Tax Update Blog: May 2004 Archives

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TREASURY DEFENDS ABILITY TO ENFORCE HEALTH SAVINGS ACCOUNT RULES

May 31, 2004

The Treasury responded last week to a statement implying that the IRS would be unable to police withdrawals from HSAs. Kevin Knopf, Benefits Tax Counsel for the Treasury Department, told a luncheon audience the requirement that HSA withdrawals be spent on medical expenses to qualify for tax-free treatement would be difficult to enforce.

In response, Treasury Assistant Secretary for Tax Policy Greg Jenner issued a statement saying that the HSA rules would be no more an enforcement problem than other tax breaks. Tax Analysts reports:

   Jenner insisted that the IRS is more than capable 
   of regulating the accounts. "HSA custodians will
   be required to submit forms to the IRS showing 
   the amount of distributions from the HSA 
   account during the year, and HSA account 
   holders will be required to report the use to 
   which those distributed amounts were put," 
   Jenner said. "As with other deductions taken 
   on their tax returns, individuals will do their best
   to fill out their forms and comply with the tax 
   laws, maintaining adequate records to enable 
   them to substantiate the claimed tax benefits." 

No links are available to the Jenner statement or the Tax Analysts article.

UPDATE: MORE THOUGHTS ON HSA ENFORCEMENT
The reporting requirements will probably be similar to those shown on Form 8853. This form computes the tax-free distributions from MSAs, which are treated much like HSA distributions. As you can see from line 9 of the form, they don't ask for a lot of detail.

Will enforcement be a big problem? It may not, as a practical matter. The requirement for the use of high-deductible plans will cause most MSA holders to have a lot of qualifying medical expenses. Most HSA users will probably try to accumulate funds in the HSA to take advantage of their tax-free income buildup. While they accumulate HSA funds, they are likely to also accumulate qualifying expenses, which apparently will be available to allow tax free distributions in years after they are incurred.

The real enforcement challenge will be those who use HSAs to have their cake and eat it too. Such taxpayers will use their MSA as a pain-free deduction by putting the cash in and taking it out without regard to their actual medical costs. In the long run this is poor planning because it wastes the tax-free accumulation feature of HSAs. Of course, if every taxpayer took a long-run view of things, there would be a lot less work for the Tax Court.

Plain old fraudulent HSAs might also be a problem. Some taxpayers may claim HSA deductions without a qualifying high-deductible health plan. A W-2 disclosure of whether or not the employee has a qualifying plan would go far to limit this ploy, but it wouldn't eliminate it.

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HEALTH SAVINGS ACCOUNTS: RIPE FOR ABUSE?

May 27, 2004

One aspect of the new Health Savings Accounts has puzzled those of us who have had to turn in our medical receipts for cafeteria plan reimbursements: nobody is monitoring HSA withdrawals to ensure they are used for medical costs.

In a nutshell, amounts contributed to Health Savings Accounts are deductible, but withdrawals used for medical expenses are tax-free. The HSA rules provide no mechanism to ensure that HSA withdrawals are used for medical expenses. Only an IRS examination will identify withdrawals not used for medical expenses.

Kevin Knopf, Treasury benefits tax counsel, seems to think the HSA rules may rely excessively on the good faith of taxpayers. According to Tax Analysts, Mr. Knopt told a luncheon that he questions whether the IRS has the resources to prevent abuse of HSAs:

   Knopf would not say whether HSAs would
   become a major target for audits. “It’s up to 
   your discretion as professionals whether you
   think the IRS has the resources to go after
   thousands and thousands of individuals to
   ensure that they are using this money 
   solely for medical expenses,” he told the 
   audience.

More on HSAs here.

UPDATE: BenefitsBlog has more.

UPDATE II: Greg Jenner, Treasury tax policy chief, responds.

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FUN AT THE COUNCIL ON STATE TAXATION

May 26, 2004

From today's electronic edition of Tax Notes:

   Business and government representatives 
   couldn't agree on a definition of "bundling" 
   at the Streamlined Sales Tax Project 
   meeting on May 25 in Tampa, Fla.; however,
   the Council On State Taxation (COST) has 
   scheduled a teleconference to hash out 
   differences on the industry side. 

Why would the Council On State Taxation would be talking about this?

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IT RAINED

May 25, 2004

In some parts of Des Moines, like Riverside Drive, travel is a bit awkward today.

No concert tonight at Des Moines' Simon Estes Amphitheater.

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SALES TAX: THE ROAD TO SIMPLIFICATION?

May 25, 2004

Some folks believe a national sales tax would bring great simplification to our tax lives. This policy letter to the Iowa Grocers Association might give them pause:

   May 10, 2004  
   Iowa Grocer’s Association  

   Your e-mail to Wayne Cooper regarding the 
   taxability of certain food products has been 
   forwarded to me for reply.  Based on your 
   e-mail, you wish to know the following:  

   1.  Is tea and flavored tea subject to Iowa 
   sales/use tax?  

   Tea is a beverage that is not subject to 
   Iowa sales tax.  However, if the tea is 
   flavored with fruit juice and it contains less 
   than 15% fruit juice, then it is subject to 
   tax.  If it contains 15% or more fruit juice, 
   then the tea would be exempt from Iowa 
   tax.  

   2.  Is Bertolli Vodka Sauce that is a pasta 
   sauce and lists vodka as the fifth ingredient 
   on the label subject to Iowa sales or use 
   tax?  

   Yes it is.  All foods with alcohol content are 
   prohibited from being purchased with 
   federal food stamps.  Consequently, any 
   food that contains alcohol, regardless of the 
   percentage of content, is subject to Iowa 
   sales or use tax.   

   3.  Are dairy drinks that have less than 15% 
   juice (such as smoothie type drinks) subject 
   to Iowa sales or use tax?  

   Pursuant to department rule 701 IAC 20.1(3),
   nontaxable beverages consist of tea, coffee, 
   beverages that contain primary dairy 
   products, or dairy ingredient bases, and 
   beverages that contain natural fruit or 
   vegetable juice of 15 percent or more by 
   volume.  However, these and similar 
   beverages are taxable if sold as prepared 
   food and drink under subrule 701 IAC 20.5(2).  
   Normally, a dairy based drink is exempt.  
   However, by adding fruit juice, this makes it 
   taxable since it cannot meet the 15% fruit 
   juice requirement.  

   4.  Is Starbucks bottled coffee considered 
   to be nontaxable as coffee?  

   Yes.  As stated in 701 IAC 20.1(3) and set 
   forth in the answer to question three, coffee 
   is a nontaxable beverage in Iowa.  

   5.  Is Aloe Vera Juice that is for human 
   consumption and is 99.8% aloe vera subject
   to Iowa sales or use tax?  

   In other policy letters, aloe vera products 
   such as pills and gels were stated to be 
   taxable as health aids.  However, what is 
   at issue here is a juice from the aloe vera 
   plant.   The aloe vera plant is considered to 
   be a vegetable plant.  Consequently, since 
   the content of this product is over the 15% 
   juice requirement for exemption, this product 
   is exempt from Iowa sales or use tax.  

   I hope this information is of assistance to 
   you.  Please be advised that this letter is 
   an informal opinion and does not bind the 
   Department in any future action.  If you 
   have any additional questions regarding 
   this matter, please do not hesitate to 
   contact me. 

   Sincerely,  
   Jerri M.K. DeVries  
   Policy Section  
 

The best part is the last paragraph, where the Department says that it can change its mind at any time. This, of course, isn't news to anybody who has dealt with sales tax examiners.

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FARMERS AND ULTRA LONG-TERM CAPITAL GAINS

May 25, 2004

Iowa has a tax reward for some of its most resilient taxpayers. These hardy souls are excused from Iowa income tax on gains from real property held for ten years and used in a trade or business in which they "materially participated" for ten years. This fits many farmers.

The Iowa Department of Revenue this week issued a policy letter on how this affects the spouse of a deceased farmer. It turns out that eligibility for this exclusion is very fact-specific, and some of the results seem almost whimsical.

The letter addressed how the title of farmland affects eligibility for the capital gain deduction when the farmer met the material participation and holding-period requirements before death and the property is sold five years later by the surviving spouse. A spouse is considered to materially participate for all years in which the other spouse materially participated, so only holding periods are at issue in the examples.

TENANCY-IN-COMMON. The surviving spouse is treated as acquiring the decedant's tenancy interest at death. The survivor is treated as meeting the holding period requirement only for "her" half of the tenancy-in-common that she held before her husbands death. Her sale of the farmland previously held as tenant-in-common is therefore only eligible for the capital gain deduction for "her" share of the tenancy in common held before the husband's death.

JOINT TENANCY. This is a different matter. The Department says:

   "If the ownership was joint tenancy, both 
   the husband and wife are deemed to own 
   100% of the farmland.  In this case, the 
   surviving spouse would have been entitled 
   to take the capital gain deduction on the 
   entire farmland, since she would have met 
   the 10 year ownership requirement.." 

So: joint tenancy, good; tenancy-in-common, bad.

BYPASS TRUST. What if the husband's interest in the land goes to a "by-pass trust" under the terms of the will? Bad:

   "The Department considers any transfer of 
   real property as an event which starts the
   ten year holding period and ten year 
   material participation period for the new 
   owner.  Therefore, if the farmland was sold
   five years after the husband’s death, any 
   capital gain reported by the trust, even if 
   the proceeds were distributed to the 
   surviving spouse, would not qualify for the 
   capital gain deduction since the ten year 
   ownership period and ten year material 
   participation period was not met by the 
   trust." 

LIKE-KIND EXCHANGE DOESN'T HELP. The policy letter goes on to say that if the spouse did a like-kind exchange of other long-held property to the trust to acquire the spouse's interest, it still wouldn't qualify. While for federal tax purposes the holding period of land given up in the exchange would "tack" to that of the land acquired from the trust, it would not do so for the Iowa capital gain deduction. The ten-year holding period for the deduction would instead start at the exchange date.

LESSONS:

Iowa farmers should take this policy letter into account in their estate planning. While the basis step-up at death to fair market value often makes capital gain go away, it doesn't always. A farmer whose fields lie in the path of suburban growth can see a lot of appreciation in five years.

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MEANWHILE BACK ON EARTH...

May 24, 2004

The IRS still takes time out from defending the Ozone layer to deal with more down-to-earth issues. For example, Barry's Bar and Grill in Lincoln. Michael Dane Webb, proprietor of Barry's, last week received five months imprisonment and five more months of home detention for failing to remit $120,000 in taxes witheld from employees.

Failing to remit federal employment taxes and withholdings is perhaps the worst financial move a business can make. The IRS has absolutely no sense of humor when it comes to unpaid withholdings. Even if the business goes bankrupt, the liability for the taxes remains with all "responsible persons," so the tax never goes away. And the IRS collection personnel make sure it doesn't.

As Mr. Webb's case shows, the IRS doesn't necessarily stop its efforts at collection. Jail time may also be in the cards.

You can learn more about the case from the Department of Justice press release.

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IRS: OZONE POLICE

May 24, 2004

One little-noted aspect of the IRS is its role as defender of the ozone layer. As part of legislation to control the use of ozone-depleting chemicals, Congress enacted an excise tax on the refrigerant Freon. Thus was the IRS thrust into the front line of protecting our skin from ultraviolet incineration.

They apparently don't mess around. Last week a federal judge in Florida sentenced a Mr. Marc Harris to 17 years in prison for evading the Freon excise tax to the tune of $6.2 million. He was also fined $20,324,560 and ordered to pay restitution of $6,588,949.50 (presumably they will be willing to make change).

   "For decades IRS special agents have 
   aggressively investigated all forms of 
   excise tax evasion whether the tax is 
   imposed on fuel, tires or ozone-depleting 
   chemicals," said Nancy Jardini, Chief, IRS 
   Criminal Investigation. "Individuals who
   illegally sell ozone-depleting refrigerant 
   chemicals such as Freon to evade the 
   excise taxes, not only defraud the 
   government, but they also threaten our
   environment." 

So next time you forget your sunblock, remember that without the IRS the sunburn might have been even worse.

The Department of Justice press release is here.

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NOT DEDUCTIBLE? INFLATE THE AMOUNT - THEN DEDUCT IT TWICE!

May 20, 2004

If you are going to take a deduction you aren't entitled to, you might as well go all out. Lorianne Blake did. She sold Herbalife products on the side. She also used them personally.

According to the Tax Court, she deducted the products she used personally as follows:

1. She deducted them as cost of goods sold.
2. She also deducted them as advertising expenses.
3. Finally, she deducted them at retail value, rather than her cost.

The IRS determined that she took excess deductions over two years of $17,748, and the Tax Court upheld the IRS.

The courts are reluctant to let people deduct stuff they ingest. Still, it seems unfair, if you are selling things that give you radiant good looks, to disallow a deduction when you are a walking advertisement for the product. Is the taxpayer a walking advertisment for Herbalife? You make the call.

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TAGGA BILL TO REQUIRE MORE M-1 DISCLOSURE

May 20, 2004

The Senate yesterday passed the "Tax Administration Good Government Act." The Senate Finance Committee report says the bill was designed "to provide improvements in tax administration and taxpayer safeguards, and for other purposes..."

It's those "other purposes" that you have to watch out for.

One provision in the bill would require the IRS to expand Schedule M-1, the part of the corporate return that reconciles financial statement income to tax return income. The IRS has already proposed an expanded schedule M-1 to smoke out how taxpayers turn large book income into small taxable income.

To be honest, we sort of like the old format:

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THE POWER OF RADIO?

May 19, 2004

The Iowa Department of Revenue this week released a declaratory order holding that a Roto-Rooter franchisee is in the business of "plumbing." Since plumbing is a taxable service, this means the franchisee is subject to sales tax.

What tipped them off? This footnote to the ruling provides one clue:

   "The Director notes that area radio 
   commercials do promote Roto-Rooter 
   franchisees as being 'your neighborhood 
   plumber.'"

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ETI REPEAL DETAILS

May 19, 2004

The Senate recently passed its bill to repeal the "Extraterritorial Income Exclusion (ETI). Any "must pass" tax legislation attracts unrelated tax provisions like a new tie attracts spaghetti sauce.

Some of the marinara spots will affect a large number of taxpayers.

SUV SECTION 179 LIMITATION. The bill would limit Sec. 179 depreciation for sport-utility vehicles to $25,000. Under current law, SUVs used for business can qualify for a deduction of up to $100,000. The Sec. 179 limitation for regular autos, by contrast, is $10,610.

CAR DONATIONS. The bill would limit charitable deductions for cars donated to charity. A General Accounting Office report said that deductions for donated vehicles often are far greater than the amount received when the charity sells the donated car. The Senate bill would limit the deduction to the charity's sales price for the donated vehicle.

EXTENDED NOL CARRYBACK PERIOD. The 2001 tax bill termporarily allowed taxpayers to carry back net operating losses back against taxable income for the five years before the loss year. The carryback period reverted back to two years starting in 2003. The Senate bill would allow taxpayers to carry 2003 losses back five years - but only if the taxpayers forego bonus depreciation.

There are many other provisions in the bill. Some will affect many taxpayers, but are highly technical (we love these), and potentially stupifying for normal folks. These include:

-A provision to enable corporations to increase their minimum tax credit in lieu of bonus depreciation.

-The Work Opportunity Tax Credit and Welfare-to-Work credits, which expired at the end of 2003, would be revived retroactively.

Some provisions are more narrowly focused. For example:

-Enhanced capital gain eligibility for "Equestrian Trade or Business Property."

-"Oldmobile Involuntary Conversion" provision would allow Oldsmobile dealers who receive payments from GM as a result of the discontinuance of the Olds nameplate to roll the payments into other auto dealership property tax-free.

We will highlight more provisions from the bill in future posts.

Will these provisions pass? The House of Representatives is still working on their version of the bill, but they still seem to have a long way to go. The Senate may have focused the House taxwriters attention with their bill, but the shape of their bill is still very unclear.

More information on the bills:

Text of Final Senate Bill (S. 1637)

Senate Finance Committee summary of amendments included in the final bill (pdf format).

Version passed by Senate Finance Committee. (pdf format)

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IRS ANNOUNCES JUNE 2004 AFRS

May 19, 2004

The IRS has issued (Rev. Rul. 2004-54) the minimum interest rates for loans made in June 2004:

Short Term (demand loans and loans with terms of 1-3 years): 1.98%
Mid-Term (loans from 3-9 years): 3.89%
Long-Term (over 9 years): 5.20%

Historical AFRs are available here and via the “Links” page at www.rothcpa.com.

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LAW FIRM TURNS OVER LIST OF SHELTER INVESTORS

May 19, 2004

Tax Analysts reports that the law firm of Jenkins & Gilchrist this week turned over to a federal judge in Chicago a list of participants in tax shelters they helped promote. The report says the firm issued as many as 1,100 tax shelter opinions.

The firm provided the list after losing a long court battle.

IRS Commissioner Mark Everson indulged in the IRS equivalent of an end zone dance. From the Tax Analysts article:

   "This is yet another in a string of victories 
   in the tax shelter battle," said IRS 
   Commissioner Mark W. Everson. "The 
   courts are rapidly dismantling the baseless 
   claim of privilege invoked by attorneys and
   accountants attempting to hide abusive 
   transactions from IRS scrutiny. The
   government is winning. The message to tax
   payers who invested in these schemes is
   clear: We are going to find you." 

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ETI REPEAL ATTACKS VIRGIN ISLANDS TAX SCHEMES

May 13, 2004

One provision in the Senate-passed ETI bill attacks tax-motivated "moves" to the Virgin Islands. Promoters have touted arrangements that promise greatly-reduced taxes though establishing residency, defined very loosely, in the Virgin Islands.

The new bill would require Virgin Islands residents to file a U.S. return on U.S. income, with penalties of up to $5,000 for failure to comply. It also would establish federal standards for determining who is a Virgin Islands resident.

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SENATE PASSES ETI REPEAL; LOTS OF OTHER STUFF INCLUDED

May 13, 2004

The Senate this week finally passed a bill to repeal the "Extraterritorial Income Exclusion," or ETI -- the tax provision that has caused the World Trade Organization to impose punitive sanctions on U.S. exports. The House of Representatives has yet to act on the ETI repeal, but the Senate action may nudge the House along.

Of course, simply repealing a tax break is not the Senate way. As few tax bills pass, Congressfolk like to load their favored tax provisions on those that do look like they will make it to the Presidents desk. This may be the only tax bill to go through this election year, so there's a lot of stuff.

The main provision of the bill is a deduction for domestic production activities. This provision would permit domestic manufacturers and farmers to exclude up to 9% of their production income. This deduction would be available to C corporations, "pass-throughs" (partnerships and S corporations), and individuals. The deduction would be phased in over a period of years, starting this year.

The bill has many other provisions, including restrictions on car donation deductions, changes to partnership rules, tax shelter restrictions, and others that we haven't figured out yet. We will highlight selected items as we figure them out.

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MRS. KERRY TO RELEASE FIRST TWO PAGES OF HER 1040

May 12, 2004

The prolific TaxProf Blog notes that Teresa Heinz Kerry, wife of presidential candidate Senator John Kerry, plans to release the first two pages of her tax return. The TaxProf says this partial release won't satisfy many who are pushing for full disclosure.

While it will be fun to see Mrs. Kerry's separate return, the first two pages won't satisfy an important* question on her husband's 2003 1040: did he report the correct amount of income from the sale of an interest in a painting?

If a recent Boston Globe story is correct, Mrs. Kerry was "reimbursed" her purchase price for her 1/2 interest in the painting, half of which she in turn gave to Senator Kerry. Their basis in their interests in the painting should have been reduced by any such "reimbursements," but the Senator's return reported the gain without any basis reduction. If there is no basis reduction reflected on Mrs. Kerry's Schedule D, something is wrong. If only the first two pages of the return are released, we won't be able to tell whether she made a basis reduction.

The question may remain open for awhile; Mrs. Kerry has extended her return, and she may re-extend until October.

*"Important" in terms of whether the tax returns are correct. The political and cosmic significance of any errors in the return are beyond our ken.

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PRINCIPAL SELLS MORTGAGE UNIT

May 12, 2004

Big Iowa news:

Des Moines-based insurer Principal Financial Group announced today that it is selling it's mortgage unit to Citigroup:

Citigroup To Pay $1.26B For Principal Financial's Mortgage Unit

The Principal press release is here.

No word on how Iowa employees will be affected.

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ACCESS AIR EXECUTIVE ON THE HOOK FOR $1.3 MILLION IN UNPAID TAX

May 07, 2004

The IRS is about the worst creditor to have when "trust fund" taxes are involved. The US Southern District Court of Iowa reminds us of that lesson with an order holding a former executive of defunct Access Air liable for unpaid airline ticket excise taxes of up to $1,300,552.09.

There is a federal tax on each ariline ticket sold. Airlines are required to collect and remit these taxes. Like payroll taxes, they are held "in trust" for the government. Also like payroll taxes, any person "responsible" for remitting the taxes can be penalized for 100% of the unremitted tax amount if the underpayment was "willful."

Des Moines-based Access Air failed to remit the ticket taxes for the second, third and fourth quarters of 1999, when the airline was in its death throes; it ceased operations in the fourth quarter of 1999.

The district court granted an IRS motion for summary judgement that Richard Musal, who served at different times as President and Chief Financial Officer of the airline, was a "responsible person who acted willfully" in failing to remit the taxes. The court denied another summary judgement motion against a former controller of the airline; this means more evidence is required to determine whether the controller will also be subject to the "100% penalty" for the unremitted taxes.

A pdf file of the court order is here.

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DOWNLOADABLE TAX STATS

May 07, 2004

The Tax Prof blog notes that an IRS web page allows you to download income tax statistics in Excel files, sorted by zipcode. The files include AGI, tax liability, and other good stuff. Hours of nerdy fun!

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2004 TAX TO-DO LIST

May 07, 2004

Another tax season has come and gone; only the extensions linger. Extensions, and the void in the pocketbook caused by missed tax planning opportunities in 2003.

Now we have 7 months and change to get things right in 2004. Some ideas:

-HEALTH SAVINGS ACCOUNTS. This IRA-like vehicle gives qualifying taxpayers an opportunity to put away up to $5,000 annually for retirement or medical expenses tax-free, without regard to participation by other employees. Amounts used for medical expenses come out tax free; otherwise their tax treatment is similar to IRAs. The HSA gives employers another vehicle to address health insurance costs. They require that your health insurance be obtained under a "high-deductible" plan.

More on HSAs:

IRS ISSUES Q&A DISCUSSION OF HEALTH SAVINGS ACCOUNTS
HAMMERING HENRY ON HSAs
HSA INSIDER.COM

-LIGHTEN UP ON MUNIS. Reduce taxes by lightening up on tax-exempt bonds? How can that be? Remember, the goal is to fill up the old cigar box with cash, not to have the lowest number at the bottom of the tax return. For taxpayers in high-tax states, like Iowa, municipal bonds can make an alternative minimum tax problem worse; they are usually taxable on your state return, increasing state taxes, which are non-deductible for AMT. As a result, the after-tax yield on the bonds may be less than you think it is. Only after tax dollars make it to the cigar box.

Note: the "cigar box concept" of financial analysis is attributable to Mr. David Widener, also known as "The Sage of Bettendorf."

-PLAN YOUR CAPITAL EQUIPMENT PURCHASES. The "Bonus Depreciation" provisions are scheduled to expire at the end of this year. Bonus depreciation lets you recover up to 60% of the cost of new five-year property (like computers) in the year of purchase. You will only be able to recover 20% of the cost for property placed in service in 2005, absent a change in the tax law. If you are going to be making a capital expenditure anyway, you are better off doing it this year than next year.

Note: The $100,000 section 179 expensing limit expires at the end of 2005.

-MONITOR YOUR CAPITAL GAINS AND LOSSES. For many of us, capital gain taxes are largely optional. Some of us have investments in our portfolio that are actually worth less than what we paif for them. If we sell an investment at a gain, these loser investments can be sold to provide an offsetting loss. Capital losses can also offset up to $3,000 of ordinary income. Watch out for the "wash sale" rules, though - these will disallow losses if the same stock is purchased within 30 days before or after the day the loss shares are sold.

-MONITOR YOUR BUSINESS INCOME AND ACT ACCORDINGLY. Many businesses are now run as "pass-through" entities, such as S corporations, where business income is taxed on the owners returns. Other taxpayers have sole proprietorships or rental properties that are reported on their 1040s. If you are having a good year, now is the time to begin budgeting tax payments and putting tax-reduction moves in place. If you're having a bad year, it is time to make sure you make lemonade out of your lemon results by planning how to make the best use of your tax losses.

-PLAN YOUR PROPERTY CONTRIBUTIONS. Many taxpayers start thinking about charitable donations of real estate around December 28 or so. Charitable contributions of real estate, or any other property over $5,000 except marketable securities, can only be deducted after a qualified appraisal is obtained. By arranging the appraisal now you can find out what the deduction will be ahead of time and plan your tax year accordingly.

Appraisals must be made no earlier than 60 days before the contribution, and no later than the due date (with extensions) of the return for the contribution year.

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IRS MAKES 'SON OF BOSS' SETTLMENT OFFER

May 06, 2004

The IRS has made what it says will be its most generous offer to settle the "Son of BOSS" tax shelter cases (Announcement 2004-46). These cases used partnerships to create millions of dollars of tax losses. A version of this shelter became notorious when it was featured on "60 Minutes."

Under the offer, taxpayers will have to concede all tax benefits, except for limited benefits for out of pocket costs. Taxpayers who disclosed their involvement under the disclosure amnesty of Announcement 2002-2 will have no penalties; other taxpayers may qualify to limit their underpayment penalties to 10%. These normally can go as high as 25% (Correction: 40%)

Taxpayers have until June 21 to accept the offer.

The TaxProf Blog has more.

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TAKE A TAX PROTESTER POSITION ON YOUR RETURN: ARE YOU OUT OF YOUR MIND?

May 05, 2004

<<UPDATE 5/4/05: FUTUREMAN PLEADS GUILTY TO TAX EVASION>>

(Original Post of 5/5/2004 below.)

If you live in a state under the jurisdiction of the Sixth Circuit Court of Appeals, the legal answer may be "yes."

The court last week affirmed a lower court ruling that master percussionist Roy Wooten - known professionally as "Future Man" - is incompetent to assist in his own defense on tax evasion charges. A district court had ruled that Mr. Wooten "...be committed to the custody of the Attorney General of the United States for further evaluation and treatment." The committment order had been stayed pending the Sixth Circuit decision.

TAX PROTESTING = "PERSECUTORY DELUSIONAL DISORDER"?

The district court questioned Mr. Wooten's ability to assist in his own trial based on his arguments in pre-trial proceedings, as explained by the Circuit Court:

   After his indictment on charges related to tax
   evasion, Wooten was released on an
   unsecured bond. He subsequently appeared
   before the district court when ordered to do
   so, but his participation in the district court
   proceedings was defined by his insistence
   on responding to virtually every question
   with arcane, pseudo-legal jargon commonly
   associated with tax protestor literature. He
   also repeatedly proclaimed his beliefs that
   the federal government is bankrupt, the
   Department of the Navy runs the country
   under Admiralty Law and the Uniform
   Commercial Code, the Internal Revenue
   Service is really a foreign debt collector
   based in Puerto Rico and that Wooten, who
   lives in Nashville, is not actually a resident
   of the United States. Wooten also filed
   volumes of pleadings, many signed only
   with his thumb print, that the district court
   found virtually indecipherable. Faced with
   these abnormalities, the district court, 
   fearing that Wooten might not be competent
   to assist in his own defense, ordered a
   competency evaluation. 

These arguments are familiar to anyone who has wandered into the alternate reality of tax protester websites and usenet discussions. For example, the use of gold fringe around courtroom flags is cited in these places as proof that admiralty law is in effect.

CRAZY, OR JUST FOOLISH?

It is disturbing to see a legal argument, however foolish and bizarre, be considered a psychological disorder meriting committment and treatment; it smacks of Soviet psychiatry. We can only hope Mr. Wooten abandons his sad illusions about the nature of the tax law and avoids an enforced interruption in his career. He was in Des Moines as recently as last July, and we can say from personal observation that he is an amazing musician.

A Des Moines Register review of a 2002 concert by Mr. Wooten's band, the Flecktones, is here.

Future Man. Click on photo to see Flecktones website.

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SIC TRANSIT GLORIA 7TH AND MULBERRY RAMP

May 04, 2004

May 4, 2004

April 21
April 19
April 13

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THE PERILS OF STUDYING TOO HARD

May 03, 2004

"Overstudying" was a seldom-observed peril in our college career. Clearly there is a point of diminishing returns when studying for a test. For example, it may be better to go to bed and get a good night's sleep than to stay up studying. Fortunately, our college acquaintances were mindful of the dangers of overstudying and never approached that frightening condition.

Richard Simkanin is evidence that "overstudying" is not just a theoretical possibility or urban legend. The Dallas-Fort Worth Star Telegram reports:

   Simkanin, 59, told U.S. District Judge John
   McBryde that after spending thousands of
   hours studying federal tax laws, the
   Constitution and the Declaration of
   Independence, he concluded that he did
   not agree with the tax laws.

Mr. Simkanin without doubt reached the point of diminished returns. He could have gotten the same result thousands of study hours sooner:

   But McBryde had heard enough. Going
   above federal sentencing guidelines,
   McBryde sentenced Simkanin to seven
   years in prison and ordered him to pay
   $302,000 in restitution to the government.
   Sentencing guidelines call for a sentence
   of 41 months to 51 months.

Mr. Simkanin, you may recall, was among a group of folks who purchased a full-page ad in USA Today denouncing the tax laws and proclaiming that they were no longer following them.

Mr. Simkanin now has a lot of time to pursue his studies, but it looks like he has a ways to go, based on what he told the judge.

VISIONS OF WALDEN POND

Mr. Simkanin's attorney tried gamely for a lighter sentence:

   "He has a sincere, well-thought-out position
   that is at odds with the government
   position," McColl said. "Reasonable
   people disagree about the tax laws. My 
   client is an American citizen who, like
   Thoreau, walked to the beat of a different
   drummer."

That drummer did tap an odd beat:

   The judge recalled that Simkanin threatened
   to kill federal judges and that he surrendered
   his Texas driver's license but continued to
   drive with a homemade identification card...

   While under investigation, Simkanin posted
   a warning on his Web site that spoke of the
   "fury of a fire" that would consume his
   adversaries. He wrote to the treasury
   secretary that he had repatriated himself
   from the United States to the "Republic of
   Texas."

No word on whether he will apply for a pardon to President Sam Houston.

Prior coverage here.

Department of Justice press release (pdf format)

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MAY CARNIVAL

May 03, 2004

The "Brain Brew Blog" hosts this week's "Carnival of the Capitalists." The Carnival is a weekly roundup of weblog economics and business commentary. Topics this week include, among others, cotton subsidies and the demise of the Oldsmobile nameplate. Well worth a visit.

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