The TaxProf and I are cited in a New York Times article on the tax implications of former House Speaker Hastert’s hush money scandal: If Hastert Was Extorted, He Could Deduct Some Losses From His Taxes.
Mr. Hastert has been indicted on charges of “structuring” deposits to avoid reporting rules as part of a plan to pay for silence from “Individual A” for alleged sexual contact pre-Congress. From the article:
While extortion payments would be taxable for Individual A, they would actually be partly deductible for Mr. Hastert, said Paul Caron, a tax law professor at Pepperdine University. It’s right there in I.R.S. Publication 17, Chapter 25: You get to deduct losses because of theft, to the extent those losses exceed 10 percent of your adjusted gross income. Blackmail and extortion count as theft.
But to claim the deduction, Mr. Hastert would have to convince the I.R.S. or a court he had been extorted, which could be difficult.
”Sometimes judges will find a way to disallow deductions for what they find unsavory behavior,” said Joe Kristan, a tax accountant with the Roth C.P.A. firm. He noted a case in which a divided Ninth Circuit panel denied a tax deduction for extortion to a man who said he paid hush money to his mistress.
For the record, I have no personal experience in deducting extortion and hush money payments.
Related: Jack Townsend, Article on Structuring to Avoid Bank Currency Reporting Requirements, on the structuring charges of the Hastert case.
Taxpayer’s IRA-owned corporation leads to tax disaster. The Eighth Circuit appeals court has upheld horrendous tax penalties against a taxpayer who had an IRA capitalize his business as an investor.
A Mr. Ellis rolled his 401(k) plan into an IRA, which invested about $310,000 in CST, a C corporation. CST started an auto dealership and employed Mr. Ellis as General Manager. That led to unfortunate tax results. From the court opinion (my emphasis):
The tax court properly found that Mr. Ellis engaged in a prohibited transaction by directing CST to pay him a salary in 2005. The record establishes that Mr. Ellis caused his IRA to invest a substantial majority of its value in CST with the understanding that he would receive compensation for his services as general manager. By directing CST to pay him wages from funds that the company received almost exclusively from his IRA, Mr. Ellis engaged in the indirect transfer of the income and assets of the IRA for his own benefit and indirectly dealt with such income and assets for his own interest or his own account. See 26 U.S.C. § 4975(c)(1)(D), (E); 29 C.F.R. § 2509.75-2(c) (“[I]f a transaction between a party in interest and a plan would be a prohibited transaction, then such a transaction between a party in interest and such corporation . . . will ordinarily be a prohibited transaction if the plan may, by itself, require the corporation . . . to engage in such transaction.”)
While the investment itself wasn’t ruled a prohibited transaction, things got messy once the IRA-owned corporation started paying Mr. Ellis a salary — an “indirect transfer” occurred.
The consequences? The prohibited transaction terminated the IRA. That means the whole value of the IRA became taxable income, with no cash made available to cover the taxes. With penalties, the bill will exceed $160,000.
The Moral? Direct business investments from IRAs are dynamite. If you must use retirement plan funds for a business start-up, it may be wiser to take a taxable withdrawal and use the after-tax funds to make the investment. If there is any way to fund it without retirement plan funds, that would be wiser still.
Cite: Ellis, CA-8, No. 14-1310
Prior coverage here.
Margaret Van Houten, Legislature Passes Bill Affecting Iowa Trusts and Estates (Davis Brown Tax Law Blog). “Beginning on July 1, 2016, a step grandchild will no longer be subject to Iowa Inheritance Tax. Currently, direct ancestors and descendants, including stepchildren, were exempt from the tax, while step grandchildren were grouped with other individuals, such as siblings, nieces and nephews and unrelated individuals and were subject to the tax.”
TaxGrrrl, The Not So Skinny On National Doughnut Day. That’s every day!
Annette Nellen, More on marijuana businesses and tax ethics. “Despite state actions, the production, sale and use of marijuana is a crime under federal law. Thus, for licensed practitioners, there is concern about ethical violations of helping someone commit a crime.”
Kay Bell, H&R Block explores virtual tax preparation.
Peter Reilly, A New York Day Is Like A New York Minute At Least For Taxes:
In the case of John and Janine Zanetti, the New York Supreme Court Appellate Division agreed with the Commissioner of Taxation and Finance that a New York day can be less than 24 hours. The point of the decision was to determine whether the Zanettis had spent enough time in New York to be considered statutory residents for the year 2006.
Jim Maule asks Is the Federal Income Tax Progressive? He focuses on the “low” federal effective rate on the “Top .001%.” Of course, the reason people get to those rates is normally because of a one-time event, typically the sale of a corporation, that is taxed at long-term capital gain rates. Such taxpayers are normally at that income level only once in their life. Of course, Prof. Maule ignores the built-in double tax hidden in these figures.
Leslie Book, DC Circuit Criticizes Government in Case Alleging an Israel Special Policy for Tax Exemptions (Procedurally Taxing). “As IRS has increased responsibility beyond its paramount mission of collecting revenues, the historical reasons for the discretion IRS has exercised have lessened.”
Russ Fox, Another Las Vegas Preparer Gets In Trouble Over the Foreign Earned Income Exclusion. “I’d say it was something in the water but Las Vegas is in a desert.”
Arnold Kling, Payroll Taxes in Europe. ” I find it hard to reconcile Germany’s relatively low unemployment rate with this high payroll tax rate.”
David Henderson responds:
I don’t find it hard to reconcile the two. The reason: Germany has had high payroll tax rates for a long time–for decades, actually. So real wages have had a long time to adjust.
I understand this as saying the total employment cost is about the same, but the employee gets less of it.
Kyle Pomerleau, CRS Outlines Four Important Aspects of the EITC. “The EITC enjoys bipartisan support among lawmakers. This is due to the fact it both reduces poverty among families with children and has a positive impact on the labor force for certain individuals. Yet, the EITC is not without its flaws. It’s benefit phase-out has a negative impact on the labor force and it suffers from high error rate and overpayment.”
Richard Auxier, Choose your tax system: progressive vs. regressive (TaxVox). A critique of the “Fair Tax” and other national sales tax proposals.
News from the Profession. Pope Figured The Lord’s Work Could Use a Good Auditor (Caleb Newquist, Going Concern)