When is a house not a home?; The Audit from Hell; and What do our children want to do when they grow up?
Gary Klott, editor, TaxPlanet.com tells us that this is the busiest tax season in Congress he has seen since the 1986 Tax Reform Act [he formerly was the lead financial/tax writer for the New York Times]. We agree, and it is coming in various forms, including health care [Joint Committee of Taxation published a report on the current HMO legislation Conference Committee's work and the project numbers are $60B over ten years in new tax expenditures.] Next week is Small Business Tax Cuts. (Keep an eye on the latest small business tax issues at the TaxAnalysts.org website.)
1. Homes of $10M or more are common these days
The LA Times headline has to catch your eye--home purchased for $40 by XXXX. Check it out.
If you had purchased the home for $10M, added $10M and sold it for $40M is that a taxable gain, less the $250,000 residential gain exclusion [the seller may have been a single person]? Maybe yes, and maybe no, it depends on if it was a home-based business as to 20%, 50% or 100%, what you think the answer may be, and whether the sale proceeds were reinvested into another home-based business.
2. The Auditor from Hell
Suppose you have taken a $75,000 loss on a real estate venture, and the IRS comes knocking at your door. What can be the issues? First shot is what deductions make up the loss, then IRC Section 469, assuming the deductions are valid, to see if it is a passive activity loss. This gives the IRS two options to challenge Schedule C business deductions, and they are in fact auditing Schedule C's especially if the W-2 income exceeds $250,000.
Would the same taxpayer have an audit problem if the 1040 had W-2 income of $150,000 and no Schedule C losses? More likely then not, NO!!!! Would the C Corp.'s 1120 be audited, not likely.
3. Are the late 90's/00's like the late 60's/70's?
If you turn on the NBC Nitely News, if you look at the local bookstore's magazine rack, if you read the print media, all we hear is the creation of wealth, wealth, wealth, caused from technology, the internet, etc. We suggest you look at two articles by Floyd Norris of the New York Times:
We also suggest you check out Boiler Room, a 90's/00's version of Wall Street in the late 80's!
We also suggest to you go to San Diego's best Web site and see their March 2000 article on the Billion-Dollar Babies in San Diego, Bradley J. Fikes, and Sudden Wealth, Helping The Nowveau Riche Stay That Way, by Patricia Morris Buckley [Have they seen IRC Section 1045?]
As tax lawyers, we have seen it all, and the taxman is looking at all this new found wealth with hungry hands. Can this new found wealth be protected from the Taxman? We believe it is already being done, if you look at IRC Sections 1202 and 1045.
It is clear to us that much of the new found wealth comes from corporations founded after August 1993, and that much of the IPO's that are coming on line can be traced back to Aug 1997, when IRC Section 1045 became effective, and allowed tax free deferral, if reinvested within 60 days.
Thus if you are one of the fortunate few to have gotten original issued stock at $.0001 per share and sell out some at $100 per share and have not been told about IRC Section 1045's deferral, then you have a potential claim for professional errors.
[The financial planners in the San Diego Metropolitan Magazine article referred to above do not mention IRC Section 1045, why not?]
Moreover, there is IRC Section 1044, which deals with all market gains, which also may be deferred [$50,000 annually today, life time maximum of $500,000 for individuals--$250,000 annually and $1,000,000 maximum for corporations--proposed to be increased to $750,000 and $2,000,000 lifetime maximum respectively, all at once], if reinvested within 60 days [proposed to be extended to 180 days].
Have your tax advisor's told you about IRC Sections 1044 and 1045? If not and you are in high tech, maybe you need to see another tax advisor.
Jim Schneider, LL.M.
The Taxman86 Speaks... is copyright 1998-2010 by James E. Schneider, LL.M. Inc.