Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for January, 2005

Vehicle Donations

Posted by taxguru on January 31, 2005

Tax change drives away donations of vehicles – This is really a misleading description of the change in the law. It doesn’t eliminate the ability to claim the market value of vehicles. It just tightens up on what can be used to determine what exactly that market value is. As I’ve discussed on several occasions, people were claiming completely bogus values for their donated vehicles when they knew full well that they could never have sold them for those prices. This new law just makes it mandatory that the actual sales prices be used.

I offend professional appraisers every time I get into this area; but it is a fact that appraisals are no more than guesses of an asset’s value. A real bona fide sale on the open market is a much more reliable number to use. If the Kelly Blue Book says that a car is worth $5,000 in tip top condition, and the car can only be sold for $1,000, the only number I would trust as accurate would be the actual sales price.

As I’ve said many times before, this is not technically a new change in the law. It is just tightening up the valuation method because of the widespread abuse by so many people, as well as the various services that had popped up to receive donated vehicles and give part of the sales proceeds to actual charities by promising much larger deductions for people than they could get from actually selling the vehicles themselves. If these services go out of business, so what?

As I’ve long told clients, highly appreciated assets are good candidates for donation to charities. With depreciated assets, such as vehicles, it’s most efficient financially to just sell them and donate the cash. You then don’t have the issue of appraisals and follow-up sales prices to even worry about.

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Posted by taxguru on January 31, 2005

Tax Protester Is Convicted on 13 U.S. Charges – Another of ex-IRS agent turned tax protesting leader Joe Banister’s disciples bites the dust for following Banister’s insane advice to not file tax returns or even withhold taxes from employees.

 

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High tech creative accounting

Posted by taxguru on January 31, 2005

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Posted by taxguru on January 30, 2005

Politicians Flouting ‘No Work, No Pay’ Rule, Taxpayer Group Says – As I’ve long noted, the main reason we don’t have many outsiders running for public office is that we have to actually do some work in order to earn a living.  Professional politicians are paid whether or not they actually do anything and can easily spend most of their time campaigning.  This perpetuates the cycle of control by professional career politicians.   

 

How Much Do You Want to Pay? Your answer on a postcard, please. – Freedom to Choose Flat Tax.

 

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Posted by taxguru on January 29, 2005

Catching Up Pays Off – Gail Buckner on the catch-up contributions that can be made to retirement accounts by people over 50.

 

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Reinvested Dividends

Posted by taxguru on January 29, 2005

Q:

Subject: Taxes on Dividend Reinvestment

Kerry, have reinvested dividends for the 1st time, and had a few questions.  If you received, say $100, in dividends in 04 which all were reinvested (in a DRIP program), do you load $100 to line 9 of the 1040?  What if you sold your stock (a long-tern capital gain) including these dividends in 04?  Is the $100 of dividends taxed a 2nd time as a capital gain, with a $0 cost basis?
 
Thanks for your time.  Glad to see you over at the new SS blog.

 

A:

As you know, reinvested dividends are reported on Schedule B and subject to the same income tax as are dividends paid in cash.

The reinvested amounts won’t be subjected to two taxes if you or your stockbroker do a proper accounting.  The offset to the dividend income is an increase in your cost basis of the stocks.  When you sell the stock, you need to show its cost basis as the accumulation of the original purchase price plus the reinvested dividends that were reported on Sch. B.  This is most efficiently accounted for if you use QuickBooks.  You credit dividend income and debit the stock asset account.

This is relatively easy to account for if you sell all of the stock at the same time.  However, if you sell shares in multiple transactions, you will need to either specifically identify the cost of the individual shares you are selling, or recalculate the average cost per share of your total holdings each time you make a new purchase, such as through a reinvested dividend.

If your stocks are managed by a stockbroker, I have found that most of them are very good at providing their clients with good year-end reports showing the sales and the cost basis of the shares sold.  This is especially true with mutual funds.

I hope this helps.  Your personal tax advisor should be able to help you set up and operate your accounting system to keep track of the reinvested dividends.

Kerry Kerstetter

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Terminated S Corp

Posted by taxguru on January 29, 2005

Q:

Subject: S Corp problem

Two shareholders own a 66% share of a Tennessee S Corp. The other 33% shareholder left disgruntled and formed a C Corp that bought his 33% share of the S Corp stock. The sale takes effect as of January 1, 2005. I am an Enrolled Agent with the IRS but do not understand the legal ramifications. Also this is not my area of expertise for tax consequences either. I understand that this terminates the S status but how else does it affect the corp and its shareholders? Can you share your expertise?

A:

Actually, because this change is effective precisely at the end of the previous tax year, this should be relatively easy to deal with.  The 2004 1120S will be marked as final and then you will report 2005 on an 1120.

It would have been messier if the change were mid-year and you had to file two short-year returns.

There are some other statements that will need to be attached to the returns and you will need to do some calculations of the retained earnings to prevent previously taxed income from being taxed again. 

I strongly encourage you to buy a copy of the Small Business Quickfinder book.  It covers this in much more detail than I can right now.  It’s my number one reference tool for questions about all non-1040 tax returns. You can order it from www.quickfinders.com

Good luck.

Kerry Kerstetter

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Various Topics

Posted by taxguru on January 29, 2005

Ohio CPA Dana Stahl brought up several good points in a recent email exchange we had and has graciously allowed me to post them here.

DS:

Mr Guru – as usual, I haven’t been receiving your daily email blog updates, so I spent my lunch hour going back over the past few weeks & reading your blog.  Some thoughts:
 

KMK:

That email feature with Bloglet became so unreliable that I took the sign-up form off of my blog a few months back. You may want to try out subscribing to it via the rss feed, such as with a service like Bloglines.  That’s how I keep up with hundreds of blogs.

 DS:

1.    On outsourcing, you really articulated points that Accountants/CPAs ought to consider when deciding whether to use this.  I had planned to use as a marketing campaign how my firm does NOT outsource, but instead keeps the work right here in the good ol’ USofA.  May I pull a Senator Biden and plagiarize some of your points in my letter to clients, current & potential?

KMK:

1. Stressing that your firm does all of its work in-house is an excellent marketing angle that I would encourage you and everyone else who is resisting the outsourcing trend to highlight in your marketing efforts.  In fact, whenever this fact is not mentioned in a tax prep office’s ads, I encourage potential clients to explicitly ask about it.

As always, you are welcome to excerpt from anything that I have posted on my web sites.

DS:

2.    On the 1040X/IRS audit issue, I’ll have a really good test case coming up.  I just completed a 1040X for 2002 & 2003 with a client who says we overstated his business revenues.  When we first updated his books, we took all deposits shown on the bank statements and classified it all as income.  We explained what we were doing all along, but he finally got the idea that perhaps some of his deposits could have been money he put into the business to cover bills.  He compiled his own billings directly for each year and said we should use those figures for each year.  So, we made the change accordingly.  He’ll have a combined overpayment of just under $16,000.  We advised him about the 1040X issue, in that he may be facing an audit since we are claiming a large amount of refund.  I hope we’ll be able to get this through with no hassle, but I’ll keep you posted on what happens.

 

KMK:

2.  Good luck with the 1040X.  I just finished up one of my audits last week.  This one actually went rather smoothly because everything was in QuickBooks and I just printed out a G/L for the auditor, who spot checked a few things and then allowed the full $15,000 refund claim.  The other audit is not going as well because the client’s records aren’t as organized, plus the auditors stumbled over a huge bad debt deduction that they are trying to disallow after failing to disqualify most of the actual changes we had made.  I may have to take that one to Appeals.

DS:

3.    As to the IRS “tax gap”, there was an article in Accountants’ World citing a $315B gap, according to an interview with IRS Comm Everson.  Nowhere in the article was there any challenge to this figure, but it appears to have been meekly accepted as the gospel truth by the author.  Since I deleted AW’s email, I can’t link you to it.  Just wanted to let you know that your comments on the tax gap were born out through this article.
 

KMK:

3.  It has always been SOP for the media and almost everyone else to blindly accept the IRS’s tax gap figures as gospel because they do toss those figures around so confidently.  A number of years back, I attempted to track down their actual calculations, even speaking with some high level IRS execs in DC, who admitted that they guessed at the numbers since unreported income is something that can never be quantified with any real precision.

DS:

4.    Forgive me if I’ve already mentioned this, but I’ve been looking at dailyhowler.com for comments on Social Security from the leftist point of view.  The blogger of that site, Bob Somerby, really takes conservatives in general and Bush in particular for wanted to revise the structure of SS.  You should really give it a look if you want information on the arguments put forth by various leftists.

KMK:

 4.  As you have hopefully already read today, I have been enlisted to help with the Club For Growth‘s efforts to counter balance the leftist propaganda related to the current Social Security reform efforts through their new blog at SocialSecurityChoice.com.  We are addressing the left’s bogus arguments head on, such as their idiotic claim that everything is hunky dory and that Bush is manufacturing this crisis.  You should monitor this new blog because there is a lot of excellent info being posted there.

DS:

5.    I still haven’t heard from Edward Jones regarding the former IRS Commish’s comments on how the 1997 anti-IRS testimony was false.  I’ll keep pursuing this, as I contacted EJ again and demanded some type of response on this matter.

KMK:

 5.  Just like with the tax gap figures, nobody really challenges people who make claims about IRS issues; so that person was unprepared to document his claim that the IRS abuse stories were bogus.  As we all know, he was full of crap when he made that claim.

DS:

6.    I’m considering joining Dan Pilla’s group Tax Freedom Institute.  He seems to have a lot of good insider knowledge on IRS procedures, etc.  However, he charges $995/year for membership.  I’m always looking for more contacts and resources in dealing with IRS, so what do you think?  Would it be worth it?

KMK:

 6.  Dan Pilla is very knowledgeable and current with his info; but I really have no idea what joining his group would entail.  I’m assuming that it would entitle you to be the first to learn of things he comes up with in order to help your clients deal with IRS.  While at first blush $995 seems like a lot of money, I’ve seen plenty of seminars and conferences costing many times that.  Since you are working on building up your practice, that seems like a pretty good investment for a year. As you know, it’s a lot less than the other practice building services that often charge in the range of $20,000 or more for their “secret formulas” for success. 

 

DS:

7.    Finally, have you considered setting up a bulletin board for tax practitioners who regularly visit your site or even possibly starting some type of organization like Dan Pilla has?  It would be good to have contact with others across the country on tax matters.  I spoke to the one fellow from CA who had passed along his experiences with the 1040X/IRS audit issue, and he thought it might be a worthwhile enterprise.  Any thoughts?
 
Thanks for all your contributions to the tax discussions and for your great blog.  Who knows, perhaps you can be the next
Andrew Sullivan, or even better, Powerline.

 

KMK:

7.  I’m not sure I have the time required to monitor an official discussion board.  I’m already stretching myself pretty thin with the limited amount of web activity I am currently doing. However, I have long dreamed of at least having a network of like minded tax pros to whom we could refer clients who are in need of good assistance.  Since we are actually trimming back on our client base, it is frustrating for us when someone asks us to take them on and we don’t have anyone to whom we can refer them.

Speaking of discussion boards, I recently joined up with the Yahoo based one on LLCs.  They haven’t gotten into the SE tax issue yet, but they have covered some interesting points.  They are at: http://groups.yahoo.com/group/lnet-llc
You may want to join up and see if the other members have more experience with the SE tax issues that will help you with your clients.

I hope this helps.  Good luck with tax season.

Kerry

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Names On Title Of 1031 Properties

Posted by taxguru on January 29, 2005

Q:

I had a quick question about a 1031 exchange we are performing.  We sold a property in which we had a 50% share.  Those funds are being held by an intermediary right now.  We have located another property in which we will be tenants in common with four other people.
Now my question is at what point can we form an LLC to hold this new property? Could this be done before the close of escrow or do we have to wait a few months before we can do it?  What is the IRS’s stance on this topic?  The escrow agent is saying it should be done after the close of escrow.

Thank You,

A:

One of the basic requirements for a valid 1031 exchange is that the names on the title of the old and new properties are the same.

Thus, if you owned the previous property in your personal name, you need to take title to the new one in the same way.

Later, after the dust has settled and you have acquired the new property, you can then contribute it to an LLC if that is what you want to do. 

There are some possible twists to doing this that you will want to work out with your personal tax advisor, such as setting the property’s basis on the LLC’s books as the same as it was on your personal books.

I hope this helps.  To be honest, your exchange facilitator should have covered this with you as it is a basic component of 1031 exchanges.

Good luck.

Kerry Kerstetter

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New Celebrity IRS Spokesman

Posted by taxguru on January 29, 2005

This famous singer-songwriter has had more experience dealing with the IRS than most people would ever want to have.

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