If Only Obama Had Taped Conversations

The just before Christmas report of Darrell Issa's Committee on Oversight and Government Reform is probably a big disappointment to promoters of the IRS scandal narrative.  They won't admit it and will maintain that the revelation of an IRS employee referring to a Tea Party group as "icky" is shocking, shocking.  Still I look at the whole thing as being like the story of the parents who tried to kill their kids excessive optimism by leaving no presents under the Christmas tree and loading his stocking with horseshit.  They woke up Christmas morning to a gleeful child running around the house looking for the pony that Santa Claus must have left.

The Issa Committee has over 1.3 million pages and 52 transcribed interviews - a veritable dung heap that could provide fertilizer to a modest farm for years.  Still no pony.  The pony would be proof of direct White House involvement in the targeting.  They have shifted to White House rhetoric inflaming the IRS - kind of like Henry II asking his knights why no one will rid him of the troublesome priest.

I feel bad for Issa and his friends, so as a belated Christmas present, I'm going to give them an imaginary pony in the form of a conversation in the West Wing that should have been taped.

President Obama:  Minion.  Come here and attend.  Tell me about these strange people with tricorner hats who call themselves the Tea Party.

Minion: Well excellency they seek to educate the people that the Founding Fathers wished the federal government to be carefully limited in its power.

Obama: Founding Fathers?  You mean the African enslaving slaughterers of indigenous people whom my liberal professors taught me to despise?

Minion: The same excellency.

Obama: I could see that this teaching would be highly dangerous to my master plan to turn America into a cradle to grave welfare state.  How can we best smite these Tea Party people in a subtle and devious manner?

Minion: Our prime minion in the IRS, Lois Lerner, who has taken the oath of silence, can harass them by delaying their exempt status applications

Obama: Make it so.

I recently read that during the Watergate hearings one of the most avid listeners was a young lad from Hawaii on his first trip to the mainland who would grow up to be President of the United States, which makes me think that there won't be any tapes.

President Obama Being For Marriage Equality Does Not Make Marriage An Unqualified Good Deal

Originally published on forbes.com.

President Obama has come out in favor of marriage equality, which seems to be generating quite a bit of excitement.  As far as I can tell there is only one tax blogger who devotes more space to the tax implications of same sex marriage than I do. That would be Paricia Cain who writes the Santa Clara Same Sex Tax Blog.  As a matter of fact, my first post on Forbes.com was about New York Marriage equality.  I introduced Robin and Terry, a couple of indeterminate gender and marital status whose income, residence and professions constantly shift.  Their role is to help me avoid awkward pronoun problems.  When taxes come up in discussions of marriage equality, there is usually a focus on the tax advantages of being married, which are admittedly many.  I thought that it might be timely, though, to once again review some of the tax advantages of not being married.  Back when the prospects of marriage equality were dimmer I advised Robin and Terry to not get mad, but rather get even.  Here are some of the ideas I came up with for them.

1. The standard deduction - Even if property is held jointly, either one can pay the real estate and mortgage interest and deduct it. (You cannot deduct somebody else’s taxes, but you can deduct all of the taxes on a property you own part of, if you pay all of it.) Robin and Terry each maintain a separate checking account. (This is a step I have found some couples find difficult to implement.). Robin pays for the groceries, home repairs, country club dues, etc. Terry makes the mortgage payments, pays the real estate taxes and makes their charitable contributions. (Terry cannot pay Robin’s state income tax, but if they have a significant diversified portfolio, Robin should own the US obligations and exempt obligations of their state of residence.) Through these steps, Robin and Terry will between them be able to deduct all their itemized deductions and one standard deduction.

2. The deferred salary - If Robin owns a C corporation (call it Robco), Robco can employ Terry. Robco should pay Terry once a year. If Robco is an accrual basis corporation it can accrue the salary due to Terry and pay it to Terry, a cash basis taxpayer in the subsequent year.

3. The free basis step-up - If Robin owns a rental property, Terry can buy it by giving Robin a long-term installment note. Robin will recognize no income until the principal is paid. Terry will have a stepped up basis for purposes of depreciation or even sale. (Thus it would even be worth doing with a vacation property, if it is likely to be sold.)

4. The basis swap - If Robin owns a high basis property and Terry owns a low basis property and they wish to sell the latter, they can do a like-kind exchange prior to the sale, thereby reducing the gain.

5. The wash sale - If Robin wants to maintain a securities position but harvest capital losses, Terry can purchase the identical security on the same day that Robin sells.

6. Forget the trade-in - If Robin has a luxury automobile that is used for business, that they would like to hang onto, Robin can sell it to Terry at loss, which unlike depreciation is not subject to luxury limitations.

If a couple chooses to use any of these techniques, the most likely way they would fail on audit is through poor execution. Everything must be done in the same way as it would be done in a truly arms-length transaction. If there is a note for a property sale a mortgage should be recorded. Payments should be made regularly as defined by the terms of the contract. Separate accounts should be maintained and receipts and disbursements should be scrupulously deposited or disbursed from the correct account (e.g. After the free basis step up, rents should go into Terry’s account and property expenses, including the interest due Robin, should be paid out of that account.)

You can follow me on twitter @peterreillycpa.