June 24, 1995

Doggy Store is not a Hobby

          The Second Circuit recently held that a badly run pet shop was not a hobby loss and therefore the losses were deductible by the owners. The Court noted that the store`s books were very disorganized, that there was little advertising and despite years of losses made no change in the method of operating the business.

 Removal of Terminate at Death Clause was Fatal

          The Tax Court recently held that failure to include terminate at death language in a final divorce decree converted payments that would have been deductible as alimony into a non- deductible property settlement.

          We recommend that you provide us with a copy of any proposed divorce agreements to review for tax consequences.

IRS to Raise Cash Reporting Compliance

          In an effort to increase compliance with the cash reporting rules the IRS has announced it is conducting a nationwide effort this spring targeted at businesses and non-bank financial institutions. This compliance initiative will focus on the responsibility to report cash (and cash equivalents) of more than $10,000 received in a single transaction or a series of related transactions within a twelve month period in the course of a trade or business.

          Businesses must report large payments of cash on Form 8300 Report of Cash Payments over $10,000 Received in a Trade or Business within 15 days of their receipt. Non-bank financial institutions generally must file Form 4789 Currency Transaction Report to report receipt of cash sums in excess of $10,000.

          The Service plans to "educate" business and non-bank financial institutions about the large cash payments reporting rules. It plans to visit auto, motorcycle and boat dealers, antique and art dealers, auction houses, jewelers, law firms, real estate and insurance agencies, and court clerks among other businesses. The announcement did not say whether its "visits" will be audits, strictly educational in nature or a combination of the two.

          If you are notified you are to be visited, please call us in advance of the "visit".

Tax Deductible Vacations

          It can pay to mix business with pleasure. By doing so on a summer trip you may be able to deduct 100% of your transportation and lodging and 50% of your meal costs.

          If the primary purpose of your trip is business you can deduct your travel costs even if your trip includes personal activities, and even if you extend the trip for a few non-business days.

          You can also deduct 100% of your lodging and 50% of your meal costs for the period in which you were engaged in business even though you also engaged in substantial recreational activities during this period. You cannot deduct separate non-business expenses incurred during your stay such as the cost of tickets to entertainment events. Nor can you deduct lodging and meal costs incurred during the extended non-business portion of your trip.

          If you bring someone with you on the trip you may still be able to deduct most of the cost of the trip even if your companion travels with you solely for pleasure.

Children`s Tax Free Summer Jobs

          Children can earn up to $3,900 of income without owing any income tax in 1995, so a summer job can be a source of extra tax free income for the family. And income in excess of the tax-free limit is taxed at the child`s own low tax rates, starting at 15%.

          No income tax withholding is required form the summer wages of a child who owed no income tax last year, who will earn less than $3,900 this year and who expects to owe no income tax this year and who has no investment income. However, if your dependent child has even $1 of investment income, withholding is required if wages will exceed $650.

Forever is a Very Long Time

          A three year statute of limitations applies to normal tax filings, but no limitations period applies if you did not file and if the IRS says you did not file it; it`s up to you to prove you did. You will need a copy of your return and a certified mail receipt showing it was sent to the IRS. If you made a payment with your return, your cancelled check or if you received a refund, a copy of the IRS`s check. In a recent case where a taxpayer could not produce any of these the IRS was allowed to assess new taxes going back as many years as it wanted (Torigan TC Memo 19954-54).

          If you have any questions about these tax notes or any other matters, please call us.