Not a firm foundation. A U.S. District Court case out of Texas last week shows why using a tax-exempt entity can be hazardous to your health. A Mr. Ziegenhals was “manager, director, trustee, and registered agent” of The Le Tulle Foundation, which was “formed in 1991 as a testamentary trust with the stated purpose of operating ‘exclusively for charitable purposes for the benefit of the citizens of Matagorda County, Texas [and] for no other purposes.’”
The court said an IRS audit found that Mr. Ziegnhals “used funds from the Foundation to obtain personal benefits and pay his expenses unrelated to the purported charitable purposes.” That triggered a revocation of charitable status and taxes on “self-dealing,” The total amount of “self-dealing” is alleged as $46,266.21.
What did that cost the alleged self-dealer? From the decision (my emphasis):
The amount allegedly owed by Ziegenhals – $461,125.44 as of November 29, 2013 — is based on the IRS’s calculations of penalties, statutory additions, and interest that have accrued from his unpaid private foundation excise taxes in 2003 and his unpaid federal income taxes in 2007. See Docket Entry Nos. 42-13, 42-14, 42-15. The current amount owed is much larger than the original unpaid taxes of $46,266.21 from 2003 and $6,829.98 from 2007 because the IRS assessed several statutory taxes and penalties on Ziegenhals as both a self-dealer and foundation manager for each year until he was issued the notice of deficiency in 2009 -- an example of what can happen when someone fails to pay his taxes in the first place and then also does not cooperate in repaying the delinquencies in a timely manner.
For example, the IRS imposed a first tier tax of 5 percent for each act of self-dealing, see 26 U.S.C. § 4941(a)(1), a second tier tax of 200 percent of the amount involved for each act of self-dealing that was not corrected within the taxable period, see § 4941(b)(1), a first tier tax of 2.5 percent against Ziegenhals as the foundation manager, see § 4945(a)(2), and a second tier tax of 50 percent of the amount involved for refusing to agree to corrections, see § 4945(b)(2). In addition, the IRS determined that Ziegenhals’ actions constituted willful and flagrant conduct, and thus imposed a penalty equal to the amount of the private foundation excise taxes pursuant to § 6684.
I don’t recommend private foundations for taxpayers who lack a huge amount of money. While it can seem attractive to have something named for you that will outlive you, you need a lot of money to make it worth the hassle. You have to file very detailed and complicated annual reports with the IRS, with $100 daily penalties for late filing. Those filings are open to the public. And if you or your heirs get careless in managing the foundation, the taxes and penalties can explode, as the gentleman from Texas now knows.
It’s much easier to use a donor-advised fund run by a competent charity, like The Community Foundation of Greater Des Moines. They take care of the filings and hassles, and you get at least as good of a tax benefit as you get from having your own foundation.
Special interest break approaches the checkered flag. The bill to extend the special sales tax spiff for the Newton racetrack passed the Iowa Senate yesterday. The bill lets the track keep sales tax it collects from customers, up to a 5% rate.
The break was first passed when the track opened, with requirement that 25% of the ownership be from Iowa and with a 2016 expiration. When NASCAR bought the track, that ended the deal. SF 2341 extends the deal through 2025 and lets NASCAR, owned by a wealthy out-of-state family, keep this special deal that is unavailable for any other tourist and entertainment facilities competing for Iowa dollars (though an athletic facility under construction in Dyersville will have a similar break). I’m sure they have a good story why they needed to pass this, but I don’t buy it; the track isn’t going anywhere, and NASCAR bought it knowing they didn’t qualify.
Like much bad legislation, it had bipartisan support, passing 36-9. There is a glimmer of good news. The total of nine “no” votes is the most I’ve seen for an “economic development” giveaway. Hats off to Senators Behn (R, Boone), Bowman (D, Jackson), Chapman (R, Dallas), Chelgren (R, Wappelo), Guth (R, Hancock) , Quirmbach (D, Story), Schneider (R, Dallas), Smith (R, Scott) and Whitver (R, Polk).
Time for Project Oblivion! The Des Moines Register reports West Des Moines data center project gets $18 million in incentives:
Iowa’s next major data center prospect seeking state-incentive money is headed to the Iowa Economic Development Authority with a stamp of approval from the West Des Moines City Council.
The council on Monday endorsed “Project Alluvion” as a consent agenda item without any discussion, offering up to $18 million in local incentives to land the major project.
Council documents show Project Alluvion would create at least 84 jobs and a minimum of $255 million in taxable valuation.
“People might say, ‘Geez, giving $18 million for only 84 jobs.’ The jobs are important, but it’s more than the jobs,” Councilman Russ Trimble said after Monday’s meeting. “It’s going to help us build the tax base and keep property taxes down.”
That’s 214,285.71 per “job.” So, if we were to move our firm to West Des Moines, that would qualify us for about $7.5 million. Hey, we use computers — we’re high-tech! We’d even call it a cool name, like Project Oblivion! Or Des Moines can pay us to stay, whatever.
Joseph Henchman, Wisconsin Approves Income Tax Reduction, Business Tax Reforms (Tax Policy Blog).
Kristy Maitre, Changes Coming for IRA Rollovers in 2015. (ISU-CALT) ” So going forward, advise your client to make only one IRA rollover per tax year, or to be on the safe side one rollover every 366 days.”
Paul Neiffer, One More Reason Why Tax Reform is Going After Cash Method:
I ran across a posting on the net farm income and loss reported by Schedule F farmers for 2011 and 2012. During each of these years, the USDA estimated that farmers had net farm income in excess of $120 billion.
However, on schedule Fs reported by individual farmers, they showed a net loss in 2011 of about $7.11 billion and for 2012 a net loss of $5.06 billion.
Yeah, “simplification” is really why farmers need accrual accounting. Not paying tax is a lot simpler.
Jeremy Scott, Portman’s Disappointing Tax Reform Plan (Tax Analysts Blog).
Len Burman, Profiles in Courage at the IRS (Really) (TaxVox). It’s a good post, once you get past the manifestly false statement that the current scandals are “fake.” And you’ll notice that Doug Shulman, unlike the hero of the Burman post, left on his own terms.
TaxProf, The IRS Scandal, Day 320
Going Concern, The Debate Heats Up Over How Many Computer Monitors You Should Have. The good folks at GC quote some loser who says nobody needs more than one monitor. Here’s how I feel about the issue:
Now if the one monitor was, oh, 3′ x 5′, I’d reconsider.