Michael Gray, CPA's Tax and Business Insight

October 7, 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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Clive Baker in a bee costume.
My grandson, Clive Baker, getting ready for Halloween.

Happy Halloween!

Boo! The year will soon be over! Halloween leads to the string of holidays for the year end.

Did you know Halloween is the second most popular holiday? Most businesses should have a promotion linked to Halloween.

Hope your holiday is a happy and safe one. Watch out for those kamikaze kids!

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Janet Gray, Panch Baker, John Siemer and Kara Siemer on a carousel
Janet and Panch on the carousel at Vasona Park celebrating birthdays.
John Siemer and granddaughter Kara Siemer are in the background.

October celebrations.

My wife, Janet, celebrated her 58th birthday last Sunday. We had a family picnic celebration for Holly, Panch (September birthdays) and Janet last Sunday.

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Final extended due date for 2008 individual returns is October 15.

Remember the final extended due date for 2008 individual income tax returns is October 15, 2009. We will have the usual "crunch" for a few clients, but can prepare a few more tax returns by October 15 if the information is complete. Call Dawn Siemer on Mondays, Wednesdays or Fridays at 408-918-3162 to make an appointment if you need help.

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It’s time for year-end tax planning.

Since the year-end will soon be here and holidays and vacations are limiting our availability, now is the time to reserve your year-end planning appointment time. Most of us believe tax increases are ahead, and that the estate tax will be reinstated for 2010. Now may be the time to take steps to avoid increased tax bills later. Call Dawn Siemer on Mondays, Wednesdays or Fridays at 408-918-3162 to make an appointment.

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Financial Insider Weekly broadcast schedule for October and November.

Financial Insider Weekly is broadcast on Wednesdays at 4:30 p.m., Pacific Time. You can watch it on Comcast channel 15 if you live in San Jose or Campbell, California. The show is broadcast as streaming video at the same time at www.creatvsj.org.

Here are the scheduled interviews for October and November:

October 7, attorney Michael Desmarais, "Your rights as a beneficiary"
October 14, attorney Jann Besson, "Qualifying for MediCal coverage for long-term healthcare"
October 21, Peggy Martin, CLU, "Long-term healthcare insurance"
October 28, Craig Martin, CFP, "How to outlive your retirement savings"
November 4, Steve Reiss, CPA, "The role of the business valuation specialist"
November 11, attorney Naomi Comfort, "Handling retirement accounts after a death"
November 18, Kathleen Wright, American Red Cross, "Financial preparation for a disaster"
November 25, attorney John Hopkins, "Legacy planning" (Benefits of charitable giving)

Past episodes of Financial Insider Weekly are posted at YouTube. The easiest way to watch them is to go to our web site, www.financialinsiderweekly.com, and click on "past episodes."

Eventually we will offer DVDs of the interviews for sale.

Let me know any ideas that you have for topics or guests. Guests will usually have to be located in or near the Silicon Valley in California.

Hope you can watch or record the show. Please tell your friends about it!

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Follow me on Twitter!

If you enjoy Twitter, please follow me at www.twitter.com/michaelgraycpa. I would especially appreciate retweets of our messages announcing episodes of Financial Insider Weekly.

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Time to revisit your home mortgage?

We are continuing to experience refinancing opportunities when the stock market goes down, 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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Deadline approaches for electing extended NOL carryback period.

The IRS has issued a reminder to small businesses that calendar-year corporations and individuals who already filed income tax returns before the enactment of the American Recovery and Reinvestment Act of 2009 on February 17, 2009 have until September 15, 2009 for corporations and October 15, 2009 for individuals to elect optional carryback periods of three, four or five years for net operating losses incurred during 2008. (IR-2009-72.)

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Foreign bank account and foreign trust reports due October 15, 2009.

An IRS amnesty program for reports of offshore accounts or trusts was supposed to end on September 23. The IRS has announced the due date is extended "for the last time" to October 15, 2009. (The due date for Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts is June 30 of the year following the year the report is for.)

As I’ve explained before, the IRS says these reports are required even when there is no tax avoidance resulting from the arrangement. For example, Mexican trust arrangements are required to hold Mexican beachfront property. Many commenters believe these arrangements are subject to reporting requirements.

The penalties are severe for failure to file, based on the fair market value of assets held by the trust. If you are wondering if this requirement applies to you, seek legal counsel.

(IR-2009-84.)

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IRS allows rollbacks of retirement plan distributions.

Required minimum distributions have been suspended for most qualified retirement plans, including IRAs, for 2009. Since many taxpayers have already taken what they believed were required minimum distributions for 2009, the IRS is allowing taxpayers to rollover or return those distributions without penalty or tax until November 30, 2009. (Rollovers usually have to be completed within 60 days after distribution.)

The IRS has also published sample language that plan sponsors may adopt to stop or continue 2009 required minimum distributions.

(Notice 2009-82.)

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Listed transaction moratorium extended through December 31, 2009.

The IRS has extended through December 31, 2009 its moratorium on collecting penalties for failure to report a "listed transaction" when the tax benefit from the transaction is less than the mandatory $100,000 penalty ($200,000 for taxpayers other than individuals.) These "naughty" items are listed at the IRS’s web site.

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IRS regulations say basis overstatement can result in six-year limitations period.

The IRS has issued temporary and proposed regulations asserting that a taxpayer who understates taxable income by reporting a basis overstatement, such as for a sale of real estate, will be subject to a six-year statute of limitations if the overstatement of tax basis results in underreporting more than 25% of gross taxable income. The usual statute of limitations during which the IRS can assert an increased tax liability for a taxable year is three years.

The regulations are contrary to court opinions in Bakersfield Energy (CA-9, 2009-1 USTC ¶ 50,448) and Salman Ranch (2009-2 USTC ¶ 50,528). The IRS is trying to bolster its litigating position with the new regulations.

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IRS rules on auto dealership LIFO revocation.

The IRS has issued guidance about when an auto dealer who received automatic consent to terminate its last-in, first-out (LIFO) method of accounting must accelerate reporting income attributable to liquidation of its LIFO reserve under Internal Revenue Code Section 481(a). Generally, the income is reported over a four-year period, starting with the year of change.

In one of the examples, the dealership had franchises of other makes of cars and terminated the LIFO method only for separate pools consisting of new Pontiacs, for which it lost the franchise in the year following the termination. In that case, the IRS said the taxpayer may continue the four-year amortization of the Section 481(a) adjustment.

In a second example, the dealership only had one franchise and continued its other operations after the franchise was terminated. In that case, the IRS said the taxpayer may also continue the four-year amortization of the Section 481(a) adjustment. However, if the taxpayer ceases to engage in this trade or business or terminates its existence, the unamortized balance of the Section 481(a) adjustment would be accelerated and become taxable in that year.

In a third example, all of the vehicles were accounted for in a single LIFO pool. The IRS said, the LIFO method couldn’t be revoked only for certain vehicles within the pool. The taxpayer would have to either revoke its LIFO election for the entire pool or continue using the LIFO method for the entire pool.

(Letter Ruling 200935024, CCA 2000935024, August 17, 2009.)

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California tax conformity legislation awaits governor’s approval.

AB 1580, California tax conformity legislation, passed the California legislature on September 11 and is awaiting approval by Governor Scwartzenegger. The legislation must be signed by October 11 to be enacted.

Many errors in preparation of California income tax returns are made because of differences between federal and California tax laws that individuals who prepare the returns don’t know about or have forgotten.

For example, California hasn’t yet adopted the exclusion of up to $500,000 for the sale of a residence by a surviving spouse within two years of the death of their spouse.

Another example is the increase in the age of a child subject to "kiddie tax," potentially up to age 24.

Although some of the provisions aren’t "taxpayer friendly," it’s probably best to reduce confusion by being as consistent as possible. So we hope the Governor approves the legislation.

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Commission recommends California tax changes.

Since California faces problems balancing its budget year after year, partly because of inconsistent revenue from its tax system, a commission was formed to make recommendations for changes to the system. The Commission on the 21st Century Economy released its report on September 29.

These are only recommendations that will be debated in California’s state legislature. Governor Schwartzenegger says he supports the recommendations.

The commission recommended:

These proposals represent a significant shift for state revenues, so there will be heated arguments on both sides about whether they should be adopted. They could go nowhere.

Eventually, California will have to "face the music" and solve its budget problems.

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Questions and Answers

Question

We won a raffle prize of $10,000 from a charity. Can we give some back or to other charities instead of paying tax on the money?

Answer

You can refuse to accept the prize (which then shouldn’t be taxable), or donate the money to another charity. In order to get the deduction for the donation, you have to be able to itemize your tax deductions.


Have a tax question?

Maybe we can answer it! Michael Gray answers 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.

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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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