Tax Bar Bulletin: Volume 37, No. 5

Current Items:                                                             

  1. Biden Tax Plan?
  2. Some SALT?
  3. Race Car Blues
  4. Revamp the IRS, Oh My!

1). You may remember your first tort or contract class in law school. A learned Professor stood before the class and told his students that what law amounts to is: Whose ox is being gored. It probably wasn’t to your last year or perhaps beyond that when you figured out what that could possibly mean. In the legal world there are winners and losers. The same holds true for tax law as everywhere else. Now depending on which lever you pulled in November the following may either make you happy, sad or simply somewhat depressed. But have no fear at this time as tax changes are mere trial balloons, as Franklin Roosevelt would have said. They are designed to get the reaction of both the Congress, the parties and the public. But it is safe to say some of this stuff will find its way into our ever complicated tax law. So behold as the Biden administration goes forward. As advertised and promised during his campaign one tax proposal would be to increase the top income tax rate on individuals from 37% to 39.6%. This would affect single filers with incomes above $452,700 and joint filers in excess of $509,300. Most ordinary taxpayers who may have pulled the right lever should be able to rest easy. Further long-term capital gains would be taxed at 39.6% instead of the current 20% this would apply to those nasty rich taxpayers reporting $1 million or more of income on their returns. But it gets even more cruel! Though the IRS attempted to do this some years ago with a disastrous result, the Biden team proposes eliminating the stepped-up basis in inherited assets. This then is very big old news. Under current law, beneficiaries of assets walk away income tax-free of sales of assets owned by the decedent which have appreciated prior to the decedent’s death. Under the proposal an income tax would be due on the difference between current death value and the tax basis of the decedent. For example: the decedent had purchased a painting for $100. It was worth $1000 at his death. Under current law the beneficiary receives a stepped up basis to $1000 and a sale at $1000 by that beneficiary produces no income tax. The proposal now would tax at death the difference between the decedent’s basis of $100 and the value of $1000 that is $900. Chasing down the original decedent’s basis is more than problematic and may pose challenges that cannot be overcome for some time, but nonetheless this idea is tempting and it is on the table. But take note: gains of less than $1 million for a single person or $2 million for a couple would not be taxed. By the way the current estate tax rate and exemption amount would remain unchanged. There are lots of other things included in the American Families Plan, but why worry so far in advance. Or should you?

2) Now our Dear Uncle Joe is well aware of the suffering the SALT limitation of $10,000 for state and local taxes claimed on schedule A has caused taxpayers like us here in New Jersey where an adequate sized two-car garage in some communities could be taxed at $10,000 by itself. So it is somewhat disappointing to mention that the Biden American Families Plan does not include any repeal of these limitations. But take heart, already a group of New York lawmakers have vowed to oppose any tax legislation that does not address this onerous tax problem. There are some difficult twists and turns ahead however. After all, most taxpayers don’t pay $10,000 worth of state and local income taxes, so any repeal would benefit the evil-upper income class of taxpayers Biden had sworn to tax in his campaign speeches. In addition, how would the loss of federal revenue be made up somewhere else? Some, including me, believe a compromise raising the limits somewhat perhaps to $15,000 or $20,000 could be achieved. Mail your cards and letters to your state representatives in DC not to me to complain about all of this. I just try to educate and amuse. They don’t ask me for input.

3) Before you read this next item you must see the movie Ford v Ferrari. You will get the proper smell in your nostrils of oil, gas and burning rubber. Don’t try to imitate any of the racetrack stunts on the parkway or turnpike. You have to wonder whether Mr. Berry in Berry TC memo 2021 – 42 saw the movie and that was the reason he got into car racing. Apparently in this case a father and son had a business building houses and developing real estate. The son, needless to say, was much impressed by the movie. He loved car racing and ran up $121,000 for expenses to restore and race his car claiming that it was in fact tax deductible advertising expenses for the business. IRS, like the state troopers on the parkway and turnpike, was not impressed. They were pulled over, audited and their write offs disallowed. Undaunted the taxpayer went to the Tax Court which discovered the racing activity was not conducted in the business firm’s name and that no company logo was visible on the car. Further the taxpayers could not prove that their activity led to any new business connections of any kind. By the way the firm’s accountant had buried the deduction among its “construction expenses” on its form 1120 – S. That was bad form and a poor pit stop. But it is a great movie…8 out of 10 stars.

4) You say you read these bulletins. If you do, you know that I have been blaming Congress for the lack of IRS funding for years. Those poor overworked civil servants have been using computers which have an abacus as their core. Given the lack of funds, tax scoundrels have been avoiding hundreds of billions of dollars of income tax every year. It has been common knowledge that every dollar spent on IRS enforcement brings two or three into the federal treasury. The problem has been who in Congress wants to go on record as being pro-IRS instead of pro-taxpayer? But all that may be changing soon as the Biden administration has proposed increasing the IRS enforcement budget by $900 million. This is to allow IRS to conduct more audits of, you guessed it, wealthy individuals and large corporations. While the stage in Congress is always ready for a fight, it is likely that funding will be increased to the agency to the chagrin once again of upper income taxpayers and their advisors. It makes perfect sense. Ask any fisherman, they’ll tell you: Fish where the fish are.