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Like almost all presidential candidates trying to be transparent to their voters, Jeb Bush recently released tax returns dating back to 1981 and going through 2013.
I could write the standard blog on how Mr. Bush’s income went from nothing in the 1980’s to topping $1,000,000 for many years in the 90’s, becoming in the low six figures in the 2000’s while he was governor to ballooning to over $2,000,000 for almost every year after 2007. How his income went above $6,000,000 for 2011 & 2013 while he was getting rich from speaking fees and consulting for banks. Or I could write about how his net worth has gone up 14 times since he left the governor’s mansion in Florida in 2007 or question how he got in excess of $1,000,000 consulting for Lehman Bros and over $10,000,000 in speaking fees since 2007.
But as a Reno CPA that wasn’t practicing during the 1980s & 1990s, I found it interesting how much the tax code has changed just from reviewing Mr. Bush’s return. For instance, when Mr. Bush sold his first home in 1981 he wasn’t allowed to exclude from income up to $500,000 from the sale of his primary residence as taxpayers can now. His gain of $34,980 decreased the basis in his new residence he purchased to give him a higher gain and tax in the future when that home was sold.
I also found it interesting how in the 1980s political contributions were allowed to be deducted and up until 1986 charitable contributions were deducted without having to itemize on Schedule A. This was the same in 1983 when employee business expenses were an above the line deduction; today they must be on Schedule A and less than 2% of adjusted gross income. There was also the deduction for married couples that both worked that was present in the tax code in 1982, which Mr. Bush and his wife did not utilize. In the 1980s it was also possible to deduct interest expense on credit cards and car loans as a personal interest expense. With the somewhat new tax regulations associated with the Affordable Care Act and constant bickering and promises by Congress about changing the tax code I’m sure in 20 years the tax code will again be drastically different.
The U.S. Tax Court settled a case in July between a landlord and a tenant who wasn’t paying rent – and the court came down on the side of the tenant.
John E. Burgess owned a piece of land that he rented to Dennis Mineni. The land was used as an overflow parking lot for Mineni’s business, Atwater Flea Market. The two men had a handshake agreement that required Mineni to pay Burgess $2,000 (later reduced to $1,500) a month for the use of the land.
Burgess failed to file income tax returns for the years 1999 through 2007. The IRS assessed taxes for each unfiled year, and the total amount was almost $5 million.
Because of the assessment, Burgess was considered a delinquent taxpayer. This designation allows the IRS to place a levy upon a taxpayer’s property or rights to property.
Burgess brought up tax-protestor-type arguments, claiming that he is not a federal citizen and therefore is not subject to the jurisdiction of any federal institution or law, including but not limited to Congress, the IRS and the Social Security Administration.
Burgess felt that he did not owe any federal income tax and that the levy placed against him was invalid.
Mineni’s business was required by law to report the rent payments made to Burgess on IRS Form 1099. A copy of the Form 1099 was sent to Burgess and another copy was submitted to the IRS as required. The IRS became aware of Burgess’s income through the Form 1099.
The IRS sent a notice of levy to Atwater Flea Market, which was now incorporated and renamed Franklynn Properties, Inc. Through payments made by his business, Mineni honored the notice of levy by paying his monthly rent payment directly to the IRS instead of Burgess.
Over a 21-month period, Franklynn Properties, Inc., paid $31,500 to the IRS.
Under Internal Revenue Code Section 6332, anyone in possession of property, or rights to property, that belongs to a delinquent taxpayer upon whom a levy has been made must surrender to the IRS the property or rights to the property. Failure to honor the levy may result in personal liability.
The person who surrenders the property or rights to the property to the IRS will be discharged from any obligation or liability to the delinquent taxpayer. Immunity under IRC Section 6332 has been interpreted generously to protect people who honor levies.
The U.S. government requested and received summary judgment on the grounds that Mineni is immune from suit for his surrender of rental payments, owed to Burgess, to the IRS under an IRS levy.
So Mineni was not required to reimburse Burgess for the rent payments that were sent to the IRS. In fact, he is to continue making the rent payments directly to the IRS until such time as the levy is found invalid or stopped (John E. Burgess, Plaintiff, v. Dennis Mineni, Defendant/Dennis Mineni, Counterclaim-Plaintiff, v. John E. Burgess, United States of America, Counterclaim-Defendants, U.S. District Court, Eastern District of California, 2015-2 U.S.T.C., July 20, 2015).
©2015 CPAmerica International
Summertime is a busy time for weddings, which can raise concerns about finances.
A few helpful tax tips can make things much easier come tax return filing time:
The IRS website provides many useful tools including YouTube videos and podcasts.
Some of the related YouTube videos are:
Some of the related podcasts include:
Getting married is one of the biggest days of your life – and can be one of the most stressful. Make things easier at tax time by following a few helpful hints. ■
The one-year IRS pilot program to provide relief to plan administrators who didn’t file required retirement plan returns on Form 5500-EZ expires June 2, 2015. So, anyone wanting to take advantage of the penalty relief program should act fast.
This penalty relief is available to:
➜ Certain small business (owner-spouse) plans and plans of business partnerships
➜ Certain foreign plans
Small business plans provide retirement benefits only for the owner and the owner’s spouse.
The late filing penalty for 5500-EZs is $25 per day, up to a maximum of $15,000 per return. A business being assessed the maximum penalty for four years’ worth of unfiled returns could pay as much as $60,000 in penalties if it were not for this pilot program.
Under the program, no penalty or other payment is required to be paid for late filing. The applicant must include a complete Form 5500 Series Annual Return/Report, including all required schedules and attachments, for each year that the applicant is seeking penalty relief.
All of the delinquent 5500s must be sent directly to the IRS. The businesses cannot file through the Department of Labor’s EFAST2 filing system. Filing through the EFAST2 filing system results in returns being processed as they normally would be, with applicable late-filing penalties being assessed.
Plans subject to ERISA are not eligible for this program.
A foreign plan is a retirement plan maintained outside the United States, primarily for nonresident aliens. A foreign plan is eligible for relief if the employer that maintains the plan is a domestic employer or a foreign employer with income derived from sources within the United States.
At the end of this pilot program, the IRS will consider whether it should be replaced with a permanent one. If a permanent program is established, the IRS will charge businesses a fee to take part in the program. ■
©2015 CPAmerica International
Taxpayers should keep up with the U.S. bonds they purchase and cash in – and their tax liability on the interest.
Mr. and Mrs. Lobs purchased ten $1,000 Series EE U.S. savings bonds for their son in mid-November 1992. The bonds were registered to both Mr. and Mrs. Lobs even though they purchased the bonds to provide for their son Joseph’s college education.
In 1995, the Lobses divorced. Mrs. Lobs received the 10 bonds in the divorce settlement.
During September 2010, Mrs. Lobs’s son needed some money. Mrs. Lobs cashed in the bonds, which were registered in both her and her ex-husband’s names.
The proceeds from the bonds were deposited in her checking account. A cashier’s check for $12,640 was immediately made payable to her son Joseph. Joseph cashed the check.
Mrs. Lobs timely filed a Form 1040 return for 2010 but did not include any interest income from the bond transaction on the return.
The IRS sent Mrs. Lobs a notice of deficiency in April 2013 determining that she had failed to report $7,640 of interest income. Mrs. Lobs timely filed a petition with the IRS claiming that the bonds belonged to her son, not to her, and that the interest on the bonds was not properly taxable to her.
The Internal Revenue Code states that interest income received by the taxpayer constitutes taxable gross income. In particular, interest on U.S. obligations, such as U.S. savings bonds, is fully taxable.
Registration of Series EE U.S. savings bonds is generally conclusive of actual ownership of, and interest in, such bonds. Savings bonds are usually not transferable and are payable only to the owner named on the bonds.
Mrs. Lobs cashed in the bonds and had the proceeds transferred to her checking account. The difference between the original purchase price and the amount of proceeds received became taxable income to her.
It doesn’t matter that Mrs. Lobs had meant to have her son’s name put on the bonds when they were originally purchased. The court can rule only on what happened.
The reality of the situation is that Mrs. Lobs was a registered co-owner of the bonds who was entitled to receive, and did in fact receive, the proceeds of the bonds upon their endorsement and surrender. Therefore the $7,640 is taxable to her as interest income (Ruth A. Lobs v. Commissioner, U.S. Tax Court, T.C. Summary Opinion 2015-17, March 3, 2015).
©2015 CPAmerica International
James A. Ericson really missed the mark as a federal income tax preparer.
In February 2015, the U.S. District Court for the District of Hawaii permanently barred Ericson from preparing federal income tax returns.
Ericson had prepared a large number of income tax returns in which he took unrealistic and unsustainable positions on clients’ tax returns. He willfully understated taxes due and had a reckless and intentional disregard for tax rules and regulations.
The 9th U.S. Circuit Court of Appeals does not have a clear standard or test for the district court to apply in determining whether a lifetime or permanent ban against all tax return preparation is proper. However, the courts have considered a variety of factors in analyzing this issue.
The following are some of the factors considered by the courts through the years in determining whether a lifetime ban is appropriate:
1. A defendant’s willingness or refusal to acknowledge wrongdoing
2. Compliance with the law following a warning or notification by the IRS that the conduct is unlawful
3. Percentage of tax returns filed that are fraudulent
4. Severity of the harm, i.e., the amount of money fraudulently requested and the amount actually and erroneously released
5. Number of discrete fraudulent practices
6. Longevity of the fraudulent scheme
7. Defendant’s degree of “scienter,” or knowledge
The facts and circumstances of the case indicate that Ericson performed negatively under all seven factors.
Regarding the first factor, Ericson has always maintained his innocence under cross-examination. He was warned by the IRS back in 2009 that his practices were improper, and he was fined.
Ericson continued preparing improper returns for the next three years, violating the second factor.
Ericson severely violated the third through fifth factors. The IRS examined 611 federal income tax returns of his clients from 2007 through 2012 and found a total tax shortfall of more than $2.4 million. This amounts to an average of almost $4,000 per return, and when projected over all of the returns that Ericson prepared, a loss to the U.S. Treasury of over $30 million in revenue. Between 86 and 92 percent of Ericson’s clients received a refund.
The sixth factor was violated because this fraudulent activity had been carried out for over five years. The court also found Ericson guilty of the seventh factor because it felt that he knowingly and repeatedly violated the U.S. Tax Code.
Because the court found all of the seven factors against Ericson, it felt it was appropriate to impose a lifetime ban on his ability to prepare individual income tax returns (United States of America v. James A. Ericson, U.S. District Court, District of Hawaii, 2015-1 U.S.T.C. Paragraph 50,222, Feb. 20, 2014).
©2015 CPAmerica International
If you’ve started your own business since 1993, and funded it with your own money as a C Corporation there could be some valuable tax savings if you’re planning on selling the company. This comes in the form of the section 1202 exclusion.
The Section 1202 exclusion allows a person to exclude up to 100% of the gain on the sale of qualified small business stock (QSBS) that has been held more than five years.
The amount available to be excluded varies depending on when the business was started and funded. If the corporation was started between Aug 10, 1993 and Feb 17, 2009, 50% is excludable; if between Feb. 17, 2009 and Sept 27, 2010, 75%; and if you were lucky enough to start the corporation between Sept 27, 2010 and before Jan 1, 2014 100% of the gain is excluded.
So what are the catches? The taxable portion of the gain is taxed at 28% (excluding the possible Medicare investment tax of 2.8%) as opposed to the regular long term capital gain rate of 20%. The maximum amount of gain that can be excluded is the greater of $10 million of 10 times the taxpayer’s basis in the stock. 
Further, QSBS is defined as a C Corporation that the taxpayer funded directly with no more than $50 million of gross assets, 80% of its assets must be in an active trade or business, the corporation cannot own real property or stock/securities exceeding 10% of its total assets, and stock/securities cannot exceed 10% of its total assets in excess of its liabilities.
As you have read the 1202 exclusion can save a lot of money, but there are many complexities not outlined above including possible alternative minimum taxes. All the more reason to contact a CPA!
Having recently visited Germany and being a CPA, I naturally was interested in their taxes. I have heard throughout my life how taxes in Europe are extremely higher than in the United States and I thought I’d do a simple comparison.
According to a KPMG report on income tax and social security rates on $100,000 USD of income, in Germany the percentage paid by individuals was 28.3% plus 9.8% in pension insurance for a total of 38.1% (this does not include the mandatory 15.5% for health insurance that we in the United States pay separately). 
In the Unites States the percentage paid was 18.2% plus 7.65% for social security for a total of 25.85% (if you live in California, add another 7% for 32.85% total). So, for somebody earning $100,000 the taxes in the United States are lower regardless of where you live.
The above result is what I figured since the United States has low marginal rates for low earners. For somebody well-off making over $1,000,000, I hypothesized that the United States would buck the stereotype and have higher rates. In Germany the top tax rate is 50.5% (which starts at $283,326 USD for a single person ). In the United States the top rate is 43.4% (starting at $406,750 USD for a single person) and would be as high as 56.7% if the income was earned in California. Further, in Germany dividends and sales of capital assets are taxed at 25% while in the United States there is a maximum of 23.8% (or up to 37.1% if you live in California).
So there you have it, if you are wealthy and live in California you are paying more income tax than people who live in the European Unions’ largest economy. Of course this is only one facet of the tax system. There are many others, like the value added tax of 19% in Germany, but Germany’s corporate tax rate is 15% while ours in 35%. If you live in California and are paying these high rates you can’t even take solace in the fact that you’re working less. In Germany the average work week is 35 hours with 24 paid vacation days and 10 paid holidays!
The U.S. Tax Court recently found that Nichelle Perez, a 29-year-old single woman, performed a service for infertile couples when she donated her eggs. Therefore, the compensation she received was taxable income to her.
The facts of the case reveal that Perez, after discovering The Donor Source
International, LLC, website, became a prospective egg donor. The Donor Source is a for-profit California company that has been in business since 2003, supervising egg donation cycles for its customers.
Perez went through an initial screening process and passed. She became a potential donor with an online profile, which included a picture, a description of her family history and other personal data.
After a couple selects a donor from the profiles, the donor signs two contracts. One contract is signed with The Donor Source, the agent. The other contract is signed with the intended parents.
These contracts give the parents the right to terminate the relationship with the donor up until the time the donor begins receiving egg-stimulation medication. If the contract is terminated at this point, the donor is owed no compensation.
The contract Perez signed with The Donor Source in February 2009 read as follows: “Donor and intended parents will agree upon a Donor Fee for Donor’s time, effort, inconvenience, pain, and suffering in donating her eggs. This fee is for Donor’s good faith and full compliance with the donor egg procedure, not in exchange for or purchase of eggs, and the quantity or quality of eggs retrieved will not affect the Donor fee.”
This contract meant that, if Perez kept her side of the deal, but produced unusable eggs or no eggs at all, she would still be paid the contract price. The parties agreed that the funds would not in any way constitute payment to the donor for her eggs.
The agreement did not instruct any of the parties on the issue of taxation of any payment made or received under this agreement or any agreement with The Donor Source.
Perez went through a number of painful procedures in March 2009. The process included stomach injections of hormones.
On the retrieval date in March 2009, 15 to 20 of Perez’s eggs were removed. She was paid her promised fee of $10,000. In August 2009, she signed a second $10,000 contract to go through the process again.
At the end of the year, Perez received a Form 1099 from The Donor Source for $20,000. Despite receiving the 1099, Perez did not claim the $20,000 as income on her 2009 income tax return.
She received a notice of deficiency from the IRS and ended up in Tax Court.
Perez argued that the $20,000 she had received from The Donor Source was in exchange for the pain, suffering and physical injuries she endured as part of the process. The IRS argued that Perez received taxable compensation.
According to Perez, she had relied on Section 104 of the Internal Revenue Code, which excludes from gross income the amount of money paid that is considered damages received because of physical injuries.
The court disagreed with Perez’s interpretation of the code and found that the physical pain and injuries were a byproduct of performing a service contract. It found that the payments were made, not to compensate her for an unwanted invasion against her bodily integrity, but to compensate her for services rendered (Nichelle G. Perez v. Commissioner, U.S. Tax Court, Jan. 22, 2015).
The $20,000 is taxable compensation. ■
©2015 CPAmerica International
Hold off on filing your income tax return until all Forms 1099 are received. Otherwise, you might be amending your return.
Various types of Forms 1099 are used to report different types of activities. Three of the more popular types of 1099’s are:
1099-Div
Some people are familiar with the 1099-Div. Most commonly, this form is used to report dividend income. The general rule is that it must be sent out to anyone who has received $10 or more in dividend income, including capital gain dividends and exempt-interest dividends.
1099-Int
Most people are familiar with the 1099-Int. The most common use of this form is to report interest income. The general rule is that it must be sent out to anyone who has received $10 or more in interest income.
Most taxpayers have either an interest-bearing checking account or some type of interest-bearing savings account. These are the most common types of accounts that trigger the preparation of a 1099-Int.
1099-Misc
The most common use of this 1099 is to report payments of $600 or more for rents or services in the course of a trade or business. Some examples of uses of this form are:
The most common use of this form is to report compensation to a non-employee for services. If the non-employee is performing these services as a corporate entity, issuing a 1099 is not required – unless the payment is for legal services. Legal services to corporate and noncorporate persons or entities must be reported if they exceed the $600 threshold.
All of these Forms 1099 must be sent to the recipient by Jan. 31 of the year following the calendar year in which the income was received.
A good idea is to wait until after Jan. 31 to prepare your income tax return so that you can be sure you are including all of the income that needs to be reported on your return. A lot of people prepare their returns early, only to realize that they had some sources of income reported on a 1099 that they did not include.
©2015 CPAmericaInternational
