New White House Proposals on Simplification
T he Treasury Department announced the Clinton administrations package of tax simplification and taxpayer rights initiatives. The package includes proposals on global interest netting and alternative minimum tax relief for small companies.
Treasury Secretary Robert E. Rubin said the package contained more than 60 measures designed to simplify tax law and enhance taxpayers rights. "Our goal is clear: We want to make life easier for the American taxpayer," said Rubin. He said the proposals represented everything the administration could do to simplify the tax code so it would be, in the aggregate, revenue neutral.
Highlights of the tax simplification proposals include
- An increase of the standard deduction for the unearned income of
dependent filers to the amount of the filers earned income, plus
$700 of unearned income.
- The elimination of the household maintenance test for the child-
and dependent-care tax credit.
- An exclusion from the corporate alternative minimum tax (AMT) for
companies with gross receipts that average less than $5 million for
the prior three years.
- Independent contractor rules allowing businesses that have
misclassified their workers and fail to meet the requirements for
the Internal Revenue Code section 530 safe harbor to reclassify
their workers prospectively with no employment tax liability for
- An exemption from the foreign tax credit limitation for taxpayers with no more than $300 of creditable foreign taxes paid that were reflected on an information return and with no foreign income other than passive income.
Global interest netting for the period that an underpayment and
an overpayment overlapped, irrespective of whether they were both
still outstanding (see
" Overpayments, Underpayments and Interest Netting
- A uniform "reasonable cause" exception for all
penalties relating to failure to meet a statutory filing requirement
or to pay or deposit required taxes.
- A clarification on the statute of limitations for all adjustments
relating to distributions from pass-through entities.
- An extension for the statute of limitations on refund claims for individuals with mental or physical disabilities.
The Clinton administration expects that many of these proposals will be included as part of the five-year balanced budget agreement; however, the precise content of the tax package will not be certain until the members of the House Ways and Means and Senate Finance committees agree on a bill.
Watch Out for Abusive Trusts
T he Internal Revenue Service issued a warning for taxpayers using trusts to illegally avoid individual or corporate income taxes. In information release 97-19, IRS Chief Compliance Officer James Donelson said the IRS receives more than 3 million trust returns annually and intends to review all questionable returns. "Well assess taxes and penalties against the participants and promoters of the trust arrangements we find abusive and will seek criminal charges when warranted," said Donelson.
The arrangements of most concern to the IRS ignore the true ownership of assets or the substance of transactions. Promoters of such trusts claim they allow owners to retain full benefit from business or personal assets while reducing or eliminating taxes. According to the IRS, taxpayers often use multiple trusts to cover the different financial aspects of their lives. For example, a taxpayer may put a business in an unincorporated business trust, place a home in a family residence trust and set up a foreign trust to hold the other trusts and receive their income.
"CPAs should use common sense when they review their clients tax returns," said Robert A. Blume, a member of the American Institute of CPAs trust, estate and gift tax committee and vice-president of the Washington Trust Bank in Spokane. He said CPAs should always ask clients with multiple trusts the following questions:
- What are the purposes of the trust arrangements?
- How were they established?
- Are they grantor-type trusts?
"Of course, there are valid reasons for taxpayers to use trusts to minimize taxes," said Blume. For example, he said credit shelter trusts are perfectly legitimate arrangements to help surviving spouses avoid unnecessary taxes when their spouses die. "However, the IRS is less concerned with trusts trying to save estate taxes," said Blume. "They are keeping a close eye on trusts used to avoid income taxes and to defraud creditors."
Watch out for certain red flags
The IRS cautions taxpayers to be suspicious of trust arrangements that claim to make personal living expenses deductible, that create charitable contribution deductions for payments benefitting the transferor or family members or that otherwise result in a taxpayer having to pay no tax with no change in control over income or assets. According to the IRS, promoters of such arrangements advertise investment seminars or tax seminars in local media, on the Internet or by unsolicited mail or telephone offers. The IRS said taxpayers should be particularly wary if the promotional materials suggest the taxpayer does not need to check the trust arrangement with a tax adviser, such as an attorney or CPA, or the IRS.
Congress Passes Antibrowsing Bill
T he House and the Senate passed legislation to criminalize the unauthorized access of taxpayer records by Internal Revenue Service employees. The Treasury Department, which strongly supported the legislation, ordered the IRS to submit a report on what the agency plans to do to prevent and detect unauthorized snooping.
The key problem, according to Deputy Treasury Secretary Lawrence H. Summers, was that unauthorized access or inspection had not been a criminal offense. "In our view, it should have been," said Summers. "We at the Treasury, as well as IRS Commissioner Margaret Milner Richardson, believe the antibrowsing legislation introduced by Senator John Glenn (D-Ohio) and Congressman Bill Archer (R-Tex.) should be enacted as soon as possible."
The Taxpayer Browsing Protection Act (S 522 and HR 1226) would create a criminal penalty in the Internal Revenue Code, making it illegal for any IRS employee to inspect tax returns or return information without authorization, punishable by a fine of up to $100,000 or a jail term of up to one year or both. The bill also calls for firing the offenders and notifying the taxpayers when violations occur. Taxpayers who are victims of snooping would be allowed to sue for civil damages under expanded civil penalty provisions.
Secretary Summers said IRS employees have been warned about unauthorized access and trained on IRS privacy policies. Taxpayers who suspect an IRS employee is snooping can call the IRS inspections hotline at 800-366-4484.
New Forms for MSA and SIMPLE Plans
T he Internal Revenue Service outlined new reporting requirements for medical savings accounts (MSAs), long-term care (LTC) accounts and Savings Incentive Match Plans for Employees of Small Employers (SIMPLE) retirement accounts. Included in the outline (announcement 97-10) is a list of all the necessary payment forms and their respective filing deadlines.
The Health Insurance Portability and Accountability Act of 1996 allowed individuals to establish MSAs and required any person paying LTC or accelerated death benefits to report the aggregate benefits paid. To carry out the provisions of the new law, the IRS developed four new forms:
- Form 1099-MSA, Distributions From Medical Savings Accounts , for trustees to report MSA distributions.
- Form 5498-MSA, Medical Savings Account Information , for trustees to report MSA contributions.
- Form 8851, Summary of Medical Savings Accounts , for trustees to report the number of MSAs established.
- Form 1099-LTC, Long-Term Care and Accelerated Death Benefits , for insurance companies and other payers to report aggregate benefits paid and other information.
No new forms are required for trustees to report distributions and contributions related to SIMPLE plans; however, trustees must report distributions and contributions on revised forms 1099-R and 5498.
All the forms discussed above can be downloaded from the IRSs Web site at http://www.irs.ustreas.gov . Printed copies of forms 1099-R and 5498 can be obtained by calling 800-829-3676.
Fathers Gift of Stock Occurred Earlier Than He Thought
C laude Autin was a successful marine industry executive who sought to establish his only child Bobby in the business. In an effort to launch his sons career, Autin formed a separate company, Louisiana International Marine Inc. (LIM). Because Bobby lacked experience, Autin thought it would be better if he was perceived as the companys principal owner.
When LIM was incorporated in 1974, 51 shares were issued in Autins name and 49 in Bobbys. At the same time, Autin executed a counterletter agreement in which he said he had no ownership interest in LIM. The counterletter also contained Autins commitment to transfer to his son, at some unspecified time in the future, all title and interest that Autin had or would have in LIM stock.
In 1988, the record of ownership of the 51 shares was changed to Bobbys name. The Internal Revenue Service said this change constituted a taxable gift, contending that Autinas the owner of record, LIM president and a listed shareholder in LIM minuteshad been the legal owner of the shares. Although he also had been listed as a shareholder on LIMs tax returns, Autin did not claim to own the shares on personal financial statements. He said the counterletter vested ownership of LIM in Bobby at the time of incorporation, so he never had owned the shares and no gift had occurred at any time. When Autin petitioned for redetermination, the Tax Court upheld the IRS. He then appealed.
Result: For the IRS. The Fifth Circuit Court of Appeals disagreed with Autin and held the counterletter did not vest ownership of LIM shares in Bobby at the moment of incorporation. Autin had paid $5,100 for the 51 shares in 1974 and therefore was the stocks owner. Although the court agreed with Autin that the 51 shares were transferred to Bobby by the counterletter, the court found the transfer took place after incorporation. The court held the 1974 counterletter transaction was a completed gift for federal tax purposes. By relinquishing legal dominion and control under local law, a complete gift had been made, regardless of any factual control retained over the property. Autins letter constituted a legally binding agreement with his son and conveyed a real right, so the gift had been completed when the counterletter was executed in 1974, and notas the IRS contendedin 1988, when the record of ownership changed.
Sole Owner Cant Use Fifth Amendment
Prevent IRS Request for Documents
M r. Maxey was the sole owner of Maxey & Co. P.C., a tax preparation business. He had organized the business as a corporation and was the sole shareholder. In 1996, the IRS served a summons on Maxeyas the companys sole agent and ownerto appear and produce specific corporate documents on the corporations behalf. Maxey failed to appear before the IRS, which filed a petition seeking to enforce the summons. The IRS contended the requested documents were necessary to determine the accuracy of Maxeys income tax returns for 1992 to 1994, as well as to ascertain whether he had committed any criminal tax offense. The court granted the IRS motion and ordered Maxey to appear and show why the order should not be enforced.
The corporation contended Maxey, as Maxey & Co.s sole agent and employee, was entitled to immunity and privilege against self-incrimination under the Fifth Amendment to the U.S. Constitution. The corporation also claimed that if a criminal prosecution was commenced against Maxey personally, evidence of his identity as the custodian of the company would prejudice his defense.
Result: For the IRS. The U.S. district court found neither the corporation nor its sole agent, Maxey, was entitled to assert a Fifth Amendment privilege against self-incrimination by producing documents sought by the IRS. The court determined the privilege is purely personal and cannot be used by a corporation. Furthermore, the court found an individual cannot rely on a personal privilege against self-incrimination to avoid producing a collective entitys records that are in the possession of the individual who represents that entity. The court cited U.S. v. Stone , which held that an agents status as sole shareholder, officer and agent of the corporation does not excuse production of documents summoned from the corporation. The court further said that, like the agent and shareholder in Stone , Maxey had decided to incorporate his business rather than operate as a sole proprietorship. Thus, Maxey must accept the limitations of his personal Fifth Amendment privilege in light of his capacity as corporate custodian.
U.S. v. Maxey & Co. P.C. , no. 3:97-CV-0111 AS, 2/24/97.
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