Taxable Talk

One of the more vexing problem tax professionals have is preparing returns for individuals who have a partnership interest where the partnership extends the deadline for filing their K-1s. The extension currently is six months, so a partnership can legally mail out the K-1 on October 15th. How are you going to prepare a return on October 15th when the K-1 is in the mail? (The answer is you estimate the income, and then amend the return when the actual K-1 arrives. But this is, obviously, not the ideal solution.)

The IRS is making a change. Effective next year, the extension for partnerships and trusts will only be to September 15th, not October 15th. Joe Kristan has more.

Question 1.

"Good afternoon Russ,

"I am a regular [poker] player online and I was wondering the policy in the state of California? Is there a certain amount and above that needs to be reported on your taxes? Since the money comes in overseas is there even a policy?"

The US Tax Code is quite explicit about gambling income: it's taxable. And whatever the source--US or foreign--all income is taxable unless Congress explicitly exempts it.

California taxes start with the Adjusted Gross Income from your US tax return. The only gambling income exempted on a California tax return is California lottery winnings.

Either report it or you are committing tax evasion.

Question 2.

"Hello, sir:

I AM 73 YEARS OLD AND WON A $1700.00 $1.00 TRIFECTA. I RECEIVED A W2-G FORM from Churchill Downs Racetrack but i don't know what or where to go with it.

The Form shows that no money has been withdrawn yet from the Winings. i understand that the Law states that in horseracing, a person owes taxes if the winnings are 300 times the wager. Therefore, if I played a $1.00 Trifectsa( I bet $36.00) i am liable. Right?

If so, my friend, what do I do now? I pay NO TAXES currently. The only money taken out of my check is a $93 amount for Medicare.

Can you please tell me how to proceed? I DO appreciate your help."

First, you owe tax on all gambling winnings whether or not you receive a W-2G. Your gambling winnings go on line 21 of Form 1040 (other income). You can deduct losses up to the amount of your winnings as an itemized deduction on Schedule A.

It sounds like your only other income is Social Security. Assuming that the $1700 is your only gambling winnings of 2008, you almost certainly won't have to pay income tax on your winnings--your Social Security won't be taxed and with just $1700 of income you won't owe any income tax. However, if you have other significant gambling winnings your Social Security could be taxed.

Question 3.

"I reside in New York City, and am planning on moving to Thailand at year-end and will be a professional gambler. I understand that if I'm out of the US for 330 days out of 365 I'm eligible for the Earned Income Exclusion."

So far so good....

"My question is how can I avoid New York taxes? How can New York tax me when I'm going to be a resident of Bangkok?"

At this point, cue Murray Head and One Night in Bangkok. Now that we have the appropriate theme in the background, here's the answer: Because they can.

Seriously, every US citizen is considered a resident of a US state or territory. You have a domicile (residency) in that state. Until you establish a domicile in another US state or territory you are considered a resident of whatever state you currently reside in. The toughest states in enforcing this are New York and California; both routinely conduct residency audits.

You may wish to consider first establishing residency in a state with no income tax, such as Texas, Florida, or Nevada, before moving to Thailand. You would need to sever your ties with New York and establish ties with your new state. You should stay in your new state for several months so that you truly become a resident of your new state.

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Just a reminder: This opinion is limited to the one or more Federal tax issues addressed in the opinion. Additional issues may exist that could affect the Federal tax treatment of the transaction or matter that is the subject of this opinion and the opinion does not consider or provide a conclusion with respect to any additional issues. With respect to any significant Federal tax issues outside the limited scope of this opinion, the article was not written, and cannot be used by the taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.

The IRS announced today that mileage rates will increase on July 1st. The new business mileage rate is $0.585/mile (up from $0.505/mile); the new medical and moving mileage rate is $0.27/mile (up from $0.19/mile). The charitable mileage rate is unchanged—it is set by a statute at $0.14/mile and Congress must change it.

If you want to give up your US citizenship, prepare to pay the IRS. As the Wall Street Journal reported on Tuesday, Congress has modified how individuals who renounce their citizenship will pay taxes. If you have a net worth of $2 million or more you will pay tax when you leave as if you sold all your assets.

The new rules do share a similarity with the old rules. The first $600,000 in gains aren't taxed. However, the old "10-year rule" is gone. Additionally, if an individual who renounces his or her citizenship later gives a gift or an inheritance to a US resident, that gift or inheritance will be taxed at 45%.

If you plan on, or are considering renouncing your citizenship you absolutely need to discuss your situation with a tax accountant and an attorney. If you're wealthy, just plan on leaving some of your money to the Internal Revenue Service whether you want to or not.

Other Coverage: Don't Mess With Taxes

Linda Stiff, Deputy Commissioner of the IRS, speaks to Americans that they may need to file a tax return in order to get the stimulus/rebate payment. Here's the video:

The IRS today released the schedule of when the stimulus payments will be received:

By Direct Deposit:

Last Two SSN Digits	Payment Will be Transmitted By:
00 through 20	May 2
21 through 75	May 9
76 through 99	May 16

By Paper Check:

Last Two SSN Digits	Payments will be mailed by:
00 through 09	May 16
10 through 18	May 23
19 through 25	May 30
26 through 38	June 6
39 through 51	June 13
52 through 63	June 20
64 through 75	June 27
76 through 87	July 4
88 through 99	July 11

More here from the IRS.

One of my favorite television shows is Get Smart. In the episode called "The Decoy," Maxwell Smart is brainwashed back to his childhood, is doing multiplication tables, and can't figure out that 7 x 2 = 14. It's one thing for a character not being able to complete that equation; it's another thing for an accountant to not be able to add or subtract correctly...on Form 1040-EZ.

Yet the IRS announced that there were 1,161 errors made on Form 1040-EZ, including "Amounts in the payments section was added incorrectly: 30." Of course, these were returns done on paper. It's hard for me to imagine a paid preparer messing up the easiest tax form around. Unfortunately, it's true.

Joe Kristan has more.

A good friend of mine called me late this afternoon and asked me for a referral. I asked him what he needed, and he told me, "Your side business." I'm a writer (and I'm certain he knew that), so this made no sense. After I expressed my bewilderment he said, "Can't you provide me with the same kind of service you did for Eliot Spitzer?"

Ah yes, the Governor of New York. Mr. Spitzer, a Democrat who decided to partake of the world's oldest profession, chose a rather expensive prostitution ring. He apparently paid somewhere between $1000 to $4300 an hour, and may have spent $80,000 of his own money.

So why did my friend call me? He had heard that the ringleader of the prostitution ring (called the Emperors Club VIP) was an Enrolled Agent. Of course, ABC gets some details of what an Enrolled Agent is wrong:

"He is also a licensed "enrolled agent" of the IRS, spokesman Rob Marvin confirmed. That means Brener was allowed to prepare and submit other people's taxes, represent others in tax court and in negotiations with the IRS, and receive information directly from the IRS on behalf of others."

For the record, an Enrolled Agent represents taxpayers before the IRS; we are not employees of the IRS. We do prepare tax returns and represent individuals and businesses in negotiations with the IRS and other tax agencies.

I had to disappoint my friend; I didn't have a Kristen to send his way. My side business doesn't earn me $4000 an hour in illegal income. Unless your name is Tom Clancy or John Grisham writers just don't make that kind of money.

On the positive side, at least Enrolled Agents are making the news....

Section 1031 exchanges are complex. The IRS has just released a fact sheet on these exchanges. These exchanges are used to defer gains on real estate.

Hat tip: Roth Tax Updates

If I told you that $1 equals $300, you'd rightly tell me that I need to take remedial math. However, there is an instance where that's the case.

The IRS issued Revenue Procedure 2008-21 yesterday. This Revenue Procedure allows an individual to add $1 as Adjusted Gross Income when that individual would normally have $0.

Why would you do that? So that you can electronically file and get the tax rebate (stimulus) payment this Spring of $300. Joe Kristan has more.

There's a tax deadline tomorrow that effects employers and others. If you file paper copies of 1099s/1096s and/or W-2Gs/1096s, you must mail your copies by February 28th, not February 29th. If you electronically file your information returns, you have until April 2nd. These forms are sent to the IRS (either Kansas City or Austin, depending on the location of the entity).

Just to confuse things, the deadline for filing W-2s/W-3s to the Social Security Administration is February 29th. However, if you efile these forms you also have until April 2nd. These forms go to the SSA in Wilkes-Barre, Pennsylvania.

If you're wondering what your tax rebate will be, here are a couple methods to find out. Kiplinger has added a rebate calculator. And Spidell will soon add one to their website.

The IRS has updated their webpage on the rebates. The IRS has posted examples of how social security recipients who normally wouldn't file a tax return should file in order to claim the rebate. That example also shows how recipients of veterans' benefits should file. There's more information here for social security recipients and here for recipients of veterans' benefits.

Thinking about using one of the creative arguments in the Tax Protester FAQ? You may want to think again. Besides the fact (and yes, it's a fact) that all of those arguments won't hold up the IRS and the Department of Justice have decided to step-up activity against the tax protester movement.

Bloomberg is reporting that beginning in March the DOJ and IRS will aim at the movement. Assitant US Attorney General Nathan Hochman, head of the Tax Division, told Bloomberg, "Too many people succumb to the fallacy, the illusion, that you don't have to pay any tax under any set of conditions."

Kay Bell of Don't Mess With Taxes including a link to another webpage debunking tax protester myths (this page is from a law professor at George Washington University).

The Third Circuit Court of Appeals ruling in Swallows Holding, Ltd. v. Commissioner is now available online. The summary of the ruling is:

"This case, grounded in the principles of administrative law, requires that we review the validity of an Internal Revenue Service (IRS) regulation. The Tax Court, in considering this regulation, analyzed it under the factors provided in National Muffler Dealers Ass’n v. United States, 440 U.S. 472, 477 (1979), and concluded that the regulation was invalid. In coming to this conclusion, the Tax Court explained that the standard established in National Muffler had not been replaced by Chevron U.S.A., Inc. v. Natural Resources Defense Counsel, Inc., 467 U.S. 837 (1984), and that the result under either standard would be the same. We do not agree with the outcome reached by the Tax Court. We have determined that the result would not be the same under Chevron analysis as it would be under National Muffler and that the regulation here should be given Chevron deference."

The TaxProf Blog has more.

...or at least within 18 months of their due date. Why? IRS regulations hold that if a foreign corporation files after that date they cannot take any deductions.

Consider a hypothetical corporation, Foreign Company Ltd., which has US source gross income of $100,000, and "necessary and ordinary" deductions of $100,000 for $0 net income. However, Foreign Company Ltd. didn't file. Under the IRS regulations, it's taxed at up to 35% of $100,000 (plus penalties and interest, of course).

This doesn't seem right, and the Tax Court agreed that these regulations were wrong in Swallows Holding, Ltd. v. Commissioner (126 T.C. No. 6). The IRS appealed to the Third Circuit Court of Appeals, and Tax Analysts is reporting (in an opinion that has yet to be released—I'll post a link to the ruling when it's released) that the appeals court has reversed the Tax Court.

The Tax Court decision notes that in a 1940 case the Fourth Circuit held that there's no reference as to time in the then regulations. I'm not sure that the two cases are at odds with each other (the current regulation was issued in 1990), but if they are this would be the kind of case that the Supreme Court would be likely to take (resolving a difference between rulings between two different appeals courts).

In any case, if you're a principal of a foreign entity with US source income you're now on notice. If you don't file the tax return within 18 months of the due date you won't get to deduct anything.

Hat Tip: Roth Tax Updates

If you are going to file Form 982 you will not be able to electronically file until March 3rd. Form 982 is the new form that allows taxpayers to not have to claim canceled home mortgage debt as income. You can submit a paper return with Form 982 today, though.

Hat Tip: Don't Mess with Taxes

The IRS gave the go-ahead to §1031 exchanges for vacation homes. Do note there are significant restrictions. If you own a second home and are considering a §1031 exchange, make sure you follow the restrictions. Joe Kristan has the details on the IRS' pronouncement (Revenue Ruling 2008-16).

Let's suppose you're playing an online role playing game such as Second Life. You've accumulated quite a bit of virtual property, and have a stash of virtual money. James Doe offers you $5,000 for your virtual money and virtual property—that's 5,000 real U.S. Dollars—and you elect to accept them. Do you have a real taxable event that would interest the IRS or just a virtual event?

I've written about this in the past, and I came to the conclusion that sooner or later the virtual world would intersect with the IRS. An article in the New York University Law Review by Professor Leandra Lederman of Indiana University's School of Law suggests that,

"...in virtual worlds that are intentionally commodified, such as Second Life, tax doctrine and policy counsel taxation of even in-world sales for virtual currency, regardless of whether the participant cashes out. However, as in game worlds, participants should not be taxed on purely in-world trades of non-currency items. This approach would allow entertainment value to go untaxed without creating a new tax shelter for virtual commerce."

The good news? She doesn't believe that pure virtual transactions in a virtual world should result in the IRS taking a bite (though a literal reading of the Tax Code could be interpreted that such transactions are subject to tax).

The IRS is aware of this issue and, sooner or later, it will be added to their priority guidance list. I suspect that sometime in the next few years if you trade virtual dollars for real dollars you will also receive a real 1099.

The abstract of the paper is available here. The full paper is not available online.

Thanks to the TaxProf Blog for the heads-up about this interesting subject.

You have a small dispute with the IRS. The IRS alleges that you owe $554 and $1142 for the two years in question. You elect to file a Tax Court petition. When most people go to Tax Court, they work with the Court and the IRS (the respondent in a Tax Court action) so that their case can be heard and the judge can determine who is right.

However, today we look at what happens when a bozo petitioner brings a Tax Court action. Would he: (a) allege that respondent's counsel has, "engaged in serious misconduct"; (b) allege that the "presiding judge has failed and failed again to show any semblance of impartiality"; (c) refuse to accept service of court documents (sent by certified mail); (d) send the IRS an ultimatum demanding settlement on his terms and not appear in any of the pre-trial hearings/motions; or (e) all of the above.

You already know the answer—we're dealing with a bozo here. All of the above happened and is documented in this case.

The IRS moved for dismissal because of lack of prosecution (the petitioner never brought the facts out on his case), and as the Tax Court noted, dismissal was a "relatively simple matter."

The IRS also asked that the petitioner face a penalty under section 6673. The Tax Court noted that in a different case the Fifth Circuit Court of Appeals held,

"it is difficult to imagine a lesser sanction that would vindicate the integrity of the court proceedings and deter * * * [taxpayers] from similar misconduct. Wasteful and dilatory appeals unjustifiably consume the limited resources of the judicial system: “While judges, staff and support personnel have expended energy to dispose of this meritless appeal, justice has been delayed for truly deserving litigants.” Foret v. S. Farm Bureau Life Ins. Co., 918 F.2d 534, 539 (5th Cir. 1990). [Id.; fn. ref. omitted.]"

As the Court concluded, "Petitioner’s attempts to delay and his belligerence must be sanctioned to vindicate the integrity of this Court’s proceedings and to deter petitioner from similar misconduct in the future." He received $1000 sanctions for each of the two cases heard.

Cases: Mack v. Commissioner, T.C. (two cases), T.C. Memo 2008-29

In years past, if I took a position on a tax return it needed "Substantial authority." That's equivalent to about a 30% chance of being upheld. Congress changed the law; now in order for me to take a position it must be "more likely than not" to be upheld. Joe Kristan has a great post on what this means for taxpayers.