(For daily exchange rates see the links section.)

2012 = 3.8559

2011 = 3.5781

2010 = 3.7330

2009 = 3.9326

2008 = 3.5878

2007 = 4.1081

2006 = 4.4565

2005 = 4.4878

2004 = 4.482

2003 = 4.5483

2002 = 4.7378

2001 = 4.208

2000 = 4.077

1999 = 4.1395

1998 = 3.8085

1997 = 3.4354

1996 = 3.1869

1995 = 3.0115

1994 = 3.0113

1993 = 2.834

1992 = 2.478

1991 = 2.278

A "phase two" tax reform outline could be unveiled by House GOP tax writers by August. Republicans have started to increase their tax meetings related to the effort, House Ways and Means Committee Chairman Kevin Brady, R-Tex., told reporters on June 13.

A "phase two" tax reform outline could be unveiled by House GOP tax writers by August. Republicans have started to increase their tax meetings related to the effort, House Ways and Means Committee Chairman Kevin Brady, R-Tex., told reporters on June 13.

Tax Reform "2.0" Timeline

The precise timing of a "phase two" tax reform bill or discussion draft release remains "to-be-determined," a House Ways and Means Committee spokesperson told Wolters Kluwer on June 14. However, Brady told reporters he expects to see a legislative package outlined before the House’s August recess.

Previously, White House Legislative Affairs Director Marc Short predicted a late-summer release of the House’s tax bill. Further, House Majority Leader Kevin McCarthy, R-Calif., has predicted that the House will approve the measure before midterm elections in November.

Individual Tax Cuts

Brady reiterated to reporters that "phase two" will focus on the individual side of the tax code. Moreover, making permanent the individual tax cuts enacted under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) will be the "centerpiece" of a " phase two" bill, Brady reportedly said. Additionally, Republican tax writers are considering proposals that would streamline the retirement savings process, a Ways and Means spokesperson previously told Wolters Kluwer.

Phase Two Fate Uncertain

The next major tax bill’s fate in the Senate remains uncertain. At least nine Democratic votes will be needed to reach the Senate’s 60-vote threshold. Brady has said he is hopeful for Democratic support.

However, Democratic lawmakers in the House and Senate remain largely opposed to the TCJA. Democrats have criticized the TCJA for primarily benefiting corporations. However, House Republicans are hopeful for bipartisan support on a new measure that focuses primarily on individual tax cuts.

A bipartisan group of House and Senate lawmakers have introduced companion Historic Rehabilitation Tax Credit (HTC) bills. The measure aims to strengthen the HTC by encouraging investment and minimizing administrative burdens, according to the lawmakers.

A bipartisan group of House and Senate lawmakers have introduced companion Historic Rehabilitation Tax Credit (HTC) bills. The measure aims to strengthen the HTC by encouraging investment and minimizing administrative burdens, according to the lawmakers.

Rehabilitation Credit

As amended by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), the rehabilitation credit under Code Sec. 47 is limited to 20 percent of qualified rehabilitation expenditures (QREs) of the taxpayer for qualified rehabilitated buildings. The credit is claimed ratably over a five-year period beginning in the tax year in which the rehabilitated building is placed in service. A "qualified rehabilitated building" (QRB) is a building and its structural components for which depreciation is allowable, and that has been substantially rehabilitated and placed in service before the beginning of the rehabilitation. The building must be a certified historic structure, but any expenditure attributable to rehabilitation of the structure is not a QRE unless it is a certified rehabilitation.

Property is considered substantially rehabilitated only if the expenditures during an elected 24-month measurement period (60-month period for phased rehabilitations) ending with or within the tax year are greater than the adjusted basis of the property or $5,000.

Basis-Adjustment Requirement

The bipartisan Historic Tax Credit Enhancement Bill, introduced June 13, would eliminate the existing basis-adjustment requirement. Eliminating this requirement would "bring the HTC in line with other tax credits claimed over multiple years," according to a joint press release by the bill’s sponsors.

The measure was introduced by Sens. Bill Cassidy, R-La., Ben Cardin, D-Md., and Susan Collins, R-Me., and Reps. Darin LaHood, R-Ill., and Earl Blumenauer, D-Ore. "Protecting this credit was one of my top priorities in tax reform, and I’m glad there is bipartisan support for making it even better," Cassidy said in the joint press release. Cardin praised the measure for helping to create economic growth.

Improved HTC

Likewise, Collins said the bill would make the HTC easier to use as well as create economic development across the country. Additionally, an improved HTC would create jobs, according to Blumenauer. "Strengthening the Historic Tax Credit will further revitalize American cities while creating local jobs and spurring economic development in communities large and small," Blumenauer said.

House tax writers have moved two bills through committee. The bills focus on IRS hiring and the tax treatment of mutual ditch irrigation companies. The House Ways and Means Committee approved the measures in a June 21 markup.

House tax writers have moved two bills through committee. The bills focus on IRS hiring and the tax treatment of mutual ditch irrigation companies. The House Ways and Means Committee approved the measures in a June 21 markup.

IRS Hiring

The Ensuring Integrity in the IRS Workforce bill (HR 3500) would set certain restrictions on the IRS’s hiring policy. The bipartisan bill would amend Code Sec. 7804 to prohibit the rehiring of any employee previously dismissed for certain misconduct issues.

The bill comes after two Treasury Inspector General for Tax Administration (TIGTA) reports noted that the IRS rehired hundreds of former employees with conduct violations. Over 200 of the more than 2,000 former employees rehired between January 2015 and March 2016 were previously terminated from the IRS for a substantiated conduct or performance issue, according to a July 2017 TIGTA report. Inspector General J. Russell George previously told lawmakers that the particular IRS hiring process is "bad decision making."

The bill, sponsored by Reps. Kristi Noem, R-S.D., and Kyrsten Sinema, D-Ariz., originally passed the House with bipartisan support in the 114th Congress. However, the Senate never took up the measure. Also, Sen. Richard Burr, R-N.C., introduced a related bill in the Senate.

"If a person is fired for falsifying information or mishandling sensitive taxpayer data, it’s common sense that individuals should not be rehired," Noem said in a June 21 press release. "Nonetheless, the IRS has done this repeatedly."

Agriculture Tax Reform

Additionally, the Ways and Means Committee approved the Water and Agriculture Tax Reform bill (HR 519). The bill aims to facilitate water leasing and transfers to promote conservation and efficiency. HR 519 would amend the "tax treatment of mutual water storage and delivery companies so that they can maintain their nonprofit status even if more than 15 percent of their revenue comes from nonmembers," according to a June 21 press release by the bill’s sponsor, Rep. Ken Buck, R-Colo.

HR 519 and HR 3500 are now headed to the House floor.

The American Bar Association (ABA) Section of Taxation has expressed concerns to top Senate tax writers about certain congressional IRS reform efforts. The ABA Section of Taxation sent a June 6 letter to Senate Finance Committee (SFC) Chairman Orrin G. Hatch, R-Utah and ranking member Ron Wyden, D-Ore., regarding the House-approved bipartisan Taxpayer First Act (HR 5444).

The American Bar Association (ABA) Section of Taxation has expressed concerns to top Senate tax writers about certain congressional IRS reform efforts. The ABA Section of Taxation sent a June 6 letter to Senate Finance Committee (SFC) Chairman Orrin G. Hatch, R-Utah and ranking member Ron Wyden, D-Ore., regarding the House-approved bipartisan Taxpayer First Act (HR 5444).

IRS Reform

"The administrative reforms included in the House bills are a welcome step forward," Hatch previously told Wolters Kluwer. The House passed a package of bills in April, which aims to restructure the IRS for the first time in 20 years. Hatch told Wolters Kluwer that he is looking forward to working with his colleagues to find a path forward that reflects both House and Senate views on IRS reform.

While the SFC considers the House’s IRS reform package, the ABA Section of Taxation has asked Senate tax writers to consider certain suggestions to enhance IRS restructuring efforts. "We appreciate that Congress has turned its attention to the relationship between taxpayers and the agency charged with the assessment and collection of taxes," the letter said. The ABA Section of Taxation agrees with most of the House-proposed changes but has concerns with certain aspects of the bill, the letter noted.

Appeals

The House bill, HR 5444, proposes the establishment of an independent Office of Appeals along with a "generally available" right to appeal for taxpayers. While the letter to Hatch and Wyden supports a statutory right to appeals, among other things, it expresses concern that the IRS could limit certain taxpayer’s access to an appeal. "To the extent that the Service wishes to deny appeal rights to taxpayers, it should be required to articulate objective standards for when appeals will not be available, so that any Service determination to deny appeal rights can be measured against those standards," the letter said.

Additionally, the letter proposes that Congress remove certain limiting words from the bill’s provisions that discuss taxpayers’ rights to access case files. Currently, the bill states that only "specified taxpayers" will automatically be provided access to their case files. The ABA Section of Taxation urges Congress to allow all taxpayers access to information in their case file, regardless of income thresholds.

Senate Timeline

As for when the SFC will release its anticipated amendments to the House-approved IRS reform package remains unclear. The Senate’s legislative efforts toward restructuring the IRS are expected among lawmakers to be bipartisan.

The U.S. Supreme Court has determined that nonqualified employee stock options are not taxable compensation under the Railroad Retirement Tax Act (RRTA). The term "money remuneration" in the Act unambiguously excludes "stock."

The U.S. Supreme Court has determined that nonqualified employee stock options are not taxable compensation under the Railroad Retirement Tax Act (RRTA). The term "money remuneration" in the Act unambiguously excludes "stock."

Background

Several railroads filed a refund claim for overpaid Railroad Retirement taxes. The railroads claimed they overpaid their taxes because they included the value of employee stock options when calculating the tax.

The IRS denied the refund request. The IRS argued that stock options were taxable "money remuneration" under the RRTA because stock can be easily converted into money.

The railroads replied that stock options are not money. Moreover, they argued that when Congress passed the RRTA, it sought to mimic existing industry pension practices. Generally, those practices ignored in-kind benefits like food, lodging, and railroad tickets.

Stock Options Not Money

When Congress adopted the RRTA in 1937, it understood "money" as "currency issued by a recognized authority as a medium of exchange." Stock options do not fall within this definition.

Further, while stock can be bought or sold for money, it is not usually considered a medium of exchange. Few people value goods and services using stock, or buy groceries or pay rent with stock.

Also, adding the word remuneration did not alter the meaning of the word money. Thus, "any form of money remuneration" indicated that Congress wanted to tax money compensation. It did not indicate that Congress wanted to tax things, like stock, that are not money.

Statutory Context

Moreover, the broader statutory context pointed to the same conclusion. For example, the 1939 Internal Revenue Code treated money and stock differently. However, the Federal Insurance Contribution Act taxes all remuneration, including benefits paid in a medium other than cash.

Further, a contemporaneous IRS rule explained that the RRTA taxed all money compensation. The rule lists examples like salaries, wages, commissions and bonuses. It also included things that could be used as money, like scrip. However, the rule did not suggest that stock was taxable compensation.

Thus, Congress knew the difference between money and other forms of compensation. The choice of Congress to use the narrower term for railroad pensions had to be respected.

Reversing and remanding CA-7, 2017-2 ustc ¶50,295.

A member of the Miccosukee Tribe of Indians of Florida had to pay federal income tax on distributions of gaming income that she and her family received from the tribe. The payments were taxable income under the Indian Gaming Revenue Act, rather than Indian general welfare benefits that were excluded from tax under Code Sec. 139E. Both the taxpayer and the tribe were bound by the decision.

A member of the Miccosukee Tribe of Indians of Florida had to pay federal income tax on distributions of gaming income that she and her family received from the tribe. The payments were taxable income under the Indian Gaming Revenue Act, rather than Indian general welfare benefits that were excluded from tax under Code Sec. 139E. Both the taxpayer and the tribe were bound by the decision.

Tribal Distributions

The Miccosukee Tribe distributed income to its members in quarterly payments. Historically, these payments were in the $20 to $25 range. In 1990, however, the tribe opened a gaming center that offered high-stakes bingo, poker, and video pull-tab machines. The tribe’s income, and its distributions to its members, increased substantially.

Each quarter, the tribe used the revenue of the gaming activities to fund per capita distributions to its members. But the tribe disregarded its federal tax obligations on these distributions. It neither reported the distributions nor withheld taxes on them. The tribe also told its members not to discuss the payments with outsiders, not to report them to credit card agencies, and not to cash the distribution checks in places that would report them to the IRS.

For the tax year at issue, the taxpayer received a total of $272,000, which represented payments for herself, her husband, and her two children. She did not file a tax return or pay any income tax for that year.

After the IRS assessed tax, interest and penalties against her, the taxpayer attempted to file a late return that reported the $272,000 as nontaxable income. She did not pay any of her assessment. The tribe intervened in her case as a matter of right.

District Court Decision

The District Court agreed with the IRS that the payments were distributions of gaming income that were fully taxable to the taxpayer. Most of the funds came from the gaming operation. The taxpayer and the tribe did not show what portion may have come from other, nontaxable sources.

Although the $272,000 included payments on behalf of the taxpayer’s husband and children, the taxpayer was responsible for tax on the entire amount. The tribe was structured as a matriarchy. Thus, the taxpayer was the head of her household, and the payments were all made available to her. She also spent all of the payments on household expenses, and she had reported all of the payments as her income when she tried to file a late return.

IGRA vs GWEA

The main issue on appeal was whether the tribe’s distributions were covered by the Indian Gaming Revenue Act or the Tribal General Welfare Exclusion Act.

The Indian Gaming Revenue Act (IGRA) was passed in 1988. It allows an Indian tribe to engage in gaming and distribute the revenue to members on a per capita basis. It also explicitly includes those distributions in a tribe member’s taxable income.

Code Sec. 139E was enacted in 2014 as part of the Tribal General Welfare Exclusion Act (GWEA). It excludes from federal taxation any payment made or services provided to or on behalf of an Indian tribe member under an Indian tribal government program. To be excludible, benefits provided under the program must be for the promotion of general welfare.

The court held that the exemption for Indian general welfare benefits under Code Sec. 139Edoes not apply to the per capita payments an Indian tribe makes from gaming revenue.

The taxpayer and the tribe claimed that GWEA effectively amended IGRA because it was more recent. The court disagreed, clarifying that IGRA applied only to gaming income, while GWEA was a law of general application. Thus, under the rules of statutory construction, IGRA continued to apply to distributions of gaming income because it was more specific than GWEA.

The court also rejected the characterization of the payments as distributions of the tribe’s tax revenues rather than its gaming income. The tax did not affect the nature of the gaming income. Instead, it was merely a mechanism to collect the income and distribute it to members.

The distributions also were not nontaxable income from Indian land, because they did not come directly from the use of the reservation land or its resources. Instead, the distributions came from improvements and related business activities–that is, gambling in the casino.

Effect on the Tribe

The tribe argued that it should not be included in the District Court’s judgment. However, the tribe had intervened as a matter of right because, if the court determined the payments were taxable, the tribe would have to report them and withhold income tax from them.

As an intervenor, the tribe had the same status as an original party. It also fully participated in the trial by arguing motions, attending depositions, presenting evidence, and examining witnesses. Thus, it was bound by the District Court’s judgment.

Affirming a DC Fla. decision, 2016-2 ustc ¶50,474.

An individual shareholder of an S corporation restaurant operator was not allowed to claim FICA tip credits under Code Sec. 45B that the S corporation did not claim. The shareholder could not unilaterally and retroactively nullify the S corporation’s election to deduct FICA tip taxes.

An individual shareholder of an S corporation restaurant operator was not allowed to claim FICA tip credits under Code Sec. 45B that the S corporation did not claim. The shareholder could not unilaterally and retroactively nullify the S corporation’s election to deduct FICA tip taxes.

Background

The restaurants owned by the S corporation had hired “tipped employees” whose earnings came partly from customer tips. The S corporation was required to pay taxes on these tips as part of its FICA tax payments. For the two tax years at issue, the S corporation did not claim any FICA tip credits. Instead, the S corporation deducted its payments of the FICA tip taxes on its Forms 1120S, and did not later amend those returns.

On his amended Forms 1040 for those tax years, the shareholder claimed he was entitled to flowthrough FICA tip credits with respect to his interest in the S corporation.

FICA Tip Credit

Code Sec. 45B allows an employer working in the food and beverage industry to claim business tax credits for the portion of the FICA taxes—i.e., social security and Medicare taxes—that it paid on employee tips in excess of the minimum wage. The employer must have employees who receive tips from customers for providing food or beverages for consumption, and must be deemed to have paid FICA taxes on the tips in excess of the minimum wage. The employer must not have already claimed a deduction for the FICA tax payment. An employer claims its FICA tip credits on Form 8846.

Here, when the S corporation chose to deduct its FICA tax payments, it had made an election not to claim any FICA tip credits. The S corporation never claimed or intended to claim FICA tip credits. Based on this reporting position, the shareholder was not entitled to any flowthrough FICA tip credits for either tax year.

S Corporation Elections

Under Code Sec. 1363(c) and its regulations, elections that affect the computation of items derived from an S corporation generally must be made by the S corporation, not separately by its shareholders. There are two exceptions: the shareholder claims any elections (1) for the deduction and recapture of certain mining exploration expenditures, and (2) for foreign tax credits.

In this case, the shareholder argued in effect that the S corporation’s election to deduct FICA tax payments could be changed unilaterally by his request, made in his capacity as a shareholder, that the S corporation amend its returns to claim the FICA tip credit. The shareholder’s position was rejected based on the plain text of Code Sec. 1363(c), and of Code Sec. 45B(d), which states that the credit does not apply to a taxpayer if the taxpayer elects to have the credit provision not apply.

Further, the Tax Court stated that it refused to create a new precedent that would give each individual shareholder the power to change an S corporation’s tax election unilaterally. Such a change, stated the court, would not only affect the tax liabilities of the requesting shareholder, but could also affect the tax liabilities of the shareholders who have not consented to the change.

The Treasury Department and the IRS have issued final regulations that:

• prevent a corporate partner from avoiding corporate-level gain through transactions with a partnership involving equity interests of the partner or certain related entities;
• allow consolidated group members that are partners in the same partnership to aggregate their bases in stock distributed by the partnership for purposes of limiting the application of rules that might otherwise cause basis reduction or gain recognition; and
• require certain corporations that engage in gain elimination transactions to reduce the basis of corporate assets or to recognize gain.

The Treasury Department and the IRS have issued final regulations that:

• prevent a corporate partner from avoiding corporate-level gain through transactions with a partnership involving equity interests of the partner or certain related entities;
• allow consolidated group members that are partners in the same partnership to aggregate their bases in stock distributed by the partnership for purposes of limiting the application of rules that might otherwise cause basis reduction or gain recognition; and
• require certain corporations that engage in gain elimination transactions to reduce the basis of corporate assets or to recognize gain.

The Treasury Decision adopts as final certain rules set forth in proposed regulations issued in 2015, under Code Sec. 337(d) (with only minor, nonsubstantive clarifications) ( NPRM REG-149518-03), and Code Sec. 732(f) ( NPRM REG-138759-14).

The final regulations affect partnerships and their partners, and apply to transactions occurring on or after June 12, 2015. The regulations are effective on June 8, 2018.

Acquisition of Interest in Stock to Avoid Gain on Appreciated Property

A corporation that distributes appreciated property to its shareholders has to recognize gain under Code Secs. 311(b) and 336(a) as if the property were sold to the shareholders for its fair market value. However, taxpayers have tried to postpone or avoiding the recognition of that gain.

For example, if a corporation exchanges appreciated property for its own stock, the corporation would recognize gain on the exchange. But corporations have tried to avoid recognizing that gain by, for example, taking these steps:

• the corporation enters into a partnership and contributes appreciated property;
• the partnership acquires stock of that corporate partner; then
• the partnership makes a liquidating distribution of the stock to the corporate partner.

The final regulations under Code Sec. 337(d) aim to prevent a corporate partner from avoiding gain recognition when it acquires or increases its interest in stock held by a partnership in exchange for appreciated property. Under the final regulations, a corporate partner may recognize gain when it is treated as acquiring or increasing its interest in stock of the corporate partner held by a partnership in exchange for appreciated property in a manner that avoids gain recognition under Code Sec. 311(b) or Code Sec. 336(a). The final regulations also provide exceptions under which a corporate partner is not required to recognize gain.

Limit on Basis Reduction or Gain Recognition for Consolidated Group Members

The final regulations limit rules that cause basis reduction or gain recognition for consolidated group members that are partners in the same partnership. Code Sec. 732(f)limits the basis of a distributed corporation’s property if—

• a corporate partner receives a distribution from a partnership of stock in another corporation (distributed corporation);
• the corporate partner has control of the distributed corporation, defined as ownership of stock meeting the requirements of Code Sec. 1504(a)(2), immediately after the distribution or at any time thereafter (control requirement); and
• the partnership’s basis in the stock immediately before the distribution exceeded the corporate partner’s basis in the stock immediately after the distribution.

Under these circumstances, the basis of the distributed corporation’s property must be reduced by this excess. Further, the corporate partner must recognize gain to the extent that the basis of the distributed corporation’s property cannot be reduced.

In applying this rule, the final regulations allow the bases of consolidated group members to be aggregated if when two conditions are met: (1) two or more of the corporate partners receive a distribution of stock in a distributed corporation from the partnership; and (2) the distributed corporation is or becomes a member of the distributee partners’ consolidated group after the distribution.

Elimination Transactions

Final regulations restrict corporate partners from entering into gain elimination transactions. They focus on attempts to eliminate gain in the stock of a distributed corporation while avoiding the effects of a basis step-down in transactions. Under the regulations, in the event of a gain elimination transaction, Code Sec. 732(f) will apply as though the corporate partner acquired control of the distributed corporation immediately before the gain elimination transaction.

Future Proposed Regs?

The Treasury and IRS are considering publishing a new notice of proposed rulemaking to propose more substantive amendments to the final 337(d) regulations, and to allow for additional public comment with respect to proposals in response to certain comments received, further reflection by the Treasury IRS, and concerns raised by practitioners.

Participants in the Son of BOSS tax shelter have maintained their perfect losing record in the Tax Court. Thus, another Son-of-Boss deal has failed to produce its promised loss deductions.

Participants in the Son of BOSS tax shelter have maintained their perfect losing record in the Tax Court. Thus, another Son-of-Boss deal has failed to produce its promised loss deductions.

Son-of-BOSS Arrangements

Son-of-BOSS is a variation of a slightly older tax shelter known as the "bond and options sales strategy," or BOSS. Son-of-BOSS transactions take many forms, but they all have one thing in common: Assets that are encumbered by significant liabilities must always be transferred to a partnership. The goal is to increase basis in that partnership or in the assets themselves.

The liabilities are usually obligations to buy securities. However, they are typically not completely fixed when they are transferred to the partnership.

This contingency is supposed to let the partnership treat the liabilities as uncertain. This, in turn, is supposed to let the partnership ignore the liabilities in computing basis. The result is supposed to give the partners basis in the partnership or in the assets themselves. This increased basis is supposed to translate into large loss deductions for the partners, all with no actual economic losses.

The Tax Court has yet to fall for the scheme.

Invalid Partnerships

The court has used several theories to reject Son-of-Boss losses. In this case, the court once again relied on the fact that the two partnerships involved in the transactions did not actually exist.

The partnerships were invalid because they were created only to carry out tax avoidance schemes. Thus, their members never intended to run any business through them.

The partnerships also failed the “prongified” test for determining whether the parties intended to, and did in fact, join together for the present conduct of an undertaking or enterprise. One managed to scrupulously adhere to the formal requirements for looking like a partnership. However, it did not display any objective indication of a mutual combination for the conduct of an ongoing enterprise.

The second partnership barely even went through the motions. It filed partnership returns and issued K-1s to its purported partners. However:

• There was no evidence the purported partners made any contributions to the partnership;
• The partnership did not have a formal operating agreement;
• The partnership did not conduct any business in its own name;
• There was no real profit for the partners to control or withdraw; and
• The partnership did not keep any books or records.

Since the partnerships were invalid, they were simply disregarded. Thus, the purported partners were treated as directly engaging in the partnerships’ activities and directly owning the partnerships’ property. This meant that the supposedly separate long and short options that were the heart of the transaction were actually a single-option spread. Thus the options were part of one contract, and they could not be separated to produce artificial losses.

The general rule on business expenses is that you must prove everything in detail to be entitled to a deduction. Logs, preferably made contemporaneously to the business transaction, must show date, amount, and business purpose and you must produce receipts. Fortunately, the tax law has a practical side. Congress, the IRS and the courts each have applied their own brand of practicality in allowing certain exceptions to be made to the business substantiation rule.

Here is a quick review of the major exceptions to the "prove-it or lose-it" rule that exist for business expense deductions. Some are relatively new; one is brand new.

General business expenses

Deductions are a matter of legislative grace, and the taxpayer must establish that he or she is entitled to them. A business taxpayer is required to maintain books and records sufficient to substantiate the items of income and deductions claimed on the return.

If the taxpayer is unable to substantiate expenses through adequate records, the courts have allowed the taxpayers to deduct an estimate of the expenses under the so-called Cohan rule named after the precedent-setting case of that name. This rule states that when a taxpayer has no records to prove the amount of a business expense deduction but the court is satisfied that the taxpayer actually incurred some expenses, the court may make an allowance based on an estimate. However, in determining the amount deductible, the courts may bear heavily on the taxpayer "whose inexactitude is of his own making."

The courts, however, cannot apply the Cohan rule to unsubstantiated travel or entertainment expenses. The Cohan rule also may not be applied to expenses for vehicles and other listed property, such as personal computers.

Travel & entertainment

Expenses for travel, meals, and entertainment are subject to strict substantiation requirements. Travel expenses in this case include meals, lodging, and incidental expenses. The Internal Revenue Code, however, gives the IRS an "out" and allows it to create exceptions to this general rule through its own regulations. The IRS has chosen to do so in a number of limited circumstances. The reason behind most of these exceptions is "administrative convenience" both for the business to maintain records in certain circumstances and for the IRS to spend an inordinate amount of audit resources in policing them. Here are the principal recordkeeping exceptions:

$75 rule.  Documentary evidence, such as receipts, paid bills, or similar evidence, is required for: (1) any expenditure for lodging while away from home; and (2) any other expenditure of $75 or more, except for transportation charges if documentary evidence is not readily available.  For expenses under $75, you do not have to provide receipts but still must maintain adequate records, such as a diary, account book, or some other expense statement.

Per diem.  IRS provides an optional per diem method for substantiating expenses reimbursed by the employer. The method applies to travel expenses for lodging, meals and incidentals, or for meals and incidental expenses (M&IE). Using per diem rates can avoid a great deal of paperwork.

Expenses are deemed substantiated if they do not exceed the per diem rates recognized by IRS. The per diem allowance must cover lodging, meals, and IE, and is not available for an allowance that only covers lodging. The employer still must be able to substantiate the time, place, and business purpose of the travel.

The current rates apply to travel within the continental United States (CONUS) on or after October 1, 2007. Rates vary by locality; where the employee sleeps determines which rate to apply. Different rates apply to travel outside the continental United States, including Alaska, Hawaii, and Puerto Rico.

IRS also provides a separate per diem rate for unreimbursed meals and incidental expenses. These rates can be used only by employees and self-employed individuals to compute the deductible costs of meals and incidental expenses. Lodging expenses still must be substantiated.

Standard mileage rate.  Taxpayers may use a standard mileage rate for the costs of using their car, rather than actual expenses. The 2008 business mileage rate is 50.5 cents per mile. Parking fees and tolls may be deducted separately.

Small fringe benefits.  De minimis fringe benefits are excluded from income and do not have to be substantiated. Examples of these benefits include monthly transit passes and occasional meal money and transportation for employees working overtime.

Statistical sampling. The IRS provided significant relief from the substantiation requirements for certain meal and entertainment (M&E) expenses. By using a statistical sampling method specified by IRS, employers can avoid the need to review every meal and entertainment expense deduction.

The sampling method can be used for expenses that are not subject to the rule that normally limits M&E expense deductions to 50 percent. These exceptions include meals and entertainment treated as compensation, such as a paid vacation; recreation benefits for rank-and-file (but not highly compensated) employees, such as a company party; tickets to charitable sports events; and meal expenses excludible as de minimis fringe benefits. An employee cafeteria or executive dining room used primarily by employees comes under this exception.

The sampling method cannot be used for the costs of entertaining business clients.

If you need advice on how your current recordkeeping practices for travel, meals and entertainment square up against these exceptions, please do not hesitate to call this office.

Parents typically encourage their children to save for college, for a house, or simply for a rainy day. A child's retirement, however, is a less common early savings goal. Too many other expenses are at the forefront. Yet, helping to plan for a youngster's retirement is a move that astute families are making. Individual retirement accounts (IRAs) for income-earning minors and young adults offer a head-start on life-long financial planning.

Parents typically encourage their children to save for college, for a house, or simply for a rainy day. A child's retirement, however, is a less common early savings goal. Too many other expenses are at the forefront. Yet, helping to plan for a youngster's retirement is a move that astute families are making. Individual retirement accounts (IRAs) for income-earning minors and young adults offer a head-start on life-long financial planning.

Traditional and Roth IRAs

Two types of individual retirement accounts are the traditional IRA and the Roth IRA. To contribute to an IRA account, whether it's a traditional or a Roth, an individual must have earned income. In general, the maximum amount that can be deposited in either type of IRA is $3,000 in 2004; $4,000 in 2005 through 2007.

Contributions to a traditional IRA are tax deductible. Amounts earned in a traditional IRA are not taxed until a distribution is made. If money is withdrawn from a traditional IRA before the individual reaches age 59 1/2, a 10 percent penalty applies to the principal. Mandatory withdrawals are required when the individual reaches age 70 1/2.

Contributions to Roth IRAs are not tax deductible, but all earnings are tax-free when the money is withdrawn from the account, if certain requirements are met. Tax-free withdrawals are a big advantage to the Roth IRA that will likely outweigh the lack of a tax deduction on contributions. Qualified distributions from a Roth IRA are not included in the individual's income if a five-year holding period and certain other requirements are met; otherwise, the 10 percent penalty applies. Unlike the traditional IRA, individuals can make contributions to a Roth IRA even after age 70 1/2.

Penalty flexibility

Both the traditional and the Roth IRAs offer some flexibility on the 10 percent penalty. Early withdrawals, without penalty, are allowed if the money is used for:

--College expenses;

--First home purchase (up to $10,000);

--Medical insurance in case of unemployment for a certain amount of time; or

--Expenses attributable to disability (Roth IRA).

Although designed for retirement planning, flexibility in how the money can be used makes IRAs very attractive for young family members.

Kid with a job

In order to contribute to an IRA, however, the child or young adult must have earned income. In other words, the kid needs a W-2, a 1099 or some other "proof" that wages were earned. Although occasional baby-sitting or lawn-mowing generally doesn't count, the money made on those jobs could qualify as earned income if adequate receipts and records are kept.

Working for the parents

Some moms and dads, who own their own businesses, are taking the "kiddy IRA" concept a step further: their sons and daughters come to work for the family business. The child earns income, making him or her eligible to contribute to an IRA. The parents, as their employers must pay employment tax and issue a W-2, but they can also make a business deduction for the child's wages, just like for any other employee. Parents should be mindful that the wage their child earns for the work performed is comparable to the going rate. If the child's wage is too large, the IRS will disallow the deduction.

Let's make a deal

The tough part of the plan may be getting the young person to "lock away" his or her hard-earned cash. After all, retirement is much harder to imagine compared to more pressing, front-burner issues like college expenses or a car. Some parents, however, are convincing their kids to put their earnings to work for their future in an IRA by promising to match their child's pay as an extra incentive to save. For example, if Susan earns $3,000, her dad promises to put $3,000 in her IRA. Susan keeps the money she made. There's no rule that restricts the origin of the IRA contribution, so long as the IRA owner earned at least that amount and the contribution doesn't exceed the cap for that year.

Conclusion

Individual retirement accounts for children and young adults are a growing part of family financial planning. A potential hazard, however, is that the money in the IRA belongs to the child. The child, or young adult, has the right to do whatever they wish with the IRA and its assets, including making a withdrawal for a new car or exotic trip. Parents do not "own" the IRA, even if they contributed the dollars as a match to their child's earnings. Families who utilize IRAs for their offspring will have to consider the risk and stress to the youngsters that the money is better off in the IRA. Through investing in an IRA, a young person's earnings from working part-time at the local ice cream parlor, or a summer job loading trucks, can have lasting effects.

Please feel free to contact this office for advice more specific to your family situation.