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 .

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 .

Congratulations Los Angeles Lakers #15

Los Angeles Lakers 2009 World Champions Game Highlights

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.

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

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.

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.

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

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).

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?

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

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.

Politics aside (Democrats position: $150,000 for clothes...she’s no Josephine Six Pack, Republicans Position: Remember John Edwards $400 hair cut), from an IRS tax perspective, it may be a non issue. (United States Tax Court US TAX COURT holds the jurisdiction to resolve any tax problems that may arise out of Palin's tax situation.)

Uniforms provided by employers for business use are not taxable to the employee. I’m not sure if Sarah Palin is “employed” by the Republican Party because she is still the governor of Alaska. It may be possible that she is employed by both entities. Regardless, Palin’s clothing from Neiman Marcus and Saks 5th Avenue probably would not constitute “uniform” as defined by the IRS TAX CODE Although if RNC argued that all female members of the party must wear certain type of Valentino or Armani in red or black while on stage to campaign, it may have a plausible counter argument if such clothing items were not usable for ordinary wear.

Some of my colleagues believe that she would need to declare fair rental value of the clothes she used on her income tax return but certainly not the full $150,000 RNC spent on her clothes. However, what would be the rental value for these clothes? Difference between cost less resale value?

I think the fair rental value or fair use valuation would be the correct tax position in most ordinary circumstances. However, RNC or Palin’s tax attorney could probably argue that she would not need to declare any rental value for these clothes.

The reason?

Most used clothing items have very little resale value. However, assuming that Governor Palin never owned these clothes, RNC could auction off Palin’s clothes which would probably generate revenues in excess of 10 to 20 times the cost basis for these clothing. (Campaign Fund Raising Issues?) In essence, the argument would be that Palin didn’t rent these clothes, she provided service and added value by having worn these items. This issue would be determined by the United States Tax Court US TAX COURT.

Further, what is the difference between expensive clothing provided to news anchors or stand-up comedians like Jay Leno by their respective stations and the situation here? They are all celebrities looking good for their jobs...right? Leno or Katie Couric don’t pay taxes for the different wardrobes which they wear every night. Regardless, Wardrobegate’s political damage may be significant but the IRS tax impact to Palin should be nominal.

California Board of Equalization California Sales Tax

Sales Tax for Construction Restaurant and Bars

APPLICATION OF TAX TO RESTAURANT EQUIPMENT CONTRACTORS

The Board of Equalization, in conjunction with the Restaurant Equipment Contractors Association, has made a study of components involved in lump-sum contracts for the furnishing and installing of restaurant equipment. Review Construction Sales Tax Basics Here

Application of California sales tax may differ based on type of contract you have with your contractor as well as classification of items used to construct the restaurant or bar. Sales tax amount for materials, equipments and fixtures will vary significantly and it may result in huge tax savings for either the restaurant owner or contractor depending upon classification method.

The following are some items which are usually considered to be materials when furnished and installed by a construction contractor in performing a contract for the food industry:

Carpeting, including padding and trim when affixed to the real property by glue, nails, etc.
Doors
Ducts installed in walls, ceilings, and floors
Grab bars (for handicapped lavatories)
Millwork
Pass window frames and shelves
Wall corner pieces and wall caps
Wall covering materials (wallpaper; paneling; etc.)
Wall flashing
Wall mirrors

The following items furnished and installed by contractors to the food service industry are generally classified as fixtures:

Bolt-down counter stool bases, with stools attached thereto
Bolt-down table bases with table tops affixed
Custom fabricated cash stands
Custom fabricated cocktail back bar superstructures
Custom fabricated cocktail back bar
Custom fabricated cocktail bars
Custom fabricated counters
Custom fabricated dishtable assemblies
Custom fabricated make-up tables
Custom fabricated pot racks
Custom fabricated scullery sink assemblies
Custom fabricated seating assemblies/booth units
Custom fabricated serving counters
Custom fabricated service stands
Custom fabricated soffits
Custom fabricated walk-in coolers and freezers that are affixed to the real estate
Dispensers for soap, towels, toilet tissue
Faucets
Freezers
Hoods
Lighting fixtures
Motors
Plumbing fixtures
Refrigeration compressors
Refrigerators
Safes, imbedded in concrete in the buildings
Water heaters (built into fixtures or into water systems)
Water softeners (built into fixtures or into water systems)

Fixtures also include the following items which are built into fixtures or otherwise built into the realty and which may not be removed without damage to the items or the realty:

Char-broilers
Dish dispensers
Dishwashers that are built into a dishtable
Disposals
Drink dispensers
Freezers
Griddles
Ice cream cabinets
Ovens
Refrigerators
Roll warmer
Scrap chutes
Soda fountain systems
Soup warmers
Syrup rails

The following is a list of items which may be generally considered to be machinery and equipment when freestanding or when they are not firmly affixed to the building or built into it or another fixture and which may be readily removed without damage to the building, the unit, or other fixture:

Adding machines
Artifacts items
Bar stools
Beverage and juice dispensers
Bulletin boards
Can openers
Chairs
Char-broilers
Chinaware, silverware, pots and pans, paper goods, culinary items
Coffee makers
File cabinets
Flight-type dishwashers
Floor racks
Griddles
Hot water hoses
Ice bins
Ice cream cabinets
Ice making machinery
Iced tea dispensers
Iced tea machine
Lockers
Microwave ovens (freestanding)
Milk dispensers
Mixers
Ovens
Portable bins and tables
Ranges
Reach-in freezers (self-contained)
Reach-in refrigerators (self-contained)
Roll covers
Safes
Salamanders
Scales
Shelving units
Silverware boxes
Slicers
Table lamps
Tables
Time car racks
Time clocks
Toasters

California Board of Equalization California Sales Tax

Sales Tax for Construction Contractors to US Government Projects

A. MATERIALS AND FIXTURES — U.S. construction contractors are the consumers of materials and fixtures which they furnish and install in the performance of construction contracts with the United States Government. Either the sales tax or the use tax applies with respect to sales of such property to U.S. construction contractors. There is no distinction between the application of tax to materials and fixtures. Only the cost is subject to tax (even though the fixtures are self-manufactured).The sales tax, but not the use tax, applies even though the contractor purchases the property as the agent of the United States.

B. MACHINERY AND EQUIPMENT — U.S. construction contractors are retailers of machinery and equipment furnished in connection with the performance of a construction contract with the United States Government. Tax does not apply to sales of machinery and equipment to U.S. contractors or subcontractors, provided title to the property passes to the United States before the contractor makes any use of it. The contractor may issue a resale certificate. However, if the contractor uses the machinery or equipment before passage of title to the United States, then the contractor is the consumer of the machinery or equipment and either sales tax or use tax applies to the sale to or the use by the contractor of the machinery and equipment.