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Tax Update Blog: February 2008 Archives

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GOVERNER GIVES MONEY TO MICROSOFT WHILE HOUSE STIFFS OTHER BUSINESSES

February 29, 2008

Governor Culver yesterday signed the big tax break for the server farm Microsoft has been dangling over the state. Meanwhile, the Iowa House yesterday passed two bills that show their attitude to the businesses that are already here.

The House passed a bill to exempt the federal individual tax stimulus checks from Iowa taxes yesterday (HF 2417). The bill doesn't extend to Iowa the federal bonus depreciation and Section 179 asset expensing provisions of the federal stimulus package; nor does the "code conformity" bill passed yesterday in the House (SF 2123) that otherwise adopts federal tax computation rules to Iowa. In doing this Iowa repeats the mistake it made in failing to conform Iowa to similar provisions in the 2001 stimulus bill, a mistake that required a special session to only partially correct. As a result, taxpayers filing Iowa returns will have to keep different sets of fixed asset records for Iowa at their own expense. They will also have to pay for years of idiotic Department of Revenue notices that the differences between federal and Iowa taxes will cause.

The Moral? The politicians love big, headline generating business openings, but they care a lot less less for the small businesses that don't have lobbyists -- the ones that pay the costs of running the government on behalf of Microsoft and Google.

Related: The Race to Feed Microsoft

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OBLIGATION TO CONTRIBUTE CAPITAL MAY NOT MAKE YOU 'AT-RISK'

February 29, 2008

The "at-risk" rules of Section 465 are one of the more obscure land-mines of the the tax law. These rules were enacted in 1976 as one of the earliest attempts to attack tax shelters. The "passive loss" rules enacted ten years later were much more effective, but the at-risk rules were never repealed, and they continue to trip up taxpayers, as a Tax Court case yesterday illustrates.

Hubert Enterprises was a C corporation that owned 99% of an LLC named "LCL." The LLC borrowed money to purchase and lease out equipment. Because owners of an LLC aren't personally liable for debts, this debt would normally be considered "non-recourse," and therefore not "at-risk." The partners would then be unable to deduct losses attributable to their partnership basis arising from the debt.

To get around this, the LLC had a "capital account deficit restoration obligation," or "DRO." The LLC operating agreement required Hubert to restore a capital account deficit under some circumstances. They took the position that this made them "at-risk" to the extent of the obligation. The Tax Court disagreed:

Under the DRO, HBW's obligation is limited to restoring the amount of any deficit in its capital account. However, the amount of that deficit, if in fact one occurs, is not necessarily the same amount as HBW's proportionate share of LCL's recourse debt. Moreover, as just noted, the revised operating agreement does not require LCL to pay any or all of the restored deficit to creditors; it allows LCL to distribute any restored funds to members with positive capital account balances.

The Moral? If you want to be "at-risk" on LLC debt, a deficit-restoration obligation may not do the trick. The LLC member should arrange be directly on the hook by agreement with the lender, ideally as guarantor of last-resort.

Note: special rules apply to real estate loans. Not all real-estate loans require personal liability to be considered "at-risk."

Cite: Hubert Enterprises Inc. v. Commissioner; T.C. Memo. 2008-46

Related: 'TIS THE SEASON FOR AT-RISK BASIS

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MY WINNING STRATEGY IS TO NOT PLAY

February 29, 2008

Congratulations to Russ Fox, the proprietor of Taxable Talk, on the release of his third book:

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He describes the book:

We consider in depth a few aspects of no-limit hold'em that have received little attention by other authors. We concentrate on betting in no-limit hold'em. We consider when bets and raises are in order, why we bet, and how circumstances change when we bet. As the centerpiece of the book we provide four chapters, one per betting round, discussing exactly how much to bet based upon many circumstances.

This book is aimed for the intermediate to advanced player. If you've been playing in the limited buy-in no-limit hold'em games and want to try deep-stacked no-limit hold'em, this is the book for you.

If you play No-Limit Hold'em, I'm sure that's important! Whatever it means. You can buy the book now at Amazon, or at your favorite store in a few weeks.

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TOPEKA RENAISSANCE COMES TO BAD END; MADISON CASBAH ROCKED

February 29, 2008

Some loose ends were tied up yesterday on some stories we've mentioned here.

Yesterday a leader of a multi-level marketing tax evasion scheme out of Topeka was convicted of a boatload of charges for helping folks evade an enormous amount of taxes through a multi-level marketing scheme:

The founder of a Topeka-based tax company that authorities described as a pyramid scheme that marketed bogus tax deductions was convicted of fraud Thursday after a six-week trial.

A federal jury in Topeka found Michael Craig Cooper, 53, founder of Renaissance-The Tax People, guilty of more than 70 charges, including mail fraud and wire fraud.

The RTTP scheme was unusual in its "dream team" of advisors that gave it a gloss of respectability - a team that included a former IRS District Director, who entered a guilty plea in 2006.

The Justice Department press release says the tax loss in the scheme was $78 million. The Renaissance model had people deduct personal expenses as business expenses under the guise of being marketers of Renaissance dealerships. At a $78 million tax loss, federal sentencing guidelines start at 97-121 months in prison.

We first covered Renaissance - The Tax People here.

MEANWHILE IN MADISON...

The culinary impressario of Madison, Wisconsin was sentenced Wednesday to one year and one day in prison on tax evasion charges, The Capital Times reports. Sabi Attiyeh, 44, who owned the popular Casbah Restaurant and Lounge and who hosted a television cooking show, made the common mistake of reporting a lot more income to prospective lenders than to the IRS. We covered his story here.

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THEY GOT CAPONE ON TAX CHARGES

February 29, 2008

Another serious criminal has been brought to justice on tax charges, reports UnionLeader.com:

The man who operated a Seabrook crematorium where bodies were mishandled and ashes were left unlabeled was sentenced to prison yesterday for tax evasion.

Derek Wallace, 37, of Salisbury, Mass., was sentenced to 1 1/2 to three years in jail and ordered to pay $240,000 in restitution for failing to pay taxes on what prosecutors described as massive amounts of money, much of it cash, that flowed through his Bayview Crematorium and other funeral related businesses. Bayview was raided in 2005 by state police, who discovered unlabeled ashes, two bodies in one oven and a body decomposing in a broken freezer.

I suppose they had them in the oven because there was no room in the broken freezer.

Speaking of Al Capone, the IRS has realeased the records of the criminal tax investigation of Al Capone (hat tip:The Tax Prof). This one is fun - it reads like it was written by an IRS agent who read too much Dashiell Hammett, but who was a skilled typist:

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It's rare for the IRS to release historical documents because of the blanket statutory prohibition against releasing tax return information. The IRS said this could only be released because Capone never filed a return. A rule that would allow the release of historical tax information - maybe after 50 years - is long overdue. Instead, the tax returns of, say, Herbert Hoover and Franklin Roosevelt, which would be of great historical interest, are guarded like an illicit gospel in the Vatican. It's a shame.

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OUR VENDORS ALL ROUND THEIR BILLS TO THE NEAREST $50

February 28, 2008

Why might the IRS have been suspicious of this deduction list for a rental property:

  - Advertising $350
  - Auto and travel 4,500
  - Cleaning and maintenance 3,000
  - Repairs 12,000
  - Supplies 900
  - Utilities 3,000

Not surprisingly, the client didn't exactly have records showing these precise amounts. Russ Fox sums it up:

[The taxpayers] invented numbers out of thin air and got the results they deserved. If you have rental property, you're supposed to treat it as a business. You can purchase a filing cabinet for under $100.

The moral: keep your receipts, and only take expenses you actually incur.

Cite: Burkley, T.C. Summary Opinion 2008-20.

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TRUSTS AND BUNDLED FEES

February 28, 2008

The IRS yesterday issued rules on how trusts treat "bundled" trust administration fees on 2007 returns in light of the recent Supreme Court decision that subjects trust investment advisory fees to a 2% of AGI floor for deductions. Notice 2008-32 says trusts will be allowed to deduct in full "bundled" fiduciary fees, even if they may include investment advisory fees, on their 2007 1041s. But:

Payments by the fiduciary to third parties for expenses subject to the 2-percent floor are readily identifiable and must be treated separately from the otherwise Bundled Fiduciary Fee.

The notice says regulations will be issued for future years soon.

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BECAUSE WE JUST CAN'T GET ENOUGH

February 28, 2008

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Source: The Tax Policy Blog.

I think the road to tax reform lies in requiring all Congresscritters to do their tax returns via live webcasts. If they use a computer, the live screen feed should be available on the webcast. The finished product would immediately be posted for review and comment by the public. The webcast would also include a live comment window so fans could do play by play. It would make them think twice before imposing any more AGI phaseouts, at least.

Less ambitious, but also worthy, is a suggestion from one of our administrative people. She says that when she buys a new outfit, she takes an old one out of her closet and disposes of it. She suggests the same principle apply to words in the tax code.

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WHO'S YOUR DEAD DADDY?

February 28, 2008

Joel Schoenmeyer shows that the life of an estate attorney isn't all wills and trusts:

I recently had a case that involved DNA testing. My client asked me to help her prove that she was the child of a recently-deceased man (who never married my client's mother). After a lot of fits and starts, we were successful.

....

I was able to locate DNA of the decedent by contacting various hospitals, one of which had retained a tissue sample for the decedent from about 20 years prior to his death.

And he almost got away with it, the cad.

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LEAP-YEAR CAVALCADE

February 28, 2008

The newest Cavalcade of Risk, the roundup of insurance and risk management blog posts, is up at Wenchypoo's place. It includes an Insureblog post on doing consumer research on doctors. Lots more good stuff - hie thee thither.

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...72...73...

February 28, 2008

They come in pairs lately, these defeats for Larry D. Harvey's clients in Tax Court. Twice more yesterday the court ruled that taxpayers working in Antarctica fail to qualify for the foreign earned income exclusion. Each of the 73 defeats has come at the hands of the seemingly-invincible IRS attorney Randall L. Preheim. Even chemically-enhanced Neifi Perez had a better batting average last year.

The judge in all of these cases, Juan Vasquez, was hearing cases in Des Moines this week. His Antarctic experience must have made him feel right at home.

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Cites:

Nossaman, T.C. Memo 2008-42

Winslow, T.C. Memo 2008-43

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THINGS THAT DRIVE TAX POLICY WATCHERS TO DRINK

February 27, 2008

A Tax Analysts story ($link) is enough to make me want to fortify my morning coffee:

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In a widely expected move, the White House on February 26 threatened to veto a House proposal providing over $18 billion in tax incentives for renewable energy production, objecting to provisions that would roll back subsidies for oil and gas companies.

In a statement of administration policy, the Office of Management and Budget said the House bill "would use the tax code to target tax increases on a specific industry in a way that will lead to higher energy costs to U.S. consumers and businesses."

In a better world, the President would say "I am vetoing this bill because politicians are about as likely to make the best energy choices for the nation as Brittany Spears is to make the best lifestyle choices for America."

In a better world, Congress would not be repealing Sec. 199 for the oil industry. They would be repealing it for everybody and lowering rates. The sponsor would say "It was a foolish mistake for us to pass Section 199, which gives special treatment to manufacturing, construction, and architects, and farmers, in the first place. A modern economy uses all of these in ways too complex for politicians to begin to grasp, let alone manipulate with the ham-fisted tools of the tax law."

Instead, Congress is trying to repeal Section 199 only for the oil industry while passing a passel of subsidies for their well-lobbied friends in agribusiness. Sure, Section 199 is foolish, but taking it from the oil industry in the name of energy security is, well, irrational. And the President opposes only one of the foolish parts of the plan.


THE AUDACITY OF FAVORS

If you have great hope for better tax policy from the next president, well, there's always 2012:

Sen. Barack Obama's presidential campaign has accepted $54,350 from members of a law firm that in 2006 lobbied him to introduce a tax provision for a Japanese drug company with operations in Illinois, according to public records and interviews. The government estimates the provision, which became law in December 2006, will cost the treasury $800,000.

Of course, it's not just Obama:

In 2002, Sen. Hillary Rodham Clinton introduced legislation at the request of Rienzi & Sons, a Queens, N.Y., food importer, according to company president Michael Rienzi. The provision, which became law in December 2004, required the government to refund tens of thousands of dollars in duty charged on imported tomato products, Rienzi told USA TODAY.

The story doesn't mention Senator McCain, but he's a Senator like the others, so we'll probably see more about him too.

The only real policy solution to this stuff is low rates and few exemptions. As rates come down, the incentive to lobby for exemptions goes down, and with fewer exemptions, you can lower the rates. It would also help if people realize that a tax break that goes for a narrow interest is a tax increase for everyone else. The grim reality of our present, and likely future, tax policy makes me contemplate a three-martini breakfast.

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THE MOUSE THAT SHELTERED

February 27, 2008

A tax evasion scandal involving the tiny country of Lichtenstein has roiled German politics. Now it has crossed the pond:

The U.S. Internal Revenue Service said it will investigate more than 100 Americans who may be avoiding taxes by hiding money in Liechtenstein bank accounts.

The tax collection agency said it will work with officials in Australia, Canada, France, Italy, New Zealand, Sweden and the United Kingdom to obtain records and prosecute tax fraud. The IRS didn't identify any of the targets of the probe.

The TaxProf has a roundup.

Link: IRS press release.

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IOWA GOES ALONG WITH MARCH 10 DUE DATE FOR E-FILING FARMERS WITH FORM 4136

February 26, 2008

The Iowa Department of Revenue issued a press release saying it will accept certain farmer tax returns as timely filed by March 10. Iowa has a similar rule to the federal law that excuses farmers from estimated tax payments if they file by March 1 - a deadline that is automatically moved to March 3 this year because March 1 falls on a Saturday.

The March 10 date is only available to farmers meeting the following conditions:

- They otherwise qualify for the March 1 deadline;

- They e-file their return, and

- Their federal return contains Form 4136, the off-highway fuel tax credit form.

That means farmers who file on paper forms, and farmers who e-file but who don't claime the Form 4136 credit, still must file by March 3.

The Iowa release is reproduced in full below; if you don't see it, click "read more" below.

Related: MARCH 10 DEADLINE FOR E-FILING FARMERS WHO HAVE FORM 4136

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WHEN RATES ARE TOO HIGH, THE ANSWER ISN'T BETTER ENFORCEMENT

February 26, 2008

Some folks are upset that Governor Culver's proposal for combined reporting is moribund in the legislature. David Brunori of Tax Analysts is sympathetic to them ($link):

I've said it a thousand times: If you're going to tax corporate profits at the state level, you must use combined reporting. Anything short of combined reporting allows corporations to legally reduce their corporate tax burdens to zero. Iowa Gov. Chet Culver (D) proposed adopting combined reporting. He was not so much interested in the integrity of the corporate tax structure as in the need to find revenue. He hoped to gain $75 million more each year. In 2006 Iowa collected $284 million from corporate income taxes, about 4.5 percent of its total tax collection.

He adds:

Iowa is one of the states in which Wal-Mart played its real estate rental tax scheme. Wal-Mart transferred its Iowa stores to a Delaware subsidiary and paid the subsidiary rent, which wiped out its Iowa profits. The only way to prevent those shenanigans is to adopt combined reporting.

All of this ignores the elephant in the room: Iowa's highest-in-the-nation corporation tax rate of 12% - a top rate that is 20% higher than in any other state. When a tax rate is way too high, the only salvation is for the tax to not work very well. The estate tax works, or doesn't work, much the same way. Were the combined reporting combined with a serious effort at tax reform - which hasn't been seen in Iowa maybe ever - it would have a chance. At a 12% marginal rate - no way.

Related: Combined Nonsense

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ZAPPED!

February 26, 2008

20080226-1.jpgThe TaxProf calls our attention to a novel use of technology for tax evasion: the "Zapper." No, it's not the purple lights that entice insects to a gruesome fiery death in the backyard. It's a software add-on to a point-of-sale accounting program that automatically skims and diverts cash receipts to other causes - like financing terror, for example.

The most notorious use of the Zapper has been the "La Shish" tax evasion case, where a husband and wife diverted $20 million of restaurant proceeds to the Hezbollah terror group. A Google search indicates that zappers are also a serious problem in Canada, with its GST national sales tax (take note, Fair-taxers). Some headlines from the Great White North:

Celine Dion-owned restaurants raided by Revenue Quebec

Quebec tests tool to halt tax evaders
Restaurant industry targeted. Province estimates use of 'zapper' software costs hundreds of millions of dollars a year

It's a much more sophisticated version of the traditional restaurant skimming technique of never closing the cash register drawer.

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OUTSOURCING A CORE COMPETENCY?

February 25, 2008

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The Information Destruction truck parked on 8th Street next to the Des Moines Register building this afternoon.

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WE THE STILL ENJOINED

February 25, 2008

bs2.jpgTax protest figure Robert Schulz has now achieved the unhappy distinction of having lost appeals in two different federal circuits in the last six months.

Back in September the Eighth Circuit brushed aside Mr. Schulz's objections and ordered Paypal to give the IRS its records on purchases of "Tax Termination Packages" from his "We The People" website. Last Friday the Second Circuit upheld a permanent injunction against the sale of such packages. The court also ordered We The People to turn over their customer lists, which will add to the membership rolls of "We the Audited."

Links:

We the Losers
Howard Bashman


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I'D HAVE DONE IT FOR ONLY $75,000

February 25, 2008

The TaxProf reports that former baseball player Lennie Dykstra is contesting a tax prep fee for his 2006 tax returns of $111,097. As a tax preparer, my first thought is "that's outrageous!" My second thought is, maybe that's what I would have charged him.

I never liked Mr. Dykstra as a player, not least because he played for Beezlebub's Team. The fee makes me think of the cartoon that shows a barber shop with a price list - "Haircut, $10. Shave, $5. Nose hair trim, $10,000." For the right price, you'll expand your range of services.

Russ Fox is also on the story.

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MARCH 10 DEADLINE FOR E-FILING FARMERS WHO HAVE FORM 4136

February 22, 2008

The official IRS announcement of the extension for electronically filing Form 4136, the fuel tax credit, has been issued. Those e-filers will have until March 10 to file, as Roger McEowen reported last week.

Many farmers file on a March 1 deadline - March 3 this year because March 1 is on a Saturday. This extension only applies to farmes who e-file and whose returns have a Form 4136. Paper-filing farmers, and e-filers without a Form 4136, still face the March 3 deadline.

The IRS announcement is reproduced in full below; if you don't see it, click "read more."

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IF IOWA JUMPS OFF A CLIFF, DOES THAT MEAN WASHINGTON HAS TO?

February 22, 2008

Anytime one speaks up against corporate welfare giveaways as an "economic development" tool, someone will pipe right up and say "Gee, we'd sure like to stop doing this, but we have to because other states do."

That claim doesn't make sense on its own terms, of course. By definition, favoring the carpetbagger business screws the guy that doesn't get the breaks -- the business that has always been here and doesn't try to extort money from the government. But does everyone "have to do it?"

Maybe not:

OLYMPIA, Wash. -- Major tech companies' campaign for a server-farm tax break appears stalled in Washington's Legislature, just a day after hometown favorite Microsoft Corp. won an incentive package from Iowa lawmakers.

The Washington plan, proposed by Gov. Chris Gregoire, would have given Microsoft, Yahoo Inc. and others a multimillion-dollar tax discount on replacement equipment at server farms - buildings that house huge banks of computers crucial in the growing market for Web-based services.

So maybe other states aren't bribing companies? Why not?

Rep. Bob Hasegawa, D-Seattle, was among the House opponents of tax breaks for companies that "don't seem to be hurting for money."

"I just saw it as a giveaway," particularly since server farms add relatively few permanent employees to the economy, Hasegawa said.

Of course, Washington has one thing going for it Iowa doesn't. Iowa's top corporate income tax rate is 12%. Washington's is exactly 12 percentage points less than that. Maybe that's why Bill Gates lives in Redmond instead of Clive.

Related: THE RACE TO FEED MICROSOFT

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FOOL'S GOLD AND CHICKEN SHELTER

February 22, 2008

The tax authorities may move slowly to shut down tax scams, but when they do move, it can be impressive. The Justice Department moved to shut down two tax-shelter organizers yesterday for what appear to be pretty brazen abusive tax shelters.

There's gold in them there football players

The New York Times reports on one of these schemes, a bogus gold-mine tax shelter:

The Justice Department filed two lawsuits on Thursday in a move against what it said was a fraudulent gold-mining scheme sold to dozens of wealthy investors, including seven current or former National Football League players.

Prosecutors say the promoters of the investment, known as Midas, for mining interest development action strategy, promised investors a return of at least 34 percent if they invested refunds they got after filing amended tax returns that claimed bogus deductions related to supposed gold-mining expenses in Colorado, Arizona and elsewhere.

Sure, just about every NFL player has been to college, but not many of them were finance or accounting majors.

Liquid Eggs

The other tax-shelter action yesterday went after two former Grant Thornton partners who apparently were run out of that national accounting firm and went into the tax-shelter business on their own in the Kansas City area. One of them became known by the not-very-manly nickname "Dr. Poof" for his alleged ability to make taxes "go poof." The Kansas City Star reports:

Two area tax advisers used sham companies and nonexistent chicken farms to shelter their clients’ income from hundreds of millions in taxes, government lawyers alleged Thursday.

In separate but related civil suits filed in federal court, the IRS said that Allen R. Davison of Overland Park and A. Blair Stover Jr. of Platte City and Beverly Hills, Calif., sold numerous fraudulent tax-avoidance schemes to wealthy investors. The agency’s lawyers asked a federal judge in Kansas City to permanently bar the men from giving tax advice or representing clients before the IRS.

The federal complaint alleges that the promoters used a menu of scams, including:

-Claiming disabled-access tax credits without actually incurring any expenses for improving disabled access.

- Deducting bogus "management fees" to Roth IRA-owned corporations.

- Inflating depreciation deductions through bogus asset basis.

The most picturesque item in their alleged toolkit is phoney chicken farms. The complaint says that non-farmers - say, insurance brokers - would write a big check at year-end to allegedly buy a flock of layers, and a tax deduction Cash-basis "dirty boots" farmers can do this, but an insurance broker in Mission Hills probably isn't spending much time on the chicken farm. The insurance broker-farmer would get the check back the following year, including it in income, and then write a bigger check the subsequent December to keep the deduction going.

The Kansas City Star report quotes one participant:

“I just think somebody doesn’t have their facts here,” she said. “Because I know that some of the investments that Al is in, and has involved other people in, are in chicken farming and they have literal chicken farms that produce liquid eggs for McDonald’s. I know about the business and it’s extremely legitimate.”

Liquid eggs? I bet they don't hard-boil very well.

Links to Justice Department Press Releases:

TAX PREPARERS FROM WASHINGTON, D.C. & TEXAS SUED FOR ALLEGEDLY PROMOTING GOLD MINING TAX SCAM

U.S. SUES TWO MEN TO BLOCK ALLEGED TAX FRAUD SCHEMES SAID TO HAVE COST U.S. TREASURY HUNDREDS OF MILLIONS

The linked items also have links to the actual complaints filed in federal court.

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APPLICABLE FEDERAL RATES (AFR) FOR MARCH 2008 ISSUED

February 22, 2008

The IRS has issued (Rev. Rul. 2008-11) the minimum interest rates for loans made in April 2008:

-Short Term (demand loans and loans with terms of up to 3 years): 2.25%
-Mid-Term (loans from 3-9 years): 2.97%
-Long-Term (over 9 years): 4.27%

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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CRACKDOWN ON CODE-CRACKERS?

February 22, 2008

Bloomberg reports that the IRS is launching a crackdown on Tax Protest movement -- the folks who say they have "cracked the code" and debunked the tax law. The TaxProf, Taxable Talk, and Don't Mess With Taxes have more.

While the government's response to such tax scams has improved in recent years, it still strikes me as flat-footed. Some of the scams operate for years before the IRS moves to crack down on them. The delay, and the bogus refund claims that get paid before the service centers realize what is going on, make gullible taxpayers think that tax protest arguments might actually work.

Maybe the IRS really does have folks assigned to cruise the web and monitor fringe message boards to quickly identify and shut down these scams, but I doubt it. As far as I can tell, they use analog measures to identify scams taking place in a digital world.

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STAND AND DELIVER

February 22, 2008

The Tax Policy Blog passes on a nightmare of state tax enforcement extortion:

This week, we bring the story of Barry Godwin (courtesy TaxProfBlog), a controller for the Stingray Boat Company of Hartsville, South Carolina. Stingray sells boats to independent dealers, and all transactions occur over the telephone or Internet from South Carolina. They occasionally send dealers to other states but have no office or employees permanently outside South Carolina.
On July 23rd, 2007 I received a call transferred over from our truck fleet dispatcher at 10:15 am. The person on the other end was Ms. Kostak, a revenue agent for the State of New Jersey. I was immediately told that our truck had been pulled over at the weigh station on the interstate highway and could not move until we paid New Jersey for jeopardy assessment taxes. I asked Ms. Kostak why they were doing this. I was told that we had a dealer in the state of New Jersey. This incident was becoming unbelievable, so I asked her to fax me proof that she was who she said she was. I asked what I could do to let the driver go and I was told to pay the New Jersey Division of Revenue money. I asked how much and I was told it depended upon our sales into New Jersey. I looked up the sales for the past seven years as requested and Ms. Kostak quoted me a price of $46,200 to release the truck.

Sometimes taxes don't just feel like highway robbery.

Read the whole thing.

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IOWA SENATE RACES TO GIVE MONEY TO MICROSOFT

February 21, 2008

Only eight days after its introduction, the bill to give Microsoft $36 million in tax breaks cleared its final hurdle in the Iowa Legislature, passing on a 48-2 vote.

Meanwhile, the legislature shows no urgency to help all Iowa businesses by conforming Iowa's depreciation rules to the new federal rules. Too bad Microsoft couldn't have lobbied for that, too.

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EVEN ACTORS HAVE TO REMIT THEIR PAYROLL TAXES ELECTRONCALLY

February 21, 2008

20080221-3.jpgActor Joe Pesci's production company remitted its payroll taxes on time. Unfortunately, they paid them the old fashioned way, using payment coupons down at the bank. The IRS requires employers to remit such taxes using EFTPS, the Electronic Federal Tax Payment System.

Last week a U.S. District Court ruled that the IRS could hit the company with penalties for failing to remit the taxes the right way. From the court decision:

With its direction that the Treasury Department implement an electronic tax deposit system and prescribe regulations to govern its operation, Congress expressed its intent that the system be utilized and made obligatory for certain depository taxes. The reading that Fallu advocates, however, would leave the choice of deposit method to the taxpayer.

Accordingly, the penalty provision of 26 U.S.C. § 6656 does, by its text, reach a taxpayer's failure to deposit taxes electronically when required to do so by regulation. The only other federal court to have decided this issue agreed. See F.E. Schumacher Co. v. United States, 308 F. Supp. 2d 819, 828 (N.D. Ohio 2004) (upholding FTD penalties where taxpayer deposited employment taxes in full and on time but did not deposit electronically as it was required to do).

We discussed the F.E. Schumacker decision here.

The Moral: Sometimes it's not whether you pay the taxes, but how you do so.

Cite: Fallu Productions, Inc. vs. U.S., SDNY NO. 1:06-cv-13248

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ONLY LITTLE PEOPLE PAY TAXES ON THEIR GULFSTREAMS

February 21, 2008

Actor Nicholas Cage and a corporation he owns are going to Tax Court to fight over $1.7 million in assessed taxes. The IRS reportedly asserts that Mr. Cage ran $3.3 million in personal expenses through the corporation -- expenses that included a Gulfstream 1159A. The reports say the IRS is disallowing the deductions at the corporate level and assessing the payments as "constructive dividends" on the actor's 1040.

The Tax Prof and the TaxGrrrl are on the case.

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GAMBLERS - TAXING WITHOUT A NET

February 21, 2008

Recreational gamblers face a hidden tax. Gamblers aren't allowed to "net" their losses against their winnings. They have to include their winnings "above the line" in computing their adjusted gross income (AGI), while separeately deducting their losses "below the line" as itemized deductions on Schedule A.

In its infinite unwisdom, Congress disallows a number of tax benefits based on AGI. Just to name a few: itemized deductions are reduced as AGI increases, as are personal exemptions; the child tax credit is disallowed for high AGIs; passive loss rules get stricter for real estate owners with high AGIs. An avid gambler can run a lot of money through the slots in a year, running up a high AGI while (almost inevitably) losing money overall.

Russ Fox tells the story of a New Jersey couple who just learned this lesson. They netted their losses against their winnings. The IRS caught up with them, recomputed the return putting their winnings above the line and their losses on Schedule A. This increased their tax by over $4,000.

Fortunately for them, the Tax Court found their netting "logical," if wrong, and didn't impose penalties.

Cite: Dawson, T.C. Summary Opinion 2008-17.

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...70...71...

February 21, 2008

Attorney Wile E. Coyote Larry D. Harvey racked up two more losses in Tax Court yesterday. That makes 71 defeats for him defending taxpayers on the grounds that wages earned in Antarctica qualify for the foreign earned income exclusion. Who knew so many people worked there?

Cites:

Minor, T.C. Memo 2008-35
Zimmerman, T.C. Memo 2008-36

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IRS RULES THAT TRADING PARTNERSHIPS MUST SEGREGATE INVESTMENT INTEREST

February 20, 2008

If you have an interest in a trading partnership, like a hedge fund, your K-1 may get slightly more complicated. The IRS issued a ruling yesterday (Rev. Rul. 2008-12) that requires such partnerships to break out their interest expense separately so that non-active partners can report it as "investment interest."

The tax law allows taxpayers to deduct "investment interest" to the extent of investment income -- that is, to the extent of taxable interest income, and to the extent of dividend income and capital gains subject to ordinary income rates. If investment interest expense exceeds investment income, it carries forward to future years. The deduction is computed on Form 4952.

Link: Publication 550 (2006), Investment Income and Expenses

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THE RACE TO FEED MICROSOFT

February 20, 2008

Iowa's Senate Ways and Means Committee sped the Microsoft subsidy bill, HF 2233, to the full Senate yesterday. The Des Moines Register reports:

"So really this bill is just an opportunity for Iowa," said Sen. Bill Dotzler, a Waterloo Democrat. "I think it makes some great corrections that allows Microsoft to consider Iowa."


Corrections to what? If Iowa's tax laws aren't "correct," shouldn't they be fixed for other companies too, not just the biggest ones that need it the least?

Where have we heard from Mr. Dotzler before? Oh, yeah:

Dotzler said Earthpark "has the potential to be a huge tourism draw." He said, "I think this is going to be a huge economic engine for central Iowa."

Oops. Well, this time for sure, right, Senator?

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HAROLD HILL CARRIES INDIANA

February 20, 2008

hh44.jpgSo much for "one man with courage makes a majority."

The Governor of Indiana, Mitch Daniels, made a rare stand for the taxpayers last year by vetoing a film subsidy bill similar to Iowa's film tax credit. Last week Indiana's senate overrode the veto, 36-11 -- illustrating just how hard it is for politicians to resist taking your money and giving it to others.

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'10 THINGS YOUR TAX PREPARER WON'T TELL YOU'

February 20, 2008

Kerry Kerstetter, the grandaddy of tax bloggers, is quoted in a "SmartMoney" article "10 Things Your Tax Preparer Won't Tell You:"

"For one W-2, mortgage interest and a couple of kids, TurboTax is just fine," says Kerry Kerstetter, an Arkansas CPA. If, on the other hand, you're attaching a schedule for self-employment income or capital losses, consider getting help. And even then, if a return is made complicated by a one-time event — say, the birth of a child or the acquisition of a rental property — you might need only one year's worth of advice.

Here are the five things your tax preparer really won't tell you:

5. "I became an accountant to fight global warming."

4. "You know, the 16th amendment was never properly ratified. All this tax stuff is optional."

3. "My best pickup line? 'Baby, you e-file my extension'"

2. "Since they found out I was a CPA, all the guys at the biker bar want to buy me drinks."

1. "It's ok if you don't pay me."


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GOOD MORNING!

February 20, 2008

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Good morning to have a desk job, anyway.

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CULVER HEALTH PLAN: TAXING THROUGH THE BACK DOOR

February 19, 2008

What does a poor politician do when when there's no tax money to finance his great spending dreams?

Make somebody else pay, of course.

That's the essence of the "key health care initiatives" rolled out by Governer Culver yesterday "aimed at increasing access to health care and lowering health care costs."

Rather than increasing taxes, two of the proposals use regulation to force policyholders to bear the costs of the Governors Plans. From the Governor's press release:

COVERING PRE-EXISTING CONDITIONS: Under current Iowa law, individuals leaving the group health insurance market can be underwritten when entering the individual market. For people who have complied with the system of maintaining health insurance coverage through a group policy (and have coverage for all types of illnesses and conditions) it is a matter of fairness to allow them to move to the individual market without any preexisting condition waiting periods or denials of coverage.

COVERAGE FOR DEPENDENT CHILDREN: Health insurance carriers in Iowa have different dependent age restrictions and requirements. Because these dependents are already on the policy and have been factored into the rating system, maintaining these unmarried, young adults through the age of 25 will provide them with coverage for a time period that may allow them to move into their own coverage options at a later date either individually or through an employer plan.

So: because insurers won't be able to issue policies based on individual risk (unlike, for example, the auto insurance market), they will have to raise the cost of all individual policies to cover poor risks -- assuming, of course, that insurers won't be allowed to charge those with pre-existing conditions a premium in line with their increased risk. This is a hidden tax on everyone else with individual coverage, and it will make it harder and more expensive for everyone now covered through individual policies to find and maintain their coverage.

The same goes for the "adult children" coverage. Rather than letting people and businesses set their own terms for coverage privately, the government will require additional plan provisions. This makes it more expensive for employers to provide coverage, and the cost will come out of the raises the employees will get, or out of other provisions cut out of the employer plan.

The Culver Plan also has some true voodoo economics:

LONG-TERM CARE INSURANCE: Under current Iowa law, rate increases for long-term care insurance must be pre-approved and actuarially justified. Governor Culver is proposing legislation to cap long-term care insurance rates at 12 percent per year to protect aging policyholders. The Governor’s legislation does give the Insurance Commissioner the right to waive the 12 percent cap in light of financial conditions of the insurer or certain conditions within the marketplace.

If we've learned anything in the last 100 years or so, it's that price controls never, ever work. Unless the cap is too high to affect anything, it will chase insurers out of the market, force them to jack up the premiums on newly-issued policies to protect against the caps, or bankrupt the insurance carriers.

Still, there is something to be said for the Governor's plan: it could be a lot worse. In fact, legislative leaders want to make it so.

UPDATE: Hank Stern resonds below in the comments and in a post at Insureblog.

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SWAPS: WHAT HAPPENS IF I DON'T SPEND ALL OF THE ESCROWED FUNDS?

February 19, 2008

You've used an escrow for a Section 1031 exchange, but you still have funds left over. What happens? Kerry Kerstetter explains at TaxGuru.net.

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THEY ALSO PREFER BEER TO BUTTERMILK

February 18, 2008

The TaxProf brings us the latest from the world of the obvious:

Students Prefer Easy Courses and "Hot" Professors

I believe "easy" and "hot" are popular attributes outside the classroom as well.

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YOU DON'T SAY

February 18, 2008

Quote of the day from David Vaudt, Iowa's state auditor:

"To spend at such a torrid pace, we must increase taxes and fees at a torrid pace. That, in turn, could adversely impact economic growth in our state."

Don't look for tax cuts in Iowa soon.

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APPEALS COURT TO FOREIGN TAXPAYERS: FILE ON TIME OR LOSE YOUR DEDUCTIONS

February 18, 2008

Back in 2006, the Tax Court cut a break to foreign taxpayers who have neglected their U.S. tax filings. Tax Regulations require tax returns of non-U.S. taxpayers to be filed within 18 months of their due date, or all deductions will be disallowed - a rather harsh penalty that makes such taxpayers taxable on their U.S. gross income. The Tax Court overturned the regulations, saying that the deductions were allowed as long as the taxpayers come forward before the IRS comes after them.

Well, so much for that. Last week the Third Circuit Court of Appeals overturned the Tax Court and said the regulations are valid, Tax Analysts reports.

Non-U.S. taxpayers that have any U.S. activity should be very careful to file all of their returns timely. If they don't, it could get expensive.

UPDATE: The TaxProf has more.

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CHEER UP, PROFESSOR MAULE!

February 18, 2008

I tried, but so far I have utterly failed to snap Dr. Maule out of his funk. He still thinks things look bad and will only get worse:

Have the supply-demand curve and human ingenuity prevented the death by starvation of millions in developing nations? Have the supply-demand curve and human ingenuity eased the spread of new and dangerous diseases throughout the planet? Have the supply-demand curve and human ingenuity lengthened life expectancy in the former Soviet Union? Have the supply-demand curve and human ingenuity prevented the riots that have broken out in various places when supplies of drinking water, gasoline, food, or other essential items become exhausted? Did the supply-demand curve and human ingenuity prevent the massive death and destruction of a world war fought principally over access to land, oil, rubber, and other supplies?

I would answer "Yes, the supply-demand curve and human ingenuity have prevented the death by starvation of millions in developing nations." I would also say that they have prevented "the riots that have broken out in various places when supplies of drinking water, gasoline, food, or other essential items become exhausted," because I'm not aware of any such riots actually occuring outside of a failed state, war zone or disaster location.

But since I haven't made much progress cheering up Dr. Maule, I will turn the floor over to Ronald Bailey (via Instapundit):

Along the way, Malthusians predicted that massive famines would occur. They didn't. Food supplies increased faster than population growth and food became cheaper and more abundant. In addition, the amount of land devoted to farming barely changed. As a consequence of growing food security and the spread of improved public health and medical technologies, global human life expectancy more than doubled. Perhaps the Malthusians are at last right? There are good reasons to think not.

Read the whole thing.

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UTAH ATTORNEY CONVICTED IN $20 MILLION TAX EVASION

February 18, 2008

Dennis B. Evanson appears to have gotten a bit carried away in trying to reduce his clients taxes. The Utah attorney was convicted last week of helping 70 taxpayers evade over $20 million in federal income taxes. Based on the the charges, Mr. Evanson ran a full-service shop, providing a variety of offshore scams to evade taxes and the tax returns to go with them. From the indictment:

The various methods used and proomoted by the DEFENDANTS to carry out the scheme shared certain common characteristics. Each method used fictitious transactions to move clientss' untaxed income into offshore entities and returned those funds to the clients predominantly under the pretense of loans.

Four co-defendants pleaded guilty, and one was acquitted.

A $20 million-plus tax loss, enhanced for use of "sophisticated means," earns a sentence of from 97 to 121 months under the federal sentencing guidelines. Sentencing is set for May 13.

The moral? Any scheme that reduces taxes through bogus offshore transactions is bad news.

Links:

The indictment

Justice Department Press Release


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NO REBATE FOR YOU!

February 18, 2008

The TaxGrrrl narrows down the question: Ok, so who DOESN’T get a rebate?

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YO QUERO ORANGE JUMPSUIT

February 18, 2008

A California Taco Bell franchise tycoon has been sentenced to three years in federal prison for diverting $3 million of company funds for personal use in a tax evasion scheme. Russ Fox has the details.

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IOWA - TAX BREAKS FOR GIANT BUSINESSES ONLY?

February 17, 2008

The big tax news out of the Iowa Legislature last week was the introduction and speedy passage by the House of HF 2233, the big tax giveaway for Microsoft.

Meanwhile, the Iowa Senate was quietly passing another bill that affects every business that files an Iowa tax return. SF 2123 is the annual bill that updates Iowa's tax computations for changes in the Internal Revenue Code. This one updates Iowa's tax law retroactively to the beginning of 2007 for changes made in the federal law up through January 1 of this year

That's all fine, but the federal government has made an important change in business tax rules not covered by the Iowa bill: the "bonus depreciation" and increased "Section 179" deductions in the economic stimulus bill. Unless Iowa updates its "code conformity" rules, businesses will have to compute depreciation and asset writeoffs using different rules for their federal and Iowa taxes.

WHAT HAPPENED LAST TIME

That happened in 2001 when Congress last tried to goose the economy with bonus depreciation and extra Section 179 deductions. Iowa initially refused to match up with the federal rules. Businesses got so annoyed that the legislature finally conformed to the federal rules in a special 2004 session, but it never did match up the rules for 2001 and 2002. Taxpayers are still battling the Department of Revenue as a result.

The Legislature didn't want to go along with the federal rules in 2001 because they were more generous than the rules they replaced. In other words, they needed the money. They need it even more this year. Last week legislative Democrats announced the death of the Governor's only big revenue-raising proposals, combined corporate reporting and the bottle tax, so it's back to the drawing board to find ways to pay for last year's spending spree. With receipts slowing with the economy, they have a problem.

THE TEMPTATION OF EXTRA REVENUE

The legislature will be sorely tempted to "de-couple" Iowa's depreciation computations from the new federal rules to help raise some of that revenue. While legislative leaders and the Governor have said they won't tax the "rebates" in the stimulus plan, they've so far been silent on the depreciation rules.

If Iowa "de-couples," they will add force every business to spend time and money keeping two extra depreciation schedules, and then answering brainless Department of Revenue notices a few years later when the depreciation computations "turn around" and the Iowa deductions exceed the federal write-offs.

Let's hope the legislature doesn't make the same mistake this year that they made in 2001. So far they find it much more urgent to appease Microsoft than to pass a bill that affects every business in the state.

Follow the progress of tax bills through the Legislature on our 2008 Iowa Tax Legislation page.

UPDATE: They really do want to screw this up:

House Speaker Pat Murphy, a Democrat from Dubuque, says Iowans will not pay state taxes on those federal rebate checks headed their way, but Murphy suggests the state can't afford to be as generous as the feds when it comes to the business tax break for equipment depreciation. "We're not like Washington, D.C. We can't print money," Murphy says. "...We are going to be fiscally responsible. We're going to be prudent. We're going to look at what we can afford to do and what not to do."

Murphy says Democrats who control the legislature's agenda will make a decision about that business tax break "later" -- perhaps as late as 2009. "We're not going to make any guarantees at this point," Murphy says. "...Stay tuned."

If you can't print money, maybe you shouldn't be giving it away to Microsoft and Google.

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IRS POSTS NEW 'FAQ' FOR REBATES

February 16, 2008

The IRS has posted a "frequently asked questions" page on the rebates signed into law this week. It includes, among other things, coverage of how it works for social security and veterans benefit payments.

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IRS GREEN-LIGHTS VACATION HOME SWAPS

February 15, 2008

Now we know how to defer taxes on your Okoboji cottage.

Taxpayers wanting to defer taxes on a vacation home through a Section 1031 "like-kind exchange: have long had to contend with fuzzy rules. The tax law only allows you to get use Section 1031 for assets "held" either "for use in a trade or business" or "for investment." Property held only for personal use doesn't qualify. As we have noted, the consequences for failing this test can be ugly.

It's always been clear that you could convert a property from "personal" to "business" or "investment" status, but it's never been clear just how to do so for Section 1031 purposes. Did this mean no personal use? A little? Less than half? And how long before the swap do you have to make the conversion?

Today the IRS has given taxpayers some bright-line rules in a new ruling, Rev. Proc. 2008-16. Under these rules, the IRS will accept that a vacation home qualifies for Section 1031 if:

- You have owned it at least 24 months before the exchange,

- In each of the two 12-month periods prior to the exchange the property has been rented at fair value for 14 days or more, and

- The taxpayer's personal use of the property during the prior two 12-month periods doesn't exceed the greater of

-14 days, or
-10% of the number of days during the periods that the property is rented at a fair rental rate.

Replacement Property

It's not just enough that the property given up qualifies; the replacement property also has to be used in a business or held for investment. Rev. Proc. 2008-16 allows the property to qualify if"

- It's held for at lest 24 months after the exchange, and

- The personal use and rental for the two 12 subsequent 12 month periods meet same 14-day/10% standards that hold for the property given up.

This Revenue Procedure is a safe-harbor, so it is possible for property that doesn't meet these rules to qualify. That said, it seems fairly generous to me; considering the appreciation that has occurred in resort properties in recent decades, a wise taxpayer will plan to meet the requirements of Rev. Proc. 2008-16 when contemplating a swap of the Aspen place for the new Florida condo.

Related:

Section 1031 Basics
NO LIKE-KIND EXCHANGE FOR GEORGIA VACATION HOME

UPDATE: The TaxProf has more.

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MICROSOFT 99, TAXPAYERS 1

February 15, 2008

Andrew Jackson said "One man with courage makes a majority." Tell that to Bruce Hunter. The Democrat from Des Moines' south side was the only vote in the Iowa House yesterday opposed to maybe $36 million in tax breaks to Microsoft.

The Des Moines Register reports on the one man with courage:

Rep. Bruce Hunter, a Democrat from Des Moines, cast the lone opposing vote. He said corporate tax breaks lead to unhealthy competition.

"States competing with each other have kind of gotten into this slippery slope that we can't get out of anymore," Hunter said, noting Iowa's high education levels, skilled labor and affordable and reliable access to energy.

"Compete on that level instead of how much money are you willing to give us,' " Hunter added.

Minority Leader Christopher Rants comes up lame:

House Minority Leader Christopher Rants, a Sioux City Republican, voted for the bill but also requested that lawmakers look at what can be done to help smaller companies, many that already exist in Iowa.

"Surely this chamber cares as much about your neighborhood manufacturing plant, the retailer down the street, the small business in your community as much as you care about one of the largest, most wealthy companies in the world," Rants said.

Surely they don't. They care about subsidizing headline-grabbing projects for well-connected companies and industries. They care about appeasing the Corn God, the heck with the consumer. They care about subsidizing Hollywood. If they cared about folks without lobbyists, we wouldn't rate 45th in our business tax environment or dead last in entrepreneurial vitality.

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SWEET, SWEET TAXES

February 15, 2008

20080215-1.JPGThe Tax Policy Blog yesterday posted a brief history of chocolate taxes in honor of Valentine's day. Iowa figures prominently.



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THE OBAMANABLE TAXMAN

February 15, 2008

Tax Vox has begun a series of posts on the tax policy positions of the three surviving major presidential candidates:

Obama
McCain

Hillary! gets it next week. Tax Vox is also building a "briefing book" on tax issues from their center-left perspective.

The Tax Policy Blog's parent, the Tax Foundation, has a chart of candidate tax views here.

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68, 69...

February 15, 2008

Chalk up two more for the Roadrunner. Wile E. Coyote Larry D. Harvey lost two more cases yesterday in Tax Court on whether income earned in Antarctica is eligible for the foreign earned income exclusion (apparently not!). That brings his losing streak to 69, all at the hands of his personal Roadrunner, Randall L. Preheim.

Cites:

Rogers, T.C. Memo 2008-32
Thompson, T.C. Memo 2008-33

Considering the weather here today, it feels like we should qualify for whatever tax breaks apply to Antarctica. But it is supposed to warm up to 11...

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REBATES: LOAN SHARK STIMULUS?

February 15, 2008

The Tick Marks blog points out how the rebate plan creates a lucrative new market for the storefront tax preparation industry:

IRS Acting Commissioner Linda Smith says that taxpayers must file to get the tax rebate, even if they have no tax liability, because the law requires at least $3,000 in qualifying income to be eligible for even a $300 rebate. Additionally, the taxpayer must file with an valid Social Security Number; Individual Tax Identification Numbers are not sufficient to prevent undocumented workers/illegal aliens from receiving rebates. The IRS has budgeted just over $200 billion for the checks and additional processing costs; the agency expects an additional 10 to 20 million returns.

Count on the loan-shark sector of the tax prep industry to roll out "rebate anticipation loans" with effective rates that would make Loan Max jealous.

Kiplingers has posted on online rebate calculator (hat tip: The TaxProf).

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THE DOUBLE-BARRELLED STIMULUS PLAN

February 14, 2008

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Page 8A, today's local edition, the Des Moines Register. Click to enlarge.

UPDATE: The Volokh Conspiracy covers half the story.

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E-FILING DELAYS FOR OFF-HIGHWAY FUEL CREDIT

February 14, 2008

2/20/08: SEE UPDATE AT BOTTOM OF POST

Roger McEowen of the Center for Agricultural Law and Taxation at Iowa State reports a problem with electronic filing of Form 4136. The IRS doesn't expect to accept e-filed returns with this form before March 3.

The problem? Many farm returns are due March 1; qualifying farmers who file by then don't have to pay estimated taxes. Farmers typically claim a credit on Form 4136 for fuel used on the farm.

Roger's report is below; it includes the awkward work-around the IRS prescribes for this problem. The other work-around: file the old-fashioned way with a paper 1040. Be sure to send it Certified Mail, Return Receipt Requested, to document that it was postmarked by March 1.

Delay in E-Filing of Form 4136 - by Roger McEowen

An individual or business can claim a credit on IRS Form 4136 for various nontaxable uses of gasoline and other fuels. The credit can be claimed for various purposes including, mining, manufacturing, farming, mowing, aviation and home heating. Claims can also be made for sales to state and local governments and for alternative fuels. The taxpayer must be the one purchasing the fuel to file a claim.

Unfortunately, as a result of changes made by H.R. 4839, the Tax Technical Corrections Act (Act) of 2007 (signed into law on December 29, 2007), the IRS will not accept e-filed Form 4136 (Credit for Federal Tax Paid on Fuels for Tax Year 2007) until March 3, 2008. The Act requires IRS to revise Form 4136 to add fields relating to the Leaking Underground Storage Tank (LUST) tax (see Act, §6(d)(B)). But, there is no delay associated with paper filing by mail of federal individual tax returns that include Form 4136. So, farm returns that are due March 1, and also contain Form 4136 will have to be paper-filed.

Planning tip: If a client qualifies for the earned income credit (EIC) or a tax refund under the recently enacted tax bill, it is possible to e-file the return without an associated Form 4136, receive the EIC and/or tax refund, then later file an amended return electronically containing the Form 4136. In many instances, the EIC and/or tax refund may be of greater dollar value than the amount of the fuel credit claimed on Form 4136.

If a federal tax return has a penalty for underpayment of estimated tax and also contains Form 4136, some or all of the underpayment penalty may be due to the IRS delay in accepting e-filed returns. A waiver of the underpayment penalty due to this delay normally could be requested on Form 2210. However, the IRS position is that because a paper return could have been timely filed, the IRS delay in accepting e-filed returns containing Form 4136 is not the cause of any underpayment. Thus, a waiver of the penalty will not be available.

Roger understands from his conversations with IRS that the "amended" return would be filed using a 1040, not a 1040X (UPDATE 2/15/08: Roger says that the IRS has contacted him and has said the amended returns should use 1040X).

2/20/2008 UPDATE: Roger McEowan reports that the IRS will grant a special one-week extension to the March 1 deadline (March 3 this year, as March 1 is on a Saturday) for farm returns with a Form 4136:

On February 20, IRS issued a press release stating that farm
returns with an attached Form 4136 that are electronically filed will be
considered timely filed if e-filed on or before March 10. IRS emphasizes that the one week relief does not impact farm returns that do not have an attached Form 4136. IRS estimates that approximately 77,000 returns will be impacted.

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LARCENY IN LADUE?

February 14, 2008

Ladue, Missouri, is a wealthy suburb of St. Louis, comparable to Lake Forest in Chicago. If a complaint filed this week by the Justice Department is any indication, some of that wealth comes from using bogus S corporations to deduct personal expenses.

The complaint seeks to bar Frank Zerjav, Sr. and his son, Frank "Tiger" Zerjav, Jr., from engaging in tax practice. The Justice Department alleges that the Zerjavs use a simple tax plainning method that could be summarized as follows:

1. Set up an S corporation.
2. Put all of your personal possessions in the S corporation.
3. Deduct them.

From the complaint:

21. At so-called tax planning seminars defendants advise customers how to improperly reduce their reported federal tax liabilities. 22. Defendants charge customers a fee of approximately $2,500 for the tax planning seminars. Defendants call the seminars the “Tax Advisory Coaching Program.” 23. During the Tax Advisory Coaching Program defendants advise customers to set up S corporations for the purpose of paying the customers’ non-deductible personal expenses and then claiming those expenses as tax-deductible business expenses. 24. According to defendants’ promotional materials, the Tax Advisory Coaching Program “shows owners how to structure and operate with the right entity and apply techniques, tactics and ideas that help make life less taxing. Proven strategies and methods can be implemented that reduce or even eliminate taxes.” 25. Defendants give customers’ “homework” as part of the Tax Advisory Coaching Program. The homework consists of instructing the customers to read the book Inc. & Grow Rich!, and to determine: 1) the square footage of each room in the customer’s home; and 2) the value of any artwork, collectibles, exercise equipment, tools and other personal property owned by the customer.

Inc. & Grow Rich? "Incorporate & Grow Rich!" is available at Amazon.com; 29 used and new from $17.00! In case you'd like your own permanent injunction.

26. Defendants then use this information to create bogus transactions for customers involving the newly formed corporation. Defendants use the homework information to determine the amount of phony reimbursements the newly formed corporation should make to the customer. For example, one Missouri customer provided homework responses to the defendants indicating that the value of his personal assets was $25,995 including a “precious moments” art collection ($10,000); humidor ($100); DVD player ($400), VHS player ($200), and a curio ($800). On February 27, 2005, the Advisory Group wrote the customer a letter confirming the value of his personal assets at $25,995. Defendants then improperly deducted these items on the customer’s 2004 1120 S federal tax return using Depreciation and Amortization Form 4562.

The complaint also alleges that an NHL hockey player was one of the Zerjav's clients, and that he claimed improper deductions. Presumably not the Precious Moments collection.

Mr. Zerjav seems to have a bit of a backstory. He contributed over $18,000 to Republican candidates in 2004 and 2006. A fat lot of good it's done him. His membership in the American Institute of Certified Public Accountants was terminated effective July 1, 2000 as a "disciplinary action," though the AICPA website doesn't provide the details. A "name search" for CPAs at the Missouri Professional Licensing website comes up with only one Frank Zerjav.

The Moral? Just putting something in a corporation doesn't make it deductible.

Links:

Justice Department Press Release
Complaint

UPDATE: I have closed this post to comments and removed one of them. Obviously opinions are pretty heated about the Zerjavs. I don't believe any of the comments were libelous, but I don't care to push that line, either.

We allow comments as a service to the readers. We love comments. Our love doesn't extend to profanity or personal attacks on other commenters. Vigorous discussion yes, flame wars, no. The line between discussion and flaming is arbitrary, but we'll call them as we see them. Of course, anything that seems libelous or defamatory will go; if you see a comment that you think crosses the line, send me an email (jkristan -at - rothcpa.com) and I will deal with it.

UPDATE 2: I removed the rest of the comments. Better safe than sorry.

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FEELING STIMULATED?

February 13, 2008

President Bush signed the Economic Stimulus bill today.

UPDATE: The TaxProf has a roundup.

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WHERE'S MY STUFF?

February 13, 2008

We have received a few questions about the stimulus package rebates:

Our tax was $2034, but because of the child tax credit it was reduced to $34. Is the rebate amount based on the final tax amount paid or the amount before credits?

The rebate is based on tax before the child tax credit, so you should qualify for the full rebate.

My AGI is 17,643, married with 3 kids. Should my family expect the rebate?

At that level of income, you should have no tax. Assuming the income is "qualifying" income such as wage income, and the children qualify for the child tax credit, you should receive $1,500: $600 for a couple, plus $300 per child.

Many elderly taxpayers who died last year probably received more than $3,000 in SSA benefits and therefore qualified for the rebate. Do you think if a federal return was filed the estate could receive the rebate?

The rebate language in the bill (new Code Sec. 6428(g) reads (empasis mine):

Each individual who was an eligible individual for such individual's first taxable year beginning in 2007 shall be treated as having made a payment against the tax imposed by chapter 1 for such first taxable year in an amount equal to the advance refund amount for such taxable year.

I believe this means if you started 2007 alive, you get stimulated even if you are vitality-challenged at year-end.

If you have more questions, the Treasury has posted a "fact sheet" on the rebates that covers many common situations.

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GREAT MOMENTS IN DEMOCRACY

February 13, 2008

"It's just not fair that big, out of state, multi-billion dollar corporations that do tens of millions of dollars of business in Iowa avoid paying Iowa income taxes because of an outdated tax loophole."

-Chet Culver in his annual address to the legislature.

"I've been given quite a bit of confidential information by Microsoft"

-Rep. Phil Wise (D, Keokuk), discussing a plan to give millions of taxpayer dollars to a company with with a market capitalization of $263 billion, and which is sitting on $19 billion in cash.

20080213-1.gifSo - the Governor and the legislative majority are wanting to raise taxes on wealthy out-of-state corporations to give money to wealthy out-of-state corporations. After doing the same thing last year for Google. And they can't share the information with the rest of us, who will be paying for it, because we just really don't need to know about what they're doing for our own good because we'd just screw it up.

In Iowa, we have a bipartisan consensus: economic development = taxing all, bribing some. And it will make Iowa the "Silicon Valley of the Midwest."

Right. And Governor Culver will be the Arnold Schwarzenegger of the Plains.

State 29 has more, with better visuals.

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THE CAVALCADE ROLLS BACK INTO TOWN

February 13, 2008

The Tax Update was working out of town Monday and Tuesday, and the airplane got me in late last night. While I get my feet back on the ground, enjoy the newest Cavalcade of Risk, a roundup of insurance and risk-management blog posts. The Insureblog's contribution asks the musical question: should insurance premiums "discriminate" against risky recreational behaviors? Or, to put it properly, should the rest of us subsidize motorcyclists and snowmobilers?

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HEDGING YOUR DEFERRED COMP BETS

February 12, 2008

One of the provisions of execrable Section 409A, the post-Enron deferred compensation bill passed in a spasm of Congressional ham-handedness, is the requirement that many deferrals of compensation normally have to be for a period of at lest five years. This is probably a better candidate for hedging via the prediction market in tax rates we mentioned yesterday than Roth IRAs and 401(k)s. Roth deferrals are a bet on tax rates after retirement, which often means you are dealing with a 15 or 20-year time frame. It might be too long a period for reasonably liquid market it rate futures.

The five-year horizon of compensation deferrals under 409A is a much better match for prediction markets. Somebody making an election to defer compensation that would otherwise be taxed in 2009 is making an implicit bet that the tax rates won't be significantly higher in 2014. President Obama might have other plans. A rate futures market might realistically cover a five-year time frame and enable taxpayers to hedge that risk.

The TaxProf picks up on the tax rate futures market in a post this morning.

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ISLEY LOSES APPEAL

February 12, 2008

R&B singer Ron Isley lost another court battle yesterday when the Ninth Circuit Court of Appeals upheld his 37 month sentence:

200px-Isleys-mrbiggs-eternal.jpg

After reviewing the evidence regarding Mr. Isley's background, health, and the sort of care provided by the [Bureau of Prisons], the district judge concluded that a 37-month sentence best balanced the need to sanction Mr. Isley's "pathological" tax evasion against the need to accommodate Mr. Isley's poor health. This determination was not unreasonable.

Absent a presidential pardon, it looks like Mr. Isley will be a guest of the government until April 13, 2010 in Terre Haute, Indiana.

Link: Ninth Circuit order

UPDATE: The Taxprof has more.

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STILL WINTER CARNIVAL

February 12, 2008

Tired of winter? Forget your cares at the Carnival - the Carnival of Taxes at Kay Bell's place.

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HEALTH CARE FOR KIDS WHILE YOU'RE AWAY?

February 12, 2008

Joel Schoenmeyer tells how do deal with childrens health care issues if the parents have to be away for a brief period: Powers of Attorney and Emergency Consent for Children.

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PREDICTION MARKETS IN TAX RATES

February 11, 2008

Prediction markets are increasing in popularity. The idea is simple: allow people to place bets on the outcome of future events. Sports betting is the oldest such market, but the Iowa Electronic Market extended the concept to politics. Now an electronic market has opened to allow bets on future tax rates:

The contracts will forecast the highest marginal single-filer federal tax rates for 2009, 2010 & 2011. I expect trade to be concentrated in the 2011 contracts, as Bush's 2001 tax cuts are scheduled to expire that year, reverting the rate in question from 35% to 39.6%, while the lower bracket rates each increase by 3%. While it is less likely, Congress may also alter the Bush tax cuts for tax years before 2011, but such changes would probably impact 2011 as well.

If reasonable liquidity can be sustained in these markets, I hope that contracts will be added to predict corporate taxes, and other factors that contribute to individual effective tax rates, like the Alternative Minimum Tax and the social security cap.

If these take off, the obvious application is to hedge your decision to go with after-tax contributions to a Roth IRA or Roth 401(k). Such contributions aren't deductible now, but they can be withdrawn on retirement, along with their earnings, tax-free. Making a Roth-type contribution is partially a bet that your tax rates on retirement will be high enough that it's worth foregoing a current deduction. A futures market might enable you to reduce the risk of a wrong bet by buying a contract betting that rates won't go up.

It's a complex bet. I think the growth of government may put irresistable pressure on rates, but I also think that there is a lot of base-broadening that can be done that could enable rates to go down. The bet has to take into account who will win the White House and Congress, and whether they mean what they say. It should be fun to follow. You can follow these contracts here.

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Intrade tax rate markets as of 9:05 central time 2/22/08

It doesn't look like a very liquid market quite yet.

(Via Marginal Revolution)

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GOOD MORNING! WE'RE ALL DOOMED!

February 11, 2008

Professer Maule goes all Malthus on us:

The impending shortages of critical goods and materials, including oil, clean water concrete, steel, natural gas, health care, copper, agricultural products, and similar life-essential ingredients, will only worsen the problem. An ever-increasing world population, seeking more and more quantities of these and other items, coupled with the emergence of a small creditor group and massive hordes of debtors, is a recipe for disaster. Somewhere along the way, these conditions will trigger armed conflict, pestilence and pandemics, civil disorder, and breakdowns in societal structures. No one ever promised that the Dark Ages were a one-time event.

Of course, people have been saying this sort of things for a long time - Thomas Malthus gave the name to this type of speculation in the 1830s. Yet since that time, we have a larger and wealthier worldwide population than ever. Still, we're told, disaster is always somewhere down the road.

But betting on catastrophe is famously a losing gamble. Being an optimist, my money is on two things: human ingenuity and the supply-demand curve:

demand1.JPG
Chart courtesy of Mike Moffat, About.com.

Of course, the government could still screw things up.

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WESLEY SNIPES SKIPS LOCAL TAXES TOO

February 11, 2008

From Don't Mess With Taxes:

Both Newsday and the New York Post report that a $70,000 tax lien on one of Wesley Snipes' properties in suburban New Jersey was sold at auction.

Snipes has two years to pay back the purchasing company, Crusader Lien Services of Jenkintown, Pa., or the firm can initiate foreclosure proceedings.

While the government may be housing Mr. Snipes for awhile after his April 24 sentencing, he presumably will want a place to stay afterwards.

Russ Fox has more.

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PROOFREADING COUNTS!

February 08, 2008

In the mail today:

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It makes me feel like Kim Jong Il!

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HOW YOU WILL BE STIMULATED

February 08, 2008

The final stimulus bill that flew through Congress yesterday is very close to the House bill, except with free stuff thrown in for old folks and veterans who might not get any free stuff otherwise. The rebates will work like this:

The IRS will look at your 2007 return. If you incurred at least $600 in tax, or $1,200 on a joint return, the IRS will mail you a $600 ($1,200 joint) check.

If your tax was less than that, the IRS will send you the lesser amount.

You'll also get a $300 check for each child for whom you received a 2007 credit.

The rebate will be reduced by 5 cents for each dollar your adjusted gross income exceeds $75,000, or $150,000 for joint returns.

For folks without at least $300 of 2007 income tax liability, the rebate works this way:

IF:

-you had at least $1 of tax liability and gross income of at least $8,750 (or $17,500 joint);

OR

at least $3,000 of income from self-employment, social security benefits, or veterans disability or survivor benefits,

you will get a $300 check, or $600 for a joint return. You also will get $300 per qualifying child.

The credit phases out five cents for each dollar adjusted gross income exceeds $75,000 on single returns or $150,000 on joint returns. This means no credit for singles with AGI over $87,0000 and joint filers with AGI over $174,000, unless they have children; then the phase out stretches out to eventually reclaim the $300-per-child credit.

When you do your 2008 return, you will recompute the credit using 2008 numbers. If you compute a higher credit, you get the difference when you file your return. If the credit is lower using 2008 numbers, you won't have to pay it back.

Some examples, mostly adopted from the Joint Committee on Taxation technical explanation, are at the bottom of this post (click "read more" below if you don't see them).

UPDATE: No, the rebate won't be taxable on your federal return, and Iowa's politicians say it won't be taxable for Iowa purposes.

BUSINESS PROVISIONS

Increased Sec. 179 deduction. Section 179 allows businesses to expense in the year of acquisition the cost of non-rental property other than real property that would otherwise have to be capitalized and depreciated. This was to be limited to $128,000 in 2008. The stimulus package raises this to $250,000 for taxable years that begin after 12/31/2007 but before 12/31/2008. It phases out dollar-for-dollar as fixed asset purchases exceed $800,000.

Bonus Deprecation. The bill allows taxpayers to expense 50% of the cost of new property placed in service during the period beginning January 1, 2008, and ending December 31, 2008, regardless of your taxable year. Used property normally won't qualify. Aircraft and some property with a long construction period qualify through 12/31/2009. Qualifying property includes machinery, software, and certain "qualified leasehold improvements." If there was a binding contract in place to acquire the property before January 1, 2008, the property will not qualify for bonus depreciation. Property placed in service after 2008 may qualify if it is acquired pursuant to a binding contract entered into from 1/1/2008 through 12/31/2008.

Both bonus depreciation and Section 179 deductions are fully allowed in computing alternative minimum tax.

The five-year net operating loss carryback provision in the Senate bill did not make it into the final bill.

The TaxProf has a roundup, including links to the bill, committee explanations, and press releases.

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WHY WOULD IOWA RETURNS GO TO KANSAS CITY, WITH FRESNO SO HANDY?

February 08, 2008

So what bureaucratic imperative spawned this IRS announcement (IR-2008-15)?

WASHINGTON — As some taxpayers begin to prepare their paper tax returns, the Internal Revenue Service notes that some may be sending their returns to a different service center than last year. Those who received a tax instruction booklet from the IRS in the mail and use the labels included with the booklet can be assured that their tax returns will go to the correct address. Taxpayers who e-file are not affected by these changes.

For tax year 2007, the mailing changes affect returns, with or without payments, from seven states: Iowa, Kansas, Kentucky, Oklahoma, Pennsylvania, West Virginia, and Wisconsin.

Taxpayers should send:

* Returns from Iowa, Kansas, Oklahoma and Wisconsin to the IRS center in Fresno, California.
* Returns from Kentucky to the IRS center in Austin, Texas.
* Returns from Pennsylvania and West Virginia to the IRS center in Kansas City, Missouri.

For taxpayers who file paper returns, the correct center addresses are on labels inside the tax packages they receive in the mail.

OK, then...

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STIMULUS SLIDES THROUGH SENATE

February 07, 2008

The Senate passed a version of HR 5140, the economic "stimulus" plan. From press reports it appears the Senate bill looks much like the House plan, but with handouts for old folks and veterans thrown in. It sounds like the House will accept these changes, as for the most part the Senate capitulated to the House version.

We'll discuss the bill more when we see the actual bill text.

Prior coverage: REBATE DEBATE

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SEVENTH CIRCUIT UPHOLDS RETROACTIVE 'SON OF BOSS' REGS

February 07, 2008

The Seventh Circuit Court of Appeals has upheld a ruling striking down a variant of the "Son of Boss" tax shelter. The TaxProf reports:

The opening of Judge Easterbrook's unanimous opinion foreshadowed the result:
Paul M. Daugerdas, a tax lawyer whose opinion letters while at Jenkins & Gilchrist led to the firm’s demise (it had to pay more than $75 million in penalties on account of his work), designed a tax shelter for himself, with one client owning a 37% share.

The Seventh Circuit described the tax shelter this way:

A transaction with an out-of-pocket cost of $6,000 and no risk beyond that expense, while generating a tax loss of $3.6 million, is the sort of thing that the IRS frowns on. The deal as a whole seems to lack economic substance; if it has any substance (a few thousand dollars paid to purchase a slight chance of a big payoff) then the $3.6 million “gain” on one premium should be paired with the $3.6 million “loss” on the other; and at all events the deal’s nature ($36,000 paid for a slim chance to receive $7.2 million) is not accurately reflected by treating Euro 56,000 as having a basis of $3.6 million.

We blogged the district court decision here.

Mr. Daugerdas hobnobs with Howie Mandel in happier times:

Daugerdas&Howie_web.jpg

Cite: Cemco Investsors, LLC v. Forest Chartered Holdings, Ltd, No. 07-2220 (7th Cir. 2/7/08).

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ETHANOL TAX CREDITS ARE KILLING THE POLAR BEARS

February 07, 2008

If you are worried about global warming, maybe you want to rethink this ethanol stuff (WSJ $Link):

While the U.S. and others race to expand the use and production of biofuels, a growing body of scientific evidence suggests these gasoline alternatives will actually boost carbon-dioxide levels and thereby aggravate the problem of global warming.

A study published in the latest issue of Science finds that corn-based ethanol, instead of reducing greenhouse-gas emissions by a hoped-for 20%, will nearly double the output of CO2 and other gases that trap the sun's heat. A separate paper in Science concludes that the clearing of native habitats around the world to grow more biofuel crops will lead to more carbon emissions, not less.

Oops. Maybe the time has come for clean, safe atomic power!

UPDATE: The Tax Policy Blog has more.

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UNCLE RICO V. COMMISSIONER

February 07, 2008

20080207-1.jpegThe hero of the movie "Napoleon Dynamite" is stuck living with his Uncle Rico after his mother hurts herself in a dirt bike accident. Uncle Rico normally lives in a van parked in a field reliving his high-school football glory days. When he moves into Napoleon's life, he pursues various home-based businesses, spectacularly failing to make sales to one woman after another.

A Tax Court case yesterday reminded me of Uncle Rico's efforts. An Indiana taxpayer commuted 80 miles daily to his job at Abbott Labs, which is located in North Chicago, Illinois. That's no milk run from, say, Osceola to Ankeny on rural interstates. This is a manly commute through Chicago, a daily battle through some of the busiest highways in the country.

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A representative commute of approximately 80 miles from Indiana to North Chicago, IL.

But this man still had the energy for more challenges. The Tax Court picks up the story:

In 1997, while employed at Abbott, petitioner met a couple at his gymnasium. They convinced him to become an independent distributor for Reliv International (Reliv), a network marketing company that sells health care products. Petitioner had no previous experience in network marketing or retail sales.

According to petitioner, he can make a profit on sales of Reliv products, which he orders directly from Reliv. He regards any profits from direct sales, however, as incidental to the supposedly more lucrative goal of "sponsoring" other people in the Reliv marketing program, which he says would enable him to earn commissions on their Reliv sales.

So far, so Amway.

As it happens, since he became involved in Reliv marketing in 1997, petitioner's only customers have been family members. Likewise, the only two people he has sponsored as Reliv distributors have been family members -- his son and his brother, both of whom became distributors to take advantage of the distributor's discounts on Reliv products. The son did not last long in the business; he quit in 1999, the same year he started.

...

Petitioner commuted 80 miles, one-way, to his job at Abbott. On certain days, he would stop at commuter train stations or shopping malls along his commuting route and place "drop cards" on car windshields. These cards proclaimed "The Opportunity of a Lifetime" and gave his phone number but generally did not mention the Reliv name. Petitioner has never received any response to any of these drop cards.

I can't imagine why not.

In 2000, petitioner began sending out direct mail information, promoting Reliv products and the opportunity to become "healthy & rich". Some of these direct mail materials indicated that petitioner had been using Reliv products for many months and that they had reduced his symptoms of various chronic illnesses and contributed to his "overall feeling of good health."

Using an Internet database at his local public library, petitioner secured names and addresses of women in the northwest Indiana area to whom he would send the direct mail information. Each week, petitioner selected names and addresses of about 48 women to whom he would mail postcards. Petitioner would follow up the first postcard with a second and a third and then attempt to telephone some of these women. Each month, he would talk to several of them on the telephone for 15 or 20 minutes, making his Reliv pitch. On rare occasions, petitioner would meet with one of these women at the local library to give them Reliv materials. As far as the record reveals, none of these contacts ever resulted in petitioner's making any Reliv sales or sponsoring any Reliv distributors.

Ouch.

As you might guess from the narrative, the financial performance of the Reliv distributorship wasn't great:


Tax Gross Operating Net
Year Income Expenses Losses
____ ______ _________ ______

1997 $233.00 ($2,925.00) ($2,692.00)
1998 688.00 (9,431.00) (8,743.00)
1999 376.08 (9,350.11) (8,974.03)
2000 732.02 (8,833.54) (8,101.52)
2001 1,003.13 (9,967.82) (8,964.69)
2002 1,123.68 (12,894.71) (11,771.03)
2003 1,221.16 (11,629.79) (10,408.63)
2004 1,633.18 (11,834.31) (10,201.13)
2005 1,616.02 (1,616.02) --

You may have already guessed how the story ends. The Tax Court ruled that the taxpayer ran afoul of Section 183, the "hobby loss" rule:

Petitioner has never generated any profit from his Reliv activity. Petitioner contends that he will begin to realize substantial profits only upon sponsoring other Reliv distributors. Over some 10 years, however, he has sponsored only his brother and (fleetingly) his son, with minimal effect on profitability.

Bottom line: no deduction for the taxpayer's Reliv losses.

Cite: Eder, TC. Summary Opinion 2008-12

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SENATE STIMULUS STYMIED

February 07, 2008

The Senate fell one vote short of ending a filibuster of the Finance Committees economic stimulus package. The Senate package has more goodies than the one passed by the House of Representatives, including money for non-working seniors and a five-year loss carryback rule. The Washington Post reports:

The defeat by the narrowest of margins nearly ensures passage of a less expensive stimulus plan fashioned by President Bush and House leaders, though the Senate may make some changes. But it keeps the government on track to begin sending hundreds of dollars in payments to most Americans this spring.

It's not too late to adopt the logical compromise plan.

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66,67...

February 07, 2008

The Tax Court yesterday ruled against two more Antarcticans on the issue of whether income earned on the continent that could use a little global warming qualifies as "foreign" earned income for U.S. taxpayers. That's four losses this week on the issue for taxpayer attorney Larry D. Harvey, and now 67 overall.

Russ Fox comments:

Look, the Washington Generals did win six games. (Well, they lost 13,000 games during that same time span....) And the Cubs are celebrating the 100th anniversary of their last World Series triumph so there is hope, Mr. Harvey.

I predict the Cubs will have more wins in 2008 than Mr. Harvey has losses.

Cites:

Martin, T.C. Memo 2008-22

Naber, T.C. Memo. 2008-23

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FILING IN 2008: WHY YOUR PREPARER SEEMS A BIT JUMPY LATELY

February 06, 2008

It's Ash Wednesday, the day on the liturgical calendar for pondering your mortality. As long as you're contemplating death, you might as well get going on your taxes, too.

While you won't see too many drastic changes in tax computations, there is one change that will affect how you put your tax information together. Congress has stiffened the standards for positions taken on tax returns by preparers. In fact, preparers now are held to a higher standard than folks who do their own returns. If a preparer signs a return that takes a position that meats the old "substantial authority" standard, but doesn't pass a "more likely than not" standard, he faces fines and professional sanctions.

This will make your preparer more cautious about signing your return. The preparer might have more questions for you, and might be less willing to accept your word that you have full documentation for the 300,000 business miles you put on your car last year.

So if you use a preparer, here are some tips for assembling your 2008 tax information in light of the new standards:

- If you take non-cash contribution deductions, don't just say "2 bags of clothes to Goodwill: $500." You should show the preparer that you have detail for the contribution, and a receipt from the charity for the items received.

- If you take travel and meal deductions, be sure to note that you have documentation for it. If you don't, you can't expect the preparer to just take your word for it anymore.

- Don't use "same as last year" for amounts for contributions, property taxes, and so on.

- If you are taking business losses on a schedule C, E, or F, be ready to document them for the preparer. If the losses have carried over for a pattern of years, you might have to answer extra questions.

- Don't be too surprised, or alarmed, if the preparer slips a Form 8275 "Disclosure Statement" in your return. This form, which discloses risky positions, probably won't trigger an audit unless the amounts involved are large, and it will let both you and your preparer sleep better.

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SCORE TWO MORE FOR THE ROADRUNNER

February 06, 2008

Two streaks continued yesterday. The Drake men's basketball team won their 20th straight game last night, sneaking past Illinois State at Normal 73-79. And Larry D. Harvey's losing streak in Tax Court rolls on. He was vanquished twice more in yesterday by his indomitable nemesis, IRS attorney Randall L. Preheim. He has now lost, by my count, 65 cases on the issue of whether income earned in Antarctica qualifies for the foreign earned income exclusion. He hasn't won yet.

Cites:

Lemke, T.C. Memo 2008-19
McQuiston, T.C. Memo 2008-20.

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COSTS MORE, WORKS WORSE

February 06, 2008

So the legislature is going to use their big brains to make us all get health insurance, whether we want it or not, using a combination of mandates and subsidies.

Here are some observations to help the big brains along.

Megan McCardle:

Every major health care program we've put in place has cost much more than promised. This, presumably, matters. The first step to assessing the costs and benefits of something is, well, knowing the costs. Obviously, the budgetary cost is only one cost, but it is a component of the larger pricetag we should hang on any national health care program. It is therefore important to know what that actual cost will be. The answer appears to be "Vastly higher than whatever its advocates are promising."

Tyler Cowen:

Jonathan Gruber has just written a very useful and comprehensive paper on health insurance (I don't yet see ungated versions). He estimates that without a universal mandate, but using subsidies, a typical plan for covering the uninsured would cost $4500-$5000 a year per person, and that is cost in the narrow budgetary sense. With a mandate the fiscal cost of the government (again, not social cost, which includes the cost of paternalistically forcing people to buy health insurance) is estimated at $2732 per person per year. Of course it is cheaper to tell people what to do, comparing to paying them to do it. That cost estimate is assuming that the mandate is effectively enforced, which I do not expect.

State 29:

So what happens when the parents who qualify decide that going gambling, buying cigarettes, getting drunk, financing giant HDTVs, and wasting their money on all manner of crap is more important than budgeting for health insurance? Is Hillary Clinton and the Democratic Party going to garnish their wages?

And what happens if the kids are regularly taken to the doctor, but the parents decide to just pay out-of-pocket and forego insurance? Those parents will be burned at the stake for not bowing down to government-mandated corporate health insurance.

I can't wait to see where the money will come from. If they think Iowa has budget problems now, just wait until they pass something like this.

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JUST ELIMINATE LIES

February 06, 2008

One argument often used for taxes on unhealthy stuff, like cigarettes and Twinkies, is that fat people and smokers impose public health costs on the rest of us buff health nuts. Well, maybe it's a lie:

Healthy people cost taxpayers more in medical bills over their lifetimes than smokers or the obese, a new study has found.

Because they tend to live longer, the savings that they make the state in youth and middle age are wiped out by the high cost of dealing with lingering diseases of old age like Alzheimer’s and Parkinson’s.

By contrast smokers - who pour millions extra into government coffers by purchasing cigarettes - cost the state the least because they tend to die younger.

So don't scorn the chubby smokers huddled in the snow on the sidewalk. They're freeing up space in the nursing home for you, and the cash to pay for it.

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(Via Tax Policy Blog)

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TAX UPDATE A 'SMART STOP'

February 05, 2008

20080205-1.jpgThis is nice. We're listed as one of the "Smart Stops on the Web" in the February 2008 Journal of Accountancy:

Get daily tax updates at this Smart Stop from Des Moines, Iowa-based firm Roth & Co. PC. Since 2001, author Joe Kristan, CPA, the firm’s tax technical director, has been posting on dozens of tax topics, including backdated options, reform, the AMT and tax shelter news. As the 2007 filing deadline approaches, check out Kristan’s “Down to the Wire” posts and “Filing Season Tip.” The site also offers a searchable archive and e-newsletter.

I hadn't started the "Filing Season Tips" yet this year. Time to get on the stick.

Remember - you can get here via www.taxupdateblog.com, so you don't have to remember the long URL that the Journal uses.

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ARE LOSS CARRYBACKS A BOONDOGGLE?

February 05, 2008

TaxVox argues that the business stimulus plans under consideration in Congress are "off target." The basic argument is that bonus depreciation and enhanced business expensing just reward what businesses would do anyway, which is probably correct for the most part.

The post has one statement that sticks in my craw, though:

The second business incentive in the Senate Finance Committee bill, allowing companies to use today's losses to lower their taxes on prior year profits, is an even worse idea. It mostly would help bail out banks and homebuilders—firms that made staggering sums of money in recent years and are now suffering thanks to their own poor decisions.

"Staggering?" I have seen plenty of bankers and homebuilders in recent years, and they were walking perfectly upright. But if they're losing "staggering" sums now, over the whole business cycle they may be only break-even, or worse. What really bothers me about the TaxVox statement is the implication that you should pay taxes when you have income, but you should just suck it up when you have losses. Consider a corporation with this income pattern:

Year 1: taxable income: $1 million
Year 2: taxable income: $0
Year 3: taxable income: $0
Year 4: taxable loss: $1 million.

Over the four-year period, the company hasn't made any money. Yet, the company would have to pay $340,000 in federal income tax on that taxable income of $0. Under current law, taxpayers with "net operating losses" -- basically, business losses -- can carry them back and claim refunds for the prior two taxable years. Any unused losses carry forward.

There is a legitimate argument against a five-year carryback - simply that at some point you have to close the book on old tax years. Still, it seems only fair to allow some sort of carryback as a way to break the tyranny of the annual accounting cycle. The "business cycle" is certainly longer than one year, after all.

I think a three-year carryback makes sense; the statute of limitations for tax returns is three years, so three years also seems right for carrybacks. Congress thinks otherwise, primarily for revenue-raising reasons.

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FIRST, STOP DIGGING

February 05, 2008

The IRS has a new "fact sheet" about what to folks who get behind on filing their returns should do. Short answer: get caught up. The fact sheet outlines some good reasons to file:

Failure to file penalty. If you owe taxes, a delay in filing may result in a "failure to file" penalty, also known as the “late filing” penalty, and interest charges. The longer you delay, the larger these charges grow. It may result in penalty and interest charges that could increase your tax bill by 25 percent or more.

Losing your refund. There is no penalty for failure to file if you are due a refund. However, you cannot obtain a refund without filing a tax return. If you wait too long to file, you may risk losing the refund altogether. In cases where a return is not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund.

EITC. Individuals who are entitled to the Earned Income Tax Credit must file their return to claim the credit even if they are not otherwise required to file. The return must be filed within three years of the due date in order to receive the credit.

Statutes of limitation.After the expiration of the refund statute, not only does the law prevent the issuance of a refund check, it also prevents the application of any credits, including overpayments of estimated or withholding taxes, to other tax years that are underpaid.On the other hand, the statute of limitations for IRS to assess and collect any outstanding balances does not start until a return has been filed.In other words, there is no statute of limitations for assessing and collecting the tax if no return has been filed.

My record for helping a non-filer is filing 10 years of returns. It's harder than you'd think; just try running 10-year old software sometime, or finding such old forms to fill out by hand. Even after we got the old ones filed, the guy was always an October filer until his last return. The only time he ever mailed me his return information before April 15, he died in a plane wreck the next day; it was strange when the package arrived, a few hours after I learned of his death. He left a note to call him on his cell phone when I got the package.

Maybe some of us are just meant to extend our returns.

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BUT WILL IT GET THEM TO CLEAN UP THEIR ROOMS?

February 05, 2008

Joel Schoenmeyer has a helpful primer on the Uniform Transfers to Minors Act up at his Death and Taxes blog.

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COMBINED NONSENSE

February 04, 2008

The lawmakers pushing for "combined reporting" say it closes a loophole for those mean out-of-state corporations. You know, the ones they spend so much time and money bribing to open locations in Iowa. Take Governor Culver:

"It's just not fair that big, out of state, multi-billion dollar corporations that do tens of millions of dollars of business in Iowa avoid paying Iowa income taxes because of an outdated tax loophole."

He doesn't mention that their loophole closer will apply just as much to big multistate corporations headquartered in Iowa. Based on the combined reporting proposal that died last year in the legislature, it would work like this:

Consider two mythical corporations: Desmoinesco, Inc, a wholly owned subsidiary of Siouxfalls Corp. of South Dakota. 1% of Desmoinesco $1,000,000 sales ($10,000) are in Iowa. Its taxable income is $100,000.

Desmoinesco, Inc sells into a nationwide market. Siouxfalls Corp. has no Iowa operations and is not required to file an Iowa return under current law; its $4,000,000 sales are 25% each in Iowa, Nebraska, South Dakota and Minnesota ($1,000,000 each). Its taxable income is $400,000.

Without combined reporting, Desmoinesco's Iowa taxable income is $1,000: 1% of its total taxable income.

If the factors are computed on a combined basis, Desmoinesco will report $5,000 in taxable income. Why? Because Desmoinesco's 1% sales factor is applied to the unitary group's $500,000 combined taxable income.

Now let's turn the companies around, and pretend that Desmoinesco is the parent company, headquartered in Des Moines, and Siouxfalls Corp. is the subsidiary. The numbers work out exactly the same - a $4,000 tax increase for the company headquartered in Iowa (computations here).

So even though the politicians say they are just going after the big bad out-of-state companies (meaning "Wal-Mart"), they are also going after Meredith and every other big company with Iowa headquarters. If they keep it up, these Iowa companies might well someday become "big, out of state" corporations.

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RICHARD WHO?

February 04, 2008

hatch100.jpgWesley Snipes' predecessor as the Tax Update Taxpayer of the Year briefly emerged from obscurity last week when his appeal of his tax evasion conviction was rejected. Russ Fox and the Tax Prof have the details.

This should be the last we hear of Richard Hatch, the first Survivor winner, until he completes his 51-month sentence in October 2009.

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WHAT FOOTBALL GAME?

February 04, 2008

If you are tired of talking about the Super Bowl, visit the TaxProf; he has assembled learned commentary on the Wesley Snipes verdict. I think Neil Buchanan of George Washington University gets it about right:

Notwithstanding the focus on the acquittal for the felony counts, the jury did convict on 3 misdemeanors. Although it is unlikely that Snipes will receive the 3-year maximum jail time, he might well serve some time in jail; so this is hardly a case where a tax denier got off scot-free. He does still owe the tax plus interest plus penalties; so for his efforts, Snipes will pay much more to the government than he otherwise would have, he'll pay huge legal fees, and he's been convicted of criminal offenses. Everyone can do their own cost-benefit analyses, but it's difficult to see this as a smart move.

If you can't get enough Snipes, this is the place to go. Also, Russ Fox has some thoughts.

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WESLEY WALKS

February 01, 2008

Wesley Snipes was convicted on three misdemeanor failure-to-file charges this afternoon, but he beat the rap on his serious tax evasion charges.

His advisors, Eddie Ray Kahn and Douglas Rosile, didn't fare so well. They were found guilty of consipracy and fraud charges.

I am cooking dinner, so I will have to come back later, but it looks like the jury blamed the advisors and let Mr. Snipes off on his "good-faith fraud" defense.

More at Ocala.com.

UPDATE:

So far I haven't seen anything that explains the jury's thinking. They likely concluded that Mr. Snipes really was stupid enough to believe tax theories that even his defense team called "kooky."

The jury was less charitable to his promoters, Eddie Ray Kahn and Douglas Rosile. They were convicted of felony evasion and conspiracy charges and can expect to go away for some time. While Mr. Snipes may also do some time, it won't be long enough to damage his career as much as some of his roles have.

Based on David Cay Johnston's New York Times account, the prosecutor is frustrated:


Mr. O’Neil, the prosecutor, was asked whether Congress needs to revise the tax laws to deal with people who follow scam artists.

“Absolutely,” he replied, directly contradicting the Justice Department’s written recommendation to Congress. Mr. O’Neil said the current standard “is entirely subjective” and results in acquittals by juries even when they are presented with what he considers unreasonable conduct by defendants.

The prosecutor has a point. While the promoters are going down the river, Mr. Snipes goes to Hollywood. Taking absurd and long-discredited tax protest positions on returns shouldn't qualify for Mr. Snipes' good-faith fraud defense. Maybe this will motivate Congress to rethink the matter.

Still, while Mr. Snipes doesn't face a lengthy prison stay, he still will have to cough up the taxes. He's also likely to face a 75% civil fraud penalty, which is much easier to impose than criminal penalties, and 10 years of accrued interest expense. The Snipes acquittal no more vindicates tax-protester theories than the O.J. acquittal vindicates multiple homicides.

The TaxProf rounds up the big media links.

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THE WEEK AT THE IOWA STATEHOUSE

February 01, 2008

Iowa's legislature has has finished its first month. Nothing much has happened with the Governor's two big tax proposals, the bottle tax and the combined reporting proposal.

The noise this week mostly has to do with the federal stimulus bill. The governor promised not to tax the federal tax rebates on Iowa returns. He hasn't committed to conforming with the business stimulus proposals, which has caused an outcry on the GOP side. It would be good policy for Iowa to conform with whatever Congress decides. The Department of Revenue still struggles with the effects of Iowa's failure to conform right away with the 2001 stimulus package, and we still get notices from them for clients because the department can't be bothered to read supporting schedules to 1040s that disclose differences between federal and Iowa depreciation.

It would be good if the legislature stopped there on the stimulus front, but there is also talk of doing more with sales tax holidays. These are bad policy for a number of reasons and should be eliminated altogether, rather than expanded. But if Iowa really wants to stimulate its economy long-term, they should try real reform of Iowa's' byzantine income tax.

BILLS INTRODUCED

The bills introduced this week are, as usual, the opposite of tax reform. They include HF 2101, a 25% tax credit for businesses that hire math and science teachers to do math; HF 2102, which freezes property taxes on houses for some old folks, and SF 2084, which creates at least four different tax credits for "Green Buildings." As if people wouldn't save energy when oil is $95/barrel without a 1.4% Iowa tax break.

You can follow the progress of tax bills in this legislative session at our 2008 Iowa Tax Legislation page.

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THE SENATE STIMULUS PINATA

February 01, 2008

The House "stimulus" package had two big tax incentives for business: a one-year increase in the "Section 179 deduction" to $250,000 and a one-year "bonus depreciation" provision. As the Worlds Greatest Distributive Body, the Senate piled on the goodies. The Senate Finance Bill has the following incentive provisions

- An increase in the Section 179 deduction to $250,000 for "property placed in service after January 29, 2007 in taxable years ending after that date." That differs from the house bill, which applies to taxable years beginning after December 31, 2007. That effective date would be a bummer for companies with January 31 year ends, as they would have only had Wednesday and Thursday of this week to use the increased deduction.

- A bonus depreciation provision that splits the 50% bonus depreciation amount 25% each to 2008 and 2009. The Ways and Means bill allows the whole amount in 2008.

The Senate Finance bill has a bunch of items that the House left out entirely:

- A five-year net operating loss carryback, instead of the usual two-year carryback period.

- Extension of all of the household energy-efficiency credits tat expired at the end of 2007 through 2009.

- Extension of some renewable energy production credit and refined and Indian coal credits. Is Indian coal is more stimulative than white man coal?

- Extension of some other energy-related deductions expiring this year through 2009, including the energy-efficient home credit.

As Senate Rules allow for more floor amendments, look for more Senators to take a whack at the pinata.

20080201-1.jpg
Creative Commons/Flickr image by Peasap

Links:

Senate Finance Bill
Finance Committee Staff Explanation

TaxVox: "Washington’s Business Stimulus: Off Target"
Tax Policy Blog: Stimulus Bill Turning Into A Christmas Tree

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REBATE DEBATE

February 01, 2008

As the remaining presidential candidates prepare for "Super Tuesday," a hungry nation yearns to know: "Will I get a rebate? And how much?"

If you pay income taxes and make under $75,000, or $150,000 on a joint return, you'll probably get something. Everyone else, maybe.

HOUSE VERSION

The plan passed by the House Ways and Means Committee earlier this week computes rebates this way:

The IRS will look at your 2007 return. If you incurred at least $600 in tax, or $1,200 on a joint return, the IRS will mail you a $600 ($1,200 joint) check.

If your tax was less than that, the IRS will send you the lesser amount.

You'll also get a $300 check for each child for whom you received a 2007 credit.

The rebate will be reduced by 5 cents for each dollar your adjusted gross income exceeds $75,000, or $150,000 for joint returns.

For folks without at least $300 of 2007 income tax liability, the rebate works this way:

IF:

-you had at least $3000 of earned income (wages or self-employment), OR

- at least $1 of tax liability and gross income of at least $8,750 (or $17,500 joint),

you will get a $300 check, or $600 for a joint return. You also will get $300 per dependent.

When you do your 2008 return, you will recompute the credit using 2008 numbers. If you compute a higher credit, you get the difference when you file your return. If the credit is lower using 2008 numbers, you won't have to pay it back.

SENATE VERSION

The bill passed by the Senate Finance Committee Wednesday works the same way as the Ways and Means Bill for people who pay income tax, except the rebate is smaller ($500 single, $1,000 joint), and the phase-out starts at $150,000 AGI, or $300,000 joint.

The Senate bill's big differences are for people who don't pay income tax. Where the House bill gives a reduced credit for non-income taxpayers with at least $3,000 of earned income, the Senate gives the full credit, and extends it to people with at least $3,000 in social security benefits or veteran's penstions.

Oh, and the Senate bill doesn't apply to Congresscritters, so they are only bribing the rest of us with our own money.

Links:

Ways and Means Explanation
Ways and Means Text

Senate Finance Explanation
Senate Finance Text

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