Tax Update Blog

Tax News & Views Truffle Trouble Roundup

August 5, 2020 | Blog
By Joe Kristan, CPA

Blue-State Tax Break Becomes a Flashpoint in Coronavirus-Relief Bill - Richard Rubin, Wall Street Journal ($). "Democrats say $10,000 limit on state and local deductions hurts states’ ability to fund services; Republicans mock effort to repeal the cap"

Also:  

Democrats’ insistence on raising the issue—over objections from progressive tax experts who say too much of the benefit goes to the rich—shows just how important the deduction is to a party that counts upper-middle-class residents of urban areas as a core part of its base. The current advocacy signals that Democrats will press to repeal the cap if they have full control of the government after the election.

SALT Repeal Remains a Sticking Point - Jad Chamseddine, Tax Notes ($). "Democrats continue to insist on repealing the $10,000 state and local tax deduction cap as part of a COVID-19 relief package despite criticism from Republicans that its benefits would flow only to the wealthy."

 

Lights Flashing, Sirens Blaring: State and Local Governments Need Federal Aid - Renu Zaretsky, TaxVox. "The House wants $1 trillion of aid for state and local governments, while the Senate has thus far has proposed $105 billion for schools that open for in-person instruction."

New PPP Loan Forgiveness FAQ Might Conflict With Earlier Guidance - Jonathan Curry, Tax Notes ($).  "The Small Business Administration and the Treasury Department have jointly issued guidance implementing the PPP in the form of notices, FAQs, and interim rules since the program was first enacted in March. In their latest FAQ, released August 4, the agencies offered nearly two dozen answers to questions about PPP loan forgiveness, including details and examples of which payroll and nonpayroll costs are eligible for loan forgiveness and what elements will reduce the forgiveness amount."

FAQ on PPP Loan Forgiveness Issued by SBA with Some Surprises on Shareholder-Employee Payroll Costs - Ed Zollars, Current Federal Tax Developments. "However, the guidance on owner compensation does contain a few surprising pieces of guidance—and these surprises are generally good news for shareholder-employees compared to what most had inferred to be the rules given prior SBA guidance."

 

Even COVID-19 Can’t Stop Sales Tax-Free Shopping - Kelly Phillips Erb, Forbes. "Here’s a look at states offering taxpayers a break on sales tax for back-to-school items this year"

IRS, we applaud your work and we feel your pain, but we need you to do more to get dollars out to vulnerable taxpayers - Nina Olson, Procedurally Taxing. "Oddly enough, the pandemic opens the door for the IRS to embrace its role in delivering social benefits. It would be more than a shame if it did not seize that opportunity."

 

The Use of the LLC For the Farm or Ranch Business – Practical Application - Roger McEowen, Agricultural Law and Taxation Blog. "This use of the single-member LLC can be a valuable aspect of an intergenerational transfer of the farming or ranching business.  Coupled with a general partnership farming entity, the single-member LLC can also optimize receipt of federal farm program payment limitations."

How High Is Too High? - Russ Fox, Taxable Talk. "California’s top marginal tax rate today is 13.3% (on those earning $1 million or more). Proposed legislation would increase the tax rate to 14.3% on those earning more than $1 million, to 16.3% on those earning more than $2 million, and to a whopping 16.8% on those earning more than $5 million."

Who will Ultimately Pay the Digital Services Tax in the UK? Amazon Passes the Cost Along to Sellers - Daniel Bunn, Tax Policy Blog. "When developing tax policy, lawmakers often ignore the incidence of a tax, or who actually pays the tax. Many times, this is different from who is legally required to pay the tax. Just because a 2 percent revenue tax applies to large digital companies does not mean that the companies will bear the entire cost of the tax."

Sin taxes are lone revenue bright spot for many states - Kay Bell, Don't Mess With Taxes. "Admit it, you're using your Zoom account for more than business meetings and school lessons for your kids. Virtual happy hours are among the few things keeping you going after months of self-isolation."

Idle keyboards are the devil's workshop.

 

Truffled. A California orthodontist and his wife had some side projects of the sort that tend to attract IRS attention. They had owned four real estate properties, some of which they rented out. They owned an airplane and a hangar. Long story short, the IRS proposed adjustments. The taxpayers paid up and sued for refunds totalling $680,115 over three years.

The taxes resulted from the disallowance of "passive" deductions by the IRS. Passive losses are generally deductible only to the extent of passive income.

Real estate activities are automatically passive unless the taxpayer is a "real estate professional." This is a tough standard to meet. To qualify a taxpayer has to both:

- "Materially participate" in real estate activities the taxpayer owns for 750 hours in a year, and

- Spend more time on the real estate activities than other activities.

The couple argued that they qualified based on the wife's participation. Things ended up in U.S. District Court in Nevada, where a judge found the participation to fall short of 750 hours. Time spent at the airplane hangar, which wasn't rented, was discounted. Time spent studying for a real estate license didn't qualify because it wasn't time spent managing properties. 

The taxpayers fall-back argument was that they had other activities that generated deductions. The taxpayers took an unconventional approach to documenting their expenses. Rather than providing, say financial statements and receipts, they provided 1000 pages of Freedom of Information Act document responses and told the court that the proof was in there, somewhere. 

This approach went poorly (taxpayer names omitted, emphasis added):

The Taxpayers never provide specific citations to any information within this voluminous exhibit and instead invite the court to peruse it in its entirety to substantiate their arguments. "It behooves litigants, particularly in a case with a record of this magnitude, to resist the temptation to treat judges as if they were pigs sniffing for truffles." ...This court finds that a tax return without further evidence substantiating the loss is insufficient to establish the Taxpayers’ right to the passthrough loss deduction.

The Moral? If you have truffles, dig them up and serve them nicely to the IRS and the judge.

Cite: DC-Nevada, No. 2:19-cv-00674.


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