Archive for May, 2012

« Older Entries

Tax Roundup, 5/31/2012: marketing your worries away; playing favorites in Kansas, and exciting new Section 83 regulations!

Thursday, May 31st, 2012 by Joe Kristan

Flickr image courtesy jnn1776 under Creative Commons license

The TaxProf notes a hilarious academic effort from Richard Lavoie, Akron University,  Patriotism and Taxation: The Tax Compliance Implications of the Tea Party Movement:

Given the rise of the tea party movement, which draws strength from the historical linkage between patriotism and tax protests in the United States, the role of patriotism as a general tax compliance factor is examined in light of the extant empirical evidence. The existing research suggests that patriotism may be a weaker tax compliance factor in the United States than it is elsewhere. In light of this possibility, the tea party movement has the potential to weaken this compliance factor even more. Further, when considered in light of the broader tax morale factors that contribute to tax compliance, the tea party movement also poses a risk of destabilizing the social contract framework that underlies our established taxpaying ethos. In order to strengthen the impact of patriotism on tax compliance and lessen any adverse impact of the tea party movement on the country’s taxpaying ethos, the government should take steps to disentangle American patriotism from its anti-tax roots. Important first steps in this regard are outlined in this Article, including the creation of a voluntary “Patriotic Remittance Tax.” Making such changes will strengthen the bond between taxpayers and the government and help promote a vision of American patriotism that is positively associated with taxation rather than antithetical to it.

That’s just wonderful.  If you think that spending the country into bankruptcy is a bad thing and you organize against it, it “poses a risk of destabilizing the social contract framework that underlies our established taxpaying ethos.“  So you just do some marketing.  A voluntary Patriotic Remittance Tax!   Strengthening the bonds between taxpayers and government!  That should be all it takes to convince the rubes that spending their grandchildren into penury is a terrific idea.

You want to know what really bonds the taxpayer and the government?  The IRS.  The federal prison system is full  of people who are truly bonded to the government like with Superglue, including that supervised release when they get out.

 

Tampa car dealer faces 32 tax counts related to identity theft:

A car dealer accused of nearly $9 million in tax refund fraud whose freedom vexed Tampa’s police chief for months was arrested Monday on 32 federal criminal charges

Authorities say Russell B. Simmons Jr., 42, owner of Simmons Auto Sales on North 34th Street, used the proceeds of tax fraud to buy a $60,000 Bentley coupe and a lot of diamond jewelry, including a $30,000, 18-karat gold Rolex perpetual date watch with a diamond dial; a 14-karat gold men’s bracelet with 2,420 diamonds; a 14-karat chain and “RS” pendant with 703 diamonds; and a 14-karat ring with 110 diamonds.

But rest assured, Commissioner Shulman will be right on this, as soon as he finishes shooting the offshore jaywalkers and administering the open-book competency tests to preparers.

Another Swiss bank customer pleads guilty: Plea for Defendant Charged with Tax Crimes (including FBAR) (Jack Townsend)

TaxGrrrl: Small Business Owners Weigh In On Tax Cuts, the Buffett Rule and the Election

TaxBreak, Tax Foundation: Kansas tax cut plays favorites

Anthony Nitti, Examining the Proposed Section 83 Regulations

Stacie Kitts, Foreign Filing Requirements – Forms 8938 and TD F 90-22.1 Handy Chart

News you can use: Get tax help covering combined business, pleasure travel (Kay Bell)

Peter Reilly, Couple Denied Homebuyer’s Credit – You Are Not Your S Corporation And Your S Corporation Is Not You.  It’s talks about the case I covered here.

Yes! Dewey Think an Accounting Firm Could Go Bankrupt? (Going Concern)

Yes again! Are New Yorkers Fleeing Higher Taxes? (Tax Policy Blog)

Share

Tags: , , , , , , , , ,
Posted in Tax Roundup, Uncategorized | No Comments »

Summer starts now cavalcade!

Thursday, May 31st, 2012 by Joe Kristan

While it’s not technically the start of summer, Memorial Day really does get the grilling season underway.  Fire up the grill, rev up the locomotives, and head to the new Cavalcade of Risk!

“Insurance Coverage Law in Massachusetts” hosts this edition of the blog world’s roundup of insurance and risk-managment posts.  I for one am please to see evidence that coffee drinkers live longer, via Insureblog.

Share

Posted in Uncategorized | No Comments »

Tax Roundup, 5/30/2012: life among the jaywalkers. What rich folk don’t pay taxes? And does having someone else cover your losses make a bad investment a good one?

Wednesday, May 30th, 2012 by Joe Kristan

What the war on “international tax cheats” means to the cowering civilians in the bombing area. International tax planning attorney Phil Hodgen dined with some Americans working abroad and reports:

For you, the American living overseas, tax return preparation is an order of magnitude more complicated than for someone living at home in the USA. There are extra forms to fill out. Extra stuff to report. Big, big penalties if you fluff things up. So you either spend an inordinate amount of your free time doing the tax returns yourself, or you pay a lot of money to an accountant to do the work for you. I don’t know what the people around the table last night spend, but it would be common to see tax bills of $3,000 – $4,000 in my experience. Let’s say you only spend $2,000. Lucky you.

The amount of tax that the IRS typically collects from people living in Europe and other high tax countries is ZERO. The foreign tax credit (PDF) ensures this. So does the foreign earned income exclusion (PDF).

Short story? You pay $2,000 or maybe much more to do a tax return that yields zero revenue for the U.S. government. And you burn up a lot of nights and weekends doing the paperwork.

Then you hear some Senator yammering about people like you and how you should be paying your “fair share” to the U.S. Treasury. 

The whole post is very much worth reading.  The pointless burden put on innocent taxpayers by the IRS shoot-the-jaywalkers enforcement of the already ridiculous international reporting rules is most disgraceful of IRS Commissioner Shulman’s many policy blunders.

And Here You Thought It Was Just Peasants Not Paying Any Income Taxes (Going Concern).  They quote a Bloomberg article:

 The percentage of U.S. taxpayers reporting adjusted gross income exceeding $200,000 who paid no U.S. income taxes increased in 2009 to 0.53 percent from 0.51 percent, meaning that one in 189 high earners avoided taxation, an Internal Revenue Service study found. The filers reported tax-exempt interest along with deductible charitable contributions, medical expenses and other items to legally reduce their taxable income.

Of course, the article is wrong in blaming muni bonds, which aren’t included in AGI in the first place.  So how do $200,000 AGI taxpayers get to zero tax?  It’s often where net income is overstated because the gross is in AGI but the expense generating the “income” is an itemized deduction.  Some candidates come to mind:

  • People with big margin interest accounts or other borrowing costs.  If you have $200,000 if interest income, you can deduct $200,000 of expense incurred to buy the interest-generating assets.  The income is “above the line” and included in AGI, but the deduction is a below-the-line itemized deduction.
  •  Gamblers.  A busy slots player can easily burn through $200,000 in “winnings,” which are above the line, offset by below-the-line gambling itemized deductions.

Another likely example is Old folks in a full-time nursing home. The medical costs can go through the roof. 

Readers – if you have other candidates, I’d love to hear about them in the comments.  Related: somehow Linda Beale gets from 1 in 189 high-income taxpayers paying no federal tax to one in four.  Not a chance.  I’d say it was a typo, but she makes the assertion both in her headline and in the article text (UPDATE, 5/31: corrected now)

 

New state tax credits making solar a better investment for Iowans. (Sioux City Journal). Nonsense. It doesn’t make it a better investment, it just shifts the loss on the “investment” to us chump Iowa taxpayers who have to pay for other peoples’ solar toys.

Because Congressional accounting is always so reliable? FASB under political heat from Congress over lease accounting (TaxBreak)

 You man people have to pay for something on their own? Hot, Hot, Hot: Air Conditioning Tax Credits Have Disappeared (TaxGrrrl)

Paul Neiffer: Be Careful if You Have a Foreign Account

Jack Townsend: Why We Cheat and Lie — Taxes Included

 Len Burman: Billions in Tax Refund Fraud–and How to Stop Most of it

Howard Gleckman: Tax Reform: Going Long v. Going Prudent

Catch Robert D Flach’s Wednesday Buzz roundup of tax posts.

Dan Meyer: Am”Bushed” by Taxes? Keep or Let Die the Decade-Old Tax Cuts?

Next time he should proclaim himself “Lord Vader of the South” instead.  “Self-proclaimed “Governor” of Alabama Sentenced to Ten Years in Federal Prison for Tax Fraud.”  Just one more bit of proof that “sovereign citizen” tax schemes don’t work.

 At least it’s an aim that any legislator can achieve.  “Legislators aim at tax fraud“

Share

Tags: , , , , , , , , , , , , , , ,
Posted in Tax Roundup | 1 Comment »

An $18 million foot-fault.

Wednesday, May 30th, 2012 by Joe Kristan

The TaxProf reports on yesterday’s Tax Court case disallowing an $18.5 million charitable deduction for failure to properly complete Form 8283 for non-cash charitable contributions:

Joseph Mohamed, a prominent Sacramento real estate broker, certified real estate appraiser, and entrepreneur, and his wife donated six properties worth at least $18.5 million to a charitable remainder trust in 2003 and 2004, but failed to read the instructions to Form 8283 (Noncash Charitable Contributions). Although the Tax Court acknowledgef that “the property was quite likely more valuable than the Mohameds reported on their tax returns,” the Tax Court denied the claimed charitable deduction for failure to comply with the substantiation requirements.

The tax law has very specific paperwork requirements for appreciated property charitable dieductions.  The Tax Court explains (my emphasis):

Section 1.170A-13(c)(4), Income Tax Regs., tells us what qualifies as an appraisal summary. One of the threshold requirements is that it be signed by the qualified appraiser who prepared the appraisal. Sec. 1.170A-13(c)(4)(i)(C), Income Tax Regs. Section 1.170A-13(c)(4)(ii), Income Tax Regs., says the summary also must include the following information:

  • the name and Social Security number of the donor;
  • a description of the property;
  • a brief summary of the overall physical condition of tangible property;
  • the manner and date of the donor’s acquisition of the property;
  • the cost or other basis;
  • the name, address, and taxpayer identification number of the donee;
  • the date the donee received the property;
  • a statement about whether the contribution was made by bargain sale;
  • the name, address, and identification number of the qualified appraiser;
  • the appraised fair market value of the property;
  • a declaration by the appraiser that he is an appraiser, with sufficient qualifications to make this appraisal, and not one of the people unable to be a qualified appraiser; and
  • a statement by the appraiser that the fee charged was not of a prohibited type, and that the appraiser has not been barred from presenting appraisals to the IRS under 31 U.S.C. section 330(c).

Joseph failed to include information about several of these categories on his Forms 8283 and the attached statements. For instance, he didn’t include his bases in the properties, there is no bargain-sale statement, and there are no statements from a qualified appraiser. In fact, the statements Joseph attached to the Forms 8283 don’t indicate that they are appraisals at all. If Joseph had hired a qualified appraiser, the lack of appraisal summaries might not have been a problem — section 1.170A-13(c)(4)(iv)(H), Income Tax Regs., says that if a donor forgets to attach the appraisal summary, the IRS can request it and the taxpayer can still get the deduction if he submits the summary within 90 days of the request. But the underlying appraisal still has to be a qualified appraisal completed before the due date of the tax return, and the appraisal summary must still contain the information required by section 1.170A-13(c)(4)(ii), Income Tax Regs. Sec. 1.170A-13(c)(4)(iv)(H), Income Tax Regs. Since Joseph didn’t seek an independent appraisal until after the audits started (well after his returns were due), he can’t even find refuge in this section.

So the taxpayer has given away $18 million and gets all of nothing as a deduction.  The judge said the taxpayer was out of luck:

We recognize that this result is harsh—a complete denial of charitable deductions to a couple that did not overvalue, and may well have undervalued, their contributions—all reported on forms that even to the Court’s eyes seemed likely to mislead someone who didn’t read the instructions. But the problems of misvalued property are so great that Congress was quite specific about what the charitably inclined have to do to defend their deductions, and we cannot in a single sympathetic case undermine those rules.

Anthony Nitti observes:

Mohamed is a bright guy with one fatal flaw: he ventured to prepare his own tax return. In doing so, he filled out Form 8823 — Noncash Charitable Contributions — without reading the instructions, because it “seemed so clear that he didn’t think he needed to.” This would prove to be a costly mistake.

That’s the scary thing about property gifts.  Appreciated or not, if you are giving away $5,000 or more, you need a qualified appraisal and you need to properly report the gift on your return with a Form 8283.  No appraisal or no 8283, no deduction.

The moral? Cheap tax help is often the most expensive.  By doing a return with an $18 million deduction by himself, the taxpayer saved on tax prep fees altogether, so he has that going for him, anyway.

Cite: Mohamed, T.C. Memo 2012-152

Related: NO APPRAISAL, NO CHARITABLE DEDUCTION

Share

Posted in Uncategorized | 1 Comment »

Tax pro’s airplane deduction misses the runway.

Tuesday, May 29th, 2012 by Joe Kristan

A man who operated tax prep businesses in California and Nevada probably felt that he knew how to arrange things to stay out of tax trouble.  The Tax Court decided otherwise last week in the case of Joseph Anthony D’Errico v. Commissioner. 

TPM was a C corporation set up by the taxpayer to provide management services to S corporations that he owned in the tax prep business.  It’s possible that he used the C corporation for the “bracket racket,” diverting enough income from the S corporations to fully use the 15% corporate bracket, but the case doesn’t say so.  The taxpayer sold his S corporation businesses in 2005, which would leave the taxpayer with a management C corporation with nothing to manage. A few weeks before the January 1, 2005 sale of his businesses, the corporation got another asset:

 In December 2004 TPM purchased a Cessna airplane (airplane) for $137,500. Mr. D’Errico  had a pilot’s license and several years of flight training at the time TPM purchased the airplane. Mr. D’Errico testified that TPM purchased the airplane in order for him to travel quickly between TPM’s purported office at the Barton Drive home in Stateline, Nevada, and his two active tax preparation corporations

So what does a mangement company with nothing to manage do with its airplane?

On December 29, 2004, TPM entered into an “Aircraft Leaseback Agreement” (leaseback agreement) which allowed the flight training company Flying Start Aero to make the airplane “available to the public for rental” for no more than 75 hours per month. The leaseback agreement stated that TPM was entering into the agreement “with the intention of generating some revenue for the purpose of offsetting a portion of the aircraft operating costs”. Even though the airplane was leased to Flying Start Aero, TPM was still responsible for airplane expenses such as insurance and maintenance. The lease was canceled by Flying Start Aero in early 2006 upon TPM’s failure to pay such expenses.

The airplane was not used in TPM’s tax management related business during 2005 or 2006. Petitioner claimed in his testimony that he used the airplane on business related trips in both January and April 2007. However, Mr. D’Errico did not introduce a log of his airplane use during 2007 into evidence. The only 2007 airplane records summarized expenses one Matthew Laughlin incurred in a trip to Los Angeles. Mr. Laughlin had been Mr. D’Errico’s certified flight instructor since Mr. D’Errico began to fly in 2001. Mr. D’Errico testified that Mr. Laughlin “came out from Denver to talk to me about multiple uses for the airplane. He thought it would be a good idea for us to start our own flight school, in which he would have a flight school and I would rent the airplane to his flight school.”

Perhaps it was an excellent idea, though nothing apparently came out of it.  Deducting the airplane expenses in the corporation also seemed like a good idea:

On its TYE April 30, 2006, tax return TPM reported income from the airplane rental of $21,869, airplane expenses of $17,042, and airplane depreciation of $11,408. On its TYE April 30, 2007, tax return TPM reported no airplane rental income,7 airplane expenses of $19,351, and total depreciation of $7,324.

The corporation also deducted expenses for a Chevy Tahoe that the taxpayer testified was “exclusively for business use,” according to the opinion.  The corporation also deducted phone expenses, “supplies,” and meals.  The corporation paid “rent” to the taxpayer for an office in his home.  Also:

TPM deducted utility expenses for the Barton Drive home of $2,695 and $2,491 for its TYE April 30, 2006 and 2007, respectively. These expenses included cable television, Internet, gas, electric, and certain repairs.

Well, the corporation didn’t have a business to manage.  Maybe having cable and Internet gave it something to do. 

The Tax Court didn’t like the deductions.  It had this to say about the airplane:

TPM argues that the airplane was necessary for its tax management business because Mr. D’Errico had to travel between Nevada and southern California to fulfill TPM’s business obligations to [his tax preparation S corporations sold in 2005]. However, at the time TPM purchased the airplane, Mr. D’Errico knew that he was going to be selling… TPM has produced no evidence that the airplane was used in TPM’s tax management business after 2004.

The Tax Court didn’t just disallow the deductions (my emphasis):

As discussed above, TPM failed to establish that it conducted business-related activities at the Barton Drive home, with the result that the rent payments made to Anthony D’Errico are not deductible by TPM. Further, Mr. D’Errico failed to introduce evidence to support his claim that he used only a portion of the Barton Drive home as his personal living area. Neither the lease between TPM and Anthony D’Errico nor the sublease between Mr. D’Errico and TPM identifies certain areas of the Barton Drive home reserved for TPM’s business use. We find that Mr. D’Errico derived a personal benefit from his use of the entire Barton Drive home and received constructive dividend income as a result of the rent payments made by TPM.

Petitioners have also failed to prove TPM’s entitlement to deductions for the airplane expenses. Further, petitioners have failed to introduce evidence to show that Mr. D’Errico did not benefit from TPM’s purchase of the airplane or TPM’s paying for rental of another airplane for Mr. D’Errico to fly. Mr. D’Errico admitted that he “enjoy[ed] flying and everything” and that he used the rented airplane to continue his flight training. Mr. D’Errico also discussed using TPM’s airplane to start a flight training school with his certified flight instructor, Mr. Laughlin. Finally, petitioners failed to substantiate any amount of business travel or lack of Mr. D’Errico’s personal use of the airplane during the years at issue. We find that Mr. D’Errico derived a personal benefit from the airplane expenses paid by TPM and received constructive dividend income as a result.

When an expense of a C corporation is changed to a “constructive dividend” in an audit, the taxpayer loses twice: the corporation loses a deduction, but the taxpayer gets extra dividend income. 

The Moral? Sometimes when taxpayers sell their business, they think it might be a good idea to keep the business around “in case they need it.”  That’s fine, if pointless, but when you don’t have a business any more, you no longer have a reason to claim business expense deductions.  If the corporation pays arguably personal expenses, you run the risk of losing the corporation deduction while boosting your personal tax bill.   That’s true no matter how much you know about taxes.

Cite: D’Errico, T.C. Memo 2012-149.

 

Share

Tags: , , , ,
Posted in Uncategorized | No Comments »

Tax Roundup, 5/29/12: NY Times discovers ID theft tax fraud; licenses run amok; IRS loses DOMA tax case; states laying off kangaroos.

Tuesday, May 29th, 2012 by Joe Kristan
Flickr image courtesy Chester Zoo under Creative Commons license.

Now that the New York Times has noticed, it’s official: “With Personal Data in Hand, Thieves File Early and Often.”  The IRS was obsessed with regulating and controlling honest preparers while the low-rent ID thieves were prying open the back door.

Yes. Do we require too many licenses, and are they too hard to get? (Gongol.com) The preparer regulation scheme is a classic example. It will raise consumer prices without improving the product. Meanwhile, the fisc is bleeding from ID theft, a completely different problem that caught the IRS flat-footed.

State Trend: Independent Tax Courts (TaxProf Blog).  I would like to see them here, but Iowa continues to rely on kangaroo justice for tax cases. 

Sometimes the best ideas are the simple ones, like this from TaxGrrrl:

But tax fraudsters today have learned that they can make big money by inflating tax credits and using stolen identities to collect even when they don’t pay into the system. In some instances, all they need is a Social Security Number.

So here’s my great advice: eliminate refundable tax credits. So simple. So easy. And I am sure that it would reduce tax fraud.

It would indeed.  The refundable first time homebuyer credit was a fraud pinata, and the earned income credit is notoriously fraud-ridden.

Going Concern: California Board of Accountancy Wants to Throw the Book at Mayer Hoffman McCann for City of Bell Audit

Robert D Flach was Buzzing over the long weekend.  Shockingly, he finds bad things to say about CPAs as tax preparers.

Linda Beale: Another US District Court finds no rational basis for DOMA treatment of same sex couples

Dan Meyer tells of a new guide to school district financial statements from the Government Accounting Standards Board.  It should be required reading for school board members.

TaxVox, the blog of the Tax Policy Center, seems to be down today.

News you can use: Dear Clients, The Guy At The Gym Who Runs All His Personal Expenses Through His Business Is Not a Role Model (Anthony Nitti)  Unless you believe in the idea of reverse role models.

Either I missed something in the paper over the weekend, or this pastor is disappointed.  Pastor Going to Trial for Tax Charges Predicts Jesus Will Come Today (5/27/12)

But then the actuaries will feel left out:  Romney Campaign Should Look At Public Accounting – Where The Really Incredibly Boring White Guys Are (Peter Pappas)

Share

Posted in Tax Roundup | 2 Comments »

That sure looks like a disincentive to me.

Friday, May 25th, 2012 by Joe Kristan

Linda Beale responds to the piece I linked to yesterday about the disincentives to increased income created by the earned income tax credit phaseout. She cites a study that doesn’t really address the question and then says “look, a squirrel” that the real problem is gender bias.

TaxVox links to “A New Urban Institute Calculator Shows What Taxes and Transfers Mean for Low-Income Families” that illustrates the problem Linda Beale waves away:

A single parent in Connecticut with two young children could have received over $18,000 in transfer benefits if she had no earnings and no income, assuming her pre-subsidy rent was $600 per month. But suppose her earnings increased to $17,000 (poverty level) – spread evenly throughout the year – increases in childcare costs (assumed to be $250 per month before subsidies) and payroll taxes would have reduced her earnings by almost $2,000. Income tax credits and transfer benefits would have then added $16,500 – for a total net income of almost $33,000. If her income increased to twice poverty, she’d have to pay almost $5,600 in subsidized child care costs, state income taxes and payroll taxes. She’d receive about $6,400 in tax and transfer benefits – for a net income of $35,000. Thus, doubling her wages from $17,000 to $34,000 resulted in a net change in income of only about $2,000.

To say that result doesn’t discourage work is to say that the poor are bad at math. No, not all of the lost benefits are from the earned income credit phaseout, but that’s an important part of the picture.  The phase out of welfare benefits, including earned income credits, can cause marginal rates at some levels to exceed 100%.  That problem doesn’t go away no matter how much Linda Beale frets over gender bias.  Arnold Kling has made more constructive suggestions:

 There are two potential solutions. One solution is to base eligibility for means-tested benefits on total income, including other government benefits programs. Another approach would be to abolish a lot of specific programs and replace them with generic cash assistance.

 Simply jacking up the benefit levels of existing programs only makes the disincentive problem worse.

 

Share

Tags: , ,
Posted in Uncategorized | No Comments »

Tax Roundup, 5/12/2012: Maryland vs. Kansas in tax reform. A national film tax credit? And weekend video tips!

Friday, May 25th, 2012 by Joe Kristan

hh44.jpgThe answer to madness: more madness! The TaxProf links to “Down the Rabbit Hole: The Madness of State Film Incentives as a ‘Solution’ to Runaway Production“, a law review article. It has this summary:

Since 2007, there has been a race to the bottom as virtually every state has enacted significant, if not detrimentally generous, tax incentives to lure film and television production. The efficacy of these incentives is evaluated at length, with particular attention paid to the origin and implementation of tax incentives in California, Massachusetts and Louisiana – states with colorful backgrounds on this issue. The paper suggests that the current “solution” to the runaway production problem (competing state incentives) is counter-productive to the point of becoming the problem and calls for the enactment of a single national tax incentive for the entire nation to better compete with foreign production locales like Canada.

I have a better solution: have Hollywood spend its own money. If Canada wants to throw their taxpayer money at Hollywood, I hope the thieves can stay warm in Winnipeg.

Speaking of corporate welfare: QQ Rhode Island Noobs: You Paid $75 Million for Failed Game Company.  Curt Schilling’s game company, bribed with taxpayer money to move to the Tiny State, closes its doors.(Reason.com).   That cost every Rhode Islander about $71.34.

An experiment. Maryland has just enacted a big honking tax increase, while Kansas has just enacted a base-broadening, rate-reducing tax reform. It will be an opportunity to see whether Maryland fares better with the Citizens for Tax Justice-type tax plan, or whether Kansas does better with a plan not designed to clobber the successful. I think some of the Kansas plan — like the “small business” income exclusion- is half-baked, it is still the most important tax reform we’ve seen lately in any state.

Have a nice day. Coming soon: ‘Fiscal Cliff,’ the biggest economic and tax disaster of all time! (Kay Bell)

Memorial Day blockbuster! Video Blog: Understanding Revenue Ruling 99-6, Situation 2 (Anthony Nitti)

Bus Fees and the Iowa Tuition and Textbook Credit (Jason Dinesen)

Tax Break, Essential reading: Greeks stop paying taxes, Nancy Pelosi’s rich tax, and more

TaxGrrrl: Hewlett Packard’s No Good, Terrible May: Layoffs And Tax Losses

Police sounds like an odd refund scheme: “Beware new bogus tax refund scheme: police” (Brisbane Times).

Share

Posted in Tax Roundup | No Comments »

Tax Roundup, 5/24/2012: Vikings pillage taxpayers, Giant, Eagle choose not to help, and why it’s harder to do taxes than to eat right.

Thursday, May 24th, 2012 by Joe Kristan

Like the Vikings of Old: Pillaging Minnesota’s Budget (Tax Policy Blog):

This week in Minnesota politics has been instructive in what kinds of projects warrant state money and attention.  Governor Dayton signed a bill approving the construction of a new stadium for the Minnesota Vikings which he boasted would create thousands of jobs and would not use “a single dollar of General Fund tax revenues“. The state agreed to pay $498 million of the $975 million price tag for the new stadium, with $150 million of their contribution coming from the revenues of Minneapolis’s “hospitality tax” (a sales tax surcharge) and $348 million from electronic pull tabs.

Dayton championed the deal despite the growing body of research that, as academics have observed, “contains no evidence supporting the idea that sports facilities are important engines of economic growth.” That is in part because, as analysts at UBS note, the economic analyses used to support sports stadiums tend to over-estimate the benefit of stadiums by ignoring the substitution effect; individuals who would travel to spend money on live music and restaurants in the downtown area instead spend them on the professional sports team. 

It’s similar to the way Iowa’s economic development officials say they create jobs with tax credits, ignoring the jobs lost by the unsubsidized competitors of the corporate welfare recipients, and the economic activity that would have occurred had the state not taxed the money from us to give away in the first place.

$452 billion tax hike in 2013: Taxmageddon by the numbers (Tax Break):

The expiration of tax breaks like the 2001/2003/2009 tax cuts, as well as the payroll tax cut, estate tax breaks, the R&D tax credit for businesses, combined with the cost of the Patient Protection and Affordable Care Act (“Obamacare”), and other sundry items, will add up to the overall tax increase in 2013 of $451.8 billion.

Repeal of Tennessee Gift and Inheritance Tax Official (Tennessee Tax Guy).  “Without a true income tax, and now without gift and inheritance taxes, Tennessee will likely be viewed as one of the most taxpayer-friendly states of the nation.”  Are you listening, Iowa?  (No.).

Former Dwarf, Crow believed to be in compliance. Former Giant, Eagle Fails to File Tax Returns (TaxDood)

 TaxVox: A Path Forward on Tax Reform.  We’ll go down that path when there are no others left. 

Peter Pappas:  I Am Aaron Worthing (or My Contribution to “Everybody Post about Brett Kimberlin Day”). Is a convicted deomestic terrorist using a 501(c)(3) and celebrity money to threaten and silence political opponents?  More here.

Brian Strahle: Teeter-Totters, Musical Chairs and Tug of Wars: The World of Multistate Income Taxes

Anthony Nitti: Doctor Done In By Tax Court’s “Too Good To Be True” Logic.  The Tax Court says that there was no reasonable cause to file returns based on the word of a promoter of a Sec. 419 tax benefit scheme.

Kay Bell: Beware unsolicited — and questionable — property tax payment plans

More Americans are very confused: More Americans Believe It’s Easier To Understand Tax Than How To Eat Healthy (TaxGrrrl)

Share

Tags: , , , , , , , , ,
Posted in Tax Roundup | 1 Comment »

EITC: a discouragement to work?

Thursday, May 24th, 2012 by Joe Kristan

When the Iowa legislature was considering a big boost in the state earned income tax credit, I pointed out how the credit phase-out punishes additional income.  The phase out works like a special high tax bracket on low-to-moderate income increases.   Today a New York Times opinion piece (via the TaxProf) makes the same point:

The earned-income tax credit is often said to encourage work, but it may do just the opposite.

…

The chart below shows the credit’s schedules for the 2011 tax year as a function of annual earned income for a given family situation (other family situations have the same basic shape). The schedule shown illustrates the mountain-plateau pattern described above: an increasing portion for the lowest incomes, a flat portion, a decreasing portion and then finally a flat portion of zero.

 

So while the credit encourages work until the maximum credit is achieved — under these facts, at $9,100 — it actively punishes increases in income from $21,770 to $41,132.  It’s the same point I made with this chart about the proposed increase in the Iowa EITC from 7% of the federal credit to 15% in one of the failed compromises to achieve property tax reform:

The EITC is credited with reducing abject poverty by its advocates.  Unfortunately, the phaseout punishes attempts to move to middle income status, locking people into relatively low income lives.  It’s an unintended consequence that EITC advocates never seem to address.

Related: Governor to buy property tax reform by doubling earned income credit?

 

 

Share

Tags: , ,
Posted in Iowa Tax Law | 4 Comments »

When IRS can’t collect $30 million it knows it is owed, maybe it shouldn’t be taking on new assignments

Wednesday, May 23rd, 2012 by Joe Kristan
http://www.rothcpa.com/misc/20090617-2.jpg

Flickr photo of "The ultimate Swiss Army Knife" by redjar

The Des Moines Register this weekend highlighted a case involving an Eastern Iowa trash hauler who the IRS says is behind on tax remittances by $30 million or so.

For two decades, federal authorities have tried unsuccessfully to get James L. Watts to pay his massive tax debts through assessments, liens and garnishments. But the U.S. Justice Department did not try to bring down a hammer on his business practices until late last year

Other problems have yet to be addressed by state and federal authorities, including the fact that Watts’ companies have failed to pay at least 14 judgments in favor of injured workers since 2008, according to the court records and Chris Godfrey, who heads Iowa’s Workers’ Compensation Division.

The result: Garbage truck drivers have been left injured and penniless, taxpayer-owned landfills have been shortchanged thousands in tipping fees, and state coffers have suffered along with the U.S. Treasury.

 The article says the problems go back to the 1960s.  We have discussed this case here.

As tax cases go, this seems rather straightforward.  The tax is assessed, the IRS knows who owes it.  Still, it can’t collect.

Every year Congress gives the IRS more to do.  It has become a sprawling superagency administering programs from industrial policy (R&D credits, export subsidies, manufacturing subsidies) to historic preservation, housing policy to healthcare.  If that’s not enough, the IRS has also eagerly taken on the chore of inventing a new profession of registered tax return preparers. 

Yet the IRS isn’t worth much if it can’t do its real job, assessing and collecting the proper tax.  Policy makers and the IRS Commissioner himself seem oblivious to the idea that making the agency the Swiss Army Knife of public policy reduces its ability to do the one job it should be doing. 

Links:

Order on moion for preliminary injunction
Amended IRS complaint
Answer to amended complaint

Share

Tags: , ,
Posted in Uncategorized | No Comments »

Tax Roundup, 5/23/2012: Investigate the IRS? Who pays corporate taxes? And fighting over $71 in Tax Court.

Wednesday, May 23rd, 2012 by Joe Kristan

20120104-1

Fortunately, it’s their offices, not yours.  IRS Announces 43 Small Offices to Close.  Trish McIntire has more.

To irrelevance and oblivion? We can only hope. IRS going the Postal Service route (Kay Bell)

Why I don’t like state tax administrators: Thanks for Visiting Washington State – That’ll Be $180,000 (Tax Policy Blog)

Robert D. Flach has the Wednesday Buzz.

It’s Time to Investigate the IRS (Fox news, via the TaxProf).  Yes it is.  There are too many wannabe politicians in the exempt organization branch, at least.

82% on capital, 18% on labor.  The Treasury Office of Tax Analysis says that’s how the burden of the corporate tax falls. (via the TaxProf)

Well, for that kind of money, it was worth litigating anyway.  Tax Court denies $71 in costs to prevailing taxpayer.

Remember, this is the outfit the IRS has hired to administer preparer “compentency” exams. CPA Exam Horror Stories: Trapped at Prometric For 6 Hours (Going Concern).

Jason Dinesen, The MC Tax Hangout, 5/22/12  I stopped by for awhile, once I figured out how to turn on my microphone.

Peter Reilly, Something To Watch Out For If You Have Investment Interest Expense – Possible Refund Opportunity

TaxGrrrl, Ask the taxgirl: Medical Expenses and Income Adjustments

Russ Fox, An Incorrect 1099-C Leads to Tax Court

News you can use: Slow Down on Those Cool Ranch Doritos, A Fat Tax May Be Coming. (Anthony Nitti) Actually, that would seem like a signal to hurry up on the Doritos, to beat the tax.

That would be convenient. A minister scheduled to go on trial on tax charges in June predicts the Second Coming for May 27.

Share

Tags: , , , , , ,
Posted in Tax Roundup | No Comments »

Tax Court: no homebuyer credits for S corprorations, LLCs.

Tuesday, May 22nd, 2012 by Joe Kristan

Flickr Image by Joe Shlabotnik under Creative Commons License

The futile and wasteful homebuyer credits are history, except for cleaning up the messes in court.  The Tax Court yesterday ruled that two sets of homebuyers foot-faulted their way out of their credits — one by by having their corporation buy their house, and one by using an LLC.

The S corporation case involved a Nevada home through their Wyoming S corporation, ”Santsu,” which also owned rental properties that the couple operated.  The tax court takes up the story:

Sanstu was the legal owner of the property. The property was petitioners’ principal residence. Petitioners had not owned another principal residence during the prior three years.

Petitioners claimed the $8,000 tax credit on their Form 1040, U.S. Individual Income Tax Return, for 2009. Sanstu did not claim the tax credit on its Form 1120S, U.S. Income Tax Return for an S Corporation, for 2009. Respondent issued a deficiency notice to petitioners, disallowing the tax credit.

The court said that didn’t work because the tax law allowed the credit only to “individuals” (Citations omitted, emphasis added):

We hold that S corporations are not individuals for purposes of section 36.  A corporation, at its core, is a business entity organized under State or Federal law, whether an association, a company or another recognized form. A corporation that satisfies certain criteria may elect small business status for Federal income tax purposes.  An S election does not alter the corporation’s corporate status; it merely alters the corporation’s Federal tax implications.  Items of income, deduction, loss and credit generally pass through to the shareholders.  S corporations remain freestanding entities “independently recognizable” from their shareholders.  Individual taxpayers, on the other hand, are subject to tax under section 1, which sets rates for married and unmarried individuals, heads of households, and estates and trusts.  A corporation’s income is not subject to tax under section 1. Rather, tax is imposed on corporate income under section 11. Accordingly, corporations are not individuals within the meaning of section 1.

As an extra kick in the teeth for the taxpayers, apparently an IRS representative had told them it was OK to use the S corporation.  Tough, says the court:

It is unfortunate when a taxpayer receives inaccurate information. We have recognized, however, that incorrect legal advice from an IRS employee does not have the force of law and cannot bind the Commissioner or this Court.

If there’s real money at stake, don’t take the word of some IRS person on the phone.  Get it in writing or get professional help.

The LLC Case involved the purchase of a New Jersey residence by “Jacco,”  a family LLC owned by the taxpayers and their four children.  Using similar reasoning as in the S corporation case, the court said that the taxpayers were out of luck because the LLC is not an individual.  The taxpayer tried another way around, saying that the LLC should be disregarded as the “alter ego” of the taxpayers.  No go, said the court:

Petitioners contend that Jacco was actually their alter ego and, therefore, should be disregarded for purposes of deciding whether petitioners are entitled to claim the first-time homebuyer credit personally. By contending that Jacco was their alter ego, petitioners seek to have the Court pierce the corporate veil. Respondent contends that, pursuant to New Jersey law, an individual member has no interest in specific LLC property.  Respondent further contends that New Jersey caselaw does not support petitioners’ veil-piercing theory.

In the absence of fraud or injustice, New Jersey courts generally will not pierce the corporate veil.  As the New Jersey Supreme Court has explained, the “purpose of the doctrine of piercing the corporate veil is to prevent an independent corporation from being used to defeat the ends of justice, to perpetrate fraud, to accomplish a crime, or otherwise to evade the law”.  Even where the corporation7 has no separate existence and the corporate form has not been respected, New Jersey courts will pierce the veil only where the corporation has been used to perpetuate a fraud or other injustice… Neither party contends that Jacco’s corporate form has been used to perpetuate some fraud or injustice, and the record does not disclose any fraud or injustice that would cause us to disregard the existence of Jacco. Accordingly, petitioners are not entitled to claim the first-time homebuyer credit on the basis of their alter ego theory.

The result should be different if the reseidence were purchased by a single-member LLC, which is normally ”disregarded” from its owner under the tax law.  The multiple owners of the entity presumably prevented that here, but the court didn’t say so specifically.

Cites:

S corporation case: Trugman, 138 T.C. No. 22

LLC Case: Rospond, T.C. SUmm. Op. 2012-47

Share

Tags: , , ,
Posted in Uncategorized | No Comments »

Tax Roundup, 5/22/2012: here comes Taxmageddon! Social Security is very broke. And have a nice day.

Tuesday, May 22nd, 2012 by Joe Kristan

Martin Sullivan gives us something to look forward to:

A combination of spending cuts and tax increases could bring the economy to its knees at the end of 2012. By our count, the economy must deal with nine significant fiscal events that will be automatically triggered by current law if Congress and the president take no action. Together these events create a perfect storm of contractionary tax and spending policies that could push the already fragile American economy back into recession. Fed Chair Ben Bernanke dubbed it a “fiscal cliff.” The media calls it Taxmageddon.

What are the odds of our leaders coming up with a wise and prudent solution?  As a wise man might say, have a nice day.

Tax Policy Blog has a thought for David Cay Johnston: Hiding it Does Not Help: Social Security is Already Broke.  My thoughts here.

Alan Reynolds: Why Top Incomes Rose: Elasticity Not Corporate Executive Pay

IRS Announces a “more flexible” Offer-in-compromise” program.  Because a less flexible one would have been hard to achieve.

No Cert for You!  Supreme Court declines to hear appeal of disqualification of Waterloo dentist’s ESOP (Page 3 of link).  Background here.

When you get an IRS notice, think before you write a check.  Beware: Lots of Incorrect IRS Notices (Russ Fox)

 TaxGrrrl: Murder Suspect Allegedly Used Victim’s Identity to Commit Tax Fraud

Kay Bell: Making stock losses pay off at tax time

First death, then taxes: Tax Duties of an Executor (Jana Luttenegger, Davis Law Tax Blog)

Congratulations on your new partnership! Plan your breakup now. (Mike Colwell, IowaBiz.com)

Shock! IRS Audits Cornell and Harvard, Finds Dangerously High Levels of Pretentiousness (Anthony Nitti)

Share

Tags: , , , ,
Posted in Tax Roundup | No Comments »

Iowa: where they’re trying to kill us all.

Tuesday, May 22nd, 2012 by Joe Kristan

The Tax Policy Blog maps the most expensive places to have a glass of wine with dinner.  Iowa is #3.

Courtesy Tax Policy Blog

With all of the studies showing health benefits for wine, the only conclusion we can draw is that our leaders hate us.  In case the traffic cameras didn’t make that clear.

Share

Posted in Uncategorized | 1 Comment »

Tax Roundup, 5/21/2012: Why giving up citizenship my be more attractive for non-billionaires; the cobbler’s barefoot children; tax tricks you wouldn’t do to a dog.

Monday, May 21st, 2012 by Joe Kristan

Flickr image by Ano Lobb under Creative Commons license.

Why giving up US citizenship can be attractive.  Andrew Mitchel tells what would happen to a U.S. Citizen with a $100,000 investment in a Singapore mutual fund who files tax returns and properly reports his income from the fund, but fails to file his “FBAR” form, Form TD F 90.22-1:

In summary, the $112,000 of cash remaining from the Singapore mutual fund goes to the I.R.S. and you still owe the I.R.S. $8,000.  You have been a loyal U.S. citizen all of your life and you want to remain a U.S. citizen and pay your U.S. taxes.  But when you begin to understand the complexity of the rules (the PFIC rules mentioned above are merely one of many complex tax situations for U.S. citizens living abroad) backstopped with the potentially bankrupting penalties, you start to wonder whether your life might be better off not being a U.S. citizen.

An excellent explanation of the jaywalker shooting that characterizes U.S. international tax enforcement.

Jack Townsend: IRS Warning Letters May be Sufficient for Some NonWillful Violations.  Shooting jaywalkers isn’t mandatory.

No surprise, the cobbler’s children always go barefoot. Seventh Circuit Surprised To See Accounting Firm “Screw Up Its Taxes” (Peter Reilly)

Why you don’t let your tax preparer handle your cash: Myrtle Beach area accountant arrested on tax fraud charges.  From the story:

During the tax years of 2007, 2008 and 2010, Department of Revenue investigators said Voltz advised clients to send money to the accounting firm with the impression that the money would be forwarded for payment of the clients’ income taxes. Voltz failed to forward the money to taxing authorities and failed to pay over $480,000.

There may be one, but I can’t think of a good reason you would ever need to give money to your preparer to pay taxes on your behalf.  Russ Fox has more.

Congratulations to Anthony Nitti!

Robert D. Flach was Buzzing over the weekend.  

Brokers to march for medical transaction tax?  Nurses Support Financial Transactions Tax (Linda Beale)

In the good old days, they kept them technically alive for the show trial, but In This Russian Trial, The Defendant Is A Dead Man (NPR)

Celebrity Tax News: Mr. and Mrs. Mark Zuckerberg and their community property taxes (Kay Bell)

Because they wanted a chance to spend it: Outraged By Facebook Expatriate, Sens. Schumer and Casey Propose Steep “Exit Tax” (Tax Policy Blog)

Tax Break ” Essential reading: Rewriting the tax code, a large tax bill for Facebook’s Saverin, and more”

No written receipt, no charitable deduction over $250. Make Sure You Get Written Confirmation of Donation! (Paul Neiffer)

A candidate for Russ Fox’s Bozo Taxpayer award: Clowne woman guilty of fraud

Well, have you ever tried to train a cat to file its own return? Couple Accused Of Filing Tax Returns In Pets’ Names (denver.cbslocal.com).  But here’s the real crime:

According to an indictment obtained by CBS4, Mathew and Sandra Zuckerman are accused of using their dog and cat’s names to file their taxes. They then allegedly used the savings on a face lift and a cruise.

I don’t condone it, but I can at least understand taking the cat’s refund.  But stealing from your dog, that’s just beyond the pale. 

 

Share

Posted in Tax Roundup | No Comments »

Million dollar mortgages: when division = subtraction

Friday, May 18th, 2012 by Joe Kristan

Filing separate returns can be an expensive move.  It was more expensive than usual for a Brooklynette in Tax Court yesterday.

The taxpayer bought a residence for $1.35 million in 2007.  She lived there with her husband and paid all of the $1 million  mortgage, including $49,739 in interest during 2007. For reasons not made clear in the Tax Court opinion, she filed her 2007 return “married filing separate,” rather than jointly with her husband.  

The tax law limits how much home mortgage interst you may deduct based on the amount of the loan.  For joint filers, you can only deduct interest on up to $1.1 million in home mortgage debt: $1 million “acquisition indebtedness” and $100,000 in “home equity indebtedness.”  As with many other deductions, the tax law cuts these amounts in half for married-filing-separate returns.  The Tax Court takes up the story (my emphasis):

There is no dispute that the property meets the definition of a qualified residence and that the mortgage interest petitioner paid is qualified residence interest because it was paid on acquisition indebtedness and home equity indebtedness secured by the property.

In his notice of deficiency respondent allowed petitioner to deduct home mortgage interest on a total of $550,000 of indebtedness ($500,000 in acquisition indebtedness under section 163(h)(3)(B)(ii) plus $50,000 of home equity indebtedness under section 163(h)(3)(C)(ii)). Petitioner claims that she should be allowed to deduct interest paid on the entire $1 million of indebtedness.

Petitioner correctly asserts that the parenthetical indebtedness limitations of section 163(h)(3)(B)(ii) and (C)(ii) are $550,000 for each spouse filing a separate return. However, petitioner further claims that these limitations were enacted so that, collectively, a married couple filing separately can claim $1.1 million of aggregate indebtedness across both of their returns and is not limited to claiming a maximum of $550,000 on any one return. We disagree.

In short, the Brooklynette said that if her husband wasn’t using all of his deduction on his separate return, she could use it for him.  Separate returns don’t work that way.  Strangely, if they had stayed unmarried but moved in together, she could have deducted the whole $1.1 million.

Citation: Bronstein, 138 T.C. No. 21

Related:

Sophy’s choice: unmarried couples get only one $1.1 million deductible home mortgage loanf

Mortgage deduction traps?

Rick Santorum makes Obama-esque tax planning move

 

Share

Tags: , ,
Posted in Uncategorized | 1 Comment »

IRS issues Applicable Federal Rates (AFR) for June 2012

Friday, May 18th, 2012 by Joe Kristan

The IRS has issued (Rev. Rul. 2012-13) the minimum required interest rates for loans made in June 2012:

-Short Term (demand loans and loans with terms of up to 3 years): 0.23%

-Mid-Term (loans from 3-9 years): 1.07

-Long-Term (over 9 years): 2.64%

The Long-term tax-exempt rate for Section 382 ownership changes in June 2012 is 3.26%.

Historical AFRs may be found here or from prior Tax Update posts.

Share

Tags: ,
Posted in Applicable Federal Rates | No Comments »

Tax Roundup, 5/18/2012: Schumer unfriends Facebook, Nanny taxes and the nanny state, and forget that Lincoln-Douglas stuff.

Friday, May 18th, 2012 by Joe Kristan

 Connect the dots: Schumer Proposes U.S. Tax on People Like Facebook’s Saverin   (SFgate.com)…. Why Foreign Banks Are Shunning American Millionaires (Bloomberg Business Week)

Related: Anthony Nitti: “The fake outrage is laughable, and the reactionary, “prisoner of the moment” tax proposal even more so.” and Phil Hodgen, More self-inflicted damage from the Senate

TaxProf:  The Facebook IPO: Taxing Mark Zuckerberg’s Stock 

Tar and feathers as a solution to the busybody epidemic.  Food Taxes as a Solution to the Obesity Epidemic (TaxProf)
 
 
Waterloo, Iowa dental practice seeks U.S. Supreme Court review of its ESOP disqualification.   Some history here. 
 
Howard Gleckman at Tax Vox on The Boehner/Obama Fiscal Brawl: 
Listening to Barack Obama and John Boehner over the past few days put me in mind of two testosterone-addled 22-year olds preparing for a bar fight, rather than the President of the United States and the Speaker of the House discussing fiscal policy.
 
He may be giving them credit for 18 years too many.
 
 
 
 
 
 
Nothing like this since Dan Quayle debated Abe Lincoln: David Cay Johnston debates Grover Norquist
 
Share

Posted in Tax Roundup | No Comments »

If the senator wants a say on executive comp, he should get himself on a board

Thursday, May 17th, 2012 by Joe Kristan

With all the headlines about fabulous mulit-million dollar compansation packages for big-time executives, you’d never notice that the tax law caps deductions for public company executive pay at $1 million (Sec. 162(m).  So how has that worked out?

Not well, obviously.  Now a new study out of the Georgetown University Law Center gets to the obvious with some academic rigor: 

Sixteen years after its enactment, can we say that the $1 million deduction limitation works and that the Code is the best vehicle for Congress’s efforts to control executive pay? Drawing from a wide range of sources, this paper examines the § 162(m) limitation and explore whether the law achieves its intended result. To add context, it surveys other tax laws that restrict compensation deductions, like the § 286G tax deduction limits for “Golden Parachute” payments, the $500,000 deduction limit on compensation paid to executives at companies that received the largest Troubled Asset Relief Program (TARP) bailouts, and the Patient Protection and Affordable Care Act’s (PPACA’s) $500,000 deduction limit on compensation payments… Upon closer examination, it becomes clear that § 162(m) is less effective than letting shareholders have a binding say over how much companies pay their executives.

The study points out the obvious: the exception for “performance based compensation,” like stock options, has channelled the executive pay away from cash and into options and the like.  Options allow the executive to bet with company money.  If things go well, they and shareholders win, but if they don’t, only shareholders lose.  Some companies might have been better off writing executives big checks rather than encouraging them to roll the dice to run up stock value.  In any case, Congress has no business or skill in telling companies how and how much to pay their employees. 

Via the TaxProf.

Share

Tags: ,
Posted in Uncategorized | No Comments »

« Older Entries