Tax Update Blog: June 2007 Archives
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ROAD TRIP!
June 14, 2007
The Tax Update is taking its annual summer vacation. If you can't do without tax news while we're away, check out the "hard core tax nerds" in the blogroll at left. If you want to narrow it down, you can't go wrong with the prolific TaxProf and Death and Taxes. Also be sure to check out IowaBiz.com, with good stuff daily for the entrepreneur.
See you in July!
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TAX COURT: HOME'S NOT WHERE THE HEART IS
June 14, 2007
Home is where the work is, not the heart. The tax home, anyway. That's the lesson from a quartet of Tax Court cases yesterday involving Northwest Airlines mechanics.
The Northwest employees all took jobs in new locations in place of accepting layoffs in 2003. They retained their old homes in hopes of returning. For example, Stanley Wasik had to take a position in Milwaukee after spending years working in Minneapolis. He kept his home in Prior Lake, Minnesota. His wife and kids stayed behind in Minneapolis.
The tax law allows you to claim meals and lodging expenses while you are "away from home" on business. Unfortunately for the mechanics, your "home" for tax purposes is generally where you work. As the Tax Court explains:
A taxpayer may deduct the expenses he or she incurred while away from home. Sec. 162(a)(2). The word "home" for purposes of section 162(a)(2) has a special meaning. It generally refers to the area of a taxpayer's principal place of employment, not the taxpayer's personal residence. Daly v. Commissioner, 72 T.C. 190, 195 (1979), affd. 662 F.2d 253 (4th Cir. 1981); Kroll v. Commissioner, supra at 561-562.
There is an exception to the general rule that a taxpayer's tax home is his or her principal place of employment. Peurifoy v. Commissioner, 358 U.S. 59, 60 (1958). The taxpayer's tax home may be the taxpayer's personal residence if the taxpayer's employment away from home is temporary. Id.; Mitchell v. Commissioner, T.C. Memo. 1999-283. On the other hand, the exception does not apply and the taxpayer's tax home remains the principal place of employment if the employment away from home is indefinite. Kroll v. Commissioner, supra at 562.
Mr. Wasik wanted to return to Minneapolis, but under the Northwest seniority rules he had to wait his turn. The court ruled that because the assignment was indefinite, with no assured or likely return date, that he was "at home" in Milwaukee for tax purposes, and his living costs there were non-deductible. His fellow mechanics also lost their cases.
The moral? When it comes to travel expenses, you live at work, not with the family.
Cites:
Wasik, T.C. Memo. 2007-148;
McKeown, T.C. Summ. Op. 2007-95;
Stephens, T.C. Summ. Op. 2007-94
Stockwell, T.C. Memo. 2007-149
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GET OUT OF TOWN CARNIVALS
June 14, 2007
As the Tax Update prepares to leave on the Tax Family vacation, we'll celebrate with the current crop of blog carnivals.
The Carnival of the Capitalists is up at Scatterbox. The Carnival of Personal Finance is at Getting Green; don't miss InsureBlog's musings about going "naked" on health coverage.
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IF THIS IS REFORM, MAYBE WE'D BETTER NOT
June 13, 2007
The left side think tanks at The Hamilton Project and The Brookings Institution have a program going on, "Reforming Taxation in the Global Age." The conference gives a peek at the ideas that would form tax policy in a Democratic presidency.
This summary from one paper struck me:
We believe these principles should command wide assent as policymakers consider tax reforms, whether incremental or far-reaching:
1. Fiscal responsibility requires addressing both taxes and spending.
2. Rising inequality strengthens the case for progressivity.
3. The tax system should collect the taxes that are owed.
4. Tax reform should strengthen taxation at the business level.
5. Taxes for individuals should be simplified.
6. Social policy can and should often be advanced through the tax code—and it must be well designed.
Items 1, 3 and 5 all make sense, but items 2,4 and 6 put the other three out of reach. Making taxes "more progressive", and "well-designed" tax provisions to make a better society are almost by definition the opposite of "Simplifying taxes for individuals." It's like saying you want to drive a motorcycle safely through downtown going 100 miles per hour; You can drive a motorcycle through downtown safely, and you can ride 100 miles per hour, but probably not both at the same time.
Also, goals 2 and 6 - progressive tax and manipulating society through the tax law - make goal 3, collecting taxes, harder to achieve. If you make the IRS into a team of social workers with calculators, you make it harder for them to actually determine income and and collect taxes - and that's not always easy in the first place.
The TaxProf has coverage of the conference here and here.
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HOW MUCH TROUBLE CAN YOU GET INTO IN JAIL?
June 13, 2007
You'd think that once behind bars, one's life would assume a stark simplicity. Imprisoned tax evader Tom Mower shows that it isn't necessarily so:
SPRINGVILLE — An injunction has been issued against the former owner of Neways International, who is accused of using inside information to help his family launch two competing multilevel marketing companies.
The May 25 injunction issued by U.S. District Judge Bruce S. Jenkins prohibits Thomas Mower Sr., Neways' former owner, and his two sons, Thomas Mower Jr. and Darick Mower, from using the company's product formulas, distributor lists and vendor lists to advance their new businesses, Sisel International LLC and SupraNaturals LLC.
Jenkins also ordered the Mowers to return any record of such information, including computer discs, to Neways, a cosmetics and health-supplement company that does business in more than two dozen countries.
Mr. Mower and his ex-wife received prison sentences for hiding earnings from Neways, a multi-level marketing firm they controlled. After the sentencing the Mowers sold their company. The buyer now accuses Mr. Mower and two sons of setting up a new business with the formulas and customer lists they sold.
The Moral? Off the streets doesn't always mean out of trouble.
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IT MUST HAVE BEEN THE SHOES
June 13, 2007
Actor Wesley Snipes is fighting tax evasion charges. If the recent success of another celebrity in fending off tax charges is any indication, the answer to Mr. Snipes' problem may be at his feet:
A COURT in the Philippines has ruled that flamboyant former first lady Imelda Marcos is innocent in five cases of tax evasion dating back to the 1980s.Mrs Marcos, the widow of late dictator Ferdinand Marcos, shed tears as Judge Rosa Samson Tatad announced the verdict in the Quezon City regional trial court.
"Thank God," Mrs Marcos, famous for vast collections of shoes and jewellery, said after hearing the decision.
Those of us who remember the '80s remember the vast shoe trove the former Phillipine first lady left behind when she fled the country with her dictator husband. He collection now resides in The Marikina City Footwear Museum, surely a magnet for shoe afficianados everywhere.
But for those without Imelda's closet space, there's always the internet.
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IOWA: WHERE THE BOYS ARE
June 12, 2007
Yesterday the Wall Street Journal had a roundup of state economic development incentives (links may only work for WSJ online subscribers). Among various charts on the attractiveness of different areas for economic development was this one:
It's not clear why this is an economic development issue, but the Wall Street Journal says it is one, so it must be important.
While it's nice to find an area where we're better than South Dakota (or worse, depending on your point of view), it seems from here that young single women are good for economic development. As Iowa's standard tool for economic development is tax breaks, it's up to you to to help design the right tax incentive to correct this imbalance by completing this carefully-designed survey of potential gender-balance tax credits:
If you have any other ideas, feel free to add them in the comments.
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QUOTE OF THE DAY
June 12, 2007
Economist Martin Sullivan in today's Tax Analysts online ($link)
Like most tax expenditures, the research credit injects many complexities and inefficiencies into tax administration. It provides uncertain benefits, while its negative impact on federal finance is not in doubt. We must ask ourselves whether competitiveness would be better served by a simple tax system with low tax rates that keep government out of the marketplace -- in the 1990s we called that "tax reform" -- or by the current ragtag collection of temporary subsidies superimposed on the world's second-highest rate of corporate tax.
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THANKS GUYS, BUT YOU'VE DONE ENOUGH ALREADY
June 12, 2007
Tax Analysts notes ($link) that Congress is once again looking to the tax law to address the nation's energy needs. For example:
Senate taxwriter Ron Wyden, D-Ore., told reporters June 11 that he would push for conditions to tax breaks for the oil industry. Wyden said he will offer at "every step of the way" a provision that would require the oil industry to expand refinery capacity by 15 percent during the next five years before an oil company can qualify for the section 199 domestic production deduction.
I hate to disappoint Senator Wyden, but I really don't think tweaking a three-year-old tax deduction will remedy the problems that have prevented any new oil refineries from being built in the U.S. since 1976. Sometimes the problem just isn't the tax law.
Here are a few facts for the senators to ponder before they proceed:
June 13, 2005 U.S. regular conventional retail gasoline price per gallon: $2.10July 29, 2005: Congress passes the Energy Tax Act of 2005.
June 11, 2007 U.S. regular conventional retail gasoline price per gallon: $3:08
Thanks, guys! You don't have to pass another energy tax bill, you've done enough. Really, you have!
UPDATE: More at The Knowledge Problem (UPDATED UPDATE: link fixed)
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I...AM... YOUR FATHER
June 12, 2007
Minnesotan James Lileks shamefacedly notes that Minnesota was cleft from a rib of the old Iowa territory in 1838, making Iowa Darth Vader to a nordic Luke Skywalker. He also notes an oft-neglected economic development advantage we have in Des Moines:
Des Moines is one of the few cities in the world that has “es” in both words of its name, and I’m sure it has many other surprising attributes, such as arts councils and paved streets.
Of course if we didn't pave the streets, the feral hogs would wallow in them.
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THAT WOULD BE A LOT OF PHONE CALLS
June 11, 2007
The IRS program to issue refunds of the discredited telephone excise tax seems to have spawned a mini-industry of bogus refund claim preparers. Unfortunately for them, refund fraud isn't all peaches and cream.
Take Riverside, California preparers Peaches Mercer Turner and Alejandro Berdin. From a Justice Department release:
According to the indictment, Turner and Berdin prepared and filed income tax returns for 2005 and 2006 that claimed false credits based on the Telephone Excise Tax Refund (TETR) or the Earned Income Tax Credit (EITC)... The indictment alleges that the total amount of false claims exceeded $600,000; one return alone claimed a $140,604 refund based upon a $137,228 TETR credit.
Joining Peaches in the bad graces of the tax law is Dallas preparer Herbert Jena, who with an other defendant is accused of filing 1200 bad claims for excise tax refunds. They operated a tax service called "Jackson Hubbert." Certainly any phonetic similarity to Jackson Hewitt is coincidental. If the tax business doesn't work out, maybe they'll open a "McRonalds" hamburger restaurant under its distinctive "golden rainbows."
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ROUNDING UP WESLEY
June 11, 2007
Wesley Snipes, the actor facing tax evasion charges, asked the judge to dismiss the charges on the grounds that they were racially motivated. The tax blogsphere reacts:
The TaxProf
Tax Grrrl
Taxable Talk
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THE BIZNISS OF LIMITED LIABILITY
June 11, 2007
We chime in at IowaBiz.com today on how Limited Liability Sometimes Isn't.
IowaBiz.com is a group blog for Iowa's entrepreneurs. Good stuff daily!
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SUNDAY STEAM ENGINE
June 10, 2007
This came through downtown Des Moines today on the Iowa Interstate line - a freight train pulled by two steam engines!
click image to enlarge
I didn't realize what was going by my window in time to get a clear shot of both engines, but this picture captures it going by the old Rock Island Depot. It sure livened up an otherwise dreary Sunday afternoon trying to clear off my desk ahead of vacation, anyway.
Here is a more closely-cropped view:
I wonder what in the world they were using steam engines to pull a freight train for? Maybe this is part of Iowa's drive for energy independence - use Iowa coal!
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WILL THE O.J. DEFENSE WORK FOR SNIPES?
June 09, 2007
The Smoking Gun reports that Wesley Snipes is falling back on racial politics in defending himself against tax evasion charges:
JUNE 8--Facing trial in a bizarre tax avoidance scheme, actor Wesley Snipes claims that prosecutors used race as a factor in deciding to charge him with failure to file six years worth of IRS returns. In a motion to dismiss an eight-count indictment filed last October, Snipes argues that he is the victim of selective prosecution. Snipes points to the fact that his two "Caucasian" codefendants, Douglas Rosile and Eddie Kahn, have not been charged with failure to file tax returns, though investigators are aware that Kahn did not file returns for six years and that it was "possible" Rosile did not file for two years.
Mr. Snipes is grasping at straws here. Rosile and Kahn are being prosecuted as the promoters of the tax evasion scheme -- charges likely to lead to longer sentences -- while Mr. Snipes is being prosecuted for using it. And considering how Mr. Kahn remains in custody as a flight risk while Mr. Snipes is free on bond, it's not clear how the white guy is getting favored treatment.
In addition to playing the race card, Mr. Snipes tries to improve his hand by playing the victim card, saying he was:
...actually a victim of "unscrupulous tax advice," not a willing participant in a criminal conspiracy hatched by Rosile and Kahn. As such, a second motion notes, Snipes is mulling a lawsuit against his two codefendants "to recover the losses he suffered as a result of his reliance upon the advice given to him."
Reliance on Mr. Kahn for tax advice says something about Mr. Snipes' judgement. Here's what the invaluable Quatloos.com has to say about Mr. Kahn (my emphasis):
Eddie Kahn of "American Rights Litigators" represents the Hee-Haw contingent of the tax protestor movement...Eddie caters to the dumbest of the dumb, and his theories for not paying taxes are thus the dumbest of the dumb. Eddie has claimed variously that he can't find the Form 1040, that the IRS was not created by Congress and apparently just materialized out of the blue, that the IRS doesn't have the power to collect taxes, that the United States doesn't actually include the states, but is actually limited to the District of Columbia, that all the money collected from taxes goes to the International Monetary Fund (Eddie doesn't say who pays for our aircraft carriers, but what the hey), and that so long as keep out of the Social Security Program that you'll never have to file taxes... It seems that if somebody has tried a theory, lost, and then gone to jail than Eddie will then take it and advocate it as gospel.
Perhaps this means the defense will argue that if you are dumb enough to take advice from Eddie Kahn, you lack the mental capacity to intend to evade taxes. Hey, they doubted that O.J.'s defense would work, too.
Prior Tax Update Snipes Coverage:
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FRIDAY LUNCH ON LOCUST
June 08, 2007
The Belin Quartet at the lawn of the Des Moines Public Library main branch this afternoon. The Des Moines headquarters of Nationwide Insurance is in the background.
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RATCHETING UP THE PRESSURE ON ED?
June 08, 2007
A report at UnionLeader.com makes it look like the Feds are stepping up the pressure on defiant tax evader Ed Brown:
Brown, who maintains there is no law that requires average American citizens to pay a direct tax on their wages, spoke to a group of reporters from a second-floor window in his house after a veritable army of heavily armed police officers and federal agents left the area around his rural home without ever making contact with him.
The government detained and questioned a man who discovered surveillance teams positioned around the house yesterday morning.
As Brown spoke, half a dozen helicopters made wide circles overhead.
The report also shows that in addition to bizarre tax theories, Mr. Brown subscribes to a variety of fringe political outlooks:
Brown, who asserts that the federal government has no jurisdiction in New Hampshire and no authority to charge him under a non-existent law, said the activity surrounding his properties in Plainfield and West Lebanon yesterday was a "Zionist, Illuminati, Free Mason movement."
As we noted yesterday, Mr. Brown also hangs with the 9-11 "truther" crowd, the folks who think that "9-11 was an inside job." It just goes to show - if your politics go far enough around the bend to the right, they meet the far left going around the bend the other way.
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TAX BREAKS AND BEERS DON'T KEEP THE KIDS
June 08, 2007
A Des Moines Register guest column has the best discussion I've seen yet on the futility of efforts to keep 20-somethings in Iowa:
What changes could Iowa have made that would have compelled someone like me to stay? None. A kid has to go wherever he thinks he has the best chance to be the person he was born to be, the person God made him to be. For some, that means staying in Iowa. But a kid who wants to work on Broadway or Wall Street has to go to Broadway or Wall Street. Build all the skate parks you want, offer all the tax breaks you can dream up, get more beers on tap, it won't matter.
In my case, I wanted to be a Washington journalist, and there's only one place to do that. So when the opportunity arose, I left.
Washington was everything I thought it would be. Big-time. Fast-paced. The woman who would become my wife moved out from Iowa three years later, chasing the same dreams I had, and we reveled in the excitement and atmosphere.
But as we tried to settle down and start a family — in other words, as we grew up — we became miserable. The crush of crowds and the hum of the city, so exhilarating when you're a young man getting around on a mountain bike, are exhausting when you're a dad trying to get your baby to an 8 a.m. doctor's appointment.
But maybe if the beer was free, or we offered a microbrew tax credit...
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GOOD DEED TAX CREDIT POLLS REMAIN OPEN
June 08, 2007
Vot early, vote often!
Background here
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BACK AGAIN AT THE STANDOFF...
June 07, 2007
It looks like things are getting interesting at the Brown residence. Convicted tax evaders Ed and Elaine Brown have holed themselves up in their fortified New Hampshire home since their convictions in January on criminal tax charges.
A Boston TV station reports:
PLAINFIELD, N.H. -- Neighbors of convicted tax evaders Ed and Elaine Brown reported police SWAT teams and at least one armored vehicle converged on a field near the Browns' Plainfield home Thursday morning.
Federal and state authorities haven't commented on whether they are moving in to arrest the fugitives, and the local police, the governor's office and the U.S. attorney's office referred calls to the U.S. marshal's office, which has been negotiating with the Browns since their tax evasion conviction in January.
So much for operational secrecy. Let's hope this ends peacefully.
A photo on the "Official: Ed Brown Video Blog" shows that fringe politics makes strange bedfellows:
No word yet on whether Rosie O'Donnell and Ron Paul are prepared to intervene.
Somewhat related:
RON PAUL, FRIEND OF THE TAX PROTESTER
SELF-IMPRISONMENT WON'T COUNT AGAINST THE SENTENCE
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TAX UPDATE GOOD BEHAVIOR TAX CREDIT POLL
June 07, 2007
As we noted earlier, the Tax Girl is running a poll on what vice you might give up in exchange for a tax credit.
We've added a poll that is more in keeping with the true spirit of the tax credit industry. We ask: what do you do already that deserves a $1,000 tax credit?
UPDATE: This automatically-generated ad for a member of the tax credit industry at the free poll company page for this poll is priceless:
Score!!!
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SCAM, ILLUSTRATED
June 07, 2007
A client forwarded this email to me (the names are removed to protect the innocent):
Click to enlarge image
This is, of course, a scam. If you get an email like this, don't click on any of the links. Ignore it. Delete it. If you follow the links, the bad guys who sent you this start loading your hard drive with malware that can let them take over your computer. (The above image is a screen shot of the email; you can click on it in perfect safety).
How do we know this is a scam?
First, the IRS does not contact taxpayers by email. If an IRS guy with a badge shows up at your door, then you should start to worry. No IRS guy will start an investigation with an email.
Second, just look at the thing. "You are being investigated for submitting false income tax returns with the Franchise Tax Board"? The IRS has nothing to do with any "Franchise Tax Board."
Third, if the IRS was investigating you because of a snitch, you can be sure they wouldn't tell you who it was. That's a good way for snitches to stop cooperating real fast.
Fourth, the email says they "regret to inform you" that you are being investigated. Rest assured: if they investigate you for criminal tax violations, they don't regret it at all.
Link: IRS news release on this scam.
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SURE I'LL NOT SMOKE FOR $1,000.
June 07, 2007
The Tax Grrrl blog is conducting an interesting thought experiment on tax credits. A reader asked if the Tax Girl would give up eating meat in exchange for a tax credit.
You see, tax policy works exactly that way. The government creates policy based on what it believes provides an incentive for “desired behavior” (mortgage interest, but not rent, is deductible because the government wants to encourage home ownership) and a disincentive for “bad behavior” (cigarette taxes are meant to discourage smoking). And it is often effective. As gas taxes increase, people drive less. As cigarette taxes rise, people smoke less.
Given that’s the way that tax policy works, I thought Sally’s question was a fair question for everyone. So, I created a poll.
Assuming that offering proof would not be onerous, which of the following would you give up in exchange for $1000 tax credit?
The poll asks which vice you'd give up for a $1,000 credit: Meat, Alcohol, Cigarettes, Sex, Television, Driving, Internet, Other, or nothing.
The whole problem with tax credits as a policy tool shows up in the sentence preceding the poll:
And no fair choosing something that you don’t do anyway. If you’re not a smoker, don’t choose cigarettes! That’s cheesy. It’s like my husband giving up watching Oprah for Lent…
Cheesy or not, that's the whole point of the tax credit industry: getting the government to pay you for what you are already doing, or what you already plan to do. Take the R&D credit. You'd have a hard time finding a research project that would clearly have not occured without the credit. In contrast, it would be very easy to identify dozens of "research credit studies" by private consultants, who are paid to visit taxpayers to identify the things they are already doing that they can claim a tax credit for.
Me, I'll give up smoking for $1,000. If I have to actually smoke a cigarette first so I can kick the habit, it's a sacrifice I'm willing to make for the sake of public policy.
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PAYING TAXES TO LURE AND SUBSIDIZE WAL-MART
June 07, 2007
Wal-Mart is a wonderful example of business dynamism, evolving into a spectacularly successful enterprise that has saved billions of dollars for its customers and made billions more for its shareholders.
But as successful as it is, Wal-Mart isn't too proud to shake down localities for subsidies. The left-side organization "Good Jobs First" identifies over $200 million in subsidies for Wal-Mart in the past three years. They also have set up "wallmartsubsidywatch.org" to track subsidies for Wal-Mart. They identify six Wal-Mart subsidies in Iowa, mostly in the form of industrial revenue bonds.
Surely Wal-Mart isn't going to turn down free money. The blame goes to the local politicians who are willing to tax their constituents - including the Main Street guys who fear Wal-Mart the most - to subsidize one of the most successful companies on the planet. That's "economic development" business as usual.
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RESEARCH TIME!
June 06, 2007
Just in case you are out of things to dread, the IRS announced today:
WASHINGTON — Internal Revenue Service officials today announced plans to launch a new National Research Program (NRP) reporting compliance study for individual taxpayers that will provide updated and more accurate audit selection tools and support efforts to reduce the nation’s tax gap.
The "National Research Program" is the kinder, gentler version of the old "Taxpayer Compliance Measurement Program," fondly remembered as the "Audits from Hell." Consider these the Audits from Heck.
The latest NRP study will be the first of an ongoing series of annual individual studies using an innovative multi-year rolling methodology. The study will start in October 2007 and examine about 13,000 randomly selected tax year 2006 individual returns. Similar sample sizes will be used in subsequent tax years.
Innovative rolling methodology? Like this, perhaps:
As much fun as it isn't to be audited, a program like this is needed for the tax law. By developing good statistics on where to find unpaid taxes, it also helps the IRS to leave the rest of us alone. That's not much consolation if you are one of the chosen 13,000, though.
The IRS says the first notices will go out to these lucky folks in October.
UPDATE: The TaxProf has more.
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SENATE STOCK OPTION PREENING
June 06, 2007
Sometimes Congress acts like a parent-slayer complaining of the trials of orphanhood. Take the Senate subcommittee hearings yesterday on stock options.
Senator Carl Levin complained that the difference between the financial accounting rules and the tax rules for reporting stock options is an unwarranted tax break for option issuers:
An investigation by the subcommittee's staff found that from December 2004 to June 2005, U.S. public companies legally avoided billions of dollars in taxes by claiming $43 billion more in tax deductions for options awards than the compensation for options recorded on their books.
Gee, that's just awful. And who wrote the rules that say how stock options are deducted on tax returns? Why, it's Congress!
And who wrote the rules that make stock options for executive compensation more deductible than cash salaries and bonuses? Why, Congress did that!
And who delayed for years the rules that required companies to make any expense provision on financial statements at all for stock options? Why, Congress again! (Though, in fairness, Sen. Levin supported the expensing requirement)
Maybe if Congress didn't try to make executive compensation decisions that properly belong to public company boards, these problems wouldn't come up so much.
Of course, economic illiteracy is a bipartisan phenomenon. From Tax Notes coverage of the hearings ($link):
Subcommittee ranking minority member Norm Coleman, R-Minn., said the excessive compensation granted to corporate executives through stock options "robs shareholders" and that the current book-tax gap "must narrow."
To remedy this issue and improve the public perception of executive compensation, Congress is also considering a bill that would require public companies to give shareholders an advisory role on its corporate compensation committees, Coleman said.
So paying employees "robs shareholders?" No, not really. Executives work for their money, and they can get fired if they don't produce. For real robbery, think of the billions that public companies must spend pointlessly on lawyers and accountants under the Sarbanes-Oxley rules, and to maneuver through the tax maze created by Mr. Coleman and his congressional colleagues. But good luck getting a congresscritter fired.
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MORE TROUBLE FOR JACKSON HEWITT
June 06, 2007
National tax prep franchisor Jackson Hewitt had a rough busy season this year. With two weeks left in the season, the IRS closed 125 of its franchised offices on allegations of rampant fraud.
Extension season isn't going all that well, either, apparently:
In a regulatory filing with the Securities and Exchange Commission late last week, Jackson Hewitt disclosed that the corporation itself and an unspecified number of its franchisee and company-owned stores now are being investigated by the IRS. The Parsippany-based company has 5,778 franchisee-operated offices and owns another 723 offices nationwide, for a total of 6,501.
That's probably not good for business.
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ANNIVERSARY CARNIVALS!
June 06, 2007
Many of us have June anniversaries. Even blog carnivals. For example, the Cavalcade of Risk, the blog carnival for insurance and risk management, has its first anniversary edition up today at Insureblog. Congratulations to Hank Stern and his beautiful blushing blog.
But don't stop there... the new Carnival of Taxes is up, too!
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STILL ANOTHER AMT-ISO VICTIM LOSES IN COURT
June 05, 2007
The Court of Claims Federal Claims last week shot down yet another attempt to undo alternative minimum tax caused by incentive stock options.
In March of 2000, Hendy Lund exercised $30,000 shares of Redback Networks, Inc. stock at a cost of $1.1875 per share; at the time the shares traded at about $149.84 each. The $148.6565 per share difference between the market price and the exercise price - the "bargain element" - would be taxable in computing her 2000 alternative minimum tax, to the tune of $4,459,695.
Ms. Lund wisely protected herself by disposing of 11,000 shares of her stock in October 2000 for $1,540,006 ($140/share). By disposing of the shares, she made sure she had some cash to cover her taxes - even though disposing of ISO shares less than 12 months after exercising the option meant forgoing capital gain treatment on the disposition proceeds. Her October sale proved prescient; she dumped the remaining 19,000 shares in April 2001 for $303,984.87 - only $16 per share. Ms. Lund therefore had over $1.8 million available to pay her 2000 and 2001 taxes of about $1.3 million. In contrast, some AMT-ISO taxpayers let their ISO shares decline to almost zero, leaving them without cash to cover their taxes.
The Court of Federal Claims ruled that Ms. Lund could not carry back a capital loss for the 19,000 shares included in AMT income at the $148.68 "bargain element" and sold for $16.00 - a loss totaling over $2.5 million. The tax law limits capital loss deductions to capital gains, plus $3,000, and this limit applies to AMT losses as well as regular tax losses.
The futility of challenging the taxation of the "bargain element" of incentive stock options in the courts seems to have been abundantly established by now. Attempting to use more than $3,000 of AMT losses to offset taxable income is also a lost cause. We probably won't see too many more of these cases, especially now that Congress has enacted relief, however complex and incomplete, for AMT-ISO victims.
Cite: DANIEL D. PIERCE AND HENDY J. LUND, Ct. Claims No. 05-1071T
UPDATE: The TaxProf has more.
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DON'T FORGET YOUR UMBRELLA
June 05, 2007
Brian Honnold explains why you need an "umbrella" insurance policy today at IowaBiz.com:
I know if I owned a business it would help to know if my defense costs were outside my limits of insurance coverage. What good is $500,000 in coverage if my defense is costing $300,000? I know we all have an attorney as a friend, but do you know one who really wants to work for free?
There's good stuff every day at IowaBiz.com.
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NO GOING WILD FOR JOE FRANCIS
June 05, 2007
The creator of the "Girls Gone Wild" empire is domesticated at the moment. Under indictment on Federal income tax evasion charges, Joe Francis remains in custody after pleading "not guilty" in a Federal Courtroom in Reno:
The Girls Gone Wild entrepreneur pleaded not guilty to tax evasion charges Monday in a Reno federal court, but, deemed a flight risk, he has been remanded into custody and will not be allowed to post bail until the terms of his freedom are sorted out with authorities in Florida, U.S. Attorney's Office spokeswoman Natalie Collins told E! Online.
Francis is wanted in the Sunshine State on charges of featuring underage girls in his X-rated empire in 2003 and smuggling contraband into his Bay County jail cell in April, where he was serving a month for contempt.
At least he has happy memories for consolation:
Joseph Francis in happier times.
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MEANWHILE IN ALBANIA...
June 05, 2007
This is interesting:
In a move aimed at creating a friendlier investment climate and making the economy more competitive, the Albanian government approved a fiscal package last week that includes implementing a 10% flat tax -- the lowest level in Southeast Europe. Corporate taxes will also be slashed to 10%.
During the Cold War, Albania was the coldest part of Europe. Defiantly Stalinist through the Glasnost era, it emerged from its communist isolation as the poorest country on the continent, and it remains poor. We'll see whether a flat tax program can achieve in a backward economy as well as it has in much more advanced post-Soviet Estonia.
Even though Albania still is emerging from under the rubble of the worst kind of communism, its policy debates echo our own:
Critics, however, say the changes will mainly benefit businesses and the affluent, have little impact on most Albanians, and punish the poor. With the abolition of a progressive tax system, they say, low-income earners will see their taxes go up, while a tiny number of high-income earners will enjoy a windfall.
Meanwhile, cutting the corporate tax in half will drain the state’s budget, as the income from this tax currently makes up about 8% of total revenue, critics argue.
It's funny how "critics" always say that, even in a country with very little wealth to redistribute in the first place. Regardless of what the critics say, it is sure to work better than what they've had.
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INTERESTING, CONSIDERING THE SOURCE
June 05, 2007
Tax Analysts today features an interview ($link) with left-side tax policy analyst Mark Schmitt (unfortunatly only available to subscribers). He writes for American Prospect and blogs at TPMCafe, and he served seven years as an advisor and speechwriter for Bill Bradley.
And yet he says this:
I think that at some point, the costs of enforcing the corporate income tax, together with the costs and the economic distortions involved in evading it, reach a level that the $150 billion or so in revenues may not be worth it -- if we are fully taxing corporate income when it is received by individuals in the form of dividends, capital gains, or stock options. The latter is a much higher priority. It is interesting to note that in recent years, as corporate profits have skyrocketed, corporate income tax as a percentage of GDP has held relatively steady -- an indication that the corporate income tax is easily gamed. We can either fix it or abandon it in favor of taxing corporate profits when received by individuals, although that is not an even trade-off and will require additional revenues.
While Mr. Schmitt emphasises the need for additional revenues (spending cuts aren't a big item in his policy toolkit), this position really isn't that different from what Barrons and the Wall Street Journal have to say. David Osterberg, call your office.
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OFF THE CHARTS!
June 04, 2007
Thanks to the normal and healthy decline in interest in taxes after April 15, our traffic levels have declined to the point that we are no longer in the top 200 on Brian Gongol's web traffic rankings.
We have no intention of lowering our lofty standards to court cheap popularity. Therefore you can be assured that our summer swimsuit issue will meet the highest standards of taste and decorum. Email your photos to the Tax Update, attention Taste and Decorum Editor!
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IRS RULES ON IN-KIND PARTNERSHIP GUARANTEED PAYMENTS
June 04, 2007
Since the appearance of Limited Liability Companies, partnerships have become increasingly popular form for doing business. Multi-owner LLCs are normally taxed as partnerships, but they don't carry the possibilty of unlimited personal liability for business debts inherent in old-fashioned general and limited partnerships.
While there are many tax advantages to operating in partnership form, there are annoyances. One drawback that surprises many taxpayers is that if you work for a partnership you own, the tax law doesn't treat you as an "employee." Instead of having taxes withheld and getting a W-2 at year-end, you are supposed to pay your own quarterly estimated taxes, with your "salary" reported as a "guaranteed payment" on your partnership Schedule K-1.
One of the advantages of operating as a partnership is that partnerships, unlike either C corporations or S corporations, don't normally trigger taxable gain when they distribute property to their owners. Like so many useful parts of the tax law, the ability to distribute appreciated partnership property without triggering tax is subject to many restrictions.
The IRS underlined one of these restrictions Friday in Revenue Ruling 2007-40. The ruling says that if a partnership pays a guaranteed payment with appreciated property, the partnership is treated as having sold the property for its fair market value - resulting in taxable gain for the partners.
You can find a discussion of the issues addressed in this ruling in a 2004 Florida Tax Review paper, Guaranteed Payments Made in Kind By a Partnership, available via SSRN.
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THIS HELPS EXPLAIN 1776 AND ALL THAT
June 04, 2007
The United Kingdom's Tax Freedom Day was Friday, June 1. The U.S. equivalent was April 30.
(Hat tip: Tax The Fish)
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BECAUSE THE NBA NEEDS A SUBSIDY
June 04, 2007
The TaxProf notes a tax subsidy to some of the least needy folks around:
[S]ome state lawmakers are seeking to pass a waiver of the state sales tax charged on tickets for the game and its associated attractions (Arizona has a 5.6% sales tax, with no exception for food or prescription drugs). Matthew Benson writes about this in today's Arizona Republic. The waiver, which is supported by Phoenix Mayor Phil Gordon, is said to be worth between $300,000 to $400,000 to the NBA and its sponsors who buy the tickets. ...
$400,000. That wouldn't fill out LeBron James wardrobe. But without it, surely Phoenix will shrivel up and blow away like a tumbleweed.
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PERHAPS THE IRS HAS FIRSTHAND KNOWLEDGE ON THIS
June 02, 2007
TaxProf Blog headline:
If the evangelist is right, you may run into a lot of IRS Collections Division people at your neighborhood "Mitt for President" rally.
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MORE ON LLCS AND TAX LIABILITIES
June 01, 2007
The recent case holding an owner of a single-member limited liability company liable for the LLCs unpaid payroll taxes is getting a fair amount of play. "Rubin on Tax," a blog I had missed until now, says:
The 2nd District Court of Appeals predictably held that the member was responsible for the taxes. The Court noted that the member "could have had the benefit of limited personal liability if he had simply elected to have his LLC treated as a corporation; he chose not to do so and thereby avoided having the LLC taxed as a separate entity. We know of no provision, policy, or principle that required the federal government to allow him both to escape personal liability for the taxes owed by his sole proprietorship and to have the proprietorship escape taxation as a separate entity."
There is also coverage at Everything Tax Law.
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IS IT SOMETHING IN THE CHEESE?
June 01, 2007
Iowa's governor hasn't been distinguishing himself on the tax policy front, but it sure could be worse. The governors of Iowa's eastern neighbors seem to be competing in a tax insanity olympics.
Illinois Governor Not Yet Indicted led off by imposing a gross receipts tax that lost by a razor-thin 0-107 margin in the Illinois House.
Now Wisconsin Governor Jim Doyle is attempting the fiscal equivalent of commanding the tide to turn back. He proposes a 2.5% gross revenue tax on oil companies, with criminal penalties if the tax is passed onto consumers.
With all due respect to Governor Doyle, that's moronic. As the Tax Policy Blog notes:
It's hard for any economist not to laugh at politicians who try to legally enforce the economic incidence of a tax. Any first-year microeconomics student will learn that the taxpayer who is legally required to pay a tax is not always the one who will really bear the economic incidence of the tax. What students aren't directly taught, however, is that on rare occasions politicians try to control both the legal incidence and the economic incidence of a tax. For that, the students merely need to flip back to their notes from the first week of class under the heading "price controls."
Imposing a tax on oil companies in Wisconsin will decrease the supply of energy brought to Wisconsin, ceteris paribus, which will raise the price of energy. And not allowing the price to increase would only lead to a shortage of energy.
By the way, ceteris paribus is a latin phrase meaning "Wisconsin leads the nation in binge drinking." Which could help explain why this might actually pass.
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KPMG CHARGES TO BE THROWN OUT?
June 01, 2007
The judge hearing the criminal case involving ex-KPMG employees will hold a hearing on whether to throw out the charges. The judge is considering dismissal on the grounds of prosecutorial misconduct. The White Collar Crime Prof Blog discusses the details. The TaxProf and the Tax Girl have more.
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