Former Film Office manager Tom Wheeler of Indianola was fired in September after questions were raised about how state tax credits to film and TV productions were being managed. Wheeler has been charged with non-felonious misconduct in office, a serious misdemeanor. If convicted, Wheeler faces a fine of up to $1875. In addition, he could be sentenced to up to a year in prison.

I'm sure that to Mr. Wheeler the charges are deadly serious, but if that's all they can come up with after a four-month investigation, it's pretty weak. They make no allegations that Mr. Wheeler benefited from the incontinent granting of film credits. It appears to be a charge of criminal ineptitude. If that's illegal, then the State Capitol, the Hoover Building and the Lucas State Office Building are dens of crime.

The Iowa State Capitol: a den of criminals?

Attorney General Tom Miller also announced more serious theft charges against two Minnesota filmmakers, accusing them of submitting inflated expenses to claim excessive film credits for a film called "The Scientist." These expenses include two $225 brooms and a $1,225 12-foot stepladder.

Documents in the case allege a newly-disclosed way the Film Office permitted the creative class to loot the state treasury:

Wheeler permitted filmmakers to allow owners of the filmmaking entity to be paid to provide "qualifying expenditure" services to the film project, provided those parties had tax IDs different from the tax ID of the filmmaking entity. This artifice, which was among those employed by the producers... allowed issuance of expenditure tax credits for payments to producers, directors and others who are expressly excluded in the Act's definition of "qualified expenditures."

So the State of Iowa subsidized the creation of tax ID numbers. That surely did great things for economic growth.

The documents also outline now-familiar practices of using strawmen LLCs to pretend that money spent out of state was really an Iowa expense, and using "in kind" (i.e., imaginary) expenses to obtain more credits.

The charges are interesting for what they leave out. In addition to not charging Mr. Wheeler with taking any improper personal benefit, the Attorney General has filed no charges relating to the infamous tax credits for a Land Rover and a Benz.

Mr. Wheeler denies any wrongdoing. From a criminal perspective, that could well be true. But from a policy and administrative viewpoint, Mr. Wheeler has plenty to answer for. So do his 147 accomplices in the legislature and his bosses in the Department of Economic Development and the Governor's Office.

Links:

Des Moines Register Coverage
AP Coverage
Tom Miller Press Release
Documents in the Wheeler Case
Documents in the Filmmaker Charges.

Related:

Tax Update Coverage of the Film Criminal Investigation

Let them eat canapes

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He told the story ... of the midlevel employee who had been with the IRS for some 30 years who became fascinated over time by what sort of creatures and things taxpayers listed as dependents. Clearly, many of these “dependents” were pets, made-up children and even objects. For many years, the IRS only asked taxpayers to put down a name for their dependents, so the employee suggested that tax forms also require that dependent social security numbers be listed. The IRS resisted until finally taking his advice in 1986, and in that first year, some seven million "children" and other "dependents" disappeared from the United States, resulting in increased federal tax collections of nearly $3 billion.

Levitt told this story to his father, "and he admitted that I had lost a brother and sister that fateful night."

This tragic story was repeated nationwide millions of times. Oh, thou bloody tax law!

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...from South Carolina comes the word that anyone who wants to overthrow the United States Government must register with the South Carolina Secretary of State for $5.

It's not clear whether Confederate notes are required as payment.

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Well, no. Unfortunately this press release from Brad Zaun, a state legislator who is running for Congress, isn't an unusual reaction:

Let's create jobs, not raise taxes

We should utilize the Tax Credit Review Panel’s recommendations to create common sense solutions – not use it as an opportunity to create a crisis and then propose to solve it by increasing taxes on hard working Iowans. This is not the time to be raising taxes – we should instead be working together to find common sense solutions that will create and retain private sector jobs.

A subsidy is a subsidy is a subsidy. Running it through the tax return doesn't transform it to a "tax cut." The only tax cuts worthy of the name are those that are broad-based and go to all similarly-situated taxpayers. When you give a tax break only to taxpayers who jump thorugh a bunch of hoops, it's a subsidy.

Worse, when you have subsidies for specific activities -- say, for ethanol, or windmills, or biodiesel, or "research" -- you take for granted that the State of Iowa has any clue about where taxpayers should invest. Fat chance of that. These subsidies inevitably go to those who can afford the necessary lobbyists and fixers.

If you really want to encourage growth, you need a tax plan that works for the rest of us -- something like the Quick and Dirty Iowa Tax Reform Plan.

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For no legitimate business purpose, Loeser's clients were advised to forward funds from their businesses to two corporations Loeser controlled. The corporations then rebated the funds to his clients. Loeser prepared the clients' books and business tax returns expensing and deducting the entire amounts that were paid to the corporations.

The IRS alleged Loeser violated Circular 230 by giving false or misleading information to the Department of Treasury and the IRS.

Jack Townsend, noting that the IRS suspended Mr. Loeser, a CPA, from IRS practice for 12 months, hints that the suspension would be a great result for the practitioner under the circumstances. Peter Pappas has more.

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Don’t put the preparer in the middle of a family fight. The same can be said about putting down another person or group.

There is no "licensed social worker" part of the CPA exam.

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A proposal to allow wealthy people to prepay estate taxes while they are still alive, in exchange for a lower tax rate, has caught the attention of Senate staff trying to craft a bipartisan, permanent compromise on the estate tax.

The estate tax prepayment idea is being pushed by Sen. Maria Cantwell (D., Wash.) as a possible compromise between senators who want a permanent, 35% estate tax rate and the position of President Barack Obama, who supports a 45% rate on inherited wealth. ...

The plan would allow wealthy people to place assets in a prepayment trust while they are still alive. Those assets would be subject to a 35% tax, which the estate owner would have five years to pay, according to a document describing the plan, obtained by Dow Jones Newswires. ... [T]he measure could be expected to have a net positive effect on revenue over the next 10 years to the extent that wealthy families begin to prepay taxes to take advantage of the lower rate.

Actually, the just-expired tax law already has a provision that pretty much does that. It's called the gift tax. The tax cost of gifting assets is lower than that of passing them on at death because the gift tax rate is imposed only on assets that reach the next generation; the estate tax is imposed on the whole estate, including the amount that has to go to the government to pay the tax. Sure, you have to give assets away to qualify for the gift tax, but that's just a detail.

In real life, relatively few people make taxable gifts, even when it means estate tax savings. It's unlikely that Senator Cantwell's deemed death provision would be much more popular.

Via The TaxProf.

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Teruya Brothers Ltd. used a qualified intermediary to hold funds on the $13 million sale of two properties to an unrelated party. They met the Section 1031 45-day and 180-day requirements for identifying and closing on the replacement property, but they acquired the replacement property from a corporation related to Teruya Brothers.

The Tax Court and the Ninth Circuit appellate panel agreed with the IRS that the use of the related party converted the transaction to a swap between the two related parties, followed by an immediate sale of the $13 million properties to the unrelated party. As the tax law says that a sale of a property acquired from a related party within two years of the exchange disqualifies the original swap, this made the original transaction taxable.

Teruya Brothers argues that this result is an unauthorized IRS rewrite of Section 1031. The odds are always against taxpayers seeking Supreme Court review. Unless and until the Supreme Court reverses this result, taxpayers are wise to not have their qualified intermediaries acquire replacement property from related parties.

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

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Although the position was permanent, petitioner intended it to be an interim position while he pursued other employment opportunities.

...

From August through December 2006 petitioner drove between Lake Mary and Delray Beach. Petitioner drove to Delray Beach at the beginning of the work week and stayed in a motel during the week. Petitioner returned to Lake Mary on the weekends so as not to incur additional motel costs for days he was not working. The 5 days a week petitioner was in Delray Beach he stayed at a motel. In mid-December 2006 petitioner signed a 1-year lease for an apartment in Delray Beach.

In September 2007 petitioner left his position with Meisner for a position with M.J. Electrical based out of Iron Mountain, Michigan. Petitioner began his employment with M.J. Electrical in Topeka, Kansas, but at the time of trial worked for that company in Morgantown, West Virginia.

The tax law allows you to deduct travel costs of work assignments when you are "temporarily" away from your "tax home." That means you have to be both "away from your tax home" and the assignment has to be "temporary." The Tax Court explains the tests (citations omitted):

As a general rule, a taxpayer's tax home is determined by the location of the taxpayer's principal place of employment, regardless of where the taxpayer's personal residence is located. Under an exception to the general rule, a taxpayer's personal residence may be his tax home where the taxpayer is away from home on a temporary rather than indefinite basis. The flush language of section 162(a) provides that a "taxpayer shall not be treated as being temporarily away from home during any period of employment if such period exceeds 1 year."

Employment is defined as "temporary" only if the taxpayer can foresee its termination within a reasonably short period of time or it is for a fixed duration. Indefinite employment is employment where the prospect is that the work will continue for an indefinite and substantially long period.

The electrician's "tax home" became his place of employment when he took the full-time position in Delray Beach, even though he commuted from far away:

Given the circumstances surrounding his employment with Meisner, we can understand why petitioner might consider his position "temporary", as that word is used in common parlance. After all, at all relevant times it was his intention to resign the position with Meisner as soon as possible for business as well as personal reasons.

Nevertheless, the position with Meisner was a permanent position with no foreseeable terminus. When petitioner accepted the position with Meisner, he had a reasonable expectation that the position would, and it in fact did, last more than 1 year... Petitioner kept his residence in Lake Mary for reasons of personal choice despite, rather than because of, the exigencies of his trade or business.

Consequently, because petitioner's position with Meisner in Delray Beach was an indefinite position, Delray Beach was his tax home for the relevant period. Because petitioner was not "away from home" within the meaning of section 162(a)(2) while in Delray Beach, he is not entitled to a deduction for vehicle expenses, lodging, and meals and incidentals incurred as a result of his position in Delray Beach. Instead, his costs were in the nature of personal or living expenses. We thus sustain respondent's determination on this issue.

Bottom line? No deduction for travel from Lake Mary and for the motel bills in Delray Beach.

The Moral? Indefinite isn't temporary, and your tax home is where your job is.

Cite: Durrance, T.C. Summ. Op. 2010-12

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(Gilbert AZ CPA on Feb 7, 2010 9:43 PM) This is very interesting and I think we will continue to see more situations like this. Difficult economic times are forcing many folks to seek work in areas they would not normally. It is easy how taxpayers could miss this one.

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I love movies. I get a big thrill when one is made in Texas or especially here in the Austin area. And I think productions do help boost local economies somewhat.

But the tax breaks to attract the film industry, like those to entice other economic sectors, can be badly abused.

They might boost a very local economy - the folks who get paid for the shoot - but there's a corresponding loss to those who unwillingly pay the cost of the credits - the rest of us. Iowa state senator Herman Quirmbach lays out the stakes:

"This last year, the (film) credits cost $38.6 million," he said. "For that kind of money, I could save the jobs of 1,000 teachers. You tell me what's more important to the future of Iowa: 1,000 teachers or having Meryl Streep come visit."

Exactly.

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Marian L. Moline is another tax protester who insists on clogging the system with ridiculous arguments. She appeals an adverse decision of the Tax Court. We have jurisdiction under 26 U.S.C. § 7483. We affirm for the reasons cogently explained in the Tax Court's memorandum opinion in this case.

Link: Tax Court opinion

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If true, this may be the best possible end to an embarrassing episode. The commission began life under impossible constraints, including the directive that it could consider nothing that raised taxes on those making less than $250,000.

Eventually, the White House put out the word that the panel would produce only a laundry list of possible reforms, but would not make any recommendations. The final blow came in December when the panel’s deadline came and went with only a White House promise that the group would complete its work “after the holidays.” Which holidays, exactly, were never specified.

Now, it seems the tax panel’s work will be rolled into a deficit reduction panel to be named later—another group whose mandate is unclear, to say the least.

It's probably more than just a coincidence that the commission is dying just as the admistration takes Mr. Volker out of mothballs.

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Moore isn't just any filmmaker. He is a current member of the Michigan Film Office Advisory Council, a state organ created to advise the Michigan Film Office, which is responsible for approving applications for Michigan's film incentive program. I do not believe it strains credulity to suggest that Moore's very presence on the council may have led to the film office approving special tax treatment for his work.

Giving an advisory council member's project tax credits makes this government "jobs" program look like a good ole' boys network where "la familia" takes care of its own - and with taxpayer dollars. This is not the only instance of high-ranking state officials appearing to benefit directly from the state program in which they play (or played) a role.

While Mr. Moore thinks capitalism is terrible, I understand you do have to pay to see the movie. It's good that Michigan is doing so well that it can afford to give money to somebody to explain how awful capitalism is. Oh, wait...

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Link: Estate of Mary Roppolo Artall, No. 09-60092

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That means it's time to hear from the Old 97s:

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Update: It's sweet when my evil plans work:

Screenshot from "Accountant's Directory," a/k/a "Accounting Blogroll." Click to enlarge.

Why haven't I linked? I hate to send them traffic. If you want to see for yourself, it's www.accountants-directory.info/ .

Oh, and thanks to Stacie Clifford Kitts for follow-up.

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(Peter on Feb 2, 2010 11:41 AM) Joe, I won't be visiting that site anymore, but I must confess that on occasion I, too, have been tempted to steal some of your work.

(Phil Hodgen on Feb 2, 2010 11:42 AM) Joe, it should be possible to write some content so it is infinitely recursive, much like those mirrors in a dressing room at a clothing store. Write something that -- when stolen -- links back to you which links back to the thief which links back . . . . The thief's head will asplode. :-)

(Joe Kristan on Feb 2, 2010 1:48 PM) Phil - that would be hilarious. I wish I were an HTML wizard sometimes. Peter - I'm glad you don't, it would definitely impair the average quality of your posts!

(Stacie Clifford Kitts on Feb 2, 2010 4:59 PM) Joe Who are these people? I can't find a web page with the names you have indicated. Maybe if you have a minute, could you shoot me an email?

(Tax Lawyer on Feb 7, 2010 9:47 PM) This is hilarious...that was a great move that shouldn't go unnoticed. Maybe this will stop them!

The Department of Justice picks up the story:

The evidence proved that in 2000, the value of Srivastava’s portfolio collapsed and he incurred massive capital losses. Disclosure of the full extent of those losses, however, would have potentially alerted the Internal Revenue Service to his massive, undisclosed short-term capital gains for 1998 and 1999, therefore, trial testimony showed that Srivastava filed a false tax return which understated his capital losses for 2000.

Busted for filing a return understating your income? That's different. In addition to that, a jury convicted Mr. Srivastava of evading $16 million in taxes in 1998 and 1999. Last week he was sentenced to 48 months in prison. It could have been worse; federal sentencing guidelines indicate a 63-78 month sentence for a $16 million tax loss.

The Moral? Next time you make $40 million day-trading, write it down somewhere so you don't forget to put it on your tax return.

Link: Washington Post 2005 writeup on Mr. Srivastava's legal troubles.

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It's a shame that the IRS has never built this into the 1120-S Schedule K-1.

For more on S corporation basis and loss limitations: Got Business Losses? Get Basis

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Now that the President and his budget director Peter Orszag have abandoned the leadership of achieving minimally necessary deficit reduction I hope we never hear them again talking tough about deficit reduction. Yes, it's hard work, but that is why we call them leaders, give them big offices, and get them good seats at the Kennedy Center. They wimped out of their most basic responsibility of putting the budget on a sustainable path.

Oh, well.

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And tip your waitress.

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"This last year, the (film) credits cost $38.6 million," he said. "For that kind of money, I could save the jobs of 1,000 teachers. You tell me what's more important to the future of Iowa: 1,000 teachers or having Meryl Streep come visit."

Exactly so. And it's the same kind of consideration that should be applied to all of the corporate welfare credits. These things cost real money.

Related: Let them eat Canapes

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(Erich Riesenberg on Feb 2, 2010 11:50 AM) "These things cost real money." How nice if everyone comes to understand that, and be honest about it.

The circled bookshelf represents the tax law in 1984, when I got out of school and started doing this for a living. It shows what happens when Congress sees the tax law as the Swiss Army Knife of public policy -- it can do it all! All the preparer regulation in the world isn't going to make up for the errors caused by tax complexity. Congress, it's your fault.

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(Erich Riesenberg on Feb 1, 2010 12:51 PM) So, missed you on the Register's tax chat today. Ed Failor was there, insisting the best way to get rid of tax credits is to get rid of all corporate income taxes. I agree with getting rid of corporate income taxes, but see getting rid of both as mutually exclusive; getting rid of the credits can come first. Lower taxes for most is a good step.

(Joe Kristan on Feb 1, 2010 2:39 PM) I hadn't realized that was scheduled, but I had a conflict anyway, so I couldn't have participated. I haven't had time to do more than scan the transcript, but I will check it out.

(Erich Riesenberg on Feb 1, 2010 8:33 PM) I think tax groups like Ed's represent taxpayers the way the Farm Bureau represents farmers.

Assistant US Attorney Michael DiCiacomo told the Buffalo News,"Unbeknownst to the businesses, Mangione would secure from the businesses the proper amount of quarterly tax due to the IRS and then submit a false tax return on behalf of the business that underreported the amount of tax due," DiGiacomo said. "According to the indictment, Mangione would then keep the difference for his personal use." Mr. Mangione, through his attorney, denies any wrongdoing.

The worst part:

None of the small businesses that hired Mangione to handle payroll have been criminally charged in the case, but they face potential tax problems with the IRS.

"They still have obligations to the IRS for taxes not fully paid," DiGiacomo said of the companies.

Having to remit payroll taxes and withholding twice -- once to the IRS, and once to a thief -- is enough to kill many businesses. That's why anybody who uses a payroll service should still enroll in the Electronic Federal Tax Payment System, EFTPS, so they can go online and verify that the money that goes to the payroll service actually gets to the IRS.

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