Date: February 26th 2006

Sorry for the delay in sending this out. Tax season, ya know... Anyhow, the attached document is a three page Microsoft Word document which contains the text of these answers in a much prettier and more useful format than this email will allow.

Notes from East Bay Enrolled Agents February 2006 Dinner meeting, featuring Karen Brosi (EA, CFP) and Steve Sims (FTB direct line 916-845-7565). These notes were compiled by Duncan Sandiland, who is fully responsible for any errors. Use at your own risk.
----------------------------------------
Domestic partners: My customers are domestic partners who are registered with the California Secretary of State. One partner has wages of $200,000 while the other has wages of $40,000.

1. Has the FTB issued regulations or other guidance which address how wage income is to be reported on the separate California returns of registered domestic partners?
Steve: report separate income on separate tax return when it’s EARNED income.

2. The partners own a home jointly and they are jointly responsible for the mortgage. Mortgage interest is $60,000 and payments are made from the joint checking account into which they deposit their paychecks. Has the FTB issued regulations or other guidance which address how this mortgage interest is to be reported on the partners' separate California returns?
Steve: The way the question is worded, domestic partners don’t matter – two people split the interest on their returns. Specifically addressing the domestic partnership issue: generally treat as MFS, splitting medical, etc deductions essentially as if they were both single. As for other issues, FTB has no answer as FTB is waiting on IRS rulings. R&TC does not address community property; that is covered by Family Code.
Karen: CA will follow whatever IRS rules in these cases, so until IRS rules, there is no clear answer for CA. In this case, clearly joint property etc, they should split this – IRS is not going to accept tracing based on %age contribution, so just split 50/50.
Karen real world: two unrelated taxpayers pool assets into joint account and by property – it’s not a partnership so they can split as they wish.

3. If the FTB has not issued regulations or other guidance that address these issues, what steps should the taxpayers take to protect themselves from penalties in the event that FTB successfully challenges their return positions?
Karen: You can’t protect yourself from an incorrect position.
Steve: Err on the side that pays the most tax and FTB won’t bother you!

----------------------------------------
Refund statute: 1) What is the official CA time limit for requesting a refund? Is there any possibility of going way back and requesting a refund? Brief Scenario: Taxpayer did not file tax return for 1994. FTB assessed tax - $4994. Taxpayer made some payments in 97-99 (approx $2700). FTB garnished wages starting in 2000 and collected $11464.90 for tax, penalties, collection costs, interest etc. throughout 2000 and 2001 and declared the year closed. Taxpayer filed the 1994 return under the CA amnesty program - total CA tax liability $108. Ca treated the income as wages. The company treated the employee as independent contractor, but made him pay rent for using company trucks and charged all types of fees that FTB did not consider in their calculations. Taxpayer is hard working, but suffering type - truck driver, young, high school education. Is any appeal for "fairness" possible anywhere?
Karen: No, if the statute of limitations has run, there is no hope.

2) Related question. There are other years beside 1994 for which tax returns were filed under the CA amnesty program. Date of filing 5/28/05. What payments should the taxpayer be able to get as refund? Is there a one-year limit? If so, does the one-year go back from the filing date of the return or some other date? Is the return considered a request for refund or what else needs to be done? Taxpayer has received some money back, but I do not understand how FTB arrived at the figures. Who can I talk to?
Karen: Anything paid in amnesty stays in amnesty, you can still amend the return but you cannot get any money back. If the statute is still open on other years and there were overpayments thereon, FTB will refund. If the statute is closed on those returns, there is no hope for refund.

----------------------------------------
Leasing: When a business client leases a vehicle and pays down the lease by $5000 to reduce the monthly lease expense, is this considered a payment or should the $5000 be amortized over the life of the lease?
Karen: IRC sec 178 says amortize it over the life of the lease.

----------------------------------------
Confused about Head of Household: Qualified Child in college under age 24 earning income but less than ½ own support. Is it limited income amount?
Karen: Yes, Qualifying Child test is met because college is a temporary absence. The amount of child’s income does not matter for a full-time student under age 24. The income test only applies when testing for Qualifying Relative. NOTE that “Qualifying Relative” is just the old test for a dependent, so don’t be put off by the new labels.

----------------------------------------
Corporate Dissolution: TP attempted a corporate dissolution in December. Documents were received at Secretary of State on 12/27. Corp had no activity after 4/05. On the Certificate of Dissolution, the assumer’s name was listed but address was left off. The request for tax clearance accompanying the docs had both name and address of the assumer. SoS denied dissolution because certificate had no address. Now corp is on the hook for $800 tax. Is there any remedy?
Karen: Nope, you’re stuck. SoS can be extremely picky. (Comment from audience – EA pulled exact corporate name from SoS website search, but that did not match the name (punctuation) as originally filed, so SoS rejected the filing. Moral of the story: go back to the original Articles to get the corp name.)

----------------------------------------
CA Reference books: Is there any comprehensive reference book for CA income tax published by the state or private publisher? Pub X by the state does not afford easy access to any info.
Karen: Spidell’s CA analysis (supported by general acclaim from the room). Also CCH, RIA etc tax guides.

----------------------------------------
State tax refund: Is a state tax refund received in 2005 taxable to IRS if the refund did not have a tax effect either because the refund was larger than the difference between the state tax deduction and a potential sales tax deduction, even if the deduction was taken to deduct income tax, or because the taxpayer was subject to AMT (and the entire state tax deduction did not reduce tax liability).
Karen: Got state income tax refund but was subject to AMT so got no benefit from the “deduction”, therefore refund not taxable for 2005, BUT make sure there really was no tax benefit.
HOWEVER, if you deducted state income tax but could have deducted sales tax, you only have to include the income tax refund to the extent it exceeds the amount of sales tax which could have been deducted.

----------------------------------------
E-services: What does FTB have available?
Steve: Transcripts are not currently available online at www.ftb.ca.gov. With taxpayer’s CSN, you can get certain things online.
Karen: You can get ES payments online, plus estimated and actual balance due. The FTB site is much easier to use than irs.gov. All you need to access FTB is SSN and last year’s AGI in order to get the CSN, which changes each year.

----------------------------------------
Offsetting refund: Can you offset balance due and refund returns if past statute date?
Steve: Only if there’s a specific offset available. Otherwise, you lose the refund, but you can use interest netting to reduce the amount of penalties and interest.

----------------------------------------
Mortgage interest: "I have a client that wants to buy a home with his life partner. One has a 750 fico, the other has a 615. I want to drop the 615 guy from the loan, put him on the title, and have them pay the mortgage payment from a joint account. Would they then be able to split the interest tax deduction, is this paper trail good enough for the IRS? Please advise, because the 615 guy makes a lot more money.”
Karen/Steve: Yes, they can split, but they would need to split the deductions equally to avoid charges of gaming. (After the meeting Karen provided the following additional information:)
Reg. §1.163-1(b) provides, in pertinent part: Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness.
In Golder v. Commissioner,(79-2 USTC 9451), the Court of Appeals for the Ninth Circuit acknowledged that Reg. §1.163-1(b) allows the deduction of interest by the taxpayer, even though the taxpayer is not personally liable for the mortgage as, for example, where the mortgage is nonrecourse, or where the taxpayer purchases property subject to a mortgage. In such situations, although the taxpayer is not directly liable on the debt, since the mortgage creditor may look only to the mortgaged property for payment, and the taxpayer stands to lose the property if the mortgage is not paid, the taxpayer must pay the mortgage to avoid foreclosure. Thus, Reg. §1.163-1(b) recognizes the economic substance of nonrecourse borrowing and allows an interest deduction to a taxpayer, who, in the situations contemplated in that regulation, is not directly liable on the mortgage indebtedness.
----------------------------------------
Miscellaneous notes from FTB:
1) Automatic installment agreement now available – up to $25K balance if paid off in 5 years. File online through e-services.
2) Installment agreements now available for businesses.
3) LLCs out-of-state must also file in CA. Make sure you download and file LLC-2 to register and then file the 568 for CA LLC.



--
To unsubscribe from: East Bay EAs NEWS List, just follow this link:

http://www.ebaea.org/cgi-bin/dada/mail.cgi?f=u&l=ebaeamem&e=example@example.com&p=[pin]

Click this link, or copy and paste the address into your browser.

IF YOU ACCIDENTALLY UNSUBSCRIBE, all you need to do to resubscribe is to click the above link again. You will be taken to the subscription page where you can resubscribe with just a few clicks. You will NOT need to email the list administrator and ask to be resubscribed.

IF YOU NEED TO CHANGE YOUR EMAIL ADDRESS, please do not notify the administrator. Instead, click on the unsubscribe link to deactivate your old email address, then click on the link again to subscribe at your new address. You will receive confirmation emails for both actions.