Tax Update Blog: January 2006 Archives
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IOWA'S SUPER-LONG TERM CAPITAL GAINS DEDUCTION: IF YOU QUIT, DON'T WAIT TOO LONG TO RETIRE
January 31, 2006
Iowa has an unusual tax exemption for certain business capital gains. It applies if you meet two conditions:
- You "held" the property for ten years, and
- You "materially participated" in the business owning the property for 10 years.
If you miss either requirement, you lose the exemption.
For the most part, "material participation" means the same thing as it does for the federal "passivie activity" rules. This usually means 500 hours of work each year (a more complete summary is in the extended entry below).
POST-RETIREMENT PARTICIPATION
When you retire, your participation lingers under the federal rules. For most businesses, you are considered to materially participate if you have done so for five of the past ten years. This means your participation "continues" for five years after retirement. For professional service businesses, participation continues until death, even after retirement (no "of counsel" jokes allowed).
Iowa follows these rules for non-farmers. That means you have five years to sell your business property after retirement to qualify for the Iowa exclusion.
RETIRE A FARMER, DIE A FARMER
Farmers, though, get a special Iowa break. They qualify for the deduction for any property in which they materially participated for five out of eight years before "retiring" -- whatever that means. That usually works out well for farmers, because they can retire, cash rent their land, and still qualify for the deduction ten years later when they finally pack up and move to Sun City.
The key question, though, is when "retirement" occurs. A policy letter issued this month shows that the Department of Revenue doesn't necessarily equate "quitting" with "retiring." The letter has a spare fact summary:
The situation posed in your letter involves 100 acres of farmland which has been jointly owned by a husband and wife since 1974. The husband materially participated in the farming operation, and the wife actively participated with the husband in the farming operation. The husband also owned a dairy operation and used the crops from the 100 acres of farmland to help support the dairy operation. The dairy operation was liquidated in March 1993, and the 100 acres of farmland was been cash rented since 1993. The husband and wife retired and began receiving social security benefits in 1997.
The husband and wife are now planning to sell the 100 acres of farmland, and are requesting an opinion on whether the capital gain from the sale of the farmland would qualify for the capital gain deduction.
The letter ruled that the couple failed to qualify because they hadn't materially participated "the farmland" in five of the eight years before "retirement." They said retirement didn't occur until June 1997 when the couple started receiving social security benefits, and that 1992 was the last year of "material participation." since they had failed to participate in the last four-plus years before "retirement," the letter holds, they failed the "five of eight" year test.
PROBLEMS WITH THE RULING
The first problem that leaps out is technical: the statement that the couple didn't participate in the activity in 1993, the year they liquidated the herd. I believe this is exactly the type of situation that the "facts and circumstances" test of the material participation rules is meant to cover - years in which the taxpayers still were in the business, but not for long enough in the year to reach 500 hours of work. The letter anticipates it by saying the taxpayer wouldn't have qualified anyway, because the July 1997 start of Social Security benefits was more than four years after the March 1993 liquidation.
The second problem is key to the ruling: the Department considers the dairy business to be a separate business from the remaining business that apparently continued until 1997. The Department doesn't say why this is so. Did the farmers report dairy income as a separate Schedule F activity?
Finally, The regulation covering "material participation" doesn't define "retirement" anywhere. I suspect that the couple considered themselves "retired" from the dairy operation when the truck drove off with the last cow. It's unfortunate that the meaning of the key term "retirement" is left to the chance whims of the Department.
Cite: Policy Letter of January 6, 2006.
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SNAKE EYES
January 31, 2006
Russ Fox of Taxable Talk tells us about a man whose hot streak on the riverboats went ice-cold when he didn't report his gambling income.
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QUOTES OF THE DAY
January 31, 2006
Much wisdom here:
"If we don't change Social Security, Medicare, or Medicaid, we're gonna raise taxes," he said. "It doesn't matter if you're a Republican, Democrat, or Martian. They're going up. You just can't avoid it."
and
"I think the problem is spending, so let's start with the spending side." (
Douglas Holt-Eakin, former Congressional Budget Office Director, in an interview with Tax Analysts. The second quote was in the context of the future of Social Security, Medicare and Medicaid. ($).
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LAST JANUARY 2006 CARNIVALS EVER
January 30, 2006
The current editions of the Carnival of the Capitalists and the Carnival of Personal Finance are up.
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KELO, EMINENT DOMAIN, AND TAX BREAKS
January 30, 2006
Income tax rules might be a hidden snag in efforts to prevent municipalities from condemning property on behalf of private developers. Since the Supreme Court ruled last year in Kelo that such municpal condemnations are constitutional, efforts have sprung up to trim back such governmental powers.
The Des Moines Register printed a piece yesterday that pretty much said downtown Des Moines would be a tumbleweed-strewn wasteland without the ability of the city to condemn land for private purposes. The piece was run to oppose an anti-Kelo bill in the Iowa legislature.
SECTION 1033: TAX BREAK FOR THE CONDEMNED
It's unlikely that Principal or Wells-Fargo would have failed to assemble parcels needed for their new downtown buildings without the muscle of the City Council backing up their efforts. Yet the existence of a threat of condemnation carries tax breaks for sellers that probably enabled the property buyers to assemble their properties at a lower cost than they would have otherwise.
Section 1033 of the federal tax code allows sellers to avoid gain on property sold "under threat or imminence" of condemnation, as long as they re-invest the proceeds no more than two years after the year in which the sale is made. It's not necessary for the city to actually institute condemnation proceedings; just a credible threat triggers the tax break. The Tax Court has stated the rules so:
A “threat of condemnation” exists if (1) the body threatening condemnation possesses the power of eminent domain, (2) the property owner is told by an official of the threatening body that condemnation will be sought unless the owner negotiates a sale or exchange of the property, and (3) the information conveyed to the owner gives the owner reasonable grounds to believe that the threat was authorized and likely to be carried out unless a sale or exchange is arranged.…
A whiff of a threat of condemnation can make a sale tax-free to a buyer who is willing to reinvest in other property somewhere. A seller and buyer can more or less arrange a condemnation "threat" with the city to qualify a property for Section 1033. While I'm not privy to the Principal and Wells-Fargo land purchases cited by the Register, I would be surprised if Section 1033 wasn't an important part of the mix.
In theory, the buyers can arrange for similar tax results using a Section 1031 "like-kind exchange." These are more difficult to pull off, though, because there is only a six-month window to reinvest proceeds, and a Section 1031 deal has to meet a long list of fussy technical requirements.
I believe Kelo is bad law and bad policy (I include here my standard disclaimer that I speak for myself, not the firm). It still amounts to a way for the well-connected to get a better deal than the little guy in their property purchases. But efforts to overturn Kelo in the legislature may run into resistance from a surprising quarter: potential sellers of property who could use a whiff of condemnation to make their property sales tax-free.
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GIVE US YOUR OLD, YOUR CREAKY, YOUR BINGO PLAYERS...
January 30, 2006
David Brunori, a tax professor who moonlights for Tax Analysts as a commentator on state tax issues, is unimpressed by efforts to exempt retirement income from Iowa taxes. Unfortunately the article is behind the Tax Analysts subscriber firewall, but here are some tidbits:
There is a movement afoot to eliminate the Iowa income tax on Social Security and pension income. The plan is being pushed by Republican lawmakers and is driven in part by the belief that retirees leave the state to avoid taxes. It is also driven in part by the lawmakers' desire to appease senior citizens, who tend to vote more than the rest of us. The plan would cost about $250 million a year -- approximately the same amount as the current deficit.
Iowa doesn't have enough old people. We're only the fourth oldest state in the country. We won't rest until we shuffle past Florida. Though we might have to stop for a couple of catnaps, and to take some meds.
There is no reason to broadly exempt all pension and Social Security income. Such an exemption runs counter to the notion that we should have a broad base and low rates. (Everybody else, specifically young people, will pay more because of this.) Then there is the question of granting exemptions to rich old people. Many wealthy elderly people collect pensions and Social Security. Many are millionaires. Why offer an exemption to the rich? But maybe -- and this is my cynical side talking -- it's because the rich elderly vote more than the poor elderly.
Yes, subsidizing the elderly wealthy on the backs of the rest of us is just the ticket to keeping our youth from fleeing the state...
I spoke with a couple of legislators who maintain that retirees are fleeing the state to avoid high income taxes. No one wants grandma to move to Florida because she can't pay her taxes. But this justification is not grounded in reality. Prof. Peter Fisher of the University of Iowa, who, by the way, is a very smart guy, recently conducted a study that showed that only 0.07 percent of Iowans age 65 and older left the state each year between 1995 and 2000. Two-thirds of those who left headed for states with the same or higher income taxes on pensions and Social Security. And more senior citizens moved from Illinois -- which does not tax pensions -- to Iowa during that time!
But think of how many more old people we could get with lower retirement taxes. Besides, somebody has to be here to play all those slot machines video lottery terminals.
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WILL GLENN REYNOLDS BE AT THE IOWA BLOGGER BASH?
January 27, 2006
Well, no. But you can be! Two one weeks (See comment. I should never post on Friday night) from tonight at the Raccoon River Brewing Company, 10th and Mulberry in glamorous downtown Des Moines! (February 4) The fun starts at 7:00 or so. Food, beer, free wi-fi, and the most glamorous group of bloggers ever to assemble in Polk County. Bloggers, friends, groupies, or just fans - hope to see you there!
PS: Glenn can come too. His first beer is free, indeed.
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NEW IOWA 'HOLDING PERIOD' PROPOSAL
January 27, 2006
A new bill in the Iowa Senate, SSB 3046, would require Iowa to follow federal tax rules in determining how long an asset has been "held."
This is important for taxpayers trying to qualify for the Iowa exclusion for capital gains on business property that has been "held" for at least ten years. The Department of Revenue has made up its own holding period rules based on a chain of reasoning stemming from (I'm not making this up) a misreading of an old CCH "Master Tax Guide."
The bill would apply for determining the holding period of property sold starting January 1, 2006 and retroactively to tax years ending after January 1, 2006.
There are many policy reasons against this capital gain exclusion in the first place, but if it is to exist, it should at least be easy to apply. Under the current Department of Revenue interpretation, like-kind exchanges and involuntary conversions of business property start a new holding period; under federal law, the holding period of teheexchanged property (or converted property) "tacks" to the property acquired to replace it. Taxpayers shouldn't have to deal with a separate unclear set of holding period rules based on the whim of state tax collectors.
While the proposed rules are fine as far as they go, they should be expanded to cover all open tax years. The Department's application of the rules up to now is wrong, and SSB 3046 should say so. The 2006 effective date is likely to embolden the Department to continue to defend its old holding period stance for examinations of pre-2006 tax years. At the very least, the explanation of the bill should say that the provision is a "clarification" of existing rules.
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THAT EXPLAINS WHY MINNESOTANS CAN FILE 1040s
January 27, 2006
The Tax Court has ruled that Antarctica isn't a "foreign country" for purposes of claiming the foreign earned income exclusion.
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GRASSLEY: THERE WILL BE NO ESTATE TAX REPEAL
January 27, 2006
The TaxProf Blog points to an interview with Bloomberg News where Senator Grassley gives up on permanent estate tax repeal:
Congressional Republicans don't have enough votes to extend a repeal of the estate tax beyond 2010 and may have to settle for a compromise that limits the levy to bequests of more than $5 million, Senator Charles Grassley said. "If we could get a $5 million exemption with a 15 percent rate, I think that would be a decent compromise," Grassley, an Iowa Republican who heads the finance committee, said in an interview in Davos, Switzerland, where he is attending the World Economic Forum. "That's not going to satisfy the president, but I think that that's the best I can do in the United States Senate in order to get the votes to get it passed."
If he thinks that's a "decent" compromise, expect a lower exemption and/or a higher rate.
(Unfortunately, the TaxProf's link doesn't go to the interview, and I can't find a link to the full Bloomberg article).
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THERE ARE NO TAX CRIMINALS?
January 27, 2006
A blogging attorney has an interesting view of the tax law, at least as applied to his fellow lawyers. He apparently thinks that there is no such thing as a tax crime:
This article about the IRS prosecuting lawyers who come up with tax shelters did more than strike me. It's just plain wrong...
Sure, there's another way to look at it: the lawyers actually did something illegal that was precluded by the code, and they should be punished. As you can see just from these paragraphs, however, there's no such thing as black and white in the Internal Revenue Service code. To prove that, all you have to do is look up section 61 that defines income and see what a mess the whole thing starts with.
It could be exciting to hire this man to do tax planning; a judge might not share his view that there is no such thing as a tax crime.
Of course the tax law is far too complicated. Still, there are some things that are black and white. Richard Hatch's jury didn't think the tax law was too unclear to return a conviction.
A search of this attorney's site shows he hasn't objected to accountants being indicted for tax crimes. It appears, then, that he's making a more parochial argument that attorneys shouldn't face tax prosecution because they can cloak their crimes in complexity. I guess that just means crooked accountants should get a J.D.
Hat tip: The TaxProf Blog
UPDATE: Dr. Maule is similarly unimpressed.
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INSURERS SCHEME TO LOSE BUSINESS?
January 27, 2006
Senator Durbin is criticizing the Administration's forthcoming proposal to expand health savings accounts. Tax Analysts ($) reports:
Durbin described HSAs as "another special-interest project for insurers disguised as a plan for covering the uninsured," and Pelosi said the accounts demonstrate "a continuing effort on the part of the Bush administration to leave more Americans to fend for themselves."
HSAs were created to allow taxpayers with high-deductible health insurance to establish tax-free accounts for medical expenses, and President Bush has previously stated that he will continue to push Congress to make HSAs "more attractive, more portable, more individualized."
However, Durbin cited a study from the Massachusetts Institute of Technology that he said concluded that the president's proposed expansion of HSAs "would actually increase the number of uninsured Americans by 350,000 and cost taxpayers $25 billion."
So it's a "special interest project for insurers" that will chase away 350,000 of their customers. If so, the insurance industry is both evil and insane. Somebody better tell the regulators...
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TAX COURT OVERTURNS REGULATION ON LATE-FILED FOREIGN CORPORATE RETURNS
January 26, 2006
The Tax Court today overturned a treasury regulation disallowing the deductions of foreign corporations who file their returns late. The decision was the second split regular decision in two weeks.
The case involves a real estate holding company that didn't get around to filing its return for its May 31, 1993 fiscal year until July 1999. It filed its returns without prompting from the IRS. The IRS, relying on its regulation under Code Sec. 882(c), said that the late filing precluded all deductions, so the corporations would be taxable on their gross income.
The courts had ruled against the IRS on prior versions of this regulation. The IRS argued that other law changes made the prior court decisions obsolete. The Tax Court opinion reviews legislation and court decisions going back to 1928 and concludes that the IRS is still wrong on this issue. Fourteen judges sided with the taxpayers, while four judges sided with the IRS in two separate dissents.
The IRS will almost certainly appeal the case, so don't get careless in filing your foreign company U.S. returns just yet; and if you don't file until the IRS contacts you, your deductions are still toast.
Cite: Swallows Holding, LTD, 126 T.C. No. 6.
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RICHARD HATCH: NOT A MODEL OF TAX PLANNING
January 26, 2006
Russ Fox has the best summary I've yet seen of the Richard Hatch tax saga over at Taxable Talk.
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FAMILY PARTNERSHIP AUDITS LOOMING?
January 26, 2006
The Wall Street Journal had a piece yesterday reporting increased IRS scrutiny of family limited partnerships. The Tax Prof and Stuart Levine have more.
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ESTATE PLANNING FOR THE UNDEAD
January 26, 2006
Joel at Death and Taxes - The Blog is on a roll in discussing the perplexing issues relating to people who hope to have their corpses reanimated someday. I had to wipe the coffee off my monitor after reading:
What happens if a cryonics facility goes out of business or is destroyed by fire or other disaster? (And please, no "heads will roll" jokes.)
And do you have to pay the life insurance company your money back when you are re-animated? Great stuff, well worth reading in full.
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IRS AND NEWFANGLED COMMUNICATIONS
January 26, 2006
Reader "Brian" makes an interesting comment in an earlier post:
They should cut back on phone service in favor of electronic communications. Remember your discussion of accrual-to-cash method changes for S-corp banks? That's a bad case of asymetrical information.
Can you imagine if designated IRS personnel were allowed to interact with practitioners online? For example, what if IRS agents could comment on ABA-Tax, misc.taxes.moderated, or one of the other tax forums? What if regulation projects were blogged instead of being subject to the antiquated notice-and-comment procedures?
INTERACTION WITH IRS PERSONNEL: IT'S ALWAYS 1985.
Brian puts into words some things that have been bugging me about dealing with the IRS. At the examination level, you can't just exchange e-mails with scanned attachments. You have to exchange paper, or if the agent is a cutting-edge kind of guy, faxes. You can't email a spreadsheet; you have print it on paper and drop it in the mail. I don't think I have any clients that do business that way.
Another example: the IRS now has a system where you can get client information via the internet, but it requires an on-file power of attorney, which slows the process down immensely. Clients share their deepest financial secrets with us so we can prepare the return, but if we want to see whether the IRS has processed the returns, we're treated like Nigerian identity thieves. If the taxpayer authorizes us to discuss return items with IRS on the signature line, that authorization should allow preparers to also view taxpayer account information for that year.
RULEMAKING FOR THE STONE AGE
Brian is dead-on in criticizing the stone-age regulation comment process. Of course the Treasury has to go by the book to ensure that taxpayers are treated fairly, but that's no excuse for the current comment system. It seems like there are two obvious ways to improve and open up the comment process for proposed rules:
1. Immediately post on the web all comments on proposed regulations as they are received. Yes, they can be accessed at the IRS reading room (this is an actual room somewhere, not a web page), and Tax Analysts does post them for its subscribers, but in this day and age, that's lame.
2. Open an electronic comment board for each open regulation project and maybe for proposed published rulings. This could include a comment section analogous to blog comments for each posted comment on the proposed rules. An open comment board would attract comments from a much broader audience. Treasury rulemakers would monitor the comment board to ward off trolls, follow the discussion, follow up with their own responses, and maybe to even post possible wording modifications to the proposed rules. A comment board with commenters and regulation writers responding to each other would accelarate and improve the current glacial "one round of written comments" system. The give and take of a comment board would be much more likely than the current system to both identify problems and suggest solutions.
Is there any reason why the IRS and Treasury shouldn't go this route?
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SO WHEN DOES HE GET BACK ON THE ISLAND?
January 25, 2006
Richard Hatch, the Survivor guy, stands convicted of evading $365,000 of tax. In addition to 15 minutes of fame, he's likely to get more than 15 minutes in prison to ponder his next move. While newspaper accounts say he faces up to 13 years in prison, the real sentence will be based on the federal sentencing guidelines for tax crimes.
I have gone to the tables to try to rough out his likely sentence. I'm not even a lawyer, much less a judge, but the way I read the guidelines, a sentence of somewhere from 27 months to 41 months may be indicated. I guess it will be on the higher end of the scale.
According to the tax loss table below (on page 4 of the linked guidelines), the $365,000 loss with no prior criminal history gets Mr. Hatch to offense level 18. He gets no points off for cooperation or acceptance of responsibility.
Tax Loss Table
He may get two points added for "sophisticated means" - namely the use of an S corporation to park his talk show income. It's my understanding that even ineffective or inept use of shell entities may be considered "sophisticated" for this purpose. That would take him to offense level 20.
If offense level 18 applies, the guidelines call for 27-33 months in prison. At level 20, he faces 33 to 41 months. Assuming that he gets the extra points for sophistication, I'm guessing 36 months.
While these guidelines aren't mandatory anymore, I understand that judges go along with them for the most part.
Tax Sentencing Table excerpt
I invite any real lawyers in the crowd to chime in with your comments.
More on the guidelines here.
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NUDE DUDE'S FATE IN HANDS OF JURY (UPDATED: GUILTY)
January 25, 2006
The tax evasion trial of Richard Hatch, went to the jury yesterday. Unless the O.J. jury has been re-empaneled, Mr. Hatch, winner of the first season of "Survivor," is likely to be voted off the island of non-felons.
Links:
Taxable Talk
Tax Prof Blog
Mauled Again
UPDATE:Guilty on the tax charges, acquitted on bank, mail and wire fraud charges.
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THE DEAD PEASANT'S LAST GASP
January 25, 2006
Upon further review, the call on the field is reversed. The IRS has now won every case litigated so far against so-called "dead peasant" insurance policies with the Sixth Circuit Court of Appeals decision in Dow Chemical Company v. United States.
The decision overturns the sole taxpayer victory for these "Corporate Owned Life Insurance (COLI) tax deductions, a 2003 Michigan ruling. The COLI schemes attempted to give companies the ability to deduct interest on amounts borrowed to purchase life insurance on large groups of employees. If the taxpayer is allowed to deduct the interest, they get a tax deduction for the production of tax-free income - the cash value buildup of the insurance policies. The large pool of insureds eliminates most mortality risk in the policies.
Congress long ago stopped these plans, but now it looks like they never did work.
Links:
Sixth Circuit Decision
District Court Decision
Prior Tax Update coverage
UPDATE: Correction made as pointed out in the comment below (Thanks, Hank!).
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TWO WAYS TO SIMPLIFY ESTATE PLANNING
January 25, 2006
Hie thee to Death and Taxes; it won't take long, and you'll want to rewrite your will as soon as you're done.
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TAX SHELTER GRAND JURY GOING AFTER LAWYERS?
January 25, 2006
The New York Times reports today that there may be more tax shelter indictments, this time targeting a group of Chicago lawyers:
Federal prosecutors are investigating three lawyers at a prominent Dallas law firm, Jenkens & Gilchrist, in a widening of an investigation into questionable shelters that shielded billions of dollars from taxes, according to people briefed on the inquiry.
The criminal investigation of the lawyers, now being heard by a grand jury in Manhattan, is a clear sign that the government is extending the investigation of tax shelters that it considers abusive beyond the case involving the accounting firm KPMG.
There is no indication that Jenkens & Gilchrist itself is a target of the investigation. Petri Darby, a spokesman for Jenkens & Gilchrist, said yesterday, "We are cooperating fully with the investigation."
Instead, the investigation is focused on three current and former tax lawyers based in the firm's Chicago office, the heart of its tax practice. They are Paul M. Daugerdas (pronounced DOG-er-dus), Erwin Mayer and Donna M. Guerin, according to the people who have been briefed on the investigation.
It's interesting that there was never any thought of going after the law firm, while the KPMG accounting firm was forced to throw a number of its people to the wolves under threat of indictment. Are accountants held to a higher (or less low) standard?
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WE LEFT THE DOOR OPEN, BUT NOBODY WENT INTO THE SAFE
January 25, 2006
The IRS has told Tax Analysts that serious security weaknesses in IRS computer systems had not resulted in unauthorized access of computer systems:
“The IRS has no evidence, after reviewing our audit logs and reviewing our processes and system configurations, that any IRS data was improperly accessed by any unauthorized individuals, either internal or external to the government,” IRS spokesman Bruce Friedland said.
When asked why "Spot Friedland" and "Tabby Friedland" were claimed as dependents on his returns after graduating from college, but not after social security numbers were required for dependents, Friedland said "Who told you?" He refused further comment, and did not respond to questions about why his wife deducted trips to the day spa as medical expenses.
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LLCs, S CORPs and 'C's, OH MY
January 24, 2006
Yesterday's post on Limited Liability Companies (LLCs) and S corporations triggered a fun exchange with Ryan Ellis of Americans for Tax Reform. It is reproduced, with Ryan's kind consent, in the extended entry below.
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BLOGGING TAX PROFS TO THE RESCUE?
January 24, 2006
George K. Yin, who recently stepped down as Chief of Staff of the Joint Committee of Taxation, has a wide-ranging interview in Tax Analysts ($) today. A very smart man, Mr. Yin has lots of food for thought for tax policy nerds afficianados. I hope the TaxProf will pull the interview from behind the Tax Analyst subscriber firewall (UPDATE 1/25: he has!), but this discussion of the difficulties of tax reform is worth passing on:
One of the advantages of any serious discussion of tax reform is the opportunity it provides to overcome the collective action problem that bedevils most tax legislative efforts. Tax reform allows lawmakers to focus on and precommit to providing small benefits for the many, as opposed to -- or in exchange for -- large benefits held by the few. There are, of course, other reasons to consider major tax reform, but to me that is a principal advantage.
Unfortunately, the current state of the tax system is not really conducive to demonstrating easily the "small benefits to be obtained by the many" from any tax reform effort. Recall that when President Reagan took office, the top tax rate on ordinary income was 70 percent. Capital gains, which as recently as 1978 had been taxed at about 50 percent, were taxed at 28 percent. By presenting a tax reform plan that taxed both types of income at no higher than 28 percent, the president and Congress were able to offer the lure of significant, tangible benefits to a broad segment of the population.
Now compare that experience to the current situation, where the top rate on ordinary income is 35 percent and the top rate on dividends and capital gains is 15 percent. Under any reasonable assumption of the amount of revenue that must be raised to pay for essential government functions, it is clear that there is much less room to maneuver in terms of possible tax rate reduction.
A CALL-OUT FOR TAX PROF BLOGGERS?
Mr. Yin also calls for the tax academics to climb down from their ivory towers:
In particular, I would encourage the academic community to become more active in the debate. For example, legal academics who think seriously about tax policy tend to work on very "big picture" ideas for the long term. They tend to ignore debates on smaller issues being considered in the short term, or even more immediately. Sometimes they write articles after a change has been made detailing the policy arguments for and against the change. But for the most part, these arguments come too late. Thus, they tend to cede the principal debate opportunities to the inside-the-Beltway crowd who provide their input to Congress in real time.
At least two tax profs are already in this game: Jim Maule and Daniel Shaviro. Not coincidentally, they are bloggers. The blog format is tailor-made for the quick responses needed to participate in a legislative debate. Let's hope Mr. Yin, who is now the Edwin S. Cohen Distinguished Professor of Law and Taxation at the University of Virginia School of Law, starts his own tax blog and joins in.
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IRS GIVES UP ON PLANS TO CUT BACK TELEPHONE SERVICE
January 24, 2006
From Tax Analysts:
After two congressional actions and continual clashes with advocacy groups, the IRS has officially abandoned plans to cut its telephone helpline hours.
The National Treasury Employees Union announced on January 23 that the IRS sent word late January 20 that it would scrap plans to cut daily helpline hours from 15 to 12, the second time over the last year the IRS has backed away from service cuts under congressional pressure. The IRS concession arrived in a one-line notification e-mail without further explanation, the NTEU said, ending a bargaining process the union was entering under protest.
“Good riddance to this ill-conceived plan that would have made it more difficult for taxpayers to voluntarily comply with their tax obligations,” said NTEU President Colleen M. Kelley.
This is good news for taxpayers who want more time to get an answer that will be wrong about one time out of four.
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CARNIVAL THE NEXT DAY
January 24, 2006
This Week's "Carnival of the Capitalists" is up at "Patent Baristas". Notable posts include a discussion at Scrivener.net, "How a tax credit can increase the cost of hybrid cars." The Scrivener notes the problem that we have pointed out with the hybrid credit: that the alternative minimum tax will make the credit useless to many taxpayers.
Also, don't miss Henry Stern's Insureblog post on whether a personal-injury defendant can be sued for the "difference" when a plaintiff's medical insurer gets a discount on the cost of treating the injury. Puzzling stuff.
Lots of other good stuff there at this weekly compilation of economics and business blog postings.
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WHY MORE S CORPORATIONS THAN LLCs?
January 23, 2006
The TaxProf Blog has a fine post this morning noting that S corporations remain more popular than LLCs. UM-KC prof Christopher R. Hoyt writes:
Trends in the real world on "choice of entity" decisions may conflict with the recommendations we might make to students. Generally I prefer an LLC to any sort of corporation, but every year there are twice as many S Corporations formed as there are LLCs.
Professor Hoyt's post doesn't discuss why this is happening. My initial thoughts*:
Self-employment and FICA taxes:While the IRS is trying its best to frighten people in this regards, S corporation shareholders still often have more ability to reduce employment taxes than LLC members. S corporation K-1 earnings aren't self employment income, while LLC earnings usually are, at least for active members. The continuing uncertainty over how LLCs are to be treated for self-employment taxes doesn't help.
Complexity: While LLCs have a lot more flexibility than S corporations, many business owners don't want the accompanying complexity. I've seen many eyes glaze over while trying to explain capital account maintenance and liability allocation issues, and I don't think the boredom was all my fault.
S corporation liberalization: Congress has passed a series of laws making it easier to qualify for an S corporation election.
General Utilities issues: A C corporation can often convert to S corporation status at a small tax cost; the ten-year built-in gain tax can often be managed. In contrast, a C corporation cannot become an LLC without immediately recognizing all of its built in gains in liquidation.
W-2 vs. guaranteed payments: S corporation owners take their compensation out of the business as salary, which is reported on form W-2, with the usual tax withholding. LLC members pick up their compensation as guaranteed payments, with no withholding mechanism. Many business owners prefer S corporation salary, with taxes withheld, to paying quarterly estimated taxes on their guaranteed payments.
State Issues: Iowa discriminates against the LLC form for multi-state businesses based here. Iowans owning S corporations get a tax credit that has the effect of applying modified single-factor apportionment to their distributive share. The credit is unavailable to LLC owners.
Regulatory restrictions: There has been a surge of S corporation elections by community banks since 1996, when they first qualified. While banking authorities are beginning to take steps to allow LLC banks, it's not clear that it is even possible for an LLC to be taxed as a bank.
In my practice I see LLCs most often used in the way noted by Mr. Hoyt:
Real estate and finance/insurance account for nearly 75% of the assets of all businesses operating in any sort of partnership form.
I see LLCs and LLPs used a lot in ventures between corporations (including S corporations), real estate deals and investment entities. For other businesses, most owners prefer the perceived simplicity and straight-up income and loss allocations of S corporations.
UPDATE: Russ from Taxable Talk looks at the issue from a California perspective:
In California, there are two major factors working against LLCs. First, all S Corps and LLCs in California must pay a minimum state franchise (income) tax of $800 per year (or 1.5% of net income, whichever is greater). But LLCs also face a gross receipts tax, so LLCs in California are triple-taxed! The current minimum gross receipts tax (called an LLC fee) is $865 per year. Second, some businesses are prohibited from being in an LLC. These include professionals, such as architects and accountants. (They can form LLPs, though).
*For purposes of this discussion, I assume we are talking about LLCs choosing to be taxed as partnerships.
UPDATE, 2/23/06: More here.
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GEORGE WASHINGTON AND ARBITRATION
January 23, 2006
I learned something new at the Death and Taxes Blog today: George Washington's will had an arbitration provision to keep any disputes over its provisions out of the courtroom:
My Will and direction expressly is, that all disputes (if unhappily any should arise) shall be decided by three impartial and intelligent men, known for their probity and good understanding; two to be chosen by the disputants--each having the choice of one--and the third by those two. Which three men thus chosen, shall, unfettered by Law, or legal constructions, declare their sense of the Testators intention; and such decision is, to all intents and purposes to be as binding on the Parties as if it had been given in the Supreme Court of the United States.
The Death and Taxes post has more good stuff, including a link to the full text of Washington's will.
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NO DEDUCTION FOR DRASTIC ASSET REDUCTION SURGERY
January 23, 2006
An IRS Chief Counsel's Office memo reported today by Tax Analysts studies the $64 question:
Whether the taxpayer's costs for male-to-female gender reassignment surgery (and related medications, treatments, and transportation) paid during Year 6 may be deducted as medical expenses under I.R.C. § 213.
Conclusion? The IRS isn't going to stick its, er, neck out on this one:
Without an unequivocal expression of Congressional intent that expenses of this type qualify under section 213, allowing the medical expense deduction is not justified in this case.
Showing once again that a deduction isn't always deductible.
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NEXT STEP: DIRECT WITHDRAWAL FROM YOUR BANK ACCOUNT
January 22, 2006
The ultimate in convenience for those choosing to pay the tax on people who are bad at math: a slot machine video lottery terminal with an ATM right alongside. This helps small businesses, like this Hy-Vee liquor mart, make ends meet.
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THE WEEK IN TAX CRIME
January 21, 2006
DEFINITIONAL DIFFICULTIES IN PHILADELPHIA:
The online edition online edition of the Philadlphia Inquirer reported yesterday:
Philadelphia restaurateur Neil Stein, who admitted that he skimmed at least $500,000 cash from his high-end establishments over a three-year period, was sentenced to one year in prison on tax evasion charges this afternoon.
Perhaps Mr. Stein's difficulties are traceable to some confusion over the meaning of "crime."
Before he was sentenced, Stein told Pollak that he had been addicted to cocaine, heroin, percocet and alcohol for much of his life.
"I am not a crook," he told the judge. "I was using a diseased brain to make decisions."
Maybe laws are different in Philadelphia, but if I'm not mistaken, cocaine and heroin are illegal there, too - making Mr. Stein a "crook," as I understand the term.
That said, Mr. Stein has enough moxie that he's likely to bounce back sometime. He is also "NEIL STEIN, The Man Who Said No to the President of the United States of America":
The Striped Bass happens to be a very popular restaurant, and it's next to impossible to secure an immediate reservation on a Saturday night. But the President of the United States could probably get the Beatles back together, and if he wants dinner, he gets dinner. All it takes is a simple phone call.
Unless the phone is answered by Neil Stein, the proprietor of the Striped Bass...
According to Stein, "there was only one decision to make. We had 300 reservations for that Saturday night, and these reservations are made some eight weeks in advance. People come here for some very important occasions including graduations, anniversaries, important business deals, and things like engagements. You want me to tell someone that they can't get engaged in the Striped Bass because the President wants to have dinner in my restaurant?"
"I have 127 employees who know exactly where I stand with my customers. They know my priorities. If I make a decision that is good for the Restaurant only, and without regard to my loyal customers and my staff, the Striped Bass would never be the same."
The man has nerve, no doubt about that. One only hopes that standing up to the President didn't attract unwanted attention to Mr. Stein.
MEANWHILE IN NEW JERSEY...
The Asbury Park Press reports:
A state Superior Court judge has sentenced a Rumson resident to four years in state prison for evading $4.6 million in business taxes.
The sentencing ends what state officials said is the biggest criminal tax-evasion case they have brought in New Jersey history.
Michael J. Buonopane, 45, a lawyer, accountant and businessman, already has repaid the $4,642,452 in federal and state employee-withholding taxes and state sales tax. He has three years to repay $1 million in interest on the taxes, along with $250,000 in penalties to the state, according to state Deputy Attorney General Denise Grugan.
His lawyer sought leniency, telling the court that Mr. Buonopane suffers depression and an anxiety disorder. If I were facing four years in a New Jersey prison, I too would be depressed and anxious.
"SURVIVOR" HATCH LAYS IT ON THICK
Richard Hatch's tax trial continues. He apparently is switching from the "blame the accountant. Oh, I'm the accountant" ploy to the "I hope the jury is really stupid" strategy:
The reality champ's defense attorney dropped a bombshell Friday at Hatch's federal tax evasion trial, alleging that Survivor producers struck a deal with Hatch while he was a contestant on the show, agreeing to pay the taxes on his million-dollar prize if he won.
The bargain purportedly came about after Hatch allegedly caught some of his fellow contestants cheating by having friends sneak food to them on the island. He told producers, who ultimately attempted to buy his silence, the story goes.
That's right, Mr. Hatch is in tax trouble because he's just too honest. O-kaaay... Let's ponder this.
Mr. Hatch caught fellow contestants cheating. He tells the producers. Do they make it part of the show and throw the cheaters off? No, they try to corrupt Mr. Hatch!
Do they offer him cash? Some decent clothes, so he doesn't have to run around naked? No! They offer to pay is taxes if he wins. And, not having won anything yet, Mr. Hatch says that's fine, he'll take a flyer on maybe saving future taxes, rather than demanding real money now.
Yeah. Uh Huh. Happens all the time...
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FEBRUARY 4, 2006 IOWA BLOGGER BASH: WHAT THEY'RE SAYING
January 20, 2006
Here are two advance notices:
Political Madman: "I'll be at the blogger bash..."
Jody of Iowa Geek: "Look forward to meeting you at the bash."
You, too can be there! Raccoon River Brewing Co., @7:00 pm. Free internet, but you buy your own beer. Unless you get somebody else to, which will probably get easier as the evening progresses.
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TROUBLE BREWING IN TERRYVILLE
January 20, 2006
Somebody in Terryville, Connecticut may be in for a bad day soon. From the IRS auction website:
The Internal Revenue Service may be conducting a public auction in the Terryville, Connecticut area in the very near future. The Items consist of approximately 8,671 pieces of Rain Suits, Rain Coats, Rain Jackets, Rain Pants, Parkas, Ponchos, Umbrellas, Boots, Rain Hats, Thermal Underwear, Socks, Retail value of merchandise is approximately $158,000.00 This sale will be conducted under IRC Section 6336, perishable goods. This means that the property will be sold the same day it is seized. This will be a cash sale and the property must be removed the same day. The sale will be absolute. We do not charge sales tax or a buyer’s premium.
Well, that gives somebody fair warning.
That's a lot of rain gear. Clearly this taxpayer is seriously underwater...
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'TOWER EXECUTIVE RESOURCES' PROMOTORS SENTENCED
January 20, 2006
The promoters of the "Tower Executive Resources" tax scam are going away for awhile, according to a Justice Department press release. Paul D Harris will serve 5 1/2 years, followed by three years of supevised release. Co-defendant Lestr R. Retherford got a 48-month sentence. The Coloradans scam involved setting up a phony offshore company:
According to the evidence introduced at trial, wealthy taxpayers paid initiation fees of up to $50,000 to join Tower Executive Resources and thousands more in annual fees to maintain their membership. Harris and Retherford set up shell corporations for their clients that were used to conceal nearly $9 million in taxable income. The clients transferred millions of dollars to secret bank accounts in the Turks and Caicos Islands and other foreign countries. These secret bank accounts were titled under the names of International Business Companies (IBC’s) and other nominee entities. Although these IBCs were owned “on paper” by a taxicab driver from the Turks and Caicos Islands, they were actually controlled by the Tower Executive Resources’ clients. The defendants made it appear as though the offshore transfers were payments for consulting services by issuing a series of false invoices to the clients’ businesses, which the clients falsely deducted on their businesses’ tax returns. The Tower Executive Resources clients then used debit cards and bogus loans to bring the money they had transferred offshore back into the United States for their own personal benefit.
An heir to the Bekins Moving business was among the clients. He testified on behalf of the Government and now awaits sentencing by the U.S. District Court in Seattle. The Justice Department release says nine Tower clients have been convicted and three more are under indictment.
The Moral: Tax planners who say you can move your wealth off shore tax-free with deductible expenses, but still keep the money - like Tower Resources and Anderson's Ark - are indictments waiting to happen. Don't touch them with a 10-foot consulting fee.
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DID CLINTON IRS COVER UP FOR FORMER HUD SECRETARY?
January 20, 2006
That's the conclusion of independent counsel David M. Barrett, filed in 2004 but only released yesterday, with heavy redactions. The report says the IRS National Office took the case out of normal channels and overrode the IRS South Texas Criminal Investigative Decision to quash tax charges. Tax Analysts reports:
Documentation from the IRS’s examination of Cisneros indicated that IRS lawyers deviated from their normal protocols in the case, according to the report. Also, Barrett’s team unearthed a memo from the head of the Texas criminal division accusing the IRS assistant chief counsel (criminal tax) of conspiring with Justice to intentionally derail the “meritorious” tax case against Cisneros. It alleged that the National Office had stepped in with the intention of “killing” the case. The head of the assistant chief counsel’s office that took control of the case was also accused of maintaining a “cozy” relationship with Cisneros’s lawyers.
For some reason reading about Clinton Administration scandals gives me the same feeling I get when I awake from a nightmare that I am back in high school. But at least when I wake up, I know I won't have to go back to high school.
Links:
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INEPTITUDE, DISCRIMINATION: THERE IS A DIFFERENCE
January 20, 2006
While same-sex couples can use wills and contracts to achieve many of the legal rights that traditional couples get through marriage, incompetence conquers all. Joel Schoenmeyer explains at his "Death and Taxes" blog.
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HARKIN: TAX CREDITS FOR E-85 PUMPS!
January 20, 2006
Gas station owners who don't want to invest in upgrading their facilities to pump E-85 might get an incentive from Uncle Sam. Iowa Senator Tom Harkin is proposing a bill that would provide a tax credit of up to 30-thousand dollars per gas station to outfit them to sell the 85-percent ethanol fuel, which is made from corn.
Harkin says "We need more E-85 pumps all over the United States. Right now we can produce the E-85 but the tax credits are not there to promote that. So my philosophy is to provide the tax credits to get more E-85 pumps, not just in Iowa, but all over the United States." Harkin says the legislation, which is being co-sponsored by several senators, goes beyond E-85.
Sigh. Leaving aside the questionable premise that E-85 is something the government should subsidize, why do politicians think that the solution for every problem lies in the tax code? And once a credit like this gets enacted, the next thing will be a credit for cars to buy the E-85 because the gas station owners aren't selling enough. Then we'd find the credits are really going to "big oil," or to "big corn." And then everyone would realize that the Alternative Minimum Tax deferred the value of those credits to the year 2023. And then we'll need slot machines in every gas station to cover the additional costs of all those extra pumps. Oh, wait...
(Via State 29)
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20-YEAR OLD TAX DISPUTE SPLINTERS TAX COURT
January 19, 2006
Today's Tax Court decision in Lois E. Ordlock is unusual in several ways.
- It is a "regular" decision, rather than a "memorandum" or "summary" ruling. In recent years these are as regular as an old accountant on a low-fiber diet.
- The court is split, 10 judges to 8, with a concurring opinion and two dissenting opinions. The last time anything like this happened was in the Bongard case last March.
- It involves tax liabilities arising while I was still in school.
The case involves whether a California woman can get a refund on taxes collected on her husband's 1982-1984 liabilities under the "innocent spouse" rules. California is a "community property" state. The question at issue was whether the "innocent" spouse can claim a refund of taxes paid out of "her" share of community property. The court said she could not.
Ms. Ordlock has the consolation of knowing that an appeal to the Ninth Circuit has some promise, given that 8 Tax Court judges agree with her side of the case. On the other hand, it can't be much fun to still be fighting a tax dispute that arose when this was on the radio:
If you are a wronged spouse in a community property case, make sure you get your refund claims or court filings in on time, because this case is probably not over.
Cite: Lois E. Ordlock, 126 T.C. No. 4
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FEBRUARY 2006 APPLICABLE FEDERAL RATES (AFRs) RELEASED
January 19, 2006
The IRS has issued (Rev. Rul. 2006-07) the minimum interest rates for loans made in February 2006:
-Short Term (demand loans and loans with terms of up to 3 years): 4.39%
-Mid-Term (loans from 3-9 years): 4.40%
-Long-Term (over 9 years): 4.61%
Can you say "flatter yield curve"?
Historical AFRs are available via the “Links” page at www.rothcpa.com.
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ROTH 401(k) AND IOWA TAXES
January 19, 2006
An astute reader queries whether Roth 401(k) plan distributions will qualify for the same tax-free treatment on Iowa returns that they will have for federal purposes.
Unless the legislature does something affirmatively stupid - unlikely in this case, but never impossible - Roth 401(k) distributions will be taxed the same way on Iowa returns as on U.S. returns. Iowa annually conforms its rules for computing taxable income to the current federal rules. Unless the legislature specifies an exception, every new tax change applies to Iowa. As Iowa has not carved out Roth 401(k) distributions in it's latest code-conformity legislation, the federal rules apply to Iowa.
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H&R BLOCK V. TURBOTAX
January 19, 2006
The 900 lb. gorillas of tax preparation are going toe to toe over ad claims. I note it with the same cheerful detachment as I would a bench-clearing brawl at a Yankees intra-squad game.
Lawyers for H&R Block and Intuit exchange pretrial motions.
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THE MAULE WAR ON DOUBLE-FICA
January 19, 2006
Villanova Professor James Maule has taken up his might cudgel against the double FICA taxation of job-switchers. This occurs when an employee works for two employers and his combined income exceeds the maximum amount (currently $90,000) subject to the 6.2% FICA tax imposed on both employers and employees. If you work for two employers, each employer will withhold FICA "OASDI portion" on income up to the cap. While the employee can treat any FICA withheld over the excess ($90,000 x 6.2%, or $5,580) as income tax withholding and get a refund, the excess paid by the two employers is just gone.
Professor Maule dislikes this result:
From a policy perspective, so long as the OASDI limit exists, and so long as employees move from job to job, the same notion of portability that is so prominent in compensation taxation considerations should similarly apply to this issue. The portability concept is that employees and employers should not be disadvantaged, in terms of the tax and other consequences of retirement savings, simply because employees change jobs. The same concept should apply to OASDI
Prof. Maule is absolutely correct. Yet I think Congress is about as likely to to fix this as it is to vote term limits on itself.
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CAR SHOPPING? IRS HAS SOME BEAUTS
January 18, 2006
It looks like a classic car collector got crossways with IRS, based on the cars for sale here on IRS auction website.
At first I wanted this 1958 Lincoln.
Then I saw this 1962 T-bird.
Then I saw my dream barge. It just needs new whitewalls and curb feelers!
But I think I'll settle for something sensible.
Does the purse come with it?
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WHAT'S 1.5% WORTH?
January 18, 2006
Most taxpayers with money coming back from the IRS don't much worry about how much interest the IRS pays. In fact, most refunds don't even earn interest. When they do, it's enough for many taxpayers just to get the money back, and the interest isn't worth fighting over.
Now if the overpayment is $1.6 billion, that's a different story.
For "large corporate overpayments" - those over $10,000 - the tax law provides a 1.5% reduction in the interest rate paid by the IRS, a result of a 1994 tax law change. Exxon-Mobil went to Tax Court to argue that interest accrued prior to the law change was exempt from the 1.5% haircut. Yesterday, the Tax Court disappointed the oil company.
A quick and dirty calculation shows that the 1.5% difference from January 1, 1995 until today on the $1.6 billion overpayment would amount to just shy of $487 million. That goes to show what a little compound interest can do, when you start with $1.6 billion.
Cite: ExxonMobil Corporation, 126 TC No. 3.
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HAPPY BIRTHDAY, BEN
January 17, 2006
Ben Franklin turns 300 today. Were he alive now, he would need to know his tax pro far too well.
Ben had a very successful printing business. He operated it as a sole proprietorship, which would have meant a schedule C and Schedule SE, with the 15.3% self-employment tax on the first $90,000 in today's income (about $4,230 in 1776 dollars); a top marginal U.S. rate of 35%; a Pennsylvania top rate of 3.07%; and a 4.4625 Philadelphia City Tax.
Today he might instead operate as an S corporation, with about the same results, but with some room to play games with his self-employment and FICA taxes.
Or he could operate as a C corporation, with a top rate of 35%, a Pennsylvania rate of 9.99% and additional federal tax of 15% on distributions, in addition to state and city income taxes at the regular rate. This would be offset somewhat by some tax-free fringes and opportunities to spend time manipulating income between the C corporation and his personal return, in lieu of, say, flying kites.
Because printing generates "Qualified Production Activities Income," he would have his accountants busy trying to allocate expenses to "non-qualifying income" to maximize his Section 199 deduction. He would be aghast that the deduction doesn't apply to revenue generated by the online version of his publications.
A federal estate tax of up to 46% and a Pennsylvania inheritance tax of up to 15% would apply at his death.
With extended stays in England and France, he would get to know the intracacies of the U.S.-U.K. and U.S. - France tax treaties. He would take advantage of the earned-income exclusion for part of his overseas income, but he would remain subject to U.S. taxes, and to some degree U.K and French taxes.
Of course, as a critical figure in the American Revolution and the drafting of the Constitution, not to mention his successful concurrent careers in business and science, he did a lot of stuff that was harder than taxes, even today's taxes. Still, he would have been appalled at the amount of his energy that would be diverted from his inventions and civic involvement to his tax compliance and planning.
Fortunately, he would have been able to keep his perspective:
"Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes."
And he would no doubt be having a lot of fun, too.
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TAX POLICY BLOG: FOR SPINACH IN PRINCIPLE, AGAINST IN PRACTICE
January 17, 2006
The Tax Policy Blog has a good post up discussing the dynamics of targeted tax incentives, better known as corporate welfare:
"The best tax policy that states can promote would not include these targeted tax policies for specific industries or companies, but rather a policy that taxes all industries equally and with a low rate; thereby promoting investment across the board and not distorting investment decisions."
Oddly, the Tax Foundation, which hosts the Tax Policy Blog, is strongly against the Cuno decision, which strikes down Ohio's tax incentive scheme. They've even filed a brief with the Supreme Court defending the right of states to enact corporate welfare tax incentives.
I'm sure the Tax Foundation has good lawyers with all sorts of good legal reasons why states should be free to engage in trade wars with other states through corporate welfare. I'm not a lawyer, I say it's all spinach, and I say the hell with it.
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CARNIVALS!
January 16, 2006
The Carnival of the Capitalists and the Carnival of Personal Finance are up for this week.
At the Capitalists Carnival, Jane at "Lip-sticking" says January 12 is "National Tax Advice Day." And I didn't get a card. Hank Stern is there to remind us who really pays for "employer-paid" health coverage.
The Personal Finance carnival has this item:
Frugal For Life has written about minimalist living and what that means. A great article for those curious about minimizing their life, or just their expenses.
I hope they mean "simplifying," rather than "minimizing." Life's too short as it is, except during tax season.
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TAX EVADERS GET BANISHED
January 16, 2006
Most tax evaders at least get to stay in the country when they finish serving their time. Not these guys:
The former owners of a North Charleston grocery store will be deported back to their native Jordan as partial punishment for tax evasion.
Brothers Amjad and Shadi Kamleh pleaded guilty in August to devising and carrying out a scheme that allowed them to hide at least $100,000 in profits from a Red and White Grocery their family bought in 1999. Federal authorities say some of the money was funneled to a joint bank account in Jordan's capital, Amman.
If Iowa starts imposing residency restrictions on tax evaders - say, by not allowing them to live within 2000 feet of a video lottery installation -- they all might have to move to Jordan.
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LINKS FOR VALUING NON-CASH DONATIONS
January 16, 2006
The TaxProf links to TaxGuru.net's summary of tools for documenting non-cash donations.
If all of the clothes donated to charity were really worth the amounts people take as deductions, I suspect Goodwill and The Salvation Army would be the largest financial organizations in the world.
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TRAGEDY OF THE TAX COMMONS
January 16, 2006
The Tax Policy Blog has an elegant little public choice theory explanation of tax complexity:
The reason, of course, is that simplicity has no political constituency. Given the choice between a concrete targeted tax credit vs. the abstract benefits of simplicity, taxpayers will prefer credits every time. And so will lawmakers rewarded for distributing them. And so will tax practitioners rewarded for navigating them. And so will tax administrators rewarded with larger agency budgets for administering them.
Gee, thanks, guys, but I'm sure I have all the "rewards" I can stand.
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IF ONLY A FEW PEOPLE PAY TAXES, WHAT HAPPENS WHEN THEY DON'T?
January 16, 2006
I've occasionally talked about the civic unwisdom of removing more and more people from the tax rolls. As more people lose their responsibility for paying for government, they also lose any stake in restraining spending.
A discussion of California taxes also points to a more practical problem: revenues from a small group of wealthy taxpayers will be more volatile than revenue from a wider base of taxpayers. Mickey Kaus explains:
Basically, if the rich have a bad year, the state's in trouble. That's what happened, A.L. points out, between 2000 and 2002. ... It certainly doesn't seem like good policy to tie the fate of schools, roads, sewers, hospitals, police etc. so closely to the success of a few mansion-generating sectors, in particular the entertainment industry--especially this year.
The TaxProf rounds up other blog commentary.
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WE THE FORECLOSED
January 16, 2006
Tax protest Honesty Movement leader Bob Schulz doesn't limit his talents to battling the federal tax system. The leader of "We The People" is also taking on Washington County, New York -- with about the same results as he's seen on the federal level:
Last week, Washington County officials initiated foreclosure proceedings against Schulz's Ridge Road property, worth more than $550,000 and located near the border of Warren County, stating that it intends to seize and auction off the unencumbered home and property to collect the unpaid taxes it claims Schulz owns.
Instead of paying the taxes to the county, for the past two years, Schulz in exercising his Right-To-Petition, has deposited $12,000 into a trust account, naming the county as beneficiary, pending a decisive legal ruling by a state or federal court.
I'll have to try that trick in Polk County and see if they will let me withhold taxes until the finances of RACI become transparent. If it works, I'll never pay property taxes again. Of course, it wouldn't...
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A $179.60 COUPON FOR A NEW E-85 CAR
January 13, 2006
Clinton Republican Steven Olson proposes to allow a $2,000 Iowa-only tax deduction for purchases of new non-business cars that use E-85 fuel.
What basic rules of good tax policy does this bill (HF 2052) violate?
- It makes taxpayers do a different computation on the federal return than the Iowa return, making life harder.
- It's not obviously computer-enforceable, so it would require an examination to determine if somebody is lying.
- It tries to make the tax law do something that it shouldn't do - make people buy E-85.
Maybe the maximum tax savings of $179.60 will help compensate the owners for the extra fuel they will burn looking for a gas station that carries E-85.
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FIRST SURRENDER, THEN NEGOTIATE
January 13, 2006
The White House has already rejected the Tax Reform panel's proposed generous cap on health insurance deductions. Why you would declare one of the biggest sacred cows in the tax code untouchable this early in the process is beyond me. The Tax Policy Blog discusses the problems with unlimited health-care deductions:
A vestige of World War II price controls, the exclusion for employer-provided health care is the largest preference in the tax code with an estimated 2006 value of roughly $126 billion. By substantially narrowing the federal tax base, it forces all taxpayers to pay higher tax rates, increasing the distortion caused by federal taxes in markets and ultimately reducing U.S. economic performance.
Lots of good links, too.
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THIS WEEK IN TAX CRIME
January 13, 2006
Because inquiring minds want to know:
RICHARD HATCH, the nude "Survivor," went on trial this week for evading taxes on, among other things, the $1 million he won in the initial "Survivor" TV series. He is using an unusual twist on the old "blame the accountant" defense:
Reality show star Richard Hatch is merely the ''world's worst bookkeeper," not the tax evader that prosecutors make him out to be, his attorney said yesterday as the ''Survivor" winner's tax fraud trial got underway in Providence.
Really, though, it's a twist on the Steve Martin "I forgot about the million dollars" defense. Presumably his next move will be to say, "Excuuuuuse Me!"
EXTREME TAX PLANNING
Perhaps this is all just some sort of misunderstanding?
A Chicago lawyer disbarred for overbilling state child-welfare officials evaded more than $640,000 in federal taxes, partly by moving $2.6 million in assets to a Swiss bank account, according to a federal indictment made public Thursday.
Joyce F. Britton, 55, failed to file tax returns for 2001 and 2002 despite receiving more than $2.2 million in legal fees from the Department of Children and Family Services during those years, according to the indictment.
If she gets caught, she'd better have a heck of an alibi. "I was... I was... helping to finance democracy in Switzerland!"
MEANWHILE IN WEST VIRGINIA...
Carl Lemley Kennedy II, 48, is scheduled to report to the federal penitentiary next month to begin serving almost 3 1/2 years.
In sentencing Kennedy, U.S. District Judge John Copenhaver Jr. noted that the accountant stole more than $1 million from employees’ withholdings, apparently investing the money in other businesses and property, and still owes the Internal Revenue Service $500,000 in personal income taxes.
The Charleston Gazette focuses lovingly on the toys bought with the ill-gotten gains:
With his 2003 Hummer H2 already sold off, Kennedy faces potential liquidation of his other property and assets. Already he sold his half-interest in a Surfside, S.C., beach house that was valued at $120,000 to a former wife...
Kennedy, who also owes more than $200,000 in West Virginia income taxes, also stands to lose his 1979 MGB, 1977 Harley-Davidson Superglider, 1976 Volkswagen Beetle convertible and his 1981 Piper Warrior II airplane.
The government will also probably offer his other property for sale at some point, including 112-120 D St. in South Charleston, 1107 and 1109 Main St. in Charleston and three, 2-acre lots in the Bahamas.
The Moral? Don't be a crook, or they take away your toys.
KPMG DEFENDANTS FILE MOTIONS TO DISMISS CHARGES
It looks like the defendants in the KPMG tax shelter case aren't going to go away without a fight. The New York Times reports:
Former KPMG tax professionals who are facing criminal charges over questionable tax shelters challenged the government yesterday to prove that they had broken the law.
The defendants filed more than two dozen motions in United States District Court in Manhattan yesterday, asking among other things that charges be dropped because no court had ever ruled the shelters in question illegal.
This is shaping up as a monumental battle.
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$13.47 FOR YOUR EXCHANGE STUDENT
January 12, 2006
The federal tax law lets you take a $50 charitable deduction for each month that you have an exchange student in your home. SF 2003 proposes to boost this to $200 for Iowa returns.
Leaving aside the questionable wisdom of a federal charitable deduction for this (it's a nice gesture, I suppose, but who really is doing this expecting a deduction?), what is the point of making the rule different for Iowa? At the top 8.98% individual rate, this would be $13.47 per month. Most teenagers consume that in milk alone. Nobody is going to adjust their bahavior because of this law, with the exception of tax software companies.
This is a classic example of a proposal that makes for a more complicated tax law with trivial compensating benefits. Iowa should avoid making its computations different from the federal rules in almost all cases.
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FLOOR FOR CHARITABLE DEDUCTION FOR ITEMIZERS?
January 12, 2006
The Senate's budget reconciliation bill has an interesting provision. It would allow non-itemizers to deduct charitable contribuitions above $420 ($210 for single filers), but impose the same floor before charitable deductions become deductible for itemizers.
I confess that I find floors for some deductions useful, because you can "deduct" stuff the client wants to deduct and have the floor make the deduction go away. The 2% floor for miscellaneous itemized deductions is a perfect example; the floor means I don't have to tell the taxpayer that his subscription to Playboy isn't really a business expense, because all of the miscellaneous deductions don't add up to enough to reach the floor.
Whether this is a good idea here, I doubt. If it's AGI-based, it's a bad idea, because that amounts to a hidden tax rate. Ultimately, the floor just makes things a little more complicated, which nobody needs.
Where the $420 number comes from, I have no idea.
Hat tip: Tickmarks blog.
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THEY'RE BAA-ACK
January 11, 2006
Yes, the Iowa legislature is back in session. That means we will see any number of proposals floated to buy votes and influence by mucking up Iowa's tax law.
We'll start a new feature here where where we will try to track Iowa tax propoposals. We may not cover them all, as there are 150 legislators and one me. But here goes:
TAX-FREE GEEZER BILL
The first big income tax proposal would phase out income taxes on all pension and social security income (HSB 502). Last year they wanted to exempt young folks. Make up your minds!
This bill is pure pandering. As much as we cherish our older Iowans, they are statistically our wealthiest folks. They didn't pay taxes on their pensions while they worked, and now they aren't to pay taxes on them as retirees? Remember, giving the old folks this break by definition means a tax increase for the rest of us. The boomers are getting ready to stick it to us once again!
Or is the goal economic development: to make Iowa the next Sun City by attracting old folks here? Maybe that's what they can use that Rainforest thingy for.
In any case, the House Ways and Means Committee has already voted this thing to the floor. Bad news travels fast.
UPDATE FROM THE COMMENTS: Another tax provision to drive out those unruly youngsters.
OTHER BILLS IN BRIEF:
•Exempting the sale of certain school supplies from the sales and use taxes during a specified time (HF 2001). There is no possible policy justification for a holiday. Either these things should be taxed, or not. Go here for a more detailed discussion, if you're interested.
•Increasing the taxes imposed on cigarettes and tobacco products and providing for deposit of the increased revenue generated in the Senior Living Trust Fund (HF 2022). Tobacco: the revenue wonder weed. Perhaps they shouldn't raid the trust fund in the first place.
The Legislature is developing a nasty nicotine habit. All these tobacco tax increases are going to bite the legislature if people come to their senses and stop smoking. Well, they can always put cigarette vending machines next to the video lottery terminals.
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ARTICLE ON BANKS, IRAs, AND S CORPORATIONS
January 11, 2006
We have an article in the current issue of the Iowa Bankers Association "Exchange" magazine. It is reproduced in the expanded entry below (if you don't see it, click "read more").
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THE TAX LAW: WHERE HAVING THE SAME MAMA DOESN'T MEAN YOU'RE RELATED
January 11, 2006
One of the wonders of the tax law is its bewildering array of rules governing transactions between related parties. One set of rules says that if you sell something to your sibling for less than you paid for it, you can't deduct the loss. Another set of rules says that your sibling isn't your relative when dealing with corporate restructurings. And unfortunately for the Garber brothers, blood isn't thicker than water in this case.
The tax law (Section 382) says that corporate loss carryforwards are limited when the corporation changes hands. Some sales between relatives don't count, but sales between siblings do. Earlier this week the Federal Fifth Circuit Court of Appeals affirmed a Tax Court rule that having the same daddy doesn't make you a related party for the corporate loss carryforward rules.
You can get the details of the case here and here.
Links:
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A CAUSE TO GET BEHIND
January 10, 2006
State 29 is in the running for a "Bloggie" award, and he kindly suggests nominating the Tax Update for an award as "Best Topical Blog."
We've always been itching for an award of some kind, but when I think of "topical," I usually think of something else:
But at the risk of getting under someone's skin, we'll get behind State 29 as the Bloggie nominee for "Best Weblog About Politics." You can pull the lever for him at the Bloggie nomination page. As you have to nominate three blogs to nominate one (dumb rule, I know) consider this humble page as the "topical" blog and "Regions of Mind" for the "Best Writing of a Weblog" award. But act now! Nominations close at 9:00 p.m. today.
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THE MORTICIAN CONFIDED, 'HAVE YOU EVER TRIED TO LOOK SAD AT A $10,000 FUNERAL?'
January 10, 2006
As somebody who is part of the cost of complying with the tax law, I have to admit mixed feelings about this news:
And that is before anybody has to start filing returns claiming the Section 199 deduction. As the Tax Foundation points out, every tax provision for a "worthy" cause makes tax compliance more expensive.
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EVIDENCE THAT IOWA HAS DRIVEN METH USE OUT OF THE STATE
January 10, 2006
Iowa has imposed stern new restrictions on the sale of pseudoephedrine, an ingredient in mehtamphetamine. We have anecdotal evidence that the restrictions have driven meth use into neighboring states, based on this State Tax Analysts ($) story:
Kansas Talks Begin on Funding for Kansas City Soccer Stadium
by Chris W. Courtwright
Politicians on the Kansas side of the Kansas City metropolitan area have begun discussing what sort of state and local tax package -- proposals include a 2 percent hotel tax and a tax increment financing district -- may be necessary to build a complex in Kansas for the Kansas City Wizards soccer team, which now plays in Missouri.
A free story from Sports Illustrated makes it appear that drug use is rampant amoung business leaders and parks and recreation officials down there:
During a county commission meeting Thursday, a 13-member committee unanimously endorsed the construction of a soccer complex that could cost up to $125 million and -- perhaps -- become the Wizards' new home.
The study group, whose members included business leaders and parks and recreation officials, made the recommendation after reviewing a study from a sports consultant.
If further proof of drug-induced policymaking were required:
"I've never seen a soccer game from the beginning to the end," said Linda Terrill, the spokeswoman for the study group. But "it's clear from the study ... it's an incredible opportunity. This is the right time we do this for the youth of Johnson County and the economic development of Johnson County."
She'd never sleep through a whole game of metric football, but how can you pass up the opportunity to spend $125 million on a new stadium for it?
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SCHEDULE D PANIC ATTACK SUBSIDES
January 10, 2006
The tax preparation community had worked itself into a frenzy over the instructions for the 2006 1040 Schedule D. The instructions implied that we would have to manually enter each stock transaction on the actual form; to save time, we have traditionally attached brokerage gain and loss summaries when a taxpayer has many stock sales. I suspected that the IRS wasn't really requiring this, based on this part of the schedule D instructions, away from the part that caused the panic:
This passage implies that attached statements of transactions are still acceptable, as long as they have the appropriate information.
The IRS yesterday issued a "clarification" email saying yes, we can again attach summaries like we always have. Tax Analysts reports ($):
"Taxpayers may submit attachments in lieu of completing lines 1 and 8 on Schedule D or D-1 as long as the attachments contain all the required information and are in a similar format," the document says.
The additional language was intended "to remind investors that they must include ALL transaction information required by Schedule D," because some investors were submitting brokerage statements that did not include all of the required information, according to the document.
Calm is restored.
Other coverage:
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MORE CARNIVAL FUN
January 09, 2006
This weeks Carnival of the Capitalists is up. This week, Iowa's own Brian Gongol sizes up the economic and tax views of our candidates for Governor, and Hank Stern discusses the ins and outs of buy-sell agreements.
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BACK ON
January 09, 2006
The site was unavailable to many of you for awhile today. Sorry about that.
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ALITO: THE TAX CASES
January 09, 2006
Paul Caron has put together a summary of all of Judge Alito's tax cases at his TaxProf blog just in time for the Senate confirmation hearings.
Lee Sheppard discussed Judge Alito's tax jurisprudence here.
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BEATS MAKING LICENSE PLATES
January 09, 2006
Professor Maule notes a surprising way to keep inmates occupied.
A prisoner with access to the Internet or a prison library prints out or makes copies of IRS forms. The prisoner, or others in the scheme, prepare fraudulent documents showing fictitious withheld taxes on fictitious income. Using these forms, the prisoners then file tax returns seeking refunds of the supposedly overpaid taxes.
It is apparently common, and taxpayer confidentiality rules make it hard to prevent. Somehow it doesn't seem like the right way to prepare them for a post-prison livelihood.
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CARELESSNESS THWARTS AN ESTATE PLANNING PLOY
January 09, 2006
Mark Senda went to an estate planning seminar sponsored by Arthur Anderson, of blessed memory. There he learned how family limited partnerships can do wonderful things to reduce your esate tax potential. He pondered this for awhile, while in the meantime coming into a small fortune in MCI/Worldcom stock.
Things got serious around December 28, 1998. On or about that day, Mr. Senda contributed $1,798,647 worth of MCI/Worldcom into a family limited partnership, and at about the same time he gave away all of his interests to his children. He then filed a gift tax return claiming a combined marketability and minority discount for the gifts of 38.82%. This discount is the whole point of the family partnership game.
He liked the results so much that he did the same thing with another $791,826 of MCI/Worldcom on December 20, 1999, using a new partnership, claiming a 45% discount, and then another $164,103 in January 2000, using a $46.13% discount.
PAPERWORK MATTERS
Unfortunately for Mr. Senda, he was a bit sloppy with his paperwork. For the 1998 and 1999 gifts, it wasn't clear that he gave the partnership interests away before he put the stock in the partnership. The IRS said that these two gifts were really just stock gifts, and that no partnership valuation discounts could be allowed. The Tax Court agreed with the IRS.
Mr. Senda appealed to the Eight Circuit. On Friday, they upheld the IRS and the Tax Court, saying, in effect, that the paperwork around the gifts was just too sloppy. They quote with approval this passage from the Tax Court opinion:
It is apparent from petitioner's evasive testimony and from the total record that petitioners were more concerned with ensuring that the beneficial ownership of the stock was transferred to the children in tax-advantaged form than they were with the formalities of FLPs. Indeed, petitioner, as general partner, did not maintain any books or records for the partnerships other than brokerage account statements and partnership tax returns. Those tax returns were prepared months after the transfers of the partnership interests. Thus, they are unreliable in deciding whether petitioners transferred the partnership interest to the children before or after they contributed the stock to the partnerships. The same is true of the certificates of ownership reflecting the transfers of the partnership interests, which were not prepared until at least several weeks after the transfers. The informality is not surprising, inasmuch as petitioners alone, individually, or on behalf of their minor children were united in purpose and acted without restraint by any adverse interest. As a result, however, petitioners have presented no reliable evidence that they contributed the stock to the partnerships before they transferred the partnership interests to the children. At best, the transactions were integrated (as asserted by respondent) and, in effect, simultaneous.
Interestingly, the 46% discount for the smaller gift in January 2000 was allowed. It was clear from the record that the partnership had held the stock for at least 20 days before the partnership interest gifts were made, so the court didn't collapse the contribution of stock and the gift of partnership interests into a single transaction.
The Moral? The Eighth Circuit covers Iowa. This case would appear to show that family partnership discounts work here, but that formalities matter.
Of course, Mr. Senda violated another important estate planning rule of thumb (surely unintentionally): give away assets that are going to increase in value. Remember, Mr. Senda made his gifts in December 1998, December 1999 and January 2000. Here's a chart of the performance of the WorldCom stock:
Lets hope the partnerships sold out. If there's any worse tax planning result than paying the $646,000 in tax because you were careless with your paperwork, it's paying it for giving away shares that quickly became worthless.
Links:
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RACCOON RIVER BREW CO. TO HOST FEBRUARY 4 2006 IOWA BLOGGER BASH
January 06, 2006
After extensive and exhaustive research, the official site selection committee for the February 2006 Iowa Blogger Bash (Central Iowa Edition) has selected the Raccoon River Brewing Company as the location for this year's event. Why there? Good beer, good food, and a good internet connection (I'm using them to post this, in fact. Yes, all three). And you don't need a T-mobile or I-Spot or any of that stuff. Just a wi-fi enabled computer or pda and you are in business. And it's reasonably kid-friendly, too, if you're there early.
Last year's event was, of course, a sparkling success, a combination of glamour, style, wit and wisdom seldom equalled in Des Moines since the glaciers retreated. I met too many great and friendly Iowa bloggers to mention by name. And Dave was there, too! Whether we can bring in the white whale, or at least Captain Ahab, remains to be seen.
The event will begin about 7:00 p.m. or so on the appointed evening. If you are coming in from out of town, you can even stay at the posh Hotel Fort Des Moines next door at the blogger rate, or the lower standard rate if you behave.
Who is invited? Bloggers and blog fans with even the most remote Iowa connection are welcome. There's no cover and no minimum (like that would be a problem with this crowd). There's a place to smoke, if you do, and lots of places to avoid it if you don't. Beer, food, pool tables, free internet access, beer... need I say more?
If you think you can attend, please let me know via e-mail or in the comments. Also, please consider promoting this event on your own site. Be there or... do something else, I guess.
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IRS ENDS A DISCLOSURE REQUIREMENT FOR LARGE 'BOOK-TAX DIFFERENCES'
January 06, 2006
The IRS this afternoon stopped requiring the disclosure of transactions with "large book-tax" differences on the tax-shelter disclosure form, Form 8886. Notice 2006-06 says the new Form M-3, introduced last year in corporate returns, makes the Form 8886 disclosure unnecessary.
The requirement is ended for transactions "that otherwise would have tobe disclosed by taxpayers... on or after January 6, 2006, the date this notice is released to the public."
Prior to Notice 2006-06, transactions that generate big differences between financial accounting income and taxable income would generally have to be reported on Form 8886 if the difference was $10 million or more in a year, or $20 million or more over more than one year.
Interestingly, the disclosure requirement is ended even though the new Form M-3 for partnerships and S corporations will not be in place until 2006 returns are filed next year. That either means that the IRS felt the disclosure requirement was a waste of time in the first place, or that anticipation of the now-waived disclosure requirement was enough to make partnerships and S corporations behave in 2005.
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ANOTHER CPA PONZI SCHEME BLOWS UP
January 06, 2006
Nobody ever accused accountants as a group of originality. Not even thief accountants. Today comes word of another CPA who has followed the well-trod dismal road of stealing from clients through a Ponzi scheme. Barry Korcan, a Pennsylvania accountant, confessed when notified of an impending IRS exam:
"I've never in my career had someone come to me and say they want to admit to a crime that hasn't even been investigated," defense attorney Charles Porter Jr. said. Korcan, who did business as Korcan & Associates in Beaver, came to him after being informed by the Internal Revenue Service in January 2005 that he was being audited.
"It was eating him up," Porter said.
U.S. Attorney Mary Beth Buchanan, however, said the IRS audit prompted Korcan to admit to his crimes. "He knew his scheme was going to be discovered," she said. Prosecutors said they will recommend a term of eight to 12 years when Korcan is sentenced April 14.
Mr. Korcan pretended to "invest" his clients money. Unfortunately for those who trusted him, he invested the money in, among other things, a vacation home and "boats." He mailed fraudulant investment statements to the clients to cover up his theft. Now he can look forward to an extended stay in a "vacation home" with constraints as he serves federal mail fraud and tax evasion sentences.
Prosecutors said Korcan took $11.3 million from clients and told them he was investing in Guardian Investments, which was only a bank account controlled by Korcan.
"This is the largest fraud scheme we have investigated and prosecuted in western Pennsylvania," Buchanan said. "He used his personal relationships and trust of his clients to defraud them."
Prosecutors said Korcan paid about $4 million back to his clients through interest and other payments and liquidation of accounts, but stole more than $7.2 million, using the money for his business and personal lifestyle.
An accountant in my hometown got into similar trouble in 2004. An Adel, Iowa CPA was disgraced by similar crimes in the late 1980s, but I can't find a link to any article about him.
The Moral: CPAs are allowed to be investment advisors. If you decide to let your CPA wear both hats, it's wise to get your investment statements directly from a third party investmenet house. If the only available statements come directly from the CPA/investment advisor, your money may disappear before you know it.
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MICHIGAN TAX POLICY: BRAKING WITH A FOOT ON THE GAS
January 05, 2006
The Tax Policy Blog notes how targeted tax incentives work at cross purposes in Michigan. They point out how Michigan's special tax breaks for homebuying in urban areas work at cross purposes to the federal tax breaks for home mortgages and property taxes:
So in summary, we have two competing policies now in place in Michigan: the federal tax code encouraging housing in suburbs and the state of Michigan using tax policy to try and encourage housing in the cities.
The post implies that Michigan is spitting into the wind with its targeted tax incentives. Given that the growth of suburbs predates the home mortgage deduction by hundreds of years, that is likely so. Michigan might be much better off cleaning up its code and lowering rates, rather than micromanaging its housing patterns through tax laws.
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GREAT MOMENTS IN DIRECT MAIL
January 05, 2006
In the news this morning:
It wasn’t exactly the way H&R Block Inc. hoped to end 2005.
As part of a promotional campaign, the Kansas City-based tax preparation giant sent complimentary copies of its TaxCut tax preparation software to an undisclosed number of people around the country. Owing to a mail production mix-up, the mailing labels on some of the recipients’ packages included their Social Security numbers.
It is unlikely that anyone but the recipients noticed. The nine-digit number was embedded in a 47-character source code. Nonetheless, out of an abundance of caution, Block recently sent letters notifying recipients of the glitch.
No word on whether the other numbers in the 47-digit code included 2004 adjusted gross income, Visa card numbers, and waist size.
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IF YOUR EMPLOYER DOESN'T WITHHOLD YOUR TAXES, IT'S YOUR PROBLEM
January 04, 2006
Tom Ackerman, from Teaneck, New Jersey, had a non-qualified deferred compensation plan at work. It was triggered in 2000 when his company was sold and he was laid off. The plan was supposed to pay out the deferred balance "net of applicable taxes, including wage withholding taxes.
The plan paid out $211,296 when he was let go; he also got a $120,000 termination bonus. The total federal withholding on the two payments: $500.
Mr. Ackerman is nothing if not optimistic. He told the Tax Court that since the agreement said he was supposed to get paid "net of applicable taxes," the $500 was all the government was entitled to.
In real life, of course, he had to pay taxes on the entire amount paid, including the $211,296. The withholding came up $68,494 short, and the Tax Court today told Mr. Ackerman that he will have to dig into his own pockets for the difference.
Cite: Thomas and Sara G. Ackerman, T.C. Memo 2006-3
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IRS ADDS 'AMT ASSISTANT' TO THEIR WEB SITE
January 04, 2006
From an IRS press release:
WASHINGTON — The Internal Revenue Service is providing a new online tool to help individual taxpayers determine whether they are potentially subject to the alternative minimum tax (AMT).
The AMT Assistant helps taxpayers determine whether or not they may be subject to the AMT by automating the AMT Worksheet of the 1040 Instructions, called the “Worksheet to See if You Should Fill in Form 6251 – Line 45.” IRS estimates most taxpayers can make entries and get an answer in five to 10 minutes using the new application.
Link: AMT Assistant
It looks like a useful tool, but you need to have much of your tax return already done to use it. You could just use numbers off of last year's return, but you might not like the answers.
Still, it requires a lot of detailed numbers. As a public service, we present the Tax Update Short Form AMT Assistant:
Are you a joint-filing couple living in a high-tax sate (like Iowa) with gross income in excess of $120,000 and have:- More than two children, or
- Significant capital gain or dividend income, or
- Significant tax credits (like the energy credit), or
- Significant home equity debt?Are you a joint-filing couple living in a high-tax state (like Iowa) with gross income in excess of $170,000 but less than $500,000?
Are you a single filer living in a high-tax state and have gross income in excess of $190,000 up to $400,000?
Do you have lots and lots of kids, at any income?
Do you have lots and lots of long-term capital gain or dividend income, regardless of what else you have?
Did you exercise incentive stock options, at any income level?
A "yes" to any of these questions makes you a likely candidate for AMT. Don't you feel special?
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SURE, WE FIRED INTO THE CROWD, BUT THINK OF ALL THE JOBS CREATED IN THE BANDAGE INDUSTRY
January 04, 2006
Jack Ciesielski of the Analyst's Accounting Observer Weblog finds the happy side of pricing smaller firms out of the public capital markets via Sarbanes-Oxley Section 404:
While we’re all still wondering what the new year will hold in store, let me toss out one expectation: we aren’t going to hear as much yelping about Section 404 costs as in 2005. At least from the big firms. Smaller firms will still yelp loudly and frequently.
This article from CFO.com cites one good reason: escalating salaries for finance personnel, in companies large and small.
It’s a necessary fact of life: if a firm wants to be in the public markets, and tap the vast capital available in those markets, then it should behave accordingly and accept the burden of having to deliver high-quality financial reporting to those who supply the capital. Paying up for the right personnel - and the right amount of personnel - is part of that burden.
Accounting students: are you paying attention? Your ticket awaits, for at least the next few years.
While I question the link between Section 404 and "high-quality financial reporting" -- I think it's more like "appease the lawyers financial reporting" -- at least my auditing brethren get a gravy train to ride.
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NEW YEAR CARNIVALS
January 03, 2006
The first 2006 editions of the Carnival of the Capitalists and The Carnival of Personal Finance are up.
The Capitalist Carnival, hosted at Chocolate and Gold Coins for the first and only time, has lots of good posts, including the InsureBlog's discussion on the wisdom of buy-sell agreements and Early Riser's advice for those contemplating the new Roth 401(k).
The Personal Finance Carnival at The Real Returns has useful posts on everything from reducing your car insurance premiums to New Year's financial resolutions.
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LOBBYIST ABRAMOFF COPS TAX PLEA
January 03, 2006
Jack A. Abramoff has pleaded guilty to a tax evasion charge connected to a scheme to defraud indian tribes of millions of dollars. A copy of the plea agreement is here, courtesy of Americablog (via Malkin).
My inner tax geek (some would ask "what else is there?") is drawn to the tax discussion in the plea agreement. While Mr. Abramoff is pleading guilty to tax evasion for 2002, he is also required to amend his returns for 2000 through 2004. While he is required to pay $25,000,000 in restitution, presumably to the tribes he defrauded, he will also have to pay taxes and penalties on the same amounts. This is likely to include the 75% civil fraud penalties. All in all, it's difficult to see how Mr. Abramoff will walk away with anything at the end of this process but a bus ticket home from prison.
Mr. Abramoff's crimes are set forth in this document filed today in the U.S. District Court in D.C. It says he used two front companies to charge the tribes for public relations and political services; the companies overcharged for the services and paid the overcharge as kickbacks to Mr. Abramoff.
The plea may lead to an interesting year in Congress, where members of both parties are rumored to be implicated in the scandal.
It's terrible how Mr. Abramoff took advantage of credulous Indian casino interests. Good thing we don't have the potential for this sort of thing here in Polk County.
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TAX PROFESSORS CHOOSE TOP TEN 2005 TAX STORIES
January 03, 2006
While I was goofing off over the holiday weekend, Paul Caron was blogging up a storm at the TaxProf blog. One post was a selection of the top ten tax stories of 2005 by members of a tax professor online discussion group.
Somehow the KPMG indictments and deferred prosecution agreement failed to make the list. This must be because the tax professors aren't practitioners. For us in the field, it is a big deal. Whether or not you think the indictments are justified, there is something chilling about seeing members of a prominent firm in your own profession hauled before a judge and facing the possibilty of professional ruin and long prison terms.
The final version of Circular 230, the IRS rules on practitioner conduct, also failed to make the tax professor's top ten. These rules have triggered a panic among tax practitioners not seen since we first realized we HAD to learn how to use computers. Now if you get an e-mail saying "have a nice day" from a practicing tax attorney or accountant, it probably has a disclaimer saying that you can't use the nice day to avoid penalties.
The professors should have mentioned the Long-Term Capital Holdings LLC case and the Tribune Company case. In Long-Term Capital Holdings, the Second Circuit upheld stiff penalties for a tax shelter by refusing to let the partners hide behind their tax advisors. The Tribune case was notable as both a rare case in which a reorganization was litigated and for the sheer size of the tax deficiency - $551 million, before interest.
But I quibble. The professors put together a respectable list, and I am too lazy to do likewise. It's well worth reading in full.
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HAPPY NEW YEAR!*
January 01, 2006
*Nothing in this New Year's greeting is meant to offend non-calendar year or 52-53-week taxpayers whose years end on dates other than the last Saturday in December. May you celebrate your own year end in ways appropriate to your own beliefs and fiscal needs.
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