Michael Gray, CPA's Tax and Business Insight

Thank you for your referrals.

Here are some of the referrals we have received during the past month. Robert Temmerman, Esq. referred co-trustees Kay Carnie and Nancy Gates, Jann Besson, Esq. referred co-trustees Barbara Hoag and Cindy Keenly, and Michael Agah referred James Aslanis and Pat Fechner.

Thanks to all of you who referred friends, associates and clients to us, and welcome to those who decided to become clients.

We will be available to meet with your friends, family and associates for tax consultations after April 17.

Minimum distribution deadline is April 1.

As most of you know, a participant must start taking distributions from a retirement plan or IRA no later than April 1 of the year after the participant turns age 70 1/2. The penalties are very severe for missing this deadline (50% of the required distribution), so be alert!

Supreme Court rules on deposit date for withholding and estimated taxes.

The Supreme Court has ruled that wage withholding and estimated tax remittances are automatically considered payments of income tax as of the normal due date of the return. The ruling is significant because a request for a credit or refund must be made within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever is later. In addition, the amount of the credit or refund cannot exceed the amount of tax paid within the period immediately preceding filing the claim, equal to 3 years plus the period of any extension of time for filing the return.

The Supreme Court rejected a ruling of the Fifth Circuit that the statute of limitations runs from the assessment of the tax by the IRS. (Ford v US, 618 f.2d 357 (1980).)

So, if you haven't filed a tax return and believe there is no problem because you expect a refund, you may find you can't recover the overpayment if the tax return is filed later than three years after the original due date. For example, if you haven't filed a 1996 income tax return for which you expect a refund, you will lose it unless you file the return by April 15, 2000.

Passive activity offset allowed for self-charged items other than interest.

The Tax Court allowed a real estate investor who charged a management fee for services provided to real estate investments he controlled an offset of the management fee income against passive activity losses from the investments under the same theory as self-charged interest. (Hillman v. Commissioner, 114 T.C. No. 6 (2/29/00).) If you suspect this might apply to you, consult with your tax advisor.

Tax Court pulls property from family partnership into estate.

The Tax Court held that a taxpayer retained possession and enjoyment of property transferred to a family limited partnership, including the right to the income from the property. Therefore, the property was included in the taxpayer's taxable estate. (Estate of Reichardt, 114 TC No 9 (2000).)

In order to have a family partnership arrangement respected, you must operate it properly so that it has economic substance. In this case, the taxpayer commingled partnership income in his personal account and used the partnership's checking account for paying his personal bills. This is probably a good example to study to find out what not to do for using a family partnership in an estate plan.

House passes small business tax bill.

The House of Representatives passed the "Small Business Tax Fairness Act of 2000" as part of legislation for a two-step $1 per hour increase in the federal minimum wage. President Clinton has indicated he will veto the legislation in its present form.

Some of the key provisions include:

• Self-employed persons would be able to deduct 100% of their medical insurance costs starting in 2001.
• The maximum deduction for expensing equipment, currently $20,000, would increase to $30,000, effective for tax years beginning after 2000.
• The recently-enacted ban of installment sale reporting for accrual basis taxpayers would be repealed retroactively to the date of enactment.
• Retirement plan contribution limits would be increased effective in 2001 for defined benefit, defined contribution and 401(k) plans.

FTB pushes for tax break for lottery winners.

The Franchise Tax Board has decided not to issue a ruling stating that a sale of installment lottery winnings for a lump sum is subject to California income tax. Instead, the FTB is seeking legislation declaring such a sale is exempt from California income tax. TP-00-02 is a legislative proposal supported by the FTB to exempt lottery winnings. Meanwhile, the FTB may still assess a tax when an exemption has been claimed and the statute of limitations is about to expire.

California considers increasing LLC fees (again) for 2000.

The FTB held a public hearing on March 13, 2000 about whether to adopt an increase an increase in fees for limited liability companies for taxable years beginning on or after January 1, 2000, as follows.

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