Thursday, January 29, 2015

The Law is an Ass

The law is an ass, or so says Charles Dickens. After reading the IRS’ latest missive on sales of marijuana, I think I agree.

The tension between federal and state law on the sale of marijuana carries over to federal income taxes. While the sale of marijuana is legal in some states at varying levels (e.g., medical use only vs. recreational use), it is still a controlled substance under federal criminal law. Thus, a state-legal marijuana seller is still an illegal enterprise. Interestingly, under federal tax law, the proceeds of criminal operations are still subject to income tax – as Al Capone learned.

Complicating the life of an illegal drug seller is Code Section 280E that says a taxpayer may not deduct any amount for a trade or business when the business consists of trafficking in Schedule I or Schedule II controlled substances.However, due to constitutional concerns that the income tax cannot be a gross receipts tax, the Senate Report to that code section said the reduction of gross receipts by the cost of goods sold should still be allowed.

A few years later, the uniform capitalization rules of Code Section 263A were enacted. These rules can create reduction in income from the sale of goods by capitalizing expenses that previously would not be included in cost of goods sold.

So getting us to the recent announcement, the IRS is now advising that these new expenses that would be capitalized under Code Section 263A cannot be capitalized for persons selling marijuana, because this would allow a taxpayer to have more in deductions than Code Section 280E should allow under the extra-official allowance of a reduction for cost of goods sold that is allowed by a mere Senate Report and not the law itself. Did I lose you? To implement this ridiculousness, the IRS is telling taxpayers to use the “old” Code Section 471 rules (under regulations issued before Code Section 263A) in determining what goes into cost of goods sold for these taxpayers. This doesn’t even get to the craziness of applying an anti-drug dealer provision of the Code (Code Section 280E) to businesses authorized under state law.

The IRS also struggled with the question of whether sellers of marijuana that nonetheless still use the cash method of accounting, should be forced onto the inventory/accrual method so as to be able to get these reductions. Persons that have that as an issue should consult the IRS pronouncement.

Chief Counsel Advice 201504011

Saturday, January 24, 2015

Applicable Federal Rates–February 2015

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Monday, January 19, 2015

No Private Letter Rulings in These Estate Planning Areas

Taxpayers who have questions about the applicability of tax law can submit a Private Letter Ruling request to the IRS. If the IRS rules, then the taxpayer can rely on the ruling as to how the law applies to their situation (although other taxpayers may not rely on the ruling). In recent years, the cost of applying has become very expensive. Nonetheless, under the right circumstances, a Private Letter Ruling can provide value and important guidance to taxpayers.

The IRS publishes a list annually of items that they will not rule on. This year, the IRS added two new estate planning issues to the list. These new additions are rulings on:

  1. Actuarial factors for valuing interests in the prospective gross estate of a living person; and
  2. Classification for Federal tax purposes of a fideicomiso or other land trust created under local law, applying the principles of Rev. Rul. 2013-14, 2013-26 I.R.B. 1267 (relating to whether certain Mexican land trusts should be characterized as a trust under the Internal Revenue Code), or Rev. Rul. 92-105, 1992-2 C.B. 204 (relating to whether a taxpayer's interests in an Illinois land trust qualified as real property for purposes of a Section 1031 exchange).

Thus, taxpayers with questions in this area will not be able to receive the benefit of a Private Letter Ruling.

Rev Proc 2015-3, 2015-1 IRB 129 (Jan. 2, 2015)