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Table of Contents

• So long...
• Problems or opportunities?
• The human drama unfolds...
• It's time for year-end tax planning!
• Thank you!
• Eli Goldratt seminar in November!
• New form issued for S subsidiary election.
• Commuting expenses aren't deductible.
• IRS allows "Reverse Starker" like-kind exchanges.
• Complicated rules adopted for capital gains from sale of interest in pass-through entity.
• Visit our new articles.
• Subscribe/Unsubscribe from Michael Gray, CPA's Tax and Business Insight.

So long...

Janet and I are scheduled to leave for Europe this Saturday. See you when we return!

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Problems or opportunities?

These are certainly interesting times.

• The stock market is like a roller coaster.
• Gasoline prices have been increasing.
• The conflict in Palestine is spreading to other parts of the world.
• California is enjoying the lowest unemployment rate in decades.
• It's hard for anyone to find a home or apartment in Silicon Valley.
• Highway 101 between San Jose and Morgan Hill has become a parking lot, and Cisco is proposing throwing 20,000 more employees in Coyote Valley onto that freeway.

If you took profits in the stock market earlier this year, but now have investments that have decreased in value, consider selling them to recognize the losses and offset your gains. Watch the "wash sale" rules. (You have to wait more than 30 days before buying the investment again.)

If you exercised an incentive stock option earlier this year that would result in a significant alternative minimum tax (AMT), consider whether it would be to your advantage to make an early disposition before the end of the year. The AMT is eliminated and you may pay less tax for ordinary income, which is the excess of the sale price over the option price.

Now may be an advantageous time to exercise employee stock options. For incentive stock options, the AMT exposure may be at a low point because the fair market value of many technology stocks is low.

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The human drama unfolds...

Anyone who doesn't think that "isolated incidents" like the conflict in Palestine can have serious consequences needs to remember that an assassination in Yugoslavia (then Austria-Hungary) resulted in World War I, which pre-framed World War II. Prophecies about the "Final Conflict" have suggested it would start in the Middle East.

The only way I can think of to "short circuit" the cycle of hate and revenge is apologies and forgiveness. A few words of humility could save many lives. It's hard to be optimistic about this situation. The stakes are staggering.

Pray for peace.

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It's time for year-end tax planning!

Many people are wrestling with planning decisions as the year comes to a close. If you need professional help with this process, make your appointment for a planning consultation as soon as possible.

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Thank you!

During the past few weeks, attorney Bob Temmerman referred the Walter Sorufka Estate and Alan Ronald of the Blakely Group at Smith Barney referred David Gilford.

You keep reading about these people referring clients to us again and again. We really appreciate the support of Temmerman and Cilley, LLP and the Blakely Group at Smith Barney. They have been some of the best friends of our firm.

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Eli Goldratt seminar in November!

Eliyahu Goldratt is the author of several business novels revolving around the Theory of Constraints. His groundbreaking novel was The Goal. He just had another book published, Necessary but not Sufficient. He is well known for his innovative ideas promoting organizational effectiveness.

On November 8 and 9, Mr. Goldratt will present a seminar on implementing computer technology, from MRP to E-business. The seminar will be located in Indianapolis, Indiana.

For details, visit his web site at http://www.eligoldratt.com.

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New form issued for S subsidiary election.

The IRS has issued new Form 8869, Qualified Subchapter S Subsidiary Election. The form is used for a subsidiary of an S corporation to elect to report its income on the parent corporation's S corporation income tax return. The election was previously made on Form 966, Corporate Dissolution or Liquidation. That form should no longer be used for this election.

If the subsidiary previously filed income tax returns, Form 8869 is filed with the IRS service center where the subsidiary filed its returns. If the subsidiary is a new corporation that hasn't filed income tax returns, Form 8869 is filed at the service center where the parent corporation sends its returns.

The effective date of the election is based on when it is filed. It can't be more than (1) two months and 15 days before the date of filing the election or (2) twelve months after filing the election.

When you file Form 8869, be sure to send it certified mail and to send a duplicate copy with a self-addressed envelope so the IRS can return a date-stamped copy. If you haven't received a response from the IRS within 60 days after filing the election, you should follow up about the status of processing the election.

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Commuting expenses aren't deductible.

Barry Knelman maintained his landscaping business in California. He and his wife lived in Ohio, and he traveled from time to time to California to supervise the landscaping business. The company reimbursed Barry for his "travel" expenses, which he excluded from his income. The Tax Court held the reimbursement to Barry was taxable income. Since the travel was from his residence to the location of his business, it was for non-deductible commuting expenses. (Barry Knelman, et ux. V. Commissioner, T.C. Memo 2000-268.)

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IRS allows "Reverse Starker" like-kind exchanges.

In the past, the IRS has not approved "reverse Starker" like kind exchanges. For this type of exchange, the replacement property is purchased before the like-kind property is sold. Now the IRS has outlined a procedure where this arrangement will be allowed. The property would be held by an unrelated "accommodator" before the exchange is closed. (Rev. Proc. 2000-37.)

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Complicated rules adopted for capital gains from sale of interest in pass-through entity.

The IRS has adopted "look through" rules relating to the sale of an interest in a pass-through entity, such as a partnership, S corporation or limited liability company. The owner will have to "look through" to the nature of the entity's assets to determine the nature of the gain from the sale of the entity, including whether the 20%, 25% or 28% maximum federal tax rates should apply to part of the gain. (TD 8902.)

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• "How to Write, Speak and Think More Effectively" book review
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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.