Revenooer Rants: So … just when is a tax not a tax?
March 18, 2013
INCLINE VILLAGE, Nev. — And you thought you had this all figured out when the Supreme Court told you some of the Obamacare exactions were "taxes," contrary to all of the blather from the politicians when all of this was being debated, thereby rendering the whole mess constitutional, as far as Uncle Sam is concerned.
So now comes the great state of California, once again raising for debate that age old question of whether something is a "tax," or merely a "fee."
And leave it to the Franchise Tax Board to conclude, in the case of California's new fire prevention "fee," that said "fee" is not deductible on your income tax return, because it just isn't a real property tax.
By way of background, in 2011, California enacted legislation imposing a charge of $150 as a "fire prevention fee" on each structure within specified areas of the state. The legislation was enacted for a variety of reasons, including:
The presence of structures within certain areas can pose an increased risk of fire ignition and an increased potential for fire damage;
The costs of fire prevention activities should be borne by the owners of these structures; and
The economic burden of fire prevention activities associated with those structures should be equitably distributed among those property owners who generally benefit.
The Internal Revenue Code allows a deduction for state, local and foreign real property taxes, but unfortunately doesn't define just what a real property tax is. The IRS has interpreted the law to mean that in order to be deductible, a real property tax must be levied for the general public welfare at a like rate against all real property in the taxing authority's jurisdiction.
In general, an amount that is assessed only on specific properties (such as for streets, sidewalks and like improvements) cannot be deducted as a real property tax.
Hence, concludes FTB, the fire fee in question is not a tax under California or Federal law. So there!
And for those of you presently slaving over your tax returns, and who may have received a little annoying Form 1099-C ("Cancellation of Debt") — all is not lost. Generally speaking, if a lender forgives or reduces the balance on a debt, that gives rise to taxable income on your end.
There is an exception for some homeowners who had mortgage debt forgiven in 2012. If you used the debt to buy, build or substantially improve your principal residence, you may qualify for exclusion of otherwise debt cancellation income of as much as $2 million! You may also qualify for the exclusion on a refinanced mortgage. Check out Form 982, "Reduction of Tax Attributes Due to Discharge of Indebtedness" if this is you.
CONSULT YOUR TAX ADVISER – This article contains general information regarding various tax matters. You should consult your CPA regarding the implications to your own particular situation. Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He can be reached at 831-7288, welcomes comments at email@example.com, and invites readers to consider his other commentary at http://blog.nolo.com/taxes.