Michael Gray, CPA's Tax and Business Insight

August 7, 2007

© 2007 by Michael C. Gray

ISSN 1539-395X

A monthly report to help you prepare for your financial future, keep more of what you earn by minimizing your taxes, and build an extraordinary business!

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(If you find this information valuable, please pass it on to a friend!)

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The lazy, hazy, crazy days of summer…

Okay, I’m dating myself. How many of you remember that old Nat "King" Cole song?

As always, time is passing quickly. "Back to school ads" are in the newspaper and on television.

We are mostly staying close to home right now and finishing extended tax returns and performing summer tax planning projects. My big vacation will be late October and early November.

How may we be of service for you?

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Katie

Here's Katie Thomas!

Welcome aboard, Katie!

Katie Thomas recently joined us as a part-time student administrative assistant.

Her biggest job will be to relieve Dawn from screening our incoming emails. We get about 200 each day, including a considerable amount of spam that isn’t blocked by our spam blocker. Since we get many inquiries and questions from prospective clients who we don’t know, we intentionally let emails from unidentified senders through.

Katie just graduated from Archbishop Mitty High School in San Jose, where she was an honors student and this year’s valedictorian. She will be a freshman at Stanford University this fall.

She earned a Junior Black Belt at Santa Clara Kenpo Karate, and is working on her Adult Black Belt. She also plays the piano.

Katie lives in Santa Clara with her parents, two brothers and sister.

She is a bright, attractive, and charming young woman, and we are delighted to have her as part of our team!

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August family celebrations.

Wally Bowers, who is my father-in-law, will be joined by his family, friends and neighbors to celebrate his 81st birthday on August 23.

Janet and I will celebrate our 36th anniversary on August 7.

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Sorry, our internet service provider has been down (again!)

Our internet service was down from Monday, July 30 through Thursday, August 2.

We apologize for the delay in answering email messages.

We may be changing providers if a telephone line-based DSL service continues to be troublesome.

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Michael Gray, CPA to be featured in San José Mercury-News article.

A feature story interview by business reporter Mark Schwanhausser of Michael Gray, CPA was published in the business section of the San José Mercury News last Sunday, August 5. To read it, visit www.mercurynews.com and search for "Michael Gray".

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Dawn Siemer’s telephone number has changed.

Dawn’s (who is our webmaster and office manager) voicemail box was filling up every two hours with unexplained, blank telephone calls, so we had to change her telephone number.

The new number is 408-918-3162.

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D.C. Circuit changes position on taxability of compensatory award.

The Court of Appeals for the District of Columbia district reversed its own decision on rehearing, and found that it is not unconstitutional to tax awards for emotional distress or damage to professional reputation. The taxpayer claimed the awards should not be taxable because they are not income and the court originally agreed with the taxpayer, but then decided to rehear the case and changed its ruling. (Murphy, CA-DC July 3, 2007.)

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Special school eligible for medical deduction.

A taxpayer has a dependent child who was diagnosed with several developmental disorders, including an endocrine disorder that contributes to delayed motor, cognitive and social development skills. A recent neuropsychological report stated that she will need to have a support program for one of her conditions and counseling for another condition in order for her to attend college.

The child was referred to a school that provides a comprehensive program designed to provide students who have learning disabilities of a medical nature with the help and support they need to complete a college or vocational program and to become competent and responsible adults.

The school does not provide college courses, but provides assistance to students who are enrolled in neighboring colleges and technical schools.

The IRS ruled the program offered by the school for the child is designed primarily to enable the child to compensate for and overcome her diagnosed medical conditions. Therefore, the school is a special school and the tuition paid for the child is deductible as a medical cost.

(Letter Ruling 200729019, 4/10/2007.)

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Deduction for SUV lost – election done wrong.

A taxpayer who had a side janitorial service claimed a $24,000 expense deduction for an SUV on Form 2106, Employee Business Expenses. The $24,000 only deducted on Form 2106, and was not listed as a Section 179 (expense) deduction on Form 4562, Depreciation and Amortization. In fact, no Form 4562 was included with the tax return.

The Tax Court ruled the taxpayers did not make a proper election to expense the vehicle, and disallowed the deduction.

PAY ATTENTION TO DETAILS. The taxpayer probably prepared his own income tax return and didn’t know any better.

(Byard v. Commissioner, T.C. Summary 2007-120 (7/17/07).)

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Employers don’t have to send questionable Forms W-4 to IRS.

The IRS has issued final regulations eliminating the requirement that employers send Forms W-4 where more than a certain number of exemptions are claimed to the IRS. However, the IRS may still issue a request to an employer for a specific employee. (T.D. 9337, 7/13/07.)

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IRS outlines how to depreciate rotable spare parts.

How to treat rotable spare parts (parts that a taxpayer can substitute for an original part that malfunctions) has been controversial for some time. Now the IRS has issued a procedure permitting depreciating the parts. The procedure follows an Eighth Circuit ruling, Honeywell v. Commissioner, that permit a computer manufacturer to exclude from inventory certain parts used in fulfilling maintenance and service contracts, and capitalize and depreciate the parts. The IRS has granted automatic consent for the change in accounting method, but Form 3115, Application of Change in Accounting Method, will have to be prepared for the tax year for which the change is requested.

The revenue procedure is effective for tax years ending on or after December 31, 2006.

(Revenue Procedure 2007-48, 2007-29 I.R.B. ___.)

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Self-insured health coverage for partners qualified as medical insurance.

The IRS privately ruled that a self-insured health care plan covering about 380 employees qualified as medical insurance, because the plan was non-discriminatory and there was adequate risk sharing under the plan. Employees will be able to exclude the coverage from their wages. Partners, who are treated as "self-employed individuals", will be able to separately deduct the benefit as an adjustment to gross income on their individual income tax returns. (Letter Ruling 200704017.)

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Pre-release offer for Secrets of Tax Planning for Employee Stock Options has been extended.

I will soon be releasing the second edition of Secrets of Tax Planning for Employee Stock Options. If you would like information about the book, including a half-price pre-release offer, visit www.employeestockoptionsecrets.com or call Dawn Siemer at 408-918-3162 today.

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Recording available of Michael Gray, CPA and Michael Brayton, Esq. speaking on non-qualified deferred compensation plans.

If you weren’t able to come to the meetings where Michael Gray, CPA and attorney Michael Brayton will discussed the final regulations under Internal Revenue Code Section 409A, Non-Qualified Deferred Compensation Plans, you can still hear the presentations. We are offering the three-CD set of recordings and copies of the outlines for $49.95 plus $10 shipping and handling (and $4.12 California sales tax for California residents. There is no continuing education credit with the program. Use the attached order form or call Dawn Siemer at 408-918-3162 to order.

Action Form

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Are you shopping for a new home?

Yes, some people are actually buying homes! Remember that we can help the mortgage financing to buy a new home. Call Mike Gray at 408-918-3161 for details.

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Do you have a summer remodeling project to finance?

Remember that we can help with setting up equity lines of credit or refinancing a first mortgage to get the cash you need to finance your new kitchen, bathroom or workshop. Call Mike Gray at 408-918-3161 for details.

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Is your interest-only mortgage going to start amortizing?

Yes, mortgage interest rates have increased from a few years ago. But you can have often have a lower mortgage payment by refinancing with a new interest-only mortgage. We can help. Call Mike Gray at 408-918-3161 for details.

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Questions and Answers

Question

My mother owned 2,000 shares of stock. Before her death, she added my name to the account as joint tenant with rights of survivorship. All of the investments made in the account were hers, none were made by me. When I sell the shares, can I receive stepped-up basis as of her date of death?

Answer

Yes. Property owned as joint tenants with an individual who isn’t the decedent’s spouse for which the decedent provided all of the consideration is fully includable in the decedent’s taxable estate, and therefore eligible for a 100% basis adjustment at death (or the alternate valuation date, if applicable).


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

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Visit our new article!

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If you have employee stock options, have you subscribed to Michael Gray, CPA's Option Alert at no charge or obligation?

To learn more, visit stockoptionadvisors.com/subscribe.shtml.

Real estate investors, have you subscribed to Michael Gray, CPA’s Real Estate Tax Letter at no charge or obligation?

For details, visit www.realestatetaxletter.com.

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P.S. Summer is a great time of year to enjoy outdoor patio dining at Marché Aux Fleurs and AVA!

My daughter and her husband, Holly and Dan Baker, have 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 and their website address is marcheauxfleursrestaurant.com. For the best meal of your life, call 415-925-9200 for a reservation and give them a try! For directions, visit our website at www.taxtrimmers.com/directions.shtml.

They also have a second restaurant, AVA, at 636 San Anselmo Ave., San Anselmo, California. AVA serves food and drinks produced in California. For reservations, call 415-453-3407. The web site is avamarin.com.

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P.P.S.

To receive the next issue of Michael Gray, CPA's Tax & Business Insight with more tax developments, another book review, and upcoming deadlines automatically via email, subscribe by filling out the form below.

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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.


Action Form

YES! I want to learn about the surprises included in the new final regulations on non-qualified deferred compensation plans, Section 409A, including a discussion about the impact of the regulations on employee stock purchase plans.

Please send me the recordings of the three-hour presentation on The Final Section 409A Regulations, Non-Qualified Deferred Compensation Plans, by Michael Gray, CPA and Michael Brayton, Esq., together with discussion outlines.

My investment is only $49.95 (half-off the regular price of $199.95) plus $10 shipping and handling and $4.12 sales tax for California residents. This offer will expire August 31, 2007.

MY SATISFACTION IS GUARANTEED. If I don’t find this material to be of value, I may simply return the course for a no-hassle immediate refund of my investment. I am the sole judge.

Name ___________________________________________________

Company Name ___________________________________________

Address _________________________________________________

City ________________________ State ______ Zip ______________

Home Phone _________________ Business Phone _______________

FAX ___________________ Email ___________________________

Date of Birth _____________________

Charge my Mastercard ____ Visa ___ American Express ___Discover _____

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Expiration __________ Card billing address zip code ____________

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FAX to 408-998-2766

or mail to Silicon Valley Publishing Company
2190 Stokes St., Ste. 102
San Jose, CA 95128-4512

© 2007 Michael C. Gray


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Michael Gray, CPA
2190 Stokes St. Ste. 102
San Jose, CA 95128
(408) 918-3162
FAX: (408) 998-2766
Hours: 8am - 5pm PDT Monday - Friday

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