Tax Update Blog: November 2005 Archives

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I WAS DRUNK THE DAY MY LOBBYIST GOT OUT OF PRISON...

November 30, 2005

With apologies to Steve Goodman, it appears Congress may enact the perfect country & western songwriter tax loophole. Under a rule proposed by congresscritter and country music fan Ron Lewis of Kentucky, songwriters would get capital gain treatment for selling the rights to their own songs to others (e.g., Paul McCartney and Michael Jackson).

Professor Maule is unimpressed:

The point is that song writers have decided that their compensation income ought to be taxed at rates lower than folks whose services are rendered working in factories, mowing lawns, bagging groceries, sweeping floors, tending the sick, fighting fires, etc. The song writers think they are special. Note that even other artists, such as novelists, painters, sculptors, and designers, aren't covered by this proposed legislation. They, it appears, aren't special.

Of course, we have our own loophole for other artists.

The professor lacks sympathy for the plight of the poor songwriter, who may only have one hit in a lifetime:

One song writer notes that because she hasn't had a hit in five years she has to make that money last, "When the hits do come, we have to be like squirrels and bury the money." Of course. So do all the other folks whose incomes peak and sag. Folks like farmers who deal with drought and floods, computer programmers and video game authors who hit the big time one year and then watch other designers' efforts get the attention of the game players, authors who have one great book followed by years of writers' block, professional athletes who rarely earn in middle age what they pulled down in their twenties, and so on. Yeah, it's called planning and budgeting. The fact you need to do this doesn't mean you deserve a tax break. Unless, of course, all taxpayers who need to plan and budget get the same tax break. Fat chance.

Precisely. Except now all the folks he listed will call their lobbyists to get in on the songwriter break.

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ANOTHER ICON TOTTERS

November 30, 2005

Is there no end to our disillusionment?

After learning that war hero turned congresscritter "Duke" Cunningham was a tax cheat who took bribes to steer defense contracts, we now learn that a prominent hip-hop figure may also be a tax cheat:

Embattled hip hop magazine, The Source, just sunk a little deeper into the ground.

Co-owner Raymond "Benzino" Scott was fined by the U.S. attorney's office in Massachusetts for failing to file a tax return on an income of $1.5 million in 1999 and 2000, according to The Boston Herald.

"There was an extensive investigation into this matter," FBI spokeswoman Gail Marcinkiewicz told the Herald. "We took a sweeping look at this individual. We were aware of the allegations of murder and everything else. This is what we came up with."

Murder? That's just part of the gangsta life. But cheating on taxes? That's too much. Next thing we'll hear is that they don't file 1099s for all of their cash payments, too.

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RANDOM MORTALITY

November 29, 2005

The Random Mentality blog is no more. Random, an Iowa corporate lawyer, actress and bon vivant, has decided the blog could be a career limiting move, according to an email sent today by the proprietress. The Iowa blogosphere now has a yawning gap in the funny professed thespian attorney niche.

If available, Random is invited to be the guest of honor at the February 4, 2006 edition of the Iowa Blogger Bash (location: Des Moines area; details t.b.a.). She will be entitled to free drinks, provided somebody is buying.

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ROSE MOVED INDOORS FOR 15 MONTHS

November 29, 2005

We missed this over Thanksgiving break:

Notorious tax protestor Larken Rose of Hollywood, Pennsylvania was sentenced in federal district court to 15 months imprisonment for failing to file tax returns for the years 1998 -2002, the Justice Department and Internal Revenue Service (IRS) announced today. In compliance with Judge Michael M. Baylson’s admonition following Rose’s conviction in August, Rose submitted delinquent tax returns for the years 1997-2004 and paid a substantial deposit to the IRS toward his outstanding tax liability. The court sentenced Rose to one year of supervised release following his prison term and ordered Rose to pay a fine of $10,000 and all taxes, interest, and penalties he owes to the IRS.

Mr. Rose has long been a fixture in the Tax Protest "Tax Honesty" movement. A former lurker in the misc.taxes usenet newsgroup, Mr. Rose evolved with the internet and even testified on behalf of Richard Simkanin, they guy who bought an ad in USA Today boasting that he had left the tax system.

Mr. Rose was a proponent of the silly "Section 861" argument that says U.S. income isn't subject to income taxes. While the sentence would seem to settle that issue, some slow learners still struggle with the obvious.

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THANKS AND SO LONG, DIRTBAG! MY NEW BOYFRIEND AND I WILL ENJOY YOUR IRA!

November 29, 2005

Don't want your "ex" to be the big winner from your inheritance? Joel Shoenmeyer gives you something to ponder at the fine Death and Taxes blog:

In my time reviewing beneficiary designations, I've seen the following designated as beneficiary:

-Client's ex-wife

-Client's ex-girlfriend

-Client's deceased mother

The moral? Review your beneficiary designations every few years for your insurance policies, IRAs and retirement plans.

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'TOURJOURS DE L'AUDACE' DIDN'T WORK OUT THEN, EITHER

November 29, 2005

The TaxProf has a complete roundup on Congressman Cunningham's guilty plea on tax and bribery charges yesterday, with a thorough selection of links. TaxProf Paul Caron quotes the Department of Justice:

U.S. Attorney Carol Lam, whose office is prosecuting the case, said in a news conference that the facts Cunningham admitted in his plea agreement show "this was a crime of unprecedented magnitude and extraordinary audacity." Cunningham, an eight-term Republican congressman, had been under scrutiny for months for his ties to defense contractors and their officials.

A public official in France, Georges Danton, was a big fan of audacity, too ("Toujours de L'audace!). While Mr. Cunningham faces up to ten years in prison, M. Danton fared much worse than that.

In addition to the bribe disguised as a house sale we discussed yesterday, the bribes received included:

- Paying for the capital gains tax on house-sale bribe;

- Buying and maintaining the yacht in Washington D.C. on which Cunningham lived;

- Paying for a graduation party for Cunningham's daughter;

- Buying a Rolls Royce, antique furniture and jewelry, and picking up travel and hotel expenses for Cunningham and his wife;

- Making a $500,000 mortgage payoff for the house in Rancho Santa Fe

I hope it was a nice graduation party.

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THEY QUOTED ME ACCURATELY, THE SCOUNDRELS

November 28, 2005

The Tax Update is mentioned in a Des Moines Business Record story on business blogs this week.

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IS A $7.9 MILLION TAX DISPUTE BIG ENOUGH TO HIRE A LAWYER FOR?

November 28, 2005

Not for Glenn Hightower. Maybe he would have lost anyway, but you'd think for that kind of money you would want a lawyer involved.

Mr. Hightower was forced out of an S corporation in 2000 by his fellow shareholder under terms of a buy-sell agreement. He fought the buyout through arbitration and all the way to the State of Washington Supreme Court. He lost and was forced to live with the $41.5 million buyout price.

He didn't pay tax on either the buyout or his share of the 2000 S corporation income. This required him to make two seemingly contradictory agruments:

1. He didn't sell the stock, but
2. he didn't own it.

Judge Colvin couldn't get his brain around the contradiction. He ruled that Mr. Hightower had to pay tax on the $41.5 million sales price for the stock when he was paid for it, even though he didn't want the money:

Petitioner contends that under the claim of right doctrine the payments are not taxable to him in the years he received them because he opposed the stock buyout, he established a separate, interest-bearing account to hold the payments, and he did not use the funds during the years in issue. Contrary to petitioner’s contention, a payment properly made to a taxpayer is includable in income in the year paid if, as here, the taxpayer (a) receives and deposits the payment in an unrestricted account, (b) seeks to invalidate the transaction or circumstance which caused the payment to be made, and (c) has no fixed obligation to pay the amount to another party. In addition, a taxpayer is taxable in the year the taxpayer receives wages where the taxpayer tried to return the wages to her employer and the employer refused to accept repayment. (Citations omitted.)

Mr. Hightower also had to pick up his share of income for the portion of the year preceding the buyout, even though he was locked out of the building by the other shareholder:

...petitioner has cited no authority for the proposition that a record owner of S corporation stock is not subject to pass through of S corporation income because the record owner has a diminished role in the corporation as a result of having a poor relationship with another shareholder.

Now nothing in the opinion indicates any blunder that lost Mr. Hightower the case that a lawyer would have prevented. Still, the case hinged on the application of tax law to the results of a lawsuit. This seems like deep water for a non-lawyer to swim in. But Mr. Hightower, while out almost $8 million in taxes, at least isn't out the legal fees.

Cite: Glenn Hightower, T.C. Memo. 2005-274.

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TAX COURT DOESN'T BUY 'SICK CATS' EXCUSE

November 28, 2005

We can only assume that Tax Court Judge L. Paige Marvel just isn't a cat person. She dismissed Robert Curci's case for failure to prosecute his petition. Mr. Curci blamed his failure to file timely returns and comply with court deadlines on "his responsibilities as the executor of a friend’s estate, on his providing aid to an evicted friend, and on two sick cats."

Maybe he just needed more cats.

Cite: Robert C. Curci, T.C. Memo. 2005-273.

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CONGRESSMAN, YOU'RE BUSTED

November 28, 2005

They got Al Capone on tax charges. Now they've got California Congresscritter Randy "Duke" Cunningham.

Mr. Cunningham pleaded guilty in federal court in San Diego today. The tax charges are really bribery charges; they cover his failure to report payments from defense contractors.

A defense contractor paid $1,676,000 for the congressman's Del Mar, California house, and resold it a year later for $975,000. The guilty plea shows that Mr. Cunningham's real estate savvy wasn't entirely responsible for this shrewd deal.

The congressman resigned today. He faces up to 10 years in prison on conspiracy and tax evasion charges.

His congressional website is still up. His "Defense" page boasts:

In 1997, he secured a seat on the House Appropriations Committee,and because of his military background, was honored with an unprecedented first term assignment to the Defense Appropriations Subcommittee. Recognized as one of the leading spokesman on joint service tactical aviation issues, Cunningham has also been a major advocate for preservation of the domestic shipbuilding industrial base, stabilization of critical equipment repair and maintenance accounts, and key military personnel and retiree pay and benefits. (TU: his own, especially). He has worked tirelessly to ensure that our troops have the most effective systems technology will allow; he wants to ensure that our troops always have the edge against any foreign competitor. Although his primary role as a member of this Subcommittee is to craft the annual defense spending bill, Cunningham still works closely with his colleague Chairman of the House Armed Services Committee Duncan Hunter on national and local defense policy matters.

No doubt Duncan Hunter is just thrilled to be associated with Mr. Cunningham.

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FULL-TUMMY CARNIVAL

November 28, 2005

Walk off the extra Thanksgiving pounds by wandering through this week's Carnival of the Capitalists and Carnival of Personal Finance. Learn about the $236 million spent on Katrina cruise ships and why GM may not survive next year. Ugh.

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DADDY, WHERE DO TAX LAWS COME FROM?

November 28, 2005

Son, you don't want to know.

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MIXING OIL AND WATER: IRS ALLOWS HSA TO CO-EXIST WITH FSA

November 28, 2005

When the Treasury allowed cafeteria plans to allow participants until 2 1/2 months after year-end to use up their prior-year Flexible Spending Account (FSA) savings, it created a problem for Health Savings Accounts (HSAs). If you are participating in an FSA, you can't also qualify for an HSA. The 2 1/2-month "grace period" could cause problems for employees switching to high-deductible health plans with HSAs on January 1, 2006.

The IRS issued a notice last week (Notice 2005-86) that will allow cafeteria plans to use the 2 1/2-month grace period without disqualifying HSAs at the beginning of 2006. They also explain what happens if they leave the cafeteria plans as they are.

The choices offered by the Notice:

1. Do nothing. If a cafeteria plan for 2005 has the grace period, and the employee switches to a high-deductible health insurance plan for 2006, the employee would be ineligible to contribute to an HSA for the first three months of 2006.

2. Mandatory Conversion to HSA-compatibe FSA. This would require amending the cafeteria plan to get rid of all benefits not compatible with the HSA for the grace period (in short, any health-related benefits).

Transition relief for 2006. For plan years ending before June 5, 2006, taxpayers won't be disqualified by a grace period if they spend all of their own and their spouses 2005 contributions by December 31, 2005, or if the employer amends the cafeteria plan to exclude those with high-deductible plans from the grace period.

Links:

BenefitsBlog Coverage
Treasury press release on Notice 2005-86
HSA Coalition guide to HSAs

InsureBlog's series on HSAs

Part 1
Part 2
Part 3
Summary

Tax Update prior coverage:

THE NEW HEALTH SAVINGS ACCOUNTS: HOW THEY WORK
TREASURY PROVIDES COMPREHENSIVE HEALTH SAVINGS ACCOUNT GUIDANCE

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DOES THIS MEAN SPACE A-LIENS CAN BE CHECKED OUT AT THE COUNTY RECORDER'S OFFICE?

November 28, 2005

A judge for the Court of Federal Claims is unimpressed by the word-bending logic of Tax Honesty adherent Robert B. Beale:

Second, plaintiff maintains that he is guaranteed certain unalienable rights by the Constitution of the United States of America, among which are his rights to "life, liberty and the pursuit of happiness (property)." Id. at 6 (parenthetical original). According to plaintiff, the federal government may not impose a tax or place a lien on these rights, because "unalienable rights are rights against which no lien can be established, precisely because they are un-a-lien-able."

"A-lien-ability" or not, it appears from plaintiff's filings that plaintiff failed to pay income tax in tax years 1992-1995. On March 2, 2005, the Internal Revenue Service ("IRS") assessed a tax lien of $456,632.67.

How can one resist such a-lien logic? By ruling against Mr. Beale, of course.

Cite: Robert B. Beale v. U.S., Ct. Claims No: 05-1132 T, 11/16/2005

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BAH. HUMBUG.

November 25, 2005

The Tax Foundation questions the policy underpinnings of the charitable deduction. (Via the TaxProf)

Killjoys.

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APPRAISE YOUR GIFTS, AND BE THANKFUL

November 23, 2005

As we pause to give thanks this year, we are presented with a new and unexpected blessing from New York's other senator. Charles Schumer has slipped a provision into the new tax bill that, while horrendous tax policy, may just finance my retirement. From a New York Times writeup (via the TaxProf):

Under the bill, artists could donate their work during their lifetimes at full market value provided that it is properly appraised and handed over at least 18 months after it is created.

The provision seems likely to open the way for more acquisitions by cash-strapped museums. "It's very important for cultural institutions and libraries to be able to be the recipient of these works of art that otherwise might go into private hands," said Mimi Gaudieri, the executive director of the Association of Art Museum Directors.

You say, "my, what a stupid idea. Every two-bit parking-lot artist is going to go to fly-by-night appraisers and donate their unsold stuff for huge tax deductions." Precisely! And that's where my retirement fund enters the picture.

If you are going to donate your art to charity, somebody has to accept it. Hence, my new career as Curator of the Digital Museaum of Deductible Art. Longtime readers may remember that this idea died when the Iowa state legislature failed to pass SF 132, which would have tried a similar idea at the state level.

For a nominal handling fee and exclusive rights, our museum would accept and display digital art donated by artists around the world. Incredibly capable appraisers would ensure laughably generous scrupulously accurate valuations of donated work. For example:

Tacks Shelter, Vol 2. Artist: J. Kristan. Estimated Fair Market Value: $25,000.

Or this lovely commentary on the impermanence of things, like old kitchen chairs:

Broken Chair. Artist: J. Kristan. Estimated FMV: $15,000.

Or even this:

Knoxville Cat. Artist: G. Reynolds. Estimated appraised value: 79 cents ($15,000 after payment of handling fee).

If this goes well and I make a killing am successful in my artistic vision, I may expand beyond digital photography and accept paintings and sculpture. I already have a unique gallery display concept in mind:

Concept for future display gallery, Museum of Deductible Art.

In my free time, I will encourage Senator Schumer to expand the concept. The arts need a lot of help, even from people who lack the kind of talent seen in these pictures. They need help from lawyers and accountants, for example. They should be able to deduct the fair market value of their time given to arts organizations, like the Museum of Deductible Art. The deductions should be at very high rates, too, no less than $600 per hour. Nothing but the best for the Arts!

Have a great Thanksgiving!

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S CORPORATIONS: WHAT'S A FAMILY?

November 22, 2005

When I started tax practice in 1984, an S corporation was limited to 35 shareholders; spouses counted as one shareholder.

The increased popularity of S corporations triggered congress to increase the limit, first to 75, then to 100. In some instances, though, the number can now be much larger.

A provision in the 2004 "American Jobs Creation Act" allows S corporations to consider members of a "family" to be a counted as a single taxpayer. For this purpose, a family is any group with a common ancestor going back six generations.

NOTICE 2005-91

One year later, the IRS has finally come with a procedure for families to elect to be counted as a single shareholder. Notice 2005-91 says the election may be made by any family member; all that is required is to identify the name of the family member making the eliction, the "common ancestor" of the family to which the election applies, and the first taxable year for which the election is to be effective.

The S corporation family provisions took effect on January 1, 2005, but the notice was delayed until today. Some families have already joined in S corporation elections and have cobbled together their own notification in the absence of IRS guidance; the Notice says they will have to provide the required information to the S corporation to perfect the election. Notice 2005-91 also cleans up some loose ends on how trusts and estates get counted in measuring family members.

FAMILY VALUES

S corporations can now be quite large. A few years back I went to a reunion for the descendants of Heinrich and Anna Scheunemann, who moved to Illinois from Westphalia in the 1850s. They produced seven children, all of whom produced their own kids. There were, I think, about 300 people at the reunion, and these were only a fraction of those eligible to attend. I am in the fifth generation of descendants, so my kids also are part of the "family." Except for a few seventh generation kids, and some unmarried significant others, the whole reunion counted as one shareholder, in case we ever want to be an S corporation. And then we can get together with 99 other families.

Research is under way to determine whether Missouri is now eligible to make an S corporation election.

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GIVING SEASON ENDS DECEMBER 31 AND STARTS JANUARY 1

November 22, 2005

It doesn't look like the estate tax is going away anytime soon. If you're fortunate enough to have an estate tax problem, an important estate planning opportunity will expire when the ball hits at Times Square. We're speaking, of course, of your 2005 annual gift tax exemption. Each year you fail to take advantage of the annual exemption - currently $11,000 per donor, per donee -- you have foregone forever a chance to reduce your taxable estate by that much.

The exclusion rises to $12,000 next year, but that's no excuse to waste this year's exclusion. The Death and Taxes blog shows how the savings can add up:

1. You and your spouse have three grown children. (Each child is married and has one child of his or her own.) You and your spouse each give $11,000 to each child on December 31, 2005 and $12,000 to each child on January 1, 2006. You have just given away $138,000 without having to pay gift tax or even file a return.

2. Same facts as in 1., but you also make the same gifts to each child's spouse. That's another $138,000 that you've given away without having to pay gift tax or even file a return.

3. Same facts as in 2., but you also make the same gifts to your three grandchildren. That's another $138,000 that you've given away without having to pay gift tax or even file a return.

Reducing your estate by $138,000 reduces your eventual estate tax by $62,100, assuming a 45% rate. Do that every year for 10 years, and your heirs will be $621,000 happier -- or wealthier, anyway. The benefit will actually be higher, to the extent the gifts appreciate in value after you give them away. Repeat on January 1: the sooner you give them away, the more post-gift appreciation there will be.

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YOU'RE DEAD. NOW WHAT?

November 22, 2005

Kreig Mitchell has a primer on basic tax issues and elections for estate adminestrators at his "Everything Tax Law" blog:

This post is written to remind non-tax attorneys who administer estates of a few basic tax issues that must be considered in administering estates. From a tax perspective, estate administration is all about making elections and timing distributions, income and expenses.

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HOW THE TAX PROFESSOR GOT INTO MY PAJAMAS I'LL NEVER KNOW

November 21, 2005

The post "Law Teaching in Pajamas" from the TaxProf could give a new and racy life to the old "I shot an elephant in my pajamas" joke. Depending on the professor, of course.

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THE TAX UPDATE: PROMINENTLY-MENTIONED ALSO RAN

November 21, 2005

I'm willing to believe that Dan Meyer, proprietor at the TickMarks blog, is a truly perceptive guy:

Congratulations to footnoted.org, Tax Prof and the Accounting Observer on recognition in the Wednesday Wall Street Journal Personal Section (Part D). Obviously, I will have to improve my writing.

The section lists blogs from a variety of business and entertainment areas, including real estate, advertising, health care, television and theatre. Based on my link section, I obviously believe that there are many blogs in the personal finance and tax areas which would have worthy of inclusion, but the omission of three blogs were particularly surprising to me: Consumerism Commentary (as the headquarters of the Carnival of Personal Finance), Free Money Finance and Roth CPA Updates.

Aw, shucks... Thanks, Dan!

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2005 TAX BILL ON ICE UNTIL DECEMBER

November 21, 2005

The House of Representatives has delayed floor action on its version of the Tax Reconciliation Bill until it returns from Thanksgiving Break on December 5.

The TaxProf has a nice chart today outlining some of the major differences between the House and Senate versions of the bill. The big issues are whether the lower rates for capital gains and dividends will be extended beyond their scheduled expiration in 2008 (House bill only) and whether the alternative minimum tax exemption will be increased in 2006 to prevent millions more taxpayers from being subject to AMT (Senate bill only).

Prior Tax Update Coverage:

SENATE PASSES TAX BILL IN WEE HOURS

SCALED-BACK GRASSLEY BILL PASSES FINANCE COMMITTEE

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DECEMBER 2005 APPLICABLE FEDERAL RATES (AFRs) ISSUED

November 21, 2005

The IRS has issued (Rev. Rul. 2005-77) the minimum interest rates for loans made in December 2005:

-Short Term (demand loans and loans with terms of up to 3 years): 4.34%
-Mid-Term (loans from 3-9 years): 4.52%
-Long-Term (over 9 years): 4.79%

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

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BE THANKFUL FOR CARNIVALS

November 21, 2005

Des Moines's own "not a blogger" Brian Gongol hosts this week's Carnival of the Capitalists, a weekly compedium of economics and business weblog hostings. I like the Insureblog's interview with Aetna's medical director about their pilot program in Cincinnati to enable its customers to comparision shop for procedures on the Web. Also check out the Et Tu Blog's discussion of how Canada has figured out a way to make casinos lose money (hint: they're government-owned and run).

Meanwhile, the Carnival of Personal Finance is playing this week at Frugal for Life.

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BUT THE CPAs SAID IT WAS IMMATERIAL ON THE FINANCIAL STATEMENTS...

November 21, 2005

Sometimes close is good enough. Sometimes, though, it's not close:

A Rockland County man pleaded guilty in White Plains federal court yesterday to four counts of income tax evasion.

According to the indictment, from 1997 to 2000, Pasquale Diaferia, who was the owner and operator of P&D Automotive Specialties, Inc., that arranged special financing for low-income and credit-impaired customers who sought to purchase automobiles, falsely claimed he earned $8,142 when his income when he actually earned $402,000.

Diaferia, of New City, faces up to 20 years in federal prison for his tax evasion scheme when sentenced next February.

Oh, THAT $394,000! My bad!

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SUDDENLY THE JURY FOREMAN FELT A SHARP PAIN, AS IF A LARGE NEEDLE HAD BEEN STUCK THROUGH HIS HEAD

November 21, 2005

News Report:

OAKLAND — A self-described "voodoo chief" and "shaman psychologist" who used to perform exorcisms in the Oakland hills was convicted Friday of failing to file income tax returns and hiding assets during her bankruptcy case.

Sharon Lee Caulder, 61, now of New Orleans, was found guilty after a one-week trial and less than four hours of jury deliberations, federal prosecutors said.

THE MORAL: While voodoo and tax practice have much in common, it's dangerous to ignore the differences.

UPDATE: Taxable Talk has more details.

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YAY, TIGERS!

November 18, 2005

Congratulations to the Valley High School Tigers of West Des Moines, Iowa's Class 4A football champions!

Congratulations to Brian Carlson, All-Conference Valley Tiger Defensive Back, and to his father, Roth & Company shareholder Jerry Carlson!

And congratulations to the Cedar Falls Tigers, who played a tremendous game against Valley, falling short only on the final play of the state championship game. Final score: 24-21.

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MIKE TAKES A HIKE

November 18, 2005

Mike Ralston is stepping down as Director of the Iowa Department of Revenue to become President of the Iowa Association of Business and Industry. He had been head of the Department since the retirement of longtime Director Jerry Bair in 2003.

While I didn't always agree with Mr. Ralston, I always believed he was trying hard to do sensible things in implementing Iowa's nonsensical tax laws. While Mr. Ralston would be too nice to ever say so, I suspect that trying to change the direction of the Department of Revenue bureaucracy is about as rewarding as quick swim in the La Brea Tar Pits. I wouldn't be surprised if Paul Streckfus's portrait of the IRS applies as well to the Iowa Department of Revenue:

..., as a general rule, the IRS's best employees tend to leave after a few years for the private sector out of frustration. Too often this exodus leaves behind the less capable. This problem is compounded by the combination of a strong union, the National Treasury Employees Union, along with civil service protections. This means IRS managers can't fire or even meaningfully discipline employees. The result is that managers don't really manage. As one IRS manager put it to me, he "suggests" that his employees perform tasks. If they decline, there is little or nothing he can do.

Welcome back to the private sector, Mike, and good luck.

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SENATE PASSES TAX BILL IN WEE HOURS

November 18, 2005

The Senate passed its version of the tax reconciliation bill early this morning. The bill includes an extension of alternative minimum tax relief, but it doesn't extend the the reduced capital gain and dividend rates past 2008. It does include a limit on the benefit of LIFO accounting for big oil companies that has been criticized as a "backdoor windfall profits tax," and which has triggered a rare veto threat from the White House.

The Senate bill will have to be reconciled with a House tax bill. There is a slim chance that the House will vote on its version today, on the heels of passage of a hotly-contested spending bill early this morning, but reports say it is more likely to be passed after the Thanksgiving break. The House bill includes the dividend and capital gain break extension but lacks the AMT relief.

The Republican leadership will work for a conference agreement to include the capital gain extension and AMT relief while dropping the oil company LIFO provision.

UPDATE: The TaxProf has links to statutory language and related information.

Links:

Prior Tax Update coverage

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TAX COURT SAYS NO ESTATE TAX DISCOUNT FOR IRA INCOME TAXES

November 17, 2005

Retirement accounts present one of the thornier problems in estate planning. Not only are they subject to estate tax (top rate 47%), but the beneficiaries have to pay income tax when the IRA amounts are distributed at rates up to 35%.

This double tax hit explains why some folks have charities as their Individual Retiremennt Account Beneficiaries. It also illustrates why the 2005-only waiver of the 50%-of-AGI limit on cash donations is useful to some taxpayers - they can withdraw their IRAs, donate the entire amount to a charity, and get full income and gift tax deductions while solving a potential estate tax problem.

DOES THE DOUBLE-HIT MAKE IRAs LESS VALUABLE?

Doris Kahn died in Glencoe, Illinois in 2000. She left behind two IRAs with assets totaling $2,620,410. Ms. Kahn's estate tax form, Form 706, reported the IRAs at a reduced value of only $2,103,416 to reflect the income tax that would be payable when the IRA assets are paid to beneficiaries.

In a way, such a discount makes sense. Courts have allowed discounts in the value of corporation stock to reflect taxes that the corporations would incur if they sold their assets, for example. Why not apply that logic to IRAs?

IT'S THE IRA ASSETS, NOT THE IRA ITSELF

The Tax Court said that the argument fails because an IRA cannot be sold. Only its assets can be sold, so only its assets can be valued.

The tax law standard for determining value is what a hypothetical willing buyer would pay a willing seller for assets, with both parties informed of the facts involved. A hypothetical buyer of a corporation with tax liabilities would pay less for the stock of a corporation with deferred tax liabilites because the buyer would eventually have to pay them. In contrast, a buyer of IRA assets would not assume any liability for IRA taxes, so there's no reason to discount his purchase price. Certainly the seller isn't going to discount the price, regardless of the taxes.

The Kahn estate didn't lose it's case for lack of trying. In arguing for the discount it used valuation cases involving, among other things, lottery payments and contaminated land. The Tax Court was not moved:

The main problem with all of the arguments based on the above-cited cases is that the estate is trying to draw a parallel where one does not exist by comparing this situation to situations where a reduction in value is appropriate because a willing buyer would have to assume whatever burden was associated with that property--paying taxes, zoning costs, lack of control, lack of marketability, or resale restrictions. In this case, a willing buyer would be obtaining the securities free and clear of any burden. We have taken note of the fact that the IRAs themselves are not marketable. Therefore, in determining their value under the willing buyer-willing seller test, we must take into account what would actually be sold--the securities. (emphasis added)

The tax law does provide some relief for IRA beneficiaries: when they do report the IRA proceeds as income, the taxable distribution is considered "income in respect of a decedent," or IRD. Taxpayers receiving IRD are allowed an income tax deduction for the estate tax paid on account of the IRD. Think of a mugger leaving you cab fare to get home.

The Moral: When you file an estate tax return, your full IRA value is going to be subject to tax. If you are fortunate enough in life to have an estate tax problem, the IRA problem isn't going away on its own. If you are charitably inclined, the IRA makes a great gift. It's an especially nice gift in 2005 because the 50% of AGI charitable deduction cap is raised to 100%. But act now - the cap reverts to 50% January 1!

Cite: Estate of Doris F. Kahn v. Commisioner, 125 T.C. No. 11.

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SENATE PASSES PENSION FUNDING, 'DEAD PEASANT' INSURANCE CHANGES

November 17, 2005

The Senate yesterday passed a bill (S. 1793) changing the rules for funding defined benefit plans. The bill includes special provisions for the airline industry, giving it 20 years to catch up on its plan funding; other industries get only seven years. The BenefitsBlog has it covered.

The bill includes another attack on "dead peasant" life insurance polices. These policies were used in a now-obsolete tax shelter to enable employers to deduct interest on loans to buy life insurance on rank and file employees to generate tax-free policy proceeds. Under the bill, employer-owned life insurance proceeds will be taxable unless purchased on the life of a highly-compensated employee or director, unless the proceeds are paid to the insured's estate or family. Currently life insurance death benefits are taxable only if the policy has been sold by the original owner to another party under the "transfer for value" rules.

Tax Analysts free coverage here.

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ANDERSON'S ARK PASSENGERS FACE CHARGES

November 17, 2005

After ancient sea battles it was standard procedure for the victors to mop up by spearing the defeated sailors clinging to their wrecked ships. The IRS likes that style. After defeating the "Anderson's Ark" tax fraud operation and winning long prison terms for its organizers, the IRS is now mopping up the hapless participants of that sunken scheme.

For example, a federal grand jury in Denver yesterday indicted Kris Smith of Grand Junction, Colorado. She was an Anderson's Ark client who allegedly filed false returns for 1999 through 2001 and a false refund claim for 1997 and 1998. She faces up to three years imprisonment and $400,000 in fines.

The IRS has indicted 16 Anderson's Ark Clients. You can find complete Tax Update coverage of the Ark here.

The moral: It's not just tax scam organizers that lose. The participants get speared, too.

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MISTRIAL DECLARED IN HOOTERS FOUNDER TAX FRAUD TRIAL

November 16, 2005

The trial of a Hooters founder on tax fraud charges ended in a mistrial today in Tampa.

Lynn "L.D." Stewart was charged with using fraudulent trusts set up by the Aegis Company of Palos Hills, Illinois. Mr. Stewart used the trusty "blame the accountant" defense, which must have been enough to sway at least one juror.

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WSJ: TAXPROF BLOG A 'MUST-READ' BLOG

November 16, 2005

The Wall Street Journal ($) names the TaxProf Blog a "must read":

The TaxProf Blog compiles the latest tax-news articles, legislation, academic papers and updates from other tax blogs. Launched last year -- on April 15 -- by University of Cincinnati College of Law Professor Paul L. Caron, the site has gained a wide following among tax professionals, academics and policy-makers. It contains links to state, federal and international tax information and even has a section called "Celebrity Tax Lore" which links to stories on the "tax issues of the rich and famous," says Mr. Caron, as well as other tax-related trivia and cartoons. A recent posting, for instance, links to articles about teenage golfer Michelle Wie receiving her first tax form.

While the Journal is dead right about the TaxProf, I'll quibble with them also naming the TaxAnalysts free site as a "must-read blog." Must read, perhaps, but it's no blog. It is merely shorter versions of articles run in its subscription-only news service.

Tax Analysts briefly had a blog, but they abandoned the experiment after about a week. That is unfortunate. A Tax Analysts group blog featuring the Rabys, Lee Sheppard, Eugene Sterle, Martin Sullivan (to name but a few commentators) and the Tax Analyst reporting staff would be great.

Of course the TaxProf has more.

PS: The TaxProf has enabled comments for his post. If you are so moved, go congratulate him!

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SCALED-BACK GRASSLEY BILL PASSES FINANCE COMMITTEE

November 16, 2005

Senator Grassley's tax reconciliation bill cleared the Senate Finance Committee last night, but without an extension of the 15% top rate for dividends and capital gains. These breaks, scheduled to expire after 2008, were stripped from the bill when Republican Olympia Snowe sided with the Democrats on the committee in opposing the bill.

The bill increases the alternative minimum tax exemption amount and then adjusts it for inflation - a long overdue measure to keep inflation from pushing more taxpayers into AMT. It also extends some tax breaks that were slated to expire after this year, including the deduction for teacher expenses, the sales tax deduction, and the research credit.

The bill still has to clear the Senate and then be reconciled with a House bill. The House Ways and Means Committee last night approved its version of the bill, which extends the dividend and capital gain breaks but has no AMT exemption extension.

Links:

Tax Analysts free coverage, Senate Bill

Tax Analysts Free Coverage, Ways and Means bill
TaxProf Blog coverage roundup

The bill still has a way to go before passage.

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COMMISSIONER EVERSON, MEET THE MINISTER OF MAGIC

November 15, 2005

Compare and Contrast.

Paul Streckfus, tax journalist and former IRS agent, on life in the IRS (letter to Tax Analysts; no link available):

..., as a general rule, the IRS's best employees tend to leave after a few years for the private sector out of frustration. Too often this exodus leaves behind the less capable. This problem is compounded by the combination of a strong union, the National Treasury Employees Union, along with civil service protections. This means IRS managers can't fire or even meaningfully discipline employees. The result is that managers don't really manage. As one IRS manager put it to me, he "suggests" that his employees perform tasks. If they decline, there is little or nothing he can do.

The result is an environment where morale is always low, as good employees watch bad employees contribute little to accomplishing organizational goals while receiving the same salaries as those who do.

Benjamin Barton, University of Tennessee College of Law, in his paper "Harry Potter and the Half-Crazed Bureaucracy:

...government is controlled by and for the benefit of the self-interested bureaucrat. The most cold-blooded public choice theorist could not present a bleaker portrait of a government captured by special interests and motivated solely by a desire to increase bureaucratic power and influence.

...

Harry's best friend's Dad, Arthur Weasley is a well-meaning government employee. He is described as stuck in a dead end job, in the least respected part of the government, in the worst office in the building. In Rowling's world governmental virtue is disrespected and punished.

I always did like that Potter boy.

Barton link via Instapundit.

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WITH AMICI LIKE THIS, WHO NEEDS ADVERSARI?

November 15, 2005

The Tax Foundation has filed an amicus curae ("friend of the court") brief urging the Supreme Court to overturn the Sixth Circuit's Cuno decision. Cuno holds that corporate welfare targeted tax incentives are an unconstitutional infringement of federal rights under the commerce clause. If upheld, the decision would imperil the Grow Iowa Values funds and tax subsidies in other states.

The court may dodge the substantive issue by ruling that the Cuno plaintiffs weren't eligible to sue to overturn the tax subsidies at issue.

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OH, SO THAT'S WHAT THE TAX LAW IS FOR

November 15, 2005

From the November 11 New York Times:

In the vast, jumbled television landscape, the "Law & Order" formula is reliably distinctive and smart, often topical yet most of all familiar and comforting. That could partly be because, like all the best mysteries, "Law & Order" provides cathartic social vengeance: middle-class detectives and prosecutors expose the greed and perversions of the rich, exacting a retribution that the tax code fails to deliver.

I've always wondered about that "retribution and revenge" line on my pay stub.

Via the TaxProf.

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JUDGE PUTS FREQUENT FLIER MILES ON ICE FOR INDICTED ACCOUNTANT

November 15, 2005

A federal judge denied bail yesterday to one of the indicted ex-KPMG partners. The judge ruled David Greenberg was a flight risk and likely to tamper with witnesses.

Kaplan said on Monday that he considered nonviolent witness tampering and obstruction a danger to the community and grounds to deny bail.

The judge noted that the defendant had allegedly told a coconspirator that if he were indicted, he would take about $16 million to $20 million he had put in his ex-wife's name and take off.

Kaplan said that Greenberg's April 2004 formation of a limited liability company in the name of his former wife and his father corroborated that claim. The executive put between $11 million and $13 million into the company's accounts.

After analyzing the signatures on papers forming the company, Kaplan concluded that it was "quite unlikely" that Laura Greenberg, the ex-wife, had signed them at all.

The government has maintained that the former wife was unaware of the formation of the asset-holding company and learned of its existence by mistake through a mass mailing. The judge said the circumstances suggest Greenberg formed the company without his former wife's knowledge and kept its existence from her.

Serious business, indeed.

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WHITHER 2005 TAX LEGISLATION?

November 14, 2005

Congress is trying to put together a "tax reconciliation" bill for 2005. This bill is important to Congressional taxwriters because it is the only tax bill that won't need 60 votes to pass the Senate. Considering that so far it can't get 11 votes to pass the Senate Finance Committee, they have their work cut out for them.

The bill has one "must pass" provision - one that would keep AMT from applying to millions more taxpayers in 2006. It also is needed to extend other popular tax breaks, including the research credit and the above-the-line deduction for teacher classroom expenses.

The biggest controversy arises over the desire to use the bill to extend the 15% top capital gain and dividend rate. That reduced rate is set to expire after 2008, at which point it would rise to 20%. Senate Finance Committee Chairman Grassley has been unable to convince Maine Republican Olympia Snowe to go along with extending the reduced rate, and he can't reach 11 votes without her help.

Meanwhile, the House Ways and Means Committee is drafting its own bill. Chairman Bill Thomas wouldn't bother to provide AMT relief. Per Tax Analysts:

Thomas had suggested that exclusion of any AMT relief might work to spur tax reform efforts in 2006, as more families would become ensnared by the tax. The need for a permanent solution to the AMT's growing reach is often regarded as an incentive to reform the tax code, and AMT repeal is the centerpiece of the tax reform plan presented November 1 by the President's Advisory Panel on Federal Tax Reform.

That's a bit like spurring debate on fire-sprinkler laws by committing arson.

One thing is for sure: estate tax reform is dead for this year, and possibly for this Congress.

Links:

Tax Analysts free coverage

Washington Post coverage

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FUN WITH DEATH AND TAXES

November 14, 2005

Joel A. Schoenmeyer has been putting up a lot of good stuff on his Death and Taxes blog, including Part 1 and Part 2 of a primer on trust distributions. Or just go there and start scrolling.

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THAT 70'S SHOW, TAX EPISODE

November 14, 2005

It's almost as if beanbag chairs and lime-green polyester suits were set to make a comeback. Responding to a disaster-driven run up in fuel prices and oil company earnings, some congresscritters are proposing to revive the "windfall profits tax." This futile response to the energy crisis of the '70s was wrapped in a shag carpet and buried in an avacado-green casket in 1987.

Tax Professor Daniel Shaviro last week thought the issue over, and came up with this tepid endorsement of a windfall profits tax:

This brings us to the better argument, which is a political second-best. Even before the Bush-Cheney administration, oil companies had a tendency to win huge concessions, tax and otherwise, from the federal government, due to their immense political clout and insider connections. So we probably have a background situation in which oil companies are inefficiently favored by government policy. A windfall profits tax is one of the politically more feasible correctives, although it probably is not the response one would choose in the absence of political constraints.

So let's hear it, albeit tentatively, for a windfall profits tax on oil companies, on the view that it might (however imperfectly) reduce the overall bias of government policy in favor of this line of business as opposed to others.

Without identifying any specific ways the government has given "huge concessions" to the oil industry, we would get a new tax to correct "a background situation in which oil companies are inefficiently favored by governmental policy." Even assuming such favoritism, his remedy is like a doctor trying to correct the side effects of sedative overuse not by reducing the sedative dose, but by prescribing methamphetamine too.

The Knowledge Problem has a wise discussion of the economics of a windfall profits tax here. The Tax Policy Blog discusses the tax policy issues and the history of windfall profits tax collections.

UPDATE 11-16: I had initally failed to link to the Shaviro post; that's fixed now. My apologies.

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PROFESSOR MAULE MUST NOT KNOW ME WELL

November 11, 2005

A reader this week fed my delusions of minor grandeur by asking what I would do if I were IRS commissioner for a day, and could skim 1% off of any additional revenue I could raise. It turns out that he asked the same question of Professor Maule, who provided a typically sensible response. Sensible, that is, but for one questionable assertion:

But to get anything done, the Commissioner needs a good Chief Counsel. So here's the deal. Joe (me - ed.) can be Commissioner for a day, and I'll be his Chief Counsel for that day. We'll split the 1%. Neither of us are greedy, so we each could be content with one-half of 1%. Of course, I'm expecting Joe would spring for that day's lunch tab.

What's this us stuff? Speak for yourself, Professor, and I'll dock your half for the lunch tab, thank you very much!

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51 DAYS LEFT IN DEFERRED COMP PLAN TERMINATION SEASON

November 11, 2005

While many of the executives who looted their corporations in the 1990s are now safely locked up, the damage they did lives on in the tax law.

Deferred compensation plans were favorite getaway vehicles for some notorious corporate malefactors. While they were busy pillaging their companies, they would send the proceeds safely offshore to fund lavish deferred executive compensation plans. Congress, as it often does, responded by firing into the crowd. Hence new Section 409A.

This tax provision requires taxpayers with "non-qualified" deferred compensation plans to jump through a large number of hoops to defer tax on the income. If they fail to jump just right, employees have to pay taxes on their deferred compensation, AND they have a 20% penalty, too. This applies even if they don't get the cash.

These rules apply to most compensation deferrals other than "qualified" retirement plans. Profit-sharing and 401(k) plans, for example, are qualified retirement plans, so they are not subject to Section 409A. In contrast, many deferred bonus plans and executive supplemental plans are subject to the new rules. The new rules also apply to some "non-compete" agreements for employees and to deferral arrangements with independent contractors.

TERMINATE?

Some taxpayers have concluded that these plans are no longer worthwhile. If old plans are terminated and the proceeds distributed to the owners before year-end, the plans don't have to deal with the new rules. If the plan isn't terminated by year-end, taxpayers will be unable to change their mind without meeting Section 409A's requirements

W-2, 1099 REPORTING

The new law requires employers with these plans to disclose amounts deferred for 2005 on 2005 W-2s. Taxpayers with such plans need to be ready to meet these rules when they issue W-2s in January. Similar rules require Form 1099 disclosure of deferred compensation amounts for independent contractors - for example, deferred director fees.

THESE RULES ARE ALREADY IN EFFECT

While you have until the end of 2006 to get your deferred compensation documents in line with the new law, you need to run them according to the new rules now. That means, among other things, that any deferrals for 2006 must be irrevocably elected in writing by the end of 2005.

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ARMISTICE DAY

November 11, 2005

In Flanders fields the poppies blow
Between the crosses, row on row,
That mark our place; and in the sky
The larks, still bravely singing, fly
Scarce heard amid the guns below

88 Years and 8 days ago, Merle Hay died in the first U.S. action in World War I. The Glidden, Iowa farm boy, pictured here, died in a night attack in near Artois, France -- possibly the first of 116,516 Americans to die in that war. Worldwide, 8.6 million soldiers and 6.5 million civilians lost their lives before it ended 87 years ago today.

Only a very few veterans of that war survive, and the cataclysm of World War II overshadows its predecessor in our memories. It's easy to overlook how much change the first war wrought before it ended at the eleventh hour of the eleventh day of the eleventh month of 1918. Next time you drive up Merle Hay Road, remember the sacrifices of Merle and millions of others.

Links: Veterans Day/Armistice Day page.

Brent's Veterans Day Tribute

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AND HE PROBABLY WON'T HAVE TO FILE TAX RETURNS ANYMORE, EITHER

November 10, 2005

Chai Soua Vang keeps on the sunny side after receiving a life sentence Tuesday for six murders in Wisconsin:

He called Tuesday the happiest day of his life, saying he would no longer have to deal with child support and mortgage payments.

Via Althouse.

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LAWMEN NEED A CLUEMAN

November 10, 2005

The tax people at the Department of Justice are seeking an injunction agains tax protest promoter Charles Conces, proprietor of the "Lawmen" web site. The DOJ press release says:

The complaint alleges that Conces helps customers to file so-called "zero" federal income tax returns that falsely report no income, sells an attachment to be used on zero returns, and sells frivolous letters, forms, and lawsuit papers for his customers to use to threaten IRS employees and obstruct the administration and enforcement of the tax laws. The complaint alleges that Conces promotes his scheme through e-mail groups, web sites, an Internet bulletin board, seminars, and meetings of his organization. He allegedly charges customers $25 to $330 for his scheme.

Those prices seem to be borne out by the handy price list at Mr. Conces's "Lawmen" web site, which features the animated authority figure at the top of this post:

1) Statement Of Facts letters for IRS agent, banks, and employers... $75

2) Statutes At Large study proving there is no law... $100

3) 20 Page report on liability ... free

4) "A" series of letters for county... $25

5) "B" series of letters for IRS agent... $25

6) "C" series of letters for IRS agent... free

7) "D" series of letters on filing W-4 exempt... $25

8) My newest series "E" letters if you have a notice of lien on your property AND they are levying on your wages... $25 (Note: We got a letter from the IRS for one of our LAWMEN entitled "We Released The Taxpayer Levy")

9) How To File Lawsuit In District Court... free

10) Winning In Court... free

11) 3 Lawsuit Samples For US District Court... $100 each

12) Affidavit Of Fact for lawsuits... comes with lawsuits

13) Affidavit Of Non-Liability for state or federal... free

14) Letters to townships on ordinances... free

15) Mich Court ruling on property seizure... free

16) State Letters on income tax... free

17) All materials available for...$330

An alert reader might ask: if this stuff works, why do I need anything after the first letter? This material progresses from initial IRS contact to lawsuits to property seizures. With each purchase, your legal situation is more dire. If you end up fighting property seizures, it seems that these things don't work very well. You can buy tax trouble all the way from the initial contact by IRS to the auction of your possessions, all for just $330 -- but why would you do such a thing? Per the Lawmen site:

All of this information is predicated on the belief that we still have a system of law and it is only necessary to obtain justice in our courts by doing the correct filings and using the correct arguements. Many people are not equiped to do this and if you find that your county has violated the rights of many of the citizens, then it is suggested that you do a class action lawsuit. You will have to contact those people and have them get a copy of the illegal notice of federal tax lien on their property and appoint someone in charge. Then the LAWMEN will assist you in any way we can.

If you think that all this is not possible, you should resign from the LAWMEN and learn how to lick boots. It will come in handy for you.

So remember, unless you follow the Lawmen's tax advice until the Sheriff sells your stuff at auction to pay your back taxes, you're a bootlicking lackey. Just so you know.

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MERCURY MARINER, FORD ESCAPE HYBRIDS CERTIFIED FOR CLEAN FUEL DEDUCTION, CREDIT

November 09, 2005

The IRS has certified two new vehicles as qualifying for the $2,000 clean fuel deduction for 2005. The Mercury Mariner and Ford Escape now qualify for the clean fuel vehicle deduction. The deduction expires at the end of this year, to be replaced by a tax credit in 2006.

DEDUCTION OR CREDIT?

If you take possession of the vehicle before year-end, you get the deduction. If you wait until next year, you get the credit. Which should you do?

The answer depends on what your alternative minimum tax (AMT) situation is. You can take the deduction in computing AMT and get a tax benefit right away. The credit is not allowed for AMT, and you won't be able to use it until the day in the misty future when you no longer are paying AMT. But if you can use the credit, it's better than the deduction.

How do you know whether you will be in AMT? You have to run the numbers. As a shortcut, if you are a two-earner professional couple in a high tax state, like Iowa, you are a likely AMT candidate as far as the eye can see - especially if you have kids.

Link: Complete list of qualifying vehicles

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FEDS SUE 'DOWN PAYMENT ASSISTANCE' OUTFIT

November 09, 2005

Some things just don't smell right. Still, when you need to close a home sale, sometimes you'll hold your nose.

An Illinois organization known as "Partners in Charity" (PIC) has been helping home sellers close deals when the buyer is unable to come up with a down payment. PIC "gives" the down payment to the buyer, and the seller "reimburses" the downpayment to PIC, plus an "administration fee." If the seller were to pay the down payment directly, that could make the lender walk away; running it through PIC gives everyone a fig leaf that there is a "down payment" and gets the deal closed.

Here's the fun part, from a tax viewpoint: Partners in Charity claims to be a 501(c)(3) charity, and the Government says they tell house sellers that the "reimbursed" down payment and administrative fee qualify for a charitable contribution. The IRS and the Justice Department disagree:

The suit alleges that in marketing and operating this scheme, PIC falsely advises house sellers and others that the sellers may claim charitable deductions on their federal income tax returns for amounts they are contractually obligated to pay PIC. According to the court filing, seller’s payments are not deductible charitable contributions, because they do not proceed from "detached and disinterested generosity," but rather the payments are made in order to "facilitat[e] the sale of the seller’s house."

Partners in Charity helpfully has put the contract terms on their website:

click image to enlarge, or click here for the full document.

Note that the seller is "obligated" to make the "contribution," or PIC doesn't play. This is an obvious quid pro quo, and the Eddie Haskell-like language "Seller understands that the contribution will not be used to provide down payment assistance to the Buyer of the Participating Home, and that the gift funds provided to the Buyer toward the purchase of the Seller’s home are derived from pre-existing PIC funds" isn't going to fool anybody. If that worked, the only way you could ever stop somebody from running almost any expense through a purported charity would be if the charity used the exact same dollar bills that you gave them to pay the expense.

More from the Justice Department press release:

According to the government complaint, a significant portion of house sellers participating in the PIC program have improperly claimed a charitable deduction on their federal income tax returns. The suit asks the court to order PIC to provide the government with a complete list of the sellers’ names, addresses, telephone numbers, e-mail addresses, and Social Security numbers.

Once they get the Social Security numbers, they will walk back to all of PIC's home sellers and look for outsized charitable deductions. PIC can also look forward to maybe losing its exempt status.

The tax deduction issue isn't even close. Common sense tells you that running a downpayment through a charity isn't really a gift to charity. The documents make it clear that you are getting something for your contribution, and the tax law says that you don't get charitable deductions when that happens.

There are a number of "charities" doing these deals (see here, for example). Unless they have been scrupulous about denying that they provide a charitable deduction for sellers, it's likely that they, too, will be getting unwelcome visits from Justice Department process servers.

THE MORAL?As a wise judge once said: " Some people believe with great fervor preposterous things that just happen to coincide with their self-interest." If it's preposterous, don't expect it to work. And if you've sold a house in one of these deals and you claim a charitable deduction for the "contribution," you can look forward to a certified letter from the IRS.

Link: Copy of injunction request.

UPDATE: Today's Wall Street Journal has a story on this topic today. Online Journal subscribers can access it here; dead-tree WSJ readers will find it below the fold on page D-1 in the "Personal Journal" section. The article says the down-payment industry is aware that they have a problem:

Ann Ashburn, chief executive officer and president of AmeriDream Inc., a Gaithersburg, Md., nonprofit organization that offers a down-payment-assistance program, said that a few months ago it posted on its Web site an opinion from its attorney saying that claiming a charitable deduction was not legal. She said that AmeriDream, started in 1999, always said from the beginning in its literature that services weren't tax deductible.

"We have a good program, but when stuff like this happens, it tends to cast some shadow on it," she said.

UPDATE 11-10-05: The TaxProf has more.

UPDATE, 5-5-2006: The IRS rules that seller-financed down-payment assistance causes the charity to lose its exempt status.

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SHAVIRO EVALUATION OF TAX REFORM REPORT NOW AVAILABLE

November 09, 2005

The TaxProf Blog has made Daniel Shaviro's evaluation of the Tax Reform Panel report that we mentioned yesterday publicly available here.

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BETTER THAN KING FOR A DAY

November 08, 2005

In a comment to this entry, reader Jeff Jacobs riddles me this:

- I regard your postings highly. But we all know that "being President for a day" doesn't guarantee enacting the tax laws you prefer.
- So let me ask you a more pragmatic, non-professorial question: What if someone made you Commissioner of Internal Revenue for one day? And what if your salary was based on 1% of the revenue you collected? Which of the current laws included in the Internal Revenue Code would you choose to enforce?

I will treat this as two questions: what I would do for good tax policy if I were IRS Commissioner for a day, and what I would do to make myself horrifically wealthy if I got a cut out of increased collections.

POLICY: I would set up a special IRS unit devoted entirely to detecting and shutting down illegal tax shelters and scams. It would be a multidisciplinary group with technical and litigating attorneys, as well as criminal and civil agents. At the first whiff of a new tax scam, this group would be empowered to analyze the transaction, fly to the location as a SWAT team and with maximum publicity get the approprate warrants and court orders to raid and close criminal tax scam enterprises. No more letting scams fester for months or years before taking action, I say. Nothing is more demoralizing for law-abiding taxpayers than undisturbed scammers.

GREED: I would program the IRS computers to run a match routine on the mortgage interest forms of every taxpayer paying AMT to look for deductions of home equity interest. While interest on home acquisition indebtedness is AMT-deductible, home equity loan interest isn't; I would bet my 1% skim that this AMT adjustment is missed more than it is made. I'd be hated, but I would simply go through witness protection and leave the country (unfortunately, probably the same way Jimmy Hoffa did).

Now if I were dictator of Iowa, then I'd have some real fun...

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DISLIKE OF THE INCOME TAX: AN OLD TRADITION

November 08, 2005

The first national income tax was enacted in the Civil War. The Internal Revenue Commissioner at the time didn't much care for it, according to this letter linked by the Tax Policy Blog:

I regard the tax as the one of all others most obnoxious to the genius of our people, being inquisitorial in its nature, and dragging into public view an exposition of the most private pecuniary affairs of the citizen.

The author of this letter had, like so many members of the Grant administration, served in the civil war. Alfred Pleasonton led Union forces in the largest cavalry battle ever, at Brandy Station at the start of the Gettysburg campaign. He also led Union forces in the largest civil war battle near Iowa's borders, the Battle of Westport near Kansas City (not to be confused with the Battle of Westport re-enacted annually by Cyclone fans during the Big 12 basketball tournament).

The letter didn't help General Pleasonton's civilian governmental career:

As a civilian, he worked as U.S. Collector of Internal Revenue and as Commissioner of Revenue, but he was asked to resign from the Internal Revenue Service after he lobbied Congress for the repeal of the income tax and quarreled with his superiors at the Treasury Department. Refusing to resign, he was dismissed.

By this time he should have known better than to talk back to U.S. Grant...

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SHAVIRO CHIMES IN ON TAX REFORM PLAN

November 08, 2005

Tax Blogger and BNA portfolio author Daniel Shaviro has an article in today's Tax Notes on the Tax Reform Panel's report. The Tax Analysts article is accessible here to subscribers only, but Mr. Shaviro has a summary here.

He finds the report wanting in important respects, particularly in its revenue assumptions. Despite these problems, he finds the report useful:

Nonetheless, the Report merits careful attention. Even if it cannot play a role like that of the Treasury I study of 1984, which promptly kick-started a political process that culminated in enactment of the Tax Reform Act of 1986, there is another route to influence worth considering. In 1977, a Treasury tax reform study, Blueprints for Basic Tax Reform, was released despite its plainly being dead on arrival with the change between Administrations. While Blueprints had no immediate political influence, it helped to shape thinking about fundamental tax reform, not just in 1986, but continuing to this day. The Panel will have accomplished much if the Report can exert similar influence over the years, whether through broad concepts that help guide future reform efforts, or by providing a hit list of potentially desirable changes.

Tax Analysts subscribers can link to the article here. I wouldn't be surprised if the TaxProf were to pull it out from behind the subscriber firewall in the coming days. (Update 11-9-05: here it is).

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ALITO'S TAX CASES

November 08, 2005

The Supreme Court rarely hears tax cases, so we get all excited when they do. Some cases leave us pulling out our hair for years (INDOPCO, anyone?) and some open gaping loopholes that we scramble to find trucks to drive through (Gitlitz).

Samuel Alito, the new nominee for Justice O'Connor's seat, has been hearing tax cases in the Third Circuit for 15 years. Lee Sheppard of Tax Analysts has read twenty tax cases ruled on by Judge Alito, along with some ERISA and bankruptcy law decisions. Thanks to the miracle of TaxProf, non-subscribers can read Ms. Sheppard's article to get an inkling of how Judge Alito looks at tax cases. Ms. Sheppard's summary:

"Scalito?" In his social views, undoubtedly. But not in his statutory interpretation. Judge Alito gives free rein to legislative history, previous versions of the pertinent statute, colloquy, whatever is available in interpreting statutes. "Giulianito" might be a more accurate sobriquet for this former federal prosecutor. No, he's not flashy or publicity seeking or serially married, but the ex- prosecutor in Judge Alito is always evident. He's a solid technician who picks and chooses his arguments based on where he wants the law to go. Unlike Chief Justice Roberts, he does not let the law lead him.

I recommend the whole article, but one passage struck me as an example of how the law should work. A pair of wives were trying to get out of paying taxes on their joint returns where their husbands had underpaid taxes on their S corporation income:

The wives said that their children committed crimes and did drugs, their parents were ill, and one husband was an alcoholic wife- beater. Judge Alito was sympathetic, but found those tragedies irrelevant. "The income tax laws do not as a general rule provide that those who have experienced unhappiness, tragedy, or abuse at the hands of family members may pay less tax than other people in identical financial circumstances who have experienced happiness, good fortune, and considerate treatment by their families," he wrote.

Tax Analysts subscribers can find the article here, if they so wish.

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INDICTED ACCOUNTANT CALLED 'FLIGHT RISK'

November 08, 2005

Prosecutors argued yesterday that a former KPMG executive might flee the country if allowed out on bail. Business Week reports:

David Greenberg amassed more than $24 million and then tried to hide it from the government by transferring money elsewhere, including to his ex-wife, prosecutor Kevin Downing said at a hearing. Greenberg, who earned $500,000 yearly from KPMG, also had real estate investments that appreciated, his attorney said.

IS THE COVERUP THE CRIME?

Some have criticized the prosecution of the former KPMG partners on the grounds that the tax shelters have not been proven illegal. Arguments in Mr. Greenberg's hearing indicate that the firm's response to the government investigation of its shelters may be a critical part of the case:

Greenberg's lawyer, John N. Nassikas III, said he assumed the prosecutor was referring to his client as a financial threat to the community. He said his client was no threat and had strong ties to California, including a pregnant fiance.

"We heavily dispute Mr. Greenberg's alleged role," Nassikas said. "There's not an effort to hide information."

But Downing insisted otherwise, saying the government had a cooperating witness and substantial documents to indicate Greenberg backdated documents and improperly took them out of KPMG offices after he learned he was being investigated in 2002.

No bail decision was reached at the hearing.

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CARNIVAL UP, WAR ENDS

November 07, 2005

Celebrate Armistice Day week at the Carnival of the Capitalists, hosted this week at Part-time Pundit. Hank Stern of InsureBlog is there "On the Case", and there's lots of other good stuff.

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I DON'T NEED ONE, BUT...

November 07, 2005

...the TaxProf gives us another reason to hate the White Sox.

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GOODBYE, SECOND EXTENSIONS

November 07, 2005

The IRS on Friday announced new rules for extending returns. Under these rules, individuals, partnerships and trusts will get a single six mointh extension, starting with the upcoming filing season. Individuals had been allowed a four-month automatic extension, with an additional two months available "for cause." In practice, second extensions were seldom denied as long as the boilerplate explanation "additional time is needed to gather information required for a complete and accurate return" was used.

Proposed regulations for the new rules requested comments on whether pass-throughs - partnership and trusts - should have a shorter deadline. They should. It doesn't make sense to allow a partnership to extend its return to October 15 when individuals with October 15 deadlines need the partnership K-1s to complete their own returns.

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BACHELOR'S LIBRARY MOGUL STRIKES PLEA DEAL

November 07, 2005

Central Iowa's bachelor bibliophiles can breathe easier today. Eddie Wedelstedt, owner of Des Moines's Bachelor's Library and 60 other "adult entertainment" facilities, pleaded guilty to distributing obscene material and obstucting an IRS investigation. He had been indicted last march on 23 tax, racketeering and obscenity charges. But while Mr. Wedelstedt will go away, the "Libary" looks like it can stay.

A Department of Justice press release says that Mr. Wedelstedt will serve a 13-month prison term. While he will forfeit his Texas stores, and the government will keep $1.25 million it has seized, the rest of his organization may continue to operate, including the Des Moines store.

It's not clear from published reports what affect the plea deal will have on co-defendant Arthur Morris Boten of Des Moines.

The tax charges alleged that Mr. Wedelstedt attempted to conceal cash receipts earned by heis company, Goalie Entertainment Holdings, Inc., from peep shows and arcades. As reported by the Rocky Mountain News,

A federal grand jury accused Wedelstedt of traveling the country in his company's Learjet and stuffing cash from back-room video arcades into a black bag, later stashing some of the money in a safety deposit box at an Arapahoe County bank.

It's a tribute to the lifting power of a Learjet that it didn't crash with all those quarters. Those quarters add up:

The government amassed more than 2,000 boxes of documents to make its case. Initially, prosecutors sought the forfeiture of his entire empire, by some estimates valued at more than $40 million.

I wonder how many agents will take those "documents" home to "catalogue and review."

Prior Tax Update coverage here and here.

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VOTE MAULE!

November 04, 2005

If the internet had Wittenberg Castle Church, I would nail Professor Maule's latest post to it.

A reader asks the good professor what tax law he would enact if he were President for a day. After reading his response, I think we should figure out a way to get him there, for a day:

I begin with three ideas. First, by taxation I mean government revenue generation. In other words, whether something is called a tax or something else isn't critical, other than, perhaps, in the practical world of politics. So, for me, taxation includes user fees, tolls, taxes, and even, yes, "revenue enhancements" for those who remember how that creative phrase entered the public policy lexicon. Second, there is a distinction between federal and state (and local taxation) and it is important, and necessary, to consider those differences in responding to Nakul's question. Third, government revenue ought to be collected for one purpose, and one purpose only, and that is to fund the legitimate purposes of government.

"Government revenue ought to be collected for one purpose, and one purpose only, and that is to fund the legitimate purposes of government." I'd make Congressional tax writers repeat this like a pledge of allegiance while facing a portrait of Dr. Maule. The tax system shouldn't encourage research, or home ownership, or health care, or... you name it. It's there to pay the government's bills.

The good doctor thinks an income tax would be the way to go, for reasons he sets forth. It would be like this:

Income would include income, with very few exclusions. It ought not matter whether the income is from wages, employment benefits, pensions, annuities, life insurance, dividends, interest, rents, royalties, gains from the disposition of property, or other sources. Taxing dividends means, of course, that corporate income would be taxed twice. Does it make sense to impose a second level of tax simply because the business is conducted in the form of a C corporation and not a partnership, LLC, or S corporation? Perhaps, if one wants to laugh at those who didn't know any better, or dish out "serves 'em right" if there were tax-savings motivations for forming a C corporation that didn't pan out. Unless one imposes a flow-through regime on C corporations, corporate income that is not distributed would not be taxed unless there were a corporate-level tax. Just as important, dividends paid to tax-exempt persons and entities would escape taxation if there were no corporate-level tax. The second problem is more easily solved, namely, taxing tax-exempt persons and entities with respect to dividends paid from income earned by corporations within the jurisdictional reach of the United States government.

The only thing I would add is that I would tax corporate income and allow the corporation to deduct distributions to shareholders. While there is some double taxation that still occurs on a sale of stock in such a system, it wouldn't be worth the complexity needed to avoid it. To make sure all income is taxed once, I would impose a flat excise tax on distributions to non-profits at the top individual rate, to be withheld by the corporation.

As for outgo, there would be two basic deductions. One would be for the expense of producing the income. In other words, I reject gross receipts taxes, which are one of the most perfidious exactions imposed by state and local governments except in those instances where gross receipts is a proper measure of a user fee, but I've yet to see such a situation. The other would be a deduction (or perhaps a credit) that would reflect the wisdom of not imposing a tax on those whose incomes were barely sufficient to live life.

Hear, hear.

There would be no depreciation on real property. Business real property so rarely goes down in value over the long-term that those few instances where it does so would be taken into account when the property is sold for a loss. Depreciation on personalty used in generating income would be computed over five years. Period. Arbitrary? Yes. Simple? Yes. Sensible? Yes.

Go and read it all. It is long, but that is the Professor's way. It's worth it.

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BANKS, CREDIT UNIONS GO TOE-TO-TOE AT WAYS AND MEANS

November 04, 2005

The credit union industry has had better days in Congress than they had yesterday.

The House Ways and Means Committee held hearings on the tax-exempt status of credit unions. The committee chairman, William Thomas, was less than sympathetic to the credit unions, according to a story in Tax Analysts:

Thomas directed some of his toughest comments to NCUA Chair JoAnn M. Johnson. He told her that as credit unions have continued to grow and offer different products, NCUA has not seemed sensitive to the downside of those changes.

Thomas also said that although members of a credit union are supposed to have a common bond with each other (such as the same occupation or neighborhood), that common bond is not possible with larger credit unions. He mentioned a credit union chartered to serve residents of Los Angeles County, which has more than 10 million people.

Johnson acknowledged that some large credit union charters have been granted and said they have been beneficial. When Thomas asked her what common bonds might exist between members of a credit union serving a large community such as Los Angeles County, she mentioned things like common use of the county’s facilities.

By that logic, there's no reason Iowa couldn't have a statewide credit union; our 2.95 million people have at least as much affinity for one another as LA County's 10 million. And I'm sure we're better-looking.

It is hard to understand why a $1 billion tax-exempt institution would get to compete on a tax-exempt basis with the hundreds of fully-taxed Iowa banks less than 1/4 that size, but there is no real expectation that the tax exemption will end anytime soon. The President has come out for continued credit union tax exemption, and that probably settles the issue until at least 2009.

Prior Tax Update coverage:

TAX FOUNDATION STUDY SLAMS CREDIT UNION TAX EXEMPTION

BANKS, CREDIT UNIONS SQUARE OFF

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TAX REFORM PARANOIA

November 04, 2005

The President's Advisory Panel on Tax Reform has nine members. One member is a former Democratic senator. One member is a law professor who used to work for a Democratic senator. One member was appointed IRS commissioner by President Clinton. These folks worked with two academics, an investment banker and two former Republican legislators over ten months. They held 12 public meetings and issued a final report of hundreds of pages.

And all that work was just an exercise to "screw Democrats."

That, at least, is the odd conclusion of a strange article in the online magazine Slate. The article says that the plan turns the screw on Democrats with its proposed limits on home mortgage interest deduction. The plans would reduce the amount of home acquisition debt for which interest is deductible from the current $1 million to the maximum insurable FHA loan amount - currently about $244,000 to $313,000, depending on region. The plan would further "screw" Democrats by repealing the deduction for state and local taxes.

If this were true, it would be an interesting commentary on the state of the Democratic party. The idea that limiting tax breaks for homes costing over $300,000 would "screw" Democrats would have puzzled Franklin Roosevelt, or even Lyndon Johnson. But as the most expensive homes are on the "blue" coasts, then it must be a plot to oppress the blue state "middle class."

More puzzling still, these changes were recommended by the tax reform panel to finance repeal of the alternative minimum tax - a tax the author of the Slate piece has called "Bush's secret tax on Democrats." It was devilishly clever of the committee to "screw" Democrats by helping them.

The Winterspeak blog doesn't buy the Slate argument:

If there is a single group in the US undeserving of sympathy, it has got to be rich homeowners in the East and West coast. These folks have enjoyed 50%-100%+ increases in the value of their homes over the past 5 years and now enjoy properties worth of half a million dollars, in Boston at least, and more in San Francisco and New York. This wealth was no more earned than a scion's bequest, so why it cannot be taxed the bejeesus out of, I don't know.

For a well-informed discussion of the "blue state" effects of the tax reform recommendations, go to Janet Novack's analysis in Forbes.

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TIME TO HARVEST THE FALL TAX DEDUCTIONS

November 03, 2005

The leaves are gone, the harvest is ending, the gray skies of November close in. For some, it’s a time to think of hot chocolate, apple cider, and the approaching warmth of the Thanksgiving holiday. We prefer to ponder taxes.

By mid-November, most taxpayers can have a pretty good idea what their income will be, and we still have six weeks or so to do something about it. Where to start?

Are you feeling really charitable?

In response to Hurricane Katrina, Congress is allowing taxpayers to deduct cash charitable contributions up to 100% of their taxable income for 2005 only. In most years, this limit is 50%.

You ask: why would I want to do such a silly thing? Well, few people are interested in giving away so much cash, but this 100% limit might be useful is if you want to donate a large IRA to charity -- perhaps as part of your estate planning. You could cash out the IRA and donate the entire balance to charity, with the charitable donation eliminating almost all of the tax on the IRA withdrawal. (You’d have about a 1% net tax in most situations, for technical reasons too revolting to review here).

O.K., are you just feeling somewhat charitable?

2005 has been a banner year for disasters. The Tsunami, Hurricanes Katrina and Rita, and the South Asian Earthquake have touched hearts everywhere. If you are looking to make a charitable contribution before year-end, look to your investment portfolio. If you donate publicly-traded securities before year-end, you may deduct the fair market value of the stock without ever paying tax on the appreciation. Just remember: you have to have held the stock for over one year. You should also get started with such donations right away. While most national charities handle contributions of securities promptly and efficiently, local charities may need extra time to process the contributions. If you wait too long, your deduction might not get completed before year-end.

Consider Alternative Minimum Tax.

More and more of us are becoming acquainted with the alternative minimum tax, or AMT. This tax was originally touted as a way to keep the wealthy from avoiding all taxes. If paying AMT means you are wealthy, Iowa is a rich state indeed.

The AMT is a sort of shadow tax, computed alongside the regular income tax. It is computed with a large exemption that disappears as income increases. It has a lower top rate (28%) than regular tax (35%), but fewer deductions. The biggest deductions missing from the AMT are the deduction for state and local income and property taxes and the personal exemptions for yourself and your dependents. This makes residents of high-tax states, like Iowa, and parents with large families, most vulnerable to AMT.

AMT matters because many tax planning tools don’t work when AMT applies. If you have family income between $100,000 and $500,000, large capital gains, or more than two or three children, you are a likely AMT candidate. The only way to tell for sure is to run the numbers -- that is, estimate what your income for the year will be and compute your projected regular tax and AMT. Your tax advisor can help you out here. This process works best if you can also project your 2006 tax picture.

Once you know whether you will have AMT in 2005, you can consider some additional tax planning moves:

Prepay state and local taxes. If you expect to owe income taxes to Iowa next April, you might want to pay them now so you can deduct them this year. You might also want to get your March 2006 property tax payments in by year-end. But this won’t work if you have AMT in 2005.

Bunch up your “miscellaneous” deductions. You can deduct tax return preparation fees, union dues, certain unreimbursed employee business expenses, and fees to investment advisors and financial planners, but only if these “miscellaneous” deductions exceed 2% of your adjusted gross income. By bunching these expenses into one year – say, by prepaying them – you can sometimes cross the 2% barrier and get a tax benefit. Your tax preparer will be happy to discuss a “2% of AGI billing plan to help you get there (just kidding!). But beware – these deductions aren’t allowed for AMT.

Hybrid Cars. Maybe you’ve had your eye on a Prius or that Lexus hybrid SUV. If you are in AMT, and will continue to be in AMT indefinitely, this is the year to buy. For 2005, you can deduct up to $2,000 of the cost of a hybrid car “above the line,” without itemizing. This deduction works for AMT, too. Next year, the deduction becomes a credit, and the credit doesn’t work if you are paying AMT.

(Note: a version of this piece is slated to appear in the December issue of "50-plus Lifestyles." )

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NOTE TO SELF: MAIL THE RETURN TO THE KUNG-FU STUDIO

November 02, 2005

Nobody is happy to get a tax return showing a big balance due, but some people just can't handle the truth:

Willy Wetzel and his son, Roy Wetzel, were experts in the martial arts, including karate, and operated a [martial arts] school.... On the day of Willy Wetzel's death, Roy had been working on his father's income tax return. Willy visited his son and began reading the completed tax forms....As Willy Wetzel started to sign the tax forms, he threw the pen against the drapes and began to scream obscenities. He walked toward the front door mumbling that he was going to lose his house, car and everything. Grabbing a Hawaiian sword, Willy Wetzel turned and let out a battle cry called a "kewah." The fight began.

Willy began to remove the sword from its case when Roy attempted to grab the case. Willy kicked Roy and the sword was bent in half. The hand-to-hand fight continued for approximately twenty-five minutes. Roy made several attempts to reach the telephone to call for help, but was stopped each time by his father's tactics. Finally, Roy placed nanchukas sticks, used in karate, around his father's head to try to render him unconscious. Shortly after that Roy realized his father was dead.

I can't imagine what Dad would have done if the IRS selected his return for audit...

Thanks to the TaxProf for this story.

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REACTIONS TO TAX REFORM PANEL

November 02, 2005

The TaxProf has a roundup of think-tank reactions.

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LINKS TO FULL TAX REFORM PANEL REPORT

November 01, 2005

Official Page (loading slowly right now)

PDF Files of report:

Chapters 1-4

Chapters 5-6

Chapters 7-9

Appendix

UPDATE: Taking a cue from the TaxProf, I have loaded the pdf files to our server so you don't have to wait forever for the downloads.

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'EXECUTIVE SUMMARY' OF TAX REFORM RECOMMENDATIONS

November 01, 2005

No link yet for the reform panel's plan issued this morning, but the Tax Analyst's free site has a link to the "executive summary."

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DES MOINES HALLOWEEN TRADITIONS EXPLAINED

November 01, 2005

By State 29.

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PAY YOUR TAXES ON TIME! (PATENT PENDING)

November 01, 2005

Real scientists often patent their discoveries. It never occurred to us that tax scientists would want patents, too.

Yet it is so, according to a story in Tax Analysts today (subscriber only link):

The ability of tax advisers to patent their cleverly constructed arrangements emerged as a hot-button issue not only for the IRS, but also for the AICPA. Once a patent right is issued, the holder of the right essentially owns the transaction or structure. This would, in theory, allow the patentholder to prevent other taxpayers from engaging in the same arrangement. Taxpayers and advisers who independently devised the same arrangement could be found liable under patent infringement laws and forced to pay damages -- even if they lacked any knowledge of the patent.

The IRS isn't pleased, according to the article. In a speech before an AICPA tax conference, Joseph Bonaffini, program manager of the IRS Estate and Gift Tax Program, said the IRS will soon meet with Patent Office representatives to urge them not to issue such papents:

Bonaffini questioned whether the PTO staff has adequate background in tax law and estate planning to properly rule on such patent applications. Even a well-seasoned patent attorney might not be in an appropriate position to determine whether a given tax minimization scheme is an original work. "That's why we're here," Bonaffini said, "to advise them."

Under the "prior art" doctrine, patent applications should be rejected if the subject matter is neither new nor original. Speculation was ripe among attendees that the tax patents issued to date should have been invalid under the prior art doctrine. "The PTO is getting it wrong," one member, who wished to remain anonymous, told Tax Analysts.

The article says that tax planning may be patentable if it gets around these obstacles, and that legislation may be required to stop such patents.

It's hard to know where to begin mocking such patents. The chutzpah needed to assert that you are the very first person to arrive at some super-genius tax idea is breathtaking, for starters. Unless, of course, you are Professor Maule, who really is that smart.

There are also many practical problems. For starters, your patent application would have to be specific enough to probably tell everyone what your super-genius plan is. Yes, it would be illegal for somebody else to use it, but tax returns are confidential by law. The whole tax world could read and use your super-genius tax plan and you'd never know. You'd never collect your "just" royalties. You'd never even get a thank-you note.

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TAX REFORM PANEL: TODAY'S THE DAY

November 01, 2005

The President's Advisory Panel on Federal Tax Reform delivers its final report at 9:00 a.m. central time today.

Is it a bad sign that the panel is delivering the report on All Saints Day, a traditional day for honoring the dead?

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THE HEAT IS ON FOR MR. BIGGS

November 01, 2005

It was a great life while it lasted, but it looks like the standard of living for R&B singer Ronald Isley, "AKA Mr. Biggs," is about to decline drastically. A federal jury yesterday convicted the lead singer of the Isley Brothers of five counts of tax evasion. The charges covered the period 1997-2002. From the noted tax law site E! Online:

Jurors deliberated for a day and a half before rendering their verdict in the trial, which stretched over three weeks. The panel was apparently swayed by a steady stream of prosecution evidence that included documents showing the "It's Your Thing" singer hiding homes and a yacht under the name of his former wife and cashing royalty checks belonging to his late brother, O'Kelly Isley.

It doesn't look like he was exactly shy about it:

During the trial, IRS officials said Isley tried to further avoid taxes by asking to be paid in only cash for performances between 1997 and 2002--amounts that added up to around $12 million, per California's CNS News Service. The IRS also claimed Isley bought personal cars using a business account and paid band members in cash to keep transactions off the books.

Mr. Isley made a gamble with a great big downside. Assuming his combined federal and state rate was 40%, the upside of not getting caught was saving $4,800,000.

The downside?

- Up to 26 years in prison when he is sentenced May 9. It will likely be a shorter sentence under federal guidelines, but he will surely do some time.

- Full payment of the tax, with interest.

- Criminal tax fines of hundreds of thousands of dollars.

- Civil fraud penalties of 75% of the amount evaded.

- State prosecution in California or Missouri, where he owned homes.

- Enormous legal bills.

While we have no way of knowing for sure, we wouldn't be surprised if Mr. Isley had failed to amass much in the way of savings to cover these costs. It probably makes him want to Shout.

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