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Itemized Medical Deductions

Before this year, you could claim itemized deductions for medical expenses paid for you, your spouse, and your dependents to the extent those expenses exceeded 7.5% of your adjusted gross income (AGI). But the rules have changed for the worse in 2013 and beyond.

Due to the 2010 Affordable Care Act, the old 7.5%-of-AGI hurdle is now 10% for most taxpayers in 2013. An exception applies for taxpayers, or their spouse if married, who are age 65 or older on December 31. They can still use the 7.5%-of-AGI threshold through 2016.

Many individuals have flexibility regarding when certain medical expenses will be incurred. They may benefit from concentrating expenses in alternating years. That way, an itemized medical expense deduction can be claimed every other year instead of lost completely if it doesn’t exceed the threshold.

Medical expenses paid for a taxpayer’s dependent, such as a parent or grandparent, can be added to the taxpayer’s own expenses for itemized medical expense deduction purposes. For a person (other than a qualified child) to be the taxpayer’s dependent, the taxpayer must pay more than half of that person’s support for the year. If that test is passed, the taxpayer can include medical expenses paid for the supported person—even if the taxpayer cannot claim a dependency exemption for that person. While the taxpayer must still clear the applicable AGI threshold to claim an itemized medical expense deduction, including a supported person’s expenses in the computation can really help.


Qualified Charitable Distributions

IRA owners and beneficiaries who have reached age 70 1/2 are permitted to make donations to IRS-approved public charities directly out of their IRAs. These so-called qualified charitable distributions, or QCDs, are federal-income-tax-free to you, but you get no charitable deduction on your tax return. But, that is fine because the tax-free treatment of QCDs is the same as an immediate 100% deduction without having to worry about restrictions that can delay itemized charitable write-offs. QCDs have other tax advantages, too.

A QCD is a payment of an otherwise taxable distribution made by your IRA trustee directly to a qualified public charity. The funds must be transferred directly from your IRA trustee to the charity. You cannot receive the funds yourself and then make the contribution to the charity. However, the IRA trustee can give you a check made out to the charity that you then deliver to the charity. You cannot arrange for more than $100,000 of QCDs in any one year. If your spouse has IRAs, he or she has a separate $100,000 limitation. Unfortunately, this taxpayer-friendly provision is set to expire at year-end unless extended by Congress.

Before Congress enacted this beneficial provision, a person wanting to donate money from an IRA to a charity would make a withdrawal from his or her IRA account, include the taxable amount in gross income, donate the cash to charity, and then claim an itemized charitable donation.

QCDs are not included in your adjusted gross income (AGI) on your federal tax return. This helps you remain unaffected by various unfavorable AGI-based phase-out rules. It also keeps your AGI low for computation of the 3.8% NIIT. In addition, you don’t have to worry about the 50%-of-AGI limitation that can delay itemized deductions for garden-variety cash donations to public charities. QCDs also count as payouts for purposes of the required minimum distribution (RMD) rules. Therefore, you can donate all or part of your 2013 RMD amount (up to the $100,000 limit on QCDs) and thereby convert otherwise taxable RMDs into tax-free QCDs. Individuals can arrange to simply donate amounts that they would normally be required to receive (and pay tax on) under the RMD rules.

Note that the charity must provide you with a record of your contribution. Also, you cannot receive any benefit from the charity in return for making the contribution. If the donor receives any benefit from the charity that reduces the deduction under the normal rules, tax-free treatment is lost for the entire distribution.


Year-end Mutual Fund Purchases

Many taxpayers make adjustments to their investment portfolio near year-end to take profits, to recognize tax losses, to reallocate their assets, and for various other reasons. When making purchases of mutual funds near year-end, however, you should be wary of actually purchasing a tax liability.

This is the danger: mutual funds must pay out their gains and income to shareholders at least annually to avoid taxation at the fund level. Income funds and balanced funds typically make taxable distributions to shareholders either monthly or quarterly. However, equity funds often make one annual distribution at or near the fund’s year-end. These taxable distributions to shareholders reflect the income and net gains realized by the fund for the period.

An equity fund that appears to have a minimal or negative overall return for the year may actually make taxable distributions to shareholders at the end of the year. This is because of gains the fund recognized on appreciation that occurred in prior years. From an investor’s standpoint, these distributions do not result in any real net benefit; instead, the distributions are already reflected in the fund’s per share value. So after a distribution is made, the share value is reduced accordingly.

Because of the income distributions mutual funds must make, the timing of a share purchase in a particular fund can affect your tax liability. Purchasing shares just before the record date (i.e., the date that determines which shareholders will receive the distribution) is essentially purchasing a tax liability. This is because the (inflated) price of the shares just before the distribution includes the income that is about to be paid out.

When the distribution is made, the price per share falls, though the total investment value remains the same (i.e., if the income distribution is reinvested, the shareholder now owns more shares with a lower value per share; if the income is distributed, the cash received plus the share value equals the shareholder’s investment before the distribution). Thus, mutual fund investors should pay particular attention to when they invest. This is especially true for equity funds that make only one distribution each year. So be sure to check with the mutual fund company to determine the status and nature of any forthcoming dividends when purchasing equity mutual funds late in the year to avoid an unexpected tax liability.


Minimizing the 3.8% Net Investment Income Tax

Higher income taxpayers beware. There is a new surtax to contend with. Originating as a component of 2010 health care legislation and first effective in 2013, the 3.8% net investment income tax (3.8% NIIT) is assessed on the lesser of net investment income (NII) or modified adjusted gross income (MAGI) above specific thresholds. The MAGI thresholds are $200,000 for single individuals, $250,000 for joint filers and surviving spouses, and $125,000 for married taxpayers filing separate returns.

Only individual taxpayers with some amount of NII and MAGI above the applicable threshold amount will be subject to the 3.8% NIIT. In other words, taxpayers with only wage or self-employment income are exempt. For example, if a married couple has $500,000 of wage income and $100,000 of interest and dividend income (i.e., MAGI totaling $600,000), the 3.8% NIIT only applies to the investment income ($100,000), not the $350,000 that is over the $250,000 MAGI threshold.

Since the 3.8% NIIT is assessed on the lesser of NII or MAGI above the threshold, planning strategies to reduce the surtax will only be effective if they target the applicable exposure point. If NII is the lower number, planning strategies should focus on reducing investment income. If the taxpayer's MAGI is lower, reduction strategies should focus on reducing AGI. The following strategies can be used to reduce NII and AGI.

NII can be reduced currently by:

·         Selling securities at a loss in a taxable account (also reduces AGI).

·         Using an installment sale to spread a large gain over several years (also reduces AGI).

·         Facilitating a like-kind exchange to defer gain (also reduces AGI).

·         Gifting appreciated securities instead of cash (also reduces AGI).

AGI can be reduced currently by:

·         Maximizing deductable contributions to a tax-favored retirement account, i.e., 401(k), SEP, and defined benefit pension plans.

·         For cash-basis self-employed individuals, deferring business income into the following year and accelerating business deductions into the current year.

·         Gifting appreciated securities to children and letting them sell the appreciated securities to avoid recognizing gains on the parent's return (also reduces the parent's NII). Be aware that the Kiddie Tax may apply; however, the child will receive his or her own MAGI exemption from the 3.8% NIIT.

Longer-term strategies:

·         Convert traditional retirement account balances to Roth IRAs, but watch out for the AGI impact in the conversion year. In the long run, gains and earnings that build up tax-free in a Roth IRA are not included in either AGI or NII when eventually distributed.

·         Invest in tax-exempt versus taxable bonds, which will reduce both AGI and NII.

·         Use tax-favored retirement accounts to invest in securities that are expected to generate otherwise-taxable gains and dividends.

·         Invest in life insurance and tax-deferred annuity products. Life insurance death benefits are generally exempt from ordinary income tax and, thus, from the 3.8% NIIT, as well. Death benefits will not increase the recipient's exposure to the 3.8% NIIT by increasing his or her AGI.

·         Invest in rental real estate and oil and gas properties. Depreciation, intangible drilling costs, and depletion deductions reduce both AGI and NII.

·         Invest in growth stocks and defer gains until the stocks are sold; offset gains with losing positions.

These are some of the ways to reduce exposure to the 3.8% NIIT. Please contact us if you have questions or need additional information to eliminate or minimize your exposure to this new surtax.

Tax Strategy: New Medicare Taxes

IRS issues final and proposed regs


In late November 2013, the Internal Revenue Service issued final regulations on the 3.8 percent Medicare contribution tax on net investment income and the additional 0.9 percent Medicare tax on earned income. The IRS had issued proposed reliance regulations in late 2012. The IRS also issued new proposed reliance regulations in certain areas where significant changes were being made to the 2012 proposed regulations on net investment income.



In general, the final regulations follow fairly closely the original proposed regulations. A number of clarifications are made and a number of changes proposed by commentators are discussed, along with explanations as to whether each change was adopted or not and why.

In an effort to further define what is included in net investment income, the final regulations discuss what constitutes a trade or business. In general, the regulations still refer to case law and administrative guidance under Code Sec. 162. In the much-discussed area of rental real estate, the final regulations still primarily defer to the facts of a particular case. However, a safe harbor is provided for treatment as a real estate professional. If a taxpayer participates in rental real estate activities for more than 500 hours per year, or if a taxpayer has participated in rental real estate activities for more than 500 hours per year in five of the last 10 years (including prior to the effective date of Code Sec. 1411), then the rental income associated with that activity will be deemed to have been derived in the ordinary course of a trade or business and not subject to NII. Even if the safe harbor is not met, the taxpayer is still free to try to establish under the facts that the rental real estate activities constitute a trade or business and should not be subject to NII.

In determining what constitutes trading in financial instruments or commodities and therefore being subject to NII, concern had been raised that a mismatch could arise with gross income included as income from a trading business (Category II gross income), but trading losses would be subject to the net gain or loss limit on net losses (Category III net gain). To address this concern, the final regulations assign all trading gains and losses to the net gain or loss category (Category III net gain). A dealer using the mark-to-market accounting method under Code Sec. 475 is allowed to deduct excess losses from the trading business against other categories of income. The final regulations also provide a definition of financial instruments and clarify that foreign currency gains and losses are NII unless they are subject to the Self-Employment Contributions Act.

In the case of any taxpayer, the final regulations stick to the position in the 2012 proposed regulations that the net gain calculation under Category III cannot be less than zero. However, the final regulations do effectively loosen the rule in several respects, by allowing the usual $3,000 net capital loss as an offset, and the net gain calculation may consider carryover losses from prior years.

In determining properly allocable deductions for the calculation of NII, the final regulations followed the 2012 proposed regulations fairly closely. Some changes and clarifications were made in the areas of estates and trusts, foreign taxes and tax refunds. With respect to the limitations on properly allocable deductions under Pease limitation and the 2 percent limit on miscellaneous itemized deductions, the final regulations shift from the pro-rata approach of the 2012 proposed regulations to an ordering approach, applying the limitations to reduce the amount of properly allocable itemized deductions only when such deductions exceed the aggregate amount of the overall deductions, regardless of whether they are property allocable or not, that would be allowed after application of the limitations. The final regulations also depart from the 2012 proposed regulations in allowing a computation for a possible limited net operating loss deduction to be properly allocable to gross income included in NII.

In determining whether a trade or business is passive with respect to a taxpayer and therefore subject to NII, the final regulations generally apply the Code Sec. 469 passive-activity rules. However, income that is recharacterized under the rules for significant participation, or property rented incidentally to development activity, and property rented to a non-passive activity, is treated as not being from a passive activity and thus not from a trade or business to which NII applies.

The final regulations also add special rules for self-charged interest and self-charged rental income. Also, the treatment of income, deductions, gains, losses and the use of suspended losses from former passive activities under NII is clarified.

With respect to the taxpayers to whom NII applies, the final regulations discuss its application to dual-resident individuals, dual-status individuals (both a resident alien and a non-resident alien in the same year), electing small-business trusts, charitable remainder trusts, pooled income funds, foreign trusts and estates, and controlled foreign corporations.



Where significant changes were being proposed to the 2012 proposed regulations, the IRS issued them in new proposed reliance form.

One significant proposed change is with respect to the treatment of the disposition of a pass-through interest. The 2012 proposed regulations would have required the NII calculation of the gain or loss from the disposition of a pass-through interest to be reduced by the amount of non-passive gain (or loss) that would have been allocated to the transferor upon a hypothetical sale of all of the entity's assets at fair market value. The 2013 proposed regulations instead include gain or loss in NII only to the extent of the gain or loss from the deemed sale of the entity's passive assets. Comments were also invited as to whether special rules are also needed to address partial recognitions, partial dispositions, and distribution transactions. The proposed regulations include a primary calculation method and also an optional simplified method available if the transferor's gain does not exceed $5 million or the transferor's recognized gain on the transaction does not exceed $250,000, with certain exceptions. Comments were also invited on possible alternative simplified methods.

The 2013 proposed regulations would treat Code Sec. 707(b) guaranteed payments received for services as excluded from NII, while guaranteed payments for the use of capital would be included in NII.

Code Sec. 736(b) payments in exchange for a retiring partner's share of partnership property would generally under the 2013 proposed regulations be treated as NII equal to the gain or loss from the disposition of property. If the retiring partner materially participated in the partnership's trade or business, NII could be reduced under the proposed rules for disposition of partnership interests discussed above.

Code Sec. 736(a) payments in exchange for past services or use of capital would be taken into account under NII based on the item's character and treatment for regular income tax purposes.

The 2013 proposed regulations provide an additional special rule for capital loss carryforwards, creating an annual adjustment to prevent excluded capital losses from becoming deductible in future years.

The regulations also provide a look-through rule in an attempt to preclude taxpayers from using common trust funds to recharacterize income that would otherwise be NII.

The 2013 proposed regulations would include the taxable income or net loss of a holder of a REMIC residual interest in NII.

The proposed regulations would treat gross income from a notional principal contract, whether periodic or non-periodic, as NII, but only if the income is derived from a trade or business of trading in financial instruments or commodities.

The 2013 proposed regulations also proposed special rules with respect to charitable remainder trusts that own interests in controlled foreign corporations or passive foreign investment companies.



The final regulations on the 0.9 percent additional Medicare tax on earned income generally follow the 2012 proposed regulations. Some clarifications are made with respect to handling employer over- and underpayments and employer liability.



Generally, the final regulations and 2013 proposed reliance regulations are effective for tax yeas beginning after Dec. 31, 2013. For tax years beginning before Jan. 1, 2014, taxpayers may rely on either the 2012 proposed regulations or the final regulations and 2013 proposed regulations.

The IRS indicated that any changes made when the 2013 proposed reliance regulations are finalized would be effective prospectively only. As of this writing, final forms for the net investment income tax, Form 8960, and for the 0.9 percent additional Medicare tax, Form 8959, had not been released, but were expected prior to the start of the 2014 tax return filing season.

George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH Tax and Accounting, a part of Wolters Kluwer.


After Retirement, the Plan Continues

The goal isn't getting to it, but getting through it



Much of the publicized focus about financial planning is geared toward the concept of financial independence and retirement. While financial independence and what you need to do in order to maintain independence is clearly important, it isn't the only thing, nor is it a final destination that can have you sitting worry-free on the front porch.

Your clients' vision of planning for retirement and accumulating enough savings is driven by large financial companies. Just think of the many commercials you've seen on TV with people carrying around their "number" - what they need to earn on their portfolio to reach financial independence - or the ads for the green line to follow to stay on your retirement path. Catchy ads, for sure, and they have been noticed by your clients.

Amongst the opportunities that I see for the CPA financial planner is to be the source of helping to figure out the most efficient way to become financially independent. Included in that discussion is way more than how much you need to save and then earn on your investments to reach the land of independence: It should include a comprehensive financial planning engagement that will integrate and coordinate all the moving parts that need to work well together. These parts include cash flow today and then the desired cash flow during retirement. It includes an exhaustive analysis of risk, and what could go wrong to mess up the simple financial independence calculation. It would necessitate an annual tax plan to be sure that you are minimizing the tax impact of your decisions today and in the future. An investment review that focuses on growth as well as volatility and downside protection becomes even more meaningful when your client isn't adding to the nest egg anymore. And lastly, this process would not be complete if you didn't also factor in estate planning considerations, ranging from premature death to your pension payout options.



Let's address a few of the issues that impact most of our clients after retirement. The first, not technical, is the state of mind of your client. When clients stop adding to 401(k)s and do not have the paycheck coming in each month, they may get a little anxious. They may seem like the same person to you, but inside many are frightened by the possibility of running out of money. This impacts everything that they do from a lifestyle perspective and impacts their financial decisions.

When examining cash flow during retirement, it all starts with the desired lifestyle. Consider using the methodology of segregating spending into the categories of needs and wants. This may help clarify the spending picture for them. Also be sure to blend in the "wish list" part of the spending. Most clients have something, ranging from a trip around the world to helping fund the grandkids' education, as a secondary goal. Your job is to dig out these secondary objectives by asking a lot of questions.

Planners also need to factor in certain undesirable possibilities for spending. Issues like extended illness or elder care are material, and any discussion about retirement planning would be negligent if you didn't discuss a few of these large contingent possibilities.

Expenses are one half of cash flow planning during retirement. Generating income is the other half. For most clients, leaving money in banks and spending only interest income is not feasible. Generating income in today's low-rate environment is a scary thought. The answer may be to diversify into asset classes that retirees have heretofore ignored. Generating income from multiple asset classes such as domestic and foreign sovereign or corporate debt, dividend-paying equities, real estate, insurance products and bank products may be helpful tools to consider for your clients' nest eggs.

The game of generating income will change. Rates will rise and fall, credit spreads will rise and fall, and taxes will go up and go down during the entire course of your clients' retirement. Today, for example, many of your clients may be taking on more risk than necessary by extending the duration of fixed-income holdings and ignoring the long-term impact of rising rates and inflation. Recent research performed by Michael Kitces suggests the possibility that a "rising equity glide path" throughout retirement may actually give the highest probability of obtaining your clients' retirement income sustainability.



The next subject to monitor closely after retirement is that of risk management. What can go wrong to mess up this rosy picture? We all think of health care issues and the possible consequences of a long-term-care issue. While this is indeed a consideration, take the guesswork out and do a comprehensive "what-if" analysis to forecast the potential outcomes. Solutions here often involve a combination of savings, long-term-care insurance and annual health care planning. The proactive CPA financial planner will address this for their clients. Playing long-term-care roulette and ignoring the peril is not wise, and may raise an issue of professional liability for the planner.

Beyond health care, use your knowledge of the client's entire financial situation to recognize other risks that may be present. Are there rental properties not held in a protected entity? Does your client have adequate umbrella liability insurance? Are there any undocumented loans to friends or family? Think "catastrophic" when assessing risk. It is your job to recognize the possible risks and to recommend a mitigation strategy. It is your client's job to decide the strategy to implement to protect against these risks.

Tax planning for retirement may be just as important after retirement as it is before retirement. Before retirement, your options are limited. You have income, retirement plans and a few other ways to reduce your tax bill. But during retirement, you and the client may decide where the income comes from, and what type of tax you'd like to pay. In fact, there may be a possibility for a little tax arbitrage here, and to pay some tax now to avoid a larger tax later.

If your client retires before any pension payments or required minimum distributions come into play, you can often architect the nature of the taxable income. You can draw from IRAs, savings, portfolios, etc. Many tax professionals would agree that utilizing low-bracket opportunities now may make sense if you are likely to be in a higher bracket later. This may be the case for clients with large qualified plan balances. Taking some from the 401(k) now may keep you from a higher bracket later by reducing your future RMDs. In fact, Roth conversions may be valuable. Just like a distribution, a Roth conversion leaves you the opportunity for a tax-free bucket of money forever, and on to the next generation. This strategy makes a lot of sense if you have targeted the next generation as the most likely user of these qualified assets. Of course, income tax planning is a year-by-year changing situation. But don't let your recently retired clients live for a few years in the lowest tax brackets only to creep up a bracket or three when RMDs must start.



Arguably, investment planning during the distribution phase of managing wealth may be the most important. As we mentioned earlier, many retiree clients live in fear of running out of money. They worry about their expenses, inflation, and the unexpected -- which include a sudden drop in their portfolio. Once you have figured out the desired rate of return for your client, making sure that a portfolio is constructed to maximize the possibility of that outcome is a valuable service.

Increasing the probability of achieving a desired rate of return each year is more active than passive in terms of the day-to-day management. Passive, low-cost holdings may still be possible, but actively managing risk with an objective of minimizing drawdowns on the portfolio will help to keep your client focused on the long term. Striving for less volatility and lower standard deviation will increase the odds that poor economic or market conditions will help clients accept some risk. When primarily focused on volatility management, you are not likely to fully participate in market rises. But if done well, you may not fully participate in market declines, either.

When it comes to estate planning, no one wants to talk about their demise. But often, retirement is the first time that many clients get more than a set of identical "I Love You" wills. Let's face it, after retirement most clients should realize that a functional estate plan makes sense.

I suppose the term "functional" is up for debate in the context of estate planning. The "I Love You" wills, for example, where each spouse leaves all the assets to each other, then equally to the children, can work. But it may create several post-mortem problems.

First can be the loss of a state or federal exemption. Portability or not, why wouldn't you set this up in a way to make it easy? The simple will estate plan often results in a lengthy and costly probate. If your client has any children with special needs or a rocky marriage, this simple estate plan may deflect assets from your grandkids if your child has an ugly divorce.

Help your retired clients keep their estate plans up to date. Things change. Some children of your clients will become wealthy in their own right and others will be in need of assistance. Even if the client wants to keep the estate distribution equal, perhaps it is the grandchildren or favorite charity of the well-off children that receive their share. Encourage a family meeting for your clients to talk about the estate plan. Don't let their passing be the first time that the children learn about the plan and who is required to act as a trustee or executrix.

While your clients may feel that they've made it to the goal line by affording the retirement of their dreams, it may be your sage guidance and wisdom that will help to maintain that ideal life and avoid the pitfalls that may derail that vision for an ideal future.

John P. Napolitano, CFP, CPA, is CEO of U.S. Wealth Management in Braintree, Mass. Reach him at (781) 849-9200.


No Sale at the Supreme Court

The rejection of Amazon's appeal brings online sales tax that much closer



The Supreme Court's decision to stay out of the legal battle over New York's attempt to collect online sales tax is expected to increase pressure on Congress to move forward with the stalled Marketplace Fairness Act, as well as opening the door to increasing numbers of states passing their own Amazon laws.

"Now that the Supreme Court has decided not to hear the Amazon and cases and to let the New York click-through nexus provisions stand, I can see many more states jumping on the bandwagon to enact similar rules," said Daniel Effron, national leader of the state and local tax practice of Top 100 Firm Marcum LLP.

Under click-through nexus provisions, online retailers who drive consumer traffic to their Web sites through links placed on other sites are considered to have the same presence, or nexus, for sales tax purposes as do traditional brick-and-mortar retailers.

"An interesting follow-on to this is the Marketplace Fairness Act, which is still stuck in Congress," Effron said. "If the act passes, it would essentially make the click-through nexus rules such as exist in New York a moot point, since all companies that sell products via the Internet will have to collect and remit sales taxes, regardless of whether a particular state enacts click-through provisions."

If so, this past December 2 may have been the last Cyber Monday to be relatively tax-free for many shoppers.



The court decision opens the door for many more states to adopt similar Internet sales taxes, according to Andrew Wesemann, a doctoral student in the Institute of Public Policy at the University of Missouri Truman School of Public Affairs, who has conducted extensive research on Internet sales taxes.

Wesemann also says that this development may put pressure on the federal government to move forward with its own Internet tax legislation. "The Marketplace Fairness Act, which has already been passed in the U.S. Senate, would require states that decide to levy Internet sales taxes to either join existing Internet sales tax agreements or create their own system that meets certain federal guidelines," he said. "With the Supreme Court possibly opening the door for more states to adopt their own Internet sales taxes, it may push Congress to pass the Marketplace Fairness Act to help regulate the system."

The reason there's an issue at all is the 1992 decision by the Supreme Court in Quill, which prohibited states from requiring out-of-state retailers to collect sales tax from residents of the state unless they have a nexus in the state. Nexus is the minimum threshold of contact that must exist between a taxpayer and a state that would allow the state to impose tax. The concept is based on two clauses in the Constitution: the Commerce Clause, which prohibits states from unduly burdening interstate commerce, and the Due

Process Clause, which requires a minimum connection between a state and an entity it wishes to tax.

Ironically, the help for small businesses that proponents of the act claim may be misplaced, according to opponents. "This bill will negatively impact small businesses that use 'no sales tax' as a way to compete on price against large retailers," said Kenneth Wisnefski, an online marketing expert and the founder and chief executive of Webimax. "It is very challenging for small businesses to survive beyond five years as of now, and this bill could most likely lessen that time span."

According to Top 100 Firm McGladrey's recently released survey of retail executives, many retailers view the Marketplace Fairness Act as a significant threat to their profitability, with nearly all - 98 percent - projecting that the legislation, if passed, would result in price increases for consumers as they seek to offset new compliance costs. Almost half of those executives said that the Marketplace Fairness Act's passage would drive them to consider terminating at least some online sales.

"It's a little ironic that MFA, while in perception designed to be competitive, has a negative impact on the smaller businesses," said Dustin Petersen, a McGladrey partner. "There is a direct correlation of smaller to larger businesses regarding the perceived negative impact this bill will have. The reason is cost -- smaller companies don't have the deep accounting team that has the ability to file monthly in 50 states, while the larger ones do. They might have an entire team that deals with state sales tax. And despite the availability of software, a lot of the tech-based compliance platforms have a pricing structure which decreases with volume, so if you're a smaller retailer your cost per transaction is likely to be a lot higher than for a larger retailer."

The McGladrey Marketplace Fairness Act Survey was conducted using an online questionnaire, promoted by McGladrey and coordinated by an independent research firm, which also compiled the final survey results. In the survey, 45 percent of smaller middle-market retailers, most of which view their ability to sell without sales tax as an advantage in competing with larger companies, view the MFA as a threat to that competition, while over three quarters (77 percent) of the largest middle-market retailers view it as a boon to their competitive positioning.

Smaller middle-market retailers were more likely to predict a negative impact on compliance costs, while larger companies, most of which currently charge sales tax, particularly those in the upper half of the $10 million to $1 billion range, predict a positive impact. Given that most of the larger companies in the survey are already charging sales tax in some or all states, this likely reflects their belief that normalization of the process will benefit them, Petersen indicated.

Retailers in the lower revenue ranges of the middle market were far more likely than their larger peers to view the MFA as a potential threat to profitability. Fifty percent of retailers in the $10 million to $50 million range projected that the MFA would have a negative impact on their companies' profit, while 74 percent of the largest companies -- in the $500 million to $1 billion range - projected that the legislation would positively impact their profit.

The results are surprising, Petersen observed, in that "more than anything else, people believe that MFA would be beneficial to mom-and-pops, while the responses to the survey overwhelmingly show smaller online retailers will see the greatest negative to this. It's further supported by the fact that Amazon is in full support of MFA."

State and municipal budget issues will be a driving factor in the arena in the near term, Petersen indicated. "I don't see Congress doing anything immediately, so we'll see continued effort to address the issue on the part of the states," he said.


N.J. Tax Preparer Sentenced for Fraudulent Returns



The owner of a New Jersey tax preparation service was sentenced to 18 months in prison for willfully preparing false tax returns for his clients.

In addition to the prison sentence, Jean Desrosiers, 56, the owner of Jean Multiple Services, was also ordered Monday to serve one year of supervised release and pay a $5,000 fine. U.S. District Court Judge Joel A. Pisano ordered Desrosiers to pay $168,424 in restitution to the IRS.

“With this year’s tax filing season just around the corner, today’s sentencing of Mr. Desrosiers is a good reminder that taxpayers should be careful when choosing a tax preparer,” said Shantelle P. Kitchen, special agent in charge of IRS-Criminal Investigation’s Newark Field Office, in a statement.

“While most return preparers provide excellent service to their clients, a few dishonest tax preparers file false and fraudulent returns to defraud the government, the taxpaying public and their own clients.”

Desrosiers pleaded guilty in June to aiding and assisting in the preparation of false tax returns (see N.J. Tax Preparer Pleads Guilty to Preparing Fraudulent Returns).

Desrosiers’ business, Jean Multiple Services, operated at various locations in Essex County, N.J., including West Orange, Newark and Maplewood. For tax years 2007 through 2011, Desrosiers prepared a number of fraudulent tax returns, according to prosecutors, fabricating and inflating deductions for medical and dental expenses, charitable contributions, job and other miscellaneous expenses, along with claiming Education Credits on Form 8863 and Child and Dependent Care Expenses on Form 2441.

Desrosiers prepared the initial version of the false and fraudulent returns in the presence of his clients. However, on certain returns, Desrosiers filed a different version with the Internal Revenue Service containing higher Form 8863 Education Credits in order to obtain higher refunds. The fraudulent tax returns filed by Desrosiers allegedly caused a tax loss to the government of approximately $168,424, according to prosecutors.

The investigation was conducted by IRS-Criminal Investigation’s Newark Field Office, under the direction of special agent in charge Shantelle P. Kitchen and the U.S. Attorney’s Office, under the direction of United States Attorney Paul J. Fishman. The government was represented by Assistant U.S. Attorney Shirley Emehelu.


Making Sure Your Data is Backed Up


JANUARY 2, 2014

I learned an important lesson in data backup not long ago.

I had taken along my personal laptop on a trip to Accounting Today’s annual Growth & Profitability Summit in Orlando. I toted the HP laptop around to various sessions at the conference, including our Best Firms to Work For awards presentation, but I also frequently brought it back to my hotel room at the Hilton Orlando so I could work on articles and edit our Web site.

On the last night of the conference, I left the laptop on the desk in my room plugged into a power outlet and went out to dinner with my colleagues.

When I got back to my hotel room, I went to sleep, still leaving the laptop plugged in, but not giving that much thought, since it’s usually plugged in at home. But then when I awoke early to work on articles for the site and to compile our daily newsletter, I turned on the computer and saw smoke streaming out of it. The computer wouldn’t go on and there was a noxious odor.

I quickly turned off the computer and unplugged it, but when I tried to turn it on again, smoke was still coming out, but from the part of the computer where the battery was located. Apparently there had been a power spike overnight and it had fried the power system in the computer.

The hotel’s security people came up to my room and checked out the computer, and they later sent up an engineer who examined the outlet. He claimed the electrical outlet was working fine and there hadn’t been a power spike. My iPhone, which I had plugged into a nearby outlet, was still working, but I suspect the power spike had come sometime before I got back to my room for the night and plugged in the phone. In any case, the insurers for the hotel cited this as a reason for refusing to pay the claim.

But I was left with a broken laptop, and a newsletter and some articles I still had to write. The hotel allowed me to use the computer in their business lounge, so with some scrambling, I was able to eventually get the articles and the newsletter together that morning.

When I arrived back in New York, I was able to get a Lenovo laptop from our company, which substituted it for my desktop computer, and it’s easy enough to take the office laptop home with me whenever I need to work from home. But while my work files are regularly backed up to our company’s server, that still left me with a lot of the files from my old laptop that had never been backed up.

I had been testing a portable hard drive from a company called Apricorn, which specializes in making secure hard drives. But unfortunately I had only backed up a handful of files to the Apricorn drive, the Aegis Portable 3.0, but not the contents of my hard drive.

I brought back the HP laptop, which had always worked very reliably since I bought it back around 2008, to the Best Buy store where I had purchased it, hoping their Geek Squad service could fix it or at least recover the files. Unfortunately they told me about a week later that the laptop was too old, and they weren’t able to procure spare parts for it anymore. They were able to back up the files, though. I thought that would be a good test for the Aegis Portable, and indeed Best Buy’s Geek Squad backed up the full contents of the My Documents folder to the Aegis Portable, and I was able to transfer the ones I needed to my work laptop. It was simply a matter of plug and play after I plugged the drive into the USB slot on the computers. Then I could just drag and drop files from the Aegis to the laptop and vice versa.

I was ready to buy a new laptop because I didn’t want to transfer many of my personal files to the work computer, but the Geek Squad service employee advised me to wait until Black Friday in November, when they would have some good sales.

By the time Black Friday rolled around, I was more than ready for a new laptop. I still had a very old Dell laptop at home that is barely working, but can be used for word processing and a little Web surfing when necessary. I didn’t like taking the office laptop home with me too often, since it’s a little bit heavy and I recently moved to an apartment that’s up a steep hill. The salesman was right about the Black Friday sales, and I was able to buy an inexpensive Asus X200CA laptop. I found there’s a bit more of a learning curve with Windows 8 than I had expected, but the laptop has been working surprisingly well for a $250 computer. I was also able to transfer all of the files from the Aegis Portable 3.0 to the Asus laptop without a problem. Again it was just a matter of plugging the external drive into my laptop and dragging and dropping files. I even found that I eventually liked Windows 8, once I got more accustomed to the tile interface.

I also asked the folks at Apricorn if I could try out another of their hard drives, since the Aegis Portable 3.0 works so automatically and seamlessly that there really isn’t a lot to review about it. Their line of secure hard drives is probably more apt for accountants anyway since they include a keypad that allows you to password protect the drive and keep client files protected.

The Aegis Padlock Fortress is the one they sent me to test. With this drive, you plug it into the USB port and set a PIN number using the alphanumeric keypad. The drive uses a series of red, green and blue LED lights to indicate when you have successfully set up a PIN number and when it’s been entered correctly. It’s fairly easy to set up, but you have to make sure you remember the PIN number to access the files. When the PIN is incorrect, the LED will turn red and will remain inoperable until the right PIN is input. It can ensure that your confidential client files remain backed up so you don’t lose them, while still keeping them safe and secure from any prying eyes.

And you’ll have the comfort of knowing that if your computer gets damaged or fried by a power spike, your files will be in a safe place, ready to be transferred to your computer again once it’s been fixed or replaced.


Top 15 Tax Developments of 2013
(Parker Tax Publishing December 2013)

The biggest tax development in 2013 came barely a day into the new year, with the dramatic, last minute passage of the American Taxpayer Relief Act (ATRA). As a follow up to this bold development, a stalemated Congress went the rest of the year without passing a single piece of significant tax legislation.

With Congress effectively on the sidelines, the highest profile tax developments for the rest of 2013 came from (1) the IRS, which issued sweeping new regulations dealing with the Affordable Care Act and several other major topics, (2) the Supreme Court, which struck down a provision in the Defense of Marriage Act thus legalizing same-sex marriages and opening the floodgates for amended tax returns; and (3) the Washington D.C. district court, which rejected the IRS imposition of requirements on unregulated tax-return preparers, effectively shutting down the Tax Preparer Registration program.

Several other high profile court decisions and IRS rulings round out the top 15 tax developments for the year.


1. ATRA Raises Tax Rates, Fixes AMT Exemption, and Extends Dozens of Deductions and Credits

The year began with the passage of the American Taxpayer Relief Act of 2012 (ATRA). Probably the most important provision of ATRA for many taxpayers was the permanent extension of lower tax rates on individuals with income of $400,000 or less, heads of households with income of $425,000 or less, and married taxpayers with incomes of $450,000 or less. Individuals with incomes above those thresholds, however, saw tax rate increases of up to 39.6 percent.

ATRA also increased the alternative minimum tax exemption amounts and, for the first time, indexed the exemption and phaseout amounts, with the result that taxpayers can avoid the annual uncertainty regarding the exemption. ATRA extended the favorable capital gains and dividends rates on income at or below $400,000 (individual filers), $425,000 (heads of households), and $450,000 (married filing jointly) for tax years beginning after December 31, 2012. However, for taxpayers with incomes above those thresholds, the rate for both capital gains and dividends increased to 20 percent.

Many tax provisions that had expired or were scheduled to expire were extended by ATRA including (1) the child tax credit, which was permanently extended; (2) the American Opportunity tax credit, which was extended through 2018; (3) the increase in the earned income credit for families with three or more children, which was extended through 2017; (4) the deduction for certain expenses of elementary and secondary school teachers, which was extended through 2013; (5) the exclusion from gross income of the discharge of qualified principal residence debt, which was extended through 2013; (6) the extension of the state and local general sales tax deduction, which was extended through 2013; (7) the above-the-line deduction for qualified tuition and related expenses, which was extended through 2013; and (8) the deduction of mortgage insurance premium that are treated as qualified residence interest, which was extended through 2013.

For businesses, ATRA retroactively extended the $500,000 Section 179 expensing amounts, which had expired at the end of 2011, through 2013. Bonus depreciation was also retroactively extended for most businesses through 2013. Other business-related provisions affected by ATRA included (1), the work opportunity credit, which was extended through 2013; (2) the reduction in the S corporation recognition period for built-in gains, which was extended through 2013; and (3) favorable basis adjustments of S corporation stock for shareholders making charitable contributions.


2. Final Repair/Capitalization Regs Provide Numerous Safe Harbors for Taxpayers

In September, the IRS issued final regulations (T.D. 9636) regarding the deduction and capitalization of expenditures related to tangible property. Under these rules, a taxpayer must distinguish whether an amount paid is for a repair, in which case it may be currently deducted, or is for an improvement to a unit of property, in which case it must be capitalized. Under the regulations, a unit of property is considered improved if the amounts paid for activities performed after the property is placed in service by the taxpayer (1) are for a betterment to the unit of property; (2) restore the unit of property; or (3) adapt the unit of property to a new or different use.

The final rules contain numerous safe harbor and de minimis rules under which a taxpayer can avoid capitalizing an item. For example, there is a safe harbor for routine maintenance on property. Under that safe harbor, amounts paid for routine maintenance on a unit of tangible property, or on a building (leased or owned), condo, or cooperative, are deemed not to improve that unit of property and may thus be expensed. The final regulations expanded the definition of materials and supplies to include property that has an acquisition or production cost of $200 or less (increased from $100 or less in the temporary regulations), clarify the application of the optional method of accounting for rotable and temporary spare parts, and simplify the application of the de minimis safe harbor to materials and supplies.

The regulations added new deminimis safe harbor for expensing items, determined at the invoice or item level and based on the policies the taxpayer uses for its financial accounting books and records. A taxpayer with an applicable financial statement (AFS) may rely on the de minimis safe harbor where the amount paid for property does not exceed $5,000 per invoice, or per item as substantiated by the invoice. A taxpayer without an AFS may rely on the de minimis safe harbor only if the amount paid for property does not exceed $500 per invoice, or per item as substantiated by the invoice. If the cost exceeds $500 per invoice (or item), then no portion of the cost of the property will fall within the de minimis safe harbor.

            The final regulations added a rule aimed at helping certain small taxpayers. Under that rule, a qualifying small taxpayer can elect to not apply the improvement rules requiring capitalization to an eligible building property if the total amount paid during the tax year for repairs, maintenance, improvements, and similar activities does not exceed the lesser of $10,000 or 2 percent of the unadjusted basis of the building.

While the final regulations made some accommodations for smaller taxpayers in an effort to ease the compliance burden of these new rules, the rules are fairly complex and businesses may need to revise their accounting procedures to accommodate the new rules. Because the rules are more favorable for businesses that have applicable financial statements, businesses without such statements may want to look at whether transitioning to AFSs would be worth their while.


3. IRS Clarifies Rules on 3.8% Net Investment Income Tax in Final and Proposed Regs

In late November, the IRS issued more than 300 pages of final (T.D. 9644) and proposed (REG-130843-13) regulations on the 3.8 percent net investment income tax. Instead of finalizing the proposed rules on how to calculate the gain or loss on the disposition of interests in partnerships and S corporations, the IRS went back to the drawing board and issued new proposed regulations which provide two methods of calculating gain or loss includible in net investment income upon the disposition of a partnership or S corporation interest a primary method and an optional simplified reporting method, as well as a list of exceptions as to who may use the optional simplified method. The IRS also issued proposed regulations which address for the first time the impact of the net investment income tax on various partnership items, such as guaranteed payments and Code Sec. 736 payments.

Additional substantial changes in the final regulations from the proposed regulations include: (1) a relaxation of the rule preventing the use of capital losses against other investment income such that capital losses may now reduce other investment income; (2) a safe harbor rule for real estate professionals so that rental income will not be included as net investment income of such professionals; (3) revising the method for computing properly allocable itemized deduction to a more simplified method; (4) partially allowing the use of net operating losses; and (5) allowing the regrouping of activities under the passive loss grouping rules on certain amended returns.

Because 2013 is the first year that the net investment income tax applies, it's reasonable to expect issues to arise particularly with respect to calculating the gain or loss on the disposition of an interest in a partnership or S corporation. The new proposed regulations in this area are not exactly the model of clarity. Similarly, the definition of a trade or business can be expected to cause issues for practitioners, as the regulations do not define what this means for purposes of the net investment income tax but say instead to follow case law. Another issue the rules did not resolve was how to determine if an estate or trust materially participates in an activity such that income from the activity is not included in net investment income. Practitioners can expect to see much guidance in this area as issues arise.


4. District Court Shuts Down Tax Preparer Registration Program in Loving Decision

In January, a district court, in Loving v. IRS, 2013 PTC 10 (D. D.C. 1/18/13), agreed with three independent tax return preparers that the IRS exceeded its authority in requiring all tax return preparers to pass a qualifying exam, pay an annual application fee, and take 15 hours of continuing-education courses each year. The court held that the tax-return preparer regulations were invalid and that the IRS could not enforce them.

Two months later, in March, in Loving v. IRS, 2013 PTC 37 (D.C. Cir. 3/27/13), the D.C. Court of Appeals rejected an IRS motion to stay the lower court's order. The IRS then suspended the requirements for tax-return preparers until the D.C. Circuit Court rules on the IRS appeal, which was heard on September 24. In an unusual move, five former IRS commissioners, appointed by Democratic and Republican Presidents, came together to file an amicus brief (2013 PTC 64) before the court. In that brief, the commissioners strongly disagreed with the D.C. district court's decision.

            Many CPAs and attorneys who prepare tax returns for a living are hoping that the D.C. Circuit court overrules the district court and that the IRS reinstates the tax preparer registration program. They feel it's important to level the playing field for tax return preparers. Without regulations, anyone, regardless of their knowledge of the tax laws, can prepare a return. And many professional return preparers report seeing the disastrous results of returns prepared by incompetent tax return preparers.

OBSERVATION: While the IRS temporarily suspended the preparer tax identification number (PTIN) program as a result of the court decision, it reopened the program after a clarification from the court that the program was not affected.


5. Supreme Court Strikes Down DOMA, Leading to Numerous Amended Returns

On June 26, in yet another 5-4 decision, the Supreme Court struck down Section 3 of the Defense of Marriage Act (DOMA). The decision in U.S. v. Windsor, 2013 PTC 167 (S. Ct. 6/26/13) has broad tax implications for many same-sex couples. Couples legally married can no longer file as single. They must either file a joint return or file as married filing separately. For high-earner same-sex couples this can be a negative, as the threshold for applying the 3.8 percent net investment income tax to joint returns is $250,000, compared to a threshold of $200,000 for single taxpayers.

On the plus side, the DOMA decision allows taxpayers that might have benefited from filing a joint return to go back and file amended returns for any open tax year. In addition, same-sex couples can take advantage of the marital deduction for estate tax purposes, thus passing their estate tax-free to their partner. Refund claims can be made for estate taxes paid on property inherited from a same-sex partner to whom an individual was married under state law and on which estate taxes were paid. Additionally, employer-provided benefits that were previously taxable to partners in a same-sex marriage are now excludible from income, so refunds can be claimed on this basis also.

There are numerous opportunities here for amended returns and practitioners with same-sex couple clients should revise their year-end questionnaire to capture situations where amended returns may be warranted.


6. IRS Issues Final Regs on Individual Health Insurance Mandate Penalty

Under the Patient Protection and Affordable Care Act (PPACA), beginning in 2014, nonexempt U.S. citizens and legal residents of the United States must maintain minimum essential healthcare coverage. There has been a lot of controversy over this provision, referred to as the "individual mandate." A penalty in the form of a "shared-responsibility payment" is imposed upon individuals who do not have such healthcare coverage. The penalty is imposed under Code Sec. 5000A.

On August 30, the IRS issued final regulations under Code Sec. 5000A in T.D. 9632. One of the more favorable provisions of the final regulations is a rule that an individual is treated as having coverage for a month so long as he or she has coverage for any one day of that month. For example, an individual who starts a new job on April 30 and is enrolled in employer-sponsored coverage on that day is treated as having coverage for the month of April. Similarly, an individual who is eligible for an exemption for any one day of a month is treated as exempt for the entire month.

The statute provides an exemption for gaps in coverage of less than three months. It generally specifies that such gaps be measured without regard to the calendar years in which the gap occurs. For example, a gap lasting from November through February lasts four months and therefore generally would not qualify for the exemption. However, recognizing that many individuals file their tax returns as early as January, before the length of an ongoing gap may be known, the final regulations provide that if the part of a gap in the first tax year is less than three months and the individual had no prior short coverage gap within the first tax year, then no shared responsibility payment is due for the part of the gap that occurs during the first calendar year, regardless of the eventual length of the gap. For example, for a gap lasting from November through February, no payment would be due for November and December.

The final regulations provide that a taxpayer is liable for the shared responsibility payment imposed for any individual for a month in a tax year for which the individual is the taxpayer's dependent for that tax year. Whether the taxpayer actually claims the individual as a dependent for the tax year does not affect the taxpayer's liability for the shared responsibility payment for the individual. Special rules are also provided for determining liability for the shared responsibility payment attributable to children adopted or placed in foster care during a tax year. If a taxpayer legally adopts a child and is entitled to claim the child as a dependent for the tax year when the adoption occurs, the taxpayer is not liable for a shared responsibility payment attributable to the child for the month of the adoption and any preceding month. Conversely, if a taxpayer who is entitled to claim a child as a dependent for the tax year places the child for adoption during the year, the taxpayer is not liable for a shared responsibility payment attributable to the child for the month of the adoption and any following month.


7. Obama Administration Delays Employer Healthcare Mandate Until 2015

In July, the Treasury Department announced that two key parts of the Affordable Care Act, the mandatory employer and insurer reporting requirements, would not take effect until 2015, one year later than originally planned.

As a result, businesses to which the law applies (generally those with 50 or more full-time employees or full-time equivalents) are not required to provide healthcare to employees until 2015.

The delay in implementing these provisions is designed to meet two goals: (1) give the IRS time to consider ways to simplify the new reporting requirements; and (2) provide employers time to adapt health coverage and reporting systems while moving toward making health coverage affordable and accessible for their employees.


8. Supreme Court Reverses Third Circuit in Foreign Tax Credit Case

In May, the Supreme Court issued a unanimous opinion in a case dealing with foreign tax credits. The decision has broad implications for entities doing business abroad because the Court declined to accept the notion that U.S. courts must take the foreign tax rate as written and accept whatever tax base the foreign tax purports to adopt.

In PPL Corporation v. Comm'r, 2013 PTC 108 (S. Ct. 5/20/13), the Supreme Court reversed a Third Circuit opinion and held that a United Kingdom (U.K.) windfall tax was creditable for U.S. tax purposes under Code Sec. 901. In doing so, it rejected the IRS's rigid construction of the foreign tax rules, saying that such rigid construction could not be squared with the black-letter principle that tax law deals in economic realities, not legal abstractions.

The important take away from this decision is that it's not important how a foreign government characterizes its own tax in determining whether a foreign tax credit is available for U.S. tax purposes. Given the artificiality of the U. K.'s calculation method, the Court followed substance over form and held that the windfall tax was nothing more than a tax on actual profits above a threshold.


9. S Corp Procedure Expands Time for Applying Corrective Procedures to Late Elections

Late S corporation elections, such as the election to become an S corporation or the election by certain trusts to become an eligible S corporation shareholder, can result in additional taxes if not properly corrected. In August, the IRS issued Rev. Proc. 2013-30, which will greatly simplify obtaining relief for various late S corporation elections. The procedure is more liberal in that it expands the time period taxpayers have in which to request relief from late S corporation elections.

Rev. Proc. 2013-30 provides corrective actions for various late S corporation elections and eliminates compliance with a number of prior procedures that taxpayers had to navigate to obtain such relief. The guidance is in lieu of requesting an IRS ruling and, thus, there is no user fee for requests filed under Rev. Proc. 2013-30. While there may still be some taxpayers that do not fall within the new procedure and will have to request an IRS ruling and pay a user fee, the number of such taxpayers is minimized under the new procedure.


10. IRS Provides Taxpayer-Friendly Guidance on Residential Energy Tax Credits

In November, the IRS issued 2013-70 which expanded guidance on tax credits for residential energy property and provided new insights into the types of property that qualify. Taxpayers that place certain nonbusiness energy property in service before 2014 or before 2017 may be eligible for tax credits under Code Sec. 25C and Code Sec. 25D, respectively. Each credit has different requirements and covers different types of property. The credits, which are aimed at homeowners installing energy efficient improvements such as insulation, new windows (including skylights), certain roofs, furnaces, and hot water boilers, range from $50 to $1,500, depending on the type of property placed in service.

Notice 2013-70 includes taxpayer-friendly guidance in several areas, including (1) expressly allowing taxpayers to claim a Code Sec. 25D credit for certain qualifying property installed in a second home or a vacation home, (2) allowing for the inclusion of sales tax paid on qualifying property when calculating credits under Code Sec. 25C or Code Sec. 25D, and (3) providing that window sash replacement kits may be eligible for the Code Sec. 25C credit even though they are not whole windows.

To the extent the notice provides new insight into the types of property that qualify, practitioners may be able to use this guidance to take credits on a client's 2013 tax return or file amended returns for prior years in which their clients placed such property in service.


11. Inappropriately Signed Return Keeps Statute of Limitations Open

The importance of knowing when the statute of limitations begins and ends is central in assessing a client's tax liability. Generally, under Code Sec. 6501, the IRS has three years from the date a return is filed in which to assess additional tax due. In Chapman Glen Limited v. Comm'r, 140 T.C. No. 15 (5/28/13), the Tax Court held that the three-year statute of limitations period remained open because the taxpayer's Form 990 was not signed by one of the taxpayer's corporate officers and thus was not a valid return.

Chapman Glen Limited is a cautionary tale of the importance of meeting return reporting requirements and the severe repercussions that can result if those requirements are not followed.


12. Court Upholds Right of Shareholder to Revoke S Status of Bankrupt QSub

In re Majestic Star Casino, LLC, 2013 PTC 109 (3d Cir. 5/21/13), a court was asked to decide for the first time whether or not the sole shareholder of an S corporation was entitled to revoke an S corporation election with the result being that the S corporation's QSub, which was in a Chapter 11 bankruptcy, lost its QSub election. The Third Circuit rejected conclusions reached by several lower courts that S corporation status was "property" and vacated a bankruptcy court order compelling the parent corporation to rescind its S revocation. The case reinforces the rule that filing a bankruptcy petition is not supposed to expand or change a debtor's interest in an asset; it merely changes the party who holds that interest.

Had the Third Circuit affirmed the bankruptcy court's holding, a QSub in bankruptcy could stymie legitimate transactions of its parent as unauthorized property transfers, even though the QSub would have had no right to interfere with any of those transactions before filing for bankruptcy.


13. Payroll Tax Fraud by Accountant Keeps Employer's Statute of Limitations Open

In City Wide Transit, Inc. v. Comm'r, 2013 PTC 27 (2d Cir. 3/1/13), the Second Circuit reversed the Tax Court and held that a CPA impersonator that filed fraudulent tax returns on behalf of a company in order to embezzle money that the company otherwise owed the IRS for employment taxes, was found to have intentionally evaded that company's taxes, thereby triggering the tolling provision of the statute of limitations. Accordingly, the IRS was free to assess the company's taxes at any time.

The case is notable because the company itself did not commit the fraud; rather, as a result of an employee's fraud, the company was subject to an unlimited statute of limitations. Thus, it's a cautionary tale for what can happen when an employee with access to filing a company's tax returns is not properly vetted.


14. Fourth Largest Tax Prep Firm in U.S. Shut Down for Fraudulent Conduct

Calling the repeated fraudulent and deceptive conduct by the fourth largest tax preparation firm in the United States "astonishing" and the evidence of such conduct "overwhelming," an Ohio district court judge permanently barred the organization, as well as its CEO and owner, from operating, or being involved with in any way, any business relating in any way to the preparation of tax returns.

In U.S. v. ITS Financial, LLC, 2013 PTC 349 (S.D. Ohio 11/6/13), the judge found the company's repeated attempts to downplay the gravity of their lawlessness "stunning" and said the injunction was necessary to protect the public and the Treasury. One of the more heinous acts committed by the owner of the company involved forging customers' signatures on duplicate refund checks that subsequently caused collection proceedings against the customers for a situation they knew nothing about. Several clients saw their credit ratings ruined. In all, the district court devoted 173 pages of its opinion to detailing a mind-boggling array of abuses perpetrated by ITS.


15. Tax Court Reverses Course on Gift Tax Issue and Rules for Taxpayer

In Steinberg v. Comm'r, 141 T.C. No. 8 (9/30/13), the Tax Court determined that it will no longer follow its decision in McCord v. Comm'r, a 2003 case in which it held that a couple had improperly reduced their gross gift value by the actuarial value of the donees' obligation to pay potential estate taxes. In reversing course, the court held that a donee's assumption of estate tax liability may reduce a gift's value.

            In Steinberg, the 89 year old taxpayer gifted securities and cash to her daughters and, in exchange, the daughters agreed to assume and pay, among other things, any estate tax liability imposed under Code Sec. 2035(b) as a result of the gifts (an arrangement commonly known as a "net gift agreement"). The Tax Court rejected the IRS's request for summary judgment and held that, because the value of the obligation assumed by the daughters was not barred as a matter of law from being consideration in money or money's worth, the fair market value of mother's taxable gift could possibly be reduced by the daughters' assumption of the potential Code Sec. 2035(b) estate tax liability.

Although the Steinberg litigation is ongoing, the Tax Court's reversal of its own McCord precedent opens the door to broader application of the taxpayer-friendly "net gift rationale".

Parker Tax Pro Library - An Affordable Professional Tax Research Solution.


What To Say When (Not If) Your Offshore Bank Asks, 'Are You Compliant With IRS?'

More than 7 million Americans live abroad, and most have bank accounts there. Many other Americans have overseas bank accounts too. Most are receiving letters from their banks about their American status.

Please provide your U.S. tax ID and verify that you are fully tax compliant with the IRS. In many cases, the bank will close your account if you don’t respond favorably. But what if you aren’t up to snuff with the IRS?

FATCA—the Foreign Account Tax Compliance Act—takes effect in 2014 and the IRS will start penalizing foreign banks if they don’t hand over Americans. Most foreign countries and their banks are getting in line to take their medicine from the IRS. So don’t count on bank secrecy anywhere.

Besides, on top of FATCA, the U.S. has a treasure trove of data from 40,000 voluntary disclosures, whistleblowers, banks under investigation and cooperative witnesses. So the smart money suggests resolving your issues. You can have money and investments anywhere in the world as long as you disclose them.

You must report worldwide income on your U.S. tax return. If you have a foreign bank account you must check “yes” on Schedule B. You may also need to file an IRS Form 8938 with your Form 1040 to report foreign accounts and assets.

Tax return filing alone isn’t enough. U.S. persons with foreign bank accounts exceeding $10,000 in the aggregate at any time during the year must file an FBAR by each June 30. Tax return and FBAR violations are dealt with harshly. Tax evasion can mean five years in prison and a $250,000 fine. Filing a false return? Three years and a $250,000 fine.

            Failing to file FBARs can be criminal too. Fines can be up to $500,000 and prison can be up to ten years. Even civil FBAR cases are scary, with non-wilful FBAR violations drawing a $10,000 fine. For willful FBAR violations, the penalty is the greater of $100,000 or 50% of the amount in the account for each violation. Each year you didn’t file is a separate violation. Those numbers can really add up and be much worse than the 27.5% Offshore Voluntary Disclosure Program penalty.

            So what are your choices? These may not be the whole universe, but here are some legitimate ones and some that seem quite unwise.

Tell the bank you’re compliant even if you’re not? This seems dangerous. The bank or the IRS will find out, maybe not right away, but eventually.

Don’t respond? Sure, you can do this for a while. But eventually, the bank will close your account. Banks routinely turn over the names of closed accounts, so that hardly solves the problem.

Join one of two IRS amnesty programs and tell your bank you’ve done it? This is the safest choice. The primary program is the Offshore Voluntary Disclosure Program. You pay back taxes and penalties but you will not be prosecuted. The other is the IRS’s Streamlined program for some U.S. persons abroad. It is far less expensive if you qualify.

File amended tax returns and FBARs and pay any taxes you owe? Then tell the bank you’ve complied with IRS laws and wait? This may be tough to orchestrate, though it could work in some cases. However, this is considered a “quiet” disclosure–a correction of past tax returns and FBARs without drawing attention to what you are doing. The IRS warns against it.

Just start filing complete tax returns and FBARs prospectively, without trying to fix the past? Still, you could tell your bank you are complying with IRS rules. Of course, there is a risk your past non-compliance will be noticed. Most people are therefore not comfortable with this one.

This is a skeletal list. Perhaps there are other choices too. But you clearly shouldn’t take any action without considering your profile, facts, numbers, actions and risk tolerance. These are serious matters.

Indeed, although the chance of a terrible result might be fairly small, terrible in this case really can mean terrible. Get some advice and try to get your situation resolved in a way that makes sense for your facts, risk profile, and pocketbook.

You can reach me at This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.



A Round Trip Ticket to Unwanted IRS Attention: False Documents and Fraud

December 31, 2013

As we approach year-end and clients push to get deals done, I am going to briefly discuss the cautionary tale of Brown v Commissioner from earlier this month. On paper, the issue in the case is dry: whether a taxpayer who took ownership of a plane on December 30, 2003 placed that plane “in service” in 2003 for the purpose of qualifying for bonus depreciation.

The case though makes for a fascinating read. It involves a $22 million dollar private plane, letters purportedly drafted by a CFO (also a CPA) whose responsibility included making up documents “to get the substantiation for deductions when the IRS requests them”, related audits that resulted in income adjustments of over $50 million, and over $20 million in civil fraud penalties.

In this post, I will highlight the procedural issue in Brown, namely the Court’s analysis of the civil fraud penalty. The case illustrates that while closing a deal before year’s end may make sense, sometimes the drive to secure tax benefits can lead to major tax problems.



Depreciation: In Service

Some judges have a flair for making any issue interesting. Having spent some time recently with a Judge Holmes TEFRA opinion that I discussed here (involving affected items and notices of deficiency), and now with an opinion in case involving bonus depreciation, I appreciate his style. His opinions clearly discuss the applicable technical rules, directly address the authorities, and somehow manage to be funny even when discussing unfunny topics like TEFRA and depreciation.

In Brown v Commissioner, the issue revolved around whether Brown, a life insurance salesman to ultra high net worth clients, was able to take about $11 million in bonus depreciation deductions for a custom jet. The dispute was one of timing: Brown purchased the plane (a Challenger) on December 16, 2003 and took delivery on December 30, 2003. On December 30, he picked the plane up in Portland, and flew to a client in Seattle for a lunch meeting. After that meeting, he flew for about 3.5 hours to a colleague in Chicago, where he gave his colleague a 10 minute tour of the plane and met for under an hour at an airport pizza restaurant. After the meeting, Brown flew back to Portland, arriving back shortly after midnight on December 31.

After returning the plane (and flying his other plane to Mexico to celebrate New Year’s Eve), the new plane stayed back in Portland where customizers worked on making changes to the plane that Brown insisted on as necessary for his business. Those changes were  20 inch rather than 17 inch monitors he would use for Powerpoint presentations and a custom conference table for on-flight meetings. The customizer made the  changes in January 2004, and Brown picked up the plane for final delivery at the end of January, 2004.

Despite the changes Brown arranged for the plane, he wanted to claim 50% bonus depreciation in 2003.To get the depreciation deduction in 2003, Brown was aware of the need to treat the plane as in service before the end of 2003. As Judge Holmes describes:

Brown understood that taking delivery wasn’t enough to capture the bonus depreciation he was hunting. So his eventful day had only just begun. In what the Commissioner calls “tax flights,” Brown proceeded to take several trips in the Challenger.

For those who are interested in or who advise clients on whether property is placed in service for depreciation purposes, I recommend reading the opinion. For purposes of this post, I’ll summarize and state that the regs under Section 168 require that the otherwise depreciable object is in service when it is “first placed in a condition or state of readiness and availability” for the “specifically assigned function” for which a taxpayer purchased it. The main issue in the case was whether Brown’s returning the plane and adding the custom conference table and larger monitors meant that the plane was not ready and available for the assigned function until he took delivery in 2004. Because Brown testified that he “needed” the custom conference table and that the monitors and the table were “required” for his business, the court found that Brown did not place the plane in service until 2004, when the plane was specifically outfitted with the changes Brown insisted on:

Cases [citations and names omitted] tell us to look at the taxpayer—he’s the one who gets to determine what an asset’s specifically assigned function is. And here that asset’s function wasn’t just to fly Brown around; it was to be configured in a particular way to meet his very particular business needs. Even though an asset like the Challenger may be operational, it’s not placed in service until it is operational for its intended use on a regular basis.


Penalties: Fraud and Substantial Understatement

In addition to IRS reversing the $11 million bonus depreciation, its notice of deficiency added a 75% civil fraud penalty.  Some context for the penalty is helpful.  Section 6663(a) adds a penalty equal to 75% of the portion of the underpayment attributable to the fraud. Generally, IRS has the burden of proving fraud, which requires clear and convincing evidence that a taxpayer underpaid tax and that the underpayment was due to the fraud. Under Section 6663(b) the burden shifts back to the taxpayer if the IRS proves that any part of the underpayment was due to fraud. Prior to trial the taxpayers agreed that $1.8 million of other adjustments to income from 2003 were subject to the fraud penalty—thus, the burden shifted back to Brown, who had to show that the bonus-depreciation was not attributable to fraud.

Fraud, as Brown discussed, is the “intentional wrongdoing with the specific purpose of avoiding a tax believed to be owed.” Because it is unusual to have direct proof of the fraud, courts and IRS look to a grab bag of factors (often called badges). The opinion lists a number of the factors that courts and IRS alike have identified.

One of the factors the courts look to as a sign of fraud is the use of false documents. Here, to support its finding of fraud, the IRS principally relied on that factor (as well as the taxpayer’s sophistication and multi-year and multi-million dollar patter of overstating deductions). Let’s consider the false documents, and consider why in some cases there are really bad false documents and only somewhat bad false documents.


False Documents and Fraud

To justify his position that he placed the plane in service in 2003, Brown introduced letters from two people he supposedly flew to and visited on December 30, a client in Seattle and a business associate in Chicago.

First, the opinion discussed the client letter.  Brown testified that he flew to Seattle on December 30 and had lunch at a restaurant for 1.5 to 2 hours, where the client introduced Brown to two potential clients. The opinion included the letter. The client did not testify at Brown’s tax trial—he was a fugitive facing money laundering and fraud charges. Following is an excerpt from the letter:

Because of your extraordinary knowledge of insurance and related matters, I was happy to introduce you to a business associate of mine and his wife. I enjoyed watching their eyes light up as you discussed how you could help them take advantage of various estate planning alternatives. I trust you will be able to turn this introduction into a win-win situation for both parties. Again, thanks for all you have done for me and my family in the past and I look forward to working with you in the future.

Best regards, /s/ Michael Mastro

Judge Holmes  was skeptical: “[n]ot only do our eyes not light up, but we sense something doesn’t smell quite right with the whole Seattle visit.” The flight logs suggested that Brown was in Seattle for only 66 minutes, but Brown said his lunch meeting in Seattle lasted between 90 minutes and two hours. At trial, Brown admitted that the letter was

neither contemporaneous nor even prepared by Mastro. He admitted his CFO/CPA, Gary Fitzgerald, drafted the letter sometime much later and had Mastro sign it. Although at one point Brown said he thought he had told Fitzgerald to write the letter “several months” after year end, we find more credible his later testimony that one of Fitzgerald’s jobs is to write letters on behalf of Brown’s business associates “to get the substantiation for deductions when the IRS requests them.”  We therefore find that Fitzgerald didn’t write this letter until at least 2006 when the IRS began auditing Brown’s return for the 2003 tax year. We do not take it seriously as proof of anything but a reason to question Brown’s credibility.

A similar finding was made with respect to a letter from a business colleague, who Brown claimed he had visited in Chicago for about an hour. Here’s the letter Brown introduced from his colleague:

Thanks for coming through for me when I told you how vital it was for us to meet before the books are closed on 2003.

As we discussed yesterday in Chicago, due to my efforts, we were able to share insurance commissions on well over a million dollars of policies in 2003. The list we reviewed, of prospective clients in the greater Chicago area, should generate even greater commissions in 2004.

Our relationship has always been mutually rewarding in the past, and based on yesterday’s meeting, looks like it will continue so well into the future. Thanks again. Sincerely, OAK

            Again, Judge Holmes found problems with the letter:

            This is just not believable. Brown admitted that Fitzgerald [Brown’s CFO/CPA] had written the letter at his direction–like the Mastro letter–and sent it to Pasquale to sign. (Pasquale confirmed he signed a letter that had been written for him.) Pasquale “couldn’t recall” exactly when he received it, saying he thought it was at some point in 2004 but also that it was possible that it was given to him as late as 2006. In light of that testimony, and Brown’s testimony that one of Fitzgerald’s jobs was to get documentation for these events only “when the IRS requests [it],” we find–as we did with the Mastro letter–that Fitzgerald didn’t send this letter to Pasquale until after the IRS began auditing Brown’s return in 2006.

Despite the problems with the letters, they did not support a finding of fraud. In addition to pointing out that it “was not clear the contents of the letter were patently false,” even if they were false, they did not support a finding of the required fraudulent intent, which must exist at the time the taxpayer files the return.

Some cases have looked to postfiling events as suggestive of finding intent that formed earlier. Despite those cases, Brown “credibly” testified that he only had his employee write the letters for others to sign when the IRS requested them at audit. Thus, according to Judge Holmes, they were not supportive of an intent to mislead at the time of filing, the crucial time when the intent must exist to justify a fraud penalty.

What also helped the court decide that Brown should not be subject to the fraud penalty was that the IRS conceded that the bonus depreciation expense was legitimate—albeit for 2004, not 2003, and that he actually took ownership of the plane in 2003. The court also concluded that Brown indeed did fly to Chicago to meet with his business associate Pasquale.  To the court, Brown did try to meet the “placed in service” requirement and he “actually believed he completed all the steps necessary to use the plane in 2003” to justify taking the expense. In light of the above, even with the burden on Brown, the court concluded that the fraud penalty should not apply.


Substantial Understatement

Despite the finding that there was no fraud, it was not a complete wipeout for the IRS on penalties. While the IRS cannot stack the fraud and 20% accuracy-related penalties, it can, and often does, argue them in the alternative. The Court sustained the 20% accuracy related penalty attributable to a substantial understatement of income taxes. That issue turned on determining whether the claimed depreciation was justified based upon substantial authority.

Finding that the penalty applied, the court rightly identified that the substantial authority standard is objective, but also seemed to fault the taxpayer for barely mentioning favorable case law in its briefs that arguably justified its position that the plane was placed in service in 2003 (“we previously noted that the discussion in their opening brief of that term was limited to one footnote that didn’t even discuss the regulation or any pertinent caselaw interpreting it”). Nonetheless, given the weight of the case law that suggested that the plane was not placed in service in 2003, the court found that there was not substantial authority. Substantial authority exists only “if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment.” Sec. 1.6662-4(d)(3).


Some Parting Thoughts

Year-end tax planning is part of tax practice. Sometimes, the desire to get something done before the end of the year can invite unwelcome IRS attention and put taxpayers in the uncomfortable position of staring down a major penalty bill. The hubris that clients sometimes feel when it comes to serving up documents justifying an expense can lead clients (and advisors) to do foolish and aggressive things that can lead to major problems.




The 3 biggest tax stories of the year


By Bill Bischoff, MarketWatch


The year 2013 will go down in history as a pretty big one for tax developments. Here are the three most important stories.

1. Fiscal cliff legislation creates welcome tax certainty (at a cost for higher-income folks)

The American Taxpayer Relief Act (better known as the fiscal cliff legislation) was enacted in January. It included federal income tax hikes for higher-income folks: a top rate of 39.6% on ordinary income (up from 35%), a top rate of 20% on long-term capital gains and dividends (up from 15%), and resurrected phase-out rules for itemized deductions and personal and dependent exemption deductions (versus no phase-out rules for 2010-2012).

Thankfully most individuals are unaffected. They still pay the familiar Bush tax cut rates of 10%, 15%, 25%, 28%, 33%, and 35% on ordinary income and 0% and 15% on long-term gains and dividends. And they are unharmed by the resurrected deduction phase-out rules.

The fiscal cliff legislation also installed a relatively favorable federal gift and estate tax regime with a $5.25 million exemption for 2013, a $5.34 million exemption for 2014, and a flat 40% tax rate on the excess of taxable estate values over these exemption amounts.

The really good news: all these provisions are permanent instead of being subject to the dreaded "sunset" dates that caused so much recurring chaos in the not-so-distant past.


2. Obamacare tax hikes become reality

President Obama's signature health-care legislation was enacted back in 2010, but it included a number of tax hikes that did not affect individual taxpayers until this year. Last year's Supreme Court decision and Obama's reelection locked in the following Obamacare tax changes for 2013 and beyond:


How to maximize your tax return

·         New 0.9% Medicare surtax on wages and self-employment income: This surtax hits unmarried individuals with wages and/or self-employment income in excess of $200,000 and married joint-filing couples with combined income from wages and/or self-employment above $250,000.


·         New 3.8% Medicare surtax on net investment income: This surtax hits unmarried individuals with positive investment income and modified adjusted gross income (MAGI) above $200,000. Married joint-filing couples will owe it if they have positive investment income and MAGI in excess of $250,000. The surtax only hits the lesser of: (1) your net investment income or (2) the amount of your MAGI in excess of the applicable threshold. Beware: the definition of net investment income is expansive. Among many other things, it includes capital gains, dividends, and the taxable portion of personal residence gains


·         New $2,500 cap on health-care flexible spending accounts: Contributions to your employer's health-care flexible spending account (FSA) plan are subtracted from your taxable salary. Then you can use the funds to reimburse yourself tax-free to cover qualified out-of-pocket medical expenses. Before 2013 there was no tax-law cap on healthcare FSA contributions, although many employers imposed their own caps. For this year and beyond, there's a new $2,500 annual cap on healthcare FSA contributions.


·         New stricter limit on itemized medical expense deductions: Before this year, you could claim an itemized deduction for the excess of eligible uninsured medical expenses over 7.5%% of your adjusted gross income (AGI). For this year and beyond, the deduction threshold for most folks is raised to 10% of AGI. However if either you or your spouse will be 65 or older as of 12/31/13, the 10%-of-AGI threshold does not take effect until 2017 (the familiar 7.5%-of-AGI threshold will continue to apply to you until that year).


3. Supreme Court's same-sex marriage decision has big impact

In June, the Supreme Court concluded that the federal Defense of Marriage Act (DOMA) was unconstitutional. The decision had mostly favorable federal tax implications for same-sex couples who are legally married under state or foreign law, because these individuals are now considered married for federal tax purposes as well. For example, members of married same-sex couples can now use the more-favorable joint tax rate schedule, and they can generally transfer assets between themselves while alive or at death without owing any federal gift or estate tax. A same-sex spouse can also receive tax-free benefits provided by the other spouse's employer, such as company-paid health coverage.

The one big disadvantage of being considered married for federal tax purposes occurs when both spouses have healthy amounts of taxable income. In this scenario, a married same-sex couple can wind up with a bigger combined federal income tax bill than if they were still considered single. This is the so-called marriage penalty in action.

After the Supreme Court's decision, the IRS clarified that same-sex couples who are legally married under state or foreign law will be considered married for federal tax purposes even if they reside in states that don't allow same-sex marriages. However, individuals who are not legally married under state or foreign law but who have entered into state-law domestic partnerships or civil unions are still considered unmarried for federal tax purposes.


Stay tuned for further action

We will probably see some tax legislation in the first quarter of next year to address the fate of various expiring tax breaks, such as the deduction for college tuition and fees. With the current hyper-partisan political climate and the 2014 mid-term elections in clear view, I make no further predictions.


Are Millions of Dollars are Hiding in Your Buildings

179D Federal Energy Tax Deductions

Has your tax adviser told you about hundreds of thousands of dollars you could save because of this tax deduction? Even worse, have you been asked by a tax client “Why didn’t YOU tell me about this tax deduction?” I take calls from shocked property owners and architects every day who wonder why they are the last to know about and are, in some cases, too late to take full advantage of this deduction.

The next time someone brings up “Section 179D” or “The Energy Policy Act”, don’t stick your head in the sand. Here’s everything you need to know about the tax deduction that became available over four years ago under the Energy Policy Act of 2005.


Who gets it?

If you own a commercial building that was built (or substantially renovated) after January 1, 2006, you’ve got a property that may be a candidate. Also, if you are a commercial tenant who owns the asset (building, HVAC, lighting) being depreciated, you may be a candidate. Finally, if you are the architect, engineer or other designer responsible for the design of a building or renovation owned by a government entity, you may be entitled to a large tax deduction.


What is the benefit?

Up to $1.80 per square foot. That may not sound like a big number but for a hotel owner in Florida that recently took advantage of it, it will mean $1.3 million dollars in tax deductions for their 2010 tax year. More commonly, buildings are certified in the 60,000 to 120,000 square foot range, resulting in benefits of between $100,000 and $200,000 per building.


What qualifies?

To take advantage of this benefit, your building or renovation not only has to go into service (use) after January 1, 2006, it also has to be energy efficient. The energy efficiency standard is simple to state but describing the process of how it is proven is complicated and best left to experts in the field. Simply stated, your new building or the renovations, must be designed to use at least 50% LESS energy than a 2001 baseline.


How do you take advantage of it?

In order to obtain the benefits of this tax deduction, you need to obtain the certification of a licensed, third party. The party certifying must use approved software and demonstrate that the building’s envelope (walls, roof, windows), lighting and HVAC systems are designed to use at least 50% less energy than the 2001 ASHRAE 90.1 standard. This is a standard set forth by the American Society of Heating, Refrigerating and Air-Conditioning Engineers and the software modeling is used to create two models. One model is the building as designed and the other is the building if designed pursuant to the 2001 standard. The models are compared to see if your building makes the grade. If if does, you can qualify for $1.80 per square foot in deductions.


Can you get partial deductions?

Yes. If the building does not meet the 50% standard, each of the systems being reviewed can be qualified separately (HVAC, Envelope and Lighting) for up $.60 per square foot. Even more specifically, lighting as a separate qualification can qualify partially for between $.30 and $.60 per square foot.


Is an inspection required?

Yes. Believe it or not, the IRS does require that there be a third party verification of the existence of the building and that it is built to the specifications that were modeled for energy efficiency.


Do you need to file a report with your tax return?

No. But the engineering report that substantiates the tax deduction should be kept on file in case of an audit. If done properly, the report can be a hundred pages or more.


How do architects qualify?

The tax deductions under the Energy Policy Act are primarily intended to benefit the owner of a commercial property. However, the statute’s intent to incentivize “green” building by giving this tax deduction, was not able to be realized in cases where the owner of the property is a federal, state or local government. Those entities don’t pay federal taxes so the deduction is essentially worthless to them. Accordingly, the statute allows the deduction in those cases, to be allocated to the DESIGNER of the building instead. The “designer” can be the architect, an engineer or any other party responsible for the energy efficient design.

Architects need to obtain a third party study of the energy efficiency of the building in question as an owner would do, but they also need to obtain an allocation of the benefit from the owner as part of their audit trail. Naturally, the IRS needs to confirm, in the event of an audit, that this particular designer was in fact responsible for the energy efficient design. Placing the responsibility for verifying that in the hands of owner makes sense but the language of the statute with regard to the allocation of 179D benefits to the designer by the owner of the energy efficient building, has been less than perfect.


When do you claim it?

The tax deduction is taken in the year in which the property is “placed in service” or opens for business. This is typically the date of a temporary certificate of occupancy but it can vary. So, for example, a new school that opens up in 2009, no matter how long the design or construction process took, would give rise to a tax deduction against 2009 income. You can take it on your tax return when filing your 2009 tax return or you an amend you return for up to three tax periods.

Tip: If you don’t know when your time to claim this benefit will run out on past tax years, find out now.


Is it a “credit” or a deduction?

It is a tax deduction, which means that the “cash value” of it is different than if it were a credit. Tax “credits” reduce each dollar of tax you pay, whereas tax “deductions” are worth the dollar amount of the deduction, multiplied times your marginal tax rate. So if you are entitled to a deduction of $100,000 in a year when you are paying taxes at a rate of 35%, the value of that tax deduction to you is $35,000.


Does it reduce basis?

Yes. Owners who take the deduction also must reduce their basis in the building asset.


What is the cost of certification?

Generally, a study can be done at a cost that equates to less than 10% of the amount of your tax deduction or less. Beware of companies that get paid on a contingency. You may be overpaying and the IRS may question the independence of the study. After all, if the company gets paid more if they qualify more, their results may be open to conflict. Companies that charge a set fee by the square foot will not raise this red flag.

- See more at:



Top 10 Tax Mistakes Investors Make

Investing is a complex undertaking. The supply of investment alternatives is seemingly endless. Evaluating various alternatives can be quite difficult and very time consuming. And unless held in check, the actual decision-making process is fraught with human emotions that often lead investors to make counterproductive investment choices.

With that in mind, John Burke, CFP, president of Burke Financial Strategies, and Steven Criscuolo, CPA, chief financial officer of Burke Financial, put together this list of the top 10 tax mistakes made by investors through a recent survey conducted of investment advisors


1. Short-term vs. long-term gains

Realized gains on appreciated securities held for one year or more qualify for favorable tax treatment. Long-term capital gain tax rates are significantly lower than short-term rates. Holding a security an extra day, week or month can significantly reduce the tax burden.


2. Foreign stock investments held in a tax-qualified account

Most foreign companies are required to withhold foreign taxes on dividends paid. U.S. investors can claim a tax credit on their tax returns, effectively recouping this lost dividend -- but only if the foreign stocks are held in a taxable account.


3. Gold and silver held in a taxable account

Gold and silver are treated as collectibles and therefore are not eligible for capital gains treatment. The federal tax for long-term gains on collectibles is 28 percent.


4. Sale of appreciated securities by elderly investors

The cost basis of appreciated securities is “stepped up” to the current market value upon the death of the owner. Prospective capital gains and related taxes disappear. Conversely, all prospective capital losses will be lost. Elderly investors should consider being quick to sell stocks with losses and slow to sell stocks with gains.


5. Generating excess unrelated business income in a tax-qualified account

Certain investments, such as Master Limited Partnerships, generate unrelated business income. These investments belong in a taxable account. If they are held in an IRA or other qualified plan, and if the Unrelated Business Taxable Income, or UBTI, is greater than $1,000, then the investor must complete and file a rather complex Form 990 and pay additional income tax.


6. Ignoring local tax laws

In some states, investors cannot carry capital losses forward to future years. On a federal return, a capital loss in one year can be used to offset gains in a subsequent year. But capital losses without offsetting gains in a current year are lost for state tax purposes.


7. Failing to consider a Roth IRA conversion

When a traditional IRA is converted to a Roth IRA, tax is due on the converted amount in the year of conversion. If, for whatever reason, an investor will have low income in a year, this is an ideal time to convert and settle the tax bill on this money at a significantly lower rate than is otherwise expected in the future.


8. Failing to realize capital gains

Once again, low income in a given year can provide an opportunity to save taxes. Long-term capital gain tax rates are progressive; rates increase as taxable income increases. For taxable incomes up to $72,500, joint taxpayers pay no tax on long-term capital gains.


9. Improperly calculating the cost basis for MLPs

Given their unique tax structure, a large portion of a typical distribution from a Master Limited Partnership (a form of publicly traded limited partnership that’s most commonly related to natural resources, like oil and gas extraction) is tax-free. This tax-free distribution is considered a return of principal and should therefore serve to reduce the cost basis. In this case, ignorance may be bliss because the reduction in basis would result in a higher capital gain at sale (unless the IRS comes knocking…).


10. Allowing a pension plan to become non-compliant

While not as common as the others, this mistake can be very costly. There are a number of actions or inactions that can put a plan’s qualified status in jeopardy. Oftentimes, an investor will establish a plan with a brokerage firm, and then assume that the brokerage firm is taking care of the ongoing regulatory requirements, including the filing of IRS Form 5500. Brokerage firms rarely do this, even though they may have provided the original plan document template. Failure to meet ongoing regulatory requirements can result in disqualification of the plan and a very large tax bill. Investors should consider hiring a third-party administrator to take care of their ongoing compliance obligations.

Investing is a complex undertaking. The supply of investment alternatives is seemingly endless. Evaluating various alternatives can be quite difficult and very time consuming. And unless held in check,

the actual decision-making process is fraught with human emotions that often lead investors to make counterproductive investment choices.

With that in mind, John Burke, CFP, president of Burke Financial Strategies, and Steven Criscuolo, CPA, chief financial officer of Burke Financial, put together this list of the top 10 tax mistakes made by investors through a recent survey conducted of investment advisors.


Pearl Jam Manager Pleads Guilty to Embezzling $300K

DECEMBER 31, 2013


Rickey Charles Goodrich, former chief financial officer of Pearl Jam’s management company Curtis Management, has pled guilty to theft after years of embezzling more than $300,000 from the rock band.

Goodrich, 55, entered a guilty plea in December to six counts of theft in the first degree, occurring from 2007 to 2010.

Hired by Pearl Jam Touring Co. in 2005, Goodrich was named CFO of the band’s management company, owned by band manager Kelly Curtis, the next year, according to reports. Though Pearl Jam removed Goodrich as tour accountant in August 2009 “due to a series of late and incomplete accounting” and an unaccounted for $35,000, he later returned to fill in for the new tour accountant in May 2010.

Goodrich’s theft from Curtis Management cost the company over $500,000, including investigative expenses, according to Seattle Police, and was used to pay personal debts, fund family vacations and spa trips, buy wine, make purchases, and pay for a personal life insurance policy, according to the charges.

As tour accountant, Goodrich claimed $15,000 in “road cash” was split among the five band members, according to reports, but after guitarist Mike McCready said he had not received his share, Goodrich then stated the money funded crew bonuses, which crew members also denied receiving.

When confronted about the discrepancies, according to reports, he repaid the band $45,000 for “loans” he made to himself by forging Curtis’ signature.

After the band brought in a private investigator to account for the missing money, including another $134,000 in company credit card charges, Goodrich was fired in September 2010. Seattle Police began their own criminal investigation in January 2011, and Goodrich was charged with the thefts in June 2012.

Goodrich, a resident of Novato, Calif., has paid back $125,000 and agreed to pay another $181,000 in restitution before his sentencing Feb. 21, according to the King County Prosecuting Attorney’s Office in Washington.

As part of the plea agreement, if that balance is paid before sentencing, the state will recommend a six-month jail sentence. If not, the sentence recommendation will include a 14-month sentence and require Goodrich to pay the remaining balance.

According to the deal, Goodrich is also not to have any contact with Curtis, his wife or Pearl Jam members.


Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.


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