Archive for the ‘Iowa Tax Law’ Category

Tax Roundup, 3/30/16: IRA blows up after investing in closely-held business. And: S corporation loan basis!

Wednesday, March 30th, 2016 by Joe Kristan


No Walnut STAnother IRA-owned business disaster. 
We’ve noted the dangers of using your IRA as the owner of your closely-held business. A Tax Court Case yesterday illustrates the dangers.

The married taxpayers rolled over funds from their retirement plans to IRAs, and then used them to fund a new corporation, which in turn bought the assets of another corporation. Part of the purchase was debt-funded, and the couple guaranteed the loan.

Tax Court Judge Marvel found that a prohibited transaction resulted, disqualifying the IRA and triggering a $180,000 deficiency:

In closing, petitioners’ participation in the prohibited transactions on or about June 18, 2003, caused petitioners’ IRAs to cease to be IRAs as of the first day of petitioners’ taxable year in which the prohibited transactions occurred. See sec. 408(e)(2)(A). Furthermore, petitioners are deemed to have received distributions on that first day of amounts equaling the fair market values (on the first day) of the assets in petitioners’ IRAs as of that first day… We also hold that petitioners are liable for the 10% additional tax set forth in section 72(t)(1) with respect to the $432,076.41, because neither petitioner was 59-1/2 years of age or older during 2003.

Using your IRA to fund your business is playing with fire.

Cite: Thiessen, 146 T.C. No. 7

 

BitcoinHow loans to your S corporation can give you basisWe talked yesterday about how S corporation stock basis can enable stockholders to deduct losses. Even if you are out of stock basis, the stockholders might still be able to take a loss — if they have loaned money to the S corporation.

This comes up most often with multiple owner S corporations. You might have one owner who can’t fund capital contributions, or who is passive and can’t use more losses. The other owner might still want to deduct his share of losses; that owner can loan money to the corporation and get a deductible loss.

There are drawbacks. If you repay the loan before the S corporation has earned back the deducted loss, the repayment will trigger taxable income.

EXAMPLE: Joe is an owner of Joebwan Inc., an S corporation. He is out of stock basis at the end of 2015, so he loans the company $30,000 in December 2015 to enable him to deduct his $25,000 share of corporate losses on his 1040. That leaves him $5,000 basis in his loan.

In January 2016, a customer pays an overdue bill, enabling Joebwan Inc. to pay back the $30,000 advance. The company breaks even in 2016.

Unfortunately for Joe, he has $25,000 gain on the repayment in January 2016; because the corporation had no taxable income, Joe’s basis wasn’t restored before repayment.

Making a new loan at the end of 2016 doesn’t fix this result. Only income does. If Joe’s share of 2016 income had been $30,000, it would have restored the entire $25,000 loss to his loan basis, and he would have had no gain.

Some things to know about debt basis:

-Only loans directly to the corporation from the shareholder work; debt guarantees do not provide S corporation basis.

-If there is gain on the loan repayment, the income is capital gain if the loan is documented with a note; the gain is ordinary if it is for “open account” debt, where no note documents the loan terms.

Complex rules govern “open account” debt repayments, causing taxable gain in unexpected situations.

This is another of our irregular series of 2016 filing season tips, running through the April 18 filing deadline.

 

20120906-1Taxing you to lure and subsidize your competitors. Mason City pork plant snags $15M in state incentives (Donnelle Eller, Des Moines Register):

A proposed $240 million pork processing plant in Mason City received approval for nearly $15 million in state incentives.

The Iowa Economic Development  Authority Board Tuesday agreed to provide Prestage Foods of Iowa nearly $11.5 million in tax incentives, plus $3.3 million in job-training assistance.

It may shock you to know that Iowa already has pork packing plants, ones that opened without getting “nearly $15 million in state incentives.” I’m sure they are thrilled to see their taxes go to fund a competitor.

 

Paul Neiffer, Danger, Will Robinson. Paul explains how a $1 difference income can trigger thousands of dollars of taxes. For health!

Jason Dinesen, Beware of the Deadlines on Amended Tax Returns.

Robert Wood, CEO Faces 5 Years For Spending $6.8M Withheld IRS Employment Taxes. And he still has to find $6.8 million to repay the IRS.

William Perez, Reviews of 18 Tax Preparation Software Programs

Kay Bell, Film industry’s willingness to sacrifice tax breaks helps defeat Georgia’s anti-gay marriage law. They would have taken some other state’s tax breaks instead, those noble filmmakers.

Keith Fogg, The Eleventh Circuit Requires IRS to Hold a Hearing Prior to Making a Trust Fund Recovery Penalty Assessment if Proposed Responsible Officer Makes Timely Request (Procedurally Taxing).

TaxGrrrl, IRS Encourages Taxpayers To Check Refund Status Online (Millions Already Have)

 

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Howard Gleckman, Cruz and Trump Would Slash Taxes on New Business Investment, But Cruz Would Cut Them More (TaxVox).

TaxProf, The IRS Scandal, Day 1056

 

Career Corner. That Time an Accounting Firm Recruiter Told Me That My Personality Sucked (Leona May, Going Concern). Reminds me of the time the first guy at the job interview spray-painted an “X” on the back of my jacket.

 

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Tax Roundup, 5/24/2013: Tuition organization credit bill has big sales tax provision. And: Fancy guys, bow ties.

Friday, May 24th, 2013 by Joe Kristan
Via Wikipedia

Via Wikipedia

In its usual last-minute frenzy, the Iowa General Assembly passed a bill (HF 625) to extend the popular School Tuition Organization credit.  The credit is 65% of the amount contributed to organizations that subsidize private elementary and secondary tuition.  When combined with the federal tax deduction for the donation, there is very little out-of-pocket cost for the donations.  The amount of the credit is limited, so it has been oversubscribed in recent years. the bill increases the cap starting in 2013.

The bill has a surprising amendment that passed yesterday: it now creates “affiliate nexus” in Iowa (my emphasis):

   (1) A retailer shall be presumed to be maintaining a place of business in this state, as defined in paragraph “a”, if any person that has substantial nexus in this state, other than a person acting in its capacity as a common carrier, does any of the following:
       (a)  Sells a similar line of products as the retailer and does so under the same or similar business name.
       (b)  Maintains an office, distribution facility, warehouse, storage place, or similar place of business in this state to facilitate the delivery of property or services sold by the retailer to the retailer’s customers.
       (c)  Uses trademarks, service marks, or trade names in this state that are the same or substantially similar to those used by the retailer.
       (d)  Delivers, installs, assembles, or performs maintenance services for the retailer’s customers.
       (e)  Facilitates the retailer’s delivery of property to customers in this state by allowing the retailer’s customers to take delivery of property sold by the retailer at an office, distribution facility, warehouse, storage place, or similar place of business maintained by the person in this state.
       (f)  Conducts any other activities in this state that are significantly associated with the retailer’s ability to establish and maintain a market in this state for the retailer’s sales.
       (2)  The presumption established in this paragraph may be rebutted by a showing of proof that the person’s activities in this state are not significantly associated with the retailer’s ability to establish or maintain a market in this state for the retailer’s sales.

This ratifies the aggressive approach of the Iowa Department of Revenue on intangible nexus, and will likely trigger more audits of out of state companies.  The Supreme Court and Congress really need to either reaffirm the Quill decision or set new rules.

Tax Justice Blog, Tax Credit for Working Poor Survives Iowa Tax Compromise.  Remember, it’s also a thief subsidy.  Just because it’s supposed to go to the “working poor” doesn’t mean it does.

 

Christopher Bergin, The IRS Is Broken, But That’s the Symptom (Tax.com):

The IRS is broken, that’s for sure. But the IRS is a symptom. The “disease” is the tax code. I think that’s absolutely right. And for me, this latest “scandal” concerning the IRS is going to make it impossible to reform our tax code anytime soon.

More difficult, but more necessary.

 

TaxProf, The IRS Scandal, Day 15

Kay Bell, IRS places Lois Lerner on administrative leave in latest fallout from Tea Party tax exemption review snafu

Joseph Henchman, Congress Asks Organizations Targeted by the IRS to Come Forward and Tell Their Story

 

Tax Trials, See You on Tuesday: IRS Furloughs Impact Certain Filing Deadlines & Services

Linda Beale, Does Apple’s Cook Cook the (U.S. tax) Books?

Jack Townsend, IRS Reminders for Foreign Income Reporting

Robert D Flach is Buzzing!

The Critical Question: Could State Taxes Cause Dwight Howard To Flee L.A. For Houston? (Anthony Nitti)

 

Breaking news from my neighborhood: Woman Allegedly Brandishing Knife ‘Welcomes’ New Neighbor.  How my neighbors are living out the pages of The Onion.

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News you can use:  Apparently It Doesn’t Take Much for an Accountant to Get Kidnapped and Beaten These Days… (Going Concern)

Always trust tax advice from rappers. Fat Joe Blames His Tax Evasion Problems On ‘Fancy Guys In Bow Ties’

 

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Legislature carves new special favors, does nothing for the rest of us.

Wednesday, May 8th, 2013 by Joe Kristan
If Iowa's tax law were a car, it would look like this.

Iowa House approves two new bumper stickers for this car.

The Iowa House of Representatives advanced two corporate welfare provisions  yesterday.

SF 433 makes it easier for businesses with “pilot projects” to keep employee withholding under a “target jobs withholding tax credit” program.  It never says what exactly the “pilot projects” are supposed to prove — maybe if you divert employee withholding to the employer, they like that?  This additional clutter to Iowa’s already byzantine tax law passed 97-2, opposed only by Bruce Hunter (D., Des Moines), and Charles Isenhart (D., Dubuque).

Gazette.com reports on the vote:

Legislation aimed at helping some Iowa border communities compete with neighboring states is on its way to the governor.

The targeted jobs program allows qualifying businesses to apply for state withholding tax credits if they plan to relocate or expand in Iowa, provided they are creating or retaining jobs.

“Creating or retaining” jobs?  Doesn’t that happen whenever you hire someone?  If you want Iowa to “compete” with neighboring states, make the whole tax law competitive.  It’s not just border cities who suffer from a bottom-tier business tax climate.

 

SF 436 expands the amount of Historic Rehab Credits available, increasing the distortion of property markets by subsidy, generally for the benefit of the well-connected developers who know how to play the game.  This one passed 97-2, with only Rep. Hunter and Rick Olson (D., Polk) voting no.

As for actual good policy — simplifying the law, lowering rates, and doing something for people without lobbyists — nothing.  The closest thing to it this session, the flat Alternative Maximum Tax (HF 478), is dying in the Senate.  So once again it looks like the legislature will go home having only added more barnacles to the Iowa income tax.

 

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Tax Roundup, 1/3/2013: Now Iowa’s filing season is a mess.

Thursday, January 3rd, 2013 by Joe Kristan
The Hoover Office Building, the warm and cuddly home of the Iowa Department of Revenue.

The Hoover Office Building, the warm and cuddly home of the Iowa Department of Revenue.

The Fiscal Cliff Bill complicates Iowa tax returns for 2012.  Iowa doesn’t automatically adopt federal tax law changes, so some retroactive tax law provisions in the Fiscal Cliff bill won’t apply to Iowa state income taxes absent action by the Iowa General Assembly.  From an Iowa Department of Revenue e-mail to practitioners yesterday:

The federal legislation passed on January 1, 2013 to avert the “fiscal cliff” included provisions for what are commonly referred to as the federal “extenders.” The federal “extenders” are not currently reflected on Iowa tax forms for 2012 and will require approval by the Iowa legislature before being allowed for Iowa tax purposes. Should legislative approval be given, Iowa online forms will be updated accordingly. The federal extender provisions include:

  • Educator Expenses (Line 24; IA 1040)
  • Tuition and Fees (Line 24; IA 1040)
  • Itemized Deduction for State Sales /Use Tax Paid (Line 4; IA Schedule A)
  • Treatment of mortgage insurance premiums as qualified residence interest (line 11, schedule A)
  • The federal section 179 expensing limit of $500,000 for 2012 and 2013 

Iowa income tax returns must be filed based upon current Iowa law. Therefore, the extenders should not be included on Iowa returns at this time.

Let’s hope the legislature acts quickly to pass conformity legislation, or we will have another messy Iowa tax season.

 

Why 12%?  Today’s Des Moines Register story on reactions by Iowa business people to the Fiscal Cliff bill quotes me as saying that Iowa businesses may face a 12% reduction in their after-tax income.  Where did I get that number?

I started by computing the after-tax amount of a dollar earned by a top-bracket taxpayer under 2012 law, assuming full detectability of Iowa taxes on the federal return and vice-versa.  That results in a combined rate of 38.92%, leaving 60.18 cents in the taxpayer’s pocket.  Under the same assumptions using the 2013 39.6% top rate and the 3.8% surtax on “passive” income, the combined federal-state effective rate goes up to 46.39%, leaving 53.61 cents after-tax.  That’s a 7.48 cent reduction in after-tax income — 12.24% of the 60.18 cent 2012 after-tax number.

The 12.24% number is actually too low because it doesn’t account for the phase-out of itemized deductions for high-income taxpayers in the new bill.  For top-bracket taxpayers, itemized deductions will be reduced 3 cents for each additional dollar of income.  The result is a hidden 1.188% additional tax.  Plugging that into our tax computation gives a combined federal and Iowa rate of 47.46%, leaving 52.54 cents after-tax.  That reduces after tax income from 2012 law by 8.54 cents, or 13.99%.

Should I assume the 3.8% passive income tax, like I do in the above examples?  It won’t apply to K-1 income if all owners “materially participate” in a pass-through business.  Those taxpayers face “only” an 8.41% reduction in their after-tax income.  If you don’t think that’s significant, consider whet your reaction would be if your employer said that your after-tax pay was going down that much.

But the 3.8% tax will apply to family members that don’t participate in the business, like out-of-town siblings, retired founders, or children of owners.  The business has to distribute at least enough to let owners pay their taxes, which means the taxpayer in the highest bracket has to be covered.  For that reason many family-owned businesses will have to distribute enough to cover the 3.8% Obamacare net investment income tax, making the combined 47.46% rate their real rate.

 

Fiscal Cliff Notes

TaxProf,  House Approves Fiscal Cliff Tax Deal

Megan McArdle, After the Fiscal Cliff: What do Democrats Want?  “I submit that just as Republicans are more interested in entitlement cuts as talking points than as actual new laws, Democrats will prove much more interested in tax hikes in theory than in practice.”

Robert D. Flach, THE AMERICAN TAXPAYER RELIEF ACT OF 2012

William McBride, Fiscal Cliff Resolved, Still Likely to Get Downgraded

TaxGrrrl, The World Will Keep Turning, Even With The Expiration Of The Payroll Tax Cuts

Patrick Temple-West, Cliff bill means some pay more taxes, and more

Trish McIntire, American Taxpayer Relief Act of 2012

Paul Neiffer, Help! What Is My Capital Gains Tax Rate?!

Kay Bell,  What’s your 2013 tax rate and other fiscal cliff tax bill questions

Margaret Van Houten,  Estate and Gift Law Tax Aspects of Fiscal Cliff Legislation (Davis Brown Tax Law Blog)

Courtney A. Strutt Todd,  A Permanent Fix to the AMT Problem (Davis Brown Tax Law Blog)

Jana Luttenegger, Individual Tax Rates, Deductions, and Credits (Davis Brown Tax Law Blog)

 

Greg Mankiw has a pithy post that I hope he doesn’t mind me reproducing in full:

Here are the effective federal tax rates (total taxes as a percentage of
income) for 2013 under the new tax law, as estimated by the Tax Policy Center, for various income groups:

Bottom fifth: 1.9
Second fifth: 9.5
Middle fifth: 15.6
Fourth fifth: 19.0
Top fifth: 28.1

80-90 percentile: 21.5
90-95 percentile: 23.4
95-99 percentile: 26.3
Top 1 percent: 36.9
Top 0.1 percent: 39.6

 

Russ Fox,  Your Mileage Log: Start It Now!  Great advice.  If you travel on business and the IRS comes by, you’ll be glad you have that log.

David Brunori,   Only Tax Professionals Benefit from the State Corporate Tax.  (Tax Analysts Blog) Well, the loophole lobbyists do pretty well by it too.

Peter Reilly, Form 8332 – Don’t Let The Kids Live In Another Home Without One ?

TaxTV, IRS Penalty Relief-First Time Penalty Abate Program

Robert Goulder, The Unspoken Tax Expenditure (Tax Analysts Blog)

Jack Townsend, New Article on the Emerging Consensus for Taxing Offshore Accounts

William Perez,  Social Security Tax For 2013

 

Career planning news you can use:  Life After Public Accounting: Harassing Auditors For a Living Isn’t a Bad Gig If You Can Get It  (Going Concern)

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An alternative maximum tax for Iowa?

Wednesday, October 24th, 2012 by Joe Kristan

Governor Branstad yesterday floated a trial balloon for his upcoming tax reform proposals. He suggested a new tax plan that would exist side-by-side with Iowa’s current complex and loophole-ridden mess.  Donnelle Eller reports in today’s Des Moines Register:

Gov. Terry Branstad suggested Tuesday letting Iowa taxpayers decide whether they want to pay a flat tax rate or deduct federal taxes under the existing tax system.

Branstad told business executives who make up the Iowa Partnership for Economic Progress Board that discussions are early and models were being used to determine what the flat tax rate proposal should be.

The plan resembles that of Iowans for Discounted Taxes.  Their web page describes their proposal:

 The legislation needs to offer you the opportunity to file with all your deductions, or with your new “discount” at the rate of only 5.32% on EARNED income. You would pay 0% on your interest income, dividends, pensions, Social Security, and, JUST LIKE BILL CLINTON DID FOR HOMEOWNERS, 0% on all capital gains.

It’s unlikely that the Governor would pursue a plan that exempted investment income, given the likely response telegraphed by Senate Majority Leader Mike Gronstal in the Register article:

 “Democrats agree that the state treasury can afford tax cuts. We think any tax cuts we do ought to be targeted toward helping growing small businesses and the middle class,” he said.

Of course “targeting” tax benefits is how we got to the horrendous tax system Iowa has now.  Politicians like to “target” tax breaks to their friends and preferred constituencies.  That means they target the wallets of everyone not lucky or well-connected enough to get the breaks.

The Governor’s trial balloon, which I’ll call an Alternative Maximum Tax, has its own problems.  The obvious one is that it would just add one more computation to an already difficult tax return.  Taxpayers would compute their taxes under each system and file whichever return produced the lowest tax.

It would seem to make more sense to just put in one simpler tax system and throw out the old one.  Why is the Governor taking this strange approach?  Possibly as a way to get around the dead-ender opposition to ending the deduction for federal taxes on Iowa’s return, led by the powerful Muscatine advocacy group Iowans for Tax Relief.  If the old mess is left as an option, perhaps a parallel simpler system with lower rates and no federal deduction could pass muster in Muscatine.  Then maybe the old system would eventually wither away.    Somehow, I don’t think the withering would ever happen, and we’d end up with an even worse system.

There’s still time for the Governor to go bold.  The time is now for the Tax Update’s Quick and Dirty Iowa Tax Reform!

Other coverage: Rod Boshart,  Branstad favors giving Iowans choice of tax breaks

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Iowa Capital Gain Break: how it works when you rent property to your business

Friday, October 5th, 2012 by Joe Kristan

 

Flickr image by John Snape used under Creative Commons license

The Iowa Department of Revenue has released a Policy Letter illustrating how Iowa’s “10 and 10” capital gain exclusion works when you own business real estate in one entity and the operating business in another.  The rule allows taxpayers to exclude capital gain from Iowa income on the sale of business real estate* held for ten years and used in a business in which the also has taxpayer “materially participated” in for ten years.The facts from the policy letter (my emphasis):

Both scenarios involve a taxpayer who is a nonresident of Iowa.  This taxpayer owns an interest in his business, an S corporation, for more than ten years.  The taxpayer has been a material participant in the S corporation for more than ten years.  The S corporation does business solely within Iowa.

Under the first scenario, the S corporation sells real estate in a sale/leaseback transaction.  The real estate has been owned by the S corporation for more than ten years.

In the second scenario, the taxpayer owns a controlling interest in a limited partnership.  The partnership has rented Iowa real estate to the S corporation for more than ten years.

You are asking if the capital gain from the sale of the real estate in both scenarios would qualify for the Iowa capital gains exclusion.

Iowa follows the federal “passive loss” Section 469 rules in defining “material participation.”  The letter says that the gain in both cases qualify for the exclusion — even though the taxpayer is an Iowa non-resident, and even though in the second scenario the real estate isn’t owned in the same entity in which the material participation occurs:

Similarly, in regard to the second scenario, as long as the taxpayer materially participated in the operations of the partnership by meeting one of the section 469(h) tests for the ten years prior to the date of the sale, the taxpayer is eligible to claim the Iowa capital gain deduction for this0`1w   sale.  The fact that the federal passive loss rules deem net income from self-rental as non-passive income does add additional support for this conclusion. 

The letter comes to the correct conclusion.  Non-residents can qualify for the Iowa capital gain exclusion, and real estate used in the business can qualify even when the real estate is owned in a separate entity by the participant.

*It also allows taxpayers to exclude gains on the sale of an entire business when the 10-and-10 standards are met.  More here.

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Home is where the heart is. And the house, wife, kids, cars…

Thursday, September 20th, 2012 by Joe Kristan

An executive got transferred from his employer’s Iowa office to Dakota Dunes, South Dakota.  His wife balked at the move, so he rented an apartment in South Dakota and came home on weekends.  Noting the difference between the income tax rates in South Dakota (0%) and Iowa (8.98%), he chose to file as a South Dakota resident.  But he did it wrong.  Ericka Eckley of the ISU Center of Agricultural Law and Taxation explains the rules:

Every Iowa resident must pay Iowa income taxes. A resident  for income tax purposes can be identified in two ways. The first is through the  establishment of a permanent home in the state, which involves spending about  half the year living in the state.  Alternatively, a domicile is another way to  prove residence. Domicile is established through the intention of the  individual to permanently or indefinitely reside in Iowa whenever absent from  the state.

An individual can only be domiciled in one place at a time  and once established, domicile is retained until the individual takes  affirmative steps to establish a domicile in another state. In Iowa, there is a  rebuttable presumption that the individual’s Iowa domicile has not changed if  an individual retains the rights of citizenship in Iowa.

A change in domicile can be established through proof of a  definite abandonment of the former domicile, actual removal of the individual’s  physical presence to the new domicile, or a bona fide intention to change and  remain in the new domicile indefinitely.

It may possible to have a domicile in a different state than your spouse — like former power couple Arnold Schwarzenegger and Maria Shriver.  But it isn’t easy, and you can’t take shortcuts if you try.  An Iowa appeals court yesterday said the taxpayer didn’t try hard enough.  For example:

  • He kept a joint Iowa bank account
  • He kept his Iowa drivers license
  • He registered to vote in Iowa
  • The family cars (five of them) were registered in Iowa.
  • His personal car had Iowa vanity plates.
  • He claimed a homestead property tax credit for his Iowa home; the credit application included the statement “I declare residency in Iowa for purposes of income taxation and no other application for homestead credit has been filed on other property.”

The court found factors like these, which indicate Iowa residency, outweighed those indicating South Dakota domicile, such as his South Dakota job, seeing a South Dakota doctor, and membership in a South Dakota  church (though not spending weekends in South Dakota probably weakened that argument).

That was a bad result for the taxpayer; the appeals court upheld the Iowa assessment of $290,472.19 in taxes, penalties and interest.

The Moral?  If you want to change your tax domicile from a high-tax state to a low-tax one, you need to mean it.  You need to burn your bridges and change as much of your life as possible to the new state.  And for heaven’s sake, don’t cheap out and claim an Iowa homestead exemption when you are filing tax returns saying you don’t live here.

Cite: Schmitz vs. Iowa Department of Revenue, Court of Appeals of Iowa No. 2-583. Additional coverage:  Dar Danielson,  Appeals Court says taxes are due as man lives in Iowa, not South Dakota (Radio Iowa).

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Tax Roundup, 7/25/2012: Thrifty thief sentenced; trashy trusts; fleeing France

Wednesday, July 25th, 2012 by Joe Kristan

Thrifty thief gets 5 1/2 years.  The woman who got a fraudulent $2.1 million tax refund from Oregon and who subsequently went on the thriftiest spending spree ever was sentenced yesterday to 5 1/2 years behind bars.  From the Huffington Post:

Before her June 6 arrest, Reyes’ spending spree included about $1,800 in cash to buy a 1999 Dodge Caravan and spending $851 on tires and wheels.

She did allow herself a few little luxuries, too:

The affidavit says other purchases included a queen-sized air mattress, a deep fryer, an air conditioner and a cream and gray floral rug. She bought a sofa and recliner with brown leather trim.

Sadly, she was more careful with the money than the state was:

The return was set aside for review by processing staff and managers for potential fraud. But “some time later,” the affidavit said, a Revenue employee overrode the flagged payment and the refund was issued.

By policy, three agency employees are required to verify the override, the newspaper said. However, according to the affidavit, no one responsible for reviewing the return opened the file to look at it or looked at the W-2 form Reyes filed.

Call me when the state fills out its vehicle fleet with 12-year old used cars.

 In Sod We Trust.  From ArgusLeader.com:

The owner of a Sioux Falls sod business ducked taxes for almost 10 years before investigators caught on to the trust fund scheme he had used to evade capture, federal prosecutors said.

Jerome Adrian, 70, was arrested and appeared Friday in U.S. District Court in South Dakota on one count of conspiracy to defraud the United States, 12 counts of willful failure to collect or pay over tax, two counts of evasion of payment, five counts of tax evasion, four counts of willful failure to file tax returns, and one count of false tax refund.

Bogus trusts are an IRS “Dirty Dozen” tax scam.  They don’t work, though they might seem like they do until you get caughtRuss Fox has more.

Congress is pretending to address Taxmageddon, the expiration of the Bush-Obama era tax cuts at the end of the year.  Coverage includes Anthony Nitti’s Republicans Propose Their Own Way of Dealing With the Bush Tax Cuts, Kay Bell’s Republican definition of ‘temporary’ tax breaks depends on your income bracket, and Howard Gleckman’s Senate Democrats Would Keep Dividend Taxes Low, But Why?

“Tax Fairness” advocates, like the President and Citizens for Tax Justice, seem to think that there can never be bad consequences for jacking up taxes on “the rich.”  France is about to give a lab test on such ideas, including a 75% rate on income exceeding €1 million.  Veronique de Rugy, a newly-naturalized U.S. citizen who got out of France while the getting was good, explains the Consequences of High Taxes: French Edition.

Surprise! IRS Audits of S Corporation Returns: No-Change Rate Remains High, TIGTA Finds. But there has to be a pony in there somewhere.

The Iowa Department of Revenue has issued its summary of 2012 lowa tax law changes.

I hate to disagree with anything in Peter Reilly’s space, but I can’t abide the notion that it is the fault of the taxpayers and their advisors that the IRS is valuing at $65 million an artwork that cannot legally be sold.  The artwork contains an American Eagle, the sale of which is subject to severe penalties.  But read “‘Canyon’ Controversy – Blame The Advisers Not The IRS,” a guest piece in Peter’s space by Matthew Erskine, and decide for yourself.

Robert D. Flach has a new “Buzz” roundup of tax news.

Jason Dinesen: Same-Sex Marriage, Community Property, and Self-Employment Earnings

Jim Maule concludes a riveting 14-part series on the idea of having the IRS prepare returns for individuals using third party information reporting.

Where to start? What is Wrong with the Press? (David Brunori,Tax.com).

 

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The Iowa Capital Gain exclusion: cash rent doesn’t make you a farmer

Monday, July 2nd, 2012 by Joe Kristan

Iowa has a special exclusion for capital gains on the sale of businesses and farm property, but it’s not for everybody.  It has two high hurdles:

You have to have held the property for ten years, and

– You have to have materially participated in the business for ten years prior to the sale.

The material participation rules piggyback the federal “passive loss” participation rules.  Three Sioux City residents didn’t clear the hurdles, according to a newly-released Administrative Decision.  The administrative law judge recounts the facts:

Frank Stoos and his brother, Nick Stoos, purchased 320 acres of land in 1978.  The farm is in Turin, which is approximately 50 miles from Sioux City where Frank lived.  They each owned an undivided 50 percent interest in the parcel.  The parcel initially consisted of 61 acres of tillable cropland, 252 acres of timber, and 7 acres of road. The brothers share-cropped the cropland until 1983.  They then hired a farm management company to rent out the property beginning in 1984.  Thereafter, the tenants performed all farming operations on the crop land.   

Frank and Nick continued to do some work on the farm after leasing it.  They went to the farm approximately three or four weekends in the spring and in the fall to clear timber, remove fallen trees, and repair fences.  By the time the farm was sold, the tillable portion had risen to 80 acres due to their efforts.  They also performed some business tasks, such as paying on the loan and completing tax forms.  The brothers did not separately lease the timber portion of the land (the land was covered under the farm lease), and they did not separately sell timber or firewood.  The only revenue generated by the property was through the farming activity operated by the tenant.   

Nick Stoos fell ill in 1999, and his sons helped out Frank in the spring and fall.  Nick passed away in 2000.  His three sons (Michael, Joe, and Ben Stoos) inherited Nick’s share of the farm.  Michael and Ben continued to help Frank as needed to clear fallen timber and mend fences.  Frank drove over to check the farm twice per month.

The ruling says that this fell short of the tax law requirements for material participation:

The only work that was arguably material participation in the farming activity was the clearing of trees that created more tillable property.  This activity may have allowed the tenant to farm more land, and could be considered material participation.  However, the taxpayers did not document how much of their time was engaged in clearing ground versus how much was spent simply removing fallen trees or repairing fences.  Moreover, the increase in tillable land occurred over the course of the 28 years the family owned the property and it was unclear whether the clearly occurred gradually, in spurts, or over a concentrated period.  I cannot find on this record that the taxpayers have met the burden to overcome the general rule that landowners who cash-rent farmland are not materially participating in the farming activity. 

Additionally, I concur with the department’s argument that Frank Stoos actions of paying the mortgage, preparing taxes, and other financial work is not materially related in the farming operation.  The regulations state that work done in a person’s capacity as an investor is not considered material participation unless part of the “day to day management or operations of the activity or business.”  Frank’s financial work was only occasional and was not part of the day-to-day operations of the farm, so it cannot be considered as material participation.

The tax law generally requires 500 hours of work in a business to reach “material participation, though there are other ways to get there in some circumstances.  “Retired” farmers are considered to materially participate forever, and you are considered to materially participate in a business if you participated for five of the past ten years.  A few weekends clearing timber didn’t make the grade here.

The moral? Iowa audits every capital gain exclusion claim, as far as I can tell, so you won’t sneak one by them.  If you want the Iowa exclusion, be sure you can document your ten-year holding period and your ten-year material participation; also make sure your old returns are consistent with your material participation claim; don’t list your farm income as “passive” if you want the deduction when you sell. 

Cite: Stoos, DOCKET NO 09-20-1-0305

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PBS Horse show producer gets 10 years for scamming the Iowa Film Credit program

Friday, June 1st, 2012 by Joe Kristan

Dennis Brouse, not dressed for dressage

The largest individual beneficiary of the defunct Iowa film tax credit program got an unwanted bonus from the state yesterday.  Dennis Brouse, producer of the “Saddle Up with Dennis Brouse” series, was sentenced to 10 years in prison in Polk County District Court yesterday.

The Des Moines Register reports that Judge Scott Rosenberg was not pleased with Mr. Brouse’s attitude:

Rosenberg said Brouse’s lack of remorse, combined with his knowing attempt to defraud the state, played into the sentence.

Prosecutors also pointed out in a filing before sentencing that the Plattsmouth man made false statements to a presentence investigator even after he was convicted for abusing the tax-credit program shut down in 2009. Among those false statements: that he never filed for bankruptcy, never gambled and never had his wages garnished.

In fact, Brouse filed for bankruptcy three times in Nebraska and was sued by two creditors — the last time in 2002 for fraudulent misrepresentation over a $100,000 investment, the prosecutors said.

It is altogether fitting and proper for somebody convicted of stealing millions from the state to go away for a long time.  Still, another filmmaker quoted by the Register has a point:

J. Douglas Miller, an Iowa filmmaker who testified at Wheeler’s trial, said he still believes the state is also to blame for the graft that occurred after state leaders enhanced the tax credits, providing little oversight and lenient rules.

“The state really wasn’t up to this, and the bad guys knew it and took advantage,” said Miller, co-founder of Great River Studios in the Quad Cities.

While thieves are solely responsible for their own actions, you aren’t surprised when they take advantage of a shopkeeper who leaves the front door unlocked and cash in the register, and that’s pretty much how it went with the film credit.  The State Auditor’s report on the program showed that the former Walgreens photo-shop clerk who ran the program was able to commit the state to spending millions on the filmmakers (and yes, it was spending, even though it was run through the Iowa tax law) with no oversight, no controls on the credit certificates, no documentation of claimed expenses, and not even a comprehensive numbered list of the credits that were handed out.

While Mr. Brouse, like another filmmaker before him, goes away for 10 years, the politicians who made the looting possible remain at large.  Only three of Iowa’s 150 state legislators voted against the misbegotten film program when it was enacted.   Governor Culver signed the credit into law and gave the keys to the state treasury to a man with no financial background beyond the Walgreens photo counter.  Neither the lawmakers or the Governor bothered to impose minimal financial controls on the program.  They limited their oversight to posing with starlets who came to town to take our money.  The fangirl newspapers had nothing but happy fluffy things to say about the program, until it blew up in scandal and disgrace.  While prison may not be the right answer to their negligence, if they had any decency or respect for us taxpayers, all of these people would make an abject public apology for squandering millions of dollars that they took from us in taxes — and then they would resign their offices and pledge to never run again.

The delusional thinking that led to the film credit program still prevails at the statehouse.  The passage in the most recent session of tax credits for solar power installations and the bill that lets the owners of the “Field of Dreams” keep for themselves the Iowa sales taxes they collect shows that the politicians still think they can wisely direct our forcibly-extracted tax money to specific industries, and even specific businesses, for our own good.  The film credit program is damning evidence otherwise.  The newly-enacted programs are only two of dozens of obscure tax credits and breaks in the Iowa tax law.  While the film credit program may have been extraordinarily badly-run, it’s a leap of faith to believe other tax credit programs are run better — especially when the the only public evidence we have is from the film credit program.  The same people who were involved in the film program still are running the Department of Revenue, with the exception of the Department Director.  The public has no idea whether the other programs are well-run; I doubt that the legislators or the new Governor know either. 

The current system of high tax rates coupled with special favors for those influential or persistent enough to get the legislators to cut them a break is both fundamentally corrupt and economically harmful.  Money directed to preferred businesses and industries by the state will normally be wasted — or even, as in the case of the film credit program, stolen.  The state takes the money from taxpayers who are already here and uses it to lure and subsidize well-connected competitors.  A low-rate, low-loophole tax system would fund the state just as well as our complicated high-rate monstrosity.  Unfortunately, the politicians think they know better how to spend our money than we do.

Link: Tax Update archived coverage of the Iowa film tax credit

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