Posts Tagged ‘Peter Reilly’

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

Wednesday, October 1st, 2014 by Joe Kristan

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

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

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

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

Related:

Whither Halbig and the ACA.

Obamacare tax credits get a reprieve.

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

Peter Reilly, Court Rules Oklahoma ObamaCare Not OK

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

 

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

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

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

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

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

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

Related: Steven Dunn, Nothing Civil About Asset Forfeiture

 

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

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

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

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

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

 

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

 

TaxProf, The IRS Scandal, Day 510

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

Joseph Henchman, State Inflation-Indexing of Gasoline Taxes

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

 

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Tax Roundup, 9/30/14: IRS handling of uncollected taxes slammed. And: ISU TaxPlace goes live!

Tuesday, September 30th, 2014 by Joe Kristan

Priorities.  While allowing billions of false refunds to go to two-bit grifters via ID-theft refund fraud, the IRS also manages to not correctly follow up on billions of unpaid assessed taxes, according to a new report by the Treasury Inspector General for Tax Administration.  “Of a stratified sample of 250 cases reviewed, there was no evidence that employees completed all of the required research steps for 57 percent of the cases prior to their closing.”

How much money was potentially involved?  A chart from the report:

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This is what happens when the tax law is treated as the Swiss Army Knife of public policy, rather than as a simple tax collection and enforcement mechanism. It doesn’t help when successive commissioners are more concerned with expanding the agency’s power and suppressing political opponents than with collecting revenue and properly issuing refunds.

The TaxProf has more.

 

20130114-1TaxPlace goes liveThe ISU Center for Agricultural Law and Taxation has launched TaxPlace:

We are very excited to introduce TaxPlace, a 24-7 resource for tax professionals, especially those preparing farm tax returns. For a limited time, we are offering a yearly subscription for the low introductory price of $150. 

What does that include?

This one-year subscription to TaxPlace entitles you and your staff to one calendar year of unlimited access to all TaxPlace materials and services, including:

A searchable database of timely articles and seminar materials explaining basic, new, and complex tax issues, with a particular emphasis on issues impacting farmers, ranchers, and ag-businesses.

Unlimited replays of recorded seminars and webinars addressing timely and challenging farm and urban tax and estate and business planning concepts.

Access to “Ask a Question,” a personal connection with a professional knowledgeable in farm tax requirements. (“Ask a question” is not a gateway for legal advice and does not substitute for services from a legal or accounting professional.)

Tables, charts, explanations of procedures and forms, and contact information to simplify your interaction with the Internal Revenue Service or state tax departments.

Access to a weekly blog and to future archives of “the Scoop,” a bi-monthly live webinar addressing new tax laws and procedures as they develop and providing attendees with an opportunity to ask questions.

A bargain for $150.

 

TaxGrrrlHow To Get Away With Tax Fraud. No, she hasn’t gone over to the dark side. She is outlining some rookie mistakes made by a Ms. Jackson, who tried to cash a $94 million tax refund check she received. Revenue agents were waiting for her at the grocery store where she tried to cash the check:

Among the basic mistakes TaxGrrrl points out is this:

 Unless you are due a lot of refundable tax credits (more on that later), you’ll want to make sure that your math makes sense. I didn’t see Jackson’s tax return. And I’m not licensed in Georgia. But even I can figure from peeking at the Georgia Department of Revenue’s web site that the highest income tax rate for individuals is 6%. To have paid in $94 million of tax, the amount of her refund claim, you’d have to have earned about $1.56 billion in income – in one year (assuming no carry forward or carry back). That kind of money should have landed Jackson on the newly released Forbes’ 400 Richest Americans list. Spoiler alert: she’s not on the list.

And no, it doesn’t appear that she sandbagged a little too much on her estimated tax payments.  Another basic mistake: real tax thieves prefer direct deposit. But, as a man once said to police here in Des Moines, “You don’t spend your days chasing geniuses, do you?’

 

Peter Reilly, New York Springs Sales Tax Trap On Passive LLC Members. Apparently New York is holding LLC members personally liable for sales taxes owed by the LLC. If the Empire State wants businesses and investors to stay far away, this is a pretty good step. Oddly, S corporation owners don’t have this problem.

 

Fresh Buzz is available from Robert D. Flach, including links to stories on retiree taxation and Roberts side project, The Tax Professional.

Carl Smith discusses The Congressman James Traficant Memorial Code Section at Procedurally Taxing.  Well, if it’s like most code sections, it will outlast all of us.

 

J.D. Tuccille, Yet More IRS Employees Busted for Stealing Taxpayers’ Identities (Reason.com):

Have I mentioned that people signing for health coverage under the Affordable Care Act are supposed to update the government on any major life changes, including marriage status, employment, finances…? Oh wait, yes I have.

I wonder if that information will be better protected.

Remain calm, all is well.

 

20130111-1Andrew Lundeen, Kyle PomerleauEstonia has the Most Competitive Tax System in the OECD. (Tax Policy Blog). The posts tells of a fascinating feature of the Estonian tax law:

Additionally, Estonia only taxes distributed profits and at a 21 percent tax rate. This means that if a business in Estonia earns $100 and pays that $100 to its shareholders, the business would be required to pay a tax of $21 on the distributed profit. Instead, if that business decides to reinvest that $100, the business would not have to pay tax on that $100.

Compare that to the U.S., where the corporations pay tax on income when it is earned, and potentially another tax if earnings are not distributed.  Still another tax is paid when the earnings are distributed; in Estonia, there is no second tax.

If you were designing a tax system to actually make sense, it would look a lot more like the Estonian setup than the U.S. income tax.  You also wouldn’t have the inversion problem people fret about so.

Martin Sullivan, Can Congress Pass Tax Reform That Would Stop Inversions? (Tax Analysts Blog). “Right now the U.S. tax system favors foreign owned corporations over U.S. owned corporations.”

 

Donald Marron, The $300 billion question: How should we budget for federal lending? (TaxVox)

 

TaxProf, The IRS Scandal, Day 509

 

Liz Malm, Businesses Paid Nearly $671 Billion in State and Local Taxes Last Year (Tax Policy Blog)

 

Career Corner. Let’s Waste Some Chargeable Hours Comparing Chargeable Hour Goals (Adrienne Gonzalez, Going Concern)

 

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

Monday, September 29th, 2014 by Joe Kristan

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

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

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

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

 

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

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

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

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

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

 

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

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

Impossibility has never been an excuse with California.

 

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

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

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

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

 

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

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

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

So to recap:

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

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

But I’m sure preparer regulation would go smoothly…

 

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

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

And he’d be the Devil, for one year.

 

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

 

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

 

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

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

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

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

 

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Tax Roundup, 9/24/14: The $3,000+ price tag of Iowa’s special tax breaks. And: Tea Parties in the strangest places.

Wednesday, September 24th, 2014 by Joe Kristan

20120906-1Do special favors for special friends in the Iowa income tax cost Iowa families $3,000? A Buena Vista University professor seems to think so.  Paul Brennan reports that Jeremy Horpedahl, an economist at BV, has determined that removing all “tax privileges” in Nebraska would save the average Nebraska family that much, and that it might be more in Iowa:

Although he hasn’t yet done a thorough analysis Iowa’s tax codes, Horpedahl said eliminating tax privileges would result in at least as great as savings.

“Actually, it would probably be a little higher, because Iowa has more privileges built into its tax code,” Horpedahl said.

Sadly, Mr. Horpedahl said he studied Nebraska’s system because they are actually considering serious tax reform, unlike Iowa.  What does he mean by “privileges?”

“I define a tax privilege as a tax break or exemption that benefits a specific type of industry or an individual taking a certain type of action,” Horpedahl explained.

“The standard deduction on income tax isn’t a privilege, because that’s available to everyone. But a tax break that benefits just the construction industry is. For an individual, that certain goods or services they buy are exempt from sales tax is a privilege,” he said.

Mr. Horpedahl sounds a theme familiar to Tax Update readers:

Horpedahl pointed out that Iowa’s businesses would  also benefit from the elimination of tax privileges.

“Iowa has a very high corporate tax rate — 12 percent — so to be attractive to businesses, the state has to offer them a way of avoiding it,” Horpedahl said.

“But not every business can avoid it. So what we end up doing is rewarding lobbying. Those who are successful in lobbying for privileges get lower taxes. And that implicitly punishes those who don’t lobby, because they end up paying higher rates.”

Also:

“Politicians love to hand out these privileges,” Horpedahl said. “It allows them to say, ‘‘I’m doing something, I’m bringing businesses to the state, I’m creating jobs.’”

“They never mention that the tax rate has to be kept high to pay for all these privileges. And most people don’t realize that research has shown that these sweetheart deals very rarely pass the cost-benefit analysis test, so there’s very little push back.”

Precisely. They take your money to lure and subsidize your competitors, and then they tell you that it is good for you. There is a solution out there, waiting for a bold politician to run with it: The Tax Update’s Quick and Dirty Iowa Tax Reform Plan.

Related:

IF TRUTH IN ADVERTISING APPLIED TO ECONOMIC DEVELOPMENT AGENCIES

Taking your wife’s purse to buy drinks for the girls

 

 

20140521-1More dangerous and inflammatory anti-tax rhetoric. A political group of Americans abroad surveyed its members and discovered that they think the FATCA crackdown on offshore financial activity is making life tough for innocent non-billionaire expats, reports Laura Saunders of the Wall Street Journal:

The survey… found that nearly one in six respondents had had a financial account closed by a bank or brokerage house. More than two-thirds of the checking accounts that were closed had a balance of less than $10,000. Nearly 60% of the closed investment accounts had a value of less than $50,000. Other people were unable to open accounts.

Respondents also reported Fatca-related difficulties with non-U.S. spouses and partners. More than one-fifth said they have separated or are considering separating financial accounts held jointly with their partner.

Added one person, “Fatca has caused enormous friction in my marriage. My non-U.S.spouse is refusing to let the U.S. government know about his salary/earnings/savings… and moving to separate bank accounts would leave me very vulnerable as I’m an unemployed, stay-at-home mother.”

Well, of course you’d expect this sort of anti-tax rhetoric from some Tea Party outfit. I wonder if Democrats Abroad, who ran the survey, will have its tax exemption questioned now. But if they expect Democrats in Congress to ease their plight, good luck.

 

William Perez, How Do You Report Alimony on Your Tax Return?

Peter Reilly, For Joint Filing Status You Have To File.  “You’re not supposed to do that if you are actually married though.”

TaxGrrrl, Back To School 2014: Internships. ” If there’s no income to report, that makes the income piece easy.”

Robert D. Flach, IRS ANNOUNCES NEW PER DIEM RATES FOR BUSINESS TRAVEL

Keith Fogg, Extracting Yourself from a Tax Court Case (Procedurally Taxing)

 

 

TaxProf, The IRS Scandal, Day 503,  The day 503 of the so-called “so-called scandal” includes a link to this from Jason Keisling and Emily Elkins: Lois Lerner Claims the IRS Did Nothing Wrong. The Data Say Otherwise, with this fine chart:

targetingstatschart

 


Alan Cole, Reducing Compliance Costs for Small Businesses (Tax Policy Blog):

A good principle in tax policy – as well as policy in general – is to let the little things go. This principle has taken form in a legal maxim, de minimis non curat lex, Latin for “the law does not concern itself with trifles.” Currently, any business expected to owe at least $1,000 in tax for the year must file quarterly. $1,000 is a trifling amount to the IRS, one that need not be split into installment payments.

The Peters bill would allow very new businesses, or businesses with less than $1 million in total revenues, to file their taxes only once yearly – an arrangement that seems more reasonable.

Good thinking.

 

Howard Gleckman, Treasury’s New Rules May Slow, But Won’t Stop Corporate Tax Inversions (TaxVox). “Now the dealmakers have the roadmap they need to keep their inversions Kosher. And with that guidance, it is likely that lawyers will attempt to restructure many transactions to satisfy the new rules.”

 

News from the Profession. Why Your Firm Needs a Bring Your Dog to Work Policy (Leona May, Going Concern).  Sounds like animal cruelty to me.

 

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

Friday, September 19th, 2014 by Joe Kristan

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

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

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

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

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

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

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

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

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

20140919-1

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

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

“This tax cut will pay for itself.”

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

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

“This tax credit created X jobs”

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

 

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

 

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

 

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

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

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

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

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

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

 

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

 

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

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

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

TaxProf, The IRS Scandal, Day 498

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

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

 

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Tax Roundup, 9/18/14: The $14.8 million suitcase squeeze. And: Koskinen visits the Hill.

Thursday, September 18th, 2014 by Joe Kristan
Flickr image courtesy Sascha Kohlmann under Creative Commons license

Flickr image courtesy Sascha Kohlmann under Creative Commons license

Accounting Today visitors: click here for the item from the September 17 “In the Blogs.”

When tax-free merger isn’t. Working with family-owned businesses, a common misunderstanding arises: if a deal is tax-free, like an “A” merger or a partnership contribution, there can’t be gift tax, right?  Very wrong, as a New Hampshire couple’s experience in Tax Court shows.

The parents, Mr. and Mrs Cavallero, had a successful S corporation known as Knight Tool Co. Their son Ken set up another business to make liquid dispensing machines, Camelot.  As part of their estate planning, the two companies merged in an income tax-free deal.  From the Tax Court summary:

Ps and their sons merged Knight and Camelot in 1995, and Camelot was the surviving entity. Valuing the two companies in accordance with the advice their professionals had given, Ps accepted a disproportionately low number of shares in the new company and their sons received a disproportionately high number of shares.

It turns out that the estate planners “postulated” a technology transfer earlier in the lives of the companies that would have resulted in most of the value already being in the second generation. One planner explained to a skeptical attorney that “History does not formulate itself, the historian has to give it form without being discouraged by having to squeeze a few embarrassing facts into the suitcase by force.”

The trouble with doing that is that when the latches break, the suitcase spills all over the place. But the planners persisted.  From the Tax Court decision:

As a result of Mr. Hamel’s correspondence campaign, however, the previously separate tracks of advice — one from the accountants at E&Y and Mr. McGillivray, and the other from the attorneys at Hale & Dorr — now came together for the first time. The contradiction was evident to all the professionals: The accountants had assumed no 1987 transfer (and thus believed there was a need for a means to transmit value to the next generation), but the attorneys postulated a 1987 transfer (and subsequent transfers) pursuant to which that value had already been placed in the hands of the next generation. The attorneys eventually prevailed, however, and the accountants acquiesced. Eventually all of the advisers lined up behind Mr. Hamel’s suggestion that a 1987 transfer be memorialized in the affidavits and the confirmatory bill of sale. They provided a draft of the documents, which Mrs. Cavallaro read aloud to Mr. Cavallaro. After they reported a few typographical errors, the attorneys prepared final versions, which Mr. Cavallaro and Ken Cavallaro executed on May 23, 1995.

So in 1995 they executed documents for a 1987 transaction.  What could go wrong? Well, perhaps the IRS could come in and assess $27.7 million in gift taxes, plus fraud penalties.  And they did. The dispute ended up in Tax Court.  The IRS won the main issue — its argument that the valuable technology was not in fact transferred in 1987 — and with that win, predictably also won the battle of appraisers.  The IRS appraiser at trail asserted a $29.6 million gift, which would result in a gift tax of about $14.8 million at 1995 rates. Because of the involvement of the outside experts, the Tax Court declined to uphold penalties.

This shows how important valuation can be even in a “tax-free” deal.  When doing business among family members at different generations in estate planning, you don’t have the conflicting interests that unrelated buyers and sellers have, so you have the possibility of creating a taxable gift if you are careless. It’s natural for family members to believe numbers that help their estate planning, so it’s wise to get an independent appraiser in to provide a reality check.  And if the facts, or values, don’t fit into the suitcase, don’t squeeze; get a bigger suitcase.

Cite: Cavallero, T.C. Memo 2014-189

 

This Koskinen isn't the IRS commissioner

This Koskinen isn’t the IRS commissioner

Instapundit, IRS COMMISSIONER: Our Story On The IRS Scandal Isn’t Changing. It’s Just, You Know, Evolving Now And Then.  “I’ve taken a dislike to this Koskinen fellow. He seems sleazy even by DC standards.”

TaxProf, The IRS Scandal, Day 497. Mostly coverage of another slippery appearance by Commissioner Koskinen before House investigators.

 

TaxGrrrl, Back To School 2014: American Opportunity Credit

Kay Bell, Private and often untaxed home rentals under fire

Peter Reilly, Need To Show Rental Effort To Deduct Expenses. “I think the way I would put it is ‘If at first and second and third you don’t succeed, try something different.  Otherwise forget about deducting losses.'”

 

David Brunori, Fairness and the Reality of State Tax Systems (Tax Analysts Blog) “etc. This week WalletHub released a rating of the fairest state and local tax systems… I am not doubting the accuracy of WalletHub’s survey. But the results don’t align with political reality.”

Cara Griffith, Single Sales Factor May Be Inevitable, but Is It Fair? (Tax Analysts):

In the end, if state officials are truly concerned with making their state more attractive to businesses, perhaps they should consider retaining (or returning to) the three factor apportionment method and focus on a less burdensome corporate tax system overall. In the end, if state officials are truly concerned with making their state more attractive to businesses, perhaps they should consider retaining (or returning to) the three factor apportionment method and focus on a less burdensome corporate tax system overall.

No, they are concerned with ribbon cuttings, press releases, and campaign contributions from those seeing tax credits and carveouts.

 

 

20140805-2Renu Zaretsky, A Hail Mary or Two on the Hill.  The TaxVox tax headline roundup covers inflation adjustments and beating up on the NFL with the tax code, among other things.

Alan Cole, Why do I have Four Different Retirement Accounts? (Tax Policy Blog) “Give us one unlimited saving account, tax it properly, like an IRA, and let us use it how we will.”

Russ Fox, Zuckermans Sentenced; No Word on Fido & Lulu “Unfortunately, members of a board of directors must be human: Fido and Lulu don’t qualify.”

Adrienne Gonzalez, Mad Scientist Gets Prison Time for Using His Dog and Cat in a Tax Avoidance Scheme (Going Concern). PETA couldn’t be reached for comment.

 

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Tax Roundup, 9/17/14: Is 30 years long enough to find a tenant? And more!

Wednesday, September 17th, 2014 by Joe Kristan

20140325-1If you can’t get a tenant in 30 years, maybe you’re doing something wrong.  A Minnesota architect named Meinhardt bought a farmstead in 1976.  He  rented out the cropland to neighboring farmers. He looked for a tenant for the farmhouse, too.  He was still looking in 2007, but never managed to find a cash-rent tenant for the house.

Though he never reported any rental income on the house, he paid for house expenses, including repairs, insurance supplies and utilities, deducting them on Schedule E on a joint return.  The deductions totaled $42,694 from 2005 through 2007.

The IRS decided that the architect failed to demonstrate enough of a profit motive to take the deductions.  The taxpayer argued that the expenses were actually part of renting the farmland, which the IRS agreed was a for-profit enterprise. The taxpayer also argued that he really tried to rent the house, but it just didn’t work out.

The Tax Court sided with the IRS, and now so has the Eighth Circuit.  First addressing the argument that the house expenses should be lumped in with the land rental:

They offered no evidence they ever tried to rent or lease the farmhouse and farmland together. Donald testified the farmhouse could be parceled off and sold separately from the crop and pasture land. The Tax Court did not clearly err in finding that the Meinhardts treated the farmhouse separately from the leased farmland, which was admittedly a business activity, and therefore expenses related solely to the farmhouse could not be deducted as ordinary and necessary expenses of the leased farmland activity.

The hard-luck landlord defense didn’t fare any better:

The Tax Court found that the Meinhardts did not prove the farmhouse was held for the production of income during the tax years in question because they “did nothing to generate revenue during the years in issue [and] had no credible plan for operating it profitably in the future. There was no affirmative act (renting or holding for appreciation in value) to demonstrate that the property was held for the production of income.” (T.C. Memo. citations omitted.) This finding, too, was not clearly erroneous. Without question, the Meinhardts’ expenditures for substantial repair and improvement of the farmhouse over many years, including the tax years in question, increased the value of that property. But they failed to prove that they were holding and improving the property to profit from its rental or its appreciation, as opposed to improving it for personal use.

The clincher:

The reasonableness of this alternative personal-use explanation for the expenditures in 2005-2007 was rather dramatically confirmed when they sold their home in suburban Minneapolis and moved into the farmhouse in 2010. 

Oops.

The Moral? If you hold property for years without generating income, you better have pretty good evidence that you have worked hard to rent it if you want to deduct the costs on your Schedule E. If it’s a rental home that you also use on weekends, you’ll have to work harder. If you hold it for 30 years without a cash tenant and then move in, your battle to convince a judge of your profit motive might be hopeless.

Cite: Meinhardt, CA-8, No. 13-2924 

Tax Court case: Meinhardt, T.C. Memo. 2013-85.

ISU Center for Agricultural Law and Taxation Annotation: No Deduction For Farmhouse-Related Expenses.

 

IMG_1944TaxGrrrl, Back To School 2014: Deducting The Cost Of Playing Sports

William Perez, Repaying the First-Time Homebuyer Tax Credit. The first misbegotten version of the misbegotten First-Time Homebuyer Credit was actually more a loan than a credit, and it must be repaid over 15 years. Some of them will be repaying long after the home was sold, or foreclosed

Kay Bell, Spousal abuse: physical, financial and tax-related

Jason Dinesen, Will Software Really Replace Accountants?  I suppose it’s possible, but not with a tax system anything like we have.

Peter Reilly, Montana Catches Non-filer With Property Tax Break. When you claim a homestead exemption on your property taxes somewhere, that place might just decide that you should pay resident income taxes.

Phil Hodgen ponders the Valuation date for expatriate’s balance sheet. When you expatriate, there’s a tax for that.

 

TaxProf, The IRS Scandal, Day 496.

20140729-2Lyman Stone, New S&P Report Shows Income Taxes Are Volatile, Sales Taxes Need Reform (Tax Policy Blog) “This closely relates to our previous findings on state revenue volatility, where we found that states with high reliance on income taxes, excise taxes, or natural resource taxes experienced some of the highest volatility.”

Howard Gleckman, Congress Cries Wolf Over Internet Access Taxes (TaxVox). “Unable to do anything important before its election season recess, Congress is about to knock down a favorite digital straw man—It will extend for a few months the about-to-expire federal ban on state taxation of Internet access.”

 

It’s campaign season, everything is a lie. PolitiFact: Democrats Are Recycling False Accusation That Republicans Support Tax Breaks for Companies That Ship Jobs Overseas (TaxProf)

Looking forward to after campaign season.  Obamacare 2.0, Outlook Not So Good (Bob Vineyard, Insureblog)

Tony Nitti, Whether You Like The Government Or Not, The IRS Expects Its Tax Revenue.  They sure do.

 

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Tax Roundup, 9/11/14 – Link and run edition.

Thursday, September 11th, 2014 by Joe Kristan

20120531-2Just links today.

Accounting Today visitors: Go here for the dog/email discussion.

 

TaxGrrrl, Back To School 2014: Commuting Tax Benefits

Peter Reilly, Did Florida County Tax Man For Being Happily Married?

Jason Dinesen, When Does the “1099s to Veterinarians” Rule Start?

Kay Bell, IRS Direct Pay one of many ways to pay estimated taxes.  Remember, third quarter payments are due Monday.

William Perez, Have a Home Office? Here’s How to Deduct It On Your Taxes

 

Cara Griffith, A Win for Transparency (Tax Analysts Blog) ” A Kentucky court has ordered the release of redacted copies of the Department of Revenue’s final letter rulings in a suit Tax Analysts joined seeking release of the documents under the Open Records Act”

Alan Cole, The Estate Tax is a Poor Source for Federal Revenue (Tax Policy Blog)

Howard Gleckman, Don’t Count on Much Economic Growth From Individual Tax Reform…Or From Tax Rate Cuts (TaxVox)

 

Russ Fox, Let’s Give Lois Lerner Credit Where Credit Is Due. “It turns out that Ms. Lerner was upset with an unnamed IRS employee who was paid $138,136 a year and was doing ‘nothing.'”

TaxProf, The IRS Scandal, Day 490

 

The IRS standard.  “Wherever we can, we follow the law.” — IRS Commissioner Koskinen.

Career Corner.  Congratulations, Your Job Has Been Arbritrarily Chosen as One of the Most Underrated of 2014 (Adrienne Gonzalez, Going Concern)

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Tax Roundup, 9/9/14: The $63 Question Edition. And: is there such thing as an influential accountant?

Tuesday, September 9th, 2014 by Joe Kristan

20140321-4Asking the judge the 63-dollar question.  CPA practitioners sue to stop PTIN fees (Journal of Accountancy):

Two CPAs have filed suit in the U.S. district court for the District of Columbia, asking the court to stop the IRS from charging fees for issuing preparer tax identification numbers (PTINs), to obtain refunds of fees paid in the past, and to enjoin the IRS from asking for more information than needed to issue preparer tax identification numbers (PTINs)…

Although the IRS claims that the excess fees are intended to be used to pay the costs of the registration cards sent to each preparer, the costs of forms and other guidance provided to preparers, and the costs of tax compliance and suitability checks, the plaintiffs point out that none of this has been done or should be done. No registration cards have been sent, the IRS does not normally charge to issue other tax forms and instructions, and it has not conducted suitability checks because attorneys and CPAs are not subject to those requirements. In fact, CPAs are subject to their own requirements to prove that they are fit and competent. 

While I think the plaintiffs are correct in saying the $63 fee far exceeds any benefit we get from it, I suspect the attorneys will be the real winners in this suit.

 

TaxProf, The IRS Scandal, Day 488

 

AndersenlogoFrancine McKenna, Arthur Ashes:

Arthur Andersen is back from the dead. A group of former partners from the accounting firm is reviving the brand a dozen years after its demise. It’s a display of hubris that attempts to give credence to some revisionist history about Andersen.

Enron was no isolated event. Andersen was implicated in cases involving Sunbeam, WorldCom and others. Its settlement with the U.S. Securities and Exchange Commission over Waste Management was at the time, in early 2001, a rare fraud case against a big accounting firm.

With only four “major” accounting firms left, it’s hard to imagine any of them going the way of Andersen.  It’s also hard to imagine that the Andersen brand will be worth more than, say, the Enron brand.

 

EITC error chartKyle Pomerleau, IRS Releases More Detail on EITC Over-Payments:

One of the major issues with the Earned Income Tax Credit is that is suffers from a high amount of payment error. In any given year, the error can amount to approximately 25% of total payments and cost $14 billion dollars.

It is usually not clear exactly why these errors occur. There are two common stories behind them. The first story is about plain fraud. Taxpayers, or the preparers that help them file taxes, are purposefully misrepresenting their information in order to receive the EITC, or increase their EITC.

The second story is that EITC filers, which are typically lower-income individuals with lower levels of education, are making a high number of mistakes when filing. For instance, they may claim their child as a dependent (which leads to a much larger EITC), but their ex-spouse may have claimed their child as well. The result being that one parent is non-compliant.

Given that the errors result in overpayments of the credit, you have to think fraud is a big part of it.  If the errors were random, you would expect about the same amount of underpayment errors as overpayment errors. Human nature itself plays a role, too; a disappointed taxpayer might keep working the numbers until a happy answer — an overpayment — is reached.  A taxpayer who reaches a happy answer right away is less likely to re-run the numbers.

 


buzz20140909TaxGrrrl, 
Back To School 2014: Expired Educator Expenses & Unreimbursed Employee Expenses

Jason Dinesen ponders What Responsibilities Do Tax Preparers Have in Assessing ACA Penalties?  “Just because we think a law is stupid doesn’t mean we don’t deal with it.” If we didn’t, we would have very little to do.

Peter Reilly, Joan Rivers Made Tax History

Robert D. Flach brings your early-in-the-week Buzz! Today he returns to the hive withmore news of the anti-PTIN fee lawsuit, among other topics.

 

Martin Sullivan, How Much Do Converted and Nontraditional REITs Cost the U.S. Treasury? (Tax Analysts Blog)

Howard Gleckman, Treasury’s Lew Says Anti-Inversion Decision Will Come Soon, But Offers No Hints About What Or When.  While we don’t know what the decision will be, we can be confident that it will leave the real problems — high rates and worldwide taxation of U.S. taxpayers — untouched.

 

Accounting Today has issued its annual list of the 100 Most Influential People in Tax and Accounting.  Somehow I missed the cut again, though I follow a few on Twitter. I hope I can make the “100 most influential accountants in Polk County” list, but I may have to do some lobbying.

Congratulations to TaxProf Paul Caron and Going Concern’s Caleb Newquist, but the omission of Caleb’s crony Adrienne Gonzalez is a crime that cries out for justice.

 

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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, 8/28/14: Frequent flying in the Tax Court. And: you don’t need 50 employees to face Obamacare problems.

Thursday, August 28th, 2014 by Joe Kristan

20120529-2TaxGrrrl, Tax Court Sides With IRS In Tax Treatment Of Frequent Flyer Miles Issued By Citibank.  TaxGrrrl reports on a case this week where a taxpayer was awarded with “points” for opening a bank account, which could be redeemed for airplane tickets.  A couple who cashed in the points for tickets worth over $600 received a 1099 for them and left it off their 1040.

TaxGrrrl reports:

Thankfully, the Tax Court did draw a distinction between the taxability of “Thank You Points” and frequent flyer miles attributable to business or official travel using Announcement 2002-18 (linked above), wherein the IRS made clear that they would not tax frequent flyer miles attributable to business travel. But that’s where the good news for taxpayers stopped.

TaxGrrrl thinks its a bad result:

In a case of what could be characterized as bad facts making bad law, taxpayers didn’t put up much of an argument for not including the income on the tax return: there was no lengthy brief explaining why it might be excludable. Nor did the IRS say much about the inclusion: they more or less took the position that Citibank’s form was enough to prove income, saying “we give more weight to Citibank’s records.”

The Tax Court made this a “reported” decision, which signals that they will side for the IRS in taxing miles that show up on 1099 information returns.

The tax law certainly allows non-cash transactions to be taxable.  If they didn’t, barter exchanges would rule the world.  It’s also true that at some point trying to tax everything of value doesn’t make sense.  You might value the smile from the cute barista on the skywalk, but that doesn’t mean you should pay tax on the extra value received with your coffee.  The hard part now is knowing when you cross the line.

Cite: Shankar, 143 T.C. 5

 

20121120-2Health Reimbursement Plans a danger under Obamacare.  Health Reimbursement Plans Not Compliant with ACA Could Mean Exorbitant Penalties  (Kristine Tidgren):

As of January 1, 2014, a number of long-time options became illegal under the ACA. Lest employers are tempted to ignore this issue, they should know that offering noncompliant plans subjects them to a possible excise tax of $100 per day per employee per violation. ACA violations are no small matter.

In IRS Notice 2013-54, issued last fall, the Treasury Department and the Department of Labor made clear that such plans are no longer allowed. This prohibition applies to a number of long-used standalone health care reimbursement plans that are not integrated with an ACA-compliant group health care plan. Although some exceptions apply, the ACA has made the following types of reimbursement plans illegal (subjecting their sponsors to the possible $100/day/employee/violation penalty tax):

  • Standalone §105 medical reimbursement plans (including Health Reimbursement Arrangements (HRAs))

  • Employer payment of individual health insurance premiums on a pre-tax basis

  • §125 salary-reduction plans for employee health insurance premiums


If you think that you don’t have to worry about Obamacare because you don’t have 50 employees, think again.


Roger McEowen, Structuring the Business: S Corporation or LLC?.  “But, beyond the requirement to pay reasonable compensation, the S classification provides a means for extracting money out of the business without paying employment taxes – there isn’t any employment tax on distributions (dividends) from the S corporation.”


20130311-1Jason Dinesen, Tax Preparer Ethics: Miscellaneous Deductions:

Is it okay to show the purchase as a miscellaneous deduction if the amount is less than 2% of their income and thus isn’t deductible anyway? That way, the taxpayer sees it on their tax return but technically the government hasn’t been harmed because the amount was too small to actually be deducted. Is this okay?

This can be tempting for a practitioner.  You can “take” a deduction for “subscriptions” that are probably Sports Illustrated and appease a pushy taxpayer without actually reducing taxes.  But Jason makes good points as to why it can make it hard to stop taxpayers from pushing for bogus deductions that actually matter.


Peter Reilly, Bank Out 40 Grand When It Allows Withdrawal Two Hours After IRS Levy.  Oops.

Kay Bell, Be tax smart in combining business and personal travel

Phil Hodgen, Toronto Consulate Wait Times Have Ballooned.  They’re lining up to get out from under U.S. taxation.  Phil offers this advice:

Many of you will want to renounce your U.S. citizenship before year-end. You can go anywhere in the world to do it. Start calling Consulates and Embassies to see what the wait time is.

Our experience is that the Caribbean and Central American countries are often good. Southeast Asia seems to be good as well.

That’s a sad commentary on how we tax Americans abroad.  Congress makes financial life miserable for expats, and then calls them “deserters” for doing something about it.

 

Stephen Olsen, Boeri: Not a citizen, never lived or worked in the US? IRS will still keep your money. (Procedurally Taxing).  Of course they will.  They’re bigger than you.

 

 

Remember, these are the people who think we preparers are out of control and in need of regulation.  IRS Ethics Lawyer Facing Possible Disbarment, Accused of Lying (Washington Times):

A lawyer in the IRS ethics office is facing the possibility of being disbarred, according to records that accuse her of lying to a court-appointed board and hiding what she’d done with money from a settlement that was supposed to go to two medical providers who had treated her client.

Of course, given Commissioner Koskinen’s policy of stonewalling and evasion, she might be just the woman he wants for the job.  (Via TaxProf)

 

 

William McBride, Canada’s Lower Corporate Tax Rate Raises More Tax Revenue (Tax Policy Blog):

The natural question is: How much tax revenue did Canada lose?

Answer: None.

canada corp revenue chart

You shouldn’t assume that the lower rate caused the revenue increases.  Still, when our current rates clearly incentivize tax-saving moves like inversions, you shouldn’t assume rate cuts will be big revenue losers, either.  The revenue-maximizing rate has to be influenced by rates charged in other jurisdictions.

 

Cara Griffith, Is the Dormant Commerce Clause in Jeopardy? (Tax Analysts Blog)  “In matters of state taxation, the dormant commerce clause provides a much stronger defense against discriminatory taxation than the due process clause.”

Kelly Davis, Cumulative Impact of Ohio Tax Changes Revealed (Tax Justice Blog)

 

TaxProf, The IRS Scandal, Day 476

 

News from the Profession.  California Board of Accountancy Moves to Stop Incarcerated CPA From Providing Exceptional Client Service in Prison

 

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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, 8/25/14: Tax Credits for not killing a puppy. Well, another puppy. And: mind your spelling!

Monday, August 25th, 2014 by Joe Kristan
Flickr Image courtisy Llima under Creative Commons license

Flickr Image courtesy Llima under Creative Commons license

Wisconsin finds a new frontier in incentive tax credits.  From madison.com:

The board overseeing the state’s flagship job-creation agency has quietly approved a $6 million tax credit for Ashley Furniture Industries with a condition allowing the company to eliminate half of its state workforce.

As approved by the Wisconsin Economic Development Corp. board, the award would allow the Arcadia-based global furniture maker to move ahead with a $35 million expansion of its headquarters and keep 1,924 jobs in the state.

Stop me with tax incentives, or I’ll fire some more people!

Of course, all of these tax credits are paid for by people who, by definition, aren’t getting their taxes wiped out with special tax breaks that allow politicians to show up for a ribbon cutting.  Politicians know that they’ll get attaboys for “creating jobs,” and nobody will call then out for the jobs they cost by taxing people to give money to their special friends.

Thanks to an alert reader for the tip.

Related: IF TRUTH IN ADVERTISING APPLIED TO ECONOMIC DEVELOPMENT AGENCIES

 

Peter Reilly reports on tax pro who thinks a case we discussed last week may have been wrongly decided.  I think the court probably got it right, but it’s a good read.  If the taxpayer wins on appeal, it will be very helpful for tax planning.

 

Does that make this a tax shelter?

Does that make this a tax shelter?

Audit the Pope, then?  New Tax Head Says She Knows Why Italians Don’t Pay Taxes: They’re Catholic (TaxGrrrl)

Kay Bell, Coverdell Education Savings Account’s pre-college options.

Jason Dinesen, Bridging the Gap Between What Clients Want … And What They’ll Pay For. “Sure, people “want” a proactive approach. But it seems to me like few are actually willing to PAY for the service.”

Russ Fox, Tax Preparers Behaving Badly, “There’s a common thread among these tax professionals: You’ll be getting a refund. That sounds good until you realize that you really shouldn’t have, and that you will likely get in trouble later.”

Robert D. Flach,  OOPS! THEY DID IT AGAIN.  “The State wants taxpayers, and preparers, to submit income tax returns electronically – but when they do the returns and payments therefor are not properly processed.”

Jack Townsend, Criminal Justice Article of U.S. Global Tax Enforcement

Tony Nitti, Your Complete Guide To Every Tax Reference In ‘The Simpsons’ Marathon 

 

TaxProf, The IRS Scandal, Day 473

Ajay Gupta, Carbon Taxes and the White Man’s Burden (Tax Analysts  Blog):

 China, which surpassed the United States as the world’s largest emitter of CO2 in 2006, has made it clear that it has no intention of agreeing to any reduction quotas “because this country is still at an early stage of development.” India, which now ranks third, behind China and the United States in total CO2 emissions, has similarly rejected the notion of subjecting itself to binding reductions.

Yet the carbon tax lobby in the West remains unfazed in the face of this repudiation of responsibility by the developing world. Among the grounds advanced for pressing ahead with unilateral action is one that relies on the residence time of CO2. For several decades, the West pumped much more CO2 into the earth’s atmosphere than China, India, or any other developing county. Unilateralists argue that those historical emissions and their persisting warming effects ensure that the West will remain the largest contributor to climate change for years to come.

That argument has more than a whiff of reparations.

Frack away.

 

2140731-3Matt Gardiner, Kinder Morgan Doesn’t Want to Be a Limited Partnership Anymore–But They’re One of the Few (Tax Justice Blog).  Paying one tax is better than paying two, other things being equal.

William McBride, More Jobs versus More Children:

I, like most humans, think that children are blessing. I am also one to think we as a society should have more kids. I also think that in the very long run, say decades, demographics are destiny, i.e. we cannot expect to be a large, flourishing economy a generation from now if our birth rate continues to be at or below the replacement rate.

However, boosting the birth rate is not as simple as boosting the child credit. 

Not every problem can be solved with a tax credit.

 

Howard Gleckman, How Much Would An Individual Tax Rate Cut Add to the Deficit, and Who Would Benefit? (TaxVox).  “A one percentage point across-the-board reduction in tax rates would add $662 billion to the budget deficit over 10 years—about $40 billion in 2015 rising to more than $85 billion by 2024.”

 

Donald Boudreax is not a happy taxpayer:

 I pay what I “owe” in taxes not because I have a “responsibility” to do so but, instead, only because government threatens to use violence against me if I don’t pay what it demands.  I stand in the same relation to the tax-gatherer as I stand in relation to any common thug who points a gun, knife, or fist at me demanding my money.  [I actually prefer the common thug, for he neither insults my intelligence by telling me that his predation is for my own good nor spends the money he takes from me to fund schemes to further interfere in my life.] 

I suppose that illusion-free approach probably applies to most of us, if you think about it.

 

Career Corner.  Use All Your Vacation Days, Even If It Means Making Less Money (Caleb Newquist, Going Concern)

 

dictionarySpelling is important.  Even for identity theives.  From Dispatch.com:

A $3.5 million bogus tax-refund scheme that unraveled because the conspirators couldn’t spell the names of well-known cities has resulted in a federal-prison sentence of more than eight years for the scam’s mastermind.

Sims and Towns misspelled the names of several cities when they listed return addresses, including “Louieville” and “Pittsburg.” That caught the attention of Internal Revenue Service investigators.

I love how they call somebody who committed a stupid crime in a stupid way — and showed up for a sentencing hearing drunk, apparently —  a “mastermind.”

 

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

Wednesday, August 20th, 2014 by Joe Kristan

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

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

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

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

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

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

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

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

There were other problems:

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

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

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

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

 

20130426-1Russ Fox, FBAR Filing Follies:

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

Mild is right.

 

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

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

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

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

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

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

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

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

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

 

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

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

 

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

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

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

 

TaxProf, The IRS Scandal, Day 468

 

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

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

 

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Tax Roundup, 8/19/14: Will people just quit paying taxes? And how far does your $100 go in Iowa?

Tuesday, August 19th, 2014 by Joe Kristan
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.

Some folks are worried that we’ll all suddenly stop paying taxes, according to a Tax Analysts story today (subscriber link only):

Richard Lavoie of the University of Akron School of Law, who studies tax ethics, says voluntary compliance rates have remained relatively high because paying taxes is an accepted social norm. Withholding plays a large role in compliance, but it does not explain everything, according to Lavoie.

Lavoie said the recent controversies surrounding the IRS, such as accusations that the agency targeted conservative groups for political reasons, and other factors such as worsening income inequality have all eroded the public’s trust in a fair tax system. If those pressures continue, it could cause taxpayer attitudes to change virtually overnight, he said. “At some point that all adds up, and what was a stable norm that we collect 83 or so percent of taxes voluntarily could flip,” he said.

I think Mr. Lavoie is identifying things he doesn’t like, such as “income inequality” and the Tea Parties, and dreaming up dreadful consequences.  For example, “Lavoie argued in his 2012 paper that antitax rhetoric such as that espoused by the Tea Party also has the potential to unbalance the tax system.”

Mr Lavoie talks about “accusations” of IRS malfeasance and “anti-tax rhetoric” as the dangers — not the well-documented abuses themselves, or the IRS stonewalling of investigations into the abuses, or the former Commissioner’s dishonest response to the scandal, or the current Commissioner’s intransigence, or the President’s “joke” about auditing his opponents.  These damage faith in the IRS much more than anything the Tea Party could come up with.

The article finds some people who get closer to identifying the real problem:

National Taxpayer Advocate Nina Olson in recent remarks also warned that the habit of voluntary compliance may be at risk. Like Koskinen, she cited the IRS’s budget situation, saying that if Congress continues to restrict the agency’s budget, it may lead to a downward spiral in voluntary compliance rates.

While the poor customer service and declining enforcement are related to funding, funding still isn’t the real problem.  The IRS budget would be just fine if the IRS were treated as just a revenue agency.  Instead Congress has made the tax system into the Swiss Army Knife of public policy.  The IRS has a portfolio that ranges from industrial policy to education to retirement security to, famously, health care.  The IRS policy roles can dwarf those of agencies with nominal responsibility for policy areas.  Giving so many jobs to the IRS necessarily makes it less capable of doing its real job, tax collection.

Unfortunately, there’s no sign that anybody is going to take away the agency’s many non-revenue tasks.  And a GOP Congress isn’t about to increase funding for the IRS as long as it seems unapologetic about going after groups opposed to the administration.  To the extent IRS intransigence causes a compliance crash, the agency has only itself to blame.

 

Alan Cole, Lyman Stone, Richard Borean, The Real Value of $100 in Each State (Tax Policy Blog):

 

20140819-1

 

This map makes Iowa look pretty good.  When you consider average incomes compared to the cost of living, Iowa looks even better.

 

Robert D. Flach’s Tuesday Buzz covers inheritance taxes, tax robots, and the large number of people who seem to rely on lottery winnings for retirement funding.

 

20140728-1TaxGrrrl, Investment Opportunity: Possibly Booby-Trapped Property Remains Unsold.  Ed and Elaine Brown forfeited their property after their armed stand-off with the IRS, but the agency can’t find anybody willing to buy it.  There is some fear of booby traps, but I suspect potential buyers would also be a bit concerned about the reaction of Brown supporters.

Peter Reilly, The OID Fraud And Criminal Gullibility:

I have to say that I have some sympathy with the perspective that a reasonable person seeing the refund checks might want to take another look at the scheme.  If they were incapable of understanding the reasoning behind the scheme and what OID actually is, it could be hard to resist.

The OID scheme is absurd.  I realize some people really are gullible enough to believe in it — but only with a leap of faith that is, literally, criminally stupid.

 

Kay Bell, Pot tourism’s potential tax payoff for states with legal weed.  Iowa’s Governor just says no.

Richard Auxler, Do Sales Tax Holidays Ever Make Sense? (TaxVox).  “In some situations, sales tax holidays can make sense. But generally, they’re bad tax policy unless the alternative is large tax cuts with dubious growth assumptions, and not just for a weekend but for the whole year.”

Erica Brady, Final Whistleblower Regulations Create Administrative Review of Rejected and Denied Claims (Procedurally Taxing)

TaxProf, The IRS Scandal, Day 467

 

News from the Profession: TIL: Ancient Greeks Used Slaves as Auditors So They Could Be Beaten When They Screwed Up (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, 8/11/14: Don’t you dare agree with me edition.

Monday, August 11th, 2014 by Joe Kristan

microsoft-appleDavid Brunori notes ($link) some odd behavior by Good Jobs First, a left-side outfit that has been on the side of the angels by highlighting the baneful effects of corporate welfare tax incentives.  The American Legislative Exchange Council came out with a report blasting cronyist tax incentives, and rather than embracing the report, Good Jobs First ripped it — because the Koch Brothers are the Devil:

Yet, Good Jobs First slams ALEC because many recipients of tax incentives have close ties to ALEC. But so what? The fact that corporations, including those run by the Koch brothers, provide support to ALEC doesn’t diminish the argument that incentives are terrible.

Weirdly, Good Jobs First primarily blames the recipients of corporate welfare for taking the money, rather than the politicians who give it away:

Moreover, Good Jobs First inexplicably says that ALEC is wrong to blame policymakers rather than the companies that receive incentives. But the blame for those horrible policies rests squarely on the shoulders of lawmakers and governors who perpetuate them. In a world where the government is handing out benefits to anyone who asks, it’s hard to fault the people who line up for the handout. No one has been more critical of tax incentives than I, but I’ve never blamed the corporations. Nor do I blame the army of consultants and lawyers who grease the wheels to make incentives happen. There’s no blame for anyone other than the cowardly politicians from both parties who can’t seem to resist using those nefarious policies.

Precisely correct.  When somebody is handing out free money, it’s hard to turn it down when your competitors are taking all they can.

I have seen smart people I respect do everything short of donning tin-foil hats when talking about the Koch Brothers and their dreadful agenda of influencing the government to leave you alone.  Maybe everyone needs an Emmanuel Goldstein.

Adam Michel, Scott Drenkard, New Report Quantifies “Tax Cronyism” (Tax Policy Blog)

Annette Nellen, What about accountability? California solar energy property.  Green corporate welfare is still corporate welfare.

 

20130121-2Russ Fox, Where Karen Hawkins Disagrees With Me…  The Director of the IRS Office of Preparer Responsibility commented on Russ’ post “The IRS Apparently Thinks They Won the Loving Case.”  Russ replies to the comment:

Ms. Hawkins is technically correct that Judge Boasberg’s order says nothing about the use of an RTRP designation. However, the Order specifically states that the IRS has no authority to create such a regulatory scheme. If there isn’t such a regulation, what’s the use of the designation?

The courts closed the front door to preparer regulation, so the IRS is trying to find an unlocked window.

 

TaxGrrrl, IRS Imposes New Limits On Tax Refunds By Direct Deposit.  “Effective for the 2015 tax season, the IRS will limit the number of refunds electronically deposited into a single financial account (such as a savings or checking account) or prepaid debit card to three.”

This seems like a measure that should have been put in place years ago.  The Worst Commissioner Ever apparently had other priorities.

 

Kay Bell, Actor Robert Redford sues NY tax office over $1.6 million bill.  The actor gets dragged into New York via a pass-through entity in which he had an interest — a topic we mentioned last week.

Renu Zaretsky, August Avoidance: Corporate Taxes and Budget Realities.  The TaxVox headline roundup covers inversions, gridlock, and Kansas.

Peter Reilly, Org Tries Exempt Status Multiple Choice – IRS Answers None Of The Above

 

 

20140811-1Ajay Gupta, The Libertarian Case for BEPS (Tax Analysts Blog)  BEPS stands for “Base Erosion and Profit Shifting.”

Matt Gardiner, Inversions Aside, Don’t Lose Sight of Other Ways Corps. Are Dodging Taxes (Tax Justice Blog).  Don’t worry, Matt.  If I did, my clients would take their business elsewhere.

Robert D. Flach, HEY MR PRESIDENT – DON’T SHOOT THE MESSENGER!  “If there is something wrong with the Tax Code do not blame the accountant or tax professional.  We have a moral and ethical responsibility to bring to our clients’ attention all the legal deductions, credits, loopholes, techniques, and strategies that are available to reduce their federal and state tax liabilities to the least possible amounts.”

 

Roger McEowen, Federal Court, Contrary To U.S. Supreme Court, Says ACA Individual Mandate Not a Tax.

Jack Townsend, U.S. Forfeits Over $480 Million Stolen by Former Nigerian Dictator.  The headline is misleading — the U.S. received the cash in a forfeiture — they seized it, rather than forfeiting it.

 

2140731-3TaxProf, The IRS Scandal, Day 459

Instapundit, GANGSTER GOVERNMENT: Inspectors general say Obama aides obstruct investigations.  The majority of the 78 federal inspectors general took the extraordinary step of writing an open letter saying the Administration is blocking their work as a matter of course.  The IRS stonewalling on the Tea Party scandal is part of the pattern.

 

 

News from the Profession. It’s Completely Understandable Someone Might Sign Over 200 Audit Reports By Mistake (Adrienne Gonzalez, Going Concern)

You mean they didn’t shift to organic carrot juice?  “From Coke to Coors: A Field Study of a Fat Tax and its Unintended Consequences” (Via Maria Koklanaris at Tax Analysts):

Could taxation of calorie-dense foods such as soft drinks be used to reduce obesity? To address this question, a six-month field experiment was conducted in an American city of 62,000 where half of the 113 households recruited into the study faced a 10% tax on calorie-dense foods and beverages and half did not. The tax resulted in a short-term (1-month) decrease in soft drink purchases, but no decrease over a 3-month or 6-month period. Moreover, in beer-purchasing households, this tax led to increased purchases of beer.

I’m sure the politicians who want to run everyone’s diet will angrily demand higher beer taxes in response.

 

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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, 8/5/14: Personal goodwill is the word. And: more inversion diversion!

Tuesday, August 5th, 2014 by Joe Kristan

20120511-2Word.  Tax Court reduces estate value of stock by executive’s “personal goodwill.”  The courts have recognized that the value of a business depend on the contacts and reputation of a key executive — “personal goodwill.”  That concept has enabled business owners to sell their goodwill separately from other business assets — handy in avoiding the double tax inherent in C corporations.

Yesterday the Tax Court applied “personal goodwill” in valuing stock in a decedent’s estate.  Franklin Z. Adell died in 2006 owning all of the stock of STN.Com, a satellite uplink company.  The company had one customer: The Word Network, a religious broadcaster set up as a non-profit and run by Mr. Adell’s son, Kevin.

The arrangement proved profitable to STN.Com, which generated nearly $16 million in revenues in 2006.  That enabled company executives to travel in style, according to the Tax Court (footnotes omitted):

In addition to rent and compensation, STN.Com made several miscellaneous payments that were primarily for the personal benefit of Mr. Adell and Kevin. STN.Com leased luxury cars, including Bentleys and Rolls-Royces, used for personal and work purposes by Mr. Adell, Kevin, and its other employees. STN.Com also helped Mr. Adell and Kevin purchase and maintain real estate. For example, STN.Com gave money to Mr. Adell and Kevin to purchase a condominium in Los Angeles, California, and guaranteed the mortgage. STN.Com purchased high-end furnishings for the condominium and for Mr. Adell’s home in Michigan and paid all expenses, including the mortgage, interest, and insurance, related to Kevin’s second home in Florida. In 2002 STN.Com paid $300,000 toward Kevin’s home in Florida. From July 2002 through June 2003 STN.Com paid between $300,000 and $400,000 of Kevin’s personal legal fees for litigation involving a dispute with a home contractor. In 2006 Mr. Adell paid a $6 million judgment entered against Kevin using funds from Mr. Adell’s salary at STN.Com.

The estate filed a tax return showing a date-of-death value of $9.3 million.  The IRS thought that number was slightly low, coming up with a value of $93.3 million.  By the time of the trial, the IRS number had come down to $26,341,030, and the estate was arguing for a $4.3 million value.  The trial came down to a duel of expert witness appraisers.

The main difference between the appraisals was the  treatment of “personal goodwill” by the estate’s expert, a Mr. Risius.  From the Tax Court decision:

Mr. Risius also adjusted STN.Com’s operating expenses to include an economic charge for Kevin’s personal goodwill. Mr. Risius explained that the adjustment was appropriate because the success of STN.Com depended heavily on Kevin’s personal relationships with the board of directors of The Word. Moreover, Kevin did not have a noncompete agreement with STN.Com, and as a result a potential buyer would acquire STN.Com only to the extent that the company retained Kevin. The economic charge for Kevin’s personal goodwill ranged from 37.2% to 43.4% of sales over the historical period and from 43.7% to 44.1% of sales over the projection period.

The IRS expert, Mr. Burns, admitted the importance of the son’s personal involvement, but took a different approach:

Instead of applying an economic charge for Kevin’s personal goodwill similar to the one found in Mr. Risius’ first valuation report, Mr. Burns concluded that a hypothetical investor would anticipate retaining Kevin as an officer of STN.Com and would need to compensate Kevin at an acceptable rate of 8.1% of sales. Mr. Burns noted that his assumed compensation level for Kevin of nearly $1.3 million in 2006 was significantly higher than Mr. Risius’ estimate of $528,000 in his first valuation report.

20140321-4Tax Court Judge Paris found the estate’s approach more persuasive:

Kevin’s goodwill was personally owned independent of STN.Com. STN.Com’s success was heavily dependent on The Word because of their symbiotic relationship. To launch The Word, it was Kevin who contacted religious leaders in the Detroit area and Rev. Jackson in Chicago. Along with his notable contacts and his father, he went to Los Angeles to meet with DirecTV representatives about broadcasting The Word. His meeting was successful and it eventually led to the national broadcasting of The Word on cable television. Kevin was the face of the operation because he was the individual soliciting content and pursuing broadcast opportunities.

Yes, that Rev. Jackson.

     Further, Kevin did not transfer his goodwill to STN.Com through a covenant not to compete or other agreement. Kevin was free to leave STN.Com and use his relationships to directly compete against his previous employer. If Kevin quit, STN.Com could not exclusively use the relationships that Kevin cultivated; thus, the value of those relationships should not be attributed to STN.Com.

Accordingly, Mr. Risius properly adjusted STN.Com’s operating expenses to include an economic charge of $8 million to $12 million for Kevin’s personal goodwill at an amount high enough to account for the significant value of Kevin’s relationships. Mr. Burns, on the other hand, not only failed to apply an economic charge for Kevin’s personal goodwill but also gave too low an estimate of acceptable compensation for Kevin, i.e., $1.3 million in 2006. This was especially so because Kevin had stepped into the position of Mr. Adell, who had previously made between over $2 million and $7 million of compensation in each of the five years before his death.

The court went with the $9.3 million value on the original tax return: “…the Court concludes that Mr. Risius’ first valuation report on the STN.Com stock included with the original estate tax return was the most creditable because it properly accounted for Kevin’s personal goodwill and appropriately used the discounted cashflow analysis of the income approach to value the STN.Com stock.”

The moral?  Appraisers working with closely-held businesses need to look closely at important customer and vendor relationships and determine whether they actually belong to the corporation, or if they instead belong separately to executives.  The case also is more support for taxpayers wanting to sell personal goodwill separately from corporate assets.

Cite: Estate of Franklin Z. Adell T.C. Memo 2014-155.

 

20140805-2Robert D. Flach offers fresh Tuesday Buzz! Robert has also started a new monthly newsletter, The Tax Professional.  “The purpose of THE TAX PROFESSIONAL is to discuss and debate issues of interest and importance to the profession of preparing income tax returns – such as certification and credentials, dealing with the IRS and state tax agencies, due diligence requirements, ethics and obligations, regulation, representation, tax law complexity, etc.”  While I often disagree with Robert, he’s a smart and entertaining guy, and both his blog and the newsletter are worth regular visits.

 

Kay Bell, August to-do list: Vacation, shopping, school and taxes

 

Peter Reilly, Homeowner Association IRS Ruling Highlights Schizophrenic Nature Of Associations.  “Unless they have vast reserves earning significant investment income, homeowners associations can avoid any significant tax liability by filing Form 1120H, which allows the organization to exclude assessments.  Despite that option, some homeowners associations go to the trouble of applying to be 501(c)(4) social welfare organizations.”

Annette Nellen, Marijuana businesses and ethical issues for tax practitioners.  Can you get in trouble for helping a pot store pay its taxes?

 

Frank Agostino, a veteran Tax Court litigator, guests posts in Procedurally Taxing with Procedural Challenges to Penalties: Section 6751(b)(1)’s Signed Supervisory Approval Requirement.  “In view of the fact that the IRS (and the Tax Court) have so strictly adhered to the Code’s substantiation requirements, one is hopeful that a similar strict compliance standard will be applied when interpreting a statutory provision clearly intended to protect taxpayer’s procedural due process rights.”

Jack Townsend, Williams Yet Again – Court Bows Deeply to Government Claims of Expansive Discretion for FBAR Willful Penalty 

 

 

nra-blue-eagleThe current diversionary panic about corporate inversions has reached its illogical conclusion, reports J.D. Tucille at Reason.com: With Loyalty Oath Demand, Crusade Against Corporate Inversion Gets Even Creepier.

Leave it to Jonathan Alter to jump the already laughably overblown “problem” of corporations seeking friendlier tax jurisdictions elsewhere right past parody. Forget any discussion of why businesses are relocating. At the Daily Beast, Alter wants potential “corporate deserters” to take…wait, I have to check this again…yep…loyalty oaths

The post quotes Mr. Alter’s argument:

For those companies less able to act as Americans or recognize their real interests, there are two ways to make this work. The president should issue an executive order that says any company that wants to keep its federal contracts must sign a new-fangled [non-desertion agreement]…

But other companies with few or no federal contracts might be tempted to desert anyway.

That’s where the rest of us come in. Under my scheme, companies that sign non-desertion agreements would embed a tiny American flag or some other Good Housekeeping-type seal in their corporate insignia for all to see, just as companies during the Great Depression that agreed to Franklin Roosevelt’s recovery plan hung an emblem of a blue eagle in their windows with the legend, “We Do Our Part.”

Mr. Tucille observes:

To make it clear where this all goes, the National Recovery Administration once boasted, “The Fascist Principles are very similar to those we have been evolving here in America.” Its head, Hugh Johnson, noted about the adoption or rejection of the blue eagle symbol and its code, “Those who are not with us are against us.”

There’s a good book about this sort of thing.

Corporations have entirely legitimate purposes other than funneling cash to the IRS.  They have to make payroll, supply desired and needed goods to customers, and provide a return to their owners.  They have no more obligation to pay un-owed taxes than you, me, or Mr. Alter.  Unless Mr. Alter declines to itemize and forgoes his personal exemption in the name of economic patriotism, no blue eagle for him either.

 

20140805-1Kyle Pomerleau, Everything You Need to Know About Corporate Inversions (Tax Policy Blog). “The most obvious benefit is that most countries do not have a worldwide corporate income tax system. The United States taxes income earned by U.S. corporations no matter where they earn that income, domestically or abroad.”

Martin Sullivan, Don’t Count on Tax Reform to Stop Inversions (Tax Analysts Blog)

Rebecca Wilkins, Wall Street a Major Player in Current Wave of Corporate Inversions (Tax Justice Blog).  Maybe because investors like companies that don’t incur unnecessary expenses.

 

Renu Zaretsky, Online Taxes: Searches, Storage, and Sales.  The daily TaxVox headline roundup covers, among other things, an insane attempt to tax websites that link to Spanish newspaper association stories.  “Note to Spanish tax authorities: buena suerte.”

 

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