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Tax Update Blog: March 2007 Archives

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March 31, 2007

daugerdas.jpgAmount paid by the fatally-wounded Jenkens and Gilchrist law firm as a penalty to the government for its tax shelter activities: $76 million.

Compensation reportedly ($link) paid from 1999 to 2003 to Paul Daugerdas, head of the Jenkens and Gilchrist tax shelter practice: $93 million.

More on the fall of Jenkens here.

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March 31, 2007

If you have kids, it's wise to have your returns prepared together. With the "kiddie tax" now applying to 17-year olds, you often can't do the kids returns without having done the parents.

Once the kids are off to college, the tax law's "education credits" make it worthwhile to coordinate parent and student returns.

The "Hope Credit" offers up to $1,650 in tax reduction if you have qualifed higher eductation costs. The "Lifetime Learning Credit" offers up to $2,000 of tax savings. Both of these credits start to phase out when adjusted gross income hits $90,000 on a joint return, or $45,000 otherwise.

If parent income exceeds the phase-out amount, they might save money by foregoing the dependency exemption for the student. If they do, the student can claim the education credits. If the student has income from a summer job or school job, she might be able to use the credit when Mom and Dad can't.

You claim these credits on Form 8863.

This is another installment in our series of 2007 filing season tips. Look for a new one each day through April 17.

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March 30, 2007

I'm tardy at this, but I should note this week's blog carnivals. The Carnival of the Capitalists is at Political Calculations this week, while the Cavalcade of Risk is at The Sentinel Effect. Don't miss the Capitalist post "Sick Time Blues" from the Insureblog.

We're late, but the carnivals are still going strong.

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March 30, 2007

There are a lot of ways the tax law can keep you from deducting losses. Individuals can only deduct capital losses to the extent of their capital gains, plus $3,000. If you have losses from a business activity in which you are a passive investor - say, a partnership or an S corporation - you can't deduct net "passive" losses. Other rules limit losses based on your "basis" or your "at-risk" investment in a business.

The silver lining is that these losses aren't gone forever. They carry forward. Capital losses disallowed last year can offset capital gains this year. Disallowed passive losses carry forward to offset future "passive" income. Losses disallowed for lack of basis or "at-risk" investment offset future income from the same business.

When you have these losses, be sure to keep track of the carryforwards and use them in future years. Capital loss carryforwards are tracked on your Schedule D. Passive loss carryforwards are tracked on the worksheets for Form 8582. At-risk losses carry forward on Form 6198. There is no formal worksheet for carrying forward losses from basis limitations on partnerships and S corporations, so you need to track them separately.

When you do your return for this year, make sure you look at last years returns. These carryforwards could make a big difference in how you settle up with Uncle Sam April 17.

This is another installment in our 2007 Filing Season Tips series. Collect them all!

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March 30, 2007

When both parties agree, it often means they're ganging up on us. That seems to be the case with SF 566, a bill that passed the Iowa Senate yesterday without dissent.

The bill increases the annual cap on Iowa building rehab credits to $20 million, from the long-oversubscribed $4 million. That's pretty straightforward.

What's sneaky is the way the bill also increases the value of tax credits that have already been issued for work already done or committed to. These credits are "refundable" if they exceed your Iowa tax without the credits; the state writes you a check. Up to now the refund has been discounted based on a formula in the Iowa code. This bill eliminates the discount, making credits already issued worth that much more.

Economic development credits may or may not be wise (I tend to think not), but even proponents of such credits don't support increasing them for work already committed. The credit was so oversubscribed under the old formula that they quintupled the amount allowed, so you wouldn't think it needed to be sweetened at all. But the Iowa Senate does, 48-0.

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March 30, 2007

lx.gifA bill introduced in the Iowa Legislature yesterday, HSB 299, would repeal the property tax exemption for "forests." This provision has become notorious as a tool for developers who buy land for future development and fill it with saplings, claiming a tax exemption until the time comes to bring in the bulldozers.

The bill comes in late in the session, so it probably won't pass, but at least somebody is on to this one.

Follow all 2007 Iowa tax legislation at our 20078 Iowa Tax Legislation page.

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March 29, 2007

daugerdas.jpgJenkens and Gilchrist rode the 1990s tax shelter boom to great wealth. Today they rode it back to earth.

The firm today agreed to pay $76 million in penalties to the IRS for its tax shelter activities - penalties that doom the firm. From a Department of Justice press release:

The firm has acknowledged not only that its tax shelter practice was fraudulent and caused serious harm to the United States Treasury, but also that the practice caused such harm to the firm’s reputation and revenues that it cannot survive as a going concern. The demise of Jenkens & Gilchrist demonstrates that a lucrative but fraudulent tax shelter practice may provide short-term financial rewards, but at a great long-term cost."

Wow. What a way to go out. While this will put a lot of Jenkens and Gilchrist attorneys on the street, the recriminations promise employment to other lawyers for years to come.

Paul Daugerdas, pictured above, was one of the Jenkens attorneys in the tax shelter practice; we blogged about one of his shelters earlier today. He probably isn't the most popular guy around the office right now.

The TaxProf has coverage and a full set of links.

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March 29, 2007

The tax law allows you to get a deduction for donations of property to charities. Congress has tightened up on these deductions in recent years, so you need to make sure your paperwork is in order if you want to take a charitable deduction.

If you deduct a non-cash gift other than publicly-traded securities, and the gift is $5,000 or more, you need to have a signed valuation from a"qualified appraiser" before you can take any charitable deduction. A "qualifed appraiser" is an independent party who regularly performs appraisals for pay who is not related to the buyer or the seller. The appraiser has to give you a signed Form 8323 to attach to your return. Otherwise, no deduction.

Even if you have a smaller gift - say, you gave some clothes to Salvation Army - you still should have your paperwork in order. A Tax Court case handed down yesterday illustrates this. Minneapolatans James and Joan Soholt, like many taxpayers, gave household items to local charities. They carefully avoided round numbers by claiming a deduction for $3,492. They were less than careful in documenting their gift (emphasis added):

We next turn to petitioners' contributions of property. Petitioners introduced receipts indicating they donated clothing and other miscellaneous goods eight times in 2003. These receipts do not list the specific items contributed and simply note that petitioners donated a certain number of bags. Petitioners also introduced a worksheet they prepared when preparing their tax return that purports to list and value more specifically the items petitioners contributed. Mr. Soholt testified that petitioners estimated the value of the clothing they donated at one-half the original cost but also admitted he did not think used clothing was worth half as much as it was worth new. Petitioners did not introduce any evidence supporting their estimated value or regarding the quality of the donated items that would permit us to estimate its value.

While we are convinced that petitioners donated property to charity in 2003, petitioners have failed to provide any reliable evidence of the items they donated or their values. Petitioners are therefore not entitled to deduct any additional amount for charitable contributions of property other than the $89 respondent allowed.

So if you are taking a deduction for bringing bags of clothes to the charity thrift store, make sure you have better documentation than a list saying "5 bags of stuff."

Go here for our complete collection of 2007 filing season tips.

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March 29, 2007

The IRS won a "summary judgment" ruling on a version of the "BLIPS" tax shelter in a Chicago Federal courtroom yesterday. A district court judge ruled that the shelter, which involved inflating the basis of a partnership through a purchase of offsetting foreign currency contracts, didn't work. The judge discussed the procedural defense of the shelter ("Cemco") with a statement that could apply to many of the big-firm tax shelters of the late '90s:

As detailed below, Cemco’s theory consists of several nuanced procedural steps. Ultimately, however, the argument amounts to little more than a house of cards, for if any of the steps fail (and several do), Cemco’s entire position collapses.

The case has additional resonance because a version of this shelter is involved in the KPMG criminal litigation. This complete defeat for the shelter (including valuation penalties) may help support the prosecution's view of the shelters. This particular shelter, though, was the progeny of Paul Daugerdas, a Jenkens and Gilchrist tax attorney pictured here in happier times with Howie Mandel:

Jenkins and Gilchrist attorney with Howie Mandel at a charity ball. No deal, says the judge.

Cite: Cemco Investors, LLC v. United States, DC-Ill Case No. C 8211 (link courtesy of the TaxProf).

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March 29, 2007

Two bills were introduced that seem designed to make the good Iowans who save to pay for their kids' education and who pay their taxes on time feel like chumps.

Iowa City's Senator Bolkcom, the chief Senate taxwriter, introduced SSB 1334 to allow employers a credit for amounts used to pay their employees student loans. This is supposed to help get kids to stay in Iowa after school. So your kid worked summer jobs, studied hard, and even won a scholarship, while you saved and covered the rest of the tuition so you wouldn't have student loans? Chumps!

Meanwhile, Governor Culver's tax amnesty bill, HSB 298, was introduced in the House Ways and Means Committee. You got behind on your taxes, but you worked hard, lived frugally, and paid off your tax debts and penalties? Chump! says the Governor.

Follow all of the 2007 Iowa tax bills at our 2007 Iowa Tax Legislation page.

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March 28, 2007

Today's filing season tip is Iowa-only. If you are lucky enough to have a teenager, you may qualify for one of the few prom-ticket tax credits known in the wild.

Iowa offers a "Tuition and Textbook Credit" of 25% of the first $1,000 paid per dependent for tuition and textbooks. These are defined loosely:

The cost of the following items are eligible for the credit:
* Books: books and other instructional materials used in teaching subjects legally and commonly taught in Iowa’s public elementary and secondary schools, including those needed for extracurricular activities

* Clothing: “non-street” costumes for a play or special clothing for a concert

* Driver’s Education: only if paid to the school

* Dues, Fees and Admissions: includes those paid for extracurricular activities such as activity fees; booster club dues; fees for track and cross-country; activity ticket or admission for high school athletic events; fees for a physical education event in school such as roller skating

* Materials: includes materials for extracurricular activities, such as sporting events, speech activities, musical or dramatic events, awards banquets, homecoming, prom, and other school-related social events

* Music: rental of musical instruments for school or band; music/instrument lessons at a school; sheet music used in a school; valve oil; cork grease; music books and reeds used in school bands or orchestras

* Shop class and mechanics class: cost of required basic materials

* Shoes: football, soccer and golf shoes; cleats for football shoes; track spike shoes

* Travel: non-travel fees for field trips if the trip is during school hours

* Tuition: the school must be accredited; amounts paid are not allowed if they relate to teaching of religious tenets or doctrines of worship

* Uniforms: band, hockey and football uniforms


You may be too old to go to the prom, but at least you can enjoy the tax credit for it. Take the credit on line 49 of the Iowa long form.

We are posting a tax tip each day for the rest of filing season. Collect them all here.

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March 28, 2007

Walter Anderson, the telecom entrepreneur who pleaded guilty in the largest individual U.S. tax evasion case to date, received a nine-year prison sentence yesterday.

Mr. Anderson pleaded guilty to moving $450 million offshore to avoid taxes. Oddly, the sentencing judge declined to order restitution of the unpaid taxes, blaming a poorly-worded plea agreement. This requires the IRS to go through the civil court system in separate collection proceedings.

Given the size of the tax loss, Mr. Anderson could have gotten the maximum 10-year sentence requested by the government. He would have been eligible for a much longer sentence if he had been convicted of all charges in the initial indictment.


Washington Post
TaxProf Blog

Complete Tax Update Walter Anderson Coverage

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March 28, 2007

Project Destiny, the effort to give Central Iowa one of the highest sales taxes in the nation, will go up for vote July 10. Just to give voters more reason to trust our local officials with more tax money, the Des Moines Register reports that there may be additional indictments in the CIETC scandal:

A federal prosecutor expects more criminal charges that will target at least one new defendant in a central Iowa job-training pay scandal that already has produced charges against five people.

Assistant U.S. Attorney William Purdy estimates a 60 percent chance of new charges as early as May in the Central Iowa Employment and Training Consortium scandal, court records show. His prediction, made last week in a scheduling meeting with defense lawyers, is contained in a transcript obtained by The Des Moines Register.

CIETC was an agency operated by a group of local governments - just like the proposed Project Destiny board. The top three officials pulled $300,000+ compensation payments under the not-so-watchful eyes of board members including County Supervisor John Mauro and City Councilman Tom "Rubber Stamp" Vlassis. It's always good to be reminded how well our local officials are handling the money they have when they want more.

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March 28, 2007

For some reason the daily emails from the Iowa House and Senate, listing bills introduced and noting their progress, have stopped. Now all we get are messy text files that make it much harder to identify bills of interest.

I hope the emails resume, but I can see why they wouldn't want people to know what they are doing.

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March 27, 2007

The IRS yesterday issued a list of the most common tax filing errors. The Top Five are (courtesy of the Tax Prof):

1. Choosing the wrong filing status
2. Failing to include or using incorrect Social Security numbers
3. Failing to use the correct forms and schedules
4. Failing to sign and date the return
5. Claiming ineligible dependents

It's a good idea to give this list a quick review before dropping that return in the mail or down the e-file hole.

Link: Our series of 2007 tax season tips.

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March 27, 2007

The feds have been tying up loose ends on three old tax scams in recent weeks. These are all good midwestern scams, showing that tax fraud isn't just confined to the financial Gomorrahs on the coasts.

For starters, a Mitchell, South Dakota man, Kerwin Millear, pleaded guilty to tax charges involving the "Aegis" scheme to use trusts and management fees to illegally hide taxable income offshore.

Meanwhile, a principal of the Topeka-based "Renaissance - The Tax People" multilevel marketing tax scheme pleaded guilty to defrauding gullible customers of $70 million and causing a tax loss of $20 million. Todd Strand's plea resulted from his role as "national marketing director" for a "service" that sold through a multi-level marketing plan that told people they could deduct personal expenses. Given that size of tax loss, Mr. Strand could be going away for the full 10-year maximum sentence. Taxable Talk has more.

Finally, James Auffenberg, an Illinois car dealer, was indicted on charges of evading taxes through use of a Virgin Islands tax credit scheme. Several promoters of the deal were also charged. From the Department of Justice Press Release:

The indictment alleges that Mr. Auffenberg joined a partnership, Kapok Management, L.P., which was created and promoted by Ferguson and Fagan in the U.S. Virgin Islands. As part of the scheme, Kapok Management fraudulently used a Virgin Islands economic development program (EDP), designed to promote the development and diversification of the local economy and establish employment opportunities for island residents. Businesses which participated in the EDP, like Kapok Management, received a "beneficiary certificate" which granted them a 90% tax credit on federal and 100 percent exemption on local taxes. In order to claim the tax credit, the certificate holder had to earn income "effectively connected" with the conduct of a trade or a business in the Virgin Islands and be a bona fide resident of the U.S. Virgin Islands.

Ferguson, Fagan and Jackson allegedly promoted the scheme to wealthy individuals, who would join Kapok Management as limited partners. As part of that scheme, the limited partner formed single- member limited liability companies (LLC) in the United States and the U.S. Virgin Islands, respectively. The U.S. LLC entered into a management agreement with Kapok to purportedly manage the partner's stateside business and paid purported "management fees" to Kapok. Within approximately 3-5 days, the monies were returned to the limited partner as "partnership distributions" which were paid to the limited partner's Virgin Islands LLC, less a fee of 5 percent kept by Kapok Management.

According to the indictment, no management services were provided by Kapok Management to the mainland businesses. In addition, the amounts paid as purported "management fees" were determined by each limited partner, not Kapok Management, and the promoters encouraged them to "recycle" the same funds in and out of Kapok Management's bank account, as many times as the limited partner wished, to fraudulently maximize the EDP tax credit.

The common themes running through these deals are that they were promoted by salesmen, not by tax pros. Two of these deals also involved offshore management fees, a common tax scam tool. No matter how much your golfing buddy insists that the offshore tax plan sold by his buddy's brother-in-law is foolproof, always have your tax pro look under the hood before you jump in. It's well worth a few hours of your tax pro's time to avoid 36 months at Club Fed.

UPDATE: More from the St. Louis Post Dispatch on Mr. Auffenberg.

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March 26, 2007

The IRS last year did a major redesign of the K-1 forms for partnerships and S corporations. These "pass through" entities don't pay taxes. They instead report their income and expenses to their owners on their K-1 forms, and the owners in turn report the K-1 information on their 1040s.

The new K-1s make some of the information harder to find. Many K-1s will have "charitable deductions" buried under "other deductions," usually as code "A" on box 12 of the S corporation K-1 or Box 13 of the partnership K-1. If your K-1 comes from a farm or a manufacturing company, also look for a code "O" deduction for the so-called "Section 199 deduction."

The K-1s should come with an attachment that tells you what the items in the different boxes are. If you don't have a copy, you can find them here (second page):

Form 1065 K-1
Form 1120-S K-1

Don't lose a deduction just because it looks like some sort of footnote!

This is the fourth in a series of daily filing season tax tips we are running through April 17. Find them all here.

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March 26, 2007

The Tax Foundation has issued a new study that combines spending and tax stats to see both who pays for government and who benefits. This chart is interesting:


While the federal tax burden is progressive - higher rates on higher-income taxpayers - the state and local burden is much less so. Just another thing to keep in mind when they ask you to vote for a higher sales tax.

While the tax collections skew in a "progressive" way, the spending skews even more so:


The TaxProf has more, including a heated debate in his commments section on what it all means.

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March 26, 2007

I've never tried to tell a client that the big check he's writing to the IRS will improve his quality of life. Maybe that's part of why I still have clients. Most people think that their quality of life will be better if they spend their money than if the government does.

Yet that's Project Destiny for you. By taking our money and giving it to a 15-member unelected committee of political insiders, backers say our quality of life will be improved with - bike trails! The Des Moines Register has the details today.

A 7% sales tax will make our sales tax as high as the highest statewide rate in the country. We also have the highest corporate income tax rate and the 5th-highest individual income tax rate. With rates like that, we must have an awesome quality of life already.

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March 25, 2007

One of the most common errors we see on self-prepared income tax returns is miscomputing the deduction for state and local taxes paid. Iowa allows taxpayer to deduct federal taxes paid in computing state income taxes, and that deduction is also frequently botched.

The most common mistake involves missing a fourth quarter payment or a prior year balance due. For example, a fourth quarter state estimated tax payment made for 2005 in January 2006 should be deducted on the 2006 federal return, but it is often forgotten.

We use a worksheet to make sure we don't miss these deductions. It looks something like this:

Click worksheet to enlarge.

You need to be careful, especially with the refund part of the worksheet. Often refunds aren't taxable, as when the refunded taxes were paid in a year when alternative minimum tax was paid. You should carefully work through the refund worksheets in the IRS instructions before you put a taxable refund number on your return.

Still, don't shortcut this worksheet, or you might shortcut some of your rightful deductions.

Link: The complete collection of our 2007 Filing Season Tips

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March 24, 2007

The tax law provides a special deduction for educators. An "eligible educator" can deduct above the line (that is, without itemizing on Schedule A) up to $250 paid:

" connection with books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used by the eligible educator in the classroom."

An "eligible educator" is:

an individual who is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year.

jon1.jpgYou qualify? Good. Now comes the tricky part - finding the line for "eligible education expenses" on page 1 of the 1040. It's tricky because the line isn't there; Congress enacted the deduction for 2007 after the forms were already printed.

Here's how the IRS wants you report your $250 deduction:

Educators claim the deduction for up to $250 of out-of-pocket classroom expenses on Form 1040, line 23, “Archer MSA Deduction.”

Enter "E" on the dotted line to the left of that line entry if claiming educator expenses, or "B" if claiming both an Archer MSA deduction and the deduction for educator expenses on Form 1040. If entering "B," taxpayers must attach a breakdown showing the amounts claimed for each deduction.

Not many folks claim Archer MSA deductions anymore, so "E" is likely to be your correct answer. Then turn in your papers and sit quietly at your desks until your refund arrives.

We will run daily filing season tax tips through the April 17 filing deadline.

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March 23, 2007

The IRS once again has a resort-area property up for auction. And at a minimum bid of $1,632, it could be a steal!

Well, maybe it isn't exactly a resort property:


And maybe it isn't right on a lake...

The property known as 94 2nd Ave, Royal IA and further described as The North Sixty (60) feet of Lots Seven (7) and Eight (8) in Block Five (5) in the Town of Royal.

94 2nd Avenue Royal IA.

Royal, Iowa?


Honey, don't you like our new summer place? Dear, where are you going with the car?

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March 23, 2007

James Hunter was President of Hunter Marine Transport, Inc., a Nashville-based boat dealer. He unwisely decided to augment his fringe benefits package, as explained in a Justice Department press release:

Hunter, President of Hunter Marine Transport, Inc. (HMT), admitted that he paid over $229,600 in personal living expenses with corporate funds from 1999 through 2001. These personal living expenses were deducted on HMT’s corporate tax returns as corporate expenses and were excluded from the income Hunter reported on his personal income tax returns for those years. During this same period of time, Hunter’s net salary was over $943,000.

Using corporation funds for personal expenses and deducting them is a common temptation for closely-held business owners. It's also one that's relatively easy for the IRS to catch as part of their standard audit practice for small businesses. They selectively review invoices with an eye for these things, and the bigger the item you try to hide, the easier it is to find.

Mr. Hunter's plea agreement indicates that he is likely to enjoy the hospitality of the Bureau of Prisons for 10 to 16 months. Not a good result.


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March 23, 2007

It would be pretty depressing to be in, say, the Polk County Jail. You'd certainly be eager to hear somebody telling you that they could get you out of there. Even so, it's not likely that a transfer to the Warren County Jail would seem like a good solution.

Congressional taxwriters are considering a similar approach to the alternative minimum tax. The AMT is computed with fewer deductions and exemptions than the regular income tax, at a nominally lower rate. It applies when it exceeds the regular tax. As a result of accumulated legislative fudging, the AMT threatens to exceed regular tax for 23 million more taxpayers next year.

Congressman Richard Neal of Massachussets, a Democrat on the Ways and Means committee, has hit on a solution. He proposes raising the regular tax high enough to exceed AMT ($link):

House Ways and Means Select Revenue Measures Subcommittee Chair Richard E. Neal, D-Mass., told reporters March 22 that his efforts to reform the alternative minimum tax will likely involve adjusting tax rates instead of going after preferences in the tax code.

When asked whether an AMT reform proposal would be offset with repeal of tax code preferences or with an adjustment to federal tax rates, Neal replied, "I think that the latter is probably more realistic."

It's reasonably save to assume Congress won't approve this transfer between jails, and if it did, it would almost certainly be vetoed. Congress is instead likely to kick the AMT problem down the road one more year by increasing the AMT exemption temporarily, as they have done for the last several years. Real AMT reform probably requires a 1986-style major tax reform, which doesn't seem to be in the cards.


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March 23, 2007

Starting today we will provide a tax tip each day to spotlight an item you might overlook on your federal or state returns. We'll start with the "Savers Credit."

This credit is designed to reward those who put away money for retirement. It provides a credit of from 10% to as much as 50% for each dollar put into an IRA or 401(k). It is available for taxpayers with an AGI as high as $50,000.

Young adults just starting in the work force are excellent candidates for this credit. The power of compound interest makes it a great idea to sock away cash into a 401(k) plan or IRA before you are 30. If the government wants give you back 50% of it as a refund, you'd be crazy to turn them down - especially if you can put the money into a 401(k) with an employer match.

This credit is claimed on Form 8880.

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March 22, 2007

It's a staple of politics to hear people offering tax cuts for "the middle class," usually coupled with calls for "the rich" to pay their "fair share."

The problem is finding a way to define "middle class" in a way that allows for any meaningful tax cuts. Consider who actually pays income taxes:


If "middle class" excludes the top 25% of taxpayers, you exclude about 85% of all income taxes paid from eligibility for tax cuts. The top 5% of taxpayers alone - those with AGI over $159,862 - payover 56% of personal income taxes.

The result? A continuous stream of complicated credits (see Lifetime Learning Credit) that phase out as income levels increase. The code gets more complicated, the tax burden continues to move to the upper end of the income scale, but the politicians continue to party like its 1959.

Hat Tip to the TaxProf Blog for the link to the charts.

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March 22, 2007

The Tax Foundation has criticized the half-baked plan for a gross receipts tax proposed by Illinois Governor Blagojevich. The Tax Foundation has a long history of opposing gross receipts taxes as bad policy.

Governor Blagojevich, of course, responded with a thoughtful and well-supported response, engaging his critics and inviting them to help improve his plan. Just kidding.

Governor Blagojevich responded in the fashion of sleazy populists everywhere, saying through a spokesweasel that "The Tax Foundation is funded by big business and they all sit on its board, so consider the source."

The Blagojevich plan would increase the Illinois tax burden 27%. And if he really thinks that the burden will only fall on "big business," he's not paying attention at all.

Prior Tax Update coverage here.

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March 22, 2007

Taxable Talk brings us the latest on the saga of gambling financial intermediary Neteller. He makes this sobering observation:

If prior to 2006 you had $10,000 at Neteller and you didn't file the TD F 90-22.1, you should consider filing it today, attaching a note that says you weren't aware of the law requiring notification of a foreign bank account. The penalty for not filing the form is $10,000 (minimum), and it's a felony—you can go to prison for this. Do realize you are likely going to have your tax return audited, but if you're choosing between an audit and jail time, I know which one I'd choose.

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March 21, 2007

Death and Taxes continues with its series on life insurance trusts today. It's all worth reading; here's a highlight:

The biggest mistakes I see with ILITs are:

(a) the failure of the grantor to understand that he or she no longer owns or has any interest in the property;

(b) the failure of the grantor to understand that "irrevocable" means "can't amend or revoke"; and

(c) the failure of the trustee to continue to administer the trust correctly, by preparing income tax returns, by sending notice of each contribution to beneficiaries, and by keeping good, clear records of what has been done.

Irrevocable means "you can't revoke." It's amazing how many people have trouble with that.

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March 21, 2007

While tax credits are sweet, they can always be made sweeter. The legislature is trying to do just that.

The state credit for rehabbing old buildings has always been capped at a maximum of $4 million per year, and it has long been badly oversubscribed. SF 556 would increase the annual ceiling to $20 million. But there's more!

If your Iowa rehab tax credit wipes out your tax liability, you can claim it as a tax refund under current law, but the refund gets trimmed under a discounting formula. SF 556 would get rid of the discounting formula for tax credits "applied for or reserved prior to July 1, 2007."

So, think about this. The credit is already generous enough to be oversubscribed years in advance. But now, even though it's already generous enough to be in great demand, it's made more generous. Such a deal! For somebody.


SF 556 also has the most generous version yet of the artist subsidy that has appeared in two other bills. This version would give artists a 100% dollar-for-dollar credit on donations of their own artwork, at fair market value, and it doesn't have the $25,000 limit included in the other bills. My dream of setting up the Museum of Deductible Art gets ever nearer.


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

And there's still more! This bill piles on the economic development. It includes subsidies for recreational trails, "workforce training" funds, and money for the "main street program." It will be interesting if throwing money to enough groups will assemble enough votes to slide this through the legislature.

You can follow the progress of HF 556 and the rest of this session's tax legislation at our 2007 Iowa Tax Legislation page.

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March 21, 2007

If you want to know who really benefits from targeted tax credits, the Des Moines Register gives you a hint this morning:

Polk County Supervisor John Mauro will receive $4.6 million in tax credits to build a low-income, senior-housing project in Des Moines.

The tax credits were awarded by Mauro's former employer, the Iowa Finance Authority. Mauro worked at the finance authority from December 2000 to January 2003. He was a board member of the Central Iowa Employment and Training Consortium until a payroll scandal erupted last spring.

Mauro is the majority owner of a company called Curly Top LLC. Last week, the Iowa Finance Authority announced that it was awarding Curly Top $4,659,010 in tax credits to build a 40-unit apartment complex for low-income senior citizens to be called Southview Senior Apartments. The building is to be constructed on what is now a 1.4-acre vacant lot located at 1720 S.W. First St. in Des Moines.

State records indicate that Mauro's company intends to buy the land from the city for the appraised value of $99,903.

It sure looks like Mr. Mauro has hit an insider's jackpot. The former CIETC board member who let its executives loot the agency under his watch, and who now sits on the Polk County Board, buys land from the city and gets a $4.6 million subsidy from the state agency he used to run.

But it can't be an inside job; Mr. Mauro says so:

"There's no favoritism that I know of that goes on," he said. "I'm pleased I got it, and I don't think I got any special favors. I'm sure I didn't."

Well, that settles that. Hey, let's increase the sales tax to 7% so Mr. Mauro can supervise more public money for us.

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March 20, 2007

The TaxProf asks the question, "When Does Life Begin for Tax Purposes?"

For tax professionals, it's an easy answer. We have no life until we finish that last extension on the tax return due date.

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March 20, 2007

On the affordability of health insurance:

In this paper, we investigate the meaning of “affordability” in the context of health insurance. Assessing the relationship between the affordability of coverage and the large number of uninsured in the U.S. is important for understanding the barriers to purchasing coverage and evaluating the role of policy in reducing the number of uninsured. We propose several definitions of affordability and examine the implications of alternative definitions for estimates of the proportion of uninsured who are unable to afford coverage. We find that, depending on the definition, health insurance was affordable to between one-quarter and three-quarters of the uninsured in the United States in 2000.

Via Marginal Revolution. Emphasis mine.

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March 20, 2007

Kreig Mitchell notes the case of Patricia Wormley, an IRS agent who lost her job after biting off part of a neighbor's thumb. Mr. Mitchell draws this lesson from the case:

The Wormely case highlights one of the major problems with the IRS; namely, IRS employees are not held to any ethical or moral standard. Three documented instances of “misbehavior” should be sufficient to warrant termination – absent an arrest for assault or confronting an IRS manager (If there were three documented instances of “misbehavior,” one is left wondering how many instances of “misbehavior” were not documented).

I've been lucky; the IRS agents I have dealt with have typically acted professionally. Still, the case highlights just how hard it is to get rid of an IRS agent. The agent had to be belligerent with her manager, attack a neighbor and be convicted of assault. Even then, it took a full rearing of the Merit Systems Protection Board and a hearing by the Court of Appeals for the Federal Circuit to get Ms. Wormley fired.

It's this system that makes me cynical about arguments against outsourcing collection activity to private firms. It strains credibility to think private firms can't be trusted to treat taxpayers fairly when it's so incredibly difficult to hold IRS agents accountable for their misbehavior. If a private employee were to put the collection agency's IRS contract in danger, it wouldn't take a federal court case to send him packing.

The opposition to private tax collection is at base an argument about unions. If the private employees were automatically enrolled in the Treasury Employees Union, the opposition to private collection would dry up.

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March 20, 2007

Melting snow has Iowa's rivers bank full, but you can stay high and dry with this week's blog carnivals.

The Carnival of Personal Finance is at "Lazy Man and Money," where you will want to read the Insureblog's coverage of the importance of the lifetime limit on your health coverage.

The Carnival of the Capitalists is up at Blogblivion, and the Carnival of Taxes is home at Don't Mess with Taxes.

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March 19, 2007

The IRS announced today that the Saturn Aura qualifies for the Hybrid Car Credit.


Taxpayers buying this vehicle qualify for a $1,300 credit, unless they are alternative minimum tax-payers, who get diddly. Which makes some people grumpy.

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March 19, 2007

One of the function of prison sentences is educational. The convict, in theory, learns not to do things that land them in prison; the bystander learns of the baleful consequences of breaking the law.

Some are slow learners. Consider a strange letter in yesterday's Concord Monitor Online from one Steven A. Swan:

The corruption of the federal criminal justice system must be experienced to be believed.

From 1996 to 2002, I was a follower and promoter of the teachings of nationally known income tax protester Irwin Schiff. I truly believed Schiff's teachings (that the federal income tax is entirely voluntary). I was so convinced that for six years I did everything I could think of to try to disseminate Schiff's teachings to others.

Then in March 2003, the government indicted me for 18 tax felonies. Seventeen of the 18 counts against me were for filing tax returns for myself or preparing them for others which I knew and believed to be false. However, I did not believe they were false, so I should not have been found guilty.

The U.S. attorney prosecuting me (Colantuono) and my judge (Barbadoro) knew I was not guilty, but they prosecuted me anyway. Unfortunately, I could not overcome "the awesome power of the federal government" and convince my jury that I was not guilty.

In July 2004, Judge Barbadoro sentenced me to six years in federal prison, where I remain.

Hmm. Mr. Swan charged people for preparing bogus returns that claimed improper refunds exceeding $1 million. When that began to backfire...

...the evidence showed that Swan initiated numerous frivolous lawsuits and sought the baseless criminal prosecution of IRS collection employees and banks, title companies, and even a recorder of deeds for complying with lawful IRS liens and levies.

How on earth could such a good guy end up in prison? Well, a Dogpile search reveals a creepy white supremecist website that says it's because Mr. Swan was silenced for revealing the "truth" behind the 9/11 attacks - it was "Israel and high-ranking dual-loyalists to both the United States and Israel within the U.S. Government."

Never mind that Irwin Schiff, Mr. Swan's tax mentor, is serving a 13 year sentence for his tax crimes; the government is just being vindictive because Mr. Swan spoke truth to power. Sure, it was really delusional rantings, but still...

Nobody should be surprised if Mr. Swan emerges from prison as willfully clueless as he went in.

Quatloos has more on Mr. Swan.

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March 19, 2007

Death and Taxes has part III of its series on Irrevocable Life Insurance Trusts up today. This is a great resource to help understand a key estate planning tool.

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March 19, 2007

npbox.jpgGovernor Culver signed the new $1 per pack cigarette tax increase last week. Now the legislature will set to work on spending the new fiscal windfall.

This is the second big step to align the interest of Iowa's government with that of the tobacco industry; the first step was the multistate tobacco lawsuit settlement. Both the tobacco companies and the legislature will enjoy more revenue from more smokers. The Tax Policy Blog has a nice discussion of the issues: "Tax Cigarettes to Save Lives, But Not Too Many Lives."

It's a common occurrence for politicians like Culver to say that we are saving lives by raising cigarette taxes. But we could save lives by passing many different tax hikes. How about taxes on unhealthy cheeseburgers? Sound ridiculous? Just wait - they're coming, and their advocates are using the exact same argument used by Culver.

Well, the Governor may have his own reasons to restrict cheeseburgers...

On the other hand, by the governor's argument, why doesn't he just ban cigarettes? If smoking is so deadly and it's somehow morally right for government to stop people from killing themselves, then why not save 100,000 Iowans instead of 20,000? Oh...that's right --- tax revenue. He wants to make those who continue to smoke pay more to fund programs that, for the most part, have nothing to do with smoking. It's an easy political sell to impose taxes on smokers rather than raise taxes on everyone.

As we've said time and time again, there is absolutely no justification for imposing additional taxes on smokers solely for the purposes of raising additional revenue to fund general programs. If there is a true negative externality from smoking, then the tax should be imposed for that reason only -- no more or no less.

If a private company made so much money off of cigarettes, nobody would trust it to fight smoking. Yet it's taken for granted that the government can have a lucrative stake in cigarette revenues and still lead the war on smoking. Go figure.

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March 19, 2007

The noble effort to provide me a lucrative retirement encourage the arts in Iowa by providing artists a "fair market value" deduction for their own work continues its progress through the legislature. Now called HF 812, the bill improves on its predecessor (HF 411) by allowing all artists the deduction, rather than just those living in "cultural and entertainment districts." The first version of this bill passed the House Economic Development Committee; the current version is now at the Ways and Means Committee.

You can follow the progress of all 2007 tax action in the Iowa legislature at our 2007 Iowa Tax Legislation page.



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

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March 17, 2007

The IRS has issued (Rev. Rul. 2007-23) the minimum interest rates for loans made in April 2007:

-Short Term (demand loans and loans with terms of up to 3 years): 4.90%
-Mid-Term (loans from 3-9 years): 4.61%
-Long-Term (over 9 years): 4.81%

Historical AFRs are available at the "links" page at

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March 16, 2007

Just when you think that the Iowa Legislature couldn't possibly find stupider tax legislation to propose, they surprise you. Consider SF 547, introduced yesterday by Dubuque's Senator Michael Connolly. It would add the following to Iowa's tax law:


In order to assist the department in collecting individual and corporate income taxes and overcome tax avoidance, financial institutions doing business in this state that open an account for a foreign trust or corporation on behalf of a resident of this state or business doing business within this state shall report, on forms approved by the department, the name and taxpayer identification number of any person involved with the account, moneys deposited into the account, and other information deemed necessary by the department.

If the department determines that a foreign trust or corporation was created primarily for the avoidance of taxation within the United States, the department shall treat any moneys deposited into such account as income earned in this state and shall impose the appropriate income tax on such income to the extent the income is not taxable in another state or the trust or corporation establishes beyond a reasonable doubt that the moneys in the account are not income taxable in this state.

There is so much wrong with this bill that it's hard to know where to begin. The bill in effect imposes state-level foreign exchange controls on Iowa businesses and financial institutions - an economic approach usually associated with failing third-world dictatorships.

It would give the Department of Revenue almost unreviewable power ("beyond a reasonable doubt") to impose punitive taxes on offshore investments. Never mind that it's entirely normal to conduct cross-border operations using corporations set up in the country where operations take place. If the sophisticated financial geniuses at the Hoover Building decide you are doing it to avoid taxes, you are out of luck.

Senator Connolly isn't just an obscure legislator, either. He is "assistant majority leader" in the Iowa Senate and he is on the Senate's tax-writing committee, the Ways and Means Committee. That makes this even more astonishing. He really should know better.

Senator Connolly apparently hasn't noticed that multinational financial operations drive a lot of Iowa's economy. Or maybe he just thinks a six-figure job, say, running currency derivative investment operations at Principal Financial Group isn't a real manly job, compared to a union position at an ethanol factory in Dubuque.

A provision like this could kill Iowa's financial services industry dead. But the finance jobs at Principal, Wells Fargo, Nationwide, ING and the other big players in Des Moines aren't union, so they just don't count, apparently. At this rate, the Iowa Legislature might as well just change the motto on Iowa's flag to "Ethanol and union jobs or bust!"


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

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March 16, 2007

The IRS issued a passel of guidance yesterday listing 40 common tax protester positions that will be subject to the new $5,000 frivolous return penalty. The penalty was raised from $500 starting this year. A sample of the silly positions:

Nothing in the Internal Revenue Code imposes a requirement to file a return or pay tax, or that a person is not required to file a tax return or pay a tax unless the Internal Revenue Service responds to the person's questions, correspondence, or a request to identify a provision in the Code requiring the filing of a return or the payment of tax.

There is no legal requirement to file a Federal income tax return because the instructions to Forms 1040, 1040A, or 1040EZ or the Treasury regulations associated with the filing of the forms do not display an OMB control number as required by the Paperwork Reduction Act of 1980, 44 U.S.C. § 3501 et seq., or similar arguments described as frivolous in Rev. Rul. 2006-21, 2006-15 I.R.B. 745.

A taxpayer may "untax" himself or herself at any time or revoke the consent to be taxed and thereafter not be subject to internal revenue taxes.

Only persons who have contracted with the government by applying for a governmental privilege or benefit, such as holding a Social Security number, are subject to tax, and those who have contracted with the government may choose to revoke the contract at will.

You'd think people would stop buying this stuff, considering how dismal the results have been over the years for those making these arguments. Yet an article from a local high school newspaper (written by its "editor-in-chief") shows that each generation includes a new cohort of the gullible. The article refers to Ed Brown, a convicted tax evader now holed up in a fortress-like house in New Hampshire:

There's one simple question here. If there really is a law, why is the IRS so afraid to show the law? Ed and many others who have gone through similar trials have said if the law is shown to them, they will pay the taxes. It's as simple as that. The answer is that there is no law.

Hmm. If there is no law, why was Mr. Brown convicted? And why have "many" others gone on trial? Is there maybe... a law? If all of the federal judges, the federal marshals, and the bureau of prisons are convinced that there is, that seems more persuasive than the word of fugitive militiamen and high school editorial writers.


Notice 2007-30, the list of discredited tax protester positions.

Rev. Rul. 2007-19, on the taxability of wages.
Rev. Rul. 2007-20, on the idea that the tax laws are voluntary.
Rev. Rul. 2007-21, on silly procedural arguments.
Rev. Rul. 2007-22, on citizenship an related arguments.

Tax Prof Blog Coverage

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March 16, 2007

Like, whoa, dude:

A federal judge threw out criminal charges today against an Oakland man accused of growing medical marijuana, ruling that authorities had vindictively prosecuted him because of remarks he made after he successfully appealed an earlier conviction.

U.S. District Judge Charles Breyer in San Francisco dismissed charges of tax evasion and money laundering against Ed Rosenthal, 62, an author and activist who has been dubbed the "Guru of Ganja."

Breyer declared that the government had improperly refiled the tax-evasion and money-laundering case last fall after Rosenthal successfully appealed his 2003 conviction for marijuana cultivation.

Reports that Mr. Rosenthal offered to share a conciliatory doobie with the prosecutors could not be confirmed.

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March 16, 2007

Anderson's Ark sank awhile ago. Now Wayne S. Anderson's lifeboat is sunk, too.

Mr. Anderson was one of the operators of the Anderson's Ark tax scheme. Participants paid money to the operations offshore accounts and falsely deducted the payments as business expenses. They would then take the funds back, after Anderson's Ark took a fee for its trouble.

The IRS didn't take kindly to this, and Mr. Anderson ended up being sentenced to 15 years behind bars on 82 federal counts.

Mr. Anderson appealed. The way I read it, he told the appeals court that the judge should have realized he was out of his mind, considering the silly arguments he was making. Maybe they included this argument used by his brother in the same trial:

   Anderson asserted that he did not recognize the 
   jurisdiction of the court because he is a "human being"
   rather than a "legal fiction entity."
   According to Anderson, the court has jurisdiction only 
   over someone who has accepted a Social Security 
   number and thus has a fictitious identity.

This week the Ninth Circuit Court of Appeals rejected his appeal:

There is no evidence that Anderson was suffering from a mental disease or defect. He may have expressed unusual views regarding taxes, government, and the court's jurisdiction over him, but he did not display irrational behavior at trial. He was polite, followed courtroom rules, and participated in the trial whenever he chose to, cross-examining witnesses effectively.

It looks like Mr. Anderson, who is 65 now, will enjoy the hospitality of the Bureau of Prisons until he is 79.

Cite: United States of America v. Wayne S. Anderson, No. 05-30216

Prior Coverage:





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March 15, 2007

The IRS has sued to shut a Nevada tax shelter promoter. The lawsuit alleges that James A DiLullo peddled sham trusts to help his customers evade taxes.

While he operated out Nevada, the lawsuit says he had customers in "Washington, Massachussetts, Kansas, Texas, Colorado, Iowa, California, and West Virginia."

Based on the lawsuit, that means somebody in Iowa is going to need a good tax lawyer:

In meetings with prospective customers, DiLullo uses a high-pressure sales technique and a persuasive personality to pitch his scheme. He advises prospective customers that wealthy Americans have protected their assets and avoided taxes for decades using trusts or layers of trusts to obscure assets and income. He falsely assures prospective customers that using his trusts is completely legal, peppering his presentation with citations to IRS publications and purportedly supportive case law. He advises that by using a combination of domestic and foreign trusts, customers can lawfully avoid taxation of income.

But he's good for service after the sale:

When one customer questioned DiLullo in 2002 about the legality of his trust scheme, DiLullo told her that she could stop using the trust as long as she was “not stupid enough” to start paying her income taxes again.

Of course, this stuff never works, and it brings financial ruin to those who fall for it. If somebody tries to sell you "pure trusts" or offshore trusts to avoid taxes, run away.

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March 15, 2007

The Tax Policy Blog has a sensible discussion of how the tax gap is percieved as the fabulous fountain of funds by Congressional taxwriters:

A number of proposals to address the problem have been floated, but no one has any solid estimates as to how much revenue they would recoup. Further, no one is sure what the added burden of stepped up enforcement, administrative reform, or stringent reporting standards would cost the federal government or the vast majority of taxpayers who already comply. Nevertheless, Senate Finance Committee Chairman Max Baucus smells blood in the water.

The IRS Commissioner Mark Everson told the Senate Budget Committee last month that "we will never be able to audit our way out of the tax gap." Still, Baucus wants the IRS to shoot for $30 billion per year. That's no small potatoes, to be sure. But Everson warns, "we will actually have to complicate the tax laws to go after the non-compliant taxpayers."

There is no doubt a "tax gap." There is simply no way that the IRS will ever capture every last penny from every nail salon, restaurant or self-employed tradesman out there. And nobody would want to in a country with the amount of enforcement you you need to do so.

The question is, how much of that gap can reasonably collected? The only remotely practical steps are to increase third-party information reporting requirements. That's why we're likely to see brokers required to report stock basis information to the IRS, and why the eBays, PayPals and credit card companies are likely to have to report remittances to enable the IRS to sniff out non-reporting vendors. Beyond that, only so much additional enforcement is possible before it drives people nuts.

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March 15, 2007

dblogo.gifIf you need a break from a hard day of filling out your NCAA brackets, you may want to visit this week's blog carnivals.

The Cavalcade of Risk is up at the MSSP Nexus Blog. It's worth the visit just for Arnold Kling's case study in "premium medicine," but there's lots more.

The Carnival of the Capitalists and the Carnival of Personal Finance are also up.

And while you're celebrating, raise a toast to the eight mighty women of Drake, who shocked the Missouri Valley by winning four games in four days to take the conference tournament and head to the NCAA Women's basketball tourney. Their reward? The injury-depleted Bulldogs start the tourney against Tennessee. Oy. I mean, go get 'em, Bulldogs!

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March 14, 2007

The Des Moines Business Record has an interesting piece on the efforts to increase the central Iowa sales tax rate to 7%. They need to get over 9,000 people to sign up to get it on the ballot. Apparently the grass roots need a little fertilizer:

The Greater Des Moines Partnership last week extended an offer of T-shirts, drawings for concert tickets and even a chance to throw out the first ball at an Iowa Cubs game to encourage its members to gather signatures prior to the March 27 deadline. More than 9,200 signatures from Dallas, Polk and Warren county residents are needed to get the proposed 1 percent local option sales tax on those counties' ballots for a July 10 special election.

While some of the biggest companies in Des Moines are on board for higher sales taxes, it remains to be seen if anybody else is. It didn't seem popular at a Des Moines forum yesterday. A 7% rate would put give us one of the highest sales tax rates in the nation, to go with the highest corporate income tax rate and the fifth-highest personal income tax rate.

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March 14, 2007

When you have an idea so bad that it even has The Des Moines Register agreeing with the Tax Update and State 29, you've really stepped in it. From the Register:

...It would be a misuse of precious public money to pay off student loans for workers who might very well have stayed in the state anyway. For example, about 65 percent of 2005 Iowa State University graduates stayed in Iowa and 70 percent of University of Northern Iowa graduates. Also, there is nothing to stop workers from packing up and heading across the state line after a mere three years.

From State 29:

That sounds like a great idea. The kids, after racking up tens of thousands of dollars worth of debt due to jacked-up tuition rates, can become indentured servants for three or more years while their debt is being paid off.

That doesn't mean it's too stupid to pass, unfortunately. This year, nothing is.

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March 14, 2007

htcigs.jpgThe Iowa Leglislature sent the $1 per pack cigarette tax boost to Governor Culver for his signature last night. Let the spending frenzy begin.

Follow 2007 session tax legislation at our 2007 Iowa Tax Legislation page.

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March 14, 2007

A federal judge declined to jail Washington D.C.s crack-smoking ex-mayor for failing to file timely tax returns:

The ruling was a blow to federal prosecutors, who wanted Barry locked up for missing deadlines for filing federal and District tax returns for 2005. Sidestepping the issue on a technical point, U.S. Magistrate Judge Deborah A. Robinson rejected the prosecutors' request to revoke Barry's probation. She said it was up to the federal probation office -- not prosecutors -- to make the request.

Still, they're picking on the poor guy:

In an interview yesterday, Barry said he was "delighted" about the new ruling and said he "thanks the judge for her fairness" in the tax matter. He added that he believes the handling of his case by the U.S. attorney's office was "embarrassing and humiliating" to him.

"Thousands of Americans have tax problems with the IRS, and they're not treated this way," Barry said. "It's a double standard, and the U.S. attorney ought to stop it."

Actually, most Americans aren't on probation for criminal failure to file tax returns. If you let someone off with probation for failing to file tax returns, it seems reasonable to require him to stop committing the crime as a condition of the probation. But if you're a crackhead politician, that's asking too much, apparently.


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March 14, 2007

bus1.jpgFor the same reason you don't hire a bus driver to prepare your tax return. From a Department of Justice press release:

A federal court in St. Louis has permanently barred Yolanda White of St. Louis from preparing federal income tax returns for others, the Justice Department announced today. Senior Judge Stephen N. Limbaugh of the U.S. District Court for the Eastern District of Missouri issued the permanent injunction order against White, who, according to papers filed in the case, works as a St. Louis school bus driver.

The court held that White repeatedly engaged in fraudulent conduct by claiming fabricated or grossly overstated deductions on customers’ federal income tax returns. Government papers filed in the case state that many of White’s customers are Bosnian immigrants who speak little or no English. The court held that the estimated harm from White’s misconduct for tax years 2003 through 2005 exceeded $1 million.

The problems are just beginning for Ms. White's customers. The IRS will systematically audit all of their returns, and Ms. White's services will turn out to be much more expensive than they first appeared to be.

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March 14, 2007

If you are following Joel Shoenmeyer's Death and Taxes blog, you are getting a great primer in estate planning. For example:

What is a Pourover Will?

Introduction to Irrevocable Life Insurance Trusts (ILITs) - Part 1

Introduction to Irrevocable Life Insurance Trusts (ILITs) - Part 2

From his most recent post:

There are many reasons to set up revocable trusts, such as living trusts: avoidance of probate, privacy, and controlling when your beneficiaries receive their inheritance are just three. By contrast, most people set up irrevocable trusts, such as ILITs, for only one reason: to pass property to beneficiaries at your death free of estate tax. This works because an irrevocable trust is, well, irrevocable. And that irrevocability goes not only to the trust document you sign, but to any property you contribute to the trust. You no longer own it, which means you can't get it back or control it in any way.

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March 13, 2007

The tax law is truly the Ginsu Knife of public policy. It slices. It dices. It stops smoking. Now it keeps the kids at home.

At least that's what some legislators think:

One way Iowa can keep young people in the state is for employers who hire them to pay back all or part of their student loans in exchange for a tax credit from the state, one professor says.

College graduates could see their loan debt - up to $25,000 - erased within three years under House File 730, a bill supported by Democrats and Republicans in the Iowa Legislature.

This is just another way to make people who scrimp and save to finance college education feel like chumps. The effect of this is to have the state retroactively pay your college tuition through tax credits. As a vehicle to keep kids in the state, it makes as much economic sense as a free beer subsidy.

If the goal is to keep kids in the state, you'd do just as well to subsidize rents or car payments; at least that wouldn't discriminate against people whose parents paid for their education, or who went to a cheaper school so they wouldn't run up loans.

It would make a lot more sense if the legislature just got rid of all such bogus tax breaks and dramatically lowered the tax rates. Don't hold your breath.

Follow the progress of HF 730 and all of the other inane tax legislation at our 2007 Iowa Tax Legislation page.

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March 13, 2007

The tax law draws some distinctions between employees and the self-employed that seem completely whimsical. Sometimes these work out in favor of employees - for example, employees get to exclude fringe benefits that get taxed to the self employed. But some of the breaks cut in favor of the self-employed.

One area where the self-employed get treated better came into stark focus in the tax court yesterday. Philip Chaplin worked as a professional fiduciary with trust company Rice, Heard & Bigelow in Massachusetts. Mr. Chaplin got crossways with RHB and went to work for another company. Lawsuits followed, and Mr. Chaplin paid legal fees of $84,542.

Mr. Chaplin deducted the legal fees as if he were a sole proprietor, rather than an employee. If you are a sole proprietor, you can deduct all of your business expenses, including legal fees, "above the line." If you are an employee, in contrast, you have to take legal fees of employment lawsuits (other than civil rights suits) as "miscellaneous itemized deductions." Miscellaneous deductions are deductible for regular tax only to the extent they exceed 2% of your adjusted gross income; they are not deductible at all in computing alternative minimum tax.

The IRS disagreed with Mr. Chaplin; they said that the expenses were employment-related, rather than for a sole proprietorship. The taxpayer made a spirited argument that his role as a professional fiduciary meant he wasn't really an "employee" of RHB, but he wasn't able to even convince the tax court to waive penalties. The result? AMT of $21,082 and accuracy-related penalties of $4,837.

Unfortunately for Mr. Chaplin, his lawsuit didn't have any wrongful discrimination allegations. If you prevail on an employment discrimination lawsuit, you can deduct your legal expenses "above the line," without AMT or 2% haircut issues.

Cite: Chaplin, T.C. Memo 2007-58.

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March 13, 2007

The tax blogosphere has followed up on a couple of cases we have discussed recently. Dr. Maule examines the ins and outs of earned income credits for murderesses, and Kreig Mitchell discusses the missteps of the owners of the China Buffet restaurant in Eau Claire.

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March 13, 2007

If I were in the PricewaterhouseCoopers Moscow office, I'd put in for a stateside transfer about now:

Russian authorities raided the offices of PwC's Russian unit, ZAO PricewaterhouseCoopers Audit, last Friday, in search of new criminal evidence to be used against the firm, which the government suspects of tax evasion, and against bankrupted oil giant OAO Yukos, whose senior executives the government suspects of accounting fraud.

According to published reports, PwC said that the raid by about 20 investigators from the Interior Ministry and the General Prosecutor's office lasted all day. Investigators reportedly confiscated company files related to a back-tax claim against the firm, as well as to PwC's work auditing Yukos.

This is related to the politically-motivated charges against the former Yukos owner Mikhail Khodorkovsky. The government stole his oil company and railroaded him into prison on trumped-up tax charges to suppress his opposition to the Putin government. Somehow I don't think a government that is willing to do that would go out of their way to be fair to accountants, either.

Considering what has happened to Putin opponents outside of Russia, I wouldn't leave a forwarding address.

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March 13, 2007

If you are into beheading infidels and stoning adulterers, skipping taxes isn't too big a stretch. From The Australian:

HARDLINE Muslim clerics are encouraging their followers to cheat the tax system because they consider paying income tax contrary to Islamic law.

Muslim leaders have warned that fundamentalist imams who put sharia law ahead of Australian law are also condoning welfare fraud and the cash economy as tax-evasion methods.

Sydney-based Islamic leader Fadi Rahman told The Australian that the extremist clerics who were preaching messages against paying income taxes were also staunchly opposed to Western ideologies, including the Australian way of life.

Though they are cool with the welfare-fraud part of Western ideologies.

Apparently this particular religious practice isn't going over big with the Australian government:

THE Federal Government has asked the tax commissioner to investigate reports radical Islamic clerics are encouraging followers to cheat the tax system.

Some Islamic clerics are reportedly encouraging their followers to cheat the tax system because they consider paying income tax contrary to Sharia law.

Assistant Treasurer Peter Dutton said he was "disgusted" by the report and is encouraging people to contact the Australian Taxation Office if they suspect anyone of cheating on tax or encouraging others to do so.

Here in the states it's the Scientologists that seem to have had the most issues with tax authorities.

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March 13, 2007

P.J. O'Rourke has never been to central Iowa, as far as I know, but he seems to have an intuitive understanding of the proposal to increase our sales tax to 7%. Today's "quote of the day" is from his book "On the Wealth of Nations" (emphasis mine):

And Maryland Congressman Benjamin L. Cardin said (using the synonym for "future" that sets of the baloney alert), "The deficit raises serious questions about our ability to control our destiny."

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March 12, 2007

The IRS has issued three technical advice memoranda that promise to rattle the credit union world. The memos say that a number of common activities carried on by credit unions are "unrelated" to the tax-exempt purpose of credit unions, and therefore are subject to income tax.

Technical advice memoranda are issued when an IRS agent asks for technical guidance from higher-ups during an audit. This trio of rulings signals that the IRS is likely to apply this thinking to credit unions nationwide.

TAM 200710018 tests activities of a credit union against this standard:

For T's activities to escape taxation as unrelated business income, the activities must contribute directly and importantly to the accomplishment of one or more of T's exempt purposes -- promotion of thrift and providing low cost credit for its members through mutual and nonprofit operation.

The memo reviews whether six activities of the credit union are related to this purpose:

A. Sale of cancer insurance

B. MEMBERS Financial Services Program (MFS Program)

C. Sale of car warranties

D. Sale of credit life and credit disability insurance

E. Sale of collateral protection insurance (CPI)

F. Sale of checks

Only the sale of checks passed muster with the IRS. The rest of the activities were considered unrelated to the purpose of "promotion of thrift and providing low cost credit for its members." In considering credit life and disability insurance sales, for example, the IRS said:

The available information indicates that the sale of insurance is primarily: 1) for the purpose of generating income to T and some of its employees; and 2) for the benefit of the insured rather than for the benefit of T's membership.

The technical advice memos say that the credit union will have to pay "Unrelated business income tax" (UBIT) on its income from these activities. UBIT is applied at the same rates as the corporate income tax under similar rules.

The other two rulings (TAM 200710019 and TAM 200710017) add accidental death and dismemberment insurance, group life and health insurance, and "guaranteed auto protection" to the list of taxable activities.

This conclusion seems sensible. Banks and other financial institutions that sell similar products have to pay tax on them. As some big credit unions are now larger than all but the biggest banks in the Iowa, it's hard to see why they should be able to compete tax-free across the whole range of financial services.

Whether these TAMs will fly politically is another matter. The credit union lobby is fiercely protective of its tax-exempt status, and it can be expected to pull all the strings it can to reverse these conclusions.

Related Tax Update coverage:



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March 12, 2007

What's a crack-smoking ex-mayor got to do to keep the law off his back?

Federal prosecutors said Councilman Marion Barry failed to file his tax returns on time for a seventh year in a row, and they asked a judge to send the former mayor to jail.

Naturally, Mr. Berry feels he's not being treated fairly:

"They're trying to harass me and embarrass me, and they ought to stop it," Barry told WUSA-TV.

Mr. Barry is 71 years old. You'd think he'd grow up by now.

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March 09, 2007

Taxwriters in the new Congress came into office vowing to slay the AMT dragon. They held hearings this week, and the dragon is still alive. One reason: the hearings showed just who it is that the populist Democratic taxwriters have vowed to rescue. It's the top 10% of earners, clustered in high-tax (Democratic-leaning) states.

The Tax Policy Blog has prepared an eye-opening chart:

Source: Tax Policy Blog

That doesn't mean the AMT doesn't affect a powerful political constituency. I would bet that the top 10% of the tax base is by far the biggest source of campaign cash. Still, it presents a marketing problem. The taxwriters have been trying to define "top 10 percent" as "middle class" as part of the debate, but it's not easy. "Save the Volvo Drivers - Repeal AMT" probably won't be a big-selling bumper sticker.

The Tax Policy Blog has the AMT solution about right:

The solution is not to pick our way through quick fixes or bomb one another with class warfare barbs that redefine the "middle class" to suit political ends. The AMT should be addressed. But only full repeal coupled with fundamental tax reform - reducing preferences and treating all income equally - offers a path that will not lead us back here again.

Unfortunately, fundamental tax reform is a policy orphan at the moment.

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March 09, 2007

The Tax Court yesterday ruled that bookkeeping services are considered to be in the business of "accounting." That means bookkeeping service operating as "C" corporations are subject to the flat 35% rate on "personal service corporations."

Rainbow Tax Service does bookkeeping and tax return preparation for Las Vegas-area clients. None of its employees are CPAs, and it doesn't do services requiring a CPA license. The IRS came calling and said that Rainbow is a personal service corporation, or PSC. A corporation is a PSC under the tax law if

substantially all of the corporation's activities involve the performance of services in the fields of "health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting"

and 95% of the stock of the business is owned by employees who perform those services.

The taxpayer argued that they didn't perform "accounting" services because they weren't required to be CPAs. The court disagreed:

Not only does bookkeeping constitute a "branch" of accounting, but our system of double entry bookkeeping undergirds modern financial accounting.

The decision was issued as a reviewed "regular" decision of the full court. That's a relatively rare procedure. Only 5 of the 100 or so decisions issued by the court this year are regular decisions. This means the court has given the issue some thought - thinking that will likely be challenged on an appeal.

Taxpayers who don't want to be "personal service corporations" have three basic options to avoid that treatment. One option is to elect S corporation status. The other is to have enough other business activity that you don't qualify. If Rainbow Tax Service opened up a side business of, say, selling dog food, they might avoid the flat 35% rate. Finally, they could just pay all of their income out as bonus and salary to avoid the 35% rate - but then they may as well elect S corporation status to avoid the year-end check-writing frenzy.

The TaxProf also has coverage.

Cite: Rainbow Tax Service, Inc. 128 T.C. No. 5.

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March 08, 2007

You Bin Yang and his brother, You Lin Yang, ran the China Buffet restaurant in Eau Claire, Wisconsin. They were under investigation for tax fraud when they suffered a burglary at their Eau Claire home. A police officer saw three notebooks labeled 2000, 2001 and 2002, and he asked You if he could take them in to the police station for fingerprinting. A police officer who knew of the fraud investigation provided the notebooks to the IRS, and things went downhill for both of You, who pleaded guilty to tax evasion. Their guilty plea was conditional: they could withdraw it if they could convince the courts that the notebooks were illegally used as evidence against them.

Yesterday the U.S Court of Appeals for the Seventh Circuit ruled that You and You Yang couldn't assert an expectation of privacy of notebooks that were turned over voluntarily to the Eau Claire police.

The Moral? When You's a tax cheat, You can't even trust the police.


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March 08, 2007

As bad as things look for this year's legislative session in Iowa, things look even worse in Illinois. Governor Blagojevich (pronounced "so-far unindicted") is looking for 32 billion in new revenue, and part of it will come through a gross receipts tax:

(UPDATE, 12/9/2008: Pronunciation correction.)

SPRINGFIELD -- Gov. Rod Blagojevich on Wednesday plans to call for a huge overhaul of Illinois government's finances that counts on raising $32 billion in new revenue by adding business taxes, leasing the state lottery and selling bonds.

Seeking to convince skeptics in a legislature controlled by his own party, the Democratic governor will try to make the case for new revenues by touting plans to pump billions of dollars into public schools and expanded health-care coverage, according to budget documents obtained by the Tribune.

Yes, the Illinois government is doing such a bang-up job with it's existing chores that the time is ripe to give it massive new responsibilities, like destroying health care in the state.

The Tax Policy Blog has a timely piece on the unwisdom of the proposed gross receipts tax.

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March 08, 2007

Iowa's House Economic Growth Committee passed the movie-maker subsidy bill, HF 411, earlier this week. The bill creates transferable tax credits for filmmakers to sell at a discount to finance their projects. It's like a direct state film subsidy, but more expensive.

Still, it's worth taking a moment to list the names of all of the brave and principled members of the committee who stood up for the taxpayers against this bipartisan naked special interest cash grab: .

The committee also unanimously passed the special interest tax breaks in two other bills. It passed HF 246, allowing the sale of loss carryforwards by biotech companies. And it passed HF 456, which allows artists to deduct the appreciated value of charitable donations of their own artwork if they live or work in a "cultural or entertainment district." We're one step closer to my dream of becoming curator of the Digital Museum of Deductible Art.

Heaven help the artist that smokes, though.

Follow the progress of these and all other execrable Iowa tax legislation at our 2007 Iowa Tax Legislation page.

Prior Tax Update Coverage:



Tags: .

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March 07, 2007

Gee, this is a surprise:

A prominent question in public debate is whether Pell grants tend to be appropriated by universities through increases in tuition – consistent with what is known as the Bennett hypothesis. Based on a panel of 1554 colleges and universities from 1989 to 1996, we find little evidence of the Bennett hypothesis for in-state tuition for public universities. For private universities, though, increases in Pell grants appear to be matched nearly one for one by increases in list (and net) tuition. Results for out-of-state tuition for public universities are similar to those for private universities, suggesting that they behave more like private ones in setting out-of-state tuition.

No doubt that the "Hope Credit," "Lifetime Learning Credit," the deduction for tuition and other tax breaks for college are similarly sucked up by tuition increases.

The next time a politician promises to "make college education more affordable," remember: he really means that he wants to "raise tuition."


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March 07, 2007

I hope Arthur Farnsworth is getting affairs in order so he can go away for awhile. He is to be sentenced today for tax evasion in Pennsylvania, and his strategy to avoid jail isn't promising:

A Bucks County man convicted of income tax evasion wants a federal judge to throw out his guilty verdict on the grounds that the U.S. attorney lacked ''territorial jurisdiction'' to prosecute him.

Arthur Farnsworth, who claimed during his trial that payment of federal income taxes is voluntary, also sought a stay of his sentencing, scheduled for today, pending a resolution of his motion to dismiss the verdict, which was filed late Monday.

His co-counsel seems unlikely to score points with his arguments:

Farnsworth's co-counsel, Jonathan Altman of Paoli, Chester County, said the argument of territorial jurisdiction is rooted in law, and if the motion to dismiss is denied, an appeal would go to the 3rd U.S. Circuit Court of Appeals and possibly the U.S. Supreme Court.

''Many people contend it's a frivolous argument, in particular the U.S. government, but my research has concluded otherwise,'' said Altman.

Tax protestors like to say they've done "extensive research" that proves that everything that the three branches of government say about the tax system is wrong. It never works, probably because the "research" really consists of reading books and tracts by other tax protestors and listening to their short-wave radio broadcasts.

In his motion to dismiss the guilty verdict, he asserts a narrowly held notion by tax honesty advocates that the U.S. government has limited jurisdiction in matters outside the District of Columbia.

Aside from exercising authority over ''erection of forts, magazines, arsenals, dockyards and other useful buildings,'' jurisdiction over all criminal matters rests with the states, and federal prosecutors throughout the United States have usurped their authority under the U.S. Constitution, Farnsworth claims.

Al Capone and John Gotti will be pleased to get that news.

''States, not the federal government, in most circumstances, can prosecute unless there is a constitutional amendment to change that,'' he said. ''This is an issue that, in my opinion, has gone unchallenged. Mr. Farnsworth tried to say this during his trial, but he didn't articulate it properly.'

Showing once again the tax protest honesty movement's touching faith that somewhere, somehow, there is a magic chant that can be used in a courtroom to drive away the evil spirits of the tax law.

Anybody wanting an encyclopedic debunking of tax protest theories should visit Dan Evans' Tax Protester FAQ page.

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March 07, 2007

An excellent article by Ryan Donmoyer for Bloomberg bursts the bubble of the congresscritters, especially Charlie Rangel, who look to harvest the tax gap for billions in easy money (Hat tip: TaxProf Blog).

The tax gap is the difference between income taxes theoretically due and those actually collected - estimated at around $300 billion or so. The problem is, there isn't that much low-hanging tax fruit for the picking. To really get it requires much more enforcement than anybody much cares to see:

The reason, say tax experts, is that doing so would require thousands of new Internal Revenue Service agents as well as stricter filing rules, more stringent audits, tighter scrutiny of small businesses and other politically unpopular steps that [Treasury Secretary] Paulson says would penalize "honorable and honest" taxpayers.

`Pot of Gold'

"Turning the `tax gap' into the pot of gold requires turning the IRS into a beast," says Pamela Olson, a former assistant Treasury secretary for tax policy under President George W. Bush. "They might be able to do it, but they won't like the result."

That won't keep Congress from trying. I think tax gap closers will feature prominently in any tax bills that come out of Congress later this year. Likely "gap closers" will include:

- Requirements that brokers track stock basis and report securities gains to IRS and taxpayers on 1099 forms.

- Requirements for credit card issuers and intermediaries like PayPal and eBay to report payments over $600 to any single recipient.

Prior Tax Update Coverage:




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March 07, 2007

Congress will be holding hearings about the AMT today. It will be lots of noise (AMT - Bad!) and no progress.

If you want to see what the real problems are in fixing AMT, go to the AMT page at the Tax Policy Center site. It won't be as easy as some folks seem to think.

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March 06, 2007

Gary Maydew, a fixture in the Iowa State University accounting department, had an article in the Des Moines Register last week that I found puzzling. He said that because he couldn't find a link between tax climate and the number of Forbes top 500 firms in a state, it must mean tax rates don't matter.

The Tax Foundation has responded with a letter to the Register. It notes the obvious problem with Dr. Maydew's thesis: his use of Forbes 500 firms as a proxy for the whole economy. The Tax Foundation points out that growth of the whole economy - as opposed to just 500 companies - is linked to tax climate and rates:

The State Business Tax Climate Index does not measure the friendliness just for large privately held firms-- it measures it for all firms. There is no theoretical link between tax friendliness and large privately held firms in a state, so it is no surprise Mr. Maydew found a small correlation.

However, states with the most competitive tax climates will grow faster than states with uncompetitive climates. The Tax Foundation has found that states with the best business tax climates have much faster rates of growth than those states with poor climates. In addition, states with the lowest tax burdens have faster rates of growth than those states with higher burdens.

I would also add that the presence of the largest provately-held firms in a state is attributable to things that happened when those firms were being formed - often decades ago. Just because John Ruan and Hy-Vee stores started out here decades ago doesn't mean Iowa is growing small businesses today. In the department of what's happening now, Iowa is dead last in growing young companies, as ranked by Entrepreneur magazine.

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March 06, 2007

The snow looks like it will melt this week - a cause to celebrate, for sure. You can do so at this week's blog carnivals. The Tax Carnival is up at Gina's Tax Articles. The rebooted and highly-selective carnival of the capitalits is up at the Carnival of the Capitalists home page. The Personal Finance Carnival is at Mapgirl's Fiscal Challenge. Enjoy!

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March 06, 2007

Ways and Means Chairman Rangel said Sunday ($link)

"You know, we have 23 million people in this country that have alternative minimum tax burdens close to a trillion dollars over the next 10 years. And that's not even on the president's radar screen."

That many people owe a TRILLION dollars? I had no idea that many people made anywhere near that much.

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March 05, 2007

Today the Tax Court issued its opinion in "Families Against Government Slavery vs. Commissioner of Internal Revenue."

Ann Coulter and the Film Actors Guild spokesman could not be reached for comment.

UPDATE, 3/6: The TaxProf reports the substance of the case here. It is very weird. The organization is was set up to fight a secret federal program:

...that the Federal Bureau of Investigation kidnaps Hollywood celebrities and that law enforcement personnel and private gangs are joined in a conspiracy to kill, trap, and enslave Hollywood celebrities and minorities "to gain more financial support" and to engage in activities that petitioner describes as "blood sport". Language in petitioner's documents also alleges that Government-sponsored welfare and housing programs force minority women to participate in the above alleged conspiracy.

So maybe the Film Actors Guild connection isn't so far-fetched.

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March 05, 2007

The Des Moines Register has a piece about the controversy stirred by the IRS proposed revenue ruling that would impose self-employment tax on Conservation Reserve Program payments:

Should landowners who have farms enrolled in the CRP pay the 15.3 percent self-employment tax on their government payments if they don't take an active part in running the farm?

No, says two Iowa State University professors and experts on agricultural law, Neil Harl and Roger McEowen.

"I think the IRS is trying to make law here," Harl said. "I don't think they are following the law."

This will be an interesting case study in how politics can affect tax administration. The proposed ruling appears to be based on the IRS reading of case law. Whether the IRS will read the cases in a different light after pressure from farm-state senators like Charles Grassley remains to be seen.

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March 05, 2007

Congressional Democrats have been saying they were ready to permanently solve the looming massive increase in the reach of the alternative minimum tax. Republican taxwriters have been kicking the problem down the road a year at a time with temporary increases in the AMT exemption.

Senate budget writers now are looking at a bold solution: ($link):

Senate Budget Committee Chair Kent Conrad, D-N.D., told Tax Analysts March 2 that the chamber's fiscal 2008 budget resolution will include -- at the minimum -- a two-year alternative minimum tax patch.

Whoa! Two years! Audacious!

The AMT is one of those commonly accepted lies has been ignored by both parties for their own reasons of convenience. Republicans have used the projected revenues from the AMT to help make their budgets look balanced; Democrats accept the temporary fixes because the AMT will hit blue-state Volvo drivers the hardest. That's tax policy for you. As former House Ways and Means Chairman Thomas famously put it,

"Don't think in this business that you're dealing with the best and the brightest," he said. "You're dealing with the available and the willing. One of the basic criteria is usually warm and vertical. That's optional in some instances."

The result: an AMT increase that nobody seriously believes will be allowed to take affect, but which is routinely used in federal budgeting and policymaking.

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March 05, 2007

From the TaxProf Blog this morning:

NY Times: Tax Policy Decreed by Merry Men in Tights: "Robin Hood as Grover Norquist in Tights"

Grover Norquist?



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March 05, 2007

Headline in today's Tax Notes ($link):

Emanuel Says Support Mounting for Healthy Kids Act


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March 02, 2007

An interesting pair of bills were thrown into the hopper in the Iowa Senate yesterday.

SF 321 is pretty straightforward:

This bill provides, for purposes of state and local sales taxes, that inspection and repair of fences, livestock monitoring, and viewing and inspection of crops are activities related to production of agricultural products. The sales price of farm machinery and equipment used in production of agricultural products is exempt from state and local sales tax.

That seems straightforward enough, but it doesn't say what items it's getting at. Four-wheel off-road vehicles? Snowmobiles? Binoculars? SUVs? All of these arguably could be used in inspecting fences, monitoring livestock, and inspecting crops (ok, so the snowmobiles would be a stretch for inspecting crops). Maybe it's obvious to a farmer, but to a city boy, it looks like another step towards a tax-free existence for the ag sector.

SF 323 is a bit more mysterious, starting with its official description:

An Act relating to certain property eligible for an exemption from property taxation, providing a refund of property taxes in certain circumstances, and including effective and retroactive applicability date provisions

That's pretty obscure. "Certain circumstances?" Which ones?

Part of the bill is routine - it allows exempt organizations to claim a property tax exemption for property they purchase even if they buy it after the normal deadline for claiming an exemption has passed.

Another provision is much more interesting. From the SF 323 explanation:

The bill also requires the board of supervisors of a county with a population of more than 88,000 but not more than 95,000 to refund the property taxes paid by a religious, literary, or charitable institution or society or by an educational institution for FY 2002-2003 and FY 2005-2006 on property purchased by the institution or society if the institution or society was unable to or failed to file for a property tax exemption in a timely manner for those fiscal years.

The population used in the bill is from the last census. A quick look at the 2000 census data ahows that this is for some well-connected exempt organization in Dubuque County - population 89,143 in 2000.

Letting exempt organizations claim a property tax exemption in the year they buy property may be reasonable, but this refund deal is for a specific exempt organization. It means that every other exempt organization that had the same problem is just out of luck. That's never sound tax policy, but that's our legislature. At least they find it embarassing enough that they don't say who it's for.

You can follow the progress of these bills at our 2007 Iowa Tax Legislation page.

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March 02, 2007

badguycowboy.gifIt has been a while since we last checked in on the "Lawmen," a Michigan tax-protest outfit. They're the charming folks that listed the prices of worthless tax and court documents that purported to get you out of tax trouble - trouble more dire with each document you purchased. They also had this persuasive argument for those who might begin to entertain dobuts about their approach:

All of this information is predicated on the belief that we still have a system of law and it is only necessary to obtain justice in our courts by doing the correct filings and using the correct arguements. Many people are not equiped to do this and if you find that your county has violated the rights of many of the citizens, then it is suggested that you do a class action lawsuit. You will have to contact those people and have them get a copy of the illegal notice of federal tax lien on their property and appoint someone in charge. Then the LAWMEN will assist you in any way we can.

If you think that all this is not possible, you should resign from the LAWMEN and learn how to lick boots. It will come in handy for you.

Lawman leader Charles Conces must have had trouble finding the right magic document to ward off the taxman, but it's so, based on this press release from the Department of Justice:

WASHINGTON, D.C. - U.S. Marshals arrested Charles Conces of Battle Creek, Mich., earlier today, the Justice Department has announced. The arrest resulted from a federal judge’s order on the Feb. 23, 2007, finding Conces in civil contempt of court for failing to obey a court order entered on February 8.

The February 8 order compelled Conces to disclose to the government the identities of certain persons for whom he drafted or provided advice regarding federal income taxes, the identities of the persons who are responsible for his Web site, and all documents that he drafted or assisted in drafting for these persons no later than February 16. Conces refused to disclose the identities and documents as ordered by the court.

On February 23, the court held Conces in civil contempt and ordered him to report to the U.S. Marshal no later than noon on March 1, 2007. Conces reported to the U.S. Marshals today, and was taken into custody. According to the court’s February 23 order, Mr. Conces will remain in the custody of the U.S. Marshals until he complies with the order to disclose these identities and documents.

I can't believe that he didn't persuade the judge to set him free using Document number 10 (free!) from the Lawmen's defunct website: "Winning in Court" (website copy available courtesy of the intenet Wayback Machine). Maybe now that the site is down, the document is lost in the ethernet. Fortunately we saved the animated figure that graced the old website, firing away at the top of this post. If that doesn't show unimpeachable legal authority, I don't know what does.

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March 01, 2007

The legislature is likely to pass combined corporation reporting this year. It's part of the governor's budget, and bills arre in the hopper in both the Iowa House (HF 326) and the Iowa Senate (SSB 1074).

The bills would apply to groups eligible to file a federal consolidated return. They attempt capture income steered to affiliated corporations in low-tax states by means of management fees and other intercompany income-shifting devices.

Example: Roy, Inc. is incorporated in Delaware; it has no Iowa nexus (taxable presence) and Iowa sales are $0 of its $90 million gross receipts. It has taxable income of $1 million, aside from management fees. It owns 100% of Gately Inc.

Gately has Iowa nexus. It has $5 million Iowa sales of its $10 million gross receipts. It has net income of $1 million before management fees. Gately pays Roy Inc. management fees of $1 million.

Without combined reporting, Gately allocates 50% ($5 mm ÷ $10 million) of $0 net income to Iowa and pays $0 tax.

With combined reporting, the Roy Inc. group allocates 5% ($5 mm ÷ $100 mm) of $2 million of income to Iowa, resulting in approximately $10,100 in Iowa tax.

A bolder and wiser move would be to repeal the state corporation income tax, which contributes insignificantly to Iowa's tax revenues (@3%), even though it imposes the highest tax rate of any state - 12%. Boldness and wisdom aren't in surplus this year, it seems.

We are tracking all tax bills in the legislature at our 2007 Iowa Tax Legislation page.

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March 01, 2007

Ethanol plant partnerships are the current hot investment craze in rural Iowa. While serious buyers remorse will wait until the first plants start to go bankrupt, investors may be having having their first second thoughts as they get their tax returns.

Partnerships don't generally pay taxes. They file tax returns that allocate their earnings among their owners on form K-1. Then the owners report the partnership income or loss from the K-1s on their own returns.

Ethanol plants often have assets in many states - railcars, storage facilities, and the like. They have to file returns in all of those states - and so do the partners. At least one ethanol partnership we know of files tax returns in 14 states. That means the partners get to file in all of those states, too. The farmer-investors in this one aren't going to like their tax return preparation bills this year.

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March 01, 2007

pman.jpgThe A Tax Court judge yesterday pretty much came out and said that video poker is a sucker bet. A Berwyn, Illinois engineer tried to get the court to treat him as a professional gambler, which would enable him to deduct his gambling losses and expenses.

"We are additionally unconvinced that petitioner’s gambling activity meets the standard for being a trade or business because we are not persuaded that an individual who gambles against a machine that is programmed by a casino can have, as his or her primary purpose, income or profit. After all, such a machine is on the floor to make money for the casino and is not there to provide income or profit for the casino’s patrons.

That's the way I look at it, but Russ Fox, who knows a lot more about gambling than I ever will, disagrees:

I strongly disagree with the Court about video poker. I know that it is quite possible to be a video poker professional. It takes practice, skill, and effort (and if you're a professional, you will maintain books, because it's the only way you will know how you're doing). This is a memorandum decision, and doesn't establish a precedent. However, it does tell you what the Tax Court is thinking, and it's clear that you would have to show substantial statistical records in order to be considered a professional video poker player.

Maybe it's one of those things that's possible, but beyond the ability or patience of 99 percent of the people that play video poker. Everybody else would probably have as much chance making money playing Pac-man.

The decision is notable for one other thing: it's the first time I've seen the court cite Wikipedia. The TaxProf counts eight Wikipedia references in the decision.

Cite: Ferguson, T.C. Summary Opinion 2007-30.

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March 01, 2007

We're under a blizzard warning for today in Des Moines. It's a great day to wrap up in a wooly blanket with an internet carnival.

The Cavalcade of Risk is at this week. The rebooted Carnival of the Capitalists is more selective this week at Bizosphere. Enjoy!

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