Talking with TaxSpeaker: Video 92

1. Client borrowed money against old home to purchase new home. Converted old home to rental property. Now, outside the 90 days of purchase, wants to mortgage current residence, pay off rental property and deduct current mortgage as home mortgage interest. I don’t think the re-fi will qualify under the home mortgage rules because it is outside the 90 window and substantial renovations have not been made to allow qualification under the 24 month rule. Your thoughts?

I agree-it does not meet the 90 day rule and I don’t know of any other exception.

2. Does a casualty loss deduction qualify for rental and business's? Or do they have to fall under the declare federal disaster.?

Business casualty losses are still allowed, they do not have to be federal disaster areas. Only personal casualty losses must be Presidentially declared.

3. We have used Gruntworks for the last couple of years. We are having problems with random returns not populating even though we are going thru the process to do so. Its becoming a real problem. I am curious if you or any of the other users are experiencing any issues. GW says they have not had any one else report a problem. We have three different people populate so I know it isn’t a “user” problem.

I have not received, nor have I had any problems with Populate in GruntWorx this year.

4. I have a client who has been leasing some land to a cell tower. They have been approached by the cell company to “buy out” their lease. The cell tower has said that the buy out will be treated as capital gain and reported on a 1099S. I am not sure that is correct but can’t really find any guidance unless there is a permanent easement. I have requested a copy of the contract. Any other ideas?

This falls under IRC Sec 1241 of lease termination payments, which says if the lease is a 1231 type asset then the termination payments get capital gain treatment. See 1231(b)(1)(A) which leads me to say it is probably a 1231 type lease and gets cap gains-report on form 4797 if so, no basis.

5. I have a number of clients that have started LLCs and then filed the 2553 to be taxed as an S corporation. For my one member or family unit LLC clients this is fine, but once you start adding third party members, I cannot figure out what rules to apply to the entity regarding equity and profit. There are no shares of stock since the entity is an LLC, so does that mean you can allocate profits, losses and gains as would for an LLC?

Once they elect to be an S, all S rules apply and distributions must be made in accordance with ownership % not in accordance with special partnership allocations. In fact in our BTID class we talk about a case which disqualifies an S that is ignoring S rules and following partnership special allocations.

6. Previously Bob has shared his experiences with respect to being involved in an E-File audit and stressed the importance of keeping/storing documented Form 8879’s. I use Ultra Tax and just found out today from them that Form 9235 is the official acknowledgement that the IRS accepts regarding confirmation of e-filing. Does Bob recommend printing/storing the Form 9325 for each filed return each year. We historically had just been saving the acknowledgement from the software company (i.e. Ultra Tax in this case).

The 9235 must be given to a client if they ask and I don’t know of any firm where a client has ever asked! Since they are retained in the tax software efiling records we don’t do anything with them but could reprint upon request.

7. A client takes his office staff (the entire office of about 20 employees and their significant others) to see a play and out to dinner (Via Limo) for the annual Christmas Party. It looks to me under the proposed regulations that this is all considered Recreational Expenses for Employees and thus, 100% deductible as a holiday party, even though there is an entertainment element involved.

Grey area, but I personally believe the play, as a minimum, is non deductible entertainment and an aggressive auditor might say all the rest is clearly directly related. The dinner however could be argued employee party, as could maybe the limo.

8. My clients have an adopted child. One of the biological parents was from Germany and has passed away. The child receives a ‘pension’ from Germany for survivorship benefits. Should this be included as unearned income/foreign income for the child?

If the child is a US citizen or resident alien it should be included in income for them.

9. My client is a resident of CO and is a shareholder in an S Corp HQ'd in DL. The other shareholders are residents of various other states [4 other states]. One of the shareholders tax preparer told that shareholder she must file a state return in each state the other shareholders reside in. Is this correct?

Absolutely incorrect-corp files returns where it has activities not where the shareholders live.

10. I have a question pertaining to the winding up of a farming operation. I have a farmer who had his hog barn burn down at the very end of 2018. During 2019 he has been working on the property to clean up the large mess left after the fire and is hoping to both sell scrap as well as get paid from his insurance company for cleaning up the property. He still sells hay off of the fertile ground off the property and has other related expenses such as taxes and insurance but will end up with a loss this year. My question revolves around the fact that, other than selling the hay, he will no longer be in the business of farming – do I move the activities related to the cleaning up of the property and scrap selling activities over to Schedule C instead of F or do I continue to keep the income and expense on Schedule F all together as these activities pertain to the winding-up of the hog business he once had. Also, I am having trouble finding documentation to support my position of taking these expenses pertaining to the winding-up of a business where there will not be much income reported but there are still legitimate expenses to deduct related to the winding-up of the business that existed prior to a catastrophic event.

There was a similar court case on this a couple of years ago where the income and related expenses were not a hobby, but also not a business. Reporting the net amount as non SE income on the 1040. Short of that I would run everything through the farm operation while it loses money.