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Tax Update Blog: July 2005 Archives

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July 31, 2005

Flamboyant San Francisco attorney Tony Serra will get another look at the wrong side of the criminal justice system when he begins a 10-month prison sentence for tax evasion next January 30.

This marks his third guilty plea for tax crimes. Amazingly, the sentecing judge allowed Mr. Serra to delay the start of his sentence to accomodate his trial schedule. That seems like excessive deference to a habitual lawbreaker, but apparently they do things differently in San Francisco.

Prior Coverage:



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July 29, 2005

Yesterday I gave a 30-minute presentation on "entity choice" as part of an estate planning seminar staged by Lorman Education Services. Here is my Powerpoint outline for your amusement.

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July 29, 2005

The IRS has issued (Rev. Rul. 2005-54) the minimum interest rates for loans made in August 2005:

-Short Term (demand loans and loans with terms of up to 3 years): 3.58%
-Mid-Term (loans from 3-9 years): 3.92%
-Long-Term (over 9 years): 4.33%

Historical AFRs are available via the “Links” page at

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July 29, 2005

ribs.jpgThe blogs are roasting the pork-laden "Energy Bill" about to emerge from Congress.

The Tax Foundation Blog has two posts:

The Skyrocketing Tax Complexity Bill of 2005

One Member of Congress defended the tax-complicating bill saying, "This is a darned good bill and this is going to help this country... The sooner we get it implemented, the better." Yet on his very own website he simultaneously advocates for tax simplification:

Tax Dollars for Iowa Ethanol Producers

Looking forward to the feast of tax subsidies in the new energy bill, QWQC-TV Iowa glowingly congratulates House Speaker Dennis Hastert for his efforts to funnel taxpayer dollars into the pockets of rent-seeking Iowa ethanol producers:

Northwestern University economist Lynne Kiesling cuts through the smoke to get to the fire:


Because that's what it looks like to me. And to Jim Lucier of Prudential Securities, who took the words right out of my mouth on Tuesday's Kudlow & Company. In all of the commentary and analysis that I have read, very few people believe that this bill will do anything constructive to remove obstacles to competitive electricity markets, reduce our overall energy consumption, or provide valuable direction to energy technology research. Its most noticeable provision amounts to little more than a farm subsidy under a different name.

Prior Tax Update coverage:



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July 29, 2005

Kreig Mitchell responds to my post that asserts the tax law is complicated:

Joe Kristan asserts that the code is asked to do too much. I don’t agree with that statement. Being able to adjust where tax revenues originate from is a valid economic tool at the government’s disposal. This tool is no different than the government’s ability to spend and print more money, to issue and pay debt, and arguably to set interest rates and enter into international trade agreements. The fact is that there are not that many economic tools at the government’s disposal to regulate and possibly stimulate the economy. Why should the government ignore one of the few tools in its economic toolbox?

The original discussion wasn't about the proper role of the tax law; it was about whether the tax law is complicated. Mr. Mitchell doesn't really address my point: asking the tax law to do a lot of things inevitably makes it complicated, even if it is simple "for all that it does." If you designed a space shuttle that also did orthodontia, shined shoes, repaired transmissions and pressed laundry, it would be a complicated machine, even if it were simple "for what it does."

As to whether the tax law should do so many things, I suppose that depends on your confidence in the government to make so many decisions well and to enforce the resulting rules competently. Color me sceptical.

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July 28, 2005

At the end of a 133-page technical explanation of the $14.5 billion energy bill, the Senate Finance Committee adds this gem:

The staff of the Joint Committee on Taxation has determined that a complexity analysis is not required under section 4022(b) of the IRS Reform Act because the bill contains no provisions that have "widespread applicability" to individuals or small businesses.

Just another of the little lies that lets legislation move forward.

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July 28, 2005

The showdown over the repeal of the estate tax has been delayed until September, reports Tax Analysts. Senate Majority Leader Frist will file a cloture motion on the bill, which would enable it to come to a vote.

This will allow Minority Leader Max Baucus and Republican negotiator John Kyl additional time to work out a compromise:

While Kyl has been pushing for a vote on full repeal to speed Democratic deal making, Baucus has repeatedly asked for more patience in achieving a Democratic consensus. Kyl has proposed an estate tax rate tied to the 15 percent capital gains rate and an $8 billion individual exemption. Baucus has yet to present a formal offer.


National Public Radio story from this morning on estate tax repeal efforts

NPR debate over the estate tax between Gene Sperling and Grover Norquist

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July 27, 2005

The Secretary of the Treasury speaks up for the pork-laden "energy bill":

I urge Congress to move quickly to pass the energy legislation that has now emerged from the conference committee. The enactment of this bill is needed to address high energy prices, which act like a tax on our economy. It will help American workers, families and businesses. It will also decrease our dependence on foreign sources of energy, and increase energy efficiency and conservation. This is bi-partisan, comprehensive energy legislation that reflects the priorities of the President's 2001 proposal. The American economy stands to benefit from it. Congress should deliver it to the President before its August recess.

Translation: "Gas is $2 a gallon. Let's look busy!"

Senator Grassley weighs in:

The conference negotiations were successful. The result is a final tax package that’s well balanced among renewable energy, conservation and traditional energy sources.

Translation: "A lot of pork to buy a lot of votes."

Renewable energy and conservation got a very big slice of the pie. We’re enacting historic legislation that will bring increased use of renewable fuels like wind, biomass, fuel-efficient cars and appliances, and even solar energy for homes.

Translation: "We've added at least 50 pages to the tax code."

It’s very essential to have strong renewable energy incentives. They’re good for consumers, farmers, national security, the environment, and the economy.

Translation: "We, Congress, are just smarter than free markets. Without us telling the economy what to do, it would be lost."

Now that MTBE liability is out of the picture, it looks like the Senate will pass this bill with no problem and the President will have it on his desk next week.

Translation: "Spread the pork around and we can pass anything."


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July 27, 2005

rat.JPGThe IRS release issued Monday that announced a program of random "research" audits of S corporations said "Program officials expect these audits to begin later this year." It appears that the "program officials" may be a bit behind the times.

A practitioner friend has one of his S corporations currently under examination. His IRS agent said that his exam was, in fact, a "reseach" audit. The focus of the 'research' appears to be smaller S corporations - say, those under $10 million in assets. Based on his experience, it would appear that the IRS is paying special attention to:

-whether salaries paid to owners are too small (the so-called "John Edwards issue";
-whether the owners of S corporations are treating their share of S corporation items from their K-1s properly on their own returns;
-related-party transactions (e.g., between S corprorations and their shareholders).


The "reseach" audits performed in the last few years on individuals were less onerous than the old "audits from hell" under the defunct Taxpayer Compliance Measurement Program. While a few individuals got the full line-by-line treatement, the "National Research Project" examinations tended to focus on specific areas - schedule C reporting, for example. These were less than audits from Hell - you might call them "audits from Heck."

The S corporation audits are likely to take a similar approach, based on our friend's experience. While a few S corporations are likely to get the full internal probe, most will get examined in more narrow areas, as happened with our friend.


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July 27, 2005

The Death and Taxes Blog notes an LA Times story about a house that has been in probate since 1925. From the Times article (free registration required):

"This is our birthright, our homeland; we can't sell this property," said Joyce Perry, 50, of Irvine, who is trying to encourage family members to buy the house from the estate.

But Perry's second cousin Sylvia Hawk, 64, of Yorba Linda wants to sell the property and split the proceeds among family members. "It's time to move on," Hawk said. The feud has escalated to the point where some relatives speak to each other only through attorneys.

The house is now valued at over $1 million.

A well-drafted will would have solved this in absolutely no more than 50 years. Even if you don't have estate taxes, you need a will; otherwise, your probate could haunt your great-grandchildren.

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July 27, 2005

breakdown.jpgThanks to the TaxProf, a great Tax Analysts article on the KPMG FLIP/OPIS tax shelters is now available free to non-subscribers. The article, "Tales from the KPMG Skunk Works: the Basis-Shift or Defective-Redemption Shelter," looks under the hood of this widely-marketed shelter and finds it wanting:

KPMG seems to have lost its internal compass as what was fair game to do to our country. By February 1998, FLIP/OPIS had been subjected to scathing internal criticism at KPMG. KPMG counsel internally criticized the KPMG opinion as not handling the argument that the FLIP loss was a sham: "No further attempt has been made to quantify why IRC § 165 should not apply to deny the loss. Instead, the argument is again made that because the law is uncertain, we win."97 Indeed, KPMG has no defense against the argument that the loss was a sham and yet KPMG went forward with the opinions for FLIP without disclosing its internal criticisms. In a closely related shelter, KPMG's question internally was whether it was receiving enough fees and internally its judgment was that the fees were high enough to assume what would be a huge risk.

The article includes exerpts from internal KPMG memos debating the shelter, as well as a technical explanation of how the shelter is supposed to work, but doesn't.

KPMG is now apparently under threat of indictment for its tax shelter promotions. If that happens, whatever money they made on tax shelters isn't enough.

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July 27, 2005

If pork is a source of energy, gas will cost pennies a gallon after the tax bill negotiated early today is passed. The bill contains $14.5 billion in corporate welfare tax incentives for energy industries.

Unforturnately, energy doesn't come from pork. But Congress will try to stuff the pig into the gas tank anyway.

From the Tax Analysts (subscriber-only version) story:

The tax package includes billions in tax breaks spread throughout every sector of the energy industry. The oil and gas industry received $1.6 billion in incentives for production that included a scaled-back Senate provision to allow refinery expensing and a House provision to amortize all geological and geophysical expenditures over two years. The gas industry was also given over $1 billion with the 10-year depreciation of gas-gathering lines.

More than $3 billion was slated for electricity infrastructure, including a provision allowing a 15-year depreciation for transmission property and another provision modifying nuclear decommissioning rules.

The coal industry should be pleased with more than $3 billion divvied primarily between the favorable depreciation rules for pollution control facilities and a tax credit for clean coal facilities.

The extension of section 45 tax credits for renewable electricity sources in the Senate bill was included, but it was scaled back to just two years at a cost of just over $2.5 billion. Alternative fuels and vehicle credits in the Senate bill were scaled back to just over $1 billion, while $1.3 billion was set aside for energy efficiency and conservation. Those provisions include new credits for both residential and business fuel and solar cells, energy-efficient commercial property, and energy-efficient appliances.

But Congress knows where to draw the line:

The House was forced to drop a $375 million provision allowing the two-year amortization of rental payments, while the Senate lost several, including a $1.4 billion enhanced oil recovery credit, a $500 million clean coal bonds provision, and a $7 million credit championed by Senate Finance Committee ranking minority member Max Baucus, D-Mont., for retrofitted wood stoves.

Somehow our Nation will have to achieve energy self-sufficiency with un-retrofitted wood stoves. Disgraceful.


Tax Analysts' abbreviated free version of energy bill story.

New York Times coverage.

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July 26, 2005

One of my colleagues was wondering yesterday how much Iowa collects in different taxes. Here's the answer for the fiscal year ended 6/30/04 ($ in millions):


For the details, here is the (pdf format) Department of Revenue Annual Report.

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July 26, 2005

rat.JPGIn the old days they were called "audits from hell." Under the "Taxpayer Compliance Measurement Program," the IRS subjected a randomly-selected group of taxpayers to an incredibly thorough review of their finances. In addition to the sadistic enjoyment, the IRS got a major benefit from the process: they learned where to focus their examinations to get the best use of their limited number of auditors.

Of course, "audits from hell" is a poor marketing slogan, so the IRS has rebranded the process as the "National Research Project." It still sounds sinister enough.

Several thousand individuuals underwent research in the past three years. Now the IRS "researchers" are turning their attention to S corporations:

WASHINGTON — Internal Revenue Service officials announced today the launch of a study to assess the reporting compliance of S corporations. The study, carried out under the National Research Program (NRP), will examine 5,000 randomly selected S corporation returns from tax years 2003 and 2004.
Hmmm. Roth & Company is an S corporation...

Program officials expect these audits to begin later this year. The last reporting compliance study of S corporations involved about 10,000 returns from tax year 1984, prior to the tax law changes that spurred the growth in S corporations. The new NRP initiative will use a study approach designed to reach statistically valid conclusions regarding compliance behavior, while using a smaller sample of returns than in the past.

The results of the NRP study will be used to more accurately gauge the extent to which the income, deductions and credits from S corporations are properly reported on returns filed by the flow through corporations and their shareholders. When completed, this research will assist the IRS in selecting and auditing S corporation returns with greater compliance risk.

Then don't pick our return - it's already perfect, you'd be wasting your research resources. Please?

We'd feel better about the process if the IRS press release didn't have a glaring technical error:

Numerous restrictions and requirements apply to S corporations. For example, an S corporation can have no more than 75 shareholders and none of these can be another corporation or non-resident alien.

The limit was raised to 100 shareholders effective January 1, 2005. But no, we mean no disrespect! Don't research us!

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July 26, 2005

Senate Finance Chairman Charles Grassley yesterday warned Majority Leader Bill Frist that forcing a (probably futile) vote on a proposal to repeal the estate tax could ruin chances of a permanent compromise on the estate tax.

Reports earlier this summer said that the Senate was on a verge of a compromise that would permanently continue the estate tax with a larger exemption and lower rates. Under current law the estate tax will be repealed for one year (2011), and then spring back to life.

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July 25, 2005

Hank Stern has completed his 3-part series on Health Savings Accounts and Health Reimbursement arrangments, and he even comes through with an extra bonus post. Hank actually deals in health insurance, and he gives you great firsthand battle reports from the health insurance front.

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July 25, 2005

The Tax Foundation has asked the Supreme Court to reverse the Sixth Circuit's Cuno decision. The decision declared a collection of Ohio corporate welfare tax incentives to be unconsitutional interference by the state in interestate commerce. The Tax Foundation thinks Cuno is overly broad and will provide too many limits on tax competition between the states.

From a policy standpoint, Cuno looks to be a gift from the gods to end the circular firing squad collection of state tax incentives, like the Grow Iowa Values Fund. As Cuno would have to fit within existing Supreme Court decisions that do allow for various kinds of state competition - in rates, for example, or the use of preferential apportionment regimes - the Tax Foundation concerns seem misplaced to me. Even the Tax Foundation agrees that the incentives are bad policy.

The Center for Budget and Policy Priorities has a critique of the Tax Foundation position here.

(I agree with the CBPP instead of the Tax Foundation? Oy.)

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July 25, 2005

New tax blogger Kreig Mitchell livened up the tax blogosphere during my vacation by making the counterintuitive assertion that the tax code is not excessively complicated:

It seems to be a generally accepted belief that our Internal Revenue Code (the Code) is too complex. But this belief has no foundation in reality. The Code is a model of clarity and simplicity for all it is to accomplish (I bet you never heard anyone say that before). (emphasis added)

"For all it is to accomplish." There's the rub.

The tax code is asked to accomplish way too much. If the Code was used simply to raise the revenue necessary to fund government operations, it would be much simpler. But revenue-raising is the least of it nowadays.

The complexity arises from from Congress burdening the tax law with other goals. Just a few of these, off the top of my head:

-Encourage home ownership
-Discourage excessive borrowing against homes
-Encourage employee ownership of corporations
-Discourage employee ownership by family-owned S corporations
-Encourage biomass and alternative energy production
-Ecourage oil production
-Discourage the use of energy tax shelters
-Encourage domestic manufacturing in preference to service and retail
-Encourage retirement savings
-Discourage excessive retirement savings

You get the picture. New Code provisions are added piecemeal, year by year, so they don't tie together, and occasionally they conflict. By qualifying the code by saying it does what asked to do well ignores the real problem - it is asked to do too much.

A quick example will illustrate how the tax law sometimes makes even a relatively simple question complicated: determine whether a farm with three equal individual partners, only one of whom works on the farm, can use the cash method of accounting. You will require no fewer than four code sections to get the correct answer. (448, 461, 1256, and 464).

Professor Maule and Stuart Levine also weigh in; Mr. Mitchell responds to them here.

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July 23, 2005

The family is through security and boarding is at least two hours away. Thank goodness for airport wi-fi and a tolerant wife.

By the end of the day we will be in beautiful tropical Des Moines, and our vacation is officially over. But it hasn't been all fun and games.

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July 08, 2005

The Tax Update is going on vacation. Posting will be sporadic at best until July 25. If you need a tax fix, the tax nerds in the blogroll on your left can tide you over. You should also treat yourself to the other voices in the blogroll, especially the "regional commentators." Smart people, they are.

Great Island.jpg

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July 08, 2005

Tax Analysts reports in its subscriber-only format this morning:

Clarissa C. Potter, former acting tax legislative counsel with the Treasury Office of Tax Policy and currently a professor at the Georgetown University Law Center, will join the IRS soon, Tax Analysts confirmed July 7.

Sources speculated that Potter would likely join the IRS Office of Chief Counsel, but at press time it was unclear to which IRS department Potter intends to move.

Ms. Potter may be leaving academia because of the pressures of maintaining her blog, "Academically Taxing." The blog has been idle since its first two posts went up last November 23; we hope the move clears her writer's block. What her posts lacked in quantity, they made up in quality - one of the two linked to our favorite post ever.

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July 08, 2005

Taxpayers who are unable to pay their tax liabilities can sometimes get some of their taxes forgiven under the "offer in compromise" program. If they work out a deal with the IRS, they pay a reduced amount, sometimes over an extended period.

While we haven't worked with the process, friends who handle these cases say the process is very slow and difficult. Part of the slowness is blamed on frivolous offers by taxpayers who can pay up, but just don't want to.

Legislation is in process to address the problem by making taxpayers pay up part of the payments up front. Attorney Kreig Mitchell says the legislation requires taxpayers to:

1. Submit non-refundable up-front lump-sum payments equal to twenty-percent of the offer if the offer proposes a payment schedule of five or fewer installments or

2. Submit non-refundable installment payments equal to the installments that are proposed in the offer beginning when the offer is submitted and continuing until the IRS accepts the offer – no matter how long that may be.

Mr. Mitchell thinks this is a bad idea; he says it is unfairly punitive and will ultimately reduce tax revenues.

I'm not so sure. If the cash payment requirement clears the bogus offers out of the system, enabling real offers to get prompt consideration, it could well be worthwhile. The current OIC system is broken, largely because of meritless claims. The taxes being settled are actually due and owing, after all, and requiring partial payment to earn consideration for waiving an admitted tax liability doesn't sound unreasonable.

But Mr. Mitchell disagrees; you'll want to read his thoughtful post on this.

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July 08, 2005

lumpcoal_f.gifThe New York Times has a piece this morning about how the Keeter family, owners of Royal Oak Charcoal, invested $188 million in KPMG-sponsored "bogus" tax shelters. They aren't happy. They are now suing KPMG.

The tax shelter the Keeters bought was named Blips, for bond linked investment premium strategy. Never valid in the eyes of the Internal Revenue Service, Blips was one of four abusive tax shelters that the Senate Permanent Subcommittee on Investigations in 2003 found that KPMG had sold to at least 350 people from 1997 to 2001, earning fees of $124 million. Those shelters cost the Treasury at least $1.4 billion in unpaid taxes, according to the subcommittee.

$188 million. That's a lot of charcoal.

One family member made a statement that is certain to be used in KPMG's defense:

Still, Steven Keeter, 46, Daren's brother, said that the huge tax bills and the litigation had not caused tensions within the family. "It hasn't really changed things between us," he said, referring to the tax shelter. "We are business people, and it was a calculated risk."

KPMG is likely to say this is evidence that the shelter is merely tax between consenting adults. You pays your $188 million, you takes your chances...

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July 07, 2005

I have thought more about the Misko decision I discussed earlier and changed the post accordingly.

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July 07, 2005

Be careful over there.

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July 07, 2005


misko.JPGFred Misko, veteran of many class-action lawsuits in Texas, added a different sort of notch to his belt yesterday. He prevailed in a tax case where he was allowed losses for renting office equipment to his C corporation law firm.

Mr. Misko faced the typical problem of running a law practice out of a P.C. Every dollar of earnings left in the PC is taxed at 35%, so he has to take it all out as salary and bonus to avoid double taxation. Yet when he does so, he has to pay employment taxes - the 2.9% medicare tax - on the amounts withdrawn.

His accountant suggested that he rent office equipment to his P.C. That worked out well until the firm had a lean year due to a delay in closing a class action settlement. The law firm delayed paying Mr. Misko his rent, so the depreciation deductions on the office equipment threw him into a loss.


The "passive loss" rules generally treat rental losses as "passive." Taxpayers can deduct passive losses only to the extent they have passive income; any net losses carry forward until they can offset other passive income, or until the "passive activity" is disposed of.

The passive loss rules have several exceptions. One of them is that rental losses are treated as nonpassive if:

The rental of such property is treated as incidental to a nonrental activity of the taxpayer (Regs. 1.469-1T(e)(3)(ii)(D)).

Mr. Misko convinced the Tax Court that this exception applied. He wasn't out of the woods yet, because he had to then convince the court that he "materially participated" in the activity. He did so by demonstrating that that he performed "substantially all" of the participation in the activity for the year.


This case opens up a nice loophole tax planning opportunity. Taxpayers would be able to rent property to their C corporations at a loss, but still suck enough cash in rents to cover their payments on the property.

The "incidental" activities exception applies to property rented to a trade or business "of the taxpayer." A C corporation is not normally considered the same "taxpayer" as its owner.

The Tax Court justifies treating the law firm activities as Mr. Misko's activities because he owns 100% of the firm; it cites a 1998 case, Schwalbach v. Commissioner, as support.

Schwalbach deals with a somewhat related, but distinct, passive loss issue. Stephen Schwalbach rented a building to his dental practice. The rent generated taxable income to him, which enabled him to use passive losses from other sources that would otherwise have been disallowed. The Tax Court ruled that Mr. Schwalbach violated a part of the passive loss rules that keeps taxpayers from artificially generating passive income -- Reg. Sec. 1.469-2(f)(6):

Property rented to a nonpassive activity. An amount of the taxpayer's gross rental activity income for the taxable year from an item of property equal to the net rental activity income for the year from that item of property is treated as not from a passive activity if the property—

(i) Is rented for use in a trade or business activity (within the meaning of paragraph (e)(2) of this section) in which the taxpayer materially participates (within the meaning of §1.469-5T) for the taxable year;

There is would appear to be a problem with using Schwalbach to support treating Mr. Misko's losses from rental to his C corporation. The regulation that applies in Schwalbach addresses activities "in which the taxpayer materially participates." This is different from the exception for "incidental activities," which applies to activities "of the taxpayer." The Schwalbach regulation covers where you work, while the regulation that applies in Misko seems to address who you are. Tax Court Judge Kroupa doesn't address this distinction in his Misko decision, but the IRS is likely to raise it on appeal or in other cases.

Another regulation appears to square the circle. Regs. Sec. 1.469-4(a) holds

A taxpayer's activities include those conducted through C corporations that are subject to section 469, S corporations, and partnerships.

While there are limits on the ability to use this provision, it seems to be written broadly enough to cover Mr. Misko. That may not be what the regulation writers had in mind, as the history of the provision seems to indicate that it was intended to control how activities are grouped for measuring participation only. Still, it's worded quite broadly, and it looks like the IRS is stuck with it.


While Mr. Misko's victory may or may not ultimately hold up, it does provide support for similarly situated taxpayers. It would not be unreasonable to follow Misko to take losses on "incidental" rentals to a C corporation where a taxpayer meets the material partipation tests on the rentals. The requirement that the rental activity be merely "incidental" does limit its potential.

Cite: Misko v. Commissioner, T.C. Memo 2005-166

UPDATE: Our summary of "material participation" requirements for passive losses is reproduced in the extended entry below.

UPDATE II I changed my mind about the soundness of the decision after looking at it again later in the day; I initially thought it appeared wrong. Good thing I'm going on vacation - I obviously need it.

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July 07, 2005

A University of Iowa professor has reviewed rankings of state business climates put out by conservative and libertarian think tanks. The professor, Peter Fisher, reports a shocking conclusion: these reports tend to favor states with low tax and regulatory burdens.

Who knew?

Tax Analysts subscriber-only edition gives the astounding details of Mr. Fisher's report, which is published by the Economic Policy Institute ("Research and Ideas for Working People"):

Fisher asserts that all five of the indexes don't look at factors actually related to growth and that they don't do a good job of measuring the factors they do consider. In all five cases, he says, scientific methods take a back seat to political ideology, and business largely ignores the results.

In contrast with the Economic Policy Institute, which in its efforts on behalf of "working people" uses only scientific analysis entirely untainted by any preconceived notions of how the world works...

The Small Business Survival Index is intended to rank states by how well their policies encourage entrepreneurial activity and the growth of small businesses, but Fisher says the index "is largely a measure of how heavily a state taxes or regulates business."

Yep, no connection between state taxes and regulation and business climate. It's all about bike paths.

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July 06, 2005

cmr.jpgA properly-postmarked certified mail receipt is to late-filing penalties what a crucifix is to a vampire. But without the right kind of postmark, it's not so easy to ward off old Vlad. Leonard Grossman learned this the hard way in Tax Court. Or at least his attorney did.

The tax law has a "timely-mailed, timely-filed" rule. If an item is postmarked by a filing deadline, the postmarked date is the filing date, even if it is received later than the filing date.

Not all postmarks are created equal. A hand-stamped postmark received at the post-office -- like the one in the above picture -- is golden. An office postage meter isn't nearly as convincing, for obvious reasons. And there lies Mr. Grossman's problem.


Mr. Grossman wanted to fight a $34,000 IRS assessment in Tax Court. His attorney was responsible for filing the Tax Court petition, which had a filing deadline of April 5, 2004. The Tax Court didn't receive the petition until May 25, 2004.

The good news for Mr. Grossman: his attorney had a certified mail receipt.

The bad news? The receipt had a postage meter postmark.


The IRS argued that the late delivery overcame what slim evidence a postage meter postmark provides for timely filing. The Tax Court seemed to agree, but it gave the taxpayer's attorney the opportunity to establish timely filing by other evidence. After a full hearing, including testimony from the law firm the office manager and evidence of a misrouting of the envelope, the Tax Court ruled that the petition was mailed on time.


Mr. Grossman needed an attorney and a Tax Court hearing and decision just to earn a chance to continue to contest his assessment. Had the attorney walked the petition to the post office and walked back with a hand-stamped postmarked receipt, he would have avoided the entire hearing.

The attorney arguing for timely filing was the same attorney who filed the petition. The Tax Court case doesn't say whether the attorney sent Mr. Grossman a bill for fighting the postmark issue -- or whether the attorney's only benefit from yesterday's decision was avoiding a malpractice claim, or at least an irate client.

Cite: Grossman v. Commissioner, T.C. Memo. 2005-164

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July 06, 2005

Insurance Broker Henry Stern has the second installment of his HSA-HRA series up at the Insureblog. It starts out:

So what, exactly, is an HRA? Well, it’s a tax-advantaged Health Reimbursement Arrangement that allows an employer to reimburse employees (and/or their dependents) for some of their medical expenses. In this regard, it’s similar to the Health Savings Account (HSA), because it means that the employer can help the employee by cushioning the blow on a major claim. And, the same kinds of expenses that are approved for reimbursement on an HSA plan are okay for HRA, as well.

So what’s the difference? It really comes down to who contributes the money for reimbursement, and who ultimately owns that money.

Read the rest here.

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July 05, 2005

The Carnival of the Capitalists for this week is up at KC's Blog. The Carnival is a weekly roundup of economics and business weblog posts. This week's Carnival is notable for DesMoineiac Brian Gongol's review of the dubious arithmetic of the Live8 promoters (3 billion viewers? and I don't know any of them?).

Lots of other good stuff, too.

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July 05, 2005

The new "Everything Tax Law" blog has a very sad first-person tale about what really happens to the folks who believe the "Tax Honesty" charlatans:

When I looked around, I noticed that the promoter and the protester support group had disappeared. They had crept out of the courtroom during the hearing. The non-tax protester spectators took their time leaving the courtroom. They were laughing and making jokes about the tax protester and the promoter. The tax protester was watching the crowd exit the courtroom and she was listening to their jokes. Eventually the tax protester and I were the only people remaining in the courtroom. The tax protester noticed that her counsel and her support group had abandoned her. She started crying. She was looking in my direction for some sign of reassurance. I did feel sorry and embarrased for her, but there was really nothing I could have done to make her feel any better. I remember thinking that she was lucky not to have been held in contempt and taken into custody. That was the only positive thing that I could think of at the moment. Realizing that she would not want to hear that point at the moment, I walked out of the courtroom.

Very sad, yet instructive. The lady in this story pays the price of delusion while the promoter skips out of the room. It's reminiscent of how wily agitator Joe Banister walks (so far) while his "clients" languish in prison.

Hat tip: Stuart Levine at Tax and Business Law Commentary.

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July 05, 2005 a woman scorned. Especially when she has the goods on his tax cheating. Taxable Talk has the story, and this useful lesson:

This case does remind us of one fact: ex-spouses are the leading source of tips of tax evasion to the IRS.

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July 05, 2005

The Treasury this year updated Circular 230, the rules governing tax practice before the IRS. The updates are a response to abuses in writing tax opinions during the corporate tax shelter frenzy of the late 1990s.

The rules provide a new category of "covered opinions" for which practitioners are responsible for a higher standard of care. These covered opinions include some obvious tax sheleter situations - for example, opinions rendered under a "confidentiality" agreement (e.g., this tax planning is so secret, you can't tell anybody!).

There is also a "catch-all" category of covered opinions: "Reliance" opinions. These are defined in Circular 230 as follows:

Written advice is a reliance opinion if the advice concludes at a confidence level of at least more likely than not (a greater than 50 percent likelihood) that one or more significant Federal tax issues would be resolved in the taxpayer's favor.

The rules also say a written disclaimer attached to written advice can allow it to avoid "reliance opinion" status.

The result? Many law and accounting firms, including some of the largest, have added a Circular 230 reliance disclaimer to every e-mail and letter they issue. Tax Analysts has a (subscriber only) story today covering the reaction of many practitioners. For example, KPMG:

(at bottom of all e-mails, above confidentiality clause, all caps)

This made us wonder whether we should be more paranoid. We looked at the penalty provision of Circular 230 as it relates to covered opinions. The provision on covered opinions provides:

(a) Prohibited conduct. A practitioner may be censured, suspended or disbarred from practice before the Internal Revenue Service for any of the following:

This is a severe penalty. Even a censure from the IRS could result in a spanking from the state bar or the state accountancy board. These are penalties that could make a tax practitioner get a real job. But reading on, the rules say that these penalties can be imposed with respect to covered opinions only when the rules are violated:

"Recklessly or through gross incompetence..."

Avoiding recklessness and gross incompetence seems like an attainable standard for your average practitioner, let alone the nation's greatest law and accounting firms. This standard makes us think the disclaimer language may be a bit much.

Cono Namorato, the IRS director of practice, is in charge of enforcing these rules. He also seems to think the practitioner concern is overblown. Tax Analysts reported on his comments at a practitioner converence:

The only other specific advice for tax practitioners was that the OPR will pay a lot of attention to the facts and circumstances giving rise to the advice subject to the section 10.35 (covered opinion) requirements for written advice, according to Namorato. "An off-the-cuff response" in a one-line e-mail is not the kind of advice the OPR is interested in, he said.

A participant asked whether the handout provided by a lawyer or accountant at a professional association meeting describing a transaction, the law, and the practitioner's analysis would be covered by the rules. No, Namorato responded; no more than would a practitioner's Valentine's Day card to his spouse.

Tax practice should be about providing good, solid, correct tax advice, and not about penalty protection, Namorato declared. "But if you want to play in that ballpark, you have to comply with section 10.35," addressing covered opinions.

Over and over again, the IRS officials told practitioners to exercise common sense in applying the rules. At one point, Namorato said the uproar over the new rules is the same reaction the IRS got when it came out with preparer penalties.

Our take? We aren't adding disclaimers to our e-mails and correspondence on a blanket basis. We have procedures in place to identify real covered opinions and ensure that they meet the new standards. Beyond that, we don't think it necessary to add disclaimers stating that our advice is worthless.

We like to think providing good tax service is all that is needed to stay out of trouble with Mr. Namorato. Then again, we haven't written multi-million dollar opinion letters for flaky tax shelters, so perhaps we lack the sensitivity to the issue of some folks. We hope our lack of paranoia turns out to be justified.

For a less hopeful view, see the Raby and Raby article from Tax Analysts, Penalty Protection for the Taxpayer: Circular 230 and the Code, made available for nonsubscribers by the TaxProf.

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July 01, 2005 spell Paul Caron. No fewer than five guest-bloggers will post to the TaxProf Blog while he goes off on vacation with his daughter to learn how to cope with her being a teen-ager.

The blogosphere has needed a good group tax blog, though some days the prolific TaxProf seems to fill the need himself. We'll have one for a week, anyway. Maybe this will finally provoke Tax Analysts into doing what needs to be done.

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July 01, 2005

"As insurance brokers it's our job to unreasonably fear change."

-Chad from Tusk and Talon commenting over at Insureblog about tax breaks for health insurance.

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July 01, 2005

The Insureblog kicks off a series of posts on Health Savings Accounts and Health Reimbursement Arrangments. No, they aren't the same thing.

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July 01, 2005

Victor Fleisher of A Taxing Blog brings to our attenion a new tax blog, Everything Tax Law. The proprietor, Kreig Mitchell from Boulder, Colorado, says:

I am a tax lawyer – self-styled "the peoples tax lawyer." I fight the good fight in helping clients resolve their tax disputes with the IRS and state government tax agencies. I also help clients structure their financial affairs so as to reduce their tax liabilities. Having worked closely with these government agencies I can tell you that American society would be markedly different if tax attorneys gave up this fight. If you have never had any trouble with these agencies then statistically you are the exception, not the norm.

Mr. Fleisher calls Mr. Mitchell's posts "provocative." I think he means statements like this:

If the estate tax is repealed, then more of the Boomer’s wealth will pass to the next generation of Americans.

The consequences of such a large transfer of wealth to one generation could be disastrous for American society. One only has to think of the problems associated with today’s stereotypical trust fund kid to see what American society will look like in the future...

When these issues are considered it appears that the estate tax should not be repealed. Instead, we might need to start thinking about increasing the estate tax rate to something closer to 100% -- or higher.

I'm not sure how an estate tax in excess of 100% might work. Maybe you would make up the percentage over 100% from the decedent's living relatives, based on how close the relationship is. Ex-spouses could be in big trouble.

While it's a stretch to think the government can better squander your money than your kids, at least Everything Tax Law promises to not be boring.

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July 01, 2005

Tax Analysts reports this morning:

Three people who purchased a foreign currency option plan dubbed HOMER –- a grantor trust scheme designed to generate fake losses to help offset legitimate income gains -- are suing Bank One and its financial and legal partners for peddling the tax scheme.

Doh! If you name a tax shelter after a cartoon character, you should at least use something adorable (SMURF?) or heroic ("BATMAN"?). Instead they name it after a blundering incompetent. Small wonder things didn't work out:

Bank One personnel purportedly developed the Hedge Option Monetization of Economic Remainder (HOMER) strategy along with fellow defendants Deutsche Bank and White & Case LLP. American Express and Arthur Andersen LLP are also named in the suit for signing off on the HOMER plan while preparing the plaintiffs’ 2001 tax returns.

They tortured the name to come up with that acronym? Why not Derivative Option Remainder Currencies? Or Currency Remainder Asset Program?

Shelter buyers Donald R. Wilson Jr.; his wife, Laurie Wilson; and business associate Kenneth S. Brody filed suit in federal court on June 13 charging their respective financial and tax advisers with breach of contract, fraud, negligent representation, and civil conspiracy for not warning them about the estate planning maneuvers. The shelter clients claim they were told the plan "took advantage of a ‘legal’ loophole in the tax code to reduce tax liability."

The plan was apparently a knockoff of one called COBRA - a much catchier acronym. Since it backfired, maybe it should now be called Derivative Underwritten Debentures (DUD).

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