Tax Update Blog: March 2005 Archives
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TODAY'S DILEMMA: DO YOU FIRE A THIEF WHO HELPS YOU CHEAT ON TAXES?
March 31, 2005
Finding that your bookkeeper is stealing from you is rough. It's rougher still when that bookkeeper has been maintaining your "secret list" of income that hasn't been reported to the IRS.
That didn't faze Orange County, California divorce attorney Albert M. Graham. He called the cops, fired the bookkeeper, and sued her, recovering much of the embezzlement. He also sued his accountant for failing to detect the embezzlement. Perhaps coincidentally, the Tax Court today ruled that Mr. Graham is liable for fraud penalties for understating his federal tax liability.
THE MORAL: Hard to say. Something about honor among thieves, maybe.
Cite: Graham v. Commissioner, T.C. Memo. 2005-68
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COMMUNITY-PROPERTY SPOUSE GETS ALIMONY-LIKE DEDUCTION FOR NONALIMONY PAYMENTS TO EX
March 31, 2005
John Dunkin wasn't ready to retire when he became eligible for his pension from the City of Los Angeles. His ex-wife, though, was ready to collect her $2,072 monthly share of his pension, which she was entitled to under their divorce decree under California's community property rules.
Even though he wasn't collecting the pension yet, the California courts ordered him to pay the $2,072 monthly as if he were. The Tax Court today ruled that he could exclude the amount he was paying his spouse from his taxable income.
NORMALLY ONLY ALIMONY GETS EXCLUDED
The tax law allows spouses to deduct alimony they pay under a divorce decree. The law spells out what alimony is (generally specified payments for a period not continuing after the death of the recipient, and not child support), and it is unusual to see any item not strictly fitting that definition allowed as a deduction (in fact, a deduction for ex-spouse payments is disallowed in another Tax Court decision issued today).
This decision doesn't say how the former Mrs. Dunkin should be taxed, but presumably she would have to pick up the payment as income.
April 15 is the date the statute of limitations runs for 2001 returns. A lot of working California divorcees might be filing some quickie refund claims based on this case. It might apply the same way in other community property states.
Cite: Dunkin v. Commissioner, 124 T.C. No. 10.
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TAX REFORM PANEL IN SAN FRANCISCO
March 31, 2005
Milton Friedman is the big name on today's witness list for The President's Advisory Panel on Federal Tax Reform. The TaxProf has all of the details and links.
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ATTORNEY IN MCLEOD ISO AMT CASE RESPONDS
March 31, 2005
We received the following email in response to our post, TAX COURT TO MCLEOD AMT VICTIMS: SORRY, BUT YOU'RE STILL SCREWED. The author was the taxpayer attorney in the Speltz case discussed in the post.
Dear Mr. Kristan,
I felt the article on the Speltz Tax Court decision was very well written and properly hit home on the need for Congress to provide remedial relief on this critical area of unfairness and injustice.
One thing I did want to point out, however, is that the conclusion that “as a matter of law, the Judge was right” is actually in my belief not correct. Certainly there is no question that the liability imposed by the ISO AMT code is correctly calculated, but that is not the end of the inquiry. Congress passed Section 7122 in 1998, and that law and its corresponding Regulations provide for relief in situations where “public policy and equity” considerations engage. Certainly I would argue (and did, in fact) that if that provision does not apply in a case where a taxpayer is being asked to pay taxes at a 220% tax rate (11x that of a similarly situated taxpayer), then I’m not sure it has any meaning at all – and Congress does not pass laws that have no meaning. Proper consideration and statutory interpretation of all the tax laws that apply in this case (the ISO AMT Statute, the ISO Statute and the ETA Statute) and a review of the relevant legislative history, lead to the conclusion that the Speltzes are indeed entitled to relief under the public policy/equity prong of Section 7122, and also under the hardship prong.
Of course, relief from the Court would only have solved half the problem for the Speltzes, who are already overextended in their efforts to pay over $100,000 in excess tax. Relief from Congress is needed, and thankfully is gaining great support in both the House and Senate. After a number of years, we are hopeful that Congress is now focusing on the need for relief for persons subjected to these egregiously disproportional ISO AMT tax liabilities.
Attached please find (i) one of the Briefing papers for the Speltzes that supports the positions I’ve summarized above, (ii) a summary and PowerPoint Presentation on the proposed legislation, and (iii) an encouraging mention of this legislation in a recent Tax Notes article, with positive comments from Reps. McCrery and English. We are encouraged that relief is on the way for the Speltzes and the many others harmed by this unintended effect of the ISO AMT law.
Please do not hesitate to contact me if you have any questions.
Best Regards.
Tim Carlson
President
Coalition for Tax Fairness
301.515.6584
Links to the attachments mentioned are below. We don't link to the Tax Notes article because it is a copyrighted piece behind a subscriber firewall.
Summary of proposed AMT relief legislation
Powerpoint discussion of ISO AMT rules
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RUNNELLS FARMERS LEARN: IRS HAS NO INTEREST IN ABATING INTEREST
March 31, 2005
Two Runnells, Iowa couples learned yestarday that a ponderous IRS bureaucracy doesn't give the Tax Court enough reason to waive interest on tax liabilities.
The couples were members of a farm partnership. After an IRS exam, the couples were assessed additional tax on the partnership income. The used the IRS Appeals process to contest the assessments.
The case lingered at the appeals level for several months, but the taxpayers apparently failed to come to an agreeement, so the IRS issued a "statutory notice of deficiency." This "90-day letter" is a ticket to Tax Court. Several times in the process the taxpayers were told that interest was running as long as the tax was unpaid.
The taxpayers apparently didn't contest the IRS adjustments, but they argued that the interest was unreasonable. The case went back to appeals. It was assigned to one appeals officer, and then reassigned because the first officer was too swamped to get to it. The new appeals officer abated some of the interest, but left a total of about $6,300 of interest owing.
The Tax Court said the delays in the appeals process weren't enough to waive the remaining interest:
Petitioners could have paid as early as the date
of the original notices of deficiency in February 2000, or they could have paid upon settlement of the original Tax Court cases in October 2000. When petitioners made voluntary payments in May 2001, they could have paid the entire amounts due and requested refunds in their abatement claims. Finally, petitioners could have paid when they received their final tax bills in December 2001 and January 2002, respectively. However, petitioners did not pay the entire amounts due until December 10, 2002. Petitioners’ delayed payments of their liabilities are not attributable to error or delay by any officer or employee of the IRS in performing a ministerial act.
Cite: Bartelma v. Commissioner, T.C. Memo 2005-64
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SOMETIMES IT'S NOT THE SOFTWARE
March 31, 2005
Tax Analysts reports that the IRS has given a taxpayer extra time to make a tax return election that he says he missed because he used TurboTax software.
The anonymous taxpayer had $270,000 of investment interest expense. He also apparently had capital gains exceeding that amount. Investment interest is deductible only to the extent of your investment income; capital gains aren't counted as investment income unless you make a special election to have your capital gains taxed at ordinary income rates.
Many taxpayers skip this election because unused investment interest deductions carry forward; if you have enough interest income, you will be able to use the extra deductions without losing the benefit of capital gain tax rates.
The company that makes TurboTax says that the taxpayer would have been notified of the election if he used the software properly, and there's no reason to doubt it.
Still, one has to wonder about a guy with income and deductions in that range not at least checking first with a tax professional. He had to get a private letter ruling, for which the IRS filing fee exceeds $5,000. He also apparently paid somebody to prepare the ruling request for him, which is probably another $2,000 or more.
Another taxpayer learns the hard way: nothing costs more than cheap tax advice.
UPDATE: The Tax Prof has a link to the complete Tax Analysts report (the link at the top of this post is to a summary)
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ON THE ROAD
March 30, 2005
The Tax Update is out of the office today, so you, dear reader, should hit the information highway to visit:
TaxGuru.net, who has a, well, contrarian take on the IRS "Tax Gap" figures released yesterday.
Professor Maule discusses "10 tax urban legends", including:
One story tells of a high school teacher and coach who concluded that money earned during the summer as an umpire was not taxable because umpiring was a hobby. When challenged by a very bright and experienced tax lawyer turned tax professor, the teacher-coach dismissed the explanation because, get this, the commissioner of the baseball league had explicitly told the umpires that their income was not taxable. Amazing. Get your tax advice from a baseball commissioner, and have your surgery done by a lumberyard sales clerk.
The Tax Prof and the BenefitsBlog also have good new stuff today.
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STUPID ISN'T CHEAP
March 29, 2005
Today was a bad day in Tax Court for tax protest Tax Honesty arguments. In four separate memorandum decisions, three judges imposed $42,500 in penalties for wasting the court's time with frivolous arguments.
One guy scored the daily double with two fines: a $12,500 fine for Tax Honesty arguments against about $34,000 in taxes for 1994-1996, and a $10,000 fine on top of a $12,006 deficiency for 1997.
As a public service, the Tax Court describes some of the arguments they found fineworthy:
In the objection, petitioner objected to the capitalization
of certain letters of his name and to the address listing
petitioner as a “resident” of a State “via the identifier of
‘TX.’” Petitioner claimed he was not a resident of that State.
MORAL: Abbreviation is no defense!
Cites:
Florance v. Commissioner, T.C. Memo 2005-60 ($10,000)
Florance v. Commissioner, T.C. Memo 2005-61 ($12,500)
Storaasli v. Commissioner, T.C. Memo 2005-59 ($5,000)
Kaplowitz v. Commissioner, T.C. Memo 2005-58 ($15,000)
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STILL KEN-FUSED?
March 29, 2005
Ken Fuson's sally at blogging that we noted yesterday hasn't gone over well with the Iowa bloggers. First State 29 took a swing, and now Royce the Iowa Libertarian and Kris at Random Mentality have weighed in. The results look bad for the paid guy.
While Mr. Fuson was trying to smile about blogs, it looked more like a grimace.
Ken, we're touchy about the underwear thing.
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WE DON'T LIKE SURPRISES
March 29, 2005
As we are about to enter the final month of tax season, hundreds of thousands of Iowa returns have already been filed. Many of these returns are computed assuming that the Iowa General Assembly will pass HF 721, which would bring Iowa tax law up to date with the federal changes enacted in the last year.
Like a second marriage, this faith in the responsibility of our legislature is a triumph of hope over experience. Yet we take a number of deductions, such as the January Tsunami contribution deduction, based on this faith.
The Senate has been sitting on HF 721 since February 17. There's no indication that it is controversial, and we expect it to pass.
Yet... the legislature has surprised us before. Let's hope they don't surprise again.
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FREEDOM LOVING PATRIOTS: READ WITH DISCRESSION
March 29, 2005
Like the emergence of daffodils and the return of the robin, the blossoming of permanent injuctions against flaky tax preparers is a perennial sign of the spring. A permanent injunction issued last week by a federal judge in Oklahoma gives a glimpse of how tax quacks use ugly websites to get folks to pay to get themselves in tax trouble.
The Oklahoma injunction, issued to Richard M. Blackstock, orders:
...that Blackstock and his representatives, agents, servants, employees, attorneys, and those persons in active concert or participation with him, remove from their websites, including www.freedomcommittee.com/5567/5567, all abusive tax scheme promotional materials, false commercial speech, and materials designed to incite others imminently to violate the law (including the tax laws), to display prominently on the first page of those websites a complete copy of this Order, and to maintain the websites, at their own expense, for one year with a complete copy of the Court's permanent injunction so displayed throughout that time; and to file with the Court, within 15 days of the date of this Order, a certification that he has done so;
What deadly, attractive snare does this website with the strange url ending in "5567" have that must be shut down? Why, it's... another injunction! Now there's a catchy promotional idea!
This injunction was issued against another, apparently affiliated, abusive promoter. This page will get crowded with another injunction. But wait - the injunction disappears before your eyes and another one that invites you to send them money, tries to appear:
Cancelling that screen, we get a website featuring this catchy slogan:
Yeah, who needs it? Not me! Sign me up!
But to close the deal, the part of the web site marked "USDC Court Order" has this to say:
Any tax promotor who can spell "discretion" with two s's has to be pretty effective. Who could resist?
UPDATE: Another misspelling noted. It's "GUMMINT," NOT "GOVERMENT". We regret any misunderstanding.
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DEMI-CARNIVAL
March 28, 2005
This week's Carnival of the Capitalists is presented in two installments; the next one is to be posted Wednesday. The first installment is up at The Mobile Technology Weblog.
The Carnival is a weekly roundup of economics and business blog posting, and the reading is always good.
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WHY DOES HE THINK WE WEAR UNDERWEAR?
March 28, 2005
Ken Fuson of The Des Moines Register gets to the essentials of the debate on whether bloggers are journalists:
They also are raising serious concerns about whether a person who could be sitting at home in his underwear, writing on his blog while watching "The Price is Right," should be able to call himself a journalist.
And the answer is no. True journalists would be watching "Jeopardy!," dreaming they will win as much as that little geek (term of endearment) Ken Jennings, which would allow them to quit their dead-end jobs and launch their own blogs.
Of course, some would say "true journalist" is an oxymoron...
UPDATE: Ouch. Mr. Fuson gets spanked.
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PROCRASTINATION AND PENURY: FOR BANKRUPT TAX RETURNS, BETTER LATE THAN NEVER
March 28, 2005
As you gather those 1099s, contribution receipts and other tax data up, you are not only doing your civic duty and staying out of trouble with the IRS. You are also making prudent preparations for a bankruptcy filing.
No, doing your tax return isn't going to make you broke (but failing to do so might). But if you do file bankruptcy - and we really hope you never have to - tax debts that are over two years old may be discharged if they were reported on a tax return.
In Iowa and several neighboring states, this 2-year deal even works for late returns, according to a court decision handed down Friday.
The Bankruptcy Appelate Panel for the Eighth Circuit, which covers Iowa, Minnesota, Arkansas, Nebraska, Missouri and the Dakotas, ruled in favor of a bankrupt taxpayer who had gotten several years behind in filing tax returns.
Gary Wayne Colsen failed to file tax returns for 1992 through 1996. By 1998 the IRS had caught up with him, assessing taxes for 1992 through 1995. In October 1999 Mr. Colsen finally filed all of his returns for 1992 through 1996, getting refunds of some of the taxes originally assessed. In February 2003, Mr. Colsen filed for Chapter 7 bankruptcy.
WHEN CAN TAXES BE DISCHARGED IN BANKRUPTCY?
The bankruptcy law has rules to prevent the use of Chapter 7 as a tax planning tool. Taxes can't be discharged, for example, if a return has never been filed, or if a late return was filed within two years of bankruptcy. The IRS argued that Mr. Colsen's late filings didn't count as "returns" because they had already assessed Mr. Colsen's taxes without returns for 1992-1995. The IRS said the filings were merely administrative refund claims. The Bankruptcy Appelate Panel disagreed:
This result is consistent with a plain reading of
the statutory language which does not contain any
modifiers for the term “return.” It is likewise
consistent with the Supreme Court’s use and
interpretation of the phrase “honest” in connection
with what constitutes a tax return. Additionally, this
result is consistent with the Bankruptcy Code’s intent
with respect to taxes: taxes should not be discharged
unless the taxing authority has had an opportunity to
collect them. The time limitations in the Bankruptcy
Code relating to taxes are designed to ensure that
taxing authorities have the opportunity to collect
taxes before any discharge in bankruptcy... In the
instant case the Internal Revenue Service had an
opportunity to collect the Debtor’s income tax
liabilities for tax years 1992 through 1996.
CONFLICT WITH SIXTH CIRCUIT?
The Sixth Circuit apparently holds that no post-assessment return can qualify for bankruptcy discharge. The Eighth Circuit specifically disagreed with that rule. For the moment, the Eighth Circuit is the place for "better late than never" bankruptcy filings.
Cite: Gary Wayne Colsen, Debtor, v. United States, No. 04-6042 NI
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RABY BROS. REVIEW IMPLICATIONS OF BONGARD
March 28, 2005
Thanks to the excellent arrangement between the TaxProf and Tax Analysts, the Raby's analysis of the Bongard Tax Court case on family limited partnerships (FLPs) is now available to all. You may read it here (pdf format). From the Raby article:
The family limited partnership does offer great
opportunities for preventing family net worth from
splintering, including some degree of asset protection.
In the process, it also offers the opportunity of
transfer tax discounts. If the discounts are all that
is being sought, however, and it appears that the decedent
merely moved the assets into the partnership and nothing
more, little is apt to be accomplished taxwise. There is
a message in all this: Practitioners need to review
not only the basic estate planning strategy but also
periodically review its implementation. The tax devil
often lurks in the details. And that is not true of FLPs
alone.
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WHY THE TAX LAW IS A MESS, CHAPTER...
March 26, 2005
From yesterday's Des Moines Register:
Bills let track keep sales taxes
The owners of a proposed $70 million racetrack in Newton would be allowed to keep the sales tax revenue the facility collects over the next 10 years under bills introduced Thursday in the Iowa Legislature.
The proposal - believed to be the first of its kind in Iowa - would allow U.S. Motorsport Entertainment Corp., the developer of the track, to pocket up to $12.5 million that its customers pay in sales taxes on tickets and concession stand sales at the Newton track. Once that total amount is collected, the sales tax revenues from the track would begin flowing into the state treasury, under the terms of the legislation.
This is a fine case study of how good intentions lead to unfair and complex tax laws.
For whatever reason, some folks have decided that having a $70 million NASCAR track in Newton is a great idea -- good enough to put $12 million of taxpayer money from the City of Newton. The Vision Iowa people declined to throw in another $20 million. Some legislators are now trying to let them keep their sales tax proceeds as a back door way of financing what Vision Iowa wouldn't.
After all, they say, it's free:
"It's not money the state currently has," (Newton Mayor Chaz) Allen said. "It's not giving up anything. . . . And if the state helps the motor sports complex get going, the rest of the sales tax goes to the state coffers."
Well, not exactly. Once they do this for the track, everybody else is going to want some of that:
Some Iowa sports and entertainment leaders said the Newton track legislation could open the door for similar requests from other attractions that lure visitors to the state.
Matthew Krantz, general manager of Adventureland, the Altoona amusement park, said, "I don't know if we'd pursue it, but it would be an attractive option to look at."
The result: a free-for-all where every well-connected business and industry tries to keep their own sales taxes - and ultimately lost tax revenues, which have to be made up by less well-connected taxpayers.
TILTING THE FIELD
The legislation would also give the track an unfair pricing advantage compared to its competitors. No, its competitors aren't just other NASCAR tracks, or the Knoxville track, which seems to get by while collecting sales taxes. The competition is everywhere else somebody might spend a leisure dollar instead of the track - say a ball game, a restaurant, or a movie.
COSTS FOR EVERYONE
In addition, by adding a layer of complexity to the tax law, the provision would add just a bit more to the difficulty of complying with and enforcing Iowa's tax laws, penalizing every Iowan.
As usual, the narrow interest that would benefit from a tax break is highly-motivated and well-connected. Those that would be damaged - the rest of us - don't have a lobbyist on this issue. That is, unless State 29's secret identity is somewhere on this list.
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TRADE YOU 'BOULEVARD OF BROKEN DREAMS' FOR THE PRINCIPAL'S 1040
March 25, 2005
Michelle Malkin reports on an unintended side effect of "peer-to-peer," or P2P, file sharing programs. These programs are used to trade music and movies across the internet. Ms. Malkin reports that a number of home-prepared tax returns have been inadverently saved to locations on the computer drive that are shared to enable file swapping, and are now available for public viewing:
Don't believe it? Download LimeWire and type in "federal return" or "1040" and see what pops up. I did it, and within a few minutes, I had access to scores of tax returns that included names, addresses, social security numbers, and bank account numbers.
Among hundreds of tax returns I saw, here are three I downloaded (note: sensitive information has been redacted): 1, 2, 3.
Hat tip: TaxGuru.net.
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TAX COURT TO MCLEOD AMT VICTIMS: SORRY, BUT YOU'RE STILL SCREWED
March 24, 2005
The bursting of the telecom bubble left victims strewn across the landscape. None got a worse deal than telecom employees who had exercised "incentive stock options" (ISOs).
ISOs were set up to be a better deal than ordinary "non-qualified" stock options. When taxpayers exercise non-qualified options, the difference between the price they pay to exercise the options and the value of the stock is treated as salary, and they pay taxes on it.
Example: A taxpayer owns non-qualified options on 100 shares of stock with an option price of $1. She pays $1 per share to exercise the stock when the shares are worth $10 each. The $9 per share "bargain element", or $900, is added to her W-2 income.
ISOs are different. The taxpayer pays no tax when an ISO is exercised; if the shares are held for a year after exercise, the "bargain element" is taxed on sale as a capital gain.
Did we say "no" tax? That's not quite right. You pay no "regular" tax, but you do have to pick up the "bargain element" as salary in computing alternative minimum tax. And that's where the nightmare begins.
MCLEOD ISOS - A BAD BARGAIN
Ronald J. Speltz, of Ely, Iowa, was earning about $75,000 annually as a senior manager for McLeodUSA. He exercised McLeod ISOs in 2000 with a bargain element of $711,118, resulting in $206,191 of AMT. Mr. and Mrs. Speltz also owed Iowa AMT of $46,792
As many Iowans know, McLeod's stock collapsed. Mr. Speltz found himself with a $206,000 tax bill on now nearly-worthless McLeod ISO shares.
Mr. Speltz paid part of the tax with his 2000 return and borrowed $134,000 from a bank to pay some more; he then entered into an installment deal to pay the rest. He then tried to compromise the remaining $125,000 or so that he owed with $4,457, which was the cash value of a life insurance policy.
The IRS, as is their custom, turned down the offer, saying Mr. and Mrs. Speltz had the ability to pay the full balance, over time.
NO 'ABUSE OF DISCRETION'
Mr. Speltz went to Tax Court. He argued that the IRS "abused its discretion" by refusing his offer. An attorney who has been fighting for other telecom ISO AMT victims joined the case.
Tax Court Judge Cohen yesterday said her hands were tied. Tax Court judges can't overturn a tax assessment just because the tax law is unfair:
Petitioners’ hardship argument is essentially that the
tax liability is disproportionate to the value that they
received from the ISOs and that they have already been
forced to change their lifestyle unreasonably. Although
we sympathize with their situation, this type of hardship
is not unique.
WHERE IS CONGRESS?
As a matter of law, the judge is right. What is baffling is the failure of Congress to deal with this issue. They are the only ones with the authority to fix this mess. Many taxpayers face the same financial disaster as Mr. Speltz. The telecom meltdown is obviously not just an Eastern Iowa problem; ISO AMT victims are strewn up and down Silicon Valley, and everywhere else the bubble burst.
Congress has passed four major tax acts and a number of minor ones since the telecom bust. The American Jobs Creation Act passed last year had goodies for just about any lobbyist worth his Gucci loafers, but no relief for ISO AMT victims. Senate Finance Committee Chairman Grassley, call your office.
Cite: Speltz v. Commissioner, 124 T.C. No. 9
UPDATE: The Speltz attorney responds.
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THERE'S A RIGHT WAY AND A WRONG WAY TO CLEAR THE OLD 'TO DO' LIST
March 24, 2005
There are worse things than having your customers angry with you. One of those things is 20 years in prison:
Six Mellon Bank workers are facing up to 20 years in prison and $750,000 in potential fines from fraud, theft, and mail tampering charges stemming from the destruction of 80,000 taxpayer returns in 2001.
U.S. Attorney Mary Beth Buchanan handed down the three-count indictments against the former IRS lockbox employees nearly four years after it was revealed that workers at Mellon’s Pittsburgh facility had deliberately hidden and subsequently destroyed pertinent tax records in order to claim performance bonuses and avoid IRS penalties.
UPDATE: Dr. Maule has some observations on this.
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TRACKBACKS - R.I.P.
March 23, 2005
We have turned off our trackback feature. It seemed like a good idea, but almost no linkers used it (except for the Carnival of the Capitalist folks). Instead, the vile spammers for online p*k*r and the like have been spamming the trackbacks to inflate their Google placement. Having tired of cleaning up their online graffiti, we had our redoubtable webmistress at Sekimori deactivate trackbacks. She does good work, and quick.
A thousand deaths to spammers.
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WHAT PART OF 'PERMANENT INJUCTION' DON'T YOU UNDERSTAND?
March 23, 2005
About this time last year a district court permanently enjoined Robert L. Mosher from engaging in tax preparation and tax practice:
Evidence presented during a court hearing in the case last year showed that Mosher helped customers illegally reduce their reported tax liabilities by selling them sham trusts to hide income. According to the court papers, Mosher also prepared tax returns for customers claiming improper deductions. Court filings also showed that IRS audits of Mosher’s customers yielded an average additional tax bill of over $13,000 per customer per year.
Mr. Mosher may be slow to get the hint:
MICHIGAN TAX PREPARER INDICTED FOR CONTEMPT OF COURT
The indictment alleges that after the injunction orders were entered, Mr. Mosher provided tax advice and other tax services for compensation and acted as an income tax return preparer, preparing six tax returns for five different taxpayers. The indictment also alleges that Mr. Mosher falsely told customers he could legally prepare tax returns provided that he did not sign them or his customers copied the returns onto new forms.
Moral: Two more signs of a bad tax preparer:
1. "All the injunction says is I can't sign."
2. "Be sure to copy this in pencil and destroy the original before you file."
Link: Copy of permanent injunction (pdf)
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WALL STREET JOURNAL TALKS ABOUT BONGARD CASE
March 23, 2005
The Wall Street Journal's weekly tax column covered the Bongard case today. The Tax Court ruled in Bongard that attempted gifts of a family partnership failed because the donor retained an "implied" control. Tom Herman's weekly Tax Report (subscribers only) says the Bongard decision "is fueling concerns about family limited partnerships, a popular technique used to slash estate and gift taxes." From Mr. Herman's WSJ piece:
So how can you create a partnership that is likely to pass muster? The partnership should have "legitimate and significant business reasons" to exist, such as managing a family business, rather than just dodging taxes, says David A. Handler, a lawyer at Kirkland & Ellis in Chicago. Also, if you transfer assets into a partnership, don't retain total control over them -- and avoid dipping into those assets for personal expenses. Retain sufficient assets, "outside of the partnership, to maintain your lifestyle," he says.
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TAX REFORM PARTY HEADS TO NEW ORLEANS TODAY
March 23, 2005
The President's Advisory Commission on Tax Reform meets today in New Orleans. The TaxProf has all of the details. There will again be a video webcast.
Today's meeting will be held at the Louisiana Childrens Museum. Why they would hold it at the only place in New Orleans where you can't get a drink at 9:30 a.m. is beyond explanation. They'd probably have a lot more fun at a different New Orleans museum.
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SUN VALLEY LAKE LOTS! SEE IRS FOR DETAILS
March 23, 2005
The IRS collection agents have apparently been busy in Iowa lately.
IRS Auction Website is featuring a nice selection of Sun Valley Lake properties in Southern Iowa. They are up for auction April 5 at the Ringgold County courthouse in Mt. Ayr. A Ringgold County Farm House is also up for sale:
If that's not your cup of tea, a May 4 auction in Waterloo features:
"Over 200 lots including but not limited to: John Deere tractors, mowers, front-end loaders, snow blades from 4 feet to 20 feet, dump trucks, semi-trucks, vans & trucks."
Including this baby:
"1970-ish Dump Truck, Chevrolet"
But there's more!
"Race Car"
Nice, but it may need tires.
Details on the Waterloo sale here.
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TAX TROUBLE AGAIN FOR FLAMBOYANT LAWYER TONY SERRA
March 23, 2005
Leona Helmsley reportedly said that taxes are only for little people. Whether or not they are for little people, they apparently aren't for Tony Serra. Mr. Serra has served prison time before on tax charges, which apparently isn't an impediment to the practice of law in California. He has now been charged for failure to pay taxes for 1998 and 1999.
Mr. Serra has defended a rogues gallery of extremist clients, including Sara Jane Moore of the Symbionese Liberation Army; he also tried to get on Unabomber Ted Kaczynski's defense team.
Mr. Serra is expected to enter a guilty plea, according to the San Francisco Chronicle.
Hat tip: Russ Fox at Taxable Talk.
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DOING THE MATH FOR THE TIMES MAN
March 22, 2005
A letter to Tax Analysts today (subscription only; no link available) considers the arithmetic of The New York Times reporter David Cay Johnston's dyspeptic response to a review of his book, Perfectly Legal.
From the letter:
Johnston in his letter criticizes Prof. Pollack for missing the "major news" he broke in his book Perfectly Legal about how truly rich the superrich in the United States have become. He drives home his point with this observation: "The economics of a two-income couple who work all year to earn $300,000 have nothing in common with someone who makes that much every 45 minutes."
...
There are 8,760 hours in a year, so $400,000 an hour would translate to earnings of $3.5 billion a year. Now, I know that corporate boards continue to disserve their shareholders with ridiculous nine-figure compensation packages for CEOs, but I had not seen anything in the 10-figure range. Perhaps Johnston was basing his figure on a standard 2,000-hour work year, so that a $400,000 hourly rate would extrapolate to annual earnings of $800 million.
The letter goes on to point out that this might only apply to Bill Gates, and even him only one year, when Microsoft took its big dividend.
Mr. Johnston waited a year to respond to the book review. He shouldn't have rushed so.
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IS THE BIG MO' IS BEHIND A 'MORE CONSUMPTION-BASED' TAX?
March 22, 2005
An administration economic advisor, says that momentum is building towards a "more consumption based tax system." The speech by Kristin Forbes, reported in today's Tax Analysts, hints at a system based on the current system, but with more generous breaks for savings:
For several years in a row, the administration has proposed creating a short-term savings vehicle and consolidating and strengthening current retirement savings accounts. Forbes said the administration is hoping the tax reform panel breathes new life into those proposals.
Our guess still is that the commission will recommend something like the current alternative minimum tax, with the "Lifetime Savings Account" and "Retirement Savings Accounts" tacked on.
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I HOPE HE GETS PUNITIVE DAMAGES
March 21, 2005
Alton attorney accidentally sues himself
“Emert Wyss, wearing his hat of Centerre Title company, collects the fees from Ms. McLaughlin, and now we have six, seven, eight months later, Emert Wyss wearing his hat as Ms. McLaughlin’s attorney suggests she file suit over the very fees his title company collected from her, is that right?” Brown asked.
Wyss replied, “That is right. It oversimplifies it, but that is correct.”
Actually, we'd like to see more lawsuits like this. (Hat tip: Volokh Conspiracy)
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2005 CAR DEPRECIATION LIMITS ANNOUNCED
March 21, 2005
The tax law's "luxury" auto rules limit the amount of depreciation available each year for passenger cars. The limits are indexed for inflation.
The IRS has just published Rev. Proc. 2005-13 with the depreciation limits for cars placed in service in 2005. For regular autos, the depreciation limits are:
Year 1 $2,960 Year 2 4,700 Year 3 2,850 Year 4+ 1,675
This means the limits apply to cars costing $14,800 or more. Welcome to the lap of luxury:
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SPRING BREAK CARNIVAL
March 21, 2005
This week's "Carnival of the Capitalists" is up at the "Beyond the Brand" Blog. The Carnival is a weekly roundup of economics and business weblog posts. My favorite post this week is an interview about why business blogging makes sense, which is good, since that is what we do here.
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N-E-WAYS OUT OF PRISON FOR THESE MULTI-LEVEL MARKETING MAGNATES?
March 20, 2005
Thomas Mower and his ex-wife, Leslie "Dee" Mower, were convicted Friday by a federal jury on tax evasion and conspiracy charges. The Mowers are founders of Neways, an international multi-level marketing company based in Utah.
Mr. Mower was also convicted of "corruptly impeding the due administration of the internal revenue laws." Neways former attorney, James Thompson, was also convicted in the case.
From the Department of Justice press release:
The defendants devised and executed a scheme to conceal from the IRS more than $1 million of Neways, Inc.’s gross receipts received from Neways Australia, as well as more than $3 million of commission income the Mowers received from distributorships in the multi-level marketing structure of their United States, Australian and Malaysian companies. In furtherance of the scheme, Mr. Thompson created and presented a false and fraudulent loan document and made false and fraudulent statements to an IRS Special Agent to hide the Mowers’ commission income.
Sentencing is set for June 21. The tax evasion and conspiracy charges could fetch up to five years in prison and $250,000 in fines; the charge for impeding the IRS could add three years and $250,000 to the penalties. These fines are in addition to the civil fraud penalties that are likely to be imposed.
We can draw several lessons from the case, no less important for being obvious:
-Don't commit tax fraud.
-Don't make it worse by forging or altering documents.
-Don't use an MLM arrangement as your tax planning - at any level!
Looking at the dollars involved, there clearly is money in MLM arrangements - at the top, anyway.
UPDATE 9/20/2005: The Utah U.S. district court last week set a sentencing date of January 4, 2006.
UPDATE 1/10/2006: Court documents indicate that sentencing will not take place before March 4, 2006.
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VAN FOSSEN TO TAKE UP 'BORDER TOWN' EXEMPTION
March 18, 2005
Tax Analysts reports that Jamie Van Fossen, chair of the Iowa House Ways and Means Committee, plans to take up the bill to allow Iowa's border cities to opt out of some or all of the state income tax. The bill, HF 721, would require the towns to make up the revenues with other tax increases.
This would mean every little border town might have a different income tax, sales tax, and property tax system. The state would have to figure out where in the state people live to determine whether the returns are even prepared correctly. This is a terrible idea. It also may be unconstitutional, though heaven only knows what that means in Iowa anymore.
In contrast, there appear to be no plans to take up SF 158, which actually deals with the structural problems of Iowa's byzantine tax system.
Fortunately, HF 721 appears to be veto bait if it is ever passed.
UPDATE: This bill has State 29 thinking outside the box.
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MY HOME EQUITY LOAN IS DEDUCTIBLE. ISN'T IT?
March 18, 2005
Home equity loans are very popular. They have lower interest rates than credit card debt. Their tax deductibility often clinches the deal. Unfortunately, for many taxpayers that deduction is a mirage.
A Revenue Ruling issued yesterday highlights the often-overlooked dark side of home equity loans: they are deductible for regular tax, but not for alternative minimum tax.
In Revenue Ruling 2005-11, a taxpayer borrowed $100,000 to purchase a home. Over time, and after one refinancing, he had paid the balance down to $80,000. He then refinanced the home again for $110,000, not using any of the refinance proceeds to improve the home.
In computing his deduction for regular tax purposes, the taxpayer can deduct his interest on the entire $110,000 balance. In computing the interest for AMT, however, he can only deduct interest on $80,000. At a 7% interest rate, that translates into a lost deduction of $2,100.
As we've discussed, AMT is becoming the default tax system for more and more taxpayers. This is especially true in states like Iowa with high state income taxes, which are not deductible for AMT. Almost any two-earner professional couple with children is a likely AMT candidate in Iowa.
The moral? Don't bank on a home equity loan deduction unless you know you are not paying AMT.
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APRIL 2005 AFRS ARE OUT
March 17, 2005
The IRS has issued (Rev. Rul. 2005-23) the minimum interest rates for loans made in April 2005:
-Short Term (demand loans and loans with terms of up to 3 years): 3.35%
-Mid-Term (loans from 3-9 years): 4.09%
-Long-Term (over 9 years): 4.68%
Historical AFRs are available via the “Links” page at www.rothcpa.com.
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HELLO, IRS? I'M FROM THE NIGERIAN BUREAU OF IDENTITY THEFT...
March 17, 2005
The IRS is known for its hardware and software problems, but it needs to work out a few kinks in the wetware, too:
While computer systems have become more secure at the IRS, the Treasury Inspector General for Tax Administration reports that IRS employees remain open to manipulation by hackers.
TIGTA personnel posing as information technology helpdesk personnel called 100 managers and other employees and duped 35 of them into providing their login names and changing their passwords to ones suggested by the callers.
A “hacker or disgruntled employee” could use those “social engineering techniques” to obtain unauthorized access to IRS systems, according to TIGTA.
I need to email these folks about my deceased uncle, the rightful President of Nigeria...
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BANKRUPTCY REFORM: THREAT OR MENACE?
March 17, 2005
Jeff at Tusk and Talon has done some thinking about the bad blog press the bankruptcy reform bill has been getting. He finds the bad press wanting:
What's missing in Glenn's posts is any discussion of why the bill is bad. He just asserts that it is and then moves on. In the second post I linked in the previous paragraph, Glenn quotes another lawyer describing why the bill is bad for lawyers. There's still no real discussion of why it's bad for consumers or why Chapter 13 is somehow not a viable alternative to Chapter 7.
Yet, that lawyer Glenn quotes does get at what I suspect is the real force behind the opposition to this bill: the lawyers don't like it.
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REALITY (SHOW) BITES?
March 17, 2005
Professor Maule has been giving a lot of thought to the tax implications to beneficiaries of extreme home makeover "reality" TV shows.
If they'll remodel Tax Update World Headquarters, we'll take our chances with the taxes.
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THE TAX LAW: MANLY, YES, BUT WOMEN LIKE IT TOO
March 17, 2005
The TaxProf summarizes a study in the University of Missouri-Kansas City Law Review about "Occupational Segregation by Gender among Law Professors.":
The article has some interesting conclusions with respect to tax courses. Federal Tax (not including Estate & Gift Tax or State & Local Tax) was a statistically significantly male dominated course both at the start and finish years of her study. Indeed, the gender disparity statistically widened over time. Estate & Gift Tax, on the other hand, did not have a statistically significant gender disparity, but there was a significant change in the gender composition over the years studied. At the start of the period, there was a slightly disproportionate number of women teaching the course, but by the end of the period gender had shifted so that a slightly disproportionate number of males were teaching it. Her theory for this shift is that Estate & Gift Tax became an increasingly prestigious area (perhaps due to its money making capacity in practice).
Or perhaps it shows that women are just smarter. With a non-trivial possibility of repeal of the estate tax, and a very high possibility of it being confined only to estates over $5 million, Estate and Gift Tax professors could go the way of Windfall Profits Tax specialists and the Dodo Bird.
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NO BOND FOR WALT
March 16, 2005
Walter Anderson has lost his bid for freedom pending his trial on evading $250 million of taxes. A federal judge today ruled that Mr. Anderson is a flight risk and must await trial in jail.
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REGISTER COVERS BACHELOR'S LIBRARY TAX INDICTMENT
March 16, 2005
In today's online edition of The Des Moines Register:
D.M. man indicted in smut caseAuthorities say Des Moines was a regional hub for a smut-peddling enterprise that led this week to federal indictments against seven people in four states.
The charges include racketeering, obscenity violations and nonpayment of sales tax from video arcades found in adult bookstores.
A federal grand jury in Dallas on Monday indicted a Des Moines man, Arthur Morris Boten, who they say is connected to a Colorado company that owns adult bookstores in 18 states.
Goalie Entertainment Holdings Inc. and its owner, Edward Wedelstedt, divided operations into regions, according to court documents. The Midwest region had its headquarters in Des Moines
A Houston TV news site has this photo of the alleged kingpin:
Edward Wedelstedt
Yesterday, of course, we scooped the Register on this...
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TAX REFORM PANEL HAS FOURTH HEARING TODAY
March 16, 2005
Today the President's Advisory Panel on Federal Tax Reform holds its fourth meeting. They will convene in Chicago.
Once again, no C-span coverage. They have no taste for exciting programming.
The TaxProf has all of the details on today's session.
UPDATE!!! The TaxProf notes that there is a live webcast! Still not C-span, but we'll live.
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SORRY, FERRARI LOVERS
March 16, 2005
The IRS has cancelled the auction of the 1967 Ferrari P3 after its owner paid his $3 million tax debt. Some sources said the car, one of only four of its kind surviving, would have fetched over $10 million.
But this fine vehicle is still available in a March 24 auction:
1994 Ford Econoline, 175,000 miles. Comes with tires.
Details here.
Thanks to TaxGuru.net for the tip.
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IS THE TAX LAW IS HARD? $52 MILLION SAYS 'YES'
March 15, 2005
Wayne Bongard slipped his mortal coils in his 59th year on a hunting trip to Germany. He left behind a wife, five children, a great deal of wealth, and an estate plan featuring a family limited partnership.
Today the Tax Court tried to sort out the tax consequences of his estate plan. In a 116 page opinion, ten judges signed on to a majority opinion, two judges signed another opinion agreeing with the result but disagreeing with its rationale, one judge agreed with the result but didn't sign on to any opinions, and four judges dissented in two separate opinions.
Their conclusion? Mr. Bongard's estate owes $52 million in additional estate tax, if the Tax Court is upheld on appeal. Our conclusion? This stuff ain't easy.
It's tax season, and given our time and wisdom constraints we won't try to read the case carefully, let alone analyze it in depth; anyway, this case that will generate reams of law review analysis by lawyers who can charge a lot more per hour than we can. But for $52 million, we'll try to hit the high points.
WHAT IS "CONTROL?" WHAT IS "MONEY OR MONEY'S WORTH?"
The tax law (Section 2036(a)) says that gifted property can be pulled back into a donor's estate if there are too many strings attached - if the donor retained up until death:
(1) the possession or enjoyment of, or the right to the income from, the property, or
(2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.
But -- if the property had been sold or traded to the family partnership in "a bona fide sale for an adequate and full consideration in money or money's worth" -- the property does not get subjected to estate tax.
The Tax Court majority said that $101 million in value had to be included in Mr. Bongard's estate because he hadn't transferred property to his family partnership "in a bona fide sale for an adequate consideration" and had retained "implied" control.
The dissenting judges said that the majority failed to properly apply the Supreme Court case that has controlled this part of the tax law.
This will send estate planners scurrying back to their documents to try to ensure that there is no "implied" control of family partnership assets. It will also send the Bongard Estate's attorney's scurrying to file appeal papers with the Eighth Circuit Court of Appeals.
There is a good chance that this will end up in the Supreme Court in a year or two. The Third and Fifth Circuits have ruled in cases with similar issues, and the results are confusing.
Code Section 2036(a) is reproduced in the extended entry below.
We will keep an eye on this case. Much more thoughtful commentary than this will come out on Bongard, and we will link to it as we come across it.
Cite: Estate of Wayne C. Bongard v. Commissioner, 124 T.C. No. 8
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NO BARN, NO BASIS, NO DEDUCTION
March 15, 2005
A tornado ripped through Powesheik County in 1997, destroying a barn owned by Lee F. McClune of Knoxville, Iowa. Mr. McClune salvaged only $2,000 of lumber from the barn, which he valued at $46,000 before the storm, so he took a casualty loss deduction of $44,000.
Only one problem: he bought the barn and 80 acres for only $20,000 in the first place. The IRS said that only the part of his purchase price allocable to the barn, $1,350, was deductible. Yesterday the Tax Court agreed.
The casualty loss rules only allow you to deduct casualty losses to the extent of the lesser of your basis or the value lost. This makes sense - you can't lose more than you paid.
Cite: McClune v. Commissioner, T.C. Memo 2005-47.
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REVENUE RULINGS FOR THE SLOW LEARNERS
March 15, 2005
We shall not painstakingly address petitioner's assertions “with somber reasoning and copious citation of precedent; to do so might suggest that these arguments have some colorable merit.”
The courts generally dispose of tax protestor Tax Honesty Movement arguments with this sentence, avoiding the effort of explaining the obvious to the clueless.
The IRS took up that task yesterday with a string of revenue rulings and a notice addressing some common worthless arguments against paying taxes. A summary is in the extended entry below.
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TAX COLLECTORS STRIKE BLOW AT BACHELOR'S LIBRARY, AFFILIATES
March 15, 2005
A nationwide obscenity and tax investigation has led to indictments of an owner of nine Iowa dirty bookstores on tax and obscenity charges.
The indictment holds that Edward Wedelstedt used his wholly-owned "Goalie Entertainment Holdings, Inc." to distribute obscene material and evade taxes "by not reporting large sums of cash income."
A Des Moines man, Arthur Morris Boton, was also charged.
This seems to be the kind of investigation that everybody wants in on:
Richard B. Roper, United States Attorney for the Northern District of Texas, said, “This indictment is a result of excellent cooperation between federal, state, and local law enforcement. Federal prosecutors in Washington, Dallas and Austin, along with prosecutors with the Dallas District Attorney's Office, teamed up to tackle a nationwide organization which, the indictment alleges, was devoted to the distribution of degrading obscene material.”
Detective Fife, you need another roll of quarters? That's the fifth today!
“The investigation leading to today's indictment exemplifies a true team effort,” said Marcy Forman, Director of Investigations for U.S. Immigration and Customs Enforcement. “Our coordinated pursuit and investigative expertise in money laundering, criminal interstate trafficking and tax fraud has uncovered the individuals who distributed obscene material while engaging in federal tax crimes related to their illicit profits.”
Isn't "uncovering individuals" part of the problem at these places?
This is only the latest blow to Iowa's "adult entertainment" industry.
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WE HAVE ANOTHER XELAN DOCUMENT ONLINE
March 15, 2005
We have added to our set of online documents relating to the Xelan case heard in the US District Court here in Des Moines with a copy of the Magistrate Judge's Recommendation; this was adopted in full by the District Court.
Our other Xelan pdf documents:
Judge's order accepting magistrate recommendations.
Joint Status Report on production of documents in compliance with Judge's order.
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CARNIVAL OF THE PHISHERMEN
March 14, 2005
This week's "Carnival of the Capitalists" is posted at The RFID Weblog. Much good stuff, as always. If you read only one item from this week's Carnival, read "How To Recognize Phishing" by Des Moines's own Brian "not a blog" Gongol. Brian shows how a little care and common sense can help you avoid the internet "phishing" scammers.
The Carnival of the Capitalists is a weekly roundup of economics and business weblog postings, hosted at a different blog each week. Check here to see where it will be next.
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WE LACK SYMPATHY (II)
March 14, 2005
Richard Hatch, the "Survivor" minor-celebrity, now says that it's CBS's fault that he failed to pay his taxes on his $1,000,000 survivor winnings because CBS didn't withhold. Note to Mr. Hatch: that doesn't cut it.
That's pretty lame to start with, and it sure doesn't explain the $321,000 he is accused of not reporting from a talk-radio gig.
We never watched "Survivor," which apparently awards money to the person who makes the lamest excuses on an island.
Hat tip: Taxable Talk.
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WE LACK SYMPATHY...
March 14, 2005
...for entertainer L'il Kim, aka Kimberly Jones:
Ms. Jones sought to deflect the blame for her financial lapses to her manager, Hillary Weston, and her tax accountant, Michael Mitnick. Ms. Weston pleaded guilty earlier this year to a charge of falsifying a passport, and has been in the courtroom every day during the trial with the contingent of spectators supporting Ms. Jones. Mr. Mitnick, of the New York tax firm Berdon, L.L.P., testified as a defense witness.
We lack sympathy despite her straitened circumstances:
But a prosecutor in Ms. Jones's federal perjury trial showed yesterday that at the same time Lil' Kim was flashing diamonds and living high off earnings of at least $750,000 a year, she owed almost $1 million in back taxes to the Internal Revenue Service. She reported to the I.R.S. that the jewelry she owned was worth only $49,000.
Tax documents that the prosecutor, Cathy Seibel, presented in the trial in Federal District Court in Manhattan also showed that Ms. Jones had bought a second home in Alpine, N.J., for $2.3 million in May 2002, in a year when she paid almost nothing on her mounting tax arrears. Her first home was an $850,000 town house in Englewood, N.J.
A tax cheat? L'il Me?
The New York Times Account is here.
Hat tip: TaxGuru.net
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START WITH THEFT, ADD SPITE, AND...
March 14, 2005
...you might end up with 36 months in federal prison, just like Nathaniel Green. (Not to be mistaken for Nathaniel Greene pictured at left.)
Mr. Green filed a phony trust return claiming a $99,929 refund of taxes he never paid. IRS internal controls broke down and the refund was issued. He stashed the money in somebody else's bank account, so the IRS began to levy his Social Security disability payments and his wifes income from a local church.
Mr. Green found this backdoor recovery of the money he stole vexatious and irksome, so he struck back. His weapon: the mighty form 8300, "Report of Cash Payments Over $10,000 Received in a trade or Business." This form is a "red flag" to help the IRS uncover money laundering. He issued these forms to an IRS agent, to the church bookkeeper who obeyed the levy, and to the church pastor. As the case progressed, the Federal Magistrate Judge and the U.S. Attorney on his case also received forms 8300.
Today's tax tip: if you are a subject of a federal criminal investigation, don't issue phony forms 8300 on your judge; it won't get him in trouble, and it won't win his sympathy.
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'JOHN EDWARDS SHELTER' TARGETED BY IRS
March 12, 2005
Tax Analysts doesn't publish a weekend edition, but they have a little "Stories we're working on for the next edition" section. One of the stories apparently reports on an interview with John Tuzynsky, chief of employment tax oprations for the IRS Small/Business/Self-Employed division.
He says the division's chief priority is non-filers. That makes sense; you don't collect a lot of self-employment tax from people who don't report their income.
THE EDWARDS ISSUE
He also said the IRS is going after what we call the "John Edwards shelter." Mr. Edwards, John Kerry's running mate last year, ran into criticism for taking "only" $360,000 of salary from his S corporation law practice, talking the remaining $26 million or so as S corporation distributions. S corporation distributions are not subject to the federal FICA and Medicare tax, so Mr. Edwards saved about $738,000 on the 2.9% medicare tax.
While Mr. Edwards came under fire for this, his position probably isn't abusive under current practice. The only cases on this issue deal with professionals who take little or no salary from their S corporation to avoid both the 12.4% FICA tax and the 2.9% Medicare tax.
Tax Analysts