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Tax Update Blog: September 2008 Archives

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Is there a tax benefit for an IRA wipeout?

September 30, 2008

When you lose your shirt in a taxable brokerage account, you get a capital loss. Those losses are subject to a sometimes painful limit - capital gains plus $3,000 per year - but at least there's hope for future gains to offset them, or a very long life.

But what if you lose your shirt in an Individual Retirement Account? Earnings inside IRAs are non-taxable, and that's great when they make money, but when they lose, they don't give you a tax benefit.

There is a way to get a tax benefit from some IRAs. Unfortunately, it's hard to get, and it will be useless to many taxpayers.

If you have either non-deductible traditional IRAs or Roth IRAs, you can get a deduction for losses in the IRA. If your losses are in traditional non-deductible IRAs, you have to close out all of your traditional IRA accounts to get the deduction; if it's in a Roth IRA, you likewise have to close all of your Roth IRAs and distribute the proceeds to yourself. Your deduction is then the amount your basis in the closed-out IRAs exceeds what was left in them. Traditional deductible IRAs have no basis (because you deducted your contributions), so they give you no deduction.

But wait, it gets worse. Any deduction you get is a miscellaneous itemized deduction. That means you only get a benefit if you itemize, and only to the extent the loss exceeds 2% of your adjusted gross income. It also means the loss doesn't count at all in computing alternative minimum tax.

The moral? There's no such thing as a good loss, but IRA losses may be the worst.

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Because Microsoft shouldn't pay for streets and fire protection

September 30, 2008

The Des Moines Register reports that the West Des Moines City Council wants to do the big property tax giveaways for server farms one better. Based on inquiries from "a handful of companies" who they will not name, but one of whom uses a city council member as a lawyer, they plan to give a five-year property tax rebate for server farm projects.

Meanwhile, Business Week reports that West Des Moines is fourth on the list of smaller cities vulnerable to a downturn in the financial industry (via Rush Nigut). I'm not sure how well thought-out the article is, as it uses this picture:

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Which, of course, is not West Des Moines; it's downtown Des Moines. It is a bit disturbing, though, in that Tax Update World Headquarters is exactly in the center of the picture they use to illustrate ground zero of the financial disaster - the whitish building. If you look close, maybe you can see me waving.

Related: Spillover Effects

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Assuming, of course, you still have any gains after yesterday

September 30, 2008

Gina Gwozdz has an idea for taxpayers in the zero capital gains bracket in 2008: Take your gain now for a free basis step-up. This can work for taxpayers who are in the 15% bracket or lower in 2008 - that's up to $65,100 for joint filers.

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On hiring a lawyer

September 30, 2008

Brett Trout, who knows from lawyers because he is one, has thoughts on hiring a lawyer today at Iowabiz.com:

Ask them if they will be your attorney for the duration of your engagement. Ask them what percentage of the services do they anticipate billing themselves. Ask them if they anticipate the need to bring other attorneys in on your case. If the attorney indicates other attorneys might be needed, ask to meet with those attorneys as well. Finally, ask if the lawyer has a direct number you can use in the event you have any questions.

Sound advice, and it applies to other professions, too, including tax preparers.

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A warning to Charlie Rangel?

September 30, 2008

"House Passes Bill Targeting Tax Cheats in Federal Prison"

- Headline, Tax Notes ($link)

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Bail fail

September 29, 2008

I sure hope the "nays" are right and I'm wrong. The Intrade market on the bill's chances was pessimistic all morning. It was right.

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Tax provisions in the bailout

September 29, 2008

The text of the bailout bill was released yesterday, including the details of the three tax provisions that ended up in the bill:

- Losses on Fannie Mae and Freddie Mac preferred stock held by financial institutions will be ordinary if the stock was held on September 6, 2008, or if it was sold from Janaury 1 through September 6, 2008. (Section 301 of the bill.)

- There will be a $500,000 annual compensation dedection ceiling for the top CEO and top three employees of institutions participating in the bailout. Benefitsblog has detailed coverage. (Section 302 of the bill.)

- The exclusion for forgiveness of home-mortgage debt, set to expire after 2009, was extended through 2012. (Section 303 of the bill)

Observations

The ordinary loss rule for Fannie and Freddie preferred stock is designed to help smaller banks that had overinvested in them. Because capital losses of C corporations are deductible only to the extent of capital gains, and expire if not used in five years, they often are useless tax-wise.

The compensation deduction limit is populist nonsense. If an institution is in trouble, it's likely to have trouble attracting top talent. Do you really want to rely on the guy willing to work cheap to steer a big bank clear of the rocks? It's funny that Barney Frank and Chris Dodd put this in the bailout bill now that banks are being brought down by the collapse of Fannie and Freddie, considering that they never objected to their fabulous executive compensation packages while carrying their water in Congress.

The debt forgiveness rules, which apply up to $2 million in mortgage forgiveness, give a break to the most feckless home speculators, while those who do their gambling at casinos or in the stock market get no such break.

Other views

Alex Taborrok has a wry comment on the comp limits:

If you think the situation is very dire and also that Wall Street is ruled by greed then it's a disaster as the captain may prefer to go down with his ship, rather than give up the golden parachute (life-jacket?). Thus, those who think the situation is very dire must be gambling on CEO altruism!

David Zaring at the Conglomerate has a good overview of the plan.

Kay Bell wonders if the $500,000 home sale exlusion helped get us into this mess. Perhaps, but remember that the $500,000 rule replaced an unlimited exclusion that applied as long as you spent at least as much on a replacement house as you got for the old one. Arguably a flat dollar amount distorts less, but allowing it every two years might have been too much. No doubt the Tax Foundation is right that the exclusion is bad policy, but there is no chance that it will go away when the housing market is already reeling.

Meanwhile, Greg Mankiw has a photo of a prototype of the new government vehicle to hold Mortgage-Backed Securities:

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UPDATE: The TaxProf has more

UPDATE, 10/2: Tax provisions in the Senate-passed bill.

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Who does a choosy taxpayer choose?

September 29, 2008

What are the most common mistakes made in choosing a preparer? Robert D. Flach, guest posting at the Tax Guy site, says these are the two most common:

· Assuming that because a person has the initials “CPA” after his name he is an expert when it comes to federal and state income taxes.

· Assuming that H+R Block (or other chains such as Jackson Hewitt or Liberty) will charge a reduced, or even reasonable, fee for preparing your tax return.

Worth reading in full.

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SMART PEOPLE, FOOLISH RETURNS

September 29, 2008

The theme this week at Russ Fox's roundup of tax fraud news is "They Should Have Known Better." It appears that the Justice Department's tax squad isn't exactly dealing with Hannibal Lecter-style evil geniuses here. If you're a lawyer, for example, and you keep your employees' withheld taxes for yourself, do you really think the IRS isn't going to notice?

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So we have a bailout?

September 28, 2008

The bailout negotiators say they have a plan. Details are still sketchy, but the Wall Street Journal reports that there are two tax provisions:

- an extension of the tax-free treatment of debt forgiveness on home mortgages, otherwise due to expire after next year, and

- A special rule that would allow banks to take their losses on Fannie Mae and Freddie Mac stock as ordinary loss. The would otherwise be capital losses, most of which would probably expire unused.

While the WSJ reports "Bailout Package Gains Key Support," the Intrade futures market on whether a deal will be reached is crashing. It was giving the plan a 90% chance last night, but the latest trades are around 50, with one recent trade as low as 35.

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I'm surprised how much trading there is on this Intrade contract. I wonder if there is some problem with the deal that hasn't yet been reported, or if it is something else - wild rumors, maybe. Or it might just be because of the September 30 deadline for an agreement in the Intrade contract.

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It's good to be King...

September 26, 2008

...because you can write yourself out of inconvenient tax law rules. For example, the corporate loss trafficking rules of Section 382:

The IRS and Treasury will issue regulations under section 382(m) providing that notwithstanding any other provision of the Code or the regulations thereunder, for purposes of section 382 and the regulations thereunder, with respect to a loss corporation, the term “testing date” (as defined in §1.382-2(a)(4)) shall not include any date as of the close of which the United States directly or indirectly owns a more-than-50-percent interest in the loss corporation.

From just-issued Notice 2008-84.

Tom Petty had it right.

More on the Sec. 382 rules here.

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Bailout sinking?

September 26, 2008

Earlier this week we said:

Senator McCain and Senator Obama may be headed back to Washington to "help" resolve the financial crisis -- much like I would "help" a brain surgeon by standing in the operating room doing shots of tequila and playing bongos.

Well, they came to help, and now the deal is foundering. The Wall Street Journal reports this morning:

Earlier in the day, congressional leaders had hammered together the outline of a compromise that involved allotting the bailout money in installments. It was widely expected to result in a deal. However a pivotal afternoon meeting at the White House, attended by President George W. Bush, congressional leaders and the two presidential candidates, broke with no agreement.

One cause of the delay: opposition from House Republicans who have tried to fashion an alternative plan that, instead of relying heavily on taxpayer money, could let banks buy insurance for the troubled assets weighing down their books.

The Intrade market for a bailout deal by September 30 took a beating overnight on news that the $700 billion plan may be foundering. The prediction market had been pricing the deal at 90, meaining 90% likely to pass, but it fell to as low as 60 overnight. The most recent trades are around 73.

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The hangup appears to be back home in the districts. Instapundit quotes a reader:

Congressman Paul Kanjorski (D-PA) was just on CNBC and said that his mail and calls on the bailout plan are running 50-50: 50% no and 50% hell no.

This is what Barney Frank is up against. Even if the Democrats ram through the plan without Republicans signing on, they will be left holding the bag if the plan fails, as it very well could, and have to face the wrath of their constituents.

It looks like it will take a Black Friday on the stock market to focus our leaders. As unpopular as the bailout may appear, it will look like free Bubble-Up compared to a 25%+ hit to 401(k) plans and the prospect of factory closings and mass layoffs in anticipation of a shutdown of the lending markets.

Greg Mankiw has posted a defense of the plan from a "smart friend" that echoes the views of my smart aquaintance in the financial world that sways me towards the plan.

Academic economists don't like the Treasury plan, but nearly all of the Wall Street economists are for it. You don't have to be all that cynical to say that the Wall Street economists are talking their book. But I'd like to think that there is at least in part a sense in which they are more attuned to the reality of the situation in credit markets -- that last week we were a day or two away from a breakdown of the financial system.

Meanwhile, I'm off to the operating room with my bottle and bongos.

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'Salesperson in training' learns about deducting travel expenses

September 26, 2008

A Brooklyn, New York man gave the insurance game a try, signing on as a "salesperson in training" for New York Life. The insurance company goes in for training by doing, as they only paid the man commissions on policies he sold -- $18,706 in 2004.

Based on his tax returns, training was even less lucrative than that. He claimed $15,500 in car and travel deductions related to the New York Life gig.

The IRS disallowed all of the deductions on the grounds that our taxpayer failed to properly substantiate his deductions. The taxpayer had an explanation:

Petitioner stored his receipts in a binder in his car. In November 2005 the car was stolen. Petitioner notified the police, and 2 or 3 weeks later the police recovered the vehicle; however, the business receipts were gone. Consequently, petitioner was not able to provide receipts to respondent or the Court.

That's typical. Car thieves take the car and they destroy your tax records. Unfortunately, the tax law doesn't let you take travel and entertainment deductions without some documentation:


Section 274 requires stricter substantiation for travel, meals, entertainment, and listed property such as a passenger automobile. Thus, all three of the unreimbursed business expenses that petitioner deducted are subject to section 274 substantiation requirements. Section 274(d) requires taxpayers to provide adequate records or sufficient other evidence establishing the amount, time, place, and business purpose of the expense to corroborate the taxpayers' statements. Even if such an expense would otherwise be deductible, section 274 may still disallow a deduction if the taxpayer does not have sufficient substantiation.

The Tax Court held for the IRS.

The Moral: When it comes to travel costs, no substantiation = no deduction.

Cite: Niyitegyeka, T.C. Summary Opinion 2008-129

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Beale accomplice cops plea in tax-protest kidnap plot

September 26, 2008

An associate of convicted tax evader Robert Beale pleaded guilty yesterday to a charge involving a plot to kidnap the judge in Mr. Beale's tax evasion trial. Norman William Pool of Blaine, Minnesota pleaded guilty to one count of conspiracy to impede an officer.

Authorities say that Mr. Pool and others conspired with Mr. Beale to "arrest" the judge and try her in their own "common law court." This brilliant plan came undone because Mr. Beale's calls from jail were monitored.

It's not clear whether Mr. Pool will now cooperate in breaking up this alleged ring of criminal masterminds.

Related: I MEANT THAT GOD WANTS ME TO BUY YOU DINNER AND DRINKS, YOUR HONOR

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More Ike Extensions

September 26, 2008

The IRS yesterday extended the deadlines for payments and filings in areas affected by Hurricane Ike to January 5, 2009. Details here.

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Whither the bailout?

September 25, 2008

The Intrade Futures Market on the prospects for a timely bailout package took a big leap overnight, with bettors saying that the odds of a deal being sealed by September 30 are now 90%. That's up from last night's 75% going rate.

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The silver lining

Having so much tied up in the bailout is going to hamstring the tax plans of whoever wins the presidency in November. As Tax Vox puts it:

Barack Obama and John McCain are slowly beginning to get it: For the next President, this week’s financial market meltdown has changed everything.

Suddenly, their grandiose promises of new tax cuts and ambitious spending are sounding more hollow than ever. An $11.3 trillion national debt will do that to you every time.

$11.3 trillion is the new cap on the public debt requested by the Bush Administration in the wake of its proposed financial market bailout. That assumes we will end up spending $700 billion of taxpayer’s money hauling these piles of financial garbage off to the dump.

If it keeps the government from doing even more dumb things, there will be a silver lining to this dark cloud.

The lunatic is in the hall Senate

If you want to restore your faith in the ability of our elected representatives to deal with the nation's fiscal crisis, avert your eyes. Otherwise, check out Senator Grassley's strange tour through pop culture history as he argues for the extenders bill on the Senate floor. Whatever Pink Floyd had in mind, it surely wasn't this.

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Sometimes it's not enough to be 'at-risk'

September 25, 2008

There are three hurdles to clear before you can deduct losses from a partnership. You have to clear them in this order:

1. You have to have basis in your partnership interest.
2. Your basis has to be "at-risk" basis.
3. The losses cannot be "passive."

A Court of Federal Claims Case Tuesday illustrated the last two hurdles. A group of taxpayers involved "in various partnerships marketed by the Greenberg Brothers" entered a closing agreement with the IRS on an at-risk issue:

Paragraph 6 of the Closing Agreement addresses the amount at risk under § 465, declaring that certain partnership liabilities were not amounts at risk for the partners, thus decreasing the amount of loss the partners might be able to claim for that year. But the agreement then permits losses disallowed under the Closing Agreement to be suspended consistent with § 465. That suspension meant, of course, the disallowed losses could be deducted in a future tax year if the partner/taxpayer were sufficiently at risk in that year.

Apparently the partners got at-risk basis in a later year and filed refund claims arising from the resulting tax losses. The IRS said, in effect, "fine, you crossed the 'at-risk' hurdle, but guess what? The losses are passive."

The partners sued, arguing that the terms of the closing agreement waived the passive loss rules. The judge was unpersuaded:

The passive loss restrictions have an entirely different aim from the at-risk rules -- namely, preventing taxpayers from using passive activity losses to offset income generated from non-passive activities. It is a stretch to assume that an agreement about the amount at risk is also an agreement on the entirely different topic of active versus passive losses, or that the words "any income" subvert the purpose of § 469 by allowing what that statute specifically prohibits.

The moral? Clearing the "at-risk" hurdle is necessary to deduct partnership losses, but it may not be sufficient.

Cite: Shelton, No. 02-1042 T (Ct. Claims, 9/23/2008)

Related: READING YOUR K-1: IS YOUR BASIS 'AT-RISK'?

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IRS cracking down on payroll tax fraud?

September 25, 2008

While I don't know if this is a trend, there seems to be a flurry of payroll tax fraud prosectutions. A Massachussets wonan was sentenced this week to 6 1/2 years in prison for evading payroll taxes by running cash payments through temporary employment agencies. Now The Tax Lawyer's Blog reports on a guilty plea in a $181 million payroll tax fraud in an employee leasing business. That's a lot of money; the defendant is likely to go away for quite awhile.

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Risky business indeed

September 25, 2008

The new Cavalcade of Risk is up at American Consumer News. This edition of the roundup of insurance and risk management blogs is appropriately focused on business risks. Care to underwrite a debt swap this morning? AIG? Anyone?

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Hank Stern's thoughts an the AIG bailout are worth the visit.

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Does John McCain know more than the Intrade crowd?

September 24, 2008

John McCain today:

It has become clear that no consensus has developed to support the Administration’s proposal. I do not believe that the plan on the table will pass as it currently stands, and we are running out of time

An Intrade prediction market says this afternoon that it's 75% likely that a bailout passes by month-end:

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Senator McCain and Senator Obama may be headed back to Washington to "help" resolve the financial crisis -- much like I would "help" a brain surgeon by standing in the operating room doing shots of tequila and playing bongos.

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An Iowa State University vendor or purchasing agent?

September 24, 2008

Let's hope not.

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Ordinary loss for Fannie and Freddie preferreds?

September 24, 2008

Tax Analysts reports ($link) that taxwriters may let financial institutions who own now-worthless Fannie Mae and Freddie Mac preferred stock to take it as an ordinary deduction. No legislation to do so has been introduced, but such treatment would ease the pain of the wipeout for the holders.

Normally such losses are capital losses, which are only deductible to the extent of capital gains for corporate taxpayers, and which expire if not used within five years.

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The limits of dumb

September 24, 2008

Ever since the Supreme Court ruled in the Cheek case that tax evasion has to "willful" to be criminal, tax protest folks have attempted to avoid prison by playing dumb. The defendants say that they didn't really believe they owed tax, based on their extensive reading of Irwin Schiff's books, or because the forms aren't properly printed, or some such. It seldom works.

Yesterday the Eighth Circuit demonstrated the limits of the dumbness defense in a case involving a Branson, Missouri chiropractor. The court laid out facts that seem to show that for a guy who didn't know he was committing a crime, he was sure trying to cover his tracks:

Robert Lee Cavins, Jr., a chiropractor, neither filed returns nor paid federal income taxes for the 1992-1994 tax years, except for estimated tax payments of $10,000 during 1992. Cavins and his wife also transferred their home and his office to residential and chiropractic trusts, and Cavins instructed his employees to deposit chiropractic revenues into various trust accounts. When Cavins sold his practice in 1999, he deposited $80,000 of the proceeds in an overseas bank.

The court didn't buy the chiropractor's argument that he didn't know what law required him to pay tax. It also rejected other tax-protest type arguments, including that he didn't have to file a tax return because the IRS violated the Paperwork Reduction Act.

The Moral? If you go out of your way to hide your money from the IRS, it's not hard for the courts to conclude that you knew why you were hiding it.

Cite: Cavins, CA-8, No. 07-3343

More here.

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Taking it off (the tax return) at Minnesota strip club

September 24, 2008

If you own a strip club, the action on stage probably palls after you've seen the show a few hundred times. Your mind starts to wander. Federal prosecutors say that Lawrence F. Kladek's mind wandered towards tax evasion using the IRS as an ATM, almost literally. From Startribune.com:

Federal officials said Kladek had the ATM put into the King of Diamonds in 1999. But this wasn't just an ordinary ATM.

The way it normally works, when a customer withdraws cash from an ATM, money is transferred from a customer's bank account into an account used to replenish the ATM. In this case, investigators say, every time customers withdrew cash at the club, money was transferred from their bank accounts into a separate account that IRS investigators say Kladek kept secret from his income tax preparers.

Federal officials say Kladek then used the secret account to pay for about $1 million in personal expenses and investments.

The government claims Mr. Kladek refilled the ATMs with money skimmed from his strip club receipts, and that about $2 million of cash income was hidden this way. If the government proves its allegations, Mr. Kladek likely will have to farm out management of his club for awhile.

Link: Indictment.

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THEY MAY AS WELL ASK METH FIENDS TO TAKE GOOD CARE OF YOUR SUDAFED AND ANHYDROUS

September 23, 2008

From an open letter to Congress by "many economists":

For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come.

They're asking this of the same Congress that gave us Fannie, Freddie and our tax law. If we need "careful consideration" and "wisdom" from Congress, we're all doomed.

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TO BAIL OR NOT TO BAIL?

September 23, 2008

I think Megan McArdle gets it about right on the bailout:

The right wing version says "Let them fail! Fractional reserve banking is inherently unstable, and we've been living on borrowed money. We need to cut back to our natural, credit-free level of output and consumption."

The left wing version says "Let them fail! Capitalism is inherently unstable; greed is no way to run an economy. We need to force banks to stop doing all of these dangerous things and regulate them so heavily they can't make a mistake. Also, as a general rule, rich people should suffer for their mistakes, and ordinary people shouldn't. This is a great opportunity to repeat FDR's awesome victories!"

These are two ways of being dangerously silly. Whatever your ideal looks like, there are two rules of financial system change:

1) Very rapid change is very bad
2) See above.

There are a lot of things that worry me about giving the Treasury Secretary $700 billion. The idea that the economy will stop, that otherwise healthy companies like GE will go into bankruptcy because the commercial paper markets shut down, and the like, worries me even more. And there isn't a lot of time to fiddle with the details or to weigh it down with stupid populist ornamentation.

Related:

REVERSE AUCTION TIME?

THE $700,000 SHOPPING SPREE

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SO, HOW'S YOUR PORTFOLIO?

September 23, 2008

If your stock portfolio has taken a hit lately, you have a lot of company. The TaxGrrrl explains whether that means you have a capital loss:

A gain or loss has to be realized in order to mean anything and this is where some taxpayers get confused. Just because the market goes up or down - as it is wont to do - doesn’t mean anything.

No trade, or not worthless, means no loss.

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THANKS, CHUMPS!

September 23, 2008

Tina Fey at least had the grace to say "thank you" for the insane subsidies her industry receives from New York, and almost every other state. You're not welcome, Tina.

Iowa currently has transferable tax credits to fund up to half the cost of film projects done in the state. That means everybody else is subsidizing Tina Fey and the rest of her (wealthy) industry. So while people flooded out of their homes in Cedar Rapids are still camping in their yards or at the Super 8, our tax money helps people like Tina Fey get that Central Park West condo they've been needing. All so legislators can get their picture taken with Tom Arnold.

Some states are at least trying to make their "economic development" subsidies more transparent, but the right answer is to go cold turkey on corporate welfare and work to make it easier for everyone to do business -- not just those with good lobbyists.

UPDATE, 9/25: The New York Times has a new puff piece on the New York version of the entertainment industry subsidy (via the TaxProf).

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PEOPLE ARE SPENDING LESS ON HEALTH CARE. IS THAT BAD?

September 23, 2008

The Wall Street Journal reports that health care spending is declining as a result of tightening economic circumstances (via Benefits Blog).

That's not necessarily a bad thing, given that overconsumption of health services is a likely villian in soaring health care costs.

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REVERSE AUCTION TIME?

September 22, 2008

A Wall Street Journal article suggested that the Treasury might use "reverse auctions" to spend its $700 billion bailout fund. My smart world of finance acquaintance says that's the obvious way to go. He explains that in a reverse auction, the Treasury would announce that it was going to buy, say, $50 billion of a certain type of bad mortgages. The holders of the paper would then bid to sell it at declining prices. Bank A would offer to sell its junk at 50 cents on the dollar, Bank B would offer at 47 cents, and so on, and the $50 billion would go to those willing to sell the cheapest.

One of the big concerns about the bailout is the risk of the Treasury overpaying for the junk assets. If you have any thoughts about whether a reverse auction is the answer to this concern, the comments are open.

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CAPITAL LOSSES DON'T HELP AT SENTENCING EITHER

September 22, 2008

One of the annoying things about taking a bath in the stock market is that it often doesn't reduce your tax much. Capital losses are limited to capital gains plus $3,000 on a 1040; I've seen cases where taxpayers would have to outlive Methuselah to use their losses up at that rate.

Capital losses were also pretty much useless last week for a man convicted of preparing fraudulent tax returns. Tax sentences are based on the tax loss for the government. The preparer argued that he lost enough of his clients money to create capital losses, and those losses should reduce the tax loss caused by his fraudulent return preparation.

Here, the investors’ offsetting capital losses that Blevins is claiming are unrelated to the tax fraud he committed. The Schedule C and Schedule E losses that Blevins had his clients fraudulently claim were ordinary business losses. Such losses presuppose an on-going business, however distressed, not a failed business that has become a worthless investment. Thus, the fraudulently claimed losses were neither related to nor in lieu of worthless investment losses. Indeed, the worthless investment losses were tax benefits that the investors could claim whether or not the fraud was perpetrated.

The Moral? There's nothing good about a capital loss.

Cite: Blevins, CA-8, No. 07-3298 (9/16/2008)

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ARE YOU A CORPORATE PACKRAT?

September 22, 2008

Brett Trout explains why the packrat is a favorite prey of the predatory litigator, and why you should cull your old documents.

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VIVE LE FRANCE

September 22, 2008

Tax Grrrl reports that France has stepped back from the brink:

French Prime Minister Francois Fillon has announced that the country will not tax sporks and other plastic utensils after all.
Another small blow in the fight against barbarism.

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51% SPEND THE MONEY OF 49%?

September 22, 2008

Regardless of who wins the election, the federal income tax looks like it be paid more and more by a narrow, wealthier segment of the population. It seems unwise to have so many voters in a position to vote to fund programs they won't be paying for, but there it is.

UPDATE: Somebody else feels the same way.

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MRS. O'LEARY FOR FIRE MARSHAL

September 22, 2008

Senator McCain last week said he would fire SEC Commissioner Christopher Cox. Over the weekend he said he might replace him with Andrew Coumo. This Andrew Coumo:

Andrew Cuomo, the youngest Housing and Urban Development secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country's current crisis. He took actions that—in combination with many other factors—helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments. He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded "kickbacks" to brokers that have fueled the sale of overpriced and unsupportable loans.

Sigh...

Via Instapundit.

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THE $700,000 SHOPPING SPREE

September 22, 2008

When both parties get together on something enthusiastically, you should have the same reaction you would have if you were to see two thugs in a street fight pausing to check you out. The two parties can hardly wait to give the Treasury Secretary a two-year, $700 billion credit card to run out and buy stuff. Lots of the very smart people don't think this is such a great idea, including Arnold Kling, Tyler Cowen, and Gary Becker. It's too much to hope that anybody will listen to them.

UPDATE: The one person of my acquaintance who understands this stuff says Secretary Paulson "had no choice." His alternative scenario is scary enough to convince me, even though I understand the rescue plan as an embrace of chronic illness to avoid a horrible and painful death. More along those lines here and here.

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GAMBLING WITH THE STANDARD DEDUCTION

September 19, 2008

Just because you lose money gambling doesn't mean you don't have gambling income. You have to report your gambling winnings "above the line" in taxable income, while losses are a "below the line" itemized deduction. This is an ugly trap for those who are better off using the standard deduction, as Tennessee gambler Charles Oliver learned yesterday in Tax Court (my emphasis):

During 2002 and 2003 petitioner gambled at Fitzgerald's Casino. During 2002 petitioner had gambling winnings of $3,097. During 2003 petitioner had gambling winnings of $1,250. In both 2002 and 2003 petitioner's gambling losses met or exceeded his gambling winnings. On each of his returns for 2002 and 2003 petitioner failed to include his gambling winnings in income and claimed the standard deduction. Although the gambling losses would be allowable as an itemized deduction up to the amount of the winnings, since petitioner did not elect to itemize his deductions, he is not entitled to deduct the gambling losses.2 Sec. 63(a) and (b); see Calvao v. Commissioner, supra; Heidelberg v. Commissioner, supra. Consequently, we hold that for each of the years in issue petitioner is required to include the gambling winnings in gross income and is not entitled to any deduction for losses.

It's the tax law; it doesn't have to be fair.

Cite: Oliver, T.C. Summary Opinion 2008-124.

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BIDEN ATTACKS PATRIOTISM OF NON-WEALTHY

September 19, 2008

Joe Biden says the wealthiest 1% of the taxpayers are the most patriotic Americans. Really:


Biden was asked by ABC News' Kate Snow in an interview aired Thursday morning on "Good Morning America" if people earning more than $250,000 a year would have to pay more taxes under an Obama-Biden administration.

"You got it," Biden replied. "It's time to be patriotic, Kate. Time to jump in, time to be part of the deal, time to help America out of the rut, and the way to do that is they're still gonna pay less taxes than they did under Reagan."

If paying taxes is patriotic, those earning more than $250,000 are the most patriotic:

... both the tax share and AGI share of the top 1 percent reached all-time highs in 2005. In 2005, the top 1 percent of tax returns earned 21.2 percent of adjusted gross income and paid 39.4 percent of the nation's federal individual income taxes. This indicates that the federal individual income tax is highly progressive as under a purely proportional system, the two shares would be identical.

Furthermore, in 2005, the top 1 percent of tax returns paid nearly the same amount in federal individual income taxes as the bottom 95 percent of tax returns, a group which was responsible for 40.4 percent of the federal individual income taxes paid.

So by linking paying taxes to patriotism, Senator Biden is impugning the patriotism of everybody who makes less than $153,542 - the bottom 95% of taxpayers. Is that a wise electoral strategy?

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NEW FEATURE: BRUTAL ASSAULT ON REASON WATCH

September 19, 2008

This week's headlines have provided constant reminders of Arnold Kling's cri de coeur:


To me, political campaigns are not sacred events, to be eagerly anticipated and avidly followed. They are brutal assaults on reason. I look forward to election season about as much as a gulf coast resident looks forward to hurricane season.

Today we launch "Brutal Assault on Reason Watch," where we will highlight statements by politicians that in a just world would require them to be bound, gagged and banished to a remedial economics course for the rest of their natural lives. So we begin.

First, John McCain:


But first McCain went after SEC Chairman Christopher Cox, a former Republican congressman. McCain said the SEC under Cox was "asleep at the switch" and "kept in place trading rules that let speculators and hedge funds turn our markets into a casino."

"The chairman of the SEC serves at the appointment of the president and in my view has betrayed the public's trust. If I were president today, I would fire him," McCain added, prompting loud cheers.

So it's Christopher Cox's fault that he couldn't prevent Fannie and Freddie - two agencies that he doesn't regulate - from bankrupting themselves? It's his fault that the SEC - which doesn't regulate the insurance industry - couldn't prevent AIG from writing bad credit default insurance? And he was supposed to stop this... how?

Now to the other side:


This crisis serves as a stark reminder of the failures of crony capitalism and an economic philosophy that sees any regulation at all as unwise and unnecessary. It’s a philosophy that lets Washington lobbyists shred consumer protections and distort our economy so it works for the special interests instead of working people; a philosophy that says we should give more and more to those with the most and hope that prosperity trickles down to the rest.

That's rich - McCain opposes regulation? Virginia Postrel has a more accurate description:

McCain is an instinctive regulator who considers business a base pursuit

A criticism of "crony capitalism" by one Fannie's very favorite Senators is -- well, a brutal assault on reason.

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SINGING THE IRS BLUES

September 19, 2008

If you have to live the blues to sing them, a Minneapolis musician is taking his act to the next level:


Steven Mark Renner, of Minneapolis, was charged Thursday with failing to pay more than $300,000 in taxes between 2002 and 2005. According to the indictment, Renner took money from his company Cash Cards International, an Internet-based money transmission business, to pay for his living expenses and investments in coins, oil wells, art, stamps and vintage musical instruments, the indictment said. The money also went to promote his band, "Stevie Renner and the Renegades," the indictment said.

As happens so often, it's the day job that pays the bills; Mr. Renner is accused of skipping taxes on $1,485,000 in taxable income.

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HOW THE IRS GOES AFTER THE OWNER OF A SINGLE MEMBER LLC

September 19, 2008

A single-member limited liability company is a "disregarded entity" when you figure taxes. An individual who runs a business in a single-member LLC reports his income on Schedule C as if the LLC did not exist. But when the IRS is trying to extract money, the LLC does exist, as Marc Ward explains:

The lawyer owed income tax to the government. Notices of tax liens were filed by the IRS. The only asset available to satisfy these liens was the income generated by the LLC. The Chief Counsel concluded that the right to receive a return of a member's capital contribution and to share in the LLC's profits is a property right subject to the levy. Accordingly, the LLC would be required to turn over the income in its possession to the IRS. However, the contingent rights represented by the contingent fee agreements belonged to the LLC and were not subject to the levy.

I don't pretend to understand the implications, but it does seem like an LLC can make life harder for the IRS Collection agents.

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BLOCKING AND TACKLING IN THE COMMERCIAL LOAN DEPARTMENT

September 19, 2008

They say that you win football games by doing the little things right - blocking and tackling. The Iowa Banking Law Blog has been running double sessions in doing the little things right when making commercial loans. For example:

Although the mortgage of a construction lender is generally entitled to priority over any mechanics lien claimant who starts its work after the mortgage is filed, a construction mortgage will be inferior to the claim of any mechanics lien claimant who starts work prior to the recording of the construction mortgage. Consequently, the construction lender must take two steps to protect the priority of its mortgage. First, it must inspect the property to confirm that no work has commenced at the site prior to the recording of the construction mortgage. Second, in the event the inspection reveals that any work has begun at the site, subordinations must be obtained from every contractor who has provided such labor or materials.

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SENATE TAXWRITERS UNVEIL 2008 'EXTENDERS' BILL

September 18, 2008

The Senate Finance Committee leadership has agreed on a tax package to exend a set of perennially-expiring tax breaks, including the "AMT Patch" and the research credit. The bill also includes a series of tax breaks for areas affected by the recent Midwest flooding, including one extending the deadline for replacing flooded property to five years - if the replacement takes place in the same county.

It wouldn't be a tax bill without some strange giveaway, and this one is no exception. Buried in the bill is a provision temporarily shortening the depreciable life for most farm equipment to five years, instead of the standard seven years. Given that the farm economy has never been better, it's extremely important to give them tax breaks, after all.

Link: Finance Committee bill summary. (Link fixed)

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BECAUSE $40 MILLION IS CHUMP CHANGE FOR MICROSOFT

September 18, 2008

Fresh off of special legislation giving Microsoft $40 million in tax breaks in exchange for moving a pile of shipping containers server farm to West Des Moines, Iowa may give them another $2.1 million in tax credits today, according to the Des Moines Register. The report now says Microsoft will initially hire 25 employees; prior reports said it would be closer to 50. I hope that means our little 35-employee accounting firm deserves even more than $28 million, but we'll not be greedy.

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I KNOW IT'S WRONG, BUT...

September 18, 2008

...I want one of these.

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THAT'S GRATITUDE FOR YOU

September 18, 2008

Igor Olenicoff, the real estate mogul who may have helped the IRS unearth an offshore tax evasion tax boutique at UBS, is now suing that bank. After all his friendly UBS bankers did to hide $200 million offshore, that's the thanks they get!

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IRS ISSUES APPLICABLE FEDERAL RATES (AFR) FOR OCTOBER 2008

September 18, 2008

The IRS has issued (Rev. Rul. 2008-49) the minimum interest rates for loans made in October 2008:

-Short Term (demand loans and loans with terms of up to 3 years): 2.19%
-Mid-Term (loans from 3-9 years): 3.16%
-Long-Term (over 9 years): 4.32%

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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WORDS TO REMEMBER

September 17, 2008

The Tax Policy Blog takes a sardonic trip down memory lane to remind us how we got into the fine financial mess we are in. First we visit Congressman Barney Frank in 2003:


Fannie Mae and Freddie Mac have played a very useful role in helping make housing more affordable, both in general through leveraging the mortgage market, and in particular, they have a mission that this Congress has given them in return for some of the arrangements which are of some benefit to them to focus on affordable housing, and that is what I am concerned about here. I believe that we, as the Federal Government, have probably done too little rather than too much to push them to meet the goals of affordable housing and to set reasonable goals. I worry frankly that there is a tension here.

The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disastrous scenarios. And even if there were a problem, the Federal Government doesn't bail them out. But the more pressure there is there, then the less I think we see in terms of affordable housing.

Thanks a lot, Barney. Now we visit the President of the Home Builders Association speaking out against stricter oversight of Fannie and Freddie in 2004:


If Congress follows Federal Reserve Chairman Alan Greenspan's advice to rein in Fannie Mae and Freddie Mac because they could conceivably one day pose a "systemic risk" to the nation's financial system, home buyers had better be ready for a far-less-accommodating home-finance system than the one they have grown accustomed to in recent years ("Greenspan says Freddie, Fannie need oversight," Money, Feb. 25).

Thank you, too, buddy.

At least one of our Congressional stalwarts isn't abandoning us in these troubled times: Rangel Refuses to Step Down as Ways & Means Committee Chair

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Stay on alert, Congressman!

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IRS GUIDANCE ON HOMEBUYER CREDIT

September 17, 2008

The IRS has released its first guidance on the new credit for "first time" homebuyers. It notes that the credit really operates like an interest-free loan, as it must be repaid over 15 years:


The first-time homebuyer credit is similar to a 15-year interest-free loan. Normally, it is repaid in 15 equal annual installments beginning with the second tax year after the year the credit is claimed. The repayment amount is included as an additional tax on the taxpayer’s income tax return for that year. For example, if you properly claim a $7,500 first-time homebuyer credit on your 2008 return, you will begin paying it back on your 2010 tax return. Normally, $500 will be due each year from 2010 to 2024.

You may need to adjust your withholding or make quarterly estimated tax payments to ensure you are not under-withheld.

As surely as a Senator will crow at the sunrise (and take credit for it), we will start hearing sad stories of taxpayers who have trouble repaying their credit starting sometime in 2010 or 2011. No doubt some congresscritter will want to demonstrate his compassion using our money by forgiving the loan repayments.

Related: IRS: LENDER OF FIRST RESORT

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2008 INFLATION ADJUSTMENTS PROJECTED

September 17, 2008

CCH has projected the inflation adjustments for 2009 tax computations. Some key figures:

Standard deduction, joint filers: $11,400 (2008 amount: $10,900)

Standard deduction, single taxpayers: $5,700 (2008 amount: 5,450)

Gift tax annual exclusion: $13,000 (from $12,000)

Kiddie tax threshold: $900 (from 850).

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THE OCEAN OFFERS NO TAX CREDITS

September 17, 2008

We all know that server farms only float on a sea of taxpayer money, right? Maybe not:


Call it Google’s data navy.

The search and advertising company has filed for a patent that describes a “water-based data center.” The idea is that Google would create mobile data center platforms out at sea by stacking containers filled with servers, storage systems and networking gear on barges or other platforms.

This would let Google push computing centers closer to people in some regions where it’s not feasible, cost-effective or as efficient to build a data center on land. In short, Google brings the data closer to you, and then the data arrives at a quicker clip.

Come to think of it, Microsoft's subsidized server farm in West Des Moines will be suspiciously close to the Raccoon River. Hmm...

(Via Marginal Revolution)

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TWO MORE 'AEGIS' CUSTOMERS WIN VACATION AT CLUB FED

September 16, 2008

In greek mythology, the aegis is the shield of Zeus. Wikipedia explains:

When the Olympian shakes the aegis, Mount Ida is wrapped in clouds, the thunder rolls and men are struck down with fear.

Maybe that's how two West Virginia doctors felt yesterday when they were sentenced to prison for their involvemment with another Aegis:

On Monday, U.S. District Judge David A. Faber sentenced Dr. Nelson E. Velazquez, 50, to a year in prison and Dr. David L. Tolliver, 53, to a month in prison followed by five months on home confinement.

Both men were caught up in the Aegis system, a Chicago-based scheme in which the promoters promised to shelter money in tax-free trust funds, said Assistant U.S. Attorney Susan Robinson.

"Aegis" was also the name of a Chicago-based outfit that sold tax evasion schemes using trusts and offshore accounts. Six founders of the Aegis Company were convicted this spring in a "$60 million conspiracy." But when tax scams go bad, it's not just the promoters that can end up in front of the judge, as the West Virginia doctors have learned the hard way.

The moral: when a golf buddy tries to get you to the guy who showed him how to make taxes go away through offshore trusts, maybe you should go home when you reach the turn.

Related: 'AEGIS' TRUST PROMOTERS CONVICTED

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POLITICS AND TRAVEL EXPENSES AT IOWABIZ

September 16, 2008

Today's my turn to post at IowaBiz, the Des Moines Business Record's blog for entreprenuers. We draw a lesson from todays headlines on how the tax law deals with per-diem travel expenses

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EVERYTHING I NEED TO KNOW ABOUT POLITICS I LEARNED IN JUNIOR HIGH

September 16, 2008

20080916-1.jpgIowa's Lieutenant Governor, Patty Judge, tells the cool girls who to shun:

Judge dismissed the idea McCain surrogates have put forward about the possibility former Hillary Clinton supporters may throw their support to Palin.

"If John McCain thinks women are than stupid, he is wrong," she said. "In summary, just because you have a pantsuit, that does not qualify you for the sisterhood."

A search of the Lieutenant Governor's website fails to turn up any additional information about what the qualifications are.

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PUT A SPORK IN FRANCE, THEY'RE DONE

September 16, 2008

The TaxGrrrl reports that France is looking to save the Earth with a tax on plastic utensils. That means no more free sporks at Cotigny Poulets-Frites.

Of course, metal silverware has its own carbon footprint, both when made and when washed in hot water. Dirty silverware, of course, has the carbon footprint of the ambulance bringing the food poisoning cases to L'hopital. But what's a little salmonella among amis?

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SO DO WOMEN MAKE IT UP IN ILLEGAL OCCUPATIONS?

September 15, 2008

Men in Legal Occupations Earn 95.6% More Than Women

- TaxProf Blog headline.

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IT'S SEPTEMBER 15!

September 15, 2008

Don't get so distracted by the turmoil on Wall Street or the Cubs juggernaut that you forget your third quarter federal estimated tax payments today. Individuals who make quarterly payments and calendar-year corporations need to make their third quarter payments today.

Link: Individual estimated tax payment summary at IRS.gov

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APPEALS FAIL FOR TWO TAX PROTEST FIGURES

September 15, 2008

20070902-1.jpgIt was a bad week for Florida tax protest folks in federal appeals court. Perky pediatric dentist Nancy Montgomery-Ware failed to convince the 11th Circuit that her tax evasion was "willful." She stopped filing tax returns after the usual "hours of study" of tax protest literature. The court wasn't buying:

Because the government proved that Ware was aware of her duty to file income tax returns and treat her wages as income, it was not required to prove Ware's knowledge that a specific statute or regulation imposed those duties. Cheek, 498 U.S. at 202, 111 S. Ct. at 610 ("[I]f the Government proves actual knowledge of the pertinent legal duty, the prosecution, without more, has satisfied the knowledge component of the willfulness requirement.").

Former IRS agent Shirley Peel Jackson did no better in the same court, using some of the same futile tax protester arguments.

For a full fraud roundup, check out Taxable Talk.

Related: A PAINFUL EXTRACTION FROM DENTAL PRACTICE

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FEWER TRADES, MORE ACCURACY?

September 15, 2008

Last week I suggested that the prediction market for tax rates in 2011 may be untrustworthy because of the small trading volume. Now a researcher says that's not necessarily so. (Via MidasOracle, via MR).

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SO HOW WAS YOUR WEEKEND?

September 15, 2008

If you are a banker at Lehman Bros., not good. Lovely Wall Street Journal headlines today:

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Good thing I didn't follow up on my impulse to buy some of that cheap Lehman stock. The best blog coverage I've seen so far is at Econlog and Marginal Revolution. Arnold Kling at Econlog has this cheerful analysis:

For the stock market, I'd say if it only drops 3 or 4 percent and stays open all day, I would count that as a win. My worry would be that there are no buyers, and when that is the case, even if 99 percent of investors are standing pat, the other 1 percent give the impression of "panic selling."

When a 570-point drop in the Dow is a "win," I sure hope we don't lose.

In other news, Cub fans are happy today, which is either a pleasant diversion or the strongest warning yet of an imminent apocalypse.

End-of-the-day Update: Dow down 504. The smell of victory! Eww... And the Cubs won a one-hitter today; that won't reassure the market.

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AWAY FROM HOME IN WASILLA?

September 12, 2008

The TaxProf notes questions on whether Alaska Governor Pallin has properly reported per-diem payments she received while she stayed at her home in Wasilla, Alaska. At least one is demanding that she release her tax returns.

The controversy illustrates the importance of correctly identifying your "tax home." You can only deduct travel expenses incurred "away from home," meaning away from your "tax home." If your employer reimburses expenses, only those incurred "away from home" are nontaxable; otherwise, your employer is supposed to put them on your W-2 as taxable compensation.

Your tax home isn't necessarily the place where you live. It's your principal place of business. If some big shot lives in Los Angeles and commutes by private jet to his full-time executive position in New York, he's at "home" in New York, and his meals and lodging there aren't deductible.

The tax home of the Governor of Alaska is presumably the state capital, Juneau. Since Juneau is remote from the rest of the state, Alaska governors travel a lot.

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Governor Palin is from Wasilla, which is maybe 40 miles from Anchorage, Alaska's largest city. She apparently took per diems, but not lodging expenses, when she stayed at her Wasilla house. Apparently Alaska also reimburses expenses for family members away from home with the Governor.

It probably isn't too difficult for an Alaska governor to come up with a business reason to go to the Anchorage area; if the trips were on business, per diem reimbursements for meals should be excludible from Governor Palin's income. The tax law doesn't allow you to get tax-free reimbursements for expenses of your family members on your business trips, so expenses for her family members should have been put on her W-2 as taxable compensation. If they weren't, Alaska will probably file an amended W-2 for her during the election silly season.

The IRS has a good summary of the rules for expenses away from home here. We've covered tax home issues, including here and here.

UPDATE, 10/8: More here.

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THEY MUST BE GRADING ON A CURVE

September 12, 2008

The Tax Policy Blog is tearing its hair out at the pervasive tax illiteracy in the current campaign. Nobody is immune. Certainly not the press, as recounted in Joe Klein's Ignorance of Tax Code:

It is frustrating that many reporters throughout this campaign continue to lack a basic understanding of the U.S. tax system and tax policy in general, yet many report on it as if they hold CPAs or Ph.Ds.

Sadly, PhD and CPA aren't as interchangeable as this implies, or I would have my tenured professorship by now and maybe enjoying nice sabbaticals in the spring, instead of tax seasons.

The TPB's frustration arises from the comical discussions of the McCain plan for a $5,000 credit for health coverage and a $7,000 child exemption. For the record, a "credit" reduces tax dollar-for-dollar, while an "exemption" or "deduction" reduces taxable income. A $5,000 credit reduces the tax bill by $5,000, regardless of your income or tax rate; A $5,000 exemption reduces your taxable income by $5,000, and your tax by $1,000 if you have a 20% tax rate.

The Democrats struggle with these basic tax concepts: Joe Biden Doesn't Understand Tax Code Either:


Repeat after me: a tax credit is not the same as an exclusion or a deduction. Either Joe Biden doesn't understand the tax code (my hypothesis), or he is a liar.

But the struggle is bipartisan, as recounted in More Tax Credit vs. Exemption vs. Deduction vs. Exclusion Ignorance (John McCain Edition). They quote a USA Today article on Senator McCain (emphasis by TPB):

McCain then went on to say he did not believe in "class warfare or redistribution of the wealth," and defended his $7,000 per child tax credit and $5,000 health insurance tax credit proposals.

You can almost see Gerald Prante's veins popping at TPB as he explains:

It is not a tax credit. It is a tax exemption. And there is a big difference. A credit would be much more costly (and rewarding to taxpayers). And a $7,000 child tax credit would be more progressive than a personal exemption doubling, which is what McCain is actually proposing.

Sadly, elections are strictly pass-fail, and they don't let us flunk the whole class.

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ROBERT BEALE EXPLORES THE LIMITS OF CONSENT

September 11, 2008

20071231-2.jpgRobert Beale put the judge in her place:

"I do not consent to incarceration, fine or supervised release," he said. "I have not committed a crime."

Unfortunately for Mr. Beale, Judge Ann Montgomery doesn't care whether he consents. Nor does the nice federal marshal who was behind Mr. Beale at his sentencing. Nor does the warden at the federal prison Mr. Beale where Mr. Beale will serve out the 134-month non-consensual sentence he received this morning.

Mr. Beale was convicted in April of five tax evasion counts. The Minnesotan was convicted of charges that he diverted income from his business offshore, partly based on testimony of employees who blew the whistle on him. He failed to show up when his trial was first scheduled, spending 15 months on the run before he was arrested in Florida.

He may have gotten off on the wrong foot with Judge Montgomery when prison officials monitored his prison phone calls in which he allegedly plotted to have her "arrested" by a "common law court" of his friends to stop the trial. He awaits another trial on charges arising out of that.

Related:

BUSINESS PLANS OF THE ALMIGHTY, VIA ROBERT BEALE

I MEANT THAT GOD WANTS ME TO BUY YOU DINNER AND DRINKS, YOUR HONOR

Update: U.S. Attorney press release

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THE DOLLARS WERE IN ENGLISH

September 11, 2008

Charles Rangel, the chief taxwriter in the House Ways and Means Committee, apparently was too busy looking after our taxes to look after his. He has vowed to pay back taxes on $75,000 of rental income on a "Dominican Republic beach house" that he has left off his tax returns. Apparently Mr. Rangel has alternately blamed his accountant and his lack of skills in Spanish. The New York Times reports:

At a Capitol Hill news conference, during which he was by turns remorseful and combative, the congressman said that he had not been aware of the income and unpaid taxes in part because he had trouble getting detailed financial statements from the resort’s managers in the Dominican Republic.

"Every time I thought I was getting somewhere, they’d start speaking Spanish," Mr. Rangel said.

About half of Mr. Rangel's constituents speak Spanish, according to the Times. In any case, the Tax Law, while it seems at times to be an alien tongue, is actually written in English.

The TaxProf has coverage, including a suggestion that Ways and Means members be audited annually. I'd extend that rule to members of the Senate Finance Committee. Further, I would make them guinea pigs for my proposal to have all congresscritters do their returns live on the internet, with running commentary by those watching. No doubt there would be some bilingual help there among the kibitzers.

The Hit and Run blog piles on.

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TOO GOOD TO BE TRUE?

September 11, 2008

The New York Times has a new piece on avoiding flaky tax shelters. It quotes this tax expert:

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“Here are three warning signs that a tax deal should be avoided,” said Tanina Rostain, a legal ethics scholar at New York Law School: “When the tax savings promised are many times the amount of the initial investment, when you are told that there is no financial risk involved and when you are urged not to show it” to anyone else.

The piece includes much good advice, most notably to consult a tax advisor who's not trying to sell you the deal. But the piece only scratches the surface. Here are some tips to help you point out a really bad tax shelter.

- It's sold on the Midway at the State Fair.
- You ask the promoter if you will go to jail for it, and he says "oh, it's about you now?"
- The promoter offers to throw in a Pocket Fisherman.
- You have to buy the shelter using small unmarked bills.
- The advisor says "hey, it worked for Wesley Snipes!"


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IT'S A CAVALCADE!

September 11, 2008

The 2008 State Fair is gone, the weather is turning, but they never close at the Cavalcade of Risk! The new edition is up at Worker's Comp Insider. Among the fine posts at this roundup of insurance and risk-management blog posts are the Insureblog's Tough Questions for the candidates on health care costs.

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IT'S BEEN SEVEN YEARS?

September 11, 2008

Yes, it has.

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MANKIW ON MCCAIN TAX POLICY

September 10, 2008

Greg Mankiw thinks that the tax rate futures market isn't a cheap way to buy McCain futures, as I have suggested; he thinks the market is likely fairly pricing future tax policy, predicting high tax rates no matter who wins in November. He may be right.

I think the tax rate futures market isn't heavily traded, so it may not be a great indicator of future tax policy. To the extent it is reliable, though, it's less an indicator of likely McCain tax policy preferences than of likely gridlock. All that has to happen for the top individual rate to go to 39.6% is for Congress to do nothing; current law provides that in 2011, the rates return to those in place in 2000.

So an investor evaluates the likelihood Congress will pass an extension of the current rates and the likelihood the president will sign them. Even if President McCain were to push for lower rates, he might have trouble getting them through a Democratic Congress. In that case, the market isn't pricing McCain's likely policy preferences. It's betting that either Obama or gridlock will prevail in tax policy.

Via Marginal Revolution.

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THREE MORE DUMB IOWA POLICIES

September 10, 2008

Yesterday we listed seven foolish Iowa tax policies. After sleeping on it, we came up with three more to round it out as a "top ten" list of policy inanity. The three new ones:

Special tax breaks for old folks. Iowa exempts old folks from tax entirely on net income up to $24,000. Iowa is also phasing out all taxation of social security income, a process to be complete by 2014. Given that old folks are a prosperous group, in general, why should they get such a break?

Taxing non-resident income of Iowa investment partnerships. If Iowa really wants to be a financial center, this policy is foolish, and it probably is contrary to the law. This is the only top ten stupid policy that is entirely correctible by the Department of Revenue itself.

Different tax results for individual owners of partnerships and S corporations. S corporation shareholders get a credit that approximates single-factor apportionment of multistate S corporation income. Partners don't. Partners can own their partnerships through S corporations, but why should investors have to go through that trouble?

For convenience, the whole "Top Ten" is in the extended entry below, in increasing order of foolishness.

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IT MIGHT BE THEFT, BUT NOT TO YOU

September 10, 2008

To the average investor, it seems like the guys behind the shenanigans of the late 1990s stock boom, with Enron, WorldCom, and the like, are thieves. But does that mean you can deduct such losses as theft losses?

If the losses are big enough, theft loss treatment can be favorable. Investment losses are normally capital losses, deductible only to the extent of capital gains plus $3,000. Unused losses carry forward indefinitely. Corporations don't get the $3,000 extra loss, and their losses only carry back three years and forward five years.

Theft losses are only deductible to the extent they exceed $100, and to the extent they exceed 10% of adjusted gross income. Corporate theft losses are fully deductible. It's easy to see why an investor would prefer deducting a theft loss now - especially a corporate investor, whose losses are especially likely to expire unused.

Electric Picture Solutions, Inc., a California corporation, lost $115,616 on its investment in Novatek international. The SEC filed an enforcement action against Novatek's officers, as the Tax Court reports:

The complaint alleged that the defendants had committed a massive fraud on investors by, among other things, orchestrating a series of sham transactions, announcing highly profitable nonexistent contracts, and filing materially false and misleading financial statements. Subsequently, without admitting or denying the SEC allegations, one of the individual defendants consented to the entry of a final judgment that imposed civil sanctions against him for his role in the Novatek matter and in a related fraud action.

Electric Picture deducted the loss as an ordinary "fraud and embezzlement" loss. The IRS disallowed the loss. This week the Tax Court upeld the IRS. The court noted that the tax law looks to whether a theft occurred under state law. Unfortunately for the taxpayers,


Generally, a taxpayer who purchases securities on the open market cannot support a claim of theft under California law because there is no privity between the perpetrator and the victim.

The Tax Court concluded that whatever happened wasn't a theft under California state law, so it was a capital loss. As the taxpayer had no capital gains for the year, that meant none of the loss was deductible.

Cite: Electric Picture Solutions, Inc., T.C. Memo 2008-212.

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U.S. CORPORATE 'EFFECTIVE' RATES

September 10, 2008

The Government Accountability Office has issued a report on the effective tax rates of large U.S. corporations. The report uses data from Schedule M-3, which came into use for 2004 tax returns of corporations with assets over $10 million. The report seems to finger offshore operations and transfer pricing as the main ways big corporations keep their U.S. taxes down.

From the report:

We estimate that the weighted average U.S. effective tax rate on the domestic income of large corporations with positive domestic income in 2004 was 25.2 percent. There was considerable variation in tax rates across corporate taxpayers, with about one-third of the taxpayers having effective rates of 10 percent or less and a quarter of the taxpayers having rates over 50 percent. U.S. tax credits had a relatively small effect on these effective rates.

The lucky 1/3 with 10% rates seem to be largely those with the ability to shift income to low-tax countries. But while some companies have low effective rates, many - one in four - just get clobbered by effective rates over 50%.

It's interesting that tax credits don't seem to play a big part in the effective rate of tax, contrary to assertions like this from members of the left side of the tax policy spectrum, like Linda Beale:

That's because the statutory rate of 35% is only on paper. Corporations engage in aggressive tax planning that cheats the system, and they take advantage of a bountiful number of lucrative loopholes built into the system under the four decades of Reagan-style corporate favoritism and deregulation, including items such as accelerated depreciation, various expensing provisions that let corporations deduct before they really have an economic cost, and the lucrative research & development credit that lowers taxes dollar-for-dollar for R&D expenditures that corporations have to do anyway (so they do not serve as an incentive to greater development) and that corporations have often already done prior to the enactment of the one-year "extensions" of the credit that have been taking place as transitions to no-credit for years.

The statory rate may be "on paper" for the lucky 1/3, but it's brutal for the unfortunate quarter, and real enough for those in-between.

What are the policy implications? Transfer pricing is certainly an issue, but it's unlikely that intercompany pricing can be policed effectively. Lower corporate rate would reduce the incentive to shift income, but even a 25% rate is a lot higher than the effective rates for our trading partners. An integrated tax system that would only impose a single level of tax on corporate income would be nice, but that seems like a pipe dream.

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THEY'RE BOTH RIGHT!

September 10, 2008

Two headlines in today's electronic version of Tax Notes Today (subscriber-only links):

Conrad Blames Republicans for Deficit

Gregg Says Democrats to Blame for Increase in Deficit

And they're absolutely correct.

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12 MONTH SENTENCE GROWS FROM FERTILE FELONY

September 09, 2008

The co-owner of a Fertile, Iowa injection molder received a prison sentence of 12 months and 1 day yesterday in connection with failing to pay taxes on funds he took from the business. U.S. District Judge Bennett departed from federal sentencing guidelines in sentencing Thomas Ray Dillavou of Lake Mills; the guidelines indicated an 18-24 month sentence.

Mr. Dillavou pleaded guilty in January to two counts of a five-count indictment, admitting that he diverted $598,172 over five years. Some of the money went to an investment scheme involving Nigerians; the diverted cash also paid for personal expenses, including remodeling and vacations.

Mr. Dillavou will also serve 24 months of supervised release, and he will have to file correct tax returns for the years involved. It's likely that Iowa authorities will also want to get involved.

The moral? Getting involved with Nigerian investment scams is foolish; embezzling funds and not paying taxes is criminal. Combining them is criminally foolish.

Links:

Sentencing document
Government Sentencing Memorandum
Defendant's memo arguing for downward departure from sentencing guidelines

Prior Tax Update Coverage

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TAX POLICY GREATEST MISSES

September 09, 2008

David Brunori, a state tax specialist at Tax Analysts, says ($link):

I'm looking for readers' opinions on particularly bad (or good) tax policies. I'm contemplating making a list of the top 10 best and worst tax policies in operation. Don't be shy. Send an e-mail with your thoughts to dbrunori@tax.org.

Here's my quick Iowa-centric list, progressing from bad to worse:

Historic rehab credits and tax breaks that have helped create a glut of unsold housing in Downtown Des Moines at a time when houses are also languishing unsold in the suburbs.

Having the highest corporation tax rate in the nation (12%), and coupling it with a tax system so riddled with loopholes that very little tax is collected. It's the worst of both worlds - it scares away business without actually raising revenue.

A bi-partisan refusal to lower rates in exchange for eliminating deductibility of federal taxes. This creates year-end tax planning headaches to no economic purpose. Except, of course, creating fees for me for year-end planning work.

De-coupling state rules from federal rules. This increases compliance headaches for businesses and individuals while creating a fiscal problem down the road when the federal breaks turn around (e.g., depreciation).

Targeted Iowa tax breaks for "new jobs" and "expansion." These breaks go to businesses that would be in Iowa anyway. Iowa takes money from existing businesses and uses it to lure and subsidize their competitors, and they reward shakedowns from businesses that threaten to leave.

Enormous tax breaks individual companies, notably Microsoft and Google. At $500,000 per job, I could give the state at least as much economic bang for the buck if they gave me the money to hire a household staff.

Tax credits for film production. Iowa has tax credits to fund half of the cost of films produced here. It's difficult to imagine a policy that could be stupider than taxing every other business to fund Hollywood projects.

While I think I could come up with more, I'm sure the legislature can.

UPDATE: Now we've made it a Top Ten list.

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PAYROLL OUTSOURCING DOESN'T OUTSOURCE RESPONSIBILITY

September 09, 2008

One of the worst nightmares for a small business is to find out that your payroll service has absconded with your employment tax payments. Suddenly you have a large debt to a very powerful and ornery creditor, as the IRS still wants the money.

The IRS has put up a useful discussion, Outsourcing Payroll Duties. It has much useful stuff, like this:

If there are any issues with an account, the IRS will send correspondence to the employer at the address of record. The IRS strongly suggests that the employer does not change their address of record to that of the payroll service provider...

This is a must. If your payroll service guy is using your payroll tax money to fund his girlfriend's condo, you don't want him receiving the IRS delinquency notices.

Employers should ensure that their service providers are using EFTPS (Electronic Federal Tax Payment System) so the employer can confirm payments made on their behalf. Everyone should use EFTPS and Treasury regulations require electronic payment for payroll taxes over $200,000 in a calendar year. EFTPS maintains a business’s payment history for 16 months and can be viewed on-line after enrollment.

Get EFTPS, and make it a point to go online after every payroll date to make sure your taxes are being remitted. It's a minor inconvenience, but it could save major headaches.

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HELL HATH NO FURY LIKE AN ACCOUNTANT SCORNED

September 09, 2008

Minnesota Tax Preparer Julius Kiage may have poached clients from the wrong guy. The Coon Rapids man is under investigation for returns that:

appear to contain a pattern of exaggerated or fraudulent claims related to education credits, individual retirement account deductions, education credits and charitable contributions.

...

IRS researchers found that J.K. Accounting prepared 1,843 returns for the 2006 and 2007 tax years, which resulted in tax refunds totaling $4.7 million. Investigators raided the firm's office Aug. 14 and seized computer data and equipment, plus 27 boxes of paperwork.

Why is the IRS investigating Mr. Kiage?

The investigation began based on a tip from an informant who had prepared a tax return for a client showing a tax refund of $304. The client then asked Kiage to redo the return, and it showed a refund of $1,646...

This client almost certainly accused his original preparer of being incompetent, or at least insufficiently bold or "creative." By now I suspect the IRS has explained otherwise.

Russ Fox has this story and more in his weekly fraud roundup.

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MCCAIN-OBAMA ARBITRAGE OPPORTUNITY?

September 08, 2008

Intrade has set up a prediction market for expected federal income tax rates in 2011. This market seems to be lightly traded. One of the contracts allows investors to bet on whether the top marginal rate will exceed 38% in 2011. The price for this contract is 85 bid, 89 ask, which means that this market is roughtly 85% certain that the top federal marginal rate will exceed 38% in 2011.

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For that to occur, the 2008 elections will need to result in both

- A victory for the Obama ticket, and
- A strong enough Democratic Senate majority to overcome a filibuster against this sort of tax increase.

The pricing seems anomolous, given the current pricing of the presidential ticket futures markets, where an Obama victory is trading at 51 and a McCain victory is trading at 48.

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Source: Intrade

If it's about equally likely that either candidate can win, it doesn't make sense that a >38% top rate would be 85% certain. Either the market thinks McCain is a closet tax raiser, or there is a disconnect.

So if you are looking for a cheap way to buy McCain futures, consider a 15-cent bet against the 38% Intrade tax rate futures contract. Assuming, of course, that you can get somebody to take the other side for 85 cents.

UPDATE: Thinking this through a bit further, the tax rate contract could be a bet on gridlock. If Congress takes no action, the rates revert to 2000 levels in 2011 -- which means a 39.6% top rate . Divided government could well produce such a result.

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WHEN YOU'RE 80, WHAT'S ANOTHER 11 MONTHS?

September 08, 2008

irwin.jpgTax Protest pied piper Irwin Schiff got another 11 months tacked on to his 13 year federal tax crimes sentence last week. The judge added the time to punish his behavior during his trial.

Mr. Schiff is 80 years old. His projected release date is in 2016, when he will be 88 or so; I'm not sure whether that includes his additional 11 months.

So - who still thinks Mr. Schiff's theories on the federal income tax are correct?

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THEY TOOK THE LOAD OFF FANNIE AND PUT THE LOAD RIGHT ON ME (AND YOU)

September 08, 2008

So the government has now nationalized Fannie Mae and Freddie Mac, the feckless government-sponsored mortgage companies. Their congressional godfathers, especially Barney Frank and Charlie Schumer, fended off all attempts to rein in the reckless lending and cowboy accounting of these supremely well-lobbied political lenders, and now the taxpayer is holding the bag.

The Cassandras at the Wall Street Journal have been screaming about this impending train wreck for years, and now they get a bitter vindication. Arnold Kling, who used to work for Freddie Mac, has been clear-eyed about this for a long time. Some other folks don't looks so good.

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NO, BUDDY, THIS IS IOWA

September 06, 2008

A man from Marion, Iowa claims he lives in Heaven. The Department of Justice has a different view. From the Des Moines Register:

A Marion man, who allegedly claims to be a citizen of heaven rather than a U.S. Citizen, has been charged in federal court in Cedar Rapids with making a false claim on his taxes.

Richard Lee Mellor, 53, has been indicted on a charge alleging that he sent a tax return to the Internal Revenue Service claiming a refund of about $240,000.

Anybody who goes to the movies knows the problem with Mr. Mellor's claim.

When it comes to trying to get your taxes back from the government, this indictment is a pretty good argument against the "sure it's nuts, but it's worth a try" approach.

Link: Copy of indictment

UPDATE, 9/8/08: The TaxProf has more.

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DEPARTMENT OF MEANINGLESS STATISTICS

September 05, 2008

A "Non Sequitur" is defined in Wikipedia as follows:

Non sequitur (IPA: /nɒnˈsɛkwɪtər/) is Latin for "it does not follow". It is most often used to indicate something which does not follow logically, such as a stated conclusion that is not supported by the facts. Non sequitur may refer to:

Non sequitur (logic), a logical fallacy

Non sequitur (humor), a comment that has no relation to the preceding comment or to an ongoing discussion or topic

Non Sequitur (comic strip), a comic strip by Wiley Miller

"Non Sequitur" (Star Trek: Voyager), an episode of Star Trek: Voyager

We'll note that Wiley Miller lives in Iowa City. We'll also note that a recent report from the Center for Budget and Policy Priorities illustrates the "logical fallacy" non sequitur:

The CBPP seems to like the idea of jacking up individual rates. Of course, that means raising the rates of pass-through businesses, like S corporations, whose income is taxed on the returns of their owners. As far as their recent report is concerned, that's not a problem:

First, critics charge that allowing the 2001 tax cut's reduction in the top two marginal income tax rates for individual taxpayers to expire as scheduled would affect a large proportion of small-business owners. In fact, only 1.9 percent of filers with any small-business income are projected to face either of the top two income tax rates in 2009.1

Where to start? Maybe with the strawman: that "critics" are saying the problem with such tax increases is the proportion of tax returns with small business income that would be affected. The otherwise well-footnoted CBPP paper doesn't cite any such critic.

When you look at the pool of returns that give the CBPP it's 1.9% figure, you'd find it hard to see how it could be even that high. To them, a small business 1040 is:


...any tax unit that receives any income (or loss) from a sole proprietorship, farm proprietorship, partnership, S corporation, or rental income.

That includes every Amway, Mary Kay and Shacklee salesmen. It includes any of the thousands of taxpayers who hold, for even a few days, a few shares in a publicly-traded oil and gas partnership like Kinder Morgan. It includes every duplex owner that rents the other unit out, everybody who rents out a vacation cabin, and every e-bay business. Of course, most such taxpayers wouldn't see such income as their livelihoods; it would be a sideline or an investment. Would anyone expect that a large proportion of these returns would be in the top two brackets?

Jacking up the rate on the top two brackets -- returning the top rate to 39.6% -- would affect a large proportion of the income and economic activity generated by small businesses. It would affect the ones that are most important - the ones that are successful, growing and hiring. If they have less after-tax income, they won't be doing as much growing and hiring - and the cost comes not only from the small business owner, but for the person who doesn't get hired because the government has sucked more money out of the would-be employer's business.

Unfortunately, the CBPP doesn't give us statistics that tell us how much small business income would be affected by jacking up the top two tax rates. We can go to IRS statistics to get a rough idea of how much economic activity would be hit with higher taxes if the rates returned to 2000 levels. Of the S corporations, partnerships and non-farm proprietorships filing in 2003, just over 3% had over $1,000,000 in gross receipts, by my reckoning. The gross receipts of this 3% over 78% of the gross receipts of such businesses and 64% of the net income.

In short, looking at the effect of an individual rate increase based only on the percentage of 1040s effected grossly understates the impact this would have on the economic activity of small businesses -- particularly the healthy ones that contribute the most to employment and growth. Using CBPP logic, you could say that breaking the legs of all NFL players wouldn't hurt football because less than 1% of those playing football nationwide would be affected.


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IRS TO MAKE $10,000 PENALTY FOR LATE FILING FOREIGN OWNERSHIP DISCLOSURES 'AUTOMATIC'

September 04, 2008

A friend forwards a rather chilling "Dear Taxpayer" letter. It seems that a C corporation missed a return deadline sometime in the murky past. Their letter begins:


Our records indicate that you late filed Form(s) 1120 (UI.S. Corporation Income Tax Return) with attached form(s) 5471 in a prior year...
...

IRC Section 6038(b)(1) provides for a monetary penalty of $10,000 for "each 5471 that is filed after the due date of the income tax return (including extensions) or does not include the complete and accurate information described in Section 6038(a).

...

Beginning January 1, 2009, the Internal Revenue Service Center will automatically assert appropriate penalties on late filed Forms 1120 with froms 5471 attached.

Harsh. Many times these forms are pretty much plain vanilla, and there are often only minor and insignificant intercompany items to report. Horrible penalties for clerical oversights by an otherwise compliant taxpayer make no sense. They presumably are doing this to police international transactions, but it's like shooting speeders going 56 in a 55 zone because the guy who robbed the bank was speeding during his getaway.

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NO JAIL FOR LIGHT-FINGERED MORTICIAN

September 04, 2008

Mark Rohde, the Northwest Iowa mortician who pleaded guilty to stealing from a business partner and not paying taxes on the stolen income, won't be going to prison. He received a suspended 10 year sentence from Judge Duane Hoffmeyer; he will be on probation for three years and will have to pay $210,000 in restitution, including $31,500 to the Iowa Department of Revenue. From the Le Mars Daily Sentinel:

The judge said he decided not to send Rohde to prison because he didn't foresee that accomplishing anything other than causing difficulty in Rohde making restitution payments.

He considered Rohde's age, prior record, family circumstances and the need for rehabilitation and protection of the community in his decision, Hoffmeyer added.

Joel Johnson, his erstwhile business partner, seems willing to wait:

During the sentencing, Johnson petitioned the judge to send Rohde to prison rather than just order him to pay restitution.

"This happened 37 times over three and a half years...There were 37 families I had to call and ask where the payment was after they had already paid," Johnson said, indicating he doubted Rohde would pay back all the losses restitution. "Getting at that money or cash is going to be hard to do."

Especially when the Department of Revenue is next to you in line for it.

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COUNTY RECORDERS LOOKING TO SELL YOUR IDENTITY DOWN THE RIVER

September 04, 2008

The Des Moines Register reports that the public records website that was posting social security numbers (see yesterday's post) was getting ready to sell the information to a private company. The site is run by the Iowa County Recorders Association, a trade group for holders of one of the more archaic elected offices around. From the report:

The recorders association this year negotiated selling its mammoth database and ongoing updates to Data Tree, a company that manages more than 4 billion records nationwide. Unsigned documents obtained by The Des Moines Register on Wednesday show Data Tree would have paid an estimated $11,750 a month for the information.

I have a better idea: replace the county recorders with a database and a technician. It would save a lot more than $11,750 per month, albeit at the horrendous cost of eliminating a patronage job for county political cronies.

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IRS ANNOUNCES GUSTAV TAX DEADLINE EXTENSIONS

September 04, 2008

Individuals in the Gustav disaster area have until January 5, 2009 to make filings and tax payments otherwise due from September 1, 2008 through January 4 under IRS relief (IR-2008-100) issued yesterday.

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FEELS LIKE FALL CARNIVAL

September 04, 2008

It's cold, cloudy and wet. Summer must be over. Celebrate the compensating benefits of fall, like football games (and ignore the politicians as much as possible), and enjoy the newest edition of the Carnival of Taxes at Kay Bell's place.

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There's even a Canadian blog there this time!

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SEND FEMA!

September 04, 2008

We're getting rain from Gustav here in Des Moines, of all places. Imagine that.

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But I thought these were tropical storms. It's 58 degrees here!

Screengrab from intellicast.com

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IOWA'S IDENTITY THEFT INCENTIVE PROGRAM

September 03, 2008

Lovely headline in today's Des Moines Register:

State Web site lists Iowans' private ID data

When the Governor and the Secretary of State found out, they leaped into action... and soon their own Social Security numbers were removed. Unfortunately, nobody else's were, even though the Governor had asked that they be removed.

Administrators of IowaLandRecords.org removed the governor's and secretary of state's information from the site after a story was published on DesMoinesRegister.com about concerns the Web site could contribute to identity theft.

"Governor Culver is committed to protecting the privacy of Iowans, which is why he was disturbed to learn that the Social Security numbers of several Iowans, including his own, were available to be viewed by the public on a Web site controlled by the Iowa County Recorders Association," said Troy Price, a spokesman for the governor.

Of course, Governor Culver has experience in this sort of thing going back to his time as Secretary of State.

When I checked this morning, IowaLandRecords.org was down. Good. It should stay down until it's cleaned up.


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ZAPPERS - THEY'RE NOT JUST FOR BUGS ANYMORE

September 03, 2008

20080226-1.jpgThe word about "zappers" is getting around. Zappers are add-on software for point-of-sale accounting programs that make sales disappear from the computer records, which is a useful feature for those inclined to tax crimes. The news has even reached the New York Times.

(via the TaxProf)

Related: ZAPPED!

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AT LEAST IT WOULD BE EASY TO FIND AUDITORS

September 03, 2008

Headline in the Tax Policy Blog:

How About a Tax on Sex?

Presumably there is a ready pool of auditors in the transom-peeker community and the high-rise apartment telescope-American community.

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ARE YOU A "TRADER"?

September 03, 2008

The Wall Street Journal Tax Report has a discussion of the rules covering "traders" under the tax law today. The piece reviews a recent Tax Court decision where a couple reduced their federal tax by $98,000 by filing their returns as if they were stock "traders," rather than investors. Unfortunately for them, the Tax Court said they didn't qualify as "traders," and their trading loss were subject to the $3000 annual capital loss limit.

The WSJ piece says:

While the Tax Court decision doesn't break new legal ground, tax analysts say it shows how difficult it can be to qualify as a trader and emphasizes the line between individual investor and professional trader. Calling yourself a trader on your tax return isn't enough, as the Tax Court decision points out. In addition to doing "substantial" trading with "continuity and regularity," the Internal Revenue Service says you must also be trying to profit from daily market price moves.

Oddly, "trader" status is most helpful if you aren't a good trader, at least for any given year. Trader gains are ordinary, but so are their losses, so the losses aren't limited. You also get to deduct your expenses as ordinary business expenses not subject to the 2% of AGI floor on investment expenses.

Cite: Holsinger, T.C. Memo 2008-191.

Related:

WHEN IS DAY TRADING A BUSINESS?

TAX COURT GIVES CLASS-ACTION MAGNATE AND DAY-TRADER A MULLIGAN

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MARGINAL RATES DON'T MATTER, EXCEPT WHEN THEY DO

September 02, 2008

Blogging tax professor Linda Beale says this:

That's because the statutory rate of 35% is only on paper. Corporations engage in aggressive tax planning that cheats the system, and they take advantage of a bountiful number of lucrative loopholes built into the system under the four decades of Reagan-style corporate favoritism and deregulation, including items such as accelerated depreciation, various expensing provisions that let corporations deduct before they really have an economic cost, and the lucrative research & development credit that lowers taxes dollar-for-dollar for R&D expenditures that corporations have to do anyway (so they do not serve as an incentive to greater development) and that corporations have often already done prior to the enactment of the one-year "extensions" of the credit that have been taking place as transitions to no-credit for years.

In short: corporations aren't paying tax, and marginal rates don't matter.

Now she asks:

Outlandish Executive Compensation: are we subsidizing it with taxpayer dollars?

If we accept Ms. Beale's conclusion that corporate rates don't matter, it seems we should be grateful that they are turning otherwise non-taxed corporate dollars into individual taxable income subject to the top marginal rate -- and to the Medicare tax to boot. Unless, of course, rates do matter at the margin.

I should also clarify that the research credit, while wrongheaded and well-deserving repeal, doesn't reduce taxes dollar for dollar for R&D expenditures - it's at best a 20% reduction, as a look at Form 6765 will show.

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WATERLOO PREPARER CONVICTED ON 31 FALSE-RETURN COUNTS

September 02, 2008

Angelique Tinder, a former Waterloo, Iowa tax preparer, was convicted in a federal court in Cedar Rapids last week of 31 counts of preparing false returns, mostly for Bosnian immigrants. From the U.S. Attorney's press release:

Evidence presented at trial showed TINDER developed a business preparing amended tax returns, mostly for Bosnian immigrants. In returns she prepared in 2003, TINDER falsely claimed deductions for medical expenses, charitable contributions, and unreimbursed employee expenses for her clients. The amounts she listed were either fraudulently overinflated or completely fabricated. For clients who sent money to family members overseas, she listed these amounts or fraudulently overinflated amounts as charitable contributions. In addition, TINDER claimed fraudulent college education credits for children who were pre-school, elementary, and high school students.

The immigrants could have been excused for thinking America is truly a great country, at least until the IRS caught up with their preparer.

TINDER traveled to Waterloo, Iowa in May 2003 and set up business in a hotel. She conducted cursory interviews of her clients’ originally filed tax returns for 2000, 2001, and 2002. She usually spent no more than 15 or 20 minutes for the preparation and signing of up to three amended returns for each client.

She's just that efficient?

She charged $35 or $40 for each return she prepared. She also advised her clients they could sign amended returns for other family members not present.

Sure is convenient, if not exactly, well, legal...

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WESTERN TAX SERVICE FIGURE GETS PERMANENT INJUNCTION

September 02, 2008

One of the defendants in the Western Tax Service criminal case has accepted a permanent injunction against ever again preparing returns. Russ Fox has been all over this case, which involved preparing returns with phony deductions.

While the Western Tax Service saga is drawing to a close, there's always fresh tax fraud to report, and Russ is on top of it.

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TAKE THE KLING PLEDGE!

September 02, 2008

Arnold Kling, half of the mighty EconLog duo, demonstrates his wisdom with "My Campaign Season Pledge." A taste:

To me, political campaigns are not sacred events, to be eagerly anticipated and avidly followed. They are brutal assaults on reason. I look forward to election season about as much as a gulf coast resident looks forward to hurricane season. Meanwhile, I pledge the following:

1. That no politician will end America's consumption of foreign oil. Ever.

2. That no politician will figure out a way to bring the bottom half of America's children up to the level where they can benefit from a college education.

3. That no politician will figure out a way to make American health care--meaning virtually unlimited access to specialists and technology--affordable for everyone.

Go read it all, take it to heart, and remember how you can tell when a politician is lying: his lips begin to move.

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TAX TAG TEAM TAKES ON THE IRS AUDITORS

September 02, 2008

Bruce the Tax Guy and Robert D. Flach, a/k/a The Wandering Tax Pro, are tag-teaming the topic of IRS exams.

Bruce's Post
Robert's Post

As our practice is more business-oriented, we see more exams than they do, but we don't see many.

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IF A BLOG POSTS IN THE FOREST AND NOBODY READS IT...

September 02, 2008

I post at IowaBiz.com on the 1st and 16th days of each month. Unfortunately, that means I posted on Labor Day, when only the really hard-working or really compulsive are reading work-related blogs. But it's still there today, so go there and read "S corporation salaries: how much is enough?"

And while you are over at IowaBiz, today's post, "Consider blog software for your site's content management," is close to our heart. We have been using the Movable Type blog software package for our entire site for several years now, and it has worked out well. The article recommends WordPress software, and I think our web designer would agree with that choice.

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Email: jkristan@rothcpa.com  •  Phone: (515) 244-0266
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