Tax Watch: Be glad your call to IRS wasn’t answered

A recent Department of the Treasury study found that taxpayers have less than a 40% chance of speaking with an Internal Revenue Service official when they call. Those who manage to get through receive wrong answers to their questions nearly half the time.

Over a recent four-day period, auditors were unable to get through to an IRS employee on 37% of 368 test calls made to the agency’s toll-free number, David C. Williams, the Treasury inspector general for tax administration, recently told the House Ways and Means subcommittee on oversight.

When the auditors did reach someone, IRS officials gave the wrong answer 47% of the time. That happened even though the questions were drawn directly from the agency’s own list of frequently asked questions.

IRS Commissioner Charles Rossotti said that overall response and accuracy rates for this year’s tax filing season were actually far better than in the Treasury Department’s test, although he acknowledged there is vast room for improvement in the agency’s telephone service.

Through March 9, Mr. Rossotti said, about 65% of taxpayers who wanted to talk to an IRS employee were able to get through. That is comparable to an access rate of about 62% at the same point in 2000 but far below private-sector rates, which are typically at least 90%.

Middlemen get additional tasks

* Just as taxpayers were beginning to believe that they had fulfilled their tax obligations, the IRS published an announcement making more work for banks, brokers and other middlemen who report discounts on Treasury bill redemptions.

It requires the middlemen, who report discounts on Treasury bill redemptions on Form 1099-INT, to use the owner’s purchase price, where available, to determine the amount of discount to report. This information, according to the IRS, can usually be obtained from the owner’s or middleman’s records.

If the owner’s purchase price is not available from existing records, however, the middleman must report the discount as if the holder had purchased the Treasury bill at its original issue price. In such a case, the middleman must use as the original issue price the non-competitive issue price for the longest-maturity Treasury bill maturing on that date.

For Treasury bill redemptions when the owner’s purchase price cannot be determined, the IRS has provided a list giving the non-competitive issue prices and corresponding amounts of discount to be reported on Form 1099-INT for Treasury bills maturing May through July 2001.

That list, which should also help middlemen determine any amounts subject to backup withholding, supplements the list that appears in the 2000 edition of Publication 1212, List of Original Issue Discount Instruments.

Cite: Announcement 2001-29

Generous employer beats IRS in court

* The U.S. Tax Court recently ruled that amounts used to purchase gift certificates for corporate customers are deductible only to the extent of the $25 limitation; nut baskets are fully tax deductible; and $100 bills given to employees as bonuses are deductible as compensation.

Ronald Leschke is the sole shareholder of an S corporation, R&J Transport Inc. Mr. Leschke filed joint returns with his wife, Sue, claiming various deductions passing through from R&J. R&J purchased 36 gift certificates, valued at $210 each, and gave them as promotional items to corporate customers.

R&J deducted $7,606 for the gift certificates as an advertising expense in 1993.

Also, during 1993 and 1994, R&J gave nut baskets to 166 non-employees and 44 employees as promotional Christmas gifts, deducting $7,500 in 1993 and $5,310 in 1994 as administrative expenses.

Finally, R&J distributed Christmas bonuses of $100 bills to 42 employees in 1993 and again deducted the amount as an administrative expense and didn’t include the amount in the wages of the recipients.

On audit, the IRS allowed R&J deductions of $25 each for the gift certificates. The IRS allowed deductions in 1993 for $25 per basket for 166 baskets, and in 1994, it allowed a deduction of $25 per basket for all 210 baskets. Finally, the IRS disallowed the entire deduction claimed for the Christmas bonuses.

Senior Tax Court Judge Arthur L. Nims III noted that the distribution of gifts or bonuses to customers and employees has long been accepted as an ordinary and necessary business practice and that those gifts and bonuses were given around Christmastime.

The court first determined that the gift certificates are deductible only to the extent of the $25 limitation in the tax rules.

Next, the judge held that the gift nut baskets are not gifts within the meaning of the tax law and not subject to the $25 limitation. Thus, a deduction of $61 is allowed.

Finally, the court allowed the full deduction for the $100 bills given to the employees.

Cite: Ronald Leschke, et ux., v. Commissioner, T.C. Memo 2001-18

Judge knocks down money-hiding plan

* A federal court has upheld the validity of the government’s tax assessments against a couple and cleared the way for the foreclosure of liens against property that they had transferred to an alter-ego trust.

Roy and Dixie Lee Powell were convicted of willfully failing to file tax returns. The Powells failed to pay the assessed amounts, and the government sought to foreclose tax liens against eight properties that the couple transferred to an alleged trust after the assessments were made. The government moved for summary judgment.

U.S. District Judge Raner C. Collins ruled that the government’s tax assessments were valid and that the income the Powells received during the years at issue was not exempt from taxation.

The court also held that the tax liens could attach to the properties that were transferred to the Motoqua Common Law Trust because the trust was the couple’s “alter ego.”

The court noted that the Powells continued to treat the transferred property as if it belonged to them.

Thus, the court ruled, the properties were properly subject to foreclosure and sale.

Cite: United States v. Roy C. Powell, et ux., D. Ariz.

Court deconstructs tax restructuring

* The 6th U.S. Circuit Court of Appeals has affirmed an individual’s federal court conviction and sentence for aiding and assisting in the preparation of false income tax returns and mail fraud for his novel “tax restructuring program.”

According to court documents, Richard Parris would establish, for $3,000, an S corporation that “employed” the client and a limited partnership that “owned” the client’s personal residence and rented it to the S corporation.

As a result, the client would be living at the S corporation’s “headquarters” for its benefit, and the S corporation would claim most of the client’s personal living expenses as business deductions.

The S corporations were designed to generate no money, and they generated losses for their owners, drastically reducing their taxes.

Circuit Judge Boyce F. Martin Jr. stated that he failed to see how Mr. Parris could reasonably believe that the scheme was legal. Agreeing with the district court, the judge concluded that Mr. Parris willfully disregarded the Internal Revenue Code, pretending it sanctioned an arrangement that he knew it did not.

Cite: United States v. Richard J. Parris, 6th Circuit