California Won’t Conform with Mortgage Debt Forgiveness for 2013

Posted on September 17, 2013 by Russ

If you have a short sale or a foreclosure and have cancelled debt, tax law treats that as income. However, Congress passed laws excluding most such debt from a short sale or foreclosure related to your principal residence from federal tax. Congress extended that law for 2013.

California had a similar such law (through 2012). However, the California legislature did not pass such legislation for 2013. Thus, an individual in California who has a short sale or foreclosure related to his principal residence will have cancelled debt income in 2013. The income can still be excluded by using either the insolvency or bankruptcy exceptions.

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California Is #1…For Highest Marginal Tax Rates for S-Corps

Posted on September 15, 2013 by Russ

The S-Corporation is a business structure that’s well liked by entrepreneurs. It allows for a flow-through entity, corporate protection, and (generally) favorable taxation. Of course, there are exceptions–in tax, there are always exceptions.

The Tax Foundation has this wonderful map showing marginal tax rates by states for S-Corporations:

California is also #1 for sole proprietors. Nevada, where I reside, is #42 for both…and that’s a good thing.

Posted in California, Nevada | 2 Comments

Two Cases of Tax Return Preparers Committing Identity Theft

Posted on September 15, 2013 by Russ

From the Bozo tax preparation front come two stories of preparers committing identity theft and preparing false tax returns. First, from Durham, North Carolina comes the case of Leslie Brewster. She’ll get to spend 70 months (nearly six years) at ClubFed for her part in a tax fraud scheme that occurred in the Tar Heel State.

Ms. Brewster did want to have her clients pay the least amount of tax possible. She just left out a couple of words that I use, “the least amount of tax legally possible.” She bought names and social security numbers to use on returns, and falsified hundreds of returns to get larger returns. It was the usual suspects in these cases: phony dependents, fake businesses, and incorrect education credits. She pleaded guilty to three felonies; besides the jail time, she must make restitution of $92,910.

From Atlantic City, New Jersey comes the story of Nicolas Gomez-Rua. He’ll get to spend 36 months at ClubFed for his part in a very similar scheme (to that of Ms. Brewster). Over a three-year periodf he ran a tax preparation business in Ventnor City, New Jersey. He, toom, included phony dependents, child tax and other credits to get his clients larger refunds.

But there’s more. from the DOJ press release:

Gomez-Rua admitted that he maintained a file of Social Security cards and birth certificates for individuals born in Puerto Rico that was used to add fraudulent dependents on the 1040 forms that were filed with the IRS. Clients paid Gomez-Rua on average $300 to $500 for the use of fraudulent dependents. Gomez-Rua admitted that after preparing the fraudulent returns, he filed the false returns electronically and by U.S. Mail with the IRS.

Not only did he admit that he filed 729 returns containing such fraudulent items, he also purchased another’s identity to use when he applied for U.S. citizenship. That’s another crime: Unlawfully obtaining United States’ citizenship.

Mr. Gomez-Rua’s wages while at ClubFed will go towards the $170,211 in restitution he was ordered to pay.

A reminder to everyone: If it sounds too good to be true, it probably is.

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Two QSB Relief Bills on Governor Brown’s Desk

Posted on September 15, 2013 by Russ

The California legislature heard from business owners, and the business owners were angry. Their anger had to do with how California’s Franchise Tax Board decided to implement a court decision on Qualified Small Business Stock. The FTB decided that the best method would be retroactive tax increases on QSB sales.

The California legislature, to their credit, passed two separate relief measures. The first would do away with the retroactivity in full; the second would eliminate 76% of the tax. Why would such transactions be taxed at a 24% rate? The theory is the state might have to issue refunds; collecting some tax would pay for the refunds.

It will be up to Governor Brown as to which bill he will sign. Of course, he could veto both measures, in which case the fight would likely move to the courts. Vetoing both measures would also cement California’s place at the bottom of states that are friendly toward small businesses.

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Business and Trust Tax Filing Deadline is Monday

Posted on September 14, 2013 by Russ

If you haven’t yet filed your corporation tax return (Form 1120 or Form 1120S), partnership tax return (Form 1065), or fiduciary (trust) tax return (Form 1041) that’s been on extension, the deadline for filing those forms is Monday, September 16th. As always, use certified mail, return receipt requested (or efile), so you have proof of the filing.

Posted in IRS | 1 Comment

Bankruptcy Trumps a Deemed Sale

Posted on September 12, 2013 by Russ

The Wilshire Courtyard is a 1-million square foot office complex in Los Angeles’s “Miracle Mile” district. The complex’s mortgage debt was acquired through bankruptcy by a consortium led by McCarthy Cook, Blackstone Real Estate Advisors, and Merrill Lynch. California’s Franchise Tax Board (FTB), the state income tax agency, felt that this was a disguised “deemed sale,” and that the owners owed capital gains tax on the transaction. The FTB said that the federal Tax Injunction Act prevented the bankruptcy court from intervening in this; the owners said that bankruptcy trumps this. Originally, the bankruptcy court agreed with the owners. However, a bankruptcy appellate panel reversed. The Ninth Circuit Court of Appeals ruled on this earlier this week.

As noted in the summary of the opinion:

Holding that the character of the core transaction of the debtor’s bankruptcy was an issue that the bankruptcy court had jurisdiction to decide, the panel remanded the case to the BAP to determine in the first instance whether the bankruptcy court’s answer to this question gave due consideration to the “economic realities” of the transaction as structured under the plan and confirmation order.

This does not mean that the owners will win. Rather, it means that the dispute will be argued in bankruptcy court rather than in front of the FTB. As the Court noted,

The real relief sought in this case involves complexities of tax, partnership, and bankruptcy law, which we do not here decide…What we do determine is that the bankruptcy court had subject matter jurisdiction to make the determination, as it is sufficiently closely related to the bankruptcy proceeding.

Because everything is tied together, the matter is properly in front of the bankruptcy court. That’s a far friendlier venue for the owners than the FTB.

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Did IRS Give Black Nonprofits Preferential Treatment?

Posted on September 8, 2013 by Russ

Investors Business Daily reported in an editorial that the IRS “selectively advised black churches and other Democrat nonprofits on how far they can go in campaigning for President Obama and other Democrats” during the 2012 campaign. IBD reported that Attorney General Eric Holder and then IRS Commissioner Douglas Shulman spoke to black church leaders at the gathering.

It is the appearance of impropriety that the IRS must avoid. The IRS continues to do a wonderful job of appearing to raise issues with their behavior. And their behavior has almost certainly been a classic example of impropriety.

Posted in IRS | Tagged | 1 Comment

The Apprentice, IRS Style

Posted on September 8, 2013 by Russ

The IRS made videos parodying Star Trek and Gilligan’s Island. It’s time for another: The Apprentice, IRS Style:

On the bright side, this video only cost us taxpayers $10,000; the Star Trek and Gilligan’s Island parodies cost a reported $60,000 each. What I’d like to see next from the IRS is a parody of Perry Mason where at the end we find out who ordered the IRS to target conservative applicants for 501(c)(4) status.

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California to Require Annual Reporting of Like-Kind Exchanges for Out-of-State Property

Posted on September 8, 2013 by Russ

Section 1031 exchanges are a popular means of deferring taxation on commercial property. Suppose in 1970 you purchased a commercial property in Los Angeles for $500,000. You decide to sell it, and discover that it’s now worth $2.5 million. One way of avoiding paying capital gains tax on the gain is to use §1031 of the Tax Code to defer that gain. (There are lots of requirements with §1031, including using a qualified intermediary, specific dates for the exchange, etc. that must be met.)

Nothing in the Tax Code prohibits you from taking that property in Los Angeles and exchanging it with a property in, say, Jacksonville, Florida. Indeed, there is no state tax in Florida. Additionally, California does not have preferential tax rates on capital gains; that $2 million gain would be taxed as ordinary income, reaching the (current) 13.3% marginal rate.

You’re probably ahead of me: One method that some tax professionals have used is to perform a §1031 exchange from California property to non-California property. If the taxpayer then leaves California (or if he is a non-Californian), the Franchise Tax Board (California’s income tax agency) has no method of going after the gain. California’s legislature didn’t like that, so Sections 18032 and 24953 were added to California’s Revenue and Taxation Code. (§18032 is for individuals while §24953 is for corporations.)

Beginning for years on January 1, 2014 and after, Californians and non-Californians will be required to file annual reports after exchanges of §1031 property. The form(s) do not yet exist; presumably, taxpayers will have to acknowledge that they still own the new property (or a successor property if another §1031 exchange has occurred). The statutes authorize the FTB to assess tax if a report is not filed.

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IRS Interest Rates Unchanged for the Fourth Quarter

Posted on September 5, 2013 by Russ

The IRS announced today that interest rates for the fourth quarter (beginning October 1, 2013) will be unchanged:

  • 3% for overpayments (2% for corporate overpayments);
  • 3% for underpayments;
  • 5% for large corporate underpayments; and
  • 0.5% for corporate overpayments exceeding $10,000.

The announcement is Revenue Ruling 2013-16 and will be in Internal Revenue Bulletin 2013-40.

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