smoke…

July 12th, 2015

Martin Olive operates “The Vapor Room,” a medical marijuana dispensary in San Francisco. His business, a sole proprietorship, was audited by the IRS for 2004 and 2005. He lost. He took that case to Tax Court. Back in August 2012 he lost (Olive v. Commissioner, 139 T.C. No. 2). He appealed that decision to the Ninth Circuit Court of Appeals. On Thursday the Ninth Circuit agreed with the Tax Court.

The issue in this case was 26 U.S.C. § 280E. That section of law prohibits a taxpayer from deducting any expenses (but not Cost of Goods Sold) related to a trade or business of trafficking in a controlled substance prohibited by Federal law. Marijuana–which may be legal under state law–is decidedly a controlled substance under Federal law.

The first argument of Mr. Olive was that he had multiple lines of businesses. The Court disagreed.

An analogy may help to illustrate the difference between the Vapor Room and the business at issue in CHAMP. Bookstore A sells books. It also provides some complimentary amenities: Patrons can sit in comfortable seating areas while considering whether to buy a book; they can drink coffee or tea and eat cookies, all of which the bookstore offers at no charge; they can obtain advice from the staff about new authors, book clubs, community events, and the like; they can bring their children to a weekend story time or an after-school reading circle. The “trade or business” of Bookstore A “consists of” selling books. Its many amenities do not alter that conclusion; presumably, the owner hopes to attract buyers of books by creating an alluring atmosphere. By contrast, Bookstore B sells books but also sells coffee and pastries, which customers can consume in a cafe-like seating area. Bookstore B has two “trade[s] or business[es],” one of which “consists of” selling books and the other of which “consists of” selling food and beverages.

Mr. Olive also argued that congressional intent and public policy should have § 280E not apply to medical marijuana.

Application of the statute does not depend on the illegality of marijuana sales under state law; the only question Congress allows us to ask is whether marijuana is a controlled substance “prohibited by Federal law.” I.R.C. § 280E. If Congress now thinks that the policy embodied in § 280E is unwise as applied to medical marijuana sold in conformance with state law, it can change the statute. We may not.

What this means for marijuana distributors and sellers is that they can deduct their Cost of Goods Sold but that they cannot deduct business expenses on their federal tax returns. It is likely, though, that on many state tax returns those business expenses will be deductible; after all, the business is selling a legal product on the state level. (This will likely depend on both the legality of marijuana under state law and the degree of conformity between the state and federal tax law in that state.)

Case: Olive v. Commissioner, No. 13-70510 (July 9, 2015)

The Operation Was a Success, but the Patient Died

July 7th, 2015

No, I’m not veering into medicine today. The title of this post is a homage to the title of a chapter in a book by the late Fred Karpin. Mr. Karpin was writing about doing everything right, but still having your contract fail in bridge. Today, we’ll look at how the IRS won all the arguments in Tax Court but lost the case.

George Starke played in the NFL back in the 1970s and 1980s, and helped lead the Washington Redskins to three Super Bowl victories. After retiring from the NFL Mr. Starke began the Excel Institute; the Washington (DC) area nonprofit provided basic education skills and job counseling and technical training. While Mr. Starke founded the institute, eventually Jack Lyon became the chairman. Mr. Starke and Mr. Lyon came to disagreements, and Mr. Starke left Excel in 2010. Excel sent Mr. Starke a Form 1099-MISC alleging $83,698.45 of income. Mr. Starke didn’t include that on his 2010 tax return and this dispute found its way to Tax Court.

Mr. Starke either received advances or loans of $83,698.45; the IRS argued they were advances and not loans and thus income. Advances are income in the year received.

We agree that the payments are not loans because we find no evidence that Mr. Starke intended to repay them at the time the payments were made. Although Mr. Starke incurred payroll deductions by Excel, he testified that he did not know why the amounts were being deducted. Further, there is no evidence of loan documents or any other document signed by Mr. Starke and a member of Excel memorializing a loan agreement. Even the 2005 letter from Excel’s accountants that set forth a repayment plan makes clear that Excel and its accountants did not consider the payments to be loans, instead characterizing them as advances.

So the IRS wins, right? Not so fast:

Because we agree that the payments were not loans, we would ordinarily look to whether the payments are considered advances; however, whether the payments are advances is irrelevant in this case because all of the items recorded by Excel as advances or prepaid expenses were recorded for years that are not before the Court. According to Excel’s general ledgers, all of the payments were made before 2010. Because advances are taxable for the year in which they are paid, any advance would have been taxable for years that are not before us.

The advances all occurred prior to 2010, so the income was earned in the past–not 2010, not the year in question. Each tax year stands on its own. So Mr. Starke wins, and while the IRS won the arguments they lost the battle.

Case: Starke v. Commissioner, T.C. Summary 2015-40