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Tax Update Blog: November 2008 Archives

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Have a great Thanksgiving!

November 26, 2008

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Southern Iowa corn harvest

Drive safely!

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Ask what you can do for your country.

November 26, 2008

V.P.-elect Biden famously linked patriotism and the payment of taxes during the recent presidential campaign. Now it looks like a legal maneuver will help Minnesotans show their patriotism by going to a strip club:

According to an agreement approved on Monday by a federal judge, King of Diamonds strip club owner Larry Kladek will plead guilty next month to a single count of tax evasion. But the plea has been delayed to allow Kladek to keep his liquor license for the coming year -- and to continue making money to pay back taxes.

Kladek was expected to plead guilty Nov. 21. But the Inver Grove Heights City Council meets Dec. 8 to review liquor licenses. The city has indicated that it would revoke Kladek's license if he is convicted. So attorneys agreed to delay his plea until Dec. 11.

"The United States believes that requiring Mr. Kladek to plead guilty prior to Dec. 8, 2008, would unnecessarily damage defendant Kladek's capacity to continue to earn a living and, derivatively, to pay to the United States back taxes which are due and oweing," attorneys wrote in a motion.

So by helping Mr. Kladek pay his taxes, strip club patrons are doing their part for their country. As Thomas Jefferson might have said, disrobing is the highest form of patriotism!

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

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S corporation health insurance and relatives

November 25, 2008

We recently discussed the treatment of company health insurance for S corporation owners, which has prompted some reader questions:

If a sub-s corp. has a health ins. plan for all employees which the owner is a part of, do you still have to include the owners share of ins. premiums on a w-2?

Yes. The special S corporation shareholder rules apply to add the premiums to shareholder W-2 income even if all employees are covered by the plan.

The S-corp pays health insurance premiums for all employees. Now, if the wife is an employee of the >2% shareholder, and the policy is in her name, and the >2% shareholder is on her policy, does her premium need to go on her W2 as wages? Or,can her premiums be deducted on the S-corp as an employee fringe benefit the same way the other employees are?

The rules on health insurance for fringe benefits for 2% S corporation shareholders also apply to "relatives" of shareholders, as defined by Sec. 318. This includes spouse, parents and children, for example, but not siblings. So you can't avoid the rules by running the health insurance through a spouse. In this case, the premiums would go on her W-2.

Keep the cards and letters coming!

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Johnny Depp says 'Thanks, Wisconsin chumps!'

November 25, 2008

Wisconsin is learning that subsidizing Hollywood stars isn't the economic boon they thought it would be:

While the big-budget, locally filmed Johnny Depp film “Public Enemies” may succeed at the box office, it has already fallen below state revenue expectations, according to the Wisconsin Department of Commerce.

Public Enemies Productions LLC reported more than $18 million in expenses to the DOC, who then estimated the tax break the company will receive at $4.6 million. The break nearly cancels out the money earned by the state from filming, which added up to $5 million.

Iowa has an even more generous subsidy than Wisconsin, but so far the stars limos aren't double parked in front of the nicer Des Moines restaurants, and the tourist throngs visiting film sites are so well-mannered that you don't notice them.

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Tourists throng downtown Des Moines, location of the remake of the sci-fi classic "The Puppet Masters."

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2009 business mileage rate: 55 cents.

November 25, 2008

The IRS has announced the standard mileage rates for 2009. From IR-2008-131:

Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups, or panel trucks) will be:

-55 cents per mile for business miles driven
-24 cents per mile driven for medical or moving purposes
-14 cents per mile driven in service of charitable organizations

The new rates for business, medical and moving purposes are slightly lower than rates for the second half of 2008 that were raised by a special adjustment mid-year in response to a spike in gasoline prices. The rate for charitable purposes is set by law and is unchanged from 2008.

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Macho Macho tax blogs

November 24, 2008

So just how manly is tax blogging? So manly that it brings out the testosterone even on the distaff side, if the Genderanalyzer.com website is to be believed. This site guesses whether blogs are written by men or women using "artificial intelligence." So how "manly" is the TaxGirl.com, written by tax lawyer Kelly Erbe?

We think http://www.taxgirl.com is written by a man (80%)

Hmmm. Artificial intelligence has a ways to go. You'd think "TaxGirl" would have some weight in the analysis, though technically Kelly can be a boys name too.

What about longtime female blog mainstay BenefitsBlog? 87% manly.

Kay Bell? 93% manly. Linda Beale? 88% manly. Roni Deutch? 84% manly.

So what about avowedly male tax blogs?

The TaxProf: 91% manly.
The TaxGuy? 98% manly.
Jim Maule: 81% manly.
Dan Shaviro: 92% manly.
Taxable Talk: 82% manly.
Tick Marks: 71% manly.
The Tax Lawyer: 72% manly.
The Wandering Tax Pro: 89% manly.

So are there any tax bloggers in touch with their feminine side? An unexpected one:

We think http://www.taxguru.net is written by a woman (62%)

It must be that picture of Kerry Kerstetter holding a cat (the full beard notwithstanding).

What about the Tax Update? We are 80% likely to be male, which puts us perilously close to metrosexuality. I'll work in some football references, or something.

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The warm and the vertical

November 24, 2008

Why it's not such a great idea to give the government more to do:

US elected officials scored abysmally on a test measuring their civic knowledge, with an average grade of just 44 percent, the group that organized the exam said Thursday.

Ordinary citizens did not fare much better, scoring just 49 percent correct on the 33 exam questions compiled by the Intercollegiate Studies Institute (ISI).

The ordinary folks didn't fare much better, but it's not their job, for heaven's sake.

Among the questions asked of some 2,500 people who were randomly selected to take the test, including "self-identified elected officials," was one which asked respondents to "name two countries that were our enemies during World War II."

Sixty-nine percent of respondents correctly identified Germany and Japan. Among the incorrect answers were Britain, China, Russia, Canada, Mexico and Spain.

Did we give up when the Canadians bombed Pearl Harbor?

Asked about the electoral college, 20 percent of elected officials incorrectly said it was established to "supervise the first televised presidential debates."

Maybe this is why Vice President-elect Biden thought FDR came on television in 1929 to discuss the stock market crash.

It just goes to show that former Ways and Means Chairman Thomas was on to something when he said ($link):

"Don't think in this business that you're dealing with the best and the brightest," he said. "You're dealing with the available and the willing. One of the basic criteria is usually warm and vertical. That's optional in some instances."

Indeed.

Via Marginal Revolution.

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Hope and changing positions

November 24, 2008

This could be good news:

In light of the downturn, Mr. Obama is also said to be reconsidering a key campaign pledge: his proposal to repeal the Bush tax cuts for the wealthiest Americans. According to several people familiar with the discussions, he might instead let those tax cuts expire as scheduled in 2011, effectively delaying any tax increase while he gives his stimulus plan a chance to work.

Still, if raising taxes is bad now, what makes it good in 2011?

Via Instapundit.

UPDATE: More here:

During an appearance on NBC’s "Meet the Press," Obama economic adviser William Daley suggested that the incoming administration would reconsider whether to quickly increase taxes for Americans earning more than $250,000 per year.

Daly, who was commerce secretary under former President Bill Clinton and is the brother of Chicago Mayor Richard Daly, said it looks "more likely than not" that Obama would not seek legislation to repeal President George W. Bush’s cut in the tax rate for the wealthiest Americans before it is scheduled to expire after the 2010 tax year. Bush cut the top rate to 35% from 39.6% in 2001.

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Frozen fraud

November 24, 2008

The chilly Upper Midwest has its share of tax fraud. Last week a Minnesota jury convicted a Montana man of criminal failure to pay employment taxes. Francis Leroy McLain was convicted of failing to remit payroll taxes for several nursing services he ran.

Mr. McLain had settled lawsuits in 1998 where he agreed to collect and remit withholding taxes. It sounds like the IRS didn't much appreciate him pulling out of the deal.

In even-colder North Dakota, meanwhile, Timothy Hertel of Fort Yates has been sentenced to a 5-month stay in a halfway house, followed by 2 years of supervised release, for failing to report income he earned from a check cashing business.

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The Moral? Even in a cold climate, you have to pay your taxes.

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The benefits of travel

November 24, 2008

Russ Fox's regular roundup of tax miscreants has an unusual story this week: a hotel executive who fled the country to avoid tax evasion charges pleaded guilty by satelitte link from London to one count of tax evasion. The unusual part? Stanley S. Tollman will pay $60 million in back taxes and penalties, but will serve no prison time. But he does have a stiff probation sentence:

One day.

For that kind of money, a one-count plea would normally merit the maximum five-year prison term. Presumably he got a better deal because the IRS couldn't easily get its hands on him. Who says the benefits of travel are overrated?

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UBS clients trying to cut deal?

November 24, 2008

Americans with Swiss bank accounts at UBS are trying to work out a deal with the IRS, reports the Wall Street Journal. As UBS prepares to spill the beans on up to 250 Americans with swiss accounts, attorneys are trying to work out an "amnesty" deal:

Moved to take action after a former UBS private banker was indicted and spilled valuable secrets, the UBS clients are hiring tax lawyers and pursuing amnesty through an Internal Revenue Service voluntary disclosure program. The program allows U.S. citizens to avoid criminal prosecution if they acknowledge evasion and agree to pay taxes and penalties.

The clients' actions are a boon for the IRS, which lacks the staff to go after about 20,000 U.S. citizens who U.S. authorities say worked with UBS private bankers to avoid taxes.

Good thing, as Citibank needs the money.

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Hong Kong on $312.30 per day

November 21, 2008

The IRS has updated the amount of housing allowances for computing the foreign earned income exclusion for overseas employees for 2008 (Notice 2008-107). The amounts are based on living costs in these cities.

At 312.30 per day, or $114,300 annually, Hong Kong is the priciest location. Other expensive cities include Paris, at $273.50; Tokyo, at 257.38; and Moscow, at 248.36.

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IRS 'Fact Sheet' on S corporation compensation and health insurance

November 21, 2008

The IRS has issued a Fact Sheet (FS-2008-25) on salary requirements for S corporation officers. The main point of the Fact Sheet is that corporate officers are required to take a "reasonable" salary out of the S corporation. The IRS doesn't like it when S corporation owners don't take a salary; S corporation income that passes through on a K-1 instead of a W-2 isn't subject to FICA and medicare tax, so S shareholders are tempted to take little or no salary to avoid the 15.3% combined employer and employee tax hit.

Unfortunately, the tax law isn't clear on how much salary you need to take to avoid IRS trouble, and the IRS guidance on that is therefore fuzzy:

There are no specific guidelines for reasonable compensation in the Code or the Regulations. The various courts that have ruled on this issue have based their determinations on the facts and circumstances of each case.

Some factors considered by the courts in determining reasonable compensation:

* Training and experience
* Duties and responsibilities
* Time and effort devoted to the business
* Dividend history
* Payments to non-shareholder employees
* Timing and manner of paying bonuses to key people
* What comparable businesses pay for similar services
* Compensation agreements
* The use of a formula to determine compensation

S corporation shareholder medical insurance

The fact sheet also addresses S corporation owner health insurance:

The health and accident insurance premiums paid on behalf of the greater than 2 percent S corporation shareholder-employee are deductible by the S corporation as fringe benefits and are reportable as wages for income tax withholding purposes on the shareholder-employee’s Form W-2. They are not subject to Social Security or Medicare (FICA) or Unemployment (FUTA) taxes. Therefore, this additional compensation is included in Box 1 (Wages) of the Form W-2, Wage and Tax Statement, issued to the shareholder, but would not be included in Boxes 3 or 5 of Form W-2.

The shareholder can then deduct these amounts on Line 29, page 1, Form 1040.

The Fact Sheet refers to Notice 2008-1, the detailed IRS guidance on reporting S corporation owner health insurance, and it addresses a question posed to us by several commenters:

Payments of the health and accident insurance premiums on behalf of the shareholder may be further identified in Box 14 (Other) of the Form W-2. Schedule K-1 (Form 1120S) and Form 1099 should not be used as an alternative to the Form W-2 to report this additional compensation.

So as you head into the final paychecks of the year, be sure your S corporation shareholders have their health insurance as a taxable (but not for FICA and Medicare) benefit on their paystubs before year-end so the W-2s come out right.

Tax Update Coverage of these issues:

A PRETTY PICTURE OF S CORPORATION EMPLOYMENT TAX PLANNING

ANOTHER QUESTION ON S CORPORATION HEALTH INSURANCE

S CORPORATION HEALTH INSURANCE: READER QUESTIONS

MORE ON S CORPORATION HEALTH INSURANCE

IF IT'S NOT ON THE W-2, S CORP SHAREHOLDERS CAN'T DEDUCT HEALTH INSURANCE

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Tracking your car expenses

November 21, 2008

There are two good new posts up on tracking car expenses. As Bruce the TaxGuy points out:

Mileage should be tracked on a daily basis – the same way you record in your calendar where you went, who you went to see and why. In fact you could easily do this all in one step. When you write down where, who, and why, also write down the mileage. On your tax return when you claim a deduction for auto expense there are two questions that being able to check “yes” to, is of major importance for a well prepared return:

1. Do you have evidence to support business use?

2. Is the evidence written?

The Wandering Tax Pro has some sound advice on the issue:

I have found that, for me, the best way to keep a mileage log is in my daily appointment book.

If you like Palm OS as your planner, there are a number of applications to do this. I like using the appointment calendar as the place to track mileage because it's easier to keep it all in one place, and it makes it easier to document the business purpose of the trip.

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Congress eyes reversal of Sec. 382 bank notice

November 21, 2008

Ways and Means Democrats introduced legislation to repeal the IRS notice (Notice 2008-83) that exempts bad loans from the Section 382 "built-in loss" rules. The legislation would repeal the notice effective on the earlier of passage by Ways and Means or the issuance of a joint statement by the chief house and senate taxwriters in support of the bill. That means the Wells Fargo - Wachovia merger, the main intended beneficiary of the notice, would not be affected by the bill.


Tax Analysts coverage ($link)
Linda Beale

Tax Update: Bank Section 382 Ruckus
WashingtonWatch.com

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Who's on first?

November 21, 2008

The high-schooler was named first-chair bass for the All-state Orchestra.

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Way to go, Dan!

The All-state concert is tomorrow night in Ames at Hilton. Here's a clip from last year's concert.

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$2.8 million of Ozark Mountain tax trouble

November 20, 2008

A Missouri entrepreneur faces some serious tax trouble:

SPRINGFIELD, Mo. — A southwest Missouri businessman pleads guilty to failing to pay up to $7 million in federal income and employment taxes.

Kyle Jon Thompson owns Branson Trailer Manufacturing in Ozark. He faces up to five years in federal prison after pleading guilty Tuesday in U.S. District Court in Springfield.

His waiver of indictment document says he tried to conceal his business income by:

...paying employees of my business, Branson Trailer Manufacturing, in cash; structuring cash bank deposits to avoid currency transaction reporting requirements; purchasing personal and real property with cash; and attempting to conceal my ownership interest in vehicles (including four limousines, three Corvettes, one Hummer SUV, two Cadillac Escallade SUVs, one Lincoln Navigator SUV, one Dodge Ram 2500 pick-up, one Ford F250 pick-up, one Jaguar, one Ford Mustang GT, one Ford Thunderbird, and one Ford Model-T) by not registering those vehicles with the office of the Assessor, Christian County, Missouri

Cheating taxes is unwise to start with. By paying his employees in cash, he was, in effect, letting his entire work force in on his tax scheme, raising the odds of being caught to approximately 100%. He may also have been fingered by a bank "suspicious transaction" report, which banks are supposed to file when it looks like somebody is trying to get around the $10,000 cash transaction reporting requirement. The results of this "planning" speak for themselves.

Court documents show a tax loss north of $900,000. If the judge gives him credit for accepting responsibility, that would give him a prison sentence of 27 to 37 months, or so. He also has to pay his back taxes before sentencing.

Links:

Waiver of Indictment
Criminal Information
U.S. Attorney press release

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Our eyes met from across the desk. I blushed...

November 20, 2008

Robert Flach remembers "My First 1040."

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Got cash?

November 20, 2008

Bruce the TaxGuy has an excellent little personal finance primer up. It talks about how you should use any future "stimulus" check you might get, but it's good advice for dealing with any extra cash or "found" money you might have. Especially his first suggestion:

Pay down your credit card balance as much as possible. Think about this. If you’re part of a couple with $10,000 in credit card debt and you apply your $1,200 right to that balance, you’re paying off more than 10% in one fell swoop. That’s huge! And it will save you a ton of money in interest over time. You’ll be in much better shape financially than if you spend that money.

It sure doesn't make sense to earn 2% at the bank when you are paying the credit card company 21%.

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What does it cost to Taser a 53-year-old accountant?

November 20, 2008

$60,000. Because we accountants are worth it!

Via the TaxProf.

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What a nice way to be called 'boring'

November 19, 2008

According to Typalyzer, the author of the Tax Update is "A Duty Fulfiller":

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Via Mankiw.

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Senator Mikulski wants to pimp your ride

November 19, 2008

A Maryland Senator says that if carmakers can't afford to offer a rebate, Congress should step in. Barbara Mikulski has proposed an above-the-line tax deduction on car loans and sales taxes for new cars bought from November 12, 2008 through the end of next year.

TaxVox is deeply unimpressed:

Anyone making up to $250,000 could take a deduction for sales taxes and the interest on loans of up to $49,500 on a car they buy through 2009.

There is so much wrong with this idea. At a time when people making minimum wage are losing jobs and houses, we are going to subsidize the purchase of $50,000+ cars by people making a quarter of a million dollars a year? I understand that Obama has deemed these folks the new middle class, but are they really the most needy in today's slumping economy? And why do we want to encourage people already saddled by underwater mortgage and credit card debt with even more borrowing? If, that is, they could even get the loans.

Maybe we need a new federal lending agency to subsidize these loans. Chevy Mae, anyone?

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Flickr image by Hillman54

More good stuff on the auto bailout proposals:

TaxVox
Megan McCardle
Greg Mankiw

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Community Bankers call for Treasury bailout rules to fit S corporations

November 19, 2008

The Treasury TARP program for equity investments in banks should be tweaked to fit the needs of S corprorations, according testimony before the House Financial Services Committee yesterday.

Independent Community Bankers Chairman Cythia Blankenship called on the Treasury to allow S corporations to issue the Treasury junior subordinated debt with terms similar to the preferred stock normally issued under TARP. The tax law does not permit S corporations to issue preferred stock.

She also said the Treasury S corporation TARP guidelines need to allow S corporations to pay dividends to enable S corporation shareholders to pay taxes on their S corporation income.

Links:

Testimony
ICBA Press Release

Related: Treasury issues term sheet for purchases of bank stock; S corporations left out for now

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Et tu, Principal?

November 19, 2008

Maybe there's a good reason the stock of Des Moines stalwart Principal Financial Group has skidded from over $70 to $14.31. Des Moines' largest employer is now taking its place in the federal bailout soupline.

Principal has also backed out of an economic development tax credit deal with Iowa to "create" 900 jobs:

"We made a judgment that the 900 jobs within the contract period of three years would be a challenge, considering the significant economic changes that have taken place," Merle Pederson, Principal Financial's counsel, said Monday.

Pederson notified the Iowa Department of Economic Development in an Oct. 24 e-mail that Principal would not pursue the state incentives. The company also cited "current projected future growth" for declining the tax breaks.

That at least provides some clarity. It's not the state that "creates" jobs; it's the business. If the jobs won't make the company money, they won't happen, no matter how much corporate welfare you throw at them. If the employees are needed, the employer doesn't need the tax credits, though it will happily take whatever cash the state is handing out.

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IRS issues Applicable Federal Rates (AFR) for December 2008

November 19, 2008

The IRS has issued (Rev. Rul. 2008-53 the minimum required interest rates for loans made in December 2008:

-Short Term (demand loans and loans with terms of up to 3 years): 1.36%
-Mid-Term (loans from 3-9 years): 2.85%
-Long-Term (over 9 years): 4.45%

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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Johnston: allow temporary dividend deduction

November 18, 2008

In his piece in today's electronic Tax Notes ($link) David Cay Johnston says that allowing corporations to deduct dividends for a limited period might be just the tonic for the sagging economy. The piece, reproduced by permission at the TaxProf Blog, proposes this as a way to unlock cash tied up in big companies. He would also, for the same two-year temporary period, make the dividends tax-exempt to those with incomes up to $250,000, with a 10% rate on those making more. He would also require 401(k) plans to distribute such dividends (without penalty), while charities would be required to spend their dividends or pay a 100% excise tax. Says Mr. Johnson:

Pushing dividends out the door will help align the interests of Corporate America with America and its investors by taking away the cash comfort cushions so many executives rely on to mask weak to middling performance. Yet most companies do not pay dividends, and those that do often pay only modest amounts, although the big drop in stock prices has increased yields.

So how do we align the interests of everyone with the interests of CEOs, who naturally want to hold onto cash right now, just like the bankers who now have $250 billion of our money but remain on strike, not making new business loans?

It's an interesting proposal. I dislike temporary tax provisions -- they tend not to be temporary, and they add uncertainty and complexity to the tax law -- but I like the concept of a dividends-paid deduction as a way to solve the dual problems of double taxation of corporate income and the misalignment of management and shareholder interest that Mr. Johnston (I think correctly) notes.

I think a dividends-paid deduction should be a permanent feature of the tax law. Under the Tax Update Corporate Tax Plan, dividends paid would be deductible to the paying corporation. They would be taxed to recipients at ordinary rates, except they should never be taxed at a rate higher than the top corporate rate. Dividends payable to exempt organizations should be subject to an excise tax withheld by the paying corporation, set at the top corporate rate.

The Tax Update plan would eliminate the double tax on coprorate income while removing the tax incentive to accumulate income inside corporations. As a bonus, it would eliminate the Accumulated Earnings Tax.

As far as I know, this sort of plan isn't in any of the major tax reform plans. Why not, I don't know; perhaps it would cause some intractable international problems. It does seem at least simple. Maybe that's the fatal flaw.

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Doh! HOMER comes to grief

November 18, 2008

Perhaps naming a tax shelter for Homer Simpson was a mistake.

Certainly John B. Ohle III is wishing he never heard of the "HOMER" tax shelter, a tortured acronym for "Hedge Option Monetization of Economic Remainder" Mr. Ohle, a former supervisor at Banc One's "Innovative Strategies Group," has been indicted for promoting "fraudulent tax shelters" -- namely HOMER.

The indictment is interesting in that it says that HOMER, a knockoff of the "COBRA" tax shelter, was never just an agressive tax planning tool, but was just slickly-packaged fraud. From the Department of Justice press release:

The indictment alleges that Ohle and his co-conspirators marketed HOMER as a legitimate tax elimination strategy, despite the fact that HOMER was actually designed as a carefully planned series of steps to fraudulently produce the tax loss amounts desired by the clients. Jenkens allegedly issued a false and fraudulent opinion letter that found that it was "more likely than not" that the transaction would withstand IRS challenge. Ohle and two Jenkens lawyers are alleged to have known that the opinion letter contained false representations, including that the clients had a substantial non-tax business purpose in engaging in the HOMER transaction; that the clients created the HOMER trust for estate planning purposes; and that the clients exchanged the options for third-party notes for sound economic reasons.

Mr. Ohle appears to like home cooking; he is also accused of using HOMER to fraudulently reduce his own taxes.

Regardless of whether the Government proves its case - and Mr. Ohle is presumed innocent until and unless it does - this indictment will make advisors think twice before doing tax deals based on a wink-and-a-nudge business purpose.

Other coverage:

The TaxProf
Linda Beale
TaxGrrl

Related: WOULD THEY HAVE BOUGHT A TAX SHELTER CALLED "DORC"?

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Now that Health Savings Accounts are growing in popularity, will they be snuffed?

November 18, 2008

Benefitsblog passes on a report that HSAs are becoming more widespread. Unfortunately, according to Benefitsblog, they may fall victim to disorganized thinking in the coming administration:

Regarding whether HSAs will survive the next administration, the article states that "the plans may not have a White House advocate." The article quotes an advisor to the President-elect as saying that "medical benefits that shift costs to employees" would not be consistent with the upcoming President's position on health care.

Hey, Mr. "advisor to the President-elect": employees already bear 100% of the costs of medical benefits. Benefits aren't paid using the cash that grows on a magical benefits tree that grows in the H.R. department. When hiring an employee, an employer looks at the total cost of the employee package - wages and benefits. If you want to put more benefits in the package, you have to take out wages to make room for them. More benefits = less wages. If you have to make a profit to keep going - a constraint unfamiliar to many in the public sector - there is no third way.

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Treasury issues term sheet for purchases of bank stock; S corporations left out for now

November 17, 2008

S corporation banks have to keep waiting to find out if they will be invited to sell equity to the Treasury under the "TARP Capital Purchase Program."

The Treasury this afternoon issued a term sheet for their plans to issue preferred securities; S corporations and mutual financial institutions don't qualify. An accompanying FAQ has this to say:

Q. Does this term sheet and deadline apply to S-Corporations and mutual organizations?

No. These structures are still under consideration. The deadline for this program will not apply to programs for S-Corporations and mutuals.

The "deadline" in the FAQ is December 8. Participants will have to sell the Treasury a minimum of 1% of their capital or a maximum of 3%, in the form of senior preferred stock with a 5% dividend that will be callable at par after three years. The Treasury will also get warrants to buy common stock worth 15% of the value of the preferred stock issued, and they will be allowed to sell their preferred stock and warrants to third parties, with some restrictions. That could make the Treasury a kingmaker in any takeover fights.

Links:

Treasury Press Release
Term Sheet
FAQ

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Not to be confused with those perfectly honest tax evasion schemes

November 17, 2008

"Carey man convicted in bogus tax-evasion scheme"

So did somebody sell a scheme purporting to be tax evasion - a crime - and it turned out to be perfectly legal? Or are there "bogus" and "non-bogus" ways to commit this felony? "Dude, when you filled in your return in green crayon with all zeros, that was, like, totally bogus."

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Walter Anderson has to pay up

November 17, 2008

walt.jpgThe D.C. District Court of Appeals ruled last week that Walter Anderson, who is serving a 9-year sentence after pleading guilty to evading taxes on $450 million in income, also has to pay the taxes. The ruling overturns a district court opinion that said a flaw in the plea bargain let him off the hook.

More Coverage from Russ Fox.

Link: DOJ press release

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Down-payment assistance organizations lose exempt status

November 17, 2008

One of the harbingers of the current mortgage finance crisis was the rise of the "Down-payment assistance" organization. These outfits were set up as non-profits, but their main role was to allow borrowers and lenders to pretend that the borrower had a down payment.

Typically a home seller would "contribute" an amount to one of these outfits in the amount of the mortgage lender's required down payment - or at least enough to make up the borrower's shortfall. This "charity" would funnel the cash to the homebuyer, after taking a cut; the homebuyer then miraculously qualified for the mortgage, somehow.

The IRS ruled in 2006 that this sort of operation couldn't be done through a tax-exempt charity. This week the IRS has released rulings stripping two more down-payment assistance outfits of their tax examption.

Cite: PLR 200846029; PLR 200846025

Related: Feds Sue 'Down Payment Assistance' Outfit

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Grassley calls for investigation of bank loss ruling

November 17, 2008

Senator Grassley, the ranking Republican on the Senate Finance Committee, calls for the Treasury Inspector General to investigate Notice 2008-83, the ruling that allows banks to ignore the Section 382 "built-in loss" rules when acquire a bank with bad loans.

The ruling provides an important benefit to Wells Fargo in its acquisition of Wachovia. Wells Fargo is a big employer in Des Moines.

The TaxProf has more.

Related: Bank Section 382 Ruckus

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Rangel's plan to upset the tax planning applecart

November 17, 2008

Ways and Means Committee Chairman Rangel is moving ahead with a proposal to reduce the top corporate tax rate to 28%. NYU Lawprof Daniel Shaviro comments:

A few points to keep in mind here: First, cutting the corporate rate and broadening the base is generally an unambiguously good idea (keeping in mind, however, that for outbound investment this depends on whether a worldwide tax is optimal, as seems unlikely given its resting on the weak reed of corporate residence).

Second, a fully financed domestic corporate rate cut (i.e., not necessarily financed by corporate base-broadening) is also highly likely to be a good idea in the setting of worldwide tax competition.

Third, even if the effective tax rate paid by U.S. companies on domestic investment is low, a high marginal rate is still a problem - not just for the general reasons why base-broadening plus rate-cutting is desirable, but also because in various cases it will be the marginal rate, not the effective rate, that drives particular decisions in the realm of worldwide tax competition.

Sometimes I wonder whether Dr. Shaviro is so shrill in his anti-Republican politics because it gives him cover to say sensible things about tax policy in Manhattan.

A reduced corporate rate makes sense for a host of reasons. In an ideal world it would be accompanied by an individual tax rate cut and base-broadening. When you have a corporate rate much lower than the individual top rate, you build in all sorts of incentives to play games with income allocations. That's great for those of us who charge for tax advice, but it creates a lot of wasted effort and time-wasting tax arbitrage.

Speaking of charging for tax help, Rep. Rangel has engaged forensic accountants to help him repair his tax returns for recent decades. It can't be cheap. It sure wouldn't be if I were quoting the work.

There's more on the Rangel plan at the Tax Lawyer's Blog.

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'Low risk doesn't exist'

November 17, 2008

Rush Nigut speaks good sense:

I recently received an email from a business brokerage advertising their services. In the email the brokerage said they have "low-risk" businesses and franchises for sale. While that may make for good marketing - I must unfortunately say that "low-risk" businesses do not exist in my opinion. If our struggling economy has show us anything, it has demonstrated that risk is inherent in business.

He wisely advises buyers to do their homework before taking the plunge on a new business.

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Sorry about that.

November 14, 2008

The site was unavailable for awhile today, to us as well as to you, as a result of a switch to a new server. We're back in business now.

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Who pays for reckless state spending?

November 12, 2008

The Iowa Policy Project, a left-side think tank, reports that Iowa's tax burden falls heaviest on the bottom 60% of income earners:

Lower-income non-elderly households in Iowa pay a disproportionate share of their income in state and local taxes. New data from the Institute on Taxation and Economic Policy (ITEP) establish a continuing problem of fairness in Iowa’s tax code: Those who earn less income can expect to pay a larger share of it in state and local taxes than those who make more. For the 60 percent of non-elderly taxpayers in Iowa who earn less than $50,000, the combination of sales and excise taxes, property taxes and income taxes together amount to well over 10 percent of total income. By contrast, the top 5 percent of taxpayers, earning over $127,000, on average pay about 7.6 percent or less of their income in state and local taxes.

Something for the Governor and the Legislature to ponder when they start their next spending spree legislative session next January.

Feckless spending is not just an Iowa problem.

Related: IOWA FISCAL POLICY GETS AN 'F'

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The house always wins

November 12, 2008

Gambing tax maven Russ Fox has been following the World Series of Poker, and it turns out the real winner wasn't anywhere near the table:

This year's winner was Peter Eastgate from Denmark. The United States and Denmark have a tax treaty. Because of the treaty Mr. Eastgate doesn't owe a penny to the IRS. That just leaves the Danish tax authorities.

Denmark's tax agency is called SKAT. Denmark, like the United States, does tax gambling winnings. For casino gambling (which is where I believe this will be classified) the tax rate is 45% on the first 4 million Danish Kroners; it's 75% on income above that. Today $1 is worth 5.88907 DKK; Mr. Eastgate won 53,899,250.70 DKK before taxes. Mr. Eastgate will owe about 39,224,438 DKK in tax ($6,660,545). Put another way Mr. Eastgate will keep 14,674,813 DKK ($2,491,871) of his winnings—just 27.23% of his prize. Yes, he faces an effective tax rate of 72.77%. Ouch.

Wow.

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LILO to shut down D.C. transit system?

November 12, 2008

The "Sale-in, Lease-out" tax shelter, also called "SILO," was one of the stranger products of the tax shelter industry. A public agency would sell its assets - say, a subway system - to someone needing depreciation deductions. They would then lease it back, with deferred payments for the purchase offsetting the lease payments.

These deals had complicated and expensive termination clauses. One of these was triggered for the Washington, D.C. subway system when AIG had to be bailed out. Because the IRS disallowed the tax shelter benefits claimed for the deals, the shelter buyers don't want to keep them going. Now the D.C. transit authority might need to cough up $43 million.

The Tax Foundation has a good piece on this problem.

The moral? It can be dangerous to be a not-so-innocent bystander to a tax shelter deal.

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Will Obama get rid of AMT?

November 12, 2008

Dan Meyer is much braver than I am about predicting tax policy:

The Democrats will either eliminate the AMT OR effectively make sure that no one with adjusted AGI under $200,000 is affected; the maximum income for OASDI (or Social Security) will increase to at least $250K and the ceiling may be eliminated entirely a la Medicare; Obama will not be able to cut taxes to $250 K; instead, only those earning under $120,000 if MFJ ($60 if MFS, $90 if single, $105 K if HoH) will get tax cuts. Going forward to 2010, assuming some improvement in the economy, tax rates will be increased, not at $250K, but at about $180K ($90 for MFS, $135 for single, $160 for HoH). Two other predictions: the Bush tax cuts for estate and other taxes will be allowed to lapse in 2010 and gay couples will get some explicit recognition: one possibility is expanded availability of Head of Household (HoH) status for gays/lesbians living in civil unions.

I think the expiration of the Bush tax cuts in 2010 is a safe bet. Everything else is subject to change, depending on the economy and politics. I had thought President Obama would be smarter than to raise taxes in the teeth of a recession, but he may do so anyway.

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How depressing.

November 11, 2008

Will President Obama really do a mini Herbert Hoover on us? Maybe:

President-elect Barack Obama plans to push ahead with a middle-class tax cut soon after taking office, his choice for White House chief of staff said yesterday.

Rahm Emanuel also hinted that Obama would not postpone a tax increase for families earning more than $250,000 a year despite the deepening economic gloom. He said Obama's proposals would reduce taxes for 95 percent of working Americans by an average of $1,000 each, resulting in "a net tax cut" for the overall economy.

Sometimes it's best when politicians weasel out of their campaign promises.

Via the Tax Policy Blog.

Cold consolation: It could be worse.

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Related: Tax planning ahead of the Obama administration

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Bank Section 382 Ruckus

November 11, 2008

Back in October we noted that the Treasury had waived the "built-in loss" limitation for bad debts of newly-acquired banks. At the time there were already questions on whether the Treasury had exceeded its authority:

Guest-posting at Marc Ward's LLC blog, Christine Holbrook points out that the IRS has ruled that built-in loss limits won't apply to bad debt deductions taken by newly acquired banks (Notice 2008-83). That means if Wells Fargo buys Wachovia and has to write off humongous bad debts, they won't have to apply the Sec. 382 limits to the bad debt deduction. While the post questions the IRS authority to do this, really, who is going to stop them? But while the IRS is clearly doing this to help smooth the way to sorting out the banking mess, it may prove an awkward precedent for them when times get better.

Now, thanks to a story in the Washington Post, Notice 2008-83 has generated a full-fledged kerfuffle.

Linda Beale:

Furthermore, the Notice is striking for more than just an usurpation of authority. It is extraordinarily costly (perhaps as much as $140 billion of foregone revenue) and selectively favorable to "healthy" banks that acquire banks with losses, a measure that Paulson had said he wants to encourage through the use of bailout funds but which has not been vetted by Congress and was not intended to be a result of the bailout funds.

Kay Bell:

Buy now, say some lawyers: Some banking lawyers are advising their clients to hurry up and deal since there's no telling how long the rule might be in effect, according to an article last month in American Banker.

Daniel Shaviro:

Today's Washington Post reveals a truly audacious stunt that the Treasury Department pulled in late September, essentially repealing on its own motion Code section 382 as applied to banks. The ruling through which it did this is available here, and it appears to be aptly described as flat-out repeal of the provision so far as banks are concerned.

The controversial notice allows acquiring banks to deduct bad debts of acquired banks without subjecting such "built-in" losses to the "Section 382" rules. These rules limit the amount of losses they can use from acquired companies to a fraction of the value of the company - currently 4.94%. If you acquire a worthless company, the deduction is 4.94% of nothing.

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No sympathy for Ark passengers

November 11, 2008

A Maryland couple invested in the Anderson's Ark tax scam/pyramid scheme and took six-figure tax losses before the feds shut things down. The IRS disallowed the losses, so the couple took another tack, attempting to deduct a "theft loss" from their participation in the scam.

The Tax Court was distinctly unsympathetic. The judge seems to have found the couple's continued use of Tara LaGrand, and Anderson's Ark-affiliated tax preparer, to be important:

In the first half of 2001 several Anderson Ark defendants had been arrested and indicted. Petitioner husband was apparently aware of these legal difficulties. Whether he chose to believe, as he had been told, that Anderson Ark ultimately would be vindicated, or whether he was indifferent to Anderson Ark’s legal problems because he had already withdrawn all or most of the funds he had invested with Anderson Ark, or whether he made a calculated decision to continue relying on LaGrand’s services in hopes of realizing the bogus tax losses from his Anderson Ark investments, the result is the same: Petitioners have failed to establish that it was reasonably certain at the end of 2001 that they would not recover their alleged Anderson Ark losses.

The issue technically turned on proof - the judge found that the couple failed to substantiate that they had made the investment they claimed as a loss. But throughout the opinion there are indications that the judge felt the couple wasn't coming to court with clean hands.

The Moral? If you try to reduce your taxes via a scam, and the scammers steal from you, don't expect a lot of sympathy from the Tax Court.

Cite: Wyatt, T.C. Memo. 2008-253 (if that link doesn't work, try this one).

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What happens? Bad Things.

November 11, 2008

The Wandering Tax Pro explains "What Happens if you do not file your Federal Income Tax Return":

...filing a tax return starts the clock running on the statutory three (3) years that the IRS has to audit the return. The IRS has three (3) years from the due date of a return – again April 15 if filed on time or October 15 if extended – or the date the return was actually filed, whichever is later, to audit the tax return. If you file your return after October 15th the clock does not start until the return is filed.

And perhaps most important, the monthly penalty rate for “filing late” with a balance due is ten times as much as that for “paying late”.

And that's just the beginning, as the post explains in great detail. The two worst downsides: If you have a refund coming, you lose it after three years of non-filing; if you owe, you dig yourself a great big hole will take you years to climb out of.

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Minnesota introduces construction contractor withholding

November 10, 2008

With state tax revenues likely to suffer as the recession takes hold, you can expect the states to tighten tax enforcement. Minnesota's new constriction contractor withholding that takes effect next year is likely to be just one of a series of new state withholding requirements we will see.

The law requires construction contractors to withhold from individual contractors if their payments exceed $600 in a year. The withholding rate will be 2%.

Minnesota has a web page desribing the requirement. It includes this example:

In February 2009, you contract with an individual construction contractor to install a stained glass window in a house you are remodeling. The total payment for the installation is $500. Since you are not aware of any future business with this individual construction contractor, you are not required to withhold 2 percent because the payment is less than $600.

In August 2009, you contract with the same individual construction contractor who installed the stained glass window in February 2009. This time the total payment for the installation is $400. Because the total you will pay the individual construction contractor for the calendar year is over $600, you are required to withhold 2 percent of the total payments, or $18 [$900 x 2% (.02)].

They define construction contractor as "A construction contractor (payer) is any individual or business entity carrying on a trade or business described in industry code numbers 23 through 238990 of the North American Industry Classification System (NAICS)." That means you won't have to withhold on the guy putting windows into your house, but if you hire a remodeling contractor who hires the window guy, the contractor will.

Link: NIACS construction trades codes.

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Move, Melissa.

November 10, 2008

Melissa Etheridge says she will stop paying California taxes as a result of the victory of anti-gay marriage Proposition 8 last week at the polls. If she's serious, the wise way to do that is to leave California. If she stays there and doesn't pay the tax, she'll pay more later, including penalties and legal bills. She wouldn't be the first celebrity tax refugee from California.

If Proposition 8 wasn't enough reason for her to move to Nevada, the proposed 1.5 cent california sales tax increase, to 8.75%, should do the trick.

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Cats and dogs sleeping together

November 10, 2008

Remember those evil corporations that could afford to pay more taxes?

Well, never mind:

House Ways and Means Committee Democrats and staff are retooling a proposal to overhaul the corporate tax code, with an eye toward introducing a new bill early next year.

The new legislation in the U.S. House of Representatives will be an updated version of a corporate tax code blueprint introduced by House Ways and Means Chairman Charles Rangel, D-N.Y., late last year, according to a Democratic House aide.

That bill would have cut the corporate rate from 35% to 30.5%. However, the new version will push that rate lower, people familiar with the effort told Dow Jones Newswires.

Don't tell Linda Beale.

If this goes through, and gets combined with a hike in individual rates, the predictible result will be a renewed popularity of C corporations and a chance to dust off our old accumulated earnings tax books.

Via the TaxProf

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Fall makes a stand

November 07, 2008

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The leaves linger on 10th Street between Walnut and Locust in Downtown Des Moines.

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The dangers of ROBS-ing your retirement plan.

November 07, 2008

It is dangerousle to use retirement plan assets to fund a new business. In addition to putting your retirement at risk, there are tax and labor law minefields.

The Benefitsblog warns of a plan aptly-named "ROBS," short for "Rollovers as Business Startups," that is being promoted around the country:

The IRS outlines in this Memorandum issued October 1, 2008 how the programs typically work:
An individual establishes a shell corporation sponsoring an associated and purportedly qualified retirement plan. At this point, the corporation has no employees, assets or business operations, and may not even have a contribution to capital to create shareholder equity.

The plan document provides that all participants may invest the entirety of their account balances in employer stock. The individual becomes the only employee of the shell corporation and the only participant in the plan. Note that at this point. there is still no ownership or shareholder equity interest.

The owner rolls retirement plan assets into the new shell corporation plan and buys employer stock. Then they amend the plan to lock any other employees out. Of course, the promoter gets a cut. Unfortunately for the owner, there are too many shortcuts. The IRS memo says:

We have examined a number of these plans - having opened a specific examination project on them based off referrals from our determination letter program - and found significant disqualifying operational defects in most. For example, employees in some arrangements have not been notified of the existence of the plan, do not enter the plan or receive contributions or allocable shares of employer stock. Additionally, we have identified that plan assets are either not valued or are valued with threadbare appraisals. Required annual reports for some plans have not been filed. In several situations, we have also found that the business entity created from the ROBS exchange has either not survived, or used the resultant assets on personal, nonbusiness purchases.

This is all reminiscent of the "Magic of ESOP" that one central Iowa CPA promoted vigorously in the 1980s. He had a great brochure that addressed the appraisal issue with some tremendous logic that went something like this: you can go out and get a professional appraisal. You can also get a lawyer to help you get a divorced. Or, you can do it yourself and be just as divorced - so why spend the money on a fancy appraisal? It hasn't worked out well for him, but it worked out even worse for his plan participants and his clients.

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Tax referendum roundup

November 07, 2008

Kay Bell rounds up state tax-related ballot initiatives, including the thrashing of an Oregon measure that would have allowed full deductibility of federal taxes on Oregon state returns. Maybe Iowa's deduction for federal taxes - in exchange for a very high rate - isn't the sacred cow Iowans for Tax Relief would have us believe.

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Pop goes the ethanol bubble

November 07, 2008

Thanks to the economic downturn and the decline in energy prices, the ethanol frenzy may be at an end. The collapse of the plan to build an ethanol plant in Des Moines was an obvious milepost, and the Chapter 11 filing of VeraSun Energy, an operator of 16 ethanol plants, is likely a harbinger of things to come. Roger McEowen explains how the bankruptcy will affect farmers.

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Pure trusts? Pure scam.

November 07, 2008

The "pure trust" scam is one of the more threadbare tax scams around, but as long as there are gullible folks, there's a market. A federal court in Arizona yesterday issued a permanent injunction against promoters of one of these schemes. Quatloos describes the pure trust thusly:

These are variously hawked as "Pure Trusts", "Patriot Trusts", "Freedom Trusts", and "Constitutional Trusts" -- but we simply call them "Con-Trusts" as that is a doubly-apt term, as it refers as accurately to the typical character of the sellers as it does to the theory behind them.Con-Trusts are premised on the clause in the U.S. Constitution which says, essentially, that no state shall impair the "obligation of contracts". It is then argued that because this is in the Constitution, any contract which you make is absolutely unassailable, never mind that no modern court decision has upheld the clause in such a fashion, any more than the courts have protected child pornography under the 1st Amendment. The argument is, essentially, that if you contract to do it, no matter what it is, it absolutely cannot be broken. For example, if you and I decide to rob a bank and enter into a contract to do that, we can then go rob the bank and there is nothing the state can do about it.

Needless to say, it doesn't work, except to fleece the gullible:

According to the complaint, the defendants received $4.7 million in fees from their sale of 2,000 so-called "pure trusts," falsely telling customers they could lawfully avoid income taxes by placing their income and assets into either an "onshore" or "offshore" trust package. The defendants allegedly charged IFC customers between $4,154 and $10,500 for setting up the sham trusts. In the injunction order, the court noted that the Internal Revenue Service (IRS) conservatively estimated a loss of more than $8.8 million to the U.S. Treasury from the defendants’ actions.

Better to put your money into Fannie Mae stock than a pure trust.

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There is such a thing as too much client service

November 07, 2008

The Department of Justice says a Detroit tax preparer went the extra mile in taking care of his clients' tax needs. The preparer allegedly not only invented deductions and credits, he also had customer tax refunds deposited in his own account, in sort of a vertically-integrated system.

The IRS doesn't care for much of this full-service system and is seeking to close it down permanently. As the preparer is doing time, there appears to be no great hurry.

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Whither Obama tax policy?

November 06, 2008

The center-left TaxVox blog, normally well-plugged in to Democratic policy wonkery, has a must-read post: What Will President Obama Do?

In his two-year campaign for president, Obama made many promises he cannot keep, and was exceedingly vague when it came to what he would do about critical issues such as the nation’s ongoing financial crisis. However, it is possible to make some educated guesses about where he’d try to take the country in the face of some major challenges.

Economic Stimulus: Congress will not enact a stimulus plan in a lame duck session, but it will set the stage for big tax cuts and spending hikes in the first weeks of the Obama Administration. The measure could include many of the tax credits he proposed in the campaign, as well as costly new alternative energy subsidies he favored. Obama could quickly name a Treasury Secretary so his nominee can work with current Treasury boss Hank Paulson to address the ongoing financial market crisis. Reregulation will be another tough issue that will sap a lot of his administration's vigor.

Tax hikes on the wealthy: They are not going to happen as long as the economy is in a slump. Obama may try for these rate increases in 2010, but not in 2009.

At least for starters it sounds like a rerun of the Clinton-era tax policies.

The idea of delaying tax rate increases to 2010 is an interesting issue. If the economy is still struggling then - certainly not out of the question - even a Democratic Congress might shy away from rate increases in an election year.

They have one prediction I'm confident will come to pass:

Post-partisan politics: Forget about it. Neither Democrats nor Republicans will be in any mood.

Anybody who expects transcendent change from any politician hasn't been paying attention in recent centuries.

UPDATE: Megan McCardle has some sobering post-election thoughts:

The middle class tax cuts are, as far as I can tell, already stillborn; in today's revenue environment, even reversing the Bush tax cuts on the wealthy probably wouldn't pay for them. But once the electorate finds out that the Democrats will not be handing out free money, not because the Republicans stopped them, but because they stopped themselves, they're going to find themselves mired in a very difficult discussion. Interest rates, sovereign debt problems, and the debt substitution effect do not make good sound bytes.

Also see the TaxProf, Private Equity, Offshore Insurers Are Likely Obama Tax Targets, for more Obama tax policy discussion.

Related: Tax planning ahead of the Obama Administration

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Whither the right?

November 06, 2008

Economist Greg Mankiw notes that the GOP didn't do well with younger voters this year.

So what does the Republican Party need to do to get the youth vote back? If these Harvard students are typical (and perhaps they are not, as Harvard students are hardly a random sample), the party needs to scale back its social conservatism. Put simply, it needs to become a party for moderate and mainstream libertarians. The actual Libertarian Party is far too extreme in its views to attract these students. And it is too much of a strange fringe group. These students are, after all, part of the establishment. But a reformed Republican Party could, I think, win them back.

Maybe something like this?

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What the IRS has in store for 2009

November 06, 2008

Administrations come and go, but the IRS is always there. Robert Flach passes on the National Association of Tax Professionals expectations for 2009 IRS activity. Some interesting insights include extra focus on payroll tax issues, corporate audits, and high-income Schedule C returns. Also:

The “National Research Program” (NPR) will continue. NATP reports, “The recent sampling of 5000 Sub-S returns revealed that IRS thinking about S Corps was not correct. The IRS learned that individuals are using S Corps to filter income. Therefore look for even more attention to be given to S Corps.”

Oh boy.

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IRS fact sheet on self-employed retirement plans

November 06, 2008

The IRS has posted a handy Fact Sheet (FS-2008-24) on basic rules for retirement plans for the self-employed.

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Getting cold Cavalcade

November 06, 2008

After a warm interlude, it suddenly feels like November. In these uncertain times, where better to retreat than the Cavalcade of Risk, the roundup of insurance and risk-management blog posts.

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Two of the many good posts there:

"Get The Right Coverage! Insurance Policies You Need and Those To Avoid" from The Digerati Life. I don't think I've seen a better short lesson on insurance. If I were school king, I'd make understanding this post a high-school graduation requirement.

Also, "I Want Care, I Want it Now, and I Want it Free," about the folks who think other people should have to pay for their health care.

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Tax planning ahead of the Obama administration

November 05, 2008

Now that the election has been decided, the pieces of the tax planning chessboard are being rearranged. How should taxpayers react?

Even with the election settled, there is still uncertainty. While the Obama campaign called for tax increases on high-bracket individuals and an increase in the capital gain and dividend rates, it's possible that he will at least delay a big tax increase in the face of a recession. Tax geeks will be watching closely to see if he really plans to plunge ahead with a tax hike, Hoover-style.

Still, there's reason to believe Senator Obama meant what he said. The area most ripe for tax planning this year is capital gains. While the plunge in the stock market has eliminated this problem for many taxpayers, it still is a live issue for others. The likely increase in the capital gain rate from 15% to 20% - a 33% increase - makes a big difference. If a taxpayer has the ability to sell an asset now that would otherwise be sold in the next three or four years, it might well pay to do so.

If it turns out that the new administration is serious about jacking up taxes right away, year-end planning will take an unaccustomed turn. High-bracket taxpayers will be looking to accelerate income to 2008 that would otherwise be taxed in 2009 at higher rates; likewise they will want to save their deductions for 2009, when the higher rates will make them worth more. We'll be talking about ways to do this in the coming weeks.

It's premature to do anything more serious until the new administration begins to take shape. In particular, it would be unwise to do things that are hard to undo, like terminating an S election, until we see what hope and change turn into in the House and Senate.

The TaxProf has a roundup of academic views of taxes in the Obama administration.

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Sometimes you can have a dependent who's not a relative

November 05, 2008

It's not common for pro se taxpayers to beat the IRS in Tax Court arguing over dependent exemptions, but it happened yesterday.

Danita Leonard, a Virginia jail guard, shared an apartment with a female friend and the friend's grandchildren in 2005. The friend's only income was Social Security benefits. Ms Leonard filed a return as a "Head of Household" claiming the friend and her grandkids as dependents.

The IRS assessed a deficiency, saying that Ms. Leonard had to file "single" and that she couldn't claim the three dependent exemptions. The IRS conceded the filing status issue by the time it got to Tax Court, but continued to argue about the dependent exemptions.

The Tax Court explains the rule that covers Ms. Leonard:

Section 152(d)(2)(A)-(G) lists eight types of qualifying relationships, seven of which involve various familial relationships that do not cover petitioner's claimed dependents. The eighth type of qualifying relationship applies to an individual, other than the taxpayer's spouse, who has the same principal place of abode as the taxpayer and is a member of the taxpayer's household for the taxable year. Sec. 152(d)(2)(H). In order for an individual to be considered a member of a taxpayer's household, the taxpayer must maintain the household, and both the taxpayer and the individual must occupy the household for the entire taxable year.

The court found that Ms. Leonard provided over half the support for the household, including her disabled friend. The court also found that nobody else claimed the children as dependents. Their parents apparently abandoned them; and their grandmother didn't have to file a return and didn't claim them. That enabled Ms. Leonard to claim them:

We conclude, as the Commissioner has recently done in Notice 2008-5, 2008-2 I.R.B. 256, that a taxpayer otherwise eligible to claim a dependency exemption deduction for an unrelated child is not prohibited by section 152(d)(1)(D) from claiming the deduction if the child's parent (or other person with respect to whom the child is defined as a qualifying child) is not required by section 6012 to file an income tax return and does not file an income tax return or files an income tax return solely to obtain a refund of withheld income taxes.

Ms. Leonard didn't qualify for child credits because those require that the children be related to the taxpayer.

It's puzzling that the IRS litigated this case, seeing how closely it fits the taxpayer-favorable facts of Example 1 of Notice 2008-5:

A supports as members of his household for the taxable year an unrelated friend, B, and her 3-year-old child, C. B has no gross income, is not required by section 6012 to file an income tax return, and does not file an income tax return for the taxable year. Accordingly, because B does not have a filing requirement and did not file an income tax return, C is not treated as a qualifying child of B or any other taxpayer, and A may claim both B and C as his qualifying relatives, provided all other requirements of sections 151 and 152 to qualify for the deduction are met.

Sometimes it seems the IRS attorneys responsible for deciding what cases to take to trial don't actually study the cases before showing up in court.

Cite: Leonard, T.C. Summary Opinion 2008-141

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At least it ends today

November 04, 2008

The quadrennial Brutal Assault on Reason is about done. Russ Fox has an insightful look at how the tax scene is likely to play out over the next four years.

If you can stand more information at this point, TaxVox and the Tax Policy Blog have good coverage of the candidates tax positions. If you want a reason to stay in bed, the estimable Gordon Tullock explains why you don't have to feel guilty.

I incline to this view.

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Election day tax carnival

November 04, 2008

Kay Bell has a new Carnival of Taxes up just in time for Election Day.

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Southern Minnesota banker pleads guilty to tax charges

November 04, 2008

Update, 5/14/09: 30 months.

20081104-1.JPGA former bank president from LeRoy, Minnesota, just over the border from Iowa, has pleaded guilty to tax and fraud charges from plundering his bank. From Startribune.com:

Gerald Alan Payne, 53, of LeRoy, pleaded guilty last week in Minneapolis to bank fraud and tax evasion while serving as president and CEO of First State Bank Minnesota.

According to Payne's plea agreement, from January 2003 through June 2007, he misappropriated funds by stealing from customer bank accounts, charging personal expenditures on the bank's credit cards and cashing checks written to the bank and other parties while retaining the proceeds.

Also, from January 2003 through April 2008, Payne willfully attempted to evade payment of taxes for tax years 2003-2007. The resulting tax loss to the federal government is more than $200,000.

The bank fraud count has a maximum 30-year sentence.

Insider theft from a bank is a crime that is about 100% certain to be detected, between state and federal examiners, outside accountants, and internal balances. It takes a sad combination of bad morals and bad judgment.

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Neways founder loses Supreme Court Appeal

November 04, 2008

tomdee.jpgThe legal battle of the founders of the Neways multi-level marketing empire appears to have reached an end yesterday when the Supreme Court denied Leslie D. "Dee" Mower's petition for certiorari.

Ms. Mower and her former husband, Tom, were sentenced in 2006 on tax charges that involved the use of offshore businesses to conceal earnings.

Life since sentencing has been more unpleasant than prison normally is. Mr. Mower has been enjoined from using inside information from Neways to start a new business. Ms. Mower's new husband was murdered. Sometimes taxes aren't the worst thing in the world.

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The Tax Geek Blogger World Iowa Tour

November 03, 2008

I will team up with Marc Ward of the Iowa LLC Blog for continuing education seminars on Limited Liability Company issues in Cedar Rapids on December 8 and West Des Moines on December 9. We will do two separate 1/2 day sessions in each location. Marc will talk lawyer stuff and I will cover basic and often neglected partnership tax issues that commonly apply to Iowa LLCs. Follow the links to enroll or call 1-800-930-6182. Be there or be, well, elsewhere.

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Double-barrelled fraud roundup

November 03, 2008

Russ Fox has not one, but two roundups of last week's tax fraud news. This is my favorite:

Glenn Lockwood is a dentist in Kenai, Alaska. He was found guilty last week of four counts of tax evasion. He allegedly used those old favorites—sham trusts and phony tax shelters—to avoid income taxes. Add to that deductions for such things as $1,504 spent at Mabel's House of Prostitution in Nevada, and clothing bought as uniforms at Dress Barn and a big and tall shop. (Yes, dental labcoats are deductible because they can't be worn in normal wear but general clothing isn't.) Dr. Lockwood will likely get to spend some time at ClubFed instead of Mabel's.

"Mabel's"? I can see something like "Kitty's" or "Foxy's," but - Mabel's? Different strokes for different dentists, apparently.

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The $10,000 foot-fault

November 03, 2008

More and more Iowa businesses have foreign owners and operations. The tax law provides some awful penalties for failing to file the right forms for your offshore activities. We cover some of the basics at IowaBiz.com, the Des Moines Business Record's blog for small business. Look for us there twice each month.

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More on tax patents

November 03, 2008

Brett Trout updates his thoughts on the future of "business process" patents, a category that includes tax strategy patents, in light of the recent Federal Circuit in re Bilski decision:

There will certainly be lots more to come, but for right now, I am sticking to my guns. I predict that post-Bilski the term “Business Method Patent” will be reserved for accused infringers making pejorative jabs at “naked” business method patents. Business method patent protection will still exist, but only in conjunction with something tangible and/or the transformation of something tangible.

LawProf Linda Beale also has some thoughts.

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