This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses a rare Tax Court victory for a taxpayer who succeeded in being treated as a real estate professional for purposes of the passive loss rules.
A.M. real estate pro, P.M. stockbroker
The IRS wins most cases in Tax Court involving taxpayers whose real estate rental losses have been disallowed. The tax law, after all, is stacked against taxpayers wanting those losses. They are automatically passive unless the taxpayer passes two stern tests:
- The taxpayer has to work at least 750 hours during the year in a “real estate trades or businesses,” and
- The taxpayer has to work more in real estate than in anything else.
This “real estate professional” rule usually filters out taxpayers with day jobs outside of real estate.
Yesterday’s taxpayer victory in Tax Court on this issue is a notable exception. The taxpayer worked mornings on her rentals. Then she went to her other job. Judge Paris takes up the story:
Petitioner has been a stock broker for more than 30 years. She began her career with a national brokerage house in 1983, and in the year in issue she was employed by Wells Fargo in its brokerage department. During the year in issue she managed a number of individual accounts with total assets of approximately $70 million. Petitioner generally worked at her brokerage office from 12:30 p.m. until the U.S. markets closed each weekday. Petitioner was compensated on the basis of her production.
With the markets closing at 3 p.m., that’s a 2 1/2 hour workday.
The taxpayer submitted evidence that the court found credible evidence documenting 889.25 hours of work on the real estate – clearing the 750 hour hurdle.
That still left the other problem — showing that she worked more in real estate than her brokerage business. Her 2.5 hour workday helped a lot here, and the court found that she worked 577.5 hours in that business.
Clearing the real estate professional test only gets you in the door. It only means your losses aren’t automatically passive. You still have to prove material participation under the same hours-based tests that apply to other businesses. The taxpayer did so, primarily under the “all of the participation in the activity” test.
Unfortunately, the court was unconvinced by the taxpayers recordkeeping for other deductions she took. For example, auto expenses were disallowed for lack of a mileage log. But one deduction stands out:
Although petitioner was a credible witness, it is clear from her testimony and the other evidence in the record that she did not keep her business and charity expenses — or her substantiation of each — separate, as those facets of her life often intersected. There is, however, an evidentiary basis in petitioner’s testimony and the other evidence presented at trial for allowing a portion of petitioner’s deduction for these expenses. Therefore the Court will follow the Cohan rule and allow petitioner one-third of her claimed deduction for office supplies, stamps, and calendar expenses.
Assuming that the calendar enabled her to prove the time she spent on the different activities, it’s the best 1/3 deductible expense she’s ever had.
Cite: Windham v. Commissioner, T.C. Memo. 2017-68 (Apr. 24, 2017)
Monday, April 24, 2017
Annette Nellen, Idaho Keeps Sales Tax On Groceries. “The governor vetoed this effort due to the revenue loss and the fact that a refundable income tax credit exists to reduce the burden of the tax.”
Career Corner. 5 Ways to Robot-Proof Your Public Accounting Job (Brad Hughes, Going Concern)
Jim Maule, Tax Dollars to Finance the Wealthy? Not Necessary and Not Appropriate. “If the owners of U.S. Bank Arena cannot make it work using their own money, they can do what every middle-class would-be entrepreneur does when the economics don’t work. They abandon their plans, or close down the enterprise, and find another way to accomplish their goals.”
Kay Bell, Tax Freedom Day 2017 has arrived! The national day was yesterday. Iowa’s was April 14.
Keith Fogg, False Return Conviction Provides Basis for Collateral Estoppel to Prevent Discharge (Procedurally Taxing). “Reasons exist for drawing a distinction between collateral estoppel in the bankruptcy discharge context and civil fraud penalty. Had the court articulated those reasons, I would have come away from the opinion with a more comfortable feeling.”
Lew Taishoff, ASK. “Well, here’s the story of Mark Glenn Hexum, Docket No. 13994-16, filed 4/21/17. Mark Glenn didn’t ask his trusty preparer, and it cost him.”
Lisa Christensen Gee, No Room to Swing a CAT in Louisiana Legislature (Tax Justice Blog). “But income tax reforms are apparently a non-starter with a large enough group of lawmakers that many of these progressive revenue solutions are being viewed as politically inviable. In light of this, Gov. Bel Edwards has presented a reform plan that includes a Commercial Activities Tax (CAT) at its core, catching many off guard and drawing early and growing opposition from the business community.”
Robert D. Flach has the season’s first Buzz, with a kind shout-out to the Tax Update among his interesting tax links.
Roger McEowen, Tax Treatment of Commodity Futures and Options:
Gain and loss from transactions that are hedges generate ordinary income and loss and are not subject to the loss deferral rules and the “mark-to-market” rules that apply to speculative transactions. I.R.C. §1221 and Treas. Reg. §1.1221-2. Because a hedge is entered into in the normal course of the taxpayer’s business (such as to lock-in a position in a particular commodity), any resulting gain is subject to self-employment tax.
However, if the transaction involves speculation, resulting gains and losses are treated as capital gains and losses.
There are a lot of ways to botch a hedge and end up with big and useless capital losses.
Russ Fox, That Was the Tax Season that Was:
Deadlines matter. Almost every tax professional I know sets deadlines for receiving paperwork from clients; ours was set at March 15th. We did get to many returns that came after that date, but for the client who wondered why I stifled a laugh when he dropped his paperwork off on April 17th and said he’d be in tomorrow to pick up his completed return. He’s on extension, of course.
I’m not sure if laughter is what I would have stifled.
Scott Drenkard, Louisiana’s Proposed Tax Plan is a Bad Deal (Tax Policy Blog). “In recent days, more details of this plan have emerged, and the structure is quite complex, with labyrinthian rules for pass-throughs, regular C-corporations, and manufacturing C-corps. See Jason DeCuir’s summary here.”
TaxGrrrl, How To Fix Your Mistakes By Filing An Amended Tax Return. “Mistakes are totally fixable.”
TaxProf, Trump Promises To Unveil ‘Massive’ Tax Cut On Wednesday, Leaving Treasury Department Officials ‘Speechless’.
Tuesday, April 25, 2017
Brian Gongol, Two rules for tax reform:
- Government shouldn’t take any more money in taxes than necessary.
- One generation shouldn’t take from another.
I would add “3. The only purpose the tax system is to fund the government with as little disruption and expense to taxpayers as possible.” No public policy run through tax returns.
Career Corner. Consider a Mid-Market Accounting Firm Before Taking a Job in Industry (Marsh Leest, Going Concern)
Des Moines Register, Branstad defends controversial tax credit as state seeks to bolster manufacturing. The refundable research credit. The article quotes Governor-in-waiting Kim Reynolds on tax reform:
Reynolds, who will succeed Branstad as governor if he is confirmed as U.S. ambassador to China, has said tax reform is among her top priorities. She said she prefers a comprehensive approach rather than “one-off” looks at individual credits.
“To really look at comprehensive tax reform, we need to put everything (on the table) and start doing the runs and take a look at what makes Iowa more competitive and how we can utilize not only a lower and more competitive tax rate, but some of the incentives that we have in place to encourage companies to invest in Iowa,” she said. “(We need) to work with existing companies so that they can grow and expand, and most importantly, most importantly, hire Iowans and provide quality careers so that we can continue to grow the economy.”
The article notes that 80% of the credits go to 29 companies, and most of those to just 8 or 10. The thousands of other Iowa businesses, and the three million Iowa individual taxpayers, pick up the tab for the $375.4 million in credits – about $125 per Iowan. Putting that money towards lowering Iowa’s highest-in-the nation corporation tax would do something for all businesses wanting to invest and grow in Iowa, except maybe for 29 or so.
Eugene Steuerle, How Both Public Tax Reform and Private Sector Initiatives Can Strengthen Charities:
What government can do:
Allow all taxpayers—even current non-itemizers—to claim a deduction for contributions above some minimum amount.
Extend the deduction to gifts made by April 15 or filing of one’s tax return—similar to the extended contribution date for Individual Retirement Account contributions– rather than December 31 of the previous calendar year.
Create a better donation-reporting system to IRS to reduce tax non-compliance, with a reward of an extra deduction for those donations; the improved tax compliance should more than pay for the extra reward.
Make it easier for individuals to make donations from their IRA accounts.
Reduce and simplify the excise tax on foundations. Encourage charitable bequests, especially if the estate tax is cut or repealed.
The whole post is worth reading. The third item creates obvious problems for little charities run by volunteers. That’s a lot of voters, so I doubt if it will ever be comprehensive. Still, for big foundations and big donations, I can imagine third party reporting covering a large percentage of donations.
Jack Townsend, Three Offshore Account Holders Sentenced.
Kay Bell, Government shutdown could delay billions in tax refunds
KSCJ.com, IOWA GOP LAWMAKERS TO AIM FOR TAX REFORM IN 2018. Audio. The argument raised against revenue-neutral tax reform appears to be “Kansas!”
Leslie Book, Counsel Clarifies the Limited Rights of Unenrolled Preparers in Tax Court Cases (Procedurally Taxing). “Most unlicensed tax return preparers are not admitted to practice before IRS Counsel attorneys. Despite that, in a 2014 Chief Counsel notice the IRS emphasized that Counsel attorneys should interact with a taxpayer’s representative if there is a valid POA on file authorizing the representative to act on the taxpayer’s behalf.”
Lew Taishoff, UNVESTED STOCK, VESTED. “That’s tax avoidance with no economic substance or business purpose. So in Year Five the guys get nailed for $45 million in tax, plus 20% chop.”
Nicole Kaeding, Wait. How Would Louisiana’s Gross Receipts Tax Work? (Tax Policy Blog). “This plan is a nightmare.”
Peter Reilly, Century Old Tax Dispute Clouds Property Title. “At any rate, Laramie County taxed Union Pacific’s mineral rights in 1911. Union Pacific did not pay.”
Robert D. Flach, THAT WAS THE TAX SEASON THAT WAS – 2017. “The IRS did much better processing returns this year.”
Robert Wood, Amending IRS Tax Returns Has Extra Opportunities, Extra Risks. “Most people suggest you must amend within three years of your original return filing. Actually, you must file a Form 1040X within three years from the date you filed your original return, or within two years from the date you paid the tax, whichever is later.”
Sam Brunson, Grover and Godwin (Surly Subgroup). “Which is to say, even if the 16th Amendment were the proximate cause of Hitler’s rise (which, btw, it’s not), we can’t pretend that without it, the world would be puppies and roses.”
TaxGrrrl, Indian Police Allege IRS, FBI, Other Law Enforcement Not Interested In Phone Scam Arrests. “Singh said there was ‘not much’ collaboration with American officials, noting that ‘[w]e had a visit from one FBI agent based out of Delhi some time ago” but that there had been no follow-up.'” If true, that’s a crime, if only morally.
TaxProf, Trump Signs Executive Order Rolling Back Obama Tax Regulations
Wednesday, April 26, 2017
Alan Cole, Could Trump’s Corporate Rate Cut to 15 Percent be Self-Financing? (Tax Policy Blog). “In order to make a deficit-neutral cut in the corporate income tax rate, other deficit-reducing policies would be necessary.”
Anosh Ali, Trump’s Back-to Basics Tax Plan: It’s Tremendous! (Surly Subgroup). Fake news, but maybe accurate.
Career Corner. A Non-Exhaustive List of What You Should Be Doing Now That Busy Season is Over (Adrienne Gonzalez, Going Concern).
Jason Dinesen, Can an Iowa Tax Return be Amended from Joint to Separate Filing Status?
Jim Maule, Pretending a Tax Payment Is For Something Else. “There’s a man in Montana who is unhappy that the county treasurer has not cashed the check he wrote in November to pay his property tax bill… In the memo line, he wrote, ‘sexual favors.'”
Kay Bell, What does Jason Chaffetz’s impending departure mean for IRS Commissioner John Koskinen? “Chaffetz has been trying to boot Koskinen from his IRS office since July 2015.”
Len Burman, A 15-Percent Corporate Tax Rate Could Create An Enormous Tax Shelter (TaxVox). “Combining a corporate tax rate of 15 percent with a top individual rate of 37 percent (another likely Trump proposal) would create a powerful incentive for wealthy people to squirrel away a large portion of their assets in a corporation.”
Leslie Book, Whistleblower Who Prompted Voluntary Compliance Not Entitled to Reward (Procedurally Taxing). “The opinion concludes that a whistleblower who provides information that exposes taxpayer misconduct and brings about a voluntary change in a taxpayer’s behavior in future years is not entitled to receive a reward.”
Lew Taishoff, EARNINGS & PROFITS. ” The C Corp isn’t a party to this case, so we don’t know what its tax posture might have been, but there was enough cash in the till for Gregory to write a $5K check for his mortgage interest, among other things not itemized by Judge Colvin.”
Matt Gardner, Does a 15 Percent Corporate Tax Rate Sound Low? For Dozens of Major Corporations, Maybe Not (Tax Justice Blog)
Robert D. Flach, JUST BECAUSE IT IS “DEDUCTIBLE” DOESN’T MEAN YOU CAN DEDUCT IT:
This past tax season I got the following email from a client –
“I was just informed that I am able to write off my union dues which were $370 for the year.”
The client was correct. Union dues are deductible on Schedule A as a “Miscellaneous Expense”. But the client did not actually get a tax deduction for union dues on her 2016 tax return.
One client of mine, an Iowan, asked me why I hadn’t taken his “consumer rebate” on his return. He pointed me to this, which turns out to be the optional deduction for sales taxes instead of income taxes. Iowans at professional income levels get a better deal by deducting their income taxes, and you can’t deduct both. And most clients at those income levels are subject to AMT, so even if you could take the deduction, it wouldn’t help.
As Robert says, “So just because someone tells you, or you hear or read somewhere, that an item is ‘deductible’ does not mean you can actually deduct it on your tax return.”
Roger McEowen, Liability Associated With A Range Fires and Controlled Burns. “Range fires typically don’t lead to personal liability issues.” Unless you’re an arsonist, of course.
TaxGrrrl, Trump Orders Review Of Obama Tax Rules. “Viewed alone, undoing the rules would appear to be at odds with Mr. Trump’s campaign pledge to reduce incentives for companies to move overseas to minimize taxes.”
TaxProf, Reports Of Extreme Income Inequality Are Exaggerated Due To Shift In S-Corporation Income Among The Very Wealthiest. Quoting an academic paper: “Put simply, so far in the 21st century, all the action in top income shares has been S-corporation income at very, very high income levels.”
Thursday, April 27, 2017
Carl Davis, Income Tax Offers Best Bang for the Buck in Alaska. (Tax Justice Blog)
David Herzig, We Should be Taking President Trump’s Tax Plan Seriously (Surly Subgroup). “President’s tend to get their policy preference’s enacted into law. So, dismissing Trump’s single page proposal as fodder is mistaken.”
Don Boudreaux, Taxing. “The core economic case for tax cuts is that they reduce the obstacles to creative and productive activities.”
Howard Gleckman, Trump’s Familiar Tax Plan Would Add Trillions To The Debt (Tax Vox). “While Trump and his aides use the phrases ‘tax reform’ and ‘tax cuts’ interchangeably, no-one should be confused. This is not reform. It is, rather, an enormous tax cut.”
Janet Novack, On His 97th Day As President, Donald Trump Made Tax Reform Less Likely. “Administration’s one page plan is actually a setback for reform, some seasoned tax hands say.”
Jason Dinesen, Bookkeeping Software is Deceptively Simple. “The problem is, the simplicity is deceptive. It’s easy to enter transactions, but it’s also easy to enter things the wrong way, thus creating trainwrecks that people such as I have to fix.”
John Cochrane, Inflating our troubles away? “We live on the edge of a run on sovereign debt. The US has a shorter maturity structure than most other countries, and a greater problem of unresolved entitlements. Despite our “reserve currency” status, we may actually be more vulnerable than the rest of the high-debt, large entitlement western world.” (Link via Arnold Kling)
Kay Bell, Popovich’s big tip prompts tips about taxes & gratuities. “Pop, as the coach of the San Antonio Spurs is known, apparently left an almost 613 percent tip after a visit April 21 to McEwen’s on Monroe. The dollar amount is just as astounding: $5,000.”
Kevin Williamson, Cutting the rate is not enough. “Donald Trump’s tax plan calls for reducing the corporate-income tax to 15 percent. That’s about 15 points too high.”
Lew Taishoff, THE JUDGE BOOTS HIS “S”. Mr. T notes that Tax Court Judge Buch has taken the unusual step of moving a case from the “small” case docket, where decisions are non-precedential, and moving it as a “case of first impression” to the regular docket. He questions the wisdom of this decision involving taxpayer “Kev D”:
Kev D is pro se. My rapid Google search does not indicate Kev D is an attorney, a CPA, EA or RTRP, or has any litigating credentials whatsoever. IRS has a gunner from Office of Chief Counsel on this case. This is less a situation for getting a useful precedent for the public at large than a chance for IRS to shoot some poor fish in a barrel, incidentally (or maybe not so incidentally) picking up useful ammo for the next fish-shoot.
A proper precedent, arising out of summary J, should result from a matter fully papered and argued. On both sides.
One hopes Kev D is a remarkably talented pro-se litigator.
Paul Neiffer, Will Farmers See Top 15% Tax Rate Under Tax Reform. “President Trump is calling for a top rate of 15% on business income. However, the details are important and we will not know them for several months and in many cases, farmers would see their tax bill go up, not down.”
Russ Fox, While I Was Out: The BOE Is In Deep Trouble. “The report is devastating, and the reactions have been uniform across both sides of the aisle in Sacramento.”
Scott Greenberg, Details of the Trump Administration Tax Proposal Released Today (Tax Policy Blog):
All in all, the document does not present many details about the administration’s intentions regarding tax reform; in fact, it is less specific than the tax proposal released by the Trump campaign in September 2016. However, the document does indicate some of the administration’s central priorities for tax reform: large rate cuts for U.S. business income, substantial individual income tax reductions, and the curtailment of certain tax preferences.
There’s a long way to go.
TaxGrrrl, About Those Huge Tax Receipts Secretary Mnuchin Mentioned…
Tyler Cowen, U.S. Can Afford Trump’s Radical Tax Cut: “We haven’t been presented with enough details to conclude whether such a plan can work, but I’ve been seeing some of my fellow economists claim — incorrectly — that we can’t afford those changes. There are some potential problems with President Donald Trump’s proposal, but there is no fiscal reason such a tax plan ought be ruled out.”