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Ruling on Bulk Sale of Property, Worker Audits, Overseas Tax Evasion

07.24.2014 | eVisor

Real Estate

Court Rules Bulk Sale of Property Taxed as Ordinary Income

A developer’s multiple, unsuccessful attempts to develop a property led to a district court’s decision that the eventual bulk sale be taxed as ordinary income. 1 Over a period of years, the developer incurred expenses on a number of engineering and development plans for the property and sought out investors and partners. Eventually, a second developer purchased the property — paying a lump sum to clear title on the property and satisfy the debts of the seller to former partners.

The district court viewed the flurry of activities by the seller in an attempt to develop the property as sufficient to conclude that he held the property primarily for sale to customers as a business, not as an investment . This decision was made even in light of the fact that the seller owned no other land and had ended his attempts to develop the property and seek backers years prior to the sale.  

1 Allen et al v. U.S. Et Al, Cite as 113 AFTR 2nd 2014-2262, Code Sec(s) 61;1221, (DC CA), 5.28.2014

Questions? Contact your Berdon advisor or Saul Brenner at 212.331.7630 or sbrenner@berdonllp.com.

 

Federal Tax

S corp Worker Misclassification Audits Expected to Rise

Independent contractor or employee? The issue of S corporations misclassifying workers is one of growing concern for the IRS, with increased audits on the horizon. And the waters are not always clear. For example: Depending upon circumstances, a member of the board could be an independent contractor or an employee.

To give businesses an opportunity to voluntarily reclassify their workers as employees, the Voluntary Classification Settlement Program (VCSP) was developed by the IRS. To be eligible to participate in the VCSP, the taxpayer must have consistently treated the workers as non-employees, including having filed the required forms 1099.

The VCSP is open to employers seeking to voluntarily change the classification of workers they have been treating as independent contractors or nonemployees to employees. The employer must have filed the required forms 1099 for those workers in the past 3 years and not be under a worker classification audit by the IRS, Department Of Labor, or a state.

If accepted, employers pay no interest or penalties and the IRS will not initiate payroll tax audits on these workers for any prior years. Further, the taxpayer has to pay, in general, 10% of the employment tax liability that would have been due on the workers being reclassified for the most recent tax year had those workers actually been classified as employees for that year.

Questions?  Contact your Berdon advisor or Marc Ausfresser at 212.331.7639 or mausfresser@BERDONLLP.com.

 

International Tax

FATCA in Effect to Identify Overseas Tax Evaders

July 1, 2014 saw the Foreign Account Tax Compliance Act (FATCA) go into effect to help identify and collect tax from U.S. persons investing in assets through non-U.S. entities.

Under FATCA, foreign financial institutions (FFIs) that fail to meet requirements will be subject to a 30% U.S. withholding tax on payments of U.S.-source interest, dividends, and investment income made to the FFI by U.S. withholding agents. FFIs include not only depositary and custodial institutions, but also investment entities that function or hold themselves out as investment vehicles. This would include private equity funds and investment funds.  FATCA’s reach is substantial as it is supported by agreements with nearly 100 nations.

With FATCA in full force, New York residents with unreported overseas income should also take advantage of NY State’s Voluntary Disclosure and Compliance program.

Questions? Contact your Berdon advisor or Saul Brenner at 212.331.7630 or sbrenner@berdonllp.com.

 

Unused ITINs Will Expire

The IRS has announced that, under a new policy, Individual Taxpayer Identification Numbers (ITIN) that go unused will expire after 5 years. Previously, all ITINs expired after 5 years whether or not they were used. Now, the ITIN expires only after not being used on a tax return for 5 consecutive years. This new policy will go into effect in 2016.   

ITINs are issued to foreign nationals and others who have to pay U.S. tax but are not eligible for a Social Security number. Upwards of 21 million ITINs have been issued since 1996 with only one quarter being used on tax returns. Those with expired ITINs must reapply using Form W-7, Application for IRS Individual Taxpayer Identification Number.

Questions? Contact your Berdon advisor or Saul Brenner at 212.331.7630 or sbrenner@berdonllp.com.