Tax Update Blog: February 2006 Archives

« Previous · Tax Update Blog Home · Next »

FROZEN TURNIP

February 28, 2006

In the due course of administering the tax law, the Treasury occasionaly finds itself in possession of taxpayer assets that it must liquidate. It does so through an auction process. Interested vultures bidders may browse the IRS auction inventory at the IRS auction website.

Sometimes the auctioneer has little to work with. As the saying goes, you can't get blood out of a turnip. Take this fine property, up for auction this Friday:

This fine property is located at 12368 Cakeeater Rd, Barrow, Alaska. Barrow, of course, is the northernmost settlement in the United States, so this would make a great place to get away from it all, as long as you're in no hurry to get back to it all.

Here's the cozy kitchen:

Looks like a fair amount of filler in the drywall, but a little paint and you'll hardly be able to tell. You can't be more than a few blocks from the ocean; unfortunately, it's the Arctic Ocean.

The minimum bid for this fine place is $29,228.19. Unfortunately, the high bid doesn't necessarily win. The IRS auction webpage notes that "This property is subject to a Right of First Refusal of Ukpeagvik Inupiat Corporation in Barrow." So even if you buy it, you probably will never find another buyer if you want to sell it someday, because the local tribe has first dibs. I don't think this auction is going to do much to close the ol' tax gap.

Link  • Comments (2)       Bookmark: del.icio.us • Digg • reddit

TAX FOUNDATION: IOWA NINTH WORST STATE FOR BUSINESS TAXES

February 28, 2006

The Tax Foundation has issued its annual ranking of state business tax climates (summarized here). Iowa, unsurprisingly, is one of the worst - worse even than California, if you can imagine that.

Source: Tax Foundation. Click graphic for larger view.

How'd we do it?

Generally the index rewards tax codes that are neutral; that is, they have low, flat tax rates that apply to everyone. This makes tax law simpler and more transparent and avoids double taxation.

The worst state tax codes tend to have:

• complex, multi-rate corporate and individual income taxes;
• above-average sales tax rates that don’t exempt business-to-business purchases;
• complex, high-rate unemployment tax systems; and
• high effective property tax rates, as well as a host of other wealth-based taxes.

Iowa leads the way to the bottom in the first category with its highest-in-the-nation 12% corporate rate. We have very complex individual and corporate systems riddled with special-interest incentives and credits. So what is the legislature doing about it? Trying to get down to number 50, as far as I can tell. Some examples:

- A bill (HF 2045) has passed the Iowa House to exempt pension and social security income from tax. This creates a favored group of taxpayers, adds complexity to the code, and requires higher rates from taxpayers outside the favored group.

- A bill (HF 2052) would allow a deduction for cars that burn E-85 fuel.

- HF 2261 would create an " Individual income tax deduction for dentists who receive state medical assistance reimbursement less than their normal fee."

- HF 2274 would provide an "Individual and corporate income tax credit for purchase and installation of methane gas conversion property by livestock producers to be used to generate electricity."

What these all have in common is that they give a small group of taxpayers a break - which means everyone not benefitting pays more. And there are lots more bills like that in the hopper. While carving up a raft of new tax breaks to buy votes, the legislature is ignoring the dire need to lower rates and get rid of the rat's nest of exemptions, credits and special favors that makes our tax law business-hostile.

Look out, No. 50 New York, we're coming at you.

Link  • Eye on the Legislature ~ • Iowa Tax Law       Bookmark: del.icio.us • Digg • reddit

PARTNERSHIP PARTY POOPER

February 28, 2006

Tax Law Professor Darryll K. Jones wants to remove the punchbowl from the partnership party ($):

By allowing partnerships to divide tax benefits and burdens in a manner disproportionate to relative ownership, subchapter K turns Horst on its head. Why should that be the case? Why should we measure partnership tax benefits and burdens so differently from individuals or shareholders, and indeed in a manner that makes no economic sense? Let's look at the history of special allocations before articulating what has become a virtually meaningless, yet rote, justification for the current state of affairs.

Why? So we can have 15 pages of tax verbiage in every partnership agreement, of course! The TaxProf Blog links to Mr. Jones's piece today.

Link       Bookmark: del.icio.us • Digg • reddit

ONE WEEK TO MARDI GRAS CARNIVALS

February 28, 2006

I'm late in noting this week's editions of the Carnival of Personal Finance and the Carnival of the Capitalists.

One highlight of The Personal Finance fest is "Uncle Bill's" avuncular discussion of how a little aftermarket work on the old car can help you get over the urge to spend a lot of money on a new one. Lots of other good posts on personal finance basics.

This week's Capitalists Carnival is hosted at the Omaha-based Ideologic LLC blog. It includes Insure Blog's post on "The Cost of Care," which is worth visiting for this observation alone:

Many who have not used their health insurance other than for minor illness or accident fail to see the other side of the equation. It always amazes me when I ask a prospective client what kind of benefits they would like, the response almost invariably goes like this. They want a low copay for doctor visits and meds. They want to be able to have an annual physical at little or no cost to them. Beyond that (they profess) they really don’t need health insurance since they never get sick.

My contention is, they really don’t need health insurance for routine things like doctor visits for mundane afflictions or even for most meds. Instead, what they need is catastrophic coverage, such as is found in the HDHP/HSA combination.

Amen, Brother Hank!

Link       Bookmark: del.icio.us • Digg • reddit

SNOW JOB

February 27, 2006

Treasury Secretary John W. Snow is shoveling the fluffy stuff at the Credit Union convention this morning:

I meet and work with financial leaders every day, but I can easily say that Credit Unions have the most heart. Your motto rings true to your culture: "not for charity, not for profit, but for service."

You do good work: loans to small business, home mortgages, financial education and working in partnership with the government to fight the financial war on terror. You were wonderful in your response to hurricane Katrina, in a time when American's helping each other meant so very much.

Each one of these efforts is critical to our country's economic health and strength, and I applaud you for doing good while you do business.

I believe I told you last year that this administration understands the basic economic principle that you get less of anything you tax -- and we don't want less of what you do. Well, that principle, and that position, remains true today.

We don't want less small-business lending. We don't want fewer home mortgages. We want a continuation of your tax exemption and we want to continue to have a strong relationship with a group of financial institutions that are dedicated to their communities, who want to see their customers educated and financially literate.

Banks, of course, do all of these things, so we can count on the Secretary to work for a repeal of the federal income tax on banks. After all, "you get less of what you tax," and "We don't want less small-business lending" and "fewer home mortgages."

Links:

Prior Tax Update coverage of credit union tax breaks.

Link       Bookmark: del.icio.us • Digg • reddit

IOWA HOLDING PERIOD LEGISLATION ADVANCES

February 27, 2006

The Iowa Senate Ways and Means Committee has passed a bill (S 2093) to make Iowa's "holding period" rules the same as federal rules. The rules are used to determine whether taxpayers meet the requirements to exclude capital gains on certain property held for longer than 10 years.

The Iowa House is considering similar legislation.

While it is good that the legislature is working to override the Department of Revenue's indefensible position on this, I wish the bill explanation asserted that they think that's what the law already is - or at least that the bill shouldn't affect any current controversies before the Department.

Link  • Eye on the Legislature ~ • Iowa Tax Law       Bookmark: del.icio.us • Digg • reddit

OH. KLAHOMA.

February 27, 2006

Oklahoma has just enacted the "Oklahoma Quality Investment Act," showing that economic illiteracy isn't just a quirk of Iowa legislators. An article in one of our subscription-only tax news sources describes the bill:

The Act creates incentive payments for “at risk establishments.” An “at risk establishment”is a “manufacturing establishment in Oklahoma that would be lost within the state based on changes in global economies, establishment structure, consolidation of establishments, and [that] are structurally noncompetitive” but that “could regain a competitive position with new investment if incentives are offered.”

The "incentives" include cash subsidies. If I lived in Oklahoma, I would be beside myself that the government is collecting taxes to pour money down a rathole - which is what a "structurally noncompetitive" business is. In a just world, no companies would qualify, because if they are "structurally noncompetitive," no amount of subsidies will change that. In the real world, the set of beneficiaries will be close to infinite.

This sort of nonsense is why I hope the Supreme Court finds a way to uphold the Cuno case, which would shut down a lot of this nonsense. Unfortunately, there is a gang of economic illiterates in Congress ready to step in if that happens.

Link       Bookmark: del.icio.us • Digg • reddit

DOMESTIC PARTNERS - BUT NOT TAX PARTNERS?

February 27, 2006

The TaxProf has an overview of the tax issues facing "domestic partners" who have registered as such under California's law. Sounds messy:

For example, if one partner earns $100,000 but a stay-at-home partner earns nothing, are they now entitled to report $50,000 of income on their individual returns? If the stay-home partner's $50,000 share isn't considered income, is it a taxable gift -- or something else? Domestic partners can't assume they'll be safe simply reporting income separately, the way they did before the state law took effect, some experts say. If the IRS decides to treat domestic partners more like married couples, some could find out later that they owe taxes because they weren't entitled to tax breaks they claimed.

"It's so bad that I don't know if I'd be able to file a return for these folks," said Kathleen Wright, a Bay Area tax attorney and professor at San Jose State University. She and others recommended filing for an extension, in hopes that the IRS will clarify the rules.

And that doesn't even touch the issues that arise if one partner donates a kidney to the other.

UPDATE, 2-28: No income-splitting, says IRS memo.

Link       Bookmark: del.icio.us • Digg • reddit

KIDNEY SWAPS: NOT A 1031 EXCHANGE?

February 27, 2006

Two women are donating kidneys to each other's husbands. The protean Dr. Maule thinks that they have a problem (aside from the one-kidney thing): they may have taxable income from the swap:

The exchange is not a gift because they each get something in return. Each has a basis of zero in the exchanged kidney. Each has an amount realized equal to the fair market value of a kidney. The like-kind nonrecognition rules do not apply because it's not a trade, business, or investment activity. No other non-recognition provisions are relevant. There's no exclusion applicable to the transaction.

Of course, there remains one helpful tax planning option: divorce. If they swap husbands, then the transaction should be sheltered by Section 1041, which exempts from gross income transfers of property between spouses or incident to a divorce. A simple switch of husbands will make the whole thing non-taxable. Sure, there are non-tax reasons that come into play, but if the wives are close enough to swap kidneys, maybe something can be worked out.

Dr. Maule doesn't address the tax issues arising out of kidney theft, a common imaginary problem for traveling salesmen, like the poor guy in the adjacent photo.

Link  • Comments (4)       Bookmark: del.icio.us • Digg • reddit

BE CAREFUL IN EXCLUDING 'PART-TIMERS' FROM QUALIFIED PLANS

February 27, 2006

The Benefits Blog passes on an IRS bulletin warning plan sponsors to be careful when they try to exclude "part-time" or "seasonal" workers:

In other words, a qualified plan cannot exclude folks as a class from participating by classifying them as "part-time" or "seasonal" because they might end up working at least 1,000 hours during the year, resulting in an improper exclusion under the rules.

Also, [the IRS bulletin] makes it clear (Example 3) that a plan cannot exclude a group of employees under a generic name like "Class B Employees" without defining in the Plan the specifications for such Class. This is because the IRS wants to make sure that the classification will not be making an "end-run" around the service requirements of the Internal Revenue Code and ERISA, i.e. that the employees are not being improperly excluded because of service.

This stuff matters because it could cause a failure to meet tax law "coverage" requirements, potentially trigger a plan disqualification, or at least expensive make-up payments to retain qualification.

Link       Bookmark: del.icio.us • Digg • reddit

'BACHELOR' LAWYER: AN OBVIOUS CHOICE

February 25, 2006

Sure, all the good unwed male lawyers I know in Des Moines got snapped up, but a former Iowan in Chicago is the presumptive choice for the next Bachelor series anyway.

Link       Bookmark: del.icio.us • Digg • reddit

TAX CRIME IN THE NEWS

February 25, 2006

Chang King Wu, the Missouri restaurant owner featured in an October Tax Update post, this week received a 21-month prison sentence for evading taxes on the restaurant's income.

GOLFING MAYOR HEADED FOR THE WRONG HOLE.

You apparently don't have to be on the tour to make money from golf, if you're the mayor. Joseph Foy, the former mayor of Burlington Township, N.J., operated an annual golf outing known as the "Mayor's Cup." His cup apparently runneth over; Mr. Foy this week pleaded guilty to evading taxes on $52,000 he pocketed from the tournaments.

Link       Bookmark: del.icio.us • Digg • reddit

GOODBYE, IRWIN

February 25, 2006

Irwin Schiff, the author of a series of books of absurd tax theory and convicted leader of a tax evasion conspiracy, received a 13-year sentence on tax crimes yesterday. This looks like the end of Mr. Schiff's long dismal career in the tax protest business, as he will be over 90 years old before his sentence runs out.

He was also ordered to cough up $4.2 million in restitution.

The Associated Press reports:

Schiff remained defiant on Friday, declaring: "There is no law that required me to pay the tax."

Unfortunately for Mr. Schiff, that's not the opinion of the judge, the jury, the federal marshals, and the Bureau of Prisons, so his opinion seems unlikely to prevail at this point.

His attorney tried to get him out on an insanity defense. It's too late for Mr. Schiff, but it's at least an arguable defense for anybody who still believes Mr. Schiff's theories.

Links:

Prior Tax Update coverage of Mr. Schiff.

TaxProf roundup

Link       Bookmark: del.icio.us • Digg • reddit

DEUTSCHE BANK: PRETENDING TO PRETEND?

February 24, 2006

Many tax shelter transactions in the 1990s depended on a certain suspension of disbelief. Taxpayers would weave an elaborate web of deals and entities to, say, move income offshore or generate artificial losses, and then try to say with a straight face that this stuff happens all the time, and they just needed an offshore partner in the Netherlands and the Caymans to borrow money just the right way. The paper trail was carefully marked with a pretend business purpose for the real transactions. With all of the transactions actually taking place, there was at least something to argue about.

But what if the real transactions with a pretend non-tax purpose were themselves imaginary? That's the intriguing implication of a story in this morning's New York Times. The story says Deutsche Bank, which played a prominent role in the shelters that are the subject of the KPMG indictments, is negotiating a settlement of criminal charges related to the Justice Department:

For Deutsche Bank, the path toward a settlement may be rockier, in part because it had a much larger role in the creation of some questionable tax shelters and the transactions underpinning them, investigators have said. A potentially larger obstacle, say the people briefed on the case, is that Deutsche Bank appears unable to account for a number of those transactions.

In the past, Deutsche Bank has described the transactions it arranged for tax shelters, including ones known as blips and cobra, as regular and ordinary.

But Deutsche Bank has been unable to provide to federal prosecutors in Manhattan paper documents detailing some transactions for these shelters, according to the people briefed on the case.

If the transactions never actually took place, that would make it hard to say that people are just being prosecuted for savvy tax planning.

Previously undisclosed internal documents that were provided by a lawyer involved in civil litigation against the bank raise questions about some Deutsche Bank transactions.

An October 2001 e-mail message written by Andrew Baxter, a trader on Deutsche Bank's derivatives desk, to a Jenkens & Gilchrist lawyer suggests that the bank did not extend actual loans to an investor in a cobra tax shelter. For the shelter, the investor had "borrowed" $20 million from the bank and "bought" options worth $20.125 million. Mr. Baxter, whose e-mail message was titled "cash flows," wrote, "Do you want the monies to actually flow into the account or is it sufficient for the client to net pay" the $125,000. "It makes a big difference to our back office."

Wow. If that stuff is true (and these are assertions from people suing KPMG, so they aren't impartial), then the tax shelter industry doesn't even live up to my already low opinion of it.

Link  • KPMG ~ • Tax Shelter News       Bookmark: del.icio.us • Digg • reddit

HIGH-SPEED TRAFFIC ADVISOR SENTENCED

February 24, 2006

Cynthia Neun, ex-honey to famed tax scamster Irwin Schiff, was sentenced to 68 months in the federal pen yesterday on 15 federal tax, conspiracy and theft charges:

LAS VEGAS The former girlfriend of anti-income tax crusader and author Irwin Schiff is going to federal prison for five years and eight months for advising people that no law required them to file federal income tax.
52-year-old Cynthia Neun ("Noon") never testified at trial -- and didn't address the judge who used sentencing today to deride Schiff's anti-tax theories as a bigger fiction than the tooth fairy.

Neun's lawyer says she'll appeal.

Neun also got three years probation and was ordered to pay more than a million dollars in restitution and several years of back taxes, interest and penalties.

Ms. Neun was on the slow end of a 100-mile-per-hour cell phone call featured in my favorite Tax Update post. Let's go down memory lane:

The chase involving Mr. Thompson, at speeds of 80 to
100 miles an hour, began about 9:30 a.m. yesterday
when federal agents went to Mr. Thompson's home to
arrest him.

The pursuit quickly moved from residential streets onto
Interstate 5, the main highway running the length of
the state. It ended when the California Highway Patrol
laid a strip of spikes on the road to flatten the tires on
Mr. Thompson's car.

As he was trying to elude arrest, Mr. Thompson placed
a cellphone call to Cindy Nuen, an associate in the
movement that denies the legitimacy of the tax system,
according to an e-mail message she sent to other
members yesterday.

"I'm going to make them take me," she quoted Mr.
Thompson as saying, adding that she asked what
she should do.

"Just put the word out," Mr. Thompson said. Then,
apparently having run over the spikes, he said "they
got my tires, they got my car. Now they are out. They
have their guns pointed - O.K., they got me."

Good luck where you're going, Ms. Neun. We'll get the word out for you.

Ms. Neun's long sentence doesn't bode well for Mr. Schiff, the kingpin of the operation.

Link       Bookmark: del.icio.us • Digg • reddit

ROTH & CO. FEATURED IN ARTICLE ABOUT TAX SEASON WORKLOADS

February 24, 2006

From today's edition of The Des Moines Register:

"We're like any other company," Kristan said. "We realize that people have to pick up kids, have a life."

Notice I never said that we actually let people do those things...

Link       Bookmark: del.icio.us • Digg • reddit

DON'T HATE ME FOR RENT-SEEKING

February 24, 2006

The Tax Policy Blog says I have only myself to blame for the awfulness of the tax law. A post from yesterday says accountants are "bashing" the results of an IRS studay of the costs of doing tax returns.

It is no surprise that the various industries that only exists because of the complexity of the tax code would come out bashing this study. And it's no surprise that these same groups have also helped lead the fight against fundamental tax reform.

With true tax reform, the need for computer programs and tax accountants to calculate everyone's taxes would be reduced dramatically.

That's the nice thing about my job - I can make a living off of the complexity I despise. Maybe it's akin to the feeling a divorced spouse gets from a monthly check from a loathed "ex." I really am for great simplification of the tax code, if not every bad idea for tax reform, and I think a walk through the archives here shows that. Yet I go to sleep with the serene knowledge I will have work to do the next day becuase there is little chance of our legislators fixing anytime soon, and if they do, the transition rules should provide for a comfortable retirement anyway.

Link  • Tax Reform       Bookmark: del.icio.us • Digg • reddit

DOWNTOWN DES MOINES - EAGLE SANCTUARY

February 24, 2006

The Law and Disorder Blog tells the story of the bald eagles that have taken up residence in the Principal Park neighborhood:

The Raccoon and Des Moines Rivers converge downtown, just south of the police department. For the last two days when I went to lunch there have been about five bald eagles flying about there, apparently searching the river for fish or whatever else it is they eat. They are beautiful birds! They gracefully glide in circles from one side of the river to the other, then on occasion find a high tree branch to perch and survey all that lays before them.

Two or three weeks ago I saw one fly past my 14th-floor window - very cool. "Majestic" is the perfect word for the way they fly. If only they ate crows...

Link       Bookmark: del.icio.us • Digg • reddit

IRS ISSUES STANDARDS FOR CREDIT FOR HOME ENERGY IMPROVEMENTS

February 23, 2006

Congress in 2005 passed a batch of new energy credits to implement last year's already-forgotten energy policy. The new law allows taxpayers to claim up to $500 of tax credits for energy-saving home improvements.

Notice 2006-26 issued by the IRS yesterday tells you how to know whether your improvements qualify. The notice tells manufacturs what they need to do to certify materials as credit-eligible; taxpayers can then rely on the manufacturer's certification to claim the credit.

Items mentioned in the notice that may qualify for the credit include:

Eligible Building Envelope Components

-Insulation systems
-Windows, skylights, doors;
-Storm windows and doors
-Metal roofing materials with "Has appropriate pigmented coatings that are specifically and primarily designed to reduce the heat gain of a dwelling unit when installed on the dwelling unit (I think that's a fancy way of saying "paint.")

QUALIFIED RESIDENTIAL ENERGY PROPERTY

-Heat pumps,
-Air conditioners
-Water heaters
-Furnaces
-Fans

The notice has details on the standards the items have to achieve to qualify.

AMT PROBLEM?

These credits do not reduce alternative minimum tax under current law. A proposal to change that rule has passed the Senate but must be reconciled with a House bill that lacks the provision.

OTHER ENERGY ACT GUIDANCE

Notice 2006-26 is one of five pieces of energy act guidance issued yesterday. The others:

Notice 2006-24 (The "coal project program")
Notice 2006-25 ("Gasification")
Notice 2006-27 (Builder credit for building energy-efficient homes)
Notice 2006-28 (Builder credit for energy-efficient manufactured homes)

Link  • Comments (2)       Bookmark: del.icio.us • Digg • reddit

WORDS OF ADVICE FOR ASPIRING ATTORNEYS

February 23, 2006

From law blogger Shaun Martin (via the TaxProf):

Don't be a sleazeball. Don't be a lawyer and be found guilty of conspiring to defraud the United States as well as multiple other federal felonys. Don't resign the State Bar of California with disciplinary charges pending against you and thereafter attempt to ply your legal trade by acting as a "lay advocate" providing legal advice to prisoners and people before administrative tribunals.

Got that? I think the first sentence about covers it, the rest is details.

Link  • QUOTATIONS       Bookmark: del.icio.us • Digg • reddit

YES, THE IRS DOES DO SOMETHING WITH 1099-B INFORMATION

February 23, 2006

A small taxpayer's lament:

My schedule C business has a loss. I sold stock to finance it, but all the sales are at a loss. I have no taxable income. Why should I waste my time and money filing a tax return?

Russ Fox points out an excellent reason to file at his Taxable Talk blog. If you don't file, the IRS will assess taxes assuming that the gross sales price of the stocks reported on your stockbroker's 1099-B forms for you is all gain. Once the IRS computers get this idea in their chips, it's very difficult to get thing straightened out.

Russ discusses Sherer, a Tax Court case. The taxpayer had to go through a Tax Court trial to prove that his cost basis in the stock he sold in 1999 exceeded his sale price.

I had a similar case recently, where a taxpayer came in to get an old return done after receiving a notice proposing tax based on the gross sales price of the stock. We prepared a corrected return and received back a "90-day letter" telling us that we had to either pay up based on the original notice of go to Tax Court. Fortunately for our taxpayer, once the Tax Court petition was filed an actual person from the IRS appeals office was put on the case and things were quickly resolved in the taxpayer's favor.

Russ has wise words for taxpayers in this situation:

There's a caution here, though. It's much, much easier to file your taxes on time and not go through the hassles that this taxpayer went through. It's cheaper, too.

All's well that ends well, but it ends better if it ends cheaper.

Link       Bookmark: del.icio.us • Digg • reddit

BIG SHOTS SAY SARBANES-OXLEY FITS JUST FINE

February 23, 2006

The TickMarks blog points out that a group of big shots, including Paul Volker, Arthur Levitt, and John Bogle, have signed a letter opposing any modification of the Sarbanes-Oxley rules to accomodate smaller companies.

I have a hard time believing that the same regulatory regime that's right for Microsoft is right for a company with $10 million in annual revenue. Oh, well; that's the majesty of the law. Just as it forbids rich and poor alike from sleeping under bridges, it also requires big and small alike to hire swarms of $400/hr consultants to participate in public equity markets.

Link       Bookmark: del.icio.us • Digg • reddit

HAPPY BIRTHDAY, GEORGE

February 22, 2006

Today is George Washington's 274th birthday. He dominated the American political scene for over four decades -- an amazing run, when you think about it. It's hard to imagine anything comparable today - it woutld be as though, for example, John F. Kennedy were still a political kingmaker in the late Clinton years.

Washington's biography is full of achievements that are unlikely to be repeated -- not least in tax policy. It's hard to imagine President Bush taking the field to lead the army to suppress a tax protest. Yet George Washington donned military uniform in 1794 to crush The Whiskey Rebellion, a Pennsylvania revolt against a whisky tax. From the Wikipedia biographical entry on George Washington:

In 1791, Congress imposed an excise tax on distilled spirits, leading to protests. By 1794, after Washington ordered the protesters to appear in U.S. district court, the protests turning into full-scale riots, and outright rebellion. On August 7, Washington invoked the Militia Law of 1792 to summon the militias of Pennsylvania, Virginia and several states. He raised an army of militiamen, and marched at its head into the rebellious districts, making him the only sitting US President to march at the head of a column of troops. There was no fighting, but Washington's forceful action proved the new government could protect itself. In leading the military force against the rebels Washington became the only president to personally lead troops in battle while commander-in-chief. It also marked the first time under the new constitution that the federal government had used strong military force to exert authority over the states and citizens.

Not "battle", exactly - the rebellion collapsed with troops on the way - but he was ready to rock and roll. So next time you get a letter from the IRS, just be glad that it's not President Bush and a division of armored cavalry.

Link       Bookmark: del.icio.us • Digg • reddit

A PRETTY PICTURE OF S CORPORATION EMPLOYMENT TAX PLANNING

February 22, 2006

A few weeks ago UM-KC Tax Professor Christopher R. Hoyt pondered why S corporations remain popular, given the existence of LLCs. We weight in with our thoughts. Prof. Hoyt is back today at the TaxProf Blog with musings that echo some of our thinking.

Prof. Hoyt:

An important choice-of-business entity consideration concerns employment taxes. A sole proprietor of a service business will pay both the employer and employee share of OASDI and health insurance taxes (with minor adjustments) on all earned income. The same result occurs if the person forms a single-member LLC. If, however, that individual forms an S corporation and takes a small salary, some of the profits will be taxed to the shareholder without being subject to employment taxes.

Tax Update:

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.

Prof. Hoyt has this pretty chart, from a Senate Report, showing how S corporation shareholders take advantage of the "John Edwards shelter":

Prof. Hoyt concludes:

With testimony like this in the Senate, it seems to me that it will only be a matter of time before we have legislation to put S corporations on par with LLCs when it comes to employment taxes. If that happens, then from a federal tax perspective it seems to me we should see more LLCs. Interesting, though, how some states have franchise taxes that discourage LLCs.

My view: legislation expanding self-employment tax is unlikely outside of broader Social Security solvency legislation or major tax reform. When the Treasury last tried to bring order to the murky self-employment tax status of LLCs, the political backlash was so severe that they haven't touched the issue in the nine years since. That backlash was nothing compared to the lobbying effort that would erupt if they try to subject S corporation K-1 income to self-employment tax.

Link       Bookmark: del.icio.us • Digg • reddit

WHAT HAPPENS AS THE TAX BASE SHRINKS?

February 22, 2006

This.

Link       Bookmark: del.icio.us • Digg • reddit

TAX REFORM? OH, YEAH, WE'RE FOR IT. JUST AS LONG AS WE CAN KEEP OUR OLD TAX BREAKS AND ADD SOME NEW ONES

February 21, 2006

The right-ish Tax Policy Blog finds the Bush Administration commitment to tax reform lacking in seriousness:

While the White House claims to be dedicated to reforming the complicated federal income tax code, how viable can this commitment be when you simultaneously have policy positions that are headed in the opposite direction of reform? These include:

- This statement saying that reforming of the home mortgage interest deduction is off the table.

- The President’s proposal to use deductions and credits in the tax code as part of his health care reform initiative.

- The President’s support of using the tax code as part of his energy reform proposals, including credits for hybrid cars and tax credits for certain corporate activities

In addition to these factors limiting the likelihood of any tax reform being implemented, paradoxically, the two sets of tax cuts that the President has pushed through have also contributed to the difficulty in obtaining broad support for tax reform. Because the tax cuts significantly cut taxes across-the-board for all income taxpayers, any reform package now that is revenue-neutral is likely going to have to raise taxes for some while lowering taxes for others.

It's well worth reading in full. It is puzzling, though, how the Tax Policy Blog, which has a clear understanding of the evil targeted tax breaks cause to the federal tax system, opposes the Cuno decision, which would eliminate many such breaks on the state level.

Link       Bookmark: del.icio.us • Digg • reddit

'FEAR IS THE KEY'

February 21, 2006

Lee Sheppard has writtan an extensive piece ($) on the latest IRS tax shelter initiative. The invaluable TaxProf Blog features the piece from Tax Analysts today.

The piece describes the essential features of some of the more popular shelters, and concludes:

It's a good time to cut a deal with the government. Some recipients of settlement offers, however, see an element of coercion in the accompanying threats of civil or criminal penalties that they do not believe would stand up in court.

Link       Bookmark: del.icio.us • Digg • reddit

NOBODY I KNOW

February 21, 2006

Slate has posted its annual list of the 60 top charitable donations (via Death and Taxes).

Link       Bookmark: del.icio.us • Digg • reddit

ARMY OF DAVIDS 1, GOLIATH 0

February 20, 2006

An Iowa news story develops:

Thursday evening, February 16: Blog "Who's Makin' Bacon" reports rumors that Bob Vander Plaats will drop out of the Governor's race and join the Nussle ticket as the Lieutenant Governor Candidate.

Friday morning, February 17: Bacon's story noted at "Diary of a Political Madman."

Saturday evening, February 18: the Bacon blog updates the story with a new detail: announcement of the combined ticket to take place Wednesday, February 22.

Monday, February 20: The Des Moines Register website confirms the story, prompting a gracious end-zone dance by Makin' Bacon.

The "Army of Davids" in the title of this posts refers to the title of Instapundit's forthcoming book with the subtitle "How Markets and Technology Empower Ordinary People to Beat Big Media, Big Government, and Other Goliaths." The Nussle-Vander Plaats story shows that The Army of Davids has troops on the ground in Iowa.

The rise of blogs poses a challenge to the Register and other old-fashioned media outlets. The speed of blogs can make them look flat-footed in cases like this. Bloggers, on the other hand, lack the time and resources to report on as many things as a full-time newspaper staff. The Register's reaction to blogs seems to be moving from the dyspeptic and humorless to a tentative embrace of the form. It's still a bit of a struggle for them; an online editorial announcing blogs for the Register's editorial staff gives the blog URL but doesn't link to it -- a mistake no self-respecting blogger would make.

It will fascinating to watch the Register and the rest of the newspaper Goliaths learn to live with the Davids.

Link  • Comments (2)       Bookmark: del.icio.us • Digg • reddit

AN LLC MULTI-STATE CATCH-22?

February 20, 2006

We talked last week about the Iowa Department of Revenue's absurd policy of treating investment income of LLCs as "business income," requiring non-residents to pay Iowa taxes on interest and dividends earned by LLCs. We said that many non-Iowans will put up with this because they will claim the Iowa taxes as a credit on their home state returns.

They may be disappointed. A distinguished tax lawyer sent the following note:

On the Iowa tax on LLCs, don't be so sure that the non-residents will get a credit for their Iowa tax.on their home state returns. I represented an Iowa taxpayer who had paid Illinois tax on some income some years ago. Iowa said the Illinois tax was not really owing, and refused to grant credit, but Illinois thought it was due, and refused a refund, leaving my client in the Catch-22 situation of deciding whether to sue Illinois, Iowa, or both (he gave up). In short, if some other state says "Iowa is wrong, you don't owe Iowa tax on that LLC income" our poor clients could be forced to pay (or litigate) in two states.

The Iowa Department of Revenue is making South Dakota look like a warm and sunny place to set up investment LLCs.

Link       Bookmark: del.icio.us • Digg • reddit

LOVE AND TAXES

February 20, 2006

Now that the pink fog of Valentine's Day is past us, it's time to take a more practical view of relationships.

Exhibit 1: A woman scorned has no fury like the IRS Criminal Division. California's "Mr. Divorce," attorney Demetrious Eugenios, decided to live up to his billing by dumping his wife. Thanks to her cooperation (with the IRS), Mr. Divorce is going away for 30 months, and he has to repay $1.2 million in back taxes. Of course, he also may face civil fraud penalties of 75% of the underpayment.

The Moral: Cheating on taxes is bad, cheating on your spouse is bad, but doing both at once can be fatal.

Exhibit 2: Due diligence for the prospective bride. Prof. Maule alerts me to a helpful guide to, "MARRIAGE AND DIVORCE: Savvy Ways For Persons Marrying, Married Or Divorcing To Trim Their Taxes - And They’re Legal." The book is available from the author, Julian Block, at julianblock@yahoo.com.

So along comes a book with chapter titles like this one: “Having An Affair Can Be Taxing” sound like one of my in-class quips that gets the students' attention. Using the question and answer format, Julian shares the questions he wants clients to ask. Almost in time for Valentine's Day is this one: “Does the IRS require a woman to pay taxes on engagement gifts if she breaks the engagement?” That'll keep some of them reading! Julian explains why December weddings often are more expensive than if postponed into January, and it has little to do with the cost of the reception hall. The marriage penalty and marriage bonus, two topics to which my students pay especially close attention, do not go unexplored. I must complain, however, that the chapter, "Unearthing Hubby's Hidden Assets" is too forgiving of the wives who are no less adept at hiding wealth. But the stories in it surely will prove to be better than any television reality show.

I wonder if it also discusses the estate planning advantages of marrying somebody 70 years younger, to maximize the advantages of the unlimited marital deduction?

Link       Bookmark: del.icio.us • Digg • reddit

WHAT, DIDN'T THEY COUNT THE LAWYERS?

February 20, 2006

From the TickMarks blog:

Germs in the Marketplace, a study conducted by the Clorox Company in Tuscon and Washington, DC found that accounting offices were second only to teachers in level of bacteria contaminations. By contrast, law offices only had about one-seventh of the germ level as accounting offices (this should provide plenty of good material for both accountant and attorney jokes).

I will have to stop licking my fingers when I work. Still, I suspect this study first vetted by Clorox's law firm.

Link       Bookmark: del.icio.us • Digg • reddit

PRESIDENTS DAY CARNIVALS

February 20, 2006

This week's Carnival of Personal Finance is up at Free Money Finance. My favorite out of this weeks compilation of money management weblog posts is a transcript and video of Steve Martin's 147th (estimate) appearance on Saturday Night Live, where he plays a finance counselor discussing the concept "Don't Buy Things You Can't Afford." He's much better at this than at tax planning, and the concept seems appropriate on Presidents Day somehow.

UPDATE: The Carnival of the Capitalists is now up, too.

Link       Bookmark: del.icio.us • Digg • reddit

MARCH 2006 APPLICABLE FEDERAL RATES (AFRs) RELEASED

February 17, 2006

The IRS has issued (Rev. Rul. 2006-10) the minimum interest rates for loans made in March 2006:

-Short Term (demand loans and loans with terms of up to 3 years): 4.58%
-Mid-Term (loans from 3-9 years): 4.51%
-Long-Term (over 9 years): 4.68%

Can you say "unusual yield curve"?

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

Link  • Applicable Federal Rates       Bookmark: del.icio.us • Digg • reddit

IOWA, THE STRANGE STATE

February 17, 2006

Earlier this week Democratic Gubernatorial Candidate Patty Judge threw in the towel and joined rival Chet Culver's ticket. Now will the two Republican Candidates join forces? And why isn't this in the paper?

(Via Political Madman)

Link       Bookmark: del.icio.us • Digg • reddit

IOWA TAXES AND THE TYRANNY OF SMALL NUMBERS

February 17, 2006

Some battles just aren't worth the money to fight. A rational client will concede an incorrect but small assessment because the professional fees required to prevail would exceed the tax. This can let state revenue authorities get away with a goofy reading of the tax law for an amazing length of time.

IT'S NONE OF YOUR NON-BUSINESS

State tax laws make a distinction between "business income" and "non-business" income. If a non-resident has business income in a state, it's fair game for the revenuers. Non-business income, in contrast, is only taxed in the state where the taxpayer lives.

Enormous amounts of professional fees have been consumed debating the precise difference between business and nonbusiness income, but in general terms, "business" income arises from, well, business. If you live in Illinois but farm in Iowa, the farm income will be Iowa business income. Interest earned on an Iowa bank account used for farm business is also Iowa income. In contrast, an Illinois retiree who earns interest from CD at a bank in Bettendorf will earn "non-business" income; that interest will be taxed in only Illinois and not Iowa.

IOWA: EVERYTHING IS BUSINESS, IF ITS IN AN LLC?

A tax professional of our acquaintance has an Iowa limited liability set up to hold investment assets as part of an estate plan. The LLC, which is taxed as a partnership, has never had an actual business; it has only owned cash and securities since it was formed. As a partnership, it reports its items of income and loss to its members on a schedule K-1; the items are then taxed on the returns of the members.

This LLC has a Missouri member. The state of Iowa has asserted on examination that the Missouri member must pay Iowa tax on the interest and dividends earned by the LLC. Why? Because, says the Iowa Department of Revenue, anything earned in an LLC is by definition, business income.

The technical term to describe this position is "bogus." Unfortunately for the taxpayer, its cheaper to file an Iowa return and pay the tax than it is to pay to fight the improper assessment.

WHY BOGUS?

The Iowa Supreme Court addressed the taxation of non-resident owners of pass-through entities (S corporations and partnerships) in a 2003 case, Camacho v. Iowa Department of Revenue and Finance. The Department in that case explicitly argued that all pass-through income was taxable to non-residents, business or not. The court rejected the Department's argument, saying that each item of income of the entity must be evaluated as business or non-business. The Court held that, from the evidence in the case, the interest from the S corporation happened to be business income because it was used for farming operations in the S corporation. The court said a different result "would be warranted... if the income at issue was nonbusiness income."

An investment LLC normally has no "trade or business" under well-established law, so all of its income should normally be non-business. Non-resident members should only pick up their share of such an LLC's interest or dividends on their home state returns.

WHERE THINGS STAND

If our acquaintance's experience is any indication, the Department intends to continue to try to tax non-residents on interest income earned by investment LLCs. Many LLC members will find it cheaper to pay the tax than to fight. Residents of other states with income taxes, in particular, will be likely to settle because they will claim a credit for the Iowa taxes against their home state taxes.

If Iowa persists, it will get away with this position until either they find somebody ornery enough to fight them on principle, or they run up against somebody with enough money at stake to make it worth litigating. Then Iowa will lose. But by then Iowa will have a new Governor and a new Director of the Department of Revenue, and they will get to figure out how to pay the refunds that will be due.

Related: IOWA SUPREMES: NONRESIDENT S CORPORATION SHAREHOLDER NOT TAXED IN IOWA ON "NONBUSINESS" INCOME

Link       Bookmark: del.icio.us • Digg • reddit

WHY COMPUTERS CAN'T REPLACE PROFESSIONALS

February 16, 2006

Marylanders Douglas and Nancy Maxfield apparently took the "life is but a tax deduction" approach to their 2000 and 2001 tax returns. They reported two schedule C businesses on their returns, "Galaxy 6" and "Common Sense Consultants." They proceeded to go hog wild running personal expenses through the "businesses," including his clothes, meals, household utility costs, travel, and, it appears, a boat.

The taxpayer had two problems with the case. First, it wasn't entirely clear that there was any business at all. Second, most of these expenses were non-deductible personal expenses even if a business was assumed to exist in the first place.

The Tax Court disallowed the deductions and considered whether the taxpayers should be hit with the 20% negligence penalty. The taxpayers, who prepared their own return, said it was the fault of Turbotax, their return prep software. Invoking the ancient legal principle of stare detritus (Garbage In, Garbage Out), the judge added the penalties to their tax bill.

They should have taken a lesson from yesterday's Melnik case, where the use of a lawyer got the taxpayers out from a fact pattern that wasn't much better.

The moral? Until tax professionals become robots (no, we aren't already, thank you), they are better blame absorbers than computers.

Link: Douglas and Nancy Maxfield, T.C. Summary Opinion 2006-27

Link       Bookmark: del.icio.us • Digg • reddit

WE THINK YOU LIED. YOU BACKDATED DOCUMENTS. BUT IT'S OK, YOU RELIED ON YOUR LAWYER.

February 16, 2006

The Tax Court came to a puzzling conclusion yesterday. The Court reviewed a case where the sellers of a scrap metal business tried to have their cake and eat it too. Immediately before the sale (or maybe later) the sellers, Zajman and Moshe Melnik, transferred their business shares to an offshore corporation in exchange for a private annuity. The idea was to defer the gain over the annuity period.

Unfortunately for the Melniks, they were - well, careless. They had effective control over the company that bought their annuity, and they used it as a piggy bank:

The record demonstrates that Clend functioned primarily as a conduit and that neither the Melniks, Clend, nor Bermuda Trust acted with the kind of restraint that one would expect to see from participants in a legitimate annuity transaction. Although Clend had a substantial annuity obligation to fund, Clend and Bermuda Trust used substantial portions of Clend's assets to make unsecured loans and high-risk real estate investments in the United States at the Melniks' request. In reality, the Melniks treated Clend's assets as a personal bank account and line of credit. Such transactions support a conclusion that the Melniks had access to, and indirect control over, Clend's assets in a manner that is inconsistent with the Melniks' paper status as creditors/annuitants.

The court had little trouble dismissing the transaction as lacking substance:

The resulting record reeks of self-interest and is riddled with imprecision and inconsistencies that petitioners do not explain. The record fails to establish the dates when certain relevant events took place, is lacking in credible evidence that the annuity transactions had economic substance independent of tax considerations, and is woefully inadequate to demonstrate that respondent's determination was wrong.

The inadequacies permeate every aspect of the record. We shall review in detail some of the problems with the record presented by petitioners and our reasons for concluding that petitioners' evidence is not worthy of belief and is not sufficient to demonstrate that respondent's determination was in error.

The opinion goes on to detail the problems in sections with titles like "Backdateing and 'Effective As of' Dating of Documents," "Missing Documents," "Lack of Arm's Length Dealings" and "Suspicious Timing."

BUT IT'S OK, NO PENALTIES: YOU HAD A LAWYER

If you just read this far into the opinion, you would think that at the very least the taxpayers would face negligence penalties, if not penalties for civil fraud, with backdated documents and whatnot. But like garlic warding off a vampire, the presence of a lawyer warded off penalties for the Melniks:

The uncontroverted record establishes that petitioners relied on [taxpayer attorney] Mr. Pennoni, who was the driving force behind the planning of the annuity transactions and who assured petitioners that there was a reasonable basis for the income tax reporting of the private annuity transactions and the HouTex stock sale.

We conclude that, under the circumstances, petitioners' reliance on Mr. Pennoni was reasonable, that petitioners had reasonable cause for the underpayment, and that petitioners acted in good faith with respect to the underpayment within the meaning of section 6664(c)(1). Consequently, we hold that petitioners are not liable for the section 6662 accuracy-related penalty.

WHEN THE WORST CASE IS NO WORSE AT ALL

Unwittingly, the Tax Court here tells taxpayers that they have nothing to lose by careless, and even outrageous, tax planning. From the opinion, the transactions look flaky from the get-go. The documents were bad, backdated, and perhaps even cooked up afterwards. Yet the taxpayers are no worse off for engaging in these shenanigans than they would have been had they properly reported the income in the first place. If the cost of cheating and losing is no worse than the cost of properly reporting a transaction in the first place, why not cheat? And why wouldn't an honest taxpayer feel like a sap for not cheating?

Link: Zalman Melnik and Moshe Melnik

Link       Bookmark: del.icio.us • Digg • reddit

BRIDGING THE TAX GAP

February 16, 2006

The tax scientists at the IRS have finished their "research" audits of 2001 tax returns and have reported their findings: a lot of folks don't pay all of their taxes.

The IRS last week estimated that the gross "tax gap" stands at $345 million annually. The IRS recaptures about $55 billion of this through enforcement actions, leaving a net gap of $290 billion.

Underreporting is inversely proportional to whether the income is subject to third-party reporting, and is worst for sole proprietors, as this IRS chart illustrates:

Source: IRS

The Senate Budget Committee yesterday had a hearing on ways to reduce the gap. Comptroller General David Walker said that capital gains enforcement should be tightened. He criticiced IRS Commissioner Mark Everson for saying it wasn't a priority because he believed capital gains account for only $11 billion of the gap: "I would also respecfully suggest that $11 billion is a lot of money."

Taxpayer Advocate Nina Olson advocates requiring stockbrokers to report basis information to customers - an idea that makes a lot of sense. While it would be a cost to brokers and their customers, it would save the customers the time of digging up the information themselves, or the cost of paying their tax preparers to figure it out. It would also mean fewer calls for brokers to return to tax preparers upon returning from their spring break vacations.

The tools needed to close the gap are there for all to see. Comproller General Walker gets it:

Walker said the tax gap should be attacked over a sustained period using strategies including regularly studying noncompliance, simplifying the tax code, improving service, and improving enforcement tools like withholding, information reporting, and penalties.

"Ultimately if you want to minimize the tax gap, you're going to have to reform the overall tax system to make it as simple as possible," he said.

Links:

IRS Release on Tax Gap

Tax Analysts Free Coverage

Tax Analysts subscriber-only coverage

TaxProf coverage of hearings, with links to testimony.

Tax Policy Blog

Link       Bookmark: del.icio.us • Digg • reddit

MORE ON BOTCHED WORLDCOM ESTATE PLANNING

February 16, 2006

The TaxProf this morning features an analysis of the Senda case by Tax Analysts. The Senda taxpayer was a bit too casual in respecting the formalities of family partnership gifts of Worldcom stock to get the courts to go along.

Wendy C. Gerzog, the author of the Tax Analysts piece, sums it up:

Senda illustrates what happens when the taxpayers do not respect the formalities of an FLP as well as the required sequence of transfers and documentation. In fact, the Tax Court was uncertain whether the taxpayers' stock contributions "were ever reflected in their [own] capital accounts."27 Otherwise, the transfer will likely be construed as an indirect transfer of property to the taxpayers' children, thus denying the taxpayers those enviable discounts.

Links:

Tax Update coverage of Senda.

Eighth Circuit opinion

Tax Court Opinion

Link       Bookmark: del.icio.us • Digg • reddit

HVB COPS SHELTER PLEA; DEUTSCHE BANK NEXT?

February 15, 2006

Serious activity on the tax shelter front this week:

- HypoVereinsbank (HVB), a German Bank, entered a plea deal yesterday with the Justice Department that includes a $29.6 million fine and a deferred prosecution agreement for its role in implementing tax shelters with the KPMG accounting firm.

- The New York Times reports that Deutsche Bank is also under investigation for its role in the KPMG shelters.

- The IRS released to Tax Analysts a copy of the settlement and cooperation offer ($ link) reported by the New York Times yesterday. The IRS says that it will make this offer to about 100 "accounting firms, law firms, and banks that the IRS contends have been involved in criminal tax shelters," according to an unnamed IRS spokesman.

BAD NEWS FOR KPMG DEFENDANTS?

The admission of criminal wrongdoing by HVB can't be good news for the 19 former KPMG partners and employees under indictment for their role in the shelters. So far none of the indicted individuals has made a plea deal to cooperate against the others; this may increase the pressure on the defendants to strike a deal.

As Deutsche Bank had many more shelters with KPMG than did HVB, they also could have a real problem. Will they also face criminal charges, or will the government try to also turn them against the individual defendants?

As the New York Times points out, "No court has ever ruled blips or the three other tax shelters in question illegal. Still, the I.R.S. has never considered the shelters valid."

BAD NEWS FOR SHELTER BUYERS?

The offer to the other tax shelter promoters could be very bad news for shelter buyers. If they find this an offer they can't refuse, their tax shelter customers will soon get unwelcome certified letters from the IRS; if the shelter promotors cooperate with IRS, it will be very costly for their customers.

Links:

TaxProf Blog Roundup
Tax Analysts Free Coverage

Link  • KPMG ~ • Tax Shelter News       Bookmark: del.icio.us • Digg • reddit

STRIKE FOUR!

February 14, 2006

Congress has addressed export subsidies in the tax code four times over the past 22 years. They have a perfect record: they've botched it each time.

Yesterday the World Trade Organization ruled that the latest attempt, passed in 2004, violates international trade rules, just like the first three did. In this case, the violations relate to "grandfathering" of the breaks repealed in the 2004 bill, which let the subsidies linger during a phase-out period.

The European Union is threatening to reimpose trade sanctions if Congress fails to take action in three months.

The EU and Congress will now commence a game of chicken, with the EU threatening to reimpose the sanctions, and Congress daring the EU to start a trade war over tax breaks that have already been repealed, if not as fast as the EU would like. If the sanctions are reimposed, it may create pressure for new tax legislation. As the last attempt to comply with the WTO rules resulted in the execrable Section 199, let's hope they aren't serious about the sanctions.

The TaxProf has a roundup of WTO documents and coverage.

Link       Bookmark: del.icio.us • Digg • reddit

ROLLING UP THE BIG FRY TO NAIL MR. SMALL

February 14, 2006

Anybody who has watched too much T.V. knows that detectives go after the Big Fish by getting the petty criminals to cooperate. The IRS appears to be taking the opposite approach in its tax shelter investigations, according to a New York Times report:

The Internal Revenue Service is making an unusual offer of leniency to firms that made and sold questionable tax shelters: come forward, pay penalties and turn over information, and you may avoid criminal prosecution.

The offer is being made to accounting firms, law firms, banks and investment firms that have created and sold tax shelters that the I.R.S. considers bogus, as well as to firms that carried out the financial transactions that underpin such shelters. Questionable shelters have been sold to thousands of wealthy investors in recent years. Under the offer, the firms must disclose the names of those investors.

Interesting. If the pushers of flaky tax shelters turn, the IRS can then sweep up the shelter addicts.

There is a logic to this. If word gets out among tax shelter users that their dealers are ratting them out, they and their associates are going to think twice before jumping into the next tax shelter frenzy, which will surely occur sooner or latter.

If IRS doesn't offer a deal to the promoters, they may be able to run out the statute of limitations on some of their customers. With the names, the IRS can audit the returns of the shelter buyers on an assembly-line basis, probably with a high success rate.

Not everyone thinks that the offer is wise:

According to the Senate report, a 1998 memorandum written by Gregg W. Ritchie, a former KPMG partner and one of the 19 indicted, concluded that aggressive shelters were so profitable as to make the fines and penalties worth the risk.

Gary V. Mauney, a lawyer with Lewis & Roberts in Charlotte, N.C., who represents investors suing the firms that sold them tax shelters, said of the I.R.S. offer yesterday: the "I.R.S. is essentially following the logic of the Ritchie memo. Promoters are going to look at this offer and laugh all the way to the bank."

The promoters, though, may need some convincing:

It is unclear how popular the offer will be among promoters. "It is a bad deal," said one lawyer who represents an accounting firm that has been sued by investors who bought its shelters. He said that the I.R.S. wanted too much information under the offer, citing a requirement that marketing materials and other documents must be turned over, leaving a firm potentially exposed to further investigations and prosecutions.

I don't have much sympathy for this anonymous lawyer. If the shelter can't work if the IRS finds out about it, it shouldn't have been sold in the first place. If the promotors won't share details about their customers, transactions, and marketing, they aren't relying on creative interpretation of the tax law; they're merely trying to skate by on deception, smoke and mirrors.

Link  • Tax Shelter News       Bookmark: del.icio.us • Digg • reddit

ON THE UNWISDOM OF TAX BREAKS FOR GOOD DEEDS

February 14, 2006

The Tax Policy Blog succinctly states why state tax benefits for "good causes," from E-85 to historical rehab, are bad policy:

Filled with deductions and various specific incentives for certain companies and industries that are not provided to other companies or industries, these specific “breaks” are merely the government controlling the allocation of resources through the tax code. Many on both sides of the aisle often call any deduction good policy because it is cutting taxes for someone. However, with the government initially taxing everyone at a high rate, then deciding arbitrarily who gets something back, this is essentially central economic planning by lawmakers -- something few policymakers would be willing to explictly endorse if not disguised in the tax code.

Link  • QUOTATIONS       Bookmark: del.icio.us • Digg • reddit

GAMBLER WINS SMALL

February 13, 2006

James Castegnetta is serious about the ponies - serious enough to defeat the IRS in Tax Court. His facts are a model of recordkeeping, if not of a profitable use of time.

Petitioner keeps a detailed account of his daily gambling transactions. This includes his daily wagers and winnings, as well as a cumulative total of his yearly winnings and losses. He also spends a considerable amount of time handicapping races and studying racing programs and other materials. As part of handicapping horseraces, petitioner prepares his own “speed figures”. Using a number of criteria, including track length, track conditions, and weather conditions, as well as his observations during the races, petitioner determines a final “speed figure” for the winning horse in each race and compares the “speed figure” to other horses. Petitioner maintains a detailed chronological record of his “speed figures” for the winner of each horserace.

What did all of this work do for Mr. Castagnetta financially? This:

$234 and an IRS exam, to be exact. But he convinced the Tax Court that his gambling rose to the level of a trade or business, so his gambling losses are "above the line," rather than on his schedule A. This saved Mr. Castagnetta $863 in taxes.

Considering the time Mr. Castagnetta spent on the ponies to earn $234, and his ability to win in Tax Court, I think it's time for him to dump the ponies and go to law school.

As far as the lessons for other taxpayers, I will leave it to Russ Fox to have the final word, given his expertise in the area. (Update: Russ has already risen to the occasion with a good post).

Link: James Castagnetta, T.C. Summary Opinion 2006-24.

Link       Bookmark: del.icio.us • Digg • reddit

VALENTINE'S WEEK CARNIVAL

February 13, 2006

This week's Carnival of the Capitalists, a weekly compilation of economics and business blog posts, is up at Frugal Underground. As always, lots of good reading. I recommend:

The Scrivener.net on why the current budget deficits don't matter (it's not good news, though).

The InsureBlog discussion of the experimental "PACE" plan giving small employers the economics of self-funded insurance with stop-loss policies - an approach available up until now only for larger employers.

Link       Bookmark: del.icio.us • Digg • reddit

HEY - WE'RE IN THE WALLY!

February 13, 2006

Reader Bob Buckley kindly informs me that the Tax Update is mentioned in this morning's Wall Street Journal:

This Des Moines, Iowa, accounting firm runs a blog mixing discussion of legislative news with practical advice for filers. December, for example, featured a series on year-end tax planning, with posts on the ins and outs of gift-tax rules, contributing to college savings plans, prepaying state and local taxes and other topics. Some of the posts are specific to Iowa, but most have a broader appeal.

If you've been to an Iowa State Fair funnel-cake stand, you know that anything that appeals to Iowans has a broad audience, at least horizontally.

The WSJ piece also mentions The TaxProf Blog, Professor Maule, and TaxGuru.net. The piece is on page R-10 in the paper edition today - the Technology section, in the "Blog Watch." If you are an online WSJ subscriber (it's worth it), you can go directly to the piece here.

If you are a visiting WSJ reader, welcome! You can return via the easier-to-remember url "www.taxupdateblog.com."

Link       Bookmark: del.icio.us • Digg • reddit

WHAT'S THE HARM IN A LITTLE TAX BREAK?

February 13, 2006

Why is it unwise to give the old folks a little tax break, as proposed in the Iowa legislature? Because every dollar saved by the old folks has to be replaced by somebody else. You end up with a few people paying all the taxes, at high rates. A narrow base is a shaky tax base.

You can see how federal tax breaks result in higher rates on the national level in this excellent Tax Policy Blog piece.

Link       Bookmark: del.icio.us • Digg • reddit

BORDER WAR OVER THE OLD FOLKS?

February 13, 2006

Midwest taxpayers must be like fine wines: they get better as they age. Certain legislators in Illinois and Iowa think so, anyway, as both Iowa and Illinois consider tax breaks for seniors. We've discussed the Iowa proposal to eliminate income taxes on pension and social security income. Now an Illinois legislator in pushing for a property tax break for seniors:

“If we don’t provide this property tax relief our senior citizens are going to choose to move outside of the state, working families are going to find it too burdensome,” he said. “This is essential to keeping people in Illinois.”

Look for traffic jams on the Iowa-Illinois river bridges as seniors go back and forth to get the best tax deal.

Why are old folks in such demand? Well, based on this story that Russ Fox of Taxable Talk passes on, they can be a pot of gold:

Take nursing home owner Jack Easterday, formerly of Alameda, CA, and soon to be residing in a federal penitentiary. Mr. Easterday was convicted on Friday of failing to pay over $3 million in payroll taxes. Evidence indicated that the scheme netted over $18 million.

Sure, it's crooked money, but we can probably approximate that legally by putting video lottery terminals in every Iowa nursing home lobby and buffet restaurant.

Link       Bookmark: del.icio.us • Digg • reddit

THANKS FOR YOUR SUPPORT, MR. DAHMER!

February 10, 2006

Iowa House Speaker Christopher Rants emails this news:

"Under the leadership of House Speaker Christopher Rants (R,Sioux City) the House leadership has put forth a budget which rejects Governor Vilsack's call for higher taxes and makes room for tax cuts."

Grover Norquist, president of the group, said this: "The (Iowa) House budget reflects a fiscally responsible approach to handling the state's finances. I commend these state legislators for their pro-taxpayer stance against the background of special interests running in the doors at the state capitol calling for higher spending and higher taxes."

Speaker Rants adds, "This is a great honor, and a testament to our 51-member House Republican majority caucus."

Norquist... Norquist... where have I heard that name lately? Oh, yeah:

"What the Republicans need is 50 Jack Abramoffs," Norquist said. "Then this becomes a different town."

Maybe Des Moines is just that town? Do we have 51 Jacks? Or maybe some endorsements you just should keep to yourself. I hope Mr. Norquist is a better judge of legislators than he is of character.

Link       Bookmark: del.icio.us • Digg • reddit

BACK IN THE SADDLE

February 10, 2006

The Tax Update is back in town. I see I'm back just in time to see an Eighth Circuit Court of Appeals decision that has as good a short statement as you are likely to find of how to make sure to lose if you are ever audited on a "hobby loss" question:

The evidence in the present case established, among other things, that the Montagnes lacked a written business plan or financial projections for their horse breeding and training activities; that they maintained a single bank account for both personal and farm expenses; that they failed to generate separate business records for their horse-related activities; and that they failed to develop economic expertise or to solicit such expertise from others regarding their horse-related activities. In light of these objective facts, we cannot say that the tax court clearly erred in its finding.

In short, all the ingredients for a "hobby loss" defeat: no profit, no plan, no records, no clue, and horses. Easy win for IRS.

Link       Bookmark: del.icio.us • Digg • reddit

WHAT'S THE EXPECTED VALUE OF A SNOWBALL'S CHANCE X $865,235,387?

February 09, 2006

An answer that seems obvious when you are dealing with a family-owned manufacturer with $20 million in sales apparently gets cloudy when you you add a zero or three to the number. The Sixth Circuit court of Appeals yesterday said the answer is the same for a big company like Chrysler as for the little guy: you can't deduct warranty costs until the warranty claim is filed.

Chrysler deducted $865 million over 1984 and 1985 to cover the estimated costs of warranty work on cars sold in those years (remembering the K-cars, that actually sounds low). Those are the years I started doing tax work, and even then it was widely accepted that warranty costs were only deductible when the warranty work was done. But Chrysler had a consultant, and maybe that would change everything. The consultant did lots of elaborate actuarial work and concluded that $865 million was the right number.

Relying on the Supreme Court's General Dynamics decision, the Tax Court said consultant or no, the deduction isn't available until the actual warranty claim is filed. The Sixth Circuit upheld the Tax Court yesterday. It seems like Chrysler had only a snowball's chance of winning, but they apparently thought it was chance worth paying the attorneys for with that much money involved.

NO DEDUCTION FOR STOCK REDEMPTION

Chrysler took another seemingly hopeless position on its 1985 return when it claimed a $327 million deduction for amounts paid to buy back stock from its employee stock ownership plan (ESOP). To me, it seems like hardly a question worth asking - of course you can't deduct costs of redeeming your own stock. But the tax law can look funny viewed through a $327 million lens.

Chrysler's argument was that it wasn't really a stock buyback - it was extortion a payment to compensate its union members as part of a larger collective bargaining agreement. The court, predictably, said the ESOP would have received the same amount selling the stock on the market, so the redemption wasn't some sort of backdoor wage payment.

FINANCING COSTS?

It appears that the IRS assessed no penalties to Chrysler for the extra 1984 and 1985 taxes. It's likely that Chrysler knew it would lose, but if it could avoid penalties, the deductions would function as a loan from the government at rates competitive with those private creditors would have charged. In that case, even if they lose, they win, because they badly needed the financing back then. A good corporate finance decision, maybe, but not a great way to run a tax system.

Links:

Sixth Circuit decision

Tax Court Decision

Link       Bookmark: del.icio.us • Digg • reddit

LIGHT AND VARIABLE POSTING

February 08, 2006

The Tax Update is on the road; I'll post when I can, but it may be sporadic.

Link       Bookmark: del.icio.us • Digg • reddit

WHEN IN DOUBT, BLAME THE ACCOUNTANTS

February 08, 2006

When the wolves are catching up, the accountants are the first ones thrown off the sled. The owners of "Scores," a strip club in New York, are following an old script.

The strip club gained noteriety (ok, a strip club starts out with noteriety, but it gained more) when it was sued by patrons for some astronomical bills:

One patron sued the club after he got a $28,000 bill and another disputed $129,000 in charges. The most notorious case involved Robert McCormick, former chief executive officer of St. Louis-based Savvis Inc., who said he was charged $241,000 after he had actually run up a tab of about $18,000 in one night.

Meanwhile, Morgenthau said, investigators found "a massive tax evasion scheme by managers and owners of the nightclub." He said the "simple and corrupt" scam involved the payment of money by Scores to dummy companies as business expenses, and the dummy companies paid the personal expenses of [owners Richard] Goldring and [Harvey]Osher.

So whose fault was it? You've already guessed:

Harvey Osher's lawyer, George Weinbaum, said, "My clients have always relied on accounting professionals." Weinbaum, who also represents two of the companies, did not explain what he meant by that.

Maybe he relied on them as good, paying customers?

Link       Bookmark: del.icio.us • Digg • reddit

BUSH BUDGET: BIGGER SECTION 179, HSA CONTRIBUTIONS

February 07, 2006

The Presdent yesterday released his budget for the federal fiscal year beginning in October 2006. Much of it was telegraphed by the State of the Union address, but the increased Sec. 179 deduction is a bit of a surpise.

Increased Section 179 expensing: President Bush proposes to permanently increase the Section 179 deduction to $200,000 starting in 2007; with it phasing out as equipment purchases exceed $800,000. The deduction is currently $108,000, and it is scheduled to revert to $25,000 in 2008.

It's hard to complain about increased Section 179 deductions, as they do simplify life for taxpayers who don't file financial statements, where depreciation is required. The increased Section 179 is of a piece with the administration's trend to nibble its way towards a Hall-Rabushka type flat tax, where all capital expenditures are expensed and investment income is untaxed.

HEALTH CARE: MORE, BIGGER HSAs.

As promised in the State of the Union speech, the budget has new provisions to encourage wider use of Health Savings Accounts (HSAs). These are IRA-like accounts that must be used in conjunction with high-deductible health insurance. The proposals:

Double break for non-group high-deductible premiums. Individuals buying their own high-deductible health insurance - i.e., individuals with no employer plan - would be allowed a full above-the-line deduction for the premiums AND a 15.3% refundable credit on the premiums paid. The credit is designed to give the individual insurance purchaser the same tax benefit as an employee with coverage through the employer.

Increase maximum HSA deduction to policy out-of-pocket maximum. Current law limits HSA contributions to the lesser of the maximum out-of-pocket costs under the plan or $5,450 ($2,650 for single coverage). The budget proposes to eliminate the dollar limits.

Refundable health premium tax credit for low-income individuals. A limited tax credit of up to 90% of premiums paid on high-deductible health policies would be available to single taxpayers with an AGI of up to $15,000. The credit would be 50% for taxpayers with up to $20,000 AGI, with the benefit phased out between $20,000 and $30,000. The credit would be refundable, which means it would operate as a subsidy. The credit is capped at $1,000 annually.

These items are designed to put individuals without employer coverage on the same tax footing as employees in terms of health care tax benefits. They are also designed to address criticisms that the HSA program is only good for wealthy taxpayers.

While the whole idea of making health care a tax benefit item is probably unwise, it isn't likely to change. That being the case, it makes sense to de-link employment from tax benefits in a world where career changes are the norm. The move to high-deductible arrangement is also wise, as it puts more health spending decisions in the hands of the patient, rather than the insurer. The tax credit for low-income policies should be of some help to young adults starting their careers, but it's benefits will be limited until the states open up their health insurance markets to out-of-state providers.

Research credit: The budget would make the research tax credit permanent. It has been extended on a year-by-year basis.

I believe the research credit should be repealed in exchange for lower rates. I think it is primarily a "harvested" credit that taxpayers claim for things they would do anyway. The IRS is poorly equipped to evaluate whether actual research occurs, and it would be better if they didn't even have to try. Yet if an ill-conceived credit is going to exist, it should be made permanent; poor policy is better than poor policy that has to be re-enacted every year.

Will any of this pass? In the current partisan atmosphere, don't hold your breath.

There's more, but it's all small-ball stuff, like changes in IRS funding, temporary AMT relief, and increased penalties for frivolous returns. You can read more at these links:

Press release summary of budget tax proposals.

"Blue Book" detailing budget tax proposals (pdf).

Link       Bookmark: del.icio.us • Digg • reddit

IF YOUR BIG BROTHER SAYS 'CLOSE YOUR EYES AND OPEN YOUR MOUTH,' DON'T

February 07, 2006

Some other life lessons:

The Liberian prince isn't really going to share an inheritance with you after you give him your bank account information.

The e-mail that says you just have to provide a credit card number to claim your lottery winnings is a lie.

PayPal and E-Bay don't need you to update your account information.

Don't believe that e-mail from "refund@irs.gov" saying "Refund Notice" (Hat tip: the TaxProf.)

Link       Bookmark: del.icio.us • Digg • reddit

SUPER BOWL OF CARNIVALS

February 06, 2006

The current Carnival of Personal Finance is up at Financial Reference. You can read about everything from Roth IRAs to the InsureBlog's tantalizing piece on an experimental self-funded "stop-loss" health insurance arrangement for small employers (so far available only in Ohio, Kentucky and South Carolina.

UPDATE: The Carnival of the Capitalists is also up now, too, at AnyLetter.

Link  • Comments (1)       Bookmark: del.icio.us • Digg • reddit

REGISTER HAS FRONT PAGER ON IOWA PENSION EXEMPTION

February 06, 2006

The Des Moines Register leads today with a skeptical piece on the pension exemption passed last week by the Iowa house. The piece features interviews with seniors, most of them opposed to or ambivalent about the proposal to exempt all pension and Social Security income from Iowa tax.

The proposal passed the Iowa House 81-18, with all Republicans and a majority of Democrats voting in favor.

The article says that pension taxes aren't always decisive for retirees leaving the state. It presents a nice map showing nationwide retiree migration patterns. The map caption summarizes the point of the article:

There are few retirees leaving Iowa near the state's border, which experts say counters the argument that "border birds" are settling in South Dakota and Illinois to avoid Iowa taxes. The elderly population tends to migrate toward the suburban fringes of metropolitan regions or to areas with warm temperatures, lakes or mountains.

I would say that retiree taxes are a factor, but usually not a decisive one. A lot more Iowans move to Arizona, which has income taxes, than to tax-free South Dakota. When retirees do leave for tax reasons, it's usually because they have large amounts of investment income; the House proposal won't affect them.

The main reason to oppose this tax, I feel, is that it further narrows the tax base. Somebody has to pay the taxes, and if the retirees pay less, everyone else pays more. It narrows the base and requires higher rates on those who remain. It also will make sensible comprehensive state tax reform that much harder to achieve because the old folks won't want to give up their tax break.

The best quote from the article:

"Which problem should Iowa be focusing on: losing young people or losing the elderly? . . . I think possibly we have our full quota of older Iowans," says Mary Jane Odell, 82, of Des Moines and a registered Republican.

Worst argument for the pension break:

Taxing retirement benefits is unfair because it's a double taxation.

No, taxing pensions is not double taxation. By definition, pension income was excluded from income during your working life. Any tax on the pensions at retirement is on amounts long tax-deferred.

Least coherent argument for the tax break (from Rep. Jamie Van Fossen):

"Not only is it the right thing to do, it's the fair thing to do," he said. "This helps cops and firefighters and health care workers and people who have invested in their 401(k)s. To me it adds up to good policy."

Huh? "Cops and firefighers and health care workers?" Why not "the children," and kittens too? It sure doesn't help the cops and firefighters and health care workers who are still working; it means they have to pay higher taxes. It sure doesn't help the people who are still investing in their 401(k) plans; the higher state taxes they have to pay will squeeze their ability to save more in the retirement plans. The only good policy about it is that it panders to a segment of the population that votes in large numbers, at the expense of everyone else.

Prior coverage:

ROLL CALL ON THE PENSION EXEMPTION

GIVE US YOUR OLD, YOUR CREAKY, YOUR BINGO PLAYERS...

THEY'RE BAA-ACK

Link  • Eye on the Legislature  • Comments (2)       Bookmark: del.icio.us • Digg • reddit

WHAT TIPPED HIM OFF?

February 06, 2006

After being sentenced to 33 months in federal prison for working with prominent tax charlatan Irwin Schiff, 65-year old Lawrence Cohen has had an epiphany:

"I now know that Irwin Schiff is wrong."

It's too bad it took a view of the wrong side of the prison gate before he figured it out. Mr. Schiff, himself no spring chicken at age 77, is likely to spend the rest of his days on the inside looking out:

Schiff, 77, is the author of "The Federal Mafia: How the Government Illegally Imposes and Unlawfully Collects Income Taxes," a book the government banned from circulation as fraudulent commercial speech.

He could face up to 43 years in federal prison and $3.25 million in fines after being found guilty of 13 conspiracy, tax evasion and tax fraud charges. He also faces unspecified sanctions on contempt citations stemming from outbursts during trial when he served as his own lawyer.

I feel regret at the thought of an old man dying behind bars. Still, Mr. Schiff has brought grief and financial ruin to untold numbers of people who foolishly followed his tax protester advice. It's a sad fate, but he has done much to earn it.

Link       Bookmark: del.icio.us • Digg • reddit

R.I.P. State 29

February 06, 2006

State 29 says it's done. Brash, rude, and over the top, the prolific State 29 was the best political blog covering Iowa. It will be missed.

Link       Bookmark: del.icio.us • Digg • reddit

LIVE AT 10TH AND MULBERRY

February 04, 2006

I'm here. The place is pretty full for dinner, but it looks like there's plenty of room upstairs by the pool table. I'm the dorky stylish guy by the bar with the laptop.

UPDATE, 7:50 pm: or not. Blogger is down, so we will live-blog here. A roll call of those in attendance:

Jeff from Tusk & Talon ;

KL Snow from Diary of a Political Madman;

Royce from Iowa Libertarian;

Blue and Red Fish from purple fish guts;

Kris from Anywhere But Here;

Anonymous Blogger who doesn't really care to tell you where he/she is.

Jody and Doug from Iowa Geek

Celti and Chris from Celtic Cross

Mike Wagner from www.OwnYourBrand.com

Mike Sansone of Copywriting Watch and IowaBlogs

Link       Bookmark: del.icio.us • Digg • reddit

TONIGHT AT THE RIVER: THE BASH!

February 04, 2006

Yes, excitement has risen to a fever pitch in advance of the Iowa blogger bash. To get past the velvet rope at Raccoon River Brewing Company, you will need to show your blogging credentials... well, actually, there is no velvet rope, and no such thing as blogging credentials. But there is a Raccoon River Brewing Company, and there is a bash! The fun starts about 7. Laptop and wi-fi card optional, but enabled.

What they're saying:

Royce says, articulately: "Uh... 'cause it's fun"

Red Fish says: "We got a babysitter, and will be at Racoon River!"

Celti says: "I’m going to try my bestest to come to the blogger bash this Saturday!"

Jeff nails it: "Be sure to be there."

What say you?

The Raccoon River Brewing Company is at 200 10th Street (10th and Mulberry) on the hip and happening, so edgy west side of Downtown Des Moines. Here's a map.

I hope to see you there!

Link  • Comments (2)       Bookmark: del.icio.us • Digg • reddit

TIME TO GET CRACKING ON THOSE RETURNS!

February 03, 2006

There's no point in putting it off now. The last 1099s are trickling in, you have your W-2s and your stockbroker statements. It's time to get cracking on putting your tax information together.

What, you say? It's Super Bowl weekend! It would be sacrilege to mar such a solemn occasion by wading through tax records!

Well, consider this your financial Super Bowl, without the wardrobe malfunctions. As you sit down to get your information to your preparer (even if that means you), here are some hints to make the process easier for the preparer and cheaper for you:

- Use the organizer. Most preparers will provide you an "organizer" based on your 2004 return. It will list out all of the income and deduction items that you had last year. You can save a lot of hassle just by making sure you account for all of the items listed there.

- Make sure you have all of your 1099s. If you got an organizer from your preparer, check against the list. If you don't have an organizer, check against the dividends and interest shown on last year's return. Then ponder any new stocks, brokerage accounts, or bank accounts you opened in the last year, and make sure you also have those 1099s.

- Get all of your W-2s. Did you change jobs? Did your spouse? Make sure you have all of that.

- Get your stock sale information together. Schedule D, the capital gain schedule, is often the most expensive part of the return. You can keep it from being that way if you make sure to list for each stock sale:

1. The date you bought it;
2. How much you paid for it; and
3. The date you sold it and the sale price.

Don't forget to include the brokerage fees with your information.

If you have held the stock for a long time, make sure to take stock splits into account. If your broker has a nice schedule with all of this information - and many do - be sure your preparer gets it.

Mutual Funds: Include all of the tax information you get from the funds. If you sold shares, try to find out your basis from the fund company; if you are like most mutual fund owners, you have been reinvesting your dividends in additional shares, and you get basis for that.

Own tax-exempt securities? Give the preparer the year-end information. Most federally-exempt securities are taxable in Iowa. Even double-exempt securities can affect your federal return, or returns you may have to file in other states.

- Did anything else unusual happen during the year? Did you cash in an insurance policy? Settle a lawsuit? Buy or sell a house? Refinance a mortgage? These things can all affect your income taxes. If you're not sure if something matters, give it to the preparer.

- If you have your own businesses or rental properties, be sure to give the preparer all of the income and deduction information you have. If you use Quicken or Quickbooks, give the preparer an "accountant's copy" or backup of your computer file. It can save a lot of time.

- Document your deductions and credits. Round up your 1098s for your home mortgage interest, your property tax statements, and your charitable contribution receipts. Go through your checkbook and make sure you really made those estimated tax payments, and write them down on your organizer, noting the dates. And don't forget to tell your preparer about your vehicle registration fees, as they may include a property tax.

Think about deduction items that may not have been on your return last year. Some are easy to miss:

* Did you have unusual contributions this year - say, a college fund drive? Make sure you have the receipt from the donee; cash donations over $250 require a written acknowledgement from the donee.

* Did you donate property? Remember that you will need an appraisal for non-stock gifts over $5,000. Ask your preparer about the information needed from the appraiser.

* Did you go back to school? You may be eligible for a tax credit.

* IRAs? Tell your preparer about any IRA contributions you made, even if you don't think they're deductible.

* If you like to gamble, list your losses so your preparer can claim them against gambling income. Many casinos can give you a printout of your activity. If you use the touch play slot machines video lottery units, call Ed Stanek on his cell phone to get your tax information.

* Did you contribute to College Savings Iowa? There is an Iowa deduction available.

* Did you have kids in elementary or high school? There is an Iowa credit for tuition and fees. Eligible items include textbook costs, instrument rental, football cleats, and, oddly, prom tickets.

You know you can't possibly enjoy this year's wardrobe malfunctions with your taxes weighing on you. Get your tax information together and you can enjoy the game, or at least the halftime show, with a clear conscience.

Link       Bookmark: del.icio.us • Digg • reddit

FOURTH CIRCUIT HELPS IRS OFF THE MAT IN BLACK & DECKER TAX SHELTER CASE

February 03, 2006

It could be a sham.

That's what the Fourth Circuit Court of Appeals ruled yesterday in reversing a serious IRS loss in a tax shelter case against Black & Decker. The Fourth Circuit order the district judge to hold a trial on whether the tax shelter involved is a "sham."

The tax shelter, marketed to 30 taxpayers by a national accounting firm, was designed to both accelerate and double-up deductions for contingent long-term health care costs. In simplified form, the basic transactions are:

1. Black & Decker formed a new corporation with a capital structure that excluded it from the Black & Decker consolidated return.

2. Black & Decker contributed $561 million of cash and $560 million of contingent health care liabilities to the Newco. (Black & Decker also remained liable on the liabilities if Newco didn't pay them).

3. Black & Decker sold the newco to a retired executive for $1 million and claimed a $560 million loss.

4. Newco also expected to deduct the liabilities as it paid them against interest income on the $560 million cash.

End result: acceleration of long-term health deduction to the current year, albeit as a capital loss (but the company had capital gains it wanted to offset. There is a great chart illustrating the transaction at andrewmitchel.com.

The sham issue trial could be interesting. Black & Decker has conceded that the transaction was done only for tax purposes. It ended up with the cash back in its own pockets, it was still liable on the future health care costs, and it would fund the Newco's payments on the health care costs by repaying the loan. Except for running the costs through Newco, it looks like very little changed. It will be an interesting test of whether the tax law will respect a non-economic deal strictly on the basis of formalities.

Links:

Fourth Circuit decision
District Court ruling
TaxProf Blog coverage

Link       Bookmark: del.icio.us • Digg • reddit

BILL GATES IS SPECIAL

February 02, 2006

From the TaxProf Blog:

Bill Gates said yesterday at a Microsoft conference in Lisbon that IRS has to store his financial data on a special computer because his fortune is so vast:

"My tax return in the United States has to be kept on a special computer because their normal computers can't deal with the numbers. So I am constantly getting these notices telling me I haven't paid something when really it is just on the wrong computer. Then they will send me another notice telling me how bad they feel they that they sent me a notice that was a mistake."

Our sources have smuggled a photograph of the Gates computer out of the Ogden Service Center:

Hat Tip: The TaxProf.

Link       Bookmark: del.icio.us • Digg • reddit

WERE RAISES THAT GOOD AT THE NEWSPAPER?

February 02, 2006

This car was photographed this week in front of the Des Moines Register building.

If it belongs to the bookkeeper, it's time to audit petty cash.

Link       Bookmark: del.icio.us • Digg • reddit

IRS ISSUES ANNUAL BAD PREPARER ALERT

February 02, 2006

The IRS has offered its annual "Helpful hints when choosing a tax preparer":

* Be careful with tax preparers who claim they can obtain larger refunds than other preparers.

* Avoid preparers who base their fee on a percentage of the amount of the refund.

* Use a reputable tax professional who signs your tax return and provides you with a copy for your records.

* Consider whether the individual or firm will be around to answer questions about the preparation of your tax return months, or even years, after the return has been filed.

* Review your return before you sign it and ask questions on entries you don't understand.

* No matter who prepares your tax return, you (the taxpayer) are ultimately responsible for all of the information on your tax return. Therefore, never sign a blank tax form.

* Find out the person's credentials. Only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.

* Find out if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics.

* Ask questions. Do you know anyone who has used the tax professional? Were they satisfied with the service they received? Tax evasion is a risky crime, a felony, punishable by five years imprisonment and a $250,000 fine.

Good advice, as far as it goes, but you should shouldn't choose a tax preparer without considering the

TAX UPDATE EVEN MORE HELPFUL HINTS FOR CHOOSING A TAX PREPARER:

* Be careful with tax preparers who claim they have bigger refunds than you do.

* Avoid preparers who base their fee on the unused amount of your credit card borrowing limit.

* Avoid preparers who base their fee on a percentage of the Gross Domestic Product.

* Use a reputable tax professional who doesn't sign his returns as "Brett Favre."

* Avoid tax preparers who do returns on street corners wearing backwards baseball caps or hooded sweatshirts.

* If your your tax professional prepares returns out of his car, the presence of cases of pseudoephedrine in the back seat is a classic warning sign.

* Don't use a tax preparer whose web site is hosted here.

* Don't hire this guy to prepare your return. Or this guy. Not this guy, either.

* You normally don't need to help a Liberian prince to recover his rightful inheritance to receive your tax refund.

You're welcome!

Link       Bookmark: del.icio.us • Digg • reddit

TAX UPDATE FINE ART FEATURE

February 01, 2006

From the IRS Auction Pages:

Whoever owned this may not have known how to keep the IRS at bay, but they sure had an interesting sense of style. Watch the auction page - sometime in 2006 it could be yours!

Link  • Comments (1)       Bookmark: del.icio.us • Digg • reddit

ROLL CALL ON THE PENSION EXEMPTION

February 01, 2006

The Iowa House yesterday passed the proposal to exempt all pension income from Iowa taxation. The bill to saddle everybody but pensioners with higher taxes passed 81-18. The roll call is below.

And another milestone is reached in Iowa's attempt to shuffle past Florida for the coveted "oldest population" prize.

Prior coverage here and here.

Link  • Eye on the Legislature       Bookmark: del.icio.us • Digg • reddit

THE TREASURY EMPLOYEE UNION WON'T GO FOR THIS

February 01, 2006

While I think the TaxProf or Dr. Maule noticed this somewhere along the line, it's still worth passing on:

For, the Municipal Corporation of Delhi (MCD) has resorted to sending drummers to help collect property tax from thousands of defaulters in the national capital.

"When they have not responded to our notice to pay taxes, we have to send dholwallas to beat drums in front of the house of those defaulters. And it looks like a safe bet," said Deep Mathur, chief spokesperson of the MCD.

The Delhi authorities have a fallback for their deaf tax deadbeats, or for those who just dig that crazy rhythm:

"In the last two weeks, over 100 defaulters have paid their tax and we will continue our drive. But if defaulters still do not respond to it, MCD will auction their properties," Mathur told IANS.

This could be effective, but between the National Treasury Employees Union and OSHA, it could never work. The NTEU would require that preference be given to non-rythmic union members who'd been laid off from positions in closed service centers, with extra points for the transgendered handicapped. Once qualified, no drummer could ever be required to keep the beat. And OSHA would require that the drums be on wheels and muffled to prevent back injuries and hearing loss.

Link       Bookmark: del.icio.us • Digg • reddit

STATE OF THE UNION AND TAXES

February 01, 2006

I plan to post something about the President's tax proposals from the State of the Union speech. The TaxProf is already on the case, and the Tax Foundation has an analysis up on the President's health care tax proposals.

Link       Bookmark: del.icio.us • Digg • reddit

THE SAGA OF 'STOPGAP INVESTMENTS'

February 01, 2006

Tax Court Judge Thornton is nicer than I am.

John Maher was an IRS valuation specialist with a gambling problem. Judge Thornton explains:

Petitioner has been described as a compulsive gambler. On one of his periodic gambling trips to Las Vegas, Nevada, petitioner falsely represented to a longtime friend, Roy Kieffer, and various Kieffer family members (collectively, the Kieffers) that he could invest money for them in a Federal employee investment program, called "Stopgap Investments", with a guaranteed 30-percent annual return. In reality, there was no such investment program.

The issue before the Tax Court was whether Mr. Maher had committed civil tax fraud when he failed to report the Kieffers' "investments" as income. If it was fraud, the 75% fraud penalty would apply; also, one additional year would be open to tax assessment, as there is no statute of limitation for tax assessment when tax fraud is involved.

The Tax Court ruled that the behavior didn't quite rise to the level of tax fraud:

Petitioner's scheme to defraud the Kieffers was reprehensible, but respondent has not convinced us that petitioner had any specific intent to evade taxes. In this proceeding, petitioner has never denied that he fraudulently misappropriated money from the Kieffers and that it was wrong to do so, although he alleges that these misdeeds were an isolated aberration in his conduct. Petitioner maintains that he always intended to repay the Kieffers with interest for their "investments", and that he eventually did so, with liquidated damages, albeit pursuant to a consent judgment

Beh. The guy worked for the IRS, he stole his friends money, gambled it away, and didn't report it. Yeah, he was forced to pay it back, but Mr. Maher's behavior falls below the level we should expect of grown-ups. But maybe that's the reason I'm not a Tax Court judge. OK, maybe one of many, many very good reasons.

Cite: John V. Maher, T.C. Memo. 2006-14

The Skywalk office of "Stopgap Investments."

Link       Bookmark: del.icio.us • Digg • reddit