Tax Update Blog: June 2008 Archives
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IOWA EXTENDS FLOOD RELIEF TO INDIVIDUAL TAX PAYMENTS
June 30, 2008
We just received an e-mail from Mark Schuling, Director of the Iowa Department of Revenue, saying that the Department has extended its deadline relief for flood estimated tax payments to cover individual income taxes. Individual taxes had been omitted from Iowa's relief package as recently as last Friday, when Iowa gave disaster-area taxpayers until July 26 to make filings and payments otherwise due between May 25 and July 23. The Department website now reflects the updated deadlines.
So if you have an Iowa second quarter estimated tax payment due today, and you live in one of the Iowa weather disaster areas, you now have until July 28 to get it in the mail.
UPDATE, 7/14/08: FEDS FURTHER EXTEND FLOOD AREA FILING DEADLINE; WILL IOWA FOLLOW SUIT?
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WAYS AND MEANS HOLDS IRA HEARINGS
June 30, 2008
The House Ways and Means Committee is pondering IRAs. The recently-revived Benefits Blog reports:
The bottom-line, of course, is that people generally aren't saving enough, small employers are not offering retirement plan vehicles for their employees, and Congress is looking at ways to encourage savings. It is no surprise that the GAO Report indicates IRAs are being used primarily as a "parking spot" for individual rollovers from employer-sponsored retirement plans, rather than as a savings vehicle. However, mandating that small employers must offer some type of automatic IRA program, as discussed in the hearing, is definitely not the answer.
She's right, of course.
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IF YOU ARE GETTING AUDITED, REMEMBER: NO TIPPING
June 30, 2008
An IRS agent chose to privatize the examination process. Tax Analysts reports ($link) that IRS Agent Robet Rosner pleaded guilty last week to soliciting a $5,000 bribe to issue a "no change" letter. Unfortunatly for the agent, the taxpayer wore a microphone for one of his discussions with the agent, according tothe indictment. Just another data point for those who argue that only official unionized government employees can be trusted with taxpayer data.
UPDATE: The TaxProf has more.
Elswhere on the fraud beat, Russ Fox has a tax miscreat roundup, including another tax-evading strip-club owner, along with something completely different: Rabbi and banker plead guilty in tax-evasion scam. So a rabbi, a banker, and an IRS agent walk into a bar...
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DON'T FORGET: IOWA INDIVIDUAL 2ND QUARTER PAYMENTS ARE DUE TODAY, COME HELL OR HIGH WATER
June 30, 2008
UPDATE, 6/30: IOWA EXTENDS FLOOD RELIEF TO INDIVIDUAL TAX PAYMENTS. This means disaster-area taxpayers now have until July 28 to file their second quarter payments, in case you haven't yet made it to the post office.
UPDATE, 7/14/08: FEDS FURTHER EXTEND FLOOD AREA FILING DEADLINE; WILL IOWA FOLLOW SUIT?
As we noted Saturday, Iowa has not extended the due date for second quarter individual estimated tax payments in the flood disaster areas, so they are due today. In contrast, the IRS has extended the deadline for such payments to July 28.
So it's time for a new motto for the Iowa Department of Revenue: "A little water never hurt anyone."
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STATE FUNERAL?
June 30, 2008
The insighfully-vulgar State 29 Blog will disappear forever this week, according to its anonymous author. He's gone away before, but I think he means it this time.
While State 29 sometimes goes overboard with the profanity and vitriol, it is by far the best and most entertaining Iowa political blog. I'll miss it.
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IOWA FURTHER EXTENDS TAX DEADLINES FOR DISASTER AREAS, EXCEPT FOR HUMANS.
June 28, 2008
See June 30 Update Below.
The Iowa Department of Revenue yesterday further extended the deadlines for taxpayers in the flood disaster areas to file returns and make payments. Now taxpayers in presidentially-declared flood disaster areas get until July 28, 2008 to file returns and pay taxes otherwise due between May 25 and July 23. Until yesterday the relief only applied to returns and payments due up to June 26.
The extension applies to these taxes:
* Withholding tax
* Corporation income tax
* Franchise tax
* Sales and use tax, including the automobile rental excise tax and the special equipment tax
* Hotel and motel tax
* Environmental protection charge
* Inheritance tax, including the generation skipping transfer tax and the qualified use inheritance tax
* Motor fuel and special fuel tax
* Cigarette and tobacco tax
What's missing? Just individual income taxes. If you have a second quarter individual tax payment, it's still due this coming Monday. Even if your home, your office, or your tax preparer's office looked like this two weeks ago:
It's good that Iowa made their disaster relief more like federal disaster relief - even better in a way, as Iowa provides better relief for employment taxes. Still, not providing relief for individual tax payments is strange and lame.
UPDATE, 6/30: IOWA EXTENDS FLOOD RELIEF TO INDIVIDUAL TAX PAYMENTS. This means disaster-area taxpayers now have until July 28 to file their second quarter payments, in case you haven't yet made it to the post office.
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MAKING OTHERS PAY FOR YOUR GOOD INTENTIONS
June 27, 2008
You're just starting a small business. You're working 18 hour days to try to keep the doors open, paying the rent, and meeting your payroll. You know what you need? You need to have to sponsor individual retirement accounts for your employees!
That's what two congressmen think, anyway. From Tax Analysts ($link):
A bill that would require business owners to offer individual retirement accounts to employees has a decent chance of becoming law within the next year, the taxwriter who introduced the bill said at a June 26 congressional hearing.House Ways and Means Select Revenue Measures Subcommittee Chair Richard E. Neal, D-Mass., argued that his bill, H.R. 2167, the Automatic IRA Act of 2007, would be a relatively painless way to boost personal savings.
Subcommittee ranking member Phil English, R-Pa., a cosponsor of the bill, attested to its bipartisan appeal. "Clearly we need to do more to encourage all Americans to save for retirement, and we need to work together to find creative solutions," English said.
"We"? Congressman English isn't going to have to do the paperwork to run these plans. The business owner will. This scheme would make it that much harder for a small business to keep going. It would push the small employer to either not hire, or to only hire independent contractors and temps.
This is a "we" in the sense that "you do what I tell you, or else" means "we." It won't solve the savings "problem," not while the government continues to spend like there's no tomorrow. But it will help the congresscritters' self-esteem. And that's what matters.
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POLITICIANS, TAXES AND THE FINE PRINT
June 27, 2008
The two big tax policy think-tanks, the Tax Foundation and the Tax Policy Center, have been looking at the Obama tax plans.
The center-right Tax Foundation says that the Obama plan would accelerate the narrowing of the federal tax base to high income taxpayers. This creates an obvious policy shortcoming: if the income tax only applies to small segment of the voters, the majority has no incentive to exercise fiscal restraint because someone else picks up the tab.
The center-left Tax Policy Center illustrates the unintended consequences of sticking it to big corporations. The Obama plan eliminates income taxes on elderly households with income under $50,000, but it actually would increase their tax burden:
On average, low-income older people own some capital—stock in their retirement funds, homes, or maybe mutual funds—and that capital bears some of the corporate tax. Obama’s plan would increase corporate taxes and poor older couples would bear some of the cost—not all of them and not much of the cost but enough to make their average federal tax bill rise.
The Tax Policy Center notes that some academics say corporate employees, rather than shareholders, bear much of the burden of corporation taxes. That means a higher corporate tax either hurts workers or old people. That's a political winner!
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MIGHT THERE POSSIBLY BE ANOTHER FACTOR?
June 26, 2008
Not-a-blogger Brian Gongol posts:
Iowa Why Sioux City and Sioux Falls have turned out so differently The two towns, about an hour apart, started off in roughly the same condition in the 1960s. But Sioux Falls has grown well while Sioux City has had a much rougher time, economically. The biggest difference is that Sioux City depends heavily upon manufacturing, while Sioux Falls has moved away from heavy industry. That should be a lesson for those who obsess over manufacturing jobs as a political issue. Manufacturing still matters, but it can't be the only thing happening in a city's economy.
That's fine as far as it goes, but why is it that those financial industry jobs have been drawn to the South Dakota side of the river, rather than to the Iowa side?
Anyone?
Iowa's top corporation income tax rate is 12%. The rate in South Dakota is zero.
Iowa's top individual income tax rate is 8.98%. The top rate in South Dakota is zero.
But other than that, I have no idea.
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NEW FAQ ON HEALTH SAVINGS ACCOUNTS
June 26, 2008
The IRS has issued Notice 2008-59 to provide an updated Q&A on how Health Savings Accounts work. As a new round of premium increases hits, the lower premiums of HSAs look more and more attractive. It includes information related to new HSA rules enacted in late 2006.
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HOW MUCH SHOULD YOU BE IN A STATE BEFORE IT CAN TAX YOU?
June 26, 2008
State taxes are a big headache for a small business. The states are all over the place in determining when you cross the line to have "nexus" making you subject to tax. Once they decide you're in, some states aren't above highway robbery as collection tool.
This week the a House of Representatives Committee has been holding hearings on H.R. 5267, the Business Activity Tax Simplification Act of 2008 (BATSA):
BATSA would establish that businesses could only be subject to tax burdens in states where they have property and employees for at least 15 days in a year. This "physical presence" standard was reaffirmed most recently in the 1992 Supreme Court case Quill Corp. v. North Dakota, which remains binding precedent. Many states, however, are pushing for "economic presence" standards, which tax businesses based on where customers are located.
The BATSA standard would save the little guy a world of hassle, cost and uncertainty. It certainly would have helped Al Franken. Naturally state governments think its a bad thing, and they have the imaginary numbers to prove it. The National Governors Association also testified against the bill. And what's more important anyway - your crummy little livelihood, or the budgeting convenience of your governor?
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WASH SALES AND MUTUAL FUNDS
June 26, 2008
If you sell a stock at a loss and buy the same stock within 30 days before or after the loss sale, the "wash sale" rules of the tax law disallow the loss. But what if you sell a Vanguard S&P 500 index fund at a loss and buy a Fidelity S&P index fund within 30 days? The Tax Tips Blog ponders the question.
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WHAT'S GOOD FOR GM IS GOOD FOR YOU!
June 25, 2008
General Motors is preparing to roll out a new electric car, the $40,000 Chevy Volt. But they want to offer it with an attractive discount: a $7,000 tax credit:
If congressional leaders agree to GM's recommendation, the Volt could have a "real" price to consumers closer to the originally reported $30,000. However, since GM is suggesting basing the tax credit not just on battery size, but also on the potential quantity of petroleum avoided, lawmakers could conceivably balk at the tax implications as more alternative fuel vehicles enter the market.
That's funny. An electric car already gets a credit based on the amount of gasoline avoided. The average federal and state gas tax combined is 47 cents per gallon; if your electric car saves you 10 gallons a week, you have a "credit" of just shy of $1,000 over four years. Apparently that just doesn't transfer enough tax money to GM.
(Via Instapundit)
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THE TAX LAW DOES IT ALL
June 25, 2008
The tax law does the great and small. The tax law does it all.
It solves the energy crisis, one wood pellet at a time:
Collins indicated she favors a similar bill introduced later in the week by Sen. Chuck Grassley, R-Iowa, that would extend expiring energy credits, create new tax credits for clean-burning wood and wood-pellet stoves, and address the AMT issue.
It dries up floods:
Washington, D.C. - Senators from flood-stricken states are banding together to push for tax relief for flood victims.The Midwestern Disaster Tax Relief Bill is similar to legislation proposed following Hurricane Katrina in 2005 and a Kansas tornado in 2007.
Iowa's two senators, Democrat Tom Harkin and Republican Charles Grassley, are co-sponsors.
Or at least it dries out retirement accounts:
Under it, taxpayers could make early withdrawals of up to $100,000 from their retirement plans without being subject to a penalty.
So when you lose everything but your retirement account in the flood, you can lose that, too!
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IN DEPTH ON IRAS
June 25, 2008
The Congressional Joint Committee on Taxation has issued a comprehensive look at how IRAs work. From the overview:
IRAs play a significant role in retirement savings. For 2005, individuals contributed approximately $57.4 billion to IRAs and rolled over $231.3 billion into IRAs. At the end of 2005, approximately 51.5 million taxpayers held $3.5 trillion in IRAs, based on fair market value.There are two basic types of IRAs under present law: traditional IRAs, to which both deductible and nondeductible contributions may be made, and Roth IRAs. The principal difference between these two types of IRAs is the timing of income tax inclusion. For a traditional IRA, an eligible contributor may deduct the contributions made for the year, but distributions are includible in gross income. For a Roth IRA, all contributions are after-tax (no deduction is allowed) but, if certain requirements are satisfied, distributions are not includable in gross income. Both types of IRAs grant consumption tax treatment to retirement savings, and thetwo types are generally economically equivalent.
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DAVID CAY JOHNSTON STARTS TAX NOTES COLUMN
June 25, 2008
Former New York Times tax reporter David Cay Johnston has begun writing for Tax Analysts. His first column went online today ($link). He says he will continue to address the themes covered by his books "Perfectly Legal" and "Free Lunch":
The hard truth this column will explore is that our tax system is working against us. It is slowly making us poorer. And it is also making some of the already rich much richer, a perversion of historic proportions that few Americans grasp.
I expect to disagree with much of what he has to say, but I'm sure he'll make me think. It's unfortunate that his work now will only be fully available to Tax Notes subscribers.
The TaxProf has more.
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NOTE TO KENNETH KIES: DON'T OPEN YOUR OWN FED-EX PACKAGES
June 24, 2008
This is a dazer:
Kenneth Kies, a Washington tax lawyer and lobbyist whose firm has been paid $540,000 by UPS since 2002, sent Ohio officials a 562-page report in December 2006 alleging that FedEx misclassified truck drivers as contractors. A copy of the report, including a cover letter in which Kies asked for confidentiality, was released to Bloomberg News by Ohio officials.
So much for the confidentiality thing.
With the new federal mandatory award system for big-dollar tax informants, this could very well catch on. Shaft the competition and get paid by IRS - where do you sign up?
Via the TaxProf.
Related: A TAX SNITCH BLOG
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'SON OF MAN' ARRESTED AT ED BROWN'S FORTRESS
June 24, 2008
The Lord truly works in mysterious ways:
PLAINFIELD – A man who says God, not the United States Treasury, owns the former home of Ed and Elaine Brown was arrested at the concrete-fortified residence Sunday morning after he set up camp on the front porch.Dressed in white, the long-haired man identified himself to police only as "Son of Man" and said he worked for a priest named "Lord's Body" as part of a church called "House of Israel," according to court documents.
The Browns are the tax-protesting couple that holed up in their house to avoid imprisonment after being convicted of tax evasion. They were arrested in their house after a long standoff by federal agents posing as sympathizers.
When you are on a mission from God, you should perform better than this:
Police allege the man activated an ADT security alarm system installed by federal agents after they seized the 401 Center of Town Road property and arrested the Browns last October on warrants connected with their January 2007 convictions on federal tax evasion charges.
If you truly are on a divine mission, you should be able to disable a security alarm.
When the other officers arrived, Sonneosman consented to a search of his belongings. Inside his Bible, police found two airplane tickets from now-defunct, Hawaii-based Aloha Airlines that identified the man as "Sonne, Israel" and "Sonneosman, Israel."In his backpack, they found a government no trespassing sign, an ADT sign, and receipts from the West Lebanon Wal-Mart for a bicycle and vegetable seeds.
West Lebanon Wal-Mart? I would have thought it would been closer to Nazareth. If you are too snooty to shop at Wal-Mart, just be aware that the Highest Authority does business there.
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FOREIGN ACCOUNT JUNE 30 DEADLINE LOOMS
June 24, 2008
Do you have a foreign bank account? Do you have signature authority over a foreign bank account at work? If so, you may have a deadline coming up.
The IRS has a friendly reminder:
U.S. persons are required to file a Report of Foreign Bank and Financial Accounts (FBAR), Form TD F 90-22.1, each year if they have a financial interest in or signature authority or other authority over any financial accounts, including bank, securities or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year.
These things can surprise you. Some online gaming accounts qualify for this reporting, for example. Also, a U.S. employee who can sign checks on the company's Candian bank account may also need to file this form. The June 30 due date cannot be extended.
Why file?
Civil and criminal penalties for non-compliance with the FBAR filing requirements are severe. Civil penalties for a non-willful violation can range up to $10,000 per violation. Civil penalties for a willful violation can range up to the greater of $100,000 or 50 percent of the amount in the account at the time of the violation. Criminal penalties for violating the FBAR requirements while also violating certain other laws can range up to a $500,000 fine or 10 years imprisonment or both. Civil and criminal penalties may be imposed together.
In other words, failing to file FBAR may leave you FUBAR.
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IMAGINARY TWINS DEDUCTED FOR 10 YEARS
June 24, 2008
I thought the IRS social security number matching system was more efficient than this:
MISSOULA, Mont. (AP) - A Belgrade woman admits that, for more than a decade, she claimed non-existant twin children as dependents on her income tax returns.Ruth Amende pleaded guilty this week in Missoula federal court to five counts of tax evasion and one count of misusing a Social Security number. The 57-year-old woman admitted her purported twins - Victor and Victoria - did not exist.
Amende says she made them up to receive larger income tax refunds from both the federal and state governments.
When the government first required taxpayers to report dependent social security numbers on returns, the number of reported dependents suddenly dropped by 7 million. Yet apparently there remain a few who exist only in the taxpayer's 1040.
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IRS BUSINESS MILEAGE RATE GOES TO 58.5 CENTS JULY 1
June 24, 2008
The IRS has made an unusual mid-year change to the standard auto business mileage reimbursement rate. The rate will increase by 8 cents, to 58.5 cents per mile, starting July 1.
The rate for moving and medical mileage will also increase 8 cents, to 27 cents. The 14 cent mileage rate for charitable mileage remains unchanged.
Lots of coverage of this:
TaxGrrrl
Don't Mess With Taxes
Taxable Talk
The Wandering Tax Pro
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IGOR'S BANKER FLIPS
June 23, 2008
Former UBS banker Bradley Birkenfeld pleaded guilty to helping real estate mogul Igor Olenicoff evade $7.2 million in taxes last week. He supposedly will be spilling the beans on UBS's alleged high-end tax evasion boutique. The TaxProf has a roundup. Linda Beale links to the "statement of facts" for the plea deal that spells out how the schemes worked (Jewelry smuggling? How... common). UBS stock fell about $2 last week, to about $22.
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TAX CRIME ROUNDUP
June 23, 2008
After a long weekend, it's always nice to brace up for a week of tax practice by seeing how people get in trouble. Russ Fox starts our perp walk with some sad sacks who used the Aegis trust tax scam to get into serious trouble. He also reports on a Georgia-based construction company whose owners fell into the time-dishonored trap of using their company to pay personal expenses, including visits to strip clubs. I'd love to see the receipts they turned in for reimbursement.
Somehow Russ missed this Chicago-area case: Alleged psychic fraud charged with tax evasion:
A DuPage County grand jury has returned a two-count indictment against Tracy M. Tan for failure to file federal tax returns in 2006 and 2007.Tan, 37, remains held in the DuPage County Jail on $100,000 bond for an alleged Tarot card scam police say she and her husband ran out of their Naperville home, bilking thousands of dollars in cash and jewelry from clients who were made to believe they were cursed.
Once again, it appears that clairvoyance isn't all it's cracked up to be. Why would you skip filing your returns when you know this will happen?
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NICE DAY CAVALCADE
June 23, 2008
There's a new Cavalcade of Risk up. The current edition of the recurring roundup of insurance and risk management blog posts. As always, the Insureblog's contribution, on how "free" govenrnment health care kills, is worth the visit.
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GEORGE CARLIN, RIP
June 23, 2008
There's no information as to what his last seven words were. Kay Bell covers the tax angle, while State 29 pays homage.
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APPLICABLE FEDERAL RATES (AFR) FOR JULY 2008 RELEASED
June 23, 2008
The IRS has issued (Rev. Rul. 2008-33) the minimum interest rates for loans made in July 2008:
-Short Term (demand loans and loans with terms of up to 3 years): 2.42%
-Mid-Term (loans from 3-9 years): 3.45%
-Long-Term (over 9 years): 4.60%
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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SEND IT IN WET
June 20, 2008
A Cedar Rapids business acquaintance forwards this picture taken inside his office at the Alliant Tower last Thursday, June 12.
It's too bad for them if they had payroll taxes due June 12. While the IRS has extended deadlines in the flood zones for most taxes through July 28, the extension to remit payroll and excise taxes expired June 9. Next time they should plan their flood a week earlier.
If this wet office belonged to an accounting firm, its individual clients would all get until July 28 to pay their second quarter Federal tax estimates originally due June 15. But Iowa won't brook that sort of nonsense. Iowa's disaster deadline waiver doesn't cover individual second quarter individual estimated tax payments due June 30. So if your CPA got washed out and hasn't given you second quarter Iowa vouchers, Iowa says that's just your bad luck.
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IOWA EXTENDS INCOMPLETE FLOOD RELIEF
June 20, 2008
UPDATE, 7/14/08: FEDS FURTHER EXTEND FLOOD AREA FILING DEADLINE; WILL IOWA FOLLOW SUIT?
The Iowa Department of Revenue has issued its version of flood deadline relief. Iowa's relief is less generous than Federal relief in two important ways.
Iowa will automatically extend deadlines for returns and payments due from May 24 through June 26 to July 28, 2009. This is much less generous than the federal relief, which applies to payments due from May 24 though July 28.
The relief is also less generous in that it does not extend the deadline for the 2nd quarter individual estimated tax payment.
The Iowa release is reproduced in full below.
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IRS CLARIFIES FLOOD DISASTER TAX DEPOSIT DEADLINE
June 20, 2008
Responding to our query about some nonsensical dates in their Iowa flood disaster tax deadline relief web site, the IRS sent us the following (my emphasis):
Thank you for contacting the IRS Web Site Help Desk.Thank you for notifying us of a typo in the article on Iowa flood relief (http://www.irs.gov/newsroom/article/0,,id=183404,00.html).
There is indeed a typo in the sentence you quoted. The sentence you sent us said: 'The IRS, however, will abate penalties for failure to make timely employment and excise deposits, due on or after May 25, 2008, and on or before June 28, 2008, provided the taxpayer made these deposits by June 9, 2008.' You suggested that the last date should read June 29 instead of June 9 to make sense. The correct sentence should have said: 'The IRS, however, will abate penalties for failure to make timely employment and excise deposits, due on or after May 25, 2008, and on or before June 9, 2008, provided the taxpayer made these deposits by June 9, 2008.' That is, it was the date of June 28 in the middle of the sentence that was incorrect, not the mention of June 9 at the end of the sentence, which is in fact the correct date. We have now corrected the text on the Web site.
Again, thank you for pointing out that there was an error in the sentence.
While that clarifies things, it's rather harsh. Many offices in Downtown Cedar Rapids, for example, were destroyed in the floods, and taxpayers are just now getting back to them more than a week after they went under. It's strange to cut off deadline relief just at the point Cedar Rapids was drowned.
For filings and tax payments other than payroll and excise tax deposits, taxpayers in Iowa disaster areas have until July 28 to make payments otherwise due between May 24 and July 28.
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DEFENDING YOUR DEDUCTIONS
June 19, 2008
If a canceled check were all you needed to satisfy an IRS agent that you are entitled to a business deduction, audits would hold few terrors. Unfortunately, it's not enough to just spend money to get a deduction. You need to show that it is a business deduction. Paperwork matters.
If you are in a regular profit-seeking business with a decent accounting system, most of this takes care of itself. Your accounting records will generate the purchase orders, invoices and payroll records for most of your day-to-day deductions. (And if you don't have a good accounting system, you should get one, and tax is the least of the reasons you need to). But some deductions require support beyond what you might normally get from your bookkeeping records.
If you want to deduct travel or meals and entertainment expenses, the tax law requires you to keep records that show:
- the amount of the expense;
- the time and place of the travel or entertainment;
- the business purpose;
- for business entertainment, the business relationship with the person being entertained.
If you want to deduct a charitable contribution, you at least need a canceled check or credit card statement for a gift up to $200. For larger gifts, a written receipt from the recipient listing the amount of the gift and the value, if any, received for the donation is required. Special rules apply when you make gifts of property; if you donate property worth over $5,000, other than publicly-traded securities, you need to get a qualified appraisal.
The IRS has more on documenting travel, meal and entertainment expenses. To learn more about documenting your contributions, visit the Tax Girl.
(This entry originally appeared at IowaBiz.com. Your regular posting resumes tomorrow).
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DON'T TRY THIS AT HOME!
June 18, 2008
Sometimes small businessmen must feel that they shouldn't so much as go to the bathroom without checking in with their professionals. No, you don't have to raise your hand, just go.
But sometimes you should call your tax guy. Anything involving the ownership of your business is one of those times.
An old friend called sometime back and told me he had put the ownership of his business in an S corporation. And it's doing great, it really has increased in value, and it generated enough funds that he had his corporation invest in another venture. Oh, and he gave an ownership interest in his corporation to a principal in that new venture. What did he have to do to make sure that the co-owner didn't get any income from the old venture?
Short answer: it was too late. Longer and more expensive answer: he has to undo what he did and restructure the ownership of his company, possibly incurring taxable gain to himself or his co-venturer.
Sadly, it would have been easy to achieve my friend's goals by doing things right in the first place, either by having the S corporation make a tax-free distribution of funds for the new venture, or by structuring the new venture as a partnership with the co-owner as a partner. But once the paperwork for the old corporation has been signed and checks have been cashed, suddenly there is potential tax all over the place when you try to undo it.
The moral? When you mess with the ownership of your business, it's a lot cheaper to call a good business lawyer and a tax guy before you do the deal; it costs a lot more to repair a deal than to do it right in the first place.
(Originally posted at Iowabiz.com)
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BRIEF BREAK
June 18, 2008
I am taking two days off for a maritime excursion to Eastern Iowa (Yes, I really go all out for a 20th wedding anniversary). To keep you coming back until Monday, I will have a scheduled post or two, including a couple of pieces you may have missed from the defunct IowaBiz blog. If this isn't enough excitement for you, check out the Tax Nerds and other worthly blogs on the right side of your screen.
See you Friday!
flickr photo of Downtown Cedar Rapids by Looondawg
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HOW YOUR BUSINESS INSURANCE RECOVERY IS TAXED
June 17, 2008
You've been hit hard by the floods and storms. The building with your business was wiped out. You paid $200,000 for the building long ago. After depreciation, the building basis was only $50,000. The building had gone up in value and was insured for $1,000,000, and the insurance company is writing you a check for the whole amount.
What does it mean for your taxes?
The tax law normally treats a business casualty loss as an "involuntary conversion." The insurance proceeds are normally taxable, but Sec. 1033 lets you avoid current tax if you invest the insurance proceeds in "like-kind" property by the end of the second year following the year the recovery is paid. The tax law allows you exclude gain if you reinvest the insurance proceeds in property "similar or related in service or use," but only if you file an election under Sec. 1033.
What does "similar or related in service or use" mean? Unfortunately, the tax law is fuzzy on this. If you invest the proceeds in continuing the same business that you were in before, that should be fine. If you decide to invest in a different line of business, that can be trouble.
The requirements for tax deferral are easier for businesses in a presidentially-declared disaster area. Such taxpayers only need to re-invest insurance proceeds in tangible property to be used in any trade or business, under the special rule of Sec. 1033(h)(2).
The catch? To the extent you avoid recognizing gain under the Sec. 1033 involuntary conversion rules, you don't get basis for the property purchased with the insurance proceeds. The taxpayer who used $1,000,000 in proceeds to buy a building and equipment, and who elected not to pay tax on the proceeds, would only get to depreciate the $50,000 basis that was in the old building. What are the rules for depreciating the replacement property? We'll save that for another post.
Links:
IRS Publication 547, Casualties, Disasters and Thefts
IRS 2007 Disaster Losses Kit for Businesses.
List of Iowa's Presidentially-declared disaster areas.
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WE REMAIN DOOMED. OR NOT.
June 17, 2008
Doomed? Professor Maule makes the case.
John Tierney at the New York Times argues the other side:
Before any other readers post another comment about “overpopulation” and doomsday scenarios, I suggest they take a look at my colleague Donald McNeil’s excellent article on Malthusian mistakes. As he notes, the current forecasts of energy and food disasters sound just like the ones made during the 1970s. Similar apocalyptic forecasts were made in the 1940s (in books like “Our Plundered Planet”) and in other eras by prophets following in Malthus’ tradition.These prophets have always claimed to be seeing the big picture, but they ignore thousands of years of history during which the prices of natural resources fell and the wellbeing of humans improved. Yes, there were sometimes shortages; yes, there were plagues and wars and natural disasters. But while empires came and went, humans overcame problems and gradually improved their lot.
(via Instapundit)
Now that the water is receding, I'm feeling more optimistic. If you want to see some good pictures of the flooding in Iowa City and the University of Iowa campus, go to John Deeth's blog and scroll down. I got the pointer from Side Notes, whose posts give an idea of how complicated little things, like getting to work, keeping appointments and meeting deadlines can be when all the roads are closed and the bridges are all out.
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TUESDAYS WITH PROF. MAULE
June 17, 2008
Villanova tax professor Jim Maule has a lengthy discussion of the execrable Sec. 409A deferred comp rules passed in response to the Enron and WorldCom scandals. It addresses the difficulties for the IRS in administering a totally botched piece of legislation:
Though it's difficult to oppose Treasury and IRS "bailouts" of Congress in at least some of the situations in which they have done so, the temptation is oh, so strong, to let Congress reap what it sows, just to teach the it and the nation that electis it a lesson or two. Imagine if the tax law were administered by the IRS as literally drafted. It could be a nightmare and then some. It might just spark some genuine change in how Congress does business and it might just bring the quality of Congressional work product to a professional level.
The worse, the better? Well, at least with tax legislation, we're sure giving the worse a try.
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LOW MILEAGE, ONE OWNER
June 16, 2008
As the floodwaters recede, it's time to take the dry, slightly-used sandbags to wherever you take such things. This was the lunchtime scene outside Tax Update World Headquarters today.
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DISASTER CASUALTY LOSS REFUNDS
June 16, 2008
If you have uninsured losses from the Iowa floods and are in a covered disaster area, you might be able to get some needed rebuilding cash by deducting this year's loss on last year's return. The tax law permits taxpayers in disaster areas to choose to deduct their casualty losses on either the return for the disaster of the return for the prior year. That means a calendar year business could file an amended 2007 return to claim the loss and generate a refund. They could also claim it on an extended 2007 return that has not yet been filed.
Remember, personal casualty losses are subject to a $100 deductible and a 10% of AGI floor.
Links:
IRS page on Disaster Assistance and Emergency Relief for Individuals and Businesses
IRS Publication 547, Casualties, Disasters and Thefts.
The sandbagged entrance to the Vaudeville Mews on Fourth Street in downtown Des Moines Sunday morning
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DEADLINE RELIEF FOR IOWA STORM DISASTER AREAS
June 16, 2008
6/20/08: SEE UPDATE BELOW
UPDATE, 7/14/08: FEDS FURTHER EXTEND FLOOD AREA FILING DEADLINE; WILL IOWA FOLLOW SUIT?
The IRS has extended tax deadline relief to additional counties in Iowa as a result of the recent storms and flooding. The relief is available to:
...individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area, but whose books, records, or tax professionals’ offices are in the covered disaster area, are also entitled to relief. In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area are eligible for relief.
Affected taxpayers can make tax payments and file returns that would otherwise be due between May 25 and July 28, 2008 as late as July 28 without penalty.
The following counties are covered:
Adams, Benton, Black Hawk, Bremer, Buchanan, Butler, Cedar, Cerro Gordo, Delaware, Fayette, Floyd, Hardin, Johnson, Jones, Linn, Louisa, Marion, Muscatine, Page, Polk, Story, Tama, Union and Winneshiek.
The IRS says they will automatically apply the relief to taxpayers in the affected areas who make filings or payments that otherwise would be late.
The IRS will also waive penalties for affected taxpayers for late payment of employment tax deposits due between May 25 and June 28 June 8 if the payments are made by June 29, 2008 (the IRS release says June 9, which is obviously a typo).
UPDATE: After inquiring with the IRS about the original IRS release, which said that employment tax payments made between May 25 and June 28 could be made by June 9, I received the following response (my emphasis):
There is indeed a typo in the sentence you quoted. The sentence you sent us said: 'The IRS, however, will abate penalties for failure to make timely employment and excise deposits, due on or after May 25, 2008, and on or before June 28, 2008, provided the taxpayer made these deposits by June 9, 2008.' You suggested that the last date should read June 29 instead of June 9 to make sense. The correct sentence should have said: 'The IRS, however, will abate penalties for failure to make timely employment and excise deposits, due on or after May 25, 2008, and on or before June 9, 2008, provided the taxpayer made these deposits by June 9, 2008.' That is, it was the date of June 28 in the middle of the sentence that was incorrect, not the mention of June 9 at the end of the sentence, which is in fact the correct date. We have now corrected the text on the Web site.Again, thank you for pointing out that there was an error in the sentence.
An Iowa Department of Revenue representative told us that the department is considering whether it will extend filing deadlines for storm-affected taxpayers.
Iowa has also extended limited disaster relief. The Iowa relief includes withholding taxes, but does not include individual estimated taxes. This is a lame and baffling omission.
Link: IRS release on Iowa storm relief.
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BACK IN BUSINESS
June 16, 2008
We were able to re-install the network equipment yesterday, and we are open as usual this morning. We are very lucky, as the downtown levees held.
Our neighbors in the Birdland area weren't so fortunate. North High suffered heavy water damage, as did many homes and businesses.
Things are much worse in eastern Iowa. The Cedar Rapids business district was devastated, and much of Iowa city is underwater, including Hancher Auditorium on the University of Iowa campus. You might want to consider a donation to the Salvation Army, as they have been working hard to take care of the many folks flooded out; or you can call the Iowa Concerns Hotline at 800-477-1985
UPDATE: I am remiss in not acknowledging the kind words from the TaxProf, Kay Bell, Russ Fox and Robert D. Flach about our office bug-out. Thanks for thinking about us.
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WE INTERRUPT THIS OFFICE
June 13, 2008
The City of Des Moines has asked business downtown to clear out, as it is touch and go tonight on the levees. We will be taking our network down this afternoon, so we might be hard to reach by e-mail or phone. If you need to reach Joe Kristan, try joekristan -at - mac - dot - com.
We should be back in business sometime this weekend, either at the office or at our backup site.
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EXPECT DELAYS AT 7TH AND MLK
June 13, 2008
It's a bit deeper than yesterday.
The bed of the Raccoon River used to be about where Martin Luther King drive is downtown. It must want to return home.
Compared to Cedar Rapids and other places in Iowa, we've been very fortunate so far.
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IN HER MAJESTY'S SNEAKY SERVICE
June 13, 2008
The British tax authorities put a tax evasion hotline in place. It hasn't been a roaring success:
Her Majesty's Revenue and Customs new tax evasion hotline has been flooded with calls making malicious and unfounded allegations, MPs have been told.One woman made 68 calls to report her husband - none of which had led to an investigation, the House of Commons Public Accounts Committee was told.
Dave Hartnett, acting chairman of HMRC, said he was 'disappointed by the quality' of calls to the line aimed at catching income tax cheats.
Not her "Ex" husband? That must be a fun relationship.
He said HMRC investigators used 'data matching' techniques but also scanned the Yellow Pages for new nail bars rather than waiting for local tax inspectors to report them.
Translation: "Nail Bar" is not a place where you go to get, er, nailed. Here we call them manicure salons. I think.
Inspectors also went after high value tax evaders by keeping an eye on individuals who were buying expensive cars or boats.
Implying that the only way you can have enough money after taxes to buy a boat is to cheat. Nice.
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TAKING IT DEEP
June 13, 2008
Parking will be a problem for tonight's scheduled I-Cubs game at Principal Park.
No word on whether there will be ferry service to the ticket windows.
They just might need to reschedule.
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SNEAKING INTO CENTER FIELD
June 12, 2008
The Des Moines river creeps over the levee to the edge of Principal Park (with the blue roof), home of the AAA Iowa Cubs, in a picture taken from Tax Update World Headquarters.
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THINGS LIKE THIS MAKE YOU NERVOUS
June 12, 2008
Water is backing up from the sewers on both lanes of 7th Street at MLK on the south side of Downtown Des Moines.
Meanwhile, nearly two inches of rain has raised the Raccoon River 2 1/2 feet upstream at Van Meter, to 5 1/2 ft over flood stage.
It's coming this way to meet the expected record crest of the Des Mones River, right here downtown. Oh, boy.
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PREPARING FOR THE WORST
June 12, 2008
While several of Iowa's larger towns have been already hammered by floods, Des Moines still awaits the worst. The crack Tax Update news team investigated preparations downtown last night. Some of our findings:
The Des Moines river is high, for one thing. Notice the tops of the lampposts just sticking out of the water where the Simon Estes Amphitheater usually is. They are just as tall as the ones you can see further up on the bank.
This new wine shop and wine bar on Court Avenue was preparing for its grand opening.
Steps are being taken to preserve essential services.
If there's one thing we've learned over the years, it's that you have to take disaster preparation into your own hands -- like this well-prepared couple. We assume that FEMA will provide floaties and snorkels so we can all get to our FEMA housebouts.
The news isn't reassuring:
Indeed, officials said the next 24 hours could be the most important in Des Moines' 157-year history.The possibility of massive flooding from the Des Moines and Raccoon rivers, coupled with heavy rain that began early Thursday, greatly increased the chance of widespread damage and set the stage for a prolonged recovery that will be made even more difficult by closed streets, filled basements and watery obstacles for police officers and firefighters.
and:
Flood-control officials predicted the Des Moines River on Saturday will surpass 1993's record height, a level five feet higher than what was predicted a day earlier. Moreover, the river is expected to hover near that record for at least three days.
On the good side, walking up to the 14th floor if the floods take out the electricity would be excellent exercise.
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TAX THE ENERGY PROFITEERS!
June 12, 2008
The price of fuel is soaring, enriching the politically-entrenched industry that is reaping billions thanks to government policy and high prices. The Tax Policy Blog has a solution: a windfall profits tax.
According to some in Congress, a windfall profits tax on oil companies would lower the price of gasoline (which is ludicrous). Then by that logic, wouldn't a windfall profits tax on farmers also lower the price of food?
It does have a certain alien logic.
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TAX POLICY CENTER OUTLINES CANDIDATE PLANS
June 12, 2008
The center-left Tax Policy Center has produced an analysis of the Obama and McCain tax plans. The TPC Blog, TaxVox, summarizes:
In the first detailed analysis of the Barack Obama and John McCain tax plans, the Tax Policy Center has run their proposals through the Big Computer and discovered that their schemes are, well, painfully predictable. Each would raise the national debt by trillions of dollars. Obama would use the money to provide modest tax cuts to low- and moderate-income people while imposing stiff tax hikes on the very wealthy. McCain would cut taxes a bit for the working-class and a lot for the rich.
The only comfort is that they are both politicians, so there's a good chance they are lying.
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INTANGIBLE INCOME TAX NEXUS IN IOWA?
June 12, 2008
Can you be required to pay Iowa corporation income tax if your only presence in Iowa is bits and bytes? A memo released this week by the Department of Revenue says "yes."
The memo deals with a taxpayer that licenses software used to prepare some unspecified government reports to Iowa users. From the memo:
As noted in the example, it does not matter if the fee is considered a royalty or something else. If the fee is received for the use of the software, then it was earned from intangible property located or having a situs in Iowa. Therefore, this activity would be sufficient to create Iowa corporation income tax nexus.
So another happy customer gets to pay Iowa's highest-in-the-nation corporation income tax.
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BECAUSE IT WORKED SO WELL THE LAST TIME
June 12, 2008
"Taxwriters Again Turn Attention to Housing Stimulus"
Headline in Tax Notes Today this morning ($link)
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VENICE ON THE PRAIRIE
June 11, 2008
2nd and Court, looking Southeast, Downtown Des Moines, around lunchtime today.
UPDATE: Eyewitness reports say this was a sewer backup that has drained back out.
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FLOOD WARNING
June 11, 2008
The "surge" from the opening of the dam gates upstream from Des Moines should get here around noon. We can hardly wait.
Meanwhile, from the "great moments in ad placement" department, look at this from the DesMoinesRegister.com story on the flood warning:
Fish Iowa! Right in your own backyard! Or maybe even your living room.
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S CORPORATION HEALTH INSURANCE: SHOULD YOU BOTHER WITH THE PAPERWORK?
June 11, 2008
A reader comments on the old post "S CORPORATION HEALTH INSURANCE: READER QUESTIONS":
For the 2007 tax return 1040 with a subchapter s corporation (husband/wife) our 27-year accountant listed health care premiums on line 29 of the 1040. I've advised him of the 2008-1 requirements from your website that the premiums need to go through the payroll and appear on the W-2, Box 1. He states this is easier and we get the deduction anyway, why put us through that hassle! Is he right?
Well, Notice 2008-1 doesn't say it's optional:
In order for the 2-percent shareholder-employee to deduct the amount of the accident and health insurance premiums, the S corporation must report the accident and health insurance premiums paid or reimbursed as wages on the 2-percent shareholder-employee’s Form W-2 in that same year. In addition, the shareholder must report the premium payments or reimbursements from the S corporation as gross income on his or her Form 1040, U.S. Individual Income Tax Return.
While it isn't 100% clear that the IRS would win if pushed in court, it is clear what they say you "must" do - have the S corporation pay or reimburse the amount with after-tax dollars. The notice doesn't say "you can ignore this and get the deduction anyway." If you fail to follow the instructions in Notice 2008-1 and an agent finds it, you can be confident that she will write it up. Then you have to waste time and money fighting, and you might lose anyway, so you lose either way, even if you ultimately get the deduction.
While it is a minor hassle to follow the rules, it's very minor, especially if you don't have to do it retroactively. In the long run, it's a lot easier than fighting it on an exam.
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BUSINESS PLANS OF THE ALMIGHTY, VIA ROBERT BEALE
June 11, 2008
A former employee of convicted tax evader Robert Beale provides insight into his business practices in a comment to an old post:
I used to work for Bob when he owned Artist Graphics. They say it is a fine line between madness and genius; Bob Beale is the ipotomy of that statement. I always remember his company mission statements used to start something along the lines of' God owns our business on Earth, God wants us to grow our business by xx% and this is how we are going to do it...' and the how bit was always inspiring; we worked in the UK office and was sheltered from his 'preaching' (I never did tell him i'm an aetheist..he'd have sacked me!); but his philosophy of life and doinng business has stood us all well from our days at Artist Graphics. We've all gone on to develop successful careers; many of us working for ourselves. It was Bob's culture of independant spirit that has stayed with us all...but we all do pay our taxes!!! There is no doubt that he has to face some sort of punishment for what he has done; but I hope that does not mean being incarcerated for 13 years.
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A HERO TO PROCRASTINATORS EVERYWHERE
June 11, 2008
It's not often that a first paragraph of a tax case is too funny to read with a mouthful of coffee, but it happened yesterday (my emphasis):
Mary Allison died in 1995. Her son, Daniel Allison, is an attorney and the personal representative of her estate. He opened a probate case shortly after her death in Seattle's King County Superior Court. It is still not closed. Mr. Allison also filed two Tax Court cases for the estate in early 2000. Neither of them has been closed. It appears that Mr. Allison has been telling our Court that resolution of the probate case is all that's needed to wrap up the Tax Court cases, and telling the King County Superior Court that resolution of the Tax Court cases is all that's needed to wrap up the probate case. We issued an order to Mr. Allison to show cause why we shouldn't sanction him for his misrepresentations. This opinion explains the reasons for our decision to make that order absolute.
It makes you wonder how long he could have kept it going if he would have just pretended to file the Tax Court case. The Tax Court would have never caught him.
Cite: Estate of Allison, T.C. Memo 2008-149
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IT'S CAMPAIGN TIME!
June 11, 2008
The candidates are doing battle on taxes, and the TaxProf has the play-by-play:
Shlaes: Obama, Democrats Embrace Fog of Complex Tax Plans
Boston Globe: McCain Calls Obama Tax Plan a Threat to All Americans
WaPo: McCain Distorts Obama's Tax Policies
WSJ: Obama Fires Back on Taxes
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FARM TAX SCHOOL!
June 11, 2008
The 2008 dates for the venerable Iowa Farm Tax School are up at the ISU Center for Agricultural Law and Taxation site. Waterloo, Sheldon, Mason City, Iowa, Wall Lake, Ottumwa, Durant, Atlantic and Ames.
The design for the tour T-shirt remains a closely-guarded secret.
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BRIDGES TO NOWHERE
June 10, 2008
From DesMoinesRegister.com:
The amount of water flowing out of the Saylorville Lake reservoir is expected to double tonight as the Army Corps of Engineers lowers an emergency flood dam.The six-foot steel dam, which was installed after the floods of 1993, was erected on Monday to give Des Moines city officials and residents more time to prepare for additional flooding, said Ron Fournier, spokesman for the Army Corps.
Fournier said the dam will be lowered slowly for up to six hours tonight sometime between 10 p.m. and midnight, though it could be earlier.
And this:
Des Moines city officials will close the Walnut Street bridge at 2 p.m. today.The bridges at Court and Grand avenues, and Locust street, will close at 6 p.m.
Based on the latest projections from the U.S. Army Corps of Engineers, city officials believe Saylorville Lake will overflow some time today and send water rushing down the Des Moines River into the downtown area.
The bridges are expected to be covered by water.
OK, we have enough rain now.
Related: Compare and Contrast, on the rising levels of the Raccoon River, which joins the Des Moines river in Downtown Des Moines.
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THANKS, MR. LAWYER-LIKE MAN, BUT WE'RE IN ENOUGH TROUBLE ALREADY
June 10, 2008
A Tennessee couple is facing federal tax evasion charges based on their use of a "de-taxing" kit. Now they've hooked up with a "lawyer" who doesn't seem likely to be a great deal of help:
An Arkansas attorney facing disbarment proceedings in his home state is trying to convince a federal magistrate judge in Knoxville to let him represent a Blount County couple accused of tax evasion."I've got a number of licenses to practice," Oscar Stilley, an anti-tax attorney from Fort Smith, Ark., insisted Monday when pressed by U.S. District Magistrate Judge Clifford Shirley about his claim of being an attorney in "good standing."
"Your law license has been suspended," Shirley responded.
How did Mr. Stilley respond? No, he didn't say "Shirley you jest!"
"It's just about over," Stilley responded.Not quite, according to court records in a number of states, including Arkansas, Hawaii and Michigan.
Not only has Stilley's law license been suspended at least twice since 2001, the attorney has been sanctioned financially, jailed for contempt and is now the subject of disbarment by the Arkansas Supreme Court.
He's been accused of lying about, at worst and, withholding, at best, his suspension from a federal judge in Hawaii and was booted out of federal court there as a result.
If you're facing time in federal prison, do you really want to be defended by somebody who's been disbarred in several states and actually been jailed for contempt?
This poor couple has been looking for professional help in all the wrong places for some time. Their indictment says they purchased a "Reliance Defense Package" to remove themselves from the federal tax system. While the indictment doesn't say who sold the package to them, Bill Benson, author of "The Law That Never Was," and who is now under a permanent injunction against providing tax services, sold a product by that name.
Link: Indictment, United States of America v. Brett Edward Dirr and Renee Dirr
More on Mr. Benson here.
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THE STATE MIGHT ENJOY YOUR STIMULUS CHECK FOR YOU
June 10, 2008
If you owe your state back taxes, don't count on using your stimulus rebate for that plasma TV you've had your eye on. The Tax Policy Blog reports on how the state is ahead of you in line for your rebate check if you owe back state taxes. As a result, some of the biggest beneficiaries of the stimulus rebate programs are state revenue departments.
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COMPARE AND CONTRAST
June 10, 2008
Racoon River streamflow at Van Meter, upstream from Des Moines, last 31 days:
Racoon River streamflow at Van Meter, 1993:
Figures courtesy USGS.
Note that the scales are compressed; the levels now are higher than they were prior to the big 1993 rise. Let's hope we don't get another 4-6 inch rain in the Raccoon River basin this week.
We all know what happened July 11, 1993.
State 29 has some links to blogger coverage of the current floods.
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A CONSTITUTIONAL RIGHT FOR TAX CREDITS FOR DIRTY MOVIES?
June 09, 2008
The Tax Policy Blog notes that Canada is trying to control the content of movies made with the help of film tax credits. The post has this observation:
In U.S. constitutional law, there is a doctrine known as "unconstitutional conditions"—essentially, that while the government can impose conditions on receiving grants or subsidies, the conditions cannot amount to surrending constitutional rights.
There is a constitutional right to make dirty movies in the U.S., more or less. It would be hilarious if the Department of Economic Development were ordered to subsidize, say, "Debbie Does Dubuque" via the stupid Iowa film tax credits.
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WE NEED MORE TAX CREDITS?
June 09, 2008
David Eilbert seems to believe that the 30 or so economic development tax credits in Iowa aren't enough of a good thing. He is unhappy that the legislature didn't expand a few tax credits this year:
The perception today is that tax credits are a Republican invention, probably because the most controversial breaks are targeted to businesses.It's not surprising then, with Democrats in control of the Iowa Legislature, that there wasn't much interest this year in creating or extending credits.
That's too bad, because there's evidence that targeted tax credits can be good for the economy.
He is careful to say "perception," as micromanaging the economy through tax credits isn't traditionally considered a "Republican" theme. It's understandable how the perception has developed in Iowa, though, as the Republican leaning "Iowans for Tax Relief" has been an important supporter of a number of these credits.
As far as evidence that "targeted tax credits can be good for the economy," that evidence is hard to find, and the Eilbert article doesn't cite any. As any money for these credits is money that would have either been used by taxpayers for their own ends, or spent on other government items, they aren't free money.
The article finishes by quoting Mike Blouin, corporate welfare officer for Dubuque:
"It's a lot cheaper to give a company tax credits to hire people than it is to have to deal with unemployment."The same is true about credits that build community endowments and that support young entrepreneurs.
Well, not necessarily. If the state is paying Microsoft $60,000 per "job," is that really better at generating jobs than letting taxpayers keep that money? Not likely. If the state pays hundreds of thousands of dollars to a business that quickly goes broke -- as several have -- is that really "cheaper than dealing with unemployment?"
Still, as long as a few well-connected businesses can claim that they have "created jobs" by taking money from the rest of us, there will always be support for these credits.
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PAY IT FORWARD, VARIABLY
June 09, 2008
Today's Wall Street Journal discusses the IRS attack on "prepaid variable forward contracts" to defer tax on a stock sale. Under these deals a taxpayer agrees to sell stock at a future date at todays price, with the cash delivered up front but without title to the stock changing hands. The seller then "loans" the shares to the buyer, who can short them to protect against price declines until the actual shares are delivered.
It's easy to see why the IRS doesn't care for these. The piece quotes tax expert Robert Willens:
"You've got all the elements of a completed sale: One guy's got the money, and the other guy's got the stock," said Robert Willens, a former Wall Street tax analyst who runs his own corporate-tax advisory firm in New York. "What more do you need for a sale?"
According to the story, the IRS is seeking $143.6 million from investor Philip Anschutz on such deals for 2000 and 2001.
UPDATE: The TaxProf has more.
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FARM BILL: WE KNOW WHAT IT SAYS, BUT WHEN DID IT SAY IT?
June 09, 2008
Roger McEowen has posted a summary of the tax provisions of the new farm bill at the ISU Center for Agricultural Law and Taxation site.
Meanwhile, Dr. Maule ponders the effective date of the new laws provisions, given how badly Congress botched the paperwork.
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WHEN AN INVESTMENT PROJECT GOES BAD
June 06, 2008
So you bought a fixer-upper with your spouse. It seemed like a sure thing. Real estate prices seemed to only go up. You bought it with borrowed money, so the risk was all the bank's, but the profits were all yours. Then things got complicated:
The couple borrowed $256,000 for the purchase of the property, only to realize shortly thereafter that not only did they not like each other, but they also could not make the payments. Rather than falling into foreclosure and ruining their credit, they entered into a short-sale agreement with the lender and, in 2003, found a buyer willing to purchase the property for $200,000.
In short, the bank forgave the $56,000 difference, plus the costs of sale and accrued interest. The bank sent 1099-C forms to the no-longer-happy spouses, as the tax law required. But the taxpayers didn't report the debt forgiveness as income.
WHEN REAL ESTATE DEBT CAN BE FORGIVEN TAX-FREE
The tax law generally requires you to report any forgiven debts as taxable income. There are exceptions for insolvent taxpayers and taxpayers in bankruptcy. There are also two specialized exceptions for real estate indebtedness.
First, debt for "qualified real property business indebtedness" can be forgiven tax-free, unless you are a C corporation. This is debt that is incurred to purchase or improve real property used in a trade or business, including the business of operating or managing real property. The taxpayer has to elect this treatment for it to apply.
Second, home mortgage debts up to $2 million can be forgiven tax-free through 2009 if it is related to the decline in value of the house.
Unfortunately for the star-crossed couple, the property wasn't a principal residence, they didn't elect the qualified real property business debt exclusion (and it may not have applied in the first place), and they apparently weren't bankrupt or insolvent.
So how was this taxed? They had debt forgiveness income - according to the Tax Court, the actual number came out to over $70,000 They had a capital loss of about that much, but you can only deduct those to the extent of your capital gains, plus $3,000. Bottom line? The Tax Court says tax is due.
Cite: Stevens, T.C. Summary Opinion 2008-61
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WHERE TO INCORPORATE? WHO IS THE SHAREHOLDER?
June 06, 2008
Our local legal bloggers have been pondering common problems of corporate structure lately.
Rush Nigut asks: "Where to Incorporate?"
Delaware or Nevada may offer viable options for some companies but in general most Iowa small businesses are probably wise to incorporate here in Iowa.
If you are setting up an S corporation, can you own your stock through an LLC that qualifies as a "disregarded entity?" Marc Ward cites three private letter rulings that say "yes." UPDATE: This is old news to Roger McEowan.
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BANKERS' (LAST) HOURS
June 05, 2008
Fascinating piece in the Wall Street Journal in which a reporter embedded with the FDIC in planning and executing a bank closing in Staples, Minnesota. The whole piece is for subscribers only on the web, but I think this slide show of pictures of the closing is available to nonsubscribers.
These things are done in great secrecy to avoid bank runs, but sometimes things go awry:
Despite the military-style planning that goes into taking over a bank, things can go wrong. Once, a local motel guessed the feds were coming and put up a welcome banner on the marquee. Another time, FDIC officials hired a hypnotist to get a confused bank employee to remember the vault code. Sometimes, locals pull up lawn chairs and watch from across the street.
You know it's a small down when the bank closing is the most interesting thing to watch.
There will be more of these in the coming months, I suspect.
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ANOTHER DE-CODER CRACKED
June 05, 2008
No matter how many times these things get shut down, new ones spring up to milk the gullible:
WASHINGTON – A federal court has barred a Tacoma, Wash., woman from selling a tax scam, the Justice Department announced today. The civil injunction order, entered against Sharon Kukhahn, will remain in effect indefinitely.Kukhahn operates businesses called IMF Decoder, Paralegal Research Advocates and Advocates for Justice, Liberty and Freedom. The Tacoma court found that Kukhahn’s IMF Decoder scheme falsely purported to “decode” Internal Revenue Service (IRS) computer transcripts of customers’ taxpayer accounts to show that the customers were not liable for federal income tax.
Just because it doesn't work doesn't mean it can't be expensive:
U.S. District Judge Benjamin Settle held that Kukhahn knew or had reason to know that her decoding scheme was false. The court found that Kukhahn charges her customers between $1,750 and $3,195 for her decoding services. According to the court order, the IRS has determined that Kukhahn’s scheme caused revenue losses of approximately $4.9 million as a result of her customers’ failure to file tax returns and pay taxes. The court ordered Kukhahn to give the Justice Department a list of her customers.
It won't be much fun to be on that list.
Link: Justice Department Press Release
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THE EMPLOYER'S WORST NIGHTMARE
June 05, 2008
Short of a direct hit by an asteroid, few things can be more disastrous to a business than to find out that the payroll service provider has been pocketing your payroll taxes. Russ Fox tells the scary story of a North Carolina payroll service provider, James McLamb:
McLamb had a unique method of handling trust fund taxes. He'd calculate the correct amount of taxes, accept those remittances, and then change the numbers to much lower figures. He'd use the lower numbers to report payroll to the IRS and the North Carolina Department of Revenue. It's unclear from the news story where the $8 million that was supposed to go to the IRS ended up; suffice to say it didn't end up in the U.S. Treasury and likely lined McLamb's pockets.
Mr. McLamb has pleaded guilty to fraud charges, but that's small comfort to the employers who now have to pay their payroll taxes a second time.
The Moral: If you use an outside payroll provider, check them out thoroughly, and check occassionally with the IRS to make sure they are receiving the payroll tax deposits.
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REMEMBER THE EXPOS?
June 05, 2008
Baseball never really quite caught on in the part of Minnesota known as Montreal, perhaps because the fans had to stand through both the Star Spangled Banner and the Yooper Song. Now the Expos are history, and the franchise has been reconstituted as the Washington Senators, or something.
Nor have things gone well for "the most successful pitcher in Montreal Expos history." Steve Rogers has gone through divorce and bankruptcy since his retirement from baseball. Now the IRS is trying to levy on his baseball pension to satisfy income tax leins for 1982, 1983 and 1985. The tax problems apparently arose from an old equipment leasing shelter he was involved in towards the end of his baseball career.
Link: Order on Motion for Summary Judgment, USA v. Stephen D. Rogers
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TO THE CAVALCADE!
June 04, 2008
The second anniversary edition of the Cavalcade of Risk is up at Insureblog. The blogosphere's roundup of risk-managment has good stuff from Insureblog on end of life planning and Michael Cannon on the ability of the individual healh insurance market to protect people with health problems.
I should have submitted to the Cavalcade the last IowaBiz post from Lara Utter, which provides some sobering background on the importance of risk management. But how risky can things be in a small town in the middle of Iowa? This risky.
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IRS DEFICIENCY AND REFUND INTEREST RATES FALL
June 04, 2008
The IRS has announced that interest rates for refunds and tax deficiencies for the quarter beginning July 1 are dropping 1% across the board. The third quarter 2008 rates:
* five (5) percent for overpayments [four (4) percent in the case of a corporation];
* five (5) percent for underpayments;
* seven (7) percent for large corporate underpayments; and
* two and one-half (2.5) percent for the portion of a corporate overpayment exceeding $10,000.
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RICHARD, THEY DON'T CARE
June 04, 2008
Richard Hatch thinks the Supreme Court will hear his case? They're just not that into you, Richard.
Tax Grrrl, Russ Fox and TWTP go barrelfishing.
UPDATE: The TaxProf has a roundup.
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BAD DAY AT THE BANK
June 03, 2008
Amazing security camera video from inside of a bank in Parkersburg, Iowa as it is destroyed by a tornado. Unfortunately, you have to wait through an ad, but it's worth it. Watch the little flag in the center of the teller line.
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SECTION 199: A CODE SECTION WITH TEETH?
June 03, 2008
The riduculous but useful Section 199 tax break - a 6% deduction for "production" income that is intended to aid manufacturers - prompts an interesting reader question (modified for my convenience).
I found & read your good stuff on Section 199. If a dentist has a machine that manufacturers crowns (which the dentist then inserts) does this qualify (by the dentist manufacturing the crown, they are not outsourcing the function to a dental laboratory).Lets say the dentist has taxable income of $600,000 & $100,000 comes from manufacturing the crowns. How would his lower tax rate work?
First, it would appear that making the crowns qualifes as manufacturing. Lets start with a quick review of the weird alphabet soup of Section 199:
MGPE = Manufactured, Grown, Produced or Extracted
QPP = Qualified Production Property
DPGR = Domestic Production Gross Recipts
The deduction is 6% of taxable income from "qualified production property," which includes items "mantufactured, grown, produced or extracted" by a taxpayer.
So, to the regulation (Reg. 1.199-3(e); emphasis mine):
(e) Definition of manufactured, produced, grown, or extracted--(1) In general. Except as provided in paragraphs (e)(2) and (3) of this section, the term MPGE includes manufacturing, producing, growing, extracting, installing, developing, improving, and creating QPP; making QPP out of scrap, salvage, or junk material as well as from new or raw material by processing, manipulating, refining, or changing the form of an article, or by combining or assembling two or more articles; cultivating soil, raising livestock, fishing, and mining minerals. The term MPGE also includes storage, handling, or other processing activities (other than transportation activities) within the United States related to the sale, exchange, or other disposition of agricultural products, provided the products are consumed in connection with or incorporated into the MPGE of QPP, whether or not by the taxpayer. Pursuant to paragraph (f)(1) of this section, the taxpayer must have the benefits and burdens of ownership of the QPP under Federal income tax principles during the period the MPGE activity occurs in order for gross receipts derived from the MPGE of QPP to qualify as DPGR.
So if a dentist makes and "installs" his own crowns, it would appear that the income from both the manufacture and the "installation" should qualify. This example from the regs seems on point:
...Y manufactures the replacement parts it uses for the reconstruction and refurbishment of customers' tangible personal property. Y has the benefits and burdens of ownership under Federal income tax principles of the replacement parts during the reconstruction and refurbishment activity and while installing the parts. Y's gross receipts derived from the MPGE of the replacement parts and Y's gross receipts derived from the installation of the replacement parts, which is an MPGE activity pursuant to paragraph (e)(3) of this section, are DPGR (assuming all the other requirements of this section are met).
So what does this mean in example? In the simplified example, $100,000 of taxable income is from "manufacturing" the crowns, so the taxapyer would get a $6,000 Section 199 deduction (100,000 x 6%). But it gets much more complicated. A few of the factors that apply in real life:
- What is the "taxable income" from the manufacture and installation of the crowns? You have to allocate overhead costs between other dental income and services.
- Unless the dentist is practicing as a schedule C sole proprieter, you have to determine who the "taxpayer" is that gets to take the Section 199 deduction. If he is a C corporation, he may have to withdraw all of the income from his professional corporation as salary or pay a 35% tax starting with the first dollar of income. Since the Section 199 deduction would be based on taxable income at the P.C. level, the deduction would be zero because there would be no corporate taxable income after salary.
- If the dentist practices in an S corporation, he has to deal with the usual juggling of salary that S corporation professionals must deal with. If he pays himself too little salary, he can look forward to a battle with the IRS.
- Would the IRS accept "installing" crowns as a manufacturing process, rather than a service?
In an ideal world, there would be no Section 199 deduction; it makes no sense in a modern economy to try to draw neat borders between "manufacturing" and "services." Even if you could, why is it somehow morally better to make money running a foundry rather than, say, saving lives by doing surgery?
But we go to war with the tax code we have, and I get to charge for applying it, so think about it - you may be a "manufacturer" without realizing it. If so, you'd be foolish to pass up the deduction.
Flickr image courtesy Mr.Thomas
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UBS BANKER FLIPS?
June 03, 2008
Press reports say that Bradley Birkenfeld, a UBS banker who was indicted for helping California billionaire Igor Olenicoff evade millions in taxes, has agreed to plead guilty and may be cooperating with the government. The reports say it may lead UBS clients to leave the bank.
If you have evaded taxes with the help of Mr. Birkenfeld, moving your checking account may not help you much now.
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COGNITIVE DISSONANCE
June 03, 2008
What do you do if you despise Republican policy in general, but your intellectual honesty compels you to a conclusion that is Republican-friendly?
You might write something like this.
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JODIE FOSTER, TAX HEROINE?
June 03, 2008
TaxGrrrl notes an article saying that Jodie Foster is responsible for ushering in the modern era of income tax:
How so? It’s tricky so follow me on this one…Jodie Foster starred in Taxi Driver. In that movie, Robert DeNiro attempted to assassinate a politician. John Hinckley was reportedly inspired by the movie to attempt to kill President Reagan - in order to impress the actress.
Mundell believes that the wave of sympathy for Reagan following the assassination attempt deterred Congress from voting against Reagan’s tax plan. The result was a 25% reduction in federal income taxes - a revolutionary change in our tax system.
But would Jodie have caught Mr. Hinkley's eye without the efforts of Travis Bickle?
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NARROWING IT DOWN
June 02, 2008
The Governor of New Jersey, in either a commendable drive for efficiency or a cynical sellout to public employee unions, proposes to revoke the charters of municipalities with fewer than 10,000 residents.
That would be an interesting experiment in Iowa. Of the 954 or so incorporated entities here, only 34 make the Corzine cut, based on Census estimates for 2004.
Link: 2004 census figures
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BECAUSE MOVIE STARS NEED MORE OF YOUR MONEY
June 02, 2008
The Tax Policy Blog speaks the truth on film tax credits:
... it's corporate welfare. The recipients of such welfare aren't who you talk to if you want a genuine evaluation of the costs and benefits (incidentally, costs and benefits before and after are almost never studied with film credits; it's just assumed that the new jobs are worth the cost). There was a bit of insight from producer John Bosher, when he told Daily Tax Report that the credit "gives us the ability to assuage investor concern by providing a guaranteed 15 to 20% return on their investment." Guaranteed 15 to 20% return? This is not a struggling industry.It's cool to see your hometown on the silver screen, and politicians love to be hobnobbing with movie stars and giving giant checks to famous directors. But if a movie company doesn't want to film in your state because your tax system is broken, applying a band-aid exemption for just one industry isn't the path to prosperity.
For Iowa, "broken" sums it up.
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EARLY TO BED, EARLY TO RISE
June 02, 2008
We asked last week what "message" Des Moines sends. One message may be "don't comment on blogs," as we only received one comment. It was a good one, though, with two important messages that Des Moines truly does send:
Early to bed, early to rise.Iowans are so smart even our GEDs are highly compensated CEOs.
Indeed, we are that smart.
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TAX RELIEF FOR IOWA TORNADO VICTIMS
June 02, 2008
The IRS has announced (MIL-2008-35) that residents of Butler County, Iowa may qualify for tax relief as a result of the recent tornado. The entire release is reproduced below (if you don't see it, click "read more"). It gives taxpayers until July 28, 2008 to meet any deadlines for return filings or tax payments otherwise due from May 25 to July 28, 2008.
There's a brief cell-phone video up showing the tornado (via Gongol).
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GOODBYE, IOWABIZ.COM
June 02, 2008
IowaBiz.com, the group blog sponsored by Professional Solutions Insurance Services, has posted its last. The final post has links to me and the home blogs of the rest of the twice-monthly rotations. Bookmark them now, as the old posts are to be taken down after June.
Blogs come, blogs go. It was a worthwhile experiment, but it may go to show that a blogging on a schedule is an oxymoron. It was fun, though, and it was nice of Professional Solutions to host us.
Rush Nigut, another IowaBiz contributor, notes that Jim Nervig of the Brick Gentry law firm has started the Iowa Real Estate Blog. So far it looks like it's big on tax sales. Welcome to the blog world, Mr. Nervig.
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