Tax Court

The Tax Court Likes Hockey

Usually, the income tax deduction for meals and entertainment is equal to half the amounts spent for meals and entertainment.  There are some exceptions, one of which is where the meals are a de minimis fringe benefit.  Tax Court Senior Judge Robert Ruwe decided that the away-game pre-game meals of the NHL’s Boston Bruins were de minimis fringe benefits.

Jeremy Jacobs, the owner of the Bruins, and his uxor petitioned the Tax Court to overturn the IRS’ determination of tax deficiencies for 2009 and 2010 in the amounts $45,205 and $39,823, respectively.  The deficiencies were caused by the IRS disallowing as deductions 50% of the cost of away-game pre-game meals for “traveling hockey employees.”   The attorneys for Mr. Jacobs argued that the de minimis fringe benefit rule under Internal Revenue Code Sections 274(n) and 132(e) allows the taxpayer to deduct 100% of the meals.  In order to claim the 100% deduction under that rule, the meals have to run a gauntlet of six tests.

Judge Ruwe ticked through facts as they applied to each of the six tests and found that the away-game pre-game meals passed all of the tests for 100% deduction.  One test that seemed rather difficult for the Bruins to pass on the road is the requirement that the eating facility where the meals were served had to be owned or leased by the Employer.  The Bruins’ contracts with the hotels were not called leases and did not look like leases that I have signed.  However, they did allow the Bruins to use property.  Thus, they must be leases said Judge Ruwe, who also interpreted several other aspects of the hockey business rather favorably for the Bruins.

As the Court points out in a footnote to its opinion, the IRS did not challenge at-home pre-game meals.  While the opinion does not explain why the IRS viewed home cooking and road meals differently, this observer thinks that it may be that the IRS’ challenge did rely significantly on the absence of “owned or leased” business premises – a fine distinction.

So, good for hockey teams.  This decision also portends well for many kinds of businesses that may provide meals to groups when away from home.  In many instances of which I am aware, businesses simply default to the 50% deduction for meals and entertainment.  Businesses and their tax advisors should look more closely at the deductions. This case may provide authority for deducting 100% of the cost of group meals when traveling, if the facts are similar to those in Jeremy M. Jacobs, et ux., 148 T.C. No. 24 (2017).  I don’t think that the subject employees must be big men missing teeth and hitting each other with sticks.

VKM

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Tax Court

TurboTax Made Me Do It

Sometimes you should not do your own brain surgery.  Well, make that almost always.  Actually, I can’t think of an exception.  A recent Tax Court Memorandum reminds us of the perils of taking on complicated tasks for which one has no training or aptitude.

Barry Bulakites is an insurance consultant whose clients are primarily accountants.  Mr. Bulakites prepared his own tax returns using TurboTax.  (A bit ironic, I should say.)  According to the Tax Court, “the Commissioner thinks he claimed a few too many deductions, but Bulakites argues that he has enough evidence to prove some of them and blames the software for luring him into claiming others.”

In 2011 and 2012, Mr. Bulakites confronted some pretty complicated tax matters.  The IRS examined those returns and assessed additional tax based on Mr. Bulakites claiming over $300,000 too much in deductions.  Representing himself, Mr. Bulakites petitioned the Tax Court for relief.

The Tax Court decided completely in favor of the IRS about the matters at issue.  Then, the Tax Court found in favor of the IRS with regard to an accuracy-related penalty imposed when there is “any substantial understatement of income tax.”  Mr. Bulakites tried to blame TurboTax, but the Tax Court did not buy his argument.  “[T]ax preparation software is only as good as the information one inputs into it.”

VKM

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Tax Court

Only The Pinball Wizard Qualifies

WARNING:  This blog has a reference that some may find politically insensitive.  If that might bother you, quit reading now.  If you are like 38% of our national electorate, keep reading.

I listen regularly to 60s and 70s rock – music from my glory days. A recent Tax Court Memorandum case reminded me of a line in “Pinball Wizard” from the rock opera Tommy by The Who.  “That deaf, dumb and blind kid sure plays a mean pinball.”  I’ve used that line to advise my clients about who qualifies for equitable “innocent spouse relief” from joint and several liability under Section 6015(f) of the Internal Revenue Code for taxes owed on joint income tax returns.  Only the Pinball Wizard qualifies.

Dr. Nicole Ryke, a medical doctor, sought equitable relief from having to pay Federal income taxes that were shown on her joint returns, but not paid.  The facts outlined in the case indicate that Dr. Ryke was careful to have sufficient withholding taken from her salary to cover her share and more of taxes.  The Court acknowledged that she knew nothing about accounting or tax.

During the years before the Tax Court, Dr. Ryke was a medical resident working long hours and caring for her three children. She left compliance with Federal tax laws in the hands of her attorney husband.  She just signed their joint returns where her husband indicated.

Mr. Ryke was not a conscientious taxpayer.  In fact, he habitually did not file on time.  He frequently did not pay the tax due with returns.  He also had a long history of not paying his debts.

In 2011, Dr. Ryke found that tax was due for 2007 and 2008.  She wrote a check to cover those liabilities.  In 2014, she learned that Mr. Ryke had not paid the tax due on the face of the returns for 2010-2012.  She asked for “innocent spouse relief” under Section 6015(f) from the liability for the 2010-2012 returns.  She also started filing separately from her husband.  She remains married to Mr. Ryke today (or at least at the time of the Tax Court opinion).

While noting that it was not bound by such authority, the Court relied on the provisions of Revenue Procedure 2013-34, which outlines the IRS’ guidelines for granting innocent spouse relief from joint and several liability caused by filing joint returns.  While Dr. Ryke passed the threshold tests to allow consideration of the application of innocent spouse relief, the Court did not grant the relief to her.  The Court concluded that since Dr. Ryke knew before her marriage to Mr. Ryke that he had bad credit and a history of not paying his debts, she should not have relied on him to properly and timely pay their income taxes.

So, even though Dr. Ryke was probably “innocent,” she did not meet the criteria that actually seem to be applied in practice under Section 6015(f).  As I tell my inquiring clients, you have to be a “deaf, dumb and blind” spouse to get innocent spouse relief.

VKM

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Personal Taxes

Hey Vance, Can I Deduct the Costs of my MBA?

On occasion, I am asked if a taxpayer can deduct the costs of graduate education.  I consulted with a client about deducting the costs of his MBA as recently as a month ago.  I confidently tell my inquirer that, in the vast majority of cases, if the costs were deductible, the costs would be treated as an employment expense and deducted as a Schedule A miscellaneous deduction subject to a floor of 2% of adjusted gross income.  Beyond that advice, the deductibility gets a bit murky, particularly with respect to an MBA.

Issued in 1958, Regulation Section 1.162-5 addresses the deductibility of educational expenses.  Basically, the regulations say that if the education is (a) a prerequisite for a specific profession or (b) required to meet the educational requirements for qualification in his or her employment, the costs are not deductible.  Costs such as continuing education requirements are deductible.

So, the costs of becoming a lawyer or doctor or a physician’s assistant are clearly not deductible: you get a license to practice a profession after you complete your studies and pass an examination (or two or three).  An MBA is different.  Generally, an MBA does not bestow upon you a license.  It may or may not qualify you for a new job; it could just make you better at your existing job.  Pursuing an MBA may cause one to take a break in employment, if one elects to enter a full-time MBA program. This break in employment, along with other variations on the MBA theme, muddies the deductibility of MBA costs.

Derek A. Jones, an attorney in Orono, Maine, and Steven C. Colburn, an associate professor of accounting at the University of Maine in Orono, published an article about this topic in the July 2017 issue of Practical Tax Strategies/Taxation for Accountants.  They examine carefully the development of the case law about the subject and lay out a clear explanation and guidelines for determining the deductibility of MBA costs.  They look at different kinds of MBA pursuits.   They even summarize their findings in a decision tree-type chart.  Kudos, gentlemen!

I paraphrase key aspects of the summary of the findings set forth by Jones and Colburn.  I am responsible for any faults in the paraphrase.  Their summary addresses how a taxpayer can best position to deduct the MBA costs, based on the regulations and court cases.

  • Before seeking an MBA, work for at least two years in a field of business to which an MBA can be applied.
  • If possible, pursue the MBA part-time. If you must study full-time, don’t take off more than two years.
  • After getting your MBA, work for the same employer in the same field. While not as convincing a case, if you don’t work for the same employer, work in the same field.
  • As much as possible in the MBA program, take courses that pertain to the type of employment you had before and after the MBA.
  • Don’t take a job after getting your MBA that requires an MBA.
  • Don’t obtain a degree that may qualify you for a professional certification (such as a CPA), whether or not you pursue that profession certification.

I’ll be asked again about the deductibility of MBA costs, I am sure.  Until authoritative pronouncements change the landscape, I will simply refer the questioner to this fine scholarship by Mr. Jones and Dr. Colburn.

VKM

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Just for Fun

Retirement Minded

Huselton, Morgan & Maultsby colleagues, don’t become giddy.  My retirement is still a few years away.

However, I am approaching a traditionally epochal birthday, so my thoughts turn to the next chapter of my life.  It is time to start thinking seriously about what retirement will look like and where it will be spent.  So, to the internet I went.  I wanted to see where my current residences (and likely permanent co-choices) rank.  Are Texas and Michigan good choices?

After looking at a number of websites, I have decided to share some opinions about where are the best states to retire.

Wallethub.com published in 2017 a ranking of best states to retire based on four factors. Florida #1, Wyoming #2 (powered by its affordability ranking) and South Dakota #3 (primarily ascendant because of its health care ranking).  Michigan #15 and Texas #18.

Based on eight factors, Bankrate.com published also in 2017 a ranking of the best retirement states.  New Hampshire #1 (#2 in “well-being”), Colorado #2 (somewhere between #1 and #8 in legalized marijuana use), and Maine #3 (#2 in “senior” – I don’t know what this means, but it must be important in retirement rankings).  Michigan #22 and TX #24.

The magazine Kiplinger last published a full ranking of states to retire in 2015, it appears.  The rankings were based on seven factors.  Delaware #1, Florida #2 and West Virginia #3.  Michigan #21 and Texas #42.  Interestingly, the Kiplinger “best states to retire” ranking in 2016 had South Dakota #1, Utah #2 and Georgia #3.  Quite a change.  Retirees must be fickle.

While my choices don’t rank with Florida and South Dakota (huh?), I conclude that my choices are pretty good.  They actually are lot better than good, if you know anything about Traverse City, MI.

My research revealed a sobering tidbit.  Kiplinger in 2016 said that a retiring couple, both 65 years of age, should expect to spend in retirement on healthcare $387,731 on average.

Then, when I finished my research, I asked Mrs. Maultsby where she thinks the best place is to retire.  Her analysis was succinct:  Where the grandchildren are.  Well, that settles the matter.

VKM

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Tax Policy

Trump’s Tax Plan – Kind of Like a Butt Sketch

First, let me acknowledge that Butt Sketch is trademarked by Krandel Lee Newton.  I give him all the well-deserved credit for the term and the concept.  Mr. Newton and his crew of associate Butt Sketchers are famous across the nation now.  About 25 years ago, the Cedar Hill, Texas resident was a bit less well-known when he sketched the lovely Beth McAllister, four friends (whom we saw last weekend), and me.  Beth had agreed that night to be my bride.  We have another of his sketches of the two of us dating some 20 years later and executed at a little party we hosted.   Including our two portraits, Mr. Newton says that he has memorialized over 600,000 backsides.

The Butt Sketch is a charcoal caricature (usually full length) from behind the fully-clothed subjects. The result is a sketch, not a full-blown portrait. It has just enough detail to make the subjects recognizable, if you know them pretty well.

President Trump released a one-page outline of his tax plan on April 26, 2017.  It has just enough detail to recognize it as a tax proposal.  Particulars are meager.

I’ll give President Trump his due.  He fancies himself as a negotiator without peer.  I will not argue that he is a pretty good, if sometimes ruthless, bargainer.  Look at this vague plan as his opening bid.  While the outline hints at some interesting and welcome reforms, the framework he proposes faces opposition from 360 degrees.  It has technical and practical shortfalls, one of the biggest being the apparent ballooning of the national debt: Everybody gets a tax cut, according to the plan.  There are no revenue offsets even hinted.

So, an army of people will be trying to influence, change and add detail to President Trump’s Butt Sketch of a tax plan.  It will be interesting.

VKM

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Personal Taxes

Home Is Where The Dog Is

Three times during this spring busy season I researched extensively the facts and the law surrounding the states of residence of taxpayers in order to determine where state taxes should or should not be paid. Maybe I should have just posed a simple question:  “Where’s your dog?”

In February 2017, the State of New York Division of Tax Appeals (the “Court”) decided the case of Gregory Blatt.  Mr. Blatt was an attorney who in 2009 had worked for several years for InterActive Corporation (“IAC”) as general counsel.  He lived in New York City.  After a corporate reorganization, Mr. Blatt decided to move on.  He spoke to IAC Chairman and CEO Barry Diller about his plans.

Mr. Diller wanted to keep Mr. Blatt as part of IAC.  He asked him if he wanted to run IAC company Match.com., based in Dallas.    Shortly after breaking up with his long-time live-in girlfriend, single Mr. Blatt is given the chance to run dating sites that include Match.com and Tinder.  Hmm. . .

Mr. Blatt was tempted to swipe right on the deal.  But there was one drawback – Dallas.  Mr. Blatt was a sophisticate from the East Coast.  What possibly would there be to do in the heart of the hinterlands?  So, Mr. Blatt negotiated to work at least half the time in New York.  He kept his apartment and his boat in New York.  He took the Dallas job in early 2009.  Match would pay his Dallas living expenses.

He rented a very nice apartment in the Ashton, in the heart of Dallas’ Uptown.  He fell in love with Dallas, the thriving social scene in Uptown, the great restaurants within walking distance, the sports and entertainment venues easily accessible.  (Full disclosure – I live about three blocks from the Ashton – Mr. Blatt is right!)

While not discussed directly in the case, I am sure of another factor.  He had to have fallen for Texas women.  And, he’s the guy that runs Tinder!

He embraced Texas.  He made the final commitment in late 2009 – he moved his dog to Big D.

Towards the end of 2010, Mr. Blatt got the opportunity be the CEO of IAC.  He tried to run IAC from Dallas, because he now fully appreciated the charms of Texas.  But he ultimately decided to move back to New York in 2011.  He claimed to be a Texas resident for most of 2009 and for 2010.  He avoided over $400,000 in New York state income taxes by so claiming.  New York’s Department of Revenue took issue with his self-classification as a Texan.

The Court conceded that Mr. Blatt did not live more than 183 days in New York in 2009 or 2010.  So, he was not a statutory resident of New York.  His residency hinged on his domicile – the place in which an individual taxpayer intends to be his permanent home.  When this saga began, he was domiciled in New York.  To change domicile (from New York to anyplace else), “a taxpayer must prove his subjective intent based upon the objective manifestation of that intent displayed through his conduct.”

The Court pointed out that Mr. Blatt submitted over 100 statements of fact regarding his intentions.  Only one seemed to really matter:

“In reviewing the factors of a change in domicile, historically, the move of items near and dear tend to demonstrate a person’s intention.  As borne out by the evidence in this case, petitioner’s dog was his near and dear item which reflected his ultimate change in domicile to Dallas.“

VKM

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