Eight Tips from the IRS to Help you Determine if your Gift is Taxable

you give someone money or property during your life, you may be subject to the federal gift tax. Most gifts are not subject to the gift tax, but the IRS has put together the following eight tips to help you determine if your gift is taxable. To read the complete IRS story, click here.

SEC Charges Houston Businessman and Talk Radio "Money Man" for Fraudulent Conduct at Advisory Firm

I know a lot of you listen to this radio group.

Washington, D.C., March 25, 2011 — The Securities and Exchange Commission today charged Houston-area businessman Daniel Frishberg with fraudulent conduct in connection with promissory note offerings made to clients of his investment advisory firm.

The SEC alleges that Frishberg's firm Daniel Frishberg Financial Services (DFFS) advised clients to invest in notes issued by Business Radio Networks (BizRadio), a media company founded by Frishberg where he hosts his own show under the nickname "The MoneyMan." Frishberg failed to tell his clients about BizRadio's poor financial condition or his significant conflicts of interest with the note offerings that helped fund his salary at BizRadio.

"Loans” from wholly owned corporations were unreported constructive distributions

The Tax Court has concluded that a husband and wife failed to report constructive distributions from their respective wholly owned corporations, rejecting their claim that these amounts represented shareholder loans. The taxpayers took funds from their corporations' operating accounts (via checks, withdrawals, and transfers) to pay their own and their children's living expenses.
RIA observation: This case is a reminder of how dangerous informality can be when a controlling shareholder borrows from a corporation. To avoid constructive dividend treatment, the owners of a corporation should observe certain formalities when making withdrawals. Whenever practicable, a withdrawal that's intended to be a loan should be documented as such, with a legally enforceable promissory note that pays sufficient interest, and the transaction should be reflected as a loan on the corporation's books and records. Further, repayments should be made in accordance with the terms of the note.
Background. A dividend is a distribution of property from a corporation to its shareholders out of the corporation's earnings and profits. (Code Sec. 316(a)) The amount of the distribution equals the fair market value of the distributed property on the distribution date. (Code Sec. 301(b)(1), Code Sec. 301(b)(3)) For the years at issue in the Rowells' case (2000-2002), dividend distributions were taxable as ordinary income.
RIA observation: For tax years beginning after Dec. 31, 2002 and before Jan. 1, 2011, §301 of the 2003 Jobs and Growth Act (JGTRRA, P.L. 108-27, 5/28/2003), as amended by §102 of the 2005 Tax Increase Prevention Act (TIPRA, P.L. 109-222, 5/17/2006), provided that qualified dividend income was taxed at the same rates that apply to net capital gain. The recently enacted Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312, 12/17/2010) has extended for two years the taxing of qualified dividend income at capital gain rates—0% and 15%—to tax years beginning before Jan. 1, 2013.
The amount of a distribution that exceeds earnings and profits, and is therefore not a dividend, is taxable capital gain to the recipient. (Code Sec. 301(c)(3)) Under long-established case law, dividends may be formally declared or they may be constructive. A constructive dividend arises when a corporation confers a benefit on a shareholder by distributing available earnings and profits without expectation of repayment.
In seeking to determine if a corporate distribution to its shareholders is a non-taxable loan, as is sometimes claimed, courts have analyzed the following objective factors:
(1) Whether the promise to repay was evidenced by a note or other instrument;
(2) Whether interest was charged;
(3) Whether a fixed schedule for repayment was established;
(4) Whether collateral was given to secure payment;
(5) Whether repayments were made;
(6) Whether the borrower had a reasonable prospect of repaying the loan and whether the lender had sufficient funds to advance the loan; and
(7) Whether the parties conducted themselves as if the transaction was a loan. (Welch v. Com., (CA 9 2000) 85 AFTR 2d 2000-1064, affg TC Memo 1998-121)
Facts. John Rowell was a trial attorney who practices law through his wholly owned corporation, Professional Law Corp (PLC). His wife, Kathleen Rowell, was a television and screen writer as well as a buyer and seller of vintage dolls and similar collectible items, who worked through her wholly owned corporation, Knutsen-Rowell, Inc. (Knutsen).
During the years at issue, the Rowells took funds from PLC's and Knutsen's operating accounts for their personal use. They took those funds through checks, withdrawals, and transfers, and used the funds to pay their living expenses (including the expenses of their children) or otherwise spent them at their discretion. With one exception, none of the transactions underlying the taking or the use of those funds related to PLC's or Knutsen's business, and the Rowells didn't report any of those funds as a distribution (or other type of income).
On audit, IRS adjusted the Rowells' income to reflect its determination that they had received constructive distributions from their corporations. IRS also made various other adjustments to reflect other disputed matters. The Rowells sought relief in the Tax Court, and the separate cases dealing with the Rowells', PLC's, and Knutsen's tax liabilities were consolidated.
Court's decision. The Tax Court concluded that the Rowells were taxable on the constructive distributions from PLC and Knutsen. The Court rejected the Rowells' self-serving statements of intent that the distributions were repayments of shareholder loans and so were erroneously characterized as distributions. Instead, the Court scrutinized objective indicia of debt to determine whether the Rowells and their corporations intended at the time of the distributions to create a bona fide debtor/creditor relationship.
While recognizing that shareholders and their closely held corporations may sometimes be lax in formalizing their dealings with each other, the Tax Court nevertheless found that the Rowells and their corporations failed to establish that the requisite bona fide debtor/creditor relationship existed between them at the time of any of the distributions. Neither conducted themselves as if the distributed amounts were loans. The purported loans weren't evidenced by notes or other writings. They weren't secured by collateral. They didn't require the payment of interest. They weren't subject to repayment schedules or to any specific terms of repayment. Neither the Rowells nor the corporations recorded the amount of any loan between them or otherwise kept track of them accurately. The distributed amounts weren't contemporaneously designated as the proceeds or the repayment of a loan.
The Court also wasn't persuaded that either the Rowells or their corporations had sufficient funds either to make loans of the magnitude made or to repay loans of the magnitude claimed.

Knutsen-Rowell, Inc., et al., TC Memo 2011-65

What You Need to Know about the Home Office Deduction

If you use a portion of your home for business purposes you may be able to take a home office deduction. As I have been trying to tell our clients; the home office deduction taken correctly does not run up a red flag as so many accountants and urban myths would indicate. I have recently recorded a DVD on the home-office deduction, and which expenses I would recommend that you deduct. The DVD will be posted on our website when all of the editing has been done. You can check at www.tradersaccounting.com under the product tab to see if it is ready. It should be ready the third week in March.

To view the remainder of the message from the IRS on home office deductions click here. Regards and good trading. jc

What are your chances for being audited? IRS's 2010 data book provides some clues

The IRS has issued its annual data book, which provides statistical data on its fiscal year (FY) 2010 activities. As this article explains, the data book provides valuable information about how many tax returns IRS examines (audits), and what categories of returns IRS is focusing its resources on, as well as data on other enforcement activities, such as collections. The figures and percentages in this article compare returns filed in calendar year 2009 and audited in FY 2010 to returns filed in calendar year 2008 and audited in FY 2009.

What are the chances of being audited? Of the 142,823,105 total individual income tax returns with a filing requirement, 1,581,394 were audited. This works out to roughly 1.1%, a bit higher than the 1% rate for the previous year. Of the total number of individual income tax returns audited in FY 2010, 473,999 (30%) were for returns with an earned income tax credit (EITC) claim, a decrease from the 35.64% of all audited returns for FY 2009.
Only 21.7% of the individual audits were conducted by revenue agents, tax compliance officers, tax examiners and revenue officer examiners; the bulk of the audits (about 78.3%) were correspondence audits. The percentages for FY 2009 were 22.8% and 77.1% respectively.
Following are selected audit rates for individuals not claiming the EITC:
• For business returns other than farm returns showing total gross receipts of $100,000 to $200,000, 4.7% of returns were audited in FY 2010, up from 4.2% in FY 2009.
• For business returns other than farm returns showing total gross receipts of $200,000 or more, 3.3% of returns were audited in FY 2010, versus 3.2% in FY 2009.
• Of the returns showing farm (Schedule F) income, .4% were audited in FY 2010 versus .3% in FY 2009.
• For returns showing total positive income of $200,000 to $1 million, 2.5% of returns not showing business activity were audited, and 2.9% of returns showing business activity were audited; for FY 2009, these percentages were 2.3% and 3.1% respectively.
• For FY 2010, the audit rate for returns with total positive income of $1 million or more was 8.4%, a substantial increase from the 6.4% rate in FY 2009.
Not surprisingly, examination coverage increases for higher income earners. For example, the percentage was .71% for those returns with adjusted gross income (AGI) between $100,000 and $200,000 (up from .67% for FY 2009), and 1.92% for those with $200,000 to $500,000 of AGI (up slightly from 1.86% for FY 2009). Exam coverage increased to 6.67% for those with at least $1 million but less than $5 million of AGI (up from 5.35% for FY 2008). Similarly, coverage increased for those with at least $5 million but less than $10 million of AGI, as well as for those with AGI of $10 million or more.
The audit rates for business returns were as follows:
• For all corporate returns other than Form 1120S, 1.4%, versus 1.3% for the year before.
• For small corporations with total assets of: $250,000 to $1 million, 1.4%; $1–$5 million, 1.7%; and $5–10 million, 3%. For FY 2009, the percentages were, respectively, 1.3%, 1.8%, and 2.7%.
• For large corporations with total assets of $10 million or more, the overall audit rate was 16.6%, up from 14.5% for FY 2009. The audit rate for these corporations increased with the size of the entity. For example, the audit rates were 13.4% for those with total assets of $10–$50 million (up from 10.1% for FY 2009); 16.1% for those with $250–$500 million (versus 15.8% for FY 2009); 45.3% for those with $5–20 billion (down from 48.7% for FY 2009), and 98% for those with $20 billion or more (down from 100% for FY 2009).
• For partnership and S corporation returns, the audit rate was .4%, the same as for the year before.
IRS's activity on other fronts.

Why should I outsource my bookkeeping?

A client recently asked me, “why should I outsource my bookkeeping when I can do it myself?” Some small business owners might view outsourcing as giving up control of a key part of their business. Companies are staring to recognize the need to stay focused on what they do best - -their core competency. Using Traders Accounting Bookkeeping means one less internal function that takes time and resources away from what really determines a company’s success. Here are just a few reasons how outsourcing can benefit your small business:

 Recordkeeping can be a tedious task! The amount of time you save by using a professional, can be used to gain more visibility in your market. Getting exposure can sometimes be the most costly part of any small business.

 Let’s face it, in these economic times we are all looking to save money. With outsourcing, accounting departments can take advantage of trained professionals for a lower cost. For example, if you were to call your local CPA, you would more than likely pay between $65-$200 per hour for consulting. Using a professional bookkeeper at Traders Accounting will minimize the cost for a CPA and accounting consulting.


 Accountants and bookkeepers have access to technology and tools that can be costly to a small business owner. Outsourcing gives you the advantage to use these tools while keeping your costs at a minimum.

I can personally tell you that most clients I speak with don’t want to be bothered with recordkeeping. Unlike most business, traders are limited to the open and close of the market when conducting business. Once the market closes, recordkeeping is the last thing they want to worry about. Why not let a professional bookkeeper at Traders Accounting take care of it? You trade, we’ll do the rest!

Health Insurance Tax Breaks for the Self-Employed

Here is some information from the IRS about a special tax deduction for the self-employed. If you are filing your taxes as a "Trader in Securities" using schedule C then you will be considered to be self employed. To read the entire IRS news click here.

New, changed and expired provisions affect 2011 individual estimated tax

Apr. 18, 2011 is the due date for affected calendar year taxpayers to make their first installment of 2011 estimated tax. There aren't any changes in the estimated tax rules themselves for 2011. However, there are a number of new, changed and expiring provisions that will affect some individuals' estimated tax computations for 2011. This alert provides a brief overview of the estimated tax rules for individuals and looks at the changes that may impact 2011 estimated taxes.

Who needs to pay estimated tax. Individuals who have income that is not subject to withholding (for example, earnings from self-employment, interest, dividends, rents, alimony, etc.) must pay estimated tax or face a penalty. In addition, taxpayers who do not elect voluntary withholding on certain types of income, such as unemployment compensation and the taxable part of social security payments, also may have to pay estimated tax on those items or face a penalty. (Code Sec. 6654)
When and how much to pay. For 2011 estimated tax, in general, a taxpayer must pay 25% of a “required annual payment” by Apr. 18, 2011, June 15, 2011, Sept. 15, 2011 and Jan. 17, 2012 to avoid an underpayment penalty. (Code Sec. 6654(c))
The required annual payment for most taxpayers is the lower of 90% of the tax shown on the 2011 return or 100% of the tax shown on the 2010 return, even if filed late (“prior year exception”). However, a taxpayer (other than a farmer or fisherman) whose adjusted gross income on his 2010 return is over $150,000 (over $75,000 if married filing separately) must pay the lower of 90% of his 2011 tax or 110% of his 2010 tax. The prior year exception does not apply for a taxpayer who did not file a 2010 return or filed a 2010 return that did not cover 12 months. (Code Sec. 6654(d))
Other exceptions to penalty. There's no underpayment penalty if the tax shown on the return (after withholding) is less than $1,000. Estimated tax does not have to be paid for 2011 if the taxpayer was a U.S. citizen or resident alien for all of 2010 and had no tax liability for the full 12-month 2010 tax year. (Code Sec. 6654(e))
Annualized method. A taxpayer who, after Mar. 31, 2011, has a large change in income, deductions, additional taxes, or credits that requires him to start making estimated tax payments should use the annualized income installment method. While the due dates will not change, the payment amounts will vary based on the taxpayer's income, deductions, additional taxes, and credits for the months ending before each payment due date. As a result, this method may allow the taxpayer to skip or lower the amount due for one or more payments. A taxpayer who uses the annualized method should be sure to file Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, with his 2011 tax return to indicate to IRS how he has computed his payments, even if no penalty is owed. (Code Sec. 6654(d)(2))
Farmers and fishermen. Special estimated tax rules apply to farmers and fishermen.

SEC Freeses Assets of Registered Investment Advisory Firm

The following article should be read by anyone trying to hire someone to manage their trading account.
On March 8, 2011, the SEC obtained an emergency court order freezing the assets of Jason Bo-Alan Beckman, of Plymouth, Minnesota, and his registered investment advisory firm Oxford Private Client Group, LLC, for their role in a massive foreign currency trading scheme that raised at least $194 million from nearly 1,000 investors. The court also entered a freeze order against the assets of Beckman’s wife, Hollie Beckman, who also received investor funds. In addition, the court issued an order appointing a receiver over all of these assets.
For the remainder of the article, click here.

Six Facts the IRS Wants You to Know about the Alternative Minimum Tax

The Alternative Minimum Tax attempts to ensure that anyone who benefits from certain tax advantages pays at least a minimum amount of tax. The AMT provides an alternative set of rules for calculating your income tax. In general, these rules should determine the minimum amount of tax that someone with your income should be required to pay. If your regular tax falls below this minimum, you have to make up the difference by paying alternative minimum tax.

To read the rest of this tax tip click here. To find a great tax preparation firm call 800.938.9513.

IRS Debunks Frivolous Tax Arguments

WASHINGTON — The Internal Revenue Service today released the 2011 version of its discussion and rebuttal of many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws.
For more information on this please click here.

If your mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income. Here are 10 facts the IRS wants you to know about Mortgage Debt Forgiveness.

1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
2. The limit is $1 million for a married person filing a separate return.
3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.
7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.
9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.

The NYSE-Deutsche Börse Merger: Building a Powerhouse or a Dinosaur?

I just have received this from The Wharton School at the University of Pennsylvania. I think it is of interest to each of us who trade.

The proposed merger between the New York Stock Exchange (NYSE) and Deutsche Börse (DB) could mean big changes for the American icon, which heralds the opening of the markets each day with the ring of a bell. Although experts say an NYSE listing is still the sign of a blue-chip company, exchanges are struggling to remain relevant in a high-tech financial world. Similar pacts are proliferating between other exchanges as the organizations try to stay one step ahead of an increasingly interconnected global market. Can a combination of DB's business might -- and NYSE's marketing panache -- turn the tide? To read the entire article please click here.

IRS Has $1.1 Billion for People Who Have Not Filed a 2007 Income Tax Return

IR-2011-21, Feb. 28, 2011

WASHINGTON — Refunds totaling more than $1.1 billion may be waiting for nearly 1.1 million people who did not file a federal income tax return for 2007, the Internal Revenue Service announced today. However, to collect the money, a return for 2007 must be filed with the IRS no later than Monday, April 18, 2011. To read the entire article click here.

Small Business News

Employers will no longer get Form 941, Employer’s Quarterly Federal Tax Return and other business forms in the mail.
All IRS forms, schedules and related instructions are available on IRS.gov.
For the complete story please click here.

Small Business Lending Fund

Enacted into law as part of the Small Business Jobs Act of 2010 (the Jobs Act), the Small Business Lending Fund (SBLF) is a $30 billion fund that encourages lending to small businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion. Through the Small Business Lending Fund, Main Street banks and small businesses can work together to help create jobs and promote economic growth in local communities across the nation.

To read the complete article click here.