Late Budget Deal Affects IRS Acceptance of 2012 Returns

The IRS recently announced that the end of year budget deal will cause the IRS start date for
accepting returns to be moved to January 30, 2013. No returns, electronic nor paper will be processed before that date. The government also announced that major tax software companies were currently accepting the returns, and warehousing or holding them until the arrival of January 30, 2013. Refunds, should be issued in nearly most of the cases within 21 days of receipt. The status of the refund can be checked on www.irs.gov and use “Where’s My Refund” tool.

Obviously, the IRS had no control over the timing of the budget deal and its effect on the tax
code. The Service’s continued movement towards electronic filing and customer inquiry has made the filing and processing of returns easier and quicker. However, the code continues to be even more and more complex. Attempts to simplify it were raised by the politicians in the latest budget negotiations. They were unsuccessful. The tax code still remains contained in two very large volumes comprising nearly 3000 pages.


Lessons Learned from MF Global

Another large bankruptcy involving the brokerage industry hit Wall Street recently and resulted is more pain for its’ clients. As has been widely reported in the MF Global bankruptcy (See NY Post, Friday, November 18, 2011” Burned by Greed”) many of its clients now face the prospect of either losing part or all of their investment. This is true with customers who held investments with MF’s securities brokage accounts. Cash only customers may be paid in full.

People will learn that the bankruptcy process can be slow, but fair. Many had their cash accounts frozen and only recently had the monies released by the bankruptcy judge.

There are other stories of people with their life savings in jeopardy. One of the major lesson to be learned is that of risk in the marketplace. Companies can and do go bankrupt and when that happens the average investor can be hurt in the process. Bankruptcy aims to even the playing field but is not a perfect solution. The problem is that there is only a limited amount of assets that can be recovered and all the clients claims are treated equally in this process. The claims generally are greater than the assets recoverable. So as in the MF case some people will only get 60% of their money back.

One way to protect oneself is to be aware of the risk and not to place all of one’s assets with any one broker or asset class. Diversification would have helped some of these people. The old saying of “not to put all your eggs in one basket” applies here as well. Those who placed their life savings with MF surely, given a second chance, would have placed only a part of their capital with MF and the rest in bank Cd’s , money market, or even another broker.

The bankruptcy process is fair and can serve to protect clients to recover funds which may not be available without the existence of such laws. However, it is not a guaranty that clients will recover all or any of their funds. Buyer beware.


Student Loans Non-Dischargeable to Parent -Debtor

Student loans used to be dischargeable and many people forget that they are now non-dischargeable due to changes in the law. Everyone attending higher education should be reminded several times before signing these notes that they are non-dischargeable and the same rules apply to the co-applicant or guarantor.  In a recent case  In Re: Curvtis V. and Connie S. Vitzhum,, 22 CBN 1, 2011 Wl 3957273 (Bankr W.D. Mo 9/7/11); Consumer Bankruptcy News October 13, 2011, vol 22 iss 1 ).  the parent, signed for a student loan along with their daughter  through Educap Inc. in October 2005 for their daughter’s college education.

Pursuant to Section 523(a) (8) student loans or loans to be used “for educational purposes only” are non-dischargeable. In the reported case, the parents applied along with their daughter for loans issued for her college education. . The daughter attended college and the parents fell on hard times and were forced to file bankruptcy. Since they were not the student under the loan they tried to have it discharged claiming that they did not receive any educational benefit. The court disagreed and said it did not matter,  that it still was an educational loan and therefore non-dischargeable.

The point of this case  is that student loans are almost never dischargeable to anyone who signs them regardless of whether they were the student are not. Until Congress changes this rule, it is the law of the land.  In today’s world with a year of private college costing more than $40,000 it is easy for students to get themselves in a great amount of debt.  Parents and students should know that they will be tied to with this debt until paid and bankruptcy will not remove it.

If you have any questions regarding this or other bankruptcy matters, please call me at 1-888-382-7880.

 

 


Art Dealer Convicted of Bankruptcy Fraud On Run for 5 Years for Bankruptcy Finally Apprehended

A bankruptcy Art dealer who plead guilty to 1 count of bankruptcy fraud was apprehended after 5 years on the run. His crime involved transferring ownership of an oil painting to another person to sell and conceal the sale proceeds. First he failed to report to jail in 2004. Then he fled abroad while the U.S. Marshals were tracking him through 14 countries including China. Ultimately he was arrested in Rome in 2009. Released on house arrest he fled Italy to Mexico and was deported back to the United States (Consumer Bankruptcy News August 18, 2011, v 21, iss18).

It’s important to note how diligent the U.S. Marshals were in apprehending him. Bankruptcy fraud is a federal offense and taken very seriously by law enforcement. People filing bankruptcy often think they can get away with transferring assets on the eve of Bankruptcy. People often ask can they transfer their house to their son or daughter or give away assets and then file bankruptcy. The obvious answer is no and taking such action can make a difficult situation much worse and turn a civil action into a criminal one. So for those contemplating bankruptcy, the advice is not to transfer any assets. Leave things the way they are and get competent legal advice. Do no turn a civil matter into a criminal one.


Could Medical Marijuana Become an Ordinary and Necessary Expense Deductible under Tax Code For California and Other States Allowing Medical Marijuana Dispensaries ?

Several Congressmen have been receiving inquiries from their constituents about the legality of deducting expenses incurred when selling marijuana for medical purposes. (See Practitioners TaxAction Bulletin No. 2011-18 p4.) The IRS has responded with a series of informational letters. Under the Internal Revenue Code Sec 280E disallows deductions incurred in the trade or business of controlled substances of which marijuana of course falls into. There is no exception for medical marijuana neither under either the code nor under Controlled Substances Act. In order for the IRS to publish formal guidance would necessitate Congress to change the Controlled Substance Act or Internal Revenue Code.

It doesn’t seem likely given the current political atmosphere and public attitude that Congress will make the necessary changes. I believe that is too bad, because if it were allowed into the code it would be one further step to full legalization and taxation of marijuana and surely would help take the criminal element out of the trade and of course generate additional revenue to bridge the current large and getting larger budget deficit.


Your Neighborhood Chevy’s, Friendly’s, Boston Market May be Closing due to Bankruptcy of Parent Company

Sun Capital Partners the parent company of big name chains such as Chevy’s, Friendly’s and Boston Market and El Torito filed for bankruptcy on October 4th., as reported by the New York Post (October 5, 2011, p 32.) Also, Sun also owns the Friendly ‘s chain which is expected to file later this month. This is just one of many recent filings for the restaurant industry as 5 chains with at least 100 locations have filed for bankruptcy.

Despite these woes, the principal of the company Marc Leder was reported to be throwing wild parties in the Hamptons with a pool full of nude guests performing sex acts.

Is the start of more chains and major national brands to go into bankruptcy? I would not be surprised with this economy. There is talk that American Airlines maybe on the verge of bankruptcy. However, it is not necessarily the end of these companies and may serve to strengthen them. For instance General Motors and Chrysler were able to reduce debt, renegotiate labor contracts, and close unprofitable plants. They had been unprofitable for several years prior to the bankruptcy. General Motors continue to make cars and has reported profits and new increased labor contracts for its workers. So Chapter 11 for large companies is not necessarily a bad thing if they are able to restructure and come out of the process more streamlined


Discharge Allowed to Stand for Debtor Later Found Guilty of Criminal Drug Sales

In an interesting case recently reported in (Consumer Bankruptcy News, vol.21, iss19, p, 3) involving both the bankruptcy and criminal laws , a person who had been first granted a Chapter 7 discharge claiming to be unemployed and having no income was  arrested 5 months later. and charged with possession of and trafficking in crack cocaine.

The Office of the US. Trustee which oversees the bankruptcy process tried to reopen her case and have her discharge revoked based on fraud.  The debtor was subsequently found guilty on several criminal counts including delivery of a controlled substance, criminal conspiracy, and child endangerment.

Despite the US Trustee  introducing  the criminal evidence into the bankruptcy proceeding, the Court found that the US Trustee hand not proved that the debtor actually derived income from these transactions during the pre-bankruptcy period and allowed the discharge to stand. U.S. Trustee v. Shiloh (In re: Lisa L. Shilo), 21 CBN 1025, 2011 W. 3204915 (Bankr. M.D. PA 7/26/11)


The IRS Provides Tax Relief to Victims of Hurricane Irene

The Internal Revenue Service is providing tax relief to individual and business taxpayers impacted by Hurricane Irene.

The IRS has announced that certain taxpayers in Connecticut, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Puerto Rico and Vermont will receive tax relief. Other locations are expected to be added in coming days following additional damage assessments by the Federal Emergency Management Agency (FEMA).

The tax relief postpones certain tax filing and payment deadlines to Oct. 31, 2011. It includes corporations and businesses that previously obtained an extension until Sept 15, 2011, to file their 2010 returns and individuals and businesses that received a similar extension until Oct, 17. It also includes the estimated tax payment for the third quarter of 2011, which would normally be due Sept. 15.

Full details, including the start date for the relief in various locations and information on how to claim a disaster loss by amending a prior·year tax return, can be found in tax relief announcements for individual states.

The tax relief is part of a coordinated federal response to the damage caused by the hurricane and is based on local damage assessments by FEMA For information on disaster recovery, individuals should visit the government’s disaster assistance website.

So far, IRS filing and payment relief applies to the following Northeastern counties and municipalities:

  • New York: Albany, Clinton, Delaware, Dutchess, Essex, Greene, Montgomery, Nassau, Orange, Otsego, Rensselaer, Rockland, Saratoga, Schenectady, Schoharie, Sullivan, Suffolk, Ulster, Warren and Westchester
  • Connecticut: Fairfield, Hartford, Litchfield, Middlesex, New Haven, New London, Tolland and Windham
  • New Jersey: Atlantic, Bergen, Burlington, Camden, Cape May, Cumberland, Essex, Gloucester, Hudson, Hunterdon, Mercer, Middlesex, Monmouth, Morris, Ocean, Passaic, Salem, Somerset, Sussex, Union and Warren
  • Massachusetts: Berkshire and Franklin

Mixing Business and Pleasure With Travel

Although business is business and pleasure is pleasure, the world rarely adheres to absolutes. Thus, this time ofyear you may want to mix some vacation days with your business travel. With a little planning, you can get Uncle Sam to subsidize your downtime. Here are the strategies for doing just that.

Combine Business and Vacation Plans for Domestic Travel

If you go on a business trip within the U.S. and add on some vacation days, you know you can deduct some of your expenses. The only question is how much. First, let’s cover just the pure transportation expenses. By this, we mean the costs of getting to and from the scene ofyour business activity, which includes travel to and from your departure airport, the airfare itself, baggage fees and tips, cabs to and from the destination airport, and so forth. Costs for rail travel or to drive your personal car also fits into this category. The bottom line is your domestic transportation costs are 100% deductible, as long as the primary reason for the trip is business rather than pleasure. On the other hand, jf vacation is the primary reason for your travel, none ofyour transportation expenses are deductible.

The IRS doesn’t specify how to determine if the primary reason for domestic travel is business. Obviously, the number of days spent on business versus pleasure is the key factor. We can look to the rules covering foreign travel for guidance on this issue. They say your travel days count as business days, as do weekends and holidays if they fall between days devoted to business, and it would be impractical to return home. “Standby days,” when your physical presence is required, also count as business days, even if you’re not called upon to work on those days. Any other day principally devoted to business activities during normal business hours is also counted as a business day, and so are days when you intended to work, but couldn’t due to reasons beyond your control (local transportation difficulties, power failure, etc.).

For domestic trips, you should be able to claim business was the primary reason for a sojourn whenever the business days exceed the personal days. Be sure to accumulate proof about this and keep the proof with your tax records. For example, if your trip is made to attend client meetings, log everything on your daily planner and copy the pages for your tax file. If you attend a convention or training seminar, keep the program and take some notes to show you attended the sessions.

Once at the destination, your out-of-pocket expenses for business days are fully deductible. Out-of-pocket expenses include lodging, hotel tips, meals (subject to the 50% disallowance rule), seminar and convention fees, and cab fare. Expenses for personal days are nondeductible (except in the “Saturday Night Stayover” situation explained later in this letter).

Example: You are a sole proprietor. You arrange a business meeting with an important client in San Francisco on Wednesday morning. You fly out Sunday evening and spend all day Monday sight­ seeing. Tuesday you spend most of the day preparing for the meeting, attend the meeting the next morning, take the client to lunch, and return home Wednesday night. So, Sunday, Tuesday, and Wednesday count as business days. The business meeting obviously necessitated the trip, and you clearly didn’t spend an unreasonable amount of time on personal activities. Therefore, you can deduct your airline tickets, plus your lodging for Sunday and Tuesday nights, 50% of your meals for Sunday, Tuesday, and Wednesday, your other out-of-pocket expenses for those days, and 50% of the cost of lunching with your client.

Maximizing the Tax Benefits of a Saturday Night Stayover

A great way to maximize deductions for the personal portions of a trip is with a Saturday night stayover that reduces the overall cost ofthe trip. Ifyou can show staying the extra day or two costs less (or no more) than coming back home immediately after the business meeting is over, the IRS allows you to deduct your additional meal and lodging expenses (subject to the 50% disallowance rule for meals) for the extra day(s). Naturally, you still must have a dominant business purpose for making the trip in the first place. Be sure to document that your airfare savings equaled or exceeded the out-of-pocket costs of staying the extra day(s). Keep the proof with your tax records.

Example: You have a business meeting in New York on Monday morning. You and your spouse fly into town Saturday morning and spend the weekend sightseeing. Your round trip airfare is only $400 versus $1,200 if you carne in Sunday night and left Monday. In this situation, Saturday is a personal day since you would normally fly in Sunday. No problem. As long as your meal and lodging expenses for Saturday are no more than $800, you can write-offyour whole trip (subject to the 50% disallowance rule for meals). Of course, you generally can’t deduct the additional costs for your spouse (his or her airfare and meals and any extra charges for having two people instead of one in the hotel room), and you can’t deduct purely personal expenses like show tickets and baseball games. Still, this is a great deal taxwise.

Deducting Foreign Travel Costs

When you travel outside the U.S. primarily for business reasons, the general rule is that you must allocate all your travel expenses, including transportation, between business and personal. However, there are two big exceptions, and you often can plan ahead to take advantage of them. You can deduct 100% of your transportation expenses ifthe trip is primarily for business and you meet either ofthe following rules:

The One-week Rule. You’ll meet this rule if your business trip is a week or less, not counting the day you leave, but counting the day you return. In this case, you can deduct 100% of your transportation costs and 100% of your other out-of-pocket expenses for business days (subject to the 50% disallowance rule for meals). You cannot deduct out-of-pocket costs incurred on vacation days. The good news: Weekends and holidays falling between business days count as business days. Ditto for an intervening weekday between two business meeting days. “Standby days” when your physical presence is required for business also count, even if you spend most of your time on personal pursuits during those days. Finally, business days include the day ofyour return trip plus days you intended to work, but couldn’t due to reasons beyond your control.

The 25% Rule. You can also deduct 100% ofyour transportation expenses for trips lasting over a week, as long as you spend less than 25% of your days on vacation. For this purpose, count the day of departure and day of return as business days, as long as you are traveling to or from the business destination. Also, count all the other types of business days mentioned tinder the one-week rule above. Once again, however, you cannot deduct meals, lodging, and other expenses allocable to personal days.

Even if you don’t qualify for either of the above two exceptions, you (or, more likely, your employer) can still deduct 100% of your transportation costs if you’re traveling on behalf of your employer under a reimbursement or travel allowance arrangement and you’re not a managing executive of the company or related to your employer. Finally, in sort of a catchall provision, 100% of your transportation costs to foreign destinations are deductible ifyou can prove a personal vacation was not a consideration in choosing to make the trip.

If 100% of your transportation expenses aren’t deductible under any of the above rules, the business percentage of your transportation costs are still deductible-assuming the trip is primarily for business. ToPage 2calculate the business percentage, divide the days spent principally on business activities by the total number ofdays outside the country, counting departure and return days. The travel days count as business days, just as the other types of days are considered business days for purposes o f the one-week rule and 25% rule. You can also deduct the out-of-pocket expenses allocable to your business days (subject to the 50% disallowance rule for meals).

Example: On Thursday, you fly to Paris for customer meetings on Friday and Monday. You vacation the following Tuesday through Friday and return home Saturday. The two travel days, the two meeting days, and the weekend days in between count as business days. However, the four vacation days amount to 40% of your time, so you fail the 25% test. Therefore, you must allocate your airfare between business and personal. You can deduct 60% of your airfare, plus your out-of-pocket expenses for the six business days.

Example: Same as above, except this time you have only two vacation days (20% ofyour total days). Remember, the weekend days between your business meetings also count as business days. Now you can deduct 100% of your airfare because you pass the 25% test. You can also deduct your out-of­ pocket expenses for the eight business days.

Example: Same as above, except this time you return home on Thursday, three days after concluding your business meetings. Now, your trip is considered to last only a week (the departure day doesn’t count). So, you can deduct 100% of your airfare under the one-week rule. You also deduct your out-of­ pocket expenses for all the business days.

Travel to Attend Foreign Conventions

If the reason for a trip outside North America is to attend a business convention directly related to your trade or business, you may qualify for deductions. However, you must follow all of the foreign travel rules just discussed plus show it was just as reasonable for the meeting to be held on foreign soil as in North America and that the time spent in business meetings or activities was substantial when compared to that spent sight-seeing and other personal activities. Otherwise, you can only deduct the registration fees and other costs directly related to business while on your trip. Regardless of the location, you cannot deduct travel costs to attend investment or financial planning conventions and seminars.

Fortunately, the stricter rules for foreign conventions are inapplicable in many cases because the definition of ”North America” for this purpose is very liberal. It includes Canada, Mexico, Puerto Rico, the U.S. Virgin Islands, American Samoa, the Northern Mariana Islands, Guam, the Marshall Islands, Micronesia, Palau, Netherlands Antilles, Bahamas, Aruba, Antigua, Barbuda, Barbados, Bermuda, Costa Rica, Dominica, Dominican Republic, Grenada, Guyana, Honduras, Jamaica, Saint Lucia, Trinidad and Tobago, Midway Islands, Palmyra Atoll, Baker Island, Howland Island, Jarvis Island, Johnston Island, Kingman Reef, and Wake Island.

Conventions on Cruise Ships

Deductions related to conventions directly related to your trade or business that are held aboard cruise ships are limited to $2,000 per individual per calendar year. In addition, the ship must be a U.S. registered vessel, and all of its ports-of-call must be in the U.S. or its possessions. Finally, the following information must be attached to your return in the year the deduction is claimed:

1. A signed statement showing the total days of the trip (excluding travel to and from the ship), the number of hours each day spent attending scheduled business activities, and the program of the convention’s scheduled business activities.

2. A statement signed by an officer of the sponsoring organization that includes a schedule of each day’s business activities and the number o f hours you attended those activities.

Conclusion

There you have it. We hope this helps you plan some lovely trips that also deliver some nice tax breaks. However, we realize the rules explained here are rather complicated. Please give us a call if you have questions or want more information. These are just a few suggestions to get you thinking. Please call us at (212)387-7880 if you’d like to know more about them or want to discuss other ideas.