Roth & Company, P.C. Tax Update Blog
WSJ: The 97% Fallacy
September 03, 2010
Supporters of increasing the rates at the top two brackets like to say that it will only affect 3%, or 2%, of "small" businesses. An opinion piece in the Wall Street Journal explains why that is an absurd talking point:
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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It failed. It cost billions. Let's do it again!
September 03, 2010
Even though the first-time homebuyer credit has proven to be as effective in reviving the housing market as using meth is at generating good study habits, there are still people who want to revive thhttp://www.rothcpa.com/mt/mt-static/images/formatting-icons/quote.gife credit. TaxVox reports:
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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Debt cancellation income: a 1099-C isn't always right
September 02, 2010
The IRS assessed Dennis Gaffney over $37,000 in taxes and penalties from 2006 based on a 1099-C from Bank of America reporting debt cancellation income. Mr. Gaffney probably thought he would have remembered something like that, and he didn't.
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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Where we go all commercial
September 02, 2010
If you like what you see here, maybe you'll like to get some Tax Update-flavored CPE. I'm participating in a webinar on LLCs with some distinguished lawyer-types. The first webcast is slated for September 16 at 1:00 Central. From the promotional blurb:
-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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It's a bad idea even when they aren't looting
September 02, 2010
Tax Policy Blog on the resumption of Iowa film credits in the wake of the film scandal:
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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Not everybody is meant to farm
September 01, 2010
Here's one sign that a couple might not have been really cut out for farming:
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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We can't use private contractors to do tax work because they might misuse the data
September 01, 2010
The AP reports that Farrah Jones has pleaded guilty to preparing a false return, using data she illicitly acquired while processing taxpayer information to claim refunds on behalf of others. That would pretty much seal the case against allowing her employer to handle confidential information, because obviously there is an inherent flaw in their procedures or culture. It's a good thing they shut down the pilot program for private collection of tax debts.
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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Back to school Cavalcade
September 01, 2010
Summer's over, and school's back in session. It's only right, then, that a student host the new Cavalcade of Risk!
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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20 more for Eddie
August 31, 2010
Wesley Snipes' tax guru's vacation from the tax advice business has been extended. From a Department of Justice press release (no free link yet available):
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.comEddie 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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Deducting your Discover Card credits
August 31, 2010
The TaxProf reports:
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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Beam him up!
August 31, 2010
Former Congressman and convicted tax evader James Trafficant has secured an independent spot on the ballot for his old seat, reports Russ Fox. He can form a special caucus for the tax-compliance-impaired with Charlie Rangel if he wins.
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Flach and preparer regulation
August 31, 2010
Robert D. Flach is unconvinced by my arguments against increased preparer regulation. I think the argument boils down to whether the benefits of regulation are worth the costs. He thinks so. I think that's as much a victory of hope over experience as a fourth marriage.
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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Relax! Iowa is funding Hollywood again.
August 30, 2010
Iowa faces a $1 billion budget gap. Teachers and state employees have been laid off, salaries have been cut, courthouse hours are trimmed back and cases are delayed. But at least Hollywood is cashing in:
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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So you go to the doctor because your head aches. The doctor tells you you have a headache.
August 30, 2010
The "Volker Panel" has issued it's report on tax reform options. After reading this from TaxVox, I'm having no difficulty containing my enthusiasm:
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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Convictions of two KPMG defendants affirmed
August 30, 2010
A federal appeals court upheld convictions of two of the defendants convicted in the KPMG tax shelter trial after charges against most of the defendants were thrown out. Jack Townsend, a defense attorney in criminal tax cases, thinks the circuit court shouldn't have been so glib.
More from the TaxProf.
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There be trolls
August 30, 2010
The Tax Update is obviously a big fan of blogging, but dangers lurk everywhere -- dangers like copyright trolls. Megan Erickson's inaugural post at IowaBiz.com will help you stay out of troll country.
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Why I think the Tax Court judge got the passive loss 750-hour test wrong
August 28, 2010
Last week I questioned whether a Tax Court judge was correct when he commented that absent an election to combine rental real estate activities under Sec. 469(c)(7), each real estate activity has to meet the "750 hour test" to make a taxpayer a "real estate professional." This often would make a taxpayer's status as passive or non-passive hinge on a procedural foot-fault -- the filing of the Sec. 469(c)(7) election.
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.
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BDO Partner convicted of helping client deduct phony costs
August 27, 2010
From a Department of Justice Press Release:
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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