Governor Chet Culver says once the existing state commitments are met, the state tax credit program for film and TV productions in Iowa should be shut down.

“We’re not going to be taken for suckers,” Culver told reporters late this morning during a statehouse news conference. “People, unfortunately, exploited that program.”

The program collapsed in scandal last fall about this time, and the former Film Office director and some filmmakers await trial on charges arising out of the program. The Attorney General's office estimates that the state is still on the hook for $200 million in subsidies to Hollywood.

Film credits may be the worst of the state's economic development tax credits, but after the monumental ineptitude shown in running this program, does anybody believe that the dozens of other targeted tax breaks are somehow run with impeccable efficiency and oversight?

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But there’s a cost to this, too–and I’m not talking about whatever revenue ‘enhancements’ are proposed to balance the cost of this plan. Rather, many states will not conform to the new law (California is guaranteed not to). It will be yet another conformity issue for tax professionals and business owners to deal with.

If I were advising the President, I’d tell him there’s a simple fix to the economy. Just cut government spending and simplify the ridiculously complex Tax Code. Unfortunately, the chance of my advising the President is just about zero. Fortunately, that also appears to be the chance that this proposal becomes law.

Excellent point. It's hard enough coping with the crazy ways states deal with the current Sec. 179 and bonus depreciation rules already.

TaxVox has has more unenthusiasm.

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Des Moines has not had regular passenger train service since May 31, 1970, when the Rock Island Lines' Cornbelt Rocket ceased operations. That train ran between Chicago and Council Bluffs.

Plans for re-establishing the Rock Island depot as a train station are tied to a push by Iowa and Illinois transportation officials to resume passenger rail service between Chicago and Omaha.

The states have asked the Federal Railroad Administration for $248 million to help establish the first phase of the train route, which would run between Chicago and Iowa City, through the Quad Cities.

Flickr image courtesy jitze under Creative Commons license

That's $248 million paid by the taxpayer before the first train carrying passengers at a $47 money-losing fare arrives late on its scheduled seven-hour journey from Chicago. But the same brilliant central planners who think it's a good idea to move the hub for city buses away from the skywalks and the center of downtown to a remote site along the railroad tracks are getting ready for the trains just the same.

Meanwhile, after an outlay of $0 for new depots and infrastructure, the Megabus offers twice-daily 6 hour trips in comfortable buses with wi-fi between Des Moines and Chicago for fares as low as $1. Every Megabus trip (I took one this weekend with the family) is a compelling argument to not spend that $248 million on the Crazy Train.

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The first-year write off of plant and equipment-- known as "expensing"--has long been a dream of the business community. But it will probably win Obama little support because of its temporary nature. No doubt the Obama economic team chose temporary expensing over other alternatives--like a much needed corporate tax rate cut--because the official revenue cost over ten years will score as small relative to the benefit it provides.

While many tax wonks say expensing is superior to capitalizing and depreciating assets over time, it smacks of fine-tuning by the government. Like the R&D credit, which would be permanently extended under the proposal, it amounts to the government telling businesses how to spend their money to avoid paying taxes at rates that are too high to begin with.

Mr. Sullivan sees a dim future for the plan:

The other reasons the proposal will win little support are: (1) the costs of the proposal will be offset by loophole closing provisions fiercely opposed by business and (2) the business community knows its best ally is the Republican Party. This is particularly true of the small business owners that are obsessed with extension of the Bush rate cuts for the highest income brackets.

There's a good reason for that "obsession." Expensing a five-year asset leaves you with the same taxable income, and the same tax, over a five-year period as depreciation; only the timing changes. An increase in the tax rate, in contrast, is a permanent difference in the amount paid. Those "obsessed" small businessmen didn't get to be businessmen by being bad at math. They can tell that combining full expensing with a rate increase leaves them with less money.

It will be interesting to see what the "loophole closers" will be; the articles linked by Mr. Sullivan (here and here) don't say.

UPDATE from Tax Policy Blog: Obama's Investment Equivalent of "Cash for Clunkers"

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(Sarah Liverman on Sep 8, 2010 9:16 AM) I can never understand why so many people fall for the fallacy of "give the rich a tax cut and the it will help the economy". What if the rich guy spend his extra money on treasury bills? Or spends it overseas? Or on drugs? Why does Paris Hilton need a tax cut?

You can't go wrong at the blog world's best roundup of tax-related blog posts!

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The 3% figure, which is computed from IRS data, is based on simply counting the number of returns with any pass-through business income. So, if somebody makes a little money selling products on eBay and reports that income on Schedule C of their tax return, they are counted as a small business. The fact that there are millions of people in the lower tax brackets with small amounts of business income may be interesting for some purposes, but it is irrelevant for the assessment of the economic impact of the tax hikes.

The numbers are clear. According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007. That's the number to look at, not the 3%.

That's a point I've been making.

Related: DEPARTMENT OF MEANINGLESS STATISTICS

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The latest round started on Sunday, when HUD Secretary Shaun Donovan said it was "too early to say" whether the White House would support another round of credits. Donovan and the Obama Administration have been backtracking ever since. But the damage is done.

Members of Congress and congressional hopefuls have leapt on the bandwagon. There is even a facebook page called "Extend the $8000 Federal Tax Credit until 2011 for 1st Time Homebuyers."

Will Congress restart this outrageously expensive economic meth lab? They've already done it twice, and there's no evidence they've gotten any smarter.

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(Roger on Sep 3, 2010 5:02 PM) Joe: If they bring it back again, I will put my house on the market and see if I can recover some of the lost home value due to the bump up in value caused by the credit. Then rent for a while and wait for the credit to expire and buy another home at depressed value after the market collapses again. Can't wait until the education cost bubble explodes! That one's been building since the 1960s - the housing mess has only been brewing since the late 1970s. Wonderful!

(Robert Eberhard on Sep 3, 2010 6:27 PM) The $8,000 didn't help me sell my condo in Connecticut last year, even though my condo was $20k cheaper than any similar condo in the neighboring 6 towns. My realtor kept telling me that she didn't understand, especially because of the credit. Maybe instead of spending money that is not there on a credit that doesn't work, they should give the money to the towns and states that keep raising property taxes on these depressed homes, and when the budgets can't pass, they simply revalue everything. At least that's what my town did. The assessed value of my condo is at least $40k higher then what I could sell it for. Maybe then people will buy houses, credit or not.

It turned out the 1099 arose out of a 1993 business setback in Hawaii. Mr. Gaffney moved to Arizona and started over. In 1996 he worked out a settlement of his known debts.

Meanwhile, an old lender embarked on a comedy of errors, according to the Tax Court:

On January 17, 1995, without petitioner's knowledge, Bank of America obtained a deficiency judgment against petitioner, who was insolvent, and "charged off" loan No. 3759415 in the name of Dennis Warren Gaffney for $90,845. In August of 1995 petitioner moved to Cave Creek, Arizona, where he lived until moving to his current address in Oregon in March of 1998. While in Arizona, petitioner continued to receive mail forwarded from his personal residence in Hawaii. However, petitioner never received notice of the foreclosure or the deficiency judgment, including service of process or a copy of the complaint or judgment.

After charging off loan No. 3759415 on January 17, 1995, Bank of America intermittently engaged in collection activity on the judgment. However, Bank of America erroneously focused its collection efforts in connection with loan No. 3759415 on Thomas Gaffney. Petitioner has no knowledge of Thomas Gaffney. In Bank of America's records, Thomas Gaffney was attributed the same Social Security number as petitioner and had the same address in Cave Creek, Arizona, where petitioner previously resided. According to the collection activity reports Bank of America provided to respondent, collection activities against Thomas Gaffney ceased on October 30, 2001. After cessation of collections, the only other activity that occurred with regard to loan No. 3759415 was the creation of an asset profile report on Thomas Gaffney on June 19, 2003.

So the 2006 1099 was a complete surprise to the petitioner, who probably thought the whole thing had been settled 10 years before. He contacted the bank:

In response, Joy Brinley, an employee of Bank of America, sent petitioner a short letter on November 4, 2008, simply stating, without further evidence, that the account had been reviewed and the Form 1099-C was correct.

That was good enough for IRS, and Mr. Gaffney had to go to Tax Court. The Tax Court pointed out that the IRS needs more than just a 1099-C to assess debt cancellation income:

In support of respondent's assertion that the discharge of indebtedness occurred in 2006 and not when the loan was "charged off" in 1995 or when collection activities ceased in 2001, respondent provided a letter from Bank of America which stated that the account had been reviewed and that both the Form 1099-C and the amount of the discharge of indebtedness income were correct. Although sufficient to meet respondent's burden of production under section 6201(d), the evidence respondent provided failed to indicate an identifiable event, a bank policy, or a State law that would justify the discharge of indebtedness in 2006. We find that petitioner has satisfied his burden of proving that the discharge occurred before 2006. Therefore, we hold that petitioner did not have $90,845 of income from the discharge of indebtedness by Bank of America in 2006.

It would have been a raw deal to hit the taxpayer with income in 2006. If he had been aware of the issue when he settled his other debts, it's likely that it would have been settled in 1996, when he was insolvent. Debt forgiveness is tax-free to the extent you are insolvent.

Meanwhile, some poor guy named "Thomas" Gaffney is probably wondering why it's so hard to get a loan.

The Moral: Debt cancellation usually is taxable, but not always, and a 1099-C doesn't by itself always mean you have to pay tax.

Cite: Gaffney v. Commissioner; T.C. Summ. Op. 2010-128

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(Paul Bonner on Sep 3, 2010 9:52 AM) I've seen someone come in with a 1099-C for a loan he cosigned with his son. For joint and several liability by co-obligors "an appropriate allocation of the discharged indebtedness should be made between the co-obligors, based on all the facts and circumstances," says Service Center Advice 1998-039 -- pretty slender authority. Seems stronger for guarantors and sureties, at least for exempting them from information reporting requirements. I'm still looking for anything more on point.

(TaxNews on Sep 7, 2010 4:41 AM) Hi Joe, do you have a twitter account in order for me to follow your blog? Here is mine: http://twitter.com/leviweisz ,I have a blog on International Taxation. Thank you very much, Levi.

-Recognize the advantages and disadvantages of LLCs, S corps and C corps.

-Walk through the formation issues of both corporations and LLCs.

-Examine the operational and tax issues encountered when working with LLCs and corporations.

If that doesn't sound exciting to you, well, you must have a life a heart of stone.

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Because of this scandal Iowa temporarily stopped shamelessly handing out cash to filmmakers, but the gravy train is up and running again. Iowa lawmakers have not learned the broader lesson: film tax credits should be eliminated permanently because they are terrible tax policy. One of most egregious forms of corporate welfare, film tax credits take money from the taxpayers and funnel it to filmmakers. The claims of economic benefits and job creation are greatly exaggerated (assuming you can even call a job shifted from one state to another a job "created") and ignore the opportunity cost of such tax expenditures (like funding essential government services, or reducing taxes). Film tax credits are yet another example of a politically well-connected special interest group securing subsidies for itself at the cost of the rest of the state's taxpayers and businesses.

Yes, even if the film program isn't buying Benzes and Ipods for film producers, it's still a bad idea. Yet there may be a silver lining. Iowa Film Insider reports:

I received the following from a good friend who is well-connected in the Iowa film world. Here is that person's message to me today:

Everything is still moving along, but Dotzler is having a hard time getting the other legislators on the tax credit committee to agree on a date. I think that Governor Branstad's move to reinvent IDED has everyone very cautious. It has become a waiting game, I'm afraid.

All of the films that had a contract or an approved application have been called by non-state employees. All had various answers, but to your question on if we are going to see any films shot - No - they have moved on to other states to shoot or have scraped the project.

For now, anyway, it's easier for Hollywood to gull other states, making it harder for Senator Dotzler to give away your tax money.

Related: Let them eat canapes.

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In 2003 petitioners purchased a goat and a horse. The goat was sold soon after it was purchased because, according to petitioners, it was "scary."

The Tax Court decided that farming wasn't really their thing. The court disallowed farming losses of $19,139 (on $750 of gross sales) under the "hobby loss" rules.

Cite: Stenslet, T.C. Summ. Op. 2010-127

Hat tip: Roger McEowen

Flickr image courtesy Ali Graney under Creative Commons license.

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Except Ms. Jones worked for the IRS.

While this is only one IRS employee, it's one more abuse of private information than was ever linked to the private collection program.

Related: Good thing Congress banned the outsourcing of federal tax collections

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The medical student who runs The Notwithstanding Blog has diagnosed the best recent insurance and risk-management blog posts, curing what ails you. Many great posts, including the Insureblog's recounting of the case of the Pre-existing Condition Pool. Fire up the tractor and head on over.

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Four promoters of a Florida-based business that sold illegal tax defiance schemes, American Rights Litigators/Guiding Light of God Ministries (ARL), were sentenced today by U.S. District Judge Royce C. Lamberth, the Justice Department and Internal Revenue Service (IRS) announced today. All four defendants were convicted in May 2010 following a one-month jury trial.

Eddie Ray Kahn, formerly of Sorrento, Fla., was sentenced to 20 years in prison for conspiracy to defraud the United States and to commit mail fraud and one count of mail fraud. Stephen C. Hunter, formerly of Candler, Fla., and Danny True, of Deltona, Fla., were sentenced to 10 years in prison for conspiracy to defraud the United States and three counts of mail fraud. Allan J. Tanguay, of Flagler Beach, Fla., was sentenced to 10 years in prison for conspiracy to defraud the United States and to commit mail fraud and one count of mail fraud.

Quatloos provides a wonderful description of Mr. Kahn:

Eddie Kahn of "American Rights Litigators” represents the Hee-Haw contingent of the tax protestor movement. “Without any doubt, the most stupid of all the ‘professional’ tax protesters. Mr. Kahn's ‘arguments’ are so utterly juvenile and worthless as to barely worth the space I am using to type this sentence."~ Taxes.com

Eddie caters to the dumbest of the dumb, and his theories for not paying taxes are thus the dumbest of the dumb.

I think that's unfair to Hee Haw and the Immortal Roy Clark, who was much better at his craft than Mr. Kahn was at tax advising. Mr. Snipes choice of tax advisors says something about his business judgment.

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In Priv. Ltr. Rul. 2010-027-015 (Apr. 5, 2010), the IRS ruled that (1) cash rewards on credit card purchases do not constitute income under § 61 to the card holder, and (2) cash rewards paid out to charity at the direction of the holder constitute a charitable contribution on the date the amount is received by the charity.

It's always good to get a deduction on non-taxable income, and it makes donations using such cards tax-efficient. But be careful:

The IRS also ruled that the written acknowledgment provided to credit card holders did not satisfy the recordkeeping requirement of § 170(f)(17) because it did not include the date the credit card company remitted the contribution amount to the charity.

Without such acknowledgement, you can't deduct contributions over $250. Presumably the credit card companies are fixing that as a result of this ruling.

Now if I can just find a way to deduct my half-filled punch cards from defunct coffee shops.

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Robert does make some interesting observations worth addressing when I have more time later. Meanwhile, he makes as good an argument for the bad case for preparer regulation as you're likely to find.

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(Apep on Aug 31, 2010 11:37 AM) Newsflash: Newly elevated member of regulatory rent-seeking apparatus elated!

Two films, Sam Steele & the Junior Detective Agency and Ash, have received tax credits through the Iowa Film, Television, and Video Promotion Program. These are the first two films that have successfully been awarded credits from the Iowa Department of Economic Development utilizing the fully revised process of issuing tax credits.

"We are very pleased to be able to assist these companies with their Iowa projects," said Bret Mills, IDED director. "IDED, the Department of Revenue, Auditor of State's Office and the Office of the Attorney General, have designed and implemented a comprehensive process to ensure all parties involved have a clear understanding of the program and also that a full audit of the project is completed prior to the issuance of the tax credits."

The film program collapsed in scandal last fall, and the film office director and two filmmakers face criminal charges. Iowa is on the hook for $200 million for credits already committed -- about $66 per Iowan. Sure, it's tough for the 5,000 teachers that the $200 million could pay, but as a local opinion leader opines:

But some benefits can't just be measured on a dollar-for-dollar basis. The movies provide employment to local actors, construction crews, artists, caterers, drivers and a host of others. They expose non-Iowans to what the state has to offer. More intangible is the benefit of interactions in a state that can be cut off from the trends and centers of power. Not to mention the excitement factor. We've relied on caucuses every four years to bring action and celebrities to town. Now, sightings are anytime, any place.

And maybe if you're close enough, they'll throw you a dime!

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(Jimmy Thompson on Sep 5, 2010 11:20 AM) Where are you getting $200 Million in tax credits? That would mean more than $1 billion in spending on films. Your fuzzy math is confusing.

(Joe Kristan on Sep 5, 2010 5:47 PM) Where? Attorney General Miller's office. See here: http://webcache.googleusercontent.com/search?q=cache:upAwjHhR2xQJ:www.desmoinesregister.com/article/20100803/NEWS10/8030362/Liability-for-film-credits-drops+Iowa+attorney+general+200+million+film&cd=1&hl=en&ct=clnk&gl=us&client=safari

While there is almost nothing in this paper that has not been hashed over by prior studies, including the Bush commission, the PERAB report does a nice job describing what is wrong with the current tax code. And it includes some valuable hints, at least, about possible future policy choices. But, in the end, it does little to advance a debate the nation desperately needs to have.

Of course, it's not as though the problems with our horrendous and baroque tax code have been a national secret up until now. It doesn't hurt to count its non-blessings, but it doesn't move the ball much. But that may not matter, if the real purposes of the panel was to distract some inconvenient economists.

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More from the TaxProf.

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If a taxpayer becomes such a "qualified taxpayer," then rental real-estate losses can be non-passive, and therefore deductible even absent offsetting "passive" income.

An alert reader poses this question to me:

Re the 750 hour test, Reg.§ 1.469-9(e)(1) appears to support the judge's conclusion.

Excerpt from reg:

"... Each interest in rental real estate of a qualifying taxpayer will be treated as a separate rental real estate activity, unless the taxpayer makes an election under paragraph (g) of this section to treat all interests in rental real estate as a single rental real estate activity. Each separate rental real estate activity, or the single combined rental real estate activity if the taxpayer makes an election under paragraph (g), will be an activity of the taxpayer for all purposes of section 469 ..."

Your thoughts?

Well, they're long -- Jim Maule long -- so if you are interested in this sort of thing, read on.

Continued reading Why I think the Tax Court judge got the passive loss 750-hour test wrong...

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WASHINGTON – A jury in U.S. District Court in Newark, N.J., has returned a guilty verdict against Stephen A. Favato, a resident of Point Pleasant Beach, N.J., and a partner in BDO Seidman LLP’s Woodbridge, N.J., office, the Justice Department and the Internal Revenue Service (IRS) announced today. The jury found Favato guilty of one count of corruptly endeavoring to obstruct and impede the Internal Revenue laws and one count of aiding and assisting in the preparation and filing of a false tax return

Some details:

The evidence presented at the trial showed that Favato advised Funsch to significantly reduce the salary payments that Funsch was receiving from his corporation and to instead have this compensation paid to Funsch’s limited liability company, Great Escape Yachts LLC, in the form of purported lease payments for Funsch’s yacht. However, his corporation had not leased the yacht. This course of action recommended by Favato enabled Funsch to fraudulently deduct his personal yacht expenses as business expenses. In addition, the evidence presented showed that Favato advised Funsch on how to falsely increase his expenses in order to fraudulently eliminate a portion of the gain on three properties that Funsch sold in 2002 and 2004. Finally, the evidence showed that Favato advised Funsch to report inflated charitable contributions on Funsch’s 2003 tax return.

The release doesn't say what happened to Mr. Funsch, but I wouldn't be surprised if it depended on how well he, er, cooperated at Mr. Favato's trial. That's the thing about helping clients cheat on taxes: when the Feds start pressing, the cheating clients sure won't be looking out for the cheating tax pro.

Prior coverage: BDO partner accused of assisting client tax evasion

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An independent candidate for governor is proposing a tax break for Iowa workers who are paid by the hour. Jonathan Narcisse says the state should only collect income taxes on 40-hours of work per week, an idea inspired by a recent stop he made at Hardee’s.

“It was about 3:22 a.m. and the young lady who waited on me had to be at her second job at 8 a.m.,” Narcisse says. “Why are we requiring her to pay taxes after 40 hours when she could use that money more than the Google millionaires in Council Bluffs or the Bill Gates’ Microsoft?” Microsoft recently announced it was building a processing center in West Des Moines.

This is a great example of tax policy by emotion. While the girl at Hardees maybe is having a tough time of it, she's financially in the same place as somebody who gets the same net salary for working a 40-hour week. And a state worker or union worker who gets time and a half for overtime, maybe double or triple-time for weekend or holiday work, could be a lot better off than a junior accountant or small shopkeeper who puts in a ton of overtime without getting any extra pay.

The proposal is also an administrative nightmare. To be enforceable, Iowa would have to have employers track and separately report hourly compensation on each W-2 -- a requirement that no other state has, and that would jack up costs for the businesses that write the paychecks -- and not enough of them in the current economy. Absent such a requirement, the break would be an invitation to massive cheating.

Fortunately, Mr. Narcisse is only slightly more likely to be governor than I am. Unfortunately, many people who do get elected to tax policymaking positions show no better judgement. The results include the special pension and Social Security breaks for old folks on Iowa 1040s (so Iowa needs to attract more old folks? At the expense of the not-so-old, and not so wealthy?). Another is the special Iowa credit for textbooks -- it may feel good, but it accomplishes nothing and is pretty much unenforceable.

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While Mr. Snipes is understandably unexcited about going to Club Fed, it could have been much worse. A Florida dentist yesterday received a 42-month sentence for tax violations connected to Mr. Kahn. So maybe 36 months isn't so bad.

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The blog world has been all over this, but I've been waiting for TaxGrrrl, the definitive Philly tax blogger, to chime in, and now she has. An excerpt:

The license only applies to folks who are making money (even if it’s a little bit of money). It does not apply to folks who aren’t running a business or trying to make money. That means that bloggers who maintain a blog for the sake of sharing information but aren’t getting paid (or running ads, etc.) are off the hook.

So, no vast conspiracy. No targeting bloggers. And no plan to try and silence free speech. No one was sitting around the Revenue Department searching online for Philadelphia bloggers. The City was acting on information that it got from the feds, something it does all of the time. It’s part of the normal information sharing that goes on (oh yeah, and states share information as between each other and the feds, too). A key difference this time was the scale of the notices and the speed at which information – even bad information – travels these days.

Of course, the City’s official position on all of this is that they’re merely trying to collect from taxpayers – each of whom should pay their fair share. That last bit is, I think, what’s really getting people going: What’s fair?

This $300 fee shouldn't exist to begin with. A city struggling to keep people working and businesses growing doesn't help itself with this sort of thing. And nothing forces the city to go after bloggers with a dozen readers and $1 in Google Ads revenue. It's as if they set up red-light cameras at every four-way stop in the city and started ticketing every car that failed to fully stop -- technically they have the legal right to do so, but what they are costing themselves with bad press and citizen annoyance has to outweigh any revenue benefits.

Other coverage:

TaxProf
Kay Bell
Instapundit
Tax Policy Blog

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I believe the California Attorney General’s civil complaint against my law firm and me to simply be election year politics. My law firm has been representing taxpayers before the IRS for almost 20 years. We have saved thousands of people tens of millions of dollars. And I have fully cooperated with the California Attorney General’s Office over the past few months. As a result, I am very disappointed in their decision to file a complaint, but I look forward to a full and fair airing of this matter in a court of law where my law firm and I will aggressively and vigorously defend the claims against us, and I am absolutely confident we will prevail.

Prior coverage here.

Additional blog coverage:

Peter Pappas

Russ Fox

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"Big Toy," notes Olson, was able to handle the regs easily and is doing fine (even though they were responsible for the imports that raised concern). Small boutique vendors were and are screwed.

Substitute "H&R Block" for "Big Toy" and you can envision the trajectory of the new IRS tax preparer regulation regime.

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(Mariette on Aug 25, 2010 3:27 PM) Have you heard about HR 5786, the "Safe Cosemtics Act"? It will do to small beauty product manufacturers what the toy regulations did to the small toy producers. Information here: http://wingedseed.com/blog/2010/07/24/why-i-oppose-h-r-5786-safe-cosmetics-act-of-2010/ If firearms enthusiasts can protest against the government taking away their guns, where do I protest that the government wants to take away my favorite soaps, lotions and eyeshadows that I buy from individual sole proprietor makers on Etsy? I think cosmetics made by the big corporations are more likely to have lead, arsenic or other contaminants in them than a bar of soap some lady made in her kitchen with oatmeal, shea butter, and orange oil, anyway. Mariette