Category Archives: Federal

DOD Adopts Uniform Policy on Same-Sex Marriage

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Last week Secretary of Defense Chuck Hagel announced that the Armed Forces (Army, Navy, Air Force, Marine Corps, Coast Guard) will comply with the U.S. Supreme Court’s decision in U.S. v. Windsor ruling by September 3, 2013. Windsor declared Section 3 of the Defense of Marriage Act (DOMA) unconstitutional.

Sec. Hagel explained that the domestic partner provisions put in place in February will be supplanted by official recognition of same-sex marriages. Recognizing that many same-sex couples have to travel to another jurisdiction to marry, the Department of Defense has amended Department of Defense Instruction 1327.06 “Leave and Liberty Policy and Procedures” to allow “non-chargeable marriage leave where a Service member is a part of a same-sex couple and is assigned to a duty station located more than 100 miles from a U.S. state (or the District of Columbia) that allows same-sex couples to get married.”  Eligible Service members may be granted non-chargeable leave for up to 7 days if they are assigned within the continental U.S (CONUS).  If they are stationed outside the continental U.S. (OCONUS), they will be granted non-chargeable leave for a period of up to 10 days. Same-sex couples will be able to use this nonchargeable marriage leave once in their career.

The memo indicates that there could be more changes to follow, as the Joint Benefits Review Working Group is focusing its efforts on extending spousal benefits to same-sex spouses.  It also gave a firm timeline for enforcement stating that all entitlements are retroactive to the date of the Supreme Court’s decision, June 26, 2013.  

Read the memoranda here:
Extending Benefits to Same-Sex Spouses of Military Members

Further Guidance on Extending Benefits to Same-Sex Spouses of Military Members

Goodbye 4-Day Weekend, IRS Will Be Open on August 30th

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Bye ByeIRS employees hoping for an end of summer vacation will have to settle for a measly 3-day Labor Day weekend this year. As we suggested may happen in July, the IRS has officially cancelled the furlough day scheduled for Friday, August 30th, 2013.On a brighter note they’ll get another day of pay to spend on the festivities.

The press release leaves open the possibility that the IRS may require an additional furlough day before their fiscal year ends on September 30th. So far, the IRS has closed for only three of the five furlough days initially proposed in the wake of the Federal sequester.

All services will be available on the normal Friday schedule.

$2M Tax Lien not a Character Issue for F. Lee Bailey

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oj3F. Lee Bailey is one of the most renowned trail attorneys of the past 50 years. He rose to fame when he convinced the U.S. Supreme Court to order a retrial for Dr. Sam Shepard (the alleged inspiration for The Fugitive). His other famous clients have included Patty Hearst, the Boston Strangler and O.J. Simpson.

His legal career went of the tracks in 2001 when he was disbarred in Florida (and later in Massachusetts) for mishandling client funds. In 2005 he tried and failed to regain his Massachusetts license.

Not one to ever give up, Bailey took and passed the Maine bar examination in 2011 and applied for a law license. However, the Maine Board of Bar Examiners denied his application on the basis that Bailey had not proved by “clear and convincing evidence that he possesses the requisite honesty and integrity” to practice law. The key factor in their ruling was “an income tax debt of nearly $2,000,000 that was and remains in litigation on appeal.”

Bailey appealed the board’s decision to the Maine Supreme Judicial Court. The high court found that the “the tax debt currently in litigation should not prevent a finding of good character and fitness to practice law.” This was good news for F. Lee (and anybody else who might be feeling blue about their tax problems).

The high court’s order paved the way for Bailey to return to the practice of law. We will follow his case to see if he prevails on the lien but for now the only question is who will be his next high profile client.

Read the Supreme Court’s first order here:
F. Lee Bailey v. Board of Bar Examiners

UPDATE: Thank you Peter Reilly CPA (follow him @peterreillycpa) for mentioning us in your recent Forbes blog post. To answer your question about the potential for appeal, the Board of Bar Examiners motion for reconsideration was denied by the high court on June 13, 2013 – six days after the order above. I believe that cleared the final obstacle to Mr. Bailey’s readmission.

Read the order on the motion for reconsideration here:
F. Lee Bailey v. Board of Bar Examiners, Motion on Reconsideration

Tax Court Reasserts Position on Conservation Easements

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Opining on a motion for reconsideration, the Tax Court has reaffirmed the circumstances under which a conservation easement might be extinguished without violating the regulatory requirement that the donation be made in perpetuity. Asked to account for an intervening change in the law based on First Circuit Court of Appeals’ decision in Kaufman v. Shulman, the Court declined to change its earlier decision in Carpenter v. Commissioner, T.C. Memo. 2012-1.

In the matter under reconsideration, the parties reserved the right to extinguish the conservation easement by mutual agreement. Under those circumstances, the donee organization would have received its proportionate share of the proceeds following removal of the easement. The taxpayers argued that these circumstances met the in perpetuity “safe harbor” under Treas. Reg. Sec. 1.170A- 14(g)(6)(i) for terminated conservation easements.

The Court disagreed and emphasized that “extinguishment by judicial proceedings is necessary” to satisfy the regulation and that a proportionate share reserved for the donee organization is not an adequate substitute for guaranteeing the donation in perpetuity. The Court also reminded the taxpayers that in cases appealable to Federal Courts of Appeals that had not ruled on the issue – as was the case here – the First Circuit’s decision is not binding on the Tax Court.

Read the entire opinion here:
Carpenter v. Commissioner, T.C. Memo. 2013-172

Tax Court Reminder: Hours Alone Do Not Turn a Hobby into a Business

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430_horse0One of my best friends emailed me yesterday. He’s up for partner at one of the largest law firms in the world. He has dedicated many hours to the practice of law since our days together as law clerks at the Tax Court.

However, the key to partnership in the modern practice of law requires more than substantial legal skill – it takes a business plan. He has been asked to write one and I have no doubt that it will be thorough, detailed and realistic. That is, it will be the product of the same skills that have made him a great lawyer already. When he is invited into the partnership of his firm, which I am confident that he will be, I know that he will be expected to execute on that business plan, and I know that he will. After all, the objective of a law firm is to provide excellent legal services and make a profit while doing it.

Yesterday, the Tax Court issued a fairly lengthy Summary Opinion reminding us that the same standard applies to every business. A Summary Opinion is not a legal precedent and cannot be cited for authority, but Craig v. Commissioner amply shows that lengthy hours and dedicated labor alone are not enough to turn an activity into a business. The opinion is instructive for those who might be unsure about the right standard. There must be a plan to make money – and some profits along the way won’t hurt either.

Ms. Craig worked 25-40 hours per week as a real estate agent. She worked 25-30 more hours per week attending to her several horses – an activity for which she claimed losses for the tax years in question. She also worked part time preparing tax returns for H&R Block. The IRS denied Ms. Craig’s losses from the horse breeding activity and she challenged the Commissioner’s determinations by filing a pro se petition in Tax Court.

The Tax Court accepted the fact that Ms. Craig dedicated many hours a week to cleaning stalls, feeding, grooming, training, and otherwise caring for her horses. It did not, however, accept the fact that Ms. Craig engaged in any of those efforts with “an actual and honest objective of making a profit.”

Notable was Ms. Craig’s business plan for the horse-breeding activity. It was prepared in early 2011, months after the IRS began its examination of Ms. Craig’s tax returns, and listed a total of 10 items (all of which are reproduced in the Court’s opinion). From the time the business plan was written until the date of trial in November 2012, Ms. Craig had accomplished only one item on the business plan (she finished training one horse for handling).

Neither the concise and late-breaking business plan nor the lackadaisical approach to execution helped Ms. Craig’s case. It also didn’t help that she also didn’t maintain a separate bank account for the alleged horse breeding business, instead preferring to run expenses through her personal checking account, and reported gross receipts from the business in only one of seven years ($950 of revenue, not even profit). All of these factors contributed to the Court’s conclusion that Ms. Craig’s horse activities were a hobby and not a business. The Court also sustained a 20% accuracy-related penalty against Ms. Craig. A timely-written and well-executed business plan might not have changed the outcome of Ms. Craig’s case, but it certainly wouldn’t have hurt.

Read the entire opinion here:
Craig v. Commissioner, T.C. Summary Opinion 2013-58

Good News? IRS Will Be Open on July 22nd

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Caribbean-DestinationsIt’s probably good news for IRS employees happy to regain an extra day of pay, less good for those who booked a flight to the islands for the long weekend.

The IRS announced yesterday that it is canceling the furlough day originally scheduled for Monday, July 22, 2013. According to the press release “the IRS will be open for taxpayers that day as scheduled.” Presumably all functions and services will be available. The press release indicates that the IRS also may cancel the scheduled August 30, 2013 furlough day but a firm decision has not been made.

Government Denied Summary Judgment in Conservation Easement Case

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white-cloud-wilderness-idahoThe U.S. District Court for the District of Idaho recently rejected the government’s pre-trial motion for summary judgment on the validity of a conservation easement donation, setting the stage for a trial on the facts of the transaction.

The District Court’s order and decision provides another ray of hope for Alan Pesky’s efforts to preserve his charitable contribution deduction for the conservation easement donation he made in 2002. Mr. Pesky has already been through a series of pre-trial motions. While this decision should have him headed for trial on the merits of the tax deductions for his donation, as we note below, the government has lobbed yet another missive over the transom.

The facts of the Pesky case are complicated but not necessarily unusual among high-net worth individuals with substantial real estate holdings who find themselves approached about a conservation easement donation. In stark summary, Alan Pesky was approached by The Nature Conservancy (TNC) to acquire a parcel over which a conservation easement ultimately was granted to TNC. The acquisition involved a series of negotiations and collateral agreements which may or may not prove to be relevant in sustaining the deduction.

When the donation was complete, Mr. Pesky deducted a portion of the conservation easement donation on his 2002 tax return and carried forward the remainder on his 2003 and 2004 returns. The government has challenged the charitable deductions for all three years but had to assert fraud for the 2002 tax year because it failed to issue a notice of deficiency within the three-year statute of limitations. The government made additional assertions of fraud which were addressed in this order (and elsewhere).

This case is a fine example of the Government’s recent approach to conservation easement litigation. The government wants to win early dismissal of these cases on pre-trials motions without allowing an examination of the facts and is willing to renew and recycle arguments that have failed before and been flat out rejected in other Federal circuits.

The government moved for summary judgment based on three primary arguments. The first argument was that the conservation easement was part of a larger quid pro quo transaction between the taxpayers and TNC.  This argument has been considered in this context by the Tax Court in at least one reported decision but under substantially different facts than these.  Considering the factors that might influence a jury on this question, the U.S. District Court ruled that a genuine issue of material fact remained for consideration at trial and denied the government’s motion.

The government’s second argument was that there was no contemporaneous written acknowledgement of goods and services received. Though the government conceded the existence of such an acknowledgment, its argument was an extension of the quid pro quo position, i.e., that there was no charitable intent. The court also rejected the argument based on the potential for a genuine issue of material fact.  One might argue though that the taxpayer should prevail based on the substantial compliance doctrine adopted in Simmons v. Commissioner, T.C. Memo 2009-208 aff’d. 646 F.3d 6 (D.C. Cir. 2011).

Finally, the government argued that donation should fail because the Pesky’s property appraisal did not meet the standard for a qualified appraisal standard in the regulations. Again, the District Court leaned on potential for a genuine issue of material facts to deny the government’s motion.  Given the minimum threshold standard for a qualified appraisal set forth by the Second Circuit Court of Appeals in Scheidelman v. Commissioner, 682 F.3d 189 (2d Cir. 2012), the taxpayers should also prevail on this issue.

In all events, the court rejected all three of the government’s arguments.  The persistence of the government, however, should not be denied. Despite the court’s rejection of their positions just last Monday, the government had already filed a motion for reconsideration of the order on Friday requesting that the court take yet another look at these well-worn arguments.  The Pesky’s might yet have their day in court, but not before they cross a few more hurdles the government intends to through in the way.

Read the Order Denying the Government’s Motion for Summary Judgement here:
Pesky Order 7.8.13

Read the Government’s Motion for Reconsideration here:
Pesky Motion for Reconsideration 7.12.13

DOMA Doomed by Estate Tax Refund Claim

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us-supreme-courtThe United States Supreme Court has struck down the Defense of Marriage Act (DOMA) as an unconstitutional violation of the “equal liberty” protections of the 5th Amendment.

The dispute in U.S. v. Windsor began when Edie Windsor filed a claim for refund of estate taxes paid after the death of her same-sex spouse, Thea Spyer. Though the court makes little mention of the $353,053 refund claim in its historic opinion, the high court’s ruling affirmed the Second Circuit Court of Appeals’ decision to award the refund.

Read the entire opinion here:
U.S. v. Windsor, Docket No. 12-307 (U.S.S.C. June 26, 2013)

Tax Court: Side Letter Invalidates Facade Easement Donation

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tread_HDIn a division opinion that reflects the increasingly technical aspects of defending conservation easement cases, the Tax Court has disallowed deductions for the contribution of cash and a façade easement to a qualified organization.  The charitable contributions were disallowed because the donee issued a “side letter” promising to refund cash contributions and rescind the easement over the donor’s property if the donation was “disallowed” by the Internal Revenue Service.

The taxpayers donated a façade easement over their home in the Treadwell Farms Historic District on the Upper East Side of Manhattan. They obtained a qualified appraisal and took deductions based on their cash contributions and the value of the donated easement. The entire transaction was covered by the side letter. The IRS disallowed the deductions for the cash and easement donations and imposed penalties. The taxpayers petitioned the Tax Court.

The case was submitted to the Court without trial on stipulated facts. The Court found that the promises in the comfort letter made the gifts conditional and thus incomplete for purposes of the deduction. It found that the possibility that the IRS would disallow the contributions was not “so remote as to be negligible” – a standard imposed under the regulations governing the deductibility of conservation easements. The Court noted IRS administrative guidance issued prior to the donation announcing increased scrutiny of somewhat similar transactions and the donee organization’s “standard policy” to refund contributions for challenged transactions as evidence that an IRS disallowance was not “so remote as to be negligible.” The Court did not address the penalties, reserving that issue for future proceedings.

Read the entire opinion here:
Graev v. Commissioner, 140 T.C. No. 17 (2013)

Worker Classification Settlement – Is Now the Time?

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IRS_logoIn December 2012, the IRS revised the Voluntary Classification Settlement Program (VCSP) that provides partial relief from federal employment taxes for eligible taxpayers that agree to treat workers as employees prospectively. The updated program relaxes the eligibility requirements and reduces the total tax exposure for participating employers.

The revised standards were accompanied by a special incentive program – Temporary Eligibility Expansion – which considerably relaxed the eligibility standards.

The incentive period for the Expanded Eligibility expires on June 30, 2013.

One enticing aspect of the temporary program is a waiver of the requirement that the employer/business have filed Forms 1099 for its workers for the last three years. In many instances, employers are not only treating workers as independent contractors but also not filing the required Forms 1099 for those workers. Those were the facts of the recent Kurek case where the taxpayer was hit with taxes, interest and penalties for payments to over 30 workers in just one year.

A taxpayer entering the Expanded Eligibility program:

  • pays 25% of the employment tax due for reclassified workers for the most recent tax year;
  • pays a reduced penalty based on a graduated scale; and
  • is not subject to an employment tax audit for those workers for prior years.

The Expanded Eligibility is also available for businesses already selected for or under an employment tax audit – a situation not covered by the standard program.

If you or your taxpayer is currently under an employment tax audit and facing potential exposure for misclassified employees then the Expanded Eligibility VCSP may be the solution. Those taxpayers have until the end of this month to enter the program and avoid certain interest charges and almost certain penalties.