Tax Update Blog: June 2005 Archives

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"ENERGY DOESN'T COME FROM PORK"

June 30, 2005

Arnold Kling, scary-smart co-proprietor of Econlog, tells you all you need to know about the bloated "energy bill" that passed the Senate this week.

Prior coverage:

HOW THE TAX LAW GETS COMPLICATED, EXAMPLE #93,412

THE ENERGY POLICY TAX ACT GETS MAULED

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BLOGGER BASH SHOUT-OUT

June 30, 2005

If you miss a meeting, chances are you get named to a committee. That's what happened when I failed to show up in Iowa City at the recent blogger bash. Now I get to plan the next one. If you are an Iowa blogger, please read the extended entry below; I need to know whether strawberry or lime Jello is best for the wrestling event.

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H&R CELLBLOCK?

June 30, 2005

Many prisoners toil away for pennies an hour in the licence-plate in the licence plate and rock-breaking sectors of the economy. Others have discovered the joy of tax.

WASHINGTON (AP) -- A South Carolina prison inmate told a rapt House panel Wednesday about how he defrauded the U.S. government of $3.5 million by filing bogus tax returns.

The man, an anonymous 37-year-old inmate dubbed ''John Doe,'' testified behind a partition to prevent him from being photographed or videotaped during the House Ways and Means subcommittee on oversight hearing.

He said he started out by filing phony returns for 10 inmates in 1991, which netted $4,200 to $5,400. He kept a $1,000 commission on each return.

"Over the years, I filed six to seven hundred returns," Doe said. "The total dollar amount would be approximately $3.5 million, face value," of which he netted $600,000 to $700,000.

The funds helped support a thriving prison economy:

"The money and drugs eventually lead to beatings, stabbings and extortion," he said. "With the money I personally made, I often looked out for poor or indigent inmates who got no help from home." But he conceded he also used the money to buy sneakers, a color TV and "lots of drugs."

Amazingly, tax privacy laws have no exception for jailbirds:

Nancy J. Jardini, chief of criminal investigation at the IRS, said one obstacle to cracking down on the problem is a section of the IRS code which prevents the agency from disclosing tax information, with a few exceptions.

"None of the exceptions permit the IRS to refer refund fraud information to prison officials for the imposition of administrative sanctions," she said.

I can see the warden now: "Boy, you'd better get me one of them big ree-funds, or you'll be breakin' rocks in the yard until they carry you out!"

Link: Tax Analysts coverage.

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DISTURBING THOUGHT OF THE DAY

June 29, 2005

"TaxProf Blog: 'Head Cheerleader on the IRS Pom Pom Squad'"

And I doubt he'd find this in his size, anyway:

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TAX HONESTY QUOTE OF THE DAY

June 29, 2005

John W. Sedwick, U.S. District Judge, Alaska District, on a case filed by a Mr. James Fountain seeking to stop paying U.S. Taxes:

While it is difficult to be sure from plaintiff's papers, it appears that he is contesting his responsibility to pay federal income taxes on the basis that somehow the money he gains from his labors is not subject to such taxation. There are myriad ways that people have attempted to shirk their financial responsibility to the government and their fellow citizens, and it is not precisely clear on what theory or theories Fountain relies, but the fact is that the chances of success on the merits of such claims is essentially zero.

Link to case here.

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TAX INCREASE? I DIDN'T SEE NO TAX INCREASE

June 29, 2005

No surprise here:

Senate Finance Committee Chair Chuck Grassley, R-Iowa, on June 28 told reporters that GOP committee members have reached a consensus on Social Security solvency that includes an increase in revenues.

They telegraphed the probability of a tax increase some time ago. But they didn't say they would hide it:

Grassley said the revenue increase will be done in such a "roundabout" way that people won't even notice an increase in taxes. While he wouldn't go into detail, he said the revenue increase will be combined with adjustments to how benefits are calculated and an adjustment in the retirement age.

A secret tax increase? How do you do that? "Hey, look! A UFO! No, I didn't take your wallet, you must have lost it."

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ESTATE TAX: BIGGER EXEMPTION, BUT SAME RATES?

June 29, 2005

Tax Analysts brings us the latest rumors on the progress towards a permanent estate tax compormise:

Senate Finance Committee ranking minority member Max Baucus, D- Mont., told reporters on June 28 that his compromise efforts on the estate tax are still preliminary, but that some Democrats have noted that raising the exemption tends to cost less than lowering the rates.

"There's a little more emphasis now on exemptions," he said.

Baucus also said there is little support for carving out specific exemptions for family-owned businesses or farms, largely because such exemptions are "so incredibly complicated."

Tax Analysts link (subscribers only)

Recent Tax Update coverage: ESTATE TAX TO OUTLIVE KPMG?

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PRICELESS

June 29, 2005

The good Dr. Yin notes a letter to a judge from recently-convicted corporate looter Dennis Kozlowski demanding a tough sentence for Girish Shah, who embezzled from a Tyco subsidiary.

I wonder if Mr. Shah has returned the favor.

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TOYOTA HIGHLANDER QUALIFIES FOR CLEAN-BURNER DEDUCTION

June 28, 2005

The IRS has certified the 2006 Toyota Highlander SUV for the clean-fuel deduction.

The clean-fuel deduction is "above the line" and available to non-itemizers. There is no separate return line or form for the deduction; you just add $2,000 to the amount on line 35, which is the total of adjustments to income, and write "clean fuel" next to the total.

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THE HOME SALE EXCLUSION: DON'T GIVE IT AWAY

June 28, 2005

The cheerfully-named Death and Taxes blog has a good little piece this morning about how gifting your residence can squander the exclusion for capital gains on home sales.

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TAX COURT: TRUST INVESTMENT FEES GET 2% HAIRCUT

June 28, 2005

The tax law disallows deductions for "miscellaneous itemized deductions," except to the extent they exceed 2% of adjusted gross income. These expenses include tax preparation fees and investment expenses. In some ways this has been a blessing for practitioners, who no longer have to explain to clients that their Maxim subscriptions don't qualify as investment expenses, because they fall victim to the haircut anyway. It also gives us the opportunity to pitch a "2% of AGI return preparation fee system" (no takers, alas). The blessing is well-disguised, though, because clients are happier with deductions than without.

Optimistic practitioners have grasped onto a part of the tax law that eliminates the 2% haircut for trusts, at least for expenses "which would not have been incurred if the property were not held in such trust or estate." The argument is that all investment expenses by a trust "would not have been incurred" absent the trust.

The Tax Court yesterday reaffirmed its disapproval of this argument. The Sixth Circuit has disagreed with the Tax Court's position, but the Tax Court will continue to require the 2% haircut in cases that can be appealed to other circuits. The Tax Court reasons:

We believe that the thrust of the language of section
67(e) is that only those costs which are unique to the
administration of an estate or trust are to be deducted
from gross income without being subject to the 2-
percent floor on itemized deductions set forth at
section 67(a). Examples of items unique to the
administration of a trust or estate would be the fees
paid to a trustee and trust accounting fees mandated by
law or the trust agreement. Individual investors
routinely incur costs for investment advice as an
integral part of their investment activities.
Consequently, it cannot be argued that such costs are
somehow unique to the administration of an estate or
trust simply because a fiduciary might feel compelled
to incur such expenses in order to meet the prudent
person standards imposed by State law.

The Eighth Circuit, which covers Iowa, has yet to rule on the issue. Iowans' who ignore the 2% haircut for trust investment expenses will find a trip to Tax Court is a waste of time, and will probably instead choose to litigate this one in district court.

Cite: Willim L. Rudkin Testamentary Trust v. Commissioner, 124 T.C. No. 19.

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MISSING THE BOAT WITH ANDERSON'S ARK

June 28, 2005

The Tax ~~Protester~~ Honesty crowd is crowing over the jury acquittal of one of their pied pipers, Joe Banister, on conspiracy charges. Back in the real world, people who follow tax protester arguments continue their unbroken and monotonous record of defeat in challenging their actual tax liabilities.

The Tax Court handed down two tax protester decisions yesterday.

HAWKS V. COMMISSIONER

This case involved a couple that bought into the Anderson's Ark tax scam. The A.A. ringleaders are serving up to 20 years in federal prison. These A.A. customers aren't necessarily going to jail, but they will have to pay up $55,590 in back taxes, $11,118 in penalties, and interest.

STANG V. COMMISSIONER

Alan Stang skipped filing tax returns for 1999, 2000 and 2001 after he:

...executed a statement asserting that he was a sovereign citizen of Arizona; a Form W-8, Certificate of Foreign Status; another Form W-4 claiming exemption from Federal income tax withholding; a document entitled "AFFIDAVIT OF CITIZENSHIP AND DOMICILE"; and a document entitled "AFFIDAVIT OF CLAIMS FOR EXEMPTION AND EXCLUSION FROM GROSS INCOME OF REMUNERATION, WAGES AND WITHHOLDING". The affidavits enumerated a litany of typical tax-protester assertions, including that the Internal Revenue Code was Federal legislation inapplicable to him as a citizen of one of the 50 States and therefore not within the territorial jurisdiction of the United States, that wages and remuneration for labor were property not subject to indirect taxation, and that the income tax was voluntary.

Despite his deft use of CAPITAL LETTERS, Mr. Stang was assessed his taxes for the three years ($26,234) and penalties of $7,840.82. He sufficiently vexed the Tax Court that they also fined him $5,000 for wasting the court's time with frivolous arguments. All in all, H&R Block would have been a better deal.

There's nothing particularly unusual about these decisions; the Tax Court has some of these just about every week. In light of the tax protester excitement over Mr. Banisters acquittal, though, it's worth highlighting what "Tax Honesty" advice actually does for folks foolish enough to follow it.

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HEALTH COSTS: A WEIGHTY ISSUE

June 28, 2005

The BenefitsBlog has a collection of links on the tie between obesity and health costs.

Two solutions come to mind:

1. Let insurers charge fat people higher rates.
2. Impose futile but lucrative taxes on junk food.

Which do you think is more likely?

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WARM WEATHER CARNIVAL

June 27, 2005

This week's edition of the Carnival of the Capitalists" is up at "BusinessBlogcasting." Lot's of stuff there on the Supreme Court's Kelo decision on eminent domain. If you are looking for more cheeful reading, Photon Courier tells how the introduction of some very basic technology can make a big difference for some of the world's poorest people.

The Carnival is a weekly roundup of economics and business blog posts.

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ADVENTURES IN WISHFUL THINKING

June 27, 2005

As expected, the tax protest crowd is citing the acquittal of anti-tax charlatan Joe Banister as evidence that people don't have to pay taxes. They have issued a press release:

Sacramento California -- On Thursday June 23, a federal jury found former IRS Criminal Investigative Division (CID) Special Agent and CPA Joseph Banister not guilty of all counts alleging criminal tax fraud and conspiracy related to actions he took on behalf of a California business owner who had openly defied the IRS over several years by stopping withholding of all income and employment taxes from the paychecks of his workers.

During the trial the Department of Justice was unable to put forth any evidence that Banister had either engaged in a conspiracy or had acted unlawfully when he shared legal research with business owner Al Thompson concluding that he had no legal obligation to withhold taxes from his workers or when he (Banister) prepared corrected tax returns for Thompson claiming his taxable income was, under U.S. law, zero.

The release omits one fact a reader might find useful: Al Thompson is doing six years in federal prison for following through with the conclusion he arrived at from Mr. Banister's "legal research."

During the trial, Banister's former supervisor at IRS's San Jose CID office, Robert Gorini (who testified via video recording) when pointedly asked, was unable to cite any U.S. law that required Banister to pay income taxes.

We can help. Title 26 (the Internal Revenue Code of 1986), Section 1, says:

(a) Married individuals filing joint returns and surviving spouses. There is hereby imposed on the taxable income of�
every married individual (as defined in section 7703 ) who makes a single return jointly with his spouse under section 6013 , and

every surviving spouse (as defined in section 2(a) ),

a tax determined in accordance with the following table: (table omitted).

(b) Heads of households.There is hereby imposed on the taxable income of every head of a household (as defined in section 2(b) ) a tax determined in accordance with the following table: (table omitted)

(c)Unmarried individuals (other than surviving spouses and heads of households).
There is hereby imposed on the taxable income of every individual (other than a surviving spouse as defined in section 2(a) or the head of a household as defined in section 2(b) ) who is not a married individual (as defined in section 7703 ) a tax determined in accordance with the following table: (table omitted).

That's a federal law that requires Banister to pay taxes, assuming he makes any money.

WHAT THE KELO DECISION REALLY MEANS

June 26, 2005

Iowa City blog-genius Salieri sums up the Supreme Court's controversial emininent domain decision:

"1. Mayor Richard M. Daley is holding his calls: he's been..."

This is a family blog; you have to follow the link to read the rest.

The Chicago Daleys are notoriously an ~~Axis of Evil~~ White Sox family; this may mean a Wal-Mart is coming soon to Clark and Addison.

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ANDREW MITCHELL LLC - GREAT TAX RESOURCE COLLECTION

June 26, 2005

Professor Maule gets the word out about the great collection of tax resoureces at the Andrew Mitchel LLC - International Tax Services site. The site contains charts showing common transactional fact patterns. It also diagrams leading corporate tax cases from Atlas Tool to Zenz. This page belongs in your tax bookmarks.

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MORE CIVIL DISCOURSE

June 25, 2005

Over at Tax & Business Law Commentary, Stuart Levine has this to say:

Some commentators have taken issue with my denominating those who follow Republican economic nostrums as being either knaves or fools. I have detailed at some length on this blog the outright lies of the right wing commentators with respect to the tax system (e.g., that the estate tax threatens closely-held family businesses and farms, that the U.S. tax system is beginning to burden the wealthy, etc.) and their willful omission of critical facts (e.g., that if you abolish the estate tax and replace the revenue loss by repealing the basis step-up rules, you shift the tax burden from the very wealthy to the less wealthy).

I believe that when individuals supporting a proposition regularly and repeatedly lie about the facts of their proposals and regularly and repeatedly fail to set forth relevant facts, they can justifiably be classified as knaves. I also believe that when the lies and omissions appear with sufficient regularity and are as egregious and transparent (or easily discoverable) as they are, individuals who buy the crap that these individuals are selling can justifiably be called fools.

We count ourselves among the commentators taking issue with the whole "knaves and fools" thing.

Calling opponents names isn't just bad manners; it is ineffective. In many issues there is a large audience that has unformed views but that might not yet agree with your position. There is also a group with tentative views that might be changed if challenged with a coherent argument. Calling such folks "knaves and fools" for not agreeing with you yet doesn't do much to bring them around.

Mr. Levine also paints opponents with too broad a brush. He seems to believe there is a monolithic "right wing" that universally follows a single set of "Republican economic nostrums." That's no more accurate than saying there is a single left-wing policy.

I may be "right-wing" from Mr. Levines standpoint. There's something I find viscerally unsettling about the state claiming a majority of somebody's net worth at death. Yet I am not dogmatically opposed to an estate tax; I see where the basis step-up it allows at death provides tremendous advantages in administering the income tax. I am opposed to the estate tax in its pre-2001 form, with its 50%+ rates and its application to a broad and growing sector of the upper middle class. I am also opposed to all of the small-business carve-outs, which are almost impossible to use anyway.

I do favor a much lower rate and a much higher exemption, so only the wealthiest have to screw around with all of the complexity involved, and so there is less need for all of the baroque loopholes in the estate tax rules. I don't think that makes me a knave, or a fool.

My views may be wrong. By disagreeing with Mr. Levine, I realize I am disagreeing with a smart man, and I have no reason to doubt his good intentions. But Mr. Levine is a lot more likely to convince me I'm wrong by pointing out how I'm wrong than by saying I'm evil or stupid. And if I continue to disagree with him -- well, grown-ups can look at the same situation and honestly come up with different conclusions. When another issue comes up, he's more likely to get my sympathy if he hasn't recently called me evil and stupid.

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TAX COURT GETS UNWELCOME COVERAGE FROM CHICAGO TRIBUNE

June 24, 2005

The Chicago Tribune reports today on the astounding backroom rewrite of the special trial judge's opinion in the Kanter case:

D. Irvin Couvillion, a special trial judge for the tax court, oversaw the trial of the case in 1994 and filed his findings in 1998. Pursuant to normal tax court rules, those findings were sent to Tax Court Judge Harold Dawson for review and issuance of a final decision.

Dawson found that there had been a fraud, stating in the first paragraph of his decision that he "agrees with and adopts the opinion of the Special Trial Judge, which is set forth below."

But last month, after a five-year court battle, Couvillion's original findings were made public and revealed that Couvillion actually had found there was no fraud and rejected the multimillion-dollar IRS claim against Kanter and his partners, Claude Ballard of Florida and Robert Lisle of Texas.

Prior Coverage: DID WE SAY "ADOPTED?" OH, WE MEANT "ADAPTED."

Hat Tip: TaxProf.

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OUR ENTRY: "WHATEVER MR. PUTIN SAYS IT IS."

June 24, 2005

In the United States, we use emininent domain to dispossess property owners for the benefit of the powerful. In Russia, they use the tax law to achieve similar results, but in more thorough and humiliating fashion.

Apparently the conveniently elastic definition of "tax evasion" in Russia has become an embarrassment even to the authorities. The authorities have luanched a contest to define "tax evation," as opposed to tax "optimization," or, as we call it in the states, tax avoidance. The successful entry gets a 300,000 ruble prize; don't bother, we think we're a lock. Now if we can just find something to buy with rubles...

Hat tip: Taxable Talk.

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TAX PROTESTER WINS JURY VERDICT; DELUSION, PARANOIA BREAK OUT

June 24, 2005

Prominent anti-tax charlatan Joe Banister was acquitted of tax conspiracy charges by a federal jury in California yesterday. He was charged with conspiring with fast-driving Al Thompson to evade taxes for Thompson and his business. Mr. Thompson is serving a six-year sentence for his tax evasion conviction.

DOES THIS MEAN THE TAX LAW IS INVALID?

Whenever a tax protest figure dodges a conviction in a jury trial, members of the Tax ~~Delusion~~ Honesty movement cite the acquittal as proof that the income tax really is invalid. That's like John Gacy citing the O.J. acquittal as evidence that there is "no law" against murder. It just means that for whatever reason, the prosecutors failed to convince the jury that Mr. Banister was guilty of conspiracy.

WHAT'S WITH THE GOVERNMENT?

The ponderous IRS response to tax protestors has always been puzzling. The government should have a special unit devoted to swiftly and publicy shutting down sellers of tax non-compliance schemes. By responding slowly, the IRS gives the Tax Honesty charlatans more time to get more folks in trouble. As time passes without injunctions and arrests, the gullible see it as evidence that their goofy theories actually work.

While the IRS and the Justice Department have stepped up their efforts in recent years against the tax protesters, the Banister acquittal may indicate that their efforts are still haphazard and unfocused. Tax Analysts quotes one frustrated observer of the tax protest movement:

McNab expressed frustration because only the regional CI (criminal investigation) office was able to move on Banister, rather than having the IRS build a more comprehensive case.

"I don't know why they don't treat him [Banister] as a national figure. He certainly has more than one client," she said. "Joe's a promoter. Al Thompson never was."

WHAT'S WITH TAX ANALYSTS?

The Tax Analysts story on the Bandister acquittal has this strange paragraph:

The Banister case now joins the 1991 Supreme Court decision in United States v. Cheek (498 U.S. 192), the 1993 Eastern District of Tennessee decision in United States v. Lloyd R. Long (CR-1-93-1), and the 2003 Western District of Tennessee decision in IRS v. Kuglin as the preeminent decisions shielding tax protesters.

"Preeminent decisions shielding tax protesters?" Only in the way the O.J. verdict is a preeminent decision shielding multiple homicides.

In Cheek, the Supreme Court ruled that a tax protester could try to convince a jury that he really believed his goofy theories. Mr. Cheek got another trial, and another conviction.

In both the Long and Kuglin cases, tax protestors won aquittal by a jury on criminal counts. They still had to pay the taxes, though.

These cases do next to nothing to "shield" tax protesters, despite their earnest assertions otherwise. It's strange that Tax Analysts seems to agree with them.

OR IS IT JUST A CLEVER CONSPIRACY?

The subscription-only version of the Tax Analysts article quotes a tax protester as taking a more sinister view of the Banister acquittal:

Longtime tax protester Otto U. Skinner said that because Department of Justice attorneys are notorious for bringing tax cases they are 90 percent sure they can win, the defeat all but confirms the theory that Banister may still be operating as an IRS mole.

"If Banister gets off, it's because the government put on a weak case," he said. "And that can only be done on purpose."

That's right, Otto, you're surrounded by spies. And how do we know you're not one, eh?

UPDATE:The TaxProf has more, with links.

Also: New York Times coverage.

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NORTH CAROLINA GROUP SUES OVER DELL TAX INCENTIVES

June 23, 2005

The North Carolina Institute for Constitutional Law has sued in a North Carolina court to block $280 million in subsidies and incentives granted to Dell, Inc. for a plant in Winston-Salem.

The suit echoes the Cuno suits percolating through federal courts to challenge tax credits.

There's no telling how this will play out, as far as I can tell. The signs point every which way:

-The Supreme Court today ruled that local governments can seize private property for developers over the objections of the property owners. This would seem to indicate that states can do whatever they please to help powerful interests, including preferential tax treatment. BUT-

-The Supreme Court also has ruled that homegrown marijuana used at home is part of the stream of interstate commerce, and is thus beyond the scope of state control. As the anti-subsidy Cuno decision is based on Commerce Clause law, this would seem to indicate that everything is interstate commerce, and states can't interfere with it via tax policy.

How will it come out? If the recent Supreme Court decisions are a guide, simply bet against what I want. That means you should bet on the ~~corporate welfare~~ tax incentive supporters.

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DON'T SEAT THESE GUYS TOGETHER

June 23, 2005

Interesting juxtaposition in our visitor listing this morning:

The KPMG visitor stopped by to read "VIC FLEISHER TO KPMG: DIE." The Dept. of Justice visited "KPMG TO BE INDICTED FOR TAX SHELTER MISDEEDS?" They behaved and didn't cause a scene in our virtual shop here.

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WHERE THERE'S A WILL, THERE'S A WAY. BUT WHERE'S THE WILL?

June 23, 2005

The Death and Taxes blog has a helpful piece about making sure your will is in a safe place.

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TORT SHARKS CIRCLE WOUNDED KPMG

June 23, 2005

An article in yesterday's New York Times reports that KPMG's courtroom problems don't end even if it avoids being indicted. Their admission of "unlawful conduct" has had a calming effect on its civil litigation akin to that of throwing bloody meat into shark-infested waters:

With the admission of unlawful conduct, "the firm's willingness to help the government presumably can be used against it in civil actions," said Howard E. Abrams, a white-collar defense lawyer in Atlanta.

Indeed, lawyers for investors who bought questionable shelters from KPMG were delighted by the admission.

"It's stunning," said Gerald H. Silk, whose New York firm, Bernstein Litowitz Berger & Grossmann, is pressing a lawsuit against KPMG in a state court in Arkansas. "Obviously, it's very helpful."

The report also quotes "a former top Internal Revenue Service official" on the likely outcome of the KPMG criminal investigation:

A former top Internal Revenue Service official said he expected that prosecutors were "not trying not to bring down the firm" but wanted to impose a deferred-prosecution agreement, with "a penalty in the tens of millions of dollars," as well as a ban lasting months on accepting publicly traded companies as new clients. The former official also said that he expected the Justice Department to pursue individual partners.

The tax-shelter industry may turn out to be as profitable to the accounting professon as a methamphetamine addiction.

Hat tip: The TaxProf Blog, which has a roundup of KPMG coverage this morning.

UPDATE:: Firms Compete for Class Settlement Action in KPMG Investor Suits

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TUSK AND TALON V. IRS, HERITAGE FOUNDATION

June 22, 2005

Chad of Tusk and Talon isn't afraid of a fight. Yesterday he took on both the IRS's new ruling on single-client insurance arrangements and the Heritage Foundation's proposal to eliminate the tax exemption for employer-provided health insurance.

No word on when Chad will pick on someone his own size...

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ESTATE TAX TO OUTLIVE KPMG?

June 22, 2005

The Wall Street Journal also reports that a compromise that would enable the estate tax to survive, but increase the exemption to $3 million, may be imminent:

According to aides close to the Senate talks, Republican and Democratic negotiators so far have agreed to dramatically and permanently lower the estate-tax rate beyond 2010 and boost the amount per person that is exempt from taxes to more than $3 million. By contrast, the personal exemption was $1 million in 2001, and this year is $1.5 million.

I wonder what crow tastes like?

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VIC FLEISHER TO KPMG: DIE.

June 22, 2005

Victor Fleisher, a UCLA Tax prof and blogger, writes in A Taxing Blog:

KPMG is getting its arm twisted over some tax shelters. Larry Ribstein thinks the government, or at least the criminal division, should back off. Christine Hurt also thinks the government is being a little harsh. I disagree.

...
One problem with both criminal indictments/staggeringly high civil penalties is that they may punish the whole firm for the misdeeds of a few. But this threat is necessary to encourage internal monitoring among law firm and accounting firm partners. Law firms will invest a lot more resources in reviewing tax opinions if their future livelihoods depend on it.

A conviction would destroy KPMG and leave only three firms in the business of auditing the largest companies. A Wall Street Journal piece yesterday (subscribers only) indicates that even with the existing four firms, it can be impossible to get an acceptable competing bid for a big company audit:

Intel Corp. is one of the many big companies now bumping up against the limitations. After using Ernst & Young LLP as its auditor for more than three decades, the semiconductor maker considered switching recently for a fresh look at its financials. But it stuck with Ernst after receiving proposals from the other Big Four firms: Deloitte & Touche LLP, KPMG and PricewaterhouseCoopers LLP. That is because federal regulations bar the three other firms from serving as Intel's independent auditor unless they give up valuation, computer-software and other work they do for Intel

While certainly KPMG partners should go to jail for crimes that KPMG seems to admit took place, and KPMG should be sanctioned, it's hard to see where anybody benefits from destroying the firm.

UPDATE: Today the Wall Street Journal reports:

Securities and Exchange Commission officials are privately discussing steps to take in the event of a collapse of one of the Big Four accounting firms, including temporarily relaxing some rules they put in place two years ago to try to improve the quality of audits.

It would be morbidly funny if the effort to punish KPMG for tax crimes led to weaker audits.

Prior Coverage:

KPMG TO BE INDICTED FOR TAX SHELTER MISDEEDS?
WE LEAD, WALL STREET JOURNAL FOLLOWS

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GOING UP THE RIVER? BE SURE TO TELL IRS

June 22, 2005

We've all moved, and we all know the ritual of sending forwarding information to our friends. Next time, don't forget your friends at the Internal Revenue Service. David Broomfield forgot, and yesterday it led to his defeat in Tax Court.

Mr. Broomfield was disputing a deficiency on his 1991 tax return. He had a telephone conference with an IRS Appeals officer on November 6, 2002, and was given a December 11 deadline to file back tax returns.

Mr. Broomfield was involuntarily given a new address on November 14, 2002: the Oakhill Correctional Institution in Oregon, Wisconsin; it seems that he had pleaded guilty to a "5th+" charge of operating while intoxicated. He had mentioned this move to the appeals officer, but hadn't given him a forwarding address.

TIMING IS EVERYTHING, IN TAX COURT

After Mr. Broomfield failed to file the back tax returns, the IRS on January 30, 2003 mailed him a "Notice of Determination," which gives a taxpayer 30 days to file a Tax Court petition to fight the tax. If you miss the deadline, your only recourse is to pay the tax and sue for a refund in U.S. District Court.

Unfortunately for Mr. Broomfield, the notice was mailed to his home address, rather than to the prison. Mr. Broomfield's petition wasn't postmarked until March 15, 2003 - after the 30 days had expired. The Tax Court ruled that the IRS had mailed the notice to his last known address, and that he had missed his chance in Tax Court.

Somewhat ironically, some cases have ruled that if the IRS puts you in jail, they are assumed to know your new address. That loophole was unavailable to Mr. Broomfield.

THE MORAL: Even when your new address is the Graybar Motel, be sure to file Form 8822 so your "friends" at IRS can reach you.

Cite: Broomfield v. Commissioner, T.C. Memo. 2005-148.

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NOW THIS IS HOW TO ILLUSTRATE DEFICIT DISCUSSIONS

June 22, 2005

The headline of Martin Sullivan's piece in Tax Analysts subscriber-only edition this morning is reassuring, in a not very reassuring way: "Economic Analysis: U.S. Financing Crises at Least a Decade Away"

He concludes:

By all historical and international standards, the United States is not close to any sort of financial meltdown, despite large fiscal and current account deficits in 2005. The first indications of any financial instability are likely to occur in about 10 years when, if there are no significant changes in law to reduce the federal deficit, the United States could lose its AAA bond rating. Even then, U.S. debt would still be investment grade. And it would still be another decade after that before the risk of default became significant.

Expecting to be around still in 10 and 20 years, this is sort of good news; we're not dead yet. But more impressive is Mr. Sullivan's use of graphics. No, not this:

THIS:

It's not clear what this illustrates, but it's not clear anyone cares. The picture is near a section titled "Gloom and Doom." If that's what doom looks like, I'm not going to worry about it.

More of this, and they'll stop calling economics the "dismal science."

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DeLAY SAYS THERE'S NO PUTTING OFF TAX REFORM

June 22, 2005

One day after a Senate taxwriter said tax reform would be put off to 2007, House Majority Leader Tom DeLay said otherwise:

"We cannot put it off," he said. "I�m glad to see the tax reform commission is being serious about what they may recommend."

That makes sense; it's unlikely that tax reform will happen at all in the Bush administration if it's delayed to 2007. Still, this part of the report makes us question how reliable his tax observations are:

DeLay is a longtime supporter of a consumption tax and said he is pleased with how the national sales tax bill from Rep. John Linder R-Ga., has gained momentum.

"I think a lot of people are starting to push aside the flat tax idea because they know it won�t work longer than two years."

That's about two years longer than sales tax rates over 35% would work.

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THE ENERGY POLICY TAX ACT GETS MAULED

June 21, 2005

Congress is set to pass the misbegotten "Energy Policy Tax Incentives Act of 2005," which will lard up the tax code with "12 new income tax credits and 2 new excise tax credits, 6 modifications and expansions of existing credits, 3 credit sunset extensions, 3 new deductions, a deduction modification, and 2 other provisions," by Professor Jim Maule's count.

We discussed this ugly legislation recently, but Prof. Maule has pitched in with much more detail, scholarship, and righteous disgust:

Americans should be expected to do what is right, even if laws need to be enacted to tell us what is right. But to rely on tax incentives to get people to do what they ought to be doing, and very well might already be doing, is wrong. Very wrong. After all, what's next, a tax credit for stopping at stop signs? A tax credit for owning a gun and going a full year without shooting someone out of anger or revenge? A tax credit for eating broccoli?

While I can quibble with some of the good professor's other policy prescriptions ("Where are the tax credits for encouraging use of passenger trains, oh, wait, Congress is cutting Amtrak funding."), his analysis of the folly of this bill is dead on.

Link: Senate language, HR. 6

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TWO YEARS TO TAX REFORM?

June 21, 2005

Senator Jon Kyl, a member of the Senate Finance Committee, says that tax reform might be on the back burner for awhile. Tax Analysts reports:

An aide to Senate Finance Committee member Jon Kyl, R-Ariz., on June 20 confirmed comments the senator made in an interview with Bloomberg News in which Kyl said congressional action on fundamental tax reform is likely to be postponed until 2007.

According to Bloomberg, Kyl said that waiting to act on tax reform would give lawmakers enough time to discuss the findings of the President�s Advisory Panel on Federal Tax Reform and debate the issue during 2006, an election year. After debate, Congress could then move forward on changes to the tax system in 2007, Kyl said.

Last weekend the White House postponed the due date for the Tax Reform panel's report.

If tax reform waits two years, it might as well wait 20. Tax reform necessarily involves slaughtering a lot of sacred cows, and Congress is loath to do so in the runup to an election.

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QUOTE OF THE DAY

June 21, 2005

"If you want to reform the health insurance markets, you must reform the tax system."

Robert Moffit, Heritage Foundation, at a forum advocating elimination of the tax-free status of employer health insurance.

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"MOM TO 130 BABIES"

June 21, 2005

The Des Moines Register today includes a feature article about a former colleague and his wife. Gene and Marilyn Joerger were foster parents to 130 children. Their run as foster parents ended when Marilyn was struck with blindness in a back operation gone sour.

The good work the Joergers did can hardly be put into words. Our hats off to them, and best wishes.

The online edition is a bit garbled; you will need to scroll down on the link to get to where they start talking about the Joergers. The article is here.

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WE LEAD, WALL STREET JOURNAL FOLLOWS

June 20, 2005

Last week we posted pieces on the unwisdom of the potential indictment of KPMG and on the conviction of the Tyco looters. Today the first two editorials in the print edition of the Wall Street Journal:

"Gunning for KPMG..."

"...and Tyco Justice."

But unlike the Wall Street Journal pieces, ours are available without a subscription! You're welcome.

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LLCs VS. CORPORATION SUBSIDIARIES - STRANGE INSURANCE RESULT

June 20, 2005

The Treasury issued a revenue ruling Friday (Rev. Rul. 2005-40) discussing what sort of arrangements constitute "insurance" under the tax law. The bottom line seems to be that if a company sells "insurance" to only one client, it's not really insurance under the tax law.

Two example puzzle us. In each of the examples, all of the risks of 12 subsidiaries of a single corporation are insured by a single "insurer."

In one case, a company has 12 subsidiaries formed as LLCs treated as "disregarded entities." In these cases no tax returns are filed for the subsidiaries, and they are included on the parent corporation's tax return as if they were divisions of the parent company.

In the other case, the 12 LLCs elect to be taxed as corporations, presumably to be included on the parent's consolidated return (although the example doesn't say so).

The company with the "disregarded" LLCs is not treated as having "insurance." The arrangement for the identical structure that has elected corporation treatment, in contrast, is treated has having insurance.

WHY IT MATTERS

If a company is treated as selling insurance, it qualifies for certain favorable tax treatments, including the ability to accrue loss reserves. Insurance premiums are deductible to the insured; if the payments fail to qualify as insurance, it may be a non-deductible deposit or loan.

WHY WE'RE PUZZLED

The consolidated return rules are designed to allow affiliated corporate groups to compute their taxable income as if they were a single entity. If the LLCs are disregarded entities, their taxable income actually is computed as a single entity. It is strange that corporations using disregarded LLCs as subsidiaries are treated differently from those using wholly-owned corporations as subsidiaries. We can understand how they can get to this point via legal analysis - disregarded entities are treated as non-existent, while corporation subsidiaries are not - but the ending result is odd.

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FATHER'S DAY CARNIVAL

June 20, 2005

This Week's Carnival of the Capitalists is up at Blog Business World. The Carnival is a weekly roundup of economics and business weblog postings.

Many posts this week there. One post close to our own heart talks about helping clients cope with sticker shock from consulting projects; it doesn't say to bill the clients for time you spend listening to them ask why the bill is so high.

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ILLINOIS CORPORATE WELFARE DISCLOSURE WEBSITE

June 20, 2005

Under new legislation, beneficiaries of certain Illinois tax breaks and subsidies are listed on a state web site. You can see the 35 or so recipients of the "EDGE Tax Credit," including struggling worthies like Abbot Labs, Target Corporation and U.S. Cellular.

You can also see the list of beneficiaries of the Corporate Headquarters Relocation Program. It's not long:

Thanks to David Brunori of Tax Analysts for the pointer.

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WHY GM BONDS ARE "JUNK" - THE SHORT COURSE

June 20, 2005

To wit:

What company provides health coverage for 1.1 million people (a population great than the state of Rhode Island), but only has 160,000 or so current employees?

BenefitsBlog has the scoop.

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IRS ISSUES JULY 2005 APPLICABLE FEDERAL RATES

June 20, 2005

The IRS has issued (Rev. Rul. 2005-38) the minimum interest rates for loans made in July 2005:

-Short Term (demand loans and loans with terms of up to 3 years): 3.45%
-Mid-Term (loans from 3-9 years): 3.85%
-Long-Term (over 9 years): 4.35%

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

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THE LIMITS OF ABSENT-MINDEDNESS

June 17, 2005

One of the boldest uses of ditziness yet attempted in a major criminal trial failed today. Former Tyco CEO Dennis Kozlowski was convicted on a 22 federal counts arising from his, well, generous compensation package. From the Wall Street Journal's online report:

The strongest prosecution evidence involved a 1999 transaction in which Mr. Kozlowski had $25 million wiped from the amounts he owed Tyco under a loan program, and Mr. Swartz had an additional $12.5 million of loans forgiven. Among other things, the sums didn't show up on either executive's W-2 tax form for the year, which prosecutors cited as evidence that the defendants were trying to hide the alleged theft.
Both defendants testified that the failure to include the amounts on the W-2 was a mistake they didn't catch at the time, but the notion that somebody wouldn't notice mega-millions missing from their tax returns must have strained credulity.

Years ago noted criminal law expert and Egyptologist Steve Martin recommended just such a defense:

You say.. "Steve.. how can I be a millionaire.. and never pay taxes?" First.. get a million dollars. Now.. you say, "Steve.. what do I say to the tax man when he comes to my door and says, 'You.. have never paid taxes'?" Two simple words. Two simple words in the English language: "I forgot!"

Absent success on appeal, it's back to the old drawing board for the white-collar defense community.

Mr. Kozlowski's CFO, Mark Swartz, was also convicted on 22 counts. Sentencing is set for August 2.

Those jurors must have had hearts of stone. Who hasn't forgotten about $25 million somewhere along the line? Must have been a bunch of Yankees fans...

More here.

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YOU BLOCKHEAD! YOU DIDN'T SUBSTANTIATE YOUR DEDUCTIONS!

June 17, 2005

Perhaps somewhere a Bartholemew Simpson is in his mid-twenties, mulling whether to change the name his parents gave him before anybody heard of Bart, Homer and Mr. Burns.

Charles Brown apparently made his peace with this issue long ago. The Tax Court says Mr. Brown has been an attorney for 30 years, which makes him about 55 years old. Charles Schultz had just invented the Charlie Brown character when Charles was born, but it was not yet a cultural icon.

Unfortunately, even a cultural icon has to substantiate his deductions.

Mr. Brown worked full time for a company called Mecca, but he also had a law practice on the side. His 1998 law practice schedule C showed $1,800 of income and $17,394 in expenses. An audit ensued.

AUTO EXPENSES: NO SUBSTANTIATION, NO DEDUCTION

Mr. Brown "reconstructed" a log book to support his $2,496 vehicle expense deduction. Based on the log book, the IRS allowed $494 of the deduction and nixed the rest. The Tax Court upheld the disallowance:

To substantiate the adequate records requirement for a passenger automobile, �a taxpayer shall maintain an account book, diary, log, statement of expense, trip sheets, or similar record * * * which, in combination, are sufficient to establish each element of an expenditure�. Sec. 1.274-5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).3 Based on a reconstructed log provided by Mr. Brown, respondent allowed a total of 7,562 business miles on a leased 1997 Acura, and accordingly allowed a deduction for a percentage of the vehicle�s lease payment, insurance, and gasoline expenses. Mr. Brown did not provide any additional account book, diary, log, statement of expense, trip sheets, or similar record for the remaining amounts of his vehicle expenses at trial. Mr. Brown testified to these expenses with estimations.

We are generally permitted to approximate the amount of an
expense if it is deductible but unsubstantiated, bearing heavily
against the taxpayer whose inexactitude is of his or her own
making.

Similar substiation failures cost Mr. Brown other home office, business and charitable contribution deductions.

THE MORAL: get a log and track those auto deductions, or you may end up feeling like a real blockhead.

Cite: Brown v. Commissioner, T.C. Summary Opinion 2005-85.

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TAX REFORM REPORT DELAYED TO SEPTEMBER 30

June 16, 2005

The President today signed an executive order delaying the deadline for the tax reform panel's report to September 30. The deadline had been July 31.

Why the delay? It might indicate that there is actual debate over the plan; in that case they might need more time. Yet the press release quotes the co-charis of the committee as saying "We were on track to issue our report by July 31," so they might be delaying for another reason.

Our guess: they figured nobody will be in Washington on July 31 anyway, so they may as well take their time and make their report when people are back from the beach and paying attention.

UPDATE: It looks like the summer vacation theory is right:

Treasury spokesman Taylor Griffin confirmed the delay was not due to fears that the panel would fail to get its work done on time. Rather, he said, the extension was granted to make sure tax reform is not lost in the shuffle amid other priorities such as energy legislation, Social Security reform, highway funding, judicial nominations, and appropriations.

The text of the release is in the extended entry below.

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LESSONS IN TAX COURT DEPORTMENT

June 16, 2005

Kris at Random Mentality links to an piece by a jaded public defender full of helpful advice for her potential clients. Consider this helpful tip for courtroom deportment:

When you come to court, consider your dress. If you�re charged with a DUI, don�t wear a Budweiser shirt. If you have some miscellaneous drug charge, think twice about clothing with a marijuana leaf on it or a t-shirt with the �UniBonger� on it. Long sleeves are very nice for covering tattoos and track marks. Try not to be visibly drunk when you show up.

Similar advice is in order for Tax ~~protesters~~ Honesty Movement adherents when they visit Tax Court. Yesterday a Tax Court special trial judge Couvillion outlined some helpful "don'ts" for plaintiff Regina Bruce:

Petitioner's positions were those of a classic tax protester. Before, during, and after trial, petitioner flooded respondent and this Court with exhibits and inflammatory affidavits advancing her position that the U.S. tax system is unlawful, and the IRS is abusive. Furthermore, her conduct at trial was highly improper. She refused to answer factual questions during trial about how much money she earned, whether she had ever filed a tax return, or whether she obtained tax advice from anyone. Instead, petitioner persisted in repeating her statements about the illegality of the Internal Revenue Code and the oppression of the IRS toward her and all fellow citizens. When the Court reprimanded her for wasting time on frivolous arguments, petitioner simply restated her beliefs and accused the Court of trying to silence her. Finally, when the Court denied her objections as to the relevancy of respondent's routine questions and ordered her to answer, petitioner answered each question with "I have amnesia; I don't know."

To help make sure she would remember not to do these things, the court fined Ms. Bruce $10,000.

Cite: Bruce v. Commissioner, T.C. Memo. 2005-139

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SARBANES-OXLEY COMPLIANCE IS TOO EXPENSIVE FOR SMALL FIRMS. DUH.

June 16, 2005

With typical finesse, Congress reacted to the Enron and Worldcom scandals by firing into the crowd. The Congressional response, the Sarbanes-Oxley act ("SOX"), treats all public companies as potential criminals. The SOX law saddles all public companies with punishing compliance costs. While these might seem a small price to pay for a multi-billion dollar company like Microsoft, the costs aren't much less for a $50 million company.

The cost of being a public company has led many smaller companies to consider withdrawing from the public markets. The New York Times reports today that the Securities and Exchange Commission is now holding hearings on SOX costs to smaller companies. The article reports:

Big corporations are complaining about Sarbanes-Oxley, too. But there is little question that the financial burden of compliance falls more heavily on smaller companies. A study by Nasdaq released in April found that, as a percentage of revenue, "companies that have revenues less than $100 million spent 11 times more than companies with revenues of $2 billion or more." Another study, released in March by Financial Executives International, a professional association for corporate financial officers that is based in Washington, said costs averaged $824,000 for companies with annual revenues under $100 million, compared with $1,572,933 for companies with sales of $100 million to $500 million.

Once again showing that when Congress tries to solve a problem, it just makes more problems.

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KPMG TO BE INDICTED FOR TAX SHELTER MISDEEDS?

June 16, 2005

The Wall Street Journal reports this morning that U.S. prosecutors are debating whether to indict the world's fourth largest CPA firm. The article says that KPMG's tax shelter promotions have put it in peril of following the Andersen path to oblivion:

Federal prosecutors and KPMG's lawyers are now locked in high-wire negotiations that could decide the fate of the firm, according to lawyers briefed on the case. Under unwritten Justice Department policy, companies facing possible criminal charges often are permitted to plead their case to higher-ups in the department. These officials are expected to take into account the strength of evidence in the case -- the culmination of a long-running investigation -- and any mitigating factors, as well as broader policy issues posed by the possible loss of the firm.

These "policy issues" are the existence of only four firms now in the business of auditing the largest enterprises. When Andersen was convicted of securities violations - charges recently thrown out by the Supreme Court - it lost its state licences and was forced out of business.

KPMG issued a statement that doesn't exactly proclaim innocence:

KPMG issued a statement early Thursday in which the firm said it "takes full responsibility for the unlawful conduct by former KPMG partners" during the period under investigation by the Justice Department. KPMG said it has taken actions "to ensure that this type of conduct does not occur again," including "firm-wide structural, cultural and governance reforms." The statement said KPMG employees "no longer provide the services in question."

We have no affection for KPMG, but it is mind-boggling that the government would even consider indicting another national firm after the Andersen debacle. By all means they should go after lawbreaking partners, but it's hard to see any point in killing one of the four big auditing firms -- especially seeing how they are all swamped now with the additional audit work triggered by Sarbanes-Oxley.

Link to WSJ Article: KPMG Faces Indictment Risk On Tax Shelters
(probably only works for WSJ online subscribers).

Link: KPMG statement

Link: NY Times Article "KPMG Says Tax Shelters Involved Wrongdoing"

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LESSONS IN RETURN FILING

June 15, 2005

Mr. Randon Scholet once took an H&R Block tax course. The Tax Court added to his tax knowledge today, but H&R Block was probably cheaper.

Mr. Scholet learned at least two valuable lessons:

LESSON #1: A LAME ASSERTION BY LETTER IS NOT A TAX RETURN.

Rather than filing a 1998 form 1040, Mr. Scholet and his wife notified the IRS by letter that:

We still sincerely believe that we are not a
person liable or required to file a 1040 U.S.
Individual Income Tax Return for 1998.

When the court determined that Mr. Scholet owed an additional $463,386 in tax for 1998, it also considered asserting a 25% failure to file penalty. Mr. Scholet said his "sincere" letter counts as a tax return, so he did file. The Tax Court explained otherwise. This lesson in the tax law comes to Mr. Scholet at a cost of $112,138.

LESSON #2: IF YOU DON'T FILE, YOU DON'T FILE JOINT

Mr. Scholet learned another unpleasant lesson: if you are married and don't file a joint return, the IRS gets to assess tax at the higher married filing separate rates. This lesson probably cost Mr. Scholet about $13,200. Expensive, yes, but a bargain compared to lesson #1.

Cite: Scholet v. Commissioner, T.C. Memo. 2005-140.

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I THINK WIKI SAYS THAT TO ALL THE GUYS

June 15, 2005

I received an email yesterday telling me that I am "one of the more forward-thinking people regarding the online collaboration of tax issues." I was excited until I noticed that Stuart Levine of Tax & Business Law Commentary got the same email.

The e-mail announced that Intuit is developing a tax "wiki" at www.taxalmanac.org. A wiki is a collaborative online encyclopedia where volunteers contribute and edit articles; the "Wikipedia" is the prototype for these things.

We accepted the invitation and visited it. It looks a bit rough. It could be a very cool tool, but it reminds me of some study groups we were in as college freshmen. One person might study the coursework; the other group members would then pump that person for information, in lieu of actually reading the material.

The Wiki will work if the ratio of study-ers to pumpers is high enough to not discourage the study-ers. It will be interesting to watch.

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WILL 51% TAX 49% TO OBLIVION?

June 15, 2005

Efforts to ensure tax cuts don't disproportionally benefit people who actually pay taxes have now excluded 58 million U.S. households from the income tax system, according to a report in the Tax Policy Blog.

This seems like a bad idea. When such a large block pays no taxes, they have no stake in restraining government spending - heck, spend some more, those other guys will pay!

UPDATE: State 29 is beating up Dick Doak with this.

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ANSWER: AS CLOSE AS DES MOINES IS TO IOWA

June 15, 2005

Question:

"How close are we already coming to legalized bribery here?"

Minneapolis Attorney John P. James, discussing state tax incentives at the annual meeting of the Federation of Tax Administrators in San Antonio, as reported by Tax Analysts.

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HOW THE TAX LAW GETS COMPLICATED, EXAMPLE #93,412

June 15, 2005

Headline from Tax Analysts free site:

Grassley Packs $16 Billion in Incentives Into Energy Tax Title

The Senate Finance Committee fell just short of its spending target with the June 14 release of a $16 billion energy bill tax title that includes tax breaks for almost every segment of the energy industry.

According to the Joint Committee on Taxation, the chairman�s mark would cost $16 billion over 10 years, but over the first 5 years would cost just less than the $11 billion allowance in the 2006 budget resolution. Finance Committee Chair Chuck Grassley, R-Iowa, and ranking minority member Max Baucus, D-Mont., held costs down by sunsetting many of the tax breaks and only temporarily extending several others. But the legislation has little in common with the $8 billion House version, making it likely the cost could again balloon in conference negotiations.

In real life, rising energy prices are all the incentive needed for increased energy production and conservation. That, and maybe the government getting out of the way of exploration and refinery construction. But Congress is here to help.

The firewalled version of the article spells out some of the new tax breaks:

For energy conservation and efficiency, the Senate left the House behind with tax credits for efficient commercial buildings ($766 million, sunsetting in 2009), business credits for construction of energy-efficient homes ($706 million, sunsetting in 2007), a building credit for efficient heating and cooling systems ($1 billion, sunsetting in 2008), and new credits for more efficient home dishwashers, clothes washers, and refrigerators ($300 million staggered sunsets).

You know things are out of hand when even the sunsets are staggered by the tax breaks.

The Senate bill also takes care of the powerful oil and coal lobbies, providing $2 billion in incentives for generating electricity with clean coal, $727 million to allow expensing of equipment for refining liquid fuels, and $1.1 billion for enhanced oil recovery.

Despite the high combined price tags of the House and Senate tax titles, and the president's admonishments on cost, Grassley said he remained confident tax incentives would not hold up the bill.

No, they'll help it slide right on through.

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CRAWLING UP THE LEARNING CURVE

June 14, 2005

Paul J. Sulla, Jr., a Hawaii-based attorney, has now litigated four cases to decision in the Tax Court. He has lost them all. He is making progress, though - the Tax Court has not fined him now in two consecutive decisions.

The court sanctioned Mr. Sulla in Takaba v. Commissioner. The court fined him for advancing tax ~~protester~~ honesty-movement "arguments" like this one:

I reviewed the sections of the code that you
supplied me [sections 1, 61, 6012, attached to
counsel�s letter of March 24, 2000]. There is no
statement in any of those sections that specifically
states that �income� is the thing that is being taxed.
Until you establish a legal and factual basis for your
claim that �income� is the subject of the tax[,] the
amount and sources of my �income� is not relevant to
the issue. The IRS issued the notice of deficiency
claiming that �income� is the subject of the tax and
that because I have �income� I am required to pay a tax
on that �income�. I can�t wait to get IRS employees on
the stand and ask them �On what factual basis do you
claim that �income� is the subject of the tax?�

The Tax Court assessed Mr. Sulla a $10,500 fine for pressing these arguments. The Tax Court sanction also led Hawaii authorities to reprimand Mr. Sulla.

PURE TRUST? PURELY YOU JEST.

Mr. Sulla apparently learned a lesson. The Tax Court handed down a decision yesterday that had many of the markers of a tax protester case, including a "pure trust" and an "unincorporated business organization" set up in the "Sovereign State of Nevada." Yet nowhere in the case do the expected tax protester arguments show up. The Court rather uneventfully disregarded the existence of the "pure trust" and taxed its income to it's owner, James Sparkman.

By refraining from tax protester arguments, Mr. Sulla avoided sanctions against himself and frivolous argument sanctions against the client. The client still lost, and was hit with negligence penalties, but it could have been worse.

Cite: Sparkman v. Commissioner, T.C. Memo 2005-136

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ONE PROBATE - FINE. MANY PROBATES - NOT SO FINE.

June 14, 2005

Joel Shoenmeyer explains how why living trusts may not be that helpful if you have assets in only one state, but can be a big help when a decedent has property all over the place:

Consider this real-life horror story from my law firm days: Client is amember of the armed services who travels quite a bit. He passes away while in his mid-30s, unmarried and with no children. Because of the nature of his job, Client found it convenient to own small condos in Illinois as well as Florida and California. Each of these condos was owned outright by Client (not in trust). At Client's death, Client was an Illinois resident, but probate proceedings had to be instituted in three states (an Illinois probate to dispose of the Illinois condo and the rest of Client's personal property; a Florida probate to dispose of the Florida condo; and a California probate to dispose of the California condo). If I remember correctly, the cost of these proceedings wound up being in excess of $20,000.

The post explains how a living trust could have eliminated the multiple probates.

Mr. Schoenmeyer is a Chicago-area attorney practicing in estate planning and estate and trust administration. If you aren't visiting his blog, Death and Taxes, you're missing lots of good stuff.

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BLOGGER BASH, IOWA CITY EDITION

June 14, 2005

Kris, proprietress of the Random Mentality blog, hosts the first Iowa City Blogger Bash June 24. The Des Moines version earlier this year was a blast. If you can be there, be there.

Who: Bloggers, Commenters, fans, and beer buyers
Where: The Old Capitol Brew Works, Iowa City
When: 7:30 pm until collapse
Why? Why not?

Purported amenities include wi-fi, microbrews, and a patio. Kris says it used to be "Fitzpatricks."

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DIG IN!

June 14, 2005

Governor Vilsack signed the new Iowa Values Fund credits into law yesterday.

Pull up to the trough here. It's like ethanol at the gas station: just because ~~they~~ you subsidize it doesn't mean you should feel guilty for using it, if you can.

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CARNIVAL UP!

June 13, 2005

This week's Carnival of the Capitalists is up at Byrne's Marketview. The Carnival is a weekly summary of economics and business weblog postings. Topics this week include a cost-benefit analysis of college education.

The host of this weeks Carnival, Byrne Hobart, describes himself as "an eighteen-year-old writer, thinker, investor, and, if pressed, student" from St. Louis. That means he wasn't even born the year I (mis)spent in St. Louis. I'm getting old...

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THE ESTATE TAX - A FAILURE OF NUANCE?

June 13, 2005

Why has the estate tax reached depths of popularity otherwise reserved for Michael Jackson and Pee Wee Herman? Joe Thorndike of Tax Analysts thinks it's partly because America can't handle nuance:

As Graetz and Shapiro point out, progressives bungled the case for the estate tax from the beginning by emphasizing its narrow incidence but failing to engage convincingly the moral claims advanced by its opponents. It would be unfair to say that liberals retreated to an argument for "soaking the rich"; their defense was much more thoughtful and nuanced than that crass sloganeering implies. But conservatives managed to make a caricature of the liberal argument, and Americans bought it.

It's more likely that the estate tax defenders real problem wasn't nuance; it was cluelessness. The estate-taxers reflexively opposed anything that smelled like a tax cut for the "rich," even as the estate tax began to affect the merely affluent and thrifty. Mr. Thorndike hints at this:

Still, the estate tax of the pre-Bush era had begun to reach people it was never meant to afflict. Although homeowners in various suburbs may in fact deserve to be called rich, they hardly fit the profile for this historically narrow tax. Indeed, soaring real estate valuations may be one of the most important explanations for the declining fortunes of this "rich man's" tax.

Estate tax fans could have finessed the issue in the late '90s or even early in the W administration by increasing the exemption and indexing it. Instead they proposed more convoluted and unworkable "small business" exemptions. Meanwhile more and more mid-career two-earner homeowners with decent retirement savings realized they needed to start dealing with credit shelter wills and life insurance trusts under the old $600,000 exemption. They didn't lack nuance; they lacked a stomach for expensive and confusing estate planning.

Mr. Thorndike says that estate taxers should be happy for whatever compromise they can salvage and move on to other battles:

If the estate tax is ever going to survive over the long haul, liberals must return to fundamentals, finding a better way to talk about tax fairness. They should start by shifting their gaze from the top of the income scale to the bottom. Rather than arguing that justice demands steep taxes on the rich, they should make the case for lower taxes on the poor and middle class -- or at least different ones. Specifically, they should target the payroll tax.

Thanks to the TaxProf for bringing this thoughtful piece out from behind the Tax Analysts subscriber firewall.

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PARDON ME

June 13, 2005

President Bush issued seven pardons last week, all for convictions before 1990. The details for the offenses was skimpy, and it isn't clear from the terse press release why the President chose to pardon these particular folks; these are old offenses, and the sentences are long expired.

Why? One commentator guesses:

I guess my issue here is the extreme randomness of the pardons. If it's a good thing to pardon 30 year old, minor, federal crimes then we should do it for all. Why this gang of 7?

My guess is none have been in trouble since, and each has a congressional sponsor that was willing to push the names up to President Bush. But most of us don't have that type of connections to get the record purged. Millions of people have been convicted of minor federal offenses over the years, but live with the criminal record.

One of tax pardon recipients seemed familiar:

William Charles Davis, Blacksburg, Va., income tax evasion, sentenced August 1983 to two years probation and a $10,000 fine.

I believe this Mr. Davis is the skilled and prolific author of Civil War histories, two of which I own. Lincoln's Men is about the relationship of President Lincoln and the Union rank and file trooops. An Honorable Defeat: The Last Days of the Confederate Government tells the story of the Confederate government on the run after the fall of Richmond. It includes a surreal story of the fugitive Confederate Secretary of Defense administering a promotion exam to a Confederate sailor for a after the major Confederate armies have surrendered and the navy is down to about one ship. The Confederacy by this point was nearly a memory, but even on the run, it's bureaucracy still twitched.

Assuming that this is the same Mr. Davis, he has made a successful and distinguished life for himself since his tax conviction. Why a pardon? Perhaps he simply wants to be a "full" citizen with voting rights and rights to posess firearms. Maybe he just wants to close a door to an embarrassment from the past. Whatever the reason, he has overcome his unfortunate encounter with the tax authorities in his professional career; bully for him.

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AND DOES THE DIVORCE LAWYER COME WITH THE JOB? I'D NEED ONE.

June 10, 2005

Sometimes you can read the most frightening things on the Internet:

"A couple days back State 29 posted that State Treasurer Mike Fitzgerald is contemplating a run for governor.
"If Fitzgerald does get the nomination, I hereby nominate Joe to be our next State Treasurer."

While I might be interested in the job if I could be appointed to it and wield absolute and unquestionable power to ~~ruthlessly suppress my enemies~~ serve the public interest, my understanding is that it doesn't work that way. So in the immortal words of General Sherman, "If nominated I will not run; if elected I will not serve."

Like that would ever happen, anyway...

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ARE THE RICHEST LEAVING THE RICH BEHIND?

June 10, 2005

Do the tax laws fail to adequately tax the "hyper-rich"? This has been a theme of the New York Times tax correspondent, David Cay Johnston. Last Sunday he wrote a piece on this subject as part of a Times series on class, "Richest Are Leaving Even the Rich Far Behind."

We hope to spend a bit more time on it - like actually read the whole article - before commenting. Mickey Kaus already has read it, so you can get his take here. He opines:

What he doesn't answer is the important question on the relationship between (a) and (b), namely how much richer would they have gotten if they hadn't gotten the tax cuts? ... When I looked at this question in the early 90s, the answer was pretty clear: the rich were growing richer due to changes in the underlying economy (e.g. greater rewards for skills) that affected their pretax income, not changes in the tax code that affected how much of that income they got to keep.

So now the article is pre-spun for you.

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COURT PROVIDES CLUES FOR THE CLUELESS - WITH LINKS!

June 09, 2005

Joseph D. Meyer needs a clue. Judge Barbara Crabb is trying to help.

Mr. Meyer filed suit in the U.S. District Court for Wisconsin, Western District, arguing that efforts to collect tax from him are illegal because the federal government has no authority to tax U.S. indivvdulas who don't earn wates from international commerce or U.S. possessions, no code section makes him liable for tax, blah, blah, etc.

Judge Crabb tells it like it is -- with hyperlinks!

It appears from plaintiff�s submissions that he obtains his erroneous view of the Internal Revenue Code from an internet website, www.taxableincome.net. The excerpt that plaintiff submitted to the court as an attachment to his �Report per order scheduling preliminary pre-trial conference� indicates that this website is typical of similar websites and seminars that have proliferated in recent years and have convinced many people, incorrectly, that they are not liable for payment of federal income taxes. Somehow, the charlatans who run these websites and conduct tax avoidance seminars continue to fool unsophisticated people to the benefit of their own bank accounts. They manage to do this despite the fact that no court anywhere has agreed with their interpretations of the tax code or Constitution and in the face of numerous successful felony prosecutions of many of their colleagues. See, e.g., www.cbsnews.com/stories/2002/04/16/national/main506237.shtml (reporting arrest of anti-tax seminar leader Lynne Meredith on federal charges)

Judge Crabb asks Mr. Meyer the question we have:

Can ... plaintiff really believe that if (his) view of the law were correct, highly paid, highly trained and highly motivated tax lawyers would not be challenging the Internal Revenue Service�s efforts to collect income tax from persons who are not engaged in �international and possessions commerce�? Id. Do they really think that as lay people, they have discovered a valid view of the tax laws that has eluded not only the tax lawyers in private practice but all of the judges in the United States?

Best of all, Judge Crabb cites one of our favorite web sites, Quatloos:

Rather than spending his money and time reading the misrepresentations, half-truths and full-fledged falsehoods perpetrated by Tom Clayton, MD, and his ilk, plaintiff would be better served if he were to read a legal text on taxation, its history, constitutionality and application such as Federal Taxation of Income, Estates and Gifts, by Boris I. Bittker and Lawrence Lokken. If he does not want to make the effort such a text requires, he might find much of interest at www.quatloos.com/taxscams/Tax_Scams_Museum.htm or www.irs.gov/pub/irs-utl/friv_tax.pdf. At the latter website, he would find the legal reasons why his arguments are groundless, at the former, he would find excellent advice. Among other things, he would be reminded that no one has ever won a civil case arguing the kinds of theories that he is arguing in this case and that hundreds of people who have relied on the arguments have not only lost their cases but have been required to pay penalties to the IRS and have been sanctioned for advocating a frivolous theory to the court. www.quatloos.com/taxscams/taxprot.htm.

So Mr. Meyer lost. Judge Crabb has scheduled a hearing for Mr. Meyer to show cause why he shouldn't pay penalties for wasting the court's time with frivolous arguments.

It's good to see courts using hyperlinks and web-references. Now if we can just get the courts to use html, rather than pdf files, and if we can get the Iowa district courts to not be so stingy about posting opinions, we can really get the tax law into the internet era.

Cite: Meyer v. Commissioner, DC-WD Wis., 5-18-05.

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ANOTHER FAILURE TO PERSUADE

June 09, 2005

For somebody known professionally as a "Persuader," Robert Poindexter isn't being very persuasive.

About two weeks ago Mr. Poindexter, an R&B songwriter, lost a Tax Court case involving his 2000 taxes. Now he's lost again. On monday, the Second Circuit Court of Appeals rejected his appeal of a Tax Court defeat for 1994 and 1996. He apparently tried to avoid taxes on the grounds that the record company isn't paying him the royalties he is entitled to -- the same grounds rejected by the Tax Court for 2000.

If he still has one of these outfits, maybe he can do a Star Trek episode.

Cite: Poindexter v. Commissioner

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IF THE OTHER STATES JUMPED OFF A CLIFF, WOULD WE HAVE TO?

June 08, 2005

The Des Moines Register ran a well-crafted piece Sunday outlining Iowa's economic development incentives. The Register's editorialists outline their conclusions today:

If Iowa only had the courage to just say no. No to bribing businesses to do what they might do anyway. No to making taxpayers captive investors in businesses from which they derive no direct return on their investments.

But Iowa won't - can't, really - unilaterally disarm in the war between the states for what's called economic development.

Only the federal government has the power to impose a cease-fire. Congress should do so.

Is it really "disarming" if you give up a weapon that only shoots yourself? As best we can tell, economists not in the employ of state economic development agencies believe that the incentives harm more than help. Common sense would tell you the same thing - how can states make better capital allocation decisions than bankers and investors? Sure, 269 businesses benefitted from the Iowa Values Fund. That just means thousands of other businesses and millions of individuals paid extra taxes on behalf of the 269 winners.

STOP ME BEFORE I BRIBE AGAIN

The Register says that states are incapable of doing the sensible thing, so Congress has to step in on their behalf. That's sort of like blaming the bartender for your drinking.

The enigmatic State 29 correctly calls the Register's editorial "schizophrenic and without logic."

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"THE SELF-DELUSION OF CONTEMPORARY ECONOMIC DEVELOPMENT"

June 08, 2005

Entrepreneur Brian Gongol has a comprehensive and link-rich critique of economic development incentives at "not a blog" Gongol.com. His conclusion:

Economic growth itself is usually a profoundly good thing -- it is what makes living in 2004 so much better than living in 1904. But much of the time, energy, and financial investment made in contemporary "economic development" is very bad at actually achieving efficient economic growth. Instead, it is a complex of subsidies, bad investments, salesmanship, and chicanery that often has the impact of harming the very people who pay for it. It would be for the good of both the communities that hope for economic development and the nation at large if the question of economic development became one of how to create the best environment for all businesses rather than of how to best package sets of special incentives for individual firms.

Hmmm. Is Mr. Gongol not getting "20 to 30 calls each week" to bribe his business to greener pastures?

He makes the important point that "economic development" has become an industry in itself; and what do economic developers have to sell, if not tax incentives?

Prior coverage:

DES MOINES REGISTER HIGHLIGHTS TAX INCENTIVES

UNLEASH THE INCENTIVE WARRIORS?

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WISCONSIN: SO LONG, IT'S BEEN GOOD TO KNOW YOU

June 08, 2005

Things didn't work out in 2000 for Cris Dishman and the Kanasas City Chiefs. The NFL veteran and one-time Pro-bowler, nearing the end of a 13-year pro career, was cut after the Chiefs' three-day preseason camp in River Falls, Wisconsin.

Fortunately for Mr. Dishman, he received a $1,050,000 signing bonus from the Chiefs in 2000 before the camp. Unfortunately, his brief stay in the cheese state didn't escape the notice of the Wisconsin tax authorities.

Wisconsin said that because Mr. Dishman's entire 2000 service with the Chiefs took place in the three-day camp, the entire bonus was taxable in Wisconsin. On May 24, the Wisconsin Tax Appeals Commission sided with the taxing authorities, citing the Wisconsin administrative code:

(a) General. The allocation to Wisconsin of income earned by a nonresident employee as total compensation for services rendered as a member of a professional athletic team shall be made on the basis of a fraction, the numerator of which is the number of duty days spent within Wisconsin rendering services for the team in any manner during the taxable year and the denominator of which is the total number of duty days spent both within and outside Wisconsin during the taxable year.

The result seems perverse. Mr. Dishman signed with the Vikings and finished the 2000 season with them. The Vikings allocated a portion of his salary to Wisconsin for the one day spent in Green Bay that year. Mr. Dishman wasn't permitted to count his days working for the Vikings in the denominator for allocating his pay to Wisconsin. An injustice, to be sure, but one presumably salved by getting paid $1,050,000 for three days work.

(Via Tax Analysts; no link yet available)

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EAGLES IN ORANGE JUMPSUITS

June 07, 2005

The author of the tax ~~protester~~ honesty manifesto "Vultures in Eagles Clothing" will have a simplified wardrobe for the next ten years. Lynne Meredith received a 121-month sentence for conspiracy and failure-to-file charges. She will also owe $2 million in restitution at the end of her sentence.

Her new residence is will be a step down from what she was accustomed to. Quoth Quatloos:

If anything, Lynne is a posterchild for the motto "crime does pay". A story appearing on the front page of the Los Angeles Times lamented that this crook

"has a perpetual tan and a lavish home in the Orange County community of Sunset Beach, lectures her followers on luxury cruises, at catered parties in hotel conference rooms.

* * *

"[S]he spends most of her time at her beachside home, surrounded by a fleet of classic cars, an extensive collection of Coca-Cola memorabilia and a parrot named Thomas Jefferson."

* * *

"The gated garage of her home holds a fleet of vintage cars � a Jaguar, a Porshe, a Bentley, a 1937 Gatsby roadster, a Range Rover and a 1973 Corvette Stingray with the vanity plate �TAXREBL�".

The AP says she was accused of failing to file returns on $8.5 million in income from 1991 to 2002.

Even at this point, Ms. Meredith seems oblivious to reality:

Meredith, who once drove a Corvette convertible with a vanity plate reading TAXREBL, said she still believes the federal government has no power to levy taxes on private citizens.

The evidence at hand seems to indicate otherwise.

The text of the Department of Justice press release on the sentencing may be found here.

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I LOANED THE KID MY DIGITAL CAMERA TODAY...

June 07, 2005

...and I can't take pictures of the crime scene below my window:

Des Moines police moved to block off an area near the Polk County courthouse today on the report that a law enforcement officer had shot a suspect in an apparent vandalism case.
The call came shortly after 1:30 p.m. from an area near the intersection of Sixth and Cherry streets, about just south of the courthouse.

A witness said the suspect was spray-painting a vehicle and tried to run. At one point, the man turned and reached for what authorities thought was a weapon, and at least one shot was fired, the witness said.

The words "Police Academy 7" were painted on a vehicle parked nearby.

The ambulance just left; 6th Street is taped off between the courthouse and the jail.

I know how Brent feels...

UPDATE: It looks like the spray-painter was shot by a deputy sheriff.

UPDATE II: The guy died. The Des Moines Register says the dead had a "history of mental health problems" and was killed after he "spray-painted words on his own pickup truck and then reached for a toy handgun." Very sad.

UPDATE III:

The Des Moines Register and State 29 are mocking me... but at least the camera was put to good use: behold yesterday's talent show.

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HOW TAXATION CAN CAUSE HAPPINESS

June 07, 2005

Humorist P.J. O'Rourke has a proposal with the potential to cut the gordian knot of tax reform and the budget deficit, while pleasing the rest of us no end.

I suggest, therefore, a Celebrity Tax with a low-end base rate of, mmm, 100 percent. Furthermore, let's make the tax progressive to get some Democrats on board. (Probably not including Hillary, Ted, and Barney Frank. They'll be working nights and weekends to pay up.) Given the modest talent of current celebrities and the immodest example they set for impressionable youth, we'll call it a "Value Subtracted Tax," or, better, a "Family Value Subtracted Tax." And it will be calculated on the celebrity's net worth.

We can quit worrying about the federal deficit, at least for this year. Forbes estimates that Oprah alone has assets of $1 billion. True, we need another $411 billion to close the budget gap. But optimism is kindled by a flip through People. I had no idea there were so many notoriety nuisances.

Let's hope the Tax Reform Commission is listening.

Of course, that will deeply impact the revenues of any cosmetic surgery tax.

Hat tip: TaxProf Blog.

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UNLEASH THE INCENTIVE WARRIORS?

June 06, 2005

It's tax incentive day over at the TaxProf's place. The good professor links to two pieces on the debate.

David Brunori of Tax Analysts is dismayed at Congressional efforts to overturn the Cuno decision that outlawed Ohio's targeted tax credit system ("Helping States to Hurt Themselves").

The Tax Foundation Blog, on the other hand, says Cuno is bad law and should be overturned (Cuno v. DaimlerChrysler: A Pyrrhic Victory for Economic Neutrality).

I agree with the Brunori article, so we haven't a lot to add to it. The Tax Foundation piece has some thoughts we address in the extended entry below.

The Tax Foundation summarizes its arguments:

Whatever one thinks about the economic efficacy of state tax incentives, ongoing analysis of Cuno reveals that the ruling suffers from three fatal flaws. First, the discrimination rule in the opinion cannot logically be limited to the most egregious forms of state corporate incentives. Second, the opinion allows state tax incentives to continue in the form of direct cash subsidies. Third, the opinion also allows state tax incentives to continue but only if they are granted to out-of-state companies. Those who are convinced that state tax incentives are harmful would be mistaken in accepting Cuno as the remedy.

OVERLY BROAD?

The Foundation seems to say that there is no tax discrimination so egregeous that it rises to the level of a commerce clause violation; any tax policy is in some way discriminatory, and therefore no lines can be drawn at all:

Moving to single-sales factor apportionment is equally discriminatory, since it only benefits those with existing or expanded physical investment in Ohio, discriminating against those who choose to invest out-of-state. There is simply no way to distinguish, on discrimination grounds, between Ohio�s investment tax credit and more general tax practices like rate reductions or single-sales apportionment.

Of course the Supreme Court long ago held that single factor taxation - allocating taxable income among states on the basis of sales alone - is not a commerce clause violation (whether it is wise or not is another issue). The court held that it wasn't so irrational a way to determine the tax base of a multistate company as to be a commerce clause violation.

A tax credit for in-state facilities, by contrast, isn't a way of apportioning a tax base; its a direct subsidy that occurs after the tax base is apportioned. From a layman's point of view, it seems that such distinctions can be drawn without great difficulty.

The second legal problem with Cuno is that the court, while striking down investment tax credits as incentives for in-state investment, gave its blessing to the use of direct subsidies.9 Whether the state gives a tax credit or a direct cash subsidy will be of little account to businesses; the impact on the bottom line will be the same. The race will still be on, with businesses seeking direct cash payments or other in-kind benefits, rather than tax incentives. The means by which the states compete will change, but the game will be the same.

This might be a more sound argument. Still, subsidies have to be re-enacted annually, and are therefore less likely to be an institutional form of discrimination against out-of-state companies. But eliminating subsidies sounds fine to me.

The third legal problem with Cuno deals with pre-existing tax liability. The court took special notice of the fact that the Ohio investment tax credit allowed DaimlerChrysler to reduce its pre-existing tax liability, but only if it invested in new machinery in Ohio. The impact on pre-existing tax liability, in the court�s opinion, worked a subtle coercion that forced DaimlerChrysler to expand in Ohio as opposed to other states, since DaimlerChrysler had other income-generating facilities in Ohio. Absent this pre-existing tax liability, the court would have upheld the investment tax credit, as it did with a property tax abatement also challenged in the case

The court here was distinguishing between tax credits on the income tax base and a property tax exemption. A taxpayer who gets a property tax exemption in one state isn't so discriminated against because he wouldn't be paying property tax anyway if he had instead bought out-of-state property. It's not unreasonable to distinguish this from discrimination on an already apportioned income tax base.

Cuno threatens to impose some discipline on tax incentives that the states seem unable to apply to themselves. Congress could use the case as leverage help the states stop the pointless incentive wars -- wars the Tax Foundation agrees are unwise. Perhaps its legal reasoning compels it, but it still seems odd that the Tax Foundation wants Congress to re-arm the incentive warriors.

« Close It

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DES MOINES REGISTER HIGHLIGHTS TAX INCENTIVES

June 05, 2005

From the banner article in today's edition:

Tax breaks' costs, benefits elusive
Privacy laws, array of programs complicate analysis

Iowa lawmakers keep expanding efforts to help businesses - this year rebating sales tax money to developers and adding new tax credits for job creation. But few officials, if any, can answer a basic question: How much does Iowa spend to boost its economy?
Finding the answer is key to addressing another issue: Are taxpayers getting their money's worth from the public subsidies?

The long piece by Donnelle Eller, Register Business Writer, does a good job of laying out all of the different facets of the debate over tax incentives.

TAX INCENTIVE FANS

There's the businessman who says he has to have tax breaks, or he'll go where the subsidies are greener:

Chris Nelson, president of Kemin Industries, said he receives 20 to 30 calls each week from states and countries that want him to relocate his company's operations. "The offers usually come with . . . all sorts of possible economic incentives," said Nelson, whose food-supplement company received $4.4 million in state and local incentives to build an $11 million headquarters and manufacturing expansion in Des Moines.

There's the legislator who gets lots of feedback from the happy beneficiaries, and who doesn't seem to think somebody else is paying for the benefits:

Rep. Clarence Hoffman, R-Denison, said he might have more concerns about tax credits, if he didn't see that they're creating new jobs and attracting new investment. "The rewards will be seen for years to come," he said.

There's the economic development official who justifies his salary by helping lure businesses by showing them loopholes that enable them to avoid the taxes everyone else has to pay:

Blouin said the state's economic development efforts are clearly working.
Since 2003, when the Iowa Values Fund was created, the state has awarded $77.8 million in loans and grants to 268 companies. The amount includes Iowa Values Fund money, plus loans repaid to the state and money from existing programs, said Tina Hoffman, the development agency's spokeswoman.

These happy perspectives are like looking at the health of an ecosystem based on how fat and happy the mosquitoes are. You can identify how happy the 268 beneficiaries of the fund are, but somebody else is paying for it - the thousands of other businesses that are unable to harvest any tax breaks, and who pay the costs of running the state on behalf of those who do.

The article points out how tax privacy laws make it impossible to identify who benefits from the tax breaks, or to determine what their costs and benefits really are:

Michael Ralston, director of the Iowa Department of Revenue and Finance, said he would risk going to jail if he complied with a Des Moines Sunday Register request to provide a list of companies that shared an estimated $32 million in tax breaks for research and development in 2004.

The article also quotes the Iowa Taxpayers Association, which inexplicably favors Iowa's byzantine raft of tax breaks:

The Iowa Taxpayers Association, which opposes most kinds of taxes, favors tax-supported incentives for businesses.

One reason, said Stacey Johnson, president of the group, is the high rates Iowa businesses pay. An association study showed Iowa industrial companies' tax burden ranked 12th-highest in the country . Commercial property owners' bills were third highest . Overall, Iowa businesses pay 43 percent of the total state and local taxes, she said.

Astonishing. Did it occur to Ms. Johnson that the rates are high in part because of the 20-odd incentive credits in the tax law?

THE DISSENTERS

The article notes how efforts by Rep. Pam Jochum of Dubuque to require an accounting of economic development incentives died from lack of interest. The article also mentions the Ohio court decision that threatens Iowa's tax incentives.

The article also presents views of someone who doesn't think tax incentives are a great idea:

Joe Kristan, a corporate accountant at Roth & Co. in Des Moines, suspects the tax incentives are growing because more businesses are savvier about tapping experts like him to "harvest" the tax code for breaks. Instead of encouraging new activity, the breaks likely reward businesses for current activities.

"Targeted tax credits hide the real cost of what are basically subsidies," Kristan said. "They may be for a good cause, but that doesn't mean that someone else should pay for it."

That's the scariest part of being interviewed: the likelihood of being quoted accurately, which I was.

I'm sure the Register editors thought the story was plenty long enough, but I wish they had used my little newsroom fable:

Reporter Bill goes to his editor for a raise because his car is old and he needs a new one. He has done a statistical study explaining how good it would be for the paper for him to have a car -- better stories, more circulation, and so on.

The editor feels his pain, but has no money in the budget for raises. He has an idea, though: he will reduce the state tax withholding from Reporter Bill's paycheck by enough to cover his car payments. He will make it up to the state by increasing the withholding from everyone else in the newsroom.

Just imagine how excited everyone in the newsroom will be to help Bill pay for his car - especially when the editor explains how it's for the good of the paper.

Targeted tax credits work much the same way as the Reporter Bill withholding system.

Repeat after me: With its tax incentive system, Iowa taxes its existing businesses to lure and subsidize their competitors.

Related Coverage:

WHITHER IOWA'S TAXES?

A list of Iowa's Targeted Tax Credits.

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DOWNTOWN YOUNKERS PICTURES

June 03, 2005

Youn3 12.jpg They announced today that the Downtown Des Moines Younkers will close forever in August. I left work a bit early this afternoon and crossed the street to Younkers to get a few images on the day they announced the closing.

There were a handful of customers in the store at 4:00 pm, and there were no "store closing" sales. A few clusters of floor clerks were gathered, but there was no funereal atomosphere; it just looked like another sleepy retail afternoon. If they saw me sneaking around with the camera, they didn't seem to mind. The results are in the extended entry below.

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DOWNTOWN YOUNKERS TO CLOSE

June 03, 2005

They're pulling the plug on the "electric stairs," and the Tea Room will serve its final sticky roll.

Younkers has announced that their downtown Des Moines location will close its doors permanently in August. The Tea Room will also close.

No new tenant has been announced for the space, which has housed the store for 106 years.

Younkers has been the only department store downtown since Penneys closed its downtown location 10 or so years ago.

Detail from sign marking the Downtown Younkers pioneering "Electric Stairs."

UPDATE: State 29 reminisces.

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ALEXANDER'S TERRIBLE HORRIBLE NO GOOD VERY BAD IRA DEDUCTION

June 03, 2005

Alexander is a wise saver. He made a $2,000 IRA contribution in 2001. So far, so good.

Alexander also participated in his employer's retirement plan. Also good.

Alexander filed a joint return for 2001 with Gloria reporting joint adjusted gross income of $114,193.66. Alexander deducted his $2,000 IRA contribution. That triggered a horrible, no good, very bad IRS notice disallowing his deduction.

The tax law disallows deductions for IRA contributions when a taxpayer participates in another retirement plan, if the taxpayer's income exceeds certain amounts. For 2001, the deduction phase-out was complete at $63,000 of income for joint filers.

Alexander used a novel argument at Tax Court. He argued that his wife's income shouldn't count in determining the deduction phase-out on the joint return. The Tax Court didn't buy it.

Some days are just like that.

Cite: Gloria Yuen-Mee Ho and Alexander Chi-Shun Tsang v. Commissioner, T.C. Memo. 2005-133

Read about the 2005 traditional IRA phase-out and deduction rules here.

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POST-PARTUM DELIRIUM

June 03, 2005

Ever wonder about the tax consequences of selling naming rights to your baby to an offshore casino? I suppose we all have. But only Prof. Maule addresses the tax implications.

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I DON'T THINK HE LIKES THE 'FAIR' TAX

June 02, 2005

The "Fair Tax," a proposal for a national retail sales tax, has gotten some attention in the tax reform debate. Joseph Thorndike, a columnist for Tax Analysts, isn't quite sold on it:

First, though, we have to sort through an embarrassment of riches: How can we identify the worst quality of a tax that has so many? As numerous critics have pointed out, the Fair Tax would raise too little revenue and prompt too much evasion. Its popularity depends on unreasonable assumptions and misleading descriptions. It would never work as advertised -- a fact that many of its supporters either choose to ignore or secretly celebrate.

But other than that, maybe he likes it.

WHAT IS THE REAL RATE?

Mr. Thorndike points out that the 23% rate touted by Fair Tax supporters is misleading, because it is a "tax inclusive" rate. The 6% tax rate we Polk Countians are accustomed to is "tax exclusive" - it isn't included in the sales tax rate.

Example:
Wally buys a new computer for $1,000, and he pays $60 in sales tax. His "tax exclusive" rate is 6%. His "tax inclusive rate" is 5.66% (60/1060 = 5.66%).

If you compute the "Fair Tax" the way we are used to talking about sales tax rates - tax exclusive - it will apply at a 30% rate. That's a real difference.

Perhaps we are biased, being income tax consultants, but the Fair Tax seems to have some huge practical problems. Two come immediately to mind.

WHEN RATES GET TOO HIGH, PEOPLE CHEAT

Sales taxes are only likely to work if rates are low enough to not interfere with commerce. When combined with state and local taxes, the Fair Tax would burden every trip to Git 'n Go with a 36% or higher surcharge. This is high enough to push many transactions into the E-bay economy.

HIGH SALES TAX RATES THREATEN BUSINESSES THAT COLLECT SALES TAXES

Taxpayers going through their first sales tax audit are astounded at how big the assessments can be. They also know that they aren't as simple as many folks believe. While income taxes are only a problem to the extent your business is profitable, sales taxes apply even when you are losing money, and they apply based on gross receipts - a much larger base than taxable income.

Because sales taxes are computed on a big base, a small error in determining what transactions are subject to tax can lead to a stiff assessment over three years, even at a "low" 6% rate. At a 36% rate, even little errors would be ruinous.

FAIR TAX PROSPECTS?

Mr. Thorndike doesn't think the Fair Tax will survive the tax reform process:

And the winner of this year's prize for Worst Idea in a Serious Public Policy Debate: the Fair Tax. In all likelihood, this plan for a national retail sales tax has already exhausted its 15 minutes of fame. Sometime later this summer, President Bush's commission on federal tax reform will probably put it out of its misery.

Link: Thorndike Article (Tax Analysts subscribers only)

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HE'S NOT DEAD; HE'S JUST ACHIEVED OPTIMAL METABOLIC EFFICIENCY

June 02, 2005

Headline on IRS web site for story about the closure of 68 Taxpayer Assistance Centers:

IRS to Create Efficiencies with Taxpayer Assistance Centers

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FATHER'S DAY GIFT TIPS

June 02, 2005

Just in time for Father's Day, Foundation Press has published Business Tax Stories. Dad will spend many happy hours on the hammock reading about the "Birth of the Corporate Income Tax" and "Evolution of Tax Free Reorganizations." But he'll probably want to read "Mrs. Gregory's Business Purpose" at night with the shades drawn.

Mom will be so jealous.

(Hat tip: TaxProf Blog.)

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ARTHUR ANDERSEN: MISCARRIAGE OF JUSTICE, OR JUSTICE BY OTHER MEANS?

June 01, 2005

Victor Fleisher rounds up thoughts on Arthur Andersen's victory yesterday at the Supreme Court. The Court overturned the criminal conviction that destroyed the firm.

Several of the opinions in the roundup say that Arthur got off on a technicality, and that they had it coming.

While we have no particular affection for Arthur, we question the wisdom of indicting the firm itself, rather than just the partners involved. The real beneficiaries of Arthur's demise are the four remaining major audit firms. They now have 20% less competition - a result that can't help but increase costs for public companies and their investors. The lack of any subsequent firm indictments makes it seem that the government might agree with us.

Prior Coverage: HANG 'EM FIRST, AND LET THEM SORT IT OUT ON APPEAL

Cite: Arthur Andersen LLP v. United States

UPDATE: The Wall Street Journal weighs in.

Also, Professor Yin from the U of I law school has his say.

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NOT ONLY IS CHEATING BAD, THE COSTS ARE NON-DEDUCTIBLE

June 01, 2005

The Tax Court yesterday reported a case where a roofer concealed income by cashing checks at a currency exchange, rather than depositing them in the bank.

The court find that the taxpayers committed fraud. Twisting the knife, the judge also held that the exchange's check-cashing fees were non-deductible:

The record shows that the Money Exchange did charge 2.5 percent of the value of each check cashed as a fee. However, in order to claim a deduction, the fees must be ordinary and necessary expenses of running petitioners� business. See sec. 162. HRDC maintained a checking account to which petitioners could have deposited the money from the extras for no charge. Petitioners testified that they cashed checks at the Money Exchange because they knew the owner and it was within blocks of the office (although Mr. Payne, who did not drive, needed someone to drive him there each time he went). It is obvious that petitioners used the Money Exchange to avoid the inclusion of the income in their bank records. These reasons are not related, let alone ordinary and necessary, to HRDC�s business. Therefore, petitioners are not entitled to deduct the cost of check-cashing fees.

Cite: Payne v. Commissioner, T.C. Memo 2005-130

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DID WE SAY "ADOPTED?" OH, WE MEANT "ADAPTED."

June 01, 2005

Is "Dilbert" really a documentary about the Tax Court's inner workings?

You know the strip. Imagine a subordinate - perhaps Asok - writing a long, detailed recommendation for the pointy-haired boss. The PHB then brings Asok to a board of directors meeting where he thanks Asok for his fine report, and tells the board he is embracing it in all respects - and proceeds to make the opposite recommendation while Asok watches in stunned silence.

Now replace "Asok" with "Special Trial Judge Couvillion" and "PHB" with "Judge Dawson," and we approximate the fact pattern in "Investment Research Associates v. Commisioner."

Tax Analysts today carries an extraordinary story (subscribers only) by their reporter Sheryl Stratton of how taxpayers slapped with civil fraud penalties by Judge Dawson had to go to the Supreme Court to uncover the Special Trial Judge's original report that Judge Dawson "adopted" -- but with opposite conclusions.

THE CASE

The original case involved a complex arrangement involving sale-leasebacks and non-recourse notes. The final tax court decision not only disallowed losses form the transactions, but also said three organizers of the transaction, including two attorneys, committed fraud.

By the looks of Judge Dawson's opinion, it appears that he simply cut and pasted the Trial Judge Report:

Nevertheless, the defendants' attorneys began to suspect that the Special Trial Judge Report "adopted" by Judge Dawson was not the opinion that the Trial Judge had actually written. The defendants lived in three different circuits, and each appealed the decision, asking for access to the original Trial Judge Report; they lost each time.

The Supreme Court agreed to hear the case -- a surprise to many observers, because usually the Supremes don't get involved when three circuits agree. They ruled, 7-2, that the appelate courts needed the original Trial Judge reports to properly consider the appeal (Ballard v. Commissioner).

EVERYTHING'S DIFFERENT NOW

It took three appeals court defeats and a Supreme Court decision to get the original Trial Judge Report. It was worth the effort, according the the Tax Analysts article:

Revelation of the more-than-300-page report not only vindicates the three taxpayers (of whom only Ballard survives) but also their lawyers, who maintained to three different appeals courts and finally the U.S. Supreme Court that the trier of fact's original report did indeed exist and held for the taxpayers

Ms. Stratton reports that the Tax Court is changing their procedures as a result of this case. That seems like a really good idea.

UPDATE: An abbreviated, publicly-available version of Ms. Stratton's article is available here.

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