TaxProf Blog

Editor: Paul L. Caron
Pepperdine University School of Law

Friday, February 17, 2017

Weekly Tax Highlight And Roundup

This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses how a dentist kept adequate records to beat the IRS's claim that he did not materially participate in his real estate business:

KristanPart-time dentist, full-time record-keeper beats IRS.

Beyond Flossing. A California man seemed to have a pretty good deal going. He had a dental practice with his dentist wife and had a pretty good six-figure joint income. Yet somehow it didn’t satisfy. He wanted a real estate career.

He still kept up a part-time dental practice, but he threw himself into real estate. He spent a lot of time on it. The couple owned for rental properties that he managed, and he also worked as a broker. The rental properties generated a taxable loss, and the IRS said that he couldn’t deduct them under the “passive loss rules.”

Rental real estate losses are automatically passive for most taxpayers, deductible only to the extent of other “passive” income or when the property is sold. A special rule applies to “real estate professionals.” They get to determine whether rental losses are “passive” using the same “material participation” standards that apply to other businesses — primarily based on hours worked in the activity.

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February 17, 2017 in Tax, Weekly Tax Roundup | Permalink | Comments (0)

Friday, February 10, 2017

Weekly Tax Highlight And Roundup

This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses how the EITC can be used to purchase drugs:

KristanEarned income credit helps poor man pay for his pharmaceuticals.

IRS 1, Grandma 0. A poor unemployed father was having difficulty financing his medication. But as a President once said, “when somebody hurts, Government has got to move.” Through the magic of the earned income tax credit, this poor man filed his tax return, moving the IRS to send a check that was used to pay for his medication.was

Unfortunately, the medication was recreational. 

The man was unemployed and living at his mother’s with his wife and kids. Grandma was working as a nurse’s aide to support the whole bunch. Judge Holmes takes up the story (as I normally do, I abbreviate the taxpayer’s name, here as “S.”):

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February 10, 2017 in Tax, Weekly Tax Roundup | Permalink | Comments (0)

Friday, February 3, 2017

Weekly Tax Highlight And Roundup: Mary Tyler Moore And The IRS

This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) reminisces about a 1970 episode of The Mary Tyler Moor Show involving an IRS audit.

The bewitching glamor of the 1970s IRS.

The Mary Tyler Moore Show was a Saturday night childhood staple in the days of three TV channels. Through the miracle of Amazon, I revisited my 10-year-old viewing habits by downloading an episode from Season 1, 1040 or Fight, in which the heroine gets examined by the IRS.

The fictional tax world of 1970 is a fabulous place. For example, the IRS does evening house calls, scheduling the exam in Mary’s bachelorette pad at 8:03 p.m. The IRS agent shows up right on time with his calculator.

MTM1

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February 3, 2017 in Celebrity Tax Lore, Tax, Weekly Tax Roundup | Permalink | Comments (0)

Friday, January 27, 2017

Weekly Tax Highlight And Roundup

This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) describes a recent Tax Court decision rejecting the IRS's attempt to attribute wages to an attorney from his failing S corporation law firm.

KristanS corporation doesn’t have to pay salary for its destruction

If Judge Holmes is to be believed, a Minnesota attorney mismanaged his law firm into oblivion and tax disaster. It hardly seems fair to make the firm pay him a salary for doing that.

That’s how Judge Holmes ruled in a Tax Court opinion issued yesterday. I’ll alter the attorney’s name to “Mr. G” when quoting from the opinion. Much of the opinion is about issues arising from chaotic management practices. For example:

Mr. G had a clear vision of the type of law he wanted to practice, but he was a self-proclaimed micromanager without the know-how to manage. He testified that he had “no personal experience, education or background in accounting or the operation of a business or financial background.” He “micromanaged virtually about everything and * * * did not have the clarity of vision to * * * try to see how things should run.” He did not keep sufficient accounting records, and for the first four months of G&A’s existence, he didn’t even keep company funds in a corporate account. He kept track of cashflow and expenses on a legal pad, but the legal pads would pile up.

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January 27, 2017 in Tax, Weekly Tax Roundup | Permalink | Comments (0)

Friday, January 20, 2017

Weekly Tax Highlight And Roundup

This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) describes how the Tax Court's treatment of a plastic surgeon's claim that his interest in a surgery center was a passive activity, distinct from his medical practice.

KristanPlastic surgeon gets his passive loss reconstructed

Losing for Winning.  A plastic surgeon convinced the Tax Court that his interest in a surgery center was “passive,” defeating an IRS attempt to group it with his medical practice. But the IRS got a partial win out of the deal.

The surgeon, who we will refer to as Dr. H., performed much of his surgery on an outpatient basis. He could not perform surgery requiring general anesthesia in his office. Hospital surgery space was scarce so he began plans to build a surgery center to accommodate patients needing anesthesia, but not an overnight hospital stay.

He dropped the plans when he was approached by a group of other surgeons asking him to invest in a surgery center, MBJ, that they were building. He ended up with a 1/8 interest in it. Tax Court Judge Buch explains how that works:

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January 20, 2017 in New Cases, Tax, Weekly Tax Roundup | Permalink | Comments (0)

Friday, January 13, 2017

Weekly Tax Highlight And Roundup

This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) describes a recent Tax Court case in which the judge rejected a taxpayer's attempt to be treated as a real estate professional for passive loss purposes because of his unsubstantiated assertions that he spent 750 hours per year working on real estate activities.

KristanIn Tax Court, the seventh “allegedly” proves fatal

Allegedly. That’s a bad word to see when a Tax Court judge is describing your arguments. It turned out badly for a Massachusetts couple in Tax Court.

Like other taxpayers we’ve seen, the couple was trying to convince the court that they had spent enough time on their rental properties to qualify as “real estate professionals.” If they did, they could deduct their rental losses despite the passive loss rules. Unfortunately, it’s a tough hurdle to clear.

Real estate professionals avoid the “per-se passive” rule that makes their rental losses automatically passive and deductible only to the extent of “passive” income. Instead they get to determine whether they are passive using the hours-spent standards that apply to other business activities. To be a real estate pro, you have to pass two tests:

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January 13, 2017 in Tax, Weekly Tax Roundup | Permalink | Comments (0)

Friday, January 6, 2017

Weekly Tax Highlight And Roundup

This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) uses a recent IRS ruling to discuss how the accumulated earnings tax on C corporations may take on increased importance in a reformed tax code emerging from the Trump Administration and the 115th Congress. 

KristanLiving fossil tax bites cashless C corporation

The accumulated earnings tax on C corporations is one of the more obscure items in the tax law. Designed to force corporations to distribute earnings as taxable dividends, it rarely comes up even in tax nerd get-togethers. A few years ago some populist politicians talked of strengthening it to force corporations to pay more dividends as a perverse form of economic stimulus, but interest soon faded.

The new administration may make C corporations much more attractive and more popular. If so, this living fossil may again rise from obscurity to bite taxpayers and their advisors. That makes a legal memorandum recently released by the IRS timely.

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January 6, 2017 in IRS News, Tax, Weekly Tax Roundup | Permalink | Comments (0)

Friday, December 30, 2016

Weekly Tax Highlight And Roundup

This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses how deductions of a zombie corporations eventually die. 

KristanCorporations may have an indefinite life, but not their deductions.

I’ll just keep that company around in case I need it for something. Sometimes clients who sell a business want to preserve the corporation that held the business. While there are occasionally reasons to do so — for example, to deal with potential liabilities — more often such zombie corporations become an annoyance, and clients dissolve them when they realize they have to pay annual state charter fees and tax return fees.

Other taxpayers have other ideas. A human relations consultant who lost his primary client kept his S corporation around for years after the revenue stopped coming in. While there was no revenue, there was no shortage of expenses. The taxpayer claimed a 2009 loss on his K-1 of $5,795 on revenue of zero. Without revenue, what kind of expenses would there be? This kind, according to Tax Court Judge Morrison:

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December 30, 2016 in New Cases, Tax, Weekly Tax Roundup | Permalink | Comments (0)

Friday, December 16, 2016

Weekly Tax Highlight And Roundup

This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses how Sec. 263A can apply to a cash-basis farmer.

KristanSec. 263A – it’s not just for inventories.

Nuts. Few farmers worry much about the so-called “inventory capitalization” rules of Sec. 263A. After all, they don’t have inventories. A California almond grower learned in Tax Court yesterday how Sec. 263A can sneak up even on a cash-basis farmer.

Most farmers deduct their input costs when they buy them under “cash basis” accounting. That’s a sweet deal, as other producers have to capitalize their input costs — raw materials, supplies, labor, etc. — into the cost of the goods they produce, recovering the costs only at the time the production is sold.

Sec. 263A, enacted with the 1986 tax reforms, requires producers to capitalize indirect costs into inventory that formerly were expensed. Most farmers aren’t required to keep inventories, so they don’t waste time worrying about inventory capitalization.

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December 16, 2016 in New Cases, Tax, Weekly Tax Roundup | Permalink | Comments (0)

Friday, December 9, 2016

Weekly Tax Highlight And Roundup

This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses the estate tax advantages of cash basis farming.

KristanDeath takes all, but leaves the deductions.

Cash-basis accounting and the rule that adjusts the basis of inherited assets to their date-of-death value confounded the IRS in Tax Court yesterday.

Most businesses that produce things have to capitalize their input costs into the costs of their inventory. They wait to get the benefit of the costs on their tax returns as part of the cost of goods sold when they sell the inventory.

Farmers get a better deal. Assuming they are non-corporate farmers who are active in the business, they get to deduct their input costs when paid. This “cash basis” accounting allows farmers to buy seed, feed, and fertilizer at in December to reduce their taxable income, even when they don’t plan to use it until they plant next year’s crop or feed next year’s livestock. The tax planning opportunities are obvious, and jealously guarded by farm state congressmen.

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December 9, 2016 in Tax, Weekly Tax Roundup | Permalink | Comments (0)

Friday, December 2, 2016

Weekly Tax Highlight And Roundup

This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses multi-level marketing business deductions.

KristanBig Hummer isn’t the same as a big deduction.

I have long been a doubter of multi-level marketing. I prepare no returns for MLM entrepreneurs, but they often seem to have a business model of deducting personal expenses as Schedule C business expenses.

My doubt is shaken a bit by a Tax Court case last week where a multi-level marketer generated a fair amount of revenue from his network. Unfortunately, his deductions were supported no better than you usually see when such cases reach Tax Court.

MLM entreprenuers often take an expansive view of just what constitutes a “business” expense. As they are always “on duty,” goes the logic, everything is an expense. That seems to have been the approach he took for his vehicle expenses:

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December 2, 2016 in Tax, Weekly Tax Roundup | Permalink | Comments (0)

Friday, November 25, 2016

Weekly Tax Highlight And Roundup

This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses the importance of not paying other creditors before you pay payroll taxes to the IRS.

KristanNo good deed goes unpunished if you owe payroll taxes.

IRS>Employees. Pay the payroll taxes to the IRS, no matter who else you have to stiff. That’s the lesson of a sad court case out of Houston last week.

Dr. McClendon ran Family Practice Associates for 20 years. Sometime along the way his CFO started keeping the payroll taxes the practice was supposed to remit to the IRS for himself, until by 2009 $10 million was unpaid. The U.S. District Court Judge takes up the story (my emphasis, citations omitted):

Family Practice stopped operating and remitted its remaining receivables to the IRS to pay toward the tax liability. Dr. McClendon made a $100,000 personal loan to Family Practice “for the restricted purpose of . . . using the funds to pay the May 15, 2009 payroll.” Family Practice used that loan to pay its employees.

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November 25, 2016 in New Cases, Tax, Weekly Tax Roundup | Permalink | Comments (0)

Friday, November 18, 2016

Weekly Tax Highlight And Roundup

This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses the importance of keeping good mileage records if you plan on deducting expenses incurred in the business use of a car (even an Aston Martin).

KristanThere is no short form mileage log for an Aston Martin.

All business. A California aerospace consultant visited his clients in a suitably space-age vehicle — an Aston Martin Vantage. Paleolithic vehicle recordkeeping blew up his car deductions on the launch pad.

The consultant claimed $21,747 in vehicle operating expenses on his 2012 return, along with $21,636 in depreciation expense for the Vantage. That’s a lot of deduction, but then again the Vantage is a lot of car. And, of course, the taxpayer said the car was used 100% for business. And he had proof! Well, sort of. Tax Court Judge Nega takes up the story (my emphasis):

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November 18, 2016 in Tax, Weekly Tax Roundup | Permalink | Comments (0)

Friday, November 11, 2016

Weekly Tax Highlight And Roundup

This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses a recent Tax Court case that illustrates the need for a “'sauce for the gander' rule that allows taxpayers to receive penalty payments from the IRS on the same basis as the IRS can impose penalties on taxpayers taking lame positions."

KristanI’ll take your house, but the money I give you is for sweeping it.

The keys will be extra. It’s common to see a Tax Court decision where you wonder why they bothered to go to the trouble of litigating. It’s unusual when the puzzling litigant is the IRS.

When the real estate bubble popped in 2008, mortgage lenders were swamped with borrowers who couldn’t keep up the payments. To deal with all of the repossessions, they came up with deals to encourage delinquent borrowers to leave quietly without wrecking the house.

A California couple took advantage of such a deal when they got underwater on a second home in North Carolina (my emphasis):

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November 11, 2016 in Tax, Weekly Tax Roundup | Permalink | Comments (0)

Friday, November 4, 2016

Weekly Tax Highlight And Roundup

This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses one way the IRS ferrets out business tax cheating.

Kristan"Sure I lie to them, but you can trust me”

No, this isn’t what “double entry bookkeeping” means. A government attorney reminds us of an inherent danger in business tax cheating. In remarks to a meeting of the California Tax Bar reported by Tax Analysts ($link), Tax Division Senior Litigation Counsel Mark Daly told of a technique to sniff out people who systematically underreport business income:

Daly said his favorite cases come from the IRS Criminal Investigation division’s business opportunity program, in which undercover agents pose as prospective buyers of a taxpayer’s business. He explained that when the agents request information on what they’re buying, the taxpayer will frequently show them a second set of books. The beauty is that the agents are wearing a wire and the taxpayer has basically written the search warrant, Daly added. 

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November 4, 2016 in Tax, Weekly Tax Roundup | Permalink | Comments (1)

Friday, October 28, 2016

Weekly Tax Highlight And Roundup

This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses Jackson v. Commissioner, T.C. Summ. Op. 2016-69 (Oct. 24, 2016).

KristanSometimes love isn’t all you need. Compensation causes income tax. Gifts don’t. This made all the difference in a Tax Court case this week.

A Florida man, who we will call Mr. J., was pastor of a little church with “approximately 25 to 30 active members.” His wife was a “director” in the church.

Mr. J. made an offer to the congregation, according to Tax Court Judge Guy:

Mr. J… informed the church’s board of directors that he did not want to be paid a salary for his pastoral services but that he would not be opposed to receiving “love offerings”, gifts, or loans from the church.

Mr. J. was in a position to keep the love coming:

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October 28, 2016 in Tax, Weekly Tax Roundup | Permalink | Comments (0)

Friday, October 21, 2016

Weekly Tax Roundup 2.0

Note from Paul Caron:  As I explained on August 1, due to my growing other commitments, I have taken steps to reduce the amount of time I devote to TaxProf Blog.  I previously have announced that:

Today, I am pleased to announce that Joe Kristan, CPA & Shareholder, Roth & Company (Des Moines, Iowa), and editor of Tax Update Blog, one of my favorite tax blogs, has taken over the weekly tax roundup.  (I took a side trip to meet with Joe when I went to my son's first Grinnell College soccer game in 2009.)  I am delighted that Joe is adding a new feature to the roundup:  a discussion of one of the week's important tax developments (often a Tax Court decision).

In this week's inaugural post, Joe discusses Hicks v. Commissioner, T.C. Summ. Op. 2016-68 (Oct. 17, 2016), in Good Records Do Not a Business Mile Make:

KristanGood Records, Bad Facts. A Tax Court case this week shows that no matter how good your records are, they don’t help if they meticulously document why your expenses aren’t deductible.

The taxpayers, whose surname name we abbreviate here as “H,” had an unusual Schedule C. Judge Carluzzo explains:

Petitioners, or at least one of them, established SC Management in 2005. According to petitioner, its stated purpose was to manage the careers of the H family. Although the exact services that the business was intended to provide with respect to the career(s) of each family member are less than clear, it appears that each family member agreed to contribute a portion of income earned from outside sources to SC Management in return for whatever services the family member received. During the years in issue the income shown on the Schedules C is attributable to amounts petitioner and one of his children earned.

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October 21, 2016 in New Cases, Tax, Weekly Tax Roundup | Permalink | Comments (0)

Friday, July 15, 2016

Weekly Tax Roundup

Friday, July 8, 2016

Weekly Tax Roundup

Friday, July 1, 2016

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Friday, June 24, 2016

Weekly Tax Roundup

Friday, June 17, 2016

Weekly Tax Roundup

Friday, June 10, 2016

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Friday, June 3, 2016

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Friday, May 27, 2016

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Friday, May 20, 2016

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Friday, May 13, 2016

Weekly Tax Roundup

Friday, May 6, 2016

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Friday, April 29, 2016

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Friday, April 22, 2016

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Friday, April 15, 2016

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Friday, April 8, 2016

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Friday, April 1, 2016

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Friday, March 25, 2016

Weekly Tax Roundup

Friday, March 18, 2016

Weekly Tax Roundup

Friday, March 11, 2016

Weekly Tax Roundup

Weekly Student Tax Note Roundup

Friday, March 4, 2016

Weekly Tax Roundup

Friday, February 26, 2016

Weekly Tax Roundup

Friday, February 19, 2016

Weekly Tax Roundup

Friday, February 12, 2016

Weekly Tax Roundup

Friday, February 5, 2016

Weekly Tax Roundup

Friday, January 29, 2016

Weekly Tax Roundup

Friday, January 22, 2016

Weekly Tax Roundup

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January 22, 2016 in Tax, Weekly Tax Roundup | Permalink | Comments (0)

Friday, January 15, 2016

Weekly Tax Roundup

Friday, January 8, 2016

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Sunday, January 3, 2016

Weekly Tax Roundup

Sunday, December 27, 2015

Weekly Tax Roundup

Friday, December 18, 2015

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Friday, December 11, 2015

Weekly Tax Roundup