jainen

>>I do not want to if at all possible to have to go out to the office everytime I want to check my messages on the answering machine<< The fax and the answering machine do not have to be in the same room. They make this really cool stuff called "wire" for that.

>>they never got my letter<< Thanks for the interesting update on audit recons. I assumed they would deny it, for exactly the reason she gave, but it didn't occur to me they would just throw it in the trash without even reading. I hope you took my advice about not writing "a very detailed, comprehensive letter." I'll send you my location, and thank you very much, but I recommend you drive over to the coast in person. The waves are just awesome from that big storm up in Oregon!

>>place where I agree << I agree with the typo in the sixth paragraph, that many of our favorite deductions are "scared cows" in the current political environment.

>>"H&R Block said 60 percent of its clients..."<< So THAT'S it! Here I was thinking it's a political fight about balancing the budget or something, but it's really a trick to push more people into RAL's. Well, I did notice that banks have been having a rough time lately and maybe we can solve this sub-prime credit mess if we all just let them skim $79 off each of our refunds.

>>On a rental, I'd depreciate at 5 years.<< I don't think there is any authority to depreciate paint over five years. If it isn't a repair, then it's 27.5 years as part of the building. All the work in the original post is repair (except the new dishwasher). Those jobs don't extend the life of the building or make it suitable for a new use. They simply restore it to the condition it was in before the damage occurred. It doesn't make any difference whether the damage was something specific like vandalism or just normal wear & tear. You could argue that paint prevents deterioration, but that is not the same thing as extending the life. In some cases new faucets or floors could constitute an upgrade, which would go to depreciation. I'm assuming that is not the case here because such a low cost indicates poor or average quality.

>>he understands their reasoning<< The do have pretty good reasoning, so he needs to bring in other issues such as judicial precedents and administrative procedure. The appeals office won't like the idea of compromise because if he wins they have to start all over again with the ex-spouse. So he has to plan to go to Tax Court. (Since he is willing to prepay the bill he could go to district court instead, but $25,000 probably isn't enough to make that worthwhile.) He needs to carefully document the timing of every single letter, phone call, and other contact with the IRS, as well as every detail of his absolute compliance with the audit process. If he does this, the burden of proof will shift off of him and onto the IRS in court, a huge advantage. Even more important, he has to find some previous cases that define alimony in his terms. Come on, a lot of people have gotten divorced! Most important of all, he has to find a way to chart the financial terms on a single page so it will be INSTANTLY clear to the judge that his payments were made solely from his own share of the marital property that was otherwise divided equitably.

>>At a minimum you would need to disclose the position<< California did a study this year comparing alimony deductions with reported income. 40% of each side were erroneous, so naturally they plan to expand the audit program substantially. I'm sure the IRS is taking notes too -- it seems like pretty easy pickings.

>>Am I worried needlessly?<< I don't think these paragraphs will accomplish their purpose (although I confess I can't perceive what that purpose might be). The effort would be better applied addressing professional ethics instead of asking the clients to waive their rights. The law imposes new standards on ME, the tax preparer, and whether the client is aware of or consents to them is irrelevant. It's not even that big of a change: we now need a one in two likelihood instead of one in three. (But oh, that fine is so much higher!) The idea of a hold harmless clause for tax preparation is rather offensive to me as a tax professional with a sense of personal accountability. Disclosure does NOT make an unrealistic position any better. This seems to say I will gladly expose my client to "actual and consequential damages" -- why, I'll even point it out to the IRS myself! -- as long as I don't get blamed. Well, I doubt that such vague, hypothetical terms of engagement can be enforced. And anyway, those "taxes, penalties, interest, and attorney fees" won't come "as a result on including such disclosures," but from the unrealistic position itself -- the one that I as the client's professional tax advisor would have signed my name to.

>>six criteria<< KC, there is another requirement that is probably relevant here. The alimony payments can't drop by more than $15000 in the second and third year.

>>write a regular paycheck<< This is a very important point. I know it seems unfair to have to pay payroll taxes on the money she stole, not to mention paying her for the time she was stealing it, but that's business.

>>Do you know any employment agencies close to St. Louis, MO<< Hey, us Californians don't pay any attention to the rest of the country. I hadn't even heard that you HAD any gas stations yet -- what for? All I know about St. Louis is that's where the covered wagons came from back in the days of '49.

>>does he have to contact federal govt or private investigators for authorization to pull employee background<< It's tricky. To avoid charges of harassment and violation of civil rights, he should use a regular employment agency to screen applicants. They will also help him set an appropriate wage scale to attract good employees. On a previous point, he should not call the police. If the video tape is ruled inadmissable, he has no other evidence. Employees can get mighty vindictive, and we already know this one is a low-life.

H&R Block fired their CEO today, two weeks after dumping the CFO. The problem is that the venture into mortgages didn't work out--apparently a lot of their borrowers aren't all that qualified. The interim replacement has vowed to concentrate on tax preparation. On the news that the company is being ripped apart by the subprime loan disaster, HRB stock went up.

>>direct me where to look for sales transaction tax treatment, or any US tax treaty with India<< You can read about the tax treaty on the IRS web site, http://www.irs.gov/businesses/internationa...=169600,00.html Your client can get additional help from his embassy. One question will be how to handle a credit or exclusion for double-taxed income. Other than that, my guess is that the sale will be treated in a normal way as a capital asset possibly subject to the Section 121 exclusion.

>>doesn't he have a dividend of $50,000? << Yes, I didn't make that clear. Even though the mortgage was $250K, he only gave $200K of it to the corporation (to pay off the construction loans). So the corporation has a taxable net profit of $50K and the shareholder has a dividend (or wages) of $50K and the best you can do is say it was the same 50K. Actually, it seems the true sales price was a FMV of $275K, with a 90% loan. If that's what the escrow papers say, the corporation profit was actually $75K, and the shareholder is likewise dinged for $25K more because he retained the down payment. According to MJG, this sale occurred at the peak of the market so he didn't do too bad on the corporate side. Personally, he got a brand new home, fifty grand in his pocket, and didn't have to pay a Realtor's commission or even shell out for a down payment. They also gave him a break at the county building, so all-in-all I think he's doing just fine.

>>the most he could have sold that house for is about $275,000.<< Now wait just a minute--you mean he risked $200,000 building a house with no prospective buyer in a fragile market that at best would have only grossed a 38% return before carrying costs and sales expenses? Now I KNOW he's lying and intended to occupy it all along, taking business deductions for his personal expenses. Well, he didn't do his homework, so now he has double taxes at ordinary rates for a profit on a house he didn't even sell and a premium mortgage whose leverage means if this "flooded" market should drop 10% his entire equity would be 100% wiped out. I hope he enjoys the quiet country life because it sounds like not too many other people want to move there.

>>I am somewhat worried about this coming tax season<< How many of your clients walk down the street and just turn in at the first tax office they come to? You'll get the ones walking north and HRB will get the ones walking south? Hey, Karen. Every one of your clients is already perfectly aware of HRB, and every one of them has already rejected their services. On the other hand, a whole lot of HRB customers don't know about you (yet!) so you can look forward to a modest increase in business as a result of your neighbor's advertising!

>>The loan proceeds went to the individual, not the corporation.<< Well, that's his problem. Sounds like he took the property plus an extra fifty grand, which is therefore taxable to him as well as the company. Yep, double taxation on C-corp earnings; no surprise there. Look at the escrow papers--he told the bank he was buying it for this much money. That means the corporation was selling it for this much. His basis (using your example figures) is $250,000, or more likely the $250,000 mortgage is only 80% of his basis. That is very low, because when he started this project he probably hoped it would be worth twice that. If he bought the house himself at that time, his basis would be 500K with no room to exclude gain on sale. The corporation would make a quarter million dollar profit and be double-taxed accordingly. But as it turns out, he picks up the property for little more than construction costs. Now if the market recovers in a year or two, he will still make that quarter mil but it will all be excluded under Section 121. What a coincidence! >>where does the corp come up with tax on a $50,000 gain?<< I already answered that. It's IRC Section 311b. Suppose there were 100 shareholders. One couldn't just take the corporation's assets for personal use without some kind of tax effect, could he? Partners, maybe, but not a shareholder. If you don't want to call it a sale, it has to be wages/benefits or a dividend. Maybe it could be a return of capital, but that doesn't fit the facts, especially since someone this heavily financed doesn't have that much basis in his stock. Even so, that just determines whether it's taxable income to the shareholder. There is no way to call it a tax-free distribution. Under 311b it's still FMV minus basis (or rather, COGS) for the corporation in any case. >>based on sq. footage, age, construction materials, etc. << Those numbers will always undervalue residential property, which carries a subjective element variously called amenities or pride of ownership or something. In a falling market the local assessment can trail the actual curve, but not for new assessments. As you point out, you can't even show that the true value is not 15% HIGHER than the new assessment, in spite of the fact that his marketing plan (whatever it was) did not succeed. >>the computer is not influenced by any amount of politicking<< NOW who's being cynical?

>>Fairness, like beauty, is in the eye of the beholder<< I've always felt beauty is unfair. Well, I would. Is a tax on beauty fair? A tax on fair beauties--only dumb blondes pay it. The beauty of that is AMT would be popular again (the Alternative Minimum Tint). Ahhh, that's not a good joke. Not even fair.

>>Whatever his original intention was<< Since you called this a spec house, I'm going to speculate about it. I have absolutely no basis for any of this fantasy, but here's what the cynic in me says: I think he intended to live in it all along. He knows you can use Section 121 every two years, which is not much longer than it takes to build and market a nice home. Like many independent builders, he's already done it two or three times before. The market downturn is a neat excuse but it didn't catch him by surprise. The signs were everywhere--it's how he got such a good deal on the building lot. In fact, the market was "flooded" partly BECAUSE people just like him were putting up spec houses before there was an established need. To suit himself, he dressed it up pretty which helped him bulldog the mortgage company into what was basically a cash-out refinance, thus providing tax-free funding for his next project. At the same time he used the excuse of a slow market to convince the assessor to go with construction costs since there was no arms-length sale. Now he also wants to use the slow market to recharacterize his plan into some kind of non-taxable shareholder basis adjustment. Unfortunately, there is no statutory authority for that approach. The cynic in me is tired from watching the election today, so I won't get into whether deducting construction costs on the corporate side and rolling the resulting basis into a Section 121 exclusion is double-dipping.

>>the mortgage represents two transactions condensed into one: An initial mortgage for whatever the true market value of the house is and a secondary home equity loan<< What an amazing statement! Pure fiction, MJG. That's not what happened at all, and you and your client both know it well. He got ONE mortgage, a purchase-money loan. Maybe it was 80 or 90 or even 100%, but nobody believes a bank gave him more money than the house was worth. Your statement that "tax assessments in this area are typically at the high end of market" is just as unbelievable--if it were true, the county would have tens of thousands of lawsuits and the assessor would quickly be voted out of office. I know you are trying to help this guy, but be realistic. Whatever his original intention was, the result is that he decided it was better to keep the house for himself than sell it for such a small profit. The bargain is that he takes it with a low basis, and if the market improves he can expect to exclude gain under Section 121, a much better deal than the double taxation of a C-corp's ordinary income. Don't pretend he hasn't figured this out. The way he set it up, it didn't even cause a short-term cash flow problem, and he ended up with a lower interest rate than the construction loan, didn't he? I'll bet a lot of builders around there would think it's a dandy solution, even if there is a little tax bill in the middle of it. By the way, when you said "follow the money" were you thinking about the loan proceeds that exceeded the amount to pay off construction costs? That was profit, was it not? And the tax is only a percentage of that profit, so please explain why he doesn't have the "wherewithal to pay tax." As you say, he has to make mortgage payments but that's just like any other buyer. The SELLER doesn't have to pay the mortgage back.

>>Doesn't the tax usually follow the money?<< Yes, but not for related parties. IRC 311b is pretty clear about this. It was not "a sale to himself" because he chose to put the property in a separate entity. Now he is stuck with that choice, just like he is stuck with his decision to keep building in "a real estate market flooded." Don't tell me there's no "wherewithal to pay tax." He MADE money on this deal. Maybe not as much as he hoped for, but that's what the word "spec" is all about. Another way to look at it is that he acquired a nice new personal residence at a bargain price, courtesy of his corporation. Nothing wrong with that, of course, but according to the regs it was a taxable transaction. Or are you suggesting he was not actually operating a business, but was simply building a house for himself?

>>show it as if the house were sold by corp to the shareholder at cost?<< Not quite. It is a sale at FMV. >>Does it matter that the mortgage was taken for more than the cost of the construction. << Yes, it matters. It proves that FMV exceeds basis, and the corporation has taxable gain.

>>The fact that it hasn't been indexed for these many years is what makes it unfair.<< I'm always a little bemused at the question of fairness in our tax system. As you point out, social engineering is a big part of the law. We can conclude that taxation is not intended to be fair by, for example, treating everybody the same or compensating for inequities that otherwise exist. Rather, it is intended to provide certain opportunities for anyone who wishes to take advantage of them. Concerning Social Security, many say it would be more fair to reduce payments to people who already have other means of support. Is that the kind of fairness you seek? What does it mean that the Social Security base amount isn't indexed? It means if your Social Security and/or other income goes up, all of the increase is allocated to taxable benefits (semi-taxable, that is). Some people would rather have any increase allocated to non-taxable or proportioned, but I don't see how one theory is inherently more fair than the other since the same rules apply to everyone. Our economy is quite committed to progressive taxation; AMT (a form of flat tax) is fiercely unpopular.

>>An unfair tax is a tax I pay and I'm paying tax on 85% of my social security<< Well, when you put it that way I can see that it IS unfair. It's unfair that you have more money than me, and the tax system unfairly emphasizes that fact.