Michael Gray, CPA's Tax and Business Insight

August 18, 2014

© 2014 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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Minerva's second birthday.
Mine! All mine! Minerva Siemer celebrates her second birthday.

Dear old golden rule days...

Children are returning to school. Hasn't summer passed quickly? Be careful when driving because the kids aren't so alert for cars at first.

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August celebrations.

August is a big month of celebrations for my family. Janet and I celebrated our 43rd anniversary. I'm very thankful she has put up with me all these years.

Birthday celebrations include my granddaughter, Minerva Siemer, who celebrated her second birthday and my sister in law, Gail Johnston. Happy birthdays!

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Michael Gray will be out of the office part of September.

Michael Gray will be out of town the week of September 8, returning September 15. He will not be checking messages or emails until he returns. Get your projects due September 15 right away!

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Extended 2013 calendar year corporations, S corporations, partnerships, estates and trust tax returns are due September 15.

To avoid significant late filing penalties, be sure to submit your income tax returns for these entities on time. This is also the due date for making most business retirement plan contributions for these entities for 2013.

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Third quarter estimated federal income tax payments are due September 15.

The third quarter federal estimated tax payment for individuals and calendar year corporations, S corporations, partnerships and trusts is due September 15. California doesn't have a third quarter payment because the first two payments are "front loaded." Most taxpayers who make estimated tax payments will base them on their 2013 tax liabilities. Those who have uneven income or whose income will be less than last year's should consult with their tax advisor to have tax projections done. Our clients should have them done by September 5, after which I'll be out of town for a week.

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Extended 2013 calendar year individual income tax returns are due October 15.

Remember the extended due date for 2013 income tax returns is October 15, less than two months away. If you haven't done so already, get the information to prepare your tax returns to your tax return preparer now. This is the extended tax season for tax return preparers, so plan on preparers being under stress and grumpy. Bring food.

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Tax deductions disallowed for RV used for business.

A husband and wife who had an insurance business bought RVs and went to RV rallies at which they actively promoted their business. (One of the RVs was a $248,457 Winnebago.) They claimed on their 2006 and 2007 income tax returns that the RVs were used 100% for business and claimed big deductions for depreciation and interest expense.

They didn't keep good records for 2006 but persuaded the Tax Court that the RV was used for business two-thirds of the time for 2007.

The Tax Court disallowed all of their business deductions for the RVs. Under the home office rules, Internal Revenue Code Section 280A, none of the business use of a residence is deductible if it is used the greater of 14 days or 10% of the number of days during the year for which the residence is rented at a fair rental. Any personal use of the unit, including watching television, during a day makes the whole day personal use. (An exception for an area used exclusively to meet with customers didn't apply in this case.)

With this decision, the IRS has a club that it can use against virtually anyone who claims tax deductions for the business use of an RV. (Ouch!)

(Jackson, T.C. Memo. 2014-160, August 7, 2014.)

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Remember California requires withholding for installment sales of California real estate.

In the August 2014 issue of Taxnews, the Franchise Tax Board (FTB) reminded readers that California income tax is required to be withheld by the payer from each payment and paid to the FTB by the 20th day of the month following the receipt of the payment. The payment is made using California Form 593-V (Payment Voucher for Real Estate Withholding) and Form 593 (Real Estate Withholding Statement). The withholding for the first payment is made by the real estate escrow company. Only the initial Form 593 is required to be signed by the seller.

Also see Franchise Tax Board Publication 1016, Real Estate Withholding Guidelines at www.ftb.ca.gov.

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IRS collects "disclaimed" assets.

A taxpayer owed federal taxes, and disclaimed a one-third interest inheritance in his deceased mother's condominium. The U.S. District Court in Kentucky ruled against the taxpayer and held the IRS could file liens against the property to collect the taxpayer's tax liability. The right to disclaim the property was a form of dominion over the property that the IRS could collect against.

This is a nasty decision. When you make a disclaimer, you are saying you refuse an inheritance and it passes as if you predeceased the decedent. It doesn't seem the property should be subject to the claims of the creditors of the disclaiming beneficiary.

On the other hand, the IRS believes you shouldn't be able to escape paying your income taxes by simply refusing an inheritance. The Court agreed with the IRS.

(Deinlein v. U.S., 2014-2 USTC 50,371, July 23, 2014.)

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Circuits split on Obamacare premium tax credit.

The Court of Appeals for the District of Columbia Circuit struck down the IRS's regulation about the premium assistance credit and the Fourth Circuit Court of Appeals has upheld the regulations. The disagreement relates to language about whether health care coverage is secured using a state-created exchange. We have such an exchange in California, but most states are using an exchange created by the federal government.

This conflict creates a situation where the Supreme Court will likely be asked to decide the issue.

(Halbig, 2014-2 USTC 50,366, July 23, 2014 and King, 2014-2 USTC 50,367, July 23, 2014.)

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Disregarded entity can use a different account method from its owner.

The IRS Chief Counsel has ruled that an LLC that is a disregarded entity can use a different method of accounting from its corporate owner. Under Treasury Regulations Section 1.446-1(d)(1), a taxpayer with two or more separate and distinct trades or businesses can use different methods of accounting for each business.

(CCA 201430013.)

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IRS finalizes regulations for identified mixed straddles.

Congress enacted legislation back in 1984 relating to securities straddles and the IRS issued temporary regulations during 1985. Those regulations weren't effective. Now the IRS has finally issued final regulations relating to identified mixed straddles, effective August 16, 2014 (30 days after the final regulations were published in the Federal Register.)

These rules are complex and I'm not going to explain them in detail here. A mixed straddle includes a section 1256 contract (usually a regulated futures contract subject to the mark-to-market rules) and an offsetting position that isn't a section 1256 contract. The taxpayer may elect to identify a mixed straddle for special tax accounting rules to apply.

Taxpayers who trade section 1256 contracts should consult with their tax advisor about these new rules, and tax advisors whose clients trade section 1256 contracts should study these regulations.


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Tax Court disallows change in estate tax valuation.

Franklin Z. Adell owned 100% of STN.Com, Inc., a company that did satellite uploads of television shows for urban ministers, including the Reverend Jesse Jackson, Sr. in Chicago, Bishop Charles Haywood Ellis of Detroit and others. Although Franklin owned the business, his son Kevin had the connections to establish the business and there was no covenant not to compete or employment agreement to prevent Kevin from leaving and starting a competing company.

After Franklin's death, Kevin developed a conflict with his sisters, and he left STN to start a competing company, taking the sole customer of STN with him. In the process of litigation with the sisters, the appraiser realized he hadn't considered a contractual limitation in the compensation agreement of STN.Com with its sole customer, named The Word. The compensation was to be "the lesser of actual cost or ninety-five percent of net programming revenue received by (The Word)." STN had always received 95% of the net programming revenue and the actual cost limitation had been disregarded.

Two amended estate tax returns were submitted to reduce the valuation of the corporation from $9.3 million to zero.

The IRS claimed the value was over $92.2 million.

The Tax Court held the original value of $9.3 million was the most reasonable. It said it seemed likely at the time of Franklin's death that the STN's revenue would continue at the 95% of net programming revenue for The Word and that the company could find additional customers for its services. The original appraisal also included a substantial adjustment for the risk that Kevin could leave, which wasn't made in the IRS's appraisal.

(Adell, T.C. Memo. 2014-155, August 5, 2014.)

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Do you need help with your extended 2013 income tax returns?

The extended due date for calendar year business income tax returns is September 15 and the extended due date for calendar year individual income tax returns is October 15. We are already hard at work for these tax returns for many of our clients and we would welcome more. May we be of service with your extended returns? Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays to make an appointment.

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Do you need help with amended income tax returns?

We have already been meeting with folks who want a second look at their 2013 income tax returns for possible corrections. Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays to make an appointment.

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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, siliconvalley.citysearch.com, and Google+.

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Financial Insider Weekly broadcast schedule for August and September.

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 August and September:

August 22, 2014, Janis Carney, attorney at law, Carney, Sugai & Sudweeks LLP, "Veterans' Administration benefits for long-term care"
August 29, 2014, Naomi Comfort, attorney at law, Silicon Valley Elder Law, "Estate planning documents in action - Donald Sterling's story"
September 5, 2014, Naomi Comfort, attorney at law, Silicon Valley Elder Law, "Financial scams with elderly victims"
September 12, 2014, Dick Blakeley, CEO, The Blakeley Group, Inc., "Family Wealth Literacy"
September 19, 2014, Dick Blakeley, CEO, The Blakeley Group, Inc., "Family Wealth Literacy" (repeat broadcast)
September 26, 2014, Scott Haislet, attorney at law, "New repair and capitalization income tax rules for business and rental real estate owners"

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 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 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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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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