House Ways and Means Committee Chairman Dave Camp (R-Michigan) issued a discussion draft of the “Tax Reform Act of 2014” last week. The proposed legislation spans almost 1,000 pages and contains some interesting provisions, including, without limitation, the following:
Individual Taxpayer Provisions
- Consolidation and simplification of individual income tax brackets. The current seven tax brackets would be consolidated into three brackets—namely, a 10% bracket, a 25% bracket and a 35% bracket. High-income taxpayers would be subject to a phase-out of the tax benefit of the 10% bracket. In addition, the special rate structure for net capital gains would be repealed. In its place, non-corporate taxpayers could claim an above-the-line deduction of 40% of adjusted net capital gain.
- Expand the standard deduction (to $22,000 for joint filers and $11,000 for individuals) and modification of available itemized deductions, including:
- Repeal of the 2% floor on itemized deductions and the overall limitation on itemized deductions.
- Reduce the itemized deduction for home mortgage interest to $500,000.
- Repeal of the deduction for personal casualty losses.
- Repeal of the deduction for unreimbursed medical expenses.
- Repeal of the deduction for state and local taxes not paid in connection with business or investment.
- Simplification of the rules surrounding charitable deductions.
- Repeal of the exclusion for employee achievement awards.
- Repeal of the deduction for moving expenses.
- Reinstating the former provision allowing the cost of over-the-counter medications to be reimbursed through tax-favored health accounts.
- Consolidation and simplification of tax benefits for higher education. A single educational tax credit of up to $2,500 annually would be made available that could be used for up to 4 years; however, the current deductions for educational expenses and interest on student loans would be repealed.
- Elimination of the income limitations on Roth IRAs and prohibiting new contributions to traditional IRAs and non-deductible traditional IRAs—effectively forcing all new IRA contributions to be Roth contributions.
- Repeal of the exception to the 10% early withdrawal penalty for withdrawals from retirement plans and IRAs used to pay first-time home buyer expenses (capped at $10,000).
- Elimination of the deduction by the payor for the payment of alimony and elimination of the inclusion in income by the recipient.
- Repeal of the individual AMT.
- IRC Section 1031 would be repealed. Consequently, tax deferral from like-kind exchanges would no longer be permitted.
- Simplification of rules surrounding in-service distributions, hardship withdrawals and required minimum distributions from retirement plans.
- Encouraging Roth contributions in 401(k) plans by requiring all 401(k) plans to offer Roth accounts and requiring larger plans to treat all employee contributions as Roth contributions once an employee had contributed one-half of the annual contribution limit.
I Won the Gold Medal in Sochi. Awesome! Do I Owe Taxes on the Value of My Prize?
As a general rule, in accordance with IRC § 61, the value of any prize or award a taxpayer receives is subject to taxation. IRC §§ 74 and 117 provide limited exceptions to this general rule.
IRC § 74 specifically excludes from the income of the recipient certain employee achievement awards and certain prizes or awards transferred to charitable organizations prior to receipt. IRC § 117 specifically excludes from the income of the recipient “qualified scholarship” proceeds. These exceptions are subject to rigid qualifications.
The value of prizes and awards which do not come within the parameters of these limited exceptions are subject to taxation. Consequently, as we know, the winning ticketholder of the lottery is taxed on his or her winnings. The recipient of the Nobel Prize is subject to taxation on the cash prize he or she receives. Likewise, the value of the ring received by each of the members of the Seattle Seahawks this year for winning the Super Bowl is subject to taxation. Also, the value of the rings received by each member of the Miami Heat for winning the NBA championship in 2012 and 2013 is subject to taxation.
On January 27, 2014, Judge Haines of the United States Tax Court issued a decision in Ydney Jay Hall v. Commissioner, TC Memo 2014-6. This case illustrates that a taxpayer’s failure to retain adequate business records to substantiate income and expenses will lead to disastrous results.
The taxpayer, Ydney Jay Hall, is a practicing attorney admitted to practice before the United States Tax Court. His law practice income was reported on Schedule C of his Individual Income Tax Return. Upon examination of Mr. Hall’s 2008 return, the Service asked to review his books and records relating to the law practice. The Service, believing Mr. Hall did not fully respond to its request for information, summoned bank records. With that information, it reconstructed his business income for the tax year. The results of the audit reconstruction were not pretty.
The IRS issued a deficiency notice to the taxpayer, asserting he had underreported his income by $76,681 for the tax year. In addition, the Service disallowed deductions for travel and other expenses listed on Schedule C totaling $63,542 as the taxpayer did not maintain any books or records for his business activities and failed to provide proof he actually paid the expenses (e.g., receipts, invoices, cancelled checks or other evidence of payment). To put salt on the wound, the Service assessed an accuracy related penalty against the taxpayer.
Mr. Hall filed a petition in the United States Tax Court challenging the notice of deficiency and the assessment of taxes and penalty. He represented himself in the case.
On December 17, 2013, the United States District Court for the Northern District of Georgia issued its decision in United States v. Morris Legal Group, LLC, 113 AFTR 2d, 2014-XXXX (D.C. Georgia). Gilbert Greenburg, a disbarred attorney, was employed as the office manager of Morris Legal Group, LLC, a law firm in Atlanta, Georgia. He helped set up and manage the law firm’s personal injury practice. Interestingly, Mr. Greenburg had no written agreement with the law firm relative to the amount of compensation he was entitled to receive. Rather, he wrote himself payroll checks from time to time based upon the level of the firm’s profits. His compensation generally ranged from $4,000 to $8,000 per month.
Mr. Greenburg owed the IRS over $100,000 in unpaid income taxes, interest and penalties. On May 26, 2011, the IRS sent the law firm a Notice of Levy and formally requested it surrender Mr. Greenburg’s wages until the levy was released. Morris Legal Group, LLC appears to have ignored the levy and continued paying Mr. Greenburg compensation.
Larry J. Brant
Larry J. Brant is a Shareholder in Foster Garvey, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; Washington, D.C.; New York, New York, Spokane, Washington; and Beijing, China. Mr. Brant practices in the Portland office. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long-term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.
Upcoming Speaking Engagements
- “The Road Between Subchapter C and Subchapter S – It May Be a Well-Traveled Two-Way Thoroughfare, But It Isn’t Free of Potholes and Obstacles,” Portland Tax ForumVirtual Event, 9.24.20
- “The Road Between Subchapter C and Subchapter S – It May Be a Well-Traveled Two-Way Thoroughfare, But It Isn’t Free of Potholes and Obstacles,” Oregon Association of Tax ConsultantsBeaverton, OR, To be rescheduled
- To be rescheduled