50 SELECTED TAX/FINANCIAL ISSUES

OF 2010

by

Curtis L. Harrington

HARRINGTON & HARRINGTON

No. 91719, 2300 Redondo Avenue

Long Beach, CA 90809-1719

(562) 594-9784, Fax: (562) 594-4414

http:/www.patentax.com E-mail: curt@patentax.com PATENTAX®

Provided in Conjunction with the IRS CID presentation:

"2010 REVIEW"

A

PATENTAX®

PRESENTATION

Disclaimer: Educational Only: This outline is Educational Only and no part of this presentation can be considered as federal or state tax advice, opinion, or position and is not intended or written to be used, and may not be used, for the purpose of (I) avoiding tax-related penalties under the internal revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein, nor (iii) constituting guidance on any tax or intellectual property matter.

I.	NEW OIC DOUBLE SECRET REVIEW

A.	IRS is agreeing to review OIC cases where the only hitch in refusing the acceptance of the OIC is a hitch on property valuation.

B.	Triggering events for second review (very narrow) are:

1.	individual tax liabilities created the need for OIC.

2.	there is a difference based upon nothing more than disagreement on equity in real property and there are no other rejection issues.

II.	FASB SHUFFLE

A.	FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48) requires a reserve to be created where a position is uncertain.

B. Needed is:

1. a complete description of each uncertain tax position

2. Maximum tax liability without a probabilistic reduction

C. Sufficiency of Description includes:

1. Identity of Code sections

2. Identity of years in question

3. Statement of Identity of income, gain, loss, deduction, or credit against tax;

4. Statement of permanency of the items in (3)

5. Statement of whether valuation is a key issue

6. Statement of whether basis is a key issue

III.	THE NEW PTIN SYSTEM

A.	All return preparers ar now subject to Treasury Department Circular 230, which brings them under IRS ethical control.

B.	IRS control includes:

1.	Formal licensing and paper work (making all preparers at least Jr.EA's)

2.	Bringing all preparers into the debarment procedure by OPR and the Administrative Procedure Act.

3.	Note licensed public accountant (LPA) is recognized by IRS as having the same rights and privileges as a CPA. Non-exclusive list of states where a LPA has the same rights and privileges as a CPA: Alabama, Alaska, Arkansas, California, Colorado, Connecticut, Hawaii, Idaho, Maine, Montana, New Hampshire, New Jersey, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Tennessee, Vermont, and West Virginia.

IV.	DOCUMENT INTERACTIONS WITH THE AUTHORITIES

A.	California Personal Income Tax Interest abatement. Interest abatement was denied whereas taxpayer charges FTB had committed an unreasonable error. Where FTB mistakes characterization of marriage status, and where marriage to his putative wife was annulled, but FTB accepted returns anyway.

B.	With no evidence of full disclosure and seeking of advice, interest will not be abated. Appeal of Horsley, SBE, Case No. 349127, 09/22/2009 (01/25/2010) (not to be cited as precedent).)

V.	YAGMAN TAKEN DOWN FOR TAX EVASION

A.	I have been watching news stories about this guy getting into shouting matches with federal judges for 20 years. Yagman was summarily disbarred December 22, 2010 for federal convictions of one count each for tax evasion and bankruptcy fraud and 17 counts of money laundering. Bankruptcy fraud is both a felony and involves moral turpitude, it meets the criteria for summary disbarment.

B.	Yagman was convicted of avoiding payment of $100,000+ in federal taxes & sentenced to three years in federal prison. Yagman filed bankruptcy in New York but hid his California assets, including his Venice Beach home, and money including $776,000 that was transferred to him by relatives.

VI.	PARTNERSHIP LEVEL AUDIT IS LIMITED(INNOCENT SPOUSE)

A.	Innocent spouse claim requires a unified of all parties. Adkison v. Comm., (CA 9 1/21/2010) Tax Court has innocent spouse relief jurisdiction, but can't force IRS to act on it until AFTER a complete audit of all parties at all levels.

B.	Background on innocent spouse relief. Tax treatment of any partnership item ,including penalties and adjustments, is determined at the partnership level § 6221, §6231(a)(3) & Reg.§301.6231(a)(3)-1. Once the decision in a partnership-level proceeding is final, IRS may assess a computational adjustment against a partner without issuing a notice of deficiency. § 6225 & 6230(a)(1)). §6230(c)(5) requires a spouse to file for innocent spouse relief within 6 months of the notice of § 6225 computational adjustment.

C.	But this case relates to a TAX SHELTER. Final Partnership Administrative Adjustment on 12/21/99. Challenges to this holding were ongoing. Spouse files for innocent spouse relief on June 9, 2005. Held: there was no final deficiency per § 6015(e)(1)(A) and the claim was premature. 9th Circuit disagrees that the claim was premature, but held that there was nothing that could be effectively done until all the controversies were finalized. In regular practice, the individual taxpayers should have never been sent a deficiency notice until all determinations at the partnership level were final.

VII.	EMPLOYEES MUST HAVE A PEACEFUL ENVIRONMENT

A.	In Julie Leigh Domeny, TC Memo 2010-9, compensation for exacerbation of physical illness in a hostile work environment was excludable from income.

B.	Even a prior diagnosis for multiple sclerosis which became worse was sufficient for physical injury. This holding would seem contrary to the general requirement to hire people with pre-existing diseases. All that a claimant must show is SOME worsening effect coupled with SOME element of causation. Some litigation ensued over whether the settlement was a form of wage or whether it was a non- taxable physical injury compensation. Settlement agreements must spell this out!! (The ability to offer tax free compensation is also a bargaining point regarding the effective amount of payment which a payee might receive).

VIII.	FOREIGN DEALS SHUT DOWN: GOVERNMENT ACTION OR SOME INTERMEDIATE ENTITY?

A.	Chief Counsel Advice 201002035. §1231 ordinary loss (instead of long term capital loss) was sought where a partnership formed for activity in a foreign country, collapsed.

B.	For §1231 property, gains are capital and losses can be ordinary, especially §1231(a)(3) governmental compulsory or involuntary conversion losses. Government chose not to favor the partnership with its business and the value of the partnership assets dropped. Held: The foreign government didn't take anything, the deal simply didn't go through as planned.

IX.	TAX PATENTS DEAD?

A.	Earlier in 2010 they were still doing reports fretting and worrying about tax patents. The Supreme Court finally ruled on Bilski (Bilski v. Cappos, 130 S.Ct. 3218 (U.S. 2010) and somewhat trimmed the state of patent law back to the 1998a pre-state street bank standing (1998)(State St. Bank & Trust Co. V. Signature Fin. Group, 149 F.3d. 1368 (Fed Cir. 1998), but with its always "more vague" than necessary language.

B.	More importantly, some commentators are reporting that the Patent Office and its Board of Patent Appeals have rejected all of the tax patent cases which involve no physical manipulations, since the Bilski case was published. The author of this outline was earlier published and in effect saying that even full-on tax patents were so ineffective that they should have been of no concern. Bilski seems to have set fire to what was otherwise a straw scarecrow.

X.	HUSHING-UP DECISIONS AGAINST YOU

A.	Can Tax Court Muzzle the IRS? In Anonymous (2010) 134 TC No. 2, the Tax Court held that it couldn't stop private letters rulings from becoming public but that it could severely edit them to delete material under § 6110(f)(3).

B.	Taxpayer learns that a private letter ruling is about to go against him, but strangely did not withdraw the request. Taxpayer instead made some sort of advance challenge in tax court ATTACKING THE OPINION and wanted the opinion, in essence to be held in SECRET. (Note, a withdrawn opinion, followed by later adjudication in the usual way might have been to taxpayers advantage-- Asking the court to change it, kill it, or make it secret is probably not the way to go). §6110(f)(3) gives the power to Tax Court to delete terms. The taxpayer still may not get what he wants if the Tax Court's editing doesn't comport with the degree of deletion wanted. Conclusion: "WITHDRAW THE OPINION".

XI.	CONDEMNATION TIMING HAS AN EXCEPTION

A.	IN PLR 200944012 IRS carved an exception where condemnation proceeds were required to remain in escrow during any contestation of the details of the condemnation or award.

B.	In order to exercise appeal rights the money could not be touched until the appeal was over, and the IRS has held essentially that any other treatment would effectively deprive taxpayer of right to appeal. The § 1033(g) three year limit is relaxed to start from the time the funds are freed from conclusion of the controversy.

XII.	LETS SEE IF THE TAX ATTORNEY IN THIS CASE IS CHEATING

A.	Chief Counsel Memorandum 201001019 requires and reminds IRS folks to not succumb to the temptation to check-up upon the returns of taxpayer representatives. Prohibited actions include accessing IRS databases. General confidentiality is governed by § 6103.

B.	There are Exceptions, which are always permissible, including:

1.	Accessing spouse of taxpayer who has tax problems,

2.	Cross referencing dependent identities

3.	Determining filer/non-filer status

4.	Practitioner's license status can always be checked.

5.	Debarment from IRS practice can always be checked.

C.	With the changes expected to Circular 230, I am expecting further relaxation in the rules of what the IRS CAN check. Most specifically being behind on payment for taxes owed which has been promised to become a disbar-able offense in future.

XIII.	CRIME RESTITUTION CAN BE DEDUCTIBLE!!

A.	In some instances, restitution payments can be deductible as business expense (Cavaretta, TC Memo 2010-4).

B.	Husband and wife entered into overbilling transactions constituting fraud. Husband made restitution regarding wife's fraud crime. The key is (a) the identity of the entity receiving the funds and (b) the compensatory nature of the payment. §162(f) disallows deduction of fines and penalties paid to government for violation of any law.

C.	§165(c)(1) is allows general business losses to be deducted. §165(c)(2) allows losses related to the pursuit of profit. §165(c)(3) allows casualty losses are if such losses arise from fire, storm, shipwreck, or other casualty, or from theft (subject to a $100 per incident subtraction and a 10% AGI floor limitation). Subject to these three treatments, a payment which is to compensate a non-governmental entity and is truly compensatory rather than punitive, is deductible. In the case, the amounts were properly deductible.

XIV.	DISREGARDED ENTITY COLLAGERAL

A.	PLR 200953005 has enabled business debt having collateral in a disregarded entity to nevertheless be considered as qualified real property business indebtedness (QRPBI) and its associated income exclusion under § 108(a)(1)(D).

B.	Non-C corp, QRPBI discharged outside of bankruptcy can be excluded from income in an amount over:

1.	The outstanding principal amount of the QRPBI just before discharge if (2) over the fair market value of securing property securing the QRPBI less the outstanding principal amount.

2.	QRPBI excluded reduces basis of property §108(c)(1)(A))

3.	QRPBI is debt which occurred after 1992, used to buy or improve property and which is elected to be treated as QRPBI.

4.	Here the property was owned through a series of disregarded entities, and Rev Proc 2003-65, 2003-1 CB 1035 was used as guide

XV.	ELECTRONIC RETURN FILING PRESS IS ON

A.	Notice 2010-13, 2010-4 IRB has been published to explain the method for waiver from electronic return filing rules. §6033 is the general requirement to file electronic returns.

B.	250 returns per year is the threshold limit which can invoke penalties if greater than this threshold is filed. The burden of waiver request is just another way that the IRS if funneling it requirement.

C.	Waiver Requirements include:

1.	Identity of the practitioner

2.	A listing of steps to meet the requirement

3.	A detailed description of the undue hardship which would otherwise result.

4.	Statement of the steps to be taken to come into line in future.

5.	Perjury signed statement.

XVI.	WHISTLEBLOWER KID GLOVE TREATMENT

A.	Limited "employed informant" contact, so as to insure that the government is not seen to be controlling, is detailed in Chief Counsel Notice 2010-003. Generally, enough contact so that the "employed informant" can be considered a "government agent can destroy the investigation.

B.	The rules benefit the informant also since the amount of the reward ranges from at least 15%, to not more than 30%, of the additional amounts actually collected based upon an informant's information.

C.	In particular, questions to the informant must be limited to clarification and not questions or statements that might urge further investigative action.

D.	Note: In California, if a person is employed in a manner that they are associated with return preparation, it is a misdemeanor under California's Business and Professions Code §17530.5. A companion sales tax provision is found at California Revenue and Tax Code §7056.6.

XVII. LACK OF E&P CAN ONLY TAKE YOU SO FAR

Appeal of Misle, SBE, Case No. 486028, 01/26/2010: A corporation distributes $593,498. Taxpayers call it a loan. Taxpayer says "there is not enough money (profit) to declare a dividend, so it must be a loan" Tax collector says if you don't have enough for a dividend, why is the corp lending you money?

XVIII. CALIFORNIA'S MORTGAGE FORGIVENESS

SB 401 passed on April 12, 2010. Unlike the Federal Statute, (it is said that) California does not limit the debt forgiveness amount, but limits the amount of underlying indebtedness upon which the debt which is relieved is based. $2,000,000 for marrieds and $1,000,000 for single taxpayers is the federal amount. California law limits the amount of qualified principal residence indebtedness to $2,000,000 ($1,000,000 for married/RDP filing separate) and debt relief stated to be otherwise unlimited, however this suggests some ratio possibly to be applied based upon the total amount of qualified principal residence indebtedness. FTB and other publications are not completely clear on th computation.

XIX.	INNOCENT SPOUSE

A.	In Greer v. Comm., (CA 6 2/17/2010) 105 AFTR 2d 2010-490, the 6th circuit adopted a reasonably prudent taxpayer knowledge standard. If the spouse could be expected to know of an understatement, no relief will be allowed. Contrast this with "knowledge the transaction" test for omitted income.

B.	For understatement, you should show:

1.	education (of the putative innocent spouse)

2.	financial involvement (of the putative innocent spouse)

3.	big expenditures (of the putative innocent spouse)

4.	deceit & cover up on the putative non-innocent spouse's part

C.	This may be an unfortunate holding as the innocent spouse in this case was still married, and much of her charges against her husband were blunted by this fact. The Tax Court went straight for the "did not know and had no reason to know" element. Another unusual factor was the fact that the tax deficiencies sprang from the early 80's, but the case was only decided January 20, 2010. The deficiency was for $87,627, but the interest was $544,125. It required a couple of decades to identify and paint the "tax shelter" deduction.

XX.	SEX CHANGE COST DEDUCTIBLE, BUT NOT BREAST AUGMENTION

A.	In the Tax Court case of O'Donnabhain (2010), 134 TC No. 4, sex change or "reassignment surgery" and hormone therapy incurred in connection with a condition known as gender identity disorder were deductible as being associated with " a disease". But enhancement of the breast shape and form, in excess of that created by hormone therapy was found to be purely cosmetic. No deductibility under § 213(d)(9).

B.	It is noted that Taxpayer here had no physical deformity at birth and Taxpayer's genitalia were unambiguously male.

XXI.	HIRE ACT SUMMARY

A.	P.L. 111-47: A number of provisions to combat offshore non-compliance.

B.	30% withholding tax on most income from U.S. financial assets held by a foreign bank or financial institution unless there is an agreement in place to disclose the identity of U.S. Citizen accounts.

C.	Increased reporting on owners of foreign: corporations/partnerships/trusts (+30% withholding tax for non-compliance.

D.	Requirement to report offshore accounts and other foreign financial assets with values of $50,000 or more on tax returns.

E.	Underpayment Penalties for undisclosed foreign financial assets will be 40% of the amount of any understatement that is attributable to an undisclosed foreign financial asset which is failed to be disclosed (even if there is no gain or otherwise reportable tax on the item).

F.	Further intermediate limitation period of 6 years for omission of $5,000 tax item which is attributable to foreign assets. Statute starts only when a return is filed which discloses reportable assets. Result: wide open limitations period for many non-reporting taxpayers of foreign assets.

G.	More reporting on passive foreign investment companies.

H.	Regulations regarding foreign trusts and U.S. Beneficiaries are codified. Related U.S. Person is presumed unless class of beneficiaries is identified and don't contain U.S. persons.

I.	Minimum penalty for failure to file regarding a foreign trust is $10,000 on any failure to file, but no more than the amount required to be disclosed on the return.

J.	Power for IRS to characterize a payment as a "Dividend Equivalent" subject to withholding rules relating to payments to foreigners.

XXII.	SETTING UP 2011 WORKER CLASSIFICATION PROGRAM 2010 PROCEDURES

A.	The 2011 audit activity increased has been talked about for some time. A number indications and directives were given in 2010. These include:

1.	Reference to a newly issued guide, Publication 4341, for employers reclassifying workers from independent contractors to employees.

2.	Guide has a format that allows reliance on it while continuing to participate in the SS-8 determination letter process.

3.	Guide includes details on reduced tax rates in exchange for compliance §3509.

XXIII. MEDICARE TAX ON INVESTMENT INCOME JUST LIKE WAGES

After 2012 a 3.8% surtax (similar to medicare tax on wages) will be levied on individuals whose AGI is over $200,000, and jointly where the AGI is over $250,000.

XXIV. FTB DISBARMENT PROCEDURES BEING EXPLORED

A.	The Franchise Tax Board held a meeting will be held on April 21, 2010, to elicit public input on the content of the proposed regulation pertaining to persons suspended or disbarred from practice before the U.S. Department of The Treasury, as mandated under Cal. Rev. & Tax. Code. § 19523.5.

B.	Given that Cal. Rev. & Tax. Code. § 19523.5. has been on the books since 2005, and given the direction given by Office of Professional Responsibility Karen Hawkins, its a good bet that California is polishing the procedures under this provision in anticipation of further activity. The provision mandates that any attorney disbarred from practice before treasury be given 45 days to report this fact to FTB or face a $5,000 penalty. A number of rule exceptions were discussed and considered.

XXV.	CAPITALIZATION NOT NEEDED FOR TRADEMARK ROYALTY NOT SPECIFICALLY TIED TO PRODUCTION

A.	Robinson Knife Manufacturing Co., Inc., (CA-2 3/19/2010) 105 AFTR 2d 2010-634. In a case of first impression, the Court of Appeals for the Second Circuit, reversing the Tax Court, has held that a corporation does not have to capitalize under Code Sec. 263A the royalties paid under trademark licensing agreements.

B.	The royalty was unusual in being a percentage of net sales over a two year period. It was argued that the royalties were advertising expenses currently deductible, and IRS argued that they were production costs and should be treated like inventory improvements and capitalized. Appeals Court allowed current deduction because the payments were not properly allocable to property produced under Reg. §1.263A-1(e)(3)(i).

C.	It was noted that commissions for sales of books that have already been manufactured should be differently from similar royalties based upon sales of other types of goods, such as kitchen products particularly since the royalty was based upon sales and not production. Stressed was that Robinson's royalties were sales based calculated as a percentage of net sales and therefore immediately deductible.

XXVI. TIP CREDIT EMPLOYEES MUST SPEND >80% OF TIME ON TIP
TASKS

A.	In the case of Fast v. Applebee's International, Inc., DC MO, Dkt. No. 06-4146-CV-C-NKL, 3/10/10, it was held that an employer may not be able to claim part of tip credit if > 20% of employee time spent on non-tip work.

B.	Tip credit under 29 USC 203(m) of the Fair Labor Standards Act (FLSA) means that an employer need only pay $2.13 per hour towards a $7.25 federal minimum wage (existing at the time of the case), while taking credit of up to $5.12 per hour based upon tips collected, to make up the difference. >20% of time spent on general preparation and maintenance disqualifies an employer's tip credit. Conversely, at least 80% of time must be spend on tipable tasks.

XXVII. TEMP REGS RELATED TO REORGANIZATIONS CONTINUE

A.	As per Notice 2010-25, 2010-14 IRB Taxpayer may rely on reorg continuity of interest rules previously in expired temp regs. The temporary regulations which deal with continuity of interest requirement for corporate reorganizations require that substantial part of the value of the proprietary interests in the target corporation must be preserved in the reorganization.

B.	§ 7805(e)(2) require that temporary regs expire three years after issuance, if not withdrawn earlier. The regulations relating to Notice 2010-25, 2010-14 IRB, namely, Reg. § 1.368-1T(e)(2) would have expired on Mar. 19, 2010.

XXVIII. IRS ANNOUNCES THE DIRTY DOZEN TAX SCAMS IN IR
2010-32

A.	Return preparer fraud.

B.	Hiding income offshore.

C.	Phishing.

D.	Filing false or misleading forms.

E.	Nontaxable Social Security benefits with exaggerated withholding.

F.	Abuse of charitable organizations and deductions.

G.	Frivolous arguments.

H.	Abusive retirement plans.

I.	Disguised corporate ownership.

J.	Zero wages.

K.	Misuse of trusts.

L.	Fuel tax credit scams.

XXIX.	GIFT OF LLC INTEREST HELD NOT TO BE GIFT OF PRESENT INTEREST

A.	In the case of Fisher v. U.S., (DC IN 3/11/2010) 105 AFTR 2d 2010-600, a district disallowed an annual gift tax exclusion in a gift from a married couple to their children as future interests.

B.	The court found:

1.	restrictions preventing current financial benefit.

2.	A gift of a minority 4.762% membership interests in an LLC holding a parcel of undeveloped land was insubstantial as even transferral was subject to restrictions.

3.	The interest was subject to a right of first refusal.

XXX. NO SECOND CHANCES ON CHARITABLE DONATION RULES

A.	In the matter of Friedman, TC Memo 2010-45 it is made a bit more plain about how severe the disallowance of a deduction can be.

B.	In a gift of in-kind property, the taxpayers failed to achieve substantial compliance with the rules Reg § 1.170A-13(c)(2). Rules required:

1.	Did not provide adequate descriptions of the property donated.

2.	Did not identify the valuation methods used

3.	Did not outline the manner of the property's acquisition

4.	Did not substantiate the cost basis of the property, and

5.	Did not obtain contemporaneous written acknowledgments of the donations.

C.	Similar donations were made in 2001 & 2002. An IRS examination occurred on May 11, 2004. Donor attempted to remedy the documentation. IRS continued to disallow the charitable contribution deductions. Taxpayers sought relief in the Tax Court urging that they substantially complied with the regulations. Taxpayers lose because:

1.	The taxpayers didn't merely fail to attach evidence of a qualified appraisal, they never obtained such an appraisal.

2.	Forms 8283 and the appraisal reports provided very generic descriptions, stating "good condition" and other such platitudes.

3.	Documents continued to omit the valuation method used and reasoning for appraisal value.

4.	Taxpayers even alleged disposal of records related to fire, but the taxpayers failed to submit an explanation.

5.	There was not a qualified appraisal BECAUSE it was untimely. An appraisal was more than 60 days before donation.

6.	Taxpayers failed to obtain adequate written acknowledgments from the donee.

7.	Taxpayer failed to obtain a statement that no goods or services were provided by the donee in exchange

XXXI. INHERITED IRA IS NOT EXEMPT ASSET FOR BANKRUPTCY

A.	It may be recalled that full-fledged retirement plan with a trust is generally immune from the claims of creditors. It may also be recalled that IRA's have a stated immunity from creditors when the original owner of the IRA declares bankruptcy.

B.	In re Chilton, (Bktcy Ct TX 3/5/2010) 105 AFTR 2d 2010-575, a Texas Bankruptcy Court holds that a debtor's inherited IRA is NOT an exempt asset of a bankruptcy estate under Bankruptcy Code §522(d)(12). The basic federal; exemption section is 11 U.S.C. §º522(d), but state exemptions may be imposed in lieu of these. One theory supporting this holding is that an inherited IRA requires the beneficiary to take distributions and may not roll it into the beneficiaries retirement vehicles.

C.	Special note for California. California has forced bankrupts to take the state exemptions. State exemptions are found at Code of Civil Procedure 703.140, and at Code of Civil Procedure 704. Retirement accounts appear in 704.115.

D.	704.115. There is a strange exception as follows: (e) Notwithstanding subdivisions (b) and (d), except as provided in subdivision (f), the amounts described in paragraph (3) of subdivision (a) are exempt only to the extent necessary to provide for the support of the judgment debtor when the judgment debtor retires and for the support of the spouse and dependents of the judgment debtor, taking into account all resources that are likely to be available for the support of the judgment debtor when the judgment debtor retires. In determining the amount to be exempt under this subdivision, the court shall allow the judgment debtor such additional amount as is necessary to pay any federal and state income taxes payable as a result of the applying of an amount described in paragraph (3) of subdivision (a) to the satisfaction of the money judgment. (f) Where the amounts described in paragraph (3) of subdivision (a) are payable periodically, the amount of such periodic payment that may be applied to the satisfaction of a money judgment is the amount that may be withheld from a like amount of earnings under Chapter 5 (commencing with Section 706.010) (Wage Garnishment Law)." This provision indicates that a judge can make a balancing act to see if the retirement account is excessive.

E.	703.140(b) The following exemptions may be elected as provided in subdivision (a):

(10) The debtor's right to receive any of the following:

(A) A social security benefit, unemployment compensation, or a local public assistance benefit.

(B) A veterans' benefit.

(C) A disability, illness, or unemployment benefit.

(D) Alimony, support, or separate maintenance, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.

(E) A payment under a stock bonus, pension, profit-sharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor, unless all of the following apply:

(i-) That plan or contract was established by or under the auspices of an insider that employed the debtor at the time the debtor's rights under the plan or contract arose.

(ii) The payment is on account of age or length of service.

(iii) That plan or contract does not qualify under Section 401(a) 403(a), 403(b), 408, or 408A of the Internal Revenue Code of 1986.

F.	The same is not true for regular (trust function) retirement plans rolled into an IRA. McMullen v. Haycock, Cal Rptr 3rd ___,2007 WL 447913, Cal App. 2 Dist, February 13, 207 (No. B187748) . Nor is it generally true for either full trust plans or erisa plans rolled into a full trust plan.

XXXII. LIMITS ON SALES WITHIN A NONPROFIT

A.	A recent statute will affect sales tax and will limit promotional items which nonprofits sell their members. AB1486, effective through January 1, 2015, provides that 501(c) membership organizations are themselves consumers rather than retailers of certain sales of merchandise sold to their members. (See California SBE Tax Information Bulletin 388, 03/01/2010 .)

B.	Affected items:

1.	The merchandise bears the organization's logo & typically shows affiliation of the member.

2.	Price to the organization's member is equal or less than the acquisition cost.

3.	The nonprofit makes sure that no member is allowed to acquire more than 30 identical items of this merchandise or to resell the items

4.	Merchandise is unrelated to political campaign.

XXXIII.	1031 EXCHANGE RELIEF WHERE INTERMEDIARY HAS A BANKRUPTCY/RECEIVERSHIP PROBLEM

A.	Rev Proc 2010-14, 2010-12 IRB gives relief to taxpayers unable to complete the exchange where the qualified intermediary is in bankruptcy or receivership. IRS will not treat taxpayers as being in actual or constructive receipt of exchange proceeds if completion is blocked for this reason.

B.	Requirements:

1.	Property transferred to QI in accordance with normal rules Reg. §1.1031(k)-1(g)(4).

2.	Replacement property identified within identification period so long as the qualified intermediary is not defaulting during this time.

3.	The bankruptcy / receiver default was the sole reason for non completion.

4.	No actual/constructive receipt of proceeds by the intermediary.

XXXIV.	6707 A PENALTIES WERE DELAYED FOR THE FIRST HALF OF THE YEAR

A.	IRS agreed to forebear §. 6707A penalty for smaller transactions. (tax shelter penalties)

B.	The penalty: $100,000 per individual and $200,000 per entity for each failure to make special disclosures for listed transactions. The delay was in order to get gentler legislation.(S. 2917)

XXXV.	SOME FREE SPEECH IS STILL POSSIBLE

A.	In the case of U.S. v. Stover, (DC MO 04/27/2010) 105 AFTR 2d, 2010-815 a U.S. a district court has would not grant summary judgment to IRS to enjoin unlawful promotion of abusive tax shelters. (§ 7408). In addition the severity of the relief sought exceeded the authority of the statute.

B.	§6700 elements are:

1.	organizing/assisting in the organization of an entity, plan or arrangement or participates (directly or indirectly) in the sale of any interest in an entity, plan or arrangement;

2.	makes statements about tax benefits that he knows or has reason to know are false, or makes or furnishes a gross valuation overstatement as to any material matter.

3.	Penalty is $1,000 for each prohibited activity or, if less, 100% of the gross income derived from the activity. (Code Sec. 6700(a))

4.	§7408 enables a civil action seeking an injunction against any person from engaging in an any action or failure to take action that is subject to penalty under § 6700.

C.	The court enforced the implied knew or had reason to know element coupled with the impropriety of the arrangement.

XXXVI.	TAXATION OF FOREIGN EMBASSY EMPLOYEES

A.	In the case of Shoukri Osman Saleh Abdel-Fattah v. Commissioner 134 TC No. 10, a foreign embassy employee was exempt from U.S. income tax without State Department certification

B.	Issuance of State Department certification under Code Sec. 893(b) is not required for the exemption but is evidence that it should be granted. The salary, wages, or fees of an employee of a foreign government received is exempt from income if:

1.	employee is not a U.S. citizen.

2.	services performed are similar in character to services performed by U.S. government employees in foreign countries

3.	The country of citizenship of the employee grants an equivalent exemption to U.S. government employees performing similar services in that foreign country.

XXXVII.	NO DEDUCTION FOR SEX SURROGACY IF TAXPAYER CAN REPRODUCE NORMALLY

A.	The case of Magdalin v. Comm., (CA 1 12/17/2009) 105 AFTR 2d 2010-335, which was denied Supreme Court Review, denies deduction for fertilization costs for taxpayer who can reproduce normally. Taxpayer had two children normally with a prior spouse.

B.	Although not stated specifically in the case, it did not appear that the taxpayer was currently married. The statement "Petitioner argues that it is his civil right to reproduce, that he should have the freedom to choose the method of reproduction, and that it is sex discrimination to allow women but not men to choose how they will reproduce." Also, it would seem that if the taxpayer had a wife who either was incapable of reproducing or was against reproduction that he would have used such facts to bolster his case. Thus it is believed that the taxpayer was making expenditures to reproduce of his own volition and that his efforts were given "hobby" treatment.

C.	This case opens up many other bases for allowance or denial of these and similar expenses. It indicates that perhaps if the taxpayer had some sort of problem deviating from his ability for natural reproduction that he would have prevailed. If the taxpayer were married to someone who was infertile or who had a genetic disease for which avoidance of being passed, that he could have prevailed. There could be abuses in this area from sham rest home marriages. Taxpayers total expenses were less than $65,000 expenses.

XXXVIII.	MORTGAGE KILLS FACADE EASEMENT

A.	A facade easement made to a charity is an exception to the rule on non- deductibility of gifts of partial interests. However, if the property has a mortgage, it holds open the possibility that foreclosure could wipe out the easement, in essence making it worthless. Kaufman, (2010) 134 TC No. 9

B.	Reg. § 1.170A-14(g)(6)(ii) requires that the donee have a perpetual conservation restriction and that it be properly valued. The case at hand looked very much like a scam in that a deduction was to be taken for the donation, but where the donee required a "cash contribution" in addition. (non-profit "selling" a deduction?) The deduction claimed was $220k and the amount "paid" to the charity to accept the easement was a little less than $17k. Further, the $17k contribution was disallowed as a conditional gift under Reg. § 1.170A-1(e). The $17k was a held to be quid pro quo (money in exchange for a deduction letter from the charity). This is a sweet ratio where $220k yields a deduction worth $77k in cash and costs $17k; a 4:1 instant payout.

XXXIX.	NO RIGHT TO EMPLOYEE SERVICE TACKING WHEN RE-
HIRED AS A "NEW HIRE"

A.	Ensley, Mark v. Ford Motor Co. (2010, CA6) 2010 WL 816731 is a case which illustrates that an employer who classes an employee as a "rehire" need not credit years of service even where employee was original with the parent company, then worked for a spinoff and where the spinoff is subsequently re-acquired.

B.	Parent employer's plan stated that "new hires" would be treated as having no account of work done while with the spun off subsidiary. This was so even though the parent offered an early retirement which took to account years of service at the parent and the spun-off subsidiary as prerequisites to taking such early retirement.

XXXX.	RELIANCE ON OTHERS TO MEET YOUR TAX OBLIGATIONS IS ALMOST NEVER AN EXCUSE

A.	In yet another of a long line of cases on embezzlement and non-action by tax professionals, the case of McNair Eye Center, Inc. v. Commissioner, TC Memo 2010-81 illustrates that when the professional fails, the principal is still liable.

B.	A corporate taxpayer was still subject to employment tax penalties for failure to file, pay, and deposit taxes on time, even where a certified public accountant (CPA) was in charge of performing the tasks. It is surprising that this case was even filed or contested in light of the cited precedent of Boyle, (S Ct 1985) 469 US 241, 55 AFTR 2d 85-1535, which clearly states that a failure of this type is not excused by an intermediaries negligence. (§ 6651(a)(1)). From a policy standpoint, its clear to see that a hobo could be everyone's accountant and everyone would have an excuse not to comply.

XXXXI.	A SIXTEEN CHAPTER CASH AUDIT TECHNIQUES GUIDE WAS RELEASED BY THE IRS IN APRIL 2010

A.	The main ways are listed as:

1.	Cash can be skimmed from receipts before it is recorded.

2.	Cash can be stolen after it has been recorded.

3.	Fraudulent disbursements can be recorded and Cash removed.

B.	Starting at chapter 9, specific businesses are identified and its clear that the IRS suspects these as having a higher potential for fraud:

1.	Bail Bond Businesses

2.	Beauty Shops

3.	Car Wash Businesses

4.	Check Cashing Services

5.	Coin Operated Amusements

6.	Convenience stores/Mini-marts/Bodegas

7.	Laundromats

8.	Scrap Metal Businesses

XXXXII.	NO DEFERRAL ON TAKING SHARES INTO INCOME WHEN PART OF AN "UNMONETIZED" SCHEME

A.	In the case of U.S. v. Bergbauer, (CA 4 4 /16/10), 105 AFTR 2d 2010-775, a planned restricted taking into income of shares with an income event for all shares and restriction on 75% of shares was such that a single dissenting shareholder was not allowed to take a different position and argue that 75% of the income was not received because it was restricted.

B.	In this scheme stock was received by a large group of partners who took the whole value into income (by contract) and restricted 75% for future sale. The objectives were to be able to sell 25% to pay the tax on 100% of the stock received, with everyone in the group holding the 75% in an escrow for future sale.

C.	One party to the transaction attempted to take the position that he had only taken the 25% into income that year because the he had no rights to it. The holding which required him to take the same status as the others was done with several interesting points:

1.	There was in intent by all participants in the scheme to recognize the value of all the stock received and in the year it was received.

2.	The parties bargained at arms-length for, and received, real economic benefit from the scheme.

3.	The economic reality test was applied based upon intent of the parties and substance of the transaction.

4.	A conclusion that there were economic reasons for the scheme.

5.	§ 83 argument was rejected because that section relates to restrictions when stock is given in exchange for services, and that was not the case here.

6.	If stock had been received without a collective agreement but with stock

7.	In a rebuke, the court said that nothing "permits a taxpayer to whipsaw the Government and the other parties to the transaction by unilaterally altering the agreed tax treatment, which has economic substance and reflects his intent, after the fact when the winds of change foment delayed seller's remorse."

XXXXIII.	CHANGE OF ADDRESS RULES COULD ADVERSELY AFFECT TAXPAYERS

A.	One very significant aspect of tax procedure is the requirement that the IRS send notices to the "last known address". IRS failure to do so can result in the IRS having to start completely over with respect to a taxpayer, including loss of penalties and interest. In some cases a "start over" can place the base case outside the statute of limitations, or have it go forward based upon a threshold statute of limitations which might again cause it to lose its case.

B.	Rev Proc 2010-16, 2010-19 IRB was set forth as REQUIRING taxpayers to inform IRS of a change of address, effective June 1, 2010. Many of cases which the IRS lost were based upon the "existence" in the file of an updated address that the IRS didn't pick up. By requiring the taxpayer to SPECIALLY COMMUNICATE ITS ADDRESS to the IRS, the IRS is laying the foundation for avoidance of a charge of failure to use last known address even where a document exists in the file showing an updated address.

C. Requirements:

1.	It will automatically update the taxpayer's address of record based on a new address that the taxpayer provides the U.S. Postal Service (USPS) that is retained in the USPS's National Change of Address database (NCOA database).

2.	Updated addresses on a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return will be ignored.

3.	Change the address of record must give clear and concise notification.

4.	Removal of address requires a clear and concise written notification of a change of address.

5.	Separating taxpayers establishing a separate residence, should each send clear and concise written notification of a current address to IRS. (IRS would always like advance notice of a divorce)

6.	notification of a change of address should identify whether any gift, estate, or generation-skipping transfer tax returns are affected to "make sure" that the estate unit is notified.

7.	taxpayer should notify the USPS facility serving the taxpayer's old address of the taxpayer's new address so that mail from IRS can be forwarded properly. Under Reg.§ 301.6212-2(b)(2), IRS will automatically update a taxpayer's address of record based on a new address that the taxpayer provides the USPS that is retained in USPS's NCOA database.

8.	If the taxpayer's last known address is altered due to address reorganization (town name change), any clear and concise notification of a different address provided by the taxpayer will control.

9.	Note: If this rule doesn't put a cherry on top of the rules attempting to shift responsibility for address, nothing can. Look for the "last known address" factor, in the rare cases where it is found, to begin to be turned back against the taxpayer.

XXXXIV.	NON-COMPETE PAYMENTS COUPLED WITH BUSINESS BUYOUT MUST BE AMORTIZED OVER 15 YEARS UNDER §197

A.	The case of Recovery Group, Inc. TC Memo 2010-76 has held that a noncompete coupled with business purchase must be amortized under §197, even where the non-compete has a much shorter term of one year.

B.	§ 197(d)(1)(E) requires 15-year amortization where a substantial asset acquisition includes a covenant not to compete. In other words, no segregation allocation will be possible.

C.	Minority (23%) shareholder was bought out, and in ADDITION paid a $400,000 per year covenant not to compete. Taxpayer interpretation that §197(d)(1)(E) means ONLY a 100% ownership interest was rejected. Court holds that amortization is required if there is "any" interest in a trade or business.

D.	How could this have been done differently? The shareholder could have been hired as an new employee for a year with a signed paper not to compete. Even better, he could have been hired for 2,3,or 4 years as a part time employee and the purchaser could thereby have significantly lengthened the covenant.

XXXXV.	BANKRUPTCY COURT DIFFERS IN RESULT FROM THE CHILTON HOLDING WITH SLIGHTLY DIFFERENT FACTS

A.	(See XXXI above). In the case of Nessa, In re Nancy (Bktcy Appellate Panel CA 8, 4/9/2010) 105 AFTR 2d 2010-724, an 8th circuit bankruptcy appellate panel has held that a debtor's inherited IRA was an exempt asset of her bankruptcy estate, under Bankruptcy Code § 522(d)(12).

B.	States can choose to allow its citizens a federal bankruptcy scheme under 11 U.S.C.§º522(d) or any number of its own state exemption schemes. Federally, an exemption is had with respect to:

1.	§401 qualified defined benefit and defined contribution plans

2.	§403 qualified annuity plans

3.	§408 IRAs, SEP-IRAs, and SIMPLE IRAs

4.	§408A Roth IRAs

5.	§414 qualified governmental plans

6.	§457 deferred compensation plans of governments & nonprofits

7.	§501(a) tax-exempt organizations.

C.	Account owner can designates a spouse as beneficiary and spouse beneficiary can roll the deceased IRA into their IRA. § 408(d)(3)(C), Reg.§ 1.408-8 Q&A 5(a). Non-spouses are not treated the same way, but can make a transfer to a new IRA set up in the same structure (type) as the transferor IRA for the benefit of the IRA beneficiary as outlined in IRS Pub. 590, Individual Retirement Accounts.

D.	If the original owner died before the start of his required distribution period, age 70.5, the successor transferee plan must be:

1.	Distributed within 5 years of the original owners death (OR)

2.	Distributed to (or for the benefit of) the designated beneficiary, over the beneficiary's life or over a period that doesn't extend beyond the transferor's his life expectancy. (Code Sec. 401(a)(9)(B); Code Sec. 408(a)(6))

E.	In this case taxpayer established a proper IRA, died, left it to his daughter who properly set up a mirror IRA .titled "daughter, Beneficiary, Decedent." Subsequently, the beneficiary filed for Chapter 7 voluntary bankruptcy claiming the IRA as an exempt asset from her estate under 11 USC§ 522(d)(12). The bankruptcy trustee objected and bankruptcy court overruled the trustee's objection holding that transferred amounts retained their retirement fund character and still qualified for the exemption. Trustee appealed to the Eighth Circuit.

F.	Reasoning:

1.	Inherited IRA retirement funds are exempt from taxation and meet bankruptcy exemption requirements

2.	Trustee argument that transferee IRA could be exempted only if the taxpayer contributed, fails. (This rule should fail because if this is the basis of attack, every transferee could add a penny to the account and it would be bullet-proof).

3.	Bankruptcy Code § 522(d)(12), does not specify a requirement that bankruptcy exemption for IRAs be based upon identity of debtor retirement funds in the account.

4.	The holding of In re Chilton was attacked directly, and specifically the assertion (made by the trustee in this case) that an "inherited" IRA has differing rules regarding use, distribution, and taxation.

5.	The 8th circuit adopted the BAP panel holding that it was irrelevant whether a traditional IRA and an inherited IRA have different rules regarding minimum distribution rules.§ 401(a)(9)). The key was stated as that under §408(e) "any IRA" is exempt from taxation.

6.	Final Note: because a successor IRA has withdrawals which are taxed when withdrawn, regardless of when withdrawn, and where such inherited IRA's still grow tax free, they have an quasi "imputed" trust under the bankruptcy code. Note that OUTSIDE of bankruptcy, these IRA assets can be reached by creditors.

XXXXVI.	USE A BARGAIN SALE WITH YOUR FAVORITE CHARITY

A.	Sales at less than FMV to a charity will result in a contribution for the balance. In the case of Klauer, TC Memo 2010-65, it was held that bargain sales via options to purchase land, resulted in charitable deductions for the difference between FMV and the bargain sale price.

B.	This technique should be used more often. Getting a charity involved in buying property and in taking less of a contribution should be exploited.

XXXXVII.	§267 RELATEDNESS CAN DESTROY THE TAX FREE NATURE OF A 1031(f) EXCHANGE

A.	Chief Counsel Advice 201013038 ruled that even with a qualified intermediary that was not related, the relatedness of the other two parties to a 1031(f) exchange

B.	§1031 Qualified Intermediaries are often used in like-kind exchanges. But gain or loss under in an exchange between related persons (related under Code Sec. 267(b) or Code Sec. 707(b)(1)) must be recognized if either there is a disposal of property within 2 years of exchange.

C.	Here taxpayer leased equipment to others and was related to a retail dealer of equipment. The transaction was essentially described in Rev Rul 2002-83.

XXXXVIII. TEXTRON: WORK PRODUCT PRIVILEGE ERODED

A.	By declining to review the First Circuit's Textron decision (U.S. v. Textron Inc. and Subsidiaries, (CA 1 8/13/2009) 104 AFTR 2d 2009-5208 cert denied 05/24/2010) an erosion of the work product rule is left in place.

B.	This case has been closely followed for some time. The holding was that tax accrual workpapers aren't protected by the work product privilege, important where the papers are required to be disclosed in an audit. Federal securities law required disclosure of public financial statements certified by an independent auditor. However part of the audit required disclosing details of contingent tax liabilities. After refusal to produce the more sensitive work papers, the IRS issued a summons and filed a petition to enforce it. The District court held that the papers would have been protected but for the waiver inherent in providing those papers to an independent auditor. The First Circuit affirmed the district court decision.

XXXXIX.	RESPONSIBLE PERSONS CAN LOSE THEIR HOUSE

A.	In what seems to be an otherwise ordinary decision, the Courts ordered the home of a responsible person to be sold to satisfy a "responsible person liability". In the case of U.S. v. Steeley, 105 AFTR 2d, 2010-873, IRS foreclosed residential real property under §7403.

B.	The president of a company was admittedly a responsible person, and acted willfully to pay operating costs when the company experienced cash flow problems. The corporation filed for bankruptcy, but several years earlier, the IRS assessed the deficiencies against the corporate president personally, totaling about $700k. He owned two properties in which his ex-wife owned half interests. The Supreme Court case of U.S. v. Rodgers, Lucille, (1983, S Ct) 52 AFTR 2d 83-5042, was cited for the proposition that § 7403 allows court enforcement of a tax lien even where an innocent person has an interest in the property, and provides for the innocent owner to receive part of the proceeds.

XXXXX.	MORE PRIVILEGE CLAIMS LOST. PREVENTABLE?

A.	A court compels production of documents from an estate representative in the case of Tom Gonzales, Personal Representative. v. U.S., (DC CA 5/4/2010) 105 AFTR 2d 2010-843.

B.	Facts:

1.	Documents were held by accountant and attorney and related to pre-death transactions of decedent.

2.	Privileges asserted were (a) attorney-client privilege, (b) the work product privilege and (c) joint defense privilege. Most of these claims were not upheld.

3.	Estate representative brings refund suit in district court. IRS compelled documents regarding communications between accountant and lawyer. Accountant was employed by decedent when transactions relating to the refund suit had occurred.

4.	Held: an estate is corporation-like (citing Upjohn Co v. U.S., (1981, S Ct) 47 AFTR 2d 81-523) and the accountant is analogous to a corporate employee. So, accountant doesn't have a separate privilege assertable with respect to the estate.

5.	Accountant was not setup in a Kovel arrangement with the lawyer and thus the attorney communication with the accountant is not privileged.

6.	Accountant was an important fact witness.

7.	Could the results have been different? Maybe: (a) if the accounting advisor employed by the decedent had not prepared his tax returns, and (b) if a DIFFERENT accountant had been properly Kovel'ed by the Attorney representing the estate.

Curtis L. Harrington

Office:	Harrington & Harrington; No. 91719, 2300 Redondo Avenue, Long Beach, CA

90809-1719; Tel. (562) 594-9784; Fax (562) 594-4414

curt@patentax.com PATENTAX®	http://www.patentax.com

Specialty:	High Technology Patent / Trademark / Intellectual Property Law & Taxation

Education:	B.S. Chemistry - Auburn University (1974)

M. S. Electrical Engineering - California State University Long Beach (1990)

M.S. Chemical Engineering - Georgia Institute of Technology (1977)

J.D. - University of Houston School of Law (1983)

M.B.A. - University of Oklahoma (1985)

LL.M. Taxation - University of San Diego School of Law (1997)

Admitted	Supreme Courts of California, Arizona, Texas, & Nevada

to Practice: U.S. Supreme Court;	U.S. District Court, Central District of California

Internal Revenue Service	U.S. Patent and Trademark Office

U.S. Court of Appeals for the Federal, Fifth & Ninth Circuits

California Department of Real Estate - Broker

Los Angeles County California EMT-Basic

U.S. Tax Court	FCC-Commercial & Amateur Extra

Certified by The State Bar of California Board of Legal Specialization: Taxation

Languages	Japanese Language Proficiency Examination, Approved by Japan Foundation, Level 4; Kanji Proficiency Exam of the Japan Kanji Aptitude Testing Foundation, passed Level 7, recognized by the Japan Ministry of Education, mastery of 640 kanji; some technical Russian reading ability.

Patents	Prepared and prosecuted more than 100 patents, in the electrical and

Prepared	chemical technologies; specialty areas include optics, fiber optics, cryogenics electromagnetics, natural gas processing and computers, & trademark and copyright preparation and prosecution. Patents include: Chemical: 4,957,634; 4,851,077; Electrical: 4,876,892; 4,833,351; 4,837,525; Mechanical: 4,879,895; 4,906,199; and Optical: 4,919,512; 4,898,468.

Litigation	Associate counsel in patent matters, trade secret litigation; Judge pro tem, Long Beach Municipal Court; Superior Court Mediation program, Long Beach; Attorney- Client fee Dispute Arbitrator, Long Beach Bar Association; Patent Panel, American Arbitration Association.

Teaching	Adjunct Law Professor, Golden Gate University School of Law, LL.M. Taxation Program; Georgia Institute of Technology - previously taught heat and mass transfer laboratories, and analog and digital computer laboratory.

Member:	State bars of California, Arizona, Texas and Nevada; Long Beach Bar Association

(Board of Governors, 1994-95); Orange County Bar Association, Taxation Section, (Co-Chair Technology Law Section 1996); Past Member, Orange County Chapter of California Society of Enrolled Agents - President 2003-2004; Fellow, National Tax Practice Institute; California Bar Association: CEB committee (1999-2000); Income & Other Tax subcommittee (Chair 2000-2002); Taxation Section Executive Committee (2002-2005); Cal Bar Taxation Advisory Committee (2006-2011); Chair (2010-2011).