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RECENT RULINGS BY THE IRS

The IRS not only has thousands of pages of regulations and rules. They govern how they treat taxpayers. True tax professionals understand that there are case laws and private letter rulings that affect how the IRS will treat a taxpayer. Here are some of the most recent highlights that affect many individuals and businesses:

1). Often times proceeds awarded under lawsuits are taxable. However, if you assign your stake in a lawsuit to someone else, it would not be taxable to you if the transfer occurs before a final judgment in the case. The IRS said this in a private ruling. In that case, a trust beneficiary sued the trustee for breach of fiduciary duty and won in Court. While the case was pending on appeal, the beneficiary decided to assign his interest in the litigation to a college. Since the transfer occurred before a final ruling on the appeal, the IRS respected the transfer for tax purposes and did not tax the transfer order.

2). Family caregivers do not owe self employment tax on the payments for a family member unless they are in the business of providing care to others.

3). Renting property to a corporation you own may not get you a tax break. In this case a man set up two pass through businesses to lease tractors and trailers to his corporation. Because his firms rented property to a closely health corporation in which he worked more than 500 hours per year, that triggered a special rule that treats the net rental income as non-passive income.

4). Solar Energy Systems that generate power for the grid may get a tax credit according to the Internal Revenue Service. The 30% tax credit can be claimed for a system that generates electricity for use in the taxpayer’s first or second home if located in the US. The IRS lawyers are considering whether a home solar unit that supplies energy to the local utility instead of to the owner’s residence is also eligible for the credit. You probably won’t find this one in Ohio. The Tax Court ruled that a retail seller of medical marijuana can deduct only the cost of the drugs. Other business expenses such as rent are not deductible, even though the business was in California where it is legal to grow and sell marijuana for medical purposes.

5). Same sex couples winning in Court. A law barring same sex couples from filing joint federal returns has been ruled unconstitutional in a District Court case. In a State that allowed them to be married. The Internal Revenue Service rejected their federal joint returns, saying a 1996 law bars them from being treated as married for federal law purposes. The Court said the law was invalid. They also held that there is no other basis in the tax law to deny joint filing status to same sex couples who are legally married, even though the tax code restricts joint filing to a husband and a wife. This was a decision out of Connecticut.

6). Payroll taxes. Outside payroll firms will have to electronically deposit all payroll taxes after November 18, 2012. This is a new IRS requirement, and it applies to tax deposits made for small employers. It makes it easier to verify that the taxes were in fact, sent to the IRS. Note, that the IRS can still pursue the employer even if the payroll agent embezzles the taxes. Some employers protect themselves by making sure that the agent posts a fiduciary bond. It is also wise to insure that all IRS correspondence about payroll taxes be sent directly to you, the taxpayer, not the agent.

Len Stauffenger’s office has been recognized as among the top 5% of Attorneys for the last 8 years running. His practice is limited strictly to helping taxpayers who owe the IRS money.