Richard Hatch Trial Update: Prosecution Rests, Defense May Be Grasping at Straws – Good recap of the trial from Reality News Online.

Q:

Subject: Re: SE tax on LLCs

 

Where is the grey area regarding SE tax on LLCs? I thought the rule was that if the income would have been subject to SE tax had you earned it personally (sales of inventory, personal services) then you owe SE tax, and if it isn’t subject to SE tax if earned personally (dividends, interest, rents from real property, etc) then you don’t owe SE tax.

Basically, LLC members are treated as general partners of a partnership. The only grey area I’m aware of is whether you can treat passive members of LLCs as limited partners e.g. no SE tax is owed even if the income would be subject to it if earned personally.

A:

While that interpretation may be fine for you, that is by no means widely accepted. 

This has long been a very widely contested issue, which is not helped by the fact that there are no firm laws or regs on this topic. 

Kerry Kerstetter

 

Investors recoup third of cash lost in trading scam – Once again, it’s hard to feel much sympathy for folks foolish enough to believe that an investment promising a yield of 21% per month was legitimate.

(Click on image for full size)

Our friends at the US Postal Service have five free educational DVDs available on various scams that seem to be luring in more and more people.  This is one more deal I learned about from TechBargains

The titles include:

Dialing For Dollars – On telemarketing fraud

Work at Home Scams

Identity Crisis – on identity fraud

Long Shot Foreign Lottery Scams

Web of Deceit – on internet scams

I ordered a copy of each and will check them out when they arrive. Since they are probably going to send them for free via the US Snail, it may be quite a while. 

Q:

Subject: Exchange Question

 

I have funds from the sale of investment real estate sitting in an exchange fund.   Can I have the trustee buy shares in a REIT?

A:

What is most disconcerting is why, in the middle of an exchange, you are asking this critical question of a stranger.  Both your personal professional tax advisor and your exchange facilitator could very easily tell you that shares in a REIT are not eligible like kind replacement property for real estate.  They are essentially equivalent to shares of stock in a corporation, another non-like kind asset.

If you are doing this exchange without the services of both a professional tax advisor and an independent exchange facilitator, you have probably screwed things up with your exchange; and should consult with some competent professional advisors ASAP to see if it can be salvaged.

Good luck.

Kerry Kerstetter

Follow-Up:

THANKS FOR THE PROMPT REPLY.

 

As you may be aware you can get multiple answers from multiple people.  Your answer was affirmed by an article in the June 2005 NY CPA Journal.

 

 

Q:

Mr. Kestetter,

 

I ran across your Web site and was hoping you could answer a question for me. In 2003 I filed a federal tax return but did not file an arkansas state income tax return. I moved out of the state in 2004. But I recently recieved a notice of non-filing from the dfa.

 

Here’s my question: on my federal return I took a lot of deductions and am thinking twice about taking them again with the state as I do not want to get audited. With just a standard deduction I will be due a refund. But I’m wondering if I just use the short form with the state and take the standard deduction, will that raise any red flags with the IRS because my returns will be different? Also, is my state return likely to recieve heavier scrutiny because it is being filed late?

 

I would really appreciate your help.

A:

IRS and DFA do share tax data; so I would keep the Ark. numbers in synch with what you reported to IRS. You could open a can of worms for yourself if you try to submit different figures.

Filing the return late doesn’t increase its audit potential. 

DFA doesn’t do the kinds of audits that IRS does.  The only time they will hold up processing a return is if you forget to attach various documents, such as W-2s, 1099s, and Federal schedules.

A qualified tax pro should be able to help you stay in compliance with the DFA.

Good luck.

Kerry Kerstetter

 

Q:

Subject: Exchange Question

 

If an exchange was declined at closing of escrow and the property has been sold, can the seller still decide to purchase a home, invest the money into a new property and still get tax even though an exchange was not established?

A:

The answer is no.

The exchange has to be set up before the sale leg closes.  It is also critical that you never touch the money. 

Kerry Kerstetter

 

Q:

Subject: 1099 forms

Kerry – The web site where I have been getting the 1099 & 1096 forms say you can no longer use these off their site because they are in red and there is a penalty if you use them.  Can you tell me where I can get these forms?  I’ve call the Post Office and the Library…they don’t have any.  Thanks,

A:

Actually, nothing has changed in regard to the 1099 forms. 

The copies you need to give to your payees by January 31 can be of the regular black and white variety as produced through QuickBooks or that you can download or photo-copy.  Those are super easy to prepare.

The hassle is with the copies that are to be sent to IRS by February 28.  They do have to be printed on a special scan-able red-ink form that is a pain in the butt to line up properly in laser printers.  You can buy these forms at most office supply stores.  You should buy a few more than you will actually need because the first test ones will probably be messed up.

Good luck.

Kerry 

It’s also time for my annual reminder that it’s best to not rush the 1099 and W-2 forms in to IRS and SSA.  They are not due to the government until February.  It will make everyone’s life much less complicated if you give your payees time to review their copies and notify you of any errors before you send in the government’s copies.