July 25, 2012

Hot Thoughts

What do Margaret Mitchell, Mark Twain, and Shaquille O'Neill all have in common? None of them like paying taxes, that's what! Here's a collection of tax quotes to start your day.

"Death and taxes and childbirth. There's never any convenient time for any of them."
Margaret Mitchell

"Blessed are the young, for they shall inherit the national debt."
Herbert Hoover

"You know we all hate paying taxes, but the truth of the matter is without our tax money, many politicians wouldn't be able to afford prostitutes."
Jimmy Kimmel

"The government deficit is the difference between the amount of money the government spends and the amount it has the nerve to collect."
Sam Ewing

"Basic tax, as everyone knows, is the only genuinely funny subject in law school."
Martin Ginsburg (Professor, Georgetown University Law Center)

"You'd be surprised at the frivolous things people spend their money on. Taxes, for example."
Nuveen Investments (Advertisement)

"If you sell your soul to the Devil, do you need a receipt for tax purposes?"
Mark Russell

"I shall never use profanity except in discussing house rent and taxes."
Mark Twain

"Last time I looked at a check, I said to myself, 'Who the hell is FICA? And when I meet him, I'm going to punch him in the face. Oh my God, FICA is killing me.'"
Shaquille O'Neill

"The invention of the teenager was a mistake. Once you identify a period of life in which people get to stay out late but don't have to pay taxes -- naturally, no one wants to live any other way."
Judith Martin ("Miss Manners")

We hope you enjoyed these quotes. But please remember this: there's nothing funny about paying more tax than you legally have to. If this summer's heat has your blood boiling about taxes and you're looking for a plan to pay less, call us today!

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call me at (954) 591-8290 TODAY or drop me a note.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

July 18, 2012

You're Fired!

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Preparation

Nobody really likes paying taxes. Sometimes, even the folks who work for the IRS resent paying the taxes that go towards funding their own salaries. Usually they just grumble about it and then go on with their day. But sometimes they try a little "self help." So now let's look at what one auditor did when she wanted to minimize her taxes.

Jacynthia Quinn spent 20 years as an IRS auditor in El Monte, California. The IRS audited her and her husband for 2006 (when she claimed $23,549 in charitable deductions and $22,217 in medical expenses) and 2007 (when she claimed $24,567 in charitable deductions and $25,325 in medical expenses). The Service disallowed those charitable and medical deductions, among other writeoffs, and the case wound up in Tax Court.

You'd think an IRS auditor would be the first to know how to avoid an audit! So, how did Quinn do on the other end of the hot seat? Well, let's look at those charitable contributions first:

"Petitioner proffered 'receipts' purportedly confirming charitable contributions. They were inconsistent and unreliable. Representatives from seven different charitable organizations credibly testified that the receipts were altered or fabricated. For example, petitioner offered a receipt purportedly substantiating $12,500 of charitable contributions to a religious organization. The purported receipt, however, identified individuals other than the couple as the donors. The organization's records did not reflect any contributions made by the couple and confirmed that the other identified individuals had contributed $12,500."

Uh oh. That doesn't sound good. Bad enough if one donor testifies your receipts are faked. But seven? How about those medical deductions? Any better luck there?

"Petitioner similarly failed to substantiate the claimed medical and dental expenses. Some of her documentation also suffered from authenticity problems and appeared to have been 'doctored.' Petitioner offered three documents purportedly issued by Dr. Christopher Ajigbotafe or his staff confirming more than $9,000 in medical expenses for Mr. Quinn. Each document, however, spelled the doctor's last name differently ('Ajigohotafe,' 'Ajibotafe' and 'Ajigbotafe'). One 'statement' was dated in January 2006 and estimated expenses for the upcoming year. The amount of expenses for 2007 contained in another 'statement' was contradicted by a letter purportedly from the doctor's staff."

Keep in mind here that Quinn is an IRS auditor, with 20 years of training and experience auditing exactly these sorts of deductions! Naturally, the Tax Court didn't show her a lot of sympathy -- they sided with the IRS on every issue and even smacked her with a civil fraud penalty. In fact, the IRS Restructuring and Reform Act of 1998 requires the IRS to fire any employee who willfully understates their federal tax liability (unless they can show the understatement is due to "reasonable cause" and not "willful neglect"). Since Quinn's own "excuse" is on a par with the dog eating her homework, she's likely to lose her job as well.

It's certainly entertaining to read about cases like Jacynthia Quinn's. It's satisfying to see a cheater get her comeuppance. And it's great to see the IRS enforcing the same rules for its own employees as it does for us. But there's a valuable lesson here, even for the majority of us who don't cheat. Dotting the "i's" and crossing the "t's" is important for everyone. That's why we don't just outline strategies and concepts to help you pay less tax. We work with you to implement those strategies and document them to survive scrutiny. And remember, we're here for your family, friends, and colleagues too!

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call me at (954) 591-8290 TODAY or drop me a note.

July 15, 2012

Employee or Independent Contractor?

by Kenneth Hoffman in Business Counsel, Tax Counsel

That was the issue in Twin Rivers Farm, Inc. (T.C. Memo. 2012-184). The taxpayer operated an horse farm and engaged two workers. The workers lived in a trailer on the property, did not appear to have paid rent, and were paid $300 and $150 per week. They cleaned the barn, barn area and grounds, groomed and watered the horses and moved them between pastures. All equipment was owned by the taxpayer. The taxpayer paid workers' compensation and employer's liability insurance, but did not file Form 943 (for agricultural workers), make deposits of employment taxes, and did not file Forms 1099 with respect to the workers.

The Tax Court examined seven factors including degree of control, investment in facilities, opportunity for profit or loss, right to discharge, whether the work was part of the principal's regular business, permanency of relationship, and the relationship the parties thought they created and held that the workers were employees of the taxpayer. The Court found the taxpayer liable for employment taxes, additions to tax under Sec. 6651(a) and penalties under Sec. 6656 for all the years at issue.

July 15, 2012

Accurate Record Keeping Is A Must!

by Kenneth Hoffman in Business Counsel, Tax Counsel

In Carl J. Mistlebauer (T.C. Memo. 2012-186) the IRS determined that the taxpayer did not maintain adequate books and records for his business reported on a Schedule C.

The IRS used the bank deposits method to reconstruct the taxpayer's income. The Court noted a bank deposit is prima facie evidence of income and the IRS need not prove a likely source of that income. The taxpayer bears the burden of proving that IRS's determinations of income based on the bank deposits method are erroneous and may satisfy that burden by establishing that the deposits that remain at issue are derived from a nontaxable source.

According to the taxpayer, none of the deposits to his bank accounts that remained at issue for each of those years was taxable because the respective sources of those remaining deposits were loans, lines of credit, proceeds from the sale of all his investments, and IRA distributions. But the only support for his position was his own testimony, which the Court found to be general, conclusory, uncorroborated, and self-serving. The Court did not rely on the testimony and sided with the IRS in finding the taxpayer had unreported income.

July 12, 2012

Show Me the Money!

by Kenneth Hoffman in Tax Counsel, Tax Planning

The week before last, while most of America was still digesting news of the Supreme Court's decision on healthcare reform, more news hit the wires. That's right, Hollywood A-listers Tom Cruise and Katie Holmes, better known as "TomKat," are calling it quits after nearly six years of marriage. Of course, Tom has been down this road twice before. But this split has already spawned far and away the biggest headlines, and tinseltown gossips are working overtime. How long has Katie planned her escape? What role does Cruise's association with the controversial Church of Scientology really play? Were Tom's lawyers really letting Katie "play the media" while they readied his reply?

News of the split came at nearly the same time as Forbes naming Cruise the world's top-earning actor. His latest blockbuster, #4 in the Mission: Impossible franchise, pulled in a whopping $700 million, powering Cruise to a $75 million year. So naturally, we want to know what the divorce means for the IRS!

Divorce is usually pretty straightforward, at least from the taxman's perspective. Property settlements between divorcing spouses are generally tax-free. Alimony or spousal support is usually deductible by the payor and taxable to the payee -- which lets the divorcing couple shift the tax burden on that income from the higher-taxed "ex" to the lower-taxed ex. Child support is both nondeductible and nontaxable -- it's strictly an after-tax obligation. And legal fees are a nondeductible personal expense, except for amounts allocated to figuring alimony payments.

But celebrity divorces can be risky business. Sometimes it's hard for outsiders to understand the stakes, which can be as different from ordinary splits as night and day. Katie hired a top gun New York attorney to represent her, one who knows all the right moves where celebrity divorce is concerned. You can be sure the tabloids were rooting for a war of the worlds -- but we were just hoping daughter Suri, age 6, wouldn't end up as collateral damage!

The Cruises had a prenup, of course. It reportedly gave Katie $3 million for each year of marriage, plus a 5,878 square foot house in Montecito, CA, where Oprah Winfrey, Kevin Costner, and Rob Lowe also have homes. And last year, Cruise deeded Holmes an apartment in Manhattan. We're sure the firm that drafted TomKat's prenup did a fine job. Of course, golfer Tiger Woods also had a prenup limiting wife Elin Nordegrin to $20 million -- but she wound up walking away with five times that amount.

What sort of romantic prospects will the couple enjoy after the divorce? Well, Cruise should be fine. He's already a legend -- he can sit back with a cocktail and audition new starlets for the role of Wife #4. And as for Holmes, she's still young, so we're sure she can still attract at least a few good men who want to show her the color of their money.

So Hollywood is playing "Taps" for Tom and Katie's storytale romance. It wasn't endless love after all. Though the media had already shifted into over-drive, anticipating a public PR battle, the quick and confidential resolution makes it possible that the story may actually just fade into oblivion.

Now, if you look carefully at this email, you'll find references to seventeen Tom Cruise movies. Can't find 'em all? Give us a call. We're experts at finding hidden opportunities, especially where it comes to taxes!

July 9, 2012

Work at Home? You May Qualify for the Home Office Deduction

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Planning

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The IRS has the following six requirements to help you determine if you qualify for the home office deduction.

    1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

        • as your principal place of business, or

        • as a place to meet or deal with patients, clients or customers in the normal course of your business, or

        • in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

    2. For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.

    3.   Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

    4.   There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

    5.   If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on Form 1040 Schedule C, Profit or Loss From Business.

    6.   If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.

July 8, 2012

Oregon Allows for Medical Marijuana Deduction

by Kenneth Hoffman in Tax Counsel, Tax Preparation

The Oregonian and the Huffington Post are reporting that Oregon is allowing a tax deduction for the costs associated with medical marijuana.

"Medical marijuana gets treated just like any other prescription drug,"

Currently, medical marijuana is not approved for a federal income tax deduction. See IRS Publication 502 for more information on what qualifies as a medical deduction for federal tax purposes.

July 8, 2012

Taking a Business Loss Deduction, Can You Prove Basis?

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Planning

Loans made by a shareholder of his or her own funds, or those borrowed from an unrelated party and loaned directly to an S corporation increase basis.

In Yolanda Welch et al. (T.C. Memo. 2012-179) the taxpayer was an 80% shareholder in an S corporation (her husband had the remaining 20%) that provided respiratory and home healthcare services. Ms. Welch asserted that she borrowed some $600,000 from a doctor and lent all the funds to the corporation. The Court noted that all the funds, however, were either paid directly by the doctor to the corporation or else represented amounts that he charged to his credit card as payments for the corporation's expenses. The doctor wrote no checks to Ms. Welch. She contributed no personal funds to the corporation, nor did the corporation execute a loan agreement or any notes evidencing any loans from her.

Ms. Welch signed 27 promissory notes in favor of the doctor. The notes were for varying amounts totaling $598,197. The notes had various maturity dates, none more than a year after execution and were secured by receivables from the corporation; Ms. Welch did not offer any personal collateral. The corporation made some payments on the notes directly to the doctor. Ms. Welch reported no interest income or constructive dividends with respect to the payments. (The husband's situation was different, but he too could not prove his basis.)

The Court noted the taxpayers failed to show that on the relevant dates they had any remaining basis in the corporation; that it was impossible to reconcile the taxpayer's asserted bases as of yearends at issue with the corporations books and tax returns. The taxpayers admitted that in the corporation's early years they did not consistently keep contemporaneous records of basis. The Court sided with the IRS in disallowing the taxpayers' claimed passthrough losses. The Court also held the taxpayers failed to show the burden of proof shifted to the IRS.

July 5, 2012

IRS Does Not Have to Approve Valuation Method for Qualified Appraisal

by Kenneth Hoffman in Tax Counsel, Tax Planning

Although the Internal Revenue Code expressly provides for tax benefits for the donation of historic preservation easements that are made in the manner set out in the Code and Treasury Regulations, the Internal Revenue Service (the “IRS”) has identified easement donations as an area in which taxpayers may act in a manner that is abusive. In recent years, the IRS has increased its enforcement efforts associated with the donation of historic preservation easements. As a result, the IRS has conducted, and is continuing to conduct, examinations of a number of taxpayers who have made historic preservation easement donations to the Trust and to other easement-holding organizations throughout the country.

In general, the IRS has been challenging the value of the easement as determined by the taxpayer’s appraiser, and has frequently focused on whether the appraiser adequately considered the impact of local preservation ordinances restricting the property. Other issues that have been raised by the IRS have included whether the supporting appraisal is a “qualified appraisal” as defined by the Treasury Regulations, and whether the language of the specific easement properly preserves the property for conservation purposes in perpetuity.

Some taxpayers have elected to challenge unfavorable determinations by the IRS. Some cases have been tried in the Tax Court and are awaiting a decision, others will be heard in the coming months, and others have not yet received a trial date. Below are links to court decisions and publicly available documents in pending cases before the Tax Court, which the Trust is including on this site by permission of the donor.

In Scheidelman v. Commissioner of Internal Revenue, 2nd Circuit Court of Appeals (6/15/12) the Court ruled:

For the purpose of gauging compliance with the reporting requirement, it is irrelevant that the IRS believes the method employed was sloppy or inaccurate, or haphazardly applied—it remains a method, and Drazner described it. The regulation requires only that the appraiser identify the valuation method “used”; it does not require that the method adopted be reliable.

The taxpayers appealed the 2010 Tax Court decision regarding tax deficiencies, and the IRS filed a cross-appeal on penalties. Oral argument was held on December 15, 2011, in New York. On June 15, 2012, the Second Circuit issued an opinion vacating the Tax Court decision and remanding the case for further proceedings.

July 4, 2012

The Cost of Reform

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Planning

By now, of course, you've heard the news that the U.S. Supreme Court upheld the Affordable Care Act, also known as "Obamacare." Ironically, the Court ruled that the controversial individual mandate is constitutional under the government's power to tax, rather than its power to regulate commerce.

We're not here to debate the merits of the Court's decision. If that's what you want, turn on any cable news network and you'll find various assorted bloviators from both sides, bloviating right now. (Try it. It's fun!)

What we are here to discuss is how the Court's decision affects your tax bill. That's because the original legislation that the Court upheld makes care affordable in part by imposing several new taxes -- in addition to the "tax" or "penalty" imposed by the individual mandate -- that will now go into effect as already scheduled:

On January 1, 2013, the Medicare tax on earned income, currently set at 2.9%, jumps to 3.8% for individuals earning over $200,000 ($250,000 for joint filers, $125,000 for married individuals filing separately).
Also on January 1, there's a new "Unearned Income Medicare Contribution" of 3.8% on investment income of those earning more than $200,000 for individuals or joint filers earning more than $250,000. (Doesn't that sound better than "tax"?)
Beginning January 1, 2014, there's a $2,500 cap on tax-free contributions to flexible spending accounts.
Also beginning January 1, 2014, employers with more than 50 employees face a penalty of $2,000 per employee for not offering health insurance to full-time employees.
Finally, the threshold for deducting medical and dental expenses rises from 7.5% of your adjusted gross income to 10%. You probably don't get to deduct your out-of-pocket medical expenses anyway -- but the new, higher threshold will just make it that much harder.

These new taxes raise new planning questions. How can we structure your investment portfolio to avoid the new "Unearned Income Medicare Contribution"? (Doesn't that sound better than "tax"?) What role should flexible spending accounts play in your finances? Should we look at a Health Savings Account or Medical Expense Reimbursement Plan to write off newly-disallowed medical expenses?

And the new healthcare taxes aren't the only challenge we face this Independence Day. We're six months away from what some wags are calling "Taxmageddon." On January 1, the Bush tax cuts are scheduled to expire. And the 2% payroll tax "holiday" expires as well. These mean higher taxes for everyone, not just "the 1%." But with Washington geared up for elections, there's little hope for quick or easy resolution.

Together, these new developments make for some real planning challenges. But when the going gets tough . . . the tough get going. So count on us to get going on today's most pressing planning questions. And remember, we're here for everyone at your July 4th barbecue!