Bees Knees

None of the utilities, repairs, or depreciation are allowed when the rental is below fair market value, even if rent exceeds expenses.

Use of a dwelling unit by any individual who pays less than fair rental value is considered personal use by the owner, and therefore, no expenses attributable to that period of rental are deductible. Rental income must nevertheless be reported as income [iRC §280A(d)(2)].

Vacation home (mixed use) rules that allow deductions for utilities, repairs, and depreciation up to the amount of rental income only apply if there is some rental use.

In Jackson, T.C. Memo. 199-226, the rent charged was determined to be below fair rental value the entire year. All expenses (with the exception of interest and taxes deductible on Schedule A) were disallowed because none of the use was considered rental use, even though the taxpayer had to pay tax on the rental income.

The imputed interest rules apply when the interest rate is less than the applicable federal rate (AFR). Thus, if interest is greater than AFR, there is no imputed interest.

The purpose of the rule is to prevent taxpayers from using loans to shift income to taxpayers in lower brackets or to shift income from ordinary income to capital gains by raising a purchase price and charging less interest.

For example, Kyle sells Ken property with a FMV of $50 million and an adjusted basis of $20 million. Assume Ken pays $5 million down and makes monthly payments of $500,000 to Kyle. If the sales price is $50 million and the interest rate is 8%, Kyle will realize a $30 million capital gain and earn approximately $24 million in taxable interest income. If the sales price is $60 million and the interest rate is 4%, Kyle will realize a $40 million capital gain and earn approximately $14 million in taxable interest income. Under both methods, Ken pays approximately $74 million in total principal and interest to purchase the property. However, by raising the purchase price and charging less interest, Kyle has shifted $10 million from ordinary income to capital gain income.

Obviously, then, the IRS does not care if the interest is higher than the AFR because in that case, income subject to ordinary income tax rates increases and income subject to capital gain rates decreases.

As to whether or not we should advise clients about the current AFR and the imputed interest rules, I believe that is a legitimate function of a tax professional.

As to fluctuations in the AFR, the AFR that applies is the rate that applied at the time the loan was made. Future AFR that go up or down after the loan is made are irrelevant.

Why are you basing your reasoning on Social Security Fraud? So, it will be OK for someone with ITIN to do it since a person with ITIN will never collect social security benefits.

Where in my post did I say it is OK for someone with an ITIN to understate their deductions?

We all know that the IRS doesn't allow deductions to be over-declared. How do they feel about under-declared? I feel that I would be preparing a false return with the intent of duping a financial institution. I won't do that.

It is illegal to under claim deductions.

From TheTaxBook, page 5-23:

Claim all deductions. The Self-Employment Contributions Act

of 1954 requires every taxpayer to claim all allowable deductions,

including depreciation, in computing net earnings from self-employment

for SE tax purposes. Penalties apply for making a false

statement or representation in connection with any matter arising

under the act. (Rev. Rul. 56-407)

The reason it is illegal to under claim deductions is you are committing Social Security fraud. Social Security benefits are based on the average 35 years of Social Security earnings. The higher the earnings, the higher the benefit. By understating your deductions, you are overstating Social Security earnings, which is fraud. You as the preparer would also be subject to penalties if you went along with the fraud.

I like it because, especially with 1099 DIV and INT, as well as 1099 MISC for clients with repeat customers, it is easy for me to tell if something might be missing. (I know, hard to believe a client would fail to give me all relevant information.)

I look at the last year Schedule B entries to compare with current year 1099s to see if any are missing.

ATX likes it that way. Plus in ATX, you would have to override the the entries and that can be a pain...........

You mean ATX won't let you enter gross income on a Schedule C without first putting it on a 1099? What if you have income for the Schedule C that wasn't reported on a 1099?

Just curious, but why waste time entering 1099-MISC data into a 1099 input worksheet? Why not just enter the income directly on the Schedule C, or F, or wherever else it goes?

E-file does not require the 1099-MISC details. Only W-2 and 1099-R details are required for e-filing.

Under the cash method, it can only be deducted when he ACTUALLY paid.

And under John's line of reasoning, he did ACTUALLY pay it in 2010.

Again, I'm not saying I necessarily agree. But since we are on a message board that likes to stretch the limits and go where no tax problem has ever gone before, John's argument deserves respect.

>>I'm taking the deduction for my client in 2010<<

As our industry moves another little step towards licensing and regulation.

John makes a good argument. I'm not sure it would fly in court, but it does have merit. Unless you don’t believe there is a great deal of ambiguity in the tax code, and it is very worthwhile to explore offbeat positions as the legal climate changes.

An unincorporated organization with two or more members is a partnership by default for federal tax purposes if its members carry on a trade, business, or financial operation and divide profits. If there is no trade, business, or financial operation activity in this LLC, then it isn’t a partnership. The fact that they applied for an EIN tells IRS they should be filing a partnership return (assuming they did not elect to be taxed as a corporation). However, Revenue Procedure 84-35 says:

“The penalty (for not filing Form 1065) will not be imposed if the partnership can show reasonable cause for failure to file a complete or timely return. Smaller partnerships (those with 10 or fewer partners) will not be subject to the penalty under this reasonable cause test so long as each partner fully reports his share of the income, deductions, and credits of the partnership ....”

My opinion is no need to file a 1065 since it really isn’t a partnership. If IRS does send a letter asking for a 1065, simply respond saying there is no business or financial operation, and Rev. Proc. 84-35 says there is no penalty.

The other alternative if you want to play it safe is fill out a 1065 with all zeros and send it in each year. Charge the client for being dumb.

It is still a decedent’s estate until all estate assets have been distributed to the heirs.

If the heirs all have an equal share of the remaining estate assets, one thing that could be done is have the estate distribute the property to the heirs by transferring title into their names. That allows you to close the estate. The heirs now own the property as joint tenants with right of survivorship.

Since it is investment property and not a trade or business, the heirs don’t even have to file a partnership tax return for the rental activity. Simply split up income and expenses between each heir and have each report his/her share of the rental activity on their personal returns. Once the property is sold, each pays tax on his/her share of the gain.

TheTaxBook, page 1-14 says:

Medicare Part B premiums. For years, tax professionals debated

whether or not Medicare Part B premiums qualified as health insurance

for purposes of claiming the self-employed health insurance

deduction. Revenue Ruling 66-216 makes it clear that the voluntary

payments under Medicare Part B are considered health insurance

premiums and thus are deductible under Section 213 as medical

expenses. However, Revenue Ruling 66-216 pre-dates the passage

of the law that made health insurance premiums an above-the-line

deduction for self-employed taxpayers. Even though it is considered

a form of health insurance, some argued it did not meet the

requirement that the health insurance plan had to be established

under the business, as required by Section 162(l)(2)(A).

The 2009 version of IRS Pub. 535 clarifies this issue by adding

the following sentence under the heading Self-Employed Health

Insurance Deduction:

Medicare Part B premiums are not considered medical insurance

premiums for purposes of the self-employed health

insurance deduction.

Then, on 1/10/2011, TheTaxBook issued an update to that page crossing out the last two sentences that quote IRS Pub 535. The update reads:

2010 Form 1040 instructions say Medicare Part B premiums can be used to figure the deduction.

Interesting the 2009 IRS instructions said Medicare Part B premiums cannot be used to figure the deduction. Then they changed those instructions for 2010 saying they can be used.

Nobody knows what the IRS will say in 2011.

"The advisor told them to make sure they extended their 2010 return, so that if the value of the converted Roth's decreases you can take advantage of that"

I don't understand that and would like someone to explain it if possible.

Tax on a conversion is determined by using the fair market value of the IRA at the time it is converted to a Roth. If the value decreases after the date of conversion, the taxpayer is paying tax on an amount greater than the current value of the IRA. Thus, by extending the due date, the taxpayer has the option to recharacterize the Roth IRA back to a traditional IRA and null and void the tax due on the over inflated value of the IRA.

Example: Taxpayer converts a traditional IRA to a Roth on 10/1/2010. As of that date, the value of the IRA was $10,000. Taxpayer files for an extension on his 2010 tax return. $5,000 of the conversion will be taxed on the 2011 return, and $5,000 will be taxed on the 2012 return under the special rule for 2010 conversions. On 5/15/2011, the value of the Roth IRA decreases to $2,000. The taxpayer no longer wants to pay tax on $5,000 on the 2011 return. Since the 2010 return was extended, the taxpayer has the option to recharacterize the Roth IRA as a traditional IRA as of 10/1/2010. In other words, it is treated as if the taxpayer never did a Roth conversion on 10/1/2010 and the taxpayer no longer has to add $5,000 of income to the 2011 return. After the recharacterization on 5/15/2011, the taxpayer now has the option to reconvert the traditional IRA to a Roth IRA using $2,000 as the taxable conversion amount rather than $10,000.

So if in my original example there was an annuity within the insurance contract with the same amounts as state from the insurance company there would be a deductible loss ?

Art

Some annuities guarantee principal, so there is no possibility of sustaining a loss. For nonqualified annuities (those that are not part of a qualified retirement plan) that do not guarantee principal, a loss is deductible as an ordinary loss only if the annuity is a refund annuity (Rev. Rul. 61-201). The unrecovered basis in a nonrefundable annuity is not deductible (Rev. Rul. 72-193).

A loss on a nonqualified refund annuity is deductible in the same manner as losses sustained on lump-sum distributions from qualified retirement plans. Thus, if a lump-sum distribution representing the total amount in a refundable annuity is less than the unrecovered cost basis in the annuity, the difference is deductible as a miscellaneous itemized deduction subject to the 2% AGI limitation.

You treat it the same way as shown in Revenue Ruling 2009-13, whether it ends up as a gain or a loss.

I disagree.

Page 7 of Rev. Rul. 2009-13 says:

In Century Wood Preserving Co. v. Commissioner, 69 F.2d 967 (3d Cir. 1934), a corporate taxpayer paid $98,242 of premiums on life insurance contracts over a period of several years to insure the lives of its officers. The taxpayer then sold the contracts to the officers for their cash surrender value of $57,646, claiming a loss for the difference between the total premiums paid and the amount for which it sold the contracts. The court held that the taxpayer did not have a loss, because it did not have a basis equal to the full amount of the premiums paid:

The Rev. Rul. explained that a life insurance contract is made up of two parts: 1) an investment, 2) the cost of life insurance itself.

If the premiums are greater than the cash value of the life insurance contract, the difference is considered the cost of the insurance itself. The cost of life insurance is non-deductible. Thus, there can be no deductible loss on an insurance contract.

If this were an annuity contract, that would be a different story.

The bigger picture is the exclusive use test for office in home. Having cable TV is an indication that the office might not always be used exclusively for business. It is kind of like playing computer games in your home office to relax between business activities. Or paying personal bills online with your home office computer. You run the risk of having an IRS auditor throw out your office in home deduction on the grounds that your home office is not being used exclusively for business. Of course, if you really want to get picky, there is a case to be made that everybody breaks the exclusive use test in one way or the other. But there is no reason to advertise that fact to the IRS by trying to deduct an insignificant personal expense like cable TV as a business expense.

I never said anything about her wages, and nobody said anything about filing separate returns. The issue is his CO wages and whether they are subject to CA tax.

I agree, he's going to have CA income, in fact he should have CO tax on it too, but that will be allowed as a credit on the CA return. I'd not waste time on trying to argue it for a part of the year, when his wife was still living there in their home, etc. Just have him get things corrected for 2011, and look at the bright side, you get a better fee this year!!!

I disagree. Just because the wife was still living in CA for part of the year does not make his CO income subject to CA tax. Especially if he can prove he moved from CA to CO in 2009 and established a new home in CO during 2009. When both husband and wife have separate jobs, it is common for each to establish domicile in their new home on separate dates. Non-resident and part-year resident returns make accommodations for that fact.

He offered an unusual interpretation based on cleverly parsing the actual text of the code. But as I said, he was teasing. We do that here from time to time.

Yeah, sure he was teasing. I was teasing too. I didn’t really think he should go back to H&R Block school, or that his theories are crazy, or that he has been doing returns wrong for all these years….No, no, no… that was just teasing.

post a link to that thread, BK

In his post on 19 March 2011 - 04:12 PM where he says Bees Knees is a vender, the original post was "Bees Knees is a jerk."

Sorry, but you may want to scroll through the ATX archives and re-read the thread where OldJack calls bees knees a jerk. Bees Knees did not hurl the first insult. So, according to your own rules, bees knees had a right to hurl one back.

I was discussing this with my assistant, who happens to be British. She figures we just have too many choices:) She also posed the question - How would the IRS know. There's not a tracking on that, is there?

In reality, the IRS would probably never know, unless the missing husband decided to file MFS and enter your client’s SSN on his return as his spouse. As professionals, on the other hand, we are not allowed to tell a client to do something wrong simply because we know they can get away with it. In my opinion, if she was abandoned, she should hire an attorney and get some sort of legal separation order so that she can start filing as single.

1) What needs to be said is that bees knees is still a jerk!

So let me understand this correctly. Because OldJack has been around awhile, he is entitled to hurl personal slurs at others, but anything hurled his way is unprofessional.

Is that what you all are saying?

So if OldJack can make a good argument that "considered unmarried" need not be restricted to Head of Household, I want to hear it.

I agree. However, up to this point, his code and pub citations supporting his claim have been refuted. If he is too stubborn to admit when he is wrong, then maybe he is not the idol some on this message board have made him out to be.

I would simply split the 1099R into two. One with code G in box 7 and the amount that was rolled over tax free in box 1. The other with $3,500 in box 1 and code 1 in box 7, subject to the 10% penalty.

If the 1099R box 7 code says G, then it is reported on the 1040 as a rollover. No other form is required.

Form 8606 would only be required if the taxpayer did not roll over the distribution within the 60 day rollover time limit. In that case, the deposit of the funds into the IRA would be treated as a contribution, subject to the deductible IRA contribution rules. If all or a portion of the contribution is non-deductible, then Form 8606 would be required to report the non-deductible portion and compute IRA basis.