Bookkeeping Service Louisiana

The First Time Homebuyer Credit Time Period Has Been Extended

7/15/2010

The Code Sec. 36 first-time homebuyer credit generally is equal to the lesser of $8,000 ($4,000 for a married individual filing separately) or 10% of the principal residence's purchase price. However, for purchases after Nov. 6, 2009, a taxpayer (i.e., a “long-time resident”) may claim the homebuyer credit if he (and, if married, his spouse) maintained the same principal residence for any 5-consecutive year period during the 8-years ending on the date that the taxpayer buys the subsequent principal residence. The maximum allowable homebuyer credit for such taxpayers, who are treated as first time homebuyers for purposes of the first-time homebuyer credit, is $6,500 ($3,250 for a married individual filing separately), or 10% of the purchase price of the subsequent principal residence, whichever is less.

For purchases after Nov. 6, 2009:

... the first-time homebuyer credit phaseout range is between $125,000 and $145,000, and for those filing a joint return, it's between $225,000 and $245,000.

... the first-time homebuyer credit cannot be claimed for a home if its purchase price exceeds $800,000; and

... a number of anti-abuse provisions apply. For example, dependents can't claim the first-time homebuyer credit; a purchaser must be at least 18 years of age on the date of purchase; and the definition of a qualifying purchase for first-time homebuyer credit purposes is amended to exclude property acquired from a person related to the person acquiring the property or the spouse of the person acquiring the property, if married.

The first-time homebuyer credit applied to a principal residence bought before May 1, 2010 and, under pre-Act law, to a principal residence bought before July 1, 2010, by a person who entered into a written binding contract before May 1, 2010, if the purchase closed before July 1, 2010. (Certain service members on qualified official extended duty service outside of the U.S. get an extra year to buy a qualifying home and get the credit.)

New Law. The Act provides that if a written binding contract to purchase a principal residence was entered into before May 1, 2010, to close on the purchase of a principal residence before July 1, 2010, the credit may be claimed if the purchase is closed before Oct. 1, 2010.Code Sec. 36(h)(2), as amended by Act Sec. 2(a) Thus, this extension allows homebuyers who signed a contract no later than the April 30th deadline, intending to close before July 1, 2010, to complete their closing by the end of September and still qualify for the credit. Conforming amendments are made for purposes of the longer periods for those service members on qualified official extended duty service outside of the U.S. (Code Sec. 36(h)(3)(B)

Required Documentation In IR 2010-80, IRS reminds taxpayers that special filing and documentation requirements apply to anyone claiming the homebuyer credit. To avoid refund delays, those who entered into a purchase contract on or before April 30, but closed after that date, should attach to their return a copy of the pages from the signed contract showing all parties' names and signatures if required by local law, the property address, the purchase price, and the date of the contract. Besides filling out Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, all eligible homebuyers must also include with their return one of the following documents:

... A copy of the settlement statement showing all parties' names and signatures, property address, sales price, and date of purchase. Normally, this is the properly executed Form HUD-1, Settlement Statement. While the Form 5405 instructions indicate that a properly executed settlement statement should show the signatures of all parties, IRS recognizes that the elements of the settlement document may vary from jurisdiction to jurisdiction and may not reflect the signatures of the buyer and seller. The settlement statement that must be attached to the return is considered to be properly executed if it is complete and valid according to local law. In locations where signatures aren't required, IRS encourages the buyer to sign the settlement statement prior to attaching it to the tax return even in cases where the settlement form does not include a signature line.

... For mobile home purchasers who are unable to get a settlement statement, a copy of the executed retail sales contract showing all parties' names and signatures, property address, purchase price and date of purchase.

... For a newly constructed home where a settlement statement is not available, a copy of the certificate of occupancy showing the owner's name, property address and date of the certificate.

... A taxpayer who entered into a binding contract before May 1, 2010 (and who closes by July 1, 2010) must also attach pages from the signed contract showing all parties names and signatures, the property address, the purchase price, and the date of the contract.

... A taxpayer claiming the credit as a long-term resident of the same main home must attach copies of one of the following: Form 1098, Mortgage Interest Statement (or substitute statement), property tax records, or homeowner's insurance records. These records should be for 5 consecutive years of the 8-year period ending on the purchase date of the new main home.

Options for claiming the credit. IR 2010-80 also reminds taxpayers that there are three options for claiming the credit on a qualifying 2010 purchase:

... If a 2009 return hasn't yet been filed, a taxpayer can claim the credit on Form 1040 for the 2009 tax yea. Though such a return cannot be filed electronically, taxpayers can still use IRS Free File to prepare their return. The returns must be printed out and sent to IRS, along with all required documentation. (Taxpayers can use direct deposit for their refunds.)

... If a 2009 return has already been filed, a taxpayer can claim the credit on an amended return using Form 1040X.

... Whether or not a 2009 return has been filed, a taxpayer can wait until next year and claim the credit on a 2010 Form 1040.

Observation: The three-month extension of the closing date is intended to provide tax relief for those who couldn't close on time because of backlogs at lenders and federal programs involved in homebuyer loans. In the words of the Act's supporters, the three-month extension “will give time for all the new mortgages to be processed and not punish those homeowners who have been delayed through no fault of their own.”

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Construction Company's Workers were Employees, Not Independent Contractors

7/12/2010

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Bruecher Foundation Services Inc v. U.S. (CA 5 06/18/2010) 105 AFTR 2d 2010-997

The Fifth Circuit has upheld a district court's finding that a construction company's workers were employees rather than independent contractors. The company's late filing of Forms 1099 for the affected workers didn't meet the reporting consistency requirement for Section 530 relief and its workers were employees under the common law tests. Although IRS failed to provide statutory notice of Section 530 relief before or at the start of its audit, the company didn't try to obtain administrative relief on this ground.

Background. Whether a worker is an independent contractor or employee generally is determined by whether the enterprise he works for has the right to control and direct him regarding the job he is to do and how he is to do it. Under the common-law rules (so-called because they originate from court cases rather than from the Code), factors used to determine if an individual is a common law employee are:

The degree of control exercised by the principal;
which party invests in work facilities used by the individual;
the opportunity of the individual for profit or loss;
whether the principal can discharge the individual;
whether the work is part of the principal's regular business;
the permanency of the relationship;
the relationship the parties believed they were creating; and
the provision of employee benefits.

However, Section 530 of the '78 Revenue Act (as amended) provides retroactive and prospective relief from employment tax liability for employers who misclassified workers as independent contractors using the common-law facts and circumstances standards. Section 530 applies only if:

The taxpayer does not treat an individual as an employee for any period, and does not treat any other individual holding a substantially similar position as an employee for purposes of employment tax for any period—the substantive consistency requirement;
for post-'78 periods, “all federal returns (including information returns) required to be filed by the taxpayer” with respect to the individual for such period “are filed on a basis consistent with the taxpayer's treatment” of the individual as a nonemployee—the reporting consistency requirement; and
the taxpayer had a “reasonable basis” for not treating the worker as an employee (judicial precedent or IRS rulings, a past IRS audit, or a long-standing practice of a significant segment of the relevant industry)—the reasonable basis requirement.

IRS must provide a taxpayer with written notice of the provisions of Section 530 before or at the start of any audit relating to the employment status of one or more individuals who perform services for the taxpayer. (Sec. 530(e)(1), P.L. 95-600, as amended by Sec. 1122(a), P.L. 104-188) However, where the portion of an audit involving worker classification issues doesn't arise until after the examination of the taxpayer has begun, IRS does not have to give the notice until the time the worker classification issue is first raised with the taxpayer. (Conf Rept No. 104-737 ( P.L. 104-188 ), p. 204)

Facts. Bruecher Foundation Services, Inc. (BFS), performed residential foundation repair and grading projects, and treated the workers who did the manual labor on its projects as independent contractors. An IRS audit found that, for the tax years ending Mar. 31, 2000 and Mar. 31, '99, BFS had claimed substantial deductions for “contract labor” on its Form 1120 income tax returns but had not filed any corresponding Form 1099s for particular contractors. The auditor referred the matter to IRS's employment tax group, which commenced an employment tax audit of BFS without telling the company it was doing so. IRS did not provide BFS with notice of the statutory worker classification safe harbor as it was required to do by law. The audit summary also carried IRS's conclusion that BFS was not entitled to the Section 530 safe harbor because it failed to file Form 1099s for the workers at issue.

Following various administrative proceedings, IRS issued a tax lien against BFS on Dec. 13, 2005, and executed a levy against its bank account on Mar. 23, 2006. On May 17, 2006, BFS filed Form 1099s for the workers at issue for calendar years '99 and 2000, then took its dispute to a district court, which found that the workers were employees. BFS then appealed to the Fifth Circuit. It argued that: (1) the district court erred in concluding that BFS was not entitled to rely on the Section 530 safe harbor to avoid liability for any misclassification of its employees; (2) if it is not entitled to Section 530 relief, then the district court should have assigned the burden of proof at trial to the government because IRS failed to comply with the advance-notice procedures of Section 530; and (3) failing other grounds for reversal, its workers were not employees.

Fifth Circuit rules for IRS. The Fifth Circuit rejected each of BFS's arguments, as follows:

Section 530 relief. BFS raised the interesting argument that there was no time limit specified for when it could file Form 1099 for the workers at issue and thus satisfy the second test for Section 530 relief. The Fifth Circuit concluded that BFS couldn't meet its threshold burden of showing that the assessment was erroneous under Section 530. BFS conceded that it was not entitled to Section 530 protection until it filed the relevant Form 1099s. When the tax was assessed, it had not done so and the assessment was therefore correct when made. While the appellate court declined to address the question of whether Section 530 requires the timely filing of the relevant Form 1099s to obtain the benefit of the safe harbor, it held that the practical effect of waiting until after the conclusion of the IRS's administrative process and the concomitant assessment of the tax was to preclude BFS from successfully raising Section 530 as a defense in this subsequent judicial proceeding.
Burden of proof. BFS argued that IRS's admitted failure to comply with the Section 530 notice procedures reversed the usual burden of proof to put the burden on the government. BFS conceded that there was no authority for this proposition and asked the Fifth Circuit to create this remedy. The Fifth Circuit declined to do so, quoting the Supreme Court's holding in United States v. James Daniel Good Real Property, 510 U.S. 43, 63 (1993), that if “a statute does not specify a consequence for [the government's] noncompliance with statutory timing provisions, the federal courts will not in the ordinary course impose their own coercive sanction.” The Fifth Circuit said it didn't mean to suggest that there can never be a remedy for the IRS's failure to comply with the Section 530 notice procedures. It said the resolution might, for example, have been different had BFS asserted a violation of its due process rights stemming from the failure to provide notice. But that wasn't the case since BFS was apprised of IRS's determination as to the non-applicability of the Section 530 safe harbor at the conclusion of the audit, allowing BFS ample opportunity for administrative relief on those grounds.
Workers were employees. The Fifth Circuit found that the workers had no risk of loss, virtually no investment in facilities, and were not in business for themselves, all indications of an employment relationship. BFS's moderate degree of control over the workers and the relatively low skill level required only weakly supported employment. The final criterion—the degree of permanence of the relationship, which varied from worker to worker—favored neither employment nor independent contractor status on the facts. Viewing all these factors together, the Fifth Circuit held that the district court did not err in finding that the workers were BFS's employees for federal employment tax purposes.

The significance of this is that the business owner had to pay not only the FICA and Medicare tax he should have paid originally, but the employees FICA and Medicare tax and the Federal withholding which should have been withheld plus penalties and interest. Frequently this will bankrupt the business and often the individuals who own the company and follow them for 10 years.

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The First Time Homebuyer Credit Time Period Has Been Extended

Construction Company's Workers were Employees, Not Independent Contractors

Louisiana Bookkeeping Service

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