Passive activity loss rules, AFRs and more

 James W. Rahmlow, The Daily Record Newswire

The Tax Court recently agreed with the IRS in connection with the disallowance of a rental real estate loss due to the passive activity rules. For married taxpayers filing separately, the conclusion was that each taxpayer filing separately must separately satisfy the requirements of Code Sec. 469 (c )(7)(B).

The taxpayer relied on spousal attribution rules in taking the position that there was material participation, but the Tax Court concluded that spousal attribution cannot be used for meeting the other requirements of the above mentioned code section.

In general, to not have the passive activity loss rules apply, the taxpayer must prove that there was material participation in the activity. Among other requirements to achieve material participation, the taxpayer must perform more than 750 hours of services during the tax year in real property trades or businesses in which the taxpayer materially participates. With married filing separate returns, each taxpayer must satisfy these requirements if they want to be considered to materially participate.

Applicable federal rates for April 2014

In Rev. Rul. 2014-12, the IRS issued its Applicable Federal Rates and its Adjusted AFRs for April 2014. Below is a summary of those monthly rates.

Short Mid Long

Term Term Term



Rate 0.28% 1.79% 3.27%


AFR 0.26% 1.35% 3.27%

Even for professional gamblers, losses deductible only to the extent of winnings

A nonprofessional gambler must report all of his gambling winnings as income and can deduct gambling losses as an itemized deduction on Schedule A on his individual tax return. Professional gamblers are allowed to report their winnings as income on a Schedule C and can write off their gambling losses directly against the winnings.

In a recent examination, the IRS held that the losses are limited to the amount of winnings even if the individual is a professional gambler. The taxpayer went to Tax Court where the position was affirmed, clearly indicating as it has in the past that the deduction of losses is limited to winnings under Code Sec. 165(d).

Over- and underpayment interest rates

In a quarter where individuals are paying attention, the IRS announced in Rev. Rul. 2014-11 that interest rates on over- and underpayments will remain the same for the quarter starting April 1, unchanged from the previous quarter.

For all overpayments other than corporations the rate will be 3 percent.

For all underpayments except large corporate underpayments, the rate will be 3 percent.

For corporate overpayments, the rate will be 2 percent except that it will be 0.5 percent for the portion of corporate overpayments exceeding $10,000.

For large corporate underpayments, the rate will be 5 percent.

Two additional FATCA agreements signed

Continuing the globalization process, the United States has signed a Model 2 intergovernmental agreement (IFA) with Chile and a bilateral IGA Model 1 IGA with Finland. The purpose of the agreements is to make international transactions more transparent. The United States will now be able to obtain and exchange information with respect to reportable accounts in Chile and Finland under the Foreign Account Tax Compliance Act. The Finnish agreement requires the United States to provide reciprocal information to Finland.

IRS issues 2014 luxury auto limits

In Rev. Proc. 2014-21, the IRS released the limitations (adjusted for inflation) on depreciation for business-use passenger automobiles, light trucks and vans placed in service during calendar year 2014. For qualifying vehicles, which is most autos, light trucks and vans, Code Sec. 280 (F) limits the amount of annual depreciation that can be taken on a vehicle regardless of whether its cost exceeds the luxury cost limits. Below is a summary of those values.

Please keep in mind that these values assume 100 percent business use and need to be adjusted if business use percentage decreases.

Passenger Trucks 

Automobiles and Vans

First tax year:

$3,160 $3,460

Second tax year

$5,100 $5,500

Third tax year:

$3,050 $3,350

Each succeeding year:

$1,875 $1,975

Number of alleged misconduct by practitioners increased in 2013

As reported by the IRS Office of Professional Responsibility, the number of cases received by OPR for potential misconduct by tax practitioners increased from 516 cases in 2012 to 784 cases in 2013, which represented an over 50 percent increase. While the actual number of disbarments was minimal (11 in 2013 and 2 in 2012), the reporting indicated a much-increased monitoring of practitioners than in the past. Once a matter has been referred, the choices by OPR range through reprimand, suspend and ultimately disbarred. There also are other sanctions.

IRS releases “Dirty Dozen” tax scams

As it has done recently each year, the IRS has released its “Dirty Dozen” list of tax scams ranging from telephone scams to hiding offshore income. Presented in the order that they were by the IRS in IR-2014-16, the tax scams are: Identity theft, pervasive telephone scams, phishing, false promises of “free money” from inflated refunds, return preparer fraud, hiding income offshore, impersonation of charitable organizations, false income, expenses or exemptions, frivolous arguments, falsely claiming zero wages or using false form 1099, abusive tax structures and misuse of trusts. Detailed analysis of each of the scams can be found at


James W. Rahmlow, CPA, is a partner with Mengel, Metzger, Barr & Co. He can be contacted at


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