Attorney Robert Wood is one of the nations premier experts on taxation, taxable damages, structured settlements and qualified settlement funds.
His commentary covers a wide range of issues related to taxation and you can find his commentary exclusively on The Legal Broadcast Network
BIO: Robert W. Wood has extraordinarily broad experience in corporate, partnership and individual tax matters. He has an international reputation as a consultant on the tax treatment of litigation recovereies. In this area he is perhaps the preeminent lawyer in the United States. He has long maintained a corporate tax practice emphasizing general business planning, negotiation and documentation of corporate distributions, divisive and acquisitive reorganizations, financings, recapitalizations, formations and liquidations. He has recently been named to "Super Lawyers" by publishers of Law & Politics and San Francisico magazines, and named to "America's Best Lawyers" by Forbes Magazine. Robert W. Wood is a frequent guest on The Legal Broadcast Network and is the featured commentator on The Tax Law Channel.
The Tax Lawyer Robert Wood says Roni Deutch surendered her law license and filed for bankruptcy protection after the California AG's $34 million lawsuit was filed. The lawsuit alleges her tax resolution service had swindled customers. Wood cautions consumers to do their homework before hiring such a service to help with tax problems.
The major product “sold” by tax resolution shops is the offer in compromise. IRS Form 656-B, Offer in Compromise Booklet, contains information, worksheets, and all forms necessary to file an offer in compromise. The IRS has good information on offers in compromise on its website.
Although legal fee structures are common today, legal fee structures of court awarded fees are uncommon, particularly those awarded under a class action. In a class action, whether or not there is a fee agreement with class representatives, attorney fees are almost always the subject of a court approval process. In many cases, that court approval process obviates and supersedes any fee agreement. Can attorney fees awarded by a court in class actions be structured? Based on established concepts of constructive receipt and economic benefit, I believe the answer is a decided yes. Although I will stick to the concept of class action attorney fees in this article, I note that it may be possible to apply the same concepts I will discuss to non-class-action court awarded fees.
You’ve no doubt heard of what the Wall Street Journal calls “a rare show of leniency” from the IRS. But as a tax lawyer for over 30 years, I’m not sure how its implementation will impact most struggling taxpayers. I’m cautiously optimistic it might have an impact, but the proof is in the pudding.
A target of the IRS’ Information Release 2011-20 is tax liens, and its true there’s long been a push-me-pull-you effect. Even if the IRS doesn’t pursue aggressive collection efforts like trying to sell assets, it is trained to slap on a tax lien. After all, that’s how creditors get priority and get security for payment. But tax liens impact credit ratings and some taxpayers say they are hurt disproportionately and can be put out of business by a tax lien.
Liens? The IRS now says it will be more cautious with liens, only filing them if tax debts are $10,000 or more, double the prior threshold. In a move to appease credit rating impacts, the IRS will also try a lien “withdrawal” in some cases, up from a mere lien release. Lien releases stay on your record for years, while withdrawals are immediate and permanent. Think of it as the difference between divorce and annulment.
A lien isn’t payment of course. Under Section 6321 of the tax code, when you fail to pay a tax liability after notice and demand, a lien attaches to all your property and rights to property. The IRS can seize and sell property subject to a federal tax lien. So filing a lien is second nature to the IRS but doesn’t necessarily mean they will try to seize and sell anything.
Taxpayer Advocate Nina Olson—I confess I am a big fan of her and all she does—is predictably cautious and understated in her praise for the IRS. She says the new IRS program is “a significant step in the right direction,” but not enough. She may well be right, and clearly she hears from many beleaguered taxpayers caught within the gears of the tax system.
Installment Agreements? Another change will be easier installment agreements, although in my experience these are relatively easy to get already. Still, the amount of time the IRS usually gives is pretty limited, which means payments can be too high. The new program for “streamlined” installment agreements will allow up to 24 months to pay as long as the tax debt is $25,000 or less.
Unfortunately, this move won’t help people in the over $25,000 category unless they can pay down their debt to get under the limit. In most cases, the IRS will require a Direct Debit Installment Agreement (DDIA) so the IRS gets its monthly payment automatically. In my view, that’s a good thing and should eliminate many of the common problems.
Offers in Compromise? It’s hard to talk about offers in compromise without wincing, since there’s already so much misinformation and so many hyperbolic infomercials about pennies-on-the-dollar tax deals. Taxpayers should be wary. If you are not submitting the IRS forms yourself, get someone reliable whom you trust. Be wary of hype.
As for amounts and types of taxes, there’s no limit on how much tax you can try to compromise. However, there’s a simplified process for smaller incomes and smaller tax debts, and that’s where the changes will be. The IRS’ new streamlined offer program welcomes taxpayers with annual incomes of up to $100,000 and tax liabilities under $50,000, doubling prior limits.
Robert W. Wood practices law with Wood & Porter, in San Francisco. The author of more than 30 books, including Taxation of Damage Awards & Settlement Payments (4th Ed. 2009, Tax Institute), he can be reached at wood@woodporter.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional
No matter how much you dislike paying taxes, moving outside the country may sound like an extreme measure. Besides, it’s hard to avoid federal income taxes even if you do. See Ten Facts About Tax Expatriation. But state taxes? Surely they are different.
In fact, you might be surprised at how many people seriously consider moving states for tax reasons. As a tax lawyer for 30 years, I’ve found that people are more likely to think of moving right before settling a big lawsuit or selling a family company.
For Californians, Nevada is just next door and has no state income tax. Other no-tax states include Alaska, Florida, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennessee only tax dividend and interest income. You might even compare tax rates between states if your plans are more modest.
But moving isn’t easy, and many high tax states have a penchant for pursuing you and asserting that you really didn’t move after all. Much depends on whether you move with the idea of returning to the state or intend to leave permanently lock, stock, and barrel. Such disputes are factually intense, with the following being some of the more obvious indicators:
Where do you vote?
Where are your cars licensed and registered?
If you have children in college, do you pay in-state or out-of-state tuition?
Where do you own property?
Of what clubs are you a member?
How much time do you spend inside vs. outside the state?
You get the idea. There’s usually a comparison between the old state and the new state. Much also hinges on when you move. Is it possible to end up labeled as a resident of two states? Unfortunately, yes.
Vacation Home? But most of us don’t think we could have this kind of tax whipsaw if we merely have a house or apartment in State X we rarely use. But consider New York’s tax grab in In re Barker. There, a Connecticut couple was ruled subject to New York state tax on all their income because of their Long Island summer home even though they used it only a few times each year.
Like many states, New York drew a bright line so non-New York residents who were in New York for more than 183 days a year had to pay New York tax on any New York income. That seems fair. But now the person’s entire income (even income having nothing to do with New York) could be captured.
The brouhaha centers on where you maintain a “residence” and how it’s defined. The New York state tax code defines a “permanent place of abode,” to exclude “a mere camp or cottage, which is suitable and used only for vacations.” It turns out many people who have fancier vacation digs may not qualify, or that’s the current fear.
Indeed, the court in the recent In re Barker case considered this couple’s Long Island vacation home as a permanent abode since it was suitable for living year-round. Whether or not the couple actually stayed in the home wasn’t relevant. In this case, the Barkers usually only spent about 17 days a year at the (now considerably more expensive) New York vacation home. For more, see Out-of-State Owners Could Face Tax Bill.
Robert W. Wood practices law with Wood & Porter, in San Francisco. The author of more than 30 books, including Taxation of Damage Awards & Settlement Payments (4th Ed. 2009, Tax Institute), he can be reached at wood@woodporter.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.
Even if you know no other tax code section, you likely know Section 1031. It’s the ubiquitous provision allowing swaps of one business or investment asset for another without tax. 1031 is bandied about by realtors, title companies, investors and soccer moms. Some people even make it a verb, a la FedEx, as in: “Let’s 1031 that building for another.”
Although most swaps are taxable as sales, if you come within 1031, you’ll either have no tax or limited tax due at the time of the exchange. In effect, you can change the form of your investment without (as the IRS sees it) cashing out or recognizing a capital gain. Your investment continues to grow tax-deferred.
No Limit! There’s no limit on how many times you can do a 1031. You can roll over the gain from one piece of investment property to another again and again. Although you may have a profit each time, you avoid tax until you actually sell for cash. Then you’ll hopefully pay one long-term capital gain tax (currently 15%).
While you can make a simple swap of one property for another, the odds are slim you’ll find someone with the exact property you want who wants the exact property you have. For that reason the vast majority of exchanges are delayed, three party, or “Starker” exchanges (named for the first tax case that allowed them). You need a middleman to hold the cash after you “sell” and to “buy” the replacement property for you. This three party exchange is treated as a swap.
Designate Within 45 Days. Once the sale of your property occurs, the intermediary will receive the cash. You can’t receive the cash or it will spoil the 1031 treatment. Within 45 days of the sale of your property you must designate replacement property in writing to the intermediary, specifying the property you want to acquire.
Close Within 180 Days. Second, you must close on the new property within 180 days of the sale of the old. These two time periods run concurrently. You start counting when the sale of your property closes. If you designate replacement property exactly 45 days later, you’ll have 135 days left to close on the replacement property.
Qualified Escrow. Another key rule is the qualified escrow account. Your money must remain there until you close the other leg of your exchange. The rules are not too complicated, and there’s a whole industry of exchange accommodators out there. Still, use care and deal with reputable professionals.
A recent Tax Court case, Ralph E. Crandall, Jr. and Dene E. Dulin, illustrates the mess these deals can become if you’re not careful. Ralph Crandall and Dene Dulin owned investment property in Arizona but wanted investment property in California. Intending a tax-free exchange, they sold the Arizona property, directing the money into an escrow account with Capital Title.
They closed on the California property and reported it as a tax-free swap but the IRS cried foul. Why? None of the escrow agreements mentioned a like-kind exchange under 1031 or expressly limited their right to get the money. That disqualified the exchange even though they actually did use the money to swap for new property.
To be qualified, an escrow agreement must expressly limit the taxpayer’s rights to receive, pledge, borrow or otherwise obtain the cash or its equivalent held in the account. The Capital Title escrow account wasn’t qualified. So even though this couple reinvested their sales proceeds, they had to pay tax.
Beware Debt. Other common glitches involve debt on the old or new property. One of the main ways people get into trouble with these transactions is failing to consider loans.
Robert W. Wood practices law with Wood & Porter, in San Francisco. The author of more than 30 books, including Taxation of Damage Awards & Settlement Payments (4th Ed. 2009, Tax Institute), he can be reached at wood@woodporter.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional
Thursday, July 7, 2011 at 04:21PM 
The Tax Lawyer Robert Wood says Roni Deutch surendered her law license and filed for bankruptcy protection after the California AG's $34 million lawsuit was filed. The lawsuit alleges her tax resolution service had swindled customers. Wood cautions consumers to do their homework before hiring such a service to help with tax problems.
