Tax Watch: Internet tax bill on the move in the Senate

The Senate Finance Committee has discharged the Internet Tax Freedom Act, a move that allows the bill to move quickly to the Senate floor. The bill would ensure that new taxes could be imposed on Internet access. It addresses all forms of access, such as broadband, cable and wireless.

The bill would permanently extend the original legislation – enacted in 1998 – which expired Nov. 1.

The Senate Commerce Committee passed the bill by voice vote July 31. The bill would amend the Internet Tax Freedom Act, which imposes a federal moratorium on state and local taxes on Internet access services, as well as on certain Internet-based sales transactions.

Tax relief offered for wildfire victims

* The Internal Revenue Service recently announced special tax relief for Southern California residents in the Presidential Disaster Area that was struck by wildfires beginning Oct. 21. That tax relief applies to all individuals and businesses in the disaster area, those whose tax records are in the disaster area and relief workers.

The IRS gives affected taxpayers until the last day of the extension period to file tax returns or make tax payments, including estimated tax payments that have either an original or extended due date falling within the period. The IRS will abate interest and any late-filing or late-payment penalties.

In a related matter, the IRS and the Department of the Treasury confirmed that taxpayers would be able to receive tax-free periodic payments from the September 11th Victim Compensation Fund. Established by Congress in 2001, the fund makes payments to victims and survivors of the terrorist attacks.

The fund, administered by a special master of the Department of Justice, initially paid out lump sums (generally $250,000 in the case of a deceased victim). But some claimants prefer to have their compensation spread out over time.

Lump-sum compensation for physical injury or death is generally tax-free. This revenue ruling clarifies that periodic payments from the fund will also be tax-free to claimants as long as they elect periodic payments before the claim is substantially complete.

To receive an award, either as a lump sum or periodic payments, a claimant generally must file a claim with the fund no later than Dec. 22.

Cite: Revenue Ruling 2003-115

Simple answer to complex issue

* In a recent technical advisory, the IRS reports several conclusions about a shareholder’s conveyance of a corporation’s stock through a partnership to a trust.

A shareholder contributed stock to a partnership in exchange for a non-managing-member interest and cash on both an execution date and an option date.

The partnership comprised two subtrusts, and it contributed stock to one.

The other subtrust issued instruments to an underwriting syndicate on both the execution date and the option date for a discount.

These interests were subsequently sold to investors for full value.

The first subtrust agreed to deliver stock, cash or a combination of the two to the second subtrust.

The investors were then entitled to receive cash or stock based on an agreed formula based on the market price of the stock.

The shareholder treated the transaction as an entry into a variable prepaid forward contract and did not report gain or loss.

The IRS concluded that the shareholder’s conveyance wasn’t a taxable sale or exchange and that the sale of the instruments to investors wasn’t a bona fide sale of stock.

It explained that the shareholder retained the right to reacquire the stock by delivering cash.

The IRS also concluded that the shareholder’s contributions and the partnership’s distributions weren’t disguised sales under the Section 707, “Related Interest Transaction,” rules and that the aggregate distributions from the partnership to the shareholder fell under Section 743, “Optional Partnership Distributions.”

Cite: Technical Advice Memorandum 200341005

Frivolous-return penalty is upheld

* The 10th U.S. Circuit Court of Appeals has upheld a summary judgment granted to the government against an individual who challenged the assessment of a frivolous-return penalty.

LaMar Lister was assessed the penalty for his 1991-95 and 1998 returns, on which he claimed that wages weren’t income.

Mr. Lister appealed the summary judgment that had been issued by a U.S. District Court, and Senior Circuit Judge Wade Brorby agreed with the lower court and once again granted summary judgment to the government.

He rejected Mr. Lister’s procedural due-process argument, stating that he had received adequate procedural protections.

The court noted that even if Mr. Lister was correct that he owed no taxes, he was still not insulated from a frivolous-return penalty.

The appeals court concluded that the IRS’ appeals officer had correctly conducted the collection-due-process hearing, and it rejected Mr. Lister’s remaining arguments as meritless.

Cite: LaMar Lister v. United States, 10th Circuit

A fake lawyer told to stop the sham

* Judge William J. Haynes Jr. of the U.S. District Court for the Middle District of Tennessee has permanently enjoined Daniel Gleason, a tax return preparer, from misrepresenting his eligibility to practice before the IRS and from guaranteeing tax refunds.

Mr. Gleason did business as Tax Toolbox Inc. and My Tax Man Inc. in Franklin, Tenn., and reportedly represented to the IRS and his customers that he was a lawyer even though he wasn’t licensed to practice law. He also guaranteed his customers refunds.

The court ordered Mr. Gleason to contact his customers and inform them of his false representation, and to provide the IRS with a client list. The court ordered him to remove all false commercial speech from his websites and to display the injunction on the sites for a year.

Cite: United States v. Daniel J. Gleason, et al., M.D. Tenn.

Woman loses bid for interest relief

* The U.S. Tax Court recently denied an individual’s request for relief from the IRS’ denial of her application for abatement of interest on a deficiency from a business partnership. The court found that the IRS hadn’t abused its discretion in denying the abatement.

Jackie Hunt claimed a loss on her 1982 (yes, 1982) tax return from Yuma Mes Jojoba Ltd. Based on another court ruling at the time, Ms. Hunt’s loss was disallowed under a partnership-level proceeding and resulted in a tax deficiency for 1982.

The IRS issued a deficiency notice for the tax plus penalties, and Ms. Hunt paid the deficiency and filed a claim for abatement of the interest. The Tax Court sustained the penalties. The IRS issued a final determination notice disallowing Ms. Hunt’s claim for interest abatement, and she petitioned the Tax Court for review.

Tax Court Judge Joseph Robert Goeke, noting that Ms. Hunt had relied solely on Section 6404 of the tax law, an area limited strictly to abatements, concluded that it didn’t apply, because its effective date was for tax years ending after July 22, 1998.

The judge, noting that Ms. Hunt had raised no other issues or facts establishing entitlement to interest abatement, concluded that she wasn’t entitled to an abatement.

Cite: Jackie H. Hunt v. Commissioner, T.C. Memo 2003-283