Roth & Company, PC Tax Update Blog

Tax Update Blog: February 2011 Archives

« Previous · Tax Update Blog Home · Next »

IRS continues its jaywalker executions

February 28, 2011

The IRS has launched another taxpayer offshore bank account reporting "amnesty". If people aren't excited about participating, it's probably because of stories like this from Phil Hodgen coming out of the last "amnesty" from 2009:

FYI, we just got hit for $107,150.80, on top of the back taxes and interest and other penalties already paid.

We owed less than 20k in back taxes, already settled, spread over 4 years, and they take 20% of the value of our UK home, that we owned for many years before coming to US, that we sold when we got our Green Card (which at the time we got it, seemed like such a great day….) which is also when we ticked the box to clean up the UK tax side and get the FBARs filed etc…. never, ever did we expect this treatment. It borders on insanity. They would probably have taken my firstborn too, except I don’t have kids ( nor could I now afford them).

I'm aware of a case of an individual who participated in the last FBAR amnesty. The taxpayer was posted overseas temporarily, opened a bank account for regular bill-paying use while overseas, and exceeded the $10,000 FBAR trigger balance. As part of the 2009 amnesty, the taxpayer paid the tax due -- less than $100 -- on the interest earned in the foreign account. There was no other unreported income. Now the IRS has proposed to "settle" for over $100,000 -- based entirely on six-figure unreported income numbers invented by the IRS.

Until the IRS learns to separate the foot-fault amnesty filers from the international tax evaders, the amnesty is only of use to actual criminals who want to avoid prison. If the IRS continues to clobber the incidental tax jaywalkers with horrendous tax bills for coming clean, it's just not going to be worth the trouble for them to participate.

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

Baseball great, tax scofflaw Duke Snider dies

February 28, 2011

Spring training games started over the weekend, with the Cubs suffering their first bullpen collapse of the year. The happy times of spring training have a sad note this year with the passing of Dodger's legend Duke Snyder. Jack Townsend passes this on from the New York Times obituary:

Snider returned to Brooklyn on a sad note on July 20, 1995, when he appeared in federal court, a couple of miles from where Ebbets Field once stood, as a criminal defendant.

Snider and another Hall of Famer, the former Giant first baseman Willie McCovey, pleaded guilty to tax fraud for failing to report thousands of dollars earned by signing autographs and participating in sports memorabilia shows. “We have choices to make in our lives,” Snider said. "I made the wrong choice."

The following Dec. 1, he was sentenced to two years’ probation and fined $5,000.

Mr. Snyder learned a lesson that can't be repeated enough: just because you get paid in cash doesn't mean it's not taxable, and just because you don't get a 1099 doesn't mean you don't have to report it.

Link       Bookmark: del.icio.usDiggreddit

Can you deduct Medicare Part B premiums?

February 28, 2011

Yes you can, reports Bill Bischoff at the Smartmoney Tax Blog. TaxGrrrl has more.

Tags: .....

Link       Bookmark: del.icio.usDiggreddit

What's missing from David Cay Johnston's wage vs. benefits tradeoff

February 26, 2011

David Cay Johnston, the Pulitzer-prize winning tax-beat reporter now writing for Tax.com, finds the idea of making state workers "contribute" to their pensions to be nonsensical:

Out of every dollar that funds Wisconsin' s pension and health insurance plans for state workers, 100 cents comes from the state workers.

How can that be? Because the "contributions" consist of money that employees chose to take as deferred wages – as pensions when they retire – rather than take immediately in cash...

Thus, state workers are not being asked to simply "contribute more" to Wisconsin' s retirement system (or as the argument goes, "pay their fair share" of retirement costs as do employees in Wisconsin' s private sector who still have pensions and health insurance). They are being asked to accept a cut in their salaries so that the state of Wisconsin can use the money to fill the hole left by tax cuts and reduced audits of corporations in Wisconsin.

In one sense, he's right: total compensation = current compensation + deferred compensation. If you reduce the deferred amount, you reduce the total, so you get a "pay cut." Unfortunately, the way state politics and government pension accounting have worked together, there has been a break in the trade-off between current and deferred compensation. The deferred part has been treated like free money. This is the result of three things working together:

- The continued use of defined-benefit pension plans for government employees. These are nearly extinct in the wilds of the private sector.

- The loose standards used in measuring and funding the future public pension obligations.

- The ability of the public sector unions to choose their negotiating partners by getting their friends elected.

If the states used the defined contribution model, like the private sector, the government employees would retire based on the amount of retirement pay that has funded, rather than an amount that has been promised. Defined contribution plans impose the trade-off discipline that Mr. Johnston invokes -- you either fund wages now or you fund retirement now. Because defined contribution retirement pay increases require immediate tax boosts or spending cuts, this is not a popular model with politicians and public-sector unions.

The discipline breaks down with government defined benefit plans because there is no right-now trade-off. You can promise a higher future benefit without boosting taxes or cutting other spending today by means of optimistic actuarial assumptions. Just pretend that pension funds will always earn 8% or higher annual returns, and maybe that retirees will die off quickly. Sure, you create a funding time-bomb, but that's for somebody else to worry about in another election. There's no incentive for the unions to exercise discipline, and the politicians, largely union-funded, have been willing to bet on the actuarial equivalent of filling out a straight flush to please their funding friends. To the extent there has been any trade-off, it has been a a trade of promises of future pensions for future tax increases and/or spending cuts -- promises billed to tomorrow.

Tomorrow's here. Government defined benefit funding deficiencies range from serious to catastrophic (Illinois, California). By having some current compensation diverted to fund their retirement plans, Wisconsin employees are finally facing Mr. Johnston's theoretical trade-off in real life.

Related link: Farewell, My Lovely - How public pensions killed progressive California

Tags: ...

Link  • Comments (10)       Bookmark: del.icio.usDiggreddit

Hey, it's not cheap to look good on HDTV

February 25, 2011

20110225-1.jpgMaybe the big-time TV anchors get their clothes custom-tailored by the networks, but it doesn't work that way in the local markets. What's a poor TV girl to do?

Deduct everything, of course -- down to the thong underwear.

Unfortunately for an Ohio anchoress, the tax law isn't much help for a working woman. The Tax Court takes up the story of 10TV Anchor Anietra Hamper of Columbus:

On Schedules A of her Federal income tax returns for the years at issue, petitioner claimed deductions for unreimbursed employee business expenses of $20,713, $18,604, $22,602, and $21,759, for 2005, 2006, 2007, and 2008, respectively. These deductions for unreimbursed employee business expenses included expenses for clothing, a cell phone, mileage expenses, professional expenses, subscriptions, union dues, supplies, promotional products, legal expenses, hair, nail, and makeup expenses, office expenses, dry cleaning costs, educational and self-defense class costs, and Internet expenses.

About the clothes:

Petitioner purchased most of her business clothing and accessories from typical clothing stores such as Nordstrom's, Kohl's, Victoria's Secret, Macy's, Old Navy, JCPenney, Sportmart, Casual Corner, DSW, Ann Taylor Loft, Dick's Sporting Goods, Marshall's, Charlotte Russe, and other local clothing stores.

Petitioner's clothing purchases for work consisted of such items as traditional business suits, lounge wear, a robe, sportswear, active wear, lingerie, cotton bikini and cotton thong underwear, and evening wear. She also deducted expenses for an Ohio State jersey, jewelry, bedding, running and walking shoes, and dry cleaning costs.

Victoria's Secret? I guess that would be consistent with national news marketing practices.

20110225-2.jpg
Some guy and Fox News' Laurie Dhue, courtesy ihatethemedia.com

The standard used by our heroine in deciding what to deduct:

Petitioner used a self-described criterion for determining whether a clothing expense was deductible. She would ask herself "would I be buying this if I didn't have to wear this" to work, "and if the answer is no, then I know that I am buying it specifically" for work, and therefore, it is a deductible business expense.

Unfortunately, that's not the standard in the tax law, as the judge explained:

Although she is required to purchase conservative business attire, it is not of a fashion that is outrageous or otherwise unsuitable for everyday personal wear. Given the nature of her expenditures, it is evident that petitioner's clothing is in fact suitable for everyday wear, even if it is not so worn. Consequently, the Court upholds respondent's determination that petitioner is not entitled to deduct expenses related to clothing, shoes, and accessory costs, as these are inherently personal expenses. Additionally, because the costs associated with the purchase of clothing are a nondeductible personal expense, costs for the maintenance of the clothing such as dry cleaning costs are also nondeductible personal expenses.

If the costs of looking like a TV anchor are non-deductible, there isn't much hope for the stained shirts and scuffed shoes of a tax-season CPA.

Cite: Hamper, T.C. Summary Opinion 2011-17

UPDATE: The TaxProf has more.

UPDATE, 2/26: Kay Bell coverage.

Tags: .......

Link  • Comments (1)       Bookmark: del.icio.usDiggreddit

Are offshore gaming accounts no longer subject to FBAR reporting?

February 25, 2011

Maybe, says attorney Taxdood at the Taxes in the Back blog.

I trust the IRS approximately zero in this area. Unless and until the IRS comes right out and says offshore gambling accounts are not subject to FBAR reporting, I would assume they are. It's Pascal's Wager applied to tax: the consequences of excess FBAR reporting are minimal, but the consequences of failing to file if it is required are horrendous.

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Subsidizing your local smug yuppie

February 25, 2011

The $7,500 taxpayer cash tax credit rebate for Chevy Volt buyers, explained by he Tennessee Tax Guy.

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

Your money going down the Whirlpool

February 25, 2011

The ability of the government to spend your grandchildren's money may be circling the drain, but that doesn't mean we can't throw more cash to a Whirlpool. The Tax Policy Blog passes on this report from Bloomberg:

"Whirlpool Corp. will claim $300 million this year in U.S. tax credits for making energy- efficient appliances, collecting almost four times the government's estimate for what all companies would receive from the tax incentive.

The credit will generate about one-third of Whirlpool's earnings this year, according to the company's projections.

Like the beneficiaries of Iowa's research credit corporate welfare, Whirlpool lobbyists, and Congresscritters with Whirlpool plants in their districts, will insist that this new subsidy is vital to the continued life of the company and the communities where the plants are located, and eliminating that subsidy so the rest of us can pay lower taxes is a crime against humanity. That's why tax reform is so hard.

Tags: .......

Link       Bookmark: del.icio.usDiggreddit

Tahoe is nice, but it's not St. Thomas

February 24, 2011

Many U.S. taxpayers have taken to claiming residency in the U.S. Virgin Islands to avoid U.S. taxes. The IRS doesn't like that, but taxpayers have had some luck litigating tax issues in the Virgin Islands U.S. District Court. A new tax case out of that court shows that the IRS can win there if the facts are right.

A family with homes in Incline Village, Nevada, on Lake Tahoe tried to establish Virgin Islands residency to claim sweet tax benefits there. The family elders purchased a home to renovate in St. Thomas. As often happens when you buy a fixer-upper, complications arose. Those complications may prove costly. The family, the Ventos, claimed they were V.I. residents for 2001 tax return purposes. The judge explains why:

The subjective Sochurek factors -- whether the Ventos truly intended to be residents of the Virgin Islands at the end of 2001, or whether they traveled to the Virgin Islands in December 2001 for the purpose of avoiding federal income taxes -- have particular relevance here because the timing of the family's decision to "move" to the Virgin Islands is suspicious. The $180 million OSI sale occurred at the beginning of 2001, and the family would receive tax savings of more than $9 million only if they were Virgin Islands residents as of December 31, 2001.

The judge found against the family (footnotes omitted):

The Ventos' testimony that they intended to become Virgin Islands residents by the end of 2001 is undermined by the objective facts surrounding the family's purported "move" -- the house they purchased was not liveable by the end of 2001, despite efforts to renovate it as quickly as possible; the house was not fully furnished by the end of 2001; the house only became liveable in 2003; none of the family's furniture or valuable personal possessions were brought to the property; the family spent very little time in the Virgin Islands during 2001 and 2002; and the family primarily engaged in vacation-type activities, such as swimming and diving, when in the Virgin Islands. The family did not have a bank account in the islands in 2001. Although Richard was starting two businesses in the Virgin Islands, neither was up and running by the end of 2001. Moreover, although both Richard and Lana made occasional trips to the Virgin Islands during 2001 and 2002, they always returned to their main home in Nevada or their vacation home in Hawaii after only a short period of time, showing they lacked the intent to remain in the Virgin Islands for an "indefinite" period of time.

If the cause for the failure to stay in the Virgin Islands was renovation delays, that was one expensive remodeling project.

Cite: VI Derivatives LLC, USDC-Virgin Islands No. 06-12.

Tags: .

Link       Bookmark: del.icio.usDiggreddit

Wait - you want me to withold on interest I pay to my broker?

February 24, 2011

If you have an offshore margin account, you just might have to withhold and remit U.S. taxes on interest paid to your stockbroker. Andrew Mitchel explains.

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Film Credits: the Waterworld of tax policy?

February 24, 2011

Reason.com says "Ishtar" is more like it.

Tags: ......

Link       Bookmark: del.icio.usDiggreddit

Four new Swiss bank indictments

February 24, 2011

In what might be seen as an advertisement for the new IRS offshore account "amnesty," the Justice Department has indicted four Swiss bankers. Jack Townsend has more.

These bankers can draw a valuable lesson from the experience of another Swiss banker, as related by Phil Hodgen:

Christos Bagios, a Credit Suisse employee, has been arrested in the United States.

This is not legal advice, and I am not your lawyer. But:

* Do not travel to the United States. Ever.

* If you are flying to South America from Europe, do not change planes in the United States. Ever.

Russ Fox has similar advice for offshore executives of online sports books.

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

What's behind "low" rates for the "rich"?

February 23, 2011

You can have a lot of fun with IRS data, if you're into that sort of thing. Martin Sullivan of Tax Analysts is, and he used IRS data to pin down the effective tax rate of dwellers in Leona Helmsley's old place:

Like so many high-profile Manhattan skyscrapers, the Helmsley building has its own zip code. The IRS tabulates individual tax return data by zip code. So we can see how much income tax was reported on individual tax returns that filed from the Helmsley Building. In 2007 there were 130 returns using the building’s zip code. The IRS data do not reveal whether these returns were filed by individuals using the building as a primary residence, secondary residence, or as a business address. In any case these are not your typical straphangers. Average adjusted gross income per tax return is $1.17 million.

...


As is true for most rich people, payroll taxes are small relative to income taxes. In 2007 the social security portion of payroll taxes (12.4 percent rate) was imposed on no more than $97,500 of wage and self-employment income. The Medicare portion (2.9 percent rate) had no limit. For Helmsley filers estimated payroll taxes added only 1 percentage point to their effective tax rate. Combined income and payroll tax liability tax for this privileged group was only 14.7 percent of AGI.

At Forbes.com, Janet Novack isn't surprised by the "low" rate:

The rich folks’ low tax rate shouldn’t come as too big a surprise. As I pointed out here, because of the historically low 15% rate on long term capital gains (compared to a top tax rate of 35% for ordinary income, like salary) the 400 highest income Americans now pay a lower effective federal income tax rate than the merely well paid. In 2007, the 400 derived two thirds of their average adjusted gross income of $345 million from capital gains and paid an average effective rate of just 16.6%.

The implication is that the "rich" are getting away with murder. Yet this 14.7% number leaves a lot out. First, it's a percentage of "Adjusted Gross Income," before the deduction for state and local taxes. If you live in Manhattan, you pay a lot of that.

Second, it leaves out the amount that's already been taxed elsewhere. The low effective rate is the result of the 15% top rate on dividends and capital gains. The dividends are distributions of income that has already been taxed at a 35% top rate, so you can quickly get to over a 40% combined rate on that income, once corporate taxes are counted.

Capital gains are also deceptive. To the extent they result from the sale of stock, part of that is accumulated income that has been taxed at the corporate level. If the asset has been held for a long time, a big chunk of that taxable gain results from inflation -- in other words, from no real gain at all.

Once all taxes and inflation are factored in, the effective rate is a lot higher than 14.7%.

Related:

Taxing the heck out of the top 400 taxpayers won't help the bottom 20 million

How 'progressive' do we want to be?

Tags: ....

Link  • Comments (1)       Bookmark: del.icio.usDiggreddit

All aboard the new Cavalcade of Risk!

February 23, 2011

The Cavalcade is leaving the station, but you can still get a seat on the greatest roundup of blog posts on insurance and risk management on the rails anywhere. The new Cavalcade of Risk is up at Free Money Finance!

20110223-1.jpg


Don't miss Insureblog's analysis of how the Health Care Reform is doing.

Link       Bookmark: del.icio.usDiggreddit

Is federal tax reform making progress?

February 23, 2011

Donald Marron at TaxVox sees hope:

Any reform creates losers as well as winners – and losers always let their representatives know how they feel. But Washington is giving hopeful signs that the journey toward tax reform – the first in a quarter century – may finally be under way.

Even glaciers move, eventually, but I expect another presidential election to come and go before anything much happens.

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

'Palimony' may be deductible claim for estate tax purposes

February 23, 2011

The TaxProf reports that the Ninth Circuit Court of Appeals has ruled that payments to an estranged live-in girlfriend under a "Palimony" suit may be deductible against a decedent's estate tax. The decision reverses a district court, which was ordered to do more factfinding to determine what amount may be deductible.

This could open the door for a do-it-yourself marital deduction for unmarried couples in the right circumstances. Roger McEowen of the ISU Center for Agricultural Law and Taxation e-mails: "Just think of the collusion that unmarried couples could accomplish!"

It's a fun idea, but a lot of things have to fall into place:

- You have to be in a state that recognizes palimony as a cause of action.
- You need to get a palimony suit going before the one with the money is dead.
- You need to make it look good enough to sell to a judge.

All in all, it would probably be easier to get married on your deathbed, if estate tax is what you're worried about. But that's between you, the object of your affection, and your respective lawyers.

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Iowa House Ways and Means passes coupling with $500K 2010 Section 179 limit AND bonus depreciation

February 22, 2011

The Iowa House Ways and Means Committee has given Iowa businesses another reason to take their time finishing their 2010 returns. Rod Boshart reports at Eastern Iowa Government.com:

The House Ways and Means Committee voted 17-7 to “couple” Iowa tax law with the federal tax code to allow small businesses to make equipment purchases and use tax advantages to generate economic activity and job growth. Unlike the Senate, however, they made the bonus depreciation provisions effective for the 2010 tax year to provide immediate benefits rather than delaying their implementation in the 2011 tax year as senators proposed.

The Senate "coupling" bill made the $500,000 Section 179 limitation effective for 2010; without coupling, Iowa taxpayers could only use Sec. 179 for up to $134,000 in 2010. Section 179 allows a current deduction for assets that would otherwise be capitalized and expensed over a period of years via depreciation deductions.

By allowing taxpayers to use the "bonus depreciation" provisions for 2010, the House Ways and Means version of SF 209 would allow taxpayers to write off 50% (100% for post-9/8/2010 purchases) of the cost of more new business assets. As bonus depreciation has fewer limits that Section 179, and can generate net operating losses, this would make a big difference in 2010 tax returns currently being prepared.

Related:

Coupling bill passes Iowa Senate with $500,000 2010 Sec. 179 deduction

Bonus Depreciation and Farm Buildings

Bush-rate extension passes; what it means

Tags: ......

Link  • Eye on the Legislature  • Comments (2)       Bookmark: del.icio.usDiggreddit

Joementum builds for broadcasting Congresscritters preparing their own returns

February 22, 2011

Only one Congresscritter admits do preparing his own 1040, reports Joseph Thorndike at Tax.com (Sen. Mike Enzi of Wyoming). He reports that it doesn't have to be this way:

Tim Pawlenty thinks members of Congress should be forced to do their own taxes. And people seem to like the idea. "Watching our elected representatives take on the challenge, broken pencils and all, could make for some entertaining moments — a kind of reality TV meets C-Span," observes John Schwartz in the New York Times. Presumably, frustrated lawmakers might also be a little more interested in tax reform and simplification (not the same thing, but we'll leave that for another day.)

The Joe running the Tax Update has long been in favor of this, in the form of 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.

With the commentary bar, it would be like Mystery Science Theater 3000, only mocking bad 1040s instead of bad movies. It might make some of them think twice before proposing yet another tax complexification; if not, it would at least make them suffer for it.

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Farmers: is this March 1 scramble really necessary?

February 22, 2011

If you have all of your 2010 taxes already paid in, probably not. Paul Neiffer explains how farmers scrambling to meet their special March 1 filing deadline can relax if they will incur no underpayment penalties for 2010 estimated taxes. Those farmers can wait until April 15 -- or even extend to October, if they wish.

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

Well, you can't have a wallet amputation without anesthesia

February 22, 2011

A liquor store that offers tax preparation. I understand the synergy there.

Tags: .

Link       Bookmark: del.icio.usDiggreddit

You mean people on cable TV news can be careless and ignorant?

February 22, 2011

Tax Professor Jim Maule is not impressed by MSNBC coverage of congresscritters sleeping on cots in their offices (tax criminals!). I might be unimpressed too if I ever watched cable news.

Tags: ..

Link  • Comments (2)       Bookmark: del.icio.usDiggreddit

'Cash for Kids' judge convicted of tax charge

February 22, 2011

A judge who pleaded guilty for taking kickbacks from the owner of a private juvenile jail to railroad kids there, but then was sent to trial after a federal judge rejected the deal, was convicted last week of 12 criminal counts, including tax charges. It's bad form to gloat about somebody being sent to prison, but not so much in this case.

Russ Fox has the scoop.

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

George Washington, too poor to buy a radio

February 21, 2011

In honor of President's Day, we rerun this from July 29, 2010

20100729-1.jpgForbes Magazine reports that George Washington was the wealthiest President. For his day, the Father of the Country was incredibly wealthy, owning immense acreage in Virginia and on the frontier (largely in current Pennsylvania and Ohio), as well as a profitable and, for its day, state-of-the-art, farming operation.

Yet all of his wealth couldn't buy George:

- A car.
- A refrigerator
- An electric light
- Air conditioning
- Central heating
- A hot shower
- A computer
- A radio or television
- Medical care that today would have cured his fatal final illness.
- A telephone
- Vegetables out-of-season
- Even the crummiest dial-up internet connection
- An airplane ride

You get the idea. In so many ways almost everybody in the U.S. is vastly richer than even the wealthiest men of 210 years ago. While he might have been hugely wealthy for his day, he did without things even the poor take for granted in our country now.

Hat Tip: Kay Bell and the TaxProf.

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

If at first you collapse in scandal and disgrace, try, try again

February 21, 2011

So what if the Iowa film tax credit program has collapsed in scandal, with millions gone missing, officials resigning in disgrace, and indictments and plea bargains coming out like direct-to-DVD movies. Iowa needs more film tax credits! According to the "Film Alliance of Iowa," anyway. WHO-TV reports:

A group of Iowans is calling on state leaders to reestablish a film office in the state, saying its time to move past the problems that brought movie-making here to a halt.

"We're forgetting what really did happen, the economic impact we had on people, and the jobs we created," said Susan Gorrell, the Interim Director for the Film Alliance of Iowa.

Yes, jobs like "film credit broker." I think the problem the Film Alliance is having is not that people are forgetting, but that they're remembering. They remember the millions of dollars dishonestly run through strawmen, the use of taxpayer money to buy a fancy car for a filmmaker, and the millions of imaginary expenses used to claim real taxpayer dollars for filmmakers.

Once an office is established again, the Alliance says building an incentive program will be essential--one with oversight by experienced professionals.

"They can have tax breaks on different levels. We know they have to have audits. We know they have to have a CPA," said Gruening.

"Incentives" is another word for "your tax money." Even if run honestly, a film tax credit program is a bad idea. There is no reasonable way to believe that the film industry, which leaves nothing behind except fast food wrappers (and in Iowa, convicted felons), is somehow so special that it deserves to be funded by your business, your boss, or your employees.

Related: Film credits: maybe they're an economic disaster, but oh, the intangibles!

Link: Tax Foundation Special Report

Tags: .....

Link       Bookmark: del.icio.usDiggreddit

Sometimes cheap isn't a bargain

February 21, 2011

$50 to do a 1040 with income from four states? What's the catch?

A college student got the preparer reference from her uncle. As it turns out, there were some hidden costs:

My uncle visited her office about three weeks after my appointment because she wouldn’t return calls. But her office was locked and someone at a neighboring business told my uncle our preparer had been arrested for allegedly funneling a client’s tax refund to her own account. She also ran a money wiring business on the side, and was allegedly wiring some of those funds into her personal accounts as well.

It's an old story, but when something sounds too good to be true, it probably is. The best place to get preparer references are from other professionals, like bankers or lawyers. You don't have to buy the high-priced spread, but when one price seems way lower that the others, that can be a warning. And don't assume that "bigger refunds" is a good thing; if they come because the preparer is inventing deductions, that's a bad thing, because you are responsible for them.

Once you get the return back, look it over; if the numbers don't make sense to you, don't file the return until they do.

Tags: .

Link       Bookmark: del.icio.usDiggreddit

Tax cheating isn't getting any safer

February 21, 2011

Tax Prof: Tax Prosecutions up 27% since 2005. It seems that way to me. I have a regular Google search for criminal tax cases, and it just seems there are a lot more than there used to be.

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Coupling bill passes Iowa Senate with $500,000 2010 Sec. 179 deduction

February 18, 2011

You might want to not file your Iowa business returns for 2010 quite yet.

The Iowa Senate yesterday passed its bill (SF 209) to update Iowa tax law for recent federal tax changes. The bill retroactively couples for 2010, and forward for 2011, for the $500,000 Sec. 179 deduction enacted last September. That is important for Iowa filers who are taking advantage of the increased Sec. 179 deduction on their 2010 returns; they may also be able to take it on their Iowa returns.

In contrast, the bill couples with the federal bonus depreciation rules only starting in January 2011.

The bill is not enacted yet, and Iowa's coupling deduction has been a mess for the past few years. As it hasn't passed, the 2010 Sec. 179 limit for Iowa officially is still $134,000. If you have to file now -- say, because you are a farmer trying to meet a March 1 deadline -- that's the number to use on your Iowa return. If you can wait, though, you might as well, to avoid having to amend your returns if the coupling legislation passes.

Tags: ...

Link  • Eye on the Legislature ~ • Iowa Tax Law       Bookmark: del.icio.usDiggreddit

IRS issues Applicable Federal Rates (AFR) for March 2011

February 18, 2011

The IRS has issued (Rev. Rul. 2011-06) the minimum required interest rates for loans made in March 2011:

-Short Term (demand loans and loans with terms of up to 3 years): 0.54%

-Mid-Term (loans from 3-9 years): 2.44%

-Long-Term (over 9 years): 4.3%

The Long-term tax-exempt rate for Section 382 ownership changes in March 2011 is 4.55%.

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.

Tags: ..

Link  • Applicable Federal Rates       Bookmark: del.icio.usDiggreddit

Dealing with the 2010 estate tax holiday

February 18, 2011

Estates of taxpayers worth over $5 million who died in 2010 can elect out of the estate tax and instead pass on assets without a step-up in asset basis to full fair-market value. Roger McEowen covers the latest guidance for such estates.

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

Hollywood Willie

February 18, 2011

A dazer from the Tax Policy Blog:

Hawaii lawmakers are moving forward with a bill that would expand the state's movie production incentives programs. And as usual the stars are out in support. Actors Cuba Gooding Jr. and Branscombe Richmond testified in support of the bill. Even former President Bill Clinton submitted written testimony in support of the measure.

As President, Bill Clinton was all about "targeted" tax breaks for favored causes. Why Hollywood deserves special breaks remains a mystery. Here in Iowa, we've learned the hard way what film tax credits really buy. Maybe Hawaii's distributors of Benzes and iPods just need a hand.

Tags: ......

Link       Bookmark: del.icio.usDiggreddit

Yes, temperance. Now pour me another drink.

February 18, 2011

From Howard Gleckman at TaxVox:

In recent weeks, the president has had a lot to say about the need to eliminate tax loopholes and cut tax rates, especially for corporations. Yet his 2012 budget is filled with new tax breaks for favored activities.

...

All of this is what my Tax Policy Center colleague Gene Steuerle long-ago dubbed tax deform. Instead of broadening the tax base and getting government out of economic decision making, Obama is proposing to narrow the base and wade hip-deep into those choices. For Obama, fossil fuels are bad, alternative energy is good. So he takes away the oil and coal subsidies but adds new ones for solar and wind.

President Obama isn't the first politician to pay lip service to tax reform while carving loopholes for favored causes, and he won't be the last. As in so many things, most of us will be better off with a broad base and lower rates, but those whose base would be broadened are the ones willing to pay for the lobbyists to keep that from happening.

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Iowa House votes 20% across-the-board individual rate cut

February 17, 2011

The Iowa House yesterday voted 62-33 to pass a 20% accross-the-board individual rate cut. HF 4 now goes to the Senate, where its fate is an interesting question.

The Iowa House has 60 Republicans, so two Democrats joined in passing the rate cut. The Iowa Senate has a 26-24 Democratic majority, so they can block the bill if they hold firm. But they didn't hold firm in the House. The Des Moines Register's William Petroski says things look "doubtful" for the rate cut:

The House bill faces doubtful prospects in the Democrat-controlled Iowa Senate. Assistant Senate Majority Leader William Dotzler, D-Waterloo, chairman of the Senate Economic Development Committee, said the Senate will give the House plan a serious look. He acknowledged that income tax cuts have an appeal to voters, but also noted that Gov. Terry Branstad has proposed major cuts in corporate income taxes and commercial property taxes.

"One of the things that we are focusing on is taking a look at the tax credit program and tax cuts and trying to apply them in a way that small businesses can create jobs," Dotzler said.

I asked a lobbyist whether the bill can pass the Senate. His answer: "Who knows?"

The individual rate cut is not part of Republican Governor Branstad's agenda for this session; his focus is on corporate rate cuts and property tax relief. And while revenues are up this year, the state isn't exactly flush after significant spending increases in recent years. But as long as the state is looking at rate cuts, tax credits, and all, why not look at them together? Why not go with the Quick and Dirty Iowa Tax Reform plan? Click "read more" to learn more!

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Runge cops plea; turning on Wheeler?

February 17, 2011

It appears that the week-and-a-half felony trial of Wendy Weiner Runge was a plea negotiation by other means. The Minnesota filmmaker pleaded guilty to a single felony fraud charge in exchange for restitution and cooperation with prosecutors, reports the Des Moines Register:

The plea agreement with prosecutors means Runge, 45, will likely face less time in prison than she would have if convicted of all five felony counts brought against her by Iowa's attorney general. Before the plea, the novice filmmaker could have faced between 10 years and 65 years behind bars.

This would seem to be bad news to designated official goat Tom Wheeler, the disgraced head of the Iowa Film Office. He faces felony "misconduct in office" charges related to the scandal. Again from the Register:

Runge admitted to District Judge Douglas Staskal that she made false statements to procure state tax credits for both unfinished projects. But she also hedged a bit, saying she was "directed to do so by Tom Wheeler," head of the Iowa Film Office.

Whether or not Mr. Wheeler is found guilty of criminal charges, it's a shame that the real masterminds of the debacle -- The 143 legislators who voted for the absurd Film credit program, and the Governor and his aides who appointed and "supervised" him -- won't even have to apologize.

Update: the defendant blogs that she is "victorious." Pleading guilty to a felony must be a new kind of victory dance.

Links:

Tax Update: 12 thumbs... up or down?

Complete Tax Update film credit coverage.

Tax Policy Blog: New Mexico and Other States Reconsidering Expensive Film Tax Subsidy Programs

Tags: ......

Link  • Comments (2)       Bookmark: del.icio.usDiggreddit

Iowa's jailbirds top nation in tax compliance!

February 17, 2011

While prisoners nationwide "earned" over $39 million in fraudulent refunds in 2009, not a single illegal tax refund stimulated the Iowa prison commissary economy. USA Today reports that Iowa was the only state where no fraudulent tax refunds were issued to prisoners. Florida's felons, in contrast, made out like, well, bandits, raking in over $12.5 million.

It would be nice to think that Iowa's prisoners are just so darn reformed that they wouldn't think of scamming the IRS. That would be like thinking they were too busy tending their pet unicorns to steal. Apparently Iowa's cons don't have much internet access.

Vit The TaxProf.

Tags: ...

Link  • Comments (2)       Bookmark: del.icio.usDiggreddit

Jaywalkers, hands up!

February 17, 2011

I cover the federal tax "amnesty" for offshore financial accounts at my post this week at IowaBiz.com. Make a habit of checking out IowaBiz.com, the Des Moines Business Record's blog for entrepreneurs, for fresh goodness daily.

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

12 thumbs... up or down?

February 16, 2011

Usually the worst a critic can do to a filmmaker is to write a bad review. A panel of critics in Des Moines has powers that Siskel and Ebert can only dream of: they can send the filmmaker to prison.

The defense in Wendy Wiener Runge's trial on charges of looting the Iowa Film Tax Credit program yesterday screened "The Scientist" for the jury. Ms. Runge is on trail for allegedly claiming improper tax credits and selling them for cash to finance the film. The Des Moines Register reports:

When the film reached its end credits, about a dozen of Runge's family and friends who sat in the first two rows applauded. The jury and attorneys did not.

While the jurors verdict on the film is unknown, a defense witness gave two thumbs down to the legislative supergeniuses who enacted the Iowa film credits. As part of a strategy to make the case more about the program and its maladministration, rather than about Ms. Runge's alleged violations, the witness gave a poor review to the state law:

Randy Greenberg, a veteran movie executive, said the tax credit program created a lax environment for moviemakers applying for tax credits.

"I am surprised at the legal language that was written by the Legislature of this state," Greenberg said. "I am surprised that the legislators of this state agreed to this scheme. When I read it, it's more about the tax credits than it is about the film business."

Out of all the legislators sitting when the program was enacted, there are only three innocent men.

Related: Film trial opening arguments: the state approved those expensive cigarette butts

Complete Tax Update film credit coverage

Tags: .....

Link       Bookmark: del.icio.usDiggreddit

Do-it-yourself escrow blows up like-kind exchange

February 16, 2011

Taxpayers often think of the Sec. 1031 like-kind exchange rules as a way to "roll over" the gain from one investment property into another one. While the economics work that way, the tax law is a stickler for the formalities, as an Arizona couple learned yesterday in Tax Court.

The couple sold a Lake Havasu City property for $76,000. They took a $10,000 down payment and put the remaining $66,000 in an escrow account that they set up for themselves. The problem? The tax law requires that a third party have the escrow account. The judge explained the tax law requirements:

Section 1.1031(k)-1(g)(3), Income Tax Regs., defines a qualified escrow account as the following:


(ii) A qualified escrow account is an escrow account wherein --

(A) The escrow holder is not the taxpayer or a disqualified person * * *, and

(B) The escrow agreement expressly limits the taxpayer's right to receive, pledge, borrow, or otherwise obtain the benefits of the cash or cash equivalent held in the escrow account * * *.

The taxpayer's own limitation of use of the funds does not convert the escrow account into a qualified escrow account.

The judge said the do-it-yourself escrow failed:

Neither escrow agreement expressly limited petitioners' right to receive, pledge, borrow, or otherwise obtain the benefit of the funds nor made any mention of a like-kind exchange. Because of the lack of limitations, neither escrow account was a qualified escrow account. See Hillyer v. Commissioner, T.C. Memo. 1996-214; Lee v. Commissioner, supra. Although petitioners used the funds in the Capital Title escrow account to purchase the California property, the lack of express limitations in the escrow agreement results in petitioners' being treated as having constructively received the proceeds.

Result: no like-kind exchange; all of the gain was taxable in the year of sale.

If you do want to have your property sale and purchase treated as a Sec. 1031 exchange, you need to set it up properly at the start. Contact a reputable Sec. 1031 intermediary company. Do some due diligence to make sure they will be around when it's time to close the deal. Don't cheap out and do it yourself, because it will cost more in the end.

Cite: Crandall, T.C. Summ. Op. 2011-14

Related: A LIKE-KIND EXCHANGE DISASTER (RELATIVELY SPEAKING)

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

2008 Homebuyer credits: time to pay them back

February 16, 2011

The first version of the "First Time Homebuyer Credit" had an unusual feature: it has to be paid back. If you took the $7,500 homebuyer credit on your 2008 return, you are to start paying them back on your 2010 return due in April. The 2009 and 2010 credits, in contrast, only have to be repaid if the house is sold in the first three years after the purchase.

The Tax Policy Blog and the TaxProf have more. Look for sad, sad stories of homebuyers who find that paying back the $7,500 interest free loan you and I have helped finance is just an intolerable burden.

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

Expats: what you need to file

February 16, 2011

A rundown at Tax.com.

Link       Bookmark: del.icio.usDiggreddit

Iowa to link to federal depreciation rules for 2011, Sec. 179 for 2010?

February 15, 2011

The Iowa Senate Ways and Means Committee yesterday approved this year's "code conformity" bill to link Iowa's income tax rules to the federal tax rules. The bill, SF 209,

The bill appears to adopt federal bonus depreciation and the $500,000 Sec. 179 limits. The bonus depreciation is effective for 2011, but not retroactively. The legislative language appears to make the Sec. 179 coupling retroactive to 2010. If the coupling is not retroactive, the Iowa Sec. 179 limit for 2010 is $134,000. The legislative explanation reads (my emphasis):

The division also decouples, for Iowa tax purposes, from the increased expensing allowance under section 179 of the Internal Revenue Code enacted by Congress as part of the American Recovery and Reinvestment Act of 2009 and makes a number of conforming changes. The changes take effect for tax years beginning on or after January 1, 2009, and before January 1, 2010.

I have emailed legislators for clarification and will post an update as soon as I hear back, as it means a lot for returns in process right now.

The bill couples retroactively for some minor breaks. For example, the bill would allow an Iowa deduction for sales taxes if that deduction is elected on the federal return. The bill also would conform Iowa the federal rules for excluding dependent health insurance.

The bill still has a way to go before it is enacted. If you have any Iowa items on your 2010 return that are on the 2009 list of federal-Iowa differences, you may want to sit on your Iowa return until conformity legislation is enacted; otherwise you may have to amend, or you may end up getting a payment notice from Iowa.

Other coverage: Sioux City Journal

Iowa Department of Revenue on 2010 conformity.

Tags: .....

Link  • Iowa Tax Law       Bookmark: del.icio.usDiggreddit

'Unlawful, immoral and unprofessional.' And state-approved!

February 15, 2011

An expert witness for the prosecution in Wendy Wiener Runge's trial said yesterday that the tactics used to extract tax credits out of Iowa's film tax credit program were "unlawful, immoral and unprofessional." But the defense appears to be pusuing a "it's not stealing if you have permission" strategy, reports Lee Rood in the Des Moines Register:

Shelly West, production manager on the 2008 film, reviewed e-mails in court Monday that showed an official from the Iowa Department of Revenue and fired Iowa Film Office manager Tom Wheeler signed off on some "in-kind" expenses later used to obtain $1.85 million in tax credits.

West and partners in the film estimated a value for those services, so that they could collect money later, once tax credits were brokered into cash by the film's accountant.

The film's budget swelled from $55,000 to $2.5 million, an increase that the prosecution's expert found improbable.

More coverage at KCCI.com

Related Tax Update coverage: News flash: Iowa taxpayers paid for some 'ridiculous' film expenses

Tags: .......

Link       Bookmark: del.icio.usDiggreddit

The President's budget

February 15, 2011

The President's fiscal blueprint isn't going over well. From the center-left TaxVox:

Obama would get there mostly with a collection of ideas that he failed to sell to even a Democrat Congress. They include: allowing the 2001 and 2003 tax cuts to expire at the end of 2012, capping the value of itemized deductions at 28 percent, taxing the compensation of hedge fund managers and other financiers at ordinary income instead of capital gains rates, and increasing taxes on multinationals.

These proposals will make lobbyists happy and even richer than they are. But there is no chance that tea-party obsessed congressional Republicans would support any of them. Thus, even with an improving economy, tax revenues are likely to remain a relatively small share of the overall economy through Obama’s first term.

The upcoming debate over that small chunk of non-defense domestic spending that is subject to annual congressional review is healthy and important—and it will get very nasty. But compared to burgeoning entitlements on one hand and tax revenues that remain near historic lows on the other, the fight over 12 percent of the budget is a fiscal sideshow.

I won't spend much time talking about the President's tax proposals until there seems to be a possibility that they might be enacted. If you want to look into them anyway, the TaxProf has links to the documents. Kay Bell and Janet Novack have more.

Link       Bookmark: del.icio.usDiggreddit

Just a struggling cook with a serious gambling habit

February 15, 2011

A man who listed his profession as "cook" and reported under $35,000 in income over two years was still a high roller, reports Russ Fox:

Our gambler didn’t report any gambling income, but somehow he had managed to have Currency Transaction Reports issued to him for over $800,000 in purchases of casino chips during 2004 and 2005.

Now, what do you with casino chips? You might sell one or two, but you gamble with them, of course. His return was selected for examination when he showed gross income of $16,450 and $18,230 in the two years selected for audit. The IRS was naturally curious how someone could buy $800,000 in casino chips while making $35,000.

The IRS jumped to the conclusion that there was some unreported income. The Tax Court agreed yesterday and boosted his two-year income to about $410,000.

Attorney "Taxdood" explains how casinos handle cash transactions at Taxes in the Back.

Cite: Pan, T.C. Memo. 2011-40

Tags: .....

Link  • Comments (1)       Bookmark: del.icio.usDiggreddit

Birds and Bees Carnival

February 15, 2011

Kay Bell has a new Valentine's Day edition of the Carnival of Taxes!

20110215-1.jpg

What could be more romantic than the blog world's roundup of tax-related posts?

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Bonus Depreciation and farm buildings

February 14, 2011

A victim satisfied attendee of the new tax law webinar we did a few weeks ago asks:

Could you go through the 2011 depreciation scenario for a steel ag building being used for machinery, hay or livestock storing including bonus depreciation, if any?

Certainly! Bonus depreciation applies to new property "which has a recovery period of 20 years or less" (Sec. 168(k)(A)(I)(i)). The tax law depreciates farm buildings over a 20-year life. See Rev. Proc. 87-56. That means new farm buildings qualify for the current 100% bonus depreciation -- fully deductible when placed in service if "acquired" after September 8, 2010, if in service by the end of this year.

20110214-1.jpg
Flickr image courtesy SteelMaster Buildings under Creative Commons license

So Mr. Farmer decides he needs a new tractor shed. He signs the deal today and the shed is up and in service on August 1, 2011. He pays $200,000 for it. His taxable income is otherwise $125,000 for this year. After the bonus depreciation, he has a $75,000 or so net operating loss that he can carry back to get a refund of prior-year taxes (farmers qualify for a special five-year carryback provision).

What if the shed was under construction on September 8, 2010 and finished on September 30, 2010?

As long as the property was not built under a contract binding as of January 1, 2008, it should qualify for 100% bonus depreciation if placed in service after September 8, 2010 and before the end of 2011.

What if I bought land from my neighbor that had a shed on it?

Sorry, then it is not "new" property and no bonus depreciation is permitted.

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Consolation prize opportunity for Bieberists

February 14, 2011

While Justin Bieber fans may be grieving that he lost the "best new artist" Grammy last night to the much more talented and deserving Esperanza Spalding, TaxGrrrl offers a possible consolation prize for them -- the consolation of TurboTax! Just leave your celebrity crush's name in her comment section.

And enjoy yourself some Esperanza!

Related: Esperanza Spalding's Wikipedia Page Attacked By Justin Bieber Fans

Link       Bookmark: del.icio.usDiggreddit

You can't make a speeding ticket go away by slowing down after you're pulled over...

February 14, 2011

...and you can't make a tax prosecution go away by paying taxes after the IRS catches up with you. A Kansan tried, and it didn't work out well, as Peter Pappas explains.

Tags: .

Link       Bookmark: del.icio.usDiggreddit

Back in action

February 14, 2011

Dan Meyer has resumed posting at TickMarks blog. Welcome back!

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Missing your W-2?

February 14, 2011

You should have it by now. If you don't, the Tennessee Tax Guy explains what to do.

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Weekend update: Iowans, we don't subsidize just Hollywood

February 12, 2011

While the Iowa film tax credit trial has moved into a finger-pointing stage, a Department of Revenue report released yesterday shows that it's not just fly-by-night film companies that we subsidize. Rockwell, Deere and DuPont also walk away with nice taxpayer checks.

Research Credit Report

Iowa has a research credit that piggybacks the federal one, but which only applies for research done in Iowa. It has one feature that the federal credit lacks: if the credit exceeds the tax you owe, the state writes the "taxpayer" a check for the difference. Over the objections of the recipients of this credit, a new law requires the state to make public the names of companies receiving over $500,000 in Iowa research credits. The first report covering a full year was issued yesterday.

The report shows that $48,461,731 of research credits were claimed in 2010; of these, $44,363,549 were paid as refunds -- as cash grants to the recipients. $39,708,665 were paid to just nine companies claiming over $500,000 in credits:

20110212-1.png

That means every Iowan pays about $13 per year in taxes to cover direct subsidies to these companies. A family of four chips in $52 for this group. Whatever you think of these companies, it's hard to imagine the General Assembly voting them multi-million dollar annual cash subsidies. That's why they prefer tax credits.

There's a new rubber stamp in town!

A few years ago, Des Moines City Councilman Tom Vlassis famously admitted he served as a "rubber stamp" for the woman convicted of looting the CIETC jobs training agency. The rubber stamp style apparently caught on at the statehouse, too. Former Economic Development bureaucrat Vince Lintz explained how yesterday in the Film Tax Credit looting trial of Wendy Weiner Runge; the Des Moines Register reports:

"Were you kind of acting as a rubber stamp on some of them?" asked Janelle Niebuhr, one of Runge's defense lawyers.

"To a certain extent on some of them, yes," Lintz answered.

The defense may have gottten some comfort from this:

Lintz took several hits in the courtroom at the Drake University Law Center for failing to notice earlier that Wheeler approved almost every expenditure, including those for Runge's project. Lintz also acknowledged that Wheeler was altering contracts on his own and failing to obtain receipts or submit completed projects' expenses for auditing within the department, as he was told to do.

The defense will likely argue that it's not stealing if you have permission, and Mr. Wheeler apparently provided some. While that may comfort the defense, it should keep taxpayers up at night.

Further reading:

Iowa releases list of research credit winners (Februrary 2010 six-month list)

Yes, state taxes do matter

Tax Update Quick and Dirty Iowa Tax Reform Plan

News flash: Iowa taxpayers paid for some 'ridiculous' film expenses

Complete Tax Update film tax credit coverage

Other research tax credit coverage:

Des Moines Register

Bloomberg

Tags: .........

Link       Bookmark: del.icio.usDiggreddit

News flash: Iowa taxpayers paid for some 'ridiculous' film expenses

February 11, 2011

As bad as the seemingly-incriminating e-mail introduced at trial Wednesday was for Wendy Weiner Runge's defense, things may have gotten worse yesterday. A witness who rented supplies to Ms. Runge's film company testified that the amounts claimed as expenses in her applications for transferable film credits were "ridiculous," reports the Des Moines Register:

The expenses claimed by a Minnesota filmmaker and her partners to obtain more than $1.85 million of Iowa's once-generous tax credits for filmmaking were "extraordinarily high" and "ridiculous," an expert witness testified Thursday.

"People I know who have worked on much larger pictures than I have never received this much money," said Michael Handley, who has owned a camera and grip rental company in Minneapolis for 12 years.

The Register's Lee Rood reports that it may not be going well for the defense:

But several observers in the courtroom, who included the head of Iowa's Motion Picture Association, said Thursday's testimony may have been the most damning so far for a woman who professed to know nothing about expenses.

As bad as things look for the defense, the testimony is also making some other folks look pretty bad:

- The Iowa Film Office, which approved these "ridiculous" expenses;
- The Iowa Department of Economic Development, which oversees the film office;
- The Iowa Department of Revenue, which oversaw the credits,
- Governor Culver, who signed the film credit into law, and who appointed all of the folks who oversaw the credits, and
- The 140 or so legislators who voted this ridiculous credit into law.

The only people in state government who didn't embarass themselves in the film program: Rep. Bruce Hunter and Sens. Herman Quirmbach and David Hartsuch, the only three legislators, out of 150, who voted "no" when the program was enacted.

The complete list of media outlets that opposed the legislation:

.

With at least one exception.

Related: Smartmoney.com: Lights, Camera, Tax Scandal: Iowa Trial Begins

Tags: ......

Link       Bookmark: del.icio.usDiggreddit

The Constitution has its uses, but sometimes you really need a receipt

February 11, 2011

A California taxpayer faced an IRS exam with a strategy that was as unorthodox as it was unwise. Tax Court Judge Vasquez explains:

Petitioner timely filed Forms 1040, U.S. Individual Income Tax Return, for 2006 and 2007, and attached Schedules C on which he reported gross income of $336,475 and $334,860, respectively, and business expenses of $252,013 and $253,490, respectively.

Respondent audited petitioner's 2006 and 2007 returns and requested that petitioner substantiate all of his Schedule C business expenses. Petitioner refused to substantiate any of his claimed business expenses, arguing that the substantiation requirement violates his Fifth Amendment rights under the U.S. Constitution. Respondent then issued petitioner a notice of deficiency disallowing petitioner's deductions for business expenses claimed on his Schedules C.

There are some obvious drawbacks to using your right to avoid incriminating yourself to document your Schedule C expenses. Not only is it useless -- they really want to see receipts, cancelled checks, and the like -- it pretty much dares the IRS to assign a criminal investigator to your case.

The Tax Court opinion doesn't say whether the IRS took up the dare, but it does make clear that the Constitution doesn't serve as expense documentation:

At trial the Court warned petitioner that his Fifth Amendment claim would not excuse him from his burden to substantiate his claimed business expenses and offered petitioner an additional opportunity to introduce evidence to satisfy his burden. However, petitioner continued to assert his Fifth Amendment privilege and offered no further evidence to substantiate his claimed business expenses. Accordingly, we sustain respondent's disallowance of petitioner's deductions for business expenses claimed on his Schedules C for 2006 and 2007.

Possible explanations of the taxpayer's behavior that come to mind:

1. There really is no documentation, and the expenses were made up.

2. There were some real doozies in the expense list.

Any other ideas, dear readers?

Cite: Raeber, T.C. Memo 2011-39

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Sometimes those who can't do, really do teach

February 11, 2011

If you are a law professor, you think you would figure out how to file a return. Not necessarily. The National Law Journal reports:

A Minnesota jury has found a Hamline University School of Law professor guilty of four misdemeanor counts of failing to file state tax returns.

Prosecutors alleged in their criminal complaint that Robin Kimberly Magee told investigators she didn't understand tax law — a claim reiterated during court testimony, according to a report from The St. Paul Pioneer Press. However, Magee's Hamline biography says that she practiced both tax law and criminal before teaching at the law school. ...

Professor Magee beat the rap on more serious felony charges. Still, it gives anybody borrowing money to pay the $28,000+ Hamline Law School tuition reason to ponder what they're getting for their money.

Via the TaxProf.

Link: Prior Tax Update coverage.

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

And where do you think you're getting the money?

February 11, 2011

If you buy a business, you need to get the cash from somewhere. Steve Sink looks at Financing the Deal at IowaBiz.com, the blog for entrepreneurs sponsored by the the Des Moines Business Record. Good stuff there all the time.

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Valentine's Day Cavalcade

February 11, 2011

The new Cavalcade of Risk is up at the Disease Management Blog!

20110211-1.png

It's still chilly out, so curl up with your deer one and the premier roundup of insurance and risk-management blog posts. Don't miss Insureblogger Hank Stern's discussion of the long-term care component of Obamacare.

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

Filmmaker learns that e-mail lingers

February 10, 2011

If Lee Rood's report in the Des Moines Register means anything, film scandal defendant Wendy Wiener Runge had a bad day yesterday. The prosecution introduced an email she sent to one of her partners in the film "The Scientist." The Register reports:

"Hey baby," begins the communication from Polynation Pictures chief Wendy Weiner Runge in the message to partner Matthias Saunders.

...

"I need a final Maximus ... invoice TOMORROW MORNING for $2.3 million in an odd, round number," Runge wrote. "Add it all up ... and make it look pretty."

This was after filming had ended. The prosecution contends the invoice was full of imaginary and inflated expenses used to get more transferable film credits.

Time constraints today prevent me from spending more time on this (if I had the time, I'd be attending the trial), but I'll note that the state film office didn't come out well, according to the report:

Over time, other e-mails showed, the group received permission from fired Iowa Film Officer manager Tom Wheeler to continue increasing its budget using estimated expenses and "in-kind" services that prosecutors contend didn't exist or were without cost.

Invoices were submitted from companies run by partners in the film.

Mr. Wheeler's attorney has made a motion to dismiss felony charges against him on the grounds of prosecution misconduct.

Related: Film trial opening arguments: the state approved those expensive cigarette butts

Ms. Runge's trial continues today.

UPDATE: This is interesting, but perhaps unwise: the defendant is blogging her own trial.

Complete Tax Update film credit coverage

Tags: ......

Link       Bookmark: del.icio.usDiggreddit

Tax Court: partnership agreements matter; Kansas LLP members owe self-employment tax

February 10, 2011

The Tax Court yesterday addressed two important tax planning issues:

- How much flexibility to partners have in allocating taxable income; and
- Are limited liability partners (and by extension LLC members) automatically "limited partners" for self-employment tax purposes.

One of the benefits of operating as a partnership is that the tax law gives you flexibility in allocating income. That contrasts with S corporations, which must allocate all items pro-rata by shareholdings. Multi-owner limited liability entities, like LLCs and LLPs, are normally taxed as partnerships. But partnership flexibility is limited under the tax law, as members of a Kansas law firm found out yesterday.

The law firm used a fancy structure where its three owners held LLP interests personally. They also set up an S corporation to own an LLP interest, and they set up an employee stock ownership plan to own the S corporation. When an ESOP owns an S corporation, the S corporation income is not currently taxed -- a huge tax break.

While the S corporation nominally held only 10% of the LLP, the attorneys filed tax returns allocating 87.5% of the LLP income to the S corporation -- making the law firm operations 87.5% tax-free.

The IRS challenged this, saying that the allocation failed to meet the tax law standards for allocations of partnership income. The partnership regulations have an elaborate standard for determining whether such allocations are valid; if the partnership agreement fails to meet the "Sec. 704(b)" standards, the income is to be allocated "in accordance with the partners interests in the partnership," whatever that means

The judge said that the law firm failed to produce a partnership agreement for the first year at issue, 2004, and that the 2005 agreement produced in court failed to support the allocations. The court looked at four items in determining the lawyers' "interests in the partnership": Capital contributions, interests in profits and losses, interests in cash flow and distributions, and liquidation rights. The judge found that the three attorneys held 1/3 capital interests and 30% profits interests based on the documents available; he reallocated the income accordingly

Self-employment tax

The issue of LLP, LLCs and self-employment tax has been uncertain for years. Back before LLCs and LLPs were invented, the tax law was written to treat general partners as subject to self-employment tax and limited partners as exempt. If limited partners were active in the business, they could lose their protection from partnership liabilities, so that operated as a check against abuse.

LLCs and LLPs muddied this issue. Their members can be active in the business without losing their personal immunity from partnership debts. The IRS tried to regulate this issue, but it became a political football and final regulations were never issued. But that didn't prevent the tax law from finding that the lawyers were subject to self-employment tax on their income, including the income reallocated away from the ESOP:

Aside from a nominal amount of income arising from recognition of certain pass-through income from RCGW, all of the law firm's revenues were derived from legal services performed by petitioner and Messrs. Campbell, and Weaver in their capacities as partners. Petitioner and Messrs. Campbell, and Weaver each contributed a nominal amount ($110) for their respective partnership units. Thus it is clear that the partners' distributive shares of the law firm's income did not arise as a return on the partners' investment and were not "earnings which are basically of an investment nature." Instead, the attorney partners' distributive shares arose from legal services they performed on behalf of the law firm.

To conclude, we hold that the respective distributive shares of petitioner and Messrs. Campbell, and Weaver arising from the legal services they performed in their capacity as partners in the law firm are subject to self-employment taxes for the 2004 and 2005 tax years.

This conclusion is unsurprising. I've always assumed this result in the case of a professional LLP, especially one with only one class of interest. This helps explain why S corporations are popular with professional firms -- if they pay a reasonable salary, they can usually get at least some of their income free of self-employment and FICA taxes.

The case leaves unanswered some interesting issues relating to the S corporation ESOP. There are severe taxes that can apply to closely-held S corporation ESOPs, as well as strict drafting and operational compliance rules that must be met. The case doesn't address these issues, but anybody who uses an S corporation ESOP must watch them carefully.

Cite: RENKEMEYER, CAMPBELL & WEAVER, LLP, 136 T.C. No. 7.

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Yes, state taxes do matter

February 10, 2011

The Iowa Fiscal Partnership, the big-government think tank joint venture of David Osterberg's Iowa Policy Project and the Child and Family Policy Family Center, has a new Peter Fisher report saying Iowa's business taxes are just hunky-dory.

It concludes:

Business tax breaks are an expensive and inefficient way to attempt to stimulate a state economy. Because of the small effect of tax breaks on business costs, and the much larger importance of other production costs and location considerations, tax breaks will have little if any positive effect on private sector employment.

I would agree with that conclusion if "business tax breaks" meant special interest "incentives" like the Iowa Film Credit program or the "green jobs" tax rebates proposed yesterday by Democrats in the Iowa legislature. Where the Fisher report goes off the rails is the way it treats reductions in Iowa's highest-in-the-nation corporation tax rate as just another "tax break."

Details matter, and marginal rates matter more than most. Marginal rates are the ones that affect the start-up, the new business that is getting off the ground and can't afford expensive tax help or fancy lobbyists to qualify it for tax credit pork. It's not coincidental that Iowa has a poor record at creating and sustaining start-ups. Growing economies grow from the ground, not by stealing businesses from neighboring states. With a 12% rate kicking in at only $250,000 of taxable income -- and 8% at only $25,000 -- Iowa is not a good place for a struggling corporation.

If rates don't matter, why doesn't Peter Fisher just propose a 100% rate? They obviously do matter, and the only question is how much. If they matter at all, it's not good to have the highest one.

Yes, get rid of "tax breaks" directed at politically-favored industries and companies. But use the savings to lower the tax rates for everyone. Let the little guy benefit from a simple and inexpensive to comply with tax system. Stop taxing businesses that are already here to lure and subsidize their competitors. Impossible? I say not. Keep reading to see how we can have both low rates and a simple system that doesn't favor the powerful and well-connected.

Other coverage: Think tank report says Iowa businesses taxed lightly

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Film trial opening arguments: the state approved those expensive cigarette butts

February 09, 2011

Whatever we did, the state said it was O.K.

That appears to be the defense strategy in the first criminal trial involving Iowa's disgraced film tax credit program. Where the prosecution contends that the defendants claimed inflated or imaginary expenses to claim more tax credits that they could sell, defendant Wendy Weiner Runge's attorney says that everything had been cleared by the state or by professional advisors. The Des Moines Register reports:

Matthew Whitaker, Runge's attorney, said Runge ran those decisions by Wheeler, as well as her lawyers and accountants. The state Department of Revenue reviewed expenses, he said.

No one in state government ever said expenses were too high, he said.

"Where was the state of Iowa's knowledge when 'The Scientist' was being made?" Whitaker asked jurors. "It was in the Iowa Film Office under the direction of Tom Wheeler."

The prosecutor focused on the allegedly inflated costs:

Runge, he said, claimed rental of the push broom cost $225. That and many other expenses - ladders, road pylons, a can of cigarette butts - were greatly inflated, he said.

Today Ms. Runge's former partners, who have worked out plea deals, will take the stand.

Related:

First Iowa film credit scandal trial opens today

Another guilty plea in Iowa film fiasco

Complete Tax Update film credit coverage

Tags: ......

Link       Bookmark: del.icio.usDiggreddit

New offshore amnesty shoots fewer jaywalkers

February 09, 2011

The IRS has announced a new program for taxpayers with offshore financial accounts. U.S. citizens are required to file Form TD F 90-22.1 -- the "FBAR" filing -- if they have "an interest" in offshore financial accounts exceeding $10,000. The civil penalties for failure to file are severe -- up to 50% of the account balance, per year. Of course, it can get much worse if the offshore accounts are used to evade taxes.

The new program allows taxpayers to come in from the cold by August 31, 2011 by paying a penalty of 25% of the highest account balance and filing tax returns showing all of the offshore income.

One of the worst aspects of the offshore account system is that it clobbers taxpayers for the foot-fault of failing to file the FBAR form, even if they pay all of their taxes. While the new amnesty doesn't repeal this "shoot the jaywalkers" effect, it offers a reduced penalty of 12.5% of the highest account balance.

The IRS is offering an even lower 5% penalty in some instances. These are instances the IRS should be embarrassed to assert any penalty at all: One condition to qualify for the 5% penalty: the taxpayer "did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account)". So you inherit account, don't even know about it, fail to file the FBAR form on time -- and you still have to pay a 5% penalty. Well, it beats 50% per year, anyway.

Because this program will often require amended returns, taxpayers with offshore accounts should get moving now; if you wait until the last minute in August, you might not be able to get in under the wire.

There are still huge problems with a system that imposes horrific financial penalties on a procedural foot-fault even when there is no tax evasion and trivial tax losses. Congress should revamp the system with higher, inflation adjusted reporting exemptions to enable U.S. citizens abroad to not get hammered for violating rules they have never heard of. You should be able to get the tax cheats without shooting the jaywalkers.

More coverage from Janet Novack, Jack Townsend and Phil Hodgen.

IRS Disclosure initiative links:

IRS 2011 Offshore Voluntary Disclosure Initiative home page

Disclosure initiative FAQ

How to Make a Voluntary Disclosure

The TaxProf has a roundup, and Going Concern has more.

Tags: ......

Link       Bookmark: del.icio.usDiggreddit

Stick it to the evil oil companies! Oh, wait, we're already doing that.

February 09, 2011

Martin Sullivan at Tax.com:

Since the Gulf oil spill, hardly a week has passed when a journalist has not called and asked for background on all the tax breaks enjoyed by the oil industry. They are invariably surprised and miffed with my response: oil companies pay high taxes. They pay high foreign taxes in the countries where they extract oil. And long gone are the days when depletion allowances got them low domestic taxes.

How high? Effective rates of well over 40%. Follow the link for details.

Tags: ..

Link  • Comments (2)       Bookmark: del.icio.usDiggreddit

Tax Court: homebuyer credit doesn't work when you buy from relatives

February 08, 2011

The insane, futile and mercifully defunct refundable first-time homebuyer tax credit had one feature that frustrated subsidy seekers: the IRS said it wasn't available to those buying homes from relatives, even at full fair-market value.

It's not entirely clear that the law should work that way. The related party rule of 36(c)(1)(3) reads:

The term “purchase” means any acquisition, but only if—

(i) the property is not acquired from a person related to the person acquiring such property (or, if married, such individual’s spouse), and

(ii) the basis of the property in the hands of the person acquiring such property is not determined—

(I) in whole or in part by reference to the adjusted basis of such property in the hands of the person from whom acquired, or

(II) under section 1014 (a) (relating to property acquired from a decedent).

It's arguable that the highlighted "and" means that a transaction fails only if it is both purchased from a related party AND the basis is at least partially carried over from the seller (as in a gift). The IRS has always argued that all related party sales fail to qualify for the homebuyer credit, and a Tax Court judge yesterday agreed with IRS.

The judge lays out the facts:

Before September 2009 petitioner spent a number of years as a U.S. expatriate citizen living and working overseas for United Airlines. In the winter and fall of 2009 petitioner discussed with his parents the purchase of a home in Milwaukee, Wisconsin, that they had inherited from petitioner's cousin in 2008. As a youth petitioner had spent some time in this home.

Petitioner had never owned a home.

On September 9, 2009, petitioner purchased the home from his parents for $115,725. Petitioner made a cash payment of $99,000 and forgave $16,725 in debts that his parents owed him. Petitioner moved into the home and made it his principal residence.

On September 15, 2009, petitioner filed his 2008 individual Federal income tax return, claiming an $8,000 FTHBC under section 36 relating to petitioner's purchase of the home. Under section 36(g), a qualified taxpayer purchasing a home in 2009 generally was allowed to claim the FTHBC for either 2008 or 2009.

The IRS rejected the credit. Judge Swift outlines his view of things:

Generally, section 36(a) and (b) allows a credit of up to $8,000 to first-time homebuyers of a principal residence in the United States. As stated, for qualified homes purchased in 2009, the FTHBC could be claimed on either the taxpayer's 2008 or 2009 Federal income tax return. Sec. 36(g).

However, under section 36(c)(3) the FTHBC is not available to a taxpayer who purchases a home from a related person, and under section 36(c)(5) related persons include direct ancestors such as parents. See also sec. 267(b) and (c)(4).

The taxpayer didn't argue that his purchase had to meet both of the Sec. 36(c)(3) conditions to fail to qualify:

Petitioner emphasizes that the particular Form 5405 that his accountant apparently obtained from the Internet and used in the preparation of petitioner's 2008 Federal income tax return and Publication 4819 do not expressly explain that to receive the FTHBC a taxpayer must not have purchased a home from parents or family members.

In addition, petitioner complains about misleading or inadequate explanations in IRS form letters he received, lack of IRS good faith in addressing his administrative appeal and his appeal to the Taxpayer Advocate Service, and repeated IRS mailings to him addressed to an incorrect address.

Respondent argues that the statutory provisions control and that section 36(c) and related provisions adequately explain the "no-purchase-from-family" limitation on the FTHBC and should have been noted by petitioner and his accountant.

We agree with respondent. The provisions of section 36(c) are clear.

The taxpayer didn't have a lawyer, and maybe an argument on the statute would have worked, but nothing in this opinion gives related party homebuyers much hope for their $8,000 check from Uncle Sugar.

Cite: Nievinski, T.C. Summ. Op. 2011-10

Tags: ...

Link  • Comments (3)       Bookmark: del.icio.usDiggreddit

Note to non-filers: bragging about not paying taxes on the web may attract IRS attention

February 08, 2011

Russ Fox reports:

Today, we learn about the Institute for Unlearning.

Yes, that’s a real website and its proprietor, one Patrick Mooney, espouses that, “[A] private sector worker’s earnings are not legally subject to the federal tax on income. They never have been, and as long as we still have a Constitution, they never will be.” Mr. Mooney was highly confident in his beliefs, so he filed a 2005 tax return with all zeroes, and claimed a refund of $2,647.48, the amount he had withheld in federal tax during the year.

The Tax Court apparently went to a source other than Mr. Mooney's website for its tax law. Russ has the details of the unhappy consequences for Mr. Mooney.

Cite: Mooney, TC Memo 2011-35

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Another 'unregulated' preparer sent to prison

February 08, 2011

From the Memphis Commercial Appeal:

A Memphis woman who admitted to preparing bogus income tax returns has been sentenced to 22 months in federal prison.

Cassandra Jordan, 46, also must make $75,000 in restitution to the Internal Revenue Service, according to the order by U.S. Dist. Court Judge Jon McCalla.

Authorities said Jordan prepared false tax returns for others for the years 2005 and 2006 and made false claims for tax refunds ranging from $3,716 to $6,620.

So explain again how having a PTIN and taking some Trivial Pursuit "competency test" keeps somebody from concocting deductions? An IRS license to do returns will just make sure that the cheaters have a government seal of approval.

Tags: ..

Link  • Comments (4)       Bookmark: del.icio.usDiggreddit

First Iowa film credit scandal trial opens today

February 07, 2011

Minnesota filmmaker Wendy Weiner Runge goes on trial today on charges of looting the Iowa film tax credit program. She's in for the fight of her life, as three of her partners have already worked out deals with the prosecutors and will presumably take the stand against her. The Des Moines Register reports:

One of those partners, Matthias Saunders, has already pleaded guilty to first-degree theft.Prosecutors allege he greatly inflated expenses for rental equipment used on the film, such as two brooms that cost $225, six road cones for another $1,350 and stepladders for $900 to $1,350.

Runge, executive producer of the film, also sought and won millions in tax credits for expenses provided "in-kind" - or at no cost - by Saunders' company, Maximus Productions.

But Runge has contended that those in-kind services - totaling $3.7 million - were approved by several people in state government, not just fired film chief Tom Wheeler.

I expect prosecutors to use the State Auditor's report on the scandal as their road map. Ms. Runge is likely to try to turn the tables by making the case about the state's shameful mismanagement of the program, also amply documented in the auditor's report.

The trial is being held at Drake University, which annually hosts a trial for the benefit of their law school students. It seems like an appropriate show-business setting for a show-business trial. Among those likely to follow the drama closely are two other filmmakers facing felony charges arising out of their use of the program, Bruce Heppner-Elgin and Dennis Brouse. A Quad Cities "film credit broker" also faces charges.

The "half-price filmmaking" program briefly made Iowa a favorite destination for Hollywood. Iowa's media watchdogs were bought off by celebrity sightings and hors d'oeuvres until the program collapsed when reports emerged of taxpayer dollars buying Mercedes cars and feather beds for producers and iPods for their relatives. So far, interestingly, no criminal charges have come out of the Benz and iPod purchases.

Related:

The Iowa 'let's pretend' film credit

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

Complete Tax Update film credit coverage

Tags: ...........

Link       Bookmark: del.icio.usDiggreddit

Long sentences for offshore tax fraudsters

February 07, 2011

Two Florida hoteliers who were convicted of hiding cash from the IRS in offshore accounts received 10-year sentences last week for their trouble. That just might make the new IRS "amnesty" seem like a better to some folks. Defense attorney Jack Townsend has more at the Federal Tax Crimes Blog, including some good discussion in the comments:

...with acceptance of responsibility and contrition (real contrition if they could muster it up), they probably would have gotten a sentence much lower than 8 years. They paid a lot to go to trial.

Let's hope they can enforce the law against tax cheats without shooting the jaywalkers.

UPDATE: More from TaxGrrrl.

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

The two-year window for great big gifts

February 07, 2011

Roger McEowen on the planning implications of the so-far temporary $5 million lifetime gifting exemption:

Except for very high wealth persons, there really isn’t much transfer tax-driven incentive to make gifts in 2011 or 2012.

But:

The Act provides a tremendous opportunity for individuals with high net-worth to accomplish some significant estate planning if death would occur in 2011 or 2012. Such persons can utilize a $5 million exemption ($10 million over both spouses (if applicable) with portability of any unused exemption if a surviving spouse mains. Grantor retained annuity trusts remain available as does valuation discounting. The $5 million exemption applies to both taxable gifts made during life or can be reserved to offset estate tax at death. But, the law is not permanent. So, it’s just a two-year window of opportunity to accomplish some significant transfers at little-to no tax cost.

It always helps to have an extra $5 million that you can afford to give away.

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Economic Substance enhanced penalties -- gone?

February 07, 2011

When U.S. District Judge Vinson overturned Obamacare, he overturned the whole thing. If that holds up, that would undo the Obamacare tax provisions too. In a Tax Notes piece linked by the TaxProf, James M. Peaslee explains how that works with the new "economic substance" penalties:

One of the revenue raisers in the Act is § 7701(o), the economic substance codification measure, and its associated penalties. If the Supreme Court ultimately agrees with Judge Vinson's reasoning with respect to both the commerce clause issue and severability (obviously far from a foregone conclusion), then ESC, or at least this version of it, would fall away.

As would the refundable adoption credit and the new small employer health insurance credit.

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Downtown Eagle

February 04, 2011

20110204-2.png

A bald eagle soars outside the South window of Tax Update World Headquarters this afternoon. I hope he has a good weekend... and that you do too!

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Does 100% bonus depreciation set up car buyers for a second-year surprise?

February 04, 2011

The 100% bonus depreciation enacted for new assets purchased after September 8 of last year is a sweet deal. You can fully deduct the cost of qualifying assets in they year they go into service, regardless of how many you buy or whether it generates a loss.

It never was a completely sweet deal for buyers of business autos. Section 280F, the "luxury car" rule, limits depreciation. For cars put in service in 2010, the first year deduction is limited to $11,060 - $3,060 plus an extra $8,000 for bonus depreciation. The limit for year two would normally be $4,900 for the second year, $2,950 in year 3, and $1,775 annually afterward until the car is fully depreciated.

But for "luxury autos" purchased after September 8, 2010, the depreciation allowed for years 2 through 6 might be... zero.

20100216-3.jpg
Flickr image by David McKelvey under Creative Commons license. At $15,353, the Yaris is subject to the Sec. 280F depreciation limits.


The Sec. 280F limits were written to restrict the depreciation otherwise allowable for automobiles under the normal Sec. 168 depreciation rules. One argument holds that when 100% bonus depreciation applies, the depreciation is only allowable in Year 1, unless you elect out of bonus depreciation for all assets in that class. That means the depreciation for the remaining five years of the auto period is the lesser of the Sec. 280F limits or the amounts that would otherwise apply under Sec. 168 -- in the case of bonus depreciation, that means zero. Then in year seven depreciation would again be allowed under a Sec. 280F catch-up rule.

Is this what Congress had in mind? Certainly not. But the IRS is seriously considering embracing this interpretation; I spent a half hour yesterday listening to an IRS technician explain why yesterday. While the technician agreed that the result is unintended and perverse, s/he thinks the IRS may be stuck with it.

I think that an IRS that can invent a massive preparer regulation regime with the flimsiest justification and no specific legislative mandate should be able to come up with a way to depreciate cars that isn't insane, but that's just me. We may learn how the IRS will decide when they issue the annual inflation update for the Sec. 280F limits; that was about February 15 last year.

Is there any way to deal with this on 2010 returns?

Even if the no-second-year-depreciation rule applies, you would probably not want to elect out of bonus depreciation. You would have to make that election to all "five year property," including passenger autos. You would lose $8,000 of your first-year depreciation, which you wouldn't make up until the third subsequent year. If you would sell your car by then anyway, you would gain nothing.

It's not clear to me whether you could take a Sec. 179 deduction for the $11,060 limit and elect out of bonus depreciation for the rest. If you could, you would get the full Sec. 280F depreciation for years 2 through 6, but that only works for "qualified" property under the bonus depreciation rules; I'm not sure you have "qualified" property under the bonus depreciation rules if you elect out of bonus depreciation.

The IRS could solve this by ruling that Sec. 280F operates in conjunction with Sec. 168 to allow depreciation in years 2-6, but they might not be so inclined. It might take a technical correction to fix this, and we all know how much we can count on Congress to clean up its messes.

If you think this potential IRS interpretation is silly, you should contact IRS people you know, and your local Congresscritters, to share your views.

Tags: .....

Link       Bookmark: del.icio.usDiggreddit

Preparer regulation will keep this from happening! Oh, wait...

February 04, 2011

The current IRS preparer regulation power-grab was preceded by preparer regulation in California and Oregon. If you think preparer regulation will make bad preparers go away, think again. A sad story of a couple who went to a California preparer who generated fabulous refunds:

The woman, who we will call Sofia, says she had trusted Nationwide Tax Solutions with her finances since 2007. The first refund seemed normal but in 2008 her refund was nearly $7,000 -- much more than ever before.

Big refund! Must be a very smart tax pro! No?

What they didn't know is that all that money did not belong to them and in September 2010 Sofia got a shocking letter from the IRS.

"It said you have wrong information on your 2008 tax returns and you owe us $5,000," said Sofia.

Naturally "Sofia" spent her windfall, and now she has had to raid the family 401(k) to try to pay off the IRS. She has learned what untold thousands will learn nationwide: when the government regulates preparers, it will just give scamming preparers a government seal of approval to help them lure their victims.

Russ Fox has more.

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Shocked. Shocked!

February 04, 2011

20110204-1.jpgI'm shocked that non-compliance and fraud is going on here in the electric car tax credit casino! But the Treasury Inspector General for Tax Administration says it is so:

Approximately $33 million in credits for plug-in electric and alternative-fueled vehicles credits were erroneously claimed by at least 12,920 taxpayers through July 24, 2010. ... That means about 20% of the $163.9 million in credits claimed by taxpayers from January 1, 2010 to July 24, 2010 for plug-in electric and alternative motor vehicle credits were claimed in error. In the course of its review, TIGTA also found that 1,719 of the 12,920 individuals also erroneously reduced the amount of Alternative Minimum Tax they owed by almost $5.3 million.

According to TIGTA’s review, approximately 29 prisoners also received $49,926 in vehicle credits even though they were in prison all of Calendar Year 2009.

This is a predictable result of using the income tax as the multi-tool of public policy. It's hard enough to determine income in a simple tax system. When you also expect the IRS to administer industrial research policy, housing policy, welfare policy, alternate fuel policy, energy policy, the health care system, etc., it's not going to do any of these things very well.

Via the TaxProf. Janet Novack has more.

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Iowa individual rate cut advances to House floor

February 03, 2011

In a surprising bi-partisan vote, a bill to reduce Iowa's individual tax rates by 20% across-the-board passed the Iowa House Ways and Means Committee yesterday. The bill passed out of the committee 19-5, with four Democrats joining the Republican majority in sending HF 4 to the House floor.

The progress of the bill is surprising to me, considering the state's fiscal situation and that the bill is not part of the Governor's budget. With bipartisan support in the House, it might not be as doomed in the Democratic-controlled Senate as I had thought.

Meanwhile, the legislature is pondering whether and how to update Iowa's tax rules to conform with recent federal tax law changes. Iowa has left many federal computation changes out of its tax law in recent years, including increases in depreciation and Section 179 deductions, the $100,000 IRA donation rule, and teacher and tuition deductions. Jennifer Jacobs reports in the Des Moines Register:

For much of the past two decades, the Legislature approved its update to the tax code by the end of January, said Sen. Randy Feenstra, R-Hull. But no update bill was passed in the last two years because the tax breaks would have put a deeper hole in recession-pinched state revenues, Democratic lawmakers said.

This is shaping up to be an interesting tax legislation session. Too bad they don't seem ready to embrace a solution that allows rate cuts, coupling with federal rules, and great simplification of Iowa's tax rules without impairing state revenues.

Tags: .......

Link       Bookmark: del.icio.usDiggreddit

Senate votes to repeal health care bill's 1099 expansion

February 03, 2011

The Senate yesterday voted to repeal the expansion of information reporting contained in last year's Obamacare legislation. It's looking more and more likely that this widely-hated expansion of information reporting will never happen.

Kay Bell and TaxGrrrl have more. Meanwhile, Linda Beale explains what's really going on:

I'm more and more convinced that it is not the deficit that the Republicans hollering for "entitlement reform" care about--it is that they just simply want to destroy all of the things that the New Deal did to provide a safety net for ordinary people, while making sure that they reinstate brute-force capitalism like existed in the 1920s, back when Teddy Roosevelt made his famous statement about the corporate titans and malefactors of great wealth.

Yes, the repeal of the 1099 expansion passed in 2010 is just a slippery step away from repealing Social Security and reintroducing the bonded servitude that Teddy Roosevelt battled heroically in the 1920s, after his death in 1919.

Tags: .......

Link       Bookmark: del.icio.usDiggreddit

IRS adjusts housing cost allowances for overseas taxpayers

February 03, 2011

The IRS has adjusted the housing exclusion numbers for overseas residents (Notice 2011-8). Andrew Mitchel explains.

Tags: .

Link       Bookmark: del.icio.usDiggreddit

Does this mean we can ignore the preparer regulations until we sign a 'memorandum of understanding' with IRS?

February 03, 2011

From the TaxProf:

Following up on last month's post, IRS Refuses to Take Steps to Cut Down on Prisoner Tax Fraud: the IRS and Bureau of Prisons yesterday announced that they have signed a memorandum of understanding to enforce a 2008 law allowing the IRS to share prisoner tax return information with the Bureau of Prisons to eliminate prisoner tax fraud.

It's nice of them to take time away from their preparer regulation power grab to actually comply with the law.

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Me and the Missouri Taxguy

February 03, 2011

Bruce the Missouri Taxguy from Grandview, Missouri has posted an interview with me. Plus a bonus picture of me visiting tax-haven Monaco, wishing I had zillions to stash there - or anywhere.

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Why you don't want to bring cats to work

February 02, 2011

There is surprisingly little tax law on IT-consulting C corporations combined with a cat-raising division. The Tax Court this week stepped into this void in a case right out of my hometown of West Des Moines.

A taxpayer performed IT services out of her C corporation, DKD, on contract. DKD was based in her home. It was a busy place, as the home also served as the "cattery" for DKD's "cattery activity" of raising "Norwegian Forest cats."

20110202-2
Flickr image of Norwegian Forest Cat courtesy don.banane under Creative Commons license.

The taxpayer had the bad fortune of being a client of a Clive, Iowa tax prep firm that the IRS is trying to shut down, ensuring that the IRS would take a close look at her tax filings. The IRS noted that the the corporation's cattery revenues were from zero to under $3,000 over a period of several years, but the cattery expenses ranged from $55,000 to $75,000. As a result, the IRS jumped to the conclusion that the activity was not conducted with a profit motive. The Sec. 183 "hobby loss" rules disallow losses from activities not conducted for profit. UPDATE: A commenter correctly points out that the loss was disallowed not under Sec. 183, which applies only to individuals and S corporations, but under Sec. 162, which only allows "ordinary and necessary" expenses "in carrying on any trade or business." If there is no profit motive, there is no "trade or business," and therefore no deduction under Sec. 162.

The Tax Court sided with the IRS, saying that the only evidence of a profit motive was the testimony of the taxpayer and her domestic partner, "on which we are unwilling to rely." They said the cat expenses were an expensive hobby of the taxpayer, DKD's sole shareholder, and were therefore non-deductible. The court also treated some of the expenses paid by the corporation as disguised dividends to the shareholder.

This case points out that the courts may be unwilling to accept your word that you are really, truly in it for profit when the numbers seem to show that profit will never happen.

The case also should give pause to practitioners. The preparer here was under investigation by the IRS anyway, but preparing returns with these large "hobby" losses probably didn't score the preparer any points with the preparer oversight folks. At some point, preparers may have to tell clients that they don't believe the cat ranch (or multi-level marketing deal, or horse farm, etc.) will really turn a profit someday.

Cite: DKD Enterprises, T.C. Memo 2011-29

Tags: .....

Link  • Comments (2)       Bookmark: del.icio.usDiggreddit

Thief workplace dilemmas

February 02, 2011

Going Concern addresses workplace issues common to bookkeeper thieves everywhere:

How Long Should an Accountant Wait to Start an Embezzlement Scheme After Landing a New Job?

Sadly, embezzlers often skip from job to job because employers don't want to go through the hassle of prosecuting them once the fraud is discovered. That's another reason to verify that your employment taxes are being paid on time.

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

Mortgage deduction traps?

February 02, 2011

As Janet Novack explains, Not All Home Mortgage Interest Is Tax Deductible. For example, acquisition debt up to $1 million generates deductible interest, but if you pay it down and then refinance without doing remodeling, only $100,000 of the refinance qualifies -- and none for alternative minimum tax.

Read the whole thing for a nice primer on home interest deductions.

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Snow day!

February 02, 2011

We just got the backwash of Snowmageddon, but it was enough to close schools today here in Central Iowa.

20110202-1

Even so, I'm taking advantage by going in to the office late. I'll get there soon enough.

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

Small-business health credit, refundable adoption credit -- gone? (Bumped)

February 01, 2011

(Note: I posted this in the evening 1/31, but I will keep this on top of the posts this morning as a place to track any developments as the day unfolds. Scroll to the bottom of the post for updates. Newer posts today will be below this one.)

When Judge Vinson overturned the Obama health care plan today, he also may have thrown a wrench into the current tax season. Overturning the entire plan -- apparently effective right now -- would also overturn the small business health care credit and the refundable adoption credit enacted as part of the legislation. Both credits were enacted to be retroactively effective for all of 2010. The ruling apparently also invalidates the 10% tanning tax that took effect July 1 of last year.

The current tax season is already delayed by the huge Bush-era rate extension passed at the end of last year. This would further delay the business return season while retroactively changing some tax returns already filed.

The ruling also threatens the other tax provisions in the bill, including the new limits to flex plans and HSAs, the requirements that adults up to 26 be included in family health coverage, and the increased 1099 reporting requirement set to take effect next year. It undoes the .9% wage surtax and the 2.9% tax on "unearned" income set to take effect in 2013.

Hat-tip to Roger McEowen, who will have more on this issue at the ISU Center for Agricultural Law and Taxation site tomorrow. Will these effects be stayed until the inevitable Supreme Court decision settling the constitutionality of the bill? If Judge Vinson's ruling stands up, will penalties be waived for underpayments resulting from the loss of the health care and adoption tax credits? Interesting times...

UPDATE: More from Russ Fox.

UPDATE II: Roger McEowen's analysis is up.

Enhanced by Zemanta

Tags: ....

Link  • TrackBacks (1)       Bookmark: del.icio.usDiggreddit

K.C. Practitioner's appeal goes 'poof'

February 01, 2011

A Missouri tax practitioner and former Grant Thornton CPA/attorney allegedly known as "Dr. Poof" -- a reference to "his purported ability to make customers’ tax liabilities disappear" -- has lost an appeal of an injunction against the promotion of certain tax planning arrangements.

Mr. Davison was enjoined last May from promoting deals involving ESOP-owned S corporations and Roth IRA-owned corporations. The district court order said:

Davison orchestrated these arrangements, including the creation of these companies. Davison knew at the time the companies were created and thereafter that the companies were shams created for the purpose of illegal tax avoidance. Davison did not intend for these companies to be operated in a legitimate fashion and knew that they were not intended by his clients to be operated in a legitimate fashion under the tax code. Nevertheless, Davison has deliberately promoted these arrangements and repeatedly advised his clients that each arrangement is a legal way to reduce tax liability.

The Eighth Circuit Court of Appeals upheld the injunction against involvement in the alleged illegal tax schemes yesterday:

Davison appeals, arguing that the government failed to prove it was entitled to an injunction, and that the injunction requiring Davison to disclose the names of his tax clients to the IRS requires him to breach fiduciary duties to his clients and violates both his First Amendment right of free speech and his clients' privacy rights.

After careful review, we conclude that the district court did not abuse its discretion in issuing the injunction. The government presented substantial evidence supporting the district court's findings that Davison knowingly created and promoted numerous tax evasion schemes. The court carefully considered and weighed the relevant factors that inform a district court's decision whether to grant a permanent injunction.

The case is related to one involving another former Grant Thornton attorney in Missouri.

The moral: Taxes don't just "go poof."

Prior Coverage: Fool's Gold and Chicken Shelter

Cite: Davison, CA-8, No. 10-2327

Link       Bookmark: del.icio.usDiggreddit

Go it, Husband! Go it, Bear!

February 01, 2011

Storefront tax prep giants are fighting it out on the airwaves and in court, reports TaxGrrrl.

I have no insights as to the merits of the battle, as I haven't seen the ads that led to the lawsuit, and I have no preference for one contestant over the other. In fact, I feel like the wife in Abe Lincoln's story:

At Alton, Illinois, during the last of the “great debates” with Douglas, Lincoln told a story that illustrated how he felt about a political feud that was currently raging between Democratic senator Douglas and the head of the Democratic Party. He said he felt like the old woman that, not knowing who was going to win a brawl between her husband and a bear, decided to cheer for both of them: "Go it husband, go it bear!"

Go it, Block! Go it, Jackson!

Going Concern has more.

UPDATE: Kay Bell also has coverage.

Link       Bookmark: del.icio.usDiggreddit

Wondering how the $13,000 annual gift tax exclusion works?

February 01, 2011

From The Tax Blog at Smartmoney.com:

Unlike the $5 million exemption, which applies to total gifts made during a person’s life, every taxpayer can take advantage of the $13,000 exclusion, every year. A taxpayer may make as many gifts as he or she desires as long as no one person gets more than $13,000 of value in any one year.

Read the whole thing.

Tags: .

Link       Bookmark: del.icio.usDiggreddit

Trust, but verify

February 01, 2011

I discuss how important it is to make sure your payroll provider or payroll department is making your payroll tax deposits on time today at IowaBiz.com.

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Email: jkristan@rothcpa.com  •  Phone: (515) 244-0266
All content © Roth & Company, P.C.  •  Powered by Movable Type  •  Site by Sekimori Design