Obama Weighs Multi-Year Effort to Overhaul Tax Code

I found an interesting news article about Obama and his plans to simplify the corporate tax code in order to reduce the $1.3 trillion deficit.  So does this mean I can forget almost everything I learned in my corporate tax class?  Is it scary to anyone else to see the democrats in charge of tax reform??  Here it is:

President Obama has instructed his economic team to draft options to close loopholes and lower income-tax rates ahead of what would be a multi-year effort to overhaul and simplify the U.S. tax code, administration officials said Thursday.

Lowering corporate tax rates could give the administration the opportunity to build an alliance with business leaders, though it would likely depend on which tax breaks officials propose to eliminate.

White House aides cautioned that the effort was in its infancy. But in the wake of last week's report from his presidential deficit commission, a broad tax overhaul has been pushed toward the front of the discussion as members of both parties try to find a way to bring down the $1.3 trillion budget deficit with minimal pain.

"The president has long said that reforming the tax system is a priority, and the bipartisan fiscal commission recently made recommendations that he will consider as part of the budget process," said White House Deputy Communications Director Jen Psaki. "But he is not considering specific policy proposals, and no decisions have been made about whether this is a priority he will push for in the near future."

The debt commission proposed ending certain tax breaks, known as tax expenditures, that allow many corporations and individuals to minimize their tax burdens. By attacking such loopholes, the commission concluded tax rates could be lowered while still bringing in more revenue to the Treasury.

A White House official said Mr. Obama had asked members of his economic team to comb through the commission's report, as well as an earlier paper on tax-simplification options drafted by a presidential economic-recovery board. No deadline has been set, and no decision has been made on whether to put any proposals into the fiscal 2012 budget, which will be released in February.

Read more: http://www.foxnews.com/politics/2010/12/10/obama-weighs-multi-year-effort-overhaul-tax-code/#ixzz17horg4FR

Tax Crimes

Although this was an oral presentation, this is the outline I created relating to the Internal Revenue Code and Tax Crimes.

Tax Crimes

I.               Criminal Offenses

A.      Section 7201—Tax Evasion: Anyone who willfully attempts in any manner to dodge a tax or its payment

B.      Section 7202—Willful Failure to Collect or Pay Over Tax: Failure by employers to withhold federal wage and FICA taxes and pay them to the government

C.      Section 7203—Willful Failure to File Return, Supply Information, or Pay Tax

D.      Section 7206—False Returns and Preparers of False Returns: Willfully make any document that he does not believe to be true and correct or any tax preparer who willfully aids in preparation of fraudulent or false documents

E.      Section 7212(a) —Attempts to Interfere with Administration of Internal Revenue Laws: Threats or forcible endeavors designed to interfere with Internal Revenue employees

F.      Related Criminal Offenses:  Other offenses associated with tax crimes including conspiracy, false claims, money laundering and conspiracy

II.               Process of Tax Crimes Enforcement

A.     Administrative Process

a.     Criminal Investigation Division (CID)—investigates all tax crimes

b.     District Counsel—sets up a meeting

c.      Department of Justice—determines government’s likelihood to prevail

d.     Office of the US Attorney—transfers to judicial process

B.     Information Gathered by Investors

a.     Summons

b.     Third Party Summons

c.      John Doe Summons

d.     Corporate Summons

e.     Undercover Tax Investigations

f.      Grand Juries

g.     Search Warrants

C.     Defenses—such as good faith misunderstanding

D.    Burden of Proof—relies on circumstantial evidence

E.     Federal Sentencing Guidelines

a.     Guideline Section

b.     Base Offense Level

c.      Adjustments

d.     Criminal History

e.     Guideline Range

f.      Sentencing Options

g.     Departure from Guideline Range

Tax Memorandum

This is a tax memorandum that was done for my Corporate Taxation class, along with my partner, Matthew Morgan.

To:                   Dr. Lawrence Kowalski, Tax Professor

From:              Emily and Matthew Morgan, Tax Associates
Subject:           Travel and Entertainment Expense Deduction
Date:                December 3, 2010

I. Facts Presented

            The Internal Revenue Service (IRS) audited Winter Corporation’s current year tax return and disallowed the $10,000 of travel and entertainment expenses incurred by Charles, an officer-shareholder, as a result of inadequate documentation. The IRS claims the expenditure was a constructive dividend paid to Charles; however, he argued that he derived no personal benefit from the expenditure.
II. Issues Presented

            Can this $10,000 expenditure be deducted as travel and entertainment expenses?  Or rather, does it qualify as a constructive dividend and if so, what are the tax consequences? 

III. Conclusion

            Without adequate documentation, the IRS will continue to assert the $10,000 travel and entertainment expenditure Charles to be classified as a constructive dividend.  He must report this amount as income, rather than a deduction.

IV. Discussion

According to Internal Revenue Code section 274(d):

“No deduction or credit shall be allowed under section 162 or 212 for any traveling expense, for any item with respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connect with such an activity, unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer’s own statement (A) the amount of such expense or other item, (B) the time and place of the travel, entertainment, amusement, recreation, or use of the facility or property, or the date and description of the gift, (C) the business purpose of the expense or other item, and (D) the business relationship to the taxpayer of persons entertained, using the facility or property, or receiving the gift.”

The requirements to deduct a travel and entertainment expense include substantial adequate documentation.  Without this, the IRS will continue assert this $10,000 expenditure as a constructive dividend to Charles, even though he maintained it is business-related and claims no personal benefit.  Oral testimony is not enough—written substantial documentation is necessary.

The limitation of requiring substantiation of travel and entertainment expense deductions supersedes Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).  In this court decision, if the taxpayer incurred travel and entertainment expenses, but could not readily determine exactly how much to deduct, then the taxpayer could make a close approximation. However, according to Treasury Regulation 1-274, “Section 274(d) contemplates that no deduction or credit shall be allowed to a taxpayer on the basis of such approximations or unsupported testimony of the taxpayer.”  Therefore, we may not deduct the travel and entertainment expenditure and Charles must pay ordinary income on the constructive dividend.

According to Gotcher v. United States, 5^th Circuit Court of Appeals, “The test for constructive dividends in such circumstances is two-fold; not only must the expenses be non-deductible to the corporation, but they must also represent some economic gain or benefit to the owner-taxpayer.” [U. S. v. Gotcher [68-2 ustc ¶9546], 401 F. 2d 118, 121-124 (5th Cir. 1968)].  Taxpayer must show to the court or IRS that they were not the primary beneficiary of the expenditure. The IRS ruled the expenditure as non-deductible, thus meeting requirement one.  They further stated it was a constructive dividend to Charles because he received an economic gain from the $10,000 expense to his name.  Although Charles contends he derived no personal economic gain or benefit, without proper documentation to substantiate how he spent the money and so forth, the IRS will contend that the expenditure is a constructive dividend.

To further support this stance on constructive dividends, court case Wortham Machinery Company v. United States states that, “a constructive dividend is paid when a corporation confers an economic benefit on a stockholder without expectation of repayment” (Wortham Machinery Company v. United States, 10 Cir., 521 F. 2d 160, 164).   If Charles creates a $10,000 travel and entertainment expenditure on the corporate account, without any substantial evidence of what he did, he is assumed to have derived some sort of economic benefit.

For next year, we strongly recommend creating a policy for all employees to follow regarding travel and entertainment expenses.  This will help alleviate the chance of this problem happening again.   Substantial documentation will provide to the IRS with the necessary information to prove the travel and entertainment expenditure qualifies as a 162(a) deduction. However, without adequate documentation proving it was within the scope and reach of IRC 162(a), the IRS will continue to disallow a deduction similar to this.