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Tax Update Blog: September 2009 Archives

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Tax Court: Roth IRA can't own S corporation stock

September 30, 2009

The Tax Court yesterday took 26 pages to decide that a Roth IRA is not a qualified S corporation shareholder -- a lot of effort to come to an obvious answer. While that seems like a long road to get to the right place, it could have been worse. Four of the Tax Court judges took 31 pages to get to the wrong answer, in dissent.

The dissent, written by the florid Judge Holmes, gets philosophical towards the end:

This case is a reminder that tax law does not cascade into the real world through a single channel. It meanders instead through a vast delta, and any general principles tugged along by its current are just as likely to sink in the braided and re-braided rivulets of specific Code provisions and the murk of regulations as they are to survive and be useful in deciding real cases. Taproot thinks it found a course through the confluence of the subchapter S and IRA rules that it could successfully navigate.

Maybe so, but anybody who has tried to get down the Mississippi would tell you that it's best to stick to the main channel if you want to get down the river. Except for a narrow exception for banks, IRAs are not permitted to own S corporation stock.

Cite: Taproot Administrative Services Inc. v. Commissioner; 133 T.C. No. 9

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Embezzlers: It's not your money, but it will be your tax.

September 30, 2009

Des Moines is agog at the indictment of a local gay rights activist on charges of stealing $5.9 million from her employer, the insurer Aviva. A lawsuit by the insurer accuses her wife of sharing in ill-gotten gains.

There is actually a tax angle. The accused's spouse has posted on her blog:

"We won’t lie about our marriage on our tax forms, either, filing as married people we are," she wrote. "We’ve racked up about a million dollars in potential criminal fines and about a hundreds years in potential prison time under the old sentencing guidelines between us — so far."

If she was just talking about filing joint tax returns as a single-sex couple, she's grossly exaggerating the trouble they were in. While Iowa now allows same-sex marriage, federal tax law doesn't recognize it. Even so, there's little chance that disallowed joint filings would ever lead to criminal liability, and the fines would never get that big.

If she was taking a $5.9 million embezzlement into account, though, she's not exaggerating so much. With that much income, you are getting into serious tax evasion, and "millions" in fines is achievable for fraudulent underpayment of taxes on that much income. Hundreds of years in jail? Tough to achieve, even with these numbers, but for a couple aged 58 and 53, a lot less than a hundred years can still be bad for the relationship.

And yes, embezzlement proceeds are taxable. Just yesterday a North Dakota man was sentenced to four years in federal prison for not paying taxes on $6.9 million stolen from his employer, a Bismarck construction company. The North Dakotan pleaded guilty and appears to be cooperating. If the Aviva defendant fights the charges and is convicted, a longer term would not be surprising.

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Farm tax school!

September 30, 2009

Registration is open for the Iowa State Center for Agricultural Law and Taxation 2009 Farm Tax Schools. I will be joining the tour this year for the schools, which feature a great slate of instructors, including Neil Harl, who started the program; CALT director Roger McEowen; and practitioners David Bibler, James Goodman, and Lee Wilmarth. Kristie Maitre of the IRS will also be there.

Tour Dates, instructors and locations:

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Buzzed

September 30, 2009

There's a nice roundup of recent tax blog posts over at Robert D. Flach's place.

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Poor Richard's Almanac

September 30, 2009

Naked Survivor Richard Hatch had to go back to jail for violating the terms of his supervised release. Now the ACLU has taken up this most pressing of civil liberties causes, reports TaxGrrrl.

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Because you can't make a movie without an iPod for your son

September 29, 2009

20090929-3.JPGMaking a movie is more complicated than us Iowa rubes can imagine. Not only do you need lights, cameras, crews, actors, and stuff like that; you also need... iPods and feather beds!.

The Des Moines Register tracked down the Bruce Isacson, the producer who bought the Land Rover with Iowa taxpayer money, and it turns out he really, really needed all kinds of stuff, bought by us of course:

Isacson said former Iowa Film Office manager Tom Wheeler told "South Dakota" movie makers that they could get one new car. An iPod was needed so his 15-year-old son could obtain royalty-free songs that saved the producers tens of thousands of dollars, he said.

Wow. I never knew an iPod was a magical talisman that made copyright royalties go away. And to think I always thought you could find things on the Internet like songs with a computer. Apparently you have to use an iPod. Maybe Iowa should have that bright boy take the vacant Film Office director job.

Isacson said he lived at Stoney Creek Inn in one room and even did his own laundry, noting that most directors have more luxurious places.

"There were no limits at all," Isacson said of Iowa’s tax credit. "I could have stayed in the most expensive hotel, in the presidential suite" and it would have been part of the credit.

Sadly, that part is probably true. He probably left some of our money on the table. What a guy.

The sports utility vehicle is in the company name and is being driven by Isacson. A feather bed was purchased because he has back problems and needed one like he had in his home, Isacson said.

Sometimes you have to pamper a few sensitive spines in the name of economic development.

Hearing the stuff that Mr. Isacson seems to have openly got us to pay for, it's no wonder that the deputy state auditor preparing to look into the program is worried:

"Whenever the state wants to do a particular program, there is an obligation to fund it, to provide the oversight, to provide the controls, to protect the resources — everything I see so far doesn’t indicate that happened in this case," said deputy state auditor Warren Jenkins.

But hey, the movie people buy T-shirts here! That makes it worth $363 million!

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'Google' is not the tax law.

September 29, 2009

While Google seems to be taking over everything from personal calendars to cell-phone operating systems, it still has its limits, as a Minnesota man learned in Tax Court yesterday. The taxpayer, a Mr. Woodard, took $150,000 in IRA distributions. He loaned the proceeds out without rolling them back into another IRA within 60 days. The IRS noticed that he didn't report the income on his 1040 after the IRA custodian issued him 1099-R forms, and tax assessments soon followed.

Mr. Woodard used the "I found it on the Internet" argument. It went badly:

Mr. Woodard explained that he thought he had a self-directed IRA and that he intended to reinvest the $100,000 in private mortgages. He searched the Internet for information about self-directed IRAs, and he followed advice he found on line.

...

Mr. Woodard makes no argument relative to his having reasonable cause and acting in good faith in not reporting income from his $50,000 conversion from a traditional IRA to a Roth IRA. Accordingly, we sustain the accuracy-related penalty as to the portion of the underpayment attributable to this unreported income.

Mr. Woodard asks the Court to accept that his research on the Internet using the Google search engine provided him with reasonable cause for the position he took when filing his 2004 Federal income tax return; to wit, not reporting IRA distributions he commingled with other funds by depositing the distributions into his checking account because he later invested those funds in private mortgages. Mr. Woodard has not provided the Court with any information about the sources of the information he found on the Internet.

It's the modern equivalent of a taxpayer in the old days saying he relied on something in the library card catalog.

Mr. Woodard claims that he relied on information found on unspecified Web sites written by unidentified individuals or organizations. From the record, it is not clear that he questioned the provenance or accuracy of the information he found through the Google search engine. Without knowing the sources of the information, it is impossible for the Court to determine that those sources were competent to provide tax advice. Accordingly, we cannot conclude that Mr. Woodard exercised ordinary business care and prudence in selecting and relying upon the information he found on line. As a result, we find that he has not shown reasonable cause for failing to report the distributions from his IRA on the 2004 Federal income tax return. Not having found reasonable cause, we need not consider whether Mr. Woodard acted in good faith.

Result: taxes and penalties.

The Moral: Google is wonderful, but it's no tax pro.

Cite: Woodard, T.C. Summ. Op. 2009-150

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No, the IRS didn't send you an email...

September 29, 2009

...and if you click on the link in that e-mail purporting to be from IRS, you can fill up your hard drive with malware and trojans.

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But Iowa's saving grace is... oh, never mind.

September 29, 2009

Iowa: We have high individual and corporate income tax rates, but we make up for it with... high residential homeowner property taxes!

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The Tax Policy Blog has more.

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Sky-gliding Cavalcade

September 29, 2009

There's a chill in the air. Get on the sky-glider and visit the Cavalcade of Risk at Wenchypoo's place.

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This edition of the blog world's roundup of insurance and risk management posts is full of good stuff, including InsureBlog's provocative "Have You Stopped Beating Your Insurance?"

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'If they think this is just UBS, they're mistaken'

September 29, 2009

The IRS has extended the offshore account reporting amnesty by another two weeks. Lee Sheppard reports in Tax Analysts ($link) that folks whose offshore accounts aren't with UBS shouldn't ignore the amnesty:

Another folk belief is that customers of banks other than UBS will get away with tax evasion. "If they think this is just UBS, they're mistaken," said [DOJ attorney Kevin] Downing. "UBS is not an anomaly. This is just the beginning. We're going after foreign banks and professionals." Countries the government is interested in include Hong Kong, Panama, and Singapore.

If you are interested in the amnesty, act now. Lawyers have been overwhelmed with amnesty cases, and they might not be able to take new clients who wait until the last minute.

UPDATE: Criminal tax defense attorney Jack Townsend has a cynical (but likely accurate) view:

DOJ Tax is on a public relations blitz to drum up business / revenue by incentivizing taxpayers with unreported offshore bank accounts to join the IRS voluntary disclosure initiative ending 10/15. A key facet of the blitz is the high profile indictments recently obtained. At last week's ABA Tax Section meeting, DOJ Tax rolled out its mouthpiece, Kevin Downing himself at the forefront of the prosecution side of this juggernaut, to remind practitioners and, through them and the press attending, the public that they should pony up in the voluntary disclosure program.

If you have offshore accounts, the amnesty looks wise, but I suppose you don't have to like it.

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The film credit fiasco: the clued-in and the clueless, media edition

September 28, 2009

Once burned, twice shy works for most of us. Some reporters and columnists seem to require repeated burning.

John Carlson at The Des Moines Register has pulled his hand away from the stove:

We are, indeed, suckers — a lot of us, anyway — smitten by the thought of spotting some third-tier actor at the next table in our favorite restaurant. Also high on the sucker list are the knuckleheads in state government who slobber at the very thought of nuzzling up next to somebody with a 90210 ZIP code. If it means handing a hay barn full of cash to people who make motion pictures, so be it.

...

It's kind of like the popular kids letting us sit next to them in the lunchroom as long as we buy their dessert. Except in this case, we bought movie executives a $67,783 Mercedes, a $61,000 Range Rover and probably a bunch of other stuff we haven't heard about yet.

But his colleague Rekha Basu seems to think the stove will cool down if she just keeps touching it:

Just weeks ago, Iowa's star shone so brightly in Hollywood that movie folks from there were talking about moving and buying houses here. The bars were full of actors, local crews were getting work and real-estate deals were in the making.

Yes, buying houses with our money with big garages for their taxpayer-funded Mercedes.

The fiasco has some Iowans suggesting all tax-credit programs be eliminated and criticizing the up-to-50-percent filmmaking credit. Certainly, requirements could be tightened. But that discussion should be had after a careful examination of all benefits and costs.

Maybe the Tax Update is just old fashioned this way, but shouldn't you do the "careful examination of all benefits and costs" before you spend $300 million?

Over at Lee Enterprises, Charlotte Eby shows how to present one side of the story in a piece on the woes of film welfare recipients. The story provides the viewpoint of a few Iowans who have gotten splattered with the money gushing to Hollywood:

Movie crews have also brought their business to Smash, a custom T-shirt shop in Des Moines’ East Village neighborhood.

Retail manger Jen Morrow said several actors, including McGowan and Abigail Breslin, have bought shirts in the store.

Smash designed T-shirts that will be worn in the movie “Janie Jones,” now being filmed in Iowa.

“You’d have to be blind not to see it’s stimulating our economy here locally,” Morrow said.

Well, they're buying T-shirts here! That's worth $363 million!

Like almost every story about the film credits, at least until last week, Ms. Eby focuses only on those who get money from the film credits, with nary a word about the 3 million Iowans who might pony up $121 each without even getting a crummy T-shirt.

Donelle Eller at The Des Moines Register has a rare piece that actually addresses the economic absurdity of the credit, as a counterpoint to the boosterism of the looter lobby. She even talks to an actual economist:

"Talking about a return on investment means you get your money back," said David Swenson, an Iowa State University economist. "The state isn't getting any of its film money back, let alone a return."

Film credits aren't magic beans. They cost real money, money that either comes from higher taxes on everybody else or reduced state services. If they actually could grow the economy by more than they cost, the state could devote its entire budget to funding the film industry, knowing that it would all come back in the form of new Range Rovers for everyone.

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You call this a 'bargain'?

September 28, 2009

Girls Gone Wild founder Joe Francis negotiated a plea deal that would limit his jail time on tax charges to time already served. Jack Townsend says that the sentencing judge may give him more time than he bargained for:

From a tax perspective, the interesting feature of the plea is the downgrading of the offense of conviction from the charged felony tax evasion to the § 7207 misdemeanor offenses. Most practitioners have argued for, pleaded, cajoled, etc. (but not bribed) tax prosecutors for such a downgrade without any success. (For DOJ’s policies on this, see here.) I imagine that DOJ Tax would have declined to do that here except for the bribery plea. My gut tells me that, in terms of sentencing, the sentencing judge is likely to focus more on the bribery plea and perhaps the criminal history; the maximum 4 year incarceration for the combined pleas will give the judge ample room to do justice.

So if Mr. Francis gets some additional time off, don't be too surprised.

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Burning down the housing tax breaks

September 28, 2009

Government tax breaks and subsidies for housing have staggered our financial system. Naturally, the government prescribes more tax breaks and housing subsidies. Howard Gleckman explains at TaxVox:

There is little evidence that this tax break increases home ownership. And at least some of the subsidy is shared by sellers in the form of higher prices--not a great long-term use of taxpayer dollars.

And he sees the insanity continuing:

At issue: a plan being pushed by the real estate industry to raise and extend the $8,000 homebuyer tax credit that was part of this year’s stimulus bill. That measure is due to expire in November and, predictably, homebuilders and real estate firms would have Congress double down on the subsidy. They’d raise the credit to $15,000, and make it available to any homebuyer through 2010. But make no mistake, come the end of next year, this goodie will end up on the ever-growing wishlist of tax extenders—allegedly temporary tax breaks that become as much a part of the Washington landscape as the Lincoln Memorial.

What he said.

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Burning down the house for charity?

September 28, 2009

The IRS says you can't get a fair-market-value deduction for a donation of a house to a fire department for burn-down practice. Kay Bell hopes the donors get the deduction; Peter Pappas agrees with the IRS that the deduction should go up in flames.

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401(k) v. IRA?

September 28, 2009

When there's an employer match, easy answer: you go with the 401(k) and take the boss's money. For all other situations, read Robert D Flach's extended discusion of the IRA/401(k) dilemma.

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Harold Hill's Film Credit Follies: where we stand one week later

September 25, 2009

hh44.jpgAt 4:56 p.m. one week ago, the Iowa Governor's office issued a press release putting out the first word of how an obscure tax credit has become what one commenter calls, without overstatement, "among the most expensive mistakes in our state's history." A program touted as being way to "create jobs" for Iowans was revealed to be funding luxury cars for film producers and large cash payments to members of the producer's families. None of the films financed by the "half-price filmmaking" program had adequately documented their expenditures, and only two had even turned in receipts.

As the scandal unfolded, we learned that the Iowa Film Credit program may have created a liability of $363 million, or about $121 per Iowan, thanks to $200 million of applications rushed through in the two months before an annual cap took effect. The Attorney General has discouraged hopes that the state can weasel out of the liability. Three top officials are out of their jobs, the Governor has suspended the program, and filmmakers are irate that they aren't getting their free money as fast as they want it.

Now the optimists among us are hoping that Iowa is finally taking a hard look at it's rats nest of tax-credit corporate welfare programs.

The politician reaction to the potential transfer of $363 million from Iowa to Hollywood is weirdly low-key. That's because almost all members of both parties in the legislature voted for the disastrous film credit program or otherwise supported it. They have to find a way to be outraged without pointing the finger at themselves.

Republicans mostly try to pull this off by blaming mismanagement and calling for investigations, ignoring their role in setting up the programs. The official blog of the Iowa Republican party has only a tepid indirect reference to the scandal:

Today Republican Party of Iowa Chairman Matt Strawn issued the following statement criticizing Governor’s Culver’s repeated lack of leadership on critical issues, including oversight of the Department of Economic Development.

One frustrated Republican blogger says that failure to speak out against the film credits could be politically fatal. I think he's right.

Democrats, when they say anything, talk of reining in all of the state's tax credit programs, wisely avoiding the issue of the obvious mismanagement of the program. For example:

A long-time critic of state tax credits welcomes the new scrutiny that’s being focused on all tax credits, courtesy of a controversy in the Iowa film office.

Senator Joe Bolkcom, a Democrat from Iowa City, is the chairman of the Iowa Senate’s Ways and Means Committee which writes and reviews state tax policy. Bolkcom says state tax credits had been on “automatic pilot” until this past spring when the governor and legislature put some “caps” or limits in place on several credits.

Of course this "long-time critic" voted for the unlimited film credits when they were first enacted; only three of the 150 legislators voted "no," making the film credit fiasco awkward on a bipartisan basis.

It would be a great time for a bold politician to say that the state's tax-credit/corporate welfare system is a disaster that should be scrapped in favor of a repeal of the corporate income tax and and a broad-based, low-rate simplified individual income tax. It hasn't happened.

It's almost certain that there will be more embarrassing revelations about this and other tax credit programs. While the politicians are dithering now, events won't let that continue.

Link: Tax Update film credit coverage.

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Our dark secret is out

September 25, 2009

Washingon Times lets the cat out of the bag:

Yes, there are death panels. Its members won't even know whose deaths they are causing. But under the health care bill sponsored by Senate Finance Committee Chairman Max Baucus, Montana Democrat, death panels will indeed exist - oh so cleverly disguised as accountants.

Don't tell anybody, but we already have life and death powers...

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Mike, me and Film Credits

September 25, 2009

So many questions, so little time.

I shared a podium this week with Mike Gronstal, the Iowa Senate Majority Leader, at the Iowa Bankers Association convention. Also on the panel were Jeff Robinson from the state Legislative Services agency and Republican State Rep. Tom Sands of Muscatine.

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Me, Jeff Robinson, Mike Gronstal, Tom Sands

It was a strange experience. The panel was supposed to talk about the deductibility of federal taxes on Iowa returns, a hot topic in the last legislative session. The guy from Legislative Services talked too long, so I hurried through my piece (short version: federeral deductibility is bad, but higher effective rates are worse). Senator Gronstal pooh-poohed the notion that increasing rates would be bad for Iowa businesses, and Rep. Sands defended deductibility.

Weirdly, the two never even mentioned film credits, the $363 million elephant in the room. It was like being at a funeral without anybody noticing the dead guy. When the time for questions started - and there was only time for one question, I had to say something, so I stole the question time. I asked (approximately): "We spend over $400 million on economic development tax credits. The Iowa corporation tax will net about $186 million this year. Wouldn't Iowa be better off, and millions of dollars ahead, repealing the corporate tax and the credits together?"

I might as well have asked if Spiderman could beat up Batman in a fair fight. Sen. Gronstal acknowledged that the corporation tax is a minor component of state finances, but he likes how the film credit brings in an industry we never have had in Iowa. If I had time for a followup, I would have suggested we subsidize banana farms too, becauses we've never had them. I don't even remember what Rep. Sands had to say. Neither seem to really get the idea of why "no corporation income tax" might be better for the Iowa economy than targeted tax credits.

I got the distinct impression that the legislature doesn't yet realize how bad the film credit makes them look. I think Iowans are really unhappy with the looting of the state treasury by the film companies and with the film credit system that invited them in. They don't seem worried about it yet. Either they are misjudging how this scandal is going over, or I am. Judging from what it seems to be doing to Governor Culver's poll ratings, they should be worried.


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Keep it clean, kids!

September 25, 2009

The White House is asking for your ideas for tax reform. I wonder how many suggestions will involve Tim Geithner and Turbotax. (Via The TaxProf).

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Kill VITA?

September 25, 2009

In the wake of the ACORN tax/prostitution/child sex slavery scandal, the IRS has cut the ties between its Volunteer Income Tax Assistance program and the community organizing agency. TaxGrrrl asks if VITA should be killed off altogether, and answers:

I couldn’t be more vehement that I think that’s a terrible idea. The implication in the email was that the population which is being served might have “complicated” tax issues that can’t be properly addressed by volunteers; the further implication was that those tax issues might be related to fraud.

This is correct. It's bad enough that the tax law is so difficult that people with simple financial lives need help with their tax forms. It would be worse if the IRS didn't even try to help poor folks with their returns.

Further regulation and licensing of tax return preparers is bad for the same reason. It would do little to improve tax filing, and might make it worse, while making it more expensive to get tax help. Let the market provide different levels of skill for different levels of tax difficulty. You might not go to VITA or a storefront tax shop to do your corporate restructuring, but they might be perfectly capable of helping a waitress through her 1040-A.

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Harold Hill's Film Credit Follies Thursday Roundup

September 24, 2009

It's been almost a week since the film credit scandal broke, but the news continues to come thick and fast. Yesterday one state agency said that we might be able to wiggle off the hook for our $363 million film credit liability, but today the Iowa Attorney General's Office isn't so sure.

While the Attorney General says we might have just found a way to send $363 million from Iowa to California, he says we should take it calmly:

Iowa Attorney General Tom Miller says lawmakers and others should avoid "overreacting" to alleged abuse and mismanagement of a state tax credit program until all of the facts in the case are fully reviewed.

Meh. Overreacting would look something like this:

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...and it would be "overreacting" only if they locked the legislators in first. With fire ants and rabid wolverines.

Meanwhile, the political fallout continues. From the Des Moines Register: Rants: will movie scandal break state budget? Too bad he didn't ask that question before he voted for the program.

Like the girl who wakes up with a black eye, big, ugly stranger and a hangover after a night on the town, some of our elected leaders are starting to think maybe the binge wasn't such a great idea:

Culver calls for review of all state tax credits

Governor: review all state tax credits

Vander Plaats calls for tax shift:

Republican gubernatorial candidate Bob Vander Plaats says he would get rid of most state tax credits and instead, cut the state’s corporate tax rate and reduce taxes on business and commercial property.

Trade credits for the corporation income tax? I wonder if anybody has ever thought of that?

Radio Iowa has put together a handy listing of Iowa's "economic development" tax credit programs. Among the two-dozen or so credit programs, six are run by the Department of Economic Development. Does anybody believe that while the film credit was a virtually unsupervised insider looting party, the other credits are all well-run and carefully monitored?

Kathie Obradovich asks: Is there political will to curb tax credits? If this doesn't provide the will, nothing will. She finally comes to the correct conclusion:

A better, longer-term strategy would be to invest in making the overall tax system simpler and more equitable.

I got to ask this question in person to Senator Gronstal this week, and his answer -- which defendend the film program, unbelievably -- shows no indication that he even comprehends how big the film credit mess really is. More on Me and Mike tomorrow.

Meanwhile, out in the blog world, more tax credit bashing. Iowa Independent notes the Charles Bruner piece we mentioned yesterday:

Bruner called the state’s tax credits to industry a “boondoggle,” and singled out the film tax credit as a “huge drain on the state treasury as well as a subsidy lacking in common sense.”

On the right side of the blog aisle, Craig Robinson at The Iowa Republican says Pull the Plug of the Film Tax Credits

Thus far, Republicans are hesitant to call for the end of the Iowa film tax credits. Instead, Republican gubernatorial candidate Chris Rants has posed a series of questions to help determine what financial impact the scandal will have on the state’s budget. Christian Fong, who is also vying for the Republican gubernatorial nomination, is calling on Governor Culver to move forward with a state website to provide more transparency. Bob Vander Plaats, on the other hand, sees this as another example of state government picking winners and losers.

He says that the Republicans could blow it big time:

While Vander Plaats came the closest to calling for a repeal of the program, Republicans risk being on the wrong side of this issue if they don’t call for the program’s demise.

Gee, do you think so?

Meanwhile, back at the legislature, they have decided there is no hurry to investigate the film program meltdown. Nothing to see here, move along.

Finally, we will take this opportunity to present The Tax Update's Film Credit Hall of Pride, an exclusive club of those legislators out of the 150 in the Iowa House and Senate who voted against the film credit program:

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The slowness of the other politicians to realize the full extent of the film credit disaster may be because they just aren't very smart, but it's also because they all were for it before it before they were against it.

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Film Credit Fiasco: $121 per Iowan, or $26?

September 24, 2009

The Des Moines Register says Iowans might be on the hook for up to $363 million in film credits, which would mean every man, woman, and child star in Iowa would be giving $121 to Hollywood for... nothing.

Iowa Independent says we're only screwed for $78 million so far, which means we're each out a mere $26. Who's right? It's not clear. Iowa Independent reports:

The state gave initial approval to another 109 projects, but no contract has been entered into and no tax credits have been promised, [DED official Erin] Seidler said. That total makes up the largest portion of the tax liability cited by The Register, at nearly $253 million, and the state will not be liable for those projects.

The law says the state allows credits to qualifying films based on "a taxpayer's investment in a project registered under the program." If "under contract" means "registered," than maybe the state can simply stop registering programs. It also would seem to mean that once a film is registered, it's entitled to our money.

I see two promising loopholes that Iowa might use to withhold registration.

One provision says the state "may negotiate" credit amounts (IA Code 15.393.2(a)). It's not clear what that means, but it could be read to allow the state to just say no. If so, "no."

Another provision requires projects to "...further tourism, economic development, and population retention or growth in the state or locality." (IA Code 15.293.1(c). I would say none of them do, that every film credit issued hurts Iowa's economy, but I don't get to make that call. Look for lots of legal wrangling over this.

UPDATE, 2:25 PM: As if on cue, this from The Des Moines Register:

Iowa Attorney General Tom Miller said statements made earlier this week by state officials regarding the state's contractual obligations with movie-makers were mistaken.

"The state's obligations and liabilities may not be determined solely by whether a contract has been signed by the parties, and statements by state officials to that effect are mistaken,” he said Thursday.

If the A.G. already thinks the film looters have us over a barrel, that's a bad sign. This may mean we're on the hook for the whole $363 million.

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IRS: You can put back a 2009 required minimum distribution if you are eligible for RMD waiver

September 24, 2009

If you have already received a 2009 required minimum distribution, you might be able to roll it back into the plan and not be taxed on the distribution, according to IRS guidance issued today:

The Worker, Retiree, and Employer Recovery Act of 2008 waives required minimum distributions for 2009 from certain retirement plans.

Generally, a required minimum distribution is the smallest annual amount that must be withdrawn from an IRA or an employer’s plan beginning with the year the account owner reaches age 70½. The 2008 law waives required minimum distributions for 2009 for IRSs and defined contribution plans (such as 401(k)s) and allows certain amounts distributed as 2009 required minimum distributions to be rolled over into an IRA or another retirement plan.

Notice 2009-82 provides relief for people who have already received a 2009 required minimum distribution this year. Individuals generally have until the later of Nov. 30, 2009, or 60 days after the date the distribution was received, to roll over the distribution.

So if you already have RMD cash, and you don't really need it, you can stick it back into the plan and not pay income tax on it this year.

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Iowa: We think we can weasel out of this

September 24, 2009

Iowa hopes to weasel out of tax credits for 109 projects that have received initial approval, reports The Des Moines Register:

Iowa has no obligation to provide tax credits for about $500 million in film projects that received initial state approval, an economic development official said Wednesday.

Dick Oshlo, interim director of the Iowa Department of Economic Development, said 109 applications have received approval, but that's no guarantee those projects will qualify for tax credits.

"The application is just an indication that they were eligible to move forward to the next stage," Oshlo said, referring to movie producers. "There was no contract, so we believe we have no liability."

This is starting to remind me of the TouchPlay disaster, where the state quietly paid millions to reimburse slot machine video lottery terminal owners after the state had let them sneak their machines into convenience stores, bars and grocery stores across the state, only to pull them in response to public outrage. The lawsuits will start any time now, and then there will be some big ugly settlement down the road.

P.M. Update: Not so fast, weasel boy.

We'll roundup more developments on the film credit fiasco later; meanwhile, check out the Register's list of film credits applied for, and the status of the applications, including the future classic "2009 Kraft Foods."

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It's a good question

September 24, 2009

Headline: "Lawyer Questions Ed Brown's Sanity"

You mean it might not be entirely rational to hole up in a foretresslike house and try to hold off the federal government in an armed standoff? What's crazy about that?

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From WMUR.com:

The lawyer for convicted tax evader Ed Brown is asking a federal judge to order a psychiatric evaluation of his client, saying he believes the New Hampshire man suffers from a delusional disorder that could affect his sentencing next week.

Mr. Brown is awaiting sentencing on charges arising from the standoff.

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'Girls Gone Wild' figure goes for plea deal

September 24, 2009

The founder of the "Girls Gone Wild" empire has copped a plea on his tax evasion charges. It looks like a good deal for him, as he gets no addtional prison time. That may mean the government had a weak case or that Mr. Francis had really good lawyers. Or maybe the government attorneys were just intimidated by his mad Powerpoint skillz:

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More coverage:

The TaxProf
Kay Bell
TaxGrrrl


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Oh, boy: IRS to begin random 'research' audits of 6,000 employers

September 24, 2009

The IRS has confirmed reports that it will soon audit 6,000 taxpayers for employment tax liabilities under its National Research Program. Tax Analysts reports ($link):

Different types of business organizations, including partnerships, limited liability companies, and S corporations, will be examined, as the IRS seeks to accumulate data for a statistical analysis focused on various compliance issues, according to John Tuzynski, chief of employment tax in the IRS Small-Business/Self-Employed Division.

"It's very broad. It's across the board of all filers," Tuzynski said.

Data from the audits will be gathered on common areas of noncompliance such as worker classification, fringe benefits, nonfilers, and officer compensation.

Tax Analysts reports that the program will get underway in February and run for three years.

The old battle over independent contractor status is often the most serious battle in employment tax exams. The IRS prefers "employee" status because it can then make the employer withhold and pay FICA and Medicare taxes. It has a much more difficult time collecting from independent contractors.

The IRS is also likely to take a hard look at S corporation shareholders to make sure they are paying "adequate" salaries. As there is almost no guidance as to what is "adequate," this could be interesting.

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No, the film credit isn't good for us

September 23, 2009

Now that every Iowan may be on the hook for $100 to Hollywood under our catastrophic film credit program -- is every Iowan getting $100 of benefit from it?

Not bloody likely. Charles Bruner of the Iowa Fiscal Partnership explains in an excellent brief column in today's Des Moines Register:

While creating some one-time economic activity, the state gets only a tiny portion back in increased sales, income or other tax revenue. The Wisconsin Department of Commerce, a state with a credit one-half the size of Iowa's, estimated it recovered less than one-tenth of the cost of the credit in increased economic activity. Further, it estimated its film credit, on a per-job basis, cost more than 20 times as much as any other state economic-development program per job created - and the film jobs created were temporary and not permanent, as other economic-development programs were designed to create.

And Mr. Bruner has a great common-sense analogy:

If Iowa established "half-priced airplane manufacturing," Boeing would be foolish not to leave Washington state to come to Iowa, but Iowa would soon be using every dollar in its state budget to subsidize that one industry - with no money left for education, health, or public safety.

There isn't a business that your couldn't attract by paying half of their production costs.

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Wednesday Harold Hill Film Credit Follies roundup

September 23, 2009

hh44.jpgThe Des Moines Register has figured out who got the fancy cars paid for by Iowa's taxpayers:

Mike Tramontina, who resigned last week as director of the Iowa Department of Economic Development, sent letters to two veteran Hollywood filmmakers — Bruce Isacson and Donald Borchers — on Aug. 6, notifying them of errors made in the amount of tax-credit certificates issued to them by the state, documents obtained Tuesday by The Des Moines Register show.

Isacson, who filmed the movie "South Dakota" last spring near Earlham, reportedly now owns a 2008 Range Rover purchased for $61,000 in March 2008 for use related to the movie, said Erin Seidler, spokeswoman for the economic development department.

Borchers, a director known for horror films, remade the movie "Children of the Corn" last year and reportedly owns a 2008 Mercedes purchased for his movie for $67,783 in August 2008, Seidler said.

The film industry is struggling to cope with its temporarily-unsubsidized existence. WHOTV.com brings us the sad cry of a struggling starlet:

As the state investigates the tax credit program, many in the industry say there's no reason why future projects should be put on hold. "Are the politicians gonna screw this up?" asks Kim Grimaldi. The Iowa actress landed a supporting role in Dylan's Wake. Grimaldi says the movie business was about to take off before the state put the brakes on the film tax credits.

Will the politicians screw this up? They already have, honey. They enacted this thing, after all. But what's a Benz compared to a chance to get a supporting role in a B-movie?

Hollywood is following the scandal, no doubt with scornful amusement, as the LA Times reports:

Ah, Iowa, land of corn -- and now, movie-making corruption.

The Farm Belt is learning a painful lesson these days in the glitzy, star-studded world of Hollywood's accounting practices: Like in the baseball movie "Field of Dreams," if you build it, they will come ... and may take your tax dollars to buy things you don't want to pay for.

Oh, but surely we'd be happy to buy each producer a nice car, once it was explained that it is for our own good.

After leaving the doors unlocked and the money stacked on the table by the picture window, the legislature is looking into how the money got stolen, reports O. Kay Henderson.

The Bleeding Heartland blog defends Governor Culver from partisan attacks on his administration's mismanagement of the film credits. It's a hopeless task. Even so, those attacking the Governor are throwing stones from a glass house, as every one of them voted for the credit program.

The Iowa Independent Blog has a long piece that quotes critics of the program:

Victor Elias, a senior policy associate with the nonpartisan Child and Family Policy Center, said his organization, along with the nonpartisan Iowa Policy Project, began looking at the tax credit program this summer. What they found was a program that was growing exponentially with practically no demonstrable benefit to taxpayers.

But quite a benefit to the producers!

Mike Glover says the investigation will go on for months. That has to make the Governor reach for the asprin bottle.

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Tax Credits make Iowa attractive to business! Oh, wait...

September 23, 2009

Boosters of Iowa's many "economic development" tax credits say they make Iowa attractive to businesses. We're still pretty ugly.

The Tax Foundation's new Business Tax Climate Index rates Iowa the 46th best business tax climate in the country. Only the tax nighmare states of Ohio, California, New York and New Jersey rank lower. This is consistent with Iowa's ranking as the least entrepreneurial state in the nation.

Why do tax credits to bribe businesses to come to your state create a bad tax climate? Because the businesses you are bribing realize that once they settle in, they will be taxed to bribe other businesses. It's like taking your wife's purse into the bar to finance your attempts to pick up girls. The girls may or may not let you buy them drinks, but they won't be impressed, and they probably won't want to go home with you.

Update: The Tax Prof has more on the Tax Foundation study.

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Tuesday Morning Film Credit Follies Roundup

September 22, 2009

The Des Moines Register reports that careless drafting helped pave the way for the film credit feeding frenzy:

"There were enough loopholes in this legislation that allowed very clever people from Hollywood and elsewhere to drive a Mercedes-Benz and a Land Rover through it," said Sen. Jack Hatch, D-Des Moines. "That's what has to be tightened up. That's not the intent."

It wasn't? Funny. It's hard to see how it would have been run or written differently if that was the intent.

Register political columnist Kathie Obradovich says there's plenty of blame to go around. She names names, but leaves out the star-struck media and its economically illiterate reporting on the program.

The Des Moines Register's editorial board questions whether all "economic development" tax credits are wise. Ya think?

Dave Price reports on the press conference held by the looters lobby. They aren't happy that looting has been suspended.

The center-left Iowa Fiscal Partnership gets it, sort of:

Those taking advantage of apparent lax management of the film-credits program may indeed be ruining it for other filmmakers who have not done so. Nevertheless, there is no justification for continuing this program while all the problems with it are being sorted out, and while education and fundamental human services are threatened with budget cuts.

But the blogger Coralville Courier really gets it:

Screw the tax credits, just let taxpayers keep more of their hard-earned money in the first place. Government officials need to quit making promises they can't keep and manipulating budgets and taxpayer money in the process. We don't need government officials making up programs that are doomed to fail. We don't need well-intended but substance free programs and liberal pipe dreams, we need basic, functional, efficient government. What we have now ain't cutting it.

Indeed.

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But we're not like the other looters!

September 22, 2009

WHOTV.com brings us the sad tale of the poor subsidized filmmakers woes now that the Governor has turned off the money spigot:

There was a lot of nervousness, people wondering what's going on. What happened? No one knows what's going on and the rumors flew, says Des Moines cinematographer Adam Carney, who is currently working on Dylan's Wake.

...


Iowans working in the film industry spent all weekend spinning their wheels with no answers in sight. Frustrated, they're gearing up to send the Governor a strong message.

"Let's not let one or two apples spoil the entire basket," says Carney.

"One or two bad apples?" Let's roll the tape. From the Mike Tramontina memo that got this all rolling Friday:

· Files on each film were inadequate. Most of the necessary information was in unsorted email archives.

· There were only receipts for two of eighteen film projects. Some receipts were obviously prepared in a single batch by the filmmaker who claimed for all of their vendors on identical receipts which were usually not signed.

· Ledger sheets that were accepted as claims were vague and overly broad. It appeared everything was allowed. Tax Credit certificates were issued for the full amount requested. It appeared nothing was ever disallowed.

· Many vendors clearly resided outside of Iowa.

· Some film makers were allowed to claim payment for several roles in a production leading to very high payments. Some of the roles played by a single individual such as Accountant/CPA should have held an arms length relationship but did not. Large payments were also made to family members.

So far there aren't enough "good apples" to save Sodom. According to the memo, not a single film appears to have fully complied with the rules. The film industry hasn't exactly earned the benefit of the doubt here.

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Meanwhile at the sausage factory...

September 22, 2009

The Senate Finance Committee is set to put its stamp on the health care destruction bill starting this morning. Kay Bell has some of the gory details.

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FBAR Extension: 'everybody wins.'

September 22, 2009

The IRS extended the FBAR amnesty deadline to October 15 yesterday. It had been September 23. Federal Tax Crimes blog comments:

I think this will be win-win for the IRS. There will still be plenty of taxpayers who choose not to try to enter the program or, if they try, will be disqualified. The initiative and this extension will thus flush out a lot of tax dollars with relatively little IRS audit / criminal investigative costs, and much of the dollars might have otherwise escaped the IRS's radar screen or willingness to pursue.

I think it will also be win-win for the taxpayers involved. The taxpayers entering the practice and not disqualified will receive a pass on criminal prosecution and will pay taxes, penalties and interest that are far less than might otherwise be the case.

Meanwhile, attorneys everywhere have gotten a little bit of sleep thanks to the extension.

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Patron saints for everything

September 22, 2009

Even tax geeks.

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The Harold Hill Follies: Monday afternoon update

September 21, 2009

hh44.jpgRadio Iowa: Film Office manager fired; another DED official resigns. It quotes from a Governor's Office press release:

Governor Chet Culver announced today the departure of two officials from the Iowa Department of Economic Development (IDED).

The manager of the Iowa Film Office, Thomas Wheeler, has been dismissed from his position effective this afternoon. The Iowa Film Office is a division of IDED. Amy Johnson will serve as the interim manager of the Iowa Film Office.

In addition, the resignation of Vince Lintz as deputy director of IDED has been accepted.

Des Moines Register: Criminal charges possible regarding film tax-credit abuses, official says

WHO's Dave Price blog has the text of a press release, GOVERNOR CULVER REQUESTS ATTORNEY GENERAL, AUDITOR TO ASSIST IN REVIEW OF IOWA’S FILM PROGRAM

Hawkeye Review: DED: Just the Tip of the Iceberg...:

I propose to you that the real story yet to be revealed is the billions in waste, mismanagement and fraud that is built into our state budget and in some cases, cleverly and deceptively hidden deep within the bowels of state government by a combination of incompetent or corrupt department managers.

Again from the Des Moines Register: Culver pledges to work with film companies to sort out tax credits. "Sorting out" isn't always the same as "paying."

Again from Radio Iowa: GOP wants legislative branch to investigate Film Office; they also have a joint statement from the top four legislative Democrats:

"We are encouraged by the steps taken by the Governor and Lt. Governor to ensure additional accountability and scrutiny with regard to the Iowa Film Office.

"It was prudent for the Governor to announce plans today to involve Attorney General Tom Miller and State Auditor David Vaudt to ensure that every fiscal and legal avenue is pursued against anyone who may have abused this program.

"We are also reassured by their commitment to lift the suspension of the program as soon as it makes sense for responsible projects."

Both parties are good at closing the barn door now that the horses are all outside.

The Bean Walker is doing a nice job of staying on top of the fast-breaking stories.

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How the Iowa Film Credit Pinata works

September 21, 2009

As the Film Credit Program grinds to a halt in a quagmire of mismanagement and corruption, let's review how this state-sponsored looting program works.

Films approved for the "half-price filmmaking" program get allocated a tax credit equal to 50% of qualifying costs (which seem to have included Mercedes and Land Rovers - "nothing was disallowed"). These are "transferable" credits. That means the filmmakers can sell them to raise money or cover their costs.

To get buyers for the credits, they have to sell them at a discount. It makes no sense to buy the tax credits unless they are cheaper than paying the taxes: a do-it-yourself tax cut. A little cottage industry of lawyers and accountants has sprung up to match well-to-do folks needing a tax cut and the film companies.

In economic terms, the state is allowing private filmmakers to discount the state's income tax receivables to finance their projects. It only differs from a straight subsidy by the general fund in that the money is spent before it is received.

So we have a well-lobbied industry that gets a taxpayer subsidy, a well-connected group of middlemen that make money doing the deals, and their clients who get to cut their tax bills. A sweet deal, except for the rest of us.

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Is $300 million enough to help California's starving starlets?

September 21, 2009

The Iowa Film Credit Program isn't as bad as we thought. It's far worse. From The Des Moines Register:

Iowa's bill for going to the movies could be a blockbuster: Up to $300 million in coming years, says an Iowa lawmaker.

In May and June, movie producers rushed to get $208 million in tax credits before a new spending cap began July 1, said Sen. Joe Bolkcom, D-Iowa City, who learned about the last-minute requests at meeting with state development leaders and lawmakers.

The state's investment in film spikes to about $300 million after projects that are under way or completed are added to the mix, said Bolkcom and others familiar with the meeting.

This comes right after the Director of the Department of Economic Development resigned because of evidence that Iowa's program to subsidize Hollywood was being looted by carpetbagging film companies. Abuses included the purchase of a Mercedes and a Land Rover, payments to relatives, and money being spent out of state in violation of the plan rules.

The looters lobby is springing into action to keep the action going:

On Saturday, Iowa's Motion Picture Association and film industry leaders urged state leaders to allow existing tax credit projects to proceed.

"The suspension of the program during the audit is not the answer," said a news release from the association announcing a Monday news conference. "There are many films currently in production and planning for production in the state later this year, and by suspending the production incentives, the state jeopardizes putting more Iowans out of work while we are facing the highest state unemployment since 1986, as well as discouraging potential future productions from considering Iowa."

Yes, what will our starving Mercedes and Land Rover dealers do? It's just been revealed that not a single film project so far has bothered to comply with the paperwork rules for the program, and yet they have the nerve to tell us we need to keep your money flowing to Mira Sorvino. In a better world, the only coverage they would get at the press conference would be with tar and feathers.

It would be surprising if the 4:56 pm Friday document dump announcing the Film credit scandal is anything more than the tip of the iceberg. Look for more to come. We'll be all over it.

Prior Tax Update Coverage:

BUY THEM A BENZ AND THEY WILL COME!

THE IOWA FILM CREDIT EXPLOSION: WE SHOULDN'T BE SURPRISED.

Other Iowa Blog Coverage:

Dave Swenson: Magic Beans, Tax Credits and Economic Development

Bleeding Heartland: Tramontina resigns over problems with film tax credits

Iowa Republican: Bad Poll Numbers + Major Scandal = Chaos for Culver

The Bean Walker links to a number of stories on the debacle.


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FBAR amnesty deadline extended until October 15? (Update: Yes it is)

September 21, 2009

The Associated Press reports that the amnesty for reporting offshore accounts scheduled to expire Wednesday will be extended today until October 15. (Via Peter Pappas)

Update: It's official:

The Internal Revenue Service today announced a one-time extension of the deadline for special voluntary disclosures by taxpayers with unreported income from hidden offshore accounts. These taxpayers now have until Oct. 15, 2009.

Under special provisions issued in March, taxpayers with these hidden accounts originally had until Sept. 23, 2009 to come forward. Those taxpayers who do not voluntarily disclose their hidden accounts by the new deadline face much harsher civil penalties, where applicable, and possible criminal prosecution.

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IRS issues Applicable Federal Rates (AFR) for October 2009

September 21, 2009

The IRS has issued (Rev. Rul. 2009-33) the minimum required interest rates for loans made in October 2009:

-Short Term (demand loans and loans with terms of up to 3 years): 0.75%

-Mid-Term (loans from 3-9 years): 2.66%

-Long-Term (over 9 years): 4.10%

The Long-term tax-exempt rate for Sec. 382 ownership changes during October is 4.48%

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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The Iowa Film Credit explosion: we shouldn't be surprised.

September 19, 2009

20090919-1.jpgIowa's statehouse politicians will all be shocked, shocked that corruption and mismanagement were rife in the Iowa Film Credit program. We should actually be more surprised when such programs aren't mismanaged and looted. Incompetence and exploitation are practically built in to all of such tax credit corporate welfare programs.

Think of the incentives that underlie these programs. The politicians like them because they can call press conferences and issue press releases to credulous media outlets talking about the "jobs" they have "created" by taking our money and giving it to other people. Once the press conference is over and the lazy news reports have been published, the part of the job they like and care about is over. There are no good press releases in the dull work of making sure records are maintained, reports are filed, and standards are enforced.

The agency heads live to make the politicians happy. The politicians only care about the initial splash, not the follow-up, so the agency heads are the same way. They see their job as giving away our money, rather than taking care of it. As long as the happy news stories keep coming, what's a taxpayer-purchased Mercedes or a Land Rover, anyway?

Tax Credit programs have a special vulnerability to corruption and mismanagement. Tax returns are normally confidential by law. That means if the inept Iowa Department of Revenue and the indolent Department of Economic Development fail to catch problems, they can't get caught. The legislature this year has required public disclosure of the largest tax credit recipients, but we are still a long way from transparency in these programs. When there's lots of incentive to give away money, little to make sure it's spent wisely, and no oversight, you have ideal conditions for waste and corruption.

The real way to make Iowa attractive to entrepreneurs is to get the state out of the "economic development" business, which has become a scam to take money from us and give it to people with good lobbyists. The state gives away more in economic development tax credits than it collects in corporate income tax. Iowa would make a far better impression on potential investors by closing down both the corporate income tax and the tax credit programs, while picking up millions of dollars to boot.

But there are no good press releases in that.

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Buy them a Benz and they will come!

September 18, 2009

So this is what economic development in Iowa comes down to:

We have heard reports of two vehicles purchased through the tax credit program that were not used directly on a film. Upon learning this management dug into those two projects and was not satisfied with the explanation or the condition of the files and records and determined that procedures had not been followed.

...

The Code clearly authorizes the purchase of vehicles but the fact they were luxury vehicles (Mercedes and a Land Rover) were not used directly on the film and the amount of credits claimed was the full purchase price rather than the lease cost during the project were judged to be abuses.

This is from a memo by a defender of the Iowa Film Credit corporate welfare giveaway bonanza, released in a Friday bad-news dump late this afternoon. The author, Mike Tramontina, resigned this afternoon as Director of the Iowa Department of Economic Development. The memo outlined a wonderful list of corruption and waste in this most-prominent of Iowa's economic development programs. From the memo (my emphasis):

· Files on each film were inadequate. Most of the necessary information was in unsorted email archives.

· Contracts were amended, often to increase amount of credits requested substantially, after Director/Deputy approval. Signature pages appeared shuffled among versions of contracts.

...

· There were only receipts for two of eighteen film projects. Some receipts were obviously prepared in a single batch by the filmmaker who claimed for all of their vendors on identical receipts which were usually not signed.

· Ledger sheets that were accepted as claims were vague and overly broad. It appeared everything was allowed. Tax Credit certificates were issued for the full amount requested. It appeared nothing was ever disallowed.

· Many vendors clearly resided outside of Iowa.

· Some film makers were allowed to claim payment for several roles in a production leading to very high payments. Some of the roles played by a single individual such as Accountant/CPA should have held an arms length relationship but did not. Large payments were also made to family members.

...

· Some of the claimed services where not actually paid for.
The vendor deferred payment until credits were sold or film was sold.

To be clear: even if the Film Credit program were run competently and honestly, it would be a bad idea to spend taxpayer money to bribe film companies to come to Iowa. But competence and honesty apparently were never part of the program. The carpetbagger film companies that came here to take our money saw us coming a mile away, and they grabbed with gusto. Mr. Tramontina, the biggest cheerleader for the giveaways that are slated to cost $77 million this year, at best took no effective steps to stop the film companies from buying new cars and enriching their relatives with our tax money.

Mr. Tramontina's memo shows only sloppiness on the part of the Iowans in charge of running the program. In Louisiana, the official in charge of a similar program went to jail on corruption charges.

You can tell that the Governor finds this very bad news by the way it was released at 4:56 this afternoon. Late Friday news dumps are the classic way to put out really bad news, to minimize coverage. The Governor has suspended all payouts from the film credit program.

It will be interesting to see whether the supporters of the program -- which was originally approved with only three dissents among Iowa's 150 legislators -- will have the nerve to try to restart the program now that it has been exposed as a pinata for out-of-state filmmakers. No wonder they all wanted to shoot here.

From earlier today: HOW DARE YOU OBJECT TO SPENDING YOUR MONEY TO PROMOTE MY BUSINESS?

LInk: More-or-less complete Tax Update coverage of the film credit.

Related: IF TRUTH IN ADVERTISING APPLIED TO ECONOMIC DEVELOPMENT AGENCIES

UPDATE: The Bean Walker is excited about this, with a siren. He links to coverage from Radio Iowa.

Further Tax Update coverage: THE IOWA FILM CREDIT EXPLOSION: WE SHOULDN'T BE SURPRISED.

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Pop tax fizzes up

September 18, 2009

As if somebody shook up a bottle of Nehi and lifted his thumb, spraying goo all over everyone, the idea of a "sin tax" on pop is suddenly all over the place. The TaxProf reports that a bunch of busybody doctors want to tax pop (called "soda" in some remote areas) as an alleged public health measure. Kay Bell is also on the story.

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The Tax Policy Blog says that if we are going to have the government be a busybody for public health, we might as well go whole hog:

Based on these supposed market failures, I'd like to pose this question to the authors: If government had perfect information, would you support a tax on out-of-wedlock sexual behavior? And if we can't do that for administrative purposes, couldn't we impose a significant tax on nightclubs and bars as a second best scenario (kind of like how the authors of this report suggest an imperfect soda tax to fight obesity-related market failures)?

If they go for the sex tax, we know just the man to draft the recordkeeping requirements.

The Tax Update doesn't drink pop. It does enjoy a healthy, sugar-free bottle of water on the road, the way some people drink pop. Many government busybodies think drinking water out of a convenient reclosable bottle bought at Walgreens is the epitome of environmental irresponsibility, and Chicago has slapped us world-destroyers with a 10-cent per bottle tax. Sugar-free or sugar-laden, they find a way to tax it -- for our own good, of course. Which makes it look as though Peter Pappas has it about right:

But let’s not kid ourselves. This isn’t about about health. It’s about finding a politically palatable way to fund state budget shortfalls and Obama’s irresponsible spending sprees.

Indeed.

Update: I Left My Soda Tax in San Francisco.

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How dare you object to spending your money to promote my business?

September 18, 2009

Thanks to Iowa's 50% movie subsidy, slated to cost $77 million this year, a local restaurant owner had a movie scene shot at her place. And she's irate that anybody would have a problem with it.

However, budget problems are causing some lawmakers to talk about repealing the tax break.

[The restaurant owner] said that talk is frustrating to her and other Iowa business owners who benefit from the Hollywood spotlight.

"They bring money to the economy, and if it takes tax credits, so be it - whatever we can do to get our name out there and let people know what Des Moines is all about and that it's a great place to be."

No, they don't "bring money to the economy." It doesn't just fall from the sky. The state takes that money from taxpayers and gives it to a well-connected few. While the restaurant owner sees the money she gets, she doesn't see the money everybody else loses. Given the choice, they just might have their own uses for the money.

UPDATE: More credulous press release journalism and corporate welfare propaganda from KCCI.

UPDATE, later in the day: The Film Credit Program explodes.

Related: Government takes your money to give to others. The others take it. Success!

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Can you deduct that frozen school band fundraising pizza?

September 18, 2009

Probably not. TaxGrrrl has the scoop.

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Health care: If it's a tax on the vendor, it's a tax on the patient

September 17, 2009

The long dance of the "Gang of Six," including Senator Grassley, has ended with nobody going home together. Senator Baucus proposed a new step on the road to government destruction of private health care with no Republican support.

The Baucus bill has a number of tax increases, the biggest of which is a tax on health insurers offering "Cadillac" plans. Of course, that's just a sneaky way of taxing the insureds. The bill would also impose taxes on "health insurance companies, large pharmaceutical and medical device manufacturers, and clinical labs," according to TaxVox. These are, again, a tax on patients. The bill would give a few crumbs back in the form of mostly-useless tax credits for small employers of low-paid workers. Another tax would be imposed on folks who choose not to buy health insurance.

The bill does not include the "millionaire's surtax" that was in earlier bills. Its tax increases, in fact, would fall exactly on the "middle income" class that President Obama says will not face tax increases. He no doubt will announce his opposition to the Baucus bill any time now.

Kay Bell has more.

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Want to deduct after-school care?

September 17, 2009

The TaxGrrrl explains how.

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Escaping from the IRS the hard way

September 17, 2009

The IRS crackdown on offshore bank accounts is putting a lot of pressure on folks who've been stashing cash around the world. It looks as though the pressure may have been more than one Florida tycoon could take:

Billionaire blue blood Finn Caspersen, whose Tampa ties and past ownership of Harbour Island made him a regional version of royalty, committed suicide 10 days ago. Only now are the reasons for his self-inflicted gunshot to the head coming to light.

Caspersen, 67, suffered from kidney cancer and had undergone chemotherapy. But it was a federal investigation of possible tax evasion in offshore accounts, of keeping untold millions tucked away in a secretive Liechtenstein bank, that likely pushed Caspersen over the edge.

...

Exact details of his tax woes are still coming into focus, but Caspersen may have owed up to $100 million in taxes and fines and faced prison.

Very sad. The IRS amnesty for offshore accounts ends next Wednesday. It seems like a better deal than the one Mr. Caspersen ended up with.

Link: New York Times coverage.

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Where did ACORN learn so much about taxes?

September 16, 2009

20090916-2.bmpThe ACORN organization has made news recently for its willingness to tackle tax problems of pimps attempting to smuggle minors into the country to ply the sex trade. Where did they pick up such skills? Why, they are "national partners" of the IRS! From the ACORN web site:

“ACORN has had the most significant growth of all our national partners. This is truly a remarkable accomplishment and a tribute to ACORN’s ability to nationally design and implement a complex program throughout a group of affiliate organizations.”
– Ron Smith
IRS Chief of Volunteer and Community Partnerships

When you are willing to go the extra mile for your clients, you grow like that. Not many practitioners are bold enough to discuss the pros and cons of claiming dependent exemptions for child sex slaves.

But now this important resource for our nation's strategic sex industry is coming under attack from opportunistic politicians:

The House GOP leadership wants President Obama and the IRS to sever the services' ties with Acorn after an expose showed Acorn staffers with the group's low-income tax prep service offering advice to clients posing as a youth prostitution ring.

How cruel it would be to deprive our hard-working pimps of the tax advice they need to stay within the law.

Prior Tax Update Coverage:

ACORN: for non-wimpy tax advice!

Aside from the child-sex trafficking, was the tax advice good?

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One week left in offshore amnesty

September 16, 2009

We are a week away from the deadline for the IRS program to bring offshore accounts in from the cold. If you are losing sleep over the IRS's aggressive program to go after offshore accounts, you don't want to put this off any longer.

Link: Voluntary Disclosure: Questions and Answers.

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Only trust official Treasury employees to steal your mail

September 16, 2009

Earlier this year the pilot program to collect some federal income taxes using private collection agencies was killed. That's because you can only trust federal employees to do this sort of work, as outlined in a Justice Department press release:

Latrice Antionette Murray, 38, of Kansas City, Mo., was charged in a five-count indictment that was returned under seal by a federal grand jury in Kansas City on Sept. 8, 2009. That indictment was unsealed and made public upon Murray's arrest this morning and initial court appearance.

Murray is employed at the IRS facility at 333 W. Pershing Road, Kansas City, Mo., where her duties include mail processing.

As a batch of incoming mail is sorted for delivery to various individuals at the Pershing Road facility, some mail is identified as misdirected or misdelivered mail and is placed in a mail bucket so it can be returned to the Postal Service for delivery to the intended addressee. Based on reports that misdelivered mail was being opened rather than being returned to the Postal Service, a hidden video surveillance camera was installed in the administrative mail room. According to the indictment, the video taken by the hidden surveillance camera confirmed that Murray rifled through the misdelivered mail, opened it, and took contents from the mail.

The federal indictment charges Murray with five counts of stealing mail between Feb. 9 and April 9, 2009.

Who knows what chaos would ensue if you let private contractors do your mail-stealing.

More from WebCPA

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Jim Thorpe makes a losing bet

September 16, 2009

Senior tour golfer Jim Thorpe made a good impression on his visits to Des Moines on the old-folks golf tour. While spending his days winning the 2001 Allianz championship, he spent his evenings at nearby casinos, gambling and coming across as a good guy.

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Flickr image courtesy Keith Allison's photostream.

Now he has lost a big bet. He gambled that he could earn $5 million and file no tax returns. You have better odds trying to draw to an inside straight. Mr. Thorpe has pleaded guilty to seven counts of failing to file and failing to pay taxes. Peter Pappas has the scoop.

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File! Now! Hurry!

September 15, 2009

Today is the due date for extended calendar-year corporate returns (and 5-year NOL carrybacks for them), all of the extended pass-throughs, and to top it off, third quarter estimated tax payments. It's also the deadline for 2008 qualified plan contributions for all of these entitities.

Thanks to the sort of snafus and last minute information dumps that often accompany deadline days, posting has taken a back seat today, so I refer you to a few worthy posts:

The IRS Mailbox Rule, where Peter Pappas at The Tax Lawyer's Blog explains how to safely file those last-minute returns.

Conservative Mackinac Center On Public Policy Rips Michigan Tax Incentives, from David Brunori at Tax.com.

Prostitutes, Pet Food, Body Oil, and Other Bizarre Claimed Tax Deductions, from The Tax Policy Blog that Inexplicably Won't Link to Other Bloggers (in negligent and willful violaton of Rule 2).

Check out Welcome to Tax Twitter Tuesday, Kay Bell's new tweetfest at Don't Mess With Taxes.

Catch a Buzz with Robert D. Flach, The Wandering Tax Pro.

And last but not least, TIGTA Recommends That IRS Seek Mandatory e-Filing of Individual Tax Returns by Paid Preparers, but then mysteriously backtracks, over at the TaxProf Blog.

Back at it tomorrow.

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Would skipping Viagra have avoided these expenses?

September 14, 2009

An unusual case out of the Tax Court this afternoon. Why unusual? From The Tax Law Report's summary:

For 2004, the taxpayer claimed medical expense deductions of $76,314 on his Schedule A. (3). Included in this amount was $65,934 for prostitutes; and $2,368 for medical books, magazines, videos, and pornographic material. (3).

For 2005, the taxpayer claimed medical expense deductions on his Schedule A of $49,023. (3). Included in this amount was $42,152 for prostitutes; and $5,005 for books, magazines, videos, and pornographic materials. (4).

The taxpayer, a New York attorney (no, not Eliot Spitzer), maintained meticulous records to document his expenses. Unfortunately for him (and maybe for Mr. Spitzer), the Tax Court noted that deductions are unavailable under the tax regulations (1.213-1(e)(1)(ii)) for illegal treatments. Given that prostitution is illegal in New York, and absent a prescription for the "treatments," no deduction could be allowed.

The Tax Court didn't address whether a deduction would be available if he had a prescription "filled" in Rhode Island or Nevada, where such "therapy" is legal.

The court also said deductions were unavailable for pornography on the grounds that it is a "personal" item, rather than a medical item.

Worst of all, the Tax Court upheld a penalty. While the taxpayer disclosed the deductions, disclosure only works if you have a reasonable basis for taking the deductions. The Tax Court said:

Petitioner did not have reasonable cause or a reasonable basis for claiming the deductions at issue. Petitioner has been an attorney for 40 years and specialized in tax law. Petitioner should have known that his visits to prostitutes in New York were illegal and that section 213, the regulations thereunder, and caselaw do not support his claimed deductions. Accordingly, petitioner is liable for the section 6662 penalty.

An Internet search of the taxpayer's name turns up a New York lawyer who is 78 years old. While the deductions may be hard to justify, some of his contemporaries might tip their hats to him for his stamina. Nothing in the record indicating whether Viagra played a role (but it would normally be deductible if it did).

The Moral? No deduction for sex therapy without a prescription. And in most states, even with one.

Cite: Halby, T.C. Memo 2009-204.

UPDATE from The Gothamist:

After the verdict, the defendant William Halby told the Post, "I live a solitary life. I have no social life. I needed that release." So he dutifully documented each liaison in a notebook titled "Tax Journal," in case he ever got audited.

Funny, I would have guessed he had a rather vigorous, if unorthodox, social life.

The TaxProf has more, including some details of Mr. Halby's prior tax difficulties arising from his therapy costs.

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The Senator and me.

September 14, 2009

I'm slated to appear on a panel with Iowa Senate Majority Leader Mike Gronstal next Tuesday at the Iowa Bankers Association Convention to discuss his efforts to repeal Iowa's individual deduction for federal taxes. I'd appreciate any thoughts or questions you might have.

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It can't hurt to ask, can it?

September 14, 2009

The lottery ads say "you can't win if you don't play." A recently-released federal prisoner took the same approach with the tax law, filing a return requesting a refund of over $9 million. All they can do is say "no", right? Well, not exactly:

Jeffrey H. Sloman, Acting United States Attorney for the Southern District of Florida, and Daniel W. Auer, Special Agent in Charge, Internal Revenue Service, Criminal Investigation Division, announced that defendant Marlon T. Moore, a/k/a Dammon Green, a/k/a Tyrone Moore, a/k/a X-Large Moore, 38, of Miami, FL, pled guilty today to one count of filing a false claim with the Internal Revenue Service, in violation of Title 18, United States Code, Section 287. At sentencing, Moore faces a maximum statutory penalty of up to five years’ imprisonment. Sentencing is scheduled for November 18, 2009 at 2:00 p.m. in Miami, FL, before U. S. District Judge Marcia G. Cooke.

According to the charges and statements made in court during the plea hearing, Moore was released as an inmate from the Federal Correctional Complex in Coleman, FL, on December 28, 2007. After his release, Moore filed a 2007 U.S. Individual Tax Return, Form 1040, and requested a fraudulent refund of $9,087,987.95 from the IRS. During 2008, Moore filed several other fraudulent U.S. Individual Income Tax Returns requesting refunds to which he was not entitled. The tax loss is the amount Moore sought as a refund, $9,087,987.95.

The genius of the scheme was to ask for the extra 95 cents. If he'd have used round numbers the IRS might have noticed.

While regular lottery losers are only out their $1, Mr. X-Large looks to lose up to five years for playing the audit lottery.

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Aside from the child-sex trafficking, was the tax advice good?

September 14, 2009

TaxGrrrl goes beyond the lurid headlines of the ACORN workers enabling the smuggling of minors for prostitution to see whether ACORN's tax advice was sound.

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Everybody's rich!

September 14, 2009

You always hear that only "the rich" benefited from the Bush-era tax cuts. According to figures from the Tax Foundation, that means everybody is rich:

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The Tax Policy Blog notes:

Every tax rate was reduced. Now, about half of the dollar savings from the tax cuts went to the top 10% of taxpayers (when you include various credits and other tax changes included as part of the packages), but that's probably because the top 10% pay over 70% of all income taxes. Those on the left side of the aisle may disagree with that approach to tax cuts, preferring targeted relief for lower-income individuals, but it's disingenuous to say that the 2001-03 tax cuts only went to "the wealthiest few."

It's not just "tax cuts for the wealthy" that have dug the fiscal hole, and, as Peter Pappas notes, it will take more than taxing the rich to get us out.

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Deadlines tomorrow!

September 14, 2009

Tomorrow is the last day calendar-year corporations can file to claim a 3-5 year carryback of their 2008 net operating losses. It's also the due date for all extended 2008 returns other than 1040s.

Peter Pappas has a rundown and a wise admonition to file last-minute returns Certified Mail, Raturn Receipt Requested.

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Goodbye, Norman Borlaug, and thanks.

September 13, 2009

The man born in this farmhouse near Cresco, Iowa 95 years ago went on to save untold millions from famine and starvation through his pioneering work in improving yields of staple crops in Mexico, India and Pakistan.

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Norman Borlaug died yesterday. He leaves behind a sister, two children, and millions of other survivors.

Link: Norman Borlaug: The Man Who Saved More Human Lives Than Any Other Has Died

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Taking money from you and your business to subsidize California's actors

September 11, 2009

From a letter to the editor in today's Des Moines Register:

Well, during my 20 years of being in and around community theater in the Des Moines area, you get to know people, and you get to know what's going on. So far, there have been six movies cast in central Iowa, and the array of new faces is apparent.

Recently, two local actors with extensive credentials read for the same small part. Neither was selected. A surprise visitor from California arrived to take the role.

There was a movie crew in Downtown Des Moines last weekend, bringing the glamour:

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It's an industry well-suited to moving from town to town, wherever they can fleece taxpayers for the richest subsidies.

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When the shooting is done, and our local newspaper columnists are partied out, Hollywood has our money, and we have...

20090911-4.jpg


...empty parking spaces.

Related: State tax receipts continue to crash; moviemakers want more of what's left.

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Eight years later

September 11, 2009

20090911-1.jpegRobert D. Flach remembers a client killed at the World Trade Center.

More about Maurice Barry here.


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ACORN: for non-wimpy tax advice!

September 11, 2009

ACORN: Helping underprivileged pimps cheat on their taxes while enabling white slavery:

In the process of finding a "tax code" the ACORN Accountant advised them not to file taxes if they wanted to get around paying them. The tax code they found was one of an “entertainer”. Soon thereafter, the boyfriend states that they want to bring up some very young girls from El Salvador to “learn” how to do what he and his girlfriend did, which was very clearly admitted to be prostitution. These girls were going to be illegal aliens as the tape shows. The ACORN representative even suggested that they could claim at lease some of them as dependants and get a child credit for them.

And you thought ACORN was just about browbeating bankers and stealing votes.

Video here. More here.

UPDATE: The TaxProf has more.

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Silver linings

September 11, 2009

Student loan debt is no fun, especially if you are coming out of college to the bleakest job market in years. But you can at least get an above-the-line deduction for student loan interest. TaxGrrrl has the details.

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Well, the market crash was an education of sorts...

September 11, 2009

You can get a miscellaneous itemized deduction by cashing out an underwater Sec. 529 college savings plan, as William Perez explains. Remember, any deduction you get - and miscellaneous deductions only count to the extent they exceed 2% of adjusted gross income - doesn't count for alternative minimum tax.

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It's not the law, it's the lie.

September 10, 2009

This is a great short summary of the problems with the big-firm marketed tax shelters of the late '90s and early years of this decade:

The problem with these shelters, as I have noted earlier, is the lie. They, like many of the earlier shelters, had plausible – noncriminal – legal constructs; the problem was that the facts – often the economics – simply did not support the legal constructs.

A juror doesn't have to understand the Sec. 752 rules for allocating partnership debt to understand a lie. That may be the real danger for the defendants in the Jenkens and Gilchrist tax shelter prosecution.

Related: Is backdating the fatal flaw for Daugerdas?

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If this is true, can her students turn in their work years late?

September 10, 2009

This has to be awkward for a law professor:

Dakota County Attorney James Backstrom announced Wednesday that 46 year old Robin Kimberly Magee of St. Paul, has been charged with 11 felonies pertaining to income tax related violations. Those charges involve the tax years 2004-2007.

Investigators for the Minnesota Department of Revenue allege that Ms. Magee, who is a law professor at Hamline University, failed to file tax returns in a timely manner and failed to pay taxes owed for tax years 2004-2007. The charges also allege that when Ms. Magee filed tax returns for 2004, 2005 and 2006 in early 2009, she failed to report taxable interest income, failed, to report income from the sale of stocks or bonds, and falsely claimed losses from previously disallowed business expenses.

These are only allegations at this point. If the state shows that she did file returns two to four years late, and still got them wrong, it might not go over well with her former students. Look for the state to ask whether she turns in semester grades on time.

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Who's got next?

September 10, 2009

How does the business continue if you don't? Christine Branstad asks the hard questions today at IowaBiz.Com. With free Yoko Ono dig!

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Working on Deadline

September 10, 2009

The Des Moines Register today covers the denial of the IRS request for a preliminary injunction against Clive tax preparer SSC Services. Of course the Tax Update broke this story almost three weeks ago. For timely service, trust the Tax Update!

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Post-Labor Day Cavalcade!

September 10, 2009

The new Cavalcade of Risk is up!

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Pay your money (ok, it's free) and take your chances at the Oz Risk Blog for the latest in insurance and risk-management news from the blog world. Don't miss the InsureBlog's contribution on some of the unstated assumptions in the current health debate.

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Ninth Circuit agrees with Tax Court: Hawaii like kind exchange blows up

September 09, 2009

The tax law gives you 180 days to close a like-kind exchange through a qualified intermediary. The intermediary holds the cash from the sale of a property while you work out a deal on buying some replacement property. You have 45 days to identify candidate properties. If all goes well, the tax law pretends there was no cash involved and you are treated as swapping the sold property for the replacement property.

It's not always easy to work out that deal on the replacement property. As the deadlines loom, it can be very tempting to buy that replacement property from a related party. There be dragons.

Hawaii real estate company Teruya Brothers sold Royal Towers Apartments and Ocean Vista Condominiums. They had the intermediary buy replacement property from Times Super Market, a grocery chain. They a Section 1031 like-kind exchange to defer over $12 million in gain. As they owned 62.5% of Times, the deal probably went smoothly. Except for the tax part.

The Ninth Circuit Court of Appeals yesterday upheld the Tax Court, ruling that the deal failed. They said that when the intermediary bought replacement property from a related party to finish the swap, the tax law recasts the deal as:

1. An exchange between the Teruya Brothers and Times Super Market, followed by

2. A sale to the third party by Times Super Market.

The tax law says that a like-kind exchange with a related party retroactively fails if the related party sells the property to an outside party within two years. As recast, the related party is considered to immediately sell the exchanged property, and the swap fails out of the gate.

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Royal Towers Apartments, Salt Lake, HI


The Moral? Related party deals are always dangerous. In a Section 1031 exchange, they can be fatal.

Cite: Teruya Brothers Ltd., CA-9, No. 05-73779

Prior Coverage:

A LIKE-KIND EXCHANGE DISASTER (RELATIVELY SPEAKING)

SECTION 1031 BASICS

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Congress, meet unintended consequences

September 09, 2009

Martin Sullivan speaks truly:

Section 162(m) became law in 1993. It capped business deductions for executive pay at $1 million, except for performance-based pay. The cap on deductions satisfied populist yearning to take high-flying executive down a peg. But the exception to the cap is a policy disaster. It encouraged the establishment of compensation packages that rewarded risk--exactly what we don't need if we wish to avoid another financial crisis.

The $1 million cap helped make stock options popular in comp packages, as option income wasn't covered. The joy of options is that the executives prosper if the stock goes up, but lose nothing if the stock crashes. When there's no downside, why not roll the dice?

But then Mr. Sullivan has a strange prescription -- some hair o' the dog:

Some members of Congress want to strengthen limits on the deductibility of pay across-the-board and get rid of the exceptions that encourage risky behavior. That's an idea that both conservatives and liberals should endorse.

I've got a better idea: forget about micromanaging corporate governance through the tax code. After viewing the damage caused by Congress, how can you recommend more Congress? I trust any random board of directors -- heck, any random crowd at McDonalds -- more than I trust Congress to come up with proper executive compensation packages.

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Uniform deductions aren't uniform

September 09, 2009

Work uniforms are deductible as miscellaneous itemized deductions. School uniforms, no. The TaxGrrrl explains.

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Urban Renewal by Drowning

September 09, 2009

Can Iowa drown farmland near Osceola for a recreational lake using eminent domain? Roger McEowen and Erin Herbold cover the ground.

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One week left to go back five years with your tax losses

September 08, 2009

A deadline looms for taxpayers who had a bad year in 2008.

One of the few silver linings to a bad year is the opportunity to carry back tax losses.  The federal income tax law normally allows you to use a current "net operating loss," or NOL, to offset taxable income as far as two years back.  A taxpayer with a 2008 taxable loss can carry those losses back to reduce taxable income for 2006 and 2007.  This retroactively reduces the taxable income for those years, generating a tax refund.

For 2008 losses, Congress enacted a special provision allowing some taxpayers to carry losses back as far as five years.  That is a boon to taxpayers who may not have had great years in 2006 and 2007, but who did well in 2003-2005.  But taxpayers wanting to use the five-year carryback face a looming deadline

Corporations
that want to use the five-year carryback have only until September 15 to take the five-year carryback.  Any carryback claims filed later only get the normal two-year carryback.  Corporations normally will file their loss carryback claims on Form 1139.

Individuals who want to use the five-year carryback have until October 15 to file Form 1045 to carry back the losses.  This applies to losses from Schedule C proprietorships, Schedule F farms and Schedule E K-1 or rental activities

Unfortunately, the five-year carryback rule isn't available for everybody's losses.  Unless the loss comes from a business with gross receipts averaging less than $15 million for the prior three years, only the two-year loss carryback is available.  If your losses come from a K-1 from an S corporation or partnership, the $15 million test is applied to the entity issuing the K-1, even if your share of the gross receipts is less than $15 million.  Complete details on claiming the losses can be found in Rev. Proc. 2009-26.  Contact your tax pro to make sure you do the right thing with your NOLs.

Congress hasn't extended the five-year carryback rule to cover 2009 losses, so if this is your bad year, the only thing you can do to get a five-year carryback is to contact your Congresscritter. 

Iowa only allows a two-year carryback for 2008 corporation losses.  That's a bargain, though, compared to what's in store: the legislature has already repealed carrybacks altogether for corporations with 2009 state NOLs.  Those losses only carry forward to offset future income -- if the corporation lives to see it.

When you file your carryback claim, be sure to mail it Certified Mail, Return Receipt Requested, so you can prove that you filed on time. It costs a few bucks extra, but unless you have great faith that both the Postal Service and the IRS will properly process your forms, it's well worth it to have that postmark in hand.

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Administration floats new retirement savings options

September 08, 2009

The Obama administration announced some new retirement savings initiatives for the coming tax season. Tax Analysts reports ($link) that the administration made the following initiatives to promote savings:

* provide guidance to make it easier for employers to automatically enroll and increase the contributions of their employees in section 401(k) plans and SIMPLE individual retirement accounts;

* provide an easy way for taxpayers to save their tax refund by making available an option for filers to automatically purchase U.S. savings bonds with their refund;

* provide guidance for employees on how to cash out and contribute unused vacation and other leave amounts to their 401(k) or similar plan to increase savings; and

* use the IRS Web site to provide more information to promote savings, including a road map for rollovers.

The savings bond proposal is the strangest item on the list. It almost looks like the government is desperate to hang onto the cash. (Update: "Obama to Let Taxpayers Convert Tax Refunds Into IOUs")

The guidance includes:

Rev. Rul. 2009-30, providing guidance for employers to implement automatic enrollment in 401(k) plans.

Notice 2009-65, with pre-approved plan language for 401(k) automatic enrollment,

Notice 2009-66, making automatic enrollment available for employers using SIMPLE IRA plans.

Rev. Rul. 2009-31, providing guidance on rolling paid time off amounts into 401(k) plans.

Press release announcing these initiatives.

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Florida preparer's returns weren't 'pre-audited,' but you can bet they did get audited.

September 08, 2009

It's amazing the stories some tax preparers tell their clients. It's even more amazing what the clients believe. Peter Pappas passes on the story of...

a Florida unenrolled tax preparer who has been convicted of filing false returns and falsely telling clients that he was an ex-IRS employee and had the IRS “pre-audit” their tax returns

The "pre-audit" wasn't the only extraordinary service this preparer offered. He also invented deductions for his clients. The IRS has now hit the guy with a permanent injunction to keep him from doing returns.

One thing the guy got right, if not intentionally. When a preparer gets an injunction, his returns will all get audited. He just was wrong about the timing.

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Can you buy a house from your father-in-law and get the $8,000 tax credit?

September 08, 2009

Find out from Roger McEowen at the Iowa State University Center of Agricultural Law and Taxation.

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What exactly are you selling?

September 08, 2009

One of the toughest issues for a buyer and seller of a business to work out is how to allocate the sales price. The buyer wants to allocate it as much as possible to inventory and short-lived assets so it can deduct the purchase price faster. The seller wants to allocate the price to buildings and goodwill to get capital gain treatment.

Sometimes the buyer and seller just ignore the issue. Steve Sink explains why this is a bad idea at IowaBiz.com.

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Labor Day Carnival!

September 08, 2009

Kay Bell has a new Carnival of Taxes up!

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Lots of good stuff at the premier roundup of tax-related blog posts.

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Sunday morning trowel

September 06, 2009

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A quiet Sunday morning near Meredith Corporation headquarters in Downtown Des Moines.

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Have a blast on Labor Day!

September 04, 2009

Enjoy the semi-official last weekend of summer, and don't forget to head down in your best sales tax-free outfit to Louisiana for the sales tax holiday on guns and ammo!

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Our Louisiana Sales Tax Holiday model courtesy Alex Compos's Flickr Photostream


And treat yourself to a crawfish pie while you're there.

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Why a generation of students chose not to be accounting majors

September 04, 2009

The TaxProf features two of the most disturbing videos ever posted to YouTube. Both were produced by Final Four CPA firms to show their inherent coolness. Words fail.

Here is a screen grab from one of the videos:

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The expression on this face is only seen in the wild among accountants around 11:30 pm on April 15, after much tequila. It could also occur, in theory, while watching a particularly evil senior accountant whose tie is stuck in an escalator.

Needless to say, the word "CPA" is not associated with the word "Glamour." I went to Virginia Postrel's Deep Glamour website and proved it:

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Maybe if I got some hair gel...

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The mysterious case of the 6,000 lb. minivan

September 04, 2009

A pair of California real estate brokers convinced a Tax Court judge that a Honda Odyssey was a 6,000 lb vehicle, enabling it to qualify for the larger Section 179 deduction normally available only for large SUVs. A great victory -- but all for naught.

The couple got the judge to do some math:

The parties agree that the minivan's gross vehicle weight without any part, component, or other item is 5,953 pounds. In addition, Mr. Engle testified that they purchased the minivan with five accessories, which were all-season floor mats that weighed 18 pounds, cargo boards that weighed 10 pounds, a cargo tray that weighed 6 pounds, a third-row sunshade that weighed 8 pounds, and a cargo mat that weighed 10 pounds.9 He testified that the cargo tray was stored in a well, the cargo boards "go on top of that area", and the cargo mat covered those. He testified that the combined weight of the five accessories is 52 pounds, and when they are added to the minivan's gross vehicle weight of 5,953 pounds, the total is 6,005 pounds. According to Mr. Engle, "since this exceeds 6,000 pounds, it is not a section 280F passenger vehicle, subject to the strict [substantiation and mileage log] rules for listed property."

...

The Court therefore finds that the minivan's gross vehicle weight exceeds 6,000 pounds and that the minivan is excepted from the definition of passenger automobile.

But that wasn't enough. To take a Section 179 deduction, you have to substantiate business use. Things went wrong for the couple here:

Mr. Engle testified that the reason they "didn't keep a vehicle log is because, since it was being used exclusively for business, we didn't need to allocate between the business and the personal usage of the vehicle." He testified that the minivan's actual expenses were automatically downloaded by his Quicken software from their credit card and bank accounts, he "set the code for which expense belongs to which", and he used that information to prepare their tax return.

The judge explained the tax law for deducting vehicle use:

To satisfy the adequate record requirement, the taxpayer must maintain an account book, a diary, a log, a statement of expense, trip sheets, or a similar record and documentary evidence that in combination are sufficient to establish each element of expenditure or use. Sec. 1.274-5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). The adequate record must be prepared or maintained in such manner that each recording of an element or use is made at or near the time of the expenditure or use.

No log, no deduction. The couple maybe should get an iPhone.

The moral: Even if all of your vehicle use is business use, you need to be able to prove it.

Cite: Engle, T.C. Summ. Op. 2009-138.

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The tax law: You gotta believe!

September 04, 2009

This year is the 40th anniversary of the worst summer ever, when the Cubs choked away a great big lead in the pennant race to the insufferable Mets, with their "you gotta believe" motto and their adoring homeboy media fans.

Things have gone downhill for a stalwart of that Mets team. Jerry Koosman imbibed tax protester ideas somewhere, and yesterday he was sentenced to six months in federal prison:

Federal prosecutors accused Koosman, 66, of not paying his federal income taxes for 2002, '03 and '04, costing the government as much as $90,000. Koosman contended that he had researched tax laws and concluded they applied only to federal workers, corporate employees and District of Columbia residents. He pleaded guilty in May to misdemeanor tax evasion for '02 in a deal with prosecutors.

I'm sure it's coincidence, not karma, though if Adolfo Phillips and Don Young are prison guards where he is going, I'll rethink that.

The Moral: You Gotta Believe! Because even if you don't, the judge does.

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Starkers

September 04, 2009

Ever wonder why the House leadership is reluctant to depose the embarrassing Charlie Rangel as Chairman of the House Ways and Means Committee? Because Fortney "Pete" Stark is next in line for the job. Why is this a problem? Where do you think the term "stark raving mad" comes from?

Related: Sorry, Charlie!

More here.

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Got Kidneys?

September 04, 2009

Federal law has harsh penalties for anybody who buys or sells human kidneys for transplant, helping to ensure that tens of thousands of folks die prematurely after many unhappy and expensive years of dialysis. But forget all that. If you could sell a kidney, you'd have taxable income. Professor Maule explains.

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Preparer testing? Only after Congresscritter testing, Treasury-secretary testing, and IRS agent testing.

September 04, 2009

As the IRS evaluates the unwise idea of a new preparer regulation bureaucracy, it is pondering the extra unwise idea of preparer testing, as Kay Bell reports.

There is a conundrum of preparer regulation that I haven't seen addressed. If preparers are regulated so strictly as to squeeze out everybody who doesn't have a grasp of our byzantine tax law, the costs of tax preparation will go through the roof. That means any regulation regime will be by definition ineffective. What is the point of an ineffective regulatory regime, anyway?

Peter Pappas says that stricter standards would be a barrier to entry to the incompetent. I think it will be also a barrier to entry for the competent -- there are other opportunities with less hassle -- and it will be a negligible barrier to evil folks. Of course, it's basic economics that barriers to entry increase prices.

Preparers are already supposed to put their social security number or a "preparer ID number" on every return they sign. If the IRS had somewhat modern information technology, this would be enough to catch dishonest preparers, as botched or implausable returns would be flagged and tracked back to their preparers. Yet the Treasury Inspector General For Tax Administration says that these numbers are scattered among 22 non-integrated IRS databases.

Rather than building an expensive, or ineffective, or most-likely an expensive AND ineffective bureaucracy, maybe the IRS should see whether it can address preparer problems by addressing its IT quagmire. It should do that anyway, after all.

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IRS likes to be first in line

September 03, 2009

When you withhold taxes, you'd better pay them. While your vendors may be howling for payment, they don't have anything like the IRS's ability to hound you. A recent Des Moines case illustrates how hard it is to shake off the IRS collection people.

In 2003 Iowa Trade Bindery, Inc. got behind in its taxes. The IRS has the ability to assess the so-called "100 percent penalty" against "responsible persons" who fail to remit employment taxes. The IRS decided that the Secretary/Treasurer of the Company, Virgil Moore, was such a responsible person and went after him. Mr. Moore argued that he wasn't an authorized check signer, and that his corporate title was "for administrative purposes only." The IRS said he was "responsible" anyway. A jury agreed with the IRS, putting Mr. Moore on the hook for five quarters worth of employment taxes.

The Secretary/Treasurer then tried a technical defense, arguing that the IRS had failed to properly notify him of their intent to collect from him. Last week a federal judge said the IRS dotted its i's and crossed its t's sufficiently. Bottom line: Mr. Moore remains on the hook for over $50,000 as a "responsible person."

The Moral: When you're writing the payables checks, that employment tax liability is on top of the stack. And even if you aren't the one writing the checks, if you are a corporate officer the IRS isn't going to be shy about dragging you in.

Cite: Moore, USDC-CD-Iowa, No. 4:07-cv-00180-JAJ

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Joe Francis: I didn't evade taxes, and it's their fault anyway

September 03, 2009

There's a new twist in the tax evasion case of "Girls Gone Wild" impresario Joe Francis. He has sued three former employees for for allegedly turning him in to the IRS in an attempt to cover their own tracks. Mr. Francis alleges the employees were stealing from him:

The complaint, filed in Los Angeles Superior Court on Tuesday by "Girls Gone Wild" production company Mantra Films, alleges that the firm's former chief financial officer Michael Barrett, former head of technology Roman Pelikh and former vice president of operations Will L'Heureux defrauded Mantra and falsely accused Francis of tax evasion.

The lawsuit charges that the three formed their own company, WMR Marketing, and hid their involvement in it as they approved fraudulent invoices it submitted to Mantra worth nearly $500,000. It also claims that Pelikh submitted and obtained reimbursements for hundreds of thousands of dollars of fraudulent expense reports.

It might not be entirely shocking to find out that Mr. Francis attracts unsavory associates. Even if the charges in the lawsuit turn out to be true, it won't help Mr. Francis if the IRS succeeds in proving their allegation that he tried to deduct his house in Mexico as a business expense.

Mr. Francis' defense team has put together a slideshow to help with his defense. I hope they add one for these new allegations that's as professional as this one:

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Related: Deductions for just being Joe

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Who's your Daddy? The judge doesn't care.

September 03, 2009

Nothing in the tax law depends on who Dad is, which is bad news for a Dallas man:

An investment adviser convicted in a tax fraud case in which he claimed to be a "child of God" with citizenship in heaven, not the U.S., is going to prison.

A federal judge in Dallas on Wednesday sentenced Lanas Evans Troxler of Dallas to 40 months in prison. Troxler must surrender by Sept. 30.

I suspect that he'd rather do the 40 months than to go home to Father first.

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Yes, you should have a separate bank account for your business

September 03, 2009

Even if the right answer is obvious, you can gin up a controversy over almost anything -- even on whether you should have a separate bank account for a Schedule C business. Of course, you should. Now Peter Pappas shows where the IRS agrees.

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Deadline looms for five-year loss carrybacks

September 03, 2009

Thanks to a temporary "stimulus" break, taxpayers with 2008 net operating losses have the option to carry them back to get refunds from up to five years back. Normally they only get to carry the losses back two years. But September 15 and October 15 deadlines loom if you want to use the five-year carryback. Read all about it at my Monday post at IowaBiz.com.

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State tax receipts continue to crash; moviemakers want more of what's left.

September 02, 2009

The state's revenue stream continues to dry up:

August was another red-letter month - as in negative growth - for net state tax collections.

Last month's 2.8 percent decline in state revenues marked the seventh straight monthly decline. Legislative Services Agency senior tax analyst Jeff Robinson said November 2008 was the last time tax receipts registered a "true" positive when processing factors didn't artificially skew the numbers.

"I would say that this was a bad month," Robinson said of the 2.8 percent August decline that drove year-to-date receipts to a negative 4.1 percent compared with the first two months of fiscal 2009.

So far, current year revenues lag behind a year ago by $41.5 million and the 4.1 percent decline is below the 0.5 percent yearly drop for fiscal 2010 envisioned by the state Revenue Estimating Conference

Never mind that. We need to spend more money on moviemakers!

Filmmakers Call For Expansion To Tax Breaks

A lot of film projects are coming to Iowa to take advantage of generous tax breaks and there are people who say Iowa should do even more. Movie makers want legislators to remove a $50 million cap to help lure more projects to Iowa.

The movie credit is "transferable," which means that filmmakers sell the credits at a discount to fund their projects. It works just like a cash subsidy, except that the discount makes it less efficient. Unless the legislature would be willing to vote direct grants to filmmakers out of the general fund, they shouldn't be willing to grant transferable credits.

Related: Government takes your money to give to others. The others take it. Success!

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21 days left in offshore amnesty. What then?

September 02, 2009

Federal Tax Crimes Blog notes an ominous development for folks still not ready to bring their foreign accounts in from the cold:

In an article in today's Tax Notes Today, David Stewart reports that the IRS is creating "a new group within its Large and Midsize Business Division to examine wealthy taxpayers who use offshore arrangements for tax evasion."

The focus of the new group is "on examinations involving webs of entities and arrangements controlled by the high wealth taxpayer segment."

That means the UBS settlement is the start, not the end, of the IRS crusade against offshore accounts.

This development should be considered by those still sitting on the fence as to whether to join the IRS's voluntary disclosure initiative which ends 9/23/09. For those who had already decided to just hunker down for the long haul (hoping the statutes of limitations expire without discovery) rather than join the inititive, this might be a reason to reconsider that decision.

Folks pondering whether to own up to their offshore accounts need to get in touch with their lawyers quickly. Three weeks isn't a long time.

Link: IRS Voluntary Disclosure Questions and Answers

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AICPA: Fix the tax penalty system

September 02, 2009

Dan Meyer reports on the dysfunctional tax penalty regime:

An AICPA report criticized the U. S. Treasury and Internal Revenue Service for overly broad and disproportionate penalties. Among criticisms: recently enacted penalties do not necessarily encourage voluntary compliance, poorly defined tax terms (examples: tax shelter and significant purpose), failure to distinguish between willful misconduct and negligent noncompliance regarding severity of penalties, an overemphasis on strict liability vs. taxpayer/preparer judgment, a bias favoring charging penalties in borderline cases and erosion of due process.

The insatiable demand for more revenue will drive penalty legislation for the next few years. Expect stricter penalties with fewer administrative outs - a package already included in the house "health care" legislation.

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Let's destroy the stock market!

September 02, 2009

There is still some life in the U.S. equity markets -- an intolerable situation that the AFL-CIO means to take care of with a transaction tax. Kay Bell has the details.

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Sorry, Charlie!

September 02, 2009

20090902-1.jpgCharlie Rangel, when you've lost Christopher Bergin, you've lost Joseph J. Thorndike, and when you've lost Joseph J. Thorndike, you've lost Middle Arlington. Representative Rangel's resignation from his chairmanship of the Ways and Means Committee is is just a matter of time.

From a policy standpoint we could do a lot worse than Mr. Rangel, who has some sensible ideas about the corporate income tax, at least. From a humor standpoint, Mr. Rangel is providing more laughs than any Ways and Means chairman since Wilbur Mills did the Tidal Basin Boogie. Yet even the joke is getting old. It seems like Mr. Rangel has screwed up just about every kind of tax there is, and his carelessness in obeying the laws he helps to write personifies the casual arrogance of the permanent Congressional ruling class.

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Lunch with the King!

September 01, 2009

I got to have lunch with Paul Caron today!

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The King (L) and I


The proprietor of the TaxProf Blog, the king of the tax blogging world, is every bit as smart and gentlemanly in person as he is in pixels. He is in town to watch his collegiate son in some athletic pursuit involving a spotted ball. Good luck at the game, Paul!

UPDATE: The TaxProf has more.

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Next time, research your preparer before you take his advice.

September 01, 2009

A pair of New Yorkers claimed losses from horse partnerships on their 1040. The IRS had some questions, so they asked the partnership return preparer for advice. The Tax Court picks up the story:

Petitioners' return and the partnership returns reporting the losses from the horse activities were prepared by [name removed by request].

Petitioners did not actively participate in the horse activities and had no knowledge of whether or not the horse activities occurred as represented in the partnership returns. They relied on representations by [name removed by request] in deducting the partnership losses against their other income.

In the notice of deficiency, the partnership losses reported by petitioners were disallowed as passive activities under section 469. Petitioners were advised by [name removed by request] not to cooperate with respondent's requests for information.

The New Yorkers wound up in Tax Court. Somewhere along the way they discovered the power of this "Internet" thingy, and its "Google" feature in particular:

Petitioner asserts in a posttrial memorandum that he was "duped by a charlatan and in essence [name removed by request] tacitly implied that I should fabricate a log that would show 'material participation'". Petitioners assert that the liability would be a financial burden for their family and "petition the Court to consider reducing the liability, throwing [themselves] at the mercy of the court." They conclude with: "Just Google [name removed by request] to see more."

It seems that a reference to Google doesn't serve to put evidence in the record:

This Court cannot reduce a liability without any basis in law and directly contrary to the law applicable to the facts appearing from the record in this case. We cannot "Google" or otherwise consider information outside of the record. It is hard to understand, however, how that information could help petitioners.

The taxpayers would have been wise to do their research before they filed their returns.

[Note: the screenshot of the Google search result has has been removed because the man whose name is removed by his request questions the accuracy of items in the screenshot]

Cite: Cunningham, T.C. Memo 2009-194

Related: Real-estate agent wins passive loss argument in Tax Court

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Unhappy anniversary!

September 01, 2009

World War II got going in Europe 70 years ago today.

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Another Aegis customer gets a free vacation

September 01, 2009

The Chicago-bases "Aegis" trust outfit has had bad outcomes all around. The promoters of the offshore tax evasion program got prison sentences ranging from ten to eighteen years. That may be long enough to have some awkward encounters with their former clients, like Donald Sikma:

Donald Sikma, a businessman from Dyer, Ind., was sentenced to 24 months in prison by U.S. District Court Judge Theresa L. Springmann in Fort Wayne, Ind., the Justice Department and Internal Revenue Service (IRS) announced.

In June 2009, Sikma pleaded guilty to one count of filing false tax returns for the 1998 tax year. According to court records, Sikma sheltered millions of dollars of income using a tax avoidance scheme promoted by the now-defunct Aegis Company. As part of this scheme, Sikma transferred portions of his income to an offshore trust. Sikma failed to report this income on his individual income tax returns. Using the offshore Aegis trust and other sham trusts, Sikma fraudulently avoided paying at least $1.13 million in federal income taxes.

The Moral: There's no magic way to manipulate trusts to make your taxes disappear legally.

Related: TWO MORE 'AEGIS' CUSTOMERS WIN VACATION AT CLUB FED

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Would an ankle bracelet get you half-price seats?

September 01, 2009

A minor league ball team has cancelled its "James A. Traficant, Jr. Release Night" promotion to celebrate the end of the former Congresscritter's tax evasion prison sentence. No word on whether it will be replaced by "Charlie Rangel Fun with Figures Night."

UPDATE from the comments: the independent Northern League Kansas City T-bones had a "welcome to the neighborhood night" in honor of Michael Vick when he was transferred to nearby Fort Leavenworth prison. It would be too good if their opponents were nicknamed the "Bulldogs."

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Don't fear the reaper

September 01, 2009

It's no fun when the IRS comes calling. You have to dig up your old receipts, and it takes time and sometimes professional fees to make them go away. But if you're not cheating, an IRS exam is an annoyance, not a terror, as Robert D Flach explains.

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