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Tax Court Case Involving Radio DJ Strikes Close to Home for Me, Part 2

On Tuesday I wrote about a Tax Court case involving a Mr. Ramirez, who was a radio station employee who sold advertising on his own, and was treated as an independent contractor in regards to his sales. This post is about my observations on this case.

Observations from an Ex-Radio Guy

As an ex-radio guy, several things stand out as odd about this case.

One: The ruling itself.

Based on the facts as presented, I can kinda-sorta see where the Tax Court was coming from in ruling that Ramirez was self-employed in regards to his promotional income. What surprises me is the setup of the whole arrangement between the sponsors, the radio station and himself. Which leads to….

Two: Why Didn’t Univision Keep Part of His Sales?

The Court ruling says Univision acted as a “conduit” for billing the customers Mr. Ramirez found, which implies that everything passed directly through to Ramirez. In the year in question before the Court, Ramirez received $82,000 from his sales. The ruling doesn’t explicitly say it, but it appears that this was what he actually sold, NOT just a commission on his sales.

I am shocked that the station didn’t deem that they were entitled to keep most of his sales and just pay him a commission.

Three: Why Didn’t the Station Try to Take Over His Clients?

At the station I worked at (which admittedly was a tiny, locally owned station rather than a big outfit like Univision), sales work was territorial and cutthroat. If you were in sales, you didn’t want to so much as say hello to someone else’s client or you’d get called on the carpet.

And if you weren’t in sales, management wasn’t keen on non-sales staff trying to break into sales.

I was the news director and wasn’t in sales. I wanted to get sales experience, so I asked to have a few accounts to manage. I was told no.

In denying my request, the exact words management said to me were: “You’d never make it in sales. You don’t have a sales personality.”

Management and sales staff are typically defensive about anyone infringing on “their gig.” So the whole arrangement Mr. Ramirez had just boggles my mind.

I’m pretty sure that if I had gone out and gotten sponsors on my own, and read my sponsor’s commercials on the air, and used my “celebrity” status — afforded to me by virtue of being a radio station employee — to get paid for doing remotes and live appearances, that my employer would not have been happy with me — especially if I was keeping 100% of the proceeds for myself and the station was getting nothing!

And I sure can’t imagine them agreeing to bill those customers for me and then passing through 100% of the proceeds to me while keeping nothing for the station!

Click here to view the Tax Court opinion.

Tax Court Case Involving Radio DJ Strikes Close to Home for Me

I used to work in radio. I was the news director at KNOD radio station in Harlan, over in the western part of Iowa.

I plan to start writing more about my past and my experiences and how it ties into my professional life. But those are different blog posts for different days.

Today I want to write about a U.S. Tax Court case that caught my eye last summer. I’ve had it on my “to-blog-about” list for a long time.

The case intrigued me because it involved a radio station employee who got paid by his employers as both an employee and an independent contractor. The result of the case surprised me.

Background:

A man by the name of Mr. Ramirez was an employee of Univision and worked for radio station KXTN in San Antonio. He was the station’s program director and was an on-air personality.

In 2005, the station was struggling financially so Mr. Ramirez took it upon himself to find sponsors. From the U.S. Tax Court ruling:

Mr. Ramirez established a direct, personal relationship with his sponsors, working hand-in-hand with them from the start of the advertising campaign to its end. They had no written contracts, just handshake agreements. Mr. Ramirez set the amount to be paid to him for his promotional services without input from Univision or KXTN….

Mr. Ramirez assisted the sponsors in developing their respective advertising campaigns, including the drafting of their “copy points” which outlined those elements of the advertising campaign that the sponsors desired to highlight. He promoted their products and/or services, both during on-air broadcasts and on “off-air” appearances at sites designated by the sponsors.

Even though Ramirez set the amounts the sponsors would pay, the sponsors were billed by Univision. Univision added these amounts to Ramirez’s wages. Withholdings for income taxes and FICA were taken out of his pay, and these amounts were included as wages on Ramirez’s W-2.

In 2007 (the year in question before the Tax Court), Ramirez was paid an additional $82,000 of wages from his sales.

When he filed his 2007 tax return, he included a Schedule C showing $0 of income and $26,303 of expenses. The Schedule C related to his sales work. According to Ramirez’s CPA, the Schedule C showed $0 of income because the $82,000 of sales income was already included on his W-2.

Naturally, the IRS audited Ramirez. The IRS believed the $26,000 of expenses were employee expenses that should have been shown as itemized deductions subject to the 2% of AGI limitation, rather than as Schedule C deductions.

Mr. Ramirez argued that his sales work was outside the scope of his regular work at the radio station and so the sales work should be treated as independent contractor wages.

To my surprise, the Tax Court agreed. They reclassified the $82,000 of sales income as Schedule C gross receipts and allowed the $26,000 of deductions against that income.

In Part 2, I’ll explain why I’m surprised at this entire arrangement based on my own experiences in my “prior life” in radio.

Deducting Miles Driven for Charity

An often overlooked charitable deduction is the deduction for mileage driven for charitable purposes.

Taxpayers can take a deduction of 14 cents/mile for mileage driven in giving services to a charitable organization, or taxpayers can take a deduction for the actual cost of gas and oil associated with giving services to a charitable organization. A deduction of 14 cents/mile isn’t huge but it is an extra deduction that’s available.

Iowa taxpayers are allowed to take 39-cents per mile as a deduction.  (Technically, the Iowa deduction is the standard 14-cents per mile as an itemized deduction, and then you can take another 25-cents per mile as an additional deduction.  The net effect is 39-cents per mile.)

Example
You volunteer to answer the phones once a week for a charitable organization.  The organization’s office is 10 miles from your home.  You can claim 20 miles (10 miles each way) as a deduction each week.  If you do this 52 weeks a year, that would be 1,040 miles.  At 14-cents per mile, the charitable mileage deduction would be $146.  If you live in Iowa, your total mileage deduction on your Iowa return would amount to $406.

Dinesen Tax Greatest Hits: Filing Separately on Your Iowa Return? Don’t Forget to Allocate Deductions

One last “greatest hits” post before regular, “new” posts resume next week!

—–

Originally published March 7, 2012

Married couples in Iowa who both have income will usually find that one of the “separate” filing statuses is the best to use on their Iowa taxes, rather than filing a joint Iowa return. The reason is, Iowa has just one tax bracket regardless of filing status, so two people filing a joint return will be taxed on their combined incomes at a high point in Iowa’s highly progressive tax bracket. Filing separate returns allows each spouse to be taxed at a lower point in the tax bracket.

Iowa offers two “separate” filing statuses — married filing separately on a combined return, and married filing separately on separate returns. A more thorough discussion of the differences between the two statuses is for another blog post on another day. The main point I want to make today is: under either of the separate filing statuses, you must allocate itemized deductions based on income.

Allocating Deductions

When a married couple files separately on their Iowa returns — either on a combined return or on a completely separate return — the couple MUST share itemized deductions based on income. This is true even if one spouse made 100% of the payments from their own separate funds.

Example

John and Jane are married in Iowa and file their Iowa taxes as married filing separately. John’s income is $50,000. Jane’s income is $25,000. On the Iowa return, John must claim 2/3 of the itemized deductions ($50,000 income/$75,000 total income of the couple) and Jane must claim 1/3 of the itemized deductions, regardless of who actually made the payments or whether the payments relate to separately held property.

This is a different concept from the married filing separately filing status on federal taxes. On a “separate” federal 1040, the itemized deductions generally go to whoever actually made the payment.

Image: renjith krishnan / FreeDigitalPhotos.net

Capital Losses and Tax Planning

The following question came up recently: ID-100167245

An investor has a $10,000 capital loss carryforward from prior years. They have $5,000 of capital gains from stock sold this year. How does the loss carryforward work this year?

Background

Tax law places limits on how much a taxpayer can deduct in capital losses each year. The limit is $3,000 of losses per year. Any unused losses beyond $3,000 are carried forward to be used, $3,000-at-a-time, in future years.

For more on stock losses and taxes, see this recent blog post.

Answer

Here’s the answer to the question posed at the start of this post.

The taxpayer has $10,000 of unused losses from prior years. These losses off-set all of their current-year capital gains. Plus, the taxpayer can take an additional deduction of $3,000 so that they get to their limit of a maximum of a $3,000 loss deduction for the year year.

So the end result is that their tax return would show a $3,000 capital loss deduction, with $2,000 of unused losses to carry forward to next year.

The $2,000 is arrived at as: $10,000 beginning loss, minus the $5,000 of current-year gains that are essentially “neutralized,” minus the additional $3,000 of capital loss the taxpayer is allowed to take = $2,000 loss remaining to be used in the future.

Image courtesy of David Castillo Dominici / freedigitalphotos.net

Death Master File Changes Coming — Finally!

Congress has finally taken action to stem the tide of tax-related identity theft by limiting access to the Death Master File. From Bloomberg.com:

A provision in the budget measure passed 64-36 by the U.S. Senate (December 18) would limit access to information in the Social Security Administration’s Death Master File to certified entities, such as life insurers and pension funds that use the data to combat fraud and administer benefits. The limits would apply for three years after an individual’s death.

The file contains the names, Social Security Numbers and dates of birth of anyone who has died. As you can imagine, it’s a treasure trove for identity thieves. It’s almost certainly how Brian Boka’s identity got stolen. Someone filed a fraudulent tax return in Brian’s name after he died, leaving his widow and me to battle with the IRS for more than 2 years before the issue was finally resolved.

The legislation requires the Commerce Department to set up a process to verify legitimate users of the file while otherwise exempting the file from the Freedom of Information Act for three years after a person dies.

All I can say is — thank you Congress (how often do we say that anymore?), and it’s about time.

(Hat tip to Joe Kristan at The Tax Update Blog for first alerting me to this story.)

Philosophical Question About Section 108, Principal Residences and Cancelled Debt

Maybe I’m overthinking this, but here’s something that’s bothered me for a long time: what is the definition of “principal residence” for purposes of determining if cancelled debt is taxable?

Background

The general rule for canceled debt is that the debt cancellation results in taxable income. For example, if the credit card company forgives $5,000 of credit card debt, you have $5,000 of taxable income. A similar concept would apply to foreclosures of homes.

There are a number of exceptions to the general rule. For example, if you’re insolvent, cancelled debt is not taxable. There’s also an exclusion that says cancelled debt isn’t taxable if it’s related to your principal residence. This is where my “overthinking” comes into play.

What if the Person Has Moved Out?

My question is. what if the homeowner moves out before the foreclosure process is complete? This happens a lot.

Section 108, which governs taxation of canceled debt, says that the Section 121 definition of “principal residence” is to be used, but that doesn’t help much because Section 121 simply says that a “principal residence” is determined based on “all the facts and circumstances.”

So what would the “facts and circumstances” be for a person going through a foreclosure who moves out of the house prior to the completion of the foreclosure and now lives in an apartment? The foreclosure isn’t complete so the debt hasn’t been cancelled yet. Is the apartment the new principal residence?

I asked this question during a seminar I attended about debt cancellation. The presenter was a tax attorney with more than 30 years of experience. His response was that his firm has grappled with this question and that there’s not a good answer.

I have found no IRS guidance. Everything just says, essentially, if it’s your principal residence you can exclude the cancelled debt.

I have always employed the common sense test. If a person was living in an apartment or a rental and the foreclosure is completed in a reasonable time frame after the move, I would argue that the person still could call their foreclosed home their principal residence. But if the person moves to, say, a new state or somehow manages to buy a new home while going through foreclosure (yes, I have encountered this!), I would say they couldn’t call their foreclosed home their principal residence.

So tax pros — am I overthinking this? Am I missing something?

Stock Losses and Taxes

Are there tax advantages to be gained when stock that you own decreases in value?  The answer is yes, at least to some extent.

Here are some planning considerations:

  • Losses can only be deducted when you sell the stock at a loss.  The reduction in value on stock that you continue to hold is not deductible.  So if your stocks go in the tank but you do not sell them, you don’t get a deduction.

  • If you sold stock at a gain earlier in the year, you can sell other stock at a loss later in the year to eat up the gain.  On your tax return, stock sold at a gain is netted against stock sold for a loss, to arrive at your net gain or loss for the year.

  • The tax code is not overly generous when it comes to deducting losses on investments.  The loss deduction is limited to $3,000 of the net loss per year.  Losses in excess of $3,000 can be carried forward to future years.

  • Beware of “wash sales.”  A wash sale occurs when you sell stock at a loss and then buy the same stock within 30 days before or after the sale.  (Example:  you sell Stock A at a loss on August 1 and then re-purchase Stock A on August 15.  This is a wash sale and the August 1 loss is not currently deductible but instead adjusts the basis of the stock you purchased on August 15.)

  • It is important to know your basis in the stock.  For stock you purchased, your basis is your purchase price.  The basis of inherited stock is generally the stock’s fair-market value on the date of death of the person you inherited the stock from.  If you receive stock as a gift, you generally take on the basis of the person who gave you the stock.

Here is an example of the above concepts:

You bought stock several years ago for $750.  Earlier this year, the value of the stock rose to $1,000.  Then the market crashed and the stock dropped to $500, at which time you sold it.  Your deductible loss is $250 ($500 sale price minus $750 basis).

In the above example, note that the fact that the stock rose in value to $1,000 at one time is irrelevant for tax purposes.  The only thing that matters for tax purposes is your basis and the sale price.

 

Is There a Way to Protect Yourself from Tax Return Identity Theft?

People who have read my multi-part series on Wendy Boka, the widow who went through an identity theft nightmare with the IRS, often ask if there’s anything they can do to protect themselves from something similar happening to them.

In the case of what happened with Wendy, the answer is, unfortunately, that there’s very little you can do.

Identity theft on tax returns (meaning, someone filing a fraudulent tax return using your name and Social Security Number) falls under two broad categories:

  1. People who got your information through “traditional” ID theft. “Traditional” is the term I am using here to describe a situation where someone stole your purse or your wallet, or got ahold of sensitive documents.
  2. Your spouse or loved one dies and a thief gets ahold of their name and Social Security Number through the Death Master File, which is published by our wonderful, helpful government and is a treasure trove for thieves. This is what happened to Wendy — her husband Brian died and someone got ahold of his name and Social Security Number, almost certainly from the Death Master File.

With category 1, your best defense is the common-sense tips about safeguarding your information. The IRS offers a variety of tips on this webpage.

Category 2 is much harder to defend against. One tax pro I was talking to about Wendy’s situation speculated that the only way to protect yourself would be to file a tax return as soon as possible in January, even if you had to report all zeros because your documents weren’t available yet, and then amend later to report the correct information.

For example, let’s say Annie and Al are married. Al dies during 2013. In order to protect against anyone who might have stolen Al’s identity from the Death Master File, Annie files a tax return as soon as the IRS will start accepting 2013 tax returns, even though she doesn’t have all of her documents yet. She’ll file an amended tax return as soon as she gets all of the documents.

This could, theoretically, block an identity thief from filing a return in Al’s name.

I am using this example hypothetically. DO NOT TRY THIS AT HOME!!!!!!!!!!!!!!!!!!!!

This example was pure speculation in a conversation I had with another tax pro. I have no idea if this would work, or if it would even be legal, since you’re supposed to file a complete and accurate tax return and you would be knowingly NOT filing a complete tax return.

I suppose if you attached a Form 8275 to tell the IRS what you were doing, maybe it would be okay. I don’t know.

And isn’t it sad that our government’s publication of deceased people’s names and SSNs causes us to speculate about doing such things in the first place?

I’m open to suggestions from readers: what options do you think people have for protecting against a deceased person having their identity stolen?

Insolvency and Canceled Debt: Make Sure You Can Prove It!

If you have a debt that gets canceled, the general rule is that you must report the canceled debt as income. For example, if the credit card company forgives $5,000 of credit card debt, you’ll need to report $5,000 of income on your tax return.

Many exceptions apply, such as debt cancellation relating to your primary residence (as in a foreclosure), bankruptcy or insolvency.

This blog post will focus on the insolvency exception.

What is Insolvency?

Insolvency is when the amount of your debt is greater than the amount of your assets, with assets being things such as cash in the bank, or the value of property you own.

Example: you owe $15,000 on a credit card and $100,000 on a mortgage, for a total of $115,000 of debt. Your home is worth $105,000, your car is worth $5,000 and you have $1,000 of cash in the bank, for a total of $111,000 of assets. You are insolvent by $4,000.

Insolvency and Canceled Debt

Canceled debt is not taxable to the extent you are insolvent. Using our example above, let’s say the credit card company cancels all $15,000 of credit card debt. You would report $11,000 of taxable income from this cancellation — $15,000 of canceled debt minus $4,000 insolvency.

Reporting Insolvency

Lenders will typically issue a Form 1099-C to you when they cancel a debt. In order to show that some or all of the canceled debt is not taxable due to insolvency, you’ll need to complete a Form 982 and mark the box that says “Discharge of indebtedness to the extent insolvent.”

And that’s it. Per the instructions to Form 982, no further explanation or attachments are needed.

In practice, though, the IRS often questions claims of insolvency by sending a notice to you several months after you’ve filed your tax return.

Insolvency Worksheet

When I’m helping someone with canceled debt, I have the person fill out the “insolvency worksheet,” which you can find on page 8 of IRS Publication 4681.

In my experience, submitting the insolvency worksheet to the IRS when they ask for proof of insolvency has been sufficient. I’ve never had them come back and ask for additional documentation beyond the worksheet, though they certainly could ask for additional documentation.

In order to further protect yourself, I would recommend keeping copies of bank statements and anything else that can prove the numbers shown on the worksheet.

Caveat: Beware of 401(k)s and IRAs

Money held in retirement accounts counts as an asset. You must include this money on the insolvency worksheet.

I have seen this derail attempts at claiming insolvency before. Clients have been sure, initially off the top of their head, that they were insolvent by thousands of dollars … except they hadn’t accounted for the thousands of dollars held in their 401(k). When they filled out the insolvency worksheet, they realized that they weren’t nearly as insolvent as they thought they were!

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