The Iowa Department of Revenue will say the darndest things. And if you don't like them, you can appeal to a Department of Revenue kangaroo court. If you don't like what Joey has to say, then you get to go to court again and again and again. Most taxpayers give up somewhere along the line because they can't afford the lawyers. That's why it's amusing when they run into someone big enough to keep fighting. David Brunori picks up the story ($link):
To see a strange litigation strategy on the part of government lawyers, you should read the Iowa Supreme Court's decision in AOL v. Iowa Department of Revenue. Iowa has a law that says interstate Internet service is exempt from sales tax. AOL customers in Iowa used to dial a local number that connected them to the AOL megatron computer in Virginia. Actually, the AOL computer was not called megatron, but I think it was really big. So the connection went from Des Moines or Dubuque to Virginia.
The Department of Revenue decided that wasn't an interstate connection and it could assess sales tax.
Never mind that all of AOLs servers are in Virginia. Iowa is everywhere.
So AOL took the case to the state district court. The district court found for AOL, holding that the department's position was an "irrational, illogical, and wholly unjustifiable application of law to fact." Ouch. Undaunted, the department appealed. The appellate court, however, affirmed the district court. The appellate court said it was obvious the interstate Internet service was not a taxable transaction. You might think that the department would have thrown in the towel at that point. No use going back in the ring when you are getting mauled. But like Rocky Balboa, the plucky Department of Revenue reached back and took one more swing. It took its ridiculous argument to the Iowa Supreme Court.
You know it will go bad when the state supreme court starts with "the director's interpretation fails to meet even the most deferential standard of review." The court went on to say that the department was engaging in legal jujitsu to escape the facts. The court called the department's position illogical, irrational, and wholly unjustified.
Bully for AOL. But its sad that the Department is so bullheaded. There are at least two other positions where the Department is equally wrong and equally stubborn:
The only question is: are these positions merely shameless revenue grabs? Or is the Department just that bullheaded?
You wouldn't expect them to say that their taking our cash was bad for us, now, would you?
Related: Let them eat Canapes.
When they were cooking the books at WorldCom, they had an unwitting silent partner: the IRS.
Robert Gourley worked as a scientist in WoldCom's engineering department from 1995 through 2000. While he was quietly earning and exercising options in WorldCom stock, mad scientists in the company's accounting department were doing amazing things with the company's financial statements, helping to pump up the stock value to dizzying heights.
As Mr. Gourley exercised his "non-qualified" stock options, he properly included the "bargain element" of the options -- the excess of their appreciated value over their exercise price -- in his taxable income, paying over $1 million in federal income taxes. Unfortunately, he also held on to the stock after exercising the options. Of course WorldCom eventually collapsed when the bookkeeping scam fell apart, and Mr. Gourley found he had paid the IRS over $1 million for the privilege of buying now-worthless stock.
This didn't seem very fair, so Mr. Gourley sued for a tax refund. On Wednesday the Court of Federal Claims denied the refund (my emphasis):
Plaintiffs are not the first, nor will they be the last, purchasers of stock who later discover that they have received less than they hoped. But they possessed the same information that was available to the public when they bought this publicly traded stock and both they and the public knew what the stock sold for on that date. When a stock has a market value, that is generally the "fair" valuation for tax assessment purposes. Amerada Hess Corp. v. Comm'r, 517 F.2d 75, 83 (3d Cir. 1975); see also id. at 84 ("The better view is that the market does provide the best evidence of value, notwithstanding a depressed state, or even a large-scale manipulation, of the market as a whole. Market cycles and susceptibilities are, after all, part of the risk which the trader assumes and which is one of the determinants of value."). There are certain limited exceptions to the fair market value rule, such as when "the stock was not sold on any exchange, or because the stock valued was part of a large block of stock, or because the stock price was artificially controlled by a syndicate." The cases cited by plaintiffs deal with these exceptions...
But none of those situations pertain here. There was an active market for WorldCom stock, the stock to be valued was not an oversized block relative to the total shares, and the stock price was not artificially controlled by any syndicate engaging in fraudulent or non-arms-length transactions. It is true that the market price was based upon imperfect information, but that does not change the value at which stock was actually traded on January 28, 2000.
The Moral? If you exercise employee stock options and it turns out the boss is a scam artist, the IRS will have no sympathy. Maybe it's not a great idea to tie up a lot of your net worth in employer stock.
Cite: Gourley, Ct. Fed. Claims No. 08-558
The man who headed up the "Dream Team" of tax advisors for the "Renaissance - The Tax People" multi-level-marketing tax scam got two years for his trouble in federal court yesterday. Jesse Ayala Cota is a former IRS district director. He headed the outfit's "dream team" of tax advisors, and his credentials gave a veneer of legitimacy to their claims. From the Department of Justice press release:
Owners of home-based businesses who paid to become members of Renaissance received services including tax preparation, tax advice and so-called "audit protection." The so-called "Tax Advantage System" offered by Renaissance was based on fraudulent claims that business owners could legally reduce the taxes they paid by converting personal expenses to business deductions. Cota and other defendants falsely assured Renaissance clients the tax reduction methods were legal. In fact, tax returns filed using Renaissance’s methods were based on providing false and fraudulent information to the IRS.
Many tax scams are based on using home-based businesses to convert personal expenses to deductions. If it seems too good to be true, it just might be.
Russ Fox has more.
Robert D Flach muses on the price of progress and the joys of manual return preparation. He's welcome to it, but you can have MY computer and my tax prep software when peel away my cold, dead fingers.
Can "Girls Gone Wild" guy Joe Francis deduct everything he does just because he's Joe? His lawyers may think it's worth a try, based on slides obtained by the gossip site The Smoking Gun. The slides, said to have been prepared for Mr. Francis's upcoming tax evasion trial, imply that because he's such a celebrity, everything he does ought to be deductible, or at least his mansion in Mexico. This slide seems to show a world of potential deductions revolving around Mr. Francis:
Source: The Smoking Gun
From a tax return perspective, it's an absurd argument, but Mr. Francis will be trying to convince a jury, not a panel of tax pros. Mr. Francis is also apparently hoping a little bit of Hollywood glitter will help his case:
As part of Joseph Francis's opening statement in U.S. District Court in Los Angeles, his defense team will show a series of slides (or "opening statement demonstratives") that link the "Girls Gone Wild" boss and his firm to movie stars like Jennifer Aniston, Jack Nicholson, Vince Vaughn, and Orlando Bloom.
Prosecutors allege that Francis, whose trial is set to open in mid-October, illegally sought to conceal income in offshore companies and deducted millions in phony business expenses, including costs incurred at Casa Aramara, Francis's beachfront Mexican home. One defense slide, seen below, includes photos of Aniston (whose surname is misspelled), Bloom, and Vaughn, who are described as "celebrity guests" at the Punta Mita property. It appears that Francis, 36, will argue that the estate was an investment property frequently leased to wealthy tenants and, as such, certain business tax deductions were warranted.
I wouldn't give much for his chances for getting the deductions from the IRS, but he doesn't have to win the deductions at trial; he just has to convince a jury that he wasn't willfully evading taxes. It should be an interesting trial.
Editor and Publisher buries the lead:
The Contra Costa (Calif.) Times reported that Harry Warren Green has been charged by a grand jury with four counts of aiding and abetting the preparation of a false tax return between 2000 and 2003. The indictment was officially announced Tuesday by U.S. Attorney Joseph Russoniello.
Green, 51, has been associated with several Contra Costa County newspapers since the late 1980s, including the Brentwood Bee, and the bi-weekly Clayton Pioneer, which was sold in 2003 to Tamara and Bob Steiner.
According to the indictment, Green is accused of reporting between $140,000 and $170,000 in gross annual income between 2000 and 2003. His actual publishing income was "substantially" greater, the indictment adds.
A newspaper that still makes money? Now that's news!
Maybe it wasn't a great idea to hang out with Ed and Elaine Brown while they were holed up in their New Hampshire house to avoid prison following their tax conviction. At the very least, it's not working out well for one couple:
A Sanbornville couple who supported tax protesters Ed and Elaine Brown during a nearly nine month standoff with federal agents have been arrested and charged with participation in tax fraud schemes in Massachusetts involving more than $16 million.
William Scott Dion and Catherine Floyd have been charged, along with several other defendants, with conspiracy to defraud the United States and obstructing the IRS for their part in creating a series of companies that federal prosecutors say were designed to obscure business finances from IRS scrutiny.
The IRS might have targeted the couple anyway, but hanging out with armed tax fugitives during a holdout has to really boost your chances of an IRS audit.
It looks like the IRS thinks they were involved in a "warehouse bank" operation, which allows participants to run their transactions through a common account to conceal their income and expenses. They apparently plan to defend themselves without attorneys; they seem to really want to be reunited with the Browns, who are serving long sentences on tax and weapons charges.
Iowa City "liberaltarian" Will Wilkinson has a great insight on politicians (I added the link for those who haven't heard of Public Choice theory):
The incentives of the political process create a kind of filter that selects for individuals extraordinarily fixated on power and status and extraordinarily motivated to keep it. If this is right (anyone know of personality studies of politicans?), then the problem with standard public choice is that it gives too much credit to politicians by assuming they’re like everyone else and therefore it fails to capture just how exceptionally prone politicians are to narcissism, motivated cognition, self-deception, and brazen lying.
The new Cavalcade of Risk is up at Political Calculations. The blog world's roundup of insurance and risk management post has a new twist this week, as the host subjects each post to a ruthless rating of topicality, information quality, and readableness. He reads the spam so you don't have to.
I like the Insureblog's coverage of the risks of serving bicycles as the drive-up window.
Whenever you point out how much of the federal income tax burden is carried by the top 1% of the income scale, some progressive will point out that it's misleading because it doesn't take into account non-income taxes. Now the center-left Tax Policy Center has a thousand words on the subject, taking into account all federal taxes:
And another 1,000 words for those folks who embrace the David Cay Johnston thesis about how the really, really rich folks get away with murder:
These are, of course, the average rates. The marginal rate -- the rate on each additional dollar -- is much higher.
The results may be different for the top .001%, because you only get there normally by selling your business and having a big one-time capital gain, which will be taxed at a lower rate. Do we have a special tax system for a few hundred people just to deal with that sort of a statistical anomaly? Sounds dumb to me.
Via the TaxProf.
The 150 ruling supergeniuses in the Iowa legislature failed to pass the usual "conformity" bill to link the Iowa income tax to the federal rules. This has caused a bunch of stupid little headaches. For example, the above-the-line teacher deduction didn't apply in computing Iowa taxes for 2008.
It didn't help that the Iowa Department of Revenue first told taxpayers to assume that a conformity bill would pass, before changing its tune later in tax season. Now the Department presents another annoyance: older folks who used the special rule make IRA distributions directly to charity face a stupid adustment to their 2008 returns.
When you have the IRA make the contribution, it bypasses your return entirely. The advantage of this is for most folks is that you don't raise your AGI, avoiding AGI-based phaseouts of personal exemptions and itemized deductions. It also avoids any AGI-based limits on charitable deductions.
Therefore, for Iowa purposes, the pre-2006 federal rules would be applicable. The IRA distribution would be included as income on the Iowa 1040 form, even though it is not reported as income on the federal 1040 form. Similarly, the amount of the IRA distribution donated to charity would be reflected as a charitable contribution on Iowa Schedule A, Itemized Deductions, even though it is not reflected on the federal Schedule A.
Worse, you have to do an Iowa-only computation of AGI phaseouts.
As long as the Iowa tax is linked to the federal income tax, it should automatically incorporate federal tax changes. The legislature can then opt out of ones they don't like.
This rule is also ridiculous from a policy standpoint and foolish from a cost-effectiveness standpoint. A sensible Department of Revenue would let this slide.
Taxpayer doesn't enter his taxable retirement plan distribution as he does his return using TurboTax. TurboTax doesn't catch the error. IRS catches the error when it runs its 1099 match. Taxpayer blames Turbotax.
The Tax Court didn't go along (citations omitted):
Petitioners have not met their burden of persuasion with respect to reasonable cause and good faith. Mr. Hopson admitted that he received both Forms 1099-R for the distributions and that he knew they constituted income. After using tax return preparation software for nearly 20 years, he simply filed the return that was generated by the software without reviewing it. The omission of the distributions resulted in the failure to report over 40 percent of petitioners' total income for the year. Granted this was a one-time event, but petitioners nevertheless had a duty to review their return to ensure that all income items were included. Petitioners were not permitted to bury their heads in the sand and ignore their obligation to ensure that their tax return accurately reflected their income for 2006. In the end, reliance on tax return preparation software does not excuse petitioners' failure to review their 2006 tax return.
The Moral: The "Garbage-in, Garbage-Out" Doctrine trumps the TurboTax Defense.
Update: Heh. "The Tax Court yesterday rejected a taxpayer's attempt to use the TurboTax defense successfully employed by Treasury Secretary Timothy Geithner."
In a reasonable post at TaxVox about sales tax holidays, Kim Rueben makes a jarring statement:
Some places, including the District of Columbia, Maryland, Florida, and Illinois, have canceled or haven’t enacted the holidays this summer. Others, including Virginia, Iowa, and Connecticut have held theirs, while Texas actually expanded its program. This might make sense in Iowa where revenues continue to match expenditures and where the rainy day fund isn’t empty.
I once met a nice guy from Connecticut who asked me if Des Moines was near Boise. I think something similar must be going on here. Iowa is looking at a budget gap for the upcoming fiscal year of (on the low side) $779 million, and maybe as high as $1 billion.
By the way, it's 1,158 miles from here to Boise, compared to 1,210 miles to Hartford.
Yes, Canada is indeed another country, as TaxGrrrl says, and U.S. Citizens have to file Form TD F 90-22.1 for Canadian accounts exceeding $10,000 at any time.
In a rare decision by the full court, the Tax Court yesterday ruled that single-member limited liability companies, which are ignored for income tax purposes under the "check-the-box" rules, are to be respected under the gift tax rules. This opens up the door to using single-member LLCs to obtain estate and gift tax valuation discounts.
The case involves a taxpayer who as part of her estate planning put investment assets into a single-member LLC and then gifted LLC interests to trusts. The taxpayer claimed a 30% valuation discount. Such discounts are a common estate planning tool when corporations or partnerships are involved, but it has never been clear that this works with "disregarded entities" like single-member LLCs. The Tax Court was divided, with a concurring opinion and nine judges participating in two separate dissenting opinions. The majority opinion says:
While we accept that the check-the-box regulations govern how a single-member LLC will be taxed for Federal tax purposes, i.e., as an association taxed as a corporation or as a disregarded entity, we do not agree that the check-the-box regulations apply to disregard the LLC in determining how a donor must be taxed under the Federal gift tax provisions on a transfer of an ownership interest in the LLC. If the check-the-box regulations are interpreted and applied as respondent contends, they go far beyond classifying the LLC for tax purposes. The regulations would require that Federal law, not State law, apply to define the property rights and interests transferred by a donor for valuation purposes under the Federal gift tax regime. We do not accept that the check-the-box regulations apply to define the property interest that is transferred for such purposes.
The Tax Court only ruled on whether the LLC could be taken into account in determining the value of the gifts. In a footnote, the court said it would rule separately on whether the "step-transaction doctrine" would apply to disallow a discount, and on what amount any discount allowed will be.
On further consideration, we should probably temper our enthusiasm a bit. Congress is likely to pass some estate tax legislation this fall to keep the estate tax from expiring for next year; disregarded entity valuation discounts will be a big fat target as a revenue raiser.
The TaxProf has more.
Cite: Pierre, 133 T.C. No. 2.
...or they could cause you more headaches than you can imagine. Headaches like this:
A prominent Bay Area accounting firm might have some serious explaining to do, according to a $5 million suit filed by a former employee.
The suit charges San Francisco's Shea Labagh Dobberstein of "violating their legal duties" in connection with tax returns the firm had prepared on behalf of two of its corporate clients. One of them allegedly had engaged in "intentional tax fraud," the other in a "substantial understatement of (its) tax liability," according to court papers.
Both were known, or became known, to the firm's principals, who signed off on the returns anyway, the suit states. For blowing the whistle, tax accountant Gary Winston says he was fired, or, in legal parlance, subject to "wrongful termination in violation of public policy."
It's not clear from the article whether the 'whistleblowing" involved the IRS whistleblower program, which can reward snitches up to 30% of taxes collected as a result of the information provided to the IRS.
If the plaintiff collected an IRS reward, the lawsuit seems a stretch. Potential whistleblowers have to weigh a tradeoff: it's asking a lot of your employer to keep you on the job after you've sold your partners and clients to the IRS, and it's not likely another firm will be eager to take you on. If you can collect 30% of a $10 million underpayment, though, you just might be willing to give up that public accounting career.
Which entity is best? That's a discussion to have with your tax advisor. If you don't know what to do, start with the partnership or proprietor formats; if nothing else, they are the easiest formats to change. C corporations are the only ones that can cause your income to be taxed twice -- when earned and when distributed -- so make sure you really know what you're doing before you go that way.
I would add the famous Bittker and Eustice admonition:
Decisions to embrace the corporate form of organization should be carefully considered, since a corporation is like a lobster pot: easy to enter, difficult to live in, and painful to get out of.
While accurate records of business mileage are vital when the IRS examiner comes calling, keeping them is a hassle. That's why the $3.99 iPhone mileage tracking application might be the best thing for the traveling entrepreneur since, well, the cell phone. Details at TaxGuru.net.
So what if the state faces a billion-dollar budget shortfall. Never mind that the state still hasn't finished paying for the 2008 floods, or that schools are having to choose between math and music. Des Moines Register Columnist Rekha Basu has more urgent uses for your tax money: swell parties.
Ms. Basu realizes that Iowa's $77 million subsidy for filmmakers has critics:
But the tax credit has its detractors on the Iowa Legislature and among some who work with vulnerable populations. They fear it drains revenues from services.
But they'd feel differently if they were cool enough to make the A-list:
But some benefits can't just be measured on a dollar-for-dollar basis. The movies provide employment to local actors, construction crews, artists, caterers, drivers and a host of others. They expose non-Iowans to what the state has to offer. More intangible is the benefit of interactions in a state that can be cut off from the trends and centers of power. Not to mention the excitement factor. We've relied on caucuses every four years to bring action and celebrities to town. Now, sightings are anytime, any place.
Saturday, "The Experiment" had a wrap party downtown. Brody and Whitaker were there, mingling and posing for pictures. Frank Meeink was there. The Iowan who may have inspired the 1998 "American History X" has an acting role. Deb Cosgrove, the nurse, was there. She's been tending to the medical needs of the film's luminaries. Casey Gradischnig, local multi-media designer, was there. He's been working for Whitaker.
And if you don't get invited to A-list parties, maybe you can get a temporary job as a driver when your employer flees to South Dakota to get away from the nation's 7th-worst business tax environment.
Ms. Basu throws in a clincher argument:
One way to look at this: It's creating a niche for Iowa, just as companies do when they move call services to India. And for once, we're not on the losing end of the outsourcing.
Of course India doesn't have to pay half the salaries of call-center workers with tax money. But then India doesn't get the sweet movie-star parties.
Many businesses have come to regret a gimmicky life insurance plan that seemed like a great idea when the salesman explained it. Now the University of Northern Iowa has joined this unhappy crowd, reports the Des Moines Register:
Nearly 1,700 contributors to a University of Northern Iowa athletic scholarship fund lost an estimated $6.8 million in accumulated insurance this year when school officials determined the benefit violated federal tax law, according to documents obtained by the Des Moines Sunday Register.
The donors and the university may owe the federal government three years of back taxes because it took so long for them to recognize that the program should have been discontinued 10 years ago, when tax law was changed, school officials acknowledged last week.
The donors received term life insurance credits based on the amounts donated. Unfortunately, the tax law doesn't care for such arrangements:
In 1999, Congress had approved two changes in the tax laws governing charities. Under one change, a donor's contribution would not be tax-deductible if the charity paid an insurance premium on behalf of the donor and the beneficiary was the donor or a member of the donor's family. The second change imposed a 100 percent excise tax on the charitable organization for any amount of money spent on an insurance policy premium for the donors - estimated by UNI officials at $50,000 annually.
So - no deduction for the donors, and a big tax penalty for UNI. Not good for the Panthers.
I believe these harsh provisions arose because of "Charitable Split Dollar" plans marketed in the 1990s, usually in cooperation with the now-bankrupt charity National Heritage Foundation. The plans purported to make life insurance purchases deductible, with the charity basically taking a fee for taking part in the deal.
The Moral: The tax law governing life insurance is very complicated. When the the salesman tells you that he has a product that will give you insurance free because of special tax benefits, make sure to talk to your tax pro before you sign.
Some of the 4,500 Swiss bank depositors who will be unmasked by last week's UBS settlement will soon have to contend with an absolutely ruthless, implacable and vengeful foe.
Ex-wives, creditors and former business partners are also salivating over the idea that a settlement between the U.S., the Swiss government and a Swiss bank may lead to the public disclosure of as many as 4,450 U.S. individuals that used the foreign bank accounts to hide money. Prominent New York City divorce lawyer Raoul Lionel Felder says he is already getting calls from clients who want to know what they can do to get their portion of the money they always suspected their ex–loved one had tucked away overseas.
"You see allegations of Swiss bank accounts in divorce proceedings all the time," says Felder, whose clients have included Rudy Giuliani, Robin Givens and the former Mrs. Martin Scorsese. "A lot of divorces are going to get opened up."
Some First Husbands will no doubt be seeking an offshore amnesty from their exes. Good luck with that. Meanwhile, some First Wives will no doubt be disappointed that their starter husband failed to make the list. Better luck next time.
UPDATE: More from the Tax Policy Blog.
A concerned mom asks tax attorney TaxGrrrl if her daughter has to file the "FBAR" form, Form TD F 90-22.1, for a bank account she set up while studying abroad.
When you buy stuff from E-bay or Amazon and pay no sales tax, it's not really supposed to be "tax free." If the seller doesn't charge sales tax, the buyer often is supposed to make it up by sending the state a check for "use tax." Businesses tend to file use tax returns because this gets looked at in their sales tax audits. Individuals, on the other hand, rarely pay their use tax, much to the chagrin of the state revenue collectors.
Kay Bell ponders the issues of use tax noncompliance and concludes:
And until states can come up with a reliable third-party way to track residents' taxable out-of-state purchases, they will continue to lose this potential revenue.
What the states are trying to do is get Amazon and other online retailers to do the collecting for them. I expect someday that Congress will mandate that.
The IRS yesterday lost its bid for a preliminary injunction against Clive tax preparer Howard Musin and the tax prep firm he runs with his wife, Jill Schwartz-Musin. The IRS had argued that the firm should be shut down immediately, pending a permanent injunction, because of alleged practices including deducting personal "image" expenses and bogus rental deductions.
This is the second recent failed bid we know of where the IRS has failed to win a preliminary injunction -- the other being the St. Louis-area Zerjav case. In both cases the IRS still is pursuing the permanent injunction, but the preparers can stay in business for now. As a preliminary injunction of a preparer is the business equivalent of execution before trial U.S. Magistrate Judge Bremer was unwilling to pull the trigger based on the IRS evidence to date:
The Court finds here, as in Zerjav, that the injury to the Government if the preliminary injunction is denied is outweighed by the certain injury to Defendants should the preliminary injunction be granted. See Zerjav, No. 4:08CV00207 ERW, 2009 WL 912821, at *30-31. The balance of harms tips the analysis in favor of Defendants.
The court appears to believe the IRS overplayed its hand:
The Government’s case does not support a preliminary injunction. The record shows that while the initial audits of targeted taxpayers do demonstrate the need for further investigation, on this record, it cannot be said that the gravity of the harm is extensive, that the infractions are not isolated (in light of the few number of returns audited in proportion to the overall number returns prepared by Defendants), or that Defendants deny culpability or do not have a sincere belief that the positions taken on clients’ returns could be reasonably sustained on the merits.
The preparers here are by no means out of the woods. There have been at least two recent Tax Court defeats for taxpayers who appear to have used the Clive firm (see here and here). They are also having to defend themselves out of their own resources against the world's largest law firm, the Department of Justice, whose client has the world's deepest pockets. But they are still in business, and that's no small achievement.
The Zerjav and Musin cases do make it appear that the IRS might be sloppy in some of its preparer injunction cases. Both cases were launched with press releases alleging egregious preparer behavior. In both cases they were unable to convince the judges that the preparers needed to be shut down immediately. It seems that what the IRS had to show the judge wasn't as conclusive as their press releases implied.
The IRS seems to win many more of these injunction cases than it loses (though they don't issue press releases for the ones they lose, so we don't know how common such losses are). There certainly are bad preparers out there, and they should be stopped. But it does make you wonder: if the IRS is sloppy in taking preparers before a real federal judge, do we really want a preparer regulation regime where the IRS would be prosecutor, judge and jury?
When you have a business that generates a lot of actual green dollar bills, it can be tempting to not tell the IRS about all of them. The problem is, it's difficult to convert large quantities of greenbacks into convenient spendable form without the IRS noticing.
The owner of the King of Diamonds strip club in Inver Grove Heights, Minnesota, thought he had solved the problem when he stocked the ATM in his strip club with his club cash receipts, diverting amounts from another account earmarked for the ATM for his own use. Somehow the IRS caught on anyway, and yesterday the owner, Larry Kladek, got 20 months in federal prison on tax charges.
Prior coverage: Taking it off (the tax return) at Minnesota strip club
From the "I don't think that word means what you think it means" department, we have this from The Des Moines Register:
Tram seen as asset to D.M.'s downtown
Des Moines is a prime candidate for a downtown tram, a feasibility study released Thursday shows.
The proposed tram, which initially would cost an estimated $104 million to build and $5.6 million annually to operate, would run on electrified rails on a route that links downtown's Western Gateway Park to the East Village. The alignment creates a four-mile loop between East Sixth and 15th streets.
So it would cost $104 million (you know it would cost more), but bleed $5.6 million annually. Some asset.
If you brought this sort of proposal before a corporate board, you'd have to flee for your life. Only somebody playing with somebody else's money would sit still for this sort of nonsense. The idea that the highest and best use for this much money is to run empty trolley cars back and forth 21 blocks is an indictment of our politicians, and ultimately of the rest of us who elect them.
The IRS will settle for getting the names of 4,450 of the 52,000 or so UBS Swiss bank account holders it was seeking as a result of this week's settlement with UBS. That might not seem like that many, but criminal tax attorney Jack Townsend thinks that might be enough for now:
The agreements do not state the criteria that will be used to identify the 4,450 (approximate) that UBS will disclose. Without the criteria, UBS' U.S. account holders will not know whether they have drawn the black bean. Each UBS U.S. depositor who has not already joined in the IRS' voluntary disclosure program will not have certainty that his name and account(s) will not be picked. It is true, that the letter UBS is required to use to notify the account holders who draw the black bean will notify the account holders that they can still get in the program. But, the program only lasts through September 23, 2009, and it appears that the picking of names will extend beyond that date.
So taxpayers wavering on whether to jump on board the IRS offshore account amnesty have to wonder if they will win a bullet should they choose to play Spin the Revolver instead of coming clean. Mr. Townsend adds:
Also, an essential part of the voluntary disclosure program and the names that get targeted by this round of UBS turnovers will be to learn the identities of the as many of the U.S. taxpayers' enablers that the U.S. can then bring to justice -- at least the most abusive of the lot. There will be lots of tentacles into U.S. lawyers, financial advisors and others who, like ordinary tax shelter promoters, raked off their share of the taxes that should have been paid to the Government.
So even if someone with an undisclosed Swiss account doesn't lose this round of Russian Roulette, it might go badly if one's financial advisor starts singing to shorten his own Club Fed vacation. Even if you didn't use UBS, can you be sure that the fellow who helped you stash money offshore didn't also have UBS ties?
TaxGrrrl has similar thoughts.
Related: FBAR FUBAR? THE IRS MAY CUT YOU A DEAL.
...will "Gratitude Day" catch on as the new name for the April 15 tax deadline.
In the first test of the "Distressed asset/Debt," or "DAD," tax shelter, a U.S. District Court in Texas Tuesday disallowed $1.1 billion in tax losses claimed by #321 in the Forbes 400 list of rich folks. The TaxProf has the scoop.
While China long ago stopped looking to Russia for economic guidance, they still see things to like in the way Russia governs:
Prosecutors have charged one of China’s leading public-interest lawyers, Xu Zhiyong, with tax evasion, his lawyer said on Tuesday, continuing a government crackdown on this nation’s small band of activist lawyers and scholars that has lasted months.
Xu Zhiyong led a nonprofit group that often has taken on high-profile civil rights cases.
Mr. Xu, 36, is a founder of the Open Constitution Initiative, known in Chinese as Gongmeng, a nonprofit group that often has taken on high-profile cases involving citizens’ civil rights.
Russia, of course, has for some time used tax charges to put down opponents too prominent to just murder. The more byzantine and obscure the tax law is, the easier it is to get away with this sort of thing. Know any tax laws like that?
A New Mexico farmer has been charged with skipping out on $18 million in taxes. Roger McEowen of the ISU Center for Agricultural Law and Taxation looks at it with an Ag perspective: "Federal Government Recognizes New Mexico Farmer For Huge Yields"
How would you like to read this news about your payroll service provider:
A Monroe County grand jury charged Jeffrey A. Sykes with the felonies of second-degree grand larceny and second-degree criminal tax fraud.
Sykes, 49, of Wayland, Steuben County is expected to be arraigned within the next few weeks. He is free on $30,000 bail.
Sykes, owner of Paybooks Inc., was arrested in June after the office of Attorney General Andrew M. Cuomo froze the company’s assets, alleging that he defrauded businesses of more than $2 million by taking clients’ money intended to pay taxes and spending it on his personal and business expenses.
The Rochester, New York-area provider's clients included lawyers, non-profits, and small businesses.
When a payroll service provider steals withheld taxes, the IRS still wants the money, and they expect the defrauded businesses to pay up. That can ruin a small business. That's why business owners should sign up for the Electronic Federal Tax Payment System ("EFTPS") -- even if they outsource their payroll function. EFTPS users can go online and make sure that their payroll provider is making the deposits to the IRS, rather than his Caymans bank account.
State tax breaks will take a bigger bite out of revenue than previously estimated — about $478 million next year, the Register reports. That’s about 50 percent higher than last year. The biggest jump has come from the movie tax credit, which lawmakers sweetened in an effort to attract more films.
It worked — feature films starring the likes of Adrien Brody are being shot here. The news is sure to have lawmakers revisiting that tax break and possibly others. It’s appropriate to ask what Iowa is getting in return for the credits. How much of this business activity would be here anyway?
In the case of the movie credits, we already know the answer — almost none. So unless the state is giving away more in credit than movie companies are spending in Iowa, the break may make sense.
Yes, we see what films get made before the film crews leave town and the temporary film jobs go away. What we don't see is what could have been done with that money in other hands, but common sense tells you Iowans spend their own money better than the legislature does. How many Iowans would give their money to film producers for nothing if they didn't have to as part of their taxes?
Related: Hello, Hangover!
Tax Grrrl explains the ins and outs of deducting beauty pageant costs, with a disturbing picture thrown in at no extra charge.
You'd think a cop would know that crime doesn't pay:
A former Minneapolis police officer was sentenced to 10 years in federal prison Tuesday for not paying taxes and showing others how to avoid paying taxes as well.
Douglas Leiter and two co-defendants were convicted in December of conspiracy to defraud the IRS out of more than $1 million. Six people in all were indicted in the scheme.
Twin Cities drivers may have cause to be thankful:
He was also notorious for a 1998 high-speed chase in which his squad car struck a pickup truck and killed two people in south Minneapolis. Following the crash, he was charged with two misdemeanors but not convicted. The families of the victims each received a $300,000 settlement from the city.
There's no mention that he has raised the Richard Hatch defense --"they're out to get me because I'm gay" -- but that might be coming:
In 2001 Leiter was suspended for 60 hours in connection with an off-duty search for records regarding his one-time housemate and former priest Timothy McCarthy, who had been accused of criminal sexual contact with an inmate at the Hennepin County juvenile detention center.
Because when you're not gay, it's perfectly fine to cheat the IRS out of $1 million. Just ask Richard Hatch.
Richard Hatch says he was imprisoned for being gay.
Let's see. He earned a million dollars in front of a national T.V. audience and left it off his tax return. He was convicted of evading tax on that, plus another $300,000 or so of radio earnings. Gay, straight or indifferent, that's a recipe for jail time.
The IRS has issued (Rev. Rul. 2009-29) the minimum required interest rates for loans made in September 2009:
-Short Term (demand loans and loans with terms of up to 3 years): 0.84%
-Mid-Term (loans from 3-9 years): 2.87%
-Long-Term (over 9 years): 4.38%
The Long-term tax-exempt rate for Sec. 382 ownership changes during September is 4.48%
The Iowa legislature has been on a corporate welfare tax credit spree in recent years. The state now has dozens of "economic development" tax credits. Foregoing taxes for favored constituents is hard to tell from spending; in fact, many of these credits are transferable or refundable, which makes them identical to spending.
As college students quickly learn, a good binge is merely the prelude to a good hangover, and the headache has set in, reports the Des Moines Register:
Tax breaks will take a $160 million bigger bite out of Iowa's revenue this year than last, including sizable increases for movie productions and historic renovations, a state report released Monday shows.
The $478 million total projected cost of tax breaks - a 50 percent spike from the previous year - will place more stress upon an already troubled state budget, both Democrats and Republicans acknowledged.
To put this corporate welfare in perspective, the entire net receipts of Iowa's highest-rate-in-the-nation corporate income tax is projected at $376.2 million for the current fiscal year.
Like many folks who wake up after a binge with a splitting headache and a stranger in the bed, the legislators are discovering the virtues of temperance:
"I think the report shows the need not only for a cap of these credits but also for continued scrutiny so these programs don't break the bank," said Sen. Joe Bolkcom, D-Iowa City, chairman of the Senate Ways and Means Committee.
Senate Republican Leader Paul McKinley of Chariton also called for more oversight of tax breaks, which he said are heavily overused.
"Any time government gets involved in picking winners and losers rather than treating everybody fairly and the same, it distorts the marketplace," McKinley said.
Better wise late than never. Still, it's worth noting that when these guys had the chance to close down the party, they sent out for more kegs. Consider Iowa's film credit, perhaps the most outrageous special interest subsidy this side of renewable fuels. This credit was enacted in 2007 and has already risen to over $77 million in spending. Both Senators McKinley and Bolkom voted for the film credits, as did all but 3 of the 150 legislators.
Iowa has a special tax break for capital gains on the liquidation of a business or farm that has been held for 10 or more years; taxpayers also have to "materially participate" in the business for 10 years to qualify.
A new ruling by the Iowa Department of Revenue illustrates that while your spouse's participation counts toward the 10-year material participation requirement, you don't get credit for your parents' work:
In this case, the capital gain will be reported by the surviving children. From the facts presented, the children have not been materially participating in the operation of the farm over the immediately preceding ten years. A nephew of the deceased farmer has been cash renting the property over the preceding ten years. The fact that the deceased farmer materially participated until the date of his death does not impact the material participation test for the surviving children. The children have not met the ten year material participation test, so any capital gain from the sale of the farmland would not qualify for the Iowa capital gains exclusion.
The tests for material participation are generally the same as for the federal passive loss rules; they are summarized below. Farmers qualify for special material participation rules for the Iowa capital gains deduction.
MATERIAL PARTICIPATION BASICS
The tax regulations say you achieve "material participation" in non-real estate activities for a tax year if:
-You participate at least 500 hours; or
-You participate at least 100 hours and at least 500 hours in that and other "100 hour" activities; or
-You participate at least 100 hours and more than anybody else, or
-You are the only participant; or
-You materially participated in five of the past ten years )or in any three years for a service activity).
There is also a "facts and circumstances" test, but don't count on it.
A special rule apples to real estate. If you are not a "real estate professional," losses are normally passive no matter what, unless you provide "extraordinary" personal services.
If you are a "real estate" professional," you can apply the normal material participation rules to determine whether you have a passive activity. To be a real estate professional, you have to spend at least half your working hours - not less than 750 hours annually - in "real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade."« Close It
South Dakota has no corporate or individual income tax. This makes it a very attractive state to establish businesses. A candidate for South Dakota Governor wants to put a stop to that nonsense. David Brunori reports:
In the words of the hippies and yippies at Woodstock, that's crazy man. But Ron Volesky, a long time Democratic lawmaker running for Governor, is calling for an income tax. Well, he is calling for an income tax on corporate profits -- not on individual income. Still, South Dakota is one of nine states without a broad based income tax and most politicians run like crazy from the idea.
As well they should:
The last time anyone seriously proposed an income tax in South Dakota was in the early 1970s and the Democrats behind the idea were hammered in the following elections.
Iowa's corporate income tax raises less revenue than Iowa's corporate welfare breaks give away. Why would South Dakota find that attractive?
A reminder to fellow bloggers: trackbacks are now enabled here. If you track back posts linking to a Tax Update post, you alert our readers to your post. I am making a point of checking the trackback spam logs more frequently, so your trackbacks won't be for naught.
By passing a proposal that would make owners of LLCs personally liable for employment law judgements and settlements. Marc Ward comments:
If this law is passed you can kiss LLCs in Iowa good-bye. The Legislature will also make it very difficult for out-of-state businesses organized as LLCs to do business in this state. In other words, the preferred business entity, chosen by 77% of all new businesses in the State of Iowa, will be persona non grata. Don't let any legislator who votes for this bill try to tell you they are pro-business or an advocate of business development in Iowa because they are not.
Bills like this make me wish the legislature only would meet every 10 years or so.
The recent edition of the IRS's Retirement News for Employers reminds employers that required minimum distributions from defined benefit plans are still required for 2009 and that the 2009 waiver does not apply to these types of plans.
That means self-employed taxpayers who used a defined-benefit Keogh plan to stockpile their retirement savings still have to take any 2009 required distribuitions or pay the 50% excise tax for failure to distribute.
If you are in the Des Moines area tonight and are looking for some good music, check out the swan song of Joey is Just an Alias, at least in it's current format. "Joey" is a jazz-fusion combo featurning some of Iowa's best young musicians, several of whom are about to go away to college. Java Joe's, 4th Street (between Court and Walnut), Des Moines, 8:00 pm.
Joey is Just an Alias plays "Watermelon Man" at the 2009 Iowa City Jazz Fest.
Full disclosure: I'll be paying tuition for the bass player.
Another UBS client pleaded guilty Friday to charges arising out of unreported Swiss bank accounts. There are apparently many more of these cases coming, not that UBS has struck an agreement with the IRS to release the names of thousands of their U.S. depositors.
Jack Tonwsend at the Federal Tax Crimes Blog says the IRS is making a point:
Most importantly for those with foreign accounts who are considering joining the voluntary disclosure program, in announcing the plea, the IRS CI Chief cautioned that the McCarthy prosecution is "the tip of the iceberg." The IRS already has a number of names from UBS and is about to get many thousands more UBS names. Moreover, as I have previously noted, the Swiss justifications under the Swiss-U.S. double tax treaty would seem to permit similar disclosures by other Swiss banks. And, of course, the problem is not just a Swiss problem. All undeclared foreign bank accounts create great risk. I think it would be imprudent to assume that this is a Switzerland only or UBS only initiative.
He also says that the IRS may be tightining the screws on those who don't come clean; the maximum sentence for the crime in the most recent plea deal is higher than that in the prior UBS plea agreements:
Facially, therefore, the McCarthy plea carries the risk of a longer sentence (5 years rather than 3). The sentence will actually be governed by the sentencing court using the § 3553(a) factors and considering the Guidelines calculations. I will talk about these sentencing considerations in a subsequent blog, but for now I just want to emphasize that this plea ups the incarceration ante.
The offshore amnesty deal expires for most filers September 23. The IRS may be giving those who have yet to take advantage of the deal an offer they can't refuse.
* four (4) percent for overpayments [three (3) percent in the case of a corporation];
* four (4) percent for underpayments;
* six (6) percent for large corporate underpayments; and
* one and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000.
While the Iowa State Cyclones have struggled lately on the football field, they're kicking butt in Gucci Gulch. Among Iowa's state schools, only Iowa State made the Top Ten in congressional pork earmarks (via the TaxProf):
1. University of Alabama ($40,550,000 in earmarks) 2. Mississippi State University ($16,625,000) 3. University of Mississippi ($12,600,000) 4. University of Mississippi Med. Center ($6,500,000) 5. Iowa State University ($4,500,000) 6. University of Southern Mississippi ($3,900,000) 7. University of North Dakota ($3,000,000) 8. Morgan State University ($3,000,000) 9. Phoenix House ($2,950,000) 10. Loma Linda University Medical Center ($2,800,000)
The big score was a $3 million earmark for a forensics lab. Northern Iowa scored $950,000 "to create a national institute to improve science, technology, engineering and mathematics education by focusing on young children."
The mighty Hawkeyes, alas, appear to have been shut out. Better luck next year.
It's time to visit to the Iowa State Fair. I know, you're jealous. Have a great weekend!
While the Tax Court earlier this week said a basis understatement doesn't "omit" gross income for purposes of extending the statute of limitations for assessing taxes, "netting" gains and losses does.
The IRS normally has three years to assess underpaid taxes. If a taxpayer omits 25% or more of gross income from a tax return, the IRS gets an extra three years to assess. A tax shelter partnership set up by the now-defunct Jenkens and Gilchrist law firm used offsetting foreign exchange option contracts to create non-economic tax losses. The partnership netted the offsetting gain and loss, presumably to help keep the IRS from noticing the big offsetting transactions. The Tax Court didn't care for this:
In an attempt to disguise the purpose of the partnership and the option transactions, Highwood and the partners reported a net loss on the offsetting options rather than separately computing gain and loss for each section 988 transaction as required by section 988. Highwood and the partners netted the gain and loss from the long and short options to conceal the fact that the partners contributed both long and short options to the partnership and to conceal the fact that Highwood increased the partners' outside bases by the premiums on the long options unreduced by the premiums on the short options. Reporting the offsetting options as a net section 988 loss is misleading and is not adequate disclosure of the nature, amount, or existence of the gain from the short options to apprise respondent of the omitted gross income.
Bottom line: not separately reporting the gain portion of the offsetting positions separately "omitted" gross income, triggering the six-year statute.
In a big-deal case for public companies, the First Circuit Court of Appeals ruled yesterday that running tax accrual workpapers through a law firm doesn't turn them into "work product" protected by attorney-client privilege. The First Circuit reversed a district court ruling that held that the workpapers were privileged.
It always seemed that this was a too-good-to-be-true result. It would have been great for corporate law firms, though, as they would have been participants in the annual financial statement audit revenue stream had the district court ruling stood:
Textron apparently thinks it is "unfair" for the government to have access to its spreadsheets, but tax collection is not a game. Underpaying taxes threatens the essential public interest in revenue collection. If a blueprint to Textron's possible improper deductions can be found in Textron's files, it is properly available to the government unless privileged.
To sum up, the work product privilege is aimed at protecting work done for litigation, not in preparing financial statements. Textron's work papers were prepared to support financial filings and gain auditor approval; the compulsion of the securities laws and auditing requirements assure that they will be carefully prepared, in their present form, even though not protected; and IRS access serves the legitimate, and important, function of detecting and disallowing abusive tax shelters.
So true. That's the first of ten keen "Random IRS Observations" by Peter Pappas.
The estate tax is scheduled to go to a better place for folks dying next year, but return like Lazarus in 2011, thanks to the botched Bush-era effort to enact a total repeal.
Now Congress is considering a one-year fix to delay the fix they've delayed since 2001:
The House will likely propose to scrap the one-year repeal and instead extend 2009 estate-tax rates for another year, according to congressional aides. At current levels, the first $3.5 million of estate wealth is exempt from the tax. Above that amount, wealth is taxed at a 45% rate.
If this happens, look for the Estate tax to become a great big perpetually-expiring provision, like the alternative minimum tax patch that has been re-extended a year or two at a time since 2002 or so. It's the lobbying industry's version of a guaranteed annual income.
Mr. Flach gets it right. You will save yourself a lot of time at tax time, and a lot of grief in an IRS exam, if personal is personal, business is business, and that's that. Run your business like a business.
David Brunori says our poor state governments are just starving, and we must give them more money:
This is What Happens When you Don't Raise Taxes
Stateline.org reported yesterday that at least 23 states have ended up cutting the budgets for prisons as a result of the economic crisis. Some of the cuts have been in the form of staff lay offs. The Illinois governor just announced he is laying off 1,000 guards. Some of the cuts are in the form of treating the inmates a little less well (Tennessee is giving prisoners less milk and meat). Other states are cutting back on rehabilitation programs, education services, and other things designed to make the prisoner fit into society when he or she is released.
Prisons are sadly underfunded in the best of times. While it's not supposed to be fun, the degrading and shocking violence inside prisons is a disgrace. But felons don't have lobbyists, and they are an easy target for legislators, who would rather not face up to the politically powerful unions and corporate welfare interests who are at the front of the trough. Consider California's unbelievable public pension black hole. Or just consider how much money Iowa shovels to the well-connected through Vision Iowa and the Iowa Power Fund.
Prisoners don't get the crumbs because states lack money; it's because the prisoners don't have enough lobbyists.
UPDATE, 8/15: And what cash does go to the prison system gets siphoned off by the usual suspects.
Leave it to the Congressional Research Service to discover the obvious:
Currently, both the top individual and the top corporate tax rates are 35%. However, President Obama's FY2010 budget proposes allowing the top individual tax rate to revert to its pre-2001 level of 39.5%. In addition, indications are that legislation similar to H.R. 3970, which was introduced in the 110th Congress by Chairman of the House Ways and Means Committee Charles Rangel and would have lowered the top corporate tax rate from 35% to 30.5%, may be introduced in the 111th Congress. In response to either one of these proposals, economic theory and data would suggest that some pass-through businesses could choose to reorganize as C corporations to take advantage of the more favorable corporate tax schedule.
I'd link to the report, which provides a very useful summary of the different ways you can organize your business, but the Congressional Research Service has perhaps the most useless web site in the world, with no links to CRS reports. The report is not yet on a private site set up to remedy this deficiency, OpenCRS.com. If you subscribe to Tax Analysts (and you'll be happy if you do), you can find the report here ($link)
Tax evasion plea bargains get worked out quietly in law offices and government conference rooms, and they usually go unnoticed by everyone not directly involved. But a plea deal involving a New Jersey developer is becoming an issue in the New Jersey governors race.
Well, not entirely:
A Montgomery (Alabama) man has been sentenced to more than eight years in prison for conspiring to defraud the U.S. government through the filing of false and fraudulent tax returns.
Tommy Jordan, 56, was sentenced by U.S. District Judge Myron H. Thompson on Thursday. His conviction Jan. 9 also included 26 counts of aiding and assisting in the preparation of false federal income tax returns, according to a news release from U.S. Attorney Leura G. Canary. Thompson also ordered Jordan to pay $93,000 in restitution.
And there's this:
A retired IRS agent from the Kansas City, Missouri, area will serve nearly four years in federal prison and repay over 10.6 million dollars to his former employer for tax fraud.
Prosecutors said today the terms were imposed after 72-year-old
Thomas W. Steelman of Blue Springs earlier admitted to involvement with the now-defunct tax-preparation firm "Renaissance, the Tax People" of Topeka, Kansas.
Somehow it seems unlikely that having an IRS-imposed continuing education requirement would have saved these folks from crossing to the dark side. In fact, in the second case, it clearly didn't. And the sanctions they face are much worse than anything an IRS preparer regulatory board is likely to dish out.
Prior Tax Update Coverage: TOPEKA RENAISSANCE COMES TO BAD END; MADISON CASBAH ROCKED
Of all the strange minor league promotional ideas, this is definitely one of them:
"Flooded with e-mails and phone calls" opposed to its "Traficant Release Night" promotion, the Mahoning Valley Scrappers are "strongly leaning" toward canceling the Sept. 2 event intended to acknowledge the ex-congressman’s release from federal prison, the team’s general manager said.
The promotion was never meant to "celebrate" the release of James A. Traficant Jr., said Dave Smith, the Class A short-season minor league baseball team’s general manager.
Traficant will be released from prison Sept. 2 after serving seven years for racketeering, bribery, obstruction of justice and tax evasion.
Mr. Traficant was convicted of failing to report taxable income from bribes. His defense: he was conducting a do-it-yourself sting operation to root out political corruption. Sure he was.
Via Russ Fox.
I hear that today is "Recycle a Blog Post Day" (via Mike Sansone), so I'm pulling a favorite out of the virtual compost pile, preserving our nation's irreplaceable supply of random words:
In a tearful virtual press conference held at their corporate headquarters, Roth & Company spokesman Joe Kristan recanted his opposition to targeted tax breaks and vowed to accept massive government subsidies on behalf of the firm.
"We are really excited about the new Microsoft server farm. The bipartisan enthusiasm for taking money from taxpayers and giving it to selected businesses frankly moved us," said Kristan. "With Microsoft receiving tax breaks worth $40 million to create 50 jobs next year, and maybe 75 eventually, we realized that our 35-employee firm must be eligible for $28 million or so." While the Microsoft benefits are in the form of tax breaks, said Kristan, "We prefer cash. We've already created the jobs and have been doing so for years. We're willing to swallow our pride and take money for it. We could charge interest and muck up the tax law, but we're a good corporate citizen. We'll just take the money."
Kristan pointed out that it was a better deal for the state than the Microsoft server farm in a number of ways. "We're using a building that's already there. You don't have to put in roads or run fiber lines. Just write us a check. A wire transfer would be fine too."
Kristan said the firm was committed to creating "dozens, maybe hundreds of thousands of jobs" eventually -- "someday, somehow, somewhere."
The firm, which was started in 1990, plans to use the money on a number of projects. Kristan said it would be nice to have a couple of fully redundant sets of file servers for the office. "Not so much a server 'farm' as a server patio garden," he explained. The firm also plans to install a state of the art coffee maker to provide fresh brewed coffee from freshly-ground beans on demand. The remainder of the funds are expected to be used to fund energy independence, affordable health care and retirement security for the firm's owners.
"We thank Governor Culver, Senator Grassley, Congressman Boswell and Senator Gronstal for opening our eyes to the benefits of these targeted incentives," said Kristan. "We are confident that the necessary legislation will pass. All it will take is for our elected officials to give our proposal the same scrutiny they gave to the proposals by Microsoft and Google."
The three-year statute of limitations for assessing taxes is what lets preparers get a good nights sleep, knowing that sins committed before we really understood that one code section early in our careers are forgiven That's why the prospect of an extended statute of limitation gets our attention.
The tax law provides a six-year statute of limitation when "gross income" is understated by 25% or more. An S corporation owner used what appears to be a basis-shifting tax shelter to generate basis to reduce gain on a sale of corporate stock. The Tax Court yesterday ruled that because the taxpayer reported the gross sales price correctly, there was no underreported amount, and the taxpayer is protected by the three-year statute of limitations.
This could be a big deal for taxpayers who used Son-of-Boss type basis-shifting shelters for which the three-year statute has run.
There is no statute of limitation for assessing tax when fraud is involved.
Russ Fox has more.
Iowa just had its sales tax holiday last weekend. It's fine as far as it goes, but not everybody wants to buy clothes and shoes, as the good people in Louisiana have figured out:
Gov. Bobby Jindal (R) has signed into law a measure that calls for his state to hold its own three-day Second Amendment Sales Tax Holiday each year starting on the first Friday in September.
This year, that means the tax-free firearms holiday will fall on Sept. 4-6. During that time, the state as well as local jurisdictions will forgo collection of sales taxes on firearms, hunting supplies and ammunition.
So put on your best tax-free outfit and drive south for Labor Day!
Paul Neiffer, a Central Washington CPA with lots of ag clients, sent us a nice note introducing his farmcpatoday.com blog. Check it out!
Folks in the East Front Street neighborhood in Statesville, N.C. don't appear to be the sharpest knives in the drawer:
Statesville Police Department Chief Tom Anderson said police were called to a vacant home that belongs to Gene Medlin on Sunday night.
Though no one was living at the house, there was property stored inside, Anderson said.
Officers spoke with neighbors in the East Front Street area and learned two men came to the house around noon Sunday.
The two men told neighbors they were with the IRS and the house was being seized. The men told the neighbors they could take whatever they wanted from the house after they retrieved some property, Anderson said.
The two men took a weed trimmer, jewelry, a chain saw and a utility trailer from the property.
Some neighbors helped themselves to various pieces of furniture, food items and other property, Anderson said.
Right. Because when IRS agents seize a house, the first thing they do is secure the Weed Whacker. The party ended when one neighbor got suspicious. The police made the neighbors return the stuff they took, but the "IRS Agents" are still at large.
Via The TaxProf
There's a concert tonight at Simon Estes Amphitheater in Des Moines tonight. I hope to see you there! Whether you're going to the show or not, you can't pass up the new Cavalcade of Risk hosted by Chatswood Consulting. The blog world's regular rundown of insurance and risk management posts is heavy on health insurance this time; don't miss Insureblog's innovative obesity control program. It's just crazy enough that Congress may pass it.
Tonight's concert will be on the stage under the arch in the above picture from last summer -- well, under the arch and maybe 10 or 15 feet of muddy water. Should be high and dry tonight.
The Tax Foundation reports that the United States has the second-highest tax rate among developed countries.
They also recently reported that the top 1% of taxpayers pays more federal income tax than the bottom 95%. That report triggered the standard response that this doesn't count payroll taxes.
The Tax Foundation tax burden numbers have another important omission -- one that goes the other way. The individual tax burden numbers don't take into account the hidden individual tax burden of corporate taxes. If a corporation pays a 35% tax and then distributes the after-tax earnings as a dividend, the tax burden numbers only show the 15% tax. The real burden, of course, is the combined corporate and individual rates - 44.75%. This rate will rise to 51.6% in 2011 when the Bush tax cuts expire. And if the dividends are ultimately taxed as ordinary income because the come out of a retirement plan, the burden is even higher.
So when your progressive friends say the Tax Foundation is wrong when they talk about how much the rich pay, let them know that yes, it's even worse than that.
Even if you are sure you don't owe money on your tax return (and how sure are you, really?), it's still wise to file and claim whatever refund you have coming. A refund delayed too long is a refund denied, as a Pennsylvania woman learned last week in the Court of Federal Claims.
Cynthia Doyle had a refund coming of $12,785.02 for 2002, including $10,000 she paid with an extension request. If she ever filed her 2002 return, the IRS had no record of receiving it, and Ms. Doyle apparently had no evidence that she had filed. The IRS contacted her in October 2006 asking for her return - conveniently after the statute for limitations for a 2006 refund had expired.
While the taxpayer said she had filed on time and had asked for the overpayment to be applied to her 2003 taxes, the IRS said it was up to her to prove it:
However, absent being eligible for an exception under § 7502, a taxpayer's own uncorroborated testimony to show timely mailing is not enough to establish a presumption of delivery under any view of the law. Id. at *3.
In this case, plaintiff does not allege she used either registered or certified mail when she sent her original 2002 Tax Return. See, e.g., Compl. at ¶ 47 ("I have never sent tax returns certified mail. . . ."). Absent proof of such mailing, plaintiff is ineligible for the § 7502(c) exception to the physical delivery rule... In view of the fact that plaintiff cannot establish that she timely mailed an original 2002 Tax Return, the physical delivery rule dictates that plaintiff's 2002 Tax Return was deemed filed when it was received by the IRS on October 30, 2006. (emphasis added)
We can take away two things:
- If Ms. Brown thought she didn't have to file because she was overpaid, she was horribly mistaken.
- If Ms. Brown did file on time, spending an extra $5.10 for certified mail, return receipt requested would have really paid off.
Cite: Doyle, USCFC No. 09-6 (Update: link fixed).
The IRS has a friendly "Summertime Tax Tip" with swell ideas for coming up with cash to pay... the IRS. It's a pretty good rundown of the standard ways to pay back taxes, including installment agreements.
Get the goods on deducting expenses for job-related moves from Kay Bell.
Hollywood says $50 million in giveaways isn't enough.
Iowa has the most generous giveaway for filmmakers in the country, with transferable tax credits (in other words, cash subsidies) for up to half of a film's Iowa production costs. Lawmakers realized that this credit, along with some other corporate welfare credits, created an unlimited potential liability for the state. They limited the total allowable amount for film credits and other corporate welfare to $185 million, to be split among the credits by the Department of
corporate welfareEconomic Development. The IDED wants to give $50 million of the $185 million to the film credits.
The film crowd says that just isn't enough:
Movie advocates said the restrictions come as dozens of movie producers have started to consider Iowa home.
"If you do this, it will be stillborn," said Jay Villwock, an unemployed Des Moines resident who hopes to work in movies.
We should be so lucky. The film credit program is an outrageous subsidy of a well-lobbied industry paid for by the rest of us. The stampede to take our money just shows that Hollywood is always happy to take free money. Yet there is no evidence that a $50 million subsidy for Hollywood will do more for our economy than a $50 million subsidy for any other industry - or than letting the taxpayers keep the money.
One of the worst aspects of the foreign financial account reporting ("FBAR") rules is the way it applies to people who can sign checks for their employers, but who don't own the accounts. This means a payables administrator who pays bills for a Canadian branch of a U.S. company can be fined half the value of a bank account that she doesn't even own if she fails to file Form 90-22.1.
The unfairness of this may be sinking in at the Treasury. They have extended the deadline (Notice 2009-62) for signature-only FBAR filers to June 30, 2010:
In light of the additional time needed for the Department of the Treasury to address issues pertaining to FBAR filing requirements and the need to provide administrative relief for (i) persons with signature authority over, but no financial interest in, a foreign financial account, and (ii) persons with a financial interest in, or signature authority over, a foreign commingled fund, this Notice provides that those persons have until June 30, 2010, to file an FBAR for the 2008 and earlier calendar years with respect to these foreign financial accounts. Thus, eligible persons that avail themselves of the administrative relief provided in this Notice may need to file FBARs for the 2008, 2009 and earlier calendar years on or before June 30, 2010, to the extent provided in future guidance.
This seems to say the IRS may scale back the reporting requirements for some of these filers.
The deadline remains September 23 for other filers wanting to take advantage of the IRS foreign account reporting amnesty.
Kay Bell reports:
Getting a rebate for a gas guzzler might be good for the vehicle's owner, but it's turning out to be terrible for some charities.
Animal Services of Thurston County, Wash., depends on up to $20,000 in donations each year from Northwest Charity Donation Service. The service, in turn, relies on donated cars.
But since the Cash for Clunkers program began this summer, the nonprofit's source of funding is drying up, reports King 5 News in Seattle.
This was entirely predictible -- and, in fact, predicted.
Tax Vox reports that some folks are finding the program a great deal:
There is already anecdotal evidence that dealers are adding hundreds of dollars in junk fees to the cost of the new cars they sell as part of the clunker program. One angry customer told me that a dealer tried to charge him more than $1,000 in extra fees for a Toyota Camry--$400 for “processing” , $250 in “prep” and $500 for “delivery.”
But Congress and the President are spending an extra $2 billion to destroy perfectly good cars -- making it harder for low-income folks to get wheels by taking used cars out of the market. That will help those poor folks who have to travel far to get a job in this era of 9%+ unemployment.
A congresscritter proposes a $3,500 deduction for pet care. Really.
Bruce the Tax Guy is giving up his blog. I'll miss it.
While buying and trashing old cars and subsidizing filmmakers may seem very different, they actually are similar in important ways.
They illustrate that politicians take the shocking phenomenon that people will line up for free money as proof that a program is a success. They also illustrate that politicians are always ready to embrace the "broken window fallacy." Here is a nice summary:
Bastiat’s essay is most famous for the “parable of the broken window,” in which a young boy shatters a shopkeeper’s window and, after some initial outrage, the villagers conclude that the rascal helped the local economy. Why?
Because if no one broke windows, window makers would be out of business, and if window makers were out of business, they wouldn’t buy any more bread or shoes, hurting the bakers and cobblers. So the six francs the shopkeeper must spend for a new window is really a boon to the community.
The problem with this argument can be gleaned from the title of Bastiat’s essay. By counting the money the shopkeeper spends to replace a perfectly good window (that which is seen), we ignore the money he might have spent on something else (that which is unseen). The shopkeeper might have instead dropped six francs on new shoes, a book, or a bonus for his assistant. Those who celebrate the broken window as a generator of growth take “no account of that which is not seen.”
Just as the "success" of Cash for Clunkers program ("Tremendous! It's already out of money!) ignores the other uses for the money, so does the "successful" Iowa Film Credit. But the other uses are "unseen" because Mike Tramontina can't issue a press release for somebody who pays off his credit card faster because he has lower taxes.
Finally, both Cash for Clunkers and the Film Credit imply that legislators are smart enough to determine the best direction for the economy. If you believe that, I offer Exhibit A.
The CBO list lacks the Value-Added Tax, the grandaddy of revenue raisers. Look for it to keep popping up, just because it can raise so much money.
Iowa's annual sales tax holiday starts today and runs through tomorrow. Nine other states have holidays this weekend.
The Iowa Department of Revenue has the details:
If you sell clothing or footwear in the State of Iowa, this law may impact your business.
* Exemption period: from 12:01 a.m., August 7, 2009, through midnight, August 8, 2009.
* No sales tax, including local option sales tax, will be collected on sales of an article of clothing or footwear having a selling price less than $100.00.
* The exemption does not apply in any way to the price of an item selling for $100.00 or more
* The exemption applies to each article priced under $100.00 regardless of how many items are sold on the same invoice to a customer
* any article of wearing apparel and typical footwear intended to be worn on or about the human body.
"Clothing" does not include...
* watches, watchbands, jewelry, umbrellas, handkerchiefs, sporting equipment, skis, swim fins, roller blades, skates, and any special clothing or footwear designed primarily for athletic activity or protective use and not usually considered appropriate for everyday wear.
Buy something that will look good when you go to South Carolina for their November sales tax holiday on guns.
Flickr photo by k@t marsh
How idiotic are the negotiations among the Senate's "gang of six" (including Senator Grassley)on health care "reform"? This much: ($link)
As the Senate adjourned for its summer recess August 6, a group of six Democratic and GOP taxwriters continued to work through the details of a healthcare reform proposal, and one senator said the group is considering exempting first responders and teachers from a potential tax on insurers that offer high-priced, "Cadillac" health plans.
So "Cadillac" plans are bad, unless teachers, policemen and firemen have them. What about, say, tollway workers, who have more dangerous jobs than any of these people? More importantly, where's mine?
No good can come of this.
Perhaps the worst move you can make as a business owner is skip paying your withholding tax liabilities. The penalties for delay are nasty; worse, anyone "responsible" for not remitting employment taxes to IRS can be personally liabile for them.
A former CEO of a florida hospital learned that the hard way Monday. When cash got tight, he used money withheld from employee paychecks to pay vendors, rather than the IRS.
There is no dispute that Plaintiff was the president and CEO of GHCH during the tax quarters in question. He admits that he knew that the payroll taxes collected from hospital employees had not been turned over to the government in their entirety for the quarters ending in March and June 2003. He acknowledges that he had the authority to make payments on behalf of the hospital. In fact, Plaintiff admits that he signed checks totaling over 2.9 million dollars (see Gov't Ex. 26), paying other creditors, rather than the government, while he knew that payroll taxes were delinquent. Thus, he decided to use the money withheld for payroll taxes to pay suppliers or other creditors when he knew that payroll taxes were due and owing to the government.
The bottom line:
The two legal issues informing the resolution of this case are 1) whether Plaintiff was a person responsible for paying over to the government payroll tax funds collected from hospital employees for the May and June 2003 tax quarters, and 2) whether Plaintiff acted willfully in failing to pay over those funds. Because the court has now ruled for the government as to each issue as a matter of law, the clerk is directed to enter judgment in favor of the United States and against James Doulgeris in the amount of $1,935,204.33.
The Moral: If you don't remit withheld taxes, you're on the hook, down to the last 33 cents.
It justs shifts the timing of purchases that people would make anyway, says the Tax Policy Blog:
After piling taxes on, politicians pick a random product to be exempted for a brief period of time. Everyone rushes in to buy in the short window, the lobbies behind the exempt products talk about how special they are, and smiling politicians can tell constituents that they're big tax cutters.
Unfortunately, sales tax holidays result in high administrative costs to deal with multiple sets of tax rules, confusion (and political fights) over what's exempt and what's not, a bunch of government advertising for what is really just a measly 5 to 7 percent off sale, and allow politicians to claim credit for cutting taxes when they haven't done anything of the sort. Some retailers even cut sales short before the holiday, resulting in prices that are higher on the holiday!
Iowa's tax holiday starts tomorrow; Kay Bell's reports that nine other states have tax holidays this weekend. Get a nice outfit so you look your best for your trip to South Carolina in Novemeber for their sales tax holiday on guns.
Flickr photo by k@t marsh
The guy convicted of stealing proceeds held for like-kind exchanges so he could treat friends to $1,000 glasses of cognac received a 100-year prison sentence yesterday.
Mr. Okun bought up like-kind exchange intermidaries and looted them. An intermediary holds funds received in a real estate sale of business or investment property until the seller can find a replacement property. The intermediary buys the replacement property and transfers it to the seller. If this is done properly, the tax law treats this as a like-kind "Section 1031" exchange, deferring the tax on the sale.
Needless to say, having your real estate proceeds stolen can be devastating. The defendant argued for a 10-15 year sentence. The sentencing judge thought otherwise.
Two unrelated related headlines from the Tax Policy Blog:
When you count on rich folks to pay for government, you put the government on a revenue roller-coaster. The income of the "rich" is very volatile. When you need it the most - during a recession, when demands on the government rise - that's just when rich folks lose a lot of income. States that have jacked up taxes on their high earners are having the same problem. Easy come, easy go.
Kelly Erb, the Tax Grrrl, is on a roll with excellent posts about the First Time Homebuyer Credit ("Shekels for Shacks"?).
Governor Culver's press office says "Iowa revenue for first month of fiscal year is 1.2 percent above last year" And that's right, if you don't count tax refunds. If you do, they're down by six percent.
Who's right? As the state can only spend the amount that's left after refunds, that's the number that matters.
In the Civil War during the siege of Vicksburg, soldiers in the trenches would amuse themselves by putting a hat on a stick, pushing it over the rim of the trench, and seeing how many bullet holes the hat would accumulate.
The White House is playing a similar game with talk of "middle income" tax increases. With deficits at unbelievable levels, they still want to start big new expensive programs like their health care thingy. That makes financial markets nervous, so they really, really would like to raise taxes. So they stick the hat on a stick and see how many bullet holes it gathers.
Just last weekend, the Treasury Secretary hinted at it on the talk shows. They don't come right out and say that they want to raise taxes, but they hint at it enough to get the point across. When the hat came back full of holes, the President backed away.
He'll be back. For all of the talk on taxing only "the rich," there just isn't enough money in the rich to pay for all of the stuff the administration wants to to do. That's why the President hinted at broad-based tax increases a few weeks ago at an Albuquerque town meeting. That's why the administration floated the value-added-tax trial balloon in the Washington Post. And that's why they floated a tax increase last weekend. If the hat doesn't collect too many bullets, then he'll stick his neck out and make a serious effort to pass the inevitable big honking tax increase.
A new study from the Tax Foundation shows that raising state corporation income taxes lowers wages. David Brunori ponders this at tax.com.
It's almost time for the great Iowa State Fair! Get psyched up at Kay Bell's latest Carnival of Taxes!
The Tax Update failed go get to this edition of the blog world's finest roundup of tax commentary, but lots of great tax bloggers did show up. Check it out!
Last week the Tax Foundation reported that the top 1% of taxpayers pays more income tax than the bottom 95%. That leads to the question: is it because they have so much of the nation's income? The Tax Policy Blog addresses that question, showing that the top 1% of earners share of the income tax burden is about twice their share of the national income.
We recently discussed the steadfast but dwindling breed of tax preparers who still do returns by hand, triggering a thoughtful responses in the comments and elsewhere. Now Monica Lawver chimes in, and I think gets it about right:
Tax prep software speeds up this process. Software will never replace the need for a qualified professional exercising judgment, but it can be a great tool.
Brains and computers can accomplish more together than either can alone.
The feds have clearance to seize a defunct theme park built around the notion that dinosaurs and hominids co-existed.
In a Tax Update exclusive, here is some conclusive evidence for that notion:
The $47 million or so spent by the "Iowa Power Fund" has created all of 100 jobs so far - even though matched by $85 million in federal money and $101 million in private money, according to a state report. The Des Moines Register reports on the resulting goal-post moving:
Although the focus has been on job creation, Roeder said, that is just one of the Power Fund's missions.
"Part of it was to create jobs and part of it was to create a climate that attracts other renewable energy companies, and part of it was to make Iowa a place where the renewable energy industry is going to grow," he said.
But everything will just work out fine if these projects that require massive state and federal subsidies "succeed":
Ron Robinson, a senior analyst for the Legislative Services Agency, said that if the projects succeed, they could create 850 to 1,000 jobs.
Absent $5 gasoline, the only success these projects are likely to see is winning additional subsidies from the taxpayers.
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to