Tax Update Blog: February 2007 Archives

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LET IT SNOW: MARCH 1 FARM FILERS GET ICE STORM EXTENSION

February 28, 2007

Farmers who are slip-sliding to their mailbox to mail their returns by March 1 can skate back inside. The IRS today announced that it is waiving the March 1 deadline for farmers and fishermen affected by the recent ice storms. From the announcement:

Generally, farmers and fisherman can avoid an estimated tax penalty if they file their returns and pay the full amount of tax shown on their return by March 1, 2006. An individual is a farmer or fisherman for these purposes if two-thirds of the individual’s total gross income for the taxable year or the preceding taxable year is from farming or fishing (including oyster farming).

If a taxpayer has an underpayment of estimated tax, all or part of the penalty for the underpayment may be waived if the IRS determines that the underpayment was due to a casualty, disaster or other unusual circumstance and it would be inequitable to impose the penalty.

To request a waiver of the estimated tax penalty, complete Form 2210-F Underpayment of Estimated Tax by Farmers and Fisherman. As indicated in the instructions, attach a statement explaining the reasons you are unable to meet the estimated tax requirements. At the top of your request write “Request for Waiver Due to Winter Ice Storms”.

UPDATE: Iowa has extended its deadline for March 1 farm filers to March 15.

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BERTHA DON'T YOU COME AROUND HERE ANYMORE, SAYS IRS

February 28, 2007

While the name "Bertha's Tax Service" sounds synonymous with "quality," the IRS doesn't see it that way. They want to shut Bertha down.

The IRS says Bertha's Tax Service as been less than punctilious in its tax preparation business. From the IRS complaint:

13. [Bertha] Steverson solicits basic information from her customers, which includes only amounts paid to them for wages and their number of dependents. Steverson reviews the customer’s information and tells them that she can increase their refund amount by including additional deductions (other income tax preparers would not claim.)

14. Steverson asks the customers to leave only their Forms W-2 with her, and she explains that she can “massage” their tax returns, to increase the amount of the customer’s tax refund. In most cases, Steverson’s customers were not provided an opportunity to review the income tax return before it was filed. Most customers reviewed
their income tax returns for the first time during an IRS audit. During the audits, the customers acknowledged the deductions claimed on their returns were false, and not based on information they provided to Steverson.

In Chicago nowadays, it appears "massage" is now a synonym for "mangle" or "abuse." I'll have to remember that if I'm ever there and have a backache.

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AMT - ISO VICTIMS RUNNING OUT OF VENUES

February 28, 2007

Many taxpayers holding incentive stock options (ISOs) at the time of the tech-bust of 2000 ended up with a big alternative minimum tax liability on worthless stock options. They have been in court ever since trying to get a better deal. The Tax Court and circuit courts have turned down their arguments. Now they've also lost in the Court of Federal Claims, a venue not often used to fight tax cases.

The AMT plaintiff this time was Lauren Guzak, who had over $1.5 million in AMT income from ISOs. When the stock dropped the value of her ISOs by $600,000, she tried to claim it as all currently deductible. Like every other court, the Court of Claims held that the loss was a capital loss, and AMT capital losses are subject to the same $3,000 annual limit as regular losses.

Looking on the bright side, Ms. Guzak can look forward to a $3,000 annual AMT capital loss for the next 200 years. She can also use recently enacted legislation to get refunds of part of her ISO AMT liability. (UPDATE: the new law may not do her any good. See the comments).

Cite: Guzak, Court of Claims No. 05-1070T

Related: YET ANOTHER AMT-ISO VICTIM LOSES IN TAX COURT

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THE IRS WANTS TO HEAR ABOUT THAT ACCOUNT IN THE CAYMANS

February 28, 2007

The IRS issued a Fact Sheet yesterday covering the requirements for reporting foreighn financial accounts:

Who is required to report their foreign accounts to the government, and how do they do so? The Bank Secrecy Act requires U.S. persons who own a foreign bank account, brokerage account, mutual fund, unit trust, or other financial account to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Authority (FBAR), if:

1. The person has financial interest in, signature authority, or other authority over one or more accounts in a foreign country, and
2. The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.

These forms are due by June 30. Failure to file can lead to unpleasant consequences:

For an FBAR violation occurring after Oct. 22, 2004, the maximum civil penalty for a willful violation of the FBAR reporting and recordkeeping requirements is the greater of $100,000 or 50% of the balance in the account at the time of the violation. Non-willful violations can result in a penalty as high as $10,000 for each violation. Criminal violations of the FBAR rules can result in a fine and/or five years in prison.

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I'LL BE RIGHT BACK, SURE

February 28, 2007

I hear the weather on the Mediterranean is delightful this time of year. One might even be tempted to linger:

ROCKFORD — A Rockford psychiatrist accused of underreporting his income by several million dollars on tax documents will be allowed travel to Lebanon while the case against him proceeds.

The United States Justice Department has accused Imad Al-Basha of underreporting his income and the income of the dermatology business
his wife owns by more than $3 million since the year 2000.

Al-Basha appeared in court on Tuesday with his attorney Jim Zuba and pleaded not guilty to the charges.

This isn't typical. Most people have to surrender their passports if they are indicted. The U.S. Attorney objected here, but the Magistrate Judge Michael Mahoney decided the travel would be fine under strict conditions:

Mahoney decided that Al-Basha would be able to travel to Lebanon for one week every four weeks as long as he made sure the court knew how to reach him in that country.

The judge shows a lot more faith in human nature than I would.

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IT'S A LONG WAY FROM HERE TO TED'S CONEY ISLAND

February 27, 2007

Welcome to the newest addition to the Kaleidescope Food Court:

You'll notice that the Sushi Box is as far away as possible from the Food Court's Maid-Rite shop.

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STATE ECONOMIC INCENTIVES: A LOSERS GAME?

February 27, 2007

Two maps say something about state tax incentives for economic development: they're for losers.

First: a map of state investment tax credit policies:

(Source: Chirinko and Wilson, State Tax Investment Incentives: A Few Facts. Tax Notes, 2/26/2007 ($link))

Next: a map of state economic growth:

(Source: Bureau of Economic Analysis)

While state investment tax credit policies aren't a perfect indicator of state economic development tax credits, they'll work as a rough indicator. You'll see that the incentives tend to cluster among the states with the weakest economic growth. Only one strong growth state (dark blue in the second map) - mighty Idaho - has an investment tax credit. Lots of the weak growth (yellow) states do.

The moral? You can't grow the economy of your whole state by taxing your existing businesses to lure and subsidize their competitors. Maybe you should try instead to make your state a good place for everyone to do business - not just those with the lobbyists and tax consultants to bag investment credits.

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HEALTH SAVINGS ACCOUNTS DON'T REGISTER WITH REGISTER

February 26, 2007

The Des Moines Register had a piece this weekend about strategies used by small business to control health care costs. They made room for Jack Hatch to plug his "universal" health plan, but there isn't a peep about high-deductible insurance, HSAs, or any other aspect of consumer-driven health care. Needless to say, there's no mention of the new Bush administration health care proposals.

The Register seems to be unware that there could be any path to health care reform other than more government.

Related:

CENTER-LEFT THINK TANK LOOKS AT BUSH HEALTH PROPOSALS

IN THIS CORNER, THE VILLANOVA MAULER

DR. MAULE AND THE BUSH HEALTH CARE PLAN

STATE OF THE UNION HEALTH CARE PROPOSAL

WHITHER HEALTH INSURANCE TAX?

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IOWA LAW BLOGGER TALKS ABOUT S CORPORATION EMPLOYMENT TAXES

February 26, 2007

Des Moines lawyer Rush Nigut talks about the employment tax savings potential of S corporations at Rush on Business.

These savings are the ones associated with the "John Edwards Tax Shelter." You can read more here. It's an issue the IRS is hitting hard on audits right now, so it's a tool to be used carefully.

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NORMAL WINTER DRIVING CONDITIONS

February 24, 2007

The view from the Interstate 235 "trip camera" at 22nd street in West Des Moines this morning. No, it's not a focus problem; that's what it looks like through the coating of ice on the camera.

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TOWER EXECUTIVE RESOURCES CLIENT GETS TWO YEARS

February 23, 2007

A California dentist today received a two-year sentence for participating in a Tower Executive Resources offshore tax scam. From the Department of Justice press release:

According to the indictment and evidence introduced at trial, in approximately 1995, Lewis became a client of Tower Executive Resources, a Denver organization that promoted a tax evasion scheme involving the use of false invoices and secret offshore bank accounts. Lewis’ medical practice paid bogus expenses to Tower to generate false tax deductions. Tower then deposited the bulk of the funds into a secret offshore bank account that Lewis controlled.

Over a 10-year period, Lewis sent approximately $300,000 to a secret offshore bank account through the Tower system. In addition, when the IRS learned of the Tower scheme and audited Lewis’s tax liabilities, he stopped filing income tax returns and falsely claimed that he believed the law did not require him to file returns.

Maybe he doesn't believe the law says that, but the judge, the federal marshals and the Bureau of Prisons feel otherwise.

Scam organizers Lester Retherford and Paul D. Harris are already serving federal sentences.

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THE ART OF SPECIAL INTEREST LEGISLATING

February 23, 2007

A tremendous new "economic growth" bill was introduced this week in the Iowa legislature. HF 456 would do three big things:

1. It would broaden the definition of "cultural and entertainment district."

2. It would allow artists to deduct the appreciated value of their own work when it is donated to charity; and

3. It would allow artists living and working in cultural and entertainment districts to skip Iowa income tax on the first $25,000 of income from the sale of "a unique work of art."

This could have two tremendous effects on my practice. First, the deduction for appreciated self-created work of arts would finally enable me to realize my long held dream: opening the Digital Museum of Deductible Art.

Second, I consider everything I do to be a unique work of art, in its own way. I do almost all my work on a computer connected to the Internet, which is certainly worthy of designation as a cultural and entertainment district. That $25,000 tax exemption is as good as mine!

Tacks Shelter, Vol 2. Artist: J. Kristan. Estimated Fair Market Value: $25,000.

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MOMMY'S GOING AWAY, BUT THE TAX COURT SAYS IT'S TEMPORARY FOR NOW

February 23, 2007

Cynthia Rowe was struggling as a single mom in 2002. She supported her two children in Eugene, Oregon with wages, unemployment benefits, welfare and food stamps. She then took a bold step in early June 2002 to secure long-term accomodations, shooting her brother-in-law in the head.

One thing led to another, and Ms. Rowe ended up with a life sentence for first-degree murder. Even so, she was attentive to her income tax obligations, filing a timely 2002 tax return claiming a refund under the earned income credit. She got her refund, but the IRS then wanted it back. The IRS said that her June incarceration meant she failed to "share the same principal place of abode" with her children for half of 2002 - one of the requirements to receive the credit.

The Tax Court decided, in effect, that she was innocent until proven guilty:

We find that an individual confined in jail after an arrest but before conviction is necessarily, but nonpermanently, absent from his or her home. Such an individual generally intends to return home, just as an individual in military service or afflicted by illness intends to return home once he or she is able. Thus, the necessary, nonpermanent absence of jail confinement is similar to those examples listed in the head of household regulations.

The moral? However dire the circumstances, it's always worthwhile to file your return on time.

Cite: Rowe, 128 T.C. No. 3.

UPDATE: The Tax Prof has more.

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OREGON ALSO HAS NICOTINE-CRAZED LEGISLATORS

February 23, 2007

A policy debate in Oregon has an eerie resemblance to the the Iowa Legislature's impending $1 hike in cigarette taxes. Like the Iowa scheme, the Oregon hike will be linked to new health insurance programs.

The Tax Policy Blog finds this unwise:

There really is no justification for raising the cigarette tax to pay for this children's health care program. If the program is worthwhile on its own, it should be funded by general revenue. Taxing cigarettes and funding a children's health insurance program are totally separate, and there is absolutely no legitimate reason for why one should fund the other beyond the fact that cigarette tax hikes are easier sells politically than raising taxes on everyone.

What's even stranger is the way that Iowa's tax hikers say the higher tax will reduce smoking. While it's nice that they admit that taxes affect behavior, it means that if the tax is successful in affecting behavior, the new programs will lose their funding as smokers quit. If you think they'll cut back the programs if the funding dries up, you're smoking something much stronger than Winstons.

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HAPPY BIRTHDAY, GEORGE

February 22, 2007

Today is George Washington's birthday. Few people anymore realize that he was the most important figure in America in five decades. It would be as though President Kennedy had just now retired from public life. He's called "the indispensable man" for a reason.

He left his mark on the tax law both through his efforts in writing a constitution with a strong central government and his determination to enforce the federal tax laws. The picture above shows him actually leading the troops as commander-in-chief of the armed forces to suppress the Whiskey Rebellion, a tax uprising in Pennsylvania.

Ed Brown, take note.

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DELIVERING THE GOODS; FRAUD ROUNDUP

February 22, 2007

Russ Fox's Taxable Talk has a roundup of some recent tax fraud cases, incuding the sad story of a man who became a day-trading celebrity during the late 1990s stock market frenzy.

He also has a very handy listing of actual street addresses for IRS service centers for taxpayers submitting filings to the IRS using private delivery services.

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BUSH HEALTH PROPOSAL FACT SHEET

February 22, 2007

The White House is continuing to push its plan to radiacally restructure the U.S. health insurance market. The effort includes a new fact sheet issued yesterday. It lays out the basics of the proposal:

The Current Tax Code Is Unfair To Americans Who Do Not Get Health Insurance Through Their Jobs. Unlike those who get insurance through their jobs, people who buy health insurance on their own have to pay for it with after-tax dollars and receive no assistance from the tax code. Americans who are self-employed pay no income taxes on their premiums, but because they still owe payroll taxes, they are also disadvantaged compared to those who get insurance through their employers.

* Under Current Law, The Tax Code Also Pushes People Toward Expensive Health Insurance And Lower Wages. The more expensive the health insurance plan people receive through their employers, the more tax relief they get. This makes the insurance market less competitive and pushes up prices for everyone by encouraging many workers to choose more expensive health insurance than they would choose if the tax code were not distorting their decision.

The President Has Proposed Replacing Our Current Health Insurance Tax System With A Standard Deduction For Health Insurance. Under the President's proposal, families with health insurance will pay no income or payroll taxes on $15,000 dollars of income. Single Americans with health insurance will pay no income or payroll taxes on $7,500 of income.

Prior Coverage:

CENTER-LEFT THINK TANK LOOKS AT BUSH HEALTH PROPOSALS

IN THIS CORNER, THE VILLANOVA MAULER

DR. MAULE AND THE BUSH HEALTH CARE PLAN

STATE OF THE UNION HEALTH CARE PROPOSAL

WHITHER HEALTH INSURANCE TAX?

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MORE PATENT ABSURDITY

February 22, 2007

The TaxProf has two posts on efforts of the American Bar Association Tax Section to cope with the proliferation of patents for tax strategies.

This post reports on a letter sent by the Tax Section's patent task force to the IRS urging them to require that all "patented" tax strategies be disclosed on tax returns as "reportable transactions."

That strikes me as a lame and doomed improvisation. All it would do would be to add an inconvenience to the use of patented tax strategies. One of the biggest dangers of these patents is the liklihood that patents are being issued on things people will do anyway; they will keep on doing what they have always done and find themselves inadvertently violating disclosure requirements resulting from some patent they've never heard of.

I'm convinced there's a much more direct and effective approach to the problem. Putting this language in the US Code should do the trick:

(a) No patent shall be granted for any method of compliance or planning with respect to Title 26 of the U.S. Code.

(b) Any patent granted prior to the date of enactment of this Section with respect to a patent referred to in subsection (a) shall be null and void.

The TaxProf also posts on a teleconference scheduled today for lawyers on issues raised by tax patents.

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JUST MAIL ME THE TITLE DOCUMENTS

February 22, 2007

Ed Brown, the convicted tax evader holed up in his fortress house in New Hampshire, just gave me an office building, according to Concord Monitor Online:

Ed Brown also offered his wife's West Lebanon dental office as a reward to the first person who can show him a law making him and his wife liable for any federal income taxes. He values the building at $1 million.

As we already did that, we get a building, right? Well, maybe not:

If Brown gives away the building, he will be violating a restraining order.

Well, the building may not be a bargain anyway. The tenant base is worthless, as his wife won't be working the dental office anytime soon. She too is holed up in the house in violation of her post-conviction bail on tax evasion charges, pending the prison sentence that will begin after they end their own self-imposed house imprisonment.

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DIRTY, DIRTY DOZEN SCAMS

February 21, 2007

The IRS issued its updated "Dirty Dozen" list of tax scams yesterday. Five new scams made the elite list, led by the new problem of telephone excise tax refund abuse.

Don't Mess with Taxes has detailed coverage, and the TaxProf is also on the case.

The five scams that fell off the list this year were unavailable for comment, but were reported by their publicists to be recovering at home.

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TOURNAMENT POKER IS STILL A GAMBLE

February 21, 2007

The Tax Court ruled yesterday that poker tournaments are gambling under the tax law, rather than sporting events like a football game (after all, nobody gambles on football, right?).

Tax bloggers are flooding the zone on this one. Russ Fox is the go-to guy on gambling tax issues, and he has coverage here. The Tax Prof and Kreig Mitchell are also on the case.

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NO RECORDS, NO DEDUCTION

February 21, 2007

If you want to take a deduction, you have to be able to document it. If you want to take a business deduction, you need to have at least rudimentary business records to document the who, what, when, where and why of your business spending.

Armies of government employees have lived comfortably off the extra taxes paid by taxpayers who fail to maintain their business records. Another taxpayer was defeated by poor records in Tax Court yesterday.

Robert Damron was a postal worker in San Francisco in 2001. He also ran a little side business:

At trial, petitioner gave examples of the services he provided, such as assisting businesses collecting debts from customers, searching courthouse records or newspapers that might provide information that could lead to assets of delinquent customers, negotiating with debtors, etc.

His day in Tax Court went badly:

At trial, petitioner offered into evidence copies of various checks that were issued purportedly for payment of expenses related to the activity; however, no documentation was offered to tie in or corroborate that such payments were in connection with the business activity. Petitioner claims he had such information at home and did not realize that such information was crucial to his case.

The case should never have gotten to the point where Mr. Damron was trying to explain cancelled checks to a judge. If he had kept decent records, the original IRS agent who audited him would have probably gone away satisfied. While keeping good business records is wise for many reasons, it's essential for taking business deductions.

Cite: Damron, T.C. Summ. Op. 2007-24

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TAX COURT REJECTS 'MURPHY'-TYPE ARGUMENT, IMPOSES PENALTIES

February 21, 2007

Murphy's law doesn't work in the Tax Court.

Marcia Green was a non-tenured Humanities instructor at San Francisco State University. She filed a discrimination complaint after she was turned down for a tenured position. The complaint wasn't upheld and the university stopped assigning her to teach courses. She sued and in 2002 won a $2.3 million judgement when the jury found the university retaliated against her because of her discrimination complaint.

Ms. Green filed a 2002 Form 1040 that omitted her lawsuit proceeds. The IRS disagreed with her position and assessed her a $909,000 tax deficiency and a $181,000 "accuracy-related" penalty. The accuracy related penalty applies when you understate your liability by 20% or more without reasonable cause.

Since 1996 the Internal Revenue Code has stated that personal injuries can be excluded from income only when they are for "physical" injuries. Before it withdrew its own decision, the Federal Circuit Court of Appeals held in Murphy that the 1996 provision was unconstitutional.

The Tax Court ruled against Ms. Green yesterday. The Tax Court didn't discuss the Murphy case in its decision; in fact, it ignored Murphy's "return of human capital" argument entirely. The opinion simply stated that the damages are income under the long-standing Glenshaw Glass reasoning. The 1996 change in the law required damages to be "physical" to qualify for exclusion. They weren't, so they didn't, and the taxpayer lost.

By imposing the accuracy-related penalty, the court seems to say that the Murphy logic wasn't even enough to pass the laugh test. That may not be entirely accurate; its decision might simply be saying that she didn't rely on professional advice when she decided to not report the income. Even so, it doesn't look like the Tax Court is very impressed with the Murphy rationale.

Cite: Green, T.C. Memo 2007-39.

Link: Complete Tax Update Murphy coverage.

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DES MOINES LAWYER PUBLISHES LAW REVIEW PIECE ON 'MURPHY' ISSUES

February 20, 2007

The TaxProf notes that John Fatino of the Whitfield and Eddy law firm has published "The Tax Treatment of Verdicts and Settlements Following the Adoption of the Jobs Creation Act of 2004: Paradise Found for the Employment Lawyer?" in the Northern Illinois University Law Review. It covers the issues that rose to prominence following the now-withdrawn Murphy decision on whistleblower damages.

Mr. Fatino seems to think that the original Murphy logic may hold up:

Shortly before this article went to press, a panel of the United States Circuit Court of Appeals for the District of Columbia held § 104(a)(2) unconstitutional, in so far as it permits the taxation of an award of damages for mental distress and loss of reputation, because such items would not have been income to the framers of the Sixteenth Amendment to the United States Constitution. Practitioners should closely examine this opinion for additional grounds of attack on the taxation of physical and non-physical injuries. Moreover, there is an excellent discussion as to whether a payment on account of physical injury is compensation for loss of capital.

Congratulations to Mr. Fatino for his work and for getting published.

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FISCAL NICOTINE ADDICTION

February 20, 2007

Governor Culver's biggest fiscal initiative is a $1 per pack cigarette tax to fund a health-insurance program. Don't Mess With Taxes points out a danger of nicotine-based public finance:

This year, according to an Associated Press story, New York, Massachusetts and Illinois are all forecasting a drop in cigarette tax revenue. I wouldn't be surprised to see that trend here in Texas, too.

The reason for the decrease? Higher cigarette taxes. In the Lone Star State, the per-pack levy went up a full dollar on Jan. 1.

But rather than bringing in more money because the tax is higher, it seems that the taxes are finally prompting some smokers to kick the nicotine habit. More nonsmokers means less cigarette tax money.

Supporters of the tax find themselves making contradictory arguments: it is good for public health because people will quit smoking; it is also sound policy to enter into long term spending committments with tobacco money because people will keep smoking. The likely result is a long-term fiscal fiasco.

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MUDDY CARNIVAL

February 20, 2007

The snow is melting, the cars are all dirty, so celebrate your grimy car with this week's blog carnivals.

The Carnival of the Capitalists is "preparing to go back to its quality roots." You can see what this means at SimplifyThis.

The Carnival of Taxes is back home at Don't Mess With Taxes. You can read Dan Meyer's (TickMarks) contribution on Tax Deduction Wallflowers.

The Carnival of Personal Finance is at Stock Market Beat this week.

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LOOKS LIKE THINGS WILL BE GETTING LIVELY AT BT

February 20, 2007

The actual story can only spoil this headline in the UK newspapaper The Independent:

Accountant Rake succeeds Bland as BT chairman

We've known a few accountant rakes in our day, but they managed to be bland at the same time.

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BECAUSE TOM ARNOLD NEEDS A SUBSIDY

February 19, 2007

The Des Moines Register reports that the bill to subsidize Iowa filmmakers and their vendors with tax credits has been introduced (SF 183) in the Iowa Senate. The bill, as expected, provides tax credits that filmmakers can sell, so the state ends up providing a direct cash subsidy to Iowa film projects. From the Des Moines Register piece:

The effort in the Legislature to make Iowa more competitive is receiving encouragement from actor Tom Arnold, an Ottumwa native. He has conferred with leading House and Senate sponsors of the bills.

Arnold would like to do some of his acting work in Iowa, said Rep. Mark Davitt, an Indianola Democrat. "He'd like the same thing for young people in Iowa, so they can do their creative work here"

Oh, come on. It's for the "young people"? That's what Harold Hill said, too, but he didn't have 27 co-sponsors.

Prior coverage:

HAROLD HILL WANTS US TO FINANCE HIS FILM

HAROLD HILL WANTS TO MAKE A MOVIE IN IOWA

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STAN VER PLOEG, 1924-2007

February 19, 2007

We lost a good friend last week. Stanley Ver Ploeg died in an auto accident in Knoxville, Tennessee.

Stan and his long time business partner, Bob Savage, were Roth & Company's first landlords in 1990, when we were just five guys with card tables and telephones.

Stan and Bob founded Savage - Ver Ploeg and Associates (now SVPA Architects, Inc.), one of Iowa's premier architecture firms. He leaves behind a legacy of elegant modern design.

Our thoughts and prayers are with Virginia and the rest of Stan's family.

Link: Des Moines Register obituary.

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HOUSE PASSES THEIR MINIMUM WAGE TAX RIDERS

February 19, 2007

The House of Representatives has passed its minimum wage bill with a set of tax provisions that differs from that passed by the Senate. The differences have to be worked out in conference.

The tax provisions are designed to compensate businesses for the higher minimum wage. The Tax Policy Blog says the tax provisions show that two wrongs don't make a right:

As we said in an earlier blog post, if Congress wants to compensate those harmed by minimum wage laws, they would be better off giving every American a $20 gift certificate to his/her favorite restaurant rather than trying to pass certain tax provisions targeted to various types of company behavior.

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DEVELOPING THE ECONOMY BY GIVING MONEY AWAY

February 17, 2007

There are several bills in the hopper in the Iowa legislature to increase the allowable tax credits for rehabbing old buildings. One has an interesting twist: it would give money away for buildings that have already been rehabbed. HF 360, introduced by the "Committee on Economic Growth," increases the value of historic rehab credits that have already been issued but haven't been used.

Iowa's rehabilitation credit allows taxpayers to eliminate their Iowa tax tax with their credits dollar-for-dollar. If the credits exceed their tax, the state gives an actual cash subsidy of up to 75 cents for each dollar of credit, using a discounting formula. Taxpayers get a certificate showing the amount of credit they are entitled to.

HF 360 eliminates the discount for tax credits issued before 2007. This means people who have already been awarded credits will get a free windfall from the state for work that they've already done or committed to.

I think credits like this are at best questionable, but there's at least a logical argument for giving taxpayers a subsidy to rehab old buildings that haven't yet been fixed up. These credits, though, are for work that's already done, or that people have agreed to do for the credits that were already available. No business would pay a contractor that way, but that's economic growth, Iowa-syle.

Follow the progress of this bill and all other 2007 Iowa session tax legislation at our 2007 Iowa Tax Legislation page.

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IT'S NOT ALWAYS A TAX PROBLEM

February 17, 2007

We've noted the tendency of lawmakers to consider the tax law a sort of Leatherman Tool of public policy - it can do anything! Unfortunately, the more things the tax law does, the worse it is at its essential function: raising the revenue needed to support essential functions of government.

The TaxProf notes an important study of one aspect of this problem, Implementing Disaster Relief Through Tax Expenditures: An Assessment of the Katrina Emergency Tax Relief Measures, 81 N.Y.U. L. Rev. 2158 (2006).  From the abstract:

Unprecedented before 2001, tax relief targeted to a disaster in a specific geographic region has now been established on two occasions--in the wake of the 9/11 attacks and in the aftermath of Hurricane Katrina. This Note argues that, in a disaster, both the vulnerability of lower-income taxpayers and the weaknesses of the Internal Revenue Code as an instrument for social programs are amplified.

Tax policies implemented in response to a disaster will be far too slow to help in the immediate recovery and are impossible to design precisely to help where its most needed. Once in place, they are hard to remove. But bad idea or not, the tendency towards spastic policymaking in the wake of disaster gives us reason to expect more tax responses after whatever disaster comes next.

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AND HOW DOES ARTIFICIAL ENDOWMENT COME INTO PLAY?

February 17, 2007

Does the placement of these stories on the TaxProf Blog, captured in this screen shot, suggest that they are related?

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MARCH 2007 APPLICABLE FEDERAL RATES (AFR) ISSUED

February 17, 2007

The IRS has issued (Rev. Rul. 2007-15) the minimum interest rates for loans made in March 2007:

-Short Term (demand loans and loans with terms of up to 3 years): 5.06%
-Mid-Term (loans from 3-9 years): 4.86%
-Long-Term (over 9 years): 5.01%

Historical AFRs are available at the "links" page at www.rothcpa.com.

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WHY ACCOUNTANTS ARE BETTER THAN TED KENNEDY

February 16, 2007

From the AICPA News Update:

AICPA Hero Jumps into Durham Swamp to Save Car Crash Victim from Drowning

Marcella Wyler, an AICPA finance staffer, risked her life by jumping into a freezing Durham swamp to save a woman whose car was upside down in several feet of water after an accident. Wyler and two other rescuers jumped into the water and pulled the woman to safety. This incident occurred less than a mile from the AICPA office in Durham, NC. Our hats go off to Marcy and the other rescuers for their courage, selflessness and quick response to a tragic situation. To find out more, visit ABC News site.

Mary Jo Kopechne could not be reached for comment.

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ATTENTION, EASTERN IOWA ENTREPRENEURS!

February 16, 2007

Check out the featured property today at the IRS Auction Page:

602 Lombard Street, Clarence, IA 52216 - Outside, in front of building. Property consists of a 2392 sq. ft., three-story brick building on a 26 foot by 92 foot lot. Building was constructed in 1900; main floor of the property is currently operated as a bar & grill, upper floors contain 3 apartments.

A great opportunity on the booming low-tech Highway 30 corridor between Mechanicsville and Clinton. The auction is February 22, so act now!

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WALL STREET JOURNAL HAS TAX SEASON BLOG

February 16, 2007

The Wall Street Journal has started a tax blog to run through the tax season. The Tax Blog should be available whether or not you are an online WSJ subscriber. It joines a blog family that includes the Law Blog and Washington Wire.

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CENTER-LEFT THINK TANK LOOKS AT BUSH HEALTH PROPOSALS

February 16, 2007

The center-left Tax Policy Center has a surprisingly favorable report on the Bush health care standard deduction proposal. From the report's introduction:

The president's plan effectively turns the existing tax subsidy for health insurance into a kind of voucher. It would increase the amount of tax relief that subsidizes acquisition of some health insurance while eliminating the tax advantages at the margin for increased consumption of health care over all other goods. The proposal will almost certainly encourage some people who currently lack insurance, particularly middle-income families, to get it. And the core of the new proposal is not biased towards the provision of favored forms of insurance (e.g., high deductible policies) over other forms of insurance that could reduce spending (e.g., managed care or plans with higher copayments).

However, as under current law, the subsidy will be more valuable for high-income people than for those with lower incomes who most need help. In fact, low-income households with no income tax liability would get very little help, as is true under the current structure. These limitations could easily be addressed by converting the proposed standard deduction into a flat credit or even a sliding-scale credit that is larger for low-income families.

The report also questions whether the proposal adequately encourages the development of markets in individual health insurance. Considering the source, this is praising the plan with faint damns.

Prior coverage:

IN THIS CORNER, THE VILLANOVA MAULER

TRY ON THE PRESIDENT'S HEALTH PLAN

STATE OF THE UNION HEALTH CARE PROPOSAL

WHITHER HEALTH INSURANCE TAX?

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NEW GUIDANCE SETS MARCH 15 DEADLINE FOR ROLLOVERS OF 2006 FLEX PLAN BALANCES TO HSAs

February 16, 2007

The tax act passed at the end of the last Congress allows taxpayers to roll some heath care flex-plan balances into Health Savings Accounts. The IRS yesterday issued rules (Notice 2007-22) for these rollovers. For rollovers from amounts in flex-plans at the end of 2006, the balances can go into HSAs if the employer amends the flex plan to allow the rollovers by March 15, 2007.

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BARRINGTON BARRISTER BANISHED

February 16, 2007

The party's over for Barrington, Illinois attorney Robert Wayne Hallock. He had a good time with the proceeds of a $1.8 million fraudulent financial instrument, including a $100,000 honeymoon on a yacht.

The party wound down yesterday when Mr. Hallock was sentenced to 24 months in prison.

Perhaps he'll skip through the prison gates humming the lyrics to one of the great pop tunes of the legal profession:

I admire, my attorney Bernie
I admire, any guy who knows his stuff
Sure we blew a couple ventures
with a counterfeit debenture
But you win a few, you lose a few
and like Bernie says you keep on hanging tough

Thanks to you, my attorney Bernie
Thanks to you, I'm considered well-to-do
Sure I made out like a bandit
Just exactly like you planned it
But like Murray my accountant
told me yesterday, I owe it all to you.

Link: Prior Tax Update Coverage.

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ECONOMIC DEVELOPMENT, OR DE SOTO'S REVENGE?

February 15, 2007

Grow the Iowa economy by subsidizing Spain?

That seems to be the plan. Between forgivable loans and tax credits, Acciona Energy of North America is lining up for over $5 million in aid to build a wind turbine factory. State 29 does the math:

Iowa taxpayers will be spending almost $47,000 for each of the 110 jobs that pay an average of $31,500 a year if Acciona get all the taxpayer-financed corporate welfare they seek.

De Soto would have had an easier time if he had tax credits and forgivable loans.

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IT'S OUR DESTINY: IOWA NEAR TOP IN INCOME, SALES TAX RATES

February 15, 2007

The Tax Policy Blog has a post linking a number of state-by-state tax comparision charts. You can go here for the corporation income tax rates, individual income tax rates, sales tax rates, and property tax and tax burden comparisions.

Iowa has the highest corporate rate in the country, at 12%, and the 5th highest individual tax rate, at 8.98%. Sure, we we get lots of special interest breaks and federal deductibility, but that just means we have a lot of complexity to go with our high rates.

The highest sales tax rate among the states is 7%, in Mississippi, Tennessee, Rhode Island and New Jersey. Central Iowans will vote on whether to join this elite group in the "Project Destiny" referendum this spring. With all Iowa counties now having a local option sales tax, we have a 6% statewide sales tax rate. The 1-cent Project Destiny tax will put central Iowa in the same 7% league as Tupelo and Newark for economic and cultural dynamism.

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KPMG CRISIS RECALLED IN WALL STREET JOURNAL

February 15, 2007

The Wall Street Journal has a page-1 piece today on accounting giant KPMG's near-death experience. It tells how Timothy Flynn took the reins of the firm when the former chairman stepped down after being diagnosed with a fatal brain tumor. Only three days later, Mr. Flynn was in conference with the Justice Department trying to keep the firm from being indicted for its tax-shelter dealings.

It's an interesting account of how KPMG narrowly avoided being put out of business by its tax shelter products. It certainly is a different firm than it was in 2005.

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SO WHAT DO THE BEARS AND COUGARS WEAR NOW?

February 14, 2007

Explanation to SSB 1220, proposed by the chairman of the Iowa Senate Natural Resources Committee:

This bill adds black bears and cougars to the list of fur-bearing animals.

They'll be happy to give up the polyester, no doubt.

Actually, the bill is much worse than just silly:

Currently black bears and cougars are not addressed in the Code and as such are unprotected nongame animals. As fur-bearing animals, black bears and cougars may be taken legally only during an open hunting season established by the natural resource commission.

Just what we need. It's not enough to have deer killing people; now we'll throw real predators into the mix, under the protection of the state. We'll all be jittery going outside if they control wildcat numbers as well as they've controlled deer numbers. Maybe there will be a new DNR policy: "When you shoot them, they're our cougars; when they eat you, they're your cougars."

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IOWA CORPORATION COMBINED REPORTING BILL INTRODUCED

February 14, 2007

The bill to impose combined reporting of income of "unitary" corporations filing consolidated returns (HF 326) has been introduced in the Iowa House. It's a key part of the Governor's budget and seems certain to pass. From the bill explanation:

This bill requires that the net income of affiliated groups of corporations engaged in a unitary usiness be computed on a combined return basis for corporate tax purposes if the group meets the requirements for filing a consolidated return for federal tax purposes. The affiliated group would include corporations with common ownership whereby one or more corporation sown 80 percent or more of another corporation. The bill would require that one Iowa corporate income tax return be filed that would include all unitary members of an affiliated group. Any nonunitary member that is subject to Iowa tax would file its own separate corporate return. Only Iowa sales of those corporations doing business in Iowa would be included in the numerator of the Iowa sales ratio. The bill also provides that only those corporations doing business in Iowa are jointly and severally liable for the tax of the combined return.

The bill applies retroactively to January 1, 2007, for tax years beginning on or after that date.

Because the bill is retroactive, it will affect estimated tax payments this year for many coporations.

Track all Iowa 2007 tax legislation at our 2007 Iowa Tax Legislation page.

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STRANGEST ATTEMPT TO INFLUENCE A SENTENCING JUDGE?

February 14, 2007

I don't know if showing a little leg to a judge has ever worked in getting a sentence reduced, but I'm pretty sure it's never worked for a 64 year-old, 366 lb. defendant:

A picture may be worth a thousand words, but a whole stack of them did not suit this self-styled seer to the stars.

"Can I show you my legs?" Caryville psychic David Marius Guardino, 64, asked Senior U.S. District Judge James H. Jarvis Tuesday.

In fairness, it appears he wasn't trying to addle the judge with his good looks:

"Come on up here," Jarvis responded, setting the stage for a surreal courtroom encounter in which Jarvis stood up from the bench and peered over it to watch as Guardino hoisted his pant legs to convince the judge he deserves judicial mercy because of health woes.

Sexy or sad, Mr. Guardino's legs didn't impress the judge:

Guardino was facing Jarvis on Tuesday to be sentenced for failing to pay taxes on $1 million he's earned from his soothsaying. With an earlier federal conviction for bilking customers, Guardino's bid for mercy was in trouble from the start.

It also didn't help that Jarvis considered most of Guardino's health woes to be the result of his obesity. Guardino has weighed in at nearly 500 pounds, though he told Jarvis he's dropped down to 366.

"What came first - the overweight (condition) or the leg problem?" Jarvis asked at one point...

...[Defense Attorney] Moffatt asked for probation. Jarvis refused and instead hit Guardino with a 21-month prison term, a figure on the high end of the penalty range the psychic faced.

Yes, the gift of clairvoyance is indeed overrated.

UPDATE: I should hope it's not overrated; I seem to have the gift myself.

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VALENTINES DAY CARNIVALS

February 14, 2007

It's a great day to cozy up to a computer screen with someone special to read this week's blog carnivals.

The Cavalcade of Risk is at My Wealth Builder this week. A fascinating post at Insureblog tells the strange tale of parents too cheap to spend $450 to protect their daughters from a slow and painful premature death. People have interesting priorities.

The Carnival of the Capitalists is at TamsPalm - the Palm OS Blog. The new Carnival of Personal Finance is at 2million blog.

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LOWER SUBSIDY = LOWER PRICES? AMAZING!

February 14, 2007

Don't Mess With Taxes brings us a shocking story: the elimination of the tax credit for Toyota hybrid cars has reduced demand for the Prius. As a result, prices are coming down!

This could lead to a radical new approach to pricing hybrid cars: setting the price at what people will pay for them. It's a bitter pill, but desperate times are leading Toyota to desperate measures.

Sellers of other subsidized products should watch this development closely. While it seems inconceivable now, in theory people will get tired of paying $2 or $3 out of every gas fill to keep excess ethanol plants running. As a dire contingency plan, they may have to resort to finding a way charge people for ethanol the amount they would pay for, say, gasoline.

This theory could also apply to the higher education industry. It appears to the untrained eye that every initiative to make college "more affordable" was immediately absorbed by higher tuition prices. Maybe someday we'll find out if the ultimate way to make college more affordable is to eliminate the rat's nest of tax credits, deductions and tuition subsidies for the college industry.

As a last resort, of course.

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TURBO TAX MOJO? ISN'T THAT LIKE 'AN ACCOUNTANT'S SWAGGER'?

February 13, 2007

I guess Vanilla Ice isn't entirely dead yet (via the TaxProf):

Vanilla Ice will always have his own dusty corner in the my early 1990s memory attic, right next to the Teenage Mutant Ninja Turtles.

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GOOD MORNING!

February 13, 2007

Just another February commute on I-235 in Des Moines this morning. This was taken at very low speed near the MLK exit.

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WHEN A TAX CHEAT IS TOO SUCCESSFUL FOR HIS OWN GOOD

February 13, 2007

George Schussel did well running DCI. The company ran "computer based training seminars, trade shows, and conferences for businesses in the computer industry."

Mr. Schussel enhanced the after-tax performance of his business by hiding his cash in Bermuda. Unfortunately, this is illegal, but he seemed to be getting by with it.

For every entrepreneur, the day comes when it's time to cash out. That's when things went south. From the Department of Justice press release:

The diversion of DCI profits to Bermuda ended in 1995, when SCHUSSEL wanted to sell the company and realized that he could not disclose the true value of the company and its ability to generate substantial income, without potential discovery of the tax evasion scheme.

Unfortunately, the IRS came calling. The agent found that DCI was writing checks to a Bermuda shell company that were purportedly for deductible services, but were really just a way to hide income offshore. Mr. Schussel eventually was convicted of one count of conspiracy and two counts of tax evasion.

The press release says that DCI underreported income by $8 million. Federal sentencing guidelines say this should result in a sentence range starting at 51-63 months in prison, assuming a $2.5 million tax loss. Not good for a 65-year old.

The Moral: Once you start cheating, it can be hard to stop.

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WHAT DO YOU NEED WHEN THE IRS HEADQUARTERS BASEMENT FLOODS?

February 12, 2007

More water! At least that seems to be the implication of this TaxProf Blog headline:

TIGTA Report: Flood of IRS Building Did Not Impact Tax Administration

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HOUSE MINIMUM WAGE BILL OMITS SENATE S CORPORATION PROVISIONS

February 12, 2007

The House Ways and Means Committee has issued its own tax provisions to accompany the bill to increase the minimum wage increase. The Ways and Means bill has none of the S corporation provisions in the Senate bill. It instead raises the Section 179 deduction to $125,000 for 2007 (instead of $112,000) while extending the work opportunity tax credit an additional year. It also allows married couples to file jointly owned businesses as a sole proprietorship, rather than a partnership.

The house bill also has a tax increase for dependent children, denying them the use of the lowest capital gain bracket (currently 5%) and increases the amount of estimated tax payments for large corporations for the first three quarters of 2012.

Once it clears the full House, the tax provisions will have to be reconciled with the more ambitious Senate version.

The TaxProf and Don't Mess with Taxes have more coverage.

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BIG COMPANIES CHIP IN FOR HIGHER TAXES

February 12, 2007

The Des Moines Register reports that a handful of big companies are financing the push to raise the local sales tax to 7%:

The companies, which include Wells Fargo, Allied Insurance and Knapp Properties, contributed $307,500 of the $315,000 raised for the "Yes to Destiny" campaign, a recently filed state report shows.

The campaign is primarily the work of the Greater Des Moines Partnership, a business development group that says the 1 cent sales tax would generate an estimated $750 million over 10 years to help lower property taxes and finance cultural efforts

Surely at least Iowa's tax watchdog, Iowans for Tax Relief, will stand up against this, right? Well, not exactly:

Jeff Boeyink, president of Iowans for Tax Relief, said his group would generally support the proposal if it is approved by taxpayers.

"People have every right if they want to tax themselves," Boeyink said. "We're not going to be arrogant enough to suggest we know what's right or wrong for any community."

Once again demonstrating that ITR functions more as a special interest lobby than as a principled force for tax relief.

Meanwhile, another story in the Register shows that the tax increase campaign is operating with the thriftiness we've come to expect from local government here:

Of the $245,819 spent on the "Yes to Destiny" campaign so far, at least $118,000 has gone to campaign consultants.

Former Polk County Supervisor Richard "Red" Brannan, for example, has been paid more than $6,200. He did not return repeated telephone calls that sought comment about his work for the tax campaign.

Jeff Link's company, Link Strategies, has been paid more than $38,000. Link is a former chief of staff for U.S. Sen. Tom Harkin and works on former Gov. Tom Vilsack's presidential campaign. Link was paid $36,000 in November for his role in Polk County Supervisor John Mauro's re-election.

The only organized opposition to the tax increase so far seems to be at nonewsalestax.blogspot.com. With a little help from the U.S. Attorney, that may be enough.

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IT'S NOT JUST HERE...

February 10, 2007

...that the local chamber of commerce perversely supports higher taxes, corporate welfare and big-government initiatives. Apparently crony capitalism is fashionable with chambers of commerce nationwide. From an opinion piece by Stephen Moore in the Wall Street Journal:

In as many as half the states, state taxpayer organizations, free market think tanks and small business leaders now complain bitterly that, on a wide range of issues, chambers of commerce deploy their financial resources and lobbying clout to expand the taxing, spending and regulatory authorities of government. This behavior, they note, erodes the very pro-growth climate necessary for businesses -- at least those not connected at the hip with government -- to prosper. Journalist Tim Carney agrees: All too often, he notes in his recent book, "Rip-Off," "state and local chambers have become corrupted by the lure of big dollar corporate welfare schemes."

It's a strange and disturbing phenomenon.

(Via the TaxProf)

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IRS APPLIES DEFERRED COMP RULES FOR 2006 BACKDATED OPTIONS

February 09, 2007

The IRS yesterday set down a plan dealing with small fry in the options backdating scandal. The program "allows" companies to pay the 20% penalty tax for backdated options exercised in 2006 by employees who are not "insiders" for SEC disclosure purposes. The employees have to include the company payment in income.

The 20% penalty tax under the recently-enacted Section 409A applies to non-compliant deferred compensation plans. In this announcement the IRS lays down a marker: it says that 409A applies to backdated options.

There doesn't appear to be much of a concession here on the part of the IRS. It seems that the company always has the option to pay the employee's Section 409A penalty, as long as the payment is included in employee income. Tax Analysts reports ($link) that tax advisors for holders of backdated options aren't happy:

The IRS program departs significantly from the practitioners' recommendations and was quickly criticized. The group had suggested that employers be allowed to make a payment equal to 20 percent of the option discount at the time it was granted to remedy any backdated options, whether or not exercised. Instead, the IRS would force employers to make the 20 percent payment, plus interest, and then count the payments on behalf of their employees as compensation.

One practitioner, who asked to remain anonymous to protect IRS relationships, said the initiative offers no carrots for either companies or taxpayers. Companies are not currently liable for the tax and would be acting only to save thousands of potential taxpayers from having to fix the problem individually -- thus saving the IRS from the trouble of pursuing thousands of cases.

"I will not recommend that any of my clients take this offer," the practitioner said.

Unfortunately for this practitioner's clients, the IRS already has them over a barrel. The only thing that can keep the IRS from catching up with them not assigning enough agents assigned to the option backdating project. If I were an employee, I'd rather have my employer pay my 20% penalty, even if it increases my taxes, if I would otherwise have to pay the whole penalty myself. If I were the employer, though, I'd have another view entirely.

Link: Complete Tax Update backdated option coverage.

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ON-LINE GAMBLERS: IT MAY BE TIME TO REDO THOSE RETURNS

February 09, 2007

Taxable Talk tells the tale of Neteller, an company that served as an intermediary for U.S. customers and on-line gambling outfits.

Neteller's founders were arrested on money laundering and other charges last month, and now the company is cooperating with the Justice Department. Russ explains why this could be bad news for online gamblers:

First, Neteller is considered to be a foreign financial institution. If you have a foreign bank account, and have $10,000 or more in a foreign bank account(s) at any one time, you are required to file Form TD F 90-22.1 by June 30th of the following year with the Department of the Treasury and check the box at the bottom of Schedule B. If you have a foreign bank account and don't declare it, you can face civil and/or criminal penalties. Anyone who received $10,000 or more in one transaction from Neteller had a foreign bank account. I expect the Treasury Department to check their records and come after those who didn't declare their Neteller account. A few individuals may even face criminal prosecution over this, if they had extremely large transactions from Neteller.

Second, the IRS will check their records and see if individuals receiving funds from Neteller declared gambling winnings. The IRS will almost certainly target those receiving large amounts. If an individual received large amounts from Neteller, and didn't declare any gambling winnings, now is the time to amend your return, and pay the tax, interest, and penalties. It's almost always better to come forward to the IRS than to have the IRS knock on your door.

The worst thing about gambling income is that it is reported "above the line" separately from gambling losses, which are itemized deductions. You can't just ignore your winnings on the ground that the losses are bigger; if you can't document your losses, you pay taxes on the gross winnings. Taxable Talk sums it up:

The Tax Code isn't fair to gamblers, but the alternatives if you don't pay your taxes are worse than paying the tax that you owe.

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LEGISLATORS UNLEASHED

February 08, 2007

If you ever wonder how the tax law gets so complicated, look no further than the good folks we elect as our representatives. Three bills introduced on Monday in the Iowa House are instructive.

HF 218 would give dentists a special deduction for income they don't receive. The bill would give a special Iowa deduction of 50% of the amount by which state medical reimbursments fall short of their "normal" fee. This gives a double benefit - the dentists wouldn't have to pay tax on income they didn't get paid anyway, but now they get a special break. It's time for dentists to jack up their "normal" feel, for sure.

HF 219 would give a 75% property tax exemption for "recreational" property, including golf courses and amusement parks. Talk about a naked special-interest provision that would make it that much harder to reform Iowa's lame property tax system.

Finally, HF 228 would deny the property tax credit for pollution-control property to farms not qualifying for the "family farm" property tax credit. Strangely, it seems that they want to encourage large corporate farms to pollute. Great plan, that.

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IOWA TAX AMNESTY BILL INTRODUCED

February 08, 2007

The legislative language of the tax amnesty proposed in Governor Culver's budget was introduced in the Iowa Senate this week. From the bill explanation:

This bill provides for a state tax amnesty program to be administered by the department of revenue from September 4, 2007, through October 31, 2007. The program covers tax liabilities delinquent as of December 31, 2006, and authorizes a taxpayer, during the period of the tax amnesty program, to pay this tax with one=half of the interest which would ordinarily be due without being subject to further penalty or civil and criminal prosecution. The taxpayer must agree to relinquish all administrative and judicial rights to challenge the imposition of the tax and its amount.

The taxes that are covered under the tax amnesty program are the individual and corporate income taxes; franchise tax; sales and use taxes; hotel and motel tax; local city, county, and school district sales and services taxes; automobile rental tax; equipment tax; petroleum diminution charge; inheritance and estate taxes; motor fuel and special fuel taxes; cigarette and tobacco taxes; and controlled substance tax.

This is likely to pass, as the legislature's desire to have a bit more money right now will trump the interests of sound tax policy. If you have unpaid taxes that Iowa hasn't noticed, you'd be crazy to 'fess up before this bill is signed. If you have been paying your taxes on time, well, you are allowed to feel a bit like a sap now. Meanwhile, Iowa is setting a pattern for tax amnesties every 20 or so years.

You can follow the progress of all 2007 Iowa tax legislation at our 2007 tax legislation tracking page.

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IN THIS CORNER, THE VILLANOVA MAULER

February 07, 2007

Villanova Tax Professor and prolific tax author Jim Maule has returned the ball to my court in our discussion of the State of the Union health care proposal. He raised some important questions about the proposal in his post and in an email he sent to me.

His questions are in italics, followed by my responses.

Do you think companies will drag out "no frills" insurance with very low premiums, very high deductibles and limited coverage to sell to (self-perceived) healthy young folks?

I certainly hope so. Health insurance should be insurance against catastrophic risks, not just a bureaucratic way to pay predictible and recurring bills. I liken it to car insurance. You insure against the car getting totalled in a wreck, not against needing to replace brake pads occasionally.

Will it become a tax shelter?

It already is. There is a tax incentive to direct compensation to health insurance because its tax-favored. That's why we've had so much first-dollar coverage. Payment of predictable and routine health costs is tax-advantaged, so naturally compensation flows that way.

An ideal tax system would not influence health insurance one way or another. Since the tax system is up to its eyeballs in the health system, we should at least seek to make it less distortive. By giving a standard deduction and taking it out of the employment picture, there's no tax advantage to first-dollar coverage vs. catastrophic coverage. The insured can make his own judgment as to the coverage he needs.

Then when one of those "almost self-insured" young folks has an accident or develops a health issue, what happens?

Much the same thing as happens now, except they'll have to pay the deductible out-of-pocket. If they are smart, they'll have built up their self-insurance reserve in their HSA to help cover it.

It's really no different than with disability insurance.

I notice that because I have health insurance, and many of my doctors' patients don't, I get sent for test after test when things are not even quite borderline. Is it "safe" and "conservative" medicine or is it a matter of creating one more profit-generating test or diagnosis (even at reduced insurance pays the hospital or lab makes more money than it does for people without insurance, I think)?

It's precisely because you have insurance that you get these tests. If you were writing the checks personally, you'd tell the doctor that maybe you don't need the MRI for that hangnail. Since the insurance company writes the check, it's not worth your time to question things.

That's the way I see it, anyway. I've had a high-deductible plan and HSA or MSA for 9 years now, and I know the premium savings and tax savings have more than outweighed the out-of pocket costs for me and my family. I have also built up a cash cushion against future medical costs.

I don't know whether I've satisfied Dr. Maule, but at least I hope I haven't made him angry.

Related:

Dr. Maule's initial post

My response to Dr. Maule's initial post

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HUNGOVER?

February 07, 2007

I was out late last night celebrating Iowa Insurance Day after working out of town for two days, so I'm still catching up. More later.

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TAXES AND THE PRESIDENT'S BUDGET

February 06, 2007

The President yesterday announced the details of his budget plan for the upcoming fiscal year. Like all presidential budget proposals, it's a mix of interesting proposals, pork-barrelling, playing to the crowd, and muddling through. Sadly, the pork-barrelling and muddling are the only parts likey to actually get enacted.

Perhaps most interesting is the health care proposal outlined in the State of the Union speech. The proposal has some more details. There's no chance it will pass this Congress, but it will help rally those who don't want a creeping federal takeover of the health-care sector.

The plan also proposes permanent extension of the administration's tax cuts. Expiring tax laws are a bad thing, but the plan doesn't address them honestly. It proposes a permanent cut in the regular tax rates while only including a one-year fix to the alternative minimum tax. This disguises the projected revenue loss from the rate cuts because millions of the millions of taxpayers projected to face AMT after the one-year fix expires. As the politicians aren't likely to let that happen, the proposal ducks the real revenue implications of the tax rate cuts. The AMT and permanent rate cuts can only really be addressed with comprehensive tax reform, but the President has abandoned that fight.

The proposal provides temporary extensions of the usual pork-barrel expiring provisions, chiefly the R&D credit. It would also make permanent a number of "temporary" breaks for contributions, including the tax break for pension and IRA gifts to charity.

The meatiest provisions likely to get enacted are "tax gap" closers. These include:

- Extending form 1099 requirements to payments to corporations.

- Requiring brokers to report basis information to IRS on sales of securities.

- Require credit-card issuers to report to the IRS the amounts received by merchants in credit card transactions - a compliance provision aimed at the e-bay economy.

- Require governments to report non-wage payments to contractors and service providers.

- Increase the failure to file timely 1099s from $50 to $100 per late or incorrect 1099, and to $250 from $100 for "intentional disregard" of the 1099 rules.

Finally, and long overdue, the budget would waive taxpayer privacy rules to allow the IRS to report inmate tax scammers to prison officials.

What will pass? The information reporting stuff, the charitable things, the expiring provision extensions, the one-year AMT fix, and maybe the prison thing.

The TaxProf has more:

NY Times: Democrats, Bush Spar Over Tax Gap

Bloomberg: Budget Plan Requires Reporting Stock Purchases to IRS

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CARNIVALS UP!

February 06, 2007

The Carnivals are in full swing this week. Don't Mess With Taxes is hosting the Carnival of Taxes. The Mighty Bargain Hunter hosts the Carnival of the Capitalists. The Simple Dollar is taking care of this week's Carnival of Personal Finance. All great stuff for the savvy blog reader.

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DR. MAULE AND THE BUSH HEALTH CARE PLAN

February 05, 2007

We'll celebrate Villanova tax prof Jim Maule's 3rd blogging anniversary by pondering his post on the President's health insurance proposals. The proposals would replace the current exemption for employer health insurance with a standard deduction for health insurance. The invaluable Dr. Maule finds this puzzling:

The plan would provide a "standard health deduction" of $15,000, with a smaller deduction of $7,500 for unmarried taxpayers with no dependents. The amount isn't critical to my question. By making the deduction "standard" the plan would not require the taxpayer to purchase health insurance.

I think Dr. Maule is mistaken here. The way I understand the plan, the standard deduction would only be avaiable for those with health insurance. It would be like the standard deduction for a dependent: yes, it's a standard amount, but you need a dependent to have one. That reading is supported by the White House fact sheet on the plan:

Under The President's Proposal, Families With Health Insurance Will Not Pay Income Or Payroll Taxes On The First $15,000 In Compensation And Singles Will Not Pay Income Or Payroll Taxes On The First $7,500.

Dr. Maule finds the concept of the standard amount troublesome:

What's to prevent a person from using the tax savings from the standard health deduction for something other than health care premiums?

As I read the plan, the answer appears to be: Nothing.

That's not a bug; it's a feature. By having the same deduction no matter how lavish the insurance, it will encourage taxpayers to shop around for cheaper insurance - insurance with higher deductibles and co-pays. In turn, taxpayers with higher deductibles are more likely to think twice before running into the doctor for a prescription, and more likely to shop around when they do.

The President's plan seems to borrow from concepts outlined in Arnold Kling's book Crisis of Abundance. Prof. Kling asserts that rising health care costs are driven by "premium medicine" -- which I'll greatly oversimplify as the tendency to consume more health care because somebody else - Medicare or the insurance company - is paying for it.

More from Dr. Maule:

Unless I'm missing something, a person who concludes that health insurance isn't worth it, who has other pressing financial needs, or who is irresponsible, will remain uninsured...I don't understand how the plan encourages purchase of health insurance by all of the people who need to do so. What am I missing?

He is missing something, I believe: you have to have insurange to get the deduction. The plan gives a tax break outside the employment market for health insurance, giving taxpayers an incentive to find low-cost, high-deductible health plan. Its backers hope the plan will create a market for high-deductible plans. Other parts of the proposals would attack state regulatory barriers to allow a national individual market in health insurance to develop.

And for the irresponsible - why is it the job of the taxpayers to protect them from their own folly?

Of course, there's no chance of the plan being enacted soon, but the proposals would be a big improvement over the current system.

Prior Tax Update Coverage:

TRY ON THE PRESIDENT'S HEALTH PLAN

STATE OF THE UNION HEALTH CARE PROPOSAL

WHITHER HEALTH INSURANCE TAX?

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WHISTLEBLOWER DAMAGES SIMILAR TO IRA SETTLEMENTS?

February 05, 2007

Tax lawyer Kreig Mitchell has an interesting post today where he compares "restorative" payments to a whistleblower to payments made by employers and banks to individuals to restore losses from pension and IRA mismanagement.

The Federal Court of Appeals in Washington D.C. had ruled that Marrita Murphy's payments for restoring her reputation were a non-taxable "return of human capital." The ruling, since withdrawn, was roundly criticized. Mr. Mitchell says we critics may have been too hasty.

He notes that the IRS has ruled that payments into 401(k) plans to restore lost amounts are tax-free when made. The IRS has issued a letter ruling applying similar thinking to IRAs. Mr. Mitchell says:

The IRS has now, in Private Letter Ruling 200705031, applied this logic to IRA payments where a taxpayer received a “restorative payment” from a financial institution to restore losses resulting from the financial institution breaching its fiduciary duty to invest prudently. The IRS made this ruling even though the taxpayer held the “restorative payment” in a separate taxable account and the taxpayer missed the sixty day deadline for contributing the “restorative payment” to another IRA...

Is there really a difference between “restorative payments” and payments that are a “return of human capital?” If so then the rule is that payments to compensate a taxpayer for someone harming the taxpayer’s retirement account are tax free, yet payments to compensate a taxpayer for someone harming the taxpayer’s person are taxable?

There is one obvious difference between the "restorative payments." Their taxation is only deferred. When the restored amounts are drawn from the IRA or 401(k) plan, they will be fully taxed. In contrast, if whistleblower damages are tax-free on receipt, they are tax-free forever.

To me, the real problem with the Murphy decision was that it disregarded decades of established law, carelessly making dubious and far-reaching constitutional conclusions that weren't needed to rule on the case. Its conflicts with the Supreme Court's Glenshaw Glass decision matter a lot more than any inconsistency with PLR 200137065.

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BEARS, IRS LOSE

February 05, 2007

The Bears weren't the only losers yesterday. But Rex Grossman's Bears had a better shot at winning than the IRS has of collecting tax on all of the gamblers who bet on the Colts to cover the spread.

But as much money is lost as won, you say? Ah, but the tax law doesn't work that way. Gambling winnings have to be included in income, but gambling losses are an itemized deduction, which means they are only available to itemizers. What's more, they are only available to the extent of gambling winnings. So if the Super Bowl bets were the only bets in the whole world, the winners would be taxed and the losers would have no winnings to offset. Sure, the world doesn't work that way, but you can see how problems arise.

Don't Mess With Taxes has more.

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ANOTHER SHELTER LOSES IN COURT

February 02, 2007

A marketed tax shelter failed a court test in Texas this week. The New York Times reports:

The shelter, known as Blips, plays a central role in the criminal inquiry of Deutsche Bank over questionable tax shelters and in the pending criminal trial in federal court in Manhattan of 16 former employees of the accounting firm KPMG and two outsiders.

The civil ruling on Tuesday by Judge T. John Ward of Federal District Court for the Eastern District of Texas will probably add ammunition to Manhattan prosecutors’ arguments that Deutsche Bank acted improperly by providing fake loans for Blips and similar shelters. Judge Ware’s is the first major civil ruling on the legitimacy of Blips, or bond-linked issue premium structure.

The opinion says that much of the transaction documentation was a facade, meant to legitimize the shelter by outlining planned events that in real life were never meant to happen.

Interestingly, the U.S. District Court declined to assess penalties on the taxpayers, saying they reasonably relied on their tax advisors and the shelter opinions.

Link:

Tax Prof Coverage

Cite: Klamath Strategic Investment Fund, LLC No 5:04-CV-278

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S CORPORATION PROVISIONS OF MINIMUM WAGE BILL CLEAR SENATE

February 02, 2007

The riders that the Senate Finance Committee leadership attached to the federal minimum wage bill have cleared the senate. These include provisions relating to bank director shares and to allow ownership of S corporation stock by non-resident aliens through trusts.

It remains to be seen whether any of these provisions will survive the House-Senate conference; the House bill has no tax provisions.

The TaxProf has a big-media roundup.

Link: Senate bill language.

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A TAX BREAK TO DIE FOR?

February 02, 2007

As the tax law stands now, the estate tax is set to be repealed for 2010, only to return in full force in 2011. Ever since that strange provision was enacted, tax folk have joked about making sure Grampa says goodbye in December, 2010.

With 2010 only three years off, the Tax Policy blog says it's no joke.

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DEATH, TAXES AND COLLEGE

February 02, 2007

Joel Schoenmeyer has two worthwhile posts up on Section 529 plans (like College Savings Iowa). Remember, CSI is the only Section 529 plan that can give you a deduction on your Iowa return. The posts:

20 Short Facts about 529 Plans (Part 1 of 2)

20 Short Facts about 529 Plans (Part 2 of 2)

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GREETINGS TO PANERA BLOGGA NOSTRA

February 02, 2007

Mike Sansone's blog gang is meeting this morning at Panera Bread in West Des Moines. I wish I could be there; thanks to Rush Nigut for calling me out. Today just didn't work. Maybe next month; April, for sure.

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JUST ONE, BUT IT'S A DOOZY

February 01, 2007

The Tax Court only generated one opinion today. But it's 457 pages long.

I won't read it today, but from skimming it, it looks like bad news for the taxpayer. But at least the shock of losing the case won't hurt him; the case goes back 29 years and the taxpayer, Burton Kanter, has been dead for five years. The case has been to the Supreme Court and back.

Mr. Kanter was a lawyer; his tax troubles left a rich legacy for his brethren.

Cite: Estate of Burton W. Kanter, T.C. Memo 2007-21

UPDATE: The TaxProf reports:

The Tax Court today issued its 457-page opinion (Kanter v. Commissioner, T.C. Memo. 2007-21) in the long-running Ballard, Kanter and Lisle saga, following the Supreme Court's decision on taxpayer acess to Special Trial Judge reports and the Eleventh Circuit's remand of the case to the Tax Court.  In issuing the opinion today, the Tax Court complied (barely) with the Eleventh Circuit's extraordinary July 20, 2006 order directing that the Tax Court give the case "high priority" and dispose of it by February 1, 2007.

UPDATE, 2/1: Tax Attorney Kreig Mitchell is unimpressed.

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IT DOESN'T GET ANY BETTER THAN THIS!

February 01, 2007

Click image to enlarge

Savoring the fresh air and a fine cigar on 9th Street during a beautiful lunch break in Des Moines (temperature: 14 f). Ahh, the good life!

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MATH IS HARD II

February 01, 2007

Dr. Maule is having fun with a drafting error in Arizona that turned an 80-cent per-pack cigarette tax into an 8/10 of a cent cigarette tax. It reminds me of the Iowa legislature's goof in 2004 that was meant to provide a $42,048 credit for a 1.5 megawatt wind turbine that ended up providing a $4.80 credit.

It would be funnier, though, if we didn't keep electing people like this...

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A NEW WAY TO BURN MONEY

February 01, 2007

A new bill in the state legislature this week (SSB 1139) would provide a 25% tax credit for "biomass burning stoves" used in residential buildings. Ah, yes, just what our cities need - the eye-stinging aroma of cinders. From the bill explanation:

A biomass burning stove is a stove or boiler designed to utilize agricultural or forest products waste, including corn, wood, and switchgrass for heating residential buildings and that has a capacity of 500,000 British thermal units. The amount of the credit equals 25 percent of the purchase and installation costs. The credit is to be claimed equally over five tax years. The credit is refundable.

That sounds like a big unit. I wonder if its the buyer or seller who is lobbying for this thing.

Follow this bill and all 2007 tax legislation at our 2007 Iowa Tax Legislation page.

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THE DANGERS OF DOING IT YOURSELF

February 01, 2007

Tax lawyer-blogger Kreig Mitchell says the Bhattacharyya case we talked about yesterday is an example of how saving money on tax professionals can be expensive:

At the end of the day the taxpayers ended up paying several hundred thousand dollars in taxes that they may not have otherwise had to pay, they incurred a hundred thousand dollar tax penalty, and the taxpayers no doubt spent a considerable amount of time working with the IRS and attending court hearings.

Had the taxpayers opted to pay a tax preparer they would probably not have incurred any of these costs. Moreover, had the taxpayers hired a tax attorney they might have won their tax court case (possibly by responding appropriately to the IRS request to amend the pleadings after the court case had started) and they might have been able to have the IRS penalty waived.

Worth reading in full.

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FREEZING COLD CARNIVALS

February 01, 2007

It's cold here, but it's always warm at the internet carnivals!

The Cavalcade of risk is up at Manged Care Matters. This compilation of blog posts on insurance and risk managment always is interesting and provocative.

The Capitalists are keeping warm at Long or Short Capital. I like the post by an entrepreur lamenting the loss of a research credit because he was too good at it. The lesson? The government has no business trying to allocate research budgets for businesses.

And Five Cent Nickel is hosting the Carnival of Personal Finance. Don't miss the discussion of the distinction between "frugal" and just plain cheap.

Looking east on Court Avenue, Des Moines, on a snowy day. (Click image to enlarge.)

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