Taxable Talk

We've said it before, and we'll continue to say it: Save your paperwork, receipts, etc. If you're ever audited by the IRS, you need documentation. If you have it, things (usually) will go well; if not, expect a battle.

Yesterday the Tax Court decided a basis case regarding an inherited portion of a home. The taxpayers became owners of 1/3 of a house after the 1/3 owner left the home. The owners then sold the home. The only question for the court to decide was the basis of the home for tax purposes.

Basis questions can be quite complex. In general, your basis in your home is the price you paid for the home, plus costs involved in purchasing the home, plus costs for selling the home and related legal expenses (including defending the title), and plus any capital improvements you made in the home. Capital improvements are major repairs such as a new roof or new carpeting; replacing one shingle is a minor repair. And, as always, you must document the improvements.

Unfortunately, the petitioners had no paperwork documenting any of the improvements (which were done by the prior 1/3 owner). Because one of the petitioners is a CPA, the Tax Court stated, "...should have known that such improvements should have been documented if, as petitioners contend, the expenditures constituted capital expenditures...." The petitioners, as a consolation prize, were allowed to deduct $5,000 in legal expenses that the court inferred were expended.

Case: Bettencourt v. Commissioner, T.C. Summary 2005-175

Is a "Contract for Deed" deductible when used to satisfy alimony obligations? The Tax Court today said no.

Contract for Deed's are financing arrangements that allow buyers to purchase property from sellers by borrowing the money from the sellers. The Tax Code only allows deductions for alimony for cash or cash equivalents (e.g. checks). The court ruled that a Contract for Deed is a debt instrument and cannot be deducted as alimony.

In the same case, the petitioner also lost his arguments for deducting Bed & Breakfast expenses and writing expenses because of lack of books and documentation. We cannot emphasize enough that you need to keep your backup paperwork. Have good books (or hire a good bookkeeper).

Case: Lofstrom v. Commissioner, 125 T.C. No. 13

Sometimes all you can do is laugh. And most likely Judge Powell, who decided today's case, was laughing quite a bit.

The case involved taxpayers disputing the assessment of a penalty for the untimely filing of their tax return. Just one problem: the return was timely filed and the IRS did not assess such a penalty. Rather, the IRS assessed penalties for failure to pay estimated taxes and for failure to pay tax. As the judge noted, "It is sufficient to say that these are separate additions to tax for different actions."

Case: Goldman v. Commissioner, T.C. Summary 2005-165

Yesterday, the Tax Reform Panel issued its final report (available here). I have come to the conclusion that no matter the merits of the reforms mentioned (which I previously commented on), this plan (really, plans) are dead-on-arrival in Congress.

A quick search of Google news shows the following:
—Senior US Senator From Iowa Opposed to Panel's Recommendations
—Realtors Upset With Tax Reform Panel
—LA Times: Popular Tax Breaks Put on Chopping Block
—New York Congresswoman: Unfair Tax Increase

You get the idea.

Now, the merits of the proposals are quite different than the rhetoric. But given that this proposal will be opposed by the delegations in New York, California, and other high-tax states, and is apparently opposed by Senator Grassley of Iowa, it has no chance of passage.

If you want to read more about the reaction to the panel's report, the TaxProfBlog has a series of links to think tank reactions to the report.