Michael Gray, CPA's Tax and Business Insight

July 27, 2011

© 2011 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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Michael and Janet Gray
Janet and I are celebrating our 40th wedding anniversary this month.

Reflecting on 40 years of marriage.

40 years ago this August, Janet Bowers and I were married in Saratoga, California. Our children are grown and we have three grandchildren who we enjoy immensely. One of the most important decisions that a person can make is whether and whom they will marry. I was very fortunate to choose and be accepted by the right person who has helped me have a rich family life.

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Hope you’re enjoying your summer!

August is the heart of the summer season. Back to school ads are on the air and many children will be back in school before the end of this month. It’s hard to believe how fast time passes. It’s important to pay attention to how time is going and the progress you are making during the year. Before you know it, it will be time for year-end planning!

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August vacations.

Janet and I are on vacation, returning August 15. We are on a Greek Isles cruise. Dawn Siemer is in the office on Mondays, Wednesdays and Fridays to make appointments or handle administrative issues. Her telephone number is 408-918-3162.

Dawn will probably be on vacation during the last week of August. During her absence, I can handle your administrative requirements at 408-918-3161.

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Company and family celebrations.

Gail Johnston, sister of my wife, Janet, is celebrating her birthday during August. We will be together on the Greek Isles cruise to celebrate Gail’s birthday and Janet and my wedding anniversary. (Guess who was the matron of honor at our wedding?)

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The next estimated tax payment for individuals is due September 15.

It may seem like this is an early reminder, but it’s only two weeks after the end of August. Remember that California has “front loaded" the first two estimated tax payments and there is no September estimated tax payment for California. If you are paying your estimated tax payments based on your actual income and deductions for this year, be prepared to assemble your information for the September estimated tax computations.

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

During the summer, we are focusing 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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The Federal budget situation.

The federal budget deadline of August 2 will soon be here. In the bargaining process, income taxes, particularly for high-income taxpayers, are in discussion. The old saying is true, nobody’s life, liberty or property is safe while Congress is in session! The world credit and credibility of the United States is on the line, so hopefully an agreement will soon be reached.

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Taxpayer penalized for Roth conversion scheme.

A taxpayer followed the advice of his tax advisor by transferring cash to a corporation that his IRA purchased from the taxpayer. The taxpayer’s Roth IRA purchased another corporation with minimal assets. The corporation owned by the IRA then transferred $1.3 million to the corporation owned by the Roth IRA. The transaction wasn’t reported to the IRS.

The Tax Court upheld the IRS in finding an excess contribution was made to the Roth IRA, resulting in $425,000 of excise taxes, $100,000 of income taxes and $2,300 of additional penalties.

The statute of limitations didn’t run on the transaction because the taxpayer didn’t file Form 5329, the excise tax form.

(Paschal v. Commisioner, 137 T.C. No 2.)

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Sixth Circuit upholds health coverage mandate.

The Sixth Circuit Court of Appeals has ruled the individual coverage mandate in the Patient Protection and Affordable Care Act is constitutional. The Court said the Act was a reasonable exercise of Congress’s authority to regulate commerce.

This isn’t the last word on the subject. The issue will probably eventually be decided by the Supreme Court.

(Thomas More Law Center v. Obama, CA-6, 2011-2 USTC ¶ 30473.)

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Medical deductions allowed for caregivers for dementia patient.

The estate of a decedent was allowed to deduct the cost of services rendered by non-licensed caregivers for a dementia patient as long-term care expenses. The taxpayer’s family hired two caregivers because the taxpayer’s doctor indicated that 24-hour home care was required for her medical condition.

The caregivers assisted the taxpayer with bathing, dressing, trips to the doctor, taking medications, and transferring to a wheelchair.

(Note that, under IRC Section 213(d)(11), amounts paid to caregivers who are family members (defined at IRC Section 152(d)(2)) are generally disallowed unless the caregiver is a licensed professional with respect to the service.)

(Estate of Lilian Baral v. Commissioner, 137 T.C. No. 1.)

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Transfer of annuity contracts by a trust to its beneficiaries wasn’t taxable.

The IRS ruled that the distribution of annuity contracts by a trust to its beneficiaries wasn’t currently taxable. The trust received no consideration for the transfer. The annuities were created based on the life expectancy of natural persons, and so treated as owned by natural persons.

(Letter Ruling 201124008.)

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Sales of most “canned" software isn’t subject to California sales tax.

The California Supreme Court denied an appeal by the State Board of Equalization of an Appeal Court decision, resulting in a huge refund of $29 million in sales tax to Nortel for the sale of software to PacBell. The sale is exempt as a Technology Transfer Agreement (TTA). A Technology Transfer Agreement is a transfer of a program that is subject to a patent or copyright.

The SBE had issued a regulation that said that prewritten software wasn’t eligible for the TTA exclusion. That regulation has been ruled to be invalid.

Customers who paid California sales tax for prewritten software subject to copyright or patent should work with their vendors to request a refund.

Taxpayers who paid California use tax for such software should apply to the SBE for a refund.

(Nortel Networks, Inc. v. State Board of Equalization, January 18, 2011, California Court of Appeal, Second District, Case No. B213415. BOE News Release 66-11-H (May 27, 2011).)

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Court rules in favor of Franchise Tax Board on small business stock issue.

Some taxpayers have been claiming a California limitation on the exclusion of gain for the sale of certain small business stock should be disregarded as violating the Commerce Clause and the Due Process Clause of the 14th Amendment of the United States Constitution.

A California Superior court recently ruled against a taxpayer on this issue.

The federal exclusion was recently increased to up to 100%. The California exclusion is unchanged at 50%.

In order to qualify for the California exclusion, the corporation must meet two additional requirements:

  1. At least 80% of the corporation’s assets must be used in California
  2. At least 80% of the corporation’s payroll must be attributed to employment located in California.

When a Corporation is doing business in other states in addition to California, the tests are determined based on Schedule R. Taxpayers have claimed these requirements are unconstitutional.

The Franchise Tax Board has settled some of these cases. Now that the FTB has prevailed in this court case, it might be less inclined to settle them.

The decision will probably be appealed to a higher court.

(Frank Cutler v. Franchise Tax Board, May 18, 2011, Los Angeles Superior Court Case No. BC421864.)

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Hotel tax is based on amount travel service pays to hotel.

Santa Monica claimed the hotel tax charged by an online travel company should be based on the amount charged to the customer by the online travel company. The online travel company pays a discounted amount to the hotel and resells the hotel use at a marked up price. The online travel company challenged the city and claimed the tax should be based on the amount paid to the hotel.

The Los Angeles Superior Court ruled in favor of the taxpayer, based on the language of the local ordinance.

(City of Santa Monica v. Expedia, et al., March 16, 2011, Los Angeles Superior Court Case No. SC108568.)

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Broadcast time and day changes for Financial Insider Weekly in San Jose and Campbell.

Effective August 15, 2011, the broadcast schedule of CreaTV in San Jose is changing. The new broadcast time and date for Financial Insider Weekly will be Friday at 8 p.m. Pacific Time. The first night for the new broadcast time and day is August 19.

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Financial Insider Weekly broadcast schedule for August and September.

Financial Insider Weekly is broadcast in San Jose and Campbell on Wednesdays at 7:00 p.m., Pacific Time. After August 15, 2011, the date and time will change to Fridays at 8:00 p.m. Pacific Time. You can watch it on Comcast channel 15 for San Jose and Campbell. The show is broadcast as streaming video at the same time at www.creatvsj.org.

Here are the scheduled interviews for August and September:

August 3: Michael Desmarais, Attorney, “Estate Planning For Second Marriages"
August 10: John Hopkins, Attorney, Hopkins & Carley, “Succession planning for a family business"
August 19 (new day & time!): Peggy Martin, ChFC, MSFS, CLU, The Family Wealth Consulting Group, “Sucially Responsible and Sustainable Investing"
August 26: Craig Martin, CFP®, The Family Wealth Consulting Group, “Alternative investments besides securities as part of a balanced portfolio"
September 2: Lori Greymont of Summit Assets Group, “Investing in bulk bank foreclosed properties (REOs)"
September 9: Lori Greymont of Summit Assets Group, “Choices for investing in real estate"
September 16: Scott Haislet, attorney and CPA, “Irrevocable life insurance trusts"
September 23: Peggy Martin, CLU, ChFC, MSFS of The Family Wealth Consulting Group, “The role of life insurance in estate and financial planning"
September 30: Stanlley Zlotoff, attorney, “Bankruptcy for individuals"

Financial Insider Weekly is also broadcast as follows:

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

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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Question 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 articles!

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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.

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 michaelgraycpa.com. Check it out!

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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 www.taxtrimmers.com/directions.shtml.

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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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