2009 Federal Tax Benefit for Qualifying Contributions for Haitian Earthquake Relief

The Internal Revenue Service is making a one-time, extraordinary allowance to taxpayers who make qualifying contributions for Haitian earthquake relief.[1]

Individual taxpayers who itemize their deductions for 2009 may deduct on their 2009 income tax return cash contributions to qualifying charities for Haitian earthquake relief made after January 11, 2010 and before March 1, 2010.  A “qualifying charity” for this purpose is a charity which is (1) based in the United States, and (2) is either (a) listed in IRS Publication 78 or (b) a bona fide church.

Publication 78 lists charities which have applied for, and been granted, IRS recognition that contributions to them are deductible as charitable contributions for Federal income tax purposes.  An online version of Publication 78 can be found at http://www.irs.gov/app/pub-78/.

To designate that a contribution is for Haitian earthquake relief, you should specify on the memo line of the check or otherwise in the documentation for the contribution that the contribution is for Haitian earthquake relief.

If you have any question about making a qualifying contribution, please feel free to contact us.

[1] IR 2010-12, Jan. 25, 2010.

This article was written by Stephen J. Dunn, Of Counsel to Demorest Law Firm.

Keeping Property Tax Values Capped Upon the Death of a Joint Tenant

Under Michigan law, a property’s taxable value is capped and may not increase by more than the rate of inflation until ownership of the property is transferred.

However, there are certain types of transfers of ownership that are exempt from this rule and will not cause an uncapping of the taxable value.  These no-transfer-of-ownership exemptions are listed in the General Property Tax Act, Section 211.27a(7).

One particular exemption that has been the subject of recent litigation in Michigan is set forth in Section 211.27a(7)(h). This exemption has to do with a transfer that creates or terminates a joint tenancy.  It has been widely assumed that the death of a joint tenant is considered a transfer that “uncaps” the taxable value of a property and is not exempt under Section 211.27a(7)(h).

However, in December 2009, the Michigan Court of Appeals reversed the decision of the the Michigan Tax Tribunal in the case of Klooster v City of Charlevoix, holding that the death of one joint tenant, even though it terminated the joint tenancy, was not a “conveyance” because there was no instrument that affected title.  In that case, husband and wife first acquired property, wife then quitclaimed to husband, husband then quitclaimed to himself and his son as joint tenants, and the husband/father subsequently died.  It is the death of the father as joint tenant that is the issue of the dispute.  The court disagreed with the City of Charlevoix and the Tax Tribunal’s contention that the death constituted a “transfer” under Michigan statutes.

Just this month, the Michigan Court of Appeals in Klevorn v. City of Boyne City, using Klooster as precedent and citing the similarity of the facts, held that the death of one joint tenant (mother) and the subsequent transfer the other joint tenant with rights of survivorship (son) was not a “conveyance”.  Therefore, the Court held that the property value upon transfer to the son should not have been uncapped and he was entitled to the no-transfer-of-ownership exemption in MCL 211.27a(7)(h).

The Klooster decision has been appealed to the Michigan Supreme Court.  In the meantime, there is precedent to argue that upon the death of a joint tenant, the remaining joint tenant with rights of survivorship is not subject to an uncapping of the property’s taxable value.

This article was written by Natalie C. Najarian, Associate at Demorest Law Firm.

New Energy Credits Available on your 2009 Michigan Tax Return

There are two new energy credits available to eligible taxpayers on their 2009, 2010 & 2011 Michigan tax returns. I am frankly shocked that these two credits where maintained during the budget cuts that came out of Lansing in October. In fact the state would have been far better off taking the tax monies from these credits and transferring them to its national award wining “Pure Michigan” advertising campaign.

Home Improvement/Appliance Credit

The credit is equal to 10% of EPA energy star certified appliances; the maximum credit is $75 for single taxpayers and $150 for married tax payers. This credit can be claimed on Michigan form 4764.

Energy Cost Recovery Surcharge Credit:

This non-refundable credit is available to both homeowners and renters who pay electric bills and is capped at $9 per meter in 2009. This credit can be claimed on Michigan Schedule 2.

For more information on these credits, including eligibility and income limitations please visit click here to visit the Michigan.gov taxes page.

This article was written by Jay Kossen, CPA at Numerico, PC. Click here to view Numerico’s website.

Broadening the State Real Estate Transfer Tax

When real property is transferred in the state of Michigan, both state and county transfer taxes are assessed based on the purchase price of the property.  Transfer taxes are imposed when a deed transferred the ownership of land from one entity to another.  However, until recently, the transfer tax did not apply if the buyer simply bought the entity that owned the land.  This was perceived as a loophole for single-purpose real estate entities to avoid paying the transfer tax.

On January 9, 2009, the State Real Estate Transfer Tax Act (MCL 207.521, et seq.) was amended to impose the state real estate transfer tax (“SRETT”) on transfers of a “controlling interest” in an entity, if the entity has 90% or more of its value in real estate. “Controlling interest” is defined to include ownership of 80% of the stock of a corporation, or 80% of the membership interests of a limited liability company.

The amended Act includes the same exemptions as the original SRETT statute, but adds new exemptions for (i) transfers made to effectuate a dissolution of the corporation, limited liability company, partnership or trust, and (ii) transfers from an entity to another where the ownership remains the same.

The amendments do not apply to the county property transfer tax. Therefore, an entity purchase still does not trigger an obligation to pay the county transfer tax.

This article was written by Natalie C. Najarian, Associate at Demorest Law Firm.

BEYOND GRATS AND IDGTS

This article was written by Stephen J. Dunn, Of Counsel to Demorest Law Firm. Click here to view his professional resume.

Tax Resolution Scams 101 Article

Stephen J. Dunn, a specialist in tax and trust and estate law at Demorest Law Firm, PLLC, recently wrote an article entitled “Tax Resolution Scams 101”.  In the article, Mr. Dunn explains how tax resolution operators use the premise of an offer-in-compromise (OIC) to defraud taxpayers out of several thousand dollars in retainer fees for nothing in return.  The IRS almost never grants an OIC, upon any grounds.  Mr. Dunn discusses how the filing of an OIC, in fact, harms the taxpayer in several ways, and he advises that taxpayers would be much better served by seeking an installment agreement from the IRS.

Mr. Dunn suggests that legislation should be passed to outlaw false or misleading statements in the marketing of tax resolution services.   Private civil actions against tax scammers are often impractical, though class-actions make more economic sense.  In addition, the IRS can seek an injunction against a tax resolution scammer, and U.S. attorneys can prosecute tax scammers for wire and mail fraud, among other offenses.

Click here to download a PDF of the article.

This article was written by Stephen J. Dunn, Of Counsel to Demorest Law Firm. Click here to view his professional resume.

The Troublesome Joint Tax Return

Stephen J. Dunn, a specialist in tax and estate planning issues at Demorest Law Firm, PLLC, recently wrote an article entitled “The Troublesome Joint Tax Return”.  The article was published in the March/April 2009 issue of the EA Journal.  This Journal is published by the National Association of Enrolled Agents, an organization representing professionals licensed to practice before the Internal Revenue Service. In the article Mr. Dunn discusses important factors in deciding whether one should file taxes jointly with their spouse.

Mr. Dunn explains why a tax preparer should not allow spouses to sign a joint income tax return if there is substantial unpaid tax liability on the return with respect to only one of the spouses.  Nor should a preparer allow the spouses to sign a joint income tax return if there are disallowable deductions or unreported income attributable to one of the spouses.

If the spouses have already filed a joint income tax return with substantial unpaid tax liability attributable to only one of the spouses, the prepared should consider filing a Form 8857 seeking relief under IRC Sec. 6015(f) for the innocent spouse.  The Form 8857 may also assert IRC Sec. 6015(b) as an alternative for innocent spouse relief.  This action could accomplish a great result for the innocent spouse.

The full article is now available for download in PDF format by clicking the link below.

DOWNLOAD A FULL COLOR PDF

This article was written by Stephen J. Dunn, Of Counsel to Demorest Law Firm. Click here to view his professional resume.

Troubled Companies & The Trust Fund Recovery Penalty

Many financially distressed companies accumulate large liabilities for employment taxes withheld from their employees’ wages. These taxes can be assessed personally against the company’s principals.

When a company fails to pay its Federal employment taxes, the trust fund portion of those taxes can and will be assessed personally against the business’s “responsible persons” (such an assessment is called a “trust fund recovery penalty”).  “Trust fund” taxes are those that the employer is required to withhold from employees’ wages and pay over to the IRS.    They include withheld income tax, Social Security tax, and Medicare tax.  Many states, including Michigan, also impose a trust fund recovery penalty for state income tax withheld from employees’ wages but undeposited with the state taxing authority.

A responsible person is one who decides how the company uses its available cash. In the IRS’ view, one who has the right to determine how a company uses its cash, even though he or she does not exercise that right, can be a responsible person.   Signature status over a company’s bank accounts is a telling indicia of responsible personhood.  A company’s chief executive officer is nearly always deemed a responsible person.

Nearly every company has at least one responsible person; it is a rare company that does not have a responsible person.  Heroic efforts to prevent assessment of a trust fund recovery penalty usually are not worth it.  It is much more worthwhile to endeavor to confine assessment of a trust fund recovery penalty to one, truly responsible, person, and to start the collection statute of limitations running on the assessment.

Within about six months after a company fails to file an employment tax return, or fails to deposit employment taxes with the IRS, an IRS Revenue Officer will contact the company and attempt to bring it into compliance with the law.  If that doesn’t work, the Revenue Officer will initiate a trust fund recovery penalty assessment, beginning with interviews of suspected responsible persons.  It is critically important that such persons immediately retain qualified counsel, and that the interviews not take place.  A target’s representative can instead complete a questionnaire for the target and submit it to the Revenue Officer.

If a target disagrees with a proposed trust fund recovery penalty assessment against him, he or she can appeal the proposed assessment to the IRS Office of Appeals.  If that is unsuccessful, the trust fund recovery penalty will then be assessed.  Upon assessment, a tax lien in the amount of the trust fund recovery penalty arises in favor of the IRS on all of the taxpayer’s property.  The IRS will record notice of the tax lien in the local register of deeds’ office, disabling the assessed target from selling or mortgaging real property.

The statute of limitations on collection is 10 years from the date of assessment for a Federal trust fund recovery penalty, and six years from the date of assessment for a Michigan trust fund recovery penalty.  Neither Federal nor state trust fund recovery penalties are dischargeable in bankruptcy.

A target against whom a trust fund recovery penalty has been assessed can litigate the assessment by paying trust fund tax for at least one employee for at least one calendar quarter   (this is called a “divisible portion” of the assessment), and then filing a claim for refund of it with the IRS.  Once the IRS denies the claim, or six months pass without IRS action on the claim, the target may sue in U.S. District Court, challenging the trust fund recovery penalty assessment.

The IRS can criminally prosecute a failure to deposit withheld trust fund taxes, and in the present economy it is doing so with increasing frequency.  A well-known Michigan restauranteur recently pleaded guilty in U.S. District Court in Detroit to a prosecution for failing to deposit trust fund taxes withheld from his employees’ wages.

Several things can and should be done to protect a company’s principals from trust fund recovery penalty assessments:

* The company’s CEO should monitor the company’s trust fund obligations and determine that they are being paid on a current basis.

* As soon as the company determines that it may not be able to fully pay its employment tax obligations as they accrue, the company should─

• prepare to cease operations as soon as possible; and
• specifically allocate any further payments of employment taxes as against the company’s trust fund obligations.

This article was written by Stephen J. Dunn, Of Counsel to Demorest Law Firm. Click here to view his professional resume.

The Right Tax Resolution

Successful resolution of tax controversies is all about experience and instincts.

When the Internal Revenue Service (“IRS”) conducts an examination and determines to make an assessment, it must issue to the taxpayer 30 days’ written notice of  its intent to make the assessment.  If the taxpayer appeals the proposed assessment within the 30-day window, the assessment will not become final until the IRS Appeals Office has completed its review of the case.  If the taxpayer files a timely petition with the U.S. Tax Court, the assessment does not become final, if at all, until the Tax Court renders its decision on the case.  In addition, a taxpayer can gain jurisdiction to litigate a civil tax case in the U.S. District Court or the U.S. Court of Federal Claims by paying at least part of the assessment and then suing for a refund.  Though we’ve litigated in all of these courts, we find that litigation of civil tax cases is usually unnecessary.  We enjoy an excellent working relationship with the IRS Detroit Appeals Office, and we find that we can successfully resolve most of our civil tax cases there.

Once an assessment is made, and it remains unpaid, a lien arises by operation of law in favor of the IRS in all property interests which the taxpayer then owns or thereafter acquires.  The lien remains in effect until the assessment, including penalties and interest, is paid in full, or the collection statute of limitations expires on it.  The IRS records  written notice of the lien in the Register of Deeds’ office for the county of the taxpayer’s residence, thereby clouding title to the taxpayer’s real property, and impairing the taxpayer’s credit standing.  But if the taxpayer arranges with the IRS to pay the assessment within one year, the IRS may refrain from recording the tax lien notice.

If the taxpayer does not enter into an installment agreement satisfactory to the IRS to pay the assessment, the IRS will periodically levy (seize) the taxpayer’s property, until the assessment is paid in full.  The IRS prefers levying liquid assets, such as bank and brokerage accounts and wages.  In unusual circumstances the IRS levies real property.  Before levying, the IRS must issue written notice of its intent to do so to the taxpayer, but the IRS need only  issue a notice of intent to levy once as to a given assessment.

When a client comes to us owing a balance to the IRS, we call the IRS and have a hold placed on collection action against the client.  Then we secure transcripts of the client’s Federal tax accounts. We analyze the transcripts and determine whether the client has been penalties abatable for “reasonable cause.”  Examples include errors in tax returns, or  failure to timely file tax returns or pay tax,  attributable to malfeasance by the taxpayer’s accountant or attorney, embezzlement perpetrated against the client by an employee, or economic factors beyond the taxpayer’s control.  Denial of a request to abate penalties can be appealed to the IRS Appeals Office, often with favorable results.

Once we have satisfied ourselves as to the propriety of the assessment, and if the client is unable to pay the balance in full, we seek to enter the client into an installment agreement with the IRS.  This requires gathering financial information on the client and submitting it to the IRS.  If the financial information indicates that the client is unable to pay anything to the IRS, the IRS will post the account as “not currently collectible,” and leave the client alone for the time  being.

An offer in compromise is rarely in the client’s best interests.  The IRS almost always rejects them.  The making of an offer in compromise extends the 10-year statute of limitations on collection of an assessment for the pendency of the offer, plus six months.  Plus the client is out the fees incurred to prepare and submit the offer.  If the IRS determines that an offer is “frivolous,” then the client is subject to a $5,000 penalty, as is the preparer.

This article was written by Stephen J. Dunn, Of Counsel to Demorest Law Firm. Click here to view his professional resume.

Is your Estate Plan Effective?

Your estate plan should:

• Make sure that your property goes to the persons you want to receive it.
• Avoid taxes on succession to your property.
• Avoid probate on succession to your property.
• Protect your property from claims of creditors.
• Appoint an attorney-in-fact to make transactions in your property, and a patient advocate to make medical decisions for you, in the event you become mentally incapacitated.

To accomplish these objectives, you need competently-drawn estate planning documents.   We see a wide variation in the quality of estate planning documents.

Funding is the process of transferring one’s property to his or her trust during his or her lifetime.  Effective funding is just as important as having a competent set of estate planning documents, if not more important.

EXAMPLE.  Husband and Wife  own their considerable estate as joint tenants with rights of survivorship.  Husband dies, then Wife.  There is no estate tax at Husband’s death.  But at Wife’s death, the entire estate in excess of Wife’s unified credit is subject to estate tax.  By failing  to have a revocable trust for each spouse, and transferring (“funding”) at least the unified credit amount ($2,000,000 currently; $3,500,000 in 2009), the couple has  wasted  the unified credit, an opportunity to pass property to the next generation free of estate tax, of the first spouse to die.

EXAMPLE.  Husband and wife each have a revocable trust.  But Wife’s trust is not funded.  If Wife dies first, her unified credit is wasted.

Funding also includes making sure that beneficiary designations on your retirement plan interests and your life insurance policies are as you want them to be.

A married couple should make sure that all of their property is titled in the name of their revocable trusts, and that each spouse’s trust is funded at least to the amount of the current unified credit.

Funding is not something to be visited every 3-5 years.   Rather, it should be monitored on an ongoing basis.  Each time you acquire real property, securities, or an interest in a business, care should be taken to title the asset in the name of your trust or your spouse’s trust.

This article was written by Stephen J. Dunn, Of Counsel to Demorest Law Firm. Click here to view his professional resume.