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Tax Update Blog: October 2010 Archives

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Time for a new set of return deadlines?

October 29, 2010

Jim Maule outlines a proposal by the American Institute of Certified Accountants to revise tax return due dates:

The AICPA proposal suggest the following:

Moves the original due date of partnership returns one month earlier and reinstates a 6-month extension (3/15 and 9/15);

Separates the due dates of S and C corporation returns;

Maintains the longstanding due dates of Form 1040 (4/15 and 10/15);

Moves the original due date of S corporation returns to two weeks after partnership returns and two weeks before the original due date of individual, trust and C corporation returns (3/31);

Moves the extended due date of both S corporation and trust returns so that they are two weeks after partnership returns and two weeks before the extended due date of individual and C corporation returns (9/30);

Moves the original and extended due date of C corporation returns one month later (4/15 and 10/15); and

Maintains the original due date of employee benefit plan returns on July 31 but allows for automatic three and one-half month extension by moving the extended due date one month later (11/15).

It makes sense for pass-through returns to be due before the returns where the tax is paid on pass-through income. Still, the proposal does little to address the way that tax season is becoming a two or three-week nightmare before April 15, given the way 1099s and K-1s are coming out later and later. An automatic penalty-free extension without a separate filing for returns that are at least 80% paid in would help a lot.

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For love or money?

October 29, 2010

The "Hobby Loss" rules disallow losses from activities not carried on for profit. Bruce the Missouri Tax Guy explains what the IRS looks for when deciding whether to apply the hobby loss limits.

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2011 401(k) max: $16,500, again

October 28, 2010

The IRS has announced (IR-2010-108) the inflation adjustments to 401(k) and IRA contribution limits and IRA phase-outs for next year (IRA deduction limits remain at $5,000):

The elective deferral (contribution) limit for employees who participate in section 401(k), 403(b), or 457(b) plans, and the federal government’s Thrift Savings Plan remains unchanged at $16,500.

The catch-up contribution limit under those plans for those aged 50 and over remains unchanged at $5,500.

The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are active participants in an employer-sponsored retirement plan and have modified adjusted gross incomes (AGI) between $56,000 and $66,000, unchanged from 2010. For married couples filing jointly, in which the spouse who makes the IRA contribution is an active participant in an employer-sponsored retirement plan, the income phase-out range is $90,000 to $110,000, up from $89,000 to $109,000. For an IRA contributor who is not an active participant in an employer-sponsored retirement plan and is married to someone who is an active participant, the deduction is phased out if the couple’s income is between $169,000 and $179,000, up from $167,000 and $177,000.

Other 2011 pension adjustments are at the link.

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Yes, Jason, Iowa does have a poor business tax climate.

October 28, 2010

Des Moines Register reporter Jason Clayworth is moved by Iowa's poor ranking in the current Tax Foundation State Business Tax Climate Index to ask: Does Iowa really have a poor business tax climate? He cites a 2005 report by the leftish think tank Economic Policy Institute that criticizes the Tax Foundation's approach.

The Tax Foundation is perfectly capable of defending their own methodology; I'll just point out what I see in doing business returns for Iowa and elsewhere for clients operating in most states.

Compared to most other states, Iowa truly does have high tax rates. Our corporate rate is the highest in the entire country -- the second highest when the partial deduction for federal taxes is taken into account -- and our individual tax rate, even after federal deductibility, is higher than that of all our neighbors except for Minnesota.

Iowa's taxes are very complex. You have to compute both regular tax and alternative minimum tax for Iowa, and a third computation can apply for low income individuals. There are many differences between Iowa and IRS tax rules. Iowans have to cope with dozens of narrowly-crafted deductions and loopholes, and some weird addbacks, to compute their tax.

Iowa's taxes are grossly inefficient. Mr. Clayworth reports:

Iowa has a top corporate income tax rate of 12 percent, the highest in the nation. However, the tax applies only to in-state sales and, along with numerous tax breaks, few companies pay the top rate, said Mike Lipsman of the state revenue department. In the fiscal year that ended June 30, the state collected less than $190 million from the tax, less than 4 percent of the state’s $5.3 billion general fund budget.

An extremely-high rate that collects little revenue is a sure symptom of a dysfunctional tax system. It clobbers the unwary and the unadvised while lining the pockets of those with good lobbyists and good advisors. Even taxpayers that end up with a low Iowa liabilty still have the deadweight cost of paying people like me to navigate to that meager bottom line. And trust me, they don't all end up paying low tax -- especially taxpayers who do most of their business in-state.

If good tax policy aims at simplicity and a broad base and, attempting to achieve lower rates for all, doesn't try to play favorites among industries, Iowa's tax law fails.

If you look at an important secondary measure of business climate -- how the state grows and fosters new business -- Iowa also does poorly. Indexes of entrepreneurship consistently place Iowa in the bottom tier, and sometimes dead last.

None of this takes away the many things Iowa has to offer. We have a relatively good regulatory and labor law climate, assuming that the efforts to repeal or scale back Iowa's Right to Work laws continue to fail. We have good schools, affordable houses, and short commutes. That doesn't change the reality that Iowa's current system of high tax rates, high complexity, and subsidies for well-connected businesses does nothing for the little guy struggling to grow a new business. Real growth occurs from the ground up, not from bribing the occasional plant to locate here.

Iowa could have a much better system to collect the same amount of revenue. Too bad the legislature and the candidates for governor aren't bold enough to embrace the Tax Update Quick and Dirty Tax Reform Plan, reproduced below.

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A peek at the post-estate tax estate tax form

October 28, 2010

Roger McEowen discusses - and links - a draft of Form 8939, the "large transfers" form to allocate the limited basis step-up allowed to estates of taxpayers dying in 2010.

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First page of draft form. Click to enlarge.

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What price citizenship?

October 28, 2010

Sobering statistics from international tax attorney Andrew Mitchel show that Americans are turning in their passports in record numbers.

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It could be just a coincidence that this increase occurs as Treasury steps up its shoot-the-jaywalkers approach to international tax compliance, but I doubt it.

Related: FBAR est FUBAR

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Auditor report: millions of real taxpayer dollars paid for imaginary film expenses

October 27, 2010

Before the Iowa Film Tax Credit program exploded in scandal in September 2009, the state had granted $31,967,641 in transferable tax credits to filmmakers. Yesterday the State Auditor reported that $25,576,301 were issued improperly -- a full 80% of the credits granted.

The 127-page report identifies two principal sources of the bad credits: the use of "in kind" expenditures, and double-dipping on the credit computation.

The "in kind" expenditures are best understood as "pretend" expenditures. From the report (page 12):

For certain projects, an expenditure was claimed for goods or services provided by a vendor in exchange for promotional advertising in the production. For example, the film included an acknowledgement such as "This film was produced with help from our sponsor, (sponsor’s name.)"

One production company approached several potential sponsors with proposed agreements for sponsorships valued in the millions of dollars. Here's one example from the report:

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Meager evidence for climate change in Iowa

October 27, 2010

Iowa's tax climate hasn't improved since last year. Still, thanks to a major policy blunder in Connecticut, Iowa rose to 45th place in the 2011 Tax Foundation State Business Tax Climate Index, from 46th place last year. Connecticut fell from 38th place to 47th, pushing Iowa up a place, thanks to it's new "millionaires tax."

Iowa has the 4th worst corporation tax climate, thanks largely to our highest-in-the-nation 12% corporation tax rate and our complex corporation tax system. We're ninth-worst in the indivdual income tax climate index, again thanks to our high rates and complex system.

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Iowa would look a lot better on this map using the Tax Update Quick and Dirty Iowa Tax Reform plan.

Additional Coverage:

Tax Policy Blog
TaxProf
Russ Fox

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We're waiving that requirement that we couldn't possibly administer anyway

October 27, 2010

The glorious and benificient Commissioner of the Internal Revenue Service, in his infinite goodness, has chosen to not enforce the new tax preparer continuing education requirements in 2011, reports Tax Notes ($link).

Not that the IRS would be anywhere near ready to administer this stupid requirement anyway, especially the part where they have to approve all CPE in advance. So much for "in house" CPE under the new regime.

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Does this state make me look fat?

October 27, 2010

Junior Deputy Accountant thinks we have Iowa to thank for all of those XXXL stretch sweatpants they're selling nowadays.

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Being a 'real estate professional' only opens the door; it doesn't carry you inside

October 26, 2010

Real estate rental losses are by law "passive" to most taxpayers. That means they can only deduct the losses to the extent they have other "passive" income, or upon a sale. Taxpayers with AGI under $125,000 who "actively participate" in their rental activity may also deduct up to $25,000 in losses.

A special rule makes it easier for "real estate professionals" to deduct rental losses. If you qualify, real estate losses are non-passive if you meet the "material participation" tests that apply under the passive loss rules to non-real estate activities. But this rule doesn't automatically make the losses deductible for real estate pros, as a California "real estate loan agent and broker" learned in Tax Court yesterday.

You can be a qualifying real estate professional if you pass two tests:

1. You spend at least 750 hours per year in real estate trades or business that you own, and
2. You spend more time in real estate businesses than in any other activities.

The judge explains the taxpayer argument:

Petitioner argues that because she is a qualifying real estate professional pursuant to section 469(c)(7)(B), all her real estate activities, including rental activities, are not passive and therefore she is not subject to the passive activity loss limitations.

...

Caselaw clearly requires that a taxpayer claiming deductions for rental real estate losses meet the "material participation" requirements of section 1.469-5T, Temporary Income Tax Regs., supra, even where the Commissioner has conceded that the taxpayer is a real estate professional pursuant to section 469(c)(7)(B).

The special rule for real estate pros just allows them to deduct rental loss if they "materially participate" in the real estate activity. Their losses are no longer automatically passive, but they do not become automatically deductible.

Cite: Perez, T.C. Memo 2010-232.

Related: Why I think the Tax Court judge got the passive loss 750-hour test wrong

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We have tax crime in Iowa too.

October 26, 2010

A Spirit Lake woman convicted of embezzling money from a state-funded non-profit has been sentenced to a year in prison on federal charges of not paying tax on the stolen funds. From the Worthington Daily Globe:

She wrote checks for $107,967 in 2002 through 2004 and made additional payments to herself of $58,400 during 2000 and 2001. In 2003, Waltz paid for family vacations to the Virgin Islands and Mexico using nearly $20,000 from the account. In 2004, she purchased a truck for her husband and paid $19,000 of the purchase price using money from the account.

She has to pay the taxes, and they'll want the money back too. Embezzlement rarely works out well.

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How well will running healthcare using the IRS work?

October 26, 2010

Former IRS Commissioner Goldberg, quoted in Tax Analysts ($link)

"50 years of experience with the tax system provides an unambiguous answer to that question. Insofar as everyday Americans are concerned, the healthcare legislation is certain to fail."

But what about the real mission of the IRS?

"Tax administration has lost its moorings in very important ways, and I question whether and how it can regain those moorings in the current environment."

Sounds like a great time to build a vast preparer regulation bureaucracy to oversee 1.2 million preparers.

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Off the rails

October 26, 2010

The federal government has decided to spend $218 million that it doesn't have on railroad track repairs between Chicago and Iowa City. The State of Iowa will throw in $20 million it doesn't have, all to enable Amtrak to start losing money forever at $42 per ticket to run trains that will take five hours to make the trip, on the occasional day that Amtrak is on time.

This is because it is important to provide a less reliable and more expensive alternative to the Megabus, which, with federal subsidies of $0, runs comfortable and reliable coaches with wi-fi on the same route in four hours at costs of $1.50 to $36. And it makes money.

Does anyone believe it will really cost "only" $218 million? And they wonder why people aren't excited about tax increases.

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Flickr image courtesy Hunterrrr under Creative Commons license

Related:

Crazy Train

But where will they put the zeppelin port?

Well, $310 million is a lot of green...

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Waterloo!

October 25, 2010

A happy crowd, including Iowa legal legend Orville Bloethe (front row, left) at the Waterloo session of the Iowa State University Center For Agricultural Law and Taxation Farm Tax School. If you can't meet us in Waterloo, it's not too late -- sign up now to see us in Denison, Ottumwa, Mason City, Muscatine, Griswold or Ames!

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Why so grumpy about the gallows? You should be more grateful for that tasty last meal.

October 25, 2010

The party in power senses their that tax cutting efforts on our behalf just aren't properly appreciated. To improve your bad attitudes, the Democratic National Committee has come out with a comprehensive list of all of their tax cuts, faithfully reproduced by Linda Beale.

When you take a closer look at the list, the curbed enthusiasm is less puzzling. The "tax cuts" tend to fall into a few uninspiring categories:

- Warmed over Bush tax policy (Child tax credits, individual cash payments, bonus depriciation, increased Sec. 179 deduction)

- Subsidies for preferred constituencies (Homebuyer credits, low income housing and energy credits)

- Ridiculously complicated provisions of very little practical value (capital gain exclusion for C corporations started in last three months of 2010 and held for five years; tax break for hiring long-term unemployed)

- Convoluted and ineffective bribes to do things that they think are good for you (Health insurance credits)

And that was the good news. The bad news hits over the next few years, including for starters:

- Top stated tax rate rising to 39.6% starting in 2011

- Return of the "Pease" phaseouts of personal exemptions and itemized deductions starting in 2011.

- Additional .9% medicare tax on W-2 and self-employment income starting in 2013

- Additional 3.8% tax on "passive activity" income, capital gains, dividends, interest and rents starting in 2013.

- Penalties for failure to provide or purchase health insurance, starting in 2014.

Given that someday we have to pay for our trillion-dollar deficits, it's not crazy for people to think that these built-in tax increases are just the start. Just because you got dessert first (a stale cookie, in this case) doesn't mean you are excited about getting some raw liver to eat for dinner.

The Tax Policy Blog sums it up:

On net, then, Americans have thus far paid lower taxes as a result of the policies of the 111th Congress and the Obama administration. Going forward, however, the administration plans on collecting significantly higher taxes.

Dessert is over.

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Cash-basis taxpayers and last-minute checks

October 25, 2010

Farm CPA Today explains the tax rules on deducting business expense payments made between cash-basis taxpayers when the check is mailed before December 31 but arrives the next year.

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Waterloo

October 25, 2010

I'm teaching at the second session of the Iowa State University Center for Agricultural Law and Taxation tax school in Waterloo, Iowa today. I'm one of three instructors, so I will catch up on posts today on breaks.

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Airborne

October 22, 2010

The Tax Update is traveling. Will post as airport wifi and travel delays permit.

UPDATE: Airport wi-fi seems hopeless, so I'll just wish you (by phone) a happy 24th anniversary of the Internal Revenue Code of 1986! Party responsibly.

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The Culver 'Middle Class Tax Cut"

October 21, 2010

Iowa Governor Chet Culver tried to shake up his re-election battle by proposing a "middle income tax cut" -- a $90 per taxpayer non-refundable tax credit for incomes up to $100,000 ($180 and $200,000 for couples). His press release says:

The Governor’s $120 million tax cut is made possible thanks to increased revenue projections last week from the Revenue Estimating Conference. The REC conservatively increased their projections by $300 million for FY 2011 and projected further revenue growth in FY 2012. This news comes after Iowa closed the books for FY 2010 with a $754 million surplus. This positive development allows Iowa taxpayers to benefit from these additional funds even as we maintain existing budget commitments.

If Iowa is flush, that word hasn't reached the Iowa Department of Revenue, which for the first time in memory has failed to send speakers to the ISU Center for Agricultural Law and Taxation Farm Tax Schools, due to budget constraints. Then again, maybe you'd rather have the $90.

The Des Moines Register's Kathie Obradovich thinks it won't help the Governor's campaign: "Culver's tax cut: Too little, too late." He should have gone with the Tax Update's Quick and Dirty Iowa Tax Reform instead.

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The great fall weather Cavalcade!

October 21, 2010

The beautiful fall days just keep rolling on, so get on board the new Cavalcade of Risk at Worker's Comp Insider.

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It's always a good day to visit the blog world's premier roundup of insurance and risk-management posts. For those of you car jocks out there, don't miss Hank Stern's video of a crash involving a1959 Chevy Bel Air and a 2009 Chevy Malibu. Surely the old behemoth will come out better... right?

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The Flach defense of preparer regulation

October 21, 2010

Robert D Flach has his "final" posts on preparer regulation up:

MY FINAL WORDS - REALLY! PART I

MY FINAL WORDS - REALLY! PART II

I won't attempt a point-by-point rebuttal. I've covered most of the ground in other posts, and I will continue to post on aspects of the issue -- so I won't have a "final" post. I will note that Robert has faith that the IRS can, out of nowhere, suddenly set up an efficient, fair and effective system to regulate a newly-invented profession with over a million members nationwide. Nothing in the history of the IRS, or regulation in general, warrants that faith. Regulation proponents always assume a wise, disinterested and efficient corps of regulators, not the actual bureaucrats that get the jobs.

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Can you defer income just by sitting on checks?

October 21, 2010

No. If you have the check, you have the income. Paul Neiffer explains at FarmCPA Today.

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Thanks, Sheldon!

October 21, 2010

The first session of this year's Iowa State University Center for Agricultural Law and Taxation Farm Tax schools began yesterday in Sheldon, Iowa. Thanks to all who attended -- you were a great audience with informed, challenging questions. Thanks also to our kind and efficient hosts at Northwest Iowa Community College.

If you haven't signed up for any of the sessions, there's still time -- go to the CALT site to register. While farm tax issues are covered, we also spend a lot of time on individual and small business tax issues, so it's a great CPE opportunity even if you don't do much farmer work. But sign up now -- spaces are going fast.

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Esogetic Colorpuncture: a deductible expense for mortgage brokers?

October 20, 2010

20101020-1.jpgMortgage brokering can be a tough business, especially since 2008. It's only natural for a broker to try to find that little something extra to stay above water. For one California broker, the edge was "Esogetic Colorpuncture."

So what is Esogetic Colorpuncture? Let's see what Colorpuncture.com has to say:

Esogetic ColorpunctureTM is a revolutionary evolution in holistic healing and one of Europe's most popular new alternative healing disciplines. The originator of Colorpuncture is a German scientist and naturopath named Peter Mandel who has conducted over 25 years of intensive empirical research to develop this unique system of healing. Colorpuncture involves focusing colored light on acupuncture (and other) points on the skin in order to energize powerful healing impulses in our physical and energy bodies.

So our mortgage broker threw her physical and energy body into her work, earning about $113,000 from two different finance companies. Against that she claimed Schedule C deductions of about $97,000, including about $3,400 in Esogetic Colortherapy education expenses. The Tax Court explains:

Petitioner believes that respondent does not understand her circumstance. She testified that she is a mortgage banker and life coach and does not have a colorpuncture business. Petitioner argues that her colorpuncture education informs her life coaching which in turn contributes to her success as a mortgage banker. Because colorpuncture and life coaching are used in her mortgage banking business, petitioner believes that expenses related to those activities, including certain educational expenses, are deductible as business expenses.

Unfortunately for our color-healer-broker, the Tax Court disagreed, saying that her Colortherapy training qualified her for a new field outside mortgage brokering:

Petitioner's certification as a practitioner of esogetic medicine qualified her to perform tasks and activities significantly different from those she could perform as a mortgage broker. Petitioner admitted at trial that "technically", her certificate entitled her to open a business in colorpuncture therapy. But she explained that she did not and did not intend to open such a practice. What matters, however, is whether the education qualifies the taxpayer for a new trade or business, not whether the taxpayer engages in a new trade or business.

Decision for IRS.

The Moral? Continuing education that is awesome enough to qualify you for a whole new career may be just too awesome to deduct.

Cite: Lewis, T.C. Summ. Op. 2010-156

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'Middle Class' now $0 to $200,000

October 20, 2010

Governor Culver has floated a new "Middle Class Tax Cut" in the runup to the election. The proposal would offer a $90 non-refundable tax credit to single filers and $180 dollars for couples. It would disappear or phase out (it's not clear which) for filers with "adjusted gross income" of $100,000 ($200,000 for couples). O. Kay Henderson reports:

Culver, a Democrat seeking a second four-year term this fall, is being challenged by Republican Terry Branstad, the former four-term governor who’s seeking a fifth term.”We’re focused on middle class tax relief while Terry Branstad is focusing on corporate tax cuts for out of state corporations,” Culver says. “He’s proposed in this campaign cutting the corporate income tax in half. That would be roughly $100 million.”

Branstad’s campaign issued a statement accusing Culver of engaging in “pathetic class warfare” by granting tax breaks to middle- and lower-income Iowans.

I think Governor Culver would have a better chance of a second term if he had embraced the Quick and Dirty Iowa Tax Reform.

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FBAR est FUBAR

October 20, 2010

Another inspiring tale of international tax enforcement from Phil Hodgen:

I’m 33 and single, I’ve been living in France for 13 years, am naturalized French (and born American). I had NO idea about these reports until I started searching on tax information for stock options I need to cash due to leaving a company.

The worst part is I’m seriously considering revoking my American citizenship over it (it being thousands of dollars) – and as a proud American, it’s breaking my heart.

The glory of the tax law is that it has the same $10,000 fine (or half the account balance, if greater) for innocents abroad who don't know about Form TD F 90.122 as it does for international money-launderers. If you don't execute jaywalkers, how can you ever slap the wrists of multi-million dollar tax cheats?

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IRS issues Applicable Federal Rates (AFR) for November 2010

October 20, 2010

The IRS has issued (Rev. Rul. 2010-26) the minimum required interest rates for loans made in November 2010:


-Short Term (demand loans and loans with terms of up to 3 years): 0.35%

-Mid-Term (loans from 3-9 years): 1.59%

-Long-Term (over 9 years): 3.35%

The Long-term tax-exempt rate for Section 382 ownership changes in November 2010 is 3.86%.

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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Fall film follies roundup

October 19, 2010

There's a lot of action in the last few days on the Iowa film fiasco front. The scandal, which broke about 13 months ago, brought Iowa's richly-subsidized film industry to a standstill. What's happening now?

The Des Moines Register reports "New charges likely in film scandal." The charges are likely to arise out of work done by the State Auditor's office investigating the credits.

In a development that should surprise no one, The Des Moines Register also reports:

Nearly all the filmmakers who sought state tax credits since the program was shut down last year have been awarded less - some far less - than they claimed they should receive, after Department of Revenue audits.

You mean you can't trust Hollywood to only ask for the corporate welfare allowed by law? Wow.

Meanwhile, charges have been dropped against filmmaker Zach LeBeau in return for cooperating with the prosecution of his former partners in the film "The Scientist." The Des Moines Register reports that one of the remaining defendants has asked for her charges to be dismissed on the grounds that it's all former Film Office Director Tom Wheeler's fault:

The moviemaker, Wendy Weiner Runge, president of Polynation Pictures, also should be cleared because of missteps made by former Iowa film chief Tom Wheeler, the motion to dismiss said.

In addition, the motion accuses the state of entrapment and takes a political stab at Gov. Chet Culver. Among other things, it says Runge was accused criminally for expense estimates on anticipated film projects that never resulted in the issuance of state tax credits.

On the "put it on the taxpayer's tab" front, the bill for Iowa's film subsidies has been whittled down to "only" $136 million, down from the $330 million originally estimated, reports Rod Boshart at EasternIowaGovernment.com. That's about $45 per Iowan, if you're keeping track.

The first film scandal trials are slated to begin in January.

Related:

Look - a talking goat!
Let them eat canapes

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IRS: The Superagency

October 19, 2010

Peter Pappas highlights a provocative interview from a former IRS commissioner, as reported in WebCPA, Mortimer Caplin said that loading the IRS with responsibilities outside of collecting taxes weakens its ability to do its real job:

"IRS personnel are people with accounting, economic and investigative abilities. The new programs require them to carry out other functions for which they’re not qualified."

For example, he noted, "Even the Earned Income Tax Credit could have been handled by Health and Human Services. What has happened is that there are a tremendous amount of fraud and deficiencies associated with the program. This has produced a great loss of revenue, because the Service has to focus attention on the wrong returns. Rather than looking at high-income returns, with, say, foreign investments, they have to examine the EITC. Their mission has been watered down."

Though I suspect the added powers may be seen as a feature, rather than a bug, by the current power-hungry IRS Commissioner.

Let's go back in time to see Commissioner Caplin running an IRS largely free from non-tax responsibilities:

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Special Buzz

October 19, 2010

The Wandering Tax Pro has a special out-of-cycle Tuesday tax blog roundup.

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Plain writing, indeed

October 19, 2010

TaxGrrrl devastates the pompous congresscritters who wrote the "Plain Writing Act of 2010" using the grossly unfair expedient of reprinting the legislation itself. A taste:

_(1) IN GENERAL.—Not later than 9 months after the date of enactment of this Act, the head of each agency shall — (A) designate 1 or more senior officials within the agency to oversee the agency implementation of this Act; H. R. 946—2 (B) communicate the requirements of this Act to the employees of the agency; (C) train employees of the agency in plain writing; (D) establish a process for overseeing the ongoing compliance of the agency with the requirements of this Act; (E) create and maintain a plain writing section of the agency’s website as required under paragraph (2) that is accessible from the homepage of the agency’s website; and (F) designate 1 or more agency points-of-contact to receive and respond to public input on— (i) agency implementation of this Act; and (ii) the agency reports required under section 5.

Yes, Congress wouldn't know "plain writing" even after a formal introduction.

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Tax moves in tough times

October 19, 2010

My new post at IowaBiz.com covers the surprising tax problems of financially-troubled businesses.

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With so many worthy entries, it's hard to pick a winner

October 18, 2010

TaxVox has selected "The Biggest Tax Policy Mistake of the Year"*:

With little time left on the legislative clock, policymakers will be hard-pressed to top the tax policy blunders they’ve already made this year. Most notable is their failure to decide what this year’s tax law should be. While politicians, analysts and the media endlessly debate how expiring tax cuts might affect taxpayers in 2011, the real disgrace is that we still don’t know what the tax law is in 2010.

Will our leaders really allow the alternative minimum tax to hit 27 million taxpayers this year, a whopping 23 million more than in 2009? Did the estate tax really expire back in January, making 2010 the year without an estate tax? Will companies really receive no tax credits for their investments in research and development?

It's hard to argue with this. If the AMT exemption really falls to $40,000 for joint filers, from the current $70,000+, the current round of taxpayer anger will seem like happy times.

*For reasons I hope are more technical than personal, you get an error message when you try to follow links there from here. Just click on your URL window after you get the error message and you will get through.

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Bucking the system

October 18, 2010

20101018-1.jpgEver heard of Young Buck? Me neither. The IRS has, though, and Going Concern reports they are auctioning the rapper's possessions to collect unpaid taxes, including a Louis Vuitton gun holster. Given that the inventory for the auction includes lots of fake fur coats, I wonder whether it's a real Vuitton, or one of those fake Vuitton holsters you can buy from street vendors?

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Real warehouse banking

October 18, 2010

"Warehouse Banks" are typically private deposit arrangements used be tax evaders and money launderers. They don't normally use an actual warehouse. But a Chicago-area strip club operator may have taken the idea literally. Russ Fox reports that the government has accused Michael Wellek of stashing $12 million in strip club cash in a warehouse without paying income tax on it.

If Mr. Wellek was careless about paying his taxes, he was a tidy warehouse keeper, says the Feds. From the Justice Department press release:

It was further part of the corrupt endeavor that defendant MICHAEL G. WELLEK concealed and intentionally failed to disclose to the IRS that between 1999 through approximately May 2003, his actual business practices included a pattern of routinely skimming in excess of $12,000,000 of gross income in the form of cash from the operation of his businesses and maintaining the cash in bags and boxes cataloged by date and business entity in a warehouse the defendant controlled.

Mr. Wellek's attorney has said his client will plead guilty. We'll see whether the sentencing guidelines reward neatness.

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Extended 1040s and individual NOL carryback elections are due today!

October 15, 2010

Today is the last day of extension season. If you haven't filed your 1040 by midnight tonight, you will be late, with all the associated penalties and annoyance.

Today is also the last day individuals can elect the extended net operating carryback for 2008 and 2009 provided by recent stimulus legislation. You can elect a 3, 4 or 5-year carryback on a 1040 today and file the Form 1045 carryback claim anytime before the end of the year. The IRS has a good FAQ page on the NOL elections.

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If you are a last-minute filer, be sure you document your timely filing. The best way is to e-file. If you paper file, your best option is to use Certified Mail, Return Receipt Requested. While it costs a few dollars in postage more, the certified mail receipt hand-stamped at the post office is golden if the IRS says you filed late. Save that manual postmark, as the IRS purges its records after two years.

And whatever you do, don't count on your office postage meter to document timely filing of anything that matters.

If you are really last minute and can't get to the post office in time, all is not lost. You can use an "authorized private delivery service," like UPS or Fed-ex. If you use a private delivery service, you have to use the IRS service center street address, as the private services can't deliver to post office boxes. Be sure that you get a reciept from them showing that they have it on time, and make sure that the timely receipt is documented both on your receipt and on their records.

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Small tax-exempts: today may be your last chance to save your exempt status

October 15, 2010

Today is the last day for many small tax-exempt organizations to retain thier exempt status. Charities that have failed to file with the IRS for three consective years now lose their exempt status automatically. It can be a lot of paperwork and expense to get that back.

The filing needed for small exempt organizations is very simple, and it can be done online (epostcard.form990.org/). The IRS has published a list of organizations at risk of losing their exempt status, organized by state. Many are in Iowa. If you are on a charitable board, and you aren't sure your filings are current, get on the stick today!

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Congress: You guys speak plainly, but we'll continue to babble gibberish

October 14, 2010

The Tax Prof reports:

President Obama yesterday signed H.R.946, the Plain Writing Act of 2010, which requires all federal agencies—including the IRS—to use "writing that is clear, concise, well-organized, and follows other best practices appropriate to the subject or field and intended audience."

It's funny that they can pass a "plain language" law with a straight face, considering their own work, like this random item from Section 409(p):

(5) Treatment of synthetic equity

For purposes of paragraphs (3) and (4), in the case of a person who owns synthetic equity in the S corporation, except to the extent provided in regulations, the shares of stock in such corporation on which such synthetic equity is based shall be treated as outstanding stock in such corporation and deemed-owned shares of such person if such treatment of synthetic equity of 1 or more such persons results in—

(A) the treatment of any person as a disqualified person, or

(B) the treatment of any year as a nonallocation year.

For purposes of this paragraph, synthetic equity shall be treated as owned by a person in the same manner as stock is treated as owned by a person under the rules of paragraphs (2) and (3) of section 318 (a). If, without regard to this paragraph, a person is treated as a disqualified person or a year is treated as a nonallocation year, this paragraph shall not be construed to result in the person or year not being so treated.

Yes, folks, this is the exciting stuff we tax geeks get to work with.

The Moral? Plain English is for little people.


UPDATE: I see from the TaxProf's comments that Jim Maule agrees with me on this, if not on much else lately.

FURTHER UPDATE: Peter Pappas weighs in.

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College tax credits: inflating the higher education bubble

October 14, 2010

Higher education costs have been increasing at a crazy pace, well beyond the inflation rate, for years. This has led to talk of a "higher education bubble," with a potential for the same fate as the housing price bubble.

When the bubble bursts and it's history is written from the rubble, there needs to be a chapter on the federal tax benefits for college. There are about eight of them right now, and they combine with subsidized loans and taxpayer grants to create an expanding pool of funds to be sucked up by ever-increasing tuition.

The Tax Policy Blog reports that the President is ready to deal with the problem -- with more tax credits! That will work out like the pre-crash expansion of Fannie Mae lending.

Related: COLLEGES USE AID BOOSTS TO JACK UP TUITION!

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Is your FBAR amnesty application FUBAR?

October 14, 2010

The IRS "amnesty" for taxpayers who have missed filing their FBAR forms for offshore financial accounts (Form TD F 90.122) has turned into a nightmare for many taxpayers. If you have fallen into the FBAR amnesty quagmire, or if you have a client who has found the process to be a nightmare, Internation tax law specialist Phil Hodgen offers get you in touch with "a certain large American publication" that is investigating IRS mistreatment of taxpayers. He says you can tell your story anonymously.

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It's a polite way to say 'pond scum'

October 14, 2010

Tax Notes headline ($link):

"Lobby Lookout: Biofuel Tax Incentives Attract Algae Fuel Interests"

In other news, both major party candidates for U.S. Senator can't get enough of them biofuel tax credits.

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Tax Court: fruit and tree, corn and stalk.

October 13, 2010

20101013-1.JPGThe tax law says that the fruit has to be taxed to the tree where it grew. The Tax Court yesterday told a Northwest Iowa farmer that the same thing goes for corn.

Washta, Iowa farmer Jerry Slota formed a corporation in 2005, according to the Tax Court (my emphasis):

In September 2005 petitioners organized the corporation and filed articles of incorporation with the Iowa secretary of state. Petitioners were the sole shareholders and served as the only directors of the corporation. Petitioners and the corporation did not sign or execute a deed, sales contract or other written agreement conveying, transferring or leasing the land or the crops from petitioners to the corporation. The only asset petitioners conveyed to the corporation upon its organization was $10,000 from petitioners' individual account to a bank account established for the corporation (corporate account).

In October 2005 Mr. Slota deposited all USDA payments received in 2005 into petitioners' individual account, except for one USDA payment of $6,142 that petitioners deposited into the corporate account. Mr. Slota then transferred into the corporate account the USDA payments he had deposited into petitioners' individual account after October 5. In addition, Mr. Slota deposited into the corporate account all crop sales proceeds received after October 5.

According to the Tax Court, then, the land and the growing crops remained in the farmer's personal ownership, but he reported the crop sale income on the corporate return:

Petitioners hired a tax adviser to prepare and file their Federal income tax return for 2005. Petitioners reported $195,938 from crop sales and $61,416 in USDA payments on Schedule F, Profit or Loss From Farming. Petitioners claimed an expense deduction for $44,165 of USDA payments and $20,532 of crop sales proceeds that petitioners deposited into or transferred to the corporate account. Petitioners reported only $481 of self-employment tax liability.

The returns as filed reached an attractive result:

The corporation also filed a corporate Federal income tax return for the fiscal year ending September 30, 2006. The corporation reported $370,647 of income that was offset by an equal amount of expenses resulting in zero taxable income.

Too attractive, according to the Tax Court:

The only property that petitioners assigned or transferred to the corporation was the proceeds from the crop sales and the USDA payments. The assignment of income doctrine provides that a taxpayer cannot escape tax liability for income the taxpayer earned by transferring the income to another. Lucas v. Earl, supra. It is equally fundamental that taxpayers may not avoid paying tax on income by transferring crop sales proceeds to a newly organized corporation in a section 351 transaction. Weinberg v. Commissioner, 44 T.C. 233 (1965), affd. in part, revd. in part and remanded sub nom. Commissioner v. Sugar Daddy, Inc., 386 F.2d 836 (9th Cir. 1967). Mr. Slota owned the farmland and the crops and earned the income when he sold the crops. Further, as the owner of the land and the crops, Mr. Slota, not the corporation, received the payments from the USDA. Accordingly, petitioners received the crop sales proceeds and USDA payments on their own behalf.

Bottom line: the income was taxed to the farmer, not the corporation. Worse, the court hit them with a $12,000+ "accuracy-related" penalty:

Petitioners failed to submit any evidence showing the return preparer's experience or qualifications and failed to show that they provided all the necessary and accurate information to a tax adviser. We cannot simply accept petitioners' bald assertion that they relied upon a tax adviser as a defense against the accuracy-related penalty.

The Moral? Getting appreciated farmland out of C corporations is a staple of rural Iowa tax practice. It would sure be handy if you could split your income with a corporation without having to face that ugly two-level tax on C corporation property sales and distributions. Unfortunately, if you want farm income taxed to a corporation, you have to put the farm and the crops into the corporation -- not just the crop proceeds.

Cite: Slota, T.C. Summ. Op. 2010-152.

UPDATE: More from Roger McEowen at the Iowa State University Center for Agricultural Law and Taxation.

Image showing approximate location of Washta, Iowa courtesy Google Maps.

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IRS delays W-2 disclosure requirement of health premium costs to 2012

October 13, 2010

The IRS has given employers an extra year to comply with the inane Obamacare requirement to disclose the cost of employee health insurance on W-2 forms (IR-2010-103).

This requirement has given rise to the urban legend that health insurance will be included in taxable income. That's not so; the requirement to disclose the premiums does not mean that they be included in taxable wages. It's just supposed to make you smarter, or something. The premiums will still be tax-exempt.

Of course, if you are a 2% S corporation shareholder-employee, your health insurance from the S corporation has to be included in taxable wages already.

Related: Tax Update items on S corporation shareholder-employee health insurance.

More from Stacie Clifford Kitts.

UPDATE, 10/14: Kay Bell has more.

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Ice phishing

October 13, 2010

On the heels of a major EFTPS phishing expedition, TaxGrrrl reports that there's a version of this scam going around in the Great White North.

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Attribution doesn't make plagarism 'fair use'

October 13, 2010

A vivid lesson for those of us tempted to get a little happy with our cutting and pasting from Megan Erickson at IowaBiz.com:

In a nutshell, giving credit doesn’t necessarily mean you’re not infringing. To illustrate: Let’s say I stole Todd’s wallet to buy myself a caramel macchiato. Would he consider me less of a thief if I clearly explained to the barista, "This is Todd’s money," as I handed over his credit card? Probably not.

I trust Megan will excuse this theft post as fair use...

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Supply, demand.

October 12, 2010

Robert D Flach, as part of our ongoing friendly discussion, requests an explanation of why tax preparation costs are likely to go up under the proposed new IRS preparer regulation regime. We did so awhile back, but it bears repeating.

The whole point of the IRS exercise is to make it harder to be a tax preparer, by way of additional CPE requirements and tests. If something is harder to do, fewer people will do it. If the CPE requirements don't reduce the number of preparers, then the whole exercise is a waste of time, because everybody is already "qualified."

If the supply of something goes down without a corresponding reduction in demand, prices go up. That is the way of the world. Maybe Robert won't increase his prices, but that doesn't repeal the law of supply and demand. The supply of preparers will go down, but increased rates and ever-increasing tax complexity will make sure demand continues to rise. The result will be higher prices. To argue otherwise is like arguing that it won't get dark at sunset.

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Related: Pushing back at the IRS preparer regulation plan

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Corn-pickin' Cavalcade

October 12, 2010

If you can get in from the fields for a break, stop by the new Cavalcade of Risk at Wenchypoos!

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The harvest is bountiful in this edition of the blogosphere's best insurance and risk management thinking -- not least Hank Stern's analysis of recent hikes in Long-Term Care insurance rates.

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Pastor, I'm just too busy to be on the church finance committee this year

October 12, 2010

Going Concern quotes an Iowa pastor who deliberately got political in the pulpit in defiance of rules for tax-exempt churches:

"I’m tired of pastors submitting to this tyranny — and I’m expecting to try to get the IRS to sue us so that we can take it all the way to the Supreme Court and restore freedom in America’s pulpits."

~ Pastor Cary Gordon, of Cornerstone World Outreach in Sioux City, Iowa, has some strange ambitions.

The Going Concern Headline says it all: "Iowa Pastor Practically Begging the IRS to Sue Him, Consume His Life for Years to Come"

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The voters are just clamoring to increase public sector pensions and city manager salaries

October 12, 2010

David Brunori thinks he has identified the real problem in state finances:

The problem now is that we want more public services -- at all levels of government -- than we are willing to pay for.

Maybe. But even the same old public services get pretty pricey when they are provided by expensive employees with gilded benefits. Reason.com explains:

As we've noted here, the public sector at all levels already enjoys better compensation and job security than the private sector (this is something that even former California Speaker Willie Brown understands). It's time for the public sector at all levels of government, to have its benefits come into line with those of the private sector. Which means that public sector workers need to shoulder more of the burden for their benefits. And that benefits are going to be cut. And they ought to be cut now.

As long as public employees earn higher income and higher benefits than the vassals who pay the bill, higher taxes will be a hard sell.

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Will states adopt the $500K Section 179 and the new bonus depreciation?

October 12, 2010

Not if they can help it. Paul Neiffer has more.

Iowa almost surely won't go with the extended bonus depreciation. I'm also betting that they won't couple with the enhanced Section 179 depreciation, in spite of the recent optimistic revenue estimates.

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Funny, you don't look unregulated

October 11, 2010

The IRS proposals to impose a new regulation regime on preparers are misguided and foolish. When this is pointed out, some regulation boosters ask the question that Robert D Flach asks:

Since regulation does not work would you prefer that CPAs, attorneys, stock brokers, architects, engineers, doctors, etc not be regulated?

Robert, there is no such thing as an unregulated preparer industry. In fact, tax return preparation is regulated right now. Hardly a week goes by without the IRS announcing that it has sued or shut down another preparer for bad behavior. Preparers can and do go to jail for bad work. For preparers covered by the Enrolled Agent, CPA and Attorney designations, the IRS and state agencies are always at work investigating and disciplining bad actors.

The most important source of regulation, of course, is the client. Every time a client chooses or fires a preparer, regulation takes place at its most effective level. If a preparer is incompetent, clients will inflict punishment by walking away long before the IRS has any idea what is going on. This regulation, while imperfect, will always be more effective than anything the ponderous IRS behemoth will ever do.

What the IRS proposes wouldn't be the first discipline in a nasty and brutish world of anarchy. It is the imposition of a specific sort of regulation regime: a new national occupational licensing regime, complete with barriers to entry and centrally-administered annual compliance requirements on an unprecedented national scale. This is superficially attractive to some preparers who are not Enrolled Agents, CPAs or lawyers because it gives their business the dignity of a licensed profession. It pulls up the ladder behind them, reducing their competition and allowing them to charge higher prices. I'm sure that many regulation advocates sincerely believe that the consumer will benefit by not being allowed to buy from unlicensed preparers, but it's also true that many other regulation advocates likely see themselves as standing to benefit financially.

I believe the attraction of these currently unlicensed preparers to regulation is short-sighted, and that they will ultimately be losers to the benefit of the nationwide franchised preparation outfits. It's also probable that the regulations will bring little benefit to consumers despite imposing costs on consumers and the preparation industry. But one thing is certain: the industry isn't unregulated now.

Considering the pointless and burdensome nature of the IRS proposals, regulation advocates need to articulate what problems they are really trying to solve, and whether the answer to those problems is a vast new IRS bureaucracy.

Links:

Tax Policy Blog: Institute Criticizes New Tax Preparation Licensing Requirements
Reason.com: Occupational Licensing Abuse Meets the IRS

Prior Coverage:

Institute for Justice speaks out on IRS power grab
Preparer testing? Only after Congresscritter testing, Treasury-secretary testing, and IRS agent testing.

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Friday is the drop-dead date for small charities wanting to stay tax-exempt

October 11, 2010

The tax law revokes the tax-exempt status of small exempt organizations that have failed to report to the IRS for three consecutive years. Hundreds of small organizations will become taxable if they don't complete the simple online report by this Friday. If you aren't sure whether your organization is at-risk, you can see if you are on the IRS list of organizations about to lose their exemptions.

The Iowa list shows about a dozen Masonic and Shrine organizations, along with organizations from the Beth El Jacob Synagogue Foundation and the Central Iowa Mens Chorus Inc. to the Urban Dreams Foundation and the West Des Moines Police Benevolent Association. It will be a lot easier for these groups to keep their exemption by filing the online report than it will be to get it back once they lose it.

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Rounding up the tax blogs south of the border

October 11, 2010

Way down south, Bruce the Missouri Tax Guy rounds up last week in the tax blogs.

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IRS drawing a bead on another Swiss bank?

October 11, 2010

Phil Hodgen thinks customers of another Swiss bank might want to lawyer up.

Anybody who thinks UBS will be the only Swiss bank to crack and release names to the IRS is either an incurable optimist or hasn't been paying attention.

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Spiro Agnew Day!

October 11, 2010

Kay Bell reminds us that yesterday was the anniversary of Spiro Agnew's resignation from the Vice-Presidency. The resignation was part of a plea bargain for tax charges arising from bribes received as Governor of Maryland. This paved the way for the Gerald Ford Era, bellbottoms, WIN buttons and all.

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Institute for Justice speaks out on IRS power grab

October 09, 2010

The libertarian public interest legal advocate Institute for Justice has joined the fight against the impending tax prep regulation regime. In an article in the Daily Caller, IJ attorney Dan Alban rips the proposed IRS power grab:

This scheme would disproportionately hurt small tax-return preparation businesses and independent preparers, many of whom may be forced out of business. Part-time and seasonal preparers — as well as those who specialize in assisting low-income or special-needs clients, such as those with language barriers — are likely to be hardest hit. By contrast, large, politically connected industry insiders will be able to easily absorb the licensing costs and, predictably, many are in favor of the scheme.

In 2009, tax-return preparers prepared approximately 87 million federal individual income-tax returns. The proposed licensing scheme, if passed, will likely result in a substantial increase in the cost of tax-return preparation services for individual taxpayers.

And make no mistake about it: These increased regulatory costs — along with the likely decrease in competition — will increase the cost of tax return preparation services.

I owe Robert D. Flach a response to his latest pro-regulation post, but given October 15 deadlines, it will have to wait. When I do respond, I will discuss these issues:

- The (obvious) increased cost to consumers that the rules will impose.
- The almost-certain failure of the regulations to noticeably improve the quality of tax service.
- The "do you oppose regulation for doctors, lawyers and engineers, too?" red herring.
- The ridiculous and pointless busy work that the regulations will impose on CPE providers and their students.
- The way the regulations are likely to greatly complicate how accounting staff are used in combined tax and audit engagements.
- The regulatory capture problem and the artificial barriers to entry placed on tax services by incumbents, with the effect of increasing their incomes by keeping newcomers out.

Until then, the Alban piece does a nice job explaining the folly of the regulation proposals without my help. Read it all.

Related:

They can't get the current rules right, so let's have them make more rules

Scenes from a regulated restaurant.

UPDATE: The TaxProf has more.

UPDATE, 10-11-10 I'm not going to do some enormous, comprehensive and boring response to Robert. I will address the topics individually as I have time and inclination. And there will be no "Preparer regulation is evil" formal series of posts. If there is anything I click past quicker than a 12-paragraph blog post, it's a post with a headline something like "Regulatory Capture: Part XXIV of a series." If I wouldn't read it, I shouldn't expect my dear readers to. I've covered a lot of this ground already, and if you want a comprehensive roundup, just click the "preparer regulation" tag on the bottom of this post.

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Family LLCs as estate beneficiaries: an Iowa inheritance tax trap

October 08, 2010

The Iowa inheritance tax lives on even after the (temporary) death of the federal estate tax. It has many exemptions and rarely applies. A recent case before the Iowa Department of Revenue kangaroo court Administrative Hearings Division shows an instance where the tax still has teeth: when property passes to an "entity," rather than to heirs. Roger McEowen reports:

...the decedent died on June 15, 2008, with a will provision that left the decedent’s property to an LLC with instructions that units of ownership then be issued to her children (or their descendant’s) equally. The only purpose of the LLC was to transfer a quarter section of farmland to the children. After the decedent’s death, the LLC became an “operating LLC” and the family members discussed the farm’s management and named the children as the members of the board of directors. The estate filed a letter and tax return with IDOR claiming that the estate had zero tax liability because all of the decedent’s property passed to her heirs. But, IDOR disagreed noting that none of the property actually passed from the estate to the heirs – it passed to the LLC. Thus, the value of the property passing to the LLC was subject to tax at a 15 percent rate. IDOR reasoned that an LLC meets the statutory definition of “firm” contained in Iowa Code §450.10. IDOR noted that the decedent could have easily left her property directly to her children and completely avoided tax.

The Moral: Family partnerships and LLCs can be great estate planning vehicles, especially for gifts, but in Iowa they can be lousy heirs.

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Diesel to dye for

October 08, 2010

The tax law allows you to buy untaxed diesel fuel for off-highway use, but it is dyed to help tax enforcement. Farmers are big users of dyed diesel. Apparently the IRS is getting a bit trigger-happy in enforcing the rules against on-road use of untaxed diesel, reports Paul Neiffer:

In my home state of Washington, we now have a case of the IRS fining a farmer $9,000 for using dyed off-road diesel in his bale wagon to transport the hay from his field to his haystack. During this transport, the farmer was briefly on a public road and an IRS agent staked him out and then pulled him over to issue a penalty for the use of the off-road diesel on the public road.

The IRS does allow the use of this diesel in tractors, etc. that go from field to field using public roads. Their interpretation in this case is that the bale wagon is not a qualified farm vehicle, however, New Holland, the manufacturer, and the state of Washington both classify it as a farm use vehicle. Plus, I think most reasonable people would understand that you are not going to take the bale wagon into town to shop.

Hey, IRS: I'm a city boy, too. But if it says "New Holland" on the side, it's a farm vehicle. Just trust me on this one.

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A New Holland Bale Wagon that, per the IRS, is not a farm vehicle.

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EFTPS phishing

October 08, 2010

Businesses almost universally pay their taxes using the Electronic Federal Tax Payment System, or EFTPS. Failure to remit your taxes timely via EFTPS can be very expensive. That's why it would be natural to click through the link on an e-mail that says EFTPS rejected your tax payment.

Don't do it. It's a scam. From the IRS:


The IRS recently became aware of a fraudulent scheme targeting EFTPS users, the scheme uses an e-mail that claims your tax payment was rejected and directs you to a website for additional information. The website contains malware that will attempt to infect your computer.

If you receive a message claiming to be from the IRS or EFTPS, please:

1. Do not reply to the sender, access links on the site or submit any information to them.
2. Forward the message as-is immediately to us at phishing@irs.gov.

The IRS doesn't initiate taxpayer contact via e-mail.

More coverage:

Trish McIntire
TaxGrrrl
William Perez

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Estate tax windfall for Iowa?

October 07, 2010

Iowa is one of about 30 states poised to get a windfall if Congress fails prevent the scheduled return of the Federal estate tax next year. TaxVox explains:*

As Congress delays action on extending the 2001-03 tax cuts, state revenue officers may be secretly hoping for continued legislative paralysis. Why? Because the federal estate tax, repealed for this year, will be back in January —and many states are in line for a windfall if the levy returns to its pre-2001 form. It’s not that states want to tax estates per se, but they wouldn’t mind getting some easy revenue.

Until 2001, every state had a “pick-up” tax that piggybacked on the federal levy. Estates could claim a credit of up to 16 percent of their federal tax for estate taxes paid to states, so it was no surprise that states typically set their estate taxes at that maximum 16 percent rate. It was “free” money—the state got the tax revenue but estates paid nothing extra.

This system will return January 1 absent Congressional action. Iowa law will automatically take advantage of the opportunity to get its share from your financial carcass. You can see whether your state also will do so here.

Unfortunately for Iowa's politicians, the benefit to the state's coffers from a revival of the estate tax will be dwarfed by the revenue loss that will result if Congressional inaction leads to higher individual tax rates. Iowa is one of the few states that allows a deduction for federal income taxes paid. If federal taxes go up, Iowa taxable income goes down, and there's no way enough rich Iowans will die to cover that revenue loss.

*If you get an error message from the link, just refresh the browser. For some reason the Tax Policy Center doesn't like me to send them referral traffic, apparently.

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Cedar Rapids real estate magnate ordered to pay restitution in wake of sentencing

October 07, 2010

Robert Miell, sentenced last week to twenty years in federal prison on tax and fraud charges, this week was ordered by the sentencing judge to pay restitution to those he defrauded. The Sioux City Journal reports:

Bennett ordered Miell to pay $547,764 in a lump sum as restitution to American Family Insurance, $86,554 in a lump sum to each victim identified in the damage deposit scheme, and $94,080 to the Internal Revenue Service for delinquent taxes for 2001 and 2002. Restitution to American Family and the renters are due by Nov. 1.

In the "damage deposit scheme," the court found that Mr. Miell illegally retained tenant damage deposits, sometimes creating false invoices from a sham repair contractor to document the purported "damages" to justify keeping the tenant money.

Mr. Miell has filed an appeal on his conviction and sentencing.

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I know nothing about my wife's tax cheating!

October 07, 2010

Running for office is full of interesting challenges. A Massachussetts congresscritter gets to tackle a tough one, reports Russ Fox:

Congressman John Tierney represents Salem and surrounding areas in the 6th Congressional District in Massachusetts. Mr. Tierney’s wife, Patrice, will plead guilty today to federal tax charges related to her helping to conceal her brother’s illegal sportsbetting business. The actual charges will be aiding and abetting filing false tax returns.

The charges stem from her brother’s operation of the Sports Offshore sportsbook. Mrs. Tierney allegedly provided incorrect information to the tax professional used by her brother, Robert Eremian. The bank account managed by Mrs. Tierney had something like $7 million, and those funds were “commission” income from “computer consulting” rather than funds from illegal gambling. (The Wire Act clearly prohibits sportsbetting in the United States except for licensed casino in areas such as Nevada.) The Eagle-Tribune notes,

The tax charges aren't related to the joint return the Tierneys presumably filed, but it just might make voters wonder about that. As Mr. Tierney is a Massachussetts Democrat, it normally wouldn't matter, but this isn't a normal election year, so this could make things interesting for him.

More from the TaxProf.

Update:: Stacy McCain piles on.

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FTC shuts down tax settlement outfit American Tax Relief

October 07, 2010

The FTC has knocked out a pillar of the late-night cable TV advertising community by shutting down American Tax Relief. This "pennies on the dollar" outfit claimed that they could make back tax liabilities go away through "offers in compromise." The FTC said ATR took up-front payments and failed to follow thorugh. WebCPA reports:

American Tax Relief charges up-front fees ranging from about $3,200 to $25,000 for the purported tax relief services. The company’s ads include a toll-free number for consumers to call for a “free consultation.” After speaking briefly with commission-based sales people who are supposedly “tax consultants,” virtually all consumers are told that they “qualify” for a tax relief program, and that American Tax Relief can help them significantly reduce their tax debts, the FTC complaint alleges.

In reality, very few of the company’s customers qualify for the promised tax relief programs, which are available only in very limited circumstances. Most people who hire the company would qualify at most for installment payment plans, which still require payment of the full amount owed, and which many taxpayers can easily arrange by themselves.

The IRS is not very generous in compromising tax debts. Usually they will do so only if you are truly a turnip, with no possibility of paying down your liability even over an unreasonably long period of time. Other outfits continue to peddle "pennies on the dollar" settlements. Buyers beware. As nice as those couples doing the testimonials on the ads look, it's possible, believe it or not, that they may be acting.

More coverage from the TaxProf.

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Talking College Savings

October 07, 2010

A nice primer on "Section 529 plans" today by the Missouri Tax Guy. Remember, contributions to Iowa's 529 plan, College Savings Iowa, may be deductible on your Iowa 1040.

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Oh, boy. More tax credits.

October 06, 2010

Iowa has over 30 targeted business tax credits to encourage this or that industry or good cause. As a key part of a complicated business tax system with high rates, it gives Iowa a bottom five rating in business tax climate and a consistently low level of new entrepreneurship. The obvious answer to this failure: a new tax credit and new tax exemptions! O. Kay Henderson reports:

Republican Terry Branstad says if he’s reelected Iowa’s governor, he’ll push for a tax credit for businesses that pay the tuition bills of employees who’re enrolled in community college. The credit would be worth up to half the tuition. Branstad contrasts his proposal with the controversial program that awarded state tax credits to filmmakers.

“This is limited to Iowans going to community colleges in Iowa for real jobs with real companies,” Branstad says. “…This is a well-thought-out, targeted plan designed to improve our competitiveness — not a pie-in-the-sky thing, a give-away to some out-of-state filmmakers. That’s the difference.”

...

Branstad would sign legislation that would give waive taxes on “true” start-up companies during their first three years of operations.

The sentiment is well-meaning, but the premise is flawed. It's unwise for the government to decide whether one business expense -- in this case, employee tuition -- is somehow more worthy than another. It's not the government's place to decide that one sort of business -- in this case, a "true start-up" -- is more worthy of low taxes than another. Each of these breaks requires paperwork and increases complexity for all businesses, especially those who try to use them. By reducing taxes on some businesses, they necessarily increase taxes on others. In both cases, the credit will be harvested by the well-advised for things they would do anyway, and missed entirely by others who fail to pay for expensive tax advice.

Far better to just sweep away Iowa's rats nest of credits, special breaks and tax complexity and make a simpler, lower-rate system for everybody. That will do much more for entrepreneurship, business start-ups and job growth than trying to "target" them. Far better to go with something like the Quick and Dirty Iowa Tax Reform, reproduced below for your tax policy pleasure.

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Regulation doesn't work. Let's regulate some more.

October 06, 2010

Florida tax attorney Peter Pappas passes on a depressing story:

After analyzing the taxpayers Z-tapes and bank statements we determined that it had failed to report upwards of $1,000,000 in gross receipts in 2006, 2007 and 2008.

When I called the taxpayer’s New York CPA preparer to alert him to the underreporting he said that he was aware of it and called us idiots for recommending that the taxpayer voluntarily amend its S corporation and individual tax returns to correct the underreporting. Here’s was his justification:

Nobody reports all of their cash receipts. That’s the way we do things in New York.

Believe it or not, the taxpayer, on the advice of this crooked preparer, fired us and hired a New York tax attorney¹ to represent it.

So the New York preparer was a (highly regulated) CPA. The apparently crooked lawyer was a (highly regulated) attorney. Both have to pass ethics and CPE requirements. Robert D Flach correctly concludes:

REGULATION DOES NOT PREVENT FRAUD

It doesn't prevent fraud, it doesn't prevent incompetence, all while imposing costs on the honest and competent at least as much as on the unscrupulous and inept.

So tell me again why all this new IRS preparer regulation is such a great idea?

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Then maybe we shouldn't have an ethanol industry

October 06, 2010

Senator Grassley:

“We wouldn’t have an ethanol industry if we had not put the tax incentive in place.”

And kept it in place for 30 years now.

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Oktoberfest Carnival!

October 06, 2010

The beer is flowing, the weather's great, so get out the dirndls and lederhosen and head on over to Kay Bell's Carnival of Taxes!

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Flicker image courtesy of 24oranges.nl under Creative Commons license

As always, this edition of the greatest roundup of tax posts in the entire Blogosphere is full of great stuff, including a link to the Going Concern coverage of tax nerd cagefighting. Don't miss it!

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Shortened Built-in Gain period: What's a year?

October 05, 2010

One of the "stimulus" bills shortened the "recognition period" for S corporation built-in gain tax to seven years for 2009 and 2010 built-in gains. The latest small business tax bill shortened the recognition period to five years for 2011 gains.

The S corporation rules normally require former "C" corporations to pay a corporate tax at 35% on any built-in gains recognized during the "recognition period" that ends ten years after the S corporation election takes effect. A "built-in gain" is an income item that has accrued economically as a C corporation but hits the tax return in the recognition period. For example, if a corporation owns a piece of land that cost $1,000 on the day it becomes an S corporation, and it's worth $4,000 on that day, there's a $3,000 "built-in gain" that will be taxed to the corporation if the property is sold for at least $4,000 during the recognition period. The after-tax gain passes through to the shareholders' K-1s, along with the corporation's other income items.

A reader found an old post about the stimulus act seven-year built-in gain period and posed this question:

according to above, a corporation that made S election in 2002 would not be subject to built-in gains tax if property sold in 2009. What if S election was made March 1, 2002 (fiscal year end changed to calender year end upon S election)? 7 whole years would not have been completed by beginning of 2009. Would S corp. not be subject to built-in gain?

That's an excellent question. The built-in gain recognition period is normally ten calendar years, so if an election took effect on March 1, 1996, assets sold through February 28, 2007 would have been subject to the built-in gain tax. The stimulus provision, however, has funny wording:

Special rules for 2009, 2010, and 2011. No tax shall be imposed on the net recognized built-in gain of an S corporation—

(i) in the case of any taxable year beginning in 2009 or 2010, if the 7th taxable year in the recognition period preceded such taxable year, or

(ii) in the case of any taxable year beginning in 2011, if the 5th year in the recognition period preceded such taxable year.

The only logical way to read this is to count short taxable years as a full year for this purpose. So for the taxpayer whose first S corporation year was a short year beginning March 1, 2002 and ending December 31, 2002, "the 7th taxable year in the recognition period preceded" 2009, and there should be no built-in gain tax.

There is some controversy over this. HR 4169, the Tax Technical Corrections Act of 2009, would make the shortened recognition period seven calendar years, rather than seven taxable years. The bill has gone nowhere so far, though it's not officially dead.

So for now, the law says that there should be no built-in gains tax for 2009 for the situation raised by our commenter.

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Corporate tax reform: a dividends paid deduction?

October 05, 2010

I've long thought a corporation dividends-paid deduction was a logical way to approach corporate tax reform. It would enable the IRS to tax income as it is earned, but keep the same income from being taxed twice. A withheld tax on distributions to tax-exempt entities would keep the income from avoiding tax altogether. A dividends paid deduction would also eliminate the bias for debt over equity in corporate capital structures.

Yet I have never seen a "serious" tax policy wonk address the idea, until now. The TaxProf links to an abstract of a paper, "The Case for Dividend Deduction". The abstract says:

It turns out that there are two good reasons to tax some business entities under some circumstances. Specifically, we believe that publicly traded corporations should be subject to tax (a) because it is hard to tax them on a pass-though basis, and if they are not taxed they become vehicles for tax deferral, and (b) because they are economically important and taxing them is a means to regulate the behavior of the people who run them. However, if those are the reasons for taxing business entities, then we believe that the right form of achieving corporate integration is not CBIT or its progeny, or dividend exemption, or imputation (giving shareholders a credit for the corporate tax). The right form of integration, we would argue, is dividend deduction.

If there is any serious effort at tax reform in the next few years, I hope this will at least be considered.

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Form 1099-TV

October 05, 2010

hatch100.jpgRichard Hatch, the original "Survivor," showed that it is risky to earn money on television and leave it off of your tax return. Now TaxGrrrl reports that the lesson was lost on Adam Jasinski, who won $500,000 on the "Big Brother 9" show in 2008. He apparently never got around to filing a 2008 1040, and he has pleaded guilty for failing to file his return. Robert D. Flach piles on.

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If you keep your receipts, will you be able to return a defective product?

October 04, 2010

A policy outfit called "Third Way" thinks we would be much happier with our government if only we got a receipt explaining how our leaders spend the money they take form us under threat of arrest:

With apologies to Syms clothing, progressives might have a better chance of winning greater funding levels for programs that invest in children, education, energy, environment, transportation, innovation, foreign aid, humanitarian assistance, and housing if taxpaying citizens had a better idea of how their money is spent. Most of these items represent a pittance of government spending as compared to other items in the budget.

...

We suggest providing each taxpayer with a receipt that shows them exactly how their money is spent to the penny.

I think Instapundit gets it about right:

The notion that people would be more supportive of big government if they knew where their money was going betrays an almost touching naivete.

Third Way suggests a receipt that looks like this:

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It would be helpful if it could be presented in an alternate format. For example, the Social Security line could be broken out into multiple categories, something like:

-Social Security benefits going to people with a higher net worth than you ever will have. $200

-Social Security benefits going to others with a higher net worth than you have. $200

-Social Security taxes being put away for your retirement: $0

-Other Social Security benefits: $640.71

You could have fun with this all day. I don't see a cetegory for ag subsidies in the Third Way receipt. You could break that into categories like:

-Corn price support money going to buy a new F-150 for a farmer with a six-figure net income.

-Money going to ADM and other ethanol producers under the guise of "green jobs"

-Money going to rich lawyers with marginal ag ground through the CRP program

-Cash going to that Spanish turbine maker to make money-losing windmills

The biggest problem is that given the size of the federal government and the intrusiveness of its spending, the postage required to give every taxpayer a fully-itemized receipt would need its own line item.

More from the TaxProf, Kay Bell, and Megan McArdle.

Update: More from Veronique de Rugy and Dan Rothschild.

Update 2: I'm clearly late to the party. More here and here.

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Round 'em up, ride 'em in

October 04, 2010

The Missouri Taxguy rounds up the action in the tax blogosphere last week, including updates on the future of the "Making Work Pay Credit" (limited) and on whether we are being "run by [naughty word omitted]" (yes)).

Meanwhile, Russ Fox rounds up tax news from his Orange County outpost, including coverage of the preparer ID number fiasco.

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A bumper crop of useless information returns

October 04, 2010

Paul Neiffer reports at Farm CPA Today:

Under this new law, I would estimate that most farmers will need to prepare in excess of 50-100 of these forms each year.

You are required to obtain the name, address and identification number of each vendor you deal with and record this information on the form 1099. Most accounting software programs already do a good job of keeping track of this information, however, you have to obtain it first.

In addition, if you exceed more than 100 1099, you will most likely have to file these electronically (the IRS may require all filings be done this way soon).

Just another benefit from Obamacare.

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Bankrupt ethanol producer backs off on threats to corn suppliers

October 04, 2010

From Erin Herbold at the ISU Center for Agricultural Law and Taxation:

On Sept. 30, 2010, attorneys for the New-York based law firms, Kelley Drye & Warren and Silverman Acampora, notified several corn producers and their attorneys in Iowa and across the Midwest that they are withdrawing demands for preference claims against a number of producers in the VeraSun Bankruptcy proceeding.

She has thoughts on what affected farmers should do next.

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New breaks for the 2010 year-end planning season

October 04, 2010

My new post at IowaBiz.com.

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President buys into the 'less than 3% of businesses will see a tax increase' fallacy

October 01, 2010

President Obama at the Des Moines backyard event this week:

The reason I think it’s important for us to do this is not because I’m not sympathetic to small businesses. It has to do with the fact that 98 percent -- 98 percent of small businesses actually have a profit of less than $250,000. So it’s not just individuals who generally don’t make that much money; most small businesses don’t make that much money, either. But it costs $700 billion.

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White House Photo

As we've mentioned once or twice, you only get to that "98 percent" figure if you count every tax return that shows K-1 income, and every Shacklee and Amway seller, every office Mary Kay rep, and every part-time moonlighter, as a "small business."

Things look different if you look at people who make their living off their small business. The Tax Policy Center, a center-left think tank, estimates that 58.7 percent of the income of taxpayers who get a majority of their income from their small business will face a tax increase under Obama tax policy. These are the taxpayers who are growing and who can hire new employees -- the successful ones. If their money goes to higher taxes, it can't go to building new locations, developing new products, and hiring new employees.

The President says we can't afford to retain the Bush-era rates at the top because they cost $700 billion over the next ten years, but we can afford to retain the cuts at the lower brackets, which will cost more than three times that. This looks like another case of "have a double, the rich guy's buying."

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Government: you private sector people need to be clear. Us? Not so much.

October 01, 2010

Incoming "Consumer Protection" overseer Elizabeth Warren is scolding bankers for not explaining their products clearly. Mary O'Keeffe thinks asks why clarity should just be a private sector function:

She ought to ask those who write our tax laws exactly the same questions:

Can customers (taxpayers) understand a product (our tax laws)? Do they know the risks? Can they easily figure out what it really costs?

Plumbers and law professors ought to be able to understand the terms of the tax policies our lawmakers are debating.

The evidence is clear that they do not, because the standard of clear and straightforward use of language that Elizabeth Warren wants to demand from the banking industry is sorely lacking in our tax code.

The financial documents produced by the banking industry, opaque and byzantine as they currently may be, are still a model of transparency compared to our convoluted tax code.

Amen.

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Estate tax: why your Uncle Harry might want to hang on awhile

October 01, 2010

TaxVox explains why even though there is no estate tax (for now) for this year, not everybody has a tax incentive to check out:

Say Uncle Harry built his business with sweat equity. His company was worth $3 million when he died, but its tax basis was zero. Jack inherits the firm and sells it right away. If Harry died in 2009, there would be no tax (since Harry’s estate was worth less than $3.5 million it owed no estate tax, and thanks to stepped-up basis Jack owed no capital gains tax). But under 2010 rules, Jack would owe $255,000 ($3 million less the $1.3 million in allowed step-up leaves $1.7 million in gains taxed at 15 percent).

There are a lot of people who lose more from not getting a basis step-up at death then they gain from not having an estate tax.

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Football Friday Cavalcade!

October 01, 2010

It's a beautiful Football Friday! While you await kickoff, march on over to the new Cavalcade of Risk at Chatswood Consulting.

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Like every edition of the blog worlds premier roundup of insurance and risk-management ost, there's lots of good stuff -- not least the Insureblog's post on an unintended but predictible consequence of Obamacare.

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