Tax Update Blog: May 2007 Archives

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NO LIKE-KIND EXCHANGE FOR GEORGIA VACATION HOME

May 31, 2007

The tax law allows you to skip taxes on up to $500,000 of gain when you sell a "principal residence." That usually doesn't cover a vacation home -- a distressing technicality, because for many owners, the resort cottage has appreciated much more than the city house.

That leads taxpayers to try to qualify for the other big real estate tax break - the "like-kind exchange." But these "Section 1031" deals have some technicalities of their own, as a Georgia couple learned yesterday in Tax Court.

Barry and Deborah Moore bought lakefront property in Georgia on Clark Hill Lake back in 1988. Ten years later they wanted a property on Lake Lanier. Working with an escrow agent, they sold the Clark Hill property and used the escrowed proceeds to buy the Lake Lanier place; they reported the deal as a like-kind exchange on their 2000 return, paying no tax on ten years worth of appreciation.

NOT 'HELD FOR INVESTMENT'

The IRS said that the exchange failed to meet one of the requirements of Section 1031:

No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.

The Moores didn't run a business out of the lake home, so they had to show that they held the property "for investment." Their argument apparently was that the resort properties were going up in value, so they were good investments. The Tax Court said that didn't cut it:

Petitioners point to their interest in the appreciation potential of the Clark Hill and Lake Lanier properties, both before and after acquisition, and argue: "If investment intent is one motive for holding * * * property, it is held for investment for purposes of Section 1031." Petitioners' argument, if carried to its logical extreme, is that the existence of any investment motive in holding a personal residence, no matter how minor a factor in the overall decision to acquire and hold (or simply to hold) the property before its inclusion in an exchange of properties, will render it "property * * * held for investment" with any gain on the exchange eligible for nonrecognition treatment under section 1031. Petitioners are mistaken. It is a taxpayer's primary purpose in holding the properties that counts. (emphasis added)

The Tax Court noted caselaw holding personal use of property isn't compatible with treating it as "held for investment" under Section 1031. The court quoted the well-known Starker case:

It has long been the rule that use of property solely as a personal residence is antithetical to its being held for investment. Losses on the sale or exchange of such property cannot be deducted for this reason, despite the general rule that losses from transactions involving * * * investment properties are deductible. A similar rule must obtain in construing the term "held for investment" in section 1031.

The court pointed to the taxpayers' use of the houses as vacation homes, their failure to rent either the old or the new property, and the personal improvements they made as evidence that the homes were for personal use, rather than for investment:

Petitioners would have us believe that they used the house only as a caretaker's cottage while awaiting the expected appreciation in the value of the property as a whole. While awaiting that event, however, they purchased a 6-to 8-passenger motorboat to pass the time on the lake.

Ouch.

In short, the evidence overwhelmingly demonstrates that petitioners' primary purpose in acquiring and holding both the Clark Hill and Lake Lanier properties was to enjoy the use of those properties as vacation homes; i.e., as secondary, personal residences.

Needless to say, the Moores lost the argument, and the Tax Court said the exchange failed the Section 1031 requirements.

The Moral? If you have any hope of qualifying a vacation home as "like-kind" property, you need to stop using it some years before it's time to sell. You need to start renting it out, to maintain it as a rental place, and to report income and loss from the property on your Schedule E. And by all means, don't keep the boat there anymore.

Cite: Moore, T.C. Memo 2007-134.

UPDATE: The TaxProf has more.

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MAULE PAYS ATTENTION, SO WE DON'T HAVE TO

May 31, 2007

Like the seventeen-year cicadas, the politicians have returned to Iowa. I prefer the noise of the bugs to that of the candidates -- especially when it comes to taxes.

Each party has its own generic tax platform. The Democrats want to raise taxes "the rich" and "big corporations" while cutting taxes for "the middle class," getting rid of the alternative minimum tax, spending more money and burning corn ethanol. Republicans want to keep taxes where they are while getting rid of the alternative minimum tax, spending more money and burning corn ethanol.

Nobody seems interested in the two real problems facing the tax system. The first is the current horrendously high-rate, loophole-riddled system itself. Every year they pass more special-interest breaks and erode the tax base, so more and more of the income tax is paid by fewer taxpayers.

The second problem is the looming spending catastrophe in Medicare and Social Security. Unless these programs are scaled back - the right answer, but one nobody seems to care for - the tax system won't, and can't, pay the bills.

Still, if you can ignore those details for the moment, you can learn something about the candidates by studying their tax plans, if you have a strong stomach. Prof. Maule must have a gut of iron.

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NYT: INDICTMENTS LOOM FOR E&Y TAX SHELTER FIGURES

May 30, 2007

The New York Times reports:

Federal prosecutors have decided not to bring criminal charges against the accounting firm of Ernst & Young over its work with questionable tax shelters, but will instead bring criminal charges against four employees today, people close to the case said.

The Ernst & Young employees to be charged by federal prosecutors for the Southern District of New York are Robert Coplan, Richard Shapiro, Martin Nussbaum and Brian Vaughn, according to these people.

The prosecutors seem to be taking a more low-key approach here than they did with their indictment of 17 people, mostly former partners and employees of KPMG, coupled with a "deferred prosecution agreement" that made major changes to the KPMG tax practice. The KPMG case has run into trouble, with the presiding judge unhappy with prosecution tactics. Perhaps the Justice Department's more subdued approach to the E&Y case is a result of their problems in the KPMG matter.

UPDATE: Indictments announced.

UPDATE II: The TaxProf has a link roundup.

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LLC OWNERS RESPONSIBLE FOR PAYROLL TAXES? NO SURPRISE.

May 30, 2007

The Instapundit makes a rare venture into the tax law with this post, repeated in its entirety:

BIG -- AND POTENTIALLY BAD -- tax news for LLCs.

He links to an article headlined Limited Liability Company owner IS Liable for Payroll Taxes - This is BIG, that reads:

The 2nd Circuit Court of Appeals in McNamee v. IRS, No. 05-6151 just affirmed a federal trial court's determination that the owner of an LLC (limited liability company) can be held personally liable for unpaid payroll taxes. This is a significant decision, which may well be appealed to the Supreme Court.

Big? Not really. It would have been much more surprising if the court had ruled otherwise.

The regulation that governs the taxation of LLCs reads:

...an eligible entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner.

If an entity is "disregarded as an entity separate from its owner," it's treated for tax purposes as if it's not there. It would be stunning if the courts had read this to mean "disregarded except for actually paying taxes."

As pointed out in the post linked by Instapundit, it usually doesn't matter anyway. Even the owner of a corporation will be on the hook if he chooses not to fork over payroll taxes withheld from employees; failure to remit payroll taxes is the most common source of tax ruin for small businesses.

The moral? Never, ever fail to remit your payroll taxes; if you do, don't expect an LLC, or any other entity for that matter, will fend off the IRS.

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GOVERNOR SIGNS IOWA AMNESTY BILL

May 30, 2007

If they have a confessional at the Iowa Department of Revenue, this would be a good time to remodel it. Nobody will be using it for the next 13 weeks or so.

Governor Culver has signed the tax amnesty bill, SF 580. The bill forgives penalties and 1/2 of the interest during the amnesty period, which runs from September 4 thorugh October 31 of this year.

The Governor's website touts this as a "one-time" amnesty. Yes, one time, just like the last one in 1986.

The Tax Policy Blog has a post on the policy implications of tax amnesties:

What we wrote in 1985 holds true today: if lawmakers decide to implement tax amnesty programs, they should be accompanied by fundamental tax reform that makes the tax code simpler and easier to comply with.

Iowa has gone in the opposite direction, adding more loopholes targeted tax incentives to its tax law while doing nothing to lower rates or broaden the tax base. Iowa's incentive is purely a cheap temporary revenue fix that does nothing but build an expectation of future amnesties while making chumps of law-abiding taxpayers. But for those of us who charge for tax work by the hour, it truly helps our economic development during an otherwise slow time of year.

IOWA HOUSE PASSES TAX AMNESTY BILL

IOWA TAX AMNESTY BILL INTRODUCED

WAYS AND MEANS VOTES TO SCHMUCK IOWA TAXPAYERS

Roth & Company 2007 Iowa Tax Legislation Page

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THIS DEAL NEEDED MORE KETCHUP

May 29, 2007

Last week the H.J. Heinz Company lost a big "basis shifting" tax shelter case.

The shelter was supposed to work like this:

1. A Heinz subsidiary, Heinz Credit Corporation, bought 3.5 million shares of Heinz stock on the public markets for about $129 million.

2. Heinz redeemed all but 175,000 of the shares in a transaction that (on purpose) did not qualify as a redemption under Sec. 302. That means the transaction is a dividend, and the $120+ million basis in the 3,325,000 shares shifts to the remaining 175,000 shares.

3. The subsidiary sells the remaining 175,000 shares on the public market, generating a $124 million capital loss and more than $40 million in tax refunds.

These basis-shifting transactions were designed to take advantage of an old tax law provision meant to keep people from disguising corporate dividends as stock sale proceeds. This was more important before dividends and capital gains were taxed at the same rate, but it still matters; a dividend is 100% taxable, while a stock sale is taxable only to the extent the proceeds exceed your stock cost ("basis").

While the redemption rules can be complicated, a simple example gives an idea how it works:

If you own all 100 shares of a corporation, a sale of 99 shares back to the corporation still leaves you with 100% ownership, so the tax law ignores the "sale" and treats the transaction as a dividend. The basis of the 99 shares "sold" is reallocated to the remaining 1 share in such a "failed" stock redemption.

The basis-shifting shelters sought to create losses by using "failed" redemptions to inflate the basis of shares and then selling them to outside parties at a loss.

The Court of Federal Claims said that the Heinz basis-shift was a "sham":

This court will not don blinders to the realities of the transaction before it. Stripped of its veneer, the acquisition by HCC of the Heinz stock had one purpose, and one purpose alone -- producing capital losses that could be carried back to wipe out prior capital gains. There was no other genuine business purpose. As such, under the prevailing standard, the transaction in question must be viewed as a sham -- a transaction imbued with no significant tax-independent considerations, but rather characterized, at least in terms of HCC's participation, solely by tax-avoidance features. The tax advantage sought by Heinz via this sham must be denied.

The moral? If you do a deal solely to generate tax losses, the courts might not buy it, no matter how much ketchup you pour on it.

The TaxProf has more.

Cite: H.J. Heinz vs. United States, Ct. Fed. Cl. No. 03-2847T

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IT'S YOUR BIZNESS

May 29, 2007

If you aren't checking out Iowabiz.com daily, you're missing good stuff, like Mike Sansone's advice on increasing web traffic.

For what it's worth, this post is perennially one of the most popular here at taxupdateblog.com. Draw whatever conclusions you deem appropriate.

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OH JOY!

May 29, 2007

Reader Joy responds to our post on Congressman Ron Paul:

It's obvious to me that you've neither read the Supreme Court decisions regarding the income tax, nor any of the research around the Sixteenth Amendment.

Brushaber, et al have consistently ruled that the Sixteenth Amendment GAVE NO NEW TAXING POWERS to the federal government, and that the income tax is an EXCISE, and not a direct tax. In fact, the USSC has consistently ruled that our labor is our right, and rights cannot be taxed.

Go do your homework before you call other people charlatans, but be sure to do it with an open mind, as others of us did, others who have been stunned to leave how they've been bilked and robbed and allowed our servant the government to become our master.

This is a government, supposedly, where its just powers come from the people. Ask yourself one thing, sir. If you don't have the right and authority to do something, can you give that authority to the government? Now ask it again. And again. And again.

I tried asking myself that question over and over, like the lady said, and I kept getting the answer "Say what?" "Say what?" and finally "Stop talking to yourself and do some work."

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FRIDAY LUNCH, DOWNTOWN DES MOINES

May 25, 2007

It's hard to go back to work some afternoons...

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S CORPORATIONS AND THE WAR EFFORT

May 25, 2007

Congress last night finally passed the war funding bill. Apparently a higher minimum wage, increased business expensing and S corporation banks all are a critical part of the war effort, as they all showed up in the final bill. From our skewed tax viewpoint, here are the high points:

- Effective this year, the maximum Section 179 deduction is increased by $25,000, to $125,000, for taxpayers who purchase up to $500,000 of qualifying property. The Section 179 deduction lets you write off fixed assets you would otherwise have to depreciate over several years. This is effective this year for calendar year taxpayers.

- Restricted bank directors shares will not be treated as outstanding stock under S corporation rules. This means bank directors required to hold shares under banking laws don't have to pick up K-1 income from the bank or sign S corporation elections. Any distributions on such shares will be deductible by the bank and includible in the directors income. This is effective starting January 1, 2007.

- Electing banks will be able to elect to include their entire bad debt reserve in income in their last C corporation year. Banks making an S corporation election are required to take their bad debt reserves into income. This election will enable such banks to avoid built-in gains tax on their reserve recapture. This is effective for 2007.

- Capital gains from stock or securities are no longer "passive investment income" for the special corporate-level tax on S corporations that still have C corporation earnings and profits.

And here are some low points:

- The "kiddie tax" will now apply to a lot of legal drinkers. Dependents will pay tax at their parents rates on investment income until they are 18 - or to full-time students up to age 23, starting in 2008. Couldn't they just lower the drinking age instead?

- Certain big corporations will have to pay 114.25 percent of the tax due for the third quarter of 2012 as estimated tax payments to avoid penalties.

There are also provisions that enhance employment tax credits, as well as increases in penalties for preparers and for claiming bogus refunds.

So maybe this mix of tax provisions is just the right formula for victory in the war. Who needs troops when you can just increase the corporate estimated tax requirements for 2012?

Link: Text of H.R. 2206 (pdf format).

UPDATE: The TaxProf has a roundup.

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LOCAL TAILOR DONS STRIPES

May 25, 2007

An Urbandale man was sentenced yesterday to five months in wide stripes yesterday, the Des Moines Register reports:

A 51-year-old Urbandale man was sentenced today to five months in federal prison for failing to pay more than $50,000 in federal income taxes over four years.

Joseph Kim, owner of Kim’s Tailor Inc. at Valley West Mall in West Des Moines, pleaded guilty in January to one count of tax evasion for using a business account to pay for personal expenses that substantially reduced the reportable net income of the business, according to federal court documents.

Mr. Kim negotiated the plea deal after being charged originally with four evasion counts; he filed no returns from 2000 through 2003.

The Register allows readers to post comments on their stories. A reader commented on this story:

Let's see....$50,000/5 months prison = $10,000/1 month.
Plus...........$50,000/5 months home confinement =$10,000/1 month.
Plus.....$50,000/2 years probation = $2,083.33/1 month.
And no mention of restitution.

So, I'll skip $5,000 in taxes, take two weeks prison, 2 weeks home confinement and 2.4 months probation.

Sure beats minimum wages. Yep, this'll scare hell out of any other potential tax evaders. Great system we got here.

The commenter misses an important part of the problem with evading taxes - the jail sentence doesn't mean you don't have to pay the taxes, too. In fact, the IRS may add 75% to the taxes as a civil fraud penalty. That changes the math.

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DON'T BELIEVE EVERYTHING YOU READ...

May 25, 2007

...even if it's a 1099-MISC or an IRS notice. Sometimes they're wrong. Taxable Talk reports on a taxpayer victory that proves the point.

(UPDATE: Link fixed; thanks to Eric for the pointer.)

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MORNING FOG

May 25, 2007

Fog creeping out of the Raccoon River Valley engulfs the parking lot district south of Dowtown Des Moines this morning.

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IOWA COLLECTION AGENCY AT CENTER OF PRIVATE COLLECTION DISPUTE

May 24, 2007

Waterloo-based collection agency CBE was in the spotlight yesterday in Congressional hearings on the use of private debt collectors to collect tax debts. The private debt collection program is a bit of a political football, supported by Republican members and opposed by committee Democrats, the Taxpayer Advocate's Office and the National Treasury Employee Union (NTEU).

The Taxpayer Advocate opposes private collection on privacy grounds and because they say the government could better use its resources elsewhere. It's funny: just a few years after congresscritters beat up the IRS for rough treatment of taxpayers, suddenly the IRS is the gold standard of customer service and privacy protection.

The committee released transcripts of tax collection calls made by CBE. If the transcript release was designed to make the private collectors look bad, they fall short. They really highlight how the private collectors have to work under ridiculous restrictions. For example, they can't even tell someone over the phone that they are calling to collect taxes until they verify social security numbers - something people are wisely reluctant to do with strangers over the phone. That leads to this sort of circular conversation:

Taxpayer. I have been getting harassing phone calls from your company by people who refuse to leave their last names. They are very rude. They say I need you to call me back. That's not something you say. You say would you please call me back. I've gotten many of these from people with names like Brandy and Heidi and so on calling me. They don't tell me what it's about and they are asking me to call them back. I have no idea what this regards, but I need information about it and if I am not treated -- if the harassment does not desist and I am not treated with courtesy, the lawyers and the police will be on this soon.

CBE: Okay. Well, I can see what this is in regards to, sir. I'm sorry, your name?

Taxpayer. [REDACTED]

CBE: Okay. And could I just get your last name.

Taxpayer. Could I have your last name?

CBE: Yes, last name is Benoit, B-E-N-O-I-T. My ID number is 100.

Taxpayer Okay. Mine is [REDACTED].

CBE: Okay.

Taxpayer. What is this company?

CBE: It's the CBE Group.

Taxpayer What is that?

CBE: And it does appear we're handling a business matter here for a [REDACTED]. But, sir, I do have to verify Social Security number and mailing address.

Taxpayer. No. I'm not going to give out my Social Security number and mailing address to somebody who I don't know.

CBE: Okay, I completely understand that. I do have it here in front of me. Is there any portion of it you are comfortable with verifying?

Taxpayer. No, I'm not. Could you please tell me what the CBE Group is?

CBE: Well, we're handling a business matter here, sir, and unfortunately it is a secure matter and so we do have to be careful about who we give that information to. Have you not received the letter we sent out to you?

Taxpayer. No.

CBE: No.

Taxpayer. And I told — people have been calling me about this. You can't just call me incessantly and say you are handling a business matter, not tell me what it is about, ask me for personal private information, and then say that I have to provide you with this information. You have to verify to me who you are. I have never heard of the CBE Group. I've never done business with anything called the CBE Group.

CBE: That's why I had hoped you had received our letter here, because that does explain the situation here.

Taxpayer. Well, you can tell it to me over the phone.

CBE: Okay. And I would love to, but unfortunately, I do have to verify at least some portion of the Social Security.

And it goes on, and the taxpayer never does learn who is calling. Yet the CBE employee never loses her cool, while the bewildered taxpayer gets more and more grumpy. Hardly a damning indictment of private collection behavior, and I'm sure people have seen worse from genuine IRS employees.

Taxpayer Advocate Nina Olson says this just proves that private collection doesn't work, and "The only solution is for the IRS to be collecting the taxes."

That's funny. In response to insistence by Ms. Olson and others that private collection is untrustworthy, the private collection program labors under almost unworkable restrictions; then Ms. Olson complains that private collection doesn't work very well. One of the congressmen responded sensibly, "Why can't we authorize through statute the private debt collectors to say: 'This is CBE calling on behalf of the IRS'?" But that still wouldn't solve the real problem opponents have with the program: the private callers aren't NTEU members.

Links:

Forbes
Govexec.com
Tax Analysts ($link)

Ways and Means Committee Hearings page and links

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SIDLEY SETTLES; KPMG AVOIDS TRIAL ON FEES

May 24, 2007

Yesterday saw two developments in the ongoing tax shelter court battles. Legal giant Sidley & Austin settled charges of promoting bad tax shelters by agreeing to pay a $39.4 million penalty; in return, the government agreed to not pursue criminal charges. The case arose from tax shelter opinions written by Richard Ruble, one of the defendants in the case of the former KPMG partners. Mr. Ruble joined Sidley & Austin when it bought the Brown & Wood law firm.

Meanwhile, KPMG avoided a separate trial on whether it would have to pay the legal fees of its indicted former partners. The Second Circuit Court of Appeals ruled that the trial court judge was out of bounds when it ordered the trial on fees. The fee issue will now be settled in arbitration.

The TaxProf Blog rounds up both stories:

TaxProf Sidley coverage
Tax Prof KPMG coverage

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RAINY DAY CARNIVAL

May 24, 2007

The Iowa forecast calls for lots of rain today. Stay warm dry with some blog carnivals. You can start with the Cavalcade of Risk, a roundup of insurance related blog postings, over at Colorado Health Insurance Insider. While you're there, don't miss Bob Vineyard's coverage of medical tourism.

The carnival of the Capitalists is also up at 800-CEO-READ.

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IOWA THINK TANKS AND TAX POLICY

May 23, 2007

The Des Moines Register today runs a piece with summaries of the tax reform positions of four Iowa policy groups.

The results are disappointing. Maybe the short format of the piece leaves out important parts, but what's left in is thin beer. Take this from Iowans for Tax Relief, the state's premier loophole lobby:

Jeff Boeyink, its president, said the group is willing to consider eliminating federal deductibility, but only if that step is coupled with lower rates and constitutional protections against future lawmakers turning around and raising those rates on the new, larger amount of taxable income. He said steps such as requiring a vote of the people or a supermajority vote of the Legislature on major tax increases could provide that protection.

Iowans for Tax Relief is a powerful lobby, and this position helps explain why serious tax reform has never happened. It conditions any tax reform on changes to Iowa's constitution, an almost impossible chore that takes three years to complete. Meanwhile the group continues to burrow new loopholes into the tax base; every beneficiary of these special interest deals has a stake in opposing tax relief.

Things aren't much better on the left. Here's what David Osterberg of the Iowa Policy Project has to offer:

He said Iowa's total tax burdens are at the national average. While some may complain about one tax being too high, that is offset by other taxes being lower than they are in other states. For example, while businesses complain about their high commercial property taxes, the state's corporate income tax is low. "Business taxes are low. Corporate income taxes are a fourth of what they were 20 years ago."

Iowa's corporation taxes are too low? We have the highest state corporate tax rate in the entire country. The only saving grace is that it is so riddled with loopholes that it is usually avoided easily. The decline in collections is a result of three things:

- Many businesses have opted out of the corporate tax system through S corporation elections or by setting up as limited liability companies or other partnership vehicles.

- Corporate tax departments are more sophisticated.

- Every year the legislature passes new or improved special interest tax breaks that eat away the tax base.

Mr. Osterberg doesn't even address the unbelievably complex and dysfunctional nature of Iowa's business income taxes. In fact, the four think tanks barely mention the role that special interest loopholes - movie credits, rehab credits, film credits, investment credits, venture capital credits (we have at least five of these), and on and on, have in keeping rates high. Without high tax rates, these credits are unaffordable; high rates themselves breed loophole-lobbying as tax self-defense - perversely making it harder to achieve low rates.

The Register also inexcusably fails to get comment from the libertarian-leaning Public Interest Institute, the lonely voice for sanity in Iowa's tax system among Iowa's think tanks, or Iowans for Discounted Taxes, an idiosyncratic group that favors an optional low-rate, low-loophole system alongside the current state tax system.

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TAX PROTEST WIKI

May 23, 2007

I just learned that Wikipdia, the online collaborative encyclopedia, has a comprehensive and heavily-footnoted article that addresses the nonsensical arguments of the "Tax Honesty" movement and its pet congresscritter, Ron Paul.

Of course, being Wikipedia, the article is subject to editing and sabotoge, but the current version is pretty good. Still, the best comprehensive internet debunking of tax protester arguments is at Dan Evans' Tax Protester FAQ.

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LOBSTERING AT IOWABIZ.COM

May 23, 2007

Today is my turn at IowaBiz.com, a new group webblog for Central Iowa Business. I talk about the tax perils of incorporation in Living the Lobster Life.

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NO WITHHOLDING ISN'T THE SAME AS NO TAXES

May 22, 2007

Natalia Escandon worked as a seamstress in a Miami bridal shop in 2003. The bridal shop told Natalia that she was an independent contractor and didn't withhold on her earnings.

Ms. Escandon never got around to filing a return, so the IRS computed her taxes for her. The IRS said that she really was an employee, so they didn't assess self-employment taxes (presumably they are going after the bridal shop for back FICA payments). They said she did still owed income tax.

Ms. Escandon argued that the bridal shop should have withheld the tax, so the IRS should go there for the $415.58 of taxes she owed for 2003. The Tax Court ruled otherwise:

As we have noted in other cases, it is unfortunate that petitioner's employer classified her as an independent contractor and not as an employee. Had petitioner been classified as an employee, it is possible that Mimi's would have withheld the proper amounts of tax from petitioner's wages, and a deficiency in petitioner's taxes might not have occurred. See, e.g., Lucas v. Commissioner, supra. But that does not alter the fact that the first principle of income taxation is that "income must be taxed to him who earns it". Commissioner v. Culbertson, 337 U.S. 733, 739-740 (1949) (and cases cited therein).

Petitioner was paid her wages without any reduction for withheld income tax, and petitioner has not yet fully paid the tax liability on her income for 2003. We therefore hold that petitioner is liable for the deficiency in the amount respondent has determined, appropriately adjusted to incorporate respondent's above-mentioned concession.

Not that the employer is off the hook. Mimi's Bridal Shop can be assessed a tax of 1.5% of Ms. Escandon's 11,120 compensation; that's $168.15. They are also on the hook for 20% of her share of social security taxes, or another $171.51, plus the $857.57 employers share.

The moral? Even if they don't withhold, the employee still has to pay income tax.

Cite: NATALIA RAVELO ESCANDON, T.C. Memo 2007-128

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IRS EYES CHARITABLE REAL ESTATE REMAINDER DONATIONS

May 22, 2007

Tax Analysts reports ($link) on a real estate charitable transaction that has drawn the attention of the IRS. From the report:

[Acting IRS Commissioner Kevin] Brown said the transaction, which the IRS learned about last summer, typically involves real property subject to a long-term lease that is purchased "through a tier of closely held flow-through entities owned by a group of investors." After about a year, the so- called remainder interest in the property is contributed to an exempt organization "at an apparently inflated value," Brown said. Sometimes, he said, "the donor may have reacquired the donated interest from the charity two years later at a significantly lower cost."

In short, you join a group to buy leased real estate, "donate" a remainder interest, and buy it back for an amount less then the deduction. This is a risky tax bet, especially now that the IRS is looking for these things. If they IRS concedes that the donation is legitimate, they'll hit the valuation hard if the charity sells the interest back for a lower price than the charitable deduction amount. They might even say the whole thing was rigged, disallow all deductions, and even hit the charity with a penalty.

Link:
IRS letter to Senator Baucus on these transactions.

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GOVERNOR SIGNS REHAB CREDIT GIVEAWAY

May 22, 2007

Governer Culver yesterday signed SF 566, the bill to increase the cap on Iowa's rehabilityation credits. For some time the credit applications have exceeded the cap, which goes to $10 million (from 6.4 million) immediately and eventually to $20 million annually.

The bill also contains a lucrative giveaway for people who already have applied for credits but haven't yet used them. The credits can be claimed in cash even if they exceed your Iowa liability; formerly the credits had to be "discounted" to claim a cash refund. The bill eliminates the discount. This means that people who already had committed to do work under the old rules get a windfall -- one that the Des Moines Register calls "adjustments in how the credits are administered so they can be used more quickly."

The Moral? You pay taxes so the state can pay rehabbers a bonus.

Links:

Text of HF 566
Tax Update 2007 Tax Legislation Page
Prior coverage of HF 566.

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YEPSEN ON TAX REFORM

May 21, 2007

Des Moines Register columnist David Yepsen takes on the Iowa tax system. He is correct in noticing that we have a problem, but his solution just scratches the surface.

Mr. Yepsen suggests a big bipartisan solution:

One device for doing that would be to call a political "summit" to be held this summer and fall. Culver would bring together key lawmakers and interest groups in an effort to forge a compromise tax-reform plan to submit to the Legislature next January.

This has little hope because the Governor is committed to an anti-tax reform agenda of special interest tax breaks. Until those go on the chopping block, there's not much to talk about.

What might a compromise change look like?

- Income tax. Iowa could get rid of federal deductibility and adopt lower but graduated rates. (Liberals and business recruiters win.) Or, Iowa could adopt a flat or two-rate tax system. (Conservatives and business recruiters win.)

Mr. Yepsen misunderstands the dynamics of "business recruiters," the local and state "economic development professionals." They like high rates and loopholes because they peddle special interest tax credits. If you have a simple, low rate tax system, they become redundant, because businesses no longer have to be bribed to come to Iowa.

To protect taxpayers from future rate increases, a constitutional supermajority vote of the Legislature or a vote of the people could be required for future tax increases. (Conservatives win.)

Better still would be a constitutional limit on the growth in state government, based on population and economic growth. Just a dream, I know.

Each income-tax credit and deduction should be examined to see if it is doing what was intended. (Liberals win.)

Eh? Not so much. Tax credits are backdoor industrial policy, which is what liberals are all about. Witness the witless biofuel, film and investment subsidies that flew through the last session of the legislature. About the only liberal who stands up against these giveaways (with rare exceptions) is Ed Fallon, and he's not even in the legislature anymore .

Mr. Yepsen also has a strange take on sales taxes:

And it might be good tax policy. According to the Iowa Taxpayers Association, Iowa's sales-tax burden ranks 33rd among the 50 states per $1,000 of personal income. That's below average. But Iowa's property tax ranks 17th, which is above the national average.

So, it makes sense to increase a below-average sales tax that people don't mind paying to relieve the property tax they hate - and that perhaps impedes economic growth.

If we have a low sales tax burden, it's not because we have a low rate. We already have a relatively high rate at 6%, and a 7% rate would give us the highest in the nation.

One thing Mr. Yepsen says is absolutely true:

Just as it took several years to win approval of a cigarette-tax increase, it might take several years to win a rewrite of the tax code, because it might take that long for people to understand the change and grow comfortable with it.

Every special interest credit, from ethanol to rehab credits to film subsidies, creates a vocal constituency against change. Until these giveaways are ended, a simple system with lower rates is impossible. Only strong leadership by the Governor, maintained over a period of years, can prevail. It doesn't seem likely anytime soon.

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WHEN YOU NEED A MOVIE SUBSIDY

May 21, 2007

Over at the IowaBiz.com blog, Rush Nigut highlights the new giveaway for film interests:

The new law allows Iowa to compete with surrounding states that offer similar incentives. It will also have another positive impact. Young, aspiring filmmakers now have a reason to stay in the state rather than take off to Southern California, New York or Chicago.

This credit is just a giveaway to a special industry. There is nothing positive about taking money from the rest of us and giving it to a politically-favored special interest. Why would we want to compete with other states in giving away tax money?

And if collecting corporate welfare is a better career move for an aspiring filmmaker than moving to where the action is in that industry, they probably have poor career prospects to begin with.

But if you want to sign up for this subsidy, go here for the details.

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HOW TO SOLVE AMT? FIX THE REGULAR TAX

May 21, 2007

The Tax Foundation has a new study on how to fix the alternative minimum tax. The solution? Fix the regular tax:

More than one quarter of personal income received during 2006 was entirely excluded from the federal individual income tax base. Untaxed government transfers, in-kind compensation of employees, and a plethora of other types of income—none of these is included when the filer tallies his income on his tax form. Another 23.5 percent of personal income was included in the tax base but avoided taxation when filers claimed various deductions, exemptions, credits, and other provisions in the tax code.

If the special interests loopholes and credits (ethanol and biodiesel are only the newest) were repealed, the tax system would raise as much money as it does now with lower rates, less complexity, and without the AMT. Why is it so hard for politicians to do the right thing? From the study:

The logical, preferable alternative to such an administratively redundant tax system would be to repeal all or some of the offending tax breaks from the regular income tax. But each of those special tax breaks has a committed group of champions who fight like dogs to preserve and expand it. In effect, by enacting the AMT and keeping it in law for decades, Congress has recognized that it simply will not repeal tax preferences that benefit politically powerful groups no matter how unjustified those tax breaks are in principle.

That's just as true for special tax breaks at the state level.

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JUNE 2007 APPLICABLE FEDERAL RATES (AFR) ISSUED

May 21, 2007

The IRS has issued (Rev. Rul. 2007-36) the minimum interest rates for loans made in June 2007:

-Short Term (demand loans and loans with terms of up to 3 years): 4.84%
-Mid-Term (loans from 3-9 years): 4.64%
-Long-Term (over 9 years): 4.91%

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

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SO THE X-RAYS ARE JUST FOR FUN?

May 18, 2007

The tax law has strange rules for "personal service corporations" that are operated as C corporations. While most C corporations pay taxes as graduated rates - 15% on the first $50,000 of income, gradually increasing to 35% at the highest levels - personal service corporations pay 35% from the first dollar earned.

The flat 35% rate applies to closely held corporations:

...substantially all of the activities of which involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting

The IRS assessed a radiology clinic additional taxes on the grounds that the clinic was a personal service corporation subject to the flat rate. The clinic tried to make the best of a bad case in Tax Court, arguing:

-The clinic was a "facility," not a "person," and therefore couldn't offer "personal" services.

-Employees who maintained the radiation equipment weren't in the healthcare field.

-The clinic wasn't in the "health," business; it was instead "in the business of creating and containing radiation."

The clinic failed to convince the judge that an MRI machine isn't just a high-tech tanning booth or something, and the IRS won.

Cite: W.W. EURE, M.D., INC., T.C. Memo. 2007-124

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SOME GENTLEMEN'S FACILITIES ARE BETTER THAN OTHERS

May 18, 2007

Russ Fox rounds up the week in tax fraud, including the sentencing of former IRS agent Ron Heidel. He retired from the IRS to run a "gentleman's club," where he engaged in ungentlemanly skimming and tax evasion. He's been awarded 18 months in a federal gentlemen's facility.

We got to know Mr. Heidel here.

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'ALL POLITICIANS ARE IDIOTS AND OTHER OBVIOUS THOUGHTS...'

May 18, 2007

The wisest words I've seen on high gas prices:

All politicians are idiots and other obvious thoughts on high gas prices

I'm angry. I can't believe we're right back where we were a year ago. Gas prices are rising and Congress is trying to do something about it. Eighty-two Democrats and 3 Republicans in the House have proposed the Federal Price Gouging Prevention Act (H.R. 1252) otherwise known as the FPGPA, pronounced STUPID. So let's take a look at the STUPID price gouging bill...

It gets better. Read it all. I don't agree with all of it, but it's hard to quibble with the main point.

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YOU KNOW YOU GO TO A SMALL SCHOOL WHEN...

May 18, 2007

...the school bus is a Chevy Impala.

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RON PAUL, FRIEND OF THE TAX PROTESTER

May 17, 2007

Texas Congressman Ron Paul made a little splash in the Republican presidential debate the other day when he pretty much said America brought 9/11 on itself.

Mr. Paul has made a name for himself in tax circles by being the favored congresscritter of the "Tax Honesty" crowd (see here, for example). These folks have a grab bag of strange theories about why nobody really has to pay income tax, all of which have been thoroughly debunked. That doesn't keep Mr. Paul from telling Maria Bartiromo in a CNBC interview that the nonsensical tax protest statements of Joe Banister are "correct and technically we shouldn't have to pay the income tax." Mr. Paul also says that the 16th Amendment to the Constitution, which says that the income tax is not subject to the requirement that direct taxes be apportioned among the states, never really passed - a standard trope of the Tax Honesty charlatans.

Apparently the Congressman has as deep an understanding of international relations as he does of the tax law.

Links:

CNBC Interview video (Congressman Paul is about 2 minutes in)

Tax Update Coverage of Joe Banister

Tax Protester FAQ

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OUCH.

May 17, 2007

Remind me never to get on Joel Schoenmeyer's bad side. It looks like famous (or notorious) estate planning icon Jonathan Blattmacher did. Now that a jury has ruled that Mr. Blattmachr breached his fiduciary duty in setting up a client with a split-dollar insurance plan, there's no mercy at Joel's Death and Taxes blog. A sample:

Jonathan Blattmachr is an estate planning attorney who is "famous" (if that word can really be applied to estate planners) for coming up with novel devices for the transfer of wealth. (One article says he's known by his first name alone, like Beyonce, although I suspect that that's because saying his last name makes you sound like you're coughing up a hairball.)

It's brutish and short, so go read it all.

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TAX GRRRL BLOGGING THE CANDIDATES TAX STANCES

May 17, 2007

The Tax Girl has gotten in touch with a bunch of presidential candidates to ask them about taxes. She starts a series of posts on presidential campaign positions on taxes today with a Q&A with Tommy Thompson, the former Wisconsin Governor who seeks the Republican nomination.

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OVERWHELMED BY PROJECTS?

May 17, 2007

I know the feeling. You might find the cure today at Iowabiz.com.

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$27,595,308 ISN'T CHICKEN FEED

May 16, 2007

Update: The decision discussed below was withdrawn 2/8/2008. The TaxProf reports:

It was subsequently determined that the claim of a tax deficiency by the IRS was an error. There was a stipulation of no tax deficiency or liability submitted to the Tax Court and the opinion was withdrawn by the Tax Court in this order.

Original post below.

It's not unusual for the Tax Court to throw out a case because the taxpayer fails to appear in court or file the required paperwork. It is unusual for it to happen when the IRS has asserted that an individual owes $27,595,308. And when the taxpayer is also a law professor, it's just baffling.

The Tax Court today dismissed Rutgers law prof Anna E. Charlton's petition, defaulting to a decision in favor of the IRS. While this doesn't end Ms. Charlton's ability to fight the assessment, it now becomes much more difficult and expensive.

The assessment appears to result from stock sales that were reported to the IRS on forms 1099-B but, according the the IRS, were never included on a tax return. The taxpayer filed a petition with the IRS saying that the IRS had not reduced the sales proceeds on the 1099-B filings by her cost basis in the stock, but she never provided any evidence or computation of her basis to the Tax Court. Attempts by the court and the IRS to contact her ahead of the trial date were unsuccessful, and she failed to show up at her trial:

Petitioner's failure to appear for trial is unexcused. In addition, petitioner has failed to properly prosecute this case in several other respects. Petitioner disregarded several orders of this Court including: (1) Our standing pretrial order, served August 18, 2006, which required her to submit a pretrial memorandum and to participate in the stipulation process; (2) our August 25, 2006 order to file a joint status report; and (3) our January 31, 2007 order to show cause. The USPS disposition of the two certified mailings sent by the Court to petitioner in January 2007 indicates that petitioner is now refusing to claim certified mail sent to her by the Court. Petitioner has also ignored attempts by the Court to initiate telephone conference calls by leaving recorded messages with petitioner at the telephone number she provided in her petition; these calls were intended to explore some means of resolving this case besides default.

This sort of assessment based on 1099-Bs isn't uncommon. Stockbrokers are required to report the gross sales price of securities trades on these forms, and IRS assessments, which treat the entire gross sales price as capital gain, are almost always too high. Taxpayers typically resolve them without much difficulty by coming up with evidence for the cost of the stock that was reported sold -- often by getting purchase records from their broker. It's puzzling that the taxpayer failed to do so here. Did she expect the $27 million assessments to just go away if she ignored it?

It would have been a mistake if the Tax Court had invited Ms. Charlton to work things out over a nice steak dinner. A visit to Google shows that Ms. Charlton was an adjunct professer at the Rutgers law school and served as co-director with her husband of the defunct Animal Rights Law Center at Rutgers. They seem to take a pretty hard-line stance on hamburgers. From his website:

The mission of this website is to provide a clear statement of a nonviolent approach to animal rights that (1) requires the abolition of animal exploitation; (2) is based only on sentience and no other cognitive characteristic, and (3) regards veganism as the moral baseline of the abolitionist approach.

Given the size of her tax bill, steak will be out of the question in any case.

Cite: ANNA E. CHARLTON, TC Memo 2007-122

UPDATE: The TaxProf has more.

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AND JUST WHAT WOULD THIS ESTATE PLAN BE?

May 16, 2007

And is this Anna Nicole Smith's sister, ready to help out with a very old client's estate plan?

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WHEN FAIRFIELD, IOWA IS JUST TOO URBAN FOR YOU

May 16, 2007

Fairfield, Iowa, is an interesting town. In has some features not uncommon in a small Iowa town, including some manufacturing and the usual ag-related small town businesses. In contrast, it is also home of the Maharishi University of Management, which, as it's name hints, isn't a typical part of small-town Iowa life.

It's a nice, quiet town. Yet even small-town life is too urban for some folks. Maybe you really want to get away from it all, and stay there. If that describes you, your Fairfield-area dream home is coming up for auction by the IRS:

Self-Sufficiency: The house is designed to enable 4 people to live comfortably for up to 2 years with no outside sources of electricity, heating fuel, gasoline, food or water.

This property consists of 2 houses on 40 acres. The first house, built in 1999 is a 3,758 sq foot home with cedar siding and carpet, ceramic and hardwood through out. It has 3 bedrooms on the main level 3 bathrooms and a 26 x 26 garage and central air. It has over 900 sq foot of vinyl deck and 2 porches. It was set up to be a self sufficient home.

Electricity and Heating Independence is enabled by:

. A 20 kilowatt electric generator.
. A bank of 8 propane tanks that can support up to 2 years of heating and electricity generation.
. A battery powered electric inverter that can support critical electric circuits when the generator is turned off to save fuel during low-demand times.
. All household appliances whose main function is heat generation burn propane to lower the overall demand for electricity. These include the kitchen stove, the furnaces, the water heaters, and the clothes dryer.
. The house is thermally very tight and heavily insulated (attic insulation is rated at R44) to minimize fuel demand in winter.

Gasoline Independence Is enabled by:

. A 1500 gallon gasoline storage tank. Includes fittings, a manual pump, and a large supply of gasoline stabilizer to allow the gas to be kept fresh for years.
. A 300 gallon rigid gasoline tank that fits in a pickup truck bed. Can be used for transporting gas 300 gallons at a time from filling stations to the large tank. .

Water Independence:

. Both the main house and the guesthouse have wells in addition to commercial water hookups. The wells run by electric pumps. If electricity fails, both wells come specially designed buckets that can be lowered into the wells to manually draw water.

"Specially designed buckets that can be lowered into wells"? As opposed to those conventional buckets that defy gravity and won't go down a well?

It looks isolated enough:

But just because you want to stay away from it all doesn't mean you can't keep in touch:

Phone System:

. The main house was equipped with a programmable Panasonic phone system that handles 8 incoming lines and 24 extensions. The phone system capacity was designed to easily handle a small business with several employees on site.
. The house was wired for a 17 full-featured programmable system phones, one cordless system phone, and a front door intercom phone that acts like any extension.

Computer Network Wiring:

. The main house is wired with two types of cable that enable a very fast wired computer network to be set up with connection points in every room.

Sounds... well-engineered. Still, the new buyer may want to redecorate the kitchen:

The minimum bid is $299,000. It's assessed at $649,400, so it would be a steal at that price. Especially with the specially-designed bucket.

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TAX COURT: SEPARATE YOUR DOPE DEALING FROM YOUR OTHER BUSINESSES TO MAXIMIZE DEDUCTIONS

May 16, 2007

The Tax Court yesterday allowed a California outfit that distributed medical marijuana to terminally ill patients to deduct expenses for earnings not related to marijuana. The court ruled that expenses related to the marijuana are non-deductible under Code Sec. 280E, a section aimed at illegal drug dealers.

The activity was legal under California law, but Federal law, in its infinite mercy, won't let you help a dying man smoke dope, let alone deduct the expenses.

The moral? If you sell illegal drugs, be sure you keep good records for your legal businesses, if any, and don't intermix the dope dealing with them, so you can deduct your lawful expenses.

Taxable Talk has the details.

Link: CALIFORNIANS HELPING TO ALLEVIATE MEDICAL PROBLEMS, INC.

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GOVERNOR SIGNS BILL MAKE IOWA EARNED INCOME TAX CREDIT REFUNDABLE

May 16, 2007

Governor Culver yesterday signed a bill increasing the Iowa earned income credit to 7% of the federal credit. SF 590 also makes the credit refundable, which means it will be available to low-income taxpayers even if they had no withholding.

Link: Press release on signing of SF 590.

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YOU PAY TAXES SO A DAIRY QUEEN DOESN'T HAVE TO

May 15, 2007

Rural Electric Co-ops are tax-free; this is supposed to help them provide energy to rural areas that might otherwise go without energy. According to an article in yesterday's Washington Post, energy can come in unexpected forms:

Rural utilities often assume broader roles in local economies. One co-op, English said, reopened a gas station that went out of business. Another, he said, bought and kept open a beloved Dairy Queen.

"Sometimes they can take over functions even local government can't," said English, a former Democratic congressman. And that, he said, can help keep people from moving away from places like his home town of Cordell, Okla., where the population, now about 3,000, peaked in the late 1920s.

Yes, the D.Q. is an essential municipal function, even if it requires a subsidy.

Hat tip: the Tax Policy Blog, which has more on the abuse of tax-exempt status by electric co-ops. As tax-free competitors to private businesses, the RECs have a lot in common with the credit union industry.

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PHONE TAX REFUNDS ARE AVAILABLE FOR NONPROFITS

May 15, 2007

Tickmarks blog has the scoop.

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GRANTOR TRUSTS PRIMER

May 15, 2007

Death and Taxes has a nice little explanation of "defective grantor trusts" today. These are trusts that are taxed to the person who set it up for income tax purposes, but are not considered part of their taxable estate at death. Joel Schoenmeyer answers the obvious question:

Why would you want to do this? Because being viewed as the owner of a trust you set up means that you can pay the trust's income tax without such payments being considered an additional gift to the trust.

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YIN IN

May 14, 2007

Congratulations to longtime Iowa blogger Tung Yin, who has officially been awarded tenure as a law professor at the University of Iowa!

Now will he cut loose and reveal his hot-headed, intemperate side? Because if he has one, he's kept it out of view so far. Good news for a good guy.

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THE NEW (MIDDLE) CLASS, ILLUSTRATED

May 14, 2007

Congress held hearings last week on "tax relief for the middle class." Scott Hodge, President of the Tax Foundation, told them something they didn't want to hear: the "middle class," statistically speaking, is the "Friends" gang - singles. Married couples with families are found in the upper 40% of the income tables. They are "the rich" folks, by the numbers.

Mr. Hodge's prepared testimony is well reading in full. I'll just give you a condensed version - some great charts by the Tax Foundation on on the distribution of the tax burden.

All charts courtesy of The Tax Foundation

The tax burden has been moving continually to the high-end of the income scale. As the third chart shows, a large portion of filers - no longer pay any income tax. It's hard to relieve the tax burden of the "middle class" in a big way because they no longer pay very much of the federal income tax.

As Mr. Hodge points out, wise tax policy isn't worried about giving tax breaks to Pheobe and Joey. Far better to simplify the system by eliminating special interest breaks and giveaways and lower the rates (and tax compliance costs) for everyone.

*UPDATE:

Link to Obama "defending the general principal of reversing income tax cuts enacted during Bush's first term."

Obama positions on tax increases (capital gain and dividend cut repeal increases axes on married filers starting at $63,700 and singles starting at $31,850)

Article on Edwards tax plan.

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IRS RELEASES HSA LIMITS FOR 2007, 2008

May 14, 2007

At the end of last year Congress made some important changes to Health Savings Accounts. One of the most important changes was the elimination of the rule that limited your HSA contribution to the amount of your health insurance plan's deductible.

The IRS last Friday updated the 2007 and 2008 HSA contribution limits to reflect the new legislation (Rev. Proc. 2007-36) If you have a qualifying high-deductible plan and you otherwise qualify for an HSA, the contribution limits are:

Taxpayers with family coverage:

2007: $5,650
2008: $5,800

Taxpayers with single coverage:

2007: $2,850
2008: $2,900

HSAs are IRA-like savings vehicles available to taxpayers with qualifying health insurance (and without other coverage). Contributions to HSAs are deductible. earnings within the HSA accumulate tax-free and can be withdrawn tax-free for out-of-pocket health costs. At retirement, the funds can withdrawn on a taxable basis like traditional IRA funds. In theory, they function like a self-insurance reserve. In practice, they are also a great tax-deferred savings vehicle with no high-income phaseouts.

Link: IRS explanation of HSAs from Publication 969.

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LATE AS USUAL TO THE CARNIVAL

May 14, 2007

We're way behind in highlighting worthy blog carnivals. We'll start to catch up with this week's Cavalcade of Risk, a roundup of blog posts on insurance and risk management -- including the risks of childbirth. Happy Mother's day!

The Carnival of Taxes is at the usual place. The Picket Line is there with a review of a book I'm reading, "Off The Books," about the economy of the urban poor in Southside Chicago.

Finally, the new Carnival of Personal Finance is up at Open My Wallet, with a mind-boggling 100 links. If you only read one, read the Insureblog's discussion of how ill-informed many folks are about the risks of disability.

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CIETC: NEW CHARGES, BUT NO TAX CHARGES

May 11, 2007

U.S. Attorney Mark Whitacre announced additional charges in the CIETC scandal. There is also a new defendant: Dan Albritton, former CIETC board member and a paid consultant for the scandal-plagued job training agency.

There are still no tax charges in the case, which may mean that the money the defendants are charged with looting was all properly reported on their tax returns.

Mr. Albritton invoked his fifth amendment rights in refusing to testify about his CIETC involvement. Yet he remains on the board of Prairie Meadows, a tax-exempt entity that handled $2.6 billion of revenue in 2004. Who better to keep an eye on that much money than a man who's not afraid to stand up for his constitutional right to remain silent?

Links:

Copy of new indictment.

Prior Tax Update coverage.

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NOW THAT'S A LACK OF SUPPORT

May 11, 2007

Yesterday we quoted an Illinois lawmaker as saying Illinois Governor Not-yet-indicted's plan for a gross receipts tax would garner 12 supporting votes in a 111-member chamber. It turns out the legislator was wildly optimistic:

SPRINGFIELD, Ill. -- The Illinois House overwhelmingly rejected the idea of a massive new business tax Thursday, dealing a potentially fatal blow to the plan and creating more uncertainty about how to balance the state budget.

Not a single lawmaker voted for Gov. Rod Blagojevich's $7.6 billion tax, while 107 opposed it in a test vote meant to reveal whether the plan had any support.

0-107. A decent junior high girls' basketball team would do better than that against the Chicago Bulls. But like Monty Python's black knight, Governor NYI vows to battle on:

Still, Blagojevich said he is sticking with his tax proposal and can pass it despite the "ups and downs" of the legislative process.

Yes, it's just a flesh wound.

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THE BEAST AIN'T STARVING

May 11, 2007

A traditional small-government argument for tax cuts is that it will "starve the beast" -- that is, a lack of revenue will constrain government growth.

It's not working.

From the AP, as quoted by the TaxProf:

Federal revenue collections hit an all-time high in April, contributing to a further improvement in the budget deficit for the year. Releasing its monthly budget report, the Treasury Department said Thursday that through the first seven months of this budget year, the deficit totals $80.8 billion, significantly below the $184.1 billion imbalance run up during the first seven months of the 2006 budget year. So far this year, tax revenues total $1.505 trillion, an increase of 11.2% over the same period last year. That figure includes $383.6 billion collected in April, the largest monthly tax collection on record. Tax collections swell in April every year as individuals file their tax returns by the deadline. For the first seven months of this budget year, which began Oct. 1, revenue collections and government spending are at all-time highs. (emphasis added).

Curse those Bush tax cuts!

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TAX REFORM 'INEVITABLE.' BUT WHEN?

May 11, 2007

Just because something is inevitable doesn't mean it's imminent:

The top tax aide for the House Ways and Means Committee said May 10 that tax reform is "inevitable," even if he doesn't know when it will happen.

John Buckley, chief tax counsel for the Ways and Means Democrats, is among those who think fiscal problems will eventually trigger a difficult overhaul of the tax system.

"In my opinion, when it comes to our tax law, we have tried all the other options," he told a gathering of tax practitioners at the American Bar Association Section of Taxation annual meeting in Washington. "As a result, we have a tax system with structural and fiscal problems that are so large that they can only be handled in the context of a major reform of our system."

Based on these remarks quoted today by Tax Analysts ($link), we shouldn't hold our breath. Mr. Buckley seems to have ruled out every existing proposal for tax reform:

Buckley declined to predict when tax reform would actually gain a foothold. Whenever that is, said Buckley, it won't be driven by the recommendations outlined in 2005 by President Bush's tax reform panel.

In November 2005 the President's Advisory Panel on Federal Tax Reform released its recommendations to improve the federal tax system, including proposals to reduce popular benefits like the deductions for mortgage interest and state and local income tax. "The plan was declared dead the day it was announced," Buckley said.

If tax reform can't address the deductions for mortgage interest, state and local taxes, or health care, there's not much left. He also rejects replacing the income tax. All Mr. Buckley can suggest is "that reform start with a series of Treasury Department studies, which he said had been crucial to reform in the past."

In other words, tax reform is inevitable, but perhaps not before the sun explodes, collapses and leaves our planet as a shriveled icy cinder in space.

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MEANWHILE IN ILLINOIS...

May 10, 2007

...it looks like Governor Blagojevich's gross receipts tax proposal will go down in flames today, according to the blog of a Chicago legislator. It would be nice if an Iowa legislator would do a blog with this sort of honesty:

The Governor must have said 3 or 4 times that gasoline could soon be $5 per gallon. After about the third time, I googled the subject and could not find any credible support for the Governor's claim. I'm just not sure that he's helping himself with a
statement like that...

...

I doubt that the opinions of many legislators were changed today, but if they were, I don't think that they would now be in favor of the proposal if they previously weren't. Speaking of which, we will be voting on a resolution essentially asking Representatives if they support the concept of a GRT.

And while nothing could can come of prognosticating on these types of subjects, here goes: 12 yes, 35 present, 69 no. Not sure how right I'll be, but it should be interesting to see the vote - and even more interesting to see the reactions to it.

Somehow I don't see anybody in Iowa doing a blog post like that.

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FRANCHISE FEVER?

May 10, 2007

Treat it with Rush Nigut's post at IowaBiz.Com.

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BLOG ROUNDUP

May 10, 2007

It's a slow day in this part of the taxworld, so maybe it's a good time for us to drop by a few other tax blogs.

Tax Girl came to my attention when she sent me an email yesterday asking a bunch of impertinent interesting questions, to which I replied with snotty thoughtful answers, which may or may not appear at her site. I like her current post, "What Not to File: Top 5 Ways to Get Caught Cheating on Your Taxes." Method #1:

1. Fail to file taxes for your brother like you promised you would… when your brother is married to Jennifer Lopez. Marc Anthony’s brother has pleaded guilty to tax felonies for failing to file tax returns for the singer’s income for five years, and for the singer’s companies for four years. Marc Anthony escaped prosecution for failing to file but is responsible for the tax, interest and penalties due.

I still think it would have been better marketing if she called herself the "Tax Grrrl."

I also have learned of the "California Tax Attorney Blog." Sure, it's California-centric, but it has posts for the rest of us, too, like "I Just Received A Notice Of Deficiency From The IRS - A 90-Day Letter - What Do I Do?"

You will be able to find them at the blogroll on the left side of this page as long as they keep at it.

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DC CIRCUIT: RIGHT TO PETITION INCLUDES RIGHT TO BE IGNORED

May 09, 2007

A "petition for redress" has long been a staple of Robert Schulz' "We the People" tax protest group's message. The First Amendment, of course, includes the right "to petition the Government for a redress of grievances."

The tax protesters have decided this also means that the government has to respond to their petitions, and that they can skip paying their taxes until the government's response satisfies them.

The Federal Court of Appeals for the D.C. Circuit said restated the obvious yesterday, saying that the government is free to ignore their petitions, and by the way they have to pay taxes. Now We the People can focus its energies fighting government's petition to enjoin them from selling "de-taxing" schemes.

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WHEN NOT EVERYONE KNOWS YOUR NAME

May 09, 2007

Joel Schoenmeyer at Death and Taxes blog ponders the benefits of having an unusual name, like, say, Joel Schoenmeyer. It makes you easy to Google, or to find if you are named in an estate planning document:

How does this relate to estate planning and probate? Well, it's important that the people named in your documents can be located if something happens to you. (It's especially important in the case of powers of attorney, which may be needed at a moment's notice.) If you are in a coma, and have named John Smith of Chicago, Illinois as your agent, with no further descriptive information, then you've got a problem.

His solution?

I typically ask for names and contact information for all family members, as well as for all non-family members named in a client's documents. And, in most cases, if there's confusion about someone's identity, I try to provide more information in the documents themselves.

He notes a Wall Street Journal article yesterday about the difficulties people with common names have when they want to be Googled - a problem that Joel and I don't have.

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IRS LOOKS TO TIGHTEN RULES ON S CORPORATION ADVANCES

May 08, 2007

Back in 2005 we noted an unusual Tax Court case. The owners of Brooks AG Company had made year-end advances to their S corporation in 1999 to enable them to take losses, withdrew the cash shortly after year-end, and then loaned the funds back to the company in December 2000 to enable them to take more losses.

The Tax Court, to our surprise, said this worked. They said only the debt balances at year-end mattered, and the withdrawal of funds during the year didn't cause trouble.

The IRS so disliked this result that it has proposed new regulations that would undo the result. They came out April 12, and are open for comment until July 11 at www.regulations.gov.

BACKGROUND

When a corporation elects to be an S corporation, it generally is no longer a taxable entity; its taxable income and loss henceforth hits the returns of the owners.

If the S corporation has a loss, owners can deduct the losses on their reutrns, but only to the extent of their basis in S corporation stock and in loans they have made to the S corporation. S corporation losses first reduce the shareholders basis in his stock, and then in his debt. Future earnings restore the basis in the debt, and then increase stock basis.

If a shareholder loan is repaid before its basis is restored, the payment triggers income. The Tax Court in Brooks said that all cash advances are one loan, and only the balances at year-end matter in determining whether there is gain.

When S corporation shareholder loans are evidenced by notes -- in contrast to open account advances -- their basis is separately tracked. If one note is paid off during the year and another is created before year-end, the results can differ from open account debt. The basis of a note that is paid off in March can't be restored by another made in December.

WHAT THE PROPOSED REGULATIONS SAY

The proposed regulations would split open account debt into multiple loans if the balance of open account debt exceeded $10,000 during the year. The open account debt on the books would be treated as a loan under a note at the time it went over $10,000, and any additional advances would be treated as a separate loan.

HOW THAT WOULD WORK

If these rules had applied in the Brooks AG case, the results would have been dramatically different. Instead of having one loan with balances measured at the end of each year, there would have been two loans - an $800,000 loan paid off in 2000 and a $1,100,000 made at the end of 2000.

The results are compared below side-by-side.

Analysis of debt in Brooks AG case as issued and under proposed regulations:

(Click for enlarged chart)

Under the proposed rules, the Brooks AG shareholders would have deducted all of their losses, but they would have also had a $441,293 gain on the repayment of the "deemed" separate debt paid off during 2000 - in effect, recapturing the 1999 loss that the 1999 year-end loan enabled them to take.

If this rule goes through, and I think it will, S corporation shareholders will need to take even more care in deducting losses using year-end loans.

And remember: basis is only the first hurdle for S corporation shareholders to cross in deducting their losses. They also need to get by the "at-risk rules" and the "passive loss" rules.

Links:

Brooks v. Commissioner, T.C. Memo 2005-204

YEAR-END PLANNING FOR S CORPORATIONS: BEWARE OF BASIS!

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OTHER PEOPLE SHOULD SACRIFICE

May 08, 2007

One of the dubious perks of high office is the free advice you get on your tax situation when you make your returns public. The labor-financed group Citizens for Tax Justice did that favor for George W. Bush and Dick Cheney this week. Their advice? They should pay higher taxes.

'The Bush and Cheney tax returns illustrate the kind of wealthy people that the President most intended to help with his tax cut program," noted Robert S. McIntyre, director of Citizens for Tax Justice. "At a time when our nation is running huge deficits and spending hundreds of billions of dollars and thousands of American lives on the Iraq war, you’d think such people would be asked to sacrifice a little rather than receiving such largesse."

It's an interesting mindset that equates "having less of your money taken" to "receiving largesse." But let's go to the charts:

This shows that the income tax burden has tilted to the high end of the scale. The share of national income earned by the top 1% of earners has declined from 2000 to 2004 (the most recent figures available), but they actually shoulder more of the tax burden. The Vice-President cracks the top 1%, while the President falls a bit short.

The arguments for more "progressive" taxes only make sense if it somehow is good for the less well-off. But "progressivity" as a goal in itself is pointless if it doesn't help the poor.

The question should be "what is the optimal rate of tax for the economy as a whole?" The poor are helped by growing the economy, not by making the rich poorer. If raising rates on the "wealthy" damages the economy, the poor will suffer the most.

In many cases, the "wealthy" are owners of businesses that pay taxes for the businesses on their 1040s via S corporations or partnerships. Increasing taxes on the "wealthy" increases taxes on these businesses. Paying higher taxes doesn't help a business hire poor folks.

Meanwhile, under the Bush administration, the bottom 40% of income earners have no net income tax burden at all. This means the question is no longer whether the income tax is progressive enough; it's whether tax policies will create a powerful constituency for big government that has no responsibility for paying the bills.

The implied logic of CTJ is "screw the economy, rich people should pay more tax anyway. Especially Bush and Cheney" But if having lower marginal rates helps the economy, it's not so terrible that rich people pay lower taxes than they otherwise would. Even Bush and Cheney.

Hat tip: Don't Mess With Taxes.

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DUST OFF THE RUBBER STAMP

May 07, 2007

Do you ever wonder who benefits from government programs for "low income housing"? The Des Moines Register offers a hint today:

Polk County Supervisor John Mauro has asked the city of Des Moines to grant him a $250,000 low-interest loan.

The money is for “financing gap” for a 40-unit apartment complex for low-income seniors that Mauro is developing as the majority owner of Curly Top LLC.

The $6 million project has already been given $4,659,010 in tax credits from the state but Mauro says there is still a $400,000 gap needed to launch the project at 1720 S. W. First St. in Des Moines

The tax credits were awarded by Mr. Mauro's former employer, the Iowa Finance Authority. At the time, Mr. Mauro assured everyone:

"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."

Not at all. And there wasn't any favoritism when he bought the land from the project from the City of Des Moines. Nor will there be when his former CIETC board colleague Tom "Rubber Stamp" Vlassis ponders the fate of Mr. Mauro's application from his seat on the city council. Any county supervisor who came in off the street would be treated exactly the same way.

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I DID NOT KNOW THAT!

May 07, 2007

A correspondent responds to our piece on the two Des Moines:

We live in Seattle, and deal with Des Moines, IA/Des Moines, WA confusion regularly. It helps that when spoken, Des Moines, WA is pronounced “duh-moineS”. It is a seedy little town near the airport, an obvious place for shady businesses... Signed, a fan (who just happens to file returns in both Iowa and Washington).

"Des Moinz," huh? I never new that. One more thing to confuse me. But "seedy?" Say it ain't so!

Butchering French place names must have been a pioneer hobby. "O'Plain Road" goes through my old hometown; it was originally a French trading bath called Rue Aux Plaines. It passes near the Des Plaines River in Northern Illinois, where it's pronounced "Dess Playns." Hilariously, I once heard a Fox news reader pronounce it as "de plaine," like a student taking high school French might. Still, he did better than the NPR reporter who pronounced "Fighting Illini" as if it rhymed with "Fighting linguine."

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FRAUD FROOM FLINT TO DALLAS

May 07, 2007

Taxable Talk rounds up the week in tax fraud. He notes a pair of Dallas personal-injury lawyers who failed to report $134,000 in income. Smart lawyers, foolish choices...

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SUBPRIME MORTGAGES, SAD STORIES AND THE IRS

May 07, 2007

The Washington Post has published "IRS Kicks Homeowners While They Are Down." Needless to say, the piece has a point of view.

The subprime mortgage market has been hit by an entirely predictable wave a delinquencies. Some of these are being worked out by having some of the debt cancelled. As the article points out, this debt cancellation can be taxable:

For homeowners who are seriously delinquent on their mortgages and hoping for relief, the IRS has bad news: If your lender agrees to modify your loan and forgive any of your debt, you could owe federal income tax on the amount forgiven. Think of it as the tax code's "kick 'em while they're down" rule. When personal debts are canceled by a creditor, the amount forgiven is treated as ordinary income under the Internal Revenue Code, except in some situations such as insolvency. Worse yet, the lender is required by law to report the canceled amount to the IRS.

"Worse yet"? You mean you might get caught if you cheat on your taxes? How unfair.

Similar situations are likely to pop up around the country in the coming year as lenders bend over backward to modify thousands of troubled loans to prevent foreclosure. Proposed legislation on Capitol Hill could soften some of the impact on financially stressed homeowners, however. The Mortgage Cancellation Tax Relief Act of 2007 (H.R. 1876) would amend the tax code to exclude debt forgiveness on principal home mortgages from treatment as income.

Tax policy by sad story. A lot of these people borrowed money to buy houses they couldn't afford otherwise. Now that they aren't making the payments, lenders are letting them keep the house while writing down the loan. The bank is giving these folks thousands of dollars of home equity.

The tax law already lets borrowers exclude debt forgiveness from income to the extent the borrower is insolvent (that is, to the extent their debts exceed the value of their assets). The Washington Post article mentions this in passing. Does it really make sense to let solvent debtors get tax-free home equity?

HR 1876 would create a new privileged class of income, followed inevitably by unintended consequences. Big companies would probably set up mortgage subsidiaries to make home loans to their executives, which would then be forgiven tax free. Making mortgage debt tax free would also encourage people to borrow too much for home debt -- something the tax laws do too much already. But sad stories from borrowers who have overextended themselves will probably carry the day.

Hat tip: TaxProf Blog.

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CRACKING THE CODE CRACKER

May 04, 2007

About a year ago we talked about the book "Cracking the Code" and its author, Peter Hendrickson. In short, Mr. Hendrickson said that you could legally recover all of your withholding and avoid federal taxes simply by filing a Form 4852. This form is designed for employees who don't receive W-2s from their employers. People following Mr. Hendrickson's book would file this form showing no income and claim their refund.

Not surprisingly, a few of these returns slipped through the system, and some of the filers actually got tax refunds this way. For awhile, anyway. The Hendrickson's then used these IRS errors as evidence that they had "cracked the code" and could legally enable people to skip out on their taxes.

Of course, it doesn't work that way.

The Justice Department yesterday announced that it won a court order permanently enjoining Mr. Hendrickson and his wife from filing returns based on:

"...the false and frivolous claims set forth in Cracking the Code that only federal, state or local government workers are liable for the payment of federal income, social security taxes from their wages under the internal revenue laws..."

The court also ordered the Hendricksons to file correct tax returns for 2002 and 2003 properly reporting their income.

The Moral: It's not necessarily the Code that's a little cracked.

Links to related coverage:

Detroit News

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ALGONA MAN STRIKES OUT IN TAX COURT

May 04, 2007

The IRS can be like a needy girlfriend sometimes. It hates to be ignored. But even the rabbit-boiling obsession of the girlfriend in "Fatal Attraction" can pale next to the IRS's institutional persistence. An Algona, Iowa man learned something about that yesterday in Tax Court.

Paul Bowman never bothered to file his tax returns for 2001 and 2002. As usually happens, the IRS came calling when no returns matched up to his W-2 income. When Mr. Bowman ignored the IRS deficiency notices, the tax man started collection proceedings. When that happens, the taxpayer is entitled to a "collection due process" hearing. These hearings aren't designed to dispute the taxes, but to ensure that the IRS follows proper procedure before seizing assets, and to give the taxpayer a chance to arrange a payment plan.

Mr. Bowman requested his due process hearing with the following explanation:

1. Refer to the Tax Reformation Act of 1998.

2. I don't agree for all the reasons Congress has determined that I have this hearing.

3. Details will be both provided and disclosed at the hearing.

4. I fully intend to cassette record the proceedings of the hearing.

5. I request a face-to-face hearing.

Tax "Reformation" act? Is that the one with 95 theses? I didn't think Martin Luther did income taxes.

When the IRS decides that all the taxpayer has to offer at a due process hearing is tax protester arguments, they do it by phone, and they sent a letter to Mr. Bowman saying so. Mr. Bowman ignored this, too, and then contested collection in Tax Court with this argument:

the alleged 'transcripts' * * * are nothing but indecipherable, computer coded gibberish. If anyone is to make any sense of them, they must obviously be 'decoded'. Respondent has presented absolutely nothing for 'decoding' its 'transcripts'. Moreover, there is nothing in the administrative record to indicate that any decoding actually took place, or, if any did take place, that it is correct.

That didn't work. The Tax Court said it would impose penalties if Mr. Bowman makes such arguments again, and that the IRS can proceed with collection of $22,640 in taxes and penalties.

Cite: Paul L. Bowman, T.C. Memo 2007-114.

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YES, STATE TAX LEVELS MATTER

May 03, 2007

Whenever a ranking comes out showing that Iowa has high taxes or a poor tax environment for business, somebody quickly writes a letter to the Des Moines Register saying tax levels don't matter.

Here's a real-life experiment that says otherwise (via TaxGuru.net).

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JUST BECAUSE IT'S DES MOINES DOESN'T MAKE IT IOWA

May 03, 2007

A challenge for our readers: what's wrong with this story from a New York-based website:

In a civil complaint filed in U.S. District Court, an Iowa man has been accused of taking at least $28 million from people around the country to conceal their assets and help them evade taxes.

The court froze the assets of Robert Arant’s bank, Olympic Business Systems LLC, and federal agents seized computers from Arant’s Seattle-area home last month. Arant has refused to turn over information about his customers.

Here's a hint: notice the "Iowa man" has a "Seattle-area home."

Yes, this "Iowa man" is actually from Des Moines, Washington.

It is an interesting story, though. Mr. Arant is accused of running a "Warehouse Bank." Such outfits exist to help their customers launder money. A warehouse bank opens an account in a real bank, and then runs its customer deposits and withdrawals through that account anonymously to make it difficult to track the transactions to an individual customer. You can read the Justice Department press release and see a copy of the restraining order here.

I will give the New York-based website credit for knowing that there is a Des Moines, Iowa, and not mixing it up with Ohio or Idaho. It can be funny to encounter East-coast geography. Once on a vacation in Cape Cod, when I told someone I was from Des Moines, I was asked if that was close to Boise. Another vacationer chimed in saying he hadn't been to Iowa, but he had been nearby once, when he visited Texas.

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ONLY TREASURY EMPLOYEE UNION MEMBERS ARE QUALIFIED TO COLLECT TAXES

May 02, 2007

The National Treasury Employees Union hates the program to farm out tax debt collection to private (and, incidentally, non-union) tax collectors. Yesterday the head of the union, Colleen Kelley, issued a new press release, Congressional Support Continues to Build For Halting IRS Private Tax Debt Collection. The release quotes the call by Ways and Means Chairman Rangel stop the program and concludes:

This call was echoed by President Kelley. "In light of the continuing controversy swirling around this program, the rational course for the IRS to take is to halt this program immediately," she said. "It is time to return the work of the IRS to the professional and dedicated IRS workforce and provide the agency with the resources its needs to collect outstanding tax debts."

One member of that professional and dedicated workforce ran into trouble in Tax Court yesterday. Barbara Trimble-Gee was a manager of an IRS examination group in California. Perhaps she found some inspiration there when she did her own tax return.

Ms. Trimble-Gee ran a cleaning business on the side. It doesn't appear to have been a big moneymaker. From the Tax Court opinion:

On her 2001 and 2002 Federal income tax returns, petitioner reported the income and expenses of the cleaning business on Schedules C, Profit or Loss From Business. On her 2001 Schedule C, petitioner reported gross income of $5,745 and expenses of $28,026. On her 2002 Schedule C, petitioner reported gross income of $2,377 and expenses of $28,045.

That kind of Schedule C is just jumping up and down for IRS attention, and sure enough, it got some.

In January 2006, respondent issued petitioner a notice of deficiency. For the taxable year 2001, the notice disallowed claimed deductions for $16,815 of depreciation and section 179 expense; $4,031 of car and truck expense; and $323 of interest expense. For the taxable year 2002, the notice disallowed claimed deductions for $2,977 of depreciation and section 179 expense; $10,390 of car and truck expense; $1,302 of meals and entertainment expense; $329 of travel expense; $898 of wage expense; and $5,202 of "remaining expenses", which consist of items such as rent, supplies, and utilities expenses.

For an IRS examination group manager, Ms. Trimble-Gee didn't seem to know very well how to back up her deductions:

For 2001, respondent determined that 35 percent of the Astro Van's use was for trade or business purposes. Petitioner, in contrast, contends that the business use was 63.88 percent. To support her contention, petitioner introduced, inter alia, a document titled "Weekly Expenses" that includes notations such as "Vallejo/SF 18th", "San Leandro 9/22", and "Riverside 5 - 7th". According to petitioner, these notations represent business trips taken in the Voyager or the Astro Van. The document does not indicate the distance between petitioner's home and the destinations listed, however, nor does it describe the purpose of the trips. In addition, it is not always clear whether a particular trip was made in the Voyager or the Astro Van.

The taxpayer/IRS agent also failed to take into account the uncanny abilities of Tax Court judges to read maps and do arithmetic - including adding 2 and 2:

We also note that petitioner indicated Riverside, California, was approximately a 500-mile round trip from her home. When asked how it was economically feasible to travel that distance for her cleaning business, petitioner explained that she hoped to obtain a large cleaning contract that would enable her to relocate to southern California. Petitioner gave no details about her efforts to obtain such a contract, however, and petitioner acknowledged that her sister lived in or near Riverside at the time.

The Tax Court concluded that business use of the van fell below 50%; if property isn't used 50% for business, it can't be deducted under Section 179. The court disallowed her deductions and assessed penalties for negligence.

The moral? If you use a vehicle for business, it's best to keep a log, or at least a detailed record of your business trips -- even if you are a member of the "professional and dedicated IRS workforce."

Cite: Barbara A. Trimble-Gee, T.C. Summ. Op. 2007-68.

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INDIANA GOVERNOR SAYS NO TO HAROLD HILL

May 02, 2007

Indiana Governor Mitch Daniels has vetoed his state's version of the filmmaker subsidy bill.

It's nice to see a politician act like an adult; it happens rarely. Iowa's version of this con, HF 892, flew through our legislature with only 3 of the 150 legislators willing to stand up against this blatant special interest giveaway.

Hats off to Governor Daniels and the three Iowa legislators who stood up for their taxpayers: Bruce Hunter (D, Polk); Herman Quirmbach (D, Ames); and David Hartsuch (R, Bettendorf).

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BLOG FOOD

May 02, 2007

Mike Sansone posts a handy explanation of "RSS feeds" at IowaBiz.com today. RSS feeds enable you to set up a customized web page that is automatically updated with posts from your favorite blogs. Our RSS feeds are found on the left side of the main Tax Update page.

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WHAT A REMARKABLE COINCIDENCE

May 01, 2007

Tax Analysts' state tax guru David Brunori has noticed Iowa's new credit for moviemakers ($link):

I've been deriding tax credits for the movie industry since their inception. People who understand tax policy will tell you those credits are unnecessary, unfair, inefficient, and so forth. They serve no purpose other than to let politicians hobnob with glamorous people. Maybe I'm old school, but I think all movies should be made in Hollywood.

Politicians in Iowa and Indiana disagree. Both states passed tax incentives for filmmakers. Interestingly, the tax incentives are identical in Iowa and Indiana, which makes me wonder if the industry has the same lobbyists working in all states. (emphasis added)

Amazing. Does Senator Dotzler have a twin brother in Indianapolis?

Related: prior Tax Update coverage of film giveaway.

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PUBLIC SERVANT, TAX DEADBEAT

May 01, 2007

Jim Maule ponders the high rate of tax noncompliance in some government agencies:

Which agency takes the prize for noncompliant employees? Rolling in at 9.4% is the U.S. Commission on Civil Rights. Perhaps it ought to be renamed the U.S. Commission on Civil Obligations and its employees sent to tax compliance classes. Not far behind is the Government Printing Office. Perhaps they ought to be reading the IRS instruction booklets that they print. The Treasury Department comes in near the bottom, at 1.3%. Yes, that's 1.3% too many, but at least the department responsible for tax law administration is near the top in terms of compliance. Even the Tax Court's noncompliance rate is disturbing because 4.9% is simply too high.

And he asks the obvious question:

If the IRS knows that these taxes have not been paid, why isn't it collecting those taxes? The IRS claims that it's no easier to collect taxes from federal employees than from other taxpayers. It ought to be easier, though, to slap liens on these delinquent taxpayers and jack up their withholding.

This hardly helps support the argument that private tax collection is a bad thing because only official unionized government employees can be trusted around the fisc.

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IOWABIZ.COM GOES LIVE

May 01, 2007

IowaBiz.com, a new group blog website for Iowa small businesses, goes live today. We will be contributing a piece at least twice monthly on tax issues. From the introductory post:

Our goal is pretty simple. We want to help you grow your business. We want you to make more money, find new customers, protect what your building -- from both a legal and insurance point of view, create an incredible experience for your customers, employees and most of all - yourself.

We've assembled 12 of the brightest and most generous Central Iowa-based professionals who have volunteered their talents and their time to guide you to a better, more profitable and more sustainable business.

They've lined up some good talent, including local lawbloggers Brett Trout and Rush Nigut. Visit it daily.

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