Los Angeles California Tax Attorney Blog

Pasadena Tax Attorney:

Here is a quick summary of a recent US TAX COURT case against the Internal Revenue Service to challenge the tax deductibility of medical expenses incurred by taxpayers. The case involves taxpayers who deducted medical expenses related to in-vitro fertilization.

CHRISTINA MARIE THOMPSON MCGRATH, Petitioner v.
COMMISSIONER OF COMMISSIONER OF Internal Revenue Service
, Respondent
Docket No. 3954-08.

IRS Tax Problem
The issue in this case is whether the petitioner is entitled to deduct medical expenses paid on her behalf by another person.

Relevant Internal Revenue Code

Internal Revenue Code §213(a) allows “ as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer.”

CAN TAXPAYER DEDUCT MEDICAL EXPENSES PAID ON THEIR BEHALF BY THIRD PARTIES?

In 2005 the petitioner and her husband entered into an agreement for in vitro fertilization services. Petitioner’s father paid $39,542 for the services as a wedding gift to petitioner and her husband. The petitioner and her husband claimed a medical expense deduction of $34,313 of their 2005 individual income tax return, under section 213(a). In 2008 the petitioner received a full refund of the amount paid because the services were not successful. The respondent determined a deficiency in petitioner’s Federal income tax for 2008.

TAXPAYER CANNOT DEDUCT MEDICAL EXPENSES PAID BY A THIRD PARTY

The Internal Revenue Service claimed that the petitioner is not entitled to deduct the amount paid because her father paid for the services on her behalf. The Internal Revenue Service relied on a series of cases holding that taxpayers are not entitled to deduct medical expenses which they did not pay or which were reimbursed by some other source. Decision was entered for the Internal Revenue Service .

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Posted In: TAX AUDIT , TAX COURT

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Torrance Tax Attorney:

Here is a quick summary of a recent US TAX COURT case against the Internal Revenue Service to challenge the taxability of lawsuit settlement funds. The case involves money settlement received by a taxpayer from a class action against the US Air Force.

KEVIN HENNESSEY v.
COMMISSIONER OF Internal Revenue Service
Docket No. 20484-07.

Tax Problem
The issue is whether a lump-sum amount of money the petitioner received pursuant to a class action settlement agreement is excludable from gross income under section Internal Revenue Code 104(a)(2).

Internal Revenue Code

Internal Revenue Code §61 (a) includes in gross income “all income from whatever source derived” unless excluded by a specific provision of the Code.

Internal Revenue Code §104 (a)(2) excludes from gross “amount of any damages received (whether by suit or agreement and whether as lump sum or as periodic payments) on account of personal physical injuries or physical sickness”.

IS MONEY FROM LAWSUIT SETTLEMENT TAXABLE?
Mr. Hennessey and other officers, whom the U.S. Air Force selected for involuntary separation because of congressionally mandated personnel reductions in the Armed Forces, filed a complaint in the U.S. Court of Federal Claims. The plaintiffs claimed that the Board in charge violated their equal protection rights under the Fifth Amendment to the U.S. Constitution because it improperly considered race and gender in selecting officers for involuntary separation. The class action case was settled and each member received a lump-sum payment. When petitioners filed their tax return, they did not include in income the lump-sum payment.

IRS TAXES ALL COMPENSATION UNLESS EXCLUDED BY SECTION 104(a)(2)

The lump-sum payment was not compensation for physical injuries or physical sickness that Mr. Hennessey might have suffered as a consequence of any actions taken by the U.S. Air Force. Therefore, the exception of Internal Revenue Code §104 (a) (2) is not applicable. The decision was entered for the Internal Revenue Service .

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Posted In: TAX & PENALTIES , TAX ATTORNEY NEWS , TAX AUDIT , TAX COURT , TAX PROBLEMS

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Los Angeles Tax Attorney:

Congratulations Los Angeles Lakers #15

Los Angeles Lakers 2009 World Champions Game Highlights

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Posted In: BANKRUPTCY , FRAUD & CRIMINAL TAX , OFFER IN COMPROMISE , TAX & PENALTIES , TAX ATTORNEY NEWS , TAX AUDIT , TAX COURT , TAX PROBLEMS

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Los Angeles Tax Attorney:

Internal Revenue Service IRS TAX has set a deadline for reporting offshore bank accounts and other offshore income activities through its voluntary disclosure program. Voluntary disclosure may eliminate risk of IRS criminal prosecution and reduce or eliminate assessment of tax penalties.

Even taxpayers who do not have offshore activities but have unreported income, fraud, unpaid taxes or unfiled tax returns will benefit from the IRS Voluntary Disclosure program.

Internal Revenue Manual Section 9.5.11.9
Voluntary Disclosure Practice:

IRS Voluntary Disclosure is the truthful, timely and complete communication from a taxpayer to the IRS, regarding the accuracy of the taxpayer’s federal income tax returns. The IRS considers voluntary disclosure along with other factors in the investigation of fraudulent tax reporting practices when determining whether criminal prosecution would be recommended. Voluntary disclosure is simply the procedural practice of the IRS, and does not provide the taxpayer with any rights.

As each case if different, taxpayers should not rely on a similar taxpayer’s situation where criminal prosecution was not recommended. It is important to note that this practice doesn’t apply to taxpayers with illegal source income.

For a IRSvoluntary disclosure to occur, the communication must be truthful, timely, complete, and meet the following requirements:

The taxpayer must express willingness to cooperate with the IRS in determining his/her correct tax liability, and the taxpayer does actually cooperate.

The taxpayer must make good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties owed to the IRS, and to be determined by the IRS.

A disclosure is considered timely if it is received before:

The IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to initiate such an examination or investigation.

The IRS received from a third party (e.g., informant, other governmental agency, or the media) information regarding the taxpayer’s noncompliance.

The IRS has already begun a civil examination or criminal investigation that is directly in connection with the specific liability of the taxpayer.

The IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

Below please find a few examples of what constitute a voluntary disclosure:

An attorney writes a letter to the IRS enclosing amended returns from a client which are complete and accurate (reporting legal source income omitted from the original returns). The letter states that the taxpayer will pay the tax, interest, and any penalties determined by the IRS to be applicable in full. The correspondence meets the timeliness standard set forth above.

The IRS sends a notice stating that it has no record of a tax return filed for a certain year and inquires whether the taxpayer has filed a return for that year. The taxpayer has not filed that year’s tax return and makes a disclosure after receiving such a letter. The individual files complete and accurate returns and makes arrangements with the IRS to pay, in full, the tax, interest, and any penalties determined by the IRS to be applicable . Because the IRS hasn’t started investigation or notified the taxpayer of its intent to investigate, this is considered a voluntary disclosure.

Examples of what are not voluntary disclosures include:

A correspondence from an attorney requesting to resolve his/her client’s tax liability, and that his/her client wants to remain anonymous. This does not meet the requirements of voluntary disclosure and in addition, the identity of the taxpayer is not disclosed.

If a taxpayer discloses its IRS tax liability, while already under grand jury investigation. The end result would be the same whether or not the taxpayer knew about the grand jury investigation.

A taxpayer who is in a partnership, is not currently under investigation and makes a disclosure. However, the partner in the partnership is under investigation. The disclosure in this case is not considered a voluntary disclosure because the investigation of the specific liability is already under investigation, whether or not the taxpayer knew about the investigation.

A taxpayer’s employee notifies the IRS regarding a double set of books. Thereafter, the taxpayer discloses to the IRS. Since the IRS has already been informed by the third party of the specific taxpayer’s noncompliance, this is not a voluntary disclosure, whether or not the taxpayer knew of the about the third party’s contact with the IRS.

Internal Revenue Manual Section 9.5.11.9.1
Voluntary Disclosure Protocols

All voluntary disclosures must meet the requirements contained in subsection 9.5.11.9 above. There is not particular format that the voluntary disclosure must abide by when making the voluntary disclosure communication. In addition, the communication by the taxpayer or their representative can be either verbally or in writing. Determining whether or not a communication is a IRS Voluntary Disclosure can only be done by examining the facts and circumstances of each situation and investigation.

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Posted In: FRAUD & CRIMINAL TAX , TAX & PENALTIES , TAX PROBLEMS

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Los Angeles Tax Attorney:

President Barack Obama filed his 2008 Internal Revenue Service IRS TAX Form 1040 Income Tax Return today.

Some of the highlights to his returns are listed here:

President Obama's Donation List

United States Tax Court US TAX COURT

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Los Angeles Tax Attorney:

Internal Revenue Service IRS criminal tax evasion charges against Helio Castroneves came to a conclusion today. Federal Jury acquitted former Los Angeles Dancing with the Stars and Indy Race Car Driver on six counts of IRS Tax Evasion. Criminal tax evasion cases are processed throug the Federal District and not through the US TAX COURT system.

IRS criminal tax evasion charges against Helio Castronoves which alleged that IRS tax evasion mechanism involving Panamanian bearer share corporation called Seven Promotions to avoid and evade IRS taxes. Asset protection attorneys view these corporations as a planning device to evade taxes and protect certain class of assets from creditors.

According to SI.com,

these Panamanian bearer share corporations can be created without producing a public record of the incorporating party's name, their shares omit any identifying information about shareholders, and a person with a controlling interest can direct corporate assets to purchase various property and goods, such as real estate and cars, with minimal risk of personal detection.

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Posted In: FRAUD & CRIMINAL TAX , TAX ATTORNEY NEWS

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Torrance Bankruptcy Attorney:

Los Angeles based mall owner files for Chapter 11 business bankruptcy. According to Los Angeles Times article, one of the largest mall owners in Southern California with locations in Burbank, Northridge, Torrance and Carson has filed bankruptcy to reorganize its debt structure.

Chapter 11 Bankruptcy filings and other consumer and business bankruptcy filings by businesses located in Manhattan Beach Torrance Hermos Beach Redondo Beach Carson Gardena Lomita Lawndale Palos Verdes have seen a dramatic increase over the last 12 months period as our local economy goes through the current recessionary cycle. Chapter 11 Bankruptcy filing by General Growth Properties could have a ripple effect to other local businesses which rely on these malls for their own survival.

Chapter 11 bankruptcy attorneys provide business protection through the bankruptcy courts which typically allows a bankrupt company to hold off creditors and operate as normal while it develops a financial reorganization plan. Most Chapter 11 bankruptcy plans and Chapter 7 liquidation bankruptcies provide pay out of few cents on the dollar to its general unsecured creditors. Chapter 11 bankruptcy is available to both individuals and businesses of all size.

Continue reading "Chapter 11 Bankruptcy - Torrance Based Mall Files Bankruptcy Business and Consmer Bankruptcy Filings Surge" »

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SUBCONTRACTOR SALES TAX

California Sales Tax Audit Attorney:

A California subcontractor who has furnished and installed materials or fixtures for a general or prime contractor must pay California sales tax on the materials cost or in the case of non U.S. contractors the retail selling price of the fixtures installed. California BOE Sales Tax rules require a subcontractor who has furnished and installed materials or fixtures for a prime contractor must pay tax on the cost of the materials or in the case of non U.S. contractors the retail selling price of the fixtures installed.

A subcontractor may not accept a resale certificate from a prime contractor for materials the subcontractor furnishes and installs. Under most circumstances, California BOE Sales Tax guidlelines state that subcontractors may also not accept a resale certificate from a prime contractor for fixtures the subcontractor furnishes and installs.

However, a subcontractor may furnish and install a fixture for a person, other than the owner of the realty, who intends to lease the fixture in place as tangible personal property and pay tax on the rental receipts. In this latter case, the subcontractor may accept a resale certificate from the lessor at the time of the transaction.

Most Sales Tax Audits for subcontractors spin off from an audit conducted on the general contractor which would disclose potential untaxed transactions among the many related companies and sub contractors in its network. In that regard, subcontractors should consider material purchase arrangements or construct their contracts with either the general contractor or the owner of realty to reduce or eliminate potential sales tax liability.

Source Document from EDD

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Los Angeles Tax Attorney:

Today is tax day - the 15th of April. If you need any last minute information you can find a lot of information here at Internal Revenue Service's website IRS TAX. Hope everyone got their IRS 1040 and California 540 tax returns filed on time. Our current income tax system has been in effect since the United States Congress (website) ratified the 16th Amendment in 1913. The following single sentence in our constitution is the genesis of the most dreaded day for most Americans:

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

The 16th amendment to the United States Constitution was proposed to the legislatures of the several States by the 61st Congress on the 12th of July, 1909, and was declared, in a proclamation of the Secretary of State, dated the 25th of February, 1913, to have been ratified by 36 of the 48 States. Ratification was completed on February 3, 1913.

Back in 1913 income tax forms were only 2 pages long. For some of us, it still is. President Obama's 2008 tax return was 43 pages long (including state return).

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California Tax Attorney: With the declining tax revenues and no budget in place, California Franchise Tax Board announced today that the state will suspend tax refunds, welfare checks, student grants and other payments owed to Californians starting Feb. 1,

According to Los Angeles Times Tax News California Controller John Chiang said he had no choice but to stop making some $3.7 billion in payments in the absence of action by the governor and lawmakers to close the state's nearly $42-billion budget deficit. More than half of those payments are tax refunds.

Is California going bankrupt?

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Sales Tax Attorney

California Sales Tax Problem BOE Sales Tax audit levels have been increasing in recent years as California budget problems creates additional need for enforcement and collection of existing sales taxes.

One the most common targets for California Sales Tax Audits in recent years has been owners of gas and service stations. Under the Sales and Use Tax Law, the sale or use of merchandise, including fuel, is taxable. For an auto repair business or service station, tax generally applies to sales or use of all of the following:

• New, used, or rebuilt automobile parts. This includes both general repair or maintenance parts such as spark plugs, belts, tires, batteries, PCV valves, and brake shoes or pads; and replacement parts such as engines, transmissions, alternators, water pumps, fenders or bumpers.

• Parts you manufacture. The taxable selling price of the part should include the cost of the labor required to manufacture it.

• Lubricating products such as oil and grease.

• Automotive fluids such as brake or transmission fluid and window washer solution.

• Fuel.

Your sale is taxable unless it qualifies for an exemption or exclusion It is important to remember that the taxable selling price of an item may include not only the charge for the item itself, but also charges for mandatory warranty contracts.

For fuel sales, the taxable selling price can also include charges for certain state and federal excise taxes.

As a retailer, you owe the sales tax to the state. But you may collect from your customer an amount equal to the tax you will owe. This is usually itemized on sales invoices as “sales tax.”

Labor and services
Generally your charges for labor and services are not taxable (two exceptions are noted below). You must list labor and service charges separately on your customer invoices. This includes your charges for:

• Installation labor on used vehicles such as replacing spark plugs, replacing brake shoes or pads, removing and installing engines, or installing sound systems.

• Repair labor to bring a vehicle back to its original condition. Examples of repair labor include rebuilding carburetors or heads, replacing parts in engines or transmissions, and performing body and fender work.

• Maintenance services such as tune-ups, oil changes, or radiator flushes.

• Services such as charging a battery or towing a vehicle.

Exceptions

While sales and use tax generally does not apply to labor charges, there are two exceptions. Labor charges for making a part (“fabrication labor”) are usually taxable, as are labor charges for installing parts on new vehicles.

If you have further questions about California Sales Tax Audits please contact us.

Content Source: California BOE

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Los Angeles Tax Attorney

United States Tax Court US TAX COURT intervention to expedite release of federal tax lien may not be required due to a new guideline issued by the IRS.

Internal Revenue Service IRS TAX today announced an expedited process that will make it easier for financially distressed homeowners to avoid having a federal tax lien block refinancing of mortgages or the sale of a home.

If taxpayers are looking to refinance or sell a home and there is a federal tax lien filed, there are options. Tax Attorneys may request that the IRS make a tax lien secondary to the lien by the lending institution that is refinancing or restructuring a loan. Taxpayers or their representatives may request that the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien under certain circumstances.

The process to request a discharge or a subordination of a tax lien takes approximately 30 days after the submission of the completed application, but the IRS will work to speed those requests in wake of the economic downturn.

“We don’t want the IRS to be a barrier to people saving or selling their homes. We want to raise awareness of these lien options and to speed our decision-making process so people can refinance their mortgages or sell their homes,” said Doug Shulman, IRS commissioner.

Filing a Notice of Federal Tax Lien is a formal process by which the government makes a legal claim to property as security or payment for a tax debt. It serves as a public notice to other creditors that the government has a claim on the property.

In some cases, a federal tax lien can be made secondary to another lien, such as a lending institution’s, if the IRS determines that taking a secondary position ultimately will help with collection of the tax debt. That process is called subordination.

Taxpayers or their representatives may apply for a subordination of a federal tax lien if they are refinancing or restructuring their mortgage. Without lien subordination, taxpayers may be unable to borrow funds or reduce their payments. Lending institutions generally want their lien to have priority on the home being used as collateral.

Tax Attorneys may apply for a certificate of discharge of a tax lien if they are giving up ownership of the property, such as selling the property, at an amount less than the mortgage lien if the mortgage lien is senior to the tax lien.

The IRS may also issue a certificate of discharge in other circumstances if the taxpayer has sufficient equity in other assets, can substitute other assets, or is able to pay the IRS its equity in the property. Without a tax lien discharge, the taxpayer may be unable to complete the home ownership change and the ownership title will remain clouded.

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