Posts Tagged ‘Judge Thornton’

Tax Roundup, February 20, 2013: Fire fail and tax reform frenzy!

Wednesday, February 20th, 2013 by Joe Kristan
Flickr Image courtisy Llima under Creative Commons license

Flickr Image courtisy Llima under Creative Commons license

If you are going to say the dog ate your tax records, make sure you have a dog.  A New Jersey man was having a hard time coming up with records supporting his deductions in Tax Court.  He blamed a fire.  The success of the argument can be guessed from the Tax Court’s discussion of “Petitioner’s Alleged Fire”:

The circumstances surrounding petitioner’s purported fire are vague, and he has offered no evidence, apart from his testimony, that a fire occurred and that his 2006 tax records were destroyed in such a fire. Significantly, he failed to introduce insurance documentation or third-party testimony describing the alleged events or the extent of any fire.

The Tax Court said the man couldn’t support his deductions.

The Moral?  Back up your work.  And if you are going to have a fire, something needs to actually burn.  (Cite: Mears, T.C. Memo 2013-54)

 

It looks like the dreaded automatic “sequestration” spending cuts are going to happen, so there is a flurry of proposals to stop this sliver of random spending discipline:

Martin Sullivan, A Proposal to Get Tax Reform Back on Track:

Before earmarking what we will do with the money from limits on chimerical loopholes, our leaders need to clear the path for the painful process of broadening the tax base. President Obama has now poisoned the well by turning Republicans’ tax reform instincts against them. If they were to put any revenue increases on the table, the President would claim the proposals have the Republican seal of approval and incorporate them into his tax hike plans.

At the same time Republicans tax reform strategy is wearing thin. Their extravagant claims about cutting the top individual rates below 30 percent are just hollow speechifying as long as they refuse to put specific revenue-raisers on the table.

Inspiring leadership.

 

Jeremy Scott, Simpson-Bowles Try Again (Tax.com):

Simpson-Bowles is just another deficit reduction plan — and a politically infeasible one at that.  Its authors want to make it seem grander by attaching tax reform to it, just like Obama wanted his own proposals (which simply include ways to raise revenue that Democrats have proposed ad infinitum over the years) to sound better when he mentioned tax reform at least three times during the State of the Union.  But what they are offering isn’t comprehensive enough to qualify as true tax reform.  Deficit reduction has its place, but conflating it with tax reform will stall whatever momentum people like Camp are trying to create for a true tax system overhaul. 

They just aren’t serious yet.

Also:

Howard Gleckman, Bowles-Simpson II: A New Plan to Avoid the Sequester (TaxVox)

Patrick Temple-West, Simpson, Bowles revive deficit plan, and more

Jacob Sullum on Obama’s Misguided Vision of Tax Reform (Reason.com)

 

High taxes are good for us, so infinite taxes will make us perfect.  The high-tax advocacy group Citizens for Budget and Policy Priorities has generated a paper that says that state tax cuts do no good:

This paper argues that state personal income tax cuts won’t help small businesses create jobs, and in fact could harm the ability of the small-business sector to contribute to economic growth.  For all the reasons  stated in this paper, the converse is also true:  personal income tax increases, including those on the highest earners, won’t harm small-business job creation. 

Really?  There is no level of taxation that would discourage economic activity?  There is no level of tax increase that would cause economic activity to be located in a neighboring state with lower taxes?

The paper makes the same mistake as the guy who drowned trying to wade across the river that was only two feet deep, on average.  You can see it on the headings of the paper: “The vast majority of those who would get a personal income tax cut are in no position to create small-business jobs.”  “Most small businesses make too little money for tax cuts to produce enough income to pay new employees.”  “Most small business owners are not significant ‘job creators’ and have no plans to be.”

This is the same logic we heard when we were told that individual tax increases wouldn’t hurt business because most small businesses wouldn’t be affected.  When you define “small business” to include your office Avon Lady and a manufacturer with dozens or hundreds of employees, of course “most” businesses won’t hire more if taxes are lower.  Just the ones that matter.

When you measure by amount of income, the amount of business affected by individual rates is huge:20130220-1

 

Sure, relatively few businesses achieve enough success to hire a lot of employees.  Yet some do, and they do a lot of hiring.  And, contrary to the CBPP paper, their ability to expand does shrink if they have to pay more taxes.  As a tax accountant, it’s part of the world I live in.  Prices matter in making decisions — including the price of living, doing business and paying taxes in a state.  Any argument to the contrary has to overcome the basic rule of economics that incentives matter.

 

Paul Neiffer, 1031 Tax-Deferred Exchange Does Not Always Defer All Taxes!

Jack Townsend, Another Plea Agreement and Sentencing for HSBC and Bank Woori Depositor

Tax Trials,  Petition for Writ of Certiorari Filed in Historic Boardwalk Hall Tax Credit Case

Trish McIntire, FASFA?

 

Kay Bell, Tax Carnival #113: Presidents Day 2013 or maybe you, too, can one day be Acting President of the United States

Breaking news from 1147: Tax Havens: The Second Crusade (Robert Goulder, Tax.com)

Going Concern, The IRS Is Wasting Millions on Unused Blackberrys and Aircards Because Of Course It Is.  Meanwhile they prepare to lay off their useful employees when sequestration hits.

 

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Management fees, mismanaged

Friday, September 30th, 2011 by Joe Kristan

The 15% tax rate on the first $50,000 of C corporation taxable income has its attractions, as we mentioned yesterday. It also has a hidden cost: trying to manage income between the personal and corporate return to use the low corporate rates can be tricky. It can tempt taxpayers to play games.
In the dimly-remembered early days of my tax career I encountered practitioners who would allocate income among controlled entities by arranging “management fees” as needed at year-end to get the taxable income to the tax returns where it would do the most good. The Tax Court yesterday shot down a C corporation management-fee arrangement
A taxpayer ran “Top Line,” a hauling business, in a C corporation. The taxpayer owned 30 trucks in a wholly-owned LLC, “Grasshopper,” that he reported on his 1040 Schedule C. in 2004 and 2005 Grasshopper paid management fees of $101,382 and $108,000 to the C corporation — expenses he deducted on his 1040 and added to his C corporation income. The IRS disallowed about $120,000 of the fees over the two years, and the case ended up in Tax Court.
The Tax Court didn’t like the fees. There was no management contract and no detail of the services provided on the intercompany invoices. The taxpayer argued that the C corporation employees spent lots of their time doing work for the single-member LLC, and the fees were fair. The judge didn’t buy it (my emphasis):

According to petitioner’s testimony, then, over half the hours allegedly worked by Top Line employees on behalf of Grasshopper consisted of services in the categories of sales management, safety, and driver relations. Petitioners have not convinced us that it was necessary for Grasshopper to incur expenses for such services. After all, Grasshopper’s business consisted of leasing trucks to other entities, mainly Top Line, that petitioner owned. The sales management services, as described by petitioner, appear to be services that Top Line would have performed on its own behalf in maintaining its own customer base, since Grasshopper had no customers other than Top Line and other related entities. Moreover, the record establishes no reason why Grasshopper would have had any need to recruit, train, test, track, or dispatch truck drivers, since it employed no drivers. In addition, we are not convinced that consulting services that petitioner allegedly provided to Grasshopper were performed in his capacity as an employee of Top Line rather than in his individual capacity as sole owner of Grasshopper. Indeed, because Grasshopper had no other owners and no employees, it is not apparent with whom at Grasshopper petitioner might have consulted, other than himself.

Not only were the fees disallowed, but the Tax Court upheld the 20% “accuracy related” penalty on the taxpayer.
The Moral? They’re “management fees,” not “magic fees.” You can’t freely allocate your income where you want it just by charging arbitrary fees between controlled taxpayers. Management fees for controlled entities are allowed, but they should be charged for services actually provided under an agreement between the entities.
Cite: Fuhrman, T.C. Memo. 2011-236

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