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A NOT SO HAPPY NEW YEAR

This will be the last issue of Steinberg Talks Tax™ in 2008. Given that the holidays are already somewhat less than merry, I won’t pour on more of the continued negative economic indicator news. I will, however, briefly mention the auto bail out, what some commentators are saying about the crisis, and, what tax changes may be implemented by the Obama administration.

THE SUB PRIME INDY 500
• President Bush Acts: Following Congressional rejection of a proposed $25 billion auto bail out President Bush announced a $13.4 billion bridge loan to the big three auto makers. The loan will drain the balance of funds from the congressionally approved first ½ of the $700 billion TARP fund.
• Agreement: The terms of the deal will start the auto companies on a race to restructure within the next 101 days, by a March 31 deadline, to prove their viability. The terms are broadly generous requiring the companies to negotiate concessions from workers, suppliers, dealers, banks and bondholders that will allow them to satisfy a mushy “viability” touchstone, that is, to show that they are taking steps to become “viable”. The Obama administration will be left to apply the test and play a large role in determining the future of the U.S. auto industry.
• Contentions: Already, there are grumblings from some in congress and the United Auto Workers about the concessions that workers should be asked to accept or are willing to accept, respectively.
• What if? If the companies fail to demonstrate that they are becoming “viable” by March 31, they must return the bridge loan funds and won’t qualify for an additional $4 billion in funding. Notwithstanding, the rescue is just the first tranche in federal assistance to the auto companies, some or all of which, may yet end up in bankruptcy.
• Start you engines: The race to find linchpins to viability is on but 101 days is a very short horizon for implementing major initiatives.
• Complications: Another... Read More »

WHEN IS A TAX LAWYER NEEDED IN A DIVORCE CASE?

Family lawyers know to engage a forensic accountant in all but the simplest cases. In addition to normal divorce related tasks like investigating finances, the accountant will sometimes be asked to perform tax services. There are occasions, however, when the client would be better served by involving a tax lawyer. Some of these are:

 When income tax returns have not been filed: The knee-jerk reaction of most CPAs to file immediately is a trap for the unwary. The failure to timely file tax returns can be a civil tax or criminal tax matter. If it is a criminal act, filing the tax return later does not erase the crime. There is no red-line separating neglect from willful conduct. Only a tax lawyer can investigate and advise someone about the consequences of filing delinquent returns. An accounting trial-expert cannot be clothed in the attorney client privilege.
 When prior filed returns contain serious errors or omissions: The considerations are similar to filing delinquent returns in that the amendment does not erase a crime committed although is can be offered to suggest that no crime was intended. Filing an amended tax return is an admission that the return filed was inaccurate and of the amount of understated tax on the original return. Only a tax lawyer can safely investigate and advise if returns can be amended without increasing the risk of criminal sanctions or excessive civil penalties.
 When tax returns under audit contain the potential for tax fraud to be charged: This is sometimes called an “eggshell audit.” In a sense you are walking on eggshells hoping that the revenue agent will not reach that conclusion. If the agent feels there is fraud, he will suspend the audit and refer the case to the IRS Criminal Investigations Division. The taxpayer wants to cooperate as long as the case is not a criminal matter and he or she is not thereby waiving Fifth Amendment rights. A CPA should not handle this kind of aud... Read More »

MORTGAGE FORGIVENESS DEBT RELIEF ACT OF 2007 PRESENTS DIVORCE TAX ISSUES

Effects of the sub-prime mortgage debacle are certain to be felt in divorce proceedings. Moreover, relief granted by Congress to distressed homeowners will present additional tax issues of which divorce lawyers should be aware.
The Mortgage Forgiveness Debt Relief Act of 2007 (Act) provides tax relief to defaulting homeowners who might otherwise owe income tax on the forgiven portion of their mortgage obligation. A lender that is paid less than the full principal owed on the mortgage often decides not to personally pursue the borrower for the deficiency. In that case the lender files Form 1099-C informing IRS and the borrower of the forgiven portion of the debt that is to be treated as income.
The Act makes nontaxable debt forgiven on a qualified principal residence (QPR) with certain limitations as follows:
1. The relief applies to debt forgiven between January 1, 2007 and December 31, 2009.
2. Qualified principal residence is a residence as to each taxpayer meeting the same definition as under Section 121 relating to the home sale exclusion of $250,000 ($500,000 for joint returns).
3. The debt must be secured by a QPR and be either:
a. Acquisition indebtedness up to $2,000,000 ($1,000,000 on a MFS return, or,
b. Home equity indebtedness up to $100,000 ($50,000 on MFS return) to the extent that when added to other QPR debt the total debt does not exceed the FMV of the residence.
4. The amount excluded from income reduces the tax basis of the property immediately.... Read More »

SOME SITUATIONS MAY REQUIRE A TAX LAWYER TO INTERPRET

1. There is accrued interest on the loan, especially on a home equity loan, that was not used to improve the residence (a cash-out).
2. There is a foreclosure sale of short sale with expenses incurred in connection with the transaction that may or may not be added to the loan balance or sales proceeds allocated to late fees or interest.
3. The home has been both a principal residence and vacation home.
4. One spouse has left the home.
5. A spouse is insolvent immediately after the forgiveness of non-qualifying debt.
6. There is home equity debt and total debt exceeds the fair market value of the home.
7. The home is sold at a gain following debt forgiveness.
8. The home is sold at a loss following debt forgiveness in the same year.
9. The lender participates in the sale of a home at a gain.
10. A single umbrella debt encumbers two residences in which the spouses reside separately.
11. The spouses are to file MFS returns following a forgiveness or foreclosure sale.

Each of these situations presents complications best handled by a tax lawyer.... Read More »

IRS CAN COLLECT TAX FROM PROCEEDS OF SALE BY WIFE OF PROPERTY FOR HUSBAND’S SEPARATE RETURN TAX DEBT – TAX LIEN AS TO HUSBAND ATTACHED TO TENANTS BY ENTIRETIES PROPERTY TRANSFERRED TO WIFE BY QUITCLAIM DEED

It was pretty well accepted by family lawyers that a safe harbor for income taxes of a divorcing spouse was to elect the status of a married person filing separately. In that case it was thought the electing spouse was freed from tax liabilities arising from the improprieties of the other spouse without having to resort to the shaky, factual laden, desperation defenses of innocence found in IRC Section 6015. If in doubt file a separate return, went the advice. You’ll have no problems with the tax man. Well, as it turns out that is not quite as true because of United States v. Craft, 535 U.S. 274 (2002).
Don Craft didn’t file any income tax returns for the years 1979 through 1986. In 1988 the IRS assessed $482,486 in unpaid income taxes against Mr. Craft. When he failed to pay, pursuant to IRC Section 6321, the federal tax lien attached to “all property and rights to property, whether real or personal, belonging to him.” This lien attaches automatically and does not have to be filed in the public records although it can be filed to protect IRS from certain good faith purchasers or lenders.
At the time the lien attached the parties owned a piece of real property in Grand Rapids, Michigan as tenants by the entireties (TBE). After the IRS filed a Notice of its tax lien in the public records, Mr. Craft transferred his interest in the real property to his wife by quitclaim deed for one dollar.
Some years later the wife contracted to sell the property and the title search revealed the IRS lien. The IRS agreed to release the lien providing one-half of the proceeds were placed in escrow pending a determination of the government’s interest in the property.
Mrs. Craft filed an action in the U.S. District Court to quiet title to the escrowed proceeds. The Sixth Circuit reversed the summary judgment for the government and held that the husband had no separate interest in the TBE property and remanded on the question of whether the quitclaim deed conveyan... Read More »