Posts Tagged ‘Judge Nega’

Tax Roundup, 3/15/16: Deadline Day, Coupling Vote Day. And: Arnold Palmer’s worst golf partner goes to Tax Court. (Updates)

Tuesday, March 15th, 2016 by Joe Kristan

coupling20160129Coupling day in the General Assembly. The bills to couple Iowa’s 2015 tax law with federal 2015 tax changes (HF 2433 and SF 2303) are scheduled for debate today in the Iowa House and Senate. I expect them to pass easily. The Governor is on vacation in Florida, but GlobeGazette.com reports that he “is expected to return to Iowa later this week” and sign the bill. We will update this post if and when the votes come down.

Update, 3:40 p.m.: The Senate passes the House bill without amendment, 50-0. On to the Governor.

Update, 1:09 p.m.: A glitch? The Iowa Society of CPAs twitter feed reports:

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I know nothing more, but if they approve an amended version, it has to go back to the House for a re-vote. I’ll monitor and update if I learn more.

Update, 10:26 am: coupling bill HF 2433 passes Iowa House, 78-17. On to Senate later today.

 

Deadline day! Corporation returns are due today. Also due are two key international tax forms, for trusts and withholding on interest, dividend and other non-business income paid to foreign taxpayers. Russ Fox has more on that.

e-file logoTake care to document that you are filing your returns or extensions timely. E-file is best if you can, as you have no worries about mail truck mishaps. If you file on paper, Certified Mail, Return Receipt Requested, is the tried-and-true way to prove you filed your returns on time.

If you don’t get to the post office on time, you can file up until midnight at the UPS Store or Fed-ex store, but be careful. Make sure you use one of the IRS-approved shipping services (for example, UPS Ground doesn’t qualify, but “Next-Day Air does). Make sure that you shipping slip has a pre-midnight time stamp. And you have to use the street addresses of the IRS service centers, rather than their P.O. boxes.

Related: William Perez, How to Mail Tax Returns to the Internal Revenue Service

 

(also see [1]). Direct image URL [2], Public Domain, https://commons.wikimedia.org/w/index.php?curid=2199960

By U.S. Coast Guard – U.S. Coast Guard historical photo

Worst Golf Partner Ever. Arnold Palmer, the famous golfer, did less well in the auto business, thanks to a partner involved in a Tax Court case released yesterday. The companies, BOH and APAG, were funded in part by Mr. Palmer. Judge Nega sets the stage:

Petitioner began siphoning money from Arnold Palmer Motors, Inc., as early as October 1985. When one dealership ran short on cash, petitioner transferred money from another dealership to cover the shortfall. Rather than transferring funds directly between dealership accounts, petitioner routed transfers through his personal bank account. Petitioner routinely kept some of the transferred funds in his own account instead of transferring them to the appropriate dealership. Messrs. Palmer and McCormack did not authorize petitioner to take money from the dealerships.

The bad partner diversified into stealing from other S corporations funded by Mr. Palmer and others, but in which he held a 1/3 interest. After some time he was caught, and the tax man came calling.

The taxpayer took a bold tax return position. You need basis in an S corporation to take losses. Loans you make to an S corporation can create basis for taking losses. The taxpayer said that he made loans to the corporations he was stealing from, giving him basis.

The Tax Court found this improbable (my emphasis):

The record contains no evidence reliably establishing petitioners’ bases, if any, in the Arnold Palmer dealerships or their entitlement to NOLs arising therefrom. Petitioners have not provided any Forms 1120S, U.S. Income Tax Return for an S Corporation, or Forms 1065, Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., for any of the Arnold Palmer dealerships in which petitioner was a one-third shareholder. They contend that he contributed “significant funds” to the dealerships but do not identify any specific dollar amounts contributed. In contrast, the record reflects that petitioners misappropriated amounts in excess of $6 million from the Arnold Palmer dealerships during the late 1980s which they did not report on their 1988 or 1989 income tax return.

As you may guess, the Tax Court ruled against the taxpayer, big time, with 75% civil fraud penalties.

I assume, dear reader, that you aren’t stealing from your employer. If you are, you should be reading another tax blog. But even non-thief readers can draw a lesson. You need basis to take an S corporation loss, and you need the records to show it. The taxpayer here was claiming losses from net operating loss carryforwards created by alleged S corporation losses. He failed to provide sufficient records from the loss years to convince the Tax Court.

The Moral? If you are claiming loss carryforwards, you need to preserve the tax records for the years in which the losses arise, and all intervening years, to document your right to the losses. That’s true even though the statute for limitations for the loss years has expired. Net operating losses carry forward for 20 years. That means you may need to maintain the records for the loss years for 23 years — and for all of the years in between — if you take 20 years to use them up.

Cite: O’Neal, Jr., T.C. Memo 2016-49.

 

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TaxGrrrl, IRS Alerts Taxpayers To New Tax Season Related Phone Scam:

Here’s how the new scam works. The scammer calls you and says that are with the IRS and have your tax return. They then say they need to verify some information to process your return. Those details generally involve asking for your personal information such as a Social Security number or personal financial information, such as bank numbers or credit cards.

To make the scam appear legitimate, scammers often alter caller ID numbers to make it look like the IRS or another government agency is calling. The callers may refer to IRS titles, fake names and fake badge numbers. They may know your name, address and other personal information that they offer to make the call sound official.

Be careful, and remember: if the caller says he’s from the IRS, he’s lying.

 

Peter Reilly, Sales Tax Collection By Out Of State Vendors May End Up At Supreme Court Again. “The reporting requirements may have created a situation illustrative of Reilly’s Second Law of Tax Planning – Sometimes it’s better to just pay the taxes.”

David Vendler, Can a Receiver Take Advantage of the Claim of Right Provisions to Benefit Defrauded Consumers? (Procedurally Taxing)

Paul Neiffer, When Not To Take A Discount? “When a farmer has a taxable estate, we usually try to obtain a discount by splitting up land ownership into “fractional” ownership.”

Kay Bell, How long are you willing to wait for your tax refund? I.D. theft has forced tax agencies to slow down refunds to keep them from going to thieves.

 

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TaxProf, The IRS Scandal, Day 1041.

J.D. Tucille, Poor Americans Will Be Stuck With the Tab for Bernie Sanders’ Generous Promises (Reason.com). “At the end of the day, grandiose promises of massive government programs are cheap. But paying for them has a high price tag—and it will be shouldered by those with the fewest means to afford the cost.” In other words, the rich guy isn’t picking up the tab, because he can’t.

Kyle Pomerleau, It Was Not A Good Week For The Patent Box (Tax Policy Blog):

A patent box, or “innovation box,” is a tax policy that provides a lower tax rate on income related to intellectual property. The stated goal of a patent box is to promote research and development, encourage companies to locate intellectual property in the country with the incentive, and to make a country’s tax code more internationally competitive.

Just as the research credit is an incentive to call more of what you do “research,” the patent box would end up broadening the definition of intellectual property income. The only innovation it would generate would be on the part of the same sort of specialty companies that make their living doing research credit studies.

Renu Zaretsky, Only Thirty-three days till Tax Day! Today’s TaxVox headline roundup covers tax refund statistics so far this season and the hiring by H&R Block of a former senator as a lobbyist for increasing barriers to competition and H&R Block profits through regulation of (other) tax preparers.

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Tax Roundup, 6/25/15: Time-traveling deductions fail fraud test. And: IRS ‘mistake’ defense won’t work for you!

Thursday, June 25th, 2015 by Joe Kristan

20120511-2Make up your mind! A Georgia investment broker finally got around to filing his 2001 in April 2003. He presented his preparer with an unusual deduction, according to a Tax Court case yesterday (my emphasis):

The return was prepared by a certified public accountant (C.P.A.). On Schedule E, Supplemental Income and Loss, petitioner claimed a flowthrough loss of $516,609 from MCM. Although MCM did not report a loss on its Form 1120S, U.S. Income Tax Return for an S Corporation, petitioner claimed a loss deduction of $554,622 on his own tax return and applied it against the $38,013 of passthrough income he reported from MCM. The deduction was characterized in a statement attached to petitioner’s 2001 return as “General Partner Expenses paid to reimburse”.

Petitioner claimed the deduction for payments he allegedly made to his clients to reimburse them for their losses in the hedge funds. Petitioner did not provide any detailed information or documentation about these payments to the C.P.A. who prepared his return. He simply told the C.P.A. to use the $554,622 expense on his 2001 income tax return.

There’s already a lot wrong here. You can’t pay deductions on behalf of an S corporation you own and deduct them on Schedule E. At best, such payments are miscellaneous itemized deductions, which must exceed 2% of AGI and do no good in computing alternative minimum tax. Only the actual K-1 amounts hit your Schedule E.

The mismatch between the K-1 and the Schedule E would attract IRS attention, even if filing almost a year late didn’t. But the facts made things worse:

Ten days after petitioner filed his 2001 return, he submitted a different version of the return to a bank while applying for a loan. This version omitted the $554,622 deduction petitioner claimed on his filed tax return.

That sort of things is bad for making friends at both the IRS and the bank.

The taxpayer told the Tax Court that the deductions weren’t fraudulent; they were just claimed in the wrong year:

Petitioner concedes that the deduction should not have been claimed for 2001. Instead, on his amended return petitioner claims his income for 2001 was fully offset by a net operating loss carryback from 2002 and 2003.

Unfortunately, the taxpayer failed to convince the tax court that there really were NOLs: “Petitioner has not provided any evidence of a net operating loss for 2002 or 2003, and we have no way of determining from the record whether a net operating loss was available for these years.”  The Tax Court was reluctant to take the broker at his word. This might explain the reluctance:

On November 3, 2006, as litigation with these clients was pending, petitioner voluntarily filed a petition with the U.S. Bankruptcy Court for the Northern District of Florida under 11 U.S.C. chapter 7, No. 06-50298-KKS. During the bankruptcy proceedings petitioner failed to report numerous assets on his bankruptcy schedules, including two boats, a Harley Davidson motorcycle, investment accounts, and $40,000 of artwork.

On October 21, 2008, petitioner was indicted in the U.S. District Court for the Northern District of Florida on 23 counts of criminal misconduct. United States v. Reinhard, No. 4:08-Cr-00049-RH-CAS (N.D. Fla. filed Oct. 21, 2008). On May 13, 2009, petitioner pleaded guilty to seven counts of the indictment, including: (1) making false statements on his 2001 and 2002 income tax returns, in violation of section 7206(1); (2) making false statements on a loan application, [*5] in violation of 18 U.S.C. sec. 1014; and (3) transferring assets and concealing them from the bankruptcy trustee, in violation of 18 U.S.C. sec. 152(7).

lizard20140826The Tax Court upheld the IRS. Worse for the taxpayer, the Tax Court upheld the 75% fraud penalty asserted by the IRS:

Petitioner admitted as part of his plea agreement that he “included as part of his return a fraudulent Schedule E expense of $554,622”. Therefore, petitioner had admitted to fraud and is liable for the civil fraud penalty under section 6663(a) for the 2001 tax year.

When he filed his original 2001 tax return in 2003, petitioner was aware that the payments he reported would have been made in 2002 or 2003, not in 2001. Yet he directed his C.P.A. to claim a deduction for the payments for 2001 without any explanation. Petitioner is an intelligent and well-educated businessman, and we find that he knew that a cash method taxpayer can claim a deduction for an expense only for the year in which it is paid.

The Moral? Aside from the obvious “don’t commit fraud” lesson, we can learn from some simple but egregious mistakes:

– Timing matters. You can only deduct cash-basis deductions in the year of payment.

– If you want to deduct an S corporation expense, have the S corporation make the payment. You can’t pay corporate expenses personally and expect to deduct them as Schedule E expenses.

– If you want to deduct an expense, keep the documentation. The Tax Court never mentioned any settlement or other document showing that the broker had agreed to reimburse losses. If such an agreement existed, showing it to the Tax Court might have helped a great deal.

Cite: Reinhard, T.C. Memo 2015-116.

 

2008 flood 2

 

Jeffrey R. Gottleib, IRS Issues Final Regulations for Estate Tax Portability Elections. “When in doubt — file it!”

TaxGrrrl, Tax Authorities Want Atlanta’s SkyView Ferris Wheel Seized To Pay Taxes.

Kay Bell, Ohio bill to make feminine hygiene products sales tax-free.

Jack Townsend, Julius Baer Reserves $350 Million for U.S. Tax Investigation. Swiss bank secrecy isn’t working out too well.

TaxProf, TIGTA: IRS Violated Federal Law By Awarding Millions In Contracts To Businesses With Unpaid Federal Taxes. Anybody expect that the lawbreakers will face any penalty at all?

Scott Greenberg, Investment Donations and the Charitable Deduction (Tax Policy Blog). “Out of the $42.91 billion of noncash donations reported on Form 8283, $22.07 billion were contributions of corporate stocks, mutual funds, and other investments.”

Gene Steurle, How to Pay Zero Taxes on Income of Millions of Dollars (TaxVox). Roth IRAs are involved.

 

2008 flood 3

 

News from the Profession. KPMG Gives Employees Enough Ice Cream to Last Them a Week (Caleb Newquist, Going Concern)

 

TaxProf, The IRS Scandal, Day 777:

IRS employees erased computer backup tapes a month after officials discovered that thousands of emails related to the tax agency’s tea party scandal had been lost, according to government investigators.

The investigators, however, concluded that employees erased the tapes by mistake, not as part of an attempt to destroy evidence.

Kids, don’t count on the “innocent mistake” excuse if you are thinking of destroying evidence they want.

 

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Tax Roundup, 10/7/14: Sweet pursuit of Tax Fairy turns sour. And: shut up and get used to FATCA!

Tuesday, October 7th, 2014 by Joe Kristan

tax fairy

Isaac Brock visitors: here is a direct link to what you are looking for.

Not so sweet.  A business owner who turned to a man associated with the JoY Foundation “pure trust” scam in pursuit of the Tax Fairy may be regretting his choice of tax advisors after a bad day in Tax Court yesterday.

The taxpayer had an apparently successful S corporation, Specific Enterprises, specializing in cabinet doors.  In 2002, Mr. Joseph Sweet came up with a cunning plan, starting with a liquidation of Specific Enterprises.  Tax Court Judge Nega takes up the story (footnotes and citations omitted, emphasis added):

On December 3, 2002, an entity called RCC Capital Group (RCC) was formed that purported to be a “PRIVATE, NON-STATUTORY, NON-ASSOCIATED, CONTRACTUAL PURE TRUST (CPT)”…

On January 2, 2003, petitioner and RCC entered into an “Asset Purchase Option Contract” (drafted by petitioner) where petitioner purported to grant RCC options to purchase petitioner’s factory building, the land upon which it was located, and equipment. The exercise price for the contract was $1,650,000, and petitioner accepted $21 (presumably the same $21 conveyed to RCC by Brad R. Scott) plus two promissory notes valued at $700,000 and $950,000 in full consideration of the deal. The contract was also contingent upon a separate rental contract, the “Facility Production Contract”, between RCC and Cabinet Door Shop for Cabinet Door Shop’s use of the factory building, land, and equipment… At the behest of petitioner, RCC did not file income tax returns.

Pursuant to the “Facility Production Contract”, dated January 3, 2003, Cabinet Door Shop made total rental payments of $273,000 and $126,000 to RCC for 2003 and 2004, respectively, although RCC did not exercise the option to purchase the factory building, land, and equipment from petitioner until some time around March 10, 2004. After receiving these rental payments RCC made total payments to petitioner in the exact same amounts: $273,000 in 2003 and $126,000 in 2004.

In 2003 as part of a separate transaction Cabinet Door Shop made monthly installment payments to petitioner totaling $80,798 for the sale of inventory.

“Pure trusts” are a hackneyed and worthless tax scheme that retains a following among tax deniers. The IRS naturally didn’t like the way this stuff was reported, assessing tax on the sale of inventory and sticking the taxpayer with the income earned in the “pure trust.”  First, the inventory:

Petitioner has not provided any facts or details that permit a reasonable estimate of his basis in the inventory. Although petitioner provided respondent with his personal tax returns and tax returns for Specific Enterprises one day before trial, these returns are mere admissions; and we are unwilling to attach significance to them in the absence of corroborating evidence as to petitioner’s basis in his assets. The record does not establish the cost basis of the inventory. The record indicates only that Cabinet Door Shop paid $80,798 to petitioner for the inventory…  Because petitioner has not provided any pertinent information that would help us estimate his basis in the inventory, the Cohan rule does not apply. Consequently, the entire amount paid by Cabinet Door Shop for petitioner’s inventory is includable in petitioner’s gross income for the 2003 taxable year.

A self-inflicted wound. Surely the taxpayer had basis in the inventory, but apparently he didn’t take the Tax Court proceeding seriously enough to document it.

The “pure trust” fared no better, with all of the “rental payments” received by the trust taxed to the taxpayer instead.  The IRS also won 25% penalties for non-filing of returns for 2003 and 2004.

It’s interesting that no tax is assessed for 2002, the year the corporation was liquidated — a corporate liquidation would normally have triggered a lot of tax. I assume the omission of 2002 from the case implies that a return was filed, starting the statute of limitations, though the Tax Court decision doesn’t confirm this. Considering the whole thing was done to start a tax avoidance scheme, it would seem strange for the gain to be properly reported.

The Moral: Beware of trust schemes that say they make your taxes go away. They are just Sweet nothings. If the Tax Court wants you to document something, don’t give them the information the day before trial. And there is no Tax Fairy.

Cite: Wheeler, T.C. Memo. 2014-204

 

No-longer-Acting IRS Commissioner Steven Miller

No-longer-Acting IRS Commissioner Steven Miller

Worst Acting Commissioner Ever says FATCA may not be worth it, but it’s here to stayTax Analysts reports ($link) on a speech by Steve Miller, who was Acting IRS Commissioner when the Lois Lerner scandal broke. He says that while the FATCA offshore disclosure bill may not be worth its cost, it shouldn’t go away:

“I can’t even say with conviction that I’m sure, looking strictly on a cost-benefit basis, that FATCA’s . . . benefits are going to outweigh the cost,” Miller told a lunch crowd at the Securities Industry and Financial Markets Association FATCA Policy Symposium in Washington. “It’s not clear to me that when you look solely at the burden placed on financial institutions and others, versus the amount of revenue that may come into the treasury, that this is going to be a revenue-positive event for the United States.”

And despite the fervent wishes of some in the finance industry, FATCA is here to stay, said Miller, now national director of tax for Alliantgroup. “I don’t see a repeal in the cards,” he said. “FATCA . . . is tied inextricably to offshore evasion work, and that has to be kept in mind as you talk about repeal, as you talk about changes.”

In case you’re wondering, Alliantgroup is a tax consulting company that specializes in tax code complexity exploitation via services like research credit studies.

Miller said he recognized “that the folks in this room are sort of on the wrong end of FATCA implementation and that you’re bearing the cost and not necessarily the benefit of FATCA.”

But Miller added, “The future is an improved global set of rules, [and] I have high hopes that it will create a level playing field that will make it much more expensive and risky to hide assets offshore. And that should be some help at least to compliant financial institutions as people consider where to invest their money into the future.”

FATCA has made ordinary personal finance difficult to impossible for Americans abroad. Americans are losing opportunities to work offshore because foreign employers fear FATCA hassles. U.S. citizens who do find work offshore face hassles and headaches just trying to open a bank account. But that’s a small price to pay for “an improved set of global rules,” right?

Of course, a defense of burdensome tax provisions is no surprise coming from an IRS official going out the revolving door to a company whose business depends on helping taxpayers deal with “the burden placed on financial institutions and others.” It makes Glenn Reynold’s Revolving Door Surtax proposal look very tempting.

 

buzz20140909Robert D. Flach has some fresh Tuesday Buzz,  including a link to a discussion of the prospects for tax reform (dismal) and the immediate future for figures in the T.V. show “Real Housewives of New Jersey” (dismal also).

TaxGrrrl has two new guest posts: Steven Chung, The Vehicle Miles Traveled Tax and Dominic Ferszt, The Accidental Tax Invasion. The second post is an excellent summary of the FATCA nightmares Steven Miller says offshore taxpayers should just suck up and get used to.

Kay Bell, Signs of change for sports league tax exempt status

 

Martin Sullivan, Can Multinationals’ Offshore Cash Fund a U.S. Infrastructure Bank? (Tax Analysts Blog). Apparently fixing a tax code debacle may be doable if we create a domestic spending boondoggle.

 

TaxProf, The IRS Scandal, Day 516

 

20140729-1Scott Drenkard, North Dakota Democrat Tax Commissioner Candidate Proposes Flat Tax—Big Tax Climate Improvement (Tax Policy Blog). In North Dakota, Tax Commissioner is a statewide elective office.

Imagine an Iowa Democrat proposing what Joseph Astrup proposes:

His plan would flatten and simplify the individual income tax to a single bracket, while lowering the top rate from 3.22 percent to 2.52 percent. The exemption would be raised to $40,000 for singles and $80,000 for married filers.

In fairness, I can’t imagine an Iowa Republican proposing something like this, either. But if an Iowa politician does want to take some inspiration from North Dakota, the Tax Update’s Quick and Dirty Iowa Tax Reform Plan would be a fine place to start.

 

Tracy Gordon, It’s Not Easy to Escape the Local Pension Vise (TaxVox). Maybe not, but it’s necessary.

Peter Reilly, Tax Court Judge Appreciates Art More Than Your Average Revenue Agent, Which presumably makes a certain art professor appreciate the Tax Court more than the IRS.

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Tax Roundup, 8/20/14: Keeping time reports isn’t just for CPAs anymore.

Wednesday, August 20th, 2014 by Joe Kristan

20120511-2Track your hours now, not when you get audited.  Doing time reports is no fun.  If I had a nickel for every CPA who left public accounting and told me how fun it is to not do time reports, I’d have multiple nickels.

Unfortunately, the tax law might make time sheets necessary for people who don’t charge by the hour.  The passive loss rules disallow losses if you don’t spend enough time on a loss activity to “materially participate.”  Obamacare uses the same rules to impose a 3.8% “Net Investment Income Tax” on “passive” income.

It’s up to the taxpayer to prove they spent enough time to “materially participate,” as a Mr. Graham from Arkansas learned yesterday in Tax Court.

The taxpayer wanted to convince Judge Nega that he met the tax law’s stiff tests to be a “real estate professional,” enabling him to deduct real estate rental losses.  If you are not a “professional,” these losses are automatically passive, and therefore deferred until there is passive income.  To be a real estate professional, the taxpayer has to both:

– Work at least 750 hours in real estate trades or businesses, and

– performs more than one-half of all personal services during the year in real property trades or businesses in which the taxpayer materially participates.

That’s a high bar to clear for a taxpayer with a day job.  Mr. Graham gave it a good try, providing a judge with spreadsheets to show that he did that work.  The judge remained unconvinced:

Mr. Graham did not keep a contemporaneous log or appointment calendar tracking his real estate services. His spreadsheets were created later, apparently in connection with the IRS audit. 

There were other problems:

Furthermore, the entries on the spreadsheets were improbable in that they were excessive, unusually duplicative, and counterfactual in some instances. As all petitioners’ rental properties were single-family homes, reporting 7 hours to install locks or 30 hours to place mulch on a single property (amongst other suspect entries) are overstatements at best. Performing maintenance for a tenant that did not pay rent for an entire year with no record of “past due rent” or any attempt to collect rent (as Mr. Graham would note on entries for other rental properties) seems dubious.

The judge ruled that the taxpayer failed to meet the tests.  Worse, the court upheld a 20% penalty: “We conclude that the exaggerated entries in petitioners’ spreadsheets negate their good faith in claiming deductions for rental real estate losses against their earned income.”

The Moral?  Maintain your time records now.  When the IRS comes calling, it’s too late.  And play it straight; the Tax Court didn’t just fall off the turnip truck.

Cite: Graham, T.C. Summ. Op. 2014-79. 

 

20130426-1Russ Fox, FBAR Filing Follies:

Joe Kristan reported last week that you cannot use Adobe Acrobat to file the FBAR; you must use Adobe Reader. In fact, if you have Adobe Acrobat installed on your computer and use Adobe Reader it won’t work either. Well, I have some mild good news about this.

Mild is right.

 

Peter Reilly, Robert Redford’s New York Tax Trouble Provides Lessons For Planners.  “You dodge non-resident state taxes, either on purpose or by accident, at the peril of missing out on a credit against the tax of your home state.”

Jason Dinesen, S-Corporation Compensation Revisited.  “But what should the salary be? And what if the year has ended and the W-2 deadlines have passed, but the corporate tax return still needs filed?”

Keith Fogg, Postponing Assessment and Collection of the IRC 6672 Liability (Procedurally Taxing).  Issues on the “trust fund” penalty imposed for not remitting withholding.

TaxGrrrl, Flipping Through History: Online Retailers Owe Popularity And Tax Treatment To Mail Order Catalogs:

Online shopping is again changing the way that we look at nexus but for now, more or less the same kinds of principles that ruled in the day of mail order catalogs are still good law. The law remains settled that in states that impose a sales tax, retailers that have established nexus must charge sales tax to customers in that state.

And just like in the old days, states want to extend their reach no matter how flimsy the nexus.

20140729-1Lyman Stone, New Upshot Tool Provides Historical Look at Migration (Tax Policy Blog):

Prominent changes in the data suggest that taxes may have a role in affecting migration, though certainly taxes are just one of many important variables, and probably not even the biggest factor. As always, talking about migration isn’t simple: migration data is challenging to measure and represent, and even more difficult to interpret.

I will be seeing Mr. Stone speak at the Iowa Association of Business and Industry Tax Committee this morning.  I’m geeking out already.

 

Jim Maule, “Give Us a Tax Break and We’ll Do Nice Things.” Not.  It seems the subsidized Yankees parking garages don’t stop with picking taxpayer pockets.

Kay Bell, Is it time for territorial taxation of businesses and individuals?  “Territorial taxation advocates hope that long local journey has at least now started.”

 

Howard Gleckman, Is Treasury About to Curb Tax Inversions on Its Own? (TaxVox).  If the law is whatever the current administration says it is, I look forward to the $20 million estate tax exclusion next time the GOP takes power.

Daniel Shaviro, The Obama Administration’s move towards greater unilateral executive action.  “And the conclusion might either be that one should tread a bit lightly after all, or that we are in big trouble whether one side unilaterally does so or not, given the accelerating breakdown of norms that, as Chait notes, are no less crucial than our express constitutional and legal structure to ‘secur[ing] our republic.'”

20130422-2The best and the brightest in action.  TIGTA: ObamaCare Medical Device Tax Is Raising 25% Less Revenue Than Expected, IRS Administration of Tax Is Rife With Errors (TaxProf)

 

TaxProf, The IRS Scandal, Day 468

 

News from the Profession.  AICPA Celebrates 400,000th Member Just Because (Caleb Newquist, Going Concern)

I can verify that a Kindle absorbs less coffee than paper.  Do readers absorb less from a Kindle than from paper? (Tyler Cowen)

 

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Tax Roundup, 8/13/14: Tax Fairies in the graveyard? And: another payroll service goes bad.

Wednesday, August 13th, 2014 by Joe Kristan

Funeral home signOf course cemetery lots are shooting up in value.  People are dying to get in!  Taxpayers seek the Tax Fairy in the strangest places.  The Tax Fairy is the mythical spirit who can make taxes go away magically, for a reasonable price to a tax wizard who claims to be able to summon her.  A Tax Court case yesterday found taxpayers looking for her in cemeteries (Emphasis mine; slightly edited for readability).

Judge Nega’s overview:

Heritage Memorial Park Associates 1995-2, Heritage Memorial Park Associates 1995-3 , and Heritage Memorial Park Associates 1995-4 (collectively, partnerships) are Maryland general partnerships. The partnerships were established to acquire cemetery sites, to hold the sites for over one year, and then to contribute the sites to qualified charitable organizations, with the aim to provide individuals who invested in the partnerships with charitable contribution deductions equal to the appraised values of the sites as of the times of the contributions. Glenn R. Johnston and his colleagues promoted the partnerships to wealthy individuals as a way for them to receive a return of tax benefits in the form of passthrough deductions or losses worth significantly more than the amounts invested. 

What sort of deductions?

…(petitioner) invested $37,500 in each partnership. He made these investments to increase the amounts of his charitable contributions for the subject years and, more particularly, to receive promoted tax benefits worth significantly more than his investments. He expected that his investments would return him tax benefits worth $50,000 for each subject year. 

HMPA 1995-2 claimed the $1,864,850 charitable contribution deduction on that return. Petitioner was allocated $135,127 of that deduction, and petitioners deducted the $135,127 on their 1996 individual return as a charitable contribution. HMPA 1995-2 reported on its 1996 Form 1065 that HMPA 1995-2 had no income or expenses for 1996 (but for the charitable contribution deduction).

So: invest $35,000, deduct $135,000, save (conservatively) 1/3 of $135,000, or $45,000.  What could go wrong?

On September 29, 2005, Mr. Johnston was indicted on (1) one count of conspiracy to defraud the United States by selling, claiming, and causing others to sell and claim millions of dollars in false and fraudulent tax deductions for charitable contributions and concealing from the IRS income from the sales of the fraudulent deductions and (2) multiple counts of aiding and assisting in the filing of false returns by investors in the partnerships so that the investors claimed charitable contribution deductions in amounts substantially greater than allowable. These charges involved the partnerships, among one or more other entities. Mr. Johnston pleaded guilty to the first count on April 12, 2007.

Sure, it’s a criminal enterprise, but the deductions are still good, right?  And didn’t the statute run?  Nope.  The court ruled that the IRS met the procedural requirements to keep the statute of limitations open by properly initiating partnership-level proceedings.  The court also ruled that the taxpayer couldn’t claim a business loss for the partnership investments:

tax fairyPetitioners argue secondarily that they may deduct a $37,500 loss for each year as to petitioner’s investments in the partnerships. To that end, petitioners assert, petitioner’s ownership interests in the partnerships were worthless as of the end of the corresponding years in which the partnerships operated, and he knew that the interests were worthless as of those times and abandoned his interests as of those times. Petitioners add that petitioner invested in the partnerships to make a profit and in furtherance of a legislative intent to encourage charitable contributions.

But the court ruled that seeking charitable deductions isn’t a “trade or business,” and that no business loss was available.  $35,000 spent to net a tax savings of nothing.

The Moral?  This thing should never have passed the “too good to be true” test.  The deductions depended on incredible post-contribution appreciation in graves.  Anybody thinking this sort of thing might actually work really needs to get out more.  And there is no tax fairy.

Cite: McElroy, T.C. Memo 2014-163.

Related:  Three Years is the Normal Statute of Limitations, But Not Always (Paul Neiffer).

 

EFTPSAnother payroll service makes off with employers’ payroll tax payments.  From emissourian.com:

 

A Washington man pleaded guilty this week to federal mail fraud and money laundering charges.

Bradley Ferguson, 48, owner of Paymaster Business Solutions in Fenton, is scheduled to be sentenced Nov. 6 in U.S. District Court. 

He pleaded guilty to one felony count of mail fraud and one felony count of money laundering before U.S. District Judge E. Richard Webber.

Ferguson is accused of withdrawing money from the bank accounts of business clients to pay federal, state and local taxes but did not make the payments, according to a federal grand jury indictment.

While it makes sense for many taxpayers to outsource payroll functions, the tax law still holds the employers responsible for getting withholdings to the IRS.  If you outsource your payroll taxes, you should use Electronic Federal Tax Payment System (EFTPS) online access to make sure your payroll tax remittances are actually hitting your account.  If you use a service that doesn’t allow you to do this — like many “professional employer organizations” who “co-employ” their clients’ workers — you need to make other arrangements, like bonding, to protect yourself.

 

Peter Reilly, Alimony Deduction Requires Good Substantiation.  “It turns out that taxpayers are routinely whipsawing the IRS.”

William Perez, How to Get a Federal Tax Credit for the Cost of Child Care.

Kay Bell, James-Love NBA combo is tax boon to two Cleveland towns.

TaxGrrrl, Think Before You Post: The Dangers Of Seeking Tax Advice On The Internet:

I was pretty shocked at how much information folks were willing to share on the internet about their tax evasion questions, strategies and justifications. Sometimes, these folks are regular forum posters who happily share their location and other identifying information while others clearly try to remain somewhat anonymous.

In case you were wondering, the IRS has internet access.

 

Jason Dinesen, Rare Home Office Deduction Win in Tax Court

Carl Smith, In Some Cases IRS Seeks to Conflict Out Lawyers Who Represented Taxpayers in CDP Hearings (Procedurally Taxing).  CDP stands for “collections due process.”  The IRS is bigger than you, peasant.

 

Tony Nitti, Final IRS Rules On Partnership Technical Terminations Will Surprise Some Tax Pros

 

20140813-1David Brunori: Congress Shouldn’t Make State Tax Systems Worse (Tax Analysts Blog)

As my colleague Maria Koklanaris reported, 29 Democratic members of Congress asked leaders of the California State Legislature to reauthorize and expand the state’s film tax credit. Led by Rep. Adam B. Schiff, D-Calif., the federal lawmakers asked California to extend a very bad tax policy, saying that if it doesn’t, film jobs will be lost forever to other states. 

Why film credits? Why not some other industry? Politicians are the worst at determining what’s best for the marketplace. Despite the studies funded by the Motion Picture Association of America that say otherwise, film tax credits don’t work. In virtually every state that has them, there’s no discernible economic effect — that is, the tax giveaway did not result in more economic activity than would have occurred without it.

Iowa has some lessons to teach here.

 

TaxProf, The IRS Scandal, Day 461

 

There’s only one left? Owner of the Pickle pleads guilty to federal tax fraud.

Because you invited clients?   PwC’s Bob Moritz on Why You Shouldn’t Miss Your Kid’s Birthday Party for Work (Adrienne Gonzalez, Going Concern)

 

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Tax Roundup, 4/21/14: Clearing the wreckage edition. And: Tax Court penalty abuse.

Monday, April 21st, 2014 by Joe Kristan

20140330-2So I took a five-day weekend.  I needed the sleep, and to see something besides the office, my bed, and my commuting route.  So now to clear the debris of the last few weeks from my desk, and my email inbox.

And I come back to see perhaps the dumbest thing ever to come out of the Tax Court.  Janet Novack reports:

“Taxpayers rely on IRS guidance at their own peril,” Judge Joseph W. Nega wrote in an order entered  on April 15th —an order denying a motion that he reconsider his earlier decision to penalize tax lawyer Alvan L. Bobrow for making an IRA rollover move that IRS Publication 590,  Individual Retirement Arrangements (IRAs), says is allowed.

Which is more astounding: he IRS decision to seek penalties against a taxpayer for following IRS guidance, or the Tax Court going along?  A great deal of what we do as professionals, and what taxpayers do, is in reliance on IRS guidance, because often that’s all there is to go on.  If you can get hit with a penalty for following IRS guidance if the IRS changes its mind, we’re all avoiding disaster only as long as the IRS is in a good mood.

This unwittingly goes to the heart of the IRS non-enforcement of the Obamacare employer mandate. The statute provides that the penalty tax on those with 50 or more employees starts this year if they fail to provide specified health insurance.  Nothing in the statute provides otherwise.  The only thing standing between all these employers and massive penalties is IRS guidance — y0u know, the guidance that Judge Nega just said taxpayers rely on “at their own peril.”

The whole Tax Court should reconsider this order.  If they decide that something that stupid really is the law, Congress should reverse with legislation providing that taxpayers relying on written IRS guidance should never be penalized for it.

 

20130419-1Megan McArdle kindly linked to me last week in You Can’t Fight the IRS — specifically, to Tax season tip: when you owe and can’t pay.  She added some thoughtful commentary, including:

 There are basically three types of tax trouble. There is “I was underwithheld at work because my salary changed over the course of the year but didn’t realize it” or “I’m a freelancer or small-business owner, and I forgot to put away enough money for taxes, or I incorrectly estimated what my tax bill would be.” Then there is “I am a small-business owner or otherwise self-employed, and I am on the brink of financial collapse; the money with which I hoped to pay the taxes had to go to keep my creditors (barely) at bay.” And, of course, though I hope this is not you, there is “I have been cheating on my taxes.”

She notes that different troubles require different solutions.

Thanks to her link, and to one from Instapundit to the same post, last week was the busiest around here all year.  My thanks to them, and to everyone who takes the time to link here.  You rock my little world.  If you ever want to link to just a piece of a Tax Roundup, you can do so if it starts in blue bold letters, like the words “Megan McArdle” at the beginning of this segment.

 

While I was too busy to do Tax Roundups at the end of tax season, I missed some excellent Bozo Tax Tips from Russ Fox, including Bozo Tax Tip #1: The Eternal Hobby Loss

 

Greg Mankiw,Transitory Income and the One Percent:

It turns out that 12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year. What’s more, 39 percent of Americans will spend a year in the top 5 percent of the income distribution, 56 percent will find themselves in the top 10 percent, and a whopping 73 percent will spend a year in the top 20 percent of the income distribution….  

-Quoting a NY Times article by Mark Rank

Occupy… yourselves!

 

Jason Dinesen, Another Tax Season Down — 2014 Tax Season Recap 

Paul Neiffer, Another Tax Season Bites the Dust.  “This year was actually much easier on myself and I think most of my compatriots since we did not have Congress passing a tax bill on the last day of the year to mess up the IRS computers (although the computers have other issues to deal with).”

TaxGrrrl, IRS Reports Tax Filing Numbers As Expected, Issues Statement On Refund Delays 

Robert D. Flach, THAT WAS THE TAX SEASON THAT WAS.  “43 down – 7 to go!”  I hope to stop before 43, myself.  Robert is tougher than I am.

In case you missed it, you can see my April 15 interview with local TV station KCCI here.

 

 

Locust Street, Des Moines

Locust Street, Des Moines

Tony Nitti, Tax Geek Tuesday: Tax Planning For Mergers And Acquisitions, Part I.  “…if we spend the time necessary to uncover and understand our clients’ non-tax and tax goals, we will typically find that choosing an ideal transaction structure is largely a process of elimination, and when the dust settles, there will often be only one option that works.”

Peter Reilly, Sawyer Taxi Heirs Midcoast Fortrend Deal – Could Have Been Worse.  It involves a C corporation attempting to have its cake while eating it too, by paying stock-deal tax on an asset sale.

Christopher Bergin, Tax Day – It Just Isn’t Fair (Tax Analysts Blog)  “I suppose the only good news is that in the last several days, there have been dozens of items in the news reporting that the IRS is doing fewer audits.”

Tax Justice Blog, Partners in Crime? New GAO Report Shows that Large Corporate Partnerships Can Operate Without Fear of Audits

Kyle Pomerleau, Why Many People are Wrong about Executive Pay and the Corporate Tax Code.  “A neutral tax code that properly defines business income would place no restriction on how much a business can deduct in compensation.”

Howard Gleckman, If Congress Lets Firms Expense Investments, It Should Take Away Their Interest Deduction.  Fine, if you let them deduct dividends.

 

Going Concern, Utah Man Discovers Liberty Tax Not as Effective as Maury Povich in Determining Paternity.

 

 

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