May 2014 - In This Issue:

 

  

 

 

   

 

 

 
Depreciation
Importance of "Placed in Service"
The Tax Court denied a wealthy taxpayer an $11 million bonus depreciation deduction on a $22 million private plane because it was not considered placed in service during the tax year at issue. The determination of when an asset is placed in service is a question of fact. While in many cases the actual use of the asset will be enough to show the asset is in service, under certain circumstances, the first use can be a misconception. In this case, the Court looked to the regulations which provide "...property is first placed in service when first placed in a condition or state of readiness and availability for a specifically assigned function" (Regs. Sec. 1.167(a)-11(e)(1)(i)). In 2003, the taxpayer, who was a highly successful life insurance salesman, was having an exceptionally good year. It was also a time when interest rates were low and 50% bonus deprecation was available. During December of '03, he began looking at private jets for use in his business and signed a contract for the purchase of a Bombardier Challenger 604 jet costing $22 million. He made it clear that he needed to close the transaction by December 31, 2003 for tax reasons. As part of the purchase, the taxpayer had modifications made to the plane consisting of, among other things, the installation of conference table, two reclining chairs around the table, and an upgrade to the display screen in the main passenger cabin. However, the modifications couldn't be completed until mid-January of the next year. Thinking he needed to first use the aircraft in 2003, the taxpayer arranged to take 3 business flights on December 30 and 31 before the modifications were completed. After IRS disallowed his depreciation deduction (including the 50% bonus amount), he took his case to Tax Court. Unfortunately, the Court ruled that due to the modifications he wanted, which were part of the purchase contract, the plane was not in a state of readiness for its "specifically assigned function". Thus, the depreciation deduction was denied for 2003 (Brown, T.C. Memo. 2013-275).  
Sports Car Enthusiasts
Watch Out for Gas-Guzzler Tax
vintage-car-crop-sm.jpg The U.S. imposes an excise tax on autos with low fuel economy and it makes no difference whether the cars are manufactured here or imported into the U.S. In a Court of Claims case, the gas-guzzler tax imposed by IRS on a rare McLaren F1 sports car was upheld. The taxpayer, a sports-car collector, imported the McLaren from Germany to the U.S. He then transferred the car to his father in satisfaction of an outstanding loan. The father then passed away, thus making the German sports car an asset in his estate. The IRS assessed the excise tax on the estate. The estate claimed the McLaren was exempt from the tax because it was not manufactured for use on public streets. The court disagreed and upheld the assessment (Gonzales, Ct. of Fed. Claims).    
Tax Debts
Settlements that are "Too Good to be True"
piggy_bank_money.jpg

We have all seen them on TV and heard them on the radio. Those ads that promise you can settle a tax debt for pennies on the dollar. The Federal Trade Commission is reporting that many people are filing complaints against the firms making those promises. The companies representing unsuspecting taxpayers charge large up-front fees and then never send the required paperwork to IRS. While some tax debts may be settled for "pennies", the usual situation doesn't fall into that category under IRS' settlement rules. Remember that if something sounds too good to be true, it usually isn't.  

Penalties
Relying on IRS' Publication Won't Work
financial-planner.jpg A taxpayer tried to avoid a 20% accuracy related penalty by claiming the position he took with respect IRA rollovers was consistent with that outlined in IRS Publication 590. The IRA rollover rule, which allows one rollover every 12 months applies on an aggregate basis to all IRA's owned by the taxpayer. The Publication says it can be done on an IRA-by-IRA basis. The Tax Court sustained the IRS' position that the rollover rule applies on the aggregate basis, so the taxpayer lost on that count. He also lost in his attempt to contest the accuracy penalty assessed by IRS, claiming he relied on IRS' own Publication. The Tax Court said IRS publications are not substantial authority for positions taken on tax returns (Bobrow, TC Memo 2014-14).

We appreciate your feedback on our efforts to raise awareness of tax issues that affect you and your business operations.

 

If you have any questions, please contact your Meaden & Moore representative or Pete DeMarco at (216) 241-3272 or pdemarco@meadenmoore.com.

 

Thank you, 

Meaden & Moore

ABOUT MEADEN & MOORE

 

Since 1919, Meaden & Moore has been providing accounting, tax, forensic and business consulting services to a wide array of clients in a variety of industries. Through careful examination of the issues affecting business success, our staff of CPAs, CFEs, advisors, and auditors develop strategies and solutions to help our clients thrive in today's global economy.

 

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