Category Archives: Uncategorized

No Mortgage Deduction If Debt Isn’t Recorded

Generally speaking, “qualified residence interest” paid during a year on “acquisition indebtedness” or “home equity indebtedness” is deductible (within limitations).  A recent Tax Court decision (Christopher DeFrancis, et al v. Commissioner) brings home the importance of paying close attention to the definitions of these tax terms.

In this case, the taxpayers borrowed from a relative, signed a “mortgage note,” and another document entitled “mortgage,” but did not actually record the documents with county authorities.

The IRC section 163 Regulations require that acquisition indebtedness not only be incurred in buying or building one’s residence, but also that the property be made security for payment of the debt, and that such debt be “recorded, where permitted, or (be) otherwise perfected in accordance with applicable State law.”

This mortgage was not recorded, and the Court further concluded that the taxpayers did not establish that the mortgage was otherwise perfected under Massachusetts law.

“In Massachusetts, an unrecorded mortgage is invalid as against third parties who do not have actual notice of it,” said the Court.

So, bottom line:  unrecorded mortgage = no tax deduction.

IRS Broadens ‘Fast Track’ Settlement Program

IRS recently announced the opportunity for smaller businesses to take advantage of its “fast track” settlement program, and thus enable them to more quickly settle audit issues with IRS.

The “fast track” settlement program is designed to expedite case resolution by allowing taxpayers under audit to work directly with IRS representatives from the Small Business/Self Employed Examination Division and Appeals to resolve those issues, with the Appeals representative generally serving in a mediator role.

Taxpayers interested in entering this program generally must do so before a 30 day letter is issued.  The goal is to complete cases within 60 days of acceptance of the application.

IRS Contractor Employees Slipping Through a Crack?

Seems there’s an inordinate number of employees of IRS contractors who owe millions in Federal taxes.  So says the Treasury Inspector General for Tax Administration (TIGTA) in a recent report.

“Because many contractor employees have access to sensitive IRS systems and facilities, the IRS should address tax noncompliance for these employees in a similar manner as it would for its own employees,” says TIGTA J. Russell George.

TIGTA found that as of June 14, 2012, about five percent of the 13,591 IRS contractor employees examined owed $5.4 million in Federal tax debt.

IRS requires its own employees to file their Federal income tax returns on time and pay any tax due, but it appears that the same standard is not imposed on contractor employees.

Social Security – Days Numbered?

A recent study by the Congressional Research Service (CRS) opines when Social Security is expected to run out of money, and potential scenarios regarding future Social Security benefit funding.

2033 is the big year – the first year of projected insolvency, when it is expected that the program will have enough dough to pay only about 77% of the required benefit payments.

And if the government fails to pay the benefits required by law, says CRS, beneficiaries could take legal action.  Insolvency would not relieve the government of its obligation to pay.

If Congress waits until insolvency takes place, it will just have to cut benefit payments by about 23% as noted above.  Or, they could eliminate annual deficits by raising the Social Security payroll tax rate from 12.4% to 16.1% in 2033, gradually increasing it to 17% thereafter – the more likely scenario in our view.  But if Congress acted right now, the benefit cuts and/or tax increases necessary to restore solvency until 2087 would be about half as large as those needed if Congress just punts – once again.

The West is Best

When it comes to business and tax climate readings – a new report from the Tax Foundation concludes, for the third year in a row, that Wyoming offers the most hospitable tax climate, and six of the ten best states are found in the west.

Alaska, Florida, Nevada, South Dakota, Washington and Wyoming – all states found in the Tax Foundation’s top ten, have no personal income tax.  And better yet, Alaska doesn’t even levy a sales tax!

Northeastern states have the dubious distinction of anchoring the “bottom” ten – notably, New York which finishes dead last, with Rhode Island, Vermont, Connecticut, New Jersey and Maryland not far behind.

And let us not forget California, which also languishes in the “bottom” ten.

Side Deal Renders Contributions Non-Deductible

So you think you can donate to a charity, and at the same time enter into a “side agreement” with that charity to return the asset to you if IRS disallows your deduction?

It won’t fly.

See the recent decision in Graev, where the Tax Court ruled that a taxpayer wasn’t entitled to charitable deductions for contributions of a façade easement on an historic property, or his related cash donation to a charity, because of the existence of a “side letter” which stated that the charity would return the cash and remove the easement if the IRS disallowed the deductions.

The gifts were “conditional,” and thus not deductible, ruled the Court.

IRS ‘Shutdown’ Rules

IRS reminds you that due to the current lapse in appropriations, IRS continues to operate, though on somewhat of a limited basis.  Nonetheless, they admonish taxpayers to continue to meet their tax obligations in the mean time.  That means that you should keep filing returns and making all relevant deposits.  In particular, folks who requested an extension of time to file their 2012 returns should still consider October 15, 2013 their operative deadline.

But don’t expect any live telephone “customer service” during the shutdown.  And if you’re under audit, consider the auditor-imposed deadlines and scheduled meetings to be essentially postponed until the resumption of normal operations.

Maintain adherence to filing deadlines for both electronically filed and paper filed returns. But don’t expect any refunds to hit your mail box until all of the folks return to work.

City of Los Angeles Offers Amnesty

If you live in L.A. and are a bit behind on your taxes, check out the recently-announced City of Los Angeles tax amnesty program.

According to a press release recently issued by Mayor Garcetti, “This business friendly program will assist those businesses that may have fallen behind in their payments or have not previously registered with the City,” and can allow folks to avoid up to 40% in penalties.

The amnesty program runs from September 1 through December 31, 2013, and applies to:

  • Business tax
  • Telephone, electricity & gas users tax
  • Commercial tenants’ occupancy tax
  • Transient occupancy tax
  • Parking occupancy tax

The city estimates this largesse will generate approximately $5.5 million for its coffers.

Recent Developments in California

Principal residence foreclosures: Recent legislative action has resulted in no extension of the “cancellation of debt” exclusion associated with a principal residence.  Although Federal law allows for relief of this nature through 2013, no similar 2013 benefit applies in California.

Electronic filing expanded: The Franchise Tax Board will begin allowing for the electronic filing of Forms 541 beginning January 1, 2014, for the 2013 tax year.  Previously, only paper filings of these forms were permitted.

Check That Withholding Before Year-End

As the clock winds down on 2013, taxpayers should carefully examine their tax withholding/estimated tax payment situations.  This year may be an especially critical year in this regard, because for the first time a new tax kicks into many taxpayers’ pictures:  the 3.8% Medicare surtax applicable to net investment income.

If you’re having an especially good year, say, in the market, and/or if the new surtaxes may apply to you – check the level of your Federal income tax withholding, in comparison to the amount of payments required to keep you out of underpayment penalty trouble.  Recall that the use of estimated tax payments doesn’t provide the same flexibility as withholding.  An individual who has underpaid an estimated tax installment generally cannot avoid the penalty by increasing one or more estimates for later periods.  But income tax withheld by an employer is treated under the law as paid in equal amounts on each of the four installment dates – even in situations in which a large amount of “extra” tax is withheld late in the year.