Tax Update Blog: April 2005 Archives
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THE TYSON LESSON: PAY AS YOU PILLAGE
April 29, 2005
From the front page of today's Wall Street Journal:
During his four years as senior chairman of Tyson Foods Inc., the perks Don Tyson received were striking even in an era of lavish executive compensation.
They included $464,132 for personal use by him and his family and friends of company-owned homes in the English countryside and Cabo San Lucas, Mexico, $20,000 for oriental rugs, $18,000 of antiques, $84,000 in lawn maintenance at five homes where he and his family and friends lived, an $8,000 horse, and other jewelry, artwork, vacations and theater tickets. The company also paid Mr. Tyson $1.1 million to cover his personal income-tax liability associated with all these benefits.
Yesterday, the Securities and Exchange Commission said those perks were among $3 million in benefits the Springdale, Ark., company paid Mr. Tyson between 1997 and 2001. As part of a broad crackdown on hidden executive compensation, the SEC said that Tyson Foods failed to disclose over $1 million in perks and made misleading or inadequate disclosures about other benefits. (Emphasis added)
It's striking that Mr. Tyson avoided the Leona Helmsley misstep by paying his taxes on his perks. There's a shrewd man under those overalls.
The article says Mr. Tyson will return $1.5 million to the company. It's not clear whether Mr. Tyson will get a deduction for this. There's a good writeup this week on Tax Analysts (via the TaxProf) on this topic. But not to worry - based on past practice, the company will take care of Mr. Tyson.
Link to article (for WSJ online subscribers only): In SEC Complaint, Tale of Chicken Mogul Feathering His Nest
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RABY'S TAKE ON DEAD CRITTER DEDUCTION
April 29, 2005
The TaxProf today makes available a Tax Analysts piece by Burgess and William Raby on the dodgy practice of deducting donations of big game to charity. We discussed this in our post THE DEAD CRITTER LOOPHOLE
Imagine the deduction for one of these:
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WISDOM FROM A TAXING BLOG
April 29, 2005
Second, there are always trade-offs. Certain taxprof types (no naming names, sorry) tend to think that the government should always win, and that more progressivity is always good. But c'mon, at a certain point, higher taxes are going to drag productivity down. On the other side, I often have students who think taxes are always bad. The taxpayer should always win, in every case they read. But of course, the more exceptions to the tax base, the higher everyone's rates have to be.
Lacking Mr. Fleisher's good manners, I'll throw in a couple of names:
Taxpayers are always wrong:
-Lee Sheppard of Tax Analysts
-New York Times editorial staff
-Congressman Fortney "Pete" Stark
IRS is always wrong:
-Wall Street Journal editorial staff
-Almost any lobbyist
-Former Ways and Means Chair Bill Archer
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TRUTH CAN BE STRANGER
April 29, 2005
Tax Analysts today has an article on the use of fiction in teaching accounting (no link available):
The use of fiction as an educational tool might aid in meeting many of the objectives and criticisms of recent examinations of accounting education. For example, the American Accounting Association Committee on the Future Structure, Content, and Scope of Accounting Education (the Bedford Committee, named for its chair, Norton Bedford), in its 1986 report entitled Issues in Accounting Education, indicated that public accounting was changing to demand more innovative individuals and therefore, accounting education programs should develop creativity and innovation in students.
That's a start. The next step is to train accountants that truth and fiction can be different things, and which one belongs on financial statements.
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TOWER FLOATS NO BETTER THAN ARK
April 28, 2005
The Anderson's Ark template of illegally moving funds offshore through bogus expense deductions wasn't unique. A Denver jury yesterday convicted two Coloradans of running a similar scheme through "Tower Executive Resources." The jurors deliberated for four weeks following a five week trial.
The Denver Post reports:
According to prosecutors, Paul Harris and Lester Retherford of Tower Executive Resources set up shell corporations in which members deposited nearly $9 million in taxable income. The money was allegedly transferred to offshore bank accounts under the guise that it was payment to Tower for consulting services. Instead, the government said, Tower's members spent the money using debit cards and loans.
The defendants - Paul Harris and Lester Retherford - face up to 10 years in prison, according to the Post report.
CUSTOMERS GET JAIL, TOO
John Mikutowica of Mashpee, Massachussetts was sentenced to 33 months in prison for tapping into Tower "resources."
Paul Bekins, a former president of Bekins Moving and Storage, pleaded guilty to evading $1.3 million via Tower; he testified for the prosecution in the Denver trial. His sentencing was delayed pending the results of the Denver trial
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TWO MORE SENTENCED IN 'ANDERSON'S ARK' CASE
April 28, 2005
From a Department of Justice press release:
...Chief U.S. District Court Judge John C. Coughenour sentenced Anderson’s Ark and Associates (AAA) defendants James Moran, age 57, and Pamela Moran, age 53, both residents of Montrose, Colorado, to seven years imprisonment, to be followed by three years supervised release, and ordered them to pay restitution of $42,311,742. The defendants were ordered to pay costs of prosecution totaling $66,488. The court also ordered the Morans to forfeit $850,863 in proceeds they earned from AAA, as well as their Montrose, Colorado home, and their Jeep Cherokee automobile.
Seven years in the Can is bad, but it beats the 20 given the ringleaders.
Link: prior Anderson's Ark coverage
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IF THIS IS POSSIBLE, SENSIBLE TAX LEGISLATION MIGHT BE, TOO
April 28, 2005
... but in both cases we require more evidence:
'Extinct' Bird Sighted In ArkansasWASHINGTON -- A Cornell University researcher says it's possible that a North American bird not seen in 60 years isn't extinct after all.
John Fitzpatrick said the ivory-billed woodpecker has been sighted in eastern Arkansas. He said there have been several independent sightings, and that a video clip of one bird, though blurry, shows key features, including the size and markings.
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TAX CREDITS! THAT'S THE ANSWER!
April 28, 2005
The Iowa House last night passed a new incarnation of the "Grow Iowa Values" fund. The bill (H.F. 868) features - sit down - new targeted tax credits! And it modifies some we already have! As Iowa only has 19 or so targeted tax credits now, these are no doubt badly needed. The new credits include:
-Economic Development Region Revolving Fund Tax Credit. This credit will equal 20% of the contribution made to an "economic development region revolving fund." It appears these will fund "economic development initiatives that are either unique to the region or innovative in design and implementation."
- We get a "Historic Preservation and Cultural and Entertainment District Tax Credit." This replaces and expands the existing Property Rehabilitation credit.
- The bill tweaks the existing "Investment Tax Credit" for "eligible businesses" meeting a ridiculously long list of criteria for projects that have won the approval of local politicians communities. The list of criteria is in the extended entry section for your convenience; click "read more" at the bottom of this post. Note that this specifically excludes retail and service businesses. Those "new economy" jobs aren't real jobs, anyway.
- The bill adds a New Jobs Credit From Withholding. This credit, which only applies to "eligible busineses," is similar to the existing new jobs credit for jobs under community college agreements, but it applies at a rate 1/2 percent of gross wages paid, without the caps of the existing programs. It applies on top of the existing credit.
-We also get an all new "Wage Benefits Tax Credit." This is available businesses (not just "eligible businesses") who add jobs with wages exceeding 130 percent of the average county wage, and who have their application for the credit certified by the Department of Economic Development. This also applies only to "non-retail, non-service" businesses. Take that, new economy!
-The existing Research and Development Credit is tweaked to allow up to $1 million in tax credits for "development and deployment of innovative renewable energy generation components manufactured or assembled in this state."
WINNERS AND LOSERS
If you are an industrial policy fan, believing that the state legislature and Iowa's Department of Economic Development can spur economic growth through judicious evaluation of businesses and distribution of carefully-targeted tax breaks, this bill is for you.
If you think that the last thing Iowa needs is more byzantine tax credits and more involvement of politicians and bureaucrats in determining the future of the economy, well, maybe next year.
If you charge by the hour to help businesses take advantage of tax credits, like we do, this truly is economic development. Party on.
UPDATE: State 29 is all over this like a cheap suit; he also has a link to the 92-8 roll call. The eight "nays":
Baudler (R, Adair Co.); De Boef (R, Keokuk Co.); Eichorn (R, Hamilton Co.); Fallon (D, Polk Co.); Jochum (D, Dubuque Co.); Sands (R, Louisa Co.); Scoultz (D, Black Hawk Co.); Van Engelenhoven (R, Marion Co.)
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DENNIS, I THINK HE WAS KIDDING
April 28, 2005
Dennis Kozlowski's defense team stepped back to the 1980s yesterday. Taking a page out of noted tax consultant Steve Martin's playbook, the former Tyco CEO said that he forgot about the $25 million loan that was forgiven in 1999 when he filed his extended return in October 2000:
"I just was not thinking when I signed my tax return that I had a $25 million loan forgiveness," Kozlowski said. "Year in and year out at Tyco, my tax returns for the most part had been correct. I didn't pick up on it."
Of course. That could happen to anyone.
The Tax Court doesn't buy the "I forgot" defense, but maybe the jury will. No doubt most of the jurors have had bigger loans forgiven, and will empathize with the defendant.
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IS IT U.S. WIRE FRAUD TO DUCK YOUR ZIMBABWE TAXES?
April 27, 2005
The U.S. Supreme Court passed down two decisions yesterday on the impact of foreign laws on U.S. citizens.
In Pasquantino v. U.S., the Court held that conspiracy to evade Canadian alcohol import duties constituted wire fraud under U.S. law.
In Small v. U.S., (via Instapundit), the Court held that U.S. laws prohibiting felons from posessing firearms don't apply when the felony conviction was by a foreign government. The New York Times sums up the Court's logic:
Justice Breyer said the gun law would create anomalies if applied to foreign convictions, because foreign legal systems have made different choices of what conduct to regard as criminal. Citing the Russian criminal code as an example, he said that someone might be regarded as a felon "for engaging in economic conduct that our society might encourage." A foreign conviction does not necessarily indicate that a person is dangerous, Justice Breyer said.That seems sensible, but it also seems the same logic ought to apply to tax law. Third world and former east-bloc kleptocracies are notoriously capricious and selective in drafting and enforcing their tax laws. If Robert Mugabe decides to confiscate your property and you try to flee Zimbabwe with some of it, does that become "wire fraud?" This doesn't sound like a good thing.
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CIVIL DEBATE, DONE RIGHT
April 27, 2005
Economists Max Sawicky and Tyler Cowen manage to shed light on the policy issues of estate tax repeal in a (free) discussion on the Wall Street Journal site. Somehow they disagree without casting doubt on each other's morals or intelligence.
Sawicky (pro-estate tax):
The best practical reason to tax transfers of wealth, either as gifts or at death, is to backstop the individual income tax. If the value of financial assets, business firms, housing, life-insurance policies or farms appreciates, such growth in value is income. In principle, it belongs in the tax base of a fair, comprehensive income tax. Under the existing U.S. income tax, income of these types as accrued isn't taxed, partly for good administrative reasons, and partly for bad political reasons.
Cowen (pro-repeal)
1. It isn't clear that the estate tax raises much, if any, revenue. The very rich engage in tax-avoidance strategies. The apparent revenue raised is often offset by a lower intake from income and capital gains taxes. Furthermore, it has been estimated that the costs of implementing tax-avoidance strategies are roughly equal to the (gross) revenue raised.2. The estate tax doesn't do much for equality. In fact it increases consumption inequality -- presumably the relevant measure -- by encouraging the rich to spend more money before they die. Joseph Stiglitz and Alan Blinder have raised this concern.
3. Estate taxes add yet another layer of taxation on savings and investment. Imagine that you must first pay taxes on earned income.
Hat tip: A Taxing Blog
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PRINCIPLES OF CIVIL DEBATE
April 27, 2005
It's official -- you can't disagree with Stuart Levine without being evil or stupid:
I have developed a simple rule of thumb in analysing conservative policy pronouncements, the Knaves and Fools Rule. The rule is simple: Conservative policy pronouncements are made by knaves and then the pronouncements are believed and repeated by fools.
That makes it a problem when you lose elections. To win the next time, you have to convince people to stop being evil, or you must convince the stupid to be stupid your way. That can be hard to do without letting them know they are stupid. And those fools don't take that well.
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SENATE TAKES UP NEWTON TRACK SALES TAX BREAK
April 26, 2005
The Iowa Senate is debating a new version of the scheme to allow the proposed Newton racetrack to keep sales taxes it collects. The current version, HF 840, would rebate the sales taxes back to the track.
This is another one of the "good causes" that crop up all the time in tax legislation, with the best of intentions. We all know where good intentions lead.
UPDATE: The General Assembly webpage "Senate Floor Action" box says the bill has been "deferred."
UPDATE II. It passed, 44-6. Sigh. On to the Governor.
Prior coverage:
"AN EVEN CRAZIER IDEA IN IOWA"
WHY THE TAX LAW IS A MESS, CHAPTER...
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THIS ARK WILL BE GONE FOR MORE THAN 40 DAYS
April 26, 2005
The four chief operators of the "Anderson's Ark" tax scheme have received sentences ranging from eight to 20 years in federal prison. As the youngest defendant is 60 years old, they will need Noah's longevity to have much of a post-prison career. 62 year-old Keith Anderson, at left, received a 20-year sentence.
Anderson's Ark and Associates ran tax shelters where businesses paid bogus expenses, billed as, say, "advertising" or "consulting," to offshore entities. They would deduct these "expenses" in computing their taxes. They would then recover the funds from the offshore entities, net of a commission to Anderson's Ark.
The defendants were convicted by a Seattle federal court jury in December. The sentencing judge apparently wasn't convinced by this argument of one of the defendants:
Anderson asserted that he did not recognize the jurisdiction of the court because he is a "human being" rather than a "legal fiction entity."According to Anderson, the court has jurisdiction only
over someone who has accepted a Social Security
number and thus has a fictitious identity.
The defendants wer also fined amounts from $42,311,742 to $63,525,860. The sentencing judge must have rounded the pennies.
The Justice Department press release is here.
Prior Ark coverage:
CREATIVITY ISN'T EVERYTHING, IN TAX
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PAVING THE ROAD TO PERDITION
April 26, 2005
Victor Fleisher at A Taxing Blog continues the discussion of the merits of taxing away the pounds of America's gravitationally-challenged population:
Joe Kristan and others question whether taxes should be used for any reason other to raise revenue. In other words, is it permissible to use tax policy to encourage or discourage behavior? I think it is okay so long as you have a strong justification for distorting behavior. Now, I must admit, given the complexities of food taxes, maybe the better route would be to push to remove existing subsidies that encourage the production of HFCS. Removing a subsidy is the equivalent of adding a tax, but somehow it seems to offend people less.
Subsidies and tax breaks are two sides of the same coin. While we're no fan of subsidies, they are at least transparent. You can look up who benefits from farm subsidies. The beneficiaries of tax breaks, in contrast, are cloaked by tax confidentiality rules.
While we can concede the principle that using tax laws to affect behavior is ok with sufficiently "strong justification" (I could get behind a tax law that somehow stopped the aging process and made me smarter and better looking), sufficiently strong justifications abound when Congress is in session. Complexity and unintended consequences follow.
Mr. Fleisher describes the flaws of a well-intentioned tax policy in his post: Time to Repeal the Charitable Deduction?
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I WILL DESTROY YOUR TAX WITH MY STUNNING LOGIC
April 26, 2005
Why did not the IRS Commissioner's defenses collapse before this argument?
Petitioner did not file a petition with the Court with respect to the notice of deficiency relating to his taxable years 1998 and 1999. Instead, on December 17, 2001, in response to that notice, petitioner sent a letter to Charles O. Rossotti, who was at the time the Commissioner of the Internal Revenue. That letter stated in pertinent part:As the new Commissioner of Internal Revenue and one who is not a lawyer, you might still be shocked to discover that the payment of income tax is totally voluntary, and not mandatory - as you were probably misled to believe while employed in the private sector. If you don’t believe me, ask your legal counsel to show you a Code Section that established a "liability" for income taxes and a requirement "to pay" such a tax * * *.
Shockingly, the Commissioner failed to take this revelation to heart, and the Tax Court was likewise unpersuaded.
Cite: Synder v. Commissioner, T.C. Memo. 2005-89
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TAX MEN IN ACTION
April 26, 2005
This is just wrong:
After work, I stopped off at a local watering hole that was conveniently located right across the street from a Post Office that was open all night for the last-minute filers. I figured that this would be a target rich environment for my legendary pick-up line: “Your tax shelter or mine?” I wasn’t wrong. After spending an average of 26.5 hours completing their returns, the honeys were primed for a little no-strings-attached loving and I was just the single filer to give it to them.
Wrong, but accurate.
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IOWA, THE STATE THAT TRIES TOO HARD
April 25, 2005
From Senate Resolution 45, passed today by the Iowa Senate:
A Resolution honoring actress Annette Bening and her Iowa roots.
WHEREAS, Grant Bening lived in Waterloo and his future wife Shirley lived in La Porte City; and
WHEREAS, the young couple met while attending the University of Iowa, and married in 1950; and
WHEREAS, Grant and Shirley Bening had four
children, Jane and Bradley, both born in Waterloo, and
Byron and Annette, born in Topeka, Kansas;
...
WHEREAS, Ms. Bening has numerous family members
who still live and work in the Des Moines area,
including Clark Bening and his wife Chris, and
Ray Bening and his wife Carrie; NOW THEREFORE,
BE IT RESOLVED BY THE SENATE, That the Senate
congratulates Annette Bening on her remarkable career
and celebrates her Iowa roots and connections.
UPDATE: State 29 wants some resolution too.
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UPON FURTHER REVIEW, THE DECISION ON THE FIELD IS REVERSED
April 25, 2005
Iowa has reversed a March 21, 2005 policy letter that would have denied the credit for taxes paid in non-resident states to Iowans participating in "composite" returns.
Composite returns are filed by pass-through entities -- S corporations and partnerships -- to save owners the expense and hassle of filing non-resident returns in all states where the entity operates. The credit keeps taxpayers from doubling-up on state income taxes.
The Department got it wrong the first time, but it deserves credit for its prompt correction. We hope it becomes a habit. Mike Ralston, Director of the Department, was personally involved in the correction process.
The letter reversing the policy can be found here. The text of the supeseded letter has been removed from Iowa's site, but can be found in the extended entry below (click "read more"). Our post on the superseded letter is here.
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ADVISORY PANEL NEXT TO TACKLE COLOR OF SKY CONTROVERSY
April 25, 2005
Professor Maule calls "No Duh" on the President's Advisory Panel on Federal Tax Reform:
Connie Mack, the former Florida Senator who chairs the tax reform commission, said, "It wasn't until we really had the opportunity to listen to so many different people talk about so many different aspects of the code that it really sunk in about how much and how often the code is being used these days to either create incentives or disincentives for either investment or behavior."Excuse me, Mr. Mack, but weren't you part of many Congresses that amended the Code, adding layer after layer of special interest provisions masquerading as palliatives for the nation as a whole? Didn't you pay attention to the parade of tax legislation prancing past your desk month after month, session after session, Congress after Congress?
We have had similar thoughts.
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POST-PASSOVER CARNIVAL
April 25, 2005
Peaktalk hosts this week's Carnival of the Capitalists, a weekly roundup of economics and business weblog postings. Where else to go for a learned discourse on the economics of the NFL draft? Maybe it depends on whether you are Ryan Leaf or Tony Mandarich.
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TELE-FILE, RIP
April 25, 2005
The happy days of filing your 1040 with your telephone are going the way of the manual switchboard. The IRS has announced the end of the Tele-file program. The last extended 1040-EZ forms can be filed by Tele-file by August 15.
The announcement says the proliferation of e-filing alternatives has caused a decline in Tele-file popularity. Computer-phobes, you will be assimilated.
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THE TAX LAW AS DIET SCOLD
April 22, 2005
A paper presented at UCLA yesterday discussed the use of food excise taxes to fight obesity. Commenting on the paper, UCLA prof Victor Fleisher has a specific suggestion:
Here's what I propose: an excise tax on High Fructose Corn Syrup. It's in all kinds of junk food, and hardly ever in healthy food. It causes diabetes. There's a close substitute, of course, sugar. But it's more expensive to process food with sugar, so the prices of really bad HFCS foods will rise a bit. Obese people will, at the margins, choose healthier foods. And healthy people who crave sweets can still indulge, just only with the real sugar at a slightly higher cost.
WHAT ARE TAXES FOR?
While the Tax Update is all for slimmer, more attractive people, we demur. From our perspective, there is one critical purpose for a tax system - to fund government. When you try to use taxes for something else - like making fat people thin - you erode the efficiency of the tax law in raising revenue by diverting resources to other things. You have to identify what "high fructose" is, or what foods are bad, and how to deal with a thousand other issues besides "what do I owe?"
From a more practical perspective, it is unlikely that any realistic tax on food will solve this problem. People will just, well, absorb it.
Hat tip: TaxProf blog.
UPDATE: Victor Fleisher responds, and we continue the conversation.
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RABYS WEIGH IN ON S CORPORATION BASIS SHIFTS
April 21, 2005
The TaxProf today pulls "Shareholder Loans and Basis in S Corporations" from behind the Tax Analyst subscriber firewall. Burgess and William Raby review the tax law rules on how shareholders get basis to take S corporation losses, including the latest cases. Wise words in their conclusion:
S corporation shareholders in need of basis to deduct losses
should seriously consider either:
* contributing assets with sufficient tax basis to the
corporation; or
* borrowing the money needed and making a contribution to capital
or a loan.
This is one of our favorite topics; here are some of our prior posts on S corporation basis:
S CORP FAILS TO COVER ITS BASIS
S CORPORATION SHAREHOLDER LOSES BASIS APPEAL
TAXPAYER APPEALS IRS ATTACK ON S CORPORATION BASIS TRANSFERS
NO BASIS, NO LOSS: YEAR END PLANNING FOR S CORPORATION SHAREHOLDERS
RING AROUND THE ROSEY FAILS AN S CORPORATION SHAREHOLDER
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STOP THE HIATUS
April 21, 2005
One of the earliest tax blogs has emerged from hibernation. UCLA law prof Victor Fleisher has revived A Taxing Blog at a new address. He says he will be an "op-ed page" of the tax blogosphere, in contrast TaxProf Paul Caron's news and links approach.
An example is his discussion of the executive comp tax shelter made infamous by Sprint Communications, where executives transferred their stock options to family partnerships to avoid income and gift tax:
If you subscribe to the Bebchuk/Fried/Walker managerial power theory of CEO pay, as I do, then the only real constraint on executive pay is outrage. If shareholders aren't outraged by $50 million pay packages, maybe they would be outraged if they knew that CEOs were receiving a large portion of this pay on a tax-deferred basis and costing the company the benefit of an earlier tax deduction.
Welcome back, Mr. Fleischer.
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HOW DO YOU LOSE THAT JOB?
April 20, 2005
Russ Fox has a great eye for good tax cases, like:
Ex-Oakland Voodoo Chief Indicted For Tax Evasion
If she weren't "ex," maybe she could do something about this bad tax juju...
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LET'S GIVE THESE FOLKS A TAX BREAK
April 19, 2005
We're overdue in noting this, but State 29 has read the Des Moines Register writeup on the questionable nature of the financiers behind the proposed Newton Speedway and done some homework of his own.
This is the project that is targeted for a unique tax break - letting it keep the sales tax it collects.
Thanks to Random for the reminder.
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TAX COMPLEXITY: BLAME IT ON THE HP 12-C?
April 19, 2005
A number of folks have suddenly noticed how the proliferation of computer techology has enabled the mind-numbing complexity of the tax law. The same technology that puts the computing power of the lunar landing program on your lowly laptop gives Congress the ability to put tax laws of intergalactic complexity on your 1040.
Blame the 12-C?
Law professor and occasional tax blogger Jack Bogdanski (via the TaxProf) says technology began to create tax complexity in the early '80s, before most tax accountants had discovered the 5-inch floppy disc:
This phenomenon is not entirely new. For example, a couple of decades back, the tax laws got much more complicated when Congress discovered the sheer beauty of cheap, handheld financial calculators, such as the classic Hewlett-Packard 12C. Once the tax staffers on Capitol Hill saw how easy it was to figure out compound interest, many important tax calculations suddenly required that such calculations be made. As one tax pro put it to me over the water cooler back in my practicing lawyer days, "The 12C created the O.I.D. rules."
I had always blamed Bob Dole. I never had him pegged as a cutting edge techie.
The libertarians at the Reason blog write of "TurboTax and Leviathan." The post points to a New York Times op-ed that points out how tax software takes the labor, if not all the pain, out of the alternative minimum tax:
In a world without paid preparers and TurboTax, taxpayers would face the tedious process of calculating their taxes twice - once under the regular income tax and once using the cumbersome alternative minimum tax rules. But software does that calculation in the blink of an eye - and for taxpayers who have to pay the tax, tell them how to adjust their withholding so that next year they won't even notice that they're paying it.
It's not just the libertarians and the New York Times center-lefties. The non-leftie Thomas Donlan at Barrons also notices (link works only for Barrons online subscribers):
Unfortunately, Congress also owns a lot of computers and it has used them to draft ever more complex deductions, benefits and exclusions from regular taxes. The tuition tax credit rolls back for persons above income level A, but the tax credit for electric vehicles continues in full effect until income level B. Other credits also vanish slowly, like the Cheshire cat's smile, at income levels C through ZZZ, and at different rates of reduction.
Though, confused, inane and devoid of reason, these complexities are no longer painful. Turbo Tax, Microsoft Money and the army of low-cost tax preparers have given taxpayers an even break in computational skill. Now Congress is free of any subtle requirement to keep tax computation within the bounds required by an innumerate public, because the public has its personal computers to figure percentages and carry from the tens' place to the hundreds' place.This is not all to the good: Taxpayers who just fill in the blanks and let the PC or preparer do the calculating are not getting mad about the fearsome complexities added to the tax code. They do not resent the stupid inequalities of the code, inserted in the name of fairness to soak the middle-class "rich." If they never have to look at a tax table, they can remain oblivious to marginal tax rates and never notice that the government in Washington thinks it highly appropriate to claim?? an increasing percentage of their income as a price of success.
The only thing that's new about this, as Mr. Bogdanski's piece indicates, is that people are noticing how much the P.C. has fueled tax complexity. Preparers figured this out long ago. Off the top of my head, it's easy to list many tax provisions other than the AMT that computers enable:
-Passive loss rules. Without P.C.s, it would be ridiculously hard to determine the amount of passive losses disallowed, allocate the disallowance among your passive activities, compute the portion of the special allowance for active participation rental real estate and its phase-out, and maintain carryforward records.
-Depreciation. Compute it for 3,5,7, 15, 27 1/2 and 39 year property, double-declining balance (or 150% declining balance, or straight-line) and then compute it again a different way for alternative minimum tax, by hand. I'll wait.
-Phase-outs. The IRA deduction. The Roth IRA. Itemized deductions. The AMT exemption amount. Earned Income Credits. The Savers Credit. Education credits. The deduction for student loan interest. All of these phase out at different income levels. Imagine trying to do these computations by hand.
-Carryovers - net operating losses, AMT credits, general business credits, excess Section 1231 losses, excess capital losses, all are nicely carried forward by modern computer software.
-Consolidated returns. Sure, people did consolidated returns by hand back before computers. That was when you could hire all the new staff accountants you wanted for $18,000 per year, and they'd work like slaves and like it. A pool of skilled typists solved your legibility problem through typing drudgery.
Apart from any single complication, the sheer volume of computations makes doing returns by hand prohibitively tedious. Sure, computing any single phaseout isn't a daunting task. But computing a half dozen in the right order becomes a challenge. And then do it all over because a corrected 1099-DIV arrives in the mail...
Still, we can't really blame the P.C. for the complexity of the tax law. The computers don't write the bad laws; Congress does. And we elect the congresscritters. As always in data processing -- garbage in, garbage out.
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MAY 2005 AFRs ARE OUT
April 19, 2005
The IRS has issued (Rev. Rul. 2005-27) the minimum interest rates for loans made in May 2005:
-Short Term (demand loans and loans with terms of up to 3 years): 3.54%
-Mid-Term (loans from 3-9 years): 4.28%
-Long-Term (over 9 years): 4.83%
Historical AFRs are available via the “Links” page at www.rothcpa.com.
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TAX SEASON - BAH.
April 19, 2005
Somewhere in the misty dawn of civilization, the first deadline inspired the first last-minute scramble to meet it, and no doubt the first request for an extension.
While tax deadlines may be ancient, the preparation of so many of the most difficult 1040s in the final weeks of tax season is relatively modern. It started when the 1986 act and subsequent legislation forced most partnerships and S corporations onto a calendar year; the owners had to wait for the entity returns to be completed before they could do their own returns.
The lowered dividend rate enacted for 2003 returns has worsened the problem; many mutual funds and corporations have had to issue corrected 1099-DIVS because they miscomputed the amount of dividends qualifying for the 15% top rate. The problem is even worse when these dividends pass through a trust, partnership or S corporation.
While the 1986 tax reform did much to simplify the tax law (most of which has since been undone), it worsened workload compression. Forcing the preparation of many of the hardest 1040s into what really is now about a three-week window seems like bad policy. Sure, you can extend, but you have to have a decent idea of what the tax will be when you file the extension.
There doesn't seem to be much talk about the filing season crunch at the President's Tax Reform Panel. We can only hope whatever reform they come up with deals with some of these problems.
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RIP: THE BABE
April 18, 2005
Alphonsus J. "Babe" Bisignano died over the weekend. The Babe is a Des Moines legend. His downtown restaurant was a huge hot spot in World War II, when the WAC training center at old Ft. Des Moines made the town a destination location for unattached young women. When downtown fell on hard times later, Babe flew the flag of downtown nightlife for years almost alone.
When I moved to Des Moines in 1985, one of my early job interviews was at Babes. It was a regular lunch destination for our little group of fledgling tax accountants, and Babe's friendly greetings made up for the sometimes grumpy waitresses and the roast beef sandwiches that they never quite cut all the way through.
Now a revived downtown Des Moines has a collection of excellent restaurants, while the old Babes has been shuttered for years. Without Babe's tenacity, there might not have been much of a downtown left to revive. Rest in peace, Babe.
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HAPPY BLOGIVERSARY TO THE TAX PROF
April 15, 2005
He's been in a blogging frenzy for a year now - go say hello to the man.
Paul Caron
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JUST IN TIME FOR TAX SEASON
April 15, 2005
Governor Vilsack on Wednesday signed HF 186, the bill updating Iowa's tax law to conform with federal tax changes. This means all the state tax returns we've been preparing are right, retroactivley.
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DO WHAT TO THE SMALL BUSINESSMAN?
April 15, 2005
Blogger Matthew Yglesias has a slogan about the estate tax that probably won't pass the focus group test (top of second paragraph of link).
Via Instapundit.
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CERTIFIED MAIL: THE $4.42 HAPPY PILL
April 14, 2005
An enduring mystery of tax practice is the unwillingness of taxpayers who have paid hundreds of dollars to a preparer for a return owing thousands of dollars of taxes to spend $4.05 extra ($4.42 total, when the regular stamp is added) to mail the return "certified mail, return receipt requested."
The tax casebooks are full of instances where taxpayers have tried to prove timely-filing in the absence of a postmark. Absent a certified mail receipt, taxpayer victories are rare - and the ones that do exist certainly cost the taxpayer more in attorney fees than they would have spent on certified mail.
As April 15 looms, here is a recap of making sure your return is treated as timely-filed.
THE TECHNOLOGICAL SOLUTION
Electronic filing is hard to beat as a means of making sure your return or extension has been filed on time. Electronic filers get prompt acknowledgment of filing from the IRS. We are unaware of any case where the timeliness of an e-filed return has been disputed.
CERTIFIED OR REGISTERED MAIL
A timely certified mail or registered mail postmark can be a valuable possession. The penalty for late filing a return is 5% of the tax due, plus 5% for each additional month. It doesn't take much tax owing to exceed the cost of that certified mail postmark.
If you send certified mail, be sure to get the postmarked receipt and put it in a safe place. It also doesn't hurt to write the receipt number on the return or extension, just to be safe.
UPS AND OTHER PRIVATE DELIVERY SERVICES
The IRS now accepts receipts from some private delivery services, such as UPS and Federal Express, as proof of timely mailing. If you want to use such a service, be sure to review Notice 2004-83 to make sure the private delivery method you use qualifies.
DROPPING THE ENVELOPE IN THE BIN HELD BY THE POSTAL WORKER ON 2ND AVENUE AT 11:59 PM ON APRIL 15
For incorrigible optimists only.
(Note: this post is 99% post-consumer content)
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HOUSE VOTES IMMEDIATE ESTATE TAX REPEAL
April 14, 2005
The House of Representatives yesterday voted to immediately repeal the estate tax. Don't throw away your credit shelter trusts just yet.
The obstacle real obstacle to estate tax repeal has always been the Senate, with it's 60-vote requirement to pass legislation over a filibuster. The Republican leadership is showing signs that it despairs of a repeal by quietly appointing Senator Kyl of Arizona to negotiate an estate tax with higher exemptions and lower rates.
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$94,000, $1,400,000 - WHAT'S THE DIFFERENCE?
April 13, 2005
Tax Analysts today reports on a case resulting from the failure several years ago of Des Moines-based Access Air (no link available). While in its death spasms, the airline failed to remit its air passenger excise taxes. These taxes are treated like payroll taxes; if they are not remitted, all persons "responsible" for payment of the taxes are personally liable.
The last Access Air president, Richard Musal, had been held liable on $1,400,000 of taxes on summary judgement; the judge thought the facts against him were so clear that no trial was needed. Two other executives went to trial to determine whether they were responsible.
At the trial, the other two exectives were found to responsible, also, but a significant new fact emerged: the unpaid taxes were about $95,000, rather than $1.4 million. These details matter.
The decision reported today knocks Mr. Musal's liability down to the same amount for which the other responsible parties were held responsible at trial.
The decision was actually issued in February, but it was never posted on the U.S. Southern District Court of Iowa's website. They are rather stingy and sporadic in posting decisions, in comparision to the Northern District out of Cedar Rapids.
Prior Tax Update coverage:
ACCESS AIR EXECUTIVE ON THE HOOK FOR $1.3 MILLION IN UNPAID TAX
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HE CAN'T DRIVE THE FERRARI IN AN OFF THE RACK SUIT
April 12, 2005
Today on Instapundit gives us a glimpse at the lifestyle at InstaManor:
"I've been having my suits made at John Daniels for years, and they're very good..."
And we thought IowaHawk was writing fiction when he reported:
I'm sorry Mister Rather, Professor Reynolds has left specific instructions that he is not to be disturbed while he grades examinations," sniffed Chalmondeley, InstaManor's imperious butler. "Perhaps the next time you are in Knoxville, you can arrange an appointment."
"I've had enough with your softshoe act, penguin," I glared. You go tell Professor Evil I got a new class for him to teach -- it's called Who Framed Dan Rather 101, and I'm the star pupil."
Chalmondeley let out an exasperated sigh. "I will relay your request to the Professor. Please wait here, and I shall return anon." He closed the massive oaken door in my face.
Now we know that IowaHawk is really a documentarian.
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IN OTHER NEWS...
April 12, 2005
"Cops Moonlighting as Strip Club Bouncers Charged with Tax Fraud"
Fortunately, Taxable Talk is on the case.
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TAXPAYERS JUST WANNA HAVE FUN
April 12, 2005
Taxpayers enjoy the experience of tax time, according to National Taxpayer Advocate Nina Olson. So says an article in Tax Analysts this morning:
"I don't think the IRS and the government really give credence to that ritual act," Olson said. "For many, many individuals it's the only time they sit down and look at what happened to them financially over the last year, and I wouldn't want to lose that in a return-free system, because for the broader financial health of the country, that's an important ritual."
Tax return preparation as an enjoyable ritual act? Hmmm... that means we've been participating in a veritable ritual orgy these last few weeks. We should lay in some new office supplies, then.
If the IRS really wants to pursue this concept, I know who they should hire for their web design work.
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IOWA DEPARTMENT OF REVENUE GETS IT WRONG AGAIN
April 11, 2005
Pass-through entities - S corporations, LLCs and other partnership vehicles - have become increasingly popular in the tax world. The income of these entities is taxed on their owners returns, avoiding an additional layer of corporate tax. Now Iowa wants to add it's own second layer of tax for many pass-throughs.
One drawback of these entities is that when the entity files in many states, the individual owner is also taxed in those states. This can result in dozens of state tax returns for each owner. Most states alleviate this problem by permitting "composite" returns, allowing the corporation to file a group 1040 on behalf of non-resident shareholders.
All states that impose an income tax allow a credit for taxes paid to other states to prevent the doubling-up of state taxes. In general, if you pay a tax to a non-resident state, you reduce your resident tax by the the non-resident state tax (but by no more than the home state tax computed on the income taxed by the other state).
Today the Iowa Department of Revenue issued a "policy letter" saying that taxes paid on composite returns don't qualify as taxes for the non-resident credit. In a crabbed and shortsighted interpretation, the Department said that because the tax is paid "on behalf" of a taxpayer on a composite return, rather than "by" the taxpayer, it doesn't qualify for the credit.
This is silly. Many states require corporations to "withhold" tax on non-resident pass-through owners. Is Iowa next going to say this doesn't qualify because it's not paid "by" the shareholder?
Under this policy, the department forces pass-through owners to choose between paying perhaps thousands of dollars to file in multiple states, or allowing Iowa to subject their income to an unauthorized second state tax.
That will do a lot for economic development.
Belated thanks to ever-alert George Davis for the tip.
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THE QUESTION ISN'T PHRASED PROPERLY
April 11, 2005
From today's TaxProf Blog:
The Tax Policy Center hosts a forum today on Can Tax Time Be Less Burdensome? as part of its Perspectives on Tax Reform Series:
The title suggests either a sly sense of humor or an unfathomable depth of cluelessness. We suggest a seminar on "Could Tax Time Possibly Be Any Harder without Expiating Original Sin?"
We'd love to attend today's event, but we're otherwise engaged today.
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"AN EVEN CRAZIER IDEA IN IOWA"
April 11, 2005
A stylishly-coiffed David Brunori, the Tax Analysts state tax policy wonk, weighs in on the bill to let the proposed Newton raceway keep the sales taxes it collects:
AN EVEN CRAZIER IDEA IN IOWA
The Iowa Senate Tax Policy Committee approved a bill that would provide a unique tax break to a planned race-car track in the state. If the bill becomes law, the owner would be able to keep up to $12.5 million of sales tax collected at the track over the next 10 years.
The state would still be imposing the sales tax on things sold at the track. But the vendors would get to keep the money. I wonder if the vendor would get a fee for collecting the sales tax as well. I wonder if the vendor would now lobby for higher sales tax rates. That's what I would do. Is this a dumb idea? Sure it is. If the state wants to assist the owner, it should appropriate money every year.
Our views are here.
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EXTENSIONS: A GOOD THING
April 11, 2005
Now that you have squandered your weekend enjoying the nice weather instead of digging through your checkbook, you may be wondering, "what's with this April 15 stuff anyway?" Excellent question!
Tax returns are due April 15, but that deadline can be automatically kicked back to August 15; another extension is usually available to push it back to October.
This doesn't mean you can just blow off the deadline entirely. You have to at least have a clue what your taxes are for the year to safely extend. Some extension basics:
HOW DO EXTENSIONS WORK? WHAT DOES IT COST?
Federal 1040s can be extended by filing Form 4868 by April 15. We can also file extensions electronically. The government charges no special fee for filing the extension.
The extension puts off the filing due date until August 15. An extension DOES NOT extend the time to pay any tax owed. If you fail to pay in at least 90% of your total tax for the year by April 15, you will be charged a 1/2% late payment penalty for taxes paid after April 15. The late payment penalty increases by 1/2% whenever another month goes by; for example, if you make your late payment on May 17, the total penalty is 1%. Interest is also charged on the underpayment at the federal underpayment rate, currently 6%.
IF I HAVE TO PAY, WHY BOTHER EXTENDING?
If you fail to even extend a return, the harsh "failure to file" penalty applies when you do pay your tax. This penalty is 5% of any underpayment once the return is late, and an additional 5% for each additional month the return is late. For example, a payment with a non-extended return filed on April 20 is subject to the 5% penalty; if the payment is instead made on May 20, the penalty is 10%. Interest is also charged on any amount owed.
If the IRS concludes that you didn't make a reasonable stab at estimating your tax liability, they can say the extension was invalid, sticking you with the higher non-filer penalty.
IF I EXTEND MY RETURN, WILL I GET AUDITED?
We are aware of no evidence that a return becomes any more or less likely to be examined if it is extended. The IRS generally has three years to assess any underpayment on an audit; if a return is extended, the IRS has until three years after the extended due date to make any examination adjustments.
For what it's worth, I've extended my returns for at least the last 15 years without any complaints from the IRS (knock wood). Had I not filed by the extended deadline, though, I'm sure they would have said something.
WHAT ABOUT IOWA?
Iowa returns can be extended for six months from the April 30 due date without filing any form as long as 90% of the tax for the year has been paid. Interest will accrue on any underpayment at 10%.
The stakes are higher when estimating the Iowa tax due with an extension. Iowa imposes its "failure to file" penalty if 90% of the tax is not paid in; this penalty is 10% of any amount not paid by the due date. This is more severe than the 1/2% monthly "failure to pay" penalty that the federal government imposes under the same circumstances.
WHERE CAN I LEARN MORE?
The IRS has a new web page devoted to extensions here.
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S CORP FAILS TO COVER ITS BASIS
April 09, 2005
The press of tax season keeps us from taking the time we'd like to talk about tax cases. The "Tax and Business Law Commentary" is apparently less busy with returns; they review a recent Tax Court case, Maloof v. Commissioner, where the taxpayer did just about everything wrong from a basis planning standpoint. From TABLC:
The opinion reads like the Children's Goldenbook of S Corporation Taxation with the Court walking through fairly basis principles of S corporation taxation. The taxpayer's positions were so adverse to established law that I'm surprised that there was no mention of possible sanctions for taking a frivolous position. (My favorite ludicrous position taken by the taxpayer is that he was a resident of Florida and thus the precedent of the 11th Circuit applied to the case. Why was he a resident of Florida: He lived with his mother, not his wife, who lives in Ohio. Note to Counsel: Your client's name is "Maloof" not "Oedipus.")
Thanks to TaxProf for noting this blog, which had escaped our attention somehow.
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KINDER, GENTLER NO MORE
April 08, 2005
Two headlines at Tax Analysts home page today seem to catch the spirit of today's IRS:
Everson Outlines Options to Close Service CentersIRS Commissioner Mark Everson said on April 7 that the Service is considering a plan to shut down roughly 70 taxpayer service centers across the country to meet the constraints of the White House's fiscal 2006 budget proposal.
And:
Expanded Civil Enforcement Lends Muscle to Tax Fraud Prosecution, IRS, Justice SayOver 100 promoters of tax avoidance scams and preparers of fraudulent returns have become subjects of civil injunctions stemming from the IRS's increased civil enforcement efforts since 2001, IRS Commissioner Mark Everson and Eileen J. O'Connor, assistant attorney general for the Justice Department's Tax Division, said April 6.
Kinder and gentler never seemed to fit IRS very well anyway.
And how might I help you today?
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TAX GAP: WHICH WAY?
April 07, 2005
The IRS came out with some figures last week to illustrate the size of the "tax gap," or the difference between what taxes should be paid under the laws and what is paid. The IRS says more should be paid than is.
TaxGuru.net says that the figure is overblown. He says that taxpayers he sees tend to overpay, before they come to him. I don't doubt that, as he's a smart and able guy, but he isn't getting a representative sample. The people he sees care whether they pay the right tax. The ones that don't care - the restaurant owner who doesn't ring up his cash sales, the e-bay seller who doesn't report his earnings, the multi-level marketer who deducts his personal expenses on Schedule C - these folks don't visit CPAs, or if they do, they don't mention their off-the-books income.
The IRS measured the "gap" based on it's "National Research Project," aka "Audits from Hell." The TaxGuru doubts the numbers, calling them "just the standard IRS tactic for tax season." The numbers don't seem out of line, though, because the existence of a tax gap is probably what you would expect from a population of rational economic actors.
James Surowiecki, author of "The Wisdom of Crowds," says the best evidence shows that some people will always try to comply with the tax laws, and some people will always try to cheat. The largest group is in the middle - people who will comply if it isn't unreasonably difficult, and if they don't think they are being chumps to do so. The existence of a significant hard core of non-compliers probably makes a tax gap in some amount almost inevitable, even without assuming "the premise that everyone is a tax cheat."
Professor Maule's take has a lot of wisdom:
Thus, I think that noncompliance increases in direct correlation to the extent taxpayers perceive the tax law as unfair. The more disporportionate a tax law's complexity is to the complexity of the context in which the law applies, the more unfairness will be perceived by more taxpayers.
If the tax law gets to be too hard to comply with, people at some point just throw up their hands. The tax law sure hasn't been getting simpler, so more folks drift to the dark side of the tax law. The IRS gets overwhelmed as the rules get too hard for most IRS agents to figure out. While reducing the gap to some extent depends on increasing IRS enforcement, more agents can only do so much. Easier compliance is worth a lot more than a few extra IRS agents.
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TONY SERRA PLEADS GUILTY TO TAX VIOLATIONS - AGAIN
April 06, 2005
For the third time in his high-profile career, California attorney Tony Serra has pleaded guilty to tax crimes. From the Justice Department press release:
Mr. Serra, an attorney who resided in Bolinas, California, admitted in his plea agreement that for the years 1992 through 2001, he filed federal income tax returns reporting taxable income and reflecting a tax due and owing, but failed to pay any of the federal income taxes due. For the years 1997 through 2001, Mr. Serra admitted to causing a tax loss of $97,964.The maximum penalty for each count of failure to pay taxes is one year of imprisonment, a $100,000 fine and payment of the costs of prosecution.
It would appear from the tax loss that Mr. Serra's fame hasn't translated well into fees.
Mr. Serra spent time in prison in the 1970s for tax violations. The California bar seems to be less concerned about tax violations than the Iowa bar.
Prior Tax Update Coverage of Mr. Serra may be found here.
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SENATE PASSES IOWA-FEDERAL TAX CODE CONFORMITY
April 06, 2005
The Senate yesterday passed HF 186, the bill to bring Iowa's tax law into conformity with the federal changes passed in the last year, including the 2004 deduction for 2005 Tsunami relief contributions. It passed 50-0, so the Governor's approval may be assumed.
The House passed the bill in February. It appears that the Senate passed an identical version.
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