Michael Gray, CPA's Tax and Business Insight

July 5, 2023

© 2023 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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Banana slug at Henry Cowell Redwoods State Park.
Banana slug at Henry Cowell Redwoods State Park on
June 23, 2023.

Happy anniversary to Disneyland!

Disneyland opened July 17, 1955. Disneyland became the prototype for theme parks in the United States.

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Family celebrations.

My daughter, Dawn and her husband, John Siemer, celebrate their wedding anniversary this month. Happy anniversary, Dawn and John! My son, James is celebrating his birthday this month. Happy birthday, James!

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Please help us promote our "How to Use Roth & IRA Accounts" book on Amazon.com.

Writing a review and/or posting a photo of yourself on Amazon.com with the 2023 Edition of How To Use Roth & IRA Accounts To Provide A Secure Retirement will help those seeking help to decide to buy the book. Thanks for your help! Here is a link to the Amazon page. https://amzn.to/46E08eY

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Need help with getting your extended tax returns, amended returns, and elections done?

To make an appointment, contact Thi Nguyen, CPA at thi@atl-cpa.com.

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Deduction for research expenses not yet restored.

The deduction for research expenses was replaced with five-year amortization, effective for expenditures after December 31, 2021, by the Tax Cuts and Jobs Act of 2017. This was a budget-balancing measure that Congress intended to repeal later. That hasn't happened. There is proposed legislation in the House of Representatives to delay the effective date, but it isn't expected to be enacted until late this year, if at all. That means tax return preparers will have to comply with the change.

Remember that not all states automatically conform to federal tax law changes, so some states will still allow a current deduction for 2022 research expenses.

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Supreme Court strikes down student loan forgiveness.

The Supreme Court has ruled that President Biden's student debt relief program does not comply with federal law. No student loans will be forgiven under the program and those with unpaid student loans will have to resume making payments.

(Biden v. Nebraska, U.S. Supreme Court, No. 22-506, June 30, 2023.)

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IRS is catching up processing paper-filed tax returns.

IRS National Taxpayer Advocate Erin Collins has announced the IRS has reduced its backlog of unprocessed paper-filed original income tax returns from 13.3 million at the end of 2022 to 2.6 million at the close of the 2023 filing season, close to pre-pandemic levels. The backlog for amended paper-filed amended income tax returns only fell from 3.6 million as of April 2022 to 3.4 million as of April 2023.

(Accounting Today, June 21, 2023, "IRS falls behind on amended returns.")

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Beneficiaries were liable for unpaid estate tax.

The Ninth Circuit Court of Appeals reversed a U.S. District Court to find that beneficiaries who received property from a decedent's revocable trust were liable for unpaid estate tax plus interest. Property was distributed to trust beneficiaries before the estate tax was paid under an installment payment agreement and the trust became insolvent. The IRS recorded tax liens against the remaining trust property and filed suit against the beneficiaries to collect the balance. The beneficiaries claimed they weren't subject to transferee liability, because they believed that only applied to life insurance benefits, which they didn't receive. They also claimed the liability would only apply to property held "on the date of the decedent's death" and they received trust distributions after the date of death. They also pointed out the value of the property could have depreciated below the amount of unpaid taxes plus interest.

The Ninth Circuit Court of Appeals disagreed with the beneficiaries' interpretation and held that transferee liability applies.

(U.S. v. Paulson, 9th Circuit No. 21-55197, May 17, 2023.)

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Buy-sell life insurance added to estate tax stock value.

Two brothers were the sole shareholders of a building materials company. They had a buy-sell agreement for their stock, for which the corporation purchased $3.5 million of life insurance for each brother.

Under the agreement, the brothers were supposed to annually adjust the agreed value of the stock or have it appraised. They never did.

One of the brothers died, and his son mutually agreed with the brother on a value of $3 million. No appraisal of the stock was done.

The IRS audited the deceased brother's estate tax return and found the stock was under-valued, mostly because the value of the life insurance proceeds wasn't included in the value of the stock.

Under Internal Revenue Code Section 2703(b), to affect valuation, a buy-sell agreement must (1) be a bona fide business arrangement, (2) not be a device to transfer property to members of the decedent's family for less than full and adequate consideration, and (3) have terms that are comparable to other similar arrangements entered into in arm's length transactions.

The Eighth Circuit Court of Appeals affirmed a district court ruling upholding the IRS. The Eighth Circuit rejected the reasoning of Estate of Blount v. Commissioner, 428 F.3d 1338 (11th Circuit, 2005.) In Blount, the 11th Circuit concluded life insurance proceeds should not be included when valuing corporate stock in a family-owned business for estate tax purposes.

(Connelly v. U.S., 8th Circuit No. 21-3683, June 2, 2023.)

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Hobby losses were miscellaneous itemized deductions.

Carl and Leila Gregory owned and chartered a yacht, held within an LLC that was a disregarded entity. The IRS found the activity wasn't for profit, so the business expenses were miscellaneous itemized deductions, subject to the 2% of adjusted gross income floor. In this case, the 2% floor wiped the deductions out.

The taxpayers claimed the deductions shouldn't be subject to the 2% of adjusted gross income floor.

The Eleventh Circuit Court of Appeals upheld the Tax Court in finding the 2% limitation applies to hobby loss expenses.

(Gregory v. Commissioner, 11th Circuit No. 22-10707, May 30, 2023.)

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State compensation for forced sterilization victims are federal tax-free.

The IRS says payments by states that have enacted laws to compensate victims of forced, involuntary or coerced sterilization that occurred under state programs aren't subject to federal income tax. Those payments shouldn't be reported on Form 1099-MISC. Taxpayers who reported payments received before 2022 as taxable income should file amended federal income tax returns, Form 1040X.

(The Kiplinger Tax Letter, May 25, 2023, p. 3, "State payments to victims of forced sterilization are tax-free.")

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Moving out of California? Be careful how you receive non-qualified deferred compensation payments!

Payments received from qualified retirement plans, including 401(k) plans and IRAs, are taxed to the state of residence when the payments are received, not where the income was earned.

In order for payments from nonqualifed deferred compensation plans to be taxed only by the state of residence, payments must be received for (1) the life or life expectancy of the recipient (or recipients for joint lives), or (2) a period not less than ten years.

If nonqualified retirement plan payments from a California employer don't meet these requirements, they will be taxable by California.

Remember this when electing how payments will be received from a nonqualified deferred compensation plan.

(Spidell's California Taxletter, July 2023, p. 2, "Help clients avoid tax when retiring outside California.")

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Child or grandchild has a part-time or summer job? Consider making a gift to their Roth IRA account.

A Roth IRA grows tax-free. The maximum contribution is the lesser of $6,000 or the earnings of the child or grandchild. The contribution for 2022 must be made by April 17, 2023. A contribution by someone other than the child or grandchild is a taxable gift, qualifying for the $16,000 annual exclusion. Be sure to communicate within the family to avoid more than $6,000 being contributed to an individual's Roth IRA account.

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Do you sell services or software to CPAs?

Maybe I can help with writing promotional material and marketing ideas. Call me, Michael Gray, at 408-918-3161 or email mgray@taxtrimmers.com.

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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 visit AngiesList.com/Review/4258970 in order to grade our quality of work and customer service.

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Financial Insider Weekly past episodes

After eight years of production, I have discontinued producing new interviews for Financial Insider Weekly. Doing the show has been a rewarding experience and I consider back episodes to be my legacy of financial literacy education to our community. Back episodes available at https://www.youtube.com/user/financialinsiderweek.

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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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Check out my blog.

I have also started a blog at www.michaelgraycpa.com. Check it out!

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Michael Gray, CPA
2482 Wooding Ct.
San Jose, CA 95128
(408) 918-3162
FAX: (408) 938-0610
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