DANRVAN

I can't think of any reason why the rule would not apply to your client's situation. I don't belong to the AICPA for the same reason as Judy.

I am not in a community property state either, but I believe the full step up must be allowed because all the joint property is included in the decedent's estate. (?)

Are you saying that they bought the property together but it is only in one partner's name?

Joel said the client was 98 years old, so maybe the successor was already acting under a durable power of attorney.

But in the meantime the IRS is wading through a pile of incorrect information sent in by the taxpayer. My experience has been the same as JMDAVIS; get the correct information sent in and a request to retract the taxpayers' initial response.

Grace, you made a good point in mentioning the 663( b ) election. The 65 day election can sitll be made if the return is filed or extended by the due date and any distributions that were made during that period would count.

I agree. You can state that your client wishes to retract his written response and has requested that you reply on his behalf instead.

From what I can gather, the daughter and daughter-in-law each received 50% of the income. Then the income would flow through dad's estate reduced by his estate's attorney fees and any other allowable deductions. The income would not be taxed at the estate level if distributions were made before the estate's year end. Daughter would get a K-1 for her share. Son's estate would get a K-1 for his share. Then son's share would flow into his estate where it would again be reduced by attorney fees and any other allowable deductions. In order to maximize deductions the estate can elect accrual accounting and a short year can be used first if it helps to match income and deductions in a later 12 month period. Hope this helps.

Yes, if it was business property it would flow through as an ordinary loss. If investment property then capital loss. That sounds like quite a loss for inherited farm property, is this in a drought area?

The fact that she got out of the business because it was not profitable is a factor in determining that she was in it for a profit. That was a determining factor in the tax court case won by the banker / weekend race car driver. Unlike the hobby loss taxpayers that forge ahead with an activity because of the personal pleasure involved.

I was scanning through the taxbookforum this morning when I saw something that looked off. Since I don't subscribe to the product, I am unable to post but I visit the site occasionally to see what I can learn. The topic was Sect 179 partnership trust. The question was what happens when a partnership takes section 179 and an estate is a partner. As I understood the answer, it was stated that the estate's portion of section 179 is simply lost unless the partnership agreement allows it to be reallocated to the other partners. Section 179 is not lost or reallocated. Instead, the estate takes normal depreciation under section 168 and a separate basis is maintained for the estates share of the asset per Treas Reg 1.179-1(f)(3).

$10,800 is not even close to reasonable. Keep in mind the related penalties that you and the client could be slapped with. Case law is not in the favor of the sole shareholder/employee when the income is from personal services. Distributions are usually not allowed by the courts until the stockholder/employee wages are over the social security base. Distributions are usually associated with income from non-shareholder employees or capital and equipment. The key is to research and document what is reasonable. The IRS will have an expert witness as a hired gun when you face them in court. In regards to the under reported payroll taxes and withholdings, there is a good chance of abating the penalties given the circumstances.

Wages are considered taxable income from trade or business per the section 179 regs.

This is from the CCH U.S. Master Depreciation Guide. 169A. Hope this helps. Increased Business Use After Recovery Period Depreciation on MACRS property that is used only partially for business or investment purposes does not necessarily end upon expiration of an asset’s recovery period. Additional depreciation may be claimed if the percentage of business or investment use in a tax year after the recovery period ends exceeds the average percentage of business or investment use during the recovery period (Code Sec. 168(i)(5); ACRS Prop. Reg. § 1.168-2(j)(2)). No MACRS regulations have been issued detailing the computational rules. However, a similar rule applied under ACRS (Code Sec. 168(f)(13) (pre-1986)) and was explained in ACRS Prop. Reg. § 1.168-2(j)(2). This rule, however, does not apply to listed property described in Code Sec. 280F at ¶208 (Temporary Reg. §1.280F-4T(a)). Under Prop. Reg. § 1.168-2(j)(2), a taxpayer determines the average percentage of business/investment use during the recovery period. In the first post recovery period year that the percentage of business/investment use is greater than the average percentage of business/investment use, a depreciation allowance is claimed as if the property were placed in service at the beginning of that year. The deduction is computed by multiplying the original cost as reduced by prior depreciation (or the fair market value at the beginning of the tax year if this is less than cost reduced by prior depreciation) by the first-year recovery percentage. This amount is then multiplied by the percentage by which business/investment use for that year increased over the average business/investment use during the prior recovery period. The same procedure is followed for each subsequent year in the “second_ recovery period. For any year in the “second_ recovery period that business/investment use does not exceed the average business/investment use for the first recovery period, no deduction is allowed. The total depreciation that a taxpayer may claim may not exceed the original cost of the property. If the original cost is not recovered during the “second_ recovery period, then the process may be applied to a “third_ recovery period. The average business/investment use, however, would be redetermined by taking into account all of the years in the first and second recovery periods. Example (1): A calendar-year taxpayer places an item of 5-year MACRS property costing $1,000 in service in 2007. The half-year convention applies. Assume that business use during each year of the recovery period (2007-2012) is 50% and that deductions were claimed as follows: Year Calculation Deduction 2007 $1,000 × 20% × 50% $100.00 2008 $1,000 × 32% × 50% 160.00 2009 $1,000 × 19.20% × 50% 96.00 2010 $1,000 × 11.52% × 50% 57.60 2011 $1,000 × 11.52% × 50% 57.60 2012 $1,000 × 5.76% × 50% 28.80 Total $500.00 Assume that business use is 60% in 2013, 40% in 2014, 60% in 2015, 70% in 2016, 60% in 2017, and 20% in 2018. Assume further that at the beginning of 2013, the fair market value of the machine is greater than the remaining $500 undepreciated basis ($1,000 − $500 depreciation = $500). Average business/investment use during the first recovery period was 50%. For each year in the second recovery period that business/investment use exceeds this percentage, the taxpayer may claim an additional depreciation deduction. The depreciation deductions in the second recovery period are computed as follows: Year Calculation Deduction 2013 $500 × 20% × 10% $10.00 2014 00.00 2015 $500 × 19.20% × 10% 9.20 2016 $500 × 11.52% × 20% 11.52 2017 $500 × 5.76% × 10% 2.88 2018 00.00 Total $33.60 This cycle would be repeated beginning in 2019 because the taxpayer has not recovered the total cost ($1,000) of the property. If the fair market value of the property in the beginning of 2019 is less than the undepreciated basis ($1,000 − $500 − 33.60 = $466.40), then the recovery percentages are applied against the fair market value. See also Example (2) in ACRS Prop. Reg. § 1.168-2(j)(7).

I have never had a problem using the force code for part one of 4797. Is that the part you are having problems with?

I agree with Ron; mail in separate envelopes. Once I sent two years of amended returns for a new client in one envelope. I thought I made it as clear as Catherine did with bold print, highlighter, sticky pads, etc. I thought that there was no way they could miss one, but they did. The one they lost was for 2010 with a $20,000+ refund. They processed the 2011 which had a small balance due. Took awhile to straighten that out.

In this case being a general partner is better considering the overall tax picture for dad. The guaranteed payment to son is SE income to son and reduces the amount of income that could be allocated as SE to dad.

KC, thanks for the edit help. How did you do that?

And most likely there was not an agreement. In any case, I believe it is important to educate the client in the difference between "draws" and GP's. In particular the effect on SE income. In the case where one partner performs more work and receives more $, fair allocation of SE income can be achieved through GPs. This is common in farming operations where son/partner performs most of the work while dad/partner provides capital. The fact that payments to the partner are not consistent or vary with cash flow does not preclude them from being classified as GP. The bottom line is to work with the clients to determine what works best for them within the tax laws.

It looks like you will need to follow the rules for liquidating distributions to both partners since the partnership will no longer exist.

I disagree. Section 707(C ) states that "payments to a partner for services are guaranteed payments" without any reference to a partnership agreement. In fact, there are cases where the IRS and the courts have reclassified capital distributions as guaranteed payments. For example see SEISMIC SUPPORT SERVICES, LLC, SCOTT A. WHITTINGTON TAX MATTERS PARTNER v COM. where they looked at substance over form. In regards to the JB's question I believe the correct answer is it depends on the facts and circumstances. Did all partners contribute and withdraw equally? Did they intend for one partner to perform most of the work while another put up most of the capital?

Agree, issue a1099 and take deduction for outstanding checks.

I believe there is a big difference between a 10 day busniess appreciation cruise with an established client/friend and the case referred. (Out of curiosity, I did a quick search and came up empty.) Entertainment deductions for attending sporting events are not uncommon and often allowed. There is a special rule for Sky Boxes to keep the expense to a "reasonable amount." The case mentioned might have involved high dollar lawyers with high dollar clients where the expense was pocket change to them. In the case of Miller, 1998, which disallowed a "business cruise", the court questioned "whether the income that could be generated by a particular trip would be in excess of the expenses". While court cases are good for educating clients, they are usually not the law. In regards to favorable court cases you have to think not only about facts and circumstances but also as to whether it has or might be appealed. For unfavorable cases watch for the words accuracy related penalty.

At a glance, I can see several issues here. How much time was devoted to business? How many family members were present? Reasonable and ordinary expense? Sounds like a vacation to me. I see now is asking in advance, that is good.

As I understand your question, the only gain would be on the amount of depreciation allowed since he met the 2 year rule. If had split off part of the house as a rental and kept the rest as his residence, then you would report the rental portion separately on 4797.