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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