Archive for the ‘Iowa Tax Law’ Category

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 (

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.



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’



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). 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.



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.”


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)


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


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.


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).


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

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,



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


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


EITC: a discouragement to work?

Thursday, May 24th, 2012 by Joe Kristan

When the Iowa legislature was considering a big boost in the state earned income tax credit, I pointed out how the credit phase-out punishes additional income.  The phase out works like a special high tax bracket on low-to-moderate income increases.   Today a New York Times opinion piece (via the TaxProf) makes the same point:

The earned-income tax credit is often said to encourage work, but it may do just the opposite.

The chart below shows the credit’s schedules for the 2011 tax year as a function of annual earned income for a given family situation (other family situations have the same basic shape). The schedule shown illustrates the mountain-plateau pattern described above: an increasing portion for the lowest incomes, a flat portion, a decreasing portion and then finally a flat portion of zero.


So while the credit encourages work until the maximum credit is achieved — under these facts, at $9,100 — it actively punishes increases in income from $21,770 to $41,132.  It’s the same point I made with this chart about the proposed increase in the Iowa EITC from 7% of the federal credit to 15% in one of the failed compromises to achieve property tax reform:

The EITC is credited with reducing abject poverty by its advocates.  Unfortunately, the phaseout punishes attempts to move to middle income status, locking people into relatively low income lives.  It’s an unintended consequence that EITC advocates never seem to address.

Related: Governor to buy property tax reform by doubling earned income credit?




Department of Revenue asks legislature to trim back real estate gain exclusion

Thursday, March 29th, 2012 by Joe Kristan

While the annual Iowa Department of Revenue policy bill is usually a snoozer, dealing with minor technical problems in the tax law, this year it’s more ambitious.  When a Senate Ways and Means subcommittee meets to discuss SSB 3117 this morning, one of the items on the Department’s agenda is to trim back the deduction for sales of business real estate.  Iowa currently allows many taxpayers who have held rental real estate for at least ten years to exclude gains from the sale of the real estate from income if they also meet a ten-year “active participation” requirement. 

The Department’s new bill makes the requirements much stiffer. From the bill’s explanation:

   The division amends Code section 422.7, relating to the Iowa capital gain exclusion, to provide that capital gains from the sale of real property used in a business or from the sale of a business which is defined as a passive activity business under section 469(c) of the Internal Revenue Code does not qualify for the exclusion. This provision of the bill applies retroactively to January 1, 2012, for tax years beginning on or after that date.

I asked the Department for a clarification and received this explanation from the Department’s policy chief, Jim McNulty (my emphasis):

The intent of the proposal is to not allow rental activities to qualify for the capital gain exclusion unless they are a real estate professional, which is the 750 hour/50% test that you cited.

 The Department has taken a position, which has been upheld by an Administrative Law Judge decision, that cash rent of farmland does not qualify for the Iowa capital gain exclusion.  We have received concerns that while rental of farmland does not qualify in many cases, rental of commercial property often does qualify.  The intent of this change is to better equalize the treatment regarding rental activities, whether they relate to farmland or commercial property.  This would still allow real estate professionals to claim the exclusion.

The bill would allow the exclusion for rental real estate only for taxpayer that meet the “rental real estate professional” hurdle of Section 469(c)(7).  To qualify, a taxpayer has to work more than 750 hours in real estate trades or businesses and spend more time in that than in any other activity.  Then the taxpayer also has to prove “material participation” in the rental real estate activity.    The current rules for the exclusion are much more lenient:

7. Rental activities or businesses.

 For purposes of subrules 40.38(1) and 40.38(7), the general rule is that a taxpayer who actively participates in a rental activity or business which would be considered to have been material participation in another business or activity would be deemed to have had material participation in the rental activity unless covered by a specific exception in this subrule (for example, the exceptions for farm rental activities in numbered paragraphs “4,” “5,” and “6” immediately above). Rental activity or rental business is as the term is used in Section 469(c) of the Internal Revenue Code.

This means, for example, that a taxpayer who is not a “real estate professional” who spends 100 or more hours on a real estate rental activity, and more time than anyone else, could qualify now but would not qualify under the law proposed by the Department.  The new rules would take effect retroactively to the beginning of this year. 

I’m not a big fan of the Iowa long-term gain exclusion; I think much lower rates without complex exclusions would be a better way to go.  Still, trimming back this exclusion shouldn’t be the job of the Department’s policy bill, especially on a retroactive basis.  It should be part of a larger discussion of how Iowa’s tax law works.


Iowa Capital Gain Deduction: an illustration

It’s hard to be a real estate professional 



Iowa Department of Revenue shreds the Commerce Clause

Thursday, March 8th, 2012 by Joe Kristan

If an Iowa Department of Revenue position on interstate income taxation stands, the limits set by Congress in 1959 on taxation of out-of-state corporations (PL 86-272) will become a dead letter. The Department is attempting to tax Jack Daniels — whose only connection to Iowa is the sale of liquor to the Iowa state wholesale liquor monopoly — based on the use of its trademarks in Iowa.
PL 86-272, enacted under the Constitutional authority given to Congress to regulate interstate commerce, prohibits states from taxing corporations whose only business in the state is the shipping of goods from out-of-state. The states are always trying to get around this, and Iowa gave itself a victory on this score when the Iowa Supreme Court ruled that KFC was taxable on royalties received from its Iowa franchisees even though KFC itself had no property, employees or operations in Iowa. Now the Department is turning this victory up to 11. From the Administrative Law Judge ruling in favor of the Department in an appeal by Jack Daniels Properties, Inc. and Southern Comfort Properties, Inc, members of the Brown-Forman group.

The department


Department of Revenue explains what Branstad didn’t veto

Friday, July 29th, 2011 by Joe Kristan

The Iowa Department of Revenue explains in an e-mail to practitioners the provisions enacted this week when Governor Branstad signed most of SF 533:

Immediate Income Tax Changes for Iowa Taxpayers
Senate File 533 enacted on July 27, 2011 made changes impacting Iowa income tax provisions for tax years 2008, 2010, and 2011.
This legislation retroactively coupled with the following federal provisions for 2008:


Governor Branstad item vetoes increase in Iowa earned income tax credit

Thursday, July 28th, 2011 by Joe Kristan

Governor Branstad has vetoed the increase in the Iowa earned income tax credit enacted in the closing hours of Iowa’s recently-ended legislative session. SF 533 would have increased the credit to 10% of the federal credit, from the current 7%. The refundable credit would have cost $28.5 million, according to the Governor. No other tax provisions were vetoed. From the veto message:

It is my desire to approach tax policy in a comprehensive and holistic manner. As such, I urge members of the House and Senate to continue to work with my office on an overall tax reduction package that both fits within our sound budgeting principles while reducing those taxes that are impeding our state’s ability to compete for new business and jobs.

Comprehensive and holistic? I got your comprehensive and holistic right here.
Related: Legislature allows Iowans to take some 2010 deductions on 2011 returns


Iowa House approves bill allowing 2010 expenses on 2011 returns; Senate future in doubt

Thursday, June 9th, 2011 by Joe Kristan

The Iowa House of Representatives approved a proposal (HF 697) to allow Iowans to take advantage of 2010 tax breaks that weren’t enacted until Apriil 2011 without amending returns. The proposal would give taxpayers the option of claiming their additional Sec. 179 expenses, educator expenses and higher-education deductions for 2010 on their 2011 Iowa returns. Otherwise the taxpayers could only claim the deductions by filing amended 2010 returns.
The proposal was passed as part of a broader budget bill, which puts its future in doubt. The Washington Examiner reports:

Democrats warned that Republicans were wasting their time on the House measure, saying the proposal will have no future in the Democratic Senate.
“This bill is dead as soon as it hits the Senate,” said Rep. Bruce Hunter, D-Des Moines.
No progress has been made in bargaining between the House and Senate over a new state budget, though the fiscal year ends on June 30.

Related: Proposal would allow Iowans to claim some 2010 breaks on 2011 returns


Proposal would allow Iowans to claim some 2010 breaks on 2011 returns

Wednesday, June 8th, 2011 by Joe Kristan

The Iowa legislature didn’t get around to deciding what Iowa’s 2010 income tax law was until April of this year. Thousands of Iowa returns were filed without claiming deductions enacted by the later-than-last-minute legislation (SF 512). Today the Iowa House is scheduled to debate a proposal to allow taxpayers the option of claiming those breaks on their 2011 returns in place of filing amended 2010 returns.
Amendment H-1735 to HF 677 — the omnibus budget bill — would allow taxpayers to take the following 2010 tax breaks on 2011 returns:
– The Section 179 deduction of up to $500,000 for otherwise depreciable equipment. The Iowa 2010 limit had been $134,000;
– The deduction for higher education expenses; and
– The $250 educator expense deduction.
This is a great idea. Amending an Iowa return to get a $250 educator deduction is hardly worth the bother of amending when you at best get a $22 refund. An S corporation claiming the increased Section 179 deduction may have multiple owners that have already filed 2010 returns; it may be a better deal to just hold the deduction over to 2011 than to pay to amend the 2010 Iowa return and all of the owner IA 1040s.
The bill also would allow taxpayers to amend their 2008 Iowa returns to claim the same teacher deductions, higher education expenses and the optional itemized sales tax deduction allowed on federal returns for that year. This is a strange provision, re-opening an old year for deductions that taxpayers have given up on. In fact, many taxpayers who accidentally claimed those deductions on Iowa returns for those years because they were on the federal return have paid assessments issued by the Department of Revenue for those items; they would then have to amend their returns to recover refunds for the deductions they claimed in the first place.
There apparently is no budget deal yet, so the passage of these provision can’t be assumed. Still, it’s good to see legislation that could save the expense of amending returns for small refund amounts.
Related: Iowa late changes: should you amend your returns?


ISU Ag Law Center rounds up Iowa tax changes

Monday, April 25th, 2011 by Joe Kristan

All of the recent Iowa tax legislation, including Section 179 and bonus depreciation changes, is rounded up by the ISU Center for Agricultural Law and Taxation.
Related: The morning after the Iowa bonus depreciation veto


The morning after the Iowa bonus depreciation veto

Friday, April 22nd, 2011 by Joe Kristan

Now that the Governor has vetoed bonus depreciation for Iowa, what happens now?
From the Des Moines Register coverage, it sounds like the Democrats are truly unhappy with the veto message because it also blocks an increase in Iowa’s Earned Income Tax Credit:

Rep. Tyler Olson, D-Cedar Rapids, accused Branstad of reckless action that unraveled a carefully crafted compromise. “His insistence on rewarding special interests and big corporations at the expense of small businesses and middle-class families is bad for Iowa and a serious blow to bipartisanship,” Olson said.

The Republicans, in contrast, don’t sound like they are all that upset:

Iowa House Speaker Kraig Paulsen, R-Hiawatha, said: “I’m pleased the governor signed the Taxpayers Trust Fund, giving Iowa taxpayers a seat at the table. Obviously, I’m disappointed that he chose to veto portions of the bill. House Republicans will continue to fight for tax relief for Iowans.”

That doesn’t sound like somebody ready to lead a veto override battle, and the Democrats won’t be able to override the veto without help.
While tax conformity is always good, Iowa has been non-conforming with bonus depreciation for so long that one more year probably isn’t that big of a deal. I do like this part of the veto message:

As earlier indicated, it is my desire to approach tax policy in a comprehensive and holistic manner. As such, I urge members of the House and Senate to continue to work with my office on an overall tax reduction package that both fits within our sound budgeting principles while reducing those taxes that are impeding our state


Bonus depreciation for Iowa — not so fast?

Thursday, April 21st, 2011 by Joe Kristan

Update, 4:15 pm: Governor item-vetoes 2011 Iowa bonus depreciation, enhanced earned-income credit. An insider tells me that since he let the “taxpayer relief fund” stand, there probably will not be an override. We’ll see.
Nothing seems easy in Iowa tax policy this year. Now it looks like the Governor may veto the bonus depreciation provisions passed Tuesday by the legislature. The Des Moines Register reports:

Iowa Senate Majority Leader Michael Gronstal on Wednesday offered what he described as a compromise to break a stalemate over the state’s budget, but it was quickly rejected by Gov. Terry Branstad.
The Republican governor also indicated he may veto portions of a tax relief and supplemental spending bill approved earlier this week by the Iowa Legislature. The situation could be an ominous sign as the House and Senate try to move towards adjournment of their annual session next week.

Governor Branstad appears mostly upset with the bill’s setting a budget for only one year at a time. The Governor is trying to reinstate two-year budgeting in Iowa. But bonus depreciation may also be a problem:
“Other issues, involving the taxes, I think are better to be resolved in a bill that deals with taxes, not supplemental appropriations,” Branstad said.
Stay tuned.


Coupling bill passes Iowa Senate with $500,000 2010 Sec. 179 deduction

Friday, February 18th, 2011 by Joe Kristan

You might want to not file your Iowa business returns for 2010 quite yet.
The Iowa Senate yesterday passed its bill (SF 209) to update Iowa tax law for recent federal tax changes. The bill retroactively couples for 2010, and forward for 2011, for the $500,000 Sec. 179 deduction enacted last September. That is important for Iowa filers who are taking advantage of the increased Sec. 179 deduction on their 2010 returns; they may also be able to take it on their Iowa returns.
In contrast, the bill couples with the federal bonus depreciation rules only starting in January 2011.
The bill is not enacted yet, and Iowa’s coupling deduction has been a mess for the past few years. As it hasn’t passed, the 2010 Sec. 179 limit for Iowa officially is still $134,000. If you have to file now — say, because you are a farmer trying to meet a March 1 deadline — that’s the number to use on your Iowa return. If you can wait, though, you might as well, to avoid having to amend your returns if the coupling legislation passes.