Posts Tagged ‘Kay Bell’

Tax Roundup, 10/31/14: Halloween! And: mortgage interest? Put it on the tab.

Friday, October 31st, 2014 by Joe Kristan

20140325-1The deduction for home mortgage interest is hugely popular among those with huge home mortgages. Taxpayers get to deduct all of the interest paid on loans used to buy a home, up to $1 million in principal; they also get to deduct interest paid on the first $100,000 in home equity debt.

But there is a technicality: the interest needs to be “paid.” That was a problem for a California couple in Tax Court yesterday.

The couple bought a home in 1991 for $300,000. They refinanced it for $600,000 in 2007. Then 2008 happened, and they got a loan modification in 2010. Tax Court Judge Lauber explains:

The modifications included a reduction of the interest rate, a change in the payment terms, and an increase in the loan balance. Immediately before the modifications, the outstanding loan balance was $579,275; after the modifications, the new balance was $623,953. The difference (equal to $44,678) resulted from adding the following amounts to the loan balance: past due interest of $30,273, servicing expense of $180, and charges for taxes and insurance of $14,225.

The taxpayers added the $30,273 to the $9,253 the bank put on their 1098 mortgage interest statement for 2010. The IRS noticed the difference and disallowed the $30,273.

20121031-2The Tax Court sided with the IRS:

Petitioners are cash basis taxpayers. It is well settled that “[a] cash-basis taxpayer ‘pays’ interest only when he pays cash or its equivalent to his lender.”

 Through the loan modification agreement, the $30,273 in past-due interest on petitioners’ mortgage loan was added to the principal. No money changed hands; petitioners simply promised to pay the past-due interest, along with the rest of the principal, at a later date. Because petitioners did not pay this interest during 2010 in cash or its equivalent, they cannot claim a deduction for it for 2010. They will be entitled to a deduction if and when they actually discharge this portion of their loan obligation in a future year. 

In short, you can’t just add interest to the loan balance and get a deduction. That has obvious implications for “reverse mortgages.”

As the taxpayers make the payments, they will have some additional factors to consider. Their original purchase price was $300,000 for the house. Unless the additional borrowing was used for renovation or expansion of the home, it is “home equity indebtedness.” Interest on only the first $100,000 of equity debt will be deductible — and only for regular tax, not AMT.

Cite: Copeland, T.C. Memo 2014-226.

 

mst3k-lanternWilliam Perez, The Tax Audit Success Story and Tips from Audit Experts

Jason Dinesen, Same-sex Marriage and State Taxes: 2014

Kay Bell, 2015 income tax rates, income brackets

TaxGrrrl, IRS Announces 2015 Tax Brackets, Standard Deduction Amounts And More

Robert D. Flach has A SCARY THOUGHT for Halloween. “What if the 114th Congress turns out to be made up of most of the same idiots as the 113th Congress!”  It will be.

 

Leslie Book, AICPA Suit Against IRS Voluntary Education and Testing Regime Thrown Out of Court (Procedurally Taxing)

Tax Trials, Tax Court Preserves Taxpayer Protections against Arbitrary and Capricious Appeals Rulings

 

Arnold Kling  on “middle class” tax credits:

Brooks endorses the reform conservative Room-to-Grow idea of showering middle-class families with tax credits. I see that as political posturing. If I could be in charge of tax reform, we would get rid of credits and deductions, and we also would move away from taxing income and instead toward taxing consumption. Note, however, that tax reform is not one of my top three priorities.

Except for the last sentence, I agree with it all.

 

6fpw32atDon Boudreax on the Arnolds Park IRS cash seizure:

I challenge anyone to justify, or even to excuse, such an abuse of power.  (HT a dear and wise and passionate friend.)

Words normally do not escape me, but I can find none that adequately convey the anger and sense of injustice that course through me when I read of seizures such as this one.  Best to let the matter speak for itself, which it surely does to anyone this side of Frank Underwood in decency and civility.  Fortunately, the great Institute for Justice is on the case.

Oh, I’m sure that things like that could never happen if the IRS had a bigger budget.

 

Andrew Lundeen, Tens of Thousands Protest Internet Tax in Hungary (Tax Policy Blog) Would-be dictators come up with wacky ideas.

20141027-2Matt Gardner, Obscure Law Allows Wealthy Professional Sports Team Owners to Reap Tax Windfalls (Tax Justice Blog) . He doesn’t care for intangibles amortization.

 

TaxProf, The IRS Scandal, Day 540

 

News from the Profession. Grant Thornton to Have Rat Problem for Foreseeable Future (Adrienne Gonzalez, Going Concern)

Tony Nitti, Want To Do Your Part To Help Fight Ebola? Skip Your Next Vacation. OK, I’m skipping my next vacation to Liberia.

Share

Tax Roundup, 10/30/14: Maquoketa! And: I was so upset, I only reported the loss items from my K-1.

Thursday, October 30th, 2014 by Joe Kristan

 

MCSD Cardinal LogoGreetings from Maquoketa, Iowa, home of the Cardinals and the largest cave complex in the state. Today is Day 1 of the second session of the Iowa State University Center for Agricultural Law and Taxation Farm and Urban Tax School. I’m on the Day 1 panel with Roger McEowen and Kristy Maitre, updating practitioners on 2014 developments and the upcoming ACA reporting nightmares. There is still time to register for the schools in Sheldon, Red Oak, Ottumwa, Mason City, Denison and Ames. Register today!

 

 

Emotional stress can have strange effects. But maybe not that strangeA married couple operated two LLCs as partnerships owned entirely between them. They paid a preparer to put together the 1065s and K-1s. But they apparently figured they could handle things from there, self-preparing the 1040s.

Their son took ill on a foreign trip, and they traveled overseas from October 4, 2011, to November 4. Perhaps as a result, they missed the extended return deadline for 2010 and filed late.  Better late, than never, of course.

There was a small problem with the self-prepared return. The K-1s showed about $129,000 in ordinary losses and $553,000 in long-term capital gains. The losses made it on to the self-prepared 1040s, but the capital gains somehow did not.

The IRS notices that sort of thing, and they assessed the additional tax on the gain, as well as a 20% “accuracy-related penalty” on the underpayment. The case ended up in Tax Court, where the taxpayer pleaded — well, I’m not sure how to describe this. From the Tax Court decision:

Petitioners reported in their 2010 return all of the information reflected in [Husband]‘s K-1 and [Wife]‘s K-1 except for the information relating to “[n]et long-term capital gain (loss)”. At trial, the Court attempted to focus [Husband] on petitioners’ inconsistent reporting in their 2010 return of the information that MMIT reflected in [Husband]‘s K-1 and [Wife]‘s K-1 by asking him about [the preparer’s} September 15, 2011 letters. The following exchange between the Court and [Husband] took place:
THE COURT: Now, what does it mean to you when a letter to you and to your wife says, this information reflects the amounts you need to complete your income tax return?

THE WITNESS: To be truthful, I never read it.

THE COURT: You never read it?

THE WITNESS: Yes.

THE WITNESS: Yes.

That sort of blew the “reliance on the preparer” defense. The taxpayer fell back on emotional trauma:

We consider now petitioners’ contention that [Husband] was so emotionally distraught about his son’s health at the time that he prepared petitioners’ 2010 return that he was unable to prepare that return properly. We are sympathetic that petitioners’ son was experiencing certain medical problems around the time petitioners’ 2010 return was due and that petitioners were seriously concerned about their son’s health. Nonetheless, on the record before us, we find that petitioners have failed to carry their burden…

 Indeed, petitioners reported in their 2010 return, which [Husband] prepared, all of the information reflected in [Husband]‘s K-1 and [Wife]‘s K-1 except for the information relating to “[n]et long-term capital gain (loss)”.

Adding the income lines to the 1040 after having to deal with a seriously ill son overseas would seem like emotional piling-on, but that means nothing to the tax law.

The Moral? As traumatic  as reporting a K-1 capital gain may be, you have to report what’s there. And maybe if your tax situation is complex enough to require hired help to prepare your pass-through returns, you might want to spring to have the preparer handle the 1040 too. The fee surely would have been less than the $12,000 penalty.

Cite: Singhal, T.C. Summ. Op. 2014-102

 

Kyle Pomerleau, Most of the Private Sector Workforce is Employed by Pass-through Businesses (Tax Policy Blog):

In the past three decades, the importance of “pass-through” businesses has grown substantially. The combined net income of sole proprietors, LLCs, Partnerships, and S corporations has increased fivefold and now accounts for more than 50 percent of all business income. C corporations now earn less than half of all business income.

Pass Through Employment by state

It you jack up taxes on “the rich,” you jack up taxes on employers. If you tax something more, you get less of it.

 

Friday is Thursday this week at Robert D. Flach’s place – with an early Buzz covering the AICPA’s loss on its suit against the “voluntary” IRS preparer program and on IRS cash seizures.

Kay Bell, Voters get their say Nov. 4 on myriad ballot initiatives

Peter Reilly, Government Coming Down Harder On Kent Hovind. Bad science isn’t a tax crime.

Joseph Thorndike, Can Jeb Bush Save Conservatism by Compromising It? (Tax Analysts Blog). If recent polls are any indication, having their opponents in power seems to be “saving” conservatism already.

Steve Warnhoff, Senator Rob Portman: Case Study in Radical, Rightwing Arguments for Slashing Corporate Taxes (Tax Justice Blog). Remember, TJB is part of Citizens for Tax Justice, a “non-partisan” exempt organization.

 

taxanalystslogoCara Griffith, Benefit Corporations: The Corporate Entity of the Future? (Tax Analysts Blog):

Those who shop at Patagonia or Etsy are likely aware of a new type of business entity that is growing in popularity. These companies and a thousand more have chosen to organize as either B corporations or benefit corporations…

 Still, the number of benefit corporations is relatively small. The reason for this is – ironically – a lack of benefits. Benefit corporations are not given tax, incentive, or procurement preferences by state or federal lawmakers. While nonprofits receive substantial benefits for their chosen entity type, benefit corporations receive no such benefits. They are taxed like c corporations – at least for now. 

This is new to me. A business structure built around moral vanity seems implausible to me, but I’ve never shopped Etsy.

 

TaxProf, The IRS Scandal, Day 539.

 

News from the Profession. Let’s Talk About Creative Accounting Themed Halloween Costumes (Adrienne Gonzalez, Going Concern)

 

Share

Tax Roundup, 10/27/14: IRS visits Arnolds Park restaurant, tips itself.

Monday, October 27th, 2014 by Joe Kristan

20120703-2IRS Commissioner Koskinen likes to say there is nothing wrong with the IRS that a bigger budget can’t cure. A story out of Arnolds Park, Iowa might cause one to question that. The New York Times reports:

For almost 40 years, Carole Hinders has dished out Mexican specialties at her modest cash-only restaurant. For just as long, she deposited the earnings at a small bank branch a block away — until last year, when two tax agents knocked on her door and informed her that they had seized her checking account, almost $33,000.

The Internal Revenue Service agents did not accuse Ms. Hinders of money laundering or cheating on her taxes — in fact, she has not been charged with any crime. Instead, the money was seized solely because she had deposited less than $10,000 at a time, which they viewed as an attempt to avoid triggering a required government report.

Banks are required to report “suspicious” deposits under $10,000 because they might be done to evade a required IRS filing. As they get in trouble for non-reporting, they are likely to overreport. And in these cases, that’s all the IRS required before stealing the cash. The victims have legal recourse, but it requires them to sue the federal government, owner of the largest law firm in the world; legal bills routinely run into tens of thousands of dollars.

So, without any evidence, or even suspicion, of a crime, the IRS uses some of its allegedly precious and constrained enforcement resources to steal money from a little Iowa restaurant. The story cites other cash seizure nightmares. One involved an Army sergeant saving for his daughters’ education. Others involved legitimate but cash-intensive businesses.

If this is what the IRS accomplishes with insufficient resources, imagine how much they could steal with full funding.

(via Instapundit)

Related:

Tax Justice Blog,  New Movie Aims to Scare Public by Depicting IRS as Jack-Booted Thugs. Where would anybody get that idea?

Dan Mitchell, Another Example of Government Thuggery – and another Reason Why Decent and Moral People Are Libertarians

Russ Fox, SARs Leading to Forfeiture: The IRS Oversteps

 

20141027-2Jason Dinesen, How Non-Residents or Part-Year Residents Report Federal Refunds on Iowa Tax Returns. One more complication from Iowa’s deduction for federal taxes.

Robert D. Flach, DON’T TRY TO BUY A HOUSE OR CONDO WITH ONLY 5% DOWN!. And don’t try to subsidize that either.

William Perez, Self-Employed Retirement Plans, “If you have self-employment income, then you can take a tax deduction for contributions you make to a SEP, SIMPLE, or a solo 401(k) retirement plan.”

Tony Nitti, The Top Ten Tax Cases (And Rulings) Of 2014: #9-Tax Court Further Muddies The ‘Dealer Versus Investor’ Issue

 

TaxGrrrl, Fundraising Campaign Ends For ‘Ebola Free’ Nurse, Donors Encouraged To Contribute To Charity

Jana Luttenegger, 2015 Retirement Plan Limits Announced (Davis Brown Tax Law Blog)

Paul Neiffer, 2015 Social Security Wage Base Increases to $118,500

Kay Bell, 6 year-end tax tips for small businesses

Stephen Olsen, Summary Opinions (Procedurally Taxing). Recent cases on whistleblowers, interest abatement, and art valuation.

 

 

Andrew Mitchel, 2014 Third Quarter Published Expatriates – Third Highest Ever. FATCA and the IRS holy war on Americans abroad takes its toll.

20141027-1

 

TaxProf, The IRS Scandal, Day 536

 

David Brunori on the inherently corrupt nature of corporate welfare tax incentives, like those so popular with Iowa politicians ($link):

I have no doubt there are more instances of companies contributing to politicians and getting economic development payouts. I’m not naïve. Corporations donate money to governors and lawmakers and expect a return on their investment. While the governors cited above were Republican, corporations and business interests don’t discriminate. Indeed, Lockheed Martin donated lots of money to Democratic governors.

We likely won’t find a smoking gun e-mail reading, “Dear Governor, your check is in the mail, please process my multimillion-dollar handout. Your friend, CEO.” Politicians and business leaders are too smart for that. But growing evidence of tax incentives being granted by politicians who receive money should give everyone pause. It’s unlikely to be a coincidence.

But, jobs! For the middlemen, fixers and lobbyists, anyway.

 

Joseph Henchman, Michigan Senate Advances Film Tax Credit Extension Bill (Tax Policy Blog). Because Detroit has no greater need than to give money to Hollywood.

 

News from the Profession. Meet the Guy Who Prefers Falafel Over PwC (Adrienne Gonzalez, Going Concern)

 

Share

Tax Roundup, 10/24/14: IRS attorney says revolving door spins away billions. And: pass-through isn’t always small.

Friday, October 24th, 2014 by Joe Kristan

20130129-1Taxes are for the little people without connections. A sensational open letter to the top Treasury tax brass from an IRS attorney alleges that the agency routinely shuts off promising examinations of big well-connected taxpayers. From Raw Story (via the TaxProf):

In a letter to Treasury Secretary Jacob Lew, IRS commissioner John A. Koskinen, and IRS chief counsel William Wilkins, Jane J. Kim, an attorney in the IRS Office of the Chief Counsel in New York, accused IRS executives of “deliberately” facilitating multi-billion dollar tax giveaways. The letter, dated October 19, will add further pressure on the agency, which is under fire for allegedly targeting conservative and Tea Party groups.

The letter describes three cases where Ms. Kim says the IRS walked away from large well-founded assessments of big corporate taxpayers raised by whistleblowers. The story implicates the revolving door between big law and accounting firms and the top levels of the IRS as a key to the strange taxpayer friendliness.

Bill Henck, who has worked for over 26 years in the IRS Office of the Chief Counsel, agreed. “The senior executives drive the train on all this and pal around with lobbyists,” he said. “Treasury was involved with both the Elmer’s Glue scam and the black liquor taxability issue. IRS executives look out for themselves, which usually means protecting corporate interests, since they hire lobbyists and are close to politicians.”

Backing up Henck’s concerns, the private sector lawyer and ex-IRS attorney explained that since 1998, IRS restructuring has focused on bringing in “outside people.” This led to the employment of an extra layer of executives who were previously “partners from big accounting firms.” Citing active IRS criminal agents, the ex-IRS attorney said: “Almost every large firm or corporation has a person inside the IRS. It’s a revolving door, with the top two or three management layers all from big accounting and law firms, and this is why they won’t work big billion-dollar cases criminally. Private bar attorneys are, in effect, controlling the IRS. It’s a type of corruption – that’s the word used by one IRS agent I’m in touch with whose case was shut down by higher ups without cause.”

This Koskinen isn't the IRS commissioner

This Koskinen isn’t the IRS commissioner

That brings to mind Commissioner Koskinen’s view of the revolving door:

So I’ve always said the best testimonial to a good place to work is people are forever coming in and trying to steal your people. And so I would be delighted to have young people come here for two or three years and some of them get recruited away because they were so good and the training is so good, because the more of that that happens, the more people are going to stand in line to get here. And as I say, the experience is, because it would be a great place to work, is the capture rate would be terrific.

So the Commissioner thinks the revolving door is a good thing. That probably means Ms. Kim’s letter isn’t exactly going to trigger reforming zeal from Mr. Koskinen. And don’t expect that you can skip out on taxes without your own mole in the IRS, chump.

 

 

Robert D. Flach has your fresh Friday Buzz! Including depressing news that Congresscritters are going to wait until January 2015 to enact the tax laws for 2014.

Kay Bell, Some retirement plan contribution, AGI limits go up in 2015

Brett Bloom, Dismantling a Partnership: The IRS’s Toolbox (Tax Litigation Survey)

William Perez, How to Plan for, Minimize, and Report the Self-Employment Tax

TaxGrrrl, IRS Gets Big Win In Court As Judge Dismisses Tea Party Targeting Cases

Peter Reilly, National Organization For Marriage – No Recovery Of Attorney Fees In Case Against IRS

TaxProf, The IRS Scandal, Day 533

 

Kyle PomerleauPass-Through Businesses are not Always Small Businesses (Tax Policy Blog). This article is a good read for anyone who thinks increases in top rates don’t hurt business because most pass-throughs are small. While that may be true, there a lots of large ones:

Compared to c corporations, pass-through businesses are still much smaller on average. The same Census data shows that 1.6 percent of corporate businesses employ 100 or more employees and 0.36 percent employ 500 or more employees. 44 percent employ between 1 and 100 employees.

However, in absolute terms, there are about as many pass-through businesses with 500 or more employees than there are traditional c corporations. According to the Census, there are approximately 9573 pass-through businesses with 500 or more employees and 9434 c corporations with 500 or more employees.

20141024-1

Source: Tax Foundation

So when you increase taxes on high-income individuals, you are also increasing taxes on employers, which isn’t likely to do good things for employment.

 20141024-2

Robert Goulder, FATCA Envy Spreads Across Hemisphere (Tax Analysts Blog) Other countries just might want to poke into foreign accounts the way we do.

Howard Gleckman, Why Tax Lawyers and Tax Economists Can’t Communicate (TaxVox)

 Megan McArdle,  Can’t Afford a House? Don’t Buy One. Wise advice, but politicians think we should have a program to buy a pony for everyone.

Tax Justice Blog asks What Horrors Await Us in Congress after the Election?  And will they be better or worse horrors than the current bunch of congresscritters?

 

Share

Tax Roundup, 10/22/14: Remembering tax reform.

Wednesday, October 22nd, 2014 by Joe Kristan

19861022President Reagan signed the Tax Reform Act of 1986 28 years ago today. In hindsight, the tax law that resulted seems like a beacon of simplicity, with its 28% top rates and its lack of a capital gain differential.

Looking hard at the 1986 Act, we can see some warning signs. It enacted a temporary research credit, setting the stage for the semi-annual parade of expiring provisions. It included the current alternative minimum tax, which adds huge complexity to individual compliance. It had some benefits that phased out based on income, such as passive losses for active renters and for some IRA contributors. But at the time those could be seen as flaws to be fixed. Instead, they were weeds that would be cultivated.

I count 47 “major” post-tax reform tax laws in the Tax Policy Center list. Every one of them has done its part to undo tax reform. Most of them are represented on my souvenir bookshelf, which has tax law summaries going back to 1984. The left half of the top shelf takes us from 1984 through the 1986 reforms. The rest of it is tax reform’s undoing.

20141022-1

While each law did its little damage to the tax law, I look at President Bush’s signing of the 1990 Omnibus Budget Reconciliation Act as the moment when things really began to unravel. OBRA increased in the top rate to 31%, uncoupled the capital gain rate from the ordinary income rate, and enacted the foul phaseouts of itemized deductions and the standard deduction that dishonestly increased the top effective rate over the top stated rate.

Three Presidents and dozens of bills later, we have individual rates over 40%, considering phaseouts and the Obamacare surtaxes. We have dozens of regularly expiring provisions that require lobbyists to pay homage to the taxwriters every year or two. We have unprecedented complexity that forces even smart taxpayers with simple financial lives to pay to get their returns done. And we have land mines all over the tax law, including foreign reporting provisions that can impose $10,000 penalties on taxpayers who have paid all of their taxes.

It’s all a depressing story. Still, 1986 did happen. Top rates came down from 50% to 28%. The base was broadened and rates reduced. It happened once, so maybe it can happen again.

 

The internet ate my first shot at this post, so just a very quick roundup today.

 

20141003-2Tony Nitti, IRS Sheds Light On The Use Of The Recurring Item Exception

 

Mitch Maahs, IRS Revises Offshore Voluntary Compliance Programs (Davis Brown Tax Law Blog)

Kay Bell, NY tax scammers copying fake IRS tax call template

Peter Reilly, IRS Collection Action Can Be Delayed For A Long Time

 

TaxProf, The IRS Scandal, Day 531

David Brunori, Tax Ballot Predictions (Tax Analysts Blog)

Tracy Gordon, Bertha and the French Professor: Lessons for Public Private Partnerships (TaxVox)

Richard Borean, Tax Foundation Awards for Outstanding Achievement in State Tax Reform in 2014 (Tax Policy Blog). No Iowans — no surprise.

 

Share

Tax Roundup, 10/21/14: Gander gets sauced! And: IRS Commissioner’s prophecy of tax season doom.

Tuesday, October 21st, 2014 by Joe Kristan
Flickr image by Sage under Creative Commons license

Flickr image by Sage under Creative Commons license

Gander, Meet Sauce. An alert reader points out something wonderful I had missed — a ruling awarding attorney fees and costs of $257,885 to the return preparers who successfully challenged the IRS preparer regulations. It’s a rare and welcome example of the IRS being held accountable for being unreasonable with taxpayers. And the court said the IRS was being unreasonable (all emphasis mine; some citations omitted):

In the present case, the reasonableness of the government’s position can be measured by the familiar guideposts of statutory interpretation: text, legislative history, statutory context, and congressional intent. In each of those dimensions, the interpretation of § 331(a)(1) advocated by the government was deficient. Indeed, on several key points, such as the proper meaning of the word “representatives,” the IRS offered no support whatever for its interpretation. The Court therefore finds that the government’s position was not substantially justified.

Losing the battle over whether its position was justified, the IRS dipped into its seemingly bottomless supply of chutzpah to challenge the amount:

As an initial salvo, the IRS argues that it was unreasonable and excessive for Plaintiffs to request compensation for over 1,700 hours spent advocating an interpretation of the statute that Plaintiffs themselves contend is obvious.

Our position was reasonable! OK, it was so unreasonable that even a cave man could litigate against it!

The Court declines the IRS’s request for across-the-board cuts to Plaintiffs’ award. The choice of a hatchet is particularly inappropriate here for several reasons. First and foremost, Plaintiffs prevailed at every stage of this litigation and achieved the entirety of their requested relief. Degree of success is “the most critical factor” in evaluating the reasonableness of a fee award.  Second, the IRS understates the complexity of this case. To be sure, this Court and the D.C. Circuit both concluded that Plaintiffs’ was the only reasonable interpretation of 31 U.S.C. § 330(a)(1). That conclusion, however, was apparent largely as a result of Plaintiffs’ thorough research and well-reasoned briefs.

Hah.

The only thing that would make it better would be if the IRS were assessed a penalty for taking a frivolous or negligent position. Maybe someday. But congratulations to the plaintiffs and the Institute for Justice for pulling off a legal end-zone dance.

 


Cite: Loving, Civil Action No. 12-385 (DC-District of Columbia)

And if you think that preparers can now do whatever they please, read Tax preparation business owner sentenced for tax fraud:

Charles Lee Harrison has been ordered to federal prison following his conviction of willfully aiding and assisting in the preparation and presentation of a false tax return, announced United States Attorney Kenneth Magidson along with Lucy Cruz, special agent in charge of Internal Revenue Service – Criminal Investigation (IRS-CI). Harrison, the owner of a tax preparation business in Houston and Navasota, pleaded guilty June 16, 2014.

Today, U.S. District Judge Lynn N. Hughes, who accepted the guilty plea, handed Harrison a 36-month sentence to be immediately followed by one year of supervised release. He was further ordered to pay $396,057 in restitution.

I’m confident Mr. Harrison feels quite regulated at the moment.

 

Oh, Goody. “So we have right now probably the most complicated filing season before us that we’ve had in a long time, if ever. ”

-IRS Commissioner John Koskinen in an interview with Tax Analysts October 17 ($link)

The Commissioner also had an interesting idea for large partnerships ($link):

Our position is the most significant thing we can do to break that bottleneck — and I think it’s supported by a lot of people in the private sector — would be to say we need to amend [the 1982 Tax Equity and Fiscal Responsibility Act] and say we can audit a partnership,” Koskinen said. “And when we make an adjustment to the tax quantities, the partnership will absorb that that year,” he said, adding that the reporting would take place on the partnership’s Schedule K-1 for that year and the adjustment would automatically flow through to the partners.

Koskinen added that even though that statutory change would effectively shift the tax liability from those who were partners in the year under audit (and who benefited from the improper tax position) to the current partners, “that happens with mutual funds all the time. . . . People are used to buying and selling investments, recognizing whatever the tax and investment situation is.

Maybe that makes some sense for large partnerships, but it would be horrible for small ones, as anybody buying a partnership interest would also be buying three open years of audit exposure.

 

buzz20140923It’s Tuesday. That means Robert D. Flach is Buzzing with links from around the tax world!

Jason Dinesen, Iowa Tax Filing Deadline is October 31: Claim Your $54 Credit Before Then

Paul Neiffer, Will ACA Require You To Include Health Insurance as Wages. Spoiler: no.

Matt McKinney, Can I force my Iowa corporation to buy my stock? (IowaBiz.com). A common question from minority owners of closely-held corporations.

Tony Nitti, The Top Ten Tax Cases (And Rulings) Of 2014: #10 – IRA and Qualified Plan Rollovers Are More Treacherous Than You Realize.

TaxGrrrl, Suspected Nazi War Criminals Collected Millions In Social Security Benefits After Fleeing The U.S.

William Perez, Payroll Taxes: A Primer for Employers

Peter Reilly, Taxpayer Barred From Communicating With CPA Still Hit With Late File Penalty. Weird and unjust.

Kay Bell, Jury doesn’t buy ‘vow of poverty’ as excuse for not filing taxes. Well, this tax evasion conviction will help the defendant fulfill the vow.

 

 

20141021-1Martin Sullivan, A Double Bias Against Infrastructure (Tax Analysts Blog)  He doesn’t mention the biggest problem: When most of government spending is just transfers from some taxpayers to others, it squeezes out everything else.

Donald Marron, A “Normal” Budget Isn’t Really Normal (TaxVox): “From 1975 to today, the federal debt swelled from less than 25 percent of GDP to more than 70 percent. I don’t think many people would view that as normal. Or maybe it is normal, but not in a good way.”

TaxProf, The IRS Scandal, Day 530

 

News from the Profession. AICPA Seeks to Better Weed Out Losers, Misfits with Evolved CPA Exam (Adrienne Gonzalez, Going Concern). Good thing I passed the exam before this development.

 

Share

Tax Roundup, 10/20/14: Extension season is over. Now what? And: do your part for Boeing!

Monday, October 20th, 2014 by Joe Kristan

We are now in the sweet spot of the tax year. We are done with extended 1040s, and it’s too early to get most people to do year-end tax planning. That’s why this is the continuing education season for most of us.

The Iowa State University Center for Agricultural Law and Taxation Farm and Urban Tax Schools begin next week. I will be speaking on the Day 1 program for all schools, starting October 28 in Waterloo, Iowa. Tour stops also include Maquoketa, Sheldon, Red Oak, Ottumwa, Mason City, Denison and Ames. Who said public accounting lacks glamour?

Now to get those slides prepared…

 

Government is just a word for things we do together. Like subsidizing big corporations. Using information from Good Jobs First, Veronique de Rugy of the Mercatus Institute provides a chart of the biggest known recipients of state subsidies:

20141020-1

Meanwhile, everyone else pays a little higher tax rate to grease Boeing’s landing gear. I believe that the damage caused to the taxpayers who don’t get these subsidies makes losers out of the states that win tax incentive bidding wars.

 

20140805-3Kay Bell, 2014 tax planning starts with your tax bracket

Annette Nellen, Premium Tax Credit Problems, “This is a big deal because the PTC serves to help make health insurance affordable to individuals with income between 100% and 400% of the federal poverty line.”

TaxGrrrl, Apple Seeds Perk Wars, Adds Egg Freezing As Employee Benefit.  Is that a tax-free benefit? It makes me wonder about their work-life balance.

Peter Reilly, UnFair: Exposing The IRS – Does Not Make Strong Case Or Decent Documentary. Peter watched the movie so you don’t have to.

Tax Trials, Tax Court Preserves Taxpayer Protections against Arbitrary and Capricious Appeals Rulings

Russ Fox, Copying Steven Martinez’s Idea Is Not a Good Choice. If you think you need to murder nine witnesses to stay out of jail, you probably won’t stay out of jail.

 

 

The Tax Prof reports that Linda Beale will resume tax blogging after going off the air as a result of the death of her husband. My condolences to Linda and her family.

Jim Maule, Putting the Brakes on Tax Breaks. “Never do indirectly through taxes what can and should be done directly.”

 

Andrew Lundeen, Most Common Jobs by Income Bracket (Tax Policy Blog). The professions do well.

Richard Auxier, Ahead of the Midterms, State Economic Trends Present Mixed Signals (TaxVox). “A September Pew Research poll found that while Americans’ assessment of job opportunities had improved, 56 percent reported their family’s income was falling behind the cost of living.”

 

TaxProf, The IRS Scandal, Day 529

20141020-2

Quotable. Tax Analysts David Brunori  on a proposed film credit for the music industry in New York ($link):

Like their film equivalents, tax breaks for musicians are bad tax policy. Even if music producers were swayed by taxes, those breaks would be bad policy. Why musicians? Why not cab drivers? Orthodontists? Flamenco dancers? New York lawmakers, many of whom wanted to be Billy Joel growing up, will probably say yes to this terrible idea.

While I have a rooting interest in the music industry, the tax credit idea is awful.

 

News from the Profession. Let’s Watch This Audit Senior Quit His Job in the Most Fabulous Way (Adrienne Gonzalez, Going Concern)

 

Share

Tax Roundup, 10/17/14: If they don’t want the money back, it’s not a loan. And: the state of your IRS “rights.”

Friday, October 17th, 2014 by Joe Kristan

20120511-2Loans aren’t income. But income isn’t loans either. A Tennessee woman struggled with the difference, but the Tax Court straightened her out yesterday.

The taxpayer did consulting work for the medical practice of a Dr. Quisling. Somehow linked to this, she got payments over an eight-year period from around $25,000 to $56,000 annually.  She didn’t file tax returns for any of these years.

The taxpayer took a strange approach to the payments. We’ll let Judge Kerrigan explain (my emphasis):

Petitioner sent Dr. Quisling a memorandum entitled “Memorandum of Understanding on Loan Terms and Conditions”. This memorandum states:

    It has been revealed to me that the action of Blue Cross Blue Shield of Tennessee, Inc., * * * has created a financial burden upon your medical practice, because the medical services rendered by your medical practice rely upon payment(s) received by BCBST. Therefore, I am willing to develop a loan package * * * for the short-range and long-range impact upon the delivery of medical services by the “in-network-provider” as well as the “out-of-network provider” * * *.

The memorandum further states “[a] reasonable expectation of this Memorandum of Understanding on Loan Terms and Conditions is that the loan proceedings will be based upon a) your ability to loan and b) the completion of the research which will result in profit to the undersigned in order that the loan can be repaid.”

This memorandum, dated April 1, 2003, includes the signature of petitioner but not the signature of Dr. Quisling. Petitioner sent Dr. Quisling a followup letter to the memorandum requesting a memorandum of acceptance. The memorandum of acceptance includes a signature alleged to be Dr. Quisling’s, but this signature is not his.

20120801-2See, loans aren’t income, so we don’t have to tell IRS! But Judge Kerrigan notes a flaw in this cunning plan:

Petitioner did not make payments to Dr. Quisling. Neither Dr. Quisling nor Mrs. Quisling demanded payment from petitioner.

Yes, repayment is a key part of a loan agreement. You give me money, I give it back later. Without the second part, it’s either a “gift” or “income.”

The doctor wisely did not play along, but unwisely failed to issue 1099s.. The doctor terminated the consulting relationship in 2011 when she refused belated requests for her Social Security number.

The taxpayer denied performing services. She said the money was given her for other things:

Petitioner contends that payments made by Quisling were loans. Petitioner testified that she needed the money to fund the research for a book that she was writing. However, petitioner produced no evidence of the book including the potential for publishing the book or any other evidence of her ability to repay. Dr. Quisling testified that the payments were not loans and that he did not expect to be repaid.

On February 5, 2011, petitioner faxed Dr. Quisling a letter referencing an alleged purchase of medical equipment that Quisling made from petitioner’s deceased husband. On February 25, 2011, Dr. Quisling’s attorney and the attorney for Quisling, Vincent Zuccaro, sent petitioner a letter stating that Quisling had not purchased any equipment from her husband or received a gift of property from her or her husband.

The Tax Court had little trouble finding that the taxpayer received income, rather than loans, upholding the tax assessment and various penalties.

The Moral? If you get income, calling it a “loan” doesn’t make it one. Especially when the “lender” doesn’t think it’s a loan and never asks for repayment.

Cite: Fisher, T.C. Memo 2014-219.

 

20130419-1Amber Athey, Is the IRS Upholding Your Taxpayer Rights? (Tax Policy Blog). Some better than others:

2. The Right to Quality Service:

While the opportunities for outreach seem robust, in 2012, only 66 percent of taxpayers trying to call the IRS reached a representative, and callers waited on average of 17 minutes, up from 12 minutes in 2011. An article from April of 2014 stated the wait time was up to 30 minutes, largely due to budget cuts.

And:

8. The Right to Confidentiality

Any information disclosed to the IRS may not be shared with anyone else unless authorized by the taxpayer or by law. The IRS struggles with protecting the confidentiality of taxpayers. Numerous information scandals have plagued the IRS, including the posting of 100,000 names and social security numbers on their website and an unencrypted thumb drive loaded with social security numbers being taken home by an employee.

In the first six months of 2013, 1.6 million taxpayers were affected by identity theft, compared to 271,000 in 2010. Thefts have resulted in billions of dollars in potentially fraudulent refunds, as the IRS issues refunds before they’re sure the filing was done by the person whose name is on the form. In 2011, fraudulent refunds totaled $3.6 billion.  Serious improvements in security measures need to occur in order for taxpayers to feel confident that the IRS can protect their information.

But Amber Athey still thinks the IRS “Taxpayer Bill of Rights” is a good thing:

The IRS has room to improve in protecting the rights of taxpayers, but the implementation of the Taxpayer Bill of Rights is a great first step in this process. A clear outline of rights is also highly beneficial to the IRS and taxpayers as a means setting expectations for the function of the IRS.

I suppose having something to aspire to is a good thing, but it would be a lot better if there was somebody who would actually enforce these rights and impose costs on the IRS for falling short.

 

buzz20141017buzz20141017Robert D. Flach has a friday “Buzz Light,” linking to tax things.

Jason Dinesen, Updated Wisconsin Tax Guidance for Same-Sex Married Couples

Kay Bell, Are you willing to pay more to cover Airbnb taxes?

Paul Neiffer invites you to an Ag Summit in Chicago on December 7 with Andy Biebl and Lance Woodbury on “Farm Retirement and Transition Planning.”

 

Kyle Pomerleau, The Pease Limitation on Itemized Deductions Is Really a Surtax (Tax Policy Blog). It’s also a lie. It works like a rate increase, but more complicated and without the honesty.

Howard Gleckman, Taxes and Spending Return To “Normal”– But Not For Long (TaxVox)

Robert Goulder, Early Results Are In: Inversions Aren’t Going Away (Tax Analysts Blog) “It’s too early to draw a definitive conclusion here, but it seems the world’s multinationals haven’t yet thrown in the towel on inverting to low-tax jurisdictions.”

Richard Phillips, Ireland’s Soft Pedaling Tax Avoidance Crack Down (Tax Justice Blog)

TaxProf, The IRS Scandal, Day 526

Me, IRS Issues Applicable Federal Rates (AFR) for November 2014

Career Corner. A Quick and Dirty Guide to Getting Away With Insider Trading (Leona May, Going Concern)

 

Share

Tax Roundup, 10/15/14: Extended return do or die day – tips on timely filing, and why you should do that.

Wednesday, October 15th, 2014 by Joe Kristan

20130415-1Friends, it’s deadline day. Extended 1040s are due today for U.S. residents. No second extension is available.

What happens if you don’t file?  Nothing good.  A few of the bad things that can happen:

- If you owe money, you can turn a 1/2% per-month late payment penalty into a 5% per month late-filing penalty.

- If you have an election to make that can only be made on a timely-filed return — for example, an election to defer insurance gains, or to carry forward net operating losses – you lose the chance to make that election forever.

- If your return would include a foreign disclosure, such as a Form 8938, Statement of Specified Foreign Financial Assets;  a Form 5471, disclosing an interest in a foreign corporation; or a Form 3520 if you have a foreign trust or a gift from a foreign personlate filing can trigger a $10,000 penalty.

- You don’t start the statute of limitations, so the IRS can come after you indefinitely for the tax year.

- Not filing can cause you to lose refunds. If you don’t file, you lose your ability to get a refund of withheld taxes after two years.

Failure to file is habit forming, and it’s a costly habit. Even if you owe and can’t pay, you still should file; you have options when you owe and can’t pay.

e-file logoWith so much on the line, it’s worth a little effort to make sure your last minute return is treated as timely-filed.  E-filing is the best way to ensure timely filing. There’s no worry about lost mail, and you get quick confirmation from the IRS.

If you must paper file, either out of conviction or because you are filing a form that can only be filed on paper, you should send it Certified mail, return receipt requestedGet down to your friendly post office and get the postmark hand stamped. And get there early; they often aren’t so friendly, or willing to hand-stamp your certified mail postmark, if you show up at closing time. And sometimes they consider that to be approximately “after lunch.”

If you can’t make it to the post office before closingall is not lost. You can go to a FedEx store or a UPS store and use a designated private delivery serviceBe sure to use one of the specified services. For example, “UPS Next Day Air” qualifies, but “UPS Ground” does not.  Get a shipping receipt with today’s date. And remember to use the street address for the IRS service center, as private services can’t deliver to the post-office box addresses.

 

Kay Bell, Tax Day 2014, the sequel: Oct. 15 Filing Extension Panic

Jason Dinesen, My Response to the IRS Saying I Can’t Speak On My Own Behalf

Peter Reilly, UnFair – One Night Stand Tonight – Exposing IRS Or Fair Tax Infomercial?

 

Keith Fogg, Picking the Wrong Collection Due Process Notice to Petition (Procedurally Taxing)

TaxGrrrl, Ireland Declares ‘Double Irish’ Tax Scheme Dead

 

np2102904

 

William McBride, U.S. Companies Continue to Flee Uncompetitive U.S. Tax System (Tax Policy Blog)

Matt Gardner, The Inversion Parade Continues: Steris Announces Pretend Move to Britain (Tax Justice Blog)

Howard Gleckman, The Small, Happy World of Supersized IRAs (TaxVox)

Joseph Thorndike, Forget Privacy — It’s Time to Tax Miles, Not Gas (Tax Analysts blog).  How do I put this politely? No, it’s not.

 

David Brunori, Schooling the Governors (Tax Analysts Blog) “Back when my libertarianism was still in the closet, I wrote critically of the Cato report card. I now regret my harsh critiques of the project because I believe Cato does the nation a great service by analyzing, assessing, and rating state executives.”

 

TaxProf, The IRS Scandal, Day 524

The new Cavalcade of Risk is up at Chatswood ConsultingThe ancient and venerable roundup of insurance and risk management posts has many highlights, including Hank Stern on Ebola and your health coverage.

 

Share

Tax Roundup, 10/14/14: Iowa tax credits expected to pay out $361 million this year. And: Fix FBAR!

Tuesday, October 14th, 2014 by Joe Kristan

Extended 1040s are due tomorrow!

 

20120906-1$521 million for the well-connected and well lobbied. The Des Moines Register reports on a new set of estimates from the Iowa Department of Revenue:

Iowa would have to pay about a half-billion dollars for tax credits during a 12-month period should every recipient come to the table asking for their awards.

The state has a tax credit liability of $462 million for the 2015 fiscal year, which started July 1 and runs until June 30, 2015, according to an Iowa Department of Revenue report.

For the 2016 fiscal year, the state’s tax credit liability is expected to hit $521.2 million.

But it’s not so bad as all that:

The Revenue Department said it only expects $361.4 million worth of tax credits to be claimed in fiscal 2015 and $402.8 million to be claimed in fiscal 2016.

Compare the $361 million in expected tax credit giveaways to expected receipts, net of refunds, from the entire Iowa corporation income tax in fiscal 2015 of $413.5 million. A good chunk of this is actually in the form of cash grants via the Iowa research credit. Iowa persists in giving these away even though a commission tasked with finding out whether they do any good was unable to say they were worth anything.

Iowa couples its regime of special favors for special political friends with high individual rates, and the highest corporation tax rate in the U.S., for those of us lacking lobbyists or state house connections.  Far better to slash individual rates, get rid of the near-worthless corporation income tax, strip out loopholes and deductions, and make everybody’s tax life easier.  It’s time for The Tax Update’s Quick and Dirty Iowa Tax Reform Plan.

 

passportAllison ChristiansPaperwork and Punishment: It’s Time to Fix FBAR (Tax Analysts, Via the TaxProf). A righteous takedown of one of the worst features of an awful tax law:

The FBAR penalty structure is harsh at best and tremendouosly unfair at worst. An FBAR failure or mistake attracts a one-size-fits-all punishment, which rapidly escalates according to a formula that is known only to the IRS. The instructions claim that a taxpayer can avoid penalties by showing a “reasonable cause,” but they also state that a “non-willful” mistake or failure carries a $10,000 penalty, regardless of the amount of money actually at stake…

It cannot be noted without irony that for a regime created to catch hard-core financial criminals, FBAR now criminalizes something we would hardly consider a serious crime — namely a paperwork mistake.

It’s IRS policy to shoot the jaywalkers so they can slap the real international financial criminals on the wrists.  Read the whole thing.

 

Paul Neiffer reminds us that you have Less Than Two Full Days to Get Your Return Filed

It’s a quiet Buzz day at Robert D. Flach’s place. 

Kay Bell, Federal holiday effects on federal taxes,

Stephen Olson has the Summary Opinions for 10/03/14, rounding up developments in tax procedure at Procedurally Taxing.

 

20121022-1TaxProf, The IRS Scandal, Day 523

Me, The C corporation dilemma and how not to solve it. My latest at IowaBiz.com, the Des Moines Business Record’s Business Professionals’ Blog. I discuss the C corporation double-tax, and a failed effort to solve the problem with a “midco transaction” in advance of a sale of the business.

 

How is that even possible? District Court Sets The Bar Lower For Accountants Than Attorneys (Peter Reilly)

News from the Profession. Center for Audit Quality Managed to Find Some People Confident in Audits (Adrienne Gonzalez, Going Concern)

 

Share

Tax Roundup, 10/10/14: Tax Court: consolidated return, consolidated determination of professional corporation status. And more!

Friday, October 10th, 2014 by Joe Kristan

20120511-2

Accounting Today visitors, click here for the pile of clothes.

Professional Services Corporation in consolidated return not subjected to flat rate tax. When a professional business – law, medicine, consulting, engineering, architecture, actuarial science, performing arts, or accounting – is operated as a C corporation, the “professional service corporation” rules tax its income at a flat 35%. It is denied the use of the 15, 25 and 34% brackets otherwise available.

A corporation is a Qualified Personal Service Corporation (QPSC) subject to the flat 35% rate if it passes (or fails, depending on how you look at it) two tests:

– Substantially all of its activities involve the performance of personal services, and

– 95% of the shares are held by employees who performed such services.

An engineer and his wife operated an engineering practice in a C corporation. This C corporation owned 100% of the stock of a ranching business. The tax law allows C corporation parent corporations to file consolidated returns with their subsidiaries, reporting all of the income on one return. On a consolidated bases, the ranch activity caused the company to not have “substantially all” of its activities involve performing personal services.  As a result, it filed its return using the lower brackets.

The IRS came in with a novel argument. It said the QPSC tests had to be applied separately to each group member — not to the consolidated return as a whole. On that basis, the engineering business would have to pay up its taxes at a flat 35% rate. Tax Court Judge Jacobs explains:

Respondent asserts that where one member of an affiliated group is a qualified personal service corporation and another is not, the consolidated taxable income of the affiliated group must be broken up into two separate baskets. Respondent argues that section 448 requires that the determination as to whether a corporation is a qualified personal service corporation is to be made at the entity level, not at the level of the affiliated group. Further, respondent posits that the Code provides for treating qualified personal service corporate members of an affiliated group differently from other members.

The Tax Court decided that the tax law fails to support the IRS here:

Although section 448(d)(4) provides special rules by which members of an affiliated group may determine their status as a qualified personal service corporation in electing whether to use the cash method of accounting, it provides no illumination as to the rate of tax to be applied to the consolidated taxable income of the entire group. Nor does section 448(d)(4) provide support for the proposition that the consolidated taxable income of an affiliated group is to be broken up into separate baskets.

The court also found that the consolidated return regulations don’t provide for a breakout of QPSC income from other income:

In computing the proper tax liability of an affiliated group, we begin with section 1.1502-2, Income Tax Regs. Section 1.1502-2(a), Income Tax Regs., does not distinguish between taxable income under section 11(b)(1) and (2), and we find no authority to permit the breakup of an affiliated group’s consolidated taxable income into separate baskets. We look to the affiliated group as a whole, i.e., the entity which generated the consolidated taxable income, to determine the characterization of the consolidated taxable income. And in this regard, the parties agree that, when viewed as a whole, Applied Research’s affiliated group is not a qualified personal service corporation.

To conclude, we hold that in the situation involved herein, graduated rates set forth in section 11(b)(1) should be applied to the affiliated group’s consolidated taxable income. I

I’m surprised the IRS even made this argument. To me, it doesn’t even seem like a close issue. It’s the sort of assertion the IRS can make without risk, because it isn’t subject to the same penalties for taking unsupported positions that apply to taxpayers. A sauce for the gander rule, allowing taxpayers to collect the same penalties for bad positions asserted by IRS that they can assert against taxpayers, is overdue.

Cite: Applied Research Associates, Inc., 143 T.C. No. 17.

 

 

20120906-1Yes, Smith’s tax break does take money out of Jones’s pocketFans of corporate welfare tax credits sometimes argue that nobody gets hurt when a favored business gets a sweetheart deal. But their competitors who don’t get the sweet deal may not agree. An Iowa City grocer sure doesn’t:

New Pioneer Food Co-op is crying foul over the idea of the city of Iowa City providing $1.75 million in tax-increment financing assistance to attract a national grocery chain.

New Pioneer’s board of directors sent a letter to the Iowa City Council’s Economic Development Committee this week saying that using TIF money to bring an out-of-state company to Iowa City would hurt local grocers.

These tax breaks — like the state income tax credits the Governor likes to hand out — take money from existing taxpayers to lure and subsidize their competitors — a point not lost New Pioneer:

New Pioneer’s board said if the city were to approve the TIF assistance, it would be at the expense of existing local businesses that would lose customers and be essentially subsidizing a competitor with their tax dollars.

“The market for groceries in the Johnson County area is fixed, and already very competitive,” the board said in its letter. “Bringing in an additional competitor in this category will not drive economic development in the city. It will not increase the size of the market, nor will it increase employment in Johnson County since one or more other stores likely will be forced to eliminate jobs to match their reduced market shares.”

But that’s no concern of the politicians handing out the breaks:

[Iowa City Economic Development Administrator] Davidson said although he respects New Pioneer’s perspective, it’s appropriate for the city to get involved because the project would have a significant impact on the taxable value of the Iowa City Marketplace and properties in the surrounding commercial district.

In other words, screw you guys who are already here paying taxes. We want to give away your money because we think it will enable us to collect more somewhere else in town.

 

buzz20140905Fresh Friday Buzzfrom Robert D. Flach, including word on the upcoming extender train wreck.

Paul Neiffer, Time Running Out on Late Portability Elections. If a taxpayer wants to carry over a deceased spouse’s unused estate tax exclusion, they have to file an election by December 31 for deaths in 2012 or 2013.  This filing requirement is, of course, stupid.

Kay Bell, Tax extenders delay could delay 2015 filing season

Jason Dinesen, Move Up the W-2 Filing Deadline to Combat ID Theft? “Moving up the W-2 deadline should be done and it might be a partial fix to the problem of identity theft … but it’s one piece of a solution, not a cure-all.”

Peter Reilly, Teresa Giudice’s Surprise Sentence And Possible Better Ways To Motivate Compliance. “What I found interesting in this piece by Kelly Phillips Erb was that Ms. Giudice was surprised when she was sentenced to some prison time.”  Me too.

TaxGrrrl has more guest posts: “Tisha,” Giving Up Citizenship Because Of Taxes; and Matthew Litz, The Inverted Talk About Tax Inversions — They’ve Got it All Upside-Down.

Keith Fogg, Unrecorded Conveyances and the Attachment of the Federal Tax Lien or Innocent Spouse Once Removed (Procedurally Taxing)

 

A map of per-return Iowa Earned Income Credit by Iowa School District, courtesy  Iowa Taxpayers Association and the Legislative Services Agency:

Iowa EITC map

Click image for full-size map.

 

TaxProf, The IRS Scandal, Day 519

Andrew Lundeen, The Tax Code Isn’t Good at Fighting Inequality (Tax Policy Blog):

A recent article on Vox, How Sweden Fights Inequality—Without Soaking the Rich, notes that countries with the most success in fighting inequality do not have highly progressive tax systems, such as the United States’ tax code.

Inequality is just something our politicians use as a distraction from their own failure to improve the lot of the poor.

 

News from the Profession. Deloitte So Desperate to Populate Its LinkedIn Group They’ve Resorted to Bribery (Adrienne Gonzalez, Going Concern). So where’s my bribe?

 

Share

Tax Roundup, 10/9/14: Tax-exempt now, tax-exempt forever! And: Real Housewife, real plea deal.

Thursday, October 9th, 2014 by Joe Kristan

 

Accounting Today visitors, click here for the pile of clothes.

 

20120511-2Maybe somebody has tried this before, but as far as I know, this is a new bad idea.  Mr. Lundy, a Florida man, received a non-taxable disability settlement. The IRS didn’t dispute that the settlement was exempt. But then things went to another level.  Tax Court Judge Armen explains (my emphasis):

Rather, petitioners contend that they invested Mr. Lundy’s disability retirement income (which respondent does not challenge as nontaxable) in Mrs. Lundy’s sole proprietorship and that, as a consequence, income generated by that proprietorship is nontaxable. Or, in petitioners’ words: “[A]ny thing we funded with those funds were completely tax free also.”

interesting argument. Once you get a tax-free dollar, anything that grows from that dollar is tax-free forever. That would be awesome. You could invest in municipal bonds, and then anything you buy with the exempt interest would be tax-free too!  If only it worked that way…

Alas, it doesn’t.  Judge Armen elaborates:

In arguing as they do, petitioners fail to distinguish between an item that is excludable from income and the income that such an item may produce once it is invested. Many items are statutorily excluded from gross income. For example, gross income does not include the value of property acquired by gift or inheritance. Sec. 102(a). In contrast, income generated from property acquired by gift or inheritance does not come within such statutory exclusion.

Dang.

Cite: Lundby, T.C. Memo 2014-209.

 

Russ Fox, It’s Not As If Anything Is Happening Right After This…:

And there is. For reasons that only the bureaucrats at the IRS can fathom, every year over Columbus Day weekend the IRS shuts down their computer systems. This includes processing of returns and IRS e-services.

Well, it’s not like there’s a deadline coming up or anything. Oh, wait…

 

The “Real Housewives” casting department apparently didn’t test reading comprehension. TaxGrrrl reports: Real Housewives’ Teresa Giudice Claims She Didn’t Know That Jail Was A Possibility:

The sentence came as a shock to Teresa who claimed, in the interview, that her lawyer did not tell her jail time was a possibility under the plea. She said about the plea, “I didn’t fully understand it. I thought my lawyer was going to fight for me. I mean, that’s what lawyers do. I don’t know. That’s why you hire an attorney. You put it in their hands.”

This shows the importance of reading legal documents before you sign them. She signed a plea agreement with the language excerpted here:

20141009-1

I’m not sure how you can sign something that says “the sentencing judge may impose any reasonable sentence up to and including the statutory maximum term” and feel safe. But then again, I’m not a real housewife.

 

harvestPaul Neiffer, Taxable is Taxable -Whether a 1099 or not! “The bottom line is any income received on the farm is taxable income whether there is a form 1099 or not.”

Jack Townsend, IRS Grants Automatic Treaty Relief for Canadian RRSPs and RRIFs

Kay Bell, Don’t overlook tax breaks in your rush to file by Oct. 15

 

Liz Malm, How Does Your State Score on Property Tax Administration? Probably Not Very Well (Tax Policy Blog). Iowa gets a C.

 

Cara Griffith, Is the Maryland Tax Court Hiding Its Opinions? (Tax Analysts Blog)

Here’s the problem: The Maryland Tax Court publishes a small fraction of its decisions online. It published a single decision in 2013 and has yet to publish a decision in 2014. The court has, of course, issued far more decisions; it simply chooses not to make them publicly available. One would presume, then, that the court retains all decisions and that if a taxpayer or practitioner wanted to review those decisions, a copy could be requested. But it is not that simple in Maryland. 
According to the court’s most recent retention schedule, decisions are to be permanently retained and periodically transferred to the Maryland State Archives. In reality, however, the tax court retains them for three years, but then the decisions are “shredded.” They are not sent to the archives.

Strange. If decisions aren’t public, they are of no use for taxpayers and practitioners trying to follow an often uncertain tax law. The shredding can also provide cover for favoritism or incompetence on the bench. Outrageous.

 

Howard Gleckman, Ryan and Lew Both Object to JCT Scoring of Future Tax Reform (TaxVox). “Like a couple of baseball managers working the umpires before a big World Series game, Treasury Secretary Jack Lew and Representative Paul Ryan (R-WI), who wants to be the next chair of the House Ways & Means Committee, are looking to change the way Congress scores tax reform even before Congress begins a rewrite.”

TaxProf, The IRS Scandal, Day 519.

News from the Profession. Comcast: Let It Be Known That We Did Not Ask PwC to Fire That Guy (Caleb Newquist, Going Concern)

 

Share

Tax Roundup, 10/8/14: Koskinen warns of another hellish filing season. And: FATCA “tormenting” offshore taxpayers.

Wednesday, October 8th, 2014 by Joe Kristan
The Younkers Building ruins, morning, March 29, 2014.

The Younkers Building ruins, morning, March 29, 2014.

Here we go again. We know from bitter experience that Congress might cause tax season delays by passing an election-year “extenders” bill at the last minute. IRS Commissioner Koskinen gave official warning yesterday in a letter to the head of the Senate Finance Committee:

This uncertainty, if it persists into December or later, could force the IRS to postpone the opening of the 2015 filing season and delay the processing of tax refunds for millions of taxpayers. Moreover, if Congress enacts any policy changes to the existing extenders or adds new provisions, the IRS would have to reprogram systems and make processing changes, which would result in longer delays. If Congress waits until 2015 and then enacts retroactive tax law changes affecting 2014, the operational and compliance challenges would be even more severe — likely resulting in service disruptions, millions of taxpayers needing to file amended returns, and substantially delayed refunds.

It was just such retroactive changes that made the 2013 filing season so awful. Add the first go round for Obamacare penalty computations on tax returns, and we can look forward to an even more wonderful tax season in 2015.

I predict that we will get a last-minute passage of the Lazarus provisions that keep dying and being resurrected, sometime in December. Of course, it could drag into January again. I expect pretty much all of the expiring provisions, including bonus depreciation, to be included. But I never rule out Congress dropping the ball entirely.

Other coverage: Richard Rubin, IRS Warns of Tax-Filing Season Delays If Congress Stalls 

Joint Committee on Taxation, list of expiring provisions 2013-2024 (pdf).

 

20140815-2Taxpayer Advocate: FATCA “Tormenting” TaxpayersTaxpayer Advocate Nina Olson doesn’t seem to be a fan of FATCA. She spoke to the Financial Markets Association yesterday, and it sounds like she foresees bad things ($link, my emphasis.):

“This is a piece of legislation that is so big and so far-reaching, and [has] so many different moving pieces, and is rolling out in an incremental fashion . . . that you really won’t be able to know what its consequences are, intended or otherwise,” Olson said. “I don’t think we’ll know that for years. And by that point we’ll actually be a little too late to go, ‘Oops, my bad, we shouldn’t have done this,’ and then try to unwind it.”

Wait, this was passed by our duly elected representatives. What could possibly go wrong?

Olson also questioned the penalty regime underlying FATCA. The law provides for a $10,000 penalty for failing to disclose a foreign bank account, and up to $50,000 for failing to disclose after IRS notification, she said. For someone with a $51,000 unreported foreign bank account, that could be a $60,000 penalty.

IRS policy states that penalties should be objectively proportioned to the offense, Olson said. “Putting a $60,000 penalty on someone for failing to report a $51,000 account does not seem to me like a penalty that is proportioned objectively to the offense,” she said.

Olson observed that a similar disproportionality emerged in recent IRS offshore voluntary disclosure initiatives, when the highest proportionate fines fell on the smallest accounts. In 2009 the median unreported balance for the smallest accounts was $44,000, she said. The lowest-balance account holders paid an FBAR penalty almost six times the actual tax due, she said. Yet the top 10 percent, with a median unreported balance of $7 million, paid a penalty roughly half the amount of tax owed, she said.

This is actually in keeping with the longstanding IRS policy of shooting jaywalkers while slapping the real international tax evaders on the wrist.

How could our legislative supergeniuses have come up with such an insane and unfair system? Look at the name of the legislation — “FATCA.” For fat cats, get it? They passed it claiming to be going after fat cats, but drafted it in a way that beats up on everybody working or living abroad attempting to commit personal finance. But because they “intended” to go after fat cats, they absolve themselves of guilt for the collateral damage, the financial devastation of the innocent and unwary, the retirements ruined. And they smear the rare politician who points out the insanity of FATCA with accusations of being soft on tax evasion.

 

canada flagThere was some rare good news on the offshore tax compliance front yesterday when the IRS made it easier to get favored tax treatment on Canadian retirement accounts:  IRS Simplifies Procedures for Favorable Tax Treatment on Canadian Retirement Plans and Annual Reporting Requirements:

The change relates to a longstanding provision in the U.S.-Canada tax treaty that enables U.S. citizens and resident aliens to defer tax on income accruing in their RRSP or RRIF until it is distributed. Otherwise, U.S. tax is due each year on this income, even if it is not distributed.

In the past, however, taxpayers generally would get tax deferral by attaching Form 8891 to their return and choosing this tax treaty benefit, something many eligible taxpayers failed to do. Before today’s change, a primary way to correct this omission and retroactively obtain the treaty benefit was to request a private letter ruling from the IRS, a costly and often time-consuming process.

Many taxpayers also failed to comply with another requirement; namely that they file Form 8891 each year reporting details about each RRSP and RRIF, including contributions made, income earned and distributions made. This requirement applied regardless of whether they chose the special tax treatment. The IRS is eliminating Form 8891, and taxpayers are no longer required to file this form for any year, past or present.

But in case you think the risk of fiscal catastrophe related to Canadian accounts is past, the IRS warns:

The revenue procedure does not modify any other U.S. reporting requirements that may apply under the Bank Secrecy Act (BSA) and section 6038D. See FinCEN Form 114 due by June 30 of each year, and Form 8938 attached to a U.S. income tax return for more information about the reporting requirements under the BSA and section 6038D.

In other words, you can still be assessed a penalty of 50% of the account balance for not filing an FBAR report on the accounts, or a $10,000 penalty for not disclosing a balance on Form 8938 foreign financial asset form. But if you get ruined by these penalties, consider it a sacrifice on the altar of “an improved set of global rules,” you fat cat.

Russ Fox has more: IRS Simplifies Reporting for RRSPs and RRIFs.

 

20141008-1William Perez, Missed the Tax Deadline? Here’s what penalties might apply

Donnie Johnson, Liz Malm, What Does Yesterday’s Supreme Court Same-Sex Marriage Appeal Denial Mean for Same-Sex Couple Tax Filers? (Tax Policy Blog). Maybe taxpayers in Indiana, Oklahoma, Utah, Virginia and Wisconsin could learn from Jason Dinesen’s work here in Iowa.

Kay Bell, Gambling pays out a $38 billion bonus to tax collectors.

Jason Dinesen, Glossary of Tax Terms: IRA

KCCI, Pharmacist’s trial has been moved to next year. The owner of Bauder’s Pharmacy, facing tax and other charges arising out of alleged illegal sales of painkillers, is now set to go on trial in February.

 

Howard Gleckman, How Asset Building Tax Subsidies Miss Their Targets (TaxVox):

Nearly one-third of all federal tax expenditures–$384 billion in 2013 alone– is aimed at various forms of asset building, such as retirement savings, higher education, and home ownership. Yet, according to research by several of my Tax Policy Center and Urban Institute colleagues, these tax breaks do little to help low-and middle-income households build wealth.

Gee, you might conclude that maybe not every problem is a tax problem.

 

Two more TaxGrrrl Guest Posts: The IRS’s Uncharitable Treatment Of Charitable Contributions (Andrew VanSingel) and Roadways And Taxes (Charles Horn III).

David Brunori, Last Stand for Soda Taxes — Hopefully (Tax Analysts Blog). “If they can’t get folks in uber-liberal San Francisco and Berkeley to vote for soda taxes, they should just hang up their hats.”

Sebastian Johnson rounds up some more Tax Proposals on the Ballot this Election Season at Tax Justice Blog.


TaxProf, The IRS Scandal, Day 517

Jeremy Scott, Will the EU Commission Crack Down on Irish Tax Deals? (Tax Analysts Blog).

 

News from the Profession. Some Big 4 Alumni Just Can’t Quit Their Old Firms. (Caleb Newquist, Going Concern). No problem for me.

 

Share

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.

Share

Tax Roundup, 10/6/14: Nine more days, folks. And: four hours of ethics to rule them all!

Monday, October 6th, 2014 by Joe Kristan

4868It’s October 6. That means extended 1040s are due in nine days, no further extension allowed.

I spent part of my weekend finishing up my own 1040, so I can’t be too self-righteous about procrastinators. Still, my return was 95% done on April 15. This was really just going through the information I had put together for my extension and making sure I hadn’t missed anything. I had gotten all of my information to the preparer (me) months ago.

Meanwhile, I have clients who have gotten me nothing, or maybe just their W-2. These taxpayers often are making the perfect the enemy of the adequate. They want to go through their checkbooks to identify every possible charitable deduction. And that last deduction is rarely worth the wait.

Just get the stuff you have to your preparer now. If you later find a deduction that matters, we have three years to amend the return. But you only have nine days left to file on time.

 

get-outEthics time. I am trying to find four hours of “ethics” courses to take before year-end, because the Iowa Board of Accountancy requires it for license renewal. Robert D. Flach sums up my feelings:

The powers that be seem to feel that unless tax preparers are forced to sit through at least 2 hours of redundant ethics preaching each and every year they will suddenly begin to create large fictional employee business expense deductions for clients, or add erroneous dependents, and false EIC claims, to client 1040s.

I have been preparing 1040s for over 40 years. If I ain’t “ethical” by now, having 2 hours of preaching thrust upon me isn’t going to miraculously make me honest.

In real life, “ethics” courses really seem to be CYA seminars — how to document your file and prepare engagement letters to help ward off frivolous lawsuits. That can be useful, but I’m not sure “ethics” is the right name for it.

 

20140805-2Tony Nitti, Artists Rejoice! Tax Court Concludes Painter’s Activity Isn’t A ‘Hobby’. Tony covers a Tax Court case last week where the IRS improbably went after an art professor’s Schedule C art business on hobby loss grounds.  She won the hobby loss issues, but Tony thinks she will lose other parts of her case, in which the IRS says she deducted personal expenses on her business filing.

Peter Reilly, TIGTA Must Disclose More About Investigation Of Possible IRS Release Of Koch Industries Return Information. Peter looks into whether Koch Industries is an S corporation and learns that some highly political people are humor-impaired and comically challenged.

Russ Fox, Legaspi Gets 21 Months:

Francisco Legaspi didn’t want to go to jail. Back in November 1992, he pleaded guilty to tax evasion. Instead of showing up for his sentencing in January 1993, he headed to Mexico and then Canada to avoid prison. That worked for 20 years. In 2012, the State Department found him when the Bureau of Diplomatic Security found his Facebook page. (A helpful hint to any fugitives out there: Avoid posting anything on the Internet. Law enforcement reads the Internet, too.) They forwarded his information to the Royal Canadian Mounted Police who arrested him; the Mounties always get their man.

Now he’ll serve that 21 months.

 

20141006-1Kay Bell, Estate gets $14 million tax refund on value of art. Kay’s a little giddy about her Baltimore Orioles sweeping Detroit. Now they have to face the Royals, managed by the Magic 8-ball.

Jim Maule, Do Squatters Have Gross Income? A woman moves into an abandoned house. Nobody kicks her out or demands rent. Prof. Maule ponders the implications.

Janet Novack, IRS: We Made A Mistake Valuing Michael Jackson’s Estate. They want more.

Annette Nellen, California to study alternative to current gas tax. Most gas taxes aren’t indexed, and technology is reducing gas consumption. This makes paying for roadwork more complicated.

TaxGrrrl is hosting a bunch of guest posters, including Josh Hoxie, When Income Tax Cuts Masquerade As Estate Tax RepealRebecca McElroy, Making Changes To The Tax Code Starting With The Medical Expense Deduction; and Elaine Kamarck, On The Tax Code, Time for America to Have it Our Way.

 

TaxProf, The IRS Scandal, Day 515

 

Quotable:

There’s nothing wrong with being nostalgic unless you’re trying to do it on someone else’s dime.

-Brian Gongol, on the denial of “landmark” status for Des Moines’ dilapidated riverfront YMCA.

 

News from the Profession. Why are People in Public Accounting So Ridiculously Good Looking? (Adrienne Gonzalez, Going Concern). If you think we’re hot, you haven’t seen the actuaries.

 

Share

Tax Roundup, October 3, 2014: A gold mine, or just a pile of old clothes? And: economic self-development!

Friday, October 3rd, 2014 by Joe Kristan
Flickr image courtesy Jen Waller under Creative Commons license.

Flickr image courtesy Jen Waller under Creative Commons license.

Is that basement full of clothes really a gold mine? Gold, if you believe the values a Maryland man used for donations of old clothes to charity. Unfortunately for him, the Tax Court yesterday ruled that sometimes all you get for your donation is a clean basement.

Many taxpayers use donations of clothing and household items as a gimme deduction.  They always write “$500 to Goodwill” on their tax information — or sometimes, a lot more.  While you can deduct the value of used clothes, the tax law imposes some limits, as Judge Lauber explains (citations omitted, emphasis added):

The nature of the required substantiation depends on the size of the contribution and on whether it is a gift of cash or property. For all contributions of $250 or more, the taxpayer must obtain a contemporaneous written acknowledgment from the donee.  Additional substantiation requirements are imposed for contributions of property with a claimed value exceeding $500. Still more rigorous substantiation requirements are imposed for contributions of property with a claimed value exceeding $5,000.


Section 170(f)(8)(A) provides that an individual may deduct a gift of $250 or more only if he substantiates the deduction with “a contemporaneous written acknowledgment of the contribution by the donee organization.” This acknowledgment must: (1) include “a description (but not value) of any property other than cash contributed”; (2) state whether the donee provided any goods or services in exchange for the gift; and (3) if the donee did provide goods or services, include a description and good-faith estimate of their value. . The acknowledgment is “contemporaneous” if the taxpayer obtains it from the donee on or before the earlier of: (1) the date the taxpayer files a return for the year of contribution; or (2) the due date, including extensions, for filing that return. Petitioner obtained blank signed forms from AMVETS and later filled them out himself by inserting supposed donation values. Because these forms were signed before the property was allegedly donated, we question whether they constitute an “acknowledgment” by AMVETS that it received anything.

 

20120511-2For contributions over $5,000,  a “qualified appraisal” is required unless the gift is of marketable securities.

The Marylander had cleaned out the house of his deceased mother, and he had a lot to give away:

These items allegedly included seven sofas, four televisions, five bedroom sets, six mattresses, a kitchen set, a dining room set, a china cabinet, and three rugs. For charitable contribution purposes, petitioner placed a value of $11,730 on these items.

Petitioner testified that he also donated to AMVETS during 2009 numerous items of clothing belonging to him and his children. These items allegedly included 180 shirts, 63 pairs of slacks, 153 pairs of jeans, 173 pairs of shoes, 51 dresses, 35 sweaters, nine overcoats, and seven suits. For charitable contribution purposes, petitioner placed a value of $14,487 on these items.

While no individual item exceeded $5,000, the appraisal rule still applied:

For contributions exceeding $500, “similar items of property” are aggregated in making this determination. Sec. 170(f)(11)(F) (“For purposes of determining thresholds under this paragraph, property and all similar items of property donated to 1 or more donees shall be treated as 1 property.”); . The term “similar items of property” is defined to mean “property of the same generic category or type,” such as clothing, jewelry, furniture, electronic equipment, household appliances, or kitchenware.

Because the value of the claimed contribution exceeds $500, we must aggregate “similar items of property” to determine what substantiation was required. Petitioner’s self-created spreadsheet shows three categories of similar items: clothing with an alleged value of $14,487; household furniture with an alleged value of $11,730; and electronic equipment with an alleged value of $1,550.

That knocked out the clothes and furniture right there, because there was no appraisal. It would be interesting to see if you could even find an appraiser to value old clothes like that. If you could, though, the appraisal expense would be a miscellaneous itemized deduction.

Who was the preparer? One odd twist is that the clothing deductions were claimed on an amended return prepared by a third party, after the IRS had already examined the taxpayer and assessed tax for unsubstantiated itemized deductions. I hope he didn’t pay that preparer too much.

The moral? 

When you have make a clothing donation (or any donation, for that matter) over $250, you need to get a written receipt meeting IRS rules to support your donation — a cancelled check or blank slip with detail of donation doesn’t cut it. If your donation goes over $5,000, and it’s not a traded security, you must have a qualified appraisal.  No appraisal, no deduction.

Oh, and the deduction for used clothing isn’t really just an additional standard deduction by another name.

Cite:  Smith, T.C. Memo 2014-203.

 

20140826-1Robert D. Flach has fresh Friday Buzz, including what he promises is a final reference to the Jersey Shore guy’s tax problems.

TaxGrrrl, Updated: ‘Real Housewives’ Reality Stars Joe & Teresa Giudice Sentenced To Jail. “Joe Giudice has been sentenced to 41 months in federal prison for financial and tax fraud. His wife, Teresa, will serve 15 months.”

William Perez, How to Calculate the Premium Assistance Tax Credit (With an Example). This will be a big deal on 2014 returns.

Jason Dinesen, Using a Line of Credit to Purchase Investments

Kay Bell, Tax moves to make during October 2014

Annette NellenLogical sales tax ruling on a web-based business

My fact check of a fact check is cited in a fact-check debunking.

 

Howard Gleckman, Pass-Through Firms Report $800 Billion in Net Income, Can’t Be Ignored in Business Tax Reform (TaxVox). “These firms have engaged in self-help tax reform by avoiding double taxation with the stroke of a pen.”  You’re welcome.

 

Jack Townsend, Penalties and Corporate America’s Shenanigans. “Instead of focusing the fire where far more revenue is involved and apply penalties in a way that will discourage misbehavior, the IRS goes after the small fish when there are bigger fish to fry.”

TaxProf, The IRS Scandal, Day 512

 

20141003-2Steve Warnhoff, Former CBO Director Holtz-Eakin on Dynamic Scoring: Revenue Estimating Is Already a Big Guessing Game So Why Stop Now? (Tax Justice Bl0g).

 

Career Corner. It’s Not All About the Big 4 (No Further Proc, a presumably pseudynomous Going Concern contributor). “So at your next recruiting event, when you witness the hordes amassing at the B4 tables, take a minute and visit other firms for a chat.”

Darn straight. Especially check out the Roth and Company table.

 

Economic development begins at home. Former Economic Development Director Charged With Tax Evasion:

 The one-time economic development director for the City of Columbia was arrested on multiple counts of income and property tax evasion.

Wayne Emerson Gregory, Jr. was arrested by investigators from the SC Department of Revenue on 3 counts of income tax evasion and 14 counts of property tax evasion.

Previously, Gregory was arrested in April of this year on embezzlement charges stemming from his time as Georgetown County’s Director of Economic Development from 2005 until September of 2013.

Silly rabbit.  When you’re an economic development director, you help other people loot the government.

Share

Tax Roundup, 10/1/14: Another court says Obamacare tax credits limited to state exchanges. Also: the Iowa Tollway.

Wednesday, October 1st, 2014 by Joe Kristan

oklahoma logoState means state. A U.S. District Court in Oklahoma has joined the D.C. District in holding that the tax credit subsidies for health insurance are limited to the 14 states that have established a health insurance exchange under the ACA. Other states let the feds set up exchanges.  Michael Cannon reports:

Noting that Obama administration wants to issue Exchange subsidies in states with federal Exchanges even though the PPACA (quoting Halbig) “unambiguously restricts the [Exchange] subsidy to insurance purchased on Exchanges ‘established by the State,’” Judge White argues that the government’s interpretation (quoting the Tenth Circuit in Sundance Assocs., Inc., v. Reno) “leads us down a path toward Alice’s Wonderland, where up is down and down is up, and words mean anything.” As evidence, White quotes the concurring opinion in King: “‘[E]stablished by the State’ indeed means established by the state – except when it does not[.]”

The D.C. District decision was upheld by a D.C. Circuit appeals panel, but has been vacated pending a rehearing by the full panel of judges.  The Fourth Circuit Court of Appeals has sided with the government, holding that the subsidies apply to all exchanges.  The issue is almost certainly going to be decided by the U.S. Supreme Court.

Both the ACA employer mandate and individual mandate penalties depend on how the decision comes out.  The employer mandate only applies if an employee gets a tax credit subsidy, so the Oklahoma rule would exempt employers in 36 states from the mandate. The tax credits are also key for determining whether insurance is “affordable” in computing individual penalties for not buying insurance; if the credits are unavailable, penalties would go away for millions of taxpayers in the 36 states using federal exchanges.

Related:

Whither Halbig and the ACA.

Obamacare tax credits get a reprieve.

Cite: Pruitt v Burwell. DC-OK, No. CIV-11-30-RAW

Peter Reilly, Court Rules Oklahoma ObamaCare Not OK

 

 

20120703-2Many economists say highway tolls are a sound way to finance road improvements. While Iowa has no official tollways, our state troopers are taking matters into their own hands, according to a report in today’s Des Moines Register:

 Two California poker players are refusing to fold in a legal battle against the state, claiming Iowa State Patrol troopers unlawfully seized their $100,020 gambling bankroll.

Troopers with the State Patrol’s criminal interdiction team — which works to catch drug traffickers and other criminals along interstates — used unfair procedures that target out-of-state drivers and cast suspicion on nonthreatening motorists, according to a lawsuit filed this week in federal district court on behalf of professional gamblers William “Bart” Davis and John Newmer­zhycky.

The men were traveling in a rented car from a poker event in Illinois with their bankroll.  They were pulled over on a pretext of not signalling a lane change — a pretext seemingly debunked by the patrol car dash cam recording — and ended up having their $100,000 seized.  They were also charged with having “drug paraphernalia.”

The state has returned $90,000, but the state has kept $7 million in seized funds from other out-of-state motorists, often without bothering to file charges.  A state spokesman defends the indefensible practice, which hits hardest people who are least likely to be able to afford to take the state to court, by saying it hurts criminals. You could probably catch some criminals and raise some cash by stopping and frisking everyone leaving the Harkin Steak Fry too, but that would hardly justify doing so.

Dallas County Sheriff took the practice a little too far; he was convicted of stashing seized funds in his garage (in a case where no charges were filed against the motorists whose cash was confiscated). Even when the troopers don’t help themselves to the cash, civil forfeiture without conviction of a crime is a corrupt and lawless practice that is overdue for reform.

Related: Steven Dunn, Nothing Civil About Asset Forfeiture

Update: From Jacob Sullum (Reason.com), Iowa Troopers Steal $100,000 in Poker Winnings From Two Players Driving Through the State

 

20121022-1William Perez, What You Need to Know About the Penalty for Not Having Health Insurance

TaxGrrrl continues her excellent “back to school” series with Back To School 2014: Educational Assistance Benefits

Kay Bell, Tax evasion charges are never fashionable. But tax cheating never seems to go out of style.

Jason Dinesen, Letting My Hair Grow Back: DIY is Not Always Better. Doing your own hair can be a bad idea; this also often applies to tax returns.

Or expatriations: There is no DIY green card abandonment (Phil Hodgen). 

 

Howard Gleckman, The Public Wants Clear Rules About Campaign Giving Through Tax-Exempts. Is It Possible? Yes, just the other day waiting in line at Hy-Vee, I heard a lady flipping through the People magazine say “Yes, they really need to do something about 501(c)(4) abuse.” She then apparated without even replacing the magazine.

 

TaxProf, The IRS Scandal, Day 510

Sebastian Johnson, State Rundown 9/30: The Gas Tax Cometh? (Tax Justice Blog). Better than taking cash from random travelers, anyway.

Joseph Henchman, State Inflation-Indexing of Gasoline Taxes

News from the Profession. Prospective Intern Wants to Know if Firm Will Let Him Go on Vacation During Internship (Adrienne Gonzalez, Going Concern).

 

Share

Tax Roundup, 9/29/14: Obamacare fines can hit $12,000 for a family for 2014. And: tax-evading Congressman beamed up.

Monday, September 29th, 2014 by Joe Kristan

20121120-2Laura Saunders, Penalty for Not Having Health Coverage Can Be Thousands of Dollars; The ACA Penalty Can Top $12,000 for a High-Income Family of Five:

For a family of five, the penalty could be as high as $12,240 for the 2014 tax year, experts say. And for many people, the penalty will rise sharply in 2015 and 2016.

The massive health-care changes passed in 2010 are phasing in, and this is the first year most Americans must have approved health insurance. Those who don’t will owe a penalty under the Individual Shared Responsibility Provision. It’s due with your income taxes, payable by April 15, 2015.

For your own good, of course.  And even if you get the coverage, you can get surprised by a tax bill at year-end if you mis-estimated your income for the year.  (Via the TaxProf). 

 

TraficantBeamed up. When Congresscritters are called “colorful,” it implies they are harmless and almost cute. James Traficant was often described as a “colorful” Congresscritter.  He would give speeches with the tag line “beam me up.”  Russ Fox reports that his request has been granted; the former Congressman died last week.

His colorful career came to a bad end with seven years in prison for tax evasion and other charges. He was accused of accepting bribes and not paying taxes as a sheriff before he made it to Congress; his defense was that he was conducting a secret undercover investigation of the bribe-givers.  He was convicted and expelled from the House. You have to achieve a pretty high standard of low to be expelled from that wretched hive of scum and villainy.

As his release date neared, a minor league baseball team prepared to celebrate with a “Traficant Release Night” promotion, until they got cold feet and cancelled.

It’s fun to laugh at these antics, and it’s healthy to mock politicians. Yet even an ineffective Congresscritter wields an enormous amount of power, with a 1/535 say in a trillion-dollar federal budget. The real laugh is on the taxpayers who put such power in such hands.

Update: Peter Reilly has a detailed history of Mr. Traficant’s tax troubles: James Traficant Jr. And The Taxpayer’s Burden

 

Russ Fox, California Mandates E-Filing of Business Returns:

There is one major issue with the law that I see: Most tax software today does not allow for electronic filing of a single-member LLC return (a disregarded entity). While there is no federal return for such an entity, California does require the return to be filed (and an $800 annual fee be paid). California also does not have its own online system to e-file business returns. My software currently does not have the ability to e-file a California single-member LLC return. I’ll be asking my software provider about this…but not until after October 15th.

Impossibility has never been an excuse with California.

 

TaxGrrrl, Back To School 2014: Saving & The Kiddie Tax.

Kay BellLying to your tax pro could result in a bad tax situation. Shockingly, this appears to be an issue with the Jersey Shore guy’s tax problems. I mean, if you can’t trust a guy from Jersey Shore, what’s left to trust?

William Perez, Investing in a 401(k)? Learn Your Yearly Maximum Contribution Amounts

Peter Reilly, Scholarships Do Not Make Beauty Pageant A Charity.  No, but 501(c)(3) also exempts “educational” institutions, and without the Miss U.S.A. pageant, I would have never been educated on the use of red cups as musical instruments.

 

Phil Hodgen, Your expatriation tax return when U.S. income is zero. It’s sad that our insane and abusive treatment of offshore Americans is making this a common issue.

Jack Townsend, Wylys Ordered to Disgorge Hundreds of Millions of Tax Benefits With Interest

Jason Dinesen, The IRS Says I’m Not Authorized to Speak On My Own Behalf:

So to recap:

  1. The IRS says I am not my own authorized representative so they can’t make the changes I requested

  2. The IRS sent me a duplicate copy of their letter because I am my authorized representative

But I’m sure preparer regulation would go smoothly…

 

20140929-1Kyle Pomerleau, Always Be Careful with IRS Income Data (Tax Policy Blog):

The U.S. tax code only accounts for capital income (capital gains, specifically) when it is realized. This means that someone may have been accumulating capital gains for 40 years in an investment portfolio, but the IRS only sees the final (sometimes massive) realization. Suppose an individual invested in stock. Each year, the gains were small, but in the 41st year, he realized all of the past years’ gains and earned $1 million in income. IRS data would show that this taxpayer was a millionaire one year (and part of the 1 percent).

And he’d be the Devil, for one year.

 

Renu Zaretsky, Pressure, Power, and a New View on Cuts. Today’s TaxVox headline roundup covers unintended consequences of the new inversion rules and the changing politics of tax cuts.

 

TaxProf, The IRS Scandal, Day 508. Speculation on whether there is a link between the IRS scandal and the Holder resignation.

 

Department of Unfortunate Examples.  Econlog’s Scott Sumner has an interesting post addressing why pay disparities that seem puzzling on the surface might make sense: Don’t jump to conclusions (markets are smarter than you or I)

It’s a wise post, but I wish he’d have found a different example:

You might think that a secretary is a secretary and a janitor is a janitor. Not so, they vary quite a bit in competence. Goldman Sachs has much more to lose from an incompetent secretary than does a small accounting firm in Des Moines.

I prefer to think that our “small accounting firm in Des Moines” doesn’t have to pay as much as Goldman Sachs because people here don’t have to work with people from Goldman Sachs.

 

Share

Tax Roundup, 9/22/14: Lerner speaks, sort of. And: a federal tax amnesty?

Monday, September 22nd, 2014 by Joe Kristan
Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner gives an interview. The former IRS officer at the center of the Tea Party disclosure scandal won’t testify under oath, but she sat down for a two-hour interview with Politico: Exclusive: Lois Lerner Breaks Silence:

And she’s a savvy lawyer: She studiously avoided answering fundamental questions about her role in the IRS scandal that could land her in deeper trouble with Congress. During her POLITICO interview, flanked by her husband, a partner at a national law firm, and two of her personal attorneys, she opened up about her life as a pariah, joked about horrible news photos and advice that she disguise herself with a blond wig, and cried when expressing gratitude for her legal team’s friendship.

It is, of course, a public-relations play, designed to make her look like a misunderstood victim of a partisan witch hunt. But it isn’t an especially impressive effort. From the Politico piece:

Several Lerner allies said she was so focused on enforcement that she failed to see the sensitivity of bringing cases against incumbents running for reelection.

But Republicans continue to point to emails in which Lerner inquired about Crossroads specifically, asking her colleagues why the group hadn’t been audited and suggesting the group’s application should be denied. And just weeks before the tea party news broke, after she had seen a draft of the damning inspector general report, she asked colleagues if internal IRS instant messages are tracked and could be requested by Congress.

A little history sheds some light on her “non-partisan” background:

– Before she worked at the IRS, she worked at the Federal Elections Commission, she attempted to get an Illinois GOP senate candidate to withdraw from public life as the price for ending an FEC investigation. The allegations were later dismissed.

– The IRS Commissioner, Doug Shulman, repeatedly denied there was any targeting before the report. Either he knew better, or as a subordinate, she didn’t pass the word up the chain.

– She was in the middle of the Tea Party efforts at an early date. When the Treasury Inspector General Report was about to open the scandal, she did a modified limited hangout, using a planted question to spin the story as just a Cincinnati rogue agent problem.

– She had a hang-up about the Citizens United decision, and her emails show that she was trying to use the tax law to accomplish what the Supreme Court had forbidden.

– The numbers are glaring, showing that conservative groups got much more scrutiny, and it took much longer for their applications to be approved than liberal groups:

targetingstats

Ms. Lerner has, of course, invoked the Fifth Amendment to avoid testifying before Congress about her role in the scandal.

Presumably this interview is the start of a P.R. campaign. I don’t think it will work, but it might get her some good press from outlets inclined to dismiss the scandal.

 

TaxProf, The IRS Scandal, Day 500. It features Stonewall Koskinen: The IRS Commissioner Was Supposed to Clean Up the Mess. Instead, He’s Running Interference from Kimberly Strassel of the Wall Street Journal:

 The only thing Mr. Koskinen has seemed remotely interested in turning around is his agency’s ugly story-line. He has yet to even accept his agency did anything wrong, spending a March hearing arguing that the IRS didn’t engage in “targeting” and claiming the Treasury inspector general agreed. This was so misleading the Washington Post gave Mr. Koskinen “three Pinocchios, ” noting the IG had testified to the exact opposite.

He seems intent on de-throning Doug Shulman as the Worst Commissioner Ever.

 

 

get-outRobert D. Flach asks WHAT ABOUT A FEDERAL TAX AMNESTY?

This would be a one-time only offer. The legislation creating the Federal Tax Amnesty Program could so state by forbidding any future Amnesty programs. Or it could state that the federal government would not be able to institute another Amnesty Program during the twenty years after the end of the current amnesty period.

I have my doubts. One Congress can’t bind another, and if it is popular, the pressure for another amnesty will start building as soon as the first one ends. I also worry about the chump effect – people will feel like chumps for complying, and will convince themselves that if they don’t comply, there will be another amnesty anyway. But I might be convinced otherwise, especially if it were combined with tax reforms that would help prevent the need for another one.

 

Russ Fox, “I’ve tried to tell you the truth every time I’ve been here”. “That quote is from IRS Commissioner John Koskinen during his testimony from earlier this week on Capitol Hill. I have a simple question for Commissioner Koskinen: Why doesn’t that quote read, ‘I’ve told you the truth every time I’ve been here?'”

TaxGrrrl, Back To School 2014: Childcare Expenses

Jack Townsend, Trial Management of the Cheek Good Faith Defense.  Or as an old lawyer I know calls it, the “good-faith fraud defense.”

Kay Bell, Getting old sucks. We can’t stop Father Time, but we can prepare physically, emotionally and financially. And it still beats the alternative.

 

David Brunori talks about Nevada’s Tesla giveaway in State Tax Notes ($link):

Nevada is giving $1.3 billion to a company that is essentially owned by a guy worth $12 billion. I don’t begrudge Elon Musk his money. On the contrary, I admire his ability to create and accumulate great wealth. I just don’t see the need to give him public money. Assuming you ascribe to the belief that horizontal equity requires that similarly situated taxpayers bear similar burdens, Nevada is giving away public money…

I know that the politics of incentives are impossible to overcome. And I have had numerous readers tell me to give my constant ranting a rest. But the political inevitability of tax incentives does not make them appropriate or good.

Tax credit corporate welfare doesn’t just hurt the states that “lose” the competition to bribe companies like Tesla. It hurts all of the businesses of the “winning” state that have to pay full-freight while brazen and well-connected companies like Tesla pay nothing.

 

20140922-1William Gale, Income Tax Changes and Economic Growth (TaxVox) “While there is no doubt that tax policy influences economic choices, it is by no means obvious on an ex ante basis that tax rate cuts will ultimately lead to a larger economy.”

Joshua McCaherty,  Senator Schumer’s Retroactive Tax Bill (Tax Policy Blog). Part of the inversion diversion.

Ajay Gupta, Renouncing the Dogma of Surrey’s Infallibility (Tax Analysts Blog). Sounds like something involving the Pope and Henry VIII, but it’s really about transfer pricing.

A new Cavalcade of Risk is up at Workers Comp Resource Center, with posts from around the insurance and risk-management world.

 

News from the Profession. 15 Reasons Why EY’s BuzzFeed Post Is a Bunch of Malarkey (Adrienne Gonzalez, Going Concern)

 

Share

Tax Roundup, 9/19/14: Brutal Assault on Reason Season Edition. Arrggh!

Friday, September 19th, 2014 by Joe Kristan

20121006-1Brutal Assault on Reason Season is underway. Elections depress me. Arnold Kling sums up my feelings:

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

Very few of us are in a position to have more than intuitions on the great issues of the day. Rarely are voters health-care economists, trade experts, military or foreign policy specialists, etc., and most of us have little basis to tell when the politicians are lying about these issues (though that is a good default assumption). Doing taxes for a living, though, I feel competent to identify bogus tax claims by politicians. William McBride does so in a Tax Policy Blog Post,  U.S. Corporate Tax Revenue is Low Because High Taxes Have Shrunk the Corporate Sector.

He quotes the U.S. Senate’s only unabashed socialist, Bernie Sanders:

“Want to better understand why we have a federal deficit? In 1952, the corporate income tax accounted for 33 percent of all federal tax revenue. Today, despite record-breaking profits, corporate taxes bring in less than 9 percent. It’s time for real tax reform.”

There is a truly brutal assault on reason, and Mr. McBride fights back:

The share of U.S. business profits attributable to pass-through businesses has grown dramatically as well, as they now represent more than 60 percent of all U.S. business profits. The second chart below shows that C corporation profits, while extremely volatile, have generally trended downward in recent decades, while the profits of S corporations and partnerships have trended upwards. In the 1960s and 1970s, C corporation profits were about 8 percent of GDP, while partnership profits were about 1 percent and S corporation profits were virtually nil. Now C corporation profits hover around 4 percent of GDP (4.7 percent in 2011), while partnership profits are almost at the same level (3.7 percent in 2011) and S corporation profits are not far behind (2.4 percent in 2011). Partnership and S corporation profits are growing such that they will each exceed C corporation profits in the near future if not already. When commentators claim that “corporate profits are at an all-time high”, they are referring to Bureau of Economic Analysis data that combines C corporations and pass-through businesses, whether they know it or not.

In sum, the Senator’s statement is flat out false. It is completely misleading to claim that corporate profits are up while corporate tax revenues are down, essentially implying there is some mischief going on via “loopholes”, etc. The truth is corporate tax revenue has been falling for decades because the corporate sector has been shrinking, and not just by corporate inversions. The most likely culprit is our extremely uncompetitive corporate tax regime.

In other words, high rates are driving businesses out of the corporate form and to pass-throughs of one sort or another.

20140919-1

As we head into election season, expect the brutal assaults to continue. Here are a few phrases commonly seen in assaults on reason when taxes are involved, enabling you to spot them even if you don’t know a 1040 from a hole in the ground:

“Politician X voted for tax breaks to ship jobs overseas.”

“This tax cut will pay for itself.”

“I believe in free markets, but tax credit X is needed to level the playing field.”

“I don’t want to punish success; I want X to pay his fair share.”

“This tax credit created X jobs”

I know I’m missing many. If you point out more in the comments, I’ll be happy to talk about them.

 

It’s Talk Like a Pirate Day, so Kay Bell comes through with Avast, me hearties! The IRS wants its cut of your illegal income, be it pirated or otherwise criminally obtained.

 

Peter Reilly, Professional C Corp Denied Deduction For Uncashed Salary Check To Owner.  He covers a story I covered earlier this week where a professional corporation deducted a year-end bonus “paid” through an NSF check that was “loaned” back to the corporation.  His take: “I’m not sure that the Tax Court was right to deny any of  deduction, but I really question whether the whole deduction should be denied.”

 

TaxGrrrl, Back To School 2014: Deducting Student Loan Interest (Even If You Don’t Pay It)

20140826-1Robert D. Flach has fresh Friday Buzz, including links on the cost of tax compliance and “7 deadly tax sins.”

William Perez, When are State Refunds Taxed on Your Federal Return?

Jason Dinesen, IRS Says Online Sorority Is Not Tax Exempt. Social media apparently isn’t social enough for them.

Jim Maule, An Epidemic of Tax Ignorance. He covers one of my pet peeves — people who use the term “the IRS code” for the Internal Revenue Code. It’s Congress that came up with that thing, not the IRS.

Russ Fox, Hyatt Decision a Win for FTB as Far as Damages, but Decision Upheld that FTB Committed Fraud. FTB is the California Franchise Tax Board. Tax authorities should get in trouble for fraud to the same extent they hold taxpayers responsible for fraud.

 

A. Levar Taylor, What Constitutes An Attempt To Evade Or Defeat Taxes For Purposes Of Section 523(a)(1)(C) Of The Bankruptcy Code: The Ninth Circuit Parts Company With Other Circuits (Part 1) and (Part 2).

 

20140801-2Joseph Thorndike, Should We Tax Away Huge Fortunes? (Tax Analysts Blog). “In other words, if you like the estate tax, talk more about revenue and less about dynasties.”

Richard Philips, House GOP Bill Combines Worst Tax Break Ideas of 2014 for Half-a-Trillion Dollar Giveaway. (Tax Justice Blog). When they know that the Senate will ignore whatever they do, it’s easy to accommodate anyone lobbying for a tax break.

Renu Zaretsky, Will Tax Reform See Light at the End of the Next Tunnel? This TaxVox headline roundup covers Tax Reform, Treasury’s plans on inversions, and the continuing resolution passed before the congresscritters left D.C. to assault reason some more.

TaxProf, The IRS Scandal, Day 498

Me, IRS issues Applicable Federal Rates (AFR) for October 2014

News from the Profession. Grant Thornton Has a Fight Song and It’s As Awful As You Might Expect (Adrienne Gonzalez, Going Concern).

 

Share