The Des Moines area has an unusual tradition for trick-or-treating on October 30, rather than October 31. On our “Beggars Night,” it’s customary for the little monsters to tell a joke. A perennial favorite:
What’s a pirate’s favorite restaurant?
So drive carefully tonight!
Speaking of scary, think of having your IRA disqualified and taxed currently, with penalties, for engaging in a prohibited transaction. That’s what happened to a Missouri man in Tax Court yesterday.
The taxpayer, a Mr. Ellis, rolled $320,000 out of his 401(k) and put it into a self-directed IRA. The IRA than bought 98% of a corporation (an LLC that elected to be taxed as a corporation) to open a used-car lot, where he began working as the general manager. It went badly. From the Tax Court opinion:
In essence, Mr. Ellis formulated a plan in which he would use his retirement savings as startup capital for a used car business. Mr. Ellis would operate this business and use it as his primary source of income by paying himself compensation for his role in its day-to-day operation. Mr. Ellis effected this plan by establishing the used car business as an investment of his IRA, attempting to preserve the integrity of the IRA as a qualified retirement plan. However, this is precisely the kind of self-dealing that section 4975 was enacted to prevent.
The result? $163,000 of taxes and penalties on the $320,000 invested in the used car lot — which, of course, may well not be very liquid, seeing that it’s all invested in a closely-held corporation.
This case has an interesting twist to those of us who follow tax cases too closely. The IRA plan was apparently the work of a Kansas City law firm whose attempt to make their practice income largely tax-exempt by funneling it through an ESOP-owned S corporation was shot down in Tax Court in 2011. I’m just guessing here, but the IRS may have taken a look at that firm’s clients after seeing how aggressive the firm was in using retirement plans to shelter business income.
It’s tempting to have your IRA invest directly to avoid the current tax and 10% penalty that can apply to an early withdrawal. The results, though, can be a lot scarier than any trick-or-treater.
Cite: Ellis, T.C. Memo 2013-245.
More scary. Econoblogger Arnold Kling has thoughts on whether Healthcare.gov might be saved:
My opinion of the distribution of likely outcomes is that it is bimodal. There is a high probability that the exchanges will be working at the end of November. I think that there is an even higher probability that they will be working never.
The public pledge where the new savior of the site impresses Mr. Kling, but he thinks the design issues might be intractable.
Andrew Lundeen, Scott Hodge, The Income Tax Burden Is Very Progressive (Tax Policy Blog):
About half of the nation’s income is reported by taxpayers who make less than $100,000, and half is reported by taxpayers who make more. However, taxpayers who make less than $100,000 collectively pay just 18 percent of all income taxes while those who make more pay over 80 percent of all income taxes.
They have a chart, of course:
Howard Gleckman, Who Benefits from Muni Bonds? It’s More Complicated Than You Think (TaxVox) “…while most of the benefit of the tax-exemption goes to high-income investors, lower-income households who hold taxable bonds in their 401(k)s also receive some advantage.”
But they’re ready to regulate preparers! TIGTA: IRS Cannot Account for 23% of its IT Assets (TaxProf).
Jason Dinesen asks Is There a Way to Protect Yourself from Tax Return Identity Theft? Use common sense — but if someone in your family dies, ID thieves may be able to get government-published information enabling them to steal the deceased’s identity no matter what you do.
David Brunori offers Tax Advice for State Legislators of All Parties (Tax Analysts Blog). There’s a lot there, including this:
Both parties should also give serious thought to greater reliance on the property tax. Yes, I know people hate that tax. I also know that politicians find it advantageous to attack it. But the property tax revolts of the late 1970s and the 1980s have badly damaged the fiscal structure of state and local governments.
Don’t expect either party to heed the advice.
William Perez, 47% of Individual Taxpayers Earn Under $30,000
TaxProf, The IRS Scandal, Day 174
High-fiber diet. Tax identity thief who ate debit card evidence is convicted (Kay Bell)
From Phil Hodgen’s series on expat taxes: Chapter 2 – Are You An Expatriate?
Carlton Smith, Byers v Comm’r – CDP Venue In Courts Of Appeals May Be Upended (Procedurally Taxing)
Joseph Thorndike, It’s Time to Give Up on Tax Reform (Tax Analysts Blog):
Tax reform? Don’t bet on it. Not this year, and probably not next year either. Tax reform, like everything else in Washington, is on hold pending the resolution of a broader, highly polarized debate about the role of government in American society.
Robert D. Flach has his Tuesday Buzz on Wednesday this week.
yard month penalty for former Eagle Mitchell. The sentence was handed down yesterday in a Florida federal courtroom, reports the Orlando Sentinel.
The former NFL wide-receiver blamed brain injuries suffered on the field after pleading guilty to a plot where he helped convince Milwaukee Bucks player to use a Florida preparer to file a refund claim, which would be split between the NBA player, Mr. Mitchell, and the preparer. The claim was fraudulent, and the NBA player wasn’t charged. Mr. Mitchell also allegedly used an LLC to conceal other fraudulent tax claims. Brain injuries are funny things.
News from the Profession: Dancing Accountant Nearly Thrown Out of a Bank For Dancing To “Money, Money, Money” (Going Concern)
Tags: ACA, Andrew Lundeen, Arnold Kling, Carlton Smith, David Brunori, Going Concern, Howard Gleckman, Joseph Thorndike, Judge Paris, Kay Bell, News from the Profession, Obamacare, Phil Hodgen, Robert D Flach, Scott Hodge, tax court, tax crime, TaxGrrrl, TaxProf, TIGTA, William Perez