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.
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:
Tax Analysts subscriber-only coverage
TaxProf coverage of hearings, with links to testimony.
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:
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