Posts Tagged ‘Judge Holmes’

Tax Roundup, 2/10/16: Tax Court rules out super-duper bureaucrat deduction. And: Don’t rob the preparer!

Wednesday, February 10th, 2016 by Joe Kristan

20120801-2You are fined $50 court costs. My accountant prefers it that way.  A good lawyer can make you seriously consider a position that seems absurd at first glance. An Arizona judge whose case showed up in Tax Court yesterday must be a good lawyer.

The case is based on the difference between the tax treatment of business expenses and employee expenses. Business expenses are normally fully deductible. In contrast, expenses incurred by an employee, and not reimbursed by the employer, are only deductible as itemized deductions, and then only to the extent they — when added to other “miscellaneous” deductions — exceed 2% of adjusted gross income. Worse, even if you have enough employee expenses to show up on Schedule A, they are non-deductible in computing alternative minimum tax. That often makes them useless.

Arizona state judge Michael Jones had a clever accountant who saw a potential way around this problem. According to the Tax Court, Judge Jones incurred some out-of-pocket expenses to run his chambers when state budget cuts began to pinch. His tax preparer, a CPA, said that Section 62(a)(2)(C) made these “above the line” business expenses:

(C)Certain expenses of officials

The deductions allowed by section 162 which consist of expenses paid or incurred with respect to services performed by an official as an employee of a State or a political subdivision thereof in a position compensated in whole or in part on a fee basis.

So how did that affect Judge Jones? From Tax Court Judge Holmes (my emphasis, citations omitted):

Maricopa County Superior Court is funded in part by the collection of fees. Individuals must pay the superior court clerk fees for various case filings, petitions, writs, the filing of any documents, and the issuance of any licenses or certificates. The county does not, however, receive fees paid for wedding ceremonies — judges are allowed to collect those directly (although Judge Jones himself did not charge for weddings during the years at issue).

Judge Jones argues that “in a position compensated in whole or in part on a fee basis” means something like “a position funded in whole or in part by fees paid by members of the public for services rendered by judges.” Neither the Code nor the regulations define what “fee basis” means, and the case law is similarly stubborn in its silence.

Judge Holmes ponders the arguments and reaches his decision:

We also have to conclude that the Commissioner’s position is the more reasonable one. An enormous number of government agencies, courts, departments, and boards receive fee income. If Judge Jones’s construction of section 62(a)(2)(C) were correct, all the positions in all these government bodies would be “position[s] compensated in whole or in part on a fee basis.” This would create a caste of employees — those employed as government “officials” — who would be exempt from the rule Congress chose to enact that limits the deductibility of unreimbursed employee expenses. Maybe Congress could do that, but it didn’t do so plainly. Business expenses are also usually thought deductible because they are an ordinary and necessary requirement for producing income. But Judge Jones’s reading of section 62 would uncouple the deductibility of an expense from the income it produces — once a position was funded in part by fees, any employee holding that position would be entitled to unlimited deduction of his unreimbursed business expenses regardless of whether those expenses had anything to do with those fees.

I think Judge Holmes comes to the right conclusion dealing with this obscure provision. If he concluded differently, every public official would be running to their preparers to amend all the open years. Though when it comes to a privileged “caste” of public employees, we’re further down that road than we should be already.

The moral? It’s important to handle business expenses properly. Many taxpayers who own S corporations, for example, pay some business expenses themselves without being reimbursed by the S corporation. Such expenses become “employee” expenses and are routinely lost. By submitting the costs to the employer — their own S corporation — for reimbursement, they become corporation expenses and fully deductible.

Cite: Jones, 146 T.C. No. 3

 

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Accounting Today, Obama Budget Includes Tax Increases and Tax Preparer Regulation. Of course it does.

We need IRS employees to oversee preparers to prevent fraud. IRS Employee Pleads Guilty to $1 Million ID Theft Tax Fraud Scheme (Department of Justice).

Kay Bell, Obama’s final budget is full of big, but unlikely to be fulfilled, tax and spending ideas. It will go over well as his prior budgets.

 

Paul Neiffer, We Knew It Was Coming!:

In doing various tax classes over the last few years, I almost always stated that it would only be a matter of time before the President would ask for this net investment income tax to be applied to S corporation and partnership income whether passive or material.  In the new budget proposal issued by the President, that time has come.

His budget proposes that all income of S corporations and partnerships be subject to the net investment income tax of 3.8%.  This would include any gains from selling any assets inside of these entities or selling the stock or partnership interest.  This will affect farmers who have large gains in the future.

Somehow I don’t think the momentum is there to expand Obamacare taxes.

 

Russ Fox, Can a Resident of a Non-Tax Treaty Country (With Respect to Gambling) Get His Withheld Funds Back? “Canadians are allowed to file a Form 1040NR and claim gambling losses up to the amount of wins, and get a refund. New Zealanders are not.”

Peter Reilly, Is Tax Foundation Unfair To Bernie Sanders? Only if it’s unfair to focus on the destruction that would result from his confiscatory taxes, rather than the magical results he promises when he gives you some of your money back through those wonderful and always efficient government programs.

Lany Villalobos, Patrick Tohomas, The Struggle to Obtain Individual Taxpayer Identification Numbers (Procedurally Taxing). The government is doing its best to increase tax burdens on offshore investors, while at the same time making it hard for them to even start complying.

TaxGrrrl, Ask The Taxgirl: The Child Tax Credit

Robert Wood, New Excuse: ‘Fear Of IRS Audit Made Me Cheat On My Taxes’ Huh?

 

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TaxProf, The IRS Scandal, Day 1007. After five years, one of the prominent 501(c)(4) applications slow-walked through the IRS process is finally approved. Nope, no politics here.

Tax Policy Blog, 2015 Outstanding Achievement in State Tax Reform Awards. None awarded to Iowans, unsurprisingly.

Ajay Gupta, Hillary Clinton’s Wall on the Border (Tax Analysts Blog):

Turns out the inevitable Democratic nominee, Hillary Clinton, would also build a great, great wall. Unlike Trump’s wall, hers would not deter foreign individuals lacking proper documentation from coming into the country. Instead, it would dissuade U.S. corporations stuck with domestic charters from leaving. And she would have U.S. investors and workers pay for that wall.

Something about grasping politicians loves a wall.

 

Career Corner. Which Popular Accounting Hashtag Should You Use? An Explainer (Caleb Newquist, Going Concern).

 

Jim Maule, Stupid Criminals, Tax Version. “According to several reports, including this one, a woman and her son walked into a Liberty Tax Services office in Toledo, Ohio, pointed what appeared to be a gun over which a towel was draped, demanded money, and made off with $280… It turned out that the “gun” was a curling iron. And it also turned out that the staff recognized the two as customers who had used Liberty’s services a few days earlier.”

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Tax Roundup, 9/9/15: Meredith HQ stays in Iowa despite taxes. And: Walter Mitty, Chiropractor — not Ghostbuster.

Wednesday, September 9th, 2015 by Joe Kristan

 

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A part of the Meredith campus in Downtown Des Moines.

Meredith Corporation will keep its headquarters in Des Moines, reports the Des Moines Register. The Des Moines-based media company yesterday announced its acquisition by Media General, a Virginia-based company. From the Register report:

Virginia-based Media General will acquire Meredith in a cash-and-stock sale, forming a new company — Meredith Media General — that will combine Meredith’s list of women-focused magazines and 17 local TV stations with Media General’s 71 TV stations and digital media assets.

“We have our corporate headquarters in Des Moines, my management team … we all live in Des Moines, our staff are in Des Moines. We will continue to be in Des Moines,” Lacy said. He will serve as CEO and president of the new company.

Meredith Media General will be incorporated in Virginia, but have corporate offices in both Richmond, Va., and Des Moines.

It’s an interesting compromise. With the CEO of the combined company already located in Des Moines, it’s unsurprising that he will run things from here, everything else being equal.

Yet not everything is equal. Des Moines is an expensive place tax-wise to run a corporate headquarters, according to the Tax Foundation’s Location Matters report. Iowa is the 4th most expensive state in which to locate a corporate headquarters, while Virginia is the 12th cheapest. 20150901-1

Fortunately for Des Moines, non-tax factors apparently outweighed the tax issues. These might include the in-place infrastructure for Meredith’s publishing arm, including Better Homes and Gardens and Martha Stewart Living. Still, those 900 Des Moines Meredith jobs might be more secure with a better tax environment. Quick and Dirty Iowa Tax Reform Plan, anyone?

 

Tony Nitti, Child’s Unauthorized Incorporation Of Father’s Business Proves Costly In Tax Court. “Raising kids comes with some well-known hazards: sleepless nights, spit-up stained clothes, and of course, the occasional flailing elbow to the genitalia. What you probably don’t anticipate upon the miracle of childbirth, however, is that one day your kid will take it upon himself to incorporate your business via the internet, costing you tens of thousands in tax deductions.”

Robert D. Flach, THE NATP TAX FORUM AND EXPO IN PHILADELPHIA – PART I. “The one thing that is missing from the NATP Tax Forum offering is the IRS perspective.”

Kay Bell, Tax scam callers now spoofing telephone numbers

TaxGrrrl, IRS To Refuse Checks Greater Than $100 Million Beginning In 2016

 

Scott Greenberg, The Carried Interest Debate is Mostly Overblown (Tax Policy Blog). Mostly? Almost entirely.

TaxProf, The IRS Scandal, Day 854

Career Corner. 5 Ways Accountants Can Protect Themselves from the Accountapocalypse (Chris Hooper, Going Concern)

 

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Who knew being a Chiropractor could be so exciting? James Thurber created the character Walter Mitty, “… a meek, mild man with a vivid fantasy life: in a few dozen paragraphs he imagines himself a wartime pilot, an emergency-room surgeon, and a devil-may-care killer.”

A Minnesota chiropractor, a Mr. Laudon, seems to have reprised the Mitty role on his tax return. If his Tax Court testimony is to believed, chiropractic practice can be pretty exciting. From the Tax Court:

He said that his patients often called him a psychiatrist, chauffeur, physician, peace officer, or even a pheasant hunter.2 Some of Laudon’s stated reasons for making these trips strain credibility: for example, driving to a “schizophrenic” patient who was — on more than one occasion — “running scared of demons” down a rural Minnesota highway, or driving to a patient’s home in a Minneapolis suburb — expensing 261 miles — because he had received a call from police that she had overdosed on OxyContin prescribed by her physician. Laudon claimed to have driven hundreds of miles per day — sometimes without a valid license — to see patients, but several of these trips were for medical procedures he was not licensed to perform.

Laudon contends that the Commissioner failed to classify certain deposits as nontaxable, including insurance payments for damage to several vehicles, one of which was involved in a “high speed police chase” with a man “high on meth and cocaine.”

IMG_1583Note that footnote 2, we’ll get to that in a minute. I never knew that a chiropractor could have such an exciting life. Law enforcement, mental health, high-speed chases — even exorcism, it seems.  Is there anything he couldn’t do? Well, back to footnote 2:

But not a ghostbuster. The Commissioner rhetorically asserted that some of Laudon’s trips might have made more sense if he was claiming to be a ghostbuster. Laudon then disclaimed any employment as a ghostbuster. In his reply brief the Commissioner conceded that Laudon was not “employed or under contract to perform work as a ghostbuster during the tax years at issue in this case.” We therefore need make no finding on the existence of a market for “supernatural elimination” in west-central Minnesota. See “Ghostbusters” (Columbia Pictures 1984).

In case you couldn’t tell, this is a Judge Holmes opinion.

Walter Mitty’s dreams didn’t go well, as his fantasy life had him in front of a fantasy firing squad. Things went badly for our chiropractor too. The court found both his documentation and his credibility lacking, including this about his mileage logs:

Laudon claimed to have driven hundreds of miles per day — sometimes without a valid license — to see patients, but several of these trips were for medical procedures he was not licensed to perform. Even his testimony about multiple entries in the logs where he wrote “DUI” was not credible: He claimed that these were not references to being stopped by police while under the influence, or driving while his license was suspended, but instead were his misspellings of a patient named “Dewey” — a supposed patient of his. He testified that he took one business trip to pick up a patient left stranded due to a domestic dispute with his girlfriend. And he even testified about trips he made to test his patients’ urine:

    Absolutely we do * * * [test urine]. It’s part of the — I believe it’s Federal, you know, that they have — we have to abide by that. It’s specific gravity. You’re basically, looking for sugar, let alone height, weight, blood pressure. Make sure they’re not drunk, doing illegal drugs.

We find Laudon not credible in his testimony regarding his business mileage, and this finding affects our views of his testimony’s credibility on every other issue in the case.

The taxpayer reported taxable losses from 2007-2009 ranging from $60,000 to $84,000. That alone is a challenge to credibility. The IRS added $346,000 to his income for the three years, and the Tax Court upheld the IRS with only minor changes. Among the disallowed expenses were “a Microsoft Xbox 360, Nintendo Wii, and numerous pieces of hair-salon equipment.” So, a barber, too.

The Moral? There might be more to that mild-mannered chiropractor than you imagined. But if there is, he needs to keep good records when the IRS comes calling.

Cite: Laudon, T.C. Summ. Op. 2015-54

Russ Fox is also on the case: Ghost Hunter, Pheasant Hunter, or Deduction Hunter: No Matter, He Loses at Tax Court

 

 

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Tax Roundup, 8/4/15: Cash-basis farmers score Tax Court win. Plus Buzz, and more!

Tuesday, August 4th, 2015 by Joe Kristan

binStrawberries. An old joke holds that the tax law has a provision that makes it illegal for farmers to pay taxes. Jokes usually express an underlying truth. The ability of most farm enterprises to deduct expenses on a cash basis is a big part of the joke. A fiscally-alert cash-basis farmer can ease the tax pain of a profitable year by buying up to a year’s worth of feed, seed and supplies on December 31, deducting the whole purchase.

The Tax Court last week upheld a broad use of cash-basis deductions by farmers in a case involving a California strawberry grower, Agro-Jal. This cash-basis deduction challenged case differs from what you might see in a typical Iowa crop or livestock operation. The taxpayer packs the strawberries it grows, and it purchased and deducted the packing materials on a cash basis. The IRS said that such supplies are not the sort of feed, seed and materials allowed to farmers as a cash basis deduction.

Judge Holmes looked at the rules and said the IRS got it wrong. The decision largely hinged on a Section that wasn’t directly in play here, Section 464. This section was enacted to fight an early tax shelter based on allowing cash basis farm deductions to off-the-farm investors by preventing “farm syndicates” from using the cash method. Judge Holmes considered the IRS arguments, and then noted (my emphasis, footnotes omitted):

But section 464 does bolster Agro-Jal’s argument indirectly, because the history of section 464 shows that before its enactment anyone in the farming business could immediately deduct prepaid expenses. Seen against this backdrop, section 464 looks like it was aimed at both especially abusive taxpayers — “farming syndicates” — and to certain especially abused expenses — “feed, seed, fertilizer, or other similar farm supplies.”

I understand this to mean that absent some other provision, farmers can, or could, deduct all prepaid expenses. Judge Holmes went on to consider the tax regulation on deductions of materials and supplies, and concluded that the IRS reading was not supported.

There is another wrinkle. The IRS has re-issued the “materials and supplies” regulation as part of its “repair regs” project, and it has changed the language relied on by the taxpayer. Tax Analysts discusses that change ($link):

Sharon Kay of Grant Thornton LLP said that the reference to the old version of the regs may not help other cash method farm taxpayers understand how to apply the new final tangible property regulations on materials and supplies. “That’s the big question,” she said. “What does this case mean, not just looking back, but actually looking forward under the new tangible property regulations?”

Kay noted that throughout the revisions to the tangible property regs, the IRS had made statements, primarily in the various preambles, that it did not intend for the revisions to substantially change the “determination of the treatment of materials and supplies as either non-incidental or incidental.” She said that the holding in Agro-Jal reflects farm taxpayers’ understanding of the law and general practices.

This may mean the IRS could continue to challenge deductions under the new regulations, hoping for a different result. But for Iowa livestock and crop farmers, whose big prepaid deductions are mostly for advance purchases of feed, seed and fertilizer, cash accounting does not seem to be under immediate threat. And it probably wouldn’t have been even if the IRS had won this case.

Paul Neiffer has more: Cash Basis Farmers Allowed to Deduct All Costs!

Cite: Agro-Jal Farming Enterprises, Inc., 145 T.C. No. 5.

 

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It’s summer. The bees are buzzing, and so is Robert D. Flach with a fresh Buzz roundup, including coverage of the new due-date rules.

Robert Wood, Charging $476K For Strippers On Company Card? No Tax Deduction, Jail Instead. That’s a lot of $1 bills.

Peter Reilly, Review Of Julian Block’s Home Seller’s Tax Guide. “The book packs a lot of important information into less than 100 pages.  I think that if I had a real estate office, I would be negotiating with Julian to buy copies in bulk to hand to potential clients as a marketing tool.”

Jim Maule, Another Problem with Targeted Tax Credits. “Once tax credits are handed out, everyone wants in on the gravy train.”

Kay Bell, Cool tax moves to make during August’s hot Dog Days

Jack Townsend, New Legislation Affecting FBAR and Tax Matters (8/1/15).

Mike Feehan, Urban Legends, Insurance File No. XXIV (Insureblog). “My opinion?  Most claims submitted are valid claims.  And systematic denial of valid claims is an urban legend.”

 

Cara Griffith, New York Attempts to Tax Income From Nonresident Lawyer Based on Bar License (Tax Analysts Blog):

“Thankfully, an administrative law judge for the DTA set the division straight. The ALJ concluded that the division’s argument is meritless, inconsistent with the state tax regulations, and inconsistent with New York judiciary laws. “The Division cannot,” the ALJ said, “assert tax merely based on a New York license.”

This is a case where my “sauce for the gander” proposal would allow taxpayers to collect penalties from the state for making a frivolous argument.

Richard Auxier, Recovery cannot save state budgets from politics (TaxVox). “Since then the economy has improved, state tax revenue are growing, and legislatures have more room to maneuver during budget season. Yet havoc still reigns in many statehouses. In fact, it might be getting worse.”

 

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TaxProf, The IRS Scandal, Day 817

Matt Gardner, Innovation Boxes and Patent Boxes: Congress Is Focusing on Corporate Tax Giveaways, Not Corporate Tax Reform. (Tax Justice Blog). The “patent box” would give preferential rates for intellectual property income, which would create a new industry of consultants devoted to making all income I.P. income. Far better to broaden the base and lower rates for everyone.

Kyle Pomerleau, Ways and Means Committee Introduces “Innovation Box” Discussion Draft (Tax Policy Blog). “Simply put, a patent box provides a lower tax rate on income related to intellectual property.”

 

Quotable: 

Most economists, on the other hand, believe that targeted tax incentives may work, but only in the sense that companies get extra cash and say the right things at press conferences. However, the tax breaks often don’t work in the sense of actually boosting state and local economies in any appreciable way. One large high-tech warehouse on the edge of town with 40 workers won’t transform anything. Neither will a dozen.

Billy Hamilton, Tax Analysts ($link)

 

News from the Profession. Accountant Posts Big Game Hunting Photos, Internet Flips Out (Caleb Newquist, Going Concern). I hope my big game trophy shots never make the internet. Oh, wait…

 

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Tax Roundup, 1/23/2015: Egg donor compensation taxable payment for services. Meanwhile, kidney donor compensation is a felony.

Friday, January 23rd, 2015 by Joe Kristan
"White-&-Brown-Eggs" by Evan-Amos - Own work. Licensed under Public Domain via Wikimedia Commons

“White-&-Brown-Eggs” by Evan-Amos – Own work. Licensed under Public Domain via Wikimedia Commons

The big news in the tax world today is a Tax Court case ruling that payments to an egg donor were compensation for services. The case turned on the language of the contract of between the egg donor and the agency that procured the eggs. Tax Court Judge Holmes ruled that the payments were not excludible as payments for physical damages because there was no tort claim involved.

There are plenty of places you can read more details on this case, including Russ Fox and Tony Nitti. The TaxProf has a roundup.

So there is an organized and legal market for donor eggs, which, if all goes well, turn into an entire new human. That’s a good thing. But if an agency paid you for one of your kidneys to save the life of an already-born child on the kidney donor list, they would face a $50,000 fine and five years in prison under the Gore-Hatch National Organ Transplant Act of 1984.

The National Kidney Foundation reports that 12 people die daily waiting for a donor kidney, and that 4,453 died waiting for a kidney transplant in 2013.  It’s a felony to save any of those lives by buying a kidney from a healthy, willing and fully-informed seller. Meanwhile, nobody dies waiting for a donated egg.

Cite: Perez, 144 T.C. No. 4

Related: The Case for Paying Organ Donors (Sally Satel)

 

Kyle Pomerleau, Richard Borean, More than Half of all Private Sector Workers are Employed by Pass-through Businesses:

53.7% of Iowans work for pass-through businesses taxed on 1040s.

53.7% of Iowans work for pass-through businesses taxed on 1040s.

“Pass-through” income is income earned by S corporations and partnerships, including LLCs. This income is taxed on 1040s. Those who favor ever-increasing individual taxation of “the rich” by definition favor increasing the tax on employment.

 

buzz20140923Robert D. Flach has your Friday Buzz, including thoughts on avoiding scammers claiming to be from IRS and on Wal-Mart’s cash tax refund program: “My advice – avoid this program.”

Kay Bell, IRS gets $1.3 million for Darryl Strawberry’s Mets annuity

Paul Neiffer, IRS Scammers Net $14 Million from 3,000 Victims. If the e-mail says it’s from the IRS, it’s not. If you aren’t expecting a call from the IRS, the caller isn’t from the IRS.

Jason Dinesen, Ridiculous IRS Situations I’ve Recently Dealt With. A continuing series.

Leslie Book, Tax Court Addresses Verification Requirement in Trust Fund CDP Case (Procedurally Taxing)

Robert Wood, Washington Nationals $210M Pitching Contract For Max Scherzer Is About Taxes. “The Home Rule Act prohibits the District from imposing a commuter tax on non-residents.”

Peter ReillyExclusive – Kent Hovind Claims Congressmen Are Looking Into His Case. All you could possibly want to know about the case of the guy who thinks the Flintstones was actually a documentary series.

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Robert Goulder, Reading the Tea Leaves: China’s Jurisdictional Tax Claims (Tax Analysts Blog). Contrary to some reports, even Communist China doesn’t plan to tax worldwide income of non-resident Chinese. The U.S. stands alone in doing that.

Howard Gleckman, A Look at the Territorial Tax Systems in Four Countries Finds No Magic Bullets (TaxVox). No magic beans, either, I’ll bet.

TaxProf, The IRS Scandal, Day 624

 

Career Corner. Here Are Just a Few Questions You’ll Be Asked in a Big 4 Interview (Adrienne Gonzalez, Going Concern).

 

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Tax Roundup, 1/21/15: The Peculiar Case of the Trucking Tax Turtle. And more SOTU reaction, oh boy.

Wednesday, January 21st, 2015 by Joe Kristan

tbtTurtles carry their home on their back. So do some taxpayers. The Tax Court yesterday ruled that a truck driver who claimed Minnesota residency was a tax turtle, carrying his tax home on his back.

It matters because you can only deduct meal and lodging expenses for travel “away from home.” When you’re a tax turtle, you’re never away from home — you live on the road.

Judge Holmes takes up the story.

Shalom Jacobs has been a truck driver since 2002. His trips were mainly long haul “over the road” — meaning he spent a significant number of weeks and months on the road and was paid by the mile…

When he wasn’t on the road, Jacobs considered his home to be in Cottage Grove, Minnesota, where he stayed in the guest room of his longtime friend and fellow expat, Shimon Casper. Casper and Jacobs were both born in Israel and reared on kibbutzim. According to Jacobs, the Caspers’ Cottage Grove home was an American-style kibbutz, where Casper, his wife and children, and Jacobs recreated the communal life of their homeland with everyone contributing everything they had and taking only what each needed.

I don’t think the kibbutz  life is the life for me, but if it were, I think I would stay in Israel, where the weather is better. But that doesn’t address our deduction issue. Judge Holmes, again (my emphasis, citations omitted):

Flickr image by USFWS Mountain Prairie under Creative Commons license

Flickr image by USFWS Mountain Prairie under Creative Commons license

The Code is a little peculiar in defining a person’s “home.” Normal people think of their home as the place where they spend their personal and family lives, but a “home” in tax law is usually where a taxpayer has his principal place of employment. Tax law defines a home as the permanent residence at which a taxpayer incurs substantial continuing living expenses only if he doesn’t have a principal place of employment But what if a taxpayer is constantly on the move? Cases decided over many decades give us the answer — a taxpayer who’s constantly in motion is a “tax turtle” — that is, someone with no fixed residence who carries his “home” with him.  Such a taxpayer is not entitled to business deductions for traveling expenses under section 162.  The burden of proof is on the taxpayer if he disagrees with the Commissioner, and that is a high hurdle for a tax turtle to clear.

Turtles aren’t typically seen in hurdle events, and this one failed to clear that high hurdle. Judge Holmes said the taxpayer failed to show that his friend’s home was, in fact, communal, that he actually paid household expenses, or that he used that address for voter registration. This is a good reminder of the importance of documentation in tax controversy; the judge is more likely to take your word if it agrees with a cancelled check.

The Moral: To deduct meals and lodging away from home, you need to leave your home behind. And Tax Turtles will clear a hurdle only if they have a ladder of good records to help them get over it.

Cite:  Jacobs, T.C. Summ. Op. 2015-3

 

buzz20140905Actually, that’s yesterday now. Reminder: Worst Tax Season Ever Starts Today (Adrienne Gonzalez, Going Concern)

Kay Bell, Tax filing season 2015 is here

William Perez, The Penalty for Not Having Health Insurance. “Here are details on how the individual shared responsibility payment is calculated.”

Jason Dinesen, Does Nebraska Recognize Same-Sex Marriages for Taxes?

Robert Wood, Why IRS Form 1099 Is So Dangerous To Your Tax Bill. “Failing to report one is asking for an audit.”

Tuesday Buzz is just as good on Wednesday. A belated Buzz from Robert D. Flach, including coverage of the recent Taxpayer Advocate’s report.

 

Stephen Olsen offers Summary Opinions for 12/19/14 to 1/05/15 at Procedurally Taxing. This rounds up tax procedure happenings.

Paul Neiffer, 2 Senators Work to Eliminate Capital Gains Tax on Chapter 12 Bankruptcies.

The US Supreme Court ruled in 2012 that the capital gains generated by these sales are subject to income tax.  The two senators do not believe this was the original intent of Congress when the wrote the original law during the 1980s farm debt crisis, so this new bill is designed to eliminate the imposition of capital gains or other taxes on the sale of property due to the Chapter 12 bankruptcy.

The two senators are Grassley and Franken.

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TaxGrrrl liveblogged the State of the Union address. I live-slept it

Howard Gleckman, The Tax Reform Gap Between Obama and the GOP is Widening (TaxVox):

But it isn’t hard to see where the two parties are headed. Obama does not want an anodyne debate over tax reform. Rather, he’s using reform rhetoric to support a “middle-class economics”agenda aimed at using the tax code to redistribute some income from the rich to working-class households. For their part, Republicans want to use reform talk as a framework for a business-oriented growth agenda leavened by some targeted breaks for working families. 

That should be “some more income.

Scott Hodge, Will Obama’s New Plan to Help the Middle-Class Succeed When $1.5 Trillion in Redistribution Has Not?. Spoiler: no.

Tony Nitti, Why Republicans Should Embrace A 28% Tax On Capital Gains. I’m not remotely convinced; the correct rate is zero, as that income is already after tax money. But if you can get the ordinary rate down to 28% too, I’ll listen.

 

TaxProf, The IRS Scandal, Day 622

Peter Reilly, Will Kent Hovind Become This Year’s Cliven Bundy? If I knew who Cliven Bundy is, I might have an opinon on that.

 

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Tax Roundup, 12/10/14: Extender bill lives, permanent charitable extender bill doesn’t. And: don’t just buy it; install it!

Wednesday, December 10th, 2014 by Joe Kristan

lizard20140826Whither the extender bill? HR 5771, the bill to extend retroactively through the end of this month the 55 or so tax breaks that expired at the end of 2013, has been “placed on the Senate Legislative Calendar.” That means it appears to be proceeding to a vote, though I find nothing on when that will happen. Tax Analysts reports ($link) that outgoing Senate Majority Leader Reid says he will take up the extender bill ” after finishing work on a defense authorization bill and a government funding measure.”

Meanwhile, the President has threatened to veto a separate attempt to permanently extend three charitable breaks in the extender bill, including the break for IRA contributions. While that’s bad for those breaks, it implies that the White House will not oppose HR 5771’s one-year extension.

 

20130422-2Because it looks as though the “extender” bill will clear the Senate, taxpayers looking to add fixed assets have extra incentive to get it done this year. The bill extends through 2014 — and only through 2014 — the $500,000 limit on Section 179 deductions and 50% bonus depreciation. These breaks allow taxpayers to deduct over half (bonus depreciation) or all (Section 179) of the cost of fixed assets that are otherwise capitalized, with their deductions spread over 3 to 20 years.

Taxpayers should remember that it’s not enough to order or pay for a new asset by the end of 2014 to qualify for these breaks. The asset has to be “placed in service” by year end.

A Tax Court case from last December drives home the point, where a taxpayer lost an $11 million bonus depreciation deduction in 2003 because an asset bought at year-end wasn’t “placed in service” on time.  Judge Holmes takes up the story:

On December 30, 2003, an insurance salesman named Michael Brown1 took ownership of a $22 million plane in Portland, Oregon. He flew from there to Seattle to Chicago — he says for business meetings — and then back to Portland. Brown says these flights put the plane in service in 2003, and entitle him to a giant bonus-depreciation allowance. But a few days later he had the plane flown to a plant in Illinois where it underwent additional modifications that were completed about a month later.

The IRS argued that the need for modifications meant the airplane wasn’t “placed in service” before year end. The taxpayer argued that the airplane was “fully functional” as purchased, and therefore was “placed in service” when acquired and used for its first flight on December 30, 2003. The court agreed with the IRS:

While acknowledging in his briefs that those modifications made the Challenger “more valuable to him” and allowed him to “more comfortably conduct business” as a passenger, he says they have “nothing to do with the Challenger’s assigned function of transporting him for his business.” The problem is that this posttrial framing just doesn’t square with the trial testimony, in which Brown testified that those two modifications were “needed” and “required”. We therefore find that the Challenger simply was not available for its intended use on a regular basis until those modifications were installed in 2004. Brown thus didn’t place the Challenger in service in 2003 and can’t take bonus depreciation on it that year.

A new asset doesn’t actually have to be used during the year to be “placed in service,” but it has to be ready to go. A new machine should be on the floor and hooked up, not just in a crate on the dock, or in a trailer on the way in, if you want to depreciate it. If the new asset is a vehicle, you need to take delivery to get the deduction. If the asset is a farm building, it needs to be assembled and in place, not in boxes on the ground.

Cite: Brown, T.C. Memo 2013-275

 

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The TaxProf reports on a new Treasury Inspector General report, TIGTA: IRS Has 25-30% Error Rate In Refundable Child Tax Credits, Mistakenly Pays $6-7 Billion:

The IRS has continually rated the risk of improper ACTC payments as low. However, TIGTA’s assessment of the potential for ACTC improper payments indicates the ACTC improper payment rate is similar to that of the EITC. Using IRS data, TIGTA estimates the potential ACTC improper payment rate for Fiscal Year 2013 is between 25.2 percent and 30.5 percent, with potential ACTC improper payments totaling between $5.9 billion and $7.1 billion. In addition, IRS enforcement data show the root causes of improper ACTC payments are similar to those of the EITC.

So at least 1/4 of the credit is claimed fraudulently or illegally. This is one of the provisions the President insists be made permanent as a price for permanently extending business provisions. He killed the permanent extender compromise when it didn’t also make the child credit permanent.

 

Wind turbineIowa Public Radio reports Grassley Wants Wind Tax Credit to Go Further. He should read Bryan Caplan’s review, The Moral Case for Fossil Fuels: We Owe Civilization to Fossil Fuels. “And despite decades of government favoritism, alternative fuels have yet to deliver.”

 

Peter Reilly, Seventh Circuit Will Not Let Tax Protester Blame His Lawyer For Conviction:

James Stuart thought that Peter Hendrickson had “cracked the code” – the Internal Revenue Code, that is. Joe Kristan would characterize it as finding the tax fairy – that magical sprite who make your taxes go away painlessly while your sucker friends send checks to the tax man.   

It’s always fun to be named-checked by a Forbes blogger.

Jana Luttenegger Weiler, Tax Tips for Gifts to Charity (Davis Brown Tax Law Blog).

Robert D. Flach, DONOR ADVISED FUNDS. For at least 99.99% of taxpayers, these are far better than setting up a private foundation.

Kay Bell, Sen. Tom Coburn’s parting gift: a tax code decoder

Paul Neiffer, Watch Your Crop Insurance Form 1099s This Year

Jason Dinesen, 5 Things You Didn’t Know About EAs, #2: We Don’t Work for the IRS

Brad Ridlehoover, The Grinch That Stole Their Reasonable Cause… (Procedurally Taxing)

Tim Todd, IRS Erred in Making Notice of Tax Lien a Condition to Installment Agreement

 

TaxProf, The IRS Scandal, Day 580. Lois Lerner appears to have been scheming to sic the Justice Department on the Tea Partiers as early as 2010, according to newly-unearthed e-mails.

 

Howard Gleckman asks Why Does Congress Pay For Some Tax Cuts and Not Others? (TaxVox). “It can’t be the merits of the recipients. By now, TaxVox readers know that the expired tax breaks included such worthies as preferences for race horse owners, Puerto Rican rum manufacturers, and TV and film producers.”

Eric Cederwall asks What is the Simplest Tax System? (Tax Policy Blog). “Normative economics aside, a per-person tax is one of the most economically efficient taxes for raising revenue.”  Not happening, though.

 

Adrienne Gonzalez, Kids These Days Trust the IRS More Than Olds Do (Going Concern). Like Santa Claus and the Tooth Fairy, they’ll figure it out eventually.

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Tax Roundup, 10/22/13: Birthday edition! And an unappealing appeal.

Tuesday, October 22nd, 2013 by Joe Kristan

The Internal Revenue Code of 1986 celebrates its 27th birthday today.

President Reagan signs PL 99-514, the Tax Reform Act of 1986.

The authors of the Tax Reform Act of 1986 felt so good about their work amending the Internal Revenue Code of 1954 that they gave it a new name.  And it had some wonderful features compared to what we have now:

– Top marginal rate of 28%, with no stupid phase-outs of itemized deductions or exemptions.

– No capital gain-ordinary income rate differential – tolerable with low marginal rates, and a great simplifier of tax planning.

– It eliminated a whole bunch of complexity, including investment tax credits, and it simplified the life of preparers everywhere by making miscellaneous itemized deductions subject to a 2% of AGI floor, saving us the pain of telling clients they can’t deduct the Swimsuit Issue as an investment expense.

Sure, it had more complexity than I’d care for.  The complicated passive loss rules came in then, on top of existing complicated at-risk rules.  Phase-outs of the passive loss rules imposed hidden marginal tax brackets that helped inspire many awful imitations, like the phase-outs reenacted this year of itemized deductions and personal exemptions.   The 1986 Act brought us inventory capitalization rules, and it left in place the alternative minimum tax.  But at the time, it looked like a good start at much better tax policy.  Now it looks like a high-water mark.

 

Martin SullivanTax Policy In a Knowledge Based Economy (Tax Analysts Blog):

The skeptical accounting profession rarely allows worker training, brand-building, software, and business restructuring to be capitalized, but in so doing it is unwittingly keeping the most important sources of value out of view of managers and stockholders.

Actually, smart managers and investors know about these things, but financial statements aren’t very good at measuring them.

 

20120801-2Tax Court leaps back to work, releasing seven new cases on its first day back after the shutdown.  They include a Judge Holmes case illustrating how good news on the estate tax return can mean bad news on a later income tax return; that case will get its own post this week.

 

TaxGrrrl, Losing Your Identity In Five Easy Steps. Step One: Go To The Doctor.  “And it can all start out with something as simple as handing out your Social Security number at the doctor’s office”

Jason Dinesen, Incorporate Your Life? Not So Fast  “…simply having a business entity DOES NOT make everything in your life tax deductible.”

William Perez, Payment Plan Options. “The IRS will automatically grant a payment plan if your balance owed is under $50,000 and the monthly payments will fully pay the outstanding balance in 72 months or less.”

TaxProf, The IRS Scandal, Day 166

Jack Townsend,  Ex Top UBS Banker Arrested; Likely to be Extradited

Kay Bell, Amazon tax now out in Illinois, coming Nov. 1 to Wisconsin

 

Not only is it the birthday of The Code, it’s Buzz Day at Robert D. Flach’s place!

The Critical Question (Really): Is Obamacare in a Death Spiral? (Megan McArdle): “Another week has passed, which apparently means that it’s time for another terrifying article from Sharon LaFraniere, Ian Austen and Robert Pear on the federal health-care exchanges.”

 

SuccessDetermined Iowa City man may be first in state to buy insurance via glitch-plagued public exchange (Des Moines Register):

Voss said Monday that he tried more than 100 times before finally being able to sign onto healthcare.gov, type in his personal information, compare insurance plans, and purchase a policy. 

I wonder if Amazon.com ever tried that?

 

20121226-1Speaking of train wrecks,  McCoy gives up on train funds (Des Moines Register).  An Iowa legislator gives up on spending $310 million to build a money-losing, slower and more expensive competitor to the Megabus.  Now he can concentrate on getting that downtown zeppelin port that is so critical to the economic future of Des Moines.

 

The Cougars of Madison County. No, Francesca Johnson isn’t back on the prowl.

 

Hey, I said I’m sorry!  That you want to put me in jail.  A New Mexico man convicted of tax crimes and of collecting fraudulent farm payments maybe should have left well enough alone, if you can think a five-year prison sentence is well-enough.  But Billy Melot appealed, with potentially dire consequences.  DailyJournal.net reports:

A southern New Mexico farmer and businessman could face more time in prison because a federal appeals court on Monday tossed out his five-year sentence for failing to pay more than $25 million in federal taxes and fraudulently collecting farm subsidies.

However, the court said a federal district court judge erred in calculating Melot’s sentence by concluding that he had accepted responsibility for his crimes. Judges have the discretion of imposing a less severe sentence when they make that determination.

Under federal sentencing guidelines, the court said, Melot had potentially faced more than 20 years in prison.

The appeals court opinion noted that if Mr. Melot accepted responsibility, he had a funny way of showing it:

Since his conviction, Melot has tenaciously opposed the Government’s efforts to collect the restitution he was ordered to pay by the district court, attempting to thwart the collection of more than $18 million in outstanding income tax assessments and more than $6.5 million in outstanding excise tax assessments. In 2012, a federal magistrate judge issued a certification of criminal contempt against him in the ancillary collection proceedings, finding he “actively and intentionally participated in a scheme to fraudulently create a third party interest in his properties with the intention of defrauding the Court, sabotaging the orderly administration of justice and delaying the United States’ lawful efforts to recover the judgment as ordered by the Court.”

Mr. Melot is 61 years old.  If his sentence is stretched to 20 years, he won’t have much time to enjoy any money he keeps away from the feds.

 

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Tax Roundup, 7/25/2013: Mo’ refundable credits, mo’ fraud. Plus cigarettes and preschoolers!

Thursday, July 25th, 2013 by Joe Kristan

momoneyRefundable tax credits are a magnet fo’ mo’ fraud.  Five from Mo’ Money tax prep office in St. Louis arrested in scheme (St. Louis Post-Dispatch):

Mo’ Money franchise owner Jimi Clark, 57, of Memphis, Tenn., abused the American Opportunity Credit to attract and keep clients, prosecutors said. They filed for the credit on at least 47 returns where the taxpayer had not incurred any educational expenses, and unwisely, claimed the same amount of educational expenses, $3,765, on the “vast majority” of the returns, their indictment says.

In all, the 47 returns claimed more than $50,000 in educational credits.

Maybe 25% of the rundable Earned Income Tax Credit is paid improperly.  Yet legislators ignore how the credits actually work because they like them in theory.

 

Bankrupt state pays people to be friends. Illlinois governor to sign deal to lure fertilizer plant (Sioux City Journal)

Speaking of Bankrupt… Detroit Taxes and the Laffer Curve (Alex Tabarrok):

  • [The] per capita tax burden on City residents is the highest in Michigan. This tax burden is particularly severe because it is imposed on a population that has relatively low levels of per capita income.
  • The City’s income tax… is the highest in Michigan.
  • Detroit residents pay the highest total property tax rates (inclusive of property taxes paid to all overlapping jurisdictions; e.g., the City, the State, Wayne County) of those paid by residents of Michigan cities having a population over 50,000.
  • Detroit is the only city in Michigan that levies an excise tax on utility users (at a rate of 5%).

Sometimes you can’t solve the problem with more taxes.

 

Robert D. Flach, DEDUCTING CAPITAL LOSSES

Tony Nitti, Q&A: How Can An Accrual Basis Business Defer Revenue When It Receives Cash In Advance?

Phil Hodgen, Nonfilers–voluntary disclosure is not your only choice:

But my opinion is that the official program is fabulous for someone who is in deep trouble and might otherwise face a spot of prison time.  For that person, the “Your money or your life!” demand from the IRS is easy to answer.  Give ‘em your money. 

For almost everyone else, the voluntary disclosure program is stupidly expensive–in tax cost, penalties, interest, and professional fees to give the government all of the paperwork they want.

You gotta shoot the jaywalkers so you can slap the real crooks on the wrist.

Peter Reilly, Not Good For Real Estate Loss When Tax Court Judge Says Purports

Fiduciary Income Tax Blog, Trials and Tribulations of Nongrantor Trusts

 

 

Cara Griffith, Improving Transparency in Pennsylvania (Tax Analysts Blog)

TaxProf, The IRS Scandal, Day 77

Howard Gleckman, The OECD’s International Tax Plan: The First Step on a Long Road (TaxVox)

Tax Justice Blog, CTJ Presents the Nuts & Bolts of Corporate Tax Reform

Linda Beale, Senators promised 50 years of secrecy on their tax reform proposals

Daniel Shaviro, What is a “tax expenditure” and when does this matter?

 

TaxGrrrl,  Louisiana To Offer ‘Fresh Start’ Tax Amnesty Program.  I’m sure this time they really mean this is the last one.

Missouri Tax Guy, The Enrolled Agent, EA

Jack Townsend, Fourth Circuit Holds Defendant to His Tax Loss Stipulated in the Plea Agreement

Kay Bell, Summer 2013 sales tax holidays begin this weekend

William Perez, Sales Tax Holidays in 2013

                                                              

Quotable: (my emphasis)

The manufacturing innovation institute, meanwhile, is just another iteration of an idea that’s been around for longer than Barack Obama has. Go to any Rust Belt city and you’ll find research campuses, innovation institutes and similar institutions named after hopeful politicians who promised that a new manufacturing base would coalesce around this exciting agglomeration of creative minds. Unfortunately, in most instances it has turned out that manufacturing bases would rather coalesce around cheap land, low taxes and acres of uncongested freeway.

-Megan McArdle, “Obama’s Speech Is a Confession of Impotence

 

I think one judge will think otherwise. Three South Dakota men say income taxes don’t apply to them (Argus-Leader.com)

Tax Court Judge Holmes has a new opinion out.  Always entertaining and enlightening.

News you can use:  No Such Thing as Free Swag (Austin John, Elizabeth Malm, Tax Policy Blog).  Sorry, ESPY winners.

More harebrained than what they do anyway? U.S. Senators with Harebrained Tax Reform Ideas Offered an Opportunity (Going Concern)

Maybe not where you grew up. Cigarettes and Preschoolers Don’t Go Together (Scott Drenkard, Noah Glyn, Tax Policy Blog)

 

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Donating property? Get an appraisal. And it helps to get it on the property you donate.

Tuesday, February 5th, 2013 by Joe Kristan

20120801-2There are big tax advantages to donating appreciated capital gain property.  You get a charitable deduction for the full value of the property without ever paying tax on the appreciation.

There is lots of potential for abuse in valuing property, so the tax law lays out strict standards requiring “qualified appraisals” for most property donations over $5,000.  A taxpayer found out how strict yesterday in Tax Court.  Judge Holmes sets the stage:

Harvey Evenchik owned shares in a corporation known as the Chateau Apartments, Inc. Chateau’s sole assets were two apartment buildings — a 42-unit building known as the Chateau Apartments at 3666 East 2nd Street in Tucson, Arizona (Second Street), and a 10-unit complex at 3815 through 3821 East Lee Street, also in Tucson (Lee Street).

     Sometime in 2004 Harvey donated the approximately 72% of Chateau’s capital stock that he owned — 15,534.67 shares — to Family Housing Resources, Inc. (FHR), a nonprofit housing corporation.

Mr. Evenchik claimed a charitable deduction of $1,045,289 on his 2004 return — more than they could deduct.  The IRS challenged the carryover used on his 2006 return, saying the appraisal requirements hadn’t been met.  The Tax Court agreed that the taxpayer disclosures fell short, but then considered whether the taxpayers came close enough.  Unfortunately, the taxpayers valued the wrong asset.  Their appraisals covered the apartment units, but the taxpayer donated stock of the corporation owning the units — not the apartments themselves:

Commissioner is unable to determine whether the contributed property interest was overvalued. And the problem of misvalued property is so great that Congress was quite specific about what the charitably inclined have to do to defend their deductions.

So while close might have been good enough, this wasn’t close.

The Moral:  When you make a property donation — whether its real estate, art, or anything besides publicly-traded securities — you need an appraisal when the donation exceeds $5,000.  Make sure you get the appraisal done right.  If you wait until the IRS audits you, it’s too late.  And make sure the appraisal covers what you actually donate.

Cite: Estate of Evenchik, T.C. Memo 2013-344.

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Cobbler’s children go barefoot, tax lawyer’s income goes unreported.

Friday, January 18th, 2013 by Joe Kristan
Flickr image courtesy Lara604 under Creative Commons license.

Flickr image courtesy Lara604 under Creative Commons license.

Judges are often hard on tax pros who get in trouble.  They seem to think practitioners should know better than to underreport income or fudge deductions.  That led to a bad result for California attorney Owen Fiore in Tax Court yesterday.

Mr. Fiore apparently was the model of a rainmaking partner.  Unfortunately, he failed to delegate other duties, according to Judge Holmes:

His sophistication did not extend to his management of the firm’s finances. Fiore came to rely on a three-checkbook method of accounting — one for the general account, one for the client trust fund, and one for minor expenses such as filing fees. The preponderant flow of dollars was thus through the general account. Client billings went into the general account; payroll, office rent, and the firm’s other expenses came out of that account. Fiore even handled payroll in a way that would have been familiar to lawyers of a hundred years before — writing out checks to each associate and employee by hand on paydays. At the end of each year, he would write out a W-2 for each employee by hand.

The attorney came under financial pressure, and things at the firm got out of hand until he turned over management of the firm to a partner in mid 1999.  Unfortunately, the IRS came poking around in time to look at the pre-transition returns.  After Mr. Fiore ignored one too many requests for a meeting, the examiner turned the case over to the Criminal Division.

Special Agent Lisa Sasso took over the investigation. She started by requesting copies of Fiore’s 1996 and 1997 tax returns from IRS Service Center — but they were missing the Schedules C. Unlike the civil agents, Sasso didn’t ask for meetings — she just showed up unannounced at Fiore’s office in March 2002. She read Fiore his rights and asked him questions about his billing procedures, books and records,  and business expenses. After her initial visit, she requested documents  for the 1996 and 1997 tax years. Fiore sent her some documentation, but  didn’t cough up any work papers to tie his information to his return.  So Sasso sent a summons to Fiore’s bank and then she did a bank-deposits analysis for 1996 and 1997.

Things went badly from there.  The agent detected unreported income, and Mr. Fiore was eventually pleaded guilty  and was sentenced to 18 months in federal prison for underreporting 1999 income.  He contested the IRS imposition of civil fraud penalties for 1996 and 1997.  Judge Holmes said that the cobbler should have minded his own shoes (my emphasis)

Notwithstanding his busy schedule and administrative shortcomings, he must have known that there was a very high probability that he wasn’t reporting all of his income. His educational background and work experience would alert him to the likely outcome of his haphazard income-estimation method — that he was likely failing to report substantial amounts of income. Fiore knew he was neglecting firm administration and running a high risk of not reporting taxable income.

We also find that Fiore deliberately avoided steps to confirm the possibility of unreported income. He could have easily confirmed whether his estimates of gross income were correct by checking his business-account bank statements. He also had a three-ring binder for each taxable year that included a copy of all the bills and deposit slips.

     Fiore in fact admitted to willful blindness “not for the purpose of defrauding the government, but rather, sadly, for the purpose of getting and keeping clients.” At the very least, this is an admission that he believed his time was better spent on getting clients than confirming whether he reported all his income — even when he suspected that at least some taxable income wasn’t being properly reported. We therefore find that Fiore was willfully blind, weighing in favor of finding fraud.

     And with particular weight given to this willful blindness we find that the Commissioner has met his burden of proving by clear and convincing evidence that Fiore filed fraudulent returns.

The court upheld the 75% civil fraud penalty for 1996 and 1997.

The Moral?  Sure, you’re busy.   Don’t be too busy to deal with an IRS agent; they won’t just go away if you ignore them.  And if you are too busy to take care of your tax filing requirements, you may wish you had taken the time to tend to your cobbling.

Cite: Fiore, T.C. Memo. 2013-21

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