Michael Gray, CPA's Tax and Business Insight

May 8, 2009

© 2009 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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Mother's Day is May 10.

Be sure to show your appreciation to the mothers in your family.

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Memorial Day is May 25.

Memorial Day is the unofficial start of summer. It is a day of rememberance for those who have died in the service of our country. A day of parades and family barbeques. A signal that the school year is about to end. Have a safe one!

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Do you need help with extended income tax returns?

Unlike many commercial tax return preparers, we are here throughout the year. Why not finish those extended income tax returns now, and sleep better for the rest of the year? To make an appointment, please call Dawn Siemer on Monday, Wednesday or Friday at 408-918-3162.

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Is there an item you have a question about the income tax returns that you already filed?

To schedule a complimentary half-hour consultation with Michael Gray, CPA or Thi Nguyen, CPA about your question, please call Dawn Siemer on Monday, Wednesday or Friday at 408-918-3162.

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An after-tax season safari.

On April 16 and 17, Janet and I took our grandson, Kyan "Panch" Baker, for an overnight stay and tour at Safari West, near Santa Rosa, California. After the afternoon tour in a safari wagon, we enjoyed a barbeque dinner and spent the night in a luxurious tent, featuring a king-size bed with electric blanket, bathroom with heated running water, and a portable electric heater.

Safari West is a nonprofit corporation that has a large, private collection of animals, including cheetahs, cape buffalos, white rhinos, giraffes, wildebeest, exotic birds, and much more. (We were expecting a T-Rex or diplodocus to show up like in Jurassic Park!)

Although it was pricey, this was a great family adventure. Until just recently, we didn't even know Safari West existed and is reasonably close to our home. For more details, visit www.safariwest.com.

Kyan Baker and Janet Gray at Safari West
Here are my grandson, Kyan "Panch" Baker, with Grandma Janet on top of a "safari wagon" at Safari West, near Santa Rosa, California.

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May family celebration.

My daughter, Holly Baker, and her husband, Dan, are celebrating their tenth wedding anniversary on May 15. Holly and Dan live in San Rafael with their two sons, Kyan "Panch" and Clive, and a "puggle" dog, Smokey. They have two restaurants, Marché aux Fleurs in Ross and AVA in San Anselmo. They have had a very busy ten years! Congratulations Holly and Dan!

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Time to revisit your home mortgage?

Although it's harder to qualify for refinancing, mortgage interest rates have been very low recently, so many people are refinancing. Through our strategic partner, Wymac Capital, Inc., we specialize in no-points, no-fees refinancing, so some clients are immediately applying to refinance again at closing. Some lenders are allowing immediate refinancing without a penalty. Some mortgages feature interest-only payments for a period of years. For more details, call Michael Gray at 408-918-3161.

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Ivanka Trump featured as a speaker at SuperConference 2009.

I just returned from the Glazer-Kennedy SuperConference held in Chicago from April 30 to May 3.

Ivanka Trump (you-know-who's daughter) was a keynote speaker. She is quite a striking young woman, resembling her mother, Ivana. She also seems to have a good head on her shoulders because she graduated summa cum laude from the Wharton School of Finance and is now the vice president of development for the Trump Organization, managing thirteen hotels. Ivanka is also a principal in Ivanka Trump Jewelry, which has a flagship store on Madison Avenue, New York City.

Among many other speakers, marketing gurus Dan Kennedy and Bill Glazer gave presentations about how to prosper in a recessionary environment and the coming New Economy. The key message is now is the time to be aggressively investing in marketing while competitors are cutting marketing spending.

I was able to get a pre-release copy of Bill Glazer's new book, Outrageous Marketing That's Outrageously Successful. This book is a steal!! It includes 108 examples of marketing campaigns you can apply to your business. You will be able to buy it at Amazon.com or your local bookstore in September. I'll write a book review on it before then.

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California issues new payroll withholding tables.

The Employment Development Department has updated the California withholding tables for 2009. Employers should start using the tables with their next payroll. The tables are required for recently-enacted tax increases. You can get the tables online at www.edd.ca.gov/Payroll_Taxes?Rates_and_Witholding.htm. If you use payroll software, download updates for your payroll tax tables.

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California Board of Equalization sends use tax inquiries.

The California State Board of Equalization has recently sent thousands of letters inquiring about potential use tax obligations for out-of-state purchases. Even if you have no use tax liability, you must respond to the BPE and provide the records requested – usually copies of depreciation schedules and federal income tax returns. The BOE may follow up with a request for additional information, such as invoices. The BOE has found that taxpayers overlook consumable supplies when determining use tax.

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Tax credit phased out for Ford Hybrids.

The alternative motor vehicle credit is being reduced for Ford Motor Company hybrids. Taxpayers who buy a Ford hybrid during the quarter beginning April 1, 2009 may claim 50% of the credit. 25% of the credit may be claimed when a Ford hybrid is purchased during the quarter beginning July 1, 2009. After September 30, 2009, no credit will be available for Ford hybrids. (Notice 2009-37, 2009-18 IRB ___.)

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Vehicle depreciation limits for 2009 released.

For passenger automobiles first placed in service in 2009 for which bonus depreciation is not claimed, the maximum depreciation deductions for the first three tax years are $2,960, $4,800 and $2,850, and $1,775 for each succeeding year. For trucks and vans first placed in service during 2009 for which bonus depreciation is not claimed, the maximum depreciation deductions for the first three years are $3,060, $4,900 and $2,950 and $1,775 for each succeeding year. (The limits apply for trucks and vans with a gross vehicle weight of less than 6,000 pounds.)

When bonus depreciation is claimed for 2009, the limit for the first year is increased by $8,000, so the first year limits are $10,960 for automobiles and $11,060 for trucks and vans. (Rev. Proc. 2009-24, 2009-17 IRB ___,)

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Guidance released on COBRA premium subsidy.

The IRS has issued formal guidance for the COBRA premium subsidy under the American Recovery and Reinvestment Act of 2009, enacted during February, 2009. I recommend that employers consult with their health insurance provider about these rules. Evidently, the subsidy applies even to small employers under state-equivalent programs, such as Cal-COBRA. In addition, the medical insurance provider may elect to handle the subsidy directly with reimbursements on its federal payroll tax return, relieving employers of the administrative burden. (Notice 2009-27, 2009-16 IRB ___.)

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Fees for payment of taxes using credit or debit card are tax deductible.

The IRS has announced that it has reversed its previous position, and that fees paid for payment of federal income taxes using a credit card or debit are tax deductible as miscellaneous itemized deductions. Remember that miscellaneous itemized deductions are not tax deductible when computing the alternative minimum tax (AMT). (IRS News Release 2009-37.)

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IRS explains extended net operating loss deduction.

A provision of the American Recovery and Reinvestment Act of 2009 allows a longer net operating loss carryback for certain small business losses, extended from two years to up to five years. An election was available to use the election for a tax year ending in 2009 when the tax return was already filed and the NOL carryback period was previously waived, but the election had to be made by April 17, 2009.

The IRS has issued more details about the election, including updated "quick refund" forms 1045 and 1139 and instructions, and an Publication 536.

For more information, see the IRS web site, www.irs.gov, or your tax advisor. (Rev. Proc. 2009-19.)

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IRS explains reporting for Ponzi scheme loss.

The IRS has issued guidance relating to losses from Ponzi investment schemes, such as those incurred by investors with money placed with Bernard Madoff.

The IRS said that a taxpayer who had a loss from such an arrangement that constituted criminal fraud or embezzlement under the law of the jurisdiction where the transactions occurred could claim an ordinary theft loss instead of a capital loss. The loss is deductible as a loss on a transaction entered into for profit, which is not subject to the $100 or 10% of adjusted gross income "haircut" for personal loss casualties or thefts.

For an individual, the loss is an itemized deduction, but is not subject to the 2% of adjusted gross income reduction for miscellaneous itemized deductions. (The loss is reported on Form 4684 and deducted at line 20 on Schedule A.)

The theft loss is deductible in the year it is discovered, provided it is not compensated by insurance or otherwise. If the taxpayer recovers a greater amount than the reduction applied when the loss was claimed, the excess is reported as income in the year of recovery, up to the amount the deduction reduced the taxpayer's tax liability.

Because the loss can be difficult to document, the IRS has issued a safe harbor procedure that can be used for losses discovered after 2007. Only "qualified losses" of "qualified investors" are eligible for the procedure. Notably, an indirect investment through a mutual fund or other entity that invested in the fraudulent arrangement isn't eligible for the safe harbor.

If the taxpayer qualifies for the safe harbor and the taxpayer doesn't pursue any potential third-party recovery, the deduction is 95% of the investment amount. If the taxpayer qualifies for the safe harbor and the taxpayer pursues or intends to pursue any potential third-party recovery, the deduction is 75% of the investment amount.

In order to claim the safe harbor, mark "Revenue Procedure 2009-20" at the top of Form 4684. An executed statement provided with the Revenue Procedure should be included with the income tax return. The deduction should be claimed with the required Form 4684 and disclosure statement no later than the extended due date for the year of discovery. The taxpayer may claim the safe harbor no later than May 15, 2009 to change information previously reported before April 17, 2009.

(Revenue Ruling 2009-9, 2009-14 IRB ___; Revenue Procedure 2009-20, 2009-14 IRB ___.)

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Estate tax extension proposal would severely curtail minority interest discounts.

Representative Earl Pomeroy, D-N.D., has proposed H.R. 436, the "Certain Estate Tax Relief Act of 2009".

Under the proposal, the estate tax exemption equivalent of $3.5 million would be extended indefinitely. Carryover basis would be repealed. The estate tax repeal for 2010 and sunset of the Bush tax cuts for estate taxes would be eliminated. The maximum estate tax rate would be frozen at 45%.

There would be severe cutbacks in minority discounts under the proposal.

First, non-business assets would be valued separately from assets used in a trade or business, and no valuation adjustments would be permitted for them. There is an exception for passive real estate.

Second, no minority interest discount would be permitted if the transferee and the family of the transferee have control of the entity after the transfer. (Publicly-traded partnerships would not be subject to this rule, but it's unlikely they would have a majority interest controlled by a family.)

I suggest that you write to your representatives in Congress opposing this proposal. There are sound economic reasons for minority interest discounts and a long line of judicial history supporting and justifying them. Families with family businesses will be facing dramatically increased estate taxes, possibly resulting in the liquidation or distress sale of a family business.

This proposal would also have a severe effect on the appraisal industry by re-writing the economic theories upon which this work is based.

It would be a shame to let this proposal be enacted without a fight.

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Ninth Circuit says ERISA preempts divorce settlement of retirement account after retirement.

Lupe Carmona died after he retired from Hilton Hotels. He participated in two retirement plans related to his employment. He was also divorced from his eighth wife, Janis, after he retired and had subsequently married his ninth spouse, Judy.

When Lupe divorced Janis, the retirement plans refused to change the beneficiary designation, because they believed the designation was irrevocable when Lupe retired. The Nevada family court granted Lupe his pension as his sole and separate property.

After Lupe died, the family court concluded that Janis had waived her beneficiary rights by the divorce decree's allocation of property, and ordered the plan administrators to change the beneficiary to Judy. Judy claimed benefits from the retirement account as Lupe's surviving spouse, and Janis contested Judy's claim.

In 2003, the Nevada Supreme Court upheld the family court order.

The family court ordered Janis to deposit the survivor benefit funds into a constructive trust and issued two "Qualified Domestic Relations Orders" directing the plans to pay survivor benefits directly to Judy or to a constructive trust.

In 2008, the Ninth Circuit ruled that the benefit from the retirement account was a joint and survivor annuity, and that Janis's status as the surviving beneficiary was vested on Lupe's date of retirement.

Since the case was between the two spouses, you can't find it in a Federal tax service, but we found it online using Google.

(Carmona v. Carmona, Ninth Circuit, September 17, 2008.)

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Questions and Answers


Last year my company took about $16 - $26 out of each paycheck for federal taxes. This year, they haven't taken any withholding except for a bonus check. When I asked about it, they said that it was due to the federal stimulus package. Is this true? I am a single mom and scared to death I'm going to owe the IRS a ton of money at the end of the year.


The American Recovery and Reinvestment Tax Act of 2009, enacted last February, includes the Making Work Pay Credit. The credit is the lesser of 6.2% of earned income or $400 ($800 for joint filers.) Instead of issuing checks, the new credit was implemented by reducing payroll tax withholding, effective April 1, 2009.

Probably your withholding is OK if you have similar facts and are claiming the same exemptions as last year. If you're really uncomfortable, you can ask your employer to withhold some additional tax by submitting another Form W-4.


When computing the AMT NOL, do you add back state income taxes?


Since the starting point for the alternative minimum tax net operating loss is alternative minimum taxable income, state income taxes should have already been added back.


I am currently a subcontractor for several mystery shop services, a promotional modeling company, and this summer, for the government. The tax forms they have me fill out are strange. Am I a home-based business? How do I know? I don't have an office, but I don't need one. This is all new to me.


Since the only "headquarters" you have for your operations is your residence, I suppose it could be considered a "home based business." Do they give you other choices? You're right though, two people would probably give two different answers.


I haven't earned any money in about four years.

I'm a writer and someone stole the rights for my book, so for all of this time I've been in a lawsuit. I finally won the lawsuit and I will probably start receiving some royalties for my book.

Since I didn't have any income, I didn't file any income tax returns. Was that wrong?


Generally, if you didn't have self-employment income of at least $400, no income tax return was required to be filed. You might be entitled to net operating loss deductions relating to the interim years. In that case, tax returns should be filed using the forms (Form 1040 and state income tax form) for those years. You can get them from the IRS and your state tax authority, or a tax return preparer should have access to them if you decide to have them prepared for you. If there was no tax, no penalty should apply for failure to file.

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 articles!

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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.

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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
2482 Wooding Ct.
San Jose, CA 95128
(408) 918-3162
FAX: (408) 938-0610
Hours: 8am - 5pm PDT Monday - Friday

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