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 The "passive loss" rules enacted ten years later were much more effective, but the at-risk rules were never repealed, and they continue to trip up taxpayers, as a Tax Court case yesterday illustrates.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:
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:
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
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.
Cites:
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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:
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
The 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
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
Tax 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:
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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?"
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
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.
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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
Actor 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
So 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
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.
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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:
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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