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