Tax Update Blog: October 2007 Archives
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HAPPY HALLOWEEN!
October 31, 2007
But not if you sell pumpkins in Iowa.
The Department of Revenue has cracked down on jack-o-lantern scofflaws:
The Iowa Department of Revenue is taxing jack-o'-lanterns this Halloween. The new department policy was implemented after officials decided that pumpkins are used primarily for Halloween decorations, not food, and should be taxed, said Renee Mulvey, the department's spokeswoman."We made the change because we wanted the sales tax law to match what we thought the predominant use was," Mulvey said. "We thought the predominant use was for decorations or jack-o'-lanterns."
Previously, pumpkins had been considered an edible squash and exempted from the tax. The department ruled this year that pumpkins are taxable — with some exceptions — if they are advertised for use as jack-'o-lanterns or decorations.
Iowans planning to eat pumpkins can still get a tax exemption if they fill out a form.
And speaking of scary, today is the last day to apply for the Iowa Tax Amnesty.
Link • Iowa Tax Law • Comments (0) Bookmark: del.icio.us • Digg • reddit
WHAT WAXMAN, KERRY AND PUTIN HAVE IN COMMON
October 31, 2007
Security firm Blackwater has been drawing fire from politicians looking to score points in the Iraq war debate. They congresscritters see Blackwater's tax filings as a point of attack. For example:
Waxman Accuses Blackwater of Tax Evasion
Kerry Demands Investigation of Blackwater Tax Filings
Obama, Durbin, Kerry Call for Investigations of Alleged Blackwater Tax Dodge
There's something creepy about politicians urging the taxman to go after their political targets. That works out badly in other countries:
New York, October 30, 2007—The Committee to Protect Journalists denounces a lengthy prison sentence handed down today by an Azerbaijani court to independent editor Eynulla Fatullayev. Fatullayev is already serving a two-and-a-half-year prison term for allegedly defaming Azerbaijanis in an Internet posting he says he did not write, and has been sentenced to another eight-and-a-half years.Judge Mekhdi Asadov of the Azerbaijani Court of Heavy Crimes in the capital of Baku convicted Fatullayev on charges of terrorism, incitement of ethnic hatred, and tax evasion.
Putin's Russia is also adept at going after opponents through the tax law - most famously using trumped-up tax charges to imprison wealthy opponent Mikhail Khodorkovsky and sieze his oil company.
Could it happen here? Actually, it did. The Franklin Roosevelt administration attempted to trump up tax crime charges against wealthy opponents, most prominently Andrew Mellon; this is spelled out in chilling detail in Amity Schlaes history of the Great Depression, The Forgotten Man. While it would be nice to think that institutional safeguards would keep that from happening today, the political nature of the Justice Department in recent administrations is hardly reassuring.
It's very dangerous for politicians to be accusing opponents of tax evasion. Given the complexity of the tax law, and the great lack of understanding of it by our political class, it's grossly irresponsible. It's disturbing to see American politicians so quick to borrow from Putin's playbook.
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$5 MILLION DOWN, $11 MILLION TO GO
October 30, 2007
The Iowa Tax Amnesty ends tomorrow. The Cedar Rapids Gazette reports that 3,000 taxpayers have taken advantage of the program, paying over $5 million in back taxes. The state is counting on $16 million in revenue from the program for the current fiscal year budget.
Delinquent taxpayers using the amnesty avoid prosecution and penalties, and pay only half the normal interest rate. Those who pay their taxes on time every get a big "Thanks, Chump!" from the state.
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WELL, THEY CAN'T TAKE IT WITH THEM, SO I'LL JUST CLAIM THE REFUNDS
October 30, 2007
Russ Fox tells the tale of a New Jersey woman who claimed 28 tax refunds on behalf of dead people. She has pleaded guilty just in time for Halloween. How the zombies will take this, I don't know.
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CALIFORNIA FIRE DISASTER FILING RELIEF
October 30, 2007
The IRS has provided blanket relief (IR 2007-178) for taxpayers in the counties affected by the California wildfires for filings due October 21, 2007 through January 1, 2008, and for payroll and excise tax deposits due from October 21 through November 5. From the IRS release:
IRS computer systems automatically identify taxpayers located in the covered disaster area and apply automatic filing and payment relief. Taxpayers within the covered disaster area do not need to identify themselves as affected by the wildfires by writing on their returns or using the disaster designation in their tax software.Affected taxpayers who reside or have a business located outside the covered disaster area are required to call the IRS disaster hotline at 1-866-562-5227 to identify themselves as eligible for disaster relief.
The TaxProf has more.
The IRS has yet to provide relief for taxpayers affected by the LAX post office disaster of October 15.
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WILE E. COYOTE 0, ROADRUNNER 50
October 30, 2007
A grim milestone was achieved in tax attorney Larry D. Harvey's crusade against the taxation of income earned in Antarctica. My count shows he has now lost 50 Tax Court cases on this issue after two defeats yesterday, again at the hands of IRS attorney Randall L. Preheim. He has not yet won a case on this issue.
Related:
HIS PERSISTENCE WILL PAY OFF WHEN THE ICE CAPS MELT
Cites:
Stevens v. Commissioner; T.C. Memo. 2007-322
Elliott v. Commissioner; T.C. Memo. 2007-321
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RANGELING THE TAX REFORM BUZZ
October 29, 2007
The blogs are having their say about Congressman Rangel's "mother of all tax reforms." Greg Mankiw, the economist, notes the Tax Policy Center's distributional analysis of the proposal:
* The bottom three-fourths of households, those making less than $75,000 a year, are not much affected. They each would receive a tax cut of about $100 per year.* The next 24 percent, those making between $75,000 and $500,000, would receive much more substantial tax cuts. Those in the $200,000 to $500,000 range, who are in the 96 to 99 percentile of the income distribution, would get a tax cut of about $3,600 per year.
* The top 1 percent, those making over $500,000, would pay substantially more in taxes. Those making more than $1 million would see their tax bill rise by an average of more than $100,000.
So the Congressman is mobilizing the Volvo drivers against the Ferrari set. It's an upper class cage match!
Tax professor Dan Shaviro likes the plan:
On the whole, I would definitely take this package over present law. Not going to happen, of course. Even apart from the lack of votes, and the Republican noise machine lying about it, it's inherently pretty hard to enact a break-even package with hundreds of billions of dollars worth of tax cuts and tax increases both, because the losers tend to screech more than the winners.
The Tax Policy Blog notes that the plan falls short as "tax reform":
The Rangel surtax does not ferret out cleverly low-paying, high-income filers. Instead, it rewards tax avoidance. Tax-exempt municipal bonds, though derided by economists as an unfair giveaway to people in the top tax bracket, will be all the more valuable. Other tax-avoidance vehicles will also thrive in the absence of the AMT and the presence of the new surtax.
But the Tax Policy Blog also says that folks shouldn't be so quick to call it a tax increase:
Regardless of whether one supports Rangel's bill or not, calling it a tax hike is somewhat dishonest . Of course it's a tax hike on some people, but it also cuts taxes for others, too. It's more of a "tax shift." Overall, the bill does not raise the average tax rate on the U.S. economy (under static scoring). The Republicans should attack the blatant tax shifting in the bill and call it class warfare rather than attack its revenue neutrality.
The new Tax Policy Center blog TaxVox says Rangel's plan is "a good start:"
Let’s start with the obvious: The tax plan rolled out today by House Ways & Means Committee Chairman Charlie Rangel (D-N.Y.) is not the “mother of all tax reforms,” the congressman’s claim notwithstanding.However, it would do some pretty big things, such as eliminating the Alternative Minimum Tax, raising individual rates, cutting corporate rates, and slashing tax benefits for big multinationals. But it largely ducks a whole host of major issues, especially how we should tax savings vs. consumption and the tax treatment of health insurance.
Russ Fox isn't sold on the plan:
Why am I harping on this? Because of what's not mentioned in this legislation. Many of the Bush tax cuts will expire (beginning in 2009). Ask your legislators whether they will vote to extend them. The legislation introduced today implies that they're dead (at least in the view of Congressman Rangel). We're looking at a $200 Billion stealth tax increase!
Much of this legislation seems good to me. For example, I'm all for simplifying the Tax Code. However, a major issue—one which Democrats seem to ignore—is that if you increase the tax rate, the tax collected tends to decrease (the Laffer curve). This is definitely the case when this occurs on the wealthy. Indeed, because of the prevalence of S-Corporations and LLCs, much of the income of the "wealthy" is actually business income. If taxes increase on business income, business owners have far less incentive to innovate and provide additional jobs.
Prior Tax Update Coverage:
THIRD COUSIN, ONCE REMOVED, OF TAX REFORMS
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RISKY BUSINESS
October 29, 2007
I'm late at noticing, but a new Cavalcade of Risk is up, rounding up insurance and risk management blog posts. I like the Insureblog's contribution asking why health insurance isn't more like car insurance.
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IOWA TAX AMNESTY: 3 DAYS TO GO
October 29, 2007
The Iowa Tax Amnesty expires Wednesday. If you owe Iowa taxes, or haven't been entirely faithful in reporting your liability, it's time to get on the stick. The carrot: 1/2 interest and penalties are waived. The stick? Er, full interest and penalties aren't waived.
And for those of you who always pay your taxes on time: Thanks, chumps!
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GIFT TAX, ESTATE TAX EXCLUSIONS
October 29, 2007
Kerry Kerstetter has posted a nice summary of the $12,000 annual and lifetime estate ($2 million) and gift tax ($1 million) exclusions.
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WHERE IN THE WORLD IS THE TAX UPDATE
October 26, 2007
Hint: I'm at a tax school that's not in Iowa.
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THIRD COUSIN, ONCE REMOVED, OF TAX REFORMS
October 26, 2007
The Chairman of the House Ways and Means Committee issued his much-touted "mother of all tax reforms" yesterday. While the plan may be a distant relative of tax reform, there's no way that it's tax reform's momma.
There are two building blocks for real tax reform: broadening the tax base and lowering the rates. The 1986 Tax Reform Act was the last tax bill that did that. The dozens of changes to the code since then have been dedicated to carving new loopholes and targeted tax breaks that narrow the base, increase complexity, and shift the burden to those not favored by Congress.
The Rangel plan goes both ways. For individuals, it is the opposite of tax reform. It increases individual rates while adding to the list of loopholes. For corporations, it actually has some elements of tax reform, lowering the top corporate rate while eliminating tax breaks. The list of tax breaks is a mixed bag. Some make sense, like the repeal of the misbegotten Section 199 domestic production deduction. Others, like the extensions of the goodwill deduction to 20 years, or the repeal of lower-of-cost-or market accounting, look like pure revenue grabs. So while the Rangel may have some DNA of tax reform, we need to keep looking for the mother, or the grandaddy, for that matter.
INDIVIDUAL TAX
The main elements of the Rangel plan for individuals are:
- An increase in the top marginal rate to 39.6%;
- A repeal of the alternative minimum tax.
So to get rid of the AMT, the Rangel plan raises the regular tax rates.
The Rangel plan also embraces an awful idea that had been slated for repeal: the phase-out of deductions for higher-rate taxpayers. This is a sneaky way to increase the top tax rate by a bit over 1%.
The bill also creates or extends a whole raft of special interest tax deductions, from the Indian Employment Credit to the Research credit. Any serious tax reform would eliminate these, not preserve them.
CORPORATE TAXES
The bill would lower the top corporate tax rate to 30.5%, while eliminating the domestic production deduction, LIFO inventory accounting, and the lower-of-cost-or-market method for non-lifo taxpayers. This actually looks like tax reform, and getting rid of the complex and economically illiterate production deduction in exchange for lower rates is a good deal.
GOING TWO DIRECTIONS
Raising individual rates while lowering corporation rates is itself nonsensical if you believe tax reform involves simplification and treating taxpayers alike. If you get the top rates of different taxpayers out of whack, you create incentives to game the system through multiple entities. Taxpayers would have more motivation than ever to shift income to lower-taxed corporations.
The Rangel plan also punishes the post-1986 move of many businesses to "pass-through" status - S corporations and partnerships. The 39.6% top rate will hit closely-held S corporations hard, for no good policy reason other than to stick it to "the rich."
LIST OF REVENUE RAISERS
The likely lasting impact of the Rangel plan is that it includes a catalogue of potential revenue raisers for the loophole writers to use to pay for their own pet projects. These will keep coming up. In addition to the inventory changes, these include:
- Making S corporation shareholders of service businesses (like me) subject to self-employment tax on all of our K-1 income - eliminating the "John Edwards Shelter."
- Requiring brokers to report the basis of stock sold by brokerage customers
- Taxation of carried interests (profits interests) of investment partnerships as ordinary income.
The Rangel plan is a big disappointment. Its recognition of the problem of high corporation rates is welcome, but the drastic increase in individual rates and its failure to broaden the base - in fact, it narrows the base further - keep it from doing much to advance tax reform.
Links:
The Tax Prof, with many links to official documents and big media articles.
Text of Bill
Ways and Means Summary
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WHAT'S A MISCELLANEOUS DEDUCTION?
October 26, 2007
Gina explains.
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IF YOU INCORPORATE YOUR BUSINESS, USE THE CORPORATE CHECKBOOK
October 25, 2007
If you have a business, run it like a business. A sad Tax Court case yesterday shows how expensive being casual with your business records can be.
John Meyer is an Orange, California engineer and software developer. He started a corporation called Pacific Payment Systems, a C corporation, to develop and market a bar-code based billing software. He worked full time on the project in 2002, when he spent $47,521 in business expenses out of his own pocket, which he deducted on his schedule C. That turns out to be a false move.
The Tax Court explained that if the business is the corporation's business, the expenses for the business can only be deducted by the corporation:
Consequently, a shareholder is not entitled to a deduction for the payment of corporate expenses. Deputy v. du Pont, 308 U.S. 488, 494 (1940). Rather, the corporate expenditures that were not reimbursed constitute capital contributions and increase the cost basis of the shareholder's stock to the extent that they can be substantiated. See Ward v. Commissioner, 20 T.C. 332, 334 (1953), affd. 224 F.2d 547 (9th Cir. 1955).
Had Mr. Meyer paid the expenses out of the corporation's bank account, the corporation would have been entitled to the deduction to offset its own income. If Mr. Meyer wanted the benefit of the deductions on his 1040, he should have made an S corporation election and paid the expenses out of the corporation account. By paying the expenses personally, the deductions here are just wasted.
The moral? If you incorporate your business, run it like a business. The corporation pays the corporations bills. And if you want to deduct corporate expenses on your own return, file a timely Form 2553 to elect to be an S corporation
Cite: Meyer T.C. Summary Opinion 2007-181
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TAX COURT TUGS ON SUPERMAN'S CAPE
October 25, 2007
Crimefighting is a lonely, unappreciated job, especially for free-lance crimefighters like Superman and taxpayer Lazar Simov Kovachevich:
Petitioner testified that his itemized deductions represented, in part, a $71,200 casualty or damages for his time fighting crime and criminals and defending himself and his business pro se in the courts against the Government. Petitioner concluded that since attorneys are paid "when [they] practice in the court," he too should be similarly compensated or rewarded for his pro se appearances. Petitioner is claiming a deduction for his loss of time or the value thereof, and he is not entitled to it.
Worse, the IRS hit the taxpayer with penalties for unsupported positions. Let's hope Lex Luthor doesn't go after any Tax Court judges as part of his plan for world domination.
Cite: Kovachevich, T.C. Summary Opinion 2007-179
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AND THAT WOULD BE DIFFERENT...HOW?
October 25, 2007
"We are looking at a filing fiasco come April 15th," said Charles E. Grassley (Iowa), the ranking Republican on the Senate Finance Committee. "That is unacceptable."
-Senator Charles Grassley, speaking of the need for Congress to act on an "AMT Patch" to kick the massive expansion of the alternative minimum tax back one more year, as quoted by the Washington Post.
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WILE E. COYOTE WATCH
October 25, 2007
The Tax Court yesterday dealt two more Tax Court defeats for Larry D. Harvey on the issue of whether wages earned in Antarctica are "foreign" wages. Again the defeats are at the hands of his nemesis, IRS attorney Randall L. Preheim. The score: Harvey 0, Preheim 48. Maybe next time.
Russ Fox has more.
Cites:
Grant, T.C. Memo. 2007-318
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SECTION 409A W-2 REPORTING FOR 2007
October 24, 2007
Execrable Code Section 409A requires employers to list the amount of compensation deferred during a year on employee W-2s. The W-2 requirement has been deferred since its enactment. The IRS yesterday punted the requirement at least to 2008 (Notice 2007-89). The Notice says that employers and those paying independent contractors are not required to report amounts deferred on 2007 W-2s or 1099s.
The notice also provides rules for reporting amounts that are taxable income in 2007 under Section 409A.
Related: IRS DELAYS SUBSTANTIVE REQUIREMENTS FOR 409A
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YOUR SHARE OF THE CORPORATE TAX
October 24, 2007
The Tax Foundation has run a study to annualize the corporate tax burden per household for each congressional district. Their analysis shows that in many districts, especially poor ones, the per-household corporation tax burden is larger than the personal tax burden.
The study shows the average burden of the corporation income tax per household nationwide is $2,818. For Iowa's congressional districts, the highest burden is in my home district, Central Iowa's 3rd, with ($2,859), with the lowest in the Western Iowa's 5th district ($1,800). You can see the burden by Congressional district here.
Interestingly, Ways and Means Chair Rangel's tax reform plan is likely to include a significant reduction in the top corporate tax rate, which indicates that there is bipartisan recognition that the corporation tax rates are too high.
Hat tip: The TaxProf.
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DR. MAULE AIN'T YO MOMMA
October 24, 2007
Note to self: if I ever loot a non-profit and evade the taxes on the loot, don't look to Dr. Maule for sympathy at sentencing time.
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THE ASSERTIVELY CLUELESS VISIT WASHINGTON
October 24, 2007
A video of Bob Schulz of the "We the People" tax protest group at IRS headquarters demanding that the IRS "show us the law" imposing an income tax.
They could have saved themselves the trip to D.C. if they would just read the Tax Update.
Via Taxalicious.
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IRS PUTS 'SECTION 419' DEATH BENEFIT ONLY PLANS ON WATCH LIST
October 23, 2007
You normally can't deduct life insurance premium payments. Some insurance promoters have apparently been telling taxpayers they can get around this by having their company buy the cash-value policies through a welfare benefit plan under Section 419.
Last week the IRS said that not only do these plans not work, they are also "listed transactions" subject to additional reporting requirements and penalties for non-reporting. The IRS issued its guidance in three pieces:
Revenue Ruling 2007-65
Notice 2007-83
Notice 2007-84.
From Notice 2007-83:
Those advocating the use of these plans often claim that the employer is allowed a deduction under § 419(c)(3) for its contributions when the trustee uses those contributions to pay premiums on the cash value life insurance policies, while at the same time claiming that nothing is includible in the owner's gross income as a result of the contributions (or, if amounts are includible, they are significantly less than the premiums paid on the cash value life insurance policies). They may also claim that nothing is includible in the income of the business owner or other key employee as a result of the transfer of a cash value life insurance policy from the trust to the employee, asserting that the employee has purchased the policy when, in fact, any amounts the owner or other key employee paid for the policy may be significantly less than the fair market value of the policy. Some of the plans are structured so that the owner or other key employee is the named owner of the life insurance policy from the plan's inception, with the employee assigning all or a portion of the death proceeds to the trust. Advocates of these arrangements may claim that no income inclusion is required because there is no transfer of the policy itself from the trust to the employees.
If you are looking to buy business-owned insurance through a welfare-benefit plan, with an eye on deducting the premiums, think long and hard about it. If you already have one of these deals, it's time for a chat with your tax advisor.
More on listed transactions here.
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IRS UPDATES PENSION PLAN, 401(k) LIMITS
October 23, 2007
The IRS last week issued the limits for qualified plan contributions for 2008 (IR-2007-171). Some key numbers for 2008:
-Maximum 401(k) deferral: $15,500 (same as 2007).
-Additional 401(k) for 50+ taxpayers: $5,000 (same as 2007).
-Maximum defined contribution plan contribution: $46,000 (from $45,000)
-Annual benefit for defined benefit plan: $185,000 (from $180,000).
The maximum 2008 IRA contribution will be $5,000, with a $1,000 additional "catch-up" for taxpayers who turn 50 or older during 2008. For 2007, it is a $4,000 contribution with a $1,000 catch-up.
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IRS DELAYS SUBSTANTIVE REQUIREMENTS FOR 409A
October 23, 2007
The IRS has given taxpayers another year to comply with the substantive requirements of the misbegotten Section 409A deferred compensation rules. The extra year, announced in Notice 2007-86, was issued in response to complaints that existing transition relief was inadequate.
Section 409A applies a 20% penalty tax on employees if their deferred compensation fails to meet the detailed and complex requirements of the statute and regulations. For example, an employee might find himself with a 20% tax (plus regular income tax) on a deferred comp balance he has no right to, and may never receive, if the employer improperly pays an amount from a similar plan to another employee.
It's good that the IRS has granted the extra year for employees and employers to identify and fix the plans that fall under the broad reach of Section 409A. It would be far better for Congress to just repeal 409A, which it enacted in a frenzy of self-righteousness in the wake of the Enron scandals. To keep Ken Lay from ever looting his deferred comp plan just ahead of bankruptcy, 409A imposes brutal punishments on foot faults in anybody's deferred comp arrangements - even schoolteachers. That will show Ken Lay what for.
The Tax Prof has more.
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HAPPY BIRTHDAY!
October 22, 2007
October 22, 1986: President Reagan signs the Tax Reform Act of 1986.
We can't let the anniversary of the Tax Reform of 1986 pass unnoticed today. It's hard to believe that in our lifetimes we had a 28% top rate while somehow doing without seven separate tax breaks for higher education, no domestic production deduction, and no ethanol or biodiesel credits.
Charles Rangel is about to spring a "reform" effort on us, purportedly to get rid of the alternative minimum tax. I'll take bets that the top Rangel rate will exceed 28%.
Meanwhile, celebrate the 21st birthday of the Internal Revenue Code of 1986 in your own way.
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CIVIC CVT QUALIFIES FOR $2,100 HYBRID CREDIT
October 22, 2007
The IRS has certified the 2008 Honda Civic CVT as qualifying for a $2,100 alternative motor vehicle credit. You can see the whole list of qualifying vehicles here.
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CALIFORNIA, KNOCKING ON THE GOLDEN DOOR
October 22, 2007
Russ Fox is our California tax paparazzi, hunting down celebrities on California's new list of top tax deadbeats. Naturally no list of famous California deadbeats would be complete without "The Juice." O.J. Simpson is listed as owing California over $1.4 million.
As he remains focused on his search for "the real killer," California's tax authorities just might need to wait a bit.
Other stars making the list of the top California tax delinquents include Dionne Warwick and "Sinbad."
Hat tip: Dan Meyer. Thanks, Dan, for the get-well note.
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NOVEMBER 2007 APPLICABLE FEDERAL RATES (AFR) ISSUED
October 22, 2007
The IRS has issued (Rev. Rul. 2007-66) the minimum interest rates for loans made in November 2007:
-Short Term (demand loans and loans with terms of up to 3 years): 4.11%
-Mid-Term (loans from 3-9 years): 4.39%
-Long-Term (over 9 years): 4.89%
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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EASY INSANITY DEFENSE: A SANE MAN WOULD HAVE SHOT HIS TAX BOOK
October 22, 2007
The TaxProf passes on a little gem from the Bloomington Herald Times:
Indiana University law student Jesse Sneed may have been aiming his assault rifle at his Real Estate Transfer Finance and Development textbook when he fired shots from his westside apartment balcony early Tuesday morning, police say. The book was found later in the parking lot, shot clean through by two rounds, according to investigators.
He "may" have been aiming at the textbook? Give the man some credit. If he hit a book twice, he wasn't aiming at the nearby Chevy Tahoe.
Sneed, 27, was charged Thursday with criminal recklessness in connection with the incident, which closed down businesses and schools for several hours after neighbors reported hearing gunshots on the city's west side Tuesday. No one was injured.
Just another 27 year-old law student blowing off a little steam. If I were still in law school at age 27, I might start acting erratic, too. Though some would say being a 27-year law student is erratic behavior in itself.
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THE CASE FOR ELECTRONIC FILING, ILLUSTRATED
October 19, 2007
Classic story from Kausfiles, posted early Tuesday morning:
Postal: Angry scene at the LAX post office, where I went this evening to mail my tax returns--midnight being the deadline if you took advantage of the automatic 6 month extension. I arrived at about 10, figuring either it wouldn't be crowded, or else there would be friendly postal workers outside with bins as on April 15. Instead, the lobby was packed with hundreds of people standing in hours long lines for the relatively few postal workers inside--even if your letters were stamped and you didn't want to send it certified mail, you had to wait in line.
Extensions must be big on the coast.
They steered me to the back of the line, which was outside the building--they weren't letting anybody else inside, under orders from the Fire Department. I was tenth from the door--and that's where I still was at 11:30 when a manager in a track suit came out and said they weren't going to let us in at all. Argument ensued. People noted they'd been there two hours before the deadline. They pointed out they were there to pay the manager's salary. The manager said, "You had 365 days," which of course pissed everyone off more.
The bureaucratic arrogance was bad enough, but what probably really annoyed the last-minute filers was the bad math: October 15 was the end of a 288-day filing season.
As I walked away at 11:55 angry taxpayers were chanting "Hell no, we won't go." ... All in all, a) impressive incompetence and callousness of the sort that obliterates support and respect for government (at least government that isn't just cutting checks)
A disgraceful performance by the Postal Service, and one that makes their alternatives more attractive:
E-filing could have saved our hero the tedium of waiting in an unmoving line and the rage of dealing with brain-dead public servants.
Alternatively, authorized private delivery services could have helped a lot of taxpayers, especially those who were there to get proof of timely filing. I'm sure there are Kinkos open all night all over LA, where for a few bucks you could get your return filed through Federal Express, and with a clerk who probably won't even imply you are a loser for being there so late.
Sure, it's more expensive than the post office, but for the people who wasted several hours at the post office without getting their returns filed, it won't seem like such a bad deal.
One government agency can still redeem the LAX debacle, and should. The IRS should declare all returns mailed this week in the LA area as timely-filed, given the LAX post office fiasco.
Related: THE HOUR IS NIGH
UPDATE, 10/20: Is tax return delivery one of those "essential government functions," like tax collection, that some folks think should never be farmed out to the private sector? Because we can always count on civil servants to behave efficiently and professionally!
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UNDER THE WEATHER
October 18, 2007
The Tax Update isn't feeling well. My apologies for the posting drought. Posting should return when my energy does.
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WILE E. COYOTE WATCH
October 16, 2007
The Tax Court has issued four new decisions in the past week on whether income earned by U.S. Citizens in Antarctica is considered earned in a foreign country (no). By my rough count, Larry D. Harvey has now litigated this issue 46 times in Tax Court, and has lost to the same IRS attorney, Randall L. Preheim, each time.
There's always hope, I suppose; the Red Sox eventually did get past the Yankees to win the World Series. On the other hand, Wile E. Coyote never did catchg the Roadrunner.
Prior coverage here.
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MORE TAX GEEKY FUN
October 16, 2007
The Tax Prof introduces "TaxVox," the new blog of the Tax Policy Center. The Tax Policy Center is a tax policy shop jointly run by The Urban Institute and the Brookings Institution - sort of a center-left version of the Tax Foundation.
As a big fan of the Tax Policy Blog, the Tax Foundation's blog, I'm excited to see their counterparts at the Tax Policy Center join the blog world.
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GOODBYE 2003
October 16, 2007
Yesterday was the last filing day for 2006. It is fitting and proper that we remember this. But it is also fitting and proper to note that yesterday marked the closing of the statute of limitations for extended 2003 tax returns. Except in the case of fraud or substantial understatement, the statute of limitations is three years for tax returns. So unless a return involved something pretty egregious, the sins of another tax return season are absolved.
And Amen to that!
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THE HOUR IS NIGH
October 15, 2007
Today is it. Your 1040 extension is up. There is no second extension. You have until midnight to get your return filed.
Since you are already living on the edge, it's worth taking some minor precautions to make sure your extended return is filed on time. My suggestions, in order:
- E-file. If you electronically file your return, you can get electronic verification that your return has been accepted. You don't have to get down to the post office, as much as you like to chat with the friendly clerks there.
- If you can't use e-file, or for some reason prefer not to, take your return down to the post office and send it "certified mail, return receipt requested." Yes, it's $4.80, on top of the postage. If the IRS says you didn't file on time, it will be the best $4.80 you ever spent.
- Use an authorized courier service. The IRS treats certain private delivery services the same as the post office for the "timely-mailed, timely-filed" rule. If you use these, you need to use the street adresses of the IRS service centers, as the private delivery services can't deliver to post office boxes.
Less helpful alternatives:
- Dumping your envelope with more or less the right postage in the drive-by mailbox on 2nd Avenue.
UPDATE: A Tale of last minute tax terror in the trenches.
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MAYBE SNIPES' NEW LAWYER DOES HELP HIS CHANCES
October 15, 2007
When Wesley Snipes fired his celebrity lawyer, I thought that he was making a false move. Dr. Maule makes a convincing case otherwise, pointing out that he has helped high-profile tax protesters win acquittal on their criminal charges.
Of course, even if they beat the rap, they still have to pay the taxes, but beating the rap is nice.
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GREEN AROUND THE GILLS
October 15, 2007
If you are looking for ways to get the IRS to subsidize you for energy efficiency, Kay Bell rounds up environmental tax breaks at Don't Mess With Taxes.
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IOWA SINKS CLOSER TO THE BOTTOM OF THE TAX POLICY BARREL
October 12, 2007
With our neighboring states providing brutal competition in insane tax policy, Iowa shows that in this area, at least, we can hold our own. Iowa has slipped one place, and now has the sixth worst business tax climate in the newly released 2007 State Business Tax Climate Index. Or, if you're a "glass is half-full" sort, we're the 45th best. We got there by edging out Nebraska, which rose two places to 43rd best.
Click to enlarge
How do we do it?
Iowa can once again trace its poor overall ranking of 45th to its income tax rates on both personal and corporate income. They stand out as a warning to entrepreneurs. Individuals face an escalating series of tax rates that hit 8.98% over $58,500. Only a handful of states tax any source of income at such a high rate, and even those high-tax states usually apply it to much higher levels of income. Iowa’s 12% corporate income tax is in a league of its own. No other state has a double-digit rate on the books.
It's worth noting that while almost all of the tax policy debate in Iowa right now concerns commercial property taxes, Iowa ranks only 19th worst in the Tax Foundation's Property Tax Index, but 6th-worst in the corporation and personal income tax indexes. What a wonderful illustration of the cluelessness of our statehouse policy establishment.
The report takes some time to address criticisms of prior business tax policy rankings made by the University of Iowa's Peter Fisher, concluding that "taxes do matter a great deal" -- a point obvious to most of us, if not to Mr. Fisher.
Even if you don't agree with the index, the report has a gold mine of state tax policy data. Personally, I think all legislators should repeat this part of the report daily, along with the pledge of allegiance:
States should strive to create tax systems that have a broad base and a low rate. Ultimately, that means that states must strive for tax systems that are economically neutral—systems that do not favor one economic activity over another—and systems that promote economic growth—by avoiding excessive taxes on business activities and keeping the cost of complying with the tax system as low as possible.
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CANDIDATES TAX POSITIONS
October 12, 2007
The Tax Policy Center has put together a handy guide to the presidential candidates' tax policy positions, in the form of a chart and an Excel spreadsheet. You can learn, for example, that Dennis Kucinich wants "Double tax refunds and credits for those making $80,000 or less" - sort of a "happy hour" approach to tax policy.
As I have just as much chance of being president in 2009 as Dennis Kucinich, you can see my tax policy positions here.
Hat Tip: The TaxProf.
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MINNEAPOLIS FED PRESIDENT: DISBAND THE CIRCULAR FIRING SQUAD
October 12, 2007
The Arthur J. Rolnick, President of the Federal Reserve Bank of Minneapolis told Congress yesterday that the congresscritters need to ban the state economic development incentive war:
It is now time for Congress to exercise its Commerce Clause power to end another economic war among the states. It is a war in which states are actively competing with one another for businesses by offering subsidies and preferential taxes. Economists find that there is a role for competition among states when it takes the form of a general tax and spend policy. Such competition leads states to provide a more efficient allocation of public and private goods. But when that competition takes the form of preferential treatment for specific businesses, not only is it not "admirable," it interferes with interstate commerce and undermines the national economic union by misallocating resources and causing states to provide too few public goods.
Amen to that.
Mr. Rolnick has some great examples of economic developmen "success" stories gone bust:
For example, Pennsylvania, bidding for a Volkswagen factory in 1978, gave a $71 million incentive package for a factory that was projected to eventually employ 20,000 workers. The factory never employed more than 6,000 and was closed within a decade.Minnesota's 1991 deal with Northwest Airlines is another example of a Pyrrhic victory. A state agency agreed to provide the company with a $270 million operating loan at a very favorable rate of interest. In return, Northwest agreed to build (with an additional $400 million of state and local government funding) two airplane repair facilities that would eventually employ up to 2,000 highly skilled workers in an economically depressed region of the state. While the operating loan was made in the spring of 1992, the company has yet to fulfill its part of the bargain. Moreover, the commitment to build the two repair facilities that would employ 2,000 workers has been reduced to a commitment to build one very modest facility and an airline reservation center, which together would employ fewer than 1,000 workers.
Success stories soon to be joined by dozens of shuttered subsidized ethanol plants all over the Midwest.
If you want to know why state economic development incentives are a loser's game, read Mr. Rolnick's prepared testimony.
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IRS TO STEP UP LIKE-KIND EXCHANGE ENFORCEMENT?
October 11, 2007
The Wall Street Journal yesterday had a piece that said the IRS is going to be stepping up scrutiny of Section 1031 "like-kind" exchanges in the wake of a Treasury Inspector General for Tax Administration report. The TIGTA report had urged increased IRS attention to Section 1031 swaps.
It seems to be getting more difficult to work Section 1031 deals. Most like-kind exchanges involve real estate. In the old days, many folks selling investment property would acquire farmland as the replacement property, but the soaring cost of farmland has taken a lot of the fun out of that. "Tenant-in-common" deals, where taxpayers would take an undivided interest with up to 29 other folks in, say, a net-lease building as the replacement property, are often seen as expensive and inconvenient. This makes it tempting to cut corners to get a deal done some other way. Other taxpayers decide that the 15% capital gain rate is low enough that they just take the cash and pay the tax.
I would expect the IRS to focus on a few areas as they put swaps under their microscope:
- Was the property given up held for investment or for use in a trade or business? Section 1031 doesn't work for personal use property. If you used the property given up for personal use - say, as a vacation home - the IRS isn't going to like it (see here, for example).
- Will the replacement property be used for investment or a trade or business?
-Were the properties given up and received held long enough to qualify? The properties have to be "held" for use in a trade or business. You can't "flip" properties under Section 1031. While it is not clear how long you have to "hold" property to qualify for an exchange, you shouldn't expect to swap property you've held less than a year or two.
- Was the property land inventory? If you are a developer and you hold property for development and sale, rather than investment, it doesn't qualify. If you change your mind on why you hold the property, you need to make sure you document that you've changed your mind, and then you need to wait a decent amount of time before the swap.
- Was the "swap" closed by acquiring property from a related party? This can kill the whole deal, especially if an intermediary is used and the property given up doesn't go to the related party (see here, for example).
- Were intermediaries or escrows used properly? Most Section 1031 deals use an intermediary or a qualified escrow to hold the funds received on the sale of the disposed property while the replacement property is found. The tax law has very strict requirements on how these are to be used. Once the cash reaches your hands, it's probably too late to do a swap.
- In a delayed swap, were the 45-day identification and 180-day closing requirements met? You have 45 days to identify a replacement property after you sell your original property, and 180 days to close. There is no wiggle room; if you don't properly identify the property until day 46, or if you close on day 181, you are out of luck.
If you qualify for a Section 1031 deal, and the economics work, the new IRS scrutiny shouldn't deter you. But do take extra care that you are well-advised on how to do the deal, and that you follow the formal rules religiously.
Hat tip: The TaxProf.
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A COLLECTION OF FINANCIAL CALCULATORS...
October 11, 2007
...is put together in a single handy post at Don't Mess With Taxes.
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NEW RELIEF FOR LATE S CORPORATION ELECTIONS
October 10, 2007
The IRS has made it easier to make a late S corporation election.
The deadline for making an S corporation is 2 1/2 months after the start of the year the election is to take effect. New Rev. Proc. 2007-62 will allow corporations to make their election when they file their first S corporation tax return, if they have "reasonable cause" for the late election. The IRS will modify the S election form, Form 2553, to accomodate relief requests under Rev. Proc. 2007-62.
And what is "reasonable cause"? Blaming the accountant is a time-honored justification for late elections, but as an accountant I prefer to take the "blame the lawyer" route.
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FEDS FEAR BROWN RETALIATION
October 10, 2007
UnionLeader.com reports that federal agents are asking questions to sniff out whether Ed Brown supporters will try to retaliate violently for Mr. Brown's arrest last week. During the standoff at his home after his tax evasion conviction, Mr. Brown spoke of a list with 50 names marked for retaliation if he were ever arrested.
In an interesting twist, a waitress at a bar frequented by Brown supporters videotaped her questioning by a federal agent, and the 13-minute tape was apparently posted on Google Video -- though I can't find it, and it looks like it was removed by the man who posted it to protect the identity of the agents. The waitress talks about the interview in this video; the focus of the questioning appears to be a man named Rob Jacobs.
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COMPASSION FOR THE SIX-FIGURE EARNERS
October 09, 2007
The TaxProf linked to the Tax Foundation's report on the progressivity of the income tax, the report we mentioned here. The TaxProf's post has generated over 30 comments so far, one of which asked "What are the numbers as a % of income (rather than absolute dollars?"
Excellent question. The full Tax Foundation report has this table that answers it:
Click to enlarge
The top 1% paid an average income tax rate of 23.13%, contrasted with a 12.45% rate for all taxpayers and a 2.98% rate for the bottom 50% of taxpayers. The adjusted gross income cutoff for the top 1% was $364,657 for 2005; the top 5% cutoff was $145,283.
Another TaxProf commenter referred to a "rebuttal" of the notion that the income tax was highly progressive by pointing to this Kevin Drum post at Washington Monthly. He uses a picture to illustrate his point:
This chart originally appeared in the New York Times, using data from the Tax Policy Center. Click to enlarge.
So the tax system is moderately progressive until you get up to the 5,000 richest people in the country, at which point it becomes regressive.
However, this includes only federal income tax and payroll taxes. It doesn't include excise taxes, state income taxes, sales taxes, or property taxes. If you add in all that stuff, things get even flatter.
The lower rates for the "top 5000" echoes the observation that New York Times tax reporter David Cay Johnston has made. The question is - is this really a problem, and if so,can it be fixed without causing more damage to the tax law and to other taxpayers than it is worth?
To understand why the top 5000 taxpayers would pay at a lower rate, you have to look at the items of income that generate lower tax rates: dividends and capital gains. Almost certainly these items, which have a top rate of 15%, make up a bigger portion of income for the "top 5000" than for other taxpayers.
Of these top 5000, there will be two sets of taxpayers. Some are the Bill Gates of the world, who receive large chunks of annual dividend income and will be in the top 5000 every year. Others are in the top 5000 only once in their life, when they sell a business they have built up for a large gain, taking advantage of the reduced capital gain rates.
So the obvious way to increase the tax rate on the top 5000 is to tax capital gains and dividends as ordinary income. There are several problems with that approach. One is economic; while it certainly isn't undisputed, there is a lot of sentiment that high capital gain rates are bad for the economy. That's why even under the Clinton administration, there was always a capital gain rate break (though not a dividend break).
Another problem is that dividends and capital gains represent a second tax on the same income. Dividends are paid by corporations that have already paid their own corporation income tax when they've earned the income; combining the 15% individual rate with the 35% corporate rate gives you a 50% rate, which doesn't look quite so attractive. Capital gains are often also a second tax, if they represent a sale of a C corporation. By excluding the 35% corporate rate, these figures understate the real effective rate on this income.
Finally, these breaks aren't just for the top 5000. The little guys that Kevin Drum worries about, with incomes from $100,000 to $200,000, also use these breaks, so to "equalize" the top 5000, you'd still hurt these folks.
Mr. Drum is obviously right that the income tax isn't the only tax. Still, it's hard to argue that much more can be done in the way of "middle class" income tax breaks, as statistically the middle class already pays a very low federal income tax. Unless, of course, you define "middle class" to include six-figure incomes.
But who knows? Maybe the country is ready for a revolt of the Volvo drivers against the Ferrari set.
UPDATE: This post initally failed to correctly attribute the chart above. It originally appeared in a New York Times piece by David Cay Johnston. I apologize for the misattribution, now corrected above.
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WHAT DO SOME LAWYERS HAVE IN COMMON WITH ED BROWN?
October 09, 2007
A surprising amount of numbers have something in common with tax protester Ed Brown - they stopped filing tax returns years ago. No, it's not because they agree that "there is no law" requiring them to pay taxes -- they're lawyers after all, so they know better. It's just, well, they're too busy, or too important, or something.
Dr. Maule, the tax prof at Villanova, tells how one lawyer wrecked his career by not filing taxes. Sobering reading for anybody who doesn't think they really need to get their returns filed -- including, according to Dr. Maule, about 1 in 12 attorneys.
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ED BROWN WRAPUP
October 08, 2007
The feds didn't take the Janet Reno "burn 'em to save 'em" approach to the arrest of Ed and Elaine Brown; after months of patient waiting and watching, they arrested the armed tax protestors without a shot being fired.
The press conference by the Federal Marshal in charge of the arrest is available on YouTube.
The marshal didn't give all of the details, but it is interesting that the recent arrests of some supporters who had been supplying the Browns during the siege may have been critical to ending the standoff peacefully. When the marshals went in posing as Brown supporters, the Browns were alone in the house - making the arrest much safer than it would have been if there were a bunch of armed tax protesters in the next room.
Some more roundups of the aftermath of the siege:
Plainfield breathes sigh of relief
Tax Update coverage:
NOW THE BROWNS WILL BE LOCKED IN FROM THE OUTSIDE
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IOWA TAX AMNESTY: $2 MILLION DOWN, $14 MILLION TO GO
October 08, 2007
The Iowa Tax Amnesty has so far raised $2 million of the $16 million in tax revenue that the state budgeteers are counting on. Presumably the bulk of the revenue will come in during the last week of the 2-month amnesty period that ends October 31.
There are no figures yet for the amount of revenue to be lost in the future to taxpayers who will expect Iowa to go for another amnesty the next time a new governor wants to spend some money.
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SO WHAT WOULD A 'PROGRESSIVE' TAX SYSTEM LOOK LIKE?
October 08, 2007
The Tax Foundation has taken a look at the recently-released income tax payment statistics for 2005. If you believe in a steeply progressive income tax, it looks like your work is done:
The report highlights the fact that both the tax share and AGI share of the top 1 percent reached all-time highs in 2005. In 2005, the top 1 percent of tax returns earned 21.2 percent of adjusted gross income and paid 39.4 percent of the nation's federal individual income taxes. This indicates that the federal individual income tax is highly progressive as under a purely proportional system, the two shares would be identical.Furthermore, in 2005, the top 1 percent of tax returns paid nearly the same amount in federal individual income taxes as the bottom 95 percent of tax returns, a group which was responsible for 40.4 percent of the federal individual income taxes paid.
The top 1% pays as much as the bottom 95%? Well, surely there must be something missing from these statistics that shows that the plutocrats are sticking it to the masses. Oh, yeah, this:
(Note: This data does not include the refundable portions of the child tax credit or the Earned Income Tax Credit, which if included, would make the share of taxes paid by the top 1 percent even greater as those items would significantly lower the tax bill of the bottom income groups.)
Even so, as long as there are politicians, some will keep saying that the rich should pay more, no matter how much they pay already.
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