Tax Update Blog: September 2004 Archives
« Previous · Tax Update Blog Home · Next »
ETI REPEAL CONFERENCE SHOWS PROGRESS
September 30, 2004
Evidence emerged yesterday that tax negotiators are serious about reaching a compromise on legislation to repeal the Extraterritorial Income Exclusion (ETI) before they adjourn for their re-election campaigns. The evidence is in the form of a "discussion draft" of compromise language for the bill released by House Ways and Means Chairman Bill Thomas. The draft language resolves a contentious point by embracing the Senate's approach to replacing the ETI exclusion with a manufacturing tax break.
The original House bill would have reduced tax rates for C corporations. The compromise approach allows a deduction that eventually reaches 9% for income from "production" activities. Production activities under the bill include manufacturing, farming, and architectural and engineering services. The compromise deduction is available for all qualifying taxpayers, not just for C corporations.
The biggest threat to the bill is an attempt to use it as a vehicle to extend FDA regulation to tobacco.
Link to New York Times coverage of bill.
Prior Tax Update coverage of ETI repeal:
WAYS AND MEANS APPROVES ETI REPEAL; QUICK HOUSE PASSAGE EXPECTED
JUST WHEN THE PARTY IS GETTING GOOD...
SENATE PASSES ETI REPEAL; LOTS OF OTHER STUFF INCLUDED
Link Bookmark: del.icio.us • Digg • reddit
SECOND OLDEST PROFESSION DROPS PLANS TO SUPPORT OLDEST
September 29, 2004
Australia's Tax Office Drops Plans To Sponsor Sex Industry's Award Night
(from the TaxProf)
Link Bookmark: del.icio.us • Digg • reddit
A LOVELY DAY AT MORDOR
September 29, 2004
The Hoover State Office Building, home of the Iowa Department of Revenue
Link Bookmark: del.icio.us • Digg • reddit
SEEING RED: THE DISTRIBUTION OF THE FEDERAL BOON
September 28, 2004
The smart kids have been looking at a new Tax Foundation report that lists how states come out on tax receipts relative to the amount of taxes they pay. The results are summarized in the map below. States where the federal governmnent spends more than it collects in taxes are "red" states.
The smart kids note that this map looks a lot like the 2000 electoral map.
Does this mean that the "red" states are a bunch of hypocrites who talk a good small government game while gorging at the federal trough? Or does it explain the Bush Administration's "big government conservatism?"
The explanation may be simpler: 1787 and all that. When hashing out the Constitution, the small states were worried that they would be kicked around by the big states (at the time, this meant Virginia and New York) if seats in Congress were distributed only by population. They cut a deal - a two house Congress. The House of Representatives would have seats determined by population (but no less than one seat for each state) and the Senate would have two members from each state, regardless of population.
This means small states are disproportionately well-represented. Their representatives go to Washington and do what comes naturally. In academic terms, they engage in rent-seeking. In more common terms, they "bring home the bacon." Or loot and pillage.
So, if you have a problem with this system, take it up with Roger Sherman.
(UPDATE/CORRECTION The original "top" map we posted was the same as the electoral map. We thought the correlation looked too close. The top map now reflects the actual 2002 numbers for the Tax Foundation study, made using this handy map-drawing utility. Any errors on the top map are ours, not the Tax Foundation's.)
Link Bookmark: del.icio.us • Digg • reddit
DES MOINES REGISTER HIGHLIGHTS IOWA DEPRECIATION QUAGMIRE
September 24, 2004
The Des Moines Register today has a well-written piece about the Iowa depreciation problems resulting from the recent special session of the legislature.
We continue to believe that the Department of Revenue has the authority to treat the depreciation change as an accounting method change, easing the compliance burden highlighted in the article.
Link Bookmark: del.icio.us • Digg • reddit
SHE'S NOT SO... MARRIED, YET
September 23, 2004
Worried about Britney Spears' filing status? The Tax Prof is all over it!
Link Bookmark: del.icio.us • Digg • reddit
NY TIMES REPORTS HSA GROWTH
September 22, 2004
Health Savings Accounts paired with high-deductible health plans are becoming increasingly popular with small businesses, according to a story in The New York Times.
The BenefitsBlog has a good summary of the story. For the story itself, go here.
For background on HSAs:
THE NEW HEALTH SAVINGS ACCOUNTS: HOW THEY WORK
Link Bookmark: del.icio.us • Digg • reddit
TODAY'S BLOW TO OUR SELF-ESTEEM
September 21, 2004
Tax Analysts is not normally much of a guide to pop culture. Today, though, they reviewed the movie "Intimate Strangers." The film is about a beautiful woman who accidentally wanders into a tax lawyer's office, thinking it is her therapist. She pours out her problems to him, even after learning he is a tax lawyer - perhaps because he has turned off the time clock and isn't charging her.
From the review:
Well, speaking as a former accountant and a former tax lawyer, and more recently a tax law professor, I really loved this movie. OK, I wouldn't want to emulate William's personality or his rather dreary law practice, and I know some tax lawyers and accountants who aren't dorks. Yet I admired William's ability to serve as a loyal friend, confidant, and adviser to a beautiful and troubled woman. This film isn't Revenge of the Nerds (1984) exactly, since William doesn't get revenge against anybody, but he wins some important personal victories as the story spools out. The film is a satisfying tribute to the simple pleasures of dorkdom.
I can see the ad now: "...a satisfying tribute to the simple pleasures of dorkdom!" (Tax Analysts)
At least they use this oldie but goodie: " It's been said that tax lawyers are good with numbers but don't have enough personality to become accountants."
Oddly, the review never mentioned our personal role model, the accountant character played by Rick Moranis in "Ghostbusters." Unfortunately, the review is available only to Tax Analysts subscribers.
The accountant is the one on the right.
Link Bookmark: del.icio.us • Digg • reddit
IRS WAIVES PENALTIES FOR STUDENT LOAN INFORMATION RETURNS
September 20, 2004
The IRS last week waived penalties on lenders for failing to properly report 2004 receipts of capitalized interest or origination fees for qualified student loans (Notice 2004-63). A recipient of such payments qualifies for the waiver if it:
(1) files and furnishes in a timely manner a Form 1098-E (or other appropriate information statement) that (i) includes the amount of interest (except for any loan origination fees or capitalized interest) received in 2004 in box 1, (ii) does not include a check in box 2, and (iii) includes all other required information; and
(2) furnishes a statement to the borrower indicating that the amount of interest reported in box 1 of Form 1098-E for calendar year 2004 does not include payments attributable to either loan origination fees or capitalized interest received on qualified education loans made on or after September 1, 2004, and that the borrower may be able to deduct amounts in addition to the amount reported in box 1.
Link Bookmark: del.icio.us • Digg • reddit
WHAT HATH DAN RATHER WROUGHT?
September 20, 2004
Maybe we will start to see a "60 Minutes defense" in tax cases:
TAXES- Who says that the only sure things are death and taxes? The IRS will be dismantled as millions of taxpayers choose the "FAKE, BUT ACCURATE" tax filing status. Yes, even if you don't have any dependents, you may now claim that you have several AND still get a refund. No harm, no foul, Uncle Sam!
Fake but accurate? Actually, isn't that sort-of how the "Cohan Rule" works? Still, don't try this at home, kids.
(Via Little Green Footballs)
Link Bookmark: del.icio.us • Digg • reddit
WHY? BECAUSE THEY'RE THE CUBS.
September 18, 2004
Is there anything that the Cubs can't screw up?
Link • Comments (2) Bookmark: del.icio.us • Digg • reddit
AFRs FOR FALL (WELL, OCTOBER 2004)
September 17, 2004
The IRS has issued (Rev. Rul. 2004-96) the minimum interest rates for loans made in September 2004:
-Short Term (demand loans and loans with terms of 1-3 years): 2.26%
-Mid-Term (loans from 3-9 years): 3.62%
-Long-Term (over 9 years): 4.84%
Historical AFRs are available via the “Links” page at www.rothcpa.com.
Link • Applicable Federal Rates Bookmark: del.icio.us • Digg • reddit
SAVE BIG MONEY, YOU'LL SAVE BIG MONEY...
September 16, 2004
...when you shop Menards! Surely Tax Court Judge Marvel has that little jingle burned into her brain, like the rest of us. In spite of (because of?) that catchy jingle, she handed the Eau Claire, Wisconsin-based hardware chain a defeat today in Tax Court.
The case had two issues frequently seen in successful closely-held C corporations: "excessive" compensation paid to a shareholder, and a dispute over whether expenses paid by the corporation were "business" expenses or personal expenses of the shareholder.
IS $20 MILLION EXCESSIVE FOR A YEAR'S WORK?
Closely-held C corporations find it tempting to pay large salaries and bonuses to their shareholders, rather than dividends. Why? Compensation is deductible, and dividends are not.
The IRS has for many years challenged "excessive" compensation on the ground that it is really a disguised non-deductible dividend.
John R. Menard owns 89% of Menard, Inc., personally and through various trusts. Menards has never paid a dividend. Mr. Menard often loaned back his compensation to the company. This is a set of classic "bad facts" in excess compensation cases.
The IRS asserted that only $1.3 million was reasonable for the year, while Menards said the whole $20 million was fine.
The Court ended up computing the reasonable compensation based on the compensation of its publicly-traded competitors, Lowe's and Home Depot, adjusted for Menard's higher return on equity. The Tax Court used a little algebra to come out with reasonable compensation of precisely $7,066,912:
16.1 (HD ROR) = 18.8 (M ROR) $2,841,307 (HD Comp) $ (M Comp)
M Comp = $3,317,799 x 2.13 = $7,066,912
Where M = Menards
HD = Home Depot and
the compensation of Lowe's CEO was 2.13 times that of the Home Depot CEO. Easy, huh?
MENARDS RACING TEAM: TOO MUCH FUN
Menards sponsored an Indy Racing League team in 1998. The team itself was owned by another corporation, TMI, which was in turn owned by Mr. Menard. Menards paid about $5.7 million of TMI's expenses. Of this, the Tax Court allowed Menards to deduct 4.4 million, and treated the remaining 1.3 million as a dividend to Mr. Menard.
THE MORAL?
Big, profitable closely helds are usually best-off as S corporations, rather than C corporations. S corporations are only taxed once - as the income is earned - so they don't have to fight excess compensation battles to get earnings to shareholders without a second level of tax.
It's possible Menards was ineligible to be an S corporation for some reason - perhaps having to do with its stock structure or its trust ownership. C corporations can take steps to fend off excess compensation challenges. These could have included the use of outside consultants to help set CEO compensation, the distribution of regular dividends, and avoiding the lending back of compensation to the company.
Still, they did get a nice car out of the deal.
Cite: Menard, Inc., TC Memo 2004-207
Update: The TaxProf Blog is on the story.
Link Bookmark: del.icio.us • Digg • reddit
CAN IOWANS TAKE ADVANTAGE OF 2003 BONUS DEPRECIATION WITHOUT AMENDED RETURNS?
September 16, 2004
The Iowa legislature last week decided to allow Iowans to use "Bonus" depreciation for property placed in service after May 3, 2003, and to use up to $100,000 of "Section 179 depreciation" on Iowa 2003 tax returns. As most of these have already been filed, this would seem to require that Iowans file amended returns to take advantage of this.
There may be another way. We feel the Department of Revenue has the authority to treat these changes as "accounting method" changes. In a letter we drafted and sent to to the Department today, we outline why the Department has this authority.
If the Department views the depreciation change as a change of accounting method, taxpayers may be able to make up their 2003 depreciation in 2004. This would save them the time and expense of filing amended returns to use the additional 2003 depreciation and Section 179 deduction. This would be especially helpful to small taxpayers, and to partnerships and S corporations whose depreciation is split among many owners.
Stay tuned.
Click "Read more" to see the letter.
Link Bookmark: del.icio.us • Digg • reddit
TAX PREP - TREASURY REPORT SAYS YOU GET WHAT YOU PAY FOR
September 16, 2004
Free tax preparation for the poor may not be much of a bargain. The Treasury Inspector General for Tax Administration had 35 dummy tax returns prepared at "VITA" sites last tax season. Exactly none of the returns were prepared correctly. But don't worry - VITA only prepared 843,803 returns last season.
In fairness to the VITA (Volunteer Income Tax Assistance) preparers, the returns involved "scenarios designed around income reporting, filing status, exemptions, and the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC)." These provisions can be very tricky, especially when a return is prepared without the aid of a computer. Still, these are typical tax issues for taxpayers that need VITA assistance.
The IRS says it is taking steps to correct these problems. It would be wise to also find ways to provide computers and software to VITA centers - this stuff is almost impossible to get right by hand.
Link to the TIGTA Report 2004-40-154
Link Bookmark: del.icio.us • Digg • reddit
MORE DANGERS OF HANGING OUT WITH THE 'IN' CROWD!
September 14, 2004
The Tax Prof Blog has the news:
Underneath Their Robes has named Tax Court Judges the "In" non-Article III judges (by way of comparison, Immigration Judges were named "Five Minutes Ago" and Bankruptcy Judges were named "Out"). Why? "Tax court judges can be funny. Who knew?"
They all sound like a rough crowd to me. You get to see Immigration judges if you are about to be deported. You get to see bankruptcy judges when you are at the end of your financial rope. Considering the alternatives, maybe the Tax Court would be the "in" crowd. They might subject you to crushing civil penalties, but they'll crack you up while doing so...
Link Bookmark: del.icio.us • Digg • reddit
BONUS DEPRECIATION: JOB KILLER?
September 13, 2004
Blogger Barry L. Ritholtz at "The Big Picture" has a theory that seems counterintuitive. He says "Bonus" depreciation provisions may have actually dampened hiring since they were enacted as an anti-recession measure.
This is counterintuitive because bonus depreciation was intended to jump-start a lagging economy by stimulating capital investment, causing factories to gear up to sell equipment. The Big Picture thinks it may have actually had an unintended side effect:
The problem seems to be that a large percentage of the capital purchases have been made in the software sector: Enterprise-wide applications make companies more efficient, productive and competitive. So efficient in fact that it reduces (or even eliminates) the need for additional hiring.
Our channel checks confirmed that suspicion: CIOs and CTOs, especially at small and medium sized firms, have been aggressively purchasing these enterprise apps over the past 2 years. Firms that design these ERPs market them as "paying for themselves" in a few years specifically, in labor savings. The tax advantage of accelerated depreciation provided management with an incentive to install these apps sooner rather than later.
The Tax Update's old economy mindset has been that when the bonus depreciation expires at the end of the year, equipment vendors might be left with empty order books for the first few months 2005 because purchasers would pre-buy their anticipated needs in 2004, before bonus depreciation expires. This, we figured, would tend to dampen the economy for the first half of 2005.
The Big Picture thinks it may work otherwise:
There is reason to hope that hiring will begin to swing upward in 2005. With the tax incentive to choose equipment over labor removed, there will be one less obstacle in the way away of corporate hiring. And if that were to occur, it would bode well for further economic expansion.
We're accountants, not economists, but we've always thought increased capital investment is good for jobs, long-term. Maybe the expiration of bonus depreciation will indicate whether there is a short term "crowding out" of jobs when there are capital equipment purchase incentives. If so, it calls into question investment incentives like bonus depreciation, the defunct investment credit, and many state investment incentives. It would also be an argument against fine tuning the tax system for non-revenue purposes, as well as an illustration of the unintended consequences of well-intended laws.
On the bright side, the empty order books of equipment suppliers in the first half of 2005 -- which Mr. Ritholtz anticipates -- may not necessarily translate into a slow employment market.
PS: This post is one of many on this week's Carnival of the Capitalists. Check it out.
Link Bookmark: del.icio.us • Digg • reddit
WALL STREET JOURNAL ON HSA 'MOMENTUM'
September 10, 2004
The BenefitsBlog highlights an article in yesterday's Wall Street Journal that says Health Savings Accounts are catching on. The article says
Health savings accounts, billed as the most significant savings vehicle to hit individual investors since the IRA and the 401(k), are starting to take off.
The new approach to paying for health care was created in December's Medicare overhaul. It combines a tax-free account to pay for medical expenses with a high-deductible health plan with low premiums.
Already, tens of thousands of the new accounts have been opened. President Bush in his convention speech last week touted the accounts as a way to help small businesses afford health benefits for their employees.
As people realize that HSAs work like deductible IRAs, but with no high-income phaseout and a medical expense tax-free withdrawal feature, they will continue to increase in popularity.
For prior coverage of HSAs in the Tax Update:
TREASURY PROVIDES COMPREHENSIVE HEALTH SAVINGS ACCOUNT GUIDANCE
THE NEW HEALTH SAVINGS ACCOUNTS: HOW THEY WORK
Link Bookmark: del.icio.us • Digg • reddit
EMILY LITELLA PRINCIPLE FAILS TO SWAY TAX COURT
September 09, 2004
If Tennessee state judges could decree that items were deductible, regardless of what the Internal Revenue Code says, they'd be very popular people. Alas - a Tax Court opinion issued today says such power is beyond their grasp.
The case involves a 1997 divorce decree. The decree provided for annual payments to the ex-wife for about ten years. If she died before the 10-year period ended, identical amounts would be paid for the education of two children.
The ex-husband treated the payments as alimony. Ex-husbands (or ex-wives who pay it) like alimony because they can deduct it. Some also get a subversive thrill from knowing that the recipient has to pay tax on the alimony received.
Unfortunately for ex-husband, the Code provides that a payment qualifies as alimony only if
there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment (in cash or property) as a substitute for such payments after the death of the payee spouse.
In other words, if the payments might continue after she's dead, they aren't deductible. The divorce judge tried to finesse this mere technical problem by putting the following wording in a decree:
Said alimony is taxable to the Defendant and deductible by the Plaintiff...
That takes care of that, right? Well, no. At some point earlier this year, the taxpayer must have realized that he had a problem, and he got another decree from the state court. The judge invoked the principle of "if I repeat it enough, maybe it's true:"
10. It is therefore held by this Honorable Court in regard to the Order of Motion for Appellate Attorney Fees that it was the stated intention of this Court to make said alimony payments, which have been paid in full by stipulation of the parties, taxable income to Barbara Buhr Okerson and tax deductible to John Russell Okerson as alimony.
NEVER MIND...
The state court also ruled that the decree's provision for after-death payments was inoperative because the ex-wife hadn't actually died. This is an example of the legal docrine known as the "Emily Litella" principle (in lay terms, "never mind"):
11. It further appeared to the Court that the paragraph 2 quote above contained a contingency that did not occur and therefore should not be the basis of confusion as to the Court’s intention in this cause.
It seems the ex-wife's wishes weren't given much consideration:
12. It further appeared to the Court that notwithstanding Barbara Buhr Okerson’s opposition to the Court’s decision in this cause that the findings and holdings of this Order are hereby ADJUDGED, ORDERED AND DECREED.
Yet, even though the state judge used capital letters and boldface type AT THE SAME TIME , the Tax Court wasn't swayed:
The complete termination upon the death of the payee spouse of all payments made as alimony or in substitute thereof is an indispensable part of Congress’s scheme for deducting a payment as alimony for Federal income tax purposes, and it is something that may not be overcome simply because the payor may establish an intent that the payments be deductible by the payor spouse as alimony.
The moral? No matter how friendly the divorce judge is, he can't make a botched alimony provision overcome the Code.
Cite: Okerson, 123 TC No. 14
This link will work starting sometime September 10.
Link Bookmark: del.icio.us • Digg • reddit
TAKE A JOURNEY WITH PROFESSOR MAULE
September 09, 2004
Your trip will start at tax issues in the presidential campaign, but you will journey down many byways. Are you tough enough to get Mauled Again?
Link Bookmark: del.icio.us • Digg • reddit
TODAY'S POOR TAX MOVE: EMBEZZLING YOUR OWN REFUND
September 09, 2004
When life gave Joseph Haranda lemons, he tried to make lemonade.
While Mr. Haranda was involuntarily housed in a secure residential facility, his girlfriend "took his pickup truck and all his worldly possessions." Among these possessions was a $4,131 tax refund check.
On release from jail, Mr. Haranda called the police to report that his refund check had been stolen. While the police contacted the girlfriend, Mr. Haranda applied for a replacement refund check. The girlfriend paid over the tax refund proceeds to Mr. Haranda, and her lawyer sent a letter with the check stating that the check was to give him the tax refund proceeds.
So far, so good. Now the replacement check arrives. Mr. Haranda siezes the moment: "...the defendant promptly deposited this check and used the proceeds."
Now things start to go haywire. Mr. Haranda gets a call from an investigator with the Treasury Inspector General's Office. One thing leads to another, and soon Mr. Haranda is trying to convince the jury that the check from his girlfriend was really for the "pickup truck and all his worldly possessions."
The outcome? Sentencing is scheduled for September 23.
The moral: you can have too much tax refund, believe it or not.
Cite: U.S. v. Haranda, No. 03-20063-BC, DC ED-MI, August 26, 2004.
Link Bookmark: del.icio.us • Digg • reddit
IOWA ISSUES NEW DEPRECIATION FORM TO REFLECT SPECIAL SESSION CHANGES
September 08, 2004
An email issued today by the Iowa Department of Revenue:
In a special session held in September 2004, the Iowa legislature passed legislation to couple with the additional 50% first-year depreciation allowance (bonus depreciation) for assets placed in service after May 5, 2003, but before January 1, 2005. In addition, this law also coupled with the increase in Section 179 expensing allowance from $25,000 to $100,000 for tax years beginning on or after January 1, 2003. These provisions were provided in the federal Jobs and Growth Tax Relief Reconciliation Act of 2003.
Previously, the Iowa legislature had decided not to adopt these provisions in Iowa law. For taxpayers who have filed a tax return which reflected either the disallowance of 50% bonus depreciation or the disallowance of the increased Section 179 expensing, amended returns must be filed to reflect this change.
Iowa continues to decouple with the 30% bonus depreciation provision set forth in the federal Job Creation and Worker Assistance Act of 2002. Form IA4562A will still need to be filed for any assets placed in service after September 10, 2001 but before May 6, 2003 to account for the difference in depreciation.
Form 2003 IA4562A has been updated to reflect this change.
2003 Line 14 online Expanded Instructions
Link • Iowa Bonus Depreciation Bookmark: del.icio.us • Digg • reddit
LABOR DAY WEEK CARNIVAL
September 07, 2004
It may be a short work week, but there's still time for a Carnival of the Capitalists. From price fixing to bureaucratic entrepreneurship, it's good reading from start to end at Joe Grossberg's place.
Link Bookmark: del.icio.us • Digg • reddit
LEGISLATURE STIMULATES TAX PREP BUSINESS!
September 07, 2004
As the tax preparation business goes, so goes the state. At least that's the way it looks to us tax preparers. The Iowa General Assembly must think so too, based on the text of the tax provisions of the compromise economic development bill being considered in today's special session.
HOW WE GOT HERE
The tax provisions of the bill stem from Iowa's decision to not conform with the federal "bonus depreciation" tax rules for assets acquired after September 11, 2001. The "bonus" depreciation alloed taxpayers to deduct 30% of the cost of many new equipment purchases in the year of purchase, rather than over the depreciable life of the asset. The remaining cost is depreciated the usual way. Effective May 5, 2003, the federal rules became more generous, increasing the first-year deduction for qualifying property to 50% of its cost. The federal bonus depreciation allowance expires for assets placed in service after December 31, 2004.
To make things yet more complicated, Iowa opted out of another federal provision - the increase in the "Section 179" deduction to $100,000 (from the prior $25,000). Section 179 enables qualifying taxpayers to deduct up to $100,000 per year in equipment or software costs that would otherwise be depreciated and deducted over a period of several years.
These rules require Iowans to maintain separate Iowa depreciation schedules for regular tax and Iowa alternative minimum tax.
WHY THE SPECIAL SESSION?
When Iowa Supreme Court struck down the "Grow Iowa Values Fund" because of Governor Vilsack's attempted line-item veto, many GIVF projects had already been funded or authorized. The special session is the result of compromises between the Governor and the legislature over some of the items that triggered the attemped item vetoes -- including some tax reductions.
WHAT THEY'RE DOING
The bill (HF 2581) does two things of interest to tax folk:
- It adopts federal bonus depreciation rules retroactively for Iowa, but only for property placed in service after May 5, 2003.
- It adopts the federal increase in Section 179 depreciation retroactively to the federal effective date of tax years beginning after December 31, 2002.
- Both of these provisions are adopted retroactively, so taxpayers who have already filed their 2003 returns can now file amended returns to claim the federal amounts.
The result is rather strange.
Because the bill only conforms federal and Iowa depreciation starting May 6, 2003, taxpayers will still have to maintain separate Iowa depreciation records and basis schedules for "bonus" depreciation property placed in service between September 11, 2001 and May 6, 2003.
What's worse, many taxpayers will have to file an extra return to take advantage of the provisions, as they will have to amend their 2003 returns. As partial consolation, Iowa will probably have to pay interest on refunds claimed based on the addtional depreciation.
WHY DID THEY DO IT THIS WAY?
It's hard to guess what the lawmakers were thinking. It would have been simpler to let taxpayers "catch up" to federal accumulated depreciation with a one-time special deduction - perhaps spread over two or three years. This option would have avoided the hassle and expense of filing amended returns, eliminated separate Iowa depreciation records, and eliminated the need for the state to pay interest on refunds. Perhaps the state's revenue estimators decided that such a move would be too "costly."
Or perhaps they decided to throw a little work to the state's tax preparer community this fall. Thanks, guys, for remembering our economic development!
UPDATE! They passed HF 2581 and its companion appropriation bill, SF 2311, and sent them to the Governor. They've gone home now. It's safe to go outside again.
UPDATE II KCRG's web site says the Governor signed the bill last night. The Governor's web site is so far silent on the issue. The state website does reveal the breaking news that the state's new Poet Laureate was named yesterday.
For our prior coverage of this legislation, click here.
Link Bookmark: del.icio.us • Digg • reddit
IRS UNDERPAYMENT, OVERPAYMENT RATES RISE FOR FOURTH QUARTER 2004
September 03, 2004
The rate of interest on unpaid taxes and underpayments of estimated taxes will rise to 5% for the fourth quarter of 2004, the IRS has announced (Rev. Rul. 2004-92). This rate also applies to individual refunds.
"Large" corporations have a higher underpayment rate - 7% for the fourth quarter. Interest on corporate overpayments and refunds will be 4%.
These rates are all a percentage point higher than the third quarter 2004 rates.
Link Bookmark: del.icio.us • Digg • reddit
OF BUFFALO MEAT AND BODY OIL
September 01, 2004
Sometimes it can be hard to say no to a client who wants to take a deduction. Some taxpayers can be very persuasive:
In addition to his work as a boilermaker, petitioner was also a professional bodybuilder. In this activity, petitioner lifted weights, posed to display his muscular finesse, trained other bodybuilders, and gave seminars. Some of his poses were published in bodybuilding publications. Petitioner won awards and received at least one endorsement from a supplement manufacturer for which he received supplements valued at $100 per month.
Did I say you can't take that deduction? I meant, of course you can take that deduction. Please put me down so I can add the deduction to your schedule C.
I understand, sir. You need to eat three pounds of buffalo meat each day. Yes, it has more protein than other meat. Yes, I know that it is an important part of what gives you the strength to press me against the ceiling like you are doing. Yes, I know you wouldn't eat three pounds of buffalo meat each day if it weren't for your bodybuilding business. How much of it to you want to deduct? All of it? Done.
Oh, the posing oils? Absolutely deductible! Yes, that pose looks great. You could do that holding two more of me? Wow, that's just amazing!
Included in the disallowed deductions labeled as "Supplements" were the costs of bison (buffalo) meat, which petitioner consumed daily, year round, at the rate of 3 pounds per day. Petitioner contends he consumed the meat for muscle development because the protein levels in buffalo are much higher than those in beef or other meat products.
Do you have any recepes for buffalo meat? Oh, you don't cook it. I see.
In addition,
petitioner also consumed enormous
quantities of vitamins and minerals
through various types of "shakes"
containing ingredients to enhance
strength and muscle development.
Petitioner also used a variety of
other products that were not ingested
but were simply sprayed on or
massaged into the skin to enhance
his appearance. One of these products
was called ProTan Muscle Juice
Professional Posing Oil and, according
to instructions, was applied "prior
to pumping up backstage for optimum
effects." Another similar product
called Blow Out was applied to the
body 5 minutes before a workout.
Still another product was massaged
over the body several hours before
a posing to provide a suntan brown
color or a deep tan to the body.
Been getting some sun? You look like it? Oh, you apply that color. Sure, we can deduct that!
Most of these products could not be purchased in local health food stores but were purchased solely through advertisements in bodybuilding publications. Respondent, in the notice of deficiency, disallowed the deductions claimed for the described items on the ground that, under section 262, these expenses were personal because the products described could be consumed by bodybuilders and nonbodybuilders as well.
No, sir, I can't guarantee the IRS will allow the deduction. They frown on deducting food. Oh, I believe you eat the vitamins for business. Ab-solutely! But the tax law doesn't like you to deduct food, even for business.
With respect to petitioner's consumption of buffalo meat, respondent has not challenged petitioner's argument that the meat developed proteins and strength that enhanced his bodily physique. However, there is no doubt that buffalo meat is also consumed as food by nonbodybuilders, albeit not with the regularity and in the quantities consumed by petitioner. On balance, the Court holds that petitioner's expenses for buffalo meat are inherently personal and are not deductible under section 262... The shake drinks consumed by petitioner also, in the Court's view, fall in this same category, and respondent is also sustained as to those disallowed expenses. Such items may well be consumed not only by bodybuilders but also by others interested in their health and physical appearance.
You're right, sir, it's judicial tyranny!
As noted above, petitioner also used a variety of other products that were not ingested but were physically applied to the body primarily to enhance his appearance as a professional bodybuilder. Even though no evidence was presented to establish that those products were used by nonprofessional bodybuilders, the Court recognizes that such products could be and might in fact be used by nonprofessionals interested in their physical appearance.
No, I'm not interested in my physical appearance, thank you. Remember, I'm an accountant.
The evidence presented indicates that these products were marketed only through bodybuilding publications and were not generally for sale through normal marketing outlets... As to these products, while there may be some doubt, the Court concludes, on balance, that the scale tips ever so slightly in favor of petitioner. Petitioner, therefore, is allowed a deduction for this portion of the expenses.
Well, we got some of the deductions, anyway. As you say in your business, no pain, no gain! No, I don't need any pain, thank you. A bill? Oh, forget it. This one's my treat!
Cite: Corey L Wheir, T.C. Summary Opinion 2004-117 (pdf format)
Link Bookmark: del.icio.us • Digg • reddit
Tax Updates
Subscribe to Tax Updates
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not neccesarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
Search Tax Updates
Friends and Neighbors
Economics Nerds
Hard-Core Tax Nerds
Gigablogs
Insurance Folk
Goners
Legislation
Tax Update Data Feeds
