Category Archives: Uncategorized

Reminder: No Profit Motive = No Deduction

In McElroy, TC Memo 2014-163, the court reminds us of the above maxim.

The taxpayer in this case invested in three partnerships, established to acquire cemetery sites for later contribution to qualified charitable organizations.  McElroy thought he could deduct losses for his investments in the three partnerships on the basis that his ownership interests in each were worthless as of the end of the years in which the partnerships operated, and that he therefore had abandoned them.  He argued he invested to derive a profit and in furtherance of a legislative intent to encourage charitable contributions.

But the court, in agreeing with IRS, found that the taxpayer lacked the requisite profit motive, and concluded that the partnerships were designed to generate tax benefits from the making of charitable contributions and not to make any profit independent of tax benefits.  Indeed, the partnerships were established not to realize any income or economic profit whatsoever!

Vacation Home Rentals

You may be renting out that mountain cabin or beach house during this vacation season.  When it comes time to prepare your 2014 tax returns, don’t forget the implications of such vacation home rentals to your tax liabilities, some of which considerations are:

  • Required reporting of rental income and expenses on Schedule E of your Federal tax return.
  • Use by you as a “home” of the property, during non-rental periods, may cause your rental deductions to be limited in various ways.
  • And “personal” use includes not only your own use of the property, but use by your family members or others who pay less than the full fair market rental value for the time spent in the property.
  • A “freebie” offered by Uncle Sam can kick in when the property is rented out fewer than 15 days per year, in which case you don’t have to report the rental income at all.

Check out IRS Publication 527, “Residential Rental Property (Including Rental of Vacation Homes”) for more details.

IRS Encourages Review of Premium Tax Credit Status

Folks with health insurance procured through the Health Insurance Marketplace may be receiving advance payments of the premium tax credit.  These are paid to your insurance company with a goal of lowering your monthly premium.

Changes in circumstances can alter the amount of these advance payments, including:

  • An increase or decrease in your income
  • Marriage or divorce
  • Birth or adoption of a child

Changed conditions such as these can result in the credit ending up too much or too little, which can result in an unpleasant surprise at tax time.

Folks are supposed to report changes in their situation to the Marketplace as they occur.  Check out IRS Health Care Tax Tip 2014-15 for more info.

So, You’re Volunteering to Help Your Favorite Charity…

You can’t deduct the value of your services, but you should be able to deduct whatever out-of-pocket costs you incur.  Such costs must be:

  • unreimbursed
  • directly connected to your services
  • incurred only because of the services you provided, and
  • not personal living or family expenses.

Your volunteer work must be on behalf of a qualified (i.e.-tax exempt) charity.  And your expenses can include travel by air, car, rail or bus.  Not to mention meals and lodging.  See IRS Publication 526 for more details.

IRS Enforcement of Trust Fund Recovery Penalty Likely to Increase

The Treasury Inspector General for Tax Administration (TIGTA) recently studied IRS’ practices in assessing and collecting the IRC Section 6672 “responsible person penalty,” and recommended that group managers pay closer attention to this revenue raising opportunity.

Recall that if an employer fails to pay its payroll taxes, IRS can attempt to collect a penalty equal to 100% of the unpaid taxes from a “responsible person” within the employer’s ranks.

TIGTA notes that when trust fund recovery penalty assessments are not timely made, factors can arise which impede IRS’ chances to collect the trust fund taxes due.

IRS has agreed with all of the TIGTA recommendations, and has indicated that corrective actions will be taken.  The inevitable consequence will be more assertions of the “responsible person penalty” and more assertive collection actions by IRS in the near term.

501(c)(3) App Just Got Easier

In theory, anyway.

That’s because on July 1, IRS introduced a new, shorter application form to help small charities apply for tax exempt status more easily.

The new Form 1023-EZ is a mere three pages long (compared with the standard Form 1023 which spans 26 pages.) IRS thinks as many as 70 percent of all tax exempt applicants will qualify to use the new streamlined form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible to use the new form, which must be filed online, and be accompanied by a $400 user fee.

Check out Rev Proc 2014-40 for the details.

Tax Court Takes Hard Line on Charitable Deduction Rules

A taxpayer who receives goods or services in exchange for a contribution of property may still be entitled to some deduction if the contribution exceeds the fair market value of any goods or services received.

But in the case of Seventeen Seventy Sherman Street, LLC (TC Memo 2014-124) the Court found that when a taxpayer fails to identify  or value all of the consideration received in the transaction, the taxpayer is not entitled to any charitable contribution deduction because of failure to comply with the regulations in this area.  The burden is on the taxpayer to demonstrate the excess of the value of the property given away over the value of consideration received.

IRS Liberalizes Offshore Compliance Programs

Among other things, changes announced last week by IRS streamline existing procedures to accommodate a larger group of U.S. taxpayers with previously unreported foreign financial accounts.

The expanded, streamlined procedures will be available to a larger population of U.S. taxpayers living outside the U.S. and, for the first time, to certain U.S. taxpayers residing in the U.S.  The changes include:

  • Eliminating a requirement that the taxpayer have $1,500 or less of unpaid tax per year;
  • Eliminating the required risk questionnaire; and
  • Requiring the taxpayer to certify that previous failures to comply were due to non-willful conduct.

Notably, for eligible U.S. taxpayers residing outside the U.S., all penalties will be waived, and for eligible U.S. taxpayers residing within the U.S., the only penalty will be a charge equal to 5% of the foreign financial assets which gave rise to the compliance issue in the first place.

Check out www.irs.gov for more details.

Good Congressional News Regarding Section 179 Depreciation

Let’s hope the momentum will continue – regarding House action last week to permanently extend the provision allowing certain businesses to write off as much as $500,000 in new equipment purchases.

The limit has been $500,000 since 2010, though without Congressional action would fall back to $25,000 for 2014.

There’s still a ways to go, however, given the need for Senate assent to such a permanent extension, and agreement from Obama who has thus far opposed such a move.

Land Sale Gain Deemed Ordinary Income!

A California District Court recently held that a taxpayer sustained ordinary income, not long term capital gain income, from a land sale because the underlying facts showed an intent to develop the property, as opposed to holding it for long term investment gain.

The decision (Frederic Allen v. U.S. (DC CA 5/28/14) 113 AFTR 2d) reminds us that conclusions in matters of this sort are directly dependent on the facts of each case in the context of factors which courts have identified, including:

  • The nature of the acquisition of the property,
  • The frequency and continuity of sales over an extended period,
  • The nature and the extent of the taxpayer’s business,
  • The activity of the seller concerning the property, and
  • The extent and substantiality of the transactions.

The Court in Allen found that the evidence was demonstrable that the taxpayer intended to develop the property when he purchased it and that he undertook substantial efforts to develop it during the time that he owned it.