Posts Tagged ‘Going Concern’

Tax Roundup, 2/3/2016: Should tax pros cheer tax complexity? And: 1000 Days of TaxProf scandal coverage.

Wednesday, February 3rd, 2016 by Joe Kristan
Remember, nobody else at the firm ever agrees with me.

Remember, nobody else at the firm ever agrees with me.

Am I more important than you? Yesterday’s post, where I left enough clues to enable people to determine which (losing) candidate I supported at the Iowa Caucuses, provoked this comment:

You voted for Rand Paul? Rand Paul who wants to pass a flat tax and put all the tax professionals out of business?

It’s a statement that verifies the darkest suspicions one might have of the tax profession.  Unless, of course, the commenter, who has “CPA” on his post name, is being sarcastic.

There is certainly a case to be made that an income tax like the one we have is the best way to raise revenue. You could make an honest case also that it is wise to use the tax law to achieve non-tax social goals. While I would disagree, such arguments have a long tradition and reasonable intellectual underpinnings. There’s an argument that in a complex economy, we should expect a complex tax system, and the need to hire tax professionals is a collateral cost to achieve a greater benefit.

But that’s not what the commenter is saying. He is saying that ensuring the ability of tax professionals to make a living off the tax system should be a policy goal. If he means more, he leaves it out; that’s the entire comment.

Sometimes taking an argument to its logical conclusion helps shed light on a system. What if we could magically create a tax system that would grow the economy by a million extra well-paying jobs a year, but was so easy to administer and comply with that it would eliminate the jobs of all 674,686 IRS- registered tax professionals? Oh, and it would cure cancer, too. An objective observer would choose the magical system, and would rightly regard any tax preparer who fought against it to preserve his own job as a monster.

The interest of tax preparers, while obviously important to me, can never be the primary concern of tax policy. Otherwise you would argue for ever-more complex taxes and ever-higher rates to make it harder to do without us. Considering the embarrassment of riches our current tax system offers to those of us who feast on complexity, arguing for more is both unconscionable and redundant.

That gets me back to Mr. Paul, who, according to my Twitter feed, will leave the race today. His tax proposal is a version of a consumption tax that, according to the Tax Foundation’s dynamic projections, would both reduce the budget deficit and grow the economy. It is the only plan that would do both. In contrast, the Bernie Sanders plan would do awful things to the economy, but it would sure make tax preparers more valuable. While people I respect support Sanders for reasons I find incomprehensible, none of them do so to make a living off of forced extractions from others.taxplanchart

Everybody who does tax for a living does so knowing that a stroke of the pen could put us out of business. My dentist taunted me with this observation before I even started my first tax job. I have always set my lifestyle and expectations accordingly. While I’ve made a living off the tax law, the world certainly doesn’t owe it to me, or to anyone else.

 

Kyle Pomerleau, Scott Greenberg, How Danish is Bernie Sanders’s Tax Plan? (Tax Policy Blog):

sandersrates

But it would be great for tax pros!

 

TaxProf, The IRS Scandal, Day 1,000. Thanks to Paul Caron for his persistence in paying attention to the past and continuing IRS abuse of power.

William Perez, 8 Reasons to Ask the IRS for a Tax Extension. Always better to extend than amend.

Peter Reilly, Tax Dependency Exemptions For Noncustodial Parents – It Is All About Form 8332

Robert Wood, Winner Of $1.6 Billion Powerball Jackpot Sued By Prisoner

TaxGrrrl, Congressman’s Son Sentenced To Five Years In Prison On Fraud & Tax Charges. Maybe he’ll meet a Powerball winner.

 

IMG_1288

 

David Brunori, Paying for Past Sins (Tax Analysts Blog) “The Jindal administration pushed tax cuts without paying for them. It then tried to address the ensuing budget problems with a barrage of gimmicks. For that, the citizens of Louisiana are likely to pay a price.”

Jeremy Scott, Ted Cruz’s Iowa Win Not a Victory for a VAT (Tax Analysts Blog). “Cruz may have a radical tax program, but it hasn’t been a big piece of his campaign.”

Renu Zaretsky, What’s so funny about taxes, love, and solidarity? “Would Americans pay higher taxes with as much love and solidarity for the people of Flint as they donate water? And would my fellow Michigan neighbors pay up, given that state government appointees and representatives caused the problem and then covered it up?” Not to mention the local one-party regime that triggered the crisis in the first place.

News from the Profession. Take the Going Concern Reader Survey (Going Concern).

Kay Bell, North Pole decides to tax marijuana. Maybe that’s why Santa is so jolly.

 

Share

Tax Roundup, 9/10/15: True crime edition; or, how to get the IRS to pay attention.

Thursday, September 10th, 2015 by Joe Kristan

IMG_0603How to make sure the IRS comes looking for your tax fraud. A Minnesota man will have 6 years to ponder mistakes he made diverting employment and excise taxes he owed to finance good times. From KSTP.com:

Fifty-seven-year-old Bartolemoea Montanari, formerly of Bayport, was sentenced Wednesday. Montanari was also ordered to pay mandatory restitution of $100,000 and, additionally, to pay more than $1.5 million as a special assessment for the taxes, interest and penalties owed.

According to court documents, from 2009 until January 2012, Montanari willfully evaded the payment of employment and excise taxes owed by him and the three businesses he controlled: St. Croix Development, Emlyn Coal Processing, and Montie’s Resources.

He was convicted on the three counts of an indictment accusing him of diverting funds to a shell company from his legitimate businesses, and then withdrawing funds from the shell company to finance, well, stuff:

During sentencing, the judge noted Montanari used the money he stole to finance an “incredibly flamboyant lifestyle,” that this was “not a single error of judgment,” and that Montanari had “many chances” to correct his behavior, but did not. 

The indictment says the lifestyle included a $1.4 million home in Tennessee and “numerous personal vehicles.”

The defendant would seem to have made two mistakes to help ensure that the IRS would come snooping. First would be the “incredibly flamboyant lifestyle.” Taxgrrrl notes a Pennsylvania tax investigation apparently started when federal agents noticed a fancy house from the air. If the feds don’t notice themselves, envious or annoyed neighbors or associates might bring their questions about a flamboyant lifestyle to their attention.

More importantly, he failed to pay over employment taxes. His employees certainly  wouldn’t have failed to report their W-2 wages and claim their refunds. Despite its information processing shortcomings, the IRS can and does notice that. The main difference between committing employment tax fraud and confessing to it is the amount of work the IRS has to do before pressing charges.

 

20150910-1

 

Speaking of foolproof crimes: Hot Lotto rigger sentenced to 10 years (Des Moines Register). The case involved an alleged inside job by an IT professional at the Multi-State Lottery:

The case has enthralled Iowans and gained national attention since late December 2011, when a New York attorney tried to claim — just hours before it would expire — a Hot Lotto ticket worth $14.3 million on behalf of a trust incorporated in Belize. The identity of the original ticket purchaser was a mystery.

Authorities with the Iowa Division of Criminal Investigation began looking into Tipton after several people identified him as the hooded man in a video showing the ticket being purchased at a Des Moines QuikTrip. At the time, Tipton was the information security director for the Urbandale-based Multi-State Lottery Association that provides games such as Hot Lotto to lotteries nationwide.

[Assistant Attorney General] Sand told jurors at trial that Tipton installed a self-deleting software program, called a rootkit, onto lottery drawing computers to manipulate the outcome of a Dec. 29, 2010, draw. Tipton then filtered the winning ticket he bought through a friend, Robert Clark Rhodes II, from Texas in an attempt to claim the money, Sand said.

There’s a reason lottery workers aren’t allowed to play the lottery. The lawyer and Belize trust didn’t help the whole thing slip by unnoticed.

 

Tony Nitti, How To Talk About The Yahoo Spin-Off Without embarrassing Yourself. A walk through the mysteries of tax-free corporate separations.

Russ Fox, IRS Removes Social Security Number from Some Notices But…:

The reason for this is the problem of identity theft. And I give kudos to the IRS for this. Unfortunately, the IRS hasn’t executed this that well.

Today I opened an IRS notice that was sent to a client. The good: The social security number in the header had only the last four digits. The bad: Right below the header the IRS put in a bar code–presumably to make processing of the return mail easier. Below the bar code in relatively small print (but easily readable by me, and I wear glasses) was the deciphering of the code. Of course, it contained the social security number.

The IRS, protecting your identity since 1913.

Jason Dinesen, From the Archives: Will Obamacare Tax Your Home Sale?

Paul Neiffer, Don’t Forget Those Fuel Tax Credits. “Most farmers obtain dyed diesel without having to paying federal and in most cases state excise taxes.  However, there can be many other uses on the farm that will allow a farmer to claim a fuel tax credit on Form 4136.”

Kay Bell, Tax diplomas, computer games and soap operas. “Will informing folks about the role of taxes in their countries, especially starting at an early age, help create more tax responsible citizens?”

Jim Maule, It’s a Failure of Some Sort, But It’s Not a Tax Failure. The professor reminds us not to believe everything you read on the internet.

 

Robert D. Flach, THE NATP TAX FORUM AND EXPO IN PHILADELPHIA – PART II

 

20150910-2

 

TaxProf, The IRS Scandal, Day 854

Howard Gleckman, Jeb Bush’s Tax Plan: High Marks for Transparency But Key Questions Remain (TaxVox). “At first glance, GOP presidential hopeful Jeb Bush’s tax reform plan is a standard lower-the-rates, broaden-the-base overhaul of the revenue code. But a closer look shows a something-for-everyone stew filled with interesting ingredients—most basic GOP fare but seasoned with a few surprising ideas.”

 

Well, it’s not my thing, but if it’s for the kids…  Let’s Get High for the Children (David Brunori, Tax Analysts Blog):

Every proposal, like the one in Arizona, calls for dedicating marijuana tax revenue to schools, which is a terrible idea. Perhaps everyone will be stoned and won’t care, but aren’t schools important enough to pay for with real, broad-based taxes on income, sales, or property?

Politicians might look for a way to legalize slavery if they thought it would give them more revenue.

Joseph Henchman, Colorado Suspends Marijuana Tax for One Day on September 16 (Tax Policy Blog).

 

News from the Profession. Rihanna and 50 Cent Need New Accountants (Going Concern)

 

Share

Tax Roundup, 8/24/15: School’s in! And: state taxes just might matter.

Monday, August 24th, 2015 by Joe Kristan

 

20150824-2School starts here today. In my mind, the day school starts will always mark the end of summer, regardless of where the sun is in the sky, and it always makes me a little sad.

 

 

 

Do state taxes matter? Some policymakers say that states can tax “the rich” as much as you want, and they’ll just sit still and take it. According to Clean Slate Tax blog, IRS migration data implies otherwise:

20150824-1

Florida and Texas were in the top ten for state business tax climates in 2013, while New Jersey, New York and California were in the bottom five. California had the highest state income tax rate, at 13.3%. New York and New Jersey are in the top ten. Texas and Florida have no state income tax.

We live in a complex world, and many factors affect migration patterns. But the weather in California is at least as nice as in Texas, yet people are fleeing California. It’s hard to believe taxes don’t have something to do with it.

Via the TaxProf.

 

20150819-2Robert D. Flach has a special Monday Buzz! roundup today, covering self-employment tax and saving for college.

Kay Bell, Tax fraud gangsters celebrate their crimes in song. IRS has made ID-theft fraud so easy, even a street gang can do it.

Russ Fox, Former Oklahoma State Senator Embezzled $1.2 Million & Committed Tax Fraud:

Over a ten-plus year period Mr. Brinkley had fraudulently obtained over $1.2 Million from the Better Business Bureau. Mr. Brinkley was President and CEO of the organization; he created phony invoices and used the money for personal expenses and to support his gambling habit. He also admitted to not reporting $148,390 in income on his 2013 tax return.

Elected officials don’t lose their human failings when they become elected officials. In fact, public office may attract people with certain kinds of failings.

 

TaxGrrrl, Debt, Equity and Startup Money. “Repayment of debt is tax-free but associated interest is taxed as ordinary income.”

Peter Reilly, Paul Hansen Receives Below Guideline Sentence – End Of L’affaire Kent Hovind?  The never ending saga of the tax trouble of the guy who things humans co-existed with dinosaurs.

 

20150824-3Jack Townsend, When a Prosecutor’s Questions Turns the Prosecutor Into a Witness

Keith Fogg, My Dad and the Tax Court are Almost the Same Age (Procedurally Taxing)

They’re, like, totally rad, too. Marijuana Taxes Swell, Not Up In Smoke After All (Robert Wood).

 

 

Scott Greenberg, Clean Energy Credits Mostly Benefit the Wealthy, New Study Shows (Tax Policy Blog). ” The credit for electric vehicles is most skewed towards high-income households, with the top 20% of taxpayers claiming 90% of all electric vehicle credits.”

Renu Zaretsky, Plans, Problems, and Production. This TaxVox headline roundup covers the Rubio tax plan, the Walker ACA replacement, and more.

20150824-4

 

TaxProf, The IRS Scandal, Day 835Day 836Day 837.

News from the Profession. Going Concern Is Now Part of AccountingflyCaleb Newquist takes the Boeing.

 

Share

Tax Roundup, 8/7/15: Iowa sales tax takes a holiday, and other brutal assaults on reason.

Friday, August 7th, 2015 by Joe Kristan

20150807-1Today is the firm field day. Once again my proposal for an all-office open chess tournament failed to win support, so it’s golf again.

The annual Iowa sales tax holiday for clothing and footwear is today and tomorrow. Details from the Iowa Department of Revenue:

-Exemption period: from 12:01 a.m., August 7, 2015, through midnight, August 8, 2015.

-No sales tax, including local option sales tax, will be collected on sales of an article of clothing or footwear having a selling price less than $100.00.

-The exemption does not apply in any way to the price of an item selling for $100.00 or more

-The exemption applies to each article priced under $100.00 regardless of how many items are sold on the same invoice to a customer

“Clothing” means…

-any article of wearing apparel and typical footwear intended to be worn on or about the human body.

“Clothing” does not include…

-watches, watchbands, jewelry, umbrellas, handkerchiefs, sporting equipment, skis, swim fins, roller blades, skates, and any special clothing or footwear designed primarily for athletic activity or protective use and not usually considered appropriate for everyday wear.

Sales tax holidays are a bad policy, for reasons explained well by Joseph Henchman and Liz Malm, including this:

Political gimmicks like sales tax holidays distract policymakers and taxpayers from genuine, permanent tax relief. If a state must offer a “holiday” from its tax system, it is a sign that the state’s tax system is uncompetitive. If policymakers want to save money for consumers, then they should cut the sales tax rate year-round

The Federation of Tax Administrators has a complete list of sales tax holidays for 2015. Mississippi and Louisiana have holidays for firearms purchases September 4-6, so you can dress up in Iowa and drive south to do your weapons shopping in Iowa style.

Related: Kay Bell, 13 state sales tax holidays on tap this weekend

20150807-2

Robert D. Flach brings the Friday Buzz, including a special offer on THE NEW SCHEDULE C NOTEBOOK, his tax Baedeker for the sole proprietor.

William Perez, Changes in Tax Deadlines to Take Effect in 2017 (Plus Deadlines for 2015 and 2016)

Jason Dinesen, Glossary of Tax Terms: LLC

Keith Fogg, The Room of Lies (Procedurally Taxing). No, it’s not about debate settings, Congress or the White House Press Briefing Room. It’s about the process the government uses in deciding whether to appeal tax cases.

Robert Wood, Mo’ Indictments For Mo’ Money Taxes, 20 Years Prison Possible. “Indeed, the fallout for innocent taxpayers patronizing a tax preparation shop that is in trouble can be far-reaching.”  Yes, that’s why taxpayers should be wary of a shop that seems to always get bigger refunds than anyone else.

Tony Nitti, If You Hired Mo’ Money Taxes To Prepare Your Return, You Continue To Have Mo’ Problems.  “The most institutionally corrupt organization south of the New England Patriots…”

TaxGrrrl Live-blogged the GOP presidential debate last night. As the political season seems to be fully underway, it’s time to express my joy of the season, best stated by Arnold Kling:

To me, political campaigns are not sacred events, to be eagerly anticipated and avidly followed. They are brutal assaults on reason. I look forward to election season about as much as a gulf coast resident looks forward to hurricane season.

And reason never comes out well in the contest.

20150807-3

Renu Zaretsky, “If at first you don’t succeed, try, try, again.” Today’s TaxVox headline roundup covers international tax reform, gas taxes, and sales tax holidays.

TaxProf, The IRS Scandal, Day 820. Lots of reaction to the Senate Finance report on the scandal.

Peter Reilly, IRS Scandal – Blame It All On Lois Lerner And Move On?

Joseph Thorndike, Clinton Should Keep It Simple and Just Propose Repealing the Capital Gains Preference (Tax Analysts). No, no, no. She should keep it simple and propose repealing the capital gain tax.

 

Career Corner. The “I’m Leaving” Conversation (Green Dot Peon, Going Concern).

Share

Tax Roundup, 5/28/15: Tax Court doesn’t let auto dealer undo LIFO termination seven years later. And more!

Thursday, May 28th, 2015 by Joe Kristan

 

No Walnut STYou messed up, but you’re stuck with it. A California auto dealer decided to get off LIFO inventory. “Last-in, First-out” inventory accounting generally reduces current income by capitalizing smaller amounts in inventory over time. If you sell your business, however, it catches up with you — those savings all come into income at once.

The auto dealership operated as an S corporation. The owner decided that because he might be selling soon, he would go off LIFO using the automatic method change procedure then offered by the IRS. That procedure, Rev. Proc. 97-37, allowed him to spread the additional income over four years.

Something went wrong. The taxpayer represented on the Form 3115 filed under the IRS procedure that it would value all inventory under the lower of (FIFO) cost or market, but instead it valued its new cars, used cars and parts three different ways. This went unnoticed and unchallenged for a number of years, starting in 2001. Needless to say, the contemplated sale of the dealership did not occur in the meantime.

At some point, the dealership’s tax preparer concluded the different methods might be a problem after attending a seminar. In 2009, they filed amended returns for 2002 through 2007 that said the LIFO termination was ineffective and that as a result the taxable income for those years was overstated – by about $875,000 for 2002 and 2003 alone.

This led to a strange argument, where the taxpayer argued that their failure to properly follow Rev. Proc. 97-37 meant their LIFO termination was never effective. The IRS said the taxpayer’s inadequate compliance was good enough, and the taxpayer is stuck with the no-longer-desired LIFO termination.

Tax Court Judge Wherry decided that the automatic change failed — siding with the taxpayer — but that didn’t settle the issue:

First, we must decide whether, notwithstanding its failure to secure respondent’s automatic consent in 2001, JHH’s filing of its 2001 through 2007 tax returns in accordance with a new method of accounting was a change in method of accounting. If so, second, we must ascertain whether the amended returns reflect a further change in method of accounting for which respondent’s consent is again required. If it is, then because respondent has not consented to the change, JHH may not revert to the LIFO method simply by filing amended returns.

The court decided that the filing of on-LIFO returns for 2001 through 2007 by the taxpayer — referred to as “JHH” —  effected an accounting method change, even though the automatic change was ineffective (citations omitted):

…”a short-lived deviation from an already established method of accounting need not be viewed as a establishing a new method of accounting.” And in that case, “neither the deviation from, nor the subsequent adherence to, the method of accounting would be a change in method of accounting.” 

As we observed in Huffman: “The question, of course, is what is short-lived.”

Seven years wasn’t short enough, to the court:

Regardless of the upper temporal boundary of a “short-lived deviation”, we think that seven years lies beyond it. JHH’s “consistent treatment of an item involving a question of timing * * * establishes such treatment as a method of accounting.”  Notwithstanding its failure to secure respondent’s automatic consent, JHH changed its method of accounting from LIFO by accounting for its vehicles inventory on the specific identification method on its 2001 through 2007 tax returns.

20121212-1The court said the IRS has two choices when confronted with such an unauthorized method change: force the taxpayer to change to the old method, or accept the unauthorized change, imposing any adjustments necessary to avoid double-counting. The IRS chose to accept the change.

That meant the attempt to go back on LIFO was another method change, again requiring IRS consent. The IRS wasn’t going along, and the taxpayer was stuck with FIFO.

The moral? Many taxpayers filed automatic accounting method changes for 2014 under the “repair reg” rules. This case shows that the IRS can enforce the automatic method change conditions and deny benefits to taxpayers who don’t dot all of their “i”s.

It also shows reminds us that if you are doing something wrong for a number of years, it becomes “right,” in that it becomes an accounting method. It might be an improper method, but you still need IRS consent to change it. Many improper methods can be changed automatically, but sometimes advanced IRS permission is required. If you don’t do it “right,” the IRS holds all the cards.

Cite: Hawse, T.C. Memo. 2015-99; No. 8267-12

 

20150528-1

 

Tom VanAntwerp, How Hackers Breached the IRS and Stole $50 Million (Tax Policy Blog):

Nicholas Weaver, a researcher at the University of California, Berkeley, previously tried to access his own transcripts without resorting to personal knowledge. Using the real estate website Zillow and personal information site Spokeo, he was able to successfully find answers to the personal questions that only he should have known.

Cybercriminals who specialize in stealing and processing this personal data en masse were able to answer these identifying questions at scale. Much of the information used by the IRS to verify identity is either publicly available or for sale to underground cybercriminals. Hackers can buy access to stolen consumer or financial data, and then write a program to plug answers into the questions asked by the IRS. Once hackers successfully claim an identity, they can use the information from previous years’ tax returns to file new, fraudulent returns and steal tax refunds.

That’s… not comforting.

 

Our friends the Russians. AP sources: IRS believes identity thieves from Russia (KWWL.com)

TaxProf, GAO, TIGTA Warned Of IRS’s Lax Computer Security For Years Before Hack Of 100,000 Taxpayer Accounts On IRS Website.

William Perez, What Can We Do Differently in Light of the IRS Data Breach. Some suggestions for protecting your personal data.

 

20150528-2

 

Robert D. Flach, WHAT A DISRUPTIVE DEVELOPMENT THIS IS!. Robert refers to the late arrival of corrected 1099s. “Clients who would normally send me their “stuff” in early or mid-February – allowing for a much smoother work flow during the season – now must wait until mid-March because of the need to “wait and see” if corrected brokerage reports arrive.”

Russ Fox, Surprise! You Heard About that May 29th Filing Deadline, Right?.

TaxGrrrl, Taxpayers Have More Time To File In 2016. “Three more days!”

Robert Wood, Man Gets Prison For Inventing His Own Church, And It’s Not Scientology. Technically, his prison time isn’t for starting a new church — that’s legal — but for using it to evade taxes.

Peter Reilly, Limits Of Hobby Lobby – Priests For Life Denied Rehearing On Contraception Mandate.

Kay Bell, Italy charges Bulgari luxury jewelry heirs with tax evasion

 

Len Burman, The Trouble with the FairTax (TaxVox). Mr. Burman concentrates on its distribution among income classes, rather than its overall implausibility.

TaxProf, The IRS Scandal, Day 749

Career Corner. Reminder: Robots Are Coming For Your Accounting Jobs (Caleb Newquist, Going Concern).

 

Share

Tax Roundup, 5/14/15: Snowbird fails to melt Iowa Department of Revenue opposition to gain exclusion. And many links!

Thursday, May 14th, 2015 by Joe Kristan

 

Programming note: No posting tomorrow. See you Monday!

 

Iowa's business tax climate, illustrated

Materially-participating in winter

Snowbird loses “material participation” Iowa capital gain exclusion argument. A taxpayer who claimed the unusual Iowa exclusion on very-long-term capital gains failed to convince the Department of Revenue that he “materially participated” in the activity for the minimum of ten years required to qualify for the exclusion.

Iowa allows taxpayers to exclude certain long-term gains from their Iowa taxable income if they meet two requirements:

– They have held the property for ten years, and

– they “materially participated” in the business sold (or in the business holding real property sold) in the ten years preceding the sale.

The “material participation” rule follows the federal “passive activity” material participation definitions. This usually is based on time spent in the activity. Farmers who materially participate in five of the last eight years before they start drawing Social Security payments are considered to materially participate in the farming activity forever. Other taxpayers who retire after working in a business generally are considered to “materially participate” for five years after retirement.

The Iowa ruling letter gives sketchy facts, but it does note (my emphasis):

In determining material participation, only the 10 calendar years immediately prior to the sale are considered and the determination of the participation is limited to that property which is sold.  Both the Department’s rule and the Internal Revenue Code (IRC) require material participation to be regular, continuous, and substantial.  The fact that you wintered in Florida lends serious doubt as to the regular part of that requirement.  Additionally, your daughter was paid for management services.  Rule 701 IAC 40.38(1)(e)(7) states in part, “Management activities of a taxpayer are not considered for purposes of determining if there was material participation if either of the following applies: any person other than the taxpayer is compensated for management services, or any person provides more hours of management services than the taxpayer.”

The letter goes on to say that it’s up to the taxpayer to prove participation, and the taxpayer failed to provide logs, calendars or other evidence that he worked sufficient hours to meet the material participation tests.

The moral? If you want to claim material participation, and you have stepped away from the business, it’s important to keep good records of your participation. The state may not be inclined to take your word for it.

Cite:  Document Reference: 15201008

Related:

Material Participation Basics

IOWA’S SUPER-LONG TERM CAPITAL GAINS DEDUCTION: IF YOU QUIT, DON’T WAIT TOO LONG TO RETIRE

 

20140508-1

 

Kay Bell, Don’t ignore that IRS letter and nine other tax notice tips

Robert Wood, Facts About FATCA, America’s Global Disclosure Law. “If you think money anywhere can escape the IRS, think again.”

Jim Maule, When Do Relationships End for Federal Income Tax Purposes?:

The taxpayer argued that the child remains her foster child because they continued their relationship and hold each other out as parent and child. The Tax Court, however, determined that the taxpayer’s guardianship terminated in 2004 when the child attained majority. At that point, the child no longer could be said to be someone who “is placed” with the taxpayer.

Interesting.

 

Robert D. Flach, NO INCOME IS TAXED ALONE

Andrew Mitchel has a new Flowchart – Taxation of Pension Distributions Under UK – US Income Tax Treaty

 

Cara Griffith, Learn to Love the Property Tax — It’s Not So Bad (Tax Analysts Blog):

Despite its bad reputation, the property tax has numerous benefits. For local governments, the tax provides a relatively stable source of revenue. Local governments also have a fairly high collection success rate. Many property owners have escrow accounts through their mortgage companies, which collect tax monthly and remit it at the appropriate time. Because of that, and the fact that the property tax is attached to something physical, it is hard to avoid or evade.

It’s hard to beat the property tax for funding local services. When the politically-influential carve themselves out of it with TIFs or special exemptions (e.g., special agricultural assessment rules), those that are left footing the bill are understandably unhappy.

 

Renu Zaretsky, Wishes, Dreams, and Bittersweet Denials Today’s TaxVox headline roundup covers thoughts on the effect of reduced refunds on this spring’s retail sales, the failure of a proposed soda tax in California, and the need for more IRS authority to fix bad EITC claims.

Alan Cole, NFIB Survey: Taxes a Top Problem for Business (Tax Policy Blog).

Carl Smith, IRS Plays Cat and Mouse With Tax Court on Its Constitutional Status (Procedurally Taxing).

IMG_1513

Joseph Thorndike, Even Under a Flat Tax, Learn to Love Those Loopholes, Because They’re Here to Stay (Tax Analysts Blog). “Once you win the battle, you have to keep fighting it over and over again.”

Greg Mankiw, Why I invest in index funds. “For investors, 2014 was the sixth consecutive year that hedge funds have fallen short of stock market performance, returning only 3 percent on average.”

Hank Stern, Cover Cali sputtering. (InsureBlog). “The Golden State’s health exchange (Covered California) continues to burn through tax-payer dollars at an alarming rate.”

 

TaxProf, The IRS Scandal, Day 735

 

Career Corner. Should CPAs Consider an MBA? (Paul Gillis, Going Concern). Not to fix your car, no.

 

Share

Tax Roundup, 5/13/15: Des Moines tries to speed through a red light. And: Tax Expert, heal thyself.

Wednesday, May 13th, 2015 by Joe Kristan

DNo Walnut STes Moines plans to sue to keep revenue camera revenue flowing. The Des Moines tax on unwary out-of-town motorists driving past Waveland Golf Course lost another battle yesterday.  The Iowa Department of Transportation turned down the city’s appeal of the Departments order to shut down the city’s freeway speed cameras (Des Moines Register)

As seems to be the practice when it imposes an illegal tax, the City now plans to blow a bunch of money on lawyers rather than obey the law, reports the Register:

Des Moines will appeal the ruling to district court, officials said.

Iowa is the only state in the United States that has permanent speed enforcement cameras on its interstate highways, according to the DOT, which in late 2013 adopted new rules governing the use of the devices on or next to state highways.

A few years ago Des Moines was caught imposing an illegal franchise tax on its residents’ utility bills. Rather than apologizing abjectly and refunding the ill-gotten gains, it appealed all the way to the U.S. Supreme Court, losing every step of the way. In the end it had to repay the tax, the city lawyers, and the taxpayer lawyers for a bunch of pointless litigation. The city still seems to favor that approach.

 

Flickr image by Ano Lobb under Creative Commons license.

Flickr image by Ano Lobb under Creative Commons license.

The cobbler’s children go barefoot. Mr. Hughes, a U.S. Citizen, had a successful career at one of international accounting firm KPMG. Tax Court Judge Wherry tells of an impressive career arc (my emphasis):

During his tenure at KPMG Mr. Hughes rose through the ranks and moved among KPMG’s international offices. Between September 1979 and 1994 he worked in the firm’s international tax group in Houston, Chicago, and Toronto, earning promotions from staff accountant to manager, from manager to senior manager, and finally, in 1986, to partner. During this period his duties shifted from preparing corporate and partnership Federal income tax returns to advising clients, particularly publicly traded corporations. Mr. Hughes also began to specialize in the international aspects of subchapter C of the Code and cross-border transactions, particularly mergers and acquisitions (M&A). He returned to the Chicago office and continued with his transactional work for publicly traded corporations.

A key aspect of M&A work is gain recognition and the basis consequences of transactions.  Transactions like this:

During 1999 KPMG spun off its consulting business to a newly formed corporation, KCI. The firm retained a direct equity stake of approximately 20% of KCI’s outstanding shares, and these shares were specially allocated among KPMG’s partners, including Mr. Hughes (K-1 shares), in January 2000. KPMG caused KCI to issue shares representing the remaining 80% of its equity to KPMG’s partners, including Mr. Hughes, who received 95,467 shares of KCI stock (founders’ shares) on January 31, 2000. Mr. Hughes did not contribute funds to KPMG in connection with KCI’s formation. He took zero bases in the founders’ shares.

So far, so good. Mr. Hughes along the way married a U.K. national and gave shares to his wife. There things begin to get a little foggy. The shares were sold at a time the couple resided in the U.S. , and the taxpayers did not claim full proceeds in income, on the grounds that the recipient spouse received a tax-free step-up in basis when she received the shares in the U.K. After clearing away some fog, the Judge lays out the remaining issues:

The first two are: (1) whether Mr. Hughes transferred ownership of the KCI shares to Mrs. Hughes, and (2) if so, whether Mrs. Hughes took bases greater than zero in the KCI shares. For petitioners to prevail, we must answer both questions affirmatively.

20120511-2When you give shares, or anything else, to a spouse who is a U.S. citizen, Sec. 1041 applies to provide that no gain is recognized and basis carries over. Sec. 1041 doesn’t apply to non-U.S. spouses. The Tax Court explains what happens:

Where, as here, an interspousal property transfer takes the form of a gift, no gain is realized, so regardless of whether section 1041(a) applies, there is no gain to be recognized…

The donee, on the other hand, realizes an economic gain upon receipt of a gift. His or her wealth increases by the value of the gift. But for tax purposes section 102(a) excludes this gain from the donee’s gross income. To preserve the U.S.’ ability to tax any unrecognized gain in property that is the subject of the gift, section 1015(a) sets the donee’s basis in the property equal to the lesser of the donor’s basis (or that of “the last preceding owner by whom it was not acquired by gift”) or if there is unrecognized loss, then for loss purposes, the property’s fair market value.

The taxpayer, who doubtless guided many clients through harrowing cross-border M&A deals unscathed, failed to achieve that on his own return. The court ruled that not only did he owe additional tax, but also a 40% “gross valuation misstatement penalty”:

Given his extensive knowledge of and experience with U.S. tax law, Mr. Hughes should have realized that the conclusion he reached — that the KCI shares’ bases would be stepped up to fair market value, such that the built-in gain in those shares would never be subject to tax in either the United States or the United Kingdom — was too good to be true.

Ouch.

Cite: Hughes, T.C. Memo 2014-89

 

Locust Street, Des Moines

Locust Street, Des Moines

 

Paul Neiffer, “Cost don’t Matter, Except When it Does”

Jason Dinesen, Marriage in the Tax Code, Part 8: 1920s Court Battles

TaxGrrrl, 11 Reasons Why I Never Want To Own A House Again

Calling Baton Rouge. Baton Rouge producer pleads guilty to film tax credit fraud (WAFB.com):

Baton Rouge producer pleads guilty to film tax credit fraud:

“Louisiana’s film tax credit program cannot function as intended when people are constantly defrauding it,” said Louisiana Inspector General Stephen Street. “We are continuing to do everything we can to make sure there are criminal consequences when that happens, and today’s guilty plea is the latest example of that.”

Au contraire, as the Cajuns might say. I think that’s pretty much exactly how these things are intended to function.

Kay Bell, Duck Dynasty’s Louisiana state tax credits could be winged

 

David Brunori, A Flat Income Tax is a Good Thing (Tax Analysts Blog). “Every — and I mean every — tax commission that has ever opined on good tax policy has called for a tax system built on a broad base and low rates.”

 

IMG_1581

 

Howard Gleckman, Is the GOP’s Enthusiasm for Tax Cuts Going the Way of American Idol? A question answered “no” since at least 1981.

Andy Grewal, The Un-Precedented Tax Court: Part I (Procedurally Taxing) ” Although the court purportedly exercises the judicial power (more on that in a later post), most of its work product is not judge-like.  That is, the Tax Court decides most of its cases as an administrative office would, without setting precedent.”

 

TaxProf, The IRS Scandal, Day 734, featuring Peter Reilly’s IRS Not Grossly Negligent In Disclosure Of Exempt Application. High standards, not.

 

Jeremy Scott, Unexpected Tory Victory Has Major Ramifications for Europe (Tax Analysts Blog). “Defying polls, pollsters, and the specter of a hopelessly fractured Parliament, the Conservatives won a resounding victory in the U.K. election last week.” Just note that I arrived in Scotland with Labour leading the Tories 41-1 in Scotland. By the time I landed in Des Moines, the Tories held the same number of Scottish seats as Labour. No wonder I felt so tired.

20150512-1

Graphic from BBC

 

News from the Profession. Grant Thornton Not Gonna Let Some Rich Guy Drag Its Good Name Through the Mud and Get Away With It (Caleb Newquist, Going Concern).

 

Share

Tax Roundup, 5/12/15: IRS updates list of permitted private delivery services for timely-mailed, timely-filed rule.

Tuesday, May 12th, 2015 by Joe Kristan

UPS 2nd-dayWhen it absolutely, positively has to be postmarked today. While we live in an electronic age, there are still tax things that can only be submitted the old-fashioned way, on dead tree byproduct. That means the “mailbox rule” — timely-mailed means timely-filed — still means something to those of us facing filing deadlines.

The traditional way to document timely filing has been to use Certified Mail, Return Receipt Requested, at the good old post office. Sometimes it’s hard to get to the post office before they close — or before they stop bothering to process certified mail for the day — so many taxpayers have come to rely on “designated private delivery services” to document their filings.

The IRS last week updated its list of permitted private delivery options in Notice 2015-38. It is the first update of the list since 2004 and reflects changes in the offerings of the large delivery services. The approved services (effective May 6, 2015) are:

 

FedEx:

1. FedEx First Overnight

2. FedEx Priority Overnight

3. FedEx Standard Overnight

4. FedEx 2 Day

5. FedEx International Next Flight Out

6. FedEx International Priority

7. FedEx International First

8. FedEx International Economy

 

UPS:

1. UPS Next Day Air Early AM

2. UPS Next Day Air

3. UPS Next Day Air Saver

4. UPS 2nd Day Air

5. UPS 2nd Day Air A.M.

6. UPS Worldwide Express Plus

7. UPS Worldwide Express.

This means DHL no longer offers approved services. It’s UPS, FedEx, or the USPS. Also note that the popular “UPS Ground” service is not on the list. If you use a non-designated service, the filing date is the date the IRS receives it.

For the thrifty among us, it’s worth noting that for both UPS and FedEx, 2nd-day service works just as well as overnight delivery. In either case, the key is to make sure your shipping documents show a ship date that beats the deadline. Also, make sure you use the proper street address; the private services can’t deliver to IRS service center post office boxes.

Related: Russ Fox, Not All Private Delivery Services Are Equal

 

IMG_1583

 

Just time for a few links today:

 

TaxGrrrl, Tax Deadline Looms For Tax Exempt Organizations

Kay Bell, It’s a bird! It’s a plane! It’s a tax collector!

Robert D. Flach has fresh Tuesday Buzz!

 

David Brunori, The Highest Corporate Tax Rate Should Be Zero (Tax Analysts Blog):

Since 2002 I have been saying that states should repeal their corporate income taxes. I speak practically and am not furthering some ideological agenda. I said then that (1) the corporate income tax did not raise a lot of money; (2) without combined reporting and other safeguards, it would never make a lot of money; (3) it consumed an inordinate amount of resources (planning, litigating, auditing); and (4) it does not matter and we should stop pretending that it does.

Repeal of Iowa’s highest-in-the-developed-world income tax is a key part of the Tax Update Quick And Dirty Iowa Tax Reform Plan.

 

IMG_1557Andrew Lundeen, Let’s Eliminate the Tax Code’s Bias Against Saving with Universal Savings Accounts (Tax Policy Blog)

TaxProf, The IRS Scandal, Day 733, discussing a non Tea Party victim of IRS targeting that took it to court: “Last week a panel of three DC Circuit judges heard the IRS appeal. The hearing did not go well for the IRS. Indeed, it was an exercise in righteous humiliation of the Department of Justice.”

 

News from the Profession. Throwing Money at People Still a Solid Retention Strategy (Going Concern)

 

 

Share

Tax Roundup, 4/2/15: For gift deductions, it’s not just the thought that counts. It’s the paperwork. And: more!

Thursday, April 2nd, 2015 by Joe Kristan

salvation armyToday’s filing season tip: assemble your contribution documents. For some things, spending the money isn’t enough to put a deduction on your return. You also have to get the paperwork right.

Charitable contributions are very much in this category. And it’s not good enough to find some paperwork when the IRS examiner starts asking questions. You need the documents in hand before you file your return.

For cash contributions of $250 or more, you need to have, in the words of IRS:

…a contemporaneous written acknowledgment from the qualified organization indicating the amount of the cash and a description of any property contributed. The acknowledgment must say whether the organization provided any goods or services in exchange for the gift and, if so, must provide a description and a good faith estimate of the value of those goods or services. 

That’s true whether you give cash or property. That means if you don’t have a nice note from your donee for your $250 gift, you need to bug them until they give you one. It also means that if you claim a deduction for dumping a bunch of household goods at Salvation Army, you need to get a note from them with a list of the items donated and the “goods or services” statement.

You need an appraisal if you donated property (other than publicly-traded securities) to charity for deductions starting at $5,000. We will talk about that tomorrow.

For more information, See Topic 506 – Charitable Contributions at www.irs.gov.

Come back every day through April 15 for another 2015 filing season tip!

 

Russ Fox, Bozo Tax Tip #8: Be Frivolous! “Tax Court judges don’t have the same sense of humor that I do about frivolous arguments.”

 

atombombAmanda Athanasiou at Tax Analysts reports ($link), FATCA: Swatting Flies With Atom Bombs:

Possible inflation of the offshore tax evasion problem and the staggering costs of the Foreign Account Tax Compliance Act are causing even the most ardent advocates of information sharing and ending bank secrecy to question the U.S. approach.

“For the U.S. to ask countries around the world to spend billions in implementation costs to deliver less than $1 billion per year is, economically, complete nonsense,” said Martin Naville, CEO of the Swiss-American Chamber of Commerce. He referred to FATCA as the least considered program in history and “mind boggling” in its unilateralism. “The net value of FATCA for the U.S. is probably negative,” said Naville, who added that tax compliance is a must but that there are better ways to achieve it.

But it goes after Fat Cats! Don’t you get our clever pun? And besides, how can we go after international money launderers without making it a crime to commit personal finance abroad?

Related: Wall Street Journal, Checking the IRS Overseas (Via the TaxProf). “Even the Obama Administration says the law would capture only $870 million a year in additional tax revenue, which is probably overstated given changes in behavior by Americans and their overseas employers.”

 

20150402-1

 

William Perez, Do Your Home Improvements Qualify for the Residential Energy Tax Credits?

TaxGrrrl, Taxes From A To Z (2015): T Is For TIN (Taxpayer Identification Number)

Peter ReillyZombies Can’t File Tax Court Petitions. Making Tax Court headquarters the go-to place for a Zombie Apocalypse.

Kay Bell, IRS’ Koskinen says tax agency’s troubles are over. No joke. Joke.

Kristine Tidgren, Don’t Be Fooled! “While many artless tactics remain (if you just wire this money to Nigeria by Friday…), the emerging scams come wrapped in a cloak of credibility. It’s often difficult for even the wary to separate fact from fiction in this new age.”

 

TaxProf, The IRS Scandal, Day 693. “The Department of Justice announced yesterday that it will not pursue contempt of Congress charges against Lois Lerner.”  Of course not. That’s not what a scandal goalie does.

Marc Bellemare, Soda taxes don’t seem to work. (via Tyler Cowen)

Renu Zaretsky, A Penny for Your Sugar: Setting a Price on Sin. (TaxVox). “Are we are all aware of our sugar sins?”  Sins? So food nannyism is really a religion.

Not that the current tax law is exactly a shining light.  Ted Cruz and His Dim-Bulb Tax Policy (Joseph Thorndike, Tax Analysts Blog). “Increasingly, Washington is alive with interesting, conservative tax proposals. But none of them are coming from the junior senator from Texas.”

Meg Wiehe, More Than 20 States Considering Detrimental Tax Proposals (Tax Justice Blog). Pretty close to 50, I’d guess.

 

20150402-2

 

Christopher Bergin, April Is More Than Just Tax Season (Tax Analysts Blog). “Koskinen announced that so far, the filing season has gone “swimmingly,” which apparently means the IRS answers the phone less than half the time when taxpayers call for help.” 

Today in advanced tax policy debate: How Tax Brackets are Adjusted Explained in Taylor Swift Gifs (Kyle Pomerleau, Dan Carvajal, Tax Policy Blog)

 

News from the Profession. Deloitte Not Taking Any Chances That Someone Might Burn Their Disneyland to the Ground (Caleb Newquist, Going Concern).

 

Share

Tax Roundup, 2/16/15: Titanic saved! Well, except for the iceberg thing. Or, the regs are dead, long live the repair regs!

Monday, February 16th, 2015 by Joe Kristan

20140925-2So is the tax season saved? The IRS gave us a big “never mind” Friday afternoon with the issuance of Rev. Proc. 2015-20, letting taxpayers of the hook for countless Forms 3115 under the “repair regs.”

The main points:

“Small” trades or businesses — those with either average 3-year gross receipts under $10 million or assets under $10 million — can adopt the most common methods under the repair regulations without having to file an accounting method change. In fact, the Rev. Proc. requires no special statement or disclosure to adopt the new methods.

The “Small” tests are based on the size of the “trade or business,” not the size of the taxpayer. This means taxpayers who exceed these limits may still qualify if their component “trades or businesses” qualify.

Taxpayers may pay a price for not filing a 3115. If you skip the 3115 for the common method changes, you aren’t allowed to get the most lucrative one – the “late partial disposition election” for real estate and machinery improvements. This is the one Peter Reilly notes as having the potential to generate “biblical” deductions. That means if you want to claim this biblical deductions for any trade or business, you need to file the most common method changes for all of them, regardless of whether they qualify otherwise under Rev. Proc. 2015-20

For the details of the new rules, I have two dedicated posts:

IRS drops “Form 3115″ requirement for smaller taxpayers under tangible property rules, and

List of Rev. Proc. 2015-20 method changes.

No Walnut STPeter Reilly says John Koskinen Saves Tax Season With Form 3115 Relief For Small Business. Well sure.  Except maybe for the entirely out-of-control epidemic of identity theft refund fraud, the continuing confusion and almost certain widespread inicidence of the new individual mandate penalty, the sticker shock that millions will face when they recompute their ACA exchange plan tax credits, and the financial disaster looming for small businesses for the horrible crime of reimbursing employee health insurance. But other than that, yes, it’s all hunky-dory.

Other Coverage: 

Russ Fox, IRS Announces Small Business Relief for Form 3115 (Property Regulation Issue)

Tony Nitti, Repair Regulation Relief: What Does It Really Mean? (Not As Much As You Think):

You don’t have to file a Form 3115. But remember, the three safe harbors that we started with 4,000 words ago — the $5,000/$500 de minimus, small building, and routine maintenance exceptions — are annual elections that apply only on a go forward basis. These still must be attached to the returns.

Paul Neiffer, You Don’t Need to File Those Form 3115s After All

 

20150205-1

William Perez has Your Helpful Guide to Capital Gains Tax Rates and Losses

Jason Dinesen, Handling Franchise Fees on a Tax Return. He gives an example involving a $5,000 franchise fee: “The $5,000 franchise fee is considered an asset. The $5,000 is deducted over 180 months (15 years). This is true even though the franchise agreement is only 5 years long.”

Annette Nellen, Taxable income of a marijuana business. That’s pretty much the same as gross income.

Jana Luttenegger Weiler, Facebook Allows Users to Designate “Legacy Contact”

Kay Bell, 5 things to check when hiring a tax preparer

Stephen Olsen has his newest Summary Opinions, rounding up recent developments in tax procedure (Procedurally Taxing).

"Boris Johnson -opening bell at NASDAQ-14Sept2009-3c cropped" by Boris_Johnson_-opening_bell_at_NASDAQ-14Sept2009-3c.jpg: *Boris Johnson -opening bell at NASDAQ-14Sept2009.jpg: Think Londonderivative work: Snowmanradio (talk)derivative work: Off2riorob (talk) - Boris_Johnson_-opening_bell_at_NASDAQ-14Sept2009-3c.jpg. Licensed under CC BY 2.0 via Wikimedia Commons - http://commons.wikimedia.org/wiki/File:Boris_Johnson_-opening_bell_at_NASDAQ-14Sept2009-3c_cropped.jpg#mediaviewer/File:Boris_Johnson_-opening_bell_at_NASDAQ-14Sept2009-3c_cropped.jpg

Via Wikipedia.

Robert Wood, Savvy London Mayor Boris Johnson Paid IRS, Is Now Renouncing U.S. Citizenship. Considering what it costs him, it’s not surprising.

TaxGrrrl, Filing As Single Or Married: When ‘It’s Complicated’ Isn’t A Choice On Your Tax Return. As a filing status, that is.

 

TaxProf, The IRS Scandal, Day 648

Renu Zaretsky, No Hitting the Brakes for Tax Breaks… Today’s TaxVox headline roundup covers early movement on extending the “expiring tax provisions.”  Remember, they only got extended through the end of last year. Also links to discussions on Section 529 deductions, tax reform, and the romantic side of spreadsheets.

 

News from the Profession. Nearly Half of Accountants Surveyed Hooked Up With a Colleague (Adrienne Gonzalez, Going Concern)

 

Share