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:
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:
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.
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.
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.
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 $181 million payroll tax fraud in an employee leasing business. That's a lot of money; the defendant is likely to go away for quite awhile.
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Risky business indeed
September 25, 2008
The new Cavalcade of Risk is up at American Consumer News. This edition of the roundup of insurance and risk management blogs is appropriately focused on business risks. Care to underwrite a debt swap this morning? AIG? Anyone?
Hank Stern's thoughts an the AIG bailout are worth the visit.
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Does John McCain know more than the Intrade crowd?
September 24, 2008
It has become clear that no consensus has developed to support the Administration’s proposal. I do not believe that the plan on the table will pass as it currently stands, and we are running out of time
An Intrade prediction market says this afternoon that it's 75% likely that a bailout passes by month-end:
Senator McCain and Senator Obama may be headed back to Washington to "help" resolve the financial crisis -- much like I would "help" a brain surgeon by standing in the operating room doing shots of tequila and playing bongos.
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An Iowa State University vendor or purchasing agent?
September 24, 2008
Let's hope not.
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Ordinary loss for Fannie and Freddie preferreds?
September 24, 2008
Tax Analysts reports ($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:
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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
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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
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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TAX MAN, HEAL THYSELF
September 16, 2008
It can be a good sign when your service provider has enough confidence in his work to use it on himself. You might feel better about your car repairman, for example, if you didn't see him waiting at line at the 20-minute oil change store.
It doesn't always work that way, though. For example, you might not be crazy about using a pharmacist who regularly fixes himself cocktails made from his own inventory of painkillers. And if your CPA is under an injunction order, and perhaps criminal investigation, you might not care to use his tax advice, even if he follows it himself.
Lowell Baisden, a California CPA, is under a preliminary injunction against his providing tax advice. A case issued today by the Tax Court shows that he at least was willing to follow his own advice:
In an effort to explain his bookkeeping and accounting methods, petitioner explained that since approximately 1998 [Mr. Baisden] had developed for his use and for the use of his clients a novel and insightful tax strategy that may be described generally as follows:(1) Booked sole proprietorship income would be totally or almost totally offset by the payment by the sole proprietorship of “royalties” to the owner of the business;(2) the so-called royalties would not be paid directly to the owner but rather would consist of payments by the sole proprietorship of the owner’s personal and family expenses;
(3) the “royalty” payments would be treated as fully deductible by the sole proprietorship, and they would reduce the booked net income of the sole proprietorship
to zero; and(4) the owner would report “royalties” paid with regard to personal and family expenses as “other income” not subject to employment taxes. The primary savings were apparently intended to be derived from petitioner’s tax strategy through the conversion of sole proprietorship business income subject to self-employment taxes into royalties not subject to self-employment taxes.
So Mr. Baisden never showed income on his Schedule C. But there's more to the strategy, according to the court (my emphasis):
Rather, petitioner used the above-described royalty strategy for each year to offset to zero or to almost zero the substantial booked income for his accounting firm. Petitioner filed with his Federal income tax return for each year no Schedule C, and petitioner reported zero income relating to his accounting practice. Additionally, on each of his Federal income tax returns petitioner reported only a portion of the so-called royalty payments his accounting firm purportedly paid on his behalf for personal and family expenses (namely, $1,224 for 2001, $20,750 for 2002, and $49,250 for 2003).
Following his own advice didn't work out well for Mr. Baisden in Tax Court. The judge upheld a $119,927 deficiency for three years, as well as civil fraud penalties of $89,946.
The preliminary injunction has never been made permanent; that doesn't appear to be good news for Mr. Baisden, however.
The Moral? Just because your tax advisor jumps off a cliff doesn't mean you should.
Cite: Baisden, T.C. Memo 2008-215.
Related: Scared Straight?
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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
Iowa'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?