Failed To File A Tax Return?

In Mario E. Cayabyab (T.C. Memo. 2012-89) the taxpayer was going through a divorce in 2006 and was struggling with the care of his children. The taxpayer's ex-wife was in possession of documents relating to their investment income. He did not attempt to retrieve these documents because his priority was to settle his divorce and take care of his children, and he believed he could settle his taxes for 2006 "later on".

The taxpayer was in good health throughout 2006 and was not hospitalized for any illness between 2006 and 2010. He was aware of his obligation to file his Form 1040 for 2006 but he did not file a timely return. The IRS sent the taxpayer a letter on November 30, 2009, requesting that petitioner file his Form 1040 for 2006. He filed the return with the IRS on October 14, 2010. The Court noted Section 6651(a)(1) imposes an addition to tax for failure to file a return on the date prescribed unless the taxpayer can establish that the failure is due to reasonable cause and not due to willful neglect. To prove reasonable cause for a failure to timely file, the taxpayer must show that he exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time. The determination of whether reasonable cause exists is based on all the facts and circumstances.

The taxpayer argued that certain documents required for filing his return were unavailable to him because of his divorce. He further argued that he was too preoccupied with the difficulties of his divorce and the care of his children to attempt to retrieve those documents.

The Court noted it has previously held that a taxpayer does not have reasonable cause for failure to file where he knew of his obligation to file but chose to make his divorce and custody battle a greater priority. Further, the unavailability of information or records does not necessarily establish reasonable cause for failure to file a timely return. The Court found the taxpayer did not demonstrate that he exercised the ordinary business care and prudence that would qualify him for relief from the Section 6651(a)(1) addition to tax. Consequently, he has not met his burden of persuasion, and the IRS's determination was sustained.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Mad at Taxes

Mad at Taxes

Fans of AMC's Mad Men rejoiced last week when Don Draper and his colleagues at Sterling Cooper Draper Pryce returned after a 17-month absence. The year is 1966, and change is in the air. Protestors oppose the war in Vietnam, and riots break out in Los Angeles, Cleveland, and Atlanta. The "kids" are listening to Dusty Springfield and the Rolling Stones. And the "grownups" are struggling to make sense of it all.

Mad Men creator Matthew Weiner is famed for his obsessive attention to period detail. (One episode featured junior executive Pete Campbell displaying a spectacularly ugly "chip and dip" platter he received as a wedding present -- the very same chip and dip that Weiner's own parents received for their wedding back in 1959.) So, fashion mavens predictably ooh'ed and ahh'ed over the period costumes, which have inspired today's Banana Republic to introduce an entire Mad Men collection. Interior design aficionados ooh'ed and ahh'ed over Don and his new bride Megan's stylish Upper East Side penthouse, with its white carpeting, sunken living room, and broad terrace. But tax professionals cheered loudest of all when partner Roger Sterling bribed media buyer Harry Crane $1,100 to give up his office for rising star Campbell. "That's more than you make in a month," Sterling wheedled, "after tax!"

And really, who cares about Don's suits, Megan's dresses, or Roger's cocktails, when we can spy on their money and their taxes?

Prices from 1966 seem comically quaint today. A gallon of gas cost just 32 cents. A dozen eggs cost 60 cents. Postage stamps cost a nickel. But there was nothing comical or quaint about taxes. Rates in 1966 started at 14% on income over $1,000 (roughly $7,000 in today's economy), and rose to 70% on income over $200,000. 70% is a lot compared to today's 35% maximum -- but 70% was actually a big step down from the 91% top rate that Don and his colleagues faced just three years earlier in 1963. One small consolation -- Don's Form 1040 was quite a bit simpler. However, the "Expense Account Information" section at the bottom of page two includes an intimidating box to check -- and separate instructions to follow -- "if you had an expense account or charged expenses to your employer."

And what about those three-martini lunches that play such a central role in lubricating Mad Men's ensemble? Well, for starters, they sure cost less back then. In one scene from Season One, Don flips a waitress at a beatnik bar $5 to cover three martinis, plus tip. Today, those same martinis cost $14 each at The Roosevelt Hotel, where Don stays after separating from first wife Betty. As for tax breaks, under today's rules, meals and entertainment are 50% deductible. That means, if you're in the top 35% bracket, a dollar's worth of martini saves 17.5 cents in tax. But back in 1966 -- when doctors appeared in cigarette commercials and seatbelts were still optional in most cars -- meals and entertainment were 100% deductible. That means that same dollar's worth of martini saved up to 70 cents in tax. No wonder the partners spent more time getting soused than they did talking business!

If we had been practicing back in 1966, we would have looked just as good wearing the silhouettes of 1960s style. But Don Draper would have appreciated us more for the way we cut his taxes. There's no need to get mad at the IRS if you have a proactive plan. And there's no pesky two-drink minimum, either!

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Tax Business, Russian Style

Tax Business, Russian Style

Working in the tax business is usually a pretty safe gig. You really just need an office, a computer with an internet connection, and a fast laser printer for all those piles of paper. There's not much heavy lifting -- and even less intrigue or danger. But sometimes the tax business is a different story. Just ask Pavel Petrovich Ivlev, who works (now) in suburban New Jersey.

Pavel was born in 1970 just outside Moscow. He earned a law degree from Moscow State University in 1993, studied more in Amsterdam and London, then joined an international law firm. At that point, he appeared set to become another one of a new breed of Russian lawyers, helping newly-privatized companies negotiate the awkward transition to "real" capitalism.

Pavel's clients included Yukos Oil, and its charismatic chairman, Mikhail Khodorkovsky. Khodorkovsky had started out collecting dues for the Communist Youth League. But as the Soviet Union collapsed, he rejected his old Leninist ideology. Taking advantage of glasnost and his party connections, he became an entrepreneur, published his own capitalist manifesto called The Man with the Ruble, and traded his way up to controlling 20% of Russia's lucrative oil production. For one brief shining moment, Khodorkovsky's $16 billion fortune made him the richest man in Russia and the 16th-richest man on earth.

In 1999, Vladimir Putin succeeded to Russia's Presidency. Putin had started his career in the KGB -- working counterintelligence, no less -- and he was no stranger to blunt force. (Google "Putin+thug" and you get 2,190,000 hits. 'Nuff said.) Putin quickly moved to tighten his grip on power, clamping down on elected officials and billionaire oligarchs alike. Khodorkovsky naturally pushed back, and at one point in 2003, embarrassed Putin in a nationally televised meeting of business leaders. Unfortunately, such resistance amounted to bringing the proverbial knife to a gunfight.

Eight months later, Putin had Khodorkovsky arrested, and slapped everyone else associated with Yukos with tax and fraud charges. And that's where our tax attorney friend Pavel comes back into the picture. Here's how he describes his own interrogation by government investigators. Clearly, they felt no need to screw around with the usual "good cop-bad cop" shtick -- or maybe the good cop was just off grabbing a ponchiki (Russian doughnut):

"On November 16, the lead detective in the case said to me 'Now I am going to interrogate you.'
I said, 'You can't do that, it's against the law.'
'I guess we are going to have to break the law then. Tell me all.'
'What do you want me to say?'
'You are the lawyer -- you know the penal code. Whatever you say, we'll use.'
'You want me to describe how we took sacks of cash out of Yukos and delivered them to Khodorkovsky personally?'
'Yes.'
'But nothing like that ever happened.'
That's when he threatened to arrest me."

Pavel's momma didn't raise any dummies. He caught the next plane out of Moscow and didn't even call his wife till he landed. But he remains under indictment in his homeland for stealing $2.4 billion, laundering $810 million, and evading tax on the gain. At least he's better off than his former client -- Khodorkovsky has spent the last seven years in a series of former Soviet prisons.

Look, there's nothing fun about the IRS. And we've all met someone who went through an "audit from hell." But few people actually flee abroad to shake off the tax man! So while we gripe about how much we pay, we can at least appreciate the IRS playing on a level field. Let Pavel's story help you feel fortunate that we won't be chased out of this country for paying less tax!

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

England's Tax Subsidized Style

England's Tax-Subsidized Style

England's creative class is known throughout the world for the richness and variety of its work. Some is good (think Savile Row tailoring and the architecture of Sir Christopher Wren). Some is not (Princess Eugenie's royal wedding hat). And some is just sublime (the 1961 Jaguar E-type). But there's one art form the English are better at than anyone else, and that's highbrow television.

It all started with Upstairs Downstairs. Next came 1981's lavish Brideshead Revisited. And now there's yet another snooty television "programme" invading American hearts and minds -- Downton Abbey, a period drama centered on the aristocratic Crawley family and their servants, during the reign of King George V.

Yes, it's a soap opera. But oh, what a soap opera it is. You have your standard-issue improbable plot complications and ill-advised romances, naturally. But it's set against a backdrop of class, manners, and humanity that seem long lost a century later. And where else will you find a soap with Oscar- and Tony-winning actors, much less a pheasant hunt? Add in Edwardian sensibilities, amusing antique technology, and impossibly dry British wit, and you have an irresistibly compelling package.

Programs like Downton Abbey showcase British culture to the world and boost the nation's economy, too. So Her Majesty's Treasury began offering film tax credits for movies roughly 10 years ago. For 2010, they gave about £100 million in credits to support more than 200 productions -- including, of course, both Harry Potter sequels. But now, as part of their 2013 budget, officials are extending the incentives to high-end television, too. To qualify, dramas must cost more than £1 million (roughly $1.58 million), and must pass a "cultural test."

We have tax credits for movies and television here in the United States, of course. There's nothing at the federal level, but state and local governments eagerly compete for filmmakers' dollars with a vast variety of tax incentives. While Hollywood is the obvious center of the film universe, you might be surprised to learn that the next most attractive location for film production, based in part on generous tax incentives, is Louisiana. In fact, Louisiana was the first state to adopt tax incentives for filmmakers, and sparked a trend across the country. Producers get a 30% transferable tax credit on total in-state expenditures, plus a 5% labor-tax credit on payroll of employed residents.

Here in the US, you wouldn't think we'd worry too much about the quality of the productions we encourage. That, after all, is part of our uniquely American charm. But at least one state official has imposed his own informal "cultural test" in an apparent attempt to class up the joint. Last year, the New Jersey legislature approved $420,000 in credits for the producers responsible for MTV's raucous Jersey Shore -- then watched in dismay as Governor Chris Christie vetoed the bill, declaring "as chief executive I am duty-bound to ensure that taxpayers are not footing a $420,000 bill for a project which does nothing more than perpetuate misconceptions about the state and its citizens." His Lordship the Earl of Grantham would heartily approve.

If you run your own business -- or even if you're just thinking about starting a business -- you may not qualify for film credits. But you will qualify for more tax breaks than you realize. So make sure you take some time to sit down with us to plan how best to take advantage of those breaks. And let your friends, family, and colleagues know we're here to help them, too!

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

2012 Tax Outlook

2012 Tax Outlook: "Campaign Heats Up"

The 2012 presidential election already seems like it's been on for years.  President Obama has proposed to raise taxes on those earning above $200,000 ($250,000 for joint filers), including a new surtax on incomes over a million.  Republicans have pledged to cut taxes in hopes of stimulating the economy.  And regardless of who wins in November, the Bush tax cuts are scheduled to automatically expire at the end of this year.

Since taking office, Obama has offered a variety of cuts for lower- and middle-income Americans.  These include new credits for working individuals, expanded breaks for higher education, extended breaks for homebuyers, and even a temporary sales-tax deduction for new car purchases.  While these changes have made taxes more complicated, they've done nothing to stall future tax hikes for higher incomes. 

The new healthcare reform law actually makes it harder to deduct healthcare costs, and imposes significant new taxes on investment income.  With the federal budget deficit topping $1 trillion per year, many observers see the new healthcare taxes as the tip of a looming iceberg. 

 This report summarizes some of the future tax hikes we can expect and offers suggestions for avoiding them where possible.  We look forward to discussing these threats and helping craft the appropriate response! 

 Tax Brackets Stable - For Now!

 Washington has extended the Bush tax cuts, effective for two years through 2012, and Congress shows little appetite for raising rates on middle-income earners. This means that tax on ordinary income is currently capped at 33% and 35% for taxpayers in the highest brackets, and taxes on capital gains and qualified corporate dividends remain capped at 15%.  However, budget deficits continue to balloon out of control, and if Congress can't agree to extend cuts, rates will rise automatically in 2013.

Do you expect your 2013 income to be significantly different than in 2012 (as may be the case if you retire, buy or sell a business, or sell significant investments)?  If so, consider timing income and deductions for maximum tax advantage.

If you expect to earn LESS in 2013, consider delaying some of this year's income (to subject it to tax next year, when you'll be in a lower bracket).  And pay deductible expenses this year, as much as you can.

Or, if you expect to earn MORE in 2013, consider accelerating income from commissions, bonuses, and qualified plan withdrawals into this year (to subject it to tax now, before you move up into a higher bracket next year).  You might also delay paying deductible expenses until next year, to the extent possible.

Itemized Deductions Going Down?

President Obama has proposed limiting the value of itemized deductions to just 28%, even for taxpayers in higher brackets.  This would amount to a "stealth" tax increase and cut the value of deductions for medical expenses, state and local taxes, mortgage interest, and even charitable gifts.

Tax Strategies for Healthcare Costs

Paying for medical care becomes harder every year.  The recent healthcare reform act improves coverage and extends it to more Americans, but actually makes it harder to deduct unreimbursed expenses.  (Under current law, you can deduct medical expenses exceeding 7.5% of your Adjusted Gross Income.  Under the new law, starting in 2013, that floor rises to 10%.)  It also limits contributions to employer-sponsored flexible spending plans to $2,500/year.  

If you're free to select your own coverage, consider choosing a "high-deductible health plan"  and opening a Health Savings Account.  These arrangements bring down premium costs and use pre-tax dollars for out-of-pocket costs, bypassing the floor on AGI.  

If you're self-employed, consider establishing a Medical Expense Reimbursement Plan, or MERP.  These plans let you pay family medical expenses with pre-tax business dollars.  They may even help you avoid self-employment tax.

Audit Odds Still Low

IRS audit odds are increasing, from 1 in 200 returns for 2000 to 1 in 100 for 2009. But your chance of getting audited is still minimal. Don't take low audit rates as an invitation to cheat! But don't let fear of an audit stop you from taking every legitimate deduction you're entitled to.

New Roth IRA Conversion Opportunity

New rules now let you convert your traditional IRA to a Roth IRA, regardless of your current income.  This is actually one of the bright spots of the of the current tax picture. 

Traditional tax planning holds that it makes sense to defer income into retirement accounts now, when you're in your peak earning years (and highest tax bracket) - then withdraw it later during retirement, when your income and tax bracket will presumably be lower.  However, tax rates are currently at historic lows, and it's entirely possible they will be higher when you're retired.  This suggests the smarter strategy may be to pay tax on retirement funds now in order to withdraw them tax-free when rates are higher.

New Tax on Interest Income

The healthcare reform act imposes a new "Unearned Income Medicare Contribution" of 3.8%, beginning on January 1, 2013, on interest income, for taxpayers reporting more than $200,000 ($250,000 for joint filers).  This tax may make municipal bonds and money market funds more attractive relative to fully taxable vehicles.  However, the recession has jeopardized state and local tax revenues, so there may be credit quality issues to consider.  You might also consider deferred annuities and permanent life insurance for fixed-income portions of your portfolio.

New Tax on Dividend Income

Tax on "qualified corporate dividends" is currently capped at 15%, even for taxpayers in the highest brackets.  However, beginning in 2013, the healthcare reform act imposes a new "unearned income Medicare contribution" of 3.8% on dividend income for individuals earning over $200,000 ($250,000 for joint filers).  Consider favoring stocks that pay little or no dividend in taxable accounts and holding stocks paying higher dividends in tax-deferred accounts.

Permanent Life Insurance for Tax-Free Income

As mentioned earlier, the healthcare reform act imposes a new "Unearned Income Medicare Contribution" of 3.8%, beginning on January 1, 2013, on "investment income" (broadly defined to include interest, dividends, capital gains, rents, royalties, and annuity distributions) for individuals making over $200,000 ($250,000 for joint filers).  Permanent life insurance offers a variety of investment options for accumulating cash values, along with tax-free withdrawals and loans so long as you keep the policy in force.

New Tax on Real Estate Income

The healthcare reform act imposes an "unearned income Medicare contribution" of 3.8%, effective starting in 2013, on income from real estate investments and taxable gains from the sale of your primary residence, for individuals making over $200,000 ($250,000 for joint filers).  There are several strategies you can use to minimize taxable real estate income, including favoring tax-deductible "repairs" over depreciable "improvements" and cost segregation strategies to maximize depreciation deductions.

Higher Tax on Capital Gains

Tax on long-term capital gains (from property you hold more than 12 months) is currently capped at 15%, even if your regular tax rate is higher.  However, the recent healthcare reform act also imposes a new "unearned income medicare contribution", beginning in 2013, of 3.8% on capital gains for individuals earning over $200,000 ($250,000 for joint filers).  If you have appreciated assets such as securities, real estate, or a business you'd like to sell, consider doing so before new rates become effective.  Check with us first, to discuss if you can use tax-free exchanges, installment sales, charitable trusts, or similar strategies to minimize or even eliminate tax on those sales.

Uncertainty on Estate Tax

The estate tax actually "died" for 2010.  Washington brought it back to life, with a 35% tax applying on estates over $5.12 million per person.  However, the new system applies only for 2011-2012.  If Washington doesn't act to extend it, the tax reverts to 55% on estates over $1.0 million, beginning January 1, 2013.  This means that smart, flexible estate planning will still be part of most affluent families' plans.

Next Steps

We're sure you appreciate this brief outline of upcoming tax threats.  While smart intelligence is crucial, intelligence alone is useless without the right action.  If the threats we've discussed so far have you worried about your financial future, you owe it to yourself to take a more comprehensive look at your taxes and finances, so that we can determine exactly which concepts and strategies will work from here. 

Any tax advice contained in the body of this presentation was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

Tax Fraud Can Lead to Deportation

On February 21, 2012, the Supreme Court of the United States issued a decision that may have an important impact on many immigrants in the United States – visa and green card holders alike.  The decision, written by Justice Thomas, isKawashima v. Holder.

As a background note on the workings of immigration law, an alien (a non-U.S. citizen) may be removed from the United States if he or she is convicted of an “aggravated felony” (yes, this even applies to Green Card holding permanent residents, who can be removed from the United States).  The term “aggravated felony” has a specific definition under immigration laws of the United States.  That term includes crimes such as trafficking in firearms, murder, rape, certain crimes of violence, and theft offenses.  And, after Kawashima v. Holder, the term “aggravated felony” also includes certain tax violations, perhaps even misdemeanors.

In Kawashima v. Holder, Mr. and Mrs. Kawashima (who were both permanent residents of the United States) have pleaded guilty to violations under 26 USC §7206(1) and §7206(2), respectively.  Mr. Kawashima pleaded guilty to one count of willfully making and subscribing a false tax return, and Mrs. Kawashima pleaded guilty to aiding and assisting in the preparation of a false tax return.

After a detailed analysis of the law’s language, the Supreme Court decided that an alien becomes deportable when he or she is convicted of a tax violation, and that violation involved intentional fraud or deceit, and a loss to the government exceeding $10,000.  Because Mr. and Mrs. Kawashima’s actions were intentional and fraudulent, and resulted in the government’s loss in excess of $10,000, the husband and wife were found to be deportable from the United States.

So, what does this mean for the average non-U.S. citizen?  Of course, each case is unique, and the courts have yet to apply the Supreme Court’s decision.  Yet, as the dissenting Justices in Kawashima v. Holder pointed out, this decision will probably have very important consequences for non-U.S. citizens.  Specifically, if a person is found guilty of (or pleads to) a tax violation which entails fraud or deceit and a $10,000 + loss to the government, he or she may be deported from the United States.  As Justice Ginsburg indicated, “the Court’s reading sweeps a wide variety of federal, state, and local tax offenses – including misdemeanors – into the ‘aggravated felony’ category.” 

In light of this decision, non-citizens should think twice before pleading guilty to tax violation charges.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

Failed Tax Strategies

#1 Delay in Getting Started
Most tax strategies fail because they are delayed in getting started - which often leads to them never getting started.

The time most people think about a tax strategy is usually at the same time they are starting a new business or investment activity.

This is a time when there are a lot of things going on to get the business or investments started.  And, at the same time, cash is usually tight.  The tax strategy gets put on hold temporarily but the temporary status grows into a permanent status.

There are key parts of a tax strategy that have to be planned out before the business or investing activity starts.  When the tax strategy is delayed in getting started, some of the tax saving opportunity could be gone forever.

I hate it when I have to tell a prospective client that we could have reduced their taxes even more had they just started with us sooner.

#2 No Check Up
Most people go to the doctor annually, even if they feel great, to get a check up.  This is usually part of a long term strategy for a long and healthy life.

The same needs to happen with a tax strategy.

Many people set up their tax strategy, work diligently with their CPA for the first year or perhaps even first two years, and then let things slide a little bit.

While it's true that some tax strategies can run themselves to some extent over time, it's never a substitute for checking in with your CPA to determine if there is anything that has changed or can be done differently.

After all, even if nothing has changed in your world, the tax world changes on a regular basis.

#3 The Cost v. Benefit
A successful tax strategy is one that creates tax savings that outweigh the costs of creating the tax savings.

Pretty straightforward concept, but sometimes the facts can be deceiving and that causes many tax strategies to fail.

For example, which is better:
- A tax return that costs $750 to have prepared, or
- A tax return that costs $2,500 to have prepared

If both tax returns produce the exact same tax results, then the lower cost tax return is a great deal.

But, what if that $750 tax return calculated a tax liability that is $5,000 more than had it been prepared elsewhere?  This is where I see many tax strategies fail.  

Have you ever seen the media studies where they take the same tax information to several tax return preparers?  The idea is to see if the results are the same.  The results are never the same!  But, that doesn't necessarily mean any of the tax returns are technically inaccurate.

It's not unusual to have options on how income and deductions can be reported on a tax return and have each option be technically accurate.

This is what is so great about the tax law.  Whether it's the U.S. tax law or elsewhere, there can be many options with how items are reported and with the right tax preparer, it can result in maximizing your tax savings.

How do you know if your tax preparer is maximizing your tax savings?
One way to assess your tax preparer is based on how much information your tax preparer wants to know about you and your activities.

Your tax preparer should ask you tons of questions that help you reveal specific details about your situation that impact your taxes.

Asking questions about your situation is not the same as asking you for your tax information (like your W-2 and financials).  Every tax preparer will ask you for your tax information.

If your tax preparer isn't probing to better understand your situation, then it is very difficult to uncover the different options available for reporting your income and deductions.  The fewer options there are, the more difficult it is to minimize your taxes.

If your tax preparer isn't asking you questions, then that is a strong indicator that they aren't leveraging the options available within the tax law to minimize your taxes.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Daughter Gets Tax Deduction For Expenses Mom Paid

Judith F. Lang v. Commissioner, TC Memo. 2010-286, December 30, 2010.

Mother paid medical expenses directly to provider, and also paid daughter’s real estate taxes. IRS denied deduction to daughter since the daughter did not pay the expenses. Tax Court ruled that based upon substance over form, the mother had in fact made a gift to the daughter, and the daughter was the payor of the expenses. Hence, the daughter is entitled to the deduction.

In 2006, Judith Lang incurred $27,776 of deductible medical expenses (assumed to be net of the 7½% of AGI limitation), and had $6,840 of real estate taxes.  Her mother, Frances Field, paid $24,559 directly to Judith’s medical providers and paid $5,508 directly to the city to pay for Judith’s real estate tax. Mrs. Field had no obligation to make these payments. Nor did she claim an income tax deduction for these payments.

In order to claim a deduction for medical expenses, the expense must be for the taxpayer, spouse or dependent. Since Judith was not a dependent of Mrs. Field, Mrs. Field could not legally claim a deduction. In order to claim a deduction for real estate taxes, one must be legally obligated to make the payment. Mrs. Field was not.  The second requirement for each of these expenses is that the taxpayer actually make the payment.  It is this second requirement that was the subject of the case.

The IRS argued that Judith did not make the payment, and therefore she could not take the deduction. Judith countered that based upon substance over form, she received a gift from mom, and she was the actual payor of the expenses.

The Court sided with Judith, stating that Mrs. Field did make a gift to Judith and Judith gets credit for making the payment. The Court noted that Mrs. Field’s payments directly to the medical providers meant that, under the gift tax rules, these payments were not taxable gifts. But the Court said that the gift tax rules do not control for income tax treatment. Hence, Judith is entitled to the deduction.

If the IRS position was allowed to stand, then no one would be entitled to a deduction in this case; mom because it wasn’t her obligation, and daughter because she didn’t pay it. The Court seemed to look at this as a situation where SOMEONE should get the deduction, and wisely (in my opinion) decided in favor of Judith.

It should be noted that since the medical payments did not constitute a gift, and the real estate tax payment did not exceed the annual exclusion, there was no gift tax issue. I would suggest that it would not be a bad idea in situations such as this, or similar ones such as a grandparent paying college tuition and  the parent claiming a deduction or credit, that the actual payor file a gift tax return to document that they’ve made a gift to the person obligated to make the payment, so that that person can claim the deduction/credit.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Deduct Nursing Home Medical Expenses

You can deduct as medical expenses the cost of medical care in a nursing home, home for the aged, or similar institution, for you, your spouse or dependents. This includes the cost of meals and lodging in the home if a principal reason for being there is for medical care. If the reason for being in the home is personal, you can't include the cost of meals and lodging, but you can deduct the part of the cost that is for medical or nursing care.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

IL-eagle Assests?

Our estate tax system is quite different from our income tax system. The income tax, as its name implies, focuses on how much money individuals, trusts, and business entities make. The estate tax system, in contrast, focuses on how much assets are worth. Most assets aren't hard to value. Stocks, bonds, mutual funds, and similar assets are valued at their publicly-traded fair market value (FMV) as of the date of death (or the executor can choose an "alternate valuation date" six months later). But some assets are a little harder. Real estate, for example, is also valued at its FMV -- but who's to say what a unique or expensive property is really "worth," especially in today's volatile market? Closely-held businesses can be even harder to appraise. And high-end collectibles, like the kind of art and antiques that usually sell at auction, can be hardest of all.

These issues make estate-tax enforcement a different challenge from income-tax enforcement. For fiscal year 2010, the IRS received 42,366 estate tax returns, and audited 4,288, or 10.1%. But just as income tax audits go up as your income rises, estate-tax audits go up as yourassets go up. For that same year, the IRS received 3,013 estate tax returns reporting assets of $10 million or more -- and audited 928 of them, or 30.8%!

Occasionally, the IRS finds assets that are especially tricky to value. For instance, how do you value an asset that would be illegal to sell? That was the challenge the IRS faced with the estate of art dealer Ileana Sonnabend. Sonnenbend died at age 92 after amassing one of the country's most important collections of contemporary art, including works by Jeff Koons, Roy Lichtenstein, Andy Warhol, and Cy Twombly. Her heirs valued her estate at $875 million, and sold several works to pay taxes of $331 million to Uncle Sam and $140 million to New York state.

But Sonnabend's collection also included a 1959 work called "Canyon" by Robert Rauschenberg, best-known for his "combine-paintings" incorporating nontraditional materials and objects. And there's a problem with that piece -- it includes a stuffed bald eagle. Bald eagles aren't just a symbol of America, they're an endangered species. Selling any part of an eagle, even a single feather, is, well, il-eagle -- punishable by a fine of up to $100,000 and a year in prison. (Yes, they will make a federal case out of it.) In fact, back in 1981, the Department of Fish and Wildlife notified Sonnabend that ownership of the piece was restricted by federal law. Sonnabend got permission to retain the piece and lend it to museums, but understood that she could never sell it or export it for sale.

Sonnabend's executors obviously took that constraint into consideration, and valued the piece for estate tax purposes at zero. The IRS, not surprisingly, cried fowl. They valued "Canyon" at $65 million -- assessed $29 million in tax -- and threw in an $11.7 "gross valuation misstatement" penalty for good measure! (The technical term for that is "holy smokes"!) The executors have filed suit, of course, but the IRS has a history of valuing illicit assets, like native American artifacts and stolen art and antiquities, at their "black market" value.

Smart planning could have avoided this whole mess. Sonnabend could have donated "Canyon" to a U.S. museum before her death. That would have avoided the absurd result of owing tax on an asset, but facing jail time for selling it to pay the tax! The good news in all this is that, at least from now through the end of the year, there's no tax due unless your taxable estate tops $10 million. The bad news is that if you do leave enough to owe tax, you can almost count on being audited. So if your house is stuffed with contraband, the time to get rid of it is now! Other tax planning questions? Call us!

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.