Programming note: The Tax Update will be on the road the rest of this week, so this is probably the last tax roundup this week. Unless I change my mind.
Sure, the more witnesses to my crime the merrier. What could go wrong? Every time I see a case in which an employer gets in trouble for evading payroll taxes by paying employees in cash, I have to wonder how much they thought things through. Every employee becomes a potential informant, and it’s hard to imaging not having either a disgruntled employee turn you in or a careless one reveal the secret in the wrong place.
The Department of Justice yesterday announced a guilty plea yesterday:
Sonny Pilcher of Casper, Wyoming, pleaded guilty to tax fraud today in the U.S. District Court for the District of Wyoming, the Justice Department and Internal Revenue Service (IRS) announced. The sentencing hearing was set for Oct. 28, 2014 before U.S District Judge Alan B. Johnson.
According to the charging document, Pilcher attempted to obstruct and impede the IRS. Pilcher did this by claiming a false bad debt expense of $258,000 on his 2008 Form 1040 tax return, and by paying his employees in cash to evade paying employment taxes. Pilcher faces a statutory maximum sentence of 36 months in prison, a $250,000 fine and may be ordered to pay restitution to the IRS.
The inclusion of the “bad debt” in the charge is interesting. You frequently see cases where people claim a non-business bad debt — which is a capital loss — as an ordinary fully-deductible business bad debt. While you might see a civil penalty in such a case, I have never seen that called a criminal matter. This presumably was something more serious than an argument over what kind of bad debt it was.
If you have a full-time job, you probably aren’t a “real estate professional” who can deduct rental losses. And if that’s so, don’t embarrass yourself in front of a Tax Court judge. A taxpayer from California made that mistake in a Tax Court case issued yesterday.
Real estate rental losses are normally passive, meaning that they only are deductible to the extent of passive income (there is a special allowance for taxpayers with adjusted gross income under $150,000). If you are a “real estate professional,” the losses are not automatically passive, but you have to meet two difficult tests to be one:
- You have to work at least 750 hours in the year in a real estate trade or business which you own, and
- your real estate business has to consume more of your time than anything else you do.
If you have a full-time day job, it is nearly impossible to rise to that standard (unless you have a pretty undemanding day job). That didn’t keep the intrepid Californian who had three rental properties — all single-family houses — from giving it a try, as the Tax Court judge explains (my emphasis):
Even if we assume that petitioner worked 1,760 hours and 1,752 hours in 2009 and 2010, respectively, for Northrop Grumman, we do not accept his activity log coupled with this testimony relating to the rental activities as reliable or credible. A review of the activity log and testimony relating to the rental activities leads us to the conclusion the petitioner did not spend more hours at the real estate activity than at his full-time employment at Northrop Grumman. According to petitioner’s logs he spent almost every spare hour in those years working on the rental properties, including 10 hours on July 4 of each year, 12 and 10 hours on February 14, 2009 and 2010, respectively, and 9 and 10 hours, respectively, on December 25 of each year.
Hey, not everybody is a romantic. And I’ll keep Christmas in my own way, thank you very much!
Although he managed three rental properties in each year, throughout 2009 alone petitioner’s records reflect that he repaired or worked on the sprinkler systems on any of the given properties on 64 separate occasions, and throughout 2010 he worked on sprinkler systems on 20 separate occasions. In addition, on March 16 and 17, 2009, the records reflect eight hours to prepare and deliver an eviction notice to be filed in court. Coincidentally, on March 15 and 16 of the next year, petitioner’s records reflect that he performed the very same activity for the same exact amount of time. A review of petitioner’s activity logs leads to the conclusion that the logs are inaccurate and exaggerated.
Maybe he just wasn’t very good at sprinkler systems? Whatever you might think of Tax Court judges, you can be sure that they didn’t get their jobs by being gullible.
Kristy Maitre, Treasury Issues Changes to Circular 230 (Treasury Decision 9668):
Many individuals currently use a Circular 230 disclaimer at the conclusion of every e-mail or other writing. Often the disclaimers are inserted without regard to whether the disclaimer is necessary or appropriate.
Treasury said they anticipate that the removal of the requirement will eliminate the use of a Circular 230 disclaimer in e-mail and other writings because Section 10.37 rules on written opinions don’t include the disclosure provisions in the covered opinion rules.
Good news. I always thought the routine disclaimers were futile and I never used them. They seemed like the email equivalent of a rabbit’s foot — it might make you feel better, but it still was mere superstition. Yet I bet that we’ll still be getting emails from our fellow practitioners with the Circular 230 disclaimer years from now.
Russ Fox, Soon: No More Circular 230 Notices
Jason Dinesen, Iowa Taxes: Filing Separately and Allocating Dependents. “In general, a typical married couple can allocate the dependency exemptions in whatever manner they choose.”
William Perez, Child and Dependent Care Tax Credit
TaxGrrrl, World Cup Mania: Figuring Out FIFA, Soccer & Tax. So there’s a soccer tournament, I hear.
Robert D. Flach starts Tuesday with a Buzz!
Martin Sullivan, Big Deal by Low-Tax Medtronic Has Even Bigger Implications (Tax Analysts Blog). “The main benefit to Medtronic after the inversion will be that the billions of profits it generates outside the United States each year can now be deployed to pay dividends and to buy other U.S. companies without paying U.S. tax.” Sounds like good corporate stewardship to me.
William McBride, Medtronic Embarks on Self-help Tax Reform (Tax Policy Blog). “The high U.S. corporate tax rate is causing serious economic distortions, chasing away businesses, investment and jobs. The only way to deal with it effectively is to bring the corporate tax rate down to competitive levels, which is the path chosen by virtually every other country.”
Renu Zaretsky, Tax Freedom, Tax Avoidance. The TaxVox headline roundup covers the Medtronic inversion and internet taxes.
TaxProf, The IRS Scandal, Day 404
Kay Bell, IRS says possible Tea Party emails lost in computer crash. “Conspiracy or clowns?”
News from the Profession. Here’s Your Authoritative Guide for Likening Game of Thrones to Public Accounting (Going Concern)
Tags: Going Concern, Jason Dinesen, Judge Panuthos, Kay Bell, Kristy Maitre, Martin Sullivan, News from the Profession, Peter Reilly, real estate professional, Renu Zaretsky, Robert D Flach, Russ Fox, TaxGrrrl, TaxProf, William McBride, William Perez