Back-up Withholding

So, you’re a contractor and you hire a bunch of contractors. You need to get W-9’s from them with their social security numbers or EIN’s. So, you do that, but let’s say, they give you false numbers. When you file their 1099’s, the IRS may contact you saying that you need to back-up withhold 24% from their gross payments.

DON’T IGNORE THAT LETTER. Failure to do that incurs liability for your company to the extent of the back-up withholding. Now if you’re lucky, the offending contractor actually paid their taxes and reported the income. If so, then you have a defense that the IRS cannot collect a tax twice. But if they didn’t you’re likely to face a pretty big liability.

And if these guys want their 24% back, they can always file a tax return and get it back. Most won’t, because 24% is less than what they really owe.

As we think about July 4

You know the American Revolution had an element of tax revolt in it. I say this because a Government must be careful to leave enough to its citizens that they might invest it and grow it and use their money to create. As we enter the mid-term election cycle we have the one thing the Chinese don’t have, the freedom to change course and the freedom to object to the direction this country is heading. Most of you know my Republican political leanings, and as a tax attorney what’s best for me, may not be what’s best for the Country. I thank God that I live in the United States. I would not trade living here with living in any other Country in the World. We may have a rough patch of road ahead, but I know that America will rebound. That free Americans will use their freedoms to move forward. It is amazing to me how quickly we can lose our freedoms. This leads me to my tax tale of the day. A girl, Blonda went into a tanning salon and found out that she had to pay 10% more for her tan than last week. Her best friend, Bambi, belongs to the Hot and Hotter Fitness Club. Hot and Hotter in addition to a few weight machines, saunas and bikes have tanning booths (which is included in their monthly fee). The exact same tanning booths that Blonda’s tanning salon has. Bambi pays no surtax, but Blonda does. Makes a lot of sense, right? Have a great weekend.

The Negative Capital Account

Meratroid Asteroid dies in 2010. His family is understandably relieved that he owes no estate taxes. He owns a bunch of real estate partnerships totalling $150 Million in value. They have been licking their chops for years to sell the real estate and retire to beaches and fruity rum drinks. So, after his death, they go into their attorney Mark Snotnose. Mr. Snotnose after looking over his half glasses at them with a sneer says, “don’t think you better sell those real estate partnership interest any time soon.” “What do you mean?”, asks daughter Delicious LaTour.

The Ex Posts

Edward ExPost was dying, his family revoked his advance medical directive in late 2009. On January 1, 2010, he died at 12:42 a.m. He left his entire $1 Billion estate to his two loving children. Due to fights on Capitol Hill over a health care bill and President Obama’s Hawaiian vacation plans, no law was passed until February 1, 2010 extending the estate tax which expired on December 31, 2009. In their haste to go celebrate President’s Day, Congress forgot about reauthorizing a step-up in basis for people inheriting from decedent’s estates.

On October 1, 2010, Edward’s Executrix, Eugenia Ex Post, filed his Federal Estate tax return. She paid the tax that would have been due under the new law. She took Dad’s company public to pay for the taxes. She sold some stock in Dad’s Company. The it was worth $490,000,000 more than what he paid for it. She then immediately filed an amended return seeking a refund of $500,000,000 on the estate tax and citing the fact that at the moment of his death there was an exclusion equal to 100% of the tax.. The Service received the amended return and after auditing it, denied the refund claim. She then filed suit in the U.S. Court of Federal Claims claiming that the law was ex post facto and thus violated the U.S. Constitution.

On April 15, 2011, Eugenia filed a Fiduciary Income Tax return showing a capital gain of $498,000,000 and estate tax deduction of $299,000,000. She paid income taxes to IRS of $45,000. She again filed for a refund and the refund claim was denied at which point she filed another lawsuit in the U.S. Claims Court, claiming that in effect she should have been allowed to step-up her basis.