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Table of Contents

• Thanks for a great tax season
• The "bear" market - disaster or opportunity?
• Major Social Security change will be a benefit for working seniors
• Court decree granting exemption deductions to ex-husband not effective
• Deduction for non-business use of assets not limited to amount included in income
• Deadline for reforming charitable remainder trusts is June 30, 2000
• Concrete contractor allowed to use cash method
• Sand seller and hauler required to use accrual method
• Inherited IRA isn't eligible for conversion to Roth IRA
• Ex-husband fully taxed on distribution from community property IRA account
• Suspended California corporation couldn't file Tax Court petition
• Visit our new articles
• Subscribe to Michael Gray, CPA's Tax and Business Insight

Thanks for a great tax season.

We really appreciate the opportunity to be of service to you who asked us to help you with your tax returns and look forward to continuing a mutually rewarding relationship.

Also, thanks to you clients and friends who referred new clients to us. We appreciate your thoughtfulness and support.

We are looking forward to working with you with tax planning issues this summer.

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The "bear" market - disaster or opportunity?

Remember the motivational synonym for problem is opportunity. Yes, the stock market has retreated to about where it was last November. Did you feel badly about the value of your stock last November? The economic cycle is a fact. Sooner or later, a real recession will come. The stock market has been a roller coaster ride reminiscent of the Roaring 20's. Try to keep grounded and be realistic in your expectations of future returns, especially for companies that have never earned a profit.

A market retreat can also be an opportunity for tax planning. If you have incentive stock options, you may now be in position to exercise your options with a reduced alternative minimum tax. You might also be able to generate some capital losses you can use to offset capital gains realized earlier in 2000.

Remember the "wash sale" rules. You are not allowed to deduct a loss from the sale or other disposition of stock or securities if, within a period beginning 30 days before and ending 30 days after the date of sale or disposition you have acquired or entered into a contract or option to acquire substantially identical stock or securities. The disallowed loss is a basis adjustment for the replacement securities.

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Major Social Security change will be a benefit for working seniors.

On April 7, President Clinton approved legislation eliminating the reduction of Social Security benefits for persons age 65 to 69 who are working. The repeal was retroactive to January 1, 2000. This is a major benefit that will eliminate some "artful dodging" strategies that many seniors have been using to avoid reducing their benefits while supplementing their income.

Many seniors who were passive investors in family businesses had an issue of having their benefits reduced because of self-employment income. Although the self-employment tax remains with us, the issue of reduced benefits is now eliminated.

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Court decree granting exemption deductions to ex-husband not effective.

The Tax Court recently ruled that a taxpayer who was not the custodial parent could not claim the dependency exemptions for his children, even though a court decree declared he was entitled to them. In order to claim the exemptions, the non-custodial parent must include Form 8332, signed by the custodial parent, to his or her tax return. (Miller v. Commissioner, 114 T.C. No. 13 (3/24/00.)

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Deduction for non-business use of assets not limited to amount included in income.

An employer permitted employees to use company aircraft for personal flights. Income was reported on the employees' Forms W-2 according to IRS guidelines. The IRS claimed the employer's deductions for the aircraft was limited to the amount included in the employees' Forms W-2. The Tax Court rejected the IRS argument and allowed the employer to deduct its expenses in full. (Sutherland Lumber-Southwest, Inc. v. Commissioner, 114 T.C. No. 14 (3/28/00.)

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Deadline for reforming charitable remainder trusts is June 30, 2000.

Many taxpayers are reforming charitable remainder trusts to incorporate a "flip" provision, changing the beneficiary distributions after a certain date or event. This reformation must be completed by June 30, 2000. If you have a CRT, you should have already consulted with your attorney about this matter. If you haven't, make an appointment today. (Notice 99-31, 1999-23 IRB.)

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Concrete contractor allowed to use cash method.

The Tax Court ruled that a concrete contractor was not required to use the accrual method because the materials it uses in providing its services are not merchandise held for sale and don't have to be inventoried. The materials are an inseparable part of his services and lose their separate identity to become part of a building or other real property. Five judges dissented from this opinion. (RACMP Enterprises, Inc. v. Commissioner, 114 TC No. 16 (2000.) This ruling follows a similar decision for medical practices, Osteopathic Med. Oncology & Hematology, P.C. v Commissioner, 113 TC 376 (1999.)

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Sand seller and hauler required to use accrual method.

In contrast to the concrete contractor, the Tax Court held that a company that acquires and transports sand and gravel is required to use inventories, even though it doesn't have any goods on hand at the end of each day, and so must use the accrual method of accounting. (Von Euw & L.J. Nunes Trucking v. Commissioner, TC Memo 2000-114.)

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Inherited IRA isn't eligible for conversion to Roth IRA.

The IRS has ruled that an estate or trust that succeeds to a decedent's regular IRA may not convert the IRA to a Roth IRA. (PLR 200013041.)

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Ex-husband fully taxed on distribution from community property IRA account.

Following a divorce decree, Michael Bunney withdrew funds from an IRA account after his divorce was final. He then transferred the funds to his ex-wife. Michael claimed that one-half of the distribution should be taxed to his ex-wife because that was her community property share. The Tax Court ruled that Michael is taxable on the entire distribution. Internal Revenue Code Section 408(g) explicitly provides that community property laws don't apply to the federal tax law for the taxability of IRA distributions. Section 408(d)(6) requires that, in order for the transfer incident to a divorce section to apply, the transfer must be of the participant's interest in the IRA itself to a spouse or former spouse, incident to a divorce decree or separation agreement.

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Suspended California corporation couldn't file Tax Court petition.

A California medical corporation was suspended by the California Franchise Tax Board for failing to pay California franchise taxes. The corporation was also involved in litigation with the IRS. The period of time for filing a Tax Court petition fell during the period the corporation was suspended. The Tax Court ruled the corporation didn't have legal standing to file a petition. The corporation couldn't even file after it was reinstated because the period of time for filing a petition had expired. If you have pending tax litigation, you have a good reason to keep your corporation in good standing with the state where it is incorporated. (David Dung Le, M.D., Inc. v. Commissioner, 114 TC No. 18 (2000.)

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Visit our new articles!

• "Have you funded your living trust?"
• "Employee Stock Options" Book Review
• "Custom designing your business"

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.