The Tax Update is taking an extra-long weekend. See you next week.
TaxGrrrl, Tax Court Sides With IRS In Tax Treatment Of Frequent Flyer Miles Issued By Citibank. TaxGrrrl reports on a case this week where a taxpayer was awarded with “points” for opening a bank account, which could be redeemed for airplane tickets. A couple who cashed in the points for tickets worth over $600 received a 1099 for them and left it off their 1040.
Thankfully, the Tax Court did draw a distinction between the taxability of “Thank You Points” and frequent flyer miles attributable to business or official travel using Announcement 2002-18 (linked above), wherein the IRS made clear that they would not tax frequent flyer miles attributable to business travel. But that’s where the good news for taxpayers stopped.
TaxGrrrl thinks its a bad result:
In a case of what could be characterized as bad facts making bad law, taxpayers didn’t put up much of an argument for not including the income on the tax return: there was no lengthy brief explaining why it might be excludable. Nor did the IRS say much about the inclusion: they more or less took the position that Citibank’s form was enough to prove income, saying “we give more weight to Citibank’s records.”
The Tax Court made this a “reported” decision, which signals that they will side for the IRS in taxing miles that show up on 1099 information returns.
The tax law certainly allows non-cash transactions to be taxable. If they didn’t, barter exchanges would rule the world. It’s also true that at some point trying to tax everything of value doesn’t make sense. You might value the smile from the cute barista on the skywalk, but that doesn’t mean you should pay tax on the extra value received with your coffee. The hard part now is knowing when you cross the line.
Cite: Shankar, 143 T.C. 5
Health Reimbursement Plans a danger under Obamacare. Health Reimbursement Plans Not Compliant with ACA Could Mean Exorbitant Penalties (Kristine Tidgren):
As of January 1, 2014, a number of long-time options became illegal under the ACA. Lest employers are tempted to ignore this issue, they should know that offering noncompliant plans subjects them to a possible excise tax of $100 per day per employee per violation. ACA violations are no small matter.
In IRS Notice 2013-54, issued last fall, the Treasury Department and the Department of Labor made clear that such plans are no longer allowed. This prohibition applies to a number of long-used standalone health care reimbursement plans that are not integrated with an ACA-compliant group health care plan. Although some exceptions apply, the ACA has made the following types of reimbursement plans illegal (subjecting their sponsors to the possible $100/day/employee/violation penalty tax):
Standalone §105 medical reimbursement plans (including Health Reimbursement Arrangements (HRAs))
Employer payment of individual health insurance premiums on a pre-tax basis
§125 salary-reduction plans for employee health insurance premiums
If you think that you don’t have to worry about Obamacare because you don’t have 50 employees, think again.
Roger McEowen, Structuring the Business: S Corporation or LLC?. “But, beyond the requirement to pay reasonable compensation, the S classification provides a means for extracting money out of the business without paying employment taxes – there isn’t any employment tax on distributions (dividends) from the S corporation.”
Jason Dinesen, Tax Preparer Ethics: Miscellaneous Deductions:
Is it okay to show the purchase as a miscellaneous deduction if the amount is less than 2% of their income and thus isn’t deductible anyway? That way, the taxpayer sees it on their tax return but technically the government hasn’t been harmed because the amount was too small to actually be deducted. Is this okay?
This can be tempting for a practitioner. You can “take” a deduction for “subscriptions” that are probably Sports Illustrated and appease a pushy taxpayer without actually reducing taxes. But Jason makes good points as to why it can make it hard to stop taxpayers from pushing for bogus deductions that actually matter.
Peter Reilly, Bank Out 40 Grand When It Allows Withdrawal Two Hours After IRS Levy. Oops.
Phil Hodgen, Toronto Consulate Wait Times Have Ballooned. They’re lining up to get out from under U.S. taxation. Phil offers this advice:
Many of you will want to renounce your U.S. citizenship before year-end. You can go anywhere in the world to do it. Start calling Consulates and Embassies to see what the wait time is.
Our experience is that the Caribbean and Central American countries are often good. Southeast Asia seems to be good as well.
That’s a sad commentary on how we tax Americans abroad. Congress makes financial life miserable for expats, and then calls them “deserters” for doing something about it.
Stephen Olsen, Boeri: Not a citizen, never lived or worked in the US? IRS will still keep your money. (Procedurally Taxing). Of course they will. They’re bigger than you.
Remember, these are the people who think we preparers are out of control and in need of regulation. IRS Ethics Lawyer Facing Possible Disbarment, Accused of Lying (Washington Times):
A lawyer in the IRS ethics office is facing the possibility of being disbarred, according to records that accuse her of lying to a court-appointed board and hiding what she’d done with money from a settlement that was supposed to go to two medical providers who had treated her client.
Of course, given Commissioner Koskinen’s policy of stonewalling and evasion, she might be just the woman he wants for the job. (Via TaxProf)
William McBride, Canada’s Lower Corporate Tax Rate Raises More Tax Revenue (Tax Policy Blog):
The natural question is: How much tax revenue did Canada lose?
You shouldn’t assume that the lower rate caused the revenue increases. Still, when our current rates clearly incentivize tax-saving moves like inversions, you shouldn’t assume rate cuts will be big revenue losers, either. The revenue-maximizing rate has to be influenced by rates charged in other jurisdictions.
Cara Griffith, Is the Dormant Commerce Clause in Jeopardy? (Tax Analysts Blog) “In matters of state taxation, the dormant commerce clause provides a much stronger defense against discriminatory taxation than the due process clause.”
Kelly Davis, Cumulative Impact of Ohio Tax Changes Revealed (Tax Justice Blog)
TaxProf, The IRS Scandal, Day 476
DOOM! PANIC! Corporate inversions! DO SOMETHING! This isn’t the first time politicians have gotten their dresses over their heads in a pseudo-patriotic panic over legal transactions, as Ajay Gupta explains for Tax Analysts ($link):
FIRPTA is a statute conceived in xenophobia and dedicated to the proposition that not all investors are created equal. It is nothing more or less than the embodiment of a congressional desire to limit the grasp of foreign investors on domestic real estate.
“FIRPTA” is the Foreign Investment in Real Property Tax Act, and it requires buyers of U.S. real estate to withhold 10% of the gross purchase price paid to non-U.S. sellers. In practice, it functions as a trap for unwary U.S. buyers who fail to withhold, leaving them liable for the withholding liability on top of their purchase price. It arose out of the panic over a wave of Japanese purchases of U.S. real estate — a panic that we can now see clearly as madness. Yet FIRPTA lives on, long after the Japanese moved on to other things.
Things like this tell us that the best way to deal with the current panics, like corporate inversions, is to not “do something” that will surely be half-baked and haunt the tax law forever.
Megan McArdle, Burger King and the Whopper About Taxes (my emphasis):
As my colleague Matt points out, most Americans — including a lot of journalists who write about this — seem to be under the misimpression that companies that invert, or people who renounce their citizenship, are doing so to get a lower tax rate on income they earn here. And in a few intellectual-property-based businesses, which can make aggressive use of transfer pricing strategies to declare most of their income in low- or no-tax countries, these complaints have some basis. In most cases, however, including Burger King, they’re doing it because the U.S. inexplicably insists on taking a big chunk off the top of all their foreign income, and making their lives miserable in the process.
But, but, deserters! Traitors!
If you are wondering why Burger King might be attracted to Canada, read How Much Lower are Canada’s Business Taxes? (William McBride, Tax Policy Blog):
First, Canada has a much lower corporate tax rate: 15 percent at the federal level plus another 11 percent on average from provincial corporate taxes. Compare that to the U.S. federal corporate tax rate of 35 percent plus an average state corporate tax rate of about 4 percent.
Second, Canada has a territorial tax system, meaning there is no additional repatriation tax on foreign profits. The U.S. has a worldwide tax system, which applies a repatriation tax to foreign profits when those profits are brought back to the U.S. The repatriation tax is basically the difference between the foreign corporate tax rate and the U.S. corporate tax rate, which is typically more than 10 percent. The average foreign corporate tax rate in the developed world is 25 percent.
Third, the U.S. is not particularly competitive in terms of taxing shareholders. Canada integrates its corporate tax with shareholder taxes to avoid double-taxation. In the U.S. it just piles up, so the integrated corporate tax rate on equity financed investment is over 50 percent.
A corporation pays 35% federal tax on its net income, leaving 65% for the shareholders. If it gets distributed to a top-bracket taxpayer, it gets hit at 20%, plus the 3.8% Obamacare surtax. That is a combined effective rate of 50.47% — and that’s low, as it doesn’t count phase-outs or state taxes. Yet congresscritters profess astonishment that anybody would find that a problem worth solving.
Howard Gleckman, Could The U.S. Fix Taxation of Multinational Corporations With A Sales-Based Formula? (TaxVox) “Instead of focusing on the real disease—an increasingly dysfunctional corporate income tax—we are obsessing over a symptom—firms such as Burger King engaging in self-help reform by relocating their legal residences overseas.”
Paul Neiffer, $563 Cost a Taxpayer $6,320:
If the taxpayers had simply paid the $563 of additional tax owed on the original assessment, that is all they would have been out-of-pocket. However, when they went to court, the IRS determined that they had made a math error in their original calculation of AMT and reassessed the tax owed from $563 to $6,883 or an increase of $6,320. Since this calculation was now correct, the Tax Court honored the IRS calculation and suddenly the taxpayers suddenly owed another $6,320 just for going to court.
TaxProf, The IRS Scandal, Day 475. It links to this from George Will: “The IRS is the most intrusive and potentially punitive institution of the federal government and it is a law enforcement institution and it is off the rails and it is now thoroughly corrupted.”
And the IRS Commissioner thinks all his agency needs is more money.
David Brunori, Repealing the Bad Franchise Tax is a Good Idea (Tax Analysts Blog). “Eighteen states still impose a franchise tax; they shouldn’t.”
By all means, lets make state tax credits an issue. The Branstad re-election campaign is making a big deal about how his campaign opponent, Jack Hatch, bottled up a GOP bill that would have reduced developer fees in tax credit deals — fees that Mr. Hatch makes a good living collecting.
Senator Hatch could truthfully explain that his committee snuffed every GOP tax bill last session, so that bill didn’t receive special treatment. Still, it doesn’t look good.
Yet this ignores the real scandal with state incentive credits: they are inherently corrupt.
For starters, the credits for low-income housing and historic rehabilitation go disproportionately to well-connected insiders who know people and know how to pull strings — at the expense of real estate owners without the connections — and arguably at the expense of renters who might benefit more from housing aid not run through developers.
But also that’s true of the other credits. Special deals go to Microsoft, Google and Facebook because they are big and they know how to play the system. Tax credits go to big fertilizer companies for doing what they would do anyway, while other poor schmucks without lobbyists and fixers pay full-freight on their income and property taxes. NASCAR and the Field of Dreams played on glamour and celebrities to keep sales taxes they collect, while other sellers of amusements have to collect the same sales taxes and turn them over to the state. And Governor Branstad has handed out these tax credits generously.
I’m fine with the Governor’s criticism of Senator Hatch for tax credit deals; I don’t care for them either. Still, the Governor should keep his old MP helmet handy, because he is calling down fire near his own position.
Claire Celsi, PR is like pork scraps and pickle juice (IowaBiz.com). Sounds yummy.
Department of Justice attorneys for the Internal Revenue Service told Judicial Watch on Friday that Lois Lerner’s emails, indeed all government computer records, are backed up by the federal government in case of a government-wide catastrophe. The Obama administration attorneys said that this back-up system would be too onerous to search.
Tremendous. After telling the court that there just was no way on earth those emails survived, now they say there is a backup, but it’s just too much of a hassle for them to use it to comply with the court’s orders. I find it hard to imagine the brashest private-sector lawyer saying something like that, at least more than once.
But wait, there’s more:
The IRS filing in federal Judge Emmet Sullivan’s court reveals shocking new information. The IRS destroyed Lerner’s Blackberry AFTER it knew her computer had crashed and after a Congressional inquiry was well underway. As an IRS official declared under the penalty of perjury, the destroyed Blackberry would have contained the same emails (both sent and received) as Lois Lerner’s hard drive.
Peter Reilly, Home Sweet RV Does Not Always Produce Best Tax Result. Peter discusses the recreational vehicle tax Catch-22 we noted recently.
Paul Neiffer, How to Sell Your Land and Pay No Tax – MAYBE. It involves stretching out the payments and keeping your other income down.
Jason Dinesen, More Commentary About Year-Round Proactive Services to Clients. “Those of us who are good professionals rarely demand the respect we have earned. And then we wonder why clients seemingly don’t respect us, don’t value us, don’t listen to our advice, or jump ship the moment you breathe about a rate increase.”
Tony Nitti, Tax Geek Tuesday: Computing Earnings and Profits. “The primary purpose for computing E&P is to determine whether a distribution represents a taxable dividend, a nontaxable return of shareholder capital, or capital gain to the recipient shareholders.”
Leslie Book, A Stolen Check, Mistaken Identity and Prisoners (Procedurally Taxing):
This post considers Hill v US, a case from the Court of Federal Claims involving a prisoner named Mark Hill whose $1182 tax refund was stolen and cashed by another prisoner with the same name after the prison system mistakenly delivered an IRS letter relating to the missing refund check to the wrong Mark Hill. With time on his hands, but no check, the right Mark Hill sought justice in the form of a new check. After getting the runaround from the IRS, the right Mark Hill sued the US to force it to issue a new refund check. For good measure, he also wanted interest and punitive damages.
Turns out the IRS doesn’t get any more helpful if you are behind bars.
Robert D. Flach serves your fresh Tuesday Buzz, with links about smart giving, educational savings options, and what you can earn working tax season at a national return prep franchise.
That’s a long time. Cobb County man sentenced to 20 years for ID theft, tax fraud (ajc.com). The guy is also supposed to pay back $5 million he stole. Good luck on that. Sure, the guy should go away for a long time, but the real crime is that the IRS let him steal that much from the taxpayers.
Jeremy Scott, Fracking Taxes Help States Now, but What About the Future? (Tax Analysts Blog) “North Dakota has been transformed by its rapidly growing energy sector, but it should be cautious about staking too much of its fiscal future on continually increasing severance taxes.”
Andrew Lundeen, Solutions on Inversions and Corporate Tax Reform (Tax Policy Blog).
Steve Warnhoff, Will Congress Let Burger King’s Shareholders Have It Their Way? (Tax Justice Blog). If it means we get Tim Horton’s donuts, I’m all for the proposed merger.
Renu Zaretsky, Tax Rates: Growth, Competition, and Debt. The TaxVox headline roundup ponders the effects of individual rate cuts, the badness of corporate rates in the U.S., and film credits in North Carolina, among other things.
Have a nice day. 1.2 Billion Reasons to Worry: Security firm reports Russian crime ring compromised 1.2 billion usernames and passwords (John Lande, Iowa Banking Law Blog)
News from the Profession. Extra-Marital Affairs Site Claims Accountants are Kings of Romance Because Their Jobs are Boring (Adrienne Gonzalez, Going Concern).
Wisconsin finds a new frontier in incentive tax credits. From madison.com:
The board overseeing the state’s flagship job-creation agency has quietly approved a $6 million tax credit for Ashley Furniture Industries with a condition allowing the company to eliminate half of its state workforce.
As approved by the Wisconsin Economic Development Corp. board, the award would allow the Arcadia-based global furniture maker to move ahead with a $35 million expansion of its headquarters and keep 1,924 jobs in the state.
Stop me with tax incentives, or I’ll fire some more people!
Of course, all of these tax credits are paid for by people who, by definition, aren’t getting their taxes wiped out with special tax breaks that allow politicians to show up for a ribbon cutting. Politicians know that they’ll get attaboys for “creating jobs,” and nobody will call then out for the jobs they cost by taxing people to give money to their special friends.
Thanks to an alert reader for the tip.
Peter Reilly reports on tax pro who thinks a case we discussed last week may have been wrongly decided. I think the court probably got it right, but it’s a good read. If the taxpayer wins on appeal, it will be very helpful for tax planning.
Audit the Pope, then? New Tax Head Says She Knows Why Italians Don’t Pay Taxes: They’re Catholic (TaxGrrrl)
Jason Dinesen, Bridging the Gap Between What Clients Want … And What They’ll Pay For. “Sure, people “want” a proactive approach. But it seems to me like few are actually willing to PAY for the service.”
Russ Fox, Tax Preparers Behaving Badly, “There’s a common thread among these tax professionals: You’ll be getting a refund. That sounds good until you realize that you really shouldn’t have, and that you will likely get in trouble later.”
Robert D. Flach, OOPS! THEY DID IT AGAIN. “The State wants taxpayers, and preparers, to submit income tax returns electronically – but when they do the returns and payments therefor are not properly processed.”
Jack Townsend, Criminal Justice Article of U.S. Global Tax Enforcement
TaxProf, The IRS Scandal, Day 473
Ajay Gupta, Carbon Taxes and the White Man’s Burden (Tax Analysts Blog):
China, which surpassed the United States as the world’s largest emitter of CO2 in 2006, has made it clear that it has no intention of agreeing to any reduction quotas “because this country is still at an early stage of development.” India, which now ranks third, behind China and the United States in total CO2 emissions, has similarly rejected the notion of subjecting itself to binding reductions.
Yet the carbon tax lobby in the West remains unfazed in the face of this repudiation of responsibility by the developing world. Among the grounds advanced for pressing ahead with unilateral action is one that relies on the residence time of CO2. For several decades, the West pumped much more CO2 into the earth’s atmosphere than China, India, or any other developing county. Unilateralists argue that those historical emissions and their persisting warming effects ensure that the West will remain the largest contributor to climate change for years to come.
That argument has more than a whiff of reparations.
Matt Gardiner, Kinder Morgan Doesn’t Want to Be a Limited Partnership Anymore–But They’re One of the Few (Tax Justice Blog). Paying one tax is better than paying two, other things being equal.
William McBride, More Jobs versus More Children:
I, like most humans, think that children are blessing. I am also one to think we as a society should have more kids. I also think that in the very long run, say decades, demographics are destiny, i.e. we cannot expect to be a large, flourishing economy a generation from now if our birth rate continues to be at or below the replacement rate.
However, boosting the birth rate is not as simple as boosting the child credit.
Not every problem can be solved with a tax credit.
Howard Gleckman, How Much Would An Individual Tax Rate Cut Add to the Deficit, and Who Would Benefit? (TaxVox). “A one percentage point across-the-board reduction in tax rates would add $662 billion to the budget deficit over 10 years—about $40 billion in 2015 rising to more than $85 billion by 2024.”
Donald Boudreax is not a happy taxpayer:
I pay what I “owe” in taxes not because I have a “responsibility” to do so but, instead, only because government threatens to use violence against me if I don’t pay what it demands. I stand in the same relation to the tax-gatherer as I stand in relation to any common thug who points a gun, knife, or fist at me demanding my money. [I actually prefer the common thug, for he neither insults my intelligence by telling me that his predation is for my own good nor spends the money he takes from me to fund schemes to further interfere in my life.]
I suppose that illusion-free approach probably applies to most of us, if you think about it.
Career Corner. Use All Your Vacation Days, Even If It Means Making Less Money (Caleb Newquist, Going Concern)
Spelling is important. Even for identity theives. From Dispatch.com:
A $3.5 million bogus tax-refund scheme that unraveled because the conspirators couldn’t spell the names of well-known cities has resulted in a federal-prison sentence of more than eight years for the scam’s mastermind.
Sims and Towns misspelled the names of several cities when they listed return addresses, including “Louieville” and “Pittsburg.” That caught the attention of Internal Revenue Service investigators.
I love how they call somebody who committed a stupid crime in a stupid way — and showed up for a sentencing hearing drunk, apparently — a “mastermind.”
Programming note: No Tax Roundup will appear tomorrow, August 22. I will be up in Ames helping teach the ISU Center for Agricultural Law and Taxation class “Affordable Care Act (ACA): What Practitioners Need to Know“ in the morning. Webinar registration is closed, but you can still attend as a walk-in.
You saved the company. Big deal. Apparently pulling the company you started from the brink of failure wasn’t enough to convince the IRS that a taxpayer “materially participated” and could deduct losses on his tax return.
Charles Wade was a founder of Thermoplastic Services, Inc. and Paragon Plastic Sheeting, both S corporations. After his son Ashley took over daily management of the business, he still owned a significant stake in the company. He never really retired, though. From the Tax Court (my emphasis, footnotes omitted in all Tax Court quotes):
With Ashley there to handle day-to-day management, Mr. Wade became more focused on product and customer development. He did not have to live near business operations to perform these duties, so petitioners moved to Navarre, Florida. After the move he continued to make periodic visits to the facilities in Louisiana and regularly spoke on the phone with plant personnel.
In 2008 TSI and Paragon began struggling financially as prices for their products plummeted and revenues declined significantly. Mr. Wade’s involvement in the businesses became crucial during this crisis. To boost employee morale, he made three trips to the companies’ industrial facility in DeQuincy, Louisiana, during which he assured the employees that operations would continue. He also redoubled his research and development efforts to help TSI and Paragon recover from the financial downturn. During this time Mr. Wade invented a new technique for fireproofing polyethylene partitions, and he developed a method for treating plastics that would allow them to destroy common viruses and bacteria on contact. In addition to his research efforts, Mr. Wade ensured the companies’ financial viability by securing a new line of credit. Without Mr. Wade’s involvement in the companies, TSI and Paragon likely would not have survived.
Slacker. At least according to the IRS, who said that this participation failed to rise to the level of “material participation” and disallowed over $3 million in pass-through losses on Mr. Wade’s return.
The Tax Court took a different view. Judge Goeke explains :
A taxpayer materially participates in an activity for a given year if, “[b]ased on all of the facts and circumstances * * * the individual participates in the activity on a regular, continuous, and substantial basis during such year.” A taxpayer who participates in the activity for 100 hours or less during the year cannot satisfy this test, and more stringent requirements apply to those who participate in a management or investment capacity. The record reflects that Mr. Wade spent over 100 hours participating in TSI and Paragon during 2008, and his participation consisted primarily of nonmanagement and noninvestment activities. Ashley managed the day-to-day operations of the companies; Mr. Wade focused more on product development and customer retention.
Although Mr. Wade took a step back when Ashley became involved in the companies’ management, he still played a major role in their 2008 activities. He researched and developed new technology that allowed TSI and Paragon to improve their products. He also secured financing for the companies that allowed them to continue operations, and he visited the industrial facilities throughout the year to meet with employees about their futures. These efforts were continuous, regular, and substantial during 2008, and we accordingly hold that Mr. Wade materially participated in TSI and Paragon.
The 100 hours might not have been considered enough under some circumstances. Usually the IRS holds taxpayers to the default 500-hour test for material participation. This case is unusual in its use of the fall-back 100-hour “facts and circumstances” test. It’s good to see the Tax Court use it, as the IRS seems to think this test never applies.
It’s also interesting that the efforts at “customer retention” were counted. This could be useful in planning for the 3.8% Obamacare Net Investment Income Tax. The NIIT taxes “passive” income, defined the same way as the passive loss rules. A semi-retired S corporation owner who still calls on some of old accounts after turning daily operations over to successors might be able to avoid the NIIT under the logic of this case. If so, though, it would be wise to keep a calendar to prove it.
Russ Fox, A Passive Activity Case Goes to the Taxpayers. “Hopefully the IRS can get more of these cases right at audit and appeals–they’ll be dealing with many more of these over the coming years.”
Paul Neiffer, More than 100 but Less than 500. “It is nice to see that a subjective test went in the taxpayer’s favor.”
How far does $100 go in your city? Last week the Tax Foundation issued a map showing how far $100 goes in different states. Now they have issued a new map in The Real Value of $100 in Metropolitan Areas (Tax Policy Bl0g). It is wonderful — just scroll your cursor over your town.
In Des Moines, $100 is good for $105.82. In New York, it gets you $81.83.
Tony Nitti, Could The IRS Disallow Ice Bucket Challenge Charitable Contributions? Go ahead, IRS, just try it. You’re just too popular.
William McBride, Earnings Stripping, Competitiveness, and the Drive to Further Complicate the Corporate Tax (Tax Policy Blog)
Roberton Williams, One Downside Of Inversions: Higher Tax Bills For Stockholders (TaxVox)
Kay Bell, How does the U.S. corporate tax rate compare to other countries? Poorly.
TaxProf, The IRS Scandal, Day 469
David Brunori, Using Local Cigarette Taxes for Schools Is Silly (Tax Analysts Blog). Smoke ‘em if you got ‘em. For the children!
Cara Griffith, Was Oregon’s Tax Incentive Deal With Intel Unnecessary? (Tax Analysts Blog). No, it was absolutely necessary to enable the Governor of Oregon to issue this press release and YouTube announcement. That’s the point, after all.
The United States gets little tax from Americans overseas today. Most of them live in high-tax countries and have no U.S. income tax in any event because of FTCs and the section 911 foreign earned income exclusion. But as we all know, Congress couldn’t care less about this subject, and this is all a non-starter. Better to place your money on a genetically modified flying pig.
Robert L. Williams in Tax Analysts ($link)
The IRS has issued (Rev. Rul. 2014-22) the minimum required interest rates for loans made in September 2014:
Short Term (demand loans and loans with terms of up to 3 years): 0.36%
-Mid-Term (loans from 3-9 years): 1.86%
-Long-Term (over 9 years): 2.97%
The Long-term tax-exempt rate for Section 382 ownership changes in September 2014 is 3.06%.
Here is the way to to the tax incentive story from today’s “In the Blogs.”
Track your hours now, not when you get audited. Doing time reports is no fun. If I had a nickel for every CPA who left public accounting and told me how fun it is to not do time reports, I’d have multiple nickels.
Unfortunately, the tax law might make time sheets necessary for people who don’t charge by the hour. The passive loss rules disallow losses if you don’t spend enough time on a loss activity to “materially participate.” Obamacare uses the same rules to impose a 3.8% “Net Investment Income Tax” on “passive” income.
It’s up to the taxpayer to prove they spent enough time to “materially participate,” as a Mr. Graham from Arkansas learned yesterday in Tax Court.
The taxpayer wanted to convince Judge Nega that he met the tax law’s stiff tests to be a “real estate professional,” enabling him to deduct real estate rental losses. If you are not a “professional,” these losses are automatically passive, and therefore deferred until there is passive income. To be a real estate professional, the taxpayer has to both:
- Work at least 750 hours in real estate trades or businesses, and
- performs more than one-half of all personal services during the year in real property trades or businesses in which the taxpayer materially participates.
That’s a high bar to clear for a taxpayer with a day job. Mr. Graham gave it a good try, providing a judge with spreadsheets to show that he did that work. The judge remained unconvinced:
Mr. Graham did not keep a contemporaneous log or appointment calendar tracking his real estate services. His spreadsheets were created later, apparently in connection with the IRS audit.
There were other problems:
Furthermore, the entries on the spreadsheets were improbable in that they were excessive, unusually duplicative, and counterfactual in some instances. As all petitioners’ rental properties were single-family homes, reporting 7 hours to install locks or 30 hours to place mulch on a single property (amongst other suspect entries) are overstatements at best. Performing maintenance for a tenant that did not pay rent for an entire year with no record of “past due rent” or any attempt to collect rent (as Mr. Graham would note on entries for other rental properties) seems dubious.
The judge ruled that the taxpayer failed to meet the tests. Worse, the court upheld a 20% penalty: “We conclude that the exaggerated entries in petitioners’ spreadsheets negate their good faith in claiming deductions for rental real estate losses against their earned income.”
The Moral? Maintain your time records now. When the IRS comes calling, it’s too late. And play it straight; the Tax Court didn’t just fall off the turnip truck.
Russ Fox, FBAR Filing Follies:
Joe Kristan reported last week that you cannot use Adobe Acrobat to file the FBAR; you must use Adobe Reader. In fact, if you have Adobe Acrobat installed on your computer and use Adobe Reader it won’t work either. Well, I have some mild good news about this.
Mild is right.
Peter Reilly, Robert Redford’s New York Tax Trouble Provides Lessons For Planners. “You dodge non-resident state taxes, either on purpose or by accident, at the peril of missing out on a credit against the tax of your home state.”
Jason Dinesen, S-Corporation Compensation Revisited. “But what should the salary be? And what if the year has ended and the W-2 deadlines have passed, but the corporate tax return still needs filed?”
Keith Fogg, Postponing Assessment and Collection of the IRC 6672 Liability (Procedurally Taxing). Issues on the “trust fund” penalty imposed for not remitting withholding.
Online shopping is again changing the way that we look at nexus but for now, more or less the same kinds of principles that ruled in the day of mail order catalogs are still good law. The law remains settled that in states that impose a sales tax, retailers that have established nexus must charge sales tax to customers in that state.
And just like in the old days, states want to extend their reach no matter how flimsy the nexus.
Lyman Stone, New Upshot Tool Provides Historical Look at Migration (Tax Policy Blog):
Prominent changes in the data suggest that taxes may have a role in affecting migration, though certainly taxes are just one of many important variables, and probably not even the biggest factor. As always, talking about migration isn’t simple: migration data is challenging to measure and represent, and even more difficult to interpret.
I will be seeing Mr. Stone speak at the Iowa Association of Business and Industry Tax Committee this morning. I’m geeking out already.
Jim Maule, “Give Us a Tax Break and We’ll Do Nice Things.” Not. It seems the subsidized Yankees parking garages don’t stop with picking taxpayer pockets.
Kay Bell, Is it time for territorial taxation of businesses and individuals? “Territorial taxation advocates hope that long local journey has at least now started.”
Howard Gleckman, Is Treasury About to Curb Tax Inversions on Its Own? (TaxVox). If the law is whatever the current administration says it is, I look forward to the $20 million estate tax exclusion next time the GOP takes power.
Daniel Shaviro, The Obama Administration’s move towards greater unilateral executive action. “And the conclusion might either be that one should tread a bit lightly after all, or that we are in big trouble whether one side unilaterally does so or not, given the accelerating breakdown of norms that, as Chait notes, are no less crucial than our express constitutional and legal structure to ‘secur[ing] our republic.’”
The best and the brightest in action. TIGTA: ObamaCare Medical Device Tax Is Raising 25% Less Revenue Than Expected, IRS Administration of Tax Is Rife With Errors (TaxProf)
TaxProf, The IRS Scandal, Day 468
News from the Profession. AICPA Celebrates 400,000th Member Just Because (Caleb Newquist, Going Concern)
I can verify that a Kindle absorbs less coffee than paper. Do readers absorb less from a Kindle than from paper? (Tyler Cowen)
Some folks are worried that we’ll all suddenly stop paying taxes, according to a Tax Analysts story today (subscriber link only):
Richard Lavoie of the University of Akron School of Law, who studies tax ethics, says voluntary compliance rates have remained relatively high because paying taxes is an accepted social norm. Withholding plays a large role in compliance, but it does not explain everything, according to Lavoie.
Lavoie said the recent controversies surrounding the IRS, such as accusations that the agency targeted conservative groups for political reasons, and other factors such as worsening income inequality have all eroded the public’s trust in a fair tax system. If those pressures continue, it could cause taxpayer attitudes to change virtually overnight, he said. “At some point that all adds up, and what was a stable norm that we collect 83 or so percent of taxes voluntarily could flip,” he said.
I think Mr. Lavoie is identifying things he doesn’t like, such as “income inequality” and the Tea Parties, and dreaming up dreadful consequences. For example, “Lavoie argued in his 2012 paper that antitax rhetoric such as that espoused by the Tea Party also has the potential to unbalance the tax system.”
Mr Lavoie talks about “accusations” of IRS malfeasance and “anti-tax rhetoric” as the dangers — not the well-documented abuses themselves, or the IRS stonewalling of investigations into the abuses, or the former Commissioner’s dishonest response to the scandal, or the current Commissioner’s intransigence, or the President’s “joke” about auditing his opponents. These damage faith in the IRS much more than anything the Tea Party could come up with.
The article finds some people who get closer to identifying the real problem:
National Taxpayer Advocate Nina Olson in recent remarks also warned that the habit of voluntary compliance may be at risk. Like Koskinen, she cited the IRS’s budget situation, saying that if Congress continues to restrict the agency’s budget, it may lead to a downward spiral in voluntary compliance rates.
While the poor customer service and declining enforcement are related to funding, funding still isn’t the real problem. The IRS budget would be just fine if the IRS were treated as just a revenue agency. Instead Congress has made the tax system into the Swiss Army Knife of public policy. The IRS has a portfolio that ranges from industrial policy to education to retirement security to, famously, health care. The IRS policy roles can dwarf those of agencies with nominal responsibility for policy areas. Giving so many jobs to the IRS necessarily makes it less capable of doing its real job, tax collection.
Unfortunately, there’s no sign that anybody is going to take away the agency’s many non-revenue tasks. And a GOP Congress isn’t about to increase funding for the IRS as long as it seems unapologetic about going after groups opposed to the administration. To the extent IRS intransigence causes a compliance crash, the agency has only itself to blame.
Alan Cole, Lyman Stone, Richard Borean, The Real Value of $100 in Each State (Tax Policy Blog):
This map makes Iowa look pretty good. When you consider average incomes compared to the cost of living, Iowa looks even better.
Robert D. Flach’s Tuesday Buzz covers inheritance taxes, tax robots, and the large number of people who seem to rely on lottery winnings for retirement funding.
TaxGrrrl, Investment Opportunity: Possibly Booby-Trapped Property Remains Unsold. Ed and Elaine Brown forfeited their property after their armed stand-off with the IRS, but the agency can’t find anybody willing to buy it. There is some fear of booby traps, but I suspect potential buyers would also be a bit concerned about the reaction of Brown supporters.
Peter Reilly, The OID Fraud And Criminal Gullibility:
I have to say that I have some sympathy with the perspective that a reasonable person seeing the refund checks might want to take another look at the scheme. If they were incapable of understanding the reasoning behind the scheme and what OID actually is, it could be hard to resist.
The OID scheme is absurd. I realize some people really are gullible enough to believe in it — but only with a leap of faith that is, literally, criminally stupid.
Kay Bell, Pot tourism’s potential tax payoff for states with legal weed. Iowa’s Governor just says no.
Richard Auxler, Do Sales Tax Holidays Ever Make Sense? (TaxVox). “In some situations, sales tax holidays can make sense. But generally, they’re bad tax policy unless the alternative is large tax cuts with dubious growth assumptions, and not just for a weekend but for the whole year.”
Erica Brady, Final Whistleblower Regulations Create Administrative Review of Rejected and Denied Claims (Procedurally Taxing)
TaxProf, The IRS Scandal, Day 467
News from the Profession: TIL: Ancient Greeks Used Slaves as Auditors So They Could Be Beaten When They Screwed Up (Adrienne Gonzalez, Going Concern).
The Des Moines Register is running a series on Jack Hatch, the Democratic nominee for Iowa Governor, focusing on subsidized housing projects he developed. The stories include Jack Hatch’s record shows no clear conflicts of interest and Review shows Hatch followed public financing rules.
The Register finds no evidence of illegality in Sen. Hatch’s tax credit-driven deals. That’s unsurprising, as the tax credits are shared with investors, who want clean tax projects and impeccable tax breaks. As usual with tax incentives, though, the scandal is what is perfectly legal.
The series describes the financing of some projects. For example:
A $6.5 million development with over $8 million in government aid. A sweet deal, if you are one of the lucky participants of an oversubscribed subsidy program.
While such projects are touted as achieving “affordable housing,” the real beneficiaries are arguably well-connected developers and tax shelter investors. It’s all legal, and all paid for by the rest of us.
If the real goal is to help the poor, there are better ways than a Rube Goldberg tax credit system running the aid through tax shelter developers and investors. Arnold Kling’s idea to provide the poor with a universal flexible benefit “to replace all forms of means-tested assistance, including food stamps, housing subsidies, Medicaid, and the EITC, with a single cash benefit,” is a more promising approach. It is what a program designed to help the poor, rather than the connected, would look like.
Kay Bell, Elvis estate seeks tax breaks for Graceland expansion. Or what? Graceland is going to leave Tennessee? Elvis will leave the building? But, but, jobs! Or something.
Robert D. Flach, KEEP COPIES OF YOUR W-2s FOREVER! Robert explains how he was able to use old W-2s to help a client show that his retirement contributions were “after tax” for New Jersey purposes, preventing a second tax on withdrawal.
William Perez, Got a Call From the IRS? It’s Probably Not the IRS. A client of our office got such a scam call last week. We told them to hang up if they call back.
Jack Townsend, Tidbits on the New Streamlined Procedures
Annette Nellen, Better identity theft efforts – S. 2736
Jason Dinesen, Why an LPA? Jason answers the question “Why did I pursue an Iowa “Licensed Public Accountant” designation? LPAs are an obscure lot, in that we only really exist in 3 states (Iowa, Delaware and Minnesota).”
Peter Reilly, IRS Stampedes A Cattle Shelter. Peter explains why losing a hobby loss case is extra bad. With a bonus quote from me (Thanks, Peter!).
TaxGrrrl, From AR-15s To Rubber Bullets: How Did Police End Up With Military Gear On American Streets? Your tax dollars at work. Amazingly, no tax credits appear to be involved.
TaxProf, The IRS Scandal, Day 466. It appears the judge who told the IRS to explain what happened to the Lois Lerner emails isn’t yet satisfied with the IRS response. More from Russ Fox: Judge Sullivan Not Impressed by the “Dog Ate my Homework” Excuse.
Ajay Gupta, Demagoguing the ‘I’ Words. (Tax Analysts Blog) “If an inversion exploits a loophole, then so does every other corporate reorganization that painstakingly adheres to the requirements of the code and regs.”
Steven Rosenthal, Can Obama slow corporate inversions? Yes he can. Silly rabbit. The idea isn’t to slow corporate diversions; it’s to demonize them for political fun and profit. And his idea of reviving the moribund Sec. 385 debt-equity regulations for this purpose shows how much the inversion panic has parted from reality.
News from the Profession. Here’s Further Proof That Accounting Firms Need a Charge Code for “Wasting Time on Internet” (Caleb Newquist, Going Concern)
It’s not just Iowa. If you sell land for a gain, the state where the land is will want to tax you. A Letter of Findings (Document 14201016) issued by the Iowa Department of Revenue this week gave the bad news to a Wisconsin man. From the letter:
Your income tax assessment for 2002 was based upon the fact that you sold property in Iowa for that year and the gain from the sale of that property was never reported as taxable income in Iowa. Your Protest seems largely based on the argument that you are not a citizen or resident of Iowa.
You don’t have to live in a state to be taxed there. States can tax income from non-residents if it has enough connection to the state. The letter explains:
Despite the fact that you are currently a nonresident, you still owe Iowa income tax on the capital gain related to the sale of property in Iowa.
This is important to a lot of non-Iowans who have inherited farmland here. Farmland values have spiked in recent years, making it tempting to cash out. The Department of Revenue will be looking for its cut.
Kyle Pomerleau asks How Much Will Corporate Tax Inversions Cost the U.S. Treasury? (Tax Policy Blog):
The Joint Committee on Taxation in May released their estimate of the revenue gained from passing the “Stop Corporate Inversions Act of 2014.” This law alters rules and makes it harder for corporations to invert and move overseas. The JCT estimates that this will raise approximately $19.5 billion over fiscal years 2015 and 2024.
Compare this to the Congressional Budget Office’s fiscal outlook that estimates that the corporate income tax is estimated to raise approximately $4.5 trillion over the same period.
That is a 0.4 percent loss to our corporate tax base due to corporate inversions. Hardly the doom and gloom many in the press and Congress make it out to be.
Or, in handy graphical form:
The whole contrived inversion panic is best understood as a diversion, an attempt to create a hate totem to divert attention from the disastrous effects of other policies.
Furchtgott-Roth asks, “What is more American than doing what is best for your company?” The answer is, doing what is best for America no matter what it does to the company. That is what America did during World War II. If today’s generation of “capitalists” were the folks around back in the 1940s, we’d be speaking German or Japanese.
The good Professor Maule makes some basic mistakes here. First, he assumes that people didn’t try to keep their taxes low back in the 1930s and 1940s. I have boxes of dusty old tax casebooks that say otherwise.
A more fundamental mistake is his assumption that paying more taxes than the tax law requires is “best for America no matter what it does to the company.” The President and our 535 Congressional supergeniuses have no magical insight on what’s “best for America.” Reasonable minds may differ on “what’s best” without being traitors.
Professor Maule seems to make the default assumption that whatever gives more revenue to the government is “best for America no matter what it does to the company.” By that logic, corporations should liquidate and turn their proceeds over to the IRS. Forget the products those corporations make, the needs they meet, the jobs they provide. Screw the pensioners with pension plans funded with corporation stock. Because America!
TIGTA reports Some Contractor Personnel Without Background Investigations Had Access to Taxpayer Data and Other Sensitive Information. Remember how everyone was all up in arms that a private company was hired to call on tax delinquents that the agency couldn’t be bothered with, on privacy and security grounds? Good thing confidential tax data is secure now.
William Perez, How to Make Sure Your Charity Donation Is Tax-Deductible.
Kay Bell, California tax deduction bill aimed at former NBA owner Donald Sterling advances. California forgets that not every problem is a tax problem, and being a jerk isn’t a taxable event.
Russ Fox, Lawsuits Against FATCA in Canada
It’s Friday, so Robert D Flach has fresh Buzz!
Employers in many countries are reluctant to hire on permanent contracts because of rigid labor rules and sky-high payroll taxes that go to funding the huge pension bill of their parents.
He adds: “Don’t think it couldn’t happen here.” It’s already starting to.
Because giving money to politicians is more important than your retirement. Amazing Waste: Tax Subsidies To Qualified Retirement Plans, (Calvin Johnson, at Tax Analysts, via the TaxProf):
Qualified plans are ineffective or counterproductive for their given rationales, which makes them a rich source of revenue when the United States needs money.
Mr. Johnson has a strange hobby of finding ways to give more of your money to the government by making tax rules even worse. Apparently he is convinced that politicians and bureaucrats have better things to do with your money than you do. (via the TaxProf)
TaxProf, The IRS Scandal, Day 463
Kelly Davis, Hey Missouri, You’re the Show Me State, But Don’t Follow Kansas’s Lead. (Tax Justice Bl0g). Shouldn’t that be “so,” no “but?”
Cash Rent, failure to pay self-employment tax ruled fatal to Iowa capital gain exclusion. Iowa has an unusual capital gain exemption on sales of farm and business property for taxpayers meeting both a 10-year holding-period requirement and a ten year “material participation” test. The Iowa Department of Revenue yesterday released three rulings holding that taxpayers failed to meet the second requirement on sales of farm ground. The material participation rules are for the most part the same as in the federal “passive loss” rules.
Cash rent. Document 14201019 holds that you don’t “materially participate” if all you do is rent farm ground:
The issue raised in the protest involves whether a capital gain deduction from the sale of farmland was properly disallowed on the Iowa individual income tax return for the 2009 tax year. The farmland, which was held in the name of two partnerships, West Side Acres and East Side Acres, was involved in a cash rent arrangement. There is no dispute that the farmland was held for more than ten years, but the Department contended that the ten year material participation test was not met.
The taxpayers claimed they spent more than 100 hours managing their farm rentals, but the Department said that activity didn’t count (my emphasis):
The Department notes that most of the hours spend by protester in the farming operation that was provided in the January 29, 2014 letter related to maintenance of business financial records, including review of property tax estimates and assessments and payment of expenses. The Stoos decision stated that actions of paying the mortgage, preparing taxes and other financial work is not materially related to the farming operation, and these hours were considered “investor-type” activities which were not part of the day-to-day operation of the farm. Therefore, those hours do not count toward material participation, and the 100 hour test has not been met by protester.
This is the result I would have predicted. Cash rent of farm land is not normally considered “farming” under the passive loss rules.
Conservation Reserve and Self-employment Tax. Documents 14201020 and 14201017 deny the capital gain exclusion to two taxpayers because they failed to pay self-employment tax on CRP payments. The liability of CRP recipients for self-employment tax is controversial; a pending Eighth Circuit case seems likely to hold that the tax doesn’t apply to CRP recipients who do not otherwise farm.
The rulings say that the Department goes by the treatment of the payments reported on the taxpayers returns: if they taxpayer paid SE tax on CRP payments, they are considered to have materially-participated in those years, but not otherwise. From Document 14201017 (my emphasis)
The Department first notes that the Federal Court of Appeals for the Sixth Circuit in Weubker v. Commissioner, 205 F.3d 897 (2000) held that CRP payments were net income from self-employment because they were received in exchange for performing tasks “that are intrinsic to the farming trade or business” such as tilling, seeding, fertilizing and weed control. Subsequently, the Internal Revenue Service issued Notice 2006-108 which states that CRP payments either to a farmer who either personally fulfills the CRP obligations or who isn’t an active farmer and fulfills this obligation through a third party are both includible in self-employment income and are not excludible as rentals from real estate.
Therefore, the Department contends that self-employment tax was clearly due on these CRP payments.
Since protester did not pay self-employment tax on this CRP income, the Department contends that the material participation test was not met. In addition, protester does not meet the retired farmer exception regarding material participation for 5 of the 8 years prior to retirement since self-employment tax was not paid on the CRP acres prior to you receiving social security benefits in 2003. Therefore, the Department contends that you do not meet the qualifications for the capital gain exclusion since you did not materially participate in the CRP activity for ten years.
The liability for SE tax on CRP payments was never as open-and-shut as the Department says. Some commentators have argued that Weubker is wrong, and that CRP, by itself, doesn’t constitute farming (see here and here). Even so, it is also a stretch to say that the minimal maintenance required on CRP ground rises to the level of “material participation.”
The Department here is saying in effect that they will take your word for it — as shown on your tax filings. If you paid SE tax on your CRP income, you’re a farmer as far as they are concerned, and you qualify for the exclusion. Given the stratospheric cost of farm ground nowadays, taxpayers may find it worth paying a little SE tax to qualify for the Iowa gain exclusion.
Canada has violated the charter rights of nearly a million Canadians by agreeing to share their financial details with authorities in the United States, two Ontario women allege in a new lawsuit.
They are talking about “FATCA,” the outrageous Congressional overreach into the operations of banks around the world.
Gwen Deegan of Toronto and Ginny Hillis of Windsor, Ont., have launched a claim against the Attorney General of Canada.
In it, they accuse Ottawa of breaching the Constitution by complying with a sweeping new American tax fraud law, known as the Foreign Account Tax Compliance Act.
Under the terms of the legislation that took effect last month, banks must share all personal and joint account details of anyone deemed to be a “U.S. person.” This includes American citizens and people born in the U.S., even those with no existing ties to the country.
I wonder what the reaction in the U.S. would be if, say, Russia demanded the bank account information of every American it said was a “Russian person.” I don’t think it would be popular. Yet our Congress thinks it is entitled to demand that non-U.S. banks cough up whatever information it feels like asking for.
The response has been to make financial life difficult for Americans overseas, as dealing with U.S. persons becomes more of a hassle than their business is worth. It also restricts employment opportunities abroad for Americans by making their employment inconvenient.
Charlie Rangel was one of the main sponsors of FATCA. He would know a little about not paying taxes.
Paul Neiffer, Sale of Gifted Grain Can Be Tax Free:
When the donee sells this grain, it will be reported as a capital gain. If time after harvest of the grain and the time of sale is less than a year, it is short-term. If this time is greater than a year, then it is long-term.
If the donee is in a low-enough bracket, long-term capital gains are taxed at zero. But watch out for the “Kiddie Tax.”
Jason Dinesen, Proper Documentation of Business Expenses:
In most circumstances, you can prove your expenses even if you don’t have a receipt. But again, I feel that receipts AND other documents are the safest way to go.
Absolutely. Jason has some tips for keeping track of them.
Andrew Lundeen, Alan Cole, The Inequality Debate Ignores How Incomes Change Over the Life Cycle (Tax Policy Blog): “Income data from the IRS and the Census Bureau have their uses, but measuring equality isn’t one of them.”
Joseph Thorndike, How ISIS Is Using Taxes to Build a Terrorist State (Tax Analysts Blog)
TaxProf, The IRS Scandal, Day 462
Career Corner. Study: Working in a Windowless Cube is Ruining Your Life (Adrienne Gonzalez, Going Concern)
Of course cemetery lots are shooting up in value. People are dying to get in! Taxpayers seek the Tax Fairy in the strangest places. The Tax Fairy is the mythical spirit who can make taxes go away magically, for a reasonable price to a tax wizard who claims to be able to summon her. A Tax Court case yesterday found taxpayers looking for her in cemeteries (Emphasis mine; slightly edited for readability).
Judge Nega’s overview:
Heritage Memorial Park Associates 1995-2, Heritage Memorial Park Associates 1995-3 , and Heritage Memorial Park Associates 1995-4 (collectively, partnerships) are Maryland general partnerships. The partnerships were established to acquire cemetery sites, to hold the sites for over one year, and then to contribute the sites to qualified charitable organizations, with the aim to provide individuals who invested in the partnerships with charitable contribution deductions equal to the appraised values of the sites as of the times of the contributions. Glenn R. Johnston and his colleagues promoted the partnerships to wealthy individuals as a way for them to receive a return of tax benefits in the form of passthrough deductions or losses worth significantly more than the amounts invested.
What sort of deductions?
…(petitioner) invested $37,500 in each partnership. He made these investments to increase the amounts of his charitable contributions for the subject years and, more particularly, to receive promoted tax benefits worth significantly more than his investments. He expected that his investments would return him tax benefits worth $50,000 for each subject year.
HMPA 1995-2 claimed the $1,864,850 charitable contribution deduction on that return. Petitioner was allocated $135,127 of that deduction, and petitioners deducted the $135,127 on their 1996 individual return as a charitable contribution. HMPA 1995-2 reported on its 1996 Form 1065 that HMPA 1995-2 had no income or expenses for 1996 (but for the charitable contribution deduction).
So: invest $35,000, deduct $135,000, save (conservatively) 1/3 of $135,000, or $45,000. What could go wrong?
On September 29, 2005, Mr. Johnston was indicted on (1) one count of conspiracy to defraud the United States by selling, claiming, and causing others to sell and claim millions of dollars in false and fraudulent tax deductions for charitable contributions and concealing from the IRS income from the sales of the fraudulent deductions and (2) multiple counts of aiding and assisting in the filing of false returns by investors in the partnerships so that the investors claimed charitable contribution deductions in amounts substantially greater than allowable. These charges involved the partnerships, among one or more other entities. Mr. Johnston pleaded guilty to the first count on April 12, 2007.
Sure, it’s a criminal enterprise, but the deductions are still good, right? And didn’t the statute run? Nope. The court ruled that the IRS met the procedural requirements to keep the statute of limitations open by properly initiating partnership-level proceedings. The court also ruled that the taxpayer couldn’t claim a business loss for the partnership investments:
Petitioners argue secondarily that they may deduct a $37,500 loss for each year as to petitioner’s investments in the partnerships. To that end, petitioners assert, petitioner’s ownership interests in the partnerships were worthless as of the end of the corresponding years in which the partnerships operated, and he knew that the interests were worthless as of those times and abandoned his interests as of those times. Petitioners add that petitioner invested in the partnerships to make a profit and in furtherance of a legislative intent to encourage charitable contributions.
But the court ruled that seeking charitable deductions isn’t a “trade or business,” and that no business loss was available. $35,000 spent to net a tax savings of nothing.
The Moral? This thing should never have passed the “too good to be true” test. The deductions depended on incredible post-contribution appreciation in graves. Anybody thinking this sort of thing might actually work really needs to get out more. And there is no tax fairy.
Cite: McElroy, T.C. Memo 2014-163.
Related: Three Years is the Normal Statute of Limitations, But Not Always (Paul Neiffer).
Another payroll service makes off with employers’ payroll tax payments. From emissourian.com:
A Washington man pleaded guilty this week to federal mail fraud and money laundering charges.
Bradley Ferguson, 48, owner of Paymaster Business Solutions in Fenton, is scheduled to be sentenced Nov. 6 in U.S. District Court.
He pleaded guilty to one felony count of mail fraud and one felony count of money laundering before U.S. District Judge E. Richard Webber.
Ferguson is accused of withdrawing money from the bank accounts of business clients to pay federal, state and local taxes but did not make the payments, according to a federal grand jury indictment.
While it makes sense for many taxpayers to outsource payroll functions, the tax law still holds the employers responsible for getting withholdings to the IRS. If you outsource your payroll taxes, you should use Electronic Federal Tax Payment System (EFTPS) online access to make sure your payroll tax remittances are actually hitting your account. If you use a service that doesn’t allow you to do this — like many “professional employer organizations” who “co-employ” their clients’ workers — you need to make other arrangements, like bonding, to protect yourself.
Peter Reilly, Alimony Deduction Requires Good Substantiation. “It turns out that taxpayers are routinely whipsawing the IRS.”
William Perez, How to Get a Federal Tax Credit for the Cost of Child Care.
I was pretty shocked at how much information folks were willing to share on the internet about their tax evasion questions, strategies and justifications. Sometimes, these folks are regular forum posters who happily share their location and other identifying information while others clearly try to remain somewhat anonymous.
In case you were wondering, the IRS has internet access.
Jason Dinesen, Rare Home Office Deduction Win in Tax Court
Carl Smith, In Some Cases IRS Seeks to Conflict Out Lawyers Who Represented Taxpayers in CDP Hearings (Procedurally Taxing). CDP stands for “collections due process.” The IRS is bigger than you, peasant.
David Brunori: Congress Shouldn’t Make State Tax Systems Worse (Tax Analysts Blog)
As my colleague Maria Koklanaris reported, 29 Democratic members of Congress asked leaders of the California State Legislature to reauthorize and expand the state’s film tax credit. Led by Rep. Adam B. Schiff, D-Calif., the federal lawmakers asked California to extend a very bad tax policy, saying that if it doesn’t, film jobs will be lost forever to other states.
Why film credits? Why not some other industry? Politicians are the worst at determining what’s best for the marketplace. Despite the studies funded by the Motion Picture Association of America that say otherwise, film tax credits don’t work. In virtually every state that has them, there’s no discernible economic effect — that is, the tax giveaway did not result in more economic activity than would have occurred without it.
TaxProf, The IRS Scandal, Day 461
There’s only one left? Owner of the Pickle pleads guilty to federal tax fraud.
Because you invited clients? PwC’s Bob Moritz on Why You Shouldn’t Miss Your Kid’s Birthday Party for Work (Adrienne Gonzalez, Going Concern)
The foreign financial account reporting system is said to be all about keeping people from evading taxes by hiding assets overseas. I’m starting to think that it is really just a strange sadistic plan to torture random taxpayers for fun and profit. Consider:
- The FBAR filings are not part of the tax returns everyone files anyway.
- They are due at separate times from regular tax filings.
- The Treasury claims the timely mailed (or transmitted) = timely filed rule doesn’t apply to FBAR filings, unlike all other tax filings.
- The filing system is entirely separate from other tax return systems, including a separate bureaucracy and facilities.
Support for my theory comes from today’s report by Tax Analysts ($link):
Taxpayers cannot file a foreign bank account report electronically if they have a copy of popular software programs such as Adobe Acrobat installed on their computers because the programs conflict with the FBAR electronic filing portal, Tax Analysts has learned.
The only way to resolve the problem is to uninstall the conflicting programs and install a copy of Adobe Reader, according to instructionsfrom the Financial Crimes Enforcement Network’s Bank Secrecy Act (BSA) e-filing help desk. The conflict was confirmed by a help desk employee.
FinCEN mandated e-filing of FBARs as of July 1, 2013. According to a FinCEN FAQ, failure to comply with the electronic filing mandate could result in civil penalties, including a $500 fine for each negligent currency transaction.
The FBAR system is way overdue for an overhaul. Some obvious steps:
- Raise the foreign account filing threshold drastically — say to $100,000 or $200,000 from the current $10,000. This would keep thousands of Americans working overseas, and thousands more Green Card holders workers from having to risk enormous fines for foot-fault violations.
- Moving the FBAR filing to the regular tax return system, with the same filing locations and due dates. Currently filing is with “FincCEN,” which is creep-ese for the Financial Crimes Enforcement Network — which helps lead to the government presumption that committing personal finance while overseas is a crime.
- Making sure “timely mailed = timely filed” applies to FBAR reports.
Still better would be to join the developed world in imposing the income tax on a territorial basis, rather than on worldwide income.
Requiring taxpayers to screw around with their computer setup just to meet their FBAR requirements is outrageous. Even if FBAR filing is not merely a sadistic plot — and it sure acts like one — it seems more designed as a hook to punish violators — purposeful and accidental — than a way to gather compliance information. As usual, Congress goes after a small set of violators by firing into the crowd.
Russ Fox, Bears Sacked; Lose Court Case Worth $4.1 Million. “No, Jay Cutler didn’t throw one of his usual interceptions. Instead, Judge Mary Mason of the 1st District Illinois Appellate Court ruled that the Chicago Bears had underpaid Cook County’s Amusement Tax.”
Paul Neiffer, How Does Section 179 Work?
Robert D. Flach has your fresh Tuesday Buzz!
TaxProf, The IRS Scandal, Day 460
Kyle Pomerleau, Two New Reports on the “New Markets Tax Credit” (Tax Policy Blog):
This week, the Government Accountability Office (GAO) released a report on “New Markets Tax Credits” (NMTC) at the request of Senator Tom Coburn (R-OK). In addition, Senator Coburn also released a report of his own outlining the program.
New Market Tax Credits were introduced in 2000 as part of the Community Renewal Tax Relief Act of 2000. The NMTC were meant to encourage investment in low-income areas that don’t have access to capital.
The credit works by giving an investor a tax credit equal to 39 percent of the initial investment the investor makes in a project. This means for every $100 in an investment, an investor will receive a $39 tax credit. The credit is distributed over seven years. From 2003 to 2013, the program has cost the federal government $40 billion.
While the credit is meant to help fund projects in low-income areas, it has actually benefitted banks substantially. GAO and Coburn’s report outline significant issues with the program.
Jeremy Scott,Kansas and Missouri Show the Dangers of Tax Competition (Tax Analysts Blog):
For the last two decades, U.S. states have found themselves competing with their neighbors to attract domestic investment and relocations. And as Missouri and Kansas are learning, the real losers in tax competitions are taxpayers and state budgets.
The winners? The well-connected, fixers, middlemen, and politicians.
Career Corner. Rat Out Your Employer On Taxes. Win Cash Rewards! (Walter Olson, Reason.com)
David Brunori notes ($link) some odd behavior by Good Jobs First, a left-side outfit that has been on the side of the angels by highlighting the baneful effects of corporate welfare tax incentives. The American Legislative Exchange Council came out with a report blasting cronyist tax incentives, and rather than embracing the report, Good Jobs First ripped it — because the Koch Brothers are the Devil:
Yet, Good Jobs First slams ALEC because many recipients of tax incentives have close ties to ALEC. But so what? The fact that corporations, including those run by the Koch brothers, provide support to ALEC doesn’t diminish the argument that incentives are terrible.
Weirdly, Good Jobs First primarily blames the recipients of corporate welfare for taking the money, rather than the politicians who give it away:
Moreover, Good Jobs First inexplicably says that ALEC is wrong to blame policymakers rather than the companies that receive incentives. But the blame for those horrible policies rests squarely on the shoulders of lawmakers and governors who perpetuate them. In a world where the government is handing out benefits to anyone who asks, it’s hard to fault the people who line up for the handout. No one has been more critical of tax incentives than I, but I’ve never blamed the corporations. Nor do I blame the army of consultants and lawyers who grease the wheels to make incentives happen. There’s no blame for anyone other than the cowardly politicians from both parties who can’t seem to resist using those nefarious policies.
Precisely correct. When somebody is handing out free money, it’s hard to turn it down when your competitors are taking all they can.
I have seen smart people I respect do everything short of donning tin-foil hats when talking about the Koch Brothers and their dreadful agenda of influencing the government to leave you alone. Maybe everyone needs an Emmanuel Goldstein.
Adam Michel, Scott Drenkard, New Report Quantifies “Tax Cronyism” (Tax Policy Blog)
Annette Nellen, What about accountability? California solar energy property. Green corporate welfare is still corporate welfare.
Russ Fox, Where Karen Hawkins Disagrees With Me… The Director of the IRS Office of Preparer Responsibility commented on Russ’ post “The IRS Apparently Thinks They Won the Loving Case.” Russ replies to the comment:
Ms. Hawkins is technically correct that Judge Boasberg’s order says nothing about the use of an RTRP designation. However, the Order specifically states that the IRS has no authority to create such a regulatory scheme. If there isn’t such a regulation, what’s the use of the designation?
The courts closed the front door to preparer regulation, so the IRS is trying to find an unlocked window.
TaxGrrrl, IRS Imposes New Limits On Tax Refunds By Direct Deposit. “Effective for the 2015 tax season, the IRS will limit the number of refunds electronically deposited into a single financial account (such as a savings or checking account) or prepaid debit card to three.”
This seems like a measure that should have been put in place years ago. The Worst Commissioner Ever apparently had other priorities.
Kay Bell, Actor Robert Redford sues NY tax office over $1.6 million bill. The actor gets dragged into New York via a pass-through entity in which he had an interest — a topic we mentioned last week.
Renu Zaretsky, August Avoidance: Corporate Taxes and Budget Realities. The TaxVox headline roundup covers inversions, gridlock, and Kansas.
Ajay Gupta, The Libertarian Case for BEPS (Tax Analysts Blog) BEPS stands for “Base Erosion and Profit Shifting.”
Matt Gardiner, Inversions Aside, Don’t Lose Sight of Other Ways Corps. Are Dodging Taxes (Tax Justice Blog). Don’t worry, Matt. If I did, my clients would take their business elsewhere.
Robert D. Flach, HEY MR PRESIDENT – DON’T SHOOT THE MESSENGER! “If there is something wrong with the Tax Code do not blame the accountant or tax professional. We have a moral and ethical responsibility to bring to our clients’ attention all the legal deductions, credits, loopholes, techniques, and strategies that are available to reduce their federal and state tax liabilities to the least possible amounts.”
Jack Townsend, U.S. Forfeits Over $480 Million Stolen by Former Nigerian Dictator. The headline is misleading — the U.S. received the cash in a forfeiture — they seized it, rather than forfeiting it.
TaxProf, The IRS Scandal, Day 459
Instapundit, GANGSTER GOVERNMENT: Inspectors general say Obama aides obstruct investigations. The majority of the 78 federal inspectors general took the extraordinary step of writing an open letter saying the Administration is blocking their work as a matter of course. The IRS stonewalling on the Tea Party scandal is part of the pattern.
News from the Profession. It’s Completely Understandable Someone Might Sign Over 200 Audit Reports By Mistake (Adrienne Gonzalez, Going Concern)
You mean they didn’t shift to organic carrot juice? “From Coke to Coors: A Field Study of a Fat Tax and its Unintended Consequences” (Via Maria Koklanaris at Tax Analysts):
Could taxation of calorie-dense foods such as soft drinks be used to reduce obesity? To address this question, a six-month field experiment was conducted in an American city of 62,000 where half of the 113 households recruited into the study faced a 10% tax on calorie-dense foods and beverages and half did not. The tax resulted in a short-term (1-month) decrease in soft drink purchases, but no decrease over a 3-month or 6-month period. Moreover, in beer-purchasing households, this tax led to increased purchases of beer.
I’m sure the politicians who want to run everyone’s diet will angrily demand higher beer taxes in response.
Tax Court: Get a room! If you spend a lot of time on the road, you may have wondered whether it might make sense to buy a Winnebago instead of hopping between motels. The Tax Court yesterday weighed in on the side of motels.
A California insurance man with an RV found a market for his wares among his fellow tin-can nomads, as the Judge Wherry explains:
Starting in 2004, petitioners began attending RV rallies not just for pleasure but also for business purposes. At or around the same time, they purchased a 2004 Winnebago RV. We reject petitioners’ contentions that they attended RV rallies solely for business purposes from 2004 but instead find that they had mixed purposes. Petitioners would gather sales leads at every rally. To that end, petitioners had a banner that they attached to their RV advertising Dell Jackson Insurance. Petitioners would set up an information table outside of their RV or outside the clubhouse, if the site had one. If they set up a table by a clubhouse, petitioners moved the banner from the RV to the table. Otherwise, the sign remained on the RV from the time they arrived until the time they left. Petitioners would invite potential customers to come to their RV, and they would sit either outside or inside the RV and discuss the prospective client’s insurance needs. It would often take months, if not years, for a relationship with a potential customer, which could begin with a lead, to develop into an actual sale.
Naturally the salesman deducted expenses of his RV in preparing the Schedule C for his insurance business. The IRS limited his deductions using Section 280A, which limits business deductions for personal residences. The Court said that the RV was a house, as far as the tax law is concerned (citations and footnotes omitted, emphasis added):
Generally, “a taxpayer uses the dwelling unit during the taxable year as a residence if he uses such unit (or portion thereof) for personal purposes for a number of days which exceeds the greater of — (A) 14 days, or (B) 10 percent of the number of days during such year for which such unit is rented at a fair rental.” “Dwelling unit” is also a defined term and “includes a house, apartment, condominium, mobile home, boat, or similar property”. Sec. 280A(f)(1)(A). This Court has previously held that a motor home qualifies as a dwelling unit within the meaning of section 280A(f)(1)(A). Although we use the more modern term throughout this opinion, an RV and a motor home are one and the same thing. Petitioners and counsel used the two terms interchangeably at trial. Accordingly, petitioners’ RV is a dwelling unit for purposes of section 280A.
The Tax Court said that while the expenses were otherwise legitimate, the Section 280A disallowance of business expenses when a residence, or part of one, isn’t used “exclusively” for business overrides the deductions:
This result may seem harsh, but it is the operation of the statute, which reflects Congress’ desire to prevent taxpayers from deducting personal expenses as business expenses.
While the court admitted the result was harsh to begin with, that didn’t stop it from piling on, adding over $8,000 in “accuracy-related” penalties to the $42,000 in additional taxes assessed by the IRS — another example of the unfortunate tendency of the IRS — with the blessing of the Tax Court — to penalize everything, even when the taxpayer used an apparently reputable preparer.
The moral: RVs may be great for retirement travel, but they aren’t the best thing for business deductions. If they had rented hotel rooms, the deductions apparently would have been just fine.
So the IRS Commissioner is just fine with cronyism in tax administration. John Koskinen Indicates IRS Revolving Door Is A Feature Not A Bug (Peter Reilly). It will be hard to unseat Doug Shulman as the Worst Commissioner Ever, but John Koskinen is giving it the old college try.
Jack Townsend, It’s So Easy to Say No — The IRS Often Gets to No for Streamlined Transition Relief in OVDP. “The bottom-line is that the IRS is denying the nonwillful certification in far more cases than practitioners thought would be the case. And, the process of denial is a bit of a black box.”
Leslie Book, Summary Opinions for 7/25/14 (Procedurally Taxing). A roundup of recent tax procedure happenings.
Federal prosecutors first filed charges against ATR in 2010. In August 2012, a federal court entered a partial summary judgment in favor of the FTC, finding that the defendants falsely claimed they already had significantly reduced the tax debts of thousands of people and falsely told individual consumers they qualified for tax relief programs that would significantly reduce their tax debts.
The court issued a $103.3 million judgment against the company.
Outfits like ATR, J.K. Harris, TaxMasters and Roni Deutsch pulled in lots of revenue from taxpayers desperate to believe in the Tax Fairy. There is no tax fairy.
It’s Friday, the Iowa State Fair is underway, and Robert D. Flach is buzzing! So it’s a good day three ways.
TaxGrrrl, normally the soul of restraint, lets loose on the inversion diversion in Obama Joins Blame Game As Companies Flee U.S. For Lower Tax Rates:
But to point fingers at lawyers and accountants as if they are holding all the cards is plain wrong. If we want to talk about responsibility, let’s talk about responsibility.
So Presidemt Obama (a Harvard Law grad) and members of Congress (about 40% have law degrees), you can be angry about corporate inversions. You can publicly denounce companies that participate. You can try and put an end to it through changing the existing legislation. But those in Washington have no business blaming the lawyers and the accountants. We didn’t write the rules, you did.
The tax code is the instruction manual for taxpayers, and their lawyers and accountants, for tax compliance. And now the politicians don’t like what happens when we read and follow instructions.
Andrew Lundeen, To Stop Inversions, Fix the Tax Code (Tax Policy Blog). “But the lack of competitiveness created by the corporate tax isn’t the only issue: at its core, the corporate tax is inherently not neutral. It is highly distortive, opaque, and economically damaging tax.”
Christopher Bergin, Beware the Individual Income Tax Inversion (Tax Analysts Blog) “The truth is that our tax system is in trouble – all of it: the corporate side, the administration side, and the individual side. And that means the country is in trouble.”
Kelly Davis, Tax Policy and the Race for the Governor’s Mansion: Illinois Edition (Tax Justice Bl0g). Political wrangling in a doomed state.
TaxProf, The IRS Scandal, Day 456. The scandal has been Voxplained. Keep calm, all is well.
Art appreciation tip: “Like the folks who believe that the limits on maritime jurisdiction, explained by a talking salamander, holds the key to beating a federal criminal charge, the full tapestry of wacko tax fraud theories is a lovely thing to behold….” (Matt Kaiser, Above The Law). He covers a “sovereign citizen” from Omaha who learned that filing a phony $19 million lien on a judge is perhaps not the optimal way to handle a tax controversy.
Adrienne Gonzalez, California Might Ditch the Attest Requirement for CPA Licensure. I’m sure I would have been a better person if I had to waste two years observing inventories and otherwise bothering real auditors.
The IRS has issued (Rev. Rul. 2014-19) the minimum required interest rates for loans made in August 2014:
Short Term (demand loans and loans with terms of up to 3 years): 0.36%
-Mid-Term (loans from 3-9 years): 1.89%
-Long-Term (over 9 years): 3.09%
The Long-term tax-exempt rate for Section 382 ownership changes in August 2014 is 3.14%.
You might be surprised just how easy it can be to get sucked into tax in another state. Cara Griffith explains how easy it is to get California to come after you for their $800 minimum return fee in Doing Business in California (Tax Analysts Blog):
The California Franchise Tax Board recently issued Legal Ruling 2014-01, which addresses when a business entity with a membership interest in a limited liability company is required to file a California return and pay applicable taxes. The ruling comes while a case is pending on that very issue.
The case is Swart Enterprises Inc. v. California Franchise Tax Bd. (Fresno County Superior Court, Case No. 13 CE CG 02171 (July 9, 2013)). Swart operates a farm in Kansas and provides farm labor contractors. The company is incorporated in Iowa, has estimated annual revenues of $280,000, and has three employees.
Swart has no physical presence in California. It doesn’t have employees in California and it doesn’t own real or personal property there. Swart did, however, own a 0.02 percent interest in a California limited liability company that invested and traded in capital equipment. Swart was not the manager of the fund and was not involved in the management or operation of the fund. Yet its status as a member is enough for the FTB to allege that Swart is doing business in California.
The post explains that California would have let Swart off the hook if they owned in interest in a limited partnership, rather than an LLC. So if your business sneezes in the general direction of California, make sure you stick an old-fashioned limited partnership in the ownership chain somewhere, or California will shake you down for $800, or maybe a lot more.
This should especially make businesses wary about buying interests in publicly-traded or broker marketed LLCs. Most of these have at least a little bit of California income, and they might just make a California filer out of your LLC or corporation. And it’s not just California — wherever the LLC might be, so might you be also. It can mean increased state taxes, not to mention increased tax return prep fees.
Howard Gleckman, Does Congress Really Care About the Deficit? Not When It Comes to Vets and Highways (TaxVox). The answer would have been correct if it stopped after the first two letters.
Annette Nellen, Push for state film credits from Congress. They don’t care about state solvency either.
Peter Reilly, FAIR Tax Abolishes IRS – Then What?
When valuing a conservation easement, you must determine the value of the property before the easement and the value after the easement. The difference in value becomes the charitable deduction amount. In the case of the Schmidt’s, their apprisal determined the before easement value was $1.6 million and the after easement value was $400,000 for a net contribution deduction of $1.2 million…
The IRS appraiser valued the property at $750,000 for the before easement value and $270,000 for the after easement value for a net deduction of $480,000.
The deduction came down a little, but the IRS lost its bid for penalties.
Me, Obamacare mandates: What’s a taxpayer to do? (IowaBiz.com, where I discuss what the Halbig decision on tax credits for policies purchased on federal exchanges means now for taxpayers subject to the individual and employer mandates.
TaxProf, The IRS Scandal, Day 455
There’s a new Cavalcade of Risk. This edition of the venerable roundup of insurance and risk-management posts is up at The Population Health Blog. Among the worthy posts is Hank Stern’s Rideshare Tricks – An Update, on the insurance implications of participating in ride-share services like Uber.
But Mr. President, imitation is the sincerest form of flattery! Accounting Today reports on yesterday’s presidential press conference in Obama Blames Accountants for Inversion Trend:
During a press conference Wednesday following a summit with African leaders, Obama said, “You have accountants going to some big corporations—multinational corporations but that are clearly U.S.-based and have the bulk of their operations in the United States—and these accountants are saying, you know what, we found a great loophole—if you just flip your citizenship to another country, even though it’s just a paper transaction, we think we can get you out of paying a whole bunch of taxes.”
Wherever would anyone get the idea to do such a thing? Well, Accounting Today points to a suspect: Obama Aides Let Delphi Avoid Taxes with Tactic President Assails:
President Barack Obama says U.S. corporations that adopt foreign addresses to avoid taxes are unpatriotic. His own administration helped one $20 billion American company do just that.
As part of the bailout of the auto industry in 2009, Obama’s Treasury Department authorized spending $1.7 billion of government funds to get a bankrupt Michigan parts-maker back on its feet—as a British company. While executives continue to run Delphi Automotive Plc from a Detroit suburb, the paper headquarters in England potentially reduces the company’s U.S. tax bill by as much as $110 million a year.
One might almost get the impression that this whole inversion panic isn’t really a serious policy effort, but instead a desperate diversion by a foundering politician and his partisans.
The problem might be the tax system, not wobbly patriotism. Record Numbers of Americans Are Renouncing Their U.S. Citizenship (TaxProf). Paul Caron links to Andrew Mitchel’s report on the latest quarterly numbers of published expatriates, which includes this chart:
Our worldwide tax system makes it difficult, dangerous and expensive to be a U.S. taxpayer abroad. Rather than impugning their patriotism, the President ought to try to make it affordable.
Bob McIntyre of the Tax Justice Blog makes perhaps the worst appeal to authority ever seen in the tax literature: Woody Guthrie on Corporate Tax Inversions. Woody Guthrie’s economic gurus weren’t exactly cutting-edge .
The Iowa State Fair Starts today!
If you show up on Saturday, look for me at the Sertoma booth at the Varied Industries Building from 1-5; I will be distributing educational hearing safety info and ear plugs, and you may even be able to get a free hearing screening from a trained audiologist. And you might want some music to fire you up for a really big show!
Is your airplane any of your business? The Tax Court yesterday dealt with a problem that will arise a lot as taxpayers struggle with the new 3.8% Obamacare Net Investment Income Tax: what “activities” can be considered to be part of a single business?
The issue comes up because “passive” activities are subject to the tax, while non-passive activities are exempt. It is especially important when S corporations are involved because their K-1 income is also exempt from the 2,9 Medicare tax and the .9% Obamacare Medicare surtax. The status of activities as “non-passive” usually depends on the amount of time spent working in the activity; if you can combine activities they are less likely to be passive.
Tax Court Judge Buch outlines yesterday’s case:
Mr. Williams is an aviation buff who owns a business that is unrelated to aviation. He purchased an airplane that he made available for rent, used for personal purposes, and used in his other business. On the Williams’ joint tax returns, they offset losses related to the ownership of the airplane against their income from the other business. Respondent disallowed those offsets…
Passive losses cannot offset non-passive income under the 1986 passive loss rules; they carry forward to offset future income until the activity is sold. Mr. Williams reported the airplane expenses as part of his business of training telemarketers. The court reviews the rules on combining activities (footnotes omitted; my emphasis):
Section 1.469-4(c), Income Tax Regs., sets rules for determining what constitutes a single “activity”. That regulation provides: “One or more trade or business activities or rental activities may be treated as a single activity if the activities constitute an appropriate economic unit for the measurement of gain or loss for purposes of section 469.” Whether activities constitute an “appropriate economic unit” depends on the facts and circumstances, giving the following five factors the greatest weight:
(i) Similarities and differences in types of trades or businesses;
(ii) The extent of common control;
(iii) The extent of common ownership;
(iv) Geographic location; and
(v) Interdependencies between or among the activities (for example, the extent to which the activities purchase or sell goods between or among themselves, involve products or services that are normally provided together, have the same customers, have the same employees, or are accounted for with a single set of books and records.)
The judge said the airplane wasn’t part of the same “economic unit” as Mr. Williams’ other business, called WPP:
The fact that there was no meaningful interdependence between the ownership of the airplane and the business of WPP is evidenced in part by the fact that Mr. Williams would rent another airplane for travel because he could earn more from renting WPP’s airplane to other pilots or pilot trainees than he would pay if he or WPP rented another airplane for a trip. Further, most of the airplane’s use and income came from renting the airplane outside WPP, which had no effect on the business of WPP. Likewise, there is no indication that the airplane activity depended on WPP; it was only an occasional user of the airplane. There is no evidence that WPP and the airplane activity had any of the same customers or that the two activities were integrated in any meaningful way.
When the airplane activity was separated his other business, Mr. Williams was unable to muster enough hours to reach “material participation,” making the airplane losses passive and non-deductible.
What does this mean in planning for the NIIT? Taxpayers get to revisit their activity groupings for 2013 and 2014 returns. Taxpayers with multiple businesses will want to ponder what things they can realistically combine. Just because you own both businesses doesn’t mean the tax law will consider them an “appropriate economic unit.”
Jack Townsend, Whistleblower Award for FBAR Penalties?
Jason Dinesen, Kudos to NAEA for Promoting EAs. Not to sound dumb, but isn’t that what the National Association of Enrolled Agents is supposed to do?
Russ Fox, The IRS Apparently Thinks They Won the Loving Case. “In Loving v. IRS, the IRS was permanently enjoined from the Registered Tax Return Preparer designation. One would think that the IRS would realize this and remove the designation from forms.”
Keith Fogg, How Bankruptcy Can Create a Pyrrhic Victory out of a Tax Court Win (Procedurally Taxing)
Peter Reilly, FAIR Tax Abolishes IRS – Then What? I have long thought the fair tax was half-baked gimmick, deceptively marketed. If you want to move to a consumption tax, move to a real consumption tax.
Adam Michel, What is the Consumed Income Tax? (Tax Policy Blog)
Allison Christians, Regulating Return Preparers: A Global Problem for the IRS:
The problem of regulating all foreigners in service of U.S. citizenship taxation plagues FATCA in the details, and it will plague the project of tax return preparer regulation as well. It won’t be easily solved unless Congress can accept that the universally practiced norm of residency-based taxation is really the only viable option in a globalized world. If not, as the world adjusts to the ongoing expansion of U.S. regulatory power through more — and more complex — financial regulation, everyone will have to accept that virtually every tax move Congress makes has global implications.
Via the TaxProf.
Just what the world needs: more IRS.
David Brunori, Keep the Inversion Hysteria Out of the States (Tax Analysts Blog). “A company’s decision to invert is no different from an individual’s decision to live in a state without an income tax or to buy a house rather than rent to take advantage of a tax break.” But, but, what about your loyalty oath? You must hate America! Or, worse, Iowa!
Scott Hodge, More Perspective on Inversions: Not a Threat to the Tax Base but the Face of U.S. Uncompetiveness (Tax Policy Blog)
Bob McIntyre, Statement: Despite Walgreens’ Decision, Emergency Action Is Still Needed to Stop Corporate Inversions (Tax Justice Blog, where inversion hysteria is always in style).
Eric Toder, How Political Gridlock Encourages Tax Avoidance (TaxVox)
Joseph Thorndike, The Origination Clause? Let It Go (Tax Analysts Blog). Since the courts allow the Senate to strip any house bill of its text and replace it with revenue provisions, it’s pretty much dead already. And that’s a shame.
Your legislators at work:
Chicago lawmaker pleads to misdemeanor; faced 17 felonies. ““I’m sorry I underestimated my taxes.”
Fattah Jr. released on bail following U.S. indictment on theft, fraud and tax-evasion charges. The son of a Congresscritter has tax issues? The apple doesn’t fall far from the tree.
TaxProf, The IRS Scandal, Day 454
Career Corner. Career Limiting Moves: A Beginner’s Guide (Leona May, Going Concern).