Michael Gray, CPA's Tax and Business Insight

June 7, 2010

© 2010 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 swing.
My grandson, Clive Baker, is ready for summer fun! Are you?

No more classrooms, no more books…

Summer vacation will soon be here, or already is. Drive carefully, with those kamikaze kids out there! Congratulations and good luck graduates!

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Wally Bowers
My father in law, Wally Bowers

Another family patriarch passes away.

After suffering from Alzheimer’s disease for several years, my father in law, Wally Bowers, passed away on May 13 at age 83. A long time member of Saratoga Toastmasters, he loved to tell stories about what a scamp he was when growing up. During the Depression years, he became self-supporting at age 15. Wally was fascinated with investing and was a great fan of Bob Brinker’s "Money Talk" radio show. Wally loved to shop for bargains at garage sales and thrift shops. His career was in Aerospace with the Department of the Navy. We enjoyed some wonderful family vacations together. Wally’s auto mechanical skills kept us on the road through many mechanical breakdowns. He taught his family many valuable lessons, and we will miss him, but know he is in a better place.

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Do you need help with finishing extended income tax returns, preparing amended income tax returns, or tax audits?

Now that April 15 has passed, it’s time to focus on finishing extended income tax returns. Some of our readers have found errors in or are uncomfortable with tax returns that they prepared using tax software or were prepared by other tax return preparation companies. We can provide a second opinion. Others have received notices for tax audits and sometimes can’t get the help they need from their tax return preparer. We can help with all of these. To make an appointment, call Dawn Siemer Mondays, Wednesdays or Fridays at 408-918-3162 from 9 a.m. to 5:30 p.m.

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Secrets of Tax Planning For Employee Stock Options Live Seminar.

Michael Gray, CPA will lead a LIVE hour and a half Secrets of Tax Planning For Employee Stock Options lunchtime seminar in Campbell, California on Friday, June 18.

Secrets of Tax Planning For Employee Stock Options Telephone Seminar.

Michael Gray, CPA will lead an hour and a half Secrets of Tax Planning For Employee Stock Options telephone seminar on Friday, June 25 at 1 p.m. Pacific Daylight Time, 2 p.m. Mountain Daylight Time, 3 p.m. Central Daylight Time and 4 p.m. Eastern Daylight Time.

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Silicon Valley Tax Professionals Save The Date!

Michael Gray, CPA will be giving a seminar, The Federal Tax Return Preparer Disclosure and Use Rules (IRC Section 7216) – A Threat To Your Practice and Our Profession?, for the Tax Interest Group of the San Jose Silicon Valley CPAs. The seminar will be a breakfast meeting at Lou’s Village in Los Gatos, California starting at 8 a.m. For details, visit the CalCPA web site at www.calcpa.org or call Stephanie Stewart at 408-983-1122.

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Second estimated tax payment due.

The second individual income tax estimated tax payment is due June 15. The second federal estimated tax payment is 25% of the 2010 total, but the second California estimated tax payment is 40% of the 2010 total. High-income California taxpayers should also remember that the "protected estimate" exception based on last year’s income tax return doesn’t apply for taxpayers who have $1 million of taxable income or more. Some taxpayers are required to make California estimated tax payments online. See your tax advisor for details or call Dawn Siemer for an appointment at 408-918-3162.

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Annual reports for foreign accounts and trusts and receipt of foreign gifts due.

Each year, a report must be filed for foreign bank and brokerage accounts owned by US residents and citizens for which US residents and citizens have signature authority. The form for accounts is TD F 90-22.1, Report of Foreign Bank and Financial Accounts. The forms for trusts are Forms 3520 and 3520-A, Annual Report of Transactions with Foreign Trusts and Receipt of Foreign Gifts, and Annual Information Return of a Foreign Trust With A U.S. Owner. You can get the forms at www.irs.gov.

These returns are due at the same time as the taxpayer's income tax returns for the tax year, including extensions. The penalties for failure to file can be onerous, starting at $10,000. Congress and the IRS are giving a lot of attention to this area, including requiring reporting by foreign banks. Don’t think you can "skate by".

If you have a question whether you are subject to these reporting requirements, see a tax consultant immediately.

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See David Lazarony’s art online and in person.

David Lazarony, who is one of our clients, is an accomplished painter. His art is being displayed in a show at the Pacific Grove Art Center Wednesdays through Sundays from June 4 to July 15, 2010. The name of the show is Experience Being Seen. David has posted the details and an online gallery of his art at www.DavidLazarony.com. Check it out! (Caution-Some of the paintings are of nude subjects.)

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Tax extenders bill passes the House.

The House of Representatives has passed the "American Jobs and Closing Tax Loopholes Act." It hasn’t passed the Senate, yet. The bill includes a number of tax extenders, including the additional standard deduction for property taxes, state and local sales tax deduction, exclusion for up to $100,000 of IRA contributions to charities, and the research tax credit. Notably, there is no AMT "patch" in the bill. A key revenue raiser is subjecting income of certain professional service S corporations to self-employment tax. Another will recharacterize 50% for 2011 and 2012 and 75% after 2012 of capital gains for "carried interests" in a partnership to ordinary income. (Carried interest means that income is being allocated to a partner in exchange for services without a capital contribution.)

If you are in the process of forming a professional services S corporation, be alert for this change. You might be better off with an LLC (not permitted in California and certain other states) or LLP.

I’ll give more details when and if the legislation passes and President Obama says he’ll approve it.

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Single member LLC owner owes unpaid employment taxes.

The Tax Court held the sole member of a limited liability company (LLC) was personally liable for the LLC’s unpaid employment taxes for 2006 and 2007. The taxpayer claimed she didn’t owe the tax because the IRS assessed the liabilities against the LLC using its employer identification number. The Court said the taxpayer and the LLC were not distinct taxpayers, so the owner was liable for the LLC’s unpaid employment taxes. (The owner could also have been held to be a "responsible party" subject to the tax.)

Under more recent rules effective January 1, 2009, the IRS is required to make a separate responsible person penalty assessment before it can impose liability against the owner.

(Meddial Practice Solutions v. Commissioner, TC Memo 2010-98.)

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Wrongful death payment excluded from taxable income.

The IRS ruled that a survivor could exclude a payment received for the wrongful death of another from taxable income. The award included an amount for personal injury and for emotional distress.

The award was paid pursuant to a law passed by a government entity. The IRS said the entire award should all be treated as paid for physical injury, being the wrongful death.

(Letter Ruling 201019005.)

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IRS issues new change of accounting method form.

The IRS has issued updated Form 3115, Application for Change in Accounting Method. The new form is marked revised December 2009 and must be used for filings after May 31, 2010.

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Information reporting expansion a nightmare for businesses.

A revenue raising provision of the Health Care Reform legislation greatly expands information reporting requirements for businesses. Information returns or "1099s" are the forms most people receive for interest in their savings accounts and dividends and sale proceeds for their investment accounts. Beginning in 2012, businesses will be required to issue these forms for payments for property and payments to corporations. Although there is a $600 threshold before an information return is required, imagine having to issue information returns for buying office supplies at Office Depot or computer equipment at Fry’s Electronics. The mountains of paper required might wipe out a forest, not to mention the waste in productivity required to comply with the requirement. (The fact it might save the U.S. Post Office is small comfort.)

Please write your representatives in Congress and urge them to reconsider this requirement and repeal it.

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New corporation uncertain positions disclosure form draft released.

The IRS has released a draft of Schedule UTP, Uncertain Tax Positions Statement. The form is to be used to disclose to the IRS information about identified uncertain tax positions under FIN 48 relating to tax provisions on financial statements. The form will be required for the following taxpayers with both uncertain tax positions and assets equal to or exceeding $10 million, if the taxpayer or a related party issued audited financial statements.

I find FIN 48 and this new disclosure form disturbing because auditors are required to make a "more likely than not" conclusion about uncertain tax positions. In my opinion, this is an unrealistic standard originally intended for tax shelters and now being extended to other tax issues for which there may actually be no clear answer.

In addition, the new disclosure form has a chilling, adversarial effect on the relationship of the auditing CPA firm and its client. Client/taxpayers may not be as forthcoming about disclosing uncertain tax positions if it results in a list being provided to the IRS with their income tax returns.

Although the deadline for comments on Schedule UTP were due by June 1, I suggest that interested persons should write to their representatives in Congress and to the AICPA about whether self-incrimination should be required for financial reporting and income tax reporting.

(Announcement 2010-30.)

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Financial Insider Weekly broadcast schedule for June and July.

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

Here are the scheduled interviews for June and July:

June 9, Hilary Martin of The Family Wealth Consulting Group, TBA
June 16, Craig Martin of The Family Wealth Consulting Group, "Alternative investments"
June 23, Attorney Michael Desmarais, "Estate planning for the second marriage"
June 30, Attorney Michael Malter of Binder & Malter, LLP, "What you should know about bankruptcy for individuals"
July 7, Attorney Scott Haislett, "1031 exchanges of real estate"
July 14, Attorney Scott Haislett, "Sale of a principal residence"
July 21, Attorney Naomi Comfort of Hawks & Comfort, LLP, "Special needs trusts"
July 28, Peggy Martin, ChFC of The Family Wealth Consulting Group, "The role of life insurance in your estate and financial planning"

Financial Insider Weekly is also broadcast as follows:

Past episodes are available at https://www.youtube.com/user/financialinsiderweek.

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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Questions and Answers

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

For your questions about dependent exemptions, see IRS Publication 501 at www.irs.gov.

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Visit our new article!

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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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I'm also on Facebook and LinkedIn.

you can also follow me on other social media sites, Facebook and LinkedIn.

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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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Check out my blog.

I have also started a blog at www.michaelgraycpa.com. Check it out!

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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.

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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.

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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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