Posts Tagged ‘ACA’

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

Wednesday, October 1st, 2014 by Joe Kristan

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

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

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

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

Related:

Whither Halbig and the ACA.

Obamacare tax credits get a reprieve.

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

Peter Reilly, Court Rules Oklahoma ObamaCare Not OK

 

 

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

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

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

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

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

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

Related: Steven Dunn, Nothing Civil About Asset Forfeiture

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

 

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

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

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

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

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

 

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

 

TaxProf, The IRS Scandal, Day 510

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

Joseph Henchman, State Inflation-Indexing of Gasoline Taxes

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

 

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Tax Roundup, 8/6/14: Telemarketing isn’t an airplane. And: inversion hysteria, always in style.

Wednesday, August 6th, 2014 by Joe Kristan

20120529-2Is your airplane any of your business?  The Tax Court yesterday dealt with a problem that will arise a lot as taxpayers struggle with the new 3.8% Obamacare Net Investment Income Tax: what “activities” can be considered to be part of a single business?

The issue comes up because “passive” activities are subject to the tax, while non-passive activities are exempt.  It is especially important when S corporations are involved because their K-1 income is also exempt from the 2,9 Medicare tax and the .9% Obamacare Medicare surtax.  The status of activities as “non-passive” usually depends on the amount of time spent working in the activity; if you can combine activities they are less likely to be passive.

Tax Court Judge Buch outlines yesterday’s case:

 Mr. Williams is an aviation buff who owns a business that is unrelated to aviation. He purchased an airplane that he made available for rent, used for personal purposes, and used in his other business. On the Williams’ joint tax returns, they offset losses related to the ownership of the airplane against their income from the other business. Respondent disallowed those offsets… 

Passive losses cannot offset non-passive income under the 1986 passive loss rules; they carry forward to offset future income until the activity is sold.  Mr. Williams reported the airplane expenses as part of his business of training telemarketers.  The court reviews the rules on combining activities (footnotes omitted; my emphasis):

Section 1.469-4(c), Income Tax Regs., sets rules for determining what constitutes a single “activity”. That regulation provides: “One or more trade or business activities or rental activities may be treated as a single activity if the activities constitute an appropriate economic unit for the measurement of gain or loss for purposes of section 469.” Whether activities constitute an “appropriate economic unit” depends on the facts and circumstances, giving the following five factors the greatest weight:

(i) Similarities and differences in types of trades or businesses;

(ii) The extent of common control;

(iii) The extent of common ownership;

(iv) Geographic location; and

(v) Interdependencies between or among the activities (for example, the extent to which the activities purchase or sell goods between or among themselves, involve products or services that are normally provided together, have the same customers, have the same employees, or are accounted for with a single set of books and records.)

The judge said the airplane wasn’t part of the same “economic unit” as Mr. Williams’ other business, called WPP:

The fact that there was no meaningful interdependence between the ownership of the airplane and the business of WPP is evidenced in part by the fact that Mr. Williams would rent another airplane for travel because he could earn more from renting WPP’s airplane to other pilots or pilot trainees than he would pay if he or WPP rented another airplane for a trip. Further, most of the airplane’s use and income came from renting the airplane outside WPP, which had no effect on the business of WPP. Likewise, there is no indication that the airplane activity depended on WPP; it was only an occasional user of the airplane. There is no evidence that WPP and the airplane activity had any of the same customers or that the two activities were integrated in any meaningful way.

When the airplane activity was separated his other business, Mr. Williams was unable to muster enough hours to reach “material participation,” making the airplane losses passive and non-deductible.

What does this mean in planning for the NIIT?  Taxpayers get to revisit their activity groupings for 2013 and 2014 returns.  Taxpayers with multiple businesses will want to ponder what things they can realistically combine.  Just because you own both businesses doesn’t mean the tax law will consider them an “appropriate economic unit.”

Cite: Williams, T.C. Memo 2014-158

 

20140805-3Paul Neiffer, IRS Provides Two Optional Methods for SE Health Insurance Deduction.

Jack Townsend, Whistleblower Award for FBAR Penalties?

Jason Dinesen, Kudos to NAEA for Promoting EAs.  Not to sound dumb, but isn’t that what the National Association of Enrolled Agents is supposed to do?

Russ Fox, The IRS Apparently Thinks They Won the Loving Case.  “In Loving v. IRS, the IRS was permanently enjoined from the Registered Tax Return Preparer designation. One would think that the IRS would realize this and remove the designation from forms.”

Keith Fogg, How Bankruptcy Can Create a Pyrrhic Victory out of a Tax Court Win (Procedurally Taxing)

 

Peter Reilly, FAIR Tax Abolishes IRS – Then What?  I have long thought the fair tax was half-baked gimmick, deceptively marketed.  If you want to move to a consumption tax, move to a real consumption tax.

Adam Michel, What is the Consumed Income Tax?  (Tax Policy Blog)

 

 

Allison Christians, Regulating Return Preparers: A Global Problem for the IRS:

The problem of regulating all foreigners in service of U.S. citizenship taxation plagues FATCA in the details, and it will plague the project of tax return preparer regulation as well. It won’t be easily solved unless Congress can accept that the universally practiced norm of residency-based taxation is really the only viable option in a globalized world. If not, as the world adjusts to the ongoing expansion of U.S. regulatory power through more — and more complex — financial regulation, everyone will have to accept that virtually every tax move Congress makes has global implications.

Via the TaxProf.

Just what the world needs: more IRS.

 

nra-blue-eagleDavid Brunori, Keep the Inversion Hysteria Out of the States (Tax Analysts Blog).  “A company’s decision to invert is no different from an individual’s decision to live in a state without an income tax or to buy a house rather than rent to take advantage of a tax break.”  But, but, what about your loyalty oath?  You must hate America!  Or, worse, Iowa!

Scott Hodge, More Perspective on Inversions: Not a Threat to the Tax Base but the Face of U.S. Uncompetiveness (Tax Policy Blog)

Bob McIntyre, Statement: Despite Walgreens’ Decision, Emergency Action Is Still Needed to Stop Corporate Inversions (Tax Justice Blog, where inversion hysteria is always in style).

Eric Toder, How Political Gridlock Encourages Tax Avoidance (TaxVox)

 

Joseph Thorndike, The Origination Clause? Let It Go (Tax Analysts Blog).  Since the courts allow the Senate to strip any house bill of its text and replace it with revenue provisions, it’s pretty much dead already.  And that’s a shame.

 

Your legislators at work: 

Chicago lawmaker pleads to misdemeanor; faced 17 felonies. ““I’m sorry I underestimated my taxes.”

Fattah Jr. released on bail following U.S. indictment on theft, fraud and tax-evasion charges.  The son of a Congresscritter has tax issues? The apple doesn’t fall far from the tree.

 

TaxProf, The IRS Scandal, Day 454

Career Corner.  Career Limiting Moves: A Beginner’s Guide (Leona May, Going Concern).

 

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Tax Roundup, 7/29/14: Whither Halbig and the ACA. And lots more!

Tuesday, July 29th, 2014 by Joe Kristan

20121120-2The Big Tax News while I was on vacation was the Halbig decision by the U.S. Court of Appeals for the D.C. Circuit.  The decision holds invalid the IRS decision allowing tax credit subsidies for policies purchased on federal insurance exchanges.  The impact of the decision was offset by a Fourth Circuit decision the same day coming to the opposite conclusion, but it is still a big deal, especially in light of some subsequent events.

The D.C. circuit has national implications because every taxpayer can come under its jurisdiction by litigating through the Court of Federal Claims.  An alert reader corrects me:

Your post today contains an error.  The  D.C. circuit is not the same as the federal circuit.  The court of federal claims is appealable to the federal circuit. The district court for the D.C. circuit is appealable to the D.C. circuit.  Halbig is a big deal in any event because the dc circuit instructed the district court to vacate the rule.  Vacated means that there is no rule anywhere.  In any event, SCOTUS will make the final call here.

As long as that decision stands — and the IRS will certainly ask the 15-member court to reconsider Halbig, decided by a three-member panel — it threatens not only the tax credits for the 37 states without their own exchanges, but it also invalidates the employer mandate tax in those states and takes much of the bite out of the individual mandate.  The South Carolina Policy Council explains why (my emphasis):

The subsidies are also important for their function as triggers of both the individual and employer mandate portions of the ACA. The ACA imposes a $2,000 per employee penalty for companies with more than 50 employees who do not offer “adequate health insurance” to their workers. This penalty is triggered when an employee accepts an IRS subsidy on a plan purchased through an exchange. If individuals in the 36 states without a state-run exchange are ineligible for subsidies, there will be no trigger to set off the employer mandate.

An absence of subsidies would also allow many people to avoid the ACA’s individual mandate, which requires citizens to maintain health insurance covering certain minimum benefits or pay a fine. This is because the ACA exempts citizens from the individual mandate whose out-of-pocket costs for health insurance exceed 8 percent of their household income. If IRS subsidies are removed, insurance plans offered on exchanges would exceed this cost threshold for many people – thereby providing them an exemption from the mandate.

Flickr image courtesy Tim under Creative Commons license

Flickr image courtesy Tim under Creative Commons license

This would devastate the already shaky economics of Obamacare.

The key ruling in Halbig is its finding that statutory language allowing tax credits through exchanges “established by a State” doesn’t cover the federal exchanges that are used in the 36 states without exchanges.   Critics of Halbig say that Congress couldn’t have been that stupid.  For example, Jonathan Gruber, an architect of the ACA, says“Literally every single person involved in the crafting of this law has said that it`s a typo, that they had no intention of excluding the federal states.”

That assertion has been challenged by a number of observers, notes Megan McArdle.  She cites a January 2012 speech by one Jonathan Gruber, an architect of the ACA:

Only about 10 states have really moved forward aggressively on setting up their exchanges. A number of states have even turned down millions of dollars in federal government grants as a statement of some sort — they don’t support health care reform.

Now, I guess I’m enough of a believer in democracy to think that when the voters in states see that by not setting up an exchange the politicians of a state are costing state residents hundreds and millions and billions of dollars, that they’ll eventually throw the guys out. But I don’t know that for sure. And that is really the ultimate threat, is, will people understand that, gee, if your governor doesn’t set up an exchange, you’re losing hundreds of millions of dollars of tax credits to be delivered to your citizens. [emphasis added] 

The 2012 Jonathan Gruber repeated the story that only state-established exchanges qualify for credits in other forums.   It’s remarkable that two ACA architects named Jonathan Gruber have such divergent views of what the bill does.  It’s even more remarkable that they are the same guy.  This seems like strong support for the D.C. Circuit’s approach.

supreme courtIf the ACA were just another tax bill, it would be pretty easy to predict that the Supreme Court would go with the D.C. Circuit’s approach, based on prior rulings involving statutes that reached results the IRS didn’t care for.  In the Gitlitz case, which arguably provided an unintended windfall for S corporation shareholders when the S corporation incurred non-taxable debt forgiveness income, the Supreme Court said in an 8-1 decision (footnotes and citations omitted, emphasis added):

Second, courts have discussed the policy concern that, if shareholders were permitted to pass through the discharge of indebtedness before reducing any tax attributes, the shareholders would wrongly experience a “double windfall”: They would be exempted from paying taxes on the full amount of the discharge of indebtedness, and they would be able to increase basis and deduct their previously suspended losses.  Because the Code’s plain text permits the taxpayers here to receive these benefits, we need not address this policy concern.

In other words, if Congress doesn’t like what it has done, it’s up to Congress to fix it, not the IRS.  Congress did just that with the Gitlitz result within a year of the decision.

Of course, the ACA isn’t typical tax legislation.  Chief Justice Roberts tied himself in knots to find a way to uphold Obamacare in 2012.  Politics makes it unlikely that the Gitlitz approach will be followed by the left side of the Supreme Court, and who knows how Justice Roberts will rule.  But it does appear at least possible that Halbig will be upheld.

What should taxpayers do?  My thought is to assume the mandates remain in effect and pay tax (or reduce your withholding) accordingly.  Then be prepared to file a refund claim if Halbig is upheld by the Supreme Court.  Plan for the worst and hope for the best.

At least one thoughtful commentator says that ultimately if Halbig is upheld, holdout states will fall into line and establish exchanges.  For the reasons laid out here, I don’t think that will happen, and Congress will be forced to clean up its mess.

 

Paul Neiffer, ACA Subsidies: One Court Strikes Down, Another Upholds

Kristy Maitre, IRS Releases Additional ACA Revenue Procedures and Draft Forms  (ISU-CALT)

 

20140729-2Jason Dinesen, Don’t Be “That” Business Owner.  “I see too many with preconceived notions of what they can “get by with.” I’ve seen and read about too many people whose life got turned upside-down when they ended up NOT “getting by with it” after all.”

Russ Fox,  2:42.  “That’s how long I spent on hold on the IRS Practitioner Priority Service (PPS) yesterday–two hours, forty-two minutes.”   It’s a good thing Practitioners are a “Priority,” or who knows how long he’d have been on hold.

Phil Hodgen, Green card holders, treaty elections, and exit tax

Stephen Olsen, Ct. of Fed. Claims Holds Merger Results in “Same Taxpayer” for Net Zero Interest Rate (Procedurally Taxing)

Peter Reilly wonders if it is Time To Let Kent Hovind Go Home?  Peter thinks the former owner of a theme park based on the idea that hominids and dinosaurs co-existed may have suffered enough for his tax misdeeds.

Robert D. Flach brings the fresh Tuesday Buzz!

Well, these things are never tidi.  Spanish Court Moving Forward With Messi Tax Evasion Case  (TaxGrrrl)

 

taxanalystslogoDavid Brunori, Who Wants to Tax a Millionaire? Lots of People (Tax Analysts Blog).  This is full fo good observations about the unwisdom of states soaking the “rich.”  Highlights include:

States do not (and should not) do a lot of redistributing to the very poor.

When states jack up taxes on the “rich,” the money doesn’t exactly go to people sleeping under bridges, as David explains (my emphasis):

I have written about this before.  I noted that “the real beneficiaries of most government spending, certainly at the state level, never come up. No one ever says that we need higher taxes because my friends in the construction business want new contracts. No one ever says that they want new taxes to expand bloated public employee union bureaucracies. Yes, crony capitalism and union bosses drive most calls for higher taxes.” My right-wing friends often criticize liberals calling for higher marginal taxes as delusional. But they know exactly what they’re doing. Often they want higher taxes just so they can give money to their friends.

The money taken from “the rich” goes to the well-connected.  Iowa’s highest-in-the-nation system fleeces those without pull to pay rich subsidies to well-connected politicians and corporations.  Better to throw out the crony subsidies and lower rates for the rest of us — like The Tax Update’s Quick and Dirty Tax Reform Plan would do.

 

Elaine Maag, The “Helping Working Families Afford Child Care Act” Would Help, but Doesn’t Solve the Timing Mismatch (TaxVox).  “Making the CDCTC refundable and increasing allowable expenses is a huge step in improving child care assistance for low-income families.”

 

20140729-1Joseph Thorndike, The Corporate Income Tax Will Never Be ‘Fixed.’ And That’s OK. (Tax Analysts Blog):

Again, I think the corporate income tax is on the way out. But that’s a long-term problem. It doesn’t mean we should throw in the towel right away. The corporate tax may, as McArdle suggests, be an “insane, unwinnable chess game” pitting lawyers against tax collectors. But for the time being, the game is still worth the candle.

I think Megan McArdle has the better case, that the corporation income tax needs to go away, one way or the other.   I like the idea of doing so via a corporation dividends-paid deduction, combined with an excise tax on dividends for otherwise-exempt stockholders, as a way to get there.

Scott Hodge, More on Inversions and the Effective Tax Rates of Foreign-Owned Firms.   “The administration may want to think twice about taking unilateral action without considering the consequences.”

Clint Stretch, Dreams of Tax Reform (Tax Analysts Blog).  Patsy Cline is invoked.

 

TaxProf, The IRS Scandal, Day 446

 

Greg Kyte, Clarifying Sex and Auditor Independence After the EY and Ventas Affair (Going Concern).  Can an auditor be “independent” while sleeping with a CFO?  Well, auditors are supposed to have hearts of stone…

 

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Tax Roundup, 5/30/15: Antidumping edition. And: permanent bonus depreciation advances.

Friday, May 30th, 2014 by Joe Kristan

20121120-2Iowa Public Radio, Can Employers Dump Workers On Health Exchanges? Yes, For A Price:

The latest tweak from the Internal Revenue Service essentially prohibits employers from giving workers tax-free subsidies to buy policies in the online public marketplaces created by the health law. The New York Times first reported the rule.

But the headline on the story, “I.R.S. Bars Employers From Dumping Workers Into Health Exchanges,” overstates the case. Nothing stops employers from canceling company plans and leaving workers to buy individual policies sold through the exchanges — as long as the companies pay the relevant taxes and penalties, said Christopher Condeluci, a Venable lawyer specializing in benefits and taxes. Those would vary according to a company’s size and circumstances.

The ACA requires employers with more than 50 “full-time equivalent” employees to provide “adequate” coverage.  The IRS says that subsidizing employees to use the ACA exchanges doesn’t work.  This, of course, is the same IRS that arbitrarily and unlawfully just waived the requirement in the first place through 2014, and for those with under 100 employees through 2015.  Some laws are more equal than others.

It’s fascinating that the Administration refers to the practice of sending employees to buy policies on the exchanges as “dumping.”  The exchanges are a centerpiece of Obamacare, touted as an important step in making affordable coverage available for everyone.  Suddenly they are a “dump.”  Obamacare fines individuals for not patronizing that very dump.

 

20130422-2Permanent bonus depreciation advances in House.  Tax Analysts reports  ($link, my emphasis)):

Camp said the extenders the committee considered had been renewed enough times that most of them have been or soon will have been extended for at least 10 years, the budget window period. “If we’ve extended something for 10 years, let’s call it what it is, [and] that’s permanent policy,” he said. “We shouldn’t have to raise taxes other places in the economy to keep current tax law.”

The costliest bill the committee approved was H.R. 4718, introduced by Ways and Means Committee member Patrick J. Tiberi, R-Ohio. That bill would permanently extend bonus depreciation, allowing businesses to immediately deduct 50 percent of qualified purchased property. The bill, passed on a 23-11 vote, would expand the definition of qualified property to include owner-occupied retail stores. It would lift restrictions to allow for more unused corporate alternative minimum tax credits, which businesses can claim in lieu of bonus depreciation, to be used for capital investment.

Expiring provisions are a lie.  Any extension of an “expiring” provision should be counted as permenent under budget rules, as they pretty much are.

Related: Dave Camp’s Great Bonus Depreciation Flip-Flop (Howard Gleckman, TaxVox);  Negative GDP Growth Illustrates the Need for Bonus Depreciation (Alan Cole, Tax Policy Blog)

 

Wind turbineOne of these is not like the other.  The Des Moines Register coverage of last night’s Iowa GOP Senate Primary debate has something I never expected to see in a story about a candidate for statewide office:

Whitaker stands out because he doesn’t support the Renewable Fuel Standard, or any tax breaks for any energy source. “If we don’t believe in mandates for health care, we shouldn’t believe in mandates as it relates to energy,” he said.

All other candidates in both parties genuflect to the Renewables Subsidy idol.  In Iowa, ethanol apostasy is rare; more typical is the GOP governor who is all about picking winners and losers, when the winners are an influential local constituency.

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

 

The IRS needs to regulate these people to stamp out fraud.  “Tammy Dickinson, United States Attorney for the Western District of Missouri, announced today that six former employees of the Internal Revenue Service have pleaded guilty to receiving unemployment benefits while they worked at the agency.” (Department of Justice press release)

Robert D. Flach serves up your Friday Buzz.  “Who would have guessed that I would agree with a group of CPAs?”

TaxProf, The IRS Scandal, Day 386

 

20140516-1

 

 

And now they’ve proved it.  A Minneapolis husband and wife who ran a website called imarriedanidiot.com were convicted last week on federal tax charges.” (TwinCities.com)

Across the road, of course.  Where are all the Chickens?  (Paul Neiffer)

News from the Profession.  This Big 4 Firm Just Ruined Selfies for Everyone (Going Concern)

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Tax Roundup, 5/19/14: The Roth dilemma. And: risks in enlisting the bookkeeper in your tax crimes.

Monday, May 19th, 2014 by Joe Kristan

IRAIs it better to get a tax benefit now and pay taxes later on retirement income, or vice-versa?  Bloomberg econobogger Megan McArdle ponders the question in To Roth, or Not to Roth:

In theory, the calculation is easy: Figure out whether your tax rate is likely to be higher now or in the future. If you’re young, the answer is likely to be “future”; if you’re in your peak earnings years, you’re probably looking at a lower tax rate when you’re retired.

But while the theory is simple, in practice, things are considerably more complicated. Personal finance is less about math than psychology . . . and tax policy, in this case. What will the tax rate on your income be when you retire — higher or lower than your current tax rate?

“Roth” IRAs and 401(k)s offer no current tax reduction, but if the account is left untapped long enough, there is never an income tax on the earnings.  It’s not always a tough choice.  Many young people face a marginal income tax rate of zero.  To the extent a low-earning young taxpayer benefits from a 401(k) plan or saves in an IRA, you might as well go with a Roth version, as there is little or no current benefit anyway.

As you climb the income ladder, it quickly becomes a more difficult decision.  When my company first had a Roth option, I opted in for a year.  Then it occurred to me that I was making a bet on much higher tax rates in the future at much lower income levels.  That seemed like a losing bet (but see this) and I switched back to the traditional 401(k) with current tax savings.

Megan also notes a real, if hard to quantify, problem with betting on future benefits (my emphasis):

We’re running some substantial deficits, and we’ve made some big promises to retirees. Those obligations will have to be paid for somehow, and by “somehow,” I mean “With higher taxes on someone.” What are the chances that you’ll be that someone? Pretty high, if you save a lot for retirement.

That makes a Roth sound like a pretty good bet. But unfortunately, the same logic that suggests higher income taxes in the future also suggests that a hungry-eyed Congress might settle on all those fat tax-free retirement accounts as a way to balance the books. What Congress giveth, Congress can taketh away. Can you really count on that income being tax-free when it’s finally time to collect it?

If you think no politician would be so brazen, just remember:  “If you like your doctor, you will be able to keep your doctor, period. If you like your health care plan, you’ll be able to keep your health care plan, period. No one will take it away, no matter what.

 

20121120-2Good thing the ACA solved the problem of the uninsured.  Report: 230,000 Iowans still lack health care coverage (Des Moines Register).  Good thing we destroyed the health insurance industry and imposed a whole series of punitive and complicated taxes.

 

Russ Fox, Deadlines for Us, But Not for Them (Part 2), “Later this week it will be seven months since my reply was received. Another nine-week hold has been put on collection activities as the IRS admits that there is correspondence waiting to be reviewed. If we go nine more weeks it will be over nine months since I responded.”

Another reason for a sauce-for-the-gander rule, applying the same rules to the IRS that they apply to us.

Robert D. Flach has a similar state-level example from New Jersey in THE DFBs!

We are told (highlight is mine) -
“New Jersey wrongly notified about 2,000 taxpayers that they underpaid their 2013 taxes, but the state won’t notify them about the error unless the taxpayer asks, possibly causing taxpayers to send the state money that wasn’t owed.”

Tar and feathers.

 

20140507-1Peter Reilly, Real Estate Dealer Or Investor – Can’t Switch At Drop Of Hat.  ” One of the more challenging questions in income taxation of real estate transactions is whether a taxpayer is a dealer or an investor.”  Investors get capital gains, dealers don’t.

TaxGrrrl, Tax Extenders Bill Stalled In Senate.  The latest move in the dance to the inevitable last-minute re-extension of the perpetually-expiring tax breaks.

 

Jack Townsend, Booker Variances are More Common in Tax Crimes. Why? And Do They Disproportionately Benefit the Rich?   He discusses variations from federal sentencing guidelines, including the shockingly-light sentence given Beanie Babies tycoon Ty Warner.

TaxProf, The IRS Scandal, Day 375

William McBride, Top 10 things to Know about Investment and Tax Policy.  (Tax Policy Blog).

Number 2: “Investment in the U.S. has yet to fully recover from the recession and remains near a record low.”

Number 10: “Of the ways to change tax policy to improve investment, expensing generally provides the greatest “bang-for-the-buck” because it applies strictly to new investment.”

 

Renu Zaretsky, Tax Mistakes, Collections, and Breaks.  Today’s TaxVox headline roundup covers a proposal to revive the use of private collectors in federal tax collection and “Affordable Care Act subsidy mistakes now could mean huge tax confusion later.”

Annette Nellen asks What’s missing from Camp’s tax reform proposal?  She has suggestions.

 

20120517-1The new Cavalcade of Risk is up at Waterwayfinancialgroup.com.  The venerable roundup of insurance and risk-management posts includes Hank Stern on the possible perils of ride share. There is risk in letting other people use your car, as anyone who has seen Animal House knows, and those risks may not be covered under your car policy.

 

 

News from the Profession.  Another EY Associate Taking a Stab at Reality TV (Going Concern)

Honor among fraudsters.  Owners of a nostalgia-themed restaurant chain in Pennsylvania and New Jersey went up the river on tax charges last year.  Now comes word that the inside accountant who (allegedly) helped them cheat on taxes also (allegedly) helped himself.  From Philly.com:

An indictment unsealed today charges 58-year-old William J. Frio, of Springfield Township, with conspiracy, filing false returns, loan fraud, and aggravated structuring of financial transactions.

Prosecutors say Frio, who has been providing accounting services to Nifty Fifty’s since 1986, conspired with the popular chain’s owners in a scheme that used skimmed cash to help themselves and associates avoid paying taxes.

He also allegedly used his role as Nifty Fifty’s accountant to embezzle hundreds of thousands of dollars from the organization.

Aside from the obvious risk of going to jail, there are other complications that arise when businesses cheat on their taxes.  Unless your business is tiny, you need some help from your accounting staff.  When your bookkeeper is willing to defraud the government, don’t be shocked if he isn’t perfectly honest with you.

 

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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, 3/20/14: An optional mandate? And: baseball-tax convergence!

Thursday, March 20th, 2014 by Joe Kristan


20121120-2
Is the Obamacare individual mandate penalty now optional?  
 A couple of weeks ago the Wall Street Journal editorial page published ObamaCare’s Secret Mandate Exemption; HHS quietly repeals the individual purchase rule for two more years.  That’s a pretty bold statement, especially because the Administration has adamantly rejected calls for a delay in the individual mandate, after having delayed the business mandate twice.  If there is no mandate, Obamacare will likely lead to huge losses for insurers (to be subsidized by taxpayers), who need the forced patronage of the healthy to cover the sick that they can no longer exclude or charge risk-adjusted premiums.  Did they really do that and not tell anyone?

Here’s what WSJ says happened:

But amid the post-rollout political backlash, last week the agency created a new category: Now all you need to do is fill out a form attesting that your plan was cancelled and that you “believe that the plan options available in the [ObamaCare] Marketplace in your area are more expensive than your cancelled health insurance policy” or “you consider other available policies unaffordable.”

This lax standard—no formula or hard test beyond a person’s belief—at least ostensibly requires proof such as an insurer termination notice. But people can also qualify for hardships for the unspecified nonreason that “you experienced another hardship in obtaining health insurance,” which only requires “documentation if possible.” And yet another waiver is available to those who say they are merely unable to afford coverage, regardless of their prior insurance. In a word, these shifting legal benchmarks offer an exemption to everyone who conceivably wants one.

Did this really happen? The IRS has just issued Tax Tip 2014-04, The Individual Shared Responsibility Payment – An Overview.  It says:

You may be exempt from the requirement to maintain qualified coverage if you:

  • Have no affordable coverage options because the minimum amount you must pay for the annual premiums is more than eight percent of your household income,

  • Have a gap in coverage for less than three consecutive months, or

  • Qualify for an exemption for one of several other reasons, including having a hardship that prevents you from obtaining coverage, or belonging to a group explicitly exempt from the requirement.

So what kind of “hardship” would that involve?  The list of eligible hardships at Healthcare.gov provides a long list of qualifying hardships, including “You recently experienced the death of a close family member.”  I’m sure you can come up with one, but if that doesn’t work, try “You experienced another hardship in obtaining health insurance.”  Like, “Healthcare.gov” crashed, for example?  It’s your word against — whose?

So how do you claim “hardship?”  The first way is “You can claim these exemptions when you fill out your 2014 federal tax return, which is due in April 2015.”   

So somebody fills out the form and finds out the government wants hundreds of dollars in penalties for not buying insurance.  I bet they’ll come up with either a loss in the family or a hardship in a hurry.  There will be tens of thousands of these.  The IRS can’t possibly police this.

It appears the Wall Street Journal is on to something.  Considering the high cost of policies on the exchanges, a struggling young single really would incur hardship buying mandated coverage.  And if you feel it’s a hardship, they are practically inviting you to opt out.  It’s hard to see this ending well.

This also poses ethical issues for practitioners, which I’ll address another time.

 

IRS Bars Appraisers from Valuing Facade Easements for Federal Tax Purposes for Five Years (IRS Press Release):

The appraisers prepared reports valuing facade easements donated over several tax years. On behalf of each donating taxpayer, an appraiser completed Part III, Declaration of Appraiser, of Form 8283, Noncash Charitable Contributions, certifying that the appraiser did not fraudulently or falsely overstate the value of such facade easement. In valuing the facade easements, the appraisers applied a flat percentage diminution, generally 15 percent, to the fair market values of the underlying properties prior to the easement’s donation.

There’s a lot of interesting things here.  For example, they never mention the name of the appraiser group.  It would seem like that would be useful information to taxpayers.  Sometimes people who seem to be barred from a line of work apparently neglect to mention that to prospective clients.

It also shows that you can’t count on a too-good-to-be-true result just because a lot of other people have gotten it.  They just might not have been caught yet.  You can be sure the IRS is working its way down the appraisal group’s client list.

 

Principal Park, as seen from my office window.

Principal Park, as seen from my office window.

Baseball-Tax Convergence.  Over at Cubs Fan site Bleacher Nation, Proprietor Brett yesterday posted The Chicago Cubs Financial Story: the Payroll, the Debt, and the Syncing of Baseball and Business Plans.  A lawyer by training, Brett digs deep into the leverage partnership deal where the Ricketts family bought the Cubs in a way structured to defer taxes to the Tribune Company:

In a leveraged partnership, a “seller” partners with a “buyer” to form a new entity, which takes on the assets and distributes cash to the “seller.” In its formation, the partnership takes on a great deal of debt, which is guaranteed by the seller. Doing so allows the “seller” to receive the cash distribution, and defer the taxes associated with the sale of the asset. 

At least that’s the idea. Brett notes that the IRS doesn’t have to agree, and that they didn’t when the Trib tried a similar trick when it sold Newsday.  After tax season, and after I wander down to Principal Park for the noon I-Cubs game on April 16, I’ll try to explain this.

 

Tony Nitti, What Are The Penalties For Failing To File Your Tax Return On Time? .  A lot more than failing to pay.  It’s worth getting that extension in, even if you can’t pay right now.

Kay Bell, Missing your 2010 tax refund? Claim deadline is 4-15-2014

William Perez, Tax Reform Act of 2014, Part 1, Tax Rates

Russ Fox, IRS Releases New Forms W-8BEN and W-8ECI.  Important if you find you are doing business with an offshore payee.

Iowa Public Radio, State Tax Laws ‘A Mess’ For Same-Sex Couples And Employers.  That’s where specialists like Jason Dinesen can really help.

TaxProf, The IRS Scandal, Day 315

Bloomberg, Buffett Cuts Tax Bill, Tells Others Not to Complain.  He’s tired of hearing you complain about subsidizing him, peasant. (Via TaxProf)

Chris Sanchirico, As American as Apple Inc. (TaxVox).  A complaint that Apple doesn’t voluntarily increase its own taxes.

ThinkAdvisor offers 8 Tax Evaders Who Should’ve Known Better — public servants biting the hand that feeds them.

 

Scott Drenkard, Richard Borean, Cigarette Smuggling Across the States (Tax Policy Blog) “Smuggled cigarettes make up substantial portions of cigarette consumption in many states, and greater than 25 percent of consumption in twelve states.”

 

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Almost one in five Iowa smokes are smuggled.

 

Cara Griffith, City of Tacoma Considers Contingent-Fee Auditors (Tax Analysts Bl0g) It’s a bad idea, but it’s hard to see where it’s any different from red-light cameras, where the camera companies collect a bounty of their own.

TaxGrrrl, 10 Tips For Making The Most Of March Madness  My strategy is to ignore it.

 

The Critical Question. Can the IRS Tell a Good Story? (Susan Morse, Procedurally Taxing)

 

 

20130419-1You lied to the IRS all these years, but you’re telling me the truth?  Sometimes business owners get away with tax evasion for years.  Then they try to sell their business.

A Henderson, Nevada auto body shop owner decided it was time to cash out.  KTNV reports:

Robert E. D’Errico, 64, was sentenced Wednesday morning to six-months in federal prison for tax evasion.

According to the plea agreement, D’Errico owned Sunset Collision Center in Henderson. In 2009, he began listing the business for sale on small business listing sites and with small business brokers. D’Errico stated in his listings that, “Seller states that his discretionary take-home cash is $150,000 per year and has receipts to prove it.”

When contacted by a potential buyer, D’Errico re-iterated, “Seller’s discretionary cash take home beyond stated net income is approx. $150,000 avg. per year and is verifiable with receipts.”

During a meeting with a potential buyer, D’Errico stated he stopped accepting checks and was taking cash deductibles from customers, as well as selling excess inventory for cash. 

Either the “potential buyer” ratted him out, or he was an IRS secret shopper.  The IRS got a search warrant, found the real ledgers, and things got ugly.  

Tax returns are sometimes the only financial statements a small business has.  Buyers naturally want to see them, and it can be awkward trying to convince a buyer that they aren’t the “real” financial statements.  But it can get a lot more awkward than that.

 

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Tax Roundup, 3/3/2014: For whom does the AMT toll this year? And Lois Lerner: will she or won’t she?

Monday, March 3rd, 2014 by Joe Kristan

Laura Saunders, Beware the Stealth Tax; How to minimize the damage of the alternative minimum tax:

…the AMT now applies to eight times as many taxpayers as it did 20 years ago, and common AMT “triggers” often are less esoteric than in the past. “They can be as simple as having three or more children, taking a large capital gain, or—especially—deducting state and local taxes,” says Dave Kautter, managing director at American University’s Kogod Tax Center, who studies the AMT.

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That’s pretty much what I see in our practice.  AMT is rare for taxpayers with income under $100,000, and usually occurs in large families.  It can be impossible to avoid AMT in the $200,000 – $500,000 income range, especially in a state with an income tax.  Above $500,000, it typically involves large capital gains.  Both AMT and regular tax have the same 20% tax on capital gains, and the AMT doesn’t let you deduct the related state income taxes, so the AMT will kick in.

 

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

Ann Althouse,  Who put “acute political pressure” on Lois Lerner “to crack down on conservative-leaning organizations,” and why did Lerner need a “plan” to avoid “a per se political project”?:

I think it must mean that it was a political project and they were hard at work figuring out how to make it not look like what she knew it was. That’s a smoking gun.

Phony scandal.  Nothing to see here…

TaxProf, The IRS Scandal, Day 298

WSJ, No Change: Former IRS Official to Take the Fifth.  “A lawyer for former Internal Revenue Service official Lois Lerner said Sunday that she will decline to testify about IRS targeting of grass-roots conservative groups, contradicting a top GOP lawmaker.”  Presumably because there’s not a smidgen of wrongdoing.

 

TaxProf, Mulligan: ObamaCare’s Multiple Taxes Are Shackling the Job Market.  The TaxProf quotes from the University of Chicago’s Casey Mulligan: 

Once we consider that the new law has an employer penalty, too, the labor market will be receiving three blows from the new law: the implicit employment tax, the employer penalty and the implicit income tax. Regardless of how few economists acknowledge the new employment tax, it should be no surprise when the labor market cannot grow under such conditions.20140106-1

It’s funny how the same people can argue for high tobacco taxes to curb smoking insist that employment taxes won’t curb hiring.

 

Jason Dinesen,  Accounting for the 0.9% Medicare Surtax on Iowa Tax Returns

Kay Bell, Delayed Tax Refunds, TC 570 And An Important Distinction .  Don’t jump to conclusions about your delayed refunds.

William Perez, Resources for Filing Corporate Taxes for 2013.  “March 17th, 2014, is the due date for filing corporate tax returns.”

 Kay Bell, 5 ways to maximize tax-deductible business entertainment

Russ Fox, Former Chairman of Woodland Park, NJ Democratic Committee Bribes His Way to ClubFed

Jack Townsend, IRS CI Is Looking at Renunciations of Citizenship Just in Case .  Looking to take one last shot at the fleeing jaywalkers.

 

Jim Maule, Find Some money, Pay Some Tax:20131017-2

Every now and then we read of someone finding something valuable. This time, it’s a California couple who found a stash of gold coins on their property. According to this story, the couple found eight cans containing 1,400 coins, valued at approximately $10 million.

The joy of the moment is tempered, of course, by the existence of income taxes, both federal and state. Must the couple pay tax? Yes. The value of the coins is included in the couple’s gross income. It is ordinary income. The law is settled. 

Easy come, easy go…

 

Martin Sullivan, The Beginning of the End of Tax Reform (Tax Analysts Blog):

Enactment of the research credit in 1981 was the antithesis of simplification. It has a highly complex incremental structure and, even more problematic, it assigns tax directors and IRS agents the impossible task of distinguishing research from ordinary business expense. The Camp draft retains the credit and eliminates expensing. The opposite approach would be more sensible.

The research credit study industry is full of former Congressional staffers who like things the way they are.

William McBride, Scott Hodge, Top Line Assessment of Camp’s Tax Reform: Increases Progressivity and Taxes on Business and Investment (Tax Policy Blog):

In general, Camp simplifies and lowers tax rates for many taxpayers and businesses, but does so through a net tax increase on businesses and taxpayers earning over $200,000. As a result, the plan makes the individual tax code even more progressive, it increases the amount of redistribution from high-income taxpayers to other taxpayers, and it worsens the current bias against saving and investment—all of which will be a drag on long-run economic growth.

It looks more and more like the Camp plan was a false move.

William Gale, Dave Camp’s pitch to overhaul U.S. taxes: An impossible dream? (TaxVox)

 

It’s getting real in New Jersey, according to the London Daily Mail online:   ‘Ready to plead guilty': Teresa and Joe Giudice set to reach plea deal on 41 charges of fraud and tax evasion.  If they were cheating on taxes, becoming national celebrities could have been a bad move.

 

 

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Tax Roundup, 2/21/14: Last-day out edition. And: another Iowa top-ten finish!

Friday, February 21st, 2014 by Joe Kristan

Today’s the last day of this season’s only extended road trip, so here are a few items to travel with.

Another top-ten finish for Iowa.  In “How High are Capital Gains Tax Rates in Your State?” Kyle Pomerleau and Richard Borean at Tax Policy Blog rank state burdens on capital gains.  Iowa’s 29.6% combined federal and state capital gain rate is ninth (California’s 33% is the worst).

20140221-1

Like so many things about Iowa taxes, it’s complicated.  Some taxpayers — those who meet both a ten-year holding period and ten-year material participation test — can sell some assets (but not stock or partnership interests) and have a zero Iowa capital gain rate.  Those who aren’t so blessed by the legislature get socked.

 

TaxGrrrl is back after the Forbes hack attack with IRS Reveals Dirty Dozen Scams For 2014.  Identity theft tops the list.  Take common-sense steps to protect yourself.  Never send your Social Security Number or similar tax information in an unencrypted email, for example.  If you need to get documents with confidential information to your preparer electronically, use a secure file transfer site.

Cara Griffith ponders What Triggers a Sales and Use Tax Audit? at Tax Analysts Blog.

Christopher Bergin says Progressivity Does Not Equal Equality (Tax Analysts Blog).  “I still support a progressive tax system, just not as a method of addressing income inequality.”

There’s no evidence that an income tax system with rates short of ridiculous can affect “equality,” however you want to measure it.  In fact, the fretted-over rise in inequality has coincided with a shift in taxes to “the rich.”

Top 1 pays more than bottom 90

If you seriously tried to use the tax system to level income differences, the best you would get would be achievement of inequality by means of mass poverty.

 

Howard Gleckman, How 19 Million Uninsured Tax Filers Could Get ACA Coverage.  (TaxVox).  He pushes the awful idea of dumping responsibility for enrolling people in the misbegotten Obamacare system on tax preparers.  It’s as bad an idea as giving responsibility for administering the healthcare  system to the IRS.  Preparers have more than enough complexity and difficulty to deal with as it is.

TaxProf, The IRS Scandal, Day 288

Tony Nitti, Kevin Durant Calls Foul On Tax Preparer Over Improper Deductions.  Funny, he didn’t seem to mind them when he signed the returns.  It never pays for preparers to curry favor with clients by using bogus deductions.  The same client who happily cashes the big refund check will throw you to the wolves in a heartbeat.

Kay Bell, Offshore account owners more likely to confess Swiss holdings

 

20140221-2Tax Justice Blog, Bipartisan Rush to Win Gold Medal in Tax Gimmickry: “A lot of gimmicky bills are proposed each Congressional session, but few are quite as ridiculous as the proposal by a bipartisan group of lawmakers in the House and Senate to create a new federal income tax break for the cash bonuses received by U.S. Olympic medalists.”

I have to disagree.  Many proposals are every bit as ridiculous, unfortunately, including a lot that have been enacted.

 

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Tax Roundup, 2/11/14: Employer mandate “shared responsibility” delayed for some. And: fresh scam!

Tuesday, February 11th, 2014 by Joe Kristan

20121120-2It’s such a disaster, we’re only going to force some employers to do it right now. The IRS has issued final regulations on the employer health insurance mandate that delay their impact on companies with 50-100 employees until 2016.  The “shared responsibility provisions” — such a creepy name — will still apply to employers with 100 “full-time equivalent” employees in 2015.  The Wall Street Journal reports:

 Under the original 2010 health law, employers with the equivalent of at least 50 full-time workers had to offer coverage or pay a penalty starting at $2,000 a worker beginning in 2014. Last year, the administration delayed the requirement for the first time by moving it to 2015.

The new rules for companies with 50 to 99 workers would cover about 2% of all U.S. businesses, which include 7% of workers, or 7.9 million people, according to 2011 Census figures compiled by the Small Business Administration. The rules for companies with 100 or more workers affect another 2% of businesses, which employ more than 74 million people.

You’ll look in vain in either Sec. 4980H, the “shared responsibility” tax code section, or Sec. 1513 of the Affordable Care Act, which enacted 4980H, for anything that says the provision can take effect later than 2014.  Once again the administration is making it up as it goes in a tacit admission that Obamacare is a half-baked mess.  I hope somebody with 100 employees sues the IRS on equal-protection grounds to enjoin this politically-motivated selective enforcement.   To me it’s another clue that the individual mandate will also be delayed, and ultimately abandoned.

Paul Neiffer, Some ACA Relief for Employers with 50 to 99 Employees

Jason Dinesen, The Affordable Care Act and Small Businesses   

Martin Sullivan, Forget Obamacare for a Minute. Here’s Some Good News About Health Policy (Tax Analysts Blog).  

 

Via Wikipedia

Via Wikipedia

New filing season, same old scams.  Our area IRS Taxpayer Liason says this email is circulating:

Dear Applicant,

An Income Tax repayment is a refund of tax that you’ve overpaid.
Internal Revenue Service  ( IRS ) has received new information about your taxable
income you’ve overpaid too much tax through your job or pension in previous years.

There was a mistake with your tax, which an error occurred on your tax return,
and therefore your income reduced. Your employer also used the wrong tax code.

You are eligible to receive a refund of $2670.48 USD as your recent tax refund.
IRS will send you a repayment. You’ll get the repayment either by cheque in the post or by bank transfer.

Please click here to get your tax refund on your Visa or Mastercard now.

Note : Your refund can be delayed for a variety of reasons. For example submitting
invalid records or applying after the deadline.

Best Wishes,

IRS Tax Refund Service Team
Internal Revenue Service.

Of course it is a scam.  Some obvious clues: a real IRS notice doesn’t have to tell you that it’s dealing in “USD.”  We say “checks” in the US; you get “cheques” in Canada, the UK, or other old Commonwealth countries.  IRS doesn’t do refunds on credit cards.  And, of course, the most important clue:  the IRS will never initiate contact you with an e-mail or phone call.  If an email says it’s from the IRS, it’s not.

 

TaxGrrrl, Understanding Your Tax Forms: The W-2   

 

haroldHooray for Hollywood!  Movie Producer Peter Hoffman Charged With Film Tax Credit Fraud.  It involves Louisiana, which continues its co-dependent relationship with Hollywood with film tax subsidies.  Iowa, sadder but wiser, now prefers producer room and board subsidies to Film Tax Credits.

 

Howard Gleckman, Incoming Senate Finance Chair Wyden Outlines His Tax Agenda (TaxVox):

Speaking in Los Angeles to a conference sponsored jointly by the USC Gould School of Law and the Tax Policy Center, Wyden framed his tax agenda around several key issues:

Narrow the gap between taxation of investment income and ordinary income.

Significantly increase the standard deduction.

Simplify and enhance the refundable Child Tax Credit and Earned Income Tax Credit.

Revise savings incentives by creating a new investment account for all Americans at birth, shift savings subsidies from high-income taxpayers to low- and moderate-income households, and consolidate and simplify the current tangle of existing tax-preferred savings incentives.

Enhance job training.

Restore Build America Bonds—a short-lived idea that partially replaced tax-exempt state and local bonds with direct federal subsidies. He’d also seek ways to encourage business to funnel overseas earnings into domestic infrastructure investment.

It’s a disappointing agenda from somebody considered a thoughtful center-left voice on tax policy.   Any tax on investment income is best understood as a double-tax, and I don’t think by “narrowing the gap” he means lowering ordinary inocme rates.  His second, third and fourth points are fine, but the “Enhance job training” and “Build America Bond” proposals are just political pinatas to be broken open by insiders.  If you want to see what jobs training dollars really accomplish, I refer you to Iowa’s own CIETC.

 

TaxProf, The IRS Scandal, Day 278

checkboxJeremy Scott, Check the Box for Tax Avoidance (Tax Analysts Blog).  

The check-the-box rules allowed multinationals to create entities that were treated one way in a foreign jurisdiction and another by the United States. These entities, so-called hybrids, are at the core of companies like Apple’s tax strategies, and they have been used to bring about obscenely low effective tax rates (2.3 percent on $700 billion in foreign earnings, according to the Obama administration).

I think any corporate above zero is obscenely high.

 

Kyle Pomerleau, Proposal to Exempt Olympians’ Prize Money from Taxation: Good Politics, Wrong Solution (Tax Policy Blog)

Kay Bell, IRS takes a bite out of U.S. Olympic medalists’ winnings

 

Keith Fogg, Holding People Hostage for the Payment of Tax – Writ Ne Exeat Republica (Procedurally Taxing). No, he’s not talking about tax season.

 

News from the Profession: PwC Will Probably Be the First Accounting Firm to Replace Interns With Robots.  (Going Concern).  Makes sense, as they were the first to do so with partners.

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Tax Roundup, 2/5/14: Tax Credits do it all! And: advice from a champion.

Wednesday, February 5th, 2014 by Joe Kristan
The income tax, the Ultimate Swiss Army Knife of public policy.  Flickr Image courtesy redjar under Creative Commons license.

The income tax, the Ultimate Swiss Army Knife of public policy. Flickr Image courtesy redjar under Creative Commons license.

Tax Credits! Is there nothing they can’t do?  Bill offering tax credits to rehab abandoned public buildings advances (Jason Noble, Des Moines Register):

House Study Bill 540 adds abandoned public buildings to the list of properties eligible for tax breaks under the state’s Redevelopment Tax Credits program, meaning businesses or nonprofits could obtain state aid for such projects as they currently can on renovations of industrial or commercial properties.

It’s an idea that Gov. Terry Branstad highlighted in his Condition of the State Address last month, and appears to have bipartisan support.

This is a back-door appropriation to help out school districts and local governments, but running it through tax return hides it from those pesky taxpayers who foot the bill.  As with Congress, the Iowa General Assembly sees the tax law as the Swiss Army Knife of public policy.

 

20121120-2Arnold Kling exposes the vastness of the Right Wing Conspiracy:

The Congressional Budget Office, a Koch-funded organization known to be affiliated with the Tea Party, writes,

CBO estimates that the ACA will reduce the total number of hours worked, on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor—given the new taxes and other incentives they will face and the financial benefits some will receive.

A conspiracy so vast…

 

James Schneider, guest-posting at Econlog, discusses why we pay our taxes in  The Sucker Tax:

Imagine a state of anarchy (a lack of government not a house full of boys). An evil genius announces that he will impose a sucker tax. Everyone will be taxed ten dollars, and the proceeds will be redistributed back to all the citizens in equal shares without reference to who paid the tax. In a certain sense, this tax maximizes unfairness. It serves no other purpose than to punish people in direct proportion to how much of the tax they paid. To make tax compliers feel even more ridiculous, the evil genius announces that he will make no effort to punish “tax cheats.” A fair outcome of the game requires that there be no suckers. This will occur if everyone evades the tax. However, it will also occur if everyone pays the tax. Under this scenario, you probably wouldn’t pay the tax (even if you believed in fairness) because you would assume that no one else was going to pay the tax.

Now imagine that the evil genius announces that unless everyone pays the tax one person will be punished.

Read the whole thing.  I especially like this: “Compliance does not mean consent.”

 

20121220-3TaxGrrrl, Baby, It’s Cold Outside: Surviving The Winter With Some Tax Help From Uncle Sam

Paul Neiffer considers One Possible Section 179 Strategy. A reader asks Paul, “Should I wait to buy section 179 property until the date 179 property is raised from $25,000 to whatever?”  He has a way for farmers to plan around the uncertainty.

William Perez, Filing Form 1040A May Help Parents Qualify for the Simplified Needs Test.  For college financial aid.

Jason Dinesen asks, Why Doesn’t the IRS Push the EA Designation?:

The IRS already oversees the EA program. There’s no new infrastructure to put in place. No new exams to create. The infrastructure and exams already exist.

Yet throughout the IRS’s ill-fated attempts at creating the “Registered Tax Return Preparer” designation, the IRS rarely mentioned the EA program, except as a side note of “CPAs, EAs and attorneys are exempt from the RTRP testing.”

I think it’s because it would be inconvenient to their efforts to regulate all preparers.

 

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

Peter ReillyThe Dog That Did Not Bark – IRS Issues Adverse 501(c)(4) Rulings To Deafening Silence:

An interesting question about the whole scandal narrative is how it would look if it turned out that many of the groups that the IRS “targeted”  were in fact inappropriately claiming 501(c)(4) status.  Tea Party Patriots Inc, for example, spends a lot of energy talking about how all those intrusive questions were harassment, but what if it turns that, in fact, all those phone calls that TPP Inc made telling people that November 2012 was the last chance to stop Obamacare from turning the country into a cradle to grave welfare state could be viewed as political? 

I think Peter is missing the point.  The issue isn’t whether every right-wing group qualified under the standards historically used for 501(c)(4) outfits.  It’s whether the rules were selectively enforced against right-side applicants —  as seems to be the case.   After all, it wouldn’t be OK to examine 1040s of only Republicans even if it turned out some of them were tax cheats.

 

TaxProf, The IRS Scandal, Day 272

 

David Brunori, Casino Taxes for Horses or Children? (Tax Analysts Blog):

Horse racing has been a dying sport since Nathan Detroit bet on a horse named Paul Revere in Guys and Dolls. In Pennsylvania, the schools are broke. So naturally, when governments need money, they turn to a moribund pastime to pay the bills. 

For the children!

 

William McBride, New CBO Projections Understate the Average Corporate Tax Rate. “Particularly, the CBO is using as their corporate tax base measure domestic economic profits from the BEA, which includes both C and S corporations, even though S corporations are pass-through entities not subject to the corporate tax.”  Well, that’s just nuts.

Tax Justice Blog, Gas Tax Remains High on Many States’ Agendas for 2014

 

Joseph Thorndike, Debt Limit Debates Are Good for Theater, Not For Policy Reform. (Tax Analysts Blog)

Jack Townsesnd, TRAC Posts Statistics on Criminal Tax Enforcement Related to IRS Referrals   “[A] surge in IRS criminal investigations referred under Obama has fueled an increase in the number of cases prosecuted.”

 

Answering the Critical Question: What Kids Peeing in the Pool Can Teach Us About Tax Compliance (Leslie Book, Procedurally Taxing)

News from the Profession: McGladrey Interns Are Busy Learning Their Colleagues Are Boring, How to Use an Ice Cream Truck (Going Concern)

 

Nice Work, Champ.  It’s funny how hard it can be for some people to heed their own good advice.  Take this North Carolina man:

Prosecutors said Larry Hill, who coined himself “the people’s champ” for his efforts to keep local children out of trouble, didn’t live by his own message and that his case represented “disturbing hypocrisy.”

In a YouTube clip posted in November 2012, Hill says, “I want all my young people to think before you act. Trouble is too easy to get into, and once you get into trouble, you’ll be all by yourself.”

Federal Judge Earl Britt sentenced Hill to 100 months in prison for conspiracy to defraud the U.S. government and 18 months for filing false tax returns.

If it’s any comfort, Mr. Hill will have plenty of company where he’s going.  But he will have to get used to a more spartan existence:

The judge agreed to the lower sentence of 100 months but said Hill deserved the “most severe punishment to reflect the seriousness of the offense,” pointing out that Hill used much of the money to buy himself expensive jewelry and cars, including a Maserati. The judge also noted that Hill was on supervised release from an insurance fraud prison term when he committed the tax fraud.

That doesn’t make his advice any less sound:

He should follow it sometime.  Russ Fox has more on Mr. Hill.

 

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Tax Roundup, 1/22/14: Let’s pay it for Hollywood! And: choosing a preparer.

Wednesday, January 22nd, 2014 by Joe Kristan

haroldTaking your money and giving it to Hollywood.  Oscar Nominees Cash In On State Tax Subsidies (Howard Gleckman, TaxVox):

Each of the nine movies nominated for this year’s Oscar for best film may already have taken home a pile of tax subsidies. Seven brought back state goodies from the U.S. and two got cash for their work in the U.K.

And, according to data collected by the Manhattan Institute, the winner is….Wolf of Wall Street. The $100 million black comedy about (irony alert) over-the-top greed among sleazy stockbrokers got a 30 percent tax credit for making the movie in New York State.

The Empire State isn’t even the most generous when it comes to doling out tax incentives to filmmakers. In Louisiana, moviemakers not only get a 30 percent credit against overall in-state production costs but also an additional 5 percent payroll credit. Even better, filmmakers with no state tax liability can monetize the credits by selling them to firms that do owe Louisiana tax or even selling them back to the state at 85 percent of their value.

Iowa used to do this, until its film tax credit program collapsed in scandal and disgrace following revelations that filmmakers were charging fancy cars and personal items to Iowa taxpayers under the guise of “economic development.   Further revelations showed that millions of dollars of pretend expenses were used to claim the credit, taking advantage of credulous administration and almost non-existent oversight.

More from Howard Gleckman:

No doubt these credits are good for filmmakers. And I’m sure residents get a kick out of seeing Leonardo DiCaprio shooting a scene in their neighborhood (assuming they are not steamed over the related traffic jam). But is there an economic payoff in return for these substantial lost tax revenues as supporters claim?

Most studies conclude there is not.

It’s amazing that politicians think Hollywood deserves their taxpayers dollars.  Fortunately, Iowa film subsidies now are limited to housing and meal expenses for filmmakers.

 

Jason Dinesen, Deducting Miles Driven for Charity.  “Taxpayers can take a deduction of 14 cents/mile for mileage driven in giving services to a charitable organization, or taxpayers can take a deduction for the actual cost of gas and oil associated with giving services to a charitable organization.”

Tony Nitti, Tax Geek Tuesday: The Sneaky Tax Consequences of Real Estate Repossessions 

 

Choosing a preparer?

Kay Bell, Time to pick the proper tax pro.  She gets one thing wrong about the IRS:  “For years, the agency has been trying to set up a system under which it register and test tax preparers to help ensure that they meet a minimum competency level.”

No, the agency simply wants to expand its control over preparers and help powerful friends in the big tax prep franchises.  The “minimum competency level” stuff is a weak pretext.

Robert D. Flach, IT’S THAT TIME OF YEAR AGAIN – CHOOSING A TAX PREPARER:

Contrary to the popular “urban tax myth”, unfortunately perpetuated by uninformed journalists and bloggers, just because a person has the initials “CPA” after his/her name does not mean that he/she knows his arse from a hole in the ground when it comes to preparing 1040s.  

True.  But a lot of the best prepaers are CPAs.  Not everybody needs a CPA.  Many folks just need somebody who knows a little more than they do to help them put the W-2 income in the right place.  But if you are doing a complex business return — even on a 1040 — a CPA may be your best bet.

That’s not to say only CPAs are competent preparers.  Enrolled Agents can be very good, and there are many very competent unregulated preparers, like Robert.  I think the competence curve between CPAs and unenrolled preparers would look something like this:

competence curve

The more complex your return, the more likely it is that you will want to bring in an Enrolled Agent or a CPA, but if you already have a strong unregulated preparer who is taking care of your tax needs, you’d be foolish to switch.

 

Paul Neiffer, Average is Important for 2013 Tax Filing.  Farm income averaging, that is.  Another example of a provision that would result in frivolous return penalties for anyone but farmers.

Fairmark.com: Share Identification Under Attack

 

20121120-2Tea Party: Resolved: Obamacare Is Now Beyond Rescue.  Oh, wait, that wasn’t the Tea Party.   It was a debate audience on New York’s Upper West Side.  

TaxProf, The IRS Scandal, Day 258

William Perez, The Number of Sole Proprietors has been Rising for 30 Years

Tax Justice Blog: CTJ Submits Comments on the Finance Committee Chairman Baucus’ International Tax Reform Proposal.  They have very different, and largely opposite, concerns from the Tax Foundation.

Jack Townsend, Tax Notes Article on IRS 2013 Victories in Offshore Evasion

 

gatsoNext: automated pedestrian jaywalking camera fines, for our own safety:  NYC Cops Allegedly Beat Up Jaywalking Elderly Man, Refused to Tell Son Which Hospital He Was In (Ed Krayewski, Reason.com)

But I thought it was about traffic safety, not money…  Council members: Traffic camera revenue helped keep property taxes down, pay for public safety.

 

The importance of philanthropy: Warren Buffett Offers $1 Billion For Perfect March Madness Bracket  (TaxGrrrl)

 

The Critical Question: A Meat Tax? Seriously?  (Joseph Thorndike, Tax Analysts Blog).

News From the Profession: Guy Who Couldn’t Hack Two Years in Public Accounting Needs Validation He Isn’t a Loser (Going Concern)

It’s Academic!  How Not to Use Your Faculty Laptop (TaxProf)

 

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Tax Roundup, 1/16/14: Bill would widen Iowa 10-year gain break. And: Obamacare tax credits survive challenge.

Thursday, January 16th, 2014 by Joe Kristan


20130117-1
Iowa Capital Gains Exclusion for stock sales?  
The first income tax bill in the hopper in this session of the Iowa General Assembly is HSB 502, which would expand the current tax break for extra-long term capital gains to stock and partnership interest sales.

Iowa currently allows taxpayers to exclude some capital gains from income when the taxpayer meets each of two 10-year requirements:

– They have to have held the property for at least ten years, and

– They have to have materially participated in the business for at least ten years. Material participation is determined under the federal passive activity rules.

If those requirements are met, a taxpayer can exclude gain on the sale of “substantially all of the assets” of a business, or on the sale of real estate used in the business.  But unless the gain is recognized in a corporate liquidation following an asset sale, stock gains aren’t eligible for the break.  Gains on the sale of partnership interests are never excluded

HSB 502 would extend the break to a sales of “substantially all of the taxpayer’s stock or equity interest in the business, whether the business is held as a sole proprietorship, corporation, partnership, joint venture, trust, limited liability company, or another business entity.”

The provision makes sense to the extent that such a break shouldn’t be dependent on the way you organize your business.  What doesn’t make sense is the way the exclusion is limited by the ten-year material participation requirement.  There is a strong economic case to not tax capital gains at all, but I can’t think of any reason that case is affected by material participation.

The biggest argument against the exclusion is that it is a carve-out of the income tax base for a very limited class of taxpayers that adds to the complexity of the Iowa income tax.  I would favor a broader, or even complete, capital gain exclusion.  I would also be OK with taxing all capital gains in exchange for repeal of the corporation income tax and reduction of the individual rate to under 4% as part of the Quick and Dirty Iowa Tax Reform Plan.

The bill has been referred to a subcommittee of the Iowa House Ways and Means Committee.  While I expect no major tax legislation to move this year, limited provisions like this could advance.

Related: Iowa Capital Gain Deduction: an illustration

 

20121120-2TaxGrrrl, Another Legal Threat To Obamacare Shot Down In Federal Court:

When the Regulations were published, those refundable tax credits which were intended for participants in state exchanges were extended to those individuals under the federal exchanges. The plaintiffs filed suit, arguing that making the credits available to those on the federal exchanges was beyond the scope of the law. The plaintiffs sought, through the lawsuit, to prohibit the IRS from enforcing the Regulations as written.

The D.C. U.S. District Court upheld the regulations yesterday on summary judgement.  An appeal to the D.C. Circuit is likely.

 

 David Henderson quotes economist John Cochrane:

Our current tax code is a chaotic mess and an invitation to cronyism, lobbying, and special breaks. The right thing is to scrap it. Taxes should raise money for the government in the least distortionary way possible. Don’t try to mix the tax code with income transfers or support for alternative energy, farmers, mortgages, and the housing industry, and so on. Like roughly every other economist, I support a two-page tax code, something like a consumption tax. Do government transfers, subsidies, and redistribution in a politically accountable and economically efficient way, through on-budget spending.

But that isn’t going to happen anytime soon.

So wise, and, sadly, so true.  Mr. Cochran has a lot of wise things to say; read the whole thing.  Lynne Kiesling passes on more Cochrane wisdom in Cochrane on ACA’s unravelling: parallels to electricity.

 

Robert D. Flach, TWO RECENT TAX POSTS WORTH DISCUSSING.  “The idiots in Congress must understand that the purpose of the Tax Code is to raise the money needed to run the government – PERIOD.”

Trish McIntire talks about Choosing A Tax Pro.  “Just because your previous preparer did something a certain way doesn’t mean that another preparer will run their office the same.”

William Perez, Free Tax Preparation Services

 

HarvestHarvest
harvest
Paul Neiffer, Grain Gifts – How Are They Taxed?:

Since there is no cost allocated to the grain that is gifted, there is no charitable deduction to report.  Rather, since you are reducing your schedule F income by the amount of grain given, this essentially results in your charitable deduction.  You are not allowed to deduct both on schedule F and on schedule A.

Only one deduction counts.

 

Jason Dinesen, Got 1099s to Issue?:

A 1099 may need to be issued if:

  1. You paid $600 or more in total to any 1 person during the year for services provided to your business. This also applies to payments made to businesses organized as partnerships. However, a 1099 does NOT need issued for payments made to a corporation. Payments made to an LLC may or may not require a 1099, depending on how the LLC is taxed.

  2. You paid $600 or more in total to a law firm during the year, regardless of how the law firm is organized. In other words, even if the law firm is a corporation, you would need to issue it a 1099 if you paid the firm $600 or more.

  3. You paid $600 or more in rental or lease payments to an unincorporated person or partnership during the year (similar rules as listed under item #1).

And the deadline is looming.

 

Jack Townsend, Switzerland’s Quixotic Efforts to Close the Stable Door After the Horse Has Left the Barn.  Consider Swiss bank secrecy most sincerely dead.

 

20130419-1Kay Bell, IRS’ fiscal year 2014 budget takes a big hit

TaxProf, The IRS Scandal, Day 252

TaxTrials, Wesley Snipes, A Lesson in Listening to Bad Advice

Keith Fogg, Forum Shopping in the Tax Court – Small Tax Case Procedure and the Rand Decision. (Procedurally Taxing).  Issues when a tax deficiency results solely from refundable tax credits.

Tax Justice Blog, What to Watch for in 2014 State Tax Policy

Scott Drenkard, Open Sky Policy Institute: “Illinois is not an Example for Other States”.  Not exactly going out on a limb, but worth noting.

Roberton Williams, Tax Complications for Same-Sex Couples in Utah (and Elsewhere) (TaxVox)

Cara Griffith, Is Connecticut Ignoring Supreme Court Precedent? (Tax Analysts Blog).  Who do they think they are anyway — Iowa?

 

News from the Profession: How To Not Tick Off Your Public Accounting Colleagues Without Being a Clown About It (Going Concern)

 

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Tax Roundup, 1/6/2014: Start this year’s year-end planning now! And lots more.

Monday, January 6th, 2014 by Joe Kristan

20140106-1I’m back.  It was good to take a little time off after year-end planning season and before the 2013 return season starts.  But now that it’s 12 below with howling winds, I might as well be at the office.

It was sort of a busman’s holiday, though, as I got an early start on my 2014 year-end tax planning.   While December year-end planning is important, it’s asking a lot of one month to do the work of all 12.  You can do some important tax planning in January that will pay off all year long.  For example:

– You can fund your 2014 Individual Retirement Account right now.  If you are married, you can also fund your spousal IRA.  The maximum contribution is $5,500, or $6,500 if you will reach at least age 50 by December 31, 2014.

– You can fund your 2014 Health Savings Account today too.  The HSA limit for taxpayers with a high-deductible plan and family coverage is $6,550 this year; for a single plan, the limit is $3,300.  You need to have a qualifying high-deductible insurance policy, but if you do, you can deduct your contribution and withdraw funds for tax-deductible expenses tax-free.  If you leave the funds in, they accumulate tax-free and can be withdrawn tax-free later for qualifying health costs.  If you stay too healthy to use the funds on medical care, withdrawals are taxed much like IRA withdrawals.

Using spousal IRAs and an HSA, a 50-year old with family coverage can tuck away a combined $19,550 right now and have it earn interest or dividends tax free right away — 15 1/2 months sooner than if you wait until April 15, 2015, the last day you can make these contributions.  And by saving it now, you won’t be tempted to spend it later in the year.

A few other things that you can do right away to get some of your 2014 year-end planning out of the way:

– If you care about estate planning, nothing keeps you from making the $14,000 maximum 2014 exempt gift to your preferred family donees right now.

– Make sure you’ve maxed out your 2014 401(k) deferral with your HR people — or at the very least, be sure you are deferring as much as you can get your employer to match.

– If you are an Iowan with kids, you can make a 2014 College Savings Iowa contribution that you can deduct on your 2014 Iowa 1040.  The maximum deductible contribution is $3,098 per donor, per beneficiary, so a married couple with two kids can put away $12,392 right now.  The Iowa tax benefit works like an 8.98% bonus to you for putting money in your college savings pocket.

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

TaxProf, The IRS Scandal, Day 242: Lois Lerner Is 2013 Tax Person of the Year.  The TaxProf provides access to a Tax Analysts piece that says:

     While many of the Service’s problems were not necessarily its own fault, the exempt organization scandal was an almost entirely self-inflicted wound. No one personifies that scandal more than Lois Lerner.

Lerner ignited a political and media firestorm when she confessed in May that the exempt organizations unit of the IRS Tax-Exempt and Government Entities Division inappropriately handled many Tea Party groups’ exemption applications.

The now former exempt organizations director’s admission and subsequent refusal to testify before Congress contributed to her becoming the public face of the scandal. Although Lerner does not bear sole responsibility for the IRS’s missteps in processing conservative groups’ exemption applications, the publicity of her role in one of the year’s biggest news stories earns her the distinction of being Tax Notes’ 2013 Person of the Year. 

And in spite of much wishful thinking, it is a scandal.

It’s worth noting that Tax Analysts gives an honorable mention to Dan Alban, the Institute for Justice attorney behind the District Court defeat for the IRS preparer regulation power grab.

 

1040 2013William Perez, How Soon Can a Person File Their 2013 Tax Return?: “The Internal Revenue Service plans to begin processing personal tax returns on Friday, January 31, 2014, for the tax year 2013 (IR-2013-100).”  But don’t even try to get it done until you have your W-2s and 1099s all in hand.

Jana Luttenegger, Reinstating Tax-Exempt Organizations  (Davis Brown Tax Law Blog). She explains new IRS procedures for organizations that have lost their exemption by failing to file annual reports with the IRS.

Kay BellSocial Security taxable earnings cap in 2014 is $117,000. Thousands have already hit that tax limit.

Jason Dinesen, Small Business Planning: Got Your Financial Statements and Budget Done Yet?

Paul Neiffer, Remember Your Simplified Home Office Deduction

TaxGrrrl, What You Need To Know About Taxes In 2014: Expired Tax Breaks, Obamacare Penalties & More.

Russ Fox, 1099 Time.  A look at who has to issue information returns, and who gets them.

 

Robert D. Flach poses AN ETHICAL, AND PERHAPS LEGAL, DILEMMA:

Beginning with the 2014 Form 1040, am I legally, or ethically, required to assess my client a penalty for not having health insurance coverage?  Or can I, as I do with the penalty for underpayment of estimated tax, ignore the issue and leave it to the IRS to determine if a penalty is appropriate?  Will I face a potential preparer penalty if I ignore the issue?

It’s a good question.  I suspect they plan to make us ask the question, under the same sort of rules that make preparers unpaid social workers for the earned income tax credit.  I don’t expect to ever have to ask the question, though, as I think this dilemma will resolve itself by an indefinite delay, and eventual repeal, of the individual mandate as Obamacare falls apart.

 

David Brunori, State Tax Reform Advice for 2014 – Think About Spending (Tax Analysts Blog). Sometimes I think that’s all they think about.  But hear David out:

But in thinking about tax reform efforts in the past year, I am more convinced than ever that our refusal to rethink the size of government makes fixing problems with the tax code impossible. Here is what we know. Cutting government programs is difficult because each program has a constituency that will fight like a gladiator to protect its access to public money. So when the topic of tax reform comes up, conservatives and liberals vow to find a fix that will neither raise nor decrease spending. But we also know that politicians – the majority anyway – generally hate raising taxes. This reflects the fact that most of their constituents hate the idea of paying more taxes. But the costs of government continue to increase. And that leads to worse tax policy as states look to gimmicks, excises, gambling, and other junk ways of collecting revenue. It also ensures that some horrible tax policies are never fixed.

If the government dialed back spending to population-and-inflation adjusted 1990 numbers, I don’t think mass famines would result.

Scott Hodge, Despite Rising Inequality, Tax Code is at Most Progressive in Decades (Tax Policy Blog). I’m not sure “despite” is the right word here.

Annette Nellen, Continued bonus depreciation or tax reform?

Cara Griffith, Cyclists: The Next Great Source of Tax Revenue? (Tax Analysts Blog):

 While I strongly believe taxes should not be used to encourage or discourage behavior, the effect of requiring cyclists to register their bikes is not the big problem with these types of proposals. The real problem is that they don’t raise any revenue. Dowell’s suggestion that a bike registration fee would raise some $10 million for the city of Chicago is a pipe dream. Almost every cent would be used simply to administer the program.

From the interests of the bureaucrats proposing the program, just funding new patronage jobs is a perfectly acceptable result.

Howard Gleckman, Time To Park The Commuter Tax Subsidy (TaxVox)

Peter Reilly, Are IRS Property Seizures The Stuff Of Reality TV?   Now there’s some grim viewing.

The ISU Center for Agricultural Law and Taxation has a shiny new look at its website.

Tony Nitti, Yes Virginia, There Is A Tax Extender Bill In Congress.

The Critical Question: If You Won the Lottery Tomorrow, Would You Still Go to Work? (Going Concern).  Only to clean out my desk, and laugh.

 

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Tax Roundup, 12/23/2013: The joys of being at-risk. And: commence self-destruction sequence!

Monday, December 23rd, 2013 by Joe Kristan

S imageS image20091210-1.JPG‘Tis the season to be at-risk.  We mentioned yesterday how you can get basis for deducting S corporation losses by making a loan to the corporation.  But not just any loan.  If you borrow from another S corporation shareholder to make your loan, your basis won’t be “at-risk.”

A Monroe, Iowa farmer learned that the hard way with his 1991 loan, as we discussed long, long ago:

Larry Van Wyk, a farmer from Monroe, Iowa, got a taste of the dangers of the at-risk related-party loan rules back when farmers were their primary target. He owned an S corporation farm 50-50 with his brother-in-law, Keith Roorda. On December 24, 1991, Larry borrowed $700,000 from Keith. The loan was fully-recourse, so the brother-in-law could proceed ruthlessly against Larry in the event of non-payment. Larry used about $250,000 to repay money he owned the S corporation and loaned the remainder to increase his basis to enable him to deduct losses.

 Unfortunately, Larry’s brother-in-law had “an interest in the activity” – he owned half of it. This made the deduction not “at-risk,” even though no loan from a brother-in-law is without risk in a very real sense. The efforts of some of the finest tax attorneys west of the Mississippi were unavailing; the Tax Court agreed with the IRS, and Larry lost his losses.

It’s not enough to avoid borrowing from another shareholder; you don’t want to borrow from somebody related to another shareholder.  And as “interest in the activity” isn’t necessarily the same as “shareholder,” you should watch out for borrowing from anybody else involved in the business.  The safe thing is to visit your friendly community banker for your loan.

This is another of our daily year-end 2013 tax tips — one a day through December 31!

 

Weekend update!  In case you missed it over the weekend:

2013 Winter Solstice Tax Tip: S corporation basis and

Winter Sunday tax tip: loans for S corporation basis.

 

William Perez, Roth Conversions as a Year-End Tax Strategy

Jason Dinesen,  Six Things I’m Talking to My Small Business Clients About at Year-End (Part 2) 

 

This Koskinen isn't the IRS commissioner

This Koskinen isn’t the IRS commissioner

We have a Commissioner.  Senate Votes 59-36 to Confirm John Koskinen as IRS Commissioner (TaxProf).  A lot of folks have noted that once again we have a Commissioner who hasn’t done taxes for a living.  That doesn’t have to be fatal.  Anybody who has hung around CPA firms can tell you that somebody who is good at taxes can be pretty terrible at running an organization.

Still, it’s not a great sign.  The new guy, John Koskinen, will be 79 years-old when his five-year term runs out.  He got his reputation as a “turnaround guy” at Freddie Mac in the wake of the financial crisis, preserving the bureaucracy as responsible as any for the financial meltdown.  I suspect he was hired to protect the agency, not the taxpayer.

By the way, there is another Koskinen.

 

The crumbling mandate.  Tax Analysts reports ($link):

Individuals whose health insurance plans were canceled by insurers because they did not meet the requirements of the Affordable Care Act will be eligible for an exemption from the individual mandate penalty that takes effect in 2014, the Department of Health and Human Services said late December 19.

20121120-2Megan McArdle says this means Obamacare Initiates Self-Destruction Sequence:

As Ezra Klein points out, this seriously undermines the political viability of the individual mandate: “But this puts the administration on some very difficult-to-defend ground. Normally, the individual mandate applies to anyone who can purchase qualifying insurance for less than 8 percent of their income. Either that threshold is right or it’s wrong. But it’s hard to argue that it’s right for the currently uninsured but wrong for people whose plans were canceled … Put more simply, Republicans will immediately begin calling for the uninsured to get this same exemption. What will the Obama administration say in response? Why are people whose plans were canceled more deserving of help than people who couldn’t afford a plan in the first place?”

Arnold Kling put it more pithily: “Obama Repeals Obamacare.”

They’re desperately improvising as they go.  Not a good situation, considering the mandate tax is supposed to take effect in less than two weeks.   I’m starting to doubt that it ever gets enforced.

Related: Paul Neiffer, Cancelled Health Insurance Policies

 

20121220-3Kay Bell, Singing the praises of tax-favored retirement savings

Brian Mahany, IRS Ordered To Pay Taxpayer’s Legal Fees 

Russ Fox, The Death of the Death Master File (Sort of)

Peter Reilly,  Woody Allen’s Blue Jasmine Has A Tax Lesson.  If you don’t wan’t to stay married to a spouse, you might not want to file a joint return either.

TaxGrrrl,  12 Days Of Charitable Giving 2013: Esophageal Cancer Action Network

Robert D. Flach has a special Monday Buzz!

 

Tax Justice BlogUltra-Wealthy Dodge Billions in Taxes Using “GRAT” Loophole

Michael Schuyler, Why A Death Tax “Loophole” May Make Economic Sense (Tax Policy Blog).

Jack Townsend, Swiss Bank Hype and Over-Hype.  ” Merely having U.S. clients with undeclared accounts is not the problem for those banks; it is those banks actions to become complicit in the U.S. clients’ failure to report the accounts.”

Jim Maule finds his inner libertarian, embracing a Reason Foundation report calling for elimination of the home mortgage deduction in exchange for lower rates.

 

News from the Professon.  PwC Won’t Stop Beliebin’ In Ugly Christmas Sweaters (Going Concern)

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Tax Roundup, 12/18/2013: Have you made your College Savings Iowa gift? And: la loi, c’est IRS!

Wednesday, December 18th, 2013 by Joe Kristan


csi logo
Year-end is sneaking up on us.
 So it doesn’t catch us completely unawares, the Tax Update will provide a year-end idea each day through December 31.  Today we pass on a reminder that Iowans can deduct contributions to College Savings Iowa, the state’s Section 529 college savings plan, on their Iowa 1040s — but only if they fund their contributions before year-end.  From the State Treasurer:

Contributions to College Savings Iowa must be made by the end of the year to qualify for the 2013 Iowa state tax deduction. Account holders can deduct up to $3,045 for each open account and can contribute online at www.collegesavingsiowa.com.* Contributions sent by mail must postmark checks by December 31, 2013.

College Savings Iowa lets anyone – parents, grandparents, friends and relatives – invest for college on behalf of a child.  Investors do not need to be a state resident and can withdraw their investments tax-free to pay for qualified higher education expenses including tuition, books, supplies and room and board at any eligible college, university, community college or accredited technical training school in the United Sates or abroad.

It’s a great way to help your kids start out in life without a big student loan.

William Perez is doing yeoman’s work on year-end planning at his place; today he has Donating Cash to Charity at Year-End.  

Kay Bell offers Donating appreciated assets to your favorite charity

 

45R credit chartLa Loi, C’est IRS.  It’s not surprising that the IRS would disregard mere vendor rules when it believes it can pass out tax credits to taxpayers who clearly don’t qualify.  That’s exactly what they did yesterday when they announced that it will allow the (ridiculously complex) Sec. 45R small employer health insurance credit in Washington and Wisconsin in 2014, even though those states won’t have the required “Small Business Health Options Program” exchange in place.

The Code clearly requires allows the credit only to employers buying through the exchange starting in 2014, but the IRS has granted “transition relief” waiving that requirement.  Heck, why not just grant the credit to anybody who just has “health” next year.  You know, as a transition rule.

 

No.  Is Obamacare Really an Improvement on the Status Quo?  (Megan McArdle).  “Bob Laszewski, an insurance industry expert who has become the go-to guy for the news media on the rollout of the Patient Protection and Affordable Care Act (because the insurance industry is extremely reluctant to talk), tells the Weekly Standard that he thinks come Jan. 1, more people will have lost private insurance than gained it…”

 

William McBride, Economists Find Eliminating the Corporate Tax Would Raise Welfare (Tax Policy Blog).  That’s why the Tax Update’s Quick and Dirty Iowa Tax Reform Plan does just that.

 

 

TIGTALeft hand, meet right hand.   The Treasury Inspector General for Tax Administration reports “IRS Vendors Owe Hundreds Of Millions Of Dollars In Federal Tax Debt“:

Federal law generally prohibits agencies from contracting with businesses that have unpaid Federal tax liabilities.

TIGTA reviewed the IRS’s controls over the integrity and validity of vendors receiving payments from the IRS, including the vendor’s tax compliance and suspension and debarment status. TIGTA also reviewed controls over the IRS’s Vendor Master File (VMF), which contains information about vendors that enables them to do business with the IRS.

The vast majority of vendors that conduct business with the IRS meet their Federal tax obligations. However, TIGTA found that 1,168 IRS vendors (7 percent) had a combined $589 million of Federal tax debt as of July 2012, the most recent data for which information was available at the time TIGTA conducted the review. Few of the vendors had a current tax payment plan.

That means the IRS breaks its own rules in dealing with about one out of 15 of its vendors — another instance where the IRS breaks the rules with no consequence.  A “Sauce for the Gander” rule, one that would penalize IRS personnel who break rules just like they do for taxpayers, might help here.

 

Sometimes the IRS gets it right.  IRS Provided Some Good Tips this Morning (Russ Fox)

 

Tony Nitti, Tax Geek Tuesday: Profits Interests, Capital Interests, And Restricted Property:

 

In Crescent Holdings v. Commissioner 141 T.C. 15 (2013), the Tax Court doled out three lessons every tax advisor con learn from:

 

  1. How to differentiate between a profits interest and a capital interest in a partnership.

  2. Section 83 applies to the grant of a capital interest,

  3. If a capital interested in a partnership has not yet vested under the meaning of Section 83, the recipient should not be allocated any undistributed income from the partnership.

  4. The income allocable to an unvested capital interest granted by a partnership must be allocated to the remaining partners of the partnership.

Good stuff.

 

TaxProf, Billionaires’ Use of Zeroed-Out GRATs Blows $100 Billion Hole in Estate Tax.  Paul Caron quotes a Forbes article.

Jack Townsend, Raoul Weil Has First U.S. Court Appearance

TaxGrrrl, 12 Days Of Charitable Giving 2013: Sow Much Good

 

 

Robert D. FlachWOULDN’T IT BE NICE.  He discusses the new IRS Commissioner nominee and asks,  “Wouldn’t it be great to have a person who had actually prepared tax returns for a living in the position?”  What, and have somebody who actually knows something?

20131211-1Robert has a thing about the Tea Party, but I suspect even he would Follow the Tea Party on Stadium Financing Issues (David Brunori, Tax Analysts Blog):

The Atlanta Braves are planning to move their stadium to the suburbs. The Braves blackmailed, threatened, and coerced the backboneless politicians in Cobb County, Ga., to pay for the stadium… As far as I can tell, the only organization to have put up any fight against this insane corporate welfare is the Atlanta Tea Party.”

When the Tea Party movement sticks to the fight for smaller government, there’s a lot to like there.

 

 

Tax Justice Blog, Income Tax Deductions for Sales Taxes: A Step Away from Tax Fairness

Joseph Thorndike, When Is a “Fee” Actually a Tax? When Politicians Say It Isn’t (Tax Analysts Blog)

Peter Reilly,  How To Tax Kody Brown And The Sister Wives And Other Polygamous Families?  He quotes my Twitter feed.  If Peter follows @joebwan, maybe you should too!

 

News From the Profession.  There’s a Hidden Deloitte Auditor in the Airport Cell Phone Crasher Video Making the Rounds (Going Concern)

 

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

Friday, December 6th, 2013 by Joe Kristan

The 3.8% Section 1411 Obamacare net investment income tax is absurdly complicated and poorly-designed to start with.  When the Treasury drafted their first set of proposed regulations, they seemed determined to make it even worse.  Taxpayer response was harsh, and the final rules put in place last week fix some of the worst problems in the original rules.

This tax applies to taxpayers with “modified” adjusted gross incomes over threshold levels of $250,000 for joint filers, $125,000 for married taxpayers filing separately, and $200,000 for other individuals.  It also applies to all top-bracket trusts.  It applies to “net investment income” to the lesser of Net Investment Income or the amount modified AGI exceeds the threshold.  It applies to all trust AGI over the top trust tax bracket amount.

Net Investment Income includes interest, dividend, capital gains, passive K-1 and other business income, royalties, non-qualified annuities, and rents.  It excludes non-passive K-1 income, wages, self-employment income, capital gains on the sale of a partnership or S corporation where the seller is non-passive, and “trade or business” rents for non-passive taxpayers.  A few highlights of the changes in the final regulations:

Self-rental.  The proposed regulations said that taxpayers who rent property to their non-passive trade or business have net investment income from the rents.  The final regulations say self-rental income from property rented to non-passive activities is not subject to the tax.

This is very helpful.  Under the old regulations, there would have been a big incentive for businesses that rent property from their owners to restructure so that they own the rental property.  This is no longer necessary.

Material Participation Rental.  The proposed regulations would have imposed the net investment tax on most rental activity income even where the taxpayer is “non-passive” on the rental.  They required taxpayers to demonstrate that their rental activity rose to the level of a “trade or business,” a vague standard, to avoid the tax.  The new regulations add a safe-harbor where taxpayers who work at least 500 hours in a rental activity are deemed to rise to the level of having a “trade or business.”

Sales of a business.  The proposed regulations required taxpayers selling even a small interest in a partnership or S corporation to identify the inherent gain or loss in each asset owned by the partnership or corporation to determine how much of the gain or loss on the sale was passive, and therefore subject to the tax.

They withdrew that proposal and issued a new proposed regulation that includes a safe-harbor that uses historic K-1 information to compute the portion of a gain of an S corporation or partnership interest to compute the “net investment income” portion.  Absent such a provision, compliance would have been impossible in many or most cases involving a sale of a minority interest.  They should add a de-minimus standard to avoid the computation altogether when non-passive amounts are a trivial portion of the K-1 income.

The tax should still be repealed.  It imposes a whole new fiendishly complex tax on a narrow subset of income.   It violates any standards of good tax policy.  But we have to live with it until Congress and the President come to their senses, and there is no sign of that happening.

Other coverage:

Tony Nitti:

The Definitive Questions And Answers On The New Net Investment Income Tax [Updated For Final Regulations]  

Final Net Investment Income Regulations: Self-Charged Interest, Net Operating Losses, And More

Final Net Investment Income Regulations: Losses From The Sale Of Property Become Much More Valuable 

Final Net Investment Income Regulations: IRS Grants Relief To Real Estate Professionals

 

Paul Neiffer:

Losses Can Offset Investment Income

More Good News on Calculating Invesment Gain

Final Net Investment Income Regs Have Good News For Farmers

(more…)

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Tax Roundup, 12/4/2013: Justice Scalia doesn’t believe in the Tax Fairy. And sure, the IRS can run another tax credit!

Wednesday, December 4th, 2013 by Joe Kristan

 

tax fairyThe Supreme Court wrapped a bow around the IRS victories in the turn-of-the-century tax shelter wars by unanimously ruling that the 40% “gross valuation misstatement” penalty applied to a tax understatement caused by the “COBRA” tax shelter.

COBRA relied on contributing long and short currency options to a partnership, but claiming basis for the long position, and ignoring the liability caused by the short position.  The shelter was cooked up in Paul Daugerdas’ tax shelter lab at now-defunct Jenkens & Gilchrist and marketed by Ernst & Young.  The shelter was designed to generate $43.7 million in tax losses for a cash investment of $3.2 million.

COBRA, like so many other shelters of the era,  was ruled a sham and the losses disallowed, but the Fifth Circuit Court of Appeals ruled that the 40% penalty did not apply.  Other circuits ruled that it did, so the Supreme Court took the case to settle the issue.

Writing for a unanimous court, Justice Scalia disposed of the Fifth Circuit’s position (citations omitted, my emphasis):

     In the alternative, Woods argues that any underpayment of tax in this case would be “attributable,” not to the misstatements of outside basis, but rather to the determination that the partnerships were shams — which he describes as an “independent legal ground.”  That is the rationale that the Fifth and Ninth Circuits have adopted for refusing to apply the valuation-misstatement penalty in cases like this, although both courts have voiced doubts about it.

We reject the argument’s premise: The economic substance determination and the basis misstatement are not “independent” of one another. This is not a case where a valuation misstatement is a mere side effect of a sham transaction. Rather, the overstatement of outside basis was the linchpin of the COBRA tax shelter and the mechanism by which Woods and McCombs sought to reduce their taxable income. As Judge Prado observed, in this type of tax shelter, “the basis misstatement and the transaction’s lack of economic substance are inextricably inter twined,” so “attributing the tax underpayment only to the artificiality of the transaction and not to the basis over valuation is making a false distinction.”  In short, the partners underpaid their taxes because they overstated their outside basis, and they overstated their outside basis because the partnerships were shams. We therefore have no difficulty concluding that any underpayment resulting from the COBRA tax shelter is attributable to the partners’ misrepresentation of outside basis (a valuation misstatement). 

tack shelterI see the basis-shifting shelters of the 1990s as elaborate incantations designed to to get the Tax Fairy to magically wish away tax liabilities.  Like any good witch doctor, the shelter designers relied on lots of elaborate hand-waving and dark magic to do their work, and they collected a lot of cash for their work.  But there is no Tax Fairy.  Justice Scalia has let Tax Fairy believers know that pursuing her is not just futile, but potentially very expensive.

 

Cite: United States v. Woods, Sup. Ct. No. 12-562.

The TaxProf has a roundup and an update.  Stephen Olsen weighs in at Procedurally Taxing.

 

 

Blue Book Blues.   One digression by Justice Scalia in Woods is worth a little extra attention.   From the opinion (citations omitted, my emphasis):

Woods contends, however, that a document known as the “Blue Book” compels a different result…Blue Books are prepared by the staff of the Joint Committee on Taxation as commentaries on recently passed tax laws. They are “written after passage of the legislation and therefore d[o] not inform the decisions of the members of Congress who vot[e] in favor of the [law].” While we have relied on similar documents in the past, …our more recent precedents disapprove of that practice. Of course the Blue Book, like a law review article, may be relevant to the extent it is persuasive.

Back in the early national firm days of my career, one of my bosses was a former national firm lobbyist who was exiled to The Field when a merger with another firm left room in Washington for only one lobbyist in the combined firm.  I remember him telling clients that he could get around unpleasantness in the tax code by arranging for helpful language in the Blue Book.  From what Justice Scalia says, he would have done as well by writing a law review article.

Jack Townsend also noticed this.

 

A new tax credit for the IRS to administer.  What could possibly go wrong?  A lot, as the IRS’s experience with the fraud-ridden refundable credits and ID-theft fraud has shown.  Now a new Treasury Inspector General’s report warns that IRS systems aren’t yet prepared to stop premium tax credit fraud under Obamacare, reports Tax Analysts ($link):

EITC error chart     While the IRS has existing practices to address ACA-related fraud, the agency’s approach is not part of an established fraud mitigation strategy for ACA systems, the report says. The IRS has two systems under development to lessen ACA tax refund fraud risk, but until those systems are completed and tested, “TIGTA remains concerned that the IRS’s existing fraud detection system may not be capable of identifying ACA refund fraud or schemes prior to the issuance of tax return refunds,” it says.

IRS Chief Technology Officer Terence Milholland said in a response included in the report that fraud prevention plans will be put in place as ACA systems are released.

The IRS loses $10 billion annually to Earned Income Tax Credit Fraud alone.  This isn’t reassuring.

 

Paul Neiffer, Losses Can Offset Investment Income:

  1. If you have a net capital loss for the year, the regular tax laws limit this loss to $3,000.  The final regulations allow this up to $3,000 loss to offset other investment income.
  2. If you have a passive loss such as Section 1231 losses, as long as that loss is allowed for regular income tax purposes, you will be allowed to offset that against other investment income.
  3. Finally, if you have a net operating loss carry forward that contains some amount of net investment losses, you will be allowed to use that portion of the NOL to offset other investment income.

A big improvement over the propsed regulations.

 

20120920-3Jason Dinesen,  Same-Sex Marriage, IRAs and After-Tax Basis:

It’s clear that for 2013 and going forward, couples in same-sex marriage will only need to apply “married person” rules to IRAs (and to everything else relating to their taxes).

What’s less clear is what happens with differences between federal and state basis for prior years.

 

Robert D. Flach,  A YEAR END TIP FOR MUTUAL FUND INVESTMENTS.  “If you want to purchase shares in a mutual fund during the fourth quarter of the year, wait until after the capital gain dividend has been issued, and the NAV has dropped, before purchasing the shares.”

 

Janet Novack,  Insurance Agent To Forbes 400 Concedes Understating Taxable Income By $50 Million

David Brunori, Indexing the State Income Tax Brackets Makes Sense (Tax Analysts Blog)

Missouri Rep Paul Curtman (R) wants to index his state’s income tax brackets to inflation. Of all the tax ideas presented this year, this is among the best. Missouri imposes its top rate of 6 percent on all incomes over $9,000. Nine grand was a lot of money in 1931 – and the top tax rate was aimed at the very wealthiest Missourians. But that threshold hasn’t changed since Herbert Hoover was president. 

Or they could just go with one flat rate.

 

TaxProf, The IRS Scandal, Day 209

William McBride, Summary of Baucus Discussion Draft to Reform International Business Taxation (Tax Policy Blog)

Kay Bell, Where do your residential property taxes rank nationally? 

Howard Gleckman,  The Supreme Court Opens The Door to Sales Tax Collections by Online Sellers (TaxVox)

They were too busy fighting the shelter wars to notice.  The Cold War Is Over, but No One Told the IRS  (Joseph Thorndike, Tax Analysts Blog)

Career Corner: A Friendly Reminder to Slobbering Drunks: Be Less Slobbery and Drunk at Your Company Holiday Party (Going Concern)

 

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Tax Roundup, 11/15/2013: Trains, Zeppelins and Fertilizer edition.

Friday, November 15th, 2013 by Joe Kristan

 

20121226-1What, no zeppelin port?   A candidate for Iowa governor proposes a gas tax increase for, well, a bunch of stuff, reports QCTimes.com:

Democratic gubernatorial hopeful state Sen. Jack Hatch is proposing to phase in a 10-cent gas tax increase to pay for overdue road and bridge improvements, build passenger rail links, construct flood protection, reduce the backlog of school construction projects and expand broadband service in rural Iowa.

The increase would amount to less than $50 a year for most Iowans, he said.

Infrastructure, in all of its forms, is one of the most basic parts of state and local government, Hatch said Thursday in announcing his Building a Better Iowa infrastructure plan.

The idea of a continuing “infrastructure crisis” is a standard political assertion, even though it isn’t true.   If it were, though, you’d stop the list of crisis projects after “bridge and road improvements.”   The idea that blowing millions to construct an unneeded and money-losing passenger rail system is an infrastructure priority is laughable.  Local school districts can finance improvements whenever their voters think they’re worth a bond issue.  And rural broadband, supplied by the government?  Because satellites don’t cover rural Iowa?

 

20120906-1

Using your wife’s money to buy drinks for your new girlfriends.  Sen. Hatch wants to run against Governor Branstad next November, who has some economic issues of his own.  These are spotlighted by the Governor’s selection as “Politician of the Year” by Site Selection Magazine.

Based on its website, Site Selection Magazine seems to be the trade journal of the little industry of fixers and middlemen who harvest taxpayer money for clients choosing to relocate or expand. Governor Branstad was “honored” for giving over $80 million of tax credits to the Orascom fertilizer plant in Southeast Iowa to build a plant they were probably going to put there anyway.  The credits add up to around $500,000 per “permanent” job.

These sorts of giveaways are great for the companies that can play the system to milk the fisc, but they aren’t so great for the rest of us who pay for them.  They are the government equivalent of the guy who takes his wife’s bar to the bar to buy drinks for the girls.  He may think he’s doing great things, but it’s neither impressive to the girls nor helpful to the wife.

Somebody out there is saying, “but what about the jobs?”  Even if you assume that the spending is responsible for the jobs — a stretch — that money wasn’t just conjured up.  It comes from the rest of us, who would have used it to create jobs through spending or investing.  If you think the state can wisely allocate investment capital, I have a nice film credit program to discuss with you.  You shouldn’t talk about the jobs you attract by giving away money without talking about the jobs that you lost.

 

Arnold Kling, It’s Implementation, Stupid:

The problems with implementation are under-rated and always have been. The Obama Administration has spent 3 years bulldozing the individual market in health insurance. Now, they expect the health insurance companies to rebuild it in 30 days.

This will not end well.  But while I expect enormous changes in the ACA law, given its evident failure, I don’t expect repeal of the new 3.8% net investment income tax or .9% additional medicare tax to happen.  Clearing the wreckage will be expensive.

Des Moines Register,  136 Iowans buy private health plans through online marketplace.  Not looking good.

Why not just kill me now?  Why Not Use Tax Preparers as a Portal to Health Exchanges?  (Howard Gleckman, TaxVox)

 

TaxProf, Number of Taxpayers Who Renounced U.S. Citizenship Skyrockets to All-Time Record High.  This doesn’t strike me as a good thing.

 

Kay Bell,  EITC claim issues prompt IRS letters, visits to tax pros.  If you prepare a lot of EITC claims, your documentation needs to be meticulous.

Jack Townsend, IRS Indian Initiative for Persons Outside OVDP; Also on Quiet Disclosures

Linda Beale, IRS will issue summonses for offshore bank account info

William Perez,  How Much Government Do People Get Compared to How Much Taxes They Pay?

 

TaxGrrrl, Braves New World? Taxpayer Funding Remains A Concern As Atlanta Rushes Towards New Stadium.  If I were an Atlanta taxpayer, I’d be concerned.

Tony Nitti, Did The Sale Of Stan Musial’s Memorabilia Give Rise To A Hefty Tax Bill?   

 

Kyle Pomerleau, Don’t Forget the Facts If You Want to Raise Taxes on the Rich (Tax Policy Blog)

20131030-2

Christopher Bergin, The IRS: A Greek Tragedy (Tax Analysts Blog)  “I mostly also agree with Olson that much of the impairment at the IRS is caused by Congress continuing to force the agency to do more with less.”

TaxProf, The IRS Scandal, Day 190

Robert D. Flach has your Friday Buzz!

News from the Profession:  Perhaps Comparing the CPA Exam to Actual War Isn’t The Best Idea (Going Concern)

 

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Tax Roundup, 11/13/13: Is more IRS money what we need? And why I’m hoping against hope!

Wednesday, November 13th, 2013 by Joe Kristan
Taxpayer Advocate Nina Olsen

Taxpayer Advocate Nina Olsen

Is more money the answer to “pitiful” IRS service?   That’s what Taxpayer Advocate Nina Olson believes, based on a story by Tax Analysts ($link):

National Taxpayer Advocate Nina Olson in a November 9 speech decried as pitiful the level of IRS customer service given to taxpayers, which she attributed to inadequate funding that has forced the Service to automate many of the most important tax administration functions and skimp on training employees on taxpayer rights.

Everything else being equal, you can do more with more money.  Yet we all face limits to our resources, so we prioritize.  The IRS — at the urging of Nina Olson — has directed resources unwisely to its misguided attempt to boss the tax prep industry.  It has been a debacle so far, and it appears headed to oblivion in the courts.

The IRS has another administrative problem that the Taxpayer Advocate has pointed out.  The tax law is too complicated to effectively administer even with a much larger budget.  The tax law is seen as the Swiss Army Knife of public policy, and like a knife with too many gadgets, it becomes hard to work as a knife.  This chart from Chris Edwards at the Cato Institute illustrates the problem:

irs budget cato 20131113

 

Chris Edwards explains:

The chart shows that the IRS has become a huge social welfare agency in recent decades. Handouts have soared from $4.4 billion in 1990 to an estimated $91.1 billion in 2013 (red line). Handouts are down a bit in recent years because some of the refundable credits from “stimulus” legislation have expired. IRS administration costs have grown from $7.7 billion in 1990 to an estimated $15.3 billion in 2013 (blue line). 

How should we reform the IRS budget? First, we should terminate the handout programs. That would save taxpayers more than $90 billion annually and cut the IRS budget by 86 percent. 

The largest IRS handout is the refundable part of the EITC, which is expected to cost $55 billion in 2013.

So true.  Considering that over $10 billion of the $55 billion is stolen or otherwise issued improperly, the EITC is a nightmare.  There would be plenty of funding available for tax administration if EITC could go away.

But the chart also shows something else: if the tax law was no more complicated than it was in 1990 — and believe me, it was plenty complicated — the IRS administrative budget would be adequate.  But with the IRS transformed into a monster multi-portfolio agency charged with healthcare administration, welfare, industrial policy, environmental enforcement, etc., etc., its budget is hopeless.

 

This will work out well:

This article examines the tax collection process to see how the IRS might enforce the individual mandate under the healthcare reform law. It concludes that resistant taxpayers can generally be forced to pay the tax penalty only if they are entitled to receive refundable tax credits that exceed their net federal tax liability. 

From Jordan BerryThe Not-So-Mandatory Individual Mandate, via the TaxProf.

 

Don’t trust the Tax Foundation?  Maybe you’ll trust the Congressional Budget Office.  A commenter yesterday took issue with a chart I reproduced showing not only the tax burden at different income levels, but the amount of government spending benefiting different income levels:

It’s not “the first chart for any tax policy debate,” it’s the last chart you should want to find on your side of the debate if you want to have any credibility.

If that doesn’t work for you, maybe this one from the CBO will be less objectionable:

cbo table

This chart is more focused on direct transfers, but it says pretty much the same thing.  It also covers 2006, and the tax law has hit the high end harder since then. (Via Greg Mankiw).

 

Scott Hodge, Andrew Lundeen,  54 Million Federal Tax Returns Had No Income Tax Liability in 2011 (Tax Policy Blog)

 

Paul Neiffer,  Sale of CRP Land – Is it Subject to the 3.8% Tax?  It depends a lot on whether an appeals court upholds the Tax Court Morehouse decision imposing self-employment tax on CRP income.  “And if the Morehouse case is overturned on appeal and the CRP is treated as rents, the land sale will also be subject to the 3.8% tax.”

 

Kay Bell, Tax tips for newlyweds saying “I do” on 11-12-13 or any day

Jack Townsend,  U.S. Banks File Long-Shot Litigation to Block FATCA Reciprocal Requirements

Leslie Book,  Disclosure and the 6-Year Statute of Limitation: S Corp Issues (Procedurally Taxing)

Jason Dinesen,  EAs are Partly to Blame for Our Obscurity  “Yes, we are treated as the red-headed stepchild of the tax world. But a big reason for this is that we ALLOW people to treat us this way.”

Russ Fox, Dan Walters with Another Example of California Dreamin’

 

TaxProf, The IRS Scandal, Day 188

 

Hope lives! 

It’s Time to Give Up on Tax Reform” – Joseph Thorndike, October 29, 2013

When Tax Reform Rises From the Dead, What Will It Look Like?Joseph Thorndike, November 12, 2013.

I should note that his vision of resurrected tax reform is hideous.  If that’s what hope for tax reform comes to, I’ll hope against his hope.

 

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