John Gemstone, a wealthy client, has recently been audited by the IRS. The agent

Question

John Gemstone, a wealthy client, has recently been audited by the IRS. The agent has questioned the following deduction items on Mr. Gemstone’s tax return for the year under review:

• A $10,000 loss deduction on the rental of his beach cottage.

• A $20,000 charitable contribution deduction for the donation of a painting to a local art museum. The agent has questioned whether the painting is overvalued.

• A $15,000 loss deduction from the operation of a cattle breeding ranch. The agent is concerned that the ranch is not a legitimate business (i.e., is a hobby).

Your supervisor has requested that you represent Mr. Gemstone in his discussions with the IRS.

a. What additional questions should you ask Mr. Gemstone in an attempt to substantiate the deductibility of the above items?

b. What tax research procedures might be applied to build the best possible case for your client?

ORIGINAL WORK ONLY!!!

Explanation / Answer

Ans : Loss on rental on beach cottage comes under the preview of Sec 280 A of mechanical rules. Hence that establishes that for how many days the cottage is used for personal use or for rental purposes. Mr. Gemstone need to furnish the details of it that for how many days he used the cottage for personal use and for how many days he used it for rental purposes. Passive Activity loss rule (sec. 465) is also applied here since this is the case of rental income/loss. In this it must has to be established whether Mr gemstone has some other passive income or not.

Regarding the painting one, Mr Gemstone has to clarify whether he undertook the appraisal from a qualified appraiser because as per the rule if painting value is more than USD 5,000 then it becomes a must that there should be an appraisal from qualified appraise so that no one should inflate the paintinh charges to increase the value of exemption.

For the cattle breeding, there must be an establishment of differences needed whether this is the business for Mr. Gemstone, does he have the expertise in doing it, does he have any profit motive attached to it, or he just simple does it because he likes, the act is the same in both the cases but intentions are different hence, that is why this is the question I would ask.

The best cases which had happened in past must be reviwed and worked upon and also there is need of time that review became necessary for norms of Tresury regulations specially pertaining to these cases on sections as mentioned earlier Sec 280 A, sec 465 and all.

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