IRS Says No Refund of Airline Ticket Tax

August 8, 2011 in Potpourri of Tax Topics with 0 Comments

The IRS says people who paid the airline ticket excise tax on tickets used between July 23 and August 5 will not be entitled to a refund.  From a post on the IRS website on Friday:

(Friday’s) Congressional action extending the Federal Aviation Administration authorization reinstates retroactively the airline ticket taxes for passengers who traveled during the lapse of the FAA’s authorization. As a result of the bill Congress passed (Friday), passengers who purchased tickets prior to July 23 and traveled between July 23 and the date of enactment of today’s legislation are not entitled to a refund of the airline ticket excise tax. Additionally, the IRS intends to provide relief for passengers and airlines with respect to ticket taxes that were not paid or collected because of the lapse.

The IRS intends to provide guidance to the airlines which will allow for an orderly restart of the collection of ticket taxes. Airlines will have from the time of enactment of the legislation through 12:01 a.m. on Monday, Aug. 8, to resume collection of the ticket taxes.

The IRS is currently reviewing other effects of the legislation and will issue future guidance.

IRS Issues Tax Guidance for 2010 Estates

August 7, 2011 in Potpourri of Tax Topics with 0 Comments

(Update 9/13/11: Form 8939 has still not been released, but the due date has been pushed back from November 15, 2011, to January 17, 2012.  Click here for more info.)

The IRS has issued guidance for estates of people who died in 2010.  Here’s more information from the IRS:

The Internal Revenue Service issued guidance today on the treatment of basis for certain estates of decedents who died in 2010.  The guidance assists executors who are making the choice to opt out of the estate tax and have the carryover basis rules apply. Form 8939, the basis allocation form required to be filed by executors opting out of the estate tax, is due Nov. 15, 2011.  Under the guidance issued today, an executor must file Form 8939, Allocation of Increase in Basis for Property Acquired from a Decedent, to opt out of the estate tax and have the new carryover basis rules apply. The IRS expects to issue Form 8939 and the related instructions early this fall.

Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the estate tax was repealed for persons who died in 2010.  However, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reinstated the estate tax for persons who died in 2010.  This recent law allows executors of the estates of decedents who died in 2010 to opt out of the estate tax, and instead elect to be governed by the repealed carry-over basis provisions of the 2001 Act.  This choice is to be made by filing Form 8939.

Further coverage:

Taxation of Emotional Distress Payments

August 4, 2011 in Potpourri of Tax Topics with 0 Comments

Amounts paid to a person for emotional distress are considered taxable income, as a taxpayer learned in Tax Court today (Thursday).  The taxpayer, a Julie McGowen, suffered emotional distress at a job she was working at in California.  As the Tax Court ruling explains, one of Ms. McGowen’s co-workers was apparently not pleasant to work with:

From August to December 2004 Mrs. McGowen was harassed at work by (a male coworker).  (The coworker) created an intimidating, hostile, and offensive work environment and, on one occasion, threw a binder at Mrs. McGowen.  Mrs. McGowen reported these incidents to her superiors, but her superiors did not take action to prevent (the coworker) from continuing to harass Mrs. McGowen.  Mrs. McGowen’s work conditions became intolerable and she began to develop symptoms of emotional distress (e.g., shaking, sweating, anxiety, sleeplessness, panic attacks, depression, etc.).  On December 19, 2004, Mrs. McGowen elected to take a medical leave of absence due to stress.

In March of 2005, Mrs. McGowen requested an extension of her leave of absence.  A few weeks later, the company fired her.  McGowen sued, and a $125,000 settlement was eventually reached.  Part of that settlement included $42,625 “for physical injury caused by emotional distress.”  When McGowen and her husband filed their tax return, they included other amounts from the settlement but did not include the payment for emotional distress.  Naturally, this caught the eye of the IRS.  The McGowens fought the IRS all the way to Tax Court.

The Tax Court sided with the IRS.  Lawsuit or settlement payments on account of “personal physical injury or physical sickness” are not taxable.  But the Internal Revenue Code specifically says emotional distress is NOT a physical injury or sickness.  From the Court ruling

Section 104(a)(2) … provides that emotional distress shall not be treated as a physical injury or physical sickness, except to the extent that damages attributable to emotional distress were used to pay for medical care….  Mrs. McGowen contends that the emotional distress payment constitutes damages received on account of physical injuries and is excludable pursuant to section 104(a)(2). We disagree.  There is no evidence that the binder physically injured Mrs. McGowen or that Mrs. McGowen suffered other than the symptoms of emotional distress.  Moreover, pursuant to the settlement agreement, Mrs. McGowen received damages on account of her emotional distress and not as a result of “a physical injury or physical sickness….”

After today’s ruling, Mrs. McGowen will now owe nearly $15,000 in additional taxes and penalties.  You can find the entire Court ruling here.

Some Same-Sex Couples Face Adoption Credit Problems with IRS

August 4, 2011 in Family Taxes, Same-Sex Marriage and Taxes with 0 Comments

Professor Pat Cain has a blog post about the problems same-sex couples are facing in cases where one of the couples tries to claim the adoption credit for adopting the partner’s kids.  From Professor Cain’s story:

There are two primary reasons that seem to have been given by the IRS in denying the credit to a number of mothers who claimed the credit in 2010. The most common explanation is that the birth mother did not terminate her parental rights as part of the adoption. That is true. That is the way second parent adoptions work. But there is nothing in the Internal Revenue Code, Treasury Regulations, or published rulings that requires the termination of parental rights. Another explanation that has been given is that the adopting mother is the domestic partner of the birth mother. But there is nothing in the Internal Revenue Code that says you cannot claim the credit for the adoption of your domestic partner’s child.

You can find Professor Cain’s blog post here.

Comparing the Tax Situations of Iowa and New York Same-Sex Married Couples

August 2, 2011 in Same-Sex Marriage and Taxes, State Taxes with 1 Comment

This is a tag-along article to this Dinesen Tax Times story about New York issuing guidance to same-sex married couples in that state.  A website visitor asks how New York’s guidance compares to Iowa.

The tax situation of same-sex married couples in New York will be similar to that of Iowans.  They’ll have two filing status options on their federal returns — single or head of household — but will have to file as married on their state return.  This means having to create a mock, joint federal return which is used to prepare the joint state return.  The mock return will have to be based on the federal laws that apply to married couples, which are often different — sometimes in a big way — from the laws that apply to people who are considered unmarried.  On the positive side, New York, like Iowa, will not tax the value of health insurance provided to same-sex spouses.

Neither state imposes a gift tax, but same-sex married couples in both states need to be careful of gifting property to each other, because the federal gift tax could come into play.  Even something as simple as placing the other spouse’s name on the title to a home could constitute a taxable gift in the eyes of the IRS.  The federal gift tax doesn’t apply to married couples, but same-sex married couples are considered legal strangers for federal purposes.

One difference between Iowa and New York is with the estate tax.  No one in Iowa — same-sex married couple or otherwise — has to worry about a state estate tax because Iowa has no estate tax (Iowa imposes an inheritance tax instead).  But as Professor Pat Cain points out, New York does have an estate tax, and same-sex couples there should benefit from having their marriages recognized:

It is worth noting that for estate tax purposes, New York has a lower exemption ($1.0 million) than under federal law (currently $5.0 million). As a result, the availability of the marital deduction at the state level will prove beneficial to many New York estates that are too small to generate federal taxes, but large enough to generate state estate tax liability.

Professor Cain has more coverage of estate tax issues in New York here.  You can find guidance from the New York Department of Revenue here.

New York Issues Tax Guidance to Same-Sex Married Couples

August 2, 2011 in Same-Sex Marriage and Taxes, State Taxes with 2 Comments

The New York Department of Revenue has issued guidance for same-sex married couples on how to file state tax returns now that same-sex marriage is legal in the state.  The Department says taxpayers in same-sex marriages must file as married on their New York state income tax returns.  From the Department’s news release:

Same-sex married couples must file using a married filing status for tax year 2011 and after

  • You must file your New York personal income tax return(s) using a married filing status even though your marital status isn’t recognized for federal purposes. Because the law only applies starting for tax year 2011, you can’t amend a prior year return or file a 2010 return that is on extension using a married filing status.
  • To complete your New York return you must recompute your federal income tax return (including all credit forms, schedules, and other attachments) using a married filing status, applying all the federal rules for married taxpayers. Don’t submit this federal as if married return to the IRS. Use it only to complete your New York return and keep it with your tax documents.
  • If you make estimated tax payments you should recompute your estimate based on a married filing status.

You can click here to find more info from the New York Department of Revenue.

Also, Professor Pat Cain has more thoughts about New York tax issues from an estate tax perspective.

Further Dinesen Tax Times coverage, from an Iowa perspective, can be found here.

Having a Business Entity Doesn’t Make Everything in Your Life Deductible

August 1, 2011 in Small Businesses Taxes with 1 Comment

A Tax Court case ended poorly for a retired minister who tried claiming large business losses for a supposed business venture.  The minister, a Reverend Ronald Faust, created something called “MacLeisure Creations” after his retirement.  According to the Court report, “‘MacLeisure’ is a combination of Ronald Faust’s previous name, ‘Mac Keyes’, and the phrase ‘leisure ministry’.”

The IRS audited Faust’s 2005 and 2006 tax returns, which showed $235 of income from MacLeisure and $20,771 of expenses in 2005, and $210 in income and $36,509 in expenses in 2006.  For the two years in question, that means that MacLeisure’s expenses were more than 128-times greater than its income.  This seems to have been the pattern for MacLeisure.  According to the Court report, “The Fausts reported that MacLeaisure Creations had large net losses eight years in a row.  Evaluated as a business, the supposed activities of MacLeisure Creations have been a financial disaster.”

Here’s more from the Court report:

In Faust’s view, MacLeisure Creations encompassed virtually all his activities. Consistent with this view, Faust claimed business deductions on his 2005 and 2006 joint tax returns for the costs of, among other things:

• writing books that he distributed to his friends and family for free;

• buying groceries;

• buying books and magazines;

• going on ski trips with friends;

• buying boating equipment;

• repairing his washing machine;

• repairing and maintaining his house;

• dining with his wife;

• buying clothes for his son;

• attending comedy shows;

• paying utility and telephone bills;

• attending art exhibits with his daughter, who is an artist.

Rather than attack the obvious fact that most of these expenses are personal and not business expenses, the Court instead went after Mr. Faust’s profit motive and ruled that MacLeisure is not operated for profit.  This results in the deductions being recharacterized as itemized deductions and limited to the amount of income from the endeavor each year (so $210 and $235).  The Court also slapped Mr. Faust with an accuracy related penalty.

The moral is:  saying that you have a “business” does not magically turn personal expenses into fully deductible business expenses.  And if you show tiny amounts of “business” income offset by tens of thousands of dollars of “business” expenses, you will probably get audited.

Home Offices, Principal Place of Business, and Mileage Deductions

July 30, 2011 in Small Businesses Taxes with 0 Comments

A question that comes up frequently from people with home-based businesses is if they can deduct mileage driven from their home to a work site.  The answer can be tricky.  IRS publications say that you can deduct mileage driven from your home to work sites if your home is your principal place of business.  But it’s actually more complicated than that:  to qualify as a principal place of business, your home office must be used regularly and exclusively as your principal place of business.  The “exclusive” part of the requirement is what sinks most people.

It should be noted that the regular and exclusive requirement is the same requirement for claiming the “business use of home” deduction.  This raises another question:  must you claim a deduction for business use of the home in order to claim a mileage deduction for mileage driven from the home office to a work site?  The answer is no; you can claim the mileage deduction without claiming the business use of the home deduction — but in order to meet the requirements to deduct mileage, you have to meet the requirements for claiming the business use of home deduction.

Assuming you are home-based but that your home office is not used exclusively for business purposes, mileage driven from your home office to your first business stop would not be deductible, but mileage between other business stops is deductible.  So with a little planning, you can still deduct at least some of your mileage.  For example, drive from your home to the post office to check your business PO box (mileage not deductible).  Then drive from the post office to another business stop (mileage is deductible).  Mileage driven from business stop to business stop is deductible, but the mileage from your home to your first stop, or from your last stop back to your home, would not be deductible.

It’s different if your home office qualifies as your principal place of business under the regular and exclusive tests.  Then, any business miles you drive from or to your home office are deductible.

A recent Tax Court case went into more detail about this issue.

Iowa Earned Income Credit Not Increasing In 2011

July 28, 2011 in Potpourri of Tax Topics with 0 Comments

It looks like the Iowa Earned Income Credit will not be increasing in 2011 after all.  Governor Branstad has vetoed the increase in the EIC.  The proposed increase was part of a budget bill passed by the legislature in late June.  The proposal would have increased the state EIC to 10% of the federal EIC (up from the current 7%).  The governor approved the other tax provisions in the bill — you can click here to read about those provisions.

Radio Iowa has more details on the governor vetoing the increase to the EIC.

Prior Dinesen Tax Times coverage of the EIC issue can be found here.

Taxpayer’s Drag Racing Team is Not a Business

July 28, 2011 in Small Businesses Taxes with 1 Comment

A taxpayer from Minnesota lost a Tax Court case earlier this month in which he tried to claim business deductions related to his drag racing team.  The taxpayer, a Mr. Zenzen, reported business income of $850 in 2005; $950 in 2006 and $350 in 2007.  This income was offset with expenses ranging from $25,000-$60,000 each year, which created large business losses on Mr. Zenzen’s returns.  This drew the attention of the IRS, which disallowed the deductions.  The Tax Court sided with the IRS on the grounds that the drag racing endeavor was a hobby rather than a business.

A number of factors worked against Mr. Zenzen.  One is that his drag racing team was not his primary source of income.  Both he and his wife had W-2 jobs and made over $100,000 in combined income from those jobs in the years in question.

Mr. Zenzen has been involved in drag racing since 1970, and has had his own team since 1988.  He told the Court that his drag racing team was a hobby up through 2005, when he believed it rose to the level of a business.  Zenzen often put in 30+ hours per week working on his cars with his two children.  The Court agreed that Mr. Zenzen put in a lot of time, but:

While this fact tends to favor (Zenzen’s) position, (Zenzen) also derived substantial enjoyment from drag racing.  For over 30 years (Zenzen) considered drag racing a hobby — it is unlikely that in 2005, 2006 and 2007 (Zenzen) ceased to derive similar enjoyment from the activity …. The time (Zenzen) devoted to his drag racing activity was also time (Zenzen) spent with his children.

The Court also found other factors working against Mr. Zenzen:

At no time did (Zenzen) have a written business plan for his drag racing, and he did not maintain a general ledger, annual budget and expense forecasts, or a separate bank account relating to his drag racing activity …. At no time before 2005 or during the years in issue did (Zenzen) speak with a business adviser about ways to make a profit in drag racing.

Mr. Zenzen did keep receipts, but the Court said that’s not enough:

There is no evidence that (Zenzen) used these receipts as a management tool to reduce expenses or increase profitability.  (Zenzen) offered no evidence of how comparable profitable businesses operate.

The Court opinion is good reading for anyone who wonders if their hobby might be at the level of being considered a business for tax purposes.  You can read the entire Court opinion here.

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