Programming note: No posting tomorrow. See you Monday!
Snowbird loses “material participation” Iowa capital gain exclusion argument. A taxpayer who claimed the unusual Iowa exclusion on very-long-term capital gains failed to convince the Department of Revenue that he “materially participated” in the activity for the minimum of ten years required to qualify for the exclusion.
Iowa allows taxpayers to exclude certain long-term gains from their Iowa taxable income if they meet two requirements:
– They have held the property for ten years, and
– they “materially participated” in the business sold (or in the business holding real property sold) in the ten years preceding the sale.
The “material participation” rule follows the federal “passive activity” material participation definitions. This usually is based on time spent in the activity. Farmers who materially participate in five of the last eight years before they start drawing Social Security payments are considered to materially participate in the farming activity forever. Other taxpayers who retire after working in a business generally are considered to “materially participate” for five years after retirement.
The Iowa ruling letter gives sketchy facts, but it does note (my emphasis):
In determining material participation, only the 10 calendar years immediately prior to the sale are considered and the determination of the participation is limited to that property which is sold. Both the Department’s rule and the Internal Revenue Code (IRC) require material participation to be regular, continuous, and substantial. The fact that you wintered in Florida lends serious doubt as to the regular part of that requirement. Additionally, your daughter was paid for management services. Rule 701 IAC 40.38(1)(e)(7) states in part, “Management activities of a taxpayer are not considered for purposes of determining if there was material participation if either of the following applies: any person other than the taxpayer is compensated for management services, or any person provides more hours of management services than the taxpayer.”
The letter goes on to say that it’s up to the taxpayer to prove participation, and the taxpayer failed to provide logs, calendars or other evidence that he worked sufficient hours to meet the material participation tests.
The moral? If you want to claim material participation, and you have stepped away from the business, it’s important to keep good records of your participation. The state may not be inclined to take your word for it.
Robert Wood, Facts About FATCA, America’s Global Disclosure Law. “If you think money anywhere can escape the IRS, think again.”
The taxpayer argued that the child remains her foster child because they continued their relationship and hold each other out as parent and child. The Tax Court, however, determined that the taxpayer’s guardianship terminated in 2004 when the child attained majority. At that point, the child no longer could be said to be someone who “is placed” with the taxpayer.
Robert D. Flach, NO INCOME IS TAXED ALONE
Andrew Mitchel has a new Flowchart – Taxation of Pension Distributions Under UK – US Income Tax Treaty
Cara Griffith, Learn to Love the Property Tax — It’s Not So Bad (Tax Analysts Blog):
Despite its bad reputation, the property tax has numerous benefits. For local governments, the tax provides a relatively stable source of revenue. Local governments also have a fairly high collection success rate. Many property owners have escrow accounts through their mortgage companies, which collect tax monthly and remit it at the appropriate time. Because of that, and the fact that the property tax is attached to something physical, it is hard to avoid or evade.
It’s hard to beat the property tax for funding local services. When the politically-influential carve themselves out of it with TIFs or special exemptions (e.g., special agricultural assessment rules), those that are left footing the bill are understandably unhappy.
Renu Zaretsky, Wishes, Dreams, and Bittersweet Denials Today’s TaxVox headline roundup covers thoughts on the effect of reduced refunds on this spring’s retail sales, the failure of a proposed soda tax in California, and the need for more IRS authority to fix bad EITC claims.
Alan Cole, NFIB Survey: Taxes a Top Problem for Business (Tax Policy Blog).
Carl Smith, IRS Plays Cat and Mouse With Tax Court on Its Constitutional Status (Procedurally Taxing).
Joseph Thorndike, Even Under a Flat Tax, Learn to Love Those Loopholes, Because They’re Here to Stay (Tax Analysts Blog). “Once you win the battle, you have to keep fighting it over and over again.”
Greg Mankiw, Why I invest in index funds. “For investors, 2014 was the sixth consecutive year that hedge funds have fallen short of stock market performance, returning only 3 percent on average.”
Hank Stern, Cover Cali sputtering. (InsureBlog). “The Golden State’s health exchange (Covered California) continues to burn through tax-payer dollars at an alarming rate.”
TaxProf, The IRS Scandal, Day 735
Career Corner. Should CPAs Consider an MBA? (Paul Gillis, Going Concern). Not to fix your car, no.