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Wednesday, September 24, 2014

Internet Tax Freedom Act Extended

The Internet Tax Freedom Act (ITFA), originally enacted in 1998 (P.L. 105-277, 10/21/98) and renewed twice, was set to expire on November 1, 2014. Its original expiration date was October 21, 2001 and then November 1, 2007. The ITFA prohibits state and local governments from imposing taxes on Internet access fees (unless already imposed and enforced before 10/1/98) or imposing any multiple or discriminatory taxes on electronic commerce.

H.J. Res 124, Continuing Appropriations Resolution 2015, was signed into law on 9/19/14 (P.L. 113-164). It provides funding to keep the government running until 12/11/14 and extends the ITFA to that date as well. This resolution was passed in the House on 9/17/14 (319-108) and in the Senate on 9/18/14 (78-22).

What will happen as December 11, 2014 approaches?  Well, H.R. 3086 (113rd Congress), the Permanent Internet Tax Freedom Act, was passed by the House Judiciary Committee on June 18, 2014 (30-4). On July 15, 2014, the full house passed this bill by voice vote. H.R. 3086 would make the ITFA permanent and remove the grandfather provision that has existed since 1998.

The rationale for the ITFA in 1998 was to help the Internet grow. The rationale for permanency was recently explained in the House Report 113-540 (7/3/14) as follows:

“Today, it is precisely the ubiquity of the Internet that councils for a permanent extension. The Internet has become the primary driver of U.S. economic growth, innovation and productivity. The Internet is indispensable for finding jobs and accessing education and healthcare resources. It helps small businesses find new markets and consumers across the country and the world.”
Per the Congressional Budget Office (CBO), H.R. 3086 imposes an intergovernmental mandate per the Unfunded Mandates Reform Act (due to the expiration of the grandfather provision). The CBO believes that at least seven states and some local jurisdictions in these states benefit from the grandfather provision ((Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas, and Wisconsin).

The rationale for repeal of the grandfather provision is that states have had many years to find alternative revenues.

Is this law even needed? Hasn't the Internet already grown? Is the slight chance that a state or local government will impose sales tax or some other tax on Internet access fees going to cause people to stop using the Internet? Would they even notice? How many states are even likely to do this?

Why does the federal government need to tell the states what they can't tax? Isn't that what the voters in that state are supposed to do?  If Congress is concerned about supporting use of the Internet, why don't they waive federal excise taxes when you buy airline tickets online? Why don't they give subsidies to Internet providers to pass along to customers?

What do you think?

Monday, September 22, 2014

Points from your bank

Today, credit card companies and several banks give you "points" of some type that can be redeemed for airline tickets and perhaps other items. Generally, when someone gives you something and expects something in return (such as your continued patronage), it is taxable income (not a gift). However, if what they are giving you is really a reduction in purchase price (such as a dealer giving a car buyer a rebate), it is not income.

In 2010, the IRS issued a private letter ruling (PLR 201027015 - only legally binding on the taxpayer who requested it) saying that points from a credit card company were non-taxable as really being reduction to the price the cardholder paid for items purchased with the card.

A few years ago there were stories in the press about Citibank (and perhaps a few other banks) issuing 1099-MISC for the award of points to people who had opened accounts with them. A 1099-MISC is only issued if the value given is $600 or more.  Even if less than $600, it is still taxable, assuming it is truly income.

Well, a few weeks ago, the U.S. Tax Court issued a regular decision (one involving interpretation of law rather than facts), to someone who received a 1099-MISC from Citibank and did not report it. What did the court say and what might this mean for others?

In Shankar, 143 TC No. 5 (8/26/14), Citibank issued Mr. S a 1099-MISC for $668 for 2009, which he did not report on his return. The court held that S had taxable income.

At trial, the IRS provided an affidavit from a Citibank employee that S redeemed 50,000 “thank you points” and purchased an airline ticket. The affidavit noted the ticket value as $668. S testified that he knew nothing about thank you points and had received no award. The court did not delve into this, but instead just noted that S had almost three months between receipt of the Citibank records in September 2013 and trial in December 2013 to investigate Citibank's information to show it was incorrect. S provide no information. Thus, the court followed the Citibank information. But, it next analyzed whether it was gross income and if yes, its value.

The court observed that S offered no information on why Citibank gave him the points. At trial, the IRS told the court that the omitted income was interest. IRS also noted that the omitted income was a noncash award of points for opening a bank account. S did not object to these statements from the IRS.

The court assumed that S received “a premium for making a deposit into, or maintaining a balance in, a bank account. In other words, something given in exchange for the use (deposit) of [S’s] money; i.e., something in the nature of interest. In general, the receipt of interest constitutes the receipt of an item of gross income. See sec. 61(a)(4)”

A few observations:

Bank Warning – The Citibank website on their points program does say in the fine print that a 1099-MISC will be issued for redeemed points where the value of the reward is $600 or more.

Frequent Flyer Miles - The court noted that this case did not involve whether frequent flyer miles (FFM) received for business travel was taxable. That matter has been addressed in Announcement 2002-18. In this announcement, the IRS noted unresolved issues involving the award of FFM and that no enforcement effort had been initiated by the IRS. The IRS stated it would “not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.” Also, any future guidance would apply prospectively. However, if the FFM or similar promotional item is converted to cash or represent compensation, the announcement does not apply.
 When and How Much - Valuation? - Issues exist as to when the receipt of points is taxable, and the value. For example, if S had only received 500 points from Citibank and they were not usable due to the low quantity, arguably, S would have not have received income. But what if something, such as flowers, could be obtained with the points, or a discount obtained on the purchase of some item? Or the points were freely transferable? Would they be income?

The court did mention Turner, TC Memo 1954-38, “in which we determined that the ‘proper fair figure’ to be included in the taxpayers’ gross income on account of the taxpayer husband’s winning steamship tickets on a radio quiz show was substantially less than the tickets’ retail price because the tickets’ value to the taxpayer was not equal to their retail cost.”

How did Citibank determine the value of the airline tickets? Airline tickets can vary tremendously in price depending on when purchased, which airport and time of day you fly, if the airline is having a special promotion, etc. Should Shankar have been allowed to show that the tickets could have been obtained for a lower amount?

Footnote 2 of the case states: “Neither party has addressed, nor do we consider, whether award of the thank you points, itself, may have been the taxable event.”

1099-INT? – In Shankar, the Tax Court referred to Shankar’s income as interest, even noting §61(a)(4) on interest income. If it is considered interest income from the bank, it seems that 1099-INT should have been given to Shankar rather than 1099-MISC. The filing thresholds for these forms are quite different:

      1099-INT         Payments of $10 or more (§6049(a))
      1099-MISC      Payments of $600 or more (§6041(a))

Why did Citibank issue a 1099-MISC rather than a 1099-INT? If the court is correct and the airline ticket represents interest income, far more 1099-INTs need to be issued by Citibank.

Tax Assistance – Shankar was not represented by legal counsel at trial. Might the result have been different if legal counsel had explored why Citibank issued the 1099 and placed a value of $668 on the tickets?  What if legal counsel had looked at Rev. Rul. 76-96 and PLR 201027015 (7/9/10) and other authorities? I suspect that legal counsel would have challenged Citibank’s valuation of the ticket given the wide range of possible prices for most airline tickets.

What's Next? - Given how many 1099-MISC Citibank must have issued, perhaps there will be additional litigation on this matter.  Perhaps the IRS will issue some guidance!

What do you think?


Tuesday, September 16, 2014

DOMA Tax Issues - Still Outstanding

Someone recently asked me what federal tax issues are still outstanding regarding DOMA and the effect of the June 2013 Windsor decision.  There are still a few income tax issues that come to mind (there are also estate and gift and state tax issues as well), that were not covered in the initial guidance (Rev. Rul. 2013-17).  Here is my list. Do you have any input or additional ones to add?

Amended returns
Will the IRS issue guidance to assist in the filing of amended returns? The current version of Form 1040X is not conducive to showing how two prior separate returns will now be treated as one MFJ return.

If a same-sex married employee tells his employer that he would like to get his FICA tax refunded by the employer, does that mean the employee must also amend his income tax form for that year to also use a married status? Notice 2013-61 and Rev. Rul. 2013-17 are silent on this question.

Assume a same-sex married taxpayer discovers an error on her 2011 return, such as omitted income. Can she amend it without changing her filing status? This likely depends on the proper interpretation of the effective date language of Rev. Rul. 2013-17. It includes this statement: “If an affected taxpayer files an original return, amended return adjusted return, or claim for credit or refund in reliance on this revenue ruling, all items required to be reported on the return or claim that are affected by the marital status of the taxpayer must be adjusted to be consistent with the marital status reported on the return or claim for refund.” [italics added]   Perhaps since the amended return is filed to correct an income omission, it is not filed "in reliance on this ruling". But if the taxpayer changes anything on the return to reflect a different filing status, then everything would need to be changed to reflect that status (including the spouse also amending if MFJ status will be claimed).

Audit of pre-2013 returns

If a same-sex married individual has a pre-2013 return audited, will the IRS change the marital status?

Will the individual be allowed to request such a change?
What do you think?

Friday, September 12, 2014

Truncating Taxpayer Identification Numbers - Enough?

In July, the IRS issued the final rules allowing most payee statements issued either in paper or electronically to use a truncated Social Security Number or Employer Identification Number. So, it would be XXX-XX-1234, or ***-**-1234.  The issuer's TIN can't be truncated and no truncation is allowed on the forms that go to the IRS - only to the payees. And, because of statutory wording, no truncated TIN on a Form W-2, something that about 85% of individual filers receive.

So, this is a good step among many in trying to reduce the ease of identity thieves obtaining your tax ID number.  But it is not enough. Consider the following:
  • Unlike truncating on receipts for credit or debit card purchases, truncating tax IDs on payee statements is optional, not mandatory.
  • Experts estimate that the easiest numbers of your SSN to figure out are the first 5, not the last 4.
  • It does nothing about the trillions of documents of all sorts that exist that have people's SSNs on them. People save old W-2s and tax returns (even those more than four years old), employment papers, etc.  Often, these get tossed without removing the SSNs.
I've got more in a short article published in the AICPA Tax Insider this week - "TTINs and protecting taxpayer identities."  I've got a few suggestions for further protecting taxpayer IDs.

What more do you suggest? What do you think?

Saturday, September 6, 2014

Is disclosure of corporate tax information a good idea?

Among the many stories about some U.S. corporations looking into becoming a foreign corporation through an "inversion" is the question of whether one possibly remedy is to make corporate tax return information available to the public. For example, an op ed by Catherine Rampell in The Washington Post (8/21/14)was titled: "Shareholders, public deserve tax transparency."  She suggests that all publicly-traded companies be required to make their tax returns available to the public.

I don't agree.  For a few reasons:
  1. Too complex to understand:  These corporate returns are complicated and few can truly understand them. In addition to the basic corporate forms, there will be numerous attachments on the details of miscellaneous expenses, inventory accounting, reconciling book-tax differences, and more. These returns can easily exceed 2,000 pages.  And the tax laws used to determine taxable income is complicated. The tax rules don't match the accounting rules as to which entities are included in the consolidated tax return. Some of the information also won't make sense unless you also look at the prior two years of returns.  It will take tax advisers very knowledgeable in the corporate income tax area to understand the many pieces of the returns. So, what would be the point?  There is some basic tax information already provided in the financial statements, already available since the companies are publicly-traded (available at the company's website and SEC website).
  2. Confidentiality: Tax return information is supposed to be confidential. If we want to know about the finances of a publicly-traded company - take a look at the financial statements, Form 10-K, etc.  The tax return has more detailed information that might expose business strategies to competitors. Why?
  3. How far?:  If we publicly disclose corporate tax returns, why not those of high income individuals?  Why stop there? Why not make every tax return public?  Of course, a publicly-traded corporation already has to make public its key financial data on sales and income. Individuals do not. But concerns about whether high income individuals are paying their "fair share" could lead to calls for them to disclose their tax information, particularly if we have already opened the door to making other tax data public.
  4. Helpful?: Even if tax returns of public companies were made public, we'd still have inversions. The public disclosure would not end the need to effectively manage all costs (including income taxes) in our globally competitive business arena.
What do you think?