Tax Roundup, 10/7/14: Sweet pursuit of Tax Fairy turns sour. And: shut up and get used to FATCA!

October 7th, 2014 by Joe Kristan

tax fairy

Isaac Brock visitors: here is a direct link to what you are looking for.

Not so sweet.  A business owner who turned to a man associated with the JoY Foundation “pure trust” scam in pursuit of the Tax Fairy may be regretting his choice of tax advisors after a bad day in Tax Court yesterday.

The taxpayer had an apparently successful S corporation, Specific Enterprises, specializing in cabinet doors.  In 2002, Mr. Joseph Sweet came up with a cunning plan, starting with a liquidation of Specific Enterprises.  Tax Court Judge Nega takes up the story (footnotes and citations omitted, emphasis added):

On December 3, 2002, an entity called RCC Capital Group (RCC) was formed that purported to be a “PRIVATE, NON-STATUTORY, NON-ASSOCIATED, CONTRACTUAL PURE TRUST (CPT)”…

On January 2, 2003, petitioner and RCC entered into an “Asset Purchase Option Contract” (drafted by petitioner) where petitioner purported to grant RCC options to purchase petitioner’s factory building, the land upon which it was located, and equipment. The exercise price for the contract was $1,650,000, and petitioner accepted $21 (presumably the same $21 conveyed to RCC by Brad R. Scott) plus two promissory notes valued at $700,000 and $950,000 in full consideration of the deal. The contract was also contingent upon a separate rental contract, the “Facility Production Contract”, between RCC and Cabinet Door Shop for Cabinet Door Shop’s use of the factory building, land, and equipment… At the behest of petitioner, RCC did not file income tax returns.

Pursuant to the “Facility Production Contract”, dated January 3, 2003, Cabinet Door Shop made total rental payments of $273,000 and $126,000 to RCC for 2003 and 2004, respectively, although RCC did not exercise the option to purchase the factory building, land, and equipment from petitioner until some time around March 10, 2004. After receiving these rental payments RCC made total payments to petitioner in the exact same amounts: $273,000 in 2003 and $126,000 in 2004.

In 2003 as part of a separate transaction Cabinet Door Shop made monthly installment payments to petitioner totaling $80,798 for the sale of inventory.

“Pure trusts” are a hackneyed and worthless tax scheme that retains a following among tax deniers. The IRS naturally didn’t like the way this stuff was reported, assessing tax on the sale of inventory and sticking the taxpayer with the income earned in the “pure trust.”  First, the inventory:

Petitioner has not provided any facts or details that permit a reasonable estimate of his basis in the inventory. Although petitioner provided respondent with his personal tax returns and tax returns for Specific Enterprises one day before trial, these returns are mere admissions; and we are unwilling to attach significance to them in the absence of corroborating evidence as to petitioner’s basis in his assets. The record does not establish the cost basis of the inventory. The record indicates only that Cabinet Door Shop paid $80,798 to petitioner for the inventory…  Because petitioner has not provided any pertinent information that would help us estimate his basis in the inventory, the Cohan rule does not apply. Consequently, the entire amount paid by Cabinet Door Shop for petitioner’s inventory is includable in petitioner’s gross income for the 2003 taxable year.

A self-inflicted wound. Surely the taxpayer had basis in the inventory, but apparently he didn’t take the Tax Court proceeding seriously enough to document it.

The “pure trust” fared no better, with all of the “rental payments” received by the trust taxed to the taxpayer instead.  The IRS also won 25% penalties for non-filing of returns for 2003 and 2004.

It’s interesting that no tax is assessed for 2002, the year the corporation was liquidated — a corporate liquidation would normally have triggered a lot of tax. I assume the omission of 2002 from the case implies that a return was filed, starting the statute of limitations, though the Tax Court decision doesn’t confirm this. Considering the whole thing was done to start a tax avoidance scheme, it would seem strange for the gain to be properly reported.

The Moral: Beware of trust schemes that say they make your taxes go away. They are just Sweet nothings. If the Tax Court wants you to document something, don’t give them the information the day before trial. And there is no Tax Fairy.

Cite: Wheeler, T.C. Memo. 2014-204

 

No-longer-Acting IRS Commissioner Steven Miller

No-longer-Acting IRS Commissioner Steven Miller

Worst Acting Commissioner Ever says FATCA may not be worth it, but it’s here to stayTax Analysts reports ($link) on a speech by Steve Miller, who was Acting IRS Commissioner when the Lois Lerner scandal broke. He says that while the FATCA offshore disclosure bill may not be worth its cost, it shouldn’t go away:

“I can’t even say with conviction that I’m sure, looking strictly on a cost-benefit basis, that FATCA’s . . . benefits are going to outweigh the cost,” Miller told a lunch crowd at the Securities Industry and Financial Markets Association FATCA Policy Symposium in Washington. “It’s not clear to me that when you look solely at the burden placed on financial institutions and others, versus the amount of revenue that may come into the treasury, that this is going to be a revenue-positive event for the United States.”

And despite the fervent wishes of some in the finance industry, FATCA is here to stay, said Miller, now national director of tax for Alliantgroup. “I don’t see a repeal in the cards,” he said. “FATCA . . . is tied inextricably to offshore evasion work, and that has to be kept in mind as you talk about repeal, as you talk about changes.”

In case you’re wondering, Alliantgroup is a tax consulting company that specializes in tax code complexity exploitation via services like research credit studies.

Miller said he recognized “that the folks in this room are sort of on the wrong end of FATCA implementation and that you’re bearing the cost and not necessarily the benefit of FATCA.”

But Miller added, “The future is an improved global set of rules, [and] I have high hopes that it will create a level playing field that will make it much more expensive and risky to hide assets offshore. And that should be some help at least to compliant financial institutions as people consider where to invest their money into the future.”

FATCA has made ordinary personal finance difficult to impossible for Americans abroad. Americans are losing opportunities to work offshore because foreign employers fear FATCA hassles. U.S. citizens who do find work offshore face hassles and headaches just trying to open a bank account. But that’s a small price to pay for “an improved set of global rules,” right?

Of course, a defense of burdensome tax provisions is no surprise coming from an IRS official going out the revolving door to a company whose business depends on helping taxpayers deal with “the burden placed on financial institutions and others.” It makes Glenn Reynold’s Revolving Door Surtax proposal look very tempting.

 

buzz20140909Robert D. Flach has some fresh Tuesday Buzz,  including a link to a discussion of the prospects for tax reform (dismal) and the immediate future for figures in the T.V. show “Real Housewives of New Jersey” (dismal also).

TaxGrrrl has two new guest posts: Steven Chung, The Vehicle Miles Traveled Tax and Dominic Ferszt, The Accidental Tax Invasion. The second post is an excellent summary of the FATCA nightmares Steven Miller says offshore taxpayers should just suck up and get used to.

Kay Bell, Signs of change for sports league tax exempt status

 

Martin Sullivan, Can Multinationals’ Offshore Cash Fund a U.S. Infrastructure Bank? (Tax Analysts Blog). Apparently fixing a tax code debacle may be doable if we create a domestic spending boondoggle.

 

TaxProf, The IRS Scandal, Day 516

 

20140729-1Scott Drenkard, North Dakota Democrat Tax Commissioner Candidate Proposes Flat Tax—Big Tax Climate Improvement (Tax Policy Blog). In North Dakota, Tax Commissioner is a statewide elective office.

Imagine an Iowa Democrat proposing what Joseph Astrup proposes:

His plan would flatten and simplify the individual income tax to a single bracket, while lowering the top rate from 3.22 percent to 2.52 percent. The exemption would be raised to $40,000 for singles and $80,000 for married filers.

In fairness, I can’t imagine an Iowa Republican proposing something like this, either. But if an Iowa politician does want to take some inspiration from North Dakota, the Tax Update’s Quick and Dirty Iowa Tax Reform Plan would be a fine place to start.

 

Tracy Gordon, It’s Not Easy to Escape the Local Pension Vise (TaxVox). Maybe not, but it’s necessary.

Peter Reilly, Tax Court Judge Appreciates Art More Than Your Average Revenue Agent, Which presumably makes a certain art professor appreciate the Tax Court more than the IRS.

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Tax Roundup, 10/6/14: Nine more days, folks. And: four hours of ethics to rule them all!

October 6th, 2014 by Joe Kristan

4868It’s October 6. That means extended 1040s are due in nine days, no further extension allowed.

I spent part of my weekend finishing up my own 1040, so I can’t be too self-righteous about procrastinators. Still, my return was 95% done on April 15. This was really just going through the information I had put together for my extension and making sure I hadn’t missed anything. I had gotten all of my information to the preparer (me) months ago.

Meanwhile, I have clients who have gotten me nothing, or maybe just their W-2. These taxpayers often are making the perfect the enemy of the adequate. They want to go through their checkbooks to identify every possible charitable deduction. And that last deduction is rarely worth the wait.

Just get the stuff you have to your preparer now. If you later find a deduction that matters, we have three years to amend the return. But you only have nine days left to file on time.

 

get-outEthics time. I am trying to find four hours of “ethics” courses to take before year-end, because the Iowa Board of Accountancy requires it for license renewal. Robert D. Flach sums up my feelings:

The powers that be seem to feel that unless tax preparers are forced to sit through at least 2 hours of redundant ethics preaching each and every year they will suddenly begin to create large fictional employee business expense deductions for clients, or add erroneous dependents, and false EIC claims, to client 1040s.

I have been preparing 1040s for over 40 years. If I ain’t “ethical” by now, having 2 hours of preaching thrust upon me isn’t going to miraculously make me honest.

In real life, “ethics” courses really seem to be CYA seminars — how to document your file and prepare engagement letters to help ward off frivolous lawsuits. That can be useful, but I’m not sure “ethics” is the right name for it.

 

20140805-2Tony Nitti, Artists Rejoice! Tax Court Concludes Painter’s Activity Isn’t A ‘Hobby’. Tony covers a Tax Court case last week where the IRS improbably went after an art professor’s Schedule C art business on hobby loss grounds.  She won the hobby loss issues, but Tony thinks she will lose other parts of her case, in which the IRS says she deducted personal expenses on her business filing.

Peter Reilly, TIGTA Must Disclose More About Investigation Of Possible IRS Release Of Koch Industries Return Information. Peter looks into whether Koch Industries is an S corporation and learns that some highly political people are humor-impaired and comically challenged.

Russ Fox, Legaspi Gets 21 Months:

Francisco Legaspi didn’t want to go to jail. Back in November 1992, he pleaded guilty to tax evasion. Instead of showing up for his sentencing in January 1993, he headed to Mexico and then Canada to avoid prison. That worked for 20 years. In 2012, the State Department found him when the Bureau of Diplomatic Security found his Facebook page. (A helpful hint to any fugitives out there: Avoid posting anything on the Internet. Law enforcement reads the Internet, too.) They forwarded his information to the Royal Canadian Mounted Police who arrested him; the Mounties always get their man.

Now he’ll serve that 21 months.

 

20141006-1Kay Bell, Estate gets $14 million tax refund on value of art. Kay’s a little giddy about her Baltimore Orioles sweeping Detroit. Now they have to face the Royals, managed by the Magic 8-ball.

Jim Maule, Do Squatters Have Gross Income? A woman moves into an abandoned house. Nobody kicks her out or demands rent. Prof. Maule ponders the implications.

Janet Novack, IRS: We Made A Mistake Valuing Michael Jackson’s Estate. They want more.

Annette Nellen, California to study alternative to current gas tax. Most gas taxes aren’t indexed, and technology is reducing gas consumption. This makes paying for roadwork more complicated.

TaxGrrrl is hosting a bunch of guest posters, including Josh Hoxie, When Income Tax Cuts Masquerade As Estate Tax RepealRebecca McElroy, Making Changes To The Tax Code Starting With The Medical Expense Deduction; and Elaine Kamarck, On The Tax Code, Time for America to Have it Our Way.

 

TaxProf, The IRS Scandal, Day 515

 

Quotable:

There’s nothing wrong with being nostalgic unless you’re trying to do it on someone else’s dime.

-Brian Gongol, on the denial of “landmark” status for Des Moines’ dilapidated riverfront YMCA.

 

News from the Profession. Why are People in Public Accounting So Ridiculously Good Looking? (Adrienne Gonzalez, Going Concern). If you think we’re hot, you haven’t seen the actuaries.

 

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Tax Roundup, October 3, 2014: A gold mine, or just a pile of old clothes? And: economic self-development!

October 3rd, 2014 by Joe Kristan
Flickr image courtesy Jen Waller under Creative Commons license.

Flickr image courtesy Jen Waller under Creative Commons license.

Is that basement full of clothes really a gold mine? Gold, if you believe the values a Maryland man used for donations of old clothes to charity. Unfortunately for him, the Tax Court yesterday ruled that sometimes all you get for your donation is a clean basement.

Many taxpayers use donations of clothing and household items as a gimme deduction.  They always write “$500 to Goodwill” on their tax information — or sometimes, a lot more.  While you can deduct the value of used clothes, the tax law imposes some limits, as Judge Lauber explains (citations omitted, emphasis added):

The nature of the required substantiation depends on the size of the contribution and on whether it is a gift of cash or property. For all contributions of $250 or more, the taxpayer must obtain a contemporaneous written acknowledgment from the donee.  Additional substantiation requirements are imposed for contributions of property with a claimed value exceeding $500. Still more rigorous substantiation requirements are imposed for contributions of property with a claimed value exceeding $5,000.


Section 170(f)(8)(A) provides that an individual may deduct a gift of $250 or more only if he substantiates the deduction with “a contemporaneous written acknowledgment of the contribution by the donee organization.” This acknowledgment must: (1) include “a description (but not value) of any property other than cash contributed”; (2) state whether the donee provided any goods or services in exchange for the gift; and (3) if the donee did provide goods or services, include a description and good-faith estimate of their value. . The acknowledgment is “contemporaneous” if the taxpayer obtains it from the donee on or before the earlier of: (1) the date the taxpayer files a return for the year of contribution; or (2) the due date, including extensions, for filing that return. Petitioner obtained blank signed forms from AMVETS and later filled them out himself by inserting supposed donation values. Because these forms were signed before the property was allegedly donated, we question whether they constitute an “acknowledgment” by AMVETS that it received anything.

 

20120511-2For contributions over $5,000,  a “qualified appraisal” is required unless the gift is of marketable securities.

The Marylander had cleaned out the house of his deceased mother, and he had a lot to give away:

These items allegedly included seven sofas, four televisions, five bedroom sets, six mattresses, a kitchen set, a dining room set, a china cabinet, and three rugs. For charitable contribution purposes, petitioner placed a value of $11,730 on these items.

Petitioner testified that he also donated to AMVETS during 2009 numerous items of clothing belonging to him and his children. These items allegedly included 180 shirts, 63 pairs of slacks, 153 pairs of jeans, 173 pairs of shoes, 51 dresses, 35 sweaters, nine overcoats, and seven suits. For charitable contribution purposes, petitioner placed a value of $14,487 on these items.

While no individual item exceeded $5,000, the appraisal rule still applied:

For contributions exceeding $500, “similar items of property” are aggregated in making this determination. Sec. 170(f)(11)(F) (“For purposes of determining thresholds under this paragraph, property and all similar items of property donated to 1 or more donees shall be treated as 1 property.”); . The term “similar items of property” is defined to mean “property of the same generic category or type,” such as clothing, jewelry, furniture, electronic equipment, household appliances, or kitchenware.

Because the value of the claimed contribution exceeds $500, we must aggregate “similar items of property” to determine what substantiation was required. Petitioner’s self-created spreadsheet shows three categories of similar items: clothing with an alleged value of $14,487; household furniture with an alleged value of $11,730; and electronic equipment with an alleged value of $1,550.

That knocked out the clothes and furniture right there, because there was no appraisal. It would be interesting to see if you could even find an appraiser to value old clothes like that. If you could, though, the appraisal expense would be a miscellaneous itemized deduction.

Who was the preparer? One odd twist is that the clothing deductions were claimed on an amended return prepared by a third party, after the IRS had already examined the taxpayer and assessed tax for unsubstantiated itemized deductions. I hope he didn’t pay that preparer too much.

The moral? 

When you have make a clothing donation (or any donation, for that matter) over $250, you need to get a written receipt meeting IRS rules to support your donation — a cancelled check or blank slip with detail of donation doesn’t cut it. If your donation goes over $5,000, and it’s not a traded security, you must have a qualified appraisal.  No appraisal, no deduction.

Oh, and the deduction for used clothing isn’t really just an additional standard deduction by another name.

Cite:  Smith, T.C. Memo 2014-203.

 

20140826-1Robert D. Flach has fresh Friday Buzz, including what he promises is a final reference to the Jersey Shore guy’s tax problems.

TaxGrrrl, Updated: ‘Real Housewives’ Reality Stars Joe & Teresa Giudice Sentenced To Jail. “Joe Giudice has been sentenced to 41 months in federal prison for financial and tax fraud. His wife, Teresa, will serve 15 months.”

William Perez, How to Calculate the Premium Assistance Tax Credit (With an Example). This will be a big deal on 2014 returns.

Jason Dinesen, Using a Line of Credit to Purchase Investments

Kay Bell, Tax moves to make during October 2014

Annette NellenLogical sales tax ruling on a web-based business

My fact check of a fact check is cited in a fact-check debunking.

 

Howard Gleckman, Pass-Through Firms Report $800 Billion in Net Income, Can’t Be Ignored in Business Tax Reform (TaxVox). “These firms have engaged in self-help tax reform by avoiding double taxation with the stroke of a pen.”  You’re welcome.

 

Jack Townsend, Penalties and Corporate America’s Shenanigans. “Instead of focusing the fire where far more revenue is involved and apply penalties in a way that will discourage misbehavior, the IRS goes after the small fish when there are bigger fish to fry.”

TaxProf, The IRS Scandal, Day 512

 

20141003-2Steve Warnhoff, Former CBO Director Holtz-Eakin on Dynamic Scoring: Revenue Estimating Is Already a Big Guessing Game So Why Stop Now? (Tax Justice Bl0g).

 

Career Corner. It’s Not All About the Big 4 (No Further Proc, a presumably pseudynomous Going Concern contributor). “So at your next recruiting event, when you witness the hordes amassing at the B4 tables, take a minute and visit other firms for a chat.”

Darn straight. Especially check out the Roth and Company table.

 

Economic development begins at home. Former Economic Development Director Charged With Tax Evasion:

 The one-time economic development director for the City of Columbia was arrested on multiple counts of income and property tax evasion.

Wayne Emerson Gregory, Jr. was arrested by investigators from the SC Department of Revenue on 3 counts of income tax evasion and 14 counts of property tax evasion.

Previously, Gregory was arrested in April of this year on embezzlement charges stemming from his time as Georgetown County’s Director of Economic Development from 2005 until September of 2013.

Silly rabbit.  When you’re an economic development director, you help other people loot the government.

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Tax Roundup, 10/2/14: The IRS helps fulfill a vow of poverty. And: ACA – good in theory?

October 2nd, 2014 by Joe Kristan

tack shelterWe should all face such poverty. A Mississippi orthopedic surgeon has been convicted of tax evasion through an unbelievably hokey dodge.  From a Department of Justice press release:

The evidence at trial showed that Dr. Jackson claimed he had taken a vow of poverty in 2003 with the “Church of Compassionate Service,” an entity located in Utah, claiming that he was therefore exempt from paying any income tax. The evidence proved that he made substantial income practicing medicine but had not filed a tax return or paid any income tax since 2003. It also showed that he used nominee accounts and other devices to conceal his income from the IRS through the “church,” but that in fact 90% of the income was returned to him.

The indictment said Dr. Jackson had taxable income of $823,000 in 2009, but failed to file a return.  He may have had a disturbing lack of faith in his faith-based tax planning, though, as he also was accused of hiding assets by using fake invoices to inflate expenses and by putting his vehicles in “Ministry Vehicle #1 Holdings Trust.”

While the failure of this scheme isn’t remarkable, it is remarkable that somebody smart enough to complete medical school and establish an evidently successful surgical practice would attempt such a ridiculous tax dodge.  After his likely prison term and the probable collection of back taxes and 75% civil fraud penalties, plus interest, the doctor may finally have a chance to fulfill his vow of poverty.

More from Robert Wood: Invent A Church, Skip Taxes, Enrage IRS, Go To Jail

 

train-wreckRobert D. Flach has published his monthly The Tax Professional newsletter for October.  Robert is always entertaining, always intelligent, even if I don’t think he’s always right.

His lead October item is “Obamacare – Good Concept but Bad Legislation:”

The basic concept of Obamacare is a good and valid one – attempting universal health insurance coverage for all Americans without having to resort to UK-like “socialized medicine”. 

He says this “good concept” was just badly executed:

However, for solely political reasons, the Democratic Party wanted a victory for President Obama early in his first term and rushed through poorly conceived legislation that turned out to be a total mess, instead of allowing for sufficient time to properly think through the correct and efficient application of the concept.

Nothing to disagree with in this sentence, but Robert misses the main point.  His flaw is his assumption that it is even possible for any Congress to enact well-conceived legislation to restructure 1/6 of the economy.  While I grant that this legislation is extraordinarily bad, there is no set of 535 humans born wise enough, and with enough information, to design a top-down system for 300 million people with 300 million different needs.  That’s why I can’t agree that this is a “good concept” to begin with.

It would have been far wiser to examine the barriers that the government itself has put in place to affordable health insurance. Obvious problems are the government-imposed restrictions on interstate sales of health insurance and the restriction of tax benefits for health coverage to employer plans. Remove the barriers to developing and marketing insurance, then leave it to consenting adults to decide whether to buy insurance, and to determine what policies they need and are willing to pay for. But because reforming these things would reduce govenment power, not expand it, these fixes don’t have much support among grasping politicians and bureaucrats.

Robert also gives an excellent example of a huge, whimsical inequity in how ACA works.  No doubt the upcoming tax season will teach practitioners everywhere what a “fess,” as Robert would say, we now have.

I will address some other topics in Robert’s October newsletter in future posts; he contains multitudes.

Update: Robert responds.

 

20140513-1Russ Fox, One Good Erasure Deserves Another:

Most of the time, I wouldn’t believe that the IRS would do this. As of 18 months ago, I wouldn’t believe that the IRS would lie to Congress, would target conservative applicants for nonprofit status, and that the hard drive of any computer (or other electronic device) touched by Lois Lerner would be magically erased.

It will take years, and a much better Commissioner, to repair the damage the IRS has done to its own reputation.

TaxGrrrl, Caroline Wozniacki Forgets Her Paycheck, Can’t Skip Out On Taxes. They don’t offer direct deposit for these things?

Roger McEowen, Counties Eligible for Extended Replacement Period for Livestock Sold Due to Drought  (ISU-CALT)

Peter Reilly, Seventh Circuit Allows Do-over On Tax Court Stipulations For Deceived Taxpayers. IRS doesn’t get to benefit from practitioner’s deceit.

Michael Desmond, Is There a Future Role for Circular 230 in the Internal Revenue Service’s Efforts to Improve Tax Compliance? (Tax Procedure Blog).  A good coverage of the flaws in Circular 230 as a regulation tool, but I can’t let this statement go:

The politics of that question extend beyond this posting, but they will have to be addressed if there is to be any comprehensive response, legislative or otherwise, to Loving and the largely unchallenged proposition that paid return preparers should be subject to broader oversight than current law appears to permit.

Don’t take that “largely unchallenged” thing for granted. I challenge it, as do many practitioners. I am unwilling to trust an organization that has shown such bad faith at the highest level to control the livelihood of those of us who have to deal with them.

 

Joseph Thorndike, Let’s Stop Talking About Tax Reform (Tax Analysts Blog) “Outside wonky policy circles, there is simply no appetite for the real work — and real pain — of genuine tax reform.”

TaxProf, The IRS Scandal, Day 511, Did the IRS leak the Koch Brothers’ returns to the White House? TIGTA ordered to disclose whether this is being investigated.

David Brunori, A Very Good Idea to Curb Incentive Abuse (Tax Analysts Blog). It’s a proposal to ban commissions for helping seek a tax credit. I think that’s inconsistent with the logic of corporate welfare — supposedly you want to spread this wonderful stuff like candy, if you think it works, and commission-collecting middlemen help.  It would be much better to eliminate their product, rather than going after their commissions for selling it.

Cara Griffith, Managing the Tax Consequences of Equity Compensation Awards (Tax Analysts Blog) “Although states have not historically been aggressive in going after nonresident individuals with equity-based compensation awards, that may change.”

Joshua D. McCaherty, Lyman Stone, A Year After $9 Billion Incentive, Boeing Employment in Washington to be Reduced (Tax Policy Blog).  Thanks, chumps!

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Tax Roundup, 10/1/14: Another court says Obamacare tax credits limited to state exchanges. Also: the Iowa Tollway.

October 1st, 2014 by Joe Kristan

oklahoma logoState means state. A U.S. District Court in Oklahoma has joined the D.C. District in holding that the tax credit subsidies for health insurance are limited to the 14 states that have established a health insurance exchange under the ACA. Other states let the feds set up exchanges.  Michael Cannon reports:

Noting that Obama administration wants to issue Exchange subsidies in states with federal Exchanges even though the PPACA (quoting Halbig) “unambiguously restricts the [Exchange] subsidy to insurance purchased on Exchanges ‘established by the State,’” Judge White argues that the government’s interpretation (quoting the Tenth Circuit in Sundance Assocs., Inc., v. Reno) “leads us down a path toward Alice’s Wonderland, where up is down and down is up, and words mean anything.” As evidence, White quotes the concurring opinion in King: “‘[E]stablished by the State’ indeed means established by the state – except when it does not[.]”

The D.C. District decision was upheld by a D.C. Circuit appeals panel, but has been vacated pending a rehearing by the full panel of judges.  The Fourth Circuit Court of Appeals has sided with the government, holding that the subsidies apply to all exchanges.  The issue is almost certainly going to be decided by the U.S. Supreme Court.

Both the ACA employer mandate and individual mandate penalties depend on how the decision comes out.  The employer mandate only applies if an employee gets a tax credit subsidy, so the Oklahoma rule would exempt employers in 36 states from the mandate. The tax credits are also key for determining whether insurance is “affordable” in computing individual penalties for not buying insurance; if the credits are unavailable, penalties would go away for millions of taxpayers in the 36 states using federal exchanges.

Related:

Whither Halbig and the ACA.

Obamacare tax credits get a reprieve.

Cite: Pruitt v Burwell. DC-OK, No. CIV-11-30-RAW

Peter Reilly, Court Rules Oklahoma ObamaCare Not OK

 

 

20120703-2Many economists say highway tolls are a sound way to finance road improvements. While Iowa has no official tollways, our state troopers are taking matters into their own hands, according to a report in today’s Des Moines Register:

 Two California poker players are refusing to fold in a legal battle against the state, claiming Iowa State Patrol troopers unlawfully seized their $100,020 gambling bankroll.

Troopers with the State Patrol’s criminal interdiction team — which works to catch drug traffickers and other criminals along interstates — used unfair procedures that target out-of-state drivers and cast suspicion on nonthreatening motorists, according to a lawsuit filed this week in federal district court on behalf of professional gamblers William “Bart” Davis and John Newmer­zhycky.

The men were traveling in a rented car from a poker event in Illinois with their bankroll.  They were pulled over on a pretext of not signalling a lane change — a pretext seemingly debunked by the patrol car dash cam recording — and ended up having their $100,000 seized.  They were also charged with having “drug paraphernalia.”

The state has returned $90,000, but the state has kept $7 million in seized funds from other out-of-state motorists, often without bothering to file charges.  A state spokesman defends the indefensible practice, which hits hardest people who are least likely to be able to afford to take the state to court, by saying it hurts criminals. You could probably catch some criminals and raise some cash by stopping and frisking everyone leaving the Harkin Steak Fry too, but that would hardly justify doing so.

Dallas County Sheriff took the practice a little too far; he was convicted of stashing seized funds in his garage (in a case where no charges were filed against the motorists whose cash was confiscated). Even when the troopers don’t help themselves to the cash, civil forfeiture without conviction of a crime is a corrupt and lawless practice that is overdue for reform.

Related: Steven Dunn, Nothing Civil About Asset Forfeiture

Update: From Jacob Sullum (Reason.com), Iowa Troopers Steal $100,000 in Poker Winnings From Two Players Driving Through the State

 

20121022-1William Perez, What You Need to Know About the Penalty for Not Having Health Insurance

TaxGrrrl continues her excellent “back to school” series with Back To School 2014: Educational Assistance Benefits

Kay Bell, Tax evasion charges are never fashionable. But tax cheating never seems to go out of style.

Jason Dinesen, Letting My Hair Grow Back: DIY is Not Always Better. Doing your own hair can be a bad idea; this also often applies to tax returns.

Or expatriations: There is no DIY green card abandonment (Phil Hodgen). 

 

Howard Gleckman, The Public Wants Clear Rules About Campaign Giving Through Tax-Exempts. Is It Possible? Yes, just the other day waiting in line at Hy-Vee, I heard a lady flipping through the People magazine say “Yes, they really need to do something about 501(c)(4) abuse.” She then apparated without even replacing the magazine.

 

TaxProf, The IRS Scandal, Day 510

Sebastian Johnson, State Rundown 9/30: The Gas Tax Cometh? (Tax Justice Blog). Better than taking cash from random travelers, anyway.

Joseph Henchman, State Inflation-Indexing of Gasoline Taxes

News from the Profession. Prospective Intern Wants to Know if Firm Will Let Him Go on Vacation During Internship (Adrienne Gonzalez, Going Concern).

 

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Tax Roundup, 9/30/14: IRS handling of uncollected taxes slammed. And: ISU TaxPlace goes live!

September 30th, 2014 by Joe Kristan

Priorities.  While allowing billions of false refunds to go to two-bit grifters via ID-theft refund fraud, the IRS also manages to not correctly follow up on billions of unpaid assessed taxes, according to a new report by the Treasury Inspector General for Tax Administration.  “Of a stratified sample of 250 cases reviewed, there was no evidence that employees completed all of the required research steps for 57 percent of the cases prior to their closing.”

How much money was potentially involved?  A chart from the report:

20140930-1

This is what happens when the tax law is treated as the Swiss Army Knife of public policy, rather than as a simple tax collection and enforcement mechanism. It doesn’t help when successive commissioners are more concerned with expanding the agency’s power and suppressing political opponents than with collecting revenue and properly issuing refunds.

The TaxProf has more.

 

20130114-1TaxPlace goes liveThe ISU Center for Agricultural Law and Taxation has launched TaxPlace:

We are very excited to introduce TaxPlace, a 24-7 resource for tax professionals, especially those preparing farm tax returns. For a limited time, we are offering a yearly subscription for the low introductory price of $150. 

What does that include?

This one-year subscription to TaxPlace entitles you and your staff to one calendar year of unlimited access to all TaxPlace materials and services, including:

A searchable database of timely articles and seminar materials explaining basic, new, and complex tax issues, with a particular emphasis on issues impacting farmers, ranchers, and ag-businesses.

Unlimited replays of recorded seminars and webinars addressing timely and challenging farm and urban tax and estate and business planning concepts.

Access to “Ask a Question,” a personal connection with a professional knowledgeable in farm tax requirements. (“Ask a question” is not a gateway for legal advice and does not substitute for services from a legal or accounting professional.)

Tables, charts, explanations of procedures and forms, and contact information to simplify your interaction with the Internal Revenue Service or state tax departments.

Access to a weekly blog and to future archives of “the Scoop,” a bi-monthly live webinar addressing new tax laws and procedures as they develop and providing attendees with an opportunity to ask questions.

A bargain for $150.

 

TaxGrrrlHow To Get Away With Tax Fraud. No, she hasn’t gone over to the dark side. She is outlining some rookie mistakes made by a Ms. Jackson, who tried to cash a $94 million tax refund check she received. Revenue agents were waiting for her at the grocery store where she tried to cash the check:

Among the basic mistakes TaxGrrrl points out is this:

 Unless you are due a lot of refundable tax credits (more on that later), you’ll want to make sure that your math makes sense. I didn’t see Jackson’s tax return. And I’m not licensed in Georgia. But even I can figure from peeking at the Georgia Department of Revenue’s web site that the highest income tax rate for individuals is 6%. To have paid in $94 million of tax, the amount of her refund claim, you’d have to have earned about $1.56 billion in income – in one year (assuming no carry forward or carry back). That kind of money should have landed Jackson on the newly released Forbes’ 400 Richest Americans list. Spoiler alert: she’s not on the list.

And no, it doesn’t appear that she sandbagged a little too much on her estimated tax payments.  Another basic mistake: real tax thieves prefer direct deposit. But, as a man once said to police here in Des Moines, “You don’t spend your days chasing geniuses, do you?’

 

Peter Reilly, New York Springs Sales Tax Trap On Passive LLC Members. Apparently New York is holding LLC members personally liable for sales taxes owed by the LLC. If the Empire State wants businesses and investors to stay far away, this is a pretty good step. Oddly, S corporation owners don’t have this problem.

 

Fresh Buzz is available from Robert D. Flach, including links to stories on retiree taxation and Roberts side project, The Tax Professional.

Carl Smith discusses The Congressman James Traficant Memorial Code Section at Procedurally Taxing.  Well, if it’s like most code sections, it will outlast all of us.

 

J.D. Tuccille, Yet More IRS Employees Busted for Stealing Taxpayers’ Identities (Reason.com):

Have I mentioned that people signing for health coverage under the Affordable Care Act are supposed to update the government on any major life changes, including marriage status, employment, finances…? Oh wait, yes I have.

I wonder if that information will be better protected.

Remain calm, all is well.

 

20130111-1Andrew Lundeen, Kyle PomerleauEstonia has the Most Competitive Tax System in the OECD. (Tax Policy Blog). The posts tells of a fascinating feature of the Estonian tax law:

Additionally, Estonia only taxes distributed profits and at a 21 percent tax rate. This means that if a business in Estonia earns $100 and pays that $100 to its shareholders, the business would be required to pay a tax of $21 on the distributed profit. Instead, if that business decides to reinvest that $100, the business would not have to pay tax on that $100.

Compare that to the U.S., where the corporations pay tax on income when it is earned, and potentially another tax if earnings are not distributed.  Still another tax is paid when the earnings are distributed; in Estonia, there is no second tax.

If you were designing a tax system to actually make sense, it would look a lot more like the Estonian setup than the U.S. income tax.  You also wouldn’t have the inversion problem people fret about so.

Martin Sullivan, Can Congress Pass Tax Reform That Would Stop Inversions? (Tax Analysts Blog). “Right now the U.S. tax system favors foreign owned corporations over U.S. owned corporations.”

 

Donald Marron, The $300 billion question: How should we budget for federal lending? (TaxVox)

 

TaxProf, The IRS Scandal, Day 509

 

Liz Malm, Businesses Paid Nearly $671 Billion in State and Local Taxes Last Year (Tax Policy Blog)

 

Career Corner. Let’s Waste Some Chargeable Hours Comparing Chargeable Hour Goals (Adrienne Gonzalez, Going Concern)

 

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Tax Roundup, 9/29/14: Obamacare fines can hit $12,000 for a family for 2014. And: tax-evading Congressman beamed up.

September 29th, 2014 by Joe Kristan

20121120-2Laura Saunders, Penalty for Not Having Health Coverage Can Be Thousands of Dollars; The ACA Penalty Can Top $12,000 for a High-Income Family of Five:

For a family of five, the penalty could be as high as $12,240 for the 2014 tax year, experts say. And for many people, the penalty will rise sharply in 2015 and 2016.

The massive health-care changes passed in 2010 are phasing in, and this is the first year most Americans must have approved health insurance. Those who don’t will owe a penalty under the Individual Shared Responsibility Provision. It’s due with your income taxes, payable by April 15, 2015.

For your own good, of course.  And even if you get the coverage, you can get surprised by a tax bill at year-end if you mis-estimated your income for the year.  (Via the TaxProf). 

 

TraficantBeamed up. When Congresscritters are called “colorful,” it implies they are harmless and almost cute. James Traficant was often described as a “colorful” Congresscritter.  He would give speeches with the tag line “beam me up.”  Russ Fox reports that his request has been granted; the former Congressman died last week.

His colorful career came to a bad end with seven years in prison for tax evasion and other charges. He was accused of accepting bribes and not paying taxes as a sheriff before he made it to Congress; his defense was that he was conducting a secret undercover investigation of the bribe-givers.  He was convicted and expelled from the House. You have to achieve a pretty high standard of low to be expelled from that wretched hive of scum and villainy.

As his release date neared, a minor league baseball team prepared to celebrate with a “Traficant Release Night” promotion, until they got cold feet and cancelled.

It’s fun to laugh at these antics, and it’s healthy to mock politicians. Yet even an ineffective Congresscritter wields an enormous amount of power, with a 1/535 say in a trillion-dollar federal budget. The real laugh is on the taxpayers who put such power in such hands.

Update: Peter Reilly has a detailed history of Mr. Traficant’s tax troubles: James Traficant Jr. And The Taxpayer’s Burden

 

Russ Fox, California Mandates E-Filing of Business Returns:

There is one major issue with the law that I see: Most tax software today does not allow for electronic filing of a single-member LLC return (a disregarded entity). While there is no federal return for such an entity, California does require the return to be filed (and an $800 annual fee be paid). California also does not have its own online system to e-file business returns. My software currently does not have the ability to e-file a California single-member LLC return. I’ll be asking my software provider about this…but not until after October 15th.

Impossibility has never been an excuse with California.

 

TaxGrrrl, Back To School 2014: Saving & The Kiddie Tax.

Kay BellLying to your tax pro could result in a bad tax situation. Shockingly, this appears to be an issue with the Jersey Shore guy’s tax problems. I mean, if you can’t trust a guy from Jersey Shore, what’s left to trust?

William Perez, Investing in a 401(k)? Learn Your Yearly Maximum Contribution Amounts

Peter Reilly, Scholarships Do Not Make Beauty Pageant A Charity.  No, but 501(c)(3) also exempts “educational” institutions, and without the Miss U.S.A. pageant, I would have never been educated on the use of red cups as musical instruments.

 

Phil Hodgen, Your expatriation tax return when U.S. income is zero. It’s sad that our insane and abusive treatment of offshore Americans is making this a common issue.

Jack Townsend, Wylys Ordered to Disgorge Hundreds of Millions of Tax Benefits With Interest

Jason Dinesen, The IRS Says I’m Not Authorized to Speak On My Own Behalf:

So to recap:

  1. The IRS says I am not my own authorized representative so they can’t make the changes I requested

  2. The IRS sent me a duplicate copy of their letter because I am my authorized representative

But I’m sure preparer regulation would go smoothly…

 

20140929-1Kyle Pomerleau, Always Be Careful with IRS Income Data (Tax Policy Blog):

The U.S. tax code only accounts for capital income (capital gains, specifically) when it is realized. This means that someone may have been accumulating capital gains for 40 years in an investment portfolio, but the IRS only sees the final (sometimes massive) realization. Suppose an individual invested in stock. Each year, the gains were small, but in the 41st year, he realized all of the past years’ gains and earned $1 million in income. IRS data would show that this taxpayer was a millionaire one year (and part of the 1 percent).

And he’d be the Devil, for one year.

 

Renu Zaretsky, Pressure, Power, and a New View on Cuts. Today’s TaxVox headline roundup covers unintended consequences of the new inversion rules and the changing politics of tax cuts.

 

TaxProf, The IRS Scandal, Day 508. Speculation on whether there is a link between the IRS scandal and the Holder resignation.

 

Department of Unfortunate Examples.  Econlog’s Scott Sumner has an interesting post addressing why pay disparities that seem puzzling on the surface might make sense: Don’t jump to conclusions (markets are smarter than you or I)

It’s a wise post, but I wish he’d have found a different example:

You might think that a secretary is a secretary and a janitor is a janitor. Not so, they vary quite a bit in competence. Goldman Sachs has much more to lose from an incompetent secretary than does a small accounting firm in Des Moines.

I prefer to think that our “small accounting firm in Des Moines” doesn’t have to pay as much as Goldman Sachs because people here don’t have to work with people from Goldman Sachs.

 

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Tax Roundup, 9/26/14: Fact-check Fail Edition. And: it’s Buzz day!

September 26th, 2014 by Joe Kristan


20121006-1During the continuing brutal assault on reason perpetrated by campaign ads in election season, it would be nice if the press would do competent work to identify misleading and stupid claims by candidates.

Alas.

Erin Jordan at Cedar Rapids’ TheGazette.com took a stab at it in her “fact check” of an ad by Pat Murphy, running in Iowa’s 1st congressional district:

“Blum cheated his workers out of overtime.”

“He moved his business to dodge Iowa taxes.”

“He laid off over 70 workers”

Source of Claim: Iowa Sen. Pat Murphy, a Dubuque Democrat running for U.S. House of Representatives

“Blum” is Rod Blum, a former executive at Eagle Point Software, and Mr. Murphy’s opponent.  This being a tax blog, let’s look at the tax claim discussion (my emphasis):

Claim 2: “Moved his business to dodge Iowa taxes”

Originally incorporated in Iowa in 1983, Eagle Point, under Blum’s leadership, reincorporated in Delaware in 1995, according to SEC filings. The company’s physical location and all employees remained in Dubuque.

Many U.S. companies — including more than half of those in the Fortune 500 — have their legal home in Delaware for beneficial tax laws and courts.

University of Iowa College of Law professor Andy Grewal, who specializes in tax law, said a company’s Delaware presence — even if it’s just a P.O. Box — may charge royalties on income gained in other states. Companies deduct those royalties from the income taxes they are required to pay in, say, Iowa, while Delaware doesn’t tax the royalties.

From the “conclusion”:

Under Blum, Eagle Point reincorporated in Delaware, generally viewed as having more business-friendly tax laws and courts. In these types of cases, the home state can lose out on corporate income taxes…

The claims in Murphy’s ad are mostly true.

20131029-3The “fact checker” has no basis for that statement, at least with the tax information in her story. The idea that companies incorporate in Delaware primarily for tax reasons is flat wrong. Delaware is preferred largely for its well-developed business-friendly corporate law.

While Delaware is tax-friendly, the royalty maneuver casually referred to in the story only works if an intellectual property corporation has been set up in Delaware to own the IP; the IP company collects the royalties in Delaware, and the operating company deducts the payments to lower its income in high-tax states.  There appears to have been no such entity. 

The 1999 10-K filing with financial statements for Eagle Point Software would detail related parties and subsidiaries included in the financial statements. Any Delaware IP subsidiary would be included in the consolidated financial information, because while investors like it when their companies reduce state taxes, they don’t like it if it means real cash leaves the company covered by the financial statements.

Eagle Point’s only subsidiary included in the financials is a Wisconsin Corporation, ECOM Associates. As Wisconsin is a high-tax state, nobody would set up an IP holding company there.

The only “related party transaction” shown in the statements is its lease for its facilities. There is no mention of any intellectual property lease.

And there almost certainly would have been no need for Eagle Point Software to go through the trouble.  Corporations apportion their income to Iowa based on the destination of the sale.  As a public company, we can assume over 90% of their sales were to non-Iowa customers.  That means almost all of its income would not be taxed in Iowa to begin with.  And that would have been just as true if the company were incorporated in Iowa, rather than Delaware.

So, apparently without looking at publicly available information on Eagle Point, and with only a general statement by a law-school prof claiming no direct knowledge of the transaction, the Gazette’s “fact checker” called the assertion that the company incorporated in Delaware to dodge Iowa taxes “mostly true.” In fact, there appears to be no royalty agreement to funnel income out of Iowa. And, as most of Eagle Point Software’s sales would have been to non-Iowa customers, there would be little state tax to reduce in the first place.

Conclusion: with respect to the tax claims evaluated by Thegazette.com, I rate their fact-checking effort worthless. I rate the claim by Pat Murphy that Eagle Point incorporated in Delaware to “dodge Iowa taxes” false.

 

buzz20140905It’s Friday, so it’s Buzz Day! Go see Robert D. Flach for the fresh Buzz, including (of course) his pungent thoughts on the Jersey Shore celebrity who is facing tax charges.

TaxGrrrl brings word of ‘Staggering’ Sanctions Slapped On Wyly Brothers In Offshore Case. $190 million, plus interest, will get anyone’s attention.

 

 

Christopher Bergin, The Hobgoblin of Little Minds (Tax Analysts Blog):

This week the Treasury Department got into the act, putting corporate America on notice that it will soon issue regulations that will take “targeted action to reduce the tax benefits of – and when possible, stop – corporate tax inversions.” Treasury said it “will continue to review a broad range of authorities for further anti-inversion measures as part of our continued work to close loopholes that allow some taxpayers to avoid paying their fair share.”

I think Treasury will end up regretting this announcement. First, two minor points: So-called loopholes are created by elected officials and include such things as the ability to deduct the interest you pay on the mortgage you got to buy that house you live in. And it’s up to Congress to decide on “fair shares.” The Treasury Department doesn’t get to make law, which is why when it comes to corporate inversions it will ultimately do little more than make a lot of noise and create an initial annoyance.

The point is to score some election season points; if it causes problems down the road, well, they’ll be somebody else’s.

 

Joshua McCaherty, California Triples Film Tax Credit. (Tax Policy Blog)  Because Hollywood needs taxpayer funding.

TaxProf, The IRS Scandal, Day 505

 

Now he’s probably taken a big step towards fulfilling that vow. Mississippi surgeon found guilty of tax evasion after claiming “vow of poverty”

 

News from the Profession. Revealed: The tax accountant who runs brothel from Belfast terrace (Belfast Telegraph).  Think of the cross-selling opportunities! No word on whether that’s where he gets his extra help for busy season.

 

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Tax Roundup, 9/25/14: Jersey Shore Special! And: does bonus depreciation really work?

September 25th, 2014 by Joe Kristan

20140925-1The IRS just dropped in to see what situation my situation is in. The big tax news today apparently is that some guy from the “Jersey Shore” T.V. show with the nickname “The Situation” is accused of not paying his taxes on $8.9 million of income.

TaxGrrrl reports:

According to the indictment, the feds allege that Mike and his brother, Marc (who is also Mike’s manager) used two companies they controlled, MPS Entertainment, LLC and Situation Nation, Inc., to evade taxation. Both of the companies were set up as S corporations which means that they were passthrough entities: the income and expenses were meant to pass through to the shareholders who were, you guessed it, Mike and Marc. As part of the conspiracy, it’s alleged that the brothers took money out of the companies for personal expenses like “high-end vehicles, purchases of high-end clothing, and personal grooming expenses” but claimed that they were legitimate business expenses. They allegedly also deliberately understated the amount of income received by the companies to their accountants who then passed through the lower income amounts to be reported on individual returns. 

To test your care in reading the story, Tony Nitti offers a quiz.

I have never seen “Jersey Shore,” but I get the impression that the indicted guy wasn’t cast to showcase his intellectual achievements.  It’s not remarkable if he didn’t pay his taxes; it is remarkable that he made almost $9 million in the first place. Easy come, easy go.

 

20140814-1William McBride, New Study Finds Bonus Depreciation Boosts Investment (Tax Policy Blog):

The authors are Eric Zwick, of the University of Chicago, and James Mahon, of Harvard, and they conclude that “bonus depreciation raised eligible investment by 17.3 percent on average between 2001 and 2004 and 29.5 percent between 2008 and 2010.” This is more than double the effect that previous studies have found, which the authors attribute to the fact that previous studies excluded the effects on small and medium-sized firms.

Bonus depreciation — the ability to deduct 50% (formerly 100%) of the cost of new assets that would otherwise have to be depreciated or amortized — expired at the end of 2013. It may be revived retroactively after the elections.

I have my doubts that it makes as much of a difference as the study concludes. Still, when you have bonus depreciation, you give businesses an easy way to control their taxable income at year-end planning time, and in some cases it surely causes purchases that would otherwise be delayed or foregone.

Bonus deprciation has other consequences. By lowering the cost of capital investment it makes it easier to substitute machinery for labor — something minimum wage advocates ignore as they merrily price low-skill people out of the labor market with their good intentions.

 

Jason Dinesen, Things Tax Preparers Say: S-Corporation Compensation (Again!):

S-corporation owner hasn’t been paying himself a salary despite having large corporate net income, and despite taking large withdrawals of money from the corporation. Those withdrawals had always been called “shareholder distributions.”

On the owner’s personal return, all of the corporate net income was reported as ordinary income. He also makes contributions into an IRA.

There is no happy ending here.

 

20130121-2Leslie Book, For Those Keeping Track: Preparers in the Spotlight (Procedurally Taxing):

TIGTA also recently released a report criticizing IRS’s failure to manage the flow of complaints relating to preparer misconduct. The TIGTA report, which did describe some progress IRS has made in its processing and review of potentially misbehaving preparers, also showed that IRS is not fully using the information it has to combat preparer misconduct. Juxtaposing that with the IRS’s efforts to expand its oversight through testing and education does not lead to a pretty picture and opens IRS up to criticism along the lines of the following: IRS has information and powers at its disposal; IRS is failing to use either properly; IRS should at least manage what it has before expanding powers and imposing costs on preparers and taxpayers

Of course, preventing misconduct and incompetence is only a pretext for preparer regulation. The real goal is to increase barriers to entry and the value of the nationwide tax prep chains. After all, they wrote the rules in the first place.

 

Andrew Mitchel, Payments to Foreign Contractor Entities: Form W-8BEN-E. You might need to be withholding from a vendor who gives you you one of these. You should always get a W-9 from your vendors; if they aren’t a U.S. person, they’ll have to give you a W-8 instead, alerting you to a possible withholding liability.

William Perez, What Is Alternative Minimum Tax?

Janet Novack, Retirement Rich List: 314 Have IRAs Averaging $258 Million Each, GAO Estimates. Naturally, the politicians want some of that.

 

20140925-2David Brunori, $1 Billion Is the New Normal in the Incentives World (Tax Analysts Blog) “Nevada is giving $1.3 billion to a company that is essentially owned by a guy worth $12 billion.” And they’re taking it from a lot of Nevadans who aren’t worth $12 billion.

Kay Bell, Amazon tax collection begins Oct. 1 in Maryland & Minnesota

Sebastian Johnson, State Rundown 9/24: Tax Cuts, Tax Cuts and More Tax Cuts (Tax Justice Blog). To The TJB folks, that’s considered bad news.

Cara Griffith, Taxing the Cloud (Tax Analysts Blog). “Interestingly, of nine states that have recently issued administrative guidance on the taxability of cloud computing services, only two have found the services taxable. The remaining seven have determined cloud computing is not taxable.”


TaxProf, The IRS Scandal, Day 504. Today’s scandal roundup features  500 Days After IRS Scandal Broke, Reporter Still Refuses To Pay His Taxes:

500 days later, the IRS still hasn’t produced emails from Lerner and the more than 20 other IRS employees whose computers allegedly crashed, whose Blackberries were thrown away and “upgraded,” and, in Lerner’s case, whose hard drive was “scratched” and destroyed. But we know that Lerner exchanged confidential taxpayer information on conservatives with top White House adviser Jeanne Lambrew during the 2012 election cycle. We know that Lerner and her White House-visiting underling Nikole Flax were involved in a “secret research project” involving conservative donor information that was approved by then-IRS commissioner Steven T. Miller. President Barack Obama first called the whole thing “outrageous.” Then he said there’s “not a smidgen of corruption.”

The reporter who isn’t paying his taxes better be putting the money aside, and then some, as he surely will pay them, with penalties and interest.

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Tax Roundup, 9/24/14: The $3,000+ price tag of Iowa’s special tax breaks. And: Tea Parties in the strangest places.

September 24th, 2014 by Joe Kristan

20120906-1Do special favors for special friends in the Iowa income tax cost Iowa families $3,000? A Buena Vista University professor seems to think so.  Paul Brennan reports that Jeremy Horpedahl, an economist at BV, has determined that removing all “tax privileges” in Nebraska would save the average Nebraska family that much, and that it might be more in Iowa:

Although he hasn’t yet done a thorough analysis Iowa’s tax codes, Horpedahl said eliminating tax privileges would result in at least as great as savings.

“Actually, it would probably be a little higher, because Iowa has more privileges built into its tax code,” Horpedahl said.

Sadly, Mr. Horpedahl said he studied Nebraska’s system because they are actually considering serious tax reform, unlike Iowa.  What does he mean by “privileges?”

“I define a tax privilege as a tax break or exemption that benefits a specific type of industry or an individual taking a certain type of action,” Horpedahl explained.

“The standard deduction on income tax isn’t a privilege, because that’s available to everyone. But a tax break that benefits just the construction industry is. For an individual, that certain goods or services they buy are exempt from sales tax is a privilege,” he said.

Mr. Horpedahl sounds a theme familiar to Tax Update readers:

Horpedahl pointed out that Iowa’s businesses would  also benefit from the elimination of tax privileges.

“Iowa has a very high corporate tax rate — 12 percent — so to be attractive to businesses, the state has to offer them a way of avoiding it,” Horpedahl said.

“But not every business can avoid it. So what we end up doing is rewarding lobbying. Those who are successful in lobbying for privileges get lower taxes. And that implicitly punishes those who don’t lobby, because they end up paying higher rates.”

Also:

“Politicians love to hand out these privileges,” Horpedahl said. “It allows them to say, ‘‘I’m doing something, I’m bringing businesses to the state, I’m creating jobs.’”

“They never mention that the tax rate has to be kept high to pay for all these privileges. And most people don’t realize that research has shown that these sweetheart deals very rarely pass the cost-benefit analysis test, so there’s very little push back.”

Precisely. They take your money to lure and subsidize your competitors, and then they tell you that it is good for you. There is a solution out there, waiting for a bold politician to run with it: The Tax Update’s Quick and Dirty Iowa Tax Reform Plan.

Related:

IF TRUTH IN ADVERTISING APPLIED TO ECONOMIC DEVELOPMENT AGENCIES

Taking your wife’s purse to buy drinks for the girls

 

 

20140521-1More dangerous and inflammatory anti-tax rhetoric. A political group of Americans abroad surveyed its members and discovered that they think the FATCA crackdown on offshore financial activity is making life tough for innocent non-billionaire expats, reports Laura Saunders of the Wall Street Journal:

The survey… found that nearly one in six respondents had had a financial account closed by a bank or brokerage house. More than two-thirds of the checking accounts that were closed had a balance of less than $10,000. Nearly 60% of the closed investment accounts had a value of less than $50,000. Other people were unable to open accounts.

Respondents also reported Fatca-related difficulties with non-U.S. spouses and partners. More than one-fifth said they have separated or are considering separating financial accounts held jointly with their partner.

Added one person, “Fatca has caused enormous friction in my marriage. My non-U.S.spouse is refusing to let the U.S. government know about his salary/earnings/savings… and moving to separate bank accounts would leave me very vulnerable as I’m an unemployed, stay-at-home mother.”

Well, of course you’d expect this sort of anti-tax rhetoric from some Tea Party outfit. I wonder if Democrats Abroad, who ran the survey, will have its tax exemption questioned now. But if they expect Democrats in Congress to ease their plight, good luck.

 

William Perez, How Do You Report Alimony on Your Tax Return?

Peter Reilly, For Joint Filing Status You Have To File.  “You’re not supposed to do that if you are actually married though.”

TaxGrrrl, Back To School 2014: Internships. ” If there’s no income to report, that makes the income piece easy.”

Robert D. Flach, IRS ANNOUNCES NEW PER DIEM RATES FOR BUSINESS TRAVEL

Keith Fogg, Extracting Yourself from a Tax Court Case (Procedurally Taxing)

 

 

TaxProf, The IRS Scandal, Day 503,  The day 503 of the so-called “so-called scandal” includes a link to this from Jason Keisling and Emily Elkins: Lois Lerner Claims the IRS Did Nothing Wrong. The Data Say Otherwise, with this fine chart:

targetingstatschart

 


Alan Cole, Reducing Compliance Costs for Small Businesses (Tax Policy Blog):

A good principle in tax policy – as well as policy in general – is to let the little things go. This principle has taken form in a legal maxim, de minimis non curat lex, Latin for “the law does not concern itself with trifles.” Currently, any business expected to owe at least $1,000 in tax for the year must file quarterly. $1,000 is a trifling amount to the IRS, one that need not be split into installment payments.

The Peters bill would allow very new businesses, or businesses with less than $1 million in total revenues, to file their taxes only once yearly – an arrangement that seems more reasonable.

Good thinking.

 

Howard Gleckman, Treasury’s New Rules May Slow, But Won’t Stop Corporate Tax Inversions (TaxVox). “Now the dealmakers have the roadmap they need to keep their inversions Kosher. And with that guidance, it is likely that lawyers will attempt to restructure many transactions to satisfy the new rules.”

 

News from the Profession. Why Your Firm Needs a Bring Your Dog to Work Policy (Leona May, Going Concern).  Sounds like animal cruelty to me.

 

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Tax Roundup, 9/23/14: Lois Lerner interview goes over… not well. And: Inversion action!

September 22nd, 2014 by Joe Kristan

man-wichLois Lerner’s interview with Politico published yesterday got some reaction. The Tax Prof has a great roundup in The IRS Scandal, Day 502, including these wonderful headlines:

American Thinker:  Politico Does Weepy Story About Poor Lois Lerner

PJ Media:  Politico Disguises A Slobbering Love Letter To Lois Lerner As An Interview

Breitbart:  News Site Seeks Mutually Beneficial Exclusive with Former IRS Exec (Must Love Dogs)

And my favorite:

Daily Caller:  Lois Lerner Compares Herself To Jeffrey Dahmer

So Tea Party-friendly web sites were not won over, apparently.  Some other reaction:

 

Instapundit:

LOIS LERNER TOOK THE FIFTH, but now she’s telling Politico that she did nothing wrong, and that she’s the real victim here. And note the prominent play Politico gives to alleged anti-semitic epithets, and to Lerner’s brownie-baking. So why the media-rehab operation — and that’s what this is — and why now?

But it’s nice to hear that even the Washington revolving-door apparat finds her “untouchable.” Perhaps that’s because nothing much in this story suggests that she didn’t target Tea Party groups for partisan political reasons.

 

David Hirsanyi, Sorry, Politico, But Lois Lerner Is Not A Victim:

 She has already admitted and apologized for the practice of targeting conservatives groups with terms like “Tea Party” or “patriots” in their titles. She claims that it was done in an effort to deal with the surge in applications for tax-exempt status asking for permission to participate in the political process. Yet, she didn’t aim at groups with the “climate change” or “fairness” in their names to mitigate this alleged crush of work she was facing.

Peter Suderman, Unapologetic Lois Lerner Insists She’s Done Nothing Wrong (Reason.com):

Lerner thinks she did nothing wrong, and she won’t apologize. “Regardless of whatever else happens, I know I did the best I could under the circumstances and am not sorry for anything I did,” she said in an interview with the paper.

That’s basically all she says about her role in the scandal. Lerner, who, after reading a statement, exercised her Fifth Amendment right to avoid self-incrimination when called to testify before Congress last year, doesn’t really add anything to her defense with the statements in her piece. She declares that she stands by her work—and that’s it.

And James Taranto reports “Politico landed an exclusive interview with Lois Lerner, the former IRS official at the center of the still-unresolved scandal, and to call it a whitewash would be an insult to lime.”

I think we can safely say of this PR stunt, so far, not so good.

Prior Tax Update coverage: Lerner speaks, sort of. And: a federal tax amnesty?

 

No Walnut STTreasury “does something” about inversions.  The moral panic over inversion transactions took its next logical step when the Treasury announced it would issue regulations out of nowhere to “crack down” on corporations trying to escape our awful U.S. corporation income tax. Notice 2014-52 has the technical details.

The Treasury has previously issued such notices, generally describing future regulations, when it is in a hurry to stop some kind of transaction and doesn’t want to wait for the usual regulation comment period to “do something.”

The Wall Street Journal explains the rules in general terms:

The Treasury rules will make it harder for companies that invert to use cash accumulating abroad—a big draw in recent deals. In addition, the government has made it more difficult to complete these overseas mergers.

The tax changes took effect immediately, officials said, and applied to all deals that hadn’t closed by Monday.

The article addresses how the deal might affect pending deals: (I removed the WSJ’s obligatory stock price info):

The new guidelines could impact a number of pending mergers and acquisitions, including Medtronic Inc. s proposed acquisition of Irish medical-device maker Covidien PLC; Salix Pharmaceuticals Ltd.’s acquisition of a division of Italy’s Cosmo Pharmaceuticals SpA; and Mylan Inc.’s  pending deal for Abbott Laboratories overseas generics business. It could also interfere with the merger of fruit grower Chiquita Brands International Inc. and Fyffes PLC.

Less clear is how it would impact Burger King Worldwide Inc. BKW -0.48% ‘s proposed acquisition of Canadian coffee-and-doughnut chain Tim Hortons Inc., THI.T +1.92% a deal that was designed to move the new corporate headquarters to Canada. 

That deal is structured somewhat differently, and experts disagree whether it would be affected by the new government rules. Most agree the rule changes aren’t likely to end inversions altogether.

Of course it won’t. As long as the U.S. has an uncompetitive business tax climate — better only than France and Portugal in the developed world — corporations will be forced to seek self-help, like inversion deals.

Tax Analysts has a story about how the last round of inversion rules created dangers for corporations who aren’t even inverting ($link): “The existing anti-inversion rules under section 7874 create several traps for foreign companies and individuals that could cause transactions to be treated as inversions when no inversion has taken place.”

Unintended consequences result, traps are created for the unwary, and the awful U.S. corporation income tax gets a little worse. Well done, Jack Lew!

The TaxProf has a roundup.  Howard Gleckman asks Does Treasury Have the Legal Authority To Curb Tax Inversions? (TaxVox): “This issue is the subject of heated debate among tax lawyers.”

 

 

buzz20140923Robert D. Flach brings the Tuesday Buzz, including links to posts covering ground from tax holidays to How Does a Sole Proprietor Get Paid?

TaxGrrrl, Back To School 2014: Moving Expenses

Tony Nitti, Tax Court: Anxiety, Depression Are Not Physical Injuries

Russ Fox, They Both Begin With “E”. Embezzlement, evasion. Add another: eventually detected.

Kay Bell, Identity theft tax refund fraud is increasing, but ways to prevent the crime are not likely to be popular

Jason Dinesen, Entrepreneurial Maturity. “In other words, a business owner who has entrepreneurial maturity knows what they don’t know.”

Annette Nellen, Points from your bank. On the “frequent flyer miles” Tax Court case.

Steven Olsen, Summary Opinions for 9/12/14 (Procedurally Taxing). Rounding up recent developments in tax procedure.

Jack Townsend has some Comments on the Warner Sentencing Oral Argument: “The panel was also concerned that, if Warner’s conduct were so bad, why did the Government argue at sentencing for only a sentence of 1 year and 1 day when the Guidelines range was significantly higher.”

 

20140923-1Alan Cole, The U.S. Tax Code is its Worst Competitive Weakness (Tax Policy Blog). “Simply put, while assessments of the U.S. tax code – both at Tax Foundation and elsewhere – are bleak, there is much to be optimistic about in America.”

Martin Sullivan, Should We Give Up On Reagan Style Tax Reform? (Tax Analysts Blog) “The landmark 1986 Tax Reform Act is an inspiration to all would-be tax reformers. But reforms following that basic framework have gotten nowhere in Congress.”

Steve Warnhoff, The Estate Tax Is Not Doing Enough to Mitigate Inequality: State-by-State Figures (Tax Justice Blog). It’s not working, so lets do it more, harder!

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Tax Roundup, 9/22/14: Lerner speaks, sort of. And: a federal tax amnesty?

September 22nd, 2014 by Joe Kristan
Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner gives an interview. The former IRS officer at the center of the Tea Party disclosure scandal won’t testify under oath, but she sat down for a two-hour interview with Politico: Exclusive: Lois Lerner Breaks Silence:

And she’s a savvy lawyer: She studiously avoided answering fundamental questions about her role in the IRS scandal that could land her in deeper trouble with Congress. During her POLITICO interview, flanked by her husband, a partner at a national law firm, and two of her personal attorneys, she opened up about her life as a pariah, joked about horrible news photos and advice that she disguise herself with a blond wig, and cried when expressing gratitude for her legal team’s friendship.

It is, of course, a public-relations play, designed to make her look like a misunderstood victim of a partisan witch hunt. But it isn’t an especially impressive effort. From the Politico piece:

Several Lerner allies said she was so focused on enforcement that she failed to see the sensitivity of bringing cases against incumbents running for reelection.

But Republicans continue to point to emails in which Lerner inquired about Crossroads specifically, asking her colleagues why the group hadn’t been audited and suggesting the group’s application should be denied. And just weeks before the tea party news broke, after she had seen a draft of the damning inspector general report, she asked colleagues if internal IRS instant messages are tracked and could be requested by Congress.

A little history sheds some light on her “non-partisan” background:

– Before she worked at the IRS, she worked at the Federal Elections Commission, she attempted to get an Illinois GOP senate candidate to withdraw from public life as the price for ending an FEC investigation. The allegations were later dismissed.

– The IRS Commissioner, Doug Shulman, repeatedly denied there was any targeting before the report. Either he knew better, or as a subordinate, she didn’t pass the word up the chain.

– She was in the middle of the Tea Party efforts at an early date. When the Treasury Inspector General Report was about to open the scandal, she did a modified limited hangout, using a planted question to spin the story as just a Cincinnati rogue agent problem.

– She had a hang-up about the Citizens United decision, and her emails show that she was trying to use the tax law to accomplish what the Supreme Court had forbidden.

– The numbers are glaring, showing that conservative groups got much more scrutiny, and it took much longer for their applications to be approved than liberal groups:

targetingstats

Ms. Lerner has, of course, invoked the Fifth Amendment to avoid testifying before Congress about her role in the scandal.

Presumably this interview is the start of a P.R. campaign. I don’t think it will work, but it might get her some good press from outlets inclined to dismiss the scandal.

 

TaxProf, The IRS Scandal, Day 500. It features Stonewall Koskinen: The IRS Commissioner Was Supposed to Clean Up the Mess. Instead, He’s Running Interference from Kimberly Strassel of the Wall Street Journal:

 The only thing Mr. Koskinen has seemed remotely interested in turning around is his agency’s ugly story-line. He has yet to even accept his agency did anything wrong, spending a March hearing arguing that the IRS didn’t engage in “targeting” and claiming the Treasury inspector general agreed. This was so misleading the Washington Post gave Mr. Koskinen “three Pinocchios, ” noting the IG had testified to the exact opposite.

He seems intent on de-throning Doug Shulman as the Worst Commissioner Ever.

 

 

get-outRobert D. Flach asks WHAT ABOUT A FEDERAL TAX AMNESTY?

This would be a one-time only offer. The legislation creating the Federal Tax Amnesty Program could so state by forbidding any future Amnesty programs. Or it could state that the federal government would not be able to institute another Amnesty Program during the twenty years after the end of the current amnesty period.

I have my doubts. One Congress can’t bind another, and if it is popular, the pressure for another amnesty will start building as soon as the first one ends. I also worry about the chump effect – people will feel like chumps for complying, and will convince themselves that if they don’t comply, there will be another amnesty anyway. But I might be convinced otherwise, especially if it were combined with tax reforms that would help prevent the need for another one.

 

Russ Fox, “I’ve tried to tell you the truth every time I’ve been here”. “That quote is from IRS Commissioner John Koskinen during his testimony from earlier this week on Capitol Hill. I have a simple question for Commissioner Koskinen: Why doesn’t that quote read, ‘I’ve told you the truth every time I’ve been here?'”

TaxGrrrl, Back To School 2014: Childcare Expenses

Jack Townsend, Trial Management of the Cheek Good Faith Defense.  Or as an old lawyer I know calls it, the “good-faith fraud defense.”

Kay Bell, Getting old sucks. We can’t stop Father Time, but we can prepare physically, emotionally and financially. And it still beats the alternative.

 

David Brunori talks about Nevada’s Tesla giveaway in State Tax Notes ($link):

Nevada is giving $1.3 billion to a company that is essentially owned by a guy worth $12 billion. I don’t begrudge Elon Musk his money. On the contrary, I admire his ability to create and accumulate great wealth. I just don’t see the need to give him public money. Assuming you ascribe to the belief that horizontal equity requires that similarly situated taxpayers bear similar burdens, Nevada is giving away public money…

I know that the politics of incentives are impossible to overcome. And I have had numerous readers tell me to give my constant ranting a rest. But the political inevitability of tax incentives does not make them appropriate or good.

Tax credit corporate welfare doesn’t just hurt the states that “lose” the competition to bribe companies like Tesla. It hurts all of the businesses of the “winning” state that have to pay full-freight while brazen and well-connected companies like Tesla pay nothing.

 

20140922-1William Gale, Income Tax Changes and Economic Growth (TaxVox) “While there is no doubt that tax policy influences economic choices, it is by no means obvious on an ex ante basis that tax rate cuts will ultimately lead to a larger economy.”

Joshua McCaherty,  Senator Schumer’s Retroactive Tax Bill (Tax Policy Blog). Part of the inversion diversion.

Ajay Gupta, Renouncing the Dogma of Surrey’s Infallibility (Tax Analysts Blog). Sounds like something involving the Pope and Henry VIII, but it’s really about transfer pricing.

A new Cavalcade of Risk is up at Workers Comp Resource Center, with posts from around the insurance and risk-management world.

 

News from the Profession. 15 Reasons Why EY’s BuzzFeed Post Is a Bunch of Malarkey (Adrienne Gonzalez, Going Concern)

 

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Great moments in urban planning

September 19th, 2014 by Joe Kristan

A city planner who claimed to be responsible for the selection of the site of the new Des Moines Palace of Transit said he chose the location so it would be convenient to passenger rail; he spoke at a luncheon I attended a few years ago.

Because it is located between two one-way streets, all buses on north-side routes have to cross the tracks twice.  As I look out my window, I can see how that works with a freight train having stopped for about 1/2 hour (accident, maybe?) across both the one-way streets.  You can spot nine stranded buses in this picture (The bus palace is the white-roofed structure in the left-center):

20140919-2

By the way, Des Moines hasn’t had passenger rail since 1970, and there is no realistic expectation of passenger train service resuming.

Related: But where will they put the zeppelin port?

 

 

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Tax Roundup, 9/19/14: Brutal Assault on Reason Season Edition. Arrggh!

September 19th, 2014 by Joe Kristan

20121006-1Brutal Assault on Reason Season is underway. Elections depress me. Arnold Kling sums up my feelings:

To me, political campaigns are not sacred events, to be eagerly anticipated and avidly followed. They are brutal assaults on reason. I look forward to election season about as much as a gulf coast resident looks forward to hurricane season.

Very few of us are in a position to have more than intuitions on the great issues of the day. Rarely are voters health-care economists, trade experts, military or foreign policy specialists, etc., and most of us have little basis to tell when the politicians are lying about these issues (though that is a good default assumption). Doing taxes for a living, though, I feel competent to identify bogus tax claims by politicians. William McBride does so in a Tax Policy Blog Post,  U.S. Corporate Tax Revenue is Low Because High Taxes Have Shrunk the Corporate Sector.

He quotes the U.S. Senate’s only unabashed socialist, Bernie Sanders:

“Want to better understand why we have a federal deficit? In 1952, the corporate income tax accounted for 33 percent of all federal tax revenue. Today, despite record-breaking profits, corporate taxes bring in less than 9 percent. It’s time for real tax reform.”

There is a truly brutal assault on reason, and Mr. McBride fights back:

The share of U.S. business profits attributable to pass-through businesses has grown dramatically as well, as they now represent more than 60 percent of all U.S. business profits. The second chart below shows that C corporation profits, while extremely volatile, have generally trended downward in recent decades, while the profits of S corporations and partnerships have trended upwards. In the 1960s and 1970s, C corporation profits were about 8 percent of GDP, while partnership profits were about 1 percent and S corporation profits were virtually nil. Now C corporation profits hover around 4 percent of GDP (4.7 percent in 2011), while partnership profits are almost at the same level (3.7 percent in 2011) and S corporation profits are not far behind (2.4 percent in 2011). Partnership and S corporation profits are growing such that they will each exceed C corporation profits in the near future if not already. When commentators claim that “corporate profits are at an all-time high”, they are referring to Bureau of Economic Analysis data that combines C corporations and pass-through businesses, whether they know it or not.

In sum, the Senator’s statement is flat out false. It is completely misleading to claim that corporate profits are up while corporate tax revenues are down, essentially implying there is some mischief going on via “loopholes”, etc. The truth is corporate tax revenue has been falling for decades because the corporate sector has been shrinking, and not just by corporate inversions. The most likely culprit is our extremely uncompetitive corporate tax regime.

In other words, high rates are driving businesses out of the corporate form and to pass-throughs of one sort or another.

20140919-1

As we head into election season, expect the brutal assaults to continue. Here are a few phrases commonly seen in assaults on reason when taxes are involved, enabling you to spot them even if you don’t know a 1040 from a hole in the ground:

“Politician X voted for tax breaks to ship jobs overseas.”

“This tax cut will pay for itself.”

“I believe in free markets, but tax credit X is needed to level the playing field.”

“I don’t want to punish success; I want X to pay his fair share.”

“This tax credit created X jobs”

I know I’m missing many. If you point out more in the comments, I’ll be happy to talk about them.

 

It’s Talk Like a Pirate Day, so Kay Bell comes through with Avast, me hearties! The IRS wants its cut of your illegal income, be it pirated or otherwise criminally obtained.

 

Peter Reilly, Professional C Corp Denied Deduction For Uncashed Salary Check To Owner.  He covers a story I covered earlier this week where a professional corporation deducted a year-end bonus “paid” through an NSF check that was “loaned” back to the corporation.  His take: “I’m not sure that the Tax Court was right to deny any of  deduction, but I really question whether the whole deduction should be denied.”

 

TaxGrrrl, Back To School 2014: Deducting Student Loan Interest (Even If You Don’t Pay It)

20140826-1Robert D. Flach has fresh Friday Buzz, including links on the cost of tax compliance and “7 deadly tax sins.”

William Perez, When are State Refunds Taxed on Your Federal Return?

Jason Dinesen, IRS Says Online Sorority Is Not Tax Exempt. Social media apparently isn’t social enough for them.

Jim Maule, An Epidemic of Tax Ignorance. He covers one of my pet peeves — people who use the term “the IRS code” for the Internal Revenue Code. It’s Congress that came up with that thing, not the IRS.

Russ Fox, Hyatt Decision a Win for FTB as Far as Damages, but Decision Upheld that FTB Committed Fraud. FTB is the California Franchise Tax Board. Tax authorities should get in trouble for fraud to the same extent they hold taxpayers responsible for fraud.

 

A. Levar Taylor, What Constitutes An Attempt To Evade Or Defeat Taxes For Purposes Of Section 523(a)(1)(C) Of The Bankruptcy Code: The Ninth Circuit Parts Company With Other Circuits (Part 1) and (Part 2).

 

20140801-2Joseph Thorndike, Should We Tax Away Huge Fortunes? (Tax Analysts Blog). “In other words, if you like the estate tax, talk more about revenue and less about dynasties.”

Richard Philips, House GOP Bill Combines Worst Tax Break Ideas of 2014 for Half-a-Trillion Dollar Giveaway. (Tax Justice Blog). When they know that the Senate will ignore whatever they do, it’s easy to accommodate anyone lobbying for a tax break.

Renu Zaretsky, Will Tax Reform See Light at the End of the Next Tunnel? This TaxVox headline roundup covers Tax Reform, Treasury’s plans on inversions, and the continuing resolution passed before the congresscritters left D.C. to assault reason some more.

TaxProf, The IRS Scandal, Day 498

Me, IRS issues Applicable Federal Rates (AFR) for October 2014

News from the Profession. Grant Thornton Has a Fight Song and It’s As Awful As You Might Expect (Adrienne Gonzalez, Going Concern).

 

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IRS issues Applicable Federal Rates (AFR) for October 2014

September 19th, 2014 by Joe Kristan

The IRS has issued (Rev. Rul. 2014-26) the minimum required interest rates for loans made in October 2014:

Short Term (demand loans and loans with terms of up to 3 years): 0.38%

-Mid-Term (loans from 3-9 years): 1.85%

-Long-Term (over 9 years): 2.89%

The Long-term tax-exempt rate for Section 382 ownership changes in October 2014 is 3.05%.

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

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Tax Roundup, 9/18/14: The $14.8 million suitcase squeeze. And: Koskinen visits the Hill.

September 18th, 2014 by Joe Kristan
Flickr image courtesy Sascha Kohlmann under Creative Commons license

Flickr image courtesy Sascha Kohlmann under Creative Commons license

Accounting Today visitors: click here for the item from the September 17 “In the Blogs.”

When tax-free merger isn’t. Working with family-owned businesses, a common misunderstanding arises: if a deal is tax-free, like an “A” merger or a partnership contribution, there can’t be gift tax, right?  Very wrong, as a New Hampshire couple’s experience in Tax Court shows.

The parents, Mr. and Mrs Cavallero, had a successful S corporation known as Knight Tool Co. Their son Ken set up another business to make liquid dispensing machines, Camelot.  As part of their estate planning, the two companies merged in an income tax-free deal.  From the Tax Court summary:

Ps and their sons merged Knight and Camelot in 1995, and Camelot was the surviving entity. Valuing the two companies in accordance with the advice their professionals had given, Ps accepted a disproportionately low number of shares in the new company and their sons received a disproportionately high number of shares.

It turns out that the estate planners “postulated” a technology transfer earlier in the lives of the companies that would have resulted in most of the value already being in the second generation. One planner explained to a skeptical attorney that “History does not formulate itself, the historian has to give it form without being discouraged by having to squeeze a few embarrassing facts into the suitcase by force.”

The trouble with doing that is that when the latches break, the suitcase spills all over the place. But the planners persisted.  From the Tax Court decision:

As a result of Mr. Hamel’s correspondence campaign, however, the previously separate tracks of advice — one from the accountants at E&Y and Mr. McGillivray, and the other from the attorneys at Hale & Dorr — now came together for the first time. The contradiction was evident to all the professionals: The accountants had assumed no 1987 transfer (and thus believed there was a need for a means to transmit value to the next generation), but the attorneys postulated a 1987 transfer (and subsequent transfers) pursuant to which that value had already been placed in the hands of the next generation. The attorneys eventually prevailed, however, and the accountants acquiesced. Eventually all of the advisers lined up behind Mr. Hamel’s suggestion that a 1987 transfer be memorialized in the affidavits and the confirmatory bill of sale. They provided a draft of the documents, which Mrs. Cavallaro read aloud to Mr. Cavallaro. After they reported a few typographical errors, the attorneys prepared final versions, which Mr. Cavallaro and Ken Cavallaro executed on May 23, 1995.

So in 1995 they executed documents for a 1987 transaction.  What could go wrong? Well, perhaps the IRS could come in and assess $27.7 million in gift taxes, plus fraud penalties.  And they did. The dispute ended up in Tax Court.  The IRS won the main issue — its argument that the valuable technology was not in fact transferred in 1987 — and with that win, predictably also won the battle of appraisers.  The IRS appraiser at trail asserted a $29.6 million gift, which would result in a gift tax of about $14.8 million at 1995 rates. Because of the involvement of the outside experts, the Tax Court declined to uphold penalties.

This shows how important valuation can be even in a “tax-free” deal.  When doing business among family members at different generations in estate planning, you don’t have the conflicting interests that unrelated buyers and sellers have, so you have the possibility of creating a taxable gift if you are careless. It’s natural for family members to believe numbers that help their estate planning, so it’s wise to get an independent appraiser in to provide a reality check.  And if the facts, or values, don’t fit into the suitcase, don’t squeeze; get a bigger suitcase.

Cite: Cavallero, T.C. Memo 2014-189

 

This Koskinen isn't the IRS commissioner

This Koskinen isn’t the IRS commissioner

Instapundit, IRS COMMISSIONER: Our Story On The IRS Scandal Isn’t Changing. It’s Just, You Know, Evolving Now And Then.  “I’ve taken a dislike to this Koskinen fellow. He seems sleazy even by DC standards.”

TaxProf, The IRS Scandal, Day 497. Mostly coverage of another slippery appearance by Commissioner Koskinen before House investigators.

 

TaxGrrrl, Back To School 2014: American Opportunity Credit

Kay Bell, Private and often untaxed home rentals under fire

Peter Reilly, Need To Show Rental Effort To Deduct Expenses. “I think the way I would put it is ‘If at first and second and third you don’t succeed, try something different.  Otherwise forget about deducting losses.'”

 

David Brunori, Fairness and the Reality of State Tax Systems (Tax Analysts Blog) “etc. This week WalletHub released a rating of the fairest state and local tax systems… I am not doubting the accuracy of WalletHub’s survey. But the results don’t align with political reality.”

Cara Griffith, Single Sales Factor May Be Inevitable, but Is It Fair? (Tax Analysts):

In the end, if state officials are truly concerned with making their state more attractive to businesses, perhaps they should consider retaining (or returning to) the three factor apportionment method and focus on a less burdensome corporate tax system overall. In the end, if state officials are truly concerned with making their state more attractive to businesses, perhaps they should consider retaining (or returning to) the three factor apportionment method and focus on a less burdensome corporate tax system overall.

No, they are concerned with ribbon cuttings, press releases, and campaign contributions from those seeing tax credits and carveouts.

 

 

20140805-2Renu Zaretsky, A Hail Mary or Two on the Hill.  The TaxVox tax headline roundup covers inflation adjustments and beating up on the NFL with the tax code, among other things.

Alan Cole, Why do I have Four Different Retirement Accounts? (Tax Policy Blog) “Give us one unlimited saving account, tax it properly, like an IRA, and let us use it how we will.”

Russ Fox, Zuckermans Sentenced; No Word on Fido & Lulu “Unfortunately, members of a board of directors must be human: Fido and Lulu don’t qualify.”

Adrienne Gonzalez, Mad Scientist Gets Prison Time for Using His Dog and Cat in a Tax Avoidance Scheme (Going Concern). PETA couldn’t be reached for comment.

 

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Tax Roundup, 9/17/14: Is 30 years long enough to find a tenant? And more!

September 17th, 2014 by Joe Kristan

20140325-1If you can’t get a tenant in 30 years, maybe you’re doing something wrong.  A Minnesota architect named Meinhardt bought a farmstead in 1976.  He  rented out the cropland to neighboring farmers. He looked for a tenant for the farmhouse, too.  He was still looking in 2007, but never managed to find a cash-rent tenant for the house.

Though he never reported any rental income on the house, he paid for house expenses, including repairs, insurance supplies and utilities, deducting them on Schedule E on a joint return.  The deductions totaled $42,694 from 2005 through 2007.

The IRS decided that the architect failed to demonstrate enough of a profit motive to take the deductions.  The taxpayer argued that the expenses were actually part of renting the farmland, which the IRS agreed was a for-profit enterprise. The taxpayer also argued that he really tried to rent the house, but it just didn’t work out.

The Tax Court sided with the IRS, and now so has the Eighth Circuit.  First addressing the argument that the house expenses should be lumped in with the land rental:

They offered no evidence they ever tried to rent or lease the farmhouse and farmland together. Donald testified the farmhouse could be parceled off and sold separately from the crop and pasture land. The Tax Court did not clearly err in finding that the Meinhardts treated the farmhouse separately from the leased farmland, which was admittedly a business activity, and therefore expenses related solely to the farmhouse could not be deducted as ordinary and necessary expenses of the leased farmland activity.

The hard-luck landlord defense didn’t fare any better:

The Tax Court found that the Meinhardts did not prove the farmhouse was held for the production of income during the tax years in question because they “did nothing to generate revenue during the years in issue [and] had no credible plan for operating it profitably in the future. There was no affirmative act (renting or holding for appreciation in value) to demonstrate that the property was held for the production of income.” (T.C. Memo. citations omitted.) This finding, too, was not clearly erroneous. Without question, the Meinhardts’ expenditures for substantial repair and improvement of the farmhouse over many years, including the tax years in question, increased the value of that property. But they failed to prove that they were holding and improving the property to profit from its rental or its appreciation, as opposed to improving it for personal use.

The clincher:

The reasonableness of this alternative personal-use explanation for the expenditures in 2005-2007 was rather dramatically confirmed when they sold their home in suburban Minneapolis and moved into the farmhouse in 2010. 

Oops.

The Moral? If you hold property for years without generating income, you better have pretty good evidence that you have worked hard to rent it if you want to deduct the costs on your Schedule E. If it’s a rental home that you also use on weekends, you’ll have to work harder. If you hold it for 30 years without a cash tenant and then move in, your battle to convince a judge of your profit motive might be hopeless.

Cite: Meinhardt, CA-8, No. 13-2924 

Tax Court case: Meinhardt, T.C. Memo. 2013-85.

ISU Center for Agricultural Law and Taxation Annotation: No Deduction For Farmhouse-Related Expenses.

 

IMG_1944TaxGrrrl, Back To School 2014: Deducting The Cost Of Playing Sports

William Perez, Repaying the First-Time Homebuyer Tax Credit. The first misbegotten version of the misbegotten First-Time Homebuyer Credit was actually more a loan than a credit, and it must be repaid over 15 years. Some of them will be repaying long after the home was sold, or foreclosed

Kay Bell, Spousal abuse: physical, financial and tax-related

Jason Dinesen, Will Software Really Replace Accountants?  I suppose it’s possible, but not with a tax system anything like we have.

Peter Reilly, Montana Catches Non-filer With Property Tax Break. When you claim a homestead exemption on your property taxes somewhere, that place might just decide that you should pay resident income taxes.

Phil Hodgen ponders the Valuation date for expatriate’s balance sheet. When you expatriate, there’s a tax for that.

 

TaxProf, The IRS Scandal, Day 496.

20140729-2Lyman Stone, New S&P Report Shows Income Taxes Are Volatile, Sales Taxes Need Reform (Tax Policy Blog) “This closely relates to our previous findings on state revenue volatility, where we found that states with high reliance on income taxes, excise taxes, or natural resource taxes experienced some of the highest volatility.”

Howard Gleckman, Congress Cries Wolf Over Internet Access Taxes (TaxVox). “Unable to do anything important before its election season recess, Congress is about to knock down a favorite digital straw man—It will extend for a few months the about-to-expire federal ban on state taxation of Internet access.”

 

It’s campaign season, everything is a lie. PolitiFact: Democrats Are Recycling False Accusation That Republicans Support Tax Breaks for Companies That Ship Jobs Overseas (TaxProf)

Looking forward to after campaign season.  Obamacare 2.0, Outlook Not So Good (Bob Vineyard, Insureblog)

Tony Nitti, Whether You Like The Government Or Not, The IRS Expects Its Tax Revenue.  They sure do.

 

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Tax Roundup, 9/16/14: U.S. taxes are worse than the Cubs. And: the last month of extension season has begun!

September 16th, 2014 by Joe Kristan

Now to finish off the extended 1040s.  The extension season for business returns ended yesterday. Now it’s time to mop up the remaining extended individual returns — the “GDEs,” as Robert D. Flach calls them.

 

CubsIf the U.S. tax system were a baseball team, it would be worse than the Cubs. That’s the conclusion I draw from the Tax Foundation’s first International Tax Competitiveness Index released yesterday. The U.S. ranked 32nd out of the 34 rated countries, ahead of only Portugal and France. At 66-84 this morning, the Cubs are ahead of four other teams out of the 30 in the major leagues. Small but mighty Estonia is number 1 (in the Index, not in baseball).

Some “key findings” of the study:

The ITCI finds that Estonia has the most competitive tax system in the OECD. Estonia has a relatively low corporate tax rate at 21 percent, no double taxation on dividend income, a nearly flat 21 percent income tax rate, and a property tax that taxes only land (not buildings and structures).

France has the least competitive tax system in the OECD. It has one of the highest corporate tax rates in the OECD at 34.4 percent, high property taxes that include an annual wealth tax, and high, progressive individual taxes that also apply to capital gains and dividend income.

The ITCI finds that the United States has the 32nd most competitive tax system out of the 34 OECD member countries.

The largest factors behind the United States’ score are that the U.S. has the highest corporate tax rate in the developed world and that it is one of the six remaining countries in the OECD with a worldwide system of taxation.

The United States also scores poorly on property taxes due to its estate tax and poorly structured state and local property taxes

Other pitfalls for the United States are its individual taxes with a high top marginal tax rate and the double taxation of capital gains and dividend income.

20140916-1Unlike the Cubs, the U.S. tax system shows little hope for improvement. What changes we’ve seen recently, or are likely to see in the coming year, only make things worse. The implementation of FATCA doubles down on the committment to worldwide taxation, while putting U.S. taxpayers at a disadvantage abroad.  The inversion frenzy is likely to promote legislation to place even more burdens on U.S.-based businesses.  This legislation responds to the failures of worldwide taxation by doing it harder. In baseball terms, it’s the opposite of Moneyball.

 

TaxGrrrl has more with U.S. Ranks Near The Bottom For Tax Competitiveness: We’re #32! “The United States is one of just six OECD countries that imposes a global tax on corporations meaning that its reach extends beyond its own border.”

Martin Sullivan, REIT Conversions: Good for Wall Street. Not Good for America. (Tax Analysts Blog). REITs are a corporate form that allows some real estate income to be taxed only once. They are a do-it-yourself response to a dysfunctional corporation income tax. It would be good for America if all corporations could move to something more like the REIT model, with a deduction for dividends paid to eliminate the multiplication of tax on corporate income.

 

 

20120511-2Leslie Book, Tax Court Finds Reliance On Advisor In Messy Small Business Setting (Procedurally Taxing), addressing a case we discussed here.  “VisionMonitor is a useful case for practitioners seeking a reliance defense even when advice does not come in the way of a formal opinion, and the advice and corporate formalities reflect less than perfect attention to detail. In other words, this case is representative of the way many small businesses operate.”

Peter Reilly, Grandfather Beats IRS In Tax Court Without Lawyer. “They mystery to me is why when the IRS decided to drop the penalty, they did not drop the case entirely, since, by dropping the penalty, they were indicating that they did not think Mr. Roberts was lying and, given that, it’s pretty clear that he wins.”

Jack Townsend, More on the Warner Sentencing Appeal. Did the Beanie Baby Billionaire get off easy?

 

Jim Maule discusses The Persistence and Danger of Tax and Other Ignorance. It’s fascinating how a man who accurately notes the prevalence of ignorance among voters still thinks policy concocted by politicians elected by these same ignorant voters is better than private solutions .

TaxProf, The IRS Scandal, Day 495. I like this point: Why Focus on Ray Rice Instead of Lois Lerner? The relative attention to Rice and Lerner is roughly inverse to their relative importance.

 

np2102904Norton Francis, How Michigan Blocked a $1 Billion Tax Windfall for Corporations (TaxVox). “The case involved the way multistate corporations calculated their state income tax liability from 2008 to 2010. The trouble for Michigan is that, during this time, they had two ways to apportion state income on the books: one, which they thought no longer applied, based on a three-factor formula—the shares of a firm’s property, payroll, and sales present in the state—and the other based only on sales in the state.”

Matt Gardner, New S&P Report Helps Make the Case for Progressive State Taxes (Tax Justice Blog). I link, but I sure don’t endorse.  Using high individual tax rates at the federal level to redistribute income is futile and unwise, but at least it’s plausible. Using state income taxes for that purpose is just absurd.

 

News from the Profession. We Can’t Help But Wonder if This EY Conference Room Cactus Is Trying to Say Something (Adrienne Gonzalez, Going Concern)

He lost the job after he told his client to get a haircut.  Former Sampson consultant guilty of fraud, conspiracy*

*For those of you who will point out that the guy in the Bible is named “Samson,” just you be quiet.

 

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Tax Roundup, 9/15/14: Extended business returns are due today. And: the great Czech Toilet Paper Caper!

September 15th, 2014 by Joe Kristan

20130415-1Extended calendar-year 2013 business returns are due today. No more extensions. If you have a 1040, 1065, 1120, or 1120-S filing for 2013, be sure you get it done today.  E-filing is the best. If you want to go the old-fashioned way, get to the post office and send it “Certified Mail, Return Receipt Requested.”  Keep the postmark.

If you can’t get to the post office before it closes, you can still head to a UPS Store, Fed-Ex Kinko’s, or similar place and use a designated private delivery service; be sure to use one of the qualifying services, and make sure your receipt has a time and date designation with today’s date to prove timely filing.

Why does it matter? The penalties are $195 per K-1 per month, so a late S corporation with 10 shareholders overdue six months racks up a late-filing penalty of $11,700 — no matter how little income is reportable on the return.

 

TaxGrrrl, Back To School 2014: Casualty Loss And Theft Deduction.  Also: a chance to win a protective phone case!

Russ Fox, From Owning a Party Mansion to Partying at ClubFed. ” Mr. Verbal and his employees offered customers a unique bonus system: If the return was falsified and the client paid cash, he would get a much larger refund.”

Tony Nitti, Client Sues Tax Advisor For Bad Advice: Is The Settlement Payment Tax-Free?

Annette Nellen, Truncating Taxpayer Identification Numbers – Enough?. “It does nothing about the trillions of documents of all sorts that exist that have people’s SSNs on them.”

Jason Dinesen, Putting Profit First While Planning for Expenses

Kay Bell, What do workers want? At some offices, it’s tax-free lunches

Keith Fogg, A Proposal to Amend Flora or Collection Due Process for Individuals Examined by Correspondence Who Do Not Pick Up or Process Their Mail. (Procedurally Taxing). “When the current procedures for tax administration were built, the rich or upper middle class were the ones interfacing with the tax system.”

lizard20140826Jack Townsend, More on [BS] Corporate Tax Shelters (with Some Rantings):

The large(r) Accounting firms developed substantial practice groups that, overtime (over time also), became an echo chamber that caused or contributed to individuals doing things that they would not do individually.  (For background, this is a major reason that conspiracy is a separate crime.)  Because individuals in these groups were in a echo chamber, they slowly begin to believe the bull shit of the echo chamber.  Had they not been in the echo chamber, they likely would not have done what they did.  But they were in the echo chamber; conduct become less evil or illegal or morally wrong because all these smart people and honorable people were participating in the venture.  Of course, the views of those at senior and more experienced levels were often substantially influenced by the extravagant money that could be made by participating.

It’s hard to see straight through a big pile of cash.

 

Joshua D. McCaherty, The Cost of Tax Compliance (Tax Policy Blog). “All said, Americans spent over 3.24 billion hours, which is about 369,858 years, preparing and filing tax returns in 2012.”

TaxProf, The IRS Scandal, Day 494. “So I’m thinking maybe Anthony Weiner should put his selfie in Lois Lerner’s emails.”

Ajay Gupta, Burning the Inversions Fuse at Both Ends (Tax Analysts Blog). “Here is the ultimate irony in the story: Investment bankers hired by a foreign multinational confronting acquisition by a U.S. corporation alerted the administration, the politicians, and the country to the imperatives of ‘economic patriotism.'”

Kelly Davis, Tax Policy and the Race for the Governor’s Mansion: Ohio Edition (Tax Justice Blog)

Renu Zaretsky, Taxes Take Center Stage This Week—At Least on the House Floor.  Today’s TaxVox headline roundup covers Nevada’s corporate welfare for Tesla, hearings on retirement savings, and another futile extenders vote coming up this week.

A special Monday Buzz! from Robert D. Flach. Among the topics is an often-overlooked price of “backdoor” Roth IRAs.

 

20140915-1We’ll get to the bottom of this.  Czech special police team flushes out corruption after it seizes millions of toilet paper rolls:

The Czech special police squad Kobra revealed tax evasion estimated at at least 25 million Kč in business involving toilet paper and tissues, representatives of the police and customs officers has told journalists.

The police seized 3.7 million toilet paper rolls from a businessman.

Czech Financial General Directorate Deputy Director Jiří Zezulka said the toilet paper circulated among firms in the European Union while only serving as “the carrier of tax fraud” and was not produced for any final customer.

No word on whether it had special absorbency to carry tax fraud.  I love that the toilet paper caper was uncovered by “Kobra.”
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Tax Roundup, 9/12/14: C Corporation can’t kite checks to owner to wash out income. And: a church of strange idols.

September 12th, 2014 by Joe Kristan

20120511-2In the misty early days of my tax career, S corporation elections were a big thing. There was a grace period after the passage of the 1986 Tax Reform Act where you could make the election and avoid having to deal with the built-in gain tax.

I remember calling on a prospect C corporation, thinking I could easily sell the merits of escaping the second layer of corporation tax. They were ready for me. They explained that they didn’t need an S corporation election because, as I remember it, they could always W-2 their income to the owner to zero out their taxable income. They then made an entry to record a “loan” or capital contribution for the same amount from the owner to the corporation, so no actual cash changed hands. That’s what they said they always did, and they’d never been audited.

I sputtered, “that doesn’t work,” but it apparently worked fine, as long as the IRS never called. Needless to say, I failed to land the prospect. I went back to the office determined to find a case with the same facts.  I never did find the perfect case — until now.

Yesterday the Tax Court ruled that a version of this trick didn’t work for a Minnesota C corporation architectural practice.  The stakes are higher for “personal service corporations,” including architects, as they don’t get to use the lower C corporation brackets for their taxable income; they pay 35% from dollar one. Many corporations accept that, assuming they can wipe out their taxable income with year-end bonuses to owner-employees; that way they retain a few tax-free fringe benefits unavailable to S corporation shareholders.

The Tax Court explains how the Minnesota taxpayer went about this (my emphasis, footnotes omitted):

In 2008 Vanney Associates paid Mr. Vanney monthly wages totaling $240,000. At the end of each year, it was the Vanneys’ practice to determine Vanney Associates’ remaining profit after paying any outstanding bills and paying bonuses to employees. After determining this amount, Ms. Vanney would prepare a check on behalf of Vanney Associates and pay the remaining profit to Mr. Vanney as a yearend bonus. The Vanneys testified that their intent behind the yearend bonus was only to pay out the remaining profit; it was not to zero out the tax liability of Vanney Associates even if that was the effect.

On December 30, 2008, Vanney Associates paid Mr. Vanney a yearend bonus totaling $815,000. After withholding and paying to the IRS the appropriate Federal income, Social Security, and Medicare taxes, Vanney Associates wrote a check to Mr. Vanney for $464,183. Mr. Vanney signed the check on behalf of Vanney Associates and then endorsed the check in his own name and made it  payable to Vanney Associates. He never attempted to cash the check. Ms. Vanney recorded the payment on the books as a loan from Mr. Vanney, and Vanney Associates repaid Mr. Vanney in March 2009.

Tax Court Judge Buch found that the check was never cashed for good reasons:

Mr. Vanney testified that he “believe[d]” he knew that Vanney Associates did not have the funds necessary to honor the check. However, he maintained that Vanney Associates could have gotten a loan to cover the check.

20131206-1The IRS disallowed the $815,000 bonus expense, and it ended up in Tax Court. The court sided with the IRS:

Mr. Vanney was the sole shareholder of Vanney Associates. Ms. Vanney, as Vanney Associates’ bookkeeper, knew or should have known that Vanney Associates did not have the funds to cover the bonus check to Mr. Vanney, and Mr. Vanney testified to having at least some idea of this as well. Vanney Associates argues that the payment was unconditional and payment occurred when Mr. Vanney took possession of the check. Vanney Associates cites O’Connor v. Commissioner, T.C. Memo. 1954-90, where this Court held that “[t]he essential element is that the control of property distributed by way of a dividend must have passed absolutely and irrevocably”. The Court in O’Connor also relied on the fact that the payee had “unrestricted use” of the money and the “amount was unqualifiedly his, to do with as he wished.” That is not the case before us. If anything, Mr. Vanney had only restricted use of the check. He could not cash it at the bank, use it to pay a debt, or use it to make a loan to someone other than to Vanney Associates. In fact, Mr. Vanney’s only option to make use of the money at that time was to lend it back to Vanney Associates because the check could not be honored. Additionally, we have previously held that although a taxpayer maintains possession of a check, the amount of the check may not be treated as a distribution or may not be included in gross income when the account has insufficient funds to honor the check.

Accordingly, respondent’s disallowance of a portion of the deduction for officer compensation is sustained.

I can’t time travel to the 1980s to show this case to my now-defunct prospect corporation, but I suspect there are plenty of other C corporations that still do this. It only works if the IRS never calls, and if they do, the value of the C corporation fringes is unlikely to cover their additional C corporation taxes.

Cite: Vanney Associates, Inc., T.C. Memo 2014-184.

 

Christopher Bergin, The Church of Corporate Inversions (Tax Analysts Blog): “I never thought I’d miss stories about Lois Lerner. But if we are going to talk about fairness in our tax system and raising enough revenue to support the people’s government, dealing with the increasingly dysfunctional IRS is just one of the problems we face that are far more important than corporate inversions.”

Speaking of worshipping at The Church of Corporate Inversions: New CTJ Report: Congress Should Require Inverting Corporations to Pay Up Taxes They Owe on Profits Held Offshore (Steve Warnhoff, Tax Justice Blog)

 

20140728-1Kay Bell, Tax relief for terrorist attack victims and their families

Paul Neiffer, How Do We Plan For Section 179 in 2014. “Now, we are fairly confident that Section 179 will be increased, but we probably will not know until the last week of the year and we may get 50% bonus depreciation back too.”

Russ Fox, Cash & Carry.  A restaurateur discovers that all receipts are taxable, even if the customer doesn’t use a credit card.

Peter Reilly, Parsonage Supporters Encouraged By Seventh Circuit Oral Arguments

Leslie Book, Technology and Tax Administration: The Appeals Virtual Service Delivery Program (Procedurally Taxing)

 

Amber Athey, House September Agenda Includes Potential Tax Changes (Tax Policy Blog). Mostly extenders, none of which seem to be going anywhere until after the elections.

 

TaxProf, The IRS Scandal, Day 491

 

Donald Marron, Does the Export-Import Bank Make or Lose Money? (TaxVox). Both. It makes money for Boeing, but loses money for those of us not on the corporate welfare rolls.

 

Career Corner. The Obvious Link Between Inadequate Staffing and Stress Explains Why You Hate Your Life (Adrienne Gonzalez, Going Concern).

 

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