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Sunday, September 30, 2007


U.S. taxpayers who require an employer identification number (EIN) generally obtain one by filling out a Form SS-4 and submitting it to the IRS via mail, phone, fax, or over the internet. The IRS has now further simplified the process by allowing one to be issued immediately over the internet without using a Form SS-4. Instead, the online service prompts the taxpayer with questions, with succeeding questions varying based on the prior responses. The system also provides help screens so that the taxpayer does not have to go look at the Form SS-4 instructions to complete the answers.

At the end of the process, an EIN is issued to the taxpayer and a confirmation notice is provided which the taxpayer can view, print and/or save, so that the taxpayer does not have to wait to receive one in the mail.

An authorized person can go through the process on behalf of the taxpayer. However, in that case, no confirmation notice is immediately provided, and it is instead mailed to the taxpayer. At first review, the process does not appear to provide for issuance of an EIN to a foreign entity.

An EIN issued in any manner by the IRS (phone, fax, mail, or online) takes up to two weeks before it becomes part of the IRS' permanent records. While you can use an issued EIN immediately, you must wait until it is part of the IRS' permanent records before you can file an electronic return, make an electronic payment, or pass an IRS Taxpayer Identification Number matching program.

The online application can be accessed at or by following the links starting at

IR 2007-161

Thursday, September 27, 2007


Before the IRS can adjust or assess income taxes for a tax year, it must send a statutory notice of deficiency (also known as a "90 day letter") to the taxpayer, advising the taxpayer of its intent to assess taxes. This notice requires the IRS to wait 90 days before it can assess the taxes, during which period the taxpayer can petition the Tax Court to challenge the proposed assessment. If the taxpayer does not file a timely Tax Court petition, the only way to obtain judicial review of the tax assessment is to pay the taxes and sue for a refund in federal court. Thus, a taxpayer cannot generally obtain judicial review (without paying the tax) unless the taxpayer files a Tax Court petition within the 90 day period.

Under Code Section 6330, a taxpayer can obtain a judicial "due process" hearing in regard to the IRS seeking to levy on his or her assets. Generally, this hearing cannot be used to review the proper assessment of the tax that the IRS is trying to collect - that is, it cannot be used as a backdoor method of getting such a review outside of the above 90 day review procedures. However, Section 6330 does provide that the tax can be reviewed if the taxpayer "did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability."

In a recent Tax Court case involving Section 6330, the taxpayer did not receive his 90 day letter until 12 days before the expiration of the 90 day period due to the taxpayer moving from his last address known to the IRS. The legal issue was whether having only 12 days to file a petition with the Tax Court (which the taxpayer did not do) denied him the "opportunity to dispute" the underlying tax liability. The Tax Court ruled that 12 days was not enough to give him such an opportunity, and thus allowed review of the tax liability in the Section 6330 due process hearing.

Kuykendall, 129 T.C. No. 9 (2007)

Tuesday, September 25, 2007


Florida's scheduled vote on January 29 on a constitutional amendment to revamp its homestead property exemption tax system has been cancelled by a Tallahassee judge. The judge indicated that the amendment is confusing and misleading to voters.

One problem with the amendment is that the ballot summary doesn't tell voters that the new system will phase out the popular Save Our Homes tax cap limiting taxable homestead value increases at 3 percent a year. It is also misleading in promising "everyone" a minimum $50,000 homestead tax exemption.

This does not mean that the vote is off for good. The Florida Legislature may appeal the ruling, or simply correct the defects in its October 3 special session.

Saturday, September 22, 2007


The IRS has issued the following adjustments to certain transfer tax and foreign items that are adjusted annually based on the prior year's inflation:

GIFT TAX EXCLUSION - For gifts made in 2008, the annual gift tax exclusion will remain unchanged at $12,000 per recipient.

ANNUAL EXCLUSION FOR GIFTS TO NONCITIZEN SPOUSES. For 2008 gifts, the exclusion will be $128,000 ($125,000 in 2007).

REPORTING OF GIFTS FROM FOREIGNERS. For gifts from a nonresident alien individual or an inheritance from a foreign estate, reporting is required if the aggregate amount of gifts from that person exceeds $100,000 during the tax year. For gifts from foreign corporations and foreign partnerships, the reporting threshold amount will be $13,561 in 2008 ($13,258 in 2007).

ESTATE TAX SPECIAL USE VALUATION REDUCTION. For decedents dying in 2008, the maximum decrease in value of qualifying assets for special use valuation is $960,000 ($940,000 in 2007).

2% INTEREST RATE PORTION ON DEFERRED ESTATE TAX. In determining the part of the estate tax that is deferred on a farm or closely-held business that is subject to interest at a rate of 2% a year, the tentative tax will be computed on $1,280,000 ($1,250,000 in 2007) plus the applicable exclusion amount.

EXPATRIATION PRESUMPTIONS. Subject to certain exceptions, a tax avoidance motive is presumed for an expatriate whose average annual net income tax liability for the 5 tax years ending before the date of loss of citizenship or residency exceeds $139,000 in 2008 ($136,000 in 2007) or whose net worth on that date exceeds $2 million.

FOREIGN EARNED INCOME EXCLUSION. The foreign earned income exclusion amount increases is $87,600 in 2008 ($85,700 in 2007).

Wednesday, September 19, 2007


October 2007 Applicable Federal Rates Summary:

-Short Term AFR - Semi-annual Compounding - 4.15% (4.76%/September -- 4.94%/August -- (4.91%/July)

-Mid Term AFR - Semi-annual Compounding - 4.3% (4.73%/September -- 5.03%/August -- (4.89%/July)

-Long Term AFR - Semi-annual Compounding - 4.82% (5.03%/September -- 5.24%/August -- (5.09%/July)


Monday, September 17, 2007


Under Code Section 174, research and development expenses are immediately deductible when incurred in a trade or business. This provision will also apply to new businesses despite the fact that no trade or business was being conducted at the time, if there is a realistic prospect that the taxpayer will later enter into a trade or business utilizing the technology developed. If deductibility is not allowed under Code Section 174, the expenses usually must be capitalized into the cost of the developed technology and thus not available for immediate tax deduction.

David Saykally went into the software development business. His intent at the time he was developing his software was to license the software to a wholly owned company, which would use the software in its business. In 1995 and 1996, Saykally deducted R&D expenses of $68,000 and $1,422,000.

The IRS challenged the deductions claiming that Saykally was not going to use the developed software in his own business. The Tax Court held for the IRS, and the 9th Circuit Court of Appeals has now affirmed the Tax Court.

Therefore, software developers who incur R&D expenses for software that they will license need to be careful if they want to currently deduct those expenses. As noted in the Tax Court case, development for license is NOT necessarily fatal to a Code Section 174 deduction. In distinguishing Saykally's situation from that in Scoggins v. Commissioner, 46 F.3d 950 (9th Cir. 1995), rev'g  T.C. Memo. 1991-263, the Tax Court noted that a deduction was allowed in Scoggins even when there was a licensing arrangement because the taxpayer there still intended to otherwise use the developed technology in its own trade or business. Since Saykally had no intent to otherwise use the developed technology himself, no R&D deduction is allowable.

David M. Saykally, 100 AFTR2d Para. 2007-5250 (CA 9 8/16/2007).

Friday, September 14, 2007


The IRS has announced the interest rates for tax overpayments and underpayments for the calendar quarter beginning October 1, 2007.

For noncorporate taxpayers, the rate for both underpayments and overpayments will be 8%.

For corporations, the overpayment rate will be 7%. Corporations will receive 5.5% for overpayments exceeding $10,000. The underpayment rate for corporations will be 8%, but will be 10% for large corporate underpayments.

Rev. Rul. 2007-56

Thursday, September 13, 2007


Employers regularly adopt plans or agreements to pay compensation to one or more employees at a later point in time. Usually, the employees don't want to be taxed at the time the agreement is entered into, but only when the compensation is paid (well, they probably NEVER want to be taxed, but clearly prefer waiting until payment at least). Various provisions of the Internal Revenue Code may affect the ability to "defer" income taxation on such compensation.

One of the newest provisions is Code Section 409A, which applies to nonqualified plans (that is, deferred compensation arrangements that do not meet the specific Code requirements for retirement/deferred compensation payouts). Under Code Section 409A , all amounts deferred under a NQDC plan are currently includible in income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income, unless the plan (a) meets certain stated distribution, acceleration of benefit, and election requirements, and (b) is operated in accordance with these requirements.

In 2007, the IRS issued regulations under Code Section 409A that required that all plans be in writing and contain requirements provided for in those regulations. Initially, it gave taxpayers until January 1, 2008 to get compliant plans in place.

Acknowledging that this was too quick a deadline, the IRS has now extended the written plan deadline until December 31, 2008. Taxpayers have until that date to adopt a fully complying written plan if (1) the plan is operated in accordance with the requirements of Section 409A and applicable regulations and guidance through that date, and (2) the plan is amended on or before December 31, 2008 to comply retroactively to January 1, 2008. However, to use this extended time period, taxpayers must still comply with certain written designation of a time and form of payment requirements by January 1, 2008.

Undoubtedly, there are numerous employers who may have plans or agreements as to paying deferred compensation but who are not aware of Code Section 409A and/or its written plan requirements. If there is any question, such employers should consult with their tax counsel soon to determine whether they come within Code Section 409A, and if yes, to assist with the preparation of a complying written plan.

Notice 2007-78

Monday, September 10, 2007


One of the more ridiculous notions out there is that tax planning techniques can be patented. Whether they can be patented as a legal matter is presently a disputed issue - the layman has to wonder, however, how someone can "own" a series of financial, trust, or asset transactions that are designed to achieve tax benefits. The uncertainty hasn't stopped some attorneys and other professionals from seeking patent protection for techniques they claim to have invented.

A measure of sanity may soon be arriving. Last week, the House of Representatives enacted legislation that, at least on a prospective basis, declares that tax planning techniques cannot be patented. Hopefully, this will pass into law.

The current version of the law does not disturb prior patents - although it does say that it should not be interpreted as to validate prior tax planning patents.

H.R.1908, the Patent Reform Act of 2007

Wednesday, September 05, 2007


According to the Summer 2007 of the IRS Statistics of Income, a significant reduction in federal estate tax returns has occurred in the new millennium.

The total number of estate tax returns filed fell by 58 percent to about 45,000 in 2005 from about 108,000 in 2001. The total amount of assets represented by these returns also fell but by far less. Total gross estate (assets) on these returns fell by 14 percent to $185 billion in 2005 from $216 billion in 2001. Meanwhile, net estate taxes reported on these returns declined by even less, only 8 percent.

The reduction in returns filed is due to the steady increase in the unified credit equivalent amount allowed for federal estate taxes from $600,000 to $1.5 million for decedents dying in 2005. Since estates with less than the available credit equivalent in assets do not need to file, increases in the credit result in few returns.

It is likely that this trend will continue as the exemption continues to grow (through 2009). The current credit equivalent amount is $2 million.

Sunday, September 02, 2007


The IRS trusts tournament poker winners to pay income taxes on their winnings as much as it trusts other gamblers. That is, it doesn't trust them at all.

In a recently issued Revenue Procedure, the IRS is requiring tournament operators to withhold 25% of poker winnings if the proceeds are more than $5,000 over the entrance fee. Information reporting to the IRS about such payments are also required. Rev. Proc. 2007-57, 2007-36 IRB 547.

Gamblers shouldn't feel slighted –Congress really doesn't trust the average U.S. wage earner either, per its continued retention of the wage withholding system. However, some believe that the wage withholding system is not based on a lack of trust but on a belief that the U.S. taxpayer will be more accepting of higher income tax rates if their employers pay the taxes( instead of the wage earner writing a check out of his or her own bank account).

This has not been a good tax year for tournament poker players. Earlier this year, the Tax Court held that tournament poker is a wagering activity, losses from which are subject to the limits of deduction under Code Section 165(g). Under Section 165(g), such losses can only be used to offset winnings – losses in excess of winnings are disallowed. Tschetschot, TC Memo 2007-38.