WASHINGTON TAX UPDATE MAY 16, 2012 Welcome to Washington Tax Update, where you will find useful information about taxes, including current events in our nation s capital, as well as informed opinions and predictions about what is expected to happen. Tax Look Inside Tax Planning Tip of the Week IRS Courts What s New from the IRS What s New from the Courts It Bears Repeating Tax Laughs Congress
tax planning tip of the week Job hunting? Don t overlook tax deductions With some parts of the economy starting to pick up, more people are in the market for a new job. Here are eight tax tips about the costs you might incur while job hunting and the ins and outs of related tax deductions: 1. To qualify for a deduction, the expenses must be spent on a job search in your current occupation. You may not deduct expenses you incur while looking for a job in a new occupation. 2. You can deduct employment and placement agency fees you pay while looking for a job. If your employer pays you back in a later year for employment agency fees, you must include the amount you receive in your gross income, up to the amount of your tax benefit in the earlier year.
3. You can deduct amounts you spend for preparing and mailing copies of your résumé to prospective employers. 4. If you travel to look for a new job, you may be able to deduct round-trip travel expenses. You can deduct the travel expenses only if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend looking for work is important in determining whether the trip is primarily for personal reasons or primarily for a new job. 5. You cannot deduct job search expenses if there has been a substantial break between the end of your last job and the time you began looking for a new one. 6. You cannot deduct job search expenses if you are looking for a job for the first time. 7. The amount of job search expenses that you can claim on your tax return is limited. You must itemize your deductions, and you can claim only the amount that exceeds 2 percent of your adjusted gross income when combined with your other miscellaneous itemized deductions. 8. If you have been unemployed or underemployed during the recent economic downturn, check with your tax adviser to learn how these rules may affect your ability to deduct job-hunting expenses. tax planning tip of the week
what s new from the IRS Health savings account limits released for 2013 The IRS has provided the annual inflation-adjusted contribution, deductible and out-of-pocket expense limits that will apply to health savings accounts for 2013. Subject to statutory limits, eligible individuals may make tax-deductible contributions to health savings accounts (HSAs). In general, an eligible individual is a person covered under a high-deductible health plan (HDHP). Employers as well as other persons, such as family members, may also make contributions on behalf of an eligible individual. Employer contributions are usually excluded from income.
General-purpose health flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs) tend to preclude HSA eligibility. However, exceptions apply for, among other things, limited-purpose FSAs and HRAs (those providing only certain benefits, e.g., dental and vision) and FSAs and HRAs imposing high annual deductibles. HSA distributions not used to pay for qualifying medical expenses generally are included in income and are subject to a 10 percent penalty tax. For calendar year 2013: The limitation on deductions for an individual with self-only coverage under an HDHP is $3,250 (up from $3,100 for 2012). The limitation on deductions for an individual with family coverage under an HDHP is $6,450 (up from $6,250 for 2012). An HDHP is defined as a health plan with an annual deductible of not less than $1,250 for self-only coverage (up from $1,200 for 2012) or $2,500 for family coverage (up from $2,400 for 2012) The annual out-of-pocket expenses deductibles, co-payments, and other amounts, but not premiums do not exceed $6,250 for self-only coverage (up from $6,050 for 2012) or $12,500 for family coverage (up from $12,100 for 2012). Read more in Revenue Procedure 2012-26. what s new from the IRS
what s new from the courts Like-kind exchange questioned by Tax Court An investor s intent may not always be obvious, but recently a couple s activities helped clarify their decisions for the Tax Court. The IRS questioned the validity of a like-kind exchange made by Patrick and Jill Reesink of San Francisco. And the case ended up in Tax Court. Sellers seeking to defer gain on the sale of real estate often engage in so-called Sec. 1031 exchanges, which involve the exchange of one piece of real estate for another. To qualify, both properties in the exchange must be business, rental or investment properties. Personal-use property does not qualify. Patrick and his brother, Michael, purchased an apartment building in San Francisco from their parents. Each brother had a 50 percent interest in the building. They sold the building for $1.4 million ($700,000 each). Patrick and Jill decided to pursue a Sec. 1031 exchange with the proceeds and used most of their sales proceeds to purchase a
single-family home and adjacent lot. The loan paperwork stated that the home was purchased for investment purposes. The Reesinks posted flyers around town and posted signs on the property, advertising the home for rent. Potential renters visited the property but ultimately declined to rent it. The Reesinks never found tenants for the property. Finally, they sold their primary residence and moved into the home that they had intended as investment property. The IRS challenged whether the Reesinks had held the home with investment intent at the time of the exchange to qualify for nonrecognition under Sec. 1031. The Tax Court determined that, at the time of the exchange, the Reesinks had the requisite investment intent and were entitled to nonrecognition treatment. The court found that the Reesinks had engaged in extensive advertising efforts, showed the home to potential renters and waited almost eight months before moving in. Their decision to purchase the home although it may not have been financially sound did not negate their investment intent. Jill Reesink testified that she was reluctant to leave their home in San Francisco and never discussed moving to the new home until after the exchange had been completed. The IRS disputed only whether the Reesinks had held the home with investment intent at the time of the exchange. Therefore, the court did not address whether the acquisition of the new home met the mechanical rules for a Sec. 1031 exchange, such as timing requirements and the use of a qualified intermediary (Patrick A. Reesink, et ux. v. Commissioner, TC Memo 2012-118, April 26, 2012).
it bears repeating When is a partnership not a partnership? Here is yet another case that emphasizes the importance of being careful when using a family limited partnership as an estate planning tool. Lois Lockett s husband predeceased her, and his will established a trust for her benefit. As part of her estate planning, Lockett created Mariposa Monarch, LLP (MM), an Arizona limited liability partnership. The partnership agreement named Lockett s sons, Joseph and Robert, as general partners and Lockett, Joseph, Robert and the trust as limited partners. Only Lockett and the trust contributed assets to the partnership. Later, the trust was terminated, and Lockett became the sole limited partner in MM. When Lockett died, MM s assets exceeded $1 million. On the estate tax return, the estate reported Lockett as the 100 percent owner of MM. The estate valued Lockett s ownership interest in MM at $667,000, applying control and marketability discounts. The IRS argued that MM was not a valid partnership under Arizona law because there was no association of two or more persons and because it did not operate a business for profit.
The Tax Court, in Estate of Lois L. Lockett, et al. v. Commissioner, TC Memo 2012-123, April 25, 2012, concluded that: MM operated a business for profit. Robert and Joseph at no time held interests in MM. The trust contributed assets to MM and was a limited partner. Lockett and the trust constituted an association of two persons to carry on a business for profit as co-owners. When the trust was terminated, Lockett became the sole partner in MM. The partnership agreement provided that MM would be dissolved upon the acquisition by a partner of all the interests of the other partners. Therefore, Lockett s acquisition of the trust s limited partnership interest caused the dissolution of MM under Arizona law. As a result, Lockett at her death owned 100 percent of MM s assets not a partnership interest in MM. And those assets were taxable in her estate at full fair market value. it bears repeating
tax laughs It s enough to scream about An 1895 version of the painting The Scream by Edvard Munch recently sold for a record-shattering $120 million at a Sotheby s auction in New York. The seller of the piece, a Norwegian businessman, will undoubtedly be paying a hefty tax on the sale. But the artist himself apparently tangled with the tax authorities. A Wall Street Journal blog post by Laura Saunders quoted a letter from Munch describing his own tax problems: This tax problem has made a bookkeeper of me too. I m really not supposed to paint, I guess. Instead, I m supposed to sit here and scribble figures in a book. If the figures don t balance, I ll be put in prison. I don t care about money. All I want to do with the limited time I have left is to use it to paint a few pictures in
peace and quiet. By now, I ve learned a good deal about painting and ought to be able to contribute my best. The country might benefit from giving me time to paint. But does anyone care? Munch s biographer Sue Prideaux noted in Edvard Munch: Behind the Scream (Yale University Press, 2005) that Munch would often pen hyperbolic rants to the Norwegian tax authorities, accusing them of wanting to tax the skin on his brain, the hand of the artist, the voice of the tenor, and the thoughts of the philosopher. Saunders speculates that Munch s Norwegian taxes might have been the inspiration for his iconic painting. Many Americans might see a similar image each year when they look in the mirror around April 15. The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing. Jean Baptiste Colbert
Courts Tax IRS Congress The technical information in this newsletter is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the information contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS. 2012 CPAmerica International