Tax Update Blog: January 2008 Archives
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CELEBRATE IN YOUR OWN WAY
January 31, 2008
In case you've missed it, today is Earned Income Tax Credit Awareness Day. Drink responsibly.
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FERTILE FIELDS OF TAX FALSEHOOD
January 31, 2008
A co-owner of an injection molding company in Fertile, Iowa, pleaded guilty Tuesday to federal tax charges. The charges against Thomas Dillavou of Lake Mills arose from a scheme to divert money from the corporation for offshore investments and to pay personal expenses. Mr. Dillavou admitted diverting $598,000 in corporate funds.
It appears that he first got the attention of the IRS by getting behind on employment taxes. From a U.S. Attorney document in the case:
Plastic Injection Molders, Inc (PIM) is a plastic molding company owned 50% each by Thomas Dillavou and Gregory Knopf. PJM has been in operation since 1986. In 1993, the defendent entered into an Offer in Compromise agreement with the Internal Revenue Service ("IRS"), on behalf of PIM, pursuant to which PIM agreed to pay delinquent employment taxes over a five year period. During the years 1997 through 2000, the defendant diverted approximately $598,172 of corporate profits from PIM and spent the money in a variety of ways, including: a personal investment scheme overseas; paying for repairs and remodeling for his personal residence; making payments for personal loans and paying for vaction expenses, among other things.
Mr. Dillavou pleaded guilty to two counts of a five count indictment. Three other counts, including one for defrauding a bank, were dropped. Based on the agreed tax loss of $153,488, an agreed 2-step enhancement for use of "sophisticated means" in the fraud, and an agreed 2-step reduction for "acceptance of responsibility," the federal sentencing guidelines indicate a prison term of 21-27 months.
Diverting corporate funds to personal use and "borrowing" withheld payroll taxes from the IRS are universal temptations for business owners -- but they are universally unwise, as Mr. Dillavou is learning the hard way. If I were his business partner, I would have other reasons to be upset at the diversion of so much money from the company.
In addition to the prison time, expect the IRS to insist on collecting the back taxes, and probably additional civil penalties. Iowa tax authorities might also get involved. Sentencing is scheduled for April 23.
Links:
Indictment (plea was to counts 1 and 4)
U.S. Attorney Plea Notification
Plea Agreement
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WESLEY WAITS
January 31, 2008
The jury in the Wesley Snipes tax fraud trial completed its first day of deliberation today. The only news was that the jury asked the judge what "conspiracy" means. The judge will respond today after consulting the attorneys on both sides. Ocala.com has the details.
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SNIPES FATE IN JURY'S HANDS
January 30, 2008
The Wesley Snipes tax evasion case went to the jury yesterday following closing arguments.
The defense pictured Wesley Snipes attempts to pay taxes with bad checks and his groundless refund claims as examples of what is great about America. From Ocala.com:
"The liberty to ask questions ... the liberty to challenge your government. The liberty to engage your government. These liberties are American liberties," Barnes said. "The Liberty Bell may be cracked in Philadelphia, but it can still be heard in Ocala."
Pretty much a modern-day Patrick Henry. Or not. While the defense reached high vistas of rhetoric, it also tried to set a pretty low bar for acceptable conduct:
"It may have been protest," he said of filings by Snipes and by Kahn on Snipes' behalf. "Protest is not criminal. It may have been disagreement. Disagreement is not criminal. It may have been frivolous. Frivolous is not fraud."David Wilson, the attorney for Mr. Snipes' co-defendant, Douglas Rosile, also aimed low:
"There's a wide gulf between 'without merit' and 'fraudulent...Meritless, yeah. Unlawful, no."
He went on:
"Doug Rosile was nothing more than an expendable tool who could easily be replaced by American Rights Litigators," he said.
When your own defense lawyer says your position is a joke, and you are a tool, that's not a great omen.
Mr. Snipes defense team also slipped the "he has suffered enough" plea into their arguments, according to the New York Times:
Mr. Barnes, the defense lawyer, said that Mr. Snipes owed so much that it would take him two decades of work to pay the amount. If convicted, Mr. Snipes faces up to 16 years in prison.
You never know what a jury is going to do, but were I in Mr. Snipes shoes, I wouldn't be feeling very confident.
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COLD AGAIN CARNIVAL
January 30, 2008
The mercury has fallen back to the single digits, so head south to Texas for Kay Bell's Carnival of Taxes, a roundup of tax blog posts.
UPDATE: The new edition of the Cavalcade of Risk is also up. The Cavalcade rounds up insurance and risk-managment posts. Don't miss Insureblog's discussion of "Silly Candidate Tricks."
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BAD NEWS FOR WAYNE
January 30, 2008
If, like one of my colleagues, you plan to move to Canada if (your most disliked nominee here) is elected in November, note this from the TaxProf: The Case For Raising Taxes On Canada's Rich.
Canada should raise federal personal income tax rates on the rich to close the growing income gap and to bring them more in line with those in the U.S., says a study released today by the Alternative Federal Budget project of the Canadian Centre for Policy Alternatives. The study, by economist Andrew Jackson, points out that Canada's top federal tax rate is considerably lower than the U.S.: The top U.S. tax rate is 35% on incomes over $326,000 and 33% on incomes over $150,000; Canada's top federal income tax rate is 29% on incomes of over $116,000.
Andrew Jackson? He never was much of an economist.
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EFFECTIVE-DATING... WITH STIMULUS!
January 29, 2008
Now there's a headline that will bring in some folks Googling for something I won't be addressing here. To proceed...
The House of Representatives today passed its version of the bipartisan "stimulus" package. It includes rebates of $600 for most singles and $1,200 for most couples. It also gives us the effective dates and details for the "business" portions of the bill.
50% Bonus depreciation will use the same rules as the post-9/11 bonus depreciation, but will apply for property placed in service in calendar 2008. This will allow taxpayers to write off half of the cost of such property in the year of purchase, with the rest depreciated as usual. A special provision covers non-commercial aircraft and property with a life of 20 years or less that takes more than a year to build; such property placed in service before January 1, 2010 will qualify for bonus depreciation.
The expanded Section 179 deduction -- up to $250,000 for taxpayers purchasing up to $800,000 of equipment in a year -- will be effective for years beginning after December 31, 2007. That means it won't "stimulate" taxpayers fiscal-year taxpayers until their new fiscal year begins - in some cases, as late as next December, when any recession will probably be a memory. This seems unwise if you believe that this kind of provision does anything for the economy; you think you would let it apply in either the current or the subsequent fiscal year for instant stimulation.
Now the Senate will take its shot at it. Some Senators are already committed to smaller rebates so that they can give them to non-working old folks. Stay tuned.
Links:
Text of House Bill, H.R. 5140
Technical explanation of HR 5140
Ways and Means HR 5140 links page.
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BORN TO AN UNSUCCESSFUL LIFE OF CRIME?
January 29, 2008
This case has nothing to do with tax, but it makes me wonder about the folks who took him as a dependent exemption:
United States v. Ralph Taken Alive, Jr.
It makes you wonder if he has a sickly brother named Walt Barely and an elderly father, Wilbur Still.
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IOWA STIMULUS
January 29, 2008
Now Iowa's politicians want to climb on the "economic stimulus" bandwagon. Legislative leaders and Governor Culver have come out for exempting the proposed federal "rebates" from Iowa income taxes. Legislative leaders want to do more:
"If we dump $200 million back into the pockets of Iowans, think what that would do for the Iowa economy," said Senate Minority Leader Ron Wieck, who was among legislators who called for the tax break. "I truly believe that we need to move forward on something that is large enough to affect the economy, and it needs to happen now."
If they have $200 million they don't need, it shouldn't take an economic downturn for them to give it back. Still, I'm all for taking money out of the hands of the legislators and giving it back to Iowans. I even have an idea where they can start.
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NO W-2? WHAT TO DO?
January 29, 2008
The Wandering Tax Pro explains what to do if your employer doesn't get you a W-2:
If you do not receive a W-2 from an employer and you cannot contact the employer because it has gone out of business or disappeared all is not lost. You can use your paystubs or other records to reconstruct the various items of income and withholding and file Form 4852 “Substitute for Form W-2 Wage and Tax Statement” with your federal and state tax returns. In such a situation I recommend that you consult a tax professional.
If you don't have one already, you should get your W-2 this week.
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SEEK THE ADVICE OF COUNSEL. OR NOT.
January 29, 2008
Two more taxpayers represented by attorney Larry D. Harvey went down to defeat in Tax Court yesterday on the issue of whether income earned in Antarctica quailfies as foreign earned income. That brings the total of Tax Court losses for Mr. Harvey to 63, all at the hands of IRS attorney Randall Preheim. Mr. Preheim has also vanquished two pro se litigants on this issue. Lawyer or no lawyer, I wouldn't hold out much hope on this issue before the Tax Court.
Cites:
McDonald, T.C. Memo 2008-11
McPike, T.C. Memo 2008-12
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SNIPES DEFENSE RESTS
January 28, 2008
Wesley Snipes' defense attorney Robert Bernhoft had hinted that he might call dozens of movie stars as defense witnesses. Today, though, he rested the defense case without calling a single witness.
The defense contends that the prosecution proved nothing when it presented its case:
Wesley Snipes' defense lawyers rested their case in the famed actor's tax-evasion case this morning without calling a single witness, saying prosecutors had a "complete failure of their burden."...
"We could have called a bunch of Hollywood stars," said Bernhoft, a Milwaukee, Wis., lawyer who specializes in tax cases. "We could have put on a big show, but we don't do that. We're not going to waste the jury's time."
It's not clear what Sylvester Stallone or Goldie Hawn could have added to the defense case. The defense was wise to not let Mr. Snipes or his co-defendants take the stand; if his 600-page letter to the IRS is any indication, Mr. Snipes could dig himself a deep hole on the stand.
Closing statements are scheduled for tomorrow. Will the Snipes defense team try to introduce tax protest arguments? If they do, the judge will probably cut them off. I expect the defense to say that the prosecution didn't show that Mr. Snipes intended to evade taxes when he wrote worthless "bills of exchange" to pay $13 million in taxes; it was just a funny way of asking the IRS a question. Acquittal seems unlikely, but you never know with a jury.
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TRACKING IOWA TAX LEGISLATION
January 28, 2008
The Iowa Legislature is back in business, and once again we will be tracking tax legislation for you. Our chart of bills introduced in 2008 includes links to the text of tax bills, a brief description, and my guess as to each bill's prospects. You can access it anytime from the "2008 Iowa Tax Legislation" link at the bottom of the blogroll on the right side of your screen.
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ARE BLOGGERS PART OF IRS COMMUNICATION STRATEGY?
January 28, 2008
The TaxProf notes a Tax Analysts piece ($link) showing the IRS is aware of these "blog" things. He quotes the article:
The tax press has played an increasingly important role in the IRS's communications strategy as the number and form of media outlets have proliferated over the last 25 to 35 years, IRS Chief Counsel Donald Korb said at a January 18 session of the American Bar Association Section of Taxation midyear meeting in Lake Las Vegas, Nev....
Tax bloggers have gone a step beyond what traditional media can do and have "democratized" the way tax news and other information reach people who may not have had access to such information before the Internet age, Korb said. People no longer have to have subscriptions to tax law publications or be in Washington to get that information, he said. Tax blogs such as TaxProf Blog, which is run by Paul Caron, a University of Cincinnati College of Law professor, "are a great tool to get information out to a particular group," he said.
It's interesting. Paul Caron, the TaxProf, is king of our little tax blogging world, but I don't get the impression that the IRS is doing anything to feed him information. He has an amazing ability to post on everything, but as far as I can tell he just works hard and writes well and fast. He doesn't appear to have special insider access.
I've certainly not been contacted by the IRS in my role as a blogger. While our visitor logs show we have readers in the IRS and the Treasury, if there is an IRS blog-relation strategy, it doesn't include me. In the world of tax policy, I remain outside the gates.
Roving Tax Update Correspondent outside the Treasury Building, looking in.
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PEEK-A-BOO NIGHTIES AND TAX FRAUD TOGETHER? KINKY...
January 28, 2008
Russ Fox gives us a tax fraud roundup. I like this:
Finally, on a somewhat lighter note, Robert Sass of Tampa, Florida will spend a year and a day at ClubFed for his conviction on tax evasion. Mr. Sass owned a lingerie modeling business called Sophisticats, Inc. Mr. Sass' business appeared, though, to be more prostitution and less modeling; he charged "room fees" in cash for his models. Somehow those fees didn't make it on to his tax returns. Oops; illegal income is taxable. The judge noted that Mr. Sass' relatively light sentence is due to his declining health (Mr. Sass is 70).
On the brighter side, now that Mr. Sass is reporting taxable income, he'll qualify for a rebate.
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MOMENTUM BUILDS FOR AIRDROP STIMULUS
January 28, 2008
While the politicians haven't gotten the message, grassroots support is building for the Tax Update Stimulus plan. From the Tax Policy Blog:
You knew it was coming. It was only a matter of time before one of the biggest interest groups in the country weighed in on the fiscal stimulus agreement reached between the White House and the House leadership. The AARP is pressuring senators to expand the fiscal stimulus so that more money can go to senior citizens who don't pay income taxes. The stimulus already includes money for those who work yet pay no income taxes. Now we are being told that it needs to be expanded to those who don't work and pay no income taxes yet earn some sort of retirement income....
On second thought...maybe we should just send helicopters over every major city in the country and drop out $20 bills. And we can even make AARP happy by putting double the money in the helicopters that fly over golf courses in Florida and Arizona.
Of course, The Tax Update Stimulus Plan plan uses B-52 bombers instead of helicopters, both because of their larger capacity and because they are loud enough to spoil any putt, even with hearing aids turned off. These are mere details that can easily be ironed out in conference.
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WHAT HAPPENS TO DEFROCKED LAWYERS
January 25, 2008
A fate worse than death:
The jig's up, see. They all know we have a huge scoreboard secreted somewhere in the courthouse that keeps detailed, up-to-the-minute statistics on every win and loss of every lawyer in town on every issue, argument, motion, or trial. They know our entire careers depend on being at the top of that scoreboard. I believe the bottom rung of lawyers is regularly culled out, sent in a giant pneumatic tube straight to hell. Or made to become accountants.
Welcome back, Side Notes!
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EFTPS USERS: UPDATE YOUR PASSWORDS
January 25, 2008
For those of you who remit your federal tax payments electronically -- and that means almost all employers and corporations -- the IRS is making you change your password:
As an additional security measure, EFTPS online will increase the complexity of passwords beginning February 7, 2008.We recommend that you change your passwords based on the following guidance at your earliest convenience:
Passwords must be 8 to 12 characters long, composed of the following character types:
* Uppercase Alpha (A, B, C, etc.),
* Lowercase Alpha (a, b, c, etc.),
* Numeric (1, 2, 3, etc.) or the following Special Characters (!, @, #, $,*, +,-).Each password must contain UPPERCASE AND LOWERCASE ALPHA CHARACTERS, and at least one character that is either a Numeric or a Special Character.
To change your password, visit the My Profile Internet Password Management page.
Actually, these are good guidelines for any password worth worrying about.
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SLOTS LOSER WINS IN TAX COURT
January 25, 2008
Francis Gagliardi had a quiet life, working for awhile as a machine operator and a truck triver. He was married and had two children. Then at age 29, his life took a tragic turn. He won $26 million in the California lottery.
The Tax Court told his sad tale yesterday. Mr. Gagliardi got divorced and started hanging out at the casinos:
Mr. Gagliardi spent most of his waking hours at the casinos. He had no outside interests, and generally if he was not at the casinos he was at home. A typical day for Mr. Gagliardi generally consisted of waking up, showering, going to a 7-Eleven, getting coffee, going to the casinos, gambling, returning home, sleeping, waking up, and returning to the casino immediately thereafter. Occasionally, Mr. Gagliardi spent up to 48 hours continuously in the casinos before returning home.
Long story short, Mr. Gagliardi squandered his money at the slots, and the IRS came calling. They said that he owed over $ 1 million in taxes on gambling winnings.
The tax law provides gamblers with two difficult problems. First, gambling winnings are not directly offset by gambling losses. You have to report the winnings as "above the line" income, while taking the losses as itemized deductions. Second, the casinos helpfully document your jackpots, but they don't create such a nice paper trail for your losses. Gamblers often have trouble documenting their losses, even though it is a near mathematical certainty that a frequent slots gambler will lose more than he wins.
Through a combination of analysis of his financial records and using expert witnesses, Mr. Gagliardi convinced the Tax Court that he did, in fact, lose more than he won. One expert testified:
Mr. Nicely opined on the basis of the extent of Mr. Gagliardi's gambling activity that (1) Mr. Gagliardi's breaking even from slot machine play was astronomically unlikely (substantially greater than 1 in 1 trillion); and (2) the estimated net losses from slot machine play for the tax years 1999, 2000, and 2001 were most likely approximately $637,000, $678,000, and $507,000, respectively, with an error range of plus or minus $65,000, $72,000, and $83,000, respectively.
No wonder casinos provide rooms for their good customers.
Tax Blogger and poker maven Russ Fox comments wisely:
There are two other important points to this case. First, Mr. Gagliardi had to go to Tax Court, hire two attorneys, have expert testimony, and then he won his case. Had he kept a gambling log it's likely he wouldn't have needed to go through the effort. And second, the IRS has a lot of problems dealing with gamblers.
Of course, had he stayed away from the slots entirely, he would even still have his money. It's a story that makes me nostalgic for the time when Iowa had slot machines in every convenience store. If Touchplay hadn't been repealed, foks like Mr. Gagliardi would never have to leave the convenience store, saving gasoline and fighting global warming.
Video lottery terminal conveniently placed alongside ATM in liquor store
Cite: Gagliardi, T.C. Memo 2008-10.
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BREVITY IS THE SOUL OF WIT. SOMEONE TELL WESLEY SNIPES.
January 25, 2008
If you were indicted on federal tax charges that could put you in prison for years, would you:
a). Pour yourself a stiff drink.
b). Flee the country
c). Call a good lawyer and devote your time to preparing your defense
d). Write a 600-page letter to the IRS telling them not to mess with you.
Wesley Snipes chose option "d," according to testimony in his tax evasion trial as reported at Ocala.com:
After being indicted in 2006, actor Wesley Snipes sent a document to the Internal Revenue Service declaring he was a "nonresident alien" of the United States, refuting his Social Security number and warning that continued prosecution could lead to professional consequences for federal employees.Among other things, the letter claimed the IRS deceives people to "terrorize, enslave, rape or pillage" taxpayers.
Don't be silly. Terrorize and pillage, sure. Enslave and rape? I haven't seen that out of the IRS.
Snipes declared he had no taxable U.S. income, making the IRS Form 1040 "absolutely the wrong form for me to file." He also claimed taxes withheld were "stolen funds."
Maybe he expected the IRS to write back and say "Your 600-page letter was quite compelling. We have reconsidered, and we have decided to end the raping and pillaging. Never mind the indictment thing."
The Snipes legal team says it was just another way for Mr. Snipes to reach out and touch the IRS:
The document was born of Snipes' frustration in trying to deal with tax issues for years, and as a reaction to being indicted, [Snipes attorney Robert] Barnes said, adding that Snipes sent a copy of the document to the U.S. Attorney's Office."Part of his emotions are frustration, exhaustion," Barnes said. "The response was a 600-page letter. His whole point in the letter is 'I've been trying to reach out to you guys for two years.'"
Well, the reaching out wasn't in vain. He certainly got their attention.
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S.O.S. STIMULUS PLAN
January 24, 2008
Same old stuff. Or same old stimulus. The White House, Congressional Republicans, and Speaker Pelosi have agreed on how to bribe us with our own money in the name of stimulating the economy. The plan includes three parts of the last stimulus plan, passed in 2001: cash rebates, bonus depreciation, and increased Section 179 deductions. From the press release of House Republican Leader Boehner:
Summary of the Economic Growth Package Agreement in PrincipleI. Tax Relief for American Families:
Rebate Checks: The economic growth package will include rebate checks in the sum of two separate calculations, with an overall phase-out for those with adjusted gross incomes above $75,000 for a single taxpayer and $150,000 for married couples. Rebate checks will include a base amount determined by the greater of two options: (a) Income tax paid in 2007, with a maximum of $600 for a single taxpayer and $1,200 for married couples; or (b) $300 for an individual and $600 for a married couple, provided the individual or couple earned income of at least $3,000 in 2007.
A children’s bonus also will be included in the rebate check calculation. Anyone qualifying for the base amount also receives an additional $300 per child, with no cap on the number of children.
II. Tax Relief for Employers:
Bonus Depreciation: The economic growth package will provide for a 50 percent bonus deduction on new equipment in the year it is placed in service, with certain exceptions for equipment with a “long life.” This temporary tax cut offers significant savings on new property with a depreciation period of 20 years or less. This will give employers – particularly small businesses – greater incentive to invest and create jobs for more Americans searching for work. The temporary bonus depreciation, coupled with expensing measures enacted in May 2003, resulted in a four percent increase in business spending in the first six months alone.
Section 179 Expensing: This provision allows employers, including small businesses, to fully expense $250,000 in both new and used tangible property in the year it is purchased up to an overall investment limit of $750,000. This will provide a particularly strong incentive for small companies to invest in their businesses so they can continue to provide good-paying jobs for the American people.
Increase in Government Sponsored Enterprises (GSE)/Federal Housing Administration (FHA) Conforming Loan Limit: The conforming loan limits for both FHA and GSE (such as Fannie Mae and Freddie Mac) loans would be increased from $362,000 to $725,000 and from $417,000 to $625,000 respectively.
The loan limit is very strange. Didn't we get into this problem by people borrowing too much on home loans? And now we're encouraging more of that?
The big question for the tax provisions: when are they effective? Presumably starting about now; it doesn't make sense to provide extra depreciation for investments already purchased, but it also doesn't make sense to delay the effective date, which would encourange businesses to delay purchases.
Another item not mentioned in the Boehner release is an increase in the net operating loss carryback period, which some reports said would be included.
Sadly, our targeted stimulus plan seems to have been ingored.
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IOWA: TAX POLICY FOR A STAGNANT TOMORROW
January 24, 2008
There seems to be no end to the devotion of Iowa's political class to the ag industry. Let some administrative agency look cross-eyed at farmers, and a host of Iowa Senators and Represenatives rises up to smite the offending bureaucrat. Short of establishing the Cult of the Corn God as Iowa's state religion, there's not too much left for row crop lobbyists to ask from our elected representatives.
Other industries, not so much. And that's puzzling, when you consider what Iowa's biggest industries are, as a percentage of its economy (2006 figures, courtesy of the Federal Reserve Bank of Chicago):
Finance, Insurance and Real Estate: 21.3% Manufacturing: 21% Services: 16.2% Wholesale and Retail: 13.9% ... Agriculture, Forestry, Fishing and Hunting: 3.3%
As the chart below shows, agriculture is much less of the Iowa economy than it was in 1980, while financial industries have become much more important.
Source: Federal Reserve Bank of Chicago. Click chart for larger image.
While Iowa's economy has moved on, the Iowa Department of Revenue and Finance is still partying like it's 1979, at least when it comes to how it taxes investment partnerships.
Partnerships have become an everyday tool in the financial world. The entire hedge fund industry is built around investment partnerships. The private equity world loves partnerships. They allow ownership and allocation flexibility without incurring extra layers of tax.
Except in Iowa.
HOW IOWA TAXES INVESTMENT PARTNERSHIPS
The Iowa Department of Revenue takes the position that investment income of non-resident partners of Iowa investment partnerships is fully taxable in Iowa as "business income." That means a Florida investor in an Iowa investment partnership is expected to pay Iowa tax of up to 8.98% on his share of a dividends, interest and capital gains earned through an Iowa partnership - income that would be free of state income taxes if he earned the money directly.
State tax laws generally distinguish between "business" and "non-business" income. Iowa can tax Iowa business income earned by residents of other states, but non-business income is taxed only by the resident state. Iowa's tax regulations recognize this principle using an example of a farm operation that also has a savings account; the interest earned on the account is non-business because the account isn't used in the day-to-day operations of the business.
The Department of Revenue makes this regulation meaningless for partners by defining all partnership income as business. Their justification? They cite the non-tax definition of "partnership" in the Iowa statutes, which says a partnership is "an association of two or more persons to carry on as co-owners a business for profit." (their emphasis). So the same savings account that is "non-business" for the farmer becomes "business" once the farmer takes on a partner. This is all spelled out in a 1992 "Letter of Findings" ( Re Herman A. & Veneta L. Jensen).
This is absurd.
The Department's position doesn't even make sense on its own terms. While Iowa's partnership statute refers to operating "for profit," the parallel laws for limited liability companies and corporations merely refer to "any lawful purpose." By Iowa's logic, then, an LLC or S corporation should be able to have non-business income; even so, the Department of Revenue insists that investment LLCs and S corporations generate "business income," just like partnerships.
The Iowa Supreme Court has rejected the implication that a pass-through entity can't have non-business income in the Comacho case, though the taxpayers lost on the facts.
OTHER STATES DON'T TRY TO TAX NONRESENTS ON PARTNERSHIP INVESTMENT INCOME
New York state uses language identical to Iowa its tax law defining business and non-business income, but, tellingly, they don't try to tax non-resident partners on their investment income. Not coincidentally, there are hundreds of hedge funds based in New York. If there are any in Iowa, I haven't seen them.
Why does the Department do this? I'm guessing it's because the state needs the cash, and because they can get away with it. For most non-resident partners, the tax involved is too small to make it worth hiring a lawyer to fight. More importantly, anybody who has enough partnership income to fight over is staying out of Iowa altogether.
So in the pursuit of a few pennies from non-resident partners, the Department stifles a critical tool of the industry that provides 20% of the state's economy and much more than 20% of its growth. Meanwhile, Iowa's politicians, who should be all over the Department for this, instead look to beat up even more on non-resident taxpayers.
Many states, including California and Illinois, have laws that exempt non-resident partners of investment partnerships from their income tax; Iowa is one of the few states that even tries to tax nonresidents on investment partnership income. It's especially sad when Iowa's laws already exempt such income, but the Department of Revenue insists otherwise. But so far our Legislature is more interested in subsidizing Hollywood than in removing tax shackles from Iowa's most dynmamic economic sector.
Maybe it's just a branding issue. If partnerships were to call themselves, say, "corn heritage funds," the legislature might leap into action.
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SNIPES TRIAL EXPLORES OPERATIONS OF AMERICAN RIGHTS LITIGATORS
January 24, 2008
Day 5 of the Wesley Snipes tax evasion trial featured an exploration of how the tax protest outfit "American Rights Litigators" operated. It existed by filing bogus refund claims, some of which didn't get stopped by the IRS service centers. Ocala.com reports:
Although Snipes never received the $11.3 million refund he sought for his 1996 and 1997 taxes, other ARL clients did receive refunds, some substantial. The organization took 20 percent of the refunds, according to documents shown to jurors Wednesday. One check to ARL was for more than $28,000, of which Rosile received half for preparing the amended tax return, the documents showed.
Mr. Snipes' attorneys also continued ot work on their "he was just asking questions" defense:
In one case, ARL lawyer Milton H. Baxley II requested a "letter of determination" as to whether Snipes was required to file a tax return. The agency responded that it could not issue such a ruling until Snipes filed tax returns for 1999 and 2000
Sending bad checks (called "bills of exchange") for millions of dollars is a funny way to ask a question:
Retired Treasury Department fraud expert William Kerr testified that the "bills of exchange" sent to the Treasury by Snipes to pay his tax bills were fictitious documents."They have no validity, and they're worthless," Kerr said.
Snipes sent a total of four such bills of exchange to the Treasury Department between 2000 and 2002, including one for $12 million.
The bills are based on the theory that the Treasury Department has a personal account for every U.S. citizen and that the bills can be drawn on that account.
Meanwhile, the Milwaukee Journal-Sentinel profiles Robert Bernhoft, who is leading the Snipes defense team:
While he was still a law student, Bernhoft caught the attention of federal authorities after he and a partner signed up 55 clients and earned $34,578 via a "De-Taxing America" program they marketed through newspaper ads proclaiming "Just Say No," according to court records.They urged clients to "cease paying federal taxes" by following a series of step-by-step instructions, leading to an IRS-estimated $691,731 not going into federal coffers, the court records show. In 1999, Bernhoft and his partner were permanently forbidden from selling their program.
"I'm very proud of that litigation and stand by the principal, political and philosophical parts that were highlighted by it," Bernhoft said.
Wow - under a permanent injunction before he even finished law school. Lots of lawyers never achieve that in their entire careers!
The TaxProf and Taxable Talk have more.
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REBATES AND NON-TAXPAYERS
January 24, 2008
One of the fights over the "stimulus" bill is whether to send income tax rebates to people who don't pay income taxes. The Tax Policy Blog points out that non-taxpayers are a growing constituency:
As the federal income tax has become more progressive, more and more Americans have been completely knocked off the tax rolls. In 2005, we estimated the total number of filers with no tax liability to be over 43.8 million. Add in typical growth over time, and people who don't file because they have little-to-no income at all, and we arrive at the 50-77 million figures cited by both Senator Clinton and Mr. Greenstein.Just to be clear, that means half of the households in America have no income tax liability - a number that's grown 50% since Bill Clinton left office and the Bush tax cuts were enacted.
Whoever said it's better to give than to receive wasn't talking about the tax system.
So do the working poor get nothing from the federal government? No - and in fact, quite to the contrary. The working poor are the biggest beneficiaries on the other side of the federal fiscal coin: spending.
They illustrate their point with this chart:
(Click to enlarge)
So rebates wouldn't really be the right word. "Transfer" would be more accurate.
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CAN YOUR TAX SOFTWARE READ YOUR MIND?
January 23, 2008
Reader Eric finds that TurboTax is clairvoyance-enabled:
You have probably received many accolades as a CPA, but can you read minds? TurboTax apparently can.Form 8283 asks taxpayers in columns E, F and H: (E) How they acquired an item, (F) The donors' cost basis, and (H) What valuation method they used. TurboTax's Deluxe Online Edition only asks when the item was donated and its FMV. When Form 8283 is printed, it shows that TurboTax has decided - via ESP - that every item was "purchased" (E), the cost basis was 2.5 times the donated value (F), and the valuation method for every item was "comparative sales." If TurboTax keeps up this pace, CPA's can spend the winter lounging on tropical islands.
On a serious note, do you think the cost-basis info matters? Would you bother finding a way to change it?
Basis does limit your deduction for donations of property in several situations:
- A gift of tangible personal property to a charitable donee whose use of the property is unrelated to its exempt purposes or functions. One example: a contribution of art to be auctioned off for charity.
- A contribution of property to a private foundation.
- A gift of a patent, copyright, trademark, trade name, trade secret, know-how, software, “similar property,” or “applications or registrations of such property.”
- Contributions of “taxidermy property”
Contribution deductions are also limited to basis for property held less that one year, or for ordinary income property.
Here TurboTax automates the kind of shorthand that busy preparers use every day of tax season to move their work along. A client says they donated clothes to the Salvation Army, and they reasonable documentation for what they gave. But sure enough, Form 8283 (you can see a reproduction of the relevant portion of the form if you click "read more") asks not only what the value of the donation is, but what it costs and where it came from. No preparer who wants to see the client again is going to demand that she go through her old credit card receipts to find out how much she paid for that blouse she bought in 1997.
So what does a preparer do? Well, you assume the client bought the item. Maybe they got it as a gift, but if they did they inherited the purchaser's basis. The preparer doesn't have to assume that the client is a shoplifter or anything.
The tax law limits your deduction for property donations to thier fair market value when it is less than basis. The tax preparer assumes that the blouse hasn't appreciated over ten years. So the cost must be higher than the deduction. The preparer says 2.5 times the value is close enough. How is it valued? Err... comparable sales! Here I think TurboTax defaults to the wrong generic instruction. Most property donations are old household items, and the Form 8283 instructions say:
Examples of entries to make include "Appraisal," "Thrift shop value” (for clothing or household items), "Catalog" (for stamp or coin collections), or "Comparable sales" (for real estate and other kinds of assets).
So TurboTax is trying to save a few steps for the preparer. But be careful - just because TurboTax defaults to something doesn't make it right, and the courts have already rejected the "blame TurboTax" defense. But don't be too disappointed that TurboTax doesn't really have ESP; clairvoyance is overrated anyway.
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ED BROWN SUPPORTER PLEADS GUILTY
January 23, 2008
A man who helped Ed and Elaine Brown while they were holed up in their New Hampshire house pleaded guilty fo federal charges yesterday:
Fifty-year-old Robert Wolffe of Randolph, Vt., pleaded guilty Tuesday to aiding and abetting Ed and Elaine Brown and conspiring to interfere with the government's efforts to arrest them. The three charges carry a combined maximum sentence of more than 53 years in prison.Under a plea agreement, Wolffe did not have any charges reduced or receive promises of a sentence reduction. But his cooperation with prosecutors could be a factor in their ultimate sentencing recommendation.
The Browns retreated to their fortress-like house to avoid going to prison following their tax evasion convictions. They were arrested without violence by federal agents posing as tax-protest sympathizers.
Related: ED BROWN WRAPUP
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SNIPES TRIAL, DAY 4
January 23, 2008
The Wesley Snipes tax evasion trial resumed yesterday. It was an unglamorous day of testimony, devoted to identifying documents relating to Mr. Snipes place of residence. Ocala.com has the details.
MARKETS IN EVERYTHING DEPARTMENT
Russ Fox has come up with a more interesting tidbit: betting odds whether Mr. Snipes will be convicted, and what his sentence will be if he is. The numbers:
Will Wesley Snipes be convicted of tax fraud? Yes 1/10 No 3/1Wesley Snipes' tax fraud sentence will be...
Convicted 1 - 5 years: 1/3
Convicted 5 - 10 years: 7/4
Convicted 10 - 16 years: 10/1
Not Convicted: 5/1
Both sets of odds look about right to me, assuming a "tax loss" of about $13 million, but you can check out the federal sentencing guidelines for yourself before you place your bet.
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STIMULUS, SCHMIMULUS
January 23, 2008
They're talking rebates on the blogs.
Dan Meyer, Bush Reprises a Tax Rebate--and the Democrats Weigh In:
My proposal: a rebate of the first $700/$1400 of total income tax and a up to $100 ($160 if self-employed) rebate per employee on Social Security taxes. On the payroll rebate: self-employed should get a potentially greater rebate because they pay a higher rate.
Jim Maule, Who Should Get a Tax Rebate?
If the theory of the rebate is to give individuals and businesses money to spend, ought not the money go to those who are most likely to spend it? Restricting the rebate to those who have paid income taxes would preclude a substantial portion of the population, and an even larger proportion of everyday consumers, from having additional money to spend. Rebates received by the wealthy are unlikely to alter their spending habits.
Tax Vox, Stimulus: Who Should Get a Rebate?
If you believe that the goal of fiscal pump-priming is to get money into the economy quickly, you need to target it carefully. And the evidence is pretty strong (though not conclusive) that lower income families are far more likely to consume their windfall than wealthy people, who may put in the bank.
I favor a targeted approach myself.
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AT LEAST THEY DIDN'T DO ANY WORSE WITHOUT A LAWYER
January 22, 2008
Like a fresh crevasse in an enormous glacier, a crack has opened in Larry D. Harvey's icy grip on aggrieved Antarctican taxpayers.
Mr. Harvey, as you may recall, has represented in Tax Court 61 Americans who have worked in the frozen continent. He has argued that the wages earned by his clients in Antarctica qualify for the foreign earned income exclusion. The IRS has thrown Randall L. Preheim against him in each court battle, and the IRS has prevailed 61 times.
Two Antarcticans weighed the odds and decided to fight it out in Tax Court without a lawyer. They, too, faced the seemingly-invincible Mr. Preheim. The result? Two more notches on Mr. Preheim's pistol.
Cites:
JOHN K. YAMASAKI, T.C. Memo 2008-7
GERALD STEPHEN MACALA, II T.C. Summary Opinion 2008-7
(Note: original post incorrectly listed only 54 losses. My apologies)
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IRS AUDITING MORE INDIVIDUALS, PASS-THROUGHS
January 22, 2008
The IRS recently released updated stats on who they are auditing. The statistics reflect what we see: more S corporations are getting audited, and the IRS is taking a closer look at high-income individuals - who often get that way because of their income from partnerships and S corporations.
For the first time in at least ten years, at least 1% of all 1040s experienced either a field audit or a correspondence exam last year. The number of 1040 field audits hit its highest number since 1999.
For taxpayers with AGI over $1 million, the audit rate was 9.25% for 2007 -- 3.6% for field audits.
The IRS exam rate bottomed out at .49% in 2000. Now a visit from the IRS is becoming more than a theoretical possibility, so conduct yourselves accordingly.
Other coverage:
TaxProf Blog
Don't Mess With Taxes
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YOU KNOW IT'S COLD WHEN...
January 21, 2008
...when even this guy takes to the skywalks:
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A TAX THAT'S ONLY TOLERABLE IF IT APPLIES TO NOBODY
January 21, 2008
So Iowa has the highest corporation income tax rate in the nation, 12%. We stand head and shoulders above Number 2, Pennsylvania, and its 9.99% rate. Why aren't Iowa's big corporations kicking and screaming about this?
Because they pay very little tax. Iowa corporations with multi-state operations can apportion their taxable income out of Iowa based on their sales. If a company that makes $100 million only has 1% of its sales to Iowa customers, it only pays the 12% tax on 1% of its taxable income. That's true even it it doesn't actually pay income tax in any other state. Other tax breaks, such as the refundable research credit, enable companies to pay little Iowa tax, or even to be net subsidy recipients.
Source: 11/19/2007 Memo to members of Iowa Legislature. Click to enlarge.
Hungry for more revenue, Governor Culver has called for "combined reporting" to collect more revenue from multi-state corporations. Similar proposals have died in the last two legislative sessions, and this one probably faces the same doom. Why does a proposal to tax big bad corporations from out-of-state fail to move in a legislature controlled by Democrats?
IT ONLY WORKS IF IT DOESN'T WORK
Iowa's highest-in-the-nation corporation tax is tolerated only as long as it applies to nobody. In this way it is like the federal estate tax, which for many years was tolerated and relatively non-controversial, even with a crushing 60% top rate. This was because it applied to almost nobody because of the then-generous lifetime exemption, and because is was riddled enough with loopholes that it was almost optional. As inflation pushed the upper middle class couples into net worths over $1.2 million, the estate tax began to apply to actual voters, became very unpopular with the political donor class, and barely avoided repeal.
In much the same way, effectiveness could be very dangerous for the Iowa corporation tax. Our overall tax structure is already generally regarded as hostile to business. A 12% rate that actually applied would keep all but the most easily-bribed businesses from locating here.
IS IT WORTH IT?
Only 5% of Iowa's tax revenue comes from the corporation tax - $320 million in the most recent fiscal year.
The Des Moines Register reports that the state has agreed to provide economic development tax credits of $444.8 million since 2003. This only counts specific credits that are run through the Depearment of Economic Development. It doesn't include the refundable research credit. It also, I believe, omits historic rehabilitation credits. Of course the state has to maintain an examination function to collect the corporation tax. Given this, maybe Iowa could repeal its corporation tax without much revenue loss if it got rid of all of the corporate welfare tax credits at the same time.. If we still need to make up some revenue, get rid of the stupid $25 million "Iowa Power Fund" and the $50 million "Grow Iowa Values" fund giveaways.
There are logistical problems with a corporation tax repeal - principally the problem of S corporations, whose earnings are taxed directly to shareholders returns. Perhaps these companies could elect to be taxed as C corporations for Iowa, with shareholders paying Iowa tax only on their distributions.
If our lawmakers were smart, the debate this session would be over the continued existence of the corporate tax, and whether a 0% corporate tax would be better for economic growth than the dozens of economic development tax credits that function as a great corporate welfare scheme. But they aren't , so they will instead be talking about "closing loopholes" in a tax that shouldn't exist in the first place.
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YOU'VE GOT A LOT OF NERVE PAYING YOUR TAXES
January 21, 2008
The first week of Wesley Snipes' tax evasion trial wrapped up with testimony from a former employee of his production company. Carmen Baker testified that Mr. Snipes told her to stop withholding from salaries. When she spoke to her own accountant, she opted to continue to pay her own taxes, which displeased Mr. Snipes. From Ocala.com:
"I got called into the office, and I was told that I was being a difficult employee and told that I should not have called an accountant," she said. "He said, 'If you're not going to play along with the game plan, then you need to find employment elsewhere.'"Baker remained with the company for three more years, she added.
Russ Fox doesn't think the trial is going well form Mr. Snipes:
To this observer who is, though, looking at the trial from 3000 miles away, it doesn't look like Mr. Snipes had a good week. First, Mr. Snipes went to trial in a locale which he has previously described as "racist," Ocala, Florida. An attorney that Mr. Snipes supposedly dismissed showed up as one of his attorneys, too. Second, the prosecution has presented evidence showing that Mr. Snipes' previous accountant, Kenneth Starr, told him that the idea that he didn't have to pay income tax on his millions of dollars of income was laughable....
At this point the only thing we know about the defense is that they plan on calling character witnesses such as Barbara Walters and Muhammad Ali. I think they're going to need a lot more than that for Mr. Snipes to avoid spending significant time at ClubFed.
The trial resumes tomorrow.
UPDATE: More from the White Collar Crime Prof Blog.
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BRRR
January 19, 2008
Today is a blinding bright icy-cold January day. It was -7 at the airport this morning, and the high is supposed to be 5f. But if you can stand to be outside for a few minutes, you are rewarded by the clearest blue skies you can hope to see.
But only if you look up from your book.
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FISCHER-IRS, 1/2 - 1/2
January 18, 2008
Bobby Fischer has died at age 64, enabling him to salvage a draw in his battle with the IRS.
His tax troubles got serious when he won $3 million in Belgrade in a rematch with his old foe Boris Spassky, vowing never to pay tax on it. As a U.S. citizen, he was subject to U.S. tax on his worldwide income. He also faced federal charges for violating the economic sanctions regime then in place against Yugoslavia.
He spent over half a year in jail in Japan after being arrested on a revoked passport, but he avoided U.S. prison when Iceland granted him citizenship and, in effect, asylum. Now he's beyond the reaches of earthly tax authorities, though the executor of his U.S. estate, if there is one, will have his hands full.
Like a lot of nerdy kids, I was caught up in the chess mania that Fischer caused in the early 1970s. It's hard to imagine there was once live television coverage of chess matches, but I remember watching. Maybe if there's ever an ESPN 23 we'll see that again. Now Fischer, and chess, have declined so much in public interest that his death is back-page news. My own interest in chess is rekindled because I help out at my fourth grader's school chess club; next time I'll ask the kids if they even know who he was. I doubt if more than two or three kids have any idea.
ChessBase has detailed coverage of Fischer's tax and legal troubles. Grandmaster Susan Polgar somehow maintained a friendship with this difficult and often ugly man; she reminisces here.
Garry Kasparov was Fischer's true successor in chess, but unlike Fischer is also magnificent away from the chessboard. He remembers Fischer here.
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'YOU ALWAYS THINK YOU'RE RIGHT, AND YOU ALWAYS THINK YOU KNOW EVERYTHING'
January 18, 2008
Wesley Snipes dusted off skills perfected by most high-schoolers in arguments with their parents when he started down the tax-protester path. This comes out of testimony yesterday by Mr. Snipes' former tax advisor, Kenneth Starr (no, not that Ken Starr) in the Snipes federal tax evasion trial.
Ocala.com reports that Mr. Starr and his son, Ronald Starr, related what must have been surreal discussions with Mr. Snipes and his tax protest jedi master, Eddie Kahn:
He said that the Internal Revenue Code was, in fact, not law," said Ronald Starr, a tax lawyer. Kahn also argued that income earned in the United States was not taxable, he added."Upon researching the code section, the argument did not seem to hold water," Ronald Starr said.
"Did not seem to hold water?" Don't stick your neck out on that conclusion, Ronald. Try "battier than Carlsbad Cavern."
The evidence presented yesterday makes it sound as though Mr. Snipes went through the whole tax protest kit of useless tools:
The ever-expanding pile of documents entered into evidence offered some insight into Snipes' beliefs. Letters that Snipes sent to various IRS offices show the actor declared the agency "in default" because it didn't respond to earlier letters. Another said Snipes would presume the IRS agreed with his documentation and interpretation of tax code if it didn't respond within 30 days.
But his attorney says Mr. Snipes was desperately seeking to get his questions answered. It sounds more like he desperately avoided listening to answers he didn't want to hear, in language familiar to any parent of a high-schooler:
Starr said his company terminated their representation of Snipes in June 2000, after a 90-minute phone call in which Snipes said he didn't think he had to file tax returns."I said that was ridiculous, that everyone had that obligation," Starr said. "His response was: 'You always think you're right, and you always think you know everything. You're wrong about this.' ... He was adamant about the fact that he did not have that obligation."
Maybe Mr. Starr should have used the classic parental response, "you'll wind up working in a gas station."
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TAX INCREASE EXCUSE FALLS INTO RIVER
January 18, 2008
When the I-35 bridge in Minneapolis collapsed last year, politicians were quick to say that it fell because taxes weren't high enought to support it. If only we paid more taxes, the story went, the bridge would have been better maintained and traffic would be humming across it today.
Well, never mind.
(via Instapundit)
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GOVERNOR CHET ARMSTRONG CUSTER?
January 18, 2008
The Ponca Indian Tribe has won a ruling saying it should be allowed to set up a casino in Carter Lake, Iowa. This could be bad news for Iowa's politicians, reports the Des Moines Register:
The ruling has raised alarms in Iowa’s casino industry and in state government because Carter Lake borders on Omaha-Council Bluffs, which is Iowa’s largest gambling market. The area’s three casinos — Horseshoe, Harrah’s and Ameristar — generated $111 million for Iowa last year in state, city and county gambling taxes and fees.Competition from a tribal casino in Carter Lake could potentially slice into Iowa’s tax revenue and have an impact on Council Bluffs’ casinos, officials said. American Indian casinos in Iowa don’t pay state, city or county gambling taxes.
The paper reports that Governor Culver is calling in the Seventh Cavalry reviewing his options, which include an appeal to the U.S District Court. Given Iowa's fiscal difficulties, this is bad news for Iowa's budgeteers.
Carter Lake is the only part of Iowa on the west side of the Missouri River, stranded from the rest of the state by a change in the river's course in the 19th century. Maybe they could sell it to Omaha for $24 in beads and trinkets.
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STIMULUS AWAY!
January 18, 2008
The TaxGrrrl says that President Bush will today propose sending taxpayers with incomes under $110,000 tax rebates - $800 for individuals and $1,600 for couples. Congress, always game to bribe us with our own money, is likely to go along in the name of "stimulating the economy."
That's so 2001. I propose a more exciting form of stimulus. Let's load our B-52 bombers with $20, $50 and $100 bills and conduct low level simulated bombing runs dropping the cash over areas affected by the mortgage crisis. Surely the sight and sound of the big birds skimming the treetops of Southern California will stimulate something, and it will be at least as effective as the rebate plan.
The Wandering Tax Pro has more thoughts.
UPDATE: One million dollars...
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'FAIR TAX = TAX INCREASE'
January 17, 2008
Tyler Cowen on the Fair Tax:
I would say this: push for a Fair Tax and if you're lucky you'll get something like a VAT, if only for reasons of enforcement. Plus you'll also get the same income tax we have now, which isn't going away anytime soon. New Zealand, of course, did something like this. "Fair Tax = Tax Increase"; it's a pretty good and simple slogan.
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IRS ISSUES APPLICABLE FEDERAL RATES (AFR) FOR FEBRUARY 2008
January 17, 2008
The IRS has issued (Rev. Rul. 2008-9) the minimum interest rates for loans made in February 2008:
-Short Term (demand loans and loans with terms of up to 3 years): 3.11%
-Mid-Term (loans from 3-9 years): 3.51%
-Long-Term (over 9 years): 4.46%
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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BADLY MISLED BY GOOGLE
January 17, 2008
Note to whoever got to our site with the Google search "who performs colonoscopy near ottumwa, iowa?" -- Sorry, I can't help you.
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SNIPES: CRIMINAL, OR JUST STUPID?
January 17, 2008
Five men and 11 women - 12 jurors and four alternates - learned yesterday that they will have to decide whether Wesley Snipes is a guilty crook or an innocent fool. From the Ocala Star Banner:
In opening statements, federal prosecutor Robert O'Neill portrayed Snipes as a man who deliberately filed false documents with the IRS and failed to file tax forms for years while conspiring with Kahn and Rosile to defraud the government."Snipes, Kahn and Rosile agreed to defraud the United States by not paying taxes due," O'Neill said.
Defense lawyers portrayed Snipes as a hardworking artist, dedicated to his family, a displaced victim of the Sept. 11, 2001 terrorist attacks, and an unwitting pawn of bad tax advisers. Lawyer Daniel Meachum said Snipes hired Kahn's American Rights Litigators organization, based in Mount Dora, to provide him with tax advice.
This could be fun. A displaced victim of 9/11? From an interview in USA Weekend:
"I lived right across the street from Ground Zero." The collapse of the World Trade Center towers caused extensive structural damage to Snipes' fourth-floor apartment and destroyed several precious belongings. "The most damaged part of the building was where my baby boys slept," he says. On that day he was at his home in Marina del Rey, Calif., taking care of his recently born child, Iset, his third.
A refugee in Marina Del Rey? Get that man a Red Cross blanket! But if that got a bit rough, he could go to the Florida house listed on his drivers license -- the one he bought in 1992 for $1,050,000, according to testimony yesterday.
Eddie Kahn, one of the "advisors" who helped Mr. Snipes get into this mess, made his first statements in his own defense:
Kahn attempted to make a brief opening statement to tell jurors why he refused to participate in the trial. He attempted to tell jurors his belief that Hodges isn't legally a judge, but Hodges quickly cut him off. Kahn declined to make any other statement.
Quatloos describes Mr. Kahn thusly:
Eddie Kahn of "American Rights Litigators" represents the Hee-Haw contingent of the tax protestor movement...Eddie caters to the dumbest of the dumb, and his theories for not paying taxes are thus the dumbest of the dumb.
So if part of Mr. Snipes strategy is to show that he's not very bright, he may have a case.
The Tax Policy Blog today discusses the moronic "Section 861 argument" that Mr. Snipes was using. Taxable Talk is also on the case.
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FRESH SNOW CARNIVAL
January 17, 2008
There's new snow on the ground here today. Stay warm indoors while they clear the streets with the Cavalcade of Risk, the blog roundup of insurance and risk management posts, and the Carnival of Taxes.
I recommend Bob Vinyard's post on how health risk management is about more than just buying insurance when you are going under the knife.
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TRUSTS LOSE 2% FLOOR CASE IN SUPREME COURT
January 16, 2008
A unanimous Supreme Court has ruled (Knight v. Commissioner) that investment advisory fees incurred by a trust are subject to the same 2% of itemized deduction floor as similar fees incurred by individuals.
That TaxProf has a roundup.
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RICH MEN, STUPID CHOICES
January 16, 2008
Megan McCardle discusses Wesley Snipes and tax protesters in general:
Actual rich people are almost never tax protesters; they have too much to lose. And Mr Snipes will lose. Whatever the justice of the argument, no court is going to shut down the tax collection system that finances the federal government. Most tax protesters get by simply because it takes quite a long while for the government to notice that they haven't paid any taxes, and to get around to collecting them. But once it does, it's ruthless
Ms. McCardle is exactly right about how tax protesters can avoid trouble for a long time simply by flying under the IRS radar. Somebody who lives in a trailer in the woods somewhere isn't going to draw a lot of IRS attention if he keeps his mouth shut and stays poor, no matter what he thinks about whether Secretary Knox properly signed off on the 16th Amendment.
But while few wealthy folks drink the tax protester kool-aid, more do than you might think. The "largest tax evasion case in U.S. history" involved Walter Anderson, an "anarcho-capitalist" telecom millionaire who asserted quasi-tax protester arguments until he made a plea deal on his multi-million dollar tax evasion case. And right now Minnesota computer millionaire Robert Beale sits in jail awaiting trial on charges of evading $5.7 million of taxes using methods inspired by imprisoned tax protest guru Irwin Schiff.
So while the rich have more to lose by tax protest arguments, they may have, in their minds, more to gain. Combine that with a healthy ego and the disdain for timid pencil-pushing accountants and attorneys held by many successful men, and sometimes you end up with a wealthy man in a heap of tax trouble.
As to whether Mr. Snipes will lose... there is a non-trivial chance that he will actually be acquitted. I expect conviction, because the facts don't look good to me, but a jury might decide he really believed his tax protester nonsense in good faith, which would mean an acquittal. But even if he wins the criminal case, he loses. He will pay the taxes, along with interest and likely 75% civil fraud penalties (which have a lower threshold than criminal penalties) - not to mention crushing attorney fees.
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MY INEFFECTIVE LAWYER. I THINK I'LL KEEP HIM.
January 16, 2008
The A.P. reports a puzzling turn of events in the Wesley Snipes trial yesterday. Mr. Snipes ostentatiously fired Daniel Meachum, his longtime lawyer, in the run-up to the trial, alleging that he was ineffective. Mr. Snipes asked for a trial delay as a result. So who shows up at his lawyer's table yesterday but Daniel Meachum? From the A.P. report:
That didn't sit well with the judge, despite the attorney's claim that he had withdrawn for medical reasons. The judge says if the medical claim is true, then the earlier claim of ineffective counsel was bogus.Snipes now has two choices: keep Meachum off the case or waive his previous claims of ineffective counsel. Waiving the claim might prove to be a problem if Snipes were convicted, since that could provide fertile ground for a possible appeal.
If I were on trial on federal criminal charges, I wouldn't care to have ineffective counsel. It makes it look as though the prior "firing" may have been just a cynical delaying tactic.
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GOVERNOR CULVER TURNS TO THE BOTTLE
January 15, 2008
The Des Moines Register reports that Governor Culver will propose doubling the state's five cent bottle deposit, but with a new twist: you would pay a 10-cent deposit, but you only get eight cents back when you return the empties. One cent would go to the retailer, and the 10th cent would go to the state.
This is part of the treatment for the fiscal hangover left by last year's spending spree. It's sad that so much effort is being spent on a penny-ante tax scheme when the Iowa really needs to tend to its dysfunctional revenue system. Every aspect of Iowa's tax system is a mess, from our highest-rate-in-the-nation corporate income tax to our property tax. Yet our lawmakers only seem interested in making it worse with more targeted tax credits, while trying to patch things up with stupid things like this penny bottle tax.
What's even sadder is how much could be accomplished by wiping the slate clean of our dozens of targeted tax breaks, especially on the corporation side. Economist Martin Sullivan points out ($link) that Iowa such a high "leakage" from its 12% corporate rate that a better designed corporate tax could have a rate around 3% with no revenue loss. With some modest reduction in state spending - like getting rid of the useless "Grow Iowa Values" corporate welfare scheme and the ridiculous Iowa Office of Energy Independence - you could get rid of the corporate income tax altogether. It's hard to imagine "Grow Iowa Values" will attract more business to Iowa than a 0% corporation tax rate would. But what would "economic development officials" do with their time then?
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MORE FRIVOLITY
January 15, 2008
The IRS released its updated list of frivolous tax arguments yesterday (Notice 2008-14). It added four more arguments to the list:
* Misinterpretation of the 9th Amendment to the U.S. Constitution regarding objections to military spending.* Erroneous claims that taxes are owed only by persons with a fiduciary relationship to the United States or the IRS.
* A nonexistent “Mariner’s Tax Deduction” (or the like) related to invalid deductions for meals.
* Certain instances of misuse or excessive use of the section 6421 fuels credit.
That sounds like fun. Let's see what frivolous arguments we can come up with.
* Federal taxes are only due if for wages received by nephews of Polk County supervisors.
* The federal income tax is invalid because of the government's support for immoral water flouridation.
* I only have to pay taxes if Wesley Snipes has to, and he says he doesn't.
* You don't have to pay taxes if it keeps you from buying a new car annually.
* I refuse to pay federal taxes until the Roswell incident is adequately explained.
Feel free to add more in the comments. More coverage at Kay Bell's place.
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CAN WHITE MEN JUMP TO AN ACQUITTAL FOR SNIPES?
January 15, 2008
Wesley Snipes tried to get his tax evasion trial moved out of Ocala, Florida, on the grounds that the area was a hotbed of racial bigotry. His federal trial opened their yesterday, and Mr. Snipes started his day with a prayer services. He may have been praying that he was wrong about the bigotry thing; the six-person jury will be selected from a pool of 105 white folks.
It looks like Mr. Snipes attorney may be serious about arguing that filing a bogus $12 million refund claim was just a new way of asking the IRS a question:
Another of Snipes' lawyers, Robert Bernhoft, assailed the Internal Revenue Service at a press briefing outside the courthouse Monday and promised the trial would vindicate the actor -- even as a small crowd of supporters snapped Snipes' picture with camera-phones."Wesley Snipes begged, pleaded and prayed for answers from the IRS," Bernhoft said. "Their reply to him was an indictment."
Note to Mr. Snipes: if you have a question for the IRS, you'll do better calling 1-800-829-1040.
Russ Fox rounds up the first day of Mr. Snipes trial at Taxable Talk:
Then jury selection began. Judge William Terrell Hodges first read off a list of prosecution witnesses: accountants, investigators, and the like. Jurors are always asked if they know a witness (the goal is an unbiased jury). Then the attorneys for Mr. Snipes read off their witness list. Tax experts, they weren't: movie director Spike Lee, actor Woody Harrelson, actress Goldie Hawn, newscasters Tom Brokaw, Barbara Walters, and Diane Sawyer, and former boxer Muhammad Ali.
No doubt Goldie Hawn will have some helpful input on Section 861.
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PAY NO ATTENTION TO THAT INFORMATION BEHIND THE CURTAIN!
January 14, 2008
"Prof Prohibits Students From Using Google" (via the TaxProf)
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THEY'RE BACK, AND THEY NEED MONEY
January 14, 2008
The Iowa Legislature opens its 2008 session this morning. As the session starts, the big tax fights are likely to be over sales taxes and vehicle registration. The Quad City Times lists these tax issues among items likely to see action this year:
-- Road construction funding: The Legislature also will be looking at dealing with an estimated $200 million annual shortfall in funding for road construction and maintenance. Culver has ruled out the idea of raising Iowa’s gasoline tax, and legislators are likely to consider raising registration fees for pickups.-- Statewide sales tax for schools: The Legislature will study ways to replace county-by-county local-option sales taxes used to pay for school infrastructure projects with a statewide penny tax.
Considering the budget pressues building after last year's spending spree, the legislature is likely to need still more money. While increases in income tax rates aren't likely, the insatiable spenders at the Capitol might grasp for "loophole closures" like a compulsive gambler grasps for an abandoned pile of chips. For example, the legislature might push for "combined reporting" for Iowa's highest-rate-in-the-nation corporation income tax.
Additional pressure to raise revenue will come from the endless push for tax loopholes for favored groups. A "young Iowan" advisory panel wants tax credits to pay their student loans, for example, and tax credits are sure to figure into plans for "universal health care."
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SNIPES TRIAL OPENS TODAY
January 14, 2008
The Wesley Snipes tax evasion trial gets underway today in Ocala, Florida. The TaxProf's roundup of big media coverage is a great resource for those interested in the issues.
This will be the most high-profile trial yet of someone for using tax protester theories. Mr. Snipes is charged with claiming $12 million in bogus refunds using the "Section 861" argument.
The Tampa Tribune reports that Mr. Snipes attorney says that Mr. Snipes refund claim was just his way of asking a question:
Snipes' lead attorney, Robert G. Bernhoft, said the issue in court will not be about various tax theories. Snipes, Bernhoft said, did not try to defraud the government. He simply asked the IRS whether this innovative way to file returns was allowed."He did what every other American is entitled to," Bernhoft said. "He asked the IRS for information. Asking questions is not a crime, even if the IRS would like it to be."
Okie dokey. It's the "enquiring minds want to know" defense.
David Cay Johnston's New York Times piece looks at the legal issues involved. He says the Mr. Snipes creative inquiry refund claim is likely to be a problem:
William Cohan, a lawyer in Rancho Santa Fe, Calif., who also represents tax opponents, said another hurdle is the refund claim form signed by Mr. Snipes. The signature statement, or jurat, was altered so that instead of saying it was signed under penalty of perjury, the word "no" was inserted before "penalty.""That’s just devastating because if you sincerely believe you are not required to pay taxes, why would you alter the jurat?" Mr. Cohan said.
Because you're just asking an insincere question, perhaps?
Prior Tax Update Coverage: SNIPES TAX STRATEGY A CLM
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STIMULUS?
January 14, 2008
As recession fears grow, politicians of all stripes are calling for a "stimulus" package. Better Bitter Blogger Daniel Shaviro perfectly describes what we're likely to see:
Let's think in terms of the actual bill we would get, not the hypothetical bill one might design. It will be late, a Christmas tree loaded with lobbyists' garbage, larded by both parties since otherwise it wouldn't become law, and full of bad new stuff that will just stay on as the business cycle changes.
Precisely.
More on "stimulus" from TaxVox.
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PAL TO THE IRS?
January 14, 2008
PayPal, the electronic remittance services, is complying with IRS summonses for customer records.
There are two things the IRS might be looking for. The obvious one, of course, is investigating whether vendors who accept PayPal have been reporting all of their income.
The other IRS goal may be more subtle. Some people who sell tax evasion scams accept PayPal. Finding the names of their customers could lead the IRS to the doorsteps of people who tried to use these scams to evade taxes.
Still, the summons is an awkward tool. Expect Congress to require PayPal and credit card companies to report remittances to the IRS electronically in the next few years.
Via TaxGuru.net.
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THE COURT ORDER THAT CERTAINLY IS
January 11, 2008
The author of the tax protest standard "The Law That Never Was" now faces a permanent injunction against marketing tax protest kits. A federal court in Chicago has enjoined Bill Benson from marketing the "Reliance Defense Package," and the "16th Amendment Reliance Package. It also forbids Mr. Benson from
promoting, organizing, or selling (or helping others to promote, organize, or sell) any other tax shelter, plan, or arrangement that incites or assists others to attempt to violate the internal revenue laws or unlawfully evade the assessment or collection of theri federal tax liabilities or unlawfully claim improper tax refunds."
Mr. Benson argues that typos and wording differences in the version of the 16th Amendment to the Constitution makes it invalid, and therefore there is no income tax. Courts routinely dismiss this argument as "frivolous."
Links:
Quatloos discussion of the Benson theory.
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LOOK OUT, WE'RE COMING!
January 11, 2008
Excited taxpayers everywhere are receiving their Roth & Company tax organizers, complete with handy return envelopes. Some folks will just stuff the handy envelopes full of W-2s, 1099s and broker statements and send them to us with an untouched organizer. That's not a great idea.
Ideally, everybody receiving an organizer will fill it out meticulously and return it to us with complete information. That's not going to happen. But even if you don't fill out the organizer, you can still use it to save yourself time and money.
The organizer is based on your 2006 tax return. That means it asks for all of the stuff we needed last year. If nothing else, use it to make sure you send us all that. But there are a lot of other ways the organizer help you avoid those annoying calls from ... us!
- You should read through the three pages of questions at the front of the organizer. Most of the questions won't apply to you, but when they do (e.g., "Did your marital status change during 2007"), they really matter. And yes, I have had a client who neglected to mention that he got married.
- Electronic filing: If you don't tell us you want to e-file, we probably won't e-file, and if you want to stop, you need to tell us. The organizer has a place for this.
- If we have direct-deposited your refunds, or direct-debited your balance due, make sure the bank information in your organizer is still current. It can be awkward to retrieve your tax refunds from someone else's bank account.
- Look over the questions on other parts of the organizer. They can help you flag things like bad debts or items that can give you a tax benefit.
- Take special care to fill out the page for estimated tax payments. Don't just say "I made the payments you told us." Make sure you wrote the checks, and give us the dates so we can deduct your payments in the right year. We see more IRS notices for incorrect estimated payments than any other cause.
WE'RE COMING FOR YOUR BUSINESS, TOO
Business return preparation is beginning to crank up. If you are a banker, we may have already been to your shop to do your taxes. While we hope you look forward to our arrival, if you also look forward to our swift departure, here are some tips:
-Complete the questionaire we send. Sure, some of the questions may sound dumb, but we have to get the answers, and it's more embarrassing to ask dumb questions in person.
-Have the details. If we needed the details for your fixed asset and travel and entertainment accounts last year, we probably need them this year, too.
Remember, it's cheaper for you to be the detective. If you tell us "it's in there somewhere, go dig it out," we're up to the challenge, but it probably doesn't make sense to pay us to do so.
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E-FILE UP AND RUNNING TODAY
January 11, 2008
The IRS begins processing electronically-filed returns today. Their "free file" e-filing program also opens today.
E-filing is still on hold for taxpayers affected by the last-minute "AMT Patch"; the IRS expects to start processing their returns around February 11. These include filers with the following forms in their returns:
* Form 8863, Education Credits.
* Form 5695, Residential Energy Credits.
* Form 1040A’s Schedule 2, Child and Dependent Care Expenses for Form 1040A Filers.
* Form 8396, Mortgage Interest Credit.
* Form 8859, District of Columbia First-Time Homebuyer Credit.
More at Don't Mess With Taxes.
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YEAH, WHO NEEDS IT?
January 11, 2008
We heard about an old acquaintance of the Tax Update yesterday when he was arrested with three others in on tax charges. Joseph Saladino was arrested in connection with the activities of his "Freedom and Privacy Committee," which was first hit with a permanent injunction against promoting tax scams in 2005. Their web site no longer features tax scams, but it still includes a slogan that strikes me as rather odd:
It's almost as though they were advertising to get people to go to jail, where they can get rid of unwanted freedom and privacy -- who needs it? Of course, in this case, it fits.
One hopes they've been working on their spelling skilz since 2005, when their web site had this statement (click on it for a larger view):
The government says the scam had a tax cost of $7.5 million, which would qualify them for at lest 63-78 months in prison under federal sentencing guidelines. Of course, a sentencing judge has discression discretion to go outside the guideline range.
Russ Fox is all over this one.
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GAMBLING EXCUSE COMES UP SNAKE-EYES FOR TAX CHEAT
January 10, 2008
I'd hate to play poker with some defense attorneys. Anyone who can keep a straight face making some of the arguments people pay them to use to get out of tax trouble would be a formidable poker player indeed. So hat's off to the assistant federal public defender from Raliegh, North Carolina, who made this argument on behalf of Said Karim Hayez:
Hayez contends first that the district court abused its discretion in excluding the expert testimony of a psychiatrist who would explain that Hayez was a pathological gambler and that therefore he did not have the requisite intent to commit a crime under 26 U.S.C. § 7206(1).1 He claims that as a pathological gambler, he considered the diverted funds to be loans, which, by definition, are not income, and thus he did not need to report the money as income. The expert proposed to testify that pathological gamblers "chase their losses," holding an honest but irrational belief that they will win back all they have lost if they just gamble one more time.
The judge didn't buy it, and neither did the appeals court. It probably didn't help that the fraud required a fairly elaborate plan to alter records of his business to help him divert corporate funds to himself. It also didn't help that the IRS had previously uncovered another skimming plan using altered invoices, a plan that the IRS chose not to prosecute.
When I was in college I did a two-month stint as an intern radio reporter in Cedar Rapids - unpaid, but I got course credit and press credentials. I got to cover some trials, including one guy who argued that he didn't intend to kill the policeman he shot; he was on his way to shoot his wife, and he was so obessed with doing so that he didn't really understand what he was doing when he shot the officer. If anything, that man's argument made more sense than Mr. Hayez's argument did, because it only required a brief zombie-like state. Mr. Hayez argued he evaded taxes in a gambling-induced haze lasting at least three years.
The Moral? If you cheat on your taxes, you won't get much sympathy for blowing the proceeds at the casino.
Cite: Hayez, No. 05-4273, CA-4 (2008)
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WHO PAYS CORPORATION TAXES?
January 10, 2008
The notion of cutting corporate tax rates seems to be spreading. Last fall Ways and Means Chair Charles Rangel included a corporate tax rate cut in his "mother of all tax reform plans." Yesterday Rudy Giuliani included a corporate rate cut in his tax proposal. And of course Barrons has issued its annual call for the repeal of the corporate tax.
So it's worth asking: who bears the cost of the corporate tax? Corporate Owners? Employees? Customers?
The Treasury Office of Tax Analysis recently released an analysis saying that the corporation tax bill tends to get paid by labor, mostly because it's easy to move capital to low-tax venues nowadays.
Tax Vox, the center-left tax policy blog, has a post on corporate tax incidence, as the problem is called. Reporting on a recent forum on the issue, it says:
If there was any agreement, it was this: Shareholders and other investors bear most of the burden of corporate taxes at first. But over time, as companies find ways to move their capital overseas, more of the tax is paid by labor, which can't move so easily.A new paper by Harvard Business School professors Mihir Desai and C. Fritz Foley and University of Michigan professor Jim Hines concludes that a big chunk of corporate taxes is eventually paid by workers—mostly likely about half, but perhaps as much as 75 percent. Other studies suggest it is much more—in excess of 100 percent in some cases. Still others argue that investors foot most of the corporate tax bill.
Of course, beating up on corporations retains a certain political appeal, even if it's failing to propel John Edwards to the presidency, so there's no telling whether anything will be done to lower corporate rates. Given the increasing popularity of pass-through entities, lowering only corporate rates does nothing for a large portion of the economy.
Whatever the rates are, taxing coporation earnings twice, like the current law does, makes little sense. Making corporation dividend payments fully deductible seems to me like a good start, but as nobody else ever mentions it, maybe I'm missing something.
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DOCUMENT YOUR DONATIONS!
January 09, 2008
As you begin to put your 2007 tax return information together, don't neglect to document your charitable donations. Marylander Akin Falodun didn't do a very good job of it, and he paid the price in Tax Court this week. Mr. Falodun claimed an $8,565 deduction for 2003 non-cash donations. From the looks of the Tax Court opinion, his documentation technique was at best haphazard:
Petitioner's testimony regarding value leaves much to be desired, as does his testimony regarding the even more fundamental issue of deciding exactly what was donated. For example, petitioner claims to have donated to the Salvation Army a brand-new surround-sound radio with 12 speakers having a value of "about maybe $400". However, petitioner was unable to produce a receipt for his purchase because "it was cash, actually" given to "some guys, you know, in the parking lot" "who approached me at Cosco" as "I was driving one day". According to petitioner:The speakers, you know -- they were very expensive speakers, and they gave me them at a discount price. So I paid for the speakers, but when I go home, the power wasn't sufficient. It wasn't worth what the guy told me, so I couldn't use it.We accept petitioner's testimony that he made some gifts of property, but his proof pales in comparison to what was claimed. As before, we exercise our discretion, but bear heavily against petitioner, see id., and we hold that he is entitled to a deduction for gifts of property in the amount of $250.
$250, of course, is a bit less than the $8,565 claimed.
The Moral: If you buy expensive stereo equipment from a stranger in the Costco parking lot and then give it to the Salvation Army, be sure to get written receipts for both transactions. Failing that, don't invent deductions.
Cite: Falodun, T.C. Summary Opinion 2008-5.
Related: TAX TIP: SUPPORT YOUR NEIGHBORHOOD CHARITABLE DEDUCTION
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WHAT TO DO IN OCALA, WESLEY?
January 09, 2008
Russ Fox plays tour guide for Wesley Snipes, who goes on trial next week in Ocala, Florida. Mr. Fox has some helpful hints for those breaks in testimony, including this one:
- Ocala is the "Horse Capital of the World" according to their chamber of commerce. Visit a horse farm or the Ocala Carriage Museum.
By the time this is over, Mr. Snipes will be wondering why he ever wanted the trial moved to New York.
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IN THE OLD DAYS THE LENDER DID THIS SORT OF THING
January 09, 2008
Joel Schoenmeyer has an insightful post this morning about people who are in trouble because they bought houses they couldn't afford:
One of the reasons I stopped practicing in the area of real estate is that it didn't make financial sense for me. The market for real estate lawyers is such that you can charge about $400 to represent someone in a purchase or sale. And, as a solo practitioner, I could spend 15 or 20 hours on a single matter.If you go to buy a house in Illinois, your team of professionals consists of:
1. a real estate broker, who is being paid a percentage of the selling price for the home;
2. a mortgage broker, who is being paid a percentage of the amount of your loan; and
3. an attorney.So, who is in your corner? Not the brokers -- they have a clear conflict of interest. And not the attorney, because he or she is usually being paid only a minimum amount to sit with you at the closing and show you where to sign.
Lenders traditionally helped keep people from borrowing too much, for the selfish but highly-motivating reason that they wanted their loans paid. The mortgage broker screws this up, and the lenders let them. The mortgage broker's interest is to generate big loans fast, because he gets paid on the front end for doing just that. When the borrower defaults a year later, that's not his problem.
The moral? Grown-ups are responsible for their own finances. If they borrow too much, that's between them and their creditors; we taxpayers didn't sign into the deal, so we shouldn't have to bail them out of it.
Related: Please Don't Destroy My American Dream
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TAX EVADER HALL OF FAME?
January 09, 2008
While the Tax Update has its Taxpayer of the Year, Roni Deutch transcends the tyranny of the calendar with her list of the "10 Biggest Tax Evaders of all Time." Two of our Taxpayers of the Year, Richard Hatch and Wesley Snipes, make this list of all-time tax crooks.
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TRUER WORDS WERE NEVER SPOKEN BY AN ECONOMIC DEVELOPMENT OFFICIAL
January 09, 2008
I don't think he really meant this, but he's absolutely right:
"You can't underestimate the excitement and the impact that comes from making a movie in Iowa," said Mike Tramontina, director of the Iowa Department of Economic Development.
No, really, you can't possibly. No matter how low you go. And no matter how much taxpayer cash you give away to the filmmakers.
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ANOTHER QUESTION ON S CORPORATION HEALTH INSURANCE
January 08, 2008
A reader comments on our recent discussion of Notice 2008-1 on S corporation owner-employee health insurance:
My concern is with the definition of earned income for this purpose. All the examples in Notice 2008-1 assume the S corp shareholder has earned income from the S corp, which is defined in section 401(c)(2) as self-employment income. But S corps don't generate self employment income. Do the wages count as earned income for this purpose? (So as long as the wages exceed the premiums the shareholder can get the line 29 deduction?) The Notice doesn't say so.What if the S corp has a loss? if the wages exceed the premiums and both the wages and the premiums create a loss, does the shareholder still get the line 29 deduction?
Fortunately, the tax law gets us around the problem that the reader raises. Sec. 162(l)(5) says that you substitute "wages" for "earned income" for purposes of the health insurance deduction:
5) Treatment of certain S corporation shareholdersThis subsection shall apply in the case of any individual treated as a partner under section 1372
(a), except that—(A) for purposes of this subsection, such individual’s wages (as defined in section 3121) from the S corporation shall be treated as such individual’s earned income (within the meaning of section 401(c)(1)).
That means that an S corporation loss doesn't reduce "earned income" for purposes of computing the shareholder's deduction for health insurance included on his W-2, because S corporation K-1 losses aren't part of W-2 wages.
Related:
MORE ON S CORPORATION HEALTH INSURANCE
IF IT'S NOT ON THE W-2, S CORP SHAREHOLDERS CAN'T DEDUCT HEALTH INSURANCE
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IRS ROCKS THE CASBAH
January 08, 2008
A Madison restaurant impresario didn't stint on quality in his restaurants, but he left some key ingredients out of his tax returns:
Former Casbah Restaurant owner Sabi Atteyih pleaded guilty Wednesday to shorting the federal government $130,000 in taxes.Atteyih, 44, faces up to five years in prison when he is sentenced on Feb. 27 by U.S. District Judge Barbara Crabb.
Prosecutors said Atteyih, a popular Madison personality who once had a television cooking show, underreported his taxable income from his restaurant earnings by nearly $350,000 from 2002 to 2005, evading $130,000 in taxes.
I don't think I'd want to be sentenced by a judge named "Crabb."
While Mr. Atteyih may be going away, you can still enjoy some tasty-looking recipies at his Cooking the Casbah website. If that's not to your taste, maybe this is:
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FAIR TAX MATH
January 08, 2008
One of the more odd assertions about the "Fair Tax" 30% national retail sales tax proposal is that it will not increase after-tax retail prices because retail prices will fall by an "embedded 22% income tax cost."
If we assume that, say, 5% of the cost of a retail sale is income tax compliance (and it's not, or I would be living in a nice beachfront mansion somewhere), that means 17% of the cost of a retail product is income tax. Assuming an average effective rate of 30%, that would require a fully-loaded profit margin of 56% through the supply chain (30% rate x 56% net income = 17% tax on 100% of the sales price). That's preposterous. Even if you assume that 4% of the 17% is attributable to the payroll taxes that the Fair Tax is supposed to replace, you still need a net margin of 43%.
The numbers get even worse when you consider how much of the cost of retail items are never subject to U.S. income tax in the first place because they are made overseas. It's hard to see how the U.S. income tax is embedded in the cost of a DVD player imported from China, or how the Fair Tax makes that price fall 22%.
Finally, even if you believe that removing an "embedded" income tax makes prices fall, why would that only affect retail prices? That same tax should be embedded in wages and salaries; why wouldn't they also fall, under the same logic?
My longer take on the Fair Tax is here, and my discussion of why the real rate is 30%, rather than 23%, is here. A lengthy pro-Fair Tax argument can be found in our comments here. Marginal Revolution has a sensible take here.
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CHOOSING A REPUTABLE PREPARER
January 07, 2008
The IRS has issued its fact sheet on return preparer fraud. It includes the following "helpful hints when choosing a return preparer."
* Be cautious of tax preparers who claim they can obtain larger refunds than other preparers.
* Avoid preparers who base their fee on a percentage of the amount of the refund.* Use a reputable tax professional who signs your tax return and provides you with a copy for your records.
* Consider whether the individual or firm will be around to answer questions about the preparation of your tax return months, or even years, after the return has been filed.
* Review your return before you sign it and ask questions on entries you don't understand.
* No matter who prepares your tax return, you, the taxpayer, are ultimately responsible for all of the information on your tax return. Therefore, never sign a blank tax form.
* Find out the person’s credentials. Only attorneys, certified public accountants (CPAs) and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.
* Find out if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics.
* Ask questions. Do you know anyone who has used the tax professional? Were they satisfied with the service they received?
These are perfectly good tips, as far as they go. Yet there are other warning signs. So here are the Tax Update's additional helpful hints when choosing a return preparer:
- It's a bad sign when you ask what your refund will be and the preparer asks, "how much do you need?"- Use caution when the preparer says she still uses 1997 tax forms because 1997 was her favorite cell.
- You can only make appointments with the preparer during visiting hours.
- Be cautious of tax preparers who claim they are larger than other preparers.
- Avoid preparers who insist that the IRS requires your ATM PIN and your Visa Card number on your return.
- Find out if the preparer is affiliated with a professional organization that provides its members with lists of countries without extradition and holds them to a code of silence.
- Be cautious when the preparer says he has to meet you at a highway rest stop because of the 2000-yard limit.
- Beware of a preparer who asks "do you want her to love you more than any other guy?"
- Avoid a preparer who doesn't offer electronic filing, but says telepathic filing is better anyway.
- Look elsewhere if, when you call his references, Wesley Snipes picks up the phone.
So be careful out there!
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NORTH CAROLINA WINS COURT VICTORY ON WAL-MART CAPTIVE REIT STATE TAX SCHEME
January 07, 2008
Can you deduct rent you pay to yourself, but then not pay tax on the same income? A North Carolina Judge has ruled that Wal-Mart may not.
Wal-Mart used a 99%-owned "real estate investment trust," or REIT, to reduce its state taxes. REITs are akin to mutual funds for operating real estate. Like mutual funds, they get a deduction for their dividends, which are then normally taxed to owners. Wal-Mart took advantage or rules that make dividends paid by subsidiaries to parents tax free to attempt to get a deduction for the rents without then picking up the offsetting income. The 99% owner of the REIT was a Delaware subsidiary with no North Carolina operations. This arrangement had the effect of sucking earnings out of the North Carolina tax base into a state where the earnings wouldn't be taxed.
The North Carolina judge ruled that there was no economic substance to the arrangement, forcing Wal-Mart to add the rent payments back to its North Carolina tax computation. This reportedly increased Wal-Mart's North Carolina tax by $33 million.
The arrangement was marketed by national accounting firm Ernst & Young, and is similar to plans marketed by other firms to multi-state companies.
Via Kay Bell.
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FAIR TAX ROUNDUP
January 07, 2008
After Mike Huckabee's victory in last week's caucuses, his "Fair tax" national retail sales tax plan is getting more attention. The Tax Policy Blog rounds up the coverage.
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ESCAPING THE ARK
January 07, 2008
A couple that invested in the Anderson's Ark tax evasion scheme won acquittal last week in a retrial on tax evasion charges. They were convicted on their first trial, but an appeals court ordered a retrial to admit evidence barred by the trial judge.
The couple won acquittal with what I call the "good faith fraud" defense - that they didn't realize they were committing tax fraud.
Anderson's Ark's tax scam was based on deducting remittances to offshore investment accounts as business expenses; the funds were then drawn on by the Ark's clients, net of a fee paid to the organizers. The ringleaders are serving long prison terms, and charges have been filed against other customers.
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MORE ON CANDIDATES AND TAXES
January 04, 2008
The TaxProf links to fresh articles about taxation in the presidential race, and to roundups of the candidates' tax positions.
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WE KNEW HIM WHEN...
January 04, 2008
The Wall Street Journal Law Blog features Joe Gunderson.
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CAUCUS CAVALCADE
January 04, 2008
There's a new Cavalcade of Risk up this week. The Cavalcade puts together insurance and risk-management blog posts in a convenient and attractive package. Don't miss Hank Stern's post on how Japan's national health insurance program has done a remarkable job of spreading Hepatitis C. That's one thing that the government can provide universally without raising taxes.
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OBLIGATORY CAUCUS POST
January 04, 2008
I haven't posted much about the Presidential candidates positions on taxes, which are, except for Huckabee's support of the absurd "Fair Tax" and Ron Paul's quasi-tax protester outlook, pretty bland and generic. The Democrats want higher taxes on high incomes and targeted tax credits for "the middle class," while the Republicans don't want to raise taxes and want to do something about the alternative minimum tax and tax reform, somehow, someday. Tax just doesn't seem to be much on the radar, unless you think Huckabee's Iowa win was a vote for a 30% sales tax, rather than a solidarity vote by evangelicals. I don't.
But some tax bloggers are talking caucuses this morning. Howard Gleckman at Tax Vox:
But look closely at Obama's economic policy platform and what you see is pretty standard Democratic stuff. There is no dramatic plan to reform the tax system or move the nation's trade or retirement security policies in a fundamentally different direction. His health reform plan would restructure the system we have today, but in ways not very different from what most Democrats have been talking about for a decade or more....
Take his tax plank, for example. Obama vows to roll back the President Bush's 2001 tax cuts and use some of the money to create a new "making work pay tax credit" of $500 for singles and $1000 for couples. He'd enact an above-the-line credit for homeowners who don't itemize, and a credit for seniors earning less than $50,000. His enthusiasm for tossing out tax credits to various constituencies hardly represents change. It is, in fact, a throwback to the (Bill) Clinton Administration, which made such targeted tax breaks into an art form.
Better Bitter Blogger Daniel Shaviro has this bitter view:
Good news from IowaAt least, that's how I see it. On the Democratic side, I just hope Obama (if elected) doesn't actually believe that he can work "together" with Republican revanchists. But perhaps this is to a degree just astute packaging. And I am hoping he will be elected.
...
Huckabee is actually a likable person in some ways. I have old friends whom I would tremble to see as president, and whom I wouldn't even recommend as, say, a spouse or parent, but who are enjoyable in the right context due to their having some nice qualities. Whatever one thinks of Christianism in politics or his hostility towards gays, rejection of evolution, etcetera. I have enjoyed his deft skewering of the Republican leadership's arrogant elitism.
For my look at the caucuses from the inside, go here.
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LIVE FROM THE CAUCUSES
January 03, 2008
My report is here.
The precinct chairman phones in the results for the Republican Caucus for Precinct 114, West Des Moines, Iowa, at Fairmeadows Elementary School
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2008 YEAR-END PLANNING STARTS NOW!
January 03, 2008
We just finished our 2007 year-end tax planning. Can't we at least wait until, oh, March to start planning?
That's up to you, of course, but isn't it asking a lot of December to correct all of the tax mistakes of the first 11 months? More importantly, a lot of things that people think of as year-end planning ideas actually work best if they are done at the start of the year.
This is especially true of tax-deferred savings vehicles, like Individual Retirement Accounts, Section 529 educational savings accounts, and Health Savings Accounts. These things all provide a tax benefit by accumulating earnings without current tax. If you fund them now, instead of waiting until year-end, you cut the IRS out of its share of your investment earnings twelve months sooner.
So put that cash away starting now. If you want to max out right away, here are the 2008 contribution limits:
IRAs: $5,000 ($6,000 if you reach age 50 by year-end).
HSAs: $5,800 if you have family coverage, or $2,900 for self-only coverage. If you reach age 55 before the end of 2008, you can contribute an additional $900.
Education savings accounts - these don't have an annual limit; they do have some total balance limits. But some states, including Iowa, allow deductions for contributions to their Section 529 plans. The maximum Iowa deduction for 2008 contributions to College Savings Iowa hasn't been released yet, but it will be at least as much as the 2007 limit of $2,595 per donor, per donee. That means two parents with two children can deduct at least $10,380 in CSI contributions for 2008 (UPDATE, 1/5/08: it's $2,685, so our two-child couple can deduct $10,740 this year).
Or you can just wait until year end to fund these. The IRS will be happy to share in your investment income until then.
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S CORPORATION HEALTH INSURANCE: READER QUESTIONS
January 02, 2008
The S corporation health insurance issues raised in Notice 2008-1 have prompted some reader questions in comments for our two previous posts (here and here) on the subject. Keep in mind that I don't know the questioners, and they're not paying me, so they should talk to their own tax advisors before doing anything. That said:
I have an S corp setup which pays me & my wife a salary with all taxes taken out just as a normal paid employee. How does this new ruling affect how I should do my 2007 taxes as far as health insurance?
S corporation owner employees have long been required to add back their company-paid health insurance on their W-2s as taxable "Box 1" income. While the premium payments are included in taxable income, they don't have to be included in taxable wages for Medicare and FICA tax purposes. The employee then deducts this amount "above the line" on line 29 of form 1040. This gets you to the same place as if it had not been included in income to begin with.
The effect of Notice 2008-1 is to say that the only way to have S corporation shareholder-employee health premiums treated as "pre-tax" deductions is to include it on the W-2 Box 1 and deduct it on line 29. Other shortcuts - such as adding it back on form K-1 as a separate information item, or issuing a 1099, or just omitting it from W-2 income - don't work. If you don't do things as set out in Notice 2008-1, the IRS will say that the premiums are taxable income, but you get no line 29 deduction.
I had been using the www.association105.com program which their advertised tax benefit is not to having to pay SS/Medicare taxes on all my healthcare expenses including out of pocket. Is the service still necessary now that this new notice is effect?
Not knowing specifically about your plan, you might want to note that S corporation 2% shareholders are not eligible to exclude Sec. 105 benefits from Box 1 income; the IRS said in Announcement 92-16 that such benefits may be excludible from FICA and Medicare tax. You might be able to do as well using a health savings account arrangement, though; see Notice 2005-8.
I'm setting up a new Quickbooks payroll service. With this new notice how should I set up the payroll to take maximum advantage of this new notice- is this to be filed under fringe benefits, S corp owners health insurance, etc? And is it pretax or after tax expense. I just want to make sure I get it right since its a initial setup.
Health insurance is pre-tax for FICA and Medicare purposes, but after-tax for Box 1 taxable income.
A question referring to the treatment required by Notice 2008-1:
I am not sure this makes sense.1. By doing the above, would we increase payroll taxes for the shareholder-employee?
2. What is the benefit of doing this? Doesn't the shareholder-employee deduct insurance payments on line 25 and 29 already, with income passed through on line 17? What difference does it make to have the income on line 7?
Does it make sense? Look, Notice 2008-1 is the IRS talking, not me. They're saying that inclusion on the W-2 is the only way for S corporation shareholder-employees to get tax-favored treatment for their health premiums. The benefit of following the 2008-1 rules is that the IRS won't disallow the deductions on line 29 for self-employed health insurance.
The premiums are not supposed to be included in line 17 of the 1040 (where shareholder K-1 income is reported) because the corporation deducts the premiums as compensation expense, which reduces the line 17 amount. It goes on the W-2 to assign the health insurance to the shareholder-employee to which it applies. If you just disallowed the expense, other shareholders, including ones that aren't employees, would bear the tax cost - and non-employee shareholders don't get the line 29 deduction.
Putting the income in box 1 doesn't increase FICA or Medicare tax, as outlined above. It may increase state payroll taxes.
UPDATE, 3/7/08: I address a question from the comments to this post here.
UPDATE II: January 28, 2009
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IT'S SNIPES!
January 02, 2008
It was really no contest this year. Wesley Snipes early on jumped out to a commanding lead in our 2007 Taxpayer of the Year voting and he never looked back. The final results:
Mr. Snipes has been short on victories lately, having lost his bid to have his tax evasion trial moved out of Florida. He can only hope that things work out better for him than they did for the 2006 winner, Richard Hatch.
An honorable mention has to go to Creed J. Pearson, who jumped into the contest late in the year when the Tax Court ruled that he couldn't work off his tax debt by auditing the Scientologists, and who left the rest of the field far behind for a clear second place finish.
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