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, a Certified Public Accountant and Utah-licensed attorney. For over seven years, I have assisted clients with estate planning and administration, tax mitigation, tax controversies, small business planning, asset protection, and nonprofit law.

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.

Covenants Not to Compete

A covenant not to compete is an agreement between an employer and an employee whereby the employee agrees not to engage in a business similar to the employer's business, thereby competing with the employer's business. Under common law in Utah, such covenants are not enforceable unless they are "supported by consideration, negotiated in good faith, necessary to protect a company's good will, and reasonably limited in time and geographic area." TruGreen Companies, L.L.C. v. Mower Brothers, Inc., 199 P.3d 929 (2008).

Until 2016, Utah had no statute governing the enforceability of covenants not to compete. However, the Post-Employment Restrictions Act now voids any covenant not to compete entered into on or after May 10, 2016 that lasts more than one year from the date on which employment ends. This restriction supplements any additional restrictions provided for by common law. This one-year maximum does not apply to nonsolicitation, nondisclosure, or confidentiality agreements; it also does not prohibit severance agreements or business sale agreements which include covenants not to compete.

Importantly, the current law provides an award of arbitration and court costs, attorney fees, and actual damages for an employee if an employer has sought to enforce a covenant not to compete that is found to be unenforceable. Proposed legislation would further protect employees by voiding covenants not to compete that are signed in exchange for mere continuation of employment at the same position and pay level. This proposed law would also void covenants not to compete if an employer fires the employee without cause within six months of the employee's signing the covenant not to compete.

Covenants not to compete can protect an employer's legitimate business interests and should be considered anytime an employee is hired. It is also critical to consider whether an existing covenant not to compete will restrict someone desiring to start a new business. In summary, these contracts are important throughout the entire life cycle of any business.

Planning with Multiple Person Accounts

There are many reasons why you might desire to involve someone else with your bank account. You may want to share ownership of the funds in the account. You may want another person to receive the funds in the account upon your death. You may simply want another person to have the ability to facilitate transactions without any ownership or survivorship rights. You may have more than one of these objectives. In order to create more predictability in light of each of these objectives, the Uniform Law Commission produced the Uniform Multiple Person Accounts Act, which has been adopted in many states.

There are three types of multiple-person accounts under the uniform law: joint accounts, pay-on-death accounts, and trust accounts. It is critical to understand the rights you are granting to another person by involving such person with each of these kinds of accounts. A trust account allows a person to serve in a trustee or agency role with respect to the funds without ever obtaining a beneficial interest. Funds remaining in a pay-on-death account on the death of the owner become the property of the pay-on-death beneficiary.


The key feature of a joint account is that while the funds "belong" to the contributor of the funds, any party to the account may unilaterally withdraw the funds in their entirety. The contributor may attempt to recoup funds that they contributed and which another party has wrongfully withdrawn, but this is a difficult and expensive process. Most people assume that the surviving owner of a joint account will necessarily own the remaining amounts in the account upon the death of the other owner, but technically, a joint account may or may not have these survivorship rights.

If your intent with respect to your account is both (1) that another person receive the remaining balance of the account upon your death and (2) that they also "own" the account during your life, then a joint account with right of survivorship makes sense. However, if you have objective (2) but not objective (1), you should ensure that the joint account has a pay-on-death option in lieu of a right of survivorship. On the other hand, if you have objective (1) but not objective (2), you should definitely not have a joint account, but rather a pay-on-death account.

If you have neither objective (1) nor objective (2), but rather simply desire that someone have the ability to facilitate transactions on the account, that person should simply be made trustee of a trust account of which you are the beneficiary. Better yet, a proper estate plan can also facilitate each of these objectives and provide many additional benefits as well.

50 States' Disclaimer of Property Interests

A disclaimer is the refusal to accept the right to receive property. Disclaiming a property interest is an estate, gift, and generation-skipping tax avoidance technique allowed by Section 2518 of the Internal Revenue Code, and the right to disclaim is codified in each states' statutes. A disclaimer is also useful where a person simply does not want the property they would otherwise receive.

The Uniform Law Commission has completed a uniform Disclaimer of Property Interest Act that has been adopted by 20 jurisdictions; a prior version has been adopted by 11 jurisdictions. The American College of Trust and Estate Counsel has an old but somewhat useful summary of each states' law on this matter located here.

Below are current references to each states' property interest disclaimer statutes. This post will be updated as laws change; please comment below if you come across any incorrect or outdated information:

 Alabama
 Ala. Code § 43-8-290
 Illinois
 755 ILCS 5/2-7
 Montana
 §72-2-811, MCA
 Rhode Island
 R.I. Gen. Laws § 34-5-1
 Alaska
 A.S. § 13.70.010
 Indiana
 I.C. § 32-17.5-1-0.2
 Nebraska
 Neb. Rev. Stat. § 30-2352
 South Carolina
 S.C. Code § 62-2-801
 Arizona
 A.R.S. § 14-10001
 Iowa
 Iowa Code § 633E.1
 Nevada
 N.R.S. § 120.100
 South Dakota
 SDCL § 29A-2-801
 Arkansas
 Ark. Code § 28-2-201
 Kansas
 K.S.A. § 59-2291
 New Hampshire
 RSA § 563-B:1
 Tennessee
 T.C.A. § 31-1-103
 California
 Ca. Prob. Code § 260
 Kentucky
 KRS § 394.035
 KRS § 394.610
 New Jersey
 N.J.S. § 3B:9-1
 Texas
 Tex. Prop. Code § 240.001
 Colorado
 C.R.S. § 15-11-1201
 Louisiana
 La. C.C. § 947
 New Mexico
 N.M.S. § 46-10-1
 Utah
 Utah Code § 75-2-801
 Connecticut
 Conn. Gen. Stat. § 45a-578
 Maine
 18-A M.R.S. § 2-801
 New York
 N.Y. Est. Powers and Trusts Law § 2-1.11
 Vermont
 14 V.S.A. § 1951
 Delaware
 12 Del. C. § 601
 Maryland
 Md. Code, ET § 9-216
 North Carolina
 N.C. Gen. Stat. § 31B-1
 Virginia
 Va. Code § 64.2-2600
 District of Columbia
 D.C. Code § 19-1501
 Massachusetts
 Mass. Gen. Laws ch. 190B, § 2-801
 North Dakota
 N.D.C.C. § 30.1-10.1-01
 Washington
 RCW § 11.86.011
 Florida
 Fla. Stat. § 739.101
 Michigan
 M.C.L. § 700.2901
 Ohio
 R.C. § 5815.36
 West Virginia
 W. Va. Code § 42-6-1
 Georgia
 O.C.G.A. § 53-1-20
 Minnesota
 Minn. Stat. § 524.2-1101
 Oklahoma
 Okla. Stat. tit. 60, § 751
 Okla. Stat. tit. 84, § 22
 Wisconsin
 Wis. Stat. § 854.13
 Hawaii
 H.R.S. § 526-1
 Mississippi
 Miss. Code § 89-21-1
 Oregon
 O.R.S. § 105.623
 Wyoming
 W.S. § 2-1-401
 Idaho
 Idaho Code §15-2-801
 Missouri
 §469.010, RSMo
 Pennsylvania
 20 Pa.C.S. § 6201
  

Avoiding a Partnership Tax Return Filing Requirement

According to the IRS, a partnership is a "relationship between two or more persons who join to carry on a trade or business..."  No formal agreement is required; in fact, a partnership can be formed inadvertently, in which case an IRS Form 1065 partnership tax return must be filed.  However, there are a few situations where two or more persons can carry on a trade or business without creating a partnership tax-filing requirement.

If two or more persons have a business relationship that, for tax purposes, constitutes a corporation or trust, obviously such an arrangement is not a partnership. However, a venture that is not a corporation or trust avoids partnership classification if the parties are merely sharing expenses. In addition, a married couple has the option of not filing a partnership tax return if they "materially participate as the only members of a jointly owned and operated business" and file a joint tax return.

Such an arrangement is known as a "qualified joint venture" and cannot be operated through a state-law entity. However, a husband and wife in a community property state may own and operate a business through a state law entity other than a corporation, such as an LLC, and elect to have that LLC disregarded for federal income tax purposes. The business entity must be owned as community property and have no other owners; if so, no partnership tax return is required. These rules are contained in Rev. Proc. 2002-69.

A final example of partnership-type arrangement that does not give rise to a partnership tax return requirement is co-ownership of real property, other than mineral property, but including rental property. Each co-owner must be a tenant-in-common, and title to the property as a whole may not be vested in a state-law entity. However, each tenant may own their interest in the property through an entity that is disregarded for tax purposes. A number of other requirements are set forth in Rev. Proc. 2002-22 which, if satisfied, will result in no partnership filing requirement.

In summary, a partnership can automatically arise for federal tax purposes even where no entity exists under local law. An arrangement of this kind includes a "syndicate, group, pool, joint venture, or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on..." However, arrangements like those described above avoid partnership classification.

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.