In Freedom from Religion Foundation v. Lew (November 22, 2013, W.D. Wisc), Judge Crabb found that Section 107 of the Internal Revenue Service was unconstitutional. This follows on the heels of another case Freedom From Religion Foundation v. Geithner 715 F. Supp 2d 105(E.D. CA, 2010) in which the District Court found the Foundation to have standing to challenge Section 107 and found that the case should not be dismissed. Section 107 and its predecessors have been in the Code since 1921 when it declared that church provided parsonages or rectories were not income to the pastor. In 1954, Section 107(b) was added to permit churches to give Pastors’ a housing allowance to permit them to live somewhere other than a parsonage. In other words, this saved churches the cost of having to maintain parsonages and allowed states to tax the real estate lived in by the Pastor. Until this ruling no successful challenge has been mounted against Section 107. However most of those cases failed because the Courts ruled that the person bringing the suit did not have standing. See Warren v. CIR 302 F 3d 1012 (9th Cir., 2002); Kirk v. CIR 425 F 2d 492 (DC, 1970). In the Wisconsin case two officers of the FFRF the United States because they couldn’t exclude their specified housing allowance from income. Thus, they had standing because they suffered from this “discrimination” more than the general public. Judge Crabb did some handstands to find that they had standing since she did not deal with the Anti-injunction Act nor did she deal with the Declaratory Judgment Act issues in such a suit. Instead, these taxpayers standing should have been predicated upon whether or not they were owed a refund of tax for not permitting them a housing allowance. The Court did not address this, and that may be this case’s fatal flaw. Had the Court addressed that issue, it could have then moved to the Constitutional issues involved. Interestingly enough this law has been around for 90 years and this is the first Court to rule that the law is unconstitutional. Now the question becomes whether or not the Obama Administration and its Justice Department choose to defend the law on appeal as they refused to do in the DOMA case. If they do not, this ruling will stand, but it will only impact taxpayers in the Western District of Wisconsin. As a practical matter until the IRS comes out with guidance pastors will still be able to exclude such allowance since those pastors were not made parties to the lawsuit.
So, you get a bill from the IRS and the IRS is demanding payment from you. You don’t understand the bill, what is your next step? (1) Call IRS and ask for them to send or fax to you a copy of their calculation so that you can compare that to your records. There is an anecdotal story (which is legendary and may not be true) about a person who worked at one of the Service Centers and decided that if people received a small bill from the IRS, they’d just pay it and this would help balance the budget. A number of these bills by legend went out and were paid, but one citizen called and asked for a calculation. After much frustration, the discovery was that there no calculation and the bill was rescinded. The story goes that no one knows how many of those fake bills really went out. So, if you don’t understand a bill from the IRS call them and get a description of the reason for the bill. 9 out of 10 times it is correct. So, after you get the bill, and determine if its correct, what should you do. If they sent you a bill because you did not file a return, prepare a return and file it with correct information. Then wait tor the revised bill. Either way, if a bill comes, DON’T IGNORE IT. The IRS will not go away simply because you put your head in the sand, they will continue to seek payment. Your first option is to start making monthly payments to them voluntarily without a plan. Many times collections will not attempt sterner actions if they see a steady payment coming in. Another is to set up a payment plan with them. If you do that, you’ll find that they will actually leave you alone for a couple of years. If you are cash strapped and can’t even afford a payment plan, then you can ask them to put you in the currently non-collectible category. Normally this is not granted unless you are retired or living on a fixed income and your expenses reasonable and your assets near zero. Lastly, you can make an Offer in Compromise. They are difficult to get approved. We’ll talk about those.
So, you have a Trust which is a member of an LLC and holds interests in real property. Does a distribution of trust LLC interests terminate the LLC and trigger a deemed sale capital gain. If the Trust has a fractional share formula clauses (equal distributions), there is no capital gain on the distributions even if one person gets land and another gets the partnership interest. So, if you are a Trustee wrapping up a trust and run into this situation, you may be able to make people happy and not trigger bad tax results.
Let’s say you buy or manufacture stuff made in the old US of A and you sell it overseas to folks who will pay an arm and a leg for U.S. made stuff. If you took your plain old business and sold the stuff overseas, you’d pay taxes at your tax rate. If you’re an LLC, it would not only be taxable business income but also self-employment income taxable at a combine rate of 35% up to 50%. Well Uncle Sam wants to even out trade, and there is an entity known as an Interest Charge DISC. It sits between your business and your customer and gets a commission on sales equal to get this THE GREATER OF 4% of gross export sales or 50% of the net taxable export income. This is taxed at the qualified dividend rate of 20%. So, you save 4% to 15% on your taxes. What is even better is you can defer recognizing the income by merely paying interest on the taxes you would have paid at Treasury rates (currently about 1.5%). There are some limitations on these benefits, but for a small exporter, it might be worth the expense. But hold on before you go charging off to set one up there are expenses. Lawyers will have to draw up the documents needed to put the regime in place, that’s about $3,000-10,000 depending on business structures used and lawyers used. You’re going to need to hire accountants, because this is not something you want to try on your tax software. That will cost you as well. So assume that if you have export sales in the $200,000 and up range you will justify the costs of setting it up and the costs of compliance.
For a smaller business, this is a cheap way to save taxes on your export sales. Otherwise, you get into overseas corporations and non-domesticated income which doesn’t put money actually in your pocket and as a small or medium sized business, you want to put money actually into your pocket.
My partner, John Braswell, passed away last week. He had been practicing tax, real estate and estate planning law in Alexandria for 30 years. His conservative tax strategies coupled with his creative abilities served his clients well. He was a great friend to me and a great sounding board when there was a particularly tough tax issue facing me. My prayers go out to his wife and daughter.