Archive for the ‘Uncategorized’ Category

Have a good weekend

Friday, August 29th, 2014 by Joe Kristan

The Tax Update is taking an extra-long weekend.  See you next week.

 

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I, for one, welcome my Accounting Today overlords.

Wednesday, August 20th, 2014 by Joe Kristan

Here is the way to to the tax incentive story from today’s “In the Blogs.”

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Tax Roundup, 8/11/14: Don’t you dare agree with me edition.

Monday, August 11th, 2014 by Joe Kristan

microsoft-appleDavid Brunori notes ($link) some odd behavior by Good Jobs First, a left-side outfit that has been on the side of the angels by highlighting the baneful effects of corporate welfare tax incentives.  The American Legislative Exchange Council came out with a report blasting cronyist tax incentives, and rather than embracing the report, Good Jobs First ripped it — because the Koch Brothers are the Devil:

Yet, Good Jobs First slams ALEC because many recipients of tax incentives have close ties to ALEC. But so what? The fact that corporations, including those run by the Koch brothers, provide support to ALEC doesn’t diminish the argument that incentives are terrible.

Weirdly, Good Jobs First primarily blames the recipients of corporate welfare for taking the money, rather than the politicians who give it away:

Moreover, Good Jobs First inexplicably says that ALEC is wrong to blame policymakers rather than the companies that receive incentives. But the blame for those horrible policies rests squarely on the shoulders of lawmakers and governors who perpetuate them. In a world where the government is handing out benefits to anyone who asks, it’s hard to fault the people who line up for the handout. No one has been more critical of tax incentives than I, but I’ve never blamed the corporations. Nor do I blame the army of consultants and lawyers who grease the wheels to make incentives happen. There’s no blame for anyone other than the cowardly politicians from both parties who can’t seem to resist using those nefarious policies.

Precisely correct.  When somebody is handing out free money, it’s hard to turn it down when your competitors are taking all they can.

I have seen smart people I respect do everything short of donning tin-foil hats when talking about the Koch Brothers and their dreadful agenda of influencing the government to leave you alone.  Maybe everyone needs an Emmanuel Goldstein.

Adam Michel, Scott Drenkard, New Report Quantifies “Tax Cronyism” (Tax Policy Blog)

Annette Nellen, What about accountability? California solar energy property.  Green corporate welfare is still corporate welfare.

 

20130121-2Russ Fox, Where Karen Hawkins Disagrees With Me…  The Director of the IRS Office of Preparer Responsibility commented on Russ’ post “The IRS Apparently Thinks They Won the Loving Case.”  Russ replies to the comment:

Ms. Hawkins is technically correct that Judge Boasberg’s order says nothing about the use of an RTRP designation. However, the Order specifically states that the IRS has no authority to create such a regulatory scheme. If there isn’t such a regulation, what’s the use of the designation?

The courts closed the front door to preparer regulation, so the IRS is trying to find an unlocked window.

 

TaxGrrrl, IRS Imposes New Limits On Tax Refunds By Direct Deposit.  “Effective for the 2015 tax season, the IRS will limit the number of refunds electronically deposited into a single financial account (such as a savings or checking account) or prepaid debit card to three.”

This seems like a measure that should have been put in place years ago.  The Worst Commissioner Ever apparently had other priorities.

 

Kay Bell, Actor Robert Redford sues NY tax office over $1.6 million bill.  The actor gets dragged into New York via a pass-through entity in which he had an interest — a topic we mentioned last week.

Renu Zaretsky, August Avoidance: Corporate Taxes and Budget Realities.  The TaxVox headline roundup covers inversions, gridlock, and Kansas.

Peter Reilly, Org Tries Exempt Status Multiple Choice – IRS Answers None Of The Above

 

 

20140811-1Ajay Gupta, The Libertarian Case for BEPS (Tax Analysts Blog)  BEPS stands for “Base Erosion and Profit Shifting.”

Matt Gardiner, Inversions Aside, Don’t Lose Sight of Other Ways Corps. Are Dodging Taxes (Tax Justice Blog).  Don’t worry, Matt.  If I did, my clients would take their business elsewhere.

Robert D. Flach, HEY MR PRESIDENT – DON’T SHOOT THE MESSENGER!  “If there is something wrong with the Tax Code do not blame the accountant or tax professional.  We have a moral and ethical responsibility to bring to our clients’ attention all the legal deductions, credits, loopholes, techniques, and strategies that are available to reduce their federal and state tax liabilities to the least possible amounts.”

 

Roger McEowen, Federal Court, Contrary To U.S. Supreme Court, Says ACA Individual Mandate Not a Tax.

Jack Townsend, U.S. Forfeits Over $480 Million Stolen by Former Nigerian Dictator.  The headline is misleading — the U.S. received the cash in a forfeiture — they seized it, rather than forfeiting it.

 

2140731-3TaxProf, The IRS Scandal, Day 459

Instapundit, GANGSTER GOVERNMENT: Inspectors general say Obama aides obstruct investigations.  The majority of the 78 federal inspectors general took the extraordinary step of writing an open letter saying the Administration is blocking their work as a matter of course.  The IRS stonewalling on the Tea Party scandal is part of the pattern.

 

 

News from the Profession. It’s Completely Understandable Someone Might Sign Over 200 Audit Reports By Mistake (Adrienne Gonzalez, Going Concern)

You mean they didn’t shift to organic carrot juice?  “From Coke to Coors: A Field Study of a Fat Tax and its Unintended Consequences” (Via Maria Koklanaris at Tax Analysts):

Could taxation of calorie-dense foods such as soft drinks be used to reduce obesity? To address this question, a six-month field experiment was conducted in an American city of 62,000 where half of the 113 households recruited into the study faced a 10% tax on calorie-dense foods and beverages and half did not. The tax resulted in a short-term (1-month) decrease in soft drink purchases, but no decrease over a 3-month or 6-month period. Moreover, in beer-purchasing households, this tax led to increased purchases of beer.

I’m sure the politicians who want to run everyone’s diet will angrily demand higher beer taxes in response.

 

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July 5, 1944

Saturday, July 5th, 2014 by Joe Kristan

Today is the 70th anniversary of my Dad’s last mission in World War II.   He was operating the machine gun in the top turret of B-24 42-78127 in an attack on the submarine pens in Toulon, France.

 

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This picture was taken by the unit photographer on the mission.  I think 42-78127 is one of the planes in the picture, based on the mission summary below:

20140705-1Not quite without incident.  The pilot of “127” was dead before they left the target, and the co-pilot was trying to get the crew home in a plane that was losing fuel and altitude.  Corsica was the nearest friendly spot.  They almost made it.

The pilot tried to ditch 42-78127 in this bay:IMG_1906

The B-24 broke in two, with the nose crashing on the beach, and the tail slowly sinking.  Tail Gunner David Korcuc pulled Dad and two other survivors out of the back end before it sank.  Six crew members died.

This picture of the bay was taken at about the spot where the front of the plane stopped.

 

The crew of 42-78127 is  below.

Those killed:

• Vaessen H William 1st Lt 0-536855 829th BS 485th BG Pilot

• Sipes R William 2nd Lt 0-705827 829th 485th BG Copilot

• Wittenbrink E George S/Sgt 36446168 829th BS 485th BG Radio

• Duer N Richard 2nd Lt 0-703456 829th BS 485th BG Bombardier

• Witham L Harris Sgt 35753847 829th BS 485th BG Nose Gunner

• McGregor W Jack Sgt 35613832 829th BS 485th BG Ball gunner

 

The survivors:

• Curtis W Carl S/Sgt 15195606 829th BS 485th BG Engineer

• Falerics M Wayne 2nd Lt 0-712782 829th BS 485th BG Navigator

• Korkuc David S/Sgt 32769227 829th BS 485th BG Tail Gunner

• Kristan J John Sgt 36650977 829th BS 485th BG Top Gunner

 

Dad rarely talked about the war, but he always seemed sad and thoughtful on July 5.   He said every year after the crash was a bonus year.  I still miss that guy.

 

Thanks to Dominique Taddei and Frank Allegrini of Corsica, who kindly shared their research on the crash and escorted my family to the remote wreck site.  More information is available at 42-78127.blogspot.com.

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IRS makes it less risky for U.S. residents to start reporting foreign accounts.

Thursday, June 19th, 2014 by Joe Kristan

The IRS has announced updated procedures for taxpayers to file overdue FBAR foreign account disclosures.  These reports are required of taxpayers who have foreign accounts with balances that exceed $10,000 at any time during the year.  Penalties can reach 50% of the highest account balance per year of willful violations.

The new rules provide a streamlined procedure for U.S. residents to begin reporting FBAR non-filing.  The procedure had been available only to non-residents.  It also has eliminated the inane $1,500 cap on unreported taxes from foreign accounts.  Tax Analysts reports ($link):

     In addition to permitting resident U.S. taxpayers to use the streamlined program, the IRS has also eliminated the $1,500 tax threshold and the risk questionnaire. Taxpayers must certify that previous compliance failures were not willful.

Under the revised program, all penalties will be waived for nonresident U.S. taxpayers and resident taxpayers will be subject only to a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue.

[Attorney Caroline] Ciraolo said practitioners will be pleased that the streamlined program will now be available to residents that previously did not qualify because they were living in the U.S. at the time they initially attempted disclosure. 

This liberalization is combined with higher penalties in some cases.

This looks like a positive development, though I still think it should be more liberal.  A no-questions asked policy for taxpayers with liabilities under a reasonable threshold, with only interest charged on late taxes, would be even better — especially given the extra penalties on those who come in only when it is clear their banks are going to turn over their names anyway.  There are requirements for submitting back foreign account statements, which may not be available.

The IRS doesn’t appear to be applying the relief retroactively, so taxpayers who have already come in voluntarily and paid ridiculous penalties are played for chumps.  And the real problem — worldwide taxation under the U.S. tax system — remains.  A Wall Street Journal report sums it up:

One potential drawback: Taxpayers who come forward in the future may end up faring better than those who heard about the U.S. campaign in the past and presented their case to the IRS then. For example, experts said, taxpayers from the latter group who owed more than $1,500 in taxes could have paid a penalty as high as 27.5%.

In addition, taxpayers abroad face the risk of double taxation, said John Richardson, a Toronto lawyer who works with U.S. taxpayers living in Canada. “The problem is that, penalties aside, the U.S. tax laws are very punitive for U.S. citizens abroad,” he said.

Links:

Commissioner Koskinen news release

IRS news release, IRS Makes Changes to Offshore Programs; Revisions Ease Burden and Help More Taxpayers Come into Compliance 

Streamlined offshore resident procedures

Streamlined U.S. resident procedures

Jack Townsend has a summary and more useful links to the updated IRS procedures.

Accounting Today has a useful article with an oxymoronic headline, IRS Eases Offshore Voluntary Disclosure Program for Non-willful Tax Evasion.  If it’s not willful, it’s not evasion.

And remember, the FBAR report for 2013 accounts on Form 114 is due June 30.

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Tax Roundup, 6/9/14: The great Illinois privatized tax shakedown. And lots more!

Monday, June 9th, 2014 by Joe Kristan

The wedding was beautiful, and great fun.  Introducing the new married couple.

 

Illinois sealGreat moments in state taxation.  Tax Analysts has a disturbing story ($link) about how an Illinois law firm is using the “qui tam” recovery procedures of the state’s False Claims Act against out-of-state taxpayers.  In a “qui tam” proceeding, an outside party, known as a “relator,” can file a lawsuit alleging fraud against the state and then share in the recovery — up to 25%, according to the story.

And they actually may be hurting state tax collection efforts, according to the story:

“The cases have clearly interfered with the administration and enforcement of tax law and may have even ultimately cost the state money, though it’s impossible to quantify how much,” said Mark Dyckman, the Illinois Department of Revenue’s deputy general counsel for sales tax litigation.

The story says the firm involved “is responsible for 99 percent of the qui tam tax litigation in Illinois.”

The story says Illinois may encouraged the suits initially, apparently thinking it could get some easy money out of the deal.  In other states where the firm tried the same thing, state Attorneys General won dismissals of the initial suits, discouraging further efforts.  The firm is also incentivized by the ability of a relator to share in outsized false claim penalties:

Second, while the treble damages for back taxes under false claims acts naturally attract the most attention, [taxpayer attorney Jordan] Goodman said the civil penalty — generally $5,000 to $10,000 per false claim under the federal law and $5,500 to $11,000 per false claim under the Illinois statute — can be just as oppressive, depending on what counts as a false claim. If each monthly sales tax return is a false claim carrying a $10,000 penalty, and 12 returns are filed in one year, that’s a $120,000 penalty. If every failure to collect taxes on shipping and handling is a false claim, and the business averages 10 sales into the state per month for 120 false claims, that’s a $1.2 million penalty for the year, which can turn into $12 million for the 10-year period covered by the false claims act.

Wikipedia image of Tams

Wikipedia image of Tams

The story says that one tactic used by the Illinois law firm is to make out-of-state purchases over the internet, and then to file suits if no sales tax is collected.  As the law covering remote sales remains unclear, it’s difficult to consider these items “false claims.”  That’s especially true in suits in which the taxpayer either was following published guidance or an audit settlement with Illinois.

These cases have apparently been going on since 2002, and the legislature and the state have yet to stop what would appear to be a purely abusive and parasitic practice.  If there ever was a case for universal application of a “sauce for the gander” rule, in which a losing plaintiff had to pay the same amount of penalties asserted against the winning defendant, this would be it.

 

Alligator bait.  The New Orleans Advocate reports on a Film tax credit promoter sentenced to 70 months.  It’s remarkable what high quality entrepreneurs these state tax giveaways attract.

 

20130114-1The ISU Center for Agricultural Law and Education is setting up a “Tax Place” feature on its website.  They seek your input.

Paul Neiffer reminds us that FBAR Filing Deadline is Near

Peter Reilly, CPA Faces Prison For Letting Client Deduct Personal Expenses.  It makes you want to carefully consider the work you want to take on.

Russ Fox, Back to the Past: Poker Sites and FBARs. Poker Sites Are Again Reportable Foreign Financial Accounts.  More incomprehensible foreign tax enforcement.

 

Cara Griffith, Protecting Confidentiality When Information Is Exchanged Between Tax Authorities  (Tax Analysts Blog)

TaxGrrrl, As NBA Finals Continue, Tax Incentives Lure 76ers Into New Jersey   

 

 

20140321-3TaxProf, The IRS Scandal, Day 396

Kyle Pomerleau, CTJ and U.S. PIRG Mislead with New Report on Corporate Taxes (Tax Policy Blog):  “USPIRG also doesn’t mention that their ideal corporate tax code has been tried in other countries with negative results. New Zealand attempted ending deferral as USPIRG suggested. The results were devastating to their economy.

Tax Justice Blog, Tax Foundation’s Dubious Attempt to Debunk Widely Known Truths about Corporate Tax Avoidance Is Smoke and Mirrors.  Never let the facts get in the way of what is “widely known.”

 

Howard Gleckman, Are Domestic Partnerships A Way For Heterosexual Couples To Avoid The Marriage Tax Penalty?   (TaxVox) This sort of thing makes makes me question the usefulness of “nudge” strategies to use the tax code to encourage behavior.  There are always perverse unintended consequences.

 

News from the Profession.  Public Accounting Firms, Ranked by CEO Hotness (Going Concern).  A tallest midget competition.

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The new married couple.

Sunday, June 8th, 2014 by Joe Kristan

The elder son went and got married to his high school sweetheart.

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In case you were wondering why it’s been quiet around here.

A beautiful couple, a beautiful wedding.  Good luck, Dan and Heather!

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Tax Roundup, 6/3/14: The joys of cronyism. And why Warren’s math is off.

Tuesday, June 3rd, 2014 by Joe Kristan

 

20120906-1When states “target” tax breaks, the little guy gets caught in the crossfire.  That’s the conclusion of a terrific new study on why special tax favors to special friends of the government hurt state economies and corrode good government.  The paper, by the free-market think-tank Mercatus Institute, is the best distillation of the case against luring businesses with special tax favors.

The study describes how big companies skillfully play state politicians for subsidies.  It shows how Wal-Mart has received at least 260 special tax breaks worth over $1 billion.  It describes the $370 million in North Carolina subsidies to Apple to create a whopping 50 jobs — $7.4 million each.  These come at the expense of small companies who pay full-ride on their tax bill as they lack the lobbyists and clout to play the system.

It discusses how the only way states can make a case for their special breaks is to ignore opportunity costs.  States assume that money spent to lure a well-connected company would otherwise be buried or something, generating no economic activity.  As the study says, “Labor and capital are scarce resources and they are rarely left idle.”  It’s a point Tax Update readers may be familiar with.

The study notes how the subsidies hurt the companies who don’t get the benefits, even if they are not direct competitors of the corporate welfare recipients: “When new companies receive extra money to invest, they raise the price of capital and drive up wages, which imposes an additional cost on unsubsidized companies in the state.”  This refutes the fallacy that “Smith’s tax credit doesn’t cost Jones a cent.”

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They also point out how targeted tax breaks create a crony culture in statehouses.  The study cites the example of Texas (citations omitted, emphasis added):

As companies direct more of their resources to securing special benefits, they need more people who can lobby or who have other rent-seeking skills.  There is already a whole industry of “location consultants,” some of whom demand a commission of up to 30 percent on the subsidies that they can negotiate with local governments.  Consultant G. Brint Ryan in Texas is a good representative of this industry.  Texas allocates corporate benefits exceeding $19 billion per year, more than any other state.  Ryan realized the profit opportunity in serving as a consultant to companies seeking to obtain these benefits.  He has since secured benefits for ExxonMobil, Samsung, and Wal-Mart, among others.  Ryan also illustrates the importance of having political networks for securing targeted benefits.  In 2012, the Texas legislature set up a commission to evaluate the impact of state investments in development projects.  Ryan, who donated more than $150,000 to the campaign of the state’s lieutenant governor, was appointed to the commission by the lieutenant governor.

The same dynamic is playing out in Iowa, as the economic development bureaucracy has spawned a cottage industry of attorneys and consultants to tap into taxpayer funds.

What should states do?  The report says:

Four policy implications for state governments follow from our analysis:

- Allow for current targeted benefits to expire, and abolish state programs that grant them on a regular basis.

- Make sure that targeted benefits cannot be granted by individual policymakers on an ad hoc or informal basis

- Broadly lower tax rates to encourage company investments and obtain a more efficient allocation of resources.

- Cooperate with other states to form an agreement about dismantling targeted benefits.

Sounds a lot like The Tax Update’s Quick and Dirty Iowa Tax Reform Plan.

Other coverage:

Joe Carter, How Enterprise Zones Lead to Cronyism

Kenric Ward, Study: Cronyism Increasingly Lucrative for Politicians and Businesses

Related:  Governor’s press conference praises construction of newest great pyramids.

 

20140603-1Tax Justice Blog, State News Quick Hits: Gas Taxes, NJ Budget Woes, Madison Square Gardens’ Sizable Tax Break

 

Jason Dinesen has Yet Another Post About Regulation of Tax Preparers.  “Preparer regulation is a bad idea. ”

Kay Bell, Tax moves to make in June 2014

Robert D. Flach has your fresh Tuesday Buzz!

 

Andrew Lundeen, The Common Misconception about the Lower Rate on Capital Gains and Dividends (Tax Policy Blog):

What is not easily seen is that the $100 that Mr. Buffett earns in dividends has already been taxed at the corporate level. In fact, Mr. Buffett’s $100 didn’t start at $100, it started as $153.85.

To receive his $100 dividend payment, Mr. Buffett must own shares in a corporation, which we will call Company A. Company A earned $153.85 in profits on Mr. Buffett’s behalf. This $153.85 is then subject to the federal corporate tax of 35 percent, or $53.85.

The corporation pays the $53.85 to the federal government on behalf of Mr. Buffett and then passes the remaining $100 to him in the form of a dividend. This is the $100 we discussed earlier, on which, Mr. Buffett pays $23.80 in dividend taxes.

Warren Buffett knows this.  But raising individual rates helps keep down those small guys whose businesses report their taxes on the owner 1040s — and, incidentally, makes it easier for Warren’s insurance business to sell tax-advantaged products.

 

Jeremy Scott, Camp Waves the White Flag (Tax Analysts Blog). “Camp tried to reform the tax system — and failed.”

Martin Sullivan, Corporate Expatriations: More Deals Are Likely (Tax Analysts Blog).  ” It is unlikely that any known or yet-to-be-made-public deals will be slowed by Democrats’ efforts.”

TaxProf, The IRS Scandal, Day 390

 

TaxGrrrl, John Daly Relied On Tax Records To Figure $90 Million Gambling Losses.  “Despite tens of millions of dollars in gambling losses, Daly doesn’t seem to regret his behavior, saying, ‘I had a lot of fun doing it.’”

 

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2 million served.

Sunday, June 1st, 2014 by Joe Kristan

According to Sitemeter, visitor #2,000,000 stopped by early yesterday afternoon.

2000000

I wish I could say that visitor won fabulous prizes, but maybe our Google visitor found some insight into Sec. 199 instead.

Lacking fabulous prizes, I’ll just say thanks to all of you for stopping by.  I hope you are finding it worth your internet time.

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IRS Releases Applicable Federal Rates (AFR) for June 2014

Thursday, May 22nd, 2014 by Joe Kristan

The IRS has issued (Rev. Rul. 2014-16) the minimum required interest rates for loans made in June 2014:

Short Term (demand loans and loans with terms of up to 3 years): 0.32%

-Mid-Term (loans from 3-9 years): 1.91%

-Long-Term (over 9 years): 3.14%

The Long-term tax-exempt rate for Section 382 ownership changes in June 2014 is 3.32%.

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

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May 15: no roundup today. File those 990s!

Thursday, May 15th, 2014 by Joe Kristan

The Tax Update is en route today, so no roundup.  Remember, calendar-year exempt organization returns are due today.  If you have a little organization, you probably can file the “postcard” form online.  If you fail to file your 990 for three years, tax-exempt status is lost.

990 and 990-PF forms can be extended with Form 8868.  There is no extension for the “postcard” form.  The IRS has more details on 990 filings.

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HSA Contribution Max for 2015 $3,350 single, $6,650 family.

Thursday, April 24th, 2014 by Joe Kristan

The IRS has released (Rev. Proc. 2014-30) the 2015 inflation-adjusted limits for Health Savings Account contributions.  The maximum annual HSA contribution for taxpayers with self-only coverage under a qualifying high-deductible plan is $3,350; the limit for taxpayers with family coverage is $6,650.

For 2015 a “high deductible plan” is one with an annual deductible of at least $1,300 for single coverage and $2,600 for family coverage.  Annual out-of-pocket costs can’t exceed $6,450 for single coverage and $12,900 for family coverage.

Qualifying HSA contributions are deductible “above-the-line,” without itemizing.  They may be withdrawn tax-free to cover qualifying medical expenses, or upon retirement in a fashion similar to traditional IRA contributions.  More information on HSAs can be found in IRS Publication 969.

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TV Me

Wednesday, April 16th, 2014 by Joe Kristan

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.

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Sunday Morning Skywalks.

Sunday, March 30th, 2014 by Joe Kristan

The aftermath of yesterday’s fire at the old Younkers building in Des Moines:

 

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The Walnut Street side:

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And the Seventh Street side:

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Coverage:

Des Moines Register, Younkers fire: History gives way to questions and Firefighters recount floor collapse at Younkers fire

KCCI, Downtown Younkers building burns; Massive fire in downtown Des Moines and Impact of Younkers fire downtown

Lots of video at the links.
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Goodbye, Younkers Building.

Saturday, March 29th, 2014 by Joe Kristan

It’s a sad day in Downtown Des Moines.

The Younkers Building ruins, morning, March 29, 2014.

The Younkers Building ruins, morning, March 29, 2014.

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.

electric stairs large

The famous “electric stairs.”

 

 youn-vator large

 

The elevator key bank, with the unusual button for floor 3 1/2.

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 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

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Tax Court decision cuts 3.8% Obamacare Net Investment Income Tax for many trusts.

Friday, March 28th, 2014 by Joe Kristan

20120511-2The 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.

Cite:  Frank Aragona Trust et al. v. Commissioner; 142 T.C. No. 9

Related: Self-rental, business sales benefit from new Net Investment Income Tax regulations.

Also: Paul Neiffer, Taxpayer Victory in Frank Aragona Trust Case, on the implications for farm interests held in trust.

A summary of “material participation” rules is below the fold.

(more…)

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Tax Roundup, 3/18/14: Now it gets serious. And: a foolproof plan goes awry.

Tuesday, March 18th, 2014 by Joe Kristan

 

Flicker image courtesy Michael Coghlan under Creative Commons license.

Flicker image courtesy Michael Coghlan under Creative Commons license.

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

 

20140303-1Paul Neiffer, Real Estate Includes Land but Not For Depreciation Purposes.

William Perez, Alternative Minimum Tax

TaxGrrrl, Taxes From A To Z (2014): I Is For Internal Revenue Code

Leslie Book, Insider Trading and Forfeiture of Millions in Stock Gains Runs into Section 1341 and Issue Preclusion (Procedurally Taxing)

Janet Novack, Former Qwest CEO Could Score $18 Million Tax Refund For Forfeited Insider Trading Profits

Kay Bell, College bowl tax audits and Colorado pot taxes.

 

Marc Ward, Annual Financial Statements Must Now be Delivered to Shareholders:

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.

 

taxanalystslogoJeremy 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)

 

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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

 

Via Wikipedia

Via Wikipedia

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.

Tony Nitti, Professional Gambler Bets Wrong In Tax Court – Takeout Expenses Are Gambling Losses, Not Business Expenses   

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.

 

taxanalystslogoChristopher 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?

 

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Tax Roundup, 3/4/14: Des Moines votes on refunding illegal tax. And: life after football!

Tuesday, March 4th, 2014 by Joe Kristan

20121002-2Des 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

TaxGrrrl, Taxes From A To Z (2014): A is for Affordable Care Act

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

 

TaxProf, Tax Court Issues 63-Page Opinion Debunking Cracking the Code Book

 

taxanalystslogoTax Analysts Blog is having a tax reform party:

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.

 

National Review, via InstapunditThe IRS Is the Problem:

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)

 

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IRS issues 2014 auto depreciation limits; luxury begins at $15,800

Friday, February 28th, 2014 by Joe Kristan

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.

20140228-1

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:

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It’s not your father’s luxury car, for sure.

The limits for trucks and vans:

20140228-2

Live it up, folks!

Related: IRS issues 2013 vehicle depreciation limits.

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