Tax Update Blog: April 2008 Archives
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MORE STATE TAX TROUBLES FOR FRANKEN
April 30, 2008
Minnesota Senate Candidate Al Franken's corporation taxes made the news again yesterday. From Startribune.com:
Democratic U.S. Senate candidate Al Franken, front-runner in the race to challenge Republican U.S. Sen. Norm Coleman, said on Tuesday that he has paid $70,000 in back taxes and penalties owed in 17 states, going back to 2003.Franken, who has earned income across the country for celebrity appearances and speeches, blamed his accountant of 18 years for failing to pay the appropriate taxes owed in each state.
Mr. Franken graciously throws his accountant under the bus:
The accountant, Allen Chanzis of New York, "just made a basic kind of error that had a lot of ramifications," Franken said.Franken said that he paid federal and state taxes on all of his income, but that the accountant had failed to properly distribute the tax payment
How this happens
State tax compliance is a bane of small business life. It can take surprisingly little activity in a state to trigger "nexus," making you subject to that state's income taxes. If you are in a business that can take you briefly to other states irregularly, like public speaking or consulting, you can end up needing to file taxes in many states. As Mr. Franken learned with California, once you get into a state, they will keep wanting returns until you find a way to formally withdraw from the state.
Mr. Franken's problem is not uncommon. Undoubtedly many little corporations hop in and out of states without bothering to file in every state where they show up briefly. That can be a dangerous habit, as Mr. Franken is learning. If you never file in a state, the statute of limitations never stops running, and you can theoretically be assessed taxes going back forever.
The federal tax law that governs taxation in other states provides that once you cross a relatively low threshold for presence in a state, you can only avoid income taxes if your only activity in a state is sales for delivery from out of state. Some states - notably Michigan, Texas and Ohio - have enacted gross receipts taxes, which have an even lower nexus threshold, so the stakes for state tax compliance are rising. Given that every state has its own laws and its own nexus standards, it's a tough problem for a small business.
Taking your chances
I have no insight into Mr. Franken's business, but I can see how this sort of thing could play out with a similar business. A taxpayer might provide income and expense information to the accountant without mentioning that it was earned in 17 states. Or maybe the accountant doesn't find out about all of these states until he gets client information in February or March. Given that the taxpayer was only briefly in a state, without any payroll in the state or other information that could identify the taxpayer to revenue department data miners, the accountant might decide to just take a chance and not file in some of the states. Or the accountant might point out the exposure in the different states, but the client could decide to take his chances rather than pay thousands of dollars to prepare an extra 17 state returns.
Such decisions may be shortsighted, but they are understandable in cost-benefit terms. Mr. Franken might never have had problems if he hadn't decided to run for office, exposing his tax life to scrutiny.
States are getting more sophisticated at identifying taxpayers who do business in a state, and this is becoming an issue to more taxpayers as interstate business becomes more common even for small businesses in the information age. Of course, states love to tax out-of-state taxpayers because they can't vote. Perhaps personal experience will make Mr. Franken sympathetic to legislation that would prevent states from taxing businesses that only are in a state a few days in a tax year.
If your business has exposure in multiple states, it might be time to sit down with your tax advisor. A typical approach is for a tax advisor to contact the state and work out a deal to limit exposure to, say, three years back taxes in exchange for the taxpayer coming forward voluntarily. But, as the mutual funds say, actual results may differ.
Links to other Franken tax coverage:
Taxable Talk
PowerLIne
Prior Tax Update Coverage
UPDATE:
Megan McCardle and James Joyner weigh in.
UPDATE II: The TaxProf rounds up coverage.
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4TH CIRCUIT REJECTS LILO APPEAL
April 30, 2008
After a defeat in a "Son of Boss" tax shelter case last week in a federal district court, the IRS bounced back yesterday with an appeals court victory. The Fourth Circuit upheld a 2007 decision defeating a "Lease-in Lease-out" shelter. From the opinion:
In closing, we are reminded of "Abe Lincoln’s riddle . . . 'How many legs does a dog have if you call a tail a leg?'" Rogers v. United States, 281 F.3d 1108, 1118 (10th Cir. 2002). "The answer is ‘four,’ because ‘calling a tail a leg does not make it one.’" Id. Here, BB&T styled the LILO as a lease financed by a loan, but did not in substance acquire a genuine leasehold interest or incur genuine indebtedness. Accordingly, although we decline to resolve whether the transaction as a whole lacks economic substance — that is, whether it has "reached the point where the tax tail began to wag the dog," Hines, 912 F.2d at 741, we conclude that the Government was entitled to recognize that tail for what it was, not what BB&T professed it to be.
The IRS has occasionally lost cases against the mass-marketed tax shelters of the late 1990s at the district court level, but I think they have won all of their cases at the more important appellate level.
Links:
TaxProf Blog
Prior Tax Update BB&T coverage
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WE THE CONTEMPTUOUS
April 30, 2008
Robert Schulz and his We The People tax protester organization continue to fare poorly in court. Yesterday a federal judge ruled that Mr. Schulz was in contempt of court for failing to turn over the list of purchasers of "tax termination packages" from the organization.
From the Justice Department Press Release:
WASHINGTON – A federal court in New York has held Robert L. Schulz of Queensbury, N.Y., in contempt of court, the Justice Department announced today. Judge Thomas J. McAvoy of the U.S. District Court for the Northern District of New York ruled that Schulz and his We The People organization have failed to comply with the court’s earlier injunction order.The contempt order states that if Schultz and the organization fail to turn over its customer list by May 5, 2008, they will face a daily $2,000 fine, imposed retroactively from April 28, 2008. The court also noted that it would consider a government request for incarceration of Schulz if the defendants have not turned over the required information by May 12, 2008.
The injunction order required Schulz and We the People to give the Justice Department a list of the names, addresses, telephone numbers and Social Security numbers of all people and businesses to whom they had distributed materials falsely purporting to show how employers and employees could legally stop federal tax withholding. The materials were distributed in connection with a tax defier scheme called the “tax termination package.” The court previously found that Schulz “knew or had reason to know” that his statements in promoting the scheme were false.
In addition to the injunction, WTP lost a battle to keep Paypal from complying with a summons for information on WTP customers.
If "there is no law" requiring you to pay income tax, as the tax protesters like to say, the judges seem not to have gotten the word yet.
Link: Copy of contempt order.
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RATES MATTER
April 30, 2008
The Tax Policy Blog says that Ireland is looking mighty attractive to UK businesses:
For the second time this month, a major British firm announced that it will reincorporate in Ireland to lower its tax bill. United Business Media (UBM) joined the pharmaceutical company Shire in the exodus of UK firms seeking relief from the country's 28 percent corporate tax rate—which is low compared to the 39.4 percent overall rate in the U.S., but is high by E.U. standards. Ireland's corporate tax rate is currently the lowest in Europe at 12.5 percent.
Connecting the dots:
While these news reports have prompted a heated debate among British lawmakers over how to make their tax system more competitive and attractive to business, they should prompt a similar debate in this country. After all, the U.S. has the second highest overall corporate tax rate among industrialized countries and 11 percentage points higher than Great Britain's rate. See: http://www.taxfoundation.org/news/show/22917.html Moreover, a growing number of U.S. multinational firms are, like UBM and Shire, are generating more profits abroad than domestically. As a result, some may face pressure from shareholders to reduce the exposure of those profits to U.S. tax.
The U.S. has the second highest corporate rate, and Iowa has the highest rate in the U.S. That's why we have to bribe companies to set up shop here.
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IOWA CAN BRING TAX CHARGES TOO
April 29, 2008
The run-up to April 15 brought a flurry of federal criminal tax charges and sentencings, sort of as a not-so-subtle reminder of the benefits of following the tax law. Iowa's deadline is April 30, and Iowa tax authorities may be getting in on the example-setting act. From Gazetteonline.com:
IOWA CITY - An Iowa City attorney who had his law license suspended on Friday and is married to an Iowa City school board member is facing felony charges for allegedly failing to file state income tax returns over a three-year period.Jeffrey Kinney Fields, 40, of 5 Modern Way, was charged Friday by the state of Iowa with three counts of second-degree fraudulent practice, a Class "D" felony, court records show. Each count is punishable by up to five years in prison and a $7,500 fine.
Arraignment is scheduled for May 29 in the Johnson County Courthouse.
I believe Iowa used to have a blanket rule that, if I recall correctly, suspended law licenses if a lawyer failed to file state tax returns and then failed to disclose the non-filing to the state courts. I wonder if that rule helped keep some otherwise careless lawyers out of tax trouble.
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A TAXPAYER ASSUMED THE POSITION, AND REGRETTED IT
April 29, 2008
The Wandering Tax Pro has a sad tale of a taxpayer who withdrew from a "Coverdell Education Savings Account," or education IRA, on the mistaken assuption that it could be used to cover pre-school expenses:
What happenned in this case is that each of the children had to file a tax return and report taxable income from the Coverdell ESA. While they did not have to pay federal income tax because of the amounts involved they did have to pay a 10% premature withdrawal penalty on the taxable portion of the distribution.
The Moral? If you are using a tax-favored vehicle, check with your tax pro before you drive it somewhere new.
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SHOULD BRITNEY SPEARS BE SLAPPED?
April 29, 2008
The California tax authorities say yes, if you're talking leins. TaxGrrrl has the scoop.
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FRANKEN'S TAX MONSTER?
April 28, 2008
Comedian and Minnesota U.S. Senate Candidate has some tax problems. It appears that a corporation controlled by Mr. Franken failed to file the $800 minimum tax payment for several years, and California says he owes $5,800. Russ Fox explains:
We're not talking big bucks here. The tax owed (including penalties) is $5,800 for not making the required minimum payments from 2003 - 2008. The corporation will likely also the Secretary of State's office $25/year plus a $250 penalty for each year that the required registration form wasn't filed. Once all of that paperwork is filed, and the state income tax returns for 2003 - 2008 are filed, Mr. Franken can dissolve his corporation.
This kind of issue is pretty common. While there may be many reasons not to vote for Mr. Franken, this shouldn't be on the list. California requires anybody corporation registered there to file an annual report with an $800 fee. You have to keep filing until you file formal withdrawal papers from the state. The main lesson from this is that if you ever file a California corporation return, you need to remember to file withdrawal papers once you stop doing business there.
Blog coverage:
The Tax Prof
Russ Fox
Kay Bell
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UNCLE SUGAR'S CRAZY FUN BUCKS START TO ARRIVE TODAY
April 28, 2008
The IRS has speeded up the tax rebate delivery schedule, with the first rebates to be deposited today for taxpayers who timely-filed their 2007 returns without extension.
Naturally, you have many choices on what to do with your rebate. Perhaps you can parlay your stimulus into some stimulation.
(Via TaxGrrrl and The Wandering Tax Pro).
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MILESTONES
April 25, 2008
The Tax Update visitor meter crossed 500,000 on April 14, which was the busiest day so far this year, I believe.
Visitor 500,000 was somebody from Michigan who Googled "s corporation tax planning blog," and he arrived at this page. Most of our traffic comes from Google and other search engines. When they arrive from that kind of search, it's a good thing, and they might actually find something useful here. In contrast, folks who get here with searches like "rat outline" and "you've got a lot of nerve" may not leave the site fully satisfied.
Of course the 500,000 mark is arbitrary. We had no Sitemeter for several years, and it has covered different parts of our blog and website at different times. Still, it's a nice round number, and a good time to thank you for stopping by. So, thanks!
We also have noticed over the last few days that we have somehow been deemed a qualified news source for Google News. I have some Google News subscriptions to notify me of tax stories on the internet, and some Tax Update posts have started coming showing up in my inbox. So that's some sort of milestone, maybe.
We appreciate your visits, whether you come to the home page or through a search engine. We hope to see you again soon.
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RAINY DAY CAVALCADE
April 25, 2008
It has been raining here for roughly 40 days and nights now; good risk management may indicate an ark about now. Other risk management items are on display at the new Cavalcade of Risk. Don't miss the InsureBlog's contribution on student health insurance.
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WESLEY WON'T WALK
April 25, 2008
The Snipes sentence - the maximum of three years in prison - is good news for the Government's campaign against "tax defiers." While three years is probably less than half what Mr. Snipes would have received had he been convicted of felony tax fraud charges, it's still a fairly unpleasant way to pass three years. It's a reasonably stiff sentence.
What's more, the promoters got clobbered. Eddie Kahn got the full 10 years he was eligible for, and the actual return preparer got 4 1/2 years.
Naturally, the Tax Blogs are on top of this. The TaxProf notes the strange gambit by the Snipes defense team of giving the judge a $5 million check to cover taxes during the sentencing hearing -- a ploy that puzzled the judge, but doesn't seem to have influenced him very much.
The TaxGrrrl notes one reason the ploy might have failed: the defense team had been cliaming that his tax understatement was only $228,000:
It’s nearly impossible to tell what Snipes owes at this point. Prosecutors allege that Snipes has, over the years, hidden at least $41 million from taxing authorities, much of it overseas. Snipes’ lawyers dispute that amount, claiming that the amount actually due is less than a quarter of a million dollars (a claim that reeks a bit, considering Snipes’ $5 million payment today).
She notes that the Snipes team vows an appeal.
Kay Bell chimes in:
Snipes' attorneys had argued for no jail time and offered dozens of letters from family members, friends and even fellow actors Denzel Washington and Woody Harrelson attesting to Snipes' good character.The judge obviously was not swayed
Russ Fox also was following the sentencing here and here.
The Justice Department is pleased:
"Snipes' long prison sentence should send a loud and crystal clear message to all tax defiers that if they engage in similar tax defier conduct, they face joining him and his co-defendants, Kahn and Rosile, as inmates in prison," said Nathan J. Hochman, Assistant Attorney General of the Justice Department's Tax Division.
Mr. Snipes' acquittal on the felony charges still is important - I estimate that he would have served at least 3 more years had he been convicted. Still, the sentences ought to give some food for thought to the "show me the law" crowd -- especially that given to Eddie Kahn, who refused to recognize the authority of the court. If you don't think there is a law requiring them to pay income tax, but the federal judges, U.S. Marshals, and the Bureau of Prisons think there is such a law, your opinions won't help you avoid prison any more than it helped Eddie Kahn or Wesley Snipes.
UPDATE: This story incorrectly reported that Mr. Snipes was fined $5 million. That is incorrect. We regret the error.
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WESLEY TO THE MAX
April 24, 2008
Wesley Snipes has been sentenced to three years in federal prison, the maximum sentence for the three convictions for failing to file tax returns.
He was not taken into custody immediately.
Co-defendant Eddie Kahn, a well-known tax-protest figure, also received the maximum sentence allowed. Unfortunately for him, his convictions get him ten years. Another co-defendant, Douglas Rosile, received a 4 1/2 year sentence.
UPDATE: The TaxProf has a full roundup.
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SO, WESLEY, WHAT SOUNDS GOOD FOR LUNCH?
April 24, 2008
The sentencing hearing for Wesley Snipes has taken a lunch break. Based on this report from Ocala.com, Wesley may not have a great appetite:
So far, at least, in the sentencing hearing, U.S. District Judge William Terrell Hodges has made it clear that actor Wesley Snipes could be facing the maximum three-year prison term on three counts of failing to file his taxes.
While it's not the 7-10 years he would have been facing had he been convicted of the felony tax evasion charges, that still isn't a cheery prospect.
Even accepting the defense's calculation of $228,000 for the government tax loss, Hodges said the guidelines still advised a sentencing range of 33 - 41 months.He noted that the maximum three-year sentence - which is one year on each misdemeanor count - is "squarely in the middle of that sentencing range.
"Why should I go any further than that," Hodges asked.
His co-defendant, Eddie Kahn, looks like he's in line for a lengthy stay at Club Fed. According to the Ocala.com report, the judge says a 10-year sentence may be indicated.
We may get the final sentence this afternoon.
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AND I'D HAVE GOTTEN AWAY WITH IT IF IT WEREN'T FOR THOSE MEDDLING LADIES
April 24, 2008
The strange trial of tax-protesting former computer executive Robert Beale continues in Minnesota. You'll recall the trial started with a bang when Mr. Beale and some associates were charged with attempting to intimidate the judge via a "common-law court."
Testimony this week featured two former employees at Mr. Beale's company, Comtrol, who tipped off the IRS.
Things started to go downhill when payroll clerk smelled something fishy when Mr. Beale directed her to stop withholding on his taxes and instead send checks to a swiss bank account, according to her testimony. Eileen Johnson testified that she began to keep a file of these transactions. From startribune.com:
Beale, who is representing himself at trial, got to face Johnson, the former employee he called "Comtrol's mother," eye-to-eye Tuesday and question her."Good afternoon, Eileen, good to see you," he said. "I still love you."
The greeting began a strange cross-examination of Johnson, who earlier had detailed alleged attempts by Beale to evade paying taxes and conceal millions of dollars in income beginning in 2000 by paying himself through a sham company called "Chayil," and sending money abroad.
It's good to know he still loves her.
Beale's defense to the charges against him seems to be that he responded several times to IRS calls for documents, but didn't feel he needed to present them. He said he figured if he was wrong, he'd eventually pay a fine. He also said it was no secret he didn't like paying taxes, which proved that he wasn't trying to hide his actions."How do you feel about going behind my back and getting me into trouble?" Beale asked Johnson.
"I'm very sorry you put yourself in this situation, Bob," Johnson replied.
No word yet on whether Mr. Beale will convene a "common-law court" to press charges against Ms. Johnson for going behind his back.
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WESLEY'S BIG DAY
April 24, 2008
Wesley Snipes will learn today how soon he can begin his next film project. He is scheduled to be sentenced for his conviction on three counts of failure to file his tax returns. He was acquitted on more serious tax evasion charges.
The government is asking for the maximum three-year sentence. The Tax Update will be all over this vital story. Of course, the Tax Prof has it well-covered already, as is Russ Fox.
Link: Tax Update Snipes Coverage
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LEFT-SIDE THINK TANK: TARGETED TAX BREAKS A WASTE
April 24, 2008
The Iowa Fiscal Partnership has issued a report saying that one of the biggest corporate welfare economic development tax credit schemes in Iowa is a big waste of money. Some points from the Executive Summary of their report on Iowa's Enterprise Zone tax credit program:
Although the subsidies received under the program are difficult to pin down, the raw numbers are daunting: Between 2003 and 2007, zone businesses racked up nearly $300 million in tax credits.
Although the flow of tax credits is hard to measure, it is clear that it is not following the program’s intent into new industries and distressed areas. Of the hundreds of millions in credits for 2003-07, nearly a quarter (over $80 million) were claimed by a few well-established insurance, financial service, agricultural processing, and agricultural equipment firms.
The state’s calculation of the program’s performance vastly overestimates its benefits and underestimates its costs. Our reassessment finds each new job created under the program to cost — on average — over $100,000.
So the state spends $100,000 per "job" and the money goes to well-established - and well-connected - interests. In other words, you pay taxes to subsidize the biggest companies in Iowa.
The report gives this "bottom line" (my emphasis):
Iowa’s Enterprise Zone Program is a practical and fiscal disaster. Its 1,200-odd zones sprawl across the state in such a way as to undermine any pretense of targeting subsidies at truly distressed areas. Its subsidies and tax credits are expansive. And the results are unimpressive at best and disturbing at worst. Again, the research on enterprise zones and their efficacy is quite clear on this point: Given the larger logic of business location, tax incentives are likely to have only a marginal impact on decisions made by investors and employers. Some of the money spent will simply encourage firms to locate in one part of the state rather than another — at no net gain and considerable cost. Much of the money will simply chase new investment and new employment that would have occurred anyway.
The report chickens out of the logical solution: getting rid of all of these absurd corporate welfare tax credit schemes, and instead lowering individual rates and eliminating the corporation income tax. It instead takes a "mend it, don't end it" approach to the program, which is a cornerstone of the Democratic approach to economic development. Still, the report does a nice job of pointing out the futility of the tax-credit approach to economic development, even if it fails to draw the logical conclusions from their findings.
In a better world, Iowa's right-side tax policy groups would be making the same points from a free-market, small-government perspective, but Iowans for Tax Relief is a shameless loophole lobby for the interests that harvest these tax subsidies, and the Public Interest Institute has not tackled Iowa's dysfunctional tax system of high rates and subsidies.
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APPLICABLE FEDERAL RATES (AFR) ISSUED FOR MAY 2008
April 24, 2008
The IRS has issued (Rev. Rul. 2008-24) the minimum interest rates for loans made in May 2008:
-Short Term (demand loans and loans with terms of up to 3 years): 1.64%
-Mid-Term (loans from 3-9 years): 2.74%
-Long-Term (over 9 years): 4.21%
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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VIRTUAL TAX CRIME, REAL JAIL TIME
April 23, 2008
A man who directed the "landmark arts venue" in Madison, Wisconsin was sentenced to a year in prison on tax charges yesterday. Robert D'Angelo pleaded guilty to evading taxes on his side business of selling used books on Amazon.com.
This is the first tax crime I've noticed based on internet sales, but I don't expect it will be the last. Mr. D'Angelo made a brief splash when a federal magistrate wrote an overwrought order quashing a subpeona served to Amazon for records of his online sales. Volokh Conspiracy contributor Orrin Kerr summed up the magistrate's ruling: : "Subpoena Ruled Unconstitutional Because Some Bloggers Are Really Freaked Out By the Bush Administration."
Links:
U.S. Attorney press release.
Magistrate Ruling
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HAPPY TAX FREEDOM DAY!
April 23, 2008
You may wish to celebrate by singing along with the Tax Freedom Day Song.
More at the Tax Policy Blog.
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BAIT, MEET SWITCH
April 23, 2008
The Iowa Legislature has voted to replace the 1-cent local option sales tax with a permanent statewide 1-cent increase in the sales tax. This completes the bait-and-switch. The local-option tax was originally sold as a tax that could be rolled back by the voters if it were no longer needed; it had to be renewed by referendum every ten years. Sorry, suckers!
The Governor is sure to sign the sales tax increase, just as he has signed the statewide increase in vehicle registration fees. After all, Microsoft, Google and Hollywood need the money. And Hormel, and...
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84... 85... 90
April 23, 2008
Since I last looked, the Tax Court has ruled against Larry D. Harvey's Antarctican clients seven more times, bringing 90 the number of losses on this issue, by my unofficial count. One more decision holding that Antarctic employees do not qualify for the foreign earned income exclusion came down yesterday.
Cite: Gober, T.C. Memo 2008-110.
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GOOD MORNING! WE'RE STILL DOOMED!
April 23, 2008
Dr. Maule revisits his unhappy forecasts for shortages of, well, everything but shortages.
Turning from something that I don't buy to nutrition that really matters, it's only a matter of time before an extremely serious shortage sets in. What does one do when the headline reads, World chocolate shortage ahead? That's news from a year ago. Chocolate prices have been increasing. Several months ago, Hershey's announced an increase of 13 percent. The law of supply-and-demand is making itself known in every corner of the economy.
I yield to no man in my concern for the security of the nation's strategic chocolate reserve. Yet Dr. Maule has correctly, if perhaps unintentionally, identified our salvation: the law of supply and demand. If demand pushes up the price of chocolate, demand will slacken or (my preference) supply will increase as opportunistic vendors gear up to meet the demand.
But what if prices in everything increase? An increase in the general price level, or general inflation, "is always and everywhere a monetary phenomenon," as a wise man once said. The solution is independent of the world commodity markets. The Fed just needs to stop flooding the economy with easy and cheap credit to bail out foolish home lenders and borrowers.
The only thing that frightens me about the future availability of commodities is the idea that shortages can be solved, as Dr. Maule says, "...if people and governments mobilize to deal with these issues while there still is time."
Whenever you can find shortages, it's almost always because government got there first. Steel shortages? Look to tariffs to "protect" the steel industry. Food shortages? The government is paying enormous amounts for us to burn food in our cars, and government intervention, primarily overseas, blocks the enormous potential of genetic modification to increase the food supply and save lives. Fuel shortages? It's the government that keeps us from tapping enormous fuel supplies on our doorstep off the Florida coast and in the arctic wastelands, for starters, and it's government regulations on what fuel can be burned where that causes the worst price spikes. Not to mention the government hassles that have kept any new oil refineries or nuclear plants from going online in recent decades. It's arguable that those are correct policies anyway, but there's no arguing that they impair the energy supply.
I suspect Tyler Cowen may have it right when he says:
I give the current price trend another ten or fifteen years or so to run. Eventually high commodity prices will seem permanent and then the bottom will drop out.
But if the government mobilizes to solve the problem, Dr. Maule's long-term pessimism could well be justified.
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IRS WITHDRAWS PROPOSAL TO TREAT MORTGAGE LOSSES AS CAPITAL LOSSES
April 23, 2008
In a victory for non-bank investors in mortgages, the IRS yesterday backed off plans to treat mortgages as capital assets. This is good news for Fannie Mae and other large institutional investors in mortgages. Corporations can only deduct capital losses to the extent of capital gains; the now-withdrawn IRS proposal would have left many institutions with large non-deductible capital loss carryforwards.
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I MEANT THAT GOD WANTS ME TO BUY YOU DINNER AND DRINKS, YOUR HONOR
April 22, 2008
The Lord truly works in mysterious ways:
The trial of millionaire tax protester Robert Beale turned bizarre even before jury selection began Monday as the prosecutor announced the arrest of four of Beale's supporters for conspiring with Beale to disrupt the proceedings and intimidate the judge."God ... wants me to take the judge out, that's what he wants me to do," Beale allegedly told his common-law wife, according to a new criminal complaint filed against him and the four associates.
Context is everything, and the context may show that he doesn't want to take the judge out to socialize:
[FBI agent Matthew] Snell said that Beale told his common-law wife, Mun Suk Kim, in an April 3 conversation that God wants him to "destroy the judge. That judge is evil. He wants me to get rid of her."
Mr. Beale founded a successful Minneapolis computer company. He is alleged to have begun evading taxes using tax protester theories. He failed to show up for his trial when it was first scheduled and was arrested after spending 14 months as a fugitive.
Mr. Beale is representing himself. He may need to work on his approach to buttering up the judge.
Links:
Prior Tax Update Beale Coverage
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A BAD DAY FOR LILO
April 22, 2008
A Cincinnati jury didn't buy the LILO tax shelter. The jury ruled Friday that Fifth Third Bancorporation wasn't entitled to deductions arising from a sale-leaseback of rail cars in the foreign countries of France, Germany and Massachusetts.* A Justice department press release said that this was "the first large, complex corporate tax shelter case tried by a jury."
More from the press release:
"The success in this case is due to the great teamwork by lawyers from both the Justice Department's Tax Division and our IRS Office of Chief Counsel," said IRS Chief Counsel Don Korb. "This is just the beginning of the enhanced collaboration between the Tax Division and the Office of Chief Counsel in litigating cases. This enhanced collaboration will be more and more evident in the coming months, and will, I believe, significantly increase the government's effectiveness in combating tax sheltering activity like the LILOs at issue in this case."
Given that the verdict disallowed $5.6 million in tax refunds, an appeal by Fifth Third wouldn't be surprising.
The TaxProf has more.
*Yes, technically speaking, Massachusetts isn't a foreign country, even though it is much too hard to spell.
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MURPHY'S END
April 22, 2008
The dramatic life of the Murphy case came to a quiet end yesterday when the U.S. Supreme Court declined to take the case.
The U.S. Appeals Court for the D.C. Circuit shocked the tax world with its initial Murphy decision, in which it ruled that damages awarded a whistleblower were not taxabe under the Constitution. The initial D.C. Circuit decision implied that any item not considered "income" in 1913 could not be subject to an income tax today.
Most tax students criticized the Murphy decision, and the three-judge panel quietly withdrew its decision and issued a more conventional ruling holding that the whistleblower damages were taxable.
A whistleblower advocacy group issued a press release that blames "pressure from the Bush administration" for the D.C. Circuit's reconsideration of its own decision. That's a strange way to describe near-universal criticism by the tax bar, unless Karl Rove's tentacles extend further than I would have ever guessed.
The TaxProf rounds things up.
Link: Complete Tax Update coverage of Murphy.
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BACK IN BUSINESS
April 22, 2008
After a few days off and a trip to the big city for some college shopping, the Tax Update reopens today. Lots to catch up on, after I carefully read hundreds of spam e-mails for about a nanosecond each.
UPDATE: It sounds like the Big City was more exciting than I realized while I was there. I suppose I didn't notice the shooting because I was in the Green Zone.
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WE INTERRUPT OUR REGULAR PROGRAMMING
April 17, 2008
The Tax Update is taking a post-tax season breather. Posting will be spotty at best until next week.
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GAME OVER. GAME ON.
April 15, 2008
Today's the day. There isn't a lot to add to what I've already said about this filing season, but a few reminders can't hurt:
- Today's the deadline
- If you don't e-file, certified mail is a great way to document timely filing.
- E-file is good.
- Extensions are your friend.
- If you claim a SEP deduction or an IRA contribution for 2007 and are filing today, make sure you have it funded by the end of the day.
If you have found the process of paying taxes painful, I understand. Sometimes the pain is unavoidable. Remember the painful parts, and start now to ease them. It's mostly the little things:
- If you always end up short on April 15, you may be underwithheld.
- If you have a lot of income not subject to withholding, keep up on your estimated tax payments.
- If you have a 401(k) plan at work, use it.
- If you are self-employed, it's easier to fund your SEP or Keogh plan a little at a time, rather than at tax time when you need to come up with a tax payment too.
- If you qualify for a health savings account, fund it.
- Keep your records in order so tax time next year isn't a debacle.
- Review your tax situation in the fall so you are ready for what happens next April.
Finally, be a good citizen. Tax simplification starts with maiking Congresscritters do their own returns live on the internet. Write your lawmakers!
This is the last installment of our 2008 filing season tips. Thanks for reading!
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WHAT EXTENDS, WHAT DOESN'T
April 14, 2008
Everyone knows that tomorrow is the deadline for filing your 1040. Most taxpayers are probably aware that you can extend this deadline six months with Form 4868. You can extend other returns due today for six more months too. Form 7004 extends both Form 1041, the estate and trust return, and Form 1065, the partenrship return.
Extending your tax return extends some other important deadlines for six months, including:
- Funding a 2007 qualified pension or profit-sharing plan contribution, including a Keogh plan.
- Establishing and funding a SEP, or Simplified Employee Pension.
- Recharacterizing a Roth IRA contribution as a regular IRA contribution.
- Withdrawing excess IRA contributions for 2007.
- Filing Form 3115 under an automatic procedure for changing accounting methods.
- Many elections, such as the partnership "Section 754" election to step up the basis of assets after a sale of partnership interest, are timely when made on an extended return.
Folks with section 1031 like-kind exchanges entered into after October 18 of last year can get extra time to close the acquisition of replacement property, but the extended deadline is 180 days after the old property was given up - not 180 days from April 15.
Some deadlines aren't extended at all with a return extension. A few examples where April 15 is the do-or-die deadline:
- Paying your federal tax due for 2007 (though no penalties, only interest, will accrue if you are 90% paid in when you extend your 1040).
- Funding an Individual Retirement Account for 2007
- Funding a Health Savings Account for 2007
- Paying your first quarter federal estimated tax for 2008
- Making a Section 475 "mark-to-market" election for securities trading.
So: extensions get you more than just time to get your return right. They can also help with cash management. But be careful about what can't get extended, and act accordingly.
This is the penultimate installment in our daily series of 2008 filing season tips, and perhaps the ultimate opportunity to use the word penultimate here.
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A CUSTOMER SATISFACTION CHALLENGE
April 13, 2008
The kinder, gentler IRS now talks a lot about "customer service" - here, for example.
They have their work cut out for them with this happy customer. She's so happy, the language is a bit rough.
Via Instapundit, so you have probably seen it already.
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LAST TAX SEASON SUNDAY MORNING
April 13, 2008
A quiet time in Downtown Des Moines.
Ladies and Gentlemen, Johnny Cash:
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IT'S BETTER TO EXTEND THAN TO AMEND
April 13, 2008
If you are scrambling to wrap up your 1040, and you don't know how you can get it right by April 15, maybe you shouldn't even try.
The tax law is hard. From bitter experience, every practitioner knows how easily mistakes can happen as you rush to get stuff filed by April 15. That's why extending your return is often the wise choice.
Filing an extension is easy. All you need to do is file your Form 4868 to get another six months to finish and file your 1040. You can also e-file an extension. If you have at least 90% of your final liability paid, you will have no penalties when you pay the rest; you will have to pay 6% interest on any amount due.
If you are a quarterly estimated payment filer, it's wise to gross up your extension payment to cover your first quarter payment. That gives you some cushion on your 2007 taxes, and you can apply your overpayment to your 2008 taxes when you file the final 2007 return.
Last year we mentioned two common arguments we hear against extensions. Our feelings towards these arguments are unchanged:
"I'm more likely to be audited." Nonsense. I have seen no evidence that extended returns attract IRS attention. It is clear, though, that returns with errors do attract IRS attention. If taking an extension means you file a more accurate return, you actually reduce your chances of an audit. That's especially true if you would other wise have to file an amended return to fix an error."I want the statute of limitations to run." This is actually has some merit, if you have a controversial position on your return. It also rarely applies in real life. While I'm sure it happens, I've never seen a client have to pay extra taxes because they kept the three-year statute open an extra few months by extending a return. Again, if by extending you make your return more accurate, you probably reduce the chances of the IRS looking at you.
Keep in mind: an e-filed return may never be seen by an actual human, while every amended return has to get at least some review from an IRS agent with the ability to refer it for examination. That shouldn't keep you from amending a return if you need to correct an error or collect money the IRS owes you. It does mean that if the choice is to extend and get it right or amend later to fix an error, better to extend than amend. And if you are paying to have your return done, amending is more expensive than extending.
Tomorrow: What you can extend, and what you can't.
Link: IRS Tax Topic 304, Extension of Time to File Your Tax Return.
This is another in our series of daily 2008 filing season tips. Only two left!
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LOW COST, BUT SURELY ACADEMICALLY RIGOROUS
April 13, 2008
From today's spam filter inbox:
very CheapPrice Bacheelor, MasteerMBA, and Doctoraate dip1omas ttqrt g9uk121
Nothing shows great learning like a Doctoraate. It's too bad the author apparently died of a seizure just as he finished the header.
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A BEAUTIFUL SATURDAY TO DO TAXES
April 12, 2008
It's snowing on April 12.
Just... lovely.
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DON'T CHEAP OUT AT THE POST OFFICE!
April 12, 2008
An entrepreneur's tax return isn't necessarily cheap. One relatively prominent entrepreneurial couple filed a 2005 tax return with three schedule Cs and K-1s from a bunch of partnerships. Their return fee was a cool $16,535.
Maybe you spent hundreds of dollars to have a preparer do your business return. Or maybe you spent the 30.3 hours the 1040 instructions say is the average estimated time it takes to do your own return. Either way, your tax return represents a substantial investment in time and/or money.
Now isn't the time to cheap out. Unless you are filing electronically, you ought to spring for the extra $4.80 to file your return "certified mail, return receipt requested."
It's well worth the time and trouble of going to the post office to get that postmarked receipt. The tax law is full of sad stories of taxpayers who lost thousands of dollars because they didn't have a postmark to document that they filed on time. Don't let it happen to you!
If there's no post office open or handy, you can also use a mailing receipt from one of the designated private delivery services authorized by IRS for timely return shipment. As they don't use P.O. boxes, you'll want to refer to Russ Fox's handy list of service center street addresses.
And don't procrastinate, because Jiffy Express isn't a designated private delivery service.
This is the fourth-to-last installment of our series of 2008 filing season tips.
(Cross-posted from IowaBiz.com)
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CAUGHT SHORT?
April 11, 2008
It happens. Sometimes, for some taxpayers, April 15 comes and there isn't enough cash on hand to cover what the IRS wants. What to do?
DON'T BLOW IT OFF. The worst thing you can do is to just put your head in the sand. If you don't file anything, you start to accrue a monthly penalty of 5% of any amount you owe the IRS. 60% APR almost makes LoanMax look reasonable (though the total penalty maxes out at 25%). Interest also accrues on the unpaid taxes and penalties. Once you start digging this kind of hole, it can take years to climb out.
BORROW (but not from a car-title or payday-loan shop. The IRS is a better creditor). If you have a home equity line, tap it. The IRS accepts credit card payments. If you have a good credit rating, your friendly banker might be able to do something. If you have a gullible sympathetic relative or significant other, take advantage.
FILING BUT NOT PAYING. Getting an automatic extension with Form 4868 gives you until October to file a timely return. Even if you can't pay your tax, an extension can turn the 5% monthly failure-to-file penalty into a 1/2% montly failure-to-pay penalty. That is, it can if you ultimately file your completed 1040 and pay your taxes by the extended due date.
Also, the tax regulations don't impose the failure to pay penalty if you have 90% of your tax paid in by the original due date. In that case, you just have to pay the interest on the remaining balance due at the IRS rate for underpayments - currently 6%. If you are coming up just short, you should pay in what you can with an extension and pay the rest as soon as possible.
BORROW FROM THE IRS. Many taxpayers can set up an installment agreement with the IRS online. You can also apply for an installment agreement by filling out Form 9465 and filing it with your timely-filed tax return, along with a check for whatever you can afford to pay now.
If you get an installment plan in place, live up to it. Once you fall behind, things can get ugly quickly.
Remember, too: The Iowa return and payment isn't due until April 30, so you have time to come up with cash for them.
And whatever you do, don't bounce a check. They really don't like that.
Link: IRS release on "Payment Options Available for Those Who Can’t Pay in Full"
This is part of our daily series of 2008 filing season tips running through April 15.
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POUR ENCOURAGER LES AUTRES
April 11, 2008
It's a tax season tradition for the IRS to release a flurry of indictments and criminal sentencing this time of year. You know, to encourage the rest of us to be good taxpayers.
Here is just what comes across my screen this morning:
Ex-Hawaii psychologists charged with tax evasion
Casper man faces federal tax evasion charges
Springfield contractor charged with six counts of felony tax evasion
Former restaurateur admits tax evasion
Provo man indicted for tax evasion
OK, guys, we get the point.
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HOUSING LEGISLATION MADNESS
April 11, 2008
The Tax Policy Blog weighs in on the proposal to give people tax credits to buy foreclosed homes:
You cannot make this stuff up, folks. It is maddening. The House Ways & Means Committee has voted to make the IRS the new Freddie Mac. The committee passed yesterday an $11 billion Housing Assistance Tax Act. As today's Daily Tax Report explains, it would create a "refundable tax credit of up to $7,500 for first-time home buyers, who would be required to repay the amount received over the next 15 years in equal installments."Rangel, McCrery, and Co. want to use the tax code for the government to offer taxpayers interest-free loans for housing. I guess we don't have enough federal spending programs that are designed to subsidize and ensure loans for housing. We only have an entire cabinet department called Housing and Urban Development, and two government-created entities called Freddie Mac and Fannie Mae.
And to believe that there are Republicans on this committee who claim to be in favor of "small government." Anybody on this committee who voted for this provision and says he/she favors simplification of the tax code is either a liar or a hypocrite.
Well said.
From the center-left side of the tax policy spectrum, TaxVox weighs in:
The bill approved today by the Senate would give tax breaks to people who buy foreclosed houses, which would only raise the price of those homes. Nice for the bankers who own them. Not so good for the folks who want to buy them.
They weigh in with a policy recommendation that makes so much sense that Congress will never consider it:
Instead of using the tax code to manipulate asset values of homes, I suspect the best thing that Congress could do for Steve and Laura is…nothing. House prices will fall a bit more, eventually new buyers like them will get back in the market, and everything will be fine.
Supply and demand -- what a concept!
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FRENZY CAVALCADE
April 11, 2008
It's the worst of tax season. Get away from it all by jumping on the latest Cavalcade of Risk! There's always good stuff at this roundup of insurance and risk-management bloggery.
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THE ROTH IRA
April 10, 2008
The Roth IRA is a nice option for personal retirement planning. Contributions to a Roth IRA are not deductible, but earnings form them are permanently tax free at retirement. This contrasts with the traditional IRAs we discussed yesterday, which are tax-deductible (within strict limits) at contribution, but fully-taxable on withdrawal.
The choice between a Roth IRA and a traditional one involves a bet. If you forego the deduction, you are wagering that the benefits of having income permanently tax-free outweighs the value of a deduction today. That's most likely to be true if you expect to pay higher tax rates at retirement. This makes the Roth IRA especially attractive for younger workers, who are busy climbing up the tax brackets while they climb the career ladder. But given that the markets predict higher rates in just a few years, a Roth IRA might be a good bet for higher-income workers, too.
intrade 2011 tax rate prediction market at 7:45 am 4/10/08
The contribution limits for Roth IRAs are generally the same as traditional IRAs for 2007: $4,000 per taxpayer or $8,000 per couple, but limited to the amount of compensation income. The ability to fund a Roth IRA phases out for high-income taxpayers under the following schedule:
You have until April 15 to fund your 2007 Roth IRA. It won't reduce your taxes now, but it could do great things for you down the road.
Link: IRS publication on Roth IRAs
We're posting a new 2008 filing season tip daily through April 15. Catch them all!
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DOG BITES MAN; LEGISLATURE VOTES TAX INCREASE
April 10, 2008
The Iowa House of Representatives has voted to replace the one-cent local option tax, which has to be approved by local referendums every ten years, with a permanent one-cent sales tax.
It's for "the children," of course.
The bill now moves to the Senate, which likely will be just as happy to pick our pockets for the greater good.
Meanwhile in Nebraska they are cutting taxes. I don't think it's a trend that will cross the Missouri river anytime soon.
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MY ROAD TO TAX REFORM
April 10, 2008
The TaxProf notes that the House Ways and Means Committee passed two bills yesterday, including a bunch of inane housing assistance provisions.
There is one step the taxwriters could take that would do more to help tax policy than anything else. I propose that all taxwriters - and eventually, all congresscritters - be required to do their own returns via live webcasts. They could use any commercially available software, but the screen with their work would also have to be webcast live.
The webcast would also allow running unmoderated chat commentary on the congresscritters' progress through the forms ("LOL! $100,000 home mortgage interest deduction? What's yr interest rate, anyway, Senator? U can only deduct interest on the first $1 million of acquisition debt. U should refinance, or stop cheating! :-)" ).
I don't believe this provision is in either bill. A pity; it would encourage these people to face the consequences of the tax stupidity they enact for the rest of us.
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THE CLINTON RETURN FEES
April 10, 2008
Intrepid Tax Update reader Eric Januzelli ventured further into the Clinton tax returns than I. He reports:
You noted that the Clintons' accountant "buried" his fees on their 2006 return in the Misc. deductions. That didn't happen on prior returns. In 2005, his charge was $16,535 and in 2004 it was $13,250.
I said any bill under $10,000 would be a "bargain." The 2004 and 2005 fees seem quite reasonable, considering the how complex those returns are.
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HERE'S THE LAW!
April 09, 2008
A commenter on this post demands (in capital letters, which means he's very insistent) that I show him the law that requires him to pay taxes. We aim to please, so here you go:
U.S. Code Title 26, Section 1, has the useful name "Tax Imposed." It begins:(a) Married individuals filing joint returns and surviving spousesThere is hereby imposed on the taxable income of--
(1) every married individual (as defined in
section 7703) who makes a single return
jointly with his spouse under section 6013,
and
(2) every surviving spouse (as defined in
section 2(a)),a tax determined in accordance with the following
table:
Section 1 goes on to impose tax and prescribe rates on single individuals, heads of households, and estates and trusts, as well.
"Taxable Income" is defined in Section 63 of Title 26. Other sections of Title 26 will give you helpful definitions like "gross income." And Section 6012 provides a useful listing those required to file tax returns.
Now I'm sure that someone will raise an argument that the 16th Amendment, or the 14th Amendment, or the Constitution, or something, wasn't properly ratified, or that the Internal Revenue Code only applies on ships with gold-fringed flags, or some such. These arguments have one flaw in common: they never, ever work. If you think the law says one thing, but every federal judge thinks it says another, it would be unwise to bet on your view prevailing.
Link: Dan Evans' tax protester FAQ
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TRADITIONAL IRAS: STILL A GOOD DEAL
April 09, 2008
The Individual Retirement Account became a red-headed stepchild of the tax law when Congress limited deductions for such accounts mostly to people with no money to save in them. Like all high-income phaseouts, the limitation of IRA deductions is bad policy and adds foolish complexity to the tax law.
But even within its limits, the traditional IRA can be a good deal for taxpayers. First, many taxpayers can deduct their IRA contributions. Your deduction is limited only if you are covered by another employer pension plan. Even if you are covered, your spouse may be eligible for a deduction. And even if you can't deduct an IRA contribution, money saved in an IRA can earn tax-deferred income from otherwise taxable investments.
You have until April 15 to make your 2007 IRA contribution of up to $4,000, or $5,000 if you were age 50 by the end of 2007, if you have at least that much 2007 compensation income.
You can deduct the contribution if:
- You and your spouse (if you have one) are not covered by any employer retirement plan during the year. Most of us can tell whether we are so covered by looking to see if the "retirement plan" box on our W-2 is checked.
- If you are covered by a retirement plan, you can use this chart to determine whether your 2007 contribution is deductible:
-If you aren't covered by a retirement plan, but your spouse is, use this chart:
IRA contributions can also qualify you for the savers credit, if your income is low enough. And the math is compelling: If you start young, you can build a terrific IRA nest egg through annual contributions.
Tomorrow: The Roth IRA
Link: IRS publication 590 on IRAs
This is another installment of our daily series of 2008 filing season tips running through April 15.
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IRS LAUNCHES CRACKDOWN ON 'TAX DEFIERS'
April 09, 2008
So it turns out yesterday's big effort to enjoin tax quacks from peddling their absurd "tax honesty" nostrums is part of a larger effort to squelch tax protest schemes:
WASHINGTON – Today Nathan J. Hochman, Assistant Attorney General of the Justice Department’s Tax Division, announced the creation of the National Tax Defier Initiative or TAXDEF. The purpose of this initiative is to reaffirm and reinvigorate the Tax Division’s commitment to investigate, pursue and, where appropriate, prosecute those who take concrete action to defy and deny the fundamental validity of the tax laws.
Maybe there will finally be a systematic effort to stop these plans before they get to far. From the Justice Department Press Release:
The TAXDEF initiative will:* Strengthen and expand coordination among the Tax Division, IRS and US Attorneys’ offices to ensure that both criminal and civil enforcement tools are fully considered and utilized.
* Leverage expertise and resources to enable agents and attorneys across the country to efficiently detect, investigate and where appropriate, prosecute tax defiers, viewing enforcement from a national rather than regional or local perspective.
* Expand our efforts to enjoin tax defier activity. Since 2001 the Tax Division has obtained over 300 civil injunctions against tax promoters and preparers, over a third of which directly involved tax defier activity. Injunctions are a powerful method of stopping the promotion of tax defier activity at the earliest possible moment. We estimate that we have collected over $600 million in tax as a result of our efforts.
* Maximize our use of technology to detect, develop and prosecute cases. The explosion of the Internet in the last decade has greatly facilitated tax defier activity and turned what was once a paper–based local or regional enterprise into a click and download national operation. Our response must take full advantage of ongoing changes in technology.
* Alert and educate the public to the falsity of tax defier claims and publicize the consequences of tax defier conduct. Simply stated, we want to pull back the curtain and show the public that the promoters of these schemes are not wizards imparting the secrets of a “tax-free universe” but are nothing more than garden variety hucksters and modern day snake oil salesmen peddling tax evasion schemes.
If they are serious, it's about time. Tax scams often have operated openly for years, like the one they went after yesterday. It's long puzzled me how long it takes to shut them down. The longer a scam stays in business, the easier it is to convince the gullible that the scam works. After all, wouldn't the IRS shut it down if they could?
The press release talks about "the use of technology to detect, develop and prosecute cases." I hope their tech budget includes a Google subscription, as many scams could be identified early by having one guy monitor the internet daily.
Once they identify a scam, they should be able to file for an injunction weeks, rather than months, and then call in the TV cameras when they back up a truck for the scammers' computers and customer lists.
Links:
Associated Press
UPDATE: For the benefit of our comments section.
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RESEARCH CREDITS = 'SECRET PAYMENTS'?
April 09, 2008
First the good news: a group has come out against one of the many foolish tax return-based business subsidies in Iowa, the refundable research credit.
The bad news: they want to get rid of the credit to make our highest-in-the-nation corporation tax more effective.
A group of advocates for needy Iowans is alleging that the state is making huge, "secret payments" to corporations -- money they argue should be used, instead, to provide a tax break for the working poor. Victor Elias, a spokesman for the Iowa Human Needs Advocates, says in 2005, the state issued almost 32-million dollars worth of checks to corporations that were tax refunds for "research activities."
As I've said, the research credit is a boondoggle. It doesn't get companies don't do any more research than they would do otherwise. It gets them to call more of what they are already doing "research" to collect more credits -- often with the help of outside consultants who do "research credit studies."
A group of advocates for needy Iowans is alleging that the state is making huge, "secret payments" to corporations -- money they argue should be used, instead, to provide a tax break for the working poor. Victor Elias, a spokesman for the Iowa Human Needs Advocates, says in 2005, the state issued almost 32-million dollars worth of checks to corporations that were tax refunds for "research activities."
Mr. Elias has a good point, but it's not what he thinks it is. Iowa's economic stagnation doesn't arise because the government isn't taking enough money from corporations to write checks to voters. The problems are in large part a result of the byzantine system of special tax breaks and high rates that take money from everyone and give it to a few.
These boodoggles go hand-in-hand with high tax rates. If they can't get rates under control otherwise, taxpayers will lobby for little tax breaks in self-defense.
How about a trade: no research credit, and no Iowa corporation income tax. Deal?
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BECAUSE THE LEGISLATURE THINKS YOU'RE TOO STUPID TO DECIDE FOR YOURSELF
April 09, 2008
News item:
Strict smoking ban heads to Culver
The only way to prove that you are enough of a grown-up to decide if and where to smoke is by blowing your cash at the slots:
Iowans would still be able to smoke in the gambling areas of casinos, although smoking would be prohibited in casino restaurants, gift shops, bars and employee areas.
Now the legislature should pass a more honest state motto. "Your liberties we despise and your vices we disdain."
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JUSTICE DEPARTMENT GOES AFTER 'TAX DEFIERS'
April 08, 2008
The Department of Justice has moved to shut down "Pinnacle Quest International," a multi-level marketing "tax defier" outfit. From the press release:
WASHINGTON- The United States has filed civil injunction complaints in three federal courts on the east and west coasts, seeking to bar promotions of alleged tax-fraud schemes, the Justice Department announced today. The government complaints and other court papers allege that a multi-level marketing organization called Pinnacle Quest International (PQI) and a number of individuals and organizations currently or formerly affiliated with it are promoting a variety of fraudulent tax defier schemes.The complaint filed against PQI alleges that the organization has 830 salespeople, thousands of customers, and gross sales from 2002 through 2006 of approximately $54 millions. During the same period, PQI’s leaders allegedly received commissions from sales of PQI products of approximately $8.8 million.
Court papers allege the defendants have sold tax-fraud and other schemes through vendors at trade-show-like conferences at resorts around the world and—in one instance—at a 400-person conference on the Celebrity Cruise Line ship Galaxy in the Mediterranean Sea in May of 2007.
If the press release is accurate, this shows that old scams never die - they just get new names:
The suits allege that PQI, based in Ft. Walton Beach, Fla., is a successor to Institute of Global Prosperity, a business that sold tax-fraud schemes until law-enforcement actions caused it to shut down. Daniel Andersen, a co-founder of Global Prosperity, pleaded guilty in 2004 to a federal felony tax charge. Last November another Global Prosperity co-founder, David Alan Struckman, was found guilty of tax evasion and conspiracy in a federal court in Seattle. According to the PQI injunction complaint, PQI took up where Global Prosperity left off, and has been promoting tax-fraud schemes similar to those that Global Prosperity formerly promoted.
The complaint says PQI has been operating since 2002. It's amazing how long it takes to shut these things down.
Note how the complaint calls these people "tax defiers,' rather than "tax protesters."
Links:
Casternovia complaint
Kukhahn Complaint
Pinnacle Quest Complaint
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ONE WEEK TO FUND AN IRA
April 08, 2008
The 2008 filing season ends a week from today. That means you have eight days, counting today, to fund an individual retirement account for 2007. if you haven't already done so.
There are several kinds of retirement IRAs: The traditional deductible IRA, the traditional non-deductible IRA, and the Roth IRA. While they differ in important details, they share common contribution limits and deadlines and the ability to shelter earnings that would otherwise be tax exempt.
You have through April 15 to fund a 2007 IRA. IRA contributions are limited to the lesser of your compensation income or $4,000 ($5,000 if you were at least 50 years old by December 31, 2007). If only one spouse has compensation income, the other spouse can use that income to meet these limits. If husband has $50,000 in 2007 wages and wife has $0, for example, both spouses can make a full IRA contribution.
But what kind of IRA? More on that tomorrow.
Link: Publication 590 (2007), Individual Retirement Arrangements (IRAs)
This is another installment of our daily series of 2008 filing season tips - a tip a day thorugh April 15.
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OUR LIBERTIES WE PRIZE AND OUR RIGHTS WE WILL MAINTAIN. AND WE'LL PAY TO DO UMA'S DRY CLEANING
April 08, 2008
David Brunori has a good discussion of film credits up today ($link). He talks about the compelling economic logic driving the film credit madness sweeping the nation:
No one ever thinks whether that is good policy or whether the credits even might work. For example, Connecticut House Speaker James A. Amann (D) is urging the state to expand the film tax credits to all performing arts. His reasoning is that a dry cleaner in his town saw more business because Uma Thurman was filming a movie. Almost all film credit arguments are based on that kind of hard-hitting evidence.
I suppose that's because all of us star-struck Uma fans drooled our coffee on our shirts. Mr. Brunori has a nice brief explanation of why taking money from the rest of us and giving it to Hollywood isn't such a hot idea (my emphasis):
For the uninformed, Bob Tannenwald is one hell of a smart guy. He's a vice president at the Federal Reserve Bank of Boston and the director of its New England Public Policy Center. Tannenwald is one of the most influential thinkers and researchers in the field of state and local tax policy. He shows up and says he has studied the film credits and, based on the data, there is no evidence that they will ever pay for themselves. The state will spend more giving out credits than it will generate by local spending. Tannenwald also said that by taking money from other programs (that actually work), the state may be harming itself in the long run.
Maybe the argument for film credits in Iowa is that they don't take money from programs that actually work, because we don't have those.
Related: Harold Hill Marches Everywhere.
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THIS ISN'T REASSURING
April 08, 2008
Tax Analysts reports ($link):
A disgruntled employee, contractor, or hacker could steal taxpayer information or "disrupt computer operations" by exploiting weaknesses in the security of IRS computer routers and network hubs, according to a Treasury Inspector General for Tax Administration report released April 7.The audit found that existing security controls over routers connecting IRS data networks throughout the country allow access to unauthorized users, group users, and users with expired authorization.
Routers set the paths for data to travel between networks. A hacker with access could gain control of the entire IRS network, divert data traffic to unauthorized users, introduce viruses, and create costly denials of service, according to the report.
Link: TIGTA Report 2008-20-071
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TAX FRENZY CARNIVAL
April 08, 2008
What better way to celebrate this time of insanity than with a visit to the Carnival of Taxes, hosted by Kay Bell?
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TAX TIP: SAY NO TO REFUND AND REBATE LOANS
April 07, 2008
The Tax Update believes Refund Anticipation Loans should be legal, just like other stupid forms of finance, like car-title loans and payday loans. Adults should be allowed to commit finance with other consenting adults, as long as the terms are all disclosed. They should then be allowed to face the consequences of their own foolish choices. Same goes for people who bought too much house and their foolish lenders.
But just because it's legal, say, to go to the bar, line up 10 shots of Jagermeister, and see if you can drink them all before "You Shook Me All Night Long" finishes on the jukebox, it's still not a great idea. Refund Anticipation Loans are in the same league.
Why are they so stupid? Let's start by looking at the IRS refund cycle chart, which tells you how quickly your refund will come for different filing dates:
What this means is that if you e-file and have direct deposit, you will have an 8 to 15-day wait to get your refund. A Refund Anticipaton Loan charges you a lot of money to get your money at most 15 days earlier -- at interest rates that run from 40% to over 700%.
There are always people willing to sell you a chance to do something stupid. When they try to sell you a Refund Anticipation Loan, take a pass.
The Tax Update is counting down filing season with a daily 2008 filing season tip through April 15.
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IS THE MIDNIGHT RUN TO THE POST OFFICE GOING THE WAY OF THE PLAYBOY CLUB?
April 07, 2008
Another tradition falls by the wayside in Omaha:
For the first time in a decade, the big top will be not be up April 15 - tax day - at Omaha's main post office downtown.It was a circus of a different sort, with a tent providing cover, postal service employees staying late and pizza, doughnuts and volunteer tax help available as last-minute income tax filers got their returns into the mail before the midnight filing deadline.
Times have changed, however. Electronic filing is making the late night less and less necessary, Omaha Postmaster EvaJon Sperling said Friday.
"Each year we have had a decreasing amount of traffic," she said.
They have more bad news for procrastinators:
So the big tent will remain folded, with no extended hours at the main post office on April 15 and no extra hours or extended collections at any post office branch.The downtown tradition will be missed, said Mary Thompson, who volunteered her tax help for years at the post office at 12th and Pacific Streets.
"It became almost kind of a carnival atmosphere," Thompson said. Some people waited until the last minute just to show up for the party, she said.
Some parties aren't worth having.
As far as I know, the main Des Moines post office on Second Avenue will be open late next Tuesday. Of course, we're often behind the curve here; we had one of the very last Playboy Clubs in the U.S., too. While strange, I'd take it over the Second Avenue post office any day, even April 15.
Of course, given the near-riot that Mickey Kaus reported from Los Angeles last year, maybe these late-night filing-festivals aren't such a great thing. And if you really need to file last minute, you can spring for FedEx at your neighborhood Kinkos.
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HILLARY-ITY
April 07, 2008
If you haven't stopped by since working hours on Friday, you may have missed our discussion of Hillary Clinton's tax return release. Also don't miss the TaxProf's roundup of coverage of the Clinton returns.
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PENALTY FACT SHEET
April 07, 2008
The IRS has issued a "Fact Sheet" on tax penalties (FS-2008-19). It includes this helpful info:
The most common penalties are for filing late or paying taxes late.Filing late: If you do not file your return by the due date (including extensions), you may have to pay a failure-to-file penalty. The penalty is usually 5 percent for each month or part of a month that a return is late, but not more than 25 percent. The penalty is based on the tax not paid by the due date (without regard to extensions).
If you file your return more than 60 days after the due date, the minimum penalty is $100 or, if less, 100 percent of the tax on your return.
Paying tax late: You will have to pay a failure-to-pay penalty of ½ of 1 percent (0.5 percent) of your unpaid taxes for each month, or part of a month, after the due date that the tax is not paid. This penalty does not apply during the automatic six-month extension of time to file period if you paid at least 90 percent of your actual tax liability on or before the original due date of your return and pay the balance when you file the return.
The failure-to-pay penalty rate increases to a full 1 percent per month for any tax that remains unpaid the day after a demand for immediate payment is issued, or 10 days after notice of intent to levy certain assets is issued.
For taxpayers who filed on time, the failure-to-pay penalty rate is reduced to ¼ of 1 percent (0.25 percent) per month during any month in which the taxpayer has a valid installment agreement in force.
The penalties are lower for late-payers who still file on time. That means you should plan to file or extend your return, even if you are short on cash.
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SNIPES LAWYER TALKS TO THE BLOG
April 07, 2008
Robert Bernhoft, Wesley Snipes' lawyer in the recent trial, has been e-mailing tax-blogger Russ Fox.
Mr. Bernhoft seems pleased with the trial result. Well he should be.
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THE SPAM OF NATIONS
April 06, 2008
I just noticed that the Tax Update is getting bombarded by comment spam using random phrases out of Adam Smith's "The Wealth of Nations" wrapped around their spam links. It does seem to get it by the spam filters. Is there no desecration beyond the depravity of the comment spammers? Is nothing sacred?
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TAX TIP: YOU CAN FUND AN IRA WITH YOUR REFUND
April 06, 2008
We will discuss the different flavors of individual retirement arrangements, or IRAs, this week. Some IRAs are better than others, but they are all good. Even the least of them enable you to earn the higher interest rates of fully-taxable investments in a tax-deferred vehicle.
Yet many people don't bother with IRAs -- often because they never set aside any cash to save.
For many folks, their tax refund is their biggest source of free cash available all year. This is a great opportunity to fund an IRA by having your refund deposited directly into one. Based on the IRS refund-cycle chart, it's too late to fund a 2007 IRA with your 2007 tax refund, as the IRA has to be funded no later than April 15. But if you haven't filed yet, you can use your 2007 federal refund to get started on your 2008 IRA. And if you have a SEP (simplified employee pension) and you extend your return, you still can use your 2007 refund to help fund your 2007 SEP.
You can use Form 8888 to have your refund deposited in your IRA. You have to make sure:
- The IRA is with an institution that can accept a direct deposit. A bank IRA can do so.
- You have to be sure they will accept it.
- You should tell the institution what year the IRA is for (but unless it's a SEP, at this point it has to be for 2008).
The maximum contribution for non-SEP IRAs is $5,000 for 2008, or $6,000 for taxpayers who will be age 50 or older by the end of 2008. If your refund is larger than than that, you can use Form 8888 to split the refund between your IRA and your other bank accounts.
This is part of a series of 2008 filing season tips the Tax Update is running through April 15. Stop back for a new one daily!
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IOWA TAX POLICY SUPPORTS ECONOMICALLY DEPRESSED AREA!
April 06, 2008
The northern border counties of Missouri, that is:
"We sell hundreds of cartons of cigarettes to people from Iowa, and we love it," said Jo Hulet, manager of Sharp's BP convenience store in Bethany, Mo.
Clearly, smoking in Iowa is down a lot less than cigarette sales are after Iowa's $1-per-pack sales tax increase.
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THE TAX PROF ROUNDS UP CLINTON 1040 COVERAGE
April 05, 2008
The good professor has a roundup of big media coverage, along with a nice chart illustrating the Clintons' charitable giving history. He also makes a much-appreciated mention of our post from last night.
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SAVING FOR COLLEGE? DON'T FORGET TO DEDUCT YOUR 2007 COLLEGE SAVINGS IOWA CONTRIBUTIONS
April 05, 2008
Iowa has a pretty good state-sponsored Section 529 plan, College Savings Iowa. It uses low-fee Vanguard Funds and has a reasonable range of investment choices. It also has one factor that clinches the deal for many Iowa taxpayers: you can get a deduction for CSI deductions on your Iowa 1040. For an Iowa top-bracket taxpayer, this is like a 6% negative load on the investment.
For 2007 you may deduct up to $2,595 per donor, per donee, in contributions made during 2007 to CSI. That means a couple with two children could deduct up to $10,380 in CSI 2007 contributions. This number goes to $2,685 for 2008. You can, of course, make additional contributions over the deductible amount subject to the normal limits for contributions for Section 529 plans.
You take the deduction on Iowa 1040 line 24.
This is today's installment of our daily series of 2008 filing season tips -- a new one daily through April 15.
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SPECIAL FRIDAY NIGHT HILLARY! RETURN DUMP EDITION
April 04, 2008
In the time-honored tradition of folks with things to hide, Hillary Clinton released her tax returns late today, Friday -- too late for the evening news, if anyone watches that anymore, but in plenty of time for it to be old news by Monday.
Our ultimate power couple has a truly impressive earning capacity -- one that puts that upstart Obama couple in their place. The TaxProf has prepared a nice comparative summary. It's enough to note that all of the Obama returns from 2000 through 2006 together don't come within shouting distance of the Clinton's poorest post-presidential year. All of the Obama returns from 2000 put together come nowhere near the Clinton's $15.8 million 2006 adjusted gross income.
Speaking as a tax preparer, though, after glancing through both the Obama and Clinton 2006 returns, one thought comes immediately to mind:
What is wrong with these people?
In 2006, Bill Clinton had north of $12 million of speaking and book self-employment income. Hillary herself had over $500,000. Both had plenty of income to fully-fund a SEP to the tune of $45,000; they would have saved over $30,000 in federal taxes alone. But like the Obamas, they didn't feel any need to set anything aside for retirement.
It's also notable that despite the example of John Edwards, the Clintons didn't bother to use an S corporation to avoid self-employment tax. Simply by having his S corporation earn his $10 million or so in speaking fees, rather than doing it himself, the former President might have save around $200,000 in the medicare tax, net of the deduction for half of the tax on line 27 of the 1040 -- even if he paid himself a $1 million salary.
Of course, taxes look different to a presidential candidate than to a normal taxpayer. They might see an S corporation as a vulnerability in a campaign. And the $30,000 or so they could save with a SEP is chump change on a return with nearly $16 million AGI. So what looks to us tax drones like madness could well have a method.
CONTRIBUTIONS
The Clinton Campaign makes much of their significant charitable contributions - $1.5 million in 2006 alone. What charity is the happy beneficiary of this generosity?
Why, it's the Clinton Family Foundation! Unlike some foundations, though, the Clinton Family Foundation distributes most of its earnings, at least in 2006. Its 2006 Form 990-PF shows that it distributed nearly $1.3 million of its $1.7 million of contributions and income. The distributions went to close to 50 charities in chunks up to $100,000, from the Tiger Woods Foundation ($10,000) to two children's hospitals ($100,000 each).
The donee list also includes the United Church of Christ, the denomination of Barack Obama's controversial "spiritual mentor," Jeremiah Wright ($3,600). Considering what Rev. Wright's sermons have been doing to the Obama campaign, that may be a bargain.
A TOUGH RETURN
Like many good accountants, the Clinton's tax preparer has buried their fees in the miscellaneous itemized deductions. No matter; the $97,000 of those deductions are far short of the 2% of AGI needed to have any effect on the return. But it can't be a cheap return. With three schedule Cs, 9 k-1s, passive activities, foreign source income, and capital gains and losses, this is a complex and difficult return. Add the fame of the clients and the near certainty of public disclosure and you have a very labor-intensive return. If the 2006 return fee was less than $10,000, the Clintons are getting a bargain.
Links:
The Clinton Campaign return page (the returns themselves are linked at the bottom)
The 2006 Clinton Family Foundation 990-PF
Related: The Audacity of Paying More Taxes than Necessary.
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PROM-TIME TAX TIP
April 04, 2008
As the high-school kids get ready for the annual prom rites, worried parents can console themselves with the possibility of a tax break. Prom tickets are among the unlikely items that qualify for the $250 maximum Iowa Tuition and Textbook Credit. This arises from a unique definition of "Tuition and Textbooks" in Iowa. From the Iowa Department of Revenue:
"Tuition" means any charges for the expense of personnel, buildings, equipment and materials other than textbooks, and other expenses that relate to the teaching of only those subjects legally and commonly taught in Iowa’s public elementary and secondary schools."Textbooks" means books and other instructional materials used in teaching those same subjects. This includes fees, books and materials for extracurricular activities.
Examples of extracurricular activities: sporting events, speech activities, musical or dramatic events, driver’s education (if paid to a school), awards banquets, homecoming, prom (clothing does not qualify), and other school related social events, etc.
Well, yes, you can learn a lot about extracurricular activities on prom night.
The credit is 25% of up to $1,000 of qualified expenses per dependent. For a more comprehensive list of what does and doesn't qualify, keep reading.
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ONLY LITTLE PEOPLE DO TIME?
April 04, 2008
Compare and Contrast.
From the Bluefield (WV) Daily Telegraph:
A most unusual three-day sentencing hearing came to an emotional close Wednesday afternoon as a former southern West Virginia nightclub owner received a 37-month prison sentence and was fined $75,000 for failing to report more than $200,000 he skimmed from the door charge at one or more of the nightclubs he owned.
Contrast the fate of our West Virginia strip club guy with this report from Forbes about a bigger fish from Orange County, California:
As part of the plea deal, Olenicoff paid $52 million in back federal taxes, interest and civil fraud penalties and agreed to bring all the money in his foreign accounts (believed to total in the hundreds of millions) back to the U.S. Forbes estimates the self-made, Russian-born Olenicoff, who came to the U.S. at age 15, is now worth $1.6 billion.While the false-tax-return charge is punishable by up to three years in jail, Olenicoff's deal with prosecutors, together with federal sentencing guidelines, made it unlikely he would get more than six months. Then last month, a U.S. probation officer filed a pre-sentencing report recommending Olenicoff get off with just one year of probation and a $3,500 criminal fine.
I love this:
But Robbins, a former federal tax prosecutor who is now a partner with Hochman, Salkin, Rettig, Toscher & Perez, in Beverly Hills, rejected any suggestion that Olenicoff is getting off lightly and insisted the felony conviction alone would indeed have a strong deterrent effect.
Yeah, that $3,500 fine and probation will really teach the guy worth $1,600,000,000 a lesson he won't soon forget.
Via the TaxProf and the Sentencing Law and Policy blog.
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NEGATIVE TAX ROLE MODELS
April 04, 2008
Russ Fox has launched his annual tax-time series of "Bozo Tax Tips," highlighting things you don't want to do as you file your 2007 returns. His first two installments:
Bozo Tax Tip #10: The Trouble With Harry
Bozo Tax Tip #9: Only Foreign Income Is Taxable
While Russ provides no guarantees, you can pretty much count on lots of intimate contact with IRS agents if you follow the Bozo Way.
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MEET THE SUGAR BEET SOCIALIST AND THE CORNHUSK COMMUNITARIAN
April 04, 2008
Steven Pearlstein, the Washington Post business columnist, is unimpressed by the tax proposals we discussed yesterday from Senators Grassley and Baucus:
Hold on to your wallets, Mr. and Mrs. America, Max and Chuck are at it again.Yes, our favorite sugar beet socialist and cornhusk communitarian have decided to ride to the rescue of the nation's troubled housing sector.
I think Max is the socialist and Chuck is the communitarian.
It all started on Monday when members of the Senate returned to Washington after another two-week recess in which they apparently discovered that voters actually expected them to do something about the housing crisis rather than just talking about it until the next recess. So Max Baucus (D-Mont.) and Charles E. Grassley (R-Iowa), the chairman and ranking member, respectively, of the Senate Finance Committee, took the opportunity to dust off a quartet of stinky tax breaks that had been rejected by the House and the Bush administration back in February, when Congress was scrambling to show that it was doing something about the gathering recession.
The voters? Not me. Maybe this one.
Might there be another reason, besides pressure from deadbeats voters, for this bill?
All this will do little to solve the housing crisis, but it may help to alleviate the campaign funding crisis created when these same tax provisions were jettisoned from the economic stimulus bill. The angry and ham-handed response from Brian Catalde, the president of the National Association of Home Builders, was to very publicly announce the indefinite cutoff of all contributions to federal candidates. Were those same provisions to be enacted now, it would be a stunning acknowledgement by members of Congress of the direct connection between political money and legislative outcomes.
A connection between political money and legislative outcomes? I feel so disillusioned.
UPDATE: From Tax Vox:
To be fair, there are some useful nuggets in the bill. More honest closing documents for buyers may help, so would modernizing the antiquated and horribly inefficient FHA program. But these proposals are vastly outweighed by the truly awful tax provisions. This is being touted as a rare instance where Senate Democrats and Republicans are working together on a bill. Maybe partisanship isn't so bad after all.
It always seems that when the Democrat and Republican politicians come together, it's to gang up on the rest of us.
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JOBS I'M NOT CUT OUT FOR
April 03, 2008
You'd never get me to ride a rope down a 25-story building for a living.
Especially when the ropes look like this:
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TAX TIP: READ YOUR RETURN!
April 03, 2008
This might seem like a self-serving thing for a tax preparer to say, but it's true: no matter how much you pay somebody to do your return, it's still your return. You are responsible for what's on it, and if it's grossly wrong, it's your problem.
A dentist from Sonora. California learned this hard lesson yesterday in Tax Court. Ronald Neufeld gave his business records, which he kept using the Quicken software program, to a preparer recommended by his brother in law. Something must have gone badly wrong. Mr. Neufeld's returns reported federal tax of $35,668 for 2001 and 2002, but the IRS figured it at $181,145. In imposing over $21,000 in penalties on Mr Neufeld, the judge spelled out the rules taxpayers are held to in relying on preparers (citations omitted, emphasis added):
The case law sets forth the following three requirements in order for a taxpayer to use reliance on a tax professional to avoid liability for a section 6662(a) penalty: (1) The adviser was a competent professional who had sufficient expertise to justify reliance, (2) the taxpayer provided necessary and accurate information to the tax adviser, and (3) the taxpayer actually relied in good faith on the adviser's advice. However, by itself, unconditional reliance on a preparer or adviser does not always constitute reasonable reliance; the taxpayer must also exercise "diligence and prudence."...
With respect to the third prong of the [requirements], petitioners did not rely in good faith on Mr. Fisher's advice. Petitioners did not meet with Mr. Fisher or otherwise discuss with him their 2001 and 2002 joint Federal income tax returns or 2002 amended return, and they did not examine their returns before signing and submitting them to the IRS. Taxpayers have a duty to read their returns to ensure that all income items are included. Petitioners did not ensure that all of the income from Mr. Neufeld's dentistry business was included in their 2001 and 2002 joint Federal income tax returns.
So when your return comes back from the preparer, look it over and ask questions if something looks wrong. Preparers make mistakes too; if you don't read your return, the preparer's mistake could become your problem.
In a footnote, the Court identified a serious flaw in Mr. Neufeld's due diligence:
At trial, Mr. Neufeld stated that when he met Mr. Fisher for the first time, he thought he was a competent accountant and tax-preparer because "He had certificates on the wall and lots of them. He seemed to be really organized. It was a nice office. And so I had no reason to believe or to doubt his competence."
If a neat office were necessary to be a competent tax guy, I'd still be bagging groceries.
Check the Tax Update daily through April 15 for more 2008 filing season tips.
Cite: Neufeld, T.C. Memo 2008-79
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OH BOY. MORE TAX INCENTIVES.
April 03, 2008
The two chief Senate taxwriters yesterday took another small step in their continuing campaign to run the world through the tax code. The Tax Prof reports they are introducing a bill with four new tax breaks:
* Standard Property Tax Deduction: $500 for single filers and $1,000 for joint filers who do not itemize their deductions.* Mortgage Revenue Bonds: $10 billion of Federal tax-exempt private activity bond authority, with the interest earned on the bonds exempt from the AMT.
* Extension of Net Operating Loss Carryback: For 2008 and 2009 losses, extend NOL carrybacks to four years (rather than two years under existing law).
* Tax Credit for Purchase of Homes in Foreclosure: $7,000 tax credit for buyers of homes in foreclosure.
That's just great. They've done such a wonderful job with the tax laws relating to housing, but they think they can make things even better! It's not enough that home ownership is already heavily subsidized by the tax law and that the housing industry is favored with special tax breaks and subsidized financing. Now they want to give people checks to buy foreclosed houses.
Meanwhile, the presidential candidates are at it:
Democratic Presidential candidate Hillary Clinton yesterday unveiled an Insourcing Plan that includes a number of tax incentives designed to spur job creation:* Increase the R&D credit by 50% (from 20% to 30%) and increase the Alternative Simplified Credit by 67% (from 12% to 20%).
* Create a 40% Basic Research Credit.
* Create a 10% Start Up Research Jobs Credit.
* Create a new $5 billion Insourcing Markets Tax Credit.
* Close loopholes that encourage companies to ship jobs overseas:
o Eliminate deferral provision that allows U.S. companies to defer paying U.S. taxes on income earned by their foreign subsidiaries until that income is repatriated to the U.S.o Close tax loopholes to ensure that companies cannot continue receiving tax benefits for locating abroad. She will disallow companies from engaging in transfer-pricing arrangements where companies avoid taxes by shifting income or assets to low-tax jurisdictions. She will eliminate incentives in the tax code (like the ability to “cross-credit”) that encourage U.S. companies to shift operations or at least profits to low-tax jurisdictions. And she will eliminate the unfair advantage that foreign insurers located in tax havens have against U.S. insurers competing for U.S. business.
I'll say it: the research credit is a boondoggle. Companies don't do more research to get more research credits. They do more research to make better stuff to sell, to make money. Higher research credits just spur companies to call more of the stuff they do anyway "research" so they can claim more tax credits.
All of these credits and tax breaks imply that the Senate is a sort of giant Star-Trek control room where 100 super-geniuses can turn dials, pull levers and throw switches to make the economy do their bidding. No 100 people are smart enough to run an economy. Especially Senators. Most of us wouldn't trust these people to watch our kids for 20 minutes.
The best thing these people could do would be to get out of the way -- get rid of all of their stupid finely-tuned tax incentives, lower the rates, and let people get about their business. If they want to have an illusion of control, we can find them a nice video game.
Besides, how can any of this stuff work when taxes are voluntary, like the Senate Majority Leader says?
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GAS PRICE GOUGING!
April 03, 2008
source: Tax Policy Blog
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ANY EXCUSE FOR A PARTY
April 02, 2008
Today is the 60th Birthday of the Revenue Act of 1948.
Drink responsibly!
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1270 SQUARE FEET OF TERROR
April 02, 2008
Consider yourself warned. Click if you dare.
Via Gongol.
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YEAR-END TAX TIP: DO YOU NEED TO CLOSE YOUR 1031 EXCHANGE?
April 02, 2008
One of the nastier land mines in the like-kind exchange rules is the deadline for closing on a purchase in a deferred swap. When you have a deferred exchange, Section 1031 gives you 45 days to identify the property you want to receive in the swap. The deadline for actually closing on the replacement property is the sooner of
- 180 days after giving up the property, or
- The due date (including extensions) for the tax return for the year.
This means if you entered into an exchange after October 18, 2007, you need to either close on your replacement property by April 15 or extend your return.
This is part of our daily series of 2008 filing season tips running through April 15. Don't miss a single exciting installment!
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NO, IT'S NOT ANOTHER NAME FOR 'MARRIAGE'
April 02, 2008
Roger McEowen has published "The Spousal Qualified Joint Venture as a Planning Tool" at the Iowa State University Center for Agricultural Law and Taxation site. It tells how the new rules that enable spouses to not use a partnership return to report joint business income can be used in farm reporting. From his summary:
The QJV election can be used to simplify the tax reporting requirement for certain spousal businesses thatvwould otherwise be required to file as a partnership. That includes spousal farming operations where each spouse qualifies as a separate person for payment limitation purposes. In those situations, there appears to be no good-faith argument that can be made for claiming that self-employment tax should not apply to each spouse’s share of income from the operation. But, for rental real estate activities that are conducted in a spousal LLC, the QJV election should not be made and a partnership return filed to avoid the imposition of self-employment tax.
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IRS DEFEATS 'MIDCO' TAX SHELTER
April 02, 2008
When a C corporation sells its business, there is typically a little tug of war between the buyer and seller.
The seller wants to sell his stock because he will be taxed twice if he sells the assets -- first on the gain on the assets themselves, and again when he liquidates the corporation.
The buyer, in contrast, wants to buy assets. The buyer doesn't want to take on any unknown liabilities of the old corporation, but he also wants to recover his purchase price through depreciation and amortization. The cost of stock isn't recoverable until it is sold.
A tax shelter launched in the 1990s tax shelter frenzy sought to give both sides what they want. The "Midco" shelters would set up a tax-indifferent middleman to buy the stock -- giving the seller his sought-after stock sale -- and then sell the assets to the buyer. The IRS won a court battle against this shelter in a U.S. District Court in Houston yesterday; the court upheld the IRS position on summary judgement.
Accounting firm PriceWaterhouse Coopers (PWC) arranged for a tax-indifferent "Midco" named "K-Pipe" to buy the stock of Bishop Group Ltd. and sell the assets to Midcoast Energy Resources. The judge disregarded the midco and said the transaction was a stock sale:
Moreover, there is no objective evidence in the record that K-Pipe negotiated the stock sale at all. All of the communications involved Midcoast, and it was at the insistence of Midcoast's tax advisors that certain actions be undertaken, such as the agreement not to liquidate Bishop for two years and the formation of the Butcher Interest Partnership to add "good facts" to the transaction. Additionally, K-Pipe's obligations were almost entirely indemnified by Midcoast through various side agreements and under the Stock and Asset Purchase Agreements. It was Midcoast's loan that acted as security for the $195 million, which K-Pipe borrowed. K-Pipe, having been created for the purposes of this transaction, could not have provided any assets as security. After the transaction, K-Pipe engaged in virtually no business activity and was, in substance, a mere shell. Finally, K-Pipe's sole purpose in participating in the transaction was to allow Midcoast to step up the basis of the Bishop Assets. Under the facts of this case, the court finds that K-Pipe's role in the transaction should be disregarded.
Another blow to the big-firm tax shelter industry.
Cite: Engbridge Energy Company, Inc. v. U.S., No. 4:06-cv-00657 (DC-SD Texas)
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DON'T MESS WITH THE PIZZA DELIVERY GUY
April 02, 2008
A Detroit Pizza Hut and Burger King Franchisee serving time for a political corruption conviction now is charged with stealing payroll taxes withheld from employees:
DETROIT -- La-Van Hawkins, the Detroit Burger King and Pizza Hut mogul who was sent to federal prison in connection with a city corruption case in Philadelphia, was indicted today by a federal grand jury in Detroit, accused of keeping $5.3 million in employee payroll taxes he was supposed to turn over to the government.Hawkins, 49, who was sentenced to 33 months in prison by a federal judge in Pennsylvania in 2005, is currently serving time at a federal prison in South Dakota and is scheduled to be released next year.
Here in Des Moines the Pizza Hut employees know how to handle these situations.
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IT'S LIKE 'GUITAR HERO' WITHOUT THE FUN
April 02, 2008
A busy third-year law student at American University has launched "Tax Rock Star," a web site that does basic tax computations for annuities, debt forgiveness, installment sales, alimony, 1031 exchanges, casualty and medical espenses, and stock options. The author says it is targeted at law students, but it looks like it would be handy for taxpayers and tax advisors dealing with simple fact patterns.
Like Guitar Hero, it's not a substitute for a professional, but it can help you put together your thoughts before you call your tax pro.
Via the TaxProf.
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TAX TIP: DUMP THE KID?
April 01, 2008
It's always hard to let go as the kids grow up, but the tax law might make it a bit easier.
There are two credits for higher education expenses: the "HOPE Credit" and the "Lifetime Learning Credit." These both phase-out at higher income levels (starting at $47,000 for single filers and $94,000 for joint filers).
If you are above the phase out range and are paying college tuition, it could make sense to forego a dependency exemption. If your student has income from a summer job or internship, they may have taxes of their own, taxes that they could offset with these credits. If your income is too high to use the credits, the family could be better off tax-wise if the parents forego their dependent exemption for the student. The student then may be able to claim the credits.
You may claim the credit on Form 8863. See IRS Publication 970 for more information.
This is another installment of our daily series of 2008 filing season tips.
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DO YOU KNOW WHERE YOUR PAYROLL TAXES ARE?
April 01, 2008
One of the worst nightmares a small business can face is to learn that the payroll service has lost the money given them to pay the payroll taxes. In 2006, this nightmare became all too real for customers of Total Time Solutions, or TTS, a New York payroll tax service. The IRS and the states will still want the money, and they don't take "the payroll service stole it" as a good answer.
Even if you use a payroll provider for your employment taxes, it's wise to join EFTPS, the IRS Electronic Federal Tax Payment System. As an IRS press release notes:
EFTPS will display all EFTPS payments made by Internet, phone or third party within the last 16 months paid under your business’ employer identification number. You will be able to confirm that the funds you turned over to your payroll service provider for employment tax deposits were credited to your account.
When it comes to payroll tax services, trust, but verify.
Link: How to enroll in EFTPS via the Internet
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TRIUMPH FOR (CLOTHING-) FREE EXPRESSION
April 01, 2008
A Texas court has ruled a $5 admittance tax to strip clubs to be a violation of constitional free speech rights, even though I'm not sure the performers talk all that much.
I have no special insights as to the constitutionality of the Texas tax, but I was struck by an argument made on behalf of the tax by Kelly Young, "a vice president with the Houston Area Women's Center." The tax was enacted to fund "sexual assault programs and health care for the uninsured." From the Houston Chronicle:
But Young said it made sense to collect a fee from strip club patrons."This is a business that typically has a higher ratio of women who work in the business, and this is a crime that typically has a higher rate of women as victims," she said.
From which we can assume that Ms. Young will support extending the tax to day-care providers, manicurists and nurses.
(Via the TaxProf)
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...82...83...
April 01, 2008
Two more taxpayer defeats for Antarcticans in Tax Court yesterday, bringing their counsel's losing streak to 83.
Cites:
Gomez, T.C. Memo 2008-76
Michaelis, T.C. Memo 2008-77
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