Posts Tagged ‘Paul Neiffer’

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.

 

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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)

 

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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)

 

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Tax Roundup, 10/13/14: Appeals Court holds CRP payments not Self-employment income to non-farmers. And: Extended due date looms!

Monday, October 13th, 2014 by Joe Kristan

binNot farming isn’t farming. That is one way to look at Friday’s decision by the Eighth Circuit in Morehouse that Conservation Reserve Program payments to non-farmers are not self-employment income. Overturning a Tax Court decision, a split three-judge panel rejected the IRS assessment of self-employment tax on landowners who enrolled in the CRP when they were not engaged in the trade or business of farming. The appeals panel said the CRP payments to hold erodable land out of production are instead rental payments with respect to non-farmers; real estate rental income is not subject to self-employment tax.

Roger McEowen, who worked on the case from the taxpayer’s side, has a detailed analysis of the case and its history. He summarizes the state of CRP law:

 Now, the Eighth Circuit’s reversal of the Tax Court means that non-farmers do not have to pay self-employment tax on CRP payments. That’s the case at least within the Eighth Circuit.  Active Farmers still have to pay on CRP payments unless the 2008 Farm Bill provision applies to them. But, non-farmers and non-materially participating farm landlords are given relief within the Eighth Circuit. For CRP rents paid after 2007, the question is whether the recipient is a materially-participating farmer.

The “2008 Farm Bill provision” holds that CRP payments are not self-employment income for recipients receiving Social Security payments.

In Iowa, taxpayers might want to think twice before taking their CRP payments out of self-employment income. Iowa has a special exclusion of capital gain income for taxpayers who have held land for ten years and who have also “materially participated” in a business with the land for ten years. The Iowa Department or Revenue in a recently-released decision said that it would consider a taxpayer to be “materially participating” in CRP ground if self-employment tax were paid. Given how much appreciation there has been on farm ground in recent years, paying a little self-employment tax might be worth it to avoid Iowa tax on a big farm sale gain.

Cite: Morehouse, CA-8, No. 13-3110.

Paul Neiffer has more: Morehouse Appeal is Released – Taxpayer Victory

 

20140513-1Making crashes more likely, for your safety The Chicago Tribune reports that Chicago shortened yellow light times to increase red-light camera revenues.  As Brian Gongol notes, this demolishes the argument that the cameras are for safety, rather than revenue: “It’s quite simple: If you want to cut down on red-light running and consequent crashes, you lengthen yellow lights and increase the gap between the red in one direction and the onset of green in the other.

Our local politicians never seemed very concerned about dangerous intersections until they found a way to make money off of them. Nor did they experiment with non-revenue safety options, like longer yellow cycles and a delay between the red one way and the green light the other, before turning on the revenue cameras.

 

Russ Fox, You Filed That Extension, And Only Now Are Realizing the Deadline is Wednesday… “First, in most cases tax professionals say it’s better to extend than amend. But extending is now out [1], so it’s better to get a reasonable return in.”

Peter Reilly, Paper Filing 1040 On October 15th? Go To The Post Office! Use Certified Mail:

 It is almost October 15th.  October 15 is the extended due date of your federal individual tax return.  If, like me, you still have not filed it and you are planning, unlike me, to paper file, use certified mail and save the return card when it comes back – especially if you owe money.

I e-file, myself, but if you are filing to claim a refund on a 2010 extended return, paper filing may be your only option — and then you absolutely should go certified mail, return receipt requested.

If you are an American abroad, Phil Hodgen explains how to obtain an Income Tax Return Extension Until December 15, 2014

TaxGrrrl, Trying To Reach IRS? Hold On Until Tuesday. Columbus Day, plus they shut down their computers for the weekend.

Tony Nitti, A Tale Of Two Activities: How To Beat The Hobby Loss Rules 

Jack Townsend, Bitcoins Update

Jason Dinesen, Glossary: Filing Status

20141013-1

TaxProf, The IRS Scandal, Day 522

William McBride, EPI Perpetuates Myth of Low Corporate Taxes. (Tax Policy Blog). A lesson on the dangers of ignoring the ascendance of pass-through entities.

Daniel Shaviro, Frontiers of quasi-tax fraud. “Because (a) partnership tax rules are so complex that only a handful of people really understand them – perhaps a thousand across the entire country? – and (b) people at the IRS generally don’t understand them, and (c) the audit rate for partnership tax returns is below 1%, compliance with partnership tax rules that are meant to block abusive tax planning that contradicts the actual tenor of the rules has pretty much completely collapsed.”

Renu Zaretsky, Cheap Talk, Scoring, and Promises, No, it’s not another night at the singles bar; today’s TaxVox headline roundup covers developments in the medical device tax repeal effort, loophole closers, and talk (just talk) of tax reform.

Sebastian Johnson, State Rundown 10/10: Lottery Bust, Music Credits on the Table (Tax Justice Blog). New York considers expanding corporate welfare to record companies, of all things.

 

Unlike the politicians, they at least give you what you pay for. A summary of tax cases involving prostitutes in the wake of the Cartagena Hooker scandal from Robert Wood.

News from the Profession. Which Accounting Firm Fired an Employee for His Dispute with Comcast? A: PwC (Caleb Newquist, Going Concern). And they fired me when I didn’t even have cable.

 

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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?

 

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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)

 

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Tax Roundup, 9/12/14: C Corporation can’t kite checks to owner to wash out income. And: a church of strange idols.

Friday, September 12th, 2014 by Joe Kristan

20120511-2In the misty early days of my tax career, S corporation elections were a big thing. There was a grace period after the passage of the 1986 Tax Reform Act where you could make the election and avoid having to deal with the built-in gain tax.

I remember calling on a prospect C corporation, thinking I could easily sell the merits of escaping the second layer of corporation tax. They were ready for me. They explained that they didn’t need an S corporation election because, as I remember it, they could always W-2 their income to the owner to zero out their taxable income. They then made an entry to record a “loan” or capital contribution for the same amount from the owner to the corporation, so no actual cash changed hands. That’s what they said they always did, and they’d never been audited.

I sputtered, “that doesn’t work,” but it apparently worked fine, as long as the IRS never called. Needless to say, I failed to land the prospect. I went back to the office determined to find a case with the same facts.  I never did find the perfect case — until now.

Yesterday the Tax Court ruled that a version of this trick didn’t work for a Minnesota C corporation architectural practice.  The stakes are higher for “personal service corporations,” including architects, as they don’t get to use the lower C corporation brackets for their taxable income; they pay 35% from dollar one. Many corporations accept that, assuming they can wipe out their taxable income with year-end bonuses to owner-employees; that way they retain a few tax-free fringe benefits unavailable to S corporation shareholders.

The Tax Court explains how the Minnesota taxpayer went about this (my emphasis, footnotes omitted):

In 2008 Vanney Associates paid Mr. Vanney monthly wages totaling $240,000. At the end of each year, it was the Vanneys’ practice to determine Vanney Associates’ remaining profit after paying any outstanding bills and paying bonuses to employees. After determining this amount, Ms. Vanney would prepare a check on behalf of Vanney Associates and pay the remaining profit to Mr. Vanney as a yearend bonus. The Vanneys testified that their intent behind the yearend bonus was only to pay out the remaining profit; it was not to zero out the tax liability of Vanney Associates even if that was the effect.

On December 30, 2008, Vanney Associates paid Mr. Vanney a yearend bonus totaling $815,000. After withholding and paying to the IRS the appropriate Federal income, Social Security, and Medicare taxes, Vanney Associates wrote a check to Mr. Vanney for $464,183. Mr. Vanney signed the check on behalf of Vanney Associates and then endorsed the check in his own name and made it  payable to Vanney Associates. He never attempted to cash the check. Ms. Vanney recorded the payment on the books as a loan from Mr. Vanney, and Vanney Associates repaid Mr. Vanney in March 2009.

Tax Court Judge Buch found that the check was never cashed for good reasons:

Mr. Vanney testified that he “believe[d]” he knew that Vanney Associates did not have the funds necessary to honor the check. However, he maintained that Vanney Associates could have gotten a loan to cover the check.

20131206-1The IRS disallowed the $815,000 bonus expense, and it ended up in Tax Court. The court sided with the IRS:

Mr. Vanney was the sole shareholder of Vanney Associates. Ms. Vanney, as Vanney Associates’ bookkeeper, knew or should have known that Vanney Associates did not have the funds to cover the bonus check to Mr. Vanney, and Mr. Vanney testified to having at least some idea of this as well. Vanney Associates argues that the payment was unconditional and payment occurred when Mr. Vanney took possession of the check. Vanney Associates cites O’Connor v. Commissioner, T.C. Memo. 1954-90, where this Court held that “[t]he essential element is that the control of property distributed by way of a dividend must have passed absolutely and irrevocably”. The Court in O’Connor also relied on the fact that the payee had “unrestricted use” of the money and the “amount was unqualifiedly his, to do with as he wished.” That is not the case before us. If anything, Mr. Vanney had only restricted use of the check. He could not cash it at the bank, use it to pay a debt, or use it to make a loan to someone other than to Vanney Associates. In fact, Mr. Vanney’s only option to make use of the money at that time was to lend it back to Vanney Associates because the check could not be honored. Additionally, we have previously held that although a taxpayer maintains possession of a check, the amount of the check may not be treated as a distribution or may not be included in gross income when the account has insufficient funds to honor the check.

Accordingly, respondent’s disallowance of a portion of the deduction for officer compensation is sustained.

I can’t time travel to the 1980s to show this case to my now-defunct prospect corporation, but I suspect there are plenty of other C corporations that still do this. It only works if the IRS never calls, and if they do, the value of the C corporation fringes is unlikely to cover their additional C corporation taxes.

Cite: Vanney Associates, Inc., T.C. Memo 2014-184.

 

Christopher Bergin, The Church of Corporate Inversions (Tax Analysts Blog): “I never thought I’d miss stories about Lois Lerner. But if we are going to talk about fairness in our tax system and raising enough revenue to support the people’s government, dealing with the increasingly dysfunctional IRS is just one of the problems we face that are far more important than corporate inversions.”

Speaking of worshipping at The Church of Corporate Inversions: New CTJ Report: Congress Should Require Inverting Corporations to Pay Up Taxes They Owe on Profits Held Offshore (Steve Warnhoff, Tax Justice Blog)

 

20140728-1Kay Bell, Tax relief for terrorist attack victims and their families

Paul Neiffer, How Do We Plan For Section 179 in 2014. “Now, we are fairly confident that Section 179 will be increased, but we probably will not know until the last week of the year and we may get 50% bonus depreciation back too.”

Russ Fox, Cash & Carry.  A restaurateur discovers that all receipts are taxable, even if the customer doesn’t use a credit card.

Peter Reilly, Parsonage Supporters Encouraged By Seventh Circuit Oral Arguments

Leslie Book, Technology and Tax Administration: The Appeals Virtual Service Delivery Program (Procedurally Taxing)

 

Amber Athey, House September Agenda Includes Potential Tax Changes (Tax Policy Blog). Mostly extenders, none of which seem to be going anywhere until after the elections.

 

TaxProf, The IRS Scandal, Day 491

 

Donald Marron, Does the Export-Import Bank Make or Lose Money? (TaxVox). Both. It makes money for Boeing, but loses money for those of us not on the corporate welfare rolls.

 

Career Corner. The Obvious Link Between Inadequate Staffing and Stress Explains Why You Hate Your Life (Adrienne Gonzalez, Going Concern).

 

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Tax Roundup, 9/10/14: Another campaign season, another Iowa tax credit proposal. And: a property tax appeal goes very badly.

Wednesday, September 10th, 2014 by Joe Kristan
If Iowa's income tax were a car, it would look like this.

If Iowa’s income tax were a car, it would look like this.

How Iowa’s tax law gets worse and worse, episode 7,433.  From TheGazette.com (my emphasis):

Gov. Terry Branstad and his running mate, Lt. Gov. Kim Reynolds, traveled to college campuses Tuesday offering their plan for making higher education affordable and reducing student debt.

The GOP team proposed offering fixed-price degrees or $10,000 bachelors degree for popular major at public universities to cut costs for al limited number of in-state students and tax credits for being volunteers in qualifying community activities during stops at Iowa State University in Ames and Drake University in Des Moines.

Say that again, slowly: “tax credits for being volunteers in qualifying community activities.”  Paid volunteerism.  What a wonderful concept, like non-alcoholic whiskey.

To reduce debt that is among the nation’s highest for college students, Branstad and Reynolds said they would work with the Legislature in 2015 to create a state tax credit that would allow students to reduce debt by participating in volunteer activities within their community through a qualified Student Debt Reduction Organization.

Details and specifics of the tax credit would be worked out so it would encourage community volunteerism while also maintaining the strength of other successful tax credit programs, such as the Student Tuition Organization Tax Credit, [campaign spokesman Tommy] Schultz said.

Bluto20140910It’s something cooked up to sound good in a re-election campaign.  Well, cooked-up may be too strong a term, when it is admittedly only half-baked (details and specifics to be worked out).  You would give the Department of Revenue a new job of supervising “Student Debt Reduction Organizations.” These organizations would be set up by non-profits and government agencies to spend state money.

Can you think of any way this will end well?  Does anyone really think the “volunteer” time will be well used? Or that these local communities will have useful projects for all these “volunteers?”  And does anyone doubt that local politicians will find ways to use these “volunteers” to help them get re-elected?

But it sounds good. “Promote civic involvement.”  And the Iowa tax law gets another barnacle.

Another fallacy of the Governor’s plan: the idea that the reason college isn’t “affordable” because there aren’t enough government programs and tax credits to subsidize it. Yet every few years there is a new subsidy or tax credit, on top of the old ones.   Pell Grants, student loan subsidies, Lifetime Learning Credits, HOPE Credits, American Opportunity Tax Credits, student loan interest deductions…  all touted as making college “more affordable.”  Yet somehow tuition keeps outpacing inflation.  It should be obvious by now that higher education just raises prices to soak up the subsidies.  More subsidies and tax credits are the problem, not the solution.

 

Why you might want to hire somebody to handle your property tax appeal.  From the Des Moines Register:

An Iowa man angry about his property taxes was fatally shot during a public meeting Tuesday after he pulled a gun from a briefcase and pointed it at the county assessor, law enforcement officials said.

Francis Glaser, a former Maquoketa city manager, had become agitated and vocal about his property taxes going up during a weekly meeting of Jackson County’s board of supervisors in Maquoketa, a town about 30 miles south of Dubuque.

It apparently involved a tax incentive.

 

Paul Neiffer, Will Tax Inversion Debate Yield Permanent Section 179

Peter Reilly, Andrew Kay Passes – Helped Accountants Abandon Pencil Pushing:

 I never knew who he was, but the machine that his company made had a profound influence on tax and accounting practice , at least in my neck of the woods.  Mr. Kay was responsible for the Kaypro.

I never used a Kaypro, but I am probably indebted to Mr. Kay. With my penmanship, I could never have survived in accounting without computers.

 

20140910-1Richard Auxier, Nearly All States Play the Lottery, But None Are Big Winners (TaxVox). “Playing the lottery can be fun. But politicians selling lotteries as a panacea for education spending are just as disingenuous as lotto advertisements promising big wins. And states pushing instant and electronic games on their poorest residents are doubling-down on a bad bet.”

Russ Fox, New Jersey Tries Hail Mary on Sports Betting; Will IRS Intercept?

Kay Bell, Will Tax Inversion Debate Yield Permanent Section 179

David Brunori, The Good, the Bad, and the Ugly — Florida Governor Rick Scott’s Tax Ideas (Tax Analysts Blog)

Matt Gardner, Wisconsin Contemplates Property Tax Shift from Business to Homeowners. (Tax Justice Blog). Business don’t ultimately pay taxes. They merely collect them on behalf of customers, employees and owners.

 

Kyle Pomerleau, New Earnings Stripping Bill is Fundamentally Unserious (Tax Policy Blog).  Of course it is. That doesn’t mean it won’t pass someday.

TaxProf, The IRS Scandal, Day 489. Today’s roundup includes this from the Washington Post about Commissioner Koskinen’s duplicity in handling the scandal:

Internal Revenue Service Commissioner John Koskinen testified this summer that he played no part in spreading word of the agency’s controversial missing e-mails to the Treasury Department or the White House. But one of his closest advisers apparently did.

And he wonders why Congress doesn’t want to give him all the money he asks for.

 

Career Corner.  How Failing the CPA Exam Might Actually Help You Succeed (Adrienne Gonzalez, Going Concern)

 

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Tax Roundup, 9/8/14: One week left for procrastinators. And: there were no abuses, because they abused everyone!

Monday, September 8th, 2014 by Joe Kristan

7004cornerYour extended 2013 corporation, partnership and trust returns are due a week from today.  If you have a pass-through entity and you file late, you have a $195 per month, per K-1 penalty going back to April if you don’t make the extension deadline.

 

TaxProf, The IRS Scandal, Day 487.  Among the links today is one from the Washington Post, Why Did the IRS Clean Out Lois Lerner’s Blackberry as Probes Began? It also quotes this from Russ Fox:

Let’s assume you’re under a court order to find some emails. Your hard drive crashed, but you think that some of them are saved on your Blackberry. Would you:

(a) Try to find them on the Blackberry,
(b) Do nothing, or
(c) Erase the Blackberry.

If you’re the IRS, the answer is (c)

For an agency that insists it has nothing to hide, the IRS sure acts like it is hiding something.  Just to ice the cake, IRS Says It Has Lost Emails From 5 More Employees. Can dogs eat emails?

Meanwhile, Democratic Senators released a report insisting the IRS picked on left-side outfits just as much as right-side ones and slamming Treasury Inspector General Russell George for insisting otherwise.  So let’s go to the stats:

 

targetingstats

No left-side groups have produced evidence of the absurdly-intrusive questioning faced by some right side groups. We can assume that if they existed, they would have come out by now. Mr. George stands by his work.

 

The Iowa Department of Revenue has given its web site a makeover.  Ain’t it pretty?

 

20120703-2Tyler Cowen, Civil forfeiture cash seizures:

Only a sixth of the seizures were legally challenged, in part because of the costs of legal action against the government. But in 41 percent of cases — 4,455 — where there was a challenge, the government agreed to return money. The appeals process took more than a year in 40 percent of those cases and often required owners of the cash to sign agreements not to sue police over the seizures.

Hundreds of state and local departments and drug task forces appear to rely on seized cash, despite a federal ban on the money to pay salaries or otherwise support budgets. The Post found that 298 departments and 210 task forces have seized the equivalent of 20 percent or more of their annual budgets since 2008.

Civil forfeiture rules in the U.S. allow outrages every day.  It’s very third-world, inherently corrupt, and way overdue for reform.

Phil Hodgen, Renunciation Interviews Not So Intense.  “The State Department justifies the new $2,350 user fee for renunciation by saying ‘Hey, it’s a lotta work. It’s intense. You have to pay me more.'” It looks a lot like civil forfeiture, where the government takes the money because they’re bigger than you, and they can.

 

20140521-2William Perez, How to Adjust Withholding in the Middle of the Year in 9 Steps

Paul Neiffer, A Deduction of Zero is Still Zero:

If the calf was born on the ranch and raised there, the tax deduction due to a death loss is zero.  Since the ranch is allowed to deduct all of the feed and other costs associated with raising the calf, the rancher has a tax basis in the calf of exactly zero.  Therefore, the rancher can deduct zero which is still zero.

It’s the same reason you can’t deduct wages you never received; you never pick them up in income to start with.

Russ Fox, Lies, Deceit, and Nefarious Schemes.  He addresses a VEBA scam:

His plans allowed you to both get the tax deduction and, “then later access the full cash value of their plan contributions by taking out loans against the life insurance policies purchased with plan contributions.” That’s not allowed.

Remember, if it sounds too good to be true, it probably is.

 

nfl logoKay Bell, NFL 2014 season underway, along with the taxable betting.  Kay also has a great map of NFL team affinities by county.  Oddly, it appears central Iowa is Packer Country.

Jack Townsend, Offshore Enabler Nabbed in Sting Operation Sentenced

Peter Reilly, New Hampshire Supreme Court Declines More Power In Tuition Credit Case. The New Hampshire court refused to stop tax credits for contributions to private schools.  Iowa and many other states have instituted such credits.  An athiest group said the credits amounted to an “establishment” of religion. If New Hampshire disallow the credits to the Richard Dawkins Country Day School, they’ll have a better case.

Annette Nellen, Is disclosure of corporate tax information a good idea?  Professor Nellen doesn’t care for proposals to require disclosure of public company returns.

 

 

Ajay Gupta, How Not to Stop an Inversion (Tax Analysts Blog).  “All those proposals focus on the inverting corporate entity—a wonderfully inanimate piñata-like container that can be repeatedly hit for enjoyment and will occasionally yield the candy of additional revenue. None targets the individuals at the helm of the corporation, the men and women who stand to make vast amounts of money from their collective decision to execute an inversion.”

Sebastian Johnson, State Rundown, 9/5: Gun Holiday in Mississippi, Shortfall in Wisconsin, and a Showdown in Washington (Tax Justice Blog)

Renu Zaretsky, Business Tax Reform: Will Patience Be a Vice? This TaxVox headline roundup talks business tax reform, Nevada’s corporate welfare plan for Tesla, and how individual tax revenues will grow, but not as fast as the government will spend them.

 

Tony Nitti, The IRS Cares Not For Your Vow Of Poverty.  “Call me conservative, but if I wanted the IRS to take my vow of poverty seriously, I’d probably refrain from cruising around town in a Mercedes.”

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Tax Roundup, 8/27/14: Inversions! Fire! Flee! FIRPTA! Edition. And: state credits and the race for Governor.

Wednesday, August 27th, 2014 by Joe Kristan

20140815-2DOOM! PANIC!  Corporate inversions!  DO SOMETHING!  This isn’t the first time politicians have gotten their dresses over their heads in a pseudo-patriotic panic over legal transactions, as Ajay Gupta explains for Tax Analysts ($link):

FIRPTA is a statute conceived in xenophobia and dedicated to the proposition that not all investors are created equal. It is nothing more or less than the embodiment of a congressional desire to limit the grasp of foreign investors on domestic real estate.

“FIRPTA” is the Foreign Investment in Real Property Tax Act, and it requires buyers of U.S. real estate to withhold 10% of the gross purchase price paid to non-U.S. sellers.  In practice, it functions as a trap for unwary U.S. buyers who fail to withhold, leaving them liable for the withholding liability on top of their purchase price.  It arose out of the panic over a wave of Japanese purchases of U.S. real estate — a panic that we can now see clearly as madness.  Yet FIRPTA lives on, long after the Japanese moved on to other things.

Things like this tell us that the best way to deal with the current panics, like corporate inversions, is to not “do something” that will surely be half-baked and haunt the tax law forever.

 

Megan McArdle, Burger King and the Whopper About Taxes (my emphasis):

As my colleague Matt points out, most Americans — including a lot of journalists who write about this — seem to be under the misimpression that companies that invert, or people who renounce their citizenship, are doing so to get a lower tax rate on income they earn here. And in a few intellectual-property-based businesses, which can make aggressive use of transfer pricing strategies to declare most of their income in low- or no-tax countries, these complaints have some basis. In most cases, however, including Burger King, they’re doing it because the U.S. inexplicably insists on taking a big chunk off the top of all their foreign income, and making their lives miserable in the process.

But, but, deserters!  Traitors!

 

canada flagIf you are wondering why Burger King might be attracted to Canada,  read How Much Lower are Canada’s Business Taxes? (William McBride, Tax Policy Blog):

First, Canada has a much lower corporate tax rate: 15 percent at the federal level plus another 11 percent on average from provincial corporate taxes. Compare that to the U.S. federal corporate tax rate of 35 percent plus an average state corporate tax rate of about 4 percent.

Second, Canada has a territorial tax system, meaning there is no additional repatriation tax on foreign profits. The U.S. has a worldwide tax system, which applies a repatriation tax to foreign profits when those profits are brought back to the U.S. The repatriation tax is basically the difference between the foreign corporate tax rate and the U.S. corporate tax rate, which is typically more than 10 percent. The average foreign corporate tax rate in the developed world is 25 percent.

Third, the U.S. is not particularly competitive in terms of taxing shareholders. Canada integrates its corporate tax with shareholder taxes to avoid double-taxation. In the U.S. it just piles up, so the integrated corporate tax rate on equity financed investment is over 50 percent.

A corporation pays 35% federal tax on its net income, leaving 65% for the shareholders.  If it gets distributed to a top-bracket taxpayer, it gets hit at 20%, plus the 3.8% Obamacare surtax. That is a combined effective rate of 50.47% — and that’s low, as it doesn’t count phase-outs or state taxes. Yet congresscritters profess astonishment that anybody would find that a problem worth solving.

 

Howard Gleckman, Could The U.S. Fix Taxation of Multinational Corporations With A Sales-Based Formula? (TaxVox) “Instead of focusing on the real disease—an increasingly dysfunctional corporate income tax—we are obsessing over a symptom—firms such as Burger King engaging in self-help reform by relocating their legal residences overseas.”

Joseph Thorndike, Warren Buffett Is a Tax Avoider. Good for Him. (Tax Analysts Blog). Now Mr. communitarian billionaire who wants high taxes for other people is a deserter too.  Is nothing sacred?

 

20140729-2Paul Neiffer,  $563 Cost a Taxpayer $6,320:

If the taxpayers had simply paid the $563 of additional tax owed on the original assessment, that is all they would have been out-of-pocket.  However, when they went to court, the IRS determined that they had made a math error in their original calculation of AMT and reassessed the tax owed from $563 to $6,883 or an increase of $6,320.  Since this calculation was now correct, the Tax Court honored the IRS calculation and suddenly the taxpayers suddenly owed another $6,320 just for going to court.

Oops.

 

TaxProf, The IRS Scandal, Day 475.  It links to this from George Will: “The IRS is the most intrusive and potentially punitive institution of the federal government and it is a law enforcement institution and it is off the rails and it is now thoroughly corrupted.”

And the IRS Commissioner thinks all his agency needs is more money.

 

Kay Bell, IRS, betting that expired state and local sales tax deduction will be renewed, hires firm to calculate Schedule A tables

TaxGrrrl, IRS Still Struggling With Tax Treatment Of Immigrants, Changes Rules Again   

Jack Townsend, BASR Briefs On Issue of Unlimited Statute of Limitations for NonTaxpayer Fraud

David Brunori, Repealing the Bad Franchise Tax is a Good Idea (Tax Analysts Blog).  “Eighteen states still impose a franchise tax; they shouldn’t.”

 

MP branstadBy all means, lets make state tax credits an issue.  The Branstad re-election campaign is making a big deal about how his campaign opponent, Jack Hatch, bottled up a GOP bill that would have reduced developer fees in tax credit deals — fees that Mr. Hatch makes a good living collecting.

Senator Hatch could truthfully explain that his committee snuffed every GOP tax bill last session, so that bill didn’t receive special treatment.  Still, it doesn’t look good.

Yet this ignores the real scandal with state incentive credits: they are inherently corrupt.

For starters, the credits for low-income housing and historic rehabilitation go disproportionately to well-connected insiders who know people and know how to pull strings — at the expense of real estate owners without the connections — and arguably at the expense of renters who might benefit more from housing aid not run through developers.

But also that’s true of the other credits.  Special deals go to Microsoft, Google and Facebook because they are big and they know how to play the system.  Tax credits go to big fertilizer companies for doing what they would do anyway, while other poor schmucks without lobbyists and fixers pay full-freight on their income and property taxes.  NASCAR and the Field of Dreams played on glamour and celebrities to keep sales taxes they collect, while other sellers of amusements have to collect the same sales taxes and turn them over to the state.  And Governor Branstad has handed out these tax credits generously.

I’m fine with the Governor’s criticism of Senator Hatch for tax credit deals; I don’t care for them either.  Still, the Governor should keep his old MP helmet handy, because he is calling down fire near his own position.

 

Claire Celsi, PR is like pork scraps and pickle juice (IowaBiz.com).  Sounds yummy.

 

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Tax roundup, 8/26/14: Oh, that backup file. You can’t have that one. And lots more!

Tuesday, August 26th, 2014 by Joe Kristan

perryheadOh, that email backup?  From Today’s TaxProf IRA scandal roundup, The IRS Scandal, Day 474, comes this dazer:

Department of Justice attorneys for the Internal Revenue Service told Judicial Watch on Friday that Lois Lerner’s emails, indeed all government computer records, are backed up by the federal government in case of a government-wide catastrophe.  The Obama administration attorneys said that this back-up system would be too onerous to search. 

Tremendous.  After telling the court that there just was no way on earth those emails survived, now they say there is a backup, but it’s just too much of a hassle for them to use it to comply with the court’s orders.  I find it hard to imagine the brashest private-sector lawyer saying something like that, at least more than once.

But wait, there’s more:

The IRS filing in federal Judge Emmet Sullivan’s court reveals shocking new information. The IRS destroyed Lerner’s Blackberry AFTER it knew her computer had crashed and after a Congressional inquiry was well underway. As an IRS official declared under the penalty of perjury, the destroyed Blackberry would have contained the same emails (both sent and received) as Lois Lerner’s hard drive. 

Yet Commissioner Koskinen says we should just stop bugging him about this silly abuse of power stuff and give him money instead.  Because we can trust the IRS.

Related: TaxGrrrl, Judicial Watch Claims IRS Attorneys Admit Lois Lerner’s ‘Missing’ Emails Exist;  Russ Fox, Remember Those Missing IRS Emails? They Appear to Exist….

 

Peter Reilly, Home Sweet RV Does Not Always Produce Best Tax Result.  Peter discusses the recreational vehicle tax Catch-22 we noted recently.

harvestPaul Neiffer, How to Sell Your Land and Pay No Tax – MAYBE.  It involves stretching out the payments and keeping your other income down.

Jason Dinesen, More Commentary About Year-Round Proactive Services to Clients.  “Those of us who are good professionals rarely demand the respect we have earned. And then we wonder why clients seemingly don’t respect us, don’t value us, don’t listen to our advice, or jump ship the moment you breathe about a rate increase.”

Tony Nitti, Tax Geek Tuesday: Computing Earnings and Profits.  “The primary purpose for computing E&P is to determine whether a distribution represents a taxable dividend, a nontaxable return of shareholder capital, or capital gain to the recipient shareholders.”

 

Leslie Book, A Stolen Check, Mistaken Identity and Prisoners (Procedurally Taxing):

This post considers Hill v US, a case from the Court of Federal Claims involving a prisoner named Mark Hill whose $1182 tax refund was stolen and cashed by another prisoner with the same name after the prison system mistakenly delivered an IRS letter relating to the missing refund check to the wrong Mark Hill. With time on his hands, but no check, the right Mark Hill sought justice in the form of a new check. After getting the runaround from the IRS, the right Mark Hill sued the US to force it to issue a new refund check. For good measure, he also wanted interest and punitive damages.

Turns out the IRS doesn’t get any more helpful if you are behind bars.

 

20140826-1Robert D. Flach serves your fresh Tuesday Buzz, with links about smart giving, educational savings options, and what you can earn working tax season at a national return prep franchise.

That’s a long time.  Cobb County man sentenced to 20 years for ID theft, tax fraud (ajc.com).  The guy is also supposed to pay back $5 million he stole.  Good luck on that.  Sure, the guy should go away for a long time, but the real crime is that the IRS let him steal that much from the taxpayers.

Jeremy Scott, Fracking Taxes Help States Now, but What About the Future?  (Tax Analysts Blog)  “North Dakota has been transformed by its rapidly growing energy sector, but it should be cautious about staking too much of its fiscal future on continually increasing severance taxes.”

 

Andrew Lundeen, Solutions on Inversions and Corporate Tax Reform (Tax Policy Blog).

Steve Warnhoff, Will Congress Let Burger King’s Shareholders Have It Their Way?  (Tax Justice Blog).  If it means we get Tim Horton’s donuts, I’m all for the proposed merger.

 

Renu Zaretsky,  Tax Rates: Growth, Competition, and Debt.  The TaxVox headline roundup ponders the effects of individual rate cuts, the badness of corporate rates in the U.S., and film credits in North Carolina, among other things.

lizard20140826Have a nice day.  1.2 Billion Reasons to Worry: Security firm reports Russian crime ring compromised 1.2 billion usernames and passwords (John Lande, Iowa Banking Law Blog)

News from the Profession.  Extra-Marital Affairs Site Claims Accountants are Kings of Romance Because Their Jobs are Boring (Adrienne GonzalezGoing Concern).

 

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Tax Roundup, 8/21/14: IRS says saving the company still “passive;” Tax Court says otherwise And: the $105.82 c-note!

Thursday, August 21st, 2014 by Joe Kristan

Programming note: No Tax Roundup will appear tomorrow, August 22.   I will be up in Ames helping teach the ISU Center for Agricultural Law and Taxation class “Affordable Care Act (ACA): What Practitioners Need to Know in the morning.  Webinar registration is closed, but you can still  attend as a walk-in.

 

S imageS imageS-SidewalkYou saved the company.  Big deal.  Apparently pulling the company you started from the brink of failure wasn’t enough to convince the IRS that a taxpayer “materially participated” and could deduct losses on his tax return.

Charles Wade was a founder of Thermoplastic Services, Inc. and Paragon Plastic Sheeting, both S corporations.  After his son Ashley took over daily management of the business, he still owned a significant stake in the company.  He never really retired, though.  From the Tax Court (my emphasis, footnotes omitted in all Tax Court quotes):

With Ashley there to handle day-to-day management, Mr. Wade became more focused on product and customer development. He did not have to live near business operations to perform these duties, so petitioners moved to Navarre, Florida. After the move he continued to make periodic visits to the facilities in Louisiana and regularly spoke on the phone with plant personnel.

In 2008 TSI and Paragon began struggling financially as prices for their products plummeted and revenues declined significantly. Mr. Wade’s involvement in the businesses became crucial during this crisis. To boost employee morale, he made three trips to the companies’ industrial facility in DeQuincy, Louisiana, during which he assured the employees that operations would continue. He also redoubled his research and development efforts to help TSI and Paragon recover from the financial downturn. During this time Mr. Wade invented a new technique for fireproofing polyethylene partitions, and he developed a method for treating plastics that would allow them to destroy common viruses and bacteria on contact. In addition to his research efforts, Mr. Wade ensured the companies’ financial viability by securing a new line of credit. Without Mr. Wade’s involvement in the companies, TSI and Paragon likely would not have survived.

Slacker.  At least according to the IRS, who said that this participation failed to rise to the level of “material participation” and disallowed over $3 million in pass-through losses on Mr. Wade’s return.

The Tax Court took a different view.  Judge Goeke explains :

A taxpayer materially participates in an activity for a given year if, “[b]ased on all of the facts and circumstances * * * the individual participates in the activity on a regular, continuous, and substantial basis during such year.” A taxpayer who participates in the activity for 100 hours or less during the year cannot satisfy this test, and more stringent requirements apply to those who participate in a management or investment capacity.  The record reflects that Mr. Wade spent over 100 hours participating in TSI and Paragon during 2008, and his participation consisted primarily of nonmanagement and noninvestment activities. Ashley managed the day-to-day operations of the companies; Mr. Wade focused more on product development and customer retention.

Although Mr. Wade took a step back when Ashley became involved in the companies’ management, he still played a major role in their 2008 activities. He researched and developed new technology that allowed TSI and Paragon to improve their products. He also secured financing for the companies that allowed them to continue operations, and he visited the industrial facilities throughout the year to meet with employees about their futures. These efforts were continuous,  regular, and substantial during 2008, and we accordingly hold that Mr. Wade materially participated in TSI and Paragon. 

20120801-2It’s notable that the judge did not require Mr. Wade to produce a daily log.  Apparently there was enough testimony and evidence to show that his participation crossed the 100 hour threshold.

The 100 hours might not have been considered enough under some circumstances.  Usually the IRS holds taxpayers to the default 500-hour test for material participation.  This case is unusual in its use of the fall-back 100-hour “facts and circumstances” test. It’s good to see the Tax Court use it, as the IRS seems to think this test never applies.

It’s also interesting that the efforts at “customer retention” were counted.  This could be useful in planning for the 3.8% Obamacare Net Investment Income Tax.  The NIIT taxes “passive” income, defined the same way as the passive loss rules.  A semi-retired S corporation owner who still calls on some of old accounts after turning daily operations over to successors might be able to avoid the NIIT under the logic of this case.  If so, though, it would be wise to keep a calendar to prove it.

Cite: Wade, T.C. Memo. 2014-169

Related:

Russ Fox, A Passive Activity Case Goes to the Taxpayers.  “Hopefully the IRS can get more of these cases right at audit and appeals–they’ll be dealing with many more of these over the coming years.”

Paul Neiffer, More than 100 but Less than 500.  “It is nice to see that a subjective test went in the taxpayer’s favor.”

Material participation basics.

 

How far does $100 go in your city?  Last week the Tax Foundation issued a map showing how far $100 goes in different states.  Now they have issued a new map in The Real Value of $100 in Metropolitan Areas (Tax Policy Bl0g).  It is wonderful — just scroll your cursor over your town.

In Des Moines, $100 is good for $105.82.  In New York, it gets you $81.83.

 

TaxGrrrl, Anna Nicole Smith’s Estate Loses Yet Another Run At The Marshall Fortune

Tony Nitti, Could The IRS Disallow Ice Bucket Challenge Charitable Contributions?  Go ahead, IRS, just try it.  You’re just too popular.

William McBride, Earnings Stripping, Competitiveness, and the Drive to Further Complicate the Corporate Tax (Tax Policy Blog)

Roberton Williams, One Downside Of Inversions: Higher Tax Bills For Stockholders (TaxVox)

Kay Bell, How does the U.S. corporate tax rate compare to other countries?  Poorly.

TaxProf, The IRS Scandal, Day 469

 

David Brunori, Using Local Cigarette Taxes for Schools Is Silly (Tax Analysts Blog).  Smoke ‘em if you got ‘em.  For the children!

Cara Griffith, Was Oregon’s Tax Incentive Deal With Intel Unnecessary? (Tax Analysts Blog).  No, it was absolutely necessary to enable the Governor of Oregon to issue this press release and YouTube announcement.  That’s the point, after all.

 

Quotable:

The United States gets little tax from Americans overseas today. Most of them live in high-tax countries and have no U.S. income tax in any event because of FTCs and the section 911 foreign earned income exclusion. But as we all know, Congress couldn’t care less about this subject, and this is all a non-starter. Better to place your money on a genetically modified flying pig.

Robert L. Williams in Tax Analysts ($link)

 

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Tax Roundup, 8/14/14: Department of Revenue says: no SE Tax, no Iowa gain exclusion on CRP ground. Cash rents also fail.

Thursday, August 14th, 2014 by Joe Kristan

20140814-1Cash Rent, failure to pay self-employment tax ruled fatal to Iowa capital gain exclusion.  Iowa has an unusual capital gain exemption on sales of farm and business property for taxpayers meeting both a 10-year holding-period requirement and a ten year “material participation” test.  The Iowa Department of Revenue yesterday released three rulings holding that taxpayers failed to meet the second requirement on sales of farm ground.  The material participation rules are for the most part the same as in the federal “passive loss” rules.

Cash rent.  Document 14201019  holds that you don’t “materially participate” if all you do is rent farm ground:

The issue raised in the protest involves whether a capital gain deduction from the sale of farmland was properly disallowed on the Iowa individual income tax return for the 2009 tax year.  The farmland, which was held in the name of two partnerships, West Side Acres and East Side Acres, was involved in a cash rent arrangement.  There is no dispute that the farmland was held for more than ten years, but the Department contended that the ten year material participation test was not met.

The taxpayers claimed they spent more than 100 hours managing their farm rentals, but the Department said that activity didn’t count (my emphasis):

The Department notes that most of the hours spend by protester in the farming operation that was provided in the January 29, 2014 letter related to maintenance of business financial records, including review of property tax estimates and assessments and payment of expenses.  The Stoos decision stated that actions of paying the mortgage, preparing taxes and other financial work is not materially related to the farming operation, and these hours were considered “investor-type” activities which were not part of the day-to-day operation of the farm.  Therefore, those hours do not count toward material participation, and the 100 hour test has not been met by protester.  

This is the result I would have predicted.  Cash rent of farm land is not normally considered  “farming” under the passive loss rules.

binConservation Reserve and Self-employment Tax.  Documents 14201020 and 14201017 deny the capital gain exclusion to two taxpayers because they failed to pay self-employment tax on CRP payments.  The liability of CRP recipients for self-employment tax is controversial; a pending Eighth Circuit case seems likely to hold that the tax doesn’t apply to CRP recipients who do not otherwise farm.

The rulings say that the Department goes by the treatment of the payments reported on the taxpayers returns: if they taxpayer paid SE tax on CRP payments, they are considered to have materially-participated in those years, but not otherwise.  From Document 14201017 (my emphasis)

The Department first notes that the Federal Court of Appeals for the Sixth Circuit in Weubker v. Commissioner, 205 F.3d 897 (2000) held that CRP payments were net income from self-employment because they were received in exchange for performing tasks “that are intrinsic to the farming trade or business” such as tilling, seeding, fertilizing and weed control. Subsequently, the Internal Revenue Service issued Notice 2006-108 which states that CRP payments either to a farmer who either personally fulfills the CRP obligations or who isn’t an active farmer and fulfills this obligation through a third party are both includible in self-employment income and are not excludible as rentals from real estate.

Therefore, the Department contends that self-employment tax was clearly due on these CRP payments.

Since protester did not pay self-employment tax on this CRP income, the Department contends that the material participation test was not met. In addition, protester does not meet the retired farmer exception regarding material participation for 5 of the 8 years prior to retirement since self-employment tax was not paid on the CRP acres prior to you receiving social security benefits in 2003. Therefore, the Department contends that you do not meet the qualifications for the capital gain exclusion since you did not materially participate in the CRP activity for ten years.

The liability for SE tax on CRP payments was never as open-and-shut as the Department says. Some commentators have argued that Weubker is wrong, and that CRP, by itself, doesn’t constitute farming (see here and here).  Even so, it is also a stretch to say that the minimal maintenance required on CRP ground rises to the level of “material participation.”

The Department here is saying in effect that they will take your word for it — as shown on your tax filings.  If you paid SE tax on your CRP income, you’re a farmer as far as they are concerned, and you qualify for the exclusion.  Given the stratospheric cost of farm ground nowadays, taxpayers may find it worth paying a little SE tax to qualify for the Iowa gain exclusion.

Related:

Material Participation Basics.

Iowa Capital Gain Deduction: an illustration

 

Canadians born in U.S. sue Ottawa over tax fraud law (TheStar.com):

Canada has violated the charter rights of nearly a million Canadians by agreeing to share their financial details with authorities in the United States, two Ontario women allege in a new lawsuit.

FATCA sponsor Charlie Rangel, D-NY

FATCA sponsor Charlie Rangel, D-NY

They are talking about “FATCA,” the outrageous Congressional overreach into the operations of banks around the world.

Gwen Deegan of Toronto and Ginny Hillis of Windsor, Ont., have launched a claim against the Attorney General of Canada.

In it, they accuse Ottawa of breaching the Constitution by complying with a sweeping new American tax fraud law, known as the Foreign Account Tax Compliance Act.

Under the terms of the legislation that took effect last month, banks must share all personal and joint account details of anyone deemed to be a “U.S. person.” This includes American citizens and people born in the U.S., even those with no existing ties to the country.

I wonder what the reaction in the U.S. would be if, say, Russia demanded the bank account information of every American it said was a “Russian person.”  I don’t think it would be popular. Yet our Congress thinks it is entitled to demand that non-U.S. banks cough up whatever information it feels like asking for.

The response has been to make financial life difficult for Americans overseas, as dealing with U.S. persons becomes more of a hassle than their business is worth.  It also restricts employment opportunities abroad for Americans by making their employment inconvenient.

Charlie Rangel was one of the main sponsors of FATCA.  He would know a little about not paying taxes.

 

20140814-2Paul Neiffer, Sale of Gifted Grain Can Be Tax Free:

When the donee sells this grain, it will be reported as a capital gain.  If time after harvest of the grain and the time of sale is less than a year, it is short-term.  If this time is greater than a year, then it is long-term. 

If the donee is in a low-enough bracket, long-term capital gains are taxed at zero.  But watch out for the “Kiddie Tax.”

 

Jason Dinesen, Proper Documentation of Business Expenses:

In most circumstances, you can prove your expenses even if you don’t have a receipt. But again, I feel that receipts AND other documents are the safest way to go.

Absolutely.  Jason has some tips for keeping track of them.

 

Kay Bell, School’s back. So are some, but not all, education tax breaks

 

Andrew Lundeen, Alan Cole, The Inequality Debate Ignores How Incomes Change Over the Life Cycle (Tax Policy Blog):  “Income data from the IRS and the Census Bureau have their uses, but measuring equality isn’t one of them.”

 

Joseph Thorndike, How ISIS Is Using Taxes to Build a Terrorist State (Tax Analysts Blog)

TaxGrrrl, Tax Revenues Still On Pace To Break Records In 2014   

 

TaxProf, The IRS Scandal, Day 462

Career Corner.  Study: Working in a Windowless Cube is Ruining Your Life (Adrienne Gonzalez, Going Concern)

 

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

Wednesday, August 13th, 2014 by Joe Kristan

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

Judge Nega’s overview:

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

What sort of deductions?

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

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

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

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

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

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

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

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

Cite: McElroy, T.C. Memo 2014-163.

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

 

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

 

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

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

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

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

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

 

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

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

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

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

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

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

 

Jason Dinesen, Rare Home Office Deduction Win in Tax Court

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

 

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

 

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

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

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

Iowa has some lessons to teach here.

 

TaxProf, The IRS Scandal, Day 461

 

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

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

 

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Tax Roundup, 8/7/14: Imitation and Flattery edition. And: How to get California to want your $800.

Thursday, August 7th, 2014 by Joe Kristan

20130819-1You might be surprised just how easy it can be to get sucked into tax in another state.  Cara Griffith explains how easy it is to get California to come after you for their $800 minimum return fee in Doing Business in California (Tax Analysts Blog):

The California Franchise Tax Board recently issued Legal Ruling 2014-01, which addresses when a business entity with a membership interest in a limited liability company is required to file a California return and pay applicable taxes. The ruling comes while a case is pending on that very issue.

The case is Swart Enterprises Inc. v. California Franchise Tax Bd. (Fresno County Superior Court, Case No. 13 CE CG 02171 (July 9, 2013)). Swart operates a farm in Kansas and provides farm labor contractors. The company is incorporated in Iowa, has estimated annual revenues of $280,000, and has three employees.

Swart has no physical presence in California. It doesn’t have employees in California and it doesn’t own real or personal property there. Swart did, however, own a 0.02 percent interest in a California limited liability company that invested and traded in capital equipment. Swart was not the manager of the fund and was not involved in the management or operation of the fund. Yet its status as a member is enough for the FTB to allege that Swart is doing business in California. 

The post explains that California would have let Swart off the hook if they owned in interest in a limited partnership, rather than an LLC.  So if your business sneezes in the general direction of California, make sure you stick an old-fashioned limited partnership in the ownership chain somewhere, or California will shake you down for $800, or maybe a lot more.

This should especially make businesses wary about buying interests in publicly-traded or broker marketed LLCs.  Most of these have at least a little bit of California income, and they might just make a California filer out of your LLC or corporation.  And it’s not just California — wherever the LLC might be, so might you be also.  It can mean increased state taxes, not to mention increased tax return prep fees.

 

TaxGrrrl, Son Of Powerful Congressman Charged With Bank & Tax Fraud.

Howard Gleckman, Does Congress Really Care About the Deficit? Not When It Comes to Vets and Highways (TaxVox).  The answer would have been correct if it stopped after the first two letters.

Annette Nellen, Push for state film credits from Congress.  They don’t care about state solvency either.

 

Peter Reilly, FAIR Tax Abolishes IRS – Then What?

Paul Neiffer, Another Conservation Easement Tax Court Case – Mostly in Taxpayer’s Favor:

When valuing a conservation easement, you must determine the value of the property before the easement and the value after the easement.  The difference in value becomes the charitable deduction amount.  In the case of the Schmidt’s, their apprisal determined the before easement value was $1.6 million and the after easement value was $400,000 for a net contribution deduction of $1.2 million…

The IRS appraiser valued the property at $750,000 for the before easement value and $270,000 for the after easement value for a net deduction of $480,000. 

The deduction came down a little, but the IRS lost its bid for penalties.

Me, Obamacare mandates: What’s a taxpayer to do? (IowaBiz.com, where I discuss what the Halbig decision on tax credits for policies purchased on federal exchanges means now for taxpayers subject to the individual and employer mandates.

TaxProf, The IRS Scandal, Day 455

 

There’s a new Cavalcade of Risk.  This edition of the venerable roundup of insurance and risk-management posts is up at The Population Health Blog. Among the worthy posts is Hank Stern’s Rideshare Tricks – An Update, on the insurance implications of participating in ride-share services like Uber.

 

nra-blue-eagleBut Mr. President, imitation is the sincerest form of flattery!  Accounting Today reports on yesterday’s presidential press conference in Obama Blames Accountants for Inversion Trend:

During a press conference Wednesday following a summit with African leaders, Obama said, “You have accountants going to some big corporations—multinational corporations but that are clearly U.S.-based and have the bulk of their operations in the United States—and these accountants are saying, you know what, we found a great loophole—if you just flip your citizenship to another country, even though it’s just a paper transaction, we think we can get you out of paying a whole bunch of taxes.”

Wherever would anyone get the idea to do such a thing?  Well, Accounting Today points to a suspect: Obama Aides Let Delphi Avoid Taxes with Tactic President Assails:

 President Barack Obama says U.S. corporations that adopt foreign addresses to avoid taxes are unpatriotic. His own administration helped one $20 billion American company do just that.

As part of the bailout of the auto industry in 2009, Obama’s Treasury Department authorized spending $1.7 billion of government funds to get a bankrupt Michigan parts-maker back on its feet—as a British company. While executives continue to run Delphi Automotive Plc from a Detroit suburb, the paper headquarters in England potentially reduces the company’s U.S. tax bill by as much as $110 million a year.

One might almost get the impression that this whole inversion panic isn’t really a serious policy effort, but instead a desperate diversion by a foundering politician and his partisans.

Kay Bell, Walgreens decides to keep U.S. tax residency

 

The problem might be the tax system, not wobbly patriotism.  Record Numbers of Americans Are Renouncing Their U.S. Citizenship (TaxProf).  Paul Caron links to Andrew Mitchel’s report on the latest quarterly numbers of published expatriates, which includes this chart:

20140807-1

 

Our worldwide tax system makes it difficult, dangerous and expensive to be a U.S. taxpayer abroad.  Rather than impugning their patriotism, the President ought to try to make it affordable.

 

Bob McIntyre of the Tax Justice Blog makes perhaps the worst appeal to authority ever seen in the tax literature: Woody Guthrie on Corporate Tax Inversions.  Woody Guthrie’s economic gurus weren’t exactly cutting-edge .

 

The Iowa State Fair Starts today!  

20120829-1

If you show up on Saturday, look for me at the Sertoma booth at the Varied Industries Building from 1-5; I will be distributing educational hearing safety info and ear plugs, and you may even be able to get a free hearing screening from a trained audiologist.  And you might want some music to fire you up for a really big show!

 

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Tax Roundup, 8/6/14: Telemarketing isn’t an airplane. And: inversion hysteria, always in style.

Wednesday, August 6th, 2014 by Joe Kristan

20120529-2Is your airplane any of your business?  The Tax Court yesterday dealt with a problem that will arise a lot as taxpayers struggle with the new 3.8% Obamacare Net Investment Income Tax: what “activities” can be considered to be part of a single business?

The issue comes up because “passive” activities are subject to the tax, while non-passive activities are exempt.  It is especially important when S corporations are involved because their K-1 income is also exempt from the 2,9 Medicare tax and the .9% Obamacare Medicare surtax.  The status of activities as “non-passive” usually depends on the amount of time spent working in the activity; if you can combine activities they are less likely to be passive.

Tax Court Judge Buch outlines yesterday’s case:

 Mr. Williams is an aviation buff who owns a business that is unrelated to aviation. He purchased an airplane that he made available for rent, used for personal purposes, and used in his other business. On the Williams’ joint tax returns, they offset losses related to the ownership of the airplane against their income from the other business. Respondent disallowed those offsets… 

Passive losses cannot offset non-passive income under the 1986 passive loss rules; they carry forward to offset future income until the activity is sold.  Mr. Williams reported the airplane expenses as part of his business of training telemarketers.  The court reviews the rules on combining activities (footnotes omitted; my emphasis):

Section 1.469-4(c), Income Tax Regs., sets rules for determining what constitutes a single “activity”. That regulation provides: “One or more trade or business activities or rental activities may be treated as a single activity if the activities constitute an appropriate economic unit for the measurement of gain or loss for purposes of section 469.” Whether activities constitute an “appropriate economic unit” depends on the facts and circumstances, giving the following five factors the greatest weight:

(i) Similarities and differences in types of trades or businesses;

(ii) The extent of common control;

(iii) The extent of common ownership;

(iv) Geographic location; and

(v) Interdependencies between or among the activities (for example, the extent to which the activities purchase or sell goods between or among themselves, involve products or services that are normally provided together, have the same customers, have the same employees, or are accounted for with a single set of books and records.)

The judge said the airplane wasn’t part of the same “economic unit” as Mr. Williams’ other business, called WPP:

The fact that there was no meaningful interdependence between the ownership of the airplane and the business of WPP is evidenced in part by the fact that Mr. Williams would rent another airplane for travel because he could earn more from renting WPP’s airplane to other pilots or pilot trainees than he would pay if he or WPP rented another airplane for a trip. Further, most of the airplane’s use and income came from renting the airplane outside WPP, which had no effect on the business of WPP. Likewise, there is no indication that the airplane activity depended on WPP; it was only an occasional user of the airplane. There is no evidence that WPP and the airplane activity had any of the same customers or that the two activities were integrated in any meaningful way.

When the airplane activity was separated his other business, Mr. Williams was unable to muster enough hours to reach “material participation,” making the airplane losses passive and non-deductible.

What does this mean in planning for the NIIT?  Taxpayers get to revisit their activity groupings for 2013 and 2014 returns.  Taxpayers with multiple businesses will want to ponder what things they can realistically combine.  Just because you own both businesses doesn’t mean the tax law will consider them an “appropriate economic unit.”

Cite: Williams, T.C. Memo 2014-158

 

20140805-3Paul Neiffer, IRS Provides Two Optional Methods for SE Health Insurance Deduction.

Jack Townsend, Whistleblower Award for FBAR Penalties?

Jason Dinesen, Kudos to NAEA for Promoting EAs.  Not to sound dumb, but isn’t that what the National Association of Enrolled Agents is supposed to do?

Russ Fox, The IRS Apparently Thinks They Won the Loving Case.  “In Loving v. IRS, the IRS was permanently enjoined from the Registered Tax Return Preparer designation. One would think that the IRS would realize this and remove the designation from forms.”

Keith Fogg, How Bankruptcy Can Create a Pyrrhic Victory out of a Tax Court Win (Procedurally Taxing)

 

Peter Reilly, FAIR Tax Abolishes IRS – Then What?  I have long thought the fair tax was half-baked gimmick, deceptively marketed.  If you want to move to a consumption tax, move to a real consumption tax.

Adam Michel, What is the Consumed Income Tax?  (Tax Policy Blog)

 

 

Allison Christians, Regulating Return Preparers: A Global Problem for the IRS:

The problem of regulating all foreigners in service of U.S. citizenship taxation plagues FATCA in the details, and it will plague the project of tax return preparer regulation as well. It won’t be easily solved unless Congress can accept that the universally practiced norm of residency-based taxation is really the only viable option in a globalized world. If not, as the world adjusts to the ongoing expansion of U.S. regulatory power through more — and more complex — financial regulation, everyone will have to accept that virtually every tax move Congress makes has global implications.

Via the TaxProf.

Just what the world needs: more IRS.

 

nra-blue-eagleDavid Brunori, Keep the Inversion Hysteria Out of the States (Tax Analysts Blog).  “A company’s decision to invert is no different from an individual’s decision to live in a state without an income tax or to buy a house rather than rent to take advantage of a tax break.”  But, but, what about your loyalty oath?  You must hate America!  Or, worse, Iowa!

Scott Hodge, More Perspective on Inversions: Not a Threat to the Tax Base but the Face of U.S. Uncompetiveness (Tax Policy Blog)

Bob McIntyre, Statement: Despite Walgreens’ Decision, Emergency Action Is Still Needed to Stop Corporate Inversions (Tax Justice Blog, where inversion hysteria is always in style).

Eric Toder, How Political Gridlock Encourages Tax Avoidance (TaxVox)

 

Joseph Thorndike, The Origination Clause? Let It Go (Tax Analysts Blog).  Since the courts allow the Senate to strip any house bill of its text and replace it with revenue provisions, it’s pretty much dead already.  And that’s a shame.

 

Your legislators at work: 

Chicago lawmaker pleads to misdemeanor; faced 17 felonies. ““I’m sorry I underestimated my taxes.”

Fattah Jr. released on bail following U.S. indictment on theft, fraud and tax-evasion charges.  The son of a Congresscritter has tax issues? The apple doesn’t fall far from the tree.

 

TaxProf, The IRS Scandal, Day 454

Career Corner.  Career Limiting Moves: A Beginner’s Guide (Leona May, Going Concern).

 

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Tax Roundup, 8/1/14: Links edition. And: no oppression.

Friday, August 1st, 2014 by Joe Kristan

Today is the annual office golf outing.  It’s also the one time I play golf each year.

For some reason golf is supposed to be fun for everyone, not just the three or four people in the office who actually have enough skill to enjoy the game.  I have proposed alternative field days, including all-office chess tournaments, shooting, rock climbing — things where I might be competitive — and have made no progress.  So golf it must be.

But I will wear my New Mexico hat, that’ll show them.

 

20130114-1Roger McEowen, Minority Shareholder in Closely-Held Farming Corporation Had No Reasonable Expectations that Majority Could Violate – Case Dismissed.

This case generated a controversial Iowa Supreme Court decision on the rights of minority shareholders.  The decision covered in Roger’s article was the trial court’s attempt to apply the Supreme Court’s decision to the facts in the case. Roger concludes:

The trial court’s remand decision is welcome relief for closely-held corporations in Iowa from an Iowa Supreme Court decision that is out-of-step with reality.  To find, as the Iowa Supreme Court did, that there can be shareholder oppression (with the likely result of corporate liquidation) where there isn’t even an allegation of a breach of fiduciary duties by the controlling shareholders would result in, as the trial court’s remand decision points out, oppression of the majority and could also result in corporate liquidation anytime a minority shareholder wants to “cash-out” for personal gain (as in the present case).  The trial court’s decision also upholds the use of bylaws that set forth stock valuation upon buy-out.  In this case, the Iowa Supreme Court allowed the minority shareholder to ignore the bylaw setting forth the valuation methodology for a buy-out (which he drafted), but the trial court held him to it.  That’s more welcome news for closely-held corporations.

This, too, can and probably will be appealed.

 

20140801-2Paul Neiffer, Pay Your Kids; It Saves Taxes!:

A farmer who operates as a sole proprietor may pay their children under age 18 wages and be exempt from payroll taxes.  If the farmer operates as a partnership (either regular or a LLC taxed as a partnership), paying wages to children under age 18 is still exempt from payroll taxes if the only partners of the partnership/LLC are parents of the children. 

But grandpa is out of luck.

From Jim Maule’s Tax Myths series, Retired People Do Not Pay Income Tax

Peter Reilly,Don’t Leave Money To Children Buried Under IRS Liens.  “Leaving money to someone who is subject to IRS liens can be like leaving money to IRS.”

Keith Fogg, When Should Bankruptcy Court Hear a Tax Case (Procedurally Taxing).

TaxGrrrl, Guilty Plea In One Of The Largest, Longest Running Tax Fraud Schemes Ever.  Kelly explains how some New York grifters milked the Treasury for years, stealing $65 million under the nose of Doug Shulman.

 

Joseph Henchman, Maryland Argues There’s No Constitutional Bar to Taxing Over 100% of Residents’ Income.  Maryland argues that it doesn’t have to allow a credit against county taxes for taxes paid in other states.  Joseph argues, I think correctly, that Maryland’s position is an unconstitutional burden on interstate commerce.

Howard Gleckman, How REIT Spinoffs Will Further Erode the Corporate Tax Base‘ (TaxVox).

 

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Kay Bell, Seersucker Day returns to Capitol Hill, but lawmakers can’t deduct their special summer duds

TaxProf, The IRS Scandal, Day 449

 

Kelly Davis, ales Tax Holidays = Not Worth Celebrating (Tax Justice Blog).  “In the long run, sales tax holidays leave a regressive tax system basically unchanged.”

Iowa’s sales tax holiday for clothing and footwear is today and tomorrow.
News from the Profession.  Teamsters Get Dynamic With a Giant Rat at Grant Thornton’s Downtown NYC Office (Adrienne Gonzalez, Going Concern)

 

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Tax Roundup, 7/10/14: The sordid history of temporary tax provisions. And: NOLA mayor wins 10-year term!

Thursday, July 10th, 2014 by Joe Kristan

taxanalystslogoLindsey McPherson of Tax Analysts has a great, but unfortunately gated, article today, “Things to Know About the Tax Extenders’ History” ($link) Update: Tax Analysts has ungated the article, so read it all here for free! ( It details four points:

1. Two-Year Retroactive Extensions Are Often Passed Late in Election Years

2. Extenders Are Often Attached to Larger Bills

3. Congress Has Never Fully Offset Extenders Legislation

4. Most Extenders Have Been Renewed at Least 3 Times

What does “most” mean? “Of the 55 expired provisions that are the focus of the current debate, 39 have been around since 2008 or longer and thus have been extended at least three times…”

This implies that Congress has no intention of letting the extenders expire.  It only passes them temporarily to hide their real cost, because Congressional funky accounting doesn’t treat them as permanent.  It also requires lobbyists to come to fund-raising golf outings every year to ensure that they get their pet provisions extended.  Honest accounting would at least treat any provision extended twice as permanent, but accounting you and I would do time for is business as usual on the Hill.

 

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

TaxProf, The IRS Scandal, Day 427.  It has this interesting bit, from the New York Times, Republicans Say Ex-I.R.S. Official May Have Circumvented Email:

Lois Lerner, the former Internal Revenue Service official at the center of an investigation into the agency’s treatment of conservative political groups, may have used an internal instant-messaging system instead of email so that her communications could not be retrieved by investigators, Republican lawmakers said Wednesday.

But the crashed hard drive epidemic is perfectly normal, isn’t it, Commissioner Koskinen?

 

Tony Nitti, Tax Geek Tuesday(?): The IRS Finally Figures Out The Real Estate Professional Rules.  Tony covers the IRS walk-back from its untenable position on the amount of participation required to be a “real estate professional.”  My coverage is here.

Paul Neiffer, Watch Out for Spousal Inherited IRAs.  “Spouses who inherited IRAs have a couple of elections available to them that non-spouses do not have.  However, care must be taken to make sure that the 10% early withdrawal penalty does not apply when distributions are finally taken.”

Kay Bell, Home sales provide most owners a major tax break

 

 

Accounting Today, IRS Loses Billions on Erroneous Amended Tax Returns.  A report from the Treasury Inspector General for Tax Administration faults IRS procedures to review amended returns.

 

Cara Griffith, The Criminal Side of Sales Tax Compliance (Tax Analysts Blog):

Imagine this scenario: In the middle of an acquisition deal, the due diligence review of a company being acquired reveals that the company has underremitted its sales tax liability. The deal is never finalized because of the problem. The company approaches its tax adviser with the news that it failed to remit some of the sales tax it collected and asks for advice. On hearing that, most state and local tax practitioners would cringe. It doesn’t matter why the company failed to remit the sales tax it collected from customers — the company is in serious trouble and could face both civil collection penalties and criminal prosecution.

You have to be special to legally keep sales tax you collect.

 

20140505-1Len Burman, “Pension Smoothing” is a Sham (TaxVox):

In a nutshell, here’s what it does: Companies can postpone contributions to their pension funds. This means that their tax deductions for pension contributions are lower now, but the actual pension obligations don’t change, so contributions later will have to be higher—by the same amount plus interest. In present value terms (that is, accounting for interest costs), this raises exactly zero revenue over the long run. 

More of that Congressional accounting.

 

Jack Townsend, Interesting Article from the Swiss Bankers Side.

Leslie Book, Recent Tax Court Case Shows Challenges Administering Civil Penalties and the EITC Ban (Procedurally Taxing)

Overnight, if you leave the cap off.  When Will the Soda Tax Go Flat? (Joseph Thorndike, Tax Analysts Blog)

Scott Eastman, $21,000 Tax Bill Just for Some Potato Salad (Tax Policy Bl0g).  I’ve had potato salad that should have been charged more than that.

Adrienne Gonzalez, Tax Superhero and George Michael Among Those Caught Using Tax Shelter in the UK.  This is a different type of shelter than the one that caused Mr. Michael’s prior legal troubles.

 

When they say it’s not about the money, it’s about the money.  From the Washington Post,  Former New Orleans mayor Ray Nagin sentenced to 10 years in prison:

“I’m not in it for the money,” Nagin said after he was elected to the first of two terms in 2002.

Mayor Nagin was convicted on 20 charges, including four charges of filing false tax returns.  Mayor Nagin’s indictment tells a story of pervasive fraud involving kickbacks and bribes for city business, and third-party payment of limo rides and private jet services.  But he did a heck of a job with Hurricane Katrina.

20140710-1

One interesting thing about the Post piece: it never mentions that Mayor Nagin is a member of a political party.  Unusual, for a politician.  Someone should look into that.

 

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Tax Roundup, 7/7/14: IRS stands down on imaginary 750-hour rule for real estate pros. And: the real IRS budget problem.

Monday, July 7th, 2014 by Joe Kristan

No Walnut STA newly-released memo indicates that the IRS will no longer hold real estate professionals to an illegal standard in determining passive losses.  

ILM 201427016 addresses how the “750-hour test” of Section 469 applies when you have multiple real estate activities.  Under the passive loss rules of Section 469, rental real estate losses are normally passive; that means the losses are normally deductible only to the extent of other passive income, until the activity is sold.

A special rule allows real estate professionals to apply the normal passive loss rules, which are based on time spent in the activity, to rental real estate losses.  To qualify as a real estate pro, you have to meet two tests:

You have to spend more than 750 hours in the taxable year working in real estate trades or business in which you materially participate, and

You have to spend more time in your real estate activity than in any other kind of activity (this test means that few people with non-real estate day jobs qualify as real estate pros).

In some cases the IRS has applied the 750 test to each activity — making it almost impossible for many taxpayers to qualify, absent an election to treat all rental real estate activities as a single activity under Reg. Sec. 1.469-9(g).  The Tax Court issues a couple opinions that seemed to agree — opinions that I insisted were wrong.

Now the IRS seems to have come around.  From the new IRS memo (my emphasis):

Therefore, whether a taxpayer is a qualifying taxpayer within the meaning of section 469(c)(7)(B) and Treas. Reg. § 1.469-9(b)(6) depends upon the rules for determining a taxpayer’s real property trades or businesses under Treas. Reg. § 1.469-9(d), and is not affected by an election under Treas. Reg. § 1.469-9(g). Instead, the election under Treas. Reg. § 1.469-9(g) is relevant only after the determination of whether the taxpayer is a qualifying taxpayer. However, some court opinions, while reaching the correct result, contain language which may be read to suggest that the election under Treas. Reg. § 1.469-9(g) affects the determination of whether a taxpayer is a qualifying taxpayer. See, for example, Jafarpour v. Comm’r, T.C. Memo. 2012-165, and Hassanipour v. Comm’r, T.C. Memo 2013-88. However, other court opinions recognize that the election under Treas. Reg. § 1.469-9(g) is not relevant to the determination of whether a taxpayer is a qualifying taxpayer. See, for example, Trask v. Comm’r, T.C. Memo 2010-78. 

One hopes the IRS will no longer raise this false issue on examination.

Related: Did the Tax Court just abandon the ‘750 hours for every rental activity’ test?

 

20130426-1Paul Neiffer, IRS Modifies Offshore Voluntary Disclosure Program (OVDP).  “I have personally worked with clients that were involved in the old voluntary disclosure program and I can tell you it is not a pleasant experience.”

Jack Townsend, Rumors on the Workings of Streamlined Programs (Including Transitioning in OVDP).  Reading this, it sounds more like a diabolical bureaucratic torture than a serious attempt to bring the non-compliant into the system.

 

Robert D. Flach, A RANDOM THOUGHT ABOUT THE NEW VOLUNTARY AFSC PROGRAM.  A pithy lesson on the difference between qualifications and credentials.

 

Jason Dinesen, Life After DOMA: A History of Marriage in the Tax Code 

Keith Fogg, When and Where to Make Your Arguments (Procedurally Taxing).  In tax controversies, making the right argument does no good unless you make it at the right time.

 

 

TaxProf, The IRS Scandal, Day 424.   The New York Times thinks the real scandal is that GOP appropriators won’t give the IRS more money to use against them.

The income tax, the Ultimate Swiss Army Knife of public policy.  Flickr Image courtesy redjar under Creative Commons license.

The income tax, the Ultimate Swiss Army Knife of public policy. Flickr Image courtesy redjar under Creative Commons license.

Scott Hodge, The IRS Needs Tax Reform Not a Bigger Budget:

The relentless growth of credits and deduction in the code over the past 20 years had made the IRS a super-agency, engaged in policies ranging from delivering welfare benefits to subsidizing the manufacture of energy efficient refrigerators.

I would argue that were we starting from scratch, these are not the functions we would want a tax collection agency to perform. Tax reform would return the IRS to its core function—simply collecting revenues to fund the basic operations of government.

Amen.  I’ve said much the same thing: “Every year Congress gives the IRS more to do.  It has become a sprawling superagency administering programs from industrial policy (R&D credits, export subsidies, manufacturing subsidies) to historic preservation, housing policy to healthcare.”

If Congress stopped using the tax law as the Swiss Army Knife of public policy, the current IRS budget would be plenty.

 

20120503-1Christopher Bergin, What’s Behind the Brain Drain at the IRS?  (Tax Analsyts Blog):

So what’s going on? Is this an internal war at the tax agency, specifically in LB&I – a power struggle, if you will? Or is it the more predictable result of competent IRS leaders, who could easily make more money in the private sector, deciding to escape an agency that is being treated like a political piñata? Or is this the new IRS commissioner cleaning house? For me, the latter is the least likely.

Yeah, the new Commissioner is more into closing the blinds to the house so we don’t see the mess, rather than cleaning it up.

 

TaxGrrrl, European Commission Broadens Tax Inquiries To Include Amazon: Google, Microsoft & McDonald’s May Follow   

Renu Zaretsky, Congress Is Back with Much To Do and Consider (TaxVox).  Today’s tax headline roundup covers this week’s Congressional agenda, inadequate retirement savings, and the EU’s efforts to crack down on multinationals.

 

Russ Fox, Pop Goes the Tax Fraud  A rapper, a Canadian, and a football player walk into before the bar…

The 70th anniversary of a red letter day for my Dad.  July 5, 1944.

 

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Tax Roundup, 7/1/14: Where the IRS budget really goes. And: IRS ends automatic expiration of foreign tax ID numbers.

Tuesday, July 1st, 2014 by Joe Kristan

Dang.  “We do not hold, as the principal dissent alleges, that for-profit corporations and other commercial enterprises can ‘opt out of any law (saving only tax laws) they judge incompatible with their sincerely held religious beliefs.'” — from the majority opinion in yesterday’s Hobby Lobby Supreme Court decision.

Had they allowed a religious exception to the tax law, all the world religions would quickly develop wildly-popular sects with a doctrinal allergy to tax, and, well,  lots of things.

 

Instapundit links to this chart where it looks like IRS spending is out of control

IRS total 20140701 cato

And I think it is — but not in the obvious way.  The Cato Institute, source of the first chart, also provides this:

IRS budget cato 20140701

It shows that almost all of the massive increase in IRS spending is from refundable credits, which are counted as part of IRS spending in the first chart.  But money given away through the Earned Income Tax Credit is not available for auditing taxpayers or buying additional backup tapes.

That, of course, doesn’t excuse the IRS malfeasance in the Tea Party scandal.  It does show that even as Congress has piled more responsibilities on the IRS — especially via Obamacare — it hasn’t provided additional resources.  Now that one party has seen that the IRS has been acting institutionally as its opposition, the agency is unlikely to get significant new resources as long as that party controls one house of Congress — even less so if the GOP takes the Senate, too.

Meanwhile, rather than trying to conciliate and reassure Congressional Republicans, Commissioner Koskinen has been defiant and tone-deaf in his response to the Tea Party and email erasure scandals.  The results for tax administration will not be good.

 

Jeremy Scott, IRS Strategic Plan Highlights Effects of Budget Cuts (Tax Anlaysts Blog):

A crippled tax collector means a damaged tax system. And a damaged tax system only hurts taxpayers and the federal government as a whole. Congress should focus more on punishing those responsible for the various missteps at the IRS and less on gutting the nation’s revenue collection and tax administration system as a whole.

That will require the IRS as a whole to stop acting like a partisan agency.

 

20130419-1IRS does something very sensible.  Credit where credit is due:  the IRS has decided to no longer make non-resident aliens renew their tax ID numbers every five years.   From IR-2014-76:

Under the new policy:

  • An ITIN will expire for any taxpayer who fails to file a federal income tax return for five consecutive tax years.
  • Any ITIN will remain in effect as long as a taxpayer continues to file U.S. tax returns. This includes ITINs issued after Jan. 1, 2013. These taxpayers will no longer face mandatory expiration of their ITINs and the need to reapply starting in 2018, as was the case under the old policy.
  • To ease the burden on taxpayers and give their representatives and other stakeholders time to adjust, the IRS will not begin deactivating unused ITINs until 2016. This grace period will allow anyone with a valid ITIN, regardless of when it was issued, to still file a valid return during the upcoming tax-filing season.
  • A taxpayer whose ITIN has been deactivated and needs to file a U.S. return can reapply using Form W-7. As with any ITIN application, original documents, such as passports, or copies of documents certified by the issuing agency must be submitted with the form.

Very welcome, and long overdue.  Obtaining an ITIN is an inconvenient and burdensome process, involving either mailing passports or national ID cards to the IRS — and trusting them to return the documents — or making the often long trip to a U.S. consulate to apply in person.  For foreign residents with long-term U.S. financial interests, the requirement to renew ITINs every five years was a gratuitous and expensive burden.

(Hat tip: Kristy Maitre).

 

BitcoinRobert Wood, What IRS Calls ‘Willful’ May Surprise You–And Mean Penalties, Even Jail.  The lingering IRS threat to impose fines for “willful” FBAR noncompliance for small amounts is unwise; it seems that they are more concerned with missing a few lawbreakers than in bringing foot-fault violators into compliance.

Jack Townsend, Good Article on the Non-Willfulness Certification for Streamlined and Related Issues

TaxGrrrl, IRS Says Bitcoin Not Reportable On FBAR (For Now)   

 

Paul Neiffer, IRS Releases Final Regulations on ACA Small-Business Tax Credit

Robert D. Flach starts out July with a Buzz!

Kay Bell, Supreme Court finds contraceptive tax costs ‘substantially burdensome’ in its ruling for Hobby Lobby stores

 

 

Martin Sullivan, States Should Cede Some Taxing Power to the Feds (Tax Analysts Bl0g):

Given that states’ corporate taxes are here to stay, we should consider making them as painless and low-cost to businesses as possible. One way to do that is for Congress to exercise its authority under the commerce clause of the Constitution and require states to entirely piggyback their corporate taxes on the federal system.

Canada does this, and it does help, but getting rid of state corporate income taxes would help much more.

Liz Emmanuel, Millionaires’ Tax Clears New Jersey Legislature, Faces Likely Veto (Tax Policy Blog)

Renu Zaretsky,The Tax Man Cometh, But Sometimes Collects Less.  The TaxVox headline roundup covers the formal effective date of FATCA (today), Kansas budget woes, and a link to an interactive tool to track state budgets.

 

Russ Fox, IRS Didn’t Tell a Court About the Missing Lerner Emails

TaxProf, The IRS Scandal, Day 418

 

20140508-1I wouldn’t try asking one this question.  What Type of Fruit is a Polar Bear? Petaluma and Interpretive Choice (Andy Grewal, Procedurally Taxing)

Career Corner.  How to Create a CPA Exam Study Schedule That Guarantees Failure (Adrienne Gonzalez, Going Concern)

News from the Profession.  San Diego CPA convicted in elaborate tax evasion scheme:

A federal jury deliberated for 30 minutes before finding Lloyd Irving Taylor, 71, guilty of all 19 counts against him, including aggravated identity theft, making false statements to a financial institution, evading taxes, corruptly impeding the Internal Revenue Service and making false statements on U.S. passport applications.

According to evidence presented at trial, Taylor, who has been in custody since April 2013, stole the identities of deceased minors, used them as aliases and obtained fraudulent passports and other identification papers.

Oh, that’s illegal?

According to witnesses who testified, Taylor failed to report $5 million in income during the span of the fraud and owed the IRS about $1.6 million. During his 42 years of working, Taylor had filed a total of seven tax returns, according to trial testimony.

That’s one every six years.  It took awhile, but the IRS eventually notices something was amiss.

At a bond hearing last year, a judge ordered Taylor detained pending trial based on a number of factors, including his international travel on his false passports, the millions of dollars he controlled through dozens of bank accounts and his numerous false statements to banks.

I suppose the man felt invincible, given how long he apparently went without drawing IRS attention.  Eventually that comes around, though he had quite a 42-year run.  But he did get caught, possibly because of better computer matching and more comprehensive bank reporting.  Don’t count on stringing the IRS out for 42 years yourself.

 

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