Welcome to TaxView with Chris Moss CPA

Cost Segregation is a tax savings strategy that in my view defies logic, yet nevertheless is a brilliant absolutely legal way to save taxes. What is Cost Segregation you ask?  In essence, Cost Segregation separates out costs in a building into structural components which can be depreciated at tax advantageous rates. "Structural components" date back to the investment tax credit (ITC) real estate tax shelters in the late 1970s. Accelerated depreciation rules were enacted by Congress back then allowing  “structural components" of a building to qualify for the ITC . More recently the US Tax Court validated "Cost Segregation" of structural components in Hospital Corporation of America vs IRS (1997). How does this help you? It could mean big tax savings for you if you own commercial real estate.  So stay with us here on TaxView with Chris Moss CPA to learn how you can use cost segregation in your commercial or rental real estate for immediate annual income tax savings.

Do any of you remember the late 1970s ITC shelter partnerships?  You would identify the structural components of a building you had just purchased, wrap the deal with a mortgage, add a little of your own money, use the ITC, and presto, you ended up with a large tax loss dramatically reducing your W2 income.  By 1981 wealthy taxpayers were starting to discover real estate tax shelters. Just a few years later the hottest topic at any cocktail party throughout the country was tax shelters.
     
Now fast forward to 1986. The Tax Reform Act was designed to rid the nation of tax shelters and it did just that. The 1986 Reform Act repealed the ITC, prohibited passive losses from offsetting W2 income and dramatically lengthened depreciation of real estate.. All of a sudden commercial property you acquired was now depreciated over 31 year life rather than 19.  (Just so you know, it’s 39 years now).  

As the 1980s came to a close investors began to panic: No ITC and no rapid depreciation and no passive loss offset. Investors looked to their CPAs and their tax lawyers for relief. CPAs and tax lawyers in the early 90s partnering with structural engineers were surprised to find the IRS Code still contained the 1970s "structural component" classifications. Was this a simple Congressional oversight back in 1986 or did Congress intend to leave these provisions in the code for some reason?  At any rate by the mid-90s tax shelter promoters were claiming that the 1970s classifications supported rapid depreciation of "structural components" as long as they were properly classified by competent structural engineers. It didn't take long for the IRS to start fighting back. 

The battle soon moved to US Tax Court in Hospital Corporation of America vs IRS (1997). The facts are simple: Hospital Corporation (HC) was in the business of building and managing hospitals. HC segregated out various components of their many buildings as Section 1245 personal property allowing them to rapidly depreciate these components over a 5 year period. The IRS disallowed all this depreciation sending a $700 Million tax bill to HC for years 1978 to 1988. The Government argued that all the buildings must be depreciated over a much longer period of time as required for Section 1250 property by 1986 Tax Reform Act.  The sole issue? Whether the structural components laws that remained in the Code from the 1970s were nevertheless still valid in 1997,  

Judge Wells in his 116 page Opinion points out that Congress in the 1986 Act did not specifically address the 1970s provisions of the Code that were created to facilitate the ITC back then. The Court noted that the statutory language manifested a Congressional intent to retain the prior law distinction between components that constitute Section 1250 real estate and items that constitute Section 1245 personal property.

With the US Tax Court giving its blessing, and the IRS acquiescing, a billion dollar 
"cost segregation" industry was born to “segregate out” the cost of the tangible Section 1245 portion of a building.  With a good engineering analysis the CPAs were able to confidently and legally rapidly depreciate substantial parts of commercial buildings on annual tax returns knowing they could win an IRS audit.  

What does all this mean to you all? First and most important: Cost Segregation is legal folks but only if your experts are better than the Governments. So if you are purchasing a building, hire the best structural engineering firm you can afford and segregate out those costs into structural components that will qualify for rapid deprecation and immediate tax savings. Second, make sure your tax attorney and structural engineers guarantee their work so when the IRS comes knocking on your door, the same people who did your analysis will be there at no extra charge to act as your expert witnesses at a possible US Tax Court trial. Likewise ask that the same tax attorney who prepared your tax return to guarantee that she will be there for the IRS audit and a trip to US Tax Court if needed.. Finally, don't forget to include your structural engineering cost segregation report summary in the actual tax return you file with the IRS.  When you are audited years later you will be glad you did..  

We hope you enjoyed this weeks TaxView with Chris Moss CPA.

See you all next time on TaxView
Kindest regards
Chris Moss CPA

Welcome to TaxView with Chris Moss CPA

Have you ever loaned money to someone who didn't pay you back?  Did you know that if you can’t get your money back you could at least write the debt off for taxes?  It’s called a “Nonbusiness Bad Debt” (NBD) and it is deductible as a short term capital loss in the year the debt becomes worthless.  Or perhaps you loaned money to someone only to discover later you were swindled out of your money by a clever scam artist. That loss is called a theft loss (TL) and is deductible as an ordinary loss in the year you were certain you could not recover your money.  Seems easy to take these deductions? Right? Wrong! There are IRS landmines waiting for you in Section 166 and Section 165 of the IRS Code. So if you have a TLs or NBDs and are not sure which year to claim or how much to claim, stay with us here on TaxView with Chris Moss CPA where you will learn how to save taxes by safely deducting a theft or bad debt loss.

So what qualifies as a NBD?  IRS Code Section 166(d)(1) and Regulation 1.166-1(c) says that you have to have a debtor-creditor relationship with the person you gave the money to, that a genuine debt in fact existed and the debt was worthless in the year of deduction. Make sure your tax attorney includes sufficient evidence to prove that there was a genuine debt and include those facts in your tax return before you deduct the bad debt. Herrera vs IRS 2012, and affirmed on appeal to US Court of Appeals (5th Cir. 2013).

Theft loss or TL is covered under IRS Section 165(a)(3)  and Regulations 1.165-1(d)(2)(i), (3), 1.165-8(a)(2).  So if there is TL you can deduct the loss as an ordinary loss. Sometimes a TL could be also an NBD.  This is “kind of” what happened in the US Tax Court case of Bunch vs IRS (August 2014). Mr. and Mrs. Bunch filed a 2006 income tax return claiming a bad debt of over $4 Million from Mortgage Co.  Bunch then amended their tax return a few years later and changed the bad debt to a theft loss for the same amount claiming that the money had been stolen by an employee who worked at Mortgage Co.  The IRS audited Bunch in 2009 disallowing both the bad debt deduction from the original return and the theft loss from the amended return. Bunch appealed to US Tax Court in Bunch vs IRS August 2014.

Judge Wherry says timing is everything when it comes to TL and NBD tax deductions.  Indeed you can only deduct a TL or NBD if you can prove that no reimbursement is possible. The Court further noted that in fact Bunch did receive some recovery of the loss and therefore he could not deduct the loss for the amount and in the year the loss was deducted. Perhaps Bunch could have deducted a smaller loss that he did not recover in some future year, but unfortunately for Bunch that is not the tax strategy his tax preparer used. IRS Wins Bunch Loses.

Jeppsen v. IRS, 128 F.3d 1410 (10th Cir. 1997), affirming Tax Court Jeppsen v IRS (1995) further brings home how important it is to prove that no reimbursement is possible in the year you deduct the loss.  Jeppsen deducted a theft loss of $194,000 on his 1987 tax return claiming a stockbroker misappropriated his money.  However, Jeppsen also sued the broker over the next few years to try to recover the money and eventually won a damage award of $1.5 Million in 1995.  The IRS audited Jeppsen about that time and disallowed Jeppsen’s 1987 loss because it was not certain back in 1987 whether or not Jeppsen would recover his stolen money.  Jeppsen appealed to US Tax Court and lost.  Jeppsen appealed again to the US Court of Appeals and also lost.  IRS Wins Jeppsen Loses.

Halata vs IRS (2012) could happen to anyone who is greedy enough to believe what is too good to be true is true.  Halata a Texas resident befriended Ojeda. Halata was told by Ojeda friend Montgomery that he could repay Halata over $2.5 million in return profits if she loaned him $180,000. Halata did in fact loan $180,000 to Montgomery. The money was never recovered.  Halata never deducted the loss as she most likely did not know she could.  Unfortunately for some other reason her 2007 tax return was audited by the IRS who sent Halata a large tax bill. Halata retained a tax attorney Polk to represent her. Polk claimed his client should be able to deduct the theft loss in 2009 and carry back the resulting net operating loss to 2007 this wiping out any taxes she might owe as a result of the audit.  The IRS disagreed and Halata appealed to US Tax Court.  Halata vs IRS (2012).

.Judge Morrison concluded that under Texas law there was in fact a theft but not until 2009.  Unfortunately for Halata, the Court denied Halata the right to carry back this large loss to 2007 on procedural grounds in that her tax attorney did not raise this issue until after the trial. The Court did however grant Halata the right to take the loss in 2009 and then carry it forward to 2010 and beyond if necessary.  This was a partial victory for Halata and partial victory for IRS.  This case once again underscored the importance of timing when it comes to deducting TL or NBD.

In conclusion, if you all have a material TL or NBD, it is perhaps critical that you retain a tax attorney to prepare your tax return so that your strategy as to the timing of the loss can be properly documented and articulated to the Government in the tax return itself before filing.  Do not file that tax return with a loss unless you can show that there is reasonable certainty that you could not obtain reimbursement for your loss in that specific year. Finally remember when it comes to TL and NBD, timing is everything, making the year of deduction more important than the deduction itself.  Bullet proof your tax return TL and NBD strategy before you file.   Your tax position will be safe and secure from IRS challenge for many years to come. Thank you for joining Chris Moss CPA on TaxView.

See you next time,

Kindest regards

Chris Moss CPA 

Welcome to TaxView with Chris Moss CPA

Are you an entrepreneur with family business? Have you thought about your children and grandchildren being more involved in your business? Perhaps a Family Limited Liability Company (Family LLC) is just what you need. Properly structured for your unique situation, the Family LLC is a 21st century way to hand down the family business for generations to come in a safe, protected and orderly business structure. But if you set up your Family LLC be aware you face dangerous IRS tax mines hidden in IRS Code Section 2036(a) that could explode your tax plan into an IRS audit focusing on when a gift is not a gift (GINAG) and when a transfer is not a transfer (TINAT). Indeed, you may experience unexpected increases in estate tax so high the children might have to sell the farm just to pay the tax. So if you don’t want GINAG or TINAT, or just want to learn more about them, stay with us here on TaxView with Chris Moss CPA to fully understand how to avoid GINAG, TINAT, and Section 2036(a) so you can save and preserve your assets for your children for many generations to come.

Section 2036(a) prohibits you transferring property out of your estate that are “testamentary “in nature. The US Supreme Court in Grace V US, 395 US 316 (1969) has defined “testamentary” as those transfers which leave you in significant control over the property transferred. For example you still control the business you just transferred to your children.Section 2036(a) does not apply to transfers that are bona-fide sales for adequate and full consideration. Furthermore, the bona fide sale exception is satisfied where the record establishes you had a legitimate and significant nontax reason for creating your Family LLC, and your children received membership interests proportionate to the value of the property transferred. Turner v IRS 2011 at page 33. Therefore, all transfers and gifts to adult or minor children in a Family Limited Liability Company must be perfectly executed to comply with Section 2036(a). See Bigelow v IRS, 503 F.3d 955 (2007)Affirming Bigelow v IRS T.C. Memo. 2005-65; also see Rector v IRS 2007.

Our first US Tax Court case is True v IRS 2001. Dave and Jean True made direct gifts in their family business to some or all of their children every year form 1955-1993 at the maximum annual exclusion each year. True did not use a Family LLC. Instead of using an LLC Operating Agreement, True created restrictive buy-sell agreements for all of the family. This Agreements gave Dave True total control over all family business. Dave True died on June 4, 1994 with many various trusts in place with True still maintaining control over all businesses. An Estate Tax return was filed on March 3, 1995 with the Estate valued less the value of all the gifts given to all the children over all the years. The estate was audited by the IRS in 1998. Do you all see the GINAG and TINAT coming?

Sure enough the IRS determined that the whole purposes of the gifts to the True children and related buy-sell agreements was to avoid estate tax. The Government sent the True family a bill for over $75 Million plus $30 Million in penalties adding back all those gifts as a violation of Section 2036(a). This is major GINAG. Why? True was giving everything away without a business structure to back up his estate plan making the primary motive to avoid estate tax. As the Court notes on page 108 of this over 300 page Opinion, Dave True had “control” over the whole operation which made for good GINAG in that he had a “life estate” in the business operations. In my view if True had set up a Family Limited Liability Company with normal restrictions placed in a family Operating Agreement allowing the family under unanimous consent provisions to control the assets, GINAG and TINAT would have been avoided, and assets would have been preserved and protected from Section 2036(a). Unfortunately for the True children, IRS wins True loses.

Our next case is Hurford v IRS 2008. Thelma Hurford was a very wealth widow. On advice of legal counsel she formed a Family Limited Partnership which allowed her to transfer assets, including farms and ranches into a single entity. Hurford gave a 25% interest to each of her children. But Hurford still maintained control over everything. GINAG is written all over this. Hurford even remained the sole signatory on many of the accounts. Hurford died on February 19, 2001. The estate tax return was filed on September 26, 2001. The IRS audited the return on November 18, 2004 claiming Hurford owed over $20 Million for estate and gift tax. Hurford appealed to US Tax Court in Hurford v IRS 2008.

Judge Holmes and the Government proposed GINAG for the whole estate plan calling it nothing more than a transparently thin substitute for a will. The Court agreed with the Government finding that Hurford retained an impermissible interest in the assets she had tried to transfer to her children in total violation of Section 2036(a). Further the Court noted that Thelma commingled her own funds with the partnerships until shortly before she died, and that there was no meaningful economic activity where the partnership furthers family investment goals or where the partners work together to jointly manage family investments. You guessed it IRS wins Hurford loses.

Our last case: Stone vs IRS 2003. Mr. and Mrs. Stone founded multiple business ventures. They were also beneficiaries of various trusts. Perhaps due to or because of all this wealth, the family and 4 children Eugene, Rivers, Rosalie and Mary and other parties sued each other in the early 1990s over these trusts. After settlement of all the litigation, Stone formed 5 family limited partnerships in 1996 for his wife and 4 adult children. The partnership agreements provided unanimous consent of all partners to sell, transfer or encumber property and the children worked in the businesses owned by the partnerships. Mr. Stone died as a South Carolina resident on June 5, 1997 at age 89. Mrs. Stone died on October 16, 1998 at age 86. An estate tax return was filed for both Mr. and Mrs. Stone and the IRS eventually audited. The Government sent Mr. Stone a bill for $8 Million and Mrs. Stone a bill for $1.5 Million claiming the transfers to the partnerships violated Section 2036(a). Stones appealed to US Tax Court Stone v IRS 2003.

Judge Chiechi notes that the Stones retained enough assets in their estate to maintain their life style. The Court found that transfers were motivated primarily by investment and business concerns relating to the management of certain of the respective assets of Mr. and Mrs. Stone during their lives and thereafter. The Court concludes that the partnerships had economic substance and operated as joint enterprises for profit through which the children actively participated in the management and development of the assets and therefore the transfers were bona fide sales for adequate and full consideration in money or money’s worth under section 2036(a). Stone wins IRS Loses. Also see Mirowski v IRS US Tax Court 2008

So what does this all mean for us? If you have a business or perhaps multiple businesses and your tax attorney has suggested a Family Limited Liability Company which will own all of these businesses make sure the operating agreements protect you from Section 2036(a) and GINAG and TINAT. Based on the US Tax Court case law, retain some assets for yourself to maintain your lifestyle and perhaps transfer everything else to the LLC. Regarding adult children who are willing to participate in the family business see to it that they are signatures on the bank accounts and make sure there are unanimous consent requirements for all important decisions. Any gifts to minor children through the annual tax free gift exclusion require an absolute legitimate bullet proof non tax purpose in forming the LLC. Finally consult a tax attorney to create your unique business plan. Avoid GINAG and TINA. Most importantly avoid violation of Section 2036(a). You will be ready for any IRS audit coming your way and your assets will be part of your family legacy to your children and your children’s children for many years to come.

Thanks for joining me on TaxView with Chris Moss CPA.

Kindest regards
Chris Moss CPA

Welcome to TaxView, with Chris Moss CPA

Death tax is a fact of life, or death, as the case may be, and  Governments have been taxing us for thousands of years with death taxes when we die. Euphemistically referred to as “estate tax”, the tax is assessed when assets are transferred to your beneficiaries on that special day of your departure over the tax free IRS allowed exemption. Despite the fact that Congress likes to adjust this exemption from time to time, if your tax attorney “guessed” right as to what the tax free exemption will be when you die, your estate pays no tax, if she guessed wrong….well your kids just might have to sell the farm to pay the estate tax. Best practice is to gift to your Family Limited Liability Company (LLC) up to the IRS annual 2014 exclusion of $14,000 per person ($28,000 if married) which reduces by the same the amount of the value of your estate. Sounds easy, but beware of the IRS tax traps waiting for the unwary beginner. So you had better stay with us on TaxView with Chris Moss CPA for an exciting journey to the beginner’s world of estate and gift tax planning so you can keep your assets legally safe from taxation for many generations to come.

First, if you don’t yet have a Family LLC I recommend you first read my article on the Family LLC as well as read my article on Family LLC Discounts. You can make up to $28,000(married) in 2014 tax free gifts a year to each of your children. If you are married and have two children age 10 by the time they are both 20 each will have $280,000 worth of membership in your family LLC. In addition to the annual gift exclusion of $28,000, you can also make lifetime gifts of $5M ($10M married) but these gifts require the filing of a gift tax return with the IRS. Any gifts over the $10 Million are taxable, either as gifts if you are alive or as estate tax if you are dead. Because Congress frequently changes these exemptions and exclusions, best practice requires annual review of your estate plan by your tax attorney to make sure your unique plan complies with current law. Sounds simple but not really. In addition to ever changing exclusion and exemptions amounts, there are many death traps awaiting you as you create the family LLC.

The first trap we are going to cover today is released with a trap question: When is a gift not a gift? To answer this question we head on over to US Tax Court to listen in on a 2013 Tax Court case Estate of Sommers v IRS. Sommers was a successful physician who owned a valuable collection of art. Sommers retained the services of a B&T Tax Attorney who advised Sommers in 2001 to get the art appraised, create an LLC as owner of the art and gift LLC units to his three nieces, Wendy Julie and Mary up to the maximum allowed exemption ($675K at that time) to avoid Sommers of having to pay gift tax. However, after the appraisal came in over the exemption and gift tax was owed, the nieces paid the gift tax themselves to avoid any breach of the agreement and more importantly to reflect that the parties carried out the original intent of the agreement that Sommers pay no gift tax.

Fast forward a few years and Sommers (or perhaps other relatives of Sommers) changed their minds about gifting the art to Wendy, July and Mary, but the nieces refused to give the art back to Sommers. After Sommers died, his executor sued the nieces for the art in various State court actions claiming that the gift agreement was illegally altered when the appraisal came in over the allowed exemption. Even though the estate eventually lost in state court, it’s legal executor nevertheless included the value of the art as part of the estate tax return on Form 706. The IRS rejected this return noting that Form 709 a US Gift tax return had been filed years earlier in 2001 for these same works of art. Sommers estate appealed to US Tax Court. Estate of Sommers vs IRS. Judge Halpern sided with the IRS noting that Sommers did not retain the power to “alter, amend, revoke or terminate those gifts within the meaning of IRS Section 2038 and therefore, the gifts were valid and had to be removed from Summers estate. IRS (and nieces) win, Estate of Sommers and other relatives lose.

The second trap we are going to look at today is found in the Operating Agreement of the LLC as highlighted in the US Tax case of Hackl v IRS. Hackl was a successful executive with Herff Jones Inc. in Georgia. Upon his retirement in 1995 he started a tree farming business with his wife in both Georgia and Florida. Treeco LLC was created with both Mr and Mrs Hackl owning 50% each. The LLC operating agreement designated Hackl as the initial manager to serve for life and had very restrictive buy sell provisions. One such restrictive provision required each new member to get Hackl’s permission before they could sell their membership, even if the sale was between brothers and sisters. Shortly thereafter, Hackl gifted various membership interests in Treeco to each of his eight (8) children and spouses and timely filed gift tax returns to the IRS claiming the gifts qualified for the annual exclusion under IRS Code 2053(b). The IRS audited the 1996 gift tax return in 2000 and disallowed the exclusions claiming the gifts were future interest gifts and had no present value. Hackl appealed to US Tax Court in 2002 Hackl v IRS claiming the gifts were in fact gifts and had real substantial present value. Judge Nims points out that for Hackl to win his children must have an unrestricted right to the immediate use possession or enjoyment of the property or the income from property within the meaning of IRS Section 2503(b). The Court agreed with the IRS that due to the severe operating agreement restrictions the children never received a “present” interest in the LLC memberships they received. IRS wins, Hackl Loses.

What does that mean for all of us? If you are planning to gift the current $28,000 (married) annual exclusion to your children through your Family LLC make sure you and your tax attorney create an operating agreement for the children that can withstand Government scrutiny regarding “present interest” in the event of an IRS audit. Second, if you are gifting large gifts over the $28,000 annual exclusion either less than or in excess of the current $10M exemption (married) make sure you file all gift tax returns and pay any gift tax you owe to make sure the gift cannot be revoked or amended by other not so happy relatives after your death. Finally, develop a long range estate and gift tax plan with your tax attorney so that when your final day comes you can keep your assets legally safe from estate taxation to assist your children and preserve your wealth for many generations to come.  Thank you for joining us on TaxView with tax attorney Chris Moss CPA.

Kindest regards and see you next time,
Chris Moss CPA

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