Michael Gray, CPA's Tax and Business Insight

September 1, 2012

© 2012 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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Kara smiling without her two front teeth.
Kara Siemer reaches the life milestone of missing two front teeth!

Autumn is almost here.

The first day of autumn is Saturday, September 22. The year is two-thirds over. Before we know it, the holidays will be here. Scary, isn’t it?

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Tax planning thoughts.

There are some tax plans that take time to implement, such as making a short sale before the end of the year or making a gift of a business interest requiring an appraisal. Now is the time to discuss what actions might be appropriate before the end of 2012.

This is the most difficult year for tax planning that I can remember. I have never seen so many changes that will happen if Congress doesn’t take action, and I can’t imagine that not happening. Nobody knows what the final answers will be, most of which may not be enacted until late next year.

Meanwhile, there are some significant tax benefits to exploit before the year end (like the 15% maximum tax rate for long-term capital gains and the $5 million exemption for gifts and generation-skipping tax) and to avoid for next year (like the Medicare tax on investment income.)

Call Michele Brantley at 408-918-3162 on Wednesdays from 8:30 a.m. to 5:30 p.m. to schedule a tax planning meeting with Michael Gray before his calendar is full.

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It’s time for working on amended, extended and late income tax returns.

It’s time to have a second look at income tax returns that were filed for possible amended income tax returns. Taxpayers who filed extensions are also looking for help getting their income tax returns done.

If you would like our help, call Michele Brantley on Wednesdays from 8:30 a.m. to 5:30 p.m. Pacific Time to make an appointment. Michele’s telephone number is 408-918-3162.

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September celebrations.

My daughter, Holly Baker, is celebrating her birthday this month.

Her son, Kyan Baker, is celebrating his eighth birthday.

Happy birthdays!

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New book about investing using Roths & IRAs to be released this month.

How to use Roth & IRA accounts to provide a secure retirement, - 2012 Edition by Michael Gray, CPA will be released this month. For the month of September, 2012, you can buy it for half price - $14,99, plus shipping and handling and applicable California sales tax. Click here to print out the order form to fax in. The book is 76 pages, and is packed with insights, including Roth Conversions, a comparison of Roth to regular IRA accounts, self-directed accounts, alternative investments, prohibited transactions, when Roth and IRAs pay income taxes and much more.

You can also get a Kindle version of the book at Amazon.com. Search “Michael Gray CPA”. Eventually a Nook version of the book will be listed at bn.com.

After you read the book, please post a book review at Amazon.com and bn.com

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Introductory offer extended for employee stock options book.

Our half-price offer for Employee Stock Options – Executive Tax Planning, 2012 Edition expires September 15, 2012. Click here for more information to print order form and fax to us. To order by telephone, call Michele Brantley at 408-918-3162.

You can also get a Kindle version of the book at Amazon.com. Search “Employee Stock Options Executive Tax Planning”. Eventually a Nook version of the book will be listed at bn.com.

After you read the book, please post a book review at Amazon.com and bn.com.

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Extended due date for calendar year tax returns for businesses, estates and trusts is September 17.

Since September 15 falls on Saturday this year, the extended due date for calendar year corporations, partnerships, estates and trusts is September 17.

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Third quarter, 2012 estimated tax payment due date is September 17

The next federal estimated tax payment for individuals and calendar-year corporations is September 17. In most cases, California doesn’t require an estimated tax payment for September 17 because the first two estimated tax payments are front-loaded.

If your estimated tax payments aren’t based on last year’s income tax returns, you should be working with your tax advisor to annualize your tax liability.

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Deadline approaches for IRA or Roth of 2011 decedents.

The deadline for having beneficiaries set up for inherited IRAs is September 30 of the year after death. Benefits should be paid out to non-individual beneficiaries like charities by this date. You might be able to divide an account into separate accounts for individual beneficiaries to receive distributions over their individual life expectancies. See your tax advisor for details.

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Corporation not allowed to deduct California tax for year of accrual.

A U.S. District Court required Wells Fargo Bank to deduct its California tax liability in the year following the year the income was earned on which the tax is based. This has been a controversial matter for accrual-basis corporations doing business in California. California changed its tax laws in 1972 so the tax accrues based on the current year reported on the California franchise tax return.

Internal Revenue Code Section 461(d) says that if a state changes its tax laws after 1960, and, as a result of that change, the accrual date of the payment of state taxes is moved up, then the change in the state tax laws is ignored under the federal tax law.

Therefore, the California tax for an accrual basis corporation reported on the 2011 California Franchise Tax return is deductible on the corporation’s 2012 federal income tax return.

(Wells Fargo and Company, 2012-2 U.S.T.C. ¶ 50,521, August 10, 2012.)

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Construction workers were employees, not independent contractors

The Tax Court found that workers for a masonry subcontractor were employees, not independent contractors. The employer was liable for more than $700,000 of employment taxes.

Many of the workers worked exclusively for the corporation. The workers worked a required eight-hour day and they could be fired at will.

Since the corporation didn’t file Forms 1099-MISC for the employees, it wasn’t eligible for Section 530 relief.

(Atlantic Coast Masonry, Inc., TC Memo. 2012-233.)

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Business expenses disallowed for medical marijuana dispensary

The Tax Court disallowed the business expenses of a legal California medical marijuana dispensary. All of the revenue from the dispensary came from the sale of marijuana, which is a controlled substance under federal law. Under Internal Revenue Code Section 280E, a taxpayer may not deduct any amount for a trade or business consisting of trafficking in controlled substances, even when sold under a legal medical marijuana dispensary.

The Tax Court allowed a deduction for cost of sales of 75.16% of the gross receipts. The IRS had proposed to disallow all of the cost of sales due to inadequate records, but the Tax Court established an acceptable ratio based on testimony of expert witnesses.

The dispensary was operated strictly by currency and didn’t accept credit cards or checks. The taxpayer admitted to underreporting his income and submitted ledgers recording the actual cash receipts from the operation.

Tax practitioners who have these dispensaries as clients are on notice that business expenses are disallowed for these operations. This is another nail in the coffin medical marijuana dispensaries that are legal under California law, but illegal under federal law. (The CPA who was a witness for this case and current accountant for Martin Olive said he had about 100 other medical marijuana dispensaries as clients.)

(Martin Olive v. Commissioner, 139 T.C. No. 2, August 2, 2012.)

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Civil penalties upheld for failure to file foreign bank account reports.

The Fourth Circuit Court of Appeals reversed a U.S. District Court decision, finding that a taxpayer who failed to report foreign bank accounts willfully failed to file the annual reports for foreign bank accounts and was subject to two $100,000 penalties.

The taxpayer deposited more than $7 million into two Swiss bank accounts in 1993. He answered “no” to the question about whether he had foreign bank accounts for his 2000 income tax return and failed to report about $800,000 of income earned on the deposits.

He later admitted that he failed to report the accounts as part of a scheme to evade paying federal income taxes. He applied to participate in the Offshore Voluntary Compliance Initiative during February, 2003, but the IRS did not accept the application because he was already under criminal investigation.

The Federal District Court said his failure to report wasn’t willful because (1) he lacked any motivation to willfully conceal the accounts from authorities because they were already aware of the accounts and (2) his failure to disclose the accounts was an understandable omission given the context in which it occurred.

The Court of Appeals found that his admission of guilt of tax evasion together with his declaration with the tax return that he had “examined this return and accompanying schedules and statements and that, to the best of his knowledge, the return was true, accurate and complete” was sufficient to find the failure to file was willful.

The IRS is on the war path for these reports, so do your best to comply.

(J. Bryan Williams, 2012-2 U.S.T.C. ¶ 50,475, July 20, 2012.)

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Community public access television needs our help.

As you can see below, public access television is a vital part of our educational outreach to various communities. These are usually nonprofit, charitable organizations, like public television stations. Unlike those stations, most of the programming for the public access stations comes from local producers.

This programming includes the local arts, productions by students at local schools, community outreach by churches, independent local producers discussing current social issues, educational programming by local providers like ourselves and much more. In other words, public access television makes a unique, important contribution to the communities it serves.

With the difficult times we are experiencing, many public access stations are facing severe financial challenges, and might not survive without more community financial support. I urge you to consider making a donation to your local public access television station. Here is a link for a list of public access television stations in California: http://www.communitymedia.se/cat/linksca.htm

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Financial Insider Weekly broadcast schedule for September and October.

Financial Insider Weekly is broadcast in San Jose and Campbell on 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 September and October:

September 7, 2012, Dick Blakeley, RIA, The Blakely Group, Inc., "A financial planning case study"
September 14, 2012, Craig Martin, CFP®, The Family Wealth Consulting Group, "Investing basics"
September 21, 2012, Craig Martin, CFP®, The Family Wealth Consulting Group, "Alternative investments besides stocks and bonds"
September 28, 2012, Gregory Carpenter, BTI Group Merges & Acquisitions, "Preparing to sell a business"
October 5, 2012, Peter Moss, Wymac Capital, Inc., "Big picture strategies for the home mortgage marketplace"
October 12, 2012, Lori Greymont, CEO, Summit Assets Group, "Real estate investment opportunities in Atlanta"
October 19, 2012, Lori Greymont, CEO, Summit Assets Group, "Different ways to invest in real estate"
October 26, 2012, Naomi Comfort, attorney, Silicon Valley Elder Law P.C., "The role of financial capacity in elder law"

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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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.

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 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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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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