IRS

IRS: The Nice Guys Once Again

About two weeks before the wildfires struck northern California, my wife and I spent a few days in Napa Valley.  We went to a stunning estate to celebrate the perfect nuptial ceremony featuring a beautiful bride.  There aren’t many places more gorgeous than California wine country.  My friends there tell me that still is true, despite the fires.  However, a lot of folks have lost their homes and their jobs.  People are helping.  Also, the IRS is doing its part.

Yesterday, the IRS released Notice 2017-70 that provides guidance on the treatment of leave-based donation programs to aid victims of the California wildfires.

Under a leave-based program, employees elect to forgo vacation, sick or personal leave and the employer makes contributions of such forgone amounts to a charitable organization that, in this case, helps victims of the 2017 California wildfires.  There are some tough questions about taxation of such programs, when one looks at underlying law and authorities.  One could certainly project all kinds of adverse tax results of people trying to do good deeds.

If the IRS were to stick to the letter of the law, a lot of money intended for victims might go into the coffers of the Treasury, instead of to the charities helping the victims.  But, the IRS is turning away from a strict interpretation and, without citing any authority (of which there is probably none), outlines for the employees and employers a best-case scenario.  It is simply the case of the Federal government, through the IRS, doing the right thing; forget about the rules.

This is not the first time that the IRS has performed a kind act.  Over the last several years I have observed a number of these types of pronouncements and actions that aided victims of all sorts by loosening the strictures of tax law.  For example, in the aftermath of the recent hurricanes, the IRS extended many deadlines for filing returns and paying taxes; it set up and manned hotlines to help victims and tax preparers serving those victims.

Most of my dealings with the IRS are ministerial.  However, some of my dealings are respectfully adversarial.  The IRS interprets the law to be sure that my clients pay no less than they should and I am interpreting the law to be sure that my clients pay no more than they should.  Sometimes, the twain do not easily intersect.

Today, though, my hat’s off to the IRS.  Well done, Revenuers.

VKM

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Uncategorized

As Proud As I Can Be!

I have always been associated with outstanding professional women.

My mother is a CPA.  My wife is an acclaimed family law attorney and former judge.  Our two daughters are accomplished licensed professionals with graduate degrees.

At HM&M, we have a lot of fine professional women.  Want proof?  Check out the “Latest News” page on our website. Last week, Carmel Wood was named as a 2017 top ten Managing Partner Elite by Accounting Today.  Carrie Reese is a 2017 Texas Society of CPAs Rising Star.  Susan Adams was named the 2017 CPA of the Year by the Fort Worth Chapter of the TSCPA.

See for yourself.  http://www.hmpc.com/latest-news/

These ladies are great representatives of the talented women we have at HM&M.

This phenomenon leads to a theory that I have harbored for a long time.  Once science has found way to produce human offspring without the help of the male gender, only one thing will stand between men and our extinction:  We kill bugs.

VKM

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Tax Policy

“Unified Framework for Fixing Our Broken Tax Code” – A Magical Mystery Tour

Last week the Trump administration and Republican Congressional leaders released the aforementioned “Unified Framework.”  After taking a tour through the magical, “giant, beautiful, massive” (according to the Exaggerator-in-Chief) tax-cutting Framework, I find that what is unified is a mystery.  (Sorry, Mr. McCartney and the late Mr. Lennon.)

The Framework outlines, without reference to many numbers and with precious few specifics, over twenty disparate changes in the tax code.  The Framework suggests that the tax-writing committees of Congress will come up with the specifics and some additional ideas.  The Framework does not explain how the Federal government’s bills will be paid with less money coming in; there are only a few significant revenue generators proposed.  There are optimistic general aspirations that corporations will bring operations, money and employees back to the good old U.S.A., answering the siren call of lower tax rates and some vaguely-defined incentives for repatriation of funds.

One of the implied proposals is the elimination of the individual itemized deduction for state and local taxes.  Within moments after the release of the Framework, the Republican Unifiers got pushback from some of the biggest states that happen to have high state income tax rates.  Leading the protests were Republican members of Congress of those states and the precious few Republican government executives of those states.

A lot of oxen are being gored.  Many of those bovines have powerful and plentiful lobbyists in Washington.  There will be battles on many fronts.

So, what kind of tax planning do I think my clients should currently undertake?  Well, that’s not a fair question.  It is bit like asking a sports reporter to turn in his coverage of a football game before the contest even starts.  I may have some opinions, but they don’t mean much in light of the future brawls in the halls of Congress.  When the winners begin to emerge, I’ll start tax planning.

VKM

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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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