jainen

>>we are having a confusion of terms<< At least I agree with THAT. The rest of your post does not reduce the confusion. Why are you citing something about assessed property taxes? And casualty? Taxman never suggested the estate made capital improvements. He said the utilities were "to repair and show property." I don't think expenses are deductible under either of those reasons. I'm trying to keep an open mind, but you should be able to support your position if it is actually allowed under the law. If you can't find it in a reg or ruling, at least point us to something about repairs in a standard tax guide, like Marilyn did, or an IRS pub, like I did.

>>Fix-up expenses have always been allowed as an adjustment to basis on a sale of real estate<< Again, I ask for your SOURCE because I don't think this is true. Until 1997, when the 250K/500K exclusion replaced the home rollover rules, Form 2119 had a line for fix-up expenses incurred during the last 90 days prior to sale. The 1996 edition of Pub 523 said, "Note. You deduct fixing-up expenses from the amount realized only in figuring the part of the gain that you postpone. You cannot deduct them in figuring the actual gain on the sale of the old home." [http://www.irs.gov/pub/irs-prior/p523--1996.pdf]

>>A properly drafted Promissory Note that included a repayment schedule, maturity date, default provisions etc would be executed.<< I wonder what sort of "default provisions" she has in mind. Then could she claim a bad debt when she refuses to pay herself? On the other hand, you all know I'm an arrogant contrarian (at least on this forum), so of course I'm going to argue that she CAN do this. Furthermore, I insist that it is really not so unusual. In fact, transactions between a business and its owners is a key planning element in choice of entity. She might want to look at forming an LLC, S-corp, or partnership. Even a sole proprietorship can elect to be taxed as a corporation, and that would pretty easily allow a shareholder loan. Allternatively, she could run her own non-business assets through a third party for a passbook or home equity loan, etc. So, Grace, find out what exactly her business purpose is, and maybe we can find a legal way to accomplish it.

>>They seem old<< Yes, I was wrong--this Internet thing is not reliable! The NJ law was amended in 2007, removing the requirement for a qualifying child. Kea should answer the letter the way KC explained. Don't forget to charge the client a hundred dollars to defend that $20 credit.

>why would not the utilities during the time they were attempting to sell be considered "selling expenses"?<< The Instructions for Form 8949 say you can include (in column G) "any expense of sale, such as broker’s fees, commissions, state and local transfer taxes, and option premiums." All these examples relate directly to the specific sales transaction itself. The utility bill was due whether the house sold or not. Michaelmars suggests utilities are an investment management expense. I'm just asking if someone can cite any authority for that position.

>>They aren't claiming any children<< I don't understand the original question or the responses so far. It was not a form letter and you can't ignore what they are asking for. NJ did not misinterpret Line 21 and the suggested formula is irrelevant. Read the instructions! According to Pub TSB-300, one of the requirements for the New Jersey Earned Income Credit is, "You file a Federal Schedule EIC on which you list at least one 'qualifying child.'"

>>inherited property is considered investment property<< No, that is not always true. Depends on how the estate uses the property. The original post contains no suggestion that this real estate was held for investment; in fact, the word "inventory" means quite the opposite. If it was investment property, the estate might elect to capitalize carrying charges such as taxes and interest (assuming acquisition debt), because they are otherwise deductible. The original post was about utilities, and as I read it not even for capital improvements or expense of selling..

>>add to basis, likewise taxes insurance etc<< This treatment has been recommended several times on this forum, but I remain skeptical. Do you have any actual citation to a reg or ruling that allows it? Even an unofficial source like a standard tax guide might explain under what circumstances and in what manner utility bills, property taxes, insurance, etc., can be capitalized. Where does this idea come from?

>>parents received $107,923.29 of which $15,150 was the equity gift<< Yes, and the prepaids and concessions further reduce what they actually received. In the other thread, you said "It's almost as if the selling price was determined then figures had to be input to get there, maybe to warrant the amount of the loan?" That's exactly what it sounds like. The son simply paid off the mortgage and took over the title. I'll guess he paid it off with a new mortgage, and the FMV was fudged so this replacement loan could be written at 80%. I'll guess there was very little cash in the deal. So just treat it as a related party transfer. The true sale price was $86,000 something--the contract price minus the gift minus the prepaids and concessions. Or just what the sellers received, which apparently was no more than needed to get rid of the loan. It does not understate the seller's gain, but it sets up the buyer with a lower basis. They can't have it both ways.

>>increased basis at fmv<< Sorry, I don't see it that way. If part of the equity were gifted, the new basis would be whatever they actually pay plus however much of the donor's basis is allocated to the gift portion. And even that might be awkward to defend in an audit.

>>what the FTB is searching for<< I guess they are looking for fraud. Same reason they require provider's phone number, which is also not on the federal form. In California this is a refundable credit so it can be claimed with no taxable AGI. But the taxpayer must at least report sufficient funds to maintain a household, one of the key requirements for a qualifying child.

>>He lives in the basement and rents the 3 rooms<< This sounds more like room rental than a duplex. I always recommend extra attention to record-keeping when there are common areas and a mix of personal and rental use. Although space is the most common method to divide expenses, you are not stuck with it if you have good records. See page 17 of Pub 527. "You can use any reasonable method for dividing the expense. It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them."

>>she was going to receive reimbursement<< In legal terms, this sounds like theft or embezzlement by the school since she did not intend to make a gift. Pub 526 has an example of a conditional donation to build a school gym. That's a different situation, but taken out of context it seems to support the later date.by saying, "You cannot deduct your gift as a charitable contribution until there is no chance of a refund." Pub 526 also says, "Usually, you make a contribution at the time of its unconditional delivery," but when it could go either way IRS naturally seems more comfortable with delayed deductions (unless obviously for tax purposes). Did she happen to be a school employee or contractor?

>>Will you please sign the tax return?<< No, you deserve all the fame. Notice that the landmark case is named after the preparer, not the taxpayer!

>>do I keep the original purchase and sale dates?<< According to Pub 537, "The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller is not a disposition." In my opinion, if there was no disposition then there could not have been an acquisition on the other side. Continue to use the same information the decedent used.

>>if the adoption is substantially complete<< Flash--Tax Court upholds the concept of "constructive adoption" in a brilliantly argued landmark case, Bulldog vs. Commissioner!

>>she didn't ask them to reimburse her in a timely fashion<< I'm not sure you can take a tax deduction for an expense that is otherwise reimbursable. The question of charitable contribution has been kicked around for teachers. The general consensus (and IRS position) is that these are employee expenses, that is, for the production of income, and therefore benefit the wage earner. However, if you can get by that issue, substantiation of less than $250 does not necessarily require a receipt.

>>the placement of the item on the form with other items of income distorted the clarity of the item<< Not bad--you say they would have put it on the tax return correctly if they just didn't have to put it on the dang tax return! Well, in this particular case it seems to be true. The way the IRS has April 15 set up is a problem for taxpayers needing to review their returns with the preparers. Something got missed, okay, but they did find and correct it right away. Assuming they also paid right away as always, and the preparer blamed the software but promises to take a good update class and the wife blamed the husband but promises to file earlier next year, Kea will save $600. Good time to donate to Eric.

>>H takes a reasonable salary<< In my opinion, that isn't reasonable for a partnership. One problem is that, while a partner's salary (better known as guaranteed payments) is deductible, payroll taxes on guaranteed payments are not deductible and should be added to the guaranteed payments subject to SE tax. Aw, it's probably not enough to make a difference unless they are doing something special with fringe benefits. Do you know why they don't use normal accounting in the matter?

>>Thanks Jainen for your response to me previous post<< You're welcome! I have the same response to this post--read the trust documents! Was this a typical living trust that automatically became an irrevocable A/B arrangement at death? Were both spouses grantors, and was all the property joint? You may still have time to elect to treat the trust as part of the estate, if that helps. I don't know the answer but I know where to find the answer. It will probably take several billable hours, but read the trust documents!

>>They view penalties as revenues that cannot be lost by the state.<< According to the California Taxpayers Bill of Rights, "The revenue is properly protected only when the true meaning of the statute is ascertained and applied." Of course, directly claiming your rights destroys any chance of working things out in examination. Just always keep the principle in mind when writing a response. OldJack has some fine verbiage, but it's not a magic spell so don't use it like a boilerplate. A standard approach will get the standard result. The law says taxpayer needs reasonable cause for penalty abatement. Anybody care to comment on my suggestion that the original post was NOT about preparer error?

>>Generally works for me<< Me too. I always take the position that the purpose of penalties is to ensure compliance, not to punish. The important thing is not so much that somebody made a mistake but that the taxpayer has taken (and can document) specific changes so the problem won't happen again. The early self-correction is perhaps your strongest point. I always emphasize a history of timely filing and whatever other compliance I can reasonably aver. There should be no penalty under this theory IF in fact it was preparer error. But there are a couple of elements to that. First, the taxpayer must have provided all relevant information to the preparer. Then the taxpayer must have relied on the preparer's advice in good faith. I think that is a weak point in the original post, and should be addressed in the abatement request. Specifically, the taxpayer is supposed to review the return in good faith. Was it reasonable to think that the large distribution would be non-taxable this year when it had been taxable the prior year? It might have been better left off entirely, so you could claim the 1099 was lost or forgotten in the rush to deadline. But there it was right on the front page.

>>how you know that<< Google!

>>if the law does not allow it to be sold, then its FMV IS ZERO<< If that were true, nobody would be a professional art thief! I mean, suppose I inherited a kilo of cocaine? The law does not allow it to be sold, but its FMV is upwards of twenty grand.

>>can't be sold as it breaks Federal law<< It might seem odd, but there are people who will pay for something that is illegal. Might even pay a premium.