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Tax Update Blog: May 2006 Archives

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May 31, 2006

lx.gifGE has electronically filed "the nation's largest tax return," at 237 MB, according to the IRS. In terms of paper, it would be 24,000 pages long.

Ah, what a fine use of our nation's intellectual resources -- brainpower that might be otherwise squandered developing new products to improve our lives.

Natural resource-wise, extensive research leads me to believe that electronic filing of the return could save approximately 14.3 trees. That assumes the 45 states with income taxes, plus DC, will accept an electronic version of the 24,000-page federal return, instead of insisting on a paper copy, and that the client will keep its own copy in electronic format. It also assumes that one tree yields 80,500 pages.

(Hat tip: The TaxProf.)

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May 31, 2006

The income tax law has always had strange treatment for health-insurance costs for self-employed taxpayers, partners, and S corporation owner-employees. For many years these folks could deduct none of their health insurance, except as an itemized deduction. The 7.5% of AGI floor on itemized health deductions made this worthless.

Over the years, an "above-the line" deduction was phased in erratically, starting at 25% of health insurance expense. In recent years these taxpayers could deduct all of their health insurance "above the line," without having to clear the 7.5% of AGI hurdle.

The IRS has decided to make it just a little harder for S corporation owners to qualify for this deduction. According to an announcement yesterday, S corporation shareholders will be able to take their health insurance costs "above the line" only when the S corporation has purchased the health insurance.

This means S corporation shareholder-employees need to make sure that they have their corporations purchase their health insurance and include it in their W-2 income; otherwise the IRS will challenge the deduction. Partners and sole proprieters are unaffected by the announcement.

(Hat tip: Taxable Talk)

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May 31, 2006

One of the cruel jokes in the 2005 "energy bill" was that many of its core tax benefits didn't apply in computing alternative minimum tax. The effect was to negate the tax for millions of taxpayers in high-tax states, like Iowa.

The recently-signed "Tax Increase Prevention and Reconciliation Act" fixes this problem for many of the personal energy credits. Unfortunately, they don't apply to some of the most highly-publicized tax credits.


These credits will now count for AMT:

Residential Energy Efficiency Credit. This credit is 10% of improvements to the "building envelope." This means roofing, doors, windows and insulation. It also is available in lump sums for certain appliances:

- $50 for each "advanced main air circulating fan";
- $150 for each "qualified" natural gas, propane, or oil furnace or water boiler, and
- $300 for "qualified energy-efficient property," including heat pumps, water heaters, and air conditioners."

These credits are limited to $500 in total, including a $200 limit on windows.

Solar credit

The 30% tax credit for residential photovoltaic, solar water heater and fuel cell property also now reduces AMT for 2006.

Be careful: thes credit only reduces AMT for 2006, even though the credits technically apply to property purchased through 2007.


The alternative vehicle credit, which applies to hybrid cars, still doesn't reduce AMT. That means most Iowans who can afford the Lexus 400h SUV probably won't be able to use the credit.

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May 31, 2006

The Tax Policy Blog notes that North Carolina wants to use its income tax law to cure a critical unmet need in our society:

You’ve all heard of the movie industry receiving special tax provisions and credits from jurisdictions all across the country trying to entice the next movie to be shot in their city or state, but now video game designers are trying to get in on the action. In the North Carolina legislature, the Video Game Producer Tax Credit has been introduced.

That's the great thing about the tax law. It can solve any problem -- even the little-known but obviously dire video game industry crisis in North Carolina. And if it means other taxpayers have to pay a little more, well, they can rest assured that the North Carolina legislature knows best how to spend their money.

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May 31, 2006

From today's Tax Analysts summary of Congressional News Releases:

Oil Execs Would Get 'Windfall' From Estate Tax Repeal, Waxman Study Finds

A May 30 release from Rep. Henry A. Waxman, D-Calif., said a study performed at Waxman's request found that if the estate tax is permanently repealed, six oil company executives could receive a windfall of up to $211 million.

Either they come from really wealthy families, or they've figured out a way to take it with them when they go...

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May 30, 2006

Tax Analysts reports ($link) that the down payment assistance industry isn't going down without a fight.

Earlier this month the IRS shocked the industry with Rev. Rul. 2006-27. The ruling holds that organizations that funnel money from home sellers to finance the down payments of their home buyers are not tax-exempt charities.

Now the industry has formed a coalition to fight for its right to continue its activities on a tax exempt basis. The coalition ( has asked Treasury Secretary Snow to suspend Rev. Rul. 2006-27. From the Tax Analysts story:

Still, the revenue ruling did not sit well with down payment assistance organization heads such as Kelly Schwedland, president of the Genesis Foundation and a spokesperson for the alliance. In a May 18 letter to Snow, Schwedland said Rev. Rul. 2006-27 jeopardizes economic growth and fails to consider previous IRS rulings. The IRS has "approved and recognized downpayment assistance organizations as 501(c)(3) organizations for almost a decade," Schwedland wrote. "In our original application to the IRS, we clearly stated our intentions of providing downpayment assistance and having seller fees provide for our funding source to future homebuyers. We received not only [IRS] approval in an advance ruling letter but also our final determination letter as recently as 2005."

If this is true, it's really an assertion that once the IRS screws up, it can't reverse the screwdriver.


The down-payment assistance folks (DPAs) come into a home sale when the buyer can't come up with a down payment. To get the sale closed, the seller "contributes" the needed down payment to the DPA, which then gives it to the buyer, net of its own fees. The lender, wanting to get a mortgage on its books, pretends this is a real down payment and the house sale closes.

The tax law requires tax-exempt entities to operate "exclusively" for charitable purposes. They say their purpose is to help people without down payments buy houses. The IRS says - I think reasonably - that their real purpose is to help sellers get their houses sold.

Consider this actual document pulled from a DPA's website:


The contract terms look more like a fee-based money-laundering service than a charity. Worse still, some DPAs have apparently asserted that the seller's "contribution" qualifies as a charitable gift, or at least hinted at it. That would be an egregious error.

Obviously the down payment assistance industry has a lot at stake. It will be interesting to see whether they can to convince the tax authorities, or Congress, that facilitating the issuance of substandard home mortgages with seller money is truly an exempt purpose.

Prior Coverage:


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May 30, 2006

The Tax Foundation is posting its historical archives to its website, including this great vintage graphic:


In 1940 the entire federal tax take was $5.7 billion? That's not enough to make a respectible hurricane relief bill nowadays. (Via the Tax Policy blog)

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May 30, 2006

The AccountingWeb has posted a nice roundup of the executive stock option backdating story.

AFTERNOON UPDATE: The Wall Street Journal continues its coverage with a profile ($link) of Norwegian U of Iowa prof Erik Lie. An excerpt:

He examined options that weren't granted the same date every year and found a striking pattern in which prices fell before the grant date, and rose soon afterward. He also discovered that the stock market as a whole also often rose following option grants at certain companies. "I said, 'look, it's uncanny how good these executives must be at predicting what will happen with future stock prices," he says. He began to wonder "that maybe it wasn't so uncanny."

Calling his hypothesis "novel," he wrote a paper entitled "On the Timing of CEO Stock Option Awards" that suggested that "at least some of the awards are timed retroactively."

"The results are provocative and might cause some investors to cry foul," he wrote. The paper was published a year ago in a journal called "Management Science." He and another researcher, Randall A. Heron, have since completed a forthcoming, follow-up study that looked at a 2002 change in regulatory law that now requires companies to report option grants within 48 hours. The study found that when companies reported options the same day they were granted, there was no pattern of share prices quickly rising. But the pattern continued when companies delayed reporting option grants.

Hmmmm.... So if there was a delay between the option grant and the announcement, prices went up after the grant date; otherwise, no. Funny how much foresight needed hindsight to work.

The WSJ also has coverage ($) of the firing of the general counsel of anti-virus software company McAfee for option-related causes.

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May 30, 2006

The Wall Street Journal reports ($link) that Henry Paulson, Goldman Sachs CEO, will replace John Snow as Treasury Secretary.

I never had the impression that Mr. Snow was a player in tax policy. This administration has yet to have a powerful Treasury Secretary; unless Mr. Paulson changes that pattern, serious tax reform has no chance.


Snow's Resignation Statement

Snow's resignation letter

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May 26, 2006

Sentences like this are what attract impressionable young lawyers into exciting tax careers:

Notice 2006-30, which informs trustees and middlemen of non-mortgage widely held fixed investment trusts (NMWHFITs) that the date for satisfying the qualified NMWHFIT exception in § 1.671-5(c)(2)(iv)(E) is extended by 60 days.

I wonder if they actually talk like that deep in the bowels of IRS headquarters? I'd love to see the pronunciation guide.

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May 26, 2006

Ken Lay hand Jeffrey Skilling aren't the only former executives who have made news the hard way recently. Former Iowan Andrew Mark Armstrong also has achieved unwanted attention. The Des Moines Register reports:

A "grade-A con man" who led an Elkhart company into bankruptcy, even while he spent its money on houses and cars, will spend 6 years in federal prison for his embezzlement and failure to pay withholding taxes, a federal judge ruled Thursday.

Andrew Mark Armstrong, 52, also will have to pay a $50,000 fine and at least $29,473 in restitution to make up for money he stole from health insurance and 401(k) accounts for employees of the now-defunct All-Tech Inc.

Federal prosecutors say Armstrong pocketed thousands of dollars from the Elkhart hydraulic company in 1999 and 2000 and deliberately didn't pay taxes that were withheld from employee paychecks. The money disappeared while Armstrong bought houses, liberally distributed All-Tech's petty cash, and leased more than 40 Cadillacs for himself and others.

The jury decided that he not only did he loot the 401(k) plan, he also failed to pay over federal withholding and employment taxes. If you ever want to see the inside of a courtroom, or a federal penitentiary, that's a good way to get there. Mr. Armstrong says he's seen enough:

"I have no desire to be in any court of law, anywhere, ever again for any reason."

Well, he has that covered for the next 78 months, anyway.

Mr. Armstrong was also fined $50,000 and required to make restitution. He also is probably liable for all employment taxes. Unfortunately for the employees of the looted 401(k) plan, he may come up short. Court documents indicate that he had trouble paying his lawyers even before he was convicted, and odds are that he won't have much earning power over the next few years.


Jury instructions

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May 26, 2006


The IRS has announced (Notice 2006-50) the procedure for obtaining refunds of the excise tax on long-distance phone services. The Treasury yesterday announced it was abandoning efforts to collect the tax, enacted to finance the Spanish-American War, following 12 straight court defeats.

Taxpayers, including 1040 filers, will be able to apply for a refund of the tax on their 2006 returns, which will have a new line for the refund. The IRS will only accept refund requests on regular 2006 income tax returns; they won't accept early refund claims made on the generic refund claim form, Form 843.

1040 filers will have a choice of collecting a "safe-harbor" amount yet to be determined or instead claiming a refund of their actual tax paid off of their phone bills from February 28, 2003 to August 1, 2006.

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May 25, 2006

I'm remiss in not posting to this week's Carnival of the Capitalists and Carnival of Personal Finance until now.

The Capitalists event has a a personal finance tip that saved one man $29,871.63. The Carnival of Personal Finance has an intersting post, "Ten good rules-of-thumb for investing."

There's also a new carnival in town: introducing the "Cavalcade of Risk", covering insurance topics. Submissions are being accepted now!

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May 25, 2006

After a long series of court defeats, the Treasury today conceded defeat and will accept that the excise tax on long distance phone service is invalid. From the Treasury press release:

WASHINGTON, DC – The U.S. Treasury Department today announced it is conceding the legal dispute over the federal excise tax on long-distance telephone service. The Department of Justice will no longer pursue litigation and the Internal Revenue Service (IRS) will issue refunds of tax on long-distance service for the past three years. Taxpayers will be able to apply for refunds on their 2006 tax forms, to be filed in 2007...

 Key Facts Regarding Tax Refunds:

  •   No immediate action is required by taxpayers. 

  • Refunds will be a part of 2006 tax returns filed in 2007. 

  • Refund claims will cover all excise tax paid on long-distance service over the last three years (time allowed given statute of limitations). Interest will be paid on refunds.

  • The IRS is working on a simplified method for individuals to use to claim a refund on their 2006 tax returns.  

  •  Refunds will not include tax paid on local telephone service, which was not involved in the litigation.

  • Originally established in 1898 as a "luxury" tax on wealthy Americans who owned telephones, the federal excise tax on telephone calls is not compatible with today's modern information-age society.

I hope you've saved your phone bills...

UPDATE: Taxable Talk has more, and the TaxProf has a roundup, with links to the IRS Circuit Court defeats.

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May 25, 2006

The Des Moines Register has a piece today on Erik Lie, the University of Iowa finance professor who helped expose the backdating of stock options by corporate executives:

Lie, a University of Iowa associate professor of finance, said he never set out to uncover what's being called the next big scandal to shake corporate America. In 2003, he began hunting for a correlation between option grant dates and price movements of the underlying shares.

Instead, his findings suggest some companies were manipulating the timing of the stock options they granted to top executives. The result pumped up the executives' pay.

Because the tax law puts caps on deductions for backdated options, some companies could end up owing millions in back taxes.

Working with data from Lie and other academics who have studied options, the Wall Street Journal reported in March on six companies that granted options whose dates repeatedly coincided with share price low points. The newspaper estimated that all six option grants made to Jeffrey Rich, the former chief executive officer of Affiliated Computer Services Inc., came just before sharp runups in the price of the Dallas company's share price. The odds of that occurring were one in 300 billion. The odds of winning the Powerball lottery with a $1 ticket are estimated at one in 146 million.

Rich denied to the paper that any backdating occurred, and said the timing was a result of "blind luck."

If I had that kind of blind luck, Angelina Jolie would accidentally call me at work and ask to buy me dinner and Lexus would accidentally deliver new cars to my house twice a year.

Link: Prior coverage of backdated options

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May 25, 2006

Kreig Mitchell says they may have done just that:

Another boon for taxpayers is that the new legislation includes a provision that says that offers are deemed accepted if not rejected by the IRS within 24 months after receipt. Personally I have witnessed offers that, had I not continued to follow up with the IRS, that would very clearly not been resolved within two years. I have also submitted offers that were simply lost by the IRS (the IRS records show that the offer was received, but it was never assigned to anyone or otherwise processed). Given this new provision, now taxpayers, who are incentivized to submit low lump sum offers, may well find that their offers are inadvertently accepted. Taxpayers may now attempt to forestall the already inefficient process. This is especially true now that the IRS offer-in-compromise workload is going to increase dramatically.

There's more, and it's all worth reading.

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May 25, 2006

A word to the wise from

Don't take tax advice from sales people.

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May 25, 2006

Raise a cold one this Memorial Day weekend to Joel Shoenmeyer, proprietor of the Death and Taxes blog, as he goes in for "some (hopefully) minor surgery" next week.

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May 24, 2006

The Section 199 regs went final today. The Treasury press release says:

The final regulations include many of the rules contained in proposed regulations issued in October 2005, and the initial guidance, Notice 2005-14, issued in January 2005. In addition, in response to more than eighty comment letters received regarding the proposed regulations, the final regulations provide many additional comprehensive rules, definitions, simplifying conventions, and examples to ease the administrative burden on taxpayers.

While the Regs take effect for tax years beginning next month and later, they are optional right away, so they can even be applied to extended 2005 calendar year returns that haven't been filed yet.

This means I have to get to read them. Bleagh.

These regulations don't address the changes to Section 199 enacted earlier this week. Congress couldn't let the law stand still long enough for the Treasury to finish its regulations.


Final regulations
Rev. Proc. 2006-22, addressing the computation of W-2 wages for purposes of computing the deduction.

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May 24, 2006

Texas has just dumped its old "franchise tax" and replaced it with a new "Taxable Margin Tax," or TMT, effective in 2007. The result will be to make many businesses Texas taxpayers next year, often to their unhappy surprise.

In enacting this new tax Texas joins Ohio, Washington and Michigan in adopting business taxes that rope in more out-of-state folks. It works this way because these taxes have lower "nexus" standards than traditional income taxes.

The new tax is based on gross receipts. Taxpayers can choose to deduct one of the three following deductions to get to the tax base:

-30% of gross receipts;
-Cost of goods sold (inventory costs); or
-Compensation expense (maximum to $300,000 per employee).

The resulting number is subject to a 1% tax, or a 1/2% tax for wholesalers and resalers. The tax base is apportioned based on the single factor of gross receipts for multistate taxpayers. Texas service providers, such as attorneys and accountants, apportion their gross receipts based on where the services are performed. A few other minor modifications also apply.

This tax applies to almost all business entities, including sinngle member LLCs and limited partnershisp. Only general parnterships owned by individuals, sole proprietorships, grantor trusts and a few other entities are exempt. Small taxpayer exemptions exclude taxpayers with less than $1,000 in tax or $300,000 in total revenues. This means that taxpayers with Texas sales under $147,000 will not be affected, for example (147,000 x 70% x 1% < $1,000).


A federal law (PL 86-272) keeps states from imposing income taxes on taxpayers with activities limited to soliciting business in a state and filling orders from out of state. These limits also applied to the old Texas franchise tax. Other taxes, like sales taxes, the new Ohio Commercial Activity Tax, and the Texas TMT, have a much lower bar to clear when taxing out-of-state taxpayers. This "commerce clause" rule applies when taxpayers have just about any regular presence in a state, including salesmen and probably including commissioned independent sales representatives.

We can expect Texas to issue more guidance on these rules in the coming weeks. Expect this guidance to take a expansive view of what it takes to be Texas-taxable. Meanwhile, most taxpayers with significant Texas revenues can look forward to becoming Texas TMT taxpayers in 2007.

Links (pdf):

Text of HB 3
Explanation of TMT by Sutherland Asbill & Brennan LLP law firm
Dallas-Ft. Worth Star Telegram

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May 24, 2006

The BenefitsBlog notes the contrast between the signing of the most recent tax bill and the "drab" signing of the 1986 Tax Reform:

No brown suits, one pink suit

One brown suit, no pink suits

Considering how much worse the tax code has gotten since 1986, I'd be happy to see a revival of anything from the '80s, even giant eyeglass frames (but not Huey Lewis), to get back to 28% top rates and a trimmed-down tax code.

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May 23, 2006

Tennessee psychic David Marius Guardino was convicted yesterday on tax evasion charges in Knoxville Federal Court:

Guardino lives in Caryville and claims he is both seer and sorcerer, able to predict the future using a mix of telekinesis and clairvoyance. He makes big bucks in the soothsaying business, but Assistant U.S. Attorney Charles Atchley said he hid mounds of it from the IRS when filing tax returns for 1998, 1999 and 2000.

Omm... ommm.... I see his sentence! I see him serving 21-27 months in prison under the federal sentencing guidelines for a first-time offender, at a tax loss of $150,000. Mr. Guardino shouldn't count on my clairvoyance, though; my last sentencing prediction was sadly low.

Link: Complete Tax Update Guardino coverage.

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May 23, 2006

The Wall Street Journal continued to advance the story of backdated executive stock options ($link). The WSJ fingered 15 more companies whose executives managed in an absolutely uncanny way to have their options priced the Wal-Mart way: always the lowest price.

If the executives were just that lucky, they had an honorable way of saving millions of dollars in stock exercise costs. Of course, the suspicion is quite strong that it wasn't just luck, and that options were in fact backdated. If that's the case, their employers stand to lose millions of dollars in deductions.

The WSJ shows a number of examples of this amazing luck, and the odds of such low option prices happening purely by chance. A sample of their charts:

(Source: Wall Street Journal)

Take these guys with you next time you go to Prairie Meadows to play the ponies.

Prior Tax Update coverage starts here.

UPDATE: The WSJ Law Blog has a subpoena scorecard.

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May 23, 2006

As part of Hurricane Preparedness Week, the IRS has issued guidelines for taxpayers to prepare your finances for natural disasters.

The best leaders set a good example for the rest of us. Congressman William Jefferson of New Orleans, a member of the tax-writing House Ways and Means Committee, is a case in point. We will review the IRS guidelines and note how well he complies with them in his own financial life.

The IRS says:

Take Advantage of Paperless Recordkeeping

Many people receive bank statements and documents by e-mail. This method is an outstanding way to secure financial records. Important tax records such as W-2s, tax returns and other paper documents can be scanned onto an electronic format.

It appears that Congressman Jefferson falls short in this area:

William Jefferson, a Democratic congressman from New Orleans who is being investigated for bribery, was caught on camera taking the money in $100 notes from an FBI informant, according to the document. His conversations were also recorded.

"All these damn notes we’re writing to each other as if we’re talking, as if the FBI is watching," he allegedly told the informant posing as a businesswoman, who was wearing an FBI recording device.

Far too much paper under the circumstances. Of course, he may have scanned his notes into digital format later. And it's entirely possible that he made sure that no records existed, on paper or otherwise.

The IRS says:

Document Your Valuables

One option is to photograph or videotape the contents in your house, especially items of greater value. The IRS has a disaster loss workbook (Publication 584) that can help you compile a room-by-room list of your belongings.

Give the Congressman an inadvertent A+ here:

A Louisiana congressman, said by the government to have been videotaped accepting $100,000 in $100 bills from an informant, said Monday he would not resign. He called an FBI search of his Capitol office “an outrageous intrusion.”

“I believe that it's totally inappropriate to use the police powers of the federal government to come into the office of a congressman. This hasn't happened before,” Democratic Rep. William Jefferson told reporters.

Jefferson, under investigation for bribery, declined to talk about the videotape or other details alleged in an FBI affidavit presented to a judge as evidence for a warrant to search his office Saturday night and Sunday.

Not only were his valuables videotaped, but his videotape was secured offsite. Well done.

The IRS says:

Check on Fiduciary Bonds

Employers who use payroll service providers should ask the provider if they have a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.

No evidence that Mr. Jefferson did anything like this. Would such a search have turned up the government informant who is causing the Congressman so much trouble?

The IRS says:

Update Emergency Plans

Emergency plans should be reviewed annually. Personal and business situations change over time and so do preparedness needs.

One important aspect of emergencies is to make sure you have enough emergency cash, and that your refrigerator is stocked. Hat's off to the congressman on this score:

The dilemma was complicated by new details contained in an 83-page affidavit unsealed on Sunday, including allegations that the FBI had videotaped Jefferson taking $100,000 in bribe money and then found $90,000 of that cash stuffed inside his apartment freezer.

Mr. Jefferson also had a backup plan for dealing with his house in Louisiana during Hurricane Katrina:

Amid the chaos and confusion that engulfed New Orleans after Hurricane Katrina struck, a congressman used National Guard troops to check on his property and rescue his personal belongings — even while New Orleans residents were trying to get rescued from rooftops, ABC News has learned.

Finally, the IRS has comforting advice:

Count on the IRS

In the event of a disaster, the IRS stands ready to help. The IRS has valuable information you can request if your records are destroyed.

I think that in the coming months, Mr. Jefferson truly can count on some attention from the IRS.

So how does the congressman stand up? A B, I'd say. He kept his refrigerator full, had solid backup plans to secure his property in an emergency, and had his valuables videotaped; his failure to get bonding for his associates and his excessive use of paper records keep him from getting full marks. We can all learn from his fine example.

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May 22, 2006

Today I learned of the existence of an liberal Iowa tax policy think tank, "Iowa Fiscal Central." The organization web page says it's a collaboration between David Osterberg's Iowa Policy Project and the Child & Family Policy Center. Among their recent articles is "Revitalizing Iowa's Corporate Income Tax," which suggests ways to make Iowa's corporation tax useful. I think the idea of reviving Iowa's useless corporation tax is misguided - repeal makes more sense - but the piece makes thoughtful arguments and would probably be part of the tax policy of a Fallon governership. I plan to address the article in more detail soon.

I'm not aware of direct conservative/libertarian counterpart to Iowa Fiscal Central, though the Public Interest Institute does some work in this area. Iowans for Tax Relief is more a loophole lobby rather than a coherent tax policy shop.

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May 22, 2006

The arm of the tax law is long:

An American futures trading guru and promotional speaker who promises to show people how to "beat the share market" has been arrested in Sydney for alleged tax evasion.

Larry Richard Williams, 64, had just arrived on a Qantas flight from South Africa on Saturday when he was escorted from Sydney Airport by Australian Federal Police.

The US Internal Revenue Service is seeking his extradition for $US1.5 million ($A1.99 million) in alleged tax evasion between 1999 and 2001.

Mr. Williams is a colorful speaker and author known for trading "live" during his speeches. His works include:

Day Trade Futures Online and
How I Made $1,000,000 Trading Commodities Last Year.

I'll nod to the obligatory joke of "I started with $10 million," though I'm sure that's generally how commodity traders do end up with $1 million. I think the real money to be made in commodity trading, exceptional traders aside, is in writing books and making speaking tours.

How did he get in trouble? The Sydney Morning Herald gives only sketchy detail:

The Virgin Islands resident is alleged to have "wilfully and affirmatively" attempted to evade paying taxes on royalties from his 10 books and earnings from the international speaking circuit.

Williams, who has twice run for the US Senate in the state of Montana, boasts he is "the only futures trader in the world to repeatedly trade $1 million of his own money live at seminars around the globe''.

There are clues here. One of them is the indication of both Montana ties and Virgin Islands "residence." Some financial professionals have claimed U.S.V.I. residence while continuing their U.S. activities. Some of them have tried to use Virgin Islands "development incentives" to shelter their income from U.S. taxes. The IRS doesn't care for such strategies, and Congress last year passed new rules to help the IRS address them. If the charges against Mr. Williams involve such U.S.V.I. shelters - and we don't know yet whether they do - it will not be comforting at all for other U.S.V.I. "residents."

Meanwhile, Mr. Williams has logistical problems:

He was due to begin a month-long speaking tour of New Zealand and Australia in Wellington today, and had flown into Sydney at the weekend to fulfil media commitments.

But instead he appeared today before Central Local Court, where defence lawyer Chris Watson described Williams as a well-known business identity who drew audiences of thousands to his workshops.

We'll be watching this. Meanwhile, Russ Fox is keeping his eye on other parts of the tax crime scene.

UPDATE: There's a Hollywood Connection:

THE father of Michelle Williams, who is engaged to the Australian actor Heath Ledger, has been arrested on arrival in Sydney by federal police pending extradition to the US on a tax evasion charge.

Larry Richard Williams, 64, who is widely regarded as a business guru, is the author of books such as Trade Stocks and Commodities and Insiders, The Right Stock at the Right Time and Day Trade Futures On Line. He is in high demand to spread his wisdom to would-be share traders and serious investors.

mw.jpgMs. Williams appeared in Brokeback Mountain as Mr. Ledger's character's wife. This movie is apparently about the outdoors, or something. She also starred in Dawsons Creek, which I understand was a T.V. show.

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May 20, 2006

Did you know that there is a blog devoted to the Des Moines restaurant scene? (No cracks about "What? Wendys or DQ?", you out-of-town elitists!) I didn't, until today when I was Googling while trying to figure out where to go for dinner. Ladies and gentlemen, the Des Moines Restaurants blog.

The bloggers explain themselves:

We are "A" and "D," experienced food critics, writers, publishers and diners. "A" is a successful cookbook author, recipe creator, food writer, extraordinary cook and was a test kitchen chef for several major television cooking series, including The Great Chefs of the World; The Great Chefs of New Orleans; The Great Chefs of the U.S.; The Great Chefs of the Southwest; and The Great Chefs Jazz Brunches. "D" is an avocational gourmand, an author and culinary publisher, and has cultivated a life of gourmandise on four continents, dining in, savoring and reviewing many of the world's greatest restaurants. Both "A" and "D" have extensive knowledge of various cuisines, techniques, specialty ingredients, U.S. and world wines, and the practice, service, lore and Joy of the Table.

Having each returned to Iowa from lives spent in the food meccas of the west and the east, we believe Des Moines to be one of the great treasures of American living and one of the developing culinary bright spots of the Midwest.

Reviews so far include old Des Moines warhorses like Tumea and Sons, Latin King and Jesse's Embers, as well as some of the newest spots in town. Comments are open, so you can argue with the reviewers. Citizen journalism at its most delicious...

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May 19, 2006

Maybe when luck has a little too much help (WSJ $link):

In a dramatic widening of the investigations into potential stock-option abuses, federal prosecutors in Manhattan have launched criminal probes of at least five U.S. companies.

Caremark Rx Inc., SafeNet Inc., Affiliated Computer Services Inc. and Vitesse Semiconductor Corp. said Thursday that they had received subpoenas from the U.S. attorney for the Southern District of New York. Late Wednesday night, giant health insurer UnitedHealth Group Inc. said it also had received a subpoena from the same prosecutor, along with a document request from the Internal Revenue Service.

The tax issue arises because if stock options are backdated so that the cost to exercise them is lower than the stock price on the real option issue date, special limits apply to disallow executive compensation deductions. Usually a company can deduct the amount that its stock price exceeds the exercise price when the executive finally exercises the option; this is the same amount the executive is taxed on. If the option is backdated, the deduction (but not the executive's taxable income) is capped at $1 million.

If a company doesn't get caught, backdating the option date to the lowest point of a market trough saves the executive a lot of money when he pays the exercise price. You can't always count being so lucky that the compensation committee issues options only at the month's market low.

A WSJ illustration shows this better than I can explain it:


The Wall Street Journal ($link) discusses why this may be more serious than just owing the IRS some millions:

Backdating itself isn't necessarily illegal. But if options' strike price and grant dates are deliberately and improperly changed, that may constitute fraud.

Backdating "is not illegal per se but you've got to look at all the circumstances," says S. James DiBernardo, a partner at Morgan Lewis & Bockius, who works in the firm's compensation practice, which designs and implements executive compensation plans. "It's not black and white." It is in disclosure and financial reporting where companies can get into hot water. It's not because of the options themselves, rather it's the way the companies treat backdated options for financial and tax purposes and regulatory disclosure that is drawing scrutiny.

All of this activity on backdated options must be bitter vindication to IRS whistleblower Remy Welling, who lost her job when she went to Congress for help after the agency refused to assess a taxpayer in a similar case.

Other Coverage:

New York Times


White Collar Crime Prof Blog

Prior Tax Update Coverage:




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May 19, 2006

How often does this tax plan work?

Paul Jensen is charged with presenting false claims to the IRS for more than $100,000 in tax refunds and failing to pay taxes on more than $500,000 in income.

The indictment includes three felony counts of false claims and three more of tax evasion.

The indictment said Jensen created "an International Academy of Lymphology" auxiliary church, opened a bank account in its name and set it up so only he could sign on the account. He claimed the church had a tax-exempt status.

Considering the, er, nerve it takes to do something like that, he should have named the church for a different gland.

More Coverage:

Taxable Talk

Tax Policy Blog

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May 18, 2006

The Wall Street Journal today has another article ($link) on the apparent popularity of backdated options:

Federal prosecutors in Manhattan began a criminal probe of options-granting practices at UnitedHealth Group Inc., and Vitesse Semiconductor Corp. fired three top managers, including its chief executive officer, in the latest developments from a stock-options scandal that is roiling corporate suites.

UnitedHealth also said the Internal Revenue Service had made a request for documents, suggesting that the agency may be looking at the tax implications of possibly misdated stock options at the giant health insurer. UnitedHealth previously said that because of a "significant deficiency" in its options administration and accounting, it may need to restate at least three years of financial results and lose tax deductions.

The tax law caps executive compensation deductions if the "strike price" of stock options is lower than the stock's value on the date the option is issued. It appears that a number of companies backdated options so their price would be lower, saving the executives money at exercise time. This could cost companies millions of dollars in executive salary deductions.

Link: Prior Tax Update Coverage.

Additional Coverage:


Twin Cities Business Journal

New York Times

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May 18, 2006

President Bush signed the tax reconciliation bill into law yesterday. The bill extends lower dividend and capital gain rates and the increased Section 179 deduction for two years; it also provides for a one-year increase in the AMT exemtpion.

The TaxProf has comprehensive coverage, including a video that lets you relive the vivid moment of the bill signing.

Prior Tax Update coverage here.

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May 18, 2006

Illinois lawyer-blogger Joel Schoenmeyer notes the story about the Iowa granny who wants no misunderstanding of her health-care directive:


Mr. Schoenmeyer says there are better ways to do this:

I agree with Bob Cowie, chairman of the Iowa Bar Association's probate and trust law section, who is quoted as saying that "[t]here are easier ways to do it than that," such as signing a living will or authorizing a medical power of attorney.

Easier, but not so stylish.

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May 17, 2006

The IRS has issued (Rev. Rul. 2006-29) the minimum interest rates for loans made in June 2006:

-Short Term (demand loans and loans with terms of up to 3 years): 4.99%
-Mid-Term (loans from 3-9 years): 5.06%
-Long-Term (over 9 years): 5:32%

Historical AFRs are available via the “Links” page at

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May 17, 2006

The Iowa Rainforest is dead. EarthPark lives.

This is tremendous. Did they have to buy franchise rights from the South Park people? Will they have a Starvin' Marvin exhibit?

And am I the first one to call it EarthPork?

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May 17, 2006

Accountants nationwide received this cheerful note this week from their professional association, the American Institute of Certified Public Accountants:

(click to enlarge)

The letter tells the sad story about how a hard drive, sent out for repair "in direct violation of the Institute's internal control policies and procedures," has gone missing. Maybe it's not in the happy and capable hands of an identity theft ring somewhere outside St. Petersburg.

Fortunately, the AICPA will use our dues to pay for a year of free credit monitoring, so we can watch online if (while?) strangers shred our credit ratings.

Tick Marks blog has more.

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May 17, 2006

If you automatically endorse employees in a 401(k) plan, you'll improve participation. That may seem obvious, but auto-enrollment is a new thing in the benefit plan area. BenefitsBlog reports on a Hewitt study that shows how this works.

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May 16, 2006

hatch100.jpgOutwitted by the tax law and outplayed by the IRS, the first winner of the "Survivor" TV series now must outlast a 51-month prison term.

U.S. District Judge Ernest Torres sentenced Richard Hatch on tax evasion charges today in Providence, R.I. The sentence was at least a year longer than expected because the judge said Mr. Hatch lied in court.

How could the judge doubt this story:

The reality champ's defense attorney dropped a bombshell Friday at Hatch's federal tax evasion trial, alleging that Survivor producers struck a deal with Hatch while he was a contestant on the show, agreeing to pay the taxes on his million-dollar prize if he won.

The bargain purportedly came about after Hatch allegedly caught some of his fellow contestants cheating by having friends sneak food to them on the island. He told producers, who ultimately attempted to buy his silence, the story goes.

Of course. He was the only honest guy on the show. He catches his opponents cheating and tells the producers, who corruptly buy his silence by promising to pay his taxes if he wins. Then they don't corruptly keep him from winning. And they welsh on the deal.

Uh huh.

I predicted a 36-month sentence, based on federal sentencing guidelines. I didn't realize that he really got on the wrong side of the judge. Good thing I'm not anybody's defense attorney.

The TaxProf has the definitive roundup, but I have the headline that will get the creepiest search engine hits.

Link: Tax Update coverage of Richard Hatch.

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May 16, 2006

After its victory in yesterday's Supreme Court Cuno decision, DaimlerChrysler's spokesman W. Frank Fountain is feeling his oats, reports Tax Analysts ($link):

"Congress and the states should seek legislation to reinforce the ability to use tax incentives as a tool to compete for investment and jobs," Fountain said. "Such legislation would be an important step to make the U.S. a more attractive destination for capital investment in this intensely competitive global economy. A wide range of business, labor, minority and civic groups, along with elected officials from both parties, voiced the importance of economic incentives to U.S. competitiveness and supported DaimlerChrysler's position in this case."

Running this statement through our handy "what they mean" software algorithm (patent pending), we get:

We at DaimlerChrysler will never forget that we still exist only because of government largesse in the Iacocca era. Government boodle will always be a cherished part of our business plan. We will gang up with gullible local politicians to crush any attempts to keep us from playing communities off against one another, selling their small taxpayers out to bribe us, all so we will throw them a few bones and ribbon-cuttings.

To test the alogorithm, we also threw in this quote from Jon Myers, an Indiana economic development official:

“It’s a big sigh of relief for economic development people everywhere”

This translates as:

"If we couldn't tax our existing businesses to lure and subsidize their competitors, we economic development professionals would have to find other work."

I think the algorithm is nearly ready for beta testing.

Link: complete Tax Update Cuno coverage.

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May 16, 2006

The sun doesn't want to come out in Des Moines this morning, but there's still a Carnival of Personal Finance to brighten up your day. The Carnvial, hosted this week at 2million blog, is heavy this week on 401(k) investing and savings plans. It also features a great piece by Hank Stern on how universal life insurance, The Policy that Fell to Earth. If you ever wondered what UL is about, this is a great place to learn.

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May 15, 2006

A rare tax post from Ann Althouse:

It's hard being a plaintiff who:

1. files a case in state court,

2. has the defendant remove the case to federal court,

3. moves to remand the case on the ground that you don't seem to meet the requirements for standing in federal court,

4. loses that motion,

5. litigates the case in federal court and ultimately wins in the Court of Appeals,

6. has the Supreme Court grant certiorari and now must argue that you do have standing in order to preserve the victory, and

7. loses when the Supreme Court decides that you don't have standing.

That happened to the plaintiffs in DaimlerChrysler Corp. v. Cuno, decided today.

Prior coverage here. The Tax Foundation's blog, which strangely supports the right of states to have beggar-thy-neighbor corporate welfare incentives, crows here.

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May 15, 2006

The Supreme Court today used technical grounds to dismiss a challenge state corporate welfare tax incentives. The court ruled that the plaintiffs in Cuno lack standing to sue against the incentives.

This is not a surprising result; the Court telegraphed this approach when it asked the parties to submit briefs on the standing issue. It leaves open the substance of the claim that corporate tax incentives violate the commerce clause of the constitution, but it pushes any resolution of the issue down the road.

If the court had ruled with the plaintiffs, many of Iowa's tax credits would likely have become invalid.

The TaxProf has coverage and links.

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May 15, 2006

One benefit of having an S corporation is the ability to deduct corporate losses on your personal return. S corporation income and loss aren't taxed on the corporate return; instead they pass to the owners' 1040s. In a startup business such losses can generate tax refunds and much needed cash.

Of course, the tax law restricts your ability to use S corporation losses. The most basic restriction is that you can only deduct losses to the extent of your basis in S corporation stock and your loans to the S corporation. But you have to be careful; if the IRS thinks you are playing games with your basis, they won't hesitate to call you on it.

Basis starts with what you pay for the S corporation stock. It is increased by your share of S corporation income and by any contributions you make to its capital. It's reduced by your share of losses and distributions.


One strategy the IRS dislikes is "circular" arrangements, where taxpayers borrow money from one business they own, loan it to the S corporation to create basis, and then have the S corporation "loan" the money back to where it started. A new "Technical Advice Memorandum" shows how the IRS fights these deals.

A married couple owned a partnership and an S corporation; each spouse owned 50% of the partnership and the S corporation. The partnership loaned money to the S corporation, which was a tenant of the building owned by the partnership. The money loaned by the partners to the corporation returned to the partnership as rent payments.

There were some other facts that didn't help. These loans were made over a series of years, and all of them were made right before year-end - clearly with taxes in mind. Not all of the loans had a fixed interest rate, and only one partial principal payment - and no interest payments - were ever made. The IRS decided that there wasn't enough to these "loans" to recognize them as giving the owners basis to take losses:

As a result of the circular route of funds, the economic insignificance of the terms of the notes, the lack of repayment on the notes, and the limits imposed on the Taxpayers ultimate liability to [the partnership], it is clear that no actual economic outlay that left the Taxpayers poorer in the material sense occurred. Therefore, the loans... did not give rise to basis in indebtedness within the meaning of § 1366.


By the time the IRS found out about the circular cash flows, some of the years were closed by the three-year statute of limitations. The IRS couldn't recapture the taxes from those years, so it set up a "suspense account" arrangement. No additional losses for the S corporation will be allowed until the "excess" losses that shouldn't have been disallowed are made up, either by S corporation income or cash contributions.

THE MORAL? If you need basis in your S corporation and you don't have cash to contribute yourself, it's best to borrow from a third-party lender, like a bank. If you need to get the funds from a related entity, like another corporation or partnership, take the funds as a distribution, rather than a loan, and don't let the S corporation send the money right back to where it started.

Related links:




Cite: TAM 200619021

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May 15, 2006

Former Tyco tycoon Dennis Kozlowski was a busy man - so busy that he forgot about $25 million in income when he filed his 1999 return. One nice thing about being a tycoon is that "your people" can remind you of the little things. Little people like Robert Morgenthau, the Manhattan district attorney.

Mr. Morgenthau last week agreed to settle sales and income tax evasion charges with Mr. Kozlowsky for payment of $21.2 million:

In June 2005, Mr. Kozlowski, and Tyco's former financial chief, Mark H. Swartz, were convicted of stealing $600 million from the company and were sentenced to up to 25 years.

But Mr. Kozlowski was initially indicted in June 2002 on charges of failing to pay sales tax on millions of dollars in artwork.

In the settlement of that case yesterday with the Manhattan district attorney, Robert M. Morgenthau, Mr. Kozlowski agreed to pay $3.2 million in sales tax and interest on the 12 paintings, of which more than $2 million is sales tax.

He also agreed to pay $17.9 million in state and city income tax, interest and penalties, of which $8.3 million represented the tax liability. Though he was never charged with income-tax fraud, it is part of the agreement.

Actually, there may have been more than forgetfulness involved here. The indictment said that when Mr. Kozlowski bought expensive artwork for his Manhattan digs, he arranged for the galleries to ship empty art crates to Tyco's New Hampshire offices so it would appear the artwork was shipped out-of-state - and therefore not subject to sales tax. "Oh, I forgot to put the painting in the box. What the heck, I'll just drive it home..."

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May 12, 2006

Remember the glorious days of the 5,000 point NASDAQ, when grown men quit their jobs to spend their afternoons with Ameritrade and Maria Bartiromo?

Most of those day traders ended up learning an unpleasant fact about the tax law: capital loss deductions are limited. Normally you can only deduct your capital losses to the extent of your capital gains, plus $3,000. By dint of hard work, careful study of the markets, and a frantic trading pace, many day traders lost lots more than that.

For such occasions, the tax law has an obscure but handy out: the "Section 475(f) election." Taxpayers who make this election have to "mark to market" all of their securities held at year end, taking into account all of their unrealized gains and losses each December 31. More importantly, such taxpayers also must treat their stock gains and losses as ordinary. That means income is taxed at regular rates, but losses are fully deductible.


After winning a big class action lawsuit in 1999, Birmingham, Alabama attorney L.S. "Lanny" Vines decided he'd had enough of law. He closed up his law practice, opened up accounts with DLJDirect and Ameritrade, and got busy with the market in the fall of 1999.

His new career wasn't as successful as his law practice. By April 14, 2000, when margin calls forced the liquidation of his trading accounts, Mr. Vines had lost $25,196,151.54. While that amount would carry forward indefinitely, he would have to live 8,398 more years to use those losses at the rate of $3,000 per year.

Considering all this, it's not surprising that Mr. Vines extended his 1999 return. He got to chatting about his trading woes with a friend of his, who told him how the Sec. 475(f) election could enable him to take these losses as ordinary. Unfortunately for Mr. Vines, the IRS rules governing the election, Rev. Proc. 99-17, required the election to be filed by April 15, 2000.

The tax law has a mulligan for late filed elections called "Section 9100 relief." Taxpayers can ask the IRS to accept a late election, and the IRS is to grant the relief if:

1. The taxpayer acts reasonably and in good faith, and

2. The interests of the Government will not be prejudiced by granting relief.

Mr. Vines hired Caplin & Drysdale to ask for the Section 9100 relief. The IRS decided its "interests" would be prejudiced, and it denied the relief.


The Tax Court yesterday ordered the IRS go grant the Section 9100 relief. The Tax Court seemed to rely largely on the fact that Mr. Vines made no trades after he applied for the relief, his tax advisor didn't tell him about Section 475(f) (in fact, didn't know about it), and he applied for the relief as soon as he learned about Section 475.

Petitioner did not realize any gains or suffer any further losses between the time he should have filed his section 475(f) election and the date he actually filed the election. Petitioner will be entitled to no more than he would have been entitled to had he filed his section 475(f) election by the date prescribed in Rev. Proc. 99-17, supra, which is precisely the purpose of section 9100 relief: to "permit []taxpayers that are in reasonable compliance with the tax laws to minimize their tax liability by collecting from them only the amount of tax they would have paid if they had been fully informed and well advised."

And so what's Mr. Vines up to? He returned to the embrace of his jealous mistress:

High-profile trial lawyer Lanny Vines has returned to full-time practice after an 18-month sabbatical.

A Magic City native and plaintiffs' attorney known for consumer class-actions and catastrophic injury cases, Vines is building a new litigation department at Birmingham's Gorham & Waldrep PC, whose primary clients are companies and government agencies.

Vines, 62, retired in September 2000 after spending six years on a nationally watched insurance fraud case. He shuttered Emond & Vines, the firm he founded with Cliff Emond in 1966, although he continued working on several of its cases from home.

"I got burned out," says Vines, a former president of the Alabama Trial Lawyers Association. "But I overreacted by retiring. I was miserable, missing my jealous mistress, the law."


The Moral? Day trading is dangerous, but if you have a Section 475(f) election, you can at least get your tax losses. And if you miss a deadline for a tax election, you may get a mulligan if you act quickly when you find out about it.

Cite: L.S. Vines, 126 T.C. No. 15.

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May 12, 2006

The Senate yesterday voted 54-44 to send the Tax Reconciliation bill to President Bush for signaure. The Tax News blog has coverage of the debate here.

Prior Tax Update coverage here.

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May 11, 2006

Well, it wasn't just alien luck after all.

Back in March the Wall Street Journal ($link) noted how the stock options of Affiliated Computer Services CEO Jeffrey Rich were always priced at exactly the low point of a stock decline - minimizing his option cost and maximizing his profit. Mr. Rich attributed his amazing streak of low option prices to "blind luck." The WSJ said he was lucky indeed - in fact, they said, a lottery ticket is twice as likely to win the Powerball drawing as his options were to be priced so consistently at market troughs.

Well, apparently Lady Luck had a little help:

Affiliated Computer Services Inc.'s shares lost ground Thursday after the technology outsourcer delayed its quarterly filing with regulators and expects to take a charge of around $40 million related to an internal probe into its stock-option grant practices.

ACS admitted in a filing with the Securities and Exchange Commission overnight that it granted stock options to executives with effective dates that "generally preceded" the date on which all members of its board's compensation committee gave written approval.

This is bad luck for the ACS tax department. The failure to properly price the options on the actual issue date will likely cost the company a lot of its tax deductions.

An excecutive who exercises a normal (non-ISO) stock option has income to the extent of the "spread" - the amount that the stock value exceeds the price paid to exercise the option. The tax law limits annual compensation deductions to $1 million per each public company executive. The biggest loophole to this rule is for stock options; the spread is deductible, even if over $1 million, if it is "solely" from the increase in option value after the grant date. When options are issued with a price lower than the stock value on the grant date, they flunk the "solely" test.

Apparently UnitedHealth is also questioning the luck of its own executives. The Wall Street Journal ($links) has more:


WSJ on United Health

Tax Update prior coverage




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May 11, 2006

We have discussed the tax case of Tennessee psychic David Guardino. For a guy who can see what's coming, he seems to make some strange decisions:

Police say a self-proclaimed psychic charged with tax evasion is now accused of forcing his way into a motel and attacking his wife and a man she was staying with.

David Marius Guardino of Caryville had been allowed to remain free pending trial in federal court on the tax evasion charges.

Now, a petition to revoke his pretrial freedom has been filed following the alleged April 27 incident with his wife.

Very strange. He filed a return he had to know would get him in trouble, and he married a woman he had to know he'd find in a motel with another man. Clairvoyance must be overrated.

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May 11, 2006

An era is coming to an end with the impending shutdown of Maytag's Newton facilities. The causes of the closure will be debated, but ultimately it appears Maytag was unable to move quickly enough to deal with unforgiving worldwide competition. While there will be political finger-pointing, the decision was beyond the politicians. The company's fate was decided by years of management decisions and market forces.

Yet there are policy lessons to be drawn. Consider this item from the Des Moines Register today:

An incentives package, including state money for job training, tax incentives and the promise of a new state-of-the-art factory, couldn't sway company officials from announcing it would shut down operations in Newton beginning this year.

Gov. Tom Vilsack called the state's offer the largest incentives package offered in Iowa. Details of that plan, which could have cost Iowa as much as $95 million, included:

- Building the company a high-tech factory at a cost of $50 million to $75 million. The state would have leased it to the company.

- More than $20 million to retrain Maytag employees to work for Whirlpool.

- Tax and energy incentives that were being ironed out.

The governor's office and state Department of Economic Development declined to provide specific details, saying state officials remained in negotiations with Whirlpool in hopes of keeping other Iowa Maytag facilities open.

"He all but gave them the keys to the state," said Rep. Paul Bell, a Democrat from Newton.

One lesson? States can't bribe their way to a sound economy through subsidies and incentives. The governor was willing to tax every other business in the state to give Whirlpool $41,667 for each job that would be kept in Newton. Even that deal wasn't sweet enough. Apparently Whirlpool is more concerned with running their worldwide business than in trolling for subsidies.

The best that politicians can do for economic development is stay out of the way. That's very hard for them to do, of course. Staying out of the way means enacting a simpler tax system with a broad base and lower rates. That means giving up all of the futile "economic development" credits and spiffs built into the tax code. The Tax Policy blog has an excellent post on this topic, where they quote the president of Pepsi's worldwide operations:

The current U.S. tax code provides a variety of incentives to businesses through credits and other preferences, and PepsiCo benefits from many of these credits and preferences.

Nevertheless, if I were asked to choose between increased credits and other preferences or a lower corporate tax rate, again I would choose the lower tax rate.

As noted above, a reduction in the corporate tax rate would allow businesses to determine for themselves how best to deploy their earnings in order to maximize returns to the business and to the shareholders.

A repeal of Iowa's horrible corporate tax would send a much better message to the Whirlpools of the world than our pathetic bribery attempts.

Another lesson is more subtle, but worth noticing. Iowa isn't really a manufacturing state, and agriculture continues to be a declining factor in our employment picture. Iowa's dynamic economic sectors are banking, financial services, and insurance. While politicians continue to chase manufacturing jobs, the economy has moved on. Maybe at some point we will elect officials with an economic outlook beyond ethanol and beyond returning to the glory days of the 1920 tractor-factory and farming economy.

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May 11, 2006

The House of Representatives last night passed the tax reconciliation bill, 244-185. Senate action is expected today.


Tax Policy Blog summary of the bill.
Taxable Talk
TaxProf Blog roundup

Tax Update bill summary and rant

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May 11, 2006

Joel Schoenmeyer has a post on the importance of turning in decedent wills to the probate court. He talks about the Illinois rules:

there's §6-1(a) of the Illinois Probate Act, which says that "[i]mmediately upon the death of the testator any person who has the testator's will in his possession shall file it with the clerk of the court of the proper county." While this section does say "immediately," it's really only invoked when a person in possession of a decedent's Will refuses to turn it over.(emphasis added)

That's a relief. When my father died in Lake County, Illinois, I was the executor. I was, you might say, less than prompt in filing the will, as the only things he owned that weren't jointly-held with my mother were a credit union account and his old pickup truck. When I finally got around to it, the clerk at the courthouse was rather stern with me until she realized I wasn't an attorney; she then became much more friendly and helped me get things settled quickly. But now I know I'd better not dawdle next time I have to do deal with a family estate.

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May 10, 2006

If it will take something dramatic to trigger a real debate about tax reform, yesterday's conference agreement on the tax reconciliation bill (H.R. 4297) may be a step forward for tax reform, in its own perverse way. So many important tax provisions will expire during the next president's first term that the tax law will look drastically different if no action is taken. Our lawmakers will have a chance to choose between dramatic changes by default and dramatic changes for a purpose.

Unfortunately, they'll probably just kick the can by extending things another year or two.


The big items - dividend and capital gain rates, Section 179 expensing, and temporary alternative minimum tax relief, went as expected:

-The 15% rate for capital gains will expire after 2010, instead of 2008.

-The $108,000 limit on the Section 179 deduction (expensing items that would otherwise have to be depreciated) will revert to $25,000 for 2010, instead of 2008.

-The AMT exclusion amount will be increased for joint filers to $62,550 for 2006; it had been set to revert to $45,000 this year, throwing millions of additional taxpayers onto the AMT rolls.

While the main points of the bill weren't surprising, a few of the details were. These include:


-A restriction of the "W-2 wage limit" of the Section 199 "production deduction." The Section 199 deduction gives manufacturers and farmers a free deduction of 3% of their "domestic production taxable income." This deduction is limited to 50% of a taxpayer's W-2 wages. The new law reduces the restriction to 50% of W-2 wages "allocable to domestic production gross receipts." This will be a nasty surprise to some folks, particularly those with highly-automated manufacturing operations.

-The bill also "simplifies" the way W-2 wages pass-through for computing the Section 199 deduction. It repeals the old provision that limits the pass-through of W-2 wages to the amount needed to cover the production deduction on that K-1. This appears to enable taxpayers to use W-2 wages from one entity to enable deductions passing through from another entity under the 50% of W-2 wages limit. This may come in very handy...


-The bill yanks the "binding contract" relief for the illegal Foreign Sales Corporation and ETI trade subsidies otherwise repealed in 2004. This is to ward off renewed WTO trade sanctions over these rules.


Taxwriters routinely use accounting sleight-of-hand that would make Andy Fastow blush, and this bill is no exception. The bill is full of tricks to manipulate income between years to meet budget limits -- no matter how silly the tax policy.

Roth IRA Conversions. The bill allows anybody to convert their IRAs to Roth IRAs in a taxable transaction. This privilege was formerly unavailable to taxpayers with AGIs over $100,000. This is designed to encourage taxpayers to pay taxes now in exchange for tax-free withdrawals in the future. This helps the current Congress with its revenue problems by increasing the revenue problems of their successors.

Cynical or not, this will provide a real opportunty for wealthy families. Roth IRAs have no minimum distribution requirements, and this will enable families to turn IRAs into multi-generation tax shelters at the price of current tax.

Corporate estimated tax games. They couldn't possibly have done this one with a straight face. C corporations with $1 billion or more in assets will deal with bizarre estimated tax requirements in 2006, 2012 and 2013:

- The 2006 estimated tax payment installments due in July, August or September (third quarter, for calendar year taxpayers) will be 105% of the amount otherwise due for the quarter. The same installment in 2012 will be 106.25% of the amount otherwise due; in 2013, the magic number will be 100.75% of the amount otherwise due.

-In 2010, 20.5% of the third quarter installment due September 15 will be payable October 1; in 2011, 27.5% of the third quarter installment is payable in October.

The government has a September 30 fiscal year, and these rules obviously shuffle income among the fiscal years to meet some arcane budget rule, at least on paper and in a laughably phony manner.


Extended Childhood: The bill increases the maximum age for the "kiddie tax," which taxes investment income of children at the parents' tax rate, to 17, from the current 13, effective this year. My 14 year-old will be thrilled.

Payments for offers in compromise. Underwater taxpayers who are trying to settle with IRS for pennies on the dollar will have to pay 20% of any lump-sum compromise offer before the IRS will consider it. Payers looking to negotiate an installment agreement will have to prepay the first proposed installment.

Withholding on government payments. The bill imposes a 3% withholding an all payments by federal, state or local governments that make over $100 million of such payments annually. This is either a reaction to revelations of tax-scofflaws with government contracts or a cynical ploy to pad out-year revenues that will never actually take effect. Given that it first will apply in 2011, "cynical ploy" is at least a reasonable surmise.

Penalty tax on tax-exempt entities that facilitate tax shelters. Many of the tax shelters of the 1990s were attempts to shift tax to complaisant tax-exempt entities. This bill creates a special tax to make that impossible. The TaxProf discusses this provision here.


Tin-Pan Lobby: How can I leave out my very favorite provision: capital gain treatment for songwriters who sell their work? While authors and artists - and you and me, for that matter - have ordinary income when we sell our work, songwriters will be eligible for capital gain treatment Who knew Tin-Pan Alley had such a lobbyist?

Most of the other provisions in the bill are fairly arcane. Some provisions that I had hoped for, such as the loosening of the strange Section 1375 tax on "net passive income" of S corporations, didn't make the cut. Eager lobbyists disappointed in this round still have hope, though, because the conference negotiators will soon hatch a separate "extenders" bill as part of their budget deal. The extenders bill renews perennially-expiring provisions like the research credit and the work opportunity credit for another year; it is a traditional Christmas tree for lobbyists.

Links (some pdf):

Text of H.R. 4297 as agreed to by Conference

Ways and Means Detailed Summary of Conference Report

Revenue Estimate for Conference Report

The TaxProf has a roundup of big-media coverage of the bill.

Senate Finance Committee bill summary.

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May 10, 2006

The negotiators have spoken. I will have an analysis of the new tax bill up later this morning. (UPDATE: here it is.) In the meantime, here are some links:

Text of H.R. 4297 as agreed to by Conference

Ways and Means Detailed Summary of Conference Report

Revenue Estimate for Conference Report

The TaxProf has a roundup of big-media coverage of the bill.

My initial thought: few surprises and little to refute cynicism.

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May 09, 2006

Mother's Day is coming up. Celebrate at this week's Carnival of the Capitalists at "Harshly Mellow" and the Carnival of Personal Finance at Bargaineering. Many good posts at both carnivals, including an InsureBlog post on the demographics of the uninsured.

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May 09, 2006

The Tax Court yesterday ruled that Peabody Coal Company can turn gold into coal, tax-free.

Why would you want to do such a thing?

Strictly speaking, they exchanged gold mines to coal mines and their attached supply-contracts. The Tax Court ruled the coal supply contracts were "Like-kind" property to the gold mines, qualifying for Section 1031 tax deferral.


For the most part, barter exchanges are fully taxable under the tax law. If this weren't the rule, the economy would be largely de-monetized as people swapped their way around the income tax.

The tax law does carve out some exceptions to this rule. "Section 1031" is probably the most important exception. Property that has been "used in a trade or business" or "held for investment" can be swapped for "like-kind" property that will also be used in a business or held for investment. If it qualifies, the gain on the swap is deferred, and the basis of the property given up becomes the basis of the property received.

Some items never can qualify for a Section 1031 exchange. These include

-Partnership Interests
-Choses in Action
-Personal-use property (i.e., not investment or business property)


If you clear this hurdle, you then have to make sure the property you receive in the swap is "like-kind" to that given up. For personal property, "like-kind" usually means property in the same "asset class" or "product class" as the property given up. The "asset classes" are classes 00.11 through 00.28 and 00.4 in Rev. Proc. 87-56. The SIC classes are the six-digit classes within "Sectors 31, 32, and 33" of the North American Industry Classification System (NAICS); they can be found on the Census Bureau web site. In a blow to transgender rights, livestock of different sexes are never like-kind.


The definition of "like-kind" is much broader for real property, which is why most swaps involve land or buildings. For example, unimproved land is like-kind to land and buildings, and farmland is like-kind to city land. The Peabody case is an example of just how broad "like-kind" can be real estate is involved.


If a swap involves both qualifying and non-qualifying property, the non-qualifying property is taxable "boot." When boot is received, the swap is taxable to the lesser of the boot received or the entire gain on the deal.

Example: Joe has a $1 million farm that he bought for $100,000. He exchanges it straight up for Russ's $950,000 efficiency apartment in Newport Beach and Russ's $50,000 used BMW. The BMW is "boot." Joe has $50,000 taxable gain - the lesser of the $50,000 boot or his $900,000 total gain on the swap.

If properties have debt, the net amount that debt is reduced in the deal is boot.


Peabody swapped its gold mining business for Santa Fe Mining's coal assets. In exchange for its coal mines and machinery. Peabody got the Lee Ranch coal mine in New Mexico, including land and leases. The coal mine was subject to two long-term supply contracts with utilities. The supply contracts must have been quite lucrative; Peabody assigned them $180.8 million of the $550 million value of the properties received.

The IRS said the supply contracts weren't real estate, and therefore were not like-kind, and so were taxable boot. The Tax Court, after pondering New Mexico's real estate law and prior Section 1031 decisions, ruled that the supply contracts couldn't be separated from the coal mines:

Peabody's right to mine and extract coal from the Lee Ranch mine land and its supply contracts payment rights for the coal cannot be separated from its ownership of the Lee Ranch mine coal reserves. Those rights are part of the bundle of rights incident to Peabody's ownership of the Lee Ranch mine land coal reserves. Indeed, those supply contracts give Peabody no right to mine and extract coal from that land. Instead, Peabody's right to mine and extract coal from that land comes solely from its ownership of that land and coal reserves...

We hold that the coal mine subject to the TEPCO and WEF supply contracts Peabody received is like kind to the gold mining property transferred and that Peabody's exchange qualifies for nonrecognition treatment under section 1031(a). See Koch v. Commissioner, 71 T.C. 54 (1978). In the light of that holding and because the supply contracts cannot be separated from Peabody's ownership of the Lee Ranch mine coal reserves, it follows that those contracts are not taxable as other property or boot under section 1031(b).

Peabody hired some expensive legal help, including Supreme Court Justice Ruth Bader Ginsburg's husband. While the opinion didn't embrace all of their high-priced arguments, the high-priced attorneys won, so presumably they have a happy client today.

The Moral? As Johnnie Cochran might have put it, "if you can't sell the land and leave it behind, the supply contract must be like-kind."

Cite: Peabody Natural Resources, 126 T.C. NO. 14.

Link: Russ Fox gives a brief and lucid explanation of the case.

UPDATE: The Taxprof has more.

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May 08, 2006

If you are interested in tax policy and the long-term burden of deficit spending, "Jane Galt" has a worthwhile post on these topics today. She also offers a guess as to the direction of tax policy:

Is the tax system likely to change? Colour me sceptical. "Raise taxes on the poor" just doesn't have much of a ring to it, and while the AARP might come around to lobbying for another increase in payroll taxes . . . excuse me, contributions . . . it will be a tough, tough, tough sell. I find it much more likely that we will see another Clinton style increase on the top earners, while keeping Bush innovations like the 10% tax bracket, meaning that the rich will be doing the bulk of any debt repayment. (Of course, they will also get a lot of the payments, since they hold a lot of t-bills . . . but so does the Chinese Central Bank.)

This looks to me like continued shrinking of the population subject to the income tax, as we approach an era where income tax-payers become a minority. I don't think that's a good thing.

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May 08, 2006

A banker wants to see a copy of my client's return. My office is two doors down from the bank, while my client is out in the western suburbs. The client sends me written authorization to make a copy for the banker to pick up. I do so. Have I committed:

1. Client Service?


2. A crime?

If Taxpayer Advocate Nina Olson has her way, I might get to wear horizontal stripes for complying with this client request:

National Taxpayer Advocate Nina Olson said May 5 that she believes taxpayers should not be allowed to grant preparers consent to share their tax return information unless it is necessary for tax-related purposes.

“I acknowledge that this is a very strong position, one that is not necessarily shared by others within and without the tax administration system,” Olson said at the plenary session of the American Bar Association Section of Taxation meeting in Washington. “Thus, I believe this is an appropriate area in which Congress could act.”

The IRS and Ms. Olson have come under fire for proposed regulations governing disclosure of returns by preparers. While much of this criticism amounts to ill-informed preening, it has apparently rattled Ms. Olson. The critics say the proposed regulations would allow the sale of return information by preparers to third parties. While potentially true, the 40-year old regulations currently in place also do so, in my view.

Ms. Olson's new approach solves a reckless driving problem by closing the highway. While it would keep preparers from selling tax information, it would also require preparers to defy the explicit wishes of clients asking them to provide tax information to third parties. This puts a pointless barrier between clients and preparers.

A 200% excise tax on preparers who sell tax information, suggested here, would solve the problem of selling return information without putting preparers in the position of defying what are now routine client requests.

Link: Tax Analysts Subscriber-only article.

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May 08, 2006

The TaxProf notes a Congressional Budget Office report showing that as fast as Congress is spending our tax money, we're sending them even more. In the first seven months of the current fiscal year (October-April), Federal spending is up $83 billion (to $1.537 trillion), but tax receipts have risen $137 billion (to $1.353 trillion). If experience is any guide, Congress is up to the job of catching up on the spending.

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May 08, 2006

Whatever you think of the merits of the current administration's tax policies, they have one great flaw: almost all important parts of the Bush tax policy are set to expire in 2011. Today the Tax Policy Blog has posted a handy list of these tax law time bombs:

Here's a list compiled by Tax Foundation staff of major federal tax changes that will occur in 2011 if this package is enacted, on the unlikely assumption that everything else remains unchanged:

• Individual income tax rates go from 10%, 15%, 25%, 28%, 33%, and 35% to 15%, 28%, 31%, 36%, and 39.6%.

• Child credit falls from $1,000 per child to $500 per child.

• Capital gains tax rates would revert back to 10% and 20% (depending on AGI), while they are currently at 5% and 15%.

• Dividends would once again be taxed at the ordinary income rates (see above), while today they are currently at 5% and 15%.

• After being fully phased out for tax year 2010, the estate tax would be fully reinstated with a top rate of 60 percent and a $1 million exemption.

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May 05, 2006

David Yepsen understands well that Iowa's tax system is a mess. His column yesterday inadvertently illustrates how it got that way.

Three short weeks ago, Mr. Yepsen wrote about Iowa's taxes:

So how can an income-tax system with the fifth-highest rates generate a burden that is 24th? How can a corporate income-tax system with the highest top rate in the country create a load that is near the bottom?

It's a bunch of Rube Goldberg tax breaks.

Someday, we'll have a governor and a Legislature that will clean up our tax mess.

The legislature has just added two new unnecessary moving parts to the machine: an exemption for seniors with income up to $44,000, and a complete exemption for the tax on social security income. And Mr. Yepsen writes that it's just dandy in his "salute to lawmakers for cutting retirees' taxes."

Mr. Yepsen writes:

The governor and the Legislature have overwhelmingly rejected the arguments of the spenders and the class warriors in Iowa by agreeing to cut state income taxes on pensions and Social Security.

Over time, this agreement will make the state just a bit more attractive for retirees. It doesn't raise tax rates for anyone else and is a smart political move in a state with so many senior voters.

"It doesn't raise taxes for anyone else?" Nonsense. Every tax system is a web of choices about how to raise a given amount of money. If one group of taxpayers gets a tax break, that means either the state has to spend less (a great idea, but not bloody likely) or somebody else has to forego their tax break. The state could have repealed the entire corporation tax for about the same revenue loss. The legislature chose the break for seniors. Even if you think the senior breaks are a good idea, there's no denying that the break could have gone to somebody else. I have to think that Iowa's growth would be better served by repealing the corporation tax.

Mr. Yepsen advances other arguments for the break:

As we add to the material wealth of our citizens, we will have fewer social problems and can create the wherewithal for people to support charitable institutions and endeavors that improve our spiritual wealth - like our religious, cultural and recreational organizations. Seniors also do a lot of volunteering in Iowa, which benefits everyone.

There's nothing specifically wrong with what he says here, but you can say the same thing about college students, churchgoers, political activists, and your kid's soccer coach. It's not just old folks that do this stuff.

This legislation also sends a signal to seniors: You are still welcome here, despite our current fixation with attracting young people.

This is puzzling. I can't say I've noticed anything that says seniors are unwelcome. There are certainly plenty of them around. I haven't seen whippersnappers harassing customers at Bishop's Cafeteria or keying Crown Victorias down at bingo night.

I don't think the tax law is the right way to send "signals." The tax law ultimately is there to pay the cost of government. The more you use the law to send "signals," the more complicated it becomes, and the less efficiently it does it's real job. There certainly is no shortage of good intentions that we might want to signal. Why just seniors? If they want to send good signals to our retirees, they should buy air time on an oldies station and leave the tax law alone.


This break illustrates how the Iowa tax law got to be a mess. Each break has its own well-intentioned supporters. Each tax break gets passed with the logic that "it doesn't raise anybody's taxes." Every year a few more of them get into the law, and you end up with the morass that we have now.

The real problem with the old folks break is that it makes it that much harder to ever reform the "Rube Goldberg" Iowa tax system. The way to tax reform is through a broad base and lower rates. Getting rid of exemptions and deductions enables the tax system to raise the same amount of money with lower rates. People will only give up their tax breaks if they get lower rates. That's something we can't offer to the old folks anymore; for many of them, the tax rate is now zero.

The legislature has created a powerful new constituency against tax reform. Given the damage our awful tax system does to economic growth every day, that's terrible news for Iowa's future.

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May 05, 2006

The Death and Taxes Blog notes an unseemly dispute over who gets Kirby Puckett's ashes.

Considering what happened to Ted Williams, Kirby was wise to go for cremation.

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May 05, 2006

A New York preparer won acquittal this week on criminal charges of preparing bogus tax returns. Newsday reports:

A Bay Shore accountant has been acquitted of income-tax evasion charges after he filed returns for 36 clients claiming that salaries cannot be legally taxed.

But don't get ready to go rushing out to your tax preparer next April. While the tactic initially saved the clients $500,000 in taxes, the Internal Revenue Service has since required them to pay tax on their salaries, according to court records.

The tax protestors will no doubt trumpet this as vindication of their flaky theories. It is, of course, nothing of the sort:

The jurors who acquitted Petrino, who faced 61/2 years in prison, were angry that they had to do so, [the defense attorney] acknowledged after speaking with them yesterday. But he said they accepted his argument that there was "reasonable doubt" that his client was intentionally committing a crime.

In other words, the jury decided that the government hadn't proved the preparer didn't really believe his nonsensical tax protestor theories. If the delusion fits, you must acquit.

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May 04, 2006

The IRS has ruled that seller-funded down-payment assistance outfits are not tax-exempt charities (Rev. Rul. 2006-27).

We had our doubts on such arrangements, and it looks like we were right.

Hat Tip: The Tax Prof.

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May 04, 2006

The Eighth Circuit court of Appeals has opened up a split in among the U.S. Courts on whether a return filed after an IRS assessment counts in making taxes eligible for discharge under bankruptcy. It adopted the dissenting position recently taken by by Judge Easterbrook in the Seventh Circuit on that issue; the Eighth Circuit now is at odds with the Fouth, Sixth, and Seventh Circuits.

Federal law requires taxpayers to have filed a return to have their taxes discharged in a bankruptcy. If you fail to file, the IRS will prepare a substitute return and assess the tax. These substitute returns use only standard deductions, so they typically assess a higher amount than is actually due; often taxpayers will file a return after assessment to get their taxes down to the correct amount.

The courts until now have upheld the IRS position that returns filed after assessments don't count as "returns" for making a tax liability eligible for discharge. I believe the Eighth Circuit is the first to rule against the IRS on this issue.

Now that the circuits are split, the Supreme Court is likely to settle the issue before too long.

Cite: In re: Gary Wayne Colson, Debtor. (CA-8, No. 05-2476, 5-4-2006)

The Tax Prof features a discussion of the Seventh's Circuit's opinion on this issue, and the Easterbrook Dissent, here.

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May 04, 2006

The state-sponsored slot machines were all unplugged last night, some while avid taxpayers were still dumping dollars into them.

Goodbye, slottery.

Video lottery terminal conveniently placed alongside ATM in liquor store

Convenient downtown Des Moines math-impairment tax collection facility

Other coverage:

Krusty Konservative

State 29

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May 04, 2006

thp.JPGThe long-delayed tax reconciliation bill is delayed a bit more. While the reconciliation bill has been settled, quibbles over a related bill containing provisions not squeezed into the reconciliation bill are holding up the process. The related bill, called the "trailer package" includes a package of tax provisions that have been extended a year or two at a time since about 1986, including the research credit.

And I always thought a trailer package was an option when you bought a minivan.

Tax Analysts reports:

A Senate Republican aide told Tax Analysts that the final draft language of the conference report was still being written and examined by the Senate parliamentarian and the Budget Committee to ensure that the bill’s cost stays below the $70 billion cap set by the congressional fiscal 2006 budget resolution. To ensure that the bill comes in under that amount, conferees chose to move several measures originally included in the House- and Senate-passed reconciliation bills into separate legislation that would not receive reconciliation protections.

The aide said Senate Finance Committee Chair Chuck Grassley, R-Iowa, wants assurances on the second “trailer” package before moving the reconciliation bill to the Senate floor.

The article says the contents of the "trailer package" are uncertain:

While the substantive provisions to be in the main reconciliation bill are well-known, the likely makeup of the trailer package is less clear. Extension of the deduction for state and local sales taxes and extension of popular business tax cuts such as the research credit are expected to be in that package. But the length of time those provisions would be extended is still up for debate.

Substantive is in the eye of the beholder. There are a number of less-publicized provisions in House and Senate reconciliation bills that are important to smaller groups of taxpayers. These relate to everything from depreciation of restaurants to taxation of S corporation "excess passive income." While they don't impact the fate of the nation, they are near and dear to many folks.

Link: Tax Analyst subscriber article (link won't rot).

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May 04, 2006

Joel Schoenmeyer has a nice, short discussion of the use of "disclaimers" in estate planning. When you disclaim something, it means you decline to inherit it. Mr. Schoenmeyer explains:

Disclaimers are one of my favorite estate planning tools, mostly because they can be used after someone dies to "fix" their estate.

He also points to a common problem in using disclaimers:

... [T]he biggest impediment to a successful disclaimer is "grabby hands." In Illinois, you can't disclaim property after you have accepted it. So, for instance, if you are a surviving spouse, and immediately start making withdrawals from your deceased wife or husband's bank accounts after her or his death, you will probably be barred if you subsequently try to disclaim these accounts.

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May 04, 2006

The Tax Policy Blog explains why the political responses to $3 gasoline are foolish and futile:

Nether of these government “solutions” will reduce gasoline prices in the short term, because as Ben Bernanke said, “Unfortunately nothing can be done to effect [sic] oil or gasoline prices in the short term.”

You can tell that Ben Bernanke isn't running for anything.

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May 03, 2006

Radio Iowa reports that Karen Tesdall, the $300,000 per-year chief accountant for public jobs training agency CIETC, can't be found.

I would ask the CEO of Chesapeake Energy. He seems to like pricey accounting help:

Chairman and CEO Aubrey McClendon received $459K in personal accounting services, which brings the company’s total spending on this particular perk — whatever it is — up to over $900K over the past three years. Though we’re not exactly sure what "personal accounting services" are or why the company’s investors are paying for it, it’s hard to believe that any one individual’s finances are that complicated that they’d need to have the equivalent of a CFO working full-time on personal business. Indeed, the $459K is not too far off what Chesapeake paid CFO Marcus Rowland last year.

Chesapeake Energy is headquartered in Oklahoma City. I think I need to get a resume down there...

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May 03, 2006

The Iowa General Assembly scored one for age and cunning yesterday. They the old folks tax exemption that was part of last week's budget agreement between Governor Vilsack and legislative leaders. The bill passed the Senate 46-4 and the House 89-6.

Youth and ability struck out in last year's session, when a bill to exempt youth from Iowa taxes died without a floor vote.


The old folks bill has two parts: a large exemption for all income, and an additional exemption for social security income.

Starting in 2007, the blanket exemption excuses taxpayers who are 65 or older from income tax if their "net income" is $24,000 ($18,000 for single filers). The exemptions increase to $32,000 for married filers, surviving spouses and heads of household in 2009, and $24,000 for single filers.

"Net income" is roughly equivalent to federal adjusted gross income, except it is reduced by the the Iowa capital gain deduction, the deduction for college savings Iowa contributions, and the additional Iowa health insurance deduction.

The bill also phases out the taxation of social security retirement income in Iowa.

Current law: In computing federal taxes, 50% of social secuirty benefits are taxable if income exceeds $32,000 ($25,000 for single filers and heads of household), and 85% are taxable if income exceeds $44,000 ($32,000 for singles and households). Iowa doesn't tax the 85% portion.

New rules: Iowa will phase out its tax on social security benefits over eight years. The amount now subject to tax will be reduced by the percentages below:

          2007     32%
          2008     32%
          2009     43%
          2010     55%
          2011     67%
          2012     77%
          2013     89%
          2014    100%


Supporters of the bill say that it will help keep retirees from leaving Iowa. Iowa's population today is the fourth-oldest in the country. By 2030, Iowa is projected to have 227,000 more people over 65 than it does now, and 246,000 fewer people between 18 and 44. Keeping old folks seems like the least of Iowa's problems.

Senator Mary Lundby says that many Iowa seniors struggle with their bills. That is certainly true. So do many younger Iowans. There are plenty of Iowans aged 18-54 who are struggling to feed their families, make mortgage or rent payments, keep the car going, pay for health insurance, and buy $2.90 gasoline. Statistically, these younger Iowans are all likely to have a lower net worth than the beneficiaries of these new tax breaks. The census bureau says that in 2000, median net worth of households under age 35 was about 6.65% of that of households 65 and up. So if you want to help struggling Iowans, a tax break based only on age is misdirected; while there are poor old Iowans, the old folks are less likely to be poor than the kids.

But we have an election coming up, and old folks tend to be reliable voters, so here we are. My hat's off to the four senators and six representatives who didn't vote to stick it to the rest of us.


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May 02, 2006

Our elected leaders continue to deal with the challenge of high gas prices with the thoughtfulness and deliberation we've learned to expect of teenagers with car keys, a credit card and a bottle of Peach Schnapps.

Last week, Senate Majority Leader Frist proposed fighting high gas prices by repealing LIFO inventory accounting. This would enable Congress to issue everyone a $100 check to fight high gas prices.

Senator Frist has now backed away from this idea. While I wouldn't mind a repeal of LIFO as part of a simplification of the tax law leading to lower rates and lower compliance costs (full disclosure: I am a compliance cost), the idea of repealing a 60+ year old inventory method used by a huge number of taxpayers to enable the Senator to mail checks to voters in advance of an election shows how much our elected officials need to get out of Washington for an extended break. Maybe 2 or 3 years.

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May 02, 2006

When you buy a full-page ad in a national newspaper bragging about not paying taxes or withholding for your employees, don't expect the Supreme Court to bail you out. It didn't work for formerly-prominent tax protester Richard Simkanin:

Tax Analysts report:

The U.S. Supreme Court on May 1 denied certiorari to Richard Simkanin, who was convicted in 2004 on multiple counts of willfully failing to collect and remit employment taxes as well as failing to file income tax returns. Simkanin, a Texas business owner, was sentenced to serve 84 months in prison and pay $302,000 in restitution to the IRS.

Background on Mr. Simkanin here.

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May 02, 2006

May 1 was the communist feast day, but in most of the world, only capitalists are left to "party." Celebrate May Day the free-market way at the Carnival of the Capitalists, a weekly roundup of economics and business blog posts. My favorite this week is Hank Stern's explanation of GM's "Viagra benefit." Too bad it doesn't work on share prices.

You can also celebrate the joys of private property at this week's Carnival of Personal Finance.

In using the word "communism," I am not exaggerating. It is not simply a metaphor for an overbright communist future: "From each according to his abilities, to each according to his needs." And so it is for those at the top of the party pyramid. I have already mentioned their abilities, which, alas, are not outstanding. But their needs! Their needs are so great that so far it has only been possible to create real communism for a couple of dozen people - communism is created for them by the ninth directorate of the KGB, and this all-powerful directorate can do anything. The life of a party leader is beneath its unsleeping, all-seeing eye, and it satisfies his every whim. A dacha behind a high green fence encircling spacious grounds alongside the Moscow River, with a garden, tennis courts, and playing fields, a body-guard under every window, and an alarm system. Even at my level as a candidate member of the Politburo, my domestic staff consisted of three cooks, three waitresses, a housemaid, and a gardener with his own team of assistant gardeners.

-Boris Yeltsin, describing how communism worked, except for almost everyone.

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May 01, 2006

Taking a cue from Michael Moore's success in installing Howard Dean in the White House, a Hollywood filmmaker is working to bring the wacky legal theories of the tax protest world into the mainstream.

Tax Analysts reports ($link):

Hollywood producer Aaron Russo's new documentary, America: From Freedom to Fascism, purports to, among many other things, conclusively debunk the legitimacy of the federal individual income tax system and the IRS. Russo's film portrays the modern-day income tax system as an illegal regime that is one of the most effective ploys used by the federal government, beholden to a wealthy elite, to keep the citizenry under control.

If so, it's a tribute to the extraordinary patience of the fascists. The first federal income tax was enacted in the Civil War. The current version dates to 1913. That means ever since the days of Teddy Roosevelt and Woodrow Wilson, the major political parties (not excepting the Bull Moose) have been conspiring together to impose fascism by 1040.

According to the article, Mr. Russo's film features tax protest luminaries Irwin Schiff, Bob Schulz, Vernice Kuglin, Joe Banister and Larken Rose. Mr. Schiff and Mr. Rose seem like less than ideal candidates for showing the illegality of the tax system, given their recent convictions and jail sentences. Ms. Kuglin and Mr. Banister won acquittals on criminal charges, but that proves skipping taxes is legal in the same way the O.J. acquittal means that double homicide is legal. Like O.J., Ms. Kuglin lost her civil case; she still had to pay her taxes, though she didn't have to go to prison.

Fascism? If we live in a fascist state, then fascism isn't what it used to be. Somehow I don't think Hitler or Mussolini would have allowed a nationwide release of a documentary showing that their regimes were illegal. I can think of at least one other documentary that offers a more realistic description of our political system.

Link: Homepage for America: From Freedom to Fascism

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May 01, 2006

From the TaxProf:

We previously blogged Tax Prof Jack Bogdanski's Internal Revenue Code Podcast Project, launched on April 7 with the audacious goal of making the entire Tax Code available via podcast through daily recordings of one section per day. Unfortunately, the project has come up 3,277 Code Sections short after thirteen consecutive days of recording, Jack has put the podcasts "on hiatus while the author seeks the guidance of a mental health professional. Check back here for updates as his various medications are adjusted."

Perhaps the techno version will catch on...

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May 01, 2006

A Charlotte, N.C. pastor is charged with not giving sufficiently unto Caesar:

The senior pastor of Macedonia Baptist Church in Charlotte has been indicted by a federal grand jury in connection with bank loans, tax evasion and false statements made to federal agents, the U.S. Attorney's office announced Friday.

According to the indictment, John Henry Walker earned nearly $600,000 from the church between 1999 and 2003 but reported an income of less than $55,000 to the government. He is charged with nine crimes and could face up to 120 years in prison and millions of dollars in fines.

Rev. Walker is charged with helping himself to the church building fund and youth fund and not sharing with the IRS.

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May 01, 2006

ABBA may not have been particularly daring with its music, but band members may have been been willing to go to the edge of the tax law in Sweden, and beyond:

Bjorn Ulvaeus, a member of the Swedish pop group ABBA, has been charged with tax evasion. He is accused of not paying 87 million kronor ($11.7 million) in taxes on royalties from ABBA's songs and musicals.

The Swedish government accuse Ulvaeus of setting up offshore entities to avoid paying taxes. Mr. Ulvaeus' attorney denies the charges.

Additionally, The Local reports that a second member of ABBA, Anni-Frid Reuss-Lyngstad, is accused of owing 12 million kronor in unpaid tax, interest, and penalties. She is accused of illegally moving her share of royalty income to a Panama based company.

Russ Fox has the scoop at Taxable Talk.

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