This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses a recent Tax Court case disallowing the deductions from a bed and breakfast operated out of Larry Bird's former home under the vacation home rules.
Owner of Larry Bird’s house fouls out in Tax Court
Larry Bird’s basketball career has been remarkable. As a player in high school, college and the NBA, he was an all-star. He is now winding down a successful career as a team executive.
An attempt to cash in on Mr. Bird’s fame was less successful. An Alaska attorney and his domestic partner formed French Lick LLC in 2007 and bought a house where Mr. Bird had once lived. They began operating a bed-and-breakfast there. The owners continued to live in Alaska, using on-site managers to run the business.
The plan went awry. Judge Kerrigan takes up the story:
About June 1, 2008, French Lick began operating the Indiana property as a bed and breakfast. Between May 2008 and January 2010 French Lick employed a series of managers for the bed and breakfast at the Indiana property. French Lick’s contracts with the managers provided them with an apartment on the Indiana property to use as their personal residence. The last manager of the bed and breakfast resigned in January 2010, and a replacement manager was not hired.
That ended the operation as a bed and breakfast. The deductions for the operations on the taxpayer’s returns continued through 2011. The IRS called a technical.
Most real estate loss disallowance cases involve the passive loss rules. Here the IRS called an older play — they said that the owner losses were limited under the “vacation home” rules of Sec. 280A. Judge Kerrigan explains (my emphasis, citations and footnotes omitted):
Under section 280A(a) generally no deduction is allowed with respect to any dwelling unit that the taxpayer uses as a residence during the taxable year. Any deductions to which petitioner would otherwise be entitled under either section 162 or section 212 will be disallowed if he used the Indiana property as a residence during the tax years in issue within the meaning of section 280A(a). A dwelling unit is used as a residence if the taxpayer uses it for personal purposes for more than the greater of 14 days or 10% of the number of days during the taxable year that the unit is rented at a fair rental value. A passthrough entity is considered to have made personal use of a dwelling unit on any day on which any beneficial owner would be considered to have made personal use of the unit.
But not every day an owner spends on the property counts against the 14-day/10% tests:
Congress did not intend for days spent primarily repairing and maintaining the property in question to count as personal use days. Likewise, a day spent traveling to or from the property, on which the taxpayer is at the property but performs no repairs and maintenance, should not be counted as a day of personal use if the principal purpose of the trip as a whole is to perform repairs and maintenance.
The Tax Court record showed the taxpayer stayed at the house 26 days in 2010 and 33 days in 2011. It was up to the taxpayer to show that the time spent there was performing maintenance and repairs. The taxpayer failed to convince Judge Kerrigan:
Petitioner testified that he spent numerous hours on “business activities” during each of his trips to the Indiana property. He relied on daily activity logs (logbooks) that he created during examination.
When you have to create your logbooks during the examination, that’s usually a bad sign.
Petitioner relies on his logbooks to establish that he engaged in repair and maintenance activities during his trips to the Indiana property. His testimony did not provide specific details about the activities that he performed. He testified that he did some work on the grounds of the Indiana property. No other witnesses testified to verify that petitioner conducted repairs and maintenance during his trips to the Indiana property.
From petitioner’s testimony and the logbooks, there is no evidence of disrepair of the Indiana property and no specific details of what was to done to improve it. … Aside from petitioner’s own visits, there was no specific use for which to repair and maintain the property.
During the tax years in issue a series of caretakers lived at the Indiana property. … Petitioner’s records indicate that these caretakers had duties and responsibilities with respect to maintaining the property and that he had conversations with the caretakers about the status and upkeep of the property at least once per month. The logbooks report that during his trips petitioner engaged in activities maintaining the grounds of the Indiana property. However, the records that petitioner maintained for French Lick show that French Lick employed a landscaping firm during the tax years in issue.
The taxpayer introduced receipts related to the trips to support his contention that he was working on the property, but the Judge did not find that they supported that contention.
Worse than passive. The court ruled that the taxpayer failed to prove that his personal use was less than 14 days. The result was a disallowance of all losses — under Sec. 280A. This is a worse result than losses disallowed under the “passive loss” rules. Passive losses are just deferred until, at worst, the property is disposed in a taxable transaction. Sec. 280A disallowed losses carry forward, but aren’t triggered on disposition.
Adding to the tax pain, the judge also imposed a 20% “accuracy-related penalty”
The Moral? Passive losses are bad, but “residential” losses are worse. Also, if you claim you are visiting the property to do repairs, keep a good log — and have a ready explanation for why your effort is needed when you have on-site caretakers and landscapers.
Cite: Cooke v. Commissioner, T.C. Memo 2017-74 (May 1, 2017).
Monday, May 1, 2017
Alan Cole, Which Places Benefit Most From State and Local Tax Deductions? (Tax Policy Blog). “The ten counties benefiting most from these deductions are all located in four states—ones that, like California, are known to have high tax burdens generally”
Annette Nellen, President Trump’s 1-page Tax Plan. “The plan is quite similar to what Trump talked about and had posted on his website during the presidential campaign.”
Howard Gleckman, What Team Trump Didn’t Tell Us About His Tax Plan (TaxVox):
This all reminds me a bit of my long-ago college days. Even today, I shudder at the thought of what happened when, instead of the 20 page paper the professor requested, I delivered a one page outline with a promise to produce the rest by the end of the semester. It didn’t go well.
This one-pager is the policy equivalent of my undergraduate misadventure. And it probably deserves the same grade.
In politics, they grade on a generous curve.
Jim Maule, Road Taxes and User Fees as a Form of Pothole Insurance. “As bad as public government can be at times, privateers are much worse.” Because government officials are all selfless, hard working, caring, and efficient, despite of all the incentives otherwise, it seems.
Kay Bell, Popular property tax deduction among those threatened by Trump’s tax reform proposal
Kristine Tidgren, How Did Agriculture Fare During the 2017 Iowa Legislative Session? (Ag Docket)
Leslie Book, Tax Court Holds That Veteran’s Submission of Election to Exclude Foreign Earned Income is Too Late When Submitted After Service Issues a Substitute Return (Procedurally Taxing).
Lew Taishoff, I’M SHOCKED…SHOCKED. “Turns out an expert witness hired by IRS actually lied.” In the Michael Jackson Estate case, no less. Is nothing sacred?
News from the Professionals. My Tax Season Recap: Business is Booming, But I’m Starting to Hate this Crap (Jason Dinesen). Jason says what we all are thinking.
Paul Neiffer, Fuzzy Details On Trump Tax Plan
Peter Reilly, You Should Just Hang Up On IRS Collection Calls Legitimate Or Not.
Questions from the Profession. Is There a Smart Person Shortage? (Going Concern).
Robert D. Flach offers A BETTER WAY. “Obviously the best solution to the problem of tax fraud and error in this situation is to remove the distribution of government benefits, and all refundable credits, from the Tax Code.”
Robert Wood, United Settles With Passenger Dragged Off Plane, But Can IRS Tax It? “Just about everything is viewed as income by the IRS. However, one big exception is for compensatory lawsuit recoveries for personal physical injuries and physical sickness.”
Roger McEowen, It’s Spring, and Roger’s fancy turns to thoughts of love. Disinheriting a Spouse – Can It Be Done?.
Russ Fox, Trump’s Tax Plan. “The final result of tax reform won’t be known for months, and it’s probable what emerges from Congress won’t look anything like what’s been proposed.”
Stephanie Hoffer, How Will Trump’s Tax Plan Affect Middle-Income Families? (Surly Subgroup)
TaxGrrrl, More Arrests – And A Guilty Plea – In IRS Phone Scams. “The suspects are alleged to be responsible for almost $8.8 million in schemes that defrauded more than 7,000 victims.”
Tax Justice Blog, Tax Justice Digest: Trickle-down revived, corps aren’t paying state taxes, young immigrants and taxes, etc..
Tony Nitti, Devoid Of Details, Trump’s Latest Tax Plan Nothing But Empty Promises
Tuesday, May 2, 2017
Annette Nellen, Tax principles for the digital age. “At the start of the 21st century, I was involved with a project with the AICPA on tax reform. An outcome of our task force work was a set of ten principle of good tax policy.”
Brian Gongol, White House says it will propose biggest tax cut ever. “Everyone like the idea of a tax cut, but it’s not always the right prescription.”
Career Corner. How to Get Ahead: Work on Your Writing (Caleb Newquist, Going Concern). A thousand words a day on your blog should cover it.
Dylan Grundman, Time to Repeal State Deductions for Federal Income Taxes (Tax Justice Blog). “Lawmakers in Alabama, Iowa, Louisiana, Missouri, Montana, and Oregon should strongly consider repealing this costly, regressive, and volatile tax break.”
Gavin Ekins, UK Government Abandons Structural Tax Reform (Tax Policy Blog)
Greg Mankiw, How Best to Tax Business. “The Better Way plan, championed by House Speaker Paul D. Ryan and Representative Kevin Brady, the Republican chairman of the Ways and Means Committee, promises fundamental changes in the nature of business taxation, most of which would, in my view, be steps in the right direction.”
Kay Bell, These May tax moves could make you very merry.
Keith Fogg, Bias Creating Remand (Procedurally Taxing). If your Tax Court judge turns out to be a tax cheat, does that call her fairness into question?
Lew Taishoff, FOOLISH INCONSISTENCY. “Bernie and Mary Ellen are in a jurisdictional joust over the Section 6662(a) chops IRS handed out for Bernie’s and Mary Ellen’s inconsistent reporting of gain from a partnership. And they never bothered to file Form 8082 or otherwise Tell IRS they were deviating from the K-1 they got.”
Peter Reilly, George Will And Columnist Tax Literacy. In which Peter ascribes to me a belief I do not hold:
George Will now having demonstrated severe tax illiteracy leaves just Joe Kristan as the only person I know of with any sense who buys the notion that IRS minions stole the 2012 election.
I don’t believe the IRS decided the 2012 election. I don’t think it was close enough for that to make the difference. I do believe that the IRS was grossly partisan and unfair in their treatment of Tea Party groups. That’s plenty of scandal by itself.
Robert D. Flach has this week’s fresh Buzz roundup of tax news. Interesting stuff, including this: “I don’t ‘hate’ the business yet ”
Robert Wood, Which IRS Violations Are Evasion Or Willful Depends On The Facts. “If you didn’t know you had a legal duty to report income or a foreign bank account, you might reason, how can you be treated as willful? Unfortunately, it is not that simple.”
Roger McEowen, Specific Property Devised in Will (or Trust) That Doesn’t Exist At Death – What Happens?
Shu-Yi Oei, We Hear What We Want to Hear (Surly Subgroup). “A quick Google search yielded me this citypages top 10 country tunes for tax day list, which includes Johnny Paycheck’s ‘Me and the IRS‘ (1978), Willie Nelson’s ‘Who’ll Buy My Memories?’ from his album, The IRS tapes, and Sleepy LaBeef’s ‘There Ain’t Much After Taxes‘ (1996).”
Wednesday, May 3, 2017
Carl Smith, Taft v. Comm’r: Innocent Spouse Relief Generates a Refund (Procedurally Taxing). “In any event, the Taft opinion provides a useful reminder of some of the rules on getting a refund under the innocent spouse provisions.”
Jack Townsend, Fascinating Case on Jury Instructions on Definition of Element of the Crime Beyond the Statutory Definition. “I offer it because the most interesting holding in the case involved a prior tax crimes case and the setting of when a jury instruction might turn into a directed verdict.”
Jason Dinesen, Is Tuition for Christian Schools Deductible in Iowa?
Jim Maule, How Not to Claim A Residential Energy Credit. “Fifth, and this is the clincher, the invoice stated that the windows were installed in 2011, but the taxpayer claimed the credit on his 2010 federal income tax return.”
Kay Bell, Trump taking truckers’ call for increased gas tax to heart.
Megan McArdle, Why People Care About the Estate Tax:
For political points. Democrats spend a great deal of time fulminating about a tax that raises roughly no revenue for the Treasury. This is not the only such inconsequential policy they care about, mind you; President Obama’s obsession with changing the depreciation schedule for corporate jets springs readily to mind. But Obama is a politician, and politicians are always happy when they can find some complete nonissue that sounds like “tax breaks for corporate jets” and prate about it on the stump to an electorate that doesn’t know fancy words like “depreciation schedule” and isn’t going to bother to learn them. Even leftish policy wonks sort of roll their eyes at the sordid necessities of politics, and move on to more important matters. But not with the estate tax. About the estate tax, left-wing wonks care.
Then you have the Republicans. I understand why Republicans are so gung ho to get rid of the estate tax: Simply put, very rich people will donate a lot of money to campaigns that suggest their children ought to be able to inherit their wealth tax-free. What is astonishing to me is how successfully Republicans have been able to rebrand the estate tax as the “death tax,” and persuade 71 percent of voters that inheritance taxes are unfair.
The piece makes an argument for either a modest estate tax or the repeal of date-of-death basis step ups.
News from the Profession. Here Are Your 2016 Elijah Watt Sells Award Winners (Caleb Newquist, Going Concern)
Renu Zaretsky, The Case for Tax Policy Education and Teacher Appreciation (TaxVox) “Maybe learning about tax policy—and associated math and finance—really is harder than organic chemistry. But perhaps it’s not as hard as school systems giving teachers one week a year to teach basic tax starting in third grade.”
Richard Phillips, Critical Anti-Tax Evasion Legislation Under Attack (Tax Justice Blog). He’s talking about FATCA. Because you can’t get the real criminals without shooting lots of jaywalkers.
Robert D. Flach, TAX REFORM – DOING AWAY WITH DEDUCTIONS AND LOOPHOLES. “I have always strongly felt, and continue to do so, that the tax return should not be used to distribute government social welfare and other program benefits.”
Scott Drenkard, Louisiana Scraps Gross Receipts Tax Proposal (Tax Policy Blog)
TaxGrrl, Trump Considers Raising Gas Tax To Pay For Infrastructure
Thursday, May 4, 2017
David Brunori, Higher Taxes In a High Tax State Are Highly Problematic (Thomson Reuters Tax & Accounting Blog). “Throughout the country we have seen a long term migration of people and businesses from high tax states to lower tax states. If this is all true, and I believe that it is, would a Connecticut politician actually want to raise taxes?”
Des Moines Register, That went well. Medica, the last insurer selling individual health policies in most of Iowa, likely to exit:
Medica Vice President Geoff Bartsh said his company would have continued selling insurance throughout Iowa if Wellmark and Aetna had stayed in the market. But Medica, which lost $1.5 million covering 14,000 Iowans last year, couldn’t afford to take on tens of thousands more from the other two carriers, he said.
“The decision wasn’t, ‘Should we continue?’ It was, ‘Should we be the only game in town?’” Bartsh said in an interview Wednesday.
ACA defenders say that “uncertainty” about the Trump administration’s approach to the insurance exchanges is to blame. Still, the statutory and regulatory structure of the ACA remains in place. If mere uncertainty can crash the market, it wasn’t very stable in begin with.
Hank Stern, And then there were… None? [UPDATED] (InsureBlog). “So what happens when there are literally no carriers left in a given market? This goes far beyond the stupid promise that ‘if you like your plan, you can keep it.'”
Jason Dinesen, When Should I Form an S-Corp? “You should look at forming an S-corp when your net income from the business starts to approach the amount of a “reasonable salary” for the work you do.”
Kay Bell, Trump tweets threaten future funding fight and possible ‘good’ government shutdown this fall.
Kyle Pomerleau, Why Full Expensing Encourages More Investment than A Corporate Rate Cut (Tax Policy Blog). “An intuitive way to understand how is that expensing is aimed entirely at new capital investment, whereas a corporate rate cut is not.”
Lew Taishoff, CLEAR THE COURTROOM. “This is a very rare occurrence in Tax Court. I can remember only one prior instance, as to which see my blogpost ‘The Carousel Is Closed,’ 10/10/14, anent the mystery fact witness in the great Amazon case.”
Megan McArdle, Trump’s Tax Proposal Is Just a Symptom of the Disease:
Perhaps even more worrying, however, is the amount of detail that is still missing. During the Q&A, I heard some variant of “We’ll provide the details at an appropriate time” more than once. This after Mnuchin opened by talking about how long they’d been working on this.
This conveys the impression that the administration cares a lot about cutting taxes for very wealthy people and corporations, and considers the other elements of the plan to be filler, to be sketched in brief if at all. Unfortunately, you can’t run policy that way, because policy is detail.
These “details” are what I do for a living, because they are important and expensive enough to require taxpayers to pay professionals to deal with them. I hope somebody up there is sweating them.
Meg Wiehe, State Rundown 5/3: Lawmakers See Value in State EITCs, Danger in Tax Cut Triggers (Tax Justice Blog)
News from the Profession. Here’s a Photo of Barry Melancon After He Got Lei’d (Adrienne Gonzalez, Going Concern)
Roger McEowen, Discounting IRAs for Income Tax Liability? “While valuation discounts are still viable for minority interests and lack of marketability in closely-held entities, valuation discounts are not available for assets that are IRD. That means that IRAs and similar items of IRD will be valued at fair market value for transfer tax purposes.”
TaxProf, The IRS Scandal, Day 1456: The Impact Of The Sixth Circuit’s Decision In NorCal Tea Party Patriots