Tax Research Problem

Tax Research Problem

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Posted By View Student Profile
Subject Business
Deadline (Pacific Time) 05/01/2017 10:00 am
Budget $10-$30
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Please read the following tax problem. Please use 3 or 4 tax code references. Must be at least 2 pages long double space.

ATTACHED IS AN EXAMPLE FORMAT AND ALSO NOTES ON HOW TO ANSWER THE PROBLEM

Dee, a 75 year old window created a trust in December of 2000. The trust was created as an irrevocable trust naming her five adult grandchildren as the beneficiaries. The assets transferred into the trust consisted of marketable securities (worth $800,000) and Dee’s personal residence (worth $400,000). Dee designated her brother Austin who is a practicing attorney as the trustee. Other provisions of the trust are:
1- Austin is given the discretion to distribute the income to the beneficiaries based on their need or, the income may be added to the corpus (retained in the trust). Austin is also given the power to change trust investments as well as the power to terminate the trust.
2- The trust is to last for Dee’s lifetime or, if sooner, until termination by Austin.
3- Upon termination of the trust, the principal and any accumulated income are to be distributed to the beneficiaries (Dee’s grandchildren)

For the year 2000, Dee files a Form 709 to report the transger in trust and pays a gift tax based on the value of $1,200,000 (the $800,000 plus $400,000 noted above).
After the transfer into the trust and up to the time of her death, Dee continues to occupy the residence. Although she pays no rent for her occupying the house, she maintains the property and pays yearly property taxes. Dee never discussed the matter of her continued occupancy of the residence with either Austin or the beneficiaries of the trust.
Upon Dee’s death this past year, the value of the trust is $2,300,000, broken down as follows: Marketable securities and cash ($1.6 million and residence ($700,000). Shortly after Dee’s death, Austin sells the residence, liquidates the trust and distributes the proceeds to the beneficiaries.
Prepare a memo discussing the Estate Tax consequences of these transactions.
Hint: Section 2036
Guynn v. U.s., 71-1 USTC 12,742, 27 AFTR 2nd 71-1653, 437 F.2nd 1148 (CA-4, 1971).
Estate of Eleanor T.R. Trotter, 82 TCM 633, T.C. Memo 2001-250.
Estate of Lorraine C. Disbrow, 91 TCM 794, TC Memo. 2006-34

SUBJECT: Deductibility of Expenses for GolfActivity

FACTS:Ryan recently became an unpaid assistant for a professional golfer and an apprentice for the Professional Golfers’ Association of America (PGA). While Ryan remains an art teacher with annual income of $32,000, he works as the pro’s assistant each day after school. During the summer, Ryan spends 12 to 15 hours a day on the golf course. In addition, he participates in PGA tournaments and has won money from such tournaments each year since he began competing. Expenses incurred for golf have exceeded Ryan’s income by $5,000 to $10,000 each year. Ryan is not yet a full member of the PGA, but expects to be approved as a member next year.

ISSUE:Are the expenses related to Ryan’s golf activity deductible?

CONCLUSION:There is substantial authority to support that Ryan was engaged in golf for profit and as such the expenses are considered deductible trade or business expenses.

ANALYSIS:IRC Section 183(a) provides authority regarding activities not engaged in for profit. Regulation 1.183-2 discusses the differences between activities not engaged in for profit, such as hobbies, and activities engaged in for profit. The main consideration is whether the taxpayer engaged in the activity with the purpose of gaining a profit. If so, expenses related to the activity are generally deductible, so long as the taxpayer has not incurred losses for three of the last five taxable years (IRC Section 183).

Regulation 1.183-2(b) outlines nine factors used to determine if an activity is engaged in for profit.According to the Tax Court decision in Keanini v. Commissioner, “No single factor is controlling. Rather the facts and circumstances of the case taken as whole are determinative.” The first factor considers the “manner in which the taxpayer carries on the activity”, citing accurate and detailed bookkeeping as an indication that the activity is akin to a business (Reg. 1.183-2(b)(1)). In Ryan’s case, the taxpayer maintains detailed records documenting income and expenses related to his golfing career. The second factor under Reg. 1.183-2(b)(2) discusses “the expertise of the taxpayer or his advisors”. As Ryan has completed courses to gain credit towards becoming a full member of the PGA, works closely with a pro golfer and competes in PGA tournaments it is clear he has expertise in the field. The third factor discussed in Reg. 1.183-2(b)(3) considers “the time and effort expended by the taxpayer in carrying on the activity” ascertains whether the activity is for profit. Every day after teaching, Ryan is on the golf course and during the summer he spends 12 to 15 hours a day on the course.

The fourth and fifth factors are not applicable or as relevant to Ryan’s specific situation. Reg. 1.183-2(b)(4) discusses the “expectation that assets used in activity may appreciate in value.” There is not sufficient information regarding the valuation of Ryan’s assets, such as golf clubs and other equipment, to further address this factor. The fifth factor considers “the success of the taxpayer in carrying on other similar or dissimilar activities.” (Reg.1.183-2(b)(5)). Ryan’s success in similar or dissimilar other activities is not addressed in the facts of this case.

The sixth and seventh factors are not as clearly satisfied as the first three factors. Reg. 1.183-2(b)(6) discusses “The taxpayer’s history of income or losses with respect to the activity.” Ryan has incurred losses each year as a result of his golf activity which could suggest that the activity is not engaged in for profit. However, the time period in which he has incurred such losses is not unusual or uncommon with respect to start-up business ventures. The seventh factor discusses “the amount of occasional profits, if any, which are earned” is not satisfied as Ryan’s winnings from golf tournaments have not exceeded his expenses (Reg. 1.183-2(b)(7)).The eighth factor considers “the financial status of the taxpayer.” (Reg. 1.183-2(b)(8)). While Ryan works full-time as a teacher, his teaching income of $32,000 is not so substantial as to indicate thathis golfing activity was not engaged in for profit. His teaching income could be supplemented by income from his golfing. “Elements of personal pleasure or recreation” is another factor highlighted in 1.183-2(b)(9). While it can be argued that Ryan enjoys playing golf and competing in tournaments, this does not necessarily diminish his interest in gaining a profit from the activity. As discussed in 1.183-2(b)(9), “the fact that the taxpayer derives personal pleasure from engaging in the activity is not sufficient to cause the activity to be classified as not engaged in for profit” especially given that the activity meets other relevant factors under Reg. 1.183-2(b).

Ryan’s situation is similar to that of another taxpayer whose case is outlined in Donald C. Kimbrough. The taxpayer described in that situation was also a teacher that had an apprenticeship with the PGA and served as an unpaid assistant to a pro golfer. The Tax Courtconsidered the applicable factors underReg. 1.183-2(b) previously discussed. Specifically, the court determined that the taxpayer engaged in the activity in “a businesslike manner [in which] the taxpayer carefully detailed expenses incurred for each golf tournament and prize money available; engaged in extensive training (coursework and practice in variety of areas); and devoted a significant amount of time and effort to activity.” (Donald C. Kimbrough).The IRS’ assertion that the taxpayer’s golf expenses were nondeductible educational expenses was not upheld in the Tax Court’s decision.

In concluding that the taxpayer was engaged in an activity for profit, the court considered IRC Section 162. This section discusses trade or business expenses and the deductibility of such expenses. The general rule under 162(a) is that “there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” In addition, under section 212 the following are deductible expenses: expenses “1) for the production or collection of income; 2) for the management, conservation, or maintenance of property held for the production of income; or 3) in connection with the determination, collection, or refund of any tax.”

Another court case in which golfing was not considered an activity engaged in for profit is discussed in William T. Heywood et, ux. v. Commissioner. In this situation, the taxpayer did not maintain accurate records of his golf related income and expenses. Furthermore, the taxpayer did not compete in any professional tournaments, gain expertise in the field, or earn income from golfing activities. Therefore, the Tax Court ruled that the taxpayer was not able to deduct golf related expenses pursuant to Section 183. Ryan’s circumstances are different from that of Heywood’s case. As established above, Ryan met several of the criteria outlined in Reg.1.183-2(b).

While Ryan’s expenses have exceeded his earnings by $5,000 to $10,000 per year, the number of years this has occurred is not clear. In accordance with Section 183, the IRS typically accepts that an activity is engaged in for profit if it results in a profit for at least three of the last five tax years. Assuming that Ryan has incurred such losses for no more than two years, he is presumed to be able to deduct the golf related expenses (burden shifts to IRS to disprove). If Ryan has not earned a profit for at least three years of the last five tax years, his losses are presumed to be hobby losses by the IRS which must be disproved by the taxpayer.

Credit for taxes previously paid.

She did not establish value at the time she transferred out.

Section 2036 talk about

How could she had been divested of the home in 2000 which was put into revocable trust?

What is the purpose of transferring in trust.

What else could she had done? If we want to establish value at 2000 if she would have paid rent to her kids. Any appreciation would not be subject to an estate tax if hey value was not established. Whole 700,000 is part of her estate and the estate tax will be paid on the full amount.

It was a big house and she paid property tax and all the upkeep . However, Statute of Fraud with real estate must be in writing.

The apprecaitions of 300,000 is not subject to estate tax outside of the trust because it was established at 400,000.