IRS Releases Guidance on Convertible Virtual Currency: Bitcoin Treated As Property for Federal Tax Purposes

opengraphThe IRS released Notice 2014-21 on Tuesday, March 25th to provide guidance on the treatment of convertible virtual currencies, like Bitcoin, as property, not currency, for Federal tax purposes.

The IRS distinguishes between virtual currency, a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value, and convertible virtual currency, which has an equivalent value in real currency or can act as a substitute for real currency. The Notice specifically mentions Bitcoin as an example of a convertible virtual currency.

Notice 2014-21 only applies to convertible virtual currency. The Notice provides additional instructions for determining basis, calculating gain or loss, and necessary forms for reporting transactions using convertible virtual currency.

You can read the full Notice here:
IRS Notice 2014-21

U.S. Supreme Court Reverses Sixth Circuit on FICA Withholding for Severance Payments

Seal_of_the_United_States_Supreme_Court.svgOn Tuesday, March 25, 2014, the United States Supreme Court reversed the Sixth Circuit Court of Appeals decision in U.S. v. Quality Stores, Inc.

Find earlier discussion of the Sixth Circuit decision here.

Read the full opinion here:
United States v. Quality Stores, No. 12-1408 (March 25, 2014)

Route 231, LLC v. Commissioner: Tax Court Issues Memorandum Opinion on Transferability of Investment Tax Credits

us_tax_courtIn Route 231 LLC v. Commissioner, the Tax Court found that a partnership’s transfer of Virginia conservation easement tax credits to a partner who agreed to make a capital contribution of 53¢ for every $1 of tax credit received in exchange for a 1% partnership interest and the credits was not a capital contribution followed by an allocation of credits but rather was a disguised sale under IRC § 707, taxable to the partnership as income.

Read the full opinion here:
Route 231 LLC v. Commissioner, TC Memo 2014-30

IRS Releases Criminal Investigation Statistics

irs-sealThe IRS released its Criminal Investigation Annual Report for fiscal year 2013 on Monday, February 24. The fiscal year ended September 30, 2013, so the report covers the fourth quarter of 2012 and the first three quarters of 2013. The report shows increases in enforcement actions and convictions for tax crimes. IRS Criminal Investigation continues its focus on identity theft crimes, recommending prosecution of over 1,250 individuals who were involved in identity theft crimes in fiscal year 2013.
As of September 30, 2013, the IRS was able to report the following:

  • IRS Criminal Investigation initiated 5,314 cases and recommended 4,364 cases for prosecution.
  • A 12.5% increase in investigations initiated compared to the 2012 fiscal year.
  • An 18% increase in prosecution recommendations compared to the 2012 fiscal year.
  • The conviction rate for fiscal year 2013 was 93%.
  • Total convictions increased by over 25% from fiscal year 2012 to fiscal year 2013.
  • 80% of convictions in fiscal year 2013 resulted in confinement to federal prison, halfway house, home detention, or some combination thereof.
  • IRS Criminal Investigation seized over $465 million in assets in fiscal year 2013.
  • Taxpayers forfeited over $517 million in assets in fiscal year 2013.

Notably, despite the controversy over regulation of return preparers, only 309 investigations of return preparers were initiated in fiscal year 2013, down from 443 in fiscal year 2012.

Here is the full report.

 

Shea Homes v. Commissioner: Tax Court Allows Homebuilder to Defer Recognition of Income from Home Sales

us_Tax_Court_fasces-with-red-ribbonIn Shea Homes, Inc. v. Commissioner, the Tax Court allowed a homebuilder to defer the recognition of income, using the completed contract method under IRC § 460(e)(1)(A), from home sales in a newly constructed development until the entire development was nearly complete.

The specific facts and contracts in Shea were crucial to the court’s determination.

Read the entire opinion here:
Shea Homes, Inc. v. Commissioner, 142 T.C. No. 3 (2014).

Court of Appeals Rules that IRS Cannot Regulate Return Preparers

The D.C. Circuit Court of Appeals has affirmed the ruling of the lower court and held that the IRS does not have the statutory authority to regulate tax return preparers.

In a unanimous and rather direct opinion, the Court of Appeals listed six reasons why the 130 year old statute, 31 U.S.C. § 330, relied upon by the IRS was insufficient to authorize regulation of non-accountant and non-attorney tax return preparers.

  1. Tax return preparers do not represent taxpayers, they assist them;
  2. Tax return preparers do not practice before the IRS;
  3. Tax return preparers are not representing taxpayers a contested proceeding;
  4. If valid, the authority of the underlying statute would make all other statutes regulating tax return preparers, e.g. the IRC, moot;
  5. The statute’s text and legislative history do not support the broad regulatory powers claimed by the IRS; and
  6. Finally, the IRS didn’t apply the century-old statute to regulate tax return preparers until 2011 and before that the agency’s statements about return preparer regulation were inconsistent with the current interpretation.

The court summarized its view: “the traditional tools of statutory interpretation – including the statute’s text, history, structure, and context – foreclose and render unreasonable the IRS’s interpretation of Section 330.” It also advised the IRS that if it wishes to regulate tax return preparers it should introduce and pass new legislation.

Despite the resounding defeat, the IRS may still petition the appellate court a for rehearing en banc, which would presumably include the three recently appointed members of the D.C. Circuit. The deadline for that motion is March 28.

If the IRS seeks a writ for certiorari with the U.S. Supreme Court, it must file a petition by May 12.

Read the entire opinion here:
Loving v. IRS, No. 13-5061 (D.C. Cir. Feb. 11, 2014)

Famous Fridays: The Tax Education of Lauryn Hill

lauryn-hill-thelavalizardLauryn Hill is a popular hip-hop and soul musician who rose to fame as the lead singer of The Fugees in the mid-1990s. The Fugees’ second album, The Score, sold over six million copies in the U.S. and more than 17 million copies worldwide. The band split up soon thereafter and Hill released a solo album, The Miseducation of Lauryn Hill to even greater acclaim and success. “Miseducation” won five Grammy Awards, spent 81 weeks in the Billboard 200, and topped out at 18 million in worldwide sales.

Following its release, Ms. Hill largely disappeared from the public eye to raise her six children, five of whom she had with Rohan Marley, the son of reggae legend Bob Marley. Despite her low profile, Ms. Hill earned over $1.8 million between 2005 and 2007, mostly from recording and film royalties.

In June 2012, Ms. Hill was charged with tax evasion for failing to file income tax returns for the years 2005 through 2007. She faced a prison sentence of up to three years (one per unfiled return). Ms. Hill pled guilty to the charges and promised to pay back the taxes she owed. During her trial she criticized the over-commercialization of the music industry and cited the safety of herself and her family as reasons for stepping back from her career.

Ms. Hill signed a recording contract with Sony to help pay her tax liabilities of over $900,000 but her sentencing hearing was delayed for two weeks because she had still not paid the back taxes. At sentencing the judge also considered Ms. Hill’s failure to pay her 2008 and 2009 tax liabilities and sentenced her to three months in prison with a $60,000 fine. A day before entering prison, Hill released a long letter addressing racism, slavery and the IRS.

Ms. Hill was released from prison last fall and is currently on tour across the U.S. She will be in Washington, D.C. on February 9 and Atlanta on Feb. 13

IRS Releases 2012 Schedule UTP Filing Statistics

irs-sealThe IRS recently released Schedule UTP filing statistics for the 2012 tax year. The statistics are not complete as returns from some late fiscal year filers and others still have not been processed.  The Schedule UTP filing statistics include updated totals for the 2011 tax year, originally reported here.

As of December 2013, the IRS was able to report the following:

  • 1,743 taxpayers filed Schedule UTP with their 2012 returns.
  • 4,166 uncertain tax positions were reported for 2012, down from 5,980 in 2011.
  • The percentage of taxpayers who filed Schedule UTP in multiple years was 55% for the 2012 tax year, down from 77% in 2011.
  • The average number of uncertain tax positions per taxpayer was 2.4 in 2012.
  • 42% of Schedule UTP returns included only one uncertain tax position
  • 55% of taxpayers filing Schedule UTP in 2012 were publicly traded companies.
  • The most frequently reported code sections underlying uncertain tax positions for 2012 were
    • § 41 Research Credit (22%),
    • § 482 Transfer Pricing (19%), and
    • § 263 Capitalization (4%).

Here are the 2012 IRS UTP Filing Statistics 2012
Read more about Schedule UTP here.

Famous Fridays: Pete Rose, Gambling Winnings Are Income Too

Pete RosePete Rose has faced his fair share of criticism for his gambling problems.  He was banned from Major League Baseball for betting on games while he was a manager.  He also underreported income from gambling, personal appearances, autograph signings, and memorabilia sales between 1984-1987.

During his playing career, Rose earned the nickname “Charlie Hustle” for his fierce competitiveness. He finished his major league career as the all-time hits leader with 4,256.  Rose also won three World Series, including two as a member of the Big Red Machine, three batting titles, one MVP, and made 17 All-Star appearances.  He managed the Cincinnati Reds from 1984 until 1989, when the 225-page Dowd Report was released to MLB Commissioner Bart Giamatti.

The infamous Dowd Report contained banking records, betting records, and witness testimony indicating that Rose bet on baseball while managing the Reds.  Rose originally denied the allegations, but agreed to a ban from Major League Baseball in 1989.  Rose is still banned from Major League Baseball and has admitted on betting on games he managed.

Shortly after his ban from baseball, Rose was charged with failure to report over $350,000 in income from memorabilia sales, autograph signings, personal appearances, and gambling winnings from 1984 through 1987.  In 1990, Rose pled guilty to two felony charges of filing false tax returns. As part of the plea agreement, prosecutors agreed not to charge Rose with the more serious crime of tax evasion.  He was sentenced to five months in prison and fined $50,000.

Rose continues to make money with appearances and memorabilia sales, presumably reporting all of it as income on his tax returns.

Famous Fridays: Willie Nelson, The IRS’s Most Talented Musician

Willie NelsonWillie Nelson may be most famous for his longevity in the music industry. He’s been making music since 1956 and has recorded over 70 albums during his career. Nelson has also participated in countless compilations and collaborations with other artists. He’s well known as a longhaired, liberal activist owning a biodiesel brand and serving on the advisory board of the National Organization for the Reform of Marijuana Laws.

In the late 1970’s and early 1980’s Nelson, along with over 4,000 other wealthy individuals, participated in a widely promoted tax shelter. The shelter, operated by First Western Securities of San Francisco, allowed investors to deduct as much as $8 on their tax returns for every $1 invested. After an investigation, Nelson was hit with taxes, penalties, and interest of over $30 million.

In 1990, Nelson’s lawyer negotiated to have the bill reduced to just over $16 million to cover tax, penalties, and interest, but Nelson did not have the money to pay his bill. The IRS executed a raid and seized most of Nelson’s assets including musical instruments, platinum records, posters and his recording studio. Nelson was able to save his guitar, Trigger, by having his daughter ship it to him in Hawaii before the raid. After hearing about his problems, fans started a number of charity drives to help pay Nelson’s tax bills. Many of Nelson’s sentimental items were saved when the IRS accepted less than full value from charity groups, who then returned them to Nelson.

The auctions and donations were not able to make any substantial progress towards resolving Nelson’s tax bill. In an unusual attempt to collect as much as it could, the IRS agreed to allow Nelson to produce a compilation album with a portion of the proceeds going to the IRS. By this time, Nelson’s lawyer had renegotiated the bill to $6 million. Nelson’s album, The IRS Tapes: Who’ll Buy My Memories?, sold for $19.95 with $9.95 going to the telemarketing company promoting the album, $3 to the IRS, $2.40 to Sony Corporation, $2 to pay the tax generated by sale of the album, $1.60 to album-related expenses, and $1 going to fund Nelson’s lawsuit against the promoter.

The album wasn’t a huge success, though the IRS collected about $3.6 million. Nelson’s settlement from his lawsuit against the promoter and his money from other projects was enough to cover the remainder of his tax bill.