July 2000
In This Issue
Do You Know . . .
The first Independence Day was celebrated on July 4, 1777,
the first anniversary of the signing of the Declaration of Independence. The
Revolutionary War had not yet ended; the celebration took place in Philadelphia
and included the ringing of bells and the firing of ships' cannons.
If you put up a Web site for your business, the same legal
issues that affect your business elsewhere also apply on the Web. But with a Web
site, you have additional risks you may not be aware of. For example, starting a
Web site is essentially entering the publishing business, and a Web site owner
has the same legal risks as a publisher. Below are some key legal issues,
publishing and non-publishing related, any Web site owner should take into
account when creating and maintaining a Web site.
Accuracy. Business Web sites generally provide company
profiles, marketing, and product information, customer service, and purchasing
ability. Any assertions on your Web site must be based on fact. Consider the Web
site a form of advertising and apply the truth-in-advertising rules to it as you
would any other advertising copy. In addition, make sure any comments about
another company or competitor are completely accurate. If not, a false statement
could be considered libelous.
Domain name. The domain name — i.e., the Web site address
you use — is subject to trademark law. Pick your domain name carefully to
avoid conflict with trademarks that belong to others. Merely securing a domain
name registration does not give you a trademark. You can have a commercial
search firm make a full check of federal, state, and foreign registrations and
common-law marks. These searches are inexpensive and can save you a potential
problem down the road. If the search comes up clear, you can then register your
domain name with the U.S. Patent and Trademark Office.
Copyright. Publishing material on a Web site requires many
of the same precautions companies must take when publishing printed or other
copyrighted material. Copyright applies to any creative work, including written
material, photographs, and illustrations. If you are going to use material your
company does not own, such as a photograph or a written product description, be
sure to get reprint permission.
Contracts with site developers. Most companies contract with
outside developers to create and maintain their Web sites. Developing a site
combines many disciplines, such as software development, data processing,
advertising, public relations, technology, and security issues (such as secured
purchasing). Any contracts with outside persons should clearly define the role,
scope, and obligations of that party, such as updates and modifications. The
contracts should cover generating reports, compilation of site-use statistics,
training for employees, and determining what happens if the site is unavailable
for a time due to hardware or software problems. Any contracts should also cover
who owns the contents of your Web pages, such as text, art, graphics, and icons,
as well as any intellectual property co-developed by the parties, such as
coding.
Disclaimers. Your Web site will dispense information that
people will be relying on, so it is important to have a disclaimer on the Web
site that disavows any warranties of accuracy or completeness. The disclaimers
should be prominently placed and, in certain cases, require users to accept them
in order to proceed. If you are going to be linked to other sites, make sure you
get permission to do so, and disclaim any liability for what may happen on the
other site.
Promotions. If your company want to use contests, games, or
sweepstakes promotions on its Web site, be aware that strict rules apply to such
promotions. First, the promotions must be games of skills, not chance, so as not
to be considered gambling. Check with your state; each has its own rules and
some impose fees or require advance permission to run this type of promotion.
Web content. A company's Web site is part of its public
image, so it is important to maintain strict control over the operational
quality and content on the site. An-out-of-date or slow Web site does a
company's business more harm than good. Also, a company should periodically
monitor any links to outside Web sites. These can be viewed as an extension of
the company's image.
Insurance. Check with your company's insurance provider to
see if the company is covered for damages and legal costs that might be incurred
because of material put on the Internet. Many carriers have
errors-and-omissions, libel, and copyright insurance for publishers and users of
the Internet.
Generally, shareholders of subchapter S corporations are
able to use their distributive shares of losses to offset income from other
sources to the extent of their basis in stock and debt. However, with regard to
a debt loss, the indebtedness must be directly between the shareholder and the S
corporation in order to be deductible. For example, if an S corporation borrows
funds from a bank, a shareholder cannot deduct the loss, even if he or she has
issued a personal guarantee for the loan. Nor can a shareholder deduct losses
where the indebtedness was owed by an S corporation to another entity controlled
by the same shareholder. But in a recent Tax Court case, Culnen v. Commissioner,
TC Memo 2000-139, an S corporation was considered directly indebted to a
shareholder even though the funds had been transferred from another corporation
owned by the shareholder.
The shareholder owned an interest in two corporations, one
that was profitable (Profit Corp.) and one that was not (Loss Corp.) To help
Loss Corp., the taxpayer had Profit Corp. transfer funds to or pay expenses on
behalf of Loss Corp. Profit Corp. recorded these transactions on its books as a
loan to the shareholder. Loss Corp. recorded the transactions as a loan from the
shareholder, and also recorded interest due to the shareholder for these
amounts. The shareholder considered these transactions as loans between himself
and each corporation and therefore, thought he had a basis in the loans. The
shareholder did not consider the loans direct transactions between the two
corporations. On his individual income tax returns, the shareholder deducted his
losses from Loss Corp.
The IRS disallowed the loss deductions because the taxpayer
had not actually paid out any money, since the funds had flowed directly between
the two corporations. Using the IRS's reasoning, had the shareholder actually
received funds from Profit Corp. and then loaned them to Loss Corp., the
deductions would have been permitted.
The Tax Court disagreed that the form of the transaction
prevented the loss deductions. The court focused on the testimony of the
taxpayer, his bookkeeper, and outside accountants to corroborate that these
transfers were on behalf of the shareholder and were never meant to create an
equity or debt interest by Profit Corp. in Loss Corp.
This case hinged on the transfers being done on behalf of
the shareholders and not the corporations. To qualify for this treatment you
must be very consistent and record the amounts as loans, use promissory notes,
pay interest, and ideally, make actual cash transfers to and from the
shareholders. If you would like to discuss how this case may affect you, please
contact us
As of April 26, 2000, the IRS had received about 39.4
million income tax returns through its e-filing program. That was up 20.4% from
a year earlier. E-filing comprises both computer and telephone filings.
The IRS received a record 8 million extensions this year, up
from 7.7 million last year. An extension to August 15 is automatically granted
when a taxpayer files Form 4868.
The IRS projects that 3.2 million taxpayers will file
amended returns this year on Form 1040X to fix mistakes on their original
returns. This form is used regardless of whether the taxpayer filed a paper
return or electronically.
More than 27 million people received their refunds through
direct deposit. This is an increase of 25% over last year.
Saving money for your business doesn't require a major
effort. Any business can trim its costs through many small steps. Here are a few
to think about.
Train your best employees
Companies regularly send employees to training classes to
learn or upgrade technical skills. Usually, employees in different departments
attend these classes, but this may not be the best way for employees to learn. A
typical class usually contains employees not only with different levels of
experience, but different needs as well. That means that much of the class is
spent catering to the least experienced student or offering very general
information, and prevents others from learning the specific skills they need.
Instead of sending a group to the class, you may be better
off arranging for one-on-one training for supervisors, or for your best or most
experienced employees. These employees, in turn, can train others in your
company and will be able to adapt what they've learned to the specific needs of
the company or department.
E-mail over fax
Here's a way to save on your phone bills: If you need to
send documents to a remote location, such as another office or client, don't
print them out and fax them. Instead, send these documents as an attachment to
an e-mail. E-mail costs less because it goes via the Internet, which is a local
call, while using the fax requires a long-distance call.
Protect your phone lines
A penny saved by preventing an equipment problem can also
save you time fixing the problem and a big headache. Often, an office has a
telephone connected to a fax machine and a computer via a modem (which, in turn,
is connected to a printer or other equipment). You may think that your equipment
is protected from any sudden electrical surges because all the equipment is
plugged into a power-surge protector. But beware: Lightning can hit a phone
line; this will destroy not only the phone, but also all the electronic
equipment linked to it. The solution is to buy a surge device equipped with both
AC-power-line and phone-line protection.
For fiscal year 2001, government budget figures show that
discretionary spending, such as education, agriculture and defense comprise 30
cents on the dollar. Mandatory spending and net interest account for 70 cents of
every federal tax dollar.
Social Security 23¢
Health & Medical 21¢
National Defense 16¢
Income Security 14¢
Net Interest 11¢
Education, Training 4¢
Transportation 3¢
Veterans 3¢
Other 5¢
A case of too much: IRS's faxing of letters to workplace did
not violate Privacy Act
An IRS attorney faxed two confidential letters to a
taxpayer's place of employment where coworkers had access to incoming messages.
The taxpayer claimed that the IRS had violated the Federal Privacy Act. The
Eleventh Circuit sided with the Service, because the taxpayer had supplied the
fax number to the government and the IRS attorney testified he was unaware that
others had access to the fax machine. Johnston v. IRS, CA-11, 2000-1 USTC
¶50,189
A case of too little: IRS informant wants bigger reward
An informant furnished information to the IRS that resulted
in the arrest of an individual, the seizure of more than $5 million in cash and
property, and the assessment of more than $72 million in taxes and penalties.
The informant applied for a reward and was given a mere $1,500. The informant
asked the Federal Court of Claims to review the case. The Court said it lacked
jurisdiction in such matters and ruled that in the absence of a binding written
contract, the payment of a reward is based purely on the government's
discretion.
No signature, no exemption rule upheld
In a divorce proceeding, the mother was awarded sole custody
of the two children, while the father was given the permanent right to claim the
children as dependents on his federal income tax return. The father attached the
divorce order to his return and claimed both children.
The IRS disallowed the exemptions because the non-custodial father did not attach to his return Form 8332, Release of Claim to Exemption for
Child of Divorced or Separated Parents, signed by the custodial mother.
The Tax Court sided with the Service and held that the
signature requirement of IRC Section 152(c)(2) must be strictly complied with.
Miller v. Commissioner, 114 TC No. 13 (2000).
Joint estimated payments can be allocated on separate
returns
Married couples often make joint estimated tax payments. If
the spouses then file separate returns for the year, what happens if they both
claim the joint payments or if together they claim more than the joint amount
paid?
According to IRS Legal Memorandum 200011047, if the spouses
can agree to an allocation of payments, then the Service will accept the
allocation. However, if the spouses cannot agree, then the government will rely
on the formula in regulation section 1.6015(b)-1(b) and allocate the payments in
proportion to the spouses' separate tax, regardless of the source of the actual
payments.
July 10
Employees who work for tips. If you received $20 or more in
tips during June, report them to your employer.
July 17
Partnerships. File a 1999 calendar year return (Form 1065).
This due date applies only if you were given an automatic three-month extension.
Employers. For Social Security, Medicare, withheld income
tax, and non-payroll withholding, deposit the tax for payments in June if the
monthly rule applies.
July 31
Employers. For Social Security, Medicare, and withheld
income tax, file Form 941 for the second quarter of 2000. Deposit any un-deposited
tax. (If the total is less than $1,000 and not a shortfall, you can
pay it with the return.) If you deposited the tax for the quarter in full and on
time, you have until August 10 to file the return. For federal unemployment tax,
deposit the tax owed through June if more than $100.
August 10
Employees who work for tips. If you received $20 or more in
tips during July, report them to your employer.
Employers. For Social Security, Medicare, and withheld
income tax, file Form 941 for the second quarter of 2000. This due date applies
only if you deposited the tax for the quarter in full and on time.
August 15
Individuals. If you have an automatic four-month extension
to file your income tax return for 1999, your return is due by this date. You
must pay any tax, interest, and penalties due. If you need an additional
two-month extension, file Form 2688.
Employers. For Social Security, Medicare, withheld income
tax, and non-payroll withholding, deposit the tax for payments in July if the
monthly rule applies.
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