Michael Gray, CPA's Tax and Business Insight

May 3, 2016

© 2016 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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Minnie Siemer with her tower.
My granddaughter, Minerva Siemer, with her tower.

Remember Mother's Day!

This year, Mother's Day falls on Sunday, May 8. Remember to express your appreciation to your mother (and other influential "mothers" in your life).

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The joys of modern communication.

We just had a cool new telephone system installed. When the cutover to the new system was done, something happened and our T-1 line (internet connection) stopped working. It took almost a week to resolve the problem so we were without telephone, internet and email services for almost a week. The good news is we were able to catch up with some old chores. The bad news is people weren't able to contact us. We apologize for any inconvenience to you. The situation was beyond our control.

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Family celebration.

My daughter, Holly Baker, and her husband Dan are celebrating their wedding anniversary this month. Congratulations Holly and Dan! They have a wonderful restaurant, Marché Aux Fleurs, in Ross, California, featuring patio dining during the spring and summer. Why not give them a try? Their web site is marcheauxfleursrestaurant.com.

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Does your tax return need a second look?

There's an old story about two barbershops having a price war. Finally, one of the barber shops posted a sign, "$2 haircuts fixed, $10." If you have an uncomfortable feeling about tax returns prepared for you last tax season (especially with stock option transactions), it might be worthwhile to let us have a second look at them. Call Dawn Siemer at 408-918-3162 on Mondays, Tuesdays, or Thursdays to make an appointment.

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Tax Court disallows estate exclusion of family partnership transfers.

An individual transferred marketable securities to a family limited partnership, and transferred interests in the partnership to her children. After her death, the IRS included the transferred partnership interests in her taxable estate. The Tax Court ruled in favor of the IRS. The Tax Court found there was an implied agreement that the decedent retained the right to the possession or the right to the income from the transferred property.

(Holiday Estate, T.C. Memo. 2016-57.)

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Basis consistency report deadline extended again.

A provision of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 requires that the basis of property acquired from a descendent not exceed the value for purposes of the estate tax imposed on the decedent's estate. A report is supposed to be filed within 30 days after the estate tax return is due. The requirement applies for estate tax returns due after July 31, 2015. The IRS has administratively extended the due date for the report from March 31, 2016 to June 30, 2016.

(Notice 2016-27.)

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Loan guarantees for IRAs were prohibited transactions.

A husband and wife transferred $432,000 from their employer's pension fund to a self-directed IRA. The self-directed IRA purchased all of the shares of a corporation for $431,500. The corporation purchased the assets of a business for $602,000, including a promissory note for $200,000. The IRA owners personally guaranteed the note.

That was a fatal mistake. The Tax Court agreed with the IRS that the loan guarantee was a prohibited transaction. A taxpayer is prohibited from extending credit to his or her own IRA. Therefore, the entire balance of the self-directed IRA was currently taxable income. (The note should have been set up as non-recourse.)

(Thiessen, 146 TC No. 7.)

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Surviving spouse doesn't "inherit" her deceased husband's minimum tax credit.

An individual exercised an incentive stock option, resulting in an alternative minimum tax and a minimum tax credit. The individual later married and filed joint income tax returns with his spouse. Several years after his death, the surviving spouse tried to use his minimum tax credit to reduce her regular tax liability.

The Tax Court upheld the IRS in disallowing the minimum tax credit. Spouses are individual taxpayers, despite being able to file joint income tax returns. Since the alternative minimum tax was incurred before marriage, it expired at the death of the deceased spouse.

(Vichich, 146 TC No. 12.)

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Franchise Tax Board refund processing issue.

During the first couple of weeks of April, the Franchise Tax Board reduced refunds because fourth quarter withholding data was missing from their system. The problem related to W-2 payments and 1099-R payments.

In addition, the Franchise Tax Board issued about 60,000 Forms 4734D, requesting a copy of the taxpayers' Social Security card, year-to-date paystubs and 1099s. The transmittal letter said a failure to respond within 15 days would result in a "denial of the taxpayer's request for refund." Although the Franchise Tax Board will hold the taxpayer's refund until a response is received, the refund will be issued when the information is provided. The refund may be delayed until up to two months after the information is received by the FTB.

Form 4734D is issued when the Franchise Tax Board suspects there may be an identity theft problem with the taxpayer's account.

(Spidell's California Taxletter, May 1, 2016, "FTB refund glitches plagued the last few weeks of filing season.")

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Watch for erroneous California practitioner account notices.

Some taxpayers have received notices that state they have been added to a practitioner account that they did not authorize. If that happens to you, contact the Franchise Tax Board and request that your information be removed from the unauthorized account.

(Spidell's California Taxletter, May 1, 2016, "Watch for fraudulent MyFTB activity in your account")

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Employees working nontraditional shifts might be entitled to more paid sick leave.

The California Labor Code requires most employers to provide at least "24 hours or 3 days" of paid sick time per year to their employees.

The requirement is for the greater of 24 hours or 3 days. For example, if an employee typically works a 10 hour shift on a workday, his or her employer would be required to provide at least 30 hours of sick time.

(Spidell's California Taxletter, May 1, 2016, "Paid sick leave for employees working nontraditional shifts")

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Damages limited in California tax harassment lawsuit by Nevada resident.

Gilbert Hyatt was awarded $250 million in punitive damages and $139 million in compensatory damages from the California Franchise Tax Board by a Nevada court. Hyatt claimed the California Franchise Tax Board harassed him in a claim that he was subject to California income taxes because he didn't actually give up his California residence when he moved to Nevada.

The U.S. Supreme Court ruled that, under Nevada law, Hyatt's damages are limited to $50,000.

The issue of Hyatt's residency for the years in question still hasn't been resolved, and is likely to be settled.

(FTB v. Hyatt (April 19, 2016), U.S. Supreme Court, Case No. 14-1175. Spidell's California Taxletter, May 1, 2016, "FTB scores a big win in the Hyatt case")

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Does your group need a speaker?

We are seeking opportunities to speak before groups. Topics include recent tax developments, tax issues relating to real estate, how estate planning has changed recently, tax issues relating to alternative investments using retirement accounts, and marketing topics such as "How I created a public access television show broadcast on eleven Bay Area stations." To make arrangements, call Michael Gray at 408-918-3161.

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Please share your good experiences with Michael Gray, CPA.

As you know, more and more people are going to the internet to find information about service providers. We hope you will share some good words about experiences that you have had with our firm. Some of the sites where you can share your experiences include yelp.com and siliconvalley.citysearch.com.

We use Angie's List to assess whether we're doing a good job keeping valued customers like you happy. Please visitAngiesList.com/Review/4258970 in order to grade our quality of work and customer service.

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Financial Insider Weekly broadcast schedule for May and June.

Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 9:30 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 May and June:

May 6, Greg Carpenter, business broker, "Buying a business"
May 13, Greg Carpenter, business broker, "Selling a business"
May 20 and 27, Bettie Baker Marshall, Attorney at Law, "Legal concerns when caring for an incapacitated friend or relative"
June 3 and 10, David Howard, Attorney at Law, "Reporting requirements for foreign bank and investment accounts"
June 17, Sharon Lacy, CFP®, CPWA®, United Capital Financial Advisors, "Social Security basics"
June 24, Sharon Lacy, CFP®, CPWA®, United Capital Financial Advisors, "Social Security concerns for married couples"

Financial Insider Weekly is also broadcast as follows:

  • Sundays at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
  • Sundays at 1 p.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola
  • Sundays at 10:00 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
  • Mondays at 1:30 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • Mondays at 6:30 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
  • Mondays at 7:00 p.m. Pacific Time on cable channel 19 in Morgan Hill and broadcast on the internet at the same time as streaming video at www.mhat.tv
  • Mondays at 7:30 p.m. on Comcast channel 15 in Saratoga
  • Tuesdays at 2:30 a.m. and 12:30 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
  • Tuesdays at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
  • Tuesdays at 7:00 p.m. Pacific Time on cable channel 19 in Morgan Hill Broadcast on the internet at the same time as streaming video at www.mhat.tv
  • Wednesdays at 8:00 p.m. on Comcast channel 28 in Hayward, Alameda and Fremont and on AT&T U-Verse Channel 99, Hayward public access TV 28 in California
  • Thursdays at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
  • Fridays at 11:00 a.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola.
  • Fridays at 3:30 p.m. on KCAT, Comcast channel 15 in Los Gatos
  • Fridays at 4:00 p.m. on KMTV cable channel 15 in Cupertino, Los Altos and Mountain View
  • Fridays at 6:00 p.m. on Comcast and Astound channel 29 in San Francisco. Online streaming video at www.bavc.org, "public access TV"
  • Fridays at 8:00 p.m. on Comcast channel 28 in Hayward, Alameda and Fremont and on AT&T U-Verse Channel 99, Hayward public access TV 28 in California
  • Saturdays at 9:00 a.m. and 6:00 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
  • Saturdays at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
  • Saturdays at 1:00 p.m. on Comcast channel 26 and AT&T U-verse channel 99 in Marin County

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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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 Social Media!

Want to see new episodes of Financial Insider Weekly as soon as they're posted on Youtube? Want to see Michael Gray's blog posts as soon as they're live? We post them (and more) on social media!

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, LinkedIn, and Google+.

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

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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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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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