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.

Per the U.S. Supreme Court, every citizen has every right to save taxes legally

Per the U.S. Supreme Court, every citizen has every right to save taxes legally

 

The U.S. Supreme Court decision, that it is every taxpayer’s right to legally save taxes, has been around for one hundred forty years.

“The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.”  United States v. Isham, 84 U.S. 496, 506, 21 L. Ed. 728 (1873); Gregory v. Helvering, 293 U.S. 465, 469, 55 S. Ct. 266, 267 (1935); Superior Oil Co. v. Mississippi, 280 U.S. 390, 395, 396, 50 S. Ct. 169, 74 L. Ed. 504 (1930); Jones v. Helvering, 63 App. D.C. 204, 71 F.2d 214, 217 (D.C. Cir. 1934).

Almost one hundred years ago, the Supreme Court held further that “A taxpayer may resort to any legal methods available to him to diminish the amount of his tax liability.”  Bullen v. State of Wisconsin, 240 U.S. 625, 630, 36 S. Ct. 473, 60 L. Ed. 830 (1916). In Iowa Bridge Co. v. Comm., 39 F.2d 777, 781 (8^th Cir. 1930), the Eighth Circuit said: ‘In fact, it is held that even thought the transaction is a device to avoid the burden of taxation, or to lessen that burden, it is not for that reason alone illegal.‘

So with this holiday season upon us, keep in mind that it is perfectly legal to choose transactions tax favorably.

 

Swiss banks likely to cave and disclose U.S. accounts to U.S. authorities

Switzerland's private banks are deciding whether to disavow centuries of secrecy and bow to U.S. pressure to disclose accounts of U.S. persons.  The Swiss banks are otherwise going to have to face fines and possible criminal prosecution.

Most of the smaller banks are expected to participate but are wrestling with the risk of customer backlash if they concede and disclose customer confidentiality.

Back in 2009, Switzerland's largest bank, UBS was fined $780 million and handed over the names of its U.S. customers to avoid facing criminal charges.

If you are a U.S. person with an account in Switzerland and have not properly reported same, you should seriously consider entering the voluntary offshore account program offered by the Internal Revenue Service.

Internal Revenue Service extends deadline for abused innocent spouses to apply for relief from 2 years to 10 years

Internal Revenue Service extends deadline for abused innocent spouses to apply for relief from 2 years to 10 years

 

To help victims of domestic violence and others, the Internal Revenue Service has proposed rules to extend from 2 years to 10 years, the amount of time taxpayers can apply for "innocent spouse" relief.

Every year approximately 50,000 people apply for innocent spouse relief and some of them are involved in domestic disputes or physical abuse.

IRS said it would stop enforcing a two-year deadline to file an innocent spouse relief application in 2011. The recent proposal would make the 10-year deadline permanent in law.

The proposed rules also stop the IRS from demanding unpaid taxes while the innocent spouse application is being processed.

 

Recent Tax Court Case outlines the factors in determining whether the Commissioner’s determination of a fraud penalty should be upheld against a taxpayer omitting income

Recent Tax Court Case outlines the factors in determining whether the Commissioner’s determination of a fraud penalty should be upheld against a taxpayer omitting income

 

In McClellan v. Comm., T.C. Memo. 2013-251 (Oct. 31, 2013), Tax Court Judge Laro discussed the nine factors for whether to impose the 75% penalty found in I.R.C. Sec. 6663.  They are referred to as nonexclusive “badges of fraud” from which the Court may infer a taxpayer's fraudulent intent.  They are: (1) understating income, (2) maintaining inadequate records, (3) failing to file tax returns, (4) giving implausible or inconsistent explanations of behavior, (5) concealing assets, (6) failing to cooperate with tax authorities, (7) engaging in illegal activities, (8) attempting to conceal illegal activities, and (9) dealing extensively in cash.  Bradford v. Comm., 796 F.2d 303 (9^th Cir. 1986).  Here, there were six of the nine present: 1, 2, 4, 5, 6 and 9.  The court therefore determined that the Commissioner had proven fraud by clear and convincing evidence.

 

This case highlights how fraud cases are dealt with currently by the Tax Court.

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.