Tax Update Blog: September 2010 Archives
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Passive loss rules spice up Illinois senate race
September 30, 2010
In Delaware, they're talking witchcraft. In Louisiana, a candidate is linked to hookers. But Illinois really has an exciting issue: passive losses!
As all tax geeks know, the Section 469 passive loss rules were enacted to shut down the mass-marketed limited partnerships of the early 1980s by allowing individuals to deduct net business losses only if they "materially participate" in an "activity." Otherwise the losses can only be used against other "passive" income, or when the activity is sold.
The Chicago Tribune reports that Illinios Senate Candidate Alexi Giannoulias was able to take a $2.7 million loss in 2009 on a controversial politically-connected bank he ran, and which failed earlier this year. The paper reported that while Mr. Giannoulias didn't work in the bank in 2009, he worked there at least 500 hours per year from 2002 through 2006.
This led blogger Ed Morrissey to ponder:
The issue isn’t tax evasion or fraud. Apparently, the deduction is legitimate if Giannoulias worked at the bank in 2006, although it’s not clear exactly how working more than 500 hours for Broadway in 2006 gets someone off the hook for that much in taxes. That goes far beyond my paltry experience in tax law, and unless someone shows this analysis by the Chicago Tribune as faulty, I’ll assume that they have the legal implications correct.
The tax law measures "material participation" based on how much time you spend on an activity (See Reg. Sec. 1.469-5T). The most common benchmark is 500 hours; if you work in an activity that much in a year, any income and losses are non-passive. Another rule treats you as materially participating in any year if you materially participated in five of the prior ten years. That allows a retiring partner or S corporation owner to be non-passive for five years after retirement. This is the rule that Mr. Giannoulias is invoking.
While it may seem convenient that he managed to get to 500 hours in 2006 after he said he left behind "day-to-day" involvement in the bank in 2005, getting him his fifth year of material participation, it was likely only a one-year acceleration of his loss. When the FDIC siezed the bank in April 2010, he probably would have triggered his losses anyway via a complete disposition of the activity.
For a more complete discussion of the material participation rules, read on.
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Film credits: maybe they're an economic disaster, but oh, the intangibles!
September 30, 2010
Now that the truth about the economic benefits and revenue costs of film tax credits is receiving more attention, backers of the credits seem to be retreating to arguments about the intangibles of film tax credits: that they provide an image enhancement and boost collective state self-esteem, and that you "can't measure the intangibles". But the price tags associated with film tax credits, often in the hundreds of millions of dollars, seem to far outweigh the intangible benefits.
We've heard that argument here in Iowa:
But some benefits can't just be measured on a dollar-for-dollar basis. The movies provide employment to local actors, construction crews, artists, caterers, drivers and a host of others. They expose non-Iowans to what the state has to offer. More intangible is the benefit of interactions in a state that can be cut off from the trends and centers of power. Not to mention the excitement factor. We've relied on caucuses every four years to bring action and celebrities to town. Now, sightings are anytime, any place.
So what if you have to lay off some teachers? Look, it's Tom Arnold!
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Don't you feel more competent already?
September 30, 2010
The IRS is still working out the kinks in its new system where all preparers will have to register for a new identification number. Tax Analysts reports ($link) system breakdowns and an entry field for preparer "CAF" numbers that was one digit short of the amount of digits in CAF numbers.
Russ Fox says he got registered without a hitch, but he has a nagging question:
As for getting $50 of value from this process, that remains to be seen.
Especially the part where even non-signing assistant preparers -- whose ID number will appear nowhere on the return, making their registration useless for monitoring and enforcement -- have to pay $50, plus the $14.25 to Accenture for running the system.
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Cedar Rapids real estate magnate slapped with 20 years for tax crime, insurance fraud, and especially tenant abuse
September 29, 2010
It's probably not unusual for a judge to throw a defendant behind bars for 20 years. It's a little more unusual when the defendant owns a $3.5 million house and has a $36 million claimed net worth. Maybe that's unusual enough to explain U.S. District Judge Bennett's 105-page opinion explaining just why he went beyond the federal sentencing guidelines to give Cedar Rapids' Robert Miell the maximum 20-year sentence on insurance fraud, deposit fraud and tax fraud charges.
According to Judge Bennett, the fraud in this case was not an aberration: "In the course of investigation of the criminal conduct at issue in the numerous charges against Miell, evidence was developed...that fraud was Miell’s everyday way of doing business." Judge Bennett says the fraud included:
- Submitting false damage claims to an insurance company to get reimbursed for non-existent hail damage to roofs of 145 properties.
- Using a phony home repair business, "The Home Doctor," to generate fake repair invoices for non-existent damages as a pretext for unjustly keeping tenant damage deposits.
- Forging notary signatures with a false notary stamp.
- Using the name of a former associate without his knowledge to cover up his involvement with "The Home Doctor."
The opinion says that the tenants didn't always take it lying down, causing Mr. Miell to double down by lying in court:
On occasion, a renter sued Miell for the return of his or her damage deposit. When Miell went to small claims court in Linn County on claims by or against tenants, he would create, or cause his staff to create, false and fraudulent invoices from The Home Doctor that purported to constitute a bill sent to him for the costs of cleaning, repairs, and replacements to the rental unit. Miell would also, at times, write checks or cause checks to be written to The Home Doctor that were never actually disbursed or cashed. He would then produce, or cause others to produce, these false and fraudulent documents, invoices, and checks to the Iowa District Court for Linn County as alleged proof of the costs of cleaning, repairs, and replacements. In this manner, Miell fraudulently kept, or attempted to keep, portions of renters’ damage deposits.The Home Doctor invoices began showing up in about 2000 or 2001. Prior to that time, the state court judges routinely discounted Miell’s claimed costs of repairs. After he began producing The Home Doctor invoices, however, the judges could not summarily discount these invoices, as they had no proof that they were false. One or more judges directly asked Miell whether The Home Doctor was tied to him in any way, and Miell claimed that it was not connected to him.
The judge also says Mr. Miell violated Iowa landlord law by commingling damage deposits with other funds. I wonder if any of his old tenants will be able to get satisfaction on lost deposits? It appears that the tenant deposit fraud really got Mr. Miell on the judge's bad side:
What I find most troubling about Miell’s history and characteristics is that Miell was already wealthy when he embarked on and pursued the scheme to defraud his tenants out of their damage deposits, yet he chose to victimize hundreds of economically vulnerable or unsophisticated people for relatively small gains in individual cases. As mentioned above, the extra amount that Miell “squeezed” out of his tenants by fraudulent means was less than one thousand dollars in most cases—often considerably less.
Mr. Miell attended Drake Law School for two years, but apparently that didn't get him a "professional courtesy" discount from Judge Bennett:
I have not lost sight of the fact that Miell also had two years of law school before withdrawing to pursue his real estate business. I have to consider that his legal training may have helped him to execute or hide his fraudulent scheme; certainly, it did not have the anticipated or at least hoped-for effect of encouraging him to recognize and avoid unlawful conduct.
Mr. Miell argued for a sentence of 15 to 21 months. Judge Bennett was unpersuaded:
In these circumstances, I find that a sentence at the statutory maximum for the mail fraud offenses is required to provide just punishment. In contrast, the paltry sentence that Miell asserts is appropriate, based on his serious misconceptions about his conduct, would amount to nothing more than a “slap on the hand,” perpetuating the belief that mere “white collar” criminals do not pay for their disrespect of the law or the rights of others... Indeed, I would find that a sentence of 240 months is appropriate for the mail fraud counts arising from the damage deposit fraud scheme, if those were the only charges against Miell.
The Moral? Other than the usual "crime doesn't pay," it really doesn't help to let Judge Bennett think that you are a tenant-abuser with legal training.
Prior coverage: Girlfriend's financial maneuvers get Cedar Rapids landlord jailed while awaiting tax evasion sentence
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Can you cash out your stocks with a 'loan'?
September 29, 2010
It would sure be nice if you could cash out on stock gains by taking a "loan" against the shares without having to worry about the stock price going down. Unfortunately, that's too good to be true. The Department of Justice is attacking a "HedgeLoan" program that purports to do just that. From their press release:
According to the government complaint, the defendants promote and operate the HedgeLoan scheme, in which customers are falsely told that they can receive tax free cash for their securities in the form of a "loan," when in reality the monies received are sales proceeds subject to federal income tax on capital gains at the time of receipt. One couple from Michigan cited in the complaint allegedly used the defendants’ HedgeLoan scheme to dispose of more than $4 million in stock through 25 separate transactions. According to the complaint, the Internal Revenue Service audited the couple’s 2005 federal income tax return and found that they had under-reported their income by $3,662,528 as a result of their participation in the scheme. The complaint further alleges that the couple allegedly agreed to pay an additional $616,984 in income tax for 2005.
Why do they think this wasn't a legitimate secured loan?
The suit claims that in virtually every case, the defendants simply sold the customer’s securities on receipt, remitted up to 90 percent of the sales proceeds to the customer as the "loan," and retained the remaining sales proceeds for themselves and the other parties who facilitated the scheme. This allegedly left defendants without the assets necessary to return every customer’s so-called "collateral" if requested at the end of the purported "loan" term.
Does this mean you can't ever use stock as security on a loan? Of course not. It does mean that you can't hide the tax on a sale just by pretending it's a loan.
Related: CALIFORNIA COURT PERMANENTLY ENJOINS DEVELOPER OF THE "DERIVIUM" "90% LOAN" TAX SCHEME
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Shooting more jaywalkers
September 29, 2010
It looks like the IRS and the Treasury, so gentle on Tim Geithner's serial tax underpayments, are making up for it by clobbering foot-faults by U.S. overseas employees. Phil Hodgen relates yet another FBAR penalty horror story, where an individual who fully reported his income from offshore accounts will be hit with a penalty in excess of $1 million for failing to also file his FBAR reports for the offshore accounts.
This death-penalty-for-jaywalkers approach is outrageous. It's going to drive more U.S. citizens working overseas to give up their passports. It will also make it less likely for multi-nationals to employ U.S. nationals overseas because of the tax troubles they will run into.
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Fact-checking the fact-checkers
September 28, 2010
An effort by "Factcheck.org" passed on by the TaxProf doesn't inspire confidence in their fact-checking prowess. This is part of their "fact check" on the Republican "pledge" election year platform:
Pledge, page 14: [Obama] also wants to raise taxes on roughly half of small business income in America.Fact: This is an exaggeration. Republicans are equating "net positive business income" reported on individual returns with "small business income," which isn’t correct. They rely on a report from the nonpartisan staff of the Joint Committee on Taxation (p. 12), which estimated that about 3% of taxpayers who have any business income on their personal returns would see a tax increase under Obama’s proposal, and that those 750,000 taxpayers account for about half of all the business income reported.
But some of that income is from big businesses raking in tens of millions of dollars a year. The JCT stated quite clearly that "These figures for net positive business income do not imply that all of the income is from entities that might be considered ’small.’" Some in fact are quite large, and those big businesses account for a good chunk of that income.
The JCT said: "For example, in 2005, 12,862 S corporations and 6,658 partnerships had receipts of more than $50 million."
Republicans do have a point here. Many small businesses and some large fraction of small-business income will be adversely impacted by raising the top rate on individual taxpayers.
The fact is, though, that the JCT couldn’t estimate how much of the total business income was accounted for by "small" businesses, or how many of the 750,000 individuals affected own "small" businesses. What we do know is that a good deal less than half the small business income, and something less than three percent of small business owners, would be subject to higher taxes.
When the "fact checkers" say that only 3% of "small businesses" will be affected, they include as a "small business" every Mary Kay seller, everybody who gets even a tiny K-1 from a publicly-traded partnership, every moonlighter with a schedule C -- in other words, a lot of people who aren't really in it for a living. But when their definition of "small business" includes successful people, suddenly that definition seems questionable.
The "fact checkers" also say "we do know" that "a good deal less than half the small business income" will be subject to the tax increase. If we "know" that, we should "know" pretty well what percentage will be hit by the expiration of the Bush-era tax cuts, but they don't offer it. "A good deal" is a mushy description. Here are some things "we do know":
- The center-left Tax Policy Center estimates that the tax increase will affect 44.3% of small business income. Is that "a good deal less than 50%"? It certainly is a good deal more than 3%.
- For taxpayers who get more than 50% of their income from their business, the Tax Policy Center estimates that 58.7% of their taxable income will be subject to the higher brackets.
When you look at the people who are serious about it -- the ones that get most of their livelihood from their business -- well over half of their income will be hit with higher taxes when the Bush-era tax cuts expire.
It hardly seems like a great "exaggeration," then, to say that "roughly half" of small business income will be affected. Not saying what percentage they think would be affected makes for a weak "fact check."
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500K Section 179, extended bonus depreciation enacted
September 28, 2010
The President yesterday signed HR 5297 into law. Some kep provisions:
- $500,000 Section 179 depreciation limit for years beginning in 2010 and 2011.
- 50% bonus depreciation has been extended for assets placed in service through December of this year.
- The built-in-gain recognition period for S corporations has been reduced to five years for 2011 recognition events.
- AMT offset for business credits. General business credits arising this year will offset alternative minimum tax, not just regular tax.
- Rental owners will have to start issuing 1099-MISCs to their service providers who they pay $600 or more in a year, starting next year.
- For this year only, self-employed taxpayers can deduct their health insurance in computing self-employment tax.
More details here. Additional coverage:
TaxProf Blog
Roger McEowen
Kay Bell
Paul Neiffer
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The blogroll works now
September 28, 2010
The Tax Update had been using a third party website to maintain the listing of blogs we like. Problems with the service have led us to ditch that service, and we now maintain the blogroll the old fashioned way, using clay tablets and a stylus. It's working now, but it's less convenient to change. We're sorry about the problems we've had with the blogroll, but it works again now.
UPDATE, 9/29/2010: Some links were inadvertently left off the bottom of the tax blogroll. We'll fix that.
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Bad Lawyer
September 27, 2010
Many lawyer blogs offer practical advice, but few as vividly as the Bad Lawyer blog:
I am off to federal court, where I will be sentenced on my tax crime at noon, today...
Do not do what I did. My failures were unjustified, completely irrational, and inexcusable. I say these things not as a consequence of being "caught," because in truth the revelation of my tax offenses are answered prayers. My secrets made me a very sick person. Anything I've done right in the last year has been because I've been relieved of my mental illness manifest in being unable to operate a successful and sane solo practice.
If you have not dealt with your business or tax obligations there is help, in fact the government is more than willing to assist you if you are proactive in seeking assistance. Do not delay one more day, call for help today--if you live in and around OurTown I can put you in touch with tax and legal professionals that can and will help you. I beg you, do not ignore the chaos.
Doubtless some people can ignore or evade the tax law and sleep soundly, but I suspect that's a minority. Maybe I'm just too close to the tax law, but the worry would wreck me. His advice is sound: if you are in a tax hole already, stop digging and get help.
I wonder who "Bad Lawyer" is. I don't know for sure if it's real. If not, he sure has invented a boring criminal persona -- a run-of-the-mill tax violator, instead of some international exotic money-launderer or something. He (I'm pretty sure it's a he) promises to share more at a less inconvenient time.
UPDATE: He blogged his sentencing:
" . . . 5 months incarceration to be served on home confinement, electronic monitoring, work release. continued [Alcoholics Anonymous meetings], 2 years of probation, and restitution to be negotiated with the IRS.]" Judge P added that he believed that I suffered from two diseases (Bi-Polar illness and alcoholism) that I didn't ask for and didn't deserve; that did not justify my offenses but which he believed contributed to the commission and perpetuation of the crime.
Weirdly compelling reading.
UPDATE 2, 10/4/2010: The bad lawyer was mistaken: he gets five months in prison, not home confinement. Does that make him a bad bad lawyer? (via Russ Fox)
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Will Obamacare impose a 3.8 percent sales tax on home sales?
September 27, 2010
No, despite what the e-mails you have been forwarded may say. Tax Policy Blog has the details. Nor will Obamacare impose a 3.8 percent wealth tax.
Obamacare's tax provisions are bad enough without making up new ones. Aside from the individual tax on those who don't purchase health insurance -- a futile and doomed gesture -- the principal tax provisions include:
- A .9% surtax on wage and self-employment income.
- A 3.8% surtax on "unearned" income, broadly defined to include not only interest, dividends and capital gains, but also "passive" income from pass-throughs and proprietorships, including K-1 earnings from rental and active business income.
Both of these kick in for the "rich" only, at least for now, with rich being AGI of $200,000 for single filers and $250,000 for married.
That's bad enough. Don't give them any ideas.
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Extended bonus depreciation, $500K Section 179 deduction await President's signature
September 24, 2010
The House yesterday passed the version of the "small business" tax and loan package passed last week by the Senate (HR 5297). The president is expected to sign the bill quickly. The key tax provisions:
$500,000 Section 179 depreciation limit. Current law allows taxpayers to expense $250,000 in capital expenses that would otherwise have to be recovered through depreciation deductions. The bill raises the Section 179 limit to $500,000, with the deduction phasing out dollar-for-dollar as capital expenditures exceed $2 million. This applies to taxable years beginning in 2010 and 2011. (Sec. 2021 of the bill)
The bill also extends the Section 179 deduction to three classes of real estate; this is the first time any real estate assets have qualified. It will apply to the two classes of property that had been eligible for 15-year depreciation -- "qualified restaurant property" and "qualified leasehold improvements," and "qualified retail improvement property."
Extended bonus depreciation. The current provision allowing taxpayers buying new property to deduct half the cost in the first year of service had expired at the end of 2009. The bill extends bonus depreciation through 2010. (Sec. 2022 of the bill)
Exclusion of certain capital gains. Current law gives a 75% exclusion for gains on C corporation stock acquired at original issue between February 17, 2009 and January 1, 2011, if the stock is held for more than five years -- though the excluded gain is an AMT preference. The bill removes the AMT preference and increases the exclusion to 100% from the date the bill is signed through the end of 2010. This means taxpayers will have about three months to start a new C corporation in the hopes that it will make money and can be sold tax free in five years. That will make the economy go nuts, no doubt. (Sec. 2011 of the bill).
Five-year built-in gain period for S corporations. If a C corporation converts to S corporation status, it has to pay a corporate level tax on "built-in gains" recognized in the first ten years of its S corporation life. The 10-year built-in gain period was shortened to seven years for gains recognized in 2009 and 2010. The bill shortens the recognition period to five years for gains recognized in taxable years beginning in 2011; the recognition period becomes 10 years again in 2012. (Sec. 2014 of the bill).
Five-year carryback and AMT offset for business credit carryforwards. The bill allows taxpayers who have "general business credits" -- for example, research credits and jobs credits -- to carry them back five years. More importantly, it will allow taxpayers to offset alternative minimum tax for "eligible small businesses" in 2010. These credits normally are not allowed to offset AMT, so they are useless to many entrepreneurs.
Unfortunately, the AMT waiver only applies to credits generated in 2010. Taxpayers who have credit carryforwards because of prior year AMT won't get to cash in their carryforward credits.
Eligible small businesses will be non-public corporations, partnerships and individuals with gross receipts under $50 million. For pass-through entities, the $50 million test will be applied at both the entity and individual levels. (Secs. 2012 and 2013 of the bill)
Deduction for health insurance in calculating 2010 SE tax. For 2010 only, taxpayers with self-employment tax will get to reduce their self-employment income by their deductible self-employed health insurance (Sec. 2042 of the bill).
1099 requirement for rental property owners. The bill isn't just tax breaks. The bill requires rental operators to issue 1099-MISC forms to vendors with over $600 of business starting with 2011 expenditures (Sec. 2101 of the bill).
Start-up expenditures. The bill increases the $5,000 limit for deductible start-up expenditures to $10,000 for 2010 only (Sec. 2031 of the bill).
Meanwhile, the Senate has punted on dealing with its real tax policy agenda -- the expiration of the Bush-era tax cuts, the "AMT patch," and the "expiring provisions" -- until after the election, reports the Wall Street Journal. That increases the chances for a tax policy train wreck, with a 39.6% top rate for individuals and a 55% estate tax with a $1 million exemption next year, and AMT for millions of new taxayers this year. Well played.
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Aviva embezzlers plead guilty to tax, other charges
September 24, 2010
The strange case of the lesbian activist Iowa insurance embezzlers has ended in a plea deal. Phyllis and Marla Stevens pleaded guilty yesterday in a Des Moines Federal courtroom. The couple agreed to pay back "at least" $5,997,825.66 to the Aviva insurance company.
Phyllis Stevens was accused of stealing the funds from the insurance company by fiddling with commission accounts, steering funds to an Indiana bank account as "Commissions" to a phony agent. They used the funds to buy three houses and, according to the Des Moines Register, to make around $175,000 in political contributions "mostly to Democratic candidates." Her spouse, Marla, was accused of helping to hide and spend the stolen funds.
When the plot began to unravel (as this sort of embezzlement always does), Phyllis made a strange oddysey to Indianapolis, where she attempted to withdraw $175,000 in cash from the bank account, and from there to Las Vegas, where she was arrested at a hotel where Marla reportedly ran up $2 million in charges.
The couple also had a blog where they wrote, presciently if unwisely:
We won’t lie about our marriage on our tax forms, either, filing as married people we are... We’ve racked up about a million dollars in potential criminal fines and about a hundreds years in potential prison time under the old sentencing guidelines between us — so far.
We'll see how good that estimate is at their sentencing, set for January 21. Assuming a tax loss of around $2 million (35% of the amount involved), the tax charges alone could be good for at least 41 months under federal sentencing guidelines, though the maximum for the two charges together is 8 years. Phyllis faces a maximum 48-year sentence on all of the charges, while Marla faces up to 25 years.
Links:
Prior Coverage:
Aviva girls in tax trouble
Embezzlers: It's not your money, but it will be your tax.
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Tax Court defies Judge Posner outside his circuit
September 24, 2010
If you are a wronged spouse, the Tax Court will give you time to claim "innocent spouse relief" of tax liability outside the Seventh Circuit. The Tax Court has held that IRS regulations providing a two-year time limit for claiming the relief is invalid, but a Seventh Circuit opinion by Judge Posner overruled the Tax Court. The Seventh Circuit includes Illinois, Indiana and Wisconsin.
Tax Lawyer Peter Pappas explains:
If you represent an otherwise qualified taxpayer who does not reside in the 7th circuit, you should apply for innocent spouse and cite Hall v. Commissioner as your authority even if more than two years have passed since the first collection action.
The TaxProf has more.
Cite: Hall, 135 TC No. 19
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Do you really need more than five months to close on a house?
September 24, 2010
Kay Bell reminds us that the last deadline for eligibility for the first-time homebuyer credit looms. If you had a house purchase under contract by April 30, you have to close by September 30 to be eligible for the credit.
Related: The Homebuyer Credit: an $8000 subsidy for buying in the spring instead of the summer
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Tax policy in an election year
September 23, 2010
TaxGrrrl is trying to get would-be congresscritters to address tax policy:
I’ve issued the same six tax-related questions to all of the candidates running for a Congressional seat. That’s right, all of them. Well, except for those without websites (are you as gobsmacked about this as I am?) and those that made contacting them sort of difficult – I’m still working on those contacts.Over the next month or so, I hope to present the candidates’ responses to the following six questions:
Her questions, and the (in my view) right answers:
1. What’s the single most important tax issue facing Americans today?An impossibly complex tax code with a too-narrow base and too-high rates.
2. If you could only make one “quick fix” in terms of an extra credit, a disallowed deduction, whatever – what would it be?
Repeal Sec. 409A.
3. Which is a more egregious tax on the American public: the AMT or the federal estate tax?
AMT. Close question, though.
4. It has been suggested that the IRS should be eliminated. Do you believe that this makes sense, and if you do, what would you establish in its place?
No, it makes no sense.
5. Do you think that significant tax cuts are possible considering the current state of the economy?
Yes, but only if we make even more significant spending cuts.
6. And just for fun, if Uncle Sam handed you a huge refund check right now, what would you do with it?
Define "huge." If it's a few thousand dollars, it goes into the bank. A few million dollars? Goodbye, public accounting!
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But your honor, you haven't had to contend with Santa Barbara weeds!
September 23, 2010
A taxpayer fails to persuade a Tax Court Judge:
Petitioner claimed that on the way home from Palo Alto he frequently stopped by his property in Santa Barbara to remove weeds. Petitioner claims that this work added up to at least 750 hours of work on his property in 2002 and that he therefore satisfied section 469(c)(7)(B)(ii) (discussed infra). Even if we were generous in assuming that petitioner made this trip every single week, his claim converts to spending over 14 hours removing weeds during each visit. Since the approximately 300-mile trip to Santa Barbara would have taken approximately 5 hours, petitioner would have arrived in Santa Barbara in the afternoon (assuming that he left Palo Alto in the morning) and would have been removing weeds into the middle of the night. Considered in its entirety, petitioner's story is thus without substance and beyond reality.
The Moral: judges have Google Maps too.
Cite: Smith, T.C. Summary Opinion 2010-142
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Wisconsin misunderstood when they said they were headed to Sturgis
September 23, 2010
It seems like paying Harley Davidson to stay in Milwaukee would be as necessary as paying somebody to drink beer at a Packers game, but Wisconsin did it anyway. David Brunori reports:
The state has offered Harley-Davidson Inc. $25 million in tax credits for keeping its factories in Wisconsin, a deal aimed at protecting about 1,000 blue-collar jobs in the state. But Wisconsinites should ask themselves if the incentives were necessary.The company just reached a seven year labor contract with unions that essentially froze wages. All along, the company was saying it needed to lower its labor costs. It did just that. Did the state have to give away $25 million as well? Such incentives are almost never necessary. Harley was staying. The company needed no incentive.
Of course, Harley does have a home-away-from-home in no-income-tax South Dakota...
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$200,000 unreported Swiss account, $21 million penalty
September 23, 2010
Janet Novack has the scoop (via the TaxProf).
This tells you that you should make sure to file your FBAR paperwork on time for any offshore financial account that goes over $10,000 during the year. It might also tell you a bit about why U.S. residents living abroad are becoming more willing to give up their U.S. passports.
If you're thinking: "that's what those tax cheats have coming," consider this from Phil Hodgen's blog, where a taxpayer who had no additional tax due on her foreign income paid a $28,280.48 penalty anyway for failing to file her form TD F90-22.1.
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A good headline can tell the whole story
September 23, 2010
This headline:
"Brick man who argues income taxes are voluntary gets prison term"
Tells you all you need to know about how well that argument worked.
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Fund raising that's as easy as falling off of a building
September 22, 2010
Ninety or so intrepid rapellers are dropping down the north side of the 25-story Financial Center in Des Moines (better known as Tax Update Blog World Headquarters) to raise money for the Iowa Special Olympics.
One participant is passing the 20th floor ("so far, so good") while another takes the first vertical steps towards dear Earth.
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Harkin: one for you, two for me
September 22, 2010
You think it's bad that the top estate tax rate will go to 55% next year? Iowa's own Senator Harkin thinks that leaves too much money beyond the grasp of the ruling class. He proposes a 65% top tax rate (S. 3533). The Wall Street Journal opines:
The Senate Redistribution Caucus—Bernie Sanders (Vermont), Sheldon Whitehouse (Rhode Island), Al Franken (Minnesota), Sherrod Brown (Ohio) and Tom Harkin (Iowa)—are sponsoring the Responsible Death Tax Act to take the federal rate to 65% on large estates. Why stop at two-thirds, guys? Clearly, you think the government has a right to every penny a man makes in a lifetime.These same five plus Budget Chairman Kent Conrad of North Dakota also want to retroactively apply a death tax to January 1, 2010 on the estates of those who have already died this year...
It's not merely the super-wealthy who will pay these rates unless they shelter their assets in foundations the way that Bill Gates and Warren Buffett have. Estates with as little as $1 million in assets would get hit at the reinstated 55% rate. That $1 million has not been indexed for inflation, so each year more and more middle class families would pay when mom or dad dies. For hundreds of thousands of families, $1 million can easily be the value of the family home, furniture, jewelry, cars, plus a 401(k).
If you want save your money to pay for college, buy a home that you can afford and pay down your loan, get a small business off the ground, and build up a nest egg for retirement, Senator Harkin and his friends will be happy to tax you at federal and state combined rates over 50% in your lifetime, and half to two-thirds of anything you try to leave behind.
On the other hand, if you want to "buy" a house without having any money; if you want to default on the loan when it becomes inconvenient; if you want to buy health insurance only when you get sick; if you want to take money from other taxpayers to fund your hopeless business plan -- the government is on your side.
Via The TaxProf.
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Dividend recipients: the forgotten targets of Obama tax increase plans
September 22, 2010
We've talked a lot about how small businesses will get clobbered by the slated expiration of the Bush era tax cuts, but not so much about how investors will be hit. Bob Williams at TaxVox says they'll get hit hard not so much by the increase in the top regular rate, but the 33% boost (from 15% to 20%) in dividend and capital gain rates:
A close look at his plan shows that fewer than three in ten affected taxpayers would be hit by the 36 percent and 39.6 percent rates on ordinary income that have drawn the loudest complaints. Another change, the limitation on itemized deductions (Pease) and the phaseout of personal exemptions (PEP) would affect less than half. But nearly 95 percent of people facing higher tax bills would pay more tax on gains and dividends. Keep in mind, btw, that while Obama would raise the top rate on capital gains from 15 percent to 20 percent, he would also tax qualified dividends at 20 percent. If the Bush-era tax cuts are allowed to expire, the top dividend rate would hit 39.6 percent.
Too bad we can't seem to elect politicians who could spend less, rather than tax more.
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Buzz day
September 22, 2010
Robert D Flach has his latest "Buzz" roundup of tax blog posts up to sweeten your morning coffee.
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Rental real estate: those don't also serve who only stand and wait
September 21, 2010
The tax law "passive loss" rules limit "passive loss" deductions to the amount of "passive" income earned in a tax year, except when a "passive activity" is disposed of in a taxable sale. A special rule makes it worse for owners of rental real estate, which is always "passive" unless you qualify as a "real estate professional." If you do qualify, then you can avoid the passive loss limits if you "materially participate" in the activity -- a test based on how much time you spend on the activity.
The tax law says you have to meet two requirements to be a real estate pro:
- You have to spend at least 750 hours working in real estate trades or businesses, and
- You have to spend more time working in real estate than on any other activities.
A nuclear plant operator in New Jersey operated several rental properties on the side. The properties showed a loss on his joint 2007 return of $40,490, which he deducted in full as a real estate professional. The IRS looked at the return and disallowed the deduction attributable to his being a real estate professional (part of the loss was allowed anyway under a provision that allows some taxpayers with incomes under $150,000 to deduct part of a passive real estate loss) and asserted negligence penalties.
The taxpayer, a Mr. Moss, could only come up with 645.5 hours of work spent on the properties in 2007. But he could have worked more because he was "on call" in case something went wrong, as the Tax Court explained:
Essentially, petitioners claim that Mr. Moss could have been called to perform work at the rental properties at any time that he was not working at the Hope Creek plant, and, therefore, such on call hours should count toward meeting the 750-hour service performance requirement. We do not agree with petitioners' contention that Mr. Moss' "on call" hours may be used to satisfy the 750-hour service performance requirement. Section 469(c)(7) applies where the taxpayer "performs more than 750 hours of services". Sec. 469(c)(7)(B)(ii) (emphasis added); see also sec. 1.469-9(b)(4), Income Tax Regs. ("Personal services means any work performed by an individual in connection with a trade or business" (emphasis added)). While Mr. Moss was "on call" for the rental properties, he could have been called in to perform services; however, these services were never actually performed by him. Accordingly, we conclude that Mr. Moss' time "on call" for the rental properties does not satisfy any part of the 750-hour service performance requirement.
The court upheld the disallowance and the penalties.
The Moral? Coulda, woulda doesn't get you far in Tax Court.
Cite: Moss, 135 T.C. No. 18
Related: Why I think the Tax Court judge got the passive loss 750-hour test wrong
Below: material participation basics.
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Forbes tax maven Janet Novack has a blog!
September 21, 2010
Set your links to http://blogs.forbes.com/janetnovack/. Her current post talks about the efforts of Microsoft executives to defeat a state income tax in Washington proposed by their old boss's dad.
Based on her work in Forbes, this blog will be a must-read for tax nerds.
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You can't claim the 'Hope Credit' just because you hope you qualify for it.
September 21, 2010
A Philadelphia man didn't have a great explanation for claiming a $1,500 "Hope Credit," which is available for certain post-high school education expenses. Still, he had to say something to the Tax Court. It went badly:
Petitioner claimed a $1,500 education credit (Hope Credit) for 2002; respondent disallowed it and included the disallowed amount in the underpayment to which the negligence penalty applies. Petitioner conceded the disallowance. Petitioner testified that he did not have any idea what an education credit was at the time he filed his 2002 tax return. He testified that he had not gone to school in 2002 and had "not been in school since 1978", when he received a bachelor's degree from Cheney University. His only explanation for the claiming of the credit was that this was some accountant's manipulation of the tax code. He did not discuss the education credit with Chester. Petitioner's claim of a $1,500 education credit on his 2002 tax return is evidence of negligence.
The "Chester" in this case is not Iowa's own governor, but Chester Muhammad, a now-dead tax practitioner whose clients have received a good deal of unpleasant attention from the IRS. Like the other clients, this one also had a bunch of imaginary charitable deductions on his 1040. Also like the other clients, his negligence penalties were upheld by the Tax Court.
The Moral: Hope can be a wonderful thing, but it isn't much of a tax return position.
Cite: Saunders, T.C. Summ. Op. 2010-138
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Get yer con-ed here!
September 21, 2010
You might be asking yourself, "I wonder if the scintillating tax insights of the Tax Update Blog are available in a tasty webcast format?" Well, ask no more! Your host is participating in a series of webcasts on LLC tax issues, with the next one scheduled for October 7. The October 7 panel, which includes three fine Des Moines lawyers, will cover the life and death of LLCs, including:
1. Buy In/Buy Out
2. Transfers of Member Interests
3. Death/Disability of Member
4. Handling Financially Distressed LLCs
5. Securities Issues
6. LLC Conversions
7. Dissolution, Winding Up and Liquidation
8. Termination of the LLC's Legal Existence
Let your extended 1040s take care of themselves for awhile on October 7. Sign up now!
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Federal jury convicts Polk City man of concealing corporation income through false deductions
September 20, 2010
One of the temptations of running a business is to skim corporate funds through false invoices. It's a two-for-one crime when it works -- it reduces corporate taxes while giving you cash tax-free.
Unfortunately for those who go down that dark path, there are lots of ways for it to go awry. They went awry for owners of two Central Iowa corporations, according to this U.S. Attorney press release:
Robert Lee Bierman, 49, of Polk City, Iowa, was convicted of conspiracy to defraud the Internal Revenue Service and three counts of filing false income tax returns, announced United States Attorney Nicholas A. Klinefeldt. The jury returned its verdicts on September 16, 2010, following a six-day trial and approximately seven hours of deliberations, over the course of two days. Senior United States District Judge Harold D. Vietor scheduled a sentencing hearing for November 23, 2010, at 11:00 a.m., at the United States Courthouse in Des Moines.Bierman was President of two related corporations – Value Marketing, Inc., and East Central Publishing, Inc. – which published regional editions of Machinery and Equipment Access, a monthly catalog that advertises heavy equipment and machinery. The companies currently do business as Access Publishing, Inc., and are now based in Johnston, Iowa.
It can seem so easy -- just create phony invoices from a non-existent vendor, pay them, and pocket the money. From the press release:
Beginning in 1997, Bierman and the companies’ accountant, Mark Terbeek, 52, of Des Moines, both of whom were shareholders in the corporations, began making large distributions to themselves. The distributions were classified as "printing expenses" in the company’s books and records. The companies then filed fraudulent corporate income tax returns, which deducted these payments as expenses, and neither Bierman nor Terbeek reported the distributions as income on their personal income tax returns. During a nine-year period, from 1997 until 2005, the companies diverted more than $1.8 million in this manner, making payments to Bierman, Terbeek, and two other shareholders, who also were prosecuted for failing to disclose this income on their individual income tax returns.An IRS revenue agent testified at trial that the resulting fraudulent deductions on the corporate income tax returns resulted in a tax loss of more than $500,000.
There are a lot of ways for this to go wrong. For starters, IRS corporate audit programs routinely look for these things. The indictment hints at another way things can go wrong:
During each of the calendar years, 1997 through 2005, Mark Terbeek, an unindicted co-conspirator, received monies in the total amount of approximately $736,380 from VMI, which payments were falsely identified as printing expenses in VMI's books and records; Terbeek failed to disclose these payments on his income tax returns for each of these calendar years.
Unless you have a tiny business, corporate skimming isn't a one-man job. You need help from your accountant, at least. A co-conspirator is also a potential informant. As this co-conspirator is "unindicted," it's not unreasonable to speculate he could have been a fatal link in the conspiracy. He was last on the Government's witness list for the trial, anyway, though we don't know what his testimony was.
The Moral? Cheating on taxes by skimming money through false invoices is inherently hazardous. With generous rewards now available for tax snitches (we don't know if there was a reward in this case), it's more dangerous every day.
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IRS issues Applicable Federal Rates (AFR) for October 2010
September 20, 2010
The IRS has issued (Rev. Rul. 2010-24) the minimum required interest rates for loans made in October 2010:
-Short Term (demand loans and loans with terms of up to 3 years): 0.41%
-Mid-Term (loans from 3-9 years): 1.73%
-Long-Term (over 9 years): 3.32%
The Long-term tax-exempt rate for Section 382 ownership changes in October 2010 is 3.98%.
Historical AFRs are available at the "links" page at www.rothcpa.com. You can also click here for the rates for prior months as reported in the Tax Update.
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A line in the New Jersey sand
September 20, 2010
The IRS plans to require preparers to e-file almost all returns starting next year. Proud paper-and-pen holdout Robert Flach of New Jersey boldly disagrees:
I do not file federal income tax returns electronically because I do not use expensive and flawed tax preparation software to prepare returns. I prepare all my federal income tax returns manually – always have and always will. Tax return software is really the only option for submitting returns directly to the IRS electronically. The current “traditional” FreeFile program offered by the IRS, which I pointed out is extremely limited, and an apparently very flawed “Free File Fillable Forms” option, use outside vendors to submit the return....
So I believe that, as the law is written, I am not required to submit the 2010, and subsequent, federal income tax returns that I prepare for clients electronically.
I think Robert is right as a policy matter, and the IRS shouldn't require e-filing unless it provides a reliable and cheap mechanism for it. As a practical matter, though, I think Robert will lose this battle. The IRS is bent on forcing through more e-filing, and they are bigger than he is.
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The real way to ensure Congressional tax compliance
September 20, 2010
The news that Congress is full of tax delinquents has let to a legislative proposal that would require Congresscritters to disclose if they owe back taxes, reports Kay Bell. That's all well and good, but sound tax policy requires more. It requires the Tax Update Open Congress Tax Preparation Proposal:
- All Congresscritters would be required to prepare their own tax returns.
- They would be required to do so on a live, scheduled webcast.
- The webcast would carry a comment bar on one side of the screen, allowing observers to comment real time on the Congresscritter's efforts.
- Congresscritters could use tax prep software, as long as the screen was visible to the internet audience.
- Congresscritters could use paper filing only if an aide were putting the numbers on the screen simultaneous with the paper entries.
- The webcasts and the returns themselves would be available for public viewing.
This would require Congresscritters to feel the pain of their own work, with the added benefit of real-time mockery (and audience assistance).
Naturally, there will be objections.
Some will say that it's wrong to make the Congresscritters undress financially in public. If they didn't make us share our private information with the government, that would be a lot more convincing. Fair's fair.
Some may say that the time spent fighting through 1040s would keep them from spending the time enacting legislation. That's a feature, not a bug. And the prospect of watching these schmucks struggle through their returns would almost make tax season something I would look forward to.
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409A: compliance or bust
September 20, 2010
Richard Meisner at 409A Dismay notes a law review article explaining why the 409A deferred comp rules -- the worst tax enactment since I got into the business in 1984 -- is such awful policy:
The author argues, however, that in Section 409A Congress nonetheless overreacted, creating a statute whose overbreadth and penalty structure imposed its own societal cost (in the form of compliance and transaction expenses) that possibly outweighs the cost of the tax abuse the section was designed to correct. More generally, he argues that "binary," high-risk enforcement schemes, where the only two possible taxpayer states are full compliance and ruinous noncompliance, lead to inefficient results and are bad tax policy.
The only thing more puzzling than the enactment of 409A is the absence of any significant Congressional efforts to repeal it.
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The $246 billion tax increase on pass-through business
September 17, 2010
The Tax Policy Blog notes that allowing the Bush-era tax cuts to expire will pull in $246 billion from small businesses -- sole proporietorships, individual partners and S corporation shareholders. We are told that this is a small price to pay, that we have to break a few businesses eggs for the greater good. Oh, and by the way, we're going after bad guys, too. Tax Policy Blog's Scott Hodge puts this in perspective:
While some have tried to trivialize the impact of these higher tax rates on businesses by repeating the true, but misleading statistic that "only" 3 percent of taxpayers with business income will be affected, this tax increase on pass-through business income is actually double what Obama has proposed for the largest U.S. firms that he claims are "shipping jobs overseas."Indeed, Obama's proposals to "reform" the deferral and foreign tax credit rules that he blames for the outsourcing of jobs are estimated to raise $122 billion over ten years - less than half of what will be extracted from pass-through businesses.
Even if we were to add to this amount the $14 billion Obama's budget would raise from insurance companies, the $39 billion it would raise from the oil, gas, and coal industries, and the $59 billion it would raise from changing the LIFO rules, the total would still be less than the tax increase on pass-through businesses.
In other words, socking it to small businesses isn't just collateral damage; it's the goal.
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If that's not regulation, I'd hate to see what regulation looks like
September 17, 2010
Peter Pappas passes on word of an Orlando preparer shut down by the IRS for allegedly inventing deductions and dependents for clients. He then makes a puzzling comment at the end:
"Score a point for tax preparer regulation."
It seems like the preparer was effectively regulated by being closed down. As for the additional regulation that Commissioner Shulman is imposing: somebody willing to commit blatant fraud isn't going to have a change of heart because they have a registration number and have to pass some lame "proficiency" test.
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'Small Business' tax hodgepodge clears Senate; extender bill stirs
September 17, 2010
The newest "stimulus" bill, which increases the Section 179 limit to $500,000 for 2010 and 2011 and extendes 50% bonus depreciation through the end of this year, cleared the Senate yesterday. It is expected to pass the House unchanged and be signed by the President. All the stimulus bills put together over the last ten years have worked wonderfully, increasing the unemployment rate from 4.2% in January 2001 to only 9.6% today, and this one will work just as well.
Meanwhile, the "extenders" bill is showing signs of life, reports Kay Bell. The bill extends dozens of tax giveaways that traditionally are passed only a year at a time; by pretending that they will expire after a year, congressional budgeteering pretends that they will be much less expensive than they actually are. The last extender bill foundered because it tried to stick small professional S corporation owners with additional self-employment tax. This bill omits that provision, but still has the ill-conceived "carried interest" partnership provision.
With so much pork at stake, I'm guessing the Senate will scrape together the necessary 60 votes for this one.
Update: Janet Novack (Forbes): John Edwards Tax Out, Steve Schwarzman Tax Still In
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Tax traumas of the tenured
September 16, 2010
Some academics are choking on their brie and wine over a case we mentioned last week. The case involved a professor who was not allowed Schedule C deductions for some conference expenses. Some of the expenses were disallowed because the judge felt the taxpayer fell short of the documentation requirements under Sec. 274, but others were disallowed because he didn't establish they were business expenses, rather than unreimbursed employee business expenses. Schedule C expenses are fully deductible, while employee business expenses are deductible only to the extend they (combined with other "miscellaneous" deductions) exceed 2% of adjusted gross income -- and not at all for alternative minimum tax. (Note: when an employer reimburses properly-documented employee expenses under an accountable plan, the employee has no income for the reimbursement and takes no deduction.)
Professor Bainbridge points out that outside writing and research is expected of a professor:
Here's the question: Since writing treatises and case books thus is part of my "services as an employee," why does my tax preparer insist on reporting the royalties from those items on Schedule C? I would argue that I can't distinguish my "research and writing activity from [my] activity as college professor." Ergo, it's not a separate trade, and I shouldn't have to report the royalties on Schedule C.
That's why having lawyers and professors for clients can be exhausting: you just want to finish a tax return, and they want to argue the tax law. Professor Bainbridge's preparer may be relying on Rev. Rul. 55-385, which addresses these facts:
In the instant case, a professor, employed by a State university to perform full-time teaching services at the university, is engaged in sideline activities involving public lecturing and the writing of several books. One of his books is a college textbook which he revises from time to time under contract with the publisher; another is a laboratory manual which he has devised for the use of students at the university where he teaches and which he sells direct to them. He receives royalties from the publisher from the sale of his textbook.
Under these facts, the IRS said he had self-employment income:
As a general rule, a person who is regularly engaged in an occupation or profession for profit which constitutes in whole or in part his livelihood, and who is not regarded as an employee for Federal Insurance Contributions Act purposes, is engaged in a trade or business for self-employment tax purposes. If an individual writes only one book as a sideline and never revises it, he would not be considered to be “regularly engaged” in an occupation or profession and his royalties therefrom would not be considered net earnings from self-employment. However, where an individual prepares new editions of the book from time to time, writes other books and materials, and lectures professionally, such activities reflect the conduct of a trade or business, and, if it is not one of the excluded professions of section 1402(c) of the Self-Employment Contributions Act, the income from it is includible in computing net earnings from self-employment, subject to the limitations of section 1402(b) of the Act.
So the question goes to the "regularly engaged" business. As Professor Bainbridge is a well-published prof-about-town, his preparer may have concluded that he was self-employed. The only litigated case I find on Rev. Rul 55-385 goes the other way. The case involved an Iowa State University assistant professor who wrote a textbook; the IRS wanted to put it on her schedule C and hit her with self-employment tax (Langford, TC Memo 1988-300, reproduced below). The judge held for the taxpayer:
She had no obligation to work on further revisions of the book and did not sign a contract to assist with the sixth edition of the textbook until 1983, more that five years after her work was completed on the fifth edition. Petitioner's co-authorship of the fifth edition of Textiles falls squarely within the statements in Rev.Ruls. 55-385 and 68-498. Petitioner's authoring activities in 1983 should be disregarded because those activities were not the source of her royalty income. Her royalties were not contingent on any performance of future services and would continue until the volume of sales of the fifth edition fell below an agreed level. There was no express or implied understanding [pg. 88-1531] that petitioner would have any part in the sixth edition until December 1983. The five-year hiatus between petitioner's work on the fifth edition of Textiles in 1976 and 1977 and the sixth edition of the textbook in 1983 persuades us that her authoring activities were not engaged in regularly.
Professor Bainbridge's preparer may also have had a practical motive. If the professor wasn't reimbursed by his university for conference travel costs, they would have been unreimbursed employee businesses expenses. I believe Professor Bainbridge lives in high-tax California; that means he is likely to have AMT liability, which would make such deductions worthless. Putting the income on Schedule C makes it possible to put the unreimbursed expenses on Schedule C, making the deductions worth something. Based on my admittedly limited exposure to academic tax returns, I suspect the deductions often exceed the royalties (raising potential hobby loss issues, but let's not go there now).
The Moral? If you are a professor, and you incur lots of outside expense, a Schedule C can be a good thing, if you have the records to back up your expenses.
The TaxProf has more.
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Just mythed
September 16, 2010
Tax Policy Blog: Five Myths about the Bush Tax Cuts. They weren't just for the rich, and letting them expire isn't the biggest tax increase ever.
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The cost of not paying taxes
September 16, 2010
My new post at IowaBiz.com, the Des Moines Business Record web home for entrepreneurs.
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$500,000 Section 179 limit, Extended Bonus Depreciation likely to be enacted
September 15, 2010
The Senate has broken the filibuster on HR 5297, the Small Business Jobs Act. Tax Analysts reports ($link) that the House is likely to approve the Senate bill as written without a conference, so it probably will become law in its current form. While it will do as much to improve the economy as every other stimulus bill passed in the past ten years, it does have some important tax provisions. Here's a quick rundown:
$500,000 Section 179 depreciation limit. Current law allows taxpayers to expense $250,000 in capital expenses that would otherwise have to be recovered through depreciation deductions. The bill raises the Section 179 limit to $500,000, with the deduction phasing out dollar-for-dollar as capital expenditures exceed $2 million. This applies to taxable years beginning in 2010 and 2011. (Sec. 2021 of the bill)
Extended bonus depreciation. The current provision allowing taxpayers buying new property to deduct half the cost in the first year of service had expired at the end of 2009. The bill extends bonus depreciation through 2010. How providing a break for expenditures already made this year stimulates anything isn't explained. (Sec. 2022 of the bill)
Exclusion of certain capital gains. Current law gives a 75% exclusion for gains on C corporation stock acquired at original issue between February 17, 2009 and January 1, 2011, if the stock is held for more than five years -- though the excluded gain is an AMT preference. The bill removes the AMT preference and increases the exclusion to 100% from the date the bill is signed through the end of 2010. This means taxpayers will have about three months to start a new C corporation in the hopes that it will make money and can be sold tax free in five years. That will make the economy go nuts, no doubt. (Sec. 2011 of the bill).
Five-year built-in gain period for S corporations. If a C corporation converts to S corporation status, it has to pay a corporate level tax on "built-in gains" recognized in the first ten years of its S corporation life. The 10-year built-in gain period was shortened to seven years for gains recognized in 2009 and 2010. The bill shortens the recognition period to five years for gains recognized in taxable years beginning in 2011; the recognition period becomes 10 years again in 2012. (Sec. 2014 of the bill).
Five-year carryback and AMT offset for business credit carryforwards. The bill allows taxpayers who have "general business credits" -- for example, research credits and jobs credits -- to carry them back five years. More importantly, it will allow taxpayers to offset alternative minimum tax for "eligible small businesses" in 2010. These credits normally are not allowed to offset AMT, so they are useless to many entrepreneurs.
Unfortunately, it appears that the AMT waiver only applies to credits generated in 2010. Taxpayers who have credit carryforwards because of prior year AMT won't get to cash in their carryforward credits if I read the bill correctly (I hope I'm wrong).
Eligible small businesses will be non-public corporations, partnerships and individuals with gross receipts under $50 million. For pass-through entities, the $50 million test will be applied at both the entity and individual levels. (Secs. 2012 and 2013 of the bill)
Deduction for health insurance in calculating 2010 SE tax. For 2010 only, taxpayers with self-employment tax will get to reduce their self-employment income by their deductible self-employed health insurance (Sec. 2042 of the bill).
1099 requirement for rental property owners. The bill isn't just tax breaks. The bill requires rental operators to issue 1099-MISC forms to vendors with over $600 of business starting with 2011 expenditures (Sec. 2101 of the bill).
Start-up expenditures. The bill increases the $5,000 limit for deductible start-up expenditures to $10,000 for 2010 only (Sec. 2031 of the bill).
The bill has non-tax provisions, including a probably pointless small-business lending fund.
LInks:
Senate Text, HR 5297
Senate Finance Summary, HR 5297
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Senate holds firm on burying businesses with useless 1099 paperwork
September 15, 2010
Tax Prof: "Senate Rejects Bills to Repeal ObamaCare's 1099 Reporting Requirements"
Apparently the supporters of the requirement feel that if one piece of the Obamacare puzzle falls out, the entire delicate structure will collapse. If only. Megan McCardle gets this right:
I think that health care wonkery is, in fact, a real job, and a very important one. But so is running a small business, and the amount of hassle that this new law imposes on taxpayers is all out of proportion to the benefit derived. Even the IRS in-house watchdog thinks so. And it's not just going to produce a lot of administrative hassle for the businesses, but for the IRS itself, which will suddenly be inundated by new tax reporting.
Her post is well worth a full read.
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Optional Estate Tax for 2010?
September 14, 2010
The Wall Street Journal is reporting that the Obama administration and Congress are toying with allowing taxpayers to choose between 2009 and 2010 estate tax rules. That would enable people who actually have big estates to not be taxed in 2010, while enabling the rest of us to get date-of-death values as basis -- avoiding the nightmare of trying to figure out what grandpa paid for the Continental Flange stock he bought in 1962 in his E.F. Hutton account.
The Tax Prof and Kay Bell have more.
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Librarians don't have to be good at math.
September 14, 2010
The tax law sets a high bar for deducting rental real estate losses as non-passive. Before you even look at whether you are "passive," you have to show you are a "real estate professional." You have to show both:
- That you work 750 hours or more in real estate trades or businesses in the tax year, and
- that you do that more than you do anything else.
A taxpayer gave it a good try yesterday in Tax Court, as Special Trial Judge Dean explains:
Petitioner worked approximately 7.5 hours per day for 187 days, a total of 1,402.5 hours, as a school librarian in 2004. During those 187 working days, she alleged, she devoted an additional 6 hours of her time researching and developing her rental real estate activity. She further asserts that on each vacation day, each Saturday and Sunday, and each holiday, she devoted 8 hours to her rental real estate activity. She estimated working a total of 2,840 hours on her rental real estate activity during 2004. On the basis of petitioner's estimates, she worked an average of over 11 hours a day throughout 2004. Her estimate may have been bolstered by her assumption that there are "72 weekends in a year".
But it's tough for a hard-working girl to get a break in Tax Court:
The following factors further diminish the credibility and accuracy of petitioner's claim: (1) The number of hours claimed appears excessive in relation to the tasks described, given the amount of time she worked as a librarian throughout the year; and (2) the Georgia property and the manufactured home were vacant during 2004.
Of course you have to work harder when your property is vacant. You need to find tenants! But the judge was unmoved.
Furthermore, the Court is not convinced that the hours petitioner claimed she spent on her rental real estate activity accounted for more than one-half of the total hours of personal services she performed in a trade or business in 2004. She therefore does not qualify as a real estate professional pursuant to section 469(c)(7), and her rental activities during 2004 were passive activities pursuant to section 469(c)(2).5 Consequently, petitioner's passive activity losses for 2004 are limited by section 469.
The Moral? Use your 52 weekends wisely, because that's all you get.
Cite: Hill, T.C. Memo. 2010-200
Related: Why I think the Tax Court judge got the passive loss 750-hour test wrong
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So Tasers work on Terminators?
September 14, 2010
A gentleman in Bettendorf yesterday reportedly:
- Crashed his car on the I-74 bridge over the Mississippi River. Survived that.
- Jumped 100 ft off the bridge into the River. Survived that.
- Swam to a nearby island.
- Defied police sent to get him.
- Got Tased. Survived that.
Question the man's judgement, sure, but not his toughness.
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Cryptographer fails to crack the secrets of Sec. 274
September 13, 2010
Vladimir Shpilrain is no doubt a brilliant guy. A professor of Mathematics at City College of New York, he does research in cryptogrophy, the art of codes. But all his brilliance wasn't enough to enable him to overcome the tax law. He deducted over $10,000 in related travel, meal and entertainment expenses related to his research in these areas on his Schedule C.
Unfortunately, he didn't take Sec. 274 into account in his tax calculations. This section imposes special documentation requirements for travel and meal expenses. It's not enough to have the expenses, as the Tax Court explained:
...the taxpayer must substantiate by adequate records or sufficient evidence to corroborate the taxpayer's own testimony: (1) The amount of the expenditure or use; (2) the time and place of the expenditure or use; (3) the business purpose of the expenditure or use; and in the case of entertainment, (4) the business relationship to the taxpayer of each expenditure or use. See sec. 274(d).To meet the adequate records requirements of section 274(d) a taxpayer must maintain some form of records and documentary evidence that in combination are sufficient to establish each element of an expenditure or use. See sec. 1.274-5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). A contemporaneous log is not required, but corroborative evidence to support a taxpayer's reconstruction of the elements of expenditure or use must have "a high degree of probative value to elevate such statement" to the level of credibility of a contemporaneous record.
The professor failed to produce records to the satisfaction of the court, costing him the deductions. The professor learned a hard way a lesson I try to teach clients: it's not enough to convince me that your auto use and travel was for business. You have to be able to convince the IRS, and you have to have the documents to prove it. No documentation, no deduction.
The TaxProf has more.
Cite: Shpilrain, T.C. Summ. Op. 2010-133
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Those that get caught, teach ethics
September 13, 2010
Two men convicted of running a high-end tax shelter scam will, as part of their sentences, will go back to their old schools to explain the error of their ways to upcoming MBAs and lawyers. Since they likely will also be serving prison sentences, they should have plenty of time to prepare their lecture notes. For details
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Would the economy suffer without the R&D credit?
September 13, 2010
Amar Bhide' in the Wall Street Journal:
President Barack Obama has called for making the on-again, off-again R&D tax credit permanent, as had Presidents Bill Clinton and George W. Bush, in the name of promoting long-term economic growth. Big companies with large R&D budgets, unsurprisingly, favor the proposal. But it's a bad idea. Tax credits for R&D don't encourage the broad-based innovation that is crucial for widespread prosperity.
Arnold Kling has similar thoughts.
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If we throw all of our money at Hollywood, it will come back manifold
September 13, 2010
I posted this comment to a new Tax Analysts piece ($link):
The article "Film Tax Credit Incentives: A Success in New Mexico" talks of the wonders wrought by throwing money at Hollywood. The article is unconvincing because it fails to address the opportunity costs of the New Mexico program.The money spent on the films could have been spent on any industry. If you subsidize any industry enough, you will attract it. There's no evidence that attracting the film industry is somehow better than attracting any other industry.
The money could have also been returned to the taxpayers and businesses in the form of improved services or lower taxes. This could have improved the economy in the countless ways that people improve things with their own resources and their own local information. But since nobody calls a press conference with a movie starlet for this kind of growth, it isn't as attractive to politicians as throwing money at Hollywood.
Sadly, it appears that Iowa may not have learned its lesson, in spite of being on the hook for $200 million in its disastrous film tax credit program. The Des Moines Register reports that GOP nominee Terry Branstad may remain open to film credits:
"I wouldn't bring it back as it was, but I'm not saying there's something that couldn't be done to try to help and encourage filmmaking in Iowa," said Branstad, who launched the state's film office in the mid-1980s. "I don't think we should slam the door on filmmaking."
His opponent, Governor Chet Culver, embarrassed by the scandal that exploded during his administration, wants nothing more to do with film credits.
No, we shouldn't "slam the door" on filmmaking. We should create a simple low-rate, broad-based tax system that is friendly to all businesses, whether they have lobbyists or not. If fimmakers want to come to Iowa like any other business, without us having to buy them Benzes and Ipods, they'd surely be welcome.
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Dead people need a place to live too.
September 10, 2010
For some folks who got through life without ever achieving the joys of home ownership, the first-time homebuyer credit gave them a shot at it in the afterlife. From a report of the Treasury Inspector General for Tax Administration:
TIGTA also identified 1,326 single taxpayers the Social Security Administration recorded as deceased who claimed $10.1 million in erroneous Credits. The IRS did not allow 528 of the 1,326 individuals to receive over $4 million they claimed for the Credit.
So what about the other 798? The report says the IRS should:
ensure the 798 individuals who TIGTA identified as being deceased prior to the purchase of the home are entitled to claim the Credit.
So the IRS has auditors beyond the veil? If you run into an IRS agent in the afterlife, you made a serious mistake somewhere along the line.
The TaxProf has more.
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And the little dog too!
September 10, 2010
So Romanian legislators have backed off from taxing witches out of fear of being cursed? Crimony, where are our witches when we need them? Our whole Congress should be turned into toads just for the taxes that apply to everybody, witch or not. Oh, wait...
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If it works so well, why does the economy still stink?
September 10, 2010
Jim Maule poses good questions about the proposal to allow full deduction of fixed assets purchased between now and the end of next year:
The previous incarnation of section 168(k) “bonus depreciation” as well as continual expansion of section 179 expensing have been consistently hailed as solutions to the nation’s economic woes of the moment. Yet no evidence exists that these tax giveaways have had the claimed effect. Why is it, for example, that during 2008 and 2009, while businesses basked in the benefit of 50-percent bonus depreciation, the economy got worse, not better? Where are all the jobs whose creation was promised when the proposal for the 2008 and 2009 tax break was being trumpeted as the answer? Where is the economic recovery that supposedly was an inescapable consequence of enacting those tax breaks? Similar questions can be asked about the long parade of tax breaks for business investments during the past 50 years.
Like all good witch doctors, the politicians need to wave their wands frantically and sacrifice some chickens, just so they look like they're trying to do something. Then when the recovery comes anyway, someday, they can claim the credit, and meanwhile they say things would be worse otherwise.
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Everybody talks about how much they hate the new 1099 requirements...
September 10, 2010
...but TaxGrrrl tells you what to do about them.
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Well, sure, if you only count the live ones...
September 10, 2010
"Iowa Has More Registered Voters than Citizens of Voting Age"
Woodland Cemetery, where everybody is of voting age by now.
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What your IRA can learn about paying tax from Cornell University
September 09, 2010
When a charity becomes "tax exempt," it might think that it never has to worry about the IRS. That can be an expensive mistake. The Henry E and Nancy Horton Bartels Trust for the Benefit of Cornell University has learned that lesson the hard way. It's a lesson that also applies to IRA investors, qualified plan fund managers, and charitable trust investment advisors.
"Tax exempt" entities are really exempt only on certain kinds of income -- things like interest, dividends, and capital gains. The tax law doesn't want taxable businesses to face tax-free comptetition, so it imposes an "unrelated business income tax" (UBIT) on charities with business income. One often-overlooked part of the UBIT is its tax on income from "debt-financed property." The classic application of the debt-financed property UBIT is for charities that invest in leveraged real estate. But the tax -- imposed at corporation income tax rates -- can apply in other settings. A Federal Judge explains how the debt-financed UPBIT of the Bartels trust arose:
This case arises from some of the Trust's investment activities during the 1999 and 2000 tax years. During those years, the Trust invested in stocks purchased "on margin." In other words, the Trust used money borrowed from its broker to complete the stock purchases. The Trust subsequently sold the stocks.When the Trust filed its "Exempt Organization Business Income Tax Return" for the 1999 tax year, otherwise known as its Form 990T, the Trust reported the income from the sale of the margin-financed securities as capital gains, without reporting any associated income tax liability. After an IRS audit, the Trust paid $48,770 in taxes on the margin sales for the 1999 tax year. For the 2000 tax year, the Trust reported income from the sale of the margin-financed securities as capital gains and paid the associated UBIT of $39,479.
The Federal Circuit Court of Appeals ruled that the UBIT applied here. UBIT also applies to Individual Retirement Accounts and pension plans, as well as to charities. Some points for IRA investors to keep in mind:
- Margin accounts in an IRA can make your IRA subject to UBIT.
- Debt-financed real-estate in an IRA can trigger UBIT.
- Hedge funds using debt can trigger UBIT, making such funds a dicey bet for IRAs.
- IRAs that invest in operating businesses through an LLC or other partnership can expect to file a Form 990-T and pay tax on their K-1 income.
Related: Got UBIT? Why IRAs need to be careful where they invest
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Judge orders separate film credit trials
September 09, 2010
Polk County district judge Arthur Gamble has ordered separate trials for three filmmakers accused of looting Iowa's film tax credit program. The Cedar Rapids Gazette reports:
"I think we have to do it. I think that’s the right approach," Polk County District Judge Arthur Gamble said in granting defense motions to separate the trials for Wendy Weiner Runge, Matthias Alexander Saunders and Zachary LeBeau, three Minnesota residents each charged with one class B felony count of ongoing criminal conduct and 11 class C felony counts of first-degree fraudulent practices for allegedly making false and inflated claims for state tax credits involving multiple film projects.Gamble, the senior judge in Iowa’s 5th Judicial District, set a Nov. 1 trial date for LeBeau while Runge will be tried in early January and Saunders in February.
That means the first trial will begin barely before the election, assuming it really does start November 1. That's too bad. It would have been nice for the legislators who voted for the film credit giveaway -- almost all of them -- to have to discuss the film disaster as the evidence unfolds at trial.
Related:
New charges in the Iowa film credit fiasco
Harold Hill Gulls the House
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Ethanol giveth, ethanol taketh
September 09, 2010
The tax subsidies for ethanol are often defended because they are supposedly good for the farmers. But maybe not for farmers who sold corn to the now-bankrupt ethanol producer Verasun. The bankruptcy trustee now threatens to force farmers to return "preferential" payments they received for corn from Verasun. Roger McEowen of the ISU Center for Agricultural Law and Taxation explains the issues, and why farmers who get letters from the trustee need to act. Paul Neiffer has more.
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A round for the house, put it on the rich guy's tab.
September 09, 2010
Howard Gleckman at TaxVox:
But my biggest objection to the Obama plan is that is manipulates expectations. It implies that the nation can solve its budget problems by simply raising taxes on the wealthy. But this is not possible. As a recent Tax Policy Center study showed, even trying to do so would result in top rates approaching 80 percent. One day, a president and Congress will have to agree on a deficit reduction package that raises taxes across the board and cuts spending. That’s when those allegedly permanent tax cuts will disappear. Pretending otherwise is irresponsible.
I lean more to the spending cut side, but we have to service our $13 trillion debt somehow.
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Culver: kill the film credits
September 08, 2010
Is it possible that Iowa is beginning to learn its lesson about economic development tax credits? There's hope, reports O. Kay Henderson:
Governor Chet Culver says once the existing state commitments are met, the state tax credit program for film and TV productions in Iowa should be shut down.“We’re not going to be taken for suckers,” Culver told reporters late this morning during a statehouse news conference. “People, unfortunately, exploited that program.”
The program collapsed in scandal last fall about this time, and the former Film Office director and some filmmakers await trial on charges arising out of the program. The Attorney General's office estimates that the state is still on the hook for $200 million in subsidies to Hollywood.
Film credits may be the worst of the state's economic development tax credits, but after the monumental ineptitude shown in running this program, does anybody believe that the dozens of other targeted tax breaks are somehow run with impeccable efficiency and oversight?
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The road not taken
September 08, 2010
Russ Fox on the President's proposals for 100% bonus depreciation and a permanent R&D credit:
But there’s a cost to this, too–and I’m not talking about whatever revenue ‘enhancements’ are proposed to balance the cost of this plan. Rather, many states will not conform to the new law (California is guaranteed not to). It will be yet another conformity issue for tax professionals and business owners to deal with.If I were advising the President, I’d tell him there’s a simple fix to the economy. Just cut government spending and simplify the ridiculously complex Tax Code. Unfortunately, the chance of my advising the President is just about zero. Fortunately, that also appears to be the chance that this proposal becomes law.
Excellent point. It's hard enough coping with the crazy ways states deal with the current Sec. 179 and bonus depreciation rules already.
TaxVox has has more unenthusiasm.
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But where will they put the zeppelin port?
September 08, 2010
The Des Moines Metro Planning Organization is working hard to plan the future of obsolete transportation, reports the Des Moines Register. The DMMPO says the old Rock Island Depot is still the best place to have a train station for the trains that will never return to Des Moines. From the report:
Des Moines has not had regular passenger train service since May 31, 1970, when the Rock Island Lines' Cornbelt Rocket ceased operations. That train ran between Chicago and Council Bluffs.Plans for re-establishing the Rock Island depot as a train station are tied to a push by Iowa and Illinois transportation officials to resume passenger rail service between Chicago and Omaha.
The states have asked the Federal Railroad Administration for $248 million to help establish the first phase of the train route, which would run between Chicago and Iowa City, through the Quad Cities.
Flickr image courtesy jitze under Creative Commons license
That's $248 million paid by the taxpayer before the first train carrying passengers at a $47 money-losing fare arrives late on its scheduled seven-hour journey from Chicago. But the same brilliant central planners who think it's a good idea to move the hub for city buses away from the skywalks and the center of downtown to a remote site along the railroad tracks are getting ready for the trains just the same.
Meanwhile, after an outlay of $0 for new depots and infrastructure, the Megabus offers twice-daily 6 hour trips in comfortable buses with wi-fi between Des Moines and Chicago for fares as low as $1. Every Megabus trip (I took one this weekend with the family) is a compelling argument to not spend that $248 million on the Crazy Train.
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100% bonus depreciation?
September 07, 2010
Forget "bonus" depreciation. The President is set to allow full expensing of fixed assets through next year, reports Martin Sullivan at Tax.com.
The first-year write off of plant and equipment-- known as "expensing"--has long been a dream of the business community. But it will probably win Obama little support because of its temporary nature. No doubt the Obama economic team chose temporary expensing over other alternatives--like a much needed corporate tax rate cut--because the official revenue cost over ten years will score as small relative to the benefit it provides.
While many tax wonks say expensing is superior to capitalizing and depreciating assets over time, it smacks of fine-tuning by the government. Like the R&D credit, which would be permanently extended under the proposal, it amounts to the government telling businesses how to spend their money to avoid paying taxes at rates that are too high to begin with.
Mr. Sullivan sees a dim future for the plan:
The other reasons the proposal will win little support are: (1) the costs of the proposal will be offset by loophole closing provisions fiercely opposed by business and (2) the business community knows its best ally is the Republican Party. This is particularly true of the small business owners that are obsessed with extension of the Bush rate cuts for the highest income brackets.
There's a good reason for that "obsession." Expensing a five-year asset leaves you with the same taxable income, and the same tax, over a five-year period as depreciation; only the timing changes. An increase in the tax rate, in contrast, is a permanent difference in the amount paid. Those "obsessed" small businessmen didn't get to be businessmen by being bad at math. They can tell that combining full expensing with a rate increase leaves them with less money.
It will be interesting to see what the "loophole closers" will be; the articles linked by Mr. Sullivan (here and here) don't say.
UPDATE from Tax Policy Blog: Obama's Investment Equivalent of "Cash for Clunkers"
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Summer's over Tax Carnival
September 07, 2010
Labor Day is behind us, so we might as well get out the sweaters and prepare for things to get colder. There's no better way to ease into fall than a trip to Kay Bell's Carnival of Taxes.
You can't go wrong at the blog world's best roundup of tax-related blog posts!
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Tax cheating and deferred consequences
September 07, 2010
Even when you get away with tax cheating for a long time, it can come back to bite you. If you are cheating in your business and your prospective buyer wants to see your tax returns, it can be awkward to explain that the business is much more profitable than it would appear to the IRS. Especially when the prospective buyer is an IRS agent.
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How long can you claim the kid?
September 07, 2010
William Perez discusses Claiming an Adult Son or Daughter as a Dependent at about.com.
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WSJ: The 97% Fallacy
September 03, 2010
Supporters of increasing the rates at the top two brackets like to say that it will only affect 3%, or 2%, of "small" businesses. An opinion piece in the Wall Street Journal explains why that is an absurd talking point:
The 3% figure, which is computed from IRS data, is based on simply counting the number of returns with any pass-through business income. So, if somebody makes a little money selling products on eBay and reports that income on Schedule C of their tax return, they are counted as a small business. The fact that there are millions of people in the lower tax brackets with small amounts of business income may be interesting for some purposes, but it is irrelevant for the assessment of the economic impact of the tax hikes.The numbers are clear. According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007. That's the number to look at, not the 3%.
That's a point I've been making.
Related: DEPARTMENT OF MEANINGLESS STATISTICS
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It failed. It cost billions. Let's do it again!
September 03, 2010
Even though the first-time homebuyer credit has proven to be as effective in reviving the housing market as using meth is at generating good study habits, there are still people who want to revive the credit. TaxVox reports:
The latest round started on Sunday, when HUD Secretary Shaun Donovan said it was "too early to say" whether the White House would support another round of credits. Donovan and the Obama Administration have been backtracking ever since. But the damage is done.Members of Congress and congressional hopefuls have leapt on the bandwagon. There is even a facebook page called "Extend the $8000 Federal Tax Credit until 2011 for 1st Time Homebuyers."
Will Congress restart this outrageously expensive economic meth lab? They've already done it twice, and there's no evidence they've gotten any smarter.
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Debt cancellation income: a 1099-C isn't always right
September 02, 2010
The IRS assessed Dennis Gaffney over $37,000 in taxes and penalties from 2006 based on a 1099-C from Bank of America reporting debt cancellation income. Mr. Gaffney probably thought he would have remembered something like that, and he didn't.
It turned out the 1099 arose out of a 1993 business setback in Hawaii. Mr. Gaffney moved to Arizona and started over. In 1996 he worked out a settlement of his known debts.
Meanwhile, an old lender embarked on a comedy of errors, according to the Tax Court:
On January 17, 1995, without petitioner's knowledge, Bank of America obtained a deficiency judgment against petitioner, who was insolvent, and "charged off" loan No. 3759415 in the name of Dennis Warren Gaffney for $90,845. In August of 1995 petitioner moved to Cave Creek, Arizona, where he lived until moving to his current address in Oregon in March of 1998. While in Arizona, petitioner continued to receive mail forwarded from his personal residence in Hawaii. However, petitioner never received notice of the foreclosure or the deficiency judgment, including service of process or a copy of the complaint or judgment.After charging off loan No. 3759415 on January 17, 1995, Bank of America intermittently engaged in collection activity on the judgment. However, Bank of America erroneously focused its collection efforts in connection with loan No. 3759415 on Thomas Gaffney. Petitioner has no knowledge of Thomas Gaffney. In Bank of America's records, Thomas Gaffney was attributed the same Social Security number as petitioner and had the same address in Cave Creek, Arizona, where petitioner previously resided. According to the collection activity reports Bank of America provided to respondent, collection activities against Thomas Gaffney ceased on October 30, 2001. After cessation of collections, the only other activity that occurred with regard to loan No. 3759415 was the creation of an asset profile report on Thomas Gaffney on June 19, 2003.
So the 2006 1099 was a complete surprise to the petitioner, who probably thought the whole thing had been settled 10 years before. He contacted the bank:
In response, Joy Brinley, an employee of Bank of America, sent petitioner a short letter on November 4, 2008, simply stating, without further evidence, that the account had been reviewed and the Form 1099-C was correct.
That was good enough for IRS, and Mr. Gaffney had to go to Tax Court. The Tax Court pointed out that the IRS needs more than just a 1099-C to assess debt cancellation income:
In support of respondent's assertion that the discharge of indebtedness occurred in 2006 and not when the loan was "charged off" in 1995 or when collection activities ceased in 2001, respondent provided a letter from Bank of America which stated that the account had been reviewed and that both the Form 1099-C and the amount of the discharge of indebtedness income were correct. Although sufficient to meet respondent's burden of production under section 6201(d), the evidence respondent provided failed to indicate an identifiable event, a bank policy, or a State law that would justify the discharge of indebtedness in 2006. We find that petitioner has satisfied his burden of proving that the discharge occurred before 2006. Therefore, we hold that petitioner did not have $90,845 of income from the discharge of indebtedness by Bank of America in 2006.
It would have been a raw deal to hit the taxpayer with income in 2006. If he had been aware of the issue when he settled his other debts, it's likely that it would have been settled in 1996, when he was insolvent. Debt forgiveness is tax-free to the extent you are insolvent.
Meanwhile, some poor guy named "Thomas" Gaffney is probably wondering why it's so hard to get a loan.
The Moral: Debt cancellation usually is taxable, but not always, and a 1099-C doesn't by itself always mean you have to pay tax.
Cite: Gaffney v. Commissioner; T.C. Summ. Op. 2010-128
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Where we go all commercial
September 02, 2010
If you like what you see here, maybe you'll like to get some Tax Update-flavored CPE. I'm participating in a webinar on LLCs with some distinguished lawyer-types. The first webcast is slated for September 16 at 1:00 Central. From the promotional blurb:
-Recognize the advantages and disadvantages of LLCs, S corps and C corps.-Walk through the formation issues of both corporations and LLCs.
-Examine the operational and tax issues encountered when working with LLCs and corporations.
If that doesn't sound exciting to you, well, you must have a life a heart of stone.
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It's a bad idea even when they aren't looting
September 02, 2010
Tax Policy Blog on the resumption of Iowa film credits in the wake of the film scandal:
Because of this scandal Iowa temporarily stopped shamelessly handing out cash to filmmakers, but the gravy train is up and running again. Iowa lawmakers have not learned the broader lesson: film tax credits should be eliminated permanently because they are terrible tax policy. One of most egregious forms of corporate welfare, film tax credits take money from the taxpayers and funnel it to filmmakers. The claims of economic benefits and job creation are greatly exaggerated (assuming you can even call a job shifted from one state to another a job "created") and ignore the opportunity cost of such tax expenditures (like funding essential government services, or reducing taxes). Film tax credits are yet another example of a politically well-connected special interest group securing subsidies for itself at the cost of the rest of the state's taxpayers and businesses.
Yes, even if the film program isn't buying Benzes and Ipods for film producers, it's still a bad idea. Yet there may be a silver lining. Iowa Film Insider reports:
I received the following from a good friend who is well-connected in the Iowa film world. Here is that person's message to me today:Everything is still moving along, but Dotzler is having a hard time getting the other legislators on the tax credit committee to agree on a date. I think that Governor Branstad's move to reinvent IDED has everyone very cautious. It has become a waiting game, I'm afraid.
All of the films that had a contract or an approved application have been called by non-state employees. All had various answers, but to your question on if we are going to see any films shot - No - they have moved on to other states to shoot or have scraped the project.
For now, anyway, it's easier for Hollywood to gull other states, making it harder for Senator Dotzler to give away your tax money.
Related: Let them eat canapes.
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Not everybody is meant to farm
September 01, 2010
Here's one sign that a couple might not have been really cut out for farming:
In 2003 petitioners purchased a goat and a horse. The goat was sold soon after it was purchased because, according to petitioners, it was "scary."
The Tax Court decided that farming wasn't really their thing. The court disallowed farming losses of $19,139 (on $750 of gross sales) under the "hobby loss" rules.
Cite: Stenslet, T.C. Summ. Op. 2010-127
Hat tip: Roger McEowen
Flickr image courtesy Ali Graney under Creative Commons license.
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We can't use private contractors to do tax work because they might misuse the data
September 01, 2010
The AP reports that Farrah Jones has pleaded guilty to preparing a false return, using data she illicitly acquired while processing taxpayer information to claim refunds on behalf of others. That would pretty much seal the case against allowing her employer to handle confidential information, because obviously there is an inherent flaw in their procedures or culture. It's a good thing they shut down the pilot program for private collection of tax debts.
Except Ms. Jones worked for the IRS.
While this is only one IRS employee, it's one more abuse of private information than was ever linked to the private collection program.
Related: Good thing Congress banned the outsourcing of federal tax collections
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Back to school Cavalcade
September 01, 2010
Summer's over, and school's back in session. It's only right, then, that a student host the new Cavalcade of Risk!
The medical student who runs The Notwithstanding Blog has diagnosed the best recent insurance and risk-management blog posts, curing what ails you. Many great posts, including the Insureblog's recounting of the case of the Pre-existing Condition Pool. Fire up the tractor and head on over.
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