To File or Not to File

[Snaggletooth]

Older gentleman moves to the South from the Frost Belt. He leaves behind a lifetime of work on Model T cars, engines, components, old tractors, etc.

He has no other reason to file. Couple thousand in interest income, and the rest in social security.

However, before moving, he sells all of his collectible stuff for $107,000 at an auction. His estimated cost in these items is over $130,000. Some of the items actually brought more than their cost, but most of them did not. Most of the stuff was 80-90 yrs old, and he has collected it over the last 50 years, not saving receipts over this retention of time.

All this stuff qualifies as personal capital assets - no loss allowed. Sch D transaction with no loss.

Should we:

a)File a return because there is a large $107,000 transaction which cleared two banks, and because the magnitude of the transaction exceeds filing thresholds.

b)Not file because he is not required, with insufficient income and no tax. Also, if the sale is audited, he would not be able to present receipts.

As far as his estimate of his costs? Neither myself nor an IRS would have enough subject knowledge to confirm or contest the taxpayers' estimate of his costs. A subject matter expert would be required.

[erchess]

I think he has to file

He didn't sell all the items at once to someone he sold them separately or in small lots. Ignore for now the question of proving basis. Items on which he had a loss get ignored while those on which he had a gain go on Sch D. Even he admits that there were such items.

Then there is the argument about proving his basis. Cohen says to me that he has basis but the question is what's the lowest price the item has traded for during the time since he started collecting these things. An expert would have to be hired and paid to dig out that information. But remember that for most of the items he probably has no idea when he bought them. For each item he could have bought it at the lowest dollar price it has fetched since it was new. And let me remind you again that digging for this information will most likely cost money.

Finally, how much money does he still have from the sale? If for example he still has most of it, then reporting the sale with no basis and paying the tax might literally be the cheap way out. That hypothesis could be tested by you or him in conversations with his contacts in the Model T Collecting Community. If on the other hand he has very little of the money left then filing the same return then doing an installment agreement or or OIC might be the way to go. I feel for the guy. I think he is a victim of an unjust tax system. I realize that I may well be telling you to tell him to let the government take almost 40% of his nest egg that he was counting on for his old age or to leave to his heirs. But if the hit is postponed it will get larger.

[Snaggletooth]

Don't Think So

Erchess, appreciate your response, but I disagree with much or most of what you said.

That's OK. I asked for opinions, and you have one.

Snag

[David1980]

and he has collected it over the last 50 years,.

That right there would make me suspicious as a preparer on his estimated cost. Obviously the dollar of today is much different than the dollar of 50 years ago, so I have to wonder if the cost truly was greater than the sales proceeds.

But going to the question, I really don't know. The instructions for the 1040 indicate gross income, which I would think implies the sales amounts before the reduction for basis. Almost makes me want to say that gross wouldn't be sales price because well, things never make sense.

[WhiteOleander]

I may show my misunderstanding of the 0% capital gains here, but if his other income is so low, wouldn't he fall into the zero tax on the capital gains if he reported all of it at a gain without a basis? I haven't had a zero gain return yet, so I may be off here.

[JohnH]

Another consideration would be that if he files, the statue of limitations begins to run on the return, whereas if he doesn't file then then there's always a chance that it could rear its ugly head in the future. Unlikely, but if it happened you'd definitely be in a defensive position at that point.

[AJsTax]

Not file??

How can he not be required to file. How is this any different than if he had sold that much old stocl? He must file to prove that the $100,000 in gross income is not all taxable. If the auction house was doing it's job a 1099 was filed for the gross amount.

[equinecpa]

However, before moving, he sells all of his collectible stuff for $107,000 at an auction. His estimated cost in these items is over $130,000. Some of the items actually brought more than their cost, but most of them did not. Most of the stuff was 80-90 yrs old, and he has collected it over the last 50 years, not saving receipts over this retention of time.

.

I have wondered about this. Just Saturday a girl called me about a property she is selling. She'd bought it a few years ago, done some improvements and is selling it. She bought it for personal reasons. What is the requirements to keep receipts to document costs on items bought for personal use? Is a log reconstructing the cost sufficient?

[Nashville]

Good Discussion

Thanks to all for a good discussion. Some of the points raised:

a) I'm assuming the preparer can walk away from this return and do nothing if he rejects payment from the taxpayer.
b) Zero % capital gains is a good idea, except claiming $107,000 would scuttle the boat. The 0% bracket only goes through the first $40,000 or thereabouts. His social security would then become taxable as well.
c) Most of the discussion casts doubt on the taxpayer's allegation that these pieces were sold at a net loss. Even had one guy tell us that the govt could force him to selectively report only those items comprising a profit, then disallow the losses (geez, I hope THAT is not true).

He would have had to keep 50 years worth of receipts. Not reasonable, but if audited, I'm sure he will be asked for them. Bear in mind this was a hobby for years - not a for/profit enterprise. We are not subject matter experts enough to know, but he says that nearly all of these items were "build up" projects, meaning that the cost of refurshing, having parts specially machined, etc. virtually assures no profit. There were a few items bought "as is" and sold the same way, and those items DID appreciate and were sold for a gain.

Taxpayer did manage to move some of this stuff down here. He has a couple old "slip-cycle" tractor engines, and a restored 1914 Ford Model T.

[taxmandan]

File the return and report the transactions

He needs to file and report the sales. Loss or gain, whatever can be discerned from the best information available of cost basis and sales. He is likely comparing the sales income to current FMV of the items, not his actual basis, most clients think along those lines. File the return, and lie low while the statute runs. I wouldn't worry about the audit until it comes, if ever.

Another tax professional said it best: 'It's an art not a science.'

[BOB W]

How about advising the client of all the pit falls of reporting or not reporting and tell him to go to another preparer for this year and keep his mouth shut.

Reporting without cost basis proof means a zero basis according to the IRS.


Collectibles are taxed at 28%

[ChEAr$]

Gross income

dictates filing of a return.

Each item sold is separately reported. Losses not deductible as we all know, but....
gains are taxable.

[Nashville]

Single Auction Sale

Harlan, this was a single auction, netting $107,000 against a cost of $130,000. I'm aware that his cost could be fictitious, but without evidence or reason, I'll accept his numbers. There is a detailed list of several hundred items, mostly old motor and tractor components. Fact of the matter is they could have brought much more money had they been sold on E-bay or separately, but they were sold at auction.

Isolating his profits, we have $30,000 in profits and $53,000 in losses.

If I understand this correctly, you would advise me to report $30,000 in gains, and ignore the losses, correct? instead of reporting the aggregate.

Will the IRS go to this extreme to go "cherry picking?" Before I would do this, I'd like to see citations.

[ChEAr$]

Single sale

Harlan, this was a single auction, netting $107,000 against a cost of $130,000. I'm aware that his cost could be fictitious, but without evidence or reason, I'll accept his numbers. There is a detailed list of several hundred items, mostly old motor and tractor components. Fact of the matter is they could have brought much more money had they been sold on E-bay or separately, but they were sold at auction.

Isolating his profits, we have $30,000 in profits and $53,000 in losses.

If I understand this correctly, you would advise me to report $30,000 in gains, and ignore the losses, correct? instead of reporting the aggregate.

Will the IRS go to this extreme to go "cherry picking?" Before I would do this, I'd like to see citations.

Well in that case, a single sale, of course all costs are added together and reported
as just one transaction. No problem.

[erchess]

It seems I misunderstood

When I think of a collection of items being sold at auction I think of there being many separate sales. If everything was sold to one buyer in one sale then of course no "cherry picking" - you have one transaction to report on Sch D.

However, I stand by my opinions that even an estimated basis per Cohen has to be backed up by historical evidence which it will cost money to obtain and that therefore reporting none at all may be the cost effective way out of this situation.

One way out of this situation would be for Snags to decline the job or the taxpayer to fire him. Then the taxpayer could stand pat and make the IRS come after him if they want to. The problem is that they would have until his estate was settled to do so and I really don't know the odds that they ever would come after him. If a return of any sort gets filed by someone who put on it all the income the taxpayer told them about then there is a comforting three year statute of limitations. The only problem is that Snags can't come right out and tell the taxpayer not to file or to go elsewhere for filing and shut up about the sale. If the IRS got wind of that Tennessee could lose a long toothed EA.