Posts Tagged ‘Judge Marvel’

Tax Roundup, 3/24/16: Executors get until June to file basis reports. And: Don’t foot-fault that charitable deduction!

Thursday, March 24th, 2016 by Joe Kristan

20160122-3Now it’s June. The IRS has again delayed (Notice 2016-27) the new requirement for executors of taxable estates to notify beneficiaries of their basis. The rule is meant to keep the IRS from being whipsawed by having taxpayers use lower values for estate tax filings than for income tax filings.

The rule, which would require the executor to provide Form 8971 to the IRS, has been delayed several times now. The form includes a schedule for each beneficiary of the assets they are inheriting, along with the asset basis reported on the Form 706 filed for estate tax purposes. Each beneficiary is to receive a copy of their own schedule.

The filing is mandatory for estates required to file an estate tax return when the return is filed after July 31, 2015. It had been due March 31. The deadline is now June 30, 2016.

 

Charitable contributions: paperwork or bust. The law isn’t willing to take your word for charitable contributions any more. If you make a charitable contribution of $250 or more, the tax law now says no deduction is allowed unless you have magic words in writing from the charity. From IRS.gov:

The written acknowledgment required to substantiate a charitable contribution of $250 or more must contain the following information:

-Name of the organization;

-Amount of cash contribution;
-Description (but not value) of non-cash contribution;
-Statement that no goods or services were provided by the organization, if that is the case;
-Description and good faith estimate of the value of goods or services, if any, that organization provided in return for the contribution; and
-Statement that goods or services, if any, that the organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.

In addition, a donor may claim a deduction for contributions of cash, check, or other monetary gifts only if the donor maintains certain written records.

Even if you have a cancelled check for your $250+ gift, if you lack the magic words, your deduction is zero. 

A taxpayer learned this lesson the hard way in a Tax Court opinion released yesterday. The taxpayer’s gift in this case was a conservation easement valued at $350,971. While there are complex additional requirements for deducting such property gifts, those weren’t the problem. The taxpayer never got past the magic words:

Although the conservation deed includes provisions stating that the intent of the parties is to preserve the property, those provisions do not confirm that the preservation of the property was the only consideration because the deed did not include a provision stating that it is the entire agreement of the parties. Without  such a provision, the IRS could not have determined by reviewing the conservation deed whether petitioners received consideration in exchange for the contribution of the conservation easement. We conclude, therefore, that the conservation deed taken as a whole is insufficient to satisfy section 170(f)(8)(B)(ii). Because petitioners’ contemporaneous written acknowledgment does not comply with section 170(f)(8)(B)(ii), petitioners are not entitled to any claimed carryover charitable contribution deductions,

Lacking the magic words, the deduction suddenly went from $350,971 to nothing. 

While this was a six-figure problem in this case, the rule is just as effective for a $250 gift to your church or your favorite charity.

I’ll just get the acknowledgment if I get audited. That doesn’t work. The acknowledgement has to be “contemporaneous.” Tax Court explains:

A written acknowledgment is contemporaneous if the taxpayer obtains the acknowledgment on or before the earlier of the date the return was filed or the due date (including extensions) for filing the return for the year in which the charitable contribution was made.

Many smaller charities, and even a few bigger ones, have been slow to realize the importance of these acknowledgements. If you don’t have one yet, it is wise to get it. If you want the charitable deduction, it’s worth extending your return for.

Cite: French, T.C. Memo 2016-53.

This is another of our irregular series of 2016 filing season tips. They’ll keep coming through the April 18 deadline!

 

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Paul Neiffer, Are You 70 1/2?. “If you have retirement or IRA accounts and you are approaching age 70 1/2, you must be careful to make sure to take your required minimum distributions (RMD) and April 1 can be a key deadline.”

Jason Dinesen, If I Turn 65 in August, Am I 65 on My Tax Return?

TaxGrrrl, Taxes From A To Z (2016): I Is For Inheritance

Robert Wood, Payroll Tax Violators Get Penalties Or Jail, And IRS Is Watching. “The IRS is especially vigorous in going after payroll taxes.”

Nicolas Xanthopoulos, Investigating Assets Prior to Submission of Collection Remedies (Procedurally Taxing). Important work from a practioner dealing with the hard end of the tax law, collections.

Jack Townsend, Interview of Acting Assistant Attorney General Ciraolo on Tax Enforcement. It sounds like they still want to shoot jaywalkers.

Kay Bell, $10,000 crowdsourcing prize available to designer of Future IRS taxpayer accounts website

 

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Howard Gleckman, Paul Ryan and The “Ridiculous Notion” of Tax Distribution (TaxVox):

Last week, House Speaker Paul Ryan said in a CNBC interview that the distributional analysis of tax plans done by the Tax Policy Center, the Joint Committee on Taxation, and others is based on the “ridiculous notion” that the effect of tax changes on different income groups  is important.

Mr. Gleckman thinks Speaker Ryan is wrong, that it is very important to show how much tax changes benefit “the rich.” While that is interesting information, Speaker Ryan is right in that notions of distributional fairness have an outsized impact on tax policy deductions. I get the impression from some people that they would be fine with executing people, seizing their property, and selling their families into slavery, so long as it only affected the top 1% of earners.

David Brunori, How to Save the Corporate Tax (Tax Analysts Blog). “First, get all the states in a big room and have them agree to end all targeted tax incentives.”

TaxProf, The IRS Scandal, Day 1050. Today’s link: Chipping Away at the IRS Stonewall: A Federal Court Scores the Agency For its ‘Continuous Resistance’

 

Humor impairment is a lifestyle, not a crime! White-Collar Crime Watch: Polygamists, Fixed Tennis Matches, An Unfunny Accountant (Leona May, Going Concern).

 

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Tax Roundup, 9/22/15: A resounding call to document your mileage. And: preparer regulation, IRS service, lots more!

Tuesday, September 22nd, 2015 by Joe Kristan

 

No Walnut STYou know you’re having a bad day in Tax Court when:

After concessions, the remaining issue relating to deductions claimed on petitioner’s Schedule A is whether she is entitled to deduct an additional $1,616 of mileage expense that she claimed as part of her unreimbursed employee business expense deduction. The answer is a resounding no.

I’m pretty sure that the Tax Court judges never read their opinions out loud, so I don’t think it was literally resounding. Still, it’s fun to imagine Judge Marvel calling the court into session, calling out a booming “NO!” and then adjourning.

The “no” may hae been resounding because of a little error the Judge detected in the taxpayer’s evidence. The taxpayer claimed mileage deductions for going between work locations. Travel expenses have to meet the special substantiation requirements of Sec. 274(d), where the taxpayer maintains evidence, such as calendars or mileage logs, to prove the deduction. This taxpayer went through a lot of effort generating a log from her work history. However…

Petitioner testified at length regarding how she prepared the reconstructed log. She testified under oath that she had worked for both ATC and MSN throughout 2007 and carefully explained her work assignments for each employer, including her work assignments for ATC from January through September 2007. Unfortunately for petitioner, the document that ATC provided to her summarizing her work history with ATC shows that she did not start her employment at ATC until October 2007. That document demolished any credibility that petitioner’s reconstructed log and her sworn testimony might otherwise have had. [emphasis added]

The Moral? No matter how much effort goes into reconstructing your unreimbursed work mileage, it doesn’t help you if you didn’t actually have the job.

Cite: Spjute, T.C. Summ. Op. 2015-58

 

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Bryan Camp has a long piece in Tax Notes today ($link) arguing that the IRS can and should “cut and paste” its way into a new preparer regulation regime. I won’t argue the legalisms, though I think if the IRS thought it plausible, it would have tried it already.

I will point out that in an article with 101 footnotes, there is no discussion of additional costs to the taxpayers, or whether the benefits exceed those costs. He discusses evidence that “unregulated” preparers make more errors, and he assumes that regulation will fix the problem. That’s not necessarily so. It’s hard to imagine the perfunctory examination and CPE requirements of the old RTRP program would improved preparation. You can make somebody take a test, but you can’t make them competent.

Mr. Camp also ignores the unintended but predictable effects of the inevitably-increased price of preparation on the quality of tax returns received by IRS. If prep price goes up, more taxpayers will do their own returns, almost certainly at a higher error rate than from paid-for preparation. Other taxpayers will drop out of the system rather than pay higher prep costs.

In short, regulation advocates assume regulation will solve the problems of inaccurate returns. That’s unproven but unlikely. It is likely, though, that it will increase taxpayer costs and push customers away from paid preparers, which creates a new set of problems.

Related: Leslie Book, AICPA Defends CPA Turf and Challenges IRS Efforts to Regulate Unenrolled Preparers (Procedurally Taxing)

 

buzz20140909Robert D. Flach has fresh Buzz today, with links ranging from silly tax proposals to silly home office deductions.

Paul Neiffer, What About Those AFRs? “Periodically I will get a question from a client asking me ‘How much interest they have to charge on a loan to their child or some other related party?’. ”

Kay Bell, Meet Obamacare deadlines or pay the higher tax price. “If you don’t file last year’s return, you won’t be able to claim an advance premium tax credit to help you pay for your 2016 Obamacare coverage.”

William Perez, What Tax Documents to Bring to Your Accountant?

 

Tony Nitti, Tax Geek Tuesday: Making Sense Of Partnership Book-Ups. A primer on adjusting capital accounts to reflect the price paid when partners enter or leave a partnership.

Russ Fox, We Don’t Need No Stinkin’ Phone Calls.

So let’s translate this into reality. In the 2013 fiscal year, 22,363,345 phone calls were attempted to various IRS toll-free lines; 15,609,615 were answered (69.8%). In the 2015 fiscal year, 22,013,468 phone calls were attempted to various IRS toll-free lines; 8,277,064 were answered (37.6%). As for the time on hold allegedly decreasing to 23.5 minutes, perhaps that’s after excluding all the time some of the 7 million people who called but whose calls were dropped or who hung up spent on the phone.

I think the IRS cuts in customer service are a sort of “Washington Monument Strategy” of cutting the most visible and useful aspects of taxpayer service to pressure Congress into providing more funds. I’ll believe the IRS is serious about its customer service issues when the IRS takes its 200 employees who spend all of their time doing Treasury Employee Union work and puts them on the phones.

Robert Wood, Let’s Tax Churches. I’m sure that won’t be controversial…

Peter Reilly, The Tax Code Explained & Why It Matters In This Presidential Race (No, It’s Not 70K Pages)

Jack Townsend, Wyly Brothers Seek Bankruptcy Relief from Disgorgement Order from Offshore Shenanigans

 

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TaxProf, The IRS Scandal, Day 866

Martin Sullivan, Donald Buffett? (Tax Analysts Blog). Looking for tax wisdom in all the wrong places.

Renu Zaretsky, Inversions, Schools, and Supermarkets. Today’s TaxVox roundup covers the ground from tax increases in Chicago to tax favors for supermarkets in Baltimore.

 

Sebastian Johnson, Progressive Era Reform Can Be Anything But Progressive (Tax Justice Blog). “Supermajority requirements and tax and spending limits, two frequently proposed ballot measures, are not designed to promote the well-being of states.”

The point isn’t the well being of the state; it’s the well-being of the citizens.

 

News from the Profession. Accountant Hiding on the Appalachian Trail Has the Mugshot to Prove It (Caleb Newquist, Going Concern). “If you were an accountant accused of making off with about $9 million of your employer’s money, I can think of few places better to hide than the wilderness.”

 

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Tax Roundup, 7/2/15: Lives, Fortunes and Sacred Honor Edition. And: why Iowa can’t have nice things.

Thursday, July 2nd, 2015 by Joe Kristan

 

20150702-1Patriotism can be costly. The founders pledged “our Lives, our Fortunes, and our sacred Honor” when they voted for independence 239 years ago today. But not everyone is down for the “Fortunes” part.

A construction contractor in Florida leaned on patriotism to minimize taxes. The Tax Court takes up the story (citations omitted):

Petitioner became involved with certain organizations and individuals, such as the Patriot Network, We the People, and Richard Cornforth, that advocate tax avoidance and encourage actions to frustrate and delay the IRS’ collection efforts. He paid an annual fee to the Patriot Network for access to its Web site and for assistance with tax problems. Petitioner testified that he became convinced that Federal income taxes were “illegitimate” and that caselaw showed that individuals who had refused to pay taxes were prevailing in court.

That caselaw must be interesting. This sort of tax protest argument never actually works in avoiding taxes, though occasionally tax deniers can convince a jury that they actually believed this stuff enough to not be intentional tax criminals.

The taxpayer tried some legal incantations to help his patriotic cause:

On January 23, 2008, petitioner filed a notarized document entitled “Official Declaration of Domicile” with the Clerk of the Circuit Court, Volusia County, Florida. The document stated that petitioner did not believe himself to be a U.S. citizen but was rather “One of the People”, a “Florida [S]tate Citizen”, a “Sovereign”, and a “Man upon the land”. Petitioner filed this document at the suggestion of one of the tax-avoidance organizations.

20120531-2The “man upon the land” thing is a new one, to me. Unfortunately for our taxpayer, it didn’t work any better than the “One of the People” thing in Tax Court yesterday. He appears to have been a successful contractor, if the amount of taxes he was assessed is an indication, and the IRS probably noticed that there was no income being reported on the 1099s issued to him.

An examination got underway, and it went as well as you might expect, given the patriotic advice he was taking (my emphasis):

Revenue Agent Pritchard sent petitioner a letter dated April 24, 2009, stating that he had submitted Form 12153 prematurely, as no tax had been assessed yet. On May 6, 2009, Revenue Agent Pritchard sent petitioner a letter informing him that his arguments were frivolous and providing Code citations and IRS guidance pertaining to his filing requirements and respondent’s authority to impose and collect income tax. The letter specifically addressed promoters of tax-avoidance activities, stating: “These people base their arguments on legal statements taken out of context and on frivolous arguments that have been repeatedly rejected by [F]ederal courts.”

Nevertheless, at the suggestion of the aforementioned tax-avoidance organizations, petitioner continued to send letters to Revenue Agent Pritchard espousing similar arguments and often accompanied by Forms 12153. For example, with assistance from the Patriot Network, petitioner sent Revenue Agent Pritchard a letter dated May 13, 2009, threatening legal action against her and the United States. Petitioner also sent Revenue Agent Pritchard a letter dated July 14, 2009, “demanding that * * * [she] send * * * [him] a certified assessment of how * * * [she has] now came [sic] up with this alleged amount & the name of the person or persons preparing it”, and a letter dated October 23, 2009, and addressed to “Tax Collector” that requests a section 6320/6330 hearing and is accompanied by an attachment of materials that petitioner received from the Patriot Network

IMG_0216Lacking cooperation from the taxpayer, the IRS did things the hard way, backing into taxable income based on bank deposits and 1099s. The result was over $238,000 in taxes assessed over four years, plus interest and fraud penalties.

At some point after the taxpayer commenced Tax Court proceedings, lucidity overcame him:

Petitioner relied on the Patriot Network Web site during the early stages of this case. For example, petitioner followed the Patriot Network’s advice to file a request for admissions and a motion in limine to exclude from evidence the bank  records that respondent had obtained. However, petitioner testified that he subsequently realized he had made foolish mistakes “in trying to follow other people” and that he was trying to fix those mistakes. He hired an accountant to file late returns for 2008-11, and he testified that he would no longer be paying the annual fee to the Patriot Network.

That probably helped him establish business deductions that the IRS might not have otherwise allowed, but it didn’t undo his prior patriotism:

We commend petitioner for adjusting his behavior during the pendency of this case and for his considerable work in reconstructing largely accurate and very helpful summaries of his business income and expenses for the years at issue. However, we cannot discount months of uncooperative behavior that gives insight into petitioner’s intent in not filing Federal tax returns. Petitioner’s failure to cooperate with respondent is persuasive circumstantial evidence of fraud.

So he kept his life and, perhaps, his honor, but he lost a fortune: $237,976 in fraud penalties on top of $328,000 in taxes and $57,000 in late payment penalties.

The Moral? If you follow the advice of “Patriot” outfits to not pay your taxes, you may be unwittingly pledging your fortune. Unlike the founders, though, you won’t win.

Cite: Porter, T.C. Memo 2015-122.

 

Gretchen Tegeler, Why priorities don’t get funded (IowaBiz.com):

One of the most significant “built-in” spending components affecting all state and local governments in Iowa is public pension debt. Our public pension systems guarantee retirees a monthly benefit for life, the size of which depends on how long they worked and at what salary. The system is built upon a financial model that involves a whole series of assumptions. If the assumptions don’t pan out, taxpayers are still on the hook to pay the benefits.

And the assumptions have not panned out.

Public defined benefit pensions are a lie. It is either a lie to the taxpayers about the cost of current services, a lie to the public employees about the size of their pensions, or some of both. A move to a defined contribution model, where benefits are limited to the amount funded, is long overdue.

 

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Kay Bell, Tax record keeping rules and tips. Jeb Bush keeps his tax returns for at least 33 years. Should you?

Jason Dinesen, From the Archives: Issue a 1099-C to a Deadbeat Client or Customer? Um, no.

 

Scott Greenberg, Gavin Ekins, Tax Policy Helped Create Puerto Rico’s Fiscal Crisis (Tax Policy Blog). “While the United States federal tax code helped create the conditions for Puerto Rico’s fiscal crisis, the Puerto Rican tax code played a much more direct role in bringing the crisis to a head.”

Tracy Gordon, Puerto Rico: Not Your Father’s Debt Crisis – or Your Greek Uncle’s (TaxVox). “In a remarkable statement, Governor Alejandro Garcia Padilla announced this week that Puerto Rico’s debts are ‘not payable.’ Nobody was really surprised.”

Cara Griffith, Texas Comptroller Improves Transparency of Administrative Decisions (Tax Analysts Blog)

Patrick J. Smith, The Implications for Tax Litigation of the Supreme Court’s Decision in Michigan v. EPA (Procedurally Taxing) “While it is probably the case that in many challenges to tax regulations, the cost of compliance with the regulation may not be a realistic basis for challenge, there is no principled reason why in appropriate cases, the cost of compliance with a tax regulation might not form part or all of the basis for challenge.”

TaxProf, The IRS Scandal, Day 784

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No Tax Update tomorrow. Our office is closed for Independence Day. Enjoy the fireworks, but spare a thought for those who have fought for independence, including 10 men who never made it back to base from a mission 71 years ago Sunday.

 

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Tax Roundup, 4/22/15: Mileage logs don’t have to be perfect, but they have to be there. And: taxes and the rich guy.

Wednesday, April 22nd, 2015 by Joe Kristan

20150422-1Keep that logbook. It’s not always enough to incur a deductible expense to earn a documentation. For travel, meals and entertainment, you have to be able to prove it under strict standards. If you fail to properly document the amount, time and place, and business purpose of travel expense, your deduction is lost.

A Minnesota man whose job managing construction projects required substantial travel claimed employee business expense deductions. The IRS disallowed the deductions, and the Tax Court got involved. Judge Marvel explains (my emphasis, citations omitted):

Substantiation by adequate records requires the taxpayer to maintain an account book, a diary, a log, a statement of expense, trip sheets, or a similar record prepared contemporaneously with the use or expenditure and documentary evidence (e.g., receipts or bills) of certain expenditures.  A log that is kept on a weekly basis is considered contemporaneous for this purpose. 

The taxpayer, A Mr. Ressen, recorded business miles and kept a calendar showing his trips, and that carried the day:

With respect to the portion of the disallowed deduction attributable to their claimed use of the 2007 and 2008 Chevys, petitioners introduced copies of the calendar in which Mr. Ressen contemporaneously recorded his weekly mileage as an employee of ICS as well as some information regarding where he was working at various times. Petitioners also introduced copies of the pages in the logbook on which he contemporaneously recorded the beginning and ending miles for the 2007 and 2008 Chevys. Considering the facts and circumstances of Mr. Ressen’s employment arrangement with ICS and his business use of the 2007 and 2008 Chevys we conclude that the calendar is a credible, adequate record of the amount of the business use of the property, the dates of such use, and the business purpose of such use, and the logbook pages are an adequate record of the total use of the property.

It’s odd that the IRS disallowed the deduction and then litigated it. They apparently were trying to hold the taxpayer to some platonic ideal of a log book. The Tax Court was willing to combine the log book with the calendar to determine the time, place and business purpose of the trips — a sensible result.

The moral: Keep that mileage log, or use one of the smart-phone apps created for this purpose, and document your business purpose. Keep that calendar, too. It made the difference for our Minnesotan.

Cite: Ressen, T.C. Summ. Op. 2015-32.

 

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William Perez, Taxes When Hiring Household Help.

Robert Wood, What To Do When IRS Agents Call On You. “Talking to the IRS without a representative is often a mistake.”

Russ Fox, Of Deadlines and Taxes:

This definitely wasn’t the worst Tax Season I’ve gone through, but it was far from the best. For taxpayers, this likely was one of the worst. Unfortunately, I don’t see any improvements on the horizon. The light I see is the oncoming train not the end of the tunnel.

Agreed.

 

TaxProf, The IRS Scandal, Day 713

 

Greg Mankiw, Why I favor estate tax repeal. “The estate tax unfairly punishes frugality, undermines economic growth, reduces real wages, and raises little, if any, federal revenue. There are no principles of good tax policy that support this tax…”

 

Martin Sullivan, As Governor, Jeb Bush Catered Tax Cuts to the Wealthy (Tax Analysts Blog). The formulation “tax cuts for the wealthy” should disappear. The loot and pillage community can call almost any tax cut a “tax cut for the wealthy” simply because the wealthy pay almost all the taxes.

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Chart by Tax Foundation

 

 

When you consider government benefits, the rich guy pretty much covers the whole thing:

distribution tax spending all taxes

Chart by the Tax Foundation

 

For your penance, say three “Our Commissioners” and three “Hail Lois.” Santa Clara Co. Priest Indicted on Bank Fraud, Tax Evasion.

 

 

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Tax Roundup, 12/31/14: Last minute tax moves: losses, gifts, and… weddings? Timing is everything!

Wednesday, December 31st, 2014 by Joe Kristan

20140608_2So.  2014 is down to its last few hours. What can we do today to make April 15, 2015 a little happier? Well, maybe less bad. It’s asking too much of one day to fix a year’s worth of tax problems, but today might still make a difference. A few things you can do yet today:

– Sell stocks at a loss to offset capital gains. It’s the trade date that counts in determining when a loss is incurred (except on a short sale). That means if you have incurred capital gains in 2014, you can sell loss stocks today and reduce your taxable gains for the year. Most individuals can deduct capital losses on a 1040 to the extent of your gains, plus $3,000. To the extent you fail to offset capital gains with the losses sitting in your portfolio, you are paying taxes voluntarilyJust make sure you make the trade in a taxable account and don’t repurchase the losers for 30 days.

– Consider making your state 4th quarter estimated tax payment today (and your federal payment, if you are an Iowan). Don’t do this rashly, as alternative minimum tax can make this a bad move for some taxpayers. Also, time value considerations can make this a bad move. But in the right circumstances, you can save a lot in April by getting your payment in the mail today.

– Make a charitable gift today, if you are so inclined. Gifts (and other deductions) paid with a credit card today are deductible, even if the credit card isn’t paid off until next year. Checks postmarked today are deductible this year. If you don’t know where to make your gifts, I have some suggestions; if you don’t like those, TaxGrrrl has some others.

– And if you are fanatical about tax planning, and someone else, you can change your marital status today. Your marital status on December 31 is your status for the whole year, as far as the IRS is concerned. But if you are seriously considering this, you definitely need to bring someone else into the discussion.

 

20120511-2A Tax Court Case yesterday shows how important year-end timing can beA Minnesota couple paid $2,150.85 of community college tuition for their daughter’s Spring 2011 semester on December 28, 2010. That normally would have qualified for an American Opportunity Tax Credit of about $2,037 — a dollar-for-dollar reduction fo their 2011 taxes. But they were four days too soon.

Tax Court Judge Marvel explains (my emphasis):

Generally, the American opportunity credit is allowed only when payment is made in the same year that the academic period begins. Sec. 1.25A-5(e)(1), Income Tax Regs. For cash method taxpayers, such as petitioners, qualified education expenses are treated as paid in the year in which the expenses are actually paid.

Because the semester didn’t begin until 2011, the 2010 payment didn’t count. Judge Marvel explains that close isn’t close enough:

We realize that the statutory requirements may seem to work a harsh result in a case such as this where a four-day delay in making the December 28, 2010, payment would have engendered a different result. However, the Court must apply the statute as written and follow the accompanying regulations when consistent therewith.

The Moral? When it comes to tax planning, the difference between December 31 and January 1 is one year, not one day. If timing matters, be sure to get on the right side of the line, and be sure you can document your timing. If you are mailing a big check, go Certified mail, return receipt requested, and save that postmark.

Cite: Ferm, T.C. Summ. Op. 2014-115.

 

If Iowa's income tax were a car, it would look like this.

If Iowa’s income tax were a car, it would look like this.

Iowa rated 8th worst small business environment. The Small Business & Entrepreneurship Council has ranked the entrepreneurial environment of the 50 states. Iowa does poorly:

Iowa is the nation’s number one producer of corn. Unfortunately, it’s costly policy climate works against production from free enterprise and entrepreneurship in general. Iowa ranks 43rd in terms of its public policy climate for entrepreneurship and small business among the 50 states, according the 2014 “Small Business Policy Index.” While Iowa’s entrepreneurs, businesses, investors and workers benefit from fairly low crime rate and a low level of government debt, there are many negatives, such as high individual capital gains taxes; very high corporate income and capital gains taxes; high unemployment taxes; and a high level of government spending.

While I think overall Iowa is better than 43rd, our awful tax environment hurts. Our system of high rates with dozens of carve-out credits for the well-advised and well-connected works great for insiders, but not so well for the rest of us. Maybe 2015 will be the year Iowa considers serious tax reform, like The Tax Update’s Quick and Dirty Iowa Tax Reform Plan.

 

Kay Bell, Donating and deducting a car

Jack Townsend, Reasonable Doubt and Jury Nullification

Jason Dinesen lists his Top 5 Blog Posts of 2014. My favorite is his #5, Having a Side Business in Multi-Level Marketing Doesn’t Make Personal Expenses Deductible

Tony Nitti warns us of Five Traps To Avoid When Deducting Mortgage Interest

Robert D Flach shares: MY NEW YEAR’S EVE TRADITIONS: “I type W-2s and 1099s.” Don’t get too wild, Robert!

Me, IRS issues Applicable Federal Rates (AFR) for January 2015

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G. Brint Ryan, Who’s Afraid of the IRS? When Business Fights Back Against Government Overreach and Wins (Procedurally Taxing)

Annette Nellen,State taxes and bitcoin

Robert Wood, No Mickey Mouse Taxes On Jim Harbaugh’s $48M Michigan Deal And 49ers Exit. “Jim Harbaugh’s 49ers contract may be history, but his $48M Michigan deal has tax components that you might not expect.”

 

Howard Gleckman, Taxes, Charitable Gifts, the ACA, and Ineffective Deadlines (TaxVox).  “Scrambling to make a last-minute charitable donation to beat the New Year’s Eve deadline for a 2014 tax deduction? Take a deep breath and ask yourself, ‘Why am I going through this craziness now?'”

TaxProf, The IRS Scandal, Day 601

 

Post-sequester commuting.

Not excited about all the wild New Years Eve hoopla? Maybe you prefer a more low-key celebration, like the one Robert D. Flach relates in MY NEW YEAR’S EVE TRADITIONS:

Every year during the day on New Year’s Eve I do the same thing I do during the day on Christmas Eve – I type W-2s and 1099s.

Live it up, Robert!

 

And Happy New Year to all of you Tax Update readers! This is it for 2014 here.  See you next week, and next year.

 

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If you buy something from your own business, do you have to pay retail?

Friday, June 28th, 2013 by Joe Kristan

20120511-2It’s very tempting for contractors to divert materials from their business to, say, build a new addition.  The business deducts the cost of the materials, and the IRS helps to subsidize the bigger house.  The IRS caught up to this sort of fraud long ago, and its audit programs look for it.

Mr. Welle, a North Dakota contractor, went about things the right way.  When he used materials from his C corporation, TWC, to build a lake home, he kept careful records and repaid the corporation out of his own funds for the actual costs of the materials.

That didn’t satisfy the IRS.  They said that the corporation should have marked up the materials by its customary 6% margin, and they assessed the owner taxes on a “constructive dividend” for the foregone markup.

Constructive dividends are an old feature of C corporation tax law.  Taxpayers often try to get things from corporations in funky ways to avoid incurring taxable dividends.  Things that can trigger constructive dividends can include use of corporate property, excessive compensation, and excessive rents, among other things.  But this is the first case I know of where the IRS said that failure to take a markup on goods sold to an owner triggered a dividend.

And with luck, it might be the last.  The Tax Court yesterday wasn’t buying the IRS argument:

The most that can be said about Mr. Welle’s use of TWC is that he used the corporation as a conduit in paying subcontractors and vendors and that he obtained some limited services from corporate employees. Mr. Welle fully reimbursed the corporation for all costs, including overhead, associated with those services, and TWC did not divert actual value otherwise available to it by failing to apply its customary profit margin in determining the amount Mr. Welle had to reimburse the corporation. We therefore conclude that this arrangement did not operate as a vehicle for the distribution of TWC’s current or accumulated earnings and profits within the meaning of section 316(a).

Even though the IRS was making an unprecedented (and losing) argument, it also asserted that the taxpayer should pay an “accuracy-related penalty” on the asserted deficiency for not anticipating this novel IRS argument.  This is one more data point in favor of my “sauce for the gander” plan for IRS penalties, where the IRS is subject to the same penalties for unsupportable audit positions as taxpayers, with the penalties payable to the winning taxpayer.

Cite: Welle, 140 TC No. 19

 

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What really happened to the dinosaurs.

Thursday, October 4th, 2012 by Joe Kristan

They got audited.

A Florida couple set up a ministry and a theme park devoted to the “young earth” theory that dinosaurs and humans walked the earth together.   Things didn’t go so well, and the husband ended up going to prison on federal tax charges.   Meanwhile the IRS went after his wife for civil tax fraud penalties.  The IRS won in Tax Court yesterday.

The wife at first asserted she hadn’t filed tax returns for a number of years because she had no taxable income.  The IRS then went through the tedious process of analyzing bank deposits, finding over $14 million in income and just short of $7 million in deductible expenses over nine years.  You can assume that the IRS wasn’t as aggressive in looking for deductions.

The Tax Court looks at a number of factors to determine whether there is fraud.  One is the absence of records:

    In a letter attached to her untimely filed returns, petitioner wrote: “I have not kept financial records, as I did not know that I needed to do so.” Petitioner introduced no records of her income and did not substantiate the amounts she claimed as income on her tax returns.

     Although petitioner claimed that she was unaware of the obligation to keep financial records, we reject this explanation as not credible. Accordingly, petitioner’s failure to keep and/or provide records of income and expenses is indicative of fraud.

The day went badly for the taxpayer, with the court saying the evidence “overwhelmingly” demonstrated that she had fraudulent intent.

The Moral?  Failing to keep records hurt the taxpayer in two ways.  It implied that she was cheating, and it probably led to a much higher tax — and certainly higher fraud penalties — than if she had kept records and filed properly in the first place.  Even a cave man can figure that out.

Cite: Hovind, T.C. Memo 2012-281.

Update, 10/5/12: Peter Reilly has more.

 

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Tax Court waves off aircraft dealership expenses as “start-up” costs

Thursday, July 26th, 2012 by Joe Kristan

A Schedule C taxpayer with an established aerial photography busienss decided to branch out into selling light aircraft.  He reported the aircraft dealership expenses on the same Schedule C as his photography venture, with a 2007 loss of about $90,000, on $10,000 of income.

A big loss on a small income tends to attract IRS examiners.  The IRS said the loss disallowed the loss under the “hobby loss” rules.   Hobby loss rulings are awkward, requiring the IRS and the courts to devine whether the taxpayer really sought to make money in a money-losing operation.  The Tax Court didn’t have to use legilimency here, as it found another way to disallow the expenses.

The tax law requires taxpayers to capitalize “start-up” costs — expenses incurred in setting up a business before it begins operations.  Once operations begin, taxpayers can fully deduct up to $5,000 of such costs.  Any costs over that amount have to be amortized over 15 years.  The tax court explains (citations omitted, emphasis added):

Until the business starts operating as a going concern, expenses related to that activity are not ordinary and necessary expenses currently deductible under section 162 but rather are startup or preopening expenses.  The Code defines startup expenditures as any amount paid or incurred in connection with investigating the creation or acquisition of an active trade or business, creating an active trade or business, or any activity engaged in for profit and for the production of income before the day on which the active trade or business begins, in anticipation of the activity’s becoming an active trade or business and which, if paid or incurred in connection with the operation of an existing active trade or business would be allowable as a deduction for the taxable year in which paid or incurred.

 The court said that the “Quicksilver” aircraft dealership was a separate business from the photography operation, and that it was still in the “startup” process in 2007:

During 2007 petitioner expanded his hangar, attended an FAA course, communicated with Quicksilver regarding his interest, and was in the process of building a demonstration model. However, petitioner did not finish the demonstration model until January 2008 and did not manufacture any LSAs for sale. He did not advertise his services or products and did not hold himself out as a dealer or repairman for Quicksilver. We conclude that in 2007 petitioner did not commence the business of being a Quicksilver dealer, for which he was preparing.

The Tax Court disallowed the expenses that it felt were “start-up” costs.

So when does the “start-up” period of a business end?  It’s not always clear.  For a retailer, it’s no later than when you open the doors to the public.  If you are a manufacturer, the start of production is probably key. 

The Moral? There is a big difference between deducting business expenses now and start-up expenses over 15 years.  If you are starting a new business, keep the limitations on start-up expenses in mind and try to defer expenses until you are up and running where possible.  If you have an existing business and are starting a new line, the start-up rules can still apply.  Be sure to carefully segregate the expenses of the existing business from the new business so the IRS can’t defer them as start-up costs.

Cite: Bramlett, T.C. Summ. Op. 2012-73.

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That mileage log isn’t worth much if you don’t fill it out right

Tuesday, April 26th, 2011 by Joe Kristan

Life can be hard for a commission seller. Jessica tried it in 2006 for a St. Louis office supply business, working her territory in her 2001 Chevy Cavalier. Six months work earned her $3,307.
Tax time came around. The Tax Court takes up the story:

Petitioner brought her Forms W-2, Wage and Tax Statement, for all of the companies she worked for in 2006,4 as well as a shoebox full of receipts, to H&R Block, and a return preparer at H&R Block completed her return.

At least it was a shoebox. It’s the grocery bags that scare me. The preparer deducted employee business expenses in a big way. The IRS ended up challenging over $17,000 of them — not bad for $3,307 of income.
The Tax Court seems to question whether she got much value from her preparer:

It is not clear whether the return preparer made any attempt to distinguish deductible from nondeductible expenses or whether the return preparer simply added up the receipts and deducted the sum as unreimbursed employee business expenses.

The biggest expense was her Chevy. That deduction went awry:

Petitioner kept track of her automobile mileage using a daily mileage log. However, there are several problems with the mileage log. First, the mileage log simply notes the odometer reading on petitioner’s car at the beginning and end of each day and includes no information regarding where petitioner drove, the purpose of the trip, or petitioner’s business relationship to the persons she visited. Second, petitioner included in the mileage log the roughly 27 miles she drove each workday commuting to and from MV Marketing’s office. Finally, petitioner conceded that she may have included some personal trips in the mileage log. Petitioner did not present any evidence at trial, such as appointment books, calendars, or maps of her sales territories, to corroborate the bare information contained in the mileage log, nor did she testify with any specificity regarding her vehicle expenses in 2006.

Well, the Court made an estimate and gave her some of her expenses, right? Wrong:

Although we do not doubt that petitioner used her Chevrolet Cavalier for business between June and December 2006, we have no choice but to deny in full petitioner’s deduction for mileage expenses. For the reasons discussed in the preceding paragraph, petitioner’s mileage log does not satisfy the adequate records requirement of section 274(d), petitioner did not present any documentary evidence to corroborate the mileage log, and petitioner’s testimony was not detailed or specific enough to satisfy the requirements of section 274(d) and section 1.274-5T(c)(3), Temporary Income Tax Regs., supra. Moreover, we are not permitted to estimate petitioner’s mileage because section 274(d) supersedes the Cohan rule. Consequently, petitioner’s deduction for mileage expenses is denied in full.

The moral? The tax law has very specific substantiation requirements for deducting travel and entertainment expenses, including vehicle expenses. You must substantiate:
(1) the amount of the expense or item;
(2) the time and place of the travel, entertainment, or expense;
(3) the business purpose of the entertainment or expense; and
(4) the taxpayer’s relationship to the person or persons entertained.
The mileage log needs to include this information, or you need to be able to be able to support it with other items, like a travel calendar. The tax law doesn’t allow you to make a good guess. No substantiation, no deduction.
Cite: Solomon, T.C. Memo 2011-91

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