Sometimes tax return preparers have to hear a long story before getting the facts straight for accurate calculations. IRS agents conduct the same efforts. Therefore, correctly gathering tax details prevents future IRS trouble for taxpayers.
When tales of confusion reach Tax Court, a judge is certain to unearth the whole matter. An illustration of this recently occurred in the case of Robert Willson. He opened a bar in 1986 and revealed to the judge his ensuing troubles. After encountering numerous lawsuits and building repairs – plus a fire – the city of Des Moines eventually condemned Willson’s property in 2000 for expansion of the airport.
According to the IRS, Willson failed to correctly report his income that year. Perhaps he needed professional tax preparation help because this is the same time that Willson began serving a federal prison term. By representing himself at trial, all the details of Willson’s history with his tavern were conveyed in court. The story makes a highly advanced case study for a registered tax return preparer class.
Willson was in the car repair business but departed after being shot in the arm by a burglar. He then purchased the bar near the Des Moines airport and renamed it “City Limits.” After extensive remodeling with new stages, the business was established as a venue for live performances by bands known as “glam metal.” This type of music was on the wane in the early 1990s when “grunge rock” became the popular replacement.
The court patiently awaited the relevant points to a tax return preparer job. The nature of Willson’s live music acts is important because one night in 1994, a few band members did something to the smoke machine that ignited a fire. The damage caused by the catastrophe was extensive. The fire engulfed the tavern.
An original house on the property was undamaged by the fire. Willson rented it to a tenant that installed some minor improvements and opened an establishment called “The Landing Strip.” This business varied from the earlier music enterprise in that the entertainment consisted solely of scantily clad female dancers.
Eventually, the property was condemned for the airport expansion. This represents a taxable event because the property is effectively sold, triggering a capital gain. The Tax Court judge sorted through these chaotic facts and noted the relevant details for tax preparer work in this case.
First, the seller has to consider depreciation in determining gain on the sale. This is the allowable depreciation during ownership, regardless of whether the tax returns actually reported depreciation expense. That factor, of course, increases the gain. Secondly, some basis is allocated to the land and thus isn’t depreciated. The Tax Court tied a value to the land in proportion to assessed values for similar land and buildings in the area at the time of the sale.
Several morals for a tax preparer training course are derived from this messy situation. The matter of greatest importance is the value of good records. This includes knowing both original cost plus outlays for improvements. Moreover, tax practitioners must always consider allowable depreciation in capital gain calculations – even when no depreciation has been deducted. Lastly, tax work entails making some determination of land value. That helps reduce depreciation and curtail the amount of taxable gain.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.