Precious metals ETFs, update

December 7th, 2009

A little over a month ago I put up a short post on how gains in a precious metal ETF might be taxed at the collectible rate of 28% instead of the normal long term capital gain rate of 15%. I said I would dig around to see if I could find more on it.

The IRS Office of Chief Counsel issued a memorandum in May 2008 stating that, generally speaking, metals-based ETFs are treated as if the shareholder held the metal itself. In other words, the 28% tax applies.

Something to keep in mind if you are considering taking profits on those GLD shares that have shot up and (recently) down.

Excel timesheet

December 3rd, 2009

I put together a simple Excel timesheet that does a pretty good job of keeping track of tasks while working on the computer. It acts as a timer by allowing you to enter start and stop times.

timesheet

 

For date, keyboard shortcut is Ctl + ; (semicolon key)

For time, keyboard shortcut is Ctl + Shift + : (colon key)

When I start a task, I enter date, client, and then go over to the start cell and enter the time shortcut above. Then I tab over to the stop cell. When I stop, I enter the time shortcut again. If more than a minute has passed, the elapsed time will read in tenths of hours.

The time is automatically totalled. If you want to add rows, remember to copy the entire row above into the new rows to preserve the formulas.

Click to download

9th Circuit partially rejects attorney fee award in automatic stay claim

November 19th, 2009

An October 22, 2009 by the 9th Circuit Court of Appeals upsets the understanding that a debtor in bankruptcy who pursues an adverary proceedings claim against a creditor who violated the automatic stay may be awarded costs and attorneys’ fees. The case is
Sternberg v. Johnston
.

In 1997, the Bankruptcy Appellate Panel of the 9th Circuit had approved a claim for attorneys’ fees asserted by a successful debtor in the prosecution of an appeal of a stay violation. In re Walsh, 208 B.R. 949, affirmed 219 B.R. 873 (Bkrtcy.N.D. Cal.1997). This led most bankruptcy practitioners to conclude that attorney fees for prosecution of a violation of the stay were allowed under 11 USC section362(k)(1) which states in part:

an individual injured by any willful violation of a stay . . . shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.

In Sternberg, the 9th Circuit interpreted this language as meaning that the debtor could only recover attorneys’ fees incurred in defending against an act resulting from a violation of the automatic stay, not in prosecuting a claim against the violating creditor. The 9th Circuit acknowledged that its interpretation was at odds with the 5th Circuit, but decided that if Congress intended to abrogate the “American Rule” (the common law rule that each party bears its own costs and attorneys’ fees absent agreement or statute), it would have done so more explicitly. It seemed to reason that the phrase “actual damages and attorneys’ fees” means only “actual damages, including attorneys’ fees spent defending a wrongful action.”

This is an odd interpretation of what one would expect from plain statutory language. But the 9th Circuit invoked the US Supreme Court case Fogerrty v. Fantaxy, Inc., 510 US 517 (1994) in support. (As an aside, this was John Fogerty of Creedance Clearwater fame.) Fogerty involved a defendant’s claim for attorneys’ fees against a plaintiff after he successfully defended against a copyright lawsuit. The statute in question gave the District Court discretion to award attorneys’ fees, but did not require it. The Supreme Court held that, because the copyright statute stated that the court “may” award attorneys’ fees, it was not required to.

The obvious problem jumps out. Section362(k)(1) states that attorneys’ fees “shall” be awarded. The 9th Circuit did not discuss this distinction.

Nevertheless, right now in the 9th Circuit it looks like there is no authority for asking for attorneys’ fees in a prosecution for violation of relief from stay.

The other issue in Sternberg was whether a lawyer representing a divorced wife pursuing delinquent support willfully violated the automatic stay by defending her claim in state court proceedings after the bankruptcy petition had been filed. The 9th Circuit said yes, restating the affirmative duty of creditors to essentially undo state proceedings to the extent that such proceedings impair a bankrupt debtor’s estate.

Contractor’s liens on projects that go bankrupt in Washington

November 11th, 2009

Contractors, engineers, architects, suppliers and other construction businesses face a potentially bad situation when the owners of a project they were working for go bankrupt. In the State of Washington, these people generally have a right to file a lien upon the property to secure payment for the services or materials they provided to improve the property.

But what to do if the owner goes bankrupt before the construction provider was able to establish a lien?

In bankruptcy, the general rule is that a creditor cannot do anything to further a claim against the entity going bankrupt during the period of the “automatic stay.” Section 362 of the bankruptcy code imposes this automatic stay, “applicable to all entities,” upon filing of a bankruptcy petition. In most cases, a creditor must file a motion with the bankruptcy court requesting “relief from stay,” and the request must be supported by facts showing specific reasons why the creditor should be able to get such relief ahead of other creditors.

But section 362 provides exceptions. 362(b) allows an exception for:

any act to perfect, or to maintain or continue the perfection of, an interest in property to the extent that the trustee’s rights and powers are subject to such perfection under section 546(b) of this title or to the extent that such act is accomplished within the period provided under section 547(e)(2)(A) of this title.

OK, maybe that is not helpful yet. Looking at section 546(b) we see that the powers of a trustee

are subject to any generally applicable law that—(A) permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of perfection. . . . such interest in such property shall be perfected, or perfection of such interest shall be maintained or continued, by giving notice with the time fixed by such law for such seizure or such commencement.

Putting 362(b) and 546(b) together, we see that the automatic stay does not apply to perfecting an interest against property if there is a general law allowing it.

Washington has such a law, RCW 60.04, which allows contractors and suppliers to place a lien upon property that they have worked on or provided supplies to. The statute has specific requirements that I won’t go into here, but generally, you must record your lien (called generally a “mechanic’s lien”) in the county of the property within 90 days of completion of services. (Note, there are other wrinkles for property owned by someone for whom you did not contract with—I am simplifying things).

After recording, in order to maintain your claim, you generally must file a lawsuit on the claim within 8 months of recording. In Washington, this period is tolled during a bankruptcy.

Keep in mind that the automatic stay prohibits you from filing a lawsuit to enforce your lien rights. But the bankruptcy code allows you to record your claim of lien in the 90 day period. And section 546(b) requires that you give notice in the bankruptcy court during the 8 month period after recording.

Summary: If you are a contractor who has not been paid for work on a project that has gone bankrupt, consider whether you have time to record a lien for your work or supplies. Once you have done that, be sure to file with the bankruptcy court a notice that you intend to pursue your claim. It also is a good idea to request the court to provide you special notice of all proceedings so that you can determine when the case is finished. It would be a shame for you to go to this trouble and find that the case was dismissed without you knowing, and the 8 month period for enforcement has lapsed.

Disclaimer:

The information on this website, comments that may appear, and other content or links are provided for informational purposes only. Do not rely upon this information solely for making decisions that may affect your legal rights. Consult with an attorney or tax professional prior to acting in such situations.

Stimulus leads to free golf carts

November 1st, 2009

I don’t know how I missed this Wall Street Journal story, but it is just another one of those unintended consequences of social engineering through the tax code.

People are getting golf carts for no cost, thanks to tax credits that encourage the purchase of electric vehicles.

The first paragraph pretty much sums it up:

We thought cash for clunkers was the ultimate waste of taxpayer money, but as usual we were too optimistic. Thanks to the federal tax credit to buy high-mileage cars that was part of President Obama’s stimulus plan, Uncle Sam is now paying Americans to buy that great necessity of modern life, the golf cart.

The article: Cash for Clubbers

Gold and Silver ETFs taxed as collectibles at 28%

October 29th, 2009

Something I hadn’t known:  Gold and Silver Exchange Traded Funds (ETFs) are taxed as collectibles.  That means that if you hold the shares for more than a year, the capital gain you realize when you finally sell them would be 28%.

Ouch.

But, apparently, you can hold those funds in a traditional IRA and avoid all this.  I’m going to dig around the IRS publications and guidance to get the story from the horse’s mouth, but here is a helpful link:

http://moneygirl.quickanddirtytips.com/money-golden-egg.aspx

Cancellation of debt income.

October 28th, 2009

 Many people do not realize that if they negotiate with a creditor to reduce the debt they owe, they might be imputed income for the amount of the reduction.

In other words, if you have a debt you cannot pay, and the creditor writes it off, you might receive a 1099 stating that you have income in the amount of the forgiven debt.

This gets reported to the IRS, and, if an exception does not apply, it will expect you to pay taxes on it. 

There are exceptions, though, and in many cases these exceptions are helpful.  For instance, discharge in bankruptcy is not taxable. 

In addition, forgiven debts on principal residence are, in many cases, not taxable.  The Mortgage Debt Relief Act of 2007 allows $2 million of forgiven debt on a qualified principal residence ($1 million if married filing separately). 

Also, if you were insolvent at the time of debt forgiveness, the amount is not taxable.  Being insolvent means that your total debts exceed your total assets.  This calculation can become complicated by the fact that you may recognize a reportable capital gain even if you are insolvent.  The IRS provides worksheets to calculate insolvency.

When attempting to work out debt reduction, if the amounts are substantial, it is a good idea to have a tax professional review the proposed plan prior to making it final.  Strategic planning can often minimize the tax bite.

Some additional information from the IRS:

http://www.irs.gov/pub/irs-pdf/p4681.pdf

http://www.irs.gov/individuals/article/0,,id=179414,00.html

Long-term tax advice not “promotion” of tax shelters

June 24th, 2009
Note taking while talking with your Federally Authorized Tax Practitioner (FATP) is still confidential, as long as your FATP is giving advice and not “promoting” a tax shelter.

In a case addressing the confidentiality of notes taken during meetings with a tax professional regarding the tax consequences of certain business transactions, the Tax Court recently decided that the limited privilege of Section 7525(b) of the Internal Revenue Code does not apply to personal notes because they are not written communications given to someone else:

“The notes were not communicated to anyone. Therefore, they do not constitute a written communication that can satisfy that element of the section 7525(b) exception. The FATP privilege accorded to the notes is not subject to the exception in section 7525(b.)”

However, the Tax Court decided that they were privileged anyway because they were not promotions of a tax shelter. The long time relationship between the FATP and the taxpayer weighed against the argument that the FATP was “promoting” a tax shelter and in favor of the argument that the FATP was providing tax privileged tax advice. Noting differences among District Courts in defining the meaning of the term “promotion” in section 7525(b), it turned to the legislative history for guidance. It noted that the conferees of the House and Senate committee stated:

“The Conferees do not understand the promotion of tax shelters to be part of the routine relationship between a tax practitioner and a client. Accordingly, the Conferees do not anticipate that the tax shelter limitation will adversely affect such routine relationships.”

Following this guideline, the Tax Court ruled that the communications from the FATP to his client remained privileged because they were not “promotion” of a tax shelter. The factors it noted were that the FATP:

“has had a long, close relationship with the Winn organization, preparing returns, assisting with tax planning when asked, answering questions when asked, and responding to notices and inquiries from Federal and State tax officials. His advice with respect to the partnership redemptions and associated transactions under review in these cases was furnished (as was similar advice with respect to similar transactions) as part of a long-standing, ongoing, and, hence, routine relationship with the Winn organization.”

Valuing a conservation easement

June 22nd, 2009
If you are in the mood to get a tax deduction for donating a conservation easement, (or any real estate for that matter) valuation is a substantial concern. The Tax Court just issued a decision that outlines in great detail how it looks at valuation in cases where there isn’t comparable sales data:

Kiva Dunes Conservation v. Commissioner

It’s a good look into how the Tax Court evaluates the valuation opinion of experts.

Lurking unfiled 941 returns?

April 7th, 2009
Business owners who have employees should be filing their quarterly 941 returns in a timely fashion. Of course, they should be paying the tax withholding as well. Perhaps that goes without saying, but I’ve received a few calls lately regarding unfiled 941 returns from small businesses.

First off, the penalties for failing to file these returns are substantial. There is the failure-to-file penalty of 5% of the tax due for each month or part of the month it wasn’t reporting (up to 25% maximum). If you receive a penalty notice, you may be able to provide a reasonable cause, but reasonable cause is not the fact that you spent the money on something else (it’s called a “trust” fund for a reason).

The IRS can, and does, seize business assets, close bank accounts, and garnish accounts receivables to get what is owed.

Even more ominous is the 100% “Trust Fund Penalty”, which is applied to any “Responsible Person” such as owners, officers, or check-signers. This is personal liability, the corporate shield will not protect from the IRS’s collection activities.

Finally, of course, there is the potential for criminal prosecution for failure to file. Section 7203 of the Internal Revenue Code states:

Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both . . . .

Indeed the IRS takes failing to file the 941 return and failing to pay withholding tax to be a serious thing.

The simple advice: if you are cash-strapped, do not, under any circumstances, use employee withholdings for anything else but to pay the IRS. It is better, in the long run, to default on your rent or on your business loan than to default with the IRS.

And, if you haven’t filed, you should file the return as soon as possible to avoid the possibility of criminal prosecution. Consult with a tax professional soon so as to arrange with the IRS to an agreement to not prosecute and enter into a payment arrangement.