Michael Gray, CPA's Tax and Business Insight

February 8, 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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Giang Tran and Chi Nguyen
Here are Giang and Chi, who are our interns for this tax season

Welcome to our interns!

Our interns for this tax season are Giang Tran and Chi Nguyen.

Giang received her Masters of Taxation degree from Golden Gate University. She came to the United States from Vietnam in 2004. Giang lives in San Jose with her husband, Minh Hoang and her children, Henry and Katie. Her pastimes are reading, cooking and travelling. Giang just returned to the USA after visiting her family in Vietnam during the holidays.

Chi will be completing her bachelor's degree in accounting at San Jose State University in May 2017. She came to the United States from Vietnam in 2009. Chi lives in San Jose with her husband, Huy Hang, and her son, Dustin. Her pastimes are playing Pokémon Go and soccer, listening to music, watching movies and hanging out with her friends.

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Happy Valentine's Day!

Remember to show your love and appreciation for your loved ones on Tuesday, February 14. (Marché Aux Fleurs restaurant, located in Ross, California, is owned by my daughter, Holly Baker, and her husband, Dan. They are fully booked for Valentine's Day. Book your reservation at your favorite restaurant now!)

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February celebrations.

My grandson, Clive Baker, is celebrating his birthday this month. Happy birthday Clive! My wife's sister, Gail Johnston, and her husband Lane are celebrating their wedding anniversary this month. Congratulations!

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Have you received your tax preparation materials?

If you haven't received a tax data organizer or instructions to submit information using the Tax Notebook and want us to prepare your income tax returns, please call Dawn Siemer at 408-918-3162 on Monday, Wednesday or Friday.

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Make your tax return preparation interview appointment now.

Most personal interview appointments for preparing 2016 individual income tax returns will be scheduled in February. Many clients send their information without having an interview, but if you need that personal attention, you should schedule your interview appointment now. Call Dawn Siemer Monday, Wednesday or Friday at 408-918-3162.

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FTB loses case for out-of-state corporation.

A California appeals court has ruled that an out-of-state corporation whose only connection with California was its 0.2% ownership interest in a California LLC was not "doing business" in California. Therefore, the corporation wasn't subject to the $800 minimum California franchise tax.

(Swart Enterprises, Inc. v. California Franchise Tax Board, California Court of Appeal, Fifth District, Case No. F070922, January 12, 2017.)

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Attorney was taxable on his share of partnership income.

An attorney didn't report his full share of partnership income from a law firm, as reported on Schedule K-1. He claimed the income wasn't taxable because he didn't receive the cash and he was subject to "fiduciary obligations" as a partner under New York law that precluded him from receiving the income in the foreseeable future.

He received advice from tax professionals that the unreported income was taxable, "even though it isn't fair."

In a summary judgment, the Tax Court upheld the IRS in assessing tax on the unreported income plus an accuracy-related penalty.

(Mack, TC Memo. 2016-229, 12/20/2016.)

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A doctor's income from a surgical center was passive.

A plastic surgeon was a limited partner with a minority interest in a surgical center. Patients were charged separately for the surgical center use fee and the doctor's surgical services. He was not involved in management decision for the center. He initially reported income from the center as non-passive. Starting in 2008, he reported the income as passive and used the income to deduct passive activity losses from other investments.

The IRS claimed the income from the surgical center should be grouped with the income from his medical practice. The income should be nonpassive income and subject to self-employment tax. The IRS assessed accuracy-related penalties.

The Tax Court ruled against the IRS. The Tax Court said the surgical center was separate from the medical practice, and the taxpayer wasn't required to combine the two. Since the taxpayer didn't participate in managing the center and only received his share of income as a passive investor, the income was passive activity income. The IRS isn't permitted to regroup a taxpayer's reasonable grouping. The taxpayers didn't have a principal purpose of circumventing the passive activity loss rules when they treated the activities as separate.

The Tax Court also disallowed passive activity loss carryovers from years before 2008. It found the taxpayers mistakenly classified the income from the surgical center as nonpassive in those years, and that income would have made the other passive losses currently deductible in those years.

The Tax Court also ruled the accuracy penalty didn't apply to the underpayment attributable to the disallowed passive activity carryovers because the taxpayers reasonably relied upon their experience tax return preparer. Therefore the taxpayers had reasonable cause and acted in good faith.

(Hardy, TC Memo 2017-016, 1/17/2017.)

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Part of an LLC termination payment qualified for long-term capital gain.

The IRS determined that part of a termination payment paid by one limited liability company (LLC) to another qualified for long-term capital gain treatment. That part of the payment was for all substantial rights to a patent. The ruling illustrates the importance of structuring business-related settlements.

(Letter Ruling 201701009.)

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IRS issues estate and gift guidelines for same-sex couples.

The IRS has issued procedures to recalculate a taxpayer's remaining applicable exclusion amount (lifetime estate and gift tax exemption) and generation-skipping transfer exemption relating to transfers made while the taxpayer was in a same-sex marriage. The procedures recognize that corrections may need to be made for tax returns filed before same-sex marriages were recognized by the Supreme Court.

For example, a transfer might have been reported as taxable when it qualified for the marital deduction.

Taxpayers that were involved in these transfers should consult with their tax advisors about the required adjustments.

(Notice 2017-15.)

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Fees of a tax-exempt organization weren't unrelated business taxable income.

A tax exempt foundation was formed to improve the lives of low income children within its states. It offered "technical assistance" to social sector organizations that included non-profits, foundations, government agencies and community organizations that also sought to improve the lives of low-income children and their families.

The IRS ruled that the technical services fell within the scope of the foundation's exempt purpose, so fees charged for providing the technical assistance weren't subject to income taxes as unrelated business taxable income.

(Letter Ruling 201701002.)

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Tax preparers are being scammed, too.

The IRS and state tax agencies have alerted tax return preparers about another scam for identity theft. An email is sent to a tax return preparer that essentially says, "I need a preparer for my income tax returns." If the preparer responds, a second email is sent with an embedded web address or a PDF that includes an embedded web address. The embedded code enables the cybercriminal to collect the preparer's email address and password and possibly other information.

The internet has become a blessing and a curse. It seems one should only open emails from a trusted source. This could make it more difficult for legitimate customers to connect with a tax return preparer for help.

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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 February and March.

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 February and March:

February 3 and 10, Mark Erickson, attorney at law, "California divorce basics"
February 17, Mark Erickson, attorney at law, "California spousal and child support - Part 1 of 2"
February 24, Mark Erickson, attorney at law, "California spousal and child support - Part 2 of 2"
March 3 and 10, Martin Schainbaum, attorney at law, "I'm being audited by the IRS! Now what?"
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?"

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 www.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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