Illegal Deduction in the Backfield

The 1985 Chicago Bears were one of the greatest teams in NFL history — in fact, ESPN ranked them the greatest ever.  Quarterback Jim McMahon, Hall-of-Fame running back Walter Payton, defensive tackle William "Refrigerator" Perry, and the rest of the team captured America's heart as they sent nine players to the Pro Bowl and shuffled their way to victory in Super Bowl XX.

Hard to believe that was just 29 short years ago. Today's "Monsters of the Midway" are 3-5 after going into hibernation against the New England Patriots this week. They've lost to the Bills, the Packers, the Panthers, and the Dolphins. They're even losing to the Cook County Revenue Department! And that contest illustrates the sort of hair-splitting that seems to define so much of tax law.

In 2003, the Chicago Park District renovated the team's home at Soldier Field. The new venue includes 8,000 "club seats" on the Lake Michigan side of the field that come with all sorts of extra goodies like access to the heated "Club Lounge," parking, and game day programs. There are also 133 luxury suites that rent for up to $300,000 per year and include private seating, private bathrooms, food and drinks, and even individual temperature controls. (If you've ever shivered through a December game at "the Eyesore on the Lake Shore," you'll realize that heat may be the most valuable perk of all!)

Cook County, where the stadium sits, levies an amusement tax equal to "three percent of the admission fee or other charges paid for the privilege to enter, to witness or to view such amusement." (We're not sure how "amusing" it is to watch Da Bears fall to the lowly Carolina Panthers, but that's a topic for a different day.) However, that tax specifically excludes "any separately stated charges for non amusement services or sales of tangible personal property."

And that's where it starts getting tricky. How much of the premium ticket price should be subject to that tax and how much should be exempt?

The team broke out a separate "club privilege fee" from the price of the club seats and argued that it shouldn't be taxable because it's separate from the right to enter the stadium and watch the game. As for the luxury suites however, they did not break out a separate fee for the extras, but assigned those seats a flat $104 value and paid the tax on that amount. In 2007, the county threw a penalty flag, holding that it's impossible to separate the extra perks from the price of a seat, and sacked the team for $4.1 million in extra taxes.

Naturally, the Bears challenged the ruling on the field. They took it to an administrative law judge, who sided with the county.

If this had been an on-field call, the Bears would have been allowed just one challenge — and they would have been charged with a timeout too, for losing it! But that's not how it works with taxes. So the team appealed to the replay judges at the Cook County Circuit Court, and won. But now the county had possession. They advanced the ball to the First District Appellate Court, which re-affirmed the tax. (Don't rule out a Hail Mary to the Illinois Supreme Court. And you thought football games have gotten too long!)

Coach Mike Ditka would never have led his '85 Bears to the field without a game plan to minimize his opponents' strengths and take advantage of their weaknesses. It works the same way with your taxes. So call us when you're ready for your own plan. But do it fast! December 31 is closer than you think, and the clock is about to run out on some of the most valuable strategies!

How to Guarantee an Audit

Most of us would rather have a root canal without anesthesia than face an IRS audit. Fortunately, your chances of winding up in that particular hot seat are fairly low. Audit odds vary according to how much you earn and how you earn it, but generally range from 0.9% (for incomes up to $200,000) to 12.1% (for incomes over $1 million). That means most of us can take comfort knowing our chances of winding up in the crosshairs are slim.  

Now, if you look up "guaranteed audit" in the dictionary, you won't find it, because it's two separate words. Still, there is one way you guarantee yourself an audit. And some of your most prominent fellow citizens are working night and day to put themselves in that position. So, how do you get there? Easy . . . just get yourself elected President of the United States!  

Take a look at Section 4.2.1.11 of the Internal Revenue Manual and you'll see it in black and white: "The individual income tax returns for the President and Vice-President are subject to mandatory examinations." Yikes! As if it's not bad enough having everyone from the New York Times to the National Enquirer all up in your business, now you'd have to contend with the IRS, too!  

Presidential audits are no ordinary examinations. The Internal Revenue Manual spells out the kind of excruciatingly detailed rules that you might imagine for the "First 1040":

•"The returns should be kept in an orange folder at all times." (We wouldn't want to confuse them with the President's nuclear launch codes in the red folder.) 

•"The returns should not be exposed to viewing by other employees." (Of course, Presidents routinely release their returns to the public, so employees without "Double Secret Presidential Clearance" will just have to find them online.)

•"The returns should be locked in a secure drawer or cabinet when the examiner is away from the work area." (Gotta keep those Russian teenagers from hacking in and running up the balance on the President's American Express!)  

The kid-glove treatment doesn't stop when the audit ends, either. Presidential returns "must be closed directly to the Employee Audit Reviewer in Baltimore Technical Services. The 'Other' box in the 'Forward to Technical Services' section of Form 3198 must be checked and the examiner should notate 'President (or Vice-President) Examination; Forward to Baltimore Technical Services.'" That's reassuring — can you imagine how embarrassing it would be send the Presidential return to the wrong archive!  

On the bright side, if you do find yourself having to put up with that mandatory annual audit, you'll get some nice perks out of it: a fleet of limousines, a comfy jumbo jet for avoiding the TSA's usual "perp walk", and a roomy white house on 18 acres in the middle of Washington, DC. You can even walk to work! Still, there might be a nagging feeling in the back of your mind, knowing the IRS has isolated your return like an Ebola specimen — in its own special orange folder, under lock and key.

 We realize that you aren't getting ready to move to 1600 Pennsylvania Avenue. But we make sure that our tax planning advice can stand up to a Presidential-level audit. It all starts with a proactive plan to take advantage of every legal deduction, credit, and strategy to cut your tax. So call us for that plan, and you'll have more to contribute to your White House run!

 

 

 

 

 

 

 

 

The Art of the Tax Loss

Everyone knows what a hobby is, right? It's something you do to relax and have fun, not something you do as an occupation. And everyone knows what a business is, too. It's something you do to make money. So everyone should know the difference between a hobby and a business, right? Well, it turns out that's a harder question than you might think — especially where our friends at the IRS are concerned.

This week's story concerns Susan Crile, a tenured professor of studio art at Hunter College in New York City. Teaching art is her "business," and she earns a respectable professional income from it — from 2004 through 2009, her salary grew from $85,999 to $106,058.

But Susan was a distinguished painter and print maker long before securing her coveted teaching position. She's sold 356 works of art since 1971. Her work hangs in the permanent collections of at least 25 museums, including the Metropolitan Museum of Art and the Guggenheim Museum. It also graces Fortune 500 and government offices, including the Federal Reserve Board, the Library of Congress, and various U.S. embassies. Criles works approximately 30 hours per week in her Manhattan studio during the academic year, and full time at a larger studio upstate in the summer. She also travels extensively for her work, including a trip to Kuwait to depict burning oil fields during the first Gulf War.

You would hope that an artist as accomplished as Criles would enjoy fame and fortune from her work. She may be famous, at least in the art world, but fortune seems to be lagging. She's grossed as much as $111,815 from sales in a year, but never shown a profit. From 2004 through 2009, Criles reported just $15,865 in income from her art. But for that same period, she reported $286,976 in expenses. These included the cost of materials, of course, but also expenses for vehicles, mortgage interest (presumably on her studio property), travel, meals and entertainment, utilities, research, maintenance, and local transportation.

Unfortunately, you don't have to take any art classes to become a tax auditor. Maybe that's why the critics at the IRS panned her tax returns. They called her art a hobby, not a business, and used the so-called "hobby loss" rule to disallow all her deductions exceeding her income. Then they presented her with their review — a bill for $98,547 in taxes and penalties!

Tax Court judge Albert Lauber agreed that some of Criles's deductions, like telephone and cable TV bills, newspaper subscriptions, tips to her doormen, and cabs to the opera, museums, and social events, were inappropriately personal and ought to be disallowed. But then he addressed the real question: had she created her art with a bona fide intent to earn a profit? Fortunately, the tax system offers a nine-factor "paint by numbers" test for distinguishing a hobby from a business, and the judge concluded that Criles's time, effort, and expertise outweighed her spotty income over time. Deduction upheld!

Do you have a hobby that makes (or loses) money? Maybe it isn't really a "hobby" at all, and maybe you can take advantage of it come tax time. The only way to know for sure is to call us and ask for a plan to make the most of your activity. So call us today while there's still time to plan for 2014, and together we'll see if we can paint a picture of savings!

What Do You Give the Man Who Has Everything?

Last week, New York Yankee shortstop and future Hall-of-Famer Derek Jeter played his last Major League Baseball game. He chopped a single to third in the third inning to drive in a run, then took himself out for good. That final hit brings his total to 3,465 hits, along with a .310 batting average, five Gold Glove awards, and five World Series rings. Jeter was that rare player who stayed with a single club for his entire career. He's also untainted by so-called "performance enhancing drugs" plaguing the game (or, in the case of Jeter's teammate Alex Rodriguez, you can leave off "performance enhancing"). Jeter goes out a very popular guy — and that popularity is about to send him into extra innings with our friends at the IRS.

Jeter earned over $265 million over the course of his 20-year career. And that's before his endorsement deals with Gatorade, Fleet Bank, Ford, VISA, Discover Card, Florsheim, Gillette, Skippy peanut butter, XM Satellite radio, and even his own Nike shoe. If ever there were a guy who could buy anything he wanted, it's "Captain Clutch."

But that didn't stop the baseball world from showering him with gifts upon his retirement. The Tampa Bay Devil Rays gave him a custom-painted kayak that cost more than $6,000. The Cincinnati Reds gave him framed autographed jerseys of fellow shortstops Dave Concepcion and Barry Larkin, along with three photos from the weekend in Cincinnati when Jeter was named captain of the Yankees. The Seattle Mariners gave him a seat from the Kingdome, where he made his major league debut on May 29, 1995. Even the lowly Chicago Cubs, which hosted Jeter for just five career games, honored him with a number from the hand-operated scoreboard. All told, the gifts are said to be worth about $33,000.

So, naturally, Jeter will owe another $16,000 or so in tax on those gifts. That includes 39.6% federal income tax, 3.8% Medicare tax, plus whatever state and local taxes apply where he receives the gifts.

Wait a minute. We're talking gifts here, right? How can Jeter owe income tax on gifts?

It all comes down to why the giver makes the gift. If a gift is made out of "detached and disinterested generosity," like when you give your children a birthday present, the officials in charge of collecting income tax generally turn a blind eye. (If the value of gifts to any single individual exceed $14,000 per year, the officials in charge of collecting gift taxes start getting interested.) But if the gift is really a marketing gesture in disguise — like when a team hosts a ceremony to present Jeter with his gift, then uses it as part of its marketing — that "gift" becomes taxable income.

What could Jeter do to avoid the tax? He could refuse the gifts, which wouldn't seem very sporting. Or he could request they go to his charitable foundation. But that would defeat the purpose of gifts like the Cincinnati shortstops' jerseys that are intended to be sentimental rather than valuable.

Jeter's final-season salary was $12 million, which works out to about $74,000 per game, or $8,230 per inning. So the good news is that the tax on the gifts should only eat up a couple of inning's worth of income.

Are your business associates planning to lavish you with gifts this holiday season? Call us. We know you won't be happy to pay tax on them, but at least we can help you with a plan to pay the least amount allowed. And remember, we're here for the rest of your teammates, too!