ASPA NEWSLETTER

April 2001

The Arkansas Public Accountant is the monthly publication of the Arkansas Society of Public Accountants. The society is a professional organization composed of Licensed Public Accountants, Enrolled agents and persons holding out to be accountants or tax preparers with their services available to the public. This organization is dedicated to helping our members give the best possible service to their clients. We are happy to accept articles and/or advertising that would be of interest to our members and ask that you submit any thing for publication by the 25^th of the month to be included in the next month’s publication. Please send to:
LaVERNE LONG, Editor
P.O. BOX 758
NEWPORT, AR 72112-0758
llonga@ipa.net

The Arkansas Public Accountant

OFFICERS & GOVERNORS
2000 - 2001

PRESIDENT...................................SHELLY RUSSELL
PRESIDENT ELECT........................JAMES C. HODGE
1ST VICE PRESIDENT...................DONNY J. WOODS
2ND VICE PRESIDENT..................BRIAN THOMPSON

GOVERNOR DISTRICT I....................SUZANNE BALTZ
GOVERNOR DISTRICT II....................DONNA GOWAN
GOVERNOR DISTRICT III...................LONNIE TAYLOR
GOVERNOR DISTRICT IV.............GEORGE SIMPSON
GOVERNOR DISTRICT V..........CARL DALRYMPLE JR.
GOVERNOR DISTRICT VI....................TOM SIMMONS

FROM THE PRESIDENT’S PEN

VIA CREDIT CARD OR CHECK — SENDING OUR MONEY TO UNCLE SAM

Dear Members:

As I write this month's letter, we have less than three weeks before T-DAY. Looking at what I have left to do and what I still expect to come in, I know that extensions are inevitable. LaVerne's recent mail out assures us that IRS is trying to make it easier for taxpayers to extend their deadline by opening up a special toll-free phone line to handle extension requests. If you haven't read her mailout, you need to.

Please don't forget to put the dates if our newest seminars on your calendar. The first one offered after tax season is the Form 1041 Seminar on May 25th. This features "Gear Up" speakers and will include a complete analysis of the Form 1041, and will include case studies that explore a variety of issues dealing with estates and trusts. This is an area that IRS plans to look at more closely, so we need to be ready.

The other new seminar we're offering this year is the Quickbooks Seminar to be held July 26th and 27th. Quickbooks is the best-selling accounting software for small business and has become THE product with which accountants must become proficient to remain competitive. If we can't help our Quickbooks clients, they just might go somewhere else.

We are very fortunate to have Phill Gomez, a nationally recognized Quickbooks authority, as our instructor. You will be hearing more about these seminars, but PLEASE get these important dates on your calendar. Both of these seminars will be held at the Holiday Inn Select in Little Rock.

By the way, my E-Mail address is incorrect in the membership directory. It should be SRuss51670@aol.com.

And now for your health tip. I heard on the radio this morning that Americans don't get enough sleep, and we would all be a lot healthier if we got the recommended eight hours, I wonder if that's possible................

Sincerely,

Shelly Russell
President - ASPA

DON'T FORGET, THE MILEAGE RATE FOR BUSINESS MILEAGE HAS BEEN INCREASED TO 34.5 CENTS PER MILE FOR 2001.

RULES FOR INTEREST FREE LOANS

Loans of up to $10,000, no adverse tax consequences:

Loans over $10,000, and up to $100,000; treated as if interest is paid on them (interest is imputed) but only to the extent that the borrower has investment income. Thus, they are tax free as well if the borrower has no investment income.

Point: Even if such a loan does produce imputed interest, it may be advantageous since there may be much less imputed interest than there would be real interest on a commercial loan, and the imputed interest may qualify for the mortgage interest deduction.

Loans over $100,000 are subject to very complex rules and should be researched thoroughly with the help of an expert.

As you are aware, any loan should be fully documented with a signed note setting its terms, and be secured by the home in the manner required by local law.

The income tax created more criminals than any other single act of government.
Barry M. Goldwater

The wages of sin are death, but by the time taxes are taken out, it's just sort of a tired feeling.
Paula Poundstone

New filing trap for couples: Starting with this season, if the second Social Security number on a joint return does not match the name for it in the files of the Social Security Administration (SSA), the IRS will remove the name from the return. It will then treat the return as "single" or " head of household" filing increasing the amount of tax due.

The IRS has sent warning letters to 2.4 million people who had mismatched numbers on 1999 returns, But many more may be affected, including newlyweds.

Be sure to inform clients of this. They need to get a name change on their social security cards and this can only be done by requesting a new card from the social security administration. You use the same application as you would if applying for the first time. This form is available at www.ssa.gov or by calling 800-772-1213.

EARNED INCOME CREDIT FIASCO: More than 25% of earned income credit (EIC) payments are erroneous or fraudulent. Congress created the EIC as a tax credit to benefit low-income working people.

But in 1997 (the most recent year for which figures are available), fully 25.6% of all EIC payments were erroneous or fraudulent, up from 21% in 1994.

Problems.......

Congress has made the rules for claiming the EIC so complex, and has changed them so many times, that low-income people often can't claim it correctly without professional help that they can't afford.

Applicants basically get the credit simply by asking for it, and the IRS doesn't have the resources to audit so many low-income individuals.

The limit on meal and entertainment deductions: As we all are aware of, only 50% of the cost if business meals and entertainment generally are deductible.

Exceptions:

Food provided as a de minimis (minimal) fringe benefit. Examples: Beverages and snacks offered in the company coffee room or kitchen.

Cost of company picnics, holiday parties and other events where expenses are incurred for recreational or social purposes and are not primarily for the benefit for highly compensated employees.

Meals on the premises provided for the company's convenience, as long as more than " of the companies employees receive these meals.

Employer paid meal costs which are treated as compensation to an employee.

Example: An employee hosts a business luncheon at her country club. You, as the employer, reimburse the employee for the full amount and treat the reimbursement as compensation, The company can deduct 100% of the cost.

Caution: Since the reimbursed amount is compensation, it is subject to employment taxes income tax withholding, FICA and FUTA taxes.

Reimbursement to independent contractors for business meals that are not adequately accounted for.

If an employee is reimbursed for meals and entertainment under "accountable" plan, he does not have to worry about the 50% limit. He's not taxed on the reimbursement, so he needn't claim any deduction for meal and entertainment costs.

MINISTER'S HOUSING ALLOWANCE TAX FREE: A minister's compensation from his church exceeded $80,000, 100% of which was designated a housing allowance, He used it all to pay the costs of the home he owned, and to add improvements. He lived on an additional $200,000 of income received from selling religious books and other items.

IRS: The housing allowance far exceeded the fair market rental value of the minister's home and it was taxable to the extent it did.

Tax Court: There is no legal basis for the IRS position. The Tax Code says a housing allowance is tax exempt to the extent it is spent on housing, It all was, so it is fully tax exempt.
Richard D. Warren, 114 TC 343.

BUSINESS GIFT DEDUCTION LIMIT LOOPHOLE?

Business gifts are subject to a deduction limit of only $25 each but a recent Tax Court decision may enable businesses to take much larger deductions for many gifts.

Case: A company gave a set of golf clubs to its top salesman and deducted the entire amount ($1,455) cost as an "employee relations" expense.

The company did not issue a 1099 or W-2 to the salesman that included the cost of the clubs in his income. Rather, it said the clubs were given to him in appreciation of his past service and as an incentive for future performance.

Snag: The IRS said that since the golf clubs were not taxable compensation, they were a gift, and the company's deduction for them was limited to $25.

Court: A voluntary transfer of property from one party to another, with nothing being received in exchange is not necessarily a gift.

Here the company owner testified that the golf clubs were neither compensation for a particular sale made by the salesman, nor a gift, but an incentive to encourage the salesman's continuing relationship with the company, which was vital to it.

Thus, the company had shown a business reason for giving the clubs to the salesman, and the full cost of the clubs was deductible as a business expense.

Impact: Of course, a great many business gifts, if not most, are made in the hope of eliciting a future business benefit from them and the rationale of the Tax Court here could eliminate the $25 deduction limit for all of them. Watch for future developments.
Bernardus A.P. Dobbe, TC Memo 2000-330.

THE IRS HAS ALL THE ANSWERS

Take questions about the earned income credit (EIC) only to the IRS.

Oops: Recently, the IRS sent out 286,000 letters to taxpayers mistakenly telling them to take questions concerning their eligibility to claim the EIC for children to their local state child support offices and even provided the phone numbers of the state agencies.

State officials have no authority over EIC issues, Potential EIC claimants should bring any questions directly to the IRS.
IRS News Release IR-2001-11.

IRS re-engineers audit process, targets partnership income.
The IRS audit rate has plunged in recent years due to limited IRS resources. To compensate, the IRS says it will refocus its audits in high income taxpayers. Special target: K-1 schedules filed by partnerships. The IRS has not matched these against individual returns in the past, but will begin doing so this year. The IRS believes that the approximately $600 million of income covered on K-1s may be up to 20% under-reported. Other targets: Trusts & non-filers.

EMPLOYEE STOCK OPTIONS GETTING THE MOST FROM THESE VERY TRICKY PERKS

As established companies and start up businesses continue to compete for top workers, more and more companies have started offering stock options to key employees.

Options, the right to buy stock at a specified price for a specified time are very tricky in regard to taxes.

Incentive stock options (ISOs) are not taxed when issued or granted to employees, as long as certain conditions are met..

............The option price must be equal or exceed the stock's fair market value when the stock is issued.

............The market value of the stock subject to options cannot exceed $100,000 a year at the time of grant for any one employee.

Stock options that don't meet these rules are automatically considered "non-qualified stock options" (NOSOs). While they aren't taxed when granted, NOSOs are subject to their own special rules.

LOOPHOLE: AVOID THE AMT. Gains from sales of stock held more than one year after an ISO is exercised and more than two years after the ISO is granted are taxed at favorable long-term capital gains rates. Otherwise, they are taxed as compensation income.

TRAP: The untaxed difference between the option price and the fair market value of the stock when the option is exercised is an adjustment to income for AMT purposes. The AMT becomes applicable when it is higher than regular tax.

STRATEGY: To avoid the AMT, exercise only enough options every year so that the AMT is equal to your regular tax, but not higher.

Loophole: Exercise nonvested ISOs early. If your company plan permits, exercise nonvested ISOs at least one year before they vest. That way you establish a holding period for long-term capital gains treatment. You can sell the shares as soon as they vest (if the ISO was granted more than two years earlier) and the proceeds will be taxed at rates no higher than 20%.

Loophole: Make a Section 83(b) election. Option holders who exercise ISOs should consider making an election under Section 83(b) of the Internal Revenue Code within 30 days of the exercise. The election is made by filing a statement containing certain information with your IRS Service Center and attaching a copy to your return.

An 83(b) election freezes the amount of preference income subject to AMT at the amount existing on the date of early exercise. Otherwise, AMT income is calculated on the date that the shares would have vested, at the difference between the value of the shares at that time and the amount paid for the option.

Example: You pay $1 for ISOs on stock worth $10 a share. When you make an 83(b) election in thirty days, your AMT taxable income is limited to $9. If you don't make the election, and the stock price rises to $25 when your options vest, your AMT taxable income is $24 a share.

Planning: When stock acquired by exercising options is sold before the statutory two-year holding period, the AMT does not apply. The downside is that you pay income tax at rates up to 39.6% on the gain, not long-term capital gains rates.

To decide whether to exercise early, consider how your after tax return on the options will fit your personal wealth accumulation plans. Also, consider early exercise to protect against price declines in the value of shares.

Returns prepared by IRS for taxpayer are deemed filed by him/her.

When the IRS found that an individual hadn't filed a tax returns for several years, it prepared returns for him and imposed tax on the basis of them. Later, the individual filed bankruptcy and tried to have his tax bill discharged. But the IRS said he was ineligible for discharge because he had never filed tax returns for those years, Court: For the individual. He had consented to the returns prepared by the IRS, agreed to the amount of tax shown on them, and signed all related paper work. So he had effectively filed the returns prepared by the IRS and his taxes were dischargeable.
John H. Mathis Jr., DC SD Fla., No.99-8525-CIV-HURLEY;87 AFTR2d p.2001-474.

Beneficiary's death cures faulty will and saves deduction. A woman's will created a trust to benefit her brother for life and then made requests to others, including several charities. Next: The brother died before his sister's estate filed it's estate tax return, and the estate claimed a charity deduction for transfers to the charities, But the IRS disagreed. Why? It said the trust created by the will split interests in its assets so many ways that the value of future charitable gifts to be made under its terms was incalculable. Court: The brother's death retroactively reformed the will and eliminated the trust, Since charitable bequests were now certain, they were deductible. Barbara Harbison, DC ND GA.,No. 1:98-ev-1675-BBM;86 AFTR2d p.2000-5593.

Smart owner can deduct his company's cash transfer to charity. The owner of a closely held corporation gave shares to a private foundation he controlled, deducted the value of the shares, then has his company redeem them. Result: The foundation received cash from the company--but he, not the company, took the deduction for the cash transfer. Snag: The IRS objected, saying the owner effectively had caused a taxable partial liquidation of the company and donated the proceeds. Court: For the owner, the stock was a legitimate, deductible gift. Key: The charitable recipient had not been legally required to redeem the donated shares. Daniel D. Palmer, 62 TC 684,aff'd, CA-8,523 F.2d 1308.

CEO's vacation home office is deductible. The CEO of a Chicago-based business set aside August each year for long-range planning. To get away from distractions he spent the month at his vacation home in Wisconsin. He built an office there and deducted it. Snag: The IRS challenged the deduction saying a home office isn't deductible to an employee who has a regular office was not necessary for business. Court: The office was a separate structure so it didn't have to be his principal place of business to qualify for a home-office deduction. The office served a valid business purpose so its deduction was allowed. Ben W. Heineman, 82 TC 538.

4/2/01
JUST RECEIVED THE FOLLOWING EMAIL FROM JOHN PEACE OF DOVER & DIXON LAW FIRM IN LITTLE ROCK.

TO: CLIENTS & FRIENDS OF DOVER & DIXON,

Last week, the House Ways and Means Committee approved a bill repealing estate and gift tax over 10 years. As we expected, the bill provides for limited step-up in basis of assets at death, which will result in capital gains taxes of larger estates when inherited assets are sold. The bill included a limited step up in basis provision for up to $1.3 million of assets transferred upon the death of a decedent, and an additional increase to $3 million for assets acquired by a surviving spouse.

In an attempt to curb abuses, the bill would require donees to report to the IRS the basis and character of any non-cash property received by gift with a value in excess of $25,000, and treat transfers by a U.S. person to a non-resident as a sale or exchange of the property for an amount equal to the fair market value of the transferred property.

We'll keep you posted on new developments.

Ed.'s note: I thank MR. Peace for sharing this and other communications to ASPA.

THEY SAY ITS SMART NOT TO BELIEVE MORE THAN HALF OF WHAT YOU HEAR, BUT THEY DON'T TELL US WHICH HALF.

WHAT? 1041 SEMINAR
WHEN? MAY 25, 2001
WHERE? HOLIDAY INN SELECT, LITTLE ROCK, AR

Laugh a Little

Would a fly without wings be called a walk?
Can you be a closet claustrophobic?
If the funeral procession is at night, do folks drive with their lights off?
If the cops arrest a mime, do they tell him he has the right to remain silent?
If a book about failures doesn't sell, is it a success?
What's another word for thesaurus
When you choke a Smurf, what color does it turn?
Accounting is a good profession because you always know how much your clients can afford to pay.
"My tax man is so considerate and compassionate," says Joey Adams, "He's the only accountant I know with a recovery room

Social Security Administration Launches E-News
THERE IS NOW A FREE MONTHLY NEWSLETTER FOR RECEIVING INFORMATION ABOUT SOCIAL SECURITY.
IT IS: www.ssa.gov. You can also choose the topics you want.

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