Tax Update Blog: September 2006 Archives
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THE IRS LEATHER BAR IS FOR SALE
September 29, 2006
The IRS is holding an auction at 1915 Main Street, Kansas City:
This sale will attract all kinds! We have restaurant equipment and supplies along with a DJs dream. We have over 50 items of lighting equipment, stereo equipment and other sound equipment. We have fog machines and even an entire stage or two of game show equipment. These assets are the contents of 5; yes count them, 5 bars.
I think maybe it will attract all kinds. A web search of "1915 Main Street Kansas City" reveals that this was the address of the "DB Warehouse Complexx." A search for that shows that this wasn't exactly a family entertainment complex. Or complexx:
click image to enlarge
This place was apparently home to the "Heart of America Leather Contests," an event that seems unlikely to now move to the Iowa State Fairgrounds, based on what I see from their website (not necessarily work-safe, depending on your employer). Here's a bio of one of the contest judges:
I'm not sure what any of this means, but something makes me think she would make a good IRS agent. Which makes me wonder - would this have been a better deal for the IRS if they just kept the place open as an IRS subsidiary? After all, who knows more about recreational pain infliction?
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EXTENDERS HUNG UP UNTIL AFTER THE ELECTION
September 29, 2006
Congress is going home without passing the "extenders" bill for this year. The bill would extend a passel of tax provisions that have been enacted for only one or two years at a time, many for the past 20 years. The largest of these is the research credit, but the college tuition deduction and the $250 deduction for teachers who buy shcool supples also expired January 1.
Congress usually passes these routinely, but they got hung up when they were yoked to the proposed estate tax reform bill.
Most of these provisions are poor tax policy. Congress would be better off just having lower rates and then let people and businesses decide for themselves how to spend their money. But if the breaks themselves are poor policy, passing them for one year at a time is really awful. They do it that way to disguise the real cost.
I expect Congress to quietly re-enact the provisions in a post-election lame duck session. I don't expect them to get out of the habit of doing so temporarily; that would cost them the opportunity to re-sell their souls to lobbyists every year or so to re-extend the provisions.
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DOWN TAX MEMORY LANE
September 29, 2006
The Tax Policy Center has posted a list of "major" tax legislation since 1981. By my count, there have been 35 of these in the 22 years I've been in the tax business. I suppose I should be thankful that Congress feels moved to pass an economic assistance bill for the tax consulting industry about 1 1/2 times per year, but really - they shouldn't have.
Still, it's hard not to get misty-eyed reminiscing about Bob Dole and the "Deficit Reduction Act of 1984." Of course, the "Tax Reform Act of 1986" remains a milepost in our tax life. And who can forget the "Family Security Act of 1988," not to be confused with the "Working Families Tax Relief Act of 2004" or the "Military Family Tax Relief Act of 2003" or the "Taxpayer Relief act of 1997" or the "Economic Growth and Tax Relief Reconciliation Acti of 2001." Sigh... good times, good times, for lobbyists and tax practitioners, anyway.
Hat Tip: The TaxProf.
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CHURCHES AND TAXES
September 28, 2006
A church in Pasadena is spoiling for a fight with the IRS over an anti-Bush sermon in the run-up to the last presidential election. They are refusing to cooperate with the IRS and setting themselves as victims of an effort to crush dissent.
It's an old story. In the 1980s Jerry Falwell's "Old Time Gospel Hour" radio show lost its tax exempt status for politicking.
It's a battle the IRS can't win. No matter what the IRS does, it's "crushing dissent." It's hard to avoid the idea that some churches goad the IRS into investigations to draw publicity.
There's a good reason churches aren't supposed to stray into politics:
The reason a church's political activities are related to tax code is to prevent a purely political organization from chartering itself as a religious organization, gaining tax exemption, and then doing nothing but campaigning, perhaps dressed up with some religious language now and then. Think about it: if your business could describe itself as a "charitable organization" and so gain tax exemption, why wouldn't it do so?
I think the IRS approach to this is to publicly announce investigations of churches to frighten them into line but to quietly settle as long as the churches say they are sorry. This enables them to keep churches from getting too out of hand without the awful publicity and expense of actually revoking tax exempt status. If a church remains stubborn and defiant for political reasons, though, it's hard for the IRS to avoid the issue - though I suspect they'll move as slowly as they possibly can.
Why preachers feel the need to stump for politicians is beyond me. Maybe some congregations are into that, but to me it's like preaching on behalf of adultery and theft. In any case, if you are on a church finance committee, parish council or board of trustees, be appropriately horrified if the preacher crosses the line. It's just too expensive.
The TaxProf has had good coverage of the issue. There's a post today on a legal analysis of the Pasadena case. Other links include a comprehensive roundup of Pasadena coverage and coverage of efforts of Americans United for Separation of Church and State to revoke the exempt status of right-leaning churches.
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STEVE KING TESTIFIES FOR 'FAIR TAX'
September 28, 2006
Iowa Congressman Steve King yesterday testified in favor of the "FAIR Tax" national retail sales tax plan ($link). His testimony includes the FAIR tax advocates' deceptive claim of a 23% rate. While 23% is bad enough, it's actually a 30% rate the way we normally calculate sales tax rates. Because the elimination of the federal income tax would undermine state income taxes, every retail transaction would end up burdened with at least a 40% sales tax, and many economists think the rate would be higher than that. That's absurd.
Yet it's a great thing for a politician to advocate, because it will never happen, so he won't ever be held responsible for it.
In the interest of fairness and balance, the Tax Foundation has podcast with Lawrence Kotlikoff, a FAIR tax advocate, available here. My own thoughts on the FAIR tax are spelled out in more detail here.
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I'M HOLDING YOUR LADDER HOSTAGE UNTIL YOU CLIMB UP
September 27, 2006
Max Baucus, the minority leader of the Senate Finance Committee, has been holding up the nomination of Eric Solomon as the head of the Treasury's Office of Tax Policy; he wants the Treasury to come up with a plan to close the $345 billion tax gap before he will let the nomination through.
That's an interesting concept, as tax policy leadership would seem to be an important part of any gap-closing effort. The Treasury took a shot at it yesterday, releasing "A Comprehensive Strategy for Reducing the Tax Gap"
My short version:
- More document matching
- More research audits to better target audit efforts.
- More document matching
- Simpler tax laws
- More document matching.
That's probably about right. Whether it's enough to get Mr. Solomon sprung from the Baucus holding cell is unclear.
With bureaucratic understatement the report makes one point the policy makers should heed:
Moreover, while it may be possible to develop a comprehensive strategy that reduces the tax gap, it is not possible to implement a policy that would come close to eliminating the tax gap without an unacceptable change in the fundamental nature of our tax compliance system.
You won't get 100% compliance, even in a dictatorship. You do, however, need to address the schmuck factor.
A comprehensive approach to closing the tax gap.
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WASTE NOT, TAX NOT?
September 27, 2006
Three egregious stories of government misfeasance prompt Prof. Maule to cry to the heavens, "So Explain Again What It Is That Taxes Are to Provide?"
He relates one story I hadn't heard:
The California Franchise Tax Board has had to notify more than two hundred corporations that their tax information was emailed by an employee to a distribution list that included journalists, reporters and other media employees. It was an accident, we're told. One media outlet which received the list, explained that it contained names of taxpayers and their identification numbers. The official position? "Clearly, this is an unfortunate incident." That's the reaction of a spokesperson for a member of the Board. Wow, we wouldn't have been able to figure that out for ourselves.
How could that happen? A state employee sent a spreadsheet with information obtained from audits... to a distribution list of reporters? I hope no ill-paid intern reporters are supplementing their income through identity theft.
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ARE STATES EASIER TO BEAT IN TAX CASES THAN THE FEDS?
September 27, 2006
The "Peoples Tax Lawyer" poses the question - are state or federal courts easier game in tax cases? He tells of a Colorado case where the state attorneys just showed up unprepared, leading to an easy taxpayer victory in an employment tax case.
The result would have been the same under the federal rules, because the law is clear that the equivalent penalty at the federal level is only to be imposed on "responsible persons" (the Section 6672 trust fund recovery penalty is the equivalent penalty at the federal level).
What is different is that the IRS attorney would have at least be prepared to put on their case in court. I am not aware of a single case where the IRS attorney failed to prepare a trust fund recovery penalty case such that they put on no evidence of the taxpayer’s role in the corporation.
Not being a lawyer, I don't know the ins and outs of Iowa tax litigation. I have seen taxpayers win cases they probably should have lost, all the way up to the Iowa Supreme Court, the highest court in the land! At lower levels, though, the Iowa tax appeals process is a true cangaroo court, lacking only real marsupials. I have seen state tax agents overreach in ways unimaginable for the IRS.
Perhaps its worse for taxpayers in the states until you litigate; then maybe the odds tilt towards the taxpayers.
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SEC AND BACKDATING
September 27, 2006
BenefitsBlog reports that the SEC has issued guidance on stock option backdating issues. It appears to have been well-received.
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CAVALCADE OF RISK!
September 27, 2006
Welcome to this edition of the Cavalcade of Risk. Thanks to Hank Stern of InsureBlog for this opportunity to host this growing blog carnival covering risks, risk management, and the like.
I'm Joe Kristan, a CPA and a shareholder of Roth & Company, P.C. of Des Moines, practicing in tax. We're a one-office CPA firm of 30-odd accountants with clients across Iowa and beyond.We serve mostly private businesses, community banks, and their owners. I suppose I'm a form of risk management for my clients. Des Moines is an insurance Mecca, so we live and breathe risk management here, in a way.
This blog covers my corner of the tax world. I'd love you to come back; you can use the easy-to-remember url "TaxUpdateBlog.com" to visit the main blog page.
This week I'm organizing the Cavalcade by rough categories. If you don't like the way I've done this, Hank is looking for hosts for future editions, so contact him and show us how it's done. Now let's get to it.
Blogging For Cancer
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UTAH: TWO INCOME TAXES FOR THE PRICE OF ONE
September 26, 2006
Utah has implemented an odd new system. The state will impose a "flat tax" at a 5.35% rate. The odd part? They will keep their old multi-rate tax. As the "Talking Taxes" blog (I think an arm of the left-ish Citizens for Tax Justice) aptly puts it:
Bottom line: last week Utah had one income tax. This week it has two.
The group "Iowans for Discounted Taxes" is pushing for a similar system in Iowa. While a flat tax is fine, pasting it on top of the existing system is stupid. You keep all of the complexity of the old system and make everybody compute their taxes twice.
The right-ish Tax Policy Blog also has coverage.
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NEWAYS FOR SALE
September 26, 2006
The multi-level marketing company founded by convicted tax cheats Thomas and Leslie Mower is for sale for $600-$700 million. The linked article says the Mowers start serving their sentences November 13.
Prior Tax Update Coverage:
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IRS: THE ONE-ARMED BANDIT'S HELPER
September 26, 2006
The popularity of slot machines baffles me. It looks about as fun as feeding a parking meter, except you can do it all day and you get nothing as useful as a parking spot out of the experience.
Obviously others see something in it that I miss. Terri and Austin Hartsook of Maryland, for example. They were hit with over $225,000 in taxes and penalties for failing to properly document their losses at the slots. The IRS determined their gross winnings based on W-2Gs, which have to be filed for any jackpot starting at $1,200.
The nasty part is that there is no equivalent requirement to report losses to the IRS. The gambler is on his own. While it is almost a mathematical certainty that the Hartsooks lost more at Harrah's and the other casinos than they won, they failed to adequately document their losses, so the Tax Court allowed the IRS to count just the winnings.
Russ Fox, the maven on gambling taxes, has sage advice for slots players:
A contemporaneous logbook would have been a good start. If they belonged to Harrah's slot club, they should have gotten a printout of their wins and losses. (Of course, they'd also have to claim the gambling wins that were not shown on W-2G's.)
If you think it's hard to document your losses at slots, just imagine the problems that Iowa's slottery players will have. Perhaps Kum & Go will let folks use security tapes to help reconstruct their losses.
Cite: Hartsook, T.C. Memo 2006-205
Interesting footnote: the taxpayers were represented by tax blogger Stuart Levine. As far as I know, this is the first Tax Court case involving an active blogger. Presumably Mr. Levine can't blog about it, but it shows an advantage bloggers have. When Mr. Levine talks about the Tax Court, remember - he's been there.
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BANKRUPTCY: THE KEY TO THE RICHES?
September 25, 2006
Florida attorney Arthur Jacobs had a quality that can be very valuable to a lawyer: he wasn't intimidated by the IRS. So unintimidated was he that filed his tax returns for 1990-1998 showing taxes due of about $800,000 - but he only sent the IRS about $200,000.
He then took the fight to bankruptcy court. Income taxes can be discharged in bankruptcy when they were reported on timely returns, providing other conditions are met. And sure enough, the bankruptcy court let him off the hook.
Being killjoys, the IRS appealed the bankruptcy court ruling, and a U.S. District Judge decided that Mr. Jacobs should pay his taxes after all on the grounds that Mr. Jacobs "willfully attempted in any manner to evade or defeat" his tax obligations. What drew the judge to such a harsh conclusion? Perhaps this:
In 1995, after five years of failing to satisfy his tax obligations, Mr. Jacobs and his wife purchased a new home located on Amelia Island for $525,000. The home is located in a luxury-island golfing resort community named Amelia Island Plantation, located just ten minutes from Fernandina Beach. Residents of the resort enjoy a truly lavish lifestyle and are treated to such amenities as tennis courts, exclusive spas, boutique-style shops, and a specialty grocery store. When the couple bought the home, it was titled solely in Mrs. Jacobs' name, however, both Mr. and Mrs. Jacobs became signatories and obligors on the purchase mortgage loan. Mr. Jacobs testified that because of his bad credit his bank would not loan him the money to purchase the home if his name was on the title. However, according to Mr. Jacobs, the bank insisted that both he and his wife sign the note and the mortgage. On May 24, 2002, the couple refinanced the property and became signatories to a 30-year mortgage for $595,000. According to Mr. Jacobs, the total current mortgage indebtedness is approximately $660,000. Mr. Jacobs has made all of the mortgage payments on the property. The total fair market value of the home is approximately $800,000. Monthly mortgage payments on the property, including taxes and insurance, comes to approximately $4,500 per month. However, Mr. Jacobs claims that no equity exists in the home.
Mr. and Mrs. Jacobs are also members of the Amelia Island Plantation Club where they frequently dine and entertain. From March 1999 to June 2003, the couple spent a total of $71,578.88 at the club. The payments for the use of the club total approximately $1,491 per month. At trial, Mr. Jacobs testified that entertaining at the club was primarily a business expense, however, while testifying at a Rule 2004 examination,9 he described the expenses as personal in nature. Mr. Jacobs also plays golf at the club at least once a week. His green fees, which are $20 per game, are subsidized in part by his wife's membership dues for the club, which Mr. Jacobs pays, and which run approximately $250 per month.
(footnotes omitted, emphasis added)
Now, living large doesn't disqualify you from bankruptcy protection; in fact, it often is the golden road to penury. Yet it's clear that Mr. Jacobs wasn't letting his mounting tax liabilities cramp his style. The "lavish" living with funds belonging to the government couldn't have made the judge any more likely to cut him slack. The judge sums it up:
There is also no evidence that Mr. Jacobs' failure to pay his taxes was a result of inadvertence or mistake. For his part, Mr. Jacobs represents that he is remorseful of the fact that he did not pay his taxes. While it is commendable that Mr. Jacobs feels some contrition that he has failed to satisfy his legal obligations to the United States for over a decade while at the same time living a life of opulence and excess, that is nevertheless an unsatisfactory explanation for his affirmative choice to willfully engage in acts to evade and defeat his tax obligations. Mr. Jacobs is a sophisticated and experienced real estate and transactional attorney who certainly knew the consequences of his actions when he engaged in them. Put bluntly, Mr. Jacobs had a duty to pay his taxes, knew that he had such a duty, and intentionally violated this duty. Accordingly, Mr. Jacobs will not be permitted to manipulate the Bankruptcy Code as a means of gaining a "head start" at the expense of the United States Treasury.
None of this Eddie Haskell stuff, Mr. Jacobs!
Cite: United States v. Arthur I. Jacobs (In re: Arthur I. Jacobs, Debtor); No. 3:05-cv-252-J-99
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TAX CRIME ROUNDUP
September 25, 2006
Russ Fox rounds up the week's tax scofflaws in a Jewish New Year themed post. The only problem for the taxpayers he chronicles: they're going to need more than one day of atonement. One, a doctor from Amarillo, will be at a federal atonement facility for 46 months.
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CARNIVAL FOR A FALL DAY
September 25, 2006
The Carnival of Personal Finance is up North today at Canadian Capitalist. As always, many good posts. Some that seem especially worthwhile:
Ex-Car Salesman Tells All: How to Beat the Auto Dealerships at Their Own Game: Money Under 30 shares what he learnt from the car salesman’s playbook.
Eight Warning Flags of Fraud: The Frugal Duchess provides eight tips for detecting investment frauds and scams in other areas as well.
How Short Term Goals Make Long Term Results: eFIPO shows how saving just for twelve years, from age 18 to 30, can build such a big nest egg that when you are 30 you can start spending most of your future salary on things that you want, like a boat or a new car.
The Tax Update is hosting a carnival this week for the first time, the Cavalcade of Risk. The Cavalcade covers insurance and risk-management topics, loosely defined. Entries will be accepted until midnight tonight, central time. Email them to me (jkristan - at - rothcpa.com) or via blogcarnival.com.
UPDATE: I forgot to include the link to Canadian Capitalist; it's fixed now. Thanks, Stephanie!
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HEY, BUDDY! FARMERS MARKET ISN'T UNTIL SATURDAY!
September 22, 2006
Downtown Des Moines has a nice farmers market every Saturday in season. Still, Downtown is really a financial district. If you bring the wrong crop downtown on the wrong day, you can run into problems. Tax problems, even. Local ag enthusiast Aaron Janssen found this out the hard way yesterday when he walked up Southwest 7th towards the Polk County Jail. He happened past the window of Chief Mark Burdock of the Polk County Sheriff's Department at lunchtime:
"I look out the window to the east, and I see him walking north carrying a green leafy substance, all pulled up by its roots. He was carrying it like you'd carry a bundle of presents," Burdock said. "It was tall enough where he was looking over the top of them, and he's just walking like nothing's going on, like he's just trying to see the sidewalk."Burdock stepped outside and yelled at Janssen, 36, who walked over to Burdock, still carrying his crop. He told Burdock that the plants were part of his marijuana grown near the river, but he wouldn't say exactly where.
So what's the tax angle?
Janssen was charged with possession of marijuana with intent to deliver and a tax stamp violation. Janssen told Burdock that he was headed to his home at 1429 Ninth St.
Yes, Iowa imposes a stamp tax on marijuana growers. It's not a big part of the state revenue picture, except perhaps to the extent the legislators are smoking something when they pass new tax laws.
Had I been looking out my window, I could have seen Mr. Janssen walking by. He's either a bold man or a very carefree one. If he was walking to 1429 Ninth Street he had 16 or 17 city blocks to go with his harvest, right through downtown Des Moines at the lunch hour. A direct route home would have carried him right past Des Moines headquarters for Principal Financial, Nationwide insurance and Wells Fargo Finance, not to mention any number of law and accounting firms. The plants wouldn't have had a chance.
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2007 INFLATION ADJUSTMENTS TO TAX RATES
September 22, 2006
The Tax Policy Blog has posted the unofficial, but almost certainly accurate, inflation adjustments to tax rates and exemptions for 2007.
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STONE-A-PHONE!
September 21, 2006
I feel like I've finally made it in this business. I've been given a company cell phone!
The carrying case is very cool, but I don't know how I'm going to clip it on my belt.
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JOHN MCCAIN: ACCESSORY TO BROADBANDITRY?
September 21, 2006
The Senate yesterday held hearings on tax reforms for business. They are probably a good thing, even if nothing comes out of them, just because they remind people what good tax policy could look like.
Former IRS Commissioner Rossoti had sensible comments, like this from his prepared remarks:
1. Lower rates are better than special preferences.
Over the years a large number of special preferences for particular kinds of business activities have been put into the code. Some of these, such as the R&E credit, are substantial in size and affect a significant percentage of businesses, and others are much smaller and affect only a few businesses. But each of this long list of preferences requires complex rules and regulations to define who is entitled to get these preferences; they are the source of enormous controversy and often confusion between taxpayers, Treasury and the IRS, and they all have the effect of raising the rates for all businesses. In addition, I should note that in a world of increased scrutiny of financial reporting, they are also a source of great complexity and potential error in reconciling tax accounts with financial reporting.
Nearly every witness at the numerous hearings held by the tax reform panel supported this principle: eliminate preferences, lower rates. As an incentive for investments, lower rates are clear cut factors that improve the calculation of the return on almost every investment decision. Special preferences may or may not be taken into account when investment decisions are made. Their impact is not only uneven and unpredictable; it is often weak or non-existent in practice.
John McCain is heading in a different direction, as Tax Analysts reports today ($link):
Meanwhile, Sen. John McCain, R-Ariz., joined the chorus in support of one of the most popular tax extender provisions: the research credit. In an appearance before the Northern Virginia Technology Council in Washington, McCain said "it's long overdue" for Congress to make the research credit permanent.
"It's really hard to understand" why the credit has not been made permanent, McCain said, "because this is a tax credit that's supported by literally everyone."
"Literally everyone"? I guess that makes Mr. Rossoti, and me, nobodies. The research credit doesn't spur research; it spurs taxpayers and their tax pros to harvest the credit from stuff the company already does. And as it doesn't even apply for AMT, its benefit is often lost to software entreprenuers. Better to lower everyone's rates and not have to have IRS agents try to distinguish "research" from "spending."
But research credits aren't the only tax spiff supported by Senator McCain:
McCain, widely considered a front-runner for the 2008 Republican presidential nomination, limited most of his comments to technology issues and the situation in Iraq. On the technology front, McCain recommended the creation of new tax incentives for municipal broadband systems to encourage more competition among broadband providers.
So Senator McCain thinks municipalities should compete with private carriers? Apperently Qwest and the satellite companies can't provide suitable competition; only the mighty City of Waterloo can cope with Mediacom.
Municipal broadband is just a boondoggle for the few companies set up to install municipal broadband networks - broadbanditry, as it is aptly called.
Maybe the Senator will come out for a tax credit for municipal sports bars to provide competition in the recreational alcohol consumption market.
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TOYOTA, LEXIS FUEL CREDITS PHASING OUT
September 21, 2006
The Toyota and Lexus hybrids are just saving too much energy, so the tax credit for them is beginning to go away.
The IRS announced the phase-out rules yesterday. The phase out chart (courtesy of the TaxProf):
The credit remains fully available for Mercury, Ford and other brands. But remember: the hybrid credit doesn't work for Alternative Minumum Tax, so don't count on pocketing the credit unless you know you aren't an AMT taxpayer.
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OCTOBER MINIMUM FEDERAL INTEREST RATES (AFR) ISSUED
September 21, 2006
The IRS has issued (Rev. Rul. 2006-50) the minimum interest rates for loans made in October 2006:
-Short Term (demand loans and loans with terms of up to 3 years): 5.00%
-Mid-Term (loans from 3-9 years): 4.82%
-Long-Term (over 9 years): 5:02%
Historical AFRs are available at the "links" page at www.rothcpa.com.
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NO APPRAISAL, NO CHARITABLE DEDUCTION
September 20, 2006
If you're planning to donate to charity, giving appreciated long-term capital gain property to charity can be a good tax move. You can get a full fair-market value deduction without ever paying taxes on the unrealized gain.
For publicly traded securities, all you need to do is report the appropriate information on Form 8238. If you want to donate something else, though - land, for example, or art - you have to jump through some hoops.
QUALIFIED APPRAISALS
When you give property worth more than $5,000 other than publicly-traded securities, the tax law requires you to get a "Qualifed Appraisal"; the detailed requirements are listed below in the extended entry. The appraisal must be done no earlier than 60 days before the property is gifted and no later than the due date of the tax return for the year of the gift, including extensions.
Bruce and Marina Ney claimed deductions in 2001 of just over $210,306 for the donation of two parcels to the Delaware Agricultural Lands Preservation Foundation. The donation was part of a bargain sale; they claimed that the value of the property was in excess of the sales price by $210,306.
The taxpayers had appriasals to support the deduction. Unfortunately, they were either made in 2000, more than 60 days before the gift, or in 2005, long after the return was due.
The Tax Court ruled that no deduction was allowed. The taxpayers argued that it wasn't fair, that they really did make a donation, and that mere paperwork shouldn't get in the way of the deduction. The Tax Court's response is worth reading (citations are omitted):
Petitioners argue that denying them a deduction would be inequitable. Petitioners contend they donated something of value to DALPF and should not be denied a deduction for failing to comply with an arbitrary deadline.
We note, first, that we are not a court of equity and do not possess general equitable powers. "'There is no general judicial power to relieve from deadlines fixed by legislatures'".
Second, "'deadlines, like statutes of limitations, necessarily operate harshly and arbitrarily with respect to individuals who fall just on the other side of them'". Nevertheless, "'The legal system lives on fixed deadlines; their occasional harshness is redeemed by the clarity which they impart to legal obligation.'"
Furthermore, we note that petitioners had approximately 16 months in which to obtain a qualified appraisal. Petitioners have not explained why they were unable to secure a qualified appraisal within that period. Nor did petitioners "'fall just on the other side'" of the deadline... The 2000 appraisals were made more than 9 months before the date of contribution. The 2005 appraisals were made more than 3 years after the due date of petitioners' tax return. Thus, we are not faced with a situation where the taxpayer has done "all that can reasonably be expected of him".
Third, as mentioned supra, DEFRA section 155 is not primarily concerned with whether a charitable contribution has been made. Rather, DEFRA section 155 is concerned with substantiating the value of the contributed property. Id. Thus, even if petitioners made a charitable contribution, they must meet the substantiation requirements to claim a deduction.
In other words, if you make a charitable gift of property, you need to get the appraisal done right. No paperwork, no deduction.
Cite: Ney, T.C. Summary Opinion 2006-154.
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CRIMINAL FRAUD = CIVIL FRAUD
September 20, 2006
The punishment for tax fraud doesn't end with the jail time and fine. Henry Uscinski learned this the hard way. You still have to pay the taxes, and you face a 75% civil fraud penalty on top of that. From Taxable Talk:
Petitioner Henry Uscinski is an attorney who pleaded guilty to evading his 1996 income taxes by filing a fraudulent 1996 tax return. Mr. Uscinski repaid $1,590,000 in restitution. He further admitted that he had failed to report some funds from a client. So in March 2003 the District Court accepted the plea bargain, sentenced Mr. Uscinski to 42 months at Club Fed for tax evasion, and also imposed a $250,000 fine.
And now it's the IRS' turn.
Bottom line: bad news for Mr. Uscinski.
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EXCEL-ENCE IN TAX COMPLIANCE
September 19, 2006
A non-profit agency, Excel Community Outreach Center, has lost its $60,000 in funding from the City of Des Moines, the Des Moines Register reports:
Officials of the agency, Excel Community Outreach Center, were in line for the money to help run two programs for juvenile delinquents and people who need help with rent or house payments.
Grant money to Excel was frozen on May 22 after city staffers discovered that some of the agency's board members were paid employees, a violation of federal rules for nonprofit grant recipients.
That sort of thing should be reported on the agency's federal Form 990, Return of Organization Exempt from Income Tax. What's this?
Receipts aren't normally more than $25,000? That seems odd, based on this segment from the article:
Records show that Excel's Youth Enrichment program also received $100,000 in state money over the past two years.
"Youth enrichment?" If I were a youth, I wouldn't turn down $100,000 worth of enrichment. But why would they say they earned less than $25,000? Well, it certainly makes preparing the tax return easier:
(click image to enlarge)
You don't have to say much of anything! Especially not part IV of the return, which lists directors and their compensation. Here's what Excel reported:
For an agency that said it normally has less than $25,000 in income, it does pay well:
Auditors also noted that Jeremiah Reed, leader of the Christ Apostolic Temple church with which the agency is affiliated, had a $300-an-hour consultant contract, which the city said was excessive. Reed, who helped form Excel in 2003, is a former board member of the agency.
Well, it had to help with his "rent or house payments."
It seems likely that the IRS may have some problems with this return, if the numbers that the Register is reporting are correct. It's not clear from the article exactly how much grant money was received in 2004.
The Moral: If you are on a non-profit board, it's not a bad idea to look over the annual tax filings, just to be sure they look ok. And remember, Form 990 is a public document, so don't expect a bad filing to pass unnoticed.
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SKIP A DEDUCTION?
September 19, 2006
Dr. Maule has a new scholarly paper out, "No Thanks, Uncle Sam, You Can Keep Your Tax Break." The Tax Prof reproduces the abstract today.
It's something I haven't given a lot of thought to. It seems counter-intuitive, but I recall one case in our practice - I forget how it came about, exactly - where taking a deduction would have increased the tax for the year. We skipped it.
Dr. Maule says that deductions aren't usually mandatory, but that they can be in some cases:
The article concludes that deductions are not mandatory other than in the computation of self-employment tax, as to which the IRS and courts have concluded deductions cannot be ignored, and other than the earned income tax credit which incorporates the self-employment tax computation concept.
That makes sense. While one can argue that skipping deductions gets in the way of Congress's intent to finely tune the economy to some platonic ideal, the real world gets in the way:
Careful analyis of the practical challenges to requiring taxpayers to claim all allowable deductions suggests that an "all deductions are mandatory" paradigm would be unworkable because it could easily be circumvented with techniques of which the IRS is aware and which the IRS has not sanctioned, such as deliberate failure to maintain requisite substantiation and other records supporting the deduction.
That said, if the deductions help, by all means, take 'em!
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SOLO LAWYER: I'M NOT AN EMPLOYEE OF MY OWN LAW FIRM
September 18, 2006
Today we offer a quiz:
1. If you walked into the law offices of Regina Felton, PC, who would you expect to be the lawyer working there?A. Clarence Darrow B. Alexander Hamilton C. John Marshall D. Regina Felton2. Who is the owner of the law firm Regina Felton, PC?
A. Warren Buffet B. Steve Jobs C. The bin Laden Group D. Regina Felton3. Who is the chief executive officer of the law firm Regina Felton, PC?
A. Gerald Ford B. Bill Clinton C. George W. Bush D. Regina Felton
If you answered "D" to each question, you agree with the Tax Court.
Regina Felton, PC. is a C corporation. It filed its 2001 and 2002 returns as a C corporation, claiming the benefit of the graduated rate structure of C corporations. Many small corporations file as C corporations to take advantage of the graduated corporate rates that start as low as 15%.
The IRS had one small problem with the returns. "Qualified personal service corporations" are ineligible to use the graduate rates. They pay a 35% rate on every dollar of their taxable income. The IRS assessed additional tax of $7,017.50 for 2001 and $4,962.65 for 2002.
PERSONAL SERVICE CORPORATION: WHAT IT TAKES
To be a "personal service corporation" you must pass (well, flunk) two tests:
1. Substantially all of the stock must be owned by employees, and
2. 95% of employees time must be spent on performing personal services in the fields of health, law, engineering, architectue, accounting, actuarial science, perfoming arts or consulting.
It was clear that all of revenues of Regina Felton, PC were from legal services, so the only issue was whether the stock was owned by an "employee." Regina Felton, arguing for her PC in Tax Court, said she did not "consider herself" an employee (making one wonder just who did the legal work around the shop).
The Tax Court said that it didn't really matter whether she "considers herself" an employee. Common sense was part of the equation - she was the only lawyer there. Also, as the Tax Court explained, corporate officers are considered corporate employees for tax purposes. While she told the court that she does not "call herself an officer," the New York Secretary of State website lists her as "Chairman or Chief Executive Officer."
Bottom line: IRS wins.
HOW TO NOT BE TAXED AT A 35% FLAT RATE
There are three main ways corporations avoid being subject to the 35% tax on personal service corporations.
S corporation election. If you make an S election and have your income directly taxed to the shareholders, the 35% flat rate doesn't apply.
Distribute all of the income in a year-end bonus. Many law firms flush all of their earnings out in year-end bonuses. This works, but it has two inherent drawbacks. First, the bonuses are subject to the 2.9% medicare tax. Second, it requires either a skilled bookkeeper and accurate records or cheating (e.g., backdated paychecks) to get the job done.
Do enough other stuff to avoid being a personal service corporation. An example would be anoptometrist who sells enough eyewear to be considered a retail outlet as well as a health professional office.
Cite: Regina Felton, PC, T.C. Summary Opinion 2006-153
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GIANT TIPS AND TAXES (NOW WITH UPDATES!)
September 18, 2006
See update below.
Professor Maule ponders the how to draw the line between a gift and compensation when somebody leaves a colossal tip:
What facts relevant to the tax issue are known? The customer has always tipped well, according to the bartender, usually leaving $15 on a $30 tab. Two weeks ago, the customer left the bartender a $100 tip on a tab of under $50. Then came the $10,000 tip. The customer put the tip on a credit card. Rather than following his usual practice of turning the credit card receipt upside-down after signing it, he kept it facing up and said to the bartender, I want you to know this is not a joke." During an interview, the bartender said, "I hate to say it, but I really don't know him. You become friends with your customers ... I think he just appreciated the fact that I took the time to talk with him."
Tips are taxable. Does this somehow cross the line to a gift, which isn't subject to income tax? My short answer: no, it's income. Dr. Maule, in a more nuanced way, gets to the same place:
Assuming the customer's intention matters, does any of this disclose customer's intention? Yes and no. He did not say, "Here is a gift." He put the $10,000 on the credit card receipt, presumably on the line that is left there for tips. Where else would he have added it in? He is a generous tipper. Fifty percent is generous. So, too, are the $100 and $10,000 tips. It looks like a tip, it walks like a tip, it talks like a tip, so is it or any part of it an excludable gift? The burden would be on the bartender to prove it is a gift. The restaurant withheld federal income tax. I predict the $10,000 will be reported on the W-2 it provides to the bartender next January. That creates a very challenging burden. Can the bartender show they were friends after saying she doesn't really know him? Was it her birthday? Did they interact outside of the restaurant? Was there any communication outside of her employment activities? There are no facts so indicating. Looking to the transferor's intent poses problems, because the taxpayer may not ever have the opportunity to ascertain the intent or to present it in some way as evidence during an audit or in litigation. It wasn't a joke, but that doesn't mean it was a gift. Or was not a gift. When we think of gifts we think of birthdays, anniversaries, get well wishes, and similar transactions between people who have something more than a business relationship. I don't think the $10,000 was a gift. There's no evidence that it was, and what evidence there is suggests that it is not.
I'm much more thoughtful than Mr. Show-off Tipper. No bartender ever has to worry about me causing her tax problems!
UPDATE:
From the comments:
I believe the 'real' tax controversy in this situation involves JS Enterprises, owner of the Applebee's in Hutchinson, Kansas, where Ms. Kiernow tends bar. There is no question that tip income - while often paid directly to the employee from a customer - is, in fact, imputed wages. Since January 1988, employee tip income has been treated as employer-provided wages for purposes of the Federal Insurance Contributions Act (FICA), as if those tips were wages paid directly to the employee from the employer.
In other words, one-half of the FICA tax burden on the $10,000 tip is borne by the bartender, while the other one-half of the tax (7.65%, or $765 in this instance) is a "contribution" by the employer - depending on whether: a) Ms. Kiernow earns more than the OASDI ceiling of $94,200 this year; and b) JS Enterprises can use the IRC sec. 45B INCOME tax credit for employers operating food and beverage establishments.
Bottom line: the other blogs have taken up the cry of "stealth tax" on behalf of bartender Kiernow. Who will take up the cudgel for her employer, if not you?
There are other blogs?
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CRACK DOWN ON OIL PROFITEERS: CUT TAXES!
September 18, 2006
When oil profits raced up last year, politicians wasted no time coming out for a tax on "windfall profits." None of these proposals provided for a credit for "sub-par profits" if oil prices declined.
Give the politicians credit for chutzpah. Their complaints about oil company profits are like a crack dealer complaining about how much the guys from Columbia rake off. The Tax Policy Blog has an eye-opening post on just how much of your gas money goes to the government.
The post also has an excellent collection of links on the whole "windfall profits" issue.
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DOG BITES MAN: NEW JERSEY POLITICIAN CONVICTED
September 18, 2006
Russ Fox rounds up a week's worth of criminal tax news. Perhaps the highest-profile offender is John Lynch, a former president of the New Jersey state senate. Read all about it at Taxable Talk.
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TAX PROF EMPIRE HITS 2 MILLION MINION MARK
September 15, 2006
All hail that TaxProf, overlord of tax and law blogging! 2 million visitors in 29 months is amazing. For comparison, the TaxUpdate has been metering its visits for about 22 months (or maybe 34 - I really don't remember, and I don't see where the Sitemeter lets me go back to day 1), and we have had 217,000 - odd visitors in that time.
The TaxProf, Paul Caron, has a great site. He adds multiple posts every day, seven days a week. He writes well and uses good graphics, and he scrupulously avoids the dreary politics that infest so many blogs. His tax coverage is comprehensive, and it's amazing that one person can be so productive. His popularity is well-deserved.
It's the TaxProf's world; he just lets us hang out here.
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SAVING IOWA
September 15, 2006
Iowa is slightly above average in its savings habits, according to an AG Edwards study. Here in Des Moines we're thriftier; we are the 79th best savers in the 500 largest communities in the nation.
Now people from the big cities would say: "Of course they can save money. What is there to do there to spend on?" I have a better reason: they're selling gas for $1.99 at the new Hy-Vee in West Des Moines. That makes it a little easier to sock it away.
Hat Tip: Tick Marks blog.
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TAX PROFESSOR FOR SENATE
September 15, 2006
A tax professor won the Republican nomination for to oppose Senator Thomas Carper's re-election bid this fall. Professor Jan Ting teaches at Temple University.
I like to think that having somebody in the Senate who actually understands taxes would be a good thing.
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MISSING THAT RAINY WEATHER?
September 14, 2006
After a four or five-day siege of continuous rain and clouds, we have been rewarded with two straight glorious fall days. If you miss the clouds, though, you can have them vicariously by visiting lapsed Iowan Peggy at Whitelees, Scotland.
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FUN WITH RISK MANAGEMENT
September 14, 2006
The new edition of the Cavalcade of Risk is up at the Colorado Health Insurance Insider. Failure to visit will create an uninsurable hazard of missing some good posts on insurable risks. Consider yourself warned!
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PENNSYLVANIA PREPARER'S CLIENTS HAVE A BAD DAY IN TAX COURT
September 14, 2006
It was a tough day for Chester Muhammad's tax clients. The Tax Court handed down five decisions disallowing deductions on returns prepared by Mr. Muhammad, imposing accuracy-related penalties on three of them.
All of the returns claimed deductions for charitible contributions to churches. Each taxpayer gave the Tax Court a computer-generated list provided by Mr. Muhammad listing weekly church donations. None of the taxpayers had any cancelled checks or third-party documents from the churches to back up the donations. It's an amazing coincidence that all of these clients had this exact same problem.
It appears that this won't be a problem for any future tax years, as Mr. Muhammad was summoned by a higher court last February.
Russ Fox has more at Taxable Talk.
Links:
Lewis v. Commissioner, T.C. Summary 2006-140
Harrell v. Commissioner, T.C. Summary 2006-141
Warren v. Commissioner, T.C. Summary 2006-142
Muhammad v. Commissioner, T.C. Summary 2006-144
Warfield v. Commissioner, T.C. Summary 2006-145
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NEWAYS FOUNDERS SENTENCED
September 14, 2006
The founders of the Utah-based multi-level marketing firm Neways received prison sentences yesterday on federal tax charges.
Tom Mower was sentenced to 33 months in prison. His former wife Leslie "Dee" Mower received a 27-month prison term. Both were also ordered to serve a 36-month "supervised release" and to pay fines.
The sentences are at the high end of the range normally indicated for the amount of taxes at issue. I haven't been able to access the judge's sentencing report; it's possible that the judge determined that the use of offshore businesses in the tax crime was a "sophisticated means" of tax evasion, calling for a longer sentence.
The judge rejected the Mower's arguments for leniency based on Mr. Mower's charitable giving and Ms. Mower's family responsibilities.
The Mowers will also have to cooperate with the IRS in determining and collecting their back taxes.
Links:
Tax Update Coverage:
N-E-WAYS OUT OF PRISON FOR THESE MULTI-LEVEL MARKETING MAGNATES?
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CARNIVALS!
September 13, 2006
This week's blog carnivals are up. I entered an item in a new carnival, the Carnival of Fraud, which features a nice piece on government contract fraud.
The new Carnival of the Capitalists and Carnival of Personal Finance are also up. Always good stuff in these weekly roundups of blog entries.
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IOWA: REMAINDER INTERESTS DON'T QUALIFY FOR TEN-YEAR GAIN EXCLUSION
September 13, 2006
When Myron Hass's father died in 1964, he left his widow with a life estate in some Sioux County farmland. Myron and his three siblings were left a remainder interest - they would get full title upon the death of Myron's widow.
Myron farmed the land until his mother's death in 2001. He sold the land in 2002 and claimed Iowa's super-long-term capital gain exclusion. This provision allows taxpayers to exclude from income capital gains from property held for 10 years if they meet certain "material participation" requirements.
This week the Department of Revenue released a ruling that the ten-year holding period didn't begin until Myron's mother died in 2001. Result: no capital gain exclusion.
Related: FARMERS AND ULTRA LONG-TERM CAPITAL GAINS
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HOLLYWOOD EVERYWHERE
September 13, 2006
The Tax Policy Blog points to an article by the Federal Reserve Bank of Minneapolis on state incentives for movie-making - a topic we discussed recently. It's worth reading in full, but I especially like this statement, which applies to all "economic development" tax incentives:
Incentives were not designed to create jobs but to create job announcements.
Exactly so.
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GAO REPORT ON HEALTH SAVINGS ACCOUNT
September 13, 2006
BenefitsBlog notes a new GAO study, "Early Enrollee Experiences with Health Savings Accounts and Eligible Health Plans."
The plans report that most people with HSAs are using them the smart way - to build up savings for use against the high deductibles when needed:
About 45 percent of tax filers reporting 2004 HSA contributions also reported that they withdrew funds in 2004, and 90 percent of these funds were withdrawn for qualified medical expenses. The other 55 percent of those reporting HSA contributions in 2004 did not withdraw any funds from their HSA in 2004.
The study was written for Max Baucus, ranking minority member of the finance committee. He, like other opponents of HSAs, is likely to tout this from the study:
HSA-eligible plan enrollees who participated in GAO’s focus groups generally reported positive experiences, but most would not recommend the plans to all consumers. Participants enrolled in the plans generally understood the key attributes of their plan. Few participants reported researching cost before obtaining health care services, although many researched the cost of prescription drugs. Most participants were satisfied with their HSA-eligible plan and would recommend these plans to healthy consumers, but not to those who use maintenance medication, have a chronic condition, have children, or may not have the funds to meet the high deductible.
This "focus group" stuff is pretty lame. A focus group can be led anywhere the moderator wants it to go. The group generates no statistical data that can be reviewed, so there's no way of knowing whether the report's author is drawing valid conclusions. The conclusion is internally contradicory - everybody seemed happy with their own HSAs, but they wouldn't recommend them "...to those who use maintenance medication, have a chronic condition, have children, or may not have the funds to meet the high deductible." That means they wouldn't recommend them to... most people. It works for most of us, but it won't work for everybody else? Hard to believe.
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A LESSON IN TIME MANAGEMENT
September 12, 2006
It's never a good sign when your judge starts mocking you. Two brothers pushed the Tax Court to the edge of mockery in a case decided yesterday, and they can't be liking the results.
The brothers - Ulysses and Kai Lee - were partners in a partnership that owned three rental properties - a single family home and a five unit apartment building in California, and a small rental property in Hawaii. Kai also owned two other single-family units and a three-plex in his own name; Ulysses other owned a four-plex personally.
The properties generated a tax loss. The tax law has a "per-se passive" rule that treats rental income and loss as "passive"; passive losses are deductible only to the extent of passive income, with net losses carried forward to offset future income until the property is sold.
The "per-se passive" rule has one out: if you are a "real estate professional" and you "materially participate"* in the real estate activities, you may deduct the real estate losses losses. In order to be a "real estate professional," you have to clear two high hurdles:
1. You have to spend at least 750 hours per year in real estate activities, and
2. You have to spend more time on your real estate businesses than you do on your non-real estate businesses.
If you have a full-time job that's not in real estate, this test is nearly impossible to pass - it's tough to work 2,000 hours in your regular job and then 2001 hours on the side. Yet the Lee brothers did their best to convince the Tax Court that they did just that.
They didn't do very well.
First, both brothers had full-time jobs. One was a full-time radiology professor; the other was... an IRS agent!
The brothers presented "reconstructed" logs of the time spent on the activities. The judge wasn't buying:
...the logs introduced at trial are packed with too much exaggeration to be believed. Here are a few examples from Ulysses':
* 280 hours each year to close the books and prepare information about the partnership for he and his brother to use in completing their tax returns.
* 80 hours in 2000 preparing for an IRS audit because the partnership's records were in such disarray, despite his 280 hours of work in closing the books. (The audit of the 2000 returns, of course, did not actually take place in 2000.)
* 24 hours to replace four miniblinds in one of the apartments, 42 hours to paint another, and 56 hours to install a new toilet in a third.
* 186 hours in 1999 to show a single vacant apartment to prospective tenants.
* 200 hours of answering calls from prospective tenants in both years.
* 48-50 hours to wrap coins from laundry machines in one of the apartment buildings.
24 hours to replace four miniblinds? Wow. I thought I was a poor home handyman, but I can't touch Ulysses.
The brothers didn't just rely on spending a lot of time on their real estate business. They also tried to convince the judge they were shirkers at their regular jobs:
But because the brothers had to show not only the time they spent on partnership business, but that it was greater than the time they spent on other jobs, the exaggeration in their logs of real estate work was matched by understatements of time spent at their full-time jobs. Ulysses calculated his hours spent working for the IRS by deducting his sick leave and vacation from a full-time schedule. But the Commissioner introduced time and attendance records from the IRS, showing that Ulysses hadn't used all his available sick and annual leave. This forced him to take the dubious position that he routinely filled in his own time-and-attendance records inaccurately.
Oops! It's a good thing that Ulysses has retired from the IRS; this would have resulted in an interesting performance review.
Kai Lee's testimony on this point was no better. He swore that he worked for the corporation that he owned -- a corporation that produced more than $60,000 in gross receipts for both years -- only 37 hours in 1999, and 3 hours in 2000.
If he grossed $60,000 in revenue with only 37 hours of work, that works out to $1621.62 per hour. Had he spent the 2,000 hours he squandered on the real-estate working for his regular business, he should have grossed $3,243,000 or so, at that hourly rate. Talk about poor time management!
The judge sticks the needle in a little more:
The credibility of the brothers' testimony was undermined even when it touched on other areas. For instance, when asked on cross- examination whether he knew anything about what an IRS appeals officer does, Kai Lee responded: "I don't know any IRS people." His brother Ulysses, who had just retired from his career as an IRS examiner, was sitting at petitioners' table with him at the time.
Ouch. Hey, judge, am I my brother's keeper?
The result, predictably, was for the IRS, including an assessment of accuracy-related penalties.
Cite: Lee, T.C. Memo 2006-193.
*A review of the material participation rules is in the extended entry below.
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$3.4 BILLION. THAT'S A VERY BIG NUMBER
September 12, 2006
The IRS announced the largest tax settlment ever yesterday; Glaxo SmithKline will pay $3.4 billion to settle a transfer pricing dispute. Transfer pricing involves the price a taxpayer charges an offshore subsidiary for goods and services. It's an obvious way to shuffle income from high-tax to low-tax countries and a constant source of conflict between taxpayers and the IRS, which has some ability to reallocate income between controlled entities.
The TaxProf has a link-rich roundup.
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TAX BLOGGERS AND 9/11
September 11, 2006
The September 11 anniversary isn't really a tax event, but it is a universal one, so it isn't surprising that some tax bloggers have thoughts.
Dr. Maule tells of a tax accountant who lost a son in the attacks and who showed enormous spirit in getting a memorial built. Dr. Maule says:
I've never met Elsie Caldwell. Perhaps someday I will. In the meantime, I'll say here what I'd say to her if I met her: "What you've done is outstanding, a tribute to your courage and determination, a gift to many, and a reminder that as geeky as people might think tax folks are, you've made it unquestionably clear that immersion in tax does not shut down the heart. Thank you."
Daniel Shaviro, on the other hand, has a less inspirational view:
The moment I saw the NY Times front page, inexplicably treating Bush's staged 9/11 milking as screamer-headline news, I correctly guessed that the lead article would say he was "visibly moved." But I missed out on the extra credit - the inevitable mention of the "unscripted stop." Anyone want to bet on whether they scripted the "unscripted stop"?
My wife speculates that the "lessons of that day" Bush will "never forget" (as the Times breathlessly quotes him) must have come out of "My Pet Goat."
I added that Bush certainly seemed to have forgotten the lessons of 9/11 when he pulled all those special forces guys off the Osama trail in Tora Bora so they could head to Iraq.
Dr. Shaviro does excellent tax work, as anybody who has used his fine BNA portfolio on passive losses knows. Unfortunately his blog has little tax content and is mostly given over to sophomoric and bitter anti-Bush snipes and rants. Benjamin Franklin's thoughts on John Adams seem to also apply well to Dr. Shaviro:
"Adams is always an honest man, often a wise one, but sometimes, and in some things, absolutely out of his senses."
My own memories of 9/11 are here.