Stuart A. Bronstein wrote:
- quote -

Tell that to all the lawyers and CPA's, even a few EA's, who
have been disbarred from practice before the IRS.

- quote -

I will never argue with Mr Justice Lerned Hand's astute
comment but will point out that there are ways to do this,
legally. And understating deductions in the arrival of net
profit, and therefore gross income, is not one of them,
unless there is a valid election to be made, like the
judicious use of a combination of section 179 and regular
depreciation.

Sunday morning ChEAr$,
Harlan Lunsford, EA n LA

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eagent wrote:

- quote -

Taking this one step further, Gene, concerning the proper
deductions on a Schedule C or any business return. We
should think also about how "we" define a proper deduction.
Usually taxpayer says "I spent 7,200 on rent last year."
We then ask, do you have cancelled checks for that?" "Well,
no, I paid in cash." We then ask "Did you give your
landlord a 1099-misc form for the rent?" "No; was I suppose
to?" "Yes, you were, and before January 31st!" "Oh" he
replies, "then since I didn't document it, I guess I don't
get to deduct it, right? And that increases my
income,right? And that qualifies me for more EIC, right?"

(GRIN!

ChEAr$,
Harlan Lunsford, EA n LA

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A.G. Kalman wrote:
and HL wrote:

- quote -

Maybe not a circular issue per se, but those of us who both
prepare returns AND represent taxpayers before the IRS don't
need to see any distinction. We just do our job ethically.
Remember, that there is Circular 230 which regulates
"practice" and other regulations which govern preparation
of tax returns for all, including unenrolled practitioners.

- quote -

That is because such publications are written with lay
people in mind who can't see any distinction between can,
may and must in everyday usage. Again, puglications are not
the law.

- quote -

Not moot, because IRS is very aware of people overstating
income, indeed of manufacturing income to obtain fraudulent
EITC. Wish I could remember where I filed that little
blurb away at the office; probably couldn't find it now.

The classic case I think I've heard is a former client with
two kids who goes to a certain preparer each year who
prepares her Schedule C with her total child support on it.
In her mind I'm sure she thinks that having been married to
whatshisname she "earned' it.

Sunday morning ChEAr$,
Harlan Lunsford, EA n LA

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<wayland1234[at]yahoo.com> wrote:

- quote -

As this is a Rule of Law country, I think that the "allowed"
language in code sections "allowing" deductions is mandatory
for the IRS, not the taxpayer. This gives a predictable
result for the millions of taxpaying citizens (i.e., we know
the rules that the IRS are bound by). For example, if a
deduction is "allowed" under the code, it means that 1) the
taxpayer is allowed (not obligated) to take it and 2) if the
taxpayer takes it, the IRS must allow it. Of course for
purposes of this example, I'm referring to deductions are
that clearly allowable under a code section (e.g., mortgage
interest meeting all relevant criteria), not deductions that
are subject to interpretation or uncertainty.

The case above re depreciation seems to make that point that
deductions are at the taxpayer's option, it similarly makes
the point that regardless of whether the deductions were
taken, both the taxpayer and the IRS are required to
calculate gain, loss and recapture as if depreciation
deductions had been taken. Note that while taking the
deductions does not appear mandatory, computing taxable
income upon disposition of the asset requires that the
allowable depreciation be considered. Calcs at disposition
are: 1) recapture depreciation under applicable code
sections even if depreciation was never taken on the assets,
2) gain will be computed as if depreciation had been taken.
Generally, these are both adverse results for the taxpayer,
but not necessarily always. However, these are the rules,
and the taxpayer is obligated to compute gain/loss &
recapture this way and the IRS is required to enforce the
rules accordingly.

One other thought. You don't see the "allowable"-type
language associated with the income inclusion sections, only
the deduction sections.

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wayland1234[at]yahoo.com wrote:

- quote -

But that is because of the language of the statute. The
statute is the ultimate law.

There are two other statutes talking about other deductions
that are allowed or allowable - sections 193 and 194. But
in those cases it's to say that you don't get a double
deduction, and if you didn't take a deduction under another
statute you can't get it under this one.

But that does not imply that failure to take a deduction is
permissible, only that it happens and if you failed to take
a deduction you're out of luck.

Stu

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wayland1234[at]yahoo.com wrote:

- quote -

<<SNIP>
- quote -

Just as long as you don't mind paying extra taxes on
recaptured depreciation you never deducted when you sell
that property.

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From pub 544:

"Depreciation allowed or allowable. The greater of the
depreciation allowed or allowable is generally the amount to
use in figuring the part of gain to report as ordinary
income. If, in prior years, you have consistently taken
proper deductions under one method, the amount allowed for
your prior years will not be increased even though a greater
amount would have been allowed under another proper method.
If you did not take any deduction at all for depreciation,
your adjustments to basis for depreciation allowable are
figured by using the straight line method."

Here's an example where the IRS is telling you what to do if
you didn't take an allowable deduction. This strongly
implies to me that you are not required to take this
deduction.

So it certainly seems like there are some deductions that
are optional in the eyes of the IRS.

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TxSrv wrote:

- quote -

You know, Fred, I sometimes get the impression that most
people don't really understand or know what powers a CID
agent has.

ChEAr$,
Harlan

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- quote -

So IRS would say "Estimate and then allocate."

ChEAr$,
Harlan

Moderator:
I'm laughing because I had a friend who was so cheap that
he lived in his office to save on rent. He tried to make
everything a business expense. An angry ex-girlfriend
reported him to the IRS.

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- quote -

"I didn't want the deduction in 2005, so I intentionally
made personal use of the space. In other years I wanted the
deduction, so I was careful _not_ to make personal use of
the space."

The Supreme Court has ruled that it's quite legal to arrange
my affairs to minimize my taxes, and choosing where to hold
my child's birthday party is clearly "arranging my affairs".

- quote -

Some things need to be 100% business in order to be
deductible.

Seth

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- quote -

And your explanation for 100% biz use in prior/subsequent
years, when full deduction was advantageous, is...?

Plus, raise that issue in the administrative process, and
IRS will simply ask you to describe the space, draw it on
paper, and we work out a personal use % for your like, pizza
parlor. You insist on only 20% biz, IRS drives out there
and asks to see 80% personal.

Fred F.

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- quote -

Taxpayer says "Some of the use of that rented space was
personal, not business, and I didn't keep track of how much
was which."

Seth

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Moderator, I did look at www.asktax.org for a policy on
copyright material before I posted but found none. Now I
know.

The relevant point in the article is you cannot ignore
allowable deductions if ignoring increases SE income. The
Social Security Act has penalties for misreporting SE
income.

Macy


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- quote -

I imagine IRS feels statute is authority, but they look
at the ones talking authority to determine a tax, issue
notices, and which have a presumption of correctness.

So, IRS can issue a notice which says "we have allowed [some
section 162 item]...." If that results in a deficiency, it's
valid notice. It's not arbitrary and capricious, unless a
pure estimate. "Shall be" or "may be" in a deduction section
doesn't matter either. IRS can do "may be allowed" on broad
agency discretion.

Let's reword sec. 162 to say, "No deduction shall be allowed
for other than ordinary and necessary expenses and which
have been verified." Can t/p say, "I insist it wasn't
ordinary and necessary. IRS doesn't know how to run my
business." And verified by whom? Neither matters unless
statute says it does.

So a t/p doesn't claim office rent paid in cash. He would if
it increased refund, but due to EITC it lowers refund if
claimed. "I never claim things I can't prove; some do, not
me." However IRS obtains verification from the landlord and
issues the notice zapping EITC. Now what's to be argued
before the Tax Court?

Fred F.

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"eagent" <gene[at]alliancetax.com> wrote:

- quote -

I agree as far as it goes. But is it really required to take
available deductions?

If you look at section 161 etc., the code says deductions are
"allowed" but does not say they are required.

Under section 6662 it requires a penalty for substantial
understatement of income tax, but only to the extent of "tax
required to be shown on a return,..."

I haven't seen anything authoritative that says deductions are
required to be taken.

On the other hand, section 62 says that adjusted gross
income means gross income minus certain deductions. While
not saying so explicitly this implies that deductions, or at
least the ones described in that section, are required to be
taken.

Chances are there never will be a resolution, since the
chances that this will ever be worth litigating (or even
getting the IRS to issue regulations on the subject) are, it
seems, close to nil.

Stu

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"eagent" <gene[at]alliancetax.com> wrote:
- quote -

I usually avoid these long rants, however, I'll break w/ my
SOP and chime in. My 2 cents are as follows:

1. The only thing I've seen in this this thread that I
believe is blatantly wrong is "claiming non-existent income"
as one of the previous poster's put it. Claiming
non-existent income is fraudulent and different than
omitting deductions, which at the end of the day may get you
to the same place. The opening language of IRC 161 is
"...there shall be allowed as deductions ..." The word
"shall" is a forceful word and would appear to make the
section mandatory as it applies to taking deductions,
however, the word "allowed" is not an word that commands
that action is taken but rather permits action it.
Therefore, Congress is saying that if the taxpayer so
chooses, they *may* take a deduction for an exependiture
that meets the criteria for deductibility of all other
applicable code sections.

2. As someone else posted, the Supreme Court, Judge Learned
Hand to be specific, wrote: "Anyone may arrange his affairs
so that his taxes shall be as low as possible; he is not
bound to choose that pattern which best pays the treasury.
There is not even a patriotic duty to increase one's taxes.
Over and over again the Courts have said that there is
nothing sinister in so arranging affairs as to keep taxes as
low as possible. Everyone does it, rich and poor".

Therefore, it is my opinion that as long as expenditures
meet all of the criteria imposed throughout the IRC for
deductibility, they may be taken as such but are not
required to be taken. Of course, some caveats come with
this such as where an business maintains their books and
records on a tax basis of accounting (i.e., financials on an
"other comprehensive basis of accounting" (OCBOA) rather
than GAAP), if expenses are left off the books to maintain
conformity with tax returns as filed, then that is
misrepresenting the books and records and financial
statements of the entity and that would be incorrect and
fraudulent as users of the financial statements would not be
getting a true and accurate picture of the business.

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This was posted in another group.

================================================== ==========
Moderator:
I really do not care how many newsgroups have posted the
following article as I am reasonably certain it is
copyrighted material. Therefore, only the identification
of the authors, the introduction, and the conclusion are
being posted here. Arguments against my decision will, as
usual, be ignored.
================================================== ==========


Avoiding Taxes by Avoiding Deductions

=A92004 N.E. Ballard, C.J. O'Neil and D.P. Samelson

By Nicole E. Ballard, Cherie J. O'Neil and Donald P. Samelson

Nicole E. Ballard, CPA, is a Tax Practicioner at
PriceWaterhouseCoopers in Denver.

Cherie J. O'Neil, CPA, Ph.D., is a Professor of Accounting
at Colorado State University in Fort Collins.

Donald P. Samelson, CPA, Ph.D., is an Associate Professor of
Accounting at Colorado State University in Fort Collins.

Nicole Ballard, Cherie O'Neil and Donald Samelson examine
two situations where it may be advantageous to forgo
deductions, discuss whether allowable deductions must be
taken and identify planning opportunities for avoiding
deductions.

Introduction

Deductions are considered a matter of "legislative grace."1
They are considered to be a good thing, and taxpayers have
the mindset of always wanting to take deductions. But there
are situations in which the taxpayer may be better off by
not claiming a deduction. Paradoxically, in these
situations, one can avoid taxes by avoiding deductions. This
raises a question: If the Internal Revenue Code ("the Code")
authorizes a deduction for a particular item, and the
taxpayer is eligible to deduct that item, is the taxpayer
required to take the deduction even in circumstances where
it may be desirable to forgo the deduction? The answer,
generally, is yes, it must be taken. However, there are a
variety of planning opportunities which permit taxpayers to
avoid certain deductions when doing so would create a tax
saving.

This article examines two situations where it may be
advantageous to avoid deductions, discusses authority on the
issue of whether allowable deductions must be taken and
identifies planning opportunities for avoiding deductions
when it is desirable to do so.

< snip
Conclusion

Generally, a taxpayer is required by established case law
and rulings to take all allowable deductions. However,
tax-planning strategies are available to cash-basis
taxpayers to accelerate/defer income into the next tax year.
In addition, taxpayers may legally avoid claiming deductions
that do not meet strict substantiation or exclusive business
use requirements. A taxpayer also may choose to limit the
Code Sec. 179 deduction claimed. Paradoxical as it may seem,
taxpayers in EIC and hobby loss situations may indeed avoid
tax by avoiding deductions. Tax practitioners should be
alert for these situations and advise clients accordingly.

< snip
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Stuart A. Bronstein wrote:
- quote -

To Stu - the Supremes HAVE said that there is nothing wrong
with arranging your affairs in such a way as to pay lower
taxes. They did NOT however say that you could
intentionally misstate or deliberately recharachterize your
affairs after the fact, in a manner inconsistent with the
correct reporting requirements. To do such would not be tax
avoidance, but tax evasion - the latter of which is illegal.

To our esteemed moderator - let the games begin!!!

Gene E. Utterback, EA, RFC

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Stuart A. Bronstein <spamtrap[at]sbcglobal.net> wrote:

- quote -

And the whole question at issue is whether or not failing to
take a deduction is "done legally".

Now, I file a Schedule A, and never include medical
expenses, because they're well under the threshhold. Yet I
still contend that my return is "correct and complete"
without them.

Seth

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- quote -

This is not a Circ. 230 issue. This is an issue of
interpreting the IRC and its regulations and complying with
court decisions. I have never seen nor heard of the IRS
enforcing IRC Sec. 446 for an overstatement of business
income due to a disregard of a business expense deduction.
In addition, IRC Sec. 162 and its regulations state quite
clearly that a taxpayer "may" deduct ordinary and necessary
business expenses. No mention of "must" deduct.

Finally, the issue itself is probably moot, as those
individuals who are manipulating self-employment income to
maximize the EITC don't have any substantiated business
expenses. If anything they are creating nonemployee
compensation where it doesn't exist.

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