Ann Romney's Tax Deductible Horse Activity--The Tax Code Got This Right

Professor Donald Tobin has a wonderful article giving some insights on the taxability of Ann Romney's participation in dressage (with some nice examples of how the passive loss limitation rules apply):

Ann Romney’s love of horses and Steven Colbert’s infatuation with Rafalca, one of her dressage horses, have created a buzz about horses, money, and taxes. Romney owns a one-third interest in Rafalca, and Rafalca will be competing, with her rider, Jan Ebeling, in the Olympic dressage event.  In the most recent uproar, the Romneys are criticized for deducting $77,731 for the Romney’s share of Rafalca’s expenses. But here is the catch: Because of anti-abuse provisions contained in the Tax Code the Romney’s only actually deducted $49 on their return. Assuming the Romney’s are in the 35% tax bracket, the benefit to the Romneys was about $17. Not much worth working yourself into a lather about.

3 Tax Increase Measures Qualify For November Ballot

Come November, Californians will will have a chance to vote on three different tax proposals.

Governor Brown's proposal would raise state sales tax and raise income taxes for those making more than $250,000.  Funds raised would be used to backfill the state's general funds and to guaratnte funding for local governments and public safety.

A competing initiative, backed by L.A. attorney Molly Munger, would instead raise income taxes accross the board for nearly every California taxpayer as well as increase the Millionaires tax to the highest in the nation--13.3%. These funds are to be used to go directly to publich schools. 

The third proposal would change corporate tax calculations for multi-state corporations--basing the liability on their share of sales in California.

Why the Tobacco Tax Defeat Does Not Bode Well for Gov. Brown

The last time California voters voted in favor of a tax increase was in 2004--the 1% tax increase on millionaires to fund mental health programs.  Since then, every other ballot measure proposing to raise taxes has failed.

Since only 14% of Californians smoke, and public smoking is already banned throughout most of California, you would think that a $1 per pack tax to fund cancer research would not have been a hard sell.  The reason it did fail is not because Californians are against cancer research, but because of a strong distrust of how proceeds would ultimately be used.  So reads the LA Times:

Many voters bought the idea that Proposition 29 was more of a tax than a strategy to reduce smoking and cure disease. ... The money it generated, the tobacco industry said, would go to a financially inept state government that for many years running has had a multibillion-dollar budget deficit.

"Californians are not anti-government," [Jon Coupal, president of the Howard Jarvis Taxpayers Assn.] said. "But they want value for their tax dollars, and they perceive correctly that they are not getting that in Sacramento."

Taxpayers have soured on expensive new ventures that promise economic windfalls and easier daily lives, he said. They remember, he said, approving a $3-billion bond measure for stem-cell research, only to hear that outsized salaries were being collected by executives running the program. He said they remember passing a $9-billion state bond measure in 2008 to build a high-speed rail network, a project that has seen costs and roadblocks multiply.

Of course, the big question is in light of Prop 29s defeat, what chance will Gov. Browns initiative have at the polls as his initiative is much broader--including both a broad based sales tax increase and increased income taxes on those making $250K or more. 

Do My Gifts of Limited Partnership Interests Qualify for the Annual Exlusion?

Under current law, a person has a right to give away $13,000 of assets to as many people as they see fit--free of gift tax.  This is commonly referred to as the "annual exclusion". 

One question that has developed over the years has been whether annual gifts of a family limited partnerships are eligible to qualify for the annual exclusion.  The hiccup was that in order to be considered a gift eligible for the annual exclusion, the gift has to be a gift of a present interest, and not just some future right or benefit. (Reg. 25.2503-3(b).)  The courts have held that in order to qualify as a present interest, the gift must confer a present economic benefit by reason of the use, possession, or enjoyment  i) of property or ii) of income from the property.

The tricky part with gifts of family limited partnership interests is that most of their partnership agreements provide restrictions on transfers--so as to ensure the business interests remain in the family.  The only problem is that the courts view these transfer restrictions as precluding the donees from having the right to use or enjoy the interest in a meaningful way.  Thus, courts are left to consider whether there is income that is of use or benefit to the donee.

The recent case of the Estate of George  H. Wimmer, TC Memo 2012-157, recently considered such a question and reiterated that for gifts of limited partnership interest to qualify for the annual exclusion under the argument that the donee received income, they must prove three things:

1. That the partnership would generate income,
2. That some portion of the income would flow steadily to the donees, and
3. That a portion of the income could be readily ascertained. 

Often, partnership agreements contain language granting the general partners full discretion as to whether or not distributions will be made to the partners--which would not appear to satisfy the second requirement.  In Wimmer, the Court noted that the general partners owed fiduciary duties to the donee limited partners, and that because the donee limited partners were actually irrevocable trusts, the only way such trusts would be able to pay their share of income tax would be for the partnership to make a distribution of income.  Based on these unique facts, the court held that the income would in fact flow steadily to the donees.

In short, before deciding whether to make annual gifts of family limited partnerships, the partnership agreement should be read carefully so as to ensure that it contains language that will ensure such gifts will be treated as present interests and eligible for the annual exclusion. 

California Entrepreneur Fills Out Form Himself-- Loses $18.5 Million Charitable Deduction

In what can be considered one of the harshest Tax Court cases of the year, the Tax Court denied a gigantic charitable deduction because admittedly "confusing" IRS forms were not filled out properly.

A prominent Sacramento real estate broker, certified real estate appraiser, and entrepreneur, donated six properties worth at least $18.5 million to a charitable remainder trust in 2003 and 2004, but failed to read and ultimately follow the instructions to Form 8283 (Noncash Charitable Contributions).  Although the Tax Court acknowledged that "the property was quite likely more valuable than the [broker] reported on [his] tax returns," the Tax Court denied the claimed charitable deduction for failure to comply with the substantiation requirements.  Ouch. Mohamed v. Commissioner, T.C. Memo. 2012-152 (May 29, 2012):

We recognize that this result is harsh—a complete denial of charitable deductions to a couple that did not overvalue, and may well have undervalued, their contributions—all reported on forms that even to the Court's eyes seemed likely to mislead someone who didn't read the instructions. But the problems of misvalued property are so great that Congress was quite specific about what the charitably inclined have to do to defend their deductions, and we cannot in a single sympathetic case undermine those rules.

The lesson here is that any time a person seeks a charitable deduction for real estate, a competent adviser should actually prepare the Form 8283 and ensure that any attached appraisal meets IRS requirements. 

(See more from Tax Prof)

Californa 9/11 Funds Raided By Politicians

In a move that is shocking, even by Sacramento standards, the Associated Press has revealed that a special account initially established to help fund scholarships for the California victims of 9/11 and their families has been raided for general government purposes.

After the 2001 terrorists attacked, Sacramento established a specialty memorial license plate emblazoned with the words, "We Will Never Forget."  Fifteen percent of funds raised were to fund scholarships for victims' families and the rest was to help fund anti-terrorism efforts. 

Since 2001, $15 million has been collected--of those funds raised, only $21,381 has reached the children and spouses of the three dozen California residents killed in the 9/11 attacks. 

On closer examination, it has been revealed that these funds are not being used to fund scholarships or anti-terrorism efforts but rather are being used as normal general funds dollars.  For instance, Gov. Schwarzenegger and Gov. Brown borrowed a combined $3 million dollars from the fund in order to fill budget deficits--loans which have yet to be repaid. 

California's Facebook Windfall Falters?

Before Facebook's IPO, many had speculated how the Facebook IPO could bring a tremendous amount of tax revenues to the state.  Gov. Brown even estimated that the IPO would generate between $1.4 billion and $1.9 billion  in income taxes over the next 13 months from sales of Facebook stock. 

This estimate was based on an IPO price of $35 per share.

On Friday when Facebook went public, it opened at $38, and then closed on Tuesday at $31. 

The Legislative Analyst's Office projected tax revenues of around $1.6 billion, but this was estimated at an IPO of $38, followed by a projected growth to $45 after six months. 

Regardless of Facebook's ultimate share price months from now, it is clear that one-time revenue increases or accounting tricks will not suffice to cure California's perennial budget woes.