INFINITE PARTNERSHIPS – Page 4

Dec 03

Step Transaction Tax Planning

By Chris Moss CPA Tax Attorney in Step Transaction, Step Transaction Doctrine, Substance over Form

Whatever your legacy is after you’re gone, whether the legacy is yours or belongs to your grandfather, I would hope that you want your kids and grandchildren to share in some way that legacy you or your mother or grandmother is leaving you all. But many of you all are not all in concurrence as to how the estate shall be handled, and surely not all in agreement as we end the year of 2014. For those of you in this situation, may I suggest tax planning in steps (STTP pronounced STEP) for the family estate and tax plan? No, tax planning in steps is not a new dance step. STTP is the way to move forward on long range estate planning now in 2014 that avoids IRS attack known as the Step Transaction Doctrine. (STD pronounced STUD) Unfortunately the IRS sees STDs even when there is none, and throws your STTP into dead end brick walls resulting in increased tax pain and injury for all. So if your mom and dad or grandparents have substantial assets and you are looking to at least get started on planning your legacy, stay tuned to TaxView with Chris Moss CPA to learn how to stay clear of IRS STTP to STD conversion audits and allow your legacy to be safely preserved for many generations to come.

You will not find “STD” in the IRS code. The concept of STD is carved from hundreds of Federal tax court cases and is a spin-off from the Substance over Form Doctrine codified by Congress into IRS Code 7701(o) as part of the Health Care and Education Reconciliation Act of 2010. STD then remains a totally Court made law somewhat guided by Section 7701(o). The IRS generally argues that STD is a series of transactions or “steps” over many months or years, that when taken as a whole, convert a taxpayer’s innocent STTP to a sinister STD scheme to avoid taxation.

On the other hand a STTP could be viewed as a legal alternative to STD. So are you a good candidate for STTP? Whether it be a private foundation for the arts to be created for the family, or whether it be the family farm being assembled for succession, or perhaps the vast commercial real estate enterprise you have spent your entire life to build now ready to pass on to the next generation, one thing you don’t want to happen is for the estate tax to be so large after you pass that you have to sell the farm to pay the tax all because there was disagreement within the family as to the specifics of the estate plan. So STTPs are used when you for whatever reason your family cannot logistically complete the estate plan all at once.

Unfortunately, there are some taxpayers out there who fall into a STD through perhaps bad advice from tax advisors. Directly in response to these poorly structured STDs, IRS audits have been converting even legitimate STTPs to STDs and have been winning big in US Tax Court. See US Tax Court Bianca Gross v IRS (2008), US Tax Court Holman v IRS (2008), US Tax Court Pierre v IRS (2010), CGF Industries v IRS (1999).

While the IRS wins most of the STD cases, they do sometimes lose a legitimate STTP case, like in Klauer v IRS (2010). Peter Klauer founded Klauer Manufacturing in Iowa in 1870 and branched out in New Mexico in 1919. More recently Klauer descendants were in discussions with the US Bureau of Land Management, the US Trust for Preservation of Land and various Indian tribes regarding purchase of the Taos Overlook or at least an option to purchase. Over three years from 2001 2002 and 2003 various agreements were executed all independent of the other. Taken separately each land sale was substantially below market value. Klauer’s S Corporation tax return for 2001 2002 and 2003 claimed millions of dollars as land donated on Form 8283 Noncash Charitable Contributions and various K1s were distributed to the stockholders with their proportionate share of the contribution. All the shareholders filed their Form 1040s for 2001 2002 and 2003 with very large charitable deductions. The IRS audited as a whipsaw and disallowed all charity deductions for all three years causing large amounts of taxes owed by the individual shareholders. The Government claimed all three years were one big STD voiding the below market sales and subsequent large charity deductions. Klauer appealed to US Tax Court in Klauer v IRS 2010 claiming each year stood by itself as separate transactions.
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The Court agreed with Klauer because it was clear that each year was separately negotiated with distinct separate agreements. Specifically, Judge Chiechi points out that the supposed first step created no binding commitment to take the second step siting Security Industrial Insurance v US 702 F.2d 1234 (5th Circuit 1983). The Court then focuses on whether the Klauer family intended to save taxes by structuring the three years from 2001-2003 a certain way citing King v US 418 F.2d 511 (Fed Cir 1969). Judge Chiechi argues that Klauer’s subjective intent was especially relevant in allowing the Court to see if Klauer directed a series of transactions to an intended purpose solely to save taxes. The Court found facts created in the record as evidence that Klauer’s primary intent from 2001-2003 was not to create a tax savings scheme but to work the Bureau of Land Management, the Land Trust, and various Indian tribes to allow for the preservation of the Taos Overlook, This had been the intent of the Klauer family for many years. While there were huge tax savings for the shareholders the way the sales were structured that result was secondary to the primary purpose of land preservation. Klauer wins IRS loses.

So where do we all go from here? First, now that you know STDs are thinly disguised tax schemes, your goal is to protect your good STTP estate plan with plenty of written evidence proving to an IRS agent years later that your primary goal is and has always been legacy preservation and protection with tax savings merely as a secondary goal. Second, discuss with your tax attorney and estate planner your options in operating a Family Limited Liability Company (FLLC) to keep, protect, preserve and grow your family legacy. You may be also able to minimize taxes as you transfer assets between generations, but saving taxes can never be your primary objective. Your tax attorney can create your FLLC in 2014 as a single member or partner with your husband or wife if married with a basic operating agreement. Finally, the whole concept of a legal and IRS bullet proof STTP is that the family estate plan is fluid with no one step leading to a predetermined second step. So while the STTP path may change direction and save you taxes along the way, your final and primary destination will always be legacy protection and preservation. We look forward to perhaps seeing you on that STTP path as we soon close out 2014. A Merry Christmas to all in 2014 from TaxView with Chris Moss CPA

Stay tuned for our year end TaxView special for 2014.

Kindest regards

Chris Moss CPA

Step Transaction, Step Transaction Doctrine

Nov 28

Mark to Market: Trader or Investor?

By Chris Moss CPA Tax Attorney in Mark to Market, Trader in Securities, Trader or Investor

Welcome to TaxView with Chris Moss CPA

Most of you all have invested in stocks and bonds or other publicly traded securities with the help of a “securities dealer” or stock broker. But if you are “trading” in securities on a regular basis for yourself and family, IRS Topic 429 says you may be upgraded to a “trader”. Why is this important? If you “substantially” trade to profit “from daily movement in the prices of securities” the Government gives you valuable tax benefits as provided in Section 162(a) and Section 475(f) of the IRS Code. More specifically, you can deduct “ordinary losses” not subject to the $3000 per year capital loss limitation by electing the “mark to market” method of accounting. This could be a huge tax saver if your husband or wife has substantial W2 income. But beware, IRS has set multiple Trader Traps (TTs) to trip up “traders” right in their investment tracks. So if you are a trader or are thinking about becoming one, stay tuned on TaxView with Chris Moss CPA to find out how to avoid TTs and to successfully defend your preferred “Trader” status to save you taxes in the event of an IRS audit years later.

Section 475(f) of the Taxpayer Relief Act of 1997 allows a “trader in securities” to elect under Rev Proc. 99-17 to “mark to market” stocks held in connection with your trading business. According to the Joint Committee on Taxation 12/17/1997 Report, “mark-to-market accounting imposes few burdens and offers few opportunities for manipulation”. So what exactly is “mark to market” for a trader? If you are a trader an elect mark to market you compute taxable income based on the market value rather than cost and you get the entire loss as a deduction not subject to the $3000 capital loss limitation.

So where are the TTs? The vast majority of TTs are set by the IRS to keep you from ever breaking out your “investor” chains to “trader” freedom. The first of the TTs is simply to make the election. But it is shocking how many of you miss a timely election to mark to market including Knish v IRS (2006). The facts are simple: Knish began trading securities in 1999 to 2001 and did not elect the mark to market method of accounting on his tax return until 2001. Knish then carried back losses from 1999 and 2000 to 1996. The IRS audited and disallowed all the losses claiming the election was 18 months too late. Knish appealed to US Tax Court in Knish v IRS. The Court found for the Government. There are no exceptions here folks, you must make the election or get downgraded to investor and pay large amounts of tax. IRS wins, Knish loses. See also Kantor v IRS (2008) and Assaderaghi and Lin v IRS (2014)

Exposure to harsh chemicals, radiations and medications can cause changes in the body which can cause imbalance in the brain, can affect sexual desire as well as arousal. sale of sildenafil tablets For us, simple noteworthy work is not the objective, but rather it must sildenafil tablets australia have a dream created through the musings of brand/organization that corporate with us. In other words, the organ becomes normal to be erect having firmness, healthiness and long-lastingness glacialridgebyway.com viagra canada pharmacy of erections. Figure out everything you can about generico cialis on line your cherished one’s disease. The second of the TTs focus us on the “frequency of the trades” and takes us to Van Der Lee v IRS (2011). Van Der Lee filed a 2002 tax return claiming to be a trader with gross receipts of almost $4.4 Million and expenses of $5 Million resulting in a $1.4 Million loss. Van Der Lee offset this loss against W2 income. The IRS audited and disallowed all losses claiming even if an election was made which it was not, Van Der Lee was still not a trader because his trades were not substantial. Van Der Lee appealed to US Tax Court Van Der Lee v IRS (2011) Judge Marvel notes that Van Der Lee did not trade with sufficient frequency to qualify as a trader. Brokerage statements show that between April 15 and Dec 31 2002 Van Der Lee executed 148 trades through Merrill Lynch and 11 trades through Prudential. Trading was sporadic with trades averaging 3 or 4 trading days per month citing Kay v IRS (2011). IRS wins Van Der Lee loses.

This brings us to the third and fourth final of the TTs, the time a trader spends on trading and the way the trader profits from short term swings in the market. Kay reported on his 2000 tax return a “trader” loss of over $2 Million from sales of securities. Kay also owned a business with large profits which he offset by his trader losses. The IRS audited and disallowed all losses. Kay appealed to US Tax Court in Kay v IRS (2011). The Court concluded that Kay’s trading activity was insubstantial citing Chen v IRS (2004) and his stock positions were more of a long term nature rather than seeking profit from short term swings in the market citing Mayer v IRS (1994). The Court also noted that Kay’s trading activity was infrequent. Kay traded 29% 7% and 8% in 2000, 2001 and 2002 citing Holsinger and Mickler v IRS (2008) Also see WSJ 9/2/2008. Finally, the Court concluded that Kay’s income from his profitable business and not his trader business was his primary source of income and (See Chris Moss CPA Hobby Loss) therefore concluded that based on all the facts presented to the Court that Kay was not a trader. IRS wins Kay loses.

What does all this mean us? First and most important, make the “Mark to Market” election on the first year of trading with the assistance of your tax attorney and document the election appropriately as you file your tax return before signing and filing you return. Your tax attorney should be prepared to sign the return and act as a witness years later if needed during an IRS audit. Second, keep track of your trades and time spent on the trading business. Remember, your trading must be substantial. You should be able to easily prove to the IRS that you spent the majority of each working day trading stocks and bonds and other securities. Third keep track of daily profit taking. You will need to prove you focused each day on short term daily profits, not long term positions or appreciation. Finally if you plan on offsetting W2 or 1099 income either from a separate business you own or from your husband or wife’s W2 income, be prepared if audited for the Government to allege you were being supported by your spouse if the pattern of losses persists year after year. In conclusion, if you are a trader you get amazing tax benefits that justify the risk of IRS audit. Be prepared and be ready to bullet proof your tax return from the TTs before filing, Happy trading and see you next time on TaxView! Thank you for joining us on TaxView with Chris Moss CPA

Kindest regards,

Chris Moss CPA

Mark to Market, Trader in Securities, Trader or Investor

Nov 07

IRS Whipsaw Tax Audit

By Chris Moss CPA Tax Attorney in IRS Whipsaw Audit, Tax Planning, Whipsaw

Welcome to TaxView with Chris Moss CPA

The IRS defines a “whipsaw case” as a settlement in one case that can have a contrary tax effect in another case.” IRS Manual 8.2.3.13 All of you at some point will most likely experience a whipsaw case during an IRS audit of a partnership, ex-spouse, related beneficiary and even your own personal tax return if you and your spouse filed separately. Whipsaws never end well because one of you is going to lose in order for the other to win. One of the most litigated of all whipsaw cases is alimony. For example one of your ex-husbands deducts alimony and you say its nontaxable support. Another common whipsaw case is between partners in a partnership. Your partner takes a distribution as capital gain, but you say nontaxable. Various beneficiaries can whipsaw each other as you claim your inheritance to be nontaxable but your sister claims it is ordinary income. Finally, if you file separately and your husband itemizes and you take the standard deduction, watch out folks, that is an automatic IRS whipsaw audit. If you are potentially in any of these situations, sit tight and stay tuned to TaxView with Chris Moss CPA to find out how the US Tax Court decides whipsaw cases and how best to prevent a whipsaw from spinning your way during an IRS audit.

The first whipsaw case we are going to look at will apply to many of you invested in partnerships. Brennan v IRS and Ashland v IRS US Tax Court 7/23/2012 Ashlands and Brennans were partners in Cutler. After Cutler filed its partnership return Form 1065 for 2003 and 2004 Ashlands filed Joint Federal returns for 2003 and 2004 as did Brennans. Ashlands reported capital gains in 2003 and Brennans did not. Note that inconsistent filing by partners almost always results in an IRS whipsaw audit. In fact, the IRS did indeed audit both Brennans and Ashlands finding that both Ashlands and Brennans should have capital gains for 2003 and 2004. Both Ashlands and Brennans appealed to US Tax Court in Brennan v IRS and Ashland v IRS (2012). Judge Kroupa finds for the Government and concludes that both Ashlands and Brennans are subject to tax in 2003 and 2004. IRS wins Ashlands and Brennans lose.

The second whipsaw case we look at will be alimony, but first a little Congressional history. The Supreme Court heard its first alimony case almost 100 years ago in Gould v Gould US Supreme Court 1917. Back in those days alimony was a duty for the “husband to support the wife” and was not considered income to the wife. The 2001 Joint Committee Taxation report further explains that in 1942 alimony was made a tax deduction to allow husbands to avoid the hardship of not having enough money to pay taxes and other bills after he paid alimony to his ex-wife at income tax rates approaching 90%.

Now fast-forward to US Tax Court Case Daugharty v IRS and Daugharty v IRS. Before we unpack Daugharty keep in mind that if the IRS receives two related tax returns that do not exactly match, there is almost a certainty of an IRS “whipsaw” audit. That means both ex-H and ex-W are going to get audited and one of them is going to have to prove the other was wrong. This is exactly what happened to the Daugharty’s in 1997. After a 22 year marriage with 3 kids, John and Faye Daugharty divorced. One of the provisions in the property settlement was that John would pay Faye $2500 per month for remainder of her life or until she remarried. John paid Faye $30,000 per year from 1988 to 1993 and deducted these payments on their tax returns as alimony. Faye did not file any tax returns from 1988 to 1993 claiming these payments were not taxable to her as a property settlement distribution.

The IRS audited and both John and Faye disallowing all deductions and requiring Faye to recognize income. Both John and Faye appealed to US Tax Court and both cases were consolidated in Daugharty v IRS 1997. The principal issue for the Court was whether or not John’s payments of $30,000 per year were alimony as John claimed or whether these payments were part of the property settlement and not taxable as Faye claimed. In this classic whipsaw case Judge Ruwe ultimately decides for John and against Faye. John wins IRS loses. IRS wins Faye loses.
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Our final case is going to take a look at a whipsaw trust and estate case Ballantyne v IRS and Ballantyne v IRS 2002. The facts are simple: Jean survived her husband Melvin. Brother Russell was a partner of Melvin in Ballantyne Brothers Partnership. Russell handled farming in North Dakota and his son’s Orlyn and Gary helped out. Melvin was an oil and gas explorer in Canada. His two sons Stephen and Kab helped out. In 1993 Melvin was diagnosed with cancer and died March 4, 1994. Partnership tax returns form 1065 were filed each year from 1980 to 1994 by CPA Jules Feldman showing Russell and Melvin as 50-50 partners. After Melvin’s death Jean sued Russell asking for proper accounting of the partnership. The Estate tax return form 1041 filed in 1995 and then amended. The IRS audited 1994 and 1995 returns disallowing various estate deductions. Jean representing the estate appealed to US Tax Court in Ballantyne v IRS claiming that Russell owed additional tax not the estate. The IRS then sent Russell and his wife Clarice a whipsaw audit notice for 1993 and 1994 claiming Russell was liable instead of Jean. Russell then appealed to US Tax Court and both US Tax Court cases were consolidated for one trial in Ballantyne v IRS. Judge Ruwe eventually sided with the US Government and Jean Ballantyne. IRS and Jean win Russell loses.

So you all out there with whipsaw situations, what can you do now to avoid litigation with your partners, ex-wives or ex-husbands, and family after your loved one passes? First and most important, in every divorce, partnership and estate plan and settlement agreement make certain you have a tax attorney involved with your divorce, partnership, or estate attorney in some capacity prior to finalizing a property settlement agreement and operating agreement or a family estate plan. Second, make sure you ask your attorney this question: What are the whipsaw implications if the IRS audits my tax return in my divorce, partnership or estate? Get your lawyers’s response to this question in writing before you sign anything. Finally, take notes in your discussions with your ex-spouse, your partners, and your family regarding whipsaw issues that are bound to surface perhaps years later during an IRS audit. Have your tax attorney witness these meetings and include her notes in your annual 1040, 1065 and 1041 tax returns. Remember, the IRS will be looking for opportunities to whipsaw you. Have your tax attorney bulletproof your tax returns each year with anti-whipsaw attachments and documents to make sure you are protected. Many years later during a possible whipsaw IRS audit you will be glad you did. Thanks for joining us on TaxView with Chris Moss CPA.

See you next time on TaxView

Kindest regards

Chris Moss CPA

IRS Whipsaw Audit, Whipsaw, Whipsaw Audit, Whipsaw Tax Audit

Oct 31

Cost Segregation of Structural Components

By Chris Moss CPA Tax Attorney in Cost Segregation, Real Estate Cost Segregation, Structural Components, Tax Planning

Welcome to TaxView with Chris Moss CPA

Cost Segregation of Structural Components is a tax savings strategy that in my view defies logic, yet nevertheless is a brilliant absolutely legal way to save taxes. What is Cost Segregation of Structural Components you ask? In essence, Cost Segregation separates out costs in a building into structural components which can be depreciated at tax advantageous rates. “Structural components” date back to the investment tax credit (ITC) real estate tax shelters in the late 1970s. Accelerated depreciation rules were enacted by Congress back then allowing “structural components” of a building to qualify for the ITC. The goal was to stimulate the real estate industry. Years later in the 90s, the US Tax Court validated “Cost Segregation” of structural components in Hospital Corporation of America vs IRS (1997). This US Tax Court landmark ruling changed the game for investments in real estate and will be a game changer for you too. How? It could mean big tax savings for you if you own commercial real estate. So stay with us here on TaxView with Chris Moss CPA to learn how you can use cost segregation of structural components in your commercial or rental real estate for immediate annual income tax savings.

Do any of you remember the late 1970s ITC shelter partnerships? You would identify the structural components of a building you had just purchased, wrap the deal with a mortgage, add a little of your own money, use the ITC, and presto, you ended up with a large tax loss dramatically reducing your W2 income. By 1981 wealthy taxpayers were starting to discover real estate tax shelters. Just a few years later the hottest topic at any cocktail party throughout the country was who had the best tax shelter with the greatest tax loss.

Now fast forward to 1986. The Tax Reform Act was designed to rid the nation of tax shelters and it did just that. The 1986 Reform Act repealed the ITC, prohibited passive losses from offsetting W2 income and dramatically lengthened depreciation of real estate. All of a sudden commercial property you acquired was now depreciated over 31 year life rather than 19. (Just so you know, it’s 39 years now).

As the 1980s came to a close investors began to panic. No ITC and no rapid depreciation and no passive loss offset. Investors looked to their tax professionals for relief. CPAs and tax lawyers in the early 90s partnering with structural engineers were surprised to find the IRS Code still contained the 1970s “structural component” classifications. Was this a simple Congressional oversight back in 1986 or did Congress intend to leave these provisions in the code for some reason? At any rate by the mid-90s tax shelter promoters were claiming that the 1970s classifications supported rapid depreciation of “structural components” as long as they were properly classified by competent structural engineers. It didn’t take long for the IRS to start fighting back.

The battle soon moved to US Tax Court in Hospital Corporation of America vs IRS (1997). The facts are simple: Hospital Corporation (HC) was in the business of building and managing hospitals. HC segregated out various components of their many buildings as Section 1245 personal property allowing them to rapidly depreciate these components over a 5 year period. The IRS disallowed all this Section 1245 depreciation sending a $700 Million tax bill to HC for years 1978 to 1988. The Government argued that all the buildings owned by HC must be depreciated over a much longer period of time as required for Section 1250 property in accordance with provisions of the 1986 Tax Reform Act. The critical key issue for the US Tax Court to decide? Whether the structural components laws that remained in the Code from the 1970s were nevertheless still valid in 1997,

Altogether problem may increase by increased discount viagra levitra size of colon gets increases and it further puts you in annoying situation where you need to fight with internal problems. Many males in the old age are suffering sildenafil levitra from erectile dysfunction. Nowadays, most of people think that they can request a friend or parents to educate them how generic viagra tadalafil to drive. When you require finding the very best podiatrist that Stanmore has to offer, it discounts on viagra will be critical to ensure that you take the time to contemplate this aspect before creating the other step. Judge Wells in his 116 page Opinion points out that Congress in the 1986 Act did not specifically address the 1970s provisions of the Code that were created to facilitate the ITC back then. The Court noted that the statutory language manifested a Congressional intent to retain the prior law distinction between components that constitute Section 1250 real estate and items that constitute Section 1245 personal property.

With the US Tax Court giving its blessing in Hospital Corporation of America vs IRS (1997), and the IRS acquiescing, a billion dollar “cost segregation” industry was born to “segregate out” the cost of the tangible Section 1245 portion of a building. With a good engineering analysis the CPAs were able to confidently and legally rapidly depreciate substantial parts of commercial buildings on annual tax returns knowing they could win an IRS audit challenging their depreciation computations.

What does all this mean to you all? First and most important: Cost Segregation is legal folks but only if your experts are better than the Governments.. So if you are purchasing a building, hire the best structural engineering firm you can afford and segregate out those costs into structural components that will qualify for rapid deprecation and immediate tax savings,. Second, make sure your tax attorney and structural engineers guarantee their work so when the IRS comes knocking on your door, the same people who did your analysis will be there at no extra charge to act as your expert witnesses at a possible US Tax Court trial. Likewise ask that the same tax attorney who prepared your tax return to guarantee that she will be there for the IRS audit and a trip to US Tax Court if needed.. Finally, don’t forget to include your structural engineering cost segregation report summary in the actual tax return you file with the IRS. When you are audited years later you will be glad you did..

We hope you enjoyed this weeks TaxView with Chris Moss CPA.

See you all next time on TaxView
Kindest regards
Chris Moss CPA

cost segregation, real estate cost segregation, structural components

Oct 24

Bad Debts vs Theft Loss

By Chris Moss CPA Tax Attorney in Bad Debt Loss, Nonbusiness Bad Debt, Theft Loss

Welcome to TaxView with Chris Moss CPA

Have you ever loaned money to someone who didn’t pay you back? Did you know that if you can’t get your money back you could at least write the debt off for taxes? It’s called a “Nonbusiness Bad Debt” (NBD) and it is deductible as a short term capital loss in the year the debt becomes worthless. Or perhaps you loaned money to someone only to discover later you were swindled out of your money by a clever scam artist. That loss is called a theft loss (TL) and is deductible as an ordinary loss in the year you were certain you could not recover your money. Seems easy to take these deductions? Right? Wrong! There are IRS traps waiting for you in Section 166 and Section 165 of the IRS Code. So if you have a TLs or NBDs and are not sure which year to claim or how much to claim, stay with us here on TaxView with Chris Moss CPA where you will learn how to save taxes by safely deducting a theft or bad debt loss.

So what qualifies as a NBD? IRS Code Section 166(d)(1) and Regulation 1.166-1(c) says that you have to have a debtor-creditor relationship with the person you gave the money to, that a genuine debt in fact existed and the debt was worthless in the year of deduction. Make sure your tax attorney includes sufficient evidence to prove that there was a genuine debt and include those facts in your tax return before you deduct the bad debt. Herrera vs IRS 2012, and affirmed on appeal to US Court of Appeals (5th Cir. 2013).

Theft loss or TL is covered under IRS Section 165(a)(3) and Regulations 1.165-1(d)(2)(i), (3), 1.165-8(a)(2). So if there is TL you can deduct the loss as an ordinary loss. Sometimes a TL could be also an NBD. This is “kind of” what happened in the US Tax Court case of Bunch vs IRS (August 2014). Mr. and Mrs. Bunch filed a 2006 income tax return claiming a bad debt of over $4 Million from Mortgage Co. Bunch then amended their tax return a few years later and changed the bad debt to a theft loss for the same amount claiming that the money had been stolen by an employee who worked at Mortgage Co. The IRS audited Bunch in 2009 disallowing both the bad debt deduction from the original return and the theft loss from the amended return. Bunch appealed to US Tax Court in Bunch vs IRS August 2014.

Judge Wherry says timing is everything when it comes to TL and NBD tax deductions. Indeed you can only deduct a TL or NBD if you can prove that no reimbursement is possible. The Court further noted that in fact Bunch did receive some recovery of the loss and therefore he could not deduct the loss for the amount and in the year the loss was deducted. Perhaps Bunch could have deducted a smaller loss that he did not recover in some future year, but unfortunately for Bunch that is not the tax strategy his tax preparer used. IRS Wins Bunch Loses.

Jeppsen v. IRS, 128 F.3d 1410 (10th Cir. 1997), affirming Tax Court Jeppsen v IRS (1995) further brings home how important it is to prove that no reimbursement is possible in the year you deduct the loss. Jeppsen deducted a theft loss of $194,000 on his 1987 tax return claiming a stockbroker misappropriated his money. However, Jeppsen also sued the broker over the next few years to try to recover the money and eventually won a damage award of $1.5 Million in 1995. The IRS audited Jeppsen about that time and disallowed Jeppsen’s 1987 loss because it was not certain back in 1987 whether or not Jeppsen would recover his stolen money. Jeppsen appealed to US Tax Court and lost. Jeppsen appealed again to the US Court of Appeals and also lost. IRS Wins Jeppsen Loses.

If one really cheap cialis for sale needs to get over and is spoiling health of so many benefits. She isn’t a very experienced driver at 17 but I still let her journey out into the tundra praying she wouldn’t generic order viagra hit a sheet of black ice that looks like dry pavement. But generally it truly is nicely http://www.donssite.com/truckphoto/pictures-pick-up-truck-photos.htm cheap viagra 100mg worth the work as individuals can understand to handle their anxiousness without the use of medications. Although the person is able distract themselves temporarily the problem worsens in the long buy cheapest cialis run. Halata vs IRS (2012) could happen to anyone who is greedy enough to believe what is too good to be true is true. Halata a Texas resident befriended Ojeda. Halata was told by Ojeda friend Montgomery that he could repay Halata over $2.5 million in return profits if she loaned him $180,000. Halata did in fact loan $180,000 to Montgomery. The money was never recovered. Halata never deducted the loss as she most likely did not know she could. Unfortunately for some other reason her 2007 tax return was audited by the IRS who sent Halata a large tax bill. Halata retained a tax attorney Polk to represent her. Polk claimed his client should be able to deduct the theft loss in 2009 and carry back the resulting net operating loss to 2007 this wiping out any taxes she might owe as a result of the audit. The IRS disagreed and Halata appealed to US Tax Court. Halata vs IRS (2012).

Judge Morrison concluded that under Texas law there was in fact a theft but not until 2009. Unfortunately for Halata, the Court denied Halata the right to carry back this large loss to 2007 on procedural grounds in that her tax attorney did not raise this issue until after the trial. The Court did however grant Halata the right to take the loss in 2009 and then carry it forward to 2010 and beyond if necessary. This was a partial victory for Halata and partial victory for IRS. This case once again underscored the importance of timing when it comes to deducting TL or NBD.

In conclusion, if you all have a material TL or NBD, it is perhaps critical that you retain a tax attorney to prepare your tax return so that your strategy as to the timing of the loss can be properly documented and articulated to the Government in the tax return itself before filing. Do not file that tax return with a loss unless you can show that there is reasonable certainty that you could not obtain reimbursement for your loss in that specific year. Finally remember when it comes to TL and NBD, timing is everything, making the year of deduction more important than the deduction itself. Bullet proof your tax return TL and NBD strategy before you file. Your tax position will be safe and secure from IRS challenge for many years to come. Thank you for joining Chris Moss CPA on TaxView.

See you next time on Tax View,

Kindest regards

Chris Moss CPA

Bad Debt Loss, Nonbusiness Bad Debt, Theft Loss

Oct 18

Say No To Offshore Tax Shelters

By Chris Moss CPA Tax Attorney in National Sales Tax, Offshore Tax Shelters, Value Added Tax, VAT

Submitted by Chris Moss CPA

Welcome to TaxView with Chris Moss CPA
You all remember when Credit Suisse plead guilty to helping “clients deceive U.S. tax authorities by concealing assets in illegal, undeclared bank accounts, in a conspiracy that spanned decades..” —and nobody going to jail? According to news reports back then the only penalty to Credit Suisse was a $2.5 billion fine. In fact, former US Attorney General Eric Holder, made certain that Credit Suisse and their CEO Brandy Dougan would still be allowed to do business as usual in the aftermath of the criminal plea. Are you surprised? The outdated and ultra-complex US Tax Code, 100 years in the making, is a dinosaur in the 21st century. Is there a better way to tax Americans? Stay with us here on TaxView with Chris Moss CPA to find out what can done to improve our current tax infrastructure and put an end to those offshore tax shelters.

It is well known that large corporations are legally moving their corporate headquarters offshore to save taxes; Wealthy individuals also move money offshore illegally. As a result, a few hundred or perhaps thousands of Americans put themselves and their family at risk of criminal prosecution just to save some tax dollars each year by illegally keeping assets and earnings off shore. Come on America’s top wealthy taxpayers there is always legal workaround to illegal activity. Keep your money and workers here in America, the country that made it possible for you to make all that money in the first place.

But what about corporations? They can and do legally reduce their taxes by setting up business operations offshore. But corporate tax strategy of shifting income oversees is hardly ethical. In my view moving offshore hurts America. Why? Because Americans lose tax revenue and workers lose jobs. Indeed the whole offshore process of allocating income and costs between Europe and the US makes absolutely no economic or even rational sense. It’s time for Congress to create incentives for American family business and large multinational corporations to keep their business assets in the United States where they belong.

But you can hardly blame corporations for wanting to save taxes. As this article is being written, Amazon is battling with the IRS in US Tax Court (Amazon vs IRS 2014) on how costs are allocated from European and US operations for years 2005 and 2006. The stakes are very high for both Amazon and the US Treasury. If Amazon loses they will owe over $1 Billion in tax and penalties. If they win, the American Government loses billions of dollars in lost tax revenue.

It is made exclusively for strong and hard erection. check out this pharmacy store now cheapest brand cialis At the recommended doses there have been no order cialis uk reported positive feedbacks from customers anywhere. Saffron milk is a safest home remedy for curing low sperm count. viagra online from india find description now The doctor will be able to determine whether it see over here now generic no prescription viagra is best suited to you or else. How do we stop the massive movement of non-taxed income to offshore tax shelters by corporate America? The simple answer is to first do away with the corporate income tax and replace with a value added tax (VAT). A VAT is nothing more than a business retail sales tax collected through all the various stages of production. With no income tax to pay on profits, corporations paying the VAT will have the incentive to produce and sell from a location in the world that maximizes profits. This would most likely translate to American businesses maintaining their world wide headquarters in the United States.

Moreover, if we want American corporations to continue to hire American and not Chinese workers, a VAT is not enough. We must replace the personal income tax with a National Sales Tax (NST). American workers with no income tax to pay could work for less, take home more pay, and at the same time compete with oversees labor markets. Even wealthy American taxpayers would soon bring back their illegal offshore never taxed income to spend here in the United States.

As funds flow back to the Government from the VAT and NST, Congress could begin to pay down the National Debt and wipe out annual deficits without cutting funds to existing Government services and agencies. The underground economy would soon vanish, and tax revenue as a percentage of GDP would rise dramatically. With increased spending for goods and services by all Americans, the US Treasury would soon see a dramatic increase in tax receipts from both the VAT and the NST. In fact, the last dramatic increase in tax revenue as a percentage of GDP was in 1943 with the introduction of the W2 form during World War II. History perhaps will show a VAT/NST combination to be a likewise dramatic turning point for America, allowing us to once again regain our place as a world political and economic leader in the 21st century.

In conclusion, replacing the corporate and personal income tax with VAT and NST would be not only good for America but provide a revolutionary new way Americans pay taxes in the 21st century. Ask your elected officials their position on VAT and NST. Is Congress willing to scrap the 100 year old income tax for both corporations and individuals? Make sure you voice is heard before the next Presidential election. Let’s keep American business here in America. Ask Congress to think seriously about replacing the corporate and personal income tax with a National VAT and NST. Thank you for joining Chris Moss CPA on TaxView.

See you next TaxView,
Kindest regards,
Chris Moss CPA

National Sales Tax, Offshore Tax Shelters, Value Added Tax, VAT

Oct 12

When a Gift Is Not a Gift

By Chris Moss CPA Tax Attorney in Estate Tax, Family Limited Liability Company, Gift Tax, Gift taxes, Section 2036(a), Tax Planning, Transfers

Welcome to TaxView with Chris Moss CPA

Are you an entrepreneur with family business? Have you thought about your children and grandchildren being more involved in your business? Perhaps a Family Limited Liability Company (Family LLC) is just what you need. Properly structured for your unique situation, the Family LLC is a 21st century way to hand down the family business for generations to come in a safe, protected and orderly business structure. But if you set up your Family LLC be aware you face dangerous IRS tax mines hidden in IRS Code Section 2036(a) that could explode your tax plan into an IRS audit focusing on when a gift is not a gift (GINAG) and when a transfer is not a transfer (TINAT). Indeed, you may experience unexpected increases in estate tax so high the children might have to sell the farm just to pay the tax. So if you don’t want GINAG or TINAT, or just want to learn more about them, stay with us here on TaxView with Chris Moss CPA to fully understand how to avoid GINAG, TINAT, and Section 2036(a) so you can save and preserve your assets for your children for many generations to come.

Section 2036(a) prohibits you transferring property out of your estate that are “testamentary “in nature. The US Supreme Court in Grace V US, 395 US 316 (1969) has defined “testamentary” as those transfers which leave you in significant control over the property transferred. For example you still control the business you just transferred to your children. Section 2036(a) does not apply to transfers that are bona-fide sales for adequate and full consideration. Furthermore, the bona fide sale exception is satisfied where the record establishes you had a legitimate and significant nontax reason for creating your Family LLC, and your children received membership interests proportionate to the value of the property transferred. Turner v IRS 2011 at page 33. Therefore, all transfers and gifts to adult or minor children in a Family Limited Liability Company must be perfectly executed to comply with Section 2036(a). See Bigelow v IRS, 503 F.3d 955 (2007) Affirming Bigelow v IRS T.C. Memo. 2005-65; also see Rector v IRS 2007.

Our first US Tax Court case is True v IRS 2001. Dave and Jean True made direct gifts in their family business to some or all of their children every year form 1955-1993 at the maximum annual exclusion each year. True did not use a Family LLC. Instead of using an LLC Operating Agreement, True created restrictive buy-sell agreements for all of the family. This Agreements gave Dave True total control over all family business. Dave True died on June 4, 1994 with many various trusts in place with True still maintaining control over all businesses. An Estate Tax return was filed on March 3, 1995 with the Estate valued less the value of all the gifts given to all the children over all the years. The estate was audited by the IRS in 1998. Do you all see the GINAG and TINAT coming?

Sure enough the IRS determined that the whole purposes of the gifts to the True children and related buy-sell agreements was to avoid estate tax. The Government sent the True family a bill for over $75 Million plus $30 Million in penalties adding back all those gifts as a violation of Section 2036(a). This is major GINAG. Why? True was giving everything away without a business structure to back up his estate plan making the primary motive to avoid estate tax. As the Court notes on page 108 of this over 300 page Opinion, Dave True had “control” over the whole operation which made for good GINAG in that he had a “life estate” in the business operations. In my view if True had set up a Family Limited Liability Company with normal restrictions placed in a family Operating Agreement allowing the family under unanimous consent provisions to control the assets, GINAG and TINAT would have been avoided, and assets would have been preserved and protected from Section 2036(a). Unfortunately for the True children, IRS wins True loses.

Our next case is Hurford v IRS 2008. Thelma Hurford was a very wealth widow. On advice of legal counsel she formed a Family Limited Partnership which allowed her to transfer assets, including farms and ranches into a single entity. Hurford gave a 25% interest to each of her children. But Hurford still maintained control over everything. GINAG is written all over this. Hurford even remained the sole signatory on many of the accounts. Hurford died on February 19, 2001. The estate tax return was filed on September 26, 2001. The IRS audited the return on November 18, 2004 claiming Hurford owed over $20 Million for estate and gift tax. Hurford appealed to US Tax Court in Hurford v IRS 2008.

Judge Holmes and the Government proposed GINAG for the whole estate plan calling it nothing more than a transparently thin substitute for a will. The Court agreed with the Government finding that Hurford retained an impermissible interest in the assets she had tried to transfer to her children in total violation of Section 2036(a). Further the Court noted that Thelma commingled her own funds with the partnerships until shortly before she died, and that there was no meaningful economic activity where the partnership furthers family investment goals or where the partners work together to jointly manage family investments. You guessed it IRS wins Hurford loses.
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Our last case: Stone vs IRS 2003. Mr. and Mrs. Stone founded multiple business ventures. They were also beneficiaries of various trusts. Perhaps due to or because of all this wealth, the family and 4 children Eugene, Rivers, Rosalie and Mary and other parties sued each other in the early 1990s over these trusts. After settlement of all the litigation, Stone formed 5 family limited partnerships in 1996 for his wife and 4 adult children. The partnership agreements provided unanimous consent of all partners to sell, transfer or encumber property and the children worked in the businesses owned by the partnerships. Mr. Stone died as a South Carolina resident on June 5, 1997 at age 89. Mrs. Stone died on October 16, 1998 at age 86. An estate tax return was filed for both Mr. and Mrs. Stone and the IRS eventually audited. The Government sent Mr. Stone a bill for $8 Million and Mrs. Stone a bill for $1.5 Million claiming the transfers to the partnerships violated Section 2036(a). Stones appealed to US Tax Court Stone v IRS 2003.

Judge Chiechi notes that the Stones retained enough assets in their estate to maintain their life style. The Court found that transfers were motivated primarily by investment and business concerns relating to the management of certain of the respective assets of Mr. and Mrs. Stone during their lives and thereafter. The Court concludes that the partnerships had economic substance and operated as joint enterprises for profit through which the children actively participated in the management and development of the assets and therefore the transfers were bona fide sales for adequate and full consideration in money or money’s worth under section 2036(a). Stone wins IRS Loses. Also see Mirowski v IRS US Tax Court 2008

So what does this all mean for us? If you have a business or perhaps multiple businesses and your tax attorney has suggested a Family Limited Liability Company which will own all of these businesses make sure the operating agreements protect you from Section 2036(a) and GINAG and TINAT. Based on the US Tax Court case law, retain some assets for yourself to maintain your lifestyle and perhaps transfer everything else to the LLC. Regarding adult children who are willing to participate in the family business see to it that they are signatures on the bank accounts and make sure there are unanimous consent requirements for all important decisions. Any gifts to minor children through the annual tax free gift exclusion require an absolute legitimate bullet proof non tax purpose in forming the LLC. Finally consult a tax attorney to create your unique business plan. Avoid GINAG and TINA. Most importantly avoid violation of Section 2036(a). You will be ready for any IRS audit coming your way and your assets will be part of your family legacy to your children and your children’s children for many years to come.

Thanks for joining me on TaxView with Chris Moss CPA.

Kindest regards
Chris Moss CPA

estate tax, gift tax, Section 2036, Testamentary Transfers

Oct 03

Yacht and Boating Tax Deductions

By Chris Moss CPA Tax Attorney in Boating Deductions, Luxury Water Craft, Yacht Tax Deductions

Welcome to TaxView with Chris Moss CPA

There are thousands of American taxpayers who deduct expenses in connection with operating a motor yacht or luxury sailing craft. Indeed, there are legitimate tax write offs in connection with yacht ownership but perhaps there are also equally as many which are not so legitimate. Just about everyone out there deducts sales tax paid as a tax write off when you first buy your yacht. If you consider purchasing the yacht as a second home, mortgage interest may also be a deductible tax write off. But you may want to steer clear of yacht charter businesses with lots of losses unless you are an experienced sea captain who has withered many a storm at sea. So if you own a yacht and you are curious as to whether or not there are legitimate tax write offs for boating enthusiasts stay with us here on TaxView with Chris Moss CPA to find out which boating income tax deductions are hot and which ones are not.

Whether you sail for a living or just plain love the ocean and waterways for motoring your water craft, the key IRS regulation you need to know about is Section 274, added to the IRS Code in the Revenue Act of 1962, prohibiting tax deductions in connection with the operation of a yacht as an entertainment facility. The Joint Committee on Taxation report points out that the 1962 Act requires that a yacht must be used for business, not entertainment. So if you purchase your yacht or yachts through the family business you would have to convince the IRS and ultimately the US Tax Court that your yacht purchase was not an entertainment facility for entertaining customers, but was used strictly 100% for business travel. Even just one instance of entertainment could disallow all deductions for business travel if the Government classified your yacht as an “entertainment facility”. Regarding this specific set of facts, the risk of adverse IRS audit action against you perhaps outweighs the possible rewards for using your yacht exclusively for travel.

Of course you can always deduct yacht expenses if you own a yacht type business like a yacht charter business. Unfortunately, for most of us who are working other jobs or earning money from other investments in the family business, the US Tax court rarely will allow you to deduct yacht charter losses against your other income. Yacht charter losses have consistently been disallowed by US Tax Court for lacking profit motive under Sect 183 including: Ballard v IRS 1996, Magassy v IRS 2004, Lucid v IRS 1997, Hilliard v IRS 1995, Courbois v IRS 1997, and Peacock v IRS 2002 and lack of material participation under Section 469(c) including Oberle v IRS 1998 and Goshorn v IRS 1993. In all these cases IRS wins you lose.

But there is good news. There are in fact legitimate boating expenses that are safe and relatively easy to deduct on your tax return as long as you consult with your tax attorney to bulletproof the strategy. You can deduct interest secured by the boat under IRS Section 163. You can also use designate your yacht as your primary and exclusive home office for your family business as described in IRS Pub 587.

However, for those of you who want a more comprehensive tax strategy, you can transfer ownership of your yacht to your Family Limited Liability Company and organize a yacht brokerage service which refurbishes high end yachts to sell for a profit. Your business could even use yacht charters as a marketing tool to promote the boating lifestyle to potential customers.. You make your money when you sell the yacht to a family who perhaps chartered your yacht a few months earlier. Your tax and business structure in this case avoids the entertainment facility black hole because you have successfully converted “entertainment” into a brilliant marketing strategy.
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To win with this strategy you are expected by the Courts to keep excellent extemporaneous, contemporaneous accounting records and travel logs, and that you maintain accurate cost basis history documentation. The yacht business, furthermore, becomes part of your entire estate plan along with all the other assets transferred to the family LLC for eventually gifting to children and grandchildren with a watertight operating agreement including all the usual discounts and marketability restrictions.

Unfortunately for legendary criminal defense attorney F Lee Bailey vs IRS U S Tax Court the Government won big time against Bailey because he did not keep accurate records for his boat refurbishing business back in 2012. IRS wins Bailey loses. Also see Knauss v IRS 2005 involving a taxpayer who lost big against the IRS simply because he couldn’t produce accurate cost basis documentation. IRS wins Knauss loses.

Notwithstanding the record keeping requirements, there are excellent rewards for starting out with a yacht refurbishing business as part of an overall estate plan. If you are set up correctly you can use forward Section 1031 or Reverse 1031 tax free exchange treatment each time you refurbish and then sell your yacht. But be warned, this is a very complex business plan incorporated into an equally challenging estate plan all set up with an entrepreneurial foundation for family unity, protection, and asset preservation. Please consult your tax attorney and qualified intermediary to bullet proof this tax strategy prior to ever filing your tax return.

In conclusion, if you truly love sailing the seas, there are legitimate expenses for boating that can be deducted on your personal or business tax return. But without a water tight business structure, perhaps through a family limited liability company as part of your overall estate plan, your yacht may not be prepared for what lies ahead. Best practice is to get plenty of professional advice before deducting any boating expenses on your tax return. Finally, whatever tax plan you decide on, have your tax attorney disclose the plan openly and honestly to the government as part of your tax return filing to the IRS with plenty of supporting documentation and US Tax court case law. You will be glad you did if you happen to be audited years later. Thanks for joining us on TaxView with Chris Moss CPA.

Kindest regards,
Chris Moss CPA

Boating, Luxury Sailing Craft, Water Craft, Yacht Tax Deductions

Sep 26

Death Gift Estate Tax For Beginners

By Chris Moss CPA Tax Attorney in Death Tax, Estate Tax, Gift Tax

Welcome to TaxView, with Chris Moss CPA

Death tax is a fact of life, or death, as the case may be, and death taxes have been taxing estates for thousands of years. Euphemistically referred to as “estate tax”, the tax is assessed when assets are transferred to your beneficiaries on that special day of your departure over the tax free IRS allowed exemption. Despite the fact that Congress likes to adjust this exemption from time to time, if your tax attorney “guessed” right as to what the tax free exemption will be when you die, your estate pays no tax, if she guessed wrong….well your kids just might have to sell the farm to pay the estate tax. Best practice is to gift to your Family Limited Liability Company (LLC) up to the IRS annual 2014 exclusion of $14,000 per person ($28,000 if married) which reduces by the same the amount of the value of your estate. Sounds easy, but beware of the IRS tax traps waiting for the unwary beginner. So you had better stay with us on TaxView with Chris Moss CPA for an exciting journey to the beginner’s world of estate and gift tax planning so you can keep your assets legally safe from taxation for many generations to come.

First, if you don’t yet have a Family LLC I recommend you first read my article on the Family LLC as well as read my article on Family LLC Discounts. You can make up to $28,000(married) in 2014 tax free gifts a year to each of your children. If you are married and have two children age 10 by the time they are both 20 each will have $280,000 worth of membership in your family LLC. In addition to the annual gift exclusion of $28,000, you can also make lifetime gifts of $5M ($10M married) but these gifts require the filing of a gift tax return with the IRS. Any gifts over the $10 Million are taxable, either as gifts if you are alive or as estate tax if you are dead. Because Congress frequently changes these exemptions and exclusions, best practice requires annual review of your estate plan by your tax attorney to make sure your unique plan complies with current law. Sounds simple but not really. In addition to ever changing exclusion and exemptions amounts, there are many death traps awaiting you as you create the family LLC.

The first trap we are going to cover today is released with a trap question: When is a gift not a gift? To answer this question we head on over to US Tax Court to listen in on a 2013 Tax Court case Estate of Sommers v IRS. Sommers was a successful physician who owned a valuable collection of art. Sommers retained the services of a B&T Tax Attorney who advised Sommers in 2001 to get the art appraised, create an LLC as owner of the art and gift LLC units to his three nieces, Wendy Julie and Mary up to the maximum allowed exemption ($675K at that time) to avoid Sommers of having to pay gift tax. However, after the appraisal came in over the exemption and gift tax was owed, the nieces paid the gift tax themselves to avoid any breach of the agreement and more importantly to reflect that the parties carried out the original intent of the agreement that Sommers pay no gift tax.

Fast forward a few years and Sommers (or perhaps other relatives of Sommers) changed their minds about gifting the art to Wendy, July and Mary, but the nieces refused to give the art back to Sommers. After Sommers died, his executor sued the nieces for the art in various State court actions claiming that the gift agreement was illegally altered when the appraisal came in over the allowed exemption. Even though the estate eventually lost in state court, it’s legal executor nevertheless included the value of the art as part of the estate tax return on Form 706. The IRS rejected this return noting that Form 709 a US Gift tax return had been filed years earlier in 2001 for these same works of art. Sommers estate appealed to US Tax Court. Estate of Sommers vs IRS. Judge Halpern sided with the IRS noting that Sommers did not retain the power to “alter, amend, revoke or terminate those gifts within the meaning of IRS Section 2038 and therefore, the gifts were valid and had to be removed from Summers estate. IRS (and nieces) win, Estate of Sommers and other relatives lose.
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The second trap we are going to look at today is found in the Operating Agreement of the LLC as highlighted in the US Tax case of Hackl v IRS. Hackl was a successful executive with Herff Jones Inc. in Georgia. Upon his retirement in 1995 he started a tree farming business with his wife in both Georgia and Florida. Treeco LLC was created with both Mr and Mrs Hackl owning 50% each. The LLC operating agreement designated Hackl as the initial manager to serve for life and had very restrictive buy sell provisions. One such restrictive provision required each new member to get Hackl’s permission before they could sell their membership, even if the sale was between brothers and sisters. Shortly thereafter, Hackl gifted various membership interests in Treeco to each of his eight (8) children and spouses and timely filed gift tax returns to the IRS claiming the gifts qualified for the annual exclusion under IRS Code 2053(b). The IRS audited the 1996 gift tax return in 2000 and disallowed the exclusions claiming the gifts were future interest gifts and had no present value. Hackl appealed to US Tax Court in 2002 Hackl v IRS claiming the gifts were in fact gifts and had real substantial present value. Judge Nims points out that for Hackl to win his children must have an unrestricted right to the immediate use possession or enjoyment of the property or the income from property within the meaning of IRS Section 2503(b). The Court agreed with the IRS that due to the severe operating agreement restrictions the children never received a “present” interest in the LLC memberships they received. IRS wins, Hackl Loses.

What does that mean for all of us? If you are planning to gift the current $28,000 (married) annual exclusion to your children through your Family LLC make sure you and your tax attorney create an operating agreement for the children that can withstand Government scrutiny regarding “present interest” in the event of an IRS audit. Second, if you are gifting large gifts over the $28,000 annual exclusion either less than or in excess of the current $10M exemption (married) make sure you file all gift tax returns and pay any gift tax you owe to make sure the gift cannot be revoked or amended by other not so happy relatives after your death. Finally, develop a long range estate and gift tax plan with your tax attorney so that when your final day comes you can keep your assets legally safe from estate taxation to assist your children and preserve your wealth for many generations to come. Thank you for joining us on TaxView with Chris Moss CPA.

Kindest regards and see you next time,
Chris Moss CPA

death tax, estate tax, gift tax

Sep 21

Temporary vs Permanent Tax Deductions

By Chris Moss CPA Tax Attorney in Permanent Tax Deductions, Permanent Tax Savings, Temporary Tax Savings, Timing of Tax Deductions

Thanks for joining us on TaxView with Chris Moss CPA

Have any of you purchased a vehicle in late December to receive that coveted tax deduction that year? If you answered yes, you were able to receive “temporary tax deduction.” (TTD) That is to say you accelerated a tax deduction into the current tax year to save taxes immediately. However, the tax savings you thought you had was unfortunately just an illusion in the big tax picture of the IRS Code. That is because as you saved taxes in year one, you did not necessarily save taxes in year two, unless you somehow were able to convert the TTD to a “permanent tax deduction. “(PTD) That is to say instead of saving taxes just one year, you would be saving taxes every year. How cool would that be? So if you are interested in learning more about how to convert TTDs to PTDs, stay with us on TaxView with Chris Moss CPA as we delve into the bizarre world of temporary vs permanent tax differences to create PTD tax strategies to permanently save you taxes and to create wealth for you and your family.

So what exactly is a TTD? If you all want to see how one taxpayer behaved at year end to receive a fleeting TTD, let’s review together Michael and Mary Brown’s timing saga in a US Tax court case recently decided in December of 2013. Brown vs IRS Brown is a successful insurance agent who purchased a Bombardier Aircraft (Challenger) to visit his clients on December 31, 2003. Brown deducted almost $11M in depreciation on the Challenger in his 2003 tax return. The IRS audited Brown for that year and disallowed the deduction on the grounds that the Challenger was not in service until 2004. The Brown’s appealed to US Tax Court Brown vs IRS. Judge Holmes takes off immediately to the issue of “timing”. The IRS says the Challenger is deductible in 2004 and Brown says 2003. Ultimately the question presented to the Court was whether or not Brown put in use the Challenger in 2003. The Court ultimately concluded that Brown did not put the Challenger “in use” until 2004. IRS wins and Brown loses.

Now that we understand the simple TTD, let’s travel out of the world of timing differences to a better more secure place, the world of PTDs more much complex and much more rewarding. For most American taxpayer’s the easiest way to create PTDs is through a 5-10 year long range financial plan. Our first example is about a family who has decided their passion is real estate. They have annual conversion of TTDs through the use of leverage and the acquisition of commercial and residential property. For a husband wife both working two jobs earning $200K with two children ages 8, and 11 that could mean a 5-10 year financial plan with the goal of creating as many PTDs as legally possible. One spouse would need to cut back on hours at his or her full time job and head up newly created Family LLC which would purchase one property with each succeeding year leveraging the appreciation on preceding properties. As you purchase and then improve each property for potential sale you meet regularly with your tax attorney to bullet proof against an IRS material participation attack to your Family LLC. Please review Chris Moss CPA material participation article. Each property is deductible in accordance with IRS regulated TTDs but taken together in the 5-10 year financial plan, you have successfully converted TTDS to PTDs. If you acquire the right property in the right location for the right price you have not only created PTDS and saved taxes, but substantially increased your net worth. In other words PTDs create wealth.

Side effects There are mild to moderate side effects cheap viagra tablets that could sometimes prove harmful. Sometimes, you may also suffer from soft or weak erection. order levitra online visit that store Against this background, we have the results online levitra of a trial into the use of a drug to prevent men from developing prostate cancer. Such products lack the authenticity and misuse the brand for viagra pills australia duping people. Continuing with the same family, once the Family LLC is set up, TTDs constantly become converted to PTDs. In your financial plan transportation perhaps should be as important as the actual purchase and sale of real estate. For example, if you purchase or lease a Bombardier Challenger, if you have a 5-10 year financial plan, it really does not matter which year you get the deduction. Because in your 5-10 year financial plan you have already determined that either you or your spouse is going to visit real estate you own, and real estate you want to purchase with perhaps someday your son or daughter piloting the plane. Again if you purchase or lease a small fleet of company owned cars and trucks, TTDs are constantly being converted to PTDs as you continually trade in older for newer models. This could be said of your office equipment and furniture as well as your office headquarters and possibly satellite offices around the country. Which leads us to al startling observations: As your business grows TTD to PTD accelerates exponentially, creating tax deductions and substantially increasing your net worth. Indeed, PTDs create wealth.

Let’s look at yet another family in another example with a very different 5-10 year financial plan. Our second family is a young couple with no children, and both husband and wife are working jobs earning $150K annually. This taxpayer’s 5-10 year financial plan focuses on purchasing a territory in their location for a franchise type of business. They are not sure whether to own a fast food franchise like a McDonalds or perhaps a less known franchise selling yogurt, or perhaps they will create their unique storefront business that could franchise out to others someday. In this example you are concerned about losing income if one of you quits your full time position. Your financial planner custom creates your financial plan so that both of you continue to work your current jobs in years one, two and three, allowing you the flexibility to start-up your franchise at night and on weekends. Since your 5-10 year financial plan calls for losses the first few years, you make sure your tax attorney bullet proofs you all against hobby loss attacks by the IRS. Please review Chris Moss CPA hobby loss article. Your PTDs in this unique 5-10 year plan would be focused on trademarks, copyrights and brand promotion. You would be converting TTDs to PTDS related to “branding” including advertising, marketing, and public relations. As you can see in this unique 5-10 year financial plan you are creating your net worth by development of a “brand” or the creation of good will. Goodwill is just as valuable an asset as real estate and can create a viable brand to sell goods and services in the community and around the nation creating wealth for you and your family just as valuable as wealth created by real estate.

So what is your 5-10 year financial plan to convert TTDs to PTDs? Don’t’ have one? It’s not too late to start. Seek out a qualified financial planner and create your 5-10 year financial plan. Round out your team with a good insurance agent, banker and Tax Attorney to protect you from the IRS traps and road mines that await you as you move forward with your financial plan. Finally, create your own path to fit your own unique family’s goals to guide you to a better American dream of financial independence and the creation of wealth for you and your family. There has never been a better time to convert TTDs to PTDs. Perhaps I will see you next time at the Mercedes dealer last week in December for that easy TTD. Better yet would be to know you are working those PTDs for your family to save taxes and create wealth. Thanks for joining us on TaxView with Chris Moss CPA.

Submitted by Chris Moss CPA

permanent differences, permanent tax deductions, permanent tax savings, temporary tax deductions, temporary tax savings, temporary vs permanent tax deductions, timing differences

Sep 14

IRS Doomsday Levy

By Chris Moss CPA Tax Attorney in IRS Doomsday Levy, IRS Levy, Levy

Welcome to TaxView with Chris Moss CPA

Just the thought of a “levy” gives me the absolute feeling of impending doom. However, an IRS levy adds additional and painfully real fear of immediate economic loss to any law abiding American taxpayer. What is an IRS levy? According to the IRS website a levy is a legal seizure of your property to satisfy a tax debt. If you think this could never happen to you, think again. What about a payroll tax debt, or perhaps a nasty divorce or partnership dissolution suit targets you as owing tax to the IRS. Or perhaps a business you were involved with that has filed bankruptcy had you listed as an officer owing tax to the IRS. In all these cases I would hope your family tax attorney would have been busy filing petitions on the merits with the US Tax Court to defend you and your family and protect your hard earned assets. But you somehow let events overtake you and now find yourself with a final “levy notice” from the IRS also referred to as a Doomsday Levy. What can you do? You have one last line of defense in this battle. So stay with us here on TaxView with Chris Moss CPA to better understand how you can minimize the damage to your family and your financial assets if an IRS Doomsday Levy ever shows up on your doorstep.

Have your heard certified letters usually bring you bad news? The IRS issued “Final Notice of Intent to Levy” oftentimes referred to as the “Doomsday Levy” is usually sent certified by the Government, but also can be delivered by a special agent in person direct to your front doorstep. Regardless how you receive the Levy notice, if the amount of the Levy is relatively large enough to cause you severe economic hardship, I recommend you retain the best tax attorney you can afford. While the IRS website is an excellent source of information on how the IRS levies you and explains your rights to appeal within the IRS and then eventually to US Tax Court, you are simply no match for the brutally effective Collection Division of the US Treasury if you should, as thousands before, lose to the IRS in Court.

Once you have your team assembled best practice in my view is to appeal within 30 days of the date on the levy notice to the IRS appeals division and submit your “offer in compromise” If you read my article on offer in compromise you know that this offer is a very viable alternative to being levied and can in many cases be a “win-win” for both you and the Government. However, your offer must be reasonable enough to be accepted by the Government. In order to better understand how reasonable is reasonable let’s take a look at some very interesting US Tax Court cases.

In Lloyd v IRS 2008-15 taxpayer Lloyd a 70 year old practicing attorney was assessed income tax after an IRS audit for years 1990 through 2002. What makes this case so interesting is that Lloyd never disputed the tax owed, but he also never paid the tax owed. After receiving a notice to levy in 2006, Lloyd’s tax attorney requested a hearing with the IRS Appeals Office to discuss an offer in compromise. Lloyd offered a 7 year payment plan for a total of $139,707 to compromise $264,457 owed. The IRS determined that Lloyd’s “reasonable collection potential” RCP was almost $1.5 Million easily allowing Lloyd to pay much more than $139,707 if not the whole amount due. After months and months if not years of delays, phone calls, meetings and correspondence by both sides no agreement could be reached. The IRS gave Lloyd 30 days to appeal to US Tax Court which indeed he did in 2008 US Tax Court Lloyd v IRS . Judge Chiechi immediately notes early on in this 63 page Opinion that Lloyd could not challenge the tax owed, but only challenge whether or not Appeals abused its discretion by not accepting Lloyds RCP calculations. The Court concluded that Appeals “on the record before us” did not abuse its discretion. IRS wins Lloyd loses.

Next case is Crosswhite vs IRS just decided two weeks ago. Crosswhite owed 2003 Form 941 payroll taxes from a business he owned. He retained a tax attorney to put forth an offer in compromise to the IRS in 2004. Crosswhite’s tax attorney was still working this case with the IRS all the way to January of 2007. Eventually in June of 2009 the IRS sent the dreaded Doomsday Levy to Crosswhite. Legal counsel executed Form 12153 “request for due process hearing” before IRS appeals. The IRS determined Crosswhite had RCP of $82,948. Crosswhite only offered $7,200. The IRS countered with a revised RCP of $68,847. Crosswhite eventually offered $25,000. The Government issued a notice of determination sustaining the levy. Crosswhite appealed to US Tax Court in Crosswhite vs IRS 2014-179.
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Judge Paris points out that the IRS analysis of RCP for Crosswhite only included net equity but not future income computations. Therefore the Court was unable to conclude whether or not it was an abuse of discretion for Appeals to proceed with the levy. The Court remanded the case back down to the Appeals office for further consideration and suggested that Crosswhite offer a revised new collection alternative. Hopefully now that Crosswhite has been given a second chance his tax attorney will work this out with Appeals.

What does all this mean for us? First, don’t ever ignore IRS notices and bills. Ignoring IRS notices and correspondence endangers your business and family making a Doomsday Levy attack very possible in your own backyard. Second, retain a tax attorney early in the battle to minimize injury and protect your assets. Just so you know, if you try to hide assets while all this is going on the IRS will invoke the power of Code Section 6331(d)(3) that “collection of the tax was in jeopardy” and proceed immediately against you to protect the Government’s best interest with such financial force your assets will not know what hit them. Finally, if you do get the dreaded Doomsday Levy, don’t rely on the US Tax Court to save you. As we saw in Lloyd and Crosswhite, Doomsday Levy US Tax Court proceedings rarely have happy endings. Your best chance to minimize the damage if an armed Doomsday Levy is racing your way, is to have your tax attorney proceed quickly and quietly to IRS Appeals, work out an offer in compromise, and neutralize and unarm that Doomsday Levy before it ever hits its target.

Thanks for joining us on TaxView with Chris Moss CPA.

Kindest regards
Chris Moss CPA

IRS Doomsday Levy, IRS Levy, Levy

Sep 13

Substitute Tax Return

By Chris Moss CPA Tax Attorney in Substitute Return, Substitute Tax Return

Welcome to TaxView with Chris Moss CPA

What is a substitute tax return? No your identity has not been stolen and a false return filed by the perpetrator. In fact, a substitute tax return is what the Government has the authority to file for you when you don’t file your tax return on time. Yes, isn’t that nice of the IRS to file your income tax return for you, and better yet, all at no charge! But wait a minute. Before you all start calling me asking how to get the government to file this free substitute tax return for you, let me make clear that a substitute return is not the real deal, it is more like a knock off return. You all know what knock offs are, those fake replicas of an authentic brand of luxury goods or service, often times not worth purchasing even at any price due to lack of quality and poor workmanship. The same holds true for a substitute tax returns, usually poorly prepared by the IRS and in worse cases substantially inaccurate, not reflective of your true net income and tax owed and unfortunately presenting you with a very large tax bill with even larger interest and penalties that is simply in many cases not correct. So if you have an outstanding tax return that has not yet been filed, or perhaps a few such returns, or if you are in any way just curious, then stay with us on TaxView with Chris Moss CPA to find out how you can get hit with a substitute knock off return and what you need to do to “return” the return back to sender where it belongs.

According to the Government’s own IRS website, the IRS warns us all: “…If you fail to file, we may file a substitute return for you. This return might not give you credit for deductions and exemptions you may be entitled to receive. We will send you a Notice of Deficiency proposing a tax assessment. You will have 90 days to file your past due tax return or file a petition in Tax Court. If you do neither, we will proceed with our proposed assessment….” Seems fair enough. In my view you get a pretty good deal. Either file or go to Tax Court. Although not everything with the IRS is quite what it seems to be especially when you go through the bizarre world of US Tax Court case law.

Gloria Spurlock did not file her tax returns for 1995 96 and 97 and in fact did go to US Tax Court in Spurlock v IRS 118 TC No 9 (2002). Judge Ruwe points out that under IRS Code Section 6020(b)(1), the Government has the authority to execute a return “If any person fails to make any return required by any internal revenue law or regulation made thereunder at the time prescribed therefor, or makes, willfully or otherwise, a false or fraudulent return”. IRS wins Gloria loses. Sandra Stern also didn’t file a tax return and decided to go to Tax Court, Sandra Stern vs IRS TC 2002-212. Judge Beghe says: “…the above-quoted language of section 6020(b) makes clear that the Commissioner is not charged with preparing a perfectly accurate return. The Commissioner is required only to do the best he can with the information available to him, in the absence of a return prepared and filed by the taxpayer…” IRS wins Sandra loses.
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The next case is even more interesting: Sam Kornhauser, a practicing attorney no less, didn’t file his 2007 tax return nor did he file one for 2008. The IRS prepared a substitute 2008 return and sent him the 90 day letter. Within the 90 day period Kornhauser signed a tax return and submitted it to the IRS for processing. However, the IRS did not process the return. Kornhauser appealed to US Tax Court, Kornhauser v IRS 2013-230. Judge Haines’ Opinion allowed into evidence Kornhauser’s “income” but not his deductions. Surprise, Surprise. Judge Haines says: “…It seems Kornhauser disputes the tax liability because the substitute return failed to take into account certain “deductions and credits”. Kornhauser’s only evidence to support his deductions and credits was his testimony as well as documents and records contained in exhibits…” Unfortunately for Kornhauser the Court did not feel the evidence Kornhauser presented to the Court or even his own sworn testimony to be credible. The Court concluded “….we find Kornhauser’s testimony to be self-serving and uncorroborated and do not accept it”. IRS wins Kornhauser loses.

In conclusion, there are certainly going to be times in your life that your tax return is going to be filed late, even years after the deadline, perhaps for reasons beyond your control. A death in the family, divorce, loss of job, natural weather disaster to name a few. So make sure you tax attorney communicates with the IRS that your return is running late and keep in constant touch with the Government until your return is eventually filed. In my view best practice in cases like this requires proper, regular, and effective written and verbal communication with the IRS to allow for cooperation not confrontation, and assistance not interference. Finally, for whatever reason, if you choose not to file your tax return without communicating to the IRS via your tax attorney, expect the IRS to file a substitute tax return for you. If you try to contest the substitute tax return in US Tax Court I bet you a Lobster dinner at the Palm that the Government wins every time. Happy tax return filings and remember, there is no substitute. Thanks for joining Chris Moss CPA on TaxView

Kindest regards
Chris Moss CPA

substitute income tax return, substitute return, substitute tax return

Sep 09

Section 1031 Reverse Tax Free Exchange

By Chris Moss CPA Tax Attorney in Reverse Exchange, Section 1031 Reverse Tax Free Exchange

Welcome to TaxView with Chris Moss CPA

What is a reverse 1031? No it is not a football game plan. Commonly known as a reverse exchange or a reverse Section 1031 tax free exchange, this very trendy tax savings variation on the traditional Starker exchange has roared back to life. If you read my article on 1031 Exchanges you are somewhat familiar with tax free exchange investment strategy. We are now going to take a look at this same tax free strategy but in reverse. As an example, the Smiths give you 30 days advance notice before their hotel in Carmel CA property officially lists for 10M. Your spouse loves that hotel and you both have talked about retiring there. You are certain you could clear 10M if you sell those three rental properties you own. You arrange to meet your tax attorney to get her to structure the deal. Unfortunately she has some bad news. She says “Even if you could sell your property within the next thirty days, depreciation recapture turns your already low basis into negative territory causing at least $5M of your 10M sales price to go to the IRS in taxes.” But your tax attorney has some good news too: a tax free and reverse section 1031 exchange, could save you 5M in taxes. Interested in how this is possible? Stay with us on TaxView with Chris Moss CPA to see how a reverse Section 1031 tax free exchange can save you taxes and help to preserve your wealth.

Just to refresh your memory, a traditional easy 1031 starts out with a sale of your investment called the “relinquished” property. A qualified intermediary (QI) escrows the proceeds. Not all QIs are qualified as experts in their field. Make sure your QI is a member of the Federation of Exchange Accomodators. After you choose a QI you trust you must identity within 45 days an investment you want to buy called the “replacement” property. Within 180 days your QI purchases the replacement property and then transfers ownership to you. All gain on the sale of your first property is deferred and adjusted into the basis of the replacement property. In theory the gain could be deferred forever unless Congress changes the rules. It’s that simple.

Now let’s tackle the reverse 1031 play. The IRS has give us a safety in a safe harbor provided by Rev Proc 2000-37 and a related IRS Bulletin 2000-40. (Page 308-310), Before this Rev Proc there was surprisingly little guidance from the US Tax Court on how to play this field. There was just one tax court case that I found which is the poster case for how not to handle a reverse exchange play. DECLEENE vs IRS 115 T.C. No. 34 US Tax Court.

The facts of the case are relatively simple, Decleene operated a trucking business since 1977 and leased the building on McDonald Street land Decleene owned. In 1992, Decleene purchased Lawrence Drive land with his intent to eventually house his trucking business on that land. In 1993 P sold the McDonald Street and Lawrence Drive land to Western Lime and Cement (WLC) in exchange for WLC constructing a building on Lawrence Drive and then conveying back Lawrence drive to Decleene. On their 1993 tax return, the Decleene’s disclosed a tax free exchange with WLC as a taxable sale of the Lawrence land (boot) and a like kind exchange of McDonald for improved Lawrence with no gain or loss reported to the IRS. The IRS audited the 1993 tax return indicating that the Lawrence property had never really been “sold” to WLC by Decleene. The Decleene’s appealed to US Tax Court Decleen vs IRS.

Judge Beghe points out that Decleene purchased the replacement property directly with WLC, without the participation of a third-party exchange facilitator or qualified intermediary (QI) a year or more before he relinquished the McDonald property. In the following year Decleene transferred title to Lawrence subject to an “exchange agreement’ again not to a QI but directly to WLC. The Court concludes that “in foregoing the use of a third party QI Decleene created an inherently ambiguous situation. The reality of the subject transactions as we see them is a taxable sale of the McDonald Street property to WLC. Petitioner’s prior quitclaim transfer to WLC of title to the unimproved Lawrence Drive property, which petitioners try to persuade us was petitioner’s taxable sale, amounted to nothing more than a parking transaction by petitioner with WLC. In substance, petitioner never disposed of the Lawrence Drive property and remained its owner during the 3-month construction period because the transfer of title to WLC never divested petitioner of beneficial ownership. IRS wins, Decleene loses.
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What does all this mean if you spot a deal of a lifetime that you want to purchase now and pay for it with tax free money from a future sale of property you presently own? It is clear form Decleene that you must use a QI if you want to survive an IRS audit. In fact, you should assemble the following team you trust: commercial real estate agent, tax attorney, and QI either in person or by conference call to map out the reverse 1031 exchange tax strategy that fits your unique situation. Furthermore, if you intend to pay off a mortgage on the relinquished property or incur new debt on the replacement property be aware that not all lenders understand complex reverse 1031 exchanges, so add to your team an experienced 1031 banker as well. Finally, have your tax attorney fully disclose to the government the nature of the reverse exchange in an attachment to your income tax return. Ask your attorney to put in writing that your unique reverse exchange complies with the safe harbor provided by Rev Proc 2000-37 and that she will be there to defend you in the likely event of an IRS audit years later.

In conclusion, if you correctly execute, a 1031 reverse exchange in compliance with Rev Proc 2000-37 and fully disclose your tax strategy in your tax return before filing, you will have bullet proofed your return from IRS audit years later, and assisted your family in preserving wealth, savings taxes, and achieving your financial goals. Happy 1031 Exchanges to all.

Thank you for joining us on TaxView with Chris Moss CPA.

Kindest regards
Chris Moss CPA

exchange, reverse, Reverse Exchange, Section 1031 Reverse Tax Free Exchange

Sep 03

Portfolio vs Passive Loss Rules

By Chris Moss CPA Tax Attorney in passive losses, Portfolio Income, Section 369 Passive Losses, Tax Planning

Welcome to TaxView with Chris Moss CPA

If you have investment gains to offset business losses this year, you may be in store for a direct head on collision with the IRS and the Tax Reform Act of 1986. The journey to disaster starts off innocently enough. You sell some stocks for a $10M gain to purchase a small retail shopping center for the same price. You think about structuring the deal so that the losses from the first year of operations at the shopping center could offset your capital gains from the sale of stocks. You never bothered to retain a tax attorney to create a tax plan because as you see it you have a no brainer zero tax due. You believe that a buy and sell for $10 Million equals a full and complete offset come April 15 2015; but perhaps not so fast says TaxView, because the offset is in great danger. There are land mines ahead that seem to explode at the worse possible moment with an IRS audit. If you are interested in how the IRS could dramatically change even your best tax plan for offsetting gains and losses, stay with us on TaxView with Chris Moss CPA to see how the Tax Reform Act of 1986 makes your no brainer into a brain strainer and a tax disaster for you the unfortunate taxpayer victim of the creation of Section 469 and the Passive Loss rules.

To get a better idea of the catastrophe ahead, first let’s all take a short trip back to the source of confusion to Washington DC. Fasten up your tax plan as we turn back the clock landing us right in the middle of the center table at the downtwon Palm. Dan Rostenkowski (House Ways Means) and Bob Packwood (Senate Finance) have gotten together to finalize some last minute provisions of the 1986 Act. Legendary Tommy Jacomo spots us immediately with a great table. We hear Rosti roar over the boisterous dinner crowd to Bob: You personally have quite a large portfolio in stocks and bonds. Would you really consider interest and dividends “positive” income? Rosti, you know I don’t like that word “positive” taken in this context. Besides, we can’t really tell the average American taxpayer that the wealthy making dividends and interest are working as hard as they are with “positive income”. Let’s just go with this term “Portfolio”. It bridges the gap between those darn “passive” tax shelters and the American W2 worker. I say we treat these items like positive income similar to a salary but call it “portfolio”. In other words we tell America that their stocks and bonds are…well like working 40 hours a week for them as their “portfolio”. Bob, you have got to be kidding, that is really dumb, really stupid… but you know, comparing portfolio to W2 earnings is so ridiculously outrageous it might just work. See Joint Committee on Taxation, page 209-213 which eventually morphed into IRS Code Section 469 Passive Loss Rules.

Agree or disagree with how my imaginary conversation might have unfolded that night, the fact is that Section 469 prohibits the offset of “portfolio” gains or losses and “passive” gains all losses. In order to see the bizarre consequences of how these two types of gains and losses can interact, let’s head over to US Tax Court just a five minute cab ride from the Palm over to Capitol Hill to survey a 2000 case More v IRS 115 T.C. No 9 More was an independent managing underwriter as part of a syndicate for Lloyds of London. In order to be accepted by Lloyds More had to demonstrate his ability to cover potential losses of his syndicate usually by posted a letter of credit. In 1988, More transferred his personal stock portfolio to a brokerage account at Bank Julius Baer (BJB), a London-based bank. During 1992 and 1993, petitioner underwrote £500,000 of Lloyd’s premiums which were secured by a letter of credit from BJB in the amount of £150,000. The policies written by More did in fact incur losses and More cashed in his stocks at a large gain to cover those losses as required by his letter of credit. More reported his losses and gains on his tax returns so that each offset the other. The IRS audited Moore, and disallowed all the losses, arguing “portfolio” income could not be offset against “passive” income. Moore appealed to US Tax Court.

Judge Vasquez in More writes a very short 16 page jam-packed with Section 469 Opinion. The Court then confirmed that Congress enacted passive loss regulations “to curb expansion of tax sheltering”. Judge Vasquez further noted that IRS regulation 469-2T makes an exception to the general rules regarding disposition of More’s stocks at a gain. Specifically, gross income derived in the ordinary course of a trade or business includes “income from investments made in the ordinary course of a trade or business of furnishing insurance or annuity contracts or reinsuring risks underwritten by insurance companies” The Court notices that More’s attorney, Louis B. Jack, did not refute or address this at all and was silent on the reason why More acquired the stock. If More could have shown that he primarily created this portfolio as a way to get into the insurance business and not as an investment More wins IRS loses. Unfortunately for More, no evidence was presented to the Court on when his investments in stocks turned primarily to assist More in keeping his job at Lloyds. I don’t know about you all, but it seemed More’s transfer to a brokerage account back in 1988 was primarily to show sufficient assets so he could work at Lloyds. Nevertheless, since More did not refute the Government’s argument leaving the Court no choice but to hold that More’s stocks were primarily created for investment and not for the convenience of Lloyds. Government wins, More loses.
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What does this rather obscure Tax Court case and the provisions within Section 469 tell us working taxpayers regarding passive loss rules that create “portfolio income” and “passive income”? Anyone out there who wants to offset losses from one activity against gains of another: Be warned, the IRS is actively and aggressively audited these kinds of offsets, particularly any losses that offset W2 income or Investment Portfolio Income, or any gains that offset passive losses. Prior to filing your tax return with any offsets from different sources of gains and losses, review with your tax attorney the ramifications of Section 469, with particularly emphasis on what kind of offsets you have. If you have “portfolio” and “passive” losses or gains pay particular attention to whether or not the Section 369 allows those offsets. Finally have your tax advisors insert into your tax return detailed evidence of your tax strategy explaining how these offsets were created, what provision of Section 469 controls, and how your tax strategy is being implemented. For example if your tax strategy involves long range estate planning, make sure you disclose this in the tax return before filing. Better you should support and bullet proof your tax strategy now than to have to wait 4 years for the Government to do it for you during an IRS income tax return audit.

May your losses and gains offset wisely. Thanks for joining Chris Moss CPA on TaxView

Kindest regards,
Chris Moss CPA

Offset, passive losses, portfolio income, Tax Reform Act 1986

Sep 01

Unreimbursed Volunteer Expense

By Chris Moss CPA Tax Attorney in Charity Deductions, Unreimbursed Charity Expense, Unreimbursed Volunteer Expense

Thanks for joining Chris Moss CPA on TaxView

Do you volunteer for a nonprofit organization which is exempt from paying income tax? For example, have you driven for Meals On Wheels, or perhaps you have dropped off some household goods to the local Salvation Army, hosted a student in your home, or headed up an usher team at Church? All of these activities most likely have legitimate tax deductions hidden from view of most American taxpayers due to the complexity of the IRS Code. I believe many of you involved with charitable organizations, whether it be the United Way, the American Cancer Society, or the Leukemia and Lymphoma Society, just to name a few, overlook a wonderful tax deduction explained in IRS Code Section 170(a) called Unreimbursed Volunteer Expense (UVE). I wager many of you have UVE which you are not deducting on your tax returns. Interested in learning more about this deduction and how you can save income tax this year? Stay with us on TaxView as we better understand the nature and history of UVE.

Taxpayers have been deducting cash and property donations to charities for almost 100 years. However, there is an obscure IRS regulation 26 CFR 1.170A-1(g), “contributions of services” that seems to generate many controversial US Tax Court case Opinions as to what constitutes UVE. We start with an easy case, so get ready for our journey to Washington DC where we can catch the opening arguments in Van Dusen vs IRS. VanDusen of Oakland California was an attorney who loved cats. As a volunteer for Fix Our Ferals VanDusen trapped feral cats, had them neutered, obtained vaccinations and necessary medical treatments, housed them while they recuperated, and released them back into the wild. She also provided long-term foster care to cats in her home. VanDusen deducted all the unreimbursed expense for this volunteered activity on her 2004 income tax return. The IRS audited her 2004 tax return and disallowed all her deductions, arguing that VanDusen was an independent cat rescue worker whose services were unrelated to Fix Our Ferals and did not benefit the organization. Proceeding Pro-Se VanDusen appealed to US Tax Court. Van Dusen vs IRS.

Judge Morrison’s Opinion recognizes that VanDusen is entitled to a charitable-contribution deduction only if her expenses were, in the words of section 1.170A–1(g), ‘‘expenditures made incident to the rendition of services’’ to Fix Our Ferals. The Court noted that in determining whether a taxpayer has provided the requisite service, courts consider the strength of the taxpayer’s affiliation with the organization, the organization’s ability to initiate or request services from the taxpayer, the organization’s supervision over the taxpayer’s work, and the taxpayer’s accountability to the organization citing Smith v. IRS and Saltzman v. IRS.

Travis Smith attended nondenominational company of Christians called an “assembly” at Cuyahoga Falls, Ohio. Smith deducted on his 1967 and 1968 tax returns the costs of trips to the rural areas of Western and Northwestern Newfoundland each year since 1964 to carry out evangelistic activities as a minister of his church. The IRS audited and disallowed all deductions claiming Smith had either taken these trips as vacation, or more probably and primarily that the trips did not directly benefit the local Ohio church economically, religiously, or otherwise. Smith appealed to US Tax Court. Smith vs IRS Judge Featherston noted that one of the basic functions of Smith’s church is evangelism — spreading the faith through preaching, teaching, and personal persuasion. As a member of his local assembly, Smith was taught that it was his duty to do missionary work of the kind he performed, and he responded to that teaching by doing it. Smith wins IRS loses.
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Not to be outdone by Smith, the Government pursued Saltzman during 1966. Salztman served without pay as the leader of the Harvard-Radcliffe Hillel Folk Dance Group. He taught folk dancing and related subject matter to a group which met once a week, 3 to 4 hours at a time. During 1966, Saltzman took four trips on which he led members of the Hillel group to folk dance festivals and conventions, at which these group members performed exhibitions as part of the convention. The IRS audited Salztman and disallowed all his expenses. Saltzman appealed to US Tax Court Saltzman v IRS. Salztman argued based on Rev. Rul. 55-4, 1955-1 C.B. 291, and Rev. Rul. 56-509, 1956-2 C.B. 129, that his expenses of his trips to Pittsburgh and Europe qualify for deduction under these rulings. Rev. Rul. 55-4 holds that a taxpayer who renders gratuitous service to a charitable organization may deduct certain unreimbursed traveling expenses incurred while away from home “in connection with the affairs of the association and at its direction.” Judge Simpson easily found for the IRS as Salztman offered no evidence that he was under the direction of the Hillel Folk Dance Group. IRS wins, Salztman loses.

Heading back to VanDusen, the Court noted that Van Dusen has demonstrated a strong connection with Fix Our Ferals. She was a regular Fix Our Ferals volunteer who performed substantial services for the organization in 2004 and clearly had the required “connection” necessary for the deduction to prevail in US Tax Court. Van Dusen wins, IRS loses.

In conclusion, the key to winning in an IRS audit for UVE is to prove that your activity has a strong enough “connection” to the exempt organization to prevail in Court. What this means is that if you are chief usher in your Church and travel with your usher team to various other cities and churches on training missions, and you want to deduct the cost of this trip on your tax return, make sure you establish the required “connection” with your home Church. Finally consult with your tax attorney to make sure you fully disclose to the Government the “connection” established. Get emails in writing from the Vestry commissioning your trip and include those documents in your tax return before filing. You will then have bullet proof UVE deductions when and if you are audited many years later by the IRS. Hope to see you again soon on TaxView with Chris Moss CPA.

Kindest regards,
Chris Moss, CPA

charity deduction, expense, unreimbursed, unreimbursed volunteer expense, volunteer

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