Welcome to TaxView with Chris Moss CPA

Would you buy stocks without reviewing the audited financial statements of the businesses you are investing in? Of course not!  But that is exactly what you do when you file your annual Federal income tax return and pay annual taxes to the US Treasury. You paid taxes to the IRS, but you never receive audited financial statements reporting how your income tax was allocated to the over 24 major Federal agencies that are headquartered in Washington, DC.  Indeed, the latest Government Accountability Office’s (GAO) audit report on the U.S. Government’s consolidated financial statements states that the GAO was prevented from expressing an opinion on these consolidated financial statements.  What is even more disturbing is that as a result of Section 405 of the Government Management Reform Act of 1994, Federal agencies were required to produce audited conolidated financial statements no later than March 1, 1997 and “each year thereafter”.  Why has this never happened? Stay with us here on TaxView with Chris Moss CPA to find out why Americans pay tax every year to a government that cannot provide its citizens with audited financial statements.

Would you believe no audited financial consolidated statements exist for US Federal Agencies?  If we rewind back to April 1998, Stephen Horn, then Chairman of the the House Subcommittee on Government Reform and Oversight, said the following regarding the lack of audited financial statements in Congressional Hearings:  “If the US had to compete as private sector businesses do we would be out of business very quickly…” After the conclusion of the hearings in 1998 there were still no audited consolidated financial statements.  Why not?

If we go back to 1999 Congressman Dan Burton of Indiana was asking the same question. As Chairman of the Committee on Government Reform. Burton acknowledges that similar to the previous year in 1997, the GAO was unable to render an opinion on the 1998 consolidated financial statements of the Federal Government.  The GAO report confirmed “at least tens of billions of taxpayer dollars are being lost each year to fraud, waste, abuse and mismanagement in hundreds of Federal programs.” Committee Report 106-170.  Unfortunately, year after year going forward we have heard much of the same.

As we head back to November 18, 2010 we spot Gene Dodaro, Acting Controller, during Congressional Confirmation Hearings. He pledges if confirmed to Controller to help agencies identify and reduce billions of dollars in improper payments.  Later in that same year Dodaro, says he cannot render an opinion on the 2010 consolidated financial statements of the Federal Government because of widespread material internal control weakness.  Dodaro went on to say that 19 of 24 major agencies did not get clean opinions on their financial statements and billions of dollars were missing or unaccounted for. Now fast forward to January 17, 2013.  Dodaro now officially the Comptroller General of the United States releases the audited results for 2012 and 2011.   Once again due to material weakness in internal control over financial reporting no opinion could be issued on the consolidated Federal financial statements. 

Today is no better. The Government’s 2013 financial statements note that three impediments prevented the GAO from issuing audited consolidated financial statements 1, Serious financial management problems at DOD  2, Inability to adequately account for balances between entities and 3, ineffective process for preparing consolidated financial statements.  Further reports released just months ago on July 9, 2014 indicate that there was an estimated $105.8 billion in improper payments in fiscal 2013 compared to $107.1 billion the prior year. Based on a year to year review since 1999, the US Government has had Trillions of dollars of improper, unaccounted for and missing payments that perhaps may never be found and accounted for.

In conclusion, it seems at least from the information that the Government Accountability Office is making available to the public, that the Federal Government has serious financial reporting issues.  It sure would be nice if we could download a brief one page financial statement each April just before we electronically file our income tax return each year-- just to give us that secure feeling that our money is being invested wisely.  Even if we received clean audited financial statements for just the most costly Federal agencies like Social Security, Health Human Services, Defense, and Homeland Security, that would be far a better improvement over what we receive now.  Finally, if you feel that the Federal Government needs to be more accountable to you all, let your elected representatives know you want the Comptroller General of the United States to comply with the Government Management Reform Act of 1994 and produce audited consolidated Federal Agency financial statements required by law since 1997.  Annual audited Government consolidated financial statements might just make April 15 a little less painful for us all.  See you all then and thanks for joining us on TaxView with Chris Moss CPA.

Kindest regards,

Chris Moss CPA

Welcome to TaxView with Chris Moss CPA

There are thousands of American taxpayers who deduct expenses in connection with operating a motor yacht or luxury sailing craft. Indeed, there are legitimate tax write offs in connection with yacht ownership but perhaps there are also equally as many which are not so legitimate. Just about everyone out there deducts sales tax paid as a tax write off when you first buy your yacht.  If you consider purchasing the yacht as a second home, mortgage interest may also be deductible tax write off.  But you may want to steer clear of yacht charter businesses with lots of losses unless you are an experienced sea captain who has withered many a storm at sea.  So if you own a yacht and you are curious as to whether or not there are legitimate tax write offs for boating enthusiasts stay with us here on TaxView with Chris Moss CPA to find out which boating income tax deductions are hot and which ones are not.

Whether you sail for a living or just plain love the ocean and waterways for motoring your water craft, the key IRS regulation you need to know about is Section 274, added to the IRS Code in the Revenue Act of 1962, prohibiting tax deductions in connection with the operation of a yacht as an entertainment facility.  The Joint Committee on Taxation report points out that the 1962 Act requires that a yacht must be used for business, not entertainment. So if you purchase your yacht or yachts through the family business you would have to convince the IRS and ultimately the US Tax Court that your yacht purchase was not an entertainment facility for entertaining customers, but was used strictly 100% for business travel.  Even just one instance of entertainment could disallow all deductions for business travel if the Government classified your yacht as an "entertainment facility".. Regarding this specific set of facts, the risk of adverse IRS audit action against you perhaps outweighs the possible rewards for using your yacht exclusively for travel.

Of course you can always deduct yacht expenses if you own a yacht type business like a yacht charter business.  Unfortunately, for most of us who are working other jobs or earning money from other investments in the family business, the US Tax court rarely will allow you to deduct yacht charter losses against your other income.  Yacht charter losses have consistently been disallowed by US Tax Court for lacking profit motive under Sect 183 including:  Ballard v IRS 1996,  Magassy v IRS, 2004,  Lucid v IRS 1997,  Hilliard v IRS 1995,  Courbois v IRS 1997, and  Peacock v IRS 2002 and lack of material participation under Section 469(c) including Oberle v IRS 1998 and  Goshorn v IRS 1993.  In all these cases IRS wins you lose.

But there is good news.  There are in fact legitimate boating expenses that are safe and relatively easy to deduct on your tax return as long as you consult with your tax attorney to bulletproof the strategy. You can deduct interest secured by the boat under IRS Section 163.   You can also use designate your yacht as your primary and exclusive home office for your family business as described in IRS Pub 587.

However, for those of you who want a more comprehensive tax strategy, you can transfer ownership of your yacht to your Family Limited Liability Company and organize a yacht brokerage service which refurbishes high end yachts to sell for a profit.  Your business could even use yacht charters as a marketing tool to promote the boating lifestyle to potential customers..  You make your money when you sell the yacht to a family who perhaps chartered your yacht a few months earlier. Your tax and business structure in this case avoids the entertainment facility black hole because you have successfully converted "entertainment" into a brilliant marketing strategy. 

To win with this strategy you are expected by the Courts to keep excellent extemporaneous, contemporaneous accounting records and travel logs, and that you maintain accurate cost basis history documentation. The yacht business, furthermore, becomes part of your entire estate plan along with all the other assets transferred to the family LLC for eventually gifting to children and grandchildren with a watertight operating agreement including all the usual discounts and marketability restrictions.  

Unfortunately for legendary criminal defense attorney F Lee Bailey vs IRS U S Tax Court the Government won big time against Bailey because he did not keep accurate records for his boat refurbishing business back in 2012.  IRS wins Bailey loses. Also see Knauss v IRS 2005 involving a taxpayer who lost big against the IRS simply because he couldn't produce accurate cost basis documentation.   IRS wins Knauss loses.

Notwithstanding the record keeping requirements, there are excellent rewards for starting out with a yacht refurbishing business as part of an overall estate plan. If you are set up correctly you can use forward Section 1031 or Reverse 1031 tax free exchange treatment each time you refurbish and then sell your yacht. But be warned, this is a very complex business plan incorporated into an equally challenging estate plan all set up with an entrepreneurial foundation for family unity, protection, and asset preservation. Please consult your tax attorney and qualified intermediary to bullet proof this tax strategy prior to ever filing your tax return. 

In conclusion, if you truly love sailing the seas, there are legitimate expenses for boating that can be deducted on your personal or business tax return.  But without a water tight business structure, perhaps through a family limited liability company as part of your overall estate plan, your yacht may not be prepared for what lies ahead. Best practice is to get plenty of professional advice before deducting any boating expenses on your tax return.  Finally, whatever tax plan you decide on, have your tax attorney disclose the plan openly and honestly to the government as part of your tax return filing to the IRS with plenty of supporting documentation and US Tax court case law.  You will be glad you did if you happen to be audited years later.  Thanks for joining us on TaxView with Chris Moss CPA.  

Kindest regards,
Chris Moss CPA

Welcome to TaxView with Chris Moss CPA

The Alternative Minimum Tax (AMT) has never been easy to understand.  It is therefore ironic that the White House and US Treasury created the AMT in the 1960s as a simple political strategy to tax the rich who paid no tax. Indeed, not all the rich mind you, just a few hundred rich folks that legally paid no tax.  It was a feel good kind of tax that most of us would appreciate back in 1969.  But today in 2014, your tax attorney may be soon be informing you that you have been snared by the AMT tax.  When you ask her how that is possible, she sadly goes on to tell you that the AMT has morphed into a monster that is taxing millions of middle class American families like you. But it's not too late to still proactively tax plan to protect yourselves from the claws of the AMT. So stay with us here on TaxView with Chris Moss CPA to learn what you can do before the AMT gets you.

In order to understand the enemy AMT, you have to understand why Congress has allowed this tax to capture many middle class Americans for so many years.  It all started back in 1969 or so when Treasury Joseph Barr announced that 155 of the highest income Americans did not pay any income tax, Wilbur Mills (Fanny Fox) sprung into action as Chairman House Ways and Means Committee. and the Tax Reform Act of 1969 was born under the Nixon administration.

Fast forward to Ronald Reagan and Chairman House Ways Means Committee Dan Rostenkowski who revised the AMT by enacting the Tax Equity and Fiscal Responsibility Act of 1982. (TEFRA).  Congress changed the law from a tax on a few hundred to a tax on potentially millions of Americans, many of them not so rich.  Congressional attempts to sufficiently raise the AMT exemption have simply not keep up with two wage earner middle class American families. Fast forward again, and this is how Max Baucus Chairman Senate Finance Committee saw it in 2007 as he expressed disappointment that the Senate Minority leader quashed an attempt to raise the exemption.  While the American Taxpayer Relief Act of 2012 finally indexed the AMT exemption for inflation, there are no "catch ups" for past years prior to 2013 for wage increases for working Americans. So the sad fact is that many Americans are still going to be captured in 2014 by the AMT.

So how could the AMT capture you this year,  If you make $100,000 a year working as an engineer for a local contracting company and your spouse makes another $100,000 working for a local college as a college professor you are in AMT range.  Add three children, live in a high tax state in a home you own and you get dangerously close to AMT capture..  Add a second beach home and unreimbursed business expense and bingo, you've been captured with over $12,000 in AMT for 2014.

And now for the astonishing news: If you had no kids, paid no state income tax because you relocated to Florida or Texas, rented your home that you do not own,  took lavish vacations in hotels rather than vacationing in second homes, and lived off interest and dividends from stocks you inherited without you ever working a day in your life, then Congress in its wisdom of insanity says you are exempt from AMT.

What can you do now?   Ask you tax attorney if you can use the now or later tax strategy.  If given a choice, pay tax later rather than now.  Because you just never know what the future may bring.   So think out of the box: pay that state tax perhaps in 2015 rather than have it withheld from your paycheck now.  Perhaps pay that late fee on your real estate tax so that you pay it late in 2015 not 2014,   Again, think out of the box:  Ask your tax attorney if it better not to take the kids as deductions or claim all those unreimbursed expenses. Finally, let your elected officials know that the enemy AMT is headed your way. In the meantime, keep deferring the dreaded AMT until later years hoping Congress will keep the enemy AMT away from you.. Thank you for joining us on TaxView with Chris Moss CPA.

Kindest regards,

Chris Moss CPA

Thanks for joining us on TaxView with Chris Moss CPA

Have any of you purchased a vehicle in late December to receive that coveted tax deduction that year? If you answered yes, you were able to receive “temporary tax deduction.” (TTD) That is to say you accelerated a tax deduction into the current tax year to save taxes immediately. However, the tax savings you thought you had was unfortunately just an illusion in the big tax picture of the IRS Code. That is because as you saved taxes in year one, you did not necessarily save taxes in year two, unless you somehow were able to convert the TTD to a “permanent tax deduction. “(PTD) That is to say instead of saving taxes just one year, you would be saving taxes every year. How cool would that be? So if you are interested in learning more about how to convert TTDs to PTDs, stay with us on TaxView with Chris Moss CPA as we delve into the bizarre world of temporary vs permanent tax differences to create PTD tax strategies to permanently save you taxes and to create wealth for you and your family.

So what exactly is a TTD? If you all want to see how one taxpayer behaved at year end to receive a fleeting TTD, let’s review together Michael and Mary Brown’s timing saga in a US Tax court case recently decided in December of 2013.Brown vs IRS Brown is a successful insurance agent who purchased a Bombardier Aircraft (Challenger) to visit his clients on December 31, 2003. Brown deducted almost $11M in depreciation on the Challenger in his 2003 tax return. The IRS audited Brown for that year and disallowed the deduction on the grounds that the Challenger was not in service until 2004. The Brown’s appealed to US Tax Court Brown vs IRS. Judge Holmes takes off immediately to the issue of “timing”. The IRS says the Challenger is deductible in 2004 and Brown says 2003. Ultimately the question presented to the Court was whether or not Brown put in use the Challenger in 2003. The Court ultimately concluded that Brown did not put the Challenger “in use” until 2004. IRS wins and Brown loses.

Now that we understand the simple TTD, let’s travel out of the world of timing differences to a better more secure place, the world of PTDs more much complex and much more rewarding. For most American taxpayer’s the easiest way to create PTDs is through a 5-10 year long range financial plan. Our first example is about a family who has decided their passion is real estate. They have annual conversion of TTDs through the use of leverage and the acquisition of commercial and residential property. For a husband wife both working two jobs earning $200K with two children ages 8, and 11 that could mean a 5-10 year financial plan with the goal of creating as many PTDs as legally possible. One spouse would need to cut back on hours at his or her full time job and head up newly created Family LLC which would purchase one property with each succeeding year leveraging the appreciation on preceding properties. As you purchase and then improve each property for potential sale you meet regularly with your tax attorney to bullet proof against an IRSmaterial participation attack to your Family LLC. Please review Chris Moss CPA material participation article. Each property is deductible in accordance with IRS regulated TTDs but taken together in the 5-10 year financial plan, you have successfully converted TTDS to PTDs. If you acquire the right property in the right location for the right price you have not only created PTDS and saved taxes, but substantially increased your net worth. In other words PTDs create wealth.

Continuing with the same family, once the Family LLC is set up, TTDs constantly become converted to PTDs. In your financial plan transportation perhaps should be as important as the actual purchase and sale of real estate. For example, if you purchase or lease a Bombardier Challenger, if you have a 5-10 year financial plan, it really does not matter which year you get the deduction. Because in your 5-10 year financial plan you have already determined that either you or your spouse is going to visit real estate you own, and real estate you want to purchase with perhaps someday your son or daughter piloting the plane. Again if you purchase or lease a small fleet of company owned cars and trucks, TTDs are constantly being converted to PTDs as you continually trade in older for newer models. This could be said of your office equipment and furniture as well as your office headquarters and possibly satellite offices around the country. Which leads us to al startling observations: As your business grows TTD to PTD accelerates exponentially, creating tax deductions and substantially increasing your net worth. Indeed, PTDs create wealth.

Let’s look at yet another family in another example with a very different 5-10 year financial plan. Our second family is a young couple with no children, and both husband and wife are working jobs earning $150K annually. This taxpayer’s 5-10 year financial plan focuses on purchasing a territory in their location for a franchise type of business. They are not sure whether to own a fast food franchise like a McDonalds or perhaps a less known franchise selling yogurt, or perhaps they will create their unique storefront business that could franchise out to others someday. In this example you are concerned about losing income if one of you quits your full time position. Your financial planner custom creates your financial plan so that both of you continue to work your current jobs in years one, two and three, allowing you the flexibility to start-up your franchise at night and on weekends. Since your 5-10 year financial plan calls for losses the first few years, you make sure your tax attorney bullet proofs you all against hobby loss attacks by the IRS. Please review Chris Moss CPA hobby lossarticle. Your PTDs in this unique 5-10 year plan would be focused on trademarks, copyrights and brand promotion. You would be converting TTDs to PTDS related to “branding” including advertising, marketing, and public relations. As you can see in this unique 5-10 year financial plan you are creating your net worth by development of a “brand” or the creation of good will. Goodwill is just as valuable an asset as real estate and can create a viable brand to sell goods and services in the community and around the nation creating wealth for you and your family just as valuable as wealth created by real estate.

So what is your 5-10 year financial plan to convert TTDs to PTDs? Don’t’ have one? It’s not too late to start. Seek out a qualified financial planner and create your 5-10 year financial plan. Round out your team with a good insurance agent, banker and Tax Attorney to protect you from the IRS traps and road mines that await you as you move forward with your financial plan. Finally, create your own path to fit your own unique family’s goals to guide you to a better American dream of financial independence and the creation of wealth for you and your family. There has never been a better time to convert TTDs to PTDs. Perhaps I will see you next time at the Mercedes dealer last week in December for that easy TTD. Better yet would be to know you are working those PTDs for your family to save taxes and create wealth. Thanks for joining us on TaxView with Chris Moss CPA.

Submitted by Chris Moss CPA

Submitted by Chris Moss CPA

Welcome to TaxView with Chris Moss CPA

Millions of Americans start new business each year and become Sch C sole proprietors, small partnerships and single member LLCs. Some of these businesses almost immediately make large profits. But an even larger number of businesses struggle for the first few years to develop market share and incur large losses.  Lurking in the path to success for many of these new business owners is an overlooked IRS trap found in Section 183 of the the IRS Code called the “hobby loss rule”,  If you should unfortunately fall into the hobby loss trap, the IRS will immediately and painfully disallow your start up losses as well as attempt to clean out your wallet.  So if you are thinking of starting a new business stay with us here on TaxView with Chris Moss CPA to find out how to keep your family protected from IRS attack and stay clear of the Hobby Loss trap. 

So when is your business in danger of getting snared by the IRS hobby loss trap?  Let me introduce you to Bill, who has been reading a lot about how home security is a profitable business.  Bill told me he decided to take an early retirement as a government auditor. He realized he would be taxed heavily if he cashed in his 401K to start the business, but his wife's sister Jane who is a part-time bookkeeper said not to worry because he could offset losses against income,.  In fact Bill said to Jane she can come work for him to do the books as soon as he can afford to hire her,.

Fast forward a few years, Bill works 40 per week trying to market and develop the Security for Life brand and to service his growing customer bases. But he also has to keep his prices competitive to maintain market share and to develop his brand and good will in the community.  As a result, his profit margins have been slim and has incurred substantial losses.    


After a few years of losses, Bill gets his first break, a new contract providing security for new home construction with a large local builder.  He rushes home to tell his wife, but before he can say a word his wife hands Bill a notice from the IRS, an IRS field audit notice. He panics and calls his sister in law Jane. who immediately refers Bill to her friend Susan a tax attorney.  

Susan tells Bill the IRS audit most likely is going to focus on whether or not there is sufficient profit motive to deduct the losses each year and avoid the Hobby Loss trap.. Bill is further told about Regulation 1.183-2(b) which lists 9 factors to be considered in determining whether an activity is engaged in for profit.  Jane says there are three key factors which will apply in this case: 

(1) manner in which Bill carries on the business;
(2) Bill's expertise in his industry.
(3) Bill's time and effort in the business.

Bill at first feels great. He clearly works a lot of hours.. But Susan is not feeling so well. 
As a tax attorney she believes Bill loses on (1) and (2) based on various US Tax Court cases she is aware of..  She sits Bill down and goes over with him Giles v IRS decided in 2006.  In this case Giles had a horse breeding business which did not have proper books and records sufficient to impress the Court that Giles was anything but a hobby.  Judge Gustafson notes that while Giles kept basic expense categories "her records did not break down the expenses by horse, by month, or by any other means.. In the words IRS wins Giles loses,.

Susan points out to Bill that he hast no separate office out of the home and uses a personal phone number for his business phone. Bill did not obtain a county business license because it would have been too much trouble for him to get a home use occupation zoning exception. His checking account was not separate and distinct from his personal accounts. Even Bill’s internet service was a “personal” rather than a business account. Furthermore, Bill had no formal training in home security. Bill read lots of books and registered for many internet training sessions, but he never worked for a home security company. He refused to joint venture with a competitor, and refused to trademark his brand “Security for Life”. Bill told Susan he was just trying to save money.  

In spite of all the mistakes Bill made, he still felt there was hope.  He says to his tax attorney, "Let's get real, a horse business for those wealthy folks never wins in Court.  On the other hand, a home security business is a down to earth real business, for real working people.  But Susan politely disagrees, So she finds another horse case, the case of Helmick v IRS decided in 2009,   In that case Hilmick ran a horse breeding and boarding operation,  The Court in that case held that the business did not fall under the hobby loss rule in part because "the Helmicks had invested so much time and effort in this failing activity that they could see no way out except to somehow make the thing work.." Helmick wins IRS loses.  

Fast forward a few more months. In fact the IRS audit did not go well for Bill. The Service claimed that Bill used the business as a “ tax shelter” for his wife’s income and his cashed in 401K. The IRS disallowed all the losses for 3 years in accordance with the hobby loss rule and assessed back taxes, interest and penalties of over $70,000.

In conclusion, the IRS is lurking out there to close the hobby loss trap on your new business start up. Hire the tax professionals who could help you make your business bulletproof from IRS audit rulings that disallow your losses. Make sure your tax attorney keeps you far away from "hobby loss" territory by creating the facts necessary to insulate you from harm in the event of an IRS hobby loss audit.  Have your tax preparer fully explain in your tax return those facts before you file.   Finally, work hard, grow your small business and prosper, and by all means, may your profits come sooner than later. 


Thank you for joining us on TaxView with Chris Moss CPA.

Submitted by Chris Moss CPA

Welcome to TaxView with Chris Moss CPA

What is a reverse 1031? No it is not a football game plan. Commonly known as a reverse exchange or a reverse Section 1031 tax free exchange, this very trendy tax savings variation on the traditional Starker exchange has roared back to life. If you read my article on 1031 Exchanges you are somewhat familiar with tax free exchange investment strategy. We are now going to take a look at this same tax free strategy but in reverse. As an example, the Smiths give you 30 days advance notice before their hotel in Carmel CA property officially lists for $10M. Your dream has always been to purchase that hotel. You are certain you could buy the hotel if you sell those three rental properties you own but you have to move quickly.. Unfortunately your tax attorney has some bad news She says “Even if you could sell your property within the next thirty days, deprecation recapture turns your already low basis into negative territory causing at least $5M of your $10M sales price to go to the IRS in taxes.” But your tax attorney has some good news too:: "a tax free and reverse section 1031 exchange, could save you 5M in taxes."  Interested in how this is possible? Stay with us on TaxView with Chris Moss CPA to see how a reverse Section 1031 tax free exchange can save you taxes and help to preserve your wealth.

Just to refresh your memory, a traditional easy 1031 starts out with a sale of your investment called the “relinquished” property.  Your retain the service of a qualified intermediary (QI) who escrows the proceeds. Not all QIs are qualified as experts in their field. Make sure your QI is a member of the Federation of Exchange Accomodators. After you choose a QI you trust you must identity within 45 days an investment you want to buy called the “replacement” property. Within 180 days your QI purchases the replacement property and then transfers ownership to you. All gain on the sale of your first property is deferred and adjusted into the basis of the replacement property. In theory the gain could be deferred forever unless Congress changes the rules. It’s that simple.

Now let’s tackle the reverse 1031 play. The IRS has given us a winning strategy as we sprint through a safe harbor pocket provided by Rev Proc 2000-37,  Also in play is IRS Bulletin 2000-40. (Page 308-310),  Before this Rev Proc came out on the field there was surprisingly little guidance from the coaches at US Tax Court on how to play this game. There was just one tax court case that I found which is the poster case for how not to handle a reverse exchange play. DECLEENE vs IRS 115 T.C. No. 34 US Tax Court.

The facts of the case are relatively simple, Decleene operated a trucking business since 1977 and leased the building on McDonald Street land Decleene owned. In 1992, Decleene purchased Lawrence Drive land with his intent to eventually house his trucking business on that land. In 1993 P sold the McDonald Street and Lawrence Drive land to Western Lime and Cement (WLC) in exchange for WLC constructing a building on Lawrence Drive and then conveying back Lawrence drive to Decleene. On their 1993 tax return, the Decleene’s disclosed a tax free exchange with WLC as a taxable sale of the Lawrence land (boot) and a like kind exchange of McDonald for improved Lawrence with no gain or loss reported to the IRS. The IRS audited the 1993 tax return indicating that the Lawrence property had never really been “sold” to WLC by Decleene. The Decleene’s appealed to US Tax Court Decleen vs IRS.

Judge Beghe points out that Decleene purchased the replacement property directly with WLC, without the participation of a third-party exchange facilitator or qualified intermediary (QI) a year or more before he relinquished the McDonald property. In the following year Decleene transferred title to Lawrence subject to an “exchange agreement’ again not to a QI but directly to WLC. The Court concludes that “in foregoing the use of a third party QI Decleene created an inherently ambiguous situation. The reality of the subject transactions as we see them is a taxable sale of the McDonald Street property to WLC. Petitioner’s prior quitclaim transfer to WLC of title to the unimproved Lawrence Drive property, which petitioners try to persuade us was petitioner’s taxable sale, amounted to nothing more than a parking transaction by petitioner with WLC. In substance, petitioner never disposed of the Lawrence Drive property and remained its owner during the 3-month construction period because the transfer of title to WLC never divested petitioner of beneficial ownership. IRS wins, Decleene loses.

What does all this mean if you spot a deal of a lifetime that you want to purchase now and pay for it with tax free money from a future sale of property you presently own? It is clear form Decleene that you must use a QI if you want to survive an IRS audit. In fact, you should assemble the following team you trust: commercial real estate agent, tax attorney, and QI either in person or by conference call to map out the reverse 1031 exchange tax strategy that fits your unique situation. Furthermore, if you intend to pay off a mortgage on the relinquished property or incur new debt on the replacement property be aware that not all lenders understand complex reverse 1031 exchanges, so add to your team an experienced 1031 banker as well. Finally, have your tax attorney fully disclose to the government the nature of the reverse exchange in an attachment to your income tax return. Ask your attorney to put in writing that your unique reverse exchange complies with the safe harbor provided by Rev Proc 2000-37 and that she will be there to defend you in the likely event of an IRS audit years later.

In conclusion, if you correctly execute, a 1031 reverse exchange in compliance with Rev Proc 2000-37 and fully disclose your tax strategy in your tax return before filing, you will have bullet proofed your return from IRS audit years later, and assisted your family in preserving wealth, savings taxes, and achieving your financial goals. Happy 1031 Exchanges to all.

Thank you for joining us on TaxView with Chris Moss CPA.

Kindest regards
Chris Moss CPA

Welcome to TaxView with Chris Moss CPA

Just the thought of a “levy” gives me the absolute feeling of impending doom. However, an IRS levy adds additional and painfully real fear of immediate economic loss to any law abiding American taxpayer. What is an IRS levy? According to the IRS website a levy is a legal seizure of your property to satisfy a tax debt. If you think this could never happen to you, think again. What about a payroll tax debt, or perhaps a nasty divorce or partnership dissolution suit targets you as owing tax to the IRS. Or perhaps a business you were involved with that has filed bankruptcy had you listed as an officer owing tax to the IRS. In all these cases I would hope your family tax attorney would have been busy filing petitions on the merits with the US Tax Court to defend you and your family and protect your hard earned assets. But you somehow let events overtake you and now find yourself with a final “levy notice” from the IRS also referred to as a Doomsday Levy. What can you do? You have one last line of defense in this battle. So stay with us here on TaxView with Chris Moss CPA to better understand how you can minimize the damage to your family and your financial assets if an IRS Doomsday Levy ever shows up on your doorstep.

Have your heard certified letters usually bring you bad news? The IRS issued “Final Notice of Intent to Levy” oftentimes referred to as the “Doomsday Levy” is usually sent certified by the Government, but also can be delivered by a special agent in person direct to your front doorstep. Regardless how you receive the Levy notice, if the amount of the Levy is relatively large enough to cause you severe economic hardship, I recommend you retain the best tax attorney you can afford. While the IRS website is an excellent source of information on how the IRS levies you and explains your rights to appeal within the IRS and then eventually to US Tax Court, you are simply no match for the brutally effective Collection Division of the US Treasury if you should, as thousands before, lose to the IRS in Court.

Once you have your team assembled best practice in my view is to appeal within 30 days of the date on the levy notice to the IRS appeals division and submit your “offer in compromise” If you read my article on offer in compromise you know that this offer is a very viable alternative to being levied and can in many cases be a “win-win” for both you and the Government. However, your offer must be reasonable enough to be accepted by the Government. In order to better understand how reasonable is reasonable let’s take a look at some very interesting US Tax Court cases.

In Lloyd v IRS 2008-15 taxpayer Lloyd a 70 year old practicing attorney was assessed income tax after an IRS audit for years 1990 through 2002. What makes this case so interesting is that Lloyd never disputed the tax owed, but he also never paid the tax owed. After receiving a notice to levy in 2006, Lloyd’s tax attorney requested a hearing with the IRS Appeals Office to discuss an offer in compromise. Lloyd offered a 7 year payment plan for a total of $139,707 to compromise $264,457 owed. The IRS determined that Lloyd’s “reasonable collection potential” RCP was almost $1.5 Million easily allowing Lloyd to pay much more than $139,707 if not the whole amount due. After months and months if not years of delays, phone calls, meetings and correspondence by both sides no agreement could be reached. The IRS gave Lloyd 30 days to appeal to US Tax Court which indeed he did in 2008 US Tax Court Lloyd v IRS . Judge Chiechi immediately notes early on in this 63 page Opinion that Lloyd could not challenge the tax owed, but only challenge whether or not Appeals abused its discretion by not accepting Lloyds RCP calculations. The Court concluded that Appeals “on the record before us” did not abuse its discretion. IRS wins Lloyd loses.

Next case is Crosswhite vs IRS just decided two weeks ago. Crosswhite owed 2003 Form 941 payroll taxes from a business he owned. He retained a tax attorney to put forth an offer in compromise to the IRS in 2004. Crosswhite’s tax attorney was still working this case with the IRS all the way to January of 2007. Eventually in June of 2009 the IRS sent the dreaded Doomsday Levy to Crosswhite. Legal counsel executed Form 12153 “request for due process hearing” before IRS appeals. The IRS determined Crosswhite had RCP of $82,948. Crosswhite only offered $7,200. The IRS countered with a revised RCP of $68,847. Crosswhite eventually offered $25,000. The Government issued a notice of determination sustaining the levy. Crosswhite appealed to US Tax Court in Crosswhite vs IRS 2014-179.

Judge Paris points out that the IRS analysis of RCP for Crosswhite only included net equity but not future income computations. Therefore the Court was unable to conclude whether or not it was an abuse of discretion for Appeals to proceed with the levy. The Court remanded the case back down to the Appeals office for further consideration and suggested that Crosswhite offer a revised new collection alternative. Hopefully now that Crosswhite has been given a second chance his tax attorney will work this out with Appeals.

What does all this mean for us? First, don’t ever ignore IRS notices and bills. Ignoring IRS notices and correspondence endangers your business and family making a Doomsday Levy attack very possible in your own backyard. Second, retain a tax attorney early in the battle to minimize injury and protect your assets. Just so you know, if you try to hide assets while all this is going on the IRS will invoke the power of Code Section 6331(d)(3) that “collection of the tax was in jeopardy” and proceed immediately against you to protect the Government’s best interest with such financial force your assets will not know what hit them. Finally, if you do get the dreaded Doomsday Levy, don’t rely on the US Tax Court to save you. As we saw in Lloyd and Crosswhite, Doomsday Levy US Tax Court proceedings rarely have happy endings. Your best chance to minimize the damage if an armed Doomsday Levy is racing your way, is to have your tax attorney proceed quickly and quietly to IRS Appeals, work out an offer in compromise, and neutralize and unarm that Doomsday Levy before it ever hits its target.

Thanks for joining us on TaxView with Chris Moss CPA.

Kindest regards
Chris Moss CPA

Welcome to TaxView with Chris Moss CPA

What is a substitute tax return? No your identity has not been stolen and a false return filed by the perpetrator. In fact, a substitute tax return is what the Government has the authority to file for you when you don’t file your tax return on time. Yes, isn’t that nice of the IRS to file your income tax return for you, and better yet, all at no charge! But wait a minute. Before you all start calling me asking how to get the government to file this free substitute tax return for you, let me make clear that a substitute return is not the real deal, it is more like a knock off return. You all know what knock offs are, those fake replicas of an authentic brand of luxury goods or service, often times not worth purchasing even at any price due to lack of quality and poor workmanship. The same holds true for a substitute tax returns, usually poorly prepared by the IRS and in worse cases substantially inaccurate, not reflective of your true net income and tax owed and unfortunately presenting you with a very large tax bill with even larger interest and penalties that is simply in many cases not correct. So if you have an outstanding tax return that has not yet been filed, or perhaps a few such returns, or if you are in any way just curious, then stay with us on TaxView with Chris Moss CPA to find out how you can get hit with a substitute knock off return and what you need to do to “return” the return back to sender where it belongs.

According to the Government’s own IRS website, the IRS warns us all: “…If you fail to file, we may file a substitute return for you. This return might not give you credit for deductions and exemptions you may be entitled to receive. We will send you a Notice of Deficiency proposing a tax assessment. You will have 90 days to file your past due tax return or file a petition in Tax Court. If you do neither, we will proceed with our proposed assessment….” Seems fair enough. In my view you get a pretty good deal. Either file or go to Tax Court. Although not everything with the IRS is quite what it seems to be especially when you go through the bizarre world of US Tax Court case law.

Gloria Spurlock did not file her tax returns for 1995 96 and 97 and in fact did go to US Tax Court in Spurlock v IRS 118 TC No 9 (2002). Judge Ruwe points out that under IRS Code Section 6020(b)(1), the Government has the authority to execute a return “If any person fails to make any return required by any internal revenue law or regulation made thereunder at the time prescribed therefor, or makes, willfully or otherwise, a false or fraudulent return”. IRS wins Gloria loses. Sandra Stern also didn’t file a tax return and decided to go to Tax Court, Sandra Stern vs IRS TC 2002-212. Judge Beghe says: “…the above-quoted language of section 6020(b) makes clear that the Commissioner is not charged with preparing a perfectly accurate return. The Commissioner is required only to do the best he can with the information available to him, in the absence of a return prepared and filed by the taxpayer…” IRS wins Sandra loses.

The next case is even more interesting: Sam Kornhauser, a practicing attorney no less, didn’t file his 2007 tax return nor did he file one for 2008. The IRS prepared a substitute 2008 return and sent him the 90 day letter. Within the 90 day period Kornhauser signed a tax return and submitted it to the IRS for processing. However, the IRS did not process the return. Kornhauser appealed to US Tax Court, Kornhauser v IRS 2013-230. Judge Haines’ Opinion allowed into evidence Kornhauser’s “income” but not his deductions. Surprise, Surprise. Judge Haines says: “…It seems Kornhauser disputes the tax liability because the substitute return failed to take into account certain “deductions and credits”. Kornhauser’s only evidence to support his deductions and credits was his testimony as well as documents and records contained in exhibits…” Unfortunately for Kornhauser the Court did not feel the evidence Kornhauser presented to the Court or even his own sworn testimony to be credible. The Court concluded “….we find Kornhauser’s testimony to be self-serving and uncorroborated and do not accept it”. IRS wins Kornhauser loses.

In conclusion, there are certainly going to be times in your life that your tax return is going to be filed late, even years after the deadline, perhaps for reasons beyond your control. A death in the family, divorce, loss of job, natural weather disaster to name a few. So make sure you tax attorney communicates with the IRS that your return is running late and keep in constant touch with the Government until your return is eventually filed. In my view best practice in cases like this requires proper, regular, and effective written and verbal communication with the IRS to allow for cooperation not confrontation, and assistance not interference. Finally, for whatever reason, if you choose not to file your tax return without communicating to the IRS via your tax attorney, expect the IRS to file a substitute tax return for you. If you try to contest the substitute tax return in US Tax Court I bet you a Lobster dinner at the Palm that the Government wins every time. Happy tax return filings and remember, there is no substitute. Thanks for joining Chris Moss CPA on TaxView

Kindest regards
Chris Moss CPA

Welcome to TaxView with Chris Moss CPA

If you have investment gains to offset business losses this year, you may be in store for a direct head on collision with the IRS and the Tax Reform Act of 1986. The journey to disaster starts off innocently enough. You sell some stocks for a $10M gain to purchase a small retail shopping center for the same price. You think about structuring the deal so that the losses from the first year of operations at the shopping center could offset your capital gains from the sale of stocks. You never bothered to retain a tax attorney to create a tax plan because as you see it you have a no brainer zero tax due. You believe that a buy and sell for $10 Million equals a full and complete offset come April 15 2015; but perhaps not so fast says TaxView, because the offset is in great danger. There are land mines ahead that seem to explode at the worse possible moment with an IRS audit. If you are interested in how the IRS could dramatically change even your best tax plan for offsetting gains and losses, stay with us on TaxView with Chris Moss CPA to see how the Tax Reform Act of 1986 makes your no brainer into a brain strainer and a tax disaster for you the unfortunate taxpayer victim of the creation of Section 469 and the Passive Loss rules.

To get a better idea of the catastrophe ahead, first let’s all take a short trip back to the source of confusion to Washington DC. Fasten up your tax plan as we turn back the clock landing us right in the middle of the center table at the downtwon Palm. Dan Rostenkowski (House Ways Means) and Bob Packwood (Senate Finance) have gotten together to finalize some last minute provisions of the 1986 Act. Legendary Tommy Jacomo spots us immediately with a great table. We hear Rosti roar over the boisterous dinner crowd to Bob: You personally have quite a large portfolio in stocks and bonds. Would you really consider interest and dividends “positive” income? Rosti, you know I don’t like that word “positive” taken in this context. Besides, we can’t really tell the average American taxpayer that the wealthy making dividends and interest are working as hard as they are with “positive income”. Let’s just go with this term “Portfolio”. It bridges the gap between those darn “passive” tax shelters and the American W2 worker. I say we treat these items like positive income similar to a salary but call it “portfolio”. In other words we tell America that their stocks and bonds are…well like working 40 hours a week for them as their “portfolio”. Bob, you have got to be kidding, that is really dumb, really stupid… but you know, comparing portfolio to W2 earnings is so ridiculously outrageous it might just work. See Joint Committee on Taxation, page 209-213 which eventually morphed into IRS Code Section 469 Passive Loss Rules.

Agree or disagree with how my imaginary conversation might have unfolded that night, the fact is that Section 469 prohibits the offset of “portfolio” gains or losses and “passive” gains all losses. In order to see the bizarre consequences of how these two types of gains and losses can interact, let’s head over to US Tax Court just a five minute cab ride from the Palm over to Capitol Hill to survey a 2000 case More v IRS 115 T.C. No 9. More was an independent managing underwriter as part of a syndicate for Lloyds of London. In order to be accepted by Lloyds More had to demonstrate his ability to cover potential losses of his syndicate usually by posted a letter of credit. In 1988, More transferred his personal stock portfolio to a brokerage account at Bank Julius Baer (BJB), a London-based bank. During 1992 and 1993, petitioner underwrote £500,000 of Lloyd’s premiums which were secured by a letter of credit from BJB in the amount of £150,000. The policies written by More did in fact incur losses and More cashed in his stocks at a large gain to cover those losses as required by his letter of credit. More reported his losses and gains on his tax returns so that each offset the other. The IRS audited Moore, and disallowed all the losses, arguing “portfolio” income could not be offset against “passive” income. Moore appealed to US Tax Court.

Judge Vasquez in More writes a very short 16 page jam-packed with Section 469 Opinion. The Court then confirmed that Congress enacted passive loss regulations “to curb expansion of tax sheltering”. Judge Vasquez further noted that IRS regulation 469-2T makes an exception to the general rules regarding disposition of More’s stocks at a gain. Specifically, gross income derived in the ordinary course of a trade or business includes “income from investments made in the ordinary course of a trade or business of furnishing insurance or annuity contracts or reinsuring risks underwritten by insurance companies” The Court notices that More’s attorney, Louis B. Jack, did not refute or address this at all and was silent on the reason why More acquired the stock. If More could have shown that he primarily created this portfolio as a way to get into the insurance business and not as an investment More wins IRS loses. Unfortunately for More, no evidence was presented to the Court on when his investments in stocks turned primarily to assist More in keeping his job at Lloyds. I don’t know about you all, but it seemed More’s transfer to a brokerage account back in 1988 was primarily to show sufficient assets so he could work at Lloyds. Nevertheless, since More did not refute the Government’s argument leaving the Court no choice but to hold that More’s stocks were primarily created for investment and not for the convenience of Lloyds. Government wins, More loses.

What does this rather obscure Tax Court case and the provisions within Section 469 tell us working taxpayers regarding passive loss rules that create “portfolio income” and “passive income”? Anyone out there who wants to offset losses from one activity against gains of another: Be warned, the IRS is actively and aggressively audited these kinds of offsets, particularly any losses that offset W2 income or Investment Portfolio Income, or any gains that offset passive losses. Prior to filing your tax return with any offsets from different sources of gains and losses, review with your tax attorney the ramifications of Section 469, with particularly emphasis on what kind of offsets you have. If you have “portfolio” and “passive” losses or gains pay particular attention to whether or not the Section 369 allows those offsets. Finally have your tax advisors insert into your tax return detailed evidence of your tax strategy explaining how these offsets were created, what provision of Section 469 controls, and how your tax strategy is being implemented. For example if your tax strategy involves long range estate planning, make sure you disclose this in the tax return before filing. Better you should support and bullet proof your tax strategy now than to have to wait 4 years for the Government to do it for you during an IRS income tax return audit.

May your losses and gains offset wisely. Thanks for joining Chris Moss CPA on TaxView

Kindest regards,
Chris Moss CPA