Tax Update Blog: March 2009 Archives
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IRAs and Partnerships can be an unhappy mix
March 31, 2009
A reader asks:
i just received a k-1 1065 from an llc which is included in my ira brand new this year.because my investment is included in my ira porfolio do i have to report the income shown on the k-1
That's a great question. It would be an even better question to ask before buying an LLC in your IRA. That's because LLCs often generate income that is - surprise! - taxable to the IRA.
The tax law frowns on tax-exempt entities like IRAs holding business assets. While it's OK to hold investments that generate interest and dividends in an IRA, Congress thought it would be unfair for taxable businesses to have to compete against tax-exempts. That's why the tax law imposes the Unrelated Business Income Tax, or UBIT, on business income earned by tax exempt entities. The UBIT is, in general, the corporation tax system applied to business income earned by exempt entities.
When UBIT applies to an IRA, the IRA has to pay income tax itself on Form 990-T at rates up to 35%. State income taxes can also apply. Of course, the after-tax income of a traditional IRA may be taxed again when it is distributed to the IRA owner.
If you have income taxable to an IRA coming from an LLC, it should be on line 20 of the LLC's K-1, listed with code "V". In this case, "V" doesn't stand for "Victory."
The Moral: LLCs and IRAs are a poor mix unless the LLC only holds investments that generate interest and dividend income. If you own an LLC that generates business income in your IRA, you may need to file Form 990-T by April 15.
Stop by tomorrow for the next installment of our 2009 filing season tips series!
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Federal tax deductibility repeal clears first hurdle; opponents rally tonight
March 31, 2009
The effort to repeal Iowa's individual deduction for federal income taxes cleared its first hurdle last night when HSB 284 was approved by the House Ways and Means Committee on a party-line vote.
The bill is touted as revenue-neutral, but it would increase the effective marginal rate for top-bracket Iowans from about 6.02% to 6.98%. Opponents are gearing up for hearings to be held tonight at the Capitol. Iowans for Tax Relief has launched an ad campaign to oppose the repeal bid. The Iowa Chamber Alliance, the coalition of chambers of commerce, has announced its opposition. Iowa Republicans are holding a rally against the repeal proposal at the Capitol tonight.
It will be interesting to see whether the Democrats will be able to hold their caucus together for this.
Links:
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California CPA charged in North Platte plot
March 31, 2009
When it rains, it pours, for California CPA Lowell Baisden. He is already under an injunction against doing tax work. Last year he lost a case in Tax Court on his own taxes. Now he is charged with conspiring to commit tax fraud in Nebraska. From the IRS press release:
The indictment alleges Lowell Baisden, Michael Koning and Susan Baisden-Koning engaged in a scheme to defraud and evade and defeat approximately $989,000 in individual federal income taxes of Michael Koning and Susan Baisden-Koning. In addition, they assisted other North Platte area taxpayers in evading the assessment of approximately $579,000 in individual federal income taxes. In total, the conspiracy entered into by Lowell Baisden, Michael Koning and Susan Baisden-Koning involved the attempt to defraud and evade and defeat approximately $1,569,000 in individual federal income taxes for all taxpayers involved.
Mr. Baisden's North Platte clients included a number of medical personnel who worked with Mr. Koning, his brother-in-law. His suggestions were apparently not universally appreciated in North Platte, and things went downhill for him and his clients after a North Platte doctor got the IRS involved.
Link: copy of indictment
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Tax Court cuts IRS agent no slack on penalties
March 31, 2009
An IRS agent and his wife did a little business on the side, selling nail care kits and carpet cleaner. The agent, Mark Squier, prepared the returns and, taking advantage of a minor IRS perk, he e-filed him at his office in Oklahoma City.
The Tax Court found that the agent wasn't entirely forthcoming with his employer about the income from his side business when, as is normal practice, he was audited himself:
In an attempt to hide the true income from the IRS, petitioner used his home copier to alter the business's bank account statements for February, March, April, September, October, November, and December 2002. Petitioner submitted the fraudulent, altered documents to the IRS examiner during the audit. Moreover, petitioner failed to keep adequate books and records for the business for the years at issue. Petitioner later admitted to other IRS agents that he altered the bank documents.
That may explain why Mr. Squier no longer works for the IRS. That doesn't keep the Tax Court from holding his old job against him:
Petitioners' deemed admissions of facts evidenced numerous badges of fraud: (1) Petitioner fraudulently understated income and overstated deductions for all years at issue with respect to the nail kit business; (2) he failed to maintain adequate records for all 3 years; (3) he used his home copier to alter bank statements which he provided to the IRS in an attempt to evade tax; (4) he failed to cooperate with respondent and was nonresponsive throughout the litigation, failing even to appear at his own hearing; and (5) he possessed greater than average knowledge of the requirements of the Internal Revenue Code because of his years of employment with the IRS.
To be sure, the "greater than average knowledge of the Internal Revenue Code" isn't universal among IRS agents, but it clearly is a working assumption when they come under audit. The Tax Court upheld over $30,000 in civil fraud penalties on the couple.
The Moral? If you work for the IRS, there's no home-field advantage on audit.
Cite: Squier, T.C. Summ. Op. 2009-47.
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Supporting the Arts in New York
March 31, 2009
Politicians love special tax exemptions for worthy causes. New York, for example, has a special sales tax exemption for "dramatic arts" performances. Unintended consequences follow, reports TaxGrrrl:
Administrative Law Judge Catherine M. Bennett has ruled that the eloquently named Nite Moves, a strip club in Albany, NY qualifies for the “dramatic arts” sales tax exemption under New York tax law.Why? The choreography, of course. It takes a simple stripper and makes her an artist.
Judge Bennett wrote: “The fact that the dancers remove all or part of their costume during the performances, that the dance routines are seductive in nature and titillation of a patron is the outcome, simply does not render such dance routines as something less than choreographed performances, or remove them from the exception to the general rule of Tax Law §1105(f)(1).”
This is one art form that manages do all right without government subsidies.
More here.
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Can you deduct your K-1 loss?
March 30, 2009
Taxpayers with 2008 net operating losses from "small" businesses are eligible for a five-year loss carryback under recent legislation. If you have such a loss, there's a good chance it will be reported to you on a K-1. Unfortunately, just because your K-1 shows a loss doesn't necessarily mean you can deduct it.
Three limits apply to the use of K-1 losses, in this order:
1. You can't deduct losses in excess of your basis.
2. Even if you have basis to deduct losses, the basis has to be "at-risk," and
3. Even if the basis is "at-risk," losses that are "passive" might be limited.
Unfortunately, K-1s aren't designed to track your basis in your partnerships or S corporations. It's up to taxpayers and their preparers.
Basis Basics:
- Your basis starts with your initial investment in your ownership interest.
-It is increased by taxable income and reduced by deductible expenses, as reported in lines 1-12 of the 1120-S K-1, or lines 1-13 of the 1065 K-1.
-It is increased by tax-exempt income (like municipal bond income) and reduced by permanently non-deductible expenses (like the 50% non-deductible portion of meals and entertainment expenses); these are reported on line 16 of the 1120S K-1 and line 18 of the 1065 K-1.
- It is increased by capital contributions, which appear nowhere on the 1120S K-1 and on Part I, line L of the 1065 K-1.
- It is reduced by distributions, which are on line 16 of the 1120-S K-1 and Line 18 of the 1065 K-1.
Partners also get basis for their share of partnership debt, as reported on line K of the K-1. In contrast, S corporation owners only get basis for loans they make themselves to the corporation; guarantees don't count. More on this tomorrow Friday.
Come back daily for more filing season tips.
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FBAR FUBAR? The IRS may cut you a deal.
March 30, 2009
The IRS is reducing penalties for taxpayers who self-report delinquent foreign bank account filings. As the penalty for failing to file foreign bank accounts is the greater of $10,000 or 50% of the account balance, a few years of not filing Form 90-22.1 can wipe out your accounts pretty quickly if the IRS catches you.
The New York Times reports:
Under the plan, the I.R.S. will cut a penalty for not filing a Report of Foreign Bank and Financial Account, known as an Fbar — something offshore tax evaders have not done, to avoid detection by the I.R.S.The current penalty is up to 50 percent of the highest annual balance of each account for each of the last three years — an amount that can quickly wipe out an investor and still leave him owing taxes and interest. While the number of Americans coming forward this year to disclose hidden assets has doubled, the I.R.S. said, it is still not enough.
Now, the I.R.S. will reduce that penalty to 5 to 20 percent, depending in part on whether the wealth was inherited. It will also levy the penalty just once, on the highest balance in the accounts over the last six years.
More from The TaxProf.
UPDATE, 3/31: Tax Lawyer Peter Pappas says the IRS offer is a good deal:
If you have owned a foreign bank account in the past five years and have not disclosed it to the IRS, we urge you to take advantage of the IRS’s voluntary disclosure program. If you do not do so and the U.S. discovers your non-compliance on its own, you can expect it to assess the full amount of penalties and seriously consider criminal prosecution.
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March Madness: surely you're paying your taxes on your winnings?
March 30, 2009
It's a problem I'm not likely to face, but because somebody has to win these NCAA pools, somebody will have some taxable winnings. And yes, the winnings are taxable, even if you don't get a 1099.
Will you winners report yours? Tax Grrrl is conducting a poll. So far it doesn't look like the NCAA tournament is going to do much to close the budget deficit.
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Fretting over Iowa's R&D Credit
March 30, 2009
One version of the Iowa R&D credit is threatened as Iowa tries to cut spending, leading to fears that a broader version might come under attack. Radio Iowa reports:
Business groups are hoping to convince legislators not to go along with Governor Culver's call for ending a tax break for companies that make big expansions in the state. If companies make multi-million dollar investments, the state currently grants the company an enhanced research and development tax credit.Iowa Taxpayers Association president Ed Wallace says his group and others are worried legislators may go even farther and get rid of another research activities tax credit at the state level for every Iowa company that qualifies for the federal research and development tax break.
I'd be more sympathetic to R&D credits if there were evidence that they actually motivate research and development. Mostly the credits motivate people to try to shoehorn expenses they incur anyway into the "R&D" category. It would be much better if the money used to fund the credits went to lower tax rates for everybody.
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If you can't trust Marion Barry, who can you trust?
March 30, 2009
Can you believe Marion Barry might not be keeping current on his tax filings?
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Confusing things on your K-1
March 29, 2009
The idea behind a K-1 is easy enough. Pass-through entities -- partnerships and S corporations -- don't pay the tax on their income; their owners pay it. The K-1 gives the owners the information they need to report their shares of entity tax on their personal returns.
It gets complicated in a hurry because different items of income and expense are treated differently. A dividend is not taxed the same as business income, for example, so the pass-through entity has to break out these items separately on your K-1.
The IRS tries to help you get these things in the right place. The taxpayer instructions for the K-1 are useful, and the list of codes for K-1 items (linked below) is indispensable. Even with this help, some items on the return confuse taxpayers every year.
A great example of a confusing item is "Unrecaptured Section 1250" gain (line 9c of the partnership K-1 and line 8c of the S corporation K-1). It throws off many taxpayers, and not a few preparers, every year. It typically arises when a business sells a building. The business will normally report a gain because it has been depreciating the building, which lowers its tax basis. All of the gain is Section 1231 gain. To the extent the gain is a recovery of depreciation deductions, it is also "Unrecaptured Section 1250 gain," taxed at a maximum rate of 25%. If the business sells the building for more than it paid for it in the first place, the extra gain is taxed at a maximum 15% rate.
Example: Partnership buys a building for $100,000. Ten years later, after it has taken depreciation deductions of $25,000, it sells the building for $110,000.The partnership has a basis in the building of $25,000 (100,000 - $25,000). It has a gain of $35,000. $25,000 is "Unrecaptured Section 1250" gain, but all of the gain is "Section 1231 gain." $25,000 of gain will be taxed at a top rate of 25%, and the rest at a top rate of 15%.*
Bottom line: "unrecaptured Section 1250" amount is part of the Section 1231 gain - not an addition to it. Don't double-report it when you report it on your tax return. Far too many taxpayers do.
Links:
1065 K-1 Instructions
1120-S K-1 Instructions
1065 K-1 codes
1120-S K-1 codes
Check in for new filing season tips through April 15!
*Unless the taxpayer has "unrecaptured Section 1231 losses," which is one step of complexity too far for this post.
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No, the partnership won't get in trouble because you don't yet have your K-1
March 28, 2009
So you don't have your K-1 yet. You have all of your 1099s. You have a mind to threaten to snitch to the IRS on them - don't they know that stuff is all supposed to be out by the end of January?
No, they don't know that, because it's not true. The deadline for issuing 1099s for S corporations is March 15, and it's April 15 for calendar-year partnerships and trusts. What's more, all of these deadlines can be extended to September 15.
Why is it so hard to get a K-1 out? It's because they often have to carry the whole income of a business to sometimes dozens, or even hundreds, of 1040s.
Pass-through entities -- partnerships and S corporations -- don't pay taxes on their own income; the owners pay the tax. If you have an operating business, this can get complicated and require some time to sort out before the K-1 can be issued.
Trusts and Estates also have K-1s; these entities can pay their own tax, but if they make distributions for the beneficiaries, the distributions carry the taxable income with them; the K-1s report how much income is carried out to the beneficiaries.
We'll be talking about how to use K-1s on your tax returns over the next few days. Don't miss any of these installments in our 2009 filing season tips series
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Des Moines man's missing refund ended up in account of H&R Block employee
March 28, 2009
The mystery of Harry Rios' missing tax refund is solved.
The Des Moines man's missing refund received national attention when a local H&R Block mistakenly entered the wrong bank account on the direct-deposit line of his return. The owner of the wrong account promptly spent it.
The preparer suggested Mr. Rios call the police, but it turns out the account owner was near at hand. The Des Moines Register takes up the story:
Police Detective Terry Mitchell said Rios' tax preparer took the bank account number from one of Rios' deposit slips but did not get the routing number for his bank. AdvertisementThe tax preparer looked for a sheet with routing numbers on it but could not find it, Mitchell said. She asked fellow staffers if anyone had an account with U.S. Bank and a secretary said she did. The tax preparer copied down the routing number from her checking account but also copied down the secretary's bank account number by mistake.
Oops! Didn't the secretary notice?
Police said the secretary called the bank to inquire about the money and was told that it was a legitimate deposit. She then spent the money on bills. Now she will have to pay it back.
The police believe that it was an honest mistake, and no wrongdoing was involved.
The Moral: If you check any number on your tax return twice before signing it, check the bank account and routing numbers for your refund direct deposit. That goes double for preparers.
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Pied pipers of the easily-deluded
March 28, 2009
Do you think you can "crack the code" to get out of paying income taxes? If so, it's likely you have read Peter Hendrickson's book. The New York Times Magazine profiles Mr. Hendrickson this week. It's an interesting backgrounder on the tax protest set.
Of course, Mr. Hendrickson's arguments don't work, and you're likely to come to financial grief by following them. And it sounds like there are always folks willing to do just that.
We talked about Mr. Hendrickson back in June 2006.
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Surprise! Federal deductibility repeal would be retroactive
March 27, 2009
The text of the bill to repeal the deduction for federal taxes on individual returns (HSB 284) is out. First impressions:
- The repeal is effective for 2009. That means taxpayers who have a big balance due on their federal returns from 2008 get a really raw deal. On the other site, it looks as though if you have a refund coming, it won't be taxable.
- $63,350 is the new $125,000. The promoters of the repeal say it will only affect "households" with incomes over $125,000. Wrong. The top rate, and the tax increase, kicks in at $63,350. The "$125,000" figure apparently assumes two-earner couples with each earner getting at least $63,350. Iowa's rate structure taxes each earner separately.
I haven't had a chance to analyse how much tax cut, if any, results from the rate cuts at the lower brackets. Otherwise the "middle class tax cuts" are pretty lame:
- An increase in the income cap for the tax-credit for pre-school enrollment, from $45,000 to $50,000.
- An increase in the personal tax credit for blind and elderly from $20 to $40
- Increase the earned income tax credit from 8% of the federal credit to 9%.
It is a tax increase at much lower income levels than advertised. It will be interesting to see how it will fly.
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What's worse policy than federal deductibility? A higher top marginal rate.
March 27, 2009
Iowa's deduction for federal income taxes is a bad tax policy, but there are worse ones. Raising the state's top marginal tax rate in the middle of a severe recession is surely worse. And that's exactly what the current Democratic proposal to repeal the deduction for federal taxes would do.
For top-bracket federal filers who don't pay alternative minimum tax, the top Iowa tax rate for each additional dollar earned is about 6.026%; for AMT taxpayers, it's as low as 5.837%. This is the additional Iowa tax incurred considering both the deduction for Iowa taxes on the federal return and the federal taxes deducted on the Iowa return. It ignores phase-outs of exemptions and deductions that provide a hidden higher bracket.
Making it worse by comparison
The Legislature Democrats would eliminate the deduction for federal taxes paid while lowering the top stated Iowa tax rate from 8.98% to 6.98%. They tout this as making Iowa's top bracket "competitive" with Nebraska's top rate of 6.84%. They are right, but not in a good way. When you do the math, you see that they are increasing Iowa's top effective rate from lower than Nebraska to higher (and, of course, much higher than South Dakota's top rate of 0%).
The top effective marginal rate is key to businesses considering where to move. Entrepreneurs typically structure their businesses as "pass-through" S corporations or partnerships, so they pay the entire business tax on their 1040s. Increasing their top tax effective rate sure won't attract them here.
Larger corporations looking to locate new facilities are mindful of the top individual rates because that affects how they have to pay their personnel there. Raising the top individual rate means that they have to pay their key people that much more to get them to move to Iowa; that makes it that much less likely to go to the trouble.
I still haven't seen the final language of the proposal. The sponsors insist that they aren't increasing total taxes; they're just passing a "middle class tax cut" by sticking it to the rich. Perhaps, though it's suspicious that they are suddenly fascinated with tax policy just as tax revenues are falling drastically.
The least convincing argument I've heard for the repeal is this statement in the Democrat's press conference yesterday:
It's not every day you can give a tax cut or no change to two-thirds of Iowa's taxpayers.
Yes, we can! In fact, if you do nothing, you give "a tax cut or no change" to three-thirds of the taxpayers. The "tax cut or no change" weasel-wording makes it sound like "no change" will be a very common result, with things going badly for the non-favored "one-third."
What real reform might look like
If the politicians were looking to really reform Iowa's tax system, they'd be using federal deductibility repeal to lower rates, without sticking it to "the rich." They would be looking to lower the rates still further by getting rid of the rats nest of personal credits, and by removing the many exemptions for favored taxpayers like old folks. They'd repeal Iowa's thirty-odd economic development credits. We'd end up with a top individual rate below 5% and a drastically lower corporation rate (ideally 0%).
Instead, they just want to build in more special breaks while raising the top effective rate. This isn't reform; it's just politics.
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Losing your ride, the IRS way.
March 27, 2009
You don't see a 1947 Indian Chief motorcycle every day. A Spirit Lake, Iowa man who owns one may not see his much longer.
Flickr Photo Indian 1947 by Angelique Eeek
Michael Alan Reed stopped filing conventional tax returns after 1998, according to an opinion issued this week by Federal Judge Mark Bennett:
In 1999, defendant Reed sent a letter and affidavit to the IRS contesting the applicability of federal income tax to him. Also in 1999, defendant Reed sent to the IRS a "Non-Negotiable Bill of Exchange" in the purported amount of $51,635,000. Along with the "Non-Negotiable Bill of Exchange", defendant Reed sent a copy of his birth certificate, indicating that he was born in the United States, driver's license, and social security card.
For some reason these important documents failed to satisfy the IRS. Things went downhill for Mr. Reed, as they usually do in these situations. He attempted to stay ahead of the tax collector by retitling his assets to "Pembina Nation Tribal Council" and to several trusts.
On October 26, 2006, Suntasso transferred title to the red and white 1974 GMC truck, the blue 2001 Ford pick-up, the silver 2004 Toyota Sequoia, the red 1947 Indian Chief motorcycle, the black/red 2002 Indian Chief motorcycle, and the red 1991 Harley-Davidson motorcycle, to Canyon Investments. Pembina Nation Tribal Council and Suntasso, through their purported former trustee, Loren Brown, disclaimed any interest in the subject real estate and personal property.
The IRS sued to disregard these transfers and seize these assets, saying Mr. Reed remained their true owner. Mr. Reed disagreed, and said that he had already paid the taxes:
Defendant Reed has attached to his motion for summary judgment copies of the purported "bonds" which he claims satisfied his outstanding federal tax liabilities. These two documents are denominated "Bond to discharge attachment for debt Via Pass-through Account Michael A. Reed 478-58-9266" and "Bond to discharge attachment for debt Via Pass-through Account Raymond M. Cox 138-34-3844". Both documents purport to be payable on demand "through the back office for settlement via the pass through account . . . at the treasury window, Department of the Treasury, 1500 Pennsylvania Ave., N.W., Washington DC 20220, for the settlement and adjustment of the account enumerated herein." The court concludes that both documents are works of legal fiction, neither of which constitutes a viable financial instrument or represents a recognized legal medium of exchange the tendering of which would satisfy defendant Reed's outstanding federal tax liabilities
Not surprisingly, the court held for the IRS. So if you collect old motorcycles, there might be a new one on the market soon.
Links:
USA v. Reed, No. 5:07-cv-04087
Affidavit filed by Mark Alan Reed, a representative example of a futile tax protester filing.
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Why would you ever want to re-do an IRS exam?
March 27, 2009
As improbable as it sounds, sometimes you want to have the IRS redo your audit - when it goes badly, for example. Tax Attorney Peter Pappas explains:
The most frequent use of the Audit Reconsideration process we see is when the IRS prepares a non-filing taxpayer’s tax returns for him or her...If you have been audited or the IRS has prepared a tax return for you, do not stop searching for your tax records.
When you find them immediately contact an experienced tax professional and inquire about the availability of an audit reconsideration.
Read the whole thing, especially if you've let the IRS be your return preparer.
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Happy Birthday, Norman Borlaug
March 26, 2009
Today is the 95th birthday of Iowan Norman Borlaug, the vastly-underappreciated hero of our time.
The Borlaug childhood home near Cresco, Iowa.
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Federal deductibility fight begins
March 26, 2009
Iowa's legislative Democrats today formally launched their campaign to repeal Iowa's deduction for federal taxes paid. The plan, which increases the effective top rate of the highest bracket to 6.98% (from about 6.1%) is coupled with tax breaks to make it a "middle class tax cut" paid for by higher-income earners.
More to come when I find the proposal details.
Link: Senate Democrat home page.
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You've already filed and you've found a mistake: what to do?
March 26, 2009
Every year it happens. After the return is filed, the taxpayer remembers that they sold some stock, or they get a corrected 1099, or they find a 1099 they forgot to give to the accountant. What to do?
It depends on what the error is.
If you owe a lot of money - say, more than 10% of your total tax - you should file an amended return by the April 15 due date. Otherwise you may incur late payment penalties.
If the error is small, relax. Your preparer will be a lot more friendly about correcting a return after April 15. If you will have an additional refund coming when you correct the error, the IRS pays interest. Let the smoke clear and file an amended return if the refund is significant.
Costs and benefits come into play here. You don't want to pay your preparer to file for a $10 refund; let it go. If it's the preparer's fault, let him take it off the bill rather than generate IRS attention.
But if the refund is significant, by all means file away. Just let your preparer get past April 15 first.
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Don't spend less; reduce expenditures instead!
March 26, 2009
A strange story from Radio Iowa:
Labor leaders and consumer advocates say the legislature should consider eliminating a host of state tax credits before slashing the state budget
We've said this before, but it obviously needs repeating: tax credits are the same thing as spending. The only difference is that the cash comes out earlier in the revenue cycle. If your paycheck is being garnished to pay a bill, you don't think you're any less out the money just because it's gone before you get it. Tax credits just spend the money before the state has it.
An Op-ed by State Senator Hagenow in the Des Moines Register today defends some of these credits:
The proposed fiscal year 2010 budget takes away the Research Activities Credit, which helps companies like Monsanto, Pioneer, Cellular Engineering Technologies and Kemin Industries develop new technologies and add high paying jobs in Iowa. Elimination of this credit would adversely impact our economic growth. This is the type of government program which should be expanded, not cut back.
If you wouldn't vote to have the state cut a check to Monsanto, you shouldn't want them to get a targeted credit, either. It just increases the taxes on those of us without good research credit consultants or lobbyists.
If you qualify for one of these credits, of course, you'd be foolish not to take it. But that doesn't mean it's wise for the state to offer it.
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Yet another tax reform panel
March 26, 2009
President Obama has launched another tax reform panel. It seems like only yesterday that President Bush's Presidential Advisory Panel on Federal Tax Reform launched its final report into instant oblivion. Any hopes that the new panel will have more success were dashed by the the conditions imposed on the panel:
“The only constraints on its activities are that there will be no tax increases during 2009 or 2010, and the proposals should not raise taxes on American families making less than $250,000,” said Peter R. Orszag , director of the Office of Management and Budget (OMB).
Unless they can interpret this very creatively, they are pretty much out of luck to start. There is a severe need to reform the vast array of crummy tax breaks, from hybrid car credits to the umpteed educational credits and deductions. You can't clean this stuff up without hurting somebody under $250,000 without making an already top-heavy tax system more unbalanced and dependent on the income of the top 5 percent of earners.
TaxVox points out how other Obama policies are making tax reform more difficult:
The first is that he keeps extending targeted business incentives, such as the research credit. Eliminating these tax breaks makes good sense. But Obama is not only not eliminating old loopholes, he’s even created a few new ones.The second is that he’s on the road to creating a troublesome spread between corporate and individual rates. In his budget, Obama would raise the top individual rate to nearly 40 percent. The president has never said how low he’d cut the corporate rate, but in 2007 House Ways & Means Committee Chairman Charles Rangel (D-N.Y.) proposed taking it down to about 30 percent.
The panel will have some smart people on it, but unless they strike out in a different direction than they've been directed to take, it's hard to imagine much coming of it. They sure won't come up with this:
The TaxProf has a roundup of stories on the panel. Kay Bell has more.
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Springtime Cavalcade
March 26, 2009
Winter's over, but risks remain. Climb on the Cavalcade of Risk at Wenchypoo's Wisdom.
Among the many fine posts on insurance and risk management this time is the InsureBlog's discussion of a spooky "life span calculator" offered by Northwestern Mutual. Check and see how long you have left, if you dare.
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Iowa Democrats heat up push to end federal deductibility
March 25, 2009
The idea of repealing Iowa's deduction for federal taxes, first floated by Senate Majority Leader Gronstal, has crossed the Capitol to the House:
In an interview with The Associated Press, Speaker Pat Murphy said there's a good chance lawmakers will take up the proposal in the closing weeks of the legislative session. He said ending the deductions would bring in hundreds of millions of dollars that would enable the state to reduce tax rates for most Iowans."It's something that we need, to eliminate federal deductibility and throw it into the rates," said Murphy, D-Dubuque. "Seventy-five to 80 percent of all Iowans will see a tax cut."
While the proponents of the repeal will dress it up as taking from the rich to give to the "middle class," they wouldn't bother if it weren't really a tax increase. Facing a big budget shortfall on the heels of their recent spending spree, federal deductibility is an irresistible target.
It's not clear what proposal the Democrats will throw together at the end of the session. The Sioux City Journal reports one version:
Rep. Paul Shomshor, D-Council Bluffs, chairman of the House Ways and Means Committee, said Tuesday the proposed changes would lower the state's top personal income tax rate from 8.98 percent to 6.98 percent and adjust the other rates downward as well to ease middle-class tax burdens.Repealing the ability for individual taxpayers to deduct their federal tax liability on their state income tax returns would generate about $594 million in revenue, which would be used to lower the overall rates and make Iowa's tax system more competitive in state-by-state comparisons, he said.
The top effective rate now taking the federal deduction into account is about 6.1%, so this would represent over a 10% increase in Iowa's top marginal rate -- just the thing we need to attract entrepreneurs to Iowa.
It's not clear whether this is going to go through or not, or what the effective dates will be if it does. If you're an Iowan who owes federal taxes for 2008, though, you might not want to wait until April 15 to pay them; you'd feel bad if they repealed the deduction for taxes paid after, say, April 10. (That's today's filing season tip, by the way).
But then, somebody has to pay for the Tower of Invincibility.
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Ten years for Aegis figure
March 25, 2009
A former attorney who was a founder of the Aegis tax scam scheme out of Chicago has been sentenced to ten years in federal prison.
The Aegis system used networks of trusts to conceal income from the IRS. Other figures in the scheme have received sentences from 13 to 18 1/2 years. Two defendants who cooperated with prosecutors await sentencing.
It's not just the promoters who ran into trouble from the Aegis scheme. Their customers have also had unhappy results.
The Moral: if somebody tells you about a trust scheme that makes your taxes go away, be extremely skeptical. If you think they are convincing, run it by a tax pro who isn't affiliated with the promoters.
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How do you report a single-member LLC with an S corporation election?
March 25, 2009
The TaxGrrrl has the answer.
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What they should tell you, and what they tell you that's wrong
March 25, 2009
The TaxProf has a handy list of 10 Things the IRS Won't Tell You, from Smart Money.
1. Like it or not, you may need help with your taxes2. You don’t have to be rich to get audited
3. Fear is often our best weapon
4. The AMT is our ATM
5. Just because we billed you doesn’t mean you owe us money
6. If you don’t pay, we’ll sic a collection agency on you
7. Want to go green? We’ll help pay
8. April 15 isn’t necessarily a hard deadline
9. We may be a government agency, but that doesn’t mean your data’s safe
10. We may still have your refund
You should read it with Peter Pappas' 5 things the IRS will tell you:
1. Instead of paying a lawyer, just pay us2. If you don’t pay your taxes, you might go to jail
3. Now it’s personal
4. Your attorney isn’t returning my calls
5. Your attorney isn’t cooperating
Great stuff from a great new voice in the tax blogosphere.
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Charity: no proof, no deduction
March 24, 2009
Since the beginning of days -- or at least since the charitable contribution was invented -- taxpayers have seen it as a mulligan. "Oh, I know I dropped at least $10 a week in the collection plate, and all of my change in the Salvation Army bucket. That has to add up to $400!"
No more. The tax law now requires you to prove every contribution. For cash gifts up to $249.99, a cancelled check or a receipt will do. If the gift is $250 or more, the IRS requires a letter telling:
- the amount of cash and a description (but not the value) of any property other than cash contributed;- whether the donee provided any goods or services in consideration for the contribution;
- a description and good-faith estimate of the value of those goods or services; and
- if the goods or services consist entirely of intangible religious benefits (e.g., admission to a religious ceremony, but not religious school tuition or fees), a statement to that effect.
No documentation, no deduction. So before you do your return, or go to your preparer, make sure you have your receipts, cancelled checks or letters from the charity. "Same as last year" is not a valid charitable deduction.
Check back for a new filing season tip every day through April 15!
Link: IRS page on Substantiating Charitable Contributions
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Senate may be sane (if only by comparison)
March 24, 2009
It appears the Senate may not move as quickly to destroy the financial sector enact a punitive tax on TARP employee bonuses as the House did.
President Obama, after whipping up populist outrage against the AIG bonuses, hedged on the tax in his "60 Minutes" interview, and some Senate Democrats are having second thoughts, reports CQ Politics:
With two Republicans signed on as cosponsors, the legislation written by Baucus and Grassley could have a clear path through a Senate with 58 Democrats sitting in the majority.But with a chunk of the Democratic Caucus remaining uncommitted to the legislation and some top Republicans vowing to slow it down, Democratic leaders would have a significant problem on their hands if they tried to push it forward.
All of this is disappointing to Senator Suicide:
Charles E. Grassley of Iowa, the committee’s ranking Republican who joined Baucus in crafting the legislation, complained bitterly about Obama’s weekend retreat from the congressional proposals.“We wouldn’t be using the tax code if he had been on top of things and kept the bonuses from going out in the first instance. All the special interests that the president said he’s fighting are raising their ugly head and he’s submissive to them,” Grassley said
As terrible as the TARP tax is as a policy matter, it would almost be worth passing if its coverage were just a little broader.
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Is IRS going easy on the rich?
March 24, 2009
Maybe. The Transactional Records Access Clearinghouse at Syracuse University says that the audit rate for returns showing over $1 million income fell 10% last year, reports the TaxProf.
Kay Bell is also on the case. She also reports that the IRS says the TRAC records are misleading:
IRS spokesman Bruce Friedland told Tax Analysts that the data from 2007 that TRAC used to show 2008's decline in audits of wealthy taxpayers are based on returns reporting $1 million or more from so-called positive income. These returns do not not include losses."It's a slightly different slice, but they are not really comparable because of the underlying definitions," Friedland said. He also pointed out that 2008 was the first year the IRS began collecting data based on adjusted gross income.
I think they're saying that if you have $1 million or more in income, but you bring it down with losses to something much less, you are more likely to get a visit than somebody who has, say, a $1 million W-2 but no above-the-line losses.
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Like-kind exchange intermediary -- or thief?
March 24, 2009
A like-kind exchange is a big deal for most taxpayers. If you're a business, you might easily be dealing with millions of dollars. For an individual moving a piece of investment real estate - a small apartment building or farm ground, say - the property might be the taxpayer's entire net worth. So imagine how you'd feel if you trusted your property to a Section 1031 intermediary -- and they stole it.
Edward Okun, a Miami businessman, was convicted last week of doing just that. He now faces a prison sentence of up to 400 years for 23 fraud counts.
Participants in like-kind exchanges are vulnerable to fraud because of the way "three party" exchanges work. The tax law doesn't allow you to just sell property and directly re-invest the cash to have a tax-deferred like-kind exchange. Taxpayers therefore arrange for an intermediary to hold the proceeds from the sale, purchase the replacement property, and transfer the new property to the seller. Mr. Okun is convicted of instead sending the proceeds to offshore accounts to buy himself goodies including a yacht and a jet.
The most frightening thing about Mr. Okun's scheme is that he would go from town to town buying established exchange intermediaries, which he operated under the old name. Folks relying on the established reputation of the intermediaries got a horrible surprise.
The Moral? You can't be too careful in choosing an exchange intermediary. Insist on some sort of bonding, even if you're dealing with an established local firm. Keep in mind that some bank trust departments perform intermediary services, too, and they aren't likely to take your money and run.
Russ Fox has more.
Links:
Prior Tax Update Okun coverage
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The Prom-season tax break
March 23, 2009
Spring break is over here, so prom season is upon us. Strangely, that can give mom and dad a tax break to ease their worry over their kids staying out late.
Prom tickets are among the expenses that qualify for Iowa's Tuition and Textbook credit. In addition to private tuition and textbook costs, certain costs for extracurricular activities qualify:
Examples of extracurricular activities: sporting events, speech activities, musical or dramatic events, driver’s education (if paid to a school), awards banquets, homecoming, prom (clothing does not qualify), and other school related social events, etc.
So tickets qualify, but dinner and clothes, the largest costs, don't.
Flickr photo by Lukasz Dunikoski
The credit is 25 percent of the first $1,000 paid for each dependent.
Check back daily through April 15 for more 2009 filing season tips. Collect them all!
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Will 'toxic asset' plan address tax trap for distressed bond buyers?
March 23, 2009
The Treasury is set to issue its plan for dealing with the bad loans held by banks and other institutions today. Such a plan should address a tax trap that the Treasury established a few years ago.
Under current rules, if somebody buys a dodgy $100,000 loan from a bank for $50,000, and they then work out a deal where the borrower will pay $70,000 in principal to get the debt settled, the buyer normally has a $20,000 taxable gain that day, before a dime gets paid on the loan. This is true even if the terms of the loan, other than principal, don't change. See Regs. 1.1001-3. The theory is that the buyer has exchanged the old loan he bought for $50,000 for a new $70,000 loan, triggering a $20,000 gain. Needless to say, this trap affects the marketability of bad loans.
If the new rules to be issued today fail to address this, it's a sign that they really haven't thought things through.
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AIG: An Insane Government
March 23, 2009
After last weeks AIG bonus frenzy, more sensible voices are emerging to point out some of the unintended consequences of the foolish TARP Bonus confiscation measure passed in the House last week.
The Tax Prof has a post (Urist: The AIG Tax Is Sexist) pointing out how the tax will clobber second earners in households when one taxpayer receives a TARP bonus. A similar fact pattern is illustrated here:
Say you're a teller at a Wells Fargo branch in Minnesota and you're married to a lawyer who makes $250,000 this year. You get a $10,000 bonus for your good work during 2008. The government steals it all (90 percent federal plus 8.5 percent state plus, unless it's included in the 90 percent, 3 percent Medicare). That is simply insane.
NYU Law Prof. Daniel Shaviro says that Congress shouldn't be so sure such a bonus isn't an unconstitutional "bill of attainder":
The 90% tax may conceivably face a serious constitutional challenge notwithstanding Larry Tribe's assurances to the contrary. Not a surprise, perhaps, as Tribe can be a bit political in his bottom line constitutional judgments. One source of possible trouble could be a NY state case from a few years back, Pataki v. Con Ed, in which a provision denying rate adjustments to the Con Ed shareholders for the blunders that had led to the Indian Point nuclear power plant problems was struck down as a bill of attainder. Obviously, the 90% tax is being drafted with an eye to avoiding the same fate, by causing it to apply more generally. But in the Con Ed case, the court cited legislative history showing that the legislators were specifically angry at Con Ed for its bad deeds and wanted to inflict punishment (hardly unreasonably, but that's not the point when the question of law is bill of attainder). Needless to say, the record of enactment for the 90% tax (if it goes through) is hardly lacking in evidence that the legislators were specifically interested in nailing AIG.
But if Congress is serious about this banana republican legislation, it's only fair that they apply the tax to income earned by congressional spouse-lobbyists and kids working for government contractors. Because we're public spirited around here, we even have drafted the necessary language for the TARP bonus tax bill.
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Iowa tax revenue continues to dry up
March 23, 2009
The Iowa Revenue Estimating Conference gave its revenue projections another haircut Friday. They estimate current year revenues to be $130 million short of their last projection; they cut their projection of next year's take by another $270 million.
Look for the politicians to respond reflexively by looking to increase taxes so they don't have to cut spending. We may even see a serious effort to repeal federal tax deductibility on Iowa returns. What we won't see is a serious effort to fix Iowa's broken revenue system.
UPDATE: I should note that the REC has reduced estimated 2010 revenues by about $1 billion for a $6 billion budget.
Link: Revenue estimating conference report.
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Your return: it's nice to check it twice
March 22, 2009
If you really want that tax refund in a hurry, take a little time to check your return before you send it. Whether you roll your own or you hire a preparer, here are some things you should double check:
- Make sure - twice - that the bank routing number and account number on your return are correct. If you get that wrong, the best that can happen is a delay of many weeks when the IRS electronic payment goes through. The worst that can happen is that your refund goes to somebody else's account, where it might be lost to you forever. You can look at the bottom of one of your checks (not your deposit slips) to check your routing and account number:
- Consider e-filing. If there's a major screw-up on your return, you normally will find out within a day, so you can fix it and re-file.
The IRS also has a good list of questions to ask yourself before filing. A few of the biggies:
-- Did you enter the names and social security numbers for yourself, your spouse, your dependents, and qualifying children for earned income credit or child tax credit, exactly as they appear on the social security cards? If there have been any name changes be sure to go to www.ssa.gov or call at 800–772–1213.-- Did you check only one filing status?
-- Did you check the appropriate exemption boxes and enter the names and social security numbers exactly as they appear on the social security cards, for all of the dependents claimed? Is the total number of exemptions entered?
-- Did you sign and date the return? If it is a joint return, did your spouse also sign and date the return?
-- Do you have a Form W-2 (PDF) from each of your employers and did you attach Copy B of each to your return? File only one return, even if you have more than one job. Combine the wages and withholdings from all Form W-2's, on one return.
-- Did you attach each Form 1099-R (PDF) that shows federal tax was withheld?
Check back daily through April 15 for more filing season tips!
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Team up with your scholar for tax prep!
March 21, 2009
When the fledglings leave the nest for college, they often take their tax prep responsibilities with them. That can be a mistake. Parents often can save money at tax time by coordinating their tax returns with their students.
Parents make more money in the normal course of things, so they assume that they get more benefit from the Hope and Lifetime Learning credits for college tuition than the student would. That's not always true. These credits phase out for joint returns at an adjusted gross income range of $96,000 to $116,000 ($48,000 to $58,000 for single taxpayers). So for many college parents, the credits are useless.
This is where coordinating returns comes in. If your student has summer or part-time work, or investment income, she may well incur income tax. But if the parents relinquish their dependent exemption for the student, the student can claim the credit. At the end of the day, the family taxes could well be lower that way.
IRS Publication 970 has this handy chart on claiming the credits:
And remember: if your student goes to school in a Midwestern disaster area, the credit can double.
Check back daily through April 15 for more 2009 filing season tips.
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March Tax Madness? Don't miss Super Saturday tomorrow.
March 20, 2009
Need tax help? Afraid you will be caught short of cash on April 15? Tomorrow's your chance to get help from the IRS:
On Saturday, March 21, 2009, approximately 250 IRS Taxpayer Assistance Centers and hundreds of community free tax help sites nationwide will open their doors to assist people. People who earn $42,000 or less are eligible for free tax return preparation at either the IRS TACs or the community partner sites.Super Saturday also is an opportunity for people, regardless of income, who may have a tax issue or who may be unable to pay their tax bill to visit an IRS TAC. The IRS can work with people to set up payment option plans that will prevent even greater penalties and interest. The IRS is committed to doing what it can to help financially distressed taxpayers who have played by the rules.
If you go, here's what you should bring:
* Valid driver’s license or photo identification (self & spouse, if applicable) * Social Security cards for all persons listed on the return* Dates of birth for all persons listed on the return
* All income statements: Forms W-2, 1099, Social Security, Unemployment, or other benefits statements, self-employment records and any documents showing taxes withheld
* Dependent child care information: payee’s name, address and Social Security Number or Taxpayer Identification Number
* Proof of account at financial institution for direct debit or deposit (i.e. cancelled/voided check or bank statement)
* Prior year tax return (if available)
* Any other pertinent documents or papers
The IRS will offer help at 11 sites in Iowa, including six in the Des Moines area. You can find all of the Super Saturday sites here.
Stop by for a daily filing season tip through April 15.
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The TARP bonus confiscation: a modest amendment
March 20, 2009
Sure, the TARP penalty tax passed yesterday by the House of Representatives is insane. But hey, when Congress passes a lemon, we might as well make some lemonade. In that spirit, the Tax Update proposes a rewrite to Section (d) of the bill passed yesterday. I'm sure a real lawyer-lobbyist could tidy up the wording; feel free to make suggestions in the comments.
My language is below the fold. It would subject all income earned by lobbyist-spouses of Congresscritters to the 90% special tax on the same terms as TARP bonuses. Same goes for money earned in cushy jobs by Congresskids employed by lobbying firms, money-sucking non-profits, or government contractors. And any Congressman who votes a farm subsidy that benefits his farm back home, or his brother's farm, will be able to do so in good conscience, knowing that the IRS will take it all back.
Fair's fair; Congress has caused far more damage to the economy than the TARP-company executives. Surely they're willing to be held to the same standards.
UPDATE: Similar thoughts from an actual lawprof.
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'Taxing AIG Bonuses: Worse Than Paying Them'
March 20, 2009
Congress is oblivious to the disastrous potential of their vendetta against the AIG executives, but the center-left TaxVox sees what's happening all too clearly:
If Congress wants to limit bonuses for employees of bailed-out companies, it should just do it. But using the Internal Revenue Code is a truly terrible idea. And dipping into the Code to win political points is worse. Long ago, people were rightly outraged when Richard Nixon tried to turn the IRS into a weapon to punish his enemies. This gotcha tax is another variation on the theme, and nearly as inexcusable. Imagine, for instance, if a GOP Congress retroactively barred people from deducting charitable gifts to Planned Parenthood. Or Democrats imposed a 50 percent surtax on companies that that do security work in Iraq.This faux-populist mob isn’t being led by a bunch of back-benchers. The House today overwhelmingly passed a 90 percent tax on some of these bonuses. Senate Finance Committee Chairman Max Baucus (D-Mont) and ranking Republican Chuck Grassley (R-Iowa) would impose a 70 percent excise tax (35 percent on the company and 35 percent on the employee) on many bonuses paid by firms receiving TARP money. I’m inclined to believe they have done this to release some of the issue’s political steam before the kettle explodes, but nonetheless, it's still dreadful legislation.
Read the whole thing. And remember that if they can confiscate AIG bonuses, they can confiscate yours, too, next time you are unpopular and in the minority. What, you say you had a contract? A promise? Tough, you lost the election, buddy.
UPDATE: A roundup from the TaxProf
Also, this:
The really distressing part is what this tax will do to the corporations that we now own and are supposedly trying to save.(Remember? That's the reason we bailed Citigroup, AIG, GM, and the rest of them out--to save them. Because we convinced ourselves that civilization would end if we didn't.)
Thanks to our
stupiditybailouts, we now own major stakes in these firms (at mind-boggling expense). So it's not clear why we want to destroy them. But that's what we seem determined to do.
Related: Why you'd be crazy to let the government invest in your business
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USDA to check farm payment recipients income with IRS
March 20, 2009
Gentlemen farmers, beware: if you get farm program payments for 2009, the IRS will be looking over your shoulder.
The USDA and the Treasury have started a joint program that allows the USDA to verify the income of direct farm program payment recipients. Recipients with average non-farm income over $500,000 for the three prior years are ineligible for farm payments; a $750,000 cap applies to adjusted gross income from farm sources. A separate $1 million non-farm income limit applies to conservation program payments.
From a USDA press release:
Beginning with the 2009 crop year and for successive years, in order to be eligible for USDA payments all recipients will be required to sign a separate form which grants IRS the authority to provide income information to USDA for verification purposes. Before IRS will provide the information for a particular producer, IRS form 8821, or a similar form, must be obtained from each producer authorizing the release of information. Failure to obtain such form will make the producer ineligible for program benefits.
A 2008 GAO report said $49 million was paid to recipients with too much income to qualify from 2003 to 2006. Of course, the rest of us still get to subsidize farm program payments to folks with only $450,000 of non-farm income.
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Weaken your strengths!
March 20, 2009
A libertarianish think tank has ranked Iowa 35th on their "Economic Competitive Index."
Iowa ranked poorly on measures related to its tax system and the size of government. Our ranking was saved by good marks for Iowa's judicial system, its relatively low government debt burden, its low workers comp costs, and its "right-to-work" labor rules.
Of course, our legislature is working on increasing our bonded debt by $750 million while raising workers comp costs and gutting right-to-work.
Well, at least it will make sure Iowa never gets too crowded.
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Dealing with the new COBRA
March 20, 2009
BenefitsBlog reports that the Department of Labor has issued model notices for complying with the stimulus bill's expanded post-termination health insurance mandate. Employers have until April 18 to meet these rules.
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Want your Iowa refund? Pay your parking tickets
March 19, 2009
If your Iowa tax refund seems to be a long time in coming, maybe there's a dark secret in your past -- like a parking ticket. Iowa court officials can place holds on your Iowa income tax refunds if you have outstanding fines and fees.
You can check on the status of your Iowa refund here. You might find that you need to send a check to the courthouse before the state sends a check to you.
Check back daily for more 2009 filing season tips
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Five new ways for the county to pick your pocket
March 19, 2009
Want fun? How about a smoke? How about a room for the night? Or maybe you just want to turn on the lights.
To the legislature, these are all opportunities for your city or county to grab more cash. The Legislative Property Tax Study Committee has proposed to allow cities and counties to impose five new taxes. From the Des Moines Register:
• ENTERTAINMENT: Tickets for entertainment events like concerts would see an additional 5 percent charge. Food and alcohol sold at entertainment events could also be taxed. If the charge were already in place in Polk County, the most expensive seats at Wednesday night’s Nickelback concert at the Iowa Events Center would have cost concert-goers an extra $3.30.• TOBACCO: Cigarettes and other tobacco products could be taxed by city and county governments, which would be in addition to the state’s $1.36 per-pack tax.
• INCOME: Iowans could pay an income surtax of up to 5 percent to their city or county. More than 300 school districts already charge such a tax, with a rate up to 20 percent. Essentially, it’s a tax on the amount of state tax a resident pays. For example, if a family pays $5,000 in state taxes, a 5 percent surcharge would cost the family an extra $250 a year.
• FRANCHISE FEES: Cities could legally charge up to 5 percent in franchise fees without regard to the city’s costs for inspecting, supervising or regulating a utility. If approved, the law would help Des Moines end a long-time legal battle over the city’s 5 percent franchise fee on gas and electricity. For a natural gas bill of $150, for example, a customer would pay $7.50 cents a month or $90 a year.
• HOTELS: Cities and counties could charge an additional 6 percent in taxes on hotels and motels. Currently, counties can charge up to 7 percent in special hotel/motel taxes. The extra charge would mean an extra $9 a night for a $150 hotel room.
So: we want to attract young people to Iowa. Let's make concerts and sporting events cost more! We want convention business; lets make it more expensive to stay here! We want to attract businesses? Lets raise their income taxes! It's strange how this comes from a "Property Tax" committee, but there's nothing here about reforming property taxes.
Of course, all of these taxes would be on top of the statewide 6% sales tax (7% in some places). Sure it's painful, but how else can we finance our municipal sports bars?
Link: SSB 1308
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Leader of BDO 'Wolfpack' brought to bay
March 19, 2009
One of the leaders of the now-defunct "Tax Solutions Group" of national accounting firm BDO Seidman, Adrian Dicker, has pleaded guilty to conspiring to sell fraudulent tax shelters. The group, known as the "WolfPack" within BDO, was involved in a number of prominent tax shelters, including the one in the Jade Trading case. The group worked with law firm Jenkens & Gilchrist and Paul Daugerdas, the law firm's tax shelter maven. From the Justice Department press release:
Dicker and his co-conspirators knew and understood that the clients entering into the tax shelter transactions being marketed and sold with J&G had neither a substantial non-tax business purpose nor a reasonable possibility of earning a profit, given the large amount of fees being charged by the accounting firm and J&G to enter the transaction. Those fees were set by the co-conspirators as a percentage of the tax loss being sought by the tax shelter clients. Dicker also knew that the clients who purchased the tax shelter had no non-tax business reasons for entering into the transactions and their pre-planned steps.
A guilty plea often implies a deal to turn on others. This can't be good news for clients still trying to defend their tax-shelter deals, and it's worse news for others involved in the design and marketing of the shelters.
The TaxProf has a roundup.
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IRS issues Applicable Federal Rates (AFR) for April 2009
March 19, 2009
The IRS has issued (Rev. Rul. 2009-10) the minimum required interest rates for loans made in April 2009:
-Short Term (demand loans and loans with terms of up to 3 years): 0.83%
-Mid-Term (loans from 3-9 years): 2.15%
-Long-Term (over 9 years): 3.67%
Historical AFRs are available at the "links" page at www.rothcpa.com. You can also click here for the rates for prior months as reported in the Tax Update.
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A long way of saying 'corporate welfare'
March 19, 2009
From SF 142, passed yesterday 50-0 by the Iowa Senate:
Division I of the bill creates an innovation and commercialization development fund in the state treasury under the control of the department of economic development,consisting of moneys appropriated to the department and of any other moneys the department is authorized to place in the fund. The department is authorized to use the moneys in the fund for purposes of facilitating agreements and enhancing commercialization in the targeted industries, for increasing the availability of skilled workers within those targeted industries, and other purposes specified in the bill. The targeted industries are advanced manufacturing, biosciences, and information technology.
"Facilitating agreements and enhancing commercialization?" That means nothing, which means it can mean almost anything. What it really means is "give money to people who work the system."
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Got floods? Double your education credit!
March 18, 2009
Vasts swaths of the Midwest were declared disaster areas last summer as a result of floods and storms. Yet if your child goes to college in one of the disaster areas, you may be able to benefit from the disaster. Congress doubled the education credits for college expenses incurred for students attending college in the disaster areas. Students in the disaster areas can claim up to $3,600 in "HOPE" credits and $4,000 in "Lifetime Learning Credits."
To find out whether you qualify, to to Table 1 in Fact Sheet 2008-27.
Check back daily for a new 2009 filing season tip through April 15.
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Why you'd be crazy to let the government invest in your business
March 18, 2009
The self-righteous feigned outrage of our congresscritters over the AIG bonuses is enough to make a grown man barf. Coming from 535 men and women who waste more money every day before they brush their teeth than the AIG executives got, it's just not very convincing.
These folks were so frantic to push through the bill that provided the cash for these bonuses -- and that in fact specifically protected them -- that they refused to wait an extra day to let anyone read the bill that was written in secret in Congressional back rooms.
Now Iowa critters Harkin and Braley want to impose a 100 percent excise tax on the bonuses, while Senate taxcritters Grassley and Baucus merely want to impose two 35% taxes on "excessive" bonuses paid to companies getting government cash.
Nothing could demonstrate better why government should never invest in private businesses. Can you imagine anyone less qualified to set private compensation levels than Congress? Nobody is even asking the obvious questions: will the companies, and the government, be worse off if these taxes pass (leaving aside the question of whether the retroactive taxes are even constitutional).
Just looking at AIG, these bonuses don't just cover the "bad guys" that wrote the swaps. They presumably cover the best people at the company, the ones who are trying to hold the company together and minimize the taxpayer's losses in AIG. These are also the ones most likely to be able to find jobs elsewhere. These guys will get screwed by these taxes just as much as the "bad guys." The Tax Rascal points out:
So what are those AIG employees thinking right now? Their first thought is probably something along the lines of “Who’s hiring?” Many of them won’t be able to get jobs. The ones who can demonstrate that they’re good at what they do will be able to get jobs. If AIG doesn’t do something to keep them on board, the company will be reduced to a pile of liabilities managed by mediocre employees, and constantly hoovering up your tax dollars.
The impact will extend far beyond just AIG. The Grassley bill will put all executive compensation of TARP recipients under political scrutiny -- even recipients like Wells Fargo who didn't want the money in the first place. These companies were forced to take TARP money so there wouldn't be a stigma to TARP funding. If only bad companies got TARP money, the reasoning goes, you could trigger bank runs by the very act of trying to help a struggling bank.
Now every executive of a TARP company will move heaven and earth to give the money back as soon as possible, and companies that retain TARP funds will end up branded, fairly or not, as welfare cases. Megan McArdle explains:
I think it's safe to assume that if this passes, any banks that possibly can will rush to return bailout funds to the Treasury. And perhaps this is a good thing. But the attempt to shield shaky banks behind a general distribution of funds will be over.I suspect that it would also not do any good things for whatever future plans Treasury has. All of the plans I'm currently aware of involve substantial voluntary participation from sound financial institutions. I don't think you'll get much voluntary cooperation from banks if you declare that any acceptance of government funds will involve substantial risk that they will appropriate your paycheck.
The only good the congresscritters might accomplish would be completely accidental: they might destroy the entire bailout structure by making it almost impossible for any self-respecting company to participate. Then they might be forced to take the route they should have taken from the start: liquidate the failed institutions, place the shaky ones under close scrutiny, and leave the rest alone.
UPDATE: Now I'm perfectly happy to take back this kind of AIG bonus.
UPDATE II: Making lemonade.
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More thoughts on IRS Madoff relief
March 18, 2009
Our initial thoughts on the IRS relief for Ponzi scheme victims seem to hold up after a days reflection. Tax Analysts notes ($link) some complaints that the guidance doesn't cover IRA and 401(k) plans victimized by Bernard Madoff, and that some taxpayers will have more losses than they can recover through NOL carrybacks. But most of the practitioners they quote are positive towards the guidance.
The TaxProf has a comprehensive roundup of coverage of the Madoff/Ponzi relief.
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Recovering from St. Patrick's Day Carnival
March 18, 2009
The new Carnival of Taxes is up!
This edition of Kay Bell's roundup of tax posts from around the blog world covers everything from the homebuyer's credit to software reviews. Check it out!
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IRS throws St. Patrick's Day party for Madoff victims
March 17, 2009
It looks like the IRS is buying the green beer today for the victims of the Madoff Ponzi scheme. They have issued a ruling (Rev. Rul. 2009-09) and a safe-harbor procedure (Rev. Proc. 2009-20) that together look very taxpayer-friendly.
The high points from a quick reading:
- There will be a safe-harbor theft loss deduction for 95% of the investment if the victim doesn't pursue recovery, and 75% if they do; this deduction is reduced by any actual recoveries received and any potential SIPC recovery. (RP 2009-20, Sec. 5.02).
- The "investment" includes both direct cash contributions and amounts included in income from the fraudulent investment; it is reduced by any cash withdrawals prior to the scheme's collapse. (RP 2009-20, Sec. 4.06)
- The deduction is available in the year the criminal complaint was filed. (RP 2009-20, Sec. 4.04). Since Mr. Madoff was charged on December 11, 2008, that allows Madoff victims to take their losses in 2008.
- Recoveries might generate income in subsequent years; further losses might be available when the final loss tallies and recoveries are settled.
- You need to have clean hands; you don't qualify for the safe harbor if you knew of the fraud.
- The deduction is considered to be a Sec. 165(b)(2) deduction for a "transaction entered into for profit," so it is not subject to the 10% of AGI floor that otherwise applies to personal theft losses. (RR 2009-09, Holding 2)
- If the Ponzi losses generate a net operating loss, they will be eligible for the temporary five-year carryback provision in the stimulus bill. (RR 2009-09, Holding 5)
The Revenue Procedure is a safe harbor, and it must be affirmatively elected. Taxpayers may opt out and pursue different amounts if they choose.
Perhaps reflection or reading other commentary will reveal some shortcomings in these rulings, but at first glance it looks as though today's IRS releases provide a simple and taxpayer-friendly way to deal with the Madoff losses, and those from other Ponzi schemes. While it's still cold consolation for those who have been fleeced, it at least helps them get their tax affairs in order with minimal complexity.
And you don't even have to be Irish.
Prior coverage:
Theft losses for Madoff victims?
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Remember to claim your out-of-state credit!
March 17, 2009
Many taxpayers pay income taxes in more than one state. With the increased popularity of "pass-through" ownership of businesses through S corporations and limited liability companies, many taxpayers find themselves filing returns in two or more states. Others have taxes paid in other states by the businesses that they own through a "composite" return filed by their S corporation or partnership.
All states with an income tax have a system to keep their residents from paying full state taxes on the same income in more than one state. The credit for taxes paid in other states is computed on your resident state return; Iowans use Form 130. The credit is the lesser of the tax paid to the other state or the tax computed on the income in the home state.
If you are an Iowan who owns an S corporation, there is another alternative. You can compute an S corporation apportionment credit on Form 134. This credit can provide significant savings, especially for taxpayers whose S corporations retain a large part of their annual income.
And remember, in Iowa you can claim a credit for taxes paid in other states if you have foreign tax withheld. Many taxpayers have this through international mutual funds.
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Court: distribution preference not automatic second class of S corporation stock
March 17, 2009
Back in the 1990s, the Treasury struck fear in S corporation owners by proposing regulations that would terminate S elections for trivial violations of the "second class of stock" rules. All S corporation shares must have identical economic rights, though voting rights may differ.
The proposed rules would have made operation as an S corporation almost impossible, and after strong taxpayer protests the IRS relented and came up with much more sensible rules. Now the rules focus on the legal rights of the shares, leaving inadvertent disproportionate distributions alone.
A shareholder in Louisiana didn't want to pay taxes on the income from her S corporation K-1, so she argued that preferential payments to her parents constituted a second class of stock. The Fifth Circuit last week ruled that the taxpayer didn't establish how any such payments made to the parents were a binding agreement that gave them different legal rights from the other shareholders.
The moral? While it's surely possible to blow an S election through disproportionate distributions, it's not automatic.
Cite: Minton, CA-5, No. 08-60284
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Farm tax school: save the date!
March 17, 2009
The ISU Center for Agricultural Law and Taxation has set the dates for the 2009 Farm Tax Schools. I will be on the tour for several of the dates this year, so get your tickets now!
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Pay up, granny!
March 17, 2009
Just in case Iowans are clamoring for a new tax on folks in nursing homes, our politicians are ready to meet the need:
Nursing homes would pay the tax, which would be about 3 percent of residents' cost of care, state officials estimated. If homes pass the expense on to their residents, it would equal about $1,970 a year for someone who pays $180 a day for care. AdvertisementSome of that money would go back to Iowa nursing homes, redistributed through Medicaid payments to homes that care for low-income elderly Iowans.
Some of the money would come back to the nursing homes? What a great deal! Maybe they can supplement it with a tax on wheelchairs and walkers, to get some of those old folks who still live at home.
Link: SSB 1179
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Ritual suicide: a chance for the political class to show real leadership!
March 17, 2009
Senator Grassley is upset with the AIG executives:
"I suggest, you know, obviously, maybe they ought to be removed," Grassley said. "But I would suggest the first thing that would make me feel a little bit better toward them if they'd follow the Japanese example and come before the American people and take that deep bow and say, I'm sorry, and then either do one of two things: resign or go commit suicide.
Fine. This is a wonderful opportunity for all of the politicians upset with the AIG bonuses to lead by example.
The hari-kari line can start with those who voted to provide the federal funds to pay the bonuses.
Next up will be the politicians like Barney Frank,who pumped up the real-estate bubble by sheltering the corrupt and wasteful Fannie Mae and Freddie Mac while sleeping with one of their high-ranking executives. Or Chris Dodd, who ran interference for the government sponsored mortgage disasters while getting sweetheart financing from Countrywide Mortgage.
Then the politicians with secondary roles in the real estate bubble can take their final bows. Everyone who has supported the real estate bubble with housing subsidies through the tax code, step on up!
But why stop there? Every politician who has had a major role in making the tax law the mess that it is can set a bold example of humility and show the AIG guys how it's done. Maybe somebody who has been either chairman or minority leader on the Senate taxwriting committee for 20-some years is ready to step forward.
More here. And here. And here.
UPDATE: Actually, Senator Grassley has been looking to Japan for CEO-bashing guidance for some time now.
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A one-stop shop for property tax protests
March 17, 2009
Iowa's county assessors have served notice that they think the real estate crash is a figment of your imagination.
Naturally this creates an entrepreneurial opportunity. There is a new Des Moines-area company that offers one-stop service for protesting your property tax assessment: Iowa Assessment Advisors. If the assessors really want to maintain or increase assessments in the face of the real estate recession, this could turn out to be a popular service.
This new company is not an affiliate of our firm.
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IRS issues rules for 5-year NOL carryback
March 16, 2009
UPDATE, 4/28/2009: IRS has issued modified rules easing Rev. Proc. 2009-19.
Yes, you can use the new five-year carryback for a net operating loss attributable to a 2008 K-1. The IRS today issued rules (Rev. Proc. 2009-19) explaining the provision, which Congress slapped together in the recent stimulus bill.
The main points:
If a K-1 from a qualifying partnership or S corporation generates a net operating loss for the taxpayer, the K-1 recipient qualifies for the five-year carryback. The amount that can be carried back five years is the lesser of the NOL or the taxpayer's loss from a the K-1.
Only taxpayers with gross receipts averaging $15 million or less for the three-year period ending with the NOL year qualify. Controlled entities are counted together as a single entity.
For losses from pass-through entities, the $15 million gross receipts test is applied at the entity level only. That's a surprise to me, and is a taxpayer-friendly move.
The IRS also explains how to file for the five-year carryback. They have updated instructions for Form 1045, the individual carryback form, and Form 1139, the corporate carryback form, for the new rules. The deadline for claiming the five-year carryback is six months after the due date (including any extensions) for the return for the NOL. That's a bit tricky, because usually you can file a 1045 anytime in the taxable year following the NOL year.
Related links:
IRS Q&As on 5-year NOL carrybacks.
UPDATE: The TaxProf has more.
UPDATE II: We should emphasize that if you haven't already filed, you need to elect the 3-5 year NOL on the actual loss return - the 1040 or 1120 - for the loss year, NOT the carryback Form 1045 of 1139. This is a classic trap for the unwary; there's no policy reason to require it on the original form, rather than the carryback.
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Got a 401(k)? Maybe the IRS will match it
March 16, 2009
Employers aren't the only ones that might match your 401(k) contribution. The IRS may match it too.
The "Savers Credit" provides a tax credit for individual contributions to IRAs or 401(k) plans. The credit can be up to $2,000 for joint filers. Eligible taxpayers in 2008 include:
* Married couples filing jointly with incomes up to $53,000;
* Heads of Household with incomes up to $39,750; and
* Married individuals filing separately and singles with incomes up to $26,500.
The credit isn't refundable - it can't take your tax below zero - but going to zero isn't a bad thing.
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Alec Baldwin needs your money
March 16, 2009
The Wall Street Journal has a sad story from Alec Baldwin:
"I'm telling you right now," Mr. Baldwin declared, "if these tax breaks are not reinstated into the budget, film production in this town is going to collapse, and television is going to collapse and it's all going to go to California." Well, well. Apparently taxes do matter, at least when it comes to filming "30 Rock" in Manhattan.
Aww, poor Alec.
Film companies have shaken down states across the country, including Iowa, to get subsidies in the guise of tax credits. Iowa allows filmmakers to get a 50% transferable tax credit for film expenses here. By being transferable, the credits can be (and are) sold at a discount to somebody who otherwise would pay Iowa taxes. This is a subsidy, just as much as if the state were to write a check. It's just executed by transferring the state's receivables to the filmmakers, rather than waiting for the receivables to be turned to cash when a return is filed.
The Journal unfortunately makes the common error of considering a subsidy a "tax cut" just because it's administered thorough the tax law:
When we asked the Motion Picture Association to justify these tax breaks, a spokesman gladly pointed to studies showing that the industry is creating thousands of jobs and hundreds of millions of dollars of new investment in the likes of Michigan and New York. Fair enough. This is called "dynamic analysis." The movie industry's tax machinations are irrefutable evidence that low tax rates do affect business decisions.
It's not "low rates" that attract the film parasites. A more correct term is "bribes," paid with your money.
The Journal does get this right:
As a general principle, however, states shouldn't chase smoke stacks or film production crews with specific tax breaks. It makes much more sense for cities, states and the federal government to lower tax rates for everyone. New York City can survive without Alec Baldwin and "30 Rock," but it can't function without the thousands of small businesses that pay taxes without the benefit of lobbyists and loopholes.
The TaxProf has more.
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Because you can always trust Illinois politicians with more money
March 16, 2009
Rod Blagojevich's successor, the so-far-unindicted Pat Quinn, proposes to raise Illinois income tax by 50%, from 3% to 4.5%. Because, of course, Illinois spends all of its current tax receipts with perfect efficiency, and there isn't a thing that can be cut.
Via the TaxProf
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Choosing a tax preparer: a helpful hint
March 16, 2009
Russ Fox speaks wisely:
Helpful tax hint #2: If your tax professional has a court order on his website that bars him from promoting tax fraud schemes, you may want to find someone else.
You mean that's not like a "Good Housekeeping" seal?
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Does the Menard's excess comp decision affect S corporations?
March 16, 2009
Marc Ward thinks it might.
Tax Update coverage: 4 1/2 years later, Seventh Circuit overrules Tax Court on Menards compensation
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When they say it's not about the money, it's about the money
March 14, 2009
And the Clive red-light cameras are all about the money.
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It can't stay cold forever!
March 13, 2009
Think warm thoughts, and have a great weekend.
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Split decision in Tax Court for client of Clive preparer targeted by IRS
March 13, 2009
Don't deduct your dogs against your Shaklee income.
That's a lesson to take from a seemingly obscure Tax Court case yesterday. A Shaklee distributor from North Carolina was hit with a 20 percent "accuracy related" penalty for certain errors in their tax returns:
Among other things, petitioners failed to report income from Prudential Insurance Company of America and the National Institutes of Health for 2003. Additionally, they deducted the costs of dog care, clothes for a meeting, personal birthday gifts, and a wedding gift. These facts establish that petitioners did not act with reasonable cause and in good faith.
The judge found the distributor's testimony on other deductions credible and allowed some items that the IRS had challenged.
A few items make the case more interesting than the average multi-level-marketing case:
- While the distributor is from South Carolina, the case was argued by a Des Moines-area lawyer.
- The case was tried in Des Moines.
- The IRS is trying to get an injunction against a Des Moines preparer that did a lot of work for Shaklee distributors.
The Tax Court's only mention of a preparer was to note that the taxpayers didn't use the unnamed preparer as a witness, a fact that it held against the taxpayer. As it turns out, these taxpayers did use the Clive preparer that the IRS is targeting; the taxpayer's partnership is mentioned in a supporting memorandum for the injunction lawsuit.
The Tax Court case did involve the use of personal expenses as business deductions, as well as disallowed "rent" paid from the distributing business to the taxpayers; these sorts of items are cited in the injunction lawsuit as "abusive" deductions taken by the targeted preparer. It will be interesting to see whether this Tax Court case affects the preparer injunction suit.
Cite: Chaney, T.C. Memo. 2009-55
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Will there be an Obama corporate rate cut?
March 13, 2009
The chief house taxwriter has been pushing for a reduction of the top U.S. corporation rate for awhile now. President Obama may be receptive, according to an article in Tax Analysts today ($link):
"My interest over time is potentially lowering corporate rates in exchange for closing a lot of the loopholes that make the tax system so complex. That's a very appealing conversation to me, and I'd like to pursue it," Obama told the Business Roundtable, a gathering of chief executives in Washington.
The rate reduction is nowhere to be found in the President's recently-proposed budget. Higher individual rates and lower corporate rates would certainly stimulate the economy of those of us who charge for tax advice by the hour.
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Don't lien on me
March 13, 2009
Who wants a tax lien? Not you? Then check out 7 Tips for Avoiding an IRS Lien at The Tax Lawyer's Blog.
It's worth reading just for tip number 1:
Respond immediately to all IRS notices - even the apparently nice ones. By far the surest way to get a tax lien slapped on you is to ignore IRS notices because the government assumes that you are delaying the collection process in order to hide or transfer your assets. The IRS puts a tax lien on you to secure its own interests.
But read the whole thing.
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The city that shall not be named between Adel and West Des Moines
March 13, 2009
From Isaiah McGee at IowaBiz.com:
The city of Waukee recently passed a resolution to "take any action necessary to prohibit the use of its name in social networking platforms" even against a Facebook fan page that asks "why is Waukee a great place to live?"
If they're serious, they might as well paint a great big red target on their municipal web page. And even if they were to somehow control the use of the word "Waukee" on the internet -- which is pretty much impossible technically, and dubious constitutionally -- the town would become known on the web by very unflattering pseudonyms.
Or maybe they're still bitter about the "Motion W" thing.
Here at taxupdateblog.com, we embrace social media! No, there is no Tax Update Facebook page, but we are Twittering. Refer to us as much as you please!
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Is the kidz lerning?
March 13, 2009
They're sure getting better grades, says the TaxProf:
Perhaps the saddest part is that the data series doesn't go anywhere near my school days. I'm not saying I was a slacker, but nobody would confuse late 1970s and early 1980s academia with the golden age of Athens.
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Montezuma melodrama
March 12, 2009
A successful lawyer in the little Iowa town of Montezuma left a secret at his office every night when he went home to his wife. Then he died, and he couldn't keep his secret anymore.
Roger Sunleaf was broke. And the IRS was hounding him.
Shortly after Mr. Sunleaf's death, his former secretary contacted the coexecutor of Mr. Sunleaf's estate (petitioner's niece) about alerting petitioner to her poor financial condition. Mr. Sunleaf's former secretary had worked for him for 15 years and knew Mr. Sunleaf was in trouble with the IRS and with the family finances. Petitioner was unaware of the financial situation while Mr. Sunleaf was alive because he swore his secretaries to secrecy, and he handled nearly all of the family's financial affairs.When petitioner learned of the financial mess that Mr. Sunleaf had caused, she was shocked. At the time of his death, Mr. Sunleaf's office, his desk, floor, chairs, and conference table were piled with mail. There were unopened envelopes from creditors, the IRS, and banks.
Mr. Sunleaf was able to keep petitioner unaware of the financial mess because all mail addressed to petitioner and Mr. Sunleaf was delivered to the post office in Montezuma instead of their home. Petitioner never picked up the mail at the post office; rather, Mr. Sunleaf picked up the mail and brought home only magazines and personal letters.
Mr. Sunleaf's widow liquidated his assets and paid off what she could. She sold the house bought during their 35-year marriage and moved into a trailer. And still that wasn't enough for the IRS. Finally, Mrs. Sunleaf ended up in Tax Court when the IRS wouldn't let her off the hook for her husband's tax debts.
The Tax Court looked at the three "safe harbors" of the IRS procedure (Rev. Proc. 2003-61) for granting innocent spouse relief:
- The couple is no longer married;
- The spouse had no reason to know that the "non-innocent" spouse would fail to pay the taxes due on a joint return, and
- The innocent spouse would suffer economic hardship.
The court said that it was clear that Mr. Sunleaf had hidden his finances from his wife. Looking at her attenuated, trailer-bound financial circumstances - a monthly income of around $1,600, which fails to meet her expenses - the Tax Court ruled in favor of the 70 year-old widow.
The real question: why on earth did the IRS fight this case at all? Maybe the kinder, gentler IRS memo got lost somewhere.
Cite: Sunleaf, T.C. Memo 2009-52
UPDATE: More at Suits & Sentences.
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4 1/2 years later, Seventh Circuit overrules Tax Court on Menards compensation
March 12, 2009
Way back in September 2004 the Tax Court held that about $13 million paid as compensation to the founder of the Menards chain in 1998 was really a non-deductible disguised dividend. Yesterday the Seventh Circuit Court of Appeals reversed the Tax Court and said the whole thing was deductible.
The IRS likes to challenge large compensation deductions to owners of closely-held C corporations. Because C corporation income is taxed twice -- once when earned and again when paid as dividends -- C corporations tend to pay big salaries to reduce their taxable income and to get earnings to owners with only one level of tax. The IRS can challenge such payments as "disguised dividends." If the IRS wins, the corporation loses the compensation deduction and the income is taxed to the recipient as dividends, rather than compensation.
The Seventh Circuit, in an opinion written by jurist-blogger Richard Posner, said that the Tax Court let the IRS unfairly second-guess the compensation level:
A risky compensation structure implies that the executive's salary is likely to vary substantially from year to year -- high when the company has a good year, low when it has a bad one. Mr. Menard's average annual income may thus have been considerably less than $20 million -- a possibility the Tax Court ignored. Had the corporation lost money in 1998, Menard's total compensation would have been only $157,500 -- less than the salary of a federal judge -- even if the loss had not been his fault. The 5 percent bonus plan was in effect for a quarter of a century before the IRS pounced; was it just waiting for Menard to have such a great year that the IRS would have a great-looking case?
As individual rates are likely to rise during the Obama administration - and with Charlie Rangel looking at cutting corporation rates - C corporations may make a comeback among closely-held businesses, bringing excess comp issues back on the agenda for tax planners. This will be a good, taxpayer-friendly case to work with.
Cite: Menard, Inc. CA-7, No. 08-2125
UPDATE: The TaxProf has more.
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Tax complexity for kids
March 12, 2009
William Perez lays out the basics of when tax breaks for kids expire. An excerpt:
* Age 12: last year to claim child and dependent care credit.* Age 16: last year to claim the child tax credit.
* Age 19: last year to claim the child as a dependent, unless they are full-time students.
* Age 23: last year to claim the child as a dependent if they are full-time students.
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Why interest-free loans are a pain
March 12, 2009
Death and Taxes blog has this handy summary of how you have to compute the gift on an interest-free family loan:
1. Figure out the market interest rate for that loan. Assuming that the loan is considered short-term loan (less than 3 years), the January 2008 market rate would be 3.18%;2. Deem you to have income equal to that amount (3.18% of $33,000, or $1,049.40); and
3. Deem you to have made a gift to your brother and his wife of the amount of deemed income ($1,049.40).
That's a lot of work for not a lot of money, isn't it?
Indeed.
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Cold-again Cavalcade
March 12, 2009
Winter's back, it's cold again, so fire up the Weinermobile and fall in with the Cavalcade of Risk! It's at Healthcare Economist this week.
Among the many worthy posts are an InsureBlog piece on freedom of conscience for healthcare providers.
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You mean tax credits aren't free?
March 11, 2009
Fans of tax credits like to pretend that they are free money falling from the sky. They don't like to point out that if I get a tax credit, that means you are paying extra taxes on my behalf (explanation here). Fine for me; for you, not so much.
This bit of reality is facing our legislators:
Lawmakers are considering setting aside $50 million a year in tax breaks to help renovate historic properties.That's $30 million more than is currently allocated. And the proposal is being made when Iowa faces hundreds of millions of dollars in revenue shortfalls and as Gov. Chet Culver calls for cuts in similar types of tax breaks
Troy Price, a spokesman for Culver, said Tuesday that the governor believes this year may not be the right time to increase historic tax credits.
I love funky old buildings, but that doesn't mean I should make you pay for them for me. When the state is full of unrented commercial space, housing prices are in free-fall, and millions of dollars of recently-renovated lofts sit unsold in Des Moines, the idea of subsidizing more commercial and residential construction right now seems a bit nuts.
Of course, that may not stop our legislators:
Many buildings continue to sit idle and will never be rebuilt without the added tax breaks. To do nothing would further harm the state's economy, advocates say.The state's investment is returned 3- or 4-to-1, depending on the community, said Rep. Sharon Steckman, D-Mason City, who is leading discussion on House Study Bill 134. "The beauty of it is that it's keeping the history of a community alive."
3 or 4 to 1? That means we should just devote the entire state budget to fixing old buildings, because we'll triple our money! At least! There's no way that this multiplier takes into account the other things that could have been done with the money, let alone the lost income to other real estate owners because they have to compete with subsidized old buildings.
Because money is tight, backers of tax credits are having to battle each other. The best answer is for them all to lose, with the savings used to bring down tax rates for those of us who don't have lobbyists.
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Offers in Compromise: a futile gesture?
March 11, 2009
Is it a waste of time to try to compromise your taxes liability with the IRS? Some attorneys are about ready to throw in the towel. I think it can be worth the trouble, but fortunately this hasn't been an issue for my clients (yet).
Tax attorney Peter Pappas has some thoughts:
While we agree that it is difficult to get the IRS to accept a valid Offer in Compromise, we still find that if the Offer is legitimate and properly presented, it will be accepted.An IRS settlement offer must be well-organized and thoroughly prepared.
The IRS is very picky about these things. If you find yourself in a situation where you can never get the taxes paid, hire a specialist to help you get the taxes settled (and not the specialists you see on late night cable t.v.). If you get the IRS to agree to compromise, live up to your end of the bargain; if you screw up, you probably won't get a second chance.
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Online gambling addresses for your FBAR filing
March 11, 2009
Russ Fox has come up with a valuable list of street addresses for some major online gambling sites that must be reported as foreign bank accounts on form TDF 90-22.1. Severe penalties apply if you don't fill out these forms correctly, including the address of the account, and I know of no other source for these addresses.
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Racehorse owner finishes out of the money in Tax Court passive loss case
March 10, 2009
Trailer salesman Douglas A. Schmuecker likes the ponies so much that he got into the business. The Tax Court sets the stage:
In 1993 petitioner got involved in horse racing. During the years at issue, he owned or co-owned five or six racehorses. They were not always the same horses. Sometimes he would acquire a horse by winning a "claiming race"; sometimes one of his horses would be claimed by someone else and he would reinvest in another horse. Because of the expense involved, petitioner generally owned no more than three horses outright at any time. The other horses he co-owned, typically 50-50, usually with his primary horse trainer, Marv Johnson.Marv Johnson kept all or most of these horses, along with 40 or 50 others, at his ranch, which was distant from petitioner's residence. Marv Johnson and his staff provided all necessary services for taking care of the horses, such as feeding, grooming, and training them. They decided when the horses were ready to race, decided on the races to enter (either on their own or in consultation with petitioner), and hauled the horses from meet to meet. Petitioner paid a fee for these services.
Mr. Schmeuker claimed net losses from his horses totalling about $64,000 from 2001-2003. Often the IRS goes after such losses on a "hobby-loss" basis, but instead they attacked them on a "passive loss" theory. The passive loss rules generally defer losses from businesses in which the taxpayer doesn't "materially participate" until the business either generates income or is sold.
The Tax Court's fact summary wasn't good for Mr. Schmeuker:
According to petitioner's statement, he was "not required to do anything as far as services" in his horse-racing business. In fact, he had no firsthand experience in training horses and did not even ride horses. Before acquiring racehorses his only previous experience in horse racing consisted of going to races with his father. Petitioner did not contemporaneously maintain logs of time spent on his horse-racing business.
That made it easy for the court. They reviewed the tax law "material participation" rules (summarized below) and concluded that the taxpayer failed to support his claim that he "materially participated."
On the good side for the taxpayer, a passive loss a far better result than a hobby loss. Passive losses are just deferred; when he gets out of the businesses, he should be able to take the losses.
Cite: Schmuecker, T.C. Summ. Op. 2009-32
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The pros and cons of sucker financing
March 10, 2009
Roni Deutch discusses "The Pros and Cons of Refund Anticipation Loans." We'll give you the quick and easy version of the pros and cons:
Pros: instant gratification.
Cons: you have to be either desperate or foolish to pay the outrageous effective interest rates and fees involved.
E-filing will get you a refund in 1-2 weeks. If you can't wait that long, you really need to reconsider your financial habits.
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Tax-protest figure arrested in firearms raid
March 10, 2009
A former FBI agent with apparent links to jailed tax-protest figure Irwin Schiff and the "We The People" organization was arrested in Nevada on weapons charges last week. Jan Lindsey, 66, was arrested with three others. The four have pleaded not guilty. From reviewjournal.com:
Lindsey, who has lived in Las Vegas for nine years and who authorities say is the leader of an organization called Nevada Lawmen Group for Public Awareness, appeared to be the most publicly active. Lindsey has failed to pay his income taxes or has filed false returns since 1999, Johnson said.Although Schiff has been incarcerated in Terre Haute, Ind. for nearly three years, he still appears to have a following in the Las Vegas Valley. Schiff’s East Sahara bookstore, which once sported a huge sign that read, “Why pay income taxes when no law says you have to?” is shuttered. But his older blogs relating to tax protests occasionally resurface on the Internet.
Photos on Schiff’s Web site show Lindsey in Schiff’s office displaying his FBI special agent badge.
Lindsey is a coordinator for an organization called "We the People," which, according to its Web site, was developed to become "the nationwide force that will institutionalize and organize citizen vigilance."
Apparently the group has what one might call "nonstandard" views:
Among other things, federal documents say members of the Sovereign Movement believe U.S. currency is invalid. The group also believes the government holds a secret $1 million account for each citizen dating back to the end of the gold currency standard in 1933.
If they do, I'll take mine in my 401(k) plan, please.
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California adds single factor apportionment option
March 10, 2009
David Brunori of Tax Analysts caught something I missed in the California Budget Frenzy: they enacted optional "single factor" apportionment ($link). Corporations subject to the California income tax will have the option to have their income allocated to California based entirely on where their sales are, rather than based on a combination of sales, payroll and property.
Usually single-factor is a "screw you, stranger!" approach to apportionment. Pioneered in Iowa, single-factor greatly reduces the tax on in-state corporations with multi-state operations, but it clobbers out-of-state corporations that have little in-state activity but sales. It has gained popularity among legislators for the perception of protecting the local guy while sticking it to the (non-voting) out of state company.
California's approach is optional, so it helps the local guy without really sticking it to the outsiders. Mr. Brunori calls it "A Devastating Blow to the Corporate Income Tax." Well, maybe something good will come out of the California budget debacle.
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Rhode Island Tax Panel Proposes Corporation Tax Repeal
March 10, 2009
An advisory board has proposed that Rhode Island repeal its corporation income tax as part of a comprehensive re-do of their state tax system.
That's exactly the sort of thing Iowa needs. Instead we have desperate revenue grabs countered by uninspired proposals to nibble around the edges of the tax system.
Link: Panel proposal (pdf)
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The education disaster double-dip
March 09, 2009
A reader e-mails:
I heard a snippet on the news last night about being able to double the amount we claim for college tuition this year if the student is from a flood-affected county? Is that true? If so, does that apply to federal and state?
The benefit is based on whether you go to school in a disaster area -- NOT whether the student is from one. From the IRS website:
The recently enacted legislation provides educational assistance to students enrolled and paying tuition at eligible educational institutions located in Midwestern Disaster Areas for any tax year beginning in 2008 or 2009. Basically, the new legislation expands the Hope and Lifetime Learning educational credits in the following way:* The Hope Credit is expanded to 100 percent of the first $2,400 in eligible expenses plus 50 percent of the next $2,400 – doubling the maximum Hope Credit from $1,800 to $3,600 for each eligible student.
* The Lifetime Learning Credit is expanded from 20 percent to 40 percent of the first $10,000 in eligible expenses.
So - same education, twice the credits. Unfortunately, you may have your academic department working out of trailers for awhile, but you'll be just as smart when you graduate.
This link has all of the eligible counties (at bottom of page)
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Capping Corporate Welfare
March 09, 2009
The Des Moines Register reports today on efforts to cap Iowa's corporate-welfare-via-the-tax-code system. The article points out how much these tax credits cost, and hint at why they'll be hard to stop.
The Governor proposes to cap a series of credits so that their benefits stop at $200 million. This is, of course, a cop-out, avoiding the hard work of picking and choosing between corporate welfare recipients. It also undercuts the entire incentive purpose of the benefits, as would-be beneficiaries will be unable to know how much their subsidies will be before the plunge into subsidized activities.
Sometimes the subsidies really do cause the activities to happen here -- for example, our insanely generous film credits undeniably attract cash-hungry filmmakers to Iowa. But more often, the subsidies reward what people would do anyway. A whole industry of "credit study" specialists makes its living finding ways to get tax credits for things businesses have already done. Things like the research credit encourage people to call more things "research."
The article points out how expensive these things can get:
Twenty of the credits have no limits and are projected to almost triple in cost - from $111.5 million five years ago to $328.6 million in the fiscal year that ends June 30, the state estimates.
That $328.6 million approximates the entire net revenue from Iowa's corporate income tax ($320 million in fiscal 2007).
The opposition to the cap is already mobilizing:
Culver's recommendation to reduce research tax breaks for companies would push highly paid jobs out of the state and ultimately cut into the Iowa's overall economy, predicted Elliott Smith, executive director of the Iowa Business Council.Pioneer Hi-Bred, the giant seed company, has invested an additional $100 million in the past five years, largely because of the research tax breaks, said spokesman Patrick Arthur. The company says the credits have helped create 700 jobs.
"Is it solely because of that program? Not necessarily, but that program has definitely provided an incentive," Arthur said.
No, that's not why we're here, but we'll cash the checks!
Des Moines Register graphic
Here, let's make it simple. Let's zero out all of these credits, and a lot of targeted deductions, too. Then:
- Repeal the corporate income tax
- Lower the individual rate to 4% (partially by getting rid of federal tax deductibility)
- Cut spending to fit the revenue, starting with Vision Iowa, the Iowa Power Fund, and other schemes for politicians to reward their friends and relatives.
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Maybe the check from California really is in the mail
March 09, 2009
Russ Fox reports that California is finally paying the tax refunds it had been sitting on during the latest iteration of its budget crisis.
Of course, the crisis isn't over, but they have a budget now. It's sort of like in the Wizard of Oz, where the scarecrow isn't any smarter, but he does have a diploma.
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When government subsidies strike!
March 09, 2009
Will Wilkinson speaks the truth from Iowa City on the effects of government "investment" in the ethanol industry:
How much money has been sunk into this? Lots. That’s money that could have been spent more productively, but wasn’t. So we’re poorer. And all the tens of thousands of folks right here in Iowa working in corn ethanol are misallocated human capital. So we’re poorer. These are skilled, hardworking people whose diligence and effort is, thanks to the government, making the world worse. And the case of ethanol is no anomaly. It is completely typical.
Read the whole thing the next time you think that government "investment," especially when "green" stuff is involved.
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You'll be allowed to keep voting until you get it right!
March 07, 2009
It looks like some politicians just won't take "no" for an answer:
CEDAR RAPIDS - The five Linn County cities that rejected a local-option sales tax Tuesday will be allowed to vote again on May 5.With Marion leaders citing voter confusion over the tax's use, the Cedar Rapids City Council has agreed to pass a resolution Monday that will put the issue on the ballot once again.
That's great - they're "allowed" to vote again to increase their taxes. Funny - it doesn't appear the folks in Cedar Rapids who voted "yes" will be "allowed" another chance to reject the tax.
This bit about citing "confusion" is rich. The politicians rushed it on the ballot as soon as they possibly could after the Governor signed the legislation allowing the referendum. If there's any confusion, it's because the referendum was held barely a month after the law allowing it was enacted.
There really should be a rule that says any sales tax rejection at the ballot box prevents another vote on the issue for at least two years. Otherwise the only way to stop them is spectacular ballot box humiliation.
Via Jeremy Cobert in the comments.
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The Helio Diaries
March 07, 2009
If you are crazy to learn the latest about the tax trial of Indy Racer and Dancing With the Stars celebrity Helio Castroneves, there's a Castroneves tax trial diary on Accountingweb.com. Strangely, I relate to this more than I do to open-wheel racing or TV talent shows.
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No, it's Iowa
March 06, 2009
A Cedar Rapids-area real estate magnate learned the hard way the lesson Kevin Costner taught years ago: This ain't heaven, it's Iowa.
Richard Lee Mellor was convicted yesterday of four counts of tax evasion, one false claim count, and one obstruction count. From the U.S. Attorney's press release:
The obstruction of tax laws conviction involved evidence that Mellor filed a frivolous and fictitious lawsuit against an IRS revenue officer for more than $84,000,000, sent and filed threatening letters to bankers concerning implications if they cooperated with IRS collection efforts, and filed an $84,000,000-plus lien against the same revenue officer.
And that didn't make the IRS exam stop? That's a big surprise.
Mr. Mellor had allegedly claimed to be a citizen of heaven. Either he failed to establish that to the jury or they (correctly) decided that U.S. taxes are due on U.S. source income, even when earned by non-residents. But it appears that there was more than a residency issue involved. From the U.S. Attorney's press release:
The evidence at trial showed that Mellor attempted to conceal his income from the IRS through abusive trust schemes using, in part, tax-avoidance methods such as those promoted by Dr. Joe Sweet and the Joy Foundation, Milton H. Baxley II, and other individuals. The evidence showed that Mellor deposited the receipts of his business into bank accounts in varying names, mainly trusts and LLC entities, from year to year. By 2005, Mellor was moving funds around the country using accounts that did not bear his name, but were in the names of companies or accounts other people opened for him. For example, in 2005 he transferred more than $289,000 to a warehouse banking company in Maryland, then transferred $180,000 to a company in Colorado, moved $248,000 from Colorado to a money order company in Arkansas, and then transferred $226,500 back to his accomplice in Colorado, who sent blank, pre-signed checks back to Mellor in Iowa. Mellor used accounts in the names of invalid trusts to hold business deposits and he transferred real estate to the trusts.
The JoY Foundation is an old and tired tax scam, but I'm sure it appeared to work fine until it blew up. There appears to be a connection with Wesley Snipes' erstwhile tax advisor, Eddie Kahn, through Milton Baxley II. (Does that make Mr. Snipes Wesley I?). It's a small world.
Links:
Press Release on injunction against Joseph Sweet
Press Release on Baxley sentencing.
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Treasury to shut down private collection
March 06, 2009
The Treasury Employee's Union had its way with its nominal boss yesterday when Treasury Secretary Geithner informed Senator Grassley that he was killing the pilot private debt collection program. This will make sure that the smaller tax debts pursued by the private contractors will go uncollected while making sure only NTEU members in good standing fail to pursue those debts.
As for the 60 non-union Iowans who had been working in the private debt collection program, well, maybe they can get a job with a good union contractor if Iowa passes its pending "prevailing wage" legislation.
Kay Bell says it was an IRS decision, but Geithner's involvement makes it look otherwise.
UPDATE: The Tax Rascal has his own take on "tax mercenaries" (though I think the IRS collection people get paid too) that seems logical, but will never fly with the union.
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Who pays taxes?
March 06, 2009
The Tax Policy Blog today has a useful recap of just how progressive the income tax system already is.
Taking their data, I compared the income and taxes paid by the top 15,956 2009 tax filers - those with adjusted gross income of $10 million or more -- to the 89,570,533 filers with AGI up to $50,000. The total adjusted gross income of the top guys was about $475.5 billion, compared to $1.9 trillion for those under $50,000. The top 15,956 paid income taxes totaling $91 billion, compared to $85.6 billion paid by the bottom 89.5 million filers.
Click to enlarge. Source: The Tax Foundation
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Yes, there is a downside to a plot to murder an IRS agent
March 06, 2009
So the lady from IRS is getting nosy, and she seems to be on to your foreign bank accounts. So do you get in touch with your lawyer, own up, and try to work out a civil settlement? Or do you go with Plan B and hire a biker named "Reaper" to kill the agent and burn down the local IRS office? Well, what could possibly go wrong with Plan B?
It didn't work out for Floridian Randy Nowak, who was sentenced yesterday to 30 years in federal prison for trying to do just that. It didn't work out largely because "Reaper" was an undercover FBI agent, which absolutely ruined what was already an insane and doomed plan (IRS exams don't just vanish if the agent does).
Mr. Nowak will be pushing 80 when he emerges from the Bureau of Prisons old folks wing. He may want to consider a different approach to tax compliance then.
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The one number on a return that you really don't want to get wrong
March 05, 2009
From the Des Moines Register:
Harry Rios told Des Moines police that a tax preparer with H & R Block copied his bank account number incorrectly on his tax forms and his refund was deposited into the bank account of another person.Police Detective Terry Mitchell said the money apparently has been spent or at least moved out of that account.
Oops. What a mess. This has to happen some every year, but there is very little guidance on how to handle it. If the story is correct, the preparer didn't handle it all that well:
Later when Rios learned that the money had, indeed, gone into the wrong account and was subsequently removed from the account, he called H & R Block again to find out how to recover his money."They told me to call the police," he said. Officers took a report that they labeled "fraud - theft."
The preparer has already lost in an important way: it's in the newspaper because of an apparent preparer mistake. It might have been easier for them to settle it quietly with the client. While there is little guidance on how to deal with this sort of mistake, what guidance there is implies that it might be the preparer's problem to begin with.
FSA 200038005 deals with a case where a dishonest preparer changed a tax return to deposit a refund into his own bank account. The IRS said that they could issue a second refund to the theft victim.
Service Center Advice 199-017, by contrast, says that if the return is correct, but the bank mistakenly credits the wrong account, the bank has to make it up to their customer. This implies that the person who makes the goof is on the hook. If they follow that logic in the Des Moines case, the preparer would have to make up the refund and go after the person who got the incorrect refund to get reimbursed. Good luck with that.
UPDATE: This story has been picked up by Kay Bell, Roni Deutch, and William Perez.
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Department of Revenue: that was then, this is now
March 05, 2009
The Iowa Department of Revenue has reversed its position about claiming several federal "extender" tax breaks. The Department had said taxpayers should go ahead and take the breaks -- including the "educator expense" tax deduction, the student tuition and fees deduction, and the deduction for sales taxes -- on their Iowa returns, on the assumption that Iowa would adopt these breaks.
Now the Department isn't so sure that the breaks will be re-enacted by the current legislature, and we should therefore stop claiming them. From an e-mail from the Department:
As we explained in that prior message, the final determination on Iowa’s treatment of these items must be made by the Iowa Legislature. The Department made an assumption when printing the 2008 income tax booklet that Iowa would follow the federal treatment. As of March 4, 2009, there has been no action by the Iowa Legislature regarding coupling with the 2008 federal law changes.In terms of filing Iowa income tax returns at this time, the returns must be filed based on current Iowa law that is not coupled with federal law. Therefore, the extenders must not be included in the Iowa return.
If the Iowa Legislature does pass an Internal Revenue Code (IRC) Update Bill this session, then an amended return can be filed to include any extender items not originally claimed on the return.
If an Iowa return has already been filed claiming the extenders, but the Iowa Legislature does not pass an IRC Update Bill, then an Iowa amended return must be filed to exclude any items originally claimed that would not qualify under Iowa law.
Shorter version: If you believed us the first time -- sor-ry!
Full text of the e-mail below.
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Looking for tax ideas in all the wrong places
March 05, 2009
The Iowa Senate Republican Leadership has launched what it calls an "ambitious jobs creation initiative." It doesn't seem like their ambitions have much to do with becoming a majority, if this is the best they can come up with.
The plan has three parts:
- A tax credit for every new job created at the level of 50 percent of the annual salary.
- Create the position of small business ombudsman.
- create an 11 member task force that will head out into our communities to cultivate ideas and look for entrepreneurial Iowans who may not have the knowledge or tools to go about starting a business.
Yes, those 11-member task forces are just what voters are clamoring for. That's just what we need - somebody from the government to help start a business. That's like hiring somebody from the morgue to advise you on wellness.
The tax credit is actually an idea from the original Obama stimulus plan that was deemed too absurd for even the Democratic Congress to embrace. From Tax Vox:
Refundable tax credits for hiring new workers promise to be an administrative nightmare and won't create many new jobs. It is tough to see how a company that is seeing its sales slaughtered in today’s recession is going to hire just because it gets a few thousand dollars per new worker from the government. Profitable firms would merely take the credit for bringing on workers they were already planning on hiring.
Exactly. Like economic development credits in general, they would be harvested by companies looking to be rewarded for what they would do anyway.
Rather than piddle around with these silly and futile ideas, why don't they propose something really bold and ambitious:
- Eliminate the corporation income tax
- Reduce the Iowa individual tax rate to 4% by eliminating all the special deductions, exclusions and giveaway tax credits like the 50% Hollywood subsidy. Oh, and get rid of federal deductibility.
- Eliminate the Iowa Power Fund, Vision Iowa and all of the other lame excuses for politicians to steer money to their friends.
- Move for a constitutional limit on spending based on economic and population growth.
More: Is this all you got?
Related: G.R.O.W.? L.A.M.E.
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Not that many folks can afford this nowadays...
March 05, 2009
Dan Meyer at Tick Marks passes on an IRS article on tax issues involved with early retirement. Of course, some folks find themselves "retired" lately a lot sooner than they had expected.
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Maule raves over Kay Bell's tax book
March 05, 2009
Law Professor James Maule has good things to say about Kay Bell's book The Truth About Paying Fewer Taxes:
Even high school students would learn quite a bit of useful information about the nation in which they live and the facts of tax life that they will encounter after graduation if they were assigned the book. Tax ignorance, and by that I mean total lack of knowledge and not inability to zip around the tax law as do tax experts, is inexcusable. Kay's book would do much to dispel the tax ignorance so prevalent among high school and college students, and likewise would function as a good remedial device to bring young adults, and even older folks, up to speed with respect to taxes.The book's price would pay for several cups of expensive coffee. In other words, for what it delivers, it's a bargain.
You can win an autographed copy at Bruce the Tax Guy's place.
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Jury acquits St. Louis-area car dealer Auffenberg
March 05, 2009
After a six week trial, a Virgin Islands jury has cleared James Auffenberg, Jr. of criminal tax charges relating to a Virgin Islands tax setup.
The government accused Mr. Auffenberg of engaging in sham transactions to move U.S.-source income to the Virgin Islands, where it would be sheltered by a popular "economic development" tax credit. While the IRS may still pursue more taxes in civil proceedings, Mr. Auffenberg won't be facing jail time, which is no small thing.
While we will never know for sure, the IRS may have lost the case from the time Mr. Auffenberg got it moved from the St. Louis area to the Virgin Islands for trial.
Related: Trial begins for car dealer's Virgin Islands tax shelter.
UPDATE, 3/7: The TaxProf has a roundup.
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Bailout aims to screw 8 in 9 homeowners (and 10 in 10 renters)
March 05, 2009
Wall Street Journal: Bailout Aims to Aid 1 in 9 Homeowners.
Don't you feel silly for buying a house you can afford, and making the payments? Or for not buying a house beyond your means and paying rent instead?
UPDATE. This seems about right:
In my view the plan is bad news and will not work. It is a waste of taxpayer money and even progressives should be highly critical of this weak initiative.
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Spring is coming carnival!
March 04, 2009
It's supposed to reach 50 degrees here today! Celebrate the warmth at Kay Bell's Carnival of Taxes, a roundup of tax-related posts from around the blog world.
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G.R.O.W.? L.A.M.E.
March 04, 2009
Iowa House Republicans really know how to kindle political passion:
Yesterday, freshman members of the House Republican caucus rolled out the party’s plan to put Iowan’s back to work and improve the state’s economy. The G.R.O.W. (generating recovery and opportunity for working Iowans) plan uses a variety of methods such as tax credits, tax deductions and constitutional protections to lift Iowa’s slumping economy.
Tax credits and deductions! That's the ticket! Iowa only has about 3 dozen economic development tax credits, making us only the second worst state to start a business. A few more credits and deductions will surely make Iowa an economic dynamo and win back the legislature for the Republicans. Right after I perfect my four-foot vertical leap.
Some of the proposals are defensible, if improbable ("Constitutionally protect Iowa’s Right-to-Work law"). Others are just wimpy and silly:
-Student loan interest deduction expansion. Unfortunately, that won't do much for the students who need to leave the state to find work.
Telecommuting tax credit. If telecommuting will work for a business, they don't need a tax credit to help them figure it out. If they are going to allow telecommuting anyway, it's just a subsidy.
Shovel-ready permits. Shovel ready!
Social Security tax deduction. Why not just cut tax rates?
Small business internship grant expansion. Somehow I think this may fail to win back the House for the Republicans.
Increase research activities credit (RAC). This is another straight subsidy awarding companies most willing to call what they do anyway "research."
Property tax freeze.
"This proposal will place a prohibition on increasing property taxes by tying assessment limitations of residential, agricultural, commercial property together and apply the lowest percentage increase to industrial property."
So it's not really a freeze; it just locks into place the current disparities in the property tax system.
All of these little nibbles amount to a big yawn. Why don't they try something really bold:
- Eliminate the corporation income tax
- Reduce the Iowa individual tax rate to 4% by eliminating all the special deductions, exclusions and giveaway tax credits like the 50% Hollywood subsidy. Oh, and get rid of federal deductibility.
- Eliminate the Iowa Power Fund, Vision Iowa and all of the other lame excuses for politicians to steer money to their friends.
- Move for a constitutional limit on spending based on economic and population growth.
If you are going to fight for something, at least make it worth the fight.
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Five years in jail for well-uniformed Alaska dentist
March 04, 2009
Glenn E. Lockwood must have had a lively dental practice in Kenai, Alaska, if his tax returns are any indication:
He claimed purchases at Dress Barn, David's Big and Tall Store, and Big Dog Sportswear as "uniforms" for the dental practice. Additionally, he claimed "advertising" expenses to companies called Latin Magic, Introductions, Our Best Friends and Friend Finder and claimed "continuing education" expenses to massage parlors.
The 61 year-old would have looked funny filling cavities while wearing a uniform from Dress Barn; maybe that's why the IRS thought that the expenses weren't really for uniforms. A jury apparently was also dubious, and Mr. Lockwood was convicted of four tax evasion counts.
A judge sentenced Mr. Lockwood to five years in prison yesterday on the charges, which also alleged that Mr. Lockwood also used shell corporations in Ireland and Nevada to conceal income.
As to the "continuing education" in message parlors -- isn't gum massage part of dental care?
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Sales tax boost passes in Cedar Rapids, fails elsewhere
March 04, 2009
Cedar Rapids voters have approved a 1 cent increase in the local sales tax. The penny increase is touted as a flood relief measure. Three suburbs -- Hiawatha, Robins and Marion -- voted against the measure. It is puzzling to think that higher taxes are what's needed to rebuild after a flood. We'll see how long the local authorities will want to keep the additional revenue; I suspect the correct answer is "forever."
An odd sales tax increase proposal failed in Davenport. A referendum that would have imposed a one-cent sales tax to provide free college tuition to Davenport high-school graduates was rejected by 61 percent of the voters.
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The end of your 2005 refund is nigh
March 04, 2009
The IRS says it's sitting on $1.3 billion of refunds for people who have never bothered to file a 2005 tax return. If some of that money is rightly yours, you need to file a 2005 return by April 15, 2009 or the money is gone forever (or it goes to the government, which is the same thing).
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Real-estate agent wins passive loss argument in Tax Court
March 03, 2009
One of the hidden advantages of being in the real-estate business is the ability it provides to deduct otherwise "passive" rental losses. If you are a "real estate professional" under Code Sec. 469(c)(7), rental real-estate losses aren't "per-se" passive, like they are for other taxpayers; instead, you determine whether your real estate losses are "passive" using the same "material participation" tests that apply to all other business activities. A "real estate professional" has to spend 750 hours or more a year in a "real property trade or business" and cannot work more hours in non-real estate businesses than in real estate.
Sudha Agarwal was a full-time real-estate agent at a Century 21 brokerage in California. She also owned two rental properties with her husband. Together Mr. and Mrs. Agarwal performed all of the work on the properties, meeting one of the tax law's tests for material participation. She therefore claimed the losses as non-passive, and deductible, based on her status as a "real estate professional."
The IRS disagreed, making the arguing that Mrs. Agarwal wasn't a "real estate professional" under the tax law. The tax law defines "real property trade or business" (my emphasis):
any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.
The IRS made the novel argument that a real estate "agent" isn't in the "brokerage" business. The Tax Court explored the meaning of "brokerage" in Sec. 469(c)(7) and concluded that it meant what every normal person would conclude: that real estate agents are in the "brokerage" business.
Cite: Agarwal, T.C. Summary Opinion 2009-29.
Read more for an overview of the tax law rules for "material participation."
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Iowa: 16th in freedom?
March 03, 2009
The Mercatus Center, a libertarian think-tank, has released a report that attempts to rank states by how free they are. Using 2006 data, Iowa was the 16th most free state by their criteria; New York was the least free. The report has this to say about Iowa:
Despite frequently electing politicians who do not seem very interested in preserving freedom, Iowa’s policies are fairly freedom friendly (#12 economic, #25 personal, #16 overall). The state particularly stands out on economic regulation. Iowa has a light touch on land-use planning. Labor regulations are business friendly, with right-to-work, no minimum or prevailing wage laws, and a lightly regulated workers’ compensation regime. Health insurance mandates are low. The court system is very good. On personal freedoms, the picture is mixed. Marijuana sentencing definitely needs reform. Private schools are highly regulated, and home school standardized testing and notification requirements are burdensome. Asset forfeiture needs reform. However, most forms of gaming are permitted, at least as a local option (oddly, social gaming is prohibited). Individual and grassroots PAC political contributions are unregulated, but corporate contributions are banned altogether. Smoking bans permit designated smoking areas and exempt bars. Sobriety checkpoints are banned.
A lot has changed since 2006. Of course now bars are not exempt from our draconian smoking laws, and there are no designated indoor smoking areas. Iowa does have minimum wage laws (and did in 2006, by the way). If legislative leaders have their way, right-to-work will be gutted; prevailing wage legislation came within one vote of passage last week, and may still pass this session.
Source: The Mercatus Center. Click to enlarge.
Iowa already has one of the worst business tax environments in the country. Don't think that frittering away Iowa's main competitive advantage -- business-friendly regulation -- will somehow reopen the Maytag plant and give everyone good $40 per-hour jobs with full benefits.
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Double-dipping in Dallas
March 03, 2009
So another Obama nominee has tax problems. I especially like the way Ronald Kirk, nominee for U.S. Trade Representative, handled speaking fees from his college -- he donated them back to the college.
The correct way to handle that would be to include them in income and deduct them on schedule A. This would leave him with a net tax cost because of the AGI-based phase-outs that President Obama wants to restore to the tax law. Mr. Kirk most years just ignored both the income and the deduction, but in 2005 he excluded the income and deducted the contribution. Sweet.
The lesson that politicians should draw from this is to not be so smug and self-righteous when criticising businesses for not paying as much in taxes as the politicians would like to receive; it could come back and bite them. Yet the politicians will surely continue to chuck stones from the verandas of their glass mansions.
The TaxProf has a roundup, and TaxGrrrl and Peter Pappas are also on the story.
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The new COBRA fired employee health insurance subsidy
March 02, 2009
Tucked into the recently-enacted stimulus bill is a new 65% subsidy for health insurance premiums of terminated employees. It applies to employees who were involuntarily terminated From September 2008 through December 2009, for up to nine months. Some basics:
- The employee has to pay the remaining 35% of the premium.
- The employer then remits the full premium to the carrier.
- Employers get a credit on their federal payroll tax returns for the 65% share not paid by the employee.
The IRS describes it this way:
Under the American Recovery and Reinvestment Act of 2009, certain individuals who are eligible for COBRA continuation health coverage, or similar coverage under State law, may receive a subsidy for 65 percent of the premium. These individuals are required to pay only 35 percent of the premium. The employer may recover the subsidy provided to assistance-eligible individuals by taking the subsidy amount as a credit on its quarterly employment tax return. The employer may provide the subsidy — and take the credit on its employment tax return — only after it has received the 35 percent premium payment from the individual.
BenefitsBlog has a great roundup of resources on this new employer mandate.
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Congested? Not much.
March 02, 2009
Des Moines is the 78th most-congested town for traffic, according to this survey in Forbes.
Putting that in perspective, it says our congestion is 1% of that in the most congested metro, Los Angeles. I'll take that.
Our busiest traffic time is Friday at 5 p.m., according to Forbes. The 99th busiest market, Deltona-Daytona Beach-Ormond Beach, Florida, is busiest on Sunday at 1 p.m. That's what, a golf-cart pile-up?
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Dancing with the Justice Department
March 02, 2009
Indy Racer and minor reality TV star Helio Castroneves goes on trial this week on tax evasion charges. It looks like he has an interesting defense:
The lawyers will tell jurors the racing champ never owed income tax on $5 million he earned from Penske Racing Inc. because the money went to his father in Brazil as repayment for financing his son's career.
That sounds like a stretch, but maybe it will sound fine to a jury. If my kids ever hit it rich it might suddenly seem more sensible to me.
From the show's website, it appears that tax offenders might be part of their format now, as "L'il Kim" is on this year's cast. Sort of a rough crowd for little Shawn Johnson to be hanging with.
I suppose Shawn can take care of herself.
Russ Fox has more on Helio's trial.
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Long-term care deductions: what's there for you
March 02, 2009
Bruce the Tax Guy has an article at mainstreet.com on how you deduct long-term care insurance premiums.
Bruce is also finding time in tax season to be a book reviewer; he reviews blogress Kay Bell's The Truth About Paying Fewer Taxes:
The Truth About Paying Fewer Taxes is a book with “52 Truths” about taxes. It plainly answers questions like ”do you have to file?”, to “when?”, to figuring out just what is taxable all the way through to retirement. Also covering Compliance, Audits, and Special Tax Situations The Truth About Paying Fewer Taxes will give you a better understanding of taxes, thus giving you what you need to cut your taxes.
For good measure, Bruce is giving away a copy of the book.
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