Tax Update Blog: December 2008 Archives
« Previous · Tax Update Blog Home · Next »
Charge those deductions!
December 31, 2008
Today is the last day for most 2008 tax deductions. If you use your credit card to pay for a deductible expense today, you can deduct it in 2008 even though you won't pay the credit card bill until 2009.
If you are charitably inclined, some excellent places to take your credit cards include:
Salvation Army
Soldiers Angels
Sertoma Foundation
Iowa Donor Network
Tax Foundation
Scan through all of our 2008 year-end planning posts to get other deduction ideas. The Tax Grrrl has year-end roundups for businesses and individuals, and Kay Bell also has some last-minute tax planning ideas. Even the IRS has a year-end deduction roundup. So get your deductions in order, and we'll see you in 2009.
Link • 2008 Year-end tax planning • Comments (0) Bookmark: del.icio.us • Digg • reddit
Our subsidies we prize, our corporate welfare we will maintain
December 31, 2008
Iowa's Governor Culver isn't even considering trimming back Iowa's corporate welfare menu, based on an interview conducted by the Des Moines Register:
For example, Culver wants to preserve scheduled teacher salary increases and the $100 million Iowa Power Fund set up to further catapult Iowa's renewable fuels industry."At the end of the day, we're going to have a choice, and I expect and hope that the people weigh in, too," Culver said. "I do not think you'll find a lot of support for cutting back on things like the Power Fund, teacher pay and early childhood education."
"Further catapult" an industry? Where are we throwing it? Given our tax structure, maybe we're throwing our industries to South Dakota.
So what are the plans to bring spending in line with revenue?
Culver said his money-saving plans may include creating mass purchasing agreements to buy state commodities in bigger quantities and finding more savings on health care.
It's the "spend more to save more" budgeting policy, combined with the look for money under the sofa approach.
No mention, of course, of addressing our archaic, high-rate, business stifling income tax. And the wasteful "renewables" subsidies and giveaways to Hollywood are off the table. No wonder Iowa has the 45th most dynamic state economy in the country.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Year-end risky business
December 31, 2008
The last Cavalcade of Risk for 2008 is up! As always, lots of good stuff at this roundup of insurance and risk management posts, including an IowaBiz.com post on why you have to put up with insurance audits. Also, don't miss Hank Stern's thoughts on the burden of illegal immigrants on the healthcare system.
Here's hoping all of your risks are manageable in 2009!
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
How municipal income taxes work in real life
December 30, 2008
This comment to our post on the proposal to allow Iowa municipalities to have their own income taxes is too good to be allowed to languish in the archives. "Gordon Gekko" writes:
As a tax practitioner in Ohio, let me tell you. City taxes are a nightmare.In SW Ohio alone, we have 80+ taxing districts. Each with different filing rules; some tax stock option income, others do not; some allow NOL carryforwards, some do not; etc.
In addition, assume you are a contractor. You are required to withhold income taxes for each municipality you operate in. You are also required to file a city income tax return in each of those municipalities.
Once, I did a return for a foreman on a road crew. He needed 60 copies of his W-2 in order to record all of the city withholdings
I can only hope Iowa takes this on so that you folks will be just as business friendly as Ohio, "The Heart of it All".
That would be a small price to pay to enable Iowa to dodge the issues of local government reform, school district reorganization, and a punitive commercial property tax environment.
Link • Comments (2) Bookmark: del.icio.us • Digg • reddit
Take your (capital loss) medicine!
December 30, 2008
If there is a silver lining to this year's cloudy stock market, it's that capital gains taxes will be optional for many of us this year. How can a capital gain tax be optional? You are likely to have capital losses available in your portfolio that you can use to offset your gains. Now's not the time to be proud. Take your medicine by selling enough losers to offset your taxable capital gains, if you can.
Ah, you ask, but why would I have capital gains this year?
- First, the market didn't tank until well into the year. It's entirely possible that you sold stock at a gain before everything went south.
- If you own mutual fund shares, it's likely that they had to liquidate old positions to redeem panicky owners, incurring capital gains on ancient positions that they had to distribute to you. Your mutual fund company website probably can tell you how much that will be for 2008.
- Maybe you sold a business, or some other non-traded asset.
So how do you take your losses? If you own publicly-traded securities, and they're not from short sales (not bloody likely this year), all you have to do is sell them today or tomorrow; the tax law considers the trade date to be the date of the sale, even if the settlement occurs in 2009.
Mind the "Wash Sale" rules. If you bought other shares of the stocks you are selling today or tomorrow in the 30 days preceding the sale, or if you buy back the stock in the 30 days after the sale, your loss is disallowed - even if the purchases are in an IRA.
Remember, you only get to deduct losses in a taxable account. Sales in an IRA or a 401(k) don't offset capital gains on your 1040. And you can only deduct capital losses to the extent of your capital gains, plus $3,000, so you don't need to overdo it. If you do take more losses than you need, capital losses carry over indefinitely until you use them all at the rate of $3,000 per year, or until you incur enough capital gains to absorb them.
Tune in tomorrow for the final installment of our 2008 year-end tax planning series.
Flickr image from Aussiegall
Link • 2008 Year-end tax planning • Comments (0) Bookmark: del.icio.us • Digg • reddit
Why you should track your passive losses
December 30, 2008
If you have an old tax shelter that keeps sending you K-1s with losses you never get to use because they are "passive," it can be tempting to just not bother to continue to track the loss. Filing Form 8582 with all of its worksheets is a hassle, after all. But the hassle can be worth it, as the former CEO of Gulfstream Aerospace learned yesterday in Tax Court.
William Lowe invested in a limited partnership in 1985. He moved around a lot, and he didn't bother to report the K-1 information or carryforwards for 1985-1990, or for 1992. He did include K-1 information from 1994 through 2002.
As often happens, the tax shelter wound up in 2003 with a big gain. At that point Mr. Lowe decided that the K-1 losses were worth something after all. He apparently got copies of the old K-1s and deducted the amounts as carryforward losses against his income.
The Tax Court noted a few problems with his computations:
- He had already deducted losses for 1991 and 1993 as non-passive.
- He had no copies of his pre-1991 returns to show that he had not claimed the losses before then.
-His 1991 return apparently had no Form 8582 tracking a passive loss carryforward from the earlier years.
The Tax Court allowed the passive loss carryforwards from the years that he had tracked - the post-1993 losses. As for the others:
Petitioners' argument that the pre-'93 losses subject to section 469, in whole or in part (1987-92), were not deducted is not based upon the returns for those years (which are not in evidence) or even upon Mr. Lowe's recollection based upon his prior review of those returns but, instead, upon his "belief" that those losses "were never claimed". That belief, based upon an alleged conversation that took place some 22 years earlier, is belied by the 1991 return, which shows that the firm responsible for preparing the 1985-92 returns treated the loss reflected on the 1991 Schedule K-1 as a deductible, ordinary loss.
The court notes that the passive loss rules didn't even take effect until 1987, and that the disallowance was phased in after that, so it would be surprising if at least some of the losses had not been taken.
The Moral? Track your losses; they could come in handy someday. Also, while you don't need to keep all of your old tax records, old tax returns can come in handy in measuring basis and loss carryforwards; if you have room, keep them.
Cite: Lowe, T.C. Memo 2008-298
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Hint: 1099s go to the same agency that gets your 1040
December 30, 2008
A California mortgage broker claimed a $74,000 Schedule C deduction labeled "Outside Help (5) 1099". When the IRS audited her, she supported her claimed deduction by providing 1099 copies to the IRS. The Tax Court noted a little problem:
Respondent and the Social Security Administration have no record of the filing of any of the Forms 1099-MISC petitioner submitted to respondent. Further, none of the Social Security numbers on the Forms 1099-MISC which petitioner submitted represented valid Social Security numbers.
Oops. Deduction disallowed.
The Moral: The same IRS that gets your 1040 also gets your 1099s. If you claim deductions using 1099s as your support, the IRS can find out whether you actually filed them. Believe it or not!
Cite: Vasquez, T.C. Memo. 2008-296
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Get organized!
December 30, 2008
Kay Bell has some wise thoughts on getting your 2009 recordkeeping started right. I especially like this:
Don't forget financial passwordsSharing this crucial computer access information is especially important if one or both of you handles accounts electronically. If something happens and your partner isn't able to take care of this or provide the details, you'll need to assume his or her duties in this area until he or she can resume them. So be sure to include your passwords, as well as your security Q&As, on your financial document list.
Having all your records perfectly organized on Quicken won't be much help if you take your password into the grave with you.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
The mortgage meltdown explained...
December 29, 2008
... by Megan McArdle:
Two years ago, like many somewhat financially literate readers, I was perusing newspapers stories about crazy negative amortization mortgages and exclaiming, "What are they, on crack?" Now we have our answer.
The answer is crank, not crack.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Sometimes the check really is in the mail
December 29, 2008
You have three days left to get a letter postmarked in 2008. That means that if you are a cash-basis taxpayer, like most walking, talking humans, you have three days to write a check for a deductible 2008 expense.
For purposes of timing an income tax deduction, having a check in the mail is usually good enough for cash-basis taxpayers You can still write a check to charity and deduct it on your 2008 return if it is postmarked no later than Wednesday this week. The same goes for a deductible mortgage interest payment, a property tax payment, or any other deductible personal or cash-basis business expense.
It wouldn't be the tax law without exceptions. The expense needs to be deductible in the first place, for starters. If it is to a related party, it won't be deductible in 2008 unless the related party picks it up in income this year. And many expenses that are technically deductible, like real estate taxes and income taxes, do no good for taxpayers subject to alternative minimum tax.
Also, while "the check in the mail" may be good enough to claim a deduction, it isn't good enough to achieve a completed gift for gift tax purposes. If you want to claim the $12,000 annual gift tax exclusion for 2008, the donee needs to cash the check no later than Wednesday at 11:59:59 p.m.
If you are writing a check for an amount that's large enough to worry about, you should spring for a certified mail postmark so you can prove timely mailing to the IRS.
To review our 2008 year-end planning posts, click here.
Link • 2008 Year-end tax planning • Comments (0) Bookmark: del.icio.us • Digg • reddit
City income taxes in Iowa?
December 29, 2008
Here's an idea that will make you want to buy that house in the country: the Iowa League of Cities is asking the Iowa legislature to permit cities to impose municipal income taxes:
"I think it's a 30-year problem in search of a solution," said Sen. Joe Bolkcom, D-Iowa City, who is co-chairman of a legislative committee that will debate the idea.Bolkcom said he doesn't know how much support the idea will have but believes it is good option and a good tool to give cities.
The Iowa League of Cities will ask Bolkcom's committee to endorse the city income tax idea on Jan. 7.
What a terrible idea. Ohio allows cities to impose income taxes, and filing a bunch of City returns is enough of an annoyance to make anybody think twice of expanding there. Of course, it would also be another incentive to move out of a city - as if, say, Des Moines needed to lose more residents. Des Moines City Councilwoman Christine Hensley says thanks, but no thanks:
Des Moines City Councilwoman Christine Hensley said her city is not interested in levying income taxes. She said it would only drive Des Moines residents to the suburbs.
Iowa already has an inexcusably complex tax system with absurdly high rates. This proposal would just make things worse.
UPDATE: I've given the comment to this post a post of its own.
Link • Comments (3) Bookmark: del.icio.us • Digg • reddit
More Madoff madness
December 29, 2008
Linda Beale has posted a good summary of the tax issues emerging from the collapse of the Madoff Ponzi scheme.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
State finance meltdown rundown
December 29, 2008
The Tax Policy Blog is on fire with stories of states scrambling to balance their budgets, including this one on Missouri. But our neighbors to the south are still maintaining their support of essential services:
The Kansas City Chiefs won approval Tuesday for $25 million in state tax credits to subsidize a training camp move from Wisconsin to Missouri and fund additional renovations around Arrowhead Stadium.The tax breaks come on top of $50 million awarded in June 2006 for the renovation of the adjacent Chiefs and Kansas City Royals stadiums. Since then, the Chiefs have added to their improvement list while also exploring a summer training camp site closer to home.
It will at least simplify the tax lives of their players.
Hat tip: Kay Bell.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Don't stop giving now!
December 26, 2008
December 26 might not be the best time to say this, but it may be a good idea for you to do some more giving.
This may seem like an odd statement. After all, estates valued up to $3.5 million will be exempt from estate tax in 2009. You may have heard that the Obama administration will propose continuing this exemption amount indefinitely. If a couple can die with $7 million tax-free, why give away anything now? Unless, of course, you are worth that much.
For starters, the current tax law provides that the estate tax goes away in 2010, only to return in 2011 with a $1 million exemption and a top rate of 50%. A lot more folks are worth $1 million than $7 million, and with inflation there will be many more. There's no guarantee that the new Congress and the new President will be any more successful than the last bunch; they've been unable to resolve the issue in 7 years of wrangling.
Also, given the current bailout fever, there will likely be tremendous pressure to raise tax revenues. Rich dead people only vote in a few major cities, so they are an easy target for tax hikes.
You can gift up to $12,000 per donor, per donee, each year without eating away at your $1 million lifetime gift exemption (yes, the gift tax exemption is much lower than the estate tax exemption). That means a couple with two kids and four grandkids can reduce their ultimate estate with $144,000 of gifts each year. Do that every years for 10 years and you've effectively increased your lifetime estate tax exemption by just shy of $1.5 million. But once you let an annual exclusion lapse, it's gone forever. Sure, you can do annual gifting in 2009 (at an increased $13,000 annual exclusion amount), but you can do that anyway; the 2008 opportunity never returns.
With your portfolio likely somewhat smaller than it might be, you can give away stocks and other assets at values unthinkable only last year, squeezing a lot more shares into the same $12,000 annual gift. So maybe you shouldn't stop giving just yet.
Link • 2008 Year-end tax planning • Comments (0) Bookmark: del.icio.us • Digg • reddit
Merry Christmas!
December 24, 2008
Or enjoy the day as it suits you with Audra and the Antidote.
Link • Comments (2) Bookmark: del.icio.us • Digg • reddit
Extreme year-end tax planning: tie (or untie) the knot
December 24, 2008
As nice it is to save taxes, some folks consider other things more important. If you can believe that. But if your tax life is everything for you, extreme year-end planning strategies may come to mind
For example, your marital status on the last day of the year is your tax status for the whole year. Many one-income couples will save taxes filing a joint return. And this is such a romantic time of year. Why wait until June for a big wedding when you can tie the knot now for a tax break?
Alternatively, marriage can still be costly for two-earner couples. A quick trip to Vegas might enable you to file singly for 2008. As a practical matter, though, I think divorce takes more paperwork than marriage (I wouldn't know personally), so it may be a bit late to do this for 2008. They don't say "marry in haste, repent at leisure" for nothing.
Now either of these strategies require a certain amount of, well, cooperation, and I'm sure they aren't for everyone. I have no good advice on how to broach the subject ("Honey, I know how we can pay for that new vacuum cleaner you need!"). But if taxes are that important to you, maybe your future (present?) spouse deserves the warning.
Link • 2008 Filing Season Tip • Comments (0) Bookmark: del.icio.us • Digg • reddit
Pushback against a bailout
December 24, 2008
The nation's auto industry is dying. In desperation, the government steps in and jacks up the import tariffs of imported cars to save the domestic producers.
Then things go awry. Riots break out when people realize they are going to be forced to pay for inferior cars they don't want. Riot police arrest and beat protesters and smash the cameras of a Japanese video crew.
America in 2009? No, Russia this week:
The government announced the tariffs on imported automobiles earlier this month to bolster flagging domestic car production and try to head off layoffs or labor unrest among the country's more than 1.5 million car industry workers.But imported used cars are highly popular among Russians, particularly throughout the Far East, where private cars imported from nearby Japan vastly outnumber vehicles built in Russia. Protests against the tariffs, which are scheduled to go into effect next month, have been most vehement in Russia's largest Pacific port—Vladivostok.
So far, U.S. taxpayers are just being asked to subsidize zombie automakers with doomed loans. Will the costs of subsidizing one industry in the U.S. ever inspire pushback from the consumers and taxpayers who bear the costs? Given the history of the U.S. crop growing industry, not anytime soon.
Hat Tip: Hank Stern of Insureblog.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
You want a deduction for WHAT?
December 24, 2008
A taxpayer incurred $50,965 in 2004 for sperm donation expenses, and another $37,954 in 2005. Clearly this process is much more complex than it would seem.
He deducted $34,050 of these as medical expenses in 2004 and $28,230 in 2005. But as costly as it was, the Tax Court yesterday said it wasn't deductible:
Although petitioner at times attempts to frame the deductibility of the relevant expenses as an issue of constitutional dimensions, under the facts and circumstances of his case, it does not rise to that level. Petitioner's gender, marital status, and sexual orientation do not bear on whether he can deduct the expenses at issue. He cannot deduct those expenses because he has no medical condition or defect to which those expenses relate and because they did not affect a structure or function of his body.
Not for long, anyway.
Russ Fox has more.
UPDATE: The Taxprof also has more.
Cite: Magdalin, T.C. Memo 2008-293.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Great expectations
December 24, 2008
From Tax Vox:
Here is the dirty little secret: Obama doesn’t know how to fix the recession. Nobody does. It is easy (though wrong) to say Herbert Hoover failed to grasp the enormity of the Depression. But in truth, FDR had little better idea of how to respond to the crumbling economy.
From a sobering and thoughtful post; read the whole thing.
Link • QUOTATIONS • Comments (0) Bookmark: del.icio.us • Digg • reddit
College Savings Iowa: a 529 with an Iowa tax bonus
December 23, 2008
Section 529 plans allow you to invest for future education expenses in an IRA-like account. The income accumulates tax-free, and it can be withdrawn tax-free for qualified education expenses.
Iowa's state sponsored Section 529 plan, College Savings Iowa, provides an addtional benefit to Iowa taxpayers: a deduction on your Iowa return for up to $2,685 per donor, per donee. That means parents with two children can deduct $10,740 in 2008 contributions (though additional non-deductible contributions are allowed). For a top-bracket Iowa taxpayer, this is like a 6% negative load on your investment.
Some other states also provide deductions for investments in their plan; you can look up your state at the College Savings Plan Network site. There is no Section 529 deduction on the federal return. Section 529 plan contributions do count against your annual $12,000 gift tax exclusion.
If you want a 2008 CSI deduction, you need to pay in by December 31.
Link: College Savings Iowa Enrollment information.
Link • 2008 Year-end tax planning • Comments (0) Bookmark: del.icio.us • Digg • reddit
The tax law: it's not rocket science. That would be too easy.
December 23, 2008
David Altman surely has a big brain, but even smart people can come to grief with taxes, as he found out yesterday in Tax Court. Mr. Altman is an actual rocket scientist:
After World War II, Dr. Altman worked for 11 years for the Jet Propulsion Laboratory at the California Institute of Technology where he investigated a variety of chemicals, fuels, and oxidizers for use in rocket motors. Following a 3-year stint as head of the propulsion department at Aeronutronic Systems, Inc., a defense and aerospace subsidiary of the Ford Motor Co., he went to United Technologies Corp. There, he eventually became vice president of the Research and Engineering Departments at the Chemical Systems Division, before retiring in June 1981.
Oh, and he has other credentials:
He received a Ph.D. in physical chemistry from the University of California at Berkeley in 1943, where Dr. J. Robert Oppenheimer was one of his thesis advisers.2 Dr. Oppenheimer offered Dr. Altman a position as an associate chemist working for the Manhattan Project, which Dr. Altman accepted.
But none of this prepared him for the jojoba bean tax shelters of the late 1970s and early 1980s. Dr. Altman bought into one, "CAL-NEVA." Like so many of these, it turned into a tax quagmire. The IRS disallowed the claimed tax benefits and assessed negligence penalties.
Dr. Altman made a valiant effort to show that he shouldn't be penalized, but the judge wasn't persuaded:
Dr. Altman's own financial analysis does not support a reasonableness defense because it was based on projected cashflows taken from the private placement memorandum -- projections which were preceded by a conspicuous warning that they were not to be relied upon. This factual situation resembles the factual situation in Kellen v. Commissioner, supra, in which the taxpayer, a "well- educated and successful attorney and a sophisticated investor", prepared an analysis based on projections set forth in an offering memorandum that were coupled with a warning that they had been prepared for the general partner, were unaudited, and were not to be relied upon. We held that "Any reliance on those projections was unreasonable." Moreover, Dr. Altman testified that he invested in CAL-NEVA knowing that the investment would provide a tax benefit -- indeed, the anticipated tax benefit was part of his financial analysis.
The moral? No matter how smart you are, a flaky tax shelter is a flaky tax shelter.
Cite: Altman, T.C. Memo. 2008-290
Link • Tax Shelter News • Comments (0) Bookmark: del.icio.us • Digg • reddit
Christmas week Carnival
December 23, 2008
Whether you keep Christmas, Hannukah, Festivus, or Thursday, you can find good cheer at the new Carnival of Taxes at Kay Bell's place.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
$1 million, $10 million -- it's just an estimate!
December 22, 2008
While estimates are part of the tax law - depreciation being but one example -- sometimes the IRS is unwilling to accept an estimate. Like in Tax Court today:
Petitioner timely filed her returns relating to 2003, 2004, and 2005. On each return, petitioner claimed a $10 million theft and casualty loss relating to a stamp collection, U.S. savings bonds, and other personal property.
You'd think she'd have gotten a safe deposit box after the first $10 million loss.
Petitioner contends that her savings bonds, stamp collection, and other personal valuables were stolen and that her home was damaged by a flood. There is no credible evidence, however, supporting petitioner’s contentions and claimed deductions. In fact, petitioner acknowledged that "My putting $10 million dollars each year from 2003-2205 [sic] was just an estimated amount". Accordingly, we sustain respondent’s determinations.
We can draw important lessons here:
1. Secure your valuables.
2. Insure them.
3. If you claim $10 million in theft losses in three successive years, the IRS may notice.
Cite: Mayewsky, T.C. Memo. 2008-286 (If that link fails, click here).
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Year-end property donations: worth the trouble?
December 22, 2008
Congress has been taking a lot of the zip out of donations of property to charity in recent years. Even so, a property donation can still be the most tax-efficient way to fulfill a charitable pledge before year-end.
When you donate appreciated long-term capital gain property to charity, you get to deduct the entire fair value of the donation without ever including the gain in income. That works out better than selling the property for a gain, paying the tax, and donating the remaining cash.
Aside from the obvious problem here -- who has capital gain property right now anyway? -- Congress has made it more difficult over the years to claim deductions for property gifts.
First they trimmed back the fun of used car donations. Unless the charity uses the car in its operations, you only get to deduct the amount the charity gets for the car when it sells it.
Then they shut down the big-game safari loophole - you don't get a fair market value deduction for stuffed game animals anymore.
Finally, they cut back the deduction for any donations of tangible personal property that the charity won't be using for its tax-exempt purpose; such gifts can only be deducted at their cost basis. For example, if you donate a painting to a museum for their collection, you get a fair market value deduction. If you donate it for them to sell, you can only deduct your cost. This restriction doesn't apply to marketable securities or real estate.
Unless you are donating marketable securities, the tax law requires you to get a qualified appraisal from a qualified appraiser to take any deduction - whether at cost or fair market value - if the claimed value exceeds $5,000. The appraiser will have to sign a Form 8283 that will be attached to the donor's tax return. No appraisal, no deduction.
What does this all mean?
- If you want to make a property donation, it's easiest to use marketable securities.
- If you are donating other property, and you plan to take a deduction over $5,000, get the appraisal done first; if you've already made the donation, arrange the appraisal now.
- If you are donating something like artwork, make sure the donee won't be selling it within three years if you plan to claim a fair-market value donation.
Check back every business day through 12/31 for another year-end tax planning post.
Link • 2008 Year-end tax planning • Comments (0) Bookmark: del.icio.us • Digg • reddit
So much for economic development via ethanol
December 22, 2008
From today's Des Moines Register:
Ethanol producers now know that when corn prices fall, the prices of crude oil and ethanol decline as well. So ethanol producers' gains on the cost side will be checkmated by losses on the revenue side.The result has been the bankruptcy and closing of three of Iowa's 32 ethanol plants.
Gee, an ethanol bubble, popped? Who'd have ever guessed?
Meanwhile, the sudden demand for corn for ethanol, driven by misguided tax breaks, is distorting grain markets and causing problems for livestock producers and other traditional corn users. These are users Iowa will want to still have around once the shiny new corn ethanol plants are shuttered in 10 years or so.
Aren't you glad the Iowa pours your tax dollars into building more ethanol plants? But rather than cutting corporate welfare, the Governor is instead cutting spending on healthcare and education. You have to have priorities...
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Handling an IRS exam: it's better to hire a CPA than a biker
December 22, 2008
A Florida construction company owner took an unusual approach to handling his IRS exam:
A Florida man has been convicted of hiring a hit man to murder an Internal Revenue Service employee who was auditing his taxes.The hit man was actually an undercover FBI agent, who called himself "Reaper," and was posing as a member of a motorcycle gang. The 6-foot, 4-inch agent wore a goatee and claimed to be a member of the Outlaws gang. Construction company owner Randy Nowak, 49, of Mulberry, Fla., paid the undercover agent $10,000 and planned to pay another $10,000 after the IRS agent, Christine Brandt, was eliminated.
Nice move. The story says that Mr. Nowak feared the agent would dig up his foreign bank accounts. I suspect the penalties for trying to murder a federal agent will dwarf anything he would have gotten for having unreported bank accounts. When he leaves prison as an old man, Mr. Nowak may want to get to know a good tax preparer to handle any future IRS exams.
Prior Coverage: How Not to Respond to an IRS Exam
UPDATE: The TaxProf has a roundup.
Link • Comments (1) Bookmark: del.icio.us • Digg • reddit
Frigid Fraud
December 22, 2008
It's 0 in Iowa. It's probably warmer in Orange County, where Russ Fox rounds up the week in tax crime, including an accusation of tax fraud against a restauranteur in my ancestral homeland of North Chicago, Illinois. The owner of Flanigans restaurant on Buckley Road is accused of evading tax on over $3 million of income by providing false books to his accountant.
I had no idea there was so much cash in North Chicago!
An intersection of a delightfully-named street in North Chicago, Illinois.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
No 2008 RMD waiver, no way, no how
December 22, 2008
BenefitsBlog has more on the Treasury's refusal to waive the rules on required minimum distributions from retirement plans for 2008.
More here.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Forbes: there will be no 2008 required minimum distribution waiver
December 19, 2008
Forbes reports that there will be no waiver for 2008 of the rules requiring minimum distributions from IRAs and retirement plans (via Kay Bell). There have been calls to waive the 2008 RMD requirement because of the stock market decline during the year; the distribution is based on account values at the end of 2007, and is mandatory for taxpayers who reach age 70 1/2 by the end of 2008. Forbes bases its report on a letter from the Treasury to Congresscritters who have called for a 2008 waiver.
This means if you haven't taken your distribution yet, you need to get it done. The tax law imposes a 50% excise tax on RMD shortfalls. If you just turned 70 1/2 this year, you have until April 1 to take the distribution; older taxpayers have to take it by December 31.
Congress has waived the RMD rules for 2009, but the waiver does not apply to the distributions that can be taken by April 1 for taxpayers reaching age 70 1/2 this year.
Related:
Required distribution relief: thanks for not much.
Remember to take your 2008 required minimum distribution from your IRA
Link • 2008 Year-end tax planning • Comments (1) Bookmark: del.icio.us • Digg • reddit
Best sentence (or so) I read yesterday
December 19, 2008
My point is simple: it is very hard to find examples of successful fiscal stimulus driving an economic recovery. Ever.
Disagree? Read the whole thing.
Link • QUOTATIONS • Comments (0) Bookmark: del.icio.us • Digg • reddit
Shrink rap
December 19, 2008
Just because you treat mental disorders doesn't mean you can't be a victim of disorganized thinking. Such appears to be the case with a Colorado psychiatrist charged this week with skipping out on her state taxes. Linda Luther-Starbird sent this evidence of confusion to Colorado:
In the letter, Luther-Starbird said, “American citizens have absolutely no obligation to file individual income tax returns ... I am not willfully ‘failing to file’ as the IRS likes to call it, but that I have a reasonable and ethical responsibility NOT to file because there is no constitutional and legitimate reason to do so.”
Of course every federal judge thinks otherwise. While occasionally folks advancing these arguments can convince a jury that the really believe this stuff, so they aren't "willfully" violating the law, they never get out of paying the taxes, and they usually end up with a Club Fed stay.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
IRS releases applicable federal rates (AFR) for January 2009
December 18, 2008
The IRS has issued (Rev. Rul. 2009-01 the minimum required interest rates for loans made in January 2009:
-Short Term (demand loans and loans with terms of up to 3 years): 0.81%(!)-Mid-Term (loans from 3-9 years): 2.06%
-Long-Term (over 9 years): 3.57%
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.
Link • Applicable Federal Rates • Comments (0) Bookmark: del.icio.us • Digg • reddit
You can't restore S corporation loan basis with a capital contribution
December 18, 2008
S corporation shareholders can only deduct losses if they have basis in either:
-Their stock, or
-Loans they have made (not guaranteed!) to the S corporation.
A big part of year-end planning for S corporation shareholders is making sure they have some basis. When you have multiple shareholders, loans are often preferred because each shareholder can choose whether or not to make the loan without disrupting the ownership percentages.
The danger with loans is that the losses reduce the shareholder-lender's basis in the loan; if it is repaid before enough S corporation income is earned to restore the loan's basis, the lender has a taxable gain. This is especially a problem under the new regulations that restrict "open account" S corporation loans. This problem snared S corporation owners with income on $1,622,050 in loan payments yesterday in Tax Court.
The Taxpayers, brothers Sheldon and Ira Nathan, loaned the funds to their S corporations, enabling them to deduct losses. In a series of transactions, they made capital contributions of over $1.4 million to the corporations and repaid the loans. The IRS said they had ordinary income on the loan repayment. The taxpayers tried to convince the court to allow them to increase the loan basis by treating the capital contributions as income, but the judge didn't go for it (my emphasis; copious citations omitted):
By attempting to treat petitioners' capital contributions to G&D and W&N CAL as income to G&D and W&N CAL, petitioners in effect seek to undermine three cardinal and longstanding principles of the tax law: First, that a shareholder's contributions to the capital of a corporation increase the basis of the shareholder's stock in the corporation; second, that equity (i.e., a shareholder's contribution to the capital of a corporation) and debt (i.e., a shareholder's loan to the corporation) are distinguishable and are treated differently by both the Code and the courts; and third, that contributions to the capital of a corporation do not constitute income to the corporation.
As you go about S corporation year-end planning, a few things to keep in mind:
- If you are looking at a loss, determine whether you have enough basis to deduct it. You need to take into account any current year loans and distributions to date.
- If you are considering year-end loans or contributions to capital, remember that basis is necessary to deduct losses, but it isn't sufficient; your basis has to be "at-risk" and you have to clear the maze of the "passive loss" rules.
- If you make a year-end loan to the S corporation to take losses, remember that the loan needs to stay in place until S corporation income has restored your loan basis; otherwise you will trigger income when you repay the loan.
- If you have repaid a loan already and now are facing taxable income as a result, don't count on restoring your basis with another loan or a capital contribution.
- Be extremely careful in using funds from another wholly-owned entity to finance a loan to the S corporation; if you circle the funds back to where they started, the IRS may strike down the loan as lacking substance.
Cite: Nathel, 131 T.C. No. 17.
Link: Tax Update 2008 year-end tax planning posts.
Link • 2008 Year-end tax planning • Comments (0) Bookmark: del.icio.us • Digg • reddit
Ice storm Cavalcade!
December 18, 2008
They forecast a big ice storm today for Iowa, so cut your risks and stay home with the Cavalcade of Risk, the blogosphere's roundup of insurance and risk-management issues. It's full of good stuff, ranging from long-term disability coverage to "sharia-based insurance."
Stay warm!
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Budgeting Santa's visit
December 18, 2008
It's touching when a grown man still believes in Santa. In fact, Pennsylvania's Governor is relying on the big guy to balance his budget. His plan to close a $1.6 billion budget gap includes "$450 million in anticipated federal fiscal relief," according to the Tax Policy Blog:
While it is good to see that the Governor has the discipline to cut $500 million of spending, over a quarter of the $1.6 billion he expects to raise comes from the “anticipated federal fiscal relief.” Rendell has been a strong proponent of state government bailouts, and had this to say:[…] I fully expect that the commonwealth will receive the federal stimulus funding that President-elect Barack Obama spoke of last week," the Governor said. "We anticipate receiving $450 million this fiscal year. Those funds will allow us to preserve the remainder of the Rainy Day Fund until 2009-10.
The private sector equivalent would be to plan to pay off your credit cards based on a bonus from a job you don't have yet. Santa's route must include a stop in Washington to pick up big bags of cash.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Meeting met needs
December 18, 2008
Recent Iowa news items that should be read together:
Des Moines area home sales fell 33 percent in Nov.Des Moines area home sales fell 33.5 percent in November compared to a year ago, a report today shows.
The average sale price in November declined 1.2 percent — or $1,913 — to $164,946 compared November 2007, said the Des Moines Area Association of Realtors.
And:
Low-Income Housing Tax Credits to Provide Affordable Housing for Hundreds of Iowans
DES MOINES – Governor Chet Culver has announced that the Iowa Finance Authority (IFA) Board of Directors has approved over $180 million in federal Low-Income-Housing Tax Credits (LIHTC) to create and restore nearly 1,400 affordable housing units in Iowa.
"As Governor, I am committed to ensuring that every Iowan has access to quality, affordable, and safe housing,” said Governor Culver. “During these tough economic times, it is imperative that state government do what it can to help those who need a place to live. With these tax credits, we are helping to turn our goal into a reality and giving thousands of Iowans a place to call home.”
Home prices are declining; some economists say that the economy can't recover until home prices stabilize. Yet the government pork machine runs on autopilot, continuing to subsidize new construction, increasing the supply of homes and further depressing prices. Like so many government solutions, these credits are solving a "problem" that has gone away while making a real problem worse.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Three KPMG convictions; one acquittal
December 17, 2008
Guilty on tax evasion counts, reports the Wall Street Journal:
Robert Pfaff, John Larson (former KPMG); Raymond Ruble (former Brown & Wood lawyer)
Not guilty on all counts: David Greenberg (former KPMG).
Thus ends the big KPMG tax shelter case that resulted in the forced divestiture of much of KPMG's business, the embarassment to the Government of the dismissal of charges against 13 defendants, and changes in the way white-collar prosecutions are to be handled.
Full Tax Update coverage here.
UPDATE, 12/18: The TaxProf has a roundup.
Link • KPMG ~ • Tax Shelter News • Comments (0) Bookmark: del.icio.us • Digg • reddit
Deferred Comp and year-end
December 17, 2008
The Section 409A rules may be the worst single piece of tax legislation passed in the Bush era. A response to the WorldCom and Enron scandals, it imposes extremely complex rules with ridiculously high penalties on every employer. Even the NFL:
NFL agents were sent an urgent memo this week from the NFLPA, requiring immediate attention to § 409A. This provision, originally aimed at bloated executive compensation packages, potentially calls for a full tax burden on signing bonuses and future guaranteed money in the year the package is negotiated, even if the money is deferred over several years. This would have dramatic ramifications. ... 409A becomes a major concern if enforced, meaning the full value of these deferred payments could be brought to taxation in the year negotiated, not earned, potentially affecting tens, even hundreds of thousands of dollars depending on the size of the contracts.
Transition rules for 409A expire at the end of the year. The rules take full force next year, including written plan requirements and full compliance with regulations. If you haven't done so, you should make sure you are ready for the new rules.
Link • 2008 Year-end tax planning • Comments (0) Bookmark: del.icio.us • Digg • reddit
Expensive free tax help
December 17, 2008
Almost everyone who does volunteer tax preparation through the VITA program does it in a true spirit of public service. Almost everyone. But not James R. Mullen. From a Department of Justice press release:
For example, in 2005, while working at the IRS VITA site, MULLEN prepared an income tax return for a particular taxpayer. The return that MULLEN prepared, and which the taxpayer signed, included no exemptions for dependents and calculated a refund of approximately $2,211. However, MULLEN did not file the return on behalf of the taxpayer. Instead, he prepared a different return in the taxpayer's name adding several children as dependents. As a result, the refund amount was increased to approximately $5,493. MULLEN then filed the false return electronically and included on the return the bank account number for his girlfriend so that the refund would be routed directly to her bank account. MULLEN then obtained the refund money from his girlfriend.
What a nice boyfriend.
Mr. Mullen has pleaded guilty to federal charges arising out of his tax prep work. He faces up to ten years in prison; for stealing from his clients and the IRS, he just might do some time.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Theft losses for Madoff victims?
December 17, 2008
See Update below
Now that Bernard Madoff's spectacular $50 billion Ponzi scheme has blown up, his victims will pick up the pieces where they can. One logical place to look is in the theft loss rules of the tax law. A recent New York Times piece explains the rules (hat tip: Tax Policy Blog):
Under the rules, investors can deduct their losses against 90 percent, and in some cases all, of their adjusted gross income. So an investor who lost $1 million to Mr. Madoff and whose adjusted gross income is $600,000 can claim a tax loss of $939,900. That is the result of $1 million reduced by 10 percent of the adjusted gross income, and minus a $100 fee that is applicable under I.R.S. rules, according to Robert Willens, a tax and accounting authority who provided the example. (Ed: But see update below)
The Times piece unfortunately has some misleading information:
The rules permit losses stemming from theft to be deducted in the year in which the loss is discovered by the investor. They also allow investors to carry back such losses for three years — one more year than under the rules for capital losses — and to carry forward losses for 20 years. Investors must compute losses according to the adjusted basis in their investment, not the fair-market value.
The three-year carryback only applies if the theft loss generates a net operating loss. You have to wipe out all of your income, including income otherwise taxed in lower brackets or protected by the personal exemption, before you have a net operating loss. The three-year period is a year longer than the normal NOL carryback period for non-theft losses; capital losses cannot be carried back by individuals, and they are only deductible to the extent of capital gains, plus $3,000.
The Tax Lawyer's Blog highlights another potential problem for the Madoff victims:
The Times article fails to point out that Madoff was arrested on December 12, 2008, and has not yet been adjudicated guilty of investor fraud. It is therefore likely that the IRS will deny a 2008 theft loss deduction on the grounds that it has not yet been determined that a theft has in fact occurred. This means that the investors will not be able to claim their theft losses until both Madoff is adjudicated guilty and there is no reasonable expectation of recovery of the lost funds.
These are true potential issues, but I don't expect the IRS to be so strict. It seems pretty clear that a theft has occurred. It also seems unlikely that there will be much recovery. The tax law doesn't require a conviction before a loss may be claimed. Not least, Madoff has a lot of victims, which means the IRS has an interest in streamlining the process for its own management purposes; and the victims include many prominent taxpayers, so the IRS will face pressure not to be jerks.
While you shouldn't file your return based on what the Tax Update thinks is likely, I would not be surprised to see the IRS allow deductions of the full account balances (actually, cost basis) in 2008, with any recovery taken back into income when received, if ever. If the IRS takes a public position, we'll post it.
Link: IRS Publication 547, Casualties, Disasters and Thefts
UPDATE, 3/17/2009: The IRS has issued a safe-harbor revenue procedure and a revenue ruling that look to be taxpayer-friendly. They allow a deduction in 2008 for up to 95% of the investment, and the deduction won't be subject to the 10% casualty loss haircut.
Link • Comments (6) Bookmark: del.icio.us • Digg • reddit
When can I deduct a business expense?
December 16, 2008
Today at IowaBiz.com we cover the pressing issue, "When do I get to deduct the expense?" The post covers the timing of business expense deductions for business taxpayers:
In general, if you are a cash-basis taxpayer, you have to pay your business expenses by the last day of the year to deduct them. If you are an accrual-basis taxpayer, you have to clear the "all-events test." That is, all events to determine the liability must have taken place by year-end, and the liability must be determinable with reasonable accuracy.
Of course, it's more complicated than that, so go there and check it out.
Link • 2008 Year-end tax planning • Comments (0) Bookmark: del.icio.us • Digg • reddit
Seven years for Ramona
December 16, 2008
Ramona Cunningham, the central figure in the CIETC scandal, received a seven-year sentence yesterday on federal charges stemming from her management of the jobs-training agency. The scandal featured pre-dawn dumpster runs, salacious stories of affairs between Ms. Cunningham and two CIETC directors, and an admission by another director - a Des Moines city council member - that he served as a mere "rubber stamp" for Ms. Cunningham.
CIETC was an obscure "jobs training agency" that managed to generate compensation of over $300,000 per year for Ms. Cunningham and two other agency employees - one who was convicted for her role and another who pleaded guilty. Ms. Cunningham was a high-school dropout who completed her GED. It just goes to show how smart we are here: even Iowa's GEDs are highly-paid executives.
Ramona Cunningham and Senator Tom Harkin in happier times at the dedication of the CIETC Tom Harkin Learning Center.
Related: Ramona gives it up.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
16 film parasites of Iowa
December 16, 2008
Iowa's unspeakably generous film subsidies have lured 16 corporate welfare seekers to make films here, according to this fluff piece from KCCI.com. At a time when the state has cut $100 million from current year spending and faces a quarter-billion shortfall in next year's budget, Iowa still finds it worthwhile to subsidize up to half the costs of films made here - a subsidy even more generous than Michigan's budget-busting film credits.
The Tax Policy Blog tells it like it is:
Because the costs and benefits aren't estimated and studied—either before or after implementation—tax incentives commonly end up channeling taxpayer dollars directly into the pockets of rent-seeking film companies, generating no corresponding economic benefits on a net basis.Ultimately, the main beneficiaries are not taxpayers but lawmakers. Every incentive package that attracts a rent-seeking company allows lawmakers to make public announcements taking credit for "new jobs." Location-based incentives can therefore be thought of as a market transaction between lawmakers and film companies. Lawmakers purchase favorable media coverage for themselves, film companies accept payment for filming in economically unprofitable places, and taxpayers finance the deal. It's hard to see how that's good policy.
No doubt the A&W in Indianola profiled in the KCCI story will become a film tourist mecca, just like Downtown Des Moines.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Twelve thingies of Christmas
December 16, 2008
'Tis the season for lists of twelve. TaxGrrrl has a worthy series, "12 Days of Charitable Giving." She asks for help from readers:
Convince me why your favorite organization is a deserving charity. But you don’t have to convince just me: I’m reaching out to 12 bloggers and companies to evaluate the comments and choose the most compelling. Those bloggers and companies will commit to making a donation of at least $25 to the charity mentioned in the comments that they find most deserving. Even better, the winning choices will be featured, one per day, for 12 days in December on taxgirl.
Yesterday's pick: DonorsChoose.org.
Meanwhile, Tick Marks has its traditional "Twelve Blogs of Christmas," highlighting some of the best in accounting and finance blogs of 2008. He did it in three posts:
Accounting
Personal Finance
Tax
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Facebook imposters!
December 16, 2008
Brett Trout has the lowdown on what to do if someone puts up a false page in your name on a social networking site. Why put up with an imposter when you can get in plenty of Facebook trouble all by yourself?
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Using your retirement plan for charity?
December 15, 2008
Retirement plans are a tricky problem for income and estate tax planning. If you die with a retirement plan balance, it can be subject to estate tax, and your beneficiaries also have to pay income tax. These two taxes help explain the popularity of the provision that allows taxpayers to use their IRAs to make charitable gifts.
Taxpayers who will reach age 70 1/2 by year-end can have their IRA trustees contribute up to $100,000 per year to charities without the donation going through the tax return. By avoiding both the income tax and the estate tax, it provides an efficient way to fund a charitable pledge. To qualify, the IRA trustee must transfer the donation directly to the charity. While the donation doesn't appear on the IRA owner's return, there is also no deduction. But by keeping the IRA out of "above the line" income, it avoids AGI-based deduction phaseouts. It also is a tax-efficient way for non-itemizers to fund charity.
The IRS has more on IRA donations to charity here.
Collect all of our 2008 year-end planning posts!
Link • 2008 Year-end tax planning • Comments (0) Bookmark: del.icio.us • Digg • reddit
Iowa faces $100 million 2009 shortfall; corporate welfare not on block
December 15, 2008
Governor Culver will have to cut $60 million in current year spending on top of the already-announced $40 million in spending cuts as a result of a downward estimate of projected tax revenues.
So far no cuts have been announced for boondoggles like the Iowa Power Fund, the Grow Iowa Values fund, or the subsidies for Filmmakers. Expect to see instead efforts to introduce combined corporate tax reporting and to reduce the Iowa "10 and 10" capital gain exclusion, as mentioned here.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Committing the sins of the father
December 15, 2008
Chester Muhammad, a Pennsylvania return preparer, had a very bad day in Tax Court in September 2006 when five of his clients lost cases based on imaginary charitable deductions supported by bogus documents cooked up by the preparer. The preparer died, but his practice, and practices, apparently lived on. Now the Justice Department has filed suit to shut down his survivors:
WASHINGTON – The United States has filed a lawsuit against a Coatesville, Pa., woman and two family members to bar them permanently from preparing federal income tax returns for others, the Justice Department announced today. The government’s civil injunction suit alleges that Chalamar Muhammad, her husband Curtis Muhammad and her mother Doranna Muhammad prepared federal income tax returns for customers claiming fabricated deductions and credits.The government complaint alleges that the Muhammad’s firm, CDC Tax Preparation and Financial Services, has a history of preparing hundreds of fraudulent returns annually and obstructing Internal Revenue Service (IRS) investigations of the fraud. The suit was filed in U.S. District Court for the Eastern District of Pennsylvania in Philadelphia.
Examples of bogus tax deductions mentioned in the government’s court papers include false claims of contributions of thousands of dollars to churches and charities, and false claims of education credits. According to the complaint, Chalamar Muhammad allegedly tried to obstruct IRS audits of her customers’ returns by submitting documents that she fabricated to purportedly substantiate bogus deductions and credits.
Of course the Muhammads' clients can look forward to some extra IRS attention.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Iowa: we have high income taxes, but we have high property taxes.
December 15, 2008
The Tax Foundation has posted an illuminating map:
Source: Tax Policy Blog
It illustrates the Foundation's New Census Data on Property Taxes on Homeowners.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Minnesota strip club owner pleads guilty to ATM-based tax fraud
December 15, 2008
Lawrence Kladek, the Inver Grove Heights strip club owner who delayed admitting to tax evasion to keep his liquor license in cahoots with the IRS and the courts, has pulled the trigger on his guilty plea. Mr. Kladek admitted to committing tax fraud through concealing cash receipts by running them through an on-site automated teller machine.
Via Russ Fox.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Required distribution relief: thanks for not much.
December 12, 2008
Congress has passed a bill (HR 7327) that eases the required minimum distribution amounts from IRAs and defined contribution plans -- but only for 2009. No relief is yet in place for 2008. The President is expected to sign the bill.
There have been calls for relief for the RMD rules for 2008 because the baseline for 2008 distributions is December 31, 2007 plan asset values. The 2008 stock market debacle means that a distribution based on 2007 values is a lot larger than one based on current values would be - so the plan asset base gets depleted.
While Treasury could waive the RMD rules for 2008, they haven't so far. It's hard to see where the waiver for 2009 distributions makes much sense, unless the Congresscritters are expecting 2009 stock marke results to be as bad as 2008. If that happens, screw changing the RMD rules; they need to allow plans to invest their assets in canned goods, guns and ammo.
Links:
HR. 7347
Joint Committee Explanation
The Tax Prof has a roundup.
Link Bookmark: del.icio.us • Digg • reddit
Is it time to start a retirement plan?
December 12, 2008
Self-employed taxpayers can get some great tax-savings opportunities via retirement plans. While SEP-IRAs the easiest type to set up, they aren't for everyone. If you have multiple employees, they provide very little flexibility. Also, a taxpayer with substantial self-employment income and no employees might achieve a much great deduction - up to --- via a "solo" 401(k) profit-sharing arrangement. A self-employed taxpayer who doesn't participate in another 401(k) plan can shelter the first $15,500 of self-employment income via such a plan; the total 2008 contribution might be as large as $46,000. This can provide a nice tax benefit for, in effect, taking money out of one pocket and putting it in another pocket.
Calendar-year taxpayers have until the end of December to formalize a qualified pension or profit-sharing plan for 2008 (SEPs, in contrast, can be put in place as late as the extended due date of the 1040). If you are interested, you should move on this immediately, as even the most accomodating plan provider needs a little time to get the paperwork in order.
Check back daily for more 2008 year-end planning ideas.
Link • 2008 Year-end tax planning • Comments (0) Bookmark: del.icio.us • Digg • reddit
Did Oklahoma ever settle the case with Joe Isuzu?
December 12, 2008
Oklahoma tax administrators seem intent on setting a record for stubborn stupidity. The Tax Policy Blog updates the Oklahoma tax case against some 20-somethings who ran Keghedz, a little party business:
Evidently they had spare time while "collect[ing] and administ[ering] taxes, licenses, and fees" in Oklahoma, enough to wander around MySpace.com, an online social networking website. There, they came across the profile of Kegheadz, a small group of twenty-something-year-old friends who throw parties for hire. The profile included such puffery as "Over a billion served," "Biggest party in the state," and "Biggest party in the country."The Oklahoma Tax Commission checked its common sense at the door and spent enough staff time and taxpayer resources to conjure up an estimate on how much Kegheadz owed in back taxes for these billions of customers. Over 4 pages, Commission staffers assumed 675 attendees per party, that they all paid a cover, and that the group threw 2 such events a month [going back to 1999, even though Kegheadz was founded in 2006]. Adding up the tourism taxes, liquor taxes, and sales taxes, and tacking on late fees, interest, and penalties, the Commission sent the kids a bill for $162,832.60 [due in 30 days].
The flimsiness of the case and the ensuing mockery wasn't enough to deter Oklahoma. They persist, trying to collect $64,000 in sales tax for 2006 and 2007 - down from an earlier $319,983.43 assessment. That sounds optimistic:
Far from a world-known megaparty contractor, Kegheadz actually threw only 22 events, attended by mostly their friends at small venues incapable of holding 675 people, and, they sheepishly admit, they had to let girls in for free. [And the venues sold the liquor, not Kegheadz.] They concede that they failed to pay tax, but estimate the amount they owe as $1,370.39.
Iowa has a problem sometimes in trying to impose imaginary tax law, but as far as I know, they don't tax imaginary parties. Maybe the next move is to have Oklahoma revenue agents hang out at pick-up bars to listen for guys trying to impress girls as being high rollers, so they can send them assessments based on the boasts in pick-up attempts.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
To Roth or not to Roth?
December 12, 2008
Robert D. Flach ponders the pros and cons of converting a traditional IRA to a Roth IRA this year.
Link • Comments (1) Bookmark: del.icio.us • Digg • reddit
Least convincing scam e-mail ever?
December 12, 2008
Yes, any e-mail from "jhgfdfghghghgguyftyuhihytuiyiyi" just exudes official authority.
I think they are trying to say that the recipient has $8 million awaiting them (upon receipt of enough information to enable the sender to drain the recipient's bank account), but it's not at all clear that someone dumb enough to fall for the scam could puzzle out enough of the message to even fall for it.
Link • Comments (2) Bookmark: del.icio.us • Digg • reddit
Section 179 and year-end planning
December 11, 2008
For business taxpayers, adding new fixed assets can be one of the easiest ways of controlling taxable income at year end. Section 179 lets taxpayers deduct currently the cost of some assets that would otherwise have to be capitalized and depreciated or amortized over a period of years.
As an anti-recession measure, Congress increased for 2008 the amount of assets for which Section 179 can be elected. For tax years beginning in 2008, taxpayers may deduct up to $250,000 of the cost of assets placed in service that would otherwise be capitalized.
There are some important limits on using Sec. 179:
- The amount of the deduction phases out dollar-for-dollar to the extent asset additions exceed $800,000.
- It doesn't apply to all property. For example, buildings and building components are ineligible, as are most assets used in a real property business.
- It is limited to active business and wage income. Sometimes Section 179 deductions are wasted when they pass through on a K-1 to a company with an operating loss, or to a retired individual with no current active income.
- The asset has to be "placed in service" by year-end. It's not enough to have ordered or paid for the asset.
You can get more information on Section 179 deductions here. You can find all of our 2008 year-end planning posts here.
Link • 2008 Year-end tax planning • Comments (2) Bookmark: del.icio.us • Digg • reddit
Congress: with loss carryforwards, two wrongs make a right
December 11, 2008
The auto industry subsidy bill passed by the house yesterday would exempt beneficiaries from the operating loss limits of the tax law. Section 382 applies to limit the use of loss carryforwards when corporate ownership changes hands outside of bankruptcy.
The Treasury has come under Congressional fire for it's generous reading of the Section 382 rules, to the extent of ignoring them, in the financial industry bailout; Congress apparently has concluded that two wrongs make a right.
In many cases, the 382 limits don't apply following bankruptcy restructuring. Congress seems to want to give the industry some of the benefits of bankruptcy without imposing the hard choices that a bankruptcy proceeding requires.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
IRS underpayment, overpayment rates drop for 2009 First Quarter
December 11, 2008
The IRS yesterday announced its interest rates on tax underpayments and overpayments for the first quarter of 2008:
- Five percent for overpayments [four percent in the case of a corporation];
- Five percent for underpayments;
- Seven percent for large corporate underpayments; and
- Two and one-half percent for the portion of a corporate overpayment exceeding $10,000.
These rates represent a 1 percentage-point drop from the fourth quarter of 2008.
Details at Revenue Ruling 2008-54.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
1000-post Maule
December 11, 2008
Villanova tax prof and blogger James Maule celebrates his 1,000th post. Congratulations!
The Tax Update has posted around 4,200 posts, but Dr. Maule's are longer, so he probably is ahead if you go by number of words posted.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
IRS guidance on year-end donations
December 10, 2008
Charitable giving is a big part of year-end tax planning. The IRS has posted a summary of tax rules governing charitable contributions (via the TaxProf). They have this to say about the always-popular gifts of household goods:
For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
If you get examined, that written record comes in handy.
Link • 2008 Year-end tax planning • Comments (0) Bookmark: del.icio.us • Digg • reddit
Blagojevich and taxes
December 10, 2008
Now that Illinois Governor Blagojevich is free on bail, the Tax Policy Blog looks back on his biggest tax policy effort, a gross receipts tax that narrowly failed to pass the Illinois house, losing on a 0-107 vote:
Much like Blagojevich's own career, the gross receipts tax went down in flames, killed by his fellow Democrats in the state legislature. But Blago limped on for another year, shaded by an ethical cloud and boasting a remarkable 4% approval rating. Perhaps once he goes to prison (if he is convicted of the alleged crimes which he allegedly committed) Blago can carry on his populist shtick there, advocating for meatier bologna sandwiches or increased rec time.
Fortunately, Illinois has plenty of politicians with similar ethical standards ready to step in.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Aiding another worthy industry
December 10, 2008
It appears that Congress might move to bail out another struggling industry: America's beleaguered tax-shelter enablers.
Many local transit agencies "sold" their assets in "LILO" or "SILO" deals to enable taxpayers to generate depreciation and interest deductions to shelter their income. When the IRS blocked the tax benefits, the "buyers" wanted out. Many of the deals were guaranteed by AIG; when its finances collapsed, it threw the agencies into default, entitling the shelter participants to penalties under the agreements.
Now Congress may step in to guarantee the agencies' liabilities under these deals. That will teach them not to participate in future tax shelters, for sure.
UPDATE: The TaxProf has more.
Link • Tax Shelter News • Comments (0) Bookmark: del.icio.us • Digg • reddit
Health Savings Accounts - are they healthy?
December 10, 2008
HSAs may come under fire in 2009. BenefitsBlog explains why HSAa are a good thing.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Thinking about starting a business?
December 10, 2008
Principal Financial Group, Des Moines' largest employer, laid off 300 of its 8,000 local employees yesterday. I'm glad it wasn't worse, but its plenty bad for those 300.
It's not unusual for those with sudden free time on their hands to start a business. It can be tempting to go the franchise route. Rush Nigut has some excellent advice on investigating a franchisor today at Iowabiz.com.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Illinois Governor 'Not-yet-indicted' no longer!
December 09, 2008
The Tax Update wishes to make a correction. In a March 8, 2007 post, we said the pronunciation of the last name of Illinois Governor Blagojevich was "so far unindicted." That is no longer correct:
Illinois Gov. Rod R. Blagojevich and his Chief of Staff, John Harris, were arrested today by FBI agents on federal corruption charges alleging that they and others are engaging in ongoing criminal activity: conspiring to obtain personal financial benefits for Blagojevich by leveraging his sole authority to appoint a United States Senator; threatening to withhold substantial state assistance to the Tribune Company in connection with the sale of Wrigley Field to induce the firing of Chicago Tribune editorial board members sharply critical of Blagojevich; and to obtain campaign contributions in exchange for official actions – both historically and now in a push before a new state ethics law takes effect January 1, 2009.
The Tax Update regrets the error.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Does it make sense to prepay your taxes?
December 09, 2008
One of the oldest tax planning tricks in the book is paying in December state and local taxes that aren't due until next year. That way you get get the benefit of the deduction one year sooner. If it works, you could get a tax benefit on your April 2009 filing, rather than your April 2010 filing.
Does the math work? Not always. I ran a little computation for a hypothetical taxpayer who will face the same marginal tax rate this year and next without owing alternative minimum tax, and without estimated tax underpayment penalties or other side issues taken into account. I take into account the value of the prepayment on the return next April to the foregone interest would have earned on the state and local taxes if you had waited to pay them until the due date, using a 4% discount rate. The results are below; the circumstances where prepaying works are in green, and the due date for the prepaid taxes are on the left side.
In short, unless you are in the top bracket, prepaying your Iowa state income taxes due April 30 doesn't make sense. 28% and 33% bracket taxpayers might benefit from prepaying property taxes due March 1.
Of course, other factors come into play. If you are in AMT both years, you get no benefit of prepaying taxes, because the deduction is worthless. If you are in AMT in one year and not the other, it only makes sense to pay the state and local taxes in the non-amt year. In any case, you have to have a decent two-year tax projection to make the call. If the dollars are big, get your tax advisor involved.
UPDATE: Robert Flach makes a good comment: for taxpayers meeting our simplifying assumptions, it always makes sense to prepay a fourth quarter state estimate otherwise due in January, if you itemize in the first place.
Link • 2008 Year-end tax planning • Comments (1) Bookmark: del.icio.us • Digg • reddit
Snow and Ice Carnivals
December 09, 2008
The new Cavalcade of Risk is up, featuring the best in recent insurance and risk related blog posts. I like this from insurance broker Hank Stern in Insureblog:
I often tell clients that not all insurance companies are run by idiots: some are run by morons.
The new Carnival of Taxes is also up, featuring blog posts about you-know-what.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Politeness pays!
December 09, 2008
And rudeness can be expensive:
Michael Brautigam was before [Judge Robert] Ruehlman representing himself in a contentious civil suit he had filed against his North Avondale condo association and other condo owners in the building who are represented by Cincinnati attorney Peter Koenig. ... He sued, accusing the condo association of not properly taking care of the building and asked a judge to force it to fix the roof and make other repairs.As Koenig and Brautigam turned to walk away from the judge, Brautigam called Koenig "a (bleeping) liar." "He used the famous F-word," Koenig said. "(Ruehlman) asked Mr. Brautigam if he said that." Brautigam admitted he had and had directed it at Koenig.
Ruehlman cited Brautigam for contempt and sent him to jail for six months.
At least the condo association meatings will be sedate for the next six months.
Via the TaxProf.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Owning plenty of nothing
December 08, 2008
Sam Zell took control of the Tribune Company, owner of the L.A. Times and Chicago Tribune, via a highly-leveraged ESOP-owned S corporation last December. Today the Tribune Company entered Chapter 11.
Sometimes when employees are handed shares of employer stock, they just end up holding the bag.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Remember to take your 2008 required minimum distribution from your IRA
December 08, 2008
One of the most painful taxes is imposed on income you don't receive. If a taxpayer who has reached age 70 1/2 fails to take the "required minimum distribution" from an Individual Retirement Account, the law slaps a 50% tax on the amount not withdrawn.
The RMD must be taken by December 31. Taxpayers who turned 70 1/2 in 2008 have until April 1, 2009 to take their first required minimum distribution.
While many IRA trustees automatically compute the required distribution, they are not required to. Many others don't. If you have multiple IRAs, you aren't protected just because you have received one or more distributions; you have to take the RMDs based on the total balance of your IRAs. You can, however, take the entire RMD from a single IRA, as long as it's enough to cover your entire required distribution for all of your IRAs.
You compute your 2008 required minimum distribution by consulting the appropriate RMD table (linked here) and dividing your aggregate IRA balance as of December 31, 2007 by your remaining life expectancy; you should use this handy IRS worksheet to make the computation. For most taxpayers, this life expenctancy table applies.
There is no RMD requirement for "Roth" IRAs, so they are not part of the computation.
The bottom line: If you have reached age 70 1/2, it's up to you to make sure you take enough out of your IRAs.
UPDATE: While there has been talk about waiving minimum distribution requirements for 2008 as a result of the decline in the stock markets this year, nothing has happened yet.
UPDATE, 12/19/08: It looks like there will be no RMD waiver for 2008.
Link • 2008 Year-end tax planning • Comments (0) Bookmark: del.icio.us • Digg • reddit
Breaking news from 1987
December 08, 2008
Interest on credit cards hasn't been deductible since the 1986 Tax Reform Act kicked in. Apparently some folks didn't get the memo.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
IRS compromises: don't count on 'pennies on the dollar'
December 08, 2008
If you watch too much late-night cable television, you probably have seen commercials that make it appear that paying federal taxes is no big deal, because you can always work out a "pennies on the dollar" deal. Don't count on it.
Peter Pappas reports on a recent Tax Court case upholding the IRS denial of an Offer in Compromise, even though the taxpayer offer was for more than the IRS thought she could pay:
The Court noted the IRS based it’s denial of the taxpayer’s offer in part on the taxpayer’s historically poor record of compliance with the tax laws.If a poor record of compliance with the federal tax laws is reason enough to reject an otherwise reasonable Offer, the IRS can reject anyone’s Offer at any time. If you are filing an Offer in Compromise, by definition, it is because you have not complied with the federal tax laws.
Mr. Pappas points out that trying to get a "pennies on the dollar" deal has real risks:
I regularly tell my clients that Offers in Compromise based on doubt as to collectibility are a crap shoot. You can meet all of the suggested requirements and the IRS can still legally reject your Offer merely because it feels it’s not in it’s best interests.Of course, by the time you find out that the Offer is not in the government’s best interest you have voluntarily given it all of the information it needs to seize your assets and have also given them at least an additional year (the filing of an Offer extends the statute of limitations) to collect the tax.
Roni Deutch, an attorney who handles a lot of compromise offers, is fed up with the way the IRS is handling them.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Another long sentence for an Aegis figure
December 08, 2008
The "Aegis" is a shield of the gods in greek mythology. The gods haven't been kind to the promoters of the Aegis trusts, a nationwide tax scheme operated out of the Chicago area. The latest long sentence for an Aegis figure is a 200-month sentence for Robert W. Hopper of Gadsen, Alabama. The Department of Justice press release on the sentencing says:
Prior to his conviction, Hopper was an original founder of Aegis and was the managing director. Hopper and his co-defendants were found to have carried out a nearly decade-long scheme to market and sell sham domestic and foreign trusts through the Aegis Company to some 650 wealthy taxpayer clients.According to court documents and evidence at trial, the tax fraud scheme used a network of promoters, sub-promoters, managers, attorneys and accountants and resulted in a $60 million dollar tax loss to the United States. Aegis, which is now defunct, was formerly based in Palos Hills, Ill.
It took a decade for this scheme to explode, but explode it did, and the IRS is going after the customers as well as the promoters. So if a golfing buddy brags about some trust scheme that magically makes his taxes go away, and it's OK because he hasn't been audited yet, "yet" may be the key word.
Related: 17 years, six months for Aegis Trust figure
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Happy Anniversary!
December 05, 2008
Today is the 75th anniversary of the repeal of Prohibition.
That enabled us to progress from this:
...to this:
One small step for rye; one giant leap for mankind.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Plan for your single-member LLC to begin filing payroll tax returns
December 05, 2008
Year-end planning isn't just about reducing 2008 taxes. It's also about getting ready for 2009. One looming 2009 item is a new regulation that will require single-member limited liability companies to begin filing their own payroll tax returns.
Single-member LLCs are normally "disregarded" for income tax purposes. If they are owned by a corporation or partnership, they are taxed as a division of that entity; if they are owned by an individual, their income is taxed on the individual's 1040. They don't file their own income tax returns. "Q-subs" -- wholly-owned subsidiaries of S corporations - are also "disregarded entities."
Prior IRS guidance (Notice 99-6) allowed disregarded entities to have their employees reported on their parents' employment tax returns. New regulations (TD 9356) that take effect in January 2009 require disregarded entities to file their own payroll tax returns, including 941s and W-2s, under their own name and taxpayer identification number.
As these rules are mandatory for the first payroll of 2009, now is the time to make sure that your payroll system is ready for the change. If you have employees in a single-member LLC or Q-Sub, but have been reporting the LLC/Q-sub employees on the owner's payroll tax returns, you need to make sure your systems are ready for the change.
Link • 2008 Year-end tax planning • Comments (0) Bookmark: del.icio.us • Digg • reddit
17 years, six months for Aegis Trust figure
December 05, 2008
A figure in the Aegis tax scam received a nasty prison sentence yesterday. Timothy Shawn Dunn of Chesterton, Indiana will go away for 210 months for his role in Aegis, which the government says caused a $60 million tax loss.
Another Aegis figure, Michael Vallone, received a 223-month sentence earlier this year.
The Aegis plan, marketed through a network of accountants and financial planners, used trusts and offshore accounts to conceal taxable income. These long sentences show that the government really doesn't care for that sort of thing. And it's not just the marketers; the IRS has been going after the Aegis customers, too.
Link: DOJ press release
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Tax holiday?
December 05, 2008
Some folks are floating the idea of turning off the income tax for a couple of months (or a year) to goose the economy. The Heritage Foundation explains why this would be unwise:
Letting Americans keep their own money is a good instinct for lawmakers. Whether they save or spend that money, Americans are more likely to use their money wisely than if Congress decides where and how to spend it. But if the goal is also to encourage Americans to use their money in ways that will encourage faster growth, it is far better to provide any particular amount of tax relief as long-term reductions in tax rates rather than as a merely temporary respite from the IRS.
Temporary provisions are almost always bad policy. This has the additional folly of undoing every incentive provision in the tax law for the period to which it applies. Most such provisions are junk policy anyway, but if you believe that tax incentives work, you have to assume a tax in the first place. But if it really were to happen, it would sure stimulate the economy of tax planners, as we would go into a frenzy to get everybody's income into the holiday.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Holes in the code
December 05, 2008
The Tax Policy Center has put together a summary of "tax expenditures" affecting individual returns. These are (more or less) items that would be taxed in a theoretical "Haig-Simons" income tax, but which are not taxed under current law.
It's a good place to see how much tax complexity costs, and to see how special-interest tax provisions lead to higher rates for everyone.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Helping the Deadbeat Sector
December 05, 2008
Should people who pay their loans on time pay extra taxes to bail out those who don't? The TaxGrrrl thinks not.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Just because a fund is battered doesn't mean it has no capital gains
December 04, 2008
One traditional year-end tax blunder is the purchase of a mutual fund share just before it makes its required annual capital gain distributions. When you do this, you buy a year's worth of capital gain taxes for the privilege of owning the shares for as little as one day. This can be especially galling in a year that the fund has lost a lot of value, like this year.
This year's expected capital-gains distributions have been caused mainly by investors leaving stock funds, which forced fund managers to sell some holdings. There was a total of $204 billion in net outflows from all stock funds through October, according to research firm TrimTabs Investment Research. And the problem has been exacerbated by fund rotations, as some investors kept their money in the stock market but moved among types of stock funds. For instance, some shifted from value funds to growth strategies and others dumped small-stock funds for large-stock funds -- all actions that could create capital gains.
The bottom line: check the fund websites for their expected 2008 capital gain distribution dates before you buy.
Link • 2008 Year-end tax planning • Comments (0) Bookmark: del.icio.us • Digg • reddit
Even when you pay a preparer, it's still your return
December 04, 2008
A tax return preparer fee isn't a "no-penalties" card for a client. The Tax Court made this point yesterday in a case involving the 2001-2002 bonus depreciation provisions.
January Transport, Inc. bought a used Cessna. The Tax Court noted:
Around the time of the purchase, Mr. January obtained a two-page article titled "30% Immediate Bonus Depreciation for New and Used Aircraft Approved by House Ways and Means Committee" (article). The article was subtitled "Anticipated Passage into Law within Two Weeks". The article was ostensibly written by a C.P.A. and was dated October 14, 2001.
As enacted, bonus depreciation only applied to new assets, not used ones; a similar rule applies to the current bonus depreciation provisions. The owner passed the article on to his CPA, and the CPA claimed bonus depreciation on the used plane.
On examination, the IRS disallowed the depreciation and assessed a 20% "accurancy-related penalty" for taking a deduction without adequate authority. The court said that it wasn't reasonable for the taxpayer to rely on the preparer for the bonus depreciation deduction:
Although Mr. January as petitioner's president had a duty adequately to examine petitioner's return, Mr. January failed to do so. A cursory review of the 2002 Federal Depreciation Schedule attached to the 2002 return would have revealed bonus depreciation claimed for the Cessna. Bonus depreciation claimed for the Cessna was a large item on petitioner's depreciation schedule. On the 2002 return petitioner claimed a depreciation deduction of $586,803 of which almost 40 percent ($225,000) related to bonus depreciation for the Cessna. A prudent person under the circumstances would have inquired before filing the return whether the bill containing the bonus depreciation provision had been enacted. Given Ms. Koskie's initial hesitation on the basis of her understanding that bonus depreciation was only available for new (original-use) assets, a prudent person also would have followed up with Ms. Koskie or another source regarding whether bonus depreciation could be claimed on used assets before filing a return that claimed a substantial bonus depreciation deduction on used assets.Mr. January, however, turned a blind eye to the issue and did not act as a prudent person would have acted. Despite his knowledge of the uncertainty of petitioner's bonus depreciation position, Mr. January failed to ask Ms. Koskie what she had done about bonus depreciation on the 2002 return. Petitioner's claim that it relied in good faith on its accountant is undermined when petitioner's president knew before the return was filed that the article on which he and the accountant were relying referred to a pending bill.
The Moral? When you suggest a tax idea to your tax preparer, find out whether the tax preparer has made sure it actually works.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Downsizing at the Des Moines Register
December 04, 2008
The Newspaper Iowa Depends Upon is eliminating 56 positions, including their editorial cartoonist job.
Very sad. Newspapers are losing their audience as young folks turn to the internet, and they are losing their advertising base to Craigslist and to other internet competition. Except for the for-pay online edition of the Wall Street Journal, they seem to lack any response to these challenges other than layoffs.
Link • Comments (2) Bookmark: del.icio.us • Digg • reddit
Costing more, paying less
December 04, 2008
One of the insights in the recent Iowa Fiscal Partnership report on the long-term Iowa budget imbalance is that while state spending on old folks will go up, they will receive special tax breaks already built-in to Iowa's tax law. Pensions already qualify for a partial exemption, and the tax on part of Social Security benefits is being phased out
And they wonder why college graduates don't want to stick around in Iowa.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Year-end looms
December 03, 2008
The end of the year is four weeks away. That means we have four weeks to set right the tax mistakes of the last 48 weeks.
This year has some unusual tax planning features. The uncertain economy makes folks reluctant to defer income out of understandable fear that income deferred a month might be deferred forever. If you need cash to complete a tax planning tactic, loans are more difficult to come by.
But the bad economy also provides some tax planning opportunities. The stock market debacle should make it easy for many of us to avoid any taxable capital gains this year, given the available losses in our portfolios. The widespread decline in asset values lets us move more assets to the next generation tax-free as part of our estate planning.
Where to start? Figure out where your 2008 taxes stand so far. Gather your paystubs and your brokerage and bank statements. Figure out whether you have any bonuses or other unusual year-end items coming up. Look over last year's tax return and identify items that are likely to change since last year. Then visit your tax advisor or dummy up a 2008 tax return to see where you stand. Tomorrow we'll start to do something about it.
This is the first in a series of 2008 year-end tax planning posts. If you can't wait, check out our tax planning for prior years - but remember, the law changes every year, so what worked last year doesn't necessarily work in 2008.
Link • 2008 Year-end tax planning • Comments (0) Bookmark: del.icio.us • Digg • reddit
We the People starts another snipe hunt
December 03, 2008
Robert Schulz's "We The People" outfit has struck out in its efforts to litigate the income tax out of existence. Now they have apparently found another futile and absurd place to channel their talents:
An anti-tax activist from upstate New York who is questioning whether President-elect Barack Obama is a "natural born citizen" eligible for the nation's top job said Tuesday that his non-profit group spent "tens of thousands of dollars" to get his message across in ads in the Chicago Tribune this week.Robert L. Schulz, 69, chairman of We The People Foundation, took out ads Monday and Wednesday to raise questions about whether Obama's Hawaii certificate of live birth is authentic.
They'll succeed in this effort just as much as they have succeeded in getting rid of the income tax.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Dismissed KPMG defendants officially off the hook
December 03, 2008
The case against the 13 KPMG defendants whose cases were thrown out by the trial judge quietly has come to the end when the government declined to ask for Supreme Court review. The Tax Prof has a roundup. The judge dismissed the charges as a result of efforts by the prosecution to keep KPMG from paying the defendants legal costs.
The case against the remaining four defendants continues.
Link • KPMG ~ • Tax Shelter News • Comments (0) Bookmark: del.icio.us • Digg • reddit
If your cheating preparer gets caught, so do you
December 03, 2008
New York State just ran a sting operation aimed at fraudulent tax reporters. Russ Fox has the scoop:
William Comiskey, Deputy Commissioner of the New York Department of Taxation and Finance, noted that had the fraud gone undetected it would have cost $4 million in tax to federal, state, and local governments. Worse, "evidence of fraud" was found at 40% of the 85 preparers visited.
This instance shows a brilliant legal mind at work:
In one case, a preparer told an undercover agent to step outside his office and return with a different set of records. When he returned, the preparer told him: "You know why I asked you to do that? Because if I have to swear it, I can say I swear to God that these are the papers you brought to me."
Yeah, I bet it worked out just like that.
Roni Deutch explains that the clients don't get off the hook:
Mr. Comiskey says some preparers have agreed to cooperate and go undercover to show that their clients knew of the fraud and build evidence against those clients -- and, in some instances, against other preparers."They are cooperating against their former clients in other ways as well," such as sharing client lists and identifying fraudulent returns, Mr. Comiskey says.
The moral: A preparer sleazy enough to prepare fraudulent returns for you isn't too ethical to sell you down the river.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Even creepy stalkers have to pay their taxes
December 02, 2008
Unrequited stalky-love and tax evasion are two bad ideas that get worse together. At least that's one lesson you can draw from U.S. v. Stierhoff, a 1st Circuit Federal tax case issued yesterday.
Mr. Stierhoff's troubles began when he went a-courting:
In March of 2002, a young woman contacted the Rhode Island State Police and complained about a stalker. She told the troopers that the man had approached her at work, given her unwanted cards and poems, and left poetic messages on her windshield while her car was parked in a dormitory parking lot at Rhode Island College. The troopers traced the suspected stalker through his license plate number and identified him as Neil Stierhoff (the defendant herein).Between April 4 and April 12, 2002, the troopers conducted a surveillance that tended to confirm their suspicions about the defendant's obsession with the complainant. They then devised a sting operation that played out on the night of April 12. The sting worked, and the troopers arrested the defendant on the spot.
Things went downhill rapidly. The stalker suspect consented to a search of his apartment:
The troopers found a treasure trove of interesting items. These items included the computer on which the defendant had composed the poems, greeting cards similar to those delivered to the complainant, a briefcase containing $100,000 in cash, another $40,000 in cash lodged in a desk drawer, and a myriad of financial documents. The troopers proceeded to make inquiries about the cash and a bank statement.We need not linger over the details of the interrogation. It suffices to say that the troopers concluded that the defendant had been operating a highly lucrative business featuring the sale of used electronic equipment over the internet. When they noticed that the aforementioned bank statement bore the name "Joseph Adams," the defendant explained that he used that pseudonym in conducting this business. As to the large sums of cash on hand, he ventured that he neither trusted banks nor paid any taxes (federal or state).
He would have been wise to have consulted a lawyer; counsel would have probably suggested he keep that last bit of information to himself. Mr. Stierhoff was convicted of the stalking charges, and the troopers got the IRS involved. This eventually led to a tax evasion sentence of around 46 months in prison.
The Moral? When a girl doesn't want to date you, move on. If you must obsess, at least get a good tax preparer first.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
The cost of corporate welfare in Iowa
December 02, 2008
The left-leaning Iowa Fiscal Partnership has tallied up the corporate welfare bill in Iowa:
In particular, the cost of business tax credits has grown dramatically. In Fiscal Year 2001, about $100 million in tax credits were awarded to businesses, a number which had increased fivefold by 2007. Most of these credits had an economic development purpose; the largest are the enterprise zone credits, the High Quality Job Creation Program, the Research Activities Credit, and the Industrial New Jobs Training Program. Projections indicate that in excess of $400 million in liabilities for tax credits already awarded will be felt each year from Fiscal Year 2010 through 2012. The actual amounts will no doubt be substantially higher as new credits are proposed and awarded. These tax-credit expansions have contributed to a substantial decline in revenue from the corporate income tax, which accounted for over 7 percent of state tax revenue in the early 1980s, but less than 3 percent in recent years.
$400 million per year -- an amount likely in excess of the entire current-year take from Iowa's highest-rate-in-the-nation corporation income tax -- is taken from your paycheck, your company, or your employer, just to fund somebody else's project. Maybe somebody as deserving and needy as Johnny Depp.
While the Iowa Fiscal Partnership rightly points to the cost of these "economic development" programs, they aren't the only culprit in the erosion of the corporation tax base. More significant is the rise of S corporations since the 1980s; most new businesses are set up as S corporations or partnerships, and many old C corporations became S corporations during the 1980s.
Of course, corporate taxpayers have become more sophisticated in their tax planning, and Iowa's 12% rate makes it worthwhile to structure your business away from Iowa.
The logical approach: repeal Iowa's corporate income tax and its corporate welfare programs. Sure, we wouldn't get to subsidize Hollywood that way, but such is the price of progress.
The IFP report is a good outline of the long-term budget and tax policy train wreck that Iowa is facing -- it is about much more than corporate taxes. While I don't think they are on the right track in all of their solutions, the report is an important step towards facing the problems.
Links:
Iowa Fiscal Partnership report: Iowa's Aging Population: Growing Challenge for State Budget
News Release
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
International gifts: 'no harm' doesn't mean 'no foul'
December 02, 2008
International tax reporting is not a "no harm, no foul" game. The tax law has severe penalties for failing to file the proper reports, even when no tax is otherwise due. The rules for reporting cross-border gifts are a good example.
If you receive a gift or bequest of over $100,000 from a nonresident alien individual, you must file Form 3520 to report it. You also have to report gifts from foreign corporations of partnerships in excess of $13,258. If you fail to file the form, you can be penalized up to 25% of the gift - even if no tax is due on the gift itself.
A new IRS release summarizes these rules.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Sometimes problems solve themselves
December 01, 2008
One of the arguments against repealing Iowa's useless highest-in-the-nation corporate income tax is that Iowa needs the money. That argument seems to be going away as Iowa's corporate income tax receipts plummet.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
The high cost of doing a favor
December 01, 2008
Anthony Marek probably felt he was doing a favor to Steven Mazzola when he created backdated invoices to document claimed expenses during an IRS audit of Mr. Mazzola's towing company. Things went well at first, and the IRS agent accepted the invoices and closed the audit.
Then Mr. Mazzola's brother called the IRS:
The criminal investigation that ultimately resulted in Marek's conviction began in April 1998, shortly after the audit closed, when Joseph Mazzola contacted IRS agents and alleged that the invoices submitted during the audit were false, and part of an effort to conceal a scheme to, inter alia, skim money from the company and pay employees "under the table" to help the employees evade income taxes and to enable the company to evade payroll and other employment taxes.
Things went badly, and Mr. Marek ended up convicted of "corruptly endeavoring to obstruct or impede the due administration of the Internal Revenue Code," earning six months of home detention, probation, and a $3,000 fine. Last week his conviction was upheld.
The Moral? Cheating on taxes is unwise; helping someone cheat is just dumb. Think about it: if it works, your cheating friend gets money, and you get nothing. If it fails, you get trouble. No upside for you, but plenty of downside.
Cite: Marek, CA-1, No. 07-2437.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Creative Tax Court judge lets CPA avoid fraud penalties
December 01, 2008
Considering that all of his cases involve taxes -- not the most naturally entertaining caseload -- Tax Court Judge Mark Holmes manages to write consistently entertaining and witty opinions (see here and here). It must have taken all of his considerable creativity to let a politically-connected Detroit CPA avoid civil fraud penalties after having been convicted of criminal fraud.
Judge Holmes didn't even hold his CPA designation against him in determining whether his understatements rose to the level of fraud. As Peter Pappas points out at The Tax Lawyer's Blog,
This finding is astonishing.If Barrow’s extensive education and business knowledge is not considered a badge of fraud, it is hard to see how this “badge” could ever be applied to anyone other than an experienced tax CPA or tax lawyer.
The Tax Lawyer's Blog has more.
Cite: Barrow, T.C. Memo. 2008-264
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Macho update
December 01, 2008
We learn from Kay Bell that Genderanalyzer.com has updated their algorithm used to guess whether a blog is written by a boy or a girl. The update apparently has altered the manliness scores we discussed here, but the Tax Update Blog remains 80% manly.
UPDATE: Genderanalyzer link fixed. Sorry about that!
Link • Comments (3) Bookmark: del.icio.us • Digg • reddit
You could go to jail; worse, you could reduce your proceeds.
December 01, 2008
Rush Nigut points out a problem often encountered by folks who run their personal bills through their business:
Business expenses are fine to deduct. But running obvious personal expenses through the business just isn't acceptable. It could even be a reason to "pierce the corporate veil" in litigation causing you to lose your limited liability protection.But where it may really hurt is when you go to sell your business. That is when it is critical to show the best possible operating profitability and cash flow to gain a fair price for your business. This means those avoidable (or perhaps illegal) expenses take away from the bottom line of the business and leave you with less value. Moreover, it draws questions about your integrity and could make it harder to sell our business.
"But we really made money, if you don't count the cheating!" may not be the most impressive thing you could tell a potential buyer of your business.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Harvesting your capital losses
December 01, 2008
Today is our turn at IowaBiz.com, the Des Moines Business Record's group blog for entrepreneurs. In "Capital losses: how to take your medicine," we discuss the rules for deducting capitla losses, including the "Wash Sale" rules.
Link • Comments (0) Bookmark: del.icio.us • Digg • reddit
Tax Updates
Subscribe to Tax Updates
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not neccesarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
Search Tax Updates
Friends and Neighbors
Economics Nerds
Hard-Core Tax Nerds
Gigablogs
Insurance Folk
Goners
Legislation
Tax Update Data Feeds
