Ch. 4:

DeductionsMedical

Deductions

ILM 201228037

Medicare Premiumsas

Self-EmployedHealth Insurance

under

Sec. 162(l)4-1

ILM 201228037

All

Medicare Partscount as

health insurance

A, B, C, D4-1

ILM 201228037

Partnership/S Corpcan

reimburse

Medicare premiums

and treat this

as part of a

company health plan

4-1

ILM 201228037

Medicare premiumsfor aspouse

ordependent childmay be deductedunder sec. 162(l)

4-2

Notice 2012-14

HSAs:

Effect of Coverage

under

Indian Health Service

4-2

Property

Taxes

4-3

Info Ltr 2012-0018

Deductibilityof

Property Tax BillAmounts

4-3

Can AnyoneFigure Out

Exactly Whatis a

DeductibleReal Property

Tax ??

“So-called taxes for local benefits referred

to in paragraph 1.164-2(g), more properly

assessments, paid for local benefits such as

street, sidewalk, and other like

improvements, imposed because of and

measured by some benefit inuring directly

to the property against which the

assessment is levied are not deductible as

taxes.

Reg. §1.164-4: 4-3

The real property taxes deductible

are those levied for the general

public welfare by the proper

taxing authorities at a like rate

against all property in the

territory over which such

authorities have jurisdiction.”

4-3

$156 Billion

in 200672% of taxpayers

overstated the deduction

GAO Report on Prop Taxes

FTB Proposal:

Ad Valorem Taxes Only

Parcel numberson Schedule A

4-3

Info Ltr 2012-0018

4-5

“§ 164(b)(1) requires a personal property tax be an ad valorem tax to be deductible. The Code does not explicitly require the same for real property taxes.”

Info Ltr 2012-0018

4-5

Assessments on real property owners, based other than on the assessed value of the property, may be deductible if they are levied for the general public welfare by a proper taxing authority . . .

Info Ltr 2012-0018

4-5

. . . at a like rate on owners of all properties in the taxing authority’s jurisdiction, and if the assessments are not for local benefits (unless for maintenance or interest charges).”

Ch. 5:

Repairs

vs.

Capital

Improvements

>200 pages

135 Examples

Mortgage

Interest

4-5

Bronstein v. Comm’r

Home Mortgage

Interest

Deduction Limit

for

Married Filing

Separate 4-5

$1,000,000 Mortgage

$1,000,000

Married Co-Tenants

MFJ

$$

$1,000,000 Mortgage

$550,000

Married Co-Tenants

MFS

$$

Sophy v. Comm’r

Home Mortgage

Interest

Deduction

Limit

for

Unmarried Co-Tenants

4-6

50% 50%

$1,500,000

Mortgage

$750,000$750,000 ?

Unmarried Co-Tenants

50% 50%

$1,500,000

Mortgage

$550,000$550,000

CCA 200911007

1

$1,100,000 per

residence

4-6

$1,400,000

Mortgage

$600,000$1,100,000

Separate Ownership

$600,000

Mortgage

RDPs

50/50

$1,400,000

Mortgage

Sophy v. Comm’r

$600,000

Mortgage

50/50

$1,400,000

Mortgage

$550,000$550,000

Sophy v. Comm’r

$600,000

Mortgage

4-6

Edosada v. Comm’r

Legal Title

Legal Borrowers

BANK

“Equitable

Ownership”

$2.15 million $1.6 million

4-7 Edosada v. Comm’r

$$$

Legal Title

Legal Borrowers

BANK

“Equitable

Ownership”

$2.15 million $1.6 million

Reg §1.163-11

Deducting

Prepaid

Mortgage Insurance

Premiums

4-8

Private/FHA

Mortgage Insurance

Premiums

Deduct over

7 years

or

Mortgage Term, if shorter

4-8

Private/FHA

Mortgage Insurance

Premiums

No deduction for

unamortized balance

upon

early pay-off

of loan

4-8

VA/RHS

Mortgage Insurance

Premiums

Deduct

in the same manner

as

prepaid interest

VA/RHSMortgage Insurance Premiums

Prepaid interest:

• Deduct over loan term

• Write-off unamortized

balance upon pay-off

of loan

Charitable

Donations

4-9

Mohamed v. Comm’r

AppraisedValue

$125,000264,040

14,873,921

2,642,191

SoldFor

$125,000265,000

22,900,000

2,280,000

2003

Rio Vista LotRio Vista LotSact’o Land

2004

Shopping Ctr

Mohamed v. Comm’r

AppraisedValue

$125,000264,040

14,873,921

2,642,191

SoldFor

$125,000265,000

22,900,000

2,280,000

2003

Rio Vista LotRio Vista LotSact’o Land

2004

Shopping Ctr

“Joseph filled out the 2003 tax return himself, including the Form 8283, Noncash Charitable Contributions. He admits that he did not read the instructions before completing the form, because he says it seemed so clear that he didn't think he needed to . . .”

4-9 Form 8283

Donations after 6/3/2004 Gift to CRUT

AppraisedValue

$125,000264,040

14,873,921

2,642,191

SoldFor

$125,000265,000

22,900,000

2,280,000

2003

Rio Vista LotRio Vista LotSact’o Land

2004

Shopping Ctr

Remainder Interest Only

Sec. 170(f)(8)(B)

Donee Acknowledgment

“Whether the

donee organization

provided any

goods or services,

in whole or in part,

for the donation”

Reg. §1.170A-13(f)(13)

Donee

Acknowledgment

not required

for

gifts to

charitable trusts

284-11 Durden v. Comm’r

Checkswritten to churchfor over $250:

$22,200

4-11

Sec. 170(f)(8)(B)

Donee Acknowledgment

“no

goods or services

provided . . .”

Conservation

Easement

on

1,092 acres

of land

Congaree River

South Carolina

Averyt v. Comm’r

4-11

Conservation

Easement

on

1,092 acres

of land

Charitable Deduction= $5.5 Million

“On behalf of Ducks Unlimited, I would like to

personally thank you for your recent donation of a

conservation easement on Cooks Mountain. We are

grateful for the opportunity to protect a vital piece of

South Carolina's low-country wildlife habitat through

this easement.

“I would also like to acknowledge your gift of $6,250 to

the Ducks Unlimited Low-country Initiative

Endowment. Per your request, this gift will be

recognized as a Life Sponsorship under Mark R. Hoover.

I will be sending your son a Life Sponsor pen and

pendant from this office. Your gift will enable us to

uphold the legal obligation to protect and maintain

your conservation easements in perpetuity.”

Averyt v. Comm’r

Defective

Acknowledgment

from Charity

Cured by

Language

in Deed4-12

Conservation

Easement

on

277 acres

of land

CharitableDeduction

=$16.4 Million

Scheidelman v. Comm’r

2nd Circuit

Upholds

Façade Easement

Appraisal

Based Upon

Percentage Reduction

in Value

4-13

Scheidelman

v.

Comm’r

$1,015,000 valuex

11.33% discount=

$115,000Easement Value

“For the purpose of gauging compliance

with the reporting requirement, it is

irrelevant that the IRS believes the method

employed was sloppy or inaccurate, or

haphazardly applied -- it remains a method,

and Drazner described it.

“The regulation requires only that the

appraiser identify the valuation method

"used"; it does not require that the method

adopted be reliable. By providing the

information required by the regulation,

Drazner enabled the IRS to evaluate his

methodology.”

4-14

Tax Court still taking a hard line:

Rothman v. Comm’r

Dunlap v. Comm’r

4-15

4-16

Kaufman v. Comm’r

1st Circuit

Allows

Façade Easement

Deduction

for

Mortgaged Property

4-17

Rolfs v. Comm’r

NoCharitable Deduction

forAllowing Fire Department

toBurn Down Your House

7th Circuit

4-19

FMV = $675,000

Land = $599,000

House = $76,000

“When property is donated to a charity

on thecondition thatit be destroyed, that condition

must betaken into account

when valuing the gift.”

House = 0

Detached from Land

Left thedoor open

for deductionfor

salvage valueof the

detached house

Patel v. Comm’r

AllowingFire Department

toBurn DownYour House

35

$625,000 $339,504

4-20

Sec. 170(f)(3)

No deductionfor

partial interestsin property

354-21

Exceptions:

•undivided portion of the taxpayer's entire interest in property,

•remainder interest in a personal residence, or

•qualified conservation contribution

4-21 Patel v. Comm’r

Undivided Interest

in the Property

or

Right to Use

theProperty?

“Granting a fire department

the right to destroy the building

while conducting training

exercises on the property is not

a conveyance of ownership,

title, or possession of the

building or any other property

interest in the building . . .

Rather it is a mere license to

use the property.”

4-21

7Judges

dissented

4-22

Dissent:

Donationof

entire interestin

housesevered

from the land

4-22

Notice 2012-52

Charity-OwnedSingleMemberLLC

354-22

Dependency

Exemptions

4-22

Carlebach v. Comm’r

Citizenship requirement

fornonresidentdependents

4-22

Scalone v. Comm’r

NoncustodialParentClaim of

Dependency Exemption 4-23

Final 2008 Regs

Divorce Decree cannot

substitutefor the

Form 8332

4-24

Custodycannot be

determined by the court decree

Actual # of nights controls

4-25 CaliforniaNow

Conformsto

Federal Rules

4-25

Business

Deductions

4-25Prop Reg §1.162-31

Deduction

Allowed

for

Certain

Local Lodging Expense

4-25

Prop Reg §1.162-31

Example 3: Temporary lodging near

employer's business premises while new

employee searches for a residence.

“Employer is paying the temporary

lodging expense primarily to provide a

personal benefit to employee by providing

housing while employee searches for a

residence.”

364-26 Prop Reg §1.162-31

Example 4: Lodging for employee with

long commute who has to work late hours

for a special project.

“Employer is paying the temporary

lodging expense primarily to provide a

personal benefit to employee by

relieving her of the daily commute to

her residence.”

4-26

Prop Reg §1.162-31

Safe Harbor• bona fide business meeting, conference, training activity, or other business function;

• employer requires the employee to remain at the activity or function overnight

• for a period that does not exceed 5 daysand does not recur more frequently than

once per calendar quarter;

• not lavish or extravagant under the circumstances and does not provide any

significant element of personal pleasure,

recreation, or benefit.

364-27 Prop Reg §1.274-2(f)

Application of

50% Limit on

M&E Expense

to

3-Party Reimbursement

Arrangements

384-27

Employer

Client

Employee

$$

4-27

Employer

Client

Employee

$$

Employee

$$

$$

Client

Employer

Employee

$$

$$

Client

Employer

50%?

Employer

takes the

50% haircut

unless there is a

written agreement

providing that the

client will reimburse

the employer for

meal expenses incurred.

4-28

Reg §1.274-10

Entertainment Useof

Business Aircraft

4-29

660 x .2569 = $ 170

Control Employee 300%

$ 510

2 x 46.97 = 94

$ 604

660 Mile RT Flight

SIFL CalculationSec. 274(e)(2)

Company’s deduction

for employee’s personal

entertainment use of

plane is limited to the

amount included in

employee’s income

“Specified Individuals”Sec. 274(e)(2)(B)

The limitation applies to use of the plane for personal entertainment travel by “specified individuals”, defined as:

• officers or directors

• >10% owners

• includes 10% partners

Bauer v. Comm’r

Use of

Industry Stats

for

Estimating Expenses

under

Cohan Rule4-32

4-33 4-33

Olive v. Comm’r

No Deductions

for

Medical Marijuana

Dispensary

4-33

Sec. 280E

“No deduction or credit shall be

allowed for any amount paid or

incurred during the taxable year in

carrying on any trade or business if

such trade or business (or the

activities which comprise such trade

or business) consists of trafficking in

controlled substances . . .”

4-33