Ranger

Client died leaving harvested wheat in storage. He was disabled and leased the farm out on a crop share basis. His wife inherited the wheat. The land was entirely in his name. This is not a community property state. Lawyer calls up and wants me to confirm if wife gets full stepped up basis on DOD. My research says yes. Does anybody on this board have other thoughts? Thanks

Can somebody tell me how many days we have to file rejected e-files after October 15th? I have a new client with dependent issues.

This is a first for me. Client is a teacher (US Citizen) living in Japan. I have been provided a copy of his 2010 1040 with form 2555 attached. I am preparing 1040 for 2011 and 2012. His only income is wages. It is my understanding that he must paper file with the Austin Texas service center and attach an equivalent of form W-2. Can someone tell me if I am overlooking anything? Thanks

How about that statement on the bottom of page two of the 1040: “Under penalties of perjury……..they are true, correct and complete.” ??

Thank you for your replies. Yes, there was AMT. Client switched because sold farm from out of state and moved here.

I understand how the election is made. The box was checked on A and as a result over $2,000 extra tax was paid. My question is why. Is there something I am overlooking or was it a slip by the prior tax preparer?

I am reviewing a 2010 tax return in which an election was made to itemize when the deductions were less than $4,000 for a MFJ. The couple was in a high income tax bracket due to selling of their cow herd and farm equipment. Taxable income over $300,000. Is there ever any reason why it would be better to take a lower amount from schedule A instead of the standard? Thanks for any comments you might have.

Tom It is not cut and dry, that was a misunderstanding. In the example you stated, the hobby loss rules would be applied to determine if the loss was allowed under section 183(a) of the tax code. Based on the information provided, I would say he was in business and the loss would be allowed considered the time and effort involved, the investment he made, and lack of personal pleasure or recreation generally associated with that activity. There is also a misunderstanding that the hobby loss rules can be applied to determine if an activity is subject to SE tax. Section 183(a) has nothing to do with SE tax. The arguments that “it’s just for fun” and the client keeps poor records are invalid in respect to SE tax and you will not find them in the revenue rulings and court cases that deal with that issue. That was the point I was trying to make. ********************************************************************* Regularity of activities, frequency of transactions, and the production of income are, accordingly, important elements in determining whether an activity will be considered a trade or business for self-employment (SE) tax purposes. 31 31 Rev Rul 77-356, 1977-2 CB 317; Rev Rul 58-112, 1958-1 CB 323;Rev Rul 55-431, 1955-2 CB 312 ; Rev Rul 55-385, 1955-1 CB 100; Rev Rul 55-258, 1955-1 CB 433;Hittleman, Richard L., (1990) TC Memo 1990-325, PH TCM ¶90325, 59 CCH TCM 1028, affd on other issue (1991, CA9) 945 F2d 409 ; Levinson, Melvin L., (1999) TC Memo 1999-212, RIA TC Memo ¶99212, 77 CCH TCM 2347.

In your example, the rules now apply because he has a loss. As others have pointed out, the rules of proving a profit motive don’t apply when you have a profit. The tax code is specific about that. It is not a science where for every force there is an equal and opposite force. It is true that some of the rules overlap in determining if a hobby goes on line 21. Those are situations where recreation is involved: golf tournaments, bass fishing tournaments etc. The fact that a business is otherwise enjoyable and the owner keeps sloppy records does not make it a hobby.

Those rules do not apply in this situation. They apply in determining whether a LOSS is allowed on Schedule C (or F) or limited to gross income. as misc deduction on Schedule A. Otherwise known as the Hobby Loss rules, they are covered under section 183(a) of the tax code.

My thought is that the remainderman steps into the shoes of the trust and would continue with 1/3 of current deprecation schedule. But I don’t have anything to back that up with.

I believe in this situation your client’s interest is treated as a remainderman. So basis would be 1/3 of the basis on date of transfer. I am not certain if depreciation period starts over or if you carry on with 1/3 of current depreciation schedule. Basis is definitely not FMV on date of transfer.

Thanks for your post Joan. I confirmed my calculations per the example on page 67 of Pub 590 for 2012.

If box 7, you can report on C and then subtract back out as other expense noting that is properly reported on line 21. Eliminates CP2000 and saves the client from cardiac arrest.

Upon conversion, basis was zero. Following the conversion rules for 2010, 7,500 would be taxed in year 2011 and 2012. But as I recall, since 5,500 was distributed and taxed in 2010, 7,500 would be taxed in 2011 and the balance of 2,000 in 2012. The software is showing 7,500 taxable in 2012. That can’t be right since the total taxable would be 5,500 more than the amount that was converted (15,000).

In 2010 client converted 15,000 from traditional IRA to Roth. After the conversion in 2010, client withdrew $5,500. According to my calculations, 5,500 was reported in 2010, 7,500 in 2011 and 2,000 in 2012. ATX is showing 7,500 due in 2012. I assume ATX is not tracking the amount taxed in 2010 but if somebody can verify I would appreciate it. Thanks.

Thanks Jainen, that answers my original question. Thanks to you and KC for posting the pub reference. That is very interesting!

Thank you Jainen and KC for your responses. I have read several articles that conclude an amendment is not allowed for years beginning after 2010. IRS Again Says Sec. 179 Elections Can Be Made on Amended Returns For Tax Years Beginning Before 2011 - by Roger McEowen To erase any doubt on the matter, and confirming the point we have been making on this issue, the Chief Counsel's Office of IRS, in an Information Letter dated February 17, 2009, has stated that Section 7 of Rev. Proc. 2008-54, 2008-38, I.R.B. 722 provides for Sec. 179 revocations as well as elections without the Commissioner's consent, and before the issuance of Treasury Regulations on the matter. The letter notes that Rev. Proc. 2008-54 provides that for any tax year beginning after 2007 and before the last year provided in Sec. 179©(2) for revoking a Sec. 179 election by a taxpayer with respect to any Sec. 179 property, the taxpayer will be permitted to make a Sec. 179 election without the Commisioner's consent on an amended tax return for that taxable year. The Rev. Proc. also points out that taxpayer can rely on the guidance specified in section 7 until Treas. Reg. Sec. 1.179-5© is amended to account for the statutory change made in 2005 which extended the rules for revoking a Sec. 179 election for tax years beginning before 2008 to tax years beginning before 2011. The Information Letter concludes, "...a taxpayer is permitted to make a section 179 election without the Commissioner's consent on an amended federal tax return for a taxable year beginning after 2007 and before 2011..." Chief Counsel Information Letter, GENIN-141682-08 (Feb. 17, 2009).

New client sold his cow herd in 2011 and bought new farm machinery. Client had a loss on schedule F but large gain on 4797 and schedule D from sale of cows. Prior tax preparer did not take section 179 to offset sale of cows as allowed and taxpayer had big tax liability. As I understand it, an amendment for section 179 cannot be made without “Commissioners consent”. Can someone tell me what that process involves?

Thank you for your reply Jainen and sorry my question wasn’t clear. My uncertainty was how to treat depreciation for the short year. It only makes sense that the short year rule applies for depreciation.

I know a short year is used if a business starts mid-year, but how about if a partnership dissolves on February 28. I cannot find a reference that indicates otherwise but it seems a short year would be in order. Thank you for any guidance.

For itemized deduction, is income tax paid to another state deductible? I am looking at page 1 of 80-108, part 1, schedule A, line 2,b. The instruction says to subtract state income taxes but does not specify if that includes taxes paid to another state. Thanks for any advice you might have.

Thanks for all your replies. That gives me a better idea of what to expect. We are waiting for the auditor to arrange the initial phone interview.

Client received a notice of examination for the year 2010. The preliminary items listed for examination are Schedule C expenses and NOL carry forward. The NOL came from a huge loss in 2008. Since the due date of the 2008 return was over three years ago, can the IRS examine the 2008 return to determine the amount deductible and carried forward in 2010?

Ok, here it is. Water wells used for livestock or crops qualify for section 179. Farmers ATG - Chapter Three - Basis on Farm Assets Publication Date - July 2006 1245 Property 1. Tangible personal property such as equipment, machinery, tools and trucks (Buildings and structural components are not included). 2. Other tangible properties, for example, are: 1. Fences in connection with raising livestock 2. Paved feedlots 3. Water wells that provide water for poultry, livestock, or irrigation of crops 4. Drainage tiles 5. Groves, orchards and vineyards if productive (Exempt from IRC §179 per Rev. Rul. 67-51) 6. Bins, gas storage tanks, silos 3. Livestock used for breeding cattle, hogs, sheep, and dairy cattle [purchased, not raised]. 4. Single purpose livestock or horticultural structures