Posts Tagged ‘Renu Zaretsky’

Tax Roundup, 12/18/14: Year-end planning and relatives. And: when will the President sign the extenders?

Thursday, December 18th, 2014 by Joe Kristan

When will he sign? Now that Congress has finally sent the extender Bill, HR 5771, to the President, the “expired provisions” require only his signature. When will that happen? I have no idea. There is nothing at Whitehouse.gov about it. But everyone says he’ll sign. It would be the practical joke of the year if he didn’t.

 


IMG_1944Beware t
he relative! The tax law generally assumes that when related parties do business together, they’re up to no good somehow. That’s why the law has so many provisions that deny or delay tax benefits when relatives are involved.

For example, Code Section 267 only allows a deduction to a related party “as of the day as of which such amount is includible in the gross income of the person to whom the payment is made.” That’s no problem if the “related party” is on the accrual method, because they will be accruing the income at the same time you accrue the expense. But if the related party is a cash-basis taxpayer, you have to pay this year to get a deduction this year.

But who is related? It’s more complicated than you might think. For purposes of year-end deductions,  owners of more than 50% of C corporation stock, and their families (siblings, spouses, ancestors and descendants) are related.  Families are usually considered as a single owner for the 50% test.

For pass-through entities — partnerships and S corporations — any owner is a related party, along with members of owners families and anybody related to the family members.

 

Seventh Avenue, Des Moines, this morning.William Perez, Tax Increase Prevention Act of 2014. “A quick summary of the tax changes included in the Tax Increase Prevention Act of 2014.”

Kay Bell, Tax filing projections for the 2015 season and beyond

Peter Reilly looks back on his idiosyncratic tax coverage this year. Everything from atheist parsonages to Dr. Dino. Peter covers a lot of stuff that I wish I did, in a lot more depth than I could.

Jason Dinesen, A Brief History of Marriage in the Tax Code: Part 1, In the Beginning

Robert D. Flach, THERE ARE A LOT MORE THAN 20 REALLY STUPID THINGS IN THE US TAX CODE! “The one and only purpose of the federal income tax is to raise the money necessary to run the government. Period.”

Me, Year-end business deductions: the two-minute drill. My new post at IowaBiz.com, the Des Moines Business Record’s Business Professionals’ Blog. “While you add up the score in April, December is when you run the two-minute drill.”

 

20130419-1Robert Wood, 8 Savvy Tax Tips & Extenders For Year-End

Tim Todd, 5th Cir. Affirms IRS’s Adjustment Outside Limitations Period for Improper Installment Sale of Partnership Interest.

Keith Fogg, Collection Due Process Determination and Decision Letters Redux (Procedurally Taxing)

Jack Townsend, Plea in Corporate Corruption Case with Tax Charge. Kickbacks kick back.

Gavin Ekins, The IRS’s Long Reach Doesn’t Just Apply to Corporations (Tax Policy Blog). The post describes some of the ridiculous hoops Americans abroad have to jump through to comply with the tax law, and observes:

Are Americans alone in this onerous system? Unfortunately, they are. Only one other country taxes its citizens is this manner. Eritrea, the small country on the northern border of Ethiopia, is the only other country which taxes its citizens who live and work abroad, but unlike the U.S., they have a reduced flat rate for those citizens and none of the reporting burden.  

The results range from annoyance to financial disaster for the absurd crime of committing personal finance while abroad.

Renu Zaretsky, They Saved the Must-Pass for Last. The TaxVox headline roundup provides a good summary of the passage of the extender bill; it also talks about state gas tax moves.

 

TaxProf, The IRS Scandal, Day 588

 

20141218-1Cara Griffith, A Champion for Tax Reform (Tax Analysts Blog). “New York enacted a comprehensive tax reform package designed to improve the competitiveness of the state’s tax code by merging the bank tax into the corporate franchise tax, adopting single-sales-factor apportionment with market-based sourcing, broadening the corporate tax base, and lowering the rate.”

Sebastian Johnson, State Rundown 12/10: The Best Laid Plans (and Reports) (Tax Justice Blog)

 

Daniel Shaviro,  Evaluating the Case for 1986-Style Corporate Tax Reform, (TaxAnalysts, available via the TaxProf)

 

Career Corner. My Firm Holiday Party is a Teaching Moment For What Not to Do at a Firm Holiday Party (Leona May, Going Concern)

 

News from the Profession. Former Stillwater mayor charged with aiding tax fraud (MPRnews.org):

A former mayor of Stillwater was charged in federal court Wednesday with helping two Minnesota brothers keep millions of dollars in taxes from the state and federal governments.

Ken Harycki, a certified public accountant, knowingly prepared false tax forms for twin brothers Thurlee and Roylee Belfrey and their health care companies, according to charges filed in U.S. District Court.

CPAs, you must only use your powers for good.

 

 

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Tax Roundup, 11/17/14: Sundog weather is shorts weather!

Monday, November 17th, 2014 by Joe Kristan

It’s 7F outside here in Mason City, Iowa. Warm enough for shorts, it seems.

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This gentleman was scraping his windows outside North Iowa Area Community College, where I am part of the Day 1 panel of the  Iowa State University Center for Agricultural Law and Taxation Farm and Urban Tax School. I wonder what this guy wears in the summer.

It’s cozy and warm here in the conference room, where 165 attendees are beginning two days of the finest continuing education available today in Cerro Gordo County. There are two sessions left after today, in Denison and Ames; the Ames school will be webcast.  Register today!

 

Just links today.

Russ Fox, The Horrible, No Good, Very Bad Upcoming Tax Season:

If you’re a tax professional here’s a warning: The 2015 Tax Season will be one you’re almost certain to remember for all the wrong reasons. If you’re a client of a tax professional be forewarned: Your tax professional will be even more grouchy than usual next year. Why? The upcoming tax season will likely be the worst in 30 years.

There are four reasons for this: tax extenders, budget issues the IRS faces, the Affordable Care Act (aka ObamaCare), and the new property capitalization/repair regulations.

Are we excited yet?

 

Mason City Sundog Morning. It's cold here today.

Mason City Sundog Morning. It’s cold here today.

Robert D. Flach, IT AIN’T FAIR – SELECTIVE INFLATION ADJUSTMENTS. “If it is appropriate to index some tax items for inflation why shouldn’t ALL deductions, credits, thresholds, etc. be indexed for inflation?”

Paul Neiffer, Direct Deposit Limits. “In an effort to combat fraud and identity theft, new IRS procedures effective January 2015 will limit the number of refunds electronically deposited into a single financial account or pre-paid debit card to three.”

Jim Maule, Soda Sales Shifting? “Does anyone seriously think that the soda tax will reduce the number of obese people in Berkeley, or raise enough revenue to make the cost of administering and complying with the tax worthwhile?”

I’ll believe it’s about health when these people tax their own “unhealthy” habits, like double caramel lattes.

Kay Bell, Navajo lawmakers approve 2% sales tax on snacks, sodas

TaxGrrrl, NFL Flagged With Another Challenge To Tax-Exempt Status Because Of Redskins

Annette Nellen, The Election, 114th Congress and Fate of Tax Reform

Keith Fogg, TIGTA Report on ACS Details the Impact of Shrinking Budget on Tax Collection Efforts (Procedurally Taxing)

 

20131112TaxProf, The IRS Scandal, Day 557

Robert Goulder, The Ghost of Captain Renault (Tax Analysts Blog). “What? There’s corporate tax avoidance going on in Luxembourg? You don’t say?”

Sebastian Johnson, State Rundown 11/14: Here Comes the Judge (Tax Justice Blog). Kansas school funding and Maryland’s attempted double-taxation are on the docket.

Stephen Entin, Tax Policy Is Child’s Play (Tax Policy Blog). “The enactment of tax reductions or regulatory changes that make it possible to profitably employ more capital is like landing on a ladder… Enacting adverse policies that force a reduction in the amount of capital that people are willing to maintain is like hitting a chute.”

Renu Zaretsky asks How Quickly Can Lame Ducks Move Before the Holidays?  The Tax Vox headline roundup is heavy on gas tax talk and extenders.

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Tax Roundup, 11/11/14: Veterans Day in Red Oak. And: open season on Iowa Snowbirds.

Tuesday, November 11th, 2014 by Joe Kristan
John Kristan, 15th Air Force, 485th Bomb Group, 829th Bomb Squad

John Kristan, 15th Air Force, 485th Bomb Group, 829th Bomb Squad

Red Oak, Iowa seems as good a place to be on Veterans Day as any.  I’m here today as part of the ISU-CALT Farm and Urban Tax School Day 1 team. Red Oak was hit hard early in World War II when the 168th Infantry, recruited in Southwest Iowa, was crushed in the Battle of Kasserine Pass. From Wikipedia:

In the Battle of the Kasserine Pass in February 1943, forty-five soldiers from Red Oak alone were captured or killed. At the time more than 100 telegrams arrived in Red Oak saying that its soldiers were missing in action. In recognition of Red Oak’s extraordinary sacrifice, the city’s name was given to a “victory ship“. The SS Red Oak Victory has become a floating museum in the shipyard where it was built, in Richmond, California.

It’s hard to imagine going from this little town to the desert, but they’re still doing it — most famously, Iowa’s new senator-elect.

There aren’t many survivors of World War II left. Appreciate them while you can.

Related: 42-78127.blogspot.com, on my Dad’s WWII experience.

 

With the sudden change of weather to bitter cold, Iowa’s snowbirds begin their annual migration south. When they get to Texas or Florida, they often decide that the tax climate sunnier year-round and ponder changing their residency from Iowa. Doing so avoids Iowa tax on all income other than business and rental income sourced to Iowa.

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Today in Red Oak, Iowa.

A recently-released protest response by the Department of Revenue points out some of the pitfalls faced by taxpayers trying to change their residence:

 Once an individual is domiciled in Iowa, that status is retained until such time as the individual takes positive action to become domiciled in another state or country, relinquishes the rights and privileges of residency in Iowa, and meets the criteria set forth in Julson v. Julson, 255 Iowa 301, 122 N.W.2d, 329, 331 (1963).

In reviewing the information you provided to departmental staff and included with your protest, the Review Unit has determined that you are an Iowa resident. This determination is based upon the following facts:

· You have renewed your Iowa driver’s license.

· You have and are still registering vehicles in Iowa.

· You have returned to Iowa to receive medical care.

· You filed federal income tax returns using an Iowa address.

These factors indicate to the Review Unit that you have not abandoned your Iowa domicile. Consequently, the Review Unit takes the position that you are still a resident of Iowa and all of the income you receive is taxable to the state.

This taxpayer made some pretty basic errors. If you vote in Iowa and keep an Iowa drivers license, you make it pretty easy for Iowa to find you. If you file your returns with an Iowa address, you almost guarantee Iowa will wonder why you aren’t filing an Iowa return. Citing the use of Iowa medical care in Iowa seems like piling on; I don’t think is a decisive factor given the other facts.

The Moral? If you want to move your tax home to another state, you need to act like you mean it. If you continue to use an Iowa address on your return, Iowa will not be easily convinced that you are a Texan at heart.

 

buzz20140909TaxProf, The IRS Scandal, Day 551.

Kristy Maitre, Kristine Tidgren, ACA’s Thorny Impact On More-Than-2% S Corporation Shareholders

William PerezThe Basics of the Medicare Tax

Robert D. Flach comes through with a “meaty” Buzz.  He says:

I continue to worry that the anticipated bi-partisan “cooperation” on tax reform in 2015 will be limited to corporate tax reform – with only some minor token, if any, 1040 tax reform instituted – and not the total rewriting of the entire US Tax Code that is needed.

I think we’ll be lucky to get even the corporate reform.

Stephen Olsen has the latest Summary Opinions at Procedurally Taxing, rounding up recent developments in tax procedure.  He points out a great comments thread in a post about IRS cash seizures by an Institute for Justice attorney.

Jason Dinesen, A Little Bit About Sole Proprietorships, Part 2:

Here are some of the advantages of operating as a sole proprietor:

  • They are easy to get into. There’s no real paperwork to fill out. You just start conducting business.
  • They are simpler to administer and therefore your accounting and legal fees will generally be lower.
  • As your business grows you can always convert to something else. As you go up the ladder from sole proprietor to corporation, it’s easy. But it’s hard to go down the ladder from a corporation to a sole proprietorship.

There are also plenty of disadvantages…

Jack Townsend, IRS on Quiet Filings for Offshore Account Delinquencies or Underreporting

Kay Bell, 2015 inflation adjustments for exemptions, deductions, more!

Annette Nellen, Premium Tax Credit Saga – New Developments and Dilemmas

 

 

roses in the snowKyle Pomerleau, How Corporate Integration Increases Transparency and Eliminates Double-Taxation (Tax Policy Blog).  “Under our current system of double-taxation, a corporation that earns $100 needs to pay the corporate income tax (for this example let’s assume a 25 percent corporate tax rate). The after-tax income ($75) is then passed to shareholders and taxed again. The result is a 46.53% tax burden on corporate income.”

Martin Sullivan, Your Quick Guide to Dynamic Scoring in the Next Congress (Tax Analysts Blog)

Renu Zaretsky, ACA Tax Provisions Still Under Fire. This TaxVox headline roundup covers the latest in ACA battles, including a brief filed by some states (including Iowa’s Attorney General Miller) saying they thought they thought being on a federal exchange wouldn’t threaten tax credits for their residents.

 

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Tax Roundup, 11/6/14: You pretend to complete the form, we’ll pretend to care. And: election mania!

Thursday, November 6th, 2014 by Joe Kristan

Accounting Today visitorsthe godawful link you seek is here.

 

20120905-1Don’t worry about getting it right, just make it look good. IRS personnel trying to appease angry practitioners at an AICPA Tax Division gathering had some strange and annoying things to say yesterday.

Practitioners are upset at the IRS insistence on Form 3115 accounting method change applications with 2014 returns from everyone moving into compliance with the new rules on repair and capitalization costs.  Tax Analysts reports ($link):

Participants in the tax methods and periods panel at the American Institute of Certified Public Accountants fall Tax Division meeting in Washington said that some taxpayers don’t want to pay the high costs associated with going through years’ worth of records to calculate a precise section 481(a) adjustment required under the final regulations (T.D. 9636). The cost of that level of compliance could be more than the entire cost of preparing their returns, practitioners said, adding that the taxpayers are considering filing their method changes with corresponding section 481(a) adjustments of zero.

The piece cites Scott Dinwiddie, special counsel, IRS Office of Associate Chief Counsel (Income Tax and Accounting):

Taxpayers were taking aggressive positions, so the government didn’t want to provide an across-the-board cutoff in the final regulations, he said. Instead, it required 481(a) adjustments as a way to allow field agents to examine taxpayers’ aggressive positions, he said.

So because some taxpayers were taking positions you didn’t like, you want to require everyone to do a bunch of wasteful and meaningless busy work during our busiest time of the year. Got it.

Dinwiddie said that, barring a situation in which the taxpayer has taken aggressive positions in the past or has in no way applied a proper capitalization method, the IRS is unlikely to have much interest in examining a taxpayer’s section 481(a) adjustment now.

So we pretend to file an accurate Form 3115, and they pretend to care. Well, you have to admit that considering the budget and enforcement restraints on the IRS, this approach is… absolutely insane. Taxpayers have to pay for a bunch of nonsense compliance, and the IRS doesn’t care whether it’s right. The IRS still has to incur processing costs. I’d love to see the IRS cost-benefit worksheets on this one.

 

20120810-1The TaxProf has a roundup of observations on the whether tax reform can happen in the new Congress, including this from William Gale:

It is a good bet that the new Republican Congress will continue to talk about tax reform. That is safe ground for Republicans generally. And, of course, seemingly impossible things do sometimes happen. But I wouldn’t bet on tax reform. 

A wise non-bet.

 

TaxGrrrl, What Matters Most When It Comes To Tax Reform? Hint: It’s Not Control Of Congress:

What is interesting, however, is that most of the significant tax policy changes in the modern era are more closely tied to the length of presidential terms. Every president has a budget – and an agenda – but real shifts in rates and policies tend to happen during a second term (or en route to a second term) no matter which party is in control. 

I don’t expect it to happen this time.

 

Scott Drenkard, What Do the 2014 Midterm Election Results Mean for State Tax Policy? “My prediction is that this means that taxes will be one of the biggest, if not the biggest issue in state policy next legislative session, and that tax reform will become even more of a bipartisan issue.”  I’m afraid that’s not true here in Iowa.

Russ Fox, Nevada Goes Deep Red. “Do you remember 1928? Well, that was the last time Nevada had a Republican governor, a Republican State Assembly, a Republican State Senate, and Republicans holding all major statewide offices.”

Paul Neiffer, A Christmas Present?! “They will meet over the next six weeks or so and around Christmas time we will get the final tax package.”

 

 

20120702-2Arnold Kling’s characteristically wise observation on the election results:

Conventional wisdom is that, relatively speaking, Democrats have a structural advantage in Presidential elections, because those elections attract more turnout. In other words, they do much better among disengaged voters. One could spin this positively for the Democrats, saying that they get support from the weaker segments of society. One could spin this negatively and say that they rely on a segment of the electorate that is poorly informed and easily bamboozled, which I believe is the case. The counter to that would be that Republicans also rely on a segment of the electorate that is poorly informed and easily bamboozled, which I also believe is the case.

While I don’t agree with all of what he says, the whole post is brief and well worth reading. So is this from Don Boudreaux:

I advise freedom-loving and free-market-appreciating Americans (of which I am unashamedly one) to be good Tullockians about the results of yesterday’s landslide wins for the G.O.P.  The Republicans who won those elections are, after all, politicians – and it is the rare politician, of whatever party, who reliably puts principle above personal interest.  As a rule, politicians are untrustworthy, duplicitous, and cowardly; they are people who have an unusually powerful craving for power and fame; and the successful among them typically posses an unusual talent for camouflaging their craving for power and fame as a saintly calling to ‘serve the people.’

Pretty much. But some are less bad than others, enough so that I do bother to vote.

Renu Zaretsky, Don’t Call It a Comeback… Yet.  The TaxVox headline roundup is full of post-election links, including news of Berkeley, California, passing an idiotic soda tax. When they start taxing mocha lattes, I’ll believe they’re such taxes are about public health than moral vanity.

 

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And some folks are actually talking about things other than the election:

Jana Luttenegger, Even Startups Need to Have the Conversation (Davis Brown Tax Law Blog).

Jason Dinesen tells us A Little Bit About Sole Proprietorships, Part 1

William Perez, Dividends: Taxes and Reporting

Robert D. Flach recounts EXPLAINING MORTGAGE INTEREST AND INVESTMENT INTEREST FOR A CLIENT

Jim Maule discusses how Mortgage Loan Modification Can Imperil Interest Deduction

Stephen Olsen at Procedurally Taxing as a new round of Summary Opinions., with links to news from the world of tax procedure.

Jack Townsend, The Honorable Jed Rakoff on Why Innocent People Plead Guilty. He quotes Judge Rakoff: “…the guidelines, like the mandatory minimums, provide prosecutors with weapons to bludgeon defendants into effectively coerced plea bargains.”

Kay Bell, 5 tax record keeping questions … and answers!

TaxProf, The IRS Scandal, Day 546

News from the Profession. McGladrey Reminds Audit Staff to Stay Billable This Busy Season (Caleb Newquist, Going Concern)

 

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

Monday, October 13th, 2014 by Joe Kristan

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

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

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

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

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

Cite: Morehouse, CA-8, No. 13-3110.

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

 

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

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

 

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

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

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

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

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

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

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

Jack Townsend, Bitcoins Update

Jason Dinesen, Glossary: Filing Status

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TaxProf, The IRS Scandal, Day 522

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

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

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

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

 

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

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

 

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Tax Roundup, 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, 9/19/14: 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, 9/15/14: Extended business returns are due today. And: the great Czech Toilet Paper Caper!

Monday, September 15th, 2014 by Joe Kristan

20130415-1Extended calendar-year 2013 business returns are due today. No more extensions. If you have a 1040, 1065, 1120, or 1120-S filing for 2013, be sure you get it done today.  E-filing is the best. If you want to go the old-fashioned way, get to the post office and send it “Certified Mail, Return Receipt Requested.”  Keep the postmark.

If you can’t get to the post office before it closes, you can still head to a UPS Store, Fed-Ex Kinko’s, or similar place and use a designated private delivery service; be sure to use one of the qualifying services, and make sure your receipt has a time and date designation with today’s date to prove timely filing.

Why does it matter? The penalties are $195 per K-1 per month, so a late S corporation with 10 shareholders overdue six months racks up a late-filing penalty of $11,700 — no matter how little income is reportable on the return.

 

TaxGrrrl, Back To School 2014: Casualty Loss And Theft Deduction.  Also: a chance to win a protective phone case!

Russ Fox, From Owning a Party Mansion to Partying at ClubFed. ” Mr. Verbal and his employees offered customers a unique bonus system: If the return was falsified and the client paid cash, he would get a much larger refund.”

Tony Nitti, Client Sues Tax Advisor For Bad Advice: Is The Settlement Payment Tax-Free?

Annette Nellen, Truncating Taxpayer Identification Numbers – Enough?. “It does nothing about the trillions of documents of all sorts that exist that have people’s SSNs on them.”

Jason Dinesen, Putting Profit First While Planning for Expenses

Kay Bell, What do workers want? At some offices, it’s tax-free lunches

Keith Fogg, A Proposal to Amend Flora or Collection Due Process for Individuals Examined by Correspondence Who Do Not Pick Up or Process Their Mail. (Procedurally Taxing). “When the current procedures for tax administration were built, the rich or upper middle class were the ones interfacing with the tax system.”

lizard20140826Jack Townsend, More on [BS] Corporate Tax Shelters (with Some Rantings):

The large(r) Accounting firms developed substantial practice groups that, overtime (over time also), became an echo chamber that caused or contributed to individuals doing things that they would not do individually.  (For background, this is a major reason that conspiracy is a separate crime.)  Because individuals in these groups were in a echo chamber, they slowly begin to believe the bull shit of the echo chamber.  Had they not been in the echo chamber, they likely would not have done what they did.  But they were in the echo chamber; conduct become less evil or illegal or morally wrong because all these smart people and honorable people were participating in the venture.  Of course, the views of those at senior and more experienced levels were often substantially influenced by the extravagant money that could be made by participating.

It’s hard to see straight through a big pile of cash.

 

Joshua D. McCaherty, The Cost of Tax Compliance (Tax Policy Blog). “All said, Americans spent over 3.24 billion hours, which is about 369,858 years, preparing and filing tax returns in 2012.”

TaxProf, The IRS Scandal, Day 494. “So I’m thinking maybe Anthony Weiner should put his selfie in Lois Lerner’s emails.”

Ajay Gupta, Burning the Inversions Fuse at Both Ends (Tax Analysts Blog). “Here is the ultimate irony in the story: Investment bankers hired by a foreign multinational confronting acquisition by a U.S. corporation alerted the administration, the politicians, and the country to the imperatives of ‘economic patriotism.'”

Kelly Davis, Tax Policy and the Race for the Governor’s Mansion: Ohio Edition (Tax Justice Blog)

Renu Zaretsky, Taxes Take Center Stage This Week—At Least on the House Floor.  Today’s TaxVox headline roundup covers Nevada’s corporate welfare for Tesla, hearings on retirement savings, and another futile extenders vote coming up this week.

A special Monday Buzz! from Robert D. Flach. Among the topics is an often-overlooked price of “backdoor” Roth IRAs.

 

20140915-1We’ll get to the bottom of this.  Czech special police team flushes out corruption after it seizes millions of toilet paper rolls:

The Czech special police squad Kobra revealed tax evasion estimated at at least 25 million Kč in business involving toilet paper and tissues, representatives of the police and customs officers has told journalists.

The police seized 3.7 million toilet paper rolls from a businessman.

Czech Financial General Directorate Deputy Director Jiří Zezulka said the toilet paper circulated among firms in the European Union while only serving as “the carrier of tax fraud” and was not produced for any final customer.

No word on whether it had special absorbency to carry tax fraud.  I love that the toilet paper caper was uncovered by “Kobra.”
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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, 8/26/14: 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, 8/11/14: 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, 8/5/14: 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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Tax Roundup, 7/11/14: Wilderness edition. And: the hazards of doing it yourself.

Friday, July 11th, 2014 by Joe Kristan
Photo courtesy Philmontscoutranch.org

Photo courtesy Philmontscoutranch.org

Programming note.  The Tax Update goes untended for the next two weeks, as I head to Philmont Scout Ranch with my younger son and others for a 10-day backpacking odyssey.  It’s my first visit to New Mexico and my first extended backpacking trip.  Horses, carabiners, and black powder rifles will be encountered.  Whatever remains of me will be back here July 28.  The lovely and talented folks in the blogroll to the right will keep the tax world under control in the meantime.

 

Accounting Today visitors: if you followed the newsletter link here, you probably are looking for this: July 5, 1944.

 

Does the tax law cause people to do work on rental properties that they really should hire out?   That’s one conclusion you could draw from a Tax Court case yesterday, where a landlord says she chose do herself work that, based on the time she says she spent, should have gone to a contractor.

The tax law says real estate losses are normally “passive,” and when adjusted gross income exceeds $150,000, they are only deductible to the extent of other passive income.  A special rule lets “materially participating real estate professionals” out of the “per-se passive” rules; these taxpayers test whether their real estate activity is passive under the rules that apply to other business activities, based on time spent.

There’s a serious catch.  To qualify as a real estate pro, you have to work at least 750 hours in real estate, and more hours than in anything else you do.  If you have a full-time day job, this doesn’t work.

20140325-1But taxpayers attempting to get to 750 hours might be tempted to do work they would otherwise outsource.  That would be the generous interpretation of these facts in the Tax Court (my emphasis):

Petitioner claimed to have spent a total of 772 hours working on her rental properties in 2009. In support of her assertion, petitioner provided activity logs purporting to document the time she spent on her rental activities. Some of the activities included painting, cleaning apartments, shoveling snow, communicating with tenants on various issues, placing rental ads in the local newspaper, picking up mail, and paying bills. Although some log entries reference a specific apartment or property, many log activities do not specifically identify a particular rental unit. In addition, the number of hours noted on petitioner’s logs appears to be significantly inflated. For example, in one instance petitioner claims to have spent 8 to 12 hours per day for 10 days staining the “deck and siding” of what appears to be one apartment at the Pulaski property.

Some people just are perfectionists.

The log also indicates that [petitioner’s husband] helped stain the deck and siding on those dates. In that instance, petitioners together spent between 160 to 240 hours staining the deck and siding of one apartment. There are several other instances in 2009 where petitioner claims to have spent many hours staining and painting decks and front porches of the rental properties. Petitioner’s log for July 2009 indicates that she spent approximately 77 hours over an eight-day period to paint a back porch. Petitioner’s log for November 2009 indicates that she spent more than 105 hours over a 12-day period on the flooring for one apartment and that on one specific day she worked 16 hours.

While a misguided attempt to reach 750 hourse might have motivated this sort of effort, the judge decided that something else was going on:

 Although petitioner claims she acted reasonably and in good faith with respect to her position that she was a real estate professional in the years in issue, we have concluded that petitioner’s records are not accurate or reliable and likely inflated the hours she spent in real estate activities. We have also concluded that the logs relating to her activity as an employee and her self-employment were not accurate.

If you want to document time for showing an activity is non-passive, it is wise to track it in a daily contemporaneous calendar.  It is also wise to not push the limits of believability.

Cite: Materano, T.C. Summ. Op. 2014-64

Material participation hours tests can be found here.

 

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

TaxProf, The IRS Scandal, Day 428.  It features  from the Wall Street Journal U.S. Judge Orders IRS to Explain How it Lost Lerner’s Emails:

A federal judge on Thursday ordered the Internal Revenue Service to explain how it lost two years’ worth of a former official’s emails, and tapped a magistrate judge to find out whether the documents can be obtained from other sources.

At a hearing in a conservative group’s lawsuit, U.S. District Judge Emmet Sullivan gave the IRS until Aug. 10 to provide a sworn declaration explaining how the email loss occurred. The IRS previously has said that the emails were lost because the top agency official’s computer crashed in 2011, and backup tapes were routinely reused after six months.

These practices violated federal recordkeeping procedures and, likely, federal law.  In spite of Ms. Lerner’s evident concern about the possibility of  her emails being found, Commissioner Koskinen says it’s silly to think anything more suspicious than a remarkable rash of hard-drive failures is to blame.

 

A new study by the Mercatus Institute says state taxes matter.  A summary says “The study finds that higher state taxes correlate with lower economic performance, even when controlling for various factors.”  It says that higher taxes lower economic growth, affect migration patterns, and reduce business startups. (hat tip: Maria Koklanaris, State Tax Notes ($link‘))

 

Carl O’Donnell, How The $1 Billion Kennedy Family Fortune Defies Death And Taxes.  Most politicians who vote for higher taxes do so assuming they won’t have to pay them. (via the TaxProf)

 

Kyle Pomerleau, Bill to be Introduced that Seeks to Reduce EITC Payment Error (Tax Policy Blog).  Unfortunately, fraud and error are baked into this cake.  You might as well try to take the chocolate out of toll house cookies.

 

20140513-1Jim Maule continues his Tax Myth series with Tips Aren’t Taxed Because They Are Gifts.  “Most people who collect tips are paid very little, rely on the tips to make a living, and are unhappy to learn that tips are included in gross income.”

Jason Dinesen, Glossary of Tax Terms: Head of Household   

It’s Friday, it’s Buzz Day at Robert D. Flach’s place.

Keith Fogg, Revoking the Release of the Federal Tax Lien and Appointing a Receiver (Procedurally Taxing)

 

TaxGrrrl, Who Should Pay For Schools? Answer Remains Unclear As Cigarette Tax Boost On Hold   Smoke ‘em if you got ‘em.  For the children!

Renu Zaretsky,  Games, Spins, Ignorance and Patience.  Today’s TaxVox headline roundup covers, among other things,  Highway Trust Fund games, corporate inversions.

Steve Warnhoff, House Poised to Throw $276 Billion “Bonus” at Businesses.  (Tax Justice Blog).  He’d rather throw it at the government.

Kay Bell, LeBron ‘King’ James’ return to Cleveland could be a win-win for fans and the so-called Win Tax

 

20140711-2

 

A new Cavalcade of Risk is up!  R.J. Weiss hosts this edition of the blog world’s venerable roundup of insurance and risk management posts, including Hank Stern on Kidnap & Ransom Insurance.

I’ll bet he does.  Beanie Babies creator defends sentence of probation, no prison time, for tax evasion (Brandon Sun)

News from the Profession.  Just How Many CPA Roommates Can You Fit In a Single Apartment? (Leona May, Going Concern)

 

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

Monday, July 7th, 2014 by Joe Kristan

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

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

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

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

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

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

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

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

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

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

 

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

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

 

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

 

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

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

 

 

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

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

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

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

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

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

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

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

 

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

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

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

 

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

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

 

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

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

 

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

Tuesday, July 1st, 2014 by Joe Kristan

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

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

 

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

IRS total 20140701 cato

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

IRS budget cato 20140701

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

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

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

 

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

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

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

 

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

Under the new policy:

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

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

(Hat tip: Kristy Maitre).

 

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

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

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

 

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

Robert D. Flach starts out July with a Buzz!

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

 

 

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

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

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

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

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

 

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

TaxProf, The IRS Scandal, Day 418

 

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

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

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

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

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

Oh, that’s illegal?

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

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

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

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

 

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Tax Roundup, 6/26/14: Misdirected e-mail edition. And: 15 years for tax fairy medium Daugerdas.

Thursday, June 26th, 2014 by Joe Kristan
Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

The IRS scandal finally found a way to get the Des Moines Register’s attention.  Lois Lerner of IRS sought audit of Grassley, emails say:

The emails show Lerner mistakenly received an invitation to an event that was meant to go to Grassley, a Republican.

The event organizer apparently offered to pay for Grassley’s wife to attend the event.

Instead of forwarding the invitation to Grassley’s office, Lerner emailed another IRS official to suggest referring the matter for an audit, saying it might be inappropriate for the group to pay for his wife.

“Perhaps we should refer to exam?” Lerner wrote.

It was unclear from the emails whether Lerner was suggesting that Grassley or the group be audited — or both.

Grassley-090507-18363- 0032A reader who relies on the Des Moines Register for news might be puzzled over who Lois Lerner is.  A search of the word “Lerner” on the Register’s website only uncovers two other stories related to her role in the scandal: “Steve King calls for abolishing the IRS on Tax Day” (4/15/14) and “Critics: Progress scant after IRS scandal” (3/27/13).  It appears that today’s article would have been the first time Register readers would have learned anything about the mysterious mass deletion of emails relating to the Tea Party scandal.  A devoted Register fan might have been puzzled as to why this seemingly important news hadn’t been mentioned before.

I think there’s a hint down in the article (my emphasis):

Lerner headed the IRS division that processes applications for tax-exempt status. The IRS has acknowledged that agents improperly scrutinized applications by tea party and other conservative groups before the 2010 and 2012 elections. Documents show that some liberal groups were singled out, too.

Nobody buys that last sentence.  While a few “liberal” words were on the list of buzzwords to identify political organizations, no liberal outfits had their donor lists illegally released, or had their exemption applications held up indefinitely with demands for ridiculous detail of the organizations — including the content of their prayers.   Here are the stats:

targetingstats

Now maybe the Register will begin to get its readers up to speed.  If not, the Tax Update is available to Register subscribers at no extra charge!

Meanwhile, the IRS will have to explain to senior Senate taxwriter Grassley just why it needs more resources.  That may be slightly awkward.

TaxProf, The IRS Scandal, Day 413

Russ Fox, Lerner Appears to Have Targeted Iowa Senator Grassley  “Of course, President Obama said earlier this year just that–that there is not even a smidgen of corruption…”

 

tax fairyThe Tax Fairy fails a true believer.  Paul Daugerdas, the Jenkens & Gilchrist attorney who generated over $90 million in fees selling tax shelters, was sentenced to 15 years in federal prison yesterday for his troubles.  Bloomberg reports:

The tax shelters at the center of the case were sold from 1994 to 2004 to almost 1,000 people, creating $7 billion in fraudulent tax deductions and more than $1 billion in phony losses for customers, the U.S. said.

It appears unlikely that Mr. Daugerdas will come out ahead on his tax shelter efforts:

Daugerdas was ordered to forfeit $164.7 million and help pay restitution, with other conspirators, of $371 million. 

While he wasn’t the only Tax Fairy guide during the great turn-of-the-century Tax Shelter frenzy, he was perhaps the most prominent, inventing tax shelters with names like HOMER and COBRA.  The shelters found eager customers among businesses and individuals looking for the Tax Fairy, the legendary sprite believers insist will wave her magic wand and make taxes go away, for a very reasonable fee.    Now Jenkens & Gilchrist is dead, the believers are out their money, plus penalties, and there still is no Tax Fairy.

The Tax Analysts story on the sentencing ($link) had one item that I hadn’t seen before:  “The jurors said that Daugerdas was convicted solely on counts for which the government presented evidence of backdating, when Daugerdas agreed to prepare false tax returns that reported as 2001 losses transactions that occurred in 2002, the defense memo says.”  Way back in 2009, I said this could be his biggest problem at trial: Is backdating the fatal flaw for Daugerdas?:

If the government can prove backdating, it might be much easier for a juror to vote for conviction. Tax is hard, and a good defense lawyer has a lot of opportunities to give jurors a reasonable doubt in a case involving short sales, derivatives and currency options. But anybody can understand backdating.

This sort of thing separates “aggressive tax planning” from plain fraud.

Related: 

Department of Justice Press Release

Jack Townsend, Daugerdas Gets 15 Year Sentence

TaxGrrrl, Daugerdas Sentenced To Prison, Ending Biggest Tax Prosecution Ever

This one is probably coincidental, but Jason Dinesen, 138 Years Ago Today: Custer’s Last Stand

 

IMG_0216Robert D. Flach, A SUMMER TAX TIP FOR SCHEDULE C FILERS

William Perez, Single Filing Status.  “A person is considered unmarried for tax related purposes if on the last day of the year the person is not married to any other person or is legally separated from a spouse under a divorce or separate maintenance decree.”

Kay Bell, Kids, summer camp tax breaks and our personal X Games site

Peter Reilly, Facade Easement Valuation Cannot Be Percentage Rule Of Thumb 

Cara Griffith, Ohio Enacts Legislation Allowing Creation of Captive Insurance Companies (Tax Analysts Blog).

The answer is clearly more tax credits.  The New Jersey Casino That Tax Credits Could Not Save  (Adam Michel, Tyler Dennis, Joseph Henchman, Tax Policy Blog)

Renu Zaretsky, Expanding a Credit, Simplifying a Break, and Cutting Off a Nose to Spite a Face.  Today’s TaxVox headline roundup covers  IRS funding, student debt, and same-sex marriage complications.

 

 

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Tax Roundup 6/24/14: Koskinen’s political gifts. And: in case you didn’t think Hitler was bad already…

Tuesday, June 24th, 2014 by Joe Kristan

 

This Koskinen isn't the IRS commissioner

This Koskinen isn’t the IRS commissioner

Just the man to build bridges to Republicans who fund the IRS.  From Bryan Preston, IRS Chief Koskinen Has Donated Big to Democrats Over the Years:

According to the Washington Free Beacon, Koskinen has donated about $100,000 to Democrat candidates and committees since his first donation in 1979. His donor recipients include Gary Hart, the Democratic National Committee, the Democratic nominee in each presidential campaign since 1980 (which would even include Walter Mondale, who stood no chance of beating President Ronald Reagan in 1984), the Democratic Congressional Campaign Committee, and Hillary Clinton’s and Barack Obama’s campaigns. He most recently donated $2,500 to Sen. Mark Warner (D-VA) in 2013.

He has given no money to Republicans.

It’s hard to believe how tone-deaf he is to the Tea Party scandal, but this helps explain it.  (Via Instapundit)

 

Jeremy Scott, Lost Lerner E-mails Latest Example of IRS Death Wish (Tax Analysts Blog), my emphasis:

In contrast to their GOP colleagues, Democrats rushed to Koskinen’s defense. That is, perhaps, understandable, even though much of what the IRS has done during this scandal is indefensible. Democrats probably want to defend their president’s pick to head the IRS, and maybe they want to try to change the narrative heading into a potentially disastrous midterm election. But the reality is that the IRS isn’t doing them any favors. There’s only so much incompetence and disingenuous behavior that can be run through a political spin machine. The Democrats’ reflexive defense of Lerner (whose conduct can’t be excused) and their apparent willingness to accept any explanation from Koskinen (who didn’t even try to adequately explain why he hid information on the lost e-mails from February until late June) is baffling. Democrats weakly attempted to paint the GOP as on a witch hunt for a conspiracy, as though the IRS’s mismanagement and appearance of bias weren’t enough to justify congressional inquiry.

The IRS isn’t doing Democratic congresscritters any favors, nor are they doing any for the IRS.  They are just making the IRS look more like a partisan agency, which could cripple tax administration for years.

 

TaxProf, The IRS Scandal, Day 411

 

20140507-1Kay Bell, Save space and trees: Digitize your tax records.  That way if you lose them, the IRS will surely understand.

Russ Fox has some valuable information for online gamblers trying to stay FBAR compliant: Online Gambling Addresses (Updated for 2014)

Robert D. Flach has a Tuesday Buzz for you!

Tony Nitti, How State Taxes Could Play A Role In Carmelo Anthony’s Landing Spot.  Nah, state taxes don’t matter…

Peter Reilly, Step Kids Remain Step Kids After Divorce.  So you may still have a dependent, if not a spouse.

Jack Townsend, Comments by IRS Personnel on New Streamlined and OVDP Procedures.  “The new procedures were designed to ‘encourage folks who are considering quiet disclosures to come in with their hands up’ and avoid taxpayers coming into OVDP with the intention to opt out.”

Annette Nellen, Bitcoin Taxation – Clarity and Mystery, “If you are a tax practitioner and don’t think you need to deal with it, I’d be surprised if none of your clients uses bitcoin.”

William Perez, Backup Withholding.

 

Tyler Dennis, The Clinton’s Estate Tax Planning Demonstrates the Arcane Nature of the Estate Tax (Tax Policy Blog):

When the Clintons created the trust in 2011, their property’s assessed value was $1.8 million.  Without a residential trust, the future appreciation between 2011 and 2021 would count against the gift tax. If the property appreciated at a 4% annual rate and reached $2.6 million by 2021, that’s the amount that would count. With the residential trust, though, the Clintons were able to “lock in” the value of the home at its 2011 value of $1.8 million without actually relinquishing the property to the beneficiary of the trust.

Most supporters of higher taxes assume that they won’t have to pay them.

 

Renu Zaretsky, Disbelief, Devolution, and Death Benefits.  The TaxVox headline roundup talks about the Koskinen appearance before the Issa committee, and about how a surprising proportion of new life insurance is taken out on employees.

Andrew Lundeen, The Average U.S. Worker Pays over $16,000 in Income and Payroll Taxes (Tax Policy Blog):

The tax burden is a combination of income taxes at the federal, state, and local levels as well as the employee and the employer payroll taxes. Of the 31.3 percent tax burden, 15.4 percent is due to income taxes and 15.9 percent is due to payroll taxes, over half of which is paid by the employer on the employee’s behalf. (Workers pay the cost of the employer-side payroll taxes through lower wages.) 

Heck of a deal.

 

Stephanie Hoffer, Kuretski, the Tax Court, and the Administrative Procedure Act (Procedurally Taxing).

 

Another great tax planning idea down the tubes.  Kidnapping Prostitutes Is Not a Good Way to Claim Dependents for Tax Purposes (Greg Kyte, Going Concern)

If you didn’t think he was a bad guy already…  Adolf Hitler: Billionaire tax-dodger?

 

 

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Tax Roundup, 6/17/14: Hiring witnesses to your tax crimes. And: some folks just aren’t into Valentines Day.

Tuesday, June 17th, 2014 by Joe Kristan

Programming note:  The Tax Update will be on the road the rest of this week, so this is probably the last tax roundup this week.  Unless I change my mind.

 

Via Wikipedia

Via Wikipedia

Sure, the more witnesses to my crime the merrier.  What could go wrong?  Every time I see a case in which an employer gets in trouble for evading payroll taxes by paying employees in cash, I have to wonder how much they thought things through.  Every employee becomes a potential informant, and it’s hard to imaging not having either a disgruntled employee turn you in or a careless one reveal the secret in the wrong place.

The Department of Justice yesterday announced a guilty plea yesterday:

   Sonny Pilcher of Casper, Wyoming, pleaded guilty to tax fraud today in the U.S. District Court for the District of Wyoming, the Justice Department and Internal Revenue Service (IRS) announced.  The sentencing hearing was set for Oct. 28, 2014 before U.S District Judge Alan B. Johnson.

 According to the charging document, Pilcher attempted to obstruct and impede the IRS.  Pilcher did this by claiming a false bad debt expense of $258,000 on his 2008 Form 1040 tax return, and by paying his employees in cash to evade paying employment taxes.  Pilcher faces a statutory maximum sentence of 36 months in prison, a $250,000 fine and may be ordered to pay restitution to the IRS. 

The inclusion of the “bad debt” in the charge is interesting.  You frequently see cases where people claim a non-business bad debt — which is a capital loss — as an ordinary fully-deductible business bad debt.  While you might see a civil penalty in such a case, I have never seen that called a criminal matter.  This presumably was something more serious than an argument over what kind of bad debt it was.

 

20120801-2If you have a full-time job, you probably aren’t a “real estate professional” who can deduct rental losses.  And if that’s so, don’t embarrass yourself in front of a Tax Court judge.  A taxpayer from California made that mistake in a Tax Court case issued yesterday.

Real estate rental losses are normally passive, meaning that they only are deductible to the extent of passive income (there is a special allowance for taxpayers with adjusted gross income under $150,000).  If you are a “real estate professional,” the losses are not automatically passive, but you have to meet two difficult tests to be one:

– You have to work at least 750 hours in the year in a real estate trade or business which you own, and

– your real estate business has to consume more of your time than anything else you do.

If you have a full-time day job, it is nearly impossible to rise to that standard (unless you have a pretty undemanding day job).  That didn’t keep the intrepid Californian who had three rental properties — all single-family houses — from giving it a try, as the Tax Court judge explains (my emphasis):

Even if we assume that petitioner worked 1,760 hours and 1,752 hours in 2009 and 2010, respectively, for Northrop Grumman, we do not accept his activity log coupled with this testimony relating to the rental activities as reliable or credible. A review of the activity log and testimony relating to the rental activities leads us to the conclusion the petitioner did not spend more hours at the real estate activity than at his full-time employment at Northrop Grumman. According to petitioner’s logs he spent almost every spare hour in those years working on the rental properties, including 10 hours on July 4 of each year, 12 and 10 hours on February 14, 2009 and 2010, respectively, and 9 and 10 hours, respectively, on December 25 of each year.

Hey, not everybody is a romantic.  And I’ll keep Christmas in my own way, thank you very much!

Although he managed three rental properties in each year, throughout 2009 alone petitioner’s records reflect that he repaired or worked on the sprinkler systems on any of the given properties on 64 separate occasions, and throughout 2010 he worked on sprinkler systems on 20 separate occasions. In addition, on March 16 and 17, 2009, the records reflect eight hours to prepare and deliver an eviction notice to be filed in court. Coincidentally, on March 15 and 16 of the next year, petitioner’s records reflect that he performed the very same activity for the same exact amount of time. A review of petitioner’s activity logs leads to the conclusion that the logs are inaccurate and exaggerated.

Maybe he just wasn’t very good at sprinkler systems?  Whatever you might think of Tax Court judges, you can be sure that they didn’t get their jobs by being gullible.

Cite: Bogner, T.C. Summ. Op. 2014-53.

 

 

20130114-1Kristy Maitre, Treasury Issues Changes to Circular 230 (Treasury Decision 9668):

Many individuals currently use a Circular 230 disclaimer at the conclusion of every e-mail or other writing.  Often the disclaimers are inserted without regard to whether the disclaimer is necessary or appropriate.

Treasury said they anticipate that the removal of the requirement will eliminate the use of a Circular 230 disclaimer in e-mail and other writings because Section 10.37 rules on written opinions don’t include the disclosure provisions in the covered opinion rules.

Good news.  I always thought the routine disclaimers were futile and I never used them.  They seemed like the email equivalent of a rabbit’s foot — it might make you feel better, but it still was mere superstition.  Yet I bet that we’ll still be getting emails from our fellow practitioners with the Circular 230 disclaimer years from now.

Russ Fox, Soon: No More Circular 230 Notices

 

Jason Dinesen, Iowa Taxes: Filing Separately and Allocating Dependents.  “In general, a typical married couple can allocate the dependency exemptions in whatever manner they choose.”

William Perez, Child and Dependent Care Tax Credit

Peter Reilly, Paul Reddam’s KPMG Tax Shelter Stunk In More Ways Than One 

TaxGrrrl, World Cup Mania: Figuring Out FIFA, Soccer & Tax.  So there’s a soccer tournament, I hear.

Robert D. Flach starts Tuesday with a Buzz!

 

20140513-1Martin Sullivan, Big Deal by Low-Tax Medtronic Has Even Bigger Implications (Tax Analysts Blog).  “The main benefit to Medtronic after the inversion will be that the billions of profits it generates outside the United States each year can now be deployed to pay dividends and to buy other U.S. companies without paying U.S. tax.”   Sounds like good corporate stewardship to me.

William McBride, Medtronic Embarks on Self-help Tax Reform (Tax Policy Blog).  “The high U.S. corporate tax rate is causing serious economic distortions, chasing away businesses, investment and jobs. The only way to deal with it effectively is to bring the corporate tax rate down to competitive levels, which is the path chosen by virtually every other country.”

 

Renu Zaretsky,  Tax Freedom, Tax Avoidance.  The TaxVox headline roundup covers the Medtronic inversion and internet taxes.

TaxProf, The IRS Scandal, Day 404

Kay Bell, IRS says possible Tea Party emails lost in computer crash. “Conspiracy or clowns?”

 

News from the Profession.  Here’s Your Authoritative Guide for Likening Game of Thrones to Public Accounting (Going Concern)

 

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Tax Roundup, 6/10/14: When doing a like-kind exchange, keep the kids away. And: Iowa biofuel credit claw-backs?

Tuesday, June 10th, 2014 by Joe Kristan

20120511-2Keep your friends close, and your relatives far away.  The tax law often assumes that any financial transaction between relatives is untrustworthy.  Many transactions that work just fine with a stranger become tax disasters when family is involved.  A New York man got a hard education in this yesterday in Tax Court.

The man was selling property at a $1.5 million gain, and he wanted to use the Section 1031 “like-kind exchange” rules to defer the gain by using the proceeds to acquire new property.  The tax regulations let you do so under the right facts as long as you follow rules on escrowing funds or using a “qualified intermediary,” and you meet deadlines for identifying and closing on the new “replacement property.”

For example (a very simplified example), if you sell an investment property and the proceeds are held by a “qualified intermediary,” and you identify the property within 30 days and close on it within 180 days, using the funds held by the intermediary in the purchase, the gain on the original property is transferred to the new property, to be only recognized if and when that property is sold.  But the IRS insists you go by the book.

These deals only work if you use a “qualified” intermediary.  The taxpayer in this case used his son.  Game over, said the Tax Court:

Petitioner acknowledges that there was no direct exchange of like-kind property; property A was sold and property B was purchased with proceeds from the sale of property A. Petitioner also acknowledges that the intermediary used in the transaction was his son. However, petitioner asserts that he meets the requirements of the regulation’s safe harbor because (1) his son is an attorney; (2) the funds from property A were held in an attorney trust account; and (3) the real estate documents refer to the transaction as a section 1031 exchange. We do not accept petitioner’s argument. The regulation is explicit: A lineal descendant is a disqualified person, and the regulation makes no exception based on his/her profession. Consequently, petitioner’s disposition of property A and subsequent acquisition of property B is not a deferred exchange within the purview of section 1031, and he must recognize income on the gain from the sale of property A.

There are a number of reputable firms that specialize in serving as intermediaries and escrow agents in like-kind exchanges.   They can make a potentially complicated deal go much more smoothly.  And they are probably not your son. Yes, they charge for their services, but when a $1,512,000 taxable gain is at stake, as it was here, it can be a real bargain.

Cite: Blangiardo, T.C. Memo 2014-110.

 

In other legal news, the Supreme Court declined to hear Wells-Fargo’s appeal of a 2013 decision striking down a lease tax shelter designed to generate a $423 million capital loss.

 

20120906-1Iowa wants some tax credits back.  Agweek reports:

 The Iowa Department of Revenue has warned at least one investor who owns shares in Energae LP of Clear Lake, Iowa, that tax credits for the company’s green energy production couldn’t be verified for 2012, and the credits must be paid back.

In a letter dated May 20, 2014, David Keenan, a revenue examiner for the compliance division of the Iowa Department of Revenue, told an unidentified taxpayer from Iowa to pay back $1,131.73. Victoria Daniels, public information officer for the agency, declined to comment on what might have disqualified the credits, or whether the denial affects only 2012. She also declined to comment on whether the department’s decision was focused on just one audited person or whether it will be extended to others who used the credits.

The Department has clawed back credits in cases where ethanol producers have failed or otherwise not met the requirements for the credits.

The article shows that the state subsidies encourage careless investing.  An attorney in a lawsuit on the matter is quoted:

“They offered a dollar-for-dollar tax credit, so people thought, ‘How can you lose?’ They may find out. I hope things come to a head soon because it seems to me there’s a lot of confusion and misinformation in the investing public. I think there needs to be some clarity.”

While this is only one side of the story, it’s easy to see where an investor might overlook due diligence when a “dollar-for-dollar tax credit” makes the deal seem like a free play.

 

The Onion is a satirical publication, but it’s hard to tell sometimes:   States Now Offering Millions In Tax Breaks To Any Person Who Says ‘High-Tech Jobs’

ST. PAUL, MN—In an effort to spur their local economies, many state governments are now offering tens of millions of dollars in tax breaks to any person who simply says the words “high-tech jobs,” according to a survey by the Pew Research Center published Monday. “We must do what it takes to draw potential innovators to the great state of Minnesota, which means granting lucrative tax credits and loan guarantees to any individual—whoever they may be—who utters the phrase ‘high-tech jobs’ in any context whatsoever,” said Minnesota governor Mark Dayton, whose office has reportedly joined numerous other states in doling out tax exclusions, low-interest municipal loans, full income tax exemption for 10 years or more, and other valuable incentives to thousands of people who have spoken such phrases as “biotech,” “innovation center,” “high-skilled workers,” and “tomorrow’s economy.”

If the story were written about Iowa, the magic words would include “renewables,” “wind-energy,” and “fertilizer.”

 

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

TaxProf, The IRS Scandal, Day 397.  The stories today mostly cover a huge illegal transfer of confidential 501(c)(4) taxpayer data to the FBI.  The House committee investigating the Tea Party scandal revealed  communications between Lois Lerner and FBI representatives arranging the illegal transfer.  This is a big deal, making it clear that the activities involving Ms. Lerner weren’t accidental, and were far more sinister than the “phony scandal” crowd would have you believe.

Russ Fox, Perhaps This Is Why Lois Lerner Is Taking the Fifth.  “Based on what I just read, if anyone is expecting the IRS’s budget to increase this year, well, that has as much chance as it snowing here in Las Vegas tomorrow. (The high is expected to reach just 105 F.)”

Leslie Book, Exploding Packages and IRS Disclosure of Confidential Tax Return Information (Procedurally Taxing)

 

Robert D. Flach brings your fresh Tuesday Buzz!

Kay Bell, Lowest U.S. property tax bill? Probably $2 in coastal Georgia

 

Jack Townsend, Court Holds Online Poker Accounts are FBAR Reportable:

The two issues were:  (1) whether the accounts with the three entities were “bank, securities or other financial account[s]” that must be reported on an FBAR; and (2) whether each of the three accounts was in a foreign country  The Court answered both questions yes.

A potentially expensive result for a lot of folks, if it holds up.

 

Gerald Prante, Deductions for Executive Pay Is Not a Subsidy. (Tax Policy Blog)  “Essentially, IPS and ATF are starting from a baseline that assumes all executive pay should be capped at $1 million and any deviation from this is a subsidy.”

 

taxanalystslogoJeremy Scott, Whistleblower Highlights Undue Influence at the IRS (Tax Analysts Blog)  “He claimed that granting credits for the use of black liquor was opposed by most of chief counsel, but that a few senior managers changed the policy, allowing paper manufacturers to take advantage of a true tax loophole.”

But we are supposed to trust them to regulate preparers without fear or favor.

 

Tax Justice Blog, State News Quick Hits: Keeping Score? Real Tax Reform 0. Tax Cuts 2

Martin A. Sullivan, How Not to Tax the Rich (Tax Analysts Blog).  “The liberal case for corporate taxation has been severely weakened by capital mobility.”

Renu Zaretsky, Repatriation, Havens, and Tax Reform Abroad.  The TaxVox daily headline roundup talks about extenders, tax havens and the costs of repatriation tax holidays.

 

Peter Reilly, Confidence Games – How The Most Prestigious Accounting Firms Raided The Treasury: 

 Now thanks to Tanina Rostain and Milton C. Regan, Jr. you can read all about it in “Confidence Games – Lawyers, Accountants, and the Tax Shelter Industry”. It is a sad story with no heroes and only one villain, who is colorful enough to be engaging – Paul Dauugerdas, who is still awaiting sentencing on his second conviction (He got a do-over on his trial due to juror misconduct).  The book is a must read for all tax professionals and others may enjoy it too.  

Sounds like a buy to me.

 

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