Tax Update Blog: October 2005 Archives
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2006 INFLATION ADJUSTMENTS, HSA LIMITS ANNOUNCED
October 31, 2005
The IRS has issued the official 2006 figures for the many inflation adjustments required by the tax law. Rev. Proc. 2005-70 contains inflation adjustments under 37 tax law provisions, including the new gift tax annual exemption for 2006 ($12,000), the new income tax rate tables, and standard deductions and personal exemptions.
The revenue procedure also lists the maximum contribution levels for health savings accounts for 2006. For taxpayers with self-only coverage, the maximum 2006 contribution is $2,700; for family coverage, the maximum is $5,450. A Treasury press release and the BenefitsBlog have more details.
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HALLOWEEN CARNIVAL
October 31, 2005
This week's Carnival of the Capitalists is up bright and early at Triplepundit.com. The Carnival is a weekly compilation of economics and business weblog postings.
Hank Stern at Insureblog is there with a typically insightful post on the uncertainties of forecasting health costs. Don't miss it.
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LIVEBLOGGING BEGGARS NIGHT
October 30, 2005
Des Moines does Halloween a bit different. We do "beggars night" on October 30th, instead of Halloween, for starters, but we have another local custom that is, as far as I know, unique: we demand the little beggars render up jokes before we surrender the candy.
Begging hours commenced at 6:00 pm. So far the best joke is:
Why did the teacher wear sunglasses? Because she had such a bright class.
Others so far:
What do you call a deer that eats grass? A "fawn mower."
Why didn't the skeleton cross the road? He didn't have any guts.
It will only get better!
6:30: business is slow so far. Are the jack-o-lanterns too frightening?
Or perhaps the kids have heard the rumors about the scary "blogger"...
6:40 p.m. : A large group, all with jokes:
Where do cows go for fun? To the mooo-vies!What's a mummy's favorite music? Rag-time!
Why did the rooster cross the road? Because he wasn't chicken.
What school did Sherlock Holmes go to? Elementary, my dear Watson! (asked by a Sherlock Holmes - best costume so far.)
There was also a "Darth Tater" punchline by a Darth Vader, but I can't remember the setup...
6:50: What's the Dracula's favorite holiday? Fangs-giving!
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7:00:
What's a pirate's favorite fast-food restaurant? AAAAAARRGGh-by's!
How do you keep a ghost from spending too much? You take away it's charge cars?
Oh, and the skeleton-guts one, again.
7:05 It's 'arry Potter!
7:20 pm: Mr. Incredible saves the day!
7:40 pm.
What do you call a cow with no legs? Ground beef.
Unless there's a late flurry, this has to be the slowest beggars night since we moved here. This is even worse than the first one here, when it snowed. One mom says the Embassy Suites hotel has some holloween party that may be sucking in the beggars. I'm sure that she's at least partially right, about the verb part.
8:00 Begging hours are over. Where was everyone? I know they don't have soccer practices after dark on Sundays in late October... do they?
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THE FEW, THE PROUD, THE ACCOUNTANT BLOGGERS
October 29, 2005
Dan Meyer, an accounting prof at Austin Peay and proprieter of the "Tick Marks" blog, attempts to summon forth more bloggers from the shy accounting ranks:
There is tremendous opportunity for a young practitioner for a private company or a doctoral student emphasizing managerial or governmental accounting (and a sizable opportunity in financial accounting and auditing as well) to make a name for himself or herself and to make a contribution to the profession.
Amen, I say.
Conservative estimates* indicate that there are approximately 10,346 activelawyer-bloggers for each accountant-blogger. That means we have room for a few more accountants in the blogosphere.
* I made this up, so it is as reliable as the old WorldCom audited statements.
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IRS BLANKET SETTLEMENT OFFER INCLUDES NON-LISTED TRANSACTIONS
October 28, 2005
The IRS yesterday made a blanket settlement offer for a wide range of tax-shelter transactions. The offer covers 16 "listed" transactions, which are transactions that the IRS has already targeted as abusive. It also covers five additional transactions that haven't yet been "listed" by the IRS. The offer would require taxpayers to pay all taxes "saved" by the transaction, plus 1/4 to 1/2 of the penalties that would otherwise be do. Taxpayers would be allowed to deduct their transaction costs for the deals.
The offer follows prior blanket settlement offers for specific tax shelters, including the "Son of Boss" initiative. By offering relatively favorable terms, the IRS hopes to minimize litigation risks and costs.
The "non-listed" transaction offer is new. It covers five sets of transactions:
Certain Abusive Conservation Easements (see Notice 2004- 41, 2004-28 I.R.B. 31) (5%);
Certain Abusive Donations of Patents and Other Intellectual Property ( Notice 2004-7,);
Reimbursements for Employee Parking (Rev. Rul. 2004-98);
Reimbursements of employees' medical expenses (Rev. Rul. 2002-3);
and Management S Corporation/ESOP Transactions (Rev. Rul. 2002-80).
Of these, the first two are the most interesting, as the IRS acknowledges that these transactions can be done in non-abusive ways. How should taxpayers know whether they should take advantage of them? Tax Analysts reports the IRS Commissioner's thoughts (subscription only link)
The commissioner, in response to a question, said taxpayers who are not sure whether their conservation easement or intellectual property transactions are abusive should consult their tax advisers. "I think they probably know who they are," Everson said of the taxpayers. "The individuals know whether they went into a transaction primarily to benefit a charity or to get an inflated tax deduction."
My initial view is that this looks like a favorable offer, especially for things like the parking transaction and the management ESOP deals.
Link: IRS press release, with additional links to more details.
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FRED WILL BE GLAD TO HEAR THIS
October 28, 2005
From an IRS press release (IR-2005-128)
Tax Relief Granted for Wilma VictimsWASHINGTON — The Internal Revenue Service today announced relief for taxpayers affected by Hurricane Wilma. The President issued a major disaster declaration covering impacted areas of Florida, effective Oct. 23, 2005.
Taxpayers affected by the hurricane are eligible for relief. Deadlines for affected taxpayers to file returns, pay taxes and perform other time-sensitive acts have been postponed to Feb. 28, 2006, the same date granted to taxpayers affected by Hurricanes Katrina and Rita.
Twenty Florida counties have been included in the Federal Emergency Management Agency (FEMA) disaster area: Brevard, Broward, Charlotte, Collier, DeSoto, Glades, Hardee, Hendry, Highlands, Indian River, Lee, Martin, Miami-Dade, Monroe, Okeechobee, Osceola, Palm Beach, Polk, St. Lucie and Sarasota.
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HARRIET WHO?
October 27, 2005
Harriet Miers won't be the next Supreme Court justice, and thus we lose an exciting opportunity to learn more about contingent deferred swaps. The nation now eagerly awaits the next nomininee and his/her views on tax issues (and some other stuff, I suppose).
If oral arguments heard this week by the Fourth Circuit in the Black & Decker appeal are any indication, the IRS tax-shelter enforcement team has to hope it's not J. Michael Luttig. Sheryl Stratton of Tax Analysts covered the arguments (available here only to Tax Analysts subscribers). Ms. Stratton makes Judge Luttig look like an ornery git:
During the October 25 oral argument, Circuit Judge Michael Luttig barely let Richard Farber, the Justice Department attorney, utter his opening lines before demanding to know why Black & Decker doesn't prevail "on the face of the statute."
The government's position "does not square with section 357(c)(3)," Judge Luttig asserted. There is nothing ambiguous about the statute, he said. The liabilities are obviously deductible by Black & Decker or BDHMI; therefore, under the plain text of the statute, the taxpayer prevails, he concluded.
The exception to the general rule of basis reduction for liabilities assumed does not apply when the liabilities are stripped away from the underlying business in the transfer, Farber responded.
Circuit Judge Blane Michael tried to get Farber to point out the statutory ambiguity, but Judge Luttig instead began to lecture the government. Taxpayers, of which he is one, he said, "are entitled to know what the law is." The statute is "as clear as day," Judge Luttig insisted, calling the government's construction of it "untenable."
Black & Decker contributed $561 million cash to a new subsidiary, which assumed contingent future health costs valued at $560 million. The subsidiary then loaned the cash back to Black & Decker on a note. It then sold the subsidiary to a retired executive for $1 million, claiming a $560 million capital loss. A district court upheld the deduction. The deduction strikes me as shaky, but I'm not a judge, and Black & Decker must be glad Judge Luttig is.
Link: Complete Tax Update Miers coverage
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PAPERWORK MATTERS
October 27, 2005
If mother and son report the income from a rental building on partnership returns for 21 years, it would be logical to expect that when mom dies, her estate will only be taxed based on her ownership percentage of the building as shown on the partnership returns. Locical, but not necessarily correct.
Marie Maniglia died in 1999. She held an interest in an apartment building at 7 Commonwealth Avenue, Boston, through the "Fam-Trust." This trust was a "nominee" trust. The Fam-Trust held the title to the building as tenants in common with Frank, one of Marie's sons. The trust was created in 1977 with Marie's other son, Joseph, as trustee. The trust document showed only Marie as the trust beneiciary.
Frank transferred his tenancy in common to the trust for to Marie for "nominal" consideration in 1977. Frank died in a plane wreck in 1985.
Before Marie died, the building's income had been reported on partnership returns going back to 1978. The partnership had reported its ownership as evenly split between Marie and Joseph at least from 1996. Her estate tax return paid tax only on half of the building value.
Unfortunately, there were no documents other than the partnership returns showing that Joe owned any interest in the building. As the Tax Court states:
The estate contends that Joseph S. Maniglia obtained a
percent pro rata share of the proceeds when the property was
refinanced and that he contributed the $25,000 in cash towards
the purchase of the property. However, the estate has failed
offer any documentary evidence corroborating its contentions.
The only evidence the estate offered to counter the documentary
evidence showing the decedent was the sole beneficial owner
the property was the self-serving testimony of Joseph S.
Maniglia and the vague testimony of his wife.
The estate put its accountant on the stand to say that Mom really owned only half the building. That backfired:
At trial, the estate offered Joseph S. Maniglia’s
accountant, Mr. Pino, as a witness. Mr. Pino’s testimony was of
little help because of his poor memory. He could not remember:
The year he became licensed as a Certified Public Accountant,
the year he met the Maniglias and began preparing their returns,
or whether he ever knew that Joseph S. Maniglia was or was not a coowner of the property. Additionally, Mr. Pino’s admission that his license was suspended "back then" because of a tax evasion conviction brings his credibility into question.
The Moral: If you want to put property into a partnership, mind your paperwork. Make sure the deed reflects the ownership you want it too. Oh, and remember that the Tax Court won't be impressed if your accountant is a tax cheat.
Cite: Estate of Marie A. Maniglia v. Commissioner, T.C. Memo 2005-247
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WHY DO HIGH-INCOME RETURNS USUALLY REPORT BUSINESS INCOME?
October 26, 2005
Blog star Glenn Reynolds has written on the increasing importance of small business in the economy. Internet tools like blogs and E-bay, make it easier to operate on your own, goes his thesis.
Mr. Reynolds is surely correct in the big picture. I only have to look around my office to see how it happens. Little firms like ours can offer compete on our turf with national firms because of technology. We only need an internet connection and a willingness to pay a reasaonble subscription cost to have a tax library that would have been the envy of a Des Moines Big 8 tax nerd 20 years ago. Computers enable us to get by with with maybe half the staff we would have needed in 1985, when most tax and audit work was still done by hand.
Without disputing his thesis, I believe Instapundit makes a mistake in reading tax data. He cites a Tax Foundation analysis showing that 83% of returns with income of over $1 million show business income schedule C (proprietership), Schedule E (rental, S corporation or partnership) or Schedule F (Farm) income. From this, the Instapundit says:
People often argue that self-employment or small business formation is up because people can't get other jobs -- it's just a step above welfare, in other words. This would seem to suggest otherwise.
HIGH-INCOME TAXPAYERS HAVE BUSINESS INCOME BECAUSE THAT'S HOW HIGH-INCOME BUSINESSES REPORT THE INCOME.
While Mr. Reynolds may be right on the big trend, I don't think this data either proves or disproves this. The high percentage of high-earners with business income really reflects a change in how businesses are structured. Simply put, more and more businesses are structured as "pass-through" entities nowadays. Pass-throughs have their income taxed not at the business level, but on their owners' personal returns. These include S corporations and partnerships (and limited liability companies, which are usually taxed as partnerships), as well as proprietorships.
People select pass-through taxation because the income is only taxed once - when it is earned. C corporation earnings are theoretically taxed twice - when earned, and when distributed as dividends (or when the stock is sold, as capital gain).
Traditional C corporations often hoard their income to avoid the second tax. When they do distribute their income, they try to do so through deductible compensation payments to avoid the second tax. When a successful C corporation elects to be an S corporation, the income is reported on its owners' 1040s, and they suddenly become high-income taxpayers. If they have been drawing money out of the corporation as salary and bonus, they suddnely become high-income taxpayers with pass-through income.
In our practice we saw many examples of this when community banks became eligible to be S corporations. Some Main Street businessmen and investors with shares in their local bank suddenly have six-figure, or even seven-figure, 1040s, because their personal returns now include their share of bank earnings. These folks aren't suddenly wealthy; they just now pay the tax on their income directly, instead of on the bank's corporate return.
Congress continues to make it easier for C corporations to become S corporations, so the trend is likely to continue. The chart illustrates the trend towards pass-throughs from 1985 through 2000.
Source: IRS; The Tax Foundation
None of this contradicts Mr. Reynolds observation that smaller businesses are becoming more important, but the high-proportion of high-income taxpayers with pass-through income is due more to changes in how businesses are taxed. The growth of entrepreneurship has an effect, but the increase in the popularity of pass-throughs is probably the real reason high-income returns are so likely to have business income.
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THEY MUST NOT TRUST THIS GUY
October 26, 2005
Al Thompson must have really made the IRS mad. After he stopped withholding and remitting employment and income taxes on the employees of his business, the high-speed tax evader was convicted of tax charges and sentenced to six years in prison. While he languishes there, the IRS has won a permanent injunction requiring him to comply with wihholding and employment tax rules. It's not like he's going anywere.
From the court order:
The government has presented evidence of defendant's past conduct of knowingly and continuously acting in a manner that violates federal tax laws. The government has also presented evidence of defendant's persistent and obstinate refusal to comply with both the federal tax laws and this court's preliminary injunction, despite contempt charges and subsequent incarceration. Defendant's business property is currently being held in storage while he is incarcerated for federal criminal tax violations. Defendant has not acknowledged the illegality of his conduct, nor has he denied any of the factual allegations against him.
It doesn't appear that Mr. Thompson has responded well to being battered by the Justice Department's clue stick:
The gravamen of defendant's (Mr. Thompson's) claim is that there are no valid internal revenue laws because they were repealed in 1939; therefore, the government's actions associated with the enforcement of these laws have violated his rights and caused him injury.
Contrary to defendant's assertions, the Internal Revenue Code is in full force and effect. Therefore, his claims for injuries resulting from the government's enforcement of allegedly invalid internal revenue laws are dismissed. The government's motion is GRANTED.
Since he spends his days in prison under the tax laws, you wouldn't think he would need to be told that they are, indeed, "in full force and effect." But if he hires any of his fellow prisoners in the next few years, he'd better withhold, or he'll be in real trouble.
Link: Memorandum and Order
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FICA BASE HITS $94,200 FOR 2006
October 26, 2005
The 6.2% tax paid by employers and employees, and the 12.4% paid by self-employed taxpayers, will apply to the first $94,200 in wage or self-employment income in 2006, the Social Security Administration has announced. The FICA base is $90,000 for 2005.
Thanks to BenefitsBlog for the link.
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IRS COUNSEL: FEAR PULLS AHEAD OF GREED
October 26, 2005
Nobody wanted to miss the great tax shelter party of the 90's. As prominent firms raced to the bottom with new tax shelter products, no tax director wanted to be the wimp who wouldn't be "aggressive."
Now that the party's over, and the hangovers have made corporate tax directors more circumspect:
The IRS’s emphasis on enforcement is gradually succeeding in changing the mindset of corporate tax executives concerning the advisability of overly aggressive tax positions, according to Deborah Butler, associate chief counsel for procedure and administration with the IRS Office of Chief Counsel.
Butler, speaking October 25 at a BNA Tax Management conference in Washington, said she has noticed a “change in attitude” among her private-sector colleagues, resulting in a more conservative approach to strategic tax planning. Butler and other panelists attributed the more risk-sensitive outlook to multiple factors, including financial disclosure and reporting requirements of the Sarbanes-Oxley Act of 2002, possible waiver of the attorney-client privilege, stricter application of penalties, and the IRS’s ability to pursue tax accrual workpapers.
Once the hangovers go away, some taxpayers will again reach for the "hair of the dog." While the bigger accounting and law firms have pulled away from the tax shelter business, it survives in smaller, discreet "boutique" firms catering to non-public businesses. The tax shelter businesses waxes and wanes depending on the balance of fear to greed. All it will take to make greed ascendent are a few years and a few high-profile taxpayer victories, and the wheel will go around again.
Link: Tax Analyst free story
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GOT MILKED?
October 25, 2005
Here's an idea: pretend to pay your employees in milk and skip paying all of your employment taxes. It can't miss. It's foolproof!
Well, maybe not:
A federal court in Boise, Idaho has permanently barred Michael Lee Yohe and two companies, Ag-Mart Services, Inc. and Mancat, Inc., from promoting an alleged employment tax-fraud scheme involving purported in-kind payments of milk to workers to avoid paying federal employment taxes, the Department of Justice announced today. The court order, entered by Judge B. Lynn Winmill of the U.S. District Court for the District of Idaho, requires the defendants to provide the Justice Department with a list of their dairy-farm customers and those customers’ employees, including names, addresses and Social Security or employer identification numbers.
People actually paid for this advice? Oh well, no use crying over... you know.
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GOODBYE, SELF ESTEEM
October 25, 2005
The TaxProf has posted valuations for tax blogs based on the price paid by AOL for Weblogs, Inc. and Technorati traffic link reports.
I guess I need to keep my day job:
My blog is worth $11,855.34.
How much is your blog worth?
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BUT AREN'T BEER TAXES THE SAME THING?
October 25, 2005
The Tax Policy Blog informs us of a group in Sweden that proposes a "man tax." I shudder at what the deductions might be.
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IF THE WILL DOESN'T FIT, TOUGH.
October 25, 2005
When Maurice Johnson died in 2000, his family overrode his will by agreement among the beneficiaries because the document was "unworkable." But the Iowa Department of Revenue thinks it works just fine.
In a ruling issued yesterday, the Department said that it would compute Iowa's inheritance tax based on the will, not the family settlement agreement. This makes a difference because the inheritance tax is computed differently based on who inherits the decedents property. From the letter:
The Iowa Supreme Court has held that where property is transferred in a manner in which the Iowa inheritance tax is imposed under section 450.3, a settlement agreement which provides for the receipt of assets in a different manner is not to be used to determine whether the inheritance tax will be imposed. In re Estate of Bliven, 236 N.W.2d 366 (Iowa 1975). The Bliven case is on point as to the overriding legal proposition that settlement agreements will not be allowed to control taxation. The Review Unit is confident in rejecting the argument that the inheritance tax calculations must be based upon the distributions mandated by the Settlement Agreement.
The Moral? If you don't get the will right, your beneficiaries can't fix your inheritance tax mistakes once you're gone.
UPDATE: Great comment below from Joel of the Death and Taxes blog, where he points out how disclaimers can often patch a bad estate plan.
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IRWIN SCHIFF AGAIN CONVICTED. 'TIS JUST A FLESH WOUND.
October 25, 2005
Monty Python's Black Knight has nothing on Irwin Schiff. A federal jury convicted Mr. Schiff of an assortment of tax crimes yesterday, and he promptly declared victory:
"I've proved the government has no authority to collect income taxes . . . and I've proved it so thoroughly there's no ifs, ands, or buts about it," he said. "Everyone's going to know that (Judge) Dawson lied."
At age 77, it's not clear how many more such victories Mr. Schiff has left. This marks his third conviction for tax crimes, and he is eligible for up to 43 years in prison and $3.25 million in fines.
Convicted along with Mr. Schiff were his associates Cynthia Neun and Lawrence Cohen. Ms. Neun famously participated in a high-speed cell phone call with convicted tax evader Al Thompson while tried to evade the California Highway Patrol.
If you believe Mr. Schiff's blog, he was convicted because in a kangaroo court proceeding because an evil judge railroaded the jury into an unjust conviction. But if you aren't willfully obtuse, it might occur to you that Mr. Schiff has been convicted of tax crimes three times because he is, well, a tax criminal. Some folks still haven't figured this out.
Links: Forbes.com
The TaxProf Blog has a comprehensive set of links (scroll down).
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TAX REFORM CAGE MATCH: BRUNORI V. MAULE
October 24, 2005
It's sweater vs. suit as David "Buzz" Brunori, Tax Analyst columnist, goes mano a mano with James "the Hulk" Maule in a high-profile battle over the Tax Reform Panel's work product.
Brunori makes the first move in a column for the Washington Post:
In the end, the panel did the right thing by making these proposals. Members of Congress will be inundated with calls asserting that capping the benefits will hinder pursuit of the dream of home ownership. It will do no such thing. People do not buy houses because of the tax benefits. They buy houses so that they have a place to call home.
Maule fights back with a blog countermove:
David makes a great case for repealing the deduction. On this point, he and I agree. But the Tax Reform Panel isn't proposing repeal. Its plan is to trim the deduction, in a manner that afflicts the upper middle class the most, and the middle class almost as much, but that does little to the wealthy and ultra wealthy. Although it might make sense to praise a movement in the direction of repeal, it is deceptive to take a crooked half-step as does the Panel's approach.
Since Dr. Maule throws me links and Dr. Brunori only sent me a crummy broken coffee mug, I award the match to Dr. Maule on points.
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ADMINISTRATION FILLS THREE TAX POLICY POSITIONS
October 24, 2005
The Treasury filled three tax policy positions last week. The top tax policy position, Assistant Secretary of the Treasury for Tax Policy, remains unfilled; it has been open since December 2003. A vacancy at this post signals that the administration is not ready to seriously pursue tax reform.
Professor Maule has more.
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NOVEMBER 2005 APPLICABLE FEDERAL RATES
October 24, 2005
The IRS has issued (Rev. Rul. 2005-71) the minimum interest rates for loans made in November 2005:
-Short Term (demand loans and loans with terms of up to 3 years): 4.04%
-Mid-Term (loans from 3-9 years): 4.23%
-Long-Term (over 9 years): 4.57%
Historical AFRs are available via the “Links” page at www.rothcpa.com.
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CARNIVAL UP!
October 24, 2005
This week's edition of the Carnival of the Capitalists, a weekly roundup of economics and business weblog postings, is up at Blawg Review. Notable pieces this week include Brian Gongol on the life-giving properties of economic growth and Hank Stern on a heath insurance company's Cincinatti pilot program allowing consumers to compare prices for routine health-care procedures on the internet.
Also: free bonus link to Accounting Basic Terms and Concepts!
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HAPPY BIRTHDAY!!
October 21, 2005
If you haven't made your weekend plans, be sure to raise a toast to our current tax code, the Internal Revenue Code of 1986. It celebrates its 19th birthday tomorrow. Remember?
October 22, 1986: President Reagan signs the Tax Reform Act of 1986.
From the looks of the Tax Reform Panel's proposals, I think the '86 code will make it to legal drinking age.
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TREASURY ISSUES 'PRODUCTION DEDUCTION' PROPOSED REGULATIONS
October 21, 2005
The long-awaited Section 199 "domestic production activities deduction" regulations were finally issued yesterday. At 224 pages, they will make for scintillating weekend reading (No link yet, apparently; when they are posted on the IRS site, I think they will be here). UPDATE: here they are (thanks, reader BPC!).
WHAT SECTION 199 DOES
The Section 199 deduction allows taxpayers to take 3% off the top of their taxable income from "domestic production activities" starting in 2005. The deduction is scheduled to eventually increase to 9%. Because Section 199 treats "production activity" income different from other income, taxpayers will have to figure out what their "production activities" are and then allocate their taxable income between "production" and "other stuff." (OK, "other stuff" is my term.)
In general, "qualified production income" comes from manufacturing, construction, farming or resource extraction. It includes software manufacture - but maybe not internet-based software. It also includes architect and engineer services on domestic construction and "qualified" film production (if you don't have to carry it out of the video store in a brown bag, it's probably qualified). The "production activity" has to take place "in whole or significant part" in the U.S.
WHY IT IS A BAD IDEA
The regulation writers were given an impossible task: writing simple regulations for a law that requires arbitrary and complex allocation of income. Consider a simple example: if you import a t-shirt and print a design on it, is that "qualifying" activity? If so, how do you allocate the income between importing the shirt and printing the design? And what if you buy some of your shirts already printed - how do you allocate your overhead between purchased and produced items?
TAKE ADVANTAGE OF THEIR MISTAKE
Section 199 is a poorly-conceived tax provision. The attempt to favor some sectors of the economy over others is economic illiteracy become law. Yet while enacting Section 199 was a bad idea, not taking the deduction is a worse one. Taxpayers and practitioners now must figure out how to gather the information they'll need to harvest this deduction without blowing it all on tax consulting fees.
Links:
Professor Maule's May 2005 discussion of Section 199.
My Powerpoint presentation on Section 199 for the Iowa Bar Association Spring Tax Institute. (Firefox-readable version here)
Tax Analysts free coverage of the new regs.
Notice 2005-14, the IRS initial Section 199 guidance.
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TAX REFORM - PLAN A
October 20, 2005
It looks as though the Presiden'ts tax reform panel will report two different tax-reform plans - a "simplified income tax system" and a "hybrid consumption based tax." We'll look here at "plan A," the simplified income tax.
The main features of this plan include:
- Four rates: 15%, 25%, 30% and 33%.- No alternative minimum tax.
- Health insurance tax-free benefits cappied at $11,500 for families
and $5,000 for single filers.- a 15% credit for home mortgage interest would replace the current deduction. The credit would be limited, with caps on the size of the loan varying among regious; the limits would range from $172,000 to $312,000.
- The state and local tax deduction would disappear.
- The exclusion for gain on home sales would be raised to $600,000, from $500,000 for couples.
- IRAs, HSAs, 401(k)s, 403(b)s, 529 college savings plans and MSAs would all be replaced by three tax-preferred plan types: "Save at Work" accounts, "Save for Retirement" accounts, and "Save for Family" accounts.
- Capital gains would be 75% excluded from income
- Dividends would not be taxed
- The top corporate rate would be reduced to 32%, from the current 35%.
- It eliminates the tax-free status of most fringe benefits (eg., child care, life insurance).
The positive aspects of the plan:
- Elimination of AMT- It addresses the home mortgage deduction.
- It eliminates double taxation of corporate income.
- It pares back the maze of tax-favored savings vehicles.
- It addresses the rat's nest of tax-free fringes.
These positives fail to overcome the plan's shortcomings:
- The base is not broadened enough to significantly reduce rates.- By favoring capital gains, it retains the complex distinction between ordinary income and capital gains, requiring a higher overall rate.
- The cap on home-mortgage interest is complex and confusing.
- By retaining multiple rates between corporations and individuals, it encourages taxpayers to manipulate income between themselves and controlled corporations.
- As far as I can tell, it doesn't address many of the time-wasting tax preferences and loophole closers that make computation of business income so difficult. This would include the execrable Section 199 "production deduction," depreciation issues, Section 263A, various inventory methods, the fire-into-the-crowd deferred compensation rules of Sec. 409A -- and we won't even talk about Subchapter K, the partnership tax laws.
Without a significant rate reduction to reward taxpayers for the loss of their targeted tax breaks, it's hard to see how this plan can advance. For all of their hard work, it seems like the best the commission can hope is that their ideas nudge the tax reform debate along for future Congresses.
In other commentary, Prof. Maule gives the panel an "F": "...and I wish there were an F- grade."
Other Links:
New York Times summary of proposals
Tax Update prior coverage
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THE FREE SOVERIEGNTY OF THE OREGON WAY MOTOR COURT
October 20, 2005
A promising approach to fighting the IRS?
During a federal investigation, the Weatherses filed documents declaring their independence from the United States, rejecting any obligation to follow federal laws.
Um, no.
A Vancouver man who owns Longview rental properties and who tried to say he was not subject to U.S. laws has received a five-year federal prison sentence for tax evasion.
Thomas D. Weathers, 55, of Vancouver was sentenced Friday in Tacoma by U.S. District Court Judge Franklin D. Burgess.
Weathers and his wife, Kathy, owe more than $1.6 million in federal back taxes, interest and the cost of prosecution, spokeswoman Emily Langlie said in a news release from the U.S. Attorney's Office for the Western District of Washington.
The couple owns the Hudson Hotel and Oregon Way Motor Court in Longview, duplexes and single-family rental homes in Longview and Kelso, the Joyce Hotel and Kent Hotel in Portland, and rental properties in Vancouver, Ridgefield and Sunriver, Ore.
One hopes these properties have good on-site managers; they'll be on their own for awhile.
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TAX REFORM? IT LOOKS LIKE I'LL STILL HAVE A JOB
October 19, 2005
A tax practitioner who opposes the devil of tax complexity is a bit like the preacher who struggles agains the forces of evil: we fight on the side of the angels, but Satan is good for business.
The President's tax reform panel is settling on its final recommendations, and it looks like business will still be ok.
My initial thoughts: the panel has many good and sensible recommendations that, taken together, would go far to improve the tax system. But not far enough.
My biggest disappointment is that the proposals wouldn't significantly lower rates. Lawmakers aren't going to fight to cap the mortgage interest deduction if the payoff is merely elimination of the alternative minimum tax and a 2% reduction in top rates. My hopes for rate reduction may be unrealistic. Still, the last big tax reform lowered the top rate from 50% to 28%. Reducing the top rate from 35% to 33% isn't the same thing, and I don't think that tax reform will work without a significant rate reduction. High rates create an irrestible motiviation to carve out loopholes, leading to higher rates, and more loopholes, etc., and you end up where we are today.
I would like to say more, but I will be at meetings today and unable to post much until late this afternoon. In the meantime you can check out the links below for details on the plan. Tax prof Daniel Shaviro has some thoughts already. No doubt the TaxProf Blog and Dr. Maule will chime in.
The New York Times has a good summary of the proposals. There is also coverage at Tax Analysts free site.
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HARVEST MOON CARNIVAL
October 18, 2005
The moon is full and the capitalists are rampant at the Carnival of the Capitalists, a weekly compedium of economics and business weblog postings. Many good posts, including "A random walk through the world of buying small businesses."
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SO HOW'S IRWIN DOING?
October 18, 2005
We have been going about our day-to-day business blissfully unaware of tax protestor honesty movement adherent Irwin Schiff's courtroom battle in Las Vegas. Mr. Schiff has authored a small library of tax-protest books. He has suffered the ultimate indignity of having royalties of his book saying the federal income tax is invalid garnished to pay those "invalid" taxes. He has also served time for tax fraud.
Now Mr. Schiff stands trial on criminal tax evasion and conspiracy charges. His fans say that Mr. Schiff continues to dominate the trial with his crushing logic:
Secondly, Irwin Schiff doesn't merely "claim" that paying INDIVIDUAL income taxes is voluntary, he illustrates it very clearly in black and white, using the IRS's own tax code book and the majority decision of multiple Supreme Court cases.
That seems unlikely, but if he can blow enough smoke to confuse a juror or two, that may be enough.
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AICPA PUBLISHES NEW TAX REFORM GUIDE
October 18, 2005
The American Institute of Certified Public Accounts has issued a new guide to the tax reform debate. The report evaluates the major policy options and proposes ten "guiding principles" in evaluating reform proposals.
Links:
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BURN OUT, OR FADE AWAY?
October 18, 2005
Professor Maule addresses the problem of burned-out tax shelters:
But eventually the shelter "burns out." Over time, depreciation deductions diminish and then terminate, while revenue usually increases. At some point, the partnership is passing out net income rather than net deductions. Sometimes this is not a problem, because the partner may have need of passive income and if the income is passive the shelter continues to serve a tax-savings purpose. Often, though, the partner does not want the net income, has no need of passive income, and wants out. The partner's adjusted basis is low, or even zero, because of the deductions. And the capital account probably is negative.
The good professor says the "classic" advice is to die with the shelter. When death becomes an attractive planning option, you know you have a problem.
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KPMG: THE OTHER SHOE DROPS
October 17, 2005
The Department of Justice, facing criticism for its indictments in the KPMG case, has responded by upping the ante. Ten more professionals were indicted today in connection with the case, raising the number of defendants to 19. The Wall Street Journal reports:
The indictment charges the former deputy chairman of KPMG, several former heads of the firm's tax practice, a former chief financial officer of the firm and a former associate general counsel, among others. The shelters were designed so that wealthy individuals who had large income or a large capital gain could eliminate taxes on that income or gain. The shelters were designed to look like legitimate investment transactions, but were in fact intended to generate phony tax losses, with no corresponding economic losses to the taxpayers, according to the charges.
The TaxProf has more.
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TAX REFORM SHORT-STAFFED?
October 17, 2005
We recently noted that the top Treasury tax policy position has been vacant since 2003. Professor Maule points out that five key Treasury tax policy positions are vacant.
If the President is serious about tax reform, he'd better fill these posts in a hurry. The Tax Reform Panel is set to issue its recommendations November 1. If "personnel is policy," then the current tax reform effort is going nowhere.
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HONEY, I JUST WANT TO HELP SAVE THE IOWA PLEISTOCENE SNAIL
October 17, 2005
You mean attractive donation solicitors get better results than ugly ones? Who knew? (via the TaxProf).
This study develops theory and uses a door-to-door fundraising field experiment to explore the economics of charity. We approached nearly 5000 households, randomly divided into four experimental treatments, to shed light on key issues on the demand side of charitable fundraising. Empirical results are in line with our theory: in gross terms, our lottery treatments raised considerably more money than our voluntary contributions treatments. Interestingly, we find that a one standard deviation increase in female solicitor physical attractiveness is similar to that of the lottery incentive.
Me, I don't look at the stunning, tall, slender blonde fund-raisers. I just donate for the tax deduction. Save the snails! Or whatever...
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CHARITIES COMPLAIN THAT CAR DONATION LIMITS WORK AS INTENDED
October 17, 2005
Last year Congress added restrictions to the donation of vehicles to charity. Under new rules, if a charity sells a donated car without using it in their charitable work, the donor only gets to deduct what the charity is paid for the car. The charity has to tell the donee what the sale price is. The charities aren't happy:
Rick Frazier, a spokesperson for Charity Motors, said Form 1098-C is a paperwork burden for nonprofits. He said his organization will have to hire at least one full-time data entry clerk whose only duties will be filling out the form.
“We estimate that we’ll do approximately 20,000 of these a year,” Frazier told Tax Analysts. “Therefore, we’ll need to increase staff just to handle the extra paperwork.”
I would weep, but then I remember why the new rules were enacted:
Maybe this is a charitable use - a vehicle donated to provide wildlife habitat:
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DAY OF RECKONING
October 17, 2005
Today is the last day to file double-extended 2004 1040s. Unless, of course, you live in the Katrina or Rita disaster areas, in which case you have until next February 28. And you probably have bigger problems than a 1040, anyway.
On a happier note, today marks the last day the IRS can assess you for tax on 2001 double-extended returns, unless you have been very naughty (e.g., you have a very large unsupportable understatement). If you commit fraud, there is no civil assessment statute of limitations, and your tax return liability will outlive you. (Hey, wasn't this supposed to be a happier note?)
Oh, and the due date for 2005 returns is only six months away!
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GEITNER SIMMONS IS BLOGGING AGAIN
October 17, 2005
In a notable non-tax related development, blogger Geitner Simmons appears to have returned with a vengeance to regular posting, with 6 posts in the past two days.
The erudite Mr. Simmons has been promoted to editorial page editor of the Omaha World-Herald. Preparing for the promotion is apparently what has been limiting his blog posting. Now the "radio silence" tag on his site is down, and I hope we can look forward to more of his learned and thoughtful posts like this.
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2006 401(k), PENSION LIMITS ANNOUNCED
October 14, 2005
The inflation-indexed qualified plan limits for 2006 were issued today by the IRS (IR-2005-120). Highlights include:
-401(k) elective deferral limit: $15,000 (2005 was $14,000)
-Defined benefit annual benifet limit: $175,000 (was $170,000)
-Defined contribution annual limitation: $44,000 (was $42,000)
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WORTH 2000 WORDS
October 14, 2005
The Tax Foundation is running a series called "A Countdown to Tax Reform." You can see the first installment here. Two charts from yesterday's second installment are worth examination:
Figure 1. Percent of Tax Filers Who Owe Zero Income Tax Liability, 1950-2004
What happens if that line crosses 50%, and a majority of the country has no stake in limiting government spending?
Figure 2. Effect of Refundable Tax Credits on the Distribution of the Income Tax Burden
A broad brush look at tax progressivity. Some feel, perhaps correctly, that the progressivity falls sharply at the very highest income levels - say the top .2% of incomes. This poses a dilemma for reformers: should the progressivity be flattened out, and if so, is it politically feasible? Can the ultra-high income taxpayers be targeted without hitting the rest of the top 20% of earners, and is the attempt worthwhile?
(Via the TaxProf)
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A LIFETIME OF COOLNESS IN STORE FOR GOLFER WIE
October 14, 2005
Golfing phenomenon Michelle Wie gets a present for her 16th birthday:
"I’ve just got my first tax form," she said, giggling. "It’s not something you should be excited about, but I thought it was pretty cool."
And the excitement will never end!
(Via BenefitsBlog)
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GRASSLEY TO STUDY MIERS LAW FIRM TAX SHELTERS
October 13, 2005
Tax Analysts will report in tomorrow's edition that Senator Grassley will study the tax shelter opinions issued by Harriet Miers's law firm. Senator Grassley, the chief Senate taxwriter, will be part of the Miers Supreme Court confirmation process from his seat on the Senate Judiciary Committee.
From the report:
"While it doesn't appear that Harriet Miers was directly involved, Sen. Grassley wants to understand better her work as managing partner as it relates to these tax opinion letters. He also wants to understand better these tax transactions and the role of the law firm in the transactions," a spokeswoman for Grassley, chair of the Senate Finance Committee and a member of Senate Judiciary, told Tax Analysts.
The report also quotes TaxProf Paul Caron on the issue:
"She had the opportunity to have her ethical antennas tweaked here," said Paul Caron, a tax law professor at the University of Cincinnati and the operator of the popular "TaxProf Blog" Web site. "Those ethical antennas were, perhaps, not as sensitive that they should have been."
The article reports that both White House and Ms. Miers's firm, Locke Liddell & Sapp, say the nominee had no involvement in the shelter work.
No link to the story is yet available.
LINK: Complete Tax Update Miers coverage here.
UPDATE 10/14: The full story is up on the Tax Analysts subscriber site here. I'm quoted.
The UPDATE 10/14: TaxProf has made the article available here to non-subscribers.
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SPEAKING OF TAX BREAKS...
October 13, 2005
Jeff at Tusk and Talon has some thoughts on the opportunity costs of the Iowa Values Fund:
The greatness of the program simply can't be measured by saying, "We spent $99 million and got 20,000 jobs out of it. You have to look at what we would have gotten had we spent that $99 million on something else. Or better yet, had the government never taxed that $99 million away from Iowa residents and businesses.
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TAX REFORM PANEL STIRS UP HORNETS NEST
October 13, 2005
If you ever have wondered why it's so hard to get good tax policy enacted, the frenzy caused by this week's meeting of the President's Advisory Panel on Tax Reform will give you some insight.
The panel discussed two ideas that policy wonks have long considered as worthwhile targets for reform: the home mortgage deduction and the tax preference for employer-provided health coverage. Many economists believe both sets of tax breaks distort their markets and subsidize uneconomical behavior (i.e., excessive investment of family wealth in real estate and "gold-plated" health plans).
The result: outrage on the left and right. From the right:
So in order to make the elimination of the Alternative Minimum Tax "revenue-neutral," the Bush-appointed tax commission proposes the elimination of the housing-mortgage deduction over $340,000. The result of such a phase-out: A colossal real-estate crash in New York, Florida, Illinois, California and, yes, even Texas, with a cascading effect throughout the country. This may be the dumbest major independent-commission proposal in all of human history.
From the left:
So while Bush is looking for ways to **** over the middle class while protecting the tax cuts to the rich.
(sic; asterisks added)
So tax-deductible mortgages on $1 million houses are now a rallying point for the left. Who knew? Left-leaning tax prof Daniel Shaviro apparently didn't get the memo:
Okay, the Republicans have so exploited the tactic of mindlessly repeating talking points ad nauseum that it's understandably tempting for Democrats to play the same game, and trot out good old Paris Hilton every five minutes. But is supporting the AMT, and opposing limits on wasteful upper-end health insurance tax benefits, as well as on tax breaks that promote borrowing and big homes, really a good place to deploy this strategy?
I saw a little bit of the tax reform panel's session rerun on C-span last night (yeah, my life is pretty darn exciting). They seemed to approach the mortgage deduction very gingerly, and they were well aware of the need to transition carefully to a reduced deduction to avoid a real-estate crash. Yet they still stirred up a hornets nest.
The promised land of tax reform is low rates. If rates are low enough, you don't need so many deductions, and taxes matter less. If the biggest tax breaks are off limits, you'll never see the promised land:
(Source: Tax Policy Blog)
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NON-PASSIVE RENTAL LOSSES: NO FUN WITH DICK AND JANE
October 13, 2005
When normal people think of "passive activity," they probably think about sitting in the La-Z-Boy watching "Will and Grace" reruns. But tax people are different. We think of the tax law rules that deny net losses for business activities where "material participation" is lacking.
The passive activity rules provide that if you have net losses from "passive" business activities in a year, the net losses are disallowed. They instead carry forward until there is passive income, or until the "activity" is disposed of in a taxable transaction. Whether an activity is passive depends whether the taxpayers "materially participate" in an activity. While there are several tests to determine whether participation is "material," the most common test is 500 hours of participation.
When the passive activity rules were enacted in 1986, they contained a "per-se passive" rule for real estate rentals. Real estate rental losses were considered passive regardless of how much you worked at them.
In 1993 this "per-se" rule was loosened up for real estate professionals. These were defined as taxpayers who spent more than half their working time, and at least 750 hours, working in real estate. Taxpayers meeting this criteria can have non-passive losses from real estate rental, but only if they pass the normal "material participation" tests that apply to non-real estate businesses.
WHAT IS AN ACTIVITY?
Richard May, a civil service worker in Buffalo, New York, built up a nice side business of renting duplexes. By 1996 he had 18 duplexes. His tax preparer prepared is joint 1996 return for Richard and his wife, Jane. The return treated Richard as a materially-participating real estate professional, and the Mays deducted net rental losses of $73,247.
The IRS challenged the deductions, saying that each duplex was a separate activity, and that the taxpayer failed to meet either the 500 hour participation test or an alternative test of 100 or more hours each in multiple activities totalling 500 hours.
The taxpayer argued that they had taken advantage of a provision of the passive loss rules (Sec. 469(c)(7)(A)) allowing them to treat multiple activities as a single activity. He said they met this requirement by reporting the multiple activities as a single activity on his 1040.
The Tax Court disagreed:
On the basis of the record, it is not clear from any of petitioners' relevant returns that petitioner made an election under section 469(c)(7)(A). Petitioners' consistent treatment of aggregating the rental income and expenses on their Schedules E is not a deemed election to treat the rental real estate activities as a single activity under the requirements of section 469(c)(7)(A). Accordingly, petitioner did not elect to treat his rental real estate activities as a single activity under section 469(c)(7)(A).
THE MORAL: ALWAYS USE THE MAGIC WORDS. If you are a real estate pro, and you want to deduct your rental losses from multiple rental units, it's not just enough to group your rental units as a single schedule E activity. You also need to say the magic words - not "please, may I," but "I elect to aggregate my rental activities pursuant to Sec. 467(c)(7)(A)." Once made, the election is good for future years.
Cite: May v. Commissioner, T.C. Summary Opinion 2005-146.
The extended entry below reviews the basics of the "material participation" rules.
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TAX REFORM COMMITTEE: TRIM MORTGAGE, HEALTH DEDUCTIONS; NO NATIONAL SALES TAX
October 12, 2005
From today's edition of Tax Analysts Taxwire:
The President's Advisory Panel on Federal Tax Reform on October 11 ruled out proposing a dramatic replacement system and instead will use the framework of the current income tax base to make major changes, including curbing benefits for housing and healthcare. Scaling back the benefits would simplify the tax code and would help finance repeal of the alternative minimum tax, which would cost $1.2 trillion over 10 years, the panel said.
The "FAIR Tax," a version of a national sales tax, has achieved some support and has spawned a best-selling book. I never thought a sales tax with a rate exceeding 35% made much sense, and the panel apparently agreed.
It will be fascinating to watch the debate over limiting mortgage interest and health cost deductions. While there are many good arguments for limiting these deductions, and many more for killing the AMT, the lobbying against such proposals will be ferocious. I also expect the deduction for state and local taxes to come into play, given that it is the biggest single AMT trigger in high-tax states like Iowa.
UPDATE: Color Prof. Maule unimpressed:
With this sort of work product, the panel should refund to the taxpayers the public funds it has wasted. Charged with reform, this panel seems dedicated to window dressing that masks maintenance of the status quo for their friends and financial backers. America is being short-changed.
Links:
Washington Post (Hat tip: Reader HH).
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MORE ON MIERS AND TAX SHELTERS
October 12, 2005
Law Prof and blogger Vic Fleisher takes issue with fellow prof-blogger Stephen Bainbridge's "casual dismissal" of the tax shelter opinions written by Harriet Miers's law firm while she was co-managing partner. He says the opinions raise concerns about her judgment and and approach to statutory interpretation:
Fleisher on judgement:
Miers' alleged success as a lawyer -- co-managing partner, president of the state bar, White House counsel, etc. -- is not about her legal ability. It's about her apparent success as a manager of other lawyers. But even if we are now judging the merits of potential Supreme Court Justices based on her ability to manage rather than her ability to think and write about legal issues, Miers may fail on this sorry metric as well. Miers either was or should have been aware of her firms' involvement in the tax shelters, and she should be called on to explain her failure to act.
Fleisher on approach:
The tax shelters provide a nice window into the problem. As once explained by Taxprof Joe Bankman, there is a split among tax professionals. Some of us, mostly the tax elitists and the older generation of tax professionals, prefer to interpret statutes with purpose in mind. And we frequently look to non-literal interpretations of the Code (business purpose doctrine, step transaction, economic substance doctrine, etc.) as a necessary part of tax practice. Others, especially the younger generation and those trained by or sharing ideologies with the Scalia school of statutory interpretation, prefer the plain meaning approach. They tend to read the Code literally, and see nothing particularly wrong with tax shelters. In the two instances we have seen (the CDS shelter and the Rainbo Club property) Miers seems to have voiced no concern about a literal interpretation of the Code.
His post raises a lively debate in his comments section, including a discussion of what knowledge a firm managing partner will have about the firm's lucrative tax shelter practice.
It's not clear that the CDS shelter, the subject of Ms. Miers's firm's opinions, is a "literal" statutory interpretation; "optimistic," "creative" or "wishful" may be more appropriate. Ms. Miers is likely to face questions on these issues before she dons a Supreme Court robe.
Hat tip: the TaxProf
Link: Complete Tax Update Miers coverage.
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"WE HAVE A THOUSAND STRATAGEMS FOR STOPPING TAX EVASION"
October 11, 2005
Paul Caron's TaxProf Blog rarely has a bad day, but today is unusually good.
He pulls a rambling but insightful Lee Sheppard piece from behind the Tax Analysts firewall. After talking about handbags and Kate Moss for awhile, Ms. Sheppard provides the concise summary of the Tribune Co. case that I wish I had done:
When the dust cleared, Times Mirror had $1.375 billion in cash in an LLC that it solely managed. Voting control of Matthew Bender was separated from economic growth, so that while the vote remained with seller Times Mirror, the growth potential went to purchaser Reed Elsevier. The merger of the subsidiary into Matthew Bender was supposed to qualify as a tax-free statutory merger under code sections 368(a)(1)(A) and (a)(2)(E) provided the tax administrator ignored the surrounding circumstances, chief among them that pile of cash that ended up in Times Mirror's control.
As a bonus, the good Dr. Caron shares with us the glorious theme song of the Chinese equivalent of the IRS. Imagine the inspiration this provides to the Chinese tax agents:
A historic mission is on our shoulders:
To collect wealth for the Four Modernizations of the State,
To promote the flourishing of the economy.
We do not fear difficulties or dangers,
We go throughout all the towns and villages;
We do not fear difficulties or dangers,
We go throughout all the towns and villages.
The national emblem is on my cap
And the motherland is in my heart.
We are glorious tax workers.
A sacred responsibility is on our shoulders:
To struggle for the administration of taxes according to law,
To stand at our post in order to see that policies are strictly followed.
We have a thousand stratagems
For stopping tax evasion;
We have a thousand stratagems
For stopping tax evasion.
The national emblem is on my cap
And the motherland is in my heart.
We are glorious tax workers.
And that's not all. Heaven help the Chinese taxpayer.
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HOW TO HELP ASIAN EARTHQUAKE VICTIMS
October 11, 2005
The response to the Katrina crisis has been tremendous. This week we have another humanitarian disaster unfolding in Pakistan. While the television coverage of the Asian earthquake is less intense, the scale of the devastation and humanitarian need appears to be even greater. You can help by giving generous tax-deductible gifts to one of the charities listed here or by giving to the Salvation Army's South Asia Disaster Fund.
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WHITE HOUSE SPOKESMAN CALLS CDS SHELTER "APPROPRIATE" TAX STRATEGY
October 11, 2005
A White House spokesman has said the tax shelter opinions written by Supreme Court nominee Harriet Miers's law firm "involved appropriate tax strategies," Bloomberg News reports.
The IRS viewed things differently when it added the "contingent deferred swap," the shelter endorsed by Ms. Miers's former firm, to the roster of "listed transactions" in Notice 2002-35:
The Service may impose penalties on participants in these transactions or, as applicable, on persons who participate in the promotion or reporting of these transactions, including the accuracy-related penalty under section 6662, the return preparer penalty under section 6694, the promoter penalty under section 6700, and the aiding and abetting penalty under section 6701.
That's a funny way of saying "appropriate."
Prior Tax Update Miers coverage:
MORE ON MIERS FIRM TAX SHELTER
HARRIET MIERS' LAW FIRM: TAX SHELTER PROMOTER?
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MORE ON MIERS FIRM TAX SHELTER
October 10, 2005
Stephen Bainbridge, the sinister-looking UCLA law professor, doesn't think the CDS tax shelter opinions written by Supreme Court nominee Harriet Miers's law firm should affect her nomination:
Personally, I think this should be a non-issue, even though it seems to be picking up some steam in the blawgosphere. As one of my tax colleagues emailed me to explain:
Although she clearly should have known about this as co-managing partner (billings of $50,000 a pop for 70 opinions is likely to get your attention), it is probably a red herring. Lots of firms were involved in these shelters, including another Dallas firm, Jenkens and Gilchrist, and they don't necessarily disqualify her as a justice as long as she didn't participate in the drafting of the opinions (which were pathetic as a legal matter by the reports of them - evidencing mediocre to bad lawyering, let alone ethics etc). Nevertheless, it is the kind of red herring issue that politicians like to jump on when they want some way to oppose a candidate or get a candidate to withdraw without stating the real objection, which might sound too elitist, too ends-oriented on a particular issue, etc. Kind of like a nanny-gate issue.
"Kind of like a nanny-gate issue." Kimba Wood might have some thoughts about whether a "nanny-gate issue" can be important.
Considering what has happened to Jenkins and Gilchrist, it's surprising that the correspondent discounts the importance of the issue.
Whether or not it should matter, it is likely to. Her role as co-managing partner of her firm is an important credential on a resume lacking any experience as a judge. These lucrative but dodgy tax shelter opinions happened on her watch, and they could tarnish her tenure as co-managing partner. If that doesn't count in her favor, there might not be enough left on her resume to get 50 Senate votes.
Prior Tax Update coverage here.
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ANNIVERSARY CARNIVAL
October 10, 2005
This week's Carnival of the Capitalists is up at BusinessPundit. It is the second anniversary edition of this weekly roundup of economics and business weblog posts. Among the many worthy posts this month is this from Brian Gongol:
The wisest state in the Union will