Long-time Roth & Company fixture Bruce Croll retired today.
We will miss Bruce, his great good humor, and his fine tax mind. We'll also miss Carla's filing season cookies. Good luck and happy trails, Bruce!
Update, July 1: the Senate passed the 3-month extension last night.
The $8,000 First Time Homebuyer Credit has turned out to be an incredibly expensive and ineffective boondoggle whose stimulative effect was largely focused on the inmate and future inmate communities. Naturally, Congress hates to see it die.
Current law requires that house sales have to close today to qualify for the credit, as TaxGrrrl explains. Anybody facing the deadline had to have a binding contract by April 30. That means they've had two months to get financing and close. Care to guess what sort of credit risks can't arrange financing within two months?
The National Association of Realtors Claims that 180,000 home sales could fall through if the June 30 deadline isn't extended. Still, look at the bright side: $1.4 billion in taxpayer money might not be flushed down a big hole $8,000 at a time if the deadline stays in place. Billions of dollars of bad mortgage loans may never be made if the deadline isn't extended.
Congress seems to be leaning towards the "flush the money down the big hole" approach, as Kay Bell explains. The House voted yesterday to give homebuyer another three months, 409-5. The Senate is trying to do the same thing.
UPDATE: More here:
The tax credit is the last injectable vein in the shriveled body of the American real estate market. Without it, there's nothing standing between dumb buyers and the horror of price discovery.
Well, other than Fannie Mae, Freddie Mac, and a passel of tax benefits for home owners and defaulters.
Maybe, if it frees up a parent to go to work. Kay Bell explains.
The Supreme Court decision in the much-awaited Bilski case on "business process" patents doesn't rule out tax-related patents, but it doesn't exactly open the floodgates, either, as Brett Trout explains. Linda Beale has more.
So Microsoft's $600 million shipping container stack/server farm with 75 or more jobs has evolved into a $100 million project with 25 jobs. Close enough for government work:
"That’s the most important thing here: economic development and job opportunities for people in this exciting information technology field," Culver says.
The so-called "server farm" will be located to the west of Interstate-35 and south of the Jordan Creek shopping mall that’s in West Des Moines. "You’re talking about really good-paying construction jobs to build this $100 million facility and then 25 permanent jobs," Culver says. "…We are very, very excited about this good news. We’ve been competing very aggressively for this project for about three years."
Combined with the subsidized Google server farm in Council Bluffs, Iowa should be an economic dynamo, right? Well, not exactly.
The Kaufmann Foundation has updated its index of entrepreneurial activity. Once again, Iowa is near the bottom, with the seventh-worst record of entrepreneurship in the country.
Source: Kaufmann Foundation.
Iowa's economic development system, based on taxing existing businesses and employees at high rates to provide tax credits and subsidies to lure and grow their competition, consistently gives Iowa some of the nation's lowest rates of new business growth. But nobody issues a press release when somebody starts a business in his garage or a rented office and slowly hires a few people a year, so as far as the politicians are concerned, those jobs don't count.
Related: THE RACE TO FEED MICROSOFT
Tom Harkin, unavowed socialist senator from Iowa, has teamed up with the Senate's avowed socialist, Bernie Sanders, to come up with a new estate tax. The results are as ugly as you'd expect. The Tax Policy Blog reports:
As reported by Janet Novack in Forbes, Senators Harkin, Whitehouse and Sanders are urging their colleagues to match Obama's exemption levels -- $3.5 million and $7 million -- but to demand a top rate of 65% on estate value above $500 million (dubbed a "billionaire's tax" because the threshold for couples would be $1 billion). Rates of 55%, 50%, and 45% would apply to estates valued lower.
Just as elderly, wealthy people have often moved to states with no estate tax to save money for their children, enactment of this bill could well start a wave of relocations to low-tax countries by people who often have homes abroad already. Here is a 2006 study by Jagadeesh Gokhale and Pamela Villarreal that compares estate tax rates in major countries. Only Japan would have a higher top estate tax rate if this bill became law. Of course, wealthy people would be more reluctant to renounce U.S. citizenship than they would be to move to Florida, but with hundreds of millions of dollars at stake, such moves would occur.
U.S. Taxpayers abroad are severing their U.S. ties in disturbing numbers. This won't help. And if you believe that taking 2/3 of somebody's wealth and giving it to the U.S. government to manage will be a good use of the money, I can get you a good deal on some Fannie Mae stock.
The "tax honesty" movement has a long list of reasons why they say that the federal income tax is invalid. As convincing as they may sound in a seminar at the local motel, there's one problem that they can't overcome: they never work. Whenever a federal judge looks at these arguments, they fail.
That didn't stop Carel A Prater. From a U.S. Attorney press release:
According to evidence presented at trial, Prater engaged in a fraudulent scheme to interfere with the internal revenue laws by selling services that he claimed would legally remove his customers from the federal tax system. Prater advocated the position that income earned in the United States is generally not taxable, and, in exchange for fees, he prepared false tax returns and bogus tax documents on behalf of his customers that were submitted to the IRS and recorded in the public records. Prater also advised his customers to conceal assets and income from the IRS. Between 2000 and 2003, Prater’s gross receipts exceeded $2 million.
That $2 million will be of limited use to Mr. Prater. He was sentenced last week to 28 years in federal prison for "corrupt interference with the Internal Revenue Laws, aiding and assisting the filing of a false tax return, failure to file a tax return, criminal contempt, structuring transactions to avoid reporting requirements, and making false declarations before a grand jury." He continued to sell tax avoidance advice even after being enjoined by a federal judge. As Mr. Prater is 71 years old, his retirement plans are pretty much complete.
Bruce the Missouri TaxGuy rounds up the "must read" tax blog commentary from last week.
If you've gotten a payment from BP for damages or for cleanup work, you've got taxes. TaxGrrrl explains.
The Tax Prof reports the sad news of the death of Martin D. Ginsberg, prominent tax lawyer and co-author of the indispensable treatise Mergers, Acquisitions, and Buyouts. Mr. Ginsberg's impressive biography in the book's "About the Authors" section shows a dry sense of humor that we can appreciate at the Tax Update:
Professor Ginsberg is a Fellow of the American College of Tax Counsel, a frequent speaker at tax seminars, mainly in warm climates, and the author of a ghastly number of articles on corporate and partnership taxation, business acquisitions, and other stimulating things. Professor Ginsburg's spouse was a lawyer before she found better work. Their older child was a lawyer before she became a schoolteacher. The younger child, when he feels grumpy, threatens to become a lawyer.
Of course "Professor Ginsberg's spouse" is Supreme Court justice Ruth Bader Ginsberg.
They were making last-minute preparations over lunch hour for the Des Moines Arts Festival, which opens downtown at 4:00 this afternoon. It runs all weekend. If the weather stays as nice as it was at lunchtime, turnout will be huge.
Find out in my new post at Going Concern.
The "extenders" bill, with its tax increases on small S corporations and private equity, fell three votes short of the 60 needed to move it through the Senate yesterday. The Senate leadership is giving up for now and moving on to other things.
It seems that the S corporation tax increase might have been the deal breaker for Olympia Snowe, the Maine Republican whose opposition sealed the fate of the bill. Tax Analysts reports ($link):
"It certainly could have been different," Snowe said. Snowe claimed that Democratic leaders had broken a promise to abandon a provision that would impose self-employment payroll taxes on many S corporation shareholders.
Snowe has said that she would like to refine the definition of reasonable compensation for shareholders. But she said that the S corporation provision as written was a "broadside attack" on small businesses.
That makes me think that the S corporation tax increase won't be back this year. Congratulations and thanks are due to all of you who contacted your congresscritters to fight the S corporation tax.
The outlook for private equity is less clear. The increased tax on "carried interests" might have passed if the S corporation provision hadn't stopped the bill. One private equity manager who I've been updating on the bill said this morning that it's just a matter of time:
Thanks Joe. We have decided to proceed with the sale of _______ for a number of reasons, including the threat of this legislation. I am just going to continue to assume it passes eventually since I believe that the only greater villain in this country than someone who receives income from a carried interest is a Goldman employee who also gets carried interest income.
The rest of the bill might well resurface later this year. There remains plenty of money and influence wanting to push through the 70-odd "temporary" tax breaks in HR 4213, including money for research credits, biodiesel, Nascar and Hollywood. But it clearly is no slam-dunk. For at least a brief golden moment it appears possible that "temporary" tax subsidies will finally become so.
Compare and contrast Cash for Clunkers:
Source: Coyote Blog
with the First-time Homebuyer Credit:
When you average the buying frenzy of the last month of each program with the crash in the next month, it's apparent that the net stimulative effect of the programs -- which cost the taxpayers around $16 billion together -- was approximately zero. When you consider that they destroyed hundreds of thousands of perfectly good used cars -- the kind that poor people buy -- and raised the price of those remaining, these stimulus programs ended up destroying wealth, not creating it.
Related prophecy: I'll bet the May house sale market will look like this too
Phil Hodgen, an international tax law attorney, welcomes IRS prosecutor Kevin Downing to the private sector:
And I wish him great success, because the ex-government attorneys are the ones you want by your side when an enthusiastic Deputy U.S. Attorney wants to put you behind bars. The former prosecutors–like Mr. Downing–have lived inside the belly of the beast and they know what to do.
There is one thing I do hope for, however. When Mr. Downing leaves the government, I hope he gets for a client an 80 year old immigrant granny who is facing poverty in her old age because of the current Voluntary Disclosure Program. I have a few of those clients.
Let’s also hope that when faced with this situation Mr. Downing will appreciate the terrible splendor of the moral rectitude and righteous pursuit of sinners from 1111 Constitution Avenue, where there is no distinction between his 80 year old granny with a $1,500 tax liability and Igor Olenicoff.
Because at the moment the IRS treats them as functionally identical. And that is partly Mr. Downing’s doing.
Actually, they don't treat them as identical. The grannies don't get Igor Olenicoff's sweet deal.
I'll update this post today; scroll down for the latest.
The effort to increase taxes on small professional S corporations remains two votes short of passage, and The Washington Post reports this morning that the effort may be near death:
Senate Democrats were ready to throw in the towel late Wednesday on a months-long effort to deliver fresh aid to states and extend benefits to unemployed workers, saying Republicans had rejected their latest offer to pare down the size and cost of the package.
Senate Majority Leader Harry M. Reid (D-Nev.) set the procedural wheels in motion for a climactic vote on the legislation as soon as Thursday. Despite days of talks, a senior Democratic aide said Reid had been unable to persuade any Republicans to support the measure, leaving him at least two votes short of the 60 needed to overcome a GOP filibuster.
The Democratic leadership has insisted on tying the enemployment extension to a big mess of pork, including subsidies for biodiesel, race tracks and film producers, to be paid for by taxes on small S corporations and private equity investors.
Tax Analysts distributed a draft version of the latest proposed compromise ($link), which still has the S corporation tax increase.
The Tax Update will watch developments throughout the day. If you think your small professional tax business shouldn't fund NASCAR, tell your congresscritter to kill HR 4213.
Update, 12:30 pm Central: It looks like the Senate is going to be spending some time on Iran sanctions, so nothing is likely with HR 4213 until later this afternoon. Meanwhile, Tax Analysts reports good news:
Senate Democrats said June 24 that they don't expect to pass extenders legislation in the near future and will move to a small-business bill after a procedural vote later in the day.
The Senate is expected to vote today on a motion to limit debate on a substitute amendment to H.R. 4213, the American Jobs and Closing Tax Loopholes Act of 2010. At a press conference, Democratic leaders said they do not anticipate that moderate Republicans will support the amendment despite repeated efforts to modify the legislation to resolve differences.
Update, 1:10 pm. The Senate continues to drone on about Iran, but I just saw this from The Hill:
Reid blasts Republicans as tax extenders bill sinks in the Senate
The Senate's tax extenders bill, which includes an extension of unemployment benefits, appears on death's door.
An increasingly frustrated Senate Majority Leader Harry Reid (D-Nev.) on Thursday said he would make another effort to move the bill, but made it clear he lacks the 60 votes necessary to win a procedual motion.
Reid also blasted Republicans for blocking the legislation and said he had concluded the GOP doesn't want a deal.
Maybe the S corporation tax will wake up with its elbows bumping wood tomorrow.
3:20 pm: Now Sen. Dorgan of North Dakota is going on about indian health care.
3:40 pm. Patty Murray talked for five minutes talking about how they did everything to attract votes but spend less money. Then it went back to somebody talking about the Supreme Court.
5:10 pm The bill fails to get 60 votes! Good for all of you S corporation people who squawked. Nice work.
Here's the roll call. All voting Republicans and Nelson of Nebraska voted no.
Washington Post says nothing will happen until after July 4.
While the first-time homebuyer credit was an expensive boondoggle, it did provide an important stimulus to the nation's hard- pressed but crucial prison commissary sector. The TaxProf reports:
1,295 prisoners receiving credits totaling $9.1 million who were incarcerated at the time they reported that they purchased their home. These prisoners did not file joint returns, so their claims could not have been the result of purchases made with or by their spouses. Further, TIGTA found that 241 prisoners were serving life sentences at the time they claimed that they bought new primary residences.
But at least it revived the housing market, right? Tax Analysts reports ($link)
Ted Gayer, a senior fellow at the Brookings Institution, agreed with Mitchell, calling the credit "very poorly designed" and "ripe for fraud." He noted that with each extension, the credit was expanded to subsidize more purchasers without discriminating between people who would have bought without the subsidy and those who couldn't have. "Each step of the way we've thrown money at the wrong problem -- that there is a very weak housing market caused by excessive supply," Gayer said.
Gayer said the proof is in the May housing numbers, which he called "terrible." After the credit's April 30 contract due date lapsed, new single-family home sales dropped more than 18 percent below estimated declines, suggesting that the credit has not led to a self-sustaining recovery in the housing sector. Even existing home sales, which were partially buoyed by the credit, were "surprisingly weak," he said.
Ooops. Given this impressive record of unrelieved failure, there are of course congresscritters eager to continue the program. The HR 4213 "extender" bill wouldn't extend the program itself, but it would give those who already have bought houses more time to close.
Cato Institute analyst Daniel Mitchell looks on the bright side:
Mitchell said he would be "very surprised if the credit had a net positive effect on housing" but that the implications if the credit did work "would be worse." Mitchell explained that he would prefer the credit to be "a short-run waste of money rather than a long-term distortion in the allocation of capital into the residential housing market."
Hey, we'll take what good news we can find.
Tax preparer Robert D Flach has prepared tax returns with pen and ink his whole career. Starting next year, the IRS wants to require him to e-file his returns, which requires software. In an open letter to the IRS Commissioner, he expresses his unhappiness:
I do not see how Congress or the IRS can require me to spend thousands of dollars each year to purchase software to comply with this new requirement. And, if all tax return preparers are required to be registered, and all tax return preparers are required to submit returns electronically, there is no need for the additional step of becoming an Electronic Return Originator.
Will the Internal Revenue Service be providing tax preparers with a free method of submitting income tax returns online? Or will it force all preparers to choose to either purchase expensive, flawed software or request that their clients OPT OUT of electronic filing?
Remember, Robert, it's for their convenience, not yours or your clients, and they are bigger. That's all they care about.
Congress lowered the budgeted cost of Obamacare by leaving out the "Doc Fix" increases in Medicare reimbursements. As we noted recently, they now propose to let pensioners help pick up the tab. TaxVox explains:
To appear fiscally prudent, lawmakers want to pay for that spending by raising new revenues or reducing other spending. About $4 billion would come from changes to Medicare. The other $2 billion would come from allowing businesses to postpone contributions to their underfunded pension plans.
Yes, you read that correctly. In the strange world of Washington budgeting, lawmakers can pay for new spending by making it easier for corporations to underfund employee pensions.
You might think this move would worsen the budget situation since the government insures pensions through the Pension Benefit Guarantee Corporation. And you would be right. If firms put off needed contributions to their plans, the PBGC will be exposed to more losses, and future government spending will be higher (even if PBGC collects somewhat higher premiums because of the underfunding). Many of those losses won’t occur for years, however, and thus fall outside the 10-year window that Congress uses to evaluate the budgetary impacts of legislation.
Yet the Congressweasels wonder why we don't like them.
It's not enough for California to have ridiculously high taxes, or to hit tourists with taxes for just looking around. Now they may make drivers carry advertising on their license plates ("Call 1-555-LAWSUIT!"). They should make sure they do the front plates in mirror-writing, for the benefit of all of the taxpayers who are driving away to more sane states.
More from Peter Pappas.
When you invest your employees' pension fund assets, it's best to think of a diversified portfolio with some mix of equities and bonds. A Central Iowa couple took another path:
The investigation of Mr. and Mrs. Van Elsen was initiated in 2006 when a former employee of their business, Van Elsen Consulting, Inc., contacted the Department of Labor to complain that the company had withheld retirement contributions from his paychecks in 2005 and 2006 but not forwarded the money to his Simple IRA retirement account.
Further investigation revealed that two other employees also had retirement contributions withheld from their paychecks during that period but not forwarded to their Simple IRA accounts. Evidence at trial established that Mr. and Mrs. Van Elsen withdrew more than $200,000 from the company’s account during the period in which the employee retirement contributions were not forwarded. Mr. and Mrs. Van Elsen also used the company’s money during that period to purchase a brand-new boat, four cars, and make mortgage payments on an expensive home near the Bos Landen Golf Course in Pella. Even after IRS and Department of Labor investigations had begun, the couple continued using company money to make car and house payments while not forwarding employee contributions to the retirement plans.
As you can tell by the context, this ended badly. The Des Moines Register reports that the couple was sentenced on embezzlement charges yesterday. James Norman Van Elsen got 15 months in prison, while his wife, Beth, received 12 months of home confinement.
The moral? Whether it's 401(k) withholding, Simple IRA withholding, or a profit-sharing contribution, you should put it in the plan as soon as you can. Never pretend that the plan money is your money.
There seem to have been no major developments in the battle over HR 4213, the "extender" bill that would raise taxes on small S corporations and private equity. Tax Analysts reports ($link) that the S corporation provision may be keeping Max Baucus, the big sponsor of the bill, from getting it passed:
A key vote in the Senate remains that of Finance Committee member Olympia J. Snowe, R-Maine, who said that she has had several recent conversations with Baucus and the Democratic leadership. Snowe said she is pleased with the direction the bill is taking but still objects to parts of it, including an offset which would subject many S corporation shareholders to self-employment payroll taxes.
Snowe has acknowledged that some S corporation shareholders improperly avoid payroll taxes but has said that the extenders provision would impose an unfair burden on small businesses.
Let's hope she doesn't cave.
Another Tax Analysts piece ($link) laments how all of the "easy" tax increases have been used up:
As the American public becomes increasingly vocal about the country's fiscal problems, taxwriters are running out of ways to pay for their policy priorities without putting broad tax increases on the table.
Here's a clue for any congresscritter looking for one: change your policy priorities. Make spending less of our money your priority. You can start by not extending the 70 "temporary" provisions. Let racetracks and biodiesel producers spend their own money.
A commenter on yesterday's post about the Parker Tax Court case, where a taxpayer got hit with penalties for tax positions that weren't considered a serious problem when Tim Geithner became Treasury Secretary:
This overlooks the fact that in Geithner's case the statute of limitations for assessing additional tax had expired. Geithner wasn't charged a penalty because at that point he had no obligation to pay the tax although he did. The statue of limitations for crediting his Social Security account have also expired so he will get no benefit from the taxes paid; Parker will.
Yes, the statute had expired. That still doesn't make Mr. Geithner look good.
Mr. Geithner made a big show of paying his "taxes." But he didn't, really. He doesn't put himself in the same position as other taxpayers if he doesn't pay the same penalty as other taxpayers who did the same thing but got caught.
More importantly, the case shows that Geithner didn't make a really innocent mistake. The Tax Court says that what he did was far enough out of line that it should be subject to an accuracy-related penalty of 20%. This wasn't a matter of botching a complex computation. He just ran a red light, each year. Hardly a great example for the head of an agency that will be leaning harder than ever on taxpayers in the coming years.
If you want to deduct your gifts to Goodwill or the Salvation Army, be specific. TaxGrrrl explains:
When you make charitable contributions, you have to be somewhat specific on the receipt. “4 bags of clothes” (one of the entries on Mr. Roberts’ tax return) is not sufficient. While you don’t need to itemize each and every piece of clothing, some attempt at accurate description is important. I’ve said before that my mom is great at this: she’ll write “four pairs women’s dress slacks, hardly worn.”
"Mr. Roberts" is the taxpayer in this case.
An alert reader sends Senator Grassley's observations on the effect of the scheduled Lazarus-like resurrection of the estate tax next year:
We have forced many unwilling sellers to have to deal with a very willing ‘shark’ of a buyer waiting in the murky waters of tax uncertainty.
Our alert reader observes: "Holy Strained Metaphor, Batman."
It's not often you get a laboratory experiment in the tax law. The Tax Court gave us one yesterday.
Treasury Secretary Timothy Geithner famously underpaid his taxes on his income from his days working at the International Monetary Fund. IMF employees don't have FICA and Medicare tax withheld from the paychecks, so they are supposed to treat the income as "self-employment" earnings, paying both employer and employee payroll taxes on the income.
Mr. Geithner's copy of TurboTax failed to flag this, and when it came up during his nomination hearings, he blamed the software. He paid his old taxes without penalty, which leads one to wonder: did he get a special deal because he's a big shot?
The scientists at the Tax Court have validated this hypothesis in a case involving IMF employee David Cameron Parker. From the Tax Court opinion:
The IMF sent, and petitioner received, Form W-2, Wage and Tax Statement (Form W-2), for his taxable year 2005. The IMF indicated in that form that it had not withheld Federal income tax or Social Security tax from the earnings that petitioner had received from the IMF during 2005.
Petitioner timely filed Form 1040A, U.S. Individual Income Tax Return, for his taxable year 2005 (2005 return). Petitioner used certain tax preparation software known as TurboTax in preparing that return.3 At all relevant times, including when he filed his 2005 return, petitioner was aware that the IMF had not withheld Federal income tax or Social Security tax from the earnings that he had received from the IMF during 2005 and that he had an obligation to report and to pay self-employment tax because the IMF had not withheld any Social Security tax for that year. Nonetheless, petitioner did not report any self-employment tax in his 2005 return.
Since blaming the software seems to have worked for Mr. Geithner, Mr. Parker gave it a go. The Tax Court didn't buy it, assessing penalties. But what about Mr. Giethner?
We shall address briefly petitioner's contention that the IRS granted "favorable treatment" in a case involving U.S. Secretary of the Treasury Timothy Geithner, which petitioner described as "incredibly similar" to the instant case. According to petitioner, "there should not be different, or favorable rules for the well-connected". The record in this case does not establish any facts relating to the case to which petitioner refers involving U.S. Secretary of the Treasury Timothy Geithner. In any event, those facts would be irrelevant to our resolution of the issue presented here. Regardless of the facts and circumstances relating to the case to which petitioner refers involving U.S. Secretary of the Treasury Timothy Geithner, petitioner is required to establish on the basis of the facts and circumstances that are established by the record in his own case that there was reasonable cause for, and that he acted in good faith with respect to, the underpayment for each of his taxable years 2005 and 2006 that is attributable to his failure to report self-employment tax.
Shorter Tax Court: The accuracy-related penalties of Sec. 6664 are for little people.
Update II More on Geithner and little people, in response to a comment.
Bonus depreciation -- the ability to deduct 50% of the cost of a capital asset in the year of purchase, rather than depreciating it over a period of years -- was enacted in 2008 as a temporary anti-recession measure. With dozens of "temporary" measures routinely re-enacted one year at a time, temporary isn't what it used to be. Now senior senate tax writers are looking to extend bonus depreciation, too. Tax Analysts reports ($link):
Leaders of the Senate Finance Committee on June 21 introduced a bill to extend through 2010 the 50 percent bonus depreciation rate under section 168, while pledging to continue work on a separate small-business package.
In a prepared floor statement, Finance Committee Chair Max Baucus, D-Mont., characterized S. 3513, the Bonus Depreciation Extension to Create Job Act, as another tool to help small businesses.
The bonus depreciation rules of 2008 and 2009 apply to new property, but not to used property.
The problem with bonus depreciation is that it really is designed get businesses to hurry up their fixed asset purchases -- stealing business activity from subsequent years. When you keep extending it, it loses its punch. It becomes an expectation, and people are less inclined to hurry up and buy when they think the break will continue into next year. Also, there are only so many fixed asset purchases to accelerate.
Bonus depreciation is also a little compliance nightmare. Most states don't allow it, so businesses have to maintain separate depreciation schedules state-by-state for bonus assets.
If bonus depreciation is a great idea, it should be permanently added to the tax law -- as should all of the "temporary" provisions that Congress keeps extending. If it's extended more than once, it's hard to believe it's really temporary, and Congressional budgeteers should be forced to recognize that.
Subsections, when divided, are broken down into paragraphs, represented by numbers in parentheses. In turn paragraphs, when divided, are broken down into subparagraphs, represented by capital letters in parentheses. If divided, subparagraphs break down into clauses and clauses into subclauses. Clauses are represented by lower-case Roman numerals and subclauses by upper-case Roman numerals. Let’s ignore the fact that in ancient Rome there were no lower-case letters, and thus no representation of numbers using what properly are called lower-case Western alphabet characters...
What is this (aa) thing? Why had I never noticed it before now?
Since the Supreme Court is still struggling with the (i) thing, this could be all it takes to have Obamacare declared unconstitutional.
The pork industry may be shelving its "The Other White Meat" slogan, but that doesn't mean unicorn producers can use it now. (via Phil Hodgen).
My local Congresscritter has had a brainstorm. He has decided that not only should taxpayers get to deduct their home mortgage interest, they should deduct part of it twice. From a Boswell Press Release:
Today, Congressman Leonard Boswll introduced the Homeownwer Tax Assistance Act which would repeal the repayment provision of the initial first-time homebuyer tasx credit and provide a temporary 25 percent allowance for qualified residence interest deduction...
...this legislation provides an additional 25 percent mortgage interest allowance for homeowners who deduct their mortgage interest, effectively allowing homeowners to deduct 125 percent of their mortgage interest when they file their taxes, thus reducing their taxable income.
This accomplishes two equally useless objectives:
It lets off the hook people who took money from the government with the full, public understanding that they would have to pay it back. This, of course, does nothing for the housing market; it just provides an additional break to a small group of taxpayers who were already getting an interest free loan from the rest of the taxpayers. The repayment requirement doesn't apply to the first-time homebuyer credit for post-2008 purchases.
The bill also encourages people to buy more and bigger houses by subsidizing part of the interest -- making housing more expensive by subsidizing demand by those who can use the deductions, at the expense of non-itemizers -- who are most likely to have low incomes. Apparently the affordable housing problem has been solved, and we can immediately repeal measures to increase the housing supply -- starting with the low-income housing tax credit.
No such luck. From the press release:
"Much has been done this Congress to spur home purchases and home construction, but I understand that there are many homeowners across the nation who are still facing tough times," Boswell said. "This bill will provide important and much-needed assistance to existing homeowners by allowing them to keep more of their hard earned money, while also helping to stem the tide of foreclosures that plague many communities."
So much nonsense in one little paragraph. If we are need to spur purchases, we don't need more supply with new construction. If we need to spur construction, demand must be strong already. Leave it to Congress to spur supply and demand at the same time.
And allowing people to deduct more of the interest they are paying will stem foreclosures? You can only deduct home mortgage interest if you make your loan payments. If you can't make your payment in the first place, a deduction for the interest you can't pay doesn't help much.
It's easy to dismiss this as just another silly bill by an obscure Iowa representative that will go nowhere, but that's how cash for clunkers started.
Related: Tax credits and magic money
The chief Senate taxwriter failed to garner the 60 needed votes for the slightly less stupid version of his tax increase on small professional S corporations last week. Kay Bell reports:
Recalcitrant lawmakers again beat back the chairman's entreaties and, facing a looming weekend, he finally surrendered … for now. The Senate adjourned Friday without finishing work on the fractious tax and offsetting spending measure.
But Baucus vows to continue his efforts to gain support of Senate moderates in both parties. We're talking specifically about Democratic Sen. Ben Nelson of Nebraska and Republican Sen. Susan Collins of Maine; both voted against the package
That means we can expect more fiddling around the edges of the S corporation tax increase in HR 4213. Senator Baucus will be loath to give up, though, as he needs to permanently increase the tax on small S corporations to pay off race tracks, biodiesel producers and movie producers for one more year.
TaxGrrrl also has an update.
Related: Extenders bill a 'jobs' bill?
Congressweasels can get really indignant when they criticize business accounting practices. Then they go do something like this (via Tax Analysts, $link):
The Senate on June 18 took a small step forward in its effort to pass extenders legislation, approving by unanimous consent a pension relief provision as an offset for a six-month extension of the "doc fix."
The pension provision would raise $2.1 billion over 10 years by easing funding requirements for plan sponsors, thereby leaving more taxable income.
The "Doc Fix" corrects an intentional underfunding of Medicare payments to physicians that was included in Obamacare to pretend it would be less expensive. They will increase tax revenue by reducing employer deductions for pension plans -- and therefore weakening the retirement security of pensioners and increasing the contingent liability of the Pension Benefit Guarantee Corporation, a government agency. So: money for doctors, courtesy pensioners and taxpayers.
And people wonder why the defined benefit model of pension plans is broken.
More from The Hill.
Attorneys get to keep their clients' confidence. They don't get to conspire to help them evade taxes. Russ Fox reports on attorney Micaela Dutson, who was convicted of conspiring on $7 million worth of tax fraud. But there's more!
I also need to mention that the Dutson filed a lien against then Treasury Secretary John Snow for $108 million.
Way to lay low there, guys. You don't want them to notice you when you're busy committing a crime.
Friday morning ominous:
Friday lunchtime sunny:
Have a great weekend!
Another "jobs" bill is creeping through Congress. Earlier this week Congress passed HR 5486, the "Small Business Jobs Tax Relief Act of 2010." One if its primary "jobs creators" is a capital gains breaks for small corporations. Kay Bell explains just how useless this is:
First, total exclusion from capital gains taxes would apply to certain small business stock purchased between March 15, 2010, and Jan. 1, 2012.
And in addition to the specific window, to qualify for the exclusion the stock must be held for at least five years.
But here's the biggest limitation. Because of their structure, most small businesses won't qualify for the tax break.
"The tax break only applies to investments in C corporations, a form of business organization that is rare among small businesses," writes Kent Hoover at Portfolio.com. "Most small firms are S corporations, partnerships, limited liability companies, or sole proprietorships — entities whose profits pass through to their owners for tax purposes. These small businesses won't benefit from this new tax break."
So you have to hold the stock forever in a suboptimal tax structure to qualify. And it does nothing for you until you sell -- meaning that while you are struggling to make payroll, file your big blizzard of 1099s, and figuring out how to meet the coverage mandates of Obamacare, you're on your own.
This whole "jobs" legislation thing is getting pretty old. Since the start of the Bush II administration, we have had the following "jobs" or "economic development" tax acts:
- Economic Growth and Tax Relief Reconciliation Act of 2001
- Job Creation and Worker Assistance Act of 2002
- Jobs and Growth Tax Relief Reconciliation Act of 2003
- American Jobs Creation Act of 2004
- Small Business and Work Opportunity Tax Act of 2007
- Economic Stimulus Act of 2008
- Worker, Retiree, and Employer Recovery Act of 2008
- American Recovery and Reinvestment Act of 2009
I'm sure that's only a fraction of the "jobs" legislation passed over the last ten years. Unemployment in January 2001 was 4.2%. Unemployment in May 2010 was 9.7%. Thanks for all the help, Congress.
Advocates of HR 4213, the "extenders" mish-mosh, say that they have to pass the hideous barrel of recycled pork, and its attendant tax increases on private equity and small professional S corporations, to save jobs. Howard Gleckman calls shenanigans on this argument at TaxVox:
Start with the roughly $32 billion in expiring tax provisions (aka the extenders) that the bill would continue for another year (or in a few cases two). Some of my favorites: $46 million in tax subsidies for movie producers and $38 million for NASCAR racetrack owners. As I have written in the past, most of these highly targeted subsidies will do little or nothing to create new jobs. They will, however, provide a financial windfall to their recipients. The other day, Bob Bixby of the Concord Coalition had a suggestion: Kill the Extenders. That's not a bad idea.
In fact, that's an excellent suggestion. I wonder why nobody has thought of that before.
Unfortunately, Senator Max Baucus managed to attract a few more votes for the bill yesterday by redistributing the pork. After the bill only got 45 of the 60 needed votes Wednesday, it got 56 votes yesterday. Tax Analysts reports ($link):
The amendment contained provisions to increase taxes on carried interest income and subchapter S shareholders that were watered down from Baucus's first version. It also included less deficit spending, and gained more support than the earlier version. But its changes were not enough to satisfy a crucial group of centrist lawmakers who said before the vote that they were still unhappy with its deficit impact.
If your congresscritter votes for HR 4213, it means they care more for Hollywood and NASCAR than they do for your little professional practice. Tell them so.
TaxGrrrl reports that Pennsylvania's tax amnesty ends today. That means folks who haven't paid their tithes to the Land of Bortherly Love will find out if the creepy amnesty ads threatening them with annihilation were just a bluff.
I prefer the Pajamas Media version of the ad:
The IRS has issued (Rev. Rul. 2010-18) the minimum required interest rates for loans made in July 2010:
-Short Term (demand loans and loans with terms of up to 3 years): 0.61%
-Mid-Term (loans from 3-9 years): 2.35%
-Long-Term (over 9 years): 3.94%
The Long-term tax-exempt rate for Section 382 ownership changes in July 2010 is 4.01%.
So the Senate really is gagging on HR 4213, the misbegotten extender bill that features tax increases on small professional-service S corporations and private equity. They needed 60 votes to move the bill yesterday, and they couldn't even get 50. Eleven Democrats joined 40 Republicans in opposition.
So Max Baucus, the Senate architect of the extender bill, went back to his drawing board. He apparently decided that the way to attract more votes was to make the bill even uglier. He increased the tax on private equity, extended the closing date deadline for the "popular" first-time hombuyer credit, and made slight changes to the S corporation tax increase.
The homebuyer credit bill gives taxpayers who entered into a home purchase contract by April 30 until the end of September to close. Apparently some of those homebuyers are having trouble getting loans. Maybe, just maybe, those people are having trouble getting loans because they aren't creditworthy. But Senator Max wants them to get $8,000 each of our money anyway. No wonder news stories always call it the "popular first-time homebuyer credit."
The S corporation provision is still lame. It replaces the completely insane test based on the value of employee "reputation and skill" of three of fewer "employees." Instead, it would apply self-employment tax to K-1 income of S corporations who have 80% or more of their income "attributable to" the "services" of three or fewer shareholders.
That leaves open an obvious question: what does "attributable to" mean? Billings to those owners' clients? Billings attributable to those owners' charge hours? The provision also blatantly targets the smallest professional service providers for the benefit of their larger competitors.
Rather than continuing their desparate search for a revenue fix, Congress should stop passing tax breaks for favored constituencies "temporarily" to hide their real cost. They should either have the nerve to face up to their true cost -- because they have no real intention of letting any of them expire -- or they should stop extending them.
Kay Bell has more.
Whenever we mention how much of the tax burden is carried by the highest-income taxpayers, somebody always says that when you look at payroll taxes - FICA and Medicare - the poor still pay more then their fair share. A good point, if it were true. Tax Policy Blog reports on some new numbers from the Congressional Joint Committee on Taxation:
In a May 28, 2010 letter to Representative Dave Camp and Senator Kent Conrad, JCT reports that between 2000 and 2006 the number of returns with refundable credits in excess of the employee's share of payroll taxes increased from 11.8 million to 16.1 million. In 2009 and 2010, those figures jumped to 23 million because of such things as the making work pay credit and the lowering of the income threshold for determining the refundable portion of the child credit to $3,000.
JCT projects that the number of returns with refundable credits exceeding the employee's share of payroll taxes will hover between 14 million and 15 million for the next ten years.
Of course, employers pay the other half of an employee's payroll taxes so JCT estimated how many returns receive refundable credits in excess of both portions of the payroll tax. In 2000, 8.7 million returns got more in refundable credits than they paid in total payroll taxes. The number jumped to nearly 12 million in 2006 and then up to 15.5 million in 2009 and 2010. It will hover between 10.6 million and 11.3 million for the next decade.
This chart from the Tax Policy Center makes a similar point:
My new post at IowaBiz.com.
When the floodwaters receded from Cedar Rapids, they seem to have left a creepy power-grabbing residue. Brian Gongol reports:
Interstate 380 now has speed cameras mounted along the freeway as it passes through Cedar Rapids. This is abhorrent. When Iowa City puts up nuclear-weapon-free zone signs along the streets, it just looks goofy and anachronistic. (Who's going to carry a nuke into Iowa City?) But when Cedar Rapids mounts police cameras along the road and uses those to issue fines, it reeks of creepy authoritarianism. When the law is enforced via camera, rather than by an individual officer of the law with judgment and discretion, then we're turning over our responsibilities to think to the machines, and asking to be baby-sat by Big Brother.
In addition to levying a creepy tax on travelers, they are also taking money form their own taxpayers and giving it to well-connected companies to steal their "jobs" from the suburb that has hosted their city council meetings since the flood. Presumably their mayor, Republican former legislator Ron Corbett, is angling for a higher office by bringing "jobs" to Cedar Rapids. Lets hope that he never gets any more power than he has.
Without it, we have the specter of continued use of the S Corp entity to avoid payroll taxes, where very well paid doctors, lawyers and other service providers magically convert compensation income to non-compensation income, and avoid paying payroll taxes on most of it.
It may be flawed, in other words, but the policy benefits are worth it, and other solutions would be harder to enact.
I don't agree with the policy goals, but even if I did, I wouldn't do it this way. Why would you use a screwy test based on whether the "principal asset" (whatever that means) of a business is the "reputation and skill" of three or fewer employees (whatever that means). If they really want to hit professional S corporations with a new tax, it would be much easier for the IRS and for taxpayers to comply with a system that just says all, or some portion, of K-1 income from certain professional business operations is subject to self-employment tax. The current HR 4213 language was obviously written by somebody who has never actually had to prepare a business return.
Fortunately, the Senate may be gagging on the bill. Tax Analysts reports ($link) that Nebraska Democrat Ben Nelson has joined Republicans Olympia Snowe and Jim Enzi in fighting the S corporation provision. This makes it more likely that the provision will be dropped to pass the rest of the giveaways in the "extender" bill.
Tax Analysts reports that so far chief Senate taxwriter Max Baucus is unmoved:
Later in the day, Baucus defended the provision on the Senate floor and urged senators to support his substitute amendment. He described how some S corporation shareholders pay themselves an "artificially low salary" in order to avoid payroll taxes, saying, "The choice of entity should not affect an individual's tax liability for his or her services."
Funny thing, Max: it still would for anybody but small professional service providers.
Our brave filmmakers want the states to give them our money. Now they're shocked, shocked that politicians get upset when state money is used to -- well, let Kay Bell explain what's happening in Michigan:
Michigan has decided not to provide tax money for the horror film The Woman, a sequel to the icky Offspring.
According to the New York Times, the state's film commissioner,Janet Lockwood, sent the director a note informing him that the film's extreme depictions of "realistic cannibalism; the gruesome and graphically violent depictions described in the screenplay; and the explicit nature of the script" were the main reasons for not providing it tax breaks.
And, oh yes, ""This film is unlikely to promote tourism in Michigan or to present or reflect Michigan in a positive light."
Philistines. Michigan probably wouldn't have funded Soylent Green either.
Apparently it's not just the states. New Zealand has been throwing money at Hollywood, too. Unlike Michigan, New Zealand is starting to figure out that they are wasting their money:
A Cabinet paper prepared by Treasury in February and released to the Herald on Sunday under the Official Information Act, said subsidies for films such as Avatar and King Kong could not be economically justified.
They had likely caused a net economic loss of $36 million.
Update: More from the Tax Policy Blog.
Related: Let them eat canapes.
This seems to be the time of year for tax bloggers to boost their traffic with giveaways. Kay Bell is giving away desk calendars. Roni Deutch is giving away an Ipad. TaxGrrrl just had her own giveaway.
It is therefore necessary to announce the Tax Update Blog's official policy on giveaways: we will not stoop to such tacky traffic-building stunts unless we get something cool to give away, like an Ipad or some cool tax book. Or a coffee cup. Or something. Sponsors, contact me, but with dignity!
Robert D. Flach has posted his weekly Wednesday "Buzz," an eclectic roundup of tax blog posts.
The Iowa Attorney General piled on some new charges in the Iowa film tax credit scandal. Additional charges were filed against Wendy Runge and Matthias Saunders, who had been charged earlier with inflating expenses to obtain unwarranted tax credits. A new filmmaker, Zachary LeBeau, was also charged. Radio Iowa reports:
The new charges allege one count of ongoing criminal conduct and 11 felony counts of first-degree fraudulent practices by the three in connection with some $90-million in production costs for several different movie projects. LeBeau turned himself in to Polk County authorities and was released on bond.
The official complaint provides a helpful window on the operation of of the tax credits. The expenses submitted to the Iowa Film Office included the following invoices for 45-day rental expenses:
one (1) push broom - $225.00
one (1) hand broom C $225.00
six (6) road cones - $1,350.00
one (1) metal rake - $225.00
one (1) pick axe - $225.00 .
two(2) 4' step ladders - $900.00
two (2) 6' step ladders - $900.00
one (1) 8' step ladder - $900.00
one (1) 10' step ladder - $900.00
one (1) 12' step ladder - $1,125.00
one (1) 24' extension ladder - $1,350.00
one (1) sledgehammer - $225.00
two (2) shovels - $450.00
The Attorney General alleges that the expenses were grossly inflated. (If not, the filmmakers badly botched their "lease or buy" computations.) In addition, the complaint says many of the items were listed twice.
The Iowa Film Office duly approved all of the expenses. The complaint adds:
Based on these claims, much of which was falsified and/or inflated, IDED, at the express recommendation and approval of Wheeler, issued tax credits worth $1,850,777.85 or 50% of the claimed "expenditures."
On or about November 25,2008, Matthias Saunders, acting as President/owner of Maximus, assigned Maximus Production Services, LLC's interest in tax credits to The Scientist, LLC.
On or before December 17, through tax credit broker/film investorllowa film consultant Chad Witter, the defendants sold to third parties their rights to the tax credits for "The Scientist."
Based upon Wheeler's representation that he had verified the eligibillty for tax credits under the Program, IDEO issued expenditure tax credits for the film project, "The Scientist," totaling $1,850,777.85.
The charges are currently scheduled to come to trial this fall, just in time for the campaign season. That seems like a bad thing for the Culver administration. The charges may be intended to show how tough they are on those who would abuse the tax system, but they are just as likely to show how badly the film credit program was run, right before the election.
Irwin Schiff has been to court again. Not surprisingly, he lost again.
Mr. Schiff was a pied piper for the "Tax Honesty" movement, using various arguments to make the (hopeless) case that there really isn't an income tax, at least not for most of us. He is currently serving a 13-year sentence for "conspiracy to defraud the government for the purpose of impeding and impairing the Internal Revenue Service, assisting in the preparation of false income tax returns, tax evasion, and filing false income tax returns."
He went back to court to argue that he should have been forbidden from acting as his own attorney on the case that resulted in his current prison stay. The appeals court held otherwise:
Although Schiff suffers from bipolar disorder and possibly a delusional disorder, his afflictions did not prevent him from adequately conducting his own defense. Schiff had a coherent trial strategy, offered rational defenses, conducted cross-examinations, direct examinations, and made a closing argument.
It presents a dilemma for those who still hold to his arguments. Either they sympathize with him and agree that he was crazy and shouldn't have been his own attorney -- with all that implies about his opinions on the tax law -- or they say that he isn't telling the truth about being incompetent, but was telling the truth about the tax law.
David Brunori reports on something I'd like to see somebody try in Iowa:
An Idaho legislator filed suit against the State Tax Commission alleging that the commission unfairly gives secret tax breaks to wealthy and well connected citizens who game the system. Rep. Shirley Ringo says the commission violates the state constitution's uniformity requirements (that everyone be treated equally) and costs the state millions of dollars in lost revenue. Ringo alleges that the commission routinely gives secret tax breaks to friends of politicians and prominent business leaders.
In Iowa the breaks are only semi-secret. The politicians like to issue press releases about the jobs they "save" or "create" giving away your money with tax credits -- of course omitting the larger number jobs they destroy by taking the money from you and your employer to give to the well-connected. But the use of the funds is a secret, protected by the courts of the great state of Iowa (though sometimes we get a frightening peek behind the curtain).
It's certainly unfair and futile for the state to take money from everybody to give to a favored industry or employer. Is it illegal? Probably not, but it would be nice if somebody filed suit just to make sure.
The government will stop writing checks and go to an all-electronic payment system over the coming years, reports Kay Bell. Tax refunds won't immediately be covered by this new policy, but are likely eventually to be.
What if you don't have a bank account?
If you don't have an account at a financial institution, Uncle Sam will issue your benefits via plastic using the the Treasury Department's Direct Express Debit MasterCard program.
So your check may not be in the mail, but the plastic may be.
The tax increase on professional S corporations in the "extenders" bill might be taking water. Two Republican tax writers, Olympia Snowe and Jim Enzi have come out against the provision, calling it "a poison pill in this tax bill." A coalition of business groups has also come out against the proposal. They note the ridiculous way the bill applies based on corporate assets:
Just as importantly, the new tax appears to be unenforceable. Section 413 would require firms – regardless of how many employees they have - to test each year to determine whether the “skill and reputation” of one, two, or three key employees is the firm’s “principal asset.” The enforcement challenges accompanying this new test and the valuation of intangible assets are too numerous to list.
TaxGrrrl praises Snowe and Enzi "for standing up to the insanity." Kay Bell also has an update on the politics of the provision -- which unfortunately don't seem to include any consideration of just letting the expiring provisions actually expire for a change. She notes that even Senate Finance Committee Chairman Baucus, who included the misbegotten House language in his own version of the bill, now convesses that the provision "needs some work."
Linda Beale, defender of the tax increase, meanwhile elevates the debate:
Do we need any more evidence of the capture of Congress by the wealthy? Will ordinary people who pay ordinary income tax rates on their full salaries, and pay payroll taxes on all that salary, stand by while wealthy partners continue to get preferential treatment?
Yes, TaxGrrrl and I are just pawns in the hands of our wealthy masters. Never mind that the bill causes a compliance nightmare for small businesses -- one that could be easily fixed by bill supporters. Never mind that it discriminates against the smallest businesses in favor of their larger competitors. Opposing a badly-conceived and drafted law is just promoting the Reagan Free Marketarian Myth.
Users of the son-of-boss basis-shifting shelters must be running out of venues. the Federal Tax Crimes Blog reports that the Court of Appeals for the Federal Circuit has upheld the Claims Court disallowance of son-of-boss benefits in Stobie Creek Investments, LLC. Maybe they'll stop when they've lost in every circuit and every district court.
Tax Policy Blog reports that Japan is looking to cut its corporation tax rates, leaving the U.S. with the highest corporate tax rates in the developed world.
The folk marxists in the tax world will immediately say that's misleading because the effective rate is lower as a result of loopholes, and that in real life the rate should be higher. This ignores some problems with high rates:
- They really do matter at the margins. For every additional dollar of U.S. income, even a loophole-loving corporation probably is paying the top rate. That makes each additional dollar of activity less desirable, and it makes it pay that much more to move activity to cheaper jurisdictions.
- The loopholes apply unevenly, and many businesses don't get to use them. Whole industries really do pay tax at an effective rate approximating the statutory rates.
- The days of the big corporate shelters are over. While there are ways for multinational corporations to manipulate transfer pricing and repatriation to minimize taxes (and there always will be), there just aren't many easy tax dodges left for big U.S. companies. These rates really do apply broadly.
The wise policy option would be to eliminate loopholes and reduce rates. The folk marxists want to only get rid of the loopholes, and too many politicians want both loopholes and low rates.
We are in the big city to pick up our son from College, and they're throwing a big party!
The ridiculously-expensive first-time homebuyer credit hasn't failed enough for Harry Reid. TaxGrrrl reports that the Senate Majority Leader is trying to extend the deadline to close home purchases from June 30 to September 30. I can't improve on TaxGrrrl's take:
Of course, it’s the National Association of Realtors who are begging for the extension. They claim that many taxpayers will not be able to close in time to qualify for the credit due to a myriad of issues including the inability to get adequate financing for a new home or problems selling an old home.
Hmm. Imagine that. A taxpayer incentive to buy a new home that you *might* not be able to afford with a manufactured deadline to sell an old home in a weak market – and there are issues? How could that be?
The Cedar Rapids city council has been meeting in the council chambers of suburban Hiawatha, Iowa, since their own meeting room was ruined in the 2008 floods. The Cedar Rapids Gazette reports how this touching example of city-suburb cooperation is working out:
War is being waged over jobs in the metro area, and for now, [Cedar Rapids] Mayor Ron Corbett has become Enemy No. 1 in neighboring Hiawatha.
Hiawatha Mayor Tom Theis and Hiawatha City Council member Dick Olson Wednesday afternoon accused Corbett of using “submarine” tactics and an “11th-hour giveaway” to redirect a new employer and a possible 500 new jobs from Hiawatha to downtown Cedar Rapids.
Theis said Corbett is also working on grabbing an existing company with 400 employees from Hiawatha.
The Gazette says that Cedar Rapids will give GoDaddy.com a 60,000-ft building, with furniture, and pay for renovations, and provide parking in a package that the Hiawatha mayor estimates to be worth $4.5 million.
Yes, Hiawatha is fuming, but existing C.R. businesses, struggling since they were inundated by floods out of Genesis, have their own reason to stew: now they get to pay taxes to buy and renovate a building for jobs that were coming to the community anyway. That's "economic development," circular firing squad style.
Hat tip: alert reader Jeremy Cobert. More here.
It can be tempting to finance a small business with your retirement plan. Sometimes it's even possible, as Paul Neiffer reports. That doesn't make it wise.
There are many technical hurdles and compliance risks for IRAs and 401(k) plans that invest in companies owned by beneficiaries, including potentially devastating prohibited transaction penalties. Even when you can negotiate through the byzantine qualified plan rules, you still face the ultimate risk: you'll lose your retirement savings. It's wise to diversify retirement plan assets; throwing the lot into a start-up business does the opposite, putting all of your nest eggs in one basket. Maybe it's worth it to follow a dream, but think it over very carefully before you turn your retirement plan into your small business.
The tiny New England state may be geographically the smallest in the country but it has big plans to make the state more attractive to business. This week, Gov. Don Carcieri (R) signed into law a bill passed by a Democratic-led General Assembly to lower taxes. That’s right, I said lower taxes.
Okay, they’re not cutting taxes for everybody – but mostly everybody. The new law will reduce the state income tax rate for top earners from 9.9% to 5.99%. The number of tax brackets is also tweaked from five down to three.
The Tax Policy Blog says that it's not just the rates; it's also the simplification:
The vote was unanimous in both houses of the legislature. Elements of the reform:
* Eliminates the option to itemize deductions
* Increases the standard deduction amounts for most tax payers
* Reduces the number of tax credits
* Eliminates the states alternative minimum tax and optional tax flat system
In other words, they broadened the base and lowered the rates -- the basic approach of the Quick and Dirty Iowa Tax Plan. They also scrapped their "optional flat tax," an approach advocated by some in Iowa, but that would in practice just force taxpayers to compute their tax yet another way.
Senate Finance Chair Max Baucus has embraced the moronic tax increase on professional S corporations in his version of the "extenders" bill. The Baucus version of H.R. 4213, chock-full of extensions of special interest tax breaks and subsidies, modifies the "carried interest" provisions passed by the House in hopes of getting the needed 60 Senate votes.
It's not yet clear whether it will work. Tax Analysts reports ($link):
Unhappy that the bill would add to the deficit, Sen. Ben Nelson, D-Neb., said he was "not sure" whether he would vote to break a filibuster with the legislation in its current form. With the economy rebounding, "we have to begin to look more closely at how we stop deficit spending," Nelson said.
Senate taxwriter Olympia J. Snowe, R-Maine, considered by Democrats to be a potential crossover vote, also expressed displeasure with the bill's spending and tax increases.
Apparently the Senate isn't even considering axing any of the 70 "expiring provisions" in the bill -- not even the "qualfied motor sports facilities" tax break This pretty well debunks the argument that temporary tax provisions are a good thing because they come up for review annally. The only "review" is the annual search for new permanent tax increases to pay for another year of the extenders. Because NASCAR is more important to Senator Baucus than your professional practice.
As the vote in the Senate may still be up in the air, it's important to contact your Congresscritters, especially your Senators, to speak up against the S corporation tax. You can find how to reach them here. Iowans can call Senator Grassley at (202) 224-3744 and Senator Harkin at (202) 224-3254.
...Forbes ranks Des Moines as the best place in the U.S. to raise a family:
Its young population is more likely to graduate high school than in other cities, and life for most families is safe and affordable. Short average commute times save working parents precious minutes to spend with their families.
Good schools, relatively cheap homes, and a 10-minute commute downtown are all nice things.
The Federal Trade Commission seems to think it's a good idea. Peter Pappas reports that the sentiment isn't widely shared.
The Cubs can hardly buy a run on the field this year, but they're clobbering the taxpayers of Mesa, Arizona. It looks like the Mesa city fathers want to give the Cubs $84 million to keep their spring training facilty in Mesa.
The Senate may begin work on the House-passed "extender" bill, HR 4213, today, reports Tax Analysts ($link). This is the bill that imposes FICA and Medicare tax on professional S corporation K-1 earnings when the corporation's "principal asset" is the "reputation and skill" of three or fewer employees.
Tax Analysts notes that the S corporation tax is generating opposition:
Because it would be limited to S corporations led by a relatively small number of employees, it has been described as unfairly targeting small businesses. At the same time, it has been criticized because its impact could still prove quite broad.
"They wanted to make it look narrow, and in effect they're going after 94 percent of all S corps," Reardon told Tax Analysts, referring to IRS data on the percentage of S corporations with three or fewer shareholders.
Skeptics of the provision, like Reardon, note that the IRS already has authority to measure the salaries of S corporation shareholders against market value and ensure that the taxpayer has received "reasonable compensation." They doubt whether it would be any easier for the IRS, or an S corporation, to value the reputation and skill of a business's employees or determine its principal asset.
The professional S corporations are victimized by the awful Congressional habit of extending "temporary" provisions one year at a time to disguise their true cost. Each annual extension of the "temporary"provisions -- there are now 70 of them -- leads to a round of permanent tax provisions to "pay for" them. This time they are doing so with a provision that not only applies disproportionally to smaller businesses at the expense of their larger competitors, but it does so in a way that will be extremely difficult to comply with and enforce.
Good tax policy doesn't require taxpayers to gather a bunch of information that they wouldn't normally need in running their business. This provision requires S corporations to value their intangibles every year to determine whether their "principal asset" is the "reputation or skill" of three or fewer employees. Nobody values their intangibles annually -- certainly not small S corporations. Nobody even knows how.
There's still time to raise your voice against this stupid provision. You can find how to contact your Senator here. Tell them that the S corporation provision of HR4213 is a mess and should not be enacted.
Though doubts sometimes arise about this, IRS agents are human, too. That means they are subject to normal human vices. Peter Pappas passes on on WebCPA report of an agent accused of going bad in Minnesota:
Roger Anthony Coombs, 40, of Circle Pines, Minn., was charged with one count of corruptly soliciting and agreeing to receive and accept anything of value personally in return for being influenced in the performance of an official act.
The criminal complaint was unsealed upon Coombs’s initial appearance last Thursday in federal court in Minneapolis.
The complaint alleges that on May 8, 2010, Coombs met the two business owners to discuss an IRS audit of their business and said the business owed the IRS approximately $60,000.
Coombs allegedly said he could make the situation “manageable,” and added he would arrange for the IRS to accept $11,000 instead of $60,000 if the business owners paid him $9,700.
That's one reason I found the arguments against using private agencies to collect tax debts unpersuasive. There is no evidence the private agencies would be any worse at maintaining standards for privacy and integrity than the IRS. Of course, the decision was about power, not evidence, and as soon as the political party sponsored by government employees unions took power, out went their non-union competition.
School lets out today around here. Time for a carnival!
So head over to Kay Bell's place for the new Carnival of Taxes -- the web's premier roundup of tax blogging.
Roxanne Conlin is likely to roll to an easy win tomorrow in her bid to be crushed by Chuck Grassley in November's U.S. Senate race. On the way to her victory, though, she has had to deal with pesky questions about her husband's tax credit-financed real estate development business. The Des Moines Register reports:
The Des Moines Register reported Friday that Conlin, who has campaigned against tax breaks that benefit wealthy Americans, is a part-owner of 27 low-income apartment complexes that were financed through the sale of millions of dollars in federal tax credits.
The rental developments, all located in the Des Moines metropolitan area, were built in the past 19 years using $64.2 million from federal low-income housing tax credits, the Register reported after a review of state and federal records.
Conlin, a Des Moines lawyer, told the Mason City audience: "I know people might think just from reading the headline that I took $65 million from the federal government, and nothing could be further from the truth."
Of course she didn't take $65 million from the federal government. Her husband just distributed it, for a fee.
Low-income housing tax credits are supposed to be a way for the government to supply low-income housing to the poor. In real life they are a way for well-connected developers to obtain and distribute tax credits for investors needing some tax shelter -- typically banks, insurance companies and wealthy individuals. Each state gets an allocation of credits from the U.S. Treasury, and the states pass the allocation to developers. The process favors insiders with connections who know how to pull the levers of the allocation bureaucracy: people like the Conlins and Senator Jack Hatch. There's nothing illegal about this. They are playing the credit allocation system the way it is designed. But does this system make sense? Not surprisingly, Ms. Conlin is a fan:
"I'm very proud of what my husband and my family have done to house people and create jobs," she said.
Since 1991 those projects have created about 2,400 jobs, mostly in construction, she said. The result was "very nice places where people can live safely and with dignity," she said.
The center-left Tax Policy Institute is less enthused. They find that running subsidies through developers is less effective than providing direct vouchers to the needy:
If the supply of low-income housing is very elastic in the long run, then production of limited amounts of subsidized housing will simply replace other housing that would otherwise have been provided. Housing supplied or subsidized by the government might increase the average quality of housing available to low-income tenants, but it would have little lasting effect on the quantity or price of housing available to poor people. (See Weicher and Thibodeau 1988 for a discussion of the effects of subsidized housing on the housing market as a whole.) Moreover, because new and substantially rehabilitated housing is expensive to produce, it is likely to be worth far less to tenants than an equal cash supplement, such as housing vouchers. Furthermore, DiPasquale, Fricke, and Garcia-Diaz (2003) estimate that the average cost of producing a tax credit unit exceeds the cost of the average voucher unit by 19 percent.
But while vouchers help the poor, they do nothing for the fixer class. That's where the tax credits come in:
Conlin said she opposes income tax cuts that benefit the top 1 percent of the wealthiest earners. In contrast, she supports tax credits that help small businesses, manufacturers and housing programs create jobs.
In other words, wants small business taxpayers to pay higher rates to subsidize her. Because that $75 million legal fee she won in the Microsoft litigation won't last forever, you know. When she loses to Senator Grassley in November, as seems probable, she at least will have the consolation of losing to someone else who favors taking money from you and me and giving it to the well connected.
South Carolina pastor and convicted tax evader Anthony Jinwright is willing to accept brutal privation to get out jail. From charlotteobserver.com:
Bishop Anthony Jinwright, locked up since a jury convicted him in May on tax evasion charges, wants to be let out of jail while awaiting sentencing.
Jinwright's lawyers are asking U.S. District Judge Frank Whitney to allow their client to be released from jail on bond so he can work on liquidating his business assets and paying his taxes.
Interesting thought. If he'd have done that in the first place,he wouldn't have this problem. But what is the bitter privation?
Jinwright's lawyers say their client will accept no more than $300,000 in compensation from his church.
What a guy. That will hardly help him make the payments on his Maybach, his Bentley, or his five Lexuses.
The Cavalcade of Risk is four years old!
Celebrate four years of the best of insurance and risk-management blogging at the 4th anniversary edition at Workers Comp Insider. It starts with an excellent Insureblog post about managing an everyday risk.
The House-passed "extender" bill, H.R. 4213, includes a poorly-designed provision designed to hit small professional S corporations with self-employment tax. An opinion issued by an Iowa U.S. district court judge last week illustrates the sort of thing the bill targets.
A West Des Moines CPA firm set itself up as a partnership of S corporations. Each S corporation is owned by one of the firm's CPAs. One of the CPAs paid himself $24,000 in salary annually from the his S corporation and treated the remaining $180,000 or so of his income as S corporation K-1 income. Only S corporation salary income is subject to FICA and Medicare tax, at a rate of 15.3% up to the FICA base (currently $106,800) and 2.9% to infinity. This arrangement, if it worked, would save the CPA thousands of dollars in employment taxes.
The IRS said that much of the K-1 income was really compensation for services. The CPA argued that he only intended to pay $24,000 in compensation, and that was that, and he asked for summary judgment against the IRS.
That didn't go well. The court said that "intent" to pay compensation is determined from all of the facts and circumstances, not just potentially self-serving assertions from the minutes of a one-man corporation's board meetings. The judge rejected the CPA's summary judgement motion and ordered the case to proceed to trial to determine the amount subject to FICA and Medicare tax.
We can draw some lessons from this:
-The IRS already has the ability to go after professional corporations that underpay employment taxes. That's how this case came up in the first place.
- If you want to use an S corporation to reduce your payroll taxes, remember that hogs get slaughtered, and treating only $24,000 of $200,000 of professional firm earnings as salary is on the porcine side.
There's no safe-harbor or fixed minimum wage required by the law. If you are setting salaries for the owners of a professional business, a reasonable place to start is to look at the salaries of the highest-paid non-shareholders. If the shareholders are doing as much work as the non-shareholders, you could have trouble passing the red-face test if you pay them less than non-owners.
Cite: David E. Watson, P.C., DC-SD Iowa, 4:08-cv-442 (5/27/2010).
The Cato Institute hosted a talk on the evils of taxing capital gains yesterday. From a policy standpoint, they may well be right. But one of the speakers, Richard Rahn, went into the weeds with this:
Dr. Rahn took Mitchell's analysis a step further. He argued that capital gains taxation is unconstitutional under the 16th Amendment. The 16th Amendment states that "the congress shall have the power to lay and collect taxes on income, from whatever source derived..." [emphasis added]. Rahn pointed out that capital gains are not considered income under any definition of the word, in any dictionary, or any IRS definition.
Mr. Rahn can rest assured that the IRS most certainly does believe that the definition of "income" includes capital gains. He can start by looking at Treas. Reg. Sec. 1.61-6, addressing "gains derived from dealings in property." The Supreme Court settled the issue of the constitutionality of capital gains in the early 1920s (Eisner v. Macomber and Merchant's Loan & Trust Co. v. Smietanka). If you go to court and argue that capital gains taxes are unconstitional, you can expect penalties for making frivolous arguments.
There are plenty of powerful economic and policy arguments against taxing capital gains. Lumping them in with tax protester arguments only makes them look stupid.
The TaxProf Blog visitor visitor log crossed 10 million last night at about 9:30 Central Time. Wow.
To put that in perspective, the Tax Update Blog has had a site meter since about 2003. The Tax Prof started on April 15, 2004. The Tax Update will probably cross the 1 million visit line next month.
It's a Tax Prof world. Congratulations to its esteemed proprietor, Paul Caron!
A starting pitcher heads out to the mound and trips over a bat. He gets up, hits the first batter, walks the next three, and then gives up a grand slam before the manager ends his day. Tax law professor Linda Beale might call the outing "not perfect."
John Edwards is the poster-boy for this problem, in that he created an S corporation that received his services income, then claimed that he was paid a "salary" from the S corporation that should be subject to payroll taxes, but claimed the rest of his services income was a pass-through of S corporation profits, so not subject to payroll taxation. Clearly, all of the profits were services income attributable to his personal efforts, and all of the pass-through should have been subject to payroll taxation.
The House bill addresses this issue, but applies it only to S corporations with three or fewer shareholder/service provides upon whose reputations the S corporation's profits hinge. A major step in addressing the problem, even if not perfect.
I would quibble over whether a successful lawsuit is attributable to one person's "personal efforts" when the success is also attributable to a team of assistant attorneys, paralegals and other support staff. But even assuming that you should hit service providers with self-employment tax on all of their K-1 income, you should do so in a way that is fair, understandable to taxpayers, and enforceable by the IRS. The S corporation provision in H.R. 4213 is none of these.
The bill only applies self-employment tax when "the principal asset" of a firm is the "reputation and skill" of three or fewer individuals. This is a terrible formulation:
The bill never defines "principal asset." Is that an asset that is more than 50% of the value of the firm? Or more valuable than any other asset?
What is the value of "Reputation and Skill"? I have never seen an appraisal that valued these items. How do you separate these items from other intangibles, like goodwill, customer lists, referral bases and the like?
It can be gamed. As drafted, the bill leaves the door wide open for professional practices to buy their office space, which would then likely be the "principal asset" of the S corporation. The bill has a generic regulation authorization to the IRS, but it's unlikely that the IRS could rewrite the statute to ignore other assets.
To whom does the "reputation and skill" belong? Under the Martin Ice Cream line of cases, "reputation and skill" might be personal goodwill to the shareholders, rather than a corporate asset -- especially when there isn't a non-compete agreement in place.
It discriminates against small taxpayers in favor of larger ones. The biggest law firms in Des Moines would be unaffected, as would my accounting firm (I think -- depending on how we value our "reputations and skill"), but smaller law firms and our smaller competitors would be hit.
It's very difficult to comply with and enforce. Small professional S corporations have to file their returns every year. That means every year they have to value their intangible assets to determine whether the value of the "reputation and skill" of each employee. On examination the IRS would have to do the same thing. "Reputation and Skill" appraisals are a new idea in the tax law -- and for appraisers, as far as I can tell. It would be a mess.
If you really want to apply self-employment tax to professional S corporations (I don't), you can easily do it in a way that's more fair and transparent. For example, you could just say the entire K-1 income from a professional practice is self-employment. You could say a percentage of the K-1 income is self-employment, to reflect the very real value of the services of non-owner employees. You could say that all income up to the FICA base and some percentage of other income is self-employment income. With so many better alternatives, to support the absurd and unenforceable S corporation provisions of H.R. 4213 as "A major step in addressing the problem, even if not perfect" is a lame cop-out for lazy drafting and terrible tax policy.
A 2006 law against internet gambling took effect yesterday, reports gambling tax maven Russ Fox:
What changed yesterday is that banks are now required to have policies to prevent funds from flowing to purveyors of “unlawful internet gambling.” The law itself did not change what is unlawful internet gambling. Indeed, the UIGEA defines unlawful internet gambling as gambling that’s unlawful according to current state or federal laws. One of the complaints from financial institutions is that the law is vague as to what is or isn’t illegal.
The US Department of Justice considers all internet gambling to be unlawful. However, the courts haven’t agreed. In the only court case on point, the DOJ lost in Re: MasterCard that the Wire Act applies to non-sports betting. (Sports betting is clearly illegal under the Wire Act.)
Kay Bell has more, including a discussion about how the real goal of the law is to protect states and their casino cash cows.
Robert D. Flach on Obamacare's ridiculous expansion of 1099 reporting:
One of my clients is a tavern. So I expect they will have to issue to each and every liquor supplier a Form 1099. On the way into work the bartender will regularly stop at a local Shop Rite and purchase food and other items for the bar. Does that mean that it must also issue a Form 1099 to Shop Rite?
The post illustrates the problems our dear leaders ignored in passing this mess. Robert speaks truly when he says:
I hate to say this, but members of Congress are at the very least lazy and at most idiots. They more often then not don’t fully understand all, if any, of the implications of what they are passing. I doubt they actually read any of the bills they vote on. Either that or they have absolutely no regard for the additional burden their oft ridiculous laws puts on various classes of taxpayers.
My only difference with Mr. Flach is that I no longer hate to say it. It feels better to call them lazy idiots every day.
Related from Peter Pappas: Repeal the New 1099 Law
A temporary surge, followed by a fall-off, and then a reversion to trend (as indicated by the dotted line). It's obvious that Cash for Clunkers clunked, merely borrowing sales from the period following the program.
Expect the same pattern for houses in May now that the First-time homebuyer credit is over.
You can't make your taxes go away by running your cash offshore through a middleman.
There always seem to be scammers willing to pretend to take a deductible payment from you on the promise of returning most of the cash to you offshore, after the scammers take a cut for their trouble. For example, Anderson's Ark was a scam built around bogus "management fees" paid to an offshore middleman, which could then be recovered by offshore ATMs and credit cards.
A Michigan scam used offshore accounts set up as insurance companies for a similar scam. From a Department of Justice press release:
Evidence presented during the four-week trial showed that the three men conspired with John A. Campbell and Anthony Merlo to defraud the United States by promoting, marketing, selling and administering sham "Loss of Income" insurance policies through an insurance company in the U.S. Virgin Islands known as Security Trust Insurance Company. The coconspirators sold these purported insurance policies to wealthy U.S. taxpayers as a tax deductible product, with the understanding that the purchasers would have most of their premiums returned to them in a non-taxable manner. The clients then improperly took tax deductions for the purchase of this sham product and improperly reduced their income taxes. The co-conspirators collected more than $20 million in premiums.
The three "coconspirators" received sentences from five to nine years. Maybe they have a good loss-of-income policy to cover that.
IRS is proposing a ridiculous new form requiring taxpayers to disclose "uncertain" positions. Certainty has been a big part of the tax law in recent decades, so the proposal is ridiculous. The American Bar Association has come out against the proposal. Peter Pappas explains:
The tax code is so complex that virtually any tax position taken by a tax preparer might be considered uncertain and thereby require disclosure.
Also, the forcing of tax return preparers to identify and disclose tax positions that are merely uncertain emasculates the right to representation provided in the taxpayer bill of rights. If the right to representation is to have any meaning whatsoever, the government cannot be allowed to dilute the value of that right by creating a conflict of interest between the representative and his his client.
It's rich for the IRS to require taxpayers to put their cards on the table when they have to be sued all the time to get them disclose anything.
In order to provide a nice ballpark for a crummy baseball team, Washington D.C. enacted a "temporary" business gross receipts tax. The politicians said they would use the money raised to pay down bonds used to finance the park. From the Washington Examiner:
But instead of using the surplus funds to pay the stadium off, Mayor Adrian Fenty and the city council are using the money to plug monstrous holes in the District's budget. ...
Many business leaders are crying foul. "The deal that we had ... was that any excess monies would be used to pay down the bond," said D.C. Chamber of Commerce Chief Executive Barbara Lang. "We would like to see those bonds paid off earlier to relieve us of that tax. I'm very concerned that it will become part of the city's operating budget." ... Councilman David Catania, I-At Large, said, "my hope is we'll raid this revenue only so long as we need to."
Expect the need to always be there.
Via the TaxProf.
"These jobs have fallen victim to a tactic used by the Democratic leadership to hold this popular and noncontroversial tax provision hostage to out-of-control deficit spending by Washington," Grassley said on the Senate floor. "So I am here again to try to put thousands of Americans back to work producing clean, renewable fuel."
The small professional practices that will be slapped with a tax increase under the extender bill -- a tax increase that will not affect their larger competitors -- may disagree about the "noncontroversial" tag. So will anybody who has studied the dubious energy economics of the biodiesel subsidy.
But even if you accept that biodiesel makes sense, it's coming at a high cost for S corporations. According the the Congressional Joint Committee on Taxation, extending the biodiesel subsidy for only two years will cost $851 million. The S corporation tax will be permanent, costing small professional businesses over $11 billion over the next ten years. Some of us find that controversial.
The biodiesel subsidy is only one of about 70 pork-barrel provisions in the bill that reaches into the pockets of small S corporation professional practices. Other provisions include a break for the nation's critical NASCAR infrastructure and a subsidy for New York originally drafted to respond to the 9/11 attacks and still in place nine years later.
UPDATE: From The TaxProf: Tax Extenders Bill Includes Small Business Tax Increase
Joe Kristan was the first to flag a particularly odious aspect of H.R. 4213, the American Jobs and Closing Tax Loopholes Act of 2010 currently making its way through Congress: small businesses would be hit with a 2.9% medicare tax increase which would not apply to larger competitors...
Reputation and skill (explaining how badly designed and discriminatory the S corporation tax is)
Spanish speaking taxpayers in Garden City, Kansas have lost one tax prep option going into next season. From a Justice Department press release:
A federal judge in Kansas City, Kan., has permanently barred a Garden City, Kan. tax preparer, Jose Lares, from preparing federal tax returns, the Justice Department announced today. The permanent injunction, to which Lares consented, was entered by Kathryn H. Vratil, Chief Judge of the U.S. District Court for the District of Kansas.
The Government's complaint alleges that Mr. Lares prepared false returns for clients with limited English skills at his "Dinero Rapido" tax shop:
As a result of its extensive investigation, the IRS discovered numerous examples of false items on returns, including incorrect filing statuses, such as claiming head of household status for taxpayers who did not qualify, false or overstated employee business expenses, improper earned income tax credits, false or overstated Schedule C business expenses, and false dependent exemptions.
The Dinero Rapido customers are getting an unhappy crash course in the U.S. tax system, thanks to Mr. Lares and the IRS.
Prior Coverage: Dinero Rapido está cerrado (Update - not necessarily cerrado)
The coming Section 1099 blizzard, courtesy of Obamacare, explained by farm tax blogger Paul Neiffer.
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
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