Tax Update Blog: August 2005 Archives
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KATRINA RELIEF
August 31, 2005
If you are sitting on your roof waiting for a boat, even the IRS can see you probably can't file your September 15 returns on time. The IRS has automatically extended all September 15 and October 15, 2005 return due dates to October 31 for areas affected by the storm.
In addition, the IRS has waived penalties for employment and excise tax deposits due from August 28 - September 23, if the payments are made by October 31
To claim the relief, taxpayers should mark late-filed returns in red on top with the words "Hurricane Katrina."
The disaster relief currently covers the following:
• 31 Louisiana parishes: Acadia, Ascension, Assumption, Calcasieu, Cameron, East Baton Rouge, East Feliciana, Iberia, Iberville, Jefferson, Jefferson Davis, Lafayette, Lafourche, Livingston, Orleans, Pointe Coupee, Plaquemines, St. Bernard, St. Charles, St. Helena, St. James, St. John, St. Mary, St. Martin, St. Tammany, Tangipahoa, Terrebonne, Vermilion, Washington, West Baton Rouge and West Feliciana;
• 15 Mississippi counties: Amite, Forrest, George, Greene, Hancock, Harrison, Jackson, Lamar, Marion, Pearl River, Perry, Pike, Stone, Walthall, and Wilkinson; and
• Three Alabama counties: Baldwin, Mobile and Washington.
The relief is likely to be extended to additional areas. Considering the nature of the devastation, additional extensions of time may be granted for parts of the affected area.
Links: IR 2005-84, a summary of tax relief for affected taxpayers.
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MAKING LEMONADE
August 31, 2005
Now that the heady days of the tax-shelter era are over, what do the big firms that marketed the shelters have to offer? Advice on how to not be embarrassed by your tax planning!
According to an article by Martin Sullivan in today's Tax Analysts (subscriber only link), different times demand different measures:
Press attention to accounting scandals and the use of aggressive tax shelters has translated into more resources for tax authorities and regulators. And as sure as night follows day, that makes tax compliance more onerous and tax planning more challenging. But in this post-Enron, post-WorldCom, post-Parmalat world, there's a new dimension of risk associated with overambitious efforts to lower taxes. Now the actions of the tax department can tarnish a company's public image.
It's not just KPMG sounding the alarm. All of the Big Four accounting firms are urging their clients to give careful consideration to "tax risk management."
It's sort of like the computer hacker who takes a job as a security consultant for Microsoft...
UPDATE: The good TaxProf has now made the article available to non-subscribers here, by arrangement with Tax Analysts.
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SPRING-TIME IS OVER FOR VALUING LIFE INSURANCE POLICIES
August 31, 2005
The Treasury has issued new regulations (TD 9223) dealing with "springing" cash-value life insurance and other issues in valuing insurance contracts. The regulations respond to a variety of ploys to artificially lower insurance values temporarily for income and estate tax planning.
In the past, a life policy's cash value was often considered the same as it's "fair market value." To take advantage of this, policies were created that had a low cash value for a few years, before the cash value "springs" to a big number.
A number of tax planning defices were built around this concept. In income-tax planning, a small pension plan would buy a springing policy and transfer it to a beneficiary -- say, the business owner -- at thelow "unsprung" value. The plan would then "spring" to life, and the owner could borrow against the policy tax free. The Treasury press release for the regs explains:
The contract is structured so that the cash surrender value increases significantly after it is transferred to the employee. The use of this springing cash value life insurance results in a mismatch between the employer's deduction and the employee's recognition of income. The employer takes a deduction for the entire value of the premiums paid into the insurance plan and the employee pays taxes only on the artificially depressed value of the contract allowing the employee to avoid taxes on the true value of the contract while the employer taxes the full deduction for the premiums paid.
The new regulations say that "fair market value" means, well, fair value, unreduced for gimmicks like springing cash value. The regulations apply to policy transfers starting February 13, 2004.
Links: Treasury Press Release
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SOMETIMES TAX GUYS REALLY PAY THEIR WAY
August 30, 2005
Attorneys from Fenwick & West LLP prevailed today in a $100 million Tax Court case. The Fenwick group, including Kenneth B. Clark, successfully defended Xilinx, Inc. in its allocation of employee stock option (ESO) costs with a foreign subsidiary under an R&D cost-sharing agreement.
The court found the IRS arguments wanting:
Simply put, the regulations applicable to the years in issue did not authorize respondent to require taxpayers to share the spread or the grant date value relating to ESOs. Petitioners are merely required to be compliant, not prescient.
The taxpayer victory also prevented the IRS from making $20 million in penalties stick.
Cite: Xilinx, Inc. and Subsidiaries v. Commissioner, 125 T.C. No. 4.
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PROFESSIONAL GAMBLING: THE TAX IMPLICATIONS
August 30, 2005
The hardest part of being a professional gambler would be making money at it. Close behind are the tax problems. Russ Fox studies what the tax law requires of "professional" gamblers in the third installment of his Taxes and Online Gambling series up at Taxable Talk.
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$458 MILLION KPMG SETTLEMENT APPROVED; SEVEN FORMER PARTNERS INDICTED
August 29, 2005
The KPMG settlement has been approved by a federal judge. The Justice Department then announced the indictment of seven former KPMG partners on tax charges. A KPMG former senior manager and a non-KPMG attorney were also indicted.
Tax Analysts reports the following were indicted on tax conspiracy charges:
Jeffrey Stein, former deputy chairman of KPMG, former vice chairman of KPMG in charge of tax;
John Lanning, former vice chairman of KPMG in charge of tax
Richard Smith, former vice chairman of KPMG in charge of tax, a former leader of KPMG’s Washington National Tax;
Jeffrey Eischeid, former head of KPMG’s innovative strategies group and its personal financial planning group;
Philip Wiesner, former partner-in-charge of KPMG’s Washington National Tax office;
Mark Watson, a former KPMG tax partner in its Washington National Tax office.
Robert Pfaff.
Also indicted were John Larson, a former KPMG senior tax manager, and Raymond J. Ruble, a former tax partner in the New York office of a prominent national law firm.
LINKS:
New York Times: U.S. Indicts 8 Ex-KPMG Employees of Sales of Tax Shelters.
Transcript of Attorney General remarks at press conference on KPMG case.
Investors.com: KPMG to pay $456M to settle tax-shelter charges
UPDATE: Copy of Indictment (pdf)
And the TaxProf has a comprehensive set of links to KPMG settlement documents.
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HIGH AND DRY CARNIVAL
August 29, 2005
Not much of a party in New Orleans today, but the Carnival of the Capitalists rocks on this week at CaseySoftware.com. This weekly compilation of economics and business weblog postings is always worth a visit.
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MISS AMERICA: CORPORATE WELFARE QUEEN?
August 29, 2005
The Miss America Pageant in leaving Atlantic City in search of a better provider. The CEO of Miss America said The pageant's subsidy wasn't enough to keep its lifestyle at the level to which it would like to be accustomed:
He told the Atlantic City Convention and Visitors Authority at a board meeting that the state's $725,000 annual subsidy to Miss America wasn't enough and he wanted the agency to release it from the last two years of its five-year contract.
Surely this could qualify for a Grow Iowa Values grant, and an annual pageant at the Wells Fargo Arena or Principal Park - maybe between games of a double-header. How do you spell glamour? "D-E-S M-O-I-N-E-S!"
Hat Tip: Tax Foundation Blog
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PROFESSIONAL RESPONSIBILITY AND TAX SCHEMES
August 29, 2005
As indictements start to come down in tax shelter cases, you can expect to see tax professionals use the accountant's version of the Nuremberg defense: "I was only doing it because our national tax office said it was ok."
Two professors at the University of New Orleans (interesting place today, no doubt) look at the conduct of those involved in the scheme, and they conclude that professionals are accountable for what they sign and sell, regardless of what the national tax office says:
As Prof. Calvin Johnson stated, Circular 230 require a
‘‘one-in-three realistic possibility of success.’’ The ‘‘audit
lottery’’ factor and ‘‘dumb agent’’ are not acceptable
defenses for tax professionals.
That essential and elementary advice went unheeded
at KPMG and other leading accounting firms. Not only
did firms not guide their clients to ethical tax positions,
they went so far as to aggressively market son-of-BOSS
tax schemes. The tax professionals who signed those
fraudulent returns should be systematically identified by
accounting firms and promptly dismissed. Further, the
Treasury should identify signers of those returns and
prohibit them from practice before the IRS.
In other words, the article says tax practitioners can't punt responsibility to higher-ups in the firm; in fact, the higher-ups have a duty to enforce proper behavior and hold all personnel accountable:
If the accounting firms are unwilling or unable to hold
those individuals who signed returns employing son-of-
BOSS tax shelters and similar schemes responsible, then
regulators should hold them accountable (for example, as
part of any settlement agreements, deferred prosecution
agreements, or by IRS enforcement action). Importantly,
the recommendation is equally applicable for lawyers
and investment bankers.
You sign it, you live with it.
Thanks to the TaxProf for pulling this article from behind the Tax Analysts subscriber firewall.
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'I FORGOT' - TRANSCENDENTAL MEDITATION FOR THE CPA?
August 29, 2005
Go to Krieg Mitchell's place for your Monday spiritual guidance:
The CPA’s mistakes could result in the taxpayer going to jail; facing penalties, interest, and additions to tax; and the loss of a hard-earned business reputation, the business itself, and even taxpayer’s family and friends. Yet, based on the CPA's testimony, the CPA seems to be indifferent to his client's situation. In fact, he seems to be completely at peace with his client's situation.
This just goes to show that we don't need religion, spirituality, medication, or even meditation or yoga to find inner peace. The secret to finding inner peace is simply to forget everything...
It costs less than this, anyway.
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YIKES
August 28, 2005
We interrupt our regularly-unscheduled weblog for this bulletin:
Unless there is a miracle, a disaster slow-approaching yet inexorable will wreak havoc on a scale not seen in the United States for decades. People alive today will be dead soon, and New Orleans as we have known it will no longer exist by Tuesday.
Have a nice day.
Link:What the "big one" would do to New Orleans.
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KPMG - FROM DEFIANCE TO DEFERRED PROSECTION
August 28, 2005
Today's editions of The New York Times provides background on how KPMG went from "stonewalling" government investigators to pledging full cooperation as part of a "deferred prosection" agreement.
According to the story, KPMG felt it was falling behind other firms in the lucrative tax shelter market. Jeffrey M. Sein, a "charismatic lawyer," was brought in to turn it around. From the report:
Throughout the late 1990's, Mr. Stein held mandatory weekly conference calls with KPMG's 500 or so tax partners. A former KPMG senior manager who sat in on the calls and objected to Mr. Stein's approach said Mr. Stein would tell anyone who questioned a tax strategy that they were "either on the team or off the team."
Under Mr. Stein, Mr. Rosenthal and others, KPMG built an aggressive marketing machine to sell tax shelters it created, with names like Blips, Flip, Opis and SC2. From the late 1990's, KPMG operated a telemarketing center in Fort Wayne, Ind., that cold-called potential clients, gleaned from public lists of firms and companies.
By 2002, $1.2 billion of KPMG's $3.2 billion in revenues were generated by their tax deparment.
When the IRS and Congress began to investigate the tax shelter practices of the major accounting firms, KPMG took its own path. While the other firms settled with the government, KPMG fought back. That worked, until it didn't. Congressional investigations were the beginning of the end:
Then KPMG hit a wall. The Senate subcommittee report, brimming with internal e-mail messages and documents obtained from informants and through subpoenas, portrayed the firm's tax department as a place where questions about the legitimacy of shelters were barely considered, where the fees from such shelters were seen as outweighing the risks and where clients could be coaxed into buying them. The Senate hearing "was the beginning of the end" for KPMG, said the former senior manager.
By last year, KPMG's resistance was bearing bitter fruit. A new chief lawyer was brought in and KPMG admitted "unlawful conduct" in the tax shelter business. KPMG is expected to pay $456,000 in fines, and a number of former partners are expected to face charges that could carry 30-year prison terms, according to reports.
If nothing else, tax firms will tread gingerly in the tax-shelter business for a few years, at least. In the eternal battle between greed and fear, fear now has the upper hand.
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KPMG SETTMENT: $456,000,000 / 1600 = $285,000
August 27, 2005
The New York Times reports today that KPMG has agreed to settle tax crime charges with the Justice Department. The report says that KPMG will have to pay $456 million in fines and accept an outside overseer to avoid indictment. That works out to about $285,000 per partner for the 1,600-partner firm.
The report says the settlement is slated to be announced Monday.
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S CORPORATION OWNERS TEMPT FATE, WIN
August 26, 2005
S corporation shareholders have to have "basis" in either their stock or in loans they have personally made (not just guaranteed!) in their S corporation. The Tax Court yesterday allowed S corporation owners to take losses for year-end loans made to their corporation, even though they took the money back out only a few days later.
S corporations don't normally pay taxes on their income. The income is instead taxed on the personal returns of their owners.
"Basis" is normally your original cost of something. The basis of S corporation stock is adjusted upward for income taxed to the owners and capital contributions, and downward for losses passed to the owner returns, and for distributions of earnings.
BAD YEARS FOR BROOKS AG COMPANY
The owners of Brooks AG Company, Inc. had no basis left in their shares. In order to take losses for 1999, they found they would have to either add to their stock basis or make an advance to their company. The shareholders each advanced funds to the company as follows:
December 31, 1999: $800,000 advanced to company
January 3, 2000: $800,000 advance is repaid.
December 29, 2000: $1,100,000 advanced to company.
Brooks Ag had losses of $882,586 in 1999 and $827,888 in 2000; the losses were split almost equally between two shareholders.
THE IRS VIEW
The IRS argued that the basis of the open account debt should be measured separately for each advance, on a first-in, first-out basis. In their view, the tax effects of the transactions to each shareholder was:
1999 loan from shareholder $800,000 Less: 1999 loss used against loan (441,293) Basis of 1999 loan 358,707 Repayment of loan made in January 2000 (800,000) Taxable (gain) on loan repayment (441,293)
THE TAX COURT SAYS OTHERWISE
Fortunately for the Brooks AG shareholders, the tax law is on their side. The Tax Court explained:
Sec. 1.1367-2(a), Income Tax Regs., provides that advances and repayments of open account debt are treated as a single indebtedness for the purpose of making debt basis adjustments and defines open account debt as "shareholder advances not evidenced by separate written instruments and repayments on the advances".
As a result, the only date that matters in measuring the basis of the advances is December 31. For 1999 and 2000, that means
1999 loan from shareholder $800,000 Less: 1999 loss used against loan (441,293) Basis of 1999 loan 358,707 Repayment of loan made in January 2000 (800,000) Advance Made December 29, 2000 1,100,000 S corp loss for 2000 (413,944) Basis in advanced loans, 12/31/2000 $244,763
In other words, the owners got to take their whole 2000 loss, and they didn't have taxable gain on the January 2000 loan repayment.
DANGERS OF THIS APPROACH
Notwithstanding the taxpayer victory here, we normally wouldn't advise taxpayers to put large amounts of cash into an S corporation right before year-end to take losses and then withdraw it right after year-end. The IRS has other tools they could use to attack such short loans, and those attacks might succeed under other circumstances. They might attack the loan as lacking substance, for example, especially if the check didn't clear before it was repaid; this would be a twist on the Oren case. Or they might say the taxpayer wasn't really "at-risk" for the loan over such a short period, especially if the lent funds were borrowed from a related party as in Van Wyk.
If a deduction for the losses is important, you should at least let the money you put into your S corporation at year-end cool down for a few weeks before you take it back out. Even if you win ultimately, it's easier to win if the IRS isn't tempted to come after you in the first place. While the taxpayers won yesterday, they'd have been happier if they didn't have to go to Tax Court at all.
Cite: Brooks v. Commissioner, T.C. Memo. 2005-204.
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COULD THIS ARTICLE HAVE SAVED MR. MISHNE?
August 26, 2005
The TaxProf highlights a new article, 'Til Death Do Us Part ... After That, My Dear, You're on Your Own: A Practitioner's Guide to Disinheriting a Spouse in Illinois.
Had Mr. Mishne disinherited his lovely bride, maybe he'd be alive today.
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HEALTH SAVINGS ACCOUNTS TO END LIFE ON EARTH?
August 26, 2005
The California Insurance Commissioner seems to think so. The InsureBlog knows better. InsureBlogger Hank Stern takes on aspiring Lieutenant Governor and Insurance Commissioner Garamendi with a 2-part defense of HSAs:
Fallen-away Iowan David Hogberg also finds Mr. Garamendi's arguments unpersuasive.
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KPMG INDICTMENTS: EIGHT SCAPEGOATS?
August 25, 2005
UPDATE 8-29-05: Seven former KPMG partners and one former senior manager have been indicted. Follow this link for details.
Original 8-25-05 post:
Reuters and Bloomberg News say eight former KPMG partners are expected to face federal criminal charges relating to KPMG's tax shelter activities. From the Bloomberg report, dated yesterday:
Robert Fink said he expects his client, a former partner at KPMG whom he wouldn't identify, to be formally notified of the indictments in New York today or tomorrow. He wouldn't disclose his source of information about the charges or identify the other seven defendants. Fink said he believes the federal charges will likely include conspiracy to defraud the Internal Revenue Service, tax evasion and possibly obstruction of justice.
"My client has always believed that KPMG did legitimate tax planning that accountants throughout America were doing and that the government is distorting that into an alleged tax crime," said Fink, a partner at New York-based Kostelanetz & Fink. He said his client will plead not guilty to all charges and go to trial.
Meanwhile, the Wall Street Journal reports that former SEC Chairman Richard Breeden is the tentative pick to serve as "outside monitor" of KPMG under a still-pending "deferred prosecution" arrangement that would enabale KPMG itself to avoid indictment. From the Journal story (subscriber-only link):
Other provisions of a deferred-prosecution agreement likely would include new restrictions on the firm's tax practice and heightened government supervision, including Mr. Breeden's appointment as an outside monitor. Deferred-prosecution agreements, which have become more common, allow companies to avoid prosecution in exchange for adhering to certain conditions over time.
Interesting times for our profession.
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QUOTE OF THE DAY
August 25, 2005
In discussing whether a lawyer includes payments in income when he prepares wills for members of his church, who donate cash to the church in return, Professor Maule observes:
Several participants pointed out that "it does not make sense" to treat the donations as the lawyer's gross income. There's something to be said for this position. Yet, it is not unusual for the tax law to require an outcome that does not make sense.
Truer words were never spoken.
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ACCEPT NO COMPROMISES
August 25, 2005
The tax law has long allowed the IRS to compromise tax liabilities when there is doubt about whether am amount owing is legitimately due, or when the taxpayer has no way to pay (the technical term for such a taxpayer is "turnip," I believe).
In 1998 Congress allowed the IRS to comrpomise tax es taking into account "factors such as equity, hardship and public policy where a compromise of an individual taxpayer’s income tax liability would promote effective tax administration."
After six years, the IRS still makes very few compromises under the 1998 changes. Thanks to the TaxProf Blog, a discussion of the IRS compromise policy written for Tax Analysts is available today to non-subscribers: The 'Effective Tax Administration' Offer in Compromise.
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HOW DARE YOU LACK SYMPATHY FOR A POOR WIDOW?
August 24, 2005
Sometimes it's easy, actually:
"Ms. Mishne was convicted of involuntary manslaughter in the 2004 slaying of her husband, Mickey Mishne. Ms. Mishne's boyfriend is serving a life sentence for aggravated murder in connection with the killing. Now Ms. Mishne has filed papers to collect a portion of her husband's estate -- this article has the details. (Evidently Mr. Mishne left most of his property to her under his Will, although the article suggests that Ms. Mishne is making her claim as surviving spouse.)"
The Death and Taxes blog has the whole story.
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SAVE THE MOVIE STARS!
August 24, 2005
How bad have state taxes gotten in California? This bad:
California Film Commission Report Backs Tax Credit for Movie Industry
The California Film Commission has released a 25-page study, What Is the Cost of Run-Away Production? Jobs, Wages, Economic Output and State Tax Revenue at Risk When Motion Picture Productions Leave California, in support of proposed legislation to provide a California tax credit of 12% on wages and other production costs for movies and TV shows
California's top individual rate is 10.3%, and a 1% additional "millionaire surtax" is in the works. The 10.3% rate with no deduction for federal taxes would be roughly equivalent to a 13.5% rate in a state where federal taxes are deductible (e.g., Iowa).
To survive, well-connected businesses carve loopholes. This puts more upward pressure on rates, creating more incentive to carve out loopholes.
(Via the TaxProf Blog)
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TAX ANALYSTS: JUSTICE DEPARTMENT TAX DIVISION OK'S KPMG PARTNER INDICTMENTS
August 24, 2005
Tax Analysts reports this morning that the Justice Department Tax Division has given the go-ahead for indictments of "most" of the 22 ex-KPMG partners who had been identified as targets. From the story:
The individual indictments, which have to be presented to the grand jury that has been investigating KPMG’s shelter involvement for the past 18 months, are likely to be announced Thursday, according to lawyers familiar with the cases. But the “tail wagging the dog” is when the deferred prosecution agreement with the firm is ready, according to one lawyer.
The government’s lead charge against the former KPMG partners is that they conspired to defraud the IRS, according to lawyers involved.
The government’s chief witness is likely to be Domenick DeGiorgio, the former banker with the German bank HVB, who earlier this month pleaded guilty to wire fraud, tax evasion, and “tax shelter fraud conspiracy,” charges related to his involvement in promoting the tax shelter transactions known as bond linked issue premium structures, or BLIPS, which were sold to KPMG clients.
The subscriber-only version of the story hints at the likely defense:
Not only is DeGiorgio's credibility suspect at the outset because of his personal problems, but much of the information he provided that the government is relying on regarding the transaction's profit potential and the investors' income tax returns is not based on DeGiorgio's own knowledge, said one defense attorney.
Furthermore, conspiracy thrives on secrecy, argued another criminal defense lawyer. The BLIPs product at issue was approved after a very long, deliberative process among a number of lawyers and accountants at KPMG, the lawyer explained. "If the intention from the beginning had been to scam the IRS, it would never have made any sense to have all those people involved."
The indictments are tied to a deal that would enable KPMG itself to avoid prosecution. KPMG's cooperation may be the Governments trump card in prosecutions of the former partners.
We don't much care for KPMGs tax-shelter practices. Still, the prosecutions are scary to all tax practitioners. If the Justice Department goes ahead with indictments, we hope that it has evidence of criminal behavior, rather than, say, malpractice.
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TAX FRAUD: PRISON TIME DOESN'T MEAN YOU'RE DONE
August 23, 2005
Iowa State University student-athlete Jason Berryman mugged a fellow student, leading to about a year in jail. Now he's back on the Iowa State football team and back on scholarship. Some say that because he spent time in jail, Mr. Berryman has paid his dues and we should let bygones be bygones.
The IRS is more vindictive. Kevin Morse, a Minnesota farmer, spent 18 months in prison for tax evasion and paid $61,700 in back taxes. Yesterday the Eighth Circuit Court of Appeals ruled that he also must pay civil tax fraud penalties equal to 75% of the tax deficiencies.
The Moral: Cyclone fans should be glad the IRS Commissioner isn't running the football team.
Link: Morse v. Commissioner
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YOU MAYBE GOT A DRIVERS LICENSE FROM THERE?
August 23, 2005
Hansen contends this Court does not have personal jurisdiction over him because he declares his domicile to be Heaven. The Court is not persuaded by these arguments.
-From an order in U.S. v. Hansen, where a Federal District Judge told a tax scam promoter that it ain't heaven, it's California.
Link: Court order
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STRANGI FRUIT
August 23, 2005
The TaxProf today lifts Lee Sheppard's analysis of the Strangi family limited partnership cases out of the Tax Analysts firewall. Her summary:
So where are we now? It will be much more difficult, if not impossible, for the family limited partnership doing nothing but holding the portfolio assets of some core affluent decedent to be justified by a made-up business purpose. The business purpose inquiry comes late, after the inquiry whether the decedent retained possession and enjoyment of the transferred assets (or controlled their disposition), but the point is that it comes eventually. Estate planners have lost their bid to keep business purpose out of the evaluation of the paper transactions they create.
Keep reading past the references to Japanese teenagers and ugly handbags; it's worth it.
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WASHINGTON POST: KPMG MAY SETTLE CRIMINAL CHARGES THIS WEEK
August 23, 2005
The Washington Post reports today that KPMG may sign an agreement by the end of the week to avoid indictment in connection with its tax shelters. In exchange, KPMG will pay a fine of between $300 million and $500 million and operate under "independent review," according to the report.
While KPMG may dodge this bullet, some of its former partners may not be so lucky:
The deal would mark an end to months of intense negotiations among prosecutors and KPMG leaders, who took the unusual step of issuing a public statement in June that said the firm took "full responsibility for the unlawful conduct by former KPMG partners."
Several of those former partners could face criminal charges by a New York grand jury within the next few days related to their work on the shelters, which brought the firm $124 million in fees between 1997 and 2001, according to Senate investigators.
.
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MAYTAG ACCEPTS WHIRLPOOL $21 OFFER
August 22, 2005
Maytag and Whirlpool have entered into a definitive merger agreement. We have updated our analysis of the effect on shareholders to reflect the $21 price - which is subject to adjustment as part of the agreement.
Links:
SEC filing on today's agreement (includes a good Q&A section on the deal).
Maytag Signs Whirlpool $2.7B Offer (MarketWatch.com)
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TAX AMNESTY IN THE GREAT WHITE NORTH
August 22, 2005
Minnesota will waive penalties and criminal charges for participants in "abusive" tax shelters under an amnesty program that runs through January 31, 2006. It appears to be directed at participants in mass-marketed tax shelters identified as listed transactions by the IRS.
Minnesota is a remote Canadian province noted for its fish-based economy.
Link: Minnesota Department of Revenue summary of amnesty.
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SHOULD HE BE FREED TO FIND THE REAL TAX EVADER?
August 22, 2005
Adrian Karsten, an ESPN sportscaster, is going to be sidelined for 11 months as a result of tax injuries. Mr. Karsten was sentenced for failing to file tax returns in 2000 and 2002 in an attempt to evade around $167,000 in taxes.
Mr. Karsten's sentence shows how fortunate Futureman is to have only received probation for evading $131,000 in taxes. But at least one former sportscaster is even more fortunate.
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JACK KNOWS JACK
August 22, 2005
Tax Analysts notes a somewhat old case from May in which Jack Cohen, the sponsor of the now defunct "taxax.org" website gets a permanent injunction against promoting his tax protestor theories. The judge describes the issue:
Through the internet, Mr. Cohen has promoted the idea that the U.S. tax system is a "hoax" and that the payment of federal income taxes is voluntary. (Pl's. Ex. 1). Additionally, Mr. Cohen advertised a number of products on his website aimed at "educating" people about their "right" to not pay taxes. Examples of these products are his book American Liberty vs. Forced Withholding and a Custom Letter, which is designed to "build a solid foundation to reverse the government's presumption that we are 'taxpayers' pursuant to the Code, instead of `taxpayers' in the ordinary sense of the term," and to "keep the IRS scrambling . . ." (Pl's Ex. 24). The distinction that Mr. Cohen draws between "tax payers" and "taxpayers" is based on his contention that the I.R.C. is not a real "code of laws," that the Secretary of the Treasury does not have authorization to operate outside of the territorial confines of Washington, D.C., and that the only people subject to tax are foreign nationals. (Cohen Dep. At 24, 30; Cohen Aff. at 13, 15).
You gotta love the transcendent significance the "Tax Honesty" crowd gives to capitalization, punctuation and compound word structure. Last week we noted a case where the taxpayer (tax payer?) fought the IRS on the ground that their given name had lower-case letters, so the notice that used all caps was invalid. Others like to put commas in their names, as if to ward off government jurisdiction beams.
Unfortunately for Mr. Cohen, the Court of Appeals seems more concerned with filing fees than with grammar.
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LIVEBLOGGING THE STATE FAIR
August 19, 2005
This morning the Tax Update staff volunteered to help man the Salvation Army booth at the State Fair. Business was slow...
...and they were nice enough to let me go run and play.
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'WAITING AT OUR DOOR TO GET TREATS'
August 19, 2005
A resolution supporting legislation to override the Cuno decision against state corporate welfare provisions tax incentives was unable to clear a committee of the National Conference of State Legislatures this week. In a story reported in State Tax Today (sorry, subscription-only link), state legislators were surprisingly ambivalent about the tax incentives they routinely pass:
NCSL committee members seemed to hold less certain conclusions regarding Cuno and tax incentives, in general, than those presented by the two panelists. Many said they favored the incentives, but many others expressed frustration with the corporate tax policies for which they said they felt compelled to vote.
Montana state Sen. Jim Elliott (D) said when the Cuno decision came down he hoped that it would give legislators "who do not support tax incentives but feel we have to vote for them . . . a logical reason to no longer support tax incentives."
THE IOWA ANGLE: TIME FOR TREATS
An Iowa legislator had a vivid description of the problem:
Similarly, Iowa state Rep. Don Shoultz (D) said Cuno might have opened up an opportunity for states to produce a clearer consensus, better discussion, and even a solution to the competitive problems caused by incentives. "We always rely on the same argument: Well, everybody else is doing it," Shoultz said, adding that "the people supporting [federal legislation] are the ones who are usually waiting at our door to get treats."
Rep. Shoultz, Nancy Reagan had it right: just say no. Or if Nancy doesn't do anything for you, listen to Bill Gates:
The merits and pitfalls of corporate tax incentives, Cuno, and federal legislation may have left committee members stumped at the end of the day, but Bill Gates, chair and chief software architect for Seattle-based Microsoft Corp., started the day with clear sentiments on the topic.
"You can go overboard on those things," Gates said in the August 17 keynote address. His industry, he said, is far more sensitive to talent than to tax policies. "Again I go back to education as really trumping all other things."
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HE COULD HAVE DONE AS WELL WITH LESS WORK
August 19, 2005
Glenn Stinson set up four trusts and put Oklahoma real estate into them to keep them out of the hands of the IRS. He then spent months fighting the IRS in court. For all this trouble, he still lost, and now has to pony up $263,000 in taxes covering 12 years. The judge wasn't even swayed by this slam-dunk logic:
If the judge doesn't understand that capital letters change everything, there's no hope...
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PLAYING POKER: THE ODDS ON OFFSHORE TAXES
August 19, 2005
Russ Fox at Taxable Talk says online poker players who think offshore winnings are tax-free are playing a losing hand.
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WHY THEY CAN'T ALL BE CALIFORNIA GIRLS
August 19, 2005
The TaxProf links to an eye-opening story today that also talks about taxes. The linked story explains how Natalie Gulbis, "the Anna Kournikova of golf," has found Reno less taxing than her former California home. It also tells how moving to Florida saved Tiger Woods $4 million on his Nike deal.
So how does California respond to the exodus of athletes? It raises their taxes. Ingenious.
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ERSTWHILE?
August 18, 2005
The TaxProf has kindly linked to our discussion of Cindy Sheehan's vow to not pay her 2004 taxes. Yet his link leaves us a little uneasy:
Erstwhile Joe Kristan notes:
In the normal process of such cases, the Tax Court would be unlikely to hear her case before 2007. By then, her campout near the Bush ranch in Crawford, Texas will be yesterday's news. The Tax Court procedures aren't likely to morph into some sort of Nurenberg Trial; the judges there tend to focus on tax liability, rather than allegations of war crimes. As the tax law has no gold-star mother exception, Ms. Sheehan can expect to hear that she does, in fact, owe some pennies.
Erstwhile? Dictionary.com defines "erstwhile" thusly:
adj : belonging to some prior time; "erstwhile friend"; "our former glory"; "the once capital of the state"; "her quondam lover" [syn: erstwhile(a), former(a), once(a), onetime(a), quondam(a), sometime(a)] adv : at a previous time; "once he loved her"; "her erstwhile writing" [syn: once, formerly, at one time, erst]
I'm still here! At least as far as I can tell... My posting is light this week, but I'm here!
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NO, YOU HAVE TO TAKE THE $16 MILLION
August 17, 2005
It's no surprise to Big 10 football fans that when Northwestern makes the news, it's off the field. From the Death and Taxes blog:
College football fans are probably familiar with Rashidi Wheeler, the Northwestern University football player who died during a preseason practice in 2001. Mr. Wheeler's mother, Linda Will, was appointed as a co-administrator of his estate, and later filed a wrongful-death case against the University.
This morning's Chicago Tribune has an update on the case, with the headline "Judge orders mom to take $16 million in Wheeler case." My first thought was, can a judge force someone to accept a settlement offer? The answer is yes, because of Mrs. Will's fiduciary duty to the other beneficiaries of her son's estate.
I think that's almost enough for tuition there.
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ESTATE TAX STANDOFF: EVIL, OR STUPID?
August 17, 2005
Pondering the state of the estate tax -- scheduled to vanish in 2010 and return with a vengeance a year later -- tax attorney Kreig Mitchell is moved to ask:
Are the Uncertainties In Our Estate & Gift Tax Laws A Strategy to Stifle Tax Planning?
The uncertainty in the estate and gift tax laws benefit the government. The uncertainty has created apathy and caused a number of affluent taxpayers to put off talking with their estate and tax advisors. The thought is "Why bother planning my estate now when the laws are going to change in a few years?" Similarly, tax advisors are currently less likely to recommend various tax avoidance techniques (due to the irrevocable nature of such techniques) in light of the uncertainties. The net result is fewer affluent taxpayers employing tax avoidance measures. Fewer tax avoidance measures will eventually result in more tax revenues for the government. So is this a strategy to raise tax revenues without politicians having to risk telling taxpayers that they intend to raise taxes?
Stupid or evil? Maybe both!
These issues leave me wondering whether the uncertainty in our estate and gift tax laws is intentional on the part of a small group of lawmakers or if the government inadvertently stumbled on a way to stifle tax planning?
These are very good questions. While cyncicism and expedience were behind the current state of legislation, a plot to prevent tax planning is far too subtle and sophisticated for our Congresscritters.
The death and Phoenix-like rebirth of the estate tax was instead a calculated gamble (or cynical ploy) to attack the estate tax while fitting within some budget rule. Those responsible either assumed that they would be able to permanently remove the tax in subsequent years (this in the era of budget surplus), or that this would keep the issue on the table for years to their own political advantage.
We should know next month whether the estate tax will live, and in what form.
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FUTUREMAN GETS HIS FUTURE BACK
August 16, 2005
Flecktones fans, rejoice!
Roy Wooten (aka Futureman), percussionist for the Flecktones, will not have to serve prison time after pleading guilty to tax evasion. He was sentenced to two years probation on August 8 by a federal judge in Nashville.
This appears to be a light sentence. The sentence comes out of a plea agreement with prosecutors in which 3 charges were dismissed. Mr. Wooten will also have to pay about $131,000 in back taxes. The maximum sentence for one count of tax evasion is five years in jail, and the "guideline range" for prison for the amount involved is 8-14 months, according to the plea agreement.
Mr. Wooten apparently got into tax trouble by believing "Tax Honesty" arguments that the tax law is invalid for various reasons. From the light sentence, it would appear the government agreed that Mr. Wooten was was more naive than cunning when he failed to pay his taxes. It's good that they can distinguish between Futureman and tax protest promoters.
UPDATE In case you were wondering, he can travel with the band. From the sentencing document linked below:
The Defendant is permitted to work by performing music without geographic limitation. Provided, however, Defendant shall advise the Probation Office in advance of any travel outside the United States and shall provide an itinerary for such work related travel. This Special Condition supersedes the Standard Conditions of Supervision.
UPDATE II: It looks like it was a light sentence. An ESPN sportscaster will serve 11 months in prison for evading $167,000 in taxes.
Documents (links fixed now):
Prior Coverage:
FUTUREMAN PLEADS GUILTY TO TAX EVASION
TAKE A TAX PROTESTER POSITION ON YOUR RETURN: ARE YOU OUT OF YOUR MIND?
I would link to media coverage of the sentencing, but I haven't found any. I have a Google "news alert" to keep me posted on tax evasion cases - and one for Futureman specifically - and have come up empty.
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BAD TAX IDEA IN CRAWFORD
August 16, 2005
Cindy Sheehan, the anti-war protester who lost a son in Iraq, has a very bad tax idea (Via The Drudge Report):
Sheehan, who is asking for a second meeting with President Bush, says defiantly: "My son was killed in 2004. I am not paying my taxes for 2004. You killed my son, George Bush, and I don't owe you a penny...you give my son back and I'll pay my taxes. Come after me (for back taxes) and we'll put this war on trial."
In the normal process of such cases, the Tax Court would be unlikely to hear her case before 2007. By then, her campout near the Bush ranch in Crawford, Texas will be yesterday's news. The Tax Court procedures aren't likely to morph into some sort of Nuremberg Trial; the judges there tend to focus on tax liability, rather than allegations of war crimes. As the tax law has no gold-star mother exception, Ms. Sheehan can expect to hear that she does, in fact, owe some pennies.
(Via Megan McCardle, as substitute for Instapundit).
UPDATE: Reader Dave Gross writes:
I think you dismiss Cindy Sheehan's tax refusal too quickly. She isn't like the various "constitutionalist" tax protesters who don't pay their taxes because of a deluded legal theory they're trying to convince other people is true. She knows that it is against the law for her to stop paying taxes but intends to do it anyway as a form of civil disobedience.
Her view of the war in Iraq may not be yours, and her choice of tactics may not be as you would recommend, but as a technique it has good credentials.
America's original civil disobedient, Henry David Thoreau, was jailed for tax resistance. And none other than Gandhi endorsed tax resistance ("Withholding payment of taxes is one of the quickest methods of overthrowing a government"):
"He or she who supports a State organized in the military way whether directly or indirectly participates in the sin. Each man old or young takes part in the sin by contributing to the maintenance of the State by paying taxes."
I suspect that you're right that Sheehan will not have the opportunity to raise Nuremberg-style defenses in tax court, but that may not be what she means when she says she'll put the war on trial. She seems to have a knack for getting the press and the people to talk about the war and its human costs by means of some well-placed performance art. Being pursued by the IRS might be another good opportunity ("I gave them my son, haven't I given them enough?").
Mr. Gross has a site devoted to pacifist tax resistance, http://www.sniggle.net/Experiment/.
He is certainly right about the distinguished pedigree of civil disobedience, but I don't see it working here. The administration has some P.R. savvy of it's own, and I would be surprised to see any aggressive IRS action before December 2008, by which time other events will have taken center stage. But Ms. Sheehan will still have a tax mess to clean up, and whatever you think of her politics, she really doesn't need any more problems.
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LARKEN DOESN'T COME OUT SMELLING LIKE A ROSE
August 16, 2005
Tax charlatan Larken Rose, a longtime proponent of the ridiculous "Section 861" argument that U.S. income isn't subject to income tax, will now face the consequences of following his own advice. A jury found him guilty August 12 of five counts of failure to file tax returns.
Mr. Rose, a "medical transcriptionist," faces a year in prison for each count.
Mr. Rose had testified on behalf of Richard Simkanin, whose seven-year tax crime prison sentence was affirmed on appeal recently.
Link: New York Times coverage (free registration required)
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RAPPER FACES TAX CHARGES
August 16, 2005
It doesn't figure that rappers would be particularly conscientious taxpayers:
Louisiana authorities issued a statement that the rapper Mystikal could face more jail time for failing to file taxes for two consecutive years. David Dugas, the U.S. Attorney of Baton Rouge, and Michael Nelson, a Special Agent in Charge of the New Orleans IRS field office reported that Mystikal, born name Michael Tyler, could face up to one year prison for each of the two years that have gone unpaid.
Jail time may actually be a good career move in Mystikal's business, but I wonder if tax charges carry the same cachet among hip-hop fans as, say, assault, murder or drug charges?
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WHIRLPOOL BID FOR MAYTAG BOOSTED TO $21
August 12, 2005
Whirlpool has increased its offer for Maytag to $21 per share. Other than the price change, the increased bid appears to be the same package we discussed earlier this week.
An analysis of the reverse merger structure used in Whirlpool's bid, prepared by Robert Willens for Tax Analysts, is available for public viewing today courtesy of the TaxProf Blog.
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TELECOM MILLIONAIRE ANDERSON STIFFING HIS LAWYERS?
August 12, 2005
A published report says the man charged with the largest individual tax evasion in U.S. history has stopped paying his lawyers:
Lawyers for Walter Anderson filed a motion in U.S. District Court in Washington to withdraw from the case because of their client's "inability to pay his attorney fees."
"While counsel understands that Mr. Anderson has made efforts to obtain the funds ... his inability to do so, regrettably, has resulted in a deterioration of the attorney-client relationship."
Yes, that will do that. No money, no honey, as they say.
Mr. Anderson, who is accused of stashing over $450 million offshore to avoid taxes, may request a court-appointed attorney. The prosecutors aren't having it:
"The government does not believe the defendant to be indigent," the U.S. Attorney's Office wrote, adding that Anderson has repeatedly offered to pay a substantial bond in exchange for his release.
Well sure, but that's different. Lawyers might get you off, but if you pay bond and flee somewhere with no extradition, you avoid jail for sure.
Prior coverage: NO BOND FOR WALT.
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BANKER PLEADS GUILTY IN SHELTER CASE
August 12, 2005
A former banker for the German bank BHV pleaded guilty yeasterday to tax charges for his role in promoting a KPMG-related tax shelter. Domienick Degiorgio was involved in selling the "BLIPS" tax shelter, which the IRS declared abusive in 2000 (Notice 2000-44).
The New York Times reported yesterday that KPMG is likely to avoid indictment for its role in promoting tax shelters. "Fragile" negotiations are leading towards an agreement that will require KPMG to pay a large fine and establish an independent monitor to keep an eye on the firm, according to the report.
While KPMG struggles to avoid indictment, two plaintiffs firms are battling in federal court over who gets to be the lead firm in a class action against KPMG. While we don't have particular concern for KPMG, watching class-action law firms at battle is sort of like watching the Yankees play the Mets: it's too bad only one team can lose.
LINK: Slide show explaining the BLIPS shelter.
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BREAK OUT THE CARDS, RUSS IS BACK
August 11, 2005
Russ Fox is back from vacation and Taxable Talk is back in business with a discussion of the tax rules of poker. For those so inclined, Russ lays out the IRS house rules.
Related: THE HOUSE ALWAYS WINS
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HOWARD HUGHES MEMORIES
August 11, 2005
Joel Shoenmeyer takes us back to our youth at Death and Taxes with a discussion of the Howard Hughes probate battle. Assetes in the billions and no will - but lots of keepsakes and nice shoes. Per Mr. Shoenmeyer:
Mr. Hughes died in 1976, and it appeared at the time that he had died intestate (i.e. without a valid Will). However, soon after Mr. Hughes' death, a handwritten Will turned up at the headquarters of The Church of Jesus Christ of Latter-day Saints. That Will was supposedly signed by Mr. Hughes and left 1/16th of his probate estate ($156 million) to a man named Melvin Dummar. For his part, Mr. Dummar claimed that one night he had found Mr. Hughes on a deserted Nevada road, and had then driven Mr. Hughes back to his home in Las Vegas. Mr. Hughes' heirs were (unsurprisingly) not amused, and a court battle ended with the Will being declared a forgery (and therefore invalid); as a result, Mr. Hughes' entire probate estate passed via intestacy to his cousins.
Which no doubt pleased the cousins.
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TIMELY-MAILED, TIMELY-FILED? PROVE IT!
August 11, 2005
The TaxProf today makes available Robert Wearing's essay for Tax Analysts of the recent Grossman Tax Court case - a tale of a lawyer's travails in proving a Tax Court petition was timely filed - and the lessons to be drawn from it.
We addressed Grossman here.
We've said it before, but it bears repeating that the TaxProf perfoms a tremendous service by making available to all some of the excellent Tax Analysts work that is otherwise only available to Tax Analysts subscribers.
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SPEAKING IN TONGUES
August 11, 2005
The BenefitsBlog breaks into the Song of the Benefits Specialist today, speaking in employee benefit acronyms:
However, after practicing for awhile in the area, one does come to accept and use the most common acronyms that prevail in the industry, to the point that we sometime forget what the acronym actually stands for. Anyway, here is a list and I am sure there are more, so email me ones that come to mind, and I will add them:
ERISA, IRC, DB, DC, CODA, IRAs, SEPs, SIMPLEs, SERPs, NQDC, ADEA, NESTEG, ERTA, TEFRA/DEFRA/REA, GUST, USERRA, SBJPA, TRA, RRA, CRA, UCA, OBRA, GATT, EGTRRA, JGGTRA, WFTRA, SOX, HSAs, HRAs, FSAs, HIPAA, COBRA, HMOs, DOL, EBSA, IRS, PBGC, HHS, CMS, EEOC, GAO, FASB, EPTA, TE/GE, ISOs, AMT, COLIs, DROPs, FLSA, FMLA, FICA, VEBAs, ESOPs, TRASOPs, PAYSOPs, KSOPs, SRI, ETI, LRMs, EPCRS, SCP, VCP, CAP, PT, UBTI, SPD, SMM, MEWA, QDRO, ACP/ADP, HCEs, non-HCEs or NHCEs, QNECs, J & S, . . .
At which point men in white coats appeared...
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HAPPY BIRTHDAY
August 10, 2005
Herbert Hoover was born 131 years ago today in West Branch, Iowa. He probably was the last president we will see with a mining engineering background.
Alas, his tax returns appear to be lost to history.
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MAYTAG SHAREHOLDERS - WHAT WILL YOU PAY IN TAXES?
August 10, 2005
Whirlpool has increased its offer for Maytag to $20 per share - half to be paid in cash, half in Whirlpool stock. (Update - the bid has since been raised to $21, also half in cash and half in stock; the numbers below now reflect the $21 price).
The prospect of payment in stock gets tax people excited because that may make a deal partially tax-free. Alas, not so here:
We are offering to acquire all of Maytag's outstanding shares by means of a merger that would provide Maytag shareholders $20.00 of total consideration per Maytag share in a taxable transaction.
The transaction is a "reverse subsidiary merger." Whirlpool will set up a transitory subsidiary that will merge into Maytag. In the merger, Maytag shares will convert automatically into (roughly) $10 cash and $10 in Whirlpool stock (the exact amount of consideration is subject to adjustment).
The tax law allows mergers to be "tax-free" reorganizations under some circumstances. This isn't one of them.
WHY THIS WOULD BE TAXABLE
While a "reverse subsidiary merger" can qualify as tax-free, that only would work if Whirlpool got "control" (meaning here, 80%) of Maytag for stock. As only 50% of the deal is Whirlpool stock, they fall short.
WHY IT MATTERS LESS THAN YOU MIGHT THINK
In a "tax-free" corporate reorganization, any cash received in the deal is treated as taxable gain starting with the first dollar, until all gain is recognized. If the Whirlpool offer did qualify has a reorganization, it would only benefit Maytag shareholders whose basis is less than $10 (i.e., 50% of the $20 offer price) because all of the cash they would receive would be taxable. Here's how it would work for two hypothetical owners - one who paid $8 for a share of Maytag, and one who paid $13:
Owner 1 Owner 2 Purchase price, Maytag share (basis) $8.00 $13.00 Offer price 21.00 21.00 Gain 'realized' (cash + stock - basis) (A) 13.00 8.00 Cash portion of offer (B) 10.50 10.50 Taxable gain (lesser of B or A) $10.50 $8.00 Basis of new Whirlpool stock received $8.00 $10.50
WHIRLPOOL DEAL WOULD ALL BE TAXABLE AT ONCE
There is no tax-free feature in the actual Whirlpool offer. Should the Whirlpool proposal be accepted, Maytag shareholders would pay tax as if they had sold their shares for $20 cash. The shares of Whirlpool stock received would be taxed as if they were cash; there is no "like-kind exchange" provision for corporate stock. In real life, the fictional shareholders in the above example would be taxed like this:
Owner 1 Owner 2 Purchase price, Maytag share (basis) $8.00 $13.00 Offer price 21.00 21.00 Gain 'realized' (cash + stock - basis) 13.00 8.00 Cash portion of offer 10.50 10.50 Taxable gain (same as gain realized) $13.00 $8.00 Basis of new Whirlpool stock received $10.50 $10.50
WHAT TAX RATES WOULD APPLY?
If you have held your Maytag shares for over one year, and you have a gain, the gain will be long-term capital gain. The federal tax on this will be no higher than 15%, whether you are in regular tax or AMT. Taxpayers in the 10% or 15% brackets will pay no more than 5% federal tax.
If you have held your shares for less than a year when the deal closes, you will have short-term capital gain taxable at ordinary income rates.
Iowa will tax any gain on the deal at the same rates as ordinary income.
WILL THERE BE ANY AMT EFFECT?
Taxpayers in states with income taxes who also have a big long-term capital gain are likely to face alternative minimum tax. While the capital gain rate is the same for regular tax and AMT, there is no deduction for state taxes for AMT. Taxpayers have to compute both regular tax and AMT and pay the higher tax. When two taxes are computed at the same rate, the one with fewer deductions will probably be higher.
WOULD THE OTHER DEAL BE ANY BETTER, TAX-WISE?
The Ripplewood offer that started the whole Maytag bidding war was a $14 per share cash-merger. This would be treated as a sale of Maytag shares for $14 each. It would be slightly more user-friendly in one sense - all amounts needed to pay taxes on any gain would already be cash. In the Whirlpool deal, Maytag shareholders face the minor inconvenience of selling Whirlpool shares to become fully liquid. The additional $6 for share value of the Whirlpool deal is more than covers this inconvenience.
Strictly from a tax standpoint, there is no advantage to either deal.
CAUTION: THIS ISN'T A DONE DEAL!
This is all based on documents for a transaction that isn't yet settled, and may well settle on different terms. See your own tax advisor for your Maytag deal tax planning.
Links:
Whirlpool Offer for Maytag filed with SEC
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TOP SENATE TAX STAFFERS BLAST AMT
August 10, 2005
The top two Republican staffers on the Senate Finance Committee attack the alternative minimum tax while defending Senator Grassley's AMT record in a Tax Notes article made available by the TaxProf today.
DEFENDING GRASSLEY
The staffers are responding to criticism that the AMT has been used cynically to enable Congress to enact tax cuts that are really illusory because they don't work for AMT. Their response to the criticism, largely consisting of saying Senate Finance Committee Chairman Grassley has long opposed the AMT, is unconvincing. They cite a 1999 bill to repeal the AMT vetoed by President Clinton; that bill "was never serious legislation," as tax prof Sheldon Pollack recounts, and should not be considered a serious attack on AMT.
Tax revenue projections are critical parts of all tax legislation. Whether used cynically or not, they are deeply woven into the legislative process. The AMT greatly reduces the cost of many different tax breaks; the just-enacted credits for residential energy savings are a classic example. The AMT probably made the president Bush's 2001 tax cuts possible by reducing their size.
Senator Grassley has been on the Finance Committee since the current version of the AMT came to life in 1986. While he can't be held solely responsible for the state of the tax law, he has been the chief Senate taxwriter for most of the last three presidential terms. No legislator has had more ability to affect the tax law over that time then Senator Grassley, so attempts to deflect responsibility from him can't entirely succeed.
THE AMT PROBLEM
The staffers are on more solid ground when they describe the practical effect of AMT:
But there are other very compelling reasons to repeal
the AMT. Not only has the AMT failed in its original
objective, but the AMT has lost its policy purpose.
Currently, the AMT derives its revenue base from large
families and those who pay high state income taxes.
According to data provided by Everson to Sens. Grassley
and Baucus in 2004, the top 15 states affected by the AMT (in order of impact) are: New York, New Jersey, California, Connecticut, Maryland, Massachusetts, Rhode Island, Oregon, Ohio, Maine, Wisconsin, Illinois, Minnesota, New Hampshire, and Vermont. From a horizontal equity perspective, Kevin Hassett made the following remark in his May testimony: "While it was originally motivated as a tax to ensure social justice, it likely does the opposite. It taxes individuals across states in a hodgepodge way, hitting similar individuals quite differently."
This is exactly right. A two-earner professional couple with children is pretty much doomed to AMT in Iowa, for example, but will be AMT-free in Nevada.
They defend their stopgap attempts to prevent AMT from affecting even more taxpayers -- Congress has increased the individual AMT exemption several times -- and they correctly note that failure to index AMT exemptions have made the AMT problem worse.
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ADVERTISING WORKS! BUT NOT ALWAYS ACCORDING TO PLAN
August 09, 2005
Richard Simkanin achieved a measure of fame by participating in a full-page ad in USA Today boasting that he no longer paid taxes or withheld taxes for his employees. He claimed his study of the tax law taught him that the tax laws are invalid, at least with respect to himself.
The Fifth Circuit Court of Appeals graded his efforts last week. It looks like an "F."
The court upheld Mr. Simkanen's 84-month prison sentence. The three-judge appeals panel rejected a host of challenges to the jury instructions, the conduct of the trial, and the length of the sentence. One objection was that the trial court required the defense to approach the bench for permission before introducing documents:
Simkanin also argues that, in an in limine ruling, the district court unfairly restrained defense counsel from introducing any documentary evidence without first approaching the bench. The government responds that the district court's ruling was justified by the nature of the documents on the defense exhibit list, which included the Communist Manifesto, multiple versions of the Bible, and various publications translating Greek and Hebrew. We agree with the government that the district court did not abuse its discretion given this exhibit list.
Maybe Mr. Simkanin didn't understand that when someone says "the tax law is Greek to me," it's really just a figure of speech.
Prior Coverage:
THE PERILS OF STUDYING TOO HARD
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ENERGY EFFICIENT APPLIANCE CREDITS - GREEN PIE IN THE SKY?
August 09, 2005
The President yesterday signed H.R. 6, the long-awaited energy bill. The bill, loaded down with corporate tax incentives and subsidies for ethanol, also has some consumer-specific provisions. These are touted in a recent press release from Senator Grassley:
* Up to a $500 tax credit for money they spend on
energy improvements in their homes. Homeowners
could qualify for as much as a $300 credit for installing
a highly efficient central air conditioner, heat pump or
water heater. Installing energy-saving windows could
net as much as a $200 credit. Those who want to take
advantage of these breaks must do so between Jan. 1,
2006 and Dec. 31, 2007. (An income tax credit directly
reduces the amount of income tax paid by offsetting
other income tax liabilities.)
* A 30 percent tax credit for the purchase of solar,
photovoltaic (or solar electric) and fuel cell properties
for use in residences.
* More access and lower prices for energy efficient
washers, dryers and refrigerators. New tax breaks for
the manufacturers of these appliances are expected to
increase the items' availability and drive down their
costs for consumers.
* Expanded tax credits for those who buy alternative
fuel vehicles, including an expansion of the range of
hybrid and clean vehicles that qualify for the alternative
motor vehicle tax credit. By purchasing such a car after
Jan. 1, 2006, consumers can get a tax credit anywhere
from $500 to $3,400, depending on the fuel efficiency
of the car.
Unfortunately, these credits are a mirage for many Iowans. These credits only reduce regular income tax - but they don't reduce alternative minimum tax. A provision to make the credits apply for AMT died in the house-senate conference on the bill.
As we've discussed, AMT applies to more taxpayers each year, especially in high-tax states like Iowa. AMT is computed at lower top rates, but with fewer deductions; when AMT higher than regular tax, you pay the AMT. Because AMT has no deduction for state and local taxes, many Iowans (and Californians, New Yorkers, Minnesotans, Wisonsinners, etc) pay AMT.
There is some cold consolation - if AMT limits your energy credits, they carry forward to future years. But that doesn't help much if you are in AMT then, too.
The moral? If you are considering an energy-efficient appliance, don't bank on the tax credits unless you know you won't be in AMT. That would probably mean you live in Texas, Tennessee, Florida, New Hampshire, South Dakota, Nevada or Washington, which lack a state income tax.
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IT WOULD FEEL BETTER IF THEY DIDN'T NEED TO ASK THIS QUESTION
August 08, 2005
Description of a sales tax policy letter posted on the Department of Revenue website this morning:
Policy letter: Floor cleaning equipment is not equipment that is directly used in processing or food processing, and therefore not eligible for the machinery and equipment exemption.
If it were, I'd prefer not to eat there.
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NANCY CLARK'S FAME PEAKS
August 08, 2005
The blog world had a great time over the weekend with Nancy Clark's anti-blog tirade. Thanks to the blogs, that piece surely had more readers than anything else she's ever done for The Newspaper (central) Iowa Depends Upon.
But remember,we were there first!
It's a good thing the Register has reporters who have learned to live in a world with bloggers without bitterness.
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SIMPLICITY IT AIN'T
August 08, 2005
Professor Maule mercilessly pummels the assertion that the tax code is somehow not complicated.
Any more questions?
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I'M AN EXPERT WITNESS ON BOTH SIDES, AND I THINK THEY'RE BOTH RIGHT
August 08, 2005
Attorney Kreig Mitchell ponders the mental gymnastics sometimes required of estate planning attorneys over at Everything Tax Law. A sample:
The tax attorney could argue either creditor protection or tax savings or both or neither. The creditor protection argument would subject the business owner and the attorney to civil and possibly criminal liability. On the other hand the tax savings argument could destroy the business purpose argument and nullify the tax savings. This second option would probably result in an increased tax liability for the business owner and it would subject the attorney to a malpractice claim by the client. Making both arguments would result in the business owner and tax attorney facing the problems arising from each and not arguing either would have an equally unacceptable result.
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KPMG TAX SHELTER CLASS ACTION FILED
August 08, 2005
The Wall Street Journal reports today that former KPMG tax-shelter client has filed a lawsuit seeking class action status against KPMG (link only works for WSJ online subscribers).
The complaint, filed last week in a federal District Court in New York, centers on a shelter that KPMG sold under the name S-Corporation Charitable Contribution Strategy, or SC2. The Internal Revenue Service in April 2004 declared SC2 to be an abusive tax-avoidance scheme. The shelter was one of four KPMG tax shelters that were criticized by the Senate Permanent Subcommittee on Investigations in public hearings in November 2003.
From 2000 to 2001, KPMG sold SC2 to 58 closely held corporations, according to a report by the subcommittee, generating $28 million in fees for the accounting firm. The shelter was one of the firm's 10 best sellers at the time, the report said.
The SC2 shelter was designed to allocate taxable income to tax-exempt entities that would later be harvested by the tax-shelter investor tax-free - and with a charitable deduction, to boot. It's described in more detail here.
As unwelcome as this suit is to KPMG, they have more serious problems. Perhaps they are starting to regret their big push into tax shelters during the 1990s.
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LOTS OF CARNIVALS THIS WEEK
August 08, 2005
The one state fair to rule them all starts this week, but you can go to a carnival every week!
The current Carnival of the Capitalists is up at "View From a Height." This Carnival is a weekly collection of Economics and Business weblog postings. The Carnival of Personal Finance for this week is up at "Consumerism Commentary." No funnel cakes, but lots of good stuff at these carnivals.
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SCHOLARS SERIOUSLY SERVE SENATORIAL SILLINESS
August 05, 2005
When we discussed S 1507, a proposal to tax internet p0rn purveyors, we thought the proposal was merely silly.
It is, actually, but it is also apparently a rich vein for scholarly discussion. Eugene Volokh discusses the First Amendment implications:
The law seems probably, though not certainly unconstitutional. Content-based taxes on the sale of First-Amendment-protected materials (and recall that the law targets not just unprotected and illegal obscenity, but also constitutionally protected pornography) are generally forbidden, see Arkansas Writers' Project v. Ragland (1987).
So it's not only silly, it's unconstitutional. Way to go, senators.
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HEY, NANCY CLARK'S FAMOUS!
August 05, 2005
Nancy Clark's risible rant against the evil blogs has attracted the notice of famous blogger Ed Morrissey, proprietor of Captain's Quarters blog. This blog is famous because it is the official blog of Captain's Quarters Motel and Conference Center, Eastham, Massachussetts.
You'll recall that Ms. Clark demonstrated her superiority over bloggers because she gets to interview Iowa sports celebrities. Mr. Morrissey is unimpressed:
That's why the blogosphere exists, Nancy -- to fact-check lazy columnists who don't check their work. Glad to meet you. Oh, and by the way, I interviewed Lynn Swann and J. C. Watts last year. I interviewed Bernard Goldberg and Rep. Mark Kennedy. You didn't.
Mr. Morrissey's Nancy-flogging is only marred by what appears to be a cheap shot at Des Moines:
First, one has to understand how frustrating it must feel to write a sports column in Des Moines. Iowa's capitol has a population "approaching 200,000", making it more equivalent to a suburb in most places, and hardly attracting much attention from sports teams.
That's a surprising statement from Mr. Morrissey, as Eastham itself has a population of only about 5,500.
UPDATE: We are informed that Mr. Morrissey lives in Minnesota, a remote Canadian province, and is unaffiliated with the motel and conference center in Eastham. We regret the error.
Prior Coverage:
NANCY CLARK TAKES ON THE BLOGS
Other Coverage at State 29: Nancy Clark From The Des Moines Register Hates Bloggers and Nancy Clark Blogger Bashing Update.
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OPEN-AIR SEATING AT BABES
August 05, 2005
The wreckers clear the rubble of Babe's Restaurant. RIP.
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NO DEDUCTION FOR SUDDEN CATASTROPHE YEARS IN THE MAKING
August 05, 2005
It was a graduation party to remember.
Francis Leonard and Patricia Leonard were celebrating their son's graduation in the spring of 2000. The party was at their 95 year-old home in the Chicago suburb of Midlothian. Five years earlier, they had updated their house with a nice new deck out back. The grill was probably warm, bratwurst were sizzling, and friends and relatives were having a great time in the fresh air. Sure, the deck cost $7,000, but it was great for parties like this.
Until it collapsed under the guests.
STRUCTURAL FAILURE, TAX FAILURE
It turned out that hidden extensive wood rot led to the collapse. The wood rot disqualified the Leonards for reimbursement for the damages from their homeowners insurance policy. The Leonards then turned to the IRS, claiming a casualty loss on their tax return.
Internal Revenue Code Section 165 allows a deduction for:
losses of property not connected with a trade or business or a transaction entered into for profit, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft.
Only the portion exceeding 10% of adjusted gross income is deductible.
Unfortunately for the Leonards, there was a problem. As the Tax Court explained:
"Other casualty" is defined as a loss proximately caused by a sudden, unexpected, or unusual event, excluding the progressive deterioration of property through a steadily operating cause or by normal depreciation.
The wood rot wasn't "sudden," said Special Trial Judge Carluzzo, but instead was a "steadliy operating cause." Bottom line: no deduction.
The Moral? Slow disasters aren't deductible. And maybe consider a concrete patio next time.
Cite: Leonard v. Commissioner, T.C. Summary Opinion 2005-114.
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THIS COULD GET CONFUSING
August 05, 2005
From SFGate.com, July 29:
Renowned attorney J. Tony Serra, convicted of his third federal tax violation in 21 years, was sentenced to 10 months in federal prison today by a magistrate who praised his devotion to justice but said no one is above the law.
From TheEmpireJournal.com, August 4:
The former bureau chief for the New York City Department of Corrections and campaign worker for Gov. George Pataki has been sentenced to only eight months in jail after admitting that he had filed false tax returns by not reporting money he had received from the state Republican committee and Friends of Pataki.
It was alleged Anthony Serra, 44 of Rustic Road, Mahopac, had failed to report approximately $200,000 that he had received as a political consultant to political organizations in 1998, 2001 and 2002 while he was also employed with the Department of Corrections.
What are the odds of two Tony Serras given light sentences within a week of one another on federal tax charges? Mail call may be interesting where they are headed.
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YOU STOP REQUIRING EXCUSES, WE STOP GIVING THEM
August 05, 2005
Taxpayers with extended 1040s have until August 15 to file the returns or get a second extension. While you have to give the IRS a reason for needing a second extension for an additional two months, they are rarely denied.
Next year we will be able to skip the August second extension. Starting next year, Form 4848 will provide a six-month extension, instead of the current four months. There will be no second extension.
Good move; it's about time.
Hat tip: TaxGuru.net.
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WILL LAWYERS, BANKERS JOIN KPMG PARTNERS IN THE DOCK?
August 04, 2005
The New York Times reports that Attorneys with Sidley Austin Brown and Wood and bankers at Deutsche Bank may also face charges in connection with the KPMG tax shelter investigation:
But former KPMG partners are not the only potential individual defendants, the people briefed on the case said. While it is unclear whom else the government might be investigating, several financial and law firms worked with KPMG on the tax shelters; government documents show that the group included Deutsche Bank and a law firm formerly called Brown & Wood, now Sidley Austin Brown & Wood.
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RADIO DAY
August 04, 2005
I just got back from the WOI studios at the Pappajohn Center downtown where they did "Talk of Iowa" live, about blogging. I was in the studio with Kathleen Richardson, formerly of the Register and now a professor at Drake. Tung Yin (Yin Blog) and Randy Brubaker (D.M. Register) were disembodied voices in the headphones.
That was fun. Prof. Yin has by far the best radio voice, and the best brain. Prof. Richardson was informed and thoughtful. Mr. Brubaker was a lot more clued in to the blog world than some of his colleagues. The host had good questions, but he was hampered by a shortage of decent callers, especially towards the end.
I was disappointed with the lack of give and take with callers, but my radio voice probably anesthetized them, rendering them unable to call or speak.
UPDATE: They will rebroadcast the show on AM 640 at 10:00 pm. Also Prof. Yin has posted his post-mortem on the show.
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NANCY CLARK TAKES ON THE BLOGS
August 04, 2005
Nancy Clark is a sportswriter for The Des Moines Register. She is also apparently a bit touchy about this "blog" stuff going around. She writes today about the superiority of paid journalists over bloggers, and unwittingly makes herself an incredibly tempting target. So here goes...
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TAX FOUNDATION FROWNS ON NAUGHTY PIXEL TAXES
August 04, 2005
The Tax Foundation Blog weighs in on the proposed 25% tax on internet pornography:
Lastly, this is yet another example of social policy being implemented through the tax code, which is generally bad tax policy. Social policy is best left out of the tax code as it is less transparent to taxpayers than spending programs and leads to more tax complexity and less neutrality.
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EXECUTORS: YOUR LAWYER'S NOT YOUR BANKER
August 04, 2005
Attorney Joel Schoenmeyer relates a cautionary tale for estate executors over at Death and Taxes.
Anthony Capetta, an attorney (and undertaker!), conviced the executors of an estate to give him custody of three checks to the estate totaling $700,000. The money disappeared and the Mr. Capetta died.
Mr. Schoenmeyer draws some lessons from the case:
That being said, I really have to ask myself why the co-executors would allow an attorney to hold that kind of money in checks in a safe. As a probate attorney, I have no reason to handle estate assets unless (a) I'm acting as executor or administrator or (b) I'm conveying them almost immediately to the executor or administrator (like if I pick up a check in connection with the sale of real estate).
Furthermore, didn't the co-executors know that they have a fiduciary duty to invest estate assets? I'm pretty sure that, even if Mr. Capetta wasn't a crook, his safe wasn't going to be paying any interest on the $700,000. I realize that, according to one of the co-executors, Mr. Capetta told the co-executors that the checks needed to be placed in the safe because "they could not be cashed until after probate." That's obviously a lie. However, at some point executors and administrators need to educate themselves, use a little common sense, and take responsibility for their actions (and inaction).
Hie thee to Death and Taxes and read the whole thing.
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REPORT: KPMG PARTNER INDICTMENTS IMMINENT
August 04, 2005
Tax Analysts reports on their free site this morning that indictments of KPMG partners are expected within days. The report also says that the Justice Department may seek life sentences for the partners on charges of conspiracy to evade taxes.
POUR ENCOURAGER LES AUTRES
Life in prison? That sort of takes the fun out of the tax shelter business. Presumably that is to encourage the rest of us in the tax world to more circumspect behavior.
Last night Bloomberg.com reported that the Bush Administration does not want to indict KPMG itself.
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REPORT SAYS ADMINISTRATION DOESN'T WANT TO INDICT KPMG
August 03, 2005
Bloomberg.com reports tonight:
Bush Administration Seeks Settlement in KPMG Case, People Say
The Bush administration has instructed federal prosecutors to seek a settlement with KPMG LLP over its sale of tax shelters to avoid criminal charges that could drive the accounting firm out of business, people familiar with the case said.The Justice Department in Washington directed David Kelley, the U.S. attorney for the Southern District of New York, to negotiate a deal, said the people, who requested anonymity. One issue is the size of the fine the Big Four firm must pay, with prosecutors demanding as much as $500 million, the people said.
Follow the link for more.
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DISABLE YOUR RADIO
August 03, 2005
I am scheduled to be a guest on Talk of Iowa on Iowa Public Radio (WOI Radio, AM 640 in central Iowa, and also available on the web) Thursday (tomorrow) at 9:00 a.m. I am told the show "will focus more on blogging in general and blogging as journalism." Whatever that means. It's a call-in show, so this is your chance to ask about the glamorous world of tax blogging.
UPDATE! Professor Yin will be on!!!! If you listen in, he'll be the smart one.
Also, per an email from WOI:
Kathleen Richardson of the Journalism Department at Drake will be on for the first few minutes, explaining what a blog is and some of the issues related to blogging and journalism.
Randy Brubaker, Associate Managing Editor at the Des Moines Register
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TOO. WEIRD.
August 03, 2005
Charlie Brown and Lucy are kidnapped and forced to tour the Des Moines Register and Tribune Building in an odd little graphic novel from 1957.
Hat tip to Gongol.com
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GOOD NEWS FOR KPMG: REPORT SAYS 20 PARTNERS MAY BE INDICTED
August 03, 2005
Times are tough for an accounting firm when a report that 20 of your former partners may face federal criminal charges is actually good news. Times are tough for KPMG.
Citing "people familiar with the case," The Washington Post says as many as 20 partners, including "members of its senior managment team," have been notified that they may be indicted in connection with KPMG tax shelter promotions.
How is this good news for KPMG? If prosecutors are targeting a herd of ex-partners, it may mean they won't indict the firm itself. The Andersen firm collapsed after it was convicted of federal tax charges (since thrown out), and KPMG would likely share the same fate. From the Washington Post story:
Analysts say those moves could help persuade regulators to forgo an indictment and instead impose lesser sanctions, such as requiring the firm to pay millions of dollars in financial penalties and admitting facts that could implicate former employees. Negotiations between prosecutors and the firm continue and a resolution could be weeks away...
The final agreement could be similar to Merrill Lynch & Co.'s pact with the Justice Department over its dealings with Enron, in which the firm agreed to increased monitoring and other business changes.
From a public policy standpoint, it makes no sense to ruin one of the four remaining auditors of large public companies; if KPMG is willing to throw partners to the wolves, the firm itself is likely to avoid criminal charges.
Prior coverage here.
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WAYNE NEWTON UPDATE
August 03, 2005
The Las Vegas Review Journal has more on the developing Wayne Newton Tax Story:
Among its claims, the IRS charges Newton failed to report $200,000 he received for the sale of an Arabian horse in 2000.
Newton also should not have claimed a $51,950 loss the same year on the sale of two antique cars, the agency said.
The IRS also claims the entertainer and his wife, Katherine, did not report dividends received from Newton's company, Erin Miel Inc., in 1999 and 2000. The agency said the dividends totaled $396,113 in 1999 and $536,532 in 2000.
Mr. Newton's attorney is defiant:
Lavar Taylor, one of the entertainer's tax lawyers, disputed that Newton owes the government. If anything, Taylor said Monday, "We believe the IRS owes him money."
If the IRS takes his money, he'll always have a place to stay; somebody will throw him a room key.
Prior Coverage:
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GOVERNOR ON FEDERAL TAX POLICY: TAX MORE, SPEND MORE
August 03, 2005
As Governor Vilsack nears the end of his term, he is moving onto a bigger stage. He is now speaking up more on national issues as part of his transformation into a national figure. Last week he addressed Tax policy:
He called for an increase in the size of the active-duty military, so more reservists are available for missions at home.
To pay for it, he thinks Congress and the president should repeal the tax cuts of the last four years, though only for people who earn more than $300,000 per year.
It would be too much to hope that they might try to spend less before raising taxes. Perhaps they could forego the federal $5.9 million snowmobile trail in Vermont? Or the $231 million Don Young's Way Bridge in Anchorage? Or maybe the $223 million bridge to Ketchickan, Alaska? No, these are vital national priorities; better raise taxes instead.
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THEY KNOW IT WHEN THEY SEE IT
August 03, 2005
Back before the internet, before they digitized naughty pictures, a kid in our neighborhood found a bunch of dirty magazines in the woods by the big oak. The news spread quickly, and within a week every adolescent boy in walking distance had ventured to the big oak to see the racy mildewed photos.
Politicians get excited about different things than most folks, but illicit news spreads in their circles like it did in our neighborhood. A couple of years ago some Iowa legislators found a new tax idea in the woods of Capitol Hill. The word was whispered around to other politicians, and now the news has reached Congress itself:
Democrats Propose 25% Internet Porn Tax
Nine Democratic Senators (Thomas Carper (DE), Mark Pryor (AR), Mary Landrieu (LA), Joseph Lieberman (CT), Blanche Lincoln (AR), Ken Salazar (CO), Debbie Stabenow (MI), Evan Bayh (IN) & Kent Conrad (ND)) have proposed a 25% tax on Internet porn.
The sponsors say the bill would raise funds "to help police prosecute online child pornographers."
Great idea. It should be added to a bill imposing a tax on Nigerian e-mail scammers to protect folks who would try to help the heirs of Sanni Abacha claim their rightful inheritance.
Of course, the new tax raises some practical problems, not the least of which is whether there will be an exemption for downloads of naughty pictures to state or county computers.
Do these Senators have what it takes to make it happen?
Clockwise from left: Sponsors of S.1507 Blanche Lincoln, Mary Landrieu, Kent Conrad and Debbie Stabenow.
UPDATE: Now they're in trouble. Prof. Maule is on the case.
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SIX-MONTH '16(b)' FORFEITURE PERIOD STARTS WITH GRANT OF STOCK OPTION
August 02, 2005
When you exercise a "non-statutory" employer stock option (not an "incentive stock option"), you pick up as W-2 wages the amount by which the stock's value exceeds what you pay to excercise the option. This excess is called the "bargain element."
An SEC rule - the "16(b) rule" - formerly required "insiders" to sit on stock for six months subsequent to an option exercise. Tax regulations said that tax on the bargain element was deferred until the six-month 16(b) period expired.
The SEC has since changed the 16(b) rule to start the six-month period when the option is acquired, rather at exercise.
The IRS issued a Revenue Ruling today (Rev. Rul. 2005-48) to conform with the newer SEC rules. Under the new ruling, the 16(b) rule will only defer tax if you exercise an option within six months of the time you received it. The ruling says may even be true even if the stock is still in a "lock-up period" under an agreement with an employer.
The IRS also said it the regulations will change to reflect the new ruling. This ruling conflicts with case law in the 1st Circuit, so it may not apply there, at least until the new regulations are issued.
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A VISIT(ATION) TO DOWNTOWN YOUNKERS
August 02, 2005
If you have been waiting for the very end of the "closing sale" at the Downtown Younkers, you may have waited too long. That is, unless you are in the market for some nice display shelving or old office furniture.
Younkers will close its downtown Des Moines location this month after 106 years. We stopped by yesterday to see if we could find some deals.
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THE HOUSE ALWAYS WINS
August 01, 2005
You don't need the IRS to tell you that gambling can be an expensive hobby. You don't them to make it more expensive, either. Just ask Jimmie Clemons.
Mr. Clemons, of Flat Rock, North Carolina, patronized Harrah's Cherokee Smokey Mountain Casino in 2001. The Casino gave him W-2G forms totalling $44,833 at year-end.
Mr. Clemons dutifully attached the W-2Gs to his 1040 for 2001, but he reported no gross income from gambling, once his losses were taken into account.
While the IRS conceded that Mr. Clemons had enough losses to wipe out his income, they took issue with Mr. Clemons return. The tax law requires you to report gambling winnings in gross income; losses are deducted as itemized deductions on Form 1040 Schedule A - "below the line." In other words, the losses reduce "taxable" income, but not "gross" income.
WHY IT MATTERS
So what, you ask? Well, Mr. Clemons also had $10,244 in Social Security benefits in 2001. Up to 85% of Social Secuirty benefits are taxable if adjusted gross income (AGI) gets high enough. For single taxpayers in 2001, the benefits start to become taxable when the taxpayers "base amount" (generally AGI plus Social Security benefits) reaches $32,000.
Without including gambling winnings in gross income, Mr. Clemons base amount would be $11,907; at this level, his Social Security benefits are tas free. With the winnings, the "base amount" is $56,430, and 85% of the Social Security benefit is taxable.
The Tax Court today ruled that the IRS treatment is correct. Even though the gambling losses wipe out his winnings "below the line," the inclusion of the winnings "above the line" in AGI makes Mr. Clemons' Social Security 85% taxable. The bottom line? $1,046 in additional federal income tax.
THE MORAL? The IRS and the house always come out ahead.
Citation: Clemons v. Commissioner, T.C. Summary Opinion 2005-109
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WAYNE NEWTON CARNIVAL
August 01, 2005
Prepare for the upcoming Iowa State Fair by visiting this week's Carnival of the Capitalists at the "Local Small Business Marketing & Advertising" Blog.
The Carnival is a weekly roundup of economics and business weblog posts. My favorite is the discussion of Wayne Newton's tax troubles:
The feds say he omitted income, took improper deductions for mortgage interest, maintenance and security at his residence, and shouldn't have written off a $51,950 loss on the sale of two antique cars. In a just-filed U.S. Tax Court lawsuit with wife Kathleen, Newton, 63, said many of the disputed items were justified by a business need to maintain "an image of larger-than-life glamour, sophistication and elegance."
Larger than life sophistication and elegance. Yeah, I need to deduct some of that, too!
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WE'LL DECIDE WHAT'S RATIONAL AROUND HERE, BUDDY
August 01, 2005
It appears the Iowa Supreme Court is most influential when it is most outrageous.
In 2003 the U.S. Supreme Court reversed the Iowa Supremes rejection of a tiered tax system for casino gambling. The Iowa Court said there was no "rational basis" for taxing boats differently from land-based casinos under the Iowa constitution's "equal protection" provision The U.S. Court took the case because the Iowa Court had said Iowa's equal protection rules were the same as the federal rules; if that were true, said the U.S. court, Iowa's supremes were wrong.
That led the Iowa court to conveniently decide that Iowa's equal-protection rules aren't the same as the federal rules after all, so the distinction between floating and landlocked casinos was still irrational, even if it was adequately rational to the entire U.S. Supreme Court.
WISCONSIN FOLLOWS
The Wisconsin Supreme Court apparently was watching. They have overturned their state's legislation limiting malpractice awards using only the state's "equal protection" rules - which they say are different from the federal rules. This precludes federal court reversal.
Like the Iowa ruling, the Wisconsin ruling includes a blistering dissent:
This court is not meant to function as a "super-legislature," constantly second-guessing the policy choices made by the legislature and governor.
As in Iowa, Wisconsin legislators now know that any laws they pass are provisional unless and until the state supreme court decides they are sufficiently rational, depending on who shows up in court and how the judges feel that day.
The BenefitsBlog and Instapundit have more.
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HOLIDAY BARBECUE?
August 01, 2005
Iowa's annual sales tax holiday takes place this Friday and Saturday (August 5 and 6). As explained by the Department of Revenue:
No sales tax, including school and local option sales taxes, will be collected on sales of an article of clothing or footwear having a selling price less than $100.00.The exemption does not apply in any way to the price of an item selling for $100.00 or more.
The exemption applies to each article priced under $100.00 regardless of how many items are sold on the same invoice to a customer
The Tax Foundation blog isn't feeling festive. They make "The Case Against Sales Tax Holidays" thusly:
Is it possible that a gimmick which lowers taxes is actually poor tax policy? Economically speaking sales tax holidays are poor tax policy for two main reasons.
First, sales tax holidays are distortionary because they are non-neutral across products. This means that consumers have an incentive to buy products which fall under the sales tax holiday as opposed to goods that are not covered in the holiday.
Second, sales tax holidays are non-neutral over time, which means that they create incentives for consumers to purchase items during the sales tax holiday that they otherwise would have purchased at another time.
Additionally, sales tax holidays add to retailers' compliance costs and make the tax code less stable. Although sales tax holidays are good for certain consumers of certain products, they are poor tax policy overall.
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