IRS 911 Procedures; Statutory Employee Deductions; Qualified Small Business Stock Investments

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, January 3, 1999.

Copyright 1999 Robert L. Sommers, all rights reserved.

Question: Help! My home has a first mortgage plus a $50,000 IRS tax lien. The lender is foreclosing, and IRS refuses to release its lien, which jeopardizes my ability to obtain financing. If I refinance with a different lender, I can pay off the first mortgage and have left $10,000 for my tax lien, but IRS Collection refuses to accept this amount.

Answer: File Form 911, "Application for Taxpayers Assistance Order" for immediate hardship relief, at no charge, with Ben Lowe, IRS Taxpayer Advocate for Northern California (510-637-2703) or your taxpayer advocate for your IRS district. The Advocate is likely to find IRS's failure to subordinate its lien will cause you significant hardship; that done, he will then represent you with IRS to resolve the matter.

Because your case involves a tax lien, you must submit an Application of Subordination of Federal Tax Lien; the Advocate will then press for an expedited review by IRS collection. If this is successful, IRS will issue a commitment letter, usually stating that if it receives the $10,000 within 30 days, it will subordinate its tax lien to your new lender. The result: IRS is paid $10,000 towards its $50,000 lien and you save your home from immediate foreclosure.

Question: As a full-time salesperson who travels to solicit business orders for a manufacturing wholesaler, I often exceed my company's per-diem allowance. May I deduct my excess expenses?

Answer: Yes, you are a "statutory employee" who reports your gross income and allowable deductions on Schedule "C" (or Schedule "EZ") of Form 1040. You may deduct ordinary and necessary business expenses incurred in connection with your trade or business, which includes costs for travel in excess of your per-diem reimbursement. Your employer indicates your statutory employee status on your W2. You are not liable for social security taxes.

Other statutory employees include sales people who solicit orders from wholesalers, restaurants or similar businesses on behalf of a company, and those who are full-time life insurance sales people.

Question: I understand certain small-business stock is taxed at lower capital gains rates and may be rolled over tax-free into stock of another small-company. How do these rules work?

Answer: An individual holding qualified small business stock ("QSBS") for more than five years may sell it at an effective maximum capital-gain rate of 14% (compared to 20% for stock held 12 months or more). QSBS must be acquired by the taxpayer at the original issue, in exchange for money, property or services provided to the issuing company. The company must be a "C" corporation (a separate taxpaying entity) with aggregate assets not exceeding $50 million on date of issuance. At least 80% of the company's assets must be used in the active conduct of a qualified trade or business. Corporations engaged in providing services, such as law, engineering, health and architecture, and businesses in the hospitality, farming and insurance industries do not qualify.

Generally, the 14% rate is limited to ten times your basis in your stock or $10 million, whichever is less. For instance, if you purchased stock for $1,000 and sold it for $100,000, the 14% rate would apply to only $10,000 (10x your basis).

Gain from a sale of QSBS (held for more than six months) may be rolled over into other QSBS, provided the acquisition occurs within 60 days of that sale and the new company is engaged in active business for at least 6 months after your acquisition.

To meet the 5-year ownership period for the 14% rate, the purchased stock includes the holding periods of QSBS sold in the past and rolled over under these rules.


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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**