360 Planning is critical in Every Situation

By Tony De Angelo

Below is a link to a FORBES article giving the sensation that Donald Trump is clearly a clueless dolt with respect to tax planning given the laws that he himself promulgated by not aggressively passing on assets by gift to his heirs.

However, buried way into the article are some references as to why Mr. Trump may not be giving assets, such as a basis step up on his passing or by allowing the passing of assets to his young spouse. (Nor, is there any mention of the term “marital trust” in the article).

Personally, I can think of at least six or seven reasons as to why Mr. Trump (regardless of opinion) may not be gifting assets. One might be a “wait and see” approach as the avoidance of income taxes on appreciated assets may be a consideration. At best, we see through a glass darkly in these situations, and to let unknown facts get in the way of a good story would ruin the aura that written pieces like this are trying to create.

Folks, this is all the more reason why good, 360 degree planning is critical in every situation. This article is just one example of how a limited view can create great difficulty.

There are fine professionals to help in this field. We are one. If we can help, please call.

https://forbes.com/sites/chasewithorn/2019/08/09/donald-trumps-financial-carelessness-could-cost-his-kids-13-billion-in-taxes/?utm source=newsletter&utm medium=email&utm campaign=daily#2236d2a665db 

MORAL: NEVER RELY ON TAX SOFTWARE (OR PRACTITIONERS TRUSTING IT) TO MAKE THE RIGHT DETERMINATIONS, (ever).

                           “THINKING VS REACTING”

June 14, 2019

Short story:

Today, I pointed out to my tax vendor that the #1 rated professional program we use is miscalculating a critical fiduciary tax deduction under IRC Sec. 164. The result is massive and needless overpayment of tax. It was our first brush with this error.

Short story, (made longer): While acknowledging its error, I was told that there was no override provided.

(Shorter story, made longer still)

When I asked incredulously as to why the vendor had not picked up on such a grievous error, I was told that no practitioner had ever raised this issue before. After comments by me as to why (oh why) software vendors allow computer programmers to practice tax law without a license, I can’t get my head around the presumed millions of tax dollars overpaid by this bad programming, compounded by untold numbers of practitioners now on a boat or golf course not focusing on this issue.

In closing, if you filed a 2018 Fiduciary Income tax Return this year, we can provide a secure portal and a no-obligation evaluation of the issue. (So message me). In life lesson, please be very careful as to what and to whom you trust with your professional obligations. I can’t say that enough.

 

Tony De Angelo, E.A., J.D.

“Ten Minutes with Tony”

TEN MINUTES WITH TONY TM ImageIn four decades in practice and 25 years of business ownership, I have been asked many questions about many different things. One day, it dawned on me that many of the answered questions were instructive, and could be useful to those confronted with the same issues in real time.

In this connection, Paragon Trust Company will sponsor me in a ten-minute show entitled “Ten minutes with Tony” beginning this Summer. The show will be a ten minute broadcast segment dealing with a particular question. The format will be alternated between guests (anonymous) coming on with a particular question or issue, or interviews and commentary. It will be a fast moving and fun way to provide information (with some fun).

So with that in mind, if you have a question you’d like to submit or an issue you would like to hear discussed concerning anything that might be related in some way to money or its personal issues. Please message or call, and we’ll do our best to get it on for you!

 

Tony De Angelo

Managing Director of Paragon Trust Company, New Haven, CT, and syndicated weekly talk and variety show host.

 

The Dangers of State Tax Workarounds

Well folks, I hate to say “I told you so” with respect to the state and local tax “workarounds” enacted by state governments (such as my home state) in order to skip over the $10k limitation under 2018 law, but I told you so.

Its also interesting that many journalistic outlets using non-practitioner authors touted these strategies at the time of introduction as the greatest invention since sliced bread. Whereas, we ( and other firms sensitive to this issue) cautioned our clients to tread warily and to await future developments.

As the tax field becomes more muddied and confused seemingly by the day, I have told many for many years that it is critical to seek the guidance of knowledgeable professionals in this area, (as opposed to articles, do-it-yourself strategies, or seasonal outlets).

Again, being cheap here can end up being very expensive.

The Dangers of “DO IT YOURSELF”

OK…forty years in this business, ( and today may be the day I may most remember).

A colleague asked if I would take a look at a friend’s box-program tax return  to see if it was done correctly. I proposed to run the data into our system and check the differences. Everyone thought that was a neat solution. However, I had no idea at the outset, HOW neat.

The new clients are wonderful people. They are highly educated professionals with Schedule C income. After running parallels. I noted that the client did not have a IRC Sec. 199A (20%) deduction for their business income. They returned to their vendor, who told them (and I quote) “we only allow you to make that deduction if you are involved in a pass-through entity”.

(For real).

Now I cannot say for sure that these folks checked every box that they needed to on the software, but I can say that if this is not set up as an easy automatic, they (along with many others), would skip over taking a very valuable deduction. And, I am dealing with very intelligent people!

Folks, I know I sound like a broken record, but “do it yourself” can cost serious money.

Meanwhile, if you would like for us to do what we are able to do for these clients by running checks of your returns, kindly let me know.

Trump’s Tax Plan

Donald Trump will take office in January 2017. What does this mean for tax season?

Fortunately, the upcoming 2016 tax season will see few changes. Trump’s proposed policies will start to go into effect for the 2017 tax season.

According to http://www.TaxFoundation.org, income tax refunds may increase, reflecting on their website the following: “On a static basis, the Trump tax plan would increase the after-tax incomes of taxpayers in every income group. The bottom 80 percent of taxpayers (those in the bottom four quintiles) would see an increase in after-tax income between 0.8 percent and 1.9 percent, under both policy assumptions.  Taxpayers in the top quintile would see a 4.4 percent increase in after-tax income under the higher-rate assumption, or 8.7 percent under the lower-rate assumption.” There will also be a likely repeal of ObamaCare, which would mean the end of the net investment income tax. The seven tax brackets will be cut down to three, featuring 12%, 25%, and 33% rates.

According to Forbes, the Federal Estate Tax will leave us, but with caveats: “According to Trump’s proposal, it won’t be completely without tax. As it stands right now, his plan would tax the appreciation inherent in the assets of an estate valued in excess of $10 million, but only when the beneficiary sells the assets; meaning that the assets won’t be taxed immediately upon death.” There will also be tax cuts for businesses, cutting rates from 35% to 15%. Of the wealthy, Forbes also had this to say: “According to the Tax Policy Center, the totality of the Trump plan will reduce federal tax revenue by $6.2 trillion over the next ten years. Of those tax cuts, nearly 47% will go to the richest 1%. To put it into dollar terms, those earning less than $48,400 will experience an annual tax cut of less than $400, while those earning in excess of $700,000 will walk away with an average of an extra $215,000 per year.”

It is unclear how these changes will impact lower tax brackets, but there will be fewer personal exemptions for families and single filers. NPR shared a slightly different take: “Economists disagree on whether the tax plan would be good for the economy. The Tax Policy Center says that over the first decade, the government would lose $6.2 trillion in revenue, producing huge budget deficits that could hurt the economy.”

For better or worse, there are changes on the horizon. In the coming months, we at Paragon Trust Company and Fortress Fiduciary Company will be working hard to keep all our clients informed regarding these changes during the upcoming tax season, and beyond.

Tony De Angelo

Tax Preparation in the United States today and how best to deal with a horribly confused landscape

Most reasonable people will agree on the fact that life is often a study in degrees. In any given situation, efficiency and cost-efficiency are best served by meeting a given need by an appropriate level of servicing that need.

For example, did you cut yourself shaving? A piece of wet tissue paper or a band aid usually does the trick. However, a deeper gash needs professional attention.

If you have some bug or tar spots on your car, a solvent purchased at the department store and some elbow grease will usually remove all of the blemishes. But did you drive through some acid rain? In that case, call your local auto body shop!

But when it comes to tax preparation, we find often that many otherwise reasonable people with known complexities in their situation will act unreasonably, and will look to get things done as cheaply as possible. If you want a cheap fix, the options of off-the-shelf software programs, and seasonal, unregistered  storefront preparers are all easy to find. But neither will be of help to you during your time of need if an error is made, or should a question arise.

Do you think I am over-dramatizing? I wish. At a recent session of the U.S. Tax Court, I rode down the elevator with a lovely young mom (“Lori”) who was called before the Court to explain her misdeeds to a Federal Judge. She was poor, and could not afford a lawyer or a practitioner. In approaching me, she somehow felt secure and shared her woes with me. Her crime? Admittedly knowing nothing about income taxes. She trusted a local “refund mill” tax preparer that was later criminally charged for falsely creating large refunds for 300 clients. She just so happened to be one such client. I felt terrible and walked her back into the building to talk to a volunteer clinician, who thankfully, was able to get her on the right track.

The Federal Government arguably acted somewhat out of character about five years ago. Seeing what was happening to the “Lori’s” of the world, it embarked on a massive  house cleaning effort demanding that all tax preparers  register and pass basic competency tests to thereby root out the bad apples. To fund this effort, all of the “good guys” on the right side of the law were forced to pay additional costly fees for yearly registration. Many of us chafed at this, but many of us felt that if this was what it took to have the losers leave town- we were all for it.

But a funny thing happened on the way to the fair. This government endeavor was challenged by several unenrolled preparers. They made the claim that what they did every winter was not “practice” or “client representation,” but rather, just a personal service that the government had no power to regulate. To that end, the Federal District Court did likewise and ruled that preparation of a tax return cannot be regulated by the Federal Government. The government declined to appeal this matter to the U.S. Supreme Court, as the possibilities for acceptance and victory were quite small.

So where does all of this leave us? In a much bigger mess than where we first started. The bad guys still roam. A large part of the commercial preparer block goes unregulated and is not subject to mandatory training and education as licensed practitioners are. A system of “voluntary” tax preparer regulation by the IRS Commissioner was just about laughed out of the park by the AICPA. State governments are being asked to pick up the regulatory slack under various “consumer protection” statutes.  And needless to say, there will be more injured “Lori’s” in the world, with nothing being done about it. The licensed folks are still paying for additional registration while the bad guys are still here.

In conclusion, I’d like to say there is a happy ending, but there really isn’t any. It is nothing more than the predictable result of what happens when large commercial enterprises and acutely thrifty consumers move to their sides of the foul line. And with that, everything in between gets more muddied than ever.

Let us leave this article where we started: Choosing your proper tax professional. Assess the need you have in a candid and honest manner. Educate yourself, as the time you take now will save costly dollars later. Talk to several practitioners and ask them what is important to you. Consider whom, or what will be there for you should you have a need or an issue. Then, make your best choice. Competent and decent practitioners have a great service to provide and nothing to hide look forward to having these discussions with you- whether you become a client or not.

Tony DeAngelo

What do you MEAN that my oil fund investment is actually a “large partnership?” And I can be AUDITED because of it?

Due to lower investment interest rates and correspondingly favorable provisions in the Tax Code in recent years, the “Master Limited Partnership” (or “MLP”) has often been the investment of choice for value seeking investors looking to find high yield at seemingly low risk.  Sold by many financial advisers as “high yield funds,” many investors have absolutely no idea that their “fund” is actually a “large partnership” until such time as they are confronted with the tax reporting nightmare of recording the entity’s results.  Even so, many investors elect to continue to hold MLP’s for a number of contemplated investment considerations, some of which are more muddied than ever due to the recent fall in oil prices.

Several years ago in our Newsletter, we had reported that the Government Accountability Office (“GAO”) stated that the IRS has failed to interact and efficiently audit “large partnerships,” which are defined as entities with 100 or more direct partners and $100 million or more in assets. The report was based on concerns that so called large partnerships have increased 47 percent since the last evaluation period.  According to “Accounting Today” it was noted that in the 2012 tax year that “IRS field audits reviewed the books and records of only 0.8 percent of large partnership returns, according to the preliminary report.” Ostensibly, the auditing of less than 1 percent of these large partnerships is failing to cover mass amounts of money. Companies who bring in millions of annual revenue, such as MLP’s, are currently audit-free. More specifically, statistics show that 99 percent of these companies manage to be unidentified.

To the best of our knowledge and observation, MLP’s are not currently being set down for examination. However, once the GAO raises a concern, it is often followed by an effort on the part of the Treasury to sharply correct the same. Since MLP’s are known in the trade as “pass-through” entities, a change to partnership tax results for an open year under the tax statute will result in changes to the returns of the MLP unit holders for the same period. Translation: if an MLP that you own happens to get audited for a past year, you’ll have to amend your tax return and probably pay more tax. So much for these investments being deemed as “funds.”

But wait, there’s more!

During 2015, we had noted that several of the larger partnerships had a ratable pass-through for their investor-partners of “cancellation of indebtedness” income. In other words, a partnership ravaged by the poor oil market was unable to pay its legitimate debts. In this case the debtor, ostensibly seeing no possible way that their debt would ever be repaid, wrote the debt off. To this end, many limited partners of oil interests were forced to pay additional taxes on forgiven debts for which they were never responsible for!

To those veterans remaining in the field, many of us remember having to ask clients to pay back taxes in the late 1980’s for all of their “dog” tax sheltered partnerships that were audited in the days of unlimited (and often fabricated) write-offs. Then, as is now, many of these folks were surprised that the government could do such a thing, and the interest and penalties to be paid were often a shock. What they did not realize, but learned all too painfully, was that a partnership pays no income taxes. Howver, its partners do! The weeping and gnashing of teeth from that initiative was enormous.

But, where does all of this proceed today? Will MLP’s be audited? Will some of them report debt-cancellation income to their investors? None of us really know. As a dear friend and colleague of mine always says…. “Stay tuned to this station.”

 

Tony De Angelo

One practitioner’s personal history of thirty years of simplified income tax proposals.

When I was a very young pup getting started in this business long ago, I was able to save a little bit of money from my job and purchase cable television, which was then a novelty. When the cable service was installed, I quickly became fascinated with the “C-Span” network, as I found it interesting as to see how tax laws were actually made.

One night, I stumbled into a debate on C-Span where Bill Bradley (then a Democratic senator from New Jersey, Princeton graduate and former player on my favorite pro-basketball team) proposed a very simple flat-tax system. Mr. Bradley explained that the existing system was ripe with over-complication and loopholes, encouraged cheating, and was far too complicated for Americans to deal with. With that comment, he took out a 3” by 5” index card, while a corresponding graphic floated on the screen.

Sen. Bradley then explained that this little card would now be our simple, new, tax form, as I followed the graphic on the screen. This was so simple that a grade school student could complete it in a matter of moments! One block for your total income, of whatever source. One block for a standard deduction, a varying amount depending if you were married or single. Another block for exemptions for your family members and dependents, and you arrived at your “taxable income.”  Depending on the result; you were to multiply that amount by one of two rates in order to arrive at your Federal tax. Voila! DONE!

I became entirely immersed in these proceedings. Not only was this man throwing me out of a job, but I began to feel that what I had chosen for my profession really had no meaningful social significance whatsoever. As I watched the senator’s presentation, I honestly did not know whether to laugh, cry, scream, or fall into a state of shock. In my case, shock dashed with a wee bit of betrayal was the predominant emotion.

However, as the Senator concluded, a number of his colleagues began to comment and ask questions:

“Sen. Bradley, I think we have to allow the deduction for mortgage interest and property taxes, otherwise, the construction and banking industries will collapse.”

“Sen. Bradley, I am concerned that people will not give to charity without a corresponding tax offset.”

“Sen. Bradley, if we do not provide a favored rate for capital assets, none of those assets will get sold. The securities markets will fall flat!”

 “Sen. Bradley, if there is not a carve out for retirement savings, no one will bother to save!”

Now Bradley, wanting to appear as an open-minded and intelligent guy, tried very hard to accommodate each comment. He made statements like “OK…we can provide for that deduction by adding another line, block, schedule, attachment, rider….” He was making markups to his card that began to resemble the grid of the failed Robert Moses New York City highway system. By the time the session ended, what was present on the screen resembled something very close to the tax return form that I was now struggling to learn at work. So really, I wondered what the reason was for all of that debate stuff was for. Truly the whole discussion about changing the tax system was entirely circular.

The next morning, I wanted to show my professional dedication to the senior tax partner of my firm by telling him how I spent the previous evening. He looked at me, shook his head, and laughed loudly. “This law-change stuff is the making of sausage, kid. None of it sticks around past the dessert course!”

As of the time of this writing, over thirty years later, these impressions remain dead-on correct. We still do not have a simple, fair, or flat system of taxation in the United States, despite many outcries to that effect.  But, could we? Is it possible?   I really do not think so. For unfortunately the problem is largely a problem of our own making.

If we were to take ten Americans of varying social and economic status and have them describe what the ideal income tax system is, each one would agree on the concept of “simplicity”, but each one would as well want to see their burdens offloaded on others.  The rich man would want a lower rate and incentives. The lower-income lady would want the rich guy to pay more. The nice young married couple down the street would absolutely flip out if we took away their housing and charitable deductions.  The well-to-do single woman with no children would protest at the loss of a charitable deduction.  And, if we add in representatives from the financial, lobbying, and non-profit industries, we could all be there debating, for many years, with lofty dissertations of social goals and revenue targets.

I have said for years that the tax rules we have, are the rules that we deserve. But needless to say, reform has all been tried before and, it’s going to be tried again. Make it simple, make it fair. Eliminate the bells and the whistles.  Eliminate the burdens.  Sure! Sounds great! But when does it happen?

No one really knows when, or if, it will ever happen.  But until such time, we’ll be here to help you  cope and deal with whatever set of ground rules is presently before us, up to, (and including) the time of the next changes.

Tony De Angelo

WHERE DO YOU LIVE FOR TAX PURPOSES?

For most people of my generation, “where do you live?” was not a complicated question. For me, “Stamford, CT” was a simple response. This was the case of most of those in my town. Most of the adults at that time worked in one of the industrial plants downtown in some capacity. Or perhaps they owned a store or worked in a sundry occupation such as my father, who ran movies on Atlantic Street. There was almost never a question as to what was someone’s residence was.

But, a funny thing happened over the years. The industrial base of the USA diluted. Plants closed. Neighborhoods shifted. People became more transient in the search for employment. In later years, we all experienced the collapse of the housing and real estate markets. We began to see how something called “social networking” could pull people together in one place that were countless miles apart.

In recent days the concept of “home” has grown to be an intention of the heart and mind, as people often identify with a place of belonging, which may not be where they are physically situated in many cases.

However, our friends at the local taxing authorities have not become so enlightened over time. Most states with an income tax law adopt a either a very rigid “physical presence” or “residential connection” test to determine who actually is tied to their jurisdiction for tax purposes. As states become more and more desperate for revenue, more and more of these hard tests are being employed in the war between states for taxpayer dollars.

The fine firm of Morrison and Foerster recently reported in its newsletter on a New York case, the Matter of Tatiana Varzar, .In this case, the New York State Tax Appeals Tribunal rejected Ms. Varzar’s claim that she had changed her residency from Brooklyn, New York, to Florida, finding she had failed to establish either that she had changed her domicile or that she was not a “statutory resident” of New York State and City.

During the years 2004, 2005, and 2006, Ms. Varzar owned and maintained a home in Brooklyn and another home in Pompano Beach, Florida. Separately, she claimed to have maintained an apartment in Tampa, Florida, for an unspecified period during this interval.

Ms. Varzar carried on an assortment of business ventures in New York and Florida. Finally, she purchased a restaurant near her Pompano Beach home, but the restaurant did not open until after the time interval in question.

For each of the years in question, Ms. Varzar filed individual income tax returns as a nonresident of New York. At audit, the NYS Tax Department determined that Ms. Varzar was a domiciliary of New York State and City, and that she was a statutory resident of New York State and City because she failed to show that she spent more than 183 days outside of New York State and City for each calendar year, with 183 days per year being the usual benchmark for the determination of residency for a given state.

Later, the Tribunal ruled against Ms. Varzar. Analyzing the four criteria for determining whether a taxpayer changed domicile, it concluded that Ms. Varzar had failed to prove that she changed her domicile from Brooklyn to Florida. Most critically, the Tribunal determined that Ms. Varzar’s business ties to Florida were “limited” as compared to her Brooklyn business ties, and that the evidence reflected Ms. Varzar as having family and community ties in Brooklyn, but not any family or community ties to Florida. The Tribunal also concluded that the Department properly characterized Ms. Varzar as a statutory resident because she did not carry her burden to show that she was not present in New York State or City for more than 183 days during any of the years at Issue. The Tribunal highlighted the lack of any documentary evidence establishing Ms. Varzar’s whereabouts during the subject years, and upheld the administrative judge’s conclusion that Ms. Varzar’s testimony was not sufficiently credible.

In this case, it was very clear to all how this particular determination was made. But do all such cases along these lines favor the governmental authorities?

Well, not exactly.

One of my favorite cases with respect to this genre is Berry Gordy, Jr. vs. the Board of Equalization of California. Some of my older readers will no doubt remember Berry Gordy Jr. (he of Motown fame), who fashioned a record company in a small building in Detroit while working in the auto industry. From said studio came some of the finest musical talent ever to walk this earth, and Berry was so successful that it dawned on him one day that there was no reason to remain in Detroit year round. So, he moved to sunny California, and spent his time enjoying life and owning several homes there. However, California noting Gordy’s success, decided that they wanted some of his wealth as well. It asserted that Gordy was spending more time in Beverly Hills than in Detroit (can you blame him?), and taxed him as a full-year resident for all of 1969.

But here, the result was different. Citing that Gordy had a much stronger residential connection to Michigan than California, the court ruled in Gordy’s favor, as his professional associations, vehicles, children’s schools, and social ties all painted a picture of a man who had never “left” Detroit.

It is interesting to take the Varzar and Gordy cases and compare them. At first it seems that they are two different decisions in different jurisdictions based on similar fact patterns, made many years apart. However, a common theme in each case is intention. Ms. Varzar never truly intended to leave New York while Mr. Gordy never truly intended to part ways with Michigan. In the end, intention followed by the commitment of large amounts of property in a given jurisdiction seemed to rule the day for determining the tax status of each respective individual.

This premise of residential intention cuts both ways. Not long ago, a desperate cash-strapped city in Connecticut attempted to levy property taxes on the vehicles parked on tax assessment day at a student dorm. Conveniently forgetting the rule that dormitories are not homes and that students are not residents, this was a good try, but the property belonged elsewhere to a permanent jurisdiction. None of the students intended for that cash-strapped city to be their permanent residence when moving into the dorm.

But for tax determinations, can intention and commitment of capital in one location override one’s physical presence in another location during a year? Frankly, there are casebooks and articles written on that very subject, and jurisdictional laws vary. There are no easy answers, and professional guidance should always be sought.

However, one thing is for certain.  As states become more desperate for revenue, look to see more strict definitions of residency and domicile made against taxpayers in order to tax anything parenthetically related to its borders.

Tony De Angelo