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Table of Contents

• Area Governor Dawn Gray.
• Corporate extended income tax returns almost due!
• September 15 estimated tax and check-up time!
• Mark your calendars for this presentation by Michael Gray.
• Are you planning to buy a California home?
• The future for estate tax audits?
• IRS will charge a users fee for offers in compromise.
• Optometrist gets disables access credit for equipment.
• Courts find Cash Balance Plans discriminatory.
• Revised industry guide issued for used cars.
• Property tax protests due September 15.
• Questions and Answers
  • Do I owe minimum corporate taxes even after dissolution?
  • Where can I find used books online?
  • Do we owe interest & penalties for our preparer's mistake?
  • How do I designate residential realty for a 1031 exchange?
  • Can California ask for back taxes from 1988 and 1982?
  • Can I deduct mortgage interest on my girlfriend's house?
  • Is my house a rental even if I don't charge rent?
  • Can my Dad 1031 exchange a house inherited from his parents?
• Do you have employee stock options?
• Visit our new articles
• PS Marché Aux Fleurs
• Subscribe/Unsubscribe from Michael Gray, CPA's Tax & Business Insight

Area Governor Dawn Gray.

Dawn Gray, who is our webmaster and my daughter, has been active in Toastmasters for some time. She is currently serving as a local Area Governor. Dawn just gave a seminar about judging speeches in preparation for a local Toastmasters speaking competition. One of the speakers for practice judging was her mother and my wife, Janet, sharing her wisdom as a Weight Watchers leader.

There is probably no more valuable skill for improving your self-esteem and for self-promotion than public speaking, and Toastmasters is a mutually supportive, safe environment to learn how to speak effectively. I highly recommend it. If you would like to learn how to participate, write to dgsiemer@taxtrimmers.com.

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Corporate extended income tax returns almost due!

The final extended due date for 2002 calendar year corporate income tax returns is September 15, 2003. Only about two weeks to go!

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September 15 estimated tax and check-up time!

With the tax cuts included in the new tax law signed last May, many people will find their 2003 federal income tax returns will be substantially reduced, so they can reduce their estimated tax payments. On the other hand, other people have been selling investments to take advantage of the 15% tax rate for long-term capital gains and increased market values on the stock market.

The September 15 due date for the third installment of estimated taxes for individuals is coming soon. This is a great time to for a tax planning check up. Why not schedule an appointment at 408-918-3161 today?

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Reminder -- CPAs, Attorneys and Financial Advisors, mark your calendars for this presentation by Michael Gray.

On September 17, 2003 at 11:45 a.m., Michael Gray and Naomi Comfort, Esq. will make a one-hour "brown bag" presentation about Handling Retirement Accounts After A Death for the Silicon Valley Bar Association. The location is the Santa Clara County Superior Court. The advance reservation investment is $15 for members and $20 for non-members. For details and reservations, call Jim Griffiths at 650-325-7808.

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Thinking of buying a California home? Get a loan pre-approval now.

With the values of investments and stock options increasing, many people are deciding now is the time to buy a nicer home or to buy their first home. Last month, a client couple needed to have a loan approval in place to make an offer on a home they liked. With some scrambling, we were able to have the approval in place the same day they asked for it. So loan approvals in one day are possible, but we prefer to have more lead time. (We already had most of this client's information from recently refinancing his current mortgage.)

Getting an approval in place before shopping for your home will help reduce the closing period so you can move in and enjoy your new home sooner.

Please remember we can provide financing for buying a California residence at very competitive interest rates. Because there are higher costs involved in financing a home purchase, there are costs for this type of loan.

For details, please call Michael Gray at 408-918-3161.

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The future for estate tax audits?

Mike McCombs, manager of the estate and gift tax audit group in the San Jose IRS office, gave a presentation to the Silicon Valley Bar Association on August 27. One of his observations was that, with higher estate tax exemptions, he believes the estate and gift audit group will disappear in three years, because the exemption equivalent will be $2 million starting in 2006.

Currently all estate and gift tax returns for which valuation discounts are claimed with respect to a family limited partnership are being referred to evaluate for audit. The San Jose audit group specializes in cases for special valuation of real estate used in farming or a trade or business. The audit group also gives a hard look at the estate tax deduction for family-owned business interests.

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IRS will charge a users fee for offers in compromise.

Effective November 1, 2003, the IRS will charge a $150 users fee for offers in compromise. The purpose of the fee is to recover some processing costs and to reduce the number of frivolous offers. Offers based solely on doubt as to liability or for taxpayers whose income falls at or below the poverty level will be exempt from the fee. (TD 9086; Reg. § 300.3, IR 2003-99.)

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Optometrist gets disabled access credit for equipment.

An optometrist was unable to test the eyesight of disabled patients using standard instruments. He purchased different equipment, including a height-adjustable instrument stand to be able to perform the tests. The Tax Court allowed him to claim a disabled access credit for the equipment, even though he used the same equipment to test normal patients. The Tax Court found there was no exclusive use or benefit test required to claim the credit. (Hubbard, TC Memo 2003-245.)

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Courts find Cash Balance Plans discriminatory.

A federal district court and the Seventh Circuit Courts of Appeals have found cash balance retirement plans at IBM and Xerox violated age discrimination and the computations of lump-sum entitlements violate the Employee Retirement Income Security Act (ERISA.) The judgment against Xerox's cash balance plan in a class-action lawsuit was $300 million.

Cash Balance plans have recently been a popular replacement for other types of plans. If you own or manage a company that has one of these plans, you should consult with the advisors for the plan about how these rulings may effect the plan. (The IBM Personal Pension Plan, DC Ill., July 31, 2003; Xerox Corp. Retirement Inc. Guarantee Plan, CA-7, August 1, 2003.)

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Revised industry guide issued for used car industry.

The IRS has issued a revised industry audit guide under the Market Segment Specialization Program for used car dealers. The guide was jointly developed by the IRS and the National Independent Automobile Dealers Association.

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Property tax protests due September 15.

Some people who own California real estate may have experienced a decline in the fair market value of the property. This is particularly the case for those who own commercial real estate. If the fair market value has declined from the assessed value on which property taxes are based, a taxpayer can appeal the value determined by the county assessor. Remember that, under Proposition 13, the value for assessing property taxes is the base year value (usually the value when the property was purchased, unless the taxpayer owned the property in 1978) plus 2% per year as an inflation adjustment. If this applies to you, get an Application for Changed Assessment from your county assessor's office and submit the completed form by September 15.

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Questions and Answers

Question

The California Franchise Tax Board has billed me for $800 plus some interest and penalty to cover the minimum State corporation tax for operations in 2003. The corporation was closed during 2002.

The filing for tax clearance was filed later during May, 2003. The FTB is using the filing date of the tax clearance request where I am using the actual closing date of 2002.

Do I owe the state the minimum tax for 2003? What is the process for disputing the tax?

Answer

The date of dissolution is based on the date the Secretary of State actually received the Certificate of Dissolution, assuming all of the assets have been sold, bills paid and monies distributed to the shareholders by that date. The dissolution is contingent on the Tax Clearance Certificate being issued. When the Tax Clearance Certificate is issued, the dissolution is retroactive to the date the Secretary of State received the Certificate of Dissolution.

If the company still owned assets, the liquidation isn't effective until the Tax Clearance Certificate is issued.

(By the way liquidating limited partnerships are having similar problems. You have to file forms with the Secretary of State to stop the $800 minimum tax.)

I don't have enough facts to advise you. If an attorney helped you with the dissolution, that person can help you resolve these issues. If this was a "do it yourself" job, you will need to call the Secretary of State's office (try 916-657-5448) and the Franchise Tax Board (800-852-5711).

Question

I saw your reply to Bo Jensen about where to find out of print and hard to get books. If you can't find them at Amazon.com, try www.alibris.com.

I was looking for a book printed in 1932 called Other Peoples Money ... and how the bankers use it by Louis Brandis. Not only did they find a copy of it, they forwarded to my home address with 2 weeks. Not bad from the US of A to the Land Down Under! All for $US20.

Answer

Thanks for the tip. I checked the site and found several copies of Frank Bettger's book, How I Multiplied My Income and Happiness In Selling, starting at about $55. It's good to have alternative sources.

Question

My wife and I were recently notified about our 2001 income tax return. It seems that our tax preparer added our W-2s and 1099s wrong. He stated our withholding was $14,000 but it should have been $11,000. The IRS wants a total of $6,000 interest, penalties and the correct tax. Any suggestions?

Answer

You apparently do owe the money for the tax. I suggest you see the tax return preparer about recovering at least the penalties and possibly the interest that is due because of the error.

Question

If I am able to do a 1031 exchange to a brand new home designated as residential, can I convert it to a rental to qualify for the exchange? When should I do it?

Answer

1031 exchanges are only available when the property given up and the property received are qualifying property, which doesn't include a personal residence. However, residential housing that is rented to someone else isn't a personal residence. You should designate the replacement property as residential rental property from the outset, including any application for financing the house and your paperwork with the county assessor. (This means you will pay a higher interest rate.)

By the way, tax-deferred exchanges aren't as good of a deal under the 2003 tax legislation. By allowing the sale to be taxed, you may pay a federal tax of 15% on most of the gain, but claim tax deductions for depreciation expense on the replacement property and receive a tax benefit up to 35%.

See your tax advisor.

Question

I am a resident of Oregon and have been for a number of years. Recently I received a letter from the California Franchise Tax Board saying I owed back taxes from 1982 and 1988. Why have they waited this long? I don't have records back that far to verify. Can they legally do this? Where do I stand?

Answer

I don't really have the details to answer your question. The statute of limitations for California to make adjustments on income tax returns is usually four years after the due date when filed on time, or, if later, four years after the tax returns were actually filed.

The statute of limitations on court actions to collect tax deficiencies, penalties and interest is ten years.

There are circumstances that can extend these dates.

I recommend that you consult with a California tax attorney and will send you a name and telephone number.

Question

I live with my girlfriend who owns the house we live in. She has no income, and I support the house. How can I deduct the mortgage interest and property taxes on my return for her house? I would also like to know if I am able to claim her son as a dependent on my tax return.

If I can not claim the interest or taxes, how can she benefit from this if she does not have any income? Do we lose out on this benefit -- about $20,000 of potential deductions.

Answer

With your current arrangement, you can't deduct the mortgage interest and property taxes for her residence.

Based on the facts you have given me, I can't tell if you can claim the dependent exemption for her son. Maybe.

Have you considered getting married? Filing a married, joint return would handle the tax problems.

Question

I own a home in California. I have been renting it out since 1987, but for the last 3 years I have let my daughter and grandson live in it, rent free. Since I am not charging them rent and she is my daughter, will it still be considered a rental home?

Answer

Probably not.

Question

My dad inherited his parents' house, but has never lived there. He has been renting it out for 10 years. Can he sell it and reinvest the money into a larger rental house without paying capital gains tax? If so, how long does he have to reinvest the money.

Answer

If your dad wants to do this, he should consult with a tax advisor. He could make a tax-deferred exchange. As I said for another question, this may not be as good a deal as it appears, because the maximum federal tax rate for long-term capital gains is currently 15%. By paying the tax, he could exchange a 15% tax on the gain for getting depreciation deductions at a higher tax rate benefit, as high as 35%.

When you make a tax-deferred exchange, the money is reinvested, tax deferred, until you sell the replacement property.

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Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter.

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If you have employee stock options, have you subscribed to the ESOAA Option Alert?

To subscribe, go to www.stockoptionadvisors.com. You can review our last issue at www.stockoptionadvisors.com/optionalert/news.shtml.

Advisors may find information about joining the Employee Stock Option Advisors Association, LLC and training materials about tax planning for employee stock options at www.stockoptionadvisors.com/seminar.shtml.

Employee option holders may find information about self-study materials relating to planning for employee stock options at www.stockoptionadvisors.com/seminar.shtml.

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Visit our new articles!

• "My Business Is Different!"
• The Robert Collier Letter Book Book Review

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P.S.

My daughter and her husband, Holly and Dan Baker, have opened a Southern French Restaurant at 23 Ross Common, Ross, California, about 15 minutes north of the Golden Gate Bridge. The name of the restaurant is Marché Aux Fleurs. For the best meal of your life, call 415-925-9200 for a reservation and give them a try soon! For directions, visit our website at taxtrimmers.com/directions.shtml.

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P.P.S.

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.