Tax Blog/Blawg

Unfortunately, Congress has yet to create a deduction or tax credit for depression or stress, although many taxpayers would like to see it happen as part of Obamacare.  Right now, people who itemize deductions may be able to claim medical expenses for treatment of stress or depression, but the actual deduction is often disappointing because only the amount which exceeds 7% of your adjusted gross income can actually be used to reduce the taxable income. But what if you receive damages for stress or depression? A pair of recent cases decided by the United States Tax Court involving taxpayers with damages for problems in their work environment provides some insight into when and how these elements affect the taxability of the damages received.

Tax Blawg’s Guest Commentator, David L. Bernard, is the recently retired Vice President of Taxes for Kimberly-Clark Corporation and a past president of the Tax Executives Institute.

It is not too soon for in-house tax professionals to be thinking about how the disclosure of uncertain tax positions (required beginning with 2010 tax returns) will change their lives and perhaps their historical practices.

There are plenty of questions about the new requirement and, not least among them, doubts that it will produce the results the IRS anticipates. The most obvious question is whether the potential over-disclosure of temporary differences and the required disclosure of maximum exposure by issue will bog down the audit process and lead to more unagreed issues going to Appeals or to the courts. Notwithstanding the controversy, tax professionals would be wise to forget arguing about the merits of the new draft requirement and begin thinking about their responses; this is going to happen!

Getting a Notice of Levy from the IRS is never fun, especially if you are the taxpayer.  However, it can be even more perilous when you receive one with respect to someone you employ that owes the IRS money, seeking to garnish the worker's compensation.

An employer would be making a serious mistake to simply ignore the levy, whether she tells the worker about it or not.  Any person who receives a levy but fails to honor it faces personal liability under I.R.C. § 6332(d) (1) in the amount of each payment that should have been turned over to the IRS.  Thus, the employer who ignores the levy could pay the worker the compensation, as well as have to pay the IRS a second time.  In addition, Subsection (d) (2) creates a second tier "penalty," up to 200% of the amount that should have been paid to the IRS, if the failure to do so was willful.

Last summer, the Ninth Circuit Court of Appeals handed the IRS a defeat that the IRS did not take lightly.  The Ninth Circuit ruled that an overstated basis, no matter how large, is simply not omitted income.  See Bakersfield Energy Partners, LP v. Commissioner , 568 F.3d 767 (2009).  The key to the decision is the definition of a four letter word, omit, which means “left out,” whereas an overstated basis by definition is stated on the return, i.e., not left out.  Without an omission of income, the three year statute of limitations applies, not the extended six year period.  The Ninth Circuit relied heavily upon a Supreme Court decision that came to the same conclusion.  Colony, Inc. v. Commissioner, 357 U.S. 28 (1958).

After Bakersfield, the IRS suffered a series of losses.  Not one to stand idly by, the IRS took matters into its own hands and seized upon a small opening left in the Ninth Circuit's decision: "The IRS may have the authority to promulgate a reasonable reinterpretation of an ambiguous provision of the tax code, even if its interpretation runs contrary to the Supreme Court's 'opinion as to the best reading' of the provision. . . . We do not." Bakersfield, 568 F.3d at 778 (citations omitted).  With that, the Treasury Department issued Temp. Reg. §§ 301.6229(c)(2)-1T and 301.6501(e)-1T, which provided "an understated amount of gross income resulting from an overstatement of unrecovered cost or other basis constitutes an omission from gross income."  With the new regulation in hand, the IRS went about attempting to overturn a series of unfavorable decisions.

Since the passage of the first Internal Revenue Code, it has seemed as if the lion's share of personal income taxes have been paid by higher income taxpayers.  If high tax rates were not enough, Congress came up with a series of things to add to the burden. In recent times, it enacted the dreaded alternative minimum tax.  Then George H. W. Bush broke his “read my lips” promise, and signed legislation that phased out itemized deductions and deductions for exemptions as income levels rise.  Now, as the George W. Bush tax cuts are scheduled to expire after 2010, and the Obama administration and ...

For almost 50 years, lawyers have relied on the “Kovel Rule” to extend the attorney-client privilege to non-testifying accountants or other business experts.   The philosophy behind the rule, so named after the landmark case, United States v. Kovel, 296 F. 2d 918 (2nd. Cir. 1961), is to recognize “the complexities of modern existence [which] prevent attorneys from effectively handling clients' affairs without the help of others . . . .”  Id. at 921.  Without such a rule, disclosure to a third party would constitute a waiver of the attorney-client privilege.

In practice, the ...

The United States Tax Court has very recently issued opinions for two couples that highlight the problems that may arise from a tax point of view when someone settles a credit card debt.

As long as there have been credit cards, there have been situations where the cardholder has for one reason or another not paid the full amount billed, and has had to “settle” a debt with the credit card company.  It is probable that most people don’t think about this as an income producing event, but Internal Revenue Code Sections 61(a)(12) and 108 provide that any cancellation or forgiveness of debt ...

The IRS National Employment Tax Research Project has started.  On November 9, 2009 the IRS announced its first employment tax research project in 25 years.  Under the program, which will last from 2010 through 2012, the IRS will audit 6,000 employers randomly selected from all employment tax filers.  It is our understanding that the initial letters for the first 2000 employees selected to be part of the study have gone out and the audits will commence in May, 2010.  The IRS will focus on historic areas of non-compliance including (i) the misclassification of employees as independent ...