Michael Gray, CPA's Tax and Business Insight

March 20, 2017

© 2017 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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John, Dawn, Minnie and Kara Siemer at Sunnymont Westside Co-op Nursery School.
John, Dawn, Minnie and Kara Siemer at Sunnymont Westside Co-op Nursery School.

Happy Spring!

Today is the first day of spring. Keep an eye out for beautiful spring flowers after our wet winter!

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Family celebrations.

My sister Arlene Gray McLean and my brothers-in-law Wade Allison and Lane Johnston, are celebrating birthdays this month. Happy Birthdays!

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Extension season has started.

We start planning on extensions for information received for tax preparation after March 15. To make arrangements, call Dawn Siemer on Mondays, Wednesdays or Fridays at 408-918-3162.

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Tax deadlines are jumbled.

The tax deadline for individuals and calendar year estates and trusts to file their 2016 income tax returns and their first 2017 estimated tax payment is April 18, 2017.

The tax deadlines for calendar year partnerships and S corporations and calendar year C corporations switched this year.

The tax deadline for calendar year partnerships and S corporations to file their 2016 income tax returns is March 15, 2017. (Many will be filing for extensions.) The due date for any estimated tax payments for calendar year 2017 is April 18, 2017.

The tax deadline for calendar year C (regular) corporations to file their 2016 income tax returns and their first 2017 estimated tax payment is April 18, 2017.

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Six month extension for C corporations.

The IRS says on its web site that a six-month extension will be allowable for C corporations, despite changing the due date for calendar year corporations to April 18 for 2016 tax returns. That means extended tax returns for calendar year 2016 income tax returns of C corporations would be due on October 16, 2017.

(Wolters Kluwer Standard Federal Tax Reports, February 16, 2017, p. 2. "IRS confirms six-month extension for C corporations.")

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Health care reform update.

The Republican leadership in Congress has introduced their initial proposal to repeal and replace "Obamacare." Most of the proposals wouldn't be effective until 2018. The Congressional Budget Office has projected huge reductions in the number of Americans with health insurance and dramatic increases in the cost of health insurance under the proposal. It seems likely Congress will have to go back to the drawing board for health care reform.

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California won't appeal decision for out-of-state corporations.

The California Franchise Tax Board says it won't appeal the California Court of Appeal decision that an out-of-state corporation wasn't doing business in California when its only connection to California was its 0.2% ownership in a California investment fund LLC. (The decision was Swart Enterprises, In. v. California Franchise Tax Board, California Court of Appeal, Fifth District, Case No. F070922, January 12, 2016.)

Out-of-state corporate taxpayers with minor investment interests in California LLCs should consider filing amended California income tax returns to recover California taxes paid.

(Spidell's California Taxletter, March, 2017, p. 1. "FTB will not appeal the Swart case.")

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Deduction disallowed for donation of aircraft.

A taxpayer filed an amended return to claim a tax deduction for the donation of an aircraft to a tax-exempt historical society. The taxpayer didn't include Form 1098-C, Contributions of Motor Vehicles, Boats and Airplanes, with the amended income tax returns. The IRS also didn't receive Form 1098-C from the charity. The letter received from the charity also didn't meet the requirements for a contemporaneous written acknowledgement, including a certification of intended use.

The Tax Court upheld the IRS in disallowing the deduction.

(Izen, 148 TC No. 5, March 1, 2017.)

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Professional advice avoids accuracy penalty.

A U.S. district court allowed a refund of an accuracy-related penalty relating to a disallowed $20 million loss claimed on the income tax return for a tax shelter. The taxpayers established they had reasonable cause. They consulted with several professionals who told them that the tax shelter was a legitimate transaction.

(The IRS said the taxpayers should have recognized that the tax shelter was "too good to be true" because a $20 million loss was generated from a $300,000 investment.)

(McNeill, 2017-1 U.S.T.C. 50,165, February 24, 2017.)

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IRS won't follow farming syndicate decision.

The IRS says it won't follow a decision by the Fifth Circuit Court of Appeals, Burnett Ranches, Ltd., 2014-1 U.S.T.C. 50,295. (It is bound by the decision for taxpayers in the Fifth Circuit.) The taxpayer was upheld in using the cash basis of accounting for a ranch held by a single owner S corporation. The IRS says the ranch didn't qualify for the active participation exception for "farming syndicates" because the managing individual's interest was held through an S corporation. (AOD-2017-1; FED 46,246; TRC FARM 3.058.)

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Fewer agents = fewer prosecutions.

IRS Criminal Investigations reported that between fiscal year 2012 and fiscal year 2016, the number of Criminal Investigations special agents declined by 447 and 485 fewer prosecutions were processed. Criminal Investigations also reported it had a 92% conviction rate in fiscal year 2016. The reduced staffing was a result of reduced funding by Congress.

(Wolters Kluwer Federal Tax Weekly, March 9, 2017, p. 114. "IRS Criminal Investigation links decline in staffing to fewer prosecutions")

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Bad debt deduction disallowed.

The Tax Court upheld the IRS in disallowing a business bad debt deduction. The taxpayer claimed he advanced funds to a business operation operated by a friend. The taxpayer couldn't substantiate making the loans or that they constituted bona fide debt. The taxpayer wasn't in the trade or business of lending money. The business had a poor credit rating so recovery seemed unlikely at the time the loan was made. The Court said the purported loan should be considered a capital contribution or a gift.

(Scheurer, TC Memo 2017-36, February 21, 2017.)

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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 March and April.

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 March and April:

March 17, Martin Schainbaum, attorney at law, "Appealing your IRS audit"
March 24 and 31, Martin Schainbaum, attorney at law, "I owe the IRS! Now what?"
April 7 and 14, Janis Carney, attorney at law, Carney Elder Law, "The Elder Care Journey Part 1 of 3"
April 21, Janis Carney, attorney at law, Carney Elder Law, "The Elder Care Journey Part 2 of 3"
April 28, Janis Carney, attorney at law, Carney Elder Law, "The Elder Care Journey Part 3 of 3"

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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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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