Paul L. Caron
Dean




Friday, March 24, 2017

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 denying a couple's claimed $18,000 charitable deduction for used clothing donated to their church.

KristanDeducting that gold mine in your closet.

Thrift shop values. Tax pros might expect Goodwill and Salvation Army to be the largest industrial enterprises in the nation, going by the values clients provide for used clothing they give away. The Tax Court gave us a lesson last week on the sort of tax value you can squeeze out of last year’s wardrobe.

A Colorado couple must have really cleared out the closets and attic in 2013, as they claimed a charitable donation of $18,000 for donation of used clothing to a church. Unfortunately, the court record is light on just what those clothes were:

Other than generalized references to various clothing designers and the quality of the items petitioners claimed to have donated, no details as to the number of specific items donated or the value of any specific item have been provided. Petitioners did not present any written substantiation for the charitable contribution deduction, nor could petitioner recall how the value of the donations was calculated.

Documentation means a lot in the tax law, and for big non-cash donations, it’s pretty much everything.

Judge Carluzzo reviews the documentation hurdles non-cash deductions have to clear (citations and footnotes omitted, emphasis added):

First, any contribution of $250 or more must satisfy the requirement of section 1.170A-13(f)(1), Income Tax Regs., which provides that to be allowed a charitable contribution deduction of $250 or more, the taxpayer must substantiate the contribution with a contemporaneous written acknowledgment from the donee organization.

Second, for noncash contributions in excess of $500, a taxpayer must maintain reliable written records with respect to each donated item. These records must include, inter alia: (1) the approximate date and manner of the property’s acquisition; (2) a description of the property in detail reasonable under the circumstances; (3) the property’s cost or other basis; (4) the property’s fair market value at the time of contribution; and (5) the method by which its fair market value was determined.

Third, for noncash contributions of property with a claimed value of $5,000 or more, a taxpayer must — in addition to satisfying both sets of requirements described above — obtain a “qualified appraisal” of the donated item(s) and attach to his tax return a fully completed appraisal summary on Form 8283.

It appears the taxpayers failed to clear the easiest first hurdle. Even if they got to hurdle number three, the appraisal, it might be a challenge to find a qualified appraiser for $18,000 of used clothing. To have a qualified appraisal, you need a qualified appraiser. IRS Publication 561 explains what that means:

A qualified appraiser is an individual who meets all the following requirements.

1. The individual either:

a. Has earned an appraisal designation from a recognized professional appraiser organization for demonstrated competency in valuing the type of property being appraised, or

b. Has met certain minimum education and experience requirements. For real property, the appraiser must be licensed or certified for the type of property being appraised in the state in which the property is located. For property other than real property, the appraiser must have successfully completed college or professional-level coursework relevant to the property being valued, must have at least 2 years of experience in the trade or business of buying, selling, or valuing the type of property being valued, and must fully describe in the appraisal his or her qualifying education and experience.

2. The individual regularly prepares appraisals for which he or she is paid.

3. The individual demonstrates verifiable education and experience in valuing the type of property being appraised. To do this, the appraiser can make a declaration in the appraisal that, because of his or her background, experience, education, and membership in professional associations, he or she is qualified to make appraisals of the type of property being valued…

If there are appraisers out there with those sorts of credentials, the taxpayers missed them. Decision for IRS.

The moral?  The IRS seems to be pretty good at spotting questionable property donations. If you don’t have the paperwork or the appraisal, don’t claim over $5,000 for donations of property, unless you are donating publicly traded securities. If you do, you get in line for an IRS visit, a deduction of zero, and the 20% “accuracy related penalty” the IRS piled on top for these taxpayers.

Cite:  Gaines v. Commissioner, T.C. Summ. Op. 2017-15 (Mar. 16, 2017)

Monday, March 20, 2017

Career Corner. Reorganization – What to Do When You Get a New Boss (Bryce Sanders, Going Concern)

Jason Dinesen, Glossary: Revenue Procedure. “In tax terms, a revenue procedure is IRS guidance on how taxpayers should comply with certain laws and regulations.”

Jim Maule, Commas and (Tax) Statutes. “Though the dispute between advocates of the Oxford comma and those who do not subscribe to it will continue, it is clear that using the comma can provide clarification that its absence cannot offer.”

Kay Bell, When it came to tax filing, the Devil made him not do it. No, that’s who writes the tax law.

Kristine Tidgren, Why a Federal Court Dismissed the DMWW Lawsuit (Ag Docket) “The court was required to dismiss the lawsuit after finding that—even if DMWW was able to prove an injury—the drainage districts would have no ability to redress (or remedy) that injury. In other words, the drainage districts were not the proper defendants for this Clean Water Act lawsuit.”

Lew Taishoff, “I SING THE SERVICE ELECTRONIC”. “Howbeit, practitioner, be aware that the judges, clerks, intakers and flailing date-stampers at the Glasshouse at 400 Second Street, NW adjure you to recollect Walt’s immortal words: ‘They will not let me off till I go with them, respond to them.'”

Morgan Scarboro, Kansas Looks at Filling Revenue Gap with Sales Tax Base Broadening. (Tax Policy Blog). “Still facing the distortionary pass-through carve-out, policymakers are seeking to raise revenue from another source. One option, HB 2384, which will be heard in the House Taxation Committee next Tuesday, would expand the sales tax base to some personal services (see below), raising $51 million in 2018.”

Congratulations to Peter Reilly, whose 2014 post Pulling IRS Into Your Business Dispute Might Not Be Such A Good Idea was cited on brief by a by the winning side as a Seventh Circuit Court of Appeals panel overturned a district court decision. Peter explains in Blog Cited In Appellate Brief In Form 1099 Case:

So last week was my week for feeling vindicated.  First there was President Trump’s return, which showed the New York Times to the contrary notwithstanding, that then developer Donald Trump’s nearly billion dollar loss carryover was not an eighteen year “Get Out Of Tax Free” card.  And now we have the Seventh Circuit Court of Appeals in Shiner V Turnoy overturning a District Court decision that I questioned back in 2014.

Well done, Peter.

Robert Wood, Man Draws $4.3M IRS Penalty For Lending $100K To Struggling Business. This is the doctor who used personal funds for the last payroll when a thieving bookkeeper bankrupted his practice.

TaxGrrrl, Taxes From A To Z (2017): C Is For Canceled Debt

TaxProf, The IRS Scandal, Day 1411: Why Did Donald Trump Fire Sally Yates And Preet Bharara, But Not John Koskinen? Maybe Koskinen knows too much. Maybe the President likes the idea of the IRS harassing political enemies as long as he gets to pick them.

 

Tuesday, March 21, 2017

David Henderson, Thoughts on the Republican Health Insurance Reform (EconLog). “As I wrote over 20 years ago, the combination of guaranteed issue and community rating, a key feature of Obamacare, leads to the destruction of insurance markets. No one would advocate forcing insurance companies to issue house insurance policies to people whose houses are burning, at premiums equal to those paid by others whose houses aren’t burning.”

Jack Townsend, Article on Filings in Coinbase John Doe Summons Case. “Also, the affidavit indicates a low level of tax compliance on Form 8949 for bitcoin users.” The IRS says Bitcoin users have to report a capital gain transaction every time they spend their virtual currency. When you impose an onerous reporting obligation on routine transactions, don’t be surprised if compliance isn’t great.

Jeremy Scott, Trump’s Leaked Return Shows Why We Need an AMT (Tax Analysts Blog). “A very wealthy taxpayer had deductions that offset most of his income, so to ensure that some tax was paid, the AMT kicked in.”

Why is this is nonsense on stilts?

The Trump AMT probably the result of AMT loss carryforwards being used up before regular tax loss carryforwards. This probably generated an AMT credit carryforward that offset subsequent regular tax.

The point of an income tax is to measure and tax income — not just to beat up on wealthy people. If deductions allowed in the income tax distort income, get rid of the deductions. Don’t make people compute income different ways until they come up with a result you like.

If Trump really had operating losses – and that isn’t seriously disputed – he shouldn’t pay income taxes until the losses are used up. After all, the point of the income tax is to tax income, not losses.

AMT, which requires taxpayers to compute taxable income at least twice, is expensive for taxpayers and foolish tax policy. If you prefer the results that AMT generates, then go with real tax reform with a broad base, a lower rate, and fewer deductions.

Kay Bell, Springtime is energy tax break time

Lew Taishoff, APPEAL? DON’T APPEAL? YOU’RE FORKED. “This dealt with the SDLIA, whereby the S Corp pays life insurance premiums on the key employee (the sole shareholder, officer, director, etc.) and deducts the same. The premiums supposedly fund the defined benefit pension plan, but the death benefit under said plan is a puny fraction of the death benefit of the life insurance policy.”

News from the Profession. Talent Worries and Opposing Auditor Rotation (Caleb Newquist, Going Concern). “Nothing says accounting news quite like a corgi on a beach.”

Roger McEowen, The Changing Structure of Agricultural Production and…the IRS:

Thus, as more farmers shift the payroll compliance duties to others so that the farmer has more time to devote to conducting farming operations, this case sounds a loud warning – shifting the payroll duties does not shift the responsibility to see that trust fund withholdings have been paid to the IRS. The farmer will be held liable.  The responsibility can’t be delegated.  Make sure to watch payroll taxes. 

Remit your payroll taxes on time. If you use a payroll service or payroll clerk, make it a habit to log into EFTPS, the Eletronic Federal Tax Payment System, to make sure that your payments are actually being made.

Russ Fox, Do Not Blindly Pay IRS Notices, Reason:

The IRS AUR [Automated Underreporting Unit] program is a huge (or should I say “bigly”) money maker for the agency. People blindly pay these notices; after all, if the IRS sends it out it must be right? Well, the last survey I saw showed that two-thirds of IRS notices are wrong in whole or in part. AUR notices are not screened before being sent out. The recipient is literally the first person to have read it.

Russ tells an all-too-common story about how a client taxpayer got a notice saying she had underreported $50,000 of income that was clearly shown on her return.

TaxProf, The Best And Worst States For Business: 90% Of The Top 10 Voted For Trump; 80% Of The Bottom 10 Voted For Clinton.

The political angle is less interesting to me than Iowa’s ranking as tied for 10th best. The ranking, “The First McGee Annual Report on the Best and Worst States for Business,” combines five rankings of business climate to produce a combined score. Iowa’s 40th place ranking in business tax climate is offset by a fifth-place regulatory freedom ranking by the libertarian Cato Institute and a 4th place ranking by the Institute for Legal Reform, which ranks the business friendliness of state legal systems.

Just think of how good Iowa would look if our tax climate were even average.

TaxGrrrl, IRS Tries Again To Make Coinbase Turn Over Customer Account Data. “The newest round of court filings suggests that there might be wide-scale tax evasion related to virtual currency.”

 

Wednesday, March 22, 2017

Career Corner, How to Say No in Public Accounting Without Killing Your Career (Rachel Andujar, Going Concern).

Carl Davis, Amazon Will Collect Every State Sales Tax by April 1 (Tax Justice Blog)

Jack Townsend, Fifth Circuit Rejects Nontraditional Contest of FBAR Willful Burden of Proof Contest

Jim Maule, Tax Return Preparation as a Side Job. “The plaintiff opened her case by saying, ‘I’m a tax preparer and I’m an adult entertainer. So I dance full time and I do taxes seasonally'” Here in Iowa, it usually is a good idea to keep your clothes on this time of year.

Jon Baron, Blockchain, Accounting and Audit: What Accountants Need to Know (Thomson Reuters Tax & Accounting Blog).

Kay Bell, 12 often overlooked tax breaks.  

Lew Taishoff, “DECLARE IT AMONG THE NATIONS” “Tax Court hasn’t got the freewheeling jurisdiction of USDC to go whithersoever it listeth.”

Nicole Kaeding, Joseph Henchman, Complicated State Taxes for Business Travelers (Tax Policy Blog):

Tomorrow [today], the House Judiciary Committee will hold a markup of HB 1393, the Mobile Workforce State Income Tax Simplification Act of 2017.

The bill limits states from imposing or collecting individual income tax on people who are in the state for less than 30 days.

Most states technically require such payments when someone is in the state for even a day (see map below), and even that withholding to be set up in advance. Such practices disrupt interstate commerce and falsely suggest that business travelers earn their income in traveling states and not from the home office. We’ve increasingly heard horror stories of states trying to collect these sums.

Since all states provide a credit for taxes paid to another state, making people fill out 20 or 30 tax returns for a net national wash is lunacy. Most everyone, except some state tax administrators, supports this legislation.

Senators and representatives from a few states that get a disproportionate share of business travel do oppose the bill. In doing so, they inconvenience all of their own constituents who travel as a favor to their in-state revenue departments.

Paul Neiffer, Will Net Investment Income Tax Disappear in 2017. “The House Republications released a “manager’s amendment” Monday night that may lead to the repeal of the net investment income tax effective January 1, 2017.”

Russ Fox begins his filing season Annual Blog Hiatus.

Sam Brunson, Satan, Tea Parties, and the IRS (Surly Subgroup). “Did you hear that the IRS granted a Satanic cult tax-exempt status in ten days?!?”

Stephen Olsen, Second Circuit Tosses Penalties Because of IRS Failure To Obtain Supervisor Approval (Procedurally Taxing).

TaxGrrrl, Taxes From A To Z (2017): F Is For Fat Finger Error

 

Thursday, March 23, 2017

Howard Gleckman, The AHCA’s Tax Changes And Transfers Would Benefit The Wealthy, Hurt The Lowest Income Households (TaxVox)

Jason Dinesen, The 4 Choices a Small Business Owner Has When Their Business is No Longer a Side Business. “Many of the business clients I work with are either side businesses, or side businesses that are turning into “real” businesses. I’ve written before about the struggle of taking a side business and turning it into something more.”

Kay Bell, Health Savings Accounts’ medical and tax advantages. I’m a believer.

Keith Fogg, A Crack in the Glass Ceiling – Victory in a Financial Disability Case (Procedurally Taxing). The IRS has administratively erased a Code provision designed to help repair old tax problems of taxpayers who have lost the ability to manage their affairs. A court case may force the IRS to follow the law. “The facts here follow fairly closely the facts in the case Brockamp v. United States, 519 U.S. 347 (1997), in which another 90 year old gentleman failed to timely file a refund claim and the failure was discovered by his executor after the ordinary statute of limitations had expired.”

Kicking to the wrong side of the field? With the house AHCA vote today, Arnold Kling tells us that our health insurance debate isn’t even addressing the real issues. Health Insurance: Where are the Goal Posts?

Lew Taishoff, THE JERSEY BOUNCE – PART DEUX. “Judge Gustafson, take a bow.”

Megan McArdle, Better Health Care for Less Money? It’s Not Easy. “No government system in the world has actually lowered health-care costs on any sustained basis, absent something like the Greek financial crisis that forces a sudden and drastic reduction in government spending.”

Morgan Scarboro and Nicole Kaeding have news on Multiple Tax Proposals in Minnesota:

With a projected surplus of $1.65 billion, some policymakers in Minnesota want tax reform. Several plans are being discussed in the state legislature, ranging from a $300 million tax cut proposed in the updated budget of Governor Mark Dayton (D) to a $1.35 billion tax cut proposed by House Republicans.

A different sort of debate than we are having in Iowa. But there are similarities:

Minnesota needs broad tax reform. The state currently levies the third highest individual and corporate income tax rates in the country. Its property tax system is unnecessarily complex and burdensome to businesses. The state ranks 46th in our State Business Tax Climate Index.

Iowa’s climate is in 40th place, but Minnesota is significantly worse.

News from the Profession. Robot Auditors Won’t Have a Problem Giving Clients Bad News (Caleb Newquist, Going Concern)

Richard Phillips, GOP Healthcare Bill Cuts Insurance Coverage for Millions to Pay for Tax Cuts for the Wealthy; ITEP State-By-State Estimates (Tax Justice Blog)

Roger McEowen, Farm-Related Casualty Losses and Involuntary Conversions – Helpful Tax Rules in Times of Distress. “The amount of the deduction for casualty losses is the lesser of the difference between the fair market value before the casualty or theft and the fair market value afterwards, and the amount of the adjusted income tax basis for purposes of determining loss.”

Sam Brunson, Update on the Future of Treasury Regulations (Surly Subgroup). “Yesterday, Commissioner Koskinen announced that the IRS was set to begin issuing “subregulatory” guidance again. He didn’t define what he meant by subregulatory, but it probably includes revenue procedures, notices, and revenue rulings, at least.” 

TaxGrrrl, In Search Of Votes, GOP Makes Changes To Plan To Repeal & Replace Obamacare

Tony Nitti, In Amended Health Care Bill, GOP Doubles Down On Tax Breaks For The Rich, Reduced Medicaid Funding. “Eliminating unwise and complex tax” = “tax breaks for the rich.”

 

Friday, March 24, 2017

Riddles of the Profession: Talent Crisis Survey: Where Have All the Accountants Gone? (Adrienne Gonzalez, Going Concern)

Annette Nellen, ACA has lots of tax provisions. A handy list.

Carl Davis, Taxing the Gig Economy (Tax Justice Blog). “Our ever-changing economy demands that lawmakers update our tax laws to keep pace.”

David Brunori, Single Sales, Bad Taxes, and the Need for Guidance (Thomson Reuters Tax & Accounting Blog). “The trend toward single sales factor apportionment is unstoppable.”

David Herzig updates his list of Tax Professors on Twitter (Surly Subgroup)

Elaine Maag, Simplifying And Targeting Tax Subsidies For Child Care (TaxVox). “Congress should consider simplifying and expanding current benefits rather than further complicating the problem by creating three new benefits.”

Jason DinesenAllocating Estimated Payments for Taxable Refund Calculations. “When a taxpayer receives a refund of state income taxes, and the taxpayer took a deduction on their federal tax return, and some of the payments made to the state were estimated payments that may have been made in a different calendar year … well, it can require some math to determine the taxable refund and the deductible portion of the estimated payment.”

Jim Maule, What Sort of Tax or Fee Will Hawaii Use to Fix Its Highways?. “Surely a state caught between higher fuel taxes and arguments about vehicle weight and value would find merit in an idea that takes the best of the weight-based tax and blends it with another measure of wear and tear, vehicle mileage. But I’m not holding my breath.”

Amazon celebrates? Amazon tax-free shopping ends nationwide on April 1 (Kay Bell). I think it will become clear that sales tax avoidance isn’t what makes Amazon’s business model work. Income tax avoidance, that always helps.

Lew Taishoff, “THE MOST UNKINDEST CUT OF ALL”. “Tax Court, per Judge Lauber, has unloaded upon you 188 pages, demolishing your twelve (count ‘em, twelve) lawyers under a barrage of eighteen (count ‘em, eighteen) lawyers, in Amazon.Com, Inc. & Subsidiaries, 148 T. C. 8, filed 2/23/17.” A $234 million win for Amazon.

Robert Wood, Man Could Face 5 Years For $18M IRS Employment Tax Violation. The IRS doesn’t look at failure to remit payroll tax as an alternate form of borrowing. They see it as an alternate form of stealing.

TaxGrrrl, Tax, Medicaid Tweaks Not Enough As GOP Postpones Vote On Obamacare Replacement:

After hours on Thursday, President Trump reportedly pushed for a vote on Friday and Ryan has agreed. However, it appears that the GOP still does not have the necessary support. Rep. Mike Simpson (R-ID) said about the health care proposal, “They’re going to bring it up, pass or fail.”

Considering the poor results from passing ACA in a hurry, maybe a hurried repeal isn’t a great idea.

TaxProf, The IRS Scandal, Day 1416:  ‘Media Attention’ And IRS Abuse. “Aside from a small number of groups related to the Occupy Wall Street movement and the defunct advocacy group Acorn, libertarian and free-market groups were almost exclusively targeted.”

Veronique De Rugy, Don’t Let Elizabeth Warren and Bernie Sanders Kill Tax Day (Reason.com):

Sens. Elizabeth Warren (D-MA) and Bernie Sanders (I-VT), think that is one time too many. They want the Internal Revenue Service to prepare tax returns on behalf of taxpayers instead of leaving it as an individual responsibility.

This idea is pitched as a “simplification.” And, to be fair, the complexity of our tax code is undeniable. It results in tax-compliance costs that can reach nearly $1 trillion annually, according to my colleague Jason Fichtner. However, the solution to this complexity isn’t to add to the opacity of the system and make the cost of government even less visible to those picking up the tab. There’s already too much of that.

Sometimes I think that having the IRS process taxes from information returns and just send a statement and a refund to taxpayers with only wage income would be good policy. After years of watching the way the IRS and the tax law really work, though, I don’t think it’s possible. The tax law is too complex, and the challenge of doing it right is probably beyond what the tax agency could accomplish with adequate competency.

I am sympathetic to the argument that it’s good for taxpayers to see what they are paying, and how, but I’d be more persuaded if the current system had done a better job of preventing high rates and complexity.

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