Flickr image courtesy Sean MacEntee under Creative Commons license
April Fools day is a challenge for tax bloggers. No matter how outlandish an idea you have for a joke story, chances are that the legislation has already been proposed. Today’s challenge: Real tax headlines are mixed with fake ones from today’s Tax Policy Blog. Can you pick the real fakes without peeking?
In fact, the research activities credit is noteworthy for its excessive cost — more than $45 million each of the past three years — and the lack of any demonstration of a public benefit. This giveaway is so loosely managed that companies are not even required to disclose how many jobs are related to the taxpayer cost, let alone demonstrate that the jobs would go away without the subsidy.
Incentives are inequitable. They’re unnecessary — and hence a waste of money. They distort markets. They breed cronyism. If the players involved weren’t establishment politicians, household name corporations, and prestigious law and accounting firms, we’d describe them as grifters.
Why wouldn’t we describe ”establishment politicians, household name corporations, and prestigious law and accounting firms” as grifters? Redundancy?
Here’s a new one. A Pakistani company, the Fatima Group, would like to open a fertilizer plant in Indiana. The company, which for all I know makes the Cadillac of fertilizer, is seeking both federal and state incentives to build its factory. The twist is that the Fatima Group’s fertilizer has been used in 80 percent of roadside bombs in Afghanistan. That’s awkward.
Right now Iowa seems to lead the world in fertilizing fertilizer companies with tax money. No doubt explosive growth is just down the road.
If spending time and effort connecting with tax collectors helpfully “draws our attention to our duties as citizens,” then tax withholding short-circuits that attention. So why not eliminate withholding and oblige each income earner to pay every cent of his or her tax bill by writing personal checks to the IRS? Not only would elimination of withholding make us even more attentive to our “duties as citizens,” we would also – as any behavioral economist would point out – gain a truer and more fully felt sense of the price we pay for Uncle Sam’s splendors.
Reading Don Beaudreax Cafe Hayek blog for one week will make you smarter than all of Iowa’s legislators combined.
Zumba instructor finds way to draw men to her studio. From RegisterCitizen.com:
The dance instructor who used her Zumba fitness studio as a front for prostitution faces jail time after pleading guilty in a case that captivated a quiet seaside town known for its beaches and picturesque homes.
The plea agreement, which calls for a 10-month sentence, spares Alexis Wright from the prospect of a high-profile trial featuring sex videos, exhibitionism and pornography. She’s scheduled to be sentenced on May 31.
Wright quietly answered “guilty” 20 times on Friday when the judge read the counts, which include engaging in prostitution, promotion of prostitution, conspiracy, tax evasion and theft by deception.
Remember, just because they pay in cash doesn’t make it tax-free.
With less than three weeks left in filing season, the US Federal Circuit Court of Appeals has denied the IRS attempt to overturn the injunction against their preparer regulation scheme. From the Wall Street Journal Total Return blog:
This doesn’t mean the IRS has permanently lost its case, but it does mean that the IRS cannot move forward with its power grab unless and until it convinces the appeals court that it has the authority to regulate preparers.
Meanwhile, filing season continues, with no evidence that taxpayers have been harmed by the availability of preparers who haven’t passed an IRS open-book exam on Publication 17.
Iowa preparer indicted – for helping clients report too much income. From KCRG.com (my emphasis):
Keith Rath, of Shellsburg, was arrested last week by IRS agents after a grand jury indicted him on eight counts of aiding in the preparation and presentation of a false tax return.
The indictment says that on eight occasions over the years 2008, 2009 and 2010, Rath helped clients falsely claim thousands of dollars in business income that he knew they did not earn.
Mr. Rath has pleaded not guilty.
You might wonder why anyone would claim business income they didn’t earn. The answer, of course, would be to claim refundable earned income tax credits. A taxpayer with no “earned income” is ineligible for the credit. The EITC is “refundable,” which means that when there is the credit exceeds the computed tax, the IRS will send you a check for the difference. By reporting imaginary Schedule C income, taxpayers can (illegally) increase their refund check.
In fact, the OECD itself recently issued a report – known as the BEPS report – on how these techniques create base erosion and profit shifting. The problem is so serious, according to the report, “What is at stake is the integrity of the corporate income tax.”
The “integrity of the corporate income tax” is in the third aisle next to the chastity of the bordello.
Ceremonial cross of John Frum cargo cult, Tanna island, New Hebrides (now Vanuatu), 1967 (via Wikipedia)
Heresies of the Cargo Cult. When some remote societies encountered the industrial world in World War II, they had trouble grasping what they were seeing. Wikipedia explains:
Cargo cult activity in the Pacific region increased significantly during and immediately after World War II, when the residents of these regions observed the Japanese and American combatants bringing in large amounts of matériel. When the war ended, the military bases closed and the flow of goods and materials ceased. In an attempt to attract further deliveries of goods, followers of the cults engaged in ritualistic practices such as building crude imitation landing strips, aircraft and faux radio equipment out of bamboo or whatever materials they had at hand, and mimicking the behavior that they had observed of the military personnel operating there.
While it’s easy to mock an islander for building a refrigerator-like box in hopes of conjuring up an icy six-pack, cargo cult behavior also occurs in modern societies. Without describing it as such, tax historian Joseph Thorndike writes about the cargo cult of the 1950s, where modern policy wonks try to conjure up 1950s-style growth through a ritualistic process of duplicating tailfin-era totems. For example, Timothy Noah thinks the crushing stated top marginal rates of that era might help generate those Happy Days results. Mr. Thorndike sees problems with that approach:
We still don’t know if high statutory rates and (relatively) high average rates were a drag on growth. And we can’t know, because we also can’t know what growth might have been in a different tax climate.
Moreover, a range of nontax factors were probably more important in shaping growth patterns in the 1950s. In particular, the economic disruptions of World War II had left the United States in a uniquely dominant position; by one estimate, U.S. manufacturing output constituted 60 percent of the world’s total in 1950.
In other words, it takes more than a bamboo box to conjure up that beer.
After all, the tax system of the Eisenhower era was not a very good one: It paired notionally sky-high rates with a deeply flawed tax base and created distortions both coming and going.
I understand that progressives like Noah are fighting a different battle: They are trying to beat back the rate-cutting mania that often serves as a definition of tax reform these days. But I think we might take a lesson from the tax experts of the 1950s, who understood the problems bedeviling their own tax system. As economist Harold Groves said at the time, “The impression is widely shared that the Congress deliberately throws a high-rate scale to the public as a demagogic bone and then as deliberately allows escapes from taxes that makes these rates specious.”
Mr. Thorndike is more sympathetic to high rates than I ever will be. Doing taxes for a living, I see first-hand how high rates affect behavior, and I have no patience for academics who say otherwise. But he wisely notes that simply trying to recreate the totems of the 1950s, like high tax rates, misses all of the other things that put cold beer in the refrigerator. Same thing goes for other 1950s fetishes like tail fins, industrial unionism and defined benefit pension plans.
Former Pittsburgh Police Chief Nathan E. Harper has been indicted by a federal grand jury in Pittsburgh on charges of conspiracy and willful failure to file income tax returns, U.S. Attorney David J. Hickton announced today.
The five-count indictment named Harper, 60, of Pittsburgh.
According to the indictment, Harper was the chief of the city of Pittsburgh Police Department. From 2009 to 2012, he caused at least $70,628.92 in checks and cash received by the special events office of the department to be diverted to two accounts at the Greater Pittsburgh Police Federal Credit Union. Using Visa debit cards, Harper obtained more than $31,000 in ATM withdrawals and debit purchases, all for his personal benefit. Harper also failed to file federal tax returns for the years 2008 through 2011.
If he’s convicted, maybe the special events office can throw a little party for the occasion.
What could possibly go wrong? James Timothy Turner was convicted last week of masterminding a cunning plan. DothanEagle.com reports:
According to a U.S. Department of Justice press release, Turner was convicted of conspiracy to defraud the U.S., attempting to pay taxes with fictitious financial instruments, attempting to obstruct and impede the Internal Revenue Service, failing to file a 2009 federal income tax return and falsely testifying under oath in a bankruptcy proceeding.
The FBI began investigating Turner in 2010 after he and three other people sent packages to all 50 governors demanding they leave office.
Turner is the president of a group of what prosecutors called “sovereign citizens” known as the “Republic for the united States of America.”
Send “packages” to all of the governors telling them to resign? Well, at least they weren’t trying to hide what they were doing.
Turner toured the country in 2008 and 2009 teaching seminars that instructed attendees how to submit bonds to pay off tax debt.
According to prosecutors, these bonds were completely fictitious and often written for amounts in excess of $1 billion.
Silly man. Only the Federal Reserve can do that. Unless we’re talking about the $1 trillion magic coin…
So, for those tax professionals engaging in such transactions that they know violated a known legal duty, their conduct is illegal and unethical. For those transactions engaging in such transactions where they don’t know (perhaps are willfully ignorant) that the conduct is illegal (ultimately most of the b—-t tax shelters are found to be illegal), then at least the ethical issues arise. These are smart professionals, paid (supposedly) to predict what a court will do with the b—–t tax shelter. Yet, in the prominent civil cases that swat down b—–t tax shelters, they fail miserably in their predictions.
IRS waives late payment penalties for returns containing delayed forms. If you can’t file or pay taxes on time, it’s always better to extend your return while you round up the information or the cash. The penalty for filing a late unextended return is 5%, plus an additional 5% for every additional month of late filing. The penalty for paying late on a timely extended return, in contrast, is only 1/2%, plus 1/2% per additional month.
While penalties will be waived, the IRS will charge interest on amounts paid after the deadline.
The notice has a complete list of forms that allow taxpayers to qualify for the late payment exception. The most commonly-seen ones are probably Form 4562, for depreciable assets and the section 179 deduction, and Form 8582 for passive activities.
By issuing this notice early, the IRS has also given taxpayers a planning opportunity. If you have a big balance due on April 15, and you have one of the qualifying forms, you now are eligible for what amounts to a low-interest loan for up to six months, until the October 15 extension deadline. Many taxpayers accelerated income into 2012 to beat the 2013 tax hikes, and they loan might come in handy. The current IRS interest rates:
three (3) percent for underpayments;
five (5) percent for large corporate underpayments
But if you have the cash, you probably want to pay up on April 15. There aren’t many places left where you can get a 3% after-tax return on your money for six months.
David Cay Johnston, Level Playing Fields Under Attack. (Tax.com). Because we don’t want Wal-Mart to be at the mercy of some guy selling stuff from his basement.
The road not taken. I left a national accounting firm to start a new firm. A (purported) alumna of the same firm took a somewhat different path. (Going Concern)
Iowa cracking down on RV tax scofflows? Southwestiowanews.com reports:
Iowa lawmakers are putting the brakes on those who avoid paying registration fees when buying expensive vehicles.
Under a bill recently approved by the Senate, tax evaders using so-called out-of-state shell corporations to avoid paying registration fees on RVs or other luxury vehicles will face criminal charges and penalties.
Going to jail to save a few bucks on your vehicle registration seems like a bad bet.
The (Decatur) Herald & Review reports that, according to Illinois officials, Iowa is offering Cronus Chemical LLC an estimated $35 million in taxpayer subsidies to build a plant in Mitchell County near the Minnesota border.
Illinois lawmakers are considering tax breaks in a proposal by state Rep. Adam Brown, a Republican from Champaign. The plant would be built near Tuscola in the east central part of the state.
Hey, Iowa Economic Development people: Illinois is broke. Busted. Played out. They’re not bidding. We don’t need to be bribing fertilizer plants to come here. Instead give us a tax system that’s not so awful that we have to pay people to like us.
It baffles me that the National Association of Enrolled Agents is so in love with the RTRP program.
In their weekly newsletter to EAs last week, NAEA bizarrely referred to the unlicensed preparers who brought suit against the IRS over the RTRP program as people who want “the right to remain incompetent.”
NAEA also kissed the government’s butt by praising the “serious and vigorous” IRS attorneys who are appealing the court ruling that struck down the RTRP program. The flowery kissing-up continued as NAEA went on to opine that the government “delivered its A-game” in the appeal.
I have never seen anything good for enrolled agents in the IRS preparer regulations. Enrolled Agents have been around a long time, and they have to meet much higher standards than the RTRPs would. Yet the EA designation is not well understood by the public, and having the IRS officially sanction a lesser credential will probably make it even harder for EAs to get their story out.
The preponderance of evidence points to corporate taxes being the most harmful to economic growth, followed by personal income taxes, consumption taxes, and property taxes. Notice a pattern? The corporate tax is the largest tax on capital income in most countries, while the personal income tax is the largest tax on labor although it also taxes capital.
Jeremy Scott, Paul Ryan Borrows a Page From Obama’s Playbook(Tax.com): “ Much like Obama, Ryan keeps releasing the same budget every year, knowing full well that it has no chance of becoming law.”
I will fight for the right to tax you to subsidize other people. Governor Branstad is touchy about criticism of the massive tax breaks for the Southeast Iowa Orascom fertilizer plant. Radio Iowa reports:
“I’m here to make it clear that the chief executive of this state is on your side and we will fight for these jobs and I want to make it clear that when we make a promise to Lee County — or to any county in Iowa for that matter — it’s a promise we’re going to keep, no matter what they might say in Des Moines in any committee meeting,”
Never mind the high possibility that the plant would have been built without our tax money. Never mind the moral problem of taxing existing businesses and taxpayers to lure and subsidize outsiders. Never mind that political allocations of investment capital are always and everywhere unwise. Forget the lost opportunities for taxpayers to spend the money on their own projects. Jobs!
The Governor also hinted at darker forces opposing the tax credits, reports KCCI.com:
And he said he believed the Koch brothers were behind some opposition to the plant because it would hurt their fertilizer business.
So Iowa Democrats opposing the subsidies are tools of the libertarian Koch brothers. Who knew?
David Brunori, Things to Read, Sites to Visit. (Tax.com). He shares some online resources, but tragically fails to mention the Tax Update.
Peter Reilly, No Fans Of Sister Wives At The IRS ? As far as I’m concerned, the possibility of consolidated individual returns should be all the argument needed against polygamy.
It just doesn’t work. The “Tax Honesty Movement” got excited a few years back when Louisiana attorney Tom Cryer was acquitted on criminal tax charges. For example:
The Internal Revenue Service has lost a lawyer’s challenge in front of a jury to prove a constitutional foundation for the nation’s income tax, and the victorious attorney now is setting his sights higher.
“I think now people are beginning to realize that this has got to be the largest fraud, backed up by intimidation and extortion and by the sheer force of taking peoples property and hard-earned money without any lawful authorization whatsoever,” lawyer Tom Cryer told WND just days after a jury in Louisiana acquitted him of two criminal tax counts.
There’s just one problem with the idea that this struck a death blow to the income tax: he still owes the taxes. Even though he’s dead. Being aquitted in a criminal tax case doesn’t make it legal to not pay taxes any more than the O.J. Simpson acquittal legalized multiple homicides in Brentwood.
The Tax Court yesterday ruled that Mr. Cryer owes taxes, interest and civil fraud penalties for tax years for which he didn’t file income tax returns. From the Tax Court:
In essence, Mr. Cryer claimed that the income he received during the tax years at issue from certain “sources” was taxable under Louisiana law, but not under Federal law. In United States v. Clayton, 506 F.3d 405, 412 (5th Cir. 2007), the Court to which an appeal would lie in this case, cited and followed its prior unpublished opinion holding that “the argument that income derived from sources within the United States” is not taxable under Federal law is “patently frivolous” and “absurd”.
The moral: No matter how convincing they are on the Internet, “Tax Honesty” arguments don’t work. They will not keep the IRS from taxing you. When “winning” means staying out of jail but paying 75% civil fraud penalties, you set the bar for victory too low.
If “carried interest” were really just a loophole it would not need such an elaborate fix. In fact, it is based on fundamental principles of partnership taxation.
The 1040 filing deadline is five weeks from today. The 1120 and 1120S deadline is this Friday. The penalty for filing an 1120-S late is $195 per shareholder, with the penalty repeated each additional month the return is late. Proceed accordingly.
Fred’s federal taxes have increased by 9% with no change in his earnings. If Fred does not increase his distributions from his business to pay these increased taxes, his disposable income will decrease by 19%. Might these increased taxes have no substantial impact on the prospects of his small business and its employees? Not a chance.
David Cay Johnston pushes for harsher accumulated earnings tax. As I predicted, we’re starting to see people pushing for enforcement of the Accumulated Earnings Tax to deal with the pretend problem of corporations “hoarding” cash. Mr Johnston takes the podium in an (unfortunately gated) article in Tax Notes:
American nonfinancial corporations held more than $2.2 trillion of cash and near cash offshore at the end of 2010 in current dollars, IRS and Federal Reserve data shows. And that is on top of the almost $1.7 trillion of liquid assets owned by firms and subsidiaries with U.S. addresses that we will see when the 2012 corporate income tax data becomes available in a few years. That global cash and near cash pile of almost $4 trillion came to $12,600 per American — well more than triple the $3,500 in per capita federal income tax revenues that year.
There is no possible business justification for that much cash. As Tax Court Judge David Laro wrote in Haffner’s Service Stations Inc. v. Commissioner, T.C. Memo. 2002-38 “a need to retain earnings must be directly connected with the needs of the corporation itself and must be for bona fide business purposes.”
No “possible” business justification for that much cash? It’s pretty easy to come up with potential justifications. If you are a corporation sitting on a lot of cash, you have a lot to think about. You have unusual opportunities, which you need to evaluate carefully. The imposition of the shareholder-level tax on earnings is certainly a factor. Does that mean I trust corporate management and boards? No. But I trust them a lot more than second-guessers at the IRS.
The Judge Laro cite that Mr. Johnston uses only restates the legal background of the accumulated earnings tax — not the economics of it.
If you want to really encourage corporations to free up their cash, end the double-taxation of corporate income by allowing full deductibility of dividend payments — with an excise withholding tax on non-profit and non-U.S. distributees to ensure the income is taxed once. That will give corporations a powerful incentive to distribute cash they aren’t using – one that will work a lot better than beefing up the IRS Second-Guess Division.
Update: Mr. Johnston e-mails:
I have written in favoring of restoring tax-free dividends for modest sums or encourage savings, partly because most Americans have little saved in the tax system and even though only one in four gets dividends directly: [$link Ed.]
And I called for a two-year test of dividend deductions in this column a few months later, arguing that dividends have the virtue of separating actual value-added managers from those who play accounting games since you need need cash to make dividend payouts. [gated links here and here. Ed.].
Unfortunately I don’t have links to free versions of the original articles.
No more paper Internal Revenue Bulletins. The IRS has discontinued its old paper Internal Revenue Bulletin, where it published tax guidance. From Announcement 2013-12:
The IRB is available on IRS.gov before printed copies are available. Also, the majority of items (about two-thirds) that appear in the IRB are released with a News Release about a month ahead of when the item appears in the IRB. Since all items in the IRB are available electronically, almost a month in advance of being available in the printed IRB, we are eliminating the printing of paper copies of the IRB, which are distributed directly from the IRS. The cost savings to printing and postage would be $148,000 annually.
It makes sense. Another bit of my accumulated tax training goes the way of the Dodo.
Going Concern, No, We Can’t Help You Pass the Ethics Exam. When I took it, it was mailed to successful CPA candidates to do at home and mail in. No wonder there are no ethical problems with our generation. Oh, wait…
“Iowa has a solid base of state - level economic development incentives tools upon which to build. However, to become more competitive, Iowa may wish to increase the funding level and flexibility of some of the State’s key incentive programs” states Darin Buelow, a Principal with Deloitte Consulting LLP.
It’s hard to imagine the study coming to a different conclusion considering what they were looking for:
At the request of the Iowa Chamber Alliance (ICA), Deloitte Consulting (Deloitte) benchmarked incentives programs in Iowa and in five alternate states, focusing on a high-level analysis of state-level incentive programs, their value, and overall effectiveness in attracting investors.
In other words, they were to look at whether Iowa has more and better giveaways than its neighbors.
I looked for the study in vain for any analysis of the value of Iowa’s tax credits to the economy vs. alternative uses for the funds — like lowering the tax rates of the rest of us who pay for them. There is no mention of “opportunity cost.” In looking at the “value” of the programs, it makes unsupported conclusions like this one about the “High Quality Jobs Program:”
Considered effective and competitive in providing benefits to mitigate corporate income tax, refunding sales tax for construction and providing a supplemental refundable research credit.
Considered effective by whom? On what basis? It doesn’t say.
The study says Iowa should enrich its data center corporate welfare — where the rest of us subsidize the infrastructure of Microsoft and Apple. They also recomment Iowa “consider allowing sale, refund or transfer” of tax credits.
Transferability of tax credits complicates the projection of revenues and the tracking of credits, creates uncertainty about when credits will be claimed because the purchasing entity may utilize a different fiscal year than the entity awarded the credit, and siphons resources from awarded entities through brokerage fees… Once tax credits are transferred, it creates limited recourse for the State to recover funds claimed in instances where the business awarded the original credit does not fulfill the contracted obligations or if the credit was awarded in error. Additionally, transferability has also resulted in abuses in some tax credit programs.
It would be better Iowa to not “compete” in taxing its current taxpayers to lure and subsidize their competitors. Instead Iowa should enact a tax system good enough that we don’t have to pay people to be our friends. The Quick and Dirty Iowa Tax Reform Plan would be better for Iowa businesses than any number of pocket-picking tax credits.
Former Kirkland & Ellis LP senior partner Theodore Freedman pleaded guilty to fraud in connection with the filing of false tax forms.
Freedman changed his plea yesterday from not guilty to guilty of four counts of tax fraud. U.S. District Judge Deborah Batts in Manhattan accepted the plea and set sentencing for Sept. 17. Freedman’s lawyers reached a plea agreement with U.S. attorneys.
Indicted in July 2011, Freedman misrepresented his income as a partner at the law firm by about $2 million, the U.S. said. He also claimed more than $500,000 in expenses for a sole proprietorship that didn’t exist, the government said.
It’s hard to imagine how he thought this would work. K-1s get matched against tax returns, at least occasionally. The IRS matching system is cumbersome and inefficient, but it works well enough that you can’t habitually ignore K-1s with six-figure income. Furthermore, claiming big bogus Schedule C losses like that is practically an engraved invitation for the IRS to visit your return.
Programming note: This site was pretty much shut down part of yesterday afternoon. Our valiant hosting service says it was a comment spam attack on the pre-2012 archived posts. Sorry about that.
A federal judge Friday sentenced a key player in the once-lucrative Jenkens & Gilchrist tax shelter practice to eight years in prison. From the AP:
U.S. District Judge William H. Pauley III sentenced 52-year-old Donna Guerin, of Scottsdale, Ariz., after she pleaded guilty to conspiracy to defraud the United States and tax evasion. He ordered her to pay $190 million in restitution besides the $1.6 million she agreed to forfeit when she pleaded guilty in September.
Guerin, a former partner at Jenkens & Gilchrist, a Texas-based law firm with offices throughout the United States, had admitted that she helped market tax shelters from 1994 through 2004 to some of the world’s richest investors, including the late sports entrepreneur Lamar Hunt, trust fund recipients, investors, a grandson of the late industrialist Armand Hammer and one of the earliest investors in Microsoft Corp.
The biggest prosecution target at Jenkens, Paul Daugerdas, faces his second trial on the charges in September. His 2011 trial was voided because of juror misconduct.
Dare we attempt to guess what the income tax might look like in another 100 years?
Personally I think it will still exist, but it will have company. The big question for policymakers is whether it should operate as a “mass” tax — as it strives to do today — or whether it will function as a “class” tax that applies only to the upper income strata. Given that roughly 47% of American households currently don’t pay the income tax (distinguished from payroll taxes, which almost everyone pays), one could argue it is already starting to resemble a class tax. Perhaps the future is already here.
I can state with some confidence that if there is an income tax in 2113, I won’t be preparing returns.
There are many ways to get in trouble with tax law. As I have said in the past, if you want to get indicted it’s a bit harder. It helps to be a celebrity, have a very large tax debt, not report large amounts of funds in foreign financial accounts, or abscond with trust fund taxes. I need to add another item to that list: File liens against IRS employees who are investigating you.
IRS Field Attorney Advice: Bank must capitalize indirect costs of holding ”OREO” property under inventory capitalizetion rules. From FAA 20123201F (my emphasis)
Section 263A applies to property that is acquired for resale. If § 263A applies, the taxpayer must capitalize both the direct costs of acquiring the property and the property’s allocable share of indirect costs.
…
In this case, X clearly acquires OREO in foreclosure (or in lieu of foreclosure) with an intent to resell the property. Bank regulators restrict the holding period for OREO and expect banks to exercise good faith efforts to sell the property. As required by applicable state and federal policies and regulations, it is our understanding that X advertises its OREO properties for sale, including those properties which it rents out. X’s Year6 Annual Report confirms that assets acquired through (or in lieu of) foreclosure are held for sale. In addition, OREO is acquired and held in the ordinary course of X’s trade or business. X’s Year6 Annual Report acknowledges as much when it states that X may foreclose on and take title to properties securing loans “during the ordinary course of business.” X engages in OREO transactions with frequency, regularity, and according to an “OREO disposition strategy.” (Year6 Annual Report, p.17). Thus, the OREO held by X constitutes property held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business.
“OREO” is “other real estate owned,” for you non-bankers. Bankers don’t care to hold much of that.
But the influence of Les Miserables doesn’t just extend to the silver screen and stage. President Obama seems to be taking tax policy advice from the musical’s comical antagonist, Thenardier.
One less metal home in town. Demise of Another Lustron House. (IowaBiz.com) These are funky steel houses, not mobile homes. They don’t build ‘em like that anymore.
The Hawkeye State gets a black eye for being the second worst state for corporate taxes, with a 12 percent rate. It also ranks 37th in property taxes, 33rd in individual income taxes and 34th in unemployment insurance taxes.
They accompany the article with this photo of the “Field of Dreams” — an unwitting illustration of the problems of Iowa tax policy. The Governor last year signed a proposal giving a special sales tax exemption to a private athletic complex being built around the field, made slightly famous in the Kevin Costner movie. It’s special carve-outs like this that make for high rates and complicated taxes all around.
State leaders ballyhooed the plan as a way of moving from old-style industry to new.
Despite tens of millions of dollars in state investment, the promised 3,000-plus jobs didn’t appear. As the Detroit Free Press reported last year, the studio employed only 15-20 people. That isn’t boffo. That’s a bust. The studio has defaulted on interest payments on state-issued bonds, and the guarantors—the state’s already stressed pension funds—may wind up holding the bag. “In retrospect, it was a mistake,” conceded Robert Kleine, the former state treasurer who signed off on the plans in 2010.
He doesn’t neglect Iowa’s film fiasco:
Iowa ended its motion-picture subsidies in 2010, after officials misused $26 million in state money, leading to criminal charges. According to a 2008 investigation by Iowa Auditor David Vaudt, 80% of tax credits issued under the state’s film-subsidy program had been issued improperly (to production companies that weren’t even spending the money in Iowa, for example).
Two film credit recipients are now serving 10-year sentences on theft charges arising from the program. That’s fine, but I really want to see a groveling public apology from the Governor who signed the program into law, the “economic development officials” who turned the keys to the state treasury over to a former Walgreens photo desk clerk in charge of the program, and to the legislators — all but three out of 150 — who voted the moronic program into existence.
“At a minimum, it’s probably going to take longer for people to get through on the phone; it’s going to take longer for refunds to be processed,” said Floyd Williams, a senior tax counsel at Public Strategies Washington.
Williams, who worked for the IRS for nearly two decades and directed the agency’s legislative affairs office for 16 years, says the sequester could also be a boon to those who purposely commit fraud, or accidentally fill out returns incorrectly.
Good thing the IRS can redirect the employees who had been assigned to the preparer regulation program to do something useful, now that the courts have shut down that futile enterprise. The IRS can’t stand their good fortune, though; Tax Analysts reports ($link) that the IRS is appealing the court decision.
It would be even better if Congress stopped using the IRS as the Swiss Army Knife of public policy. Given the agency’s new mandate to take care of our health insurance, their performance at the job of actually collecting taxes is only going to get worse.
Preparers gone bad. Accounting Today rounds up the week in preparer fraud, including a guy in New Mexico who, while serving time for identity theft-related charges, has been hit with 56 counts of fraud and embezzlement. That would be overachieving in underachieving.
Durango man pleaded guilty to tax evasion this week in federal court in New Mexico.
Hak Ghun, 62, is facing 12 to 18 months in prison after signing a plea agreement with the U.S. Attorney’s Office. He also will be required to pay $249,567 in restitution to the Internal Revenue Service.
The man was accused of embezzling from a company that had received investments from the Navajo Nation. For those who don’t get the old TV show reference, here you go.
Iowa’s top state personal income tax rate is 8.98 percent, compared to 13.3 percent in California. Probably not enough of an improvement to lure millionaires from Pacific Palisades to Dubuque. By contrast, Texas offers zero percent.
Earlier this year, Branstad said he would no longer pursue getting rid of Iowa’s corporate and personal income taxes. Instead, he’s going to focus on cutting property taxes.
Well, California’s property taxes already are fairly low thanks to Proposition 13. Although property prices here are triple those in Iowa and most other states because of our severe restrictions on building.
Bottom line: Iowa doesn’t offer enough incentives to attract many businesses and people to leave California. The Hawkeye State is the Golden State with bad weather.
Ouch. Well, Iowa’s solvent, too, unlike California, which is a fiscal disaster. We also have short commutes. Still, he makes a valid point: it’s not enough to compete with a basket case like California. Golden State refugees have plenty of places to choose from, many of which have better taxes, better weather, or both. I have no thoughts on fixing the weather, but The Quick and Dirty Iowa Tax Reform Planwould take care of the tax problems. With no corporate tax and a 4% individual rate, combined with good employees, education and quality of life, we’d see some Californians.
“Even though on the surface you’re looking at 35% versus 39.6%, it’s a deceptive comparison,” says Robert W. Wood, a tax lawyer with Wood LLP in San Francisco. “There may be a slight short-term advantage in C-Corporations, but there are a number of negative long-term implications that would outweigh short-term benefit.”
For example, C-Corporation profits can be double-taxed. In addition to the corporate tax on profits, owners also would owe personal taxes on any money they take out of the company as dividends. The double tax kicks in when a business is sold, too.
Another potential problem is that a firm that switches from an S-Corporation generally has to remain a C-Corporation for at least five years.
At current rates, a switch to C corporation format is probably still unwise, if tempting, because of the double tax issue. You might have lower tax up front, but getting the money out involves either paying a second tax on the dividends or expensive tax gymnastics, often involving renting to a corporation or potentially “excessive” compensation. C corporations are the Roach Motels of the tax world: they’re a lot easier to check into than check out of. But if there is a significant reduction in corporation rates, the current tax savings will be enough to tip the balance for many taxpayers to C corporation status, double tax or no.
The tax code, as most everyone knows and acknowledges, is ridiculously complex and getting more complex all the time.
When will the complexity cause the system to collapse? And what, exactly, will collapse?
I think it would require a combination of things to “collapse” the tax law. If the perception becomes widespread that it is impossible to comply with the tax law without unreasonable effort, or the rates get intolerably high, and technical advances allow for cash transfers and banking that the government can’t trace, then the game is over.
Tax Analysts is having a conference today on whether, after 100 years, the income tax has run its race.
For the working poor, the EITC is unabashedly a welfare program. For the corporate recipients, the credit is touted as “economic development.” I’m sure EITC recipients feel the same way about their government checks.
The report shows that about $34.2 million of the $50.5 million claimed in research credits was refunded — about 2/3. The biggest recipient of the credit was Rockwell Collins, which received $13.8 million in credits. The report doesn’t say how much credit was refunded for each large recipient; If 2/3 of the Rockwell Collins credits were refunded, that means Iowa taxpayers gave the company $9.2 million
I don’t believe Rockwell Collins, or anyone else, should pay Iowa corporation income tax. It is a bad tax whose repeal would make life better for Iowans. But that’s a long way from saying that taxpayers should actually cut annual welfare checks to corporations doing business in Iowa. While I don’t blame them for taking the checks — who turns down free money? – don’t try to tell me that it’s good for me.
Repeal of giveaways like the refundable research credit and the “economic development” credits given to the big fertilizer companies would go a long way towards paying for repeal of the corporation income tax for businesses lacking the lobbyists and wire-pullers needed to hit the corporate welfare jackpot. Maybe some day we’ll demand the legislature replace the tax-some, pay-others Iowa tax system with something better, like The Quick and Dirty Iowa Tax Reform Plan.
Dislike. The left-wing high-tax advocacy group Citizens for Tax Justice is scandalized that Facebook isn’t paying income taxes on its 2012 income (via the TaxProf):
Earlier this month, the Facebook Inc. released its first “10-K” annual financial report since going public last year. Hidden in the report’s footnotes is an amazing admission: despite $1.1 billion in U.S. profits in 2012, Facebook did not pay even a dime in federal and state income taxes.
Instead, Facebook says it will receive net tax refunds totaling $429 million. Facebook’s income tax refunds stem from the company’s use of a single tax break, the tax deductibility of executive stock options. That tax break reduced Facebook’s federal and state income taxes by $1,033 million in 2012, including refunds of earlier years’ taxes of $451 million.
So why are “executive stock options” deductible? Because they are taxable to the recipients as W-2 income. They are reported as taxable income on the executives 1040s at the same 35% top rate that the corporation pays. In other words, CTJ is upset because the executives, rather than the corporation, write the checks to the IRS.
There is no actual tax reduction. In fact, the government actually gets more income from the options than if Facebook had not issued the options and just paid 35% tax. Because they are also subject to the 2.9% medicare tax (3.8% starting in 2013), the option exercises actually generate additional revenue for the IRS. Presumably CTJ would want the executives to pay tax with no deduction on the other side. That seems unjust.
Kay Bell, Sign up now to pay your federal tax bill via EFTPS. With the ongoing disintegration of the postal service, it’s good to have a secure and sure way to get your taxes paid on time. I’m signed up.
Our new Marriage Bonus and Penalty calculator, despite all its Valentine’s Day finery, ignores the new 0.9 percent Medicare payroll tax hike buried in the 2010 health law. The extra levy affects only a few high-income couples but in very different ways. Lucky couples will collect marriage bonuses of up to $450. But those less fortunate—if anyone making $250,000 can be considered less fortunate—will incur marriage penalties of as much as $1,350 in additional Medicare tax.
Just another example of the whimsical and poorly-conceived nature of the Obamacare Net Investment Income tax.
The last three governors of Illinois all went to prison (and it’s equal opportunity corruption: both Republicans and Democrats). Joining them will be former Congressman Jesse Jackson, Jr. and his wife, Sandi (a former Alderman in Chicago).
Mr. Jackson resigned last November from Congress; Ms. Jackson resigned in January from the Chicago City Council. Both are pleading guilty: Mr. Jackson to conspiracy and Ms. Jackson to filing a false tax return. They pleaded guilty on Friday.
The scheme apparently had them using “business” credit cards (here, business is their re-election campaign) for personal expenses. As this blog has highlighted numerous times in the past (and will likely do numerous times in the future), you can’t put personal expenses on a business return. And we’re not talking nickel and dime purchases; the total is $582,772.58. Add in filing false campaign reports and you have problems.
When people complain about the need to turn power over to government instead of ”greedy corporations,” there is an implied assertion that the government and its operatives are somehow less vulnerable to avarice and self-dealing. Against all evidence.
How H&R Block guy got to write preparer regs. Civil Service! Tim Carney reports:
In 2009, the Obama administration hired Mark Ernst, the previous CEO of tax prep giant H&R Block, as IRS deputy commissioner. Ernst became a “co-leader” (in the words of an IRS spokesman) in drafting new regulations for tax preparers.
This seems to clash with President Obama’s executive order barring appointees from working on regulations directly affecting their former employers.
But thanks to a fine legal distinction, these rules didn’t cover Ernst. “Mark Ernst is a civil servant at the IRS; he is not a political appointee,” an IRS spokesman wrote me. “The Presidential Executive order on Ethics Commitments by Executive Branch Personnel only applies to political appointees.”
Nobody here but us chickens.
Jason Dinesen has a new installment about his client whose identity was stolen in the ID theft epidemic that really got rolling while the IRS was busy regulating preparers. “If you hired the best comedy writers and satirists in Hollywood, they couldn’t come up with a more farcical script about government ineptness.”
A new working paper recently released by the Mercatus Center at George Mason University… finds that contrary to conventional wisdom, sin taxes are often not used to correct externalities but rather for general fund spending. My take on that is politicians don’t really care about externalities. They would like to raise money from people whose activities they despise. The report also found that the goal of “sin taxes” has changed from correcting market failures to protecting consumers from their own choices. That is, people are too stupid to run their own lives and they need help. Finally, the report finds that sin taxes are regressive, i.e., they punish the poor. Unfortunately, my liberal friends never get exercised over this issue. Maybe it’s as the great PJ O’Rourke surmised, liberals hate poor people.
If they would just not wear those icky Wal-Mart clothes and watch their weight, like they tell them to… (Tax.com)
Even accepting that he spent 520 hours working on his own properties, he still lost. Two of the properties were short-term vacation rentals and one was being readied for sale. The time spent on those properties could not be grouped with the time spent on properties dedicated to long term rentals.
Meanwhile, somewhere an ID thief is trying to get cash from an ATM with a peanut butter sandwich. TBO.com reports:
A 6-year-old pupil at Symmes Elementary School in Riverview was asked to take her homework out of her backpack, according to Cpl. Bruce Crumpler of the Hillsborough County Sheriff’s Office.
The girl reached into her bag and pulled out a baggie containing 52 debit cards, Crumpler said.
The cards, which can be used as accounts for depositing tax refunds are commonly used by people who use stolen personal identities to file tax returns to obtain fraudulent refunds.
Maybe she’s the little princess of tax fraud. Meanwhile, the same TBO.com has an update on Rashia Wilson, who allegedly proclaimed herself the “Queen of IRS Tax Fraud:”
Wilson may not have been the biggest player in Tampa’s income tax fraud explosion, but she was one of the most brazen — “flashy,” a sheriff’s investigator called her, “in your face about it.”
The affidavits show Wilson even had a picture of herself with a cool smile on her face, wearing an oversized jewel-encrusted pendant spelling out her first name as she held bundles of cash.
“YES I’M RASHIA THE QUEEN OF IRS TAX FRAUD,” reads a May posting on her Facebook page described in the affidavits. “IM’ A MILLIONAIRE FOR THE RECORD SO IF U THINK INDICTING ME WILL BE EASY IT WONT I PROMISE U!”
Easier than she thought, apparently. She has been indicted on 57 federal tax fraud charges for collecting $1.3 million through fake tax returns, apparently claiming earned income credits and refundable education credits. That should make the politicians think twice before they expand these fraud-ridden credits, but it won’t.
How many lawyers does it take to lose a tax case? 15. At least that’s how many lawyers were listed on the losing side yesterday in Bank of New York Mellon Corp., a Tax Court case disallowing foreign tax credits in a tax shelter case. Six lawyers are listed on the IRS side, for a total of 21. The losing side was led by former IRS Chief Counsel B. John Williams. If nothing else, the legal expense deductions should take a bite out of the losing side’s tax bill. The TaxProfhas more.
Iowa’s push for a 4.5% optional flat tax — which I call an “alternative maximum tax” – puzzles David Brunori ($link)
Many liberals in Iowa are complaining that a flat tax wouldn’t require the rich to pay their fair share, whatever that means. But a lot of those people seem more interested in soaking the rich than in helping the poor. Personally, I am much more in favor of reducing the tax burdens on the poor and dispossessed than I am in making rich people suffer.
I think a flat income tax with few deductions (and a sizable exemption for low-income people) is the way to go. I’m unsure why the state would continue its horribly complicated personal income tax system that benefits return preparers, tax lawyers, and tax accountants.
It’s because of a peculiarity of Iowa politics. The powerful lobbying group Iowans for Tax Relief opposes a repeal of the Iowa deduction for federal taxes paid. ITR has shown that it can provoke successful primary challenges of Republican legislators who displease the Muscatine-based lobby. Yet significant rate reduction is impossible if the deduction is retained. Making the lower rate an “alternative” rather than a replacement appeases Muscatine, though at a cost in incoherence.
Will we see a revival in enforcement of the accumulated earnings tax? The obscure depression-era tax on C corporations that retain cash in excess of their “needs,” as second-guessed by the IRS, is rarely asserted. With left-side economists like Paul Krugman asserting that corporate cash-hoarding is one reason why the economy remains weak, don’t be surprised if his friends in the Obama administration try to revive enforcement of this archaic and foolish penalty tax. (Via Tyler Cowen).
As the chart below shows, mandatory spending represents the majority of the federal budget, and the part that has grown most dramatically in recent years. Mandatory spending was about 10 percent of GDP for most of the 30 years prior to 2008. It leapt to 15 percent of GDP in 2009 and now remains at 13.1 percent. It is projected to increase to 14.1 percent of GDP by 2023. Meanwhile, discretionary spending, on programs like defense, roads, and other infrastructure, is on a steady decline. Discretionary spending is now 8.3 percent of GDP and set to go to a 50 year low of 5.5 percent of GDP by 2023.
No spending is really “mandatory.” Congress and the President can always change the “mandatory” programs. And they will, or we will face fiscal disaster and crushing taxes.
When a convicted criminal feels he has been ill-used by an accomplice, the normal recourse tends to involve unpleasant events in the prison gallery. Lawyers are rarely consulted. But when international tax cheating is involved, it apparently works differently.
A group of clients of Swiss bank UBS who claim that bad things happened to them as a result of their Swiss accounts sued UBS. Seventh Circuit appeals judge Posner was distinctly unsympathetic (my emphasis):
The plaintiffs are tax cheats, and it is very odd, to say the least, for tax cheats to seek to recover their penalties (let alone interest, which might simply compensate the IRS for the time value of money rightfully belonging to it rather than to the taxpayers) from the source, in this case UBS, of the income concealed from the IRS. One might have expected the plaintiffs to try to show that they had forgotten they had accounts with UBS (though that would be preposterous, for these were significant investments for each of the plaintiffs). Or that UBS had told them that income earned in those accounts was somehow tax exempt and moreover that the accounts themselves were somehow not foreign bank accounts within the meaning of the tax code and so the plaintiffs didn’t have to acknowledge having accounts with UBS. They don’t make any of these feeble arguments. They do argue, as we’ll see, that UBS was obligated to give them accurate tax advice and failed to do so, but not that it gave them inaccurate, as distinct from no, advice.
While the IRS offshore compliance programs have abused many innocent Americans who have foot-fault violations, that doesn’t appear to be the case here. A U.S. resident who set up a Swiss bank account probably didn’t do so to ensure tax compliance.
At worst, UBS, as we’re about to see, violated an agreement with the IRS designed to prevent the kind of evasion that the plaintiffs engaged in. That might conceivably make UBS an aider or abettor of the plaintiffs’s tax evasion and so make this case a distant relative to Everet v. Williams (Ex. 1725), better known as The Highwayman’s Case and eventually reported under that name in 9 L.Q. Rev. 197 (1893). A highwayman had sued his partner in crime for an accounting of the illegal profits of their criminal activity. The court refused to adjudicate the case, and both parties were hanged. Minus the hanging and with certain exceptions (such as contribution and indemnity) irrelevant to this case, the principle enunciated in The Highwayman’s Case applies to accomplices in civil wrongdoing, as noted in our recent decision in Schlueter v. Latek, 683 F.3d 350, 355-56 (7th Cir. 2012). In The Highwayman’s Case one accomplice was seeking a bigger share of the profit from the crime from the other one; here one accomplice is seeking a smaller share of the costs of the crime from the other one. The principle is the same; the law leaves the quarreling accomplices where it finds them.
The moral? Your banker isn’t your tax advisor, and when you are cheating, you are on your own. At least in Judge Posner’s court.
Overwhelming? A Tax Analysts story on the fallout from the Loving decision overturning the IRS preparer regulation program reports:
“There is overwhelming support for registration” among EAs, said Frank Degen, president of the National Association of Enrolled Agents. While preparers are watching to see what an appeals court will do — as the IRS said it would file an appeal soon — “most practitioners are just interested in cranking out those 1040s right now,” Degen said.
I’d want to see some polling showing that “overwhelming” support. The preparer regulation program strikes me as potentially fatal for the Enrolled Agent brand. EA’s, who have to pass a much stricter test and more stringent continuing education requirements than the registered preparers would have to, already have difficulty marketing their additional qualification. The IRS blessing of a competing bargain brand could easily bury the EA designation. At the very least, I see no overwhelming support for the preparer registration program from EA-bloggers Jason Dinesen and Russ Fox.
Even if seemingly everything goes right – in economic terms and in political terms – we are still on the edge of dangerously high debt and deficit levels with little room to spare.
In 2012, the IRS says its investigations and in-house filtering systems prevented $20 billion in would-be fraudulent refunds, up from $14 billion the year before. But [Acting IRS Commissioner] Miller acknowledged that thieves still get away with stealing numerous tax refunds, although the IRS could not provide exact loss figures.
“In terms of how much got past us, we’re quite sure some did,” Miller told reporters in a conference call. “I know it doesn’t approach the number that we stopped.”
How much might that be? Maybe $5 billion a year, maybe more. That’s means about 20% of the fraud gets through. If your “in-house filter” let 1/5 of the grounds of your coffee into the pot, you’d change filters.
This is the first highly-publicized nationwide IRS crackdown on identity theft, years after the problem began to spiral out of control. It’s surely coincidence, but it almost is as if the IRS, now that it has been barred from it’s preparer regulation power grab, has decided that maybe it really should do something about ID theft after all.
DES MOINES – The first bill the Iowa Legislature will send to the governor this year will align the Iowa and federal tax codes, a move that will reduce the amount of taxes Iowans pay to the state.
Although Republican Gov. Terry Branstad will thoroughly review the legislation, his spokesman said the governor supports the intent of Senate File 106 “and will likely support it.”
That’s good news. The sooner he signs it, the sooner the state can begin processing 2012 returns with Section 179 deductions, educator expenses, and a number of other provisions affected by the Fiscal Cliff legislation.
Up until now, I’ve given the President the benefit of the doubt about reforming our broken tax system. I just didn’t think tax reform was a big issue for his administraiton. But now I’m beginning to think he doesn’t care about tax policy at all.
What was the tip-off?
No matter the fiscal crisis, the President never misses an opportunity to propose tax increases on “the fat cats.” To the President, the fat cats are the people and the businesses he thinks can pay a “little more” to support their government. I’m not sure I buy his definition of fat cat. But I certainly don’t buy his definition of tax reform. Tax reform is about building a tax system that is fairer, simpler, and more economically efficient. If in the process it raises revenue, I’m fine with that, but I don’t think the primary goal of tax reform is to wring more money from the well-to-do simply because they are doing better than you are.
It’s been blindingly obvious from the beginning that the President has no interest in tax policy. Look at his record:
- Increases in top marginal rates, which creates incentives for more loophole-carving.
And his big current proposals are to limit deductions for corporate jets and screwing around with how private equity is taxed — symbolic and political gestures that would make the tax law even more complex. Any belief that the Obama administration cares a fig about tax reform requires more unfounded faith than a fourth marriage.
Central Iowa Culture Watch. The State Fairgrounds in Des Moines hosts the cultural event of the season this weekend: the Blue Ribbon Bacon Festival. Tickets routinely sell out in minutes, so if you have to ask, you can’t go. What will you miss? KCCI.com reports:
Start with the dress. It is made of real bacon, created by an East Des Moines dressmaker – and it is actually worn by the Bacon Queen…
“It wildly surpassed anything I thought was achievable. I mean, look at it, it sparkles,” said Porter.
Today is the last day to make a charitable IRA rollover for 2012. Yes, 2012 is over, but taxpayers who are required to make IRA minimum annual distributions may still have one 2012 transaction left in them.
- Taxpayers who are born before July 1, 1942 who took cash from an IRA in December 2012 can contribute up to $100,000 to a charity today and have it excluded from their 2012 income.
- Taxpayers who have failed to take their required minimum 2012 distribution can avoid the 50% penalty for failing to take their distribution by arranging for the IRA to transfer the minimum amount, up to $100,000, to a charity today.
For an example of the disruption routinely caused by the IRS’s misadministration of the RTRP regulations, see Alban Decl., Ex. 3 (the comments from preparers are illustrative and reference previous examples of similar disruptions); see also Joe Kristan, IRS quietly delays CPE requirement under new preparer regulation scheme , Tax Update Blog (January 8, 2013), http://rothcpa.com/2013/01/irs-quietly-delays-cpe-requirement-under-new-preparer-regulationscheme/ (describing IRS message as “a quiet admission of failure”).
With the Tax Update Blog on their side, who can be against them?
What does a poor college student have that could be lucrative to a thief? A Social Security number. From the Memphis Business Journal:
With tax season bearing down, the IRS has a warning about a new refund scam aimed at college students, seniors and church members.
The Internal Revenue Service said Tuesday the scam tries to get students to give their personal identification and file tax returns claiming fraudulent refunds. It has sent misleading and bogus refund claims using the American Opportunity Education Tax Credit on college campuses throughout the Southeast.
Be very cautious about giving anybody but your employer, your bank, a medical provider or the IRS your Social Security number. And never give it to a scammer.
So the pro tax people managed to shut Mickelson up. Rather than engaging in a discussion about why it is okay to take his money, they stifled him.
Shut up, they explained.
Paul Neiffer points out that now that penalties are waived for farmers who file after March 1, they may not want to file by their usual deadline: File Your Return After March 1 Not Before!
Have you mailed your 1099s and W-2s? Today is the deadline for sending them to recipients. Russ Fox has the scoop.
Flickr image courtesy John Snape under Creative Commons license
The IRS isn’t saying.
It matters for real estate operators. The proposed regulations on the Obamacare “Net Investment Income Tax” impose the 3.8% levy on rental income, but not for “material participants” in a rental “trade or business.” Tax Analysts reports ($link) that IRS attorney David Kirk weasels out of saying what “trade or business” means:
“On one end of the [section 469(c)(7)] spectrum, you have the real estate pro that owns one-tenth of lower Manhattan and lives, breathes, and dies by occupancy, building up, renting out,” Kirk said, adding that that individual would be considered to be in the trade or business of renting real estate.
Kirk declined to say whether someone on the other end of the spectrum — the real estate broker who not only lists houses but also owns a couple of townhouses or condos — would be considered to be in the trade or business of renting real estate. “I’m not really comfortable coming out and saying what a trade or business is,” he said.
The term “trade or business” has been defined some under Section 108(a)(1)(D), which allows taxpayers to exclude debt cancellation income if the debt was on “trade or business” real property. The IRS discussed the issue in PLR 9840026 (some citations omitted):
The rental of even a single property may constitute a trade or business under various provisions of the Code. However, the ownership and rental of property does not always constitute a trade or business. The issue of whether the rental of property is a trade or business of a taxpayer is ultimately one of fact in which the scope of a taxpayer’s activities, either personally or through agents, in connection with the property, are so extensive as to rise to the stature of a trade or business. Bauer v. United States, 168 F. Supp. 539, 541 (Ct. Cl. 1958); Schwarcz v. Commissioner, 24 T.C. 733 (1955); See Higgins v. Commissioner, 312 U.S. 212 (1941) (management of taxpayer’s own investment portfolio not a business).
In Rev. Rul. 73-522, 1973-2 C.B. 226, the Service held that rental of real property under a “net lease” does not render the lessor engaged in a trade or business with respect to such property for purposes of section 871 of the Code
It was unwise to make “trade or business” status key to this tax; it makes it difficult for taxpayers to know whether it applies and it encourages taxpayers to be agressive. They should just say that if you achieve non-passive treatment as a real estate professional, you don’t pay the tax.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
Disclaimer
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Answering the wrong questions. The Iowa Chamber Alliance asked 
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
