It's time for our annual summer vacation. See you July 28 or so!

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Currently awaiting sentencing on federal tax evasion charges, Mr. Beale and three associates have now been charged with "conspiring to prevent a federal judge from performing her duties." From TwinCities.com:

Robert Beale, 65, was charged Monday in federal court with one count of conspiracy to impede an officer and one count of obstruction of justice. Also indicted on the same charges were Frederick Bond, 62, of Champlin; John Pelton, 67, of Stillwater; and Norman Pool, 43, of Blaine.

"God wants me to destroy the judge," Beale is accused of saying in court records.

According to the charges, these four had an ingenious plot to "arrest" the trial judge to stop the tax trial:

The men issued fake warrants for Montgomery's arrest, filed fraudulent liens, planned to disrupt court proceedings and planned to arrest Montgomery. The plans were concocted at meetings of their "common law court" in Little Canada and in phone calls from Beale, after he was jailed.

Just... brilliant! What could possibly go wrong? Aside from it being absolutely insane and doomed from the start, of course.

Links:

Copy of indictment

Prior Tax Update Coverage

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George Baker Jr. was 54 years old when he burned to death in his wheelchair on the patio of the CLC University nursing home in Des Moines in 2002.

State inspectors cited the home for a lack of supervision, noting that Baker had been left alone on the patio to smoke cigarettes, despite having a pressurized container of oxygen strapped to his chair. When the tank exploded, Baker was consumed by fire before he could be rescued.

The story tells of a pattern of patient neglect and state fines for the facilities mangaged by the three. What were the executives doing with the money that should have gone to patient care?

According to court records, the executives diverted other money that could have paid for improved care and supervision of 6,000 seniors living in the company's 70 nursing homes. Instead, the money was used to pay for luxury cars for the executives, antiques, monthly trips to England and Australia, and shopping trips to the Gap, Saks Fifth Avenue and Wal-Mart.

The Gap, Saks, and Wal-Mart? I love this comment in the Register's web site:

obviously these men had some issues. They took luxury trips and shopping trips at the Gap, Saks Fifth Avenue and "WALMART". It is clear that you can take white trash out of the trailer court but you can't take the trailer court out of the white trash.

Link: DOJ Press release on the case

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Petitioners' first objection to the application of the AMT is that it contravenes a 2001 statutory enactment of a 15-percent tax rate on capital gains. Petitioners assert that the application of the AMT makes the effective rate on their capital gain income slightly more than 15 percent. In their own words, petitioners contend that the "application of AMT [is] * * * rendered null and void" because of this contravention.

If only it were that easy.

In computing the AMT there is a special computational provision for taxpayers with net capital gains. Generally speaking, the net capital gain income is multiplied by 15 percent and the result is added to the tax on other income which is computed in the manner described above. Sec. 55(b)(3). Following this computational provision, petitioners' AMT is computed at $7,007, which petitioners contend causes their net capital gain income to be taxed at an effective rate slightly greater than 15 percent because of the disallowance of the entire amount of the standard deduction and exemptions.

Petitioners' position would require a change to the statute that would apportion the disallowed items. Ultimately, however, respondent's computation is in accord with the statutes, and petitioners' argument fails.

The moral? The tax law is enforced based on what Congress actually did -- not on what you think they were trying to do.

Cite: Fritz, T.C. Summ. Op. 2008-81.

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(Robert D Flach on Jul 15, 2008 10:31 AM) Joe- Who said tax law had to be fair? Even under the “regular” income tax the effective tax on capital gains is not limited to 15%. Since net capital gain increases Adjusted Gross Income, and therefore affects a ton of deductions and credits that are reduced or phased out based on AGI and potentially increases the taxable portion of Social Security and Railroad Retirement benefits, the true tax cost of capital gains can be substantially more than the stated maximum 15%. The only way to truly limit the tax on capital gains to the stated rate is to remove such gains from the calculation of AGI. TWTP

(Joe Kristan on Jul 15, 2008 10:53 AM) Good points, Robert- by Fritz taxpayer logic, the whole tax law is invalid because it is full of phase-outs that raise the marginal rate above the stated rate. I'd still be happy to get rid of the phase-outs.

You can read some of the old shelter cases that look a lot like the current shelter cases where no one even got assessed a penalty, and now suddenly we're talking about people going to jail for a long, long time.

...

Tax enforcement was moribund until 2002, as a result of the 1998 [Internal Revenue Service Restructuring and Reform] Act. It has picked up in the last five years.

...

The trick for prosecutors is to go after the right people for the right crimes and seek the right level of punishment. And I'm not convinced in any white-collar cases that these 15-, 20-, or 25-year sentences make sense at all. The public has a very short memory and will forget five years from now that anyone is still rotting in prison. And in my experience, white-collar defendants get it real fast.

You need a Tax Notes subscription to read the whole thing. Why don't you have one yet?

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The Iowa Chops. Seriously....this is embarrassing.

The Partnerships and CVB have been working their tails off (no pig pun intended) to change the image the world has of Iowa and Des Moines. We heralded national coverage in the New York Times, Forbes and other publications that said Des Moines had gotten a whole lot more hip, thanks to the East Village and some upscale restaurants.

And now we've named our hockey team after an irate pig? Talk about three steps forward, five steps back.

The idea of a porcine mascot seems inherently problematical. The old saying goes "pigs get fat, hogs get slaughtered." Obesity or ghastly defeat would seem to be a hard sell for a hockey franchise.

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Andrew Healy, my favorite new empirical political economist, has written a bold new paper. You might have thought that disasters were "acts of God," but Healy argues that the American voter is a co-conspirator. From the abstract:

Using comprehensive data on natural disasters, government spending, and election returns, I show that voters reward disaster relief spending but not disaster prevention spending. This aspect of voter behavior creates a large distortion in the incentives that governments face, since the data show that prevention spending substantially reduces future damage.

The paper has some nifty graphs showing the incumbent party's vote share (and change in vote share) as a function of relief and prevention spending. The slope for relief is sharply positive; the slope for prevention is flat. Given these incentives, it's hardly surprising that politicians spend about fifteen times as much on relief (which attracts votes) as they do on prevention (which doesn't).

We're watching an example of this unfold right now. I have received a flurry of emails from Senator Harkin, who is running for re-election, boasting of disaster relief bills he is flogging through Congress. I'm pretty sure I didn't receive any releases from him about his hard work making sure that the Birdland levee would hold. Since the levee failed, causing millions of dollars worth of damage, we can assume that no such work was done. This study would predict that the Senator will be rewarded for bringing in post-disaster pork, rather than punished for neglecting the levee in the first place. The uncritical coverage of the disaster aid pork in The Newspaper Central Iowa Depends Upon is a data point in favor of Mr. Healy's conclusion.

flickr photo of Birdland flooding by MNgilen.

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Let's hope that the Iowa Department of Revenue finally gets it right and quickly adopts the federal deadline extension. So far they have have only extended disaster deadlines in dribs and drabs, and in the case of individual second-quarter estimated tax payments, not until the afternoon of the due date.

The list of covered counties is here.

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The ad lambastes Governor Culver. While he bears as much responsibility for the giveaway as anyone, he has lots of company in both parties.

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In Mr. Leconte’s “Intimate Strangers” Sandrine Bonnaire enters the wrong office, mistakes a rivetingly dull tax specialist (Fabrice Luchini) for a psychiatrist and pours out her heart to him. Flummoxed but enthralled, he cannot bring himself to confess his real identity. After a dust-up when Ms. Bonnaire finds out who he is, the two decide to continue their weekly consultations and ultimately fall in love.

Yeah, that sort of thing happens all the time around here. It sure beats the portrayal of the accountant in "Ghostbusters" as Vinz Clortho the Keymaster, but people do forget that he did get the girl, at least for awhile.

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(Amanda on Jul 15, 2008 11:54 AM) No mentions, either, of Harold Crick of Stranger Than Fiction or the yummy Henry Grubstick of Ugly Betty. Now, to glamorize women in the profession...

Members of Bank A's ISG were engaged in the design, marketing, and implementation of tax shelter transactions, including a transaction known as "Hedge Option Monetization of Economic Remainder" or "HOMER." In 2001, Individual A — together with other members of ISG, attorneys at the Jenkens & Gilchrist law firm (hereinafter "J&G"), and a foreign bank with United States headquarters in New York (hereinafter "Bank B") — implemented 36 HOMER tax shelter transactions for high net worth clients of Bank A and J&G.

Mr. Daugerdas reportedly earned $93 million ($link) for his work promoting these shelters. He might need some of it to pay some attorney fees of his own.

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(asdf on Jul 15, 2008 2:38 PM) Band of brothers? Dumb-ass.. Get your facts straight.

(Joe Kristan on Jul 15, 2008 5:22 PM) asdf, you appear to be posting from a Jenkins & Gilchrist IP address. Maybe that's why you are a bit touchy, or humor-impaired, when it comes to Mr. Daugerdas.

After the audit he purchased a publication from Save a Patriot Foundation that argued that you don't have to pay income tax. Interestingly enough, in 2006 a court ordered that a notice be put on their home page that states, "The District Court orders...That Defendants...are hereby permanently enjoined from directly or indirectly: ...Advising anyone that they are not required to file federal tax returns or pay federal taxes...." But I digress.

Dr. Miller then ceased filing tax returns. In 2000 he sold his office building to De Soto Regional Health System and became an employee. He was supposed to remit substantially all of his medical income to De Soto but didn't. There's a word for that—embezzlement.

A federal jury made the doctor's long story short, convicting him of tax evasion in only two hours. He's likely to serve considerably more time than that.

The moral? It's probably not wise to trust your financial well being to an outfit with the acronym "SAP." Even if you are one.

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Mr. Guardino, a professional psychic, was serving time on tax evasion charges. It's a sad way to go out.

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(Shannon on Jul 19, 2008 12:35 PM) I'm the one who did the Search for "David Guardino Died Prison." David Guardino took my disabled mother for everything she owned and left her for dead, the first time I was in Iraq. I got home just in time to save her from what they were heading her to. I'm glad to see that Guardino got what he deserved, but he's still a thorn in my side, even after his passing, he's made a HUGE mess, that now, 3 years later, I'm finally starting to get cleaned up. My mother is now in a nursing home, a broken woman forever tied to a wheelchair thanks to him and the group of pond scum that associated with him. I found of 8 or so families that he wrecked before this one with his brainwashing of the elderly. He's a criminal, and always has been. I've finished a second tour in Iraq, now home to take care of my mother again, from what these evil people did to her. I'm glad he's gone.

A bold driver stands up against the stifling conformity of the one-way street ordinance on 7th Street today at Walnut in Downtown Des Moines.

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(Kyle on Jul 11, 2008 4:17 PM) I made a similar bold statement accidentally in Denver a week ago.

While taxes are deadly serious, the IRS is surprisingly generous with mulligans. Marc Ward discusses an S corporation that had an LLC as a shareholder - which, of course, is not allowed. The IRS gave the corporation a mulligan:

The Company and its shareholders represented that the termination of the S Corp election was inadvertent and the Company was unaware that the LLC was an ineligible S Corp shareholder.

The Service ruled that the termination of the S Corp election was inadvertent and it unrung the bell. The Company would continue as an S Corp as if the transfer to the LLC never occurred, the individual shareholders to whom the LLC transferred its shares would be deemed shareholders from the time of the original transfer to the LLC, and adjustments would be made for this period consistent with the treatment of the Company as an S Corp and the shareholders as S Corp shareholders.

The IRS has an automatic procedure to perfect some late S corporation filings. It also has been lenient in allowing corporations to get their S elections in order when they don't qualify for the automatic fix. So if you have messed up your S corporation paperwork, you might get another swing.

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Business expenses are fine to deduct. But running obvious personal expenses through the business just isn't acceptable. It could even be a reason to "pierce the corporate veil" in litigation causing you to lose your limited liability protection.

It's a universal temptation for the small businessman, and many have come to grief for it.

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It turns out that if you want to finance complete repeal of the corporate tax, you’d need to boost the top three individual rates to an eye-popping 50.1 percent, 59.1 percent, and 62.7 percent, and raise the tax on capital gains and dividends to about 27 percent. If you leave the rates on gains and dividends untouched, taxes on ordinary income would have to double to 56 percent, 66 percent and 70 percent.

Ouch.

It would be easier in Iowa. The Iowa corporation income tax, while imposed at the highest rate in the nation, is so riddled with loopholes that it generates a puny share of state revenues. That tax should be repealed yesterday, along with the economic development credits and the corporate welfare subsidies like the Iowa Power Fund.

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From the Rochester Post-Bulletin:

Joseph William Hughes, 46, entered his plea before U.S. District Court Judge Ann Montgomery in Minneapolis. He was indicted on April 23.

According to his plea agreement, from May 2004 to December 2006 Hughes was a registered representative of AXA Advisors LLC, a financial services company that sold insurance, investment products and retirement planning services.

The couple became clients in June 2005 after the husband suffered a stroke that impaired his ability to manage the family's finances. The couple had provided more than $400,000 to Hughes for investment in AXA investment accounts.

What a sweet guy, taking care of an elderly couple's money like that. How did he take care of it?

Authorities allege that Hughes spent the money on luxuries including cars, jewelry and country-club membership fees, as well as on tuition, mortgage payments and personal debt.

Presumably AXA will make the victims whole. But what could registered representative Mr. Thief have been thinking? Did he really think nobody would notice? The IRS certainly did.

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John Meyer is an Orange, California engineer and software developer. He started a corporation called Pacific Payment Systems, a C corporation, to develop and market a bar-code based billing software. He worked full time on the project in 2002, when he spent $47,521 in business expenses out of his own pocket, which he deducted on his schedule C. That was a false move.

The Tax Court told him that only the corporation can deduct corporate expenses.  If the shareholder pays them and isn't reimbursed, the expenses are treated as a contribution to capital.  That increases the shareholder's basis, but that doesn't help the shareholder's tax picture until the company is sold.  That's true both for C corporations and S corporations.

Mr. Meyer could have submitted his receipts to the company for reimbursement; the company would have been able to deduct the expenses.  Or he could have had the corporation pay the expenses directly.  But by paying the expenses out of his own checkbook and not turning them in for reimbursement, he lost his deductions altogether.

The moral of our story: if you incorporate your business, run it like a business. The corporation pays the corporation's bills, or your deduction vanishes.

This post originally appeared at IowaBiz.com

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As bad as the defeat was, it was a moral victory compared to the 15-85 beatdown of the Project Destiny sales tax increase last year.

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The dentist, Frederick Kriemelmeyer, tried his luck with the appeals court. It didn't work out any better.

From the opinion:

In 2002, Kriemelmeyer was a self-employed dentist who owned and operated a dental office in LaCrosse, Wisconsin. That year, his mother began frequently cashing checks made payable to cash at a local bank. Bank employees became suspicious of these deposits and notified the IRS, which investigated and in December 2004 executed a search warrant at his dental office. In March 2007 a grand jury returned an indictment charging that Kriemelmeyer's 2000, 2002, 2003, and 2004 returns reported gross receipts substantially below his income. The IRS determined that he underreported his gross receipts by $392,023 in total for those four years, thus underpaying his taxes by $135,337.

Which goes to show that the little banks do take those "suspicious transactions" rules seriously.

Dr. Kriemelmeyer represented himself in court, based on his years of study of the tax code and of the law, after the judge wouldn't let him use "Plenipotentiary Judge" David Wynn Miller as his lawyer. With such representation, it's not surprising that the appeal cited ineffective representation at trial. The appeals court noted that the trial judge told the dentist that a lawyer would be a real good idea, and that the dentist declined.

Looking at David Wynn Miller's website, it's hard to believe he'd have helped much. Here is a screenshot from his ":HOME" page:

Click to enlarge

Mr. Miller did appear as the dentist's only witness. If the dentist got 36 months with him as a witness, imagine how much time he could could have gotten with Mr. Miller as a lawyer.

Cite: USA v. Kriemelmeyer, No. 07-CR-52-C-01

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I decided to see how often the Internal Revenue Code and Immigration and Nationality Act have been amended of late. And, as you probably expected, nothing beats the IRC for congressional tinkering. Here's the number of sections of the code amended since 2001:

                           
2007 	141
2006 	229
2005 	259
2004 	370
2003 	67
2002 	125
2001 	140

In the comments to the post I'm quoting from, a reader says many of these amendments are extensions of "expiring provisions," so they shouldn't really count. That's more of an admission than a defense, in my view, because the expiring provisions provide built-in uncertainty and a dandy platform for congresscritters to wheedle favors from lobbyists year after year.

And many of the amendments aren't mere extensions of expiring provisions, as any practitioner who has to work with the Code will tell you. The Section 409A deferred comp nightmare and the Section 199 production deduction are just two of the more egregious examples of legislative malpractice embedded in the Code since 2001.

Via the TaxProf.

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This steal goes on the auction block at the Polk County Courthouse at 10:00 a.m. Thursday. This 6-bedroom, 5-bath property is at 1720 7th St. in Des Moines. The IRS will take a minimum bid of $13,391.73 for this 106-year old beauty. You may need a bit more, though, as the Polk County Assessor's Web Site says property taxes are delinquent going back to 2005.

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(Dustin on Jul 8, 2008 4:22 PM) Here's some news from around KC. Lee's Summit tax preparer gets six years, 10 months for embezzlement http://www.bizjournals.com/kansascity/stories/2008/07/07/daily16.html?surround=lfn

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A year or two later, your friendly IRS agent pays a visit. He disallows all of the expenses you incurred before you opened your doors, saying they were "start-up" expenses and "organizational" expenses. Further, he tells you that they are permanently capitalized and nonamortizable because you failed to make the proper elections on you initial return.

Kind of stinks? Sadly, that has long been the state of the law - until today.

Yesterday the IRS issued Temporary Regulations that make the start-up cost and organization cost elections automatic when taxpayers incur such costs. The regulations take effect today, but they can be applied to all expenditures paid or incurred after October 22, 2004, if the statute of limitations hasn't run on them.

You still have to pay attention to such costs. While you no longer need to make a separate election, you still have to comply with tax law rules that control how and when such costs are deducted.

Start-up costs are deductible only over a 15-year period under Section 195, though the first $5,000 can be deducted when the the start-up phase ends if total start-up costs don't exceed $50,000. "Start-up" costs are those that you incur before you begin business operations.

Corporation organization costs (such as drafting legal documents) are deducted under Section 248 in a manner similar to start-up costs, with a 15-year life and a limited ability to deduct $5,000 in the first year. Partnership organization costs are subjected to the same restrictions by Section 709.

The automatic "deemed" election under the new regulations is a good thing. Disallowing the deduction permanently for failure to make the election was a pointless punishment for not getting good tax advice.

Link: IRS Publication 535 on Start-up and organizational costs (not updated for new regulations)

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I respectfully disagree with your reading of DeAngelis, as described in your blog. The "STEP Plan" had been previously attacked as not a welfare plan. See Daniels v Burse, 313 F. Supp. 2d 790 (N.D. Ill. 2004)(STEP alleged to be RICO enterprise; settlement for plaintiffs). There was also a previous settlement in favor of IRS in a docketed case, Coastal Neurological v Com'r (2002).It turns out that DeAngelis was not about 419A at all.

Continued reading READER COMMENTS ON DEANGELIS...

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