Hi, Folks: just a reminder that we've moved the Tax Update to a new WordPress platform. Unfortunately, those of you who follow us through RSS feeds need to update your readers. You can do that here: http://rothcpa.com/feed/ or at hte new Tax Update home page. All of the old posts and allowed comments will remain in place.
Also, I am turning off the comments to the old posts. I will miss the brain-dead feedback from loyal comment spammers like Shasta Zapato, sklepy magento, and wkqwaovbvu, but I am sure they will find their way to to the WP spambox in their own good time.
The Tax Update has switched to a new blogging platform, so RSS users should set their feeds on "stun" at http://rothcpa.com/feed/
Hi! Starting today - March 19, 2012 - the Tax Update moves to a new Wordpress platform. All of the old stuff will stay here, but new stuff will be there. You can still reach it through here. I hope you like the new format.
The biggest beneficiary of Iowa's film tax credit boondoggle is in for more Iowa hospitality than he hoped for. Dennis Brouse faces up to 10 years in prison after a Polk County jury convicted him yesterday on a charge of "fraudulent practice" for claiming improper tax credits from the Iowa Film Program. He was acquitted on two other charges.
In happier times, Mr. Brouse had programs on up to 170 public TV stations, according to the Des Moines Register.
The prosecution charged that Mr. Brouse claimed inflated values for expenditures on films produced in Iowa. The state awarded him $9.2 million in transferable tax credits for the pretend spending, which he sold to investors at a discount for cash. From the Register's story:
Brouse made $3.1 million after his expenses were paid and he obtained the state’s “half-off” credits for filmmaking — before his productions were distributed, according to Iowa’s Department of Revenue.
He split the proceeds with tax credit broker Chad Witter, who faces trial next month on charges related to the program.
As I had speculated, the prosecution told the jury about pretend "sponsorship" expenses, including a $1 million expense that the "sponsor" claimed was so "grossly overvalued" that it refused to sign off on it.
The film credit program was touted as an "economic development" boon when it was voted into law over the "no" votes of only three of the 150 members of the Iowa legislature. Almost until the very end it received nothing but credulous Tiger Beat-style coverage from the Des Moines Register and other news outlets -- with one exception (CORRECTION: there was another). The Register's story tells whose economy was really developed:
Among the other purchases Brouse made before the film program collapsed: a Nebraska ranch for more than $566,000, bought in May 2009 just after $1 million in credits were transferred by the state.
Fortunately for Iowa, this $30-million plus boondoggle is dead. Unfortunately, this is only one of dozens of economic development credits that Iowa has, all operating in the shadows with little oversight, and almost none from outside media outlets. While the administration of the film credit program was spectacularly bad, it takes a leap of faith to believe that other programs that provide transferable or refundable tax credits to the well-connected and to politicians in the name of "affordable housing," "green energy" or "downtown redevelopment" are run carefully and accurately and claimed with complete honesty.
TaxGrrrl has some document retention tips, including:
If you claim depreciation, amortization, or depletion deductions, you’ll want to keep related records for as long as you own the underlying property. That includes deeds, titles and cost basis records. Similarly, if you claim special deductions and credits, you may need to keep your records a little longer than normal (for example, if you file a claim for a loss from worthless securities or bad debt deduction, you should keep those records for 7 years).
Keep your documents organized (arranged by year is a good start) and store them in a safe place. But figuring out storage for all of those records can be tricky – that’s a lot of paper. To save space (and quite possibly, your marriage and/or sanity), you might want to consider scanning your records and storing them electronically. The IRS has accepted scanned receipts since 1997 (Rev. Proc. 97–22).
But more importantly, she is having a contest, with two scanners as prizes:
To enter to win the contest, tell me about your most memorable meal at a restaurant – even if it wasn’t deductible.
Then how would you remember?
A nice rundown of the essential tax problems for a new business by Courtney Strutt Todd at the Davis Tax Law Blog.
Kay Bell reports that customers of some storefront tax prep shops are actually threatening the preparers because the IRS is behind in processing refunds.
When you give out a "targeted" tax break, lots of folks hire lobbyists to put a target on their own backs. That seems to be happening with the misguided proposal to exempt some sales of stock to employee stock ownership plans from Iowa tax. From the Sioux City Journal:
However, Sen. Joe Bolkcom, D-Iowa City, chairman of the Senate Ways and Means Committee, said he is studying the capital gains piece of the legislation to determine whether it's a necessary component, given there are other business groups, tax opponents and investment representatives who want to eliminate the capital gains tax altogether or expand the incentive provision beyond the ESOP application.
"Since that bill's been filed, there have been a number of interests come forward that would like to have special capital gains tax treatment," said Bolkcom, who worried House File 2284 could touch off a domino effect of unintended consequences. "There's maybe sufficient incentive in the $1 million appropriation to assist companies to form ESOPS and the capital gains piece may not be as big of an issue."
[Senator Bill] Dotzler said he believed the legislation is targeted and could be implemented in a measured way that would provide a benefit without opening it up too broadly.
When you have high tax rates -- and Iowa has them -- taxpayers have that much more incentive to hire lobbyists to carve them breaks. Once you start, it's hard to stop. Senator Dotzler was a big supporter of film credits, and they sure failed to prevent "opening it up too broadly."
Martin Sullivan at Tax.com calls shenanigans on the whole "targeted" tax break game:
Worse still, they are continuously urged to move in the exact opposite direction and extend more tax benefits to targeted constituencies. They are told this will create jobs. This is true—but only in the businesses getting the benefits. Totally ignored are the job losses from other businesses that are left out in the cold. Economics tells us the unseen and ignored job losses are greater in number than the gains, as I tried to explain to [federal] Ways and Means Committee members at a hearing last week.
The tax law is not the Swiss Army Knife of public policy.Not every problem is a tax problem, but the politicians think every problem has a tax solution. That's why the tax law is such a nightmare, on both federal and state levels.
Aside from not getting much time off this time of year, Jason Dinesen says Enrolled Agents are miffed by the new preparer regulations:
EAs also have a very real and legitimate fear that we will get left in the dust once the new RTRP designation gets rolling. After all, RTRPs have the phrase “tax return preparer” in their designation, while EAs are saddled with a designation that includes the word “agent” (automatic code word for “Works for the IRS, flee for your lives!”). EAs need to be educating the public, and we need help from our national association — help that I feel has been absent in the past (though the association says public education is its #1 priority in the new “3-year plan”).
You say you don't know what an EA is? Most people don't. From the IRS website:
An enrolled agent is a person who has earned the privilege of representing taxpayers before the Internal Revenue Service by either passing a three-part comprehensive IRS test covering individual and business tax returns, or through experience as a former IRS employee. They must adhere to ethical standards and complete 72 hours of continuing education courses every three years.
When the new preparer regulation power grab came out, I felt enrolled agents had the most to lose. Most people at least have heard of a CPA and have some vague idea of what that means, so the new Registered Tax Return Preparer designation won't hurt us much. Because people don't know much about EAs, the danger of being lumped in with RTRPs, who have much lower entry requirements, is higher.
At least they do to Russ Fox, whose business was one of 254 that fled California last year. He explains:
Well, as one of those 254 businesses that fled the
BronzeGolden State, I can say that Nevada has been a wonderful change. California may have a far better meteorological climate but from a business standpoint Nevada is far, far better.
What does California need to do to improve its business climate? Cut regulations, cut taxes, cut the pervasiveness of government. What are Governor Jerry Brown and the Democrats in Sacramento proposing? More taxes, more regulations, more of the same.
I’ll take the over on 254 for 2012.
Taxes matter. It's funny when people who want to tax cigarettes to make people stop smoking turn around and say income taxes don't affect anything.
Most business fixed assets are depreciated over five or seven year lives. The cost of buildings, in contrast, has to be recovered over much longer lives -- 27.5 for residential property and 39 years for other business buildings. An entire "cost segregation study" industry thrives by identifying items to carve out of buildings as shorter-lived assets.
Cost segregation studies are most effective in a factory building, where special wiring, concrete pads built to accommodate heavy machinery, lighting and so on can qualify for shorter lives. There is less opportunity for savings in apartment buildings, but that didn't keep one partnership that showed up in Tax Court this week from giving it the old college try. Amerisouth XXXII, Ltd. threw in everything -- including the kitchen sink -- as shorter-lived property to maximize depreciation deductions. Judge Holmes sets the stage in his distinct style:
The Commissioner argues that with minor exceptions the apartment complex is one asset that AmeriSouth must depreciate over 27.5 years. AmeriSouth argues that, whatever the apartment complex may look like to an untrained observer, to a tax adept it is not a single asset but a collection of more than 1,000 components depreciable over much shorter periods. It is usually the case that a shorter depreciation period benefits taxpayers. It would certainly benefit AmeriSouth by generating hundreds of thousands of dollars' worth of accelerated depreciation deductions. We are tempted to say this is why AmeriSouth throws in everything but the kitchen sink to support its argument -- except it actually throws in a few hundred kitchen sinks, urging us to classify them as "special plumbing," depreciable over a much shorter period than apartment buildings.
Judge Holmes considers the sinks:
AmeriSouth concentrates most of its persuasive efforts on the permanence of the sinks. AmeriSouth argues that the sinks are easy to remove -- disconnect the sink from the water lines and remove approximately four screws or clamps -- and uses the 2003 apartment renovations as an example.
But section 1.48-1(e)(2), Income Tax Regs., specifically lists sinks as structural components ("'structural components' includes * * * plumbing fixtures, such as sinks and bathtubs"). And while AmeriSouth tags this type of plumbing with the epithet "special", providing water for the kitchen is hardly unusual in the sense of Scott and later cases, and AmeriSouth fails to give any other evidence that it periodically replaced or even planned to replace sinks after the 2003 renovation. So we find the sinks are also structural components of the buildings and not depreciable apart from them.
This reminds me of the "sledgehammer theory" used back in the old investment tax credit days -- in fact, cost segregation studies are pretty much the old ITC studies under a different name. The theory was that if it could be moved with the help of a sledgehammer, it was "movable," rather than part of the building, and could qualify for the credit. It wasn't a particularly successful theory.
In this case, many other items - pipes, drain lines, wiring, and electric panels, for example, were claimed to be five-year property, unsuccessfully. A few items -- garbage disposals, special plugs for refrigerators, and cable, phone and data outlets -- did qualify for shorter lives.
The Moral: You should ponder what you are buying if you buy real property; there may be more depreciation available than meets the eye. But don't throw in the kitchen sink.
Anthony Nitti has more.
The Institute for Justice lawsuit has drawn much-deserved attention to IRS Commissioner Shulman's inane and wasteful preparer regulation initiative. For example, Instapundit links to Katherine Mangu-Ward:
Readers get no points for guessing who backed the regulation. H&R block, and other big tax prep firms were in favor of the rule. Attorneys and certified public accountants are exempt from the requirements. As with many kinds of regulation, relatively low compliance costs for the big boys can be ruinously high for the little guys.
Of course, those of you astute enough to follow the Tax Update have known about this for a long time. Stay on the bleeding edge with the Tax Update!
Doing your taxes is at best a nuisance. When somebody steals your identity and pockets your tax refund, it's a nightmare, delaying your refund for months and likely requiring weeks of inconvenience and hours of paperwork.
Identity theft tax fraud is a worse problem than ever this tax season. It's hard to feel sympathy when the fraudsters get put away for awhile, like Melinda Clayton of Montgomery, Alabama. From a Department of Justice Press Release:
According to the indictment and plea agreement, Clayton stored tens of thousands of stolen means of identification (names and Social Security numbers) at her house, which came from numerous sources, including private companies, health clinics and prisons. Dale and [a co-defendant] used the stolen identities to file false returns that fraudulently claimed tax refunds. They directed the refunds to bank accounts and debit cards.
Bye-bye. Always shelter your social security number and shred any documents with it before throwing them out.
...on HORSES? Taxdood thinks that may be enough bets to qualify a fellow as a professional gambler.
Iowa could use a real tax court. Jason Dinesen says efforts to set up a tax court in Louisiana might be instructive.
This week's state tax map from the Tax Policy Blog covers gas taxes. New York, California and Connecticut are the worst, taking almost 50 cents for every gallon of gas you put in your car.
Iowa's 22 cents is about in the middle, though there is a push to raise that. Alaska's 8-cent tariff is the lowest, but it's probably not worth driving there just to fill your tank.
The libertarian public interest law firm Institute for Justice is suing the IRS today to shut down the preparer regulation program. From the IJ press release:
Congress never gave the IRS the authority to license tax preparers, and the IRS can’t give itself that power.
But last year the IRS imposed a sweeping new licensing scheme that forces tax preparers to get IRS permission before they can work. This is an unlawful power grab that exceeds the authority granted to the IRS by Congress.
It would be great to see the courts stop Commissioner Shulman's preparer regulation power grab, though they don't have a great record of stopping IRS overreach. However the courts come down, I think IJ correctly identifies the unwise policy behind the regulations:
The burden of compliance will fall most heavily on independent tax return preparers and small businesses. Unsurprisingly, big firms such as H&R Block and Jackson Hewitt support the licensing scheme. As The Wall Street Journal explained: "Cheering the new regulations are big tax preparers like H&R Block, who are only too happy to see the feds swoop in to put their mom-and-pop seasonal competitors out of business."
These regulations are typical government protectionism. They benefit powerful industry insiders and at the expense of entrepreneurs and consumers, who will likely have fewer options and face higher prices. But tax preparers have a right to earn an honest living without getting permission from the IRS. And taxpayers—not the IRS—should be the ones who decide who prepares their taxes.
They have produced a video on the case:
The Institute for Justice claims four Supreme Court victories since 2002. Its loss is the controversial Kelo eminent domain case. Here's hoping they win this one.
Prior Tax Update preparer regulation coverage:
Margaret Van Houten explains proposals to allow eternal trusts now before the Iowa legislature at the Davis Tax Law Blog.
The trial of Dennis Brouse, known to public TV viewers for his shows about horses, is winding down, according to a story by Lee Rood in the Des Moines Register, which apparently just started printing coverage. Before the trial closes, accountant Chad Witter, who served as a broker for film tax credits, is expected to testify today.
It appears the trial centers around non-cash "expenditures" used to claim millions of dollars in transferable film tax credits, which could be cashed out by selling them at a discount to investors. From the Register's story:
Brouse’s company reported millions of “in-kind” and “sponsorship” expenditures — or ones in which no cash changed hands. He also purchased vehicles and a trailer for his productions that state officials have argued should not have qualified for state tax credits.
Wheeler testified that those types of expenditures were approved by Jim McNulty, a senior analyst at the Iowa Department of Revenue. Wheeler was fired after abuse of the program was discovered and convicted of misconduct in office.
The State Auditor's report on the mismanagement of the film credit program reported this about film credits claimed by Mr. Brouse's company:
Kent Feeds, Inc. (Kent Feeds) is an Iowa-based corporation for which Changing Horses claimed $2,250,000.00 of in-kind expenditures. Of this amount, $1,000,000.00 and $1,250,000.00 were claimed for projects 08-020 and 08-027, respectively. The agreements provided by Changing Horses were signed by Kent Feeds but did not include a value for the services provided.
According to a Kent Feeds representative we spoke with, Mr. Witter [a film credit middleman] initially approached the company to determine if they were interested in purchasing tax credit certificates. When Kent Feeds declined, they were asked if they would be interested in sponsoring a project for Changing Horses. Kent Feeds agreed and a contract was prepared and presented to the company which included a value of $1,000,000.00 for the sponsorship.
According to the Kent Feeds representative, they declined to sign the contract for the first project which included the $1,000,000.00 value. The representative stated he told Mr. Witter the amount was grossly overvalued and they would not sign the contract. After the value was removed, Kent Feeds signed a contract which did not include a value for the sponsorship.
It appears (from Exhibit B in the Auditor's report) that the production company claimed a $1,000,000 value for the Kent Feeds sponsorship anyway.
The defense is likely to focus on the apparent approval of the practice of claiming credits for such pretend expenditures by the Department of Revenue in an e-mail. The valuation problems that Kent Feeds pointed out may blunt such a defense.
Of course, even an competently-run program to transfer money from Iowa taxpayers to Hollywood is a bad idea. Hire a guy with no financial background to run the program and wave money around to Hollywood with no controls, and this is what you get.
Enough of this namby-pamby springing forward only one hour. Spring forward all the way to St. Patrick's day and get the party started at the new Carnival of Taxes!
Once again Kay Bell has scoured the blog world for the latest and greatest in tax coverage, so climb on top the bus and head on over!
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to