Caraker Law Firm Blog

Taxation of Discharge of Indebtedness

Posted by Chad Caraker on Wed, Aug 01, 2018 @ 09:46 PM

I.R.C. Section 108(a)(1)(B), insolvency exception. In Vincent C. Hamilton and Stephanie Hamilton v. Comm’r, T.C. Memo 2018-62, filed May 8, 2018, the Tax Court explores a common exception to inclusion of discharge of indebtedness in gross income. Gross income generally includes discharge of indebtedness – I.R.C. section 61(a)(12). Section 108(a)(1)(B) excludes income from the discharge of indebtedness from gross income if the discharge occurs when the taxpayer is insolvent. Insolvency is measured by comparing the excess of the taxpayer’s liabilities over the fair market value of the taxpayer’s assets immediately before discharge. Taxpayers borrowed money in order to finance their son’s education. The husband ultimately injured his back and became permanently disabled. The student loan provider discharged over $158,000 in student loan debt. Husband then exhibited poor money management skills and his wife took over their finances. To protect their assets, she transferred $323,000 into their son’s savings account. She had the password and permission from her son to transfer money. She did this regularly during the year at issue to pay bills from her joint account with her husband. When filing the return, their accountant advised they were insolvent and claimed as much on the return. He had not included the value of the savings account in the son’s name. In this case, the sole issue is whether or not a bank account of taxpayers’ son should be included in their asset calculation. In this case, the taxpayers failed to prove that their son was not their nominee because they continued to enjoy the benefits of the funds they transferred to their son’s savings account. There was no evidence that the son paid any consideration for the funds transferred to his savings account by the taxpayers. As such, the funds were included as assets of the taxpayers, and the taxpayers were no longer insolvent.

Tags: Canceled debt, Tax Liability, Tax Controversy

Passports - revocation or denial due to tax debt

Posted by Chad Caraker on Wed, Aug 01, 2018 @ 09:43 PM

I.R.C. Section 7345. If a taxpayer has “seriously delinquent tax debt,” the IRS will certify that debt to the State Department for action. The State Department will generally not issue a passport to a taxpayer after receiving certification from the IRS. Further, the State Department may revoke a taxpayer’s passport on certification from the IRS. “Seriously delinquent tax debt” is defined as a tax debt currently in excess of $51,000 (this is inflation adjusted), for which a notice of federal tax lien has been issued and all administrative remedies under I.R.C. section 6320 have lapsed or been exhausted, or a levy has been issued. Some tax debts are not included, even if they meet the above criteria. This includes tax debt that is being paid timely on an IRS approved installment agreement, is being paid timely with an accepted Offer in Compromise, is pending a timely requested Collection Due Process hearing regarding a levy, or for which collection is suspended because of an application for innocent spouse relief. Additionally, a passport won’t be at risk under the program if the taxpayer is in bankruptcy, identified by the IRS as a victim of identity theft, if the taxpayer’s account is in currently not collectible, if the taxpayer resides in a federally declared disaster area, if the taxpayer has a pending request for an installment agreement, if the taxpayer has a pending Offer in Compromise, or if the taxpayer has an IRS accepted adjustment that will satisfy the debt in full. Before denying a passport, the State Department will hold the application for 90 days to allow the taxpayer to resolve any erroneous certification issues, make a full payment of the tax debt, or enter a payment arrangement with the IRS.

Tags: Tax Liability, Tax Controversy, Passport

Trust Fund Recover Penalty - I.R.C. section 6672

Posted by Chad Caraker on Wed, Aug 01, 2018 @ 09:40 PM

This is a hard fought case on a narrow issue that ultimately went in favor of the IRS. The Tax Court in Scott T. Blackburn v. Comm’r, 150 T.C. No. 9, filed April 9, 2018, was asked to review the verification of compliance rule of I.R.C. section 6751(b), as required by sections 6330(c)(1) and (3)(A). The Appeals officer must “obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met.” Sec. 6330(c)(1). The Petitioner did not argue or contest the liability issue relating to assessment of the Trust Fund Recovery Penalty against him. The Revenue Officer in this instance has recommended assessment and said assessment was approved by the Revenue Officer’s manager using Form 4183. The name of the manager was listed on the form, but no signature was present. The taxpayer argued that in creating section 6751(b), Congress could not have meant to require a meaningless, supervisory “rubber stamped” signature. Petitioner asked the IRS many times to provide some evidence that the supervisor’s review was meaningful. Petitioner relies on the Internal Revenue Manual to suggest an argument that the signature of a supervisor in support of a penalty is not in itself a sufficient showing to comply with section 6751(b). The Court indicated that caselaw review applying these code sections has only required the officer to review the administrative steps taken before assessment of the underlying liability. To impose the requirement of a substantive review on the officer would allow the taxpayer to avoid the limitations of pursuing the underlying liability in a review under section 6330 and apply a level of detail in the verification process that has never been previously required, the Court explained.

Tags: Tax Liability, Tax Controversy, IRS, Trust Fund Recovery Penalty

Innocent Spouse Relief - Income attribution rule addressed by Tax Court

Posted by Chad Caraker on Wed, Aug 01, 2018 @ 09:24 PM

In Connie L. Minton a.k.a. Connie L. Keeney v. Comm’r, T.C. Memo 2018-15, filed February 5, 2018, the Tax Court was asked to review an IRS Appeals’ decision denying innocent spouse relief based on equitable relief. In this case, taxpayer made application for relief after divorce. The return in question reflected income from a 401(k) withdrawal taxpayer instituted at the request of her former spouse – for the purpose of investing in a business venture that failed. Additionally, the spouse’s income from his business, along with a small amount of interest income was reported on the return. The Appeals officer indicated that the taxpayer’s request for relief failed because the tax was attributed to her income. Thus, it did not meet the threshold condition for relief. The Tax Court reviewed this decision and discussed the exceptions to the attribution rule. Those exceptions include: a) attribution due solely to the operation of community property law, b) nominal ownership, c) misappropriation of funds, d) abuse before the return was filed that affects the requesting spouse’s ability to challenge the treatment of items on the return or question payment of any balance due, and e) fraud committed by the nonrequesting spouse that is the reason for the erroneous item. Ultimately, the Court indicated that the taxpayer did not meet any of the exceptions and failed the threshold conditions as to her 401(k) withdrawal. The Tax Court, however, disagreed with Appeals in that they concluded the liability attributed to the nonrequesting spouse’s business income should not be attributed to the taxpayer because her involvement in the business was nominal only. This is a good discussion of some exceptions to the income attribution rule, not regularly reviewed by the Court.

 

Tags: Tax Court, Tax Liability, Tax Controversy, Innocent Spouse Relief

Innocent Spouse Relief - Taxpayer obtains relief while still married

Posted by Chad Caraker on Fri, Aug 25, 2017 @ 06:33 PM

In Hudson v. Comm’r T.C. Summary Opinion 2017-7, filed February 8, 2017, the Tax Court granted equitable relief from joint and several liability under section 6015(f).  It is a rare case that the IRS grants relief to a taxpayer that requests innocent spouse relief, unless that individual is legally separated or divorced from the jointly liable taxpayer. The taxpayer and her husband remained legally married, but were essentially estranged.  Petitioner remained in the marriage because she “regards the vow of marriage as sacrosanct and does not believe in divorce.” The liability reported on the face of the return was largely from the early withdrawal penalty associated with Petitioner’s husband taking a distribution from his retirement account to finance the purchase of a piece of residential real estate – in his name alone. Though petitioner resided at this residence, the Tax Court did not believe she enjoyed a lavish lifestyle.  Petitioner held a bachelors degree and, while she was out of the workplace caring for their children during the year at issue, she later became employed in her field. At the time of filing the Petition in the Tax Court, she was unemployed and struggled with reasonable living expenses. The Court could not provide “streamlined” relief because the Petitioner remained married.  That triggered a facts and circumstances analysis where economic hardship and lack of significant benefit factored heavily into the Court’s grant of liability relief. 

Tags: Delinquent Taxes, Innocent Spouse Relief, Tax

IRS planning increased collection activity against federal employees Thrift Savings Plans (TSP)

Posted by Chad Caraker on Thu, May 05, 2016 @ 08:00 PM

retirementglassball.jpg

IRS Planning increased collection activity against federal employees'

Thrift Savings Plans (TSP)

The National Taxpayer Advocate has reported in its Fiscal Year 2016 Objectives report to Congress that a proposal by the IRS to expand collection efforts against retirement plans of federal employees "infringes on taxpayers' rights to a fair and just tax system." Federal employees have the ability to participate in the Thrift Savings Plan (TSP), which is similar to a private sector 401(k) plan in that employee savings are tax deferred and qualify for some level of employer, (in this case the federal government), matching. 

Taxpayers, including federal government employees, who owe taxes are subject to IRS levy on their property and rights to property.  This power extends to retirement accounts, including the TSP.  However, given the importance of retirement savings to an individual's welfare during old age, the IRS has historically regarded a levy on retirement funds as a special case that requires additional scrutiny and a manager's approval. 

Essentially, before a field Revenue Officer can levy a retirement benefit, the agent would determine what property is available to levy - both retirement and non-retirement, determine if the taxpayer has acted in a flagrant manner, and finally determine if the retirement funds are required for necessary living expenses. There are distinct problems with these factors, but that has been partially mitigated by other requirements prior to issuance of the levy.  The field Revenue Officer must either secure the signature of the Area Director of Field collections, or secure a manager's approval.

In order to obtain a collection manager's approval in this instance, the field Revenue Officer is required to draft a detailed memo that sets out a summary of all information provided to the agent by the taxpayer, whether the taxpayer has exhibited any flagrant behavior, and more importantly, other collection alternatives that have been considered and rejected.  In other words, the retirement account falls into a secondary level of collection after the field Revenue Officer reviews other property or income to levy. 

Recent activity at the IRS has created a pilot program to levy TSP accounts.  Most importantly, and of greatest concern, this program will be administered by ACS employees.  ACS is the Automated Collection System unit.  When a taxpayer's account is in ACS, it is not assigned to a single employee for collection, rather, there are various employees in functions and units that work on similar matters.  These employees do not receive the same level of financial analysis training as a field Revenue Officer. 

In addition to the reduced training received by ACS employees, the pilot program calls for ACS employees to document any information that a retirement is impending and that the taxpayer will be relying on funds from the TSP for necessary living expenses.  This lacks any analysis regarding other property the taxpayer may have that would be available to collect from, or if the taxpayer acted in a flagrant manner, all requirements of a field Revenue Officer. 

Finally, the pilot program requires managerial approval prior to levy on retirement accounts - but that is a requirement of many collection actions by ACS employees - hardly elevating these situation to a special case status.  What is not referenced is the required memo to the manager detailing information provided by the taxpayer and collection alternatives considered and rejected before proposing levy to the retirement account - all requirements of the field Revenue Officer.

In summary, the IRS is targeting one type of retirement account, the TSP, for increased collection activity, over all others. ACS does not have the ability to levy any other retirement accounts at this time.  The National Taxpayer Advocate believes that this pilot program undermines both taxpayer rights and retirement security policy.  As such, the National Taxpayer Advocate is going to continue to push the IRS to abandon the Thrift Savings Plan levy pilot program  If the IRS adopts the program, the National Taxpayer Advocate is prepared to accept all TSP levy cases coming from ACS.  Taxpayers should take advantage of this opportunity to protect their retirement income.  Additionally, where possible, taxpayers should seek assistance from the Appeals division in order to entertain collection alternatives through Appeals' Collection Due Process hearing procedures.  Feel free to contact Caraker Law Firm, P.C. with any questions you may have. 

Tags: Pension Contribution, Levy, IRS debt, Appeals Division, IRS

IRS institutes Early Interaction Initiative for Employment Tax matters

Posted by Chad Caraker on Wed, Jan 06, 2016 @ 03:34 PM

 

Blog.January 2016

 

IRS institutes Early Interaction Initiative for Employment Tax matters

  It is expected that the IRS will be instituting swifter action against employers that are falling behind on their Federal Tax Deposits (FTD’s) for employment taxes.  Those taxpayers who have had interaction with a field Revenue Officer are likely hearing from those Revenue Officers more quickly if they fall behind on their required deposits.  However, the IRS announced in December 2015 that it is instituting efforts to identify employers who appear to be falling behind on their tax payments – apparently even before their employment tax return is being filed. 

            The IRS has indicated that their identification efforts will result in letters, automated phone messages, and other communications which could include a visit from a field Revenue Officer.  The IRS has indicated that this effort will reduce the likelihood of the problem becoming uncontrollable.  Many taxpayers simply do not realize how steep the penalties can be for failure to properly make tax deposits, pay employment taxes timely, or failure to file timely returns.  Further, it is unlikely that most taxpayers understand the personal liability that can be assessed from unpaid employment taxes.  A liability that is not dischargeable in bankruptcy.

            While the education efforts are beneficial, certainly there is an enforcement aspect of this activity by the IRS.  The IRS readily admits that two-thirds of federal taxes are collected through the payroll tax system.  With a reduced budget, this activity makes good sense for the IRS.  However, it is most likely going to be most burdensome for small businesses. 

            No doubt early action is best.  If you know you have been falling behind on your payroll tax obligations and need assistance planning before you hear from the taxing authorities, feel free to call. 

Tags: employment taxes, Tax, Tax Controversy, Federal Tax Deposits, Revenue Officer, IRS debt, IRS, Penalties, FTDs, Civil Penalties

2016 Inflation Adjustments on Several Tax Benefits and Retirement Adjustments

Posted by Chad Caraker on Mon, Nov 23, 2015 @ 09:17 PM

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IRS Announces 2016 Inflation Adjustments on Several Tax Benefits and Retirement Adjustments

The IRS recently announced annual inflation adjustments for several tax provisions, which will apply to the 2016 tax year. Some of the affected provisions include: income tax rate schedules, the estate tax exemption, long-term care adjustments, and retirement adjustments. Below is a summary of those adjustments.

Tax Rates. Beginning in the 2016 tax year, the following tax rates will apply:

If the Taxable Income Is:

The Tax for Married Individuals Filing Jointly is:

Less than or equal to $18,550

 

10% of the taxable income

Over $18,550 but not over $75,300

 

$1,855 plus 15% of the excess over $18,550

Over $75,300 but not over $151, 900

 

$10,367.50 plus 25% of the excess over $75,300

Over $151,900 but not over $231,450

 

$29,517.50 plus 28% of the excess over $151,900

Over $231,450 but not over $413,350

 

$51,791.50 plus 33% of the excess over $231,450

Over $413,350 but not over $466,950

 

$111,818.50 plus 35% of the excess over $413,350

Over $466,950

$130,578.50 plus 39.6% of the excess over $466,950

 

If the Taxable Income Is:

 

The Tax for Heads of Households is:

Not over $13,250

 

10% of the taxable income

Over $13,250 but not over $50,400

 

$1,325 plus 15% of the excess over $13,250

Over $50,400 but not over $130,150

 

$6,897.50 plus 25% of the excess over $50,400

Over $130,150 but not over $210,800

 

$26,835 plus 28% of the excess over $130,150

Over $210,800 but not over $413,350

$49,417 plus 33% of the excess over $210,800

 

Over $413,350 but not over $441,000

 

$116,258.50 plus 35% of the excess over $413,350

 

Over $441,000

 

$125,936 plus 39.6% of the excess over $441,000

 

If the Taxable Income Is:

The Tax for Unmarried Individuals is:

Not over $9,275

 

10% of the taxable income

Over $9,275 but not over $37,650

 

$927.50 plus 15% of the excess over $9,275

Over $37,650 but not over $91,150

 

$5,183.75 plus 25% of the excess over $37,650

 

Over $91,150 but not over $190,150

 

 

$18,558.75 plus 28% of the excess over $91,150

Over $190,150 but not over $413,350

 

 

$46,278.75 plus 33% of the excess over $190,150

Over $413,350 but not over $415,050

 

 

$119,934.75 plus 35% of the excess over $413,350

Over $415,050

 

 

$120,529.75 plus 39.9% of the excess over $415,050

 

If the Taxable Income Is:

The Tax for Married Individuals Filing Separate Returns is:

Not over $9,275

 

10% of the taxable income

Over $9,275 but not over $37,650

 

$927.50 plus 15% of the excess over $9,275

Over $37,650 but not over $75,950

 

$5,183.75 plus 25% of the excess over $37,650

 

Over $75,950 but not over $115,725

 

 

$14,758.75 plus 28% of the excess over $75,950

Over $115,725 but not over $206,675

 

$25,895.75 plus 33% of the excess over $115,725

 

Over $206,675 but not over $233,475

$55,909.25 plus 35% of the excess over $206,675

 

Over $233,475

$65,289.25 plus 39.6% of the excess over $233,475

 

 

If the Taxable Income Is:

The Tax for Estates and Trusts is:

Not over $2,550

 

15% of the taxable income

Over $2,550 but not over $5,950

 

$382.50 plus 25% of the excess over $2,550

Over $5,950 but not over $9,050

 

$1,232.50 plus 28% of the excess over $5,950

Over $9,050 but not over $12,400

 

 

$2,100.50 plus 33% of the excess over $9,050

Over $12,400

 

$3,206.00 plus 39.6% of the excess over $12,400

 

 

Estate Tax Exemption. The Estate Tax is a tax imposed on the transfer of property at a person’s death, for any portion of the decedent’s gross estate that exceeds the Federal Estate Tax Exemption. This year the estate tax exclusion has increased from a total of $5,430,000 to $5,450,000. This means that decedents who die in 2016 have an estate tax exclusion that has increased by $20,000 from the previous year.

Long-term Care. Deductions for Long Term Care Insurance Premiums have increased slightly from 2015. The 2016 deductible limits under §213(d)(10) for eligible long-term care premiums are as follows:

Attained Age Before Close of Taxable Year

Limitation on Premiums

40 or less

$390

More than 40 but not more than 50

$730

More than 50 but not more than 60

$1,460

More than 60 but not more than 70

$3,900

More than 70

$4,870

 

Retirement Adjustments. The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the government’s Thrift Savings Plan remains unchanged at $18,000. In addition, if you are 50 or over you can contribute an additional $6,000 as a catch-up contribution. The limit on annual contributions to IRA accounts remains unchanged at $5,500 with the catch-up contribution limit remaining $1,000.

The deduction for taxpayers making contributions to traditional IRA accounts is phased out gradually starting at an Adjusted Gross Income (AGI) of $61,000 for single taxpayers and heads of households, $98,000 for married couples filing jointly (when the spouse who makes the IRA contribution is covered by a workplace retirement plan).  These amounts are unchanged in 2016.  The phase out moves from a starting point of $183,000 to $184,000 for an IRA contributor not covered by a workplace retirement plan but who is married to someone who is covered. 

The deduction for taxpayers making contributions to a Roth IRA is phased out gradually starting at an AGI of $184,000 for married couples filing jointly and $117,000 for singles and heads of households.

Lastly, the AGI limit for the saver’s credit (retirement savings contribution credit) for low and moderate income workers has also increased slightly for 2016. The credit is now $61,500 for married couples filing jointly, $46,125 for heads of household, and $30,750 for singles and married couples who file separately.

If you have any questions about how these adjustments might affect your tax situation, please feel free to contact our office for further assistance. 

2015 Inflation Adjustments on Several Tax Benefits and Retirement Adjustments

Posted by Chad Caraker on Mon, Dec 08, 2014 @ 01:42 PM

 

 

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IRS Announces 2015 Inflation Adjustments on Several Tax Benefits and Retirement Adjustments

The IRS recently announced annual inflation adjustments for several tax provisions, which will apply to the 2015 tax year. Some of the affected provisions include: income tax rate schedules, the estate tax exemption, long-term care adjustments, and retirement adjustments. Below is a summary of those adjustments.

Tax Rates. Beginning in the 2015 tax year, the following tax rates will apply:

If the Taxable Income Is:

The Tax for Married Individuals Filing Jointly is:

Less than or equal to $18,450

 

10% of the taxable income

Over $18,450 but not over $74,900

 

$1,845 plus 15% of the excess over $18,450

Over $74,900 but not over $151, 200

 

$10,312.50 plus 25% of the excess over $74,900

Over $151,200 but not over $230,450

 

$29,387.50 plus 28% of the excess over $151,200

Over $230,450 but not over $411,500

 

$51,566.50 plus 33% of the excess over $230,450

Over $411,500 but not over $464,850

 

$111,324 plus 35% of the excess over $411,500

Over $464,850

$129,996.50 plus 39.6% of the excess over $464,850

 

If the Taxable Income Is:

 

The Tax for Heads of Households is:

Not over $13,150

 

10% of the taxable income

Over $13,150 but not over $50,200

 

$1,315 plus 15% of the excess over $13,150

Over $50,200 but not over $129,600

 

$6,872.50 plus 25% of the excess over $50,200

Over $129,600 but not over $209,850

 

$26,722.50 plus 28% of the excess over $129,600

Over $209,850 but not over $411,500

$49,192.50 plus 33% of the excess over $209,850

Over $411,500 but not over $439,000

$115,737 plus 35% of the excess over $411,500

Over $439,000

$125,362 plus 39.6% of the excess over $439,000

 

If the Taxable Income Is:

The Tax for Unmarried Individuals is:

Not over $9,225

 

10% of the taxable income

Over $9,225 but not over $37,450

 

$922.50 plus 15% of the excess over $9,225

Over $37,450 but not over $90, 750

 

$5,156.25 plus 25% of the excess over $37,450

Over $90,750 but not over $189,300

 

 

$18,481.25 plus 28% of the excess over $90,750

Over $189,300 but not over $411,500

 

 

$46,075.25 plus 33% of the excess over $189,300

Over $411,500 but not over $413,200

 

 

$119,401.25 plus 35% of the excess over $411,500

Over $413,200

 

 

$119,996.25 plus 39.9% of the excess over $413,200

 

If the Taxable Income Is:

The Tax for Married Individuals Filing Separate Returns is:

Not over $9,225

 

10% of the taxable income

Over $9,225 but not over $37,450

 

$922.50 plus 15% of the excess over $9,225

Over $37, 450 but not over $75,600

 

$5,156.25 plus 25% of the excess over $37,450

Over $75,600 but not over $115,225

 

 

$14,693.75 plus 28% of the excess over $75,600

Over $115,225 but not over $205,750

 

$25,788.75 plus 33% of the excess over $115,225

 

Over $205,750 but not over $232,425

$55,662 plus 35% of the excess over $205,750

 

Over $232,425

$64,989.25 plus 39.6% of the excess over $232,425

 

 

If the Taxable Income Is:

The Tax for Estates and Trusts is:

Not over $2,500

 

15% of the taxable income

Over $2,500 but not over $5,900

 

$375 plus 25% of the excess over $2,500

Over $5,900 but not over $9,050

 

$1,225 plus 28% of the excess over $5,900

Over $9,050 but not over $12,300

 

 

$2,107 plus 33% of the excess over $9,050

Over $12,300

 

$3,179.50 plus 39.6% of the excess over $12,300

 

 

Estate Tax Exemption. The Estate Tax is a tax imposed on the transfer of property at a person’s death, for any portion of the decedent’s gross estate that exceeds the Federal Estate Tax Exemption. This year the estate tax exclusion has increased from a total of $5,340,000 to $5,430,000. This means that decedents who die in 2015 have an estate tax exclusion that has increased by $90,000 from the previous year.

Long-term Care. Deductions for Long Term Care Insurance Premiums have increased slightly from 2014. The 2015 deductible limits under §213(d)(10) for eligible long-term care premiums are as follows:

Attained Age Before Close of Taxable Year

Limitation on Premiums

40 or less

$380

More than 40 but not more than 50

$710

More than 50 but not more than 60

$1,430

More than 60 but not more than 70

$3,800

More than 70

$4,750

 

Retirement Adjustments. The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the government’s Thrift Savings Plan has increased from $17,500 to $18,000. In addition, if you are 50 or over you can contribute an additional $6,000 as a catch-up contribution. However, the limit on annual contributions to IRA accounts remains unchanged at $5,500 with the catch-up contribution limit remaining $1,000.

The deduction for taxpayers making contributions to traditional IRA accounts is phased out gradually starting at an Adjusted Gross Income (AGI) of $61,000 for single taxpayers and heads of households, $98,000 for married couples filing jointly (when the spouse who makes the IRA contribution is covered by a workplace retirement plan), and $183,000 for an IRA contributor not covered by a workplace retirement plan but who is married to someone who is covered. 

The deduction for taxpayers making contributions to a Roth IRA is phased out gradually starting at an AGI of $183,000 for married couples filing jointly and $116,000 for singles and heads of households.

Lastly, the AGI limit for the saver’s credit (retirement savings contribution credit) for low and moderate income workers has also increased slightly for 2015. The credit is now $61,000 for married couples filing jointly, $45,750 for heads of household, and $30,500 for singles and married couples who file separately.

If you have any questions about how these adjustments might affect your tax situation, please feel free to contact our office for further assistance.

Tags: IRA, Roth IRA, Pension Contribution, Retirement, Financial Planning, Tax, Long-term Care, Thrift Savings Plan, Income Taxes, Tax Planning, Estate Tax Exemption, Tax Adjustments, Wealth Planning, Long Term Care Insurance

Court Affects Payments from Conservation Reserve Program

Posted by Chad Caraker on Mon, Dec 01, 2014 @ 12:27 PM

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8th Circuit Ruling Affects Characterization of Payments from Conservation Reserve Program:

The US Court of Appeals for the 8th Circuit recently handed down a decision in Morehouse v. C.I.R, (8th Cir. Oct. 10, 2014), which decided whether or not payments received under the Department of Agriculture’s Conservation Reserve Program (CRP) should be included as income from self-employment on a taxpayer’s return.

In this case, the taxpayer inherited 1223 acres of land in 1994, located on three different properties in South Dakota (503 acres in Grant County, 320 acres in Roberts County, and 400 acres in Day County). All of the land was tillable cropland with exception of a gravel pit on the Grant County property and 129 acres on the Roberts County property that the taxpayer’s father placed under the CRP program. The taxpayer never farmed any of the land.

In 1997, the taxpayer enrolled the remaining acreage of the Roberts County property and the tillable land in Grant County in the CRP program. The primary purpose of the CRP program is to reduce soil erosion and improve soil conditions on highly erodible cropland by limiting the taxpayer’s use of the property. Therefore, by enrolling in the program, the taxpayer entered into a contractual obligation with the Commodity Credit Corporation (CCC) requiring him to implement conservation plans for the properties in the program. These plans required the taxpayer to establish and maintain certain types of grass or vegetative cover on the land and engage in periodic weed and pest control. As compensation for implementing the conservation plans, the taxpayer was reimbursed for a portion of his costs and was paid an “annual rental payment.”

In both 2006 and 2007, the taxpayer received CRP payments of $37,872. The taxpayer included the CRP payments on his return in both years as a rental payment received from real estate. As a result, on October 14, 2010 the IRS sent the taxpayer a notice of deficiency stating that the CRP payments should have been reported as self-employment income on a Schedule F, Profit or Loss from Farming. The taxpayer petitioned the Tax Court for review of this determination, claiming that the CRP payments were rentals from real estate under 26 U.S.C. §1402(a)(1), and therefore should be excluded from his net earnings from self-employment. However, the Tax Court sustained the service’s conclusion that the CRP payments constituted self-employment income reasoning that because the payments were proceeds from the taxpayer’s own use of the land they did not constitute rental payments.

On appeal, the primary issue centered on whether or not CRP payments should be categorized as “net earnings from self-employment.” In deciding this question, the Appeals Court first looked at types of payments that would generally be classified as self-employment income. The Court explained that self-employment income consists of the gross income derived from the taxpayer’s trade or business. Or in other words, the trade or business must give rise to the income before it can be included as self-employment income.

Contrary to the Tax Court’s opinion, the Appeals Court found that the CRP payments did not derive from the taxpayer’s activities on the land because the only reason the taxpayer engaged in any activities such as tilling and seeding on the land was because it was required by the CRP contracts. The Appeals Court further determined that because the contracts reserved a right of entry for the government onto the CRP property for purposes of inspection, that the government was “using” the land as much as if not more than the taxpayer. Therefore, the CRP payments were given to the taxpayer in consideration for this right to use and occupy the taxpayer’s property.

Next the Court looked at how similar payments to taxpayers have been categorized in the past. In doing so, the Court looked to Rev. Ruling 60-32, 1960-1 C.B. 23 (1960) concerning the CRP’s predecessor, the Soil Bank Act. In this ruling the IRS concluded that soil bank payments to people who did not operate or materially participate in a farming operation were to be viewed as rental income, not self-employment income. However, the ruling further stated that soil bank payments made to farmers were self-employment income.  Although this precedent was not controlling, the Court decided that given the significant overlap in the CRP and Soil Bank programs, and because it reflects a longstanding and reasonable interpretation of the Agency’s regulations, the revenue ruling was persuasive. Therefore, the Court decided to follow the Soil Bank Program distinction between payments to farmers and non-farmers in concluding that CRP payments to the taxpayer in this case were rental income because he was not engaged in farming operations. Looking forward it appears that at least in the 8th Circuit, taxpayers who receive payments from the CRP program will be able to include the income as rental income rather than self-employment income on their tax return, if they are not operating farming activities on the land.

If you have any questions about how this ruling might affect the characterization of your CRP payments, please feel free to contact our office.

Tags: Tax Controversy, CRP, Income Taxes, Conservation Reserve Program, Department of Agriculture, Rental Income, Court of Appeals, IRS, Tax Liability, Self-Employment Income, Tax Court