July 2000

In This Issue

Creating a Business Web Site

Taxpayer Victory: Shareholder Allowed Deduction for S Corp. Debt Loss

Tax Stats

Simple Ways for Your Business to Save Money

Uncle Sam's Budget for 2001

Tax Briefs

Tax Cases

Tax Calendar

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.

Creating a Business Web Site? Look Out for Some Legal Risks

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.

Taxpayer Victory: Shareholder Allowed Deduction for S Corp. Debt Loss

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

Tax Stats

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.

Simple Ways for Your Business to Save Money

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.

Uncle Sam's Budget for 2001

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

Tax Briefs: Giving The IRS Too Much Or Too Little Information

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.

Tax Cases: Divorce, and Marriage, and the IRS

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.

Tax Calendar

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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