Tax Update Blog: September 2007 Archives
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PERHAPS IT IS MORE THAN THAT, BUT SURELY IT IS THAT
September 28, 2007
"Blogging is More Than Lunacy" - Mike Sansone, in a smart post at Iowabiz.com.
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THE TAX LAW SOLVES ALL
September 28, 2007
A good article in Forbes points out how politicians of all stripes seem to think the tax law can solve just about any public policy problem. President Bush and most of the presidential candidates have proposed new targeted tax gimmicks to buy votes. These range from health insurance tax credits to credits for "workers" and special breaks for old folks. Meanwhile, the Senate Finance Committee has just come out for new tax breaks for conservation, endangered species, and intercity rail.
Why tax breaks?
"Republicans buy into it because they like tax cuts, and Democrats buy into it because they want new programs. But it has the same effect as direct spending, and it's more wasteful,'' argues Len Burman, director of the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution. Burman, a former Clinton administration treasury tax official, adds that the proclivity of the Clintonites to push their favored programs through tax credits "used to drive me crazy."
Why do they stink? The article points out the main reasons:
One problem with all these tax breaks is complexity; there are now 11 different tax breaks for higher education alone, each with its own rules for who can claim it and for what. A less obvious problem with government by tax credit was highlighted in a little-noticed House Budget Committee hearing also held last week: Congress and the executive branch have made virtually no attempts to monitor whether all these tax gee-gaws get to the right people or promote the ends they're supposed to.
There is an even more fundamental problem than complexity: there is no hope that the economic illiterates we elect to congress could better direct the nation's economic resources through targeted tax breaks than the rest of us would making our own decisions with our own money.
Hat tip: Tax Policy Blog
Related: Our Pimpin' Senator
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MURPHY DEAD TO THE TAX COURT
September 28, 2007
The Federal Appeals Court for the DC Circuit buried it's controversial Murphy decision over the summer. Before the DC court changed its mind, Murphy said emotional damages -- and potentially many other items now subject to income tax -- were tax exempt because they weren't "income" when the income tax was enacted in 1913.
Yesterday the Tax Court danced on Murphy's grave. Paul Ballmer received a $337,000 emotional damages award in 2001 and failed to pay any income taxes on it. The IRS caught up with him, assessing tax and penalties. Mr. Ballmer cited the defunct original Murphy decision in trying to convince the Tax Court not to assess tax, or at least penalties.
The Tax Court seems to believe that Mr. Ballmer had no intention of paying tax on his award from the start, and his reliance on Murphy was a last-minute improvisation:
On cross-examination, petitioner admitted that he had not reviewed the flush language of section 104(a), which provides "emotional distress shall not be treated as a physical injury or physical sickness" for purposes of excluding damages received from gross income under section 104(a)(2). Petitioner further admitted that he had not sought the advice of a tax professional in regard to his conclusions that no provision of the Code required him to file a return or that the damages he received were not income.Petitioner's attempt to cloak his argument of reasonable cause in the initial Murphy decision is also unpersuasive. First, as discussed above, the Court of Appeals for the D.C. Circuit vacated its initial decision and has since determined that damages for emotional distress are gross income. Further, there is no evidence before the Court that petitioner performed an analysis similar to that of the D.C. Circuit, nor that he received any advice from a competent tax professional, at the time he chose not to file a return for 2001.
Mr. Ballmer may have fallen for tax protest arguments:
Petitioner further testified that he had reviewed the Internal Revenue Code for several years and could find no provision that required him to file a return
The "years of study" line is a standard tax protestor catchphrase (see here, for example). It's amazing that you can spend so much time with the Code without coming across Section 6012.
Cite: Ballmer, T.C. Memo 2007-295.
Link: Tax Update Murphy coverage
UPDATE: The TaxProf has more.
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READY TO BE RESEARCHED?
September 27, 2007
The IRS plans to get to know another 13,000 lucky taxpayers starting next month as part of the National Research Program. The successor to the old Taxpayer Compliance Measurement Program "audits from Hell," this kinder, gentler program relies more on matching and tends to focus on limited portions of the returns - audits from Heck, perhaps.
If you are one of the 13,000, you have the consolation of knowing that your pain will help the IRS to focus its efforts where there are real tax problems, which should mean less bother for compliant taxpayers. I know, that probably isn't that consoling.
Research time!
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NEW 'REAL TIME' EIN SERVICE AT IRS.GOV
September 27, 2007
The IRS has launched a new web-based application process to enable you to get employer ID numbers online in "real time."
This EIN is your permanent number and can be used immediately for most of your business needs, including: opening a bank account; applying for business licenses; and filing a tax return by mail. However, no matter how you apply (phone, fax, mail, or online), it will take up to two weeks before your EIN becomes part of the IRS' permanent records. You must wait until this occurs before you can: file an electronic return, make an electronic payment, or pass an IRS Taxpayer Identification Number matching program.
So technology slowly advances at the IRS. Some day we may even be able to access our own account information so easily.
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CARNIVALS FOR THE START OF AUTUMN
September 27, 2007
The sun has gone back across the equator, so we can officially celebrate the end of summer with some blog carnivals.
The Cavalcade of Risk is up at Investments and Loans. The Carnival of the Capitalists is running at The Virtual Handshake.
Have fun!
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PROPOSAL FOR MORTGAGE FORGIVENESS WOULD HIT VACATION HOME OWNERS
September 26, 2007
The House Ways and Means Committee is working on a bill to exempt home mortgage debt forgiveness from taxes. The bill would only qualify for the debt incurred on purchasing and improving the home; equity loans would not qualify.
The bill would make up some of the lost tax revenue by restricting the gain exclusion on the sales of vacation homes that are converted to primary residences. The bill would reduce the $250,000 exclusion on the gain on the sale of a principal residence ($500,000 on joint returns) for periods the home was not used as a principal residence. An example from the Joint Committee Explanation of the bill:
Assume that an individual buys a property on January 1, 2008, for $400,000, and uses it as rental property for two years claiming $20,000 of depreciation deductions. On January 1, 2010, the taxpayer converts the property to his principal residence. On January 1, 2012, the taxpayer moves out, and the taxpayer sells the property for $700,000 on January 1, 2013. As under present law, $20,000 gain attributable to the depreciation deductions is included in income. Of the remaining $300,000 gain, 40% of the gain (2 years divided by 5 years), or $120,000, is allocated to nonqualified use and is not eligible for the exclusion. Since the remaining gain of $180,000 is less than the maximum gain of $250,000 that may be excluded, gain of $180,000 is excluded from gross income.
The cutback on the exclusion would only be for "nonqualified" use after 2007, so you still have three months or so to move into your vacation home, live there for two years, and qualify for the full exclusion. Assuming, of course, the bill will pass.
Of course, there is already a tax law that allows insolvent or bankrupt taxpayers to avoid taxes on debt forgiveness. This bill makes people who spend too much on houses a protected class of taxpayers. Those poor saps who ran up crushing debt paying for college or gambling (in casinos, not on the housing bubble) are just out of luck.
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FILED LATE? PAID LATE?
September 26, 2007
The California Tax Attorney Blog explains the penalties that apply if you file or pay late, and how you can try to talk the IRS out of them.
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MONEY TO STAY, MONEY TO GO
September 26, 2007
The Des Moines Register has a summary of the tax giveaways to Aviva and Allied Nationwide insurance for their new headquarters projects. Among them:
- The state is awarding Aviva up to $13.4 million in credits to move its headquarters from downtown Des Moines to the suburbs.
- The state is awarding Allied up to $14 million in tax credits not to move its headquarters from downtown to the suburbs.
I wonder if you can double your credits if your project straddles the city limits.
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A NEW LOOK
September 26, 2007
After millions of dollars of market research and countless hours of focus group testing, our new look is up. We hope you like it. I'll explain all of the new features when I figure them out.
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NORTH PLATTE, NEBRASKA: DEN OF TAX INIQUITY
September 25, 2007
Does North Platte have a good country club? If not, they should get one to keep their medical professionals off the streets and out of trouble.
Back in April a tax indictment alleged the existence of a cell of doctors in North Platte who evaded taxes using sham 'real estate and forestry corporations."
Now Russ Fox reveals the story of a retired North Platte dentist who has pleaded guilty to tax charges arising from what appears to be a Ponzi scheme involving banks from Gothenberg, Nebraska to Grenada:
According to the indictment, Miller solicited investors for purported high yield investment programs through the offshore bank, conducted seminars and mailed solicitations to potential investors promoting offshore banking and investing. He requested investments of $100,000....
The indictment said Miller provided false account statements showing earnings from $700 to $4,000 per certificate per month. Investments from some investors plus credit and debit cards were used as lulling payments to forestall investors and trick them into believing their investment was viable and earning interest.
The moral? This may be hard to believe, but when a retired dentist from rural Nebraska promises to invest your money in safe investments offering a 4% monthly return, there are reasons to be skeptical.
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DAVID WIDENER
September 24, 2007
We received awful news this morning: the death of our friend David Widener. The smartest man I have ever worked with, David had been a good friend since I first met him in the 1980s. He was brilliant, funny, and kind, and his sudden death while jogging -- at only age 55 -- just seems incomprehensible right now. If you knew David, you know what I mean.
Our thoughts and prayers are with Chris, Sara, Scott and the grandchildren. Services are Wednesday in Davenport; details are here.
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CATTLE SHELTER KINGPIN DIES IN PRISON
September 24, 2007
Cattle-feeding tax shelters were all the rage in the 1970s and 1980s, and nobody did it like Walter J. Hoyt III. Mr. Hoyt launched over 100 partnerships. Unfortunately for Mr. Hoyt's partners, the partnerships used bogus bovines to generate the deductions, as Tax Analysts reported:
By the time of his conviction and 20-year sentence on 52 counts of fraud and conspiracy, Hoyt had created some 38,000 cows from thin air, each of which generated millions in deductible expenses allocated to limited partners coast to coast.
Taxpayers are still ensnared in the courts over the resulting tax deficiencies. The Tax Court has issued 15 decisions so far this year dealing with Hoyt partnership investers, most recently on August 8.
Mr. Hoyt didn't last as long as the litigation. The TaxProf reports that he died in prison earlier this month.
This cow is not believed to be associated with a Hoyt partnership.
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FAIR USE, AND FOUL
September 24, 2007
Local intellectual property maven Brett Trout explains what "fair use" is, and isn't:
What is Fair Use?
In some situations it is permissible to use limited portions of a copyright work, including quotes, for purposes such as commentary, news reporting, scholarly reports. This is particularly true for current news stories & historical analysis (to promote accuracy). The quoted material, however, must not be unreasonably large and must not destroy the market for the original work (quoting the salacious portions of Monica Lewinsky’s memoirs).
So is this quotation from Brett's post at Iowabiz.com "fair use?" You'll have a better idea if you read the whole thing. I'll know for sure when I get the cease and desist letter, I suppose.
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TAX AND THE VIRTUE POLICE
September 24, 2007
A number of "adult" business owners have had tax problems in the last few years (here, for example). I assumed that these prosecutions were just an unsurprising consequence of mixing a business dealing in lots of cash with the, well, easy virtue that accompanies that business.
It turns out that there may be more to it: the government might be using the tax laws to protect us from naughty pictures.
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WANT ATTENTION?
September 24, 2007
TaxGirl tells how to get some -- from the IRS.
I prefer Crissy Hynde's idea.
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BOB SAVAGE
September 21, 2007
We lost a friend yesterday. Bob Savage, a renowned architect and a founder of SVPA Architects, Inc., died at Hospice Kavanagh House in Des Moines.
Bob and his longtime business partner Stan Ver Ploeg were Roth & Company's first landlords when we set up our own shop in 1990. Bob and Stan have left their design mark across Iowa; their many local projects include the Regency West complex on Westown Parkway.
Our thoughts and prayers are with Marjorie and the rest of Bob's family.
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IRS ISSUES NEW RATES FOR VALUING FLIGHTS ON COMPANY AIRCRAFT
September 21, 2007
The IRS this week announced the new "Standard Industry Fare Level" (SIFL) rates for the second half of 2007 (Rev. Rul. 2007-55). Companies use these rates to determine how much income employees must report when they use a company aircraft for personal purposes. You can find details of how to do the computation here.
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MICHIGAN QUAGMIRE
September 21, 2007
A reader is unhappy that I neglected Michigan when I talked about self-destructive tax increases yesterday in California and Chicago. He has a good point. From the Tax Policy Blog:
With their economy in shambles, Michigan lawmakers, spurred on by the governor, are currently working to raise taxes!It is baffling that during a time of such economic hardship Michigan could actually increase taxes, but maybe such thinking is what got them in this mess in the first place.
Michigan is facing a $1.75 billion state budget deficit. Many state leaders want to close the gap by increasing the income tax. They say spending cuts are out of the question, as though there can't be anything the state government is doing that might not be wise.
Meanwhile, Michigan unemployment is at a 14-year high, at 7.4%. Somehow I don't think higher income taxes will lure many employers to Michigan.
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EDUCATION BREAK ROUNDUP
September 21, 2007
Don't Mess With Taxes has a handy summary of the rats nest of federal education tax breaks today. These breaks perform a valuable service by providing funds for the colleges to take by raising their tuitions.
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DISABILITY HEADACHE
September 20, 2007
Richard Cotler planned wisely. When he was in practice as an attorney in Florida, he participated in a group disability insurance policy.
Mr. Cotler's wise planning paid off when he was hit with debilitating headaches. They were so bad that he had to give up his law practice, and he eventually forced into bankruptcy. Fortunately, his disability policy kicked in, providing him an income.
Unfortunately, the IRS said that Mr. Cotler's P.C. had paid his disability insurance. If you pay your own disability insurance, or if your employer pays on your behalf out of your after-tax earnings, any income you later get from the policy is tax-free.
The Tax Court got involved. Judge Vasquez found that while the paper trail could have been better, Mr. Cotler had reimbursed the P.C. for the premiums out of his own pocket, and therefore his proceeds were tax free.
The Moral? Everyone of working age should have a disability policy. If you want any proceeds to be tax-free, make it clear who that you are paying for the policy out of your own after-tax dollars.
Cite: Cotler, T.C. Memo 2007-283
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CHICAGO TAX FOLLIES
September 20, 2007
Our central Iowa politicians were crushed at the polls when they attampted a 17% boost in the local sales tax rate: from 6% to 7%.
Chicago's politicians are even more brazen. Taxable Talk reports:
But Chicago may become a much more taxing place to visit or shop. Currently, the sales tax in Cook County (Chicago and nearby suburbs) is 9.00%. That doesn't appear to be large enough to Cook County Commissioners.Cook County Commissioner Joan Murphy told Leah Hope of WLS-TV, "We just need to do something other than cut jobs if we want to maintain services to our residents." What's the something she proposes? A sales tax increase from 9% to between 11% and 11.75%. That's somewhere between a 22.2% increase and a 30.6% increase.
Of course they need the money. There are a lot of worthy politicians who still need something to plead guilty to, and there are a number of airports in Chicagoland that haven't been destroyed in the dead of night.
The Tax Policy Blog has more.
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CALIFORNIA DREAMING
September 20, 2007
If you were given a choice between jumping off a 20-foot cliff or a 38 foot cliff, you'd probably choose the shorter leap, but you'd first ask whether "none of the above" were an option.
Unfortunately, California doesn't get the third option. Instead their legislature is fighting with their governor on whether to saddle businesses with a 4% tax (Governer Schwarzenegger) or a 7.5% tax (the legislature) to pay (allegedly) for health insurance.
The whole debate ignores the conundrum of health insurance. As Arnold Kling points out, the three factors in the health policy debate are
- insulation of patients from health costs
- open access to health care
- affordability
You can only have two.
California wishes away this choice. Its leaders pretend that the choice is only between between crushing taxes and uttely insane taxes.
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59/60
September 20, 2007
I'd like to think my score on the Civic Literacy Quiz means I'm nearly as smart as Megan McCardle, but I very much doubt it. Still, I can blow away the Harvard Kids, who averaged under 70%.
I missed question number 39:
39) The question of why democracy leads to well-ordered government in America when disorder prevails in Europe is central to:
A. Thomas Jefferson's Notes on the State of Virginia.
B. Walt Whitman's Democratic Vistas.
C. John Adams's "Thoughts on Government."
D. Alexis de Tocqueville's Democracy in America.
E. Charles Beard's An Economic Interpretation of the Constitution of the United States.
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OCTOBER 2007 APPLICABLE FEDERAL RATES (AFR) ISSUED
September 19, 2007
The IRS has issued (Rev. Rul. 2007-63) the minimum interest rates for loans made in October 2007:
-Short Term (demand loans and loans with terms of up to 3 years): 4.19%
-Mid-Term (loans from 3-9 years): 4.35%
-Long-Term (over 9 years): 4.88%
Historical AFRs are available at the "links" page at www.rothcpa.com. You can also click here for the rates for prior months as reported in the Tax Update.
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LEAVE YOUR FAMILY PARTNERSHIP OUT OF YOUR IOWA WILL
September 19, 2007
You shouldn't use a hammer to fix a watch (just trust me on this one).
Using the right tool for the job is important in estate planning too. Family partnerships are a popular estate planning tool. While they are great for lifetime gifting, they may not be so hot as a way to pass property under a will.
Inez Peterson's will passed property to a family partnership. Iowa has an inheritance tax that exempts some related recipients from inheritance tax entirely, while others pay tax at reduced rate. The highest rate is applied to "firms."
The estate argued that the inheritance tax should be figured based on the status of the partners of the family partnership. The Iowa Department of Revenue said that the family partnership was a firm, and that meant the estate owed an additional $33,625.
THE MORAL? The job of a family partnership is to help with lifetime gifts. Use another tool - trusts or direct bequests, perhaps - to deal with after-death transfers.
Cite: Iowa Letter of Finding re: Estate of Inez M Patterson, May 10, 2007.
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MURPHY IS DEAD
September 18, 2007
The Federal Appeals Court for the D.C. Circuit has turned down the appeal for the rehearing of the Murphy case. That means the case, which at one time seem poised to disrupt decades of federal tax law before the D.C. panel reversed itself, is final, barring an unlikely Supreme Court reversal.
The TaxProf and the TaxGirl have more.
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IRS SETS UP FORECLOSURE PAGE
September 18, 2007
There has been much talk about potential taxes for people who lose homes through foreclosure (see here, for example).
The IRS has set up a web page on the tax consequences of foreclosure.
One crucial item not mentioned on the foreclosure page: debt cancellation on foreclosure is not taxable to the extent you are insolvent - that is, to the extent your liabilities exceed the value of your assets. Debt cancellation in bankruptcy is also non-taxable.
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COMPARED TO THIS, PRIVATE TAX COLLECTION BY PHONE ISN'T SO BAD
September 18, 2007
When the Government really is motivated, it has great power to enforce the tax laws. That's been quite clear ever since President Washington marched an army into Pennsylvania to subdue a revolt over a whiskey tax.
The Internal Revenue Commissioner doesn't raise armies to enforce taxes. He also has other powers that are wisely left unused. Section 7601, for example:
§ 7601. Canvass of districts for taxable persons and objects(a) General rule
The Secretary shall, to the extent he deems it practicable, cause officers or employees of the Treasury Department to proceed, from time to time, through each internal revenue district and inquire after and concerning all persons therein who may be liable to pay any internal revenue tax, and all persons owning or having the care and management of any objects with respect to which any tax is imposed.
(b) Penalties
For penalties applicable to forcible obstruction or hindrance of Treasury officers or employees in the performance of their duties, see section 7212.
Yes, this section authorizes the IRS to go door-to-door and ask whether the household is current on its tax filings. Tax Analysts reports ($link) that this power was used as recently as 1953:
As the sun climbed into the sky on July 29, 1953, Boston commuters made their way to work. For most, it was just another Wednesday, with cloudy skies and temperatures in the mid-80s. But for 280 employees of the IRS, the day was anything but ordinary. With orders from Washington, an army of revenue agents fanned out across the city, knocking on doors and looking for tax delinquents.The canvass, supervised by New England Regional Commissioner William A. Gallahan, was both simple and systematic. Agents across New England were assigned to particular streets and instructed to knock on the door of every business or residence. When taxpayers answered, they were asked whether they had filed a return for 1952. If yes, then they were asked for proof of payment -- a receipt, perhaps, or a cancelled check.
The canvass was cancelled after the first dozen agents vanished, never to be seen again, right? Well, not exactly:
According to press reports, taxpayers throughout most of New England greeted the itinerant agents with civility, if not enthusiasm. According to Gallahan, most accepted the necessity of such a survey. Rhode Islanders, however, proved troublesome. Agents reported "a good many doors slammed in their faces," according to The New York Times. And some taxpayers were furious. "My husband's in the service," declared one woman as she shut the door. "What more do you want?"
Congress got irate, and soon the "survey" was ended, never to be resumed. The irate Congresscritters were content to criticize the IRS for following a law written by... Congress. They never bothered to actually change the law.
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ANOTHER WAY TO PAY FOR AMWAY
September 17, 2007
There's a lot of money in home-based businesses.
A lot of tax money, anyway.
The Treasury Inspector General For Tax Administration issued a report last week with some startling figures on how many taxpayers report improbable Schedule C "sole proprietorship" losses for amazing lengths of time. The report says 70,000 taxpayers with six-figure incomes reported Schedue C losses for four consecutive years (2002-2005) where the business expenses were at least five times revenues.
Another 30,000 taxpayers claimed schedule C losses for four straight years with no gross receipts at all, losing an average of $5,456 each over that period.
In real life, people smart enough to have $100,000 of income usually don't pour money down a rathole indefinitely. Where expenses dwarf revenues four consecutive years, real business owners usually take the hint that the business isn't a good idea.
This chart illustrates the report:
When losses like this continue for a long time, the IRS begins to assume that the business isn't really losing money; rather, the taxpayer is showing a loss by taking personal expenses as business expenses. Multi-Level marketing arrangements, like the former Amway, are notorious vehicles for this.
The tax law has a rule, Section 183, that disallows losses from activities not carried on for profit. Section 183 requires the IRS to look into the taxpayer's heart, to subjectively determine whether the business is really carried on for profit. The TIGTA report recommends instead a "bright line" rule for determining whether the activity is for profit, though it doesn't say what that rule should be.
Given the size of the problem TIGTA identifies - $2.8 billion in tax savings for "high income" taxpayers in 2005 alone -- it would seem like an attractive revenue-raiser for Congress. Considering that other taxpayers have to pick up the slack for these "business" losses of high-income taxpayers, it seems like an easy sell politically; still, with salesmen in every district, the MLM folks surely have some lobbying clout. We can expect legislation, but it's far from certain that Congress is capable of drawing a "bright line" that shuts down true "hobby losses" without clobbering legitimate businesses that happen to have a bad year or two.
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WHEN NOT TO PAY EXTRA
September 17, 2007
While it's against my interest to say discourage higher tax prep fees, sometimes higher fees really aren't worth it. Russ Fox reports on a preparer who would offer clients increased refunds for increased fees:
Thomas Mercer of Romulus, Michigan pleaded guilty to 30 counts in federal court. Mr. Mercer prepared 23 tax returns full of bogus deductions for things like business losses, charitable donations, and tuition and fees. His clients agreed to share their refunds—refunds that ranged between $900 and $19,000 for a total of $330,000—with him. Mr. Mercer also coached his clients on what to say during meetings with the IRS and provided them with phony documents backing up the phony deductions. Mr. Mercer is looking at a significant stay at ClubFed.
Not only will Mr. Mercer be going away, his clients can expect some awkward conversations with the IRS.
Clearly, higher prices don't always mean higher quality. Still, I'd be happy to explain the virtues of paying your tax preparer 2% of your adjusted gross income, to make all of your miscellaneous itemized deductions actually deductible...
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15-13 CARNIVALS
September 17, 2007
The Iowa-Iowa State game is over, but the current Cavalcade of Risk is still playing at Health Business Blog.
Meanwhile, the new Carnival of Personal Finance is up at Money, Matter and More Musings, including a smart piece from InsureBlog on the Massachussetts health insurance experiment ("health insurance isn't an all you can eat buffet.").
The real carnival has to be at the University of Northern Iowa. UNI beat Iowa State, which beat Iowa, which makes UNI the king of Iowa college football. Panthers!
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ARMY RECRUIT CHARGED WITH AIDING BROWNS
September 14, 2007
A thread of the case of holdout tax evaders Ed and Elaine Brown reached into Missouri yesterday:
GARDEN CITY, N.Y. (AP) — A pipe bomb and other weapons were confiscated from the home of an Army recruit charged in a federal indictment with helping a fugitive pair of convicted New Hampshire tax evaders, police said Thursday.
Jason Gerhard, 22, who recently enlisted, was arrested Wednesday at Fort Leonard Wood in Missouri, according to a statement from the U.S. Marshals Service. He was one of four men charged with helping obstruct justice in the case Ed and Elaine Brown.
The Browns, who were convicted in January and have refused to turn themselves in, claim the federal income tax is not legitimate.
This may be a warning to those who have been bringing supplies to the Browns' fortified compound. They may not be so eager to drop off groceries for them if it means a stretch in federal prison.
Related: TROUBLE IN THE BROWN COMPOUND
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DOMINATING THE HOUSING MARKET
September 14, 2007
Dr. Maule brings us an inspiring story of initiative and enterprise. A story...
...about two mortgage brokers who bought a home, moved to another so they could renovate the second home, found themselves unable to cover the mortgage or sell the first home even after cutting the asking price from $750,000 to $600,000, ran into problems renting it to tenants, and then discovered the solution. Or what appeared to be the solution. The story's title almost tells all: "Housing Market Slump Forces Couple To Open Brothel"
When the housing market hands you lemons, make, er, lemonade!
Dr. Maule's post does make me worry about him, though. From his post:
Police responded to a Craig's List posting "offering dominatrix services with a grand opening special." Wow, there must be some interesting things for sale on Craig's List, but at the moment I don't have time to go look. I have a much more interesting event that begins in a few minutes called a faculty meeting.
Egads. Poor Dr. Maule. A faculty meeting can provide at least as much torture as an adept dominatrix, but unrelieved by either the cool outfits or any satisfaction of accomplishment.
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WHY TARGETED TAX BREAKS STINK: THE LITERATE VERSION
September 14, 2007
The blogress formerly known as Jane Galt has moved her blog home to the Atlantic, where she has posted a wonderful explanation of the economic folly of high tax rates ameliorated by targeted deductions. It includes this observation:
The targeted tax cuts of which Clinton/Gore were so fond are bad for another reason: they distort peoples' choices. In general, if an activity isn't a good idea without a small tax deduction, it isn't a good idea with one, either. Finally, they add to the complexity of the tax code, and if there's anything that economists from left to right agree on, it's that the simpler the tax code is, the better it is for everyone
But the excerpt really doesn't do it justice. Read the whole thing.
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COURT: PAYPAL HAS TO TURN OVER RECORDS OF 'TAX TERMINATION' KIT PURCHASES
September 13, 2007
Tax protest figure Robert Schulz lost another courtroom battle with the IRS today. The U.S. Court of Appeals for the Eighth Circuit ruled that the IRS may enforce a subpeona to PayPal as part of an investigation of his taxes.
Mr. Schulz leads We The People, a tax protest non-profit. Until recently stopped by a federal injunction, their website offered a "Tax Termination Package" for $39.99, with PayPal payments accepted. As part of a tax investigation of Mr. Schulz, the IRS subpeoned the PayPal records. The Nebraska U.S. District Court upheld the subpoena last year, dismissing Mr. Schulz's argument that enforcement would chill his freedom of speech:
Aside from a jumble of constitutional challenges, Schulz's specific arguments challenging the legitimacy of the third-party summons are that the IRS is retaliating against him for exercising his First Amendment rights by filing suit against the United States government, and that the summons is an effort to chill the associational rights of both himself and his customers. Schulz also argues that the third-party summons is improper based on the ruling in the Second Circuit case, Schulz v. IRS, 395 F.3d 463 (2d Cir. 2005).
The court does not find Schulz's arguments persuasive. First, the IRS statute specifically allows the government to seek financial information from third parties in cases such as this one where the tax payer is not cooperating with the government investigation. This is not retaliation or harassment; rather, it is a standard and effective investigative technique. Second, Schulz has failed to present any probative evidence that he and his customers associational rights would be chilled by the summons at issue. On the We The People Foundation website Schulz has already posted the names of around two thousand persons who joined him as plaintiffs in a lawsuit against the federal government. Furthermore, other than alleging that the disclosure of customer information from PayPal to the IRS would chill his customers right to petition the government or inhibit any other First Amendment speech, Schulz fails to provide any evidence of how the disclosure of the customer information will infringe on his First Amendment rights. Indeed, Schulz does not have a First Amendment right to withold money owed to the government and avoid governmental enforcement actions because he objects to government policy.
The appellate panel upheld the decision today, allowing enforcement of the subpoena to go forward. Mr. Schulz has a record of spinning victory from defeat, but today's decision may challenge his spinning skills. The disclosure poses a potential problem to not only Mr. Schulz, but to the customers who bought the bogus "Tax Termination" kit using PayPal. They can expect the IRS to give their returns a closer look.
Links:
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HIS PERSISTENCE WILL PAY OFF WHEN THE ICE CAPS MELT
September 13, 2007
Give attorney Larry D. Harvey credit for persistence, and for successful penetration of a niche market. By my count the Tax Court has decided 37 cases litigated by Mr. Harvey regarding the taxability of income earned by U.S. citizens in Antarctica (UPDATE: Make that 38 39.).
Unfortunately, he has lost every one of them, the latest just yesterday. I think the issue is pretty well settled, as far as the Tax Court is concerned.
In each case the government attorney is Randall L. Preheim. He must be the Roadrunner to Mr. Harvey's Wile E. Coyote.
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PATENTLY EMBARASSING
September 13, 2007
Only a week after President Bush signalled his opposition to tax strategy patents, his top economist turns out to have applied for one. Tax Analysts reports ($link):
The president's top economic adviser, Edward Lazear, is attempting to patent a way for corporations to minimize their tax bills.
A patent application listing Lazear and Swiss economist Alexandre Ziegler as the inventors was filed with the U.S. Patent and Trademark Office (USPTO) in October 2006, 10 months after President Bush tapped Lazear to be chair of the Council of Economic Advisers.
The discovery of the application prompted immediate criticism of Lazear, who is now listed as the inventor of a current method for corporate tax planning at the same time he is helping drive White House tax and economic policy.
The patent is for a software program to help establish multistate corporation structures to minimuze taxes. This would differ from a "tax strategy" patent, which would cover schemes like the notorious marketed tax shelters of the late 1990s. It seems to fall somewhere between a mere tax computation engine, like Turbotax, and patenting a set of legal moves.
The article quotes one patent attorney as calling the application "silly," while others, including two former IRS commissioners, consider it unseemly in light of Mr. Lazear's position in the administration.
The House voted last week to outlaw tax patents as part of a broader patent reform bill.
Prior Tax Update Coverage: PATENTLY ABSURD.
UPDATE: The TaxProf has more, including a link to the patent application and abstract.
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DON'T TRUST TRUSTS?
September 13, 2007
Mitchell A. Port has posted a great primer on the different types of trusts: Everything You Always Wanted To Know About Trust Tax Law.
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TOYOTA, LEXUS ALT FUEL CREDIT ALIVE, BUT FADING
September 13, 2007
Kay Bell has the details.
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BAUCUS PROPOSES NEW FARM PORK TAX BILL
September 12, 2007
Senate Finance Committee Chairman Baucus is poised to reach out and touch our wallets for the sake of the farmer. From a Senate Finance Committee press release:
Senate Finance Committee Chairman Max Baucus (D-Mont.) today outlined his goals for an agriculture tax package that will create a permanent trust fund to help ranchers and farmers hurt by crop and livestock losses, convert a number of conservation payment programs into fully-offset tax credit programs, and offer additional incentives for rural economic development and energy-related tax relief to agricultural producers.
Smells like special-interest pork to me. The corn lobby already gets enormous energy subsidies. Now we get to buy their fuel, too.
The Tax Policy Blog isn't amused:
We all know that farmers don't get enough money from Washington through traditional spending means (i.e. direct appropriations). So Senator Max Baucus (D-MT) feels it is necessary to further increase spending to farmers indirectly through the tax code.
Indeed he does.
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IOWA LEGISLATURE PLOTS LAMENESS
September 12, 2007
Speaking of clueless tax policy in a place where the population has been migrating away for some time, the Iowa legislature is pondering its moves for the next legislative session. It looks like more of the same:
House Speaker Pat Murphy, D-Dubuque, was optimistic that lawmakers would address the state's property tax system, even if only in a limited fashion.
Commercial property tax rates are at the heart of the issue. All sides agree that Iowa's commercial rates are out of line with other states, but resolving the problem without shifting the burden to either farmland taxes or residential rates has been difficult -- lawmakers couldn't agree on a solution last session.
"I think we will do something this session," said Murphy. "We may not do something statewide, but we may get some pilot projects started that would be very beneficial."
Oooh, a pilot project! Expect the "pilots" to be well-connected at the statehouse.
Like in Mexico, the Iowa politicians may have their eye on gas tax increases:
Lawmakers could look in a limited number of places for highway construction -- primarily gasoline taxes, vehicle registration fees or license fees. Murphy added another potential source to the mix: a "severance tax" on renewable fuels.
"Why not do it like Texas?" Murphy asked. "Texas has a tax on fuel when it leaves the state so consumers throughout the United States pay for their education system."
Brilliant. Subsidize ethanol with one hand, tax it with the other. I can hardly wait for the legislature to convene to show off their bold leadership again.
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MEXICO AND LAME TAX REFORMS
September 12, 2007
The president of Mexico has announced a "tax reform" plan. Mexico could certainly use a low-rate, pro-growth tax plan. This isn't it. From USAToday.com:
To raise more money, the tax plan would:
•Create a corporate income tax based on companies' revenue, rather than their profits. Companies would have to pay the higher of the two figures, making tax deductions irrelevant.
•Require banks to deduct a 2% tax on deposits over a certain amount, probably $1,800 per month. The measure is aimed at catching people who are paid under the table.
•Give a $2.7 billion tax break to the Pemex petroleum company, so it can improve its refineries and explore for new oil reserves.
•Impose a 5.5% tax on gasoline, equivalent to about 13 cents per gallon.
Mexico has a corporate tax rate of 28%, an individual top rate of 30%, and a 15% value added tax (link). To bad Mexico isn't taking a bold move like Estonia, with its low-rate, broad-based 22% flat tax.
The USA Today story adds:
Making matters worse, 30% to 40% of Mexicans don't pay income tax, according to the Treasury Secretariat.
Not in Mexico, anyway.
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NEW E&Y TAX SHELTER CHARGES?
September 12, 2007
Fresh from winning a guilty plea in their tax shelter case involving former KPMG partners, the Justice Department is revving up a case involving another national accounting firm, reports the New York Times:
Federal prosecutors are planning a fresh indictment in a case that involves tax shelters sold by the accounting firm Ernst & Young, according to defense lawyers in the case.
Four current and former partners of Ernst & Young were indicted last May in connection with their tax shelter work from 1998 through 2004. The firm itself, which has not been charged, has been under investigation since 2004 by federal prosecutors in Manhattan, who have been looking into its creation and sale of aggressive shelters.
Nobody expects charges against E&Y, but that can't be much comfort to those involved in tax shelter frenzy that ran from the late 1990s until around 2003. The Times provides some background:
The case against the four Ernst & Young defendants focuses on four aggressive shelters known as Cobra, Pico, CDS and CDS Add-on. Several firms other than Ernst & Young, including Deutsche Bank and the law firm of Jenkens & Gilchrist, which is now defunct, also worked on Cobra. Deutsche Bank, which is part of the broad criminal investigation, helped make and sell Cobra to more than 1,100 wealthy investors in 1999 and 2000, according to court papers in related cases.
While the tax shelter party was incredibly lucrative for the big firms at the time, the hangover is nasty.
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IRS DELAYS DOCUMENT DATE FOR 409A DEFERRED COMP RULES
September 11, 2007
The IRS yesterday gave companies with non-qualified deferred compensation plans an extra year - until December 31, 2008 - to rewrite their plans to comply with the severe new rules enacted in the wake of the Enron and WorldCom scandals (Notice 2007-78).
While this extension will save the lives of any number of deferred compensation attorneys, its benefits to employers is very limited. While the documents can wait, taxpayers still must decide whether to continue or terminate their plans by December 31 to avoid the possibility of either a 20% penalty tax on employee deferred amouunts or unintended long-term deferrals of earnings.
Section 409A treats deferred compensation as current income, and subjects it to an additional 20% tax, if it fails to meet the requirements of new Section 409A. These rules place stringent limits on the time and manner in which compensation can be deferred.
The notice allows plans to be amended in 2008 if the amendments are retroactive to the beginning of the year. It provides rules for operating plans in compliance with 409A until final regulations are issued, and before the plans are amended.
The notice also says that the IRS will establish a limited "Voluntary Compliance Program" to enable plans to correct minor and unintentional violations without clobbering employees with big tax bills.
This is all nice, but Section 409A is still a horrible piece of Congressional malpractice. Only full repeal will really provide the appropriate "transitional relief."
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GUILTY PLEA BOOSTS KPMG CASE PROSECUTION
September 11, 2007
A few weeks ago, the high-profile tax shelter prosecution of former KPMG seemed on the verge of collapse. A guilty plea may give it new life. From today's New York Times:
The government’s criminal case against promoters of questionable tax shelters took a step forward yesterday when an investment adviser at the center of the inquiry pleaded guilty and provided new details on those involved.
The plea by David Amir Makov, 41, in Federal District Court in Manhattan is expected to bolster the government’s investigation of Deutsche Bank over its work with questionable shelters, including one known as Blips, whose workings Mr. Makov described in detail yesterday.
The work must have been profitable; Mr. Makov agreed to pay a $10 million fine. His plea may help prosecutors argue that the shelters were not agressive tax planning, but mere shams. He explained the "BLIPS" tax shelter, versions of which were marketed by KPMG and others. The shelter is reported to have generated over $5 billion in false tax losses. From the Times report:
Although Blips were created on paper to look like seven-year investments, it had neither real loans nor a real investment component, Mr. Makov explained yesterday. "There was no economic substance," he said. "Instead, we created the appearance of economic substance, rather than the reality." Mr. Makov added that he was "clearly told by Bank A, KPMG” and others “that the loan was not at risk."
While he initially thought that Blips were legitimate, he said that "as part of the deception" he was eventually "asked by representatives of Bank A," among others, "to come up with an investment rationale."
How's this for a rationale: "to generate $10 million to pay my criminal fines."
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TUESDAY TAX TOUR
September 11, 2007
Good stuff in the tax blogs today.
Kay Bell has a good common-sense guide to personal finance, "17 money rules of thumb."
Russ Fox discusses yesterday's strange-looking Albert decision, where a taxpayer who claimed he was picking up someone else's gambling winnings was taxed on them.
Mitchell Port discusses common trust-based tax scams at the California Tax Attorney Blog.
Lots of good bloggy tax stuff out there.
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ISN'T BORING THE ENEMY TO DEATH A WAR CRIME?
September 11, 2007
"Petraeus Caves to Dems, Orders Surge of Accountants"
Troops from the 343rd Forensic Accounting Brigade out of Fort Lee Nicholas, Cedar Falls.
(Parody via TaxGuru.net)
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BURNS MOSSMAN
September 10, 2007
Our friend Burns Mossman died this weekend. Funeral arrangements are pending at Iles Funeral Homes.
I met Burns for 20 years ago when I moved to town. A member of the Nyemaster law firm, Burns specialized in messy tax cases, and he helped many people get out of trouble with the law and turn their lives around. Burns, a longtime diabetic, was a kidney transplant recipient. Grateful for his gift, he worked tirelessly for organ donation causes, and he was chairman of the Iowa Donor Network when he died. Our thoughts and prayers go out to Nancy and the rest of his family. I'll miss him greatly.
It would be a fitting tribute to Burns to put your name on the Iowa Donor Registry as an organ donor.
UPDATE: Visitation is at Dunn’s Funeral Home (2121 Grand Avenue) Des Moines from 4:00 to 7:00 pm Wednesday, September 12. The funeral will be Thursday at West Des Moines United Methodist Church, 8th and Grand, at 10:00 a.m. The obituary is here.
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BETTER THAN AN AMNESTY, DUDE
September 10, 2007
Iowa has a tax amnesty in progress. Qualifying taxpayers can pay delinquent taxes without penalty, and at only half the normal interest rate.
One of the taxes qualifying for the amnesty is Iowa's drug stamp tax. People in possession of illegal drugs are required to puchase revenue stamps for the drugs they aren't supposed to have. It really functions as a severe financial penalty for drug possession. The nice folks at the Iowa Department of Revenue even provide on the web a handy mail-in form to buy the stamps (marijuana - $5 per gram!). Be sure to use a good friend's return address.
Tennessee had a similar tax, but narcotics afficianados in the Volunteer State caught a break last week when the Tennessee Supreme Court struck down the tax. The TaxProf has details, and Taxable Talk is also on the case.
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JUDGE TO SNIPES: THEY'RE NOT PICKING ON YOU, THEY'RE MAKING AN EXAMPLE OF YOU
September 07, 2007
Actor Wesley Snipes uses some slick moves in his action movies. So far his legal moves in his federal court case haven't been as helpful.
Mr. Snipes is fighting federal charges of conspiracy to defraud the government, making false claims for refund, and failure to file tax returns. The actor apparently acted under the influence of tax protest figure Eddie Kahn when he tried to recover millions of dollars of taxes he had paid using tax protester arguments.
Mr. Snipes tried to get the charges thrown out by arguing that the charges were racially motivated and unconstitutional "selective prosecution" of a non-Caucasian.
The trial judge this week denied the motion. The court said that if Mr. Snipes is being picked on, it's because he's famous, not because he is nonwhite:
From a prosecutor's point of view, especially in tax cases, the primary objective in deciding whom to prosecute is to achieve general deterrence. Here, Defendant Snipes is admittedly a well known movie star, and a person of apparent wealth, whose prosecution has already attracted considerable publicity. By contrast, the Defendant Eddie Ray Kahn does not appear to share Defendant Snipe's notoriety. "Since the government lacks the means to investigate and prosecute every suspected violation of the tax laws, it makes good sense to prosecute those who will receive, or are likely to receive, the attention of the media." United States v. Catlett, 584 F. 2d 864, 868 (8th Cir. 1978) (internal citations omitted); see also United States v. Hastings, 126 F.3d 310, 314 (4th Cir 1997) (no selective prosecution in case against prominent businessman and Republican party leader charged with failure to file income tax returns).
Celebrity definitely has its drawbacks.
The court also denied Mr. Snipes' motions to move the trial and to separate his trial from his co-defendants cases.
Links:
Court order of September 5, 2007.
Complete Tax Update Snipes coverage.
UPDATE: The TaxProf has more!
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2008 MALIBU, AURA HYBRIDS QUALIFY FOR CREDIT
September 07, 2007
The IRS yesterday certified the 2008 Chevy Malibu and Saturn Aura hybrid cars for the Alternative Motor Vehicle Credit (IR-2007-156).
Chevy Malibu Hybrid
Saturn Aura hybrid
Both cars qualify for a $1,300 credit. Remember, this credit doesn't work for alternative minimum tax.
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THE GOVERNMENT GIVES, THE COLLEGES TAKE
September 06, 2007
One dirty secret of the hodgepodge of tax breaks for college is their unintended consequences. They make it easier for our well-endowed colleges (like, say, Grinnell) to deny financial aid while jacking up tuitions.
The TaxProf points out a tremendous Wall Street Journal piece, Applying for Financial Aid: When It Isn't Worth Your Time. From the WSJ piece:
You can get a handle on your aid eligibility by ... playing with the College Board's Expected Family Contribution, or EFC, calculator. The key concept: If your EFC is below a college's total annual cost, you will get help from the college or the federal government in bridging the gap. ... So will you receive needs-based aid? Imagine you don't own your home, have no savings and just one child.
How much income takes you out of the college financial aid sweepstakes?
* $90,000, if your child goes to the average in-state public college costing $13,000/year
* $150,000, if your child goes to the average private college charging $30,000/year
* $220,000, if your child goes to the most-expensive private college charging $48,000/year
And if you do the responsible thing, saving money to help the kid pay for college, you are rewarded with reduced financial aid.
The Tax Foundation talks about the perverse affects of federal subsidies and tax breaks for higher education in a new study, Expand But Simplify? Education Credits Under Emanuel-Camp-Bayh. The Tax Policy Blog summarizes the study:
In the new study, part of the Tax Foundation's Fiscal Fact series, Prante argues that the Emanuel-Camp-Bayh legislation does the most good by consolidating the three current tax provisions students and families can qualify for into one unified credit. The legislation would also bump the yearly tax relief cap up to $3,000 from the present $2,000 level. Prante notes, however, that this increase could be whittled away by colleges that chose to simply increase tuition in response to the increased tax relief offered to families.
Could? Would.
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MAULE IS BACK, SMART AND WRONG.
September 06, 2007
Super-smart tax blogger Jim Maule wasn't really gone this summer, but he has spent it doing a 7,345-part (I'm estimating - I'm not good with Roman numerals) series on how to teach a basic tax course.
He's back with a long, thoughtful, and ultimately wrong call for the elimination of capital gain treatment for "carried interests" (treatment we discussed here). The difficulty of dealing with the purported problem - the idea that hedge fund partners shouldn't get capital gain rates on their partnership interests like other partners - is evident when Dr. Maule says:
...there's no unanimity in the mechanics of the reform, but once the competent put their minds together it ought not take long to work out the details.
It's not the competent that enact legislation. It's Congress.
It is probably impossible to draft legislation that would only affect the "bad guys" - hedgies - without disrupting the management structures of any number of LLCs operating real businesses. "Carried interests" are really just "profits interests," which are a way to let management share in the growth of a business without having to make a big cash investment or pay a bunch of taxes before they earn anything. They provide a result very similar to a grant of restricted stock coupled with a Section 83(b) election - and I don't see Senator Grassley going after that "abuse."
Dr. Maule's argument is really an argument against lower rates for capital gains; at the end of his piece, he pretty much says as much. This is a defensible position; eliminating the capital gain preference would do much to simplify the tax law. But as long as the preference is there, trying to eliminate it in small bites just mucks up an already baffling area of the tax law.
UPDATE: Dr. Maule responds.
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