Tax News

CCH (cch.taxgroup.com) reports:

  The Arizona Department of Revenue has issued a ruling clarifying the imposition of transaction privilege tax on sales of tangible personal property by out-of-state mail-order or Internet-based ("remote") vendors and the responsibility for use tax collection by such vendors. Ascertaining whether a remote vendor is liable for transaction privilege tax, is responsible for collecting use tax, or has no liability for either tax requires a determination of the vendor's nexus with the state.

CCH (cch.taxgroup.com) reports:

  The effectiveness of the new limitation on the home sale exclusion imposed by the Housing Assistance Tax Act (P.L. 110-289) may be likened to casting the proverbial wide net to catch a small fish, John Olivieri, partner in White & Case's private clients practice in New York, told CCH in a recent interview. He reasoned that the real abuse --the serial sheltering of gain from the sequential sales of principal residences by those owning three or more properties --could have been prevented more cleanly by simply imposing a 5-year limit or similar restriction on the number of times within which the home sale exclusion could be used. In its place, Olivieri sees unnecessary complexity, especially with respect to recordkeeping to prove precise periods during which a property is used as a principal residence.

  Olivieri also sees as unrealistic the Joint Committee of Taxation's 10-year revenue estimate of $1.4 billion collected from this provision, confirming the impression that the new restrictions are not worth the additional paperwork that will be required. Even considering the scheduled rise in the capital gains rate from 15 percent to 20 percent after 2010, Olivieri speculates that a flat real estate market may limit gains, and, hence, the necessity for the full $250,000 home sale exclusion ($500,000 for joint filers). Of course, many property owners may still have gains, if they bought long ago, but they may still be suffering from recent drops in the real estate market (especially if their properties are mortgaged) and Olivieri questions the sense of choosing this time, when many are smarting from lower real estate prices, to take even more from owners upon sale. He points out that this seems to be at odds with the overall aims of the Housing Assistance Act.

  Another factor to consider in assessing the impact of the new legislation is the decreasing value of the home sale exclusion in general. The exclusion caps have not been adjusted for inflation since its inception in 1997. Adjusted for a CPI that has been relatively modest over the past 10 years, an inflation-adjusted exclusion would now have reached $340,000 ($680,000 for joint filers). Given another 10 years of similar, low inflation, the amounts, if inflation-adjusted, would be $462,000 and $925,000, respectively.

  With gain from a residence converted from a vacation or rental property now being divided into a portion qualifying for the home sale exclusion and a portion that is nonqualifying use, determining precisely when a residence is converted to a principal residence becomes critical for determining the percentage of the gain exclusion the seller will be entitled to claim. Looking at objective factors such as mail delivery, banking activity, food shopping, church attendance, and the like is the only way to make this determination. Under prior law, all that needed to be proved to win a full exclusion was at least two years of use as a principal residence within a five-year ownership period before sale. Now, Olivieri stressed that the exact period of use as a principal residence is necessary to make the proper calculation of the amount of exclusion available.

  Example. Assume ownership of a property takes place between January 1, 2009, and January 1, 2020, and gain on its sale in 2020 is $600,000. Under prior law, proving use as a principal residence for at least two years between 2015 and 2020 was enough for a full $500,000 exclusion if a joint return were filed. Now, proving two years of use as a principal residence only entitles 2/10ths or $120,000 of the $600,000 gain to be sheltered by the home sale exclusion.

  Olivieri forecasts other strategies growing in popularity as the result of the new restrictions, again limiting the true revenue gains that they will bring into the Treasury. Many families simply will hold onto vacation properties rather that sell them, passing them on to their heirs with a date-of-death stepped-up basis of income tax purposes. Others will take a closer look at contributing residences to qualified personal residence trusts, which may become more attractive due to the inability of the contributor to maximize the principal residence exclusion if he or she were to sell the property.

  George Jones, CCH News Staff

CCH (cch.taxgroup.com) reports:

  IRS Commissioner Doug Shulman has selected J. Richard (Dick) Harvey Jr. as a senior advisor to the commissioner. As senior advisor to the commissioner, Harvey will provide guidance and assistance on matters of policy and tax administration. He will also maintain a close partnership between the commissioner's office and the IRS business units responsible for key programs in his areas of expertise, which include financial services tax issues and financial accounting for income taxes.

  Harvey is currently a partner at PricewaterhouseCoopers, where he serves as the U.S. Banking and Capital Markets Team Leader. Harvey will assume his new post on September 2.

IR-2008-95
 

CCH (cch.taxgroup.com) reports:

  A married couple, who bought and sold stocks through their limited liability company (LLC), were not engaged in a trade or business as traders in securities. As a result, the mark-to-market election (Code Sec. 475(f)) made by the LLC was invalid and losses reported by the taxpayers were capital and not ordinary.

  CCH Comment. A taxpayer is considered engaged in the trade or business of trading stock if (1) the taxpayer's trading is substantial and (2) the taxpayer seeks to profit from short-term swings in daily market movements. In evaluating whether trading activities are substantial, courts generally consider the number of executed trades in a year and the amount of money involved.

  In 2000, the couple began buying and selling stocks and reported approximately $280,000 in capital gains. In April 2001, they formed an LLC and made a mark-to-market election. From April through December, they reported an ordinary loss of approximately $180,000 based on 289 trades of stock with an aggregate basis of $933,000 and a collective sales price of $754,000. In 2002, they executed approximately 372 trades and claimed an ordinary loss of $45,000. They traded on 63 days from April through December 2001 or 40 percent of the possible trading days and on 110 days or 45 percent of the possible trading days in 2002. However, the number of trades and the amount of money involved were not sufficient to qualify the couple as traders.

  CCH Comment. For purposes of comparison, the court cited two decisions in which taxpayers were engaged in substantial trading. In the first case, the taxpayers traded stocks or options worth approximately $9 million ( S.A. Paoli, DC Ill., 92-1 USTC ¶50,102). In the second case, the taxpayer executed over 1,100 sales and purchases in each of the years at issue ( F.R. Mayer, 67 TCM 2949, Dec. 49,838(M), TC Memo. 1994-209). In another case, trading activity was held insubstantial when a taxpayer executed at most 83 purchases and 41 sales in one year and 76 purchases and 30 sales in the second year ( J.A. Moller, CA-FC, 83-2 USTC ¶9698, 721 F2d 810).

  Furthermore, the taxpayers were not attempting to catch swings in daily market movements. Their records showed that they rarely bought and sold on the same day. Many of the their stocks were held for more than 31 days. This trading pattern was more consistent with that of an investor than a trader.

  Since the taxpayers were not engaged in a trade or business, various expenses related to their trading activity were not deductible as business expenses. Deductions of investment interest paid were not allowed to the extent the deductions exceeded the limitation placed on investment income.

W. G. Holsinger, TC Memo. 2008-191, Dec. 57,512(M)

Other References:

 
Code Sec. 162

  CCH Reference - 2008FED ¶8521.1475

 
Code Sec. 163

  CCH Reference - 2008FED ¶9403.45

 
Code Sec. 475

  CCH Reference - 2008FED ¶22,268.55

  Tax Research Consultant

  CCH Reference - TRC INDIV: 48,450

  CCH Reference - TRC SALES: 45,052

  CCH Reference - TRC SALES: 45,350

Tax Analysts report: