Q:

Subject: Questions for research project

 

Dear Tax Guru,

 

I’m a lawyer doing research on taxes.  I was reading your site a the part that says that an IRS agent can fine someone $10,000 for stating that “income taxes are not constitutional. These are all bogus arguments that will earn anyone mentioning them in the presence of an IRS employee an automatic $10,000 fine.”

 

What is your authority for this statement?  I find it difficult to believe this is true.  Please help?

A:

I was referring to the Frivolous Appeal (Section 6673) penalty, which is frequently assessed against people who waste the IRS’s and Tax Court’s time using the same kind of idiotic tax protestor arguments that have long been settled.

The actual amounts of each penalty occasionally vary from $500 to $25,000 per instance, depending on the mood of the IRS or Tax Court authority, as well the level of belligerence in the attitude of the idiot tax protestor they are dealing with at the time.

If you scan reports of Tax Court cases, such as in many of the tax blogs, you will see this penalty constantly referred to.  It is anything but rare.

I hope this helps.  

Kerry Kerstetter

 

IRS Announces 2007 Standard Mileage Rates

 Beginning Jan. 1, 2007, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:

• 48.5 cents per mile for business miles driven;
• 20 cents per mile driven for medical or moving purposes; and
• 14 cents per mile driven in service to a charitable organization.

 This info has been added to my Quick Reference page.

Q:

Subject: Capital Gains question

Good morning,

First, thanks for making a site where people can ask questions. Secondly, here is my question:

My wife and I moved from NY to Florida and purchased a home. We had no idea that within a few weeks, the woods was about to be plowed away and some 80 foot lights installed for a high school football field. Needlessless to say we want to move and we have only had the house for one month.

If we sell it now, do we have to have to pay capital gains?

Thank you for any help.

A:

If this truly was a surprise, and you are ready and able to make the case to IRS if they were to ask, that you wouldn’t have purchased that particular home if you had known about the developments next door, you shouldn’t have any problem qualifying for the pro-rated tax free exclusion of all or part of your profit.

However, the questions that pops into my mind is how much profit are you really expecting after owning the home for such a short time, especially after factoring in selling costs? Unless you bought the property at a bargain basement price, odds are high that you will be lucky to come out with a break even, and are more likely to end up with a non-deductible personal loss.

You need to consult with your personal professional tax advisor, who can crunch the numbers to see if there will be a profit to worry about; and if so, how long you will need to hold onto the home to cover the full amount of profit under the pro-rated exclusion calculation.

Good luck. I hope this helps.

Kerry Kerstetter

Follow-up:

Hi Kerry,

Thank you for the response. To be quite frank, I am not expecting a profit at all. In fact, i am expecting to take a loss. I just wan’t clear who it worked, but apparently I get taxed only on profit over what I paid, if in fact that happens?

Thank you,

My Reply:

That’s correct. I had a hunch you were worrying about a non-existent problem; qualifying for the tax free exclusion when there isn’t any profit.

As your personal tax advisor will remind you, the double standard of the tax code will hit you here. While any profit on the sale of a personal residence is potentially taxable, any loss is not deductible.

Good luck. Hopefully, you won’t have too large of a loss.

Kerry Kerstetter

During this November, use discount code AFFNOV-20D to save $20 off any corporation or LLC formation, trademark service, or DBA filing.

What’s the cost of your 401(k)? Hint: not free – from Lynn O’Shaughnessy

Would you accept this as a valid hundred dollar bill?

This was actually used by a bonehead here in Arkansas.

Q:

Subject: C corporations

 

Kelly

 

I read your artical on the tax benefits of having a C corporation Versus an corporation. My son set up an S corp. about three years ago herein California. He paid a lot of money to set it up with a lawyer. We knew nothing about the difference between the two and less about the tax ramifications. I would like to know if we can still change to a C corporation? what would need to do? 

 

He set up the business as an entertainment business ( record label and other types of entertainment), can he change this to some other type of business? Thank you

A:

The attorney should have explained the tax implications to the S corp election before it was done, or at least advised your son to seek advice from a tax pro if s/he wasn’t knowledgeable on the points I cover in my article, as is the case for many attorneys.

Your son should consult with a professional tax advisor ASAP as to the best setup for his unique situation.  The S corp may be a fine arrangement, or a C corp may be better.  As I mentioned in my article, converting an S corp to C doesn’t give you as much flexibility as starting up a new C corp, especially in the area of the fiscal year.  A new C corp can select any month end; while a converted S corp is required to stick with the December 31 year end. 

There may also be a good case for leaving the S corp as is and also having a C corp.  Too many people think everything has to be operated through one entity, when there are in fact many benefits to having multiple different kinds of entities.  There is obviously more bookkeeping involved, but the benefits often outweigh those extra costs.  An experienced tax pro can help decide which structure or structures makes the most sense.

Once a corp is established, it is not required to limit itself to its original type of business.  It can operate any kind of legal business enterprise.  That is another common misconception, that each type of business has to have its own separate corp.  The reporting for each type of business may be handled a little differently; but they can all be run through one corporation, if that makes the most sense.  Using QuickBooks with a Class for each type of business makes keeping track of these an easy task.  An experienced tax pro can assist with this.

I hope this helps.  Good luck.

Kerry Kerstetter