Tax Update Blog: March 2008 Archives
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TAX TIP: LET THE GOVERNMENT MATCH YOUR 401(K) CONTRIBUTION
March 31, 2008
Poor Richard said "a penny saved is a penny earned." It might be a penny-and-a-half earned if you qualify for the "Saver's Credit" for retirement plan contributions.
The Savers Credit reduces your federal taxes by up to $1,000, or $2,000 for joint filers, for individual contributions to IRAs, 401(k)s, and other qualified retirement plans.
The credit is up to 50% of contributions for single filers with adjusted gross income up to $15,500 and joint filers with AGI up to $31,000. It is available at 10% of IRA or 401(k) contributions for single filers with AGI up to $26,000 and joint filers with AGI up to $52,000.
This is an easy credit to miss. Don't overlook it. You claim it using Form 8880.
This is another installment in our daily series of 2008 filing season tips. Watch for them each and every day here through April 15!
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HAROLD HILL MARCHES EVERYWHERE
March 31, 2008
The Tax Policy Blog has an excellent short discussion of the madness of filmmaker tax credits that is sweeping the nation. An excerpt:
Foremost, it shows that economic actors (like owners of businesses) respond to incentives, whether you say the credits fall under the heading of lower taxes or a government subsidy (essentially the two are equivalent).
Amen to that!
It also highlights a prisoner's dilemma problem that the economy of the nation as a whole faces. Each state government may have an individual incentive to give special subsidies to film makers to lure them into their state. However, these tax credits must be paid for by higher taxes (or lower spending) for others. In the end, if each state passes a film tax credit (which it appears may happen) given that another state has and that it may be in their own self-interest to do so, the national economy has had another tax distortion imposed on it. Overall, film production will be favored at the expense of higher taxes on other activities, leading to too much film production and too little of something else, thereby lowering the nation's economic well-being.
It's short; read the whole thing.
Related: HAROLD HILL GULLS THE HOUSE
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POOR ISN'T ALWAYS SIMPLE
March 31, 2008
Some states determine compensation based on the value of an estate. To me, these things have little relation. The lives of the poor can be very complicated; the lives of the rich may not be.
Iowa is one of those states.
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FLAWED PAIN MANAGEMENT
March 31, 2008
A doctor with Council Bluffs connections pleaded guilty to tax evasion charges last week. Benjamin Zamora Rosario entered a guilty plea at the U.S. District Court in Des Moines on charges of willful failure to file returns for 2001 to report income from his "pain management clinic." The charge carries a maximum penalty of one year in prison.
The story is a sad result for Mr. Rosario, but it generated a headline in the Council Bluffs Nonpareil Online that is instructional for headline writers everywhere:
Unless you lose your medical license when you leave Council Bluffs, the headline writer seems to have perhaps read the story too quickly.
Links:
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READING YOUR K-1: EXAMPLES
March 30, 2008
In the last few days we have provided an overview of what a Form K-1 does, reviewed why your basis in your partnership or S corporation investment is important, and discussed how the at-risk rules can limit your K-1 losses. Today we will go through two simple examples on how K-1 items can go on your return.
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READING YOUR K-1: IS YOUR BASIS 'AT-RISK'?
March 29, 2008
If you have losses on your K-1 from an S corporation or partnership, there are three hurdles to clear before you can deduct them. Yesterday we discussed how to use K-1 information in when seeing if you clear the first hurdle: having enough tax basis to deduct the loss. Today we'll look at the second hurdle: is your basis "at-risk"?
The at-risk rules apply to almost all business activities. Originally enacted to deal with the first wave of marketed tax shelters in the 1970s, these rules were largely superseded by the "passive loss" rules of 1986, but they were never repealed. In fact, your losses don't even get to the "passive loss" rules unless they are "at-risk." Losses that aren't at-risk are disallowed until they can offset future income from the activity, or until the taxpayer gets other "at-risk" basis.
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USING YOUR K-1: BASIS INFORMATION
March 28, 2008
We discussed yesterday how information flows from a partnership or S corporation to your 1040 via the Schedule K-1. Unfortunately, as elaborate as the K-1 is, it doesn't necessarily have all of the information you need.
When the K-1 shows nothing but income items, reporting the information is usually simple. When the K-1 shows losses, things can get complicated.
There are three limits that apply to the use of K-1 losses, applied in the following order:
1. You can't deduct losses in excess of your basis.
2. Even if you have basis to deduct losses, the basis has to be "at-risk," and
3. Even if the basis is "at-risk," losses that are "passive" might be limited.
Neither the 1065 (partnership) or 1120-S (S corporation) K-1s are well designed to tell you what your basis is. The taxpayer or the tax preparer for the K-1 have to do that, year-by-year.
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DATA SECURITY FLAWS: A CORE GOVERNMENT FUNCTION?
March 28, 2008
Opponents of the use of private debt collection agencies say that private companies just can't be trusted to protect taxpayer data. Both the IRS and the two private debt collection agencies in the IRS private collection private program were recently audited by the Treasury Inspector General for Tax Administration. See if you can identify which statement from the TIGTA reports is about the IRS itself, and which refers to the private contractors:
Statement 1:TIGTA reviewed the computer security controls over taxpayer data... and determined that the controls were adequate. In particular, files were securely transmitted... and adequately secured on the... systems. In addition, workstations used by... collection personnel were adequately controlled to prevent unauthorized copying of taxpayer information to removable media or transfer via email. The... also maintained adequate audit trails and performed periodic reviews, including reviews to identify unauthorized access to taxpayer data.
Statement 2:As of October 25, 2007,... still needed to complete 328 (65 percent) of the 508 required risk assessments and 293 (68 percent) of the 432 required compliance reviews. Also,... had not maintained sufficient information to evaluate the overall... physical security program.Records of physical security reviews were not properly maintained and, in some instances, records were either lost or misplaced. In addition, management reports used to monitor completion of the reviews were incomplete. Due to these program weaknesses,... cannot provide adequate assurance that the necessary controls are in place to protect employees, facilities, and taxpayer data.
If you have been listening to the Colleen Kelley (right), head of the Treasury employees union, you'd have no doubt that the IRS is the high-performing, security-conscious outfit in Statement 1, and the private collectors were the lax, careless custodians of confidential information. And you'd be exactly wrong.
It's not that surprising, really. We trust the private sector with important confidential information every day, and we shouldn't be surprised when they have systems in place to protect their data. After all, their business depends on it.
Nor should we be shocked when civil service employees, backed by an aggressive union and protected by elaborate due process procedures for employee discipline, working for an agency that will never go out of business, might sometimes be less than obsessive about protecting customer data.
Links to TIGTA highlights:
PRIVATE COLLECTION AGENCIES ADEQUATELY PROTECTED TAXPAYER DATA
Actions Are Needed to Improve the Effectiveness of the Physical Security Program
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KIPLINGER TAX TIPS
March 28, 2008
Kiplinger.com is running a Q&A tax advice series through April 15. It has good coverage of many common 1040 issues.
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TAX TIPS FROM BARRY BONDS
March 28, 2008
From NewsGroper! Warning: "Barry" uses some rough language.
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WHEN A CPA GOES BAD
March 27, 2008
A duck decapitater! The best part of the linked story is the automated ads below it:
Via Buzz.mn.
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FILING SEASON TIP: READING YOUR K-1
March 27, 2008
One fun part of doing the Tax Update is seeing what web searches get people here. Sometimes it's not clear why a search ends up here (if you got here by searching the word "girls" or "adult bookstore," I think you are on the wrong track). Sometimes its very clear. "How do I read K-1" gets internet seekers here pretty often - probably because the K-1 can be confusing:
One of the most common misconceptions about K-1s is the belief that issuers are under the same January 31 deadline that applies to 1099 forms. They are not. A Form 1120-S K-1 for a calendar-year S corporation is technically due March 15, but that deadline can be extended until September 15. Partnership and Estate and Trust K-1s are due April 15, but that deadline can also be extended for six months.
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TAX FREEDOM DAY IS APRIL 16 IN IOWA, APRIL 23 NATIONWIDE
March 27, 2008
The Tax Foundation has determined that April 23 is "the day on which Americans have earned enough money to pay all their federal, state and local taxes for the year." Iowa's Tax Freedom day comes a bit earlier, on April 16, which I will celebrate by taking the day off. The earliest Tax Freedom day is March 29, in Alaska, while the latest is May 8, in Connecticut.
Click image to enlarge
To put it in perspective, the Tax Foundation compares your tax expenses to other normal expenses:
See you April 16!
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GOVERNOR SIGNS BILL MAKING REBATES IOWA TAX-FREE
March 27, 2008
Governor Culver yesterday signed HF 2417, exempting the federal "stimulus" rebates from Iowa income tax. The Des Moines Register has details.
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IS THIS REALLY THE BEST USE OF LIMITED TAX PROSECUTION RESOURCES?
March 27, 2008
I'm all for strict enforcement of the tax laws, but isn't this like executing a dead man:
WATERLOO --- A convicted sex offender is now facing accusations he cheated the federal government out of income tax.Authorities charged Frank Dotseth, 73, of Decorah, last week in U.S. District Court in Waterloo with three counts of attempting to evade income tax and three counts of aiding and assisting in preparation and presentation of a false return.
All well and good, if that's the only way to get a sex offender off the streets. But it's not:
A jury in January in Winneshiek County convicted Dotseth of five counts of third-degree sexual abuse. According to court records, his victim was a 13-year-old girl.A judge sentenced Dotseth to 50 years in prison and imposed a $5,000 fine. He is appealing the conviction and sentencing.
Sure, they got Al Capone for tax evasion, but would they have bothered with the tax charges had they got him for the Valentine's Day Massacre?
This man will be in prison until he's 123 years old. They can use civil proceedings to get whatever cash he may have left to pay the taxes. It hardly seems worth the effort to give him another 38 months or so for tax evasion.
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'YOU DON'T OWE ANYBODY ANY MONEY. EVER'
March 27, 2008
Ladies and Gentlemen, the 'Wesley Snipes' tax blog
(via the TaxProf)
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THE AUDACITY OF PAYING MORE TAXES THAN NECESSARY
March 26, 2008
For a pair of high-powered lawyers, Mr. and Mrs. Obama seem a bit careless about their tax planning. We can draw a money-saving lesson for your 2007 1040 from the Obamas' 2006 1040.
Self-employed taxpayers can take advantage of "Keogh" retirement plans and SEP plans. Keogh plans are simply ordinary retirement plans for a single self-employed taxpayer. A "SEP," or Simplified Employee Pension, is basically a special kind of deductible individual retirement account for a self-employed taxpayer (UPDATE: this means earnings on the accounts accumulate tax-free until they are withdrawn for returement).
While Keogh plans have to be set up before year-end to be effective, you can set up and fund a SEP as late as the due date of your return. The only documentation required is a Form 5305-SEP for your records and a deposit to your SEP account with your friendly community banker or broker by April 15 - or October 15, if you extend your 1040.
For 2007, you can save as much as 25% of your self-employment income (on up to $180,000 in income) in a SEP, for a maximum contribution of $45,000.
Mr. Obama had self-employment income $506,618, mostly from his book. Mrs. Obama had $51,200 of what appear to be directors fees from "Treehouse Foods," which is also self-employment income. With this income, the Obamas could have contributed $54,103 to SEP plans for 2006, reducing their taxes by about $17,661.
So keep hope alive! If you have self-employment income for 2007, you can still have the audacity to open a 2007 SEP. By moving money from one pocket to another, you can still make a dent in your 2007 taxes.
Link: The TaxProf rounds up coverage of the Obama 2006 returns here and here.
This is another in our series of 2008 filing season tips.
UPDATE from the comments: It looks like the Obamas aren't exactly model savers, tax-deferred or otherwise.
UPDATE II: More From Greg Mankiw.
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CARNIVAL OF THE THAW
March 26, 2008
The snow is about gone, so it's a good time to celebrate with a blog carnival. The new Carnival of Taxes is up at My Wealth Builder.
Meanwhile, a new Cavalcade of Risk, the roundup of insurance and risk-management blog posts, is up at InsuranceYak.com.
Check them out!
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THE IOWA SPAM SUBSIDY
March 26, 2008
Why does Iowa have the highest corporate income tax rate in the country? Why do we have terrible property taxes? Why our our income tax rates so high?
So we can give $6 million to Hormel!
From the Austin, MN Post-Bulletin:
Hormel Foods Corp. will get tax benefits totaling more than $6 million from the state of Iowa for its future plant in Dubuque.The Austin-based Hormel Foods received one of 11 economic-stimulus awards Thursday from Iowa's Economic Development Board and the Iowa Department of Economic Development.
Hormel - high-tech jobs for the 21st century!
The Iowa news release says Hormel's capital investment with the project totals $91 million and is expected to create 196 jobs.Hormel's release from earlier this year, however, listed the plant's value at $89 million, with 180 jobs to be created.
Given the Department of Economic Development's history of inflating "job creation" stats, we'll defer to the welfare recipient's numbers. The subsidy works out to $33,333 per "job," paid for by your taxes.
In fact, Iowa approved $516 million in corporate welfare tax incentives in 2007. The entire Iowa corporation income tax generated only $320.3 million in revenue in the 12 months ending last October.
It's too much to expect Mr. Tramontina to call an honest press conference on economic development.
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DOESN'T EVERYONE REALLY WISH THEY WERE ACCOUNTANTS?
March 26, 2008
A Colorado woman is arrested for impersonating an accountant. Who can blame her for wanting to live the dream?
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IOWA SUPREME COURT: PARTNERSHIP INTERESTS DON'T QUALIFY FOR LONG-TERM GAIN BREAK
March 25, 2008
Iowa has a special tax break for certain business interest sales. If you have held an interest in a business for 10 years and "materially participated" in the business for 10 years, you can exclude the gain on a sale of "substantially all" of the business assets, or business real estate, on your Iowa tax return.
Gaylin Ranniger practiced as a CPA for many years with his partner Morrie Heithoff. In 1992 he sold his 50-percent interest to his partner. He claimed the Iowa "10 and 10" exclusion on his tax return, and the Iowa Department of Revenue disagreed.
The Iowa Department of Revenue rules on the capital gain exclusion provide:
Capital gains from the sale of an ownership interest in a partnership, limited liability company or other entity are not eligible for the capital gain exclusion.
The Iowa Department of Revenue rules on the capital gain exclusion provide:
Capital gains from the sale of an ownership interest in a partnership, limited
liability company or other entity are not eligible for the capital gain exclusion.
Mr. Ranniger argued that the rule was unreasonable, but the Iowa Supreme Court upheld the Department of Revenue last week. The court also said that because Mr. Ranniger's sale only was of half the business, rather than "substantially all" of it, it wouldn't qualify even if partnership interest sales did qualify.
IMPLICATIONS
The case shows that the deck is stacked in the Department of Revenue's favor in court:
Our cases require that exclusions from taxation be “construed strictly against the taxpayer and liberally in favor of the taxing body.”
The Ranniger result isn't surprising given the facts in the case. The Department has been holding other cases in abeyance while awaiting the Ranniger decision. Some of the cases involve the Department's old interpretation of what "held for 10 years" means -- an interpretation based (and I'm not making this up) on a misreading of an out-of-context passage in an old "Master Tax Guide." For you lawyers out there, this is like basing an argument over Iowa statutes on a misunderstood quote from Black's Law Dictionary. The Legislature overturned their strange interpretation for sales after 2005; they now conform to federal holding period rules.
The Iowa Supreme Court says it will overturn a Department rule only if it is "...irrational, illogical, or wholly unjustifiable." The Court had little trouble overturning the state's system of taxing casinos under a similar standard. If the Department maintains its "Master Tax Guide" position on pre-2005 holding-period cases, we'll see whether the Court gives the Department of Revenue more deference than it gives the Legislature.
Cite; Ranniger vs. Iowa Department of Revenue and Finance, Sup. Ct. Iowa, No. 11 / 06-0761
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IRS SPONSORS 'SUPER SATURDAY' TO HELP NON-FILERS GET REBATES
March 25, 2008
If you are one of those folks entitled to Uncle Sam's Crazy Fun Bucks Tax Rebates, but you don't usually have to file a return, the IRS has a treat for you this Saturday! They will be holding a "Super Saturday" event to help Social Security and Veterans Benefits recipients to file the returns they need to file to get their tax rebates. From the IRS press release:
WASHINGTON — The Internal Revenue Service and scores of its partners nationwide will open hundreds of locations on Super Saturday, March 29, in an effort to reach those Americans who are eligible for the economic stimulus payment but who normally are not required to file an income tax return.Approximately 320 IRS offices will be open on Super Saturday to prepare the simple Form 1040A for people who are filing a return solely to receive their stimulus payment. IRS partners such as AARP, United Way of America and dozens of others also are making special efforts on Super Saturday to reach out to those who normally are not required to file a tax return.
There are six Iowa Super Saturday locations, including the Federal Building in Des Moines. The complete list of locations nationwide is here.
This is part of a series of daily 2008 filing season tips we are running through April 15. Collect them all!
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AT LEAST THE LAWYER DIDN'T GET CHEWED OUT
March 25, 2008
The U.S. Supreme Court declined to hear Illinoisan Danny Patridge's tax evasion appeal yesterday. Mr. Patridge represented himself when he asked for Supreme Court review, which isn't too surprising considering what happened to his lawyer in his last courtroom visit:
Jerold W. Barringer represented Patridge at trial, in the Tax Court, and during the three appeals to this court. He has performed below the standard of a pro se litigant; we have serious doubt about his fitness to practice law. The problem is not simply his inability to distinguish between plausible and preposterous arguments. It is his disdain for the norms of legal practice (19 issues indeed!) and the rules of procedure.
Tax Notes ($link) says the request for a Supreme Court hearing was based on the following:
Patridge asserted that the Paperwork Reduction Act of 1980 foreclosed his conviction. Patridge also argued that the district court violated his Fifth and Sixth Amendment rights since the district judge personally triggered a criminal investigation of a key defense witness and failed to disclose his involvement in the prosecution of the witness; that the district court failed to dismiss Patridge's indictment based on the rule of lenity; and that it was not reasonable for the district court to use a whipsawed tax loss to determine the sentencing guideline range.
Surprisingly, there's nothing about having poor legal help.
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NOW HE TELLS US
March 25, 2008
Former Treasury official Michael Doran in Tax Notes ($link) on the execrable Sec. 409A deferred compensation rules:
In fairness to the regulators who wrote the section 409A regulations, the statute itself is fundamentally unsound. I had all too close a look at the legislative problems when I was part of the Treasury Department team that provided technical advice to the congressional staffers who drafted section 409A. Although staffers added the worst feature -- the 20 percent penalty tax on "bad" deferred compensation -- after I left government, the wheels came off early in the process. Without question, I share responsibility for the poor legislative product.
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TRACKING THE BIG BUNNY ACROSS IOWA
March 24, 2008
The intrepid investigors from the Tax Foundation followed the Easter Bunny around Iowa to see how the roving rodent copes with Iowa's whacky sales taxes:
We limited our analysis to one state for the sake of simplicity. We chose Iowa for two reasons. First, Iowa was home to the ridiculous pumpkin tax, which stipulated that pumpkins that were intended to be carved but not eaten would be taxed and pumpkins that were purchased for cooking were not taxable. We blogged about this and the story made the rounds of the internet. Finally Iowa lawmakers came to their senses and did away with the tax discrepancy. As we were calculating the Easter Bunny's tax bill, it occurred to us that the same sort of policy could be applied to Easter eggs: A state could tax eggs that were bought for consumption but exempt eggs that were bought solely to be dyed or hunted on Easter but not eaten. Of course this sounds absurd, but it would be just as logical as the pumpkin tax....
The second reason we chose Iowa is that the state has adopted the Streamlined Sales Tax Project's definition of candy, which is taxable in Iowa even though most food is not. One of the changes is that food containing flour is not considered candy anymore, even if most rational people would argue otherwise. For example, classic Milky Way bars, which contain flour, are tax-exempt, while Milky Way Midnight (dark chocolate) bars are taxed because they do not contain flour.
Surprisingly, the Easter Bunny buys local. He must lack Santa's transportation infrastructure. Here's what it cost him to hop around Iowa to fill an Easter basket:
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TAX TIP: DON'T LOSE A 2004 REFUND
March 24, 2008
When tax preparers celebrate on April 15, they aren't just celebrating the end of return season. They are also celebrating the closing of the statute of limitations for 2004, which puts another year of taxpayer and preparer screw-ups permanently in the past.
Unfortunately, the closing of the 2004 statute also closes the chance to get refunds on 2004 returns. The IRS reports that it is sitting on $1.2 billion of unclaimed tax payments for 2004. If some of that money is yours, you lose it forever if you haven't filed a 2004 return or refund claim when the three-year statute of limitations closes in three weeks,
If you haven't filed your 2004 return, you still can file one and claim your refund by April 15. Any decent tax preparer can help you, or you can get your own 2004 forms and instructions at the www.irs.gov page for Prior Year Forms, Instructions and Publications.
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THAT EXPLAINS EVERYTHING
March 22, 2008
Erica Jong employs the most unfortunate and disturbing metaphors yet used in describing the current Democratic presidential nomination campaign:
We need beavers and we need stallions. Beavers get the work done. Stallions inspire us. And they both have limitations. Stallions have fragile legs (think Barbaro). And beavers are nothing without their teeth.
Well, if there is a Clinton/Obama Unity ticket, there's already a theme song for it:
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IOWA: FIRST IN THE NATION WORLD
March 21, 2008
It's not just caucuses. Iowa is first in the nation in corporate tax rates. From a new Tax Foundation study:
Many states impose state corporate income taxes at rates above the national average of 6.6 percent. Iowa, for example, imposes the highest corporate tax rate of 12 percent, followed by Pennsylvania's 9.99 percent rate and Minnesota's 9.8 percent rate. When added to the federal rate, these states tax their businesses at rates far in excess of all other OECD countries.When compared to other OECD countries:
* 24 U.S. states have a combined corporate tax rate higher than top-ranked Japan.
* 32 states have a combined corporate tax rate higher than third-ranked Germany.
* 46 states have a combined corporate tax rate higher than fourth-ranked Canada.
* All 50 states have a combined corporate tax rate higher than fifth-ranked France.
But as Iowa is run by and for the public employee unions now, we should just smile and pay up.
UPDATE: the TaxProf is on the case
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PARTNERSHIP TAX IS HARD
March 21, 2008
Villanova tax law professor James Maule:
Partnership taxation probably is the epitome of what's wrong with the tax system. It is almost a farcical exaggeration. Yet it is very real, and very challenging to tax practitioners. It could be simplified, but attempts to do so would bring howls of objection from those who find in its complexities little folds and wrinkles in which they can hide yet another scheme to circumvent the general purpose of subchapter K. Simplification attempts would also be opposed by those who have advantages under the current system that they would lose if the partnership provisions were simplified.
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ENCOURAGING THE OTHERS
March 21, 2008
Spring is here. The snow is melting, the grass is turning green, the daffodils are starting to push away the mulch, and the IRS is making examples to encourage the rest of us to stay on the straight and narrow.
Last week the IRS and the Justice Department Tax Division set out to make examples of three Minnesotans, who they indicted on separate tax charges. Two of the indictments were for garden-variety false refund schemes. The other one is a bit more interesting.
The IRS accuses William Franklin Jones of Park Rapids of concocting phony Section 1031 "like-kind" exchanges to avoid taxes on property he sold. The indictment alleges that he identified property he already owned as property to be received tax-deferred in a Section 1031 swap.
Section 1031 allows taxpayers to exchange "like-kind" property without paying taxes the appreciation of the property given up. The basis of the old property carries over to the new property, and no gain is recognized until the new property is sold. Because it's hard to find somebody who wants to do a straight-up real estate swap, most exchanges are done through intermediaries. The taxpayer sells property, the intermediary receives holds the proceeds, and then buys a new property to give in "exchange" for the sold one. If this is done within strict time limits, with no cash touching the "seller," the tax law recognizes this a valid Section 1031 swap.
According to the indictment, the scheme worked as follows:
Mr. Jones opened accounts in other people's names. He sold some properties, with the cash going to an intermediary. He told the intermediary that the people whose names were on the bank accounts were the owners of the property he wanted to receive in the exchange, but he actually owned that land already. He would then arrange for the intermediary to "buy" the land he already owned by sending the cash to the phony bank accounts. The idea was to pretend to buy property to receive in an exchange, but instead to really cash out. He then reported the transaction as a tax-deferred exchange, instead of a taxable sale.
Mr. Jones has not been convicted and remains entitled to the legal presumption of innocence until he has had the opportunity to defend himself in court. The indictment alleges a $90,000 tax loss; the federal sentencing guidelines provide for 21-27 months in prison for that size of tax loss.
The Moral? If you do an exchange, you can't have your cake and eat it too. Either you get property and defer the tax, or you get the cash and pay the tax.
Link: Copy of Indictment, United States of America v. William Franklin Jones.
Related: IRS Like-kind exchange Fact Sheet
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NO IT DOESN'T
March 20, 2008
Professor Maule asks the question, "Does It Make Sense to Overload the IRS and the Tax Code?" He examines Senator Obama's proposed $4000 college tax credit:
Turning to the tax question, does it make sense to add yet another credit to a tax code already stuffed with tax credits and other provisions? If the goal is to reward college students for providing services, why not simply issue a check to the student? If there is concern that the money would not be used for tuition, then why not simply issue a voucher? If there is concern that the student would somehow not get the voucher to where it should go, why not simply issue a check to the student's college? Ought this not be administered by the Department of Education? Why bring the IRS into the picture? Could it be that Congress, elected officials, and candidates have far more faith in the IRS to get the job done properly than they do in some other agency? If that is the answer, then why do we tolerate the existence of agencies that cannot do what they ought to be doing and that need to be bailed out by the IRS?
Dr. Maule raises an important point. Each time Congress enacts tax credits to do this or that good thing, the IRS becomes less a revenue-collection arm and more a super-bureaucracy, with tasks including (just off the top of my head) encouraging research and manufacturing, supervising pensions and benefit plans, funding higher education, policing executive compensation, encouraging energy-efficient remodeling, and providing cash grants to the poor. A full list would be much longer.
It's hard enough just to measure income and determine the correct tax. Yet the Congresscritters continue to pile on other things for the IRS to do, and then they act surprised that billions of tax dollars go uncollected.
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WHEN A LIKE-KIND EXCHANGE IS TOO TAX FREE
March 20, 2008
A federal indictment handed down this week in Richmond, Virginia says a man in the business of facilitating like-kind exchanges went a bit too far in making sure that clients weren't taxable on their real estate sales. How, allegedly?
He stole the proceeds.
From the Justice Department press release:
Specifically, the indictment alleges that 1031TG obtained funds by promising clients that their money would be used solely to effect 1031 exchange as outlined in the exchange agreements. After making such promises, Okun misappropriated approximately $132 million in client funds, to support his lavish lifestyle, pay operating expenses for his various companies, invest in commercial real estate, and purchase additional qualified intermediary companies to obtain access to additional client funds.The indictment also alleges that Okun instructed employees to withdraw $15,000 in cash from Investment Properties of America's (IPofA) bank account, a company owned by Okun, and smuggle the cash to his personal yacht on Paradise Island in the Bahamas to avoid federal currency reporting requirements.
The indictment itself tells an interesting story. It says that Mr. Okun purchased and looted six existing intermediary companies. His in-house lawyer discovered the fraud and wrote a memo warning of of criminal exposure, and eventually resigned, according to the charges. The outside counsel also resigned at about the same time, in November 2006. Unchastened, Mr. Okun bought and looted another company, according to the charges, with the looting continuing until the enterprise collapsed in bankruptcy in May 2007.
The most frightening part of this story is the allegation that Mr. Okun bought and looted established exchange companies. A customer relying on the established reputation of one of these companies would have been blindsided by the looting.
The Section 1031 intermediary business isn't heavily regulated. If you are going to trust somebody with your real estate sale money, you need to take extra care that they are trustworthy. Cases like this may steer more Section 1031 intermediary business to bank trust departments.
Russ Fox has more.
Link: Indictment, United States of America v. Edward Hugh Okun
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EX-KPMG PARTNER FACES NEW TAX SHELTER CHARGES
March 20, 2008
One of the defendants still facing criminal charges relating to KPMG's tax shelter business was hit with a new round of criminal charges yesterday. Robert Pfaff faces new charges of setting up fraudulent shelters in the Northern Marianas islands. The charges also allege that he hid his fees for the transactions from both the IRS and his own accounting firm, KPMG.
The TaxProf has a roundup.
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JOE FRANCIS CATCHES A BREAK
March 19, 2008
Joe Francis hasn't had things go his way for awhile. The founder of the "Girls Gone Wild" empire has been bouncing between jails in Florida and Nevada awaiting trial on federal tax charges and Florida child abuse and prostitution charges. While in jail he was accused of bribing a guard.
Now things seem to be breaking his way. He has settled lawsuits from some of his, her, actresses, and he plea-bargained the Florida charges for time already served, enabling him to get out of jail. Now he has hit a jackpot: he apparently has hours of footage of Eliot Spitzer's femme fatale "going wild" in his archives -- enabling him to call off negotiations to give her $1 million to film new footage. From the AP:
According to a "Girls Gone Wild" press release, Dupre visited Miami in 2003 to celebrate her 18th birthday. After fighting with a friend and getting thrown out of her hotel, Dupre found a nearby "Girls Gone Wild" bus, the company said.She signed legal papers and spent a full week on the bus, filming seven full-length tapes which included nudity and same-sex encounters, according to the company.
"I personally ended up buying her a Greyhound bus ticket back home to North Carolina," Francis told the AP.
It must be great consolation to Elliot Spitzer that he has made both "Kristen" and Joe very happy.
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SOME DEBTORS ARE MORE EQUAL THAN OTHERS
March 19, 2008
Congress and the President recently got together to allow non-bankrupt homeowners to walk away from up to $2 million of home mortgage debt tax-free - even if they have enough net worth to pay the debt.
The Tax Court yesterday illustrated what happens to the poor scmuck who instead runs up too much credit card debt. A Minnesota man got upside down on his credit card:
At the end of 1992 petitioner Ancil N. Payne, Jr. (Mr. Payne), opened a credit card account with MBNA America Bank. Mr. Payne used the credit card to pay hospital bills and receive cash advances during periods of unemployment. By April 26, 2004, Mr. Payne had accumulated $21,407 of credit card debt. At no time did Mr. Payne challenge the accuracy of this amount. Petitioners were not insolvent in 2004, nor did they file for bankruptcy.By October 19, 2004, Mr. Payne and MBNA entered into an agreement whereby MBNA agreed to accept $4,592 as a full settlement of the account balance of $21,270, payable in installments over 4 months.2 Mr. Payne made the necessary payments, and MBNA issued him a Form 1099-C, Cancellation of Debt, reporting $16,678 of discharge of indebtedness income.
Mr. Payne didn't include the $16,678 in his 2004 taxable income. The IRS matched the 1099-C to his return, noted the omission, and things ended up in Tax Court. The Tax Court sums up the law:
Petitioners also allege that no income arises from the discharge of indebtedness for interest payments. In support of this proposition, petitioners reference Earnshaw v. Commissioner, T.C. Memo. 2002-191.Generally, when a solvent debtor's fixed obligation is reduced or canceled, the amount of the reduction or cancellation constitutes income. Sec. 61(a)(12); United States v. Kirby Lumber Co., supra. In Earnshaw v. Commissioner, supra, we concluded that there had been a legitimate dispute between the debtor and creditor regarding the amount of the debtor's obligation. We held that the taxpayer recognized discharge of indebtedness income from the settlement, but the amount was based on the account balance that the taxpayer admitted to rather than the higher amount the Commissioner alleged. Earnshaw does not stand for the principle that discharge of indebtedness income does not include the cancellation of debt attributable to interest payments.
As no exclusion applies and the amount of petitioners' obligation was clearly fixed, petitioners should have included $16,678 of discharge of indebtedness income in their gross income on their 2004 tax return.
The Moral? If you are going to get yourself in too much debt, the government wants you do so by buying too much house. If you're in credit card trouble, that's just too bad.
Cite: Payne, T.C. Memo. 2008-66
Link: Wikipedia discussion of Kirby Lumber case.
UPDATE, 9/24/2008: Mr. Payne has added in the comments:
When you say that the IRS matched up the 1099-C, you do not note that the situation was disclosed in an attachment filed with the return. As you say it, there seems to me to be a slight element of defamation.
No, there is no defamation. I noted correctly that he did not include it in taxable income, and that it ended up in Tax Court as a result. This post uses the case to illustrate the tax law standards for determining debt discharge income, and how it applies differently to different types of debt. The disclosure is irrelevant to the issue of whether it is taxable, so I left it out, along with many other details of the case. The case was linked for those interested in all of the details.
For the record, Mr. Payne did disclose in an attachment to the return that he had received the 1099-C reporting the debt discharge. It's worth noting that the IRS assessed no negligence penalties in the case; it's reasonable to assume that the disclosure helped prevent the penalty assessment the IRS typically imposes when a 1099 amount is omitted from income.
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GOVERNMENT FILES BRIEF OPPOSING SUPREME COURT REVIEW OF 'MURPHY' DECISION
March 19, 2008
The taxpayer in the controversial Murphy decision asked the U.S. Supreme Court to review the case. The TaxProf reports that the government has filed its reply brief to the request for review.
The Murphy case briefly threatened much tax law that had long been taken for granted, until the D.C. Court of Appeals, which initially held for the taxpayer, changed its mind. I expect the Supreme Court to decline to hear the case.
Link: Tax Update coverage of Murphy.
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LEGAL AND STUPID
March 19, 2008
TaxGrrrl reports that a New Jersey attempt to legislate interest rates on refund anticipation loans has been struck down on the grounds that Federal rules control.
I believe consenting adults should have the right to engage in finance with other consenting adults, even if they do stupid things with that right - refund anticipation loans, for example. And boy, are they ever stupid, as TaxGrrrl points out:
A federal judge has ruled that New Jersey cannot limit the interest rates and fees national banks can charge for taxpayer RALs (refund anticipation loans) even though the judge noted that the loans’ APR average 115%. Nope, not a typo, that’s well over 100%. New Jersey law limits interest and fees to 30% of the loan’s value as part of its usury laws.
The worst credit card in the U.S. doesn't charge rates that high. Refund Anticipation Loans are a worse deal than even "payday" loans and car-title loans, and that's not easy to do. If you are e-filing your return, you are going to get your refund in two weeks anyway - three, max. If you are so desperate for cash that you would pay 115% APR to get it that much sooner, you really need to re-evaluate your meth habit.
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GREAT MOMENTS IN TELEVISED INVESTMENT ADVICE
March 18, 2008
(via Megan McCardle)
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APPLICABLE FEDERAL RATES (AFR) FOR APRIL 2008 ISSUED
March 18, 2008
The IRS has issued (Rev. Rul. 2008-20) the minimum interest rates for loans made in April 2008:
-Short Term (demand loans and loans with terms of up to 3 years): 1.85%
-Mid-Term (loans from 3-9 years): 2.87%
-Long-Term (over 9 years): 4.40%
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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2007 IOWA CORPORATE WELFARE BILL: $516 MILLION
March 18, 2008
David Brunori at Tax Analysts ($link) notes a report from the Iowa Fiscal Partnership on the wild proliferation of tax credits in Iowa in recent years:
The Iowa Fiscal Partnership has published an insightful critique of the proliferation of tax incentives in the state. Iowa granted $516 million in tax incentives in 2007, up from $111 million in 2001. The group is concerned, rightfully so, with the state's ability to fund education, healthcare, environmental protection, and other important public services....
The partnership also calls for a moratorium on the enactment of any additional tax incentives. Some will say that such a moratorium is a sign that Iowa would be less friendly to business. But Iowa has created 24 tax credit programs since 2000. Isn't that enough? Could there be a tax break that a business wants that's not already offered by Iowa? No, those suggestions aren't antibusiness, they're just good government.
Exactly. These breaks aren't "pro-business;" they're pro some businesses, the ones with good lobbyists, at the expense of everyone else.
The $516 million in tax incentives in 2007 is more than the entire net receipts of Iowa's corporate income tax. If tax incentives were any good at economic development, we'd be better than last place in Iowa as a home for entrepreneurs. A zero corporate tax rate could benefit everyone, not just the well-lobbied. That may be why there isn't any lobby for a zero corporate rate.
Oh, and remember, Iowa "can't afford" to couple Iowa's depreciation rules to the federal rules.
Related: MILLIONS FOR MICROSOFT, DIDDLY FOR YOU
Sometimes I think State 29 has the right idea for legislative reform.
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DO FEDERAL SENTENCING GUIDELINES ALLOW FOR FIRE ANTS?
March 18, 2008
The man who "authorities have described as the 'King of Spam'" has pleaded guilty to tax charges. Robert Soloway, 28, of Seattle, pleaded guilty to tax evasion last week, according this report. From a Justice Department press release:
As part of the scheme, SOLOWAY spammed tens of millions of email messages to advertise the NIM websites from which he sold his product and services. Soloway constantly “moved” this website, which was hosted on at least 50 different domains. In at least one instance SOLOWAY used another person’s credit card to pay for the domain name used to host the NIM website. Since 2006, SOLOWAY registered the domain names through Chinese Internet Service Providers in an apparent effort to hide the true ownership of the domain names used to host the NIM website. The spammed messages used to advertise the NIM websites contained false and fraudulent header information, and were relayed using networks of proxy computers (“botnets”) to disguise the true originating IP addresses of the spam. Many of the false headers contained forged e-mail addresses or domain names that belonged to other real people, businesses, or organizations, causing these other innocent parties to mistakenly be blamed for spam transmitted by Soloway. Innocent parties whose email addresses and domain names were forged by SOLOWAY sometimes had their legitimate addresses “blacklisted” as spam sources, as a result. SOLOWAY refused to remove email addresses from his distribution lists, leaving some victims with no choice but to close their email accounts or cancel established domain names to stop the spamming.
While we are all heartbroken by the fall of a spammer, we console ourselves with our continued receipt of valuable offers in many languages for things that will help us grow more hair and make her love us more than other men.
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TAX COURT VISITS CHUCK'S PLACE ON ST. PAT'S DAY
March 18, 2008
While the police waited outside Irish-theme bars like grizzly bears waiting on the salmon run, Tax Court judge Mark V. Holmes visited Chuck's Place on St Patrick's day, deciding a case that turns on whether a taxpayer owned the bar, or was just its landlord.
Judge Holmes writes a lively opinion, providing more information than may be strictly necessary:
Raymond Monk has dabbled over the years in a variety of businesses, including drywall installation, plumbing, running a delicatessen, and even raising rabbits. He's also invested in more than a half dozen pieces of commercial real estate in and around Baltimore. In all but one of these rental arrangements, Monk declined to draft written leases, relying instead on "you pay, you stay" oral agreements.Charles (Chuck) Maney met Monk more than twenty years ago when Monk was dating his sister. Their friendship grew and Maney went to work for Monk in both his plumbing and drywall businesses. When Monk decided to retire from construction, Maney decided to retire as well. But unlike Monk, who was leaving the city life to move to the bucolic mountains of western Maryland, Maney -- who had worked in a saloon before meeting his friend -- wanted to stay in Baltimore and run a bar. He faced just two obstacles: He didn't have the money or knowhow to buy a building for the bar, and in his distant youth he'd committed a felony which, as far as he knew, would keep him from getting a liquor license. Maney talked to Monk; Monk said that since Maney liked the bar business and Monk liked rental property, Monk would help Maney out.
So we learn here that Mr. Maney dated Mr. Monk's sister, but we don't know how the relationship worked out. We do learn that Western Maryland is bucolic, and we get hints of a dark secret of Mr. Maney's past... perhaps a misjudgement in a wild youth in bucolic Baltimore.
Judge Holmes ventures perilously near the "too much information" line in his footnote 7:
Maney also testified that he (and not Monk) has the bar's logo tattooed on his chest. Though the Court did not undertake a visual inspection, we found him credible on this point. His numerous expressions of pride in the bar and its role in the neighborhood -- and the fact that it is named "Chuck's Place" and not, say, "Famous Ray's" -- are additional, albeit minor, factors supporting our conclusion that the bar is his.
The result: A taxpayer victory. Mr. Monk was judged a landloard, saving self-employment taxes that would otherwise have been due.
The Moral: If you have a tax case pending before Judge Holmes, a strategic tattoo may not hurt.
Mark Holmes Trivia: He is, as far as I know, the only Tax Court judge to have appeared on Jeopardy.
Link: Russ Fox has more.
Cite: Monk, T.C. Memo 2008-64
UPDATE: The TaxProf has more.
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ST. PAT'S TAX PARTY
March 18, 2008
Kay Bell celebrates March 17 with 17 tax tips.
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WHEN DO I GET UNCLE SAM'S CRAZY FUN BUCKS?
March 17, 2008
The IRS has announced the schedule for issuing the rebate checks authorized in the recent "stimulus" bill. The basic schedule:
If you extend your return, you have to wait on the rebate.
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MAJOR LEAGUE BASEBALL GETS A FREE RETURN REVIEW
March 17, 2008
Major League Baseball gets a sweet tax status, operating as a tax-exempt enity under Internal Revenue Code Section 501(c)(6). While not paying taxes on a $124 million operation is nice, it has a downside: your tax return is a public document. Furthermore, that public document lists the compensation paid to the entity's top officers.
The TaxProf today says Street & Smith's Sports Business Journal is reporting that Baseball left this detail out of their Form 990 for their 10/31/06 taxable year:
MLB did not include the compensation amounts for its other top officers in its most recent return. The names of MLB President Bob DuPuy and four executive vice presidents are listed but without pay totals. Those numbers appeared in prior MLB tax returns, with DuPuy pulling in a total of $4.875 million in the 2005 fiscal year.Nonprofit tax experts said such omissions are not permissible under the current tax code. “The [tax return] instructions just couldn’t be clearer. The compensation of the officers, directors and key employees must be disclosed in the return,” said Marcus Owens, former director of the IRS’s exempt organizations division and currently an attorney with Caplin & Drysdale in Washington, D.C., representing a variety of nonprofits.
Said DuPuy of that assessment, “We respectfully disagree.”
For what it's worth, here are the figures for the 10/31/05 tax year:
Click to enlarge
Can I be commissioner for a year?
The instructions on reporting the compensation information seem pretty clear. From Page 28 of the 2005 Form 990 instructions:
Show all forms of cash and noncash compensation received by each listed officer, etc., whether paid currently or deferred....
A failure to fully complete Part V-A can subject both the organization and the individuals responsible for such failure for penalties for filing an incomplete return.
These penalties run at $20 per day for each day the information is supplied, up to $10,000.
The entire return is available here (pdf).
Downside: potentially unwanted publicity. Upside: no income tax on the business, and lots of free review of your tax return. It's the Army of Davids open-source approach to tax filing!
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NO NEED TO BE SHY
March 17, 2008
If you are going to risk going to prison for tax fraud, why do it in a small way?
According to a federal indictment, the Smith family of West Virginia did it in a big way. From the Charleston Gazette:
Corporate expenses were used to mask salary payments and other expenditures, which included numerous cars and trucks, the indictment alleges.Donald Smith and his nephew used the money to indulge their respective hobbies of show horse breeding and car racing, Assistant U.S. Attorney Booth Goodwin wrote in the indictment.
According to the indictment, Donald Smith's expenditures included:
- $350,000 for a horse named "Look Who's in Command" on June 1, 1998;
- $100,000 on a horse barn in Sandyville in July and August 1998;
- $200,000 on a horse named "This Is It" on Sept. 1, 1999;
- $40,000 on a horse named "Spirits High Market" in March and April 2001;
- $110,000 on a horse named "Pineapple Willy" on Jan. 1, 2002; and
- 25 rolls of fencing and 25 30-gallon barrels of herbicide for his Tennessee horse farm in April and September 2003, billed to CESI's credit account.Edward Michael Smith's spending included:
- $29,997 for a 1998 Chevrolet Camaro SS on June 30, 1998;
- $104,279 for a Kenworth semi truck used to transport race cars on March 25, 1999; and
- $168,000 for a race car transporter between August 1999 and February 2000.
With 30 barrels of weed-killer, they shouldn't need to worry about cutting the grass if they have to go away for awhile. Of course, the defendants are presumed innocent until they have a chance to defend themselves in court.
Russ Fox has more.
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THE TAX GUY AND THE JERSEY GIRL
March 17, 2008
How a broken-hearted tax guy became the matchmaker for "Kristen" and Client # 9.
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FINANCIAL ADVICE: PAY YOUR TAXES
March 16, 2008
The Washington Post has a timely seasonal piece about the "close your eyes and they won't be there" approach to paying income taxes. The piece lists out alternatives for getting caught up once you get behind on your taxes, including installment agreements and borrowing from other sources. They quote a West Des Moines financial planner:
You might also consider borrowing against your 401(k) retirement plan, but that too can come with tax liabilities and other fees. "I always kind of recommend that as one of those last resort items," said Dave Strege, a certified financial planner at Syverson Strege in Des Moines.
"Last resort" isn't putting it too strongly. Unfortunately, the folks who get behind on taxes tend to also get behind on all their other bills, and they are likely to get behind on repaying the 401(k); then the borrowing can become a taxable distribution, and the hole gets even deeper. The first step to getting out of a hole is to stop digging.
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WORSE THAN A ROOT CANAL
March 15, 2008
A St. Louis-area dentist is going to get an expensive vacation from his practice. The Belleville, Illinois News-Democrat reports:
A Belleville dentist was sentenced today to six months in prison for federal tax evasion charges.Gerald M. Dortch will serve an additional three-year term of supervised release, with the first six months under home arrest.
He was also ordered to perform 240 hours of community service and to make restitution to the Internal Revenue Service in the amount of $127,103.
Mr. Dortch pleaded guilty to keeping taxes withheld from his employees - a fraud technique that is approximately 100% doomed.
Related: THERE'S A CAVITY IN YOUR TAX RETURN
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DEPARTMENT OF OOPS, PAPER-FILER CATEGORY
March 15, 2008
The IRS has posted a summary of errors on paper-filed tax returns through February 29. The report breaks the mistakes down between self-prepared returns and returns from paid preparers.
The frightening part? The 1,161 errors by paid preparers on 1040-EZ, including:
Tax amount wasn't the correct amount based on taxable income and filing status: 82Taxable income was figured incorrectly. There was an error in subtraction of exemption or of combined standard: 58
We figured the taxable income and taxpayer didn't owe any tax: 47
Amounts in the payments section was added incorrectly: 30
OK, the tax law is complicated, but these are 1040-EZ mistakes. If a paid preparer can't get that right, what happens when they see a return that's actually hard? Yikes.
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A GOOD FOOT RUB IS WORTH MORE THAN A LOT OF THE MORTGAGES OUT THERE
March 14, 2008
Dora Margaret Benson won $4 million in the Colorado lottery in 2000. She used the funds to set up a "memorial/Christian counseling center" in honor of her late mother in a building set up for the purpose:
The building has nine offices, a waiting room, and a bathroom. Petitioner's two brothers play videogames and use their computers in one of the building's offices. Another office is used as a prayer room by a volunteer missionary who provides free counseling services. Still another office houses a reading room with books on religion and a computer on which visitors can access and view six different versions of the Bible. Petitioner provides reflexology and mortgage broker services in other rooms of the building; according to her testimony, she provides these services to maintain income for the memorial. Petitioner also thought these activities would be good ways to provide for her retirement.
It's not quite clear where the mortgage brokering fits in, though faith in life after death might explain a lot of the mortage lending that went on in the last few years. Reflexology, a foot-rubbing method that is supposed to be therapeutic, might be a better bet than subprime loans.
Ms. Benson deducted the losses from this project on her Schedule C. Unfortunately for her, the Tax Court yesterday decided that there was no true profit objective for the project, disallowing her expenses under the "hobby loss" rules:
Petitioner has not demonstrated that she has taken any steps to minimize losses or increase earnings in order to recoup the sizable losses she has sustained. Accordingly, we are not persuaded that petitioner has engaged in this activity with a profit objective sufficient to satisfy section 183.
The Moral: Foot rubs may be wonderful, but they may not do much for your tax return.
Cite: Benson, T.C. Summary Opinion 2008-29
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2008 DIRTY DOZEN SCAM LIST ISSUED
March 14, 2008
The IRS issued it's newest "Dirty Dozen" list of tax scams yesterday. The list:
Phishing Scams Related to Economic Stimulus Payment Frivolous Arguments Fuel Tax Credit Scams Hiding Income Offshore Abusive Retirement Plans Zero Wages False Claims for Refund and Requests for Abatement Return Preparer Fraud Disguised Corporate Ownership Misuse of Trusts Abuse of Charitable Organizations and Deductions
The following scams from 2007, while still "dirty," fell off the dozen list:
Telephone Excise Tax Refund Abuses Abusive Roth IRAs American Indian Employment Credit Trust Misuse Structured Entity Credits Form 843 Tax Abatement
While Abusive Roth IRAs seemed genuinely pleased that her sister Abusive Retirement Plans made the list, Trust Misuse broke into tears and stormed out of the awards ceremony.
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MILLIONS FOR MICROSOFT, DIDDLY FOR YOU
March 14, 2008
We reported that the budget hit to Iowa of coupling Iowa's depreciation and Section 179 rules with the federal "stimulus" package would be about $33 million. Now we see from Tax Analysts ($link) that it's $13.5 million.
Compare that to carpetbagging Google, which by one account has received tax breaks from Council Bluffs alone worth up to $48 million, not counting their state sales tax exemption; or to Microsoft, which will receive an identical bribe.
That's our Legislature: a banquet to big, well-lobbied clients, but not even a bone to your business or your employer.
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OVER 4 MILLION SERVED
March 14, 2008
The Tax Prof's visitor count has hit 4 million. Congratulations, Prof. Caron!
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SELF-ESTEEM DEFLATER OF THE DAY
March 14, 2008
Thanks, Megan:
If I'd grown up in a culture that thought of "prostitute" as a job like "CPA" (another job I'd hate), I probably still wouldn't want to be one.
Would it be different if Kristan could bill at "Kristen's" rates?
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DEDUCTIONS: MAULED AGAIN
March 13, 2008
The prolific Dr. Maule has produced the third edition of his BNA Tax Management Portfolio "Deductions: Overview and Conceptual Aspects."
Congratulations, Dr. Maule!
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DEDUCTING PAYROLL TAXES THIS YEAR ON NEXT YEAR'S BONUSES
March 13, 2008
An employee has earned a $10,000 of vested vacation pay in 2007; the employer is going to have to pay $765 in FICA and medicare taxes on that. Does an accrual-basis employer have to wait until 2008 to deduct the taxes as they are paid, or can he deduct them in 2007, when they accrued?
For a long time the IRS held that taxpayers had to wait until the year of payment; after a court defeat, it abandoned this position. Unfortunately, taxpayer who had been following the old position still needed IRS permission to change their accounting method to the new position. Unless the IRS says otherwise, such method changes require taxpayers to file a Form 3115 requesting the change; they also have to pay a $3,800 fee.
Now the IRS has provided a procedure allowing taxpayers who haven't been accruing such taxes to automatically change their accounting method; this will enable them to begin accruing such taxes on their 2007 tax returns, if they haven't yet been filed. This procedure requires no user fee and may be filed as late as the time the return is due, including extensions.
Cite: Rev. Proc. 2008-25
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NEWAYS FOUNDERS LOSE TAX EVASION APPEAL
March 13, 2008
A federal appelate court yesterday upheld the tax convictions and prison sentences of the founders of the Neways multi-level marketing business. Tom Mower is serving a 33-month sentence. His former wife, Leslie "Dee" Mower, is serving a 27-month sentence.
Mrs. Mower has been unlucky at marriage; while she was serving her sentence, her second husband was murdered.
Related: NEWAYS FOUNDERS SENTENCED
Cite: U.S. vs. Thompson, No. 06-4232 (CA-10)
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RISK ON THE MARCH
March 13, 2008
The first Cavalcade of Risk for the month of March is up at Regulating Health Insurance. The Cavalcade is a roundup of blog posts on insurance and risk management. The many good posts include Hank Stern's musings on whether you really want to know your Alzheimer's risk and Moolanomy's "Should I Buy Whole Life Insurance?"
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BREAKING IOWA NEWS FROM BOISE
March 13, 2008
From the online version of the Houston Chronicle:
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ESTATE PLANNING 101
March 13, 2008
Why listen to audio books when you can learn estate planning basics? Check out Joel Schoenmeyer's first podcast.
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NOTE TO NEW YORK POST: MY NAME IS 'KRISTAN,' NOT 'KRISTEN'
March 13, 2008
Just in case you were planning to do some stalking.
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LEGISLATURE SENDS REBATE EXEMPTION TO GOVERNOR
March 12, 2008
The legislature yesterday passed the bill (HF 2417) to exempt the federal "stimulus" rebate checks from Iowa Income tax. Governor Culver is expected to sign the bill.
Unfortunately, there's no sign that the legislature will conform Iowa tax law to adopt the federal depreciation and asset expensing provisions of the federal stimulus bill, forcing Iowa businesses to keep a separate set of fixed asset records at their own expense. Why? Because Microsoft, Google and itinerent filmmakers are more important to the Legislature than your business and your employer.
Related: IOWA DEPARTMENT OF REVENUE OUTLINES IOWA TREATMENT OF STIMULUS PROVISIONS
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SWAP OR CASH OUT?
March 12, 2008
A Wall Street Journal piece today (via the TaxProf) points out a dilemma that clients have been pondering for awhile now. The article says that taxpayers are passing up the chance to defer capital gains on real estate via like-kind exchanges. The taxpayers fear that they would be deferring taxes that would be paid this year at 15% to years when the capital gain rates may be higher. Absent a mature tax futures market, the only way to hedge against higher taxes is to incur them now.
This is, of course, partially a political computation. If you think that 2009 will see a Democratic President working with a Congress controlled by his own party, higher capital gain rates seem likely. The nascent tax rate futures market at intrade is pointing to higher ordinary rates:
intrade market in top individual tax rates at @8:00 a.m. 3/12/08
This market appears to be predicting top individual rates between 38 and 40% for 2011. While intrade doesn't have a capital gain market, it does indicate a trend of rising rates.
Other factors also make taxpayers reluctant to engage in Section 1031 exchanges. Such exchanges require you to jump through legalistic hoops to acquire "replacement property" for the property you give up. The property has to be "held for investment or use in a trade or business." You can't just swap for a new Florida residence, for example. If you don't want to stay invested in real estate, maybe it's not worth deferring taxes.
In the past, many taxpayers have swapped their developed real estate into farmland. They could then hire a farm manager and have a headache-free source of income. With farm prices at historic highs, taxpayers who remember the farmland price crash of the 1980s are leery.
"Tenancy-in-Common" arrangements, where brokers arrange for people to swap into developed real estate with other joint owners, are often touted as a place to park proceeds in a like-kind exchange. While they sometimes work well, running them requires interaction with the joint owners. If something goes wrong with the property - say, a loss of a big tenant - getting every joint owner to work together can become awkward. Such arrangements can also require significant fees to the enabling broker.
If you want to remain invested in real estate for some time, Section 1031 exchanges are very handy. If you aren't sold on staying in that market, though, 2008 may be a good time to just take cash on a real estate deal.
Related:
IRS ISSUES LIKE-KIND EXCHANGE 'FACT SHEET'
IRS GREEN-LIGHTS VACATION HOME SWAPS
SECTION 1031 BASICS
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WHITHER GIFT AND ESTATE TAXES?
March 12, 2008
The Congressional Joint Committee on Taxation has released a Description and Analysis of Alternative Wealth Transfer Tax Systems. The TaxProf reports that this is for a hearing today on the current estate tax system.
What do other countries do? Everything. From the report:
Among the thirty OECD countries, only the United States and the United Kingdom have estate and gift tax systems that tax the transferor on gratuitous transfers during life and at death. The majority of OECD countries have inheritance taxes. Five countries have no inheritance or estate taxes: Australia, Canada, Mexico, New Zealand, the Slovak Republic and Sweden. In Canada, a capital asset transferred at death is deemed sold immediately before death. Gains on capital assets are deemed recognized at the time of the transfer. In Australia and Mexico, recipients of capital assets transferred at death take a carry-over basis from the transferor. In Australia, for example, there is no gift tax but the donor is treated as transferring a capital asset for market value. New Zealand has no estate tax but imposes a graduated "gift duty" on donors who transfer gifts totaling more than NZD 27,000 (USD 21,444) in a 12-month period.
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STRANGEST TAX POLICY ARGUMENT EVER?
March 12, 2008
Harold Myerson in the Washington Post:
And, politically, I suppose, the whole affair is one more argument against continuing tax cuts to the rich, even if Spitzer did invest his money here rather than in China.
So the argument is what, exactly? Require wealthy cads to economize on their rent-a-friends? Or is he talking about the working girls?
Update: Russ Fox can't help Mr. Spitzer.
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81 and counting
March 11, 2008
Another Antarctican lost an argument that income earned on "the Ice" is eligible for the Section 911 foreign earned income exclusion. By my count, that's the 81st time the Tax Court has rejected this argument as made by attorney Larry D. Harvey. Two taxpayers who have made the argument without an attorney fared no worse, but no better.
One Antarctic employee has kindly provided me some background on these cases. He reports that a Colorado CPA first suggested using the Section 911 exclusion on Antarctic income to one or two taxpayers in the late 1990s. The idea was passed around the Antarctic taxpayer set by word of mouth and became, understandably, quite popular, until the IRS caught on. The CPA referred the taxpayers to Mr. Harvey, and the rest is history.
There is a MySpace page for the beleaguered Antarctic taxpayers. While Mr. Harvey's losing streak may have reached comic proportions, the Antarcticans that have to come up with back taxes can be excused if they fail to get the joke.
Cite: Cephers, T.C. Memo. 2008-57
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FARMERS, FOOT DOCTORS AND FOOLISH TAX RETURNS
March 11, 2008
Although Wesley Snipes may well do some time on his federal tax charges, he beat the rap on his most serious tax charges. Many taxpayers who make the same moronic arguments aren't so lucky.
Russ Fox passes on the story of a Minnesota farmer who used the absurd "Section 861 argument" that he owed no taxes on U.S. income. A federal jury in St. Paul convicted Kevin J. Morse of five false return counts:
Prosecutors presented evidence that showed Morse netted more than $680,000 on more than $1 million in revenue from farming, interest and dividends, government farm subsidies and rental of his land to other farmers, according to a news release. Morse is believed to owe more than $200,000 in taxes for the years involved in the case.A tax preparer who prepared returns for Morse in 2002 testified at Morse's trial that he calculated an obligation of more than $100,000 in back taxes, the U.S. Attorney's office says. But instead of filing those documents, prosecutors said, Morse filed returns in which he deducted all of his income using an irrelevant section of the tax code and claimed to owe virtually no taxes.
Too proud to pay taxes, but not too proud to collect farm subsidies!
Meanwhile, an Arkansas podiatrist had no better luck with the Section 861 argument yesterday with the Eighth Circuit Court of Appeals. Clifford Marston tried what I like to call a "good-faith fraud" defense. Like Wesley Snipes, he argued that he was really dumb enough to believe the nonsense he read on a tax-protest website. From the court opinion:
According to his testimony, Marston formed the opinion that his income was non-taxable from several sources, including the statements of Thurston Bell and Larkin Rose, individuals who once maintained separate Internet websites advancing the so-called 861 defense, an argument that contends section 861 of the Internal Revenue Code permits taxation of only income derived from foreign sources. Over Marston's objection the government was permitted to ask Marston if he knew that Rose had been convicted of willful failure to file a tax return and that Bell had been enjoined from operating his website. Marston admitted that he had learned these facts, but only after he had sent to the I.R.S. the documents referenced in the indictment....
Although the acts of the offense occurred before Marston learned of the indictment and injunction, he admitted that he continued to rely upon Larkin and Rose as a basis for his beliefs long afterwards, even at trial. The fact that Marston continued to espouse a belief that his income was not taxable, even though he knew its proponent had been convicted of tax evasion, reflects negatively on his credibility
The court upheld Mr. Marston's 26-month sentence.
The Moral? If you fall for the moronic "Section 861" position, don't count on being as lucky as Wesley Snipes.
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SPITZER VICTIM OF SECOND OLDEST PROFESSION
March 11, 2008
New York Governor Spitzer has been brought low by the two oldest professions. By now you've heard of his involvement with the oldest one. The second oldest is tax collection, and Kay Bell explains how the revenuers quietly followed the Governor's money to the Emperor's Club.
It couldn't have happened to a nicer guy.
Meanwhile, the Tax Policy Blog explains how Mr. Spitzer's rent-a-friend, "Kristen," is likely to find herself entangled in the District of Columbia income tax, via the rules that apply to professional athletes.
UPDATE: The TaxProf has more.
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MARCH 15 IS ON THE 17TH THIS YEAR
March 11, 2008
Today is my turn at IowaBiz.com. I talk about corporate extensions, paying accrued bonuses, and paying your qualified plan contributions on time.
IowaBiz is a group blog with good stuff every day - like Brian Honnold's piece last week on leasehold interest insurance and Rush Nigut's suggestions on negotiations.
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YOUR TAX DOLLARS AT WORK
March 10, 2008
The Des Moines Register has a puff piece about a movie to be shot in Iowa, "thanks to tax incentives."
That's the insidious problem with these giveaways. The recipients can issue a press release and get the paper to do a writeup about the wonderful opportunities for star-struck extras to compete for a role in a movie that will end up in the dollar dvd rack at Hy-Vee. With your money.
In a just world, they would have to pair each such puff piece with an article about a business that chose to relocate from Iowa, or to stay out of Iowa in the first place, because of our high tax rates.
Oh, and it definitely is your money paying for this movie. The film credits are "transferable," which means they are sold to Iowans at a discount to enable them to pay their own Iowa taxes at, say, 90 cents on the dollar. Economically, that's the same as if the legislature had voted a direct cash subsidy. This is money that they can't use to, say, reduce rates or conform Iowa's depreciation to the new federal rules.
So remember: Microsoft, Google, and out-of-town moviemakers are more important to the Iowa Legislature than you are.
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IOWA DEPARTMENT OF REVENUE OUTLINES IOWA TREATMENT OF STIMULUS PROVISIONS
March 10, 2008
The Department of Revenue has posted a tentative summary of how the provisions of the stimulus package will affect Iowa taxpayers. The summary is tentative, as the legislature still hasn't passed the bills that address this. Short version:
- Stimulus payments will be exempt from Iowa income taxes, and
- Iowa probably won't conform to federal depreciation and Sec. 179 changes.
That means Iowa taxpayers can look forward to years of notices asking why Iowa and federal income are different, because Iowa's legislators are more concerned about Microsoft than the businesses that have always been here. Oh, and because the Department of Revenue can't be bothered to design a form that reconciles federal and Iowa taxes, so they issue annoying notices asking taxpayers do do their own reconciliations later.
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E-FILING, FUEL-USING FARMERS: TODAY'S THE DAY
March 10, 2008
Today is the extended deadline for e-filed farm returns claiming the Form 4136 fuel tax credit. This deadline applies for both Federal and Iowa returns. Details here.
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FACEBOOK WILLS?
March 10, 2008
Joel Schoenmeyer says Facebook's "My Own Last Wishes" applet shouldn't be confused for actual estate planning:
I know that "My Own Last Wishes" is really just like any other application -- it's intended to waste a bit of time on the internet. But you can probably see the problem with this, can't you?-Very few Americans have a Will. Presumably (hopefully) they understand that they need one, and that "My Own Last Wishes" is not a substitute for one. This doesn't create a legally-binding document.
-I also question whether "My Own Last Wishes" can even do what it says it's trying to do: "give your family and friends a roadmap for your final journey and more." How does your family know that you are on Facebook? Or know how to access your account? Or know that Facebook is where you listed your last wishes? And will they find all of this out soon enough after your death to cremate you, or bury you like Elvis?
Bury you like Elvis? Just what does that mean? This:
Elvis was buried wearing a white suit and a blue shirt, with his signature TCB logo ring brought in by Vernon and a metal bracelet placed, with assistance, by daughter Lisa Marie. A cylinder with Elvis' name and birth and death dates was included for future identification.Elvis Presley is buried on the grounds of Graceland, his mansion in Memphis, Tennessee (3764 Elvis Presley Boulevard, in Memphis, Tennessee), specifically in the Meditation Garden that lies next to the pool. Originally Elvis was buried in Forest Hill Cemetery at 1661 Elvis Presley Blvd. next to his mother, Gladys, but after a failed break-in by graverobbers it was moved to its present location on October 3rd, 1977. Daughter Lisa Marie stated in 1999 that she was troubled by the number of tourists who visit the site every day and would like the grave moved to a private location.
The crypt that Elvis was interred in at Forest Hill is empty now, preserved for tourists, but it is available for sale -- at a reported price of over one million dollars.
So you can not only be buried "like" Elvis - it looks like you can be buried where he was. I know I'll wear a white suit and blue shirt over my dead body...
Elvis, our first Drug Czar
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$42 MILLION TO FIND OUT ABOUT YOUR $600
March 10, 2008
The tab for the letters that will tell you that you might get a rebate will be $42 million. Kay Bell has the details.
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WIECK HAS 'NO REGRETS' ABOUT SUBSIDIZING MICROSOFT
March 08, 2008
Radio Iowa reports "Top Republican has no regrets about Microsoft package":
The top Republican in the Iowa Senate says he has no regrets about voting to give new state tax breaks to Microsoft. A Republican-led group called the "Iowa Future Fund" is running ads which criticize Democrat Governor Chet Culver for backing the bill which granted those breaks to Microsoft, but every Republican in the legislature voted for the bill, too.Senate Republican Leader Ron Wieck of Sioux City says he does not regret backing the bill. "I know that there are those out there who are critical of the bill," Wieck says. "...I'm supportive of business."
No, he's a supporter of one business, at the expense of every business that didn't get the break. Every other business in the state will have to pay a bit more to make up for the sales taxes and property taxes that Microsoft won't be paying. There's no other way; the money to pay for the services Microsoft and its employees use doesn't grow on trees. Every kid who has put up with a teacher's pet knows that if you give one person special favors, you dump on everyone else.
The controversy over the Iowa Future Fund ads seems to be opening at least one politician's eyes:
While Wieck stands behind his "yes" vote on the Microsoft bill, House Republican Leader Christopher Rants of Sioux City is having a bit of buyer's remorse."You know, it's all fine and good that, you know, we're supporting Microsoft. Apparently since Bill Gates slipped from number one in the world to number three (on the list of wealthiest people) he needs the tax break, but what about everybody else?" Rants asks.
Better that wisdom arrives late than never.
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IOWA BONUS DEPRECIATION FAILS FUNNEL
March 07, 2008
The "funnel day" for the Iowa Legislature has passed, and with passes the best chance to avoid a repeat of a costly mistake they made in 2002.
Bills that fail to pass a committee of either the Iowa House or Senate by funnel day are pretty much dead for the session. The legislators have failed to conform Iowa's rules to the recently passed federal "bonus depreciation" and Section 179 changes. Unless they fix this by amending a bill that has already cleared the funnel, Iowa businesses will have to maintain separate depreciation records at their own expense. That won't be the only cost to businesses; the Department of Revenue still is generating notices because it doesn't seem to understand what happened in 2002; tax people have to charge their clients to set the Department straight.
The legislature is doing this because it doesn't want to part with about $30 million of revenue. This is the same legislature that has given tax breaks to both Google and Microsoft. Meanwhile, tax collections are running about $400 million ahead of last year. If they are spending so much that they can't spare $30 million to be shared by every Iowa business, they should all resign and go home before they do any more damage.
Related: GOVERNER GIVES MONEY TO MICROSOFT WHILE HOUSE STIFFS OTHER BUSINESSES
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SO THEY SCREWED UP THE S CORPORATION OWNER'S W-2. NOW WHAT?
March 07, 2008
The following comment was posted to this old post:
As a fellow CPA, can I ask a question and get your thoughts? I have quite a few clients that had another company prepare the payroll and W2s and the SH Health insurance was not on the W2. What do you suggest doing?My thought would be to deduct on 1120S, include as income on 1040, deduct against AGI (washing it out). Then, if it were to come under audit, at that point, issue W2cs and W3cs as necessary, as there would be zero change in the taxes for either entity. Thoughts?
This all comes out of IRS Notice 2008-1, which says that the only way for S corporation owners to get favorable treatment for health insurance is to have it included on their W-2; they may then deduct the amount of health insurance included on the W-2 on LIne 29 of Form 1040.
The method suggested in the comment - just include the insurance amount in "other income" and backing it out on Line 29 - was commonly used before Notice 2008-1, as it pretty much gets you to the same place as putting it on the W-2. Unfortunately, the notice makes it clear that the IRS doesn't accept that do-it-yourself method. As far as they're concerned, if it's not on the W-2, it's not eligible for the Line 29 deduction and therefore must be taxed to the recipient:
In order for the 2-percent shareholder-employee to deduct the amount of the accident and health insurance premiums, the S corporation must report the accident and health insurance premiums paid or reimbursed as wages on the 2-percent shareholder-employee's Form W-2 in that same year.
Given that clear language, and especially given the newly-enacted preparer penalties, I think the commenter's suggested solution is unwise. A preparer who takes this approach is going against a clear IRS position. Unless the preparer adds Form 8275 to a return to disclose the position, he is exposed to either a $250 or $1,000 penalty; such penalties could also lead to trouble with state accountancy regulators.
I would amend the W-2s. Amending the W-2 and W-3 reports for the affected shareholders is a hassle, but far less so than trying to explain a preparer penalty to a state Board of Accountancy.
Related:
IF IT'S NOT ON THE W-2, S CORP SHAREHOLDERS CAN'T DEDUCT HEALTH INSURANCE
ANOTHER QUESTION ON S CORPORATION HEALTH INSURANCE
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CIETC TRIAL MOVED TO DAVENPORT
March 07, 2008
The trial of Ramona Cunningham and the other CIETC defendants has been moved to Davenport in search of an adequate pool of unbiased jurors.
The trial is still scheduled to open April 7. To while away the time until then, you can see the Des Moines Register's video of Ms. Cunningham defending her $300,000 salary for running the once obscure and now defunct agency.
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WISCONSIN CREDIT UNION SUES TO ESCAPE UBIT
March 07, 2008
A Wisconsin credit union has filed a suit to recover $54,000 in "unrelated business income tax" paid on income earned from the sale of credit life and disability insurance and "guaranteed auto protection" insurance.
While credit unions are normally exempt from federal taxes, the IRS has been assessing UBIT on some non-lending activities of credit unions. UBIT is, more or less, the corporate income tax imposed on non-exempt activities of tax exempts, to prevent taxable businesses from having to cope with tax-free competitors. The IRS says that side activities, like insurance sales, are unrelated to the core function of credit unions.
You can read the credit union's petition here.
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FREE-FILING FOR NO-INCOME REBATE SEEKERS
March 07, 2008
The IRS has opened its "Free File" electonic filing program to those who have no taxable income, but who qualify for Uncle Sam's Crazy Cash rebates through Social Security or veterans benefits. Kay Belll has the details at Don't Mess With Taxes.
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BUT MY EMPLOYER REQUIRES ME TO WEAR CLOTHES!
March 06, 2008
A Minnesota doctor learned yesterday that stuff you buy at Banana Republic normally isn't a deductible work uniform.
The tax law allows an employee business deduction on line 21, Schedule A, for uniform expenses. Special Trial Judge Goldberg explains:
Articles of clothing, including shoes, stockings, and socks are deductible under section 162(a) only if the clothing is required in the taxpayer's employment, is not suitable for general or personal wear, and is not worn for general or personal purposes.
The Tax Court opinion indicates an important flaw in the taxpayer's trial strategy:
Petitioner testified that there was no dress code or uniform requirement at the medical center where she worked, and that even though she was not inclined to wear the clothing in question when she was not at work, the clothes were, in fact, suitable for general wear. In fact, petitioner acknowledged at trial that she was actually wearing some of the clothes that she purchased for work in 2002. Therefore, and on the record before us, we find that petitioner is not entitled to the deductions she claims for clothing, shoes, stockings, and socks for her 2002 taxable year, nor is she entitled to claim dry cleaning expenses for these items.
The Moral? If you want to deduct your clothes, don't wear them to Tax Court.
Cite: JUVY LYN ANDRADE TE ENG FO, T.C. Summary Opinion 2008-25
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UNCLEAR ON THE CONCEPT OF TAX BREAKS
March 06, 2008
The recent ads criticizing Governor Culver's role in the Microsoft giveaway seems to have touched a nerve. The Governor's partisans in the legislature have called for an investigation of the ads.
Tax Analysts reports ($link) on the response of Bill Dotzler, a cheerleader for the giveaway:
Sen. Bill Dotzler Jr. (D), a manager of HF 2233, said the ads are wrong because the state is not giving up any tax revenue.
So a tax exemption means "not giving up any tax revenue"? Does that mean I can tell Polk County that I'm not paying my property taxes, because they won't be giving up any tax revenue? Will Senator Dotzler explain that to the Sheriff when he comes to take the house?
Of course, Senator Dotzler has other interesting views on finance and economics.
The Governor's defender's have a point when they say the giveaway was bi-partisan, but peer behavior is a weak excuse for both teenagers and politicians. It's nice to see somebody calling out politicians for taking our money to subsidize businesses with lobbyists.
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THE 400
March 06, 2008
400 taxpayers, $85.6 billion of income. That's life at the top of the tax return totem pole, according to The Wall Street Journal's Tom Herman.
Citing recently-released statistics, he reports that the top 400 taxpayers earned 1.15% of the total taxable income in 2005, while paying 1.67% of the income taxes paid for the year.
The 400 club, while exclusive, has a lot of turnover:
The IRS analysis updates a report issued five years ago that drew widespread attention. In that report, which focused on the years 1992-2000, the IRS noted that the members of the club of 400 varied widely from year to year. During those years, a total of 3,600 returns were identified. Of those who appeared in that group, less than 25% appeared more than once, and less than 13% appeared more than twice, the IRS said. Thus, the data shown in that study represented "a changing group of taxpayers over time, rather than a fixed group of taxpayers," the agency said.No such analysis was available for the latest data. But tax analysts say it's safe to assume there is significant movement into and out of the top 400 list from year to year. For example, the list might include someone who sold a business after many years, or hedge-fund managers who enjoyed a particularly lucrative year.
David Cay Johnston has prominently advanced the argument that taxpayers with the highest incomes fail to pay their proper share of taxes, disadvantaging the merely wealthy. Statistics show that the income tax is progressive until you get to the very top 1/10 of 1%; then the effective rate goes down.
Much of this is because of the break for capital gains taxes. As we've said before, it's probably not worth diddling with the tax law just to beat up on statistical outliers. To solve the "problem" would require raising capital gains rates, a step widely believed to be bad economic policy (even the Clinton administration retained a lower capital gain rate). Doing so would punish taxpayers across the board, just not at the highest levels. It would also increase the double tax on corporate income, which most economists consider a bad thing.
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IRS ISSUES LIKE-KIND EXCHANGE 'FACT SHEET'
March 06, 2008
The IRS has posted a handy summary of the Section 1031 "Like-Kind Exchange" rules (FS-2008-18). From the Fact Sheet:
Gain is deferred, but not forgiven, in a like-kind exchange. You must calculate and keep track of your basis in the new property you acquired in the exchange.The basis of property acquired in a Section 1031 exchange is the basis of the property given up with some adjustments. This transfer of basis from the relinquished to the replacement property preserves the deferred gain for later recognition. A collateral affect is that the resulting depreciable basis is generally lower than what would otherwise be available if the replacement property were acquired in a taxable transaction.
When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.
Related:
IRS GREEN-LIGHTS VACATION HOME SWAPS
Tax Update Section 1031 coverage
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GIFT TAX PRIMER
March 06, 2008
Mitchell A. Port reviews the basics of the annual gift tax exclusion at California Tax Attorney Blog.
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MAULE ON BOULWARE
March 06, 2008
Villanova Tax Prof James Maule thinks the Supreme Court got it right in this week's Boulware decision, but is disturbed that nobody else did:
It is disappointing and aggravating that of all the judges and law clerks involved in the cases, no one could figure out something that is taught in basic corporate tax classes, and that can be understood by someone who has not been in a basic corporate tax class but who has learned basic federal income tax principles, because the taxpayer's brief would educate everyone on that point. What is more disturbing is that the federal government argued the case despite the clarity of section 301.
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...78...79...80...
March 06, 2008
The roadrunner got a hat trick yesterday in Tax Court.
Cites:
Miller, T.C. Memo 2008-51
Nordquist, T.C. Memo 2008-52
White, T.C. Memo 2008-53
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WANT STONES?
March 06, 2008
The IRS is auctioning the Stones Restaurant building in Marshalltown at 10:00 this morning.
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LUXURY: $14,800 USED, $18,267 new
March 05, 2008
The IRS has released (Rev. Proc. 2008-22) the depreciation limits for autos purchased in 2008 under the so-called "luxury auto" rules of Section 280F. Luxury is cheaper this year.
There are two laps of luxury for 2008 as a result of the "stimulus" package. If the auto qualifies for "bonus" depreciation, the limits kick in for cars at prices starting at $18,267. That would normally be business-use new cars. Used equipment doesn't qualify for bonus depreciation, and the limits start affecting depreciation at $14,800 - a decline from the $15,300 threshold that applied last year.
$14,800 will get you a lovely 2007 Monte Carlo:
The new limits:
MAXIMUM ANNUAL DEPRECIATION, PASSENGER AUTOMOBILES QUALIFYING FOR BONUS DEPRECIATION:
Year 1..................$10,960 Year 2....................4,800 Year 3....................2,850 Year 4 and after..........1,775
MAXIMUM ANNUAL DEPRECIATION, PASSENGER AUTOMOBILES NOT QUALIFYING FOR BONUS DEPRECIATION
Year 1...................$2,960 Year 2....................4,800 Year 3....................2,850 Year 4 and after..........1,775
MAXIMUM ANNUAL DEPRECIATION, TRUCKS AND VANS
Year 1...................$3,160 Year 2....................5,100 Year 3....................3,050 Year 4 and after..........1,875
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...76...77...
March 05, 2008
Two more defeats for the Wile E. Coyote of the Tax Court bar. Meep!. Meep!.
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IRS POSTS FACT SHEET ON REBATES FOR LOW-INCOME EARNERS
March 05, 2008
Want your Uncle Sams Mad Bucks, but don't have much income? Check out the new IRS Fact Sheet, Low-Income Individuals with No Filing Obligations May Still Qualify for Economic Stimulus Payments.
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DOCUMENT YOUR CLOTHING DONATIONS
March 05, 2008
If you haven't already done so, you should be getting your 1040 information together. If you donate household stuff, it's helpful to list out what you donated, along with your estimated value. Don't just tell your preparer "5 bags of clothes - $4,000." That doesn't give us much to work with in this age of enhanced preparer penalties.
This Intuit site is helpful for valuing such donations, once you get through the annoying registration process. The Salvation Army also provides helpful guides, like this one.
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IRS SPOTS E-FILERS A DOLLAR FOR THEIR REBATE
March 04, 2008
The IRS has generously decided to let people add an extra dollar to their income.
Why would you do that? To get your rebate faster.
To get your free mad cash from Uncle Sam, you have to file a 2007 return. The catch? Many folks are eligible for the rebate but have no income with which to file a return. An electronically-filed return has to have at least $1 of adjusted gross income, but taxpayers with income only from social security, for example, may have no AGI.
Rev. Proc. 2008-21 says taxpayers may just add an imaginary dollar to their income so they qualify to electronically file their return. Otherwise they would have to file a paper return to qualify for their rebate.
The IRS provides this example:
A, an unmarried individual, receives $200 of interest income, $100 of dividend income and $7,000 of social security retirement benefits during the year 2007. Under section 86, no portion of A's social security benefits is includible in A's gross income for 2007. Because A's gross income does not exceed the sum of the exemption amount plus the basic standard deduction applicable to an unmarried individual, A is not required by sections 6012 or 6017 to file an income tax return for 2007. In accordance with the procedures provided in Notice 2008-28, A enters the amount of his social security benefits on line 14a of Form 1040A, but does not enter the amount of his interest income or dividend income on Form 1040A. A seeks to file his return electronically. In order to effectuate the electronic filing of A's return, A may include $1.00 in the adjusted gross income reported on his electronically filed return.
Funky math, but if it gets you $300, it's worth doing.
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NOT MUCH FOR TAX PLANNERS TO WORK WITH FROM THIS SUPREME COURT CASE
March 04, 2008
The U.S. Supreme Court yesterday issued a tax decision. It is always notable when the Supreme Court issues a tax case, as they don't seem to much like them. This one, though, doesn't give much for tax planners to work with.
The case involved an owner of a C corporation who diverted funds from the corporation for personal use. Normally these are treated as "constructive dividends" of corporate earnings. The taxpayer was convicted of failing to pay taxes on the constructive dividends.
Under the tax law, you can only have "dividends" if the corporation has "earnings and profits," or "E&P." While E&P is a ancient and obscure tax law concept, it basically means undistributed taxable income, increased by non-taxable income and reduced by non-deductible expenses (like federal income taxes paid) and by prior dividends. If distributions exceed E&P, they are a non-taxable return of capital to the extent the taxpayer has basis in corporate stock; distributions in excess of E&P and basis are taxed as capital gains.
The taxpayer, a Michael Boulware, was prohibited at trial from trying to show that he diverted funds from a corporation with no E&P; that would mean there couldn't be unreported dividends under the tax law. If he can show an absence of E&P, his diversion of may not taxable income by a happy accident. A unanimous Supreme Court reversed the decision and ordered a new trial for Mr. Boulware.
It's hard to see where this does anything for tax planners. We can't exactly recommend that our clients only loot corporations without E&P (This is, however, a strange but true argument for S corporations, as S corporation distributions normally contain no E&P).
The practical effect will be seen in criminal defense. Tax Analysts ($link) got this comment from attorney Bryan Skarlatos:
"Perhaps the most significant aspect of the decision," he said, "is that it reminds criminal tax lawyers to examine whether there really is tax due and owing in every criminal tax case."
If I were facing criminal tax charges, I'd sure hope my attorney wouldn't need that sort of reminder.
Cite: Boulware v. United States, No. 06-1509
The TaxProf has more.
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...74...75...
March 04, 2008
Two more anvils fell on Wile E. Coyote's head yesterday. Well, actually, two more clients of Larry D. Harvey lost cases in Tax Court on the issue of whether income earned in Antarctica qualifies for the foreign earned income exclusion. As in 73 previous Tax Court cases, the victorious IRS attorney was Randall L. Preheim, and the Judge was Juan Vasquez.
Maybe they should go see a movie together sometime.
Cites:
Hahn, T.C. Memo 2008-47
Young, T.C. Memo 2008-48
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ANALOG-FILING FARMER DEADLINE TODAY
March 03, 2008
Today is the deadline for filing returns for farmers who qualify to avoid estimated tax requirements through early filing. That is, unless they are electronically filing a 1040 with a Form 4136 to claim the credit for off-road fuel use. Those e-filers have until March 10.
Details here.
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INTEREST RATES UNDERPAYMENT AND REFUNDS DECLINES FOR 2ND QUARTER 2008
March 03, 2008
The IRS announced today that the interest rates on refunds and underpayments has declined by a percentage point for the second quarter (Rev. Rul. 2008-10).
The rate for non-corporate taxpyaers will be 6% for both overpayments and underpayments starting April 1. The rate for corporate taxpayers will be 5% for overpayments and 6% for underpayments. starting in April. The rate for "large corporate underpayments" -- the amount exceeding $10,000 -- will be 8%, while the rate for large corporation overpayments will be 3.5%.
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RICH? SOAKED
March 03, 2008
Whenever one points out how much of the tax burden is borne by the top 1% and 5% of the income scale, someone will immediately point out how that ignores Social Security taxes. So here is a chart, using 2005 data, from the Congressional Budget Office showing allocation of tax burden on different incomes. This chart takes into account all federal taxes, including Social Security, and even corporate income taxes:
And here is an interesting chart of effective rates over time (via Instapundit).
Finally, here is the tax burden on the suffering middle class the politicians talk so much about, using the same data:
No, these items don't take into account state local taxes, which tend to be less progressive, but it is hard to make a case that the federal tax burden is shifting from the upper class, except perhaps when it is defined as the very top one-tenth of 1% of earners.
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IT'S BAD; ARE THE ALTERNATIVES WORSE?
March 03, 2008
The center-left Tax Vox blog has a thoughtful discussion of the current system of tax breaks for health care:
Conservatives dislike this system because it discourages people from buying insurance on their own. Progressives trash it because it benefits high income workers far more than their low-wage colleagues. Tax and health policy experts are offended because it encourages workers to buy more insurance than they need—and thus spend more medical care dollars for little added health benefit.Overall, it has little to recommend it—except for one small thing: it is the financial underpinning of an employee sponsored health system that covers nearly 90% of all privately insured people. So that leaves the policy experts with a big question: What should Washington do instead? To make it even more difficult, no one really knows what would happen if the tax break is repealed.
Worth reading in full.
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WEEKEND FRAUD ROUNDUP
March 03, 2008
Russ Fox rounds up the week in tax crime at Taxable Talk, including one fraudster with Iowa ties:
FORT WORTH — An attorney who ran dozens of nursing homes in Texas, Oklahoma, Iowa, Kansas and Virginia pleaded guilty on Wednesday in a federal tax-evasion case involving at least $34 million in payroll taxes.Gary Trebert, 57, pleaded guilty to conspiracy to defraud the government by obstructing and impeding lawful government functions of the Internal Revenue Service and the Department of Health and Human Services, tax evasion and aiding and abetting, U.S. Attorney Richard B. Roper said.
As part of the plea agreement, prosecutors will recommend an eight-year federal prison term when Trebert is sentenced in July, Roper said.
It sounds like Mr. Trebert might take as much care with his residents as with his taxes:
In Iowa, a Trebert home made the list of the worst 18 homes in the state, according to The Des Moines Register. In Kansas, a rehabilitation center's director of nurses filed suit, alleging that patients healthy enough to go home were not released. The suit, which was settled, alleged that the facility may have been defrauding Medicare by extending patients' stays.
The Des Moines Register article referred to here no longer appears to be online.
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WHO WOULD YOU TRUST WITH CASH MORE THAN A COOK COUNTY SUPERVISOR?
March 03, 2008
The spectactularly dysfunctional government of Cook County, Illinois, just decided it needs more money:
CHICAGO (AP) - Among the things Chicago wants to be known for, having the highest total sales taxes of any major U.S. city is probably not one of them.But that's what it's getting after the Cook County Board voted Saturday to double the county sales tax to 1.75 percent. When added to the city's sales tax, the county' increase has the cumulative effect of setting a 10.25 percent sales tax on goods bought in Chicago.
At least Chicago gets wise, deliberative and honest government for their money, right?
So, Iowans: give thanks for the requirement that these things require a referendum here in Iowa, so such craziness gets a reality check.
More from the TaxProf and the TaxGrrrl. The Tax Policy Blog outlines the parlaimentary chicanery used to keep the vote open past the midnight deadline to permit the 9-8 approval of the tax increase.
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THEY DON'T SPEND THEIR DAYS CHASING GENIUSES
March 01, 2008
Maybe this man was just getting an advance on his rebate:
Des Moines detectives were on the lookout Friday for a man who robbed a convenience store and fled with about $115.The robber told the clerk at the Git-N-Go store, 865 42nd St., that he had a gun, but he showed no weapons, police said. He quickly shed his hat and jacket before he ran off with the cash.
Police found the jacket — and, in a pocket, a W-2 form they are sure belongs to the man.
The W-2 belongs to a thief who is out on probation; when shown a picture of the man on the W-2, the clerk identified him as the robber.
On the positive side, the employer on the W-2 may be able to claim extra deductions and tax credits for hiring a criminal.
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