Chapter 5. Deductions. Page 5-4. Mortgage Interest

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1 Chapter 5 1 Deductions 1 Page 5-4 Mortgage Interest 2

2 IRS Acq to Voss Decision 2 AOD (8/1/16) IRS acq to Voss (9 th Cir. 2015) The debt limits at 163(h) for mortgage interest apply per taxpayer rather than per residence. Unmarried co-owners each get $1 million AI limit and $100,000 HEI limit. 3 Mortgage Interest Limits if MFS Hsu, Docket No S (7/29/16) H and mother owned home Debt of about $2.5 million W had no ownership interest or interest expense MFS H argued that is no abuse of law for him to deduct interest on $1.1 million since W has no interest expense Court not allowed by law If MFS, debt limit is half of usual, no exceptions. Note if filed MFJ, $1.1 limit would apply. 6

Refinancing with Same Lender 3 Slavin, TC Summary Opinion 2016-28 (6/21/16) When a lender capitalizes unpaid interest by adding the unpaid interest amount to the loan principal, a cash basis borrower

3 Refinancing with Same Lender 3 Slavin, TC Summary Opinion (6/21/16) When a lender capitalizes unpaid interest by adding the unpaid interest amount to the loan principal, a cash basis borrower is not entitled to a current interest deduction for the interest that is added to the loan s principal balance. Modification of the loans did not result in payment of interest, but only deferral of such payment. Also owed penalties! 7 Page 5-7 Property Taxes 8

4 What is S Corp Pays S/H Property Taxes? Garada, TC Summary Opinion (1/7/16) S corp paid the property taxes Did not deduct them Court - If this is a distribution, then it is a constructive distribution. And we have previously held that when an S corp pays a personal expense of its shareholder, shareholder receives a constructive distribution. It also follows that for purposes of claiming the deduction, the shareholder is treated as constructively paying the obligation. 4 9 Page 5-7 Charitable Contributions 10

5 Wholesome Food Donations - PATH 5 Enhanced donation deduction for food inventory PATH made permanent ( 170(e)(3)(C)) For 2016 and later Increases % limit from 10 to 15% Excess can c/f 5 years Adds presumption about basis of food inventory donated by certain businesses If not using 471 or 263A, can elect to treat basis of wholesome food as equal to 25% of FMV of the food. If not salable, presumptions provided for valuation. apparently wholesome food = food that meets all quality and labeling standards imposed by Federal, State, and local laws and regs even though may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions. Food donation - benefits 170(e)(3)(C) is for non-c corp businesses C corps already have 170(e)(3)(A) for any inventory donation Donation must be to 501(c)(3) charity for care of ill, needy or infants. Can t be exchanged for money, property or services. Must have documentation from charity as to the use. 12

6 Food donation - calculation 6 General rule: Donation = basis + ½ of profit Can t exceed 200% of basis Thus, cash basis non-c corp business using basis as 25% of FMV, donation is 50% of FMV (because basis + ½ of profit exceeds 200% of basis). 13 Cash Donation Problems Brown, TC Memo (3/3/16) ~$15,000 of cash donations $4,700 need CWA No CWA All need documentation of 170(f)(17) None produced No bank records to show cash withdrawals amounts of cash contributions claimed to have made during certain short periods are improbable, and there is no independent verification of the authenticity of the receipts or the reliability of what they purport to show. Most significantly, neither [Mr. B or Mrs. B] testified under oath that they in fact made the cash contributions claimed. 17

7 Charitable Contributions - Documentation 7 Barnes, TC Memo (4/27/16) Donations of clothing and household items over 2 years. Receipts for all General details 5 boxes of clothing, 1 printer Apparently detail summary sheet produced for trial (not for return prep) Summary sheet showed more FMV Problem Receipts and summary sheet did not tie Did not contemporaneously attach values to items on the receipts Only got $1,000 each year (rather than double that claimed). 18 Charitable Donation Problems Garcia, TC Memo (2/16/16) $390 of travel NO no evidence of distinct services performed for their church. $3,560 for ~ 450 items of clothing NO No CWA Insufficient documentation for non-cash > $500 No evidence that in good used condition or better $5,350 of cash and property to Knights of Columbus chapter NO No proof that was a 501(c)(3) entity Accuracy penalty upheld - YES Had documentation for other donations, so clearly knew the rules. Should have verified status of KoC before deducting. 19

8 You really do have to have the CWA! 8 Beaubrun, TC Memo (11/16/15) Numerous donations, mostly of $250 or more B had cancelled checks and statements BUT did not have CWA per 170(f)(8) canceled checks do not qualify as contemporaneous written acknowledgments because they do not state whether B received any goods or services in exchange for her contributions 20 Unbelievable Charitable Contributions Payne, TC Summary Opinion (6/23/16 Non-cash donations: > $25,000 each year 2010 $79,000 (46% of AGI) - audited 2011 $90,000 (47% of AGI) audited 2012 $80, $36, $52,000 Insufficient documentation Ex - Various items/goods antique, furniture, appliances, books, household items, clothes, electronics, toys, etc. 21

9 Court said 9 Lacked credibility Unbelievable How did they have so much in a 1,600 square foot home? P picked a lot up from people s curbs All denied penalty. 22 Failure to Attached Appraisal Gemperlie, TC Memo (1/4/16) Façade easement donation in Appraisal report of $108,000 IRS and court maximum is $35,000 here. 170(h)(4) states that appraisal must be attached to the return. Not attached. JCT leg history Failure to obtain and attach an appraisal * * * results in disallowance of the deduction. No deduction. Penalties apply including 40% overvaluation! 23

10 Conservation Easement Failed 10 French, TC Memo (3/23/16) Conservation easement donation by parties to Montana Land Reliance. Appraiser - $1.1 million (F s share = $350K) IRS appraiser $432,000 Issues: CWA per 170(f)(8)? Ownership of the property? Proper valuation? 24 No CWA No Deduction! Letter from MLR dated June 2006 Too late not contemporaneous Alternative Tax Court approach Look at the deed Here no specific statement that donor rec d no goods or services from donee. No alternative language as allowed by prior easement cases. No statement that Preservation of property is only consideration because did not state it was entire agreement of the parties. 25

11 Query can 170(f)(8)(D) help? 11 subparagraph (A) [the CWA req] shall not apply to a contribution if the done org files a return, on such form and in accordance with such regs as the IRS may prescribe, which includes the information in (b) with respect to the contribution. 26 NO - Documentation Necessary Despite Information on an Amended Form 990 and 170(f)(8)(D) 15 West 17th Street LLC, 147 T.C. No. 19 (12/22/16) See supplement $64 million donation for conservation easement LOST deduction 170(f)(8)(D) not operational w/o regulations Query who ends up paying for this missing CWA? Obligation is on donor, not the charity Likely overvalued (per IRS) Supplement 27

12 Page Education 30 Law School Tuition Not Deductible Summaries in Chapter 5 Santos, TC Memo (5/17/15) O Connor and Tracy, No (10th Cir., 6/28/16) 31

Employee Page 5-25 13 Expenses 32 Employee Clothes Deduction Barnes, TC

Required to wear RL clothing on the job Deducted as unreimbursed employee

Criteria: (1) clothing required or essential in taxpayer s employment -

13 Employee Page Expenses 32 Employee Clothes Deduction Barnes, TC Memo (4/27/16) B salesperson at Ralph Lauren Corp. Required to wear RL clothing on the job Deducted as unreimbursed employee business expense IRS and Court no way! Criteria: (1) clothing required or essential in taxpayer s employment - MET (2) clothing not suitable for general or personal wear NOT MET (3) clothing is not so worn Not addressed (failed #2) 33

Reminders EmployeesBusiness Deductions 14 EE working away from home over 1 year is not temporarily away from home No travel/mileage/incidental expenses Collodi, TC Summary Op 2016-57 (9/19/16)

14 Reminders EmployeesBusiness Deductions 14 EE working away from home over 1 year is not temporarily away from home No travel/mileage/incidental expenses Collodi, TC Summary Op (9/19/16) University employees Expenses related to expanding general knowledge not deductible (personal) Depreciation deductions must have proof of purchase of the assets Lost deductions for internet, books, computer expenses, satellite TV, cell phones Tanzi, TC Memo (8/9/16) 34 Business Page 5-29 Deductions 35

15 Inadequate Records 15 Galbraith, TC Memo (9/12/16) Employee + Sch C for same type of sale work Claimed deductions of $96K IRS and court only allowed $2K! 4 vehicles Tracked miles on post-it notes w/o enough details Odometer readings for 2 vehicles was negative No 274 documentation for miles, travel, meals, entertainment Home not exclusively used for work No utilities deduction Substantial underpayment of tax penalty too! 39 Tour de France Advertising Nebeker, TC Memo (8/16/16) N successful Sch C since 1995 Bike racer for 10 years $31,000 to participate in 2 European races over 18 days Invoice vague as to purpose Poor evidence of any business activity including fact that rode about 120 miles per day No business purpose shown Logo on jerseys not enough No deduction 6662 penalty waived for reasonable reliance on CPA preparer. 40

16 No Deduction for Donations Related to PAC PLR (4/15/16) Corp creates PAC for donations to candidates Encourages employees to donate If donate within stated range, C will make matching donation to charity of employee s choice C ask IRS are the donations deductible? Law 162(e) and Reg No deduction allowed for amounts paid or incurred in connection with participation in, or intervention in, any political campaign on behalf of (or in opposition to) any candidate for public office In connection with Per case law interpret broadly Here, charitable donations only made due to PAC donations inextricably linked Thus, Corp can t deduct. 43

17 Business Deduction Rulings 17 When does business start? Tizard, TC Summary Opinion (8/15/16) United pilot planning post-retirement income opps Investigates and buys Firefly Forms LLC Meets 2 possible clients, but nothing comes of it Two flights + add l flights in year plane purchased Business plan on how to break even 2010 no gross receipts, clients or contracts So, NOT in business yet Schedule C loss disallowed 44 How to prove business has started? T had Facebook page with 50 likes But no mention of her business. If T had visited a tax adviser, would have learned: Getting ready ( 195) versus Carrying on ( 162) Need to go beyond investigating and getting ready Must be ready to take a client Doing what business was intended to do. Best to actually have had a client or customer. Business processes in place is a good idea including tax registrations (sales tax, business license tax, etc.) 45

18 IRS Audit Guide on TPR! Supplement 18 Issued 9/14/16 by LB&I Division, 202 pages Query Will one be issued by SB/SE? 46 Note: Can find all ATGs (50+) at: 47

19 The 18 Chapters 1. Examination of tangible property 2. Compliance considerations 3. Unit of property 4. Amounts paid to acquire or produce property 5. De minimis safe harbor 6. Improvement rules betterments 7. Improvement rules restorations 8. Improvement rules new or different use 9. Safe harbors special rules other provisions 10.Materials and supplies 11.Leased property 12.Disposition concepts and MACRS accounting rules 13.Dispositions in general 14.MACRS disposition rules 15.General asset account rules 16.Accounting method changes 17.Accounting method changes capitalization 18.Accounting method changes depreciation and dispositions

Accounting Methods and 199

Chapter 8 Accounting Methods and 199 1 New Form 3115 and Filing Location New form and instructions (12/15). After 4/19/16, may only use the 12/15 version (not the 2009 version). Ann. 2016-14 Instructions