Tax Lawyer Blog

A Blog written by the Tax Attorneys for Individuals and Businesses

Jimmy Chen Seminar Attendees and Clients at Risk of Being Investigated for Tax Evasion

This past summer, Jimmy J. Chen, accountant and promoter of private charitable foundations, was charged with six felony counts of tax evasion. From 2009 through 2011, Mr. Chen apparently used his tax-exempt ChenSung Family Foundation to make only a single $250 contribution – and spent the rest of the money on himself.

Mr. Chen, through his office Jimmy J. Chen & Associates, Inc., used to conduct seminars throughout Northern California for individuals and families. Many of the attendees hired Chen to help them set up their own private foundations and advise them regarding his "tax saving" methods. The Franchise Tax Board (FTB) is now investigating Chen’s contacts for potential tax violations. Anyone who worked with Mr. Chen is at risk of being investigated and charged with civil or criminal tax evasion. (also see)

The Purpose and Function of a Private Charitable Foundation

Private Charitable Foundations are 501(c)(3) tax-exempt organizations that are funded by one or a small number of sources (usually an individual, family or business) that gift large amounts for charitable activities. Following are the two main types of private charitable foundations:

  •  Private Nonoperating Foundations make grants to other charitable organizations. They have their own list of pre-selected charities to which they donate and/or they run a competitive grants cycle.
  • Private Operating Foundations spend substantially all of their income and assets actively conducting their own charitable activities. For example, the Gates Foundation, established by Bill and Melinda Gates with a sizeable contribution from Warren Buffett, actively works to further the main philanthropic goals of their trustees, namely, expanding educational opportunities in the U.S., and enhancing healthcare and reducing extreme poverty worldwide.

Private foundations may not be used for buying yourself a luxury condominium with a karaoke room and an indoor golf range, or for buying life insurance for your spouse, as Chen’s apparently did.

Private Foundation Requirements

Private Charitable Foundations are required to pay only a small excise tax (1-2%) on their investment earnings, but under 26 U.S. Code § 4942(e) must spend at least 5% of the average fair market value of their assets each year on grants and other charitable activities. The failure to make that minimum distribution by the end of the following fiscal year subjects a foundation to a 30% excise tax on any undistributed amount 26 U.S. Code § 4942(a), and if the amounts continue to remain unpaid at the close of the next taxable period, the excise tax increases to 100% of any undistributed amount 26 U.S. Code § 4942(b).

The minimum distribution keeps the trustees from trying to use the foundation to hold their investments in a low-tax environment, but also makes the establishment of a private foundation not financially feasible for small donations. The starting contribution to establish a private foundation is generally around $5 million.

Consequences of using private foundations for tax avoidance

Chen used his private charitable foundation to avoid roughly $60,000 in taxes and is now facing hefty penalties and criminal charges. Felony tax evasion is punishable by up to five years in prison and/or up to $250,000 in fines ($500,000 in the case of corporations), as well as possible civil tax fraud penalties.

San Francisco tax lawyers

Those utilizing Chen’s methods may be subject to severe penalties and should obtain immediate legal assistance from an experienced tax attorney. For over 30 years, the Moskowitz, LLP tax team has worked diligently to achieve exceptional outcomes for the firm’s clients and our lawyers have successfully defended tax litigation cases throughout the United States.

Airbnb Taxation

In only 10 years, Airbnb has developed into a $31 billion industry with offices worldwide. To date, more than 100 million guests have shunned expensive hotels during their travels and instead choose the online booking service to rent other people’s homes, apartments and spare rooms.

Although there have been some reported thefts, property destruction and sexual assaults by hosts and guests (as well as discrimination claims, numerous lawsuits with cities and management companies, and some hefty fines in some cities for violating local short-term rental laws), the company is continuing to gain popularity and is making home-renting a mainstream activity. There are an estimated 640,000 hosts currently earning extra cash through this service, with roughly 2.3 million current listings.

Airbnb rental income is taxable

Airbnb receipts are taxable much like all other rental property income. U.S. taxpayers must report and pay taxes on their Airbnb rents, which includes not only rental payments, but also cancellation fees, utilities, meals and cleaning services paid for by guests.

Note that income received for renting out your personal residence for less than 15 days during the tax year is not considered taxable rental income.

Allowable deductions

Airbnb hosts are permitted to deduct many expenses connected with their rentals. Following are some of the permitted deductions:

  • Airbnb service fees
  • Other advertising fees and fees paid to collect rent
  • Guest refunds made following a cancellation or reservation change
  • "Airbnb Open" convention fees
  • Other educational programs and conferences on property management
  • Property management fees (legal, real estate, and accounting)
  • Homeowner’s association fees
  • Property maintenance and repairs
  • Property taxes and insurance
  • Rents paid by tenant hosts to property owners
  • Mortgage interest, and amortization of points paid to acquire the mortgage
  • Utilities (electrical, gas, internet, television, garbage collection, etc.)
  • Cleaning services and supplies
  • "Ordinary and necessary" travel expenses
  • For property owners, depreciation on the basis (purchase price, including fees and costs of acquiring the property) and improvements made to the property

Note that expenses can only be deducted for the period (and space) in which the property has been used for rental purposes – if the property is rented for only part of the year, and/or if only a portion of the property (e.g., just a room) is being rented out, expenses must be prorated by the time and/or square footage of the rental period.

Local occupancy tax

Occupancy tax (also known as hotel tax, lodging tax, room tax, sales tax, or tourist tax), is a state or county tax on the rent of rooms. Where required, it is generally paid for by the guest but the host must deliver the funds to the tax authorities. In some locations, including San Francisco, Airbnb handles the collection and remittance of the tax on behalf of the host.

California county occupancy taxes range from 9.5% to 14% of the listing price, including any cleaning fees for stays of 30 nights or less.

San Francisco full service tax firm

The tax lawyers and accountants at Moskowitz, LLP understand the intricacies of real estate and taxation. For tax preparation assistance, if you are being audited, or if you require other legal tax assistance, call our San Francisco office at (415) 394-7200.