ACCOUNTING
Memorandum
RE: Zavala, Julio and Clara
This memo includes a brief summary of the Julio Zavala information pertaining to tax law, a brief discussion of the tax issues that arise and examples of court cases that are likely to have an influence on the tax status of Zavala, his wife and son.
Julio Zavala is married (Clara) and they have one adult son (Robin). Due to medical issues Robin lives at home with his parents. Zavala was able to retire from his day job (9am to 5pm) because he has enough money to do so. He has enough in fact to travel to various places around the world with his wife Clara. Therefore the assumption can be made that they are in the upper tax levels although no exact amounts are available at this point. Zavala does not considers himself as retired in fact the reason he travels is not only to visit with long time friends but also try to make a business connection with his these friends whom he considers as potential clients as well as his old friends. He wishes to consider his travel expenditures as tax deduction. He has not had any offers to sit in board positions but he has been paid some money in consulting fees after giving some tax advice. Zavala assumes the fees he received are tax deductible as business income along with the receipts for travel and entertaining the potential clients (his long time friends). The costs for his wife’s travel and other expenditures, Julio and Clara Zavala claim, are also business expenditures because she is writing a book based on interviews of the friends they have been visiting. In Argentina both Julio and Clara become ill and checked into a spa-like treatment center to recover Zavala assumes that since they were in Argentina due to an invitation initiated to them by a former banking client even the health care expenses including drugs are deductible. The couple have one adult son, Robin, who is still living at home because he is autistic. Zavala wants to deduct the fees paid to Robin’s tutor who comes to the home.
TAX ISSUES
The claim that travel costs should be deducted as business trips is not clear since the Zavala travels with his wife, the business connections he meets are old friends, he has not successfully found employment as a financial consultant on his trips. A similar situation could be considered as retirement travel unrelated to business therefore are the costs business deductions or something else? Clara Zavala is writing a book but she has no book agent and although she has written two previous books they were very personal and only interesting to local people. Does her history and activity qualify her actions for business deductions Health costs are especially controversial but Zavala wants to claim the following expenses for drug costs: Medicine (not FDA approved) $15,000 times 2 so equal to $30,000. The facility charge was 22,240 so the total expenditure Zavala wants to claim as deductible is $52,000. The tutor for Robin has two other similar students so may be considered an educational professional but two more issues about the tutoring include the age of Robin and the Robin’s autism.
DEDUCTIONS
Does Julio Gonzales have a clear intent to use his travels for profit making? The best way to show intent to make money is to show a profit or at the very least a pending job resulting from the trip. E. and Frances G. Eastman v. The United States, United States Tax Cases (1913-1999), [80-2 USTC ¶ 9742] U.S. Court of Claims (Oct. 22, 1980) is a precedent that does not accept vague claims but expect to see the taxpayer proving to have a job that will last for a certain period of time showing that the taxpayer continually working and is working at regular times. And the primary purpose is to gain income. It must be proved that “the taxpayer’s primary purpose and intention is engaging in the activity to make a profit” according to E. and Frances G. Eastman v. The United States, United States Tax Cases (1913-1999), [80-2 USTC ¶ 9742] U.S. Court of Claims (Oct. 22, 1980)
“Business deductions are approved if “a taxpayer expends his own funds in order to protect or promote his own established business for a cost which would be an ordinary and necessary expense of his business.” Lohrke v. Commissioner [Dec. 28,570], 48 T.C. 679, 684-685 (1967). 26 C.F.R. § 1.274-2 MAGRUDER v. COMMISSIONER 57 T.C.M. 117 (1989) United States Tax Court.Filed April 17, 1989.Disallowance of deductions for certain expenses for entertainment, amusement, recreation, or travel. Title 26 - Internal Revenue “Respondent contends that petitioners are not entitled to a deduction for these expenses because they have failed to provide sufficient evidence to satisfy the substantiation requirements of section 274 or to establish that petitioner was in the trade or business of being a corporate director.”
[80-2 USTC ¶9742
]Samuel E. and Frances G. Eastman v. The United States U. S. Court of Claims, No. 538-78, 635 F2d 833, 10/22/80, Adopting Ct. Cls. Trial Judge’s Decision at, 80-2 ustc ¶9551[Code Secs. 162 and 183] is an example of a hobby (horse breeding) cannot be considered for business deductions because no intent for profit-making was discerned. Zavala is travelling (a hobby) with his wife and because there is not profit and no direct link to a serious intent to make a profit so the travel expenditures should not be deductible. The 26 USC § 162 make the point IRC sect. 163 that all the paperwork be available (receipts etc.) in order to determine if the costs are business deductible if they are they are considered deductible if no profit making motive can be discerned they cannot be deductible.
A court case demonstrating that the responsibility is on the plaintiff to prove intent to make a profit. United States v. General Dynamics Corp. [87-1 USTC ¶ 9280], 481 U.S. 239, 242 (1987). Owens v. Commissioner [78-1 USTC¶ 9144] 568 F 2d 1233, 1243 (6th Cir. 1977) cited 26 U.S.C. §162(a) because the plaintiff must show a direct link between the expenditures and making a profit from some type of business activity.
The petitioners were denied the ability to deduct the claimed business expense in the case CHRISTINE v. COMMISSIONER OF INTERNAL REVENUE WILLARD MICHAEL CHRISTINE; PATRICIA ETHEL BORGIA, Tax Ct. Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Nos. 10-72997, 15410-08. The petitioners had not adequately substantiated the business costs for “expenses related to travel, entertainment, a laptop computer, dry cleaning and a home office.”
In McLAUCHLAN v. COMMISSIONER OF INTERNAL REVENUE T.C. Memo. 2011-289 United States Tax Court. Filed December 19, 2011 the claimant was directed to prove the existence of a partnership. The petitioner could not prove that partnership existed between himself and the person he claimed was a business partner; no partnership was substantiated and the petitioner’s business costs were not allowed to be deducted on the petitioner’s personal income e tax
In the court case RANHEIM v. COMMISSIONER 39 T.C.M. 720 (1979), United States Tax Court. Filed December 13, 1979 the necessary substantiation of travel expenses being business expenses required included as defined by the phrase “adequate records” included
“an account book, diary, or other similar record as well as documentary evidence in i), Income Tax Regs. Documentary evidence, such as receipts or bills, is required for any expenditures exceeding $25.00 (except for transportation charges where such evidence is not readily available). Sec. 1.274-5(c)(2)(iii), Income Tax Regs. With respect to expenditures of less than $25.00, the regulations do not dispense with the recordkeeping requirement except for the need of keeping receipts. Sec. 1.274-5(c)(2)(iii)(b), Income Tax Regs. If the taxpayer fails to comply with the "adequate records" requirement, he must prove the elements of business travel expenses by his own detailed statement and by other corroborative evidence. Sec. 1.274-5(c)(3), Income Tax Regs.”
AUTHORING A BOOK
An author who successfully claimed his travel costs and other expenditures related to his authorship of a book in order to claim business deductions for the cost was Vitale.(Ralph Louis Vitale, Jr. v. Commissioner, U.S. Tax Court, CCH Dec. 53,346(M), T.C. Memo. 53,346(M), 77 T.C.M. 1869, T.C. Memo. 1999-131, (Apr. 21, 1999)) But the judgment came down on his side because he kept records and receipts of all the money he spent. He also kept a carefully detailed journal to substantiate the claims.
MEDICAL EXPENSES
In 2012 before medical expenses can be claimed the total must equal more than 7.5 percent of the Adjust Gross Income (AGI) must equal more than 10 percent of the claimed AGI. So the medical deduction threshold for 2013 was raised 2.5 percent from 2012 to 2013. According to Section 162(a)(2) deductions can be made if the travelling expenses that were paid during the tax year were made while (a) the taxpayer was not going home for the nights or staying home and (b) the reason the taxpayer is travelling is “in the pursuit of a trade or business.” Several cases put the emphasis on the plaintiff/petitioner to prove the travel costs meet criteria for a deduction. In other words the burden of proof is on the petitioners. Meals and overnight lodging are the services which can (if proven) be claimed as deductible. Welch v. Helvering [3 USTC ¶ 1164], 290 U.S. 111, 115 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure.
Section 274(d) states that “no deduction is allowable under section 162 for any traveling expenses (including meals and lodging while away from home) unless the taxpayer substantiates these expenses by adequate records or other corroborating evidence.” Section 1.274-5(b)(2), Income Tax Regs., demands that the elements which a taxpayer must establish with respect to each expenditure for business travel are the amount, time, place, and business purpose of the expense. In addition, substantiation of these elements is required by adequate records or by sufficient evidence corroborating his statement." Sec. 1.274-5(c)(1), Income Tax Regs.
TUTORING COSTS
Deductions for tuition of a dependent child are taken by filling in and turning Form 8917. Zavala can receive a deduction if Zavala paid Robin’s tutoring fees and still claims Robin as a dependent. “If your dependent is an eligible student and you claim an exemption for your dependent and you paid all qualified education expenses for your dependent; then you can deduct the qualified education expense that you paid. Your dependent cannot take a deduction” according to IRS Government Publication 970. (2012, www.irs.gov)Dr. Bernard A Krooks (2012), a tax lawyer, explained that an Earned Income Tax Credit is usually only for families from low or middle class families and for “adult children living with their parents the age limit does not apply.”A deduction for tuition or fees is considered an adjustment to the person’s income tax; it is applicable if the taxpayer does or if the taxpayer does not itemize Schedule A (Form 1040); so the itemization of taxes does not have an impact on ability to made an adjustment. Although only taxpayers that do not meet the qualification for either the American opportunity or lifetime learning credits can deduct tuition or fees with form.
In the court case RANHEIM v. COMMISSIONER 39 T.C.M. 720 (1979), United States Tax Court, Filed December 13, 1979. The petitioners needed to prove their daughter qualified as a dependent under Section 152 in order to allow them to take a medical deduction for medical expenses they paid assuming a deduction would be allowed under Section 213. Under Section 213 the petitioners needed to prove that the daughter received over 50 percent of her annual support from her parents (the petitioners/claimants). In Ranheim v. Commissioner the daughter did not qualify under the definition of dependent and the capability to make deductions on the charges for her medical expenses was not allowed.
CONCLUSION
More clarification from Zavala about he and his wife spent money while in Argentina They need to supply an accounting of expenditures and other documentation such as receipts. More clarification is needed from Zavala to prove his serious intent to make a profit on his trip. The evidence put forward at this point does not prove a serious profit-making intent. If the banking client organized the business trip and made all the arrangements before the Zavala couple left home that would work in favour of Zavala. On other hand if Zavala’s business partnership is only a potential business partnership that will be enough to prove that deductions of the travel expenses as business costs cannot be applied. Mrs. Zavala must substantiate the link between writing her book a profit making incentive if her expenses have a change of being deductible. The medical costs in Argentina (with the information provided) do not meet the requirement as deductible business expenses. The son of the Zavala’s if he is supported by his parents for more than six months out of each year may possibly have the tutor’s fees to be deductible.
References
Primary Sources
26 C.F.R. §1.274-2 Disallowance of deductions for certain expenses for entertainment, amusement, recreation, or travel. Title 26 - Internal Revenue
I.R.C. 26 U.S.C. §162 - Trade or business expenses
I.R.C. 26 U.S.C. §162(a)- Deductible Business Expense
IRC 26 USC § 263(2b) - Capital expenditures and deductions
Section 1.274-5(b)(2), Income Tax Regs.
Sec. 1.274-5(c)(1), Income Tax Regs.
IRS Government Publication 970. (2012, www.irs.gov)
CHRISTINE v. COMMISSIONER OF INTERNAL REVENUE WILLARD MICHAEL CHRISTINE; PATRICIA ETHEL BORGIA, Tax Ct. Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Nos. 10-72997, 15410-08
E. and Frances G. Eastman v. The United States, United States Tax Cases (1913-1999), [80-2 USTC ¶ 9742] U.S. Court of Claims (Oct. 22, 1980)
Lohrke v. Commissioner [Dec. 28,570], 48 T.C. 679, 684-685 (1967)
MAGRUDER v. COMMISSIONER 57 T.C.M. 117 (1989) United States Tax Court. Filed April 17, 1989.
Owens v. Commissioner [78-1 USTC¶ 9144] 568 F 2d 1233, 1243 (6th Cir. 1977) Treasury Regulation 1.183-2 IRC sect.162 and sect. 212
United States v. General Dynamics Corp. [87-1 USTC ¶ 9280], 481 U.S. 239, 242 (1987)
RANHEIM v. COMMISSIONER 39 T.C.M. 720 (1979), United States Tax Court. Filed December 13, 1979.
Vitale, Jr., Ralph Louis v. Commissioner, U.S. Tax Court, CCH Dec. 53,346(M), T.C. Memo. 53,346(M), 77 T.C.M. 1869, T.C. Memo. 1999-131, (Apr. 21, 1999) U.S. Tax Court, Docket No. 346-97, TC Memo. 1999-131, 77 TCM 1869, Filed April 21, 1999 [Appealable, barring stipulation to the contrary, to CA-4.—CCH.] Retrieved from Tax Court Memoranda (Archive).
Welch v. Helvering [3 USTC ¶ 1164], 290 U.S. 111, 115 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure
Secondary Sources
Claiming tuition for dependent. IRS. http://www.irs.gov/publications/p970/ch06.html#en_US_2012_publink1000295066
Brooks, Bernard. (2012). Tax deductions for special needs families. FriendshipCircle.org http://www.friendshipcircle.org/blog/2012/10/10/5-tax-deductions-credits-for-special-needs-families/
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