RE tax paid by brother & check bounced

[Kea]

Client asked his brother to pay his property tax for him because he was too busy at work. He gave his brother the money & he paid the bill on 12/31/10. But the county check went through before the deposit -- so it bounced. Client then paid bill himself in January 2011.

He wants it to count for 2010. He does have a receipt dated in 2010, but it shows his brother as payer. The 2011 receipt has client's name as payer.

I'm thinking this needs to go to 2011. Would the receipt being in the brother's name cause problems? The client would have been able to trace funds back to himself. I'm not too sure about the bounce check issue. Would that change the 2010 eligibility?

Thanks!

[JohnH]

I'd take the deduction in 2010. There's some ambiguity here, and the worst case in an audit would be reclassifying from one year to another - basically a wash unless there are drastically different income amounts in the two years. So there might be some interest to pay in that situation. On the other hand, if the 2011 year were audited and it happened that 2010 were closed, then the deduction could be lost if an auditor decided the earlier year is the correct one. if that were the only issue, it would probably be cost- prohibitive to fight it.

[jainen]

>>if an auditor decided the earlier year is the correct one<<

How could 2010 possibly be the right year? He didn't pay anything in 2010. There's no problem with having his brother deliver the check, but he knew there were no funds at the time he wrote it. Legally and ethically it was nothing more than a promise to pay in the future. That is what he intended, and that is what happened.

[Kea]

Thanks. He does have a 2011 receipt for documentation.

I'm not sure if he knew the funds were not there at the time he paid the taxes. (I haven't asked that question.) It could be that he deposited the check not knowing the bank put a hold on it.

[Pacun]

Thanks. He does have a 2011 receipt for documentation.

I'm not sure if he knew the funds were not there at the time he paid the taxes. (I haven't asked that question.) It could be that he deposited the check not knowing the bank put a hold on it.

Don't especulate. For cash TPs, You can deduct real estate taxes when paid to a state govenment NOT when you put it in a scrow. Puting the money in the hands of the brother doesn't constitute payment.

[JohnH]

So it may be that the reason the brother's check bounced is because he deposited the client's check in his account and then wrote a check in good faith to pay the taxes, not knowing that a teller hold had been placed on the deposit. Therefore the brother has a deposit ticket showing the funds deposited to his account prior to 12/31/2010 to cover the check issued to the county. The deposit ticket probably has a notation that funds are being held for x number of days, which he may or may not have noticed or understood.

From the client's perspective, he forefeited the "use" of the funds prior to 12/31/2010 and the only reason the check bounced is because the bank gummed up the works by their internal procedures. He arranged to pay the taxes in good faith and has two transactions to prove it. Under these circumstances, I'm still in favor of taking the deduction in 2010.

[Margaret CPA in OH]

Hmmmm, just how much in tax is this single payment worth? If we combined all the potentially billable time from the professionals chiming in on this, I imagine it would exceed whatever the tax is. JohnH, the client may have forfeited the use of the funds but the funds did not make it to the agency. I would not take the deduction in 2010.

[Kea]

------Hmmmm, just how much in tax is this single payment worth?-----

$1000. The RE tax was $4000 and client is in 25% bracket.

But I still lean towards 2011 deduction -- it's got the receipt from the client & check that cleared.

I had been under the impression that "either" problem might kick it out, but really wasn't sure. Now I know paid through brother isn't a problem & bounced check is an issue of intent. I'll ask more about "why" the check bounced.

I apologize if I cost y'all too much time on this.

[jainen]

>>He arranged to pay the taxes in good faith <<

Okay, I accept that--so if loss of the deduction generates an underpayment for 2009, he has reasonable cause to abate the penalty. It doesn't change the fact that payment was not actually made. He was required to, he wanted to, he tried to. But in the end, for whatever reason, his efforts failed. It's as simple as that, our old friend Substance-Over-Form.

[samingeorgia]

I beg to differ. As I understand the facts, the taxpayer gave the cash to his brother, who was acting as his agent, and who was to pay the taxes on his behalf. The brother, acting in the scope of his agency, wrote a check to pay the taxes. The fact that the check hit the bank before the brother deposited the funds has no bearing on the facts of the case, because the brother had the funds available to make the payment.

The taxpayer should count himself lucky if he can get the cash back from the brother in order to make the payment good. From what I'm seeing around here that cash would ususally be long gone.

[Kea]

FWIW, client is still eligible for refund on 2010 tax -- just a smaller one (by $1000). I'm pretty sure he got the money back from the brother (his e-mail did not mention ill-will to any kind of "ex-brother"). Payment to County not due until 1/31/11 & was paid by then.

I "assume" he will be in the same tax bracket for 2011, but you never know about future lay-offs or anything else that can change expectantly.

[JohnH]

I beg to differ. As I understand the facts, the taxpayer gave the cash to his brother, who was acting as his agent, and who was to pay the taxes on his behalf. The brother, acting in the scope of his agency, wrote a check to pay the taxes. The fact that the check hit the bank before the brother deposited the funds has no bearing on the facts of the case, because the brother had the funds available to make the payment.

The taxpayer should count himself lucky if he can get the cash back from the brother in order to make the payment good. From what I'm seeing around here that cash would ususally be long gone.

Thanks samingeorgia. I was beginning to think I was the lone ranger here. I'll grant that it isn't a slam dunk, but based on the info as I understand it, I'm taking the deduction for my client in 2010. (But I will let him know it's potentially swappable year-to-year in the event of an audit).

[jainen]

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

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

[Bees Knees]

>>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.

[JohnH]

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

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

As our industry moves another big step towards becoming unpaid extensions of the IRS audit divisions.

[jainen]

>>you don’t believe<<

Oh, I still believe that, but I was talking about the tax code. I never suggested the FACTS be changed. Only under the accrual method could this payment be deducted in the year he was required to pay, wanted to pay, and tried to pay. Under the cash method, it can only be deducted when he ACTUALLY paid.

In the long list of lame excuses, this one is an old classic. "It was my brother's fault!"

[Bees Knees]

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.

[JohnH]

Since this discussion has already gone down a rabbit trail of sorts, what would our answer be if a cash-basis client receives a $50K check on Dec 29, 2010 deposits it in his company bank account, and the bank places a 3 business-day teller hold on the funds. Does that $50K properly get reported in 2010 gross receipts or 2011 gross receipts? (I've seen this before, as have many of you, although you wouldn't necessarily know it unless you actually looked at the receipted bank deposit tickets.)

[jainen]

>>a cash-basis client receives a $50K check<<

Well, when it's a matter of INCOME, of course you have to pay the tax immediately. But we're talking about when you get a DEDUCTION. Not the same thing at all!

[JohnH]

And Bees says John "don't get no respect"...

[Margaret CPA in OH]

Kea, I was't complaining about what this great exercise cost _us_, rather trying to get at whether the amount in play was worth YOUR time spent and possibly having to bill the client to resolve an issue worth less than that. Turns out at $4000, it was worth pursuing some satisfactory resolution. Are we there yet?

Much of the time we spend on this board in these discussions are in part continuing education for some and theoretical exercises for others. I almost never consider the cost to me as wasted because I receive much more than I am able to provide. And I almost never bill clients for time spent researching here.

[Kea]

I never bill research time. (Oops, now I've started another controversy!) But I feel my clients pay me for what I know & when I have to research a question it might help me with the current client & with future clients. So, how do you allocate? But my regular billing rate does take into account my time taking classes & that I will need additional research on various items during the year.

I learn so much from reading this board. As to "are we there yet?" - I'm still happy with the 2011 deduction, but I really enjoy (& learn from) reading the various approaches. My client still hasn't responded to my first e-mail of questions, so I don't know how upset he will be with my answer.

I do appreciate everyones' time & the discussions. I was surprised this question spurred such a debate.

Thanks again.