My interview on KCCI-TV about the Iowa Tuition and Textbook (and prom) Credit can be seen here. It was at the end of my April 15 workday, so anything short of drooling on my shirt is a success.
Archive for the ‘Uncategorized’ Category
The aftermath of yesterday’s fire at the old Younkers building in Des Moines:
The Walnut Street side:
And the Seventh Street side:
Des Moines Register, Younkers fire: History gives way to questions and Firefighters recount floor collapse at Younkers fire
It’s a sad day in Downtown Des Moines.
Sometime early this morning the 115 year-old Younkers Department Store building caught fire. It looks like a total loss. The building is (was) on the northwest corner of Seventh and Walnut, kitty-corner from our offices. This picture was taken from our 14th-floor conference room. You can still see flames on lower floors. Compare this to an older street-level picture of this corner of the building at the end of this post.
Our building still works, with power and water, though it smells a bit smoky.
The building was in the middle of a rehabilitation project. The store had shuttered in 2005, and was being repurposed into apartments and shops, with a revived Younkers Tea Room restaurant. That doesn’t look like it will happen now.
I took some pictures there the day they announced the closing; here are a few of them.
The famous “electric stairs.”
The elevator key bank, with the unusual button for floor 3 1/2.
The corner of the building at Seventh and Walnut, on the left side of the picture.
Downtown Des Moines has lost an old friend.
Related: A VISIT(ATION) TO DOWNTOWN YOUNKERS
The Tax Court reduced 2013 income taxes for a lot of trusts yesterday. The court ruled that trustees can “materially participate” in rental real estate activities, and by extension in other activities. If a taxpayer “materially participates” in an activity, it is not subject to the Obamacare 3.8% “Net investment Income Tax” on that activity’s income.
This is a big deal for trusts because they are subject to this tax at a very low income level — starting at $11,950 in 2013. The IRS has said that it considers it nearly impossible for trusts to materially participate. Yesterday’s decision flatly rejects the IRS approach.
The IRS had stated its position in a ruling involving an “Electing Small Business Trust,” which is a type of trust that can hold interests in S corporations — and which tend to get hit hard by the NII tax. The IRS said that a president of the corporation who was also a trustee of the ESBT was participating in the business not “as trustee,” but as a corporation employee — and therefore the trust didn’t materially participate. The Tax Court disagreed with IRS thinking yesterday:
The IRS argues that because Paul V. Aragona and Frank S. Aragona had minority ownership interests in all of the entities through which the trust operated real-estate holding and real-estate development projects and because they had minority interests in some of the entities through which the trust operated its rental real-estate business, some of these two trustees’ efforts in managing the jointly held entities are attributable to their personal portions of the businesses, not the trust’s portion. Despite two of the trustees’ holding ownership interests, we are convinced that the trust materially participated in the trust’s real-estate operations. First, Frank S. and Paul V. Aragona’s combined ownership interest in each entity was not a majority interest — for no entity did their combined ownership interest exceed 50%. Second, Frank S. and Paul V. Aragona’s combined ownership interest in each entity was never greater than the trust’s ownership interest. Third, Frank S. and Paul V. Aragona’s interests as owners were generally compatible with the trust’s goals — they and the trust wanted the jointly held enterprises to succeed. Fourth, Frank S. and Paul V. Aragona were involved in managing the day-to-day operations of the trust’s various real-estate businesses.
That would seem to put to rest the IRS “as trustees” catch-22.
The Tax Court decision doesn’t make the NII go away for all trusts. Trusts with only “investment” income, like interest and dividends, are not helped by this decision. Also, the decision by its terms only covers situations in which the trustee is materially participating in the trust activity; “We need not and do not decide whether the activities of the trust’s non-trustee employees should be disregarded.” In this respect the Tax Court doesn’t go as far as a Texas U.S. District Court did it the Mattie Carter Trust case, which counted participation of trust employees in determining whether the trust materially participated in an activity.
Still, even with limitations, the case is a big taxpayer win. It will especially help ESBTs avoid tax on operating income from S corporations when a trustee is also a corporation employee. Also, while the case doesn’t say that non-trustee employees can give trusts material participation, it doesn’t rule it out, either. That means bold trusts with employees that manage trust operations may be able to avoid the 3.8% tax, should the Tax Court adopt the Mattie Carter Trust approach. Future litigation will have to settle the issue. The IRS is also likely to appeal this case.
An aside: The IRS asserted its usual outrageously-routine 20% “accuracy-related” penalty — and it lost on its underlying argument. In a just tax system, the IRS would have to write a check to the taxpayer for the amount of the asserted penalties whenever this happens. The IRS assertion of penalties is far too routine, and should be reserved for cases in which the taxpayer is actually taking a flaky position, or doesn’t bother to substantiate deductions. When it asserts a penalty and the taxpayer actually wins on the merits, the IRS loses nothing under current law. Tax Analysts hosted a seminar yesterday on a Taxpayer Bill of Rights. Any bill worthy of the name would have a “sauce for the gander” rule that would make the IRS — and even IRS employees — as liable as taxpayers are for flaky positions.
Also: Paul Neiffer, Taxpayer Victory in Frank Aragona Trust Case, on the implications for farm interests held in trust.
The IRS has issued (Rev. Rul. 2014-12) the minimum required interest rates for loans made in April 2014:
Short Term (demand loans and loans with terms of up to 3 years): 0.28%
-Mid-Term (loans from 3-9 years): 1.81%
-Long-Term (over 9 years): 3.32%
The Long-term tax-exempt rate for Section 382 ownership changes in April 2014 is 3.56%.
OK, we’ve got all of the corporations done or extended. Now it gets serious.
For the last several years, our 1040 practice has become more and more a three or four-week death sprint. Most of our individual returns are business owners or executives, or their families. That means most of them are waiting on K-1s. Ever since the enactment of the reduced dividend rate, it has taken longer every year for brokerages to issue their 1099s. It’s common for “corrected” 1099s to come out several weeks after the originals. So it just takes longer for our clients to assemble their 1040 data.
While the start of the returns is delayed, April 15 is still April 15. That means all of the most complicated returns hit in the four weeks after the corporate return deadline. This isn’t good for many reasons — not least of which is that you don’t want a bleary-eyed tax pro helping you deal with big-dollar decisions, like the grouping options under the passive activity rules that kick in this year.
What I’m getting at: if your tax pro recommends an extension, don’t object. This stuff is hard — if it wasn’t, you wouldn’t be paying someone else to do it. You don’t want to risk an expensive mistake by rushing things. There is nothing to the myth that extensions increase your risk of getting examined. I have extended my own 1040 every year for 20+ years without an exam. Errors, on the other hand, absolutely do increase your audit risk.
Your tax return is worth the wait.
Russ Fox, The Flavor of the Season
Paul Neiffer, Real Estate Includes Land but Not For Depreciation Purposes.
William Perez, Alternative Minimum Tax
Leslie Book, Insider Trading and Forfeiture of Millions in Stock Gains Runs into Section 1341 and Issue Preclusion (Procedurally Taxing)
One of the changes to the Iowa Business Corporation Act that went into effect this year is a new requirement that corporations deliver financial statements to their shareholders. These financial statements must include a balance sheet, an income statement and a statement of changes in shareholders’ equity. The financial statements must be sent within 120 days of the end of the fiscal year.
I did not know that.
Jeremy Scott asks, Would a Republican Senate Improve the Chances for Tax Reform? (Tax Analysts Blog):
Republican chances for retaking the Senate have improved…
And that would be good for tax reform proponents, even those who don’t support GOP policies or want to see Republicans in office. Senate Democrats aren’t interested. And they aren’t going to work with a Republican House at all. Tax reform takes a lot of legislative groundwork, and right now at least, the GOP is the only party with any real interest in doing it.
There is, of course, another factor. I don’t think President Obama will sign anything big coming out of a GOP Congress.
William McBride, Some Questions Regarding the Diamond and Zodrow Modeling of Camp’s Tax Plan. (Tax Policy Blog).
Eric Todor, Who Should Get the Tax Revenue from Apple’s Intellectual Property? (TaxVox)
TaxProf, The IRS Scandal, Day 313
Great moments in tax evasion. A Texan who was worried about being sentenced to prison came up with an ingenious plan: hire someone to murder the sentencing judge. Because then the court system would just forget about him, or something.
Somehow that plan went awry, and Phillip Ballard was sentenced to 20 years in federal prison yesterday for his trouble. Mr. Ballard is 72. This will impact his retirement options. (via Going Concern)
Tax Roundup, 3/14/14: Unhappy with your state revenue exam? Iowans can appeal to the examiner’s boss! And: stealing the wrong identity.Friday, March 14th, 2014 by Joe Kristan
How would you feel about going to court and finding out that if you win, the appeal will be heard by your opponent? That’s pretty much how the Iowa internal tax appeals process works. And while a reform bill is getting attention in the legislature, that feature isn’t going to change just yet, reports Maria Koklanaris in a State Tax Analysts article:
In a letter to legislators, DOR Director Courtney Kay-Decker said the department was able to successfully draft legislation for some of the priorities outlined in the report, including implementing a small claims process and eliminating the State Board of Tax Review for all matters except property tax protests. But she said it could not come up with language this year for what she called her highest priority, which is also the top priority of taxpayers in the eyes of many.
“Most importantly, we were unable to cohesively and comprehensively incorporate the recommendation to remove the Director from the appeals process,” Kay-Decker said in her letter. “This is disappointing as it was perhaps my highest priority.”
The Council on State Taxation gives the current Iowa system failing marks. From Tax Analysts:
Ferdinand Hogroian, tax and legislative counsel at the Council On State Taxation, said Iowa’s tax appeals process is the only area in which the state earns poor marks in COST’s most recent report on tax administration. The report specifies the director’s involvement in tax appeals as a major problem.
“Although an Administrative Law Judge of the Department of Inspections and Appeals conducts evidentiary hearings, IA DOR can retain jurisdiction and override,” the report says.
Attorney Bruce Baker, who frequently does battle against the Department of Revenue, points out the obvious problem with the current system: “I’ve often joked that my clients would like to be able to appeal to the chairman of the board.” But the Department of Revenue will retain that option, at least for now.
While the legislation they are working on (SSB 3203) is an improvement, I still think Iowa needs an independent tax court — perhaps three judges from around the state who will agree to serve as tax judges as part of their caseloads to develop expertise. It could be modeled on the specialty business litigation court that Iowa is experimenting with. Now if you leave the current internal Department of Revenue Process — appealable by the Department to the Director of the Department — you litigate before generalists judges who may have never heard a tax case before. They tend to defer to the Department, even when it seems clear the department is wrong.
Paul Neiffer, A Bad Day in Court. A bookie who tried to hide funds overseas does poorly.
TaxGrrrl, Taxes From A To Z (2014): G Is For Garnished Wages . I hope not yours or mine!
Kay Bell, Sorry tax pros, more taxpayers filing on their own. Taxpayers always have that option, and preparer regulation would drive more taxpayers to do so by increasing the cost of preparers. Whether that will improve compliance is left as an exercise for the reader.
Christopher Bergin, It’s Not Just About Lois Lerner (Tax Analysts Blog):
But we need to remind ourselves that there is a lot more potential abuse going on at the IRS than what’s been associated with Lois Lerner. Here are a few examples. I talk to many practitioners who (a) don’t want to be identified, probably for fear of retaliation, and (b) question the independence of the IRS Appeals Office. That is a big problem.
In 2012 a high-ranking IRS executive said in a speech that she believes the government has a higher duty than that of a private litigant. “The government,” the executive said, “represented by the tax administrator, should not pursue a particular outcome and then look for interpretations in the law that support it. The tax administrator should do nothing more or less than find the law and follow it, regardless of outcome. The separation of powers, a bedrock principle of our Constitution, demands it.”
I have a few questions. How many private tax litigators believe that’s actually how the IRS operates? If this noble statement is taken seriously by others in the IRS, why did Tax Analysts have to go to court to get training materials? And why is the IRS being questioned so strongly by Congress on its belief – or, more accurately, the lack thereof – in the bedrock principle of the separation of powers?
The results-driven IRS approach to non-political issues doesn’t lead you to think Lois Lerner was acting with Olympian detachment in the Tea Party scandal.
TaxProf, The IRS Scandal, Day 309
Len Burman, How the Tax System Could Help the Middle Class (TaxVox)
My most “innovative”—some would say “radical”—policy option would replace across-the-board price indexing, which exists under current law, with indexation that reflects changes in economic inequality.
An awful idea. The tax code will never “solve” the problem of inequality. This is a clever-sounding idea that will do nothing but create complexity.
Sauce for the gander, indeed. Identity Thief Sentenced for Filing Tax Returns in the Names of the Attorney General and Others:
A federal judge sentenced Yafait Tadesse to one year and one day in prison for using the identities of over ten individuals, including the Attorney General of the United States, to file false and fraudulent tax returns.
I don’t wish identity theft on anybody, not even a politician. It can lead to all kinds of expensive and time-consuming inconveniences and embarrassments. But if it had to happen to someone, why couldn’t it have been Doug Shulman, who let identity theft spin out of control while he pursued his futile and misguided preparer regulation crusade?
Des Moines voters decide today whether to approve a legal tax to refund a similar tax imposed illegally. The Des Moines Register reports:
A special election Tuesday will determine how the city pays back a portion of a franchise fee it illegally collected from 2004 to 2009.
The Iowa Legislature gave Des Moines the authority to temporarily increase its franchise fee — a tax assessed on anyone who connects to electric and natural gas utilities — to pay off the judgment.
However, if voters reject the proposal, city officials will be forced to raise property taxes for at least 20 years in order to issue and pay municipal bonds to cover the court judgment.
When the tax was ruled illegal, the city appealed all the way to the U.S. Supreme Court before finally conceding that it would have to issue refunds — incurring enormous legal bills in the process, including a $7 million bill to the winning lawyers on the other side. From the District Court opinion awarding the fee:
This case has been in our courts since 2004. To say it was highly contested would be a gross understatement. The history of this case shows that the City, while it was entitled to do so, erected one barrier after another in an attempt to prevent the class from being successful in obtaining a refund. Almost without exception, class counsel was successful in dismantling each of those barriers.
It just goes to show that the city will do the right thing, once it has exhausted all appeals. Maybe next time they won’t be so quick to enact an illegal tax.
The state legislature voted to allow Des Moines to impose the tax legally to repay the illegal tax. Somehow I doubt the legislature would do a similar favor for taxpayers by letting them, say, legally not pay income tax for a few years to help them repay the taxes they had illegally avoided in prior years.
William Perez, Deducting Work-Related Expenses
Leslie Book, EITC Snapshot: Overclaims and Commercial Preparer Usage (Procedurally Taxing). ”In fact, there is a steady decline in the use of paid preparers among EITC claimants, while the rate of paid preparer usage overall has remained fairly steady.”
Another reason why preparer regulation to cut fraud is like pushing on a string.
Jack Townsend, The Scariest Tax Form? Scary Is in the Eye of the Beholder. I think the article he cites, which chooses Form 5471, makes a good case, considering the almost-automatic $10,000 fine for filing it late.
Kay Bell, Tax moves to make in March 2014
Clint Stretch, 10 Reasons Republicans Should Embrace the Camp Tax Bill. This is pretty faint praise: ”2. If they want a credible claim that Obama and Democrats are responsible for the failure of tax reform, they must pass a bill in the House.”
Jeremy Scott, Comparing the Camp and Obama Bank Taxes:
Including the bank tax in his plan is one of Camp’s most intriguing decisions, if only because the gain for him isn’t obvious, even after a closer look. The tax doesn’t raise much money. It is very similar to an Obama proposal that congressional Democrats didn’t really like, meaning it doesn’t buy the chair any bipartisan support. And it comes about four years too late to take advantage of widespread public anger at financial institutions. All Camp seems to have accomplished is legitimizing a revenue raiser for future use by the progressive caucus and undermining his own party’s opposition to this kind of tax increase.
Just… brilliant. I prefer ending the “too big to fail” subsidy directly, if necessary by denying deposit insurance to such institutions.
Martin Sullivan, 25 Interesting Features of Camp’s New Tax Reform Plan. ”Biggest disappointment. Camp and fellow House Republicans all but promised to reduce the top rate to 25 percent. They failed.”
Christopher Bergin, Tax Reform Only a Mother Could Love:
Many political observers think the GOP has a good chance of not only increasing its majority in the House, but also taking the majority in the Senate. I’m among those who believe that the Republicans will shoot themselves in the foot before that happens. I’ll bet there are more than a few Republicans this week who fear that Camp just put a bullet in the chamber.
I think the Camp plan will be quietly forgotten long before November, but there is still plenty of time for the GOP to demonstrate its skills with a Glock 40.
Norton Francis, Camp Tax Reform Would Create New Challenges for States (TaxVox). The repeal of the deduction for state and local taxes and limits on muni bonds won’t win friends in the state capitals.
Representative Camp’s thou-shalt-not list is fine so far as it goes, and, unlike the IRS bureaucracy, Congress does have the authority to rewrite the law. But his proposal falls short in that it assumes that the IRS is a proper and desirable regulator of political speech. It is not. It is not even particularly admirable in its execution of its legitimate mission, the collection of revenue: Its employees have committed felonies in releasing the confidential tax information of such political enemies as the National Organization for Marriage and Mitt Romney, and the agency itself has perversely interpreted federal privacy rules as protecting the criminal leakers at the IRS rather than the victims of their crimes.
Instapundit comments: “Abolish governmental immunity and make them personally liable for damages for misconduct.” Hard to argue with that; it would be a good addition to my “Sauce For the Gander” reforms. I still don’t understand why a nonprofit should lose its exempt status for being primarily political. Isn’t freewheeling debate a good thing? The IRS certainly hasn’t shown itself a neutral observer here.
TaxProf, The IRS Scandal, Day 299
Scott Drenkard, Johannes Schmidt, Guess Which State Has the Highest Liquor Taxes in the Nation? (Tax Policy Blog). Think coffee.
Preparing for life after football. Two former members of a Sioux Falls indoor football league team may have to change their post-athletic career plans. From the Sioux Falls Argus:
A federal grand jury has indicted six people for conspiracy to defraud the United States and aggravated identity theft.
Two of those indicted – Undra Stewart Franks, 27, and Donta Moore, 28 – are former Sioux Falls Storm players.
The new federal indictment says Moore, Franks and the others conspired to defraud victims by using names, Social Security numbers and dates of birth stolen from others to file fraudulent income tax returns that claimed false income tax refunds.
Identity theft isn’t just a Florida thing. If you deal with Social Security numbers at work, treat them as valuable confidential data — because that’s what they are. Guard your own identity by never giving out your social security numbers, protecting your bank account info, and being sure never to transmit those things in unencrypted e-mails. If you need to send documents with that info electronically, use a secure file transfer site, like our rothcpa.filetransfers.net.
News from the Profession. 10 People Not Cut Out to Be Partner (Going Concern)
The IRS has released the 2014 limits on depreciating autos, trucks and vans for 2014 (Rev. Proc. 2014-21). These assets are subject to special annual depreciation limits, often known as the “luxury auto” limits. The limits are lower than last year because of the expiration of the “bonus depreciation” rules. While bonus depreciation may be retroactively applied to 2014 later this year, these limits reflect what the law is for now, and what it will be if Congress does nothing.
The limits begin to apply for cars costing at least $15,800. A quick search of Cars.com finds that “luxury” can be had locally in a new 2014 Hyundai Accent SE, for $15,810:
It’s not your father’s luxury car, for sure.
The limits for trucks and vans:
Live it up, folks!
The Department of Revenue last week released its listing of claims for the Iowa research credit over $500,000 for 2013. Unlike the federal credit, the Iowa credit is “refundable” — if the company claiming the credit has less tax due than its credit, the state writes the company a check for the difference. Of the $58.2 million in credits claimed, about 65% of them exceeded taxes due and were granted as refunds, according to the report.
Two John Deere entities combined to claim over $18 million in credits in 2013; assuming the 65% figure applies to them, that means the got a net $12 million subsidy from Iowa taxpayers.
The Des Moines Register reports:
Twelve of Iowa’s major employers accounted for more than 86 percent of tax credit money awarded for research and development last year, according to a new Revenue Department report.
Companies claimed a total of $53.3 million in credits for research and development in 2013, with 12 companies claiming $46.2 million of that amount. Including individuals who claimed credits, the total rises to $58.2 million.
While recipients of the credits will always argue passionately for their virtues, it’s impossible to justify cash operating subsidies from the state for a dozen well-connected corporations. The Tax Update’s Quick and Dirty Iowa Tax Reform Plan would benefit all taxpayers, not just those who hire tax credit harvest consultants to get cash for what they would do anyway.
Liz Malm, Richard Borean, Lyman Stone, Map, Spirits Excise Tax Rates by State, 2014 (Tax Policy Blog)
It looks like Iowa hits the sauce pretty hard.
Annette Nellen, State income tax filing post-Windsor.
Jason Dinesen, Glossary of Tax Terms: Enrolled Agent
Russ Fox, Tax on the Run Owners Run to ClubFed:
Here’s a scheme for you: The government has set up this new tax credit worth thousands of dollars. What if we find some impoverished individuals, have them fill out tax returns claiming this credit, and we pocket all that cash? We’ll just phony up some other parts of the return to make it look real. They’ll never catch us!
As an aside, this sort of thing happens with all refundable tax credits. It’s one of the reasons why they attract fraudsters like moths are drawn to bright lights.
Yes, this really happened…except for the part about never being caught.
But even if you catch them, that money is gone.
Christopher Bergin, To Fix the IRS, You Have to Fund It (Tax Analysts Blog)
This agency is so mismanaged that there may very well be corruption. But I have no proof of that. I do, however, agree with those who are calling for a special prosecutor. Because the way House Democrats are behaving – ignoring that there is any problem at all – is almost scandalous, and what the Obama administration is doing is useless.
And that brings me to the House Republicans. They think it’s a good idea to punish the IRS by cutting its budget. That won’t fix the problem, and it’s the classic cutting-off-your-nose-to-spite-your-face move.
We tax practitioners deal with the degrading IRS service levels every day, and it’s clear the IRS should be better funded. It won’t happen, though, unless the IRS finds a way convince Republican appropriators that it isn’t a political arm of the other party. Dropping the proposed 501(c)(4) regulations is probably a necessary, though not sufficient, first step.
TaxProf, The IRS Scandal, Day 284
Tax Justice Blog, Congress Is About to Shower More Tax Breaks on Corporations After Telling the Unemployed to Drop Dead. Apparently the “extenders” bill is showing some life.
Jack Townsend, Government Files Protective Appeal in Ty Warner Sentencing
The $70 million doggie treat. The greyhound industry is a legacy of the early days of gambling in Iowa, but as opportunities to lose money recreationally have expanded, gamblers have lost interest in the doggies. Yet state law still requires two casinos to retain their dog tracks. Now the Des Moines Register reports that the casinos are willing to buy out the dogs for $70 million:
Combined betting on greyhound races in Dubuque and Council Bluffs has dropped from $186 million in 1986 to $5.9 million in 2012, a 97 percent decline. Both dog tracks typically have only a scattering of fans in grandstands that once held thousands of patrons.
The proposed legislation envisions a payment of $10 million annually for seven years for Iowa’s greyhound industry. This would include a total of about $55 million from Horseshoe Casino in Council Bluffs and about $15 million from the smaller Mystique Casino in Dubuque.
The casinos say they are losing $14 million annually on the dogs. I would guess that horse racing in Iowa has a similarly hopeless economic model.
Somewhat related: Tyler Cowen, Triply stupid policies.
News from the Profession: Just What Every Accountant Wants for Valentine’s, Another Calculator (Going Concern)
The Shulman-era IRS preparer regulation program is dead. The Appeals Court for the DC Circuit today upheld the DC District decision in Loving, a decision holding that the IRS had no authority to enact its elaborate “Registered Tax Return Preparer” regime. The winning attorneys at the Institute for Justice issued a press release:
Today, the D.C. Circuit Court of Appeals ruled that the IRS had no legal authority to impose a nationwide licensing scheme on tax-return preparers. The decision affirms a January 2013 ruling by U.S. District Court Judge James E. Boasberg, which struck down the IRS’s new regulations as unlawful. Both courts rejected the agency’s shocking claim that tax-preparer licensure was authorized by an obscure 1884 statute governing the representatives of Civil War soldiers seeking compensation for dead horses.
“This is a major victory for tax preparers—and taxpayers—nationwide,” said Dan Alban of the Institute for Justice, the lead attorney for the three independent tax preparers who filed the suit. “The court found that Congress never gave the IRS the power to license tax preparers, and the IRS cannot give itself that authority.”
It’s great news for taxpayers, who will not have their return prep costs artificially increased by a regulatory scheme written by a former H&R Block CEO. It’s good news for preparers, who will not have to waste time and effort in futile paperwork that will do nothing to solve the real problems of the tax system — baroque complexity and internal controls so weak that petty grifters steal billions through refund fraud annually.
The court was blunt in dismissing IRS arguments that a Reconstruction-era statute on Civil War claims gave them the authority to invent an elaborate preparer regulation scheme out of thin air:
In our view, at least six considerations foreclose the IRS’s interpretation of the statute.
Put simply, tax-return preparers are not agents. They do not possess legal authority to act on the taxpayer’s behalf. They cannot legally bind the taxpayer by acting on the taxpayer’s behalf. The IRS cites no law suggesting that tax-return preparers have legal authority to act on behalf of taxpayers. Indeed, a tax-return preparer who tried to act on the taxpayer’s behalf would run into trouble with the IRS…
The IRS may not unilaterally expand its authority through such an expansive, atextual, and ahistorical reading of Section 330.
It’s bad news for the already battered legacy of The Worst Commissioner Ever, who let identity theft balloon while he wasted his time on this pointless exercise.
Congratulations to Dan Alban and the Institute For Justice for their winning work in this case. I’m glad to have played a small role as an early agitator against preparer regulation and as a participant in an Amicus brief to the D.C. Circuit opposing the rules.
Iowa gets all of the good bad ESOP cases. Thanks largely to the energetic work of a single ESOP evangelist in the 1980s and 1990s, Iowa has been treasure trove of cases involving faulty employee stock ownership plans. The pinnacle of these cases may have been the Martin v. Feilen case, finding violations sufficient for the Eighth Circuit to rule that a district court “abused its discretion” by not banning the Iowa ESOP evangelist from doing any further ERISA work.
Iowa’s bad ESOP history got another chapter yesterday in Tax Court. The ESOP involved a Rockwell, Iowa S corporation, which had an ESOP owner. The non-ESOP shares were owned by the corporation’s sole employee and his wife.
So many things can go wrong with this sort of arrangement, and they all did — starting with Sec. 409(p). Judge Kroupa explains (some citations omitted, emphasis added):
Responding to perceived abuses, Congress in 2001 enacted section 409(p), which generally limits the tax benefits available through an ESOP that owns stock of an S corporation unless the ESOP provides meaningful benefits to rank-and-file employees.
There are significant tax consequences when an ESOP violates the section 409(p) requirements. For one, an excise tax equal to 50% of the total prohibited allocation is imposed. Sec. 4979A. Furthermore, the ESOP will not satisfy the requirements of section 4975(e)(7) and will cease to qualify as an ESOP.
Those are pretty severe penalties. So how do you violate Sec. 409(p)? Roth and Company alum Nancy Dittmer explains:
Section 409(p) is satisfied if “disqualified persons” do not own 50% or more of the S corporation’s “stock.” This stock includes allocated and yet-to-be allocated ESOP shares, synthetic equity of the S corporation, and any shares held directly in the S corporation. The ESOP shares and any synthetic equity are considered to be “deemed-owned” shares for purposes of Section 409(p).
In general, a disqualified person is any ESOP participant who owns 10% or more of the ESOP’s stock.
As our Rockwell taxpayer was the only employee of the S corporation and, by attribution, the only owner of the ESOP, he owned 100% of the shares. Those of you who are good at math will realize that 100% exceeds 50%, and 409(p)’s excise tax and plan disqualification applies.
So things looked dark for the Rockwell ESOP. Yet there was a glimmer of hope — not only was the ESOP screwed up, so was the S corporation. The corporation had 2 classes of stock, which normally disqualifies an S corporation election. If the corporation isn’t an S corporation, it can’t violate 409(p)! Alas, Judge Kroupa decided here that two (OK, more than two) wrongs didn’t make a right:
Petitioner represented to respondent that it qualified as an S corporation for 2002 when it filed its election to be treated as such. Respondent relied on this representation for 2002 because petitioner reported on its 2002 Form 1120S that it owed no income tax because of its electing to be treated as a passthrough entity under subchapter S. The statute of limitations on assessment now bars respondent from adjusting petitioner’s income tax liability for 2002. See sec. 6501(a).
Petitioner was silent regarding its desire to be treated as something other than an S corporation for 2002. Petitioner cannot avoid the duty of consistency, however, by simply remaining silent. Allowing silence to trump the duty of consistency would only encourage gamesmanship and absurd results. Therefore, we will treat petitioner as an S corporation for 2002 under the duty of consistency.
This bundle of bad facts resulted in $161,200 in taxes and another $76,000 or so in penalties.
The moral? In spite of media reports, it can be dangerous to game the ESOP rules to avoid tax on S corporation income. There are many hazards and much legal complication. If you want to have an ESOP, be sure to bring in a specialist.
Paul Neiffer, Not Too Late to Make Portability Election! I have more here.
Kay Bell, Decoding your W-2
TaxProf, The IRS Scandal, Day 264
Kyle Pomerleau, The U.S. Has the Highest Corporate Income Tax Rate in the OECD (Tax Policy Blog):
And as Iowa has the highest corporate rate in the U.S., at 12%, we’re number 1! In a bad way.
Robert D. Flach is right on time with your Tuesday Buzz!
Career Corner: Soft Skills Are For Pansies (Going Concern)
It’s bound to happen. Dad Taxpayer dies suddenly, leaving behind a car on blocks and a paid-for 12-wide for his widow. A lawyer friend of the family handles the estate paperwork for the widow for a nominal fee. Two years later the widow buys a winning lottery ticket, and dies of a heart attack shortly after she learns she won $50 million.
Her surviving children are happy that Dad’s $5 million lifetime estate exemption is “portable,” meaning Mom could use it to reduce the estate tax on her shiny new $50 million estate by $2 million or so. Except for one thing: lawyer friend didn’t file an estate tax return electing to pass the unused $5 million exemption to the widow ($5,340,000 for 2014, with inflation adjustments).
The permanent estate tax enacted last year allows a surviving spouse to use the lifetime exemption the first spouse doesn’t use, saving the need for sometimes complex estate planning to make sure the first spouse’s estate exclusion doesn’t go to waste. But that only works if the first spouse files a timely estate tax return electing to pass the unused exemption to the survivor.
The IRS yesterday gave a limited mulligan to family lawyer with Rev. Proc. 2014-18. Tax Analysts reports ($link) on how Catherine Hughes, attorney-adviser, Treasury Office of Tax Legislative Counsel, explains the relief:
Estates eligible for the simplified method under Rev. Proc. 2014-18 are those for which the decedent is a U.S. citizen or resident, the decedent died after 2010 and before 2014, the decedent is survived by a spouse, the estate was not required to file an estate tax return under section 6018(a) because the estate lacked sufficient assets, and the estate did not file a timely estate tax return.
“Estates of decedents that meet that criteria have an automatic extension of time to file a timely estate tax return until the end of 2014,” Hughes said.
So all sins up until 2014 are forgiven if an estate return is filed this year. Unfortunately, the requirement to file a return remains for decedents dying in 2014 and later to achieve portability, even if a return wouldn’t be required otherwise. This is a stupid foot-fault requirement. The election should be available on the surviving spouse’s Form 706 unless the decedent elects out. Until then, though, every first spouse estate should consider filing an estate return, just in case the widowed spouse picks the right Powerball.
The TaxProf has more.
CASH BASIS TAXPAYERS
If you file your business returns on a “cash basis,” you generally can get your deduction if the check for a deductible expense is postmarked by December 31. If you are talking big numbers, you should consider a wire transfer, or at least a certified mail receipt to prove you sent the check on time. Postage meter postmarks are almost worthless in trying to prove a timely payment.
There is one common expense that can be paid after year-end by a cash-basis taxpayer without losing the deduction: pension and profit-sharing contributions. If your plan is in place by year-end, you have until the due date of the 2013 return to fund the 2013 contributions; if you extend the return, you also extend the funding deadline.
If you are looking to reduce expenses by buying a depreciable asset and using the Section 179 or bonus depreciation rules, the asset has to be “placed in service” by December 31 to get a 2013 deduction. It’s not enough to pay for it by year-end if it’s not placed in service.
ACCRUAL BASIS TAXPAYERS: EXPENSES TO NON-RELATED PARTIES
Accrual-method taxpayers have less flexibility in controlling their income and deductions, but they usually have more ability to deduct unpaid income.
If an expense is accrued to a non-related party, the deduction timing depends on what the expense is for. Accrued compensation must be paid within 2 1/2 months after year-end to be deductible in the year it was accrued. Most other accrued expenses must be paid within 8 1/2 months of year-end under the “recurring item” rules, if the taxpayer has made the proper accounting method election. Accrual taxpayers have the same deadline for funding pension and profit-sharing plan contributions as cash-basis taxpayers.
Remember that if you are required to maintain inventories, merely filling your storeroom with inventory isn’t going to help reduce your taxes.
ACCRUAL BASIS TAXPAYERS: RELATED PARTIES
There are some expenses that accrual-basis taxpayers can only deduct on a cash basis. If you owe money to a “related party,” there is no deduction until the related party has to take the payment into income. For example, a calendar-year corporation cannot deduct a bonus to its sole shareholder for 2013 unless the bonus is paid by year-end and included on the shareholder’s 2013 W-2. The same goes for interest, rent, or any other accrued expense.
The related party rules are complicated. For purposes of deducting accrued expenses of C corporations, related parties include 50% owners and other corporations with 50% or more common control. “Family members” of 50% owners also are related parties; for this purpose, “family” is: “…brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.”
This does cut off, though. You are considered to own what your husband owns directly, but you aren’t considered to own what your husband’s brother owns, even though your husband is considered to own it. A famous tax commentary explains this elegantly:
A fortiori, this limitation ensures that stock owned by Bittker will not be attributed to his parents and then from them to their parents, and so on back to Adam and Eve, and then down through the family of man to Eustice.
For S corporations and partnerships, the related party net is wider. You are considered a “related party” if you own any stock in the S corporation or any capital interest in the partnership. The constructive ownership rules also extend out one level further. So while your husband’s brother’s C corporation may deduct an expense accrued to you at December 31, 2013 that isn’t paid until January 2014, his S corporation may not.
If you are accruing an expense to somebody who might be related, ask your tax advisor to help sort out whether it needs to be paid by December 31 to get a 2013 deduction.
Two more 2013 year-end tax tips to go!
In honor of my parents’ anniversary this week, today’s tax tip is an update of a 2009 post.
Love is a many-splendored thing, but love is even better when it saves taxes. Your marital status at year-end is your filing status for the entire year, so maybe you want to run down to the courthouse and tie the knot before the ball drops before midnight January 1, local time. Sure, call me a hopeless romantic. The Tax Update just rolls that way.
A quick trip to the preacher may be in order in the following circumstances:
- One prospective spouse has a big capital gain, and the other has capital losses that would otherwise go unused.
- One of you has passive income, the other has passive losses. If you are married on the last day of the year, the losses can offset the income on a joint return.
- One of you has substantial income in 2013, and the other doesn’t. If you have only one income between the two of you, you’ll save taxes on a joint return because of the wider tax brackets on a joint filing.
- If you are Iowans, and one of you has pension income, marriage will enable you to exclude up to $12,000 from your Iowa income tax return. A single filer can only exclude $6,000.
- One of you has AGI over $200,000 and investment income, and the other has AGI under $50,000. A quick wedding gets the higher-earning spouse out of the new Obamacare Net Investment Income Tax.
There are a wide variety of other special circumstances that could lead you to tie the knot. A good tax marriage results whenever one partner has tax attributes, like capital losses, that can be used on a joint return but would not be useful on a single return. Other such items could include tax credit carryforwards and investment interest carryforwards, among others
Of course these things apply to couples pondering divorce, too, but that’s too sad to dwell on this time of year. Oops, I just did. And some couples, particularly those where both have good incomes, are better off postponing marriage, or (shudder) accelerating divorce.
Anyway, you should marry for the right reasons. But if you can both be in love and cut your taxes, why not let IRS help pay for your honeymoon?
There will be three more 2013 year-end tax tips!
I know most people have better things to do today than read the Tax Update Blog (and the chorus says “and every other day!”), but I said there would be a tip every day for the rest of the year, so here goes. Self-plagarization alert: It’s much like one I did in 2009.
In this season of frantic giving, don’t forget the $14,000 per-donor, per-donee gift tax exclusion. A couple with four kids maximizing annual giving can reduce their taxable estates by $560,000 over five years, not even counting appreciation of the gift.
If it’s worth doing, it’s worth doing right. To get the gift to count in 2013, here are some tips:
-If you’re writing a check, march the lucky recipient down to the bank to cash it by December 31. Checks not cashed by year-end normally won’t count as 2013 gifts.
- If you are donating private company stock, make sure the corporate secretary records the transfer on the company’s books by year-end. Also make sure the tax returns reflect the gift – if you make a December 25 gift of S corporation stock, make sure the donee gets a K-1 showing income for the 12/25 through 12/31 period.
- If you are donating public company stock, make sure it’s in the donee’s brokerage account before the end of the day December 31.
Personal gifts are neither deductible to the donor nor taxable to the recipient. For non-cash gifts, the recipient steps into the donors basis for a future sale if the property has appreciated. If the value at the date of gift is less than the basis, the recipients basis for determining loss only is the date of gift value.
Plan on filing a gift tax return for any property gifts, even if you owe not gift tax; a properly prepared gift tax return starts the three-year statute of limitations, preventing any future IRS quibbling over the values.
Remember, if you miss the 2013 annual gifting exclusion, it’s gone forever. 2013 isn’t coming back.
Stop by tomorrow for another 2013 year-end tax tip!
Yesterday we talked about making capital contributions to an S corporation before year-end to restore basis for deducting K-1 losses. While that works well if you own all of the corporation stock, it gets difficult when there are other shareholders. If they aren’t pro-rata, capital contributions will change the ownership percentages. The other shareholders may not want to issue you more stock, and they may not want to make additional capital contributions themselves.
Fortunately, S corporation owners can also deduct losses based on loans they make to the corporation. As the loans don’t need to be pro-rata, it’s easier to do. But you need to do it right, as S corporation loans have some potential tax traps.
First, the shareholder has to make the loan directly. A guarantee of a third-party loan to the S corporation doesn’t work. Second, don’t borrow the money you wish to lend from another owner; we’ll explain why tomorrow.
Third, plan to leave the cash in the corporation until you have earned back any losses you take. If you take losses against an S corporation loan, you reduce your basis in the loan itself, so a repayment can result in a taxable gain. Subsequent K-1 income will first restore the basis of the loan before going against stock basis, but until that happens, a repayment of a loan used to deduct S corporation losses is a taxable event.
Finally, how you do the loan matters. It is wise to document the loan with a note at the current Applicable Federal Rate with a definite repayment term. Making the loan as just “open account debt” can be treacherous, as any time the balance exceeds $25,000, the tax law considers there to be a new separate loan. An example shows how this works:
Joe owns all of Joe Inc., an S corporation. He is out of stock basis at the end of 2013 so he loans the company $30,000 at the end of 2013 to enable him to deduct $25,000 of corporate losses on his 1040. That leaves him a $5,000 basis is his open account loan.
In January 2014 a customer pays an overdue bill, enabling Joe to pay back his $30,000 advance. The company breaks even in 2014, and Joe loans the $30,000 back on open account in December 2014.
Unfortunately for Joe, he has $25,000 gain on the repayment in January 2014; because the corporation had no taxable income, Joe’s basis wasn’t restored before repayment. The 2014 year-end advance is considered a different loan.
Stop by tomorrow for a new tax tip – one daily through December 31!
Just because today is the shortest day of the year doesn’t mean you can’t do some year-end tax planning. Today is a good day for S corporation owners with losses to ponder whether they can use those losses on their 2013 return.
An S corporation owner needs to jump three hurdles to deduct losses passing through on the K-1.
There needs to be basis.
The basis needs to be “at-risk.”
The losses either need to be “non-passive,” or you need other “passive income” to enable you to deduct a passive loss.
We’ll just talk about basis today.
A taxpayer’s initial basis in an S corporation is the amount paid for the stock. It is increased by capital contributions and by undistributed income of the S corporation. It is reduced by distributions of S corporation earnings and by S corporation losses and expenses.
Your basis is determined on the last day of the tax year, so if you are short right now, a capital contribution made by December 31 can get you where you need to be. So look at your S corporation income, losses and distributions for this year so far, and see if you need to put some more cash in the company before year-end. If you own all of the company, that can be just a matter of writing a check. Don’t try to be cute and take the money back out on January 1, either.
If you have other owners, it gets more complicated. In that case, a loan to the S corporation might be the way to get you the basis you need. We’ll talk about that tomorrow.
Check the Tax Update for a new year-end tip daily through December 31!
The IRS has announced (Rev. Rul. 2013.-25) that the interest rates on tax underpayments and overpayments remain unchanged for the first quarter of 2014.
For individuals, the rate owed on underpayments to the IRS, and the rate they owe on refunds, will be 3%.
For corporations, the interest rate is 3% for underpayments (5% for “large corporate underpayments”). A For corporate overpayment amounts over $10,000, the IRS will only pay .5%.
“Large corporate underpayments” are C corporation underpayments exceeding $10,000.