Welcome to CPA at Law, helping individuals and small businesses plan for the future and keep what they have.

This is the personal blog of Sterling Olander, Certified Public Accountant and Attorney at Law. For over five years, I have worked as a tax professional helping clients with tax mitigation strategies, tax controversies, business transactions, wealth preservation structures, tax-exempt organiations, and estate plans.

I write about any legal, tax, or technological information that I find interesting or useful in serving my clients. All ideas expressed herein are my own and don't constitute legal or tax advice.

Donations of S-Corp Stock

Public charities have been permitted shareholders of S-Corporations since 1998. Since that time, charitably-inclined business owners have sought to donate shares of their closely-held business stock to charitable organizations. Normally, donating long-term capital gain property to a charity is highly tax efficient because (1) the donor receives a deduction for the fair market value of the donated asset, (2) the donor avoids paying tax on the asset's built-in gain, and (3) the charity, being tax-exempt, also avoids paying tax on any gain from the sale of the asset. In a previous post, I addressed some situations where the charity may some tax.

In the case of S-Corp stock, however, charities pay a lot of tax. Section 512(e)(1)(B)(ii) of the Internal Revenue Code requires that "any gain or loss on the disposition of the stock in the S corporation" is included in unrelated business taxable income (UBTI). Unlike the gain on "virtually every other asset that a charity might own," only the gain on the sale of S-Corp stock is includible in UBTI. See Christopher R. Hoyt, Charitable Gifts of Subchapter S Stock: How to Solve the Practical Legal Problems. This is a significant issue because charities typically seek to sell closely-held business interests as quickly as possible, especially stock in S-Corporations.

However, different charities pay different rates of tax on sales of S-Corp stock. Specifically, charities that are trusts pay less tax on gains included in UBTI than do charities that are corporations. This is because trusts are taxed at trust rates, which impose a 20% rate on long-term capital gains, whereas all corporate income, including long-term capital gains, is taxed at corporate rates of around 35%. Moreover, a trust is able to deduct up to 50% of its adjusted gross income for donations to other charities, while corporations are limited to 10%.

This is what makes a Donor Advised Fund at a charity that (1) is a trust and (2) maximizes contributions to other charities, such as Fidelity Charitable, an attractive target for a gift of S-Corp stock. The legal structure of the charity reduces the tax erosion of the gift, while the donor still has the right to advise what organization will ultimately receive the proceeds from the stock sale. Below is a comparison of the post-tax benefits that a corporate charity and trust charity would enjoy from the donation and immediate sale of S-Corporation stock:

 Corporation   Trust 
 Gain from S-Corp. Shares   1,000,000   1,000,000 
 Maximum Charitable Deduction   (100,000)   (500,000) 
 Net Unrelated Business Taxable Income   900,000   500,000 
 Estimated Tax Rate   35%   20% 
 Unrelated Business Income Tax   315,000   100,000 
 Effective Tax Rate   31.5%   10% 

Recognizing an IRS Impostor Scam

In a previous post, I discussed a scam whereby a person purporting to be an IRS agent calls demanding immediate payment of past-due taxes. In this post, my hope is to provide additional insight into how to recognize these scams by reproducing a transcript of an actual phone call to an IRS impostor. The target of the scam in this case was instructed to call 479-935-1612; I am also aware of a scam involving phone number 512-212-1838. The transcript begins when the target returns the call:

JS: Internal Revenue Service, how can I help you?

WC: Yeah, I got a call that said I have to call this number or I'll be arrested.

JS: Alright, and when did you receive this call?

WC: Uh, just a half hour ago.

JS: On this very same number?

WC: Yep.

JS: Can you please confirm for me your first and last name?

WC: Wayne Curley.

JS: Williams Curley?

WC: No, Wayne Curley.

JS: Alright, alright; and can you please confirm for me your area's zip code?

WC: 36608.

JS: 36608, correct?

WC: Yeah.

JS: Alright, now do you have a piece of pen and paper?

WC: Yes.

JS: I want you to take a piece of pen and paper and write down some information. My name is officer Jack... my name is officer Jack Smith and my badge ID number is IRM11010. 11010.

WC: K.

JS: Now, I will go ahead an read out the legal charge against your name, so while I'm speaking do not interrupt me. I will give you a fair time to speak once I am done, alright?

WC: Alright.

JS: We conducted an audit in your tax return for a term of last five years, and we found out that there was a numerical miscalculation error in your tax return, and the return in your file does not match the record that we have. So, according to the section 26 U.S. Code 6651 there is an outstanding amount left for you to pay. Failure to do so will result in your arrest. You will be taken into federal custody as an arrest warrant has been already issued in your name. Your travel will cease and all of the property that is in your name will be seized and even your bank account will be totally frozen, and you will be in federal imprisonment without appeal for a minimum of five years. Now, the total outstanding amount in your name which you owe to the Internal Revenue Service that is 4,987 dollar. So, Mr. Wayne, have you done this intentionally or was it by mistake?

WC: Definitely a mistake.

JS: So, at this point of time do you have an attorney ready to fight in your defense? Because you will be summoned to the United States Tax Court in Washington DC in a matter of 48 hours and the second option is that you can resolve this case outside the court house. So that is your decision because we are not here to force you, we are not here to convince you, we are just here to help on how to resolve this case. You make a right decision; that is your wish. So which option do you want to go for it?

WC: Well, I can't afford an attorney.

JS: So you want to resolve this case outside the court house, this correct?

WC: Yeah.

JS: So, in that case, I am going to connect this call to the senior officer who is handling your case right now and he is the decision maker how to resolve your case and how to make a payment plan for you alright?

WC: Okay.

JS: Stay connected with me, alright?

WC: Okay.

JS: Thank you very much.

JH: Thanks for being on hold, your line has be transferred to Jason Horner; how may I help you?

WC: Well, I'm just trying to resolve my account.

JH: I'm sorry?

WC: Just trying to resolve my account.

JH: Alright sir, your line has been transferred to me so that you want to rectify outside a court house without facing any legal consequences, right?

WC: Yeah.

JH: Alright, so I hope you understand, if you want to resolve this case, then you need to pay what you owe, right? The full outstanding amount is 4,987 dollars, that is the outstanding amount that you owe to the IRS.

WC: Yes.

JH: So, if you want to resolve this case then as I've told you, you need to pay the outstanding amount that you owe to the IRS so can you come up today in order to... in order to resolve this case?

WC: Yeah.

JH: Alright, so if you want to resolve this case, then you need to be online with me you need to stay connected with me on the same recording line, you need to follow the procedure alright? I will guide you step by step how you are going to resolve this case, alright?

WC: Ok.

JH: So at this time the payment is not going to be accepted over the phone call, check, or online payment; this time the payment will be done using electronic federal tax payment system, which is a tax pay voucher that you need to purchase from a government-certified store. I will be guiding you where you have to go and which voucher you need to purchase in order to resolve this case, alright?

WC: Alright.

JH: So, uh, is this your home phone number or this is your cell phone number?

WC: Cell phone.

JH: Alright, so you need to stay connected with me while you're on this recording line; you cannot put me on mute, you cannot put me on hold, you need to stay connected, is that understood?

WC: Yes.

JH: So, you need to drive down to a... a store, a government-certified store, which is... by the government. You can go to either Walmart or a Target or a Rite Aide store. So which store will be convenient and nearest to you?

WC: Um, I'm not sure, I'll have to drive around and see what's closest.

JH: Do you have any nearby store like Walmart or Target?

WC: Um, let me, let me look outside and kind of see where I am. Now I can't... I can't pay this over the phone?

JH: No, no, you're not going to pay a single penny over the phone call.

WC: Oh, and should I go to the IRS website and use their online payment option?

JH: No, no, there is a procedure, alright? Before your warrant get expired, I need to cancel your warrant, so there is a procedure you need to follow the protocols of the IRS, alright, if you want to resolve this case. As I've told you, you need to stay connected with me on this same recording line until... resolve this case; you cannot put me on mute, you cannot put me on hold, alright?

WC: Alright, but I know you can pay online with the IRS's EFTPS system, and you're saying I shouldn't do that?

JH: If you can follow the procedure, I'm here to guide you, I'm here to help you, if you don't follow the procedures that's okay, alright. You can disconnect this call, and just wait to face the consequences.

WC: Can I... can I just mail a check in to the IRS?

JH: No, we are not going to accept from a check or online payment; we're not going to do that.

WC: Why?

JH: As I've told you, there is a procedure, right? If you want to resolve this case, than you need to follow the procedure.

WC: It sounds like...

JH: Step by step, I will guide you on how... on how you're going to make a payment.

WC: It just sounds like an unusual procedure.

JH: I'm sorry?

WC: The procedure you've described sounds very unusual. I didn't know the IRS did that.

JH: So, I'm not here to force you, I'm not here to convince you, you can just disconnect this call and just wait to face the consequences.

WC: And what are the consequences again?

JH: You will be getting arrested within 45 minutes, your state police department will be at your doorstep and your house, your car, your bank account, everything will be seized by the government.

WC: That also sounds unusual, I didn't think the IRS acted in that way.

JH: Why? Why did you say that?

WC: Well, from what I know, the IRS always sends out letters before they take collection action.

JH: Uh-huh. And?

WC: And I didn't get any.

JH: What else?

WC: Well, I didn't get any letters, so why is that?

JH: As I've told you, you can just disconnect this call and just wait to face the consequences, alright?

WC: Are you really the IRS?

JH: No, no I'm not from the IRS.

WC: Where are you from?

JH: I'm from Washington DC.

WC: But do you work for the IRS?

JH: Yes, exactly, why do you ask that kind of question?

WC: What office? Which IRS office are you out of?

JH: Uh, today, sir, if you want to resolve this case, then you need to go down to Walmart, alright?

WC: I don't think you work for the IRS. I think this is a scam.

JH: What?

WC: Yep, I think this is a scam.

JH: Why, why are you saying that?

WC: The IRS doesn't take collection action without sending letters first.

JH: So why... why did you say you want to resolve this case?

WC: Just wanted to see what would happen

JH: Hmm?

WC: So who do you really work for? Where are you located?

JH: We are located 1111 Constitution, Washington DC. Is there any problem?

WC: Well, who do you really work for if your not the IRS?

JH: Are you an idiot?

WC: No.

JH: Then why are you asking these kinds of questions? So get ready to face the consequences. Alright, bye.

WC: Okay, bye.

Reporting Refunds of Charitable Contributions

A donation to a charitable organization is an irrevocable gift, and even if the donor changes his or her mind about the gift, they generally have no legal basis on which to seek a return or refund of the donation. Furthermore, even if the charity desired to return the gift, the rules under the Internal Revenue Code are such that it should be hesitant to do so. For a good summary of these issues, see Richard R. Hammar's article, Refunds of Charitable Contributions.

If a charity nevertheless decides to refund a charitable donation, the question of whether it must then issue an IRS Form 1099 to the donor arises. In general, businesses must file a Form 1099 to report many types of income; the requirement also applies to charities.

It is clear that a taxpayer who receives the full tax benefit of a charitable donation in one year and who receives a refund of that donation in another year is required to include in gross income the amount previously deducted. In this situation, it makes sense that a charity should issue the former donor a Form 1099.

However, if the donor only received a partial tax benefit or no benefit for the donation, the charity would be placing the donor in an unfair position by issuing a Form 1099. Fortunately, the Internal Revenue Code contemplates this and does not require the charity to issue a 1099 when it refunds a charitable donation.

IRC § 6041(a) imposes the 1099 filing requirement where an organization makes a payment of, among other things, "fixed or determinable gains, profits, and income... of $600 or more." PLR 200704004 interprets this provision as follows:
While any accession to wealth can be income, not all income is fixed or determinable. Income is “fixed” when it is to be paid in amounts definitely predetermined [and] is “determinable” when there is a basis of calculation by which the amount to be paid may be ascertained. Because section 6041(a) is conditioned on a payor knowing that a payment to a payee is in the nature of income and the amount of income, if a payor cannot determine either that a payment is in the nature of income or in what amount, then the payor is not required to file an information return under the section...

The effect of the tax benefit rule can be seen in a number of contexts, for example, casualty losses, real estate tax refunds, and charitable contributions... If by its nature a payment to a taxpayer would not be an item of gross income unless the tax benefit rule applies, and the payor has no way of knowing one way or the other, then the payment is not “fixed or determinable” income falling within section 6041(a).
Accordingly, a charity should not need to report refunded charitable donations on Form 1099.