Taxable Talk

There's a tax deadline tomorrow that effects employers and others. If you file paper copies of 1099s/1096s and/or W-2Gs/1096s, you must mail your copies by February 28th, not February 29th. If you electronically file your information returns, you have until April 2nd. These forms are sent to the IRS (either Kansas City or Austin, depending on the location of the entity).

Just to confuse things, the deadline for filing W-2s/W-3s to the Social Security Administration is February 29th. However, if you efile these forms you also have until April 2nd. These forms go to the SSA in Wilkes-Barre, Pennsylvania.

If you're wondering what your tax rebate will be, here are a couple methods to find out. Kiplinger has added a rebate calculator. And Spidell will soon add one to their website.

The IRS has updated their webpage on the rebates. The IRS has posted examples of how social security recipients who normally wouldn't file a tax return should file in order to claim the rebate. That example also shows how recipients of veterans' benefits should file. There's more information here for social security recipients and here for recipients of veterans' benefits.

Thinking about using one of the creative arguments in the Tax Protester FAQ? You may want to think again. Besides the fact (and yes, it's a fact) that all of those arguments won't hold up the IRS and the Department of Justice have decided to step-up activity against the tax protester movement.

Bloomberg is reporting that beginning in March the DOJ and IRS will aim at the movement. Assitant US Attorney General Nathan Hochman, head of the Tax Division, told Bloomberg, "Too many people succumb to the fallacy, the illusion, that you don't have to pay any tax under any set of conditions."

Kay Bell of Don't Mess With Taxes including a link to another webpage debunking tax protester myths (this page is from a law professor at George Washington University).

The Third Circuit Court of Appeals ruling in Swallows Holding, Ltd. v. Commissioner is now available online. The summary of the ruling is:

"This case, grounded in the principles of administrative law, requires that we review the validity of an Internal Revenue Service (IRS) regulation. The Tax Court, in considering this regulation, analyzed it under the factors provided in National Muffler Dealers Ass’n v. United States, 440 U.S. 472, 477 (1979), and concluded that the regulation was invalid. In coming to this conclusion, the Tax Court explained that the standard established in National Muffler had not been replaced by Chevron U.S.A., Inc. v. Natural Resources Defense Counsel, Inc., 467 U.S. 837 (1984), and that the result under either standard would be the same. We do not agree with the outcome reached by the Tax Court. We have determined that the result would not be the same under Chevron analysis as it would be under National Muffler and that the regulation here should be given Chevron deference."

The TaxProf Blog has more.

...or at least within 18 months of their due date. Why? IRS regulations hold that if a foreign corporation files after that date they cannot take any deductions.

Consider a hypothetical corporation, Foreign Company Ltd., which has US source gross income of $100,000, and "necessary and ordinary" deductions of $100,000 for $0 net income. However, Foreign Company Ltd. didn't file. Under the IRS regulations, it's taxed at up to 35% of $100,000 (plus penalties and interest, of course).

This doesn't seem right, and the Tax Court agreed that these regulations were wrong in Swallows Holding, Ltd. v. Commissioner (126 T.C. No. 6). The IRS appealed to the Third Circuit Court of Appeals, and Tax Analysts is reporting (in an opinion that has yet to be released—I'll post a link to the ruling when it's released) that the appeals court has reversed the Tax Court.

The Tax Court decision notes that in a 1940 case the Fourth Circuit held that there's no reference as to time in the then regulations. I'm not sure that the two cases are at odds with each other (the current regulation was issued in 1990), but if they are this would be the kind of case that the Supreme Court would be likely to take (resolving a difference between rulings between two different appeals courts).

In any case, if you're a principal of a foreign entity with US source income you're now on notice. If you don't file the tax return within 18 months of the due date you won't get to deduct anything.

Hat Tip: Roth Tax Updates

If you are going to file Form 982 you will not be able to electronically file until March 3rd. Form 982 is the new form that allows taxpayers to not have to claim canceled home mortgage debt as income. You can submit a paper return with Form 982 today, though.

Hat Tip: Don't Mess with Taxes

The IRS gave the go-ahead to §1031 exchanges for vacation homes. Do note there are significant restrictions. If you own a second home and are considering a §1031 exchange, make sure you follow the restrictions. Joe Kristan has the details on the IRS' pronouncement (Revenue Ruling 2008-16).

Let's suppose you're playing an online role playing game such as Second Life. You've accumulated quite a bit of virtual property, and have a stash of virtual money. James Doe offers you $5,000 for your virtual money and virtual property—that's 5,000 real U.S. Dollars—and you elect to accept them. Do you have a real taxable event that would interest the IRS or just a virtual event?

I've written about this in the past, and I came to the conclusion that sooner or later the virtual world would intersect with the IRS. An article in the New York University Law Review by Professor Leandra Lederman of Indiana University's School of Law suggests that,

"...in virtual worlds that are intentionally commodified, such as Second Life, tax doctrine and policy counsel taxation of even in-world sales for virtual currency, regardless of whether the participant cashes out. However, as in game worlds, participants should not be taxed on purely in-world trades of non-currency items. This approach would allow entertainment value to go untaxed without creating a new tax shelter for virtual commerce."

The good news? She doesn't believe that pure virtual transactions in a virtual world should result in the IRS taking a bite (though a literal reading of the Tax Code could be interpreted that such transactions are subject to tax).

The IRS is aware of this issue and, sooner or later, it will be added to their priority guidance list. I suspect that sometime in the next few years if you trade virtual dollars for real dollars you will also receive a real 1099.

The abstract of the paper is available here. The full paper is not available online.

Thanks to the TaxProf Blog for the heads-up about this interesting subject.

You have a small dispute with the IRS. The IRS alleges that you owe $554 and $1142 for the two years in question. You elect to file a Tax Court petition. When most people go to Tax Court, they work with the Court and the IRS (the respondent in a Tax Court action) so that their case can be heard and the judge can determine who is right.

However, today we look at what happens when a bozo petitioner brings a Tax Court action. Would he: (a) allege that respondent's counsel has, "engaged in serious misconduct"; (b) allege that the "presiding judge has failed and failed again to show any semblance of impartiality"; (c) refuse to accept service of court documents (sent by certified mail); (d) send the IRS an ultimatum demanding settlement on his terms and not appear in any of the pre-trial hearings/motions; or (e) all of the above.

You already know the answer—we're dealing with a bozo here. All of the above happened and is documented in this case.

The IRS moved for dismissal because of lack of prosecution (the petitioner never brought the facts out on his case), and as the Tax Court noted, dismissal was a "relatively simple matter."

The IRS also asked that the petitioner face a penalty under section 6673. The Tax Court noted that in a different case the Fifth Circuit Court of Appeals held,

"it is difficult to imagine a lesser sanction that would vindicate the integrity of the court proceedings and deter * * * [taxpayers] from similar misconduct. Wasteful and dilatory appeals unjustifiably consume the limited resources of the judicial system: “While judges, staff and support personnel have expended energy to dispose of this meritless appeal, justice has been delayed for truly deserving litigants.” Foret v. S. Farm Bureau Life Ins. Co., 918 F.2d 534, 539 (5th Cir. 1990). [Id.; fn. ref. omitted.]"

As the Court concluded, "Petitioner’s attempts to delay and his belligerence must be sanctioned to vindicate the integrity of this Court’s proceedings and to deter petitioner from similar misconduct in the future." He received $1000 sanctions for each of the two cases heard.

Cases: Mack v. Commissioner, T.C. (two cases), T.C. Memo 2008-29

In years past, if I took a position on a tax return it needed "Substantial authority." That's equivalent to about a 30% chance of being upheld. Congress changed the law; now in order for me to take a position it must be "more likely than not" to be upheld. Joe Kristan has a great post on what this means for taxpayers.