Michael Gray, CPA's Tax and Business Insight

June 4, 2008

© 2008 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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Welcome Sonia!

Sonia Monroy has joined our firm as a student administrative assistant. Sonia spent three years studying in Mexico. Now she is a student at our local high school, Del Mar. In her spare time, Sonia enjoys playing soccer and hanging out with her friends.

Sonia Monroy, our new student administrative assistant.
Sonia Monroy – Our new student administrative assistant.

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A babysitting first!

Last Saturday, Mom Holly (Gray) Baker decided it was time for baby Clive to stay home while she went to work at one of the family restaurants. So, Grandma Janet and Grandpa Mike got to look after brothers Kyan and Clive for the first time together.

Janet Gray with Kyan and Clive Baker.
Here are Kyan and Clive Baker and Grandma Janet.

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Second 2008 estimated tax payment is due June 16.

Remember the second estimated tax payments for calendar year taxpayers are due on June 16. If you have a change in your situation or your estimated taxes are based on your 2008 income and deductions, you should contact your tax advisor now.

If we can be of service with this, call Mike Gray at 408-918-3161.

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June graduations.

We have some graduations in our family. My son, James, is graduating from San Jose State University with a Masters of Science in Philosophy. (Hooray! Anybody know a university looking for an adjunct professor for philosophy classes?) Grandniece Ashley Allison is graduating with a Bachelor of Science in Public Relations from Cal Poly Pomona. Grandniece Brittany JoAnn Ray is graduating from high school.

Congratulations to all graduates! Your parents, families and friends are all relieved and proud of you!

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Remember Father’s Day is June 15.

Hope you and your family are gathering to express your appreciation to Dads.

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Did you see Michael Gray’s quote in the San Francisco Chronicle?

Kathleen Pender of the San Francisco Chronicle wrote an article in the May 18, 2008 edition, Business section about erroneous billings being issued by the Franchise Tax Board. Since payments are being mailed separately for e-filed California income tax returns, the Franchise Tax Board has issued notices for penalties plus interest for payments received after April 15, even though they were mailed on time.

Here is a link to the article: www.sfgate.com.

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AVA restaurant praised by Marin Independent Journal.

AVA restaurant in San Anselmo, owned by Dan and Holly (Gray) Baker received a very complimentary review in the Marin Independent Journal. Here is a link to the article: www.marinij.com

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Web site devoted to Elmer Wheeler ebooks.

Last month I wrote a book review about Elmer Wheeler’s classic, Tested Sentences that Sell. Elmer Wheeler’s byline was, "Don’t sell the steak; sell the sizzle!" Tom Lister wrote that he has a web site devoted to making Wheeler’s material available at a bargain price. The web site is www.wheelermagic.com. Take a look!

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Free offer for The Irresistable Offer.

Some time ago I wrote a book review about The Irresistible Offer. Author Mark Joyner has decided to offer an ebook edition at no charge. You can get the ebook at www.simpleology.com/training/tio.

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Wesley Snipes sentenced to three years in prison for not filing tax returns.

Actor Wesley Snipes was convicted last February for willful failure to file his income tax returns. He was sentenced on April 24, 2008 to three years in federal prison. His sentence is one year for each count, to be served consecutively, and an additional year of probation. He must also pay up to $17 million in back taxes, plus penalties and interest.

Mr. Snipes’ legal team has indicated they will appeal his conviction.

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Correcting erroneous deposits of stimulus payments to IRA or Roth.

Some taxpayers have designated that their refunds should be deposited to their IRA or Roth account or other tax favored account. The IRS may also electronically deposit stimulus (rebate) payments to the same accounts, resulting in an excess contribution. The IRS has announced that taxpayers may withdraw these excess contributions as a result of the stimulus payment no later than the time for filing their 2008 individual income tax returns, including extension. The amount withdrawn will not be subject to tax or penalties. (Ann 2008-44, 2008-20 IRB; IR 2008-68, 4/30/2008.)

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Delivery to IRS District Counsel didn’t start statute of limitations.

On February 21, 1997, Fred Allnut had delivered his original, late income tax returns for 1981 through 1995 to the IRS District Counsel’s office in Baltimore. He also delivered a copy of the returns to the IRS Baltimore District Director’s office. He was acting under the instructions of his lawyer.

The District Counsel does not have the authority to accept income tax returns for filing. The returns were filed to the Special Procedures Office of the Baltimore District Director, which stamped them as "received" on March 10, 1997.

The IRS sent Fred a notice of deficiency for the taxes shown on the income tax returns on March 6, 2000. Fred claimed the notice of deficiency was invalid because it was issued more than three years after he delivered the income tax returns on February 21, 1997.

The Fourth Circuit affirmed the decision of the Tax Court that the statute of limitations had not expired, because the tax returns weren’t considered filed until March 10, 1997, when the Special Procedures office stamped them as received.

When hand delivering income tax returns to the IRS, it’s a good idea to bring a duplicate copy of the returns to be stamped as received, and to note the name and badge number of the individual who received the returns.

(Alnutt v. Commissioner, 4th Cir. 4/23/2008.)

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Proposed regulations tighten up alternate valuation election.

The IRS has issued proposed regulations to attempt to overturn a Tax Court decision against the IRS in Kohler v. Commissioner (T.C. Memo. 2006-152.)

The alternate valuation election can generally be made when the value of property has declined. An election can be made to use the value on the estate tax return six months after death, provided it results in a decrease in the estate tax.

In the Kohler case, a reduction in the value of corporate stock was the result of a corporate reorganization of a corporation controlled by the family of the decedent. The estate received new Kohler Company shares that were subject to transfer restrictions. The value of the shares was reduced because of the transfer restrictions. The Tax Court ruled that this valuation reduction should not be disregarded in applying the alternate valuation election.

In the proposed regulations, the IRS would only allow the alternate valuation election when the reduction is a result of market conditions, not other post-death events. Market conditions are defined as events outside the control of the decedent (or the decedent’s executor or trustee) or other person whose property is being valued that affect the fair market value of the property being valued.

The proposed regulations would generally apply to estates of decedents dying on or after April 25, 2008. For life estates, remainders and similar interests, and for patents, the rules would apply for decedents dying on or after August 16, 1954.

(REG-112196-07, 73 Fed. Reg. 22,300 (4/25/2008).)

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U.S. Supreme Court rules against taxpayers on municipal bond issue.

The U.S. Supreme Court has ruled that states may tax municipal bond interest received by their residents from municipal bonds issued by other states. Protective claims that such interest should be tax-free will be disallowed. (Dept. of Revenue of Kentucky v. Davis (May 19, 2008.)

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Questions and Answers

Question

I am under the impression that home mortgages and charitable deductions are still deductible under the alternative minimum tax (AMT). Most AMT articles discuss the low end trigger, but what if you are on the upper side of the AMT? What happens when income is above $500,000? Is the mortgage and/or charitable deduction still working in your favor or is it eliminated also? Can I buy a better house, or am I stuck?

In states like California where the taxes are high and cost of living is high, the penalty is already painful. Is the high income earner totally cut out of the deductions under the AMT?

Answer

I suggest that you download a copy of Form 6251, (the AMT form) and instructions from the IRS web site, www.irs.gov. The deduction for mortgage interest is similar for AMT reporting as for regular tax reporting, except interest expense relating to up to $100,000 of mortgage for which the proceeds were not used for acquiring or substantially improving a principal residence or a second residence may be deductible for the regular tax but not the alternative minimum tax. There is no AMT adjustment for charitable contributions, except possibly for some basis adjustments.

The phase out of itemized deductions based on adjusted gross income that applies for computing the regular tax does not apply when computing the alternative minimum tax. The phase out is restored at line 6 of Form 6251. Remember, when the regular tax exceeds the alternative minimum tax, you pay the regular tax.

In California, many high-income taxpayers are subject to the alternative minimum tax because the deductions for state income taxes, property taxes, and miscellaneous itemized deductions are disallowed when computing the alternative minimum tax.


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!

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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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.

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.

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P.S. 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 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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