Tax Update Blog: November 2007 Archives
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IN TAX, CLOSE CAN MEAN NO CIGAR
November 30, 2007
Sometimes it's not enough to do what the tax law wants you to do. You have to also do it the way the tax law says. This is especially true in the baroque area of estate planning.
Anthony J. Tamulus, a Catholic priest, was blessed with a high net worth, and he died with a $3.4 million estate. He set up a charitable remainder trust; the income from the trust assets went to relatives during the lives of his brother and his sister-in-law; the remainder went to a diocese of the Church.
Unfortunately, he didn't do it the right way. The trust wasn't set up as a "unitrust," which would distribute either a fixed dollar amount or a specific percentage of the trust's value to the life beneficiaries. The trust also missed a deadline to get the document corrected by the Illinois courts. That meant the estate failed to qualify for a charitable deduction for the present value of the interest going to the Church.
The trustee argued that they "substantially" complied with the law, because the distributions were made as if the trust document were a unitrust. Writing for the court, Judge Posner said that wasn't good enough:
The executor-trustee, represented by counsel, as he was, and well aware that a substantial tax deduction was at stake, had no excuse for failing to bring the required judicial proceeding to reform the trust. The requirement is not unimportant; it protects against efforts to bend trust law to get a tax benefit. Nor is the requirement stated unclearly or confusingly in the Code or in any regulation -- it is perfectly clear.
Judge Posner drove his point home with this striking comparison:
Congress has made the benefit dependent on state law, and there is no doubt of its power to do so. Nothing is more common than for tax benefits to depend on state law; a state that does not permit 14-year-olds to marry deprives them of access to the benefits of filing a joint return.
I had never really thought about it that way.
Cite: Tamulis, CA-7, No. 06-4141, Affirming T.C. Memo 2006-183.
The TaxProf has more.
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MAYBE HE SHOULD HAVE TRIED 333,333 $3 BILLS
November 30, 2007
AIKEN, S.C. (AP) - A bank teller in Clearwater had a million reasons not to open an account for an Augusta, Ga., man Monday, authorities said. Alexander D. Smith, 31, was charged with disorderly conduct and two counts of forgery after he walked into the bank and tried to open an account by depositing a fake $1 million bill, said Aiken County Sheriff's spokesman Lt. Michael Frank.The employee refused to open the account and called police while the man started to curse at bank workers, Frank said.
The $1 million bill.
Via TaxGuru.net
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EVERY OLD SCAM IS NEW AGAIN
November 30, 2007
The Justice Department has sued to shut down an alleged tax fraud scam in Ohio. The scam sounds familiar. From the Justice Department press release:
The lawsuit alleges that the defendants’ customers pay inflated prices for participating in purported oil and gas joint ventures. Defendants allegedly artificially inflate the prices by having customers use sham notes to pay for most of the stated purchase price. Customers then allegedly claim tax deductions for intangible drilling costs based on the inflated price. In some instances, the suit alleges, the defendants sold the same intangible drilling deductions to more than one customer. According to the complaint the defendants have more than 200 customers across the country, with most being from central Ohio.
Well, that's one way of promoting energy independence; too bad a well that's been sold twice doesn't produce twice as much oil.
The basic scam is old. By selling an asset at an artifically high price for a note you nobody expects to ever be paid, the deal generates inflated deductions. It's much like the "Hoyt" cattle shelters of the 1970s and early 1980s, down to the multiple sales of the same asset - but this time it's oil wells, not cows. Some of the Hoyt investors are still in court 15 or 20 years after their investment. The investors in the Ohio scheme may have a lifetime of IRS fun in store.
Taxable Talk has more.
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SENIORITY DOESN'T COUNT WORTH A DARN IN THE BIG TEN
November 30, 2007
Pennsylvania's most closely guarded secret has leaked. Penn State Coach Joe Paterno's salary is a whopping...
Meanwhile in Iowa, whippersnapper Kirk Ferentz scraped by on $2,765,000.
By the way, Penn State was 8-4 and is going to a bowl game; 6-6 Iowa looks to stay home.
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TWO MORE LOSSES FOR WILE E. COYOTE
November 30, 2007
The Tax Court this week handed defeats in two more cases to attorney Larry D. Harvey on the issue of whether his clients can treat income earned in Antarctica as foreign income eligible for the foreign earned income exclusion. Again the IRS attorney was Randall L. Preheim.
The score: Harvey 0, Preheim 56.
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THE TAX TRAVAILS OF THE THIEVING POLITICIAN
November 29, 2007
George N. "Nick" Wilson was a state senator in Arkansas. He pleaded guilty to racketeering charges for taking kickbacks and defrauding government programs. As part of the plea agreement Mr. Wilson agreed to pay restitution of the money.
Mr. Wilson was a law-abiding taxpayer, as crooks go. He apparently reported $187,382 of graft income in 1994 and another $185,707 in 1995. When he paid the restitution, he filed a claim for a refund of his 1994 and 1995 taxes under the "claim of right doctrine." This doctrine, embodied in Code Sec. 1341, is designed to help taxpayers who have received income that they later find that they have to return - for example, a miscomputed bonus or contract payment.
A federal judge ruled this week that Mr. Wilson is out of luck. To qualify for the "claim of right" rule, A taxpayer has to believe he has an unrestricted right to the funds. As the judge put it:
This Court finds that the Wilsons' reliance on § 1341 must fail in light of Wilson's guilty plea on March 2, 2000, to the RICO violations in Count I of the Superseding Indictment. In pleading guilty, Wilson admitted to knowingly defrauding various state and federal agencies beginning in 1993 and he agreed, in his plea agreement, that the fraud schemes set forth in the racketeering acts were to be combined for sentencing purposes. Wilson further agreed to pay restitution to the governmental agencies he defrauded and his obligation to repay past income as restitution for his criminal acts required in this case that the corresponding income had been earned from the criminal acts. It is clear, then, that the monies received were a result of criminal activity and Wilson cannot establish that he believed that he had an unrestricted right to the income listed in 1994 and 1995.
Pity the poor politician/thief. If he doesn't report his graft income, the IRS can put him away. If he does report it, but gets caught and has to cough up the loot, he is still out the taxes. Awww...
Cite: Wilson, ED-Arkansas, No. 4:06-cv-01628
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CNN: TRY A TAX PLANT
November 29, 2007
It looks like CNN's YouTube Republican debate did a good job of raising the questons on the minds of the average Democratic activist. Planting questions is fine, as long as they're the ones I want planted. The Tax Policy Blog has an excellent set of tax questions (here and here) that should have been planted, but weren't.* I like this one:
The top 1% of taxpayers now pays a larger share of the income tax burden than the bottom 90% combined - that is, more than the share of income taxes paid by every American earning under $100,000 combined. Is there a danger in having so few Americans shouldering the cost of government? Is it possible that the majority will demand more from government because they bear so little of the cost? Does this constitute a Madisonian "tyranny of the majority?"
* I just assume that they weren't asked. I'd rather be waterboarded than actually watch one of these things. Maybe the debate pushed this guy over the edge.
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BANKS IN NEED OF MORE REGULATION?
November 29, 2007
This is really more of a fit for our friends at the Iowa Banking Law Blog, but I have to pass on this post, "Should we regulate banks more?" Shorter version: if hitting it with a hammer didn't work before, don't expect hitting it harder to work better.
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IRS ISSUES INTEREST RATES FOR FIRST QUARTER 2008
November 29, 2007
The IRS has updated its interest rates for underpayments and overpayments for the first quarter of 2008 (IR 2007-193):
- 7% for overpayments
- 6% for corporation overpayments
- 4.5% for corporation overpyaments over $10,000
- 7% for underpayments
- 9% for large corporation underpayments
These are all down one percentage point from the fourth quarter of 2007.
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THE FIRST AMENDMENT FREAKOUT CLAUSE
November 28, 2007
Do booksellers enjoy a special first amendment exception to tax enforcement? A federal judge in wisconsin apparently thinks so.
The IRS subpeonad Amazon.com for information on sales through the online retail outlet made by a Robert D'Angelo. The judge is unprepared to enforce the subpeona because, well, because they sell books. The judge wants the government to do more to demonstrate that it really needs the information, or the internet might get chilly enough to boil:
Taken a step further, if word were to spread over the Net — and it would — that the FBI and the IRS had demanded and received Amazon’s list of customers and their personal purchases, the chilling effect on expressive e-commerce would frost keyboards across America. Fiery rhetoric quickly would follow and the nuances of the subpoena (as actually written and served) would be lost as the cyberdebate roiled itself to a furious boil.
Chilling effect causes fiery rhetoric, leading to a furious boil. And boils hurt.
Orrin Kerr sums up the ruling: "Subpoena Ruled Unconstitutional Because Some Bloggers Are Really Freaked Out By the Bush Administration."
This contrasts with a decision in September by the Eighth Circuit Court of Appeals where tax[ protest leader Robert Schulz failed to get a subpoena to e-Bay quashed on First Amendment grounds. The Eighth Circuit panel ignored Mr. Schulz's "chilling effect" arguments.
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.
I'd put my money on the Eighth Circuit's approach winning out in the end.
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'NO 1099' DOESN'T MEAN 'TAX EXEMPT'
November 28, 2007
The IRS has issued a "Fact Sheet" that explains the taxablity of miscellaneous income, including moonlighting income, gambling winnings, and prizes. Some key bits:
It is a common misconception that if a taxpayer does not receive a Form 1099-MISC or if the income is under $600 per payer, the income is not taxable. There is no minimum amount that a taxpayer may exclude from gross income.
And:
Even if a W-2G is not issued, all gambling winnings must be reported as taxable income regardless of whether any portion is subject to withholding. In addition, taxpayers may be required to pay an estimated tax on the gambling winnings.Losses may be deducted only if the taxpayer itemizes deductions and only if he or she also has gambling winnings. The losses deducted may not be more than the gambling income reported on the return.
So keep track of that moonlighting income, and those deductions.
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AT LEAST HE HIT THE GROUND RUNNING
November 28, 2007
Former IRS Commissioner Mark Everson became president of the American Red Cross on May 29 this year. Apparently he got right to work. Unfortunately, it looks like his efforts were misdirected. He was fired yesterday by the Red Cross board, who explained:
The Board acted quickly after learning that Mr. Everson engaged in a personal relationship with a subordinate employee. It concluded that the situation reflected poor judgment on Mr. Everson's part and diminished his ability to lead the organization in the future.
Sure, you can't tolerate that sort of thing around the office. Still, you can see why he might have thought that was part of the job. As IRS Commissioner, his job required him to have "engaged in a personal relationship" with all of us.
The TaxProf has the authoritative roundup. Tax Grrrl and Don't Mess With Taxes are also on the case.
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SOME THINGS ARE WORSE THAN PAYING TAXES...
November 28, 2007
...and going to prison is surely one of them.
Back in July we told the story of Wisconsin businessman Sheldon Lasky, who pleaded guilty to having his company pay and deduct over $875,000 in personal expenses - which he never bothered to report as income. Yesterday a federal judge sentenced him to 18 months in prison. The judge also hit Mr. Lasky with a $40,000 fine. This is on top of the $351,753 in taxes, $263,814 in civil fines, and $285,733 in interest specified in the plea agreement. This doesn't count the taxes and penalties Wisconsin is likely to impose.
Paying personal expenses with business funds is a sore temptation for the small business owner. Mr. Lasky might be able to explain why it is unwise.
Speaking of unwise, flamboyant California attorney Stephen Yagman got a three-year sentence on federal tax evasion charges yesterday, in spite of (if I were the judge, it would be because of) a four-hour long speech to the court asking for a light sentence. From the LA Times Online:
"A cage went in search of a bird," Yagman told U.S. District Judge Stephen V. Wilson, quoting from Franz Kafka's book "The Zurau Aphorisms." "I'm the bird, and they got me."Wearing a blue suit and a sailboat-decorated tie, Yagman also quoted from, or referred to, Woody Allen, Abraham Lincoln and Socrates during more than four hours of oration. At times, he was remorseful, but for the most part, he was defensive.
Hint to Mr. Yagman: Abe Lincoln's best speech was over in two minutes, not four hours.
Russ Fox has a full rundown at Taxable Talk.
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IRS ISSUES APPLICABLE FEDERAL RATES (AFR) FOR DECEMBER 2007
November 28, 2007
The IRS has issued (Rev. Rul. 2007-70) the minimum interest rates for loans made in December 2007:
-Short Term (demand loans and loans with terms of up to 3 years): 3.88%
-Mid-Term (loans from 3-9 years): 4.13%
-Long-Term (over 9 years): 4.72%
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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WHY SOCIAL SECURITY IS A PROBLEM TODAY
November 28, 2007
More from Howard Gleckman at TaxVox on why we shouldn't ignore Social Security's long-term fiscal imbalance:
For example, the benefit of increasing payroll taxes will decline as time goes by. Today, for every retiree there are three workers to pay those higher taxes. In less than three decades, there will be only two. That will mean unacceptably steep tax hikes for those relatively few who are on the job.
Best read it all.
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2008 STANDARD MILEAGE RATE: 50.5 CENTS
November 27, 2007
The IRS today issued (Rev. Proc. 2007-70) the standard mileage rates for business, charitable and medical travel in 2008. The rates:
Business: 50.5 cents per mile (2007 rate: 48.5)
Charitable: 14 cents per mile (unchanged from 2007)
Medical and moving: 19 cents per mile (2007 rate: 20 cents)
Link: IRS summary of business auto deduction rules
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WHY THE IRS NEEDS TO KEEP 'WHITE-OUT' ON HAND
November 27, 2007
Next time the IRS makes a mistake on a tax notice, they should use White-Out. Or maybe they should just throw the sheet away and start over. That's the lesson of a Tax Court case yesterday.
When the IRS issues a "notice of deficiency," a taxpayer has 90 days to file a Tax Court petition to challenge the tax. The IRS issued such a "90 day letter" to John S. Burke on March 22, 2007, which would give Mr. Burke until June 20 to file with the Tax Court. Mr. Burke filed his petition June 21, which would normally be too late.
Not this time. Mr. Burke said the date on the letter was March 24, not March 22, so he thought he had until June 22 to file. The Tax Court took a good hard look at the letter:
At the hearing on respondent's motion, petitioner produced the original notice of deficiency, and the Court examined it.2 The date of the notice is reasonably legible and it certainly looks like March 24, 2007. However, in using a magnifying glass and a high-powered halogen light to examine the date, it appears that respondent originally stamped the notice March 21, 2007, and then restamped it March 22, 2007. This interpretation is consistent with the Declaration of respondent's employee who was responsible for the mailing of the notice.The stamp-over of the date on the notice of deficiency had no effect on the legibility of either the month or the year or the first digit of the day. However, the stamp-over of the "1" and the "2" of the second digit of the day ended up producing what clearly looks like a "4" to the unaided eye.
The Tax Court said taxpayers aren't required to use a magnifying glass to figure out what the IRS means, so the 90-day period starts March 24.
Cite: Burke, T.C. Summary Opinion 2007-200.
UPDATE: The Tax Prof has more.
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IRS OVERSIGHT BOARD: IRS CAN'T BAIL OUT DAWDLING CONGRESS
November 27, 2007
The IRS Oversight Board says that the IRS can't change it's systems based on what Congress might do to fix the alternative minimum tax. The IRS return processing systems can't be programmed for "what-ifs," according to the board:
These systems can only accommodate one programming option without introducing excessive risk to the filing season. Above all else, the IRS must ensure that its systems can process tax returns under current law. The IRS believes that implementing program changes into these systems that do not reflect current law could jeopardize this responsibility. The Board concurs.
The Oversight Board's views were stated in a letter to Senators Baucus and Grassley, the lead Senate taxwriters.
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FAIR TAX - AN OXYMORON?
November 27, 2007
Business-school prof Hank Adler has posted a lengthy analysis in opposition to the "Fair tax" national retail sales tax plan (via Hewitt).
My views of the plan are posted here and here.
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THE LIBERAL CASE FOR SOCIAL SECURITY REFORM
November 27, 2007
Surprisingly, the issue of Social Security solvency has cropped up in the Democratic presidential nomination campaign. Unfortunately, the debate seems to be whether to raise taxes, or to declare the topic taboo.
Howard Gleckman at TaxVox says ignoring the problem is unwise:
What is especially interesting is the reaction of the Democratic Left. The New York Times' Paul Krugman, for instance, calls Obama a "sucker" for even talking about Social Security. For him, "Social Security isn't a big problem that demands a solution, it's a small problem."...
Years ago, Brookings Institution scholar Belle Sawhill warned liberals about the long-term entitlement problem. Left unchecked, she reminded them, entitlements would absorb funds for programs that were important to Democrats, such as education and children's health. In recent months, we have learned how hard it is for a Democratic Congress to boost spending for these programs, even while the Social Security surplus masks the real deficit. Over the next decade, as the retirement program's annual benefits inexorably exceed its revenues, Democrats will learn just how right Sawhill was, and how wrong Krugman is.
It is baffling that "progressives" are so wedded to a program that taxes the working population to transfer cash, with no means-testing, to a comparatively well-off part of the population. Maybe they think they'll get it back with the estate tax.
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START THE CAMPAIGNING NOW!
November 26, 2007
Tired of the caucuses? Who isn't, anyway? We will be starting a new campaign tomorrow, when we open the polls for our annual "Taxpayer of the Year" award. Stay tuned!
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IRS YANKS EXEMPT STATUS OF 'DOWN-PAYMENT ASSISTANCE' OUTFIT
November 26, 2007
At least one down-payment assistance shop has had its tax exemption pulled by the IRS. A private letter ruling released today. The unnamed organization lost its exemption retroactively, perhaps to its inception, and now will have to file corporation tax returns.
These outfits should have been seen as a warning sign of the overheated credit markets. They came into pay when a would-be homebuyer had no money for a down payment. The seller would "contribute" the down payment to a down-payment assistance organization as a "contribution." The contribution would then be passed on to the buyer as if it were a real down payment. The lender either never found out, or they winked at it to get the loan closed.
The ruling explains the revocation:
We have determined that you are not operating exclusively for charitable or educational purposes. A substantial part of your activities consists of providing down payment assistance to home buyers. To finance the assistance you rely on home sellers and other real-estate related businesses that stand to benefit from these down payment assistance transactions. Your receipt of payment from the home seller corresponds to the amount of the down payment assistance provided in substantially all of your down payment assistance transactions. The manner in which you operate demonstrates you are operated primarily to further your insiders' business interests. Therefore, you are operated for a substantial nonexempt purpose. In addition, your operations further the private interests of the persons that finance your activities. Accordingly, you are not operated exclusively for exempt purposes described in section 501(c)(3).
The IRS said this would happen when it issued Rev. Rul. 2006-27. Any seller who was foolish enough to deduct their "contribution" can expect to hear from the IRS eventually.
Cite: LTR 200747024
Prior coverage:
FEDS SUE 'DOWN PAYMENT ASSISTANCE' OUTFIT
IRS: DOWN-PAYMENT ASSISTANCE OUTFITS AREN'T CHARITIES
DOWN PAYMENT ASSISTANCE OUTFITS FIGHT BACK
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LATE FLURRY OF PAYMENTS PUTS IOWA AMNESTY OVER THE TOP
November 26, 2007
Last-minute payments raised the total take of the Iowa Tax Amnesty to $26 million, according to figures released last week by the Iowa Department of Revenue, reports the Cedar Rapids Gazette. This means approximately $13 million arrived in the mail postmarked by the October 31 deadline, as the amount collected by the deadline was only $13 million.
The final collections exceeded the $16 million budgeted by the state, but fell short of both the legislature's expectations and the 1986 amnesty's take. Of course, there's no measuring of how much of that would have been collected eventually without the amnesty, or how much interest and penalty payments were reduced by the amnesty. Finally, who can ever tell how much tax went unpaid because of the bruised feelings of sensitive tax delinquents?
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WHITE LINE FEVER
November 21, 2007
The Tax Update is on the road for Thanksgiving, so posting will be spotty for the rest of the week. We hope you enjoy the festivities.
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THE TRADE OR BUSINESS OF FEEDING SLOT MACHINES
November 20, 2007
Gambling losses are normally deductible only to the extent of gambling winnings, and only as an itemized deduction. Serious gamblers try to to claim they are in the "trade or business" of gambling, enabling them to deduct their losses above the line, getting to a better tax result. Few succeed, but Minnesota trucker/slot feeder Linda Myers did yesterday in Tax Court.
We defer to gambling tax maven Russ Fox for further analysis. Russ says that while the decision is a summary opinion and can't be used as precedent, "It does, though, show the factors and issues that you will need to prevail in a case where you maintain multiple businesses and want to be considered as a professional gambler."
Cite: Myers, T.C. Summary Opinion 2007-194
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SAVE THE PLANET SOME OTHER WAY
November 20, 2007
Congressional zeal to conserve energy and save the planet is second only to its desire to serve special interests. That's why the hybrid vehicle credit starts to go away after a carmaker has sold 60,000 hybrid cars. After all, if you give people the credit for buying the cars they actually want, they might not buy any from the Big Three, with their unionized workforce, enormous unfunded benefits, and powerful friends in Congress.
Toyota hit the 60,000 car limit in the 2006, and its cars stopped qualifying for the credit October 1, 2007.
Now Honda has hit the 60,000 sales mark. Starting January 1 Honda vehicles will qualify for a reduced credit, and after 2008, for no credit at all.
Ford, GM, Nissan and Mazda vehicles continue to qualify for the full credit.
Link: Current list of qualifying vehicles.
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NEED THANKSGIVING MONEY?
November 20, 2007
The IRS says it has refund checks for $110 million that it can't deliver. If you never got your refund, visit the IRS "Where's my Refund?" page for some shopping money.
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TAX COURT AVERTS ANARCHY
November 19, 2007
Bounty hunting has never really been part of the income tax law, but Creed J. Pearson gave it the good college try in the Tax Court:
Petitioner strongly opposes the beliefs and actions of a particular organization (the organization), and he asks that we allow him to audit the Organization and pay the taxes he owes out of the proceeds of that audit, even though petitioner’s tax liability is not related to the Organization.
The Tax Court didn't take Mr. Pearson up on his offer, but for a fleeting moment I wished they had. If private sector tax preparers were turned loose on the taxpaying public with the opportunity to audit returns and keep some of the proceeds, we could make a pretty good living, at least until all of us were brutally murdered by our relatives and neighbors.
Still, the social fabric would be unlikely to survive if we could all audit everyone else in lieu of paying our own taxes. Hobbes' description of a "war of all against all" describes life under such a system:
Whatsoever therefore is consequent to a time of war, where every man is enemy to every man, the same consequent to the time wherein men live without other security than what their own strength and their own invention shall furnish them withal. In such condition there is no place for industry, because the fruit thereof is uncertain: and consequently no culture of the earth; no navigation, nor use of the commodities that may be imported by sea; no commodious building; no instruments of moving and removing such things as require much force; no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short.
And refunds would take forever.
The Tax Court never names "the Organization" that Mr. Pearson so dislikes, but I think I have a pretty good guess.
Cite: Creed J. Pearson, T.C. Memo 2007-341.
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IF TRUTH IN ADVERTISING APPLIED TO ECONOMIC DEVELOPMENT AGENCIES
November 19, 2007
News item: State approves funding for 14 businesses; 1,000 new jobs expected.
Every time the state announces how many new jobs they've "created" by bribing businesses with tax dollars extracted from other businesses, you wish they had to to cover the other side of the story. It would look something like this:
Des Moines (AP). Economic development officials today called a press conference to discuss the jobs lost this week as a result of the state's economic development activities."Yes, that sucking sound you hear is the sound of jobs leaving Sioux City for South Dakota," said economic development director Mike Tramontina. "Our 'bribes for business' program has had disappointing results when compared to South Dakota's 'no income tax' economic development program."
Tramontina cited the state's highest-in-the-nation 12% corporate tax rate and its 8.98% top individual rate as important causes of the job losses. "And if that weren't bad enough," said the Director, "the laws are so brutally complex here that nobody wants to hear about our dandy tax credits."
Tramontina also pointed out that when some businesses are bribed, other businesses suffer. "Sure, I can bribe somebody to open a bar in a rehabbed building. But then I have to find somebody else to bribe when the unsubsidized bar down the street closes because of the state-sponsored competition. So we create new jobs at the new bar, but we lose the jobs at the old one. It's like treading water."
He also pointed out that when one business gets a property tax exemption, all of the neighboring businesses have to take up the slack to pay for services for the new one. "Sombody always says 'the heck with it' and moves to South Dakota or someplace warm"
Tramontina also set aside a part of his press conference to address the dozens of businesses that don't even consider moving to Iowa. "Sure, I can brag about some obscure movie being made in Burlington. But we get far less than our share of businesses because of our tax structure. Businesses aren't stupid. They know that if they come here for the bribes, we'll be taxing them soon enough to bribe somebody else. It's like a girl who sees a married guy trying to pick her up in a bar by buying her drinks with his wife's money. If she's smart, she'll know that soon enough he'd dump her for some other new girl, while she pays the tab."
Tramontina finished his conference by outlining proposals to cement Iowa's standing as the worst state for new businesses. He boasted how proposals to tax corporations on a "combined" basis will apply the highest corporate tax rate not only to corporations doing business in Iowa, but also to their corporate siblings. "That will make sure the whole corporate group stays the heck away from Iowa."
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2008 FICA BASE: $102,000
November 19, 2007
The IRS has announced (Notice 2007-92) that the FICA base for 2008 will be $102,000. That means the employer and employee FICA tax of 6.2% will max out at $6,324. The $102,000 is also the ceiling for the 12.4% social security portion of the self-employment tax.
The base was $97,500 for 2007.
There is no ceiling for the 1.45% (2.9% for self-employeds) Medicare tax.
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'LAWMAN' SHOT DOWN AGAIN
November 19, 2007
The "Lawmen" organization was a Michigan outfit that sold documents that were supposed to get you out of tax trouble. The animated figure at the top of this post vouched for the efficacy of the documents. They provided everything from "Statement of Facts" letter for your IRS agent for $75 to "Winning in Court" (free!).
You get what you pay for. Charles Conces, the founder of the Lawmen, attracted the unwelcome attention of the IRS, who eventually shut him down and ordered him to turn over his customer lists. Mr. Conces declined to cooperate, prompting a judge to jail him for contempt of court. A federal appeals court upheld the contempt order Friday.
Apparently that little cowboy was shooting blanks.
Cite: US v. Conces, No. 07-1343 (CA-6, 11/16/2007)
Prior Tax Update Coverage:
LAWMEN MISFIRE
LAWMEN NEED A CLUEMAN
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THERE'S A CAVITY IN YOUR TAX RETURN
November 19, 2007
Belleville, Illinois dentist Gerald Dortch practiced poor mental hygiene when he did his tax planning. Mr. Dortch has pleaded guilty to skimming checks from his dental practice and depositing them in his personal accounts to evade taxes. He also withheld taxes from employees without forwarding them to the IRS -- an almost foolproof way to get the IRS to visit.
Russ Fox rounds up the week in tax crime at Taxable Talk.
UPDATE, MARCH 17, 2008: Six Months in prison.
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ACCOUNTANTS: OUTRIDERS OF PROGRESS!
November 16, 2007
Finally - a woman who understands us:
Accounting is the inherited wealth of generations of smart businessmen trying to make themselves smarter. You may think our great economic legacy is the factories and railroads and steel mills that litter the landscape, but it's not; it's the system by which we tell ourselves what we've got. Europe had all that other stuff basically bombed into nonexistance, and built it all back in a couple of decades. Places without decent accounting find it hard to get anything much more complicated than a Yak farm up and running.
We accountants are important! Like good sewer engineers, maybe, but important!
Actually, this quote is part of a larger point Megan McArdle makes about her travels in southeast Asia. Many good posts; just go to her site and scroll.
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HOW NOT TO FARM THE GOVERNMENT
November 16, 2007
Kansas is a prosperous agricultural state, but you can't try to raise just anything. Just ask Dennis and Margaret Knudsen.
These Liberal residents (Liberals? Libertarians?) took a fling at raising exotic animals. It's not for the faint of heart, as the Tax Court explains:
* Petitioners lost many bird eggs and chicks after an employee brought her young child into the bird breeding facility.* Wind storms caused eye problems for the Rocky Mountain goats, which affected their breeding.
* A drought in Kansas negatively affected the breeding of many animals.
* A very expensive bird escaped after an employee left the bird cage open.
* A heater failed on a very cold night, resulting in the deaths of two bongos.
* Two Clydesdale horses died in a barn fire.
* Several gemsbok crashed into a fence during the barn fire, and one of them was killed.
* Several others lost market value after breaking their horns.
* A coyote killed a Black Buck antelope.
* A mountain lion killed an East African crowned crane and its chick.
* A male addax died during a windstorm.
* A giraffe died after slipping on wet ground.
* A giraffe calf died as a result of the cold weather on the night of its birth.
From 1995 through 2002, the Knudsens deducted over $2.9 million in taxable losses from the farm -- not surpising, considering their Job-like litany of mishaps. Fortunately, Mr. Knudsen has a good day job as aon OB-Gyn physician. Unfortunately, the IRS came calling.
The tax law's "hobby loss" rules (Section 183) disallow business losses from businesses "not engaged for profit." Such losses carry forward against the day, if ever, that the business makes money. The Tax Court evaluated whether the Knudsen's farming operation was a profit-seeking venture using nine tests in the section 183 regulations. The court decided that the farm passed one of the tests, failed six, and tied two. The Knudsens lost.
The Moral: If you want to farm the government, forget the giraffes and alpacas; best stick with the time-tested corn subsidy and CRP programs.
Taxable Talk has more.
Cite: Knudsen, T.C. Memo. 2007-340
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IOWAN TESTIFIES AGAINST ESTATE TAX
November 16, 2007
Eugene Sukup, the founder of Sheffield's Sukup Manufacturing Company, testified against the estate tax before the Senate Finance Committee on Wednesday:
If my wife Mary and I died today, we estimate that our estate tax liability would be somewhere between $15 and $20 million dollars. The only way for my sons to pay that tax would be to sell off the business.Folks will tell you that you can "avoid" the tax. Well, maybe that's true in some cases, but it also involves extremely high financial planning costs including expensive life insurance policies that businesses pay year in and year out. Money that we put into life insurance policies and other financial planning tools to avoid the tax is money that we could have been putting into the business -- hiring more employees and expanding into other states.
Furthermore, it's nearly impossible to plan for a tax that changes every year. Under current law, the exemption for the tax is $2 million with a top rate of 45 percent. In 2010, the tax is repealed. But, in 2011 the top tax rate goes back up to 55 percent and the exemption drops back down to $1 million. The uncertainty of the tax means that we have to plan for the worst case scenario, costing us even more money.
Mr. Sukup's testimony highlights two of the biggest problems with the current estate tax: high rates and continuously changing rules. In their overreaching attempt to force a permanent repeal of the estate tax, a Republican Congress enacted a phase-out of the estate tax that only makes it disappear for one year. Absent new legislation, the estate tax reappears full-blown in 2011.
Even if you favor an estate tax, it's hard to justify one with such complexity and baroque rules as the current structure, with its interplay with gift taxes, the income tax, and the "generation-skipping tax" for bequests and gifts to grandchildren. If you support a confiscatory tax, there's no reason to make it complex, too.
HIGH RATES ALWAYS BREED COMPLEXITY AND LOOPHOLES
Yet the complexity is an inevitable result of such high rates. High rates provide a huge incentive for taxpayers to carve out exemptions for themselves, which add complexity, which only increases when the exemptions are trimmed back to close "loopholes."
To me the most convincing argument for the estate tax is as a backup for the income tax. A 15% estate tax with a generous exemption amount would tie in with the 15% capital gain rate; amounts taxed under such a system would have their basis stepped up, simplifying the administration of the income tax for the next generation.
Warren Buffet also testified. He thinks the estate tax is just dandy. His arguments would be more convincing if he would name the IRS the residual beneficiary of his own estate. While he worries about dynasties developing, there is a time-tested mechanism for destroying inherited wealth without an estate tax. They're called "beneficiaries."
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UTAH CAN BE A ROUGH PLACE
November 16, 2007
The saga of Leslie and Dee Mower took a strange and tragic turn yesterday with the murder of Ms. Mower's husband in Sandy, Utah yesterday.
While they were married, the Mowers built the Neways multi-level marketing empire, which they sold after their 2005 tax evasion convictions. The couple divorced around 2001, before the tax charges were filed.
The Deseret News reports on the murder:
A Springville man who is credited with launching the UVSC club hockey program was shot multiple times and killed in the parking lot of a Village Inn restaurant Thursday.Kenneth G. Dolezsar, 50, was killed just before 7 a.m. He had just arrived at the restaurant at 10600 S. 150 West, where he reportedly was going to meet a friend or acquaintance for breakfast, said Sandy Police Sgt. Victor Quezada.
...
The entire incident was witnessed by a third man who was sitting in his car, apparently unnoticed by the other two, waiting for a friend to join him for breakfast, Quezada said.
The gunman and the victim began arguing in front of the third man's car and on the sidewalk at the side of the restaurant. At one point, Dolezsar started backing up with his hands in the air as if to say he didn't want any trouble, Quezada said. That's when the gunman pulled out a weapon and fired at least three times, he said.
Very strange and sad.
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HEADS THEY WIN, TAILS YOU LOSE IN PASSIVE LOSS RULES
November 15, 2007
About 10 seconds after President Reagan signed the passive loss rules into law in 1986, tax scientists began tinkering in their laboratories with "passive income generators," fondly known as "PIGs," to enable taxpayers to use passive losses that would otherwise be deferred.
As we discussed yesterday, the passive loss rules keep you from deducting losses from "passive" businesses, including most real estate rentals, except to the extent of "passive" income. Taxpayers who rented property to their controlled businesses swiftly raised their rental rates to themselves so that their properties suddenly produced taxable passive income, offsetting their otherwise deferred passive losses.
Gregory J. Farris and his law partner Mark Susi ran a real estate partnership that owned an office building in Gardiner, Maine. The partnership rented an office to the law firm of Farris and Susi. The lease coincidentally generated taxable income, which Mr. Farris treated as passive loss on his 1040 to enable him to offset other passive losses.
Unfortunately for Mr. Farris, the IRS long ago issued Reg. Sec. 1.469-2(f)(6), which says:
Property rented to a nonpassive activity. An amount of the taxpayer's gross rental activity income for the taxable year from an item of property equal to the net rental activity income for the year from that item of property is treated as not from a passive activity if the property --(i) Is rented for use in a trade or business activity * * * in which the taxpayer materially participates (within the meaning of § 1.469-5T) * * * for the taxable year.
As the Tax Court explains,
Simply put, the regulation recharacterizes a taxpayer's rental income from property rented for use in a trade or business in which the taxpayer materially participates as nonpassive income and therefore not taken into account in the computation of the taxpayer's passive activity loss.
Mr. Farris argued that his lease was "grandfathered" under rules that applied to existing leases when the regulation was issued. The Tax Court didn't see things that way; to be grandfathererd, the lease had to be in place on February 19, 1988. Unfortunately, the law firm had been incorporated in 1992; it had operated before then as a partnership. The Tax Court said it couldn't therefore be the same lease, and the income couldn't be treated as passive.
The moral? If you want a lease to your own business to be a PIG, it needs to be an old PIG.
Cite: Farris, T.C. Summ. Op. 2007-192.
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2008 NISSAN ALTIMA QUALIFIES FOR ALTERNATIVE VEHICLE CREDIT
November 15, 2007
The IRS has certified the 2008 Nissan Altima Hybrid for a $2,350 hybrid car tax credit. Claim the credit onf form 8910.
Links:
Full list of qualifying vehicles
Summary of the Credit for Qualified Hybrid Vehicles
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BAD DAY FOR BARRINGER THE BARRISTER
November 15, 2007
Attorney Jerold W. Barringer probably won't list Federal Appeals Judge Easterbrook as a reference on his next resume.
Mr. Barringer has represented convicted tax evader Denny Patridge in civil and criminal tax litigation, losing every time. And he lost his appeal before the Seventh Circuit Court of Appeals yesterday in a big way. From Judge Easterbrook's opinion:
Jerold W. Barringer represented Patridge at trial, in the Tax Court, and during the three appeals to this court. He has performed below the standard of a pro se litigant; we have serious doubt about his fitness to practice law. The problem is not simply his inability to distinguish between plausible and preposterous arguments. It is his disdain for the norms of legal practice (19 issues indeed!) and the rules of procedure.
Discussing the "statement of facts" in Mr. Barringer's brief, Judge Easterbrook says:
This contains not a single fact and verges on illiteracy. One might think that Barringer had confused the "Statement of Facts" section with the "Summary of Argument" required by Rule 28(a)(8), except that this passage does not contain any argument (it is argument free, though full of assertion) and is immediately followed by a six-page-long "SUMMARY OF APPELLANT'S ARGUMENTS".
The tongue-lashing is the least of it:
Members of the bar must be held to standards at least as high as those of unrepresented litigants. Barringer is a recidivist; he ignored our 2006 decision reminding him that taxpayers cannot use a request for a collection hearing to contest their substantive liability. We therefore give Barringer 14 days to show cause why he should not be fined $10,000 for his frivolous arguments and noncompliance with the Rules, and why he should not be suspended from practice until he demonstrates an ability to litigate an appeal competently and responsibly.
But your honor, how does he get better if he doesn't practice?
Mr. Barringer appears to be an Illinois attorney (note his 2001 censure by the Illinois Supreme court), but he has a far-flung client base. He unsuccessfully defended Floridian Jo Hovind, one of the operaters of "Creation Science Evangelism Ministry," on tax evasion charges. The ministry operated a theme park based on the theory that dinosaurs and humans co-existed back in the old days. And we think our deer problem is bad...
Via Orin Kerr at Volokh. The TaxProf has more.
Cite: U.S. vs. Patridge, No. 06-3635 and No. 06-3785 (CA-7)
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COURT SHUTS DOWN 'PURE TRUST' PROMOTER WITH IOWA CUSTOMERS
November 15, 2007
A federal judge in Las Vegas permanently shut down a Las Vegas business that sold 'pure trust' schemes in at least eight states, including Iowa. For $1,000 to $2,000 a throw, the government said James DiLullo would set up trusts to conceal income - trusts he said the IRS could not legally investigate. From the federal complaint:
When customers contact DiLullo regarding IRS inquiries about their trusts, DiLullo instructs the customers to ignore the IRS correspondence or throw it away. DiLullo advised one customer by e-mail in October of 2002 that the "IRS was committing mail-fraud" by sending correspondence regarding an investigation of several of the customers' trusts. He further advised that "[y]ou cannot respond to these or it looks like YOU are the correspondent and they are off the hook. These are not nice people to work with—so don’t!!!" DiLullo further advised this customer that the IRS "will go away because YOU do not give them information about what they have no business asking."
"Ignore them and they'll go away" is never good advice in dealing with the IRS.
The Moral: You can't make your taxes go away using "pure" trusts, "constitutional common law trusts," or anything of the sort -- no matter what the salesman says.
Prior Coverage: SOME IOWANS MADE A BLUNDER
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PASSIVE LOSSES: MARK YOUR CALENDAR (CAREFULLY)
November 14, 2007
A Tax Court case issued yesterday illustrates how hard it can be to get around the anti-taxpayer tilt of the "passive loss rules." These rules were enacted in 1986 to shut down the retail tax shelter industry by limiting your ability to deduct losses from businesses you don't actually work for.
Limits on real estate losses are key to the passive loss rules. For most taxpayers, any losses from real estate are automatically "passive," so you can't use real estate rental losses to offset your salary or interest income. There are two important exceptions to this rule:
- If you "actively" participate in a rental activity, you can deduct up to $25,000 of real estate losses; your ability to deduct these losses begins to phase out when adjusted gross income reaches $100,000, and disappears completely at $150,000 AGI.
- If you are a "real estate professional," you can deduct rental real estate losses if you "materially participate" in the real estate activity. To be a real estate professional, you have to spend 750 or more hours annually in the real estate business, and you have to spend more time in real estate than in any other business activity (a more complete discription of "material participation" is at the bottom of this post).
The $186,487 part-time job
Carolyn Fenderson worked for Symantec, the software company, in 2002. The Tax Court describes her job:
In 2002 petitioner's compensation from Symantec totaled $186,487. Some of the commissions included in that amount relate to sales of software licenses made in years prior to 2002. According to petitioner, she spent about 15 hours a week working for Symantec during 2002. She maintained a calendar that tracked her activities and appointments in connection with her employment at Symantec, which ended during 2003.
Ms. Fenderson, by her own account, was busy in 2002, operating 10 residential real estate properties. She claimed "real estate professional" status and said she was eligible to deduct the loss.
The Tax Court's evaluation of her argument illustrates how the courts look at the evidence of participation in an activity under the passive loss rules. Ms. Fenderson had to demonstrate that she spent at least 750 hours working on her properties and that she spent more time on them than she did for her regular job. She had no detailed time records for either job. The Court had no evidence as to the time spent on her Symantec job, so they assumed "without finding" that she was correct in saying she worked 15 hours a week there; since 15 hours x 52 weeks is 780, she would need at least that many real estate hours to qualify as a real estate pro.
To document her real estate time, Ms. Fenderson worked up a summary of hours based on her appointment calendar. The tax court found her summary wanting:
A number of inconsistencies between items shown on petitioner's 2002 return, her calendar, and the exhibits were brought out during petitioner's cross-examination at trial. Furthermore, upon careful review of those documents, we are unable to reconcile estimates of time shown on Exhibits 3-J and 4-P with entries made in petitioner's calendar. On many dates, the estimate of time spent on a particular activity exceeds the amount of time shown on that calendar for that date.
The court adjusted down her time based on the inconsistencies they found in the calendar, and decided she could only document 759 real estate hours - 21 hours less than her Symantec time.
The Moral? If you say you have a $180,000 part-time job, the tax law is likely to look pretty hard at your claims that you work more than that on your side job.
Cite: Fenderson v. Commissioner; T.C. Summ. Op. 2007-191
MATERIAL PARTICIPATION BASICS
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THE POOR YOU WILL ALWAYS HAVE WITH YOU, BUT THEY WON'T BE THE SAME PEOPLE
November 14, 2007
To hear some of the would-be presidents running around Iowa, America has become a nation of lowly wage slaves living in permanent squalor while Bill Gates and hedge fund managers buy new yachts where they fish for endangered whales on lines baited with escargot.
A Treasury report issued this week puts things in perspective. The report notes that people move up and down the income scale during their lives.
One finding of the study:
The composition of the very top income groups changes dramatically over time. Less than half (40 percent or 43 percent depending on the measure) of those in the top 1 percent in 1996 were still in the top 1 percent in 2005. Only about 25 percent of the individuals in the top 1/100th percent in 1996 remained in the top 1/100th percent in 2005.
This illustrates a point we have made on how many of those who hit the top income levels do so based on a one-time event -- often through the sale of a family business or a business they started. That's one reason I find misguided arguments to increase the effective tax rate on the top 5000 or so taxpayers; they aren't the same people every year, and attempts to go after them are likely to do more harm than good.
More at the TaxProf Blog. Arnold Kling at Econlog ties the findings together with other studies showing similar results, and how they vary by race.
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ROADRUNNER 54, WILE E. COYOTE 0
November 14, 2007
The Tax Court decided two more cases yesterday on whether Antarctica is a foreign country for U.S. tax purposes. As in the prior 52 cases litigated by Larry D. Harvey on behalf of Americans who had been stationed on the cold continent, the court ruled the taxpayer doesn't qualify for the foreign earned income exclusion. These cases were again litigated for the IRS by Mr. Harvey's nemesis, Randall L. Preheim.
Mr. Harvey will have to reorder from the Acme catalog.
Cites:
Barber, T.C. Memo 2007-338
Swanson, T.C. Memo 2007-337
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STATES DON'T HAVE TO HAVE TAX GIVEAWAYS
November 13, 2007
It's man bites dog time:
New Jersey Gov. Corzine conditionally vetoed a proposed tax break yesterday sought by major media companies and those looking to lure high-tech firms to the state, but the bill's sponsor said he would look into overriding Corzine's move.
Shocking - a politician saying no to bribes to private companies. The Tax Policy blog praises the veto:
Special tax provisions for specific companies or industries are not principles of sound tax policy. And they are not a free lunch, as Corzine states. They come at the expense of higher taxes on others or lower spending, or they create an unhealthy type of tax competition where states compete with one another to offer companies the biggest handout.
Dr. Maule also weighs in.
Iowa remains a happy hunting ground for wealthy companies seeking money from the rest of us. From the Des Moines Register:
- Rapidly growing Rockwell Collins wants to add 310 jobs in Cedar Rapids that pay an average of $77,800 annually. Rockwell plans to spend $13.7 million to lease a building and remodel and equip it. The company seeks $8.2 million in state tax credits, the largest amount of which is for research and development.- Google, which is building a $300 million server farm in Council Bluffs, seeks $1.4 million in state tax credits. The Internet search company also seeks $936,000 for worker training. Local governments plan to provide Google $33 million in property tax exemptions over 20 years.
- Monsanto Co. seeks $10 million in state tax credits for its proposed $231.4 million expansion at existing facilities in Grinnell, Boone, Ankeny and Williamsburg. The company also plans to build a $90.5 million seed production plant in Black Hawk County.
So Iowa continues to tax its existing businesses and employees to lure and subsidize their wealthy and profitable competitors. And it's working so well.
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THE FREIGHTLINER OF YOUR DREAMS
November 13, 2007
If you like well-used old Freightliners, make your travel plans for Herrin, Illinois tomorrow. The IRS has an auction on a truck you aren't likely to find anywhere else:
1983 Freightliner Tractor with Trailer and a 1981 55' RO Stinger Boom. Model TC110-55
VIN #1FUPYDB9D9222272
Odometer Reading-824,985
You could have the coolest Stinger Boom on the block!
Herrin is the hometown of Roth & Company's own Jay Anderson. When this truck was first placed in service, Jay was a young college student earning side money in a grocery store while pursuing his dream of accounting fame and fortune, so in a very remote way this truck is a bit of Roth & Company history. Okay, that's a stretch, but don't you want to see if you can push the odometer to 1,000,000 miles?
But if you go down there, be careful - Herrin is in Bloody Williamson County.
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DO WHAT YOU WANT TO THE DOGS, BUT PAY YOUR TAXES
November 13, 2007
A strange story out of Hawaii:
HONOLULU -- The Hawaiian Humane Society accused an Oahu woman of running a puppy mill with dozens of dogs jammed into a roach- and feces-filled townhouse.But this week a circuit court judge dismissed all 25 counts of animal cruelty.
But the long arm of the tax law had no fear of a stinky apartment:
On Saturday, another judge sentenced Kagan to five years probation and 100 hours of community service in a tax evasion case, which was for "failure to report income" from the sale of dogs in 2001 and 2002.
I would rather be in jail than an apartment with 25 dogs, so maybe that qualifies as a harsh sentence.
The TaxDog has yet to comment on this case.
(TaxDog link courtesy of Robert Flach.)
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