Apr 16, 2014
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The Farm CPA

RSS By: Paul Neiffer, Top Producer

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

The 2013 Tax Season Bites the Dust

Apr 15, 2014

I am waiting for my oldest son's age to finally surpass the number of tax seasons I have completed. He is 27 (and working at a CPA firm in Costa Mesa, CA) and his little brother, age 25 works at Price Waterhouse Coopers in downtown LA (there is a chance he gets to spend 3 months in Calcutta, India since he is in International Tax). It will require me to retire for about 7 years for his age to catch up to my tax seasons.

This year was actually much easier on myself and I think most of my compatriots since we did not have Congress passing a tax bill on the last day of the year to mess up the IRS computers (although the computers have other issues to deal with). Next year may go back to being a bit of a mess since I think we will get a new tax law at the end of the year and this will delay 2014 filings, but that is at least 9 months in the future.

Since the 2013 tax season is now done, it is time to look forward to getting additional farm tax and accounting education. I had previously mentioned a couple of times about the AICPA Farm Conference in Austin this May. I am fairly certain it is officially sold out, but for those CPA's, Attorney's, Banker's, Farmer's and others that are interested in getting two days of good farm business and estate tax advice in a nice resort location, Roger McEowen of Iowa State Center for Agricultural Law and Taxation has two summer conferences planned. The first is in West Baden Springs, Indiana (the home of Larry Bird, technically French Lick, but very close) the first Thursday and Friday in June. The second is scheduled for the last Thursday and Friday in West Yellowstone, Wyoming.

Each course has a full day of farm business taxation update and a full day of estate taxation and planning. I will be teaching with Roger (and one or two others) at each conference. I taught at the two events last year and I think anyone interested in getting more farm tax knowledge; it would be worth attending and the resort areas are nice too.

If you are interested, here is a link to the CALT website.

Social Security, Treasury Targets Taxpayers for Their Parent's Decades-Old Debts

Apr 14, 2014

According to a recent Washington Post article, the Treasury Department has been seizing tax refunds or demanding payment from hundreds of thousands of Americans on some very old debts due to a single sentence in the 2008 farm bill that removed the 10-year statute of limitations on debt owed to the government. Since 2011, the Treasury has collected $424 million on these old accounts.

Social Security has been especially aggressive, targeting 400,000 taxpayers that it says collectively owe back $714 million in ancient overpayments. In many cases, the people who actually received the money are dead, so the agency goes after any children who may have indirectly benefited from the money, starting with the eldest, until the debt is paid. Per the article, some of the debts go back over 50 years and the responsible agencies have not been very helpful in substantiating the amounts owed or willing to take credit for reopening the cases. A Social Security spokeswoman says the agency didn’t seek the change; ask Treasury. Treasury says it wasn’t us; try Congress. Congressional staffers say the request probably came from the bureaucracy.

The only explanation the government provides for suddenly going after decades-old debts comes from Social Security spokeswoman Dorothy Clark: “We have an obligation to current and future Social Security beneficiaries to attempt to recoup money that people received when it was not due.”

See the full article here.

Trusts Can Get You in Trouble

Apr 10, 2014

In a Tax Court filing from last week (Estate of Elwood H. Olsen, TC Memo 2014-58), we find how much tax can be owed if taxpayers do not administer trusts correctly. In the case, Mr. Olsen passed away in 2008 at the age of 92. In 1994, Mr. Olsen and his wife Grace each formed revocable living trusts (a very common estate planning tool). Each of these trusts had essentially identical terms and upon death, the trusts would be split into (1) a so-called marital trust that in turn would be divided into two separate and distinct trusts known as Marital Trust A and Marital Trust B and (2) a Family Trust.

On December 8, 1998, Mrs. Olsen passed. The final estate settlement allocated (1) $1 million to Marital Trust A, ; (2) $504,695 to Marital Trust B; and (3) $600,000 to the Family Trust. At that time, the maximum lifetime exclusion was $600,000 so that is why the family trust was allocated that amount. Also, the executor made a "QTIP" election on the two marital trusts. This election allowed the estate to reduce the estate value so that no tax would be due on Mrs. Olsen's death. However, upon Mr. Olsen's death, the trust assets would then be included in his estate.

As can sometimes happens with these facts and circumstances, Mr. Olsen did not create three separate trusts after the settlement of the estate. Rather, he simply kept all of the assets in one trust and throughout his life, made substantial charitable gifts and other transfers.

Upon his death, his personal representative elected not to include any of the trust assets in his estate return. The IRS audited the estate and assessed additional tax based upon their calculation of the value of Marital Trust A and B that should have been included. The IRS determined this value at $1,071,224 resulting in a deficiency of $482,051.

The Tax Court finally ruled that only $607,927.51of the Marital Trusts would be included, however, this still increased the tax by about $250,000 plus the estate probably spent another $100,000 or more on legal fees.

As advisors, we find too many other cases like this where clients have trusts and do not totally understand the mechanics involved in properly administering the terms and provisions of the trust. Since Mr. Olsen made several substantial charitable gifts during his life; the proper set up of the trusts and using the Marital Trusts to funds these gifts would most likely have reduced his estate and not caused an audit and court proceedings. This is a case where using a qualified trustee to handle the trusts along with Mr. Olsen would have been prudent.

Senate Finance Committee Proposes Two-Year Extension of Section 179 and Bonus Depreciation

Apr 03, 2014

Senator Ron Wyden (D - Oregon), chairman of the Senate Finance Committee has submitted a bill to extend many of the provisions that automatically expired at December 31, 2013. Of special interest to farmers is that Section 179 would be retained at the $500,000 level for 2014 and 2015 AND 50% bonus depreciation would be extended through December 31, 2015.

However, since this is an election year, there is little chance that this bill will make it to the Senate for passage and even if it makes it that far, it will most likely stall in the House. Most pundits agree that this bill will come up for a vote after the Mid-Term elections and before year-end, similar to what happened two years ago.

There seems to be bi-partisan support for passing this bill, but again, with an election year, nothing will happen until late in the year and certain items may get eliminated in the final bill.

We will keep you posted.

Taxpayer Victory in Frank Aragona Trust Case

Mar 27, 2014

The US Tax Court released today their long anticipated decision in the Frank Aragona Trust case. This case had been previously decided in favor of the IRS and then appealed to the Tax Court. The background on the case is as follows:

  • The Frank Aragona Trust was formed by Frank Aragona during his lifetime and after his death, the trustees of the trust were his five children plus an independent trustee. Three of the children trustees were also employees of a LLC which was 100% owned by the trust and two of these children were also part owners of other LLCs which were majority owned by the trust.
  • The trust incurred substantial real estate losses during 2005 and 2006 which were carried back to 2003 and 2004 to get income tax refunds. The IRS audited the tax returns and disallowed those losses due to their conclusion that the trust did not materially participate in these real estate activities. The IRS asserted a trust could not provide personal services to meet the material participation test, only an individual or an C corporation meeting certain requirements.
  • However, the Tax Court decided that a trust could in fact provide personal services and that the activities of its employees and trustees could be attributed to the trust and if they provided enough hours of activity, then the trust could deduct the real estate losses.

In the case of the Frank Aragona Trust, the Tax Court concluded exactly that. They indicated that the services provided by the three trustees (and the employees) were more than sufficient to allow the trust to deduct these real estate losses. Another factor in favor of the trust was the three trustees were employees of a LLC owned 100% by the trust. This allows all of their activities to be attributed to the trust. If these trustees had been employees of a LLC not related to the trust, the case decision may have been decided otherwise.

Many farm holdings have now been placed into trust for the benefit of children and grandchildren. This decision would allow "farming operations" with enough material participation by trustees and employees to fully deduct those losses and not have any income subject to the new 3.8% net investment income tax. However, for most farmland placed in a trust that is cash rented or crop shared, these losses would most likely still not be deductible and any income would be subject to the new 3.8% tax (once trust income exceeds about $13,000).

Although a victory for the taxpayer, it will primarily apply to those larger trusts with major farming or ranching activities.

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