Tax Update Blog: October 2004 Archives
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LAST NICE DAY?
October 29, 2004
View towards 2nd and Walnut at lunchtime today. Temperature: 80.
Long shadows at noon on Nollen Plaza.
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MAYBE HE HAD THE WRONG DECODER RING
October 28, 2004
From a Justice Department press release:
The Justice Department announced today that it has sued a Cincinnati-area man in federal court, seeking to halt an allegedly fraudulent tax scheme. The lawsuit alleges that Richard W. Standring, of Batavia, Ohio, gives seminars at which he falsely claims that he can help customers “decode” IRS records to help them establish that they need not file federal income tax returns or pay federal income taxes. Standring, who also does business as “VIP Sales” and operates several websites to promote his schemes, allegedly calls his scheme a “Document Decoding Service.”
We await a useful document decoding service -- for example, one that will explain the Qualified Production Activity Income deduction in the new tax act. Or documents in our handwriting.
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BUILT-IN LOSSES - HERE TODAY, GONE TOMORROW UNDER THE NEW LAW
October 27, 2004
The deduction for "production" activities is the star of the recently-enacted ETI repeal bill. The new law's dramatic changes to the rules for tax-free incorporations and partnership formations have passed nearly unnoticed. These rules, designed to thwart tax-shelter promoters, also sow the seeds of tax disaster for honest but unwary taxpayers.
OLD RULES: NO GAIN, NO LOSS, CARRYOVER BASIS
While the long-standing rules for tax-free incorporations ("Section 351 transactions") and partnership formations ("Section 721 transactions") have their complications, the basic pattern is simple. If the transaction qualifies as a tax-free incorporation or partnership formation:
- No gain or loss is recognized by a party contributing property to the entity.
- The entity recognizes no gain or loss when it issues stock (or partnership interests) in exchange for property.
- The entity inherits the contributor's basis in the contributed property.
- The basis of the contributor in the contributed property becomes the basis of the contributor's stock (or partnership interest).
NEW RULES: THE CASE OF THE VANISHING BASIS
The tax shelter industry takes advantage of this pattern to strip value from assets. They find ways to allocate value, and gain, to tax-exempt US entities or foreign corporations, leaving a loss for the use of American taxpayers.
This was used to disastrous effect by Long-Term Capital Managment (LTCM), the giant hedge fund whose liquidity crisis threatened a worldwide financial panic in the '90s. The basic pattern: a tax-shelter promoter has an English company purchase trucks subject to leases. They sublease the equipment to an accomodating taxpayer, who "prepays" the sublease using financing from a friendly banker. This strips the value from the trucks, because a truck that will generate no additional cash for five years is worth a lot less than a new truck. Yet - and this is critical - the basis of the trucks hasn't changed.
The promoter then contributes the trucks (but not the lease payment) to a US partnership - like LTCM. The partnership now owns low-value, high basis trucks. After a decent interval, the promoter is redeemed; his proceeds cover his transaction costs, and then some.
The partnership now sells the low-value trucks to another friend of the promoter for their reduced value. The resulting artificial losses are deducted by the partnership, and the remaining partners. (The real LTCM facts had an additional set of transactions in the series; describing it would lengthen this already too-long post without shedding much light).
This shelter has not worked out for LTCM; a U.S. District Court disallowed the deductions as "shams" and slapped LTCM with negligence penalties. Still, the pattern has proved irresistable to shelter promoters, and Congress has now intervened.
CORPORATE CONTRIBUTIONS: LOSE YOUR BASIS NOW
The new law changes the carryover basis rules for property that is worth less than its basis when it is contributed to a corporation in a Section 351 transaction. While the contributing taxpayer still recognizes no loss in such a deal, the basis of the property is reduced to its fair market value. (No changes are made to the rules covering appreciated property contributons). The taxpayer may instead elect to allow the corporation to instead reduce its basis in the stock it receives in the Section 351 transaction. This basis is gone forever, and nobody gets to take deductions that would otherwise result from the basis.
The corporate basis reduction applies if the value of all property contributed by a shareholder is less than its basis. If a shareholder contributes some gain property and some loss property, the basis reduction is limited to the net loss contributed, if any.
PARTNERSHIPS: WHAT YOU LOSE BEFORE YOU CONTRIBUTE STAYS WITH YOU
The new law takes a different approach when loss property is contributed to a partnership. The law doesn't reduce the basis of loss property contributed to a partnership to its value; nor does it reduce the basis of the contributing partner's partnership interest.
Instead, the new law causes the basis of the contributed loss property to disappear forever if the partnership interest is transferred to another partner. This would have thwarted LTCM by reducing the basis of the trucks inside the partnership when LTCM bought its partnership interest. There would then be no taxable loss on the sale of the trucks.
THE MORAL:
New corporate or partnership formations face a new tax hazard. Careless formation of new entities could mean deductions forever lost. If you start a new corporation or partnership, make sure you know both the tax basis and the value of what you put into it.
Both the corporation and partnership provisions took effect when the president signed the bill Friday.
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ETI REPEAL SIGNED - TODAY IS LAST DAY FOR BIG SUV DEDUCTION
October 22, 2004
The President this morning signed HR 4520, the American Jobs Creation Act of 2004. It will certainly create work for those of us who charge for tax advice by the hour.
The reduction of the maximum Section 179 deduction for business-use sport utility vehicles is therefore effective tomorrow. If the SUV is placed in service after today, the maximum Section 179 deduction is $25,000.
Keep in mind that it has to be an SUV more than 50% in your business. Also, the SUV has to go into service today. An order today for delivery tomorrow will be too late.
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OUR LITTLE MONSTER HAS GROWN UP
October 22, 2004
The Internal Revenue Code of 1986 is 18 years old today. At the time it seemed like a confusing and difficult work. Compared to today's version of the '86 code, suffering from 18 years of poorly thought-out and expedient amendments, the 1986 product looks like a model of simplicity and sound tax policy.
Raise a glass with us to a bygone day when sound tax policy seemed to matter.
October 22, 1986: President Reagan signs the Tax Reform Act of 1986.
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PRESIDENT TO SIGN TAX BILL TOMORROW?
October 21, 2004
The President may sign HR 4520, the ETI repeal bill, " as early as October 22," according to a story by Tax Analysts.
The day the bill is signed is the last day an SUV can be placed in service in a business and qualify for a Section 179 deduction of up to $102,000. The limit goes down to $25,000 the next day.
Of course, the SUV also has to be primarily used in your business to qualify. Be sure to consult your tax advisor if you aren't sure if it does.
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IOWA ON 2003 BONUS DEPRECIATION: YOU MUST AMEND
October 20, 2004
The Iowa Department of Revenue stands by its decision to require amended returns for taxpayers who took the 50% "bonus depreciation," or Section 179 deductions in excess of $25,000, on their 2003 federal returns. The Iowa legislature last month retroactively allowed taxpayers to take these extra deductions for 2003.
The Iowa State Bar Association Tax Council had sent a letter urging the Department to permit taxpayers to treat the change as an accounting method change, allowing taxpayers to take the extra deductions on their 2004 returns. This would save millions of dollars in compliance costs for taxpayers who will now have to pay for otherwise unnecessary amended returns to take the new deductions.
Allowing the "accounting method" approach would harm no taxpayers and help many. The Bar Tax Council feels the department has the authority to do so; it therefore seems the Department has at least a credible argument for permitting accounting method treatment. Nobody would be harmed by that position, and nobody would have challenged it.
The Department has failed to implement the new depreciation rules in a sensible, taxpayer-friendly way. This seems an odd approach to implementing "economic development" legislation.
LEGISLATURE MAY STEP IN
The legislature may enact legislation in January to permit taxpayers to make the change on their 2004 returns. If amending returns is not cost-effective for you, it makes sense to wait for the legislature.
Even if the legislature fixes thse problem in January, it is a second-best solution; if it comes at all, it will come in the middle of filing season, making implementation awkward.
Links:
Text of Department's response to The Iowa State Bar Association Tax Council letter.
The Iowa State Bar Association Tax Council letter
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'EX-FATHER IN LAW MADE ME DO IT' DEFENSE FAILS
October 20, 2004
Working for your ex-wife's father can have its awkward moments. It was Larry Borman's misfortune to have such a moment in Bankruptcy Court.
Mr. Borman ran Gold Auto Sales in Florida for his "former father in law," who owned the business. When financial difficulties arrived, the business made the always unwise choice to pay other creditors before paying its employment taxes. Still, the business failed.
The IRS tried to collect the unpaid taxes from Mr. Borman as a "responsible person." Under the tax law, if an employer fails to pay employment taxes, the IRS can collect the taxes from any person "responsible" for "willful" failure to pay the tax - even if the "responsible person" is not the owner.
Mr. Borman asked the Bankruptcy Court to stop IRS collection efforts. He argued that his ex-wife's father would have fired him if he had paid the IRS before other creditors. The Court disagreed:
The Debtor's defense is that, although he had knowledge, Mr. Goldstein told him not to pay the taxes and, if he did, that he would be fired. The IRS contends that this "Nuremberg defense" is not available to the Debtor. Debtor's belief that he would be fired if he did not obey orders not to pay employee withholding taxes to IRS did not excuse the debtor from liability. The fact that the Debtor was told not to pay the taxes and he might have been fired does not negate his liability to pay the taxes.
For the foregoing reasons, the Debtor is a "responsible person" pursuant to § 6672 of the Internal Revenue Code and is liable for the tax liability determined by the IRS to be the amount of $41,465.00.
(citation omitted)
Lessons:
-Pay the IRS first.
-If the boss tells you to pay someone else first, the IRS won't care that you were "only following orders."
-Even if your boss is your ex-wife's daddy.
Citation: In Re Larry Borman, Debtor (USBC, SD-FL, 9/12/2004). Case courtesy Tax Analysts; no link available.
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THE O'REILLY DEDUCTIONS?
October 19, 2004
We haven't followed the lawsuit Fox talking head Bill O'Reilly. It's about sex, after all, so it is of no interest to the accounting profession.
But it might also be about taxes, so maybe we should pay attention. The TaxProf is on the case.
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NOVEMBER 2004 AFRs ISSUED
October 19, 2004
The IRS has issued (Rev. Rul. 2004-102) the minimum interest rates for loans made in November 2004:
-Short Term (demand loans and loans with terms of 1-3 years): 2.37%
-Mid-Term (loans from 3-9 years): 3.55%
-Long-Term (over 9 years): 4.70%
Historical AFRs are available via the “Links” page at www.rothcpa.com.
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FREE TAX ADVICE, AND WORTH EVERY PENNY
October 18, 2004
As we've noted before, one of the perks of running for president is free tax advice. As far as we know, Senator Kerry's spouse is the first candidate's wife who has filed "married filing separately." She released the separate return last friday - the last extended due date available for her return.
Unfortunately for nosy free advice-givers, she only released the first two pages of her 2003 federal return, and none of her state return. Still, we can make observations and tentative suggestions based on the limited release. We warn: don't act on our free advce without consulting your paid tax advisor (our rates are available on request).
BIG ALTERNATIVE MINIMUM TAX - ADJUST YOUR MUNI PORTFOLIO
Ms. Heinz (the return is in the name of "Theresa Heinz") reports tax-exempt interest of $2,781,791 for 2003. She also reports alternative minimum tax (AMT) of $326,451. Her AMT is more than half of her tax bill.
AMT is computed alongside your regular income tax bill. It is computed on a broader base (more items are taxable, and fewer deductions are allowed), and at a lower rate (28% maximum).
If you are paying taxes at the 28% AMT rate, the tax savings from holding municipal interest may not compensate for their inferior gross yield. Many AMT taxpayers can improve their after-tax yields by selling their muni bonds and buying taxable corporate bonds.
TOO MANY PRIVATE ACTIVITY MUNI BONDS?
Some "tax-exempt" municipal bonds aren't really very tax-exempt. Ms. Heinz appears to own a lot of them. We refer here to "private activity bonds," which, while exempt for regular income tax, are fully taxable for AMT. Private activity bonds are muni-bonds issued for private purposes, like to build a sports stadium for a baseball team.
Based on the amount of minimum tax Ms. Heinz pays on her return, we estimate that she has over $1,000,000 in private-activity bond interest. It's very likely that she could boost her after-tax yield by dumping these non-exempt exempt bonds and moving into a good corporate bond fund.
DIVIDENDS - A GOOD THING
While Ms. Heinz may not care much for President Bush, she certainly benefits from his 15% top tax rate on dividends. We compute that the 15% dividend rate reduced her federal tax bill by about $290,000.
MASSACHUSETTS - BETTER FOR VACATION HOMES THAN TAX HOMES
The address on Ms. Heinz's 2003 return is crossed out. According to The New York Times, the Kerry Campaign says the wife of the Massachusetts Senator is a Pennsylvania resident for tax purposes. From a tax-planner's point of view, that's a shrewd move. We estimate her Pennsylvania taxes for 2003 at about $142,000. On the same income, her taxes as a Massachusetts resident would have been about $388,000.
BACKUP WITHHOLDING?
Ms. Heinz reports federal taxes withheld of $2,230. This probably is the result of "backup withholding," which occurs when an interest or dividend payor has no social security number or an incorrect number for the payee. Get those folks the correct social security number - no need to let the IRS have that much money ahead of time, ma'am!
RETIREMENT PLAN CONTRIBUTION
Ms. Heinz reports "self-employment tax" of $1,251. This means she has self-employment income of $8,183. This made her eligible for a self-employed retirement plan contribution of $1,521, but for unknown reasons she bypassed this tax-deferred savings opportunity.
According to her return, Ms. Heinz is at least 65 years old. Since she's not adding to her retirement plan, we hope she has a little something put away for her golden years...
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ANOTHER CAPITALIST BACCHANALIA
October 18, 2004
This week's installment of the "Carnival of the Capitalists," a collection of business and economics weblog postings, is now online. Much good reading there. My favorite this week is "Executive Hubris and Acquisition Premium," by the "Photon Courier" blog. It cites evidence that executives who are overly fond of themselves tend to pay too much when they buy companies. The meek shall inherit the best deals, perhaps.
Oh, the Carnival has a picture of a cute "babe," too.
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NO BILL SIGNING TODAY
October 15, 2004
According to the White House website, the new tax bill has not been signed so far today. The $102,000 Section 179 limit for business-use SUVs becomes $25,000 for vehicles placed in service the day after the bill is signed. This gives dealers one more weekend sale day to push those big boys out the door...
More here.
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IOWA - CLIMATE AND TAX CLIMATE COULD BE WORSE
October 15, 2004
The Tax Foundation released a study of the tax climate of different states. It seems that any correlation between weather and tax climate is very shaky:
Map Source: Tax Foundation. Click map to enlarge.
Most of us would say Hawaii has the best climate in the U.S. The Tax Foundation says Hawaii pays for its nice weather with the worst tax climate in the country. Looking to see whether tax climate and good weather are inversely related, we see that South Dakota has the best tax climate, and Alaska has the third best. That would seem to support an inverse relationship.
The bad weather, good tax hypothesis falls apart quickly on further examination. North Dakota, arguably with the worst weather in the lower 48, has the 11th worst tax climate. Minnesota and New York, not much blessed with warm ocean breezes, have the 3rd and 2nd worst tax climates, while balmy Florida has the second best climate.
Iowa? Just a bit below average, says the Tax Foundation. Economic development motto suggestion: "Nebraska's worse!" For the first time ever, that may be true for Big 12 football, too. But probably not.
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ISLEY BROTHER TO ACCEPT LONG-TERM GIG?
October 15, 2004
"The lead singer of the popular R&B recording group the Isley Brothers has been indicted by the federal government on charges of tax evasion, the Justice Department announced October 14."
Tax Analysts has the scoop.
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BENEFITSBLOG IS BACK!
October 14, 2004
And she has the latest on the FASB decision to defer implementation of expensing rules for stock options.
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ROTH & COMPANY SEMINAR ON ETI REPEAL BILL SLATED FOR NOVEMBER 10
October 14, 2004
The Roth & Company seminar on the new tax law will be held at Des Moines Golf and Country Club at 3:30 p.m. November 10. We will cover the high points in the new law, with emphasis on its effect on manufacturers, bankers and business practices. Heck, we'll even buy you a pop or adult beverage afterwards. But you have to RSVP to newlaw04-at-rothcpa.com.
Map to Des Moines Golf and Country Club, 1600 74th Street, West Des Moines. IA
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NOT SIGNED YET!
October 14, 2004
As of this morning, the President has yet to sign the ETI repeal tax bill. That means you can still take delivery of that business SUV weighing over 6,000 lbs today and take a Section 179 deduction of up to $102,000. The reduction of the SUV Section 179 deduction to $25,000 takes effect the day after the President signs off.
More information here, here, and here.
Remember, the Section 179 deduction is only available for equipment used primarily in a business.
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OUR EXCELLENT ADVENTURE AT THE ADMINISTRATIVE RULES COMMITTEE
October 12, 2004
Your correspondent visited the hearing held by the Legislature's Administrative Rules Committee this afternoon. We were trying to get the Department of Revenue to back off of its position that it must require amended 2003 returns for taxpayers wishing to take 50% bonus Iowa depreciation and Iowa Section 179 deductions over $25,000. For what it's worth, the Department is going to think about it for another week. Unfortunately, they didn't seem eager to change their minds.
We think the Department has the authority to allow taxpayers to treat the retroactive change in Iowa law for 2003 as an "accounting method change." This would allow taxpayers to choose between filing amended returns to claim the extra deductions, or just claiming the extra amount as a 2004 deduction. This option would save taxpayers the time and expense of amending returns - an expense we estimate to exceed $30 million.
The Department representative at the hearing said he didn't think the Department is allowed to treat it as an accounting method change. We noted that the Iowa State Bar Association Tax Council says the Department does have such authority. We also said that allowing accounting method change treatment would help many taxpayers, while hurting none, and said that any uncertainty about the rules should be resolved in favor of taxpayers.
Did we accomplish anything? All we know for sure is that the Department will consider our submission and that of the Iowa State Bar Association Tax Council and report to the Administrative Rules Committee next week; we like to believe we helped make that happen. Unfortunately, the Department seems to have the the final say, at least for now. One legislator said that it would be "awkward" to make the Department do something if the Department said it lacks the authority to do it. We take that as saying that if the Department doesn't change its mind, the Administrative Rules Committee isn't going to try to force it to.
The legislators said that they might try to fix this issue when they open their session in January. We pointed out that filing season will be in full swing by then, and it would be much less disruptive to fix the problem now. We are left to hope that the Department attorneys are persuaded by the brilliance of the Tax Council's submission and the crushing -- well, we hope persuasive, anyway -- logic of our argument.
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IOWA DEPRECIATION - LAST SHOT AT SANITY
October 12, 2004
This afternoon the Iowa legislature's Administrative Rules Committee will consider the Department of Revenue's position on handling the change in depreciation deductions passed in last month's special session. The legislature retroactively adopted federal depreciation rules for property placed in service after May 5, 2003.
Most 2003 returns had been filed by the time the legislation was passed. The Department has taken the position that it must require all taxpayers affected by this rule to file amended returns, no matter how small the deduction change. We maintain that the Department can allow taxpayers to treat the change as an "accounting method change," which could be taken on 2004 returns -- saving taxpayers the time and expense of filing amended returns for small amounts of tax savings.
We have submitted a statement to the committee, which is reproduced below. We plan to attend the meeting at 2:45 pm in Room 116 at the Capitol. (UPDATE: go here to see how this adventure went.)
The Department lacks good statistics on how many taxpayers will be affected. We did some estimating of our own based on federal filing statistics. Our guess is that the Department would save taxpayers over $30 million in unnecessary return preparation costs by allowing taxpayers to treat the change as a change in accounting method. The statistics used to arrive at the $30 million compliance cost estimate may be found here.
Our submission:
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VOTING NOW ON ETI REPEAL
October 11, 2004
Should be done soon...
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GETTING PRESIDENTIAL
October 11, 2004
The TaxProf Blog provides one-stop shopping for presidential candidate tax positions. If you're more interested in the candidates's returns, Tax Analysts has you covered.
Senator Kerry files "married filing separately." His wife has not yet released her 2003 return.
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TAX BREAK FOR BIG SUVs MAY DIE TODAY
October 11, 2004
Today may be the last day for the $102,000 maximum Section 179 deduction for SUVs.
The Senate is scheduled to vote on the ETI repeal bill at 11:00 am (Central Time) today. The bill contains a provision to trim the maximum Section 179 deduction for SUVs to $25,000. The new limit will apply to vehicles "placed in service" on the day after the bill is signed by the President. If the President signs the bill today, SUVs delivered tomorrow and later will be subject to the $25,000 limit.
The Senate voted yesterday to end an attempted filibuster on the bill, 66-14. Under Senate rules, that means the oppenents of the bill can't put off a vote after today.
Tax Analysts current coverage is here. For our prior coverage, go here, here, and here, or just scroll down.
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FILIBUSTER FAILS, SENATE TO VOTE ON ETI REPEAL
October 10, 2004
The video feed of C-Span 2 at Tax Update world headquarters says that the filibuster attempt on the ETI repeal has failed. This clears the last obstacle to this enormous bill. It appears there were only about 14 votes for the filibuster, if we read the tiny letters that appeared on the video feed correctly. The feed says 11 Democrats and 3 Republicans voted to continue the filibuster.
650 pages of bill text to wrestle with and start to work with. Hoo-boy.
UPDATE: On and on the Senators drone. Doesn't cloture mean debate ends? Not right away, apparently. Fortunately, we have the technology to have a silent video feed so we can listen to music while keeping an eye on them.
Senator Akaka was just showing a poster for Camel cigarettes. That was the first Tobacco ad on TV in a long time, thanks to the Senator.
UPDATE II: Cloture roll-call here.
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TAX REFUND TURNS INTO PUMPKIN FOR PURPORTED PENNSYLVANIA PRINCESS
October 08, 2004
Awhile back we noted the story of a Pennsylvania cafeteria worker who claimed to be a Hawaiian princess, to the point of obtaining a $2.1 million tax refund belonging to the real princess Abigail. Things don't seem to be going well for the Pennsylvania pretender, judging by a court order issued recently by a US District Judge in Philadelphia:
ORDERED that the defendants Abigail and James E. Roberts are indebted to the United States in the amount of $2,123,453.00, plus statutory interest accruing from March 8, 2004, on any unpaid balance and continuing to accrue until paid;
ORDERED that the defendants Abigail and James E. Roberts, and each of them, are permanently enjoined from using or appropriating the social security number, XXX-XX-7276, belonging to Abigail K. Kawananakoa for any use or purpose whatsoever;
ORDERED that the defendants Abigail and James E. Roberts, provide an accounting of the disposal and distribution for all funds obtained by them in the amount of $2,123,453.00;
ORDERED that the defendants Abigail and James E. Roberts, shall take all reasonable steps necessary to preserve the personal and real property titled in their name and/or in their possession in its current condition, including, without limitation, continuing to pay the expenses of the real property and maintaining fire and casualty insurance policies on the real property, and shall not commit waste against the personal and real property titled in their name and/or in their possession, nor shall they cause or permit anyone else to do so, nor shall they do anything that tends to reduce the value or marketability of the personal and real property, nor shall they record any instruments, publish any notice, or take any other action that may directly or indirectly tend to adversely affect the value of the personal and real property.
We hope that the Pennsylvania Cinderella at least had a good time at the ball.
Via Tax Analysts.
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ETI FILIBUSTER HOPES FADING?
October 08, 2004
The ETI bill passed out of the House-Senate conference Wednesday won approval by the full House of Representatives last night in a 280-141 vote. The Senate is the final obstacle to passage of the measure, but prospects for opponents to muster the 41 votes needed to block the bill with a filibuster appear dim.
Senator Kennedy from Massachussetts is leading the opposition because the conference report omitted a proposal to apply FDA regulation to the tobacco industry.
Coverage:
Tax Analysts
New York Times
Wall Street Journal
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WAYS AND MEANS POSTS LEGISLATIVE LANGUAGE OF CONFERENCE REPORT
October 07, 2004
Bill Text (It's a big pdf file - 650 pages).
A mild surprise: the new rules limiting auto donations don't take effect until 2005.
The new Section 179 SUV limitation is effective for vehicles placed in service starting the day after the bill is signed.
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BUDGET EFFECTS OF CONFERENCE AGREEMENT
October 07, 2004
The Congressional Joint Committee on Taxation has issued "Estimated Budget Effects Of The Conference Agreement For H.R. 4520, The 'American Jobs Creation Act Of 2004'" (pdf format). The bill is estimated to reduce tax revenues by just under $8.7 billion through 2009.
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WAYS AND MEANS, FINANCE ISSUES SUMMARIES, RELEASES ON ETI REPEAL
October 07, 2004
The Ways and Means Committee has issued a summary press release on the ETI repeal conference agreement.
The Senate Finance Committee has issued a number of releases on the bill:
Grassley Advances Tax Relief for Manufacturers, Farmers, Plus Significant International Tax Reforms
Grassley Advances Civil Rights Tax Reform
Grassley Advances Crackdown on Car, Intellectual Property Donation Abuses
Grassley Advances Ethanol Tax Restructuring, Tax Incentives for Biodiesel, Biomass
Grassley Advances Tax Incentives, Fairness for Farmers, Cooperatives, Small Businesses
Grassley Advances Crackdown on Fuel Tax Evasion
Grassley Advances Tax Fairness for Rural Letter Carriers
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ETI REPEAL - QUICK TAKES
October 07, 2004
The ETI bill hammered out yesterday by the House-Senate conference is over 400 pages long. The new deduction for "Qualfied Production Activity Income" may be the most far-reaching piece of the bill, but there are many other notable provisions.
- The bill repeals the "Extraterritorial Income Exclusion," or ETI. This provision is the reason the bill was so urgent. The World Trade Organization ruled the ETI an illegal subsidy and has imposed trade penalties against the US because of it. The ETI repeal is designed to end the trade penalties. The ETI deduction will be reduced 20% in 2005 and 40% in 2006, then disappear altogether.
- It has a number of S corporation provisions, including an increase in the number of S corporation shareholders to 100, a provision to enable banks with IRA shareholders to make S elections, and an exclusion of investment income from "passive investment income" for S corporation purposes.
- It will reduce the maximum Section 179 deduction for sport-utility vehicles to $25,000.
- It will greatly restrict the ability to take inflated deductions for cars donated to charity.
- It will allow taxpayers to elect to deduct sales taxes instead of state and local income taxes. This presumably helps win the support of Senator Daschle of South Dakota, whose state has a sales tax, but no income tax. It will be popular among many ex-Iowans who have migrated to Florida. Unfortunately, this deduction won't apply for alternative minimum tax.
- Legal fees of pursuing civil rights claims will be allowed as a deduction for regular tax and AMT, regardless of whether the taxpayer itemizes, to the extent of income from the suit.
- New information reporting requirements for acquiring corporations in taxable mergers and acquisitions. A new form will require a description of the acquisition, the name and address of shareholders required to report gain, and the amount of transaction proceeds. This will be effective on enactment.
- New tax shelter provisions, penalties and reporting rules, including a ban on "SILO" transactions.
- Strict new rules on the ability to be treated as a "resident" of a US possession, such as the Virgin Islands.
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THE ETI REPEAL BILL GIVES LIFE TO MONSTER TAX BREAK
October 07, 2004
The ETI repeal bill is a big deal. It will provide an huge and complicated new tax break for "producers" -- manufacturers, farmers, construction, and some related businesses. It also provides some narrow tax breaks that will be huge to affected industries. This post concentrates on the new deduction for "producers."
Only a potential filibuster by Senator Kennedy now stands in the way of passage of H.R. 4520, the ETI repeal bill. As six Democratic senators - including Minority Leader Tom Daschle - approved the final version of the bill, it seems unlikely that a filibuster will attract the 40 votes it would need. The House and Senate conferees had filibuster in mind when they crafted the bill, and they presumably added enough pet provisions to attract the 61 votes they need. (UPDATE: The filibuster failed Sunday when the Senate voted to end debate, 66-14).
THE DEDUCTION FOR PRODUCERS
The new deduction for "Domestic Production Activities" will probably affect more taxpayers than any other provision in the bill. The bill creates a new deduction for a portion of "qualified production activities income," which we abbreviate as "QPI" so we can pronounce it "cupie."
The deduction will be a percentage of QPI, or if less, of taxable income. The deduction will be phased in:
2005-2006: 3 percent of QPI 2007-2009: 6 percent of QPI 2010 and after: 9 percent of QPI
WHAT INCOME IS QPI?
Five categories of income qualify as QPI:
1. Income from "qualifying production property" which was manufactured, produced, grown, or extracted by the taxpayer in whole or in significant part within the United States. Qualifying Production Property includes tangible property, software, and film and sound recordings.The "grown or extracted" language is critical - embracing, for example, farms, quarries and mines.
2. Income from films produced primarily in the U.S.
3. Income from "electricity, natural gas, or potable water" produced in the U.S.
4. Construction performed in the U.S.
5. "engineering or architectural services performed in the United States for construction projects in the United States."We could have taken engineering courses, but we didn't. We aren't optimistic that we will convince the IRS that tax consulting is really "engineering," or that we "manufacture" pretty bound copies of tax returns.
WHAT INCOME IS PRODUCTION INCOME?
The QPI deduction requires taxpayers to split their taxable income between "qualifying" and "non-qualifying" activities. For example, a taxpayer with both manufacturing and retail income will have to determine how much of their taxable income is attributable to manufacturing. The law computes QPI as gross receipts from production activities, reduced by cost of goods sold (inventory production costs) and a ratable portion of other costs. The law punts further definition of QPI to the Treasury.
Taxpayers will try to allocate their deductions to "non-qualifying" income. Presumably the Treasury will put out regulations to try to stop them.
OTHER QUIRKS
The QPI deduction has some quirks.
The deduction cannot exceed 50% of the employer's W-2 wages for the year. This would seem to be a great motivator for home businesses and farmers with few or no employees to incorporate and pay themselves a salary.
The deduction isn't available for the production and sale of food at retail.
There will be rules to keep people from selling to related parties to take advantage of the deduction.
Other analysis of the bill here and here.
For more coverage:
Tax Analysts: ETI Bill Headed to House, Senate Floors
New York Times: Negotiators Approve Big Tax Cuts for Business
Tax Update: CHAIRMAN THOMAS ISSUES 'CHAIRMAN'S MARK' OF ETI REPEAL BILL
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MAXIMUM SEC. 179 DEDUCTION FOR SUVs TO BE SLASHED
October 06, 2004
The Ways and Means Committee website has a list of Senate amendments adopted in today's final session of the conference on the ETI repeal bill. The limitation of the maxumum Sec. 179 deduction for sport-utility vehicles made the bill, probably effective when signed by the president. If you are eyeing that $102,000 business SUV, it's time to make up your mind.
So, what is an SUV? Here's how the Senate bill describes it:
(i) IN GENERAL. -- The term "sport utility vehicle" means any 4-wheeled vehicle --
(I) which is primarily designed or which can be used to carry passengers over public streets, roads, or highways (except any vehicle operated exclusively on a rail or rails),
(II) which is not subject to section 280F (over 6000 lbs - ed.), and
(III) which is rated at not more than 14,000 pounds gross vehicle weight.
(ii) CERTAIN VEHICLES EXCLUDED. -- Such term does not include any vehicle which --
(I) is designed to have a seating capacity of more than 9 persons behind the driver's seat,
(II) is equipped with a cargo area of at least 6 feet in interior length which is an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible directly from the passenger compartment, or
(III) has an integral enclosure, fully
enclosing the driver compartment and
load carrying device, does not have
seating rearward of the driver's seat,
and has no body section protruding
more than 30 inches ahead of the
leading edge of the windshield.
So if you want to take a $102,000 Section 179 deduction for an SUV after the ETI repeal is signed, it needs to have room for more than 9 passengers in back of the drivers seat, or it will have to weigh more than 14,000 lbs. Maybe something like this:
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THERE ARE 8 MILLION STORIES IN THE NAKED CITY...
October 06, 2004
...but this is just weird.
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ETI CONFERENCE ADJOURNS
October 06, 2004
The ETI conference has finished its work. The conference bill will now return to the House and Senate for final votes.
Some suspense remains over whether a Senate filibuster will be attempted to use the bill to extend FDA authority to tobacco, but the conferees apparently believe that the votes to sustain a filibuster are lacking.
For more:
Tax Analysts story on the conference bill
Ways and Means press release on conference agreement
No word yet on the fate of the SUV Sec. 179 deduction limit.
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NO NOL CARRYBACK EXTENSION
October 06, 2004
Tax Analysts reports that after a day of negotiation, the ETI repeal bill still looks much like the Chairman's Mark. House negotiators rebuffed a series of amendments proposed by the Senate, including tax shelter language and an increase in the NOL carryback period to four years, from the current two years.
The story makes it seem that the bill has some momentum. Money quote from Assistant Majority Leader Mitch McConnell: "There are a lot of things in this bill that are very popular with senators of both parties. And I think killing the conference report over the fact that something isn't in it is highly unlikely."
Today conferees will wrestle with other issues, including the proposed limitation of the Sec. 179 deduction for large SUVs to $25,000. The limit is currently $102,000.
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CHAIRMAN THOMAS ISSUES 'CHAIRMAN'S MARK' OF ETI REPEAL BILL
October 05, 2004
The "must-pass" ETI repeal bill moved another step closer to enactment when Ways and Means Committee Chairman Thomas issued his "chairman's mark" of the legislation.
The bill is "must-pass" because it contains a provision to remove the Extraterritorial Income Exclusion (ETI), which has been ruled an illegal trade subsidy. Until ETI is repealed, the United States will be subject to escalating trade penalties.
In addition to the repeal of ETI, the mark contains a variety of other provisions, including technical fixes to specific tax law problems, anti-tax shelter language, and provisions to tobacco farmers.
The mark is part of a House-Senate conference committee to reconcile the ETI repeal bills passed by each house. Thomas chairs the conference committee.
The Chairman's mark has raised some hackles. Tax Analysts quotes Iowa Senator Tom Harkin:
"As an old pilot, this airplane lost a wing," Sen. Tom Harkin, D-Iowa, a conferee, said. The bill would "spin and crash and burn and die" if the other wing is not put back on, Harkin said.
Tax Analysts also quotes a letter from Treasury Secretary Snow objecting to the scope of the bill:
"Legislation taking up more than 1000 pages of statutory language (or even 400 pages) goes far beyond the bill's core objective of replacing the FSC/ETI tax provisions with broad-based tax relief that is WTO-compliant," the letter says. "The Administration will work with the conferees to eliminate these narrowly crafted provisions."
The mark includes a provision limiting deductions for auto donations to the amount the charity sells the vehicle for, effective on enactment. The mark does not provide for the capping of Sec. 179 deductions for SUVs at $25,000.
Our prediction: The Conferees will put together a messy bill with lots of "narrowly crafted provisions" to attract the votes needed to pass it, and they will get it done in time to go home by the weekend. If we were making odds, though, it would be maybe 6-5.
Links:
Prior Tax Update Coverage:
ETI REPEAL CONFERENCE SHOWS PROGRESS
CONGRESS MISSES DEADLINE, EU SANCTIONS KICK IN
EXPORT INCENTIVES – GET ‘EM WHILE YOU CAN
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DEED DONE IN DES MOINES
October 04, 2004
The tax bill is signed.
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NOW THE IRAQIS JUST NEED A FEW GOOD IOWA ACCOUNTANTS
October 04, 2004
"LAWYER sworn into the Iowa Bar while in Baghdad, via videoconference hookup. Kinda cool" - Instapundit.
Melissa Head, Soldier and newly-fledged lawyer
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OCTOBER IS FOR CARNIVALS, TOO
October 04, 2004
This week's Carnival of the Capitalists is up at Drakeview. Articles range from selling your business to economics of health insurance to interstate wine sales and capacity constraints on railroads. Good reading, and good for you!
Oh, and "Drakeview" is a Southern California site, so their view of Drake is from a respectful distance - not from Forest Ave.
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PRESIDENT TO SIGN TAX BILL IN DES MOINES TODAY
October 04, 2004
News reports say the President will sign into law HR 1308 today at an appearance at Des Moines' South Side YMCA.
The bill prevents scheduled reductions in a number of individual tax benefits. It maintains the child credit at $1,000. It keeps in place the 10% tax bracket, and it prevents AMT from reducing the benefit for the credit. It also prevents the reduction of the individual AMT exemption for one more year.
The bill also retroactively extends the research tax credit and the work opportunity tax credit.
One "substantive" provision provides a uniform definition of "dependent" for income tax purposes. There have been a number of different definitions for different tax rules.
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DES MOINES REGISTER FOREIGN SUBSTANCE INCIDENT
October 01, 2004
Locust Street in front of The Des Moines Register building has been closed off; reporters nearby say a "granular substance" fell out of a letter there, and that building ventilation systems are turned off.
UPDATE: Several floors are closed, but others remain open, according to people milling about the sidewalk outside the paper.
Here is The Register's current coverage.
UPDATE, OCTOBER 2: SNAIL POISON!?
And here are our lunch-hour photos:
Hazmat personnel in front of the R&T building
Decontamination Tarp?
Looking west on Locust
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HOW DID YOU GET HERE?
October 01, 2004
One of many humbling aspects of managing this web site comes when we look at how people find us using search engines, like Google. From the search requests used to reach us in September, it appears that people who end up here are not necessarily seeking our witty expositions on the tax law.
The top three phrases used to reach our site, and the number of visitors attracted by the search request:
"riot" - 177
"remy welling" - 48
"fat pigs" - 15
OK, we understand why people might come here for information on IRS whistleblower Remy Welling. But "riot?" "Fat pigs?" A riot of fat pigs, maybe?
A few other odd searches that found our site - and will again, now that we are repeating them here:
smoking secretaries
gold in them thar data mines
kicked in the groin
roth beer (Great idea!!!)
fat chris
time-space continuum
texas drummer tax law
typefaces tacky
sex roth
One we really like:
roth billion
And finally, one we don't approve of at all:
roth bad
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BENEFITS BLOG TAKES A BREAK
October 01, 2004
The esteemed BenefitsBlog announces that she "will be on hiatus while I complete some projects."
Oh, that's what you do with projects...
We wish her successful projects and a speedy return.
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