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Common Tax Issues in a Down Economy, IRS Red Flags & Transactions in Property

IRS Circular 230 Disclosure

To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matters addressed herein.

Pedram Ben-Cohen is an Attorney-at-Law and Certified Public Accountant (CPA) licensed by the State of California who practices in all areas of Tax Law. Mr. Ben-Cohen’s experience stems from practicing Tax Law at Latham & Watkins, LLP and Gibson, Dunn & Crutcher, LLP where he represented high net worth individuals, public and private corporations, partnerships, s corporations, and tax-exempt organizations in connection with a broad range of tax-related matters including tax disputes with the Internal Revenue Service (IRS) and Franchise Tax Board (FTB), taxable and tax-free acquisitions and dispositions, joint ventures, entity formation, and estate planning. He also gained tax experience working at Deloitte & Touché, LLP and the Tax Division of the U.S. Attorney’s Office.

Mr. Ben-Cohen earned his law degree cum laude from Georgetown University Law Center. While at Georgetown, Mr. Ben-Cohen was a member of The Tax Lawyer, where he published The Real Estate Exception to the Passive Activity Rules in Mowafi v. Commissioner and the New Burden Shifting Statute, 55 TAX LAW. 961 (2002). Mr. Ben-Cohen has also published Public Civil Defenders: A Right to Counsel for Indigent Civil Defendants, 10 GEO. J. ON POVERTY L. & POL'Y, 1 (2003).

He earned a B.S. degree cum laude from the University of Southern California, where he majored in accounting.

Additional articles published by Mr. Ben-Cohen include:

  • "Payments by Majority Shareholders to Minority Shareholders to Secure Change in Control: Ordinary Income or Capital Gain?," Daily Tax Report, August 17, 2005
  • "Consideration of Subject Matter Jurisdiction of District Courts Required When Preparing Cases Where Taxpayers Seek Solely Statutory Interest." Daily Tax Report, November 30, 2004
Topics of Discussion
  1. Deductibility of Bad Debts
  2. Cancellation of Indebtedness Income
  3. Red Flags that can Increase the Likelihood of an Audit IV. Transactions in Property
I. Deductibility of Bad Debts
  • Debt must be “bona fide” debt:
    • arise from a debtor-creditor relationship;
    • based upon a valid and enforceable obligation; and
    • to pay a fixed or determinable sum of money
  • Deductibility depends on whether the debt is business or nonbusiness debt
  • Business debts: ordinary deduction; allowed for partial worthlessness
  • Nonbusiness debts: short-term capital loss; only allowed if totally worthless
  • Nonbusiness debt is any debt other than:
    • Debt created or acquired by the creditor in connection with the creditor’s trade or business; or
    • Debt the loss from the worthlessness of which was incurred in the creditor’s trade or business
  • May be able to take an ordinary deduction for a theft loss, must look at all facts and circumstances surrounding the debt, including:
    • terms of the note
    • ponzi scheme; and
    • whether debtor has been criminally convicted or under investigation
II. Cancellation of Indebtedness Income
  • General Rule: Taxable income will arise from the retirement of debt at a discount (“COD” income)
  • Rationale: Borrowing does not result in taxable income at time of receipt of funds; if repayment is subsequently cancelled or the obligation is diminished, the borrower obtains an economic benefit
  • Some Exceptions to COD income:
    • Discharge is a gift (might result in gift tax);
    • Debt is discharged in a bankruptcy or if debtor is insolvent;
    • The Mortgage Forgiveness Debt Relief Act of 2007 created an exception for discharged qualified principal residence indebtedness. This does not apply to home equity loan used to pay off credit cards, purchase a car, buy jewelry, etc. Also must determine whether debt is recourse or non-recourse; and
    • Qualified real property indebtedness incurred in connection with real property used in a trade or business
III. Common IRS Red Flags
  • Overestimating the Value of Donated Amounts
    • Value donated items at less than 30% of the original purchase price
    • Items valued at $5,000 or more require an appraisal
  • Income reported should be reasonable as compared to home mortgage interest deduction; also only interest on up to $1.1 million of debt incurred to purchase a principal residence is deductible
  • Account for all W-2s & 1099s
  • Reasonableness of deductions for taxpayer’s industry
  • Schedule C versus S Corporations, C Corporations, and LLCs
  • Home Office Deductions
IV. Transactions in Property
  • Interest on obligations of a state or one of its political subdivisions (e.g. municipal bonds) is generally excluded from income
  • Capital gains and losses result from the sale or exchange of capital assets. Long-term vs. short-term, up to 15% vs. up to 35%
  • Can deduct up to $3,000 net capital loss in arriving at adjusted gross income
  • Sale or exchange of principal residence:
    • An individual may exclude from income up to $250,000 of gain ($500,000 for individuals filing jointly) that is realized on the sale of a residence, if the individual owned and occupied the residence as a principal residence for an aggregate of at least two of the five years preceding the sale.
    • A loss from the sale of personal residence is not deductible.
  • Loss is disallowed on the sale or exchange of property to a related taxpayer
  • Example:
    • In August 2007, Bob sold investment real estate with a basis of $400,000 to his brother Ray for $300,000, its fair market value. In June 2008, Ray sold the investment real estate to an unrelated party for $450,000. Bob’s loss of $100,000 is disallowed; Ray recognizes a short-term capital gain of $450,000 - $300,000 -$100,000 (disallowed loss) = $50,000.
  • 1031 Like-Kind exchange:
    • Exchange of business or investment property for property of a like-kind
    • Property held for business use may be exchanged for investment property or vice versa
    • Does not apply to property held for personal use, inventory, stocks, bonds, notes, or interests in a partnership
  • Example:

    Cyrus owned an apartment building that he bought in 1995. In 2008, when Cyrus’ adjusted basis for this property was $2 million, he traded it for an office building having a fair market value of $6 million. The apartment building has 100 dwelling units, while the office building has 40 units rented to business enterprises. The properties are NOT located in the same city.

    Is Cyrus’ exchange considered “Like-Kind” resulting in no gain recognition?

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Client Reviews
I approached Mr. Ben-Cohen regarding a pending case with the State of California and my small business. During a time that was quite stressful, I found Mr. Ben-Cohen to be the perfect person to represent me and my company. He communicated with me in clear terms so that I understood everything that was taking place in a timely manner. He treated my situation with the type of candor you only find in a consummate professional and successfully negotiated a deal with the State of California that far exceeded my expectations. I found him to be kind, efficient, sensitive and nothing short of brilliant. I consider myself fortunate to have met him and highly recommend his services. I will not hesitate to use his firm in the future should a need arise. Google, We Care Spa
★★★★★
I am an international tax advisor and have worked with Pedram on more than a dozen difficult and challenging cases. Pedram's clients and fellow advisors highly respect him because he has an uncanny ability to quickly identify and work diligently to resolve his clients' issues. Pedram is pragmatic in his approach. He is transparent with his clients and dedicated to getting to a fair and reasonable outcome. I have attended an IRS Appeals conference with Pedram and would want no other attorney on my side. Pedram is extremely passionate in his work and representing his clients. He is also enjoyable to work with and develops very good relationships with his clients and fellow advisors. I highly recommend Pedram for any tax controversy work. Avvo, Curt
★★★★★
Top Drawer Tax Fraud Lawyer. Pedram got me out a CI jam I thought I would not resolve. He is also fair and reasonable with his billing. I interviewed 4 top Tax Fraud Lawyers in LA and went with Pedram...Glad I did! Google, Michael Jeppson
★★★★★
Pedram Ben-Cohen at Ben-Cohen Law Firm, PLC is one of the most incredible, creative, and caring attorneys I have ever dealt with. He gave us hope but also gave us the reality and worst case scenario. He fought for us tooth and nail. The attention and time Pedram put into the case was like no other. He charged us more than fair and was very reasonable in every aspect. He is not the kind of attorney that charges for every minute. I liked him very much not only as an attorney but as a person because he is very honest, is true to his integrity, and is dedicated to his clients. He loves what he does and has the passion to protect and defend his clients, which totally shows in his work and our outcome. We originally hired another attorney from a famous firm who basically did not give us much hope on our case . That is when we came to Pedram who won our case in a short amount of time and got us the outcome we were looking for. Because of Pedram and his creativeness, willingness, and dedication, he got us our favorable outcome. He is our go to attorney for sure, without a doubt. Avvo, Anonymous
★★★★★
A few years ago I had a major tax problem and I was looking for the right professional tax lawyer. I interviewed at least five experts and all of them were very professional. I am very picky. When I met Mr. Pedram Ben-Cohen, it took me no more than five minutes to decide that he was the one, and I was absolutely right with my intuition. He is very professional, knowledgeable, smart, and knows his job perfectly. In addition to all of his professional skills, as a person he is very friendly, pleasant, ready to help, and took care of me like I was his own family. I referred and recommended him to friends and family with tax problems and will continue to do so warmly to anyone. I know that he is able and will do his job the best way for his clients. He is my personal tax lawyer and expert and will remain so. Google, Shlomo Kattan
★★★★★
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