Burn down your house to get a tax deduction? May not be such a hot idea!

A property owner, wanting his lot cleared of the existing house so a new one could be built, donated the house to the fire department and claimed a charitable deduction.  The fire department burned the house down as a training exercise.

Using a valuation concept that has been around for years, the property owner obtained two appraisals – one valuing the property with the house, and one valuing the property without the house.  The difference between the two is presumably the fair market value of the house itself.  As this is the house that was given to the fire department, a charitable deduction was claimed for that value.

The IRS rejected this burnt offering.  The Tax Court agreed.  So did the 7th Circuit on appeal.  The case hinged on whether the value of the donation was greater than the benefit the taxpayers received.  The Court found that the fair market value of the property had to take into account the conditions the donor placed on the property and the benefit the donor received in return.  Namely, the donor gave the house on the condition that it be burned down and, in return, the house was demolished.

Since there is no market for houses that must be destroyed, the Court instead looked at the salvage value of the house.  It concluded the house was worth almost nothing.  Further, the Court found that the owners received a substantial benefit in that the fire department demolished the house, and this benefit outweighed the nominal value of the house. Although in this case the taxpayer did not receive the charitable deduction as sought, under the right set of facts and circumstances, a taxpayer can still qualify for a charitable deduction.

See here for the Tax Court ruling and fact details: http://www.ustaxcourt.gov/InOpHistoric/rolfsgallagher.TC.WPD.pdf and here for the 7th Circuit ruling: http://www.ca7.uscourts.gov/tmp/FM0R1XBH.pdf

For further information, please contact an Aronson tax professional at 301.231.6200.

Major Family Gifting Faces Headwind if Obama’s Budget Proposal Passes

On February 13th, the Obama Administration released its fiscal year 2013 budget, including various estate tax proposals that, starting in 2013, would result in:

• Reducing the lifetime gift exemption back to $1M (the 2009 level)
• Reducing the overall estate tax exemption to $3.5M (the 2009 level)
• Increasing the top estate tax rate back to 45% (the 2009 level)
• Making the trust assets in the IDGTs (Intentionally Defective Grantor Trusts) includible in the grantor’s estate
• Modifying the rules on valuation discounts
• Requiring a minimum 10-year term on GRATs (Grantor Retained Annuity Trusts)
• Making permanent the portability (carryover) of unused estate tax exemption amounts between spouses.
• Limiting the duration of the GST exemption to 90 years

Among the Administration’s various proposals on estate tax law changes, the most damaging one is the proposed reduction of the Continue reading »

Need cash? Don’t borrow from the IRS!

Many businesses and individuals are experiencing cash flow difficulties in today’s economy. To ease the cash crunch, it may be tempting to delay payment of taxes in the hope that finances will improve soon. Unlike other creditors, the IRS moves relatively slowly, lulling the taxpayer into complacency. During this time, interest and penalties accrue which, in some situations, can even exceed the original tax due. When the IRS decides to act, they often file liens, levies, and other garnishments that can cause significant and sometimes permanent economic damage. In addition to these civil penalties and collection actions, the IRS can pursue criminal charges. The failure to truthfully account for or turn over taxes is a felony, with the potential of up to five years of jail time. This applies to all taxes under the Internal Revenue Code – income tax, payroll tax, gift tax, and excise tax, to name a few. Continue reading »

Opportunity for Maryland Taxpayers: Get Credit for Taxes Paid to Other States!

Maryland taxpayers who were not permitted to claim a credit for personal income taxes paid to other states against their local income tax (i.e., City, County or Town) may still claim such a credit on a timely filed protective claim for refund for a tax year with respect to which such opportunity is still available.

Last year, the Howard County Circuit Court ruled that Maryland’s current application of the credit for taxes paid to other states is unconstitutional in so far as the credit is not allowed to offset the Maryland local personal income tax. That decision is still working its way through the appeal process and is unlikely to get to a final determination anytime soon. Nonetheless, the decision presents an opportunity for Maryland taxpayers to amend prior years’ tax returns and claim credits Continue reading »

The Total Cost of Healthcare?

Starting in tax year 2012, the “aggregate cost” of employer-sponsored health plans is required to be reported in Box 12 (Code DD) of Form W-2.  This amount includes the costs paid by both the employer and employee, regardless of whether those contributions were pre-tax or after-tax.   This provision, IRC §6051(a)(14), applies to employers with 250 or more employees starting in 2012 and Continue reading »

Have Foreign Bank Accounts or Other Assets? The IRS Wants to Know!

The IRS recently released a new tax form (Form 8938) that may need to be filed with your tax return this year if you have an ownership in certain “foreign financial assets.”  Foreign financial assets include: foreign bank accounts; foreign broker accounts; investments in foreign bonds or securities; ownership interests in a foreign trust; certain foreign pension payments; and investments in any foreign entity which may hold such assets as real estate, a trade business, etc.

The reporting rules and filing thresholds are complex, but if the value of your foreign financial assets was in excess of $50,000 (or $100,000 if married filing jointly) at the end of 2011 or exceeded $75,000 ($150,000 if married filing jointly) at any time during 2011, and you are a United States citizen or resident alien, you are required to file the new form.  These dollar thresholds are four times higher for taxpayers who lived abroad during 2011.

The penalty for failure to provide the required information with your tax returns is $10,000 unless your failure to file is due to reasonable cause. Continue reading »