Tax Update Blog: January 2005 Archives

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WORTH 1,000 WORDS (AND A $283,011 PENALTY ASSESSMENT)

January 31, 2005

Behold a work of modern art:

Click on picture to enlarge

This is a simplified chart of a tax shelter lease transaction that was struck down in a case released by the Tax Court this afternoon (CMA Consolidated, Inc. & Subsidiaries, Inc., T.C. Memo 2005-16)

Surely all these steps were necessary for non-tax reasons?

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FAST-DRIVING, USA TODAY AD-BUYING AL THOMPSON CONVICTED ON 13 TAX COUNTS

January 31, 2005

The TaxProf has posted another roundup of big media tax stories, where we learn that Al Thompson was convicted on 13 tax charges in a federal courtroom in California.

You may remember Mr. Thompson for leading the California Highway Patrol on a high-speed car chase when the Feds came for him. In a move that appears, in hindsight, to have been ill-advised, he had purchased an ad in USA Today boasting that he didn't pay taxes or withhold taxes for his employees.

From the New York Times account (registration required) of the case:

Mr. Thompson, who acted as his own lawyer, argued that he had not willfully violated the law and contended that he had been charged with a crime because "the I.R.S. was misapplying the law."

Mr. Thompson's attitude, and that of other protestors, brings to mind a story we heard about a federal district judge here in Des Moines. The judge, goes the story, was told by a pro se tax protestor that he didn't have jurisdiction to try the case -- that somehow he wasn't a "real" judge. The judge is said to have replied to this effect:

Well, perhaps you don't believe I am a judge. But the man behind you is a federal marshall. He thinks I'm a judge. The bailiffs think I am a judge. The appeals court and the Supreme Court think I am a judge. And the warden at the penitentiary thinks I am a judge. As long as they think so, it doesn't really matter that you don't.

The judge believes the IRS correctly applied the law, too.

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FIVE CARNIVAL MONTH!

January 31, 2005

The fifth Carnival of the Capitalists for January 2005 is up at "Ashish's Niti." The Carnival is a weekly complilation of business and economics weblog postings. If you want to know why excessive profits are a good thing, or if you are looking for an explanation for the decline of trade unions, go there now.

This weeks edition also links to a worthwhile discussion of the AMT problems of successful plaintiffs that we discussed not long ago. The discussion even includes cases of celebrities paying an effective rate on "winnings" in excess of 100%.

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FAMILY VALUES: ARE YOU YOUR BROTHER'S RELATIVE?

January 31, 2005

The tax law is full of backhanded tributes to family values -- especially the family value of scheming with your relatives to avoid taxes. These tributes to the ties of kinship take the form of rules delaying, disallowing or altering the results of transactions between relatives.

If you have rules that treat transactions between relatives differently, you have to have rules that say who your relatives are. Your brother? Your spouse? Your sister-in-law's second cousin? It would be a simple matter to have one set of rules for this. That's probably why the tax law has two major sets of rules defining relatives differently for different things, and at least a half-dozen such rules altogether.

It can get complicated, this relative business. Garber Industries Holding Co. lost $680,000 in loss deductions last week because two brothers turned out to be unrelated, under the tax law.

SECTION 382: LOSS TRAFFIC ROADBLOCK

The tax law frowns on the purchase of businesses simply to use their tax loss carryforwards. If a corporation has a taxable loss for a year, it normally can carry that loss back two years to get tax refunds; if the loss doesn't get used up in the carryback, it carries forward for 20 years, or until it offsets income.

While there are many limits to the purchase of companies to use their tax losses, the main barrier nowadays to traffic in tax losses is Section 382. This section limits the use of tax losses in companies that have had an "ownership change" to an interest rate multiplied by the value of the company. For example, a loss corporation purchased for $1 million in January 2005 could use $42,700 losses annually ($1 million x the 4.27% "long-term exempt rate")-- even if it had millions of dollars in loss carryforwards.

An "ownership change" takes place if 50% of the corporation's stock changes hands in a 3-year period. The tax law actually helps families here by treating certain relatives as a single shareholder. Transfers between such relatives don't count in measuring ownership changes.

SORRY, BRO

In April 1998, Kenneth Garber sold all of his shares in GIHC to his brother, Charles. This increased Charles's ownership percentage from 19% to 84% - a 65% shift that would trigger Section 382 if the brothers weren't related. And, under the tax law, they aren't.

Section 382 uses Section 318 to determine who your relatives are. Section 318, for obscure reasons, doesn't count siblings as relatives. The Garbers argued that the way Section 382 uses Section 318, anybody with the same parent is related anyway. The IRS said that the Garbers were right, but only if the parent was still alive; Kenneth and Charles were orphans by 1998.

The Tax Court said the both Garbers and the IRS were wrong - you are related to your parents under Section 382 (dead or alive), but that doesn't make you related to your siblings.

A BAD DEAL

Perhaps most galling for the Garbers is that at the beginning of the three-year Section 382 testing period, Charles owned 68% of the stock. If an intervening reorganization were ignored, Charles's ownership went only from 68% to 84%, a mere 16% change that wouldn't trigger the Section 382 limits. Unfortunately, the reorganization lowered his interest to 19% before he bought Kenneth's shares; Section 382 uses your lowest ownership interest in the testing period to measure ownership changes.

THE MORAL?

Transactions between relatives should always be vetted with your tax advisors, just in case. This is especially true when the deal involves a loss corporation.

Cite: Garber Industries Holding Co., Inc. v. Commissioner, 124 T.C. No. 1.

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MORE ON PRODUCTION DEDUCTION

January 28, 2005

The Treasury recently put out its first round of guidance on the deduction for "qualified production activity income." The TaxProf has pulled a good analysis of the new guidance from behind the Tax Analysts subscriber firewall for your reading pleasure.

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WE KNEW HIM WHEN...

January 28, 2005

TaxGuru.net has taken a step up in the blogging world. Mr. Kerstetter has joined a new group blog, "Social Security Choice," sponsored by The Club for Growth. He will be hanging there with, among other big shots, Pat Toomey, Larry Kudlow and Donald Luskin.

Thanks to BenefitsBlog for the pointer.

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TOUJOURS L'AUDACE!

January 28, 2005

It's common wisdom that when one needs to get out of a hole, one should first stop digging. Robert Rodriguez is apparently not cut from common cloth.

2003: BREAKING GROUND

Mr. Rodriguez first appeared in Tax Court in 2003; he was disputing his taxes for 1994 through 1996. Mr. Rodriguez filed no returns for those years, so the IRS assessed him based on 1099s and W-2s. He fought the IRS assessment by claiming he should be allowed deductions and should be treated as married, without providing evidence of either deductions or a wife.

At the end of the day, the Tax Court upheld the IRS assessment of $6,733 in taxes and $2,299.46 in penalties on $63,459 of income. Judge Laro also hit Mr. Rodriguez with a $10,000 penalty for pursuing a frivolous position.

2005: DIGGING DEEP

Mr. Rodriguez tested his luck again for his 1997 through 2000 tax years - this time before Tax Court Chief Judge Gerber. It went poorly.

   The opinion admonishing petitioner for his previous 
   conduct in 3 taxable years was filed on April 17, 2003.
   Nonetheless, petitioner had the audacity to once again   
   petition the Court to redetermine his tax liability for
   4 subsequent taxable years less than 3 months later, 
   on July 1, 2003, and to continue to submit the same 
   baseless arguments in this case as had been 
   presented in his earlier case.

George Danton liked audacity ("l'audace, toujours l'audace!"), but Tax Court judges don't:

   In his prior case, as in this case, petitioner was 
   warned before trial by respondent and during trial by 
   the Court that his position would warrant a penalty of 
   up to $25,000. Petitioner’s arguments are the same 
   frivolous and groundless arguments that we previously
   found were instituted primarily for delay. Petitioner
   continues in his failure to cooperate with respondent 
   and to advance the same frivolous arguments with the 
   Court after repeated warnings. Accordingly, we hold 
   that petitioner is liable for a $25,000 penalty under 
   section 6673.

Of course, audacity didn't work out well for Danton either.

WAS IT WORTH IT?

Let's look at the bottom line for Mr. Rodriguez's efforts:

Tax if returns were filed and taxes paid timely, 1994-2000: $24,209.
Tax and penalties assessed, 1994-2000, after two Tax Court cases: $66,141.74

As a result of his efforts, Mr. Rodriguez increased his liability 273%. Way to go, dude!

Cites:
Robert Rodriguez v. Commissioner; T.C. Memo. 2005-12
Robert Rodriguez v. Commissioner; T.C. Memo. 2003-105

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IOWA BLOGGERS ON SOYLENT GREEN TAX PROPOSAL

January 27, 2005

As best we can remember the movie "Soylent Green," the plot revolved arount a dystopian future where everybody was killed and processed into yummy wafers before they could get old. Maybe this thought helped inspire the proposal by Iowa's Senate Republicans to exempt those under age 30 from Iowa's income tax.

The Iowa Blogosphere has chimed in.

The enigmatic State 29:

    My god, could they get any dumber?

(On another topic, the State 29 illustrated commentary on the proposal to stamp out the menace of spinning hubcaps is priceless.)

Kris at Random Mentality is sceptical that a tax break will make Iowa financially attractive to new graduates:

   You get about twice the salary for going out of state. 
   If you want new grads to stay here based on 
   financials alone, you'd better look at grants to double 
   their salary, not tax breaks.

Jeff at Tusk and Talon has a long and thoughtful post. Among other things, he discusses the non-financial reasons young folks leave Iowa on graduation:

   Who doesn't dream of going out into the world and 
   conquering it--small town kid makes good and returns 
   triumphantly. There is never going to be a better time
   to make your attempt than when you finish up school 
   (either high school or college). So, kids bolt to 
   Chicago, L.A., New York, Minneapolis, Denver, Dallas, 
   or Atlanta to give life a whirl. Short of developing 
   some big cities or making our existing cities more like 
   big cities, we aren't going to avoid losing young ones 
   to those temptations.

The Des Moines Register has another story on this today. Charles Grassley appears unimpressed.

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IOWA BONUS DEPRECIATION CATCH-UP CLEARS HOUSE

January 26, 2005

The Iowa House yesterday passed HF 102 (formerly HF 23). The bill is an effort to clean up the depreciation and Section 179 mess left at the end of last year's special session.

The new bill would permit taxpayers to claim on 2004 returns the extra 2003 bonus depreciation and Section 179 deduction allowed in the Legislature's September 2004 special session. It would also allow taxpayers to simply continue to use the depreciation rules that were in effect before the special session.

The 2004 special session allowed Iowa taxpayers to claim bonus depreciation for assets eligible for federal 50% bonus depreciation. It also increased the Iowa maximum Section 179 deduction to $100,000 (from $25,000) to match the federal maximum. These changes were effective for 2003 returns, but were not passed until after most 2003 returns had been filed. The Department of Revenue then announced that the only way to use the deduction would be to file amended returns.

A Senate version of the bill (SSB 1061) was referred today to the Senate Ways and Means Committee.

WHAT WILL THE GOVERNOR DO?

The bill passed the house 99-0. No opposition has yet been noted, but the Governor's office has not committed to sign the bill. An aide to the Governor's office said, "Before the Governor can take a position, we like to see the bill in final form. The Senate has been known to frequently change and amend House Files."

Given the 99-0 margin in the house, it seems that the bill is an unlikely veto target.

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AT LEAST THE REVENUE LOSSES WILL BE MINIMAL

January 25, 2005

The latest plan to restore economic vitality to Iowa:

   Iowans under age 30 would pay no state income taxes
   under an economic development plan unveiled today 
   by Senate Republicans.

   "More than half of our college graduates leave the 
   state after graduation. We want to reverse Iowa's 
   brain drain and make our state a more attractive place 
   for our young people," said Senate Republican 
   Co-President Jeff Lamberti of Ankeny.

It's tempting to liken this proposal to a "kids eat free" special in Sun City, but we won't sink so low.

There's more:

   The GOP plan also would give businesses a tax credit 
   for newly created jobs paying at least $10 an hour. 
   The tax credit would be available for up to five years, 
   with a maximum annual credit of 20 percent of the 
   salary.

By our count, Iowa already has 19 different economic development credits, including the "industrial new jobs creation credit." If targeted tax credits were the key to economic development, Iowa would be the nation's economic juggernaut.

   Senate Republicans also proposed setting aside $25 
   million per year to help companies with the cost to 
   build or renovate business facilities. 

Apparently banks and investors can't be trusted with this.

   A state fund for assisting local governments with the 
   development of community attractions would increase 
   from $12 million to $25 million annually over five years.

So that's why the kids leave. Not enough government-financed attractions.

Here's an idea: eliminate a bunch of counties, consolidate government functions, get rid of all of these credits and special deductions, and reduce the tax rates. Somebody should try it sometime.

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IRS: 'UNSCRUPULOUS FEW' TARNISH TAX PRACTICE

January 25, 2005

Cono Namorato, who directs the IRS Office of Professional Responsibility, told the American Bar Association tax section that the IRS is beefing up its enforcement arm for tax professionals to deal the the "corrosive effect" of unethical practicitioners. Tax Analysts reports:

   Namorato acknowledged that the tax bar faces a 
   daunting task in staying current on difficult and 
   technical areas of the law. The tax field is fortunate to
   have practitioners with high standards, but the 
   "unscrupulous few" tarnished the standing of the 
   entire tax community, he said.

Still, Mr. Namorato is puzzled about how we got to this point.

   OPR is more interested in getting a positive "do the 
   right thing" message out, Namorato said, but a 
   troubling aspect is the number of "high-prestige 
   institutions" involved in abusive practices.

   "Where was the firm management?" Namorato asked.
   "Where were the internal controls?" 

The Tax Update has the same questions. Our investigations have given us some tentative answers:

Where firm management was:

Where the internal controls were:

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DUBIOUS ACRONYM DEPARTMENT

January 25, 2005

From Tax Analysts:

   The Marriage, Opportunity, Relief, and Empowerment
   Act (S. 6) would permanently extend the expanded 
   10 percent income tax rate bracket, "marriage penalty
   " relief, and the $1,000-per-child tax credit, as well as
   the expanded dependent care credit, 25 percent credit
   for employer- provided child care, and the expanded 
   $10,000 adoption tax credit.

Only time will tell the wisdom of a MORE tax bill.

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SUPREME COURT: CONTINGENT ATTORNEY FEES ARE INCOME

January 24, 2005

The Supreme Court today ruled that contingent fees in successful lawsuits are taxable income to the recipients, and must be deducted as miscellaneous itemized deductions. As miscellaneous deductions are not deductible for computing alternative minimum tax, this usually means they aren't really deductible at all.

The Court rejected the argument that the contingent fees shouldn't be treated as income to the plaintiff in the first place.

In effect the Court is again telling Congress: you broke it, you fix it. Congress last year changed this rule for plaintiffs who prevail in civil rights cases, but the Supreme Court's ruling will still apply to other cases unless Congress acts.

The Tax Prof is on top of this one.

Prior Tax Update Coverage: SUPREMES TO HEAR CASE ON TAXATION OF CONTINGENT ATTORNEY FEES IN INCOME

UPDATE: Prof. Maule weighs in with a kind of wisdom that has so far eluded our tax writers:

   The Congress needs a better way of dealing with tax 
   issues, and I, for one, will not accept "but it's 
   complicated" as an excuse for its failure to prevent 
   the sort of mess that taxpayers found themselves in, 
   when it is the Congress itself that created the mess. 
   The fact that Congress chose to help only some 
   taxpayers and not all highlights the dangers of a 
   Congress that legislates by caving to lobbyists rather 
   than acting with wisdom and even-handed judgment. 
   And leaving the clean-up to the courts is just plain 
   irresponsible.

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MARKETING IOWA'S TAXES

January 24, 2005

Heh.

Overworked?

US?

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NEW PRESIDENTIAL TERM, NEW CARNIVAL

January 24, 2005

The first Carnival of the Capitalists of the first second Bush term is up at the Business Opportunities Weblog.

The Carnival is a weekly collection of economics and business weblog posts. This weeks posts include one from Small Business Trends on "podcasting," touted as a "citizens' revolution in broadcasting." Photon Courier talks about "participatory mutual fund management," where the fund makes its investment decisions "based on the investment choices of 70,000 individual investors." Lots of good food for thought.

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BASIS CHEATING: A $29 BILLION PROBLEM?

January 24, 2005

Last week a Winston Knauss was spanked in Tax Court for inflating the cost basis of assets he sold to falsely reduce his taxable gain. While Mr. Knauss was penalized for basis fraud, a study published today by Tax Analysts says basis cheating may cost the IRS $29 billion in revenues annually.

The New York Times has picked up the story, which may make basis cheating part of this year's tax reform debate.

The study notes the obvious solution for basis cheating in stocks and securities: requiring brokerage houses to report the cost of stock sold to the IRS. Under current law, only the sales price of stocks is reported; this makes the IRS aware that stock has been sold, but the IRS gets no information on the amount of gain or loss.

The study also suggests other measures to reduce basis cheating, including

-require stock sales to be reported using average cost of the securities, eliminating fifo or specific identification reporting.
-Impose strict recordkeeping requirements to track stock basis, with a zero-basis rule if documentation isn't maintained.
-Eliminate other tax rules that can make basis determination complicated, such as Sec. 1031 for like kind exchanges.

ESTATE TAX REPEAL AND BASIS ISSUES

If the current version of estate tax repeal remains in place, another complication to basis tracking looms. Under current estate tax rules, the basis of all assets, including stocks and bonds, is adjusted to the date of death fair market value. If the current version of the estate tax repeal becomes permanent, taxpayers will be able to increase basis at death by up to $1.3 million ($3 million for spousal property). Since the "increase" has to to be based on initial basis, there is much more potential for confusion and error than the current system, which wipes the slate clean and assigns all estate property current fair market value.

As difficult as it can be to get information from a living person about the basis of stock purchased long ago, it's even harder to get it from the dead.

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SUN DOG ON A DARK DAY

January 22, 2005

W.A.K. 1-22-2005

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YOUR HONOR, YOU'RE FIRED!

January 21, 2005

When you're really, truly, doomed, an absurd and futile gesture sometimes is irresistable. That's the approach an Oregon-based tax scammer took when the IRS moved to shut down her operation.

Judy Harkins sold "corporation sole" arrangements for "American Tax Consultants." These deals purported to enable customers to avoid tax using a corporate form used by religious and charitable entities. Of course, it doesn't work.

A court order published today by Tax Analysts shows that Ms. Harkins refused to respond to the IRS motion for a permanent injunction against her activities or produce documents. Instead she sent a document called "Return of Unacceptable, Irrelevant, and Immaterial Documents" and said "this case is closed with the consent of all concerned." The district judge takes it from here:

   Defendant further stated that plaintiff's failure to prove 
   that it has not engaged in mail fraud by serving the 
   above referenced documents on the defendant acts as 
   plaintiff's "admission that you are harassing me and 
   have made an extortion demand under the color of law, 
   and to your consent of my filing a criminal action against
   you in a court of competent jurisdiction for harassment 
   and extortion as Respondents have failed to provide 
   their credentials/power of attorney to make any 
   legitimate demands on me." Finally, defendant states 
   that, "all respondents, Mike Mossman [sic], Karin J. 
   Immergut, Donald N. Dowie, Robert D. Metcalfe and 
   [this court), are fired in as much as they presume to 
   make any legal determination for me.
                                           (emphasis added)

As "Otter" in "Animal House" recognized, "I think that this situation absolutely requires a really futile and stupid gesture, to be done on somebody's part." Ms. Harkins was up to the task.

It wouldn't be a futile gesture if it worked. Of course, there was no risk of that happening. Quatloos has more on Ms. Harkins.

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IOWA BONUS DEPRECIATION FIX GOES TO HOUSE FLOOR

January 20, 2005

The bill that would permit Iowa taxpayers to "catch up" their 2003 50% bonus depreciation and added Section 179 deduction has cleared its first hurdle. The bill, HF 23, cleared the House Ways and Means Committee Tuesday, according to an e-mail newsletter from House Speaker Christopher Rants.

In last September's special session, the liegislature permitted taxpayers who claimed bonus 50% depreciation on their 2003 returns to claim it for Iowa purposes. They also changed Iowa rules to conform to the federal $100,000 Sec. 179 deduction limt (it had been $25,000 for Iowa).

Unfortunately, the Department of Revenue decided that the only way to claim the extra deductions was to file amended returns. By the time Iowa allowed these deductions for 2003, almost all 2003 returns were already filed. For smaller taxpayers, or for S corporations and partnerships with many partners, the cost of amending returns makes the deduction too expensive to use.

HF 23 will allow taxpayers to "catch up" the deductions in 2004, instead of filing amended returns. The leadership is behind it, so we can hope it passes soon enough for taxpayers to use this filing season. The bill has yet to start its way through the Iowa Senate.

To see the entire text of Speaker Rants' e-mail, click "read more."

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TAX FRAUD IS FOREVER, EVEN WHEN LOVE ISN'T

January 20, 2005

As a group, former spouses bear a heavy burden. If you only talk to embittered ex-husbands, for example, you could get the impression that their ex-es are responsible for everything from the failure of the League of Nations to the difficulty of getting your colleagues at work to make a fresh pot of coffee.

Another thing about bitter ex-husbands: after awhile, people stop listening. This week the Tax Court featured a case in point.

Winston Knauss operates a charter yacht business in Ft. Lauderdale. He also has a track record as a successful real estate developer. The IRS had assessed Mr. Knauss for civil fraud penalties, saying he had overstated his costs on some yachts he sold by over a million dollars - understating his income by the same amount. Mr. Knauss admitted that he couldn't document the additional costs, but said there was a good reason.

   Petitioner contends that he in fact made expenditures to
   account for his claimed basis, but is unable to 
   substantiate the expenditures because all of his records
   were stolen by his estranged spouse.

What, the dog wasn't hungry? The Tax Court wasn't buying:

   We do not find credible petitioner’s claim that his boat
   records were stolen by his former spouse. The former 
   spouse testified credibly that the only records she took 
   when she left petitioner were those pertaining to the 
   couple’s personal joint checking accounts.  She denied 
   taking records related to his yachts, yacht charter
   business, or any other records besides the joint 
   checking accounts in either 1995 or 1997.

Well, it's just "he said, she said," right? Maybe not:

   Moreover, some of the purportedly stolen records in 
   fact turned up as part of petitioner’s evidence intended 
   to document expenditures for yachts built in later years.
   That is, although petitioner claimed that the records 
   substantiating claimed capital improvements to the Sir 
   Winston II that he made from January 1996 to January 
   1997 were stolen, invoices for yacht-related 
   expenditures dated within that period were offered by 
   him into evidence for other purposes.

Tax Tip: If you plan to say your ex stole your tax records, do not, under any circumstances, say she stole the same records you introduce as your own evidence.

Things went downhill from there, and the Tax Court upheld the IRS assessment of $545,489 in tax and $475,875 in fraud penalties for 1991-1997.

HOW FRAUD OUTLIVES LOVE

While love often endures, no law requires it to. Not so with tax fraud. Most tax returns are final, for better or worse, after three years; if you underpaid, you're home free, and if you overpaid, you're out of luck. Fraudulent returns, in contrast have no statute of limitations. This was bad news for Mr. Knauss, who was past the three-year line.

While we all look for things that last in this uncertain world, we mostly can do without eternal statutes of limitation.

Cite: Winston Knauss, T.C. Memo 2005-6.

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FEBRUARY 2005 FEDERAL RATES (AFR) ARE OUT

January 19, 2005

The IRS has issued (Rev. Rul. 2005-8) the minimum interest rates for loans made in February 2005:

-Short Term (demand loans and loans with terms of up to 3 years): 2.92%
-Mid-Term (loans from 3-9 years): 3.83%
-Long-Term (over 9 years): 4.72%

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

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'PRODUCTION' DEDUCTION: IRS ISSUES INITIAL GUIDANCE

January 19, 2005

The 2004 "American Jobs Creation Act" begat an odd offsping: the deduction for "Qualified Production Activities Income." This deduction allows those who qualify to simply reduce their taxable income by a percentage of qualifying income: 3% for 2005, and 9% when fully phased-in by 2010.

The deduction is also known as the "Section 199 deduction." It is meant to help manufacturers, but it also applies to farmers, filmmakers, construction companies and, strangely, architects and engineers.

Congress punted much of the dirty work of figuring out this deduction to the Treasury. For example, the law allows the deduction for sales of goods made "in whole or significant part" in the U.S., but it never says what "significant part" means. For example, does a shirt made in Bangledesh but screen-printed in the U.S. qualify?

The Treasury took its first stab at trying to administer the new QPAI deduction this week with Notice 2005-14. The notice is 102 pages long, so we have a lot of reading to do to figure it out. It's also full of crunchy acronyms like MPGE, QPP and DPGR. This sentence out of the notice scores an acronym triple play:

   Under § 199, the gross receipts that are considered DPGR
   are not limited to the gross receipts attributable to QPP 
   MPGE entirely by a taxpayer.

Sort of chokes you up, doesn't it? I love the tax law!

If you're wondering, "significant part" means the work done in the U.S. is "substantial in nature." The notice says that depends on "facts and circumstances." It has a "safe harbor" where it meets the "significant part" test if 20% of costs are incurred in the U.S. That of course begs the question - how do you figure that? More on that later, if we figure it out.

Policy aside: provisions like this are are opposite of simplification. While it is easy to mock the Treasury for 102 pages of gobbledygook, Congress is really responsible. Congress decided to tax some business income more favorably and then threw the mess at Treasury.

In today's economy it is difficult to tell where "production" stops and distribution or design begin. All of these processes routinely cross borders. Now Congress has told the Treasury to draw arbitrary lines of "production" and "U.S. Activity through integrated multinantional economic processes.

Like the tsumani deduction, it was done with the best intentions - in this case, to support domestic manufacturers. Still, we all know which road is paved with good intentions.

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SURVIVOR - LEAVENWORTH!

January 18, 2005

Richard Hatch, the first "Survivor" victor ("The Naked Guy") may soon get to test his survival skills in federal prison. Mr. Hatch has been indicted on charges of criminal tax fraud for attempting to evade taxes on his Survivor winnings; he has agreed to plead guilty, according to "The Smoking Gun."

According to the indictment, Mr. Hatch failed to report the $1,000,000 Survivor prize, even though he received a form 1099-MISC reporting the earnings.

He is also charged with attempting to evade taxes on $321,000 he earned as a talk-show host by having the income paid to an S corporation he owned. S corporation owners are supposed to report corporation earnings, but the income purportedly never showed up on either his personal return or the corporate return.

Each count carries a maximum jail term of five years.

Where he may be going, he wins when he leaves.

Hat tip: Reader Heather

UPDATE: Professor Yin, as I should have known, is already all over this.

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TREASURY EMPLOYEES UNION: WE DON'T NEED NO STINKIN' QUALIFICATIONS

January 18, 2005

In a bold move to protect taxpayers from excessively-competent IRS agents, the National Treasury Employees Union (NTEU) is trying to prevent the IRS from hiring 300 new revenue agents until the minimum qualifications are watered down.

Tax Analysts reports:

   NTEU's request comes from an arbitrator's decision in 
   July 2004 that struck down a tougher set of 
   qualifications for IRS revenue agents aimed at 
   strengthening the accounting skills of the agency's 
   enforcement personnel. The new standards would have 
   raised from 24 hours to 30 hours the minimum 
   requirement for applicants' accounting coursework 
   completed in five specific areas at an accredited college.

The NTEU has a solid grasp on the importance of mediocrity in tax enforcement. We are reminded of the immortal words of Senator Hruska when similar standards were being applied to the Supreme Court:

   ...there are a lot of mediocre judges and people and 
   lawyers," Hruska declared. "They are entitled to a little 
   representation, aren't they, and a little chance? We 
   can't have all Brandeises and Cardozos and Frankfurters 
   and stuff like that there."

Darn tootin! And it's not like the tax law is complicated or anything.

The IRS is inexplicably insisting on hiring more qualified people:

   "If you accept the logic underlying the arbitrator's 
   decision -- that the higher standard is not essential -- 
   we will be hard-pressed to meet the challenges of 
   increasingly complex schemes to hide income from IRS 
   scrutiny," IRS Commissioner Mark Everson said when 
   the agency announced it would appeal the ruling. "To 
   protect the public's interest, American taxpayers deserve 
   someone with the equivalent of a college accounting 
   degree conducting IRS audits."

No we don't! We're not worthy! We enjoy training examining agents, and our clients love to pay us to do it!

/sarcasm

No link to the Tax Analysts article is available.

For some background on the dispute, go here.

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WARM UP AT THE CARNIVAL OF THE CAPITALISTS!

January 17, 2005

Even though it was 5 below at drive time in Des Moines this morning, it's always warm at the Carnival of the Capitalists. This week's roundup of economics and business web posts covers, among other topics, the decline of radio and the rise of the iPod shuffle; the existence of $700 billion in outstanding frequent-flyer miles; and misguided assumptions behind Iowa's economic development programs.

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IOWA SCRAMBLES TO CONFORM TO 2005 TSUNAMI DEDUCTION

January 17, 2005

The President has signed PL 109-1, allowing taxpayers to deduct January 2005 cash contributions for Tsunami relief on their 2004 tax returns. Now Iowans are waiting to see whether their state legislators will permit the same break on Iowa returns.

The federal Tsunami deduction allows individuals or corporations to deduct on their 2004 returns contributions by cash, check or credit card in January 2005 for the specific purpose of Tsunami relief. Taxpayers cannot again deduct the January 2005 contribution on their 2005 returns. They can, however, elect to deduct in in 2005 instead of 2004.

Bills have been introduced in both houses of the Iowa Legislature (SF 32 and HF 70) to allow the same treatment for Iowa. As written, it appears the bills would allow taxpayers to make different elections on their federal and Iowa returns. For example, a taxpayer writing a $500 check for Tsunami relief this month could deduct it on the federal 2004 return, but delay the deduction until 2005 for Iowa purposes.

That is probably a bad idea, administratively. Anything that unlinks federal and Iowa taxable income is a recipe for confusion. It would be best to require Iowa taxpayers to take the Iowa deduction in the same year they take the federal deduction.

PLACES TO MAKE THAT 2005 DONATION TO GET A 2004 DEDUCTION

Credit card donations made by January 31, 2005 at these sites will qualify for the deduction:

American Red Cross (via Amazon.com)

Salvation Army South Asia Relief Fund

WorldVision

Save the Children USA

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WILL IOWA ALLOW 2003 BONUS DEPRECIATION ON 2004 RETURNS?

January 13, 2005

Danny Carroll (R-Grinnell), Iowa House Speaker Pro Tempore, has introduced a bill (HF 23) to allow Iowans to take their 2003 "bonus" depreciation on 2004 returns. The bill would also allow taxpayers to "catch up" their 2003 Iowa Section 179 deductions on 2004 returns.

Legislation enacted last September allows Iowans to take "bonus" depreciation on assets placed in service after May 5, 2003; the legislation also conformed the limit for Iowa Section 179 deduction to the federal level of $100,000 for 2003. Of course, most Iowans had already filed their 2003 returns by the time this law was enacted.

The Department of Revenue has taken the misguided position that the only way for Iowans to take advantage of the law change is to amend their 2003 returns. It would be much more reasonable to permit Iowans to "catch up" the depreciation on 2004 returns, eliminating the need to pay preparers to amend returns. The cost of amending returns effectively denies the advantage of the deduction to many Iowans.

The bill to do legislatively what the Department refuses to do administratively is co-sponsored by Linn County Democrat Rob Hogg, so it doesn't appear to be a partisan issue. With Rep. Carroll pushing the bill, we can hope it will move quickly; otherwise it will be too late in the filing season to be of much use. No Senate counterpart of the bill has yet been introduced, as far as we can tell.

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TAX SHELTERS: IS SUNLIGHT A SOLUTION?

January 13, 2005

Professor Maule finds little hope that the government can deal with abusive corporate tax shelters. He discusses three obstacles to the IRS in dealing effectively with shelters, which we'll paraphrase as:

1. Judges are clueless about business.
2. Private lawyers can run rings around government attorneys.
3. The tax law is too complicated.

These problems strike Dr. Maule as intractable, and maybe they are. Still, there might be one more way to bring the distributed might of the private sector to bear on the tax shelter industry: public disclosure.

The tax law strictly prevents the IRS from making taxpayer information public. The restrictions serve a crucial role by allowing taxpayers to be honest with the taxman without undressing financially in front of the world.

DISCLOSE PUBLIC COMPANY RETURNS?

Return confidentiality would seem to be less of a concern for public companies. They already expose their assets to the world with audited financial statements, disclosures to analysts, press releases and the like. Tax returns are about the only aspect of their finances that remains demurely hidden.

The new mandatory e-filing regime that kicks in for corporations next year, combined with the new M-3 disclosure of book-tax differences, will provide information that could be placed on the web in a database similar to the SEC's EDGAR system. Gimlet-eyed competitors could use this information to ferret out tax shelters, helping the IRS by helping themselves.

Maybe this is a bad idea for other reasons. There are probably cases where disclosure would really be counterproductive, or simply ineffective. Any disclosure rules would have to deal with public company partnerships or joint ventures with private companies and non-US companies.

Still, it seems odd that the issue doesn't arise in discussing the tax shelter problem.

UPDATE: Dr. Maule has a response.

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IRS ISSUES WARNING ON FRAUDULENT TAX PREPARERS; TAX UPDATE HAS 'REAL' WARNING SIGNS

January 12, 2005

As another tax return filing season gets underway, the IRS has issued a new "fact sheet" warning taxpayers not to use fraudulent return preparers. They helpfully offer the following "Helpful Hints When Choosing a Return Preparer":

· Avoid tax preparers who claim they can obtain larger refunds than other preparers

· Avoid preparers who base their fee on a percentage of the amount of the refund.

· Use a reputable tax professional who signs your tax return and provides you with a copy for your records.

· Consider whether the individual or firm will be around to answer questions about the preparation of your tax return months, or even years, after the return has been filed.

· Review your return before you sign it and ask questions on entries you don't understand.

· No matter who prepares your tax return, you (the taxpayer) are ultimately responsible for all of the information on your tax return. Therefore, never sign a blank tax form.

· Find out the person’s credentials. Is he or she an Accredited Tax Preparer, Enrolled Agent, Certified Public Accountant (CPA), Licensed Public Account or Tax Attorney? Only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection and appeals. Other return preparers may only represent taxpayers for audits.

· Find out if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics.

· Ask questions. Do you know anyone who has used the tax professional? Were they satisfied with the service they received?

REAL WARNING SIGNS

This is, of course, all sound advice, but it is incomplete. You also should carefully watch for the following "red flags" indicating a potentially fraudulent tax preparer:

· You meet the preparer in an internet chat room where he goes by the name “Fraudster.”

· He schedules your initial consultation at an interstate highway rest stop.

· When you arrive for your initial consultation, he has already electronically filed your return and withheld your fee from your refund.

· He asks you to watch his meth lab while he runs to the drugstore.

· He insists “parolee” is just another way to spell “CPA.”

· He says he won’t charge you if you will help him claim his rightful inheritance as son of the late president of Nigeria.

Happy filing!

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IRS SPEAKS ON HSA CONTRIBUTIONS TO PARTNERS, S CORP SHAREHOLDERS

January 12, 2005

The IRS today issued Notice 2005-8, setting forth the treatment of HSA contributions by partnerships to partners and S corporations to shareholder-employees. In short:

· If made to partners as distributions, they are deductible HSA contributions by partner, not the partnership, and the contributions then have no effect on the partner's self-employment income.
· If made to partner as guaranteed payment: deductible by partnership, includible to partner, deductible by partner as HSA contribution, and subject to SE tax by the recipient partner.
· If made to 2% S corporation shareholder: Taxable wages, but not normally taxable for FICA, and deductible on shareholder 1040 as an HSA contribution.

As always, remember that limited liability companies are normally taxable as partnerships; "salary" payments to LLC members should be reported as guaranteed payments on the K-1, not as wages on a W-2.

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LATE TO THE CARNIVAL

January 12, 2005

We're delinquent in noting that this week's Carnival of the Capitalists is up. This weeks roundup of economics and business blog postings includes "the world's first blog-based calculation tool" for figuring what your 2005 paychecks will look like.

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TAX COMPLEXITY IS A PROBLEM?

January 12, 2005

Nina Olson, the National Taxpayer Advocate, says tax law complexity is "the largest source of compliance burdens for taxpayers..."

Oh, it's about the taxpayers now, eh? What about us tax preparers? Don't you want to generate more pointless paperwork to pay us to do?

Oh.

The tax preparation industry does benefit from complexity (though we certainly have enough to get by on now). Perhaps that's why the President chose to omit preparers from the new tax reform panel. That's an unfortunate choice, as there are surely preparers willing to rise above their seeming economic interests to find ways to simplify the tax law; if nothing else, a preparer might help the commission understand what any changes would really mean in terms of paperwork.

Well, maybe when they get organized, they'll check in with us.

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DID YOU HEAR ABOUT THE PENSION SECURITY PROPOSALS?

January 12, 2005

With all of the talk of social security and tax reforms, the Administration's new proposal on pension security reforms haven't been much noted. Fortunately, BenefitsBlog is on the job.

The proposals include risk-based PBGC premiums for underfunded plans and liberalized funding limits.

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PAPER BUSINESS RETURNS SLOUCH TOWARDS EXTINCTION

January 11, 2005

The Treasury severed another link to the tax profession's age of typewriters and carbon paper today. Starting with the 2005 tax year, corporations with assets over $50 million will have to file their federal tax returns electronically. The threshold falls to $10 million for 2006 returns. The new rules apply to both C corporations and S corporations.

The new rules will also extend electronic filing rules to many exempt organizations.

Taxpayers will be allowed to attach any supporting documents using "pdf" format, eliminating all need for paper submissions.

There are a few exemptions; for example, if a corporation files fewer than 250 Federal returns of any kind in a year - W-2s, 1099s, 941s included - electronic filing will be optional.

IRS Commissionar Everson says it's all for our own good. From today's IRS press release:

   “The use of technology through electronic filing can 
   improve both our service and enforcement missions,” 
   IRS Commissioner Mark W. Everson said. “Electronic 
   filing will help speed tax processing and reduce audit 
   cycle time. Taxpayers will benefit from electronic filing 
   by resolving uncertainties earlier. This is important 
   because audits, on average, take five years to 
   complete for large corporations. Speeding processing 
   also will help identify emerging trends and abuses 
   earlier, enabling the IRS to address problems before 
   they get out of hand.”

   Although there are no current plans to make electronic
   filing mandatory for small business taxpayers, all 
   taxpayers are strongly encouraged to adopt electronic 
   filing.

The amount of data keypunching now required at IRS service centers for paper returns is absurd. It's hard to feel good about the nation's finances when you consider how much they rest on scenes like this:

Cincinnati Enquirer Photo

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GREETINGS FROM THE FROZEN NORTH

January 07, 2005

While we should be posting on the naming of the President's tax reform panel, we are taking a little pre tax-season break in Northern Minnesota. We disembark from Duluth, where we look out directly at the abandoned loading crib off Canal Park, shortly. Maybe we will have great thoughts later if they have wi-fi in Lutsen...

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CONGRESS: 2005 CONTINUES, ON A LIMITED BASIS

January 07, 2005

Both houses of Congress voted yesterday to allow cash donations made specifically to Tsunami-related charities by the end of this month to be deducted on 2004 returns due April 15, 2005. Of course, normally deductions made in 2005 are only deductible on 2005 returns. We can assume a swift signing of the bill.

As narrow tax law carve-outs go, this one is hard to criticize, but it illustrates how complexity creeps into the tax law. There are always worthy causes in need of some special tax provision. The accumulation of these over time makes the tax law the hideous creature we've come to know and love.

Professor Maule's thoughts are worth reading. The Instapundit is more supportive.

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BENEFITSBLOG COLLECTS ALL THE NUMBERS

January 06, 2005

The BenefitsBlog has posted an extremely handy list of key inflation-adjusted compensation limit numbers for 2005. It includes 401(k) limits ($14,000, plus $4,000 "catch-up" contributions for the Beatles generation); the FICA base ($90,000) and a bunch of other compensation-related figures.

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WILL JANUARY 2005 TSUNAMI CONTRIBUTIONS BE DEDUCTIBLE IN 2004?

January 05, 2005

The leaders of the Senate Finance Committee have proposed allowing a 2004 deduction for cash contributions made to Tsunami relief efforts during January 2005. Normally, of course, such deductions would only be deductible on 2005 returns.

It appears that the plan is non-controversial and likely to pass, but you shouldn't claim January 2005 deductions on 2004 returns until it is signed into law.

Link: Grassley/Baucus press release on the plan (pdf format)

UPDATE: Professor Maule has a (wise) contrarian view. Not every problem is best solved by changing the tax law.and the complication and confusion caused by these changes have real costs. As he says, "There are other, less complicated, less chancy, and less questionable ways to assist those in need and to encourage others to do so."

Of course, that probably means the bill is a cinch to pass.

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IT'S VOLUNTARY, AND EVERYONE WILL PARTICIPATE

January 05, 2005

Now that the TaxProf gets to pull an article from behind the Tax Analysts subscription firewall every day, the weekly Tax Practice articles by attorneys Burgess and William Raby will get more of the attention they deserve.

Today the TaxProf gives us all access to the Raby's discussion of the new rules of Tax Practice before the IRS, as provided in the new version of Circular 230.

Mssrs. Raby shrewdly note how the "aspirational" standards - what practitioners should aspire to - slide into the practice so familiar to survivors of charitable drives in large offices: "it's voluntary, but we always have 100% particpation."

   The preamble to the final 2004 revision 
   explained that both the best practices 
   themselves and "the provisions relating 
   to steps to ensure that a firm's 
   procedures are consistent with best 
   practices, now set forth in section 
   10.33(b)," are only aspirational. This is 
   a "foot in the door" statement if we have
   ever seen one. Our "foot in the door" 
   view is reinforced not only by section 
   10.36 but by the preamble's conclusion on 
   this point that "although best practices 
   are solely aspirational, tax professionals
   are expected to observe these practices to
   preserve public confidence in the tax 
   system."

They say that the new standards recognize that tax practice largely occurs in groups, and that practice groups should have institutional quality controls in place. They think this could be a step in the direction of mandatory "peer review" along the lines of that required in financial audit practice:

   We think those revisions could be the 
   first step toward requiring tax practice 
   peer review by outside reviewers --  
   preferably, we should add, conducted by 
   members of the profession as is peer 
   review of attest function work within the 
   CPA profession and not by an outside 
   governmental body, such as the Public 
   Companies Oversight Board audit practice 
   reviews mandated by the Sarbanes-Oxley 
   Act.

It's worth reading the whole thing.

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TOO SOON THE BAGBOY

January 04, 2005

Where were customers like Pansy V. Panages when I was a bagboy?

Ms. Panages, a florist in Sparks, Nevada, had an avocation: semi-pro slot-machine player. After work she would spend 30 or more hours per week pursuing riches at the Smith's Food & Drug slot machines. She had an angle:

   She began cultivating relationships with some of the 
   grocery employees and started “tipping” them so they
   would alert her to what machines had not “paid out” 
   recently.  Petitioner usually played the machine or 
   machines that had gone the longest without a winner. 
   On her 2001 tax return, she deducted as business 
   expenses $6,000 in tips she paid grocery employees 
   for that information.

After asking an IRS representative how to file a return as a "professional gambler," she reported the expenses on a schedule C. The IRS on audit disallowed the expenses, and she went to Tax Court.

The Court applies a stern test for taxpayers wanting to be taxed as gambling pros. The test pretty much requires you to abandon any other means of making a living:

   Petitioner’s livelihood was not her winnings from slot 
   machines; instead, her primary income came from 
   her flower shop. Her gambling was not a trade or 
   business under section 162.

Pansy still could itemize her gambling deductions, but that only helps to the extent she exceeds her standard deduction.

Still, she won one part of her case: the Tax Court refused to impose penalties for the addtional taxes she owed.

Cite: Pansy V. Panages v. Commissioner, T.C. Summary Opinion 2005-3.

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YOU CAN'T BLAME A TEACHER FOR TRYING!

January 04, 2005

Teaching can be an all-absorbing profession. It can be hard to tell where your job ends and your life begins. The IRS and the Tax Court helped one high-school English teacher draw that line yesterday:

   Respondent argues, and we agree, that petitioners’ 
   claimed expenses relating to Mrs. Garcia’s 
   employment as a high school English teacher are 
   personal in nature and not ordinary and necessary 
   business expenses. Giving birthday cards and wedding
   presents, renting movies, visiting the Museum of 
   Natural Science, contributing to a holiday party, 
   subscribing to periodicals of general interest, and 
   purchasing tissues, lotion, and cleaning supplies are 
   not directly attributable to the performance of the
   duties of a high school English teacher. These are 
   personal expenses and are thus not deductible under 
   section 162(a) as ordinary and necessary business 
   expenses.

   We next address whether petitioners may deduct 
   expenses relating to Mrs. Garcia’s European travels. 
   Mrs. Garcia claims that her experiences during her 
   travels gave her new insights into some of the topics 
   she taught in her English class.

   ...

   While we recognize that Mrs. Garcia may have gained
   insights during her travels that were helpful to her 
   role as a high school English teacher, she has not 
   established a direct relationship between her travels 
   and the specific skills required of her as a high school 
   English teacher. Nor has she shown that the travels 
   were expressly required by her employer.  Accordingly,
   petitioners are not entitled to deduct the expenses
   related to Mrs. Garcia’s European travels.

Her husband, a high-school golf coach, seems to have his own work-life issues:

   We next address whether the amount Mr. Garcia paid
   for country club dues is deductible. Section 274 
   contains several exceptions to the deductibility of 
   ordinary and necessary expenses incurred in carrying 
   on a trade or business. Expenses paid or incurred for 
   membership in any club organized for business, 
   pleasure, recreation, or other social purpose are not
   deductible. Sec. 274(a)(3). More specifically, expenses
   paid for golf and country club dues are not deductible...
   No one, including golf professionals or instructors, may
   deduct club dues. Congress explained that the
   non-deductibility rule eased compliance with former 
   law that required determining whether the primary 
   purpose of belonging to the country club was personal.
   Accordingly, petitioners are not entitled to deduct 
   $1,628 that they paid in 2000 for Mr. Garcia’s 
   membership in the Baywood Country Club.

Still, it would take a heart of stone to not be touched by Mr. Garcia's willingness to join a country club, for the kids.

Well, maybe you can blame a teacher for trying. The Tax Court did, imposing a $1,595 penalty for the $26,356 in disallowed deductions.

Cite: Garcia vs. Commissioner, T.C. Summary Opinion 2005-2

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WHAT DID THEY FEED THAT THING?

January 04, 2005

Why "barf," and who had to mop it up?

Maybe it stayed at the New Year's Party too long...

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HIPAA PARTY

January 04, 2005

BenefitsBlog has the scoop on the herd of HIPPA regulations issued at the end of 2004.

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'NOT EVERYTHING IN LIFE IS DEDUCTIBLE'

January 03, 2005

Occasionally a judge in a relatively mundane case makes an observation so wise, pithy and memorable that it deserves to be chiseled across a courthouse entrance. Tax Court Special Trial Judge John Pajak's statement "Not everything in life is deductible" should be etched into the face of Tax Court headquarters.

The statement comes from today's case John A. Walz, Jr. v Commissioner (T.C. Summary Opinion 2005-1). The case provides a handy summary of what the tax law looks for when a musician-employee attempts to deduct "business" expenses.

Mr. Walz is a cellist of some renown. His services were rendered in 2000 under union agreements to 25 different organizations, including the Los Angleles Opera and the Long Beach Symphony; as a result, he received 25 W-2 forms for 2000.

WHAT WORKED

In the Tax Court Mr. Walz claimed "employee business expense" deductions for a wide variety of items. The Tax Court allowed him deductions for:

- a room at his residence in Pasadena that he used exclusively for a studio and home office.

- Costs for repairs to his cello and bow.

- $2,689.72 for supplies and postage.

- $566 for CDs, books, DVDs and sheet music, "all of which related to his profession."

- $670 for "publicity shots."

- $3,415 union dues

- $1,679 of "business-related bank fees."

WHAT DIDN'T

The Court disallowed:

- $10,135 in travel expenses for which the taxpayer failed to meet the "stringent" substantiation rules of Section 274.

- an unspecified amount spent attending concerts.

The money quote of the decision:

   The claimed deduction of $1,969 is for meals 
   petitioner ate.   Based on petitioner’s testimony, we 
   find this to be a nondeductible personal expense under 
   section 262. As the Court said at trial: “Not everything 
   in life is deductible.”

Dang.

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HAPPY NEW YEAR! TIME TO START YEAR-END PLANNING!

January 03, 2005

December is the traditional time for year-end tax planning. That's sensible, of course, but it asks a lot of one month to undo the other eleven. When tax planning requires actual cash, it is best to spread the planning over the entire year. So let's get started!

MAXIMIZE YOUR 401(k) CONTRIBUTION

The easiest way for most taxpayers to cut their tax bill without reducing their net worth is to increase their 401(k) payroll deduction. When you have your employer withhold extra from your 401(k) plan, you may reduce your current cash on hand, but the money is still yours - it's just in a different pocket. 401(k) contributions are not currently taxed, and the earnings build-up tax-free until you withdraw them on retirement.

Many employers match some or all employee deferrals. In that case, you are turning down the boss's money if you fail to defer as much as the boss will match. That's not just poor planning; that's crazy.

The 401(k) limit for 2005 is $14,000, plus an additional $4,000 "catch-up" contribution for participants aged 50 and up.

IRA NOW!

Most people ask what the last day they can contribute to an IRA. From a tax-planning standpoint, it's better to ask what the first day is for IRA contributions for 2005. The answer is January 1, 2005.

If you make your $4,000 2005 IRA contribution now, rather than the last possible day (April 15, 2006), you have the $4,000 building up tax-deferred income 15 1/2 months longer. There is also an additional $500 "Catch-up" contribution for IRA participants aged 50 or over.

This holds true whether your IRA contribution is for a Roth IRA or a traditional IRA - deductible or not.

Not everyone has $4,000 sitting around waiting to be put in an IRA. If that's true now, it's not any less likely to be true 14 months from now. But if you start putting a little aside each paycheck for your IRA, you are a lot more likely to fund your 2005 IRA than if you wait until the last minute.

START YOUR OTHER TAX DEFERRED CONTRIBUTIONS NOW

After you have your 401(k) and IRA funding in place, consider any other tax deferred plans you might be involved in. The most common of these might be "section 529" plans. These plans enable you to make contributions to a tax-deferred account that can be tapped tax-free for college expenses. While contributions to section 529 plans are non-deductible for federal purposes, an Iowa deduction is available for the "College Savings Iowa" section 529 plan. The sooner you contribute, the greater the benefit.

Other common tax-deferred plans include "Education IRAs" and Health Savings Accounts.

CONSIDER YOUR WITHHOLDING AND ESTIMATES

Probably the worst part of a prosperous new year is the tax bill at the end of it. This is especially true for taxpayers who have a lot of income not subject to withholding - S corporation or partnership income, for example, or self-employment income.

If you don't meet the tax law rules for withholding or estimates, you may find yourself with a non-deductible underpayment penalty. Many taxpayers with a big year-end bill don't have an underpayment penalty, but they still don't like writing that big check.

From a purely financial standpoint, it is better to pay only the smallest tax permitted during the year and then pay the balance the following April. Taxpayers with the discipline to manage their extra cash can have it work for them, rather than the IRS, in the meantime.

Still, if you can't bear the sticker shock in April, or if you habitually have to borrow to make your tax payments, you should increase your withholding or estimates accordingly.

ESTIMATED TAX AND WITHHOLDING REQUIREMENTS

The tax law requires individuals to pay in through withholding or estimates the lesser of

-90% of current year tax, or
-100% of prior year tax (110% if your AGI exceeds $150,000 in 2004).
-Lower installments may be available if your income is seasonal or fluctuating during the year.

We hope you have a prosperous 2005!

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