Tag Archives: Internal Revenue Code

Podcast – Exclusion from Gross Income | LEGAL THOUGHTS

Coleman Jackson, P.C. | Transcript of Legal Thoughts Podcast
Published October 7, 2020

Exclusion from Gross Income

Legal Thoughts is a podcast presentation by Coleman Jackson, P.C., a law firm based in Dallas, Texas serving individuals, businesses, and agencies from around the world in taxation, litigation, and immigration legal matters.

This particular episode of Legal Thoughts is a podcast where the Attorney, Coleman Jackson is being interviewed by Mayra Torres, the Public Relations Associate of Coleman Jackson, P.C.   The topic of discussion is “Income from Discharge of Indebtedness.” You can listen to this podcast by clicking here:

You can also listen to this episode and subscribe to Coleman Jackson, P.C.’s Legal Thoughts podcast on Apple Podcast, Google Podcast, Spotify, Cashbox or wherever you may listen to your podcast.

TRANSCRIPT:

ATTORNEY:  Coleman Jackson
LEGAL THOUGHTS
COLEMAN JACKSON, ATTORNEY & COUNSELOR AT LAW

ATTORNEY:  Coleman Jackson

Welcome to Tax Thoughts

  • My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, litigation, and immigration law firm based in Dallas, Texas
  • Our topic for today is: “Income from Discharge of Indebtedness.”
  • Other members of Coleman Jackson, P.C. are Yulissa Molina, Tax Legal Assistant, Leiliane Godeiro, Litigation Legal Assistant, Reyna Munoz, Immigration Legal Assistant and Mayra Torres, Public Relations Associate.
  • On this “Legal Thoughts” podcast our public relations associate, Mayra Torres will be asking the questions and I will be responding to her questions on this important tax topic: ““Income from Discharge of Indebtedness.”

Interviewer:  Mayra Torres, Public Relations Associate

  • Good morning everyone. It is a pretty chilly Autumn morning today! My name is Mayra Torres and I am the public relations associate at Coleman Jackson, P.C. We are a taxation, litigation and immigration law firm based right here in Dallas, Texas.
  • Question 1:  Attorney:  Is all income taxable in the United States?

Attorney Answers Question 1:

  • Good morning Mayra. Wow that is a broad question this morning! Let me begin with Internal Revenue Code Section 61 where gross income is defined in U.S. Tax Law. That is where we must begin our discussion of taxable income in U.S. tax law. Gross income is defined in Internal Revenue Code Section 61 as all income from whatever source derived.
  • The Internal Revenue Code contains a laundry list of types of income that are taxable, but IRC Section 61 specifically states that the list is not intended to be exhaustive or complete. The types of income specifically included on the gross income laundry list are:
    1. Compensation for services, including fees, commissions, fringe benefits, and similar items;
    2. Gross income derived from business;
    3. Gains derived from dealings in property;
    4. Interest;
    5. Rents;
    6. Royalties;
    7. Dividends
    8. Alimony and separate maintenance payments;
    9. Annuities;
    10. Income from life insurance and endowment contracts;
    11. Pensions;
    12. Income from discharge of indebtedness;
    13. Distributive share of partnership gross income;
    14. Income in respect of a decedent; and
    15. Income from an interest in an estate or trust
  • Repeat: This list of taxable gross income is not exhaustive. Gross income under U.S. Tax Law is extremely broad and envision taxation of increments of wealth constituted in whatever shape or form.

Interviewer:  Mayra Torres, Public Relations Associate

  • Attorney that is a lot. Let me see whether we can narrow down our discussion to this!
  • QUESTION 2: Is any income excluded from gross income for U.S. tax purposes?

Attorney Answers Question 2:

  • Mayra, that indeed is a good strategy because as I have said the concept of gross income in U.S. tax law is a global concept. Gross income includes income derived from whatever source derived.
  • As for income that is excluded from gross income for tax purposes. Let me just limit our discussions to income from discharge of indebtedness since this could potentially be a looming problem as the economic impact of Covid-19 continues to hammer many families in their pocketbooks. Internal Revenue Code Section 108(a) states that gross income does not include any amount which would otherwise be includible in gross income by reason of the discharge of indebtedness of the taxpayer if
    1. The discharge occurs in a title 11 bankruptcy case;
    2. The discharge occurs when the taxpayer is insolvent;
    3. The indebtedness discharged is qualified farm indebtedness;
    4. In the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness; or
    5. The indebtedness discharged is qualified principal residence indebtedness which is discharged-
      • Before January 1, 2021 , or
      • Subject to an arrangement that is entered into and evidenced in writing before January 1,2021.

Interviewer:  Mayra Torres, Public Relations Associate

  • Okay, you have listed about five categories there. Right now, could you please explain the last one you mentioned in the list in more detail.
  • Question 3: Explain what qualified principal residence indebtedness is and how it works and all?

Attorney Answers Question 3:

  • Mayra, the term principal residence indebtedness means the debt financing the taxpayer’s principal residence or place where the taxpayer resides most of the time. This is the main residence of the taxpayer.
  • The mortgage on the taxpayer’s main residence must meet both of these prongs or conditions:
    1. the mortgage must have been taking out to purchase, build, or substantially improve the taxpayer main home; and
    2. the mortgage must secure the taxpayer’s main home
    3. Let me just add that the taxpayer cannot have but one main residence which turns on all the facts and circumstances. The debt can be a second mortgage obligation if it meets requirements one and two.

Interviewer:  Mayra Torres, Public Relations Associate

  • Question 4:
  • Attorney how much of this qualified principal residence indebtedness is eligible for exclusion from the gross income of the taxpayer?

Attorney Answers Question 4:

  • Well, first of all let me say, the list of exclusions have a pecking order that taxpayers must be aware of; for example, the discharge of debt in a Chapter 11 Bankruptcy proceeding preempts all other exclusions under Code Section 108. And the insolvency exclusion that I mentioned awhile ago takes precedence over the farm debt exclusion and the qualified real property exclusion; and the principal residence indebtedness exclusion takes precedence over the insolvency exclusion unless the taxpayer makes the proper elections.
  • Now, let’s go back to your original question Mayra; please repeat your question again so that we can be clear on this.

Interviewer:  Mayra Torres, Public Relations Associate

  • Sure, no problem, Attorney! Thanks for pointing out the pecking order of the various exclusions.My original question was…
  • Question 5: How much of the qualified principal residence indebtedness that is forgiven by the lender is excluded from the gross income of the taxpayer?

Attorney Answers Question 5:

  • Okay, let me make four very important points as it relates to the amount of the exclusion of cancellation of debt income of certain qualified principal residence indebtedness:
    • Number 1: the exclusion of residence indebtedness only applies, for the most part, to debt discharged after 2006 and before 2021 or at least the taxpayer needs to have a written discharge agreement in place by December 31, 2020
    • Number 2: the maximum amount of forgiven debt that the taxpayer can treat as qualified principal residence indebtedness is $2 million dollars or $1 million if filing married filing separate; and
    • Number 3: The discharged debt must be directly related to decline in the market value of the taxpayer’s main home or directly due to the taxpayer’s disrupted or poor financial condition.
    • Number 4: The exclusion amount is limited to the part of the discharged loan that is qualified principal residence indebtedness. That simply means that the exclusion is limited to the portion of the discharged debt that meets the definition of qualified principal residence indebtedness that I discussed at the beginning of this discussion.

Interviewer:  Mayra Torres, Public Relations Associate

  • Question No. 6: Attorney, how does a taxpayer actually take the qualified principal residence debt exclusion? I mean is this on the tax return they file or what?

Attorney Answers Question 6:

  • Yes, the taxpayer must attach tax Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness to their annual income tax return filed with the IRS and comply with appropriate instructions explaining their tax position.
  • Mayra, do you have any further questions with respect to types of income excluded from gross income? So far, we mostly have talked about qualified principal residence debt exclusion. And there are many aspects of this topic that we have not explored. I mean we could talk more about debt extinguished through repossessions and foreclosures. Any specific additional questions at this time on this debt cancellation topic?

Mayra’s Concluding Remarks

  • Attorney,Attorney thank you for answering my questions. I do have more questions involving the exclusion of canceled debt from U.S. taxation, but I can put them off to some other time.
  • Our listeners who want to hear more podcast like this one should subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever they listen to our podcast. Everybody take care!  And come back in about two weeks, for more taxation, litigation and immigration Legal Thoughts from Coleman Jackson, P.C., which is located right here in Dallas, Texas at 6060 North Central Expressway, Dallas, Texas 75206.
  • English callers: 214-599-0431 and Spanish callers:  214-599-0432.

 Coleman Jackson, Attorney’s concluding remarks:

 THIS IS THE END OF “LEGAL THOUGHTS” FOR NOW

  • Thanks for giving us the opportunity to inform you the exclusions of cancellation of debt income from U.S. taxes. If you want to see or hear more taxation, litigation and immigration LEGAL THOUGHTS from Coleman Jackson, P.C.  Stay tune!  Watch for a new Legal Thoughts podcast in about two weeks.  We are here in Dallas, Texas and want to inform, educate, and encourage our communities on topics dealing with taxation, litigation and immigration.  Until next time, take care.

REASONABLE CAUSE AND GOOD FAITH – IRS Penalties Can Be Abated, Forgiven or Waived

By Coleman Jackson, Attorney & Certified Public Accountant
June 21, 2018

IRS Penalties Can Be Abated, Forgiven or Waived

The Internal Revenue Code is full of various kinds of penalties that the Internal Revenue Service is authorized to assess and collect from errant, indifferent, negligent, ambivalent, and indecisive or otherwise noncompliant taxpayers who fail to collect or pay their tax bill or attempt to evade the federal tax laws.  Six IRS penalties that seem to be common in recent years are as follows:

Code Sec. 6672 Penalties:  penalties assessed when taxpayers fail to timely collect, turn over withholding taxes or avoid timely payment of tax obligations;

Code Sec. 6701 Penalties:  penalties assessed against tax return preparers, such as enrolled agents, certified public accountants or others working in the tax return preparation services industry who aids and abet taxpayers in filing false or fraudulent tax returns;

Code Sec. 6676 Penalties:  penalties assessed against taxpayers and others who file tax refund claims or take tax credits without basis in reality, truth or facts.  Unsubstantiated deductions and credits on a tax return commonly give rise to Code Sec. 6676 penalties.   Filing a tax return with the IRS with a false refund request constitutes a false statement under the penalty of perjury.

IRS Penalties

Code Sec. 6697-6699 Penalties:  penalties for failure to file various types of tax returns that should be filed.  Such as failure to file a Form 1040, Form 1120, Form 1120S or Form 1165 can all be the basis for the IRS to assess a failure to file penalty.  Pass through entities, such as, partnerships and s-corporations must still file entity tax returns even though federal taxes are paid at the individual ownership level rather than the entity level.

Code Sec. 6712 Penalties:  penalties assessed against taxpayers who fail to disclose treaty based tax positions.  Immigrants, expatriates and foreigners are especially susceptible to incurring faulty tax treaty position penalties unless they hire well qualified tax consultants in preparation of their annual tax returns.

Code Sec 6662 Penalties:  penalties assessed against taxpayers who fail to report income from foreign sources, such as, foreign bank accounts, foreign businesses, and foreign asset holdings can incur very severe penalties.  U.S. citizens, resident aliens and certain nonresident aliens must report worldwide income from all sources including foreign bank accounts, foreign businesses, foreign trusts and other foreign assets.  Moreover, taxpayers with foreign holdings whose aggregate value exceeds $10,000 at any point during the calendar year must file Form 114, Report of Foreign Bank and Financial Accounts (FBAR) electronically with the Financial Crimes Network (FinCen’s BSA E-Filing System).  Failure to report the existence of offshore holdings is subject to civil and criminal penalties.  It is anticipated that this set of penalties and potential criminal prosecution will be on the rise in the near future because the IRS has announced that it will end the 2014 Voluntary Disclosure Program on September 28, 2018.

REASONABLE CAUSE AND GOOD FAITH

Another special set of tax rules have long been in force to forgive tax penalties due to reasonable cause and good faith.  The reasonable cause relief is set out in Code Sec. 6664.  The IRS will not impose accuracy related penalties upon a showing by the taxpayer that there was reasonable cause for the tax position and that they acted in good faith with respect to the tax position or act in question.  The reasonable cause defense under Code Sec. 6664 turns on all the facts and circumstances.  That simply means that the IRS and Courts try to determine ‘why’ the taxpayer failed to comply with the federal tax laws.  A taxpayer’s substantial knowledge of federal tax law is a significant factor that the IRS and Courts consider in determining whether a taxpayer acted in good faith and reasonable.  Immigrants or those recently immigrating to the U.S. often lack the sophistication and knowledge of U.S. tax laws.  U.S. tax laws complexity often confounds well educated Americans as well.  Taxpayers reliance on tax return preparers’ suggestions, recommendations and guidance also have been found by many Courts to meet the taxpayers burden to show that they acted reasonable and with good faith.  Taxpayers exercising ordinary business care and diligence sometimes likewise are found by the IRS and Courts as acting in good faith and reasonably.  These various examples simply show that the IRS can abate, forgive or waive federal tax penalties in a very broad spectrum of situations.  Taxpayers confronted with IRS tax penalty situations must act reasonable and be prudent in exploring with their tax attorney the potential that the penalties can be abated, forgiven or waived.  Even fraud penalties can be waived under certain circumstances and criminal charges may likewise be averted.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432

IRS REFUNDS LIKE DISCOUNT COUPONS CAN BE LOST

By:  Coleman Jackson, Attorney, CPA
May 11, 2018

IRS REFUNDS LIKE DISCOUNT COUPONS CAN BE LOST

Read discount coupons’ fine print.  IRS refunds like discount coupons can be lost for a variety of reasons.  That is why you need to read the fine print; so that, it is more likely than not, that you receive what you expected.  Read carefully the fine print of the Internal Revenue Code too.

Focus on the Internal Revenue Code.  26 United States Code exclusively set for the guidelines and requirements for federal tax refunds claims.  26 U.S.C. is commonly referred to as the Internal Revenue Code.  The Internal Revenue Code governs tax refund claims.  Taxpayer’s must focus on the fine print or legitimate refunds can be lost.  IRS refunds like discount coupons can be lost.  Under 26 U.S.C.S Section 7422(a), a taxpayer who seeks a refund must make a timely claim for refund.  This means that the taxpayer must file a timely tax return and do everything it can to attempt to collect the erroneously or illegally assessed or collected tax.  This includes seeking an appeals conference within the IRS.  The taxpayer must exhaust these administrative attempts before filing suit against the United States government in the appropriate federal District Court.

A tax refund claim encompasses a taxpayer’s attempt to obtain a credit, offset or return of any overpayments of taxes assessed or collected by the United States government under the Internal Revenue Code

Pay more attention to fine points.  A tax refund claim encompasses a taxpayer’s attempt to obtain a credit, offset or return of any over payments of taxes assessed or collected by the United States government under the Internal Revenue Code.  Refund claims must be filed within the statute of limitations which depends upon whether an original tax return was timely filed.  If a tax return was timely filed, a taxpayer must file a refund claim with the IRS within 3 years of the return due date or within two years of paying the tax.  The due date governs when the statute begins to run.  For example, if the return was due on April 15, 2018 and the taxpayer actually filed early; the actual due date of the return and not the early filing date would govern the start of the statute of limitations.  Likewise, for example, if the payment due date is June 30, 2018 and the taxpayer actually pays on May 15, 2018, the due date of the payment governs the start of the statute of limitations and not when the taxpayer actually paid the tax.   Filing early or paying early reverts back to their respective due dates.  The fallback statute of limitations is two years under the IRC if no return was required; see IRC Sec. 6511(a).  If a tax return was required and no return was filed within three years of its due date; the taxpayer is not entitled to a refund.  Normal filing extensions, insolvency and bankruptcy of the taxpayer and formal agreements with the Internal Revenue Service; such as, installment agreements has absolutely no affect on the ‘due date of the return’ for refund purposes. Pay attention to waivers, however, because taxpayers can waive (give up) their legal rights to recover IRS refunds.

Focus on IRS delays.  The IRS must be given the opportunity to return the erroneously assessed or collected tax, penalty or interest

Focus on IRS delays.  The IRS must be given the opportunity to return the erroneously assessed or collected tax, penalty or interest.  If the IRS refuses to return the erroneously assessed or collected tax within six months of the taxpayer’s refund claim, the IRS is required to inform the taxpayer of its right to an appeals conference pursuant to Treasury Regulation 301.7430-1(e)(3)(iii).  If the government fails to give the taxpayer notice of the right to an appeal conference, the taxpayer can file suit six months after filing its tax refund claim because the presumption is that the taxpayer has exhausted its administrative remedies.  If the IRS gives the taxpayer the required ‘right to appeals conference notice’ but refuses to return the erroneously or illegally assessed or collected tax, penalty or interest after the appeals conference, the taxpayer can sue in federal court.  Note ; however, that no federal lawsuit can be filed against the tax collector, or IRS auditor, or IRS revenue officer because claims for return of erroneously assessed or collected taxes, penalties and interest are claims against the United States government—not claims against the government’s agents, auditors or collectors.  See Kaucky v. Southwest Airlines Co., 109 F. 3d 349 (7th Cir. 1997).  The U.S. government is the only party that the taxpayer can sue in tax refund recovery cases.  The taxpayer must file suit against the United States government for erroneously assessed taxes, penalties or interest within two years after exhaustion of administrative remedies pursuant to 26 U.S.C.S. Sections 7422(a) through 7422(f).    The tax refund lawsuit must be brought in federal court; taxpayer’s cannot sue the federal government in state court for tax refunds.  Tax refund cases can be brought in the Court of Federal Claims and federal District Court with jurisdiction over all parties.  Repeat!  Taxpayers must bring their refund suit within two years of exhausting their administrative remedies.  The federal suit can include claims for recovery of overpaid taxes, penalties and interest.  And when the IRS agents have acted in a manner that is arbitrary and capricious the taxpayer can also seek to recover its administrative cost which includes litigation costs and reasonable attorney fees.  Government agents act arbitrary and capricious whenever their actions have no basis in law or fact.

To summarize; IRS refunds like discount coupons can be lost if the taxpayer ignores the fine print.  Focus on the following summary:

  1. The Internal Revenue Code governs tax refunds relating to taxpayer’s attempts to recover allegedly erroneous assessment or collection of federal taxes, penalties and interest;
  1. Taxpayer’s must file a claim for refund with the Internal Revenue Service within the statutory time frame for filing such claim. The statute of limitation is typically 3 years from the due date of the tax return or 2 years from the payment due date when the tax is paid;
  1. The IRS is required to act lawfully and in a reasonable amount of time pursuant to the Internal Revenue Code and the IRS Practice Manual to resolve administratively tax refund claims;
  1. Taxpayer’s who exhaust their administrative remedy can sue the United States government in federal court to recover overpayments of taxes, penalties and interest from the U.S. government. If the IRS had no basis in law or fact to support its position in denying the taxpayer’s refund claims, the taxpayer can seek to recover administrative cost, including litigation costs and attorney fees pursuant to the 5th Amendment to the United States Constitution.  The pertinent part of the 5th Amendment reads that no one shall be deprived by the federal government of life, liberty or property without due process of law.   The U.S. Constitution sits atop all statutes and other laws both federal laws and state laws; including the Internal Revenue Code.  The term “Rule of Law” simply means that the country is ruled by laws and not the dictates of men.  The federal government cannot constitutionally take anyone’s ‘life, liberty and property’ without due process of law.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432