William Byrnes' Tax, Wealth, and Risk Intelligence

William Byrnes (Texas A&M) tax & compliance articles

Posts Tagged ‘Internal Revenue Code’

How to Lose a Charitable Deduction

Posted by William Byrnes on October 21, 2011

As an advisor, your clients look to you for competent advice in planning their charitable giving. It would be terrible to find out that the gift you thoughtful suggest cannot be deducted due to an avoidable paperwork mistake. Although the IRS sometimes forgives these minor errors, others are unforgivable, as illustrated in recent IRS email advice.

The IRS was not so forgiving with a taxpayer, who made what would otherwise qualify as a tax-deductible charitable gift. The problem was that the taxpayer “failed to get a contemporaneous written acknowledgment” from the charitable organization. In its advice the IRS said it will deny the taxpayer’s charitable deduction even if the taxpayer takes remedial measures and the charity amends its Form 990 (Return of Organization Exempt from Income Tax) to acknowledge the donation and include the information required by the Code.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of charitable deductions in Advisor’s Journal, see Qualified Charitable Distributions from an IRA (CC 11-03) & IRS Takes Qualified IRA Charitable Distributions off the Table for 2010 (CC 11-15).


For in-depth analysis of the charitable deduction under Section 170, see Advisor’s Main Library: B6—The Income Tax Charitable Deduction—I.R.C. §170.

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Taxing Gaming Wins and Losses

Posted by William Byrnes on March 12, 2011

How does the average gambler determine wagering gains and losses for tax purposes?

Mrs. X is a casual gambler.   She uses the cash receipts and disbursements method of accounting and files her returns on a calendar year basis.  Mrs. X’s gaming practice is to commit only $100 to slot machine play on any visit to a casino.  She wagers until she loses the original $100 committed to gambling or until she stops gambling and “cashes out.”

Upon cashing out, there are three possibilities, that she have $100 (the basis of her wagers), less than $100 (a wagering loss), or more than $100 (a wagering gain).   She went to a casino to play the slot machines on ten separate occasions throughout the year.  On each visit to the casino, she exchanged $100 of cash for $100 in slot machine tokens and used the tokens to gamble.  On five occasions, the she lost her entire $100 in tokens before terminating play.  On the other five occasions, the she redeemed her remaining tokens for the following amounts of cash:  $20, $70, $150, $200 and $300.

Under the Internal Revenue Code, gross income means all income from whatever source derived, which has been determined to include wagering gains. [1]

The Code further allows a deduction for any loss sustained during the taxable year and not compensated for by insurance or otherwise. [2] In the case of losses from wagering transactions, losses are allowed only to the extent of gains from such transactions. [3]

In ordinary practice, a wagering “gain” means the amount won in excess of the amount bet (basis). [4] That is, the wagering gain is the total winnings less the amount of the wager.  The term wagering “loss” means the amount of the wager (basis) lost.

Generally, gamblers may not carry over excess wagering losses to offset wagering gains in another taxable year or offset non-wagering income. [5] Nor may casual gamblers net their gains and losses from play throughout the year and report only the net amount for the year. [6]

It is accepted that fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems her tokens and can definitively calculate the amount above or below basis (the wager) realized. [7]

Under the facts presented above, Mrs. X purchased and subsequently lost $100 worth of tokens on five separate occasions.  As a result, the taxpayer sustained $500 of wagering losses.  She also sustained losses on two other occasions, when she redeemed tokens in an amount less than the $100 (basis) of tokens originally purchased.

Therefore, on the day the taxpayer redeemed $20 worth of tokens, the taxpayer incurred an $80 wagering loss.  On the day the taxpayer redeemed $70 worth of tokens, the taxpayer incurred a $30 wagering loss.  On three occasions, the taxpayer redeemed tokens in an amount greater than the $100 of tokens originally purchased.  The amount redeemed less the $100 basis of the wager constitutes a wagering gain. [8] On the day the taxpayer redeemed $150 worth of tokens, the taxpayer had a $50 wagering gain.  On the day the taxpayer redeemed $200 worth of tokens, the taxpayer had a $100 wagering gain.  And on the day the taxpayer redeemed $300 worth of tokens, the taxpayer had a $200 wagering gain.

For the year, the taxpayer had total wagering gains of $350 ($50 + $100 + $200) and total wagering losses of $610, ($500 from losing the entire basis of $100 on five occasions + $80 and $30 from two other occasions).  Mrs. X’s wagering losses exceeded her wagering gains for the taxable year by $260 ($610 – $350).  She must report the $350 of wagering gains as gross income under IRC § 61. However, under IRC §165(d), she may deduct only $350 of the $610 wagering losses.  In this case, the taxpayer may deduct only $350 of her $610 of wagering losses as an itemized deduction.   Generally, a casual gambler who takes the standard deduction rather than electing to itemize may not deduct any wagering losses. [9]

[1] IRC Section 61; Rev. Rul. 54-339; Umstead v. Commissioner, T.C. Memo. 1982-573, 44 TCM 1294, 1295 (1982).


[2] IRC Section 165(a).

[3] IRC Section 165(d); Treasury Regulations Section 1.165-10.

[4] See Rev. Rul. 83-103.

[5] Skeeles v.  United States, 118 Ct. Cl. 362 (1951), cert. denied, 341 U.S. 948 (1951).

[6] See United States v. Scholl, 166 F.3d 964 (9thCir. 1999).

[7] See Commissioner v. Glenshaw Glass  Co., 348 U.S. 426 (1955).

[8] See Rev. Rul. 83-130.

[9] See Rev. Rul. 54-339.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

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Higher Filing Thresholds Doubles for Non-Profits

Posted by William Byrnes on February 16, 2011

Why is this Topic Important to Wealth Managers? Discusses the new income reporting threshold for non-profit organizations.  Provides details on the new level of reporting required on Form 990 for 501(c) organizations.  

Generally the Internal Revenue Code requires the filing of an annual return by exempt organizations. [1]  However, there are certain mandatory exceptions to the annual filing requirement for exempt organizations provided by the Code.  [2] 

Further, the tax law provides that the Secretary of the Treasury, through the Commissioner of the Internal Revenue Service may relieve exempt organizations from the annual filing requirement if the Secretary determines that such filings are not necessary to the efficient administration of the internal revenue laws. [3]

Before, exempt organizations were relieved from the Form 990 (Return of Organization Exempt from Income Tax) filing requirement for organizations described in § 501(c) (other than private foundations) whose annual gross receipts are normally not more than $25,000. [4]

Read the full analysis and on similar issues – AdvisorFYI

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Foreign Trust Disclosure

Posted by William Byrnes on February 9, 2011

Although trusts can be taxpayers, Sections 671 to 679 of the Internal Revenue Code contain the so-called ‘grantor trust rules’, which treat certain trust settlors (and sometimes persons other than the settlor) as the owner of a portion or all of a trust’s income, deductions and credits for US tax purposes. A trust where the settlor (or other person) is treated as the owner of the trust assets for US tax purposes is referred to as a ‘grantor trust’. The grantor trust rules apply to both foreign and domestic trusts, but in different ways.

Under the grantor trust rules, a US person who transfers property to a foreign trust is generally treated for income tax purposes as the owner of that portion of the trust attributable to the transferred property, even if the trust would not have been a grantor trust had it been domestic.

This is the result for any tax year in which any portion of the foreign trust has a US beneficiary.  A foreign trust is treated as having a US beneficiary for a tax year unless (i) under the terms of the trust, no part of the trust’s income or corpus may be paid or accumulated during the tax year to or for the benefit of a US person, and (ii) if the trust is terminated at any time during the tax year, no part of the income or corpus could be paid to or for the benefit of a US person.  The Internal Revenue Service (IRS) regulations under Section 679 of the Internal Revenue Code generally treat a foreign trust as having a US beneficiary if any current, future or contingent beneficiary of the trust is a US person.  To read this article excerpted above, please access AdvisorFYI.


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When may a taxpayer deduct as business expenses the costs related to the use of his residence?

Posted by William Byrnes on December 28, 2010

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Why is this Topic Important to Wealth Managers? Americans are increasingly using their personal residence as their office.  This trend has picked up much steam since the financial crisis began.  Businesses cut costs during this period by not just allowing, but requiring, employees to telecommute.  In fact, government, including the IRS, has also jumped on the bandwagon.

Yesterday we opened the discussion of when may a taxpayer be allowed to deduct a business expense from his gross income.  That article noted that Congress grants the authority to the Treasury department to write corresponding “Regulations” to address the administration and enforcement surrounding the ability of taxpayers to take such deductions allowed by the Code.  Treasury, being the Internal Revenue Service in this case, promulgated such regulations for Section 162 to guide taxpayers through its morass, and provide some example scenarios and the IRS’ application of the Code to those scenarios.

By example, Treasury’s Regulation for Section 162 states that: “Among the items included in business expenses are management expenses, commissions …, labor, supplies, incidental repairs, operating expenses of automobiles used in the trade or business, traveling expenses while away from home solely in the pursuit of a trade or business …, advertising and other selling expenses, together with insurance premiums against fire, storm, theft, accident, or other similar losses in the case of a business, and rental for the use of business property.”

Home Office Deduction

To read this article excerpted above, please access www.AdvisorFX.com


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How are business expenses reported for income tax purposes?

Posted by William Byrnes on December 27, 2010

Why is this Topic Important to Wealth Managers? As the end of the calendar and personal tax year approaches, Advanced Market Intelligence will focus on end-of-the-tax-year issues that every wealth manager may relay as helpful information to his and her clients.

“How are business expenses reported for income tax purposes?” may initially seem like an easy question for many wealth managers.  But normally, the easiness of answering this question is a result of referring to an information pamphlet by a service provider or perhaps a newspaper article.  Unfortunately, these public sources of information are not always accurate.  Also, because they are trying to present very complex information in understandable terms, these types of sources gloss over finer, yet very important elements, that if known, would impact a decision.

Seldom does the wealth manager take the initiative to undertake his own initial research of the actual rules and how the rules may be applied.  Advanced Market Intelligence has been committed to empowering the wealth manager with the necessary information to efficiently find the important rules and provide examples of how the rules are applied to various example scenarios.  Thus, let us first turn to the legislative rule applying to business expenses.

The Internal Revenue Code (the “Code”), legislated by Congress, establishes rules regarding ‘if and when’ a taxpayer may choose to deduct certain expenses from income.  Congress grants the authority to the Treasury department to write corresponding “Regulations” to address the administration and enforcement surrounding the ability of taxpayers to take such deductions allowed by the Code.  Business expenses are one type of such expense Congress has established for a taxpayer to reduce his gross income.

The Code section establishing the ability of a taxpayer to deduct a business expense is Section 162.  The first part of the first paragraph of Section 162 reads:

(a) In general

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, including— …

To read this article excerpted above, please access www.AdvisorFX.com

Read the key information you need to know and relate to your client at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber):

Tax Facts 7537. How are business expenses reported for income tax purposes?

Main Library – Section 19. Income Taxes B4—Business Income And Deductions

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Exclusions from Gross Income—Gifts

Posted by William Byrnes on December 23, 2010

Why is this Topic Important to Wealth Managers? Discusses gifts and the general income tax implications gifts have to those who are the beneficiaries.  Also discusses gifts as they relate to estate taxes.

As Christmas and Holiday time approaches, some clients who may be expecting large sums from Santa or other sources as gifts, may be interested to know the tax laws on gifts generally; today’s blogiticle present’s our “re-gifting” of an old idea, Section 102 of the Internal Revenue Code.

For those who haven’t had an opportunity to read the Code lately, (some estimate the Code and Regulations are close to 80,000 pages) there are still a few “friendly” sections that remain which serve as a reminder of a time gone by.  Side Note:  These authors have not yet evaluated the shortest Code section in terms of actual words, but if we were to, our guess is that Section 102 would be in the running at 212 words.

Section 102(a) reads: “Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.”  It is worth noting, if we go back to Section 61, and the starting point for gross income, that Section 61(a) states:  “Except as otherwise provided in this subtitle gross income means all income from whatever source derived…”   The “[e]xcept as otherwise provided” is applicable here to amounts received as a gift, bequest, devise, or inheritance, which are specifically excluded from gross income.  In other words, a taxpayer can give another taxpayer a gift of $1,000,000 and the latter will not recognize a penny of income for tax purposes, so long as it is really a gift, bequest, devise or inheritance.  To read this article excerpted above, please access www.AdvisorFX.com

For further discussion on the gift tax generally see, AdvisorFX: Nature and Background of the Federal Gift Tax (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

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Employer Owned Life Insurance and Notice 2009-48

Posted by William Byrnes on November 29, 2010

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Why is this Topic Important to Wealth Managers? Provides an update for wealth managers into the status of employer owned life insurance.  Discusses two notable exceptions to the general rule including income from the death benefits of an insurance policy when paid to a trade or business.

In 2006, Congress added Section 101(j) to the Internal Revenue Code which addresses the taxation of employer owned life insurance (EOLI) under Section 863 of the Pension Protection Act.  The law departed from the traditional status of life insurance proceeds payable by death of the insured as excluded from gross income. [1]

Section 101(j) essentially taxes life insurance proceeds payable at death, in the amount over contributions or basis, when the policy is owned by a trade or business, where the employer is the beneficiary, and the employee is the insured. [2] There are a certain number of exceptions where the benefit payable to the beneficiary will remain excludable.  [3] In all of the exceptional situations notice and consent requirements must be met. [4] For a discussion on the notice requirements specifically, or Section 101(j) generally, please see AdvisorFX: Death Benefits Under Employer Owned Life Insurance Contracts[5]

Since the enactment of law, the Service has issued guidance in regards to what transactions may be allowed under section 101(j).  That guidance came in part, last year when the Service published Notice 2009-48.

How do some of the exceptions work in consideration of the guidance published in Notice 2009-48?  Read our entire analysis and citations at AdvisorFYI.

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FATCA Act: Foreign Trusts

Posted by William Byrnes on November 25, 2010

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Use of Foreign Trust Property and Deemed Distributions

The new FATCA law expands 26 U.S.C. § 643(i) to provide that any use of trust property by a U.S. grantor or U.S. beneficiary, or any U.S. person related to a U.S. grantor or U.S. beneficiary, is treated as a distribution equal to the fair market value of the use of the property. [1]

“Thus, the rent free use of real estate, yacht, art work or other personal property (wherever located including the United States) or an interest-free or below-market loan of cash or uncompensated use of marketable securities will trigger a distribution equal to the FMV for the use of such property to the extent of distributable net income”. [2]

However, if the trust is paid the fair market value, within a reasonable period of time, for the use of property or the market rate of interest on a loan by the trust, the new law does not create a deemed distribution. [3] Read the entire article at AdvisorFYI.

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Tax-Exempt State and Local Municipal Bonds

Posted by William Byrnes on October 18, 2010

Why is this Topic Important to Wealth Managers?   Discuses one alternative investment wealth managers are continuing to explore in consideration of uncertain tax law changes.  Provides general background as well as analysis and comparison to show the benefits available through the purchase of tax-exempt bonds.     

Interest received from bonds is generally taxed at ordinary income rates.  This includes both government and corporate bonds unless otherwise excluded by the tax code.  Dividends though are taxed at capital gains rates, which for the meanwhile can provide significant tax benefits.  See our previous AdvisorFYI blogticle of September 13th Bush Tax Cuts Set to Expire. 

However, some state and local municipal bonds often called “muni” bonds, produce tax—exempt interest income under Internal Revenue Code § 103. The general obligation interest on state or local bonds fall into this category as distinguished from private activity bonds.  

A detailed discussion of private activity bonds in comparison to general obligation bonds can be found at AdvisorFX Tax Facts: Q 1123. Is interest on obligations issued by state and local governments taxable? (sign up for a free trial subscription if you are not a subscriber). 

To read the remainder of this blogticle that deals with general obligation bonds, and offers a comparison between tax-exempt and taxable income bonds with illustrated rates of return, please see AdvisorFYI

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Subchapter L: Life Insurance Companies

Posted by William Byrnes on October 9, 2010

Why is this Topic Important to Wealth Managers? Presents an introduction into the taxation of U.S. life insurance companies.  Provides insight for wealth managers considering advanced planning techniques involving the use of life insurance companies.

Congress has determined, generally, that insurance companies by issuing insurance contracts are serving the public good.  Moreover, Congress has determined that the tax accounting applicable to corporations does not adequately align to the operations of the insurance industry.  Thus, to distinguish insurance companies, Congress created a special chapter of the Internal Revenue Code (subchapter “L”) applicable only for them.  Subchapter L is divided into Section 801 to 848 of which 801 to 818 address the taxation of lile insurance companies.

By example, because of the nature of the life insurance business, in that liabilities carry long into the future, Congress has afforded special deductions to this class.  To avoid potential reserve deficiencies by recognizing income (and therefore incurring a present tax liability) when premiums are collected, Congress essentially allows underwriting gains to occur once the insurance liability obligations have expired.

Let’s take a look at the Code specifically to see how these mechanics actually work.  First and foremost, pursuant to IRC Sec. 801 a life insurance company is taxed at the same rates as other corporations.  These rates can be found in IRC § 11.

A life insurance company means under IRC § 816(a), “ an insurance company which is engaged in the business of issuing life insurance and annuity contracts”, generally, as well as accident or health contracts, so long as, the company’s “life insurance reserves, plus unearned premiums” on “noncancellable” policies, “comprise more than 50 percent of its total reserves.”

Read on about Subchapter L: Life Insurance Companies

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The Internal Revenue Code: Decoded

Posted by William Byrnes on October 8, 2010

Why is this Topic Important to Wealth Managers? Provides an introduction into the Internal Revenue Code so that tomorrow’s blogticle about specific sections of the Code may be better understood, in particular the taxation of life insurance companies.

How are the laws related to tax organized or in other words, what’s the general process in finding an answer to a tax question?

All federal laws of the United States arise out of the Constitution.  The Constitution has granted Congress certain enumerated powers, such as the power to regulate commerce among the several states.  Congress also has the power to create laws that are necessary and proper in governing based on its listed powers.  All powers not granted to the Federal government are reserved by the States through the 10th Amendment – meaning only the States may enact laws in those areas (al least this is how it is supposed to work).

Once Congress passes a necessary and proper law to carry out its enumerated powers, that law becomes a United States Statute, or a Statute already existing is either amended or deleted.  The Statutes of the United States are called the United States “Code”.

The United States Code is divided into 50 different titles.  Title 26 is perhaps the most infamous, being the “Internal Revenue Code”.  The Internal Revenue Code, or Title 26 of the United States Code is further delineated, into Subtitles, Chapters, Subchapters, Parts, and finally Sections and Subsections.

Congress has delegated the power of enforcement of these laws, which lies with the executive branch, of Title 26 to the Secretary of Treasury to create Regulations or Administrative Interpretations of the Statutes.  The regulations are not in and of themselves laws but rather, direction from the Secretary of interpretation of the laws.  The regulations have legal authority, which means they may be presented in court.  In almost all tax cases, there is some Statute, that is called into question, therefore the Court’s exclusive job is to rule on interpretation of the Statute as it applies to the situation before the court, not to overrule any statute, unless it found the law unconstitutional.  Therefore, additional law is generated by courts’ interpreting Statutes.  This is known as “case law”.

Read on about the The Internal Revenue Code: Decoded

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Trusts that Purchase Life Insurance – Known Formally as the “Irrevocable Life Insurance Trust”

Posted by William Byrnes on September 21, 2010

Why is this Topic Important to Wealth Managers?   The terminology associated with common estate planning techniques is generally misguided. Provides a better understanding of the tax and legal implications, on behalf of the client’s estate plans, of trusts that purchase life insurance

One commentator states “If the practitioner would examine either the Internal Revenue Code or the Treasury Regulation designed to interpret the Code, they will not find the use of the term ‘Insurance Trust’ or the term ‘ILIT.’” For a detailed analysis of the ILIT see the Main Library Section 4. Estate Planning Techniques H—Life Insurance Trusts. 

For the complete blogticle and its analysis, see AdvisorFYI

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