Michael Gray, CPA's Tax and Business Insight

November 2, 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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Happy Thanksgiving!

Have a happy and safe Thanksgiving!

To our clients: Thank you for your business! We wouldn’t be here without you!

To our readers: Thank you for your support and referrals! In many ways, you represent the future of our business!

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November family celebrations.

My brother, Stephen, and I will be celebrating our 56th birthday on November 17. I feel I have a lot to be thankful for. All of my children are living and healthy and I have two grandchildren that I enjoy immensely. I have a great wife to whom I’ve been married over 36 years. (Thank God!) I have a business within walking distance from my home, where I work with my daughter, Dawn, and Thi Nguyen – a great friend and employee – both diligent workers.

Kara Siemer, Michael Gray's granddaughter, as a leopard.
Kara Siemer, Michael Gray’s granddaughter, on her first Halloween.

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See you in a few weeks.

With the final extended due date for 2006 calendar-year income tax returns behind us, Janet and I are on our vacation. We will spend a week seeing the polar bears near Churchill, Manitoba, Canada, then spend a week thawing out at Edisto, South Carolina and Savannah Georgia and I’ll return to my office on November 13. If you need help while I’m away, call Thi Nguyen at 408-918-3163.

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It’s time for year-end tax planning.

Considering my vacation, Thanksgiving and Christmas, my availability will be very limited for the rest of the year. To make appointment reservations, call Dawn Siemer on weekday afternoons at 408-918-3162.

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Are you an advisor to employees with employee stock options?

I will lead a two-day Secrets of Tax Planning For Employee Stock Options, Stock Grants and ESOPs For Advisors seminar on January 25 and 26, 2008 at the Pruneyard Plaza Hotel in Campbell, California, 20 minutes from the San Jose International Airport. For details, call Dawn Siemer weekday afternoons at 408-918-3162, or email mgray@taxtrimmers.com.

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How have the mighty fallen! Lessons from a former tax guru.

Owen Fiore was once one of the most prominent tax attorneys in the USA. He was one of the leaders of the movement promoting family limited partnerships as an important estate and gift tax reduction strategy. In a plea bargain, Owen pled guilty to criminal tax fraud for his 1999 individual income tax return, and served 14 months at Lampoc Federal Prison.

On October 22, 2007, Owen shared some observations about his experience with the Santa Clara County Estate Planning Council.

Since he still has civil fraud charges pending, Owen wasn’t able to share all of the details about how he got in this predicament. He said that he believes he was negligent relating to his personal tax affairs, but he believes his behavior wasn’t "willful" as required for tax fraud, and when faced with the choice of a potential 20-year sentence versus 18 months, he decided to accept the plea offer. This was an extremely embarrassing experience for Owen. He lost his license to practice law and his inactive CPA license in the process, but will be able to reapply for his license to practice law after a couple more years.

Owen pointed out to an audience of financial advisors that new preparer penalties and guidelines for practice before the Internal Revenue Service have created a very difficult environment to operate in for tax advisors and tax return preparers. The IRS is interested in making public examples of tax advisors and tax return preparers (especially high-profile ones – like Owen) by punishing them for violations of tax laws.

He also pointed out that he made a tactical error in handling his case. Owen is not well-schooled in criminal tax law. He did not seek legal representation by a criminal tax lawyer when IRS criminal investigation division agents appeared on the scene. I remember years ago, Ken Wood, CPA said, "If a criminal investigation division agent shows up, tell the client to say nothing, you say nothing. Drag the client immediately to a criminal tax lawyer." Remember that. It might have made a real difference in the how Owen’s case was handled.

In classical Greek literature, hubris is a characteristic of fallen heroes. They have exaggerated pride or self-confidence that blinds them to their vulnerabilities, and ultimately leads to their defeat. Owen Fiore certainly suffered from hubris, but is determined, like the phoenix, to rise from his own ashes.

The rest of the tax consulting community should take note and keep their own noses clean to avoid a similar fate.

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Procedure issued to fix late S corporation election.

The IRS has issued a simplified method to get relief when an S corporation election isn’t filed on time. The procedure eliminates the requirement to apply for a private letter ruling, which eliminates expensive filing fees. The application for relief must be filed no later than 6 months after the due date of the tax return (excluding extensions) of the entity seeking to make the election for the first taxable year in which the election was intended. None of the shareholders may have reported inconsistently with the S election. The procedure is to attach the election Form 2553 to Form 1120S with an explanation why there was a reasonable cause for a late election.

A simplified procedure was also issued for the situation where a timely election wasn’t filed for an entity to elect to be taxed as a corporation on Form 8832 in addition to the missed S election. In addition to the procedure above, the taxpayer must include an explanation of a reasonable cause for failing to file the entity classification election on time. (Revenue Procedure 2007-62.)

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Limited liability company owner liable for payroll taxes.

A district court ruled that the sole owner of an LLC was personally liable for federal employment taxes owed by the LLC. The owner claimed that LLCs are disregarded entities for income tax reporting, but not for payroll taxes. The court said there is no such distinction in the "check the box" regulations. (Stern & Company, LLC v. United States, No. 06-CV-14923-DT (E.D. Mich. 6/29/07.)

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Social Security wage base increased for 2008.

The wage base for social security tax for 2008 will be $102,000. It was $97,500 for 2007. The tax rates for employees remain at 6.2% for social security and 1.45% for Medicare (with no limit for Medicare). (Social Security New Release, 10/17/2007.)

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Poker tournament sponsers required to report winnings.

The IRS has announced that, effective March 4, 2008, sponsors of poker tournaments will be required to report tournament winnings of more than $5,000 using IRS Form W-2G. When the sponsor complies with this requirement, no withholding will generally be required from the winnings. If a tournament winner doesn’t provide his or her social security number to the tournament sponsor, backup withholding of 28 percent will apply. Also, if the tournament sponsor fails to report the winnings on Form W-2G, the sponsor would be required to pay 25% of the amounts that should have been reported.

Whether or not a reporting form is issued, taxpayers are required to report their gambling winnings on their income tax returns. (IR-2007-173, 10/19/2007.)

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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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Is your mortgage rate adjusting upwards?

Yes, mortgage interest rates have increased from a few years ago. But if your credit is good, chances are that I can refinance your loan to a lower fixed rate (optionally with interest only) with no points and no fees. We can help. Call Mike Gray at 408-918-3161 for details.

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Questions and Answers

Question

I have an S corporation and I am the only employee. Can I establish a SEP-IRA? If so, do I base the 25% calculation on my salary (W-2 income) from the business or on the business earnings?

Answer

W-2 income.

Question

What is the cost basis for stock acquired in a swap? I purchased Company A stock and held it for several years. Company B took over Company A with a share swap. The share price of B stock is much higher than A stock.

Also, when does my holding period start for the Company B shares?

Answer

Assuming this was a tax-free reorganization acquisition, the tax basis of Company A shares is allocated to Company B shares. For example, if you bought 10 shares of Company A stock for $10 per share, and received 1 share of Company B stock in your "swap", the tax basis of the Company B share would be $100.

The holding period for the Company B shares received would start the date you acquired the Company A shares surrendered in the "swap". For example, if you purchased the Company A shares on January 1, 2001 and received Company B shares in exchange for the Company A shares on June 1, 2007, your holding period for the Company B shares would start on January 1, 2001.


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.

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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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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.

P.S. Still a few months left of great weather 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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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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