Federal District Court in Wisconsin Rules Parsonage Allowance to Clergy is Unconstitutional

Federal District Court in Wisconsin Rules Parsonage Allowance to Clergy is Unconstitutional

The United States District Court for the District of Wisconsin in Freedom from Religion Foundation, Inc. v. Lew, 112 AFTR 2d ¶ 2013-5565 (D. Wis. 2013) has held that the clergy housing parsonage allowance pursuant to Code Sec. 107(2) is unconstitutional. It issued an injunction ordering the Commissioner of Internal Revenue to stop allowing the exclusion to gross income.  The Order is not to take effect until the conclusion of any appeals (sure to be) filed by the Government.  FFRF is a non-profit organization that advocates for the separation of church and state that brought the action against the Treasury Department and Internal Revenue Service. 

Pursuant to Code Sec. 107, in the case of a minister of the gospel, gross income does not include:

(1) The rental value of a home furnished to him, or the cost of utilities paid for him, as part of his compensation; or

(2)  The rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.

The Internal Revenue Service has previously ruled in Rev. Rul. 70-549, 1970-2 CB 16 that the parsonage allowance exclusion only applies to a duly ordained, licensed, or commissioned member of the clergy.

The case is legally fascinating on many levels.  The suit sought a declaration that the parsonage allowance violates the equal protection clause of the Fifth Amendment and the Establishment Clause of the U.S. Constitution.  FFRF had a couple of hurdles to climb. 

First, FFRF needed to show it had standing to sue and it successfully accomplished this by claiming that it was – in fact – injured because its owners were denied the exemption that the clergy receives.  Second, FFRF needed to show that the parsonage allowance violates the establishment clause. The District Court here agreed with FFRF and relied upon Texas Monthly, Inc. v. Bullock, (Sup Ct 1989) 489 U.S. 1 (1989) which held that a state statute exempting religious writings from sales tax was unconstitutional.  

In developing its reasoning, the District Court stated that a reasonable observer would view the parsonage allowance as an endorsement of religion.  Stay tuned as this landmark decision will be most certainly appealed through the appellate court and most likely the Supreme Court and Congress may be asked to weigh in and perhaps redraft the parsonage allowance in a way that does not violate the Constitution.

Internal Revenue Service Aggressively Pursuing U.S. Banks For Ties To Offshore Accounts

Internal Revenue Service Aggressively Pursuing U.S. Banks For Ties To Offshore Accounts

The Internal Revenue Service is issuing “John Doe” Summonses on major U.S. based banks.  The IRS uses John Doe summonses to obtain information concerning possible tax fraud by persons whose identities are unknown. Two federal judges from the Southern District of New York have authorized the summonses on five banks (Bank of New York Mellon (“Mellon”), Citibank, JP Morgan Chase Bank (“Chase”), HSBC Bank USA (“HSBC”), and Bank of America (“BOA”) requiring them to produce records relating to U.S. taxpayers with offshore accounts

Judge Kimba Wood authorized the summonses on November 7, requiring Mellon and Citibank to produce information about U.S. taxpayers by holding interests in undisclosed accounts at Zurcher Kantonalbank and its affiliates (“ZKB”) in Switzerland.  Then on November 12, Judge Richard Berman authorized the summonses requiring Mellon, Citibank, Chase, HSBC and BOA to produce similar information in connection with undisclosed accounts at The Bank of N.T. Butterfield & Son Limited and its affiliates (“Butterfield”) in various offshore locations including the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland, and the United Kingdom. The summonses seek records identifying U.S. taxpayers with accounts at ZKB and Butterfield.

According to the Department of Justice (“DOJ”), the IRS Offshore Voluntary Disclosure programs have identified 371 previously undisclosed accounts at ZKB and 81 such accounts at Butterfield.  As such, the IRS has reason to believe that other U.S. taxpayers may hold undisclosed accounts at ZKB and Butterfield in violation of federal tax law.

The Offshore Voluntary Disclosure programs have thus been successful in not only getting taxpayers to fess up (without risk of criminal prosecution) but those who have come forward have helped the Internal Revenue Service to understand the processes used and thereby find the taxpayers who have not come forward and pursue them more aggressively.

Per IRS: Married same sex couples are married but unwed same sex couples are not

Per IRS:  Married same sex couples are married but unwed same sex couples are not

In June, the United States Supreme Court in U.S. v. Windsor, 111 AFTR 2d 2013-2385, struck down section 3 of the Defense of Marriage Act (DOMA).  As such, the Internal Revenue Service determined that married same-sex couples are married for federal tax purposes. However, the IRS's website continues unequivocally that same sex (and opposite sex) individuals who are in registered domestic partnerships, civil unions, or other similar relationships that are not considered marriages under State law are not considered as married for federal tax purposes.  Thus, those couples are not permitted to file federal tax returns using a married filing jointly or married filing separately status.

All other Code provisions that only apply to married taxpayers similarly do not apply to registered domestic partners. They are simply not married for federal tax purposes.

Also, if the partner is dependent, he cannot be claimed as a dependent because he is not one of the specified related individuals in Code Sec. 152(c) or Code Sec. 152(d) that qualifies the taxpayer to file as head of household.  

Domestic partners who reside in community property states and who are subject to their State's community property laws are also addressed by the Internal Revenue Service website.  Registered domestic partners must each report their own separate income plus half the combined community income earned by the partners.

Internal Revenue Service to get tougher

Internal Revenue Service to get tougher

Most people fear an Internal Revenue Service audit but starting in January the IRS will start setting strict deadlines for compliance with its Information Document Requests (“IDR”).

While those deadlines currently do not exist, for wealthy taxpayers and companies with more than $10 million in assets, the deadlines will apply.  Initial IDRs will not be under a strict guideline.  But if the initial deadline is not met, then under the new policy, a 49-day clock will start ticking.

After two warnings, a 49 day warning goes into effect.  If the information still is not divulged, the agency will go to federal court to seek a summons.  This step could expose the audit to the public and pose a risk to investors because the existence of an IRS summons can signal IRS trouble for a company, risking a blow to investor confidence and ultimately the share price.

The compressed timeframes can yield uncertainty and there will be more court cases involving summons enforcement.

Internal Revenue Service Aggressively Pursuing U.S. Banks For Ties To Offshore Accounts

The Internal Revenue Service is issuing “John Doe” Summonses on major U.S. based banks.  The IRS uses John Doe summonses to obtain information concerning possible tax fraud by persons whose identities are unknown. Two federal judges from the Southern District of New York have authorized the summonses on five banks (Bank of New York Mellon (“Mellon”), Citibank, JP Morgan Chase Bank (“Chase”), HSBC Bank USA (“HSBC”), and Bank of America (“BOA”) requiring them to produce records relating to U.S. taxpayers with offshore accounts

Judge Kimba Wood authorized the summonses on November 7, requiring Mellon and Citibank to produce information about U.S. taxpayers by holding interests in undisclosed accounts at Zurcher Kantonalbank and its affiliates (“ZKB”) in Switzerland.  Then on November 12, Judge Richard Berman authorized the summonses requiring Mellon, Citibank, Chase, HSBC and BOA to produce similar information in connection with undisclosed accounts at The Bank of N.T. Butterfield & Son Limited and its affiliates (“Butterfield”) in various offshore locations including the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland, and the United Kingdom. The summonses seek records identifying U.S. taxpayers with accounts at ZKB and Butterfield.

According to the Department of Justice (“DOJ”), the IRS Offshore Voluntary Disclosure programs have identified 371 previously undisclosed accounts at ZKB and 81 such accounts at Butterfield.  As such, the IRS has reason to believe that other U.S. taxpayers may hold undisclosed accounts at ZKB and Butterfield in violation of federal tax law.

The Offshore Voluntary Disclosure programs have thus been successful in not only getting taxpayers to fess up (without risk of criminal prosecution) but those who have come forward have helped the Internal Revenue Service to understand the processes used and thereby find the taxpayers who have not come forward and pursue them more aggressively.

Negotiations on a tax information exchange agreement between the U.S. and the Cayman Islands conclude

The Cayman authorities have announced that the Cayman Islands and the United States have “concluded negotiations” regarding the Foreign Account Tax Compliance Act (FATCA).   The consensus reached a Model 1 Intergovernmental Agreement (IGA) and a new tax information exchange agreement (TIEA).  The United States has been putting pressure on foreign governments in its initiative to gather tax dollars from U.S. citizens and permanent residents who have assets overseas but are not reporting the income.  Under this pressure, Wayne Panton, the Cayman's minister for financial services said: “as an international financial center that contributes to the efficient functioning of global markets, the initialing and subsequent signing of the IGA and new TIEA with the United States will again demonstrate Cayman's commitment to engage in globally accepted tax and transparency initiatives.”

We have all heard of late, the cooperation that has been occurring between the U.S. and the Swiss Government and between the U.S. and the Israeli Government.  Any U.S. citizen or resident with assets overseas – whether in Switzerland, Israel, Cayman or anywhere else, that has not been properly reporting same, should consider speaking to an attorney to discuss the alternatives.

John Hom gets caught “all in” by Tax Court

John Hom gets caught “all in” by Tax Court

Poker player John Hom’s bluff was called in a U.S. Tax Court decision: John C. Hom v. Comm., T.C. Memo 2013-163 (Tax Ct Memo 2013).  Hom had failed to substantiate his gambling losses so his winnings were unreported.  He represented himself at trial.

Background:   Net gambling winnings are taxable while net gambling losses are not deductible.  I.R.C.  §165(d).  This rule also applies to professional poker players where gambling losses exceed gambling income.

Decision:  Hom earned income from various poker tournaments including a $136,695 victory from Grand Sierra Resort & Casino in 2007.  Yet he reported net gambling losses in each year.  The Court held that he could not substantiate his losses or his expenses and charged him with tax on the winnings.  Hom asked the court to let him estimate, but that plan got trumped by the Tax Court because there was no evidence from which to estimate.  The court allowed only a few hundred dollars for entry fees.  Additionally, the court imposed accuracy related penalties pursuant to I.R.C. § 6662 of 20% of the underpayment.

Conclusion:  Representing yourself in the Tax Court can be disastrous.  Gamblers (like all taxpayers) must keep accurate records of their expenses and losses or risk losing the ability to claim the deductions.