Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for December 21st, 2005

Posted by taxguru on December 21, 2005

State Budgets Boosted by Bush Tax Cuts, Analysts Say – Just another example of the fact that lower Federal tax rates stimulate more economic activity, resulting in more tax dollars.


Sarbanes-Overkill – John Stossel looks at the biggest beneficiaries of the SOX laws, accountants.


Tax Practice Across State Lines – As I’ve mentioned a few times before, Spidell has been following the issue of whether CPAs who prepare out of state tax returns need to be licensed by those states.  In this latest announcement, Spidell links to Art Berkowitz’s website, where he has an Excel sheet available for download that shows the rules for each state for both individual and business income tax returns. 

After looking over his spreadsheet, it seems that the rules are still very nebulous, with some states allowing out of staters to prepare tax returns, as long as they don’t use their CPA designation, and others that don’t want to regulate unless you actually step foot inside the state.  As someone who prepares tax returns for dozens of states that I never visit, I’m not planning to go through any more licensing than what I already have with Arkansas and the PRC.


New IRS Stats Show Bush Tax Cuts Shrinking Revenues, Magnifying AMT Does anyone else smell some book cooking here? This is a very different spin on the numbers than other reports have shown.   


Tax Cut Conference to Wait Until February, Grassley Says There’s nothing better for tax planning than mid-year changes in the laws.


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Manufacturing Tax Gap Figures

Posted by taxguru on December 21, 2005

I’ve written several times of how the IRS pulls numbers out of thin air as the supposed tax gap in order to justify more power for that agency, as well as how the media slavishly accept those figures without any kind of skepticism.  A new fictional tax gap is in the works now.

Ohio CPA Dana Stahl writes:

Mr Guru – more BS on the so-called “tax gap”.  At least, I’m on the right track, aren’t I?  I wonder who can be approached to challenge the thrust of this article.

My Reply:


I saw a summary of that report yesterday and figured right away that this was another case of our rulers comparing apples and oranges.  There are so many ways to calculate the value of economic activity in this country (GNP and GDP are just two), that it is impossible to match any of them up with what is shown on income tax returns.  Anybody who claims that such a comparison is possible has been smoking far too much wacky weed to be trusted.

As we have seen for several years, the mainstream media don’t care one whit about accuracy when it gets in the way of their agenda.  Giving more power to the IRS has obviously been their goal for a very long time, and anything they can use to bolster that argument will be used regardless of its legitimacy.


More from Dana:

Mr Guru -couldn’t agree more.  The MSM just pisses me off royally, with their obvious bias & agenda (yet they continue to deny such!).  Fortunately, there are more options today, with the internet, talk radio, etc. to at least get the true word out.

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Fake IRS Notices

Posted by taxguru on December 21, 2005 looks at the recent wave of phony IRS emails trying to convince people to reveal their Social Security numbers and credit card info.


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Exchanging Into Less Expensive Property

Posted by taxguru on December 21, 2005


Subject: Exchange Question
State:  CT
My parents own our business building.  It is a corporation I believe.
Are corporations not allowed to do the exchange thing.
If they sell the original big building and buy a smaller building can the save tax money with the 1031 exchange?
Lets say they sell the building for 1 million.
Buy a smaller building for 300,000
Can they save on taxes for the 300,000
I assume they are on the hook for the 700,000 difference.



Corporations can do 1031 exchanges just as individuals can. 

The rule to avoid all of the tax is to replace with like kind property costing at least as much as the net sales price of the old property.  When you trade down, you are required to report as taxable income the unreinvested portion or the actual gain, whichever is lower.

In your example, you left out a crucial figure, the adjusted cost basis (after depreciation) of the old property.  Basically, if it is less than $300,000, acquiring a $300,000 replacement property would result in some of the gain being deferred (rolled into the new property). 

If the adjusted basis is over $300,000, such an exchange would make no sense tax-wise, because the overall profit would be less than $700,000.

Something else to keep in mind is the fact that 1031 exchanges don’t require a one for one swap.  The corporation could acquire multiple properties totaling more than $1 million and defer all of the profit.

The corporation’s tax accountant should be able to work the various what-if scenarios, using the actual numbers, most efficiently for you.

Good luck.

Kerry Kerstetter


Thanks Kerry.

Do you do phone meetings for 15-30 minutes type thing for a fee?

Further details:

Parents have a realty company called T&J Realty.

They own the building.  Bought in 1975.  Mortgages all paid off.

I am pretty sure it is depreciated big time.

If they bought it for $300,000 back then.  What is the tax savings for this:

Building sells for 1.4 million in March 2006.

They buy smaller building for $300,000 in April 2006.

I know they get whacked by the state plus uncle sam big time on capital gains.  Over 30 % I think.


Unfortunately, we are still too backed up to be able to accept any new paying tax or consulting clients.

The best person to do calculations such as you are requesting would be their normal corporate tax accountant, so that s/he can properly take into account the depreciation on the building, as well as any possible operating or capital loss carry-forwards that might offset some of the potential gain. 

Another option that should be considered is an installment sale, where a good portion of the sales price is carried back in a note.  This will allow the taxable capital gain to be spread out over the next several years; ideally keeping it in lower tax brackets than would be the case if all of the money is collected in the first year.

Kerry Kerstetter


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Gifts For IRS Employees

Posted by taxguru on December 21, 2005

Andy Roth at Club For Growth passes along this T-shirt on eBay for those IRS employees on your gift list.

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