Posts Tagged ‘Judge Carluzzo’

Tax Roundup, 3/17/16: Brokering mortgages isn’t “real estate activity,” says Tax Court. And: Irish scenery!

Thursday, March 17th, 2016 by Joe Kristan
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All photos today courtesy Dan Kristan

Sometimes training isn’t enough. A taxpayer whose case was decided this week in Tax Court seems well equipped to fight the IRS:

Petitioner holds a bachelor of science degree in accounting and a master’s degree in tax law. During each year in issue petitioner was licensed in California as a real estate broker and was qualified to represent taxpayers before the Internal Revenue Service (IRS) as an enrolled agent.

A specialized tax degree and an E.A. designation is pretty strong background, but credentials don’t always get the job done.

The taxpayer’s business involved mortgage brokerage, real estate brokerage, and tax preparation. The taxpayer argued that the time he spent as a mortgage broker counts as a “real estate trade or business,” enabling him to treat rental losses as non-passive and therefore deductible.

Some background. The tax law treats rental losses for most taxpayers as automatically passive, and therefore deductible only to the extent of “passive” income or at the time the “passive activity” is sold.

Business activities other than real estate rental are not automatically passive. Taxpayers can avoid the passive loss rules if they “materially participate” in the activity. This is based on the amount of time spent on the activity.

If you qualify as a “real estate professional,” your real estate losses are not automatically passive; they are tested as passive or non-passive based on the tests used for other businesses. But it is hard to be a real estate pro under these rules:

-You have to spend at least 750 hours a year working in a “real estate” trade or business, and

-Your real estate time has to exceed the time you spend doing non-real estate work.

This second test keeps most people from being real estate pros, as its hard to convince the IRS or the courts that you have a 2000-hour full time job but that you spend more time than that managing real estate.

The taxpayer in this case said his mortgage brokerage was a real estate business:

According to petitioners, petitioner’s mortgage brokerage activity is a “real property trade or business” within the meaning of section 469(c)(7)(C). Petitioners go on to argue that because petitioner spent more than 750 hours providing services in connection with his mortgage brokerage business for both years in issue, and because he spent more time in that business than he did in any other trades for business during each of those years, for both years in issue he is a [real estate professional]…

This is the first time I’ve seen mortgage brokering treated as a “real estate” trade or business. The Tax Court ponders the question (my emphasis):

Section 469(c)(7)(C) defines a real property trade or business to mean “any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.” Petitioners focus on the word “brokerage” contained in that section and argue that petitioner’s mortgage brokerage business is contemplated by the statute. We disagree. Petitioners’ argument ignores the words “real property” that precede the specific activities listed in the statute; those words modify each of those activities. While petitioner’s mortgage brokerage activity constitutes a “brokerage” trade or business, it does not constitute a “real property brokerage” trade or business. Petitioner was not during either year in issue brokering real estate; he was brokering financial services.

The court was unconvinced that the taxpayer met the 750-hour test without counting the mortgage brokerage time, so the rental losses were passive and disallowed. The issue was novel enough, though, for the taxpayer to avoid penalties.

The Moral? Credentials are helpful to a tax preparer, but they aren’t always enough to convince the Tax Court to see things your way.

Cite: Guarino, T.C. Summ. Op. 2016-12.

 

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Scott Drenkard, Sights and Sounds from Kansas as they Consider Bill to Eliminate Pass-through Carve-out:

Kansas is on the right track by broadening its tax base and lowering its rates, but should be cautious about favoring some businesses over others. A better path to encouraging economic growth is creating a tax environment that is not overly burdensome and treats all businesses well. Further, while tax reductions can have positive economic benefits, they will cost revenue and will ultimately have to be paid for either by cutting spending or increasing taxes elsewhere.

If Iowa ever gets around to much-needed business tax reforms, Kansas will provide a good bad example.

 

TaxGrrrl, 7 Options To Consider When You Can’t Pay Your Tax Bill In Full. With this importand advice: “What if you know that you can’t pay what you owe? File anyway.

Robert Wood, Before Filing Your Taxes With IRS, Consider This. “As you start preparing to file your tax return this year, consider what will happen if you are audited.”

Keith Fogg, A Different Type of Offset Fight – Illegal Exaction (Procedurally Taxing). “In the end, this type of case appears extremely difficult to win which is why so few of these cases make it to published opinions.”

Paul Neiffer, IRS Interest Rates Finally Start to Rise. “It seems like forever that the interest that the IRS will pay or collect on tax refunds/underpayments has been stuck at 3%.  The IRS just announced today that beginning April 1, 2016, the interest rate will rise to 4% for most taxpayers.”

Kay Bell, New tax scam alert: Cons posing as fake IRS agents now calling to ‘verify’ filers’ tax return information

 

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TaxProf, The IRS Scandal, Day 1043

Renu Zaretsky, Caution, Cuts, and a Chunk of Change. Today’s TaxVox headline roundup covers budget battles in Minnesota and proposed corporate tax cuts in the U.K., among other things.

 

Career Corner. Study: Women Even Less Willing to Put Up With Crappy Pay Than Men (Caleb Newquist, Going Concern)

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Tax Roundup, 8/11/15: Extreme Time Management fails in Tax Court. And: the rise of scam-by-mail.

Tuesday, August 11th, 2015 by Joe Kristan

20150811-1Dedication. The tax law “passive loss” rules generally treat real estate rental as automatically passive. If losses are passive, they can’t be deducted until either the taxpayer has passive income or the taxpayer sell the “passive activity” (think about that phrase for a minute).

There are two exceptions to this “per-se passive” rule. One rule allows up to $25,000 in rental losses to “active” real estate owners, but this phases out between $100,000 and $150,000 in adjusted gross income. The other exception applies to “materially participating real estate professionals.”

It’s hard to qualify as a real estate pro. There are two big hurdles:

– You have to spend at least 750 hours in a year working on real estate activities in which you have an ownership interest, and

– You have to spend more time in your real estate activities than in your other work or business activities.

The second condition is a tough hurdle for taxpayers with full-time jobs outside of real estate to clear, as a Los Angeles teacher learned yesterday in Tax Court. The teacher presented logs to the court to show that he spent more time on his real estate than on his teaching job. This from the Tax Court decision gives you an idea how that went (my emphasis):

In addition to the obvious understatement in the logs of hours petitioner spent as a teacher for each year in issue, the reliability of the logs is also called into question by what appear to be exaggerated amounts of time shown for relatively routine, recurring events, such as check writing. During petitioner’s cross-examination respondent’s counsel pointed out numerous instances of entries showing one to several hours for such activities. The Court does not exist in a vacuum, and we cannot divorce ourselves from our own experiences of daily life, such as the time it takes to review a mortgage statement and/or bill and pay the item by check. We reject petitioner’s claim that the dozens, if not hundreds, of checks that he wrote over the years in issue each took at least an hour to prepare.

Other entries pointed out by respondent’s counsel during petitioner’s cross-examination add to our concerns. Rather than point out each one, however, suffice it to note the following exchange during petitioner’s cross-examination after respondent’s counsel totaled the hours shown in the logs for time spent on various activities on a particular day:

MR. RICHMOND [respondent’s counsel]: And on November 30th [2007], you worked a 25-hour day on your rental properties?

WITNESS [petitioner]: Well, I guess it was a big day.

MR. RICHMOND: I guess it was.

So the Tax Court has something against the time-traveler-American community?

Decision for IRS.

The moral? A long-ago and now deceased big-firm partner/boss once told me “you can create hours with a pencil.” While that may be valid in big-firm public accounting, it doesn’t work so well in Tax Court.

Cite: Escalate, T.C. Summ. Op. 2015-47

 

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Robert D. Flach has fresh Tuesday Buzz, including this wise advice:

For years I have also been telling you that whenever you receive any correspondence from the IRS or a state tax agency give it to your tax preparer immediately. Do not send any money to anyone without first checking with your tax pro.

It appears scammers are starting to use the postal service, so watch out.

 

Russ Fox, Up In Smoke…Again. Tax life is hard for Marijuana businesses, even legal ones.

Tony Nitti, Ninth Circuit: Unmarried Cohabitants Each Entitled To Deduct Interest On $1,100,000 Mortgage Limit

Robert Wood, New IRS Guidance Suggests Obamacare 40% Cadillac Tax Could Get Even Worse

Keith Fogg, Ninth Circuit Reverses Tax Court on Qualified Offer Case and Holds That a Concession is not a Settlement (Procedurally Taxing)

Jim Maule, This Tax Change Will Help But It Won’t End the Problem. Thoughts on the new partnership return due dates.

Jason Dinesen, The Jason Dinesen Plan for Preparer Regulation. “Which begs the question of why they need a regulatory program — mandatory or voluntary — at all.”

Kay Bell, Cleveland to take Ohio jock tax ruling to U.S. Supreme Court

William Perez, Communicate Effectively with Your Tax Preparer

 

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TaxProf, The IRS Scandal, Day 824

Jeremy Scott, Jeb Bush’s Troubling Reversal on Taxes (Tax Analysts Blog).

Career Corner. Why You Should (and Shouldn’t) Accept a Full-Time Offer From a Public Accounting Firm (Amber Setter, Going Concern)

 

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Tax Roundup, 3/10/15: Deductions by the bag. And: tax credits put the “green” in green energy!

Tuesday, March 10th, 2015 by Joe Kristan
Flickr image courtesy Jen Waller under Creative Commons license.

Flickr image courtesy Jen Waller under Creative Commons license.

Bags and bags of deductions. To many taxpayers, the deduction for donations of household goods is sort of an extra standard deduction. If the value of non-cash charitable deductions claimed on 1040s were really as high as the deductions claimed, Salvation Army and Goodwill could be in the Fortune 500.

But the tax law doesn’t really have a freebie deduction for contributions of household goods. The IRS explains (item 7):

To claim a deduction for gifts of cash or property worth $250 or more, you must have a written statement from the qualified organization. The statement must show the amount of the cash or a description of any property given. It must also state whether the organization provided any goods or services in exchange for the gift.

A Maryland woman failed to meet this test in Tax Court yesterday. Special Trial Judge Carluzzo takes up the story:

Petitioner claimed a $31,037 charitable contribution deduction on her 2008 return, consisting of $15,340 in cash contributions and $15,697 in noncash contributions. Petitioner claimed a $10,357 charitable contribution deduction on her 2009 return, consisting of $6,490 in cash contributions and $3,867 in noncash contributions.

The cash contribution substantiation was inadequate. The documentation for the non-cash portion wasn’t any better (my emphasis):

With respect to the noncash charitable contributions, petitioner attached a Form 8283 to her 2008 and 2009 return, showing several contributions of property for each year, with each contribution of property valued over $250. To substantiate the contributions, petitioner submitted donation receipts from the Purple Heart, the National Children’s Center, the Lupus Foundation of America, Inc., and the Vietnam Veterans of America. Each of the donation receipts is deficient in one way or another, lacking either a date of contribution or a description of the property contributed, or both. Furthermore, the donation receipts neither reconcile with petitioner’s Form 8283 nor provide anything more than vague descriptions of the items donated.

Every practitioner who has been doing 1040 work for very long has seen things like this — say a round “$2,000” for, say, “10 bags, clothes — Goodwill.”  Or, sometimes, $7,000 (that never works; good luck finding a “qualified appraiser” for your old laundry). No receipts, or maybe an unsigned slip of paper that says “10 bags” from the donee. That doesn’t meet the requirements for a “statement” showing a “description of any property given.” The outcome:

Accordingly, we find that for each year in issue, petitioner has failed to establish entitlement to a charitable contribution deduction for donations of property in greater amounts than those now allowed by respondent.

The Moral? The deduction for household goods is not a freebie. If you are claiming it for over $250, you have to meet documentation requirements similar to those for cash donations. Even if you took pictures of the items before donating them, you lose without the statement from the donee.

Cite: Jalloh, T.C. Summ. Op. 2015-18.

 

Wind turbinePutting the green in renewable energy tax creditsTax Analysts’ Brian Bardwell tells us ($link) how green energy credits worked in Oregon:

The Oregonian reported at the end of February that the Oregon University System had claimed credits under that later deadline, saying that it had already begun work on a $27 million installation of solar arrays across its seven main campuses. And although then-Gov. John Kitzhaber used a golden shovel in a 2011 groundbreaking ceremony, contractor Renewable Energy Development Corp. — known as Redco — had not yet obtained building permits for the project or even finished its design plans, the paper reported.

But the DOE approved credits for the program, apparently relying on invoices from a nonexistent company indicating that it had already begun installing the foundations for solar racks at each of the campuses.

Following the reports, DOE Director Michael Kaplan called on the Oregon Department of Justice to investigate the case.

The program had some things in common with Iowa’s film credit program:

Relatively modest to start, the program grew quickly, with lawmakers approving an ever-growing list of eligible projects, increasing the maximum credit from $2 million to $20 million, removing the overall program cap, and allowing some claimants to transfer their credits.

As the program became more unwieldy and the DOE struggled to administer it, the legislature began winding it down…

This is related to the scandal that forced Governor Kitzhaber to resign. Special industry incentives are inherently corrupt, even if nobody in government is on the take, because they reward insiders at the expense of the body of taxpayers, known genericly as “chumps.” (for you Illinois readers, that’s the same as chumbolones).

More coverage at oregonlive.com: Oregon’s signature solar energy project built on foundation of false hopes and falsehoods

 

TaxGrrrl, Heart Surgery & Hospital Stays: Deducting Medical Expenses On Your Tax Return. An intrepid tax blogger finds a tax angle in her father’s heart surgery. We wish him a speedy recovery.

William Perez has Concise Guide to Schedule C for all you self-employeds.

Robert Wood, Wesley Snipes Lands NBC Show Endgame. Why His IRS Endgame Failed. “Stay away from crazy arguments.”

 

Alan Cole, Tom VanAntwerp, Richard Borean, Where Do Americans Take Their Retirement Income? (Tax Policy Blog).

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Warm places and lake country, it looks like.

 

TaxProf, The IRS Scandal, Day 670. This missing email stuff seems to be a pattern.

So what? The Rich Get (Much) Richer Under The Rubio-Lee Tax Plan (Tony Nitti). If it helps everyone else more than any other plan, why is that a problem?

Kay Bell, Tax simplification is focus of yet another Capitol Hill hearing.

Peter Reilly,  Pensacola Shows Little Interest In Kent Hovind Trial

Simon Johnson, Dynamic Scoring Forum: The Dangers of Dynamic Scoring (TaxVox)

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Martin Sullivan, “Beep, Beep” — Korean Singer YoonA Wins Model Taxpayer Award (Tax Analysts Blog):

She is one of eight members of the wildly popular band Girls Generation which has recorded such hits as Beep-Beep and Do the Catwalk. And now . . . she is the recipient of a presidential award from the South Korean government for being a dutiful and honest taxpayer who has made a significant financial contribution to her country.

We don’t expect an award, but it would be nice if the IRS would at least send a thank-you note.

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The IRS isn’t co-signing that loan

Friday, May 11th, 2012 by Joe Kristan

The tax law allows you to take a capital loss deduction for non-business bad debts that become worthless.  There’s a big catch: you have to take the deduction in the year the debt becomes worthless.  If you take the deduction in a later year, the IRS can disallow it; if the statute of limitations for the year of worthlessness has expired, you are out of luck.

That’s exactly what happened to George Saadian.  In 1988 he loaned money to a “distant relative” who was a fellow member of the Persian Jewish Community in California, a Mr. Simantob.  The Tax Court takes up the story:

As it turned out, things did not go as planned. Mr. Simantob did not begin to make monthly payments as required under the promissory note until some point in 1990. From 1990 through 2000 Mr. Simantob made partial interest payments that ranged from $1,750 to $8,000 per year. Petitioner contacted Mr. Simantob for the first time around March 1988 and then several times between 1988 and 2004 to inquire as to why the interest payments were not being made as required by the terms of the note.

The record is unclear as to whether Mr. Simantob made any payments during 2001 and 2002. Mr. Simantob made a $4,100 interest payment to Mrs. Toufer in 2003, which was the last payment made on the promissory note.

Mr. Simantob died in 2004, and efforts to collect from his sons failed.  Mr Simantob deducted the loan as a non-business bad debt on his 2006 1040.  The Tax Court decided 2006 wasn’t the right year (my emphasis):

The note matured in 2000, six years before the year in which petitioner claims the debt to have become worthless. Although there is evidence that petitioner pursued collection of the debt with Mr. Simantob’s heirs after the death of Mr. Simantob, there is no showing that any formal claim against Mr. Simantob’s estate was made or that Mr. Simantob’s sons had any legal obligation to satisfy the debt. If the debt became worthless, it would seem that it did so before the year in issue.

The Moral?  If you have a troubled personal debt, deduct it as worthless sooner rather than later.  If the IRS questions the timing, make sure to file protective refund claims for subsequent years to keep the statute of limitations open.  Also, as Anthony Nitti notes, the Tax Court found the taxpayer’s collection efforts half-hearted, which hurt his case.  If you really want your money back, act like you mean it and sue for collection.

Cite: Saadian, T.C. Summary Opinion 2012-44

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Taxpayer spreadsheet wins car deductions

Tuesday, August 30th, 2011 by Joe Kristan

Many taxpayers come to grief at IRS exams because they didn’t bother keeping track of their business auto use they reported on their returns. A taxpayer turned the tables on the IRS yesterday in Tax Court.
The taxpayer worked for a Florida chain of Midas auto service franchises. The Tax Court explains where the auto use came in:

Her employment duties varied; as she describes her responsibilities, she did whatever the operations manager required. On any given day she routinely drove from one of the shops to another in order to attend managers’ meetings, check inventory, check paperwork, enroll employees in the company’s health insurance plan, and research customer complaints. She used her own automobile when it was necessary to drive between the shops.

She wasn’t reimbursed by her employer, so she claimed her auto mileage as an unreimbursed employee business expense on Schedule A. She used a computer spreadsheet program to maintain her mileage records. The IRS disallowed her deductions, and she ended up in Tax Court. The judge sided with the taxpayer on this issue (my emphasis):

Petitioner maintained and submitted her mileage log showing the use of her automobile for business purposes during 2006. The log shows the beginning and ending location of each trip, the date of the trip, and the mileage for each trip. Petitioner’s log does not show the total mileage for all use of the automobile during 2006, nor does it state the business purpose of the use of the automobile as required under section 1.274-5T(b)(6), Temporary Income Tax Regs., supra. Nonetheless, petitioner’s mileage log substantially complies with the “adequate records” requirement of section 1.274-5T(b)(6), Temporary Income Tax Regs., supra, and to the extent her log is deficient, she has provided corroborative evidence sufficient to establish the required elements. Accordingly, petitioners are entitled to a $6,675 vehicle expense deduction attributable to business miles.

The Moral: an imperfect auto mileage log might be just good enough — and it is sure better than nothing at all.
Cite: Diaz, T.C. Summ. Op. 2011-103

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