disqualified income for EIC
Charles Mayer
<< ------------------------------------------ >>
I am having trouble with a couple of my clients with EIC and
rental income. I have a farmer and her son that own land and
rent it to their "c" corporation. I believe that this is
considered self-rental and it should not be included at
disqualified income. I also have this same situation with a
couple of "s" corporations and the agent has allowed these.
It is also a different agent handling the "c" corporation
issues. Should this be considered disqualified income. It
is clearly not passive income. As the courts have already
concluded. Any discussion???
Richard B. Gardner
<< ------------------------------------------ >>
"Charles Mayer" <c...@brainerd.net> wrote:
> I am having trouble with a couple of my clients with EIC and
> rental income. I have a farmer and her son that own land and
> rent it to their "c" corporation. I believe that this is
> considered self-rental and it should not be included at
> disqualified income. I also have this same situation with a
> couple of "s" corporations and the agent has allowed these.
> It is also a different agent handling the "c" corporation
> issues. Should this be considered disqualified income. It
> is clearly not passive income. As the courts have already
> concluded. Any discussion???
Sec. 32(i) lists rental income as part of the "disqualified
income" for EIC purposes. Self-rental loses its passive
character under Sec. 469 when the property is rented to the
taxpayer-owned entity in which the taxpayer actively
participates. Under these circumstances, the rental income
does lose its character as rental income, it only loses its
ability to offset other passive losses. It still remains
disqualified income.
--
Richard B. Gardner, EA (OK)
Michael T. Wing, CPA
<< ------------------------------------------ >>
Charles Mayer <c...@brainerd.net> wrote:
> Should this be considered disqualified income. It
> is clearly not passive income. As the courts have already
> concluded. Any discussion???
We had a case involving rental income earned by a "real
estate professional". Since such income is deemed *non*
passive, we took the position that it was *not*
disqualifying income for EIC purposes.
The Fresno Service Center "bounced" the return and, due to
mishandling on their part, immediately issued a 90 letter.
We couldn't talk them into rescinding the deficiency notice
or referring the case to Appeals, so the client proceeded to
pay the balance due under an installment agreement.
About a year later, we filed an amended return *clearly*
noting the non-passive nature of the Schedule E income as
per instructions in an IRS Pub that had been revised *after*
the original return in question had been filed. The Feds
"bought" the amended return and issued a refund and/or
cancelled the balance due on the installment agreement.
My advice would be to continue negotiating with the agent,
and to prepare to take the issue to Appeals where I suspect
you will win.
MTW
Richard B. Gardner
<< ------------------------------------------ >>
"Richard B. Gardner" <rb...@mindspring.com> wrote:
> Under these circumstances, the rental income
> does lose its character as rental income...
Should read "does NOT lose it character..."
Michael T. Wing, CPA
<< ------------------------------------------ >>
Richard B. Gardner <rb...@mindspring.com> wrote:
> Sec. 32(i) lists rental income as part of the "disqualified
> income" for EIC purposes.
The exact quote is as follows:
-----begin quote-----
(C) the excess (if any) of--
(i) gross income from rents or royalties not derived in the
ordinary course of a trade or business, over
(ii) the sum of--
(I) the deductions (other than interest) which are
clearly and directly allocable to such gross income,
plus
(II) interest deductions properly allocable to such
gross income,
-----end quote-------
Since no one on the face of the earth - not Congress, not
even the Supreme Court - seems to know what a "trade is
business" is (whether for the purpose of this code section,
or any other...), this provision is ~very~ mysterious. I
would certainly argue that the "self-rental" rent *is*
derived in the course of a trade or business (ie: that is the
whole rationale of it being deemed "non-passive") and,
therefore, does *not* constitute disqualifying income for EIC
purposes. (A similar argument would be made for rents derived
by a "real estate professional.")
One person I dealt with at the Fresno Service Center tried to
claim that rental income could only be deemed associated with
a T or B if it was treated as *earned* income (thereby
increasing the total amount of earned income on the return,
resulting in a likely phaseout of the EIC). That's a nice
theory - but it isn't what Congress "said". <g>
MTW
Michael T. Wing, CPA
<< ------------------------------------------ >>
Charles Mayer <c...@brainerd.net> wrote:
> Should this be considered disqualified income. It
> is clearly not passive income. As the courts have
> already concluded. Any discussion???
We had a case involving rental income earned by a "real
estate professional". Since such income is deemed *non*
passive, we took the position that it was *not*
disqualifying income for EIC purposes.
The Fresno Service Center "bounced" the return and, due to
Richard B. Gardner
<< ------------------------------------------ >>
"Michael T. Wing, CPA" <MTWi...@excite.com> wrote:
> Since no one on the face of the earth - not Congress, not
> even the Supreme Court - seems to know what a "trade is
> business" is (whether for the purpose of this code section,
> or any other...), this provision is ~very~ mysterious. I
> would certainly argue that the "self-rental" rent *is*
> derived in the course of a trade or business (ie: that is the
> whole rationale of it being deemed "non-passive") and,
> therefore, does *not* constitute disqualifying income for EIC
> purposes. (A similar argument would be made for rents derived
> by a "real estate professional.")
But the reason self-rental income is *deemed* to be
non-passive is to stop abuses under the PAL rules (i.e.,
creating passive income through self-rental to offset
passive losses that otherwise would just be suspended).
Because it is *deemed* to be non-passive for this particular
scenario doesn't mean it loses its character as rental
income for this section of the code.
I believe it would be the taxpayer's responsibility to
*prove* that self-rental income is not disqualified income
for Sec. 32(i) purposes. I, for one, don't think that the
argument presented thus far would be that persuasive.
Obviously, the issue will need to be settled by a higher
court than what we have here <g>.
Michael T. Wing, CPA
<< ------------------------------------------ >>
Richard B. Gardner <rb...@mindspring.com> wrote:
> Because it is *deemed* to be non-passive for this particular
> scenario doesn't mean it loses its character as rental
> income for this section of the code.
Actually, I think this one would be a "no brainer". IRC 32
says:
-----begin quote-----
For purposes of subparagraph (E), the term `passive activity'
has the meaning given such term by section 469.
-----end quote-------
And, IRC 469 very specifically directs the Secretary to draft
applicable regulations defining "activities", etc.
So, if the IRS (under the scope of its regulatory powers) has
decided that "self-rentals" are not passive activities for the
purposes of 469, then I think they are "hoisted by their own
petard" as far as the EIC disqualifying income issue is
concerned. This may not be exactly what Congress "intended",
but it *is* (as far as I can see) what they *enacted*.
In summary, my view is that rental income generated in a
"non-passive", "trade or business" activity is not
disqualifying income for EIC purposes. Examples would be
rental income earned by a "real estate professional" and the
"self-rental" situation. Contrary to theories espoused by
agents I've dealt with, I see no requirement (in the statute)
that such income must be "earned" in order to avoid
disqualification.
MTW
D. Stussy
<< ------------------------------------------ >>
Michael T. Wing, CPA wrote:
> ...
> One person I dealt with at the Fresno Service Center tried to
> claim that rental income could only be deemed associated with
> a T or B if it was treated as *earned* income (thereby
> increasing the total amount of earned income on the return,
> resulting in a likely phaseout of the EIC). That's a nice
> theory - but it isn't what Congress "said". <g>
Sometimes, Congress doesn't even know what they've said!
LoTax
<< ------------------------------------------ >>
MTW says that the IRS has decided that "self-rentals" are not
passive activities, and based on that he seems to conclude
that "self-rentals" are trade or business income.
What the "self-rental" recharacterization regulations say is
that income from a "self-rental" will be treated as if it's not
income from a passive activity. The regulations do not say
that "self-rentals" are business activities, nor do they say
that "self-rentals" are not rental activities. [This is
distinctly different from what the "real estate professional"
rules do, which is to making rental activities subject to the
material participation tests rather than the "per se" passive
rule of IRC 469(c)(2).]
In the context of IRC 32(i)(2)(C) and (E), the income from
a "self-rental" is still rental income, even though it's treated
as not from a passive activity. Also, the passive/non-passive
characterization of income from a "self-rental" has nothing to
do with whether it's derived from trade or business.
The way Congress wrote Section 32(i)(2)(C) is that rents,
whether they're passive or not, including "self-rents," are
disqualified income, unless they are derived from trade or
business.
The way Congress wrote the real estate professional rules
simply moves rental activities out of IRC 469(c)(2).
Neither 32(i)(2) nor 469(c) addresses whether such income is
trade or business, nor what would make it trade or business.
--
LoTax
Michael T. Wing, CPA
<< ------------------------------------------ >>
LoTax <lotaxN...@hotmail.com.invalid> wrote:
> MTW says that the IRS has decided that "self-rentals" are not
> passive activities, and based on that he seems to conclude
> that "self-rentals" are trade or business income.
Well, then maybe I mis-stated my position. <g>
Clearly, the self-rental income *is* derived from a trade or
business over which the taxpayer has control (ie: a controlled
corporation or similar entity). In the absence of a case or two
on point, I think that is sufficient to exempt the income from
the EIC limitation.
To re-state, I'm not saying that "non-passive" automatically
equals "trade or business". I am just saying that self-rental
to an active trade or business causes the the income to be
"derived" from a trade or business of the taxpayer. The fact
that the IRS has classified the income as non-passive simply
adds to the argument.
MTW