To Practitioners' Dismay, Form 1099 Question Returns on Tax Forms

Practitioners continue to be concerned about tax form questions on whether any payments requiring disclosure on Form 1099 have been made and whether all Form 1099s have been filed. The question first popped up on 2011 tax forms and has returned on the same forms for 2012.

The 2012 Forms 1065, 1120 and 1120S contain the following questions: "Did you make any payments in 2012 that would require you to file Form(s) 1099?" and "If 'Yes,' did or will the corporation file required Forms 1099?" The questions also appear on Form 1040, Schedule C. The arrival of these questions last year coincided with an increase in the penalties, effective in 2011, for failing to file correct information returns and payee statements. Practitioners are rightly concerned that their clients may not be focused enough on the ramifications of not correctly reporting Form 1099 income and on their own liability for checking these boxes.

PRACTICE AID: See ¶320,690 for a client letter which explains the requirement to file Form 1099 and the significance of the 1099 question on the various returns.

For example, how should a contractor, who sporadically picks up day laborers during the year to perform occasional work, answer the questions? If any of these day laborers are picked up several times during the year, the amounts paid to that worker will most likely exceed $600 so that the contractor is responsible for issuing a Form 1099-MISC to that individual.

PRACTICE TIP: Practitioners should advise their clients to have non-employee laborers or workers complete a Form W-9 if they believe payments to any individual might add up to $600 or more for the year. To the extent anyone is paid more than $600, a Form 1099-MISC should then be issued at the end of the year. Practitioners should also document in their files that they've had this discussion with clients and may want to consider revising their engagement letter to reflect the documentation a client will need in order to take certain deductions on the return.

A person that fails to file a correct information return by the due date and cannot show reasonable cause may be subject to a penalty. The penalty applies if the person fails to file timely, fails to include all information required to be shown on a return, or includes incorrect information on a return. The penalty also applies if a person files on paper when required to file electronically, reports an incorrect taxpayer identification number (TIN) or fails to report a TIN, or fails to file paper forms that are machine readable. The amount of the penalty is based on when the correct information return is filed. For returns required to be filed on or after January 1, 2011, the penalty is:

(1) $30 per information return for returns filed correctly within 30 days after the due date (by March 30 if the due date is February 28), with a maximum penalty of $250,000 a year ($75,000 for certain small businesses);

(2) $60 per information return for returns filed more than 30 days after the due date but by August 1, with a maximum penalty of $500,000 a year ($200,000 for certain small businesses); and

(3) $100 per information return for returns filed after August 1 or not filed at all, with a maximum penalty of $1,500,000 a year ($500,000 for certain small businesses).

For this purpose, a business is a small business for any calendar year if its average annual gross receipts for the most recent three tax years (or for the period it was in existence, if shorter) ending before the calendar year do not exceed $5 million.

Persons who are required to file information returns electronically but who fail to do so (without an approved waiver) are treated as having failed to file the return, and are therefore subject to a penalty of up to $100 per return unless the person shows reasonable cause for the failure. However, they can file up to 250 returns on paper; those returns will not be subject to a penalty for failure to file electronically. The penalty applies separately to original returns and corrected returns.

For each fifth calendar year beginning after 2012, each of the dollar amounts described above is subject to indexing for inflation.

The penalty for failure to include the correct information on a return does not apply to a de minimis number of information returns with such failures if the failures are corrected by August 1 of the calendar year in which the due date occurs. The number of returns to which this exception applies cannot be more than the greater of 10 returns or 0.5 percent of the total number of information returns required to be filed for the year.

The penalty for a failure to include the correct information on a return does not apply to inconsequential errors or omissions. If a failure to file a correct information return is due to an intentional disregard of one of the requirements (i.e., it is a knowing or willing failure), the penalty is the greater of $250 per return or the statutory percentage of the aggregate dollar amount of the items required to be reported (the statutory percentage depends on the type of information return at issue). In addition, in the case of intentional disregard of the requirements, the $1,500,000 limitation does not apply.

For a discussion of the reporting requirements for Form 1099-MISC, see Parker Tax ¶252,565.

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IRS to Begin Processing Tax Returns on January 30; But Some Forms Won't Be Accepted Until Late February at the Earliest

Following the January tax law changes, the IRS has announced that it plans to open the 2013 filing season and begin processing individual income tax returns on January 30. Some forms, however, won't be accepted until late February at the earliest. IR-2013-2 (1/8/13).

The IRS announced that it will begin accepting tax returns on January 30 after updating forms and completing programming/testing of its processing systems. These updates will reflect the bulk of the late tax law changes enacted January 2. The announcement means that the vast majority of tax filers -- more than 120 million households -- should be able to start filing tax returns starting January 30.

The IRS estimates that remaining households will be able to start filing in late February or into March because of the need for more extensive form and processing systems changes. This group includes people claiming residential energy credits, depreciation of property or general business credits. Most of those in this group file more complex tax returns and typically file closer to the April 15 deadline or obtain an extension.

The IRS will not process paper tax returns before the anticipated January 30 opening date. There is no advantage to filing on paper before the opening date, and taxpayers will receive their tax refunds much faster by using e-file with direct deposit. The opening of the filing season follows passage by Congress of an extensive set of tax changes in American Taxpayer Relief Act of 2012 on January 1, 2013, with many affecting tax returns for 2012. While the IRS worked to anticipate the late tax law changes as much as possible, the final law required that the IRS update forms and instructions as well as make critical processing system adjustments before it can begin accepting tax returns.

According to the IRS, there are several forms affected by the late legislation that require more extensive programming and testing of IRS systems. The IRS said it hopes to begin accepting tax returns including these tax forms between late February and into March and will announce a specific date in the near future.

The key forms that require more extensive programming changes include Form 5695, Residential Energy Credits, Form 4562, Depreciation and Amortization, and Form 3800, General Business Credit. A full listing of the forms that won't be accepted until later is available on IRS.gov.

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IRS Releases New Tax Tables and Remaining Inflation Adjusted Amounts for 2013

Now that the American Taxpayer Relief Act (Pub. L. 112-240) has been signed into law, the IRS has released the remaining 2013 inflation-adjusted numbers, including the 2013 tax rates. Rev. Proc. 2013-15.

Last October, the IRS issued inflation adjusted numbers for 2013. However, because of the uncertainty about the fiscal cliff and 2013 tax rates, the IRS withheld releasing some of those numbers. Now the IRS has released Rev. Proc. 2013-15, which provides the remaining 2013 inflation-adjusted numbers, including the 2013 tax rates. In addition, a change was made for 2012 relating to the amount excludible from income for the qualified transportation fringe benefit.

2013 Tax Rates

All 2013 tax rate tables for individuals, estates, and trusts reflect the new 39.6% maximum rate, which begins at the following levels of taxable income:

MFJ and Surviving Spouses - $450,000

Heads of Households - $425,000

Unmarried Individuals - $400,000

Married Filing Separately - $225,000

Estates and Trusts - $11,950

For full 2013 tax rate tables, see Parker Tax ¶19,114 for individuals, and Parker Tax ¶51,103 for estates and trusts.

Adoption Credit

For tax years beginning in 2013, the credit allowed for an adoption of a child with special needs is $12,970. For tax years beginning in 2013, the maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $12,970. The available adoption credit begins to phase out for taxpayers with modified adjusted gross income in excess of $194,580 and is completely phased out for taxpayers with modified adjusted gross income of $234,580 or more.

Child Tax Credit

For tax years beginning in 2013, the value used to determine the amount of the child tax credit that may be refundable is $3,000.

Earned Income Credit

For tax years beginning in 2013, the maximum earned income credit amounts are as follows:

No Qualifying Children - $487

One Qualifying Child - $3,250

Two Qualifying Children - $5,372

Three or more Qualifying Children - $6,044

The earned income tax credit is not allowed in 2013 if the aggregate amount of certain investment income exceeds $3,300.

See Parker Tax ¶360,840 for 2013 AGI phaseout ranges for the earned income tax credit.

Hope Scholarship, American Opportunity, and Lifetime Learning Credits

For tax years beginning in 2013, the Hope Scholarship Credit is an amount equal to 100 percent of qualified tuition and related expenses not in excess of $2,000 plus 25 percent of those expenses in excess of $2,000, but not in excess of $4,000. Accordingly, the maximum Hope Scholarship Credit for tax years beginning in 2013 is $2,500.

A taxpayer's modified adjusted gross income in excess of $80,000 ($160,000 for a joint return) is used to determine the reduction in the amount of the Hope Scholarship Credit otherwise allowable. A taxpayer's modified adjusted gross income in excess of $53,000 ($107,000 for a joint return) is used to determine the reduction in the amount of the Lifetime Learning Credit otherwise allowable.

Exemption Amounts for Alternative Minimum Tax

For tax years beginning in 2013, the AMT exemption amounts are:

MFJ or Surviving Spouses - $80,800

Heads of Households - $51,900

Unmarried Individuals - $51,900

Married Filing Separately - $40,400

Estates and Trusts - $23,100

The excess taxable income above which the 28 percent tax rate applies is $89,750 for married individuals filing separate returns and $179,500 for joint returns, unmarried individuals (other than surviving spouses), and estates and trusts.

The amounts used under Code Sec. 55(d)(3) to determine the phaseout of the exemption amounts begins at the following AGI levels: MFJ and surviving spouses - $153,900; unmarried individuals and heads of households - $115,400; MFS, estates, and trusts - $76,950.

Standard Deduction

For tax years beginning in 2013, the standard deduction amounts are as follows:

MFJ and Surviving Spouses - $12,200

Heads of Households - $8,950

Unmarried Individuals - $6,100

Married Filing Separately - $6,100

The standard deduction amount for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of (1) $1,000, or (2) the sum of $350 and the individual's earned income.

The additional standard deduction amount for the aged or the blind is $1,200. The additional standard deduction amount is increased to $1,500 if the individual is also unmarried and not a surviving spouse.

For tax years beginning in 2013, the applicable amounts that are used to determine the phaseout of the deductions are $300,000 in the case of a joint return or a surviving spouse, $275,000 in the case of a head of household, $250,000 in the case of an unmarried individual, and $150,000 in the case of a married individual filing a separate return.

Qualified Transportation Fringe Benefit

For tax years beginning in 2013, the monthly limitation regarding the aggregate fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass is $245. The monthly limitation regarding the fringe benefit exclusion amount for qualified parking is also $245.

For tax years beginning in 2012, the monthly limitation regarding the aggregate fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass is $240. The monthly limitation regarding the fringe benefit exclusion amount for qualified parking is also $240 for 2012.

Adoption Assistance Programs

For tax years beginning in 2013, the amount that can be excluded from an employee's gross income for the adoption of a child with special needs is $12,970. For tax years beginning in 2013, the maximum amount that can be excluded from an employee's gross income for the amounts paid or expenses incurred by an employer for qualified adoption expenses furnished pursuant to an adoption assistance program for other adoptions by the employee is $12,970. The amount excludable from an employee's gross income begins to phase out for taxpayers with modified adjusted gross income in excess of $194,580 and is completely phased out for taxpayers with modified adjusted gross income of $234,580 or more.

Personal Exemption Phaseout

For tax years beginning in 2013, the personal exemption amount is $3,900. The AGI phaseout ranges for personal exemptions are as follows:

MFJ or Surviving Spouses - $300,000 to $422,500

Heads of Households - $275,000 to $397,500

Unmarried Individuals - $250,000 to $372,500

Married Filing Separately - $150,000 to 211,250

Interest on Education Loans

For tax years beginning in 2013, the $2,500 maximum deduction for interest paid on qualified education loans begins to phase out for taxpayers with modified adjusted gross income in excess of $60,000 ($125,000 for joint returns), and is completely phased out for taxpayers with modified adjusted gross income of $75,000 or more ($155,000 or more for joint returns).

Unified Credit Against Estate Tax

For an estate of any decedent dying during calendar year 2013, the basic exclusion amount is $5,250,000 for determining the amount of the unified credit against estate tax under Code Sec. 2010.

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IRS Provides Safe-Harbor Method for Calculating Home Office Deductions

Under a safe harbor method for calculating a home office deduction, a taxpayer determines the allowable deduction by multiplying a prescribed rate by the square footage of the portion of the taxpayer's residence used for business purposes. Rev. Proc. 2013-13.

Under Code Sec. 280A(c)(1), a taxpayer can deduct expenses that are allocable to a portion of a dwelling unit that is exclusively used on a regular basis (1) as the taxpayer's principal place of business for any trade or business, (2) as a place to meet with the taxpayer's patients, clients, or customers in the normal course of the taxpayer's trade or business, or (3) in the case of a separate structure that is not attached to the dwelling unit, in connection with the taxpayer's trade or business. The amount deductible is limited to the gross income derived from that activity reduced by (1) the deductions allocable to the use that are allowable for the tax year whether or not the unit is used in the activity (for example, deductions for qualified residence interest, property taxes, and casualty losses); and (2) the allowable trade or business expenses that are not allocable to the use of the dwelling unit for the tax year (for example, advertising, wages, and supplies).

According to the IRS, it recognizes that the calculation, allocation, and substantiation of allowable home office deductions can be complex and burdensome for small business owners. Accordingly, the IRS issued Rev. Proc. 2013-13, which provides an optional safe-harbor method to reduce the administrative, recordkeeping, and compliance burdens of determining the allowable deduction for certain business use of a residence under Code Sec. 280A. Under the safe-harbor method, the taxpayer determines the allowable deduction for business use of a residence by multiplying a prescribed rate by the square footage of the portion of the taxpayer's residence that is used for business purposes.

Rev. Proc. 2013-13 applies to a taxpayer who is an individual and who elects to use the safe-harbor method provided by the revenue procedure to determine the deduction allowable under Code Sec. 280A for the taxpayer's qualified business use of a home for the tax year. For this purpose, "qualified business use" means (1) business use that satisfies the requirements of Code Sec. 280A(c)(1); (2) business storage use that satisfies the requirements of Code Sec. 280A(c)(2); or (3) day care services use that satisfies the requirements of Code Sec. 280A(c)(4).

A taxpayer determines the amount of deductible expenses for a qualified business use of the home for the tax year under the safe-harbor method by multiplying the allowable square footage by the prescribed rate. The allowable square footage is the portion of a home used in a qualified business use of the home, but not to exceed 300 square feet. The prescribed rate is $5, but the IRS said it may update this rate from time to time as warranted. This safe-harbor method is an alternative to the calculation and allocation of actual expenses otherwise required by Code Sec. 280A. Accordingly, a taxpayer electing the safe-harbor method for a tax year generally cannot deduct any actual expenses related to the qualified business use of that home for that tax year.

For a discussion of the rules for taking a home office deduction, see Parker Tax ¶85,505.

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Tax-Free Transfers to Charity Renewed for IRA Owners 70 1/2 or Older; January 2013 Rollovers Can Count for 2012

Certain owners of individual retirement arrangements (IRAs) have a limited time to make tax-free transfers to eligible charities and have them count for the 2012 tax year. IR-2013-6 (1/16/13).

IRA owners age 70or older have until Thursday, January 31 to make a direct transfer, or alternatively, if they received IRA distributions during December 2012, to contribute, in cash, part or all of the amounts received to an eligible charity.

The American Taxpayer Relief Act of 2012, enacted January 2, extended for 2012 and 2013 the provision authorizing qualified charitable distributions (QCDs)otherwise taxable distributions from an IRA owned by someone, 70 1/2 or older, paid directly to an eligible charitable organization. Each year, the IRA owner can exclude from gross income up to $100,000 of these QCDs. First available in 2006, this provision had expired at the end of 2011.

The QCD option is available regardless of whether an eligible IRA owner itemizes deductions on Schedule A. Transferred amounts are not taxable and no deduction is available for the transfer. QCDs are counted in determining whether the IRA owner has met his or her IRA required minimum distributions for the year. For tax-year 2012 only, IRA owners can choose to report QCDs made in January 2013 as if they occurred in 2012. In addition, IRA owners who received IRA distributions during December 2012 can contribute, in cash, part or all of the amounts distributed to eligible charities during January 2013 and have them count as 2012 QCDs. QCDs are reported on Form 1040, Line 15. The full amount of the QCD is shown on Line 15a. Taxpayers should not enter any of these amounts on Line 15b but write "QCD" next to that line.

For a discussion of QCDs, see Parker Tax ¶134,560.

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Renting Replacement Property to Son Didn't Preclude Section 1031 Gain Deferral

Even though replacement property was occupied by the taxpayer's son, the property was still investment property and qualified for like-kind exchange treatment. Adams v. Comm'r, T.C. Memo. 2013-7 (1/10/13).

In 1963, William Adams bought a house in San Francisco for $26,000. He and his family lived in the house until 1979, when they moved to Rohnert Park, California. Soon after moving to Rohnert Park, William rented the San Francisco house to an acquaintance. During the period that he rented out the house (1979 to 2003), William made various improvements to it and claimed $26,000 of depreciation over that period. After the renter moved out in 2003, William decided to sell the San Francisco house. He consulted a real estate broker to help him with the sale. At the broker's suggestion, William engaged an intermediary known as a 1031-exchange facilitator to reduce the income tax on the gain from the sale of the San Francisco house. The sale of the San Francisco house and the purchase of another home took place through the intermediary. William sold the San Francisco house on June 17, 2004, for $572,000. Within 45 days, he identified a property to buy (through the intermediary) and subsequently bought a house in Eureka, California, for $340,000. William's son Bill, who had extensive homebuilding and home renovation experience, lived in Eureka, and William thought buying a house in Eureka would be advantageous because Bill could manage its rental to a third party or even be the tenant himself. William chose the particular house because of its size: With five bedrooms, it suited Bill's large family.

The Eureka house was old, dilapidated, and moldy. Much work was required to make it livable. Bill and his family began working on the Eureka house in July 2004. They worked an aggregate of 60 hours per week on the property during July, August, and September 2004. Among other things, they repaired mold damage, replaced broken doors, fixed holes in walls, and repaired rotten subflooring. They exterminated rats and other pests and, on one occasion, even chased away a bear. Their efforts made the house livable. For July, August, and September 2004, William accepted the services performed by Bill and his family in lieu of monetary rent. William did not reimburse them for the labor and out-of-pocket costs of the home improvements. The three months of services were worth $3,600. In October 2004, Bill and his family started living in the Eureka house and paying monetary rent. They paid $1,200 per month in October, November, and December 2004. They continued to pay rent of $1,200 per month--with one exception--until they moved out in early 2008. Bill and his family also continued to maintain and conduct home improvement work on the Eureka house until they moved out. Similar houses in the neighborhood rented for a few hundred dollars more than $1,200 per month. However, the tenants did not maintain or conduct home improvement on the houses. In the meantime William continued to live in Rohnert Park, where he had moved in 1979.

William reported $169,755 of capital gain from the sale of the San Francisco house and $340,000 of deferred gain. Upon audit, the IRS treated the entire $572,000 of sale proceeds from the San Francisco house as ordinary income.

William argued that the sale of the San Francisco house and the purchase of the Eureka house was a valid Code Sec. 1031 exchange that qualified for nonrecognition treatment. He claimed that both the San Francisco house and the Eureka house were held for productive use in a trade or business or for investment within the meaning of Code Sec. 1031. For the Eureka house in particular, William asserted that he charged fair market rent to Bill and his family, considering the condition of the house and the home-improvement work Bill and his family performed. William also argued that the boot from the Code Sec. 1031 exchange (i.e. the property he received other than the Eureka house) should be treated as capital gain, not ordinary income.

The IRS argued that the sale of the San Francisco house and the purchase of the Eureka house did not qualify as a Code Sec. 1031 exchange because William acquired the Eureka house for personal purposes--i.e., "with the intention of letting his son and family live there at below market rent." Thus, the IRS asserted that William had to recognize gain on the sale of the San Francisco house.

The Tax Court held that William bought the Eureka house "for investment" within the meaning of Code Sec. 1031(a)(1). In determining whether William intended to hold the acquired property for investment in a Code Sec. 1031 exchange, the court considered William's intent at the time of the exchange. The court noted that a taxpayer's conduct before and after an exchange can help determine the taxpayer's intent. Although William chose the Eureka house because Bill and his family lived in Eureka and the house suited Bill's large family, the court did not believe William intended to charge Bill and his family below-market rent. The monthly rent of $1,200 was a fair rental value, the court said, because Bill and his family assumed substantial responsibilities for renovating, maintaining, and repairing the Eureka house. Even though William stated that the rental of the Eureka house was a "gift" when pressed on cross-examination, the court construed his testimony to mean that he wished to offer Bill reduced rent in exchange for working on the house. Thus, the court concluded that the sale of the San Francisco house and the purchase of the Eureka house constituted a valid Code Sec. 1031 exchange of like-kind property to be held "for investment." However, the court also found that William had to recognize gain to the extent of the boot he received in the exchange. Of the total boot received, $26,000 (i.e., depreciation taken) was ordinary income and the remaining amount was capital gain.

For a discussion of the requirements for a valid like-kind exchange, see Parker Tax ¶113,130.

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IRS Updates Scholarship Guidance for Learning-Through-Working Programs

Rev. Rul. 64-54 is still the published position of the IRS, and taxpayers in a learning-through-working program may continue to rely on it and exclude certain payments from income. CCA 201302023.

In Rev. Rul. 64-54, the IRS held that the value of tuition and work payments granted to students enrolled in a course of study at a college having no tuition charge and requiring all students to participate in a work program that implements its educational philosophy are scholarship payments that are excludible from income under Code Sec. 117. The learning-through-working program (LTWP) described in Rev. Rul. 64-54 was an integral part of the school's overall scholastic program, and the primary purpose of the student work program was to further the education and training of the students in their individual capacities.

A question arose as to whether Rev. Rul. 64-54 is still the published position of the IRS and whether taxpayers falling within its scope may continue to rely on it. According to the Office of Chief Counsel, Rev. Rul. 64-54 is still the published position of the IRS, and taxpayers falling within its scope may continue to rely on it. Thus, any LTWP payments applied to tuition or related expenses are still covered by Code Sec. 117(a) and are not subject to income tax.

However, the Chief Counsel's Office added a caveat to its ruling. To the extent any LTWP payments are applied to room and board, those payments are not excludible under Code Sec. 117(a) and are subject to income taxes.

For a discussion of the exclusion from income of scholarship payments, see Parker Tax ¶77,315.

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Chief Counsel Clarifies What Constitutes an On-Site Sale for Uniform Cap Purposes

A reseller does not have to capitalize handling and storage costs relating to an on-site sale; a sale is considered on-site when the retail customer is physically present at the sales facility at any point during the sales transaction. CCA 201302018.

Generally, under the uniform capitalization rules, a taxpayer that acquires property for resale (reseller) must capitalize the acquisition cost of, and the indirect costs that are properly allocable to, property acquired for resale. The indirect costs most often incurred by resellers are purchasing, handling, and storage costs. However, a reseller is generally not required to capitalize handling and storage costs attributable to property sold in on-site sales. On-site sales are defined in Reg. Sec. 1.263A-3(c)(5)(ii)(D) as sales made to retail customers physically present at a facility. For example, mail order and catalog sales are made to customers not physically present at the facility, and thus, are not on-site sales. Reg. Sec. 1.263A-3(c)(5)(ii)(E)(1) defines a retail customer as the final purchaser of the merchandise.

In CCA 201302018, a retailer sells goods to retail customers from its physical store. While physically present at the sales facility, retail customers may select, inspect, purchase, or take possession of the goods in connection with sales transactions. The following four fact patterns were presented:

(1) The retail customer physically visits the sales facility to select, inspect, and purchase goods. The retail customer takes possession of these goods at the time of purchase.

(2) The retail customer physically visits the sales facility to select and inspect goods. While physically present at the sales facility, the retail customer fills out a purchase order form agreeing to pay for the goods upon delivery. The retail customer pays for the goods from sales facility when the goods are delivered.

(3) The retail customer selects and purchases goods over the internet from the sales facility. The retail customer physically visits the sales facility to inspect and take possession of these goods.

(4) The retail customer selects goods advertised in a catalog and orders these goods by mail from the sales facility. The retail customer does not physically visit the sales facility at any time to select, inspect, purchase, or take possession of these goods. The purchased goods from sales facility are delivered to the retail customer.

The Office of Chief Counsel advised that, for purposes of Reg. Sec. 1.263A-3(c)(5)(ii)(D), a sale is an on-site sale, and thus a reseller does not have to capitalize handling and storage costs relating to the sale, when the retail customer is physically present at the sales facility at any point during the sales transaction. In the four fact patterns presented, the Chief Counsel's Office concluded the following for each scenario:

(1) The sale is an on-site sale because the retail customer is physically present at the sales facility to select, inspect, purchase, and take possession of the goods.

(2) The sale is an on-site sale because the retail customer is physically present at the sales facility to select and inspect the goods as well as fill out a purchase order form for the goods.

(3) The sale is an on-site sale because the retail customer is physically present at the sales facility to inspect and take possession of the goods selected and purchased at an earlier time.

(4) The sale is not an on-site sale because the retail customer is not physically present at the sales facility at any point during the sales transaction.

For a discussion of indirect costs that are not required to be capitalized under the uniform capitalization rules, see Parker Tax ¶242,380.

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Failure to Exhaust Administrative Remedies Precludes Challenge of Levy by Taxpayer

A taxpayer could not challenge the IRS's collection of two-thirds of his social security income to pay back taxes where he failed to exhaust administrative remedies. Bowers v. U.S., 2012 PTC 312 (7th Cir. 12/20/12).

In 2010, the IRS imposed a levy on Gary Bowers' monthly social security benefits in an effort to collect some of the $100,000 Gary owed in unpaid taxes. The Social Security Administration sent $1,108, or approximately two-thirds of Gary's social security check, to the IRS. This left a $779 monthly benefit for Gary. Gary filed suit in district court, arguing that the levy exceeded the 15 percent maximum allowed under Code Sec. 6331(h) and that all efforts to remedy the situation through the administrative process had failed.

Under Code Sec. 6331(h), if a levy is approved, the effect of the levy on specified payments to or received by a taxpayer is continuous from the date the levy is first made until the levy is released. The continuous levy attaches to up to 15 percent of any specified payment due to the taxpayer. A specified payment for this purpose includes social security payments.

The district court ruled that the 15 percent cap in Code Sec. 6331(h) does not apply to "one-time" levies under Code Sec. 6331(a). According to the court, a levy placed on a stream of social security benefit payments is effectively a onelevy because the beneficiary has a predetermined right to the payments. Accordingly, the district court concluded that the 15 percent cap did not apply to Gary's retirement benefits.

On appeal, Gary challenged the district court's decision. The IRS offered three responses. First, it argued that the district court lacked jurisdiction under Code Sec. 7433 because Gary did not exhaust his administrative remedies, a prerequisite to the government's waiver of sovereign immunity for damages suits. Second, the AntiAct and Declaratory Injunction Act barred Gary from enjoining future tax collections or obtaining a declaratory judgment. Finally, on the merits, the IRS maintained that the 15 percent cap did not limit the levy on Gary's retirement benefits.

Gary argued that he did exhaust his administrative remedies by sending a letter to the IRS. He noted that the IRS's regulation setting forth the mailing address refers anachronistically to the office of the "Area Director" - an office that no longer exists. Therefore, he explained, he mailed his letter to two IRSoffices that he thought would suffice. When he received no response, he sued.

The Seventh Circuit held that Gary did not exhaust his administrative remedies and thus could not maintain an action for damages arising from wrongful tax collection. Gary did not comply with the applicable requirements, the court stated, as the only evidence of exhaustion was a letter Gary mailed that was ineffective for two reasons. First, he did not send his letter to the correct IRS office. Second, the letter did not articulate the grounds for his claim in reasonable detail. The court noted that, while the address in the regulations no longer exists, the IRS has published a notice (Notice 2010-53) referring taxpayers to the agency's website, which lists the updated address that taxpayers must use. Further, the court indicated that when Gary received no response to his mailing, he should have explored whether he contacted the wrong offices rather than just sue. Without giving the IRS fair notice of the law that it allegedly violated, the court stated, Gary did not meet the strict, "complete exhaustion" requirement and he could not maintain a claim for damages.

For a discussion of the rules relating to continuous levies and the 15 percent cap, see Parker Tax ¶260,540.