Tax Update Blog: July 2008 Archives
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HOUSING BILL ENACTS 1099 REPORTING FOR CREDIT-CARD AND E-PAY VENDORS
July 31, 2008
One revenue-raising provision of the new tax bill is aimed at the online economy. HR 3221 will required credit-card companies and online payment processors like PayPal to make 1099 reports to vendors recieving remittances over $10,000. This new rule takes effect starting in 2011. The Wall Street Journal describes the provision:
The new reporting requirement is similar to a proposal the Bush administration has put forward in its most recent budgets as a way to ensure that taxes owed are being collected. It also applies to intermediary banks that process card payments for restaurants and brick-and-mortar retailers. Congressional tax estimators predict the reporting change will help the IRS collect an additional $9.5 billion in taxes owed by online and traditional businesses over the next 10 years.The payment processors will be required to file a 1099 form for each merchant to the IRS and to the merchant. They won't have to file for merchants with less than $10,000 in gross sales and less than 200 transactions in a given year.
The payment processing companies and credit card companies will now have to begin collecting tax identification numbers from the vendors to prepare for this. Vendors who don't provide that information will find their remittances garnished, in effect, through "backup withholding" starting in 2012.
The IRS has always had the ability to obtain payment information from these providers as part of an investigation, but only through the cumbersome summons process, which can be dragged out in the courts for years. 1099 matching provides, at least in theory, a much more reliable way for the IRS to ferret out unreported income.
Still, lots of questions remain. Recent attempts to extend matching, like the K-1 matching program, have not gone smoothly. Will the IRS just send out blanket assessments if the top line of a tax return falls short of the 1099 amounts? Will there be lots of just erroneous assessments based on 1099s? And will new payment methods evolve that bypass these reporting rules?
The tax blogs are responding to the signing of HR 3221, including the following:
TaxProf Blog
Roger McEowen
The Wandering Tax Pro
Tax Guide for Investors
Tax Info Blog
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YOUR BASIS IS ZERO UNTIL YOU SHOW IT'S NOT
July 31, 2008
Yes, it can be inconvenient to keep track of your cost of stocks in a taxable brokerage account. Yet it can be expensive not to. A Virginia man learned this lesson the hard way in Tax Court yesterday.
Stanley Cook, an EPA employee, didn't get around to filing his 2003 tax return. As typically happens, the IRS noticed that he was still getting issued W-2s and 1099 forms, including a 1099B showing proceeds of $972.79 on a stock sale. The IRS assessed taxes based on the 1099s and W-2s assuming that he had a basis of $0 in the stock he sold.
Mr. Cook then finally sent the IRS a 1040. He said that he really lost $2,427.93 on his stock. The IRS didn't buy it, and they ended up in Tax Court. Mr. Cook didn't show the Tax Court any evidence of what he paid for the stock, so the Tax Court upheld the IRS (citations omitted):
To overcome respondent's determinations, petitioner must prove that he is entitled to claim a $2,427.93 long-term capital loss, and he must prove a basis greater than zero.Citing certain IRS publications that refer to the time within which one may timely file a refund claim, petitioner argues that his Form 1040 was timely filed and therefore the IRS's "policy" of using a zero basis "leads [the] IRS to make false claims of indebtedness."
The language he refers to does not, however, negate a taxpayer's obligation to file a timely Federal income tax return... Petitioner did not provide any evidence to respondent or to the Court to substantiate the $3,400.72 amount that he claimed as his basis or the claimed $2,427.93 long-term capital loss, as required by the IRC and the regulations
The Moral? Mr. Cook made two false moves. Had he filed his return without IRS prompting, it's unlikely the IRS would have ever questioned the capital loss he claimed later. Once he tried to claim the loss, he failed to present checks or brokerage statements to prove his basis - which almost certainly was higher than zero. So file on time, and keep your cost records for your stock purchases.
Cite: Stanley A. Cook, T.C. Memo 2008-182.
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401(k) BORROWING CAN BE COSTLY
July 31, 2008
If you borrow from your 401(k) plan and then lose your job, you can find yourself facing an ugly tax situation. If you don't somehow repay the loan and are under age 59 1/2, your loan will be considered an early distribution and you'll get smacked with income tax on the loan and a 10% early withdrawal penalty. The Benefits Blog elaborates (my emphasis):
If you want to read a good case in point that illustrates how things can go awry when it comes to a 401(k) plan loan, read the recent Tax Court case of Tilley v. Commissioner. The participant in that case had borrowed from her 401(k) account to purchase a home, but when she was terminated, couldn't pay the loan off. Even though the participant received a Form 1099R indicating that the unpaid loan balance was taxable, the participant failed to pay any additional tax on the distribution. The IRS ended up assessing tax on the loan balance, a 10% early distribution penalty as well as a 20% negligence penalty. After trying to allege that a call center representative for the provider had indicated that the distribution was not taxable, the Tax Court stated that it was not reasonable for the taxpayer "to rely on a. . . call-center representative for tax advice."
The whole point of a 401(k) is to help you save. Borrowing from your 401(k) badly misses the point.
The Benefits Blog has more links to stories on 401(k) borrowing.
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HOUSING TRAIN WRECK ENACTED
July 30, 2008
The President has signed the "Housing and Economic Recovery Act of 2008," HR 3221.
So all of our housing and economic problems are solved, right?
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FANNIE MAE BAILOUT BILL RESTRICTS HOME SALE EXCLUSION FOR FORMER VACATION HOMES
July 30, 2008
Once some clever tax committee staff member comes up with a tax increase idea, it tends to pop up in bill after bill until it passes. One of these ideas graduates to the tax law in the Fannie Mae bailout bill, HR 3221.
First floated last year as a revenue offset to the debt forgiveness relief for mortgage defaulters, this provision reduces the ability to exclude gain on the sale of a principal residence when the home has been rented.
Taxpayers can exclude $250,000 on the gain on a home sale ($500,000 for joint filers) if the home has been used as a principal residence for two of the prior five years. Under the old rules, this allowed taxpayers with vacation homes to move into the homes as their primary residence for a few years before sale, qualifying them for the gain exclusion.
Under the new rules, taxpayers can only exclude gain based on how much time the house served as a principal residence while they owned it.
Example:Assume that an individual buys a property on January 1, 2009, for $400,000, and uses it as rental property for two years claiming $20,000 of depreciation deductions. On January 1, 2011, the taxpayer converts the property to his principal residence. On January 1, 2014, the taxpayer sells the house and moves out.
As under present law, $20,000 gain attributable to the depreciation deductions is included in income.
Of the remaining $300,000 gain, 40% of the gain (2 years divided by 5 years), or $120,000, is allocated to nonqualified use and is not eligible for the exclusion. Since the remaining gain of $180,000 is less than the maximum gain of $250,000 that may be excluded, gain of $180,000 is excluded from gross income.
Of course it gets more complicated. If you have used a house as a principal residence but then move out, but still sell it in the five-year period qualifying for the home sale exclusion, there is no haircut for the period it wasn't a personal residence after you moved out. Also, there is no haircut for absences up to 10 years while on active duty for the government, or for up to two years "due to change of employment, health conditions, or such other unforseen circumstances as may be specified by the Secretary."
This provision takes effect for sales and exchanges after December 31, 2008, so if you are looking to sell your vacation home in the next five years, maybe it's time to pack up and move there.
flickr photo courtesy Lance and Erin
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CHARITY BEGINS AT THE EGO?
July 30, 2008
Did you know that there is a charity dovoted to the sacred cause to "assist in educating and informing the public about the career of Senator Ted Stevens"? You won't be shocked to know that this "nonpartisan and nonpolitical" charity is run by a lobbyist was treasurer for the 2004 Stevens for Senate campaign. Based on his indictment yesterday, the Ted Stevens Foundation might need to draw up a new wing for any future Senator Ted museum.
The Tax Policy Blog has the entertaining details.
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TAX ANALYSTS RETURNS TO THE TAX PROF BLOG
July 30, 2008
The TaxProf announced yesterday:
I am thrilled to announce that Tax Analysts has agreed to share some of its content with readers of TaxProf Blog. Each week, I will blog one article from three of Tax Analysts' publications: Tax Notes, State Tax Notes, and Tax Notes International. The full-text of each article will remain available on TaxProf Blog for one week after the post.I hope this new service will be of interest to the tax community.
This is great news. Tax Analysts is a gold mine of tax technical and tax policy discussion that deserves a wide audience. And if it convinces you to subscribe to Tax Analysts, tell them the TaxProf sent you!
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'MURPHY' CASE MAKES NEW EDITION OF TAX STORIES
July 30, 2008
Paul Caron, the TaxProf, is preparing a second edition of Tax Stories, a terrific compilation of the backstories of landmark tax cases. He has posted an except of a chapter he is adding about the Murphy case, the one where the D.C. Circuit ruled that damages for loss of reputation couldn't be taxed because such damages weren't considered income in 1913. From the excerpt:
The D.C. Circuit, prodded by the tax blogosphere, ultimately backed away from the brink, but the panel’s willingness to arm the anti-tax brigades should give pause to those committed to defend the income tax. Although questions about the taxation of damage recoveries will not bring down the income tax, the willingness of so many to shake its foundations may ultimately prove its undoing.
Link: Tax Update Murphy coverage.
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DOG DAYS CARNIVAL
July 30, 2008
The vacation is over, the summer sun and humidity are unrelenting, and the state fair is yet to come. We need a carnival!
The Cavalcade of Risk, the roundup of insurance and risk management blog posts, is up at The Sentinal Effect. Among the quality posts is Hank Stern's tribute to the magical health effects of beer.
Meanwhile, the new Carnival of Personal Finance is up, featuring Kay Bell's roundup of state sales tax holidays. Iowa's is Friday and Saturday this week.
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FOCUS, ROBERT!
July 30, 2008
New Jersey tax blogger Robert D. Flach has seemed a bit distracted lately. This post may explain why.
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TED STEVENS: WHERE ARE THE TAX CHARGES?
July 29, 2008
Senator Ted Stevens, one of the masterminds of the aborted "Bridge To Nowhere" in Alaska, has been indicted on charges of failing to report hundreds of thousands of dollars in "gifts" from an Alaska company on Senate financial disclosure reports. From the indictment:
It was a part of the scheme that STEVENS, while during that same time period that he was concealing his continuing receipt of things of value from ALLEN and VECO from 1999 to 2006, received and accepted solicitations for multiple official actions from ALLEN and other VECO employees, and knowing that STEVENS could and did use his official position and his office on behalf of VECO during that same time period. These solicitations for official action, some of which were made directly to STEVENS, included the following topics: (a) funding requests and other assistance with certain international VECO projects and partnerships, including those in Pakistan and Russia; (b) requests for multiple federal grants and contracts to benefit VECO, its subsidiaries, and its business partners, including grants from the National Science Foundation to a VECO subsidiary; and (c) assistance on both federal and state issues in connection with the effort to construct a natural gas pipeline from Alaska's North Slope Region.
If the allegations are true, I'm sure there's a perfectly innocent explanation, though one doesn't come immediately to mind. Perhaps he could argue that he didn't omit any "gifts" from the forms. The tax law requires "disinterested generosity" to be a gift, rather than taxable income. I can see it now: "Judge, it was for services rendered. I was bought and paid for, fair and square. I was telling the truth when I said it wasn't a gift." I don't think that would score a lot of points, though.
If he accepted the goodies as alleged, it would be a stretch to say that they were gifts, which can be excluded from taxable income, rather than taxable bribes. Unless VECO gives hundreds of thousands of dollars of presents to other old guys in Alaska who aren't public officials, of course. It would be remarkable if he omitted such "gifts" from his Senate disclosures but scrupulously put them on his 1040. Maybe that's something the Feds are holding in reserve.
Via Instapundit.
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THE TENNESSEE TEAM-BUILDERS
July 29, 2008
State department of revenue auditors are scary. It can be intimidating dealing with them, with their aura of power and menace.
In Tennessee, so much for that.
A Nashville television station has some hilarious video taken at a Tennessee Department of Revenue team-building exercise. You'll have to follow the link to to see the video, but it's worth it.
You gotta love this stout chorus line:
Will any taxpayer ever be intimidated if they are audited by Mr. Tinfoil Cones here, singing "Like an Auditor" to the tune of "Like a Virgin"?
Of course, there's always a spoilsport:
Tax watchdog Drew Johnson, of the Tennessee Center for Policy Research, can't find the lessons."The only lesson that I'm taking out of this is that the Department of Revenue loves to waste tax dollars," Johnson says.
What, would you rather they be out auditing you?
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CAN'T SELL HOUSING? BUILD MORE HOUSING!
July 29, 2008
So houses aren't selling. Congress has passed a monstrosity to prop up the housing market and the two great tottering accounting gamesters, Fannie Mae and Freddie Mac. How does Congress solve the glut of housing? By subsidizing more housing construction!
The tax title of HR 3221 includes an expansion and sweetening of the low-income housing tax credit and rehab tax credit, to encourage the building of more housing units. The bill increases the per-state limit on allowable credits and makes technical changes that make the credit easier to use. You can find detail on these provisions here.
Solve a housing glut by subsidizing more construction! No wonder the economy is sputtering, with all of the talent of the nations' economic supergeniuses wasted in Congress, rather than in the private sector.
Related: New York Times coverage.
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AN ODD SORT OF PROSPERITY
July 29, 2008
The Global Prosperity Institute was a notorious multi-level marketing scheme selling offshore tax evasion products. Two of its sales associates were sentenced on federal charges yesterday - one to three years in prison, and one to 36 months. It could have been worse; they had cooperated with prosecutors in their case against David Struckman, one of the GPI founders, according to the Worcester Telegram. Mr. Struckman received a 70-month sentence.
According to Quatloos, the anti-fraud web site, we shouldn't waste too much sympathy on the newly sentenced GIobal Prosperity multi-level marketeers:
The people associated with GPG are the bottom of the bottom, too. Many of the people have criminal pasts, others are lifelong network marketers. In other words, you have to be a total scumbug to be affiliated with GPG -- that is, creating relationships with hardened criminals and a programs which has a reputation for scamming young and old, rich and poor alike. If somebody actually admits they are in Global Prosperity, you know you are dealing with a lowlife, so run!Global Prosperity's reputation is so bad that other network marketers will often add a disclaimer to the bottom of their own spams and advertisements which says "Not Global Prosperity" -- now that is pretty bad! And Global Prosperity really had to work at being the Black Sheep of the multi-level marketing industry, which is like being the really dislikeable guy in a lineup of child molesters.
Ouch.
UPDATE: Department of Justice press release
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LEARN TO SPEAK 'TRUST'
July 29, 2008
Joel Schoenmeyer has a nice trust glossary up at Death and Taxes.
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FANNIE, FREDDIE... IRS?
July 29, 2008
So we are in a great big mess because of the incontinent lending practices of the exquisitely well-connected Fannie Mae and Freddie Mac. So how do you solve the problem? Privatize? Nationalize?
Neither. You cut the IRS in on the action!
The "Housing Assistance Tax Act if 2008" -- the tax title of H.R. 3221, the housing train wreck that the President is about to sign -- makes makes the IRS the lender of first resort for "first time homebuyers" by providing a strange new tax credit. This tax credit, available for those buying homes in 2008 and 2009, will then have to be paid back as an additional tax, but without interest, over 15 years, starting with the second year after the credit is taken. That makes the credit an interest-free loan by the IRS.
How it works
This new credit is 10% of the purchase price of a house purchased in 2008 or 2009 by a qualifying "first-time" homebuyer. The maximum credit is $7,500 ($3,500 for married taxpayers filing separately). A first-time homebuyer is someone who had no ownership of a "principal residence" during the three-year period before the day the house was purchased.
It wouldn't be a tax law without a lot of confusing limitations and requirements. The bigger ones include:
- You have to acquire the property between April 9, 2007 and July 1, 2009. If you are building the property, you have to move in by July 1, 2009.
- The credit phases out for taxpayers with adjusted gross income exceeding $75,000 ($150,000 for joint filers) over a $20,000 range. This means the credit is $0 at $95,000 AGI, or $175,000 for married taxpayers.
- No credit is allowed if the residence is purchased from a spouse, ancestor or lineal descendant.
- No part of the residence can be acquired by gift or inheritance.
- The credit is unavailable to a non-resident alien.
If you sell the property before the end of the 15-year "recapture period," you have to pay back any of the credit that hasn't yet been recaptured.
2008 refunds for 2009 purchases
If you buy the house in 2009, you can claim the credit on an amended 2008 return. If you use one of the loan shark rapid refund services, this makes the credit very close to "down payment assistance." Another provision of H.R. 3221 outlaws seller-financed down payment assistance. Apperently Congress doesn't want any competition.
And to think that Congress ignored serious alternative legislation, "H.R. 7802".
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I VACATIONED, BUT THEY DIDN'T
July 28, 2008
While the Tax Update took a brief vacation, tax charlatans and Congress (but I repeat myself) didn't. Congress passed a misguided and futile housing relief bill full of tax favors to special interests disguised as help for you. I will work on a more complete discussion of the bill, which the President is expected to sign, but Kay Bell already has posted her summary. It's "bipartisan," which means we're all screwed regardless of party affiliation.
There was quite a bit of private sector tax fraud news, highlighted by the opening of the tax evasion trial of "Girls Gone Wild" mogul Joe Francis. He's represented by Robert Bernhoft, the former tax protester who pulled a rabbit out of his hat and got Wesley Snipes off on misdemeanor charges. He is reportedly alleging that he's only being prosecuted because The Man disapproves of his naughty videos. In an interesting sidelight, he is suing a former bookkeeper for allegedly blowing the whistle on him under the new whistleblower rewards program (via Taxguru.net). I think this whistleblower program is going to have a huge effect on the risks of committing tax fraud, and ib the relationship between accountants and bookkeepers and their clients/employers. This case may open some eyes on that score.
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IRS ISSUES APPLICABLE FEDERAL RATE (AFR) FOR AUGUST 2008
July 28, 2008
The IRS has issued (Rev. Rul. 2008-43) the minimum interest rates for loans made in August 2008:
-Short Term (demand loans and loans with terms of up to 3 years): 2.54%
-Mid-Term (loans from 3-9 years): 3.55%
-Long-Term (over 9 years): 4.58%
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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IOWA (NEARLY) MATCHES FEDERAL DISASTER AREA DEADLINE EXTENSIONS
July 28, 2008
Responding to additional Federal deadline relief, Iowa has further extended due dates for taxpayers in flood disaster areas. The Iowa extended deadline is August 29, 2008 for returns otherwise due from May 25 through August 23. The Federal Deadline is August 29 for returns due from May 25 through August 29.
While it's odd that Iowa wouldn't match the federal deadline exactly, it's good that they nearly did so, and promptly. It's a huge improvement over their dithering performance when the disaster extensions were first announced.
The current list of affected areas is here.
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VACATION!
July 16, 2008
flickr photo courtesy Lance and Erin
It's time for our annual summer vacation. See you July 28 or so!
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SO MUCH FOR THE 'ARREST THE JUDGE' DEFENSE STRATEGY
July 15, 2008
Minnesota entrepreneur Robert Beale already had a plate full of legal troubles. Now he's getting an extra helping.
Currently awaiting sentencing on federal tax evasion charges, Mr. Beale and three associates have now been charged with "conspiring to prevent a federal judge from performing her duties." From TwinCities.com:
Robert Beale, 65, was charged Monday in federal court with one count of conspiracy to impede an officer and one count of obstruction of justice. Also indicted on the same charges were Frederick Bond, 62, of Champlin; John Pelton, 67, of Stillwater; and Norman Pool, 43, of Blaine."God wants me to destroy the judge," Beale is accused of saying in court records.
According to the charges, these four had an ingenious plot to "arrest" the trial judge to stop the tax trial:
The men issued fake warrants for Montgomery's arrest, filed fraudulent liens, planned to disrupt court proceedings and planned to arrest Montgomery. The plans were concocted at meetings of their "common law court" in Little Canada and in phone calls from Beale, after he was jailed.
Just... brilliant! What could possibly go wrong? Aside from it being absolutely insane and doomed from the start, of course.
Links:
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WHO KNEW NEGLECTING OLD FOLKS COULD BE SO PROFITABLE?
July 15, 2008
Thre former executives of several Iowa nursing homes are likely to be, er, institutionalized for evading $34 million in taxes, according to a story in today's Des Moines Register. They can only hope that they fare better in their new "care facility" than one of their former clients:
George Baker Jr. was 54 years old when he burned to death in his wheelchair on the patio of the CLC University nursing home in Des Moines in 2002.State inspectors cited the home for a lack of supervision, noting that Baker had been left alone on the patio to smoke cigarettes, despite having a pressurized container of oxygen strapped to his chair. When the tank exploded, Baker was consumed by fire before he could be rescued.
The story tells of a pattern of patient neglect and state fines for the facilities mangaged by the three. What were the executives doing with the money that should have gone to patient care?
According to court records, the executives diverted other money that could have paid for improved care and supervision of 6,000 seniors living in the company's 70 nursing homes. Instead, the money was used to pay for luxury cars for the executives, antiques, monthly trips to England and Australia, and shopping trips to the Gap, Saks Fifth Avenue and Wal-Mart.
The Gap, Saks, and Wal-Mart? I love this comment in the Register's web site:
obviously these men had some issues. They took luxury trips and shopping trips at the Gap, Saks Fifth Avenue and "WALMART". It is clear that you can take white trash out of the trailer court but you can't take the trailer court out of the white trash.
Link: DOJ Press release on the case
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FAIR OR NOT, AMT APPLIES
July 15, 2008
So the AMT can make your effective rate on capital gains higher than 15%? Tough, says the Tax Court:
Petitioners' first objection to the application of the AMT is that it contravenes a 2001 statutory enactment of a 15-percent tax rate on capital gains. Petitioners assert that the application of the AMT makes the effective rate on their capital gain income slightly more than 15 percent. In their own words, petitioners contend that the "application of AMT [is] * * * rendered null and void" because of this contravention.
If only it were that easy.
In computing the AMT there is a special computational provision for taxpayers with net capital gains. Generally speaking, the net capital gain income is multiplied by 15 percent and the result is added to the tax on other income which is computed in the manner described above. Sec. 55(b)(3). Following this computational provision, petitioners' AMT is computed at $7,007, which petitioners contend causes their net capital gain income to be taxed at an effective rate slightly greater than 15 percent because of the disallowance of the entire amount of the standard deduction and exemptions.Petitioners' position would require a change to the statute that would apportion the disallowed items. Ultimately, however, respondent's computation is in accord with the statutes, and petitioners' argument fails.
The moral? The tax law is enforced based on what Congress actually did -- not on what you think they were trying to do.
Cite: Fritz, T.C. Summ. Op. 2008-81.
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INSIGHTS ON TAX CRIMINAL PROSECUTIONS
July 15, 2008
Tax Analysts has a fascinating interview up ($link) with Paula Junghans, a criminal tax litigator and former acting assistant attorney general in the Justice Department Tax Division. A few of her insights:
You can read some of the old shelter cases that look a lot like the current shelter cases where no one even got assessed a penalty, and now suddenly we're talking about people going to jail for a long, long time....
Tax enforcement was moribund until 2002, as a result of the 1998 [Internal Revenue Service Restructuring and Reform] Act. It has picked up in the last five years.
...
The trick for prosecutors is to go after the right people for the right crimes and seek the right level of punishment. And I'm not convinced in any white-collar cases that these 15-, 20-, or 25-year sentences make sense at all. The public has a very short memory and will forget five years from now that anyone is still rotting in prison. And in my experience, white-collar defendants get it real fast.
You need a Tax Notes subscription to read the whole thing. Why don't you have one yet?
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WHEN CHOPS GO BAD
July 15, 2008
The first live post of the new IowaBiz.com is up, and it's a good one. Marketeer Drew McClellan rips the new name of our local American Hockey League Franchise:
The Iowa Chops. Seriously....this is embarrassing.The Partnerships and CVB have been working their tails off (no pig pun intended) to change the image the world has of Iowa and Des Moines. We heralded national coverage in the New York Times, Forbes and other publications that said Des Moines had gotten a whole lot more hip, thanks to the East Village and some upscale restaurants.
And now we've named our hockey team after an irate pig? Talk about three steps forward, five steps back.
The idea of a porcine mascot seems inherently problematical. The old saying goes "pigs get fat, hogs get slaughtered." Obesity or ghastly defeat would seem to be a hard sell for a hockey franchise.
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DISASTROUS POLITICIANS
July 15, 2008
Bryan Caplan tells a sad tale this morning about politicians and us, the voters that enable them:
Andrew Healy, my favorite new empirical political economist, has written a bold new paper. You might have thought that disasters were "acts of God," but Healy argues that the American voter is a co-conspirator. From the abstract:Using comprehensive data on natural disasters, government spending, and election returns, I show that voters reward disaster relief spending but not disaster prevention spending. This aspect of voter behavior creates a large distortion in the incentives that governments face, since the data show that prevention spending substantially reduces future damage.The paper has some nifty graphs showing the incumbent party's vote share (and change in vote share) as a function of relief and prevention spending. The slope for relief is sharply positive; the slope for prevention is flat. Given these incentives, it's hardly surprising that politicians spend about fifteen times as much on relief (which attracts votes) as they do on prevention (which doesn't).
We're watching an example of this unfold right now. I have received a flurry of emails from Senator Harkin, who is running for re-election, boasting of disaster relief bills he is flogging through Congress. I'm pretty sure I didn't receive any releases from him about his hard work making sure that the Birdland levee would hold. Since the levee failed, causing millions of dollars worth of damage, we can assume that no such work was done. This study would predict that the Senator will be rewarded for bringing in post-disaster pork, rather than punished for neglecting the levee in the first place. The uncritical coverage of the disaster aid pork in The Newspaper Central Iowa Depends Upon is a data point in favor of Mr. Healy's conclusion.
flickr photo of Birdland flooding by MNgilen.
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FEDS FURTHER EXTEND FLOOD AREA FILING DEADLINE; WILL IOWA FOLLOW SUIT?
July 14, 2008
The IRS this afternoon announced an additional extension of filing deadlines for taxpayers in the Iowa counties that are presidentially-declared disaster areas. Taxpayers in the 62 covered counties now have until August 29 to file returns and make income tax payments that would otherwise be due between May 25, 2009 and August 29. The former deadline was July 28 for May 25 - July 28 due dates.
Let's hope that the Iowa Department of Revenue finally gets it right and quickly adopts the federal deadline extension. So far they have have only extended disaster deadlines in dribs and drabs, and in the case of individual second-quarter estimated tax payments, not until the afternoon of the due date.
The list of covered counties is here.
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IOWABIZ IS BACK!
July 14, 2008
The IowaBiz group blog for entrepreneurs has been acquired by the Business Record, and is back on the air this week. I will be posting on the 1st and 16th each month, and otherwise as events warrant, as part of a 13-blogger line up.
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RADIO AD TAKES ON MICROSOFT CORPORATE WELFARE
July 14, 2008
The Iowa Progress Project is running a radio ad criticising the $50 million tax break package for Microsoft's server farm - "$1 million in tax breaks per job."
The ad lambastes Governor Culver. While he bears as much responsibility for the giveaway as anyone, he has lots of company in both parties.
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ACCOUNTING GLAMOUR
July 14, 2008
Kay Bell points to an article by Joe Queenan about how accountants are suddenly getting glamorous lead roles in arty movies.
In Mr. Leconte’s “Intimate Strangers” Sandrine Bonnaire enters the wrong office, mistakes a rivetingly dull tax specialist (Fabrice Luchini) for a psychiatrist and pours out her heart to him. Flummoxed but enthralled, he cannot bring himself to confess his real identity. After a dust-up when Ms. Bonnaire finds out who he is, the two decide to continue their weekly consultations and ultimately fall in love.
Yeah, that sort of thing happens all the time around here. It sure beats the portrayal of the accountant in "Ghostbusters" as Vinz Clortho the Keymaster, but people do forget that he did get the girl, at least for awhile.
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DOH!
July 14, 2008
Naming a tax shelter after Homer Simpson seems a poor marketing tool, but it worked well enough to make it a lucrative product for a group of shelter promoters and others that orbited around Jenkens & Gilchrist tax shelter guru Paul Daugerdas. This band of brothers appears to be breaking up; one of them, Chicago Businessman Douglas Steger, has copped a plea with the U.S. Attorney. From a press release (courtesy Linda Beale):
Members of Bank A's ISG were engaged in the design, marketing, and implementation of tax shelter transactions, including a transaction known as "Hedge Option Monetization of Economic Remainder" or "HOMER." In 2001, Individual A — together with other members of ISG, attorneys at the Jenkens & Gilchrist law firm (hereinafter "J&G"), and a foreign bank with United States headquarters in New York (hereinafter "Bank B") — implemented 36 HOMER tax shelter transactions for high net worth clients of Bank A and J&G.
Mr. Daugerdas reportedly earned $93 million ($link) for his work promoting these shelters. He might need some of it to pay some attorney fees of his own.
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THE DOCTOR IS A SAP
July 14, 2008
Russ Fox reports on how not to respond to an IRS audit:
After the audit he purchased a publication from Save a Patriot Foundation that argued that you don't have to pay income tax. Interestingly enough, in 2006 a court ordered that a notice be put on their home page that states, "The District Court orders...That Defendants...are hereby permanently enjoined from directly or indirectly: ...Advising anyone that they are not required to file federal tax returns or pay federal taxes...." But I digress.Dr. Miller then ceased filing tax returns. In 2000 he sold his office building to De Soto Regional Health System and became an employee. He was supposed to remit substantially all of his medical income to De Soto but didn't. There's a word for that—embezzlement.
A federal jury made the doctor's long story short, convicting him of tax evasion in only two hours. He's likely to serve considerably more time than that.
The moral? It's probably not wise to trust your financial well being to an outfit with the acronym "SAP." Even if you are one.
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PSYCHIC CROSSES TO THE OTHER SIDE
July 14, 2008
Glancing through our referrer logs, I noticed somebody got here with a search "david marius guardino died prison." While I find no articles on his passing, the Bureau of Prisons Inmate Locator reports that Mr. Guardino is no longer with us.
Mr. Guardino, a professional psychic, was serving time on tax evasion charges. It's a sad way to go out.
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CONTRARIAN
July 11, 2008
A bold driver stands up against the stifling conformity of the one-way street ordinance on 7th Street today at Walnut in Downtown Des Moines.
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MULLIGANS AND S CORPORATION ELECTIONS
July 11, 2008
Golf "mulligans" only exist in informal settings. If you are playing a friendly round with your buddies, maybe everyone gets one free do-over a round to ease the pain of the drive that doesn't get out of the tee box. When golf gets serious, mulligans disappear. You're as likely to outplay Tiger Woods as you are to see a mulligan allowed on one of the pro tours.
While taxes are deadly serious, the IRS is surprisingly generous with mulligans. Marc Ward discusses an S corporation that had an LLC as a shareholder - which, of course, is not allowed. The IRS gave the corporation a mulligan:
The Company and its shareholders represented that the termination of the S Corp election was inadvertent and the Company was unaware that the LLC was an ineligible S Corp shareholder.The Service ruled that the termination of the S Corp election was inadvertent and it unrung the bell. The Company would continue as an S Corp as if the transfer to the LLC never occurred, the individual shareholders to whom the LLC transferred its shares would be deemed shareholders from the time of the original transfer to the LLC, and adjustments would be made for this period consistent with the treatment of the Company as an S Corp and the shareholders as S Corp shareholders.
The IRS has an automatic procedure to perfect some late S corporation filings. It also has been lenient in allowing corporations to get their S elections in order when they don't qualify for the automatic fix. So if you have messed up your S corporation paperwork, you might get another swing.
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DON'T RUSH TO USE COMPANY FUNDS TO PAY PERSONAL EXPENSES
July 11, 2008
Rush Nigut talks about the danger of using corporate funds to pay personal expenses:
Business expenses are fine to deduct. But running obvious personal expenses through the business just isn't acceptable. It could even be a reason to "pierce the corporate veil" in litigation causing you to lose your limited liability protection.
It's a universal temptation for the small businessman, and many have come to grief for it.
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WHAT IF WE JUST REPEAL THE CORPORATE INCOME TAX AND RAISE INDIVIDUAL RATES?
July 11, 2008
According to Tax Vox, this:
It turns out that if you want to finance complete repeal of the corporate tax, you’d need to boost the top three individual rates to an eye-popping 50.1 percent, 59.1 percent, and 62.7 percent, and raise the tax on capital gains and dividends to about 27 percent. If you leave the rates on gains and dividends untouched, taxes on ordinary income would have to double to 56 percent, 66 percent and 70 percent.
Ouch.
It would be easier in Iowa. The Iowa corporation income tax, while imposed at the highest rate in the nation, is so riddled with loopholes that it generates a puny share of state revenues. That tax should be repealed yesterday, along with the economic development credits and the corporate welfare subsidies like the Iowa Power Fund.
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SOME FOLKS REALLY LIKE THEIR CELL PHONES
July 11, 2008
Megan McArdle liveblogs staying in line all night to get the new i-phone that comes out today.
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TAX TROUBLE FOR MORE-THAN-FULL-SERVICE BROKER
July 11, 2008
A full-service broker helps you invest your money. A southeast Minnesota broker did more than invest his clients money; he also spent it. Now he's in big trouble with the IRS and has pleaded guilty to tax evasion and mail fraud.
From the Rochester Post-Bulletin:
Joseph William Hughes, 46, entered his plea before U.S. District Court Judge Ann Montgomery in Minneapolis. He was indicted on April 23.According to his plea agreement, from May 2004 to December 2006 Hughes was a registered representative of AXA Advisors LLC, a financial services company that sold insurance, investment products and retirement planning services.
The couple became clients in June 2005 after the husband suffered a stroke that impaired his ability to manage the family's finances. The couple had provided more than $400,000 to Hughes for investment in AXA investment accounts.
What a sweet guy, taking care of an elderly couple's money like that. How did he take care of it?
Authorities allege that Hughes spent the money on luxuries including cars, jewelry and country-club membership fees, as well as on tuition, mortgage payments and personal debt.
Presumably AXA will make the victims whole. But what could registered representative Mr. Thief have been thinking? Did he really think nobody would notice? The IRS certainly did.
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IT'S YOUR COMPANY. IS IT YOUR DEDUCTION?
July 10, 2008
When you're an entrepreneur, the line between your business and your personal life can get blurry. When that happens with your checkbook, it means trouble.
John Meyer is an Orange, California engineer and software developer. He started a corporation called Pacific Payment Systems, a C corporation, to develop and market a bar-code based billing software. He worked full time on the project in 2002, when he spent $47,521 in business expenses out of his own pocket, which he deducted on his schedule C. That was a false move.
The Tax Court told him that only the corporation can deduct corporate expenses. If the shareholder pays them and isn't reimbursed, the expenses are treated as a contribution to capital. That increases the shareholder's basis, but that doesn't help the shareholder's tax picture until the company is sold. That's true both for C corporations and S corporations.
Mr. Meyer could have submitted his receipts to the company for reimbursement; the company would have been able to deduct the expenses. Or he could have had the corporation pay the expenses directly. But by paying the expenses out of his own checkbook and not turning them in for reimbursement, he lost his deductions altogether.
The moral of our story: if you incorporate your business, run it like a business. The corporation pays the corporation's bills, or your deduction vanishes.
This post originally appeared at IowaBiz.com
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WARREN COUNTY: DESTINY II
July 09, 2008
Warren County voters yesterday crushed the effort to raise their sales tax by 1 cent. The final results showed it losing in every community that voted on the issue. The total vote was 1,351 for, 2,516 against - a 35% to 65% defeat for the proposal.
As bad as the defeat was, it was a moral victory compared to the 15-85 beatdown of the Project Destiny sales tax increase last year.
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FUNKY PUNCTUATION DEFENSE FAILS ON APPEAL
July 09, 2008
Last summer we reported on the LaCrosse dentist who pleaded non-standard punctation as a defense to tax evasion charges. The trial judge didn't buy it, and the dentist got a 36-month sentence.
The dentist, Frederick Kriemelmeyer, tried his luck with the appeals court. It didn't work out any better.
From the opinion:
In 2002, Kriemelmeyer was a self-employed dentist who owned and operated a dental office in LaCrosse, Wisconsin. That year, his mother began frequently cashing checks made payable to cash at a local bank. Bank employees became suspicious of these deposits and notified the IRS, which investigated and in December 2004 executed a search warrant at his dental office. In March 2007 a grand jury returned an indictment charging that Kriemelmeyer's 2000, 2002, 2003, and 2004 returns reported gross receipts substantially below his income. The IRS determined that he underreported his gross receipts by $392,023 in total for those four years, thus underpaying his taxes by $135,337.
Which goes to show that the little banks do take those "suspicious transactions" rules seriously.
Dr. Kriemelmeyer represented himself in court, based on his years of study of the tax code and of the law, after the judge wouldn't let him use "Plenipotentiary Judge" David Wynn Miller as his lawyer. With such representation, it's not surprising that the appeal cited ineffective representation at trial. The appeals court noted that the trial judge told the dentist that a lawyer would be a real good idea, and that the dentist declined.
Looking at David Wynn Miller's website, it's hard to believe he'd have helped much. Here is a screenshot from his ":HOME" page:
Click to enlarge
Mr. Miller did appear as the dentist's only witness. If the dentist got 36 months with him as a witness, imagine how much time he could could have gotten with Mr. Miller as a lawyer.
Cite: USA v. Kriemelmeyer, No. 07-CR-52-C-01
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THAT'S HOW THEY SAY THEY AREN'T A 'DO-NOTHING' CONGRESS
July 09, 2008
Congress wants to look busy:
I decided to see how often the Internal Revenue Code and Immigration and Nationality Act have been amended of late. And, as you probably expected, nothing beats the IRC for congressional tinkering. Here's the number of sections of the code amended since 2001:
2007 141
2006 229
2005 259
2004 370
2003 67
2002 125
2001 140
In the comments to the post I'm quoting from, a reader says many of these amendments are extensions of "expiring provisions," so they shouldn't really count. That's more of an admission than a defense, in my view, because the expiring provisions provide built-in uncertainty and a dandy platform for congresscritters to wheedle favors from lobbyists year after year.
And many of the amendments aren't mere extensions of expiring provisions, as any practitioner who has to work with the Code will tell you. The Section 409A deferred comp nightmare and the Section 199 production deduction are just two of the more egregious examples of legislative malpractice embedded in the Code since 2001.
Via the TaxProf.
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DES MOINES FIXER-UPPER
July 08, 2008
Urban pioneers: the IRS has the home for you!
This steal goes on the auction block at the Polk County Courthouse at 10:00 a.m. Thursday. This 6-bedroom, 5-bath property is at 1720 7th St. in Des Moines. The IRS will take a minimum bid of $13,391.73 for this 106-year old beauty. You may need a bit more, though, as the Polk County Assessor's Web Site says property taxes are delinquent going back to 2005.
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PROJECT OBLIVION II?
July 08, 2008
Warren County is holding a referendum today to increase its sales tax by one cent. What might be this referendum's Destiny?
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NEW REGS MAKE START-UP COST ELECTION AUTOMATIC
July 08, 2008
So you're starting up your new business. You spend some time and money investigating your opportunities. You pay a lawyer to draft your documents. You pay somebody to help put together your business plan. Then you open your doors.
A year or two later, your friendly IRS agent pays a visit. He disallows all of the expenses you incurred before you opened your doors, saying they were "start-up" expenses and "organizational" expenses. Further, he tells you that they are permanently capitalized and nonamortizable because you failed to make the proper elections on you initial return.
Kind of stinks? Sadly, that has long been the state of the law - until today.
Yesterday the IRS issued Temporary Regulations that make the start-up cost and organization cost elections automatic when taxpayers incur such costs. The regulations take effect today, but they can be applied to all expenditures paid or incurred after October 22, 2004, if the statute of limitations hasn't run on them.
You still have to pay attention to such costs. While you no longer need to make a separate election, you still have to comply with tax law rules that control how and when such costs are deducted.
Start-up costs are deductible only over a 15-year period under Section 195, though the first $5,000 can be deducted when the the start-up phase ends if total start-up costs don't exceed $50,000. "Start-up" costs are those that you incur before you begin business operations.
Corporation organization costs (such as drafting legal documents) are deducted under Section 248 in a manner similar to start-up costs, with a 15-year life and a limited ability to deduct $5,000 in the first year. Partnership organization costs are subjected to the same restrictions by Section 709.
The automatic "deemed" election under the new regulations is a good thing. Disallowing the deduction permanently for failure to make the election was a pointless punishment for not getting good tax advice.
Link: IRS Publication 535 on Start-up and organizational costs (not updated for new regulations)
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JUST WORDS
July 08, 2008
Many LLC agreements are form agreements from a one-size-fits-all legal forms book. The results can be unhappy. Marc Ward tells how some Illinois LLC owners came to grief at his IowaLLC blog (with new edgy design!).
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SUMMERTIME TAX CARNIVAL
July 08, 2008
Kay Bell hosts the newest edition of the Carnival of Taxes.
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READER COMMENTS ON DEANGELIS
July 07, 2008
A reader provided a lengthy discusion of the DeAngelis case we discussed here in the comments to that post. They are reproduced below so they aren't lost in the comments and you can read them in full. I'll address some of his comments in a later post.
I respectfully disagree with your reading of DeAngelis, as described in your blog. The "STEP Plan" had been previously attacked as not a welfare plan. See Daniels v Burse, 313 F. Supp. 2d 790 (N.D. Ill. 2004)(STEP alleged to be RICO enterprise; settlement for plaintiffs). There was also a previous settlement in favor of IRS in a docketed case, Coastal Neurological v Com'r (2002).It turns out that DeAngelis was not about 419A at all.
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IRS: YOUR FRIENDLY BANKER?
July 07, 2008
A reader asked taxblogger Robert D. Flach whether the IRS interest rate on overpayments is high enough to make it worthwhile to overpay taxes on an original return and then file a refund at a convenient later date.
It depends a lot on whether you have time on your hands and the ability to do your own taxes.
The IRS is currently paying 5% on overpayments. The highest savings account rates are running 3% to 4%. If you pay $10,000 in extra taxes, you might earn, say, 2% more than you you would from the IRS than you would at your friendly banker. If you leave the money with the IRS for six months, you would earn an extra $100.
The catch? You only earn interest if you file an amended return. You normally don't get paid interest when you get a refund on a timely-filed extended return. You would have to file a full-blown return with an income overstatement high enough to support your $10,000 payment, and then you would have to file an amended return to get your $10,000 back.
Assuming all goes well, it's hard to believe you can do all of the work involved in less than two hours, even if you are good at return prep. That's $50 per hour for your time. If the amended returns generate IRS notices, you have more time invested. It's hard to see how this is a good use of your time, unless maybe you are in prison and you have all the free time in the world.
And the whole prison thing isn't entirely out of the question. Taxpayers have gotten in trouble for filing false returns overstating their income - typically to perpetrate creditor fraud. If you overdo it, the IRS might not be amused.
All in all, it seems like a better idea to go on the internet to shop savings rates than to game the IRS overpayment rate.
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BECAUSE TAUNTING THE TAX MAN ALWAYS WORKS!
July 07, 2008
This isn't the sort of statement most tax professionals would recommend to a client responding to a contact from the tax authorities:
"Come and get me, you miserable bastards."
Australian actor Paul Hogan, lately of California, isn't thrilled that the Austrialian Taxation Office is seeking IRS help in a tax investigation. If he had been acting pursuant to professional advice, he would have said something more conciliatory, like "Dear Miserable Bastards: I look forward to settling this matter on an amicable basis."
There's more at Tickmarks and Don't Mess With Taxes.
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WELL, CAREFUL RECORDKEEPING IS USUALLY A GOOD THING...
July 07, 2008
A pair of New York businessmen followed the standard advice of all accountants by keeping careful records. Unfortunately for them, these included a logbook of their tax evasion. Russ Fox tells their sad story in his weekly roundup of tax miscreants.
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ADVENTURES IN OUTSOURCING
July 07, 2008
If you think private tax collection is bad, just wait for private tax enforcement:
USA’s Internal Revenue Service (IRA) has booked a conference call for Tuesday, with accountants such as Ernst & Young and PricewaterhouseCoopers, to discuss ways their auditing departments can help clamp down on tax evasion by US citizens.
It appears that it may just be educational:
Next week’s conference call is also thought to include Deloitte & Touche, Grant Thornton, KPMG and BDO Seidman and will centre on how the auditors can help the US government to make its ongoing ‘Qualified Intermediary’ programme more effective which enables foreign banks operating in the US to release the names and details of customers in return for lenient treatment on their taxes.
If they enlist the big firms as a public relations arm, that's one thing. It's hard to see how they could use them in enforcement without destroying their independence in the eyes of their clients.
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LEAGUE LEADERS
July 07, 2008
Chicago has long been called the "Second City," but this month it is the first city:
-The Cubs and White Sox are first in their divisions.
-The Cubs have a league-leading total of seven players in the All-Star Game.
- Chicago has the highest retail sales tax in the nation - 11.25% for some restaurants, and 10.25% elswhere.
Congratulations, Chicago! Except for that last one.
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FLORAL FIREWORKS
July 03, 2008
A colorful outburst on Grand Avenue, Downtown Des Moines:
Have a great Independence Day!
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I'LL STOP SMOKING WHEN I'M DEAD
July 03, 2008
Sure, the downtown Des Moines Younkers store has been closed for almost three years, but it is already in compliance with the signage requirements of the indoor smoking law that took effect in Iowa this week.
Exuberantly so:
Sure, it's stupid, but if just one security guard is saved from the menace of secondhand smoke, it's worth it!
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WELL, THEY DO CALL IT 'STIMULUS'
July 03, 2008
Via Greg Mankiw:
An unforeseen and surprising beneficiary of the Economic Stimulus Plan, a plan that George Bush contends will "boost our economy and encourage job creation," has surfaced this week. An independent market-research firm, AIMRCo (Adult Internet Market Research Company), has discovered that many websites focused on adult or erotic material have experienced an upswing in sales in the recent weeks since checks have appeared in millions of Americans' mailboxes across the country.According to Kirk Mishkin, Head Research Consultant for AIMRCo, "Many of the sites we surveyed have reported 20-30% growth in membership rates since mid-May when the checks were first sent out, and typically the summer is a slow period for this market."
Time to update the old "chicken in every pot" slogan.
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TEACHERS GET 409A BREAK
July 03, 2008
The IRS issued a notice (Notice 2008-62) that will remove the threat of a 20% penalty tax on teachers who have their earnings for the school year paid over a 12-month period. The notice says that the punitive Sec. 409A rules will only apply to teachers with Ramona-like salaries:
For example, assume a school district employee works during a school year that begins on August 1, 2008 and ends on May 31, 2009 (a 10-month school year). Assume further that the employee is paid over the 12-month period beginning August 1, 2008 (either because the school system pays over a 12-month period or because the employee may elect to be paid over the 12-month period and has made such an election). Under these facts and circumstances, the arrangement would not provide for deferred compensation for purposes of § 457(f) unless the employee earns more than $186,000 for the school year.
That's all well and good, but it looks to me like the IRS can only come to this position by ignoring the actual legislation passed by Congress. Nobody is likely to complain, but it's too bad that the IRS has to clean up after 535 incompetents. And Sec. 409A still lurks to pummel anybody else who fails to negotiate its byzantine ways.
UPDATE: Oops. I forgot to point out that The TaxProf has more.
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SELECTION BIAS
July 03, 2008
Howard Gleckman at TaxVox asks, "Does Business Really Want Low Tax Rates?":
Not only has John McCain promised to cut the top corporate rate from 35% to 25% but, now, Barack Obama is hinting that he too might trim rates in exchange for closing loopholes.That is a deal I would make in a minute. It makes a lot of sense to keep the Code as far away from investment decisions as possible, so, for example, companies don’t do debt financing merely because the tax payoff is bigger. But I am not sure the supposed beneficiaries of these rate cuts agree.
I had lunch with a long-time business lobbyist (iced tea, no martinis) the day the Journal editorial ran and his response to this offer was, in effect, “Thanks, but no thanks.” The members of his trade association are very happy with their credits and deductions--complex as they may be—and are not remotely interested in swapping them for lower rates.
This strikes me as selection bias. Of course a lobbyist isn't going to want to get rid of targeted tax breaks in exchange for a broader base. His job is to carve loopholes, and lower rates by definition make his loopholes less valuable. If he has been a successful lobbyist, his clients won't want to change either; their lobbyist has done such a good job screwing the rest of us on their behalf that fairness would only hurt them.
Mr. Gleckman highlights an important point about tax legislation -- the "public choice" problem. There will always be a highly-motivated and well-financed lobby for special tax breaks, and there is no comparable lobby for the rest of us. The Internal Revenue Code is chock-full of special breaks (ethanol, anyone?). Iowa's tax law is the same way, as the recent Microsoft and Google bribes illustrate.
That doesn't mean that tax reform resulting in lower rates and a broader base is impossible. It does mean it's hard, and it can only occur with strong leadership for it, and even then the stars need to be aligned just right. Once it is achieved, the lobbyists will start right back in, so it's an eternal battle.
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CENTRAL IOWA GETS TO SUBSIDIZE MICROSOFT
July 03, 2008
Microsoft is taking up Iowa's offer of bribes tax preferences to build a server farm in the Des Moines area. The exact site hasn't been determined, but:
Microsoft has said it must have a good supply of energy, water, workers and certain fiber optics.
So if Iowa has everything Microsoft needs in the way of power, water, workers and fiber, it's a bitter indictment of Iowa's property tax system if they practically have to repeal it for Microsoft to get them to even locate a server farm here. Oh, and they get a big sales tax exemption too. And what about all of the businesses that have been here for years and have to continue to pay their full load of taxes so Microsoft doesn't have to? Too bad, suckers!
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GOODBYE WESLEY?
July 03, 2008
Wesley Snipes can go overseas to make more bad movies. The judge in Mr. Snipes tax evasion case has ruled that he can travel pending his appeal of his three-year tax evasion sentence. From E! Online:
According to Senior U.S. District Judge William Terrell Hodges' ruling, Snipes is allowed to go to London this month to complete postproduction on the horror film Gallowwalker and then to Bangkok in September to film the action flick Chasing the Dragon.Prosecutors objected to what they called Snipes' vague estimate of how long he'd be spending in Thailand (eight weeks, the actor said), saying it's one thing to let him go to England for a week but another to allow him to spend at least two months "beginning a new project half-way around the world with an open-ended return date."
The last time Mr. Snipes was overseas, after his indictment, he wasn't in a great hurry to come home. It will be interesting to see how quickly he comes back. Meanwhile, it's the moviegoers who will pay the price for Mr. Snipes being allowed to resume work.
UPDATE: The TaxProf has a roundup, including court documents.
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LIFE INSURANCE PREMIUMS AND S CORPORATION DISTRIBUTIONS
July 02, 2008
A sure way to make a client's day during tax season is to tell them that they accidentally made a taxable distribution from their S corporation. Normally S corporation distributions are non-taxable; they are treated as a tax-free payout of income that has been taxed on the owners' 1040s. But if the S corporation was once a C corporation, a distribution to shareholders can be a taxable dividend if the corporation has no accumulated S corporation income to distribute.
An S corporation's cumulative S corporation income is tracked in an "Accumulated Adjustments Account" ("AAA")on Schedule M-2 on page 4 of Form 1120-S. Distributions are treated as first coming out of AAA. If the the corporation was a C corporation at one time, the distributions are taxable distributions of C corporation "earnings and profits" if there is no AAA left.
COMPUTING AAA
AAA works like this:
- It's increased for S corporation taxable income items.
- It's decreased for taxable losses, and for expense items that pass through separately, like charitable contributions and the Section 179 deduction.
- It's decreased for permanently non-deductible expense items, like the non-deductible portion of meals and entertainment.
- It's reduced by distributions to shareholders.
AAA is not adjusted for tax-exempt income and related expense. These items increase shareholder basis when earned by an S corporation, but these increases are tracked as "other adjustments" to basis on Schedule M-2. This basis increase prevents the tax-exempt income from become taxable when a shareholder computes gain or loss on the sale or liquidation of their shares. Other adjustments can't be distributed unless all old C corporation earnings have been paid out as taxable dividends.
So where does life insurance fit in? Yesterday the IRS issued Rev. Rul. 2008-42, holding that non-deductible life insurance premiums do not reduce AAA, and that tax-free life insurance proceeds do not increase AAA. That means life insurance proceeds do not increase the amount that former C corporations can distribute tax-free. They instead go into the "other adjustments" to shareholder basis.
This is the proper result, and we have always filed our returns this way. But what is the proper treatment if the life insurance policy becomes taxable - for example, if the S corporation cashes out the policy for its surrender value, and the value exceeds cumulative premiums? I believe that the cumulative premiums and the surrender proceeds move out of "other adjustments" to AAA -- the premiums as expenses related to the production of taxable income (the surrender proceeds), and the proceeds themselves as taxable income. The IRS hasn't specifically addressed this issue, as far as I know.
UPDATE:: Roger McEowen has more.
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INDEPENDENCE DAY WEEK CAVALCADE
July 02, 2008
The new Cavalcade of risk is up! As always, good stuff at this roundup of insurance and risk-management blog posts. I like this piece on the importance of having an umbrella policy (and that doesn't mean "don't open them indoors"). Also: duct tape vs. biohazards.
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AW, SHUCKS
July 01, 2008
I had not heard of LexMonitor.com, a site that aggregates law blog posts, until I got an e-mail from them today, but I am convinced that they are unusually keen and perceptive observers, based on their profile of this site:
Roth & Company, the small Iowa-based firm behind the Tax Update Blog, seems to understand the value that a prominent and up-to-the-minute web presence can bring to firms in their position: Joe Kristan’s posts are brief and simple, but they exemplify his understanding of tax law and the firm’s willingness to stay abreast on the latest development within their industry. Both a source of breaking news and resource center on policies that could impact taxpayers, Tax Update Blog is a shining star among tax blogs.
But I bet they say that to all the blogs...
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FLOOD TAX URBAN LEGEND
July 01, 2008
Claim: Governor Culver has declared that flood victims in Iowa must pay income tax on debit cards received from the American Red Cross.
Status: False.
Roger McEowen says he has received several calls from attorneys in Cedar Rapids asking if this rumor is true. It isn't.
The debit cards will normally be not subject to income tax under Internal Revenue Code Section 139. Iowa income tax rules follow federal law unless the legislature specifies otherwise, and they haven't. Even if the Governor wanted to tax disaster cards (and why would any politician be that stupid?), he doesn't have the authority do do so.
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RAMONA GIVES IT UP
July 01, 2008
Iowa's most famous GED recipient gave up her legal battle yesterday, pleading guilty to eight charges related to her fabulous compensation arrangements at the obscure, and now defunct, Central Iowa Employment Training Consortium (CIETC).
While no sentence is specified in the plea deal, the Des Moines Register reports that Federal Sentencing Guidelines suggest a 6 1/2 to 8-year sentence for Ramona Cunningham. If that's the guideline, she seems likely to serve some real prison time, and under federal rules, there is little leeway for early parole. She has a glimmer of hope, though, as her sentence will be handed down by Judge Robert Pratt, who gained legal fame when the Supreme Court upheld a sentence he imposed below that suggested by the federal guidelines.
Ramona Cunningham and Senator Tom Harkin at the dedication of the $1 million CIETC Tom Harkin Learning Center. Photo copied from CIETC website before it disappeared.
Links:
Statement before plea agreement
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IRS SHORTENS DEADLINES FOR 2009 EXTENDED K-1S
July 01, 2008
One of the hardest things to explain to the average tapayer is that K-1s don't have to be issued by April 15. In fact, current rules allow partnerships and trusts to issue K-1s with extended returns as late as October 15, which is also the extended due date for 1040s - and is after the due date for corporate returns. That creates an obvious problem for folks using the K-1s. K-1s are the the forms issued by partnerships, S corporations and trusts to report their income to their owners, who have to then report up the K-1 income on their own returns.
Yesterday the IRS announced (IR 2008-84) a rule change that will give taxpayers at least a little time to incorporate K-1s in their 1040s. Starting with next filing season, the extended due date for partnerships and trusts will be September 15. Extended S corporation returns are already due September 15. The new extension deadline applies to returns due after January 1, 2009, which means it takes effect for partnership years ending on September 30, 2008.
Additional coverage at the Tax Info Blog.
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IRS GOES AFTER UBS DOCUMENTS
July 01, 2008
In the wake of the guilty plea by UBS Banker Bradley Birkenfeld, the IRS has issued a summons for UBS to turn over records of its U.S. clients with offshore accounts. This should be interesting. Considering the consequences of failure to report offshore accounts, I bet some UBS clients are quietly beginning to work on deals with the IRS and Treasury.
The TaxProf rounds up the coverage.
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PRIORITIES
July 01, 2008
Every August Iowa has a two-day sales tax holiday on clothes and shoes.
Now South Carolina will have an annual two-day sales tax holiday on guns.
Fortunately the South Carolina holiday is in November, so you can go there to accessorize the outfit you buy in Iowa in August.
Flickr photo by k@t marsh
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DES MOINES MAYOR: STOP DRINKING BOTTLED WATER
July 01, 2008
It's funny that a mayor of Des Moines says we should trust the city for our drinking water.
Sure, Mayor Cownie, whatever you say. We'll get right on that.
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