Posts Tagged ‘Roberton Williams’

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

Thursday, August 21st, 2014 by Joe Kristan

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

 

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

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

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

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

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

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

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

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

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

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

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

Cite: Wade, T.C. Memo. 2014-169

Related:

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

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

Material participation basics.

 

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

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

 

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

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

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

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

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

TaxProf, The IRS Scandal, Day 469

 

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

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

 

Quotable:

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

Robert L. Williams in Tax Analysts ($link)

 

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Tax Roundup, 7/3/2014: Interested generosity edition. And: cheap smokes!

Thursday, July 3rd, 2014 by Joe Kristan

20140703-2If you wouldn’t have gotten the cash if you had kept your clothes on, it may not be a gift.  A “professional adult entertainer” was convicted on tax charges in Sioux Falls last week.  She apparently treated cash thrust upon her in performance as nontaxable gifts, according to the Associated Press writeup. Gifts are good to receive for many reasons, not least because they are not taxable income.  Of course the tax law is pretty strict about what it takes to be a gift, or we would all be working for nontaxable holiday bonuses.   The jury instructions in the case explain what it takes for something to be a gift:

The practical test of whether income is a gift is whether it was received gratuitously and in exchange for nothing.  Where the person transferring the money did not act from any sense of generosity, but rather to secure goods, services, or some other such benefit for himself or for another, there is no gift.

I wonder if it ever struck the professional adult entertainer that while men eagerly stuffed dollars into her garter on stage, they seldom stuffed cash into the elastic of her sweats at the local Hy-Vee.  It must have occurred to her that there was some connection with what she was wearing, or not, on stage and the generosity of her admirers.  If it didn’t before, it probably has now.  Sentencing is set for September.

Liz Emmanuel, Richard Borean, State Cigarette Tax Rates in 2014. (Tax Policy Blog):

20140703-1   Life is good for Missouri cigarette dealers on the Iowa border.   20120531-2

Robert D. Flach brings your Friday Buzz on Thursday in honor of Independence Day.

Jana Luttenegger, New Simplified Application Form for Small Nonprofits and UPDATE: Form 1023 EZ Released for Small Nonprofits (Davis Brown Tax Law Blog)

Tax Trials, IRS Offers New Streamlined Procedures & Reduced Penalties for Foreign Accounts

Trish McIntire, Why E-file a Tax Return…

TaxGrrrl, Money Literally Flying At World Cup: Is It A Clever Attempt At Tax Avoidance?  Strange soccer doings in Ghana.

Jim Maule gets his Tax Myth series underway with The IRS Enacted the Internal Revenue Code and If It’s Not Cash, It’s Not Income.  It always bugs me when congresscritters talk about the “IRS Code.”  It strikes me as sneaky blame-shifting by the perpetrators.

Jason Dinesen, From the Archives: Patient-Centered Outcomes Trust Fund Fee – An Exercise in Bureaucratic Futility

Kay Bell, Fitness enthusiasts exercised over D.C.’s new yoga sales tax

 

 

Cara Griffith, Censorship in New Hampshire? (Tax Analysts Blog):

The DRA can be opposed to the website all it wants. That does not give it the right to monitor it or demand modifications to its content. Yet the DRA is going one step further. It is attempting not only to prohibit the use and publication of information about its general policies, but to impose criminal penalties on the publication of truthful information about a matter of public concern.

It sounds like The New Hampshire Department of Revenue Administration badly needs some exemplary firings.

 

20130912-1Lyman Stone, Happy July 2! 14 States Exempt Flags from Their Sales Taxes (Tax Policy Blog).

Roberton Williams, President Obama’s FY 2015 Budget (TaxVox). “Most of the president’s tax proposals have appeared in previous budgets, but he added four new ones this year. TPC delves into those additions in a separate analysis that accompanies the distributional estimates.” None of them will be enacted during the remainder of the Obama presidency.

 

That would be “zero.”  41 Million July 4th Travelers Would Have a Nicer Trip if Corporations Paid Their Fair Share (Steve Wamhoff, Tax Justice Blog).  Why zero? Scott Sumner explains that “There should be no corporate income taxes, which represent triple taxation of wage income.”

TaxProf, The IRS Scandal, Day 420

Has the NHL lost its focus?  Hockey aiming to tighten tax loophole

Have a great Independence Day!

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Tax Roundup, 6/23/14: Making no friends edition.

Monday, June 23rd, 2014 by Joe Kristan
Rose Mary Woods checks her e-mail in the Nixon administration.

Rose Mary Woods checks her e-mail in the Nixon administration.

New IRS Commissioner Koskinen isn’t exactly making new friends for the agency in Congress.  His testimony Friday on the implausible rash of hard-drive failures that hit the IRS just as Congress began looking at Tea Party harassment amounted to an insistence that Congress take the IRS at its word, and give it more money.  From Tax Analysts ($link):

     “I don’t think an apology is owed,” Koskinen answered. “Not a single e-mail has been lost since the start of this investigation.”

Regarding the six other IRS employees who have experienced computer failures since the investigation began, Koskinen said technology experts told him that 3 to 5 percent of hard drives can be expected to fail during their warrantied lifetimes. 

It just happened to all the hard drives of the people most involved in beating up on the Tea Party.

This Koskinen isn't the IRS commissioner

This Koskinen isn’t the IRS commissioner

Commissioner Koskinen (correctly) points out that the IRS is underfunded for all of the chores (unwisely) given it by Congress.  With Congressional Republicans understandably reluctant to fund an agency it percieves, with justification, as its opposition, Mr. Koskinen ought to be going out of his way to assure them that he is making sure to eliminate political bias in the agency and to fully cooperate with the investigation.  He is doing nothing of the sort, and he may have already irretreivably lost his opportunity to convince GOP appropriators that he can be trusted.

IRS stonewalling isn’t a new thing.  As the many lawsuits filed by Tax Analysts to get the IRS to release its internal documents show, covering up is a way of life in the agency.  Christopher Bergin, in The Coverup Is Usually Worse Than the Crime (Tax Analysts Blog), gives some background:

Maybe it’s just sloppy record-keeping, which would be bad enough. Most of the government’s business is now conducted digitally, and those records need to be properly handled. Or is it worse? Is the IRS deliberately keeping things from the public? Excuse my cynicism, but the IRS’s penchant for secrecy is what led Tax Analysts, using the new Freedom of Information Act, to sue the agency in the 1970s to force it to release private letter rulings. There have been several subsequent lawsuits to pry records that should have been public out of the agency’s hands.

The idea that IRS emails are public records requiring preservation is nothing new, and was well-established at the time Ms. Lerner was busy.  It’s either negligent and outrageous incompetence or criminal destruction of public records, and to say that the IRS owes no apologies is to say that at least one of these unpleasant choices is just fine with him.

 

 

20140623-1TaxProf, The IRS Scandal, Day 410

Megan McArdle, An IRS Conspiracy? Not Likely … Yet.  “To be clear, of course six tragic hard drive failures in a relatively short period of time would make it very hard to believe in a benign explanation.”

Brian Gongol, Backing up your email isn’t hard to do.  “Someone should tell the IRS, which is making excuses for losing administrative emails — excuses that wouldn’t pass muster in an IRS audit

Russ Fox, We Don’t Need No Stinkin’ Backups

 

TaxGrrrl, Raking It In At Summer Yard Sales: Does Uncle Sam Get A Cut?   

Roger McEowen, U.S. Supreme Court Says Inherited IRA’s Not Exempt in Bankruptcy

Jason Dinesen, Bedside Manner is Important for Tax Pros, Too

Peter Reilly, Does Sixth Circuit ABC Decision Give Tenants Incentive To Buy?  “ABC Beverage Corporation is entitled to deduct the premium portion of the price it paid for the real estate as a cost of terminating the lease.”

 

Keith Fogg, D.C. Circuit Upholds the Constitutionality of Presidential Removal Powers of Tax Court Judges (Procedurally Taxing)

I think it’s only half-baked.  Stick a Fork in It: Is the Corporate Income Tax Done? (Joseph Thorndike, Tax Analysts Blog)

It’s not just a problem in Florida.  Seven indicted in Minnesota identity theft ring (TwinCities.com).

 

Wind turbineQuad City Times, Tax credits boost solar power in Iowa

David Henderson, Low-Carbon Alternatives: Solar and Wind Suck (Econlog).  “[A]ssuming reductions in carbon emissions are valued at $50 per metric ton and the price of natural gas is $16 per million Btu or less–nuclear, hydro, and natural gas combined cycle have far more net benefits than either wind or solar.”

 

Roberton Williams, U.S. Taxes Have Changed A Lot Since 1929 (TaxVox)

Steve Wamhoff,  Good and Bad Proposals to Address the Highway Trust Fund Shortfall (Tax Justice Blog).  The TJB has started putting individual author names on their posts, so I’ll do so too.

David Brunori, Tax Policy Is Not the Way to Deal With an Ass (Tax Analsyts Blog).  Not every problem is a tax problem.

Going Concern, IRS Can’t Afford to Upgrade to Windows 7 But Can Afford to Pay Microsoft to Use XP

 

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Tax Roundup, 6/13/14: Extenders advance, estimates loom.

Friday, June 13th, 2014 by Joe Kristan

Remember, second-quarter estimates are due Monday.  If you are a business paying through EFTPS with a payment due Monday, you need to set your payment up today to have it go through on time.

Kay Bell, Second estimated tax payment of 2014 is due June 16

 

S imageS imageS-SidewalkExtenders for Sec. 179, S corporations advance in House.  

The House of Representatives voted yesterday to make permanent $500,000 Section 179 expensing, a five-year built-in gain tax recognition period for S corporations, and the basis adjustment for S corporation contributions of appreciated property.

The President has said he will veto these permanent items, so this is more symbolic.  The Democrats want to keep pretending these are temporary measures to avoid counting their cost in long-term budget computations.   It is interesting, though, that it appears that these items are expected to be extended indefinitely, whether a year at a time or honestly.  They were initially passed in an anti-recession “temporary” measure.  It just shows that there are few things as permanent as a temporary tax break.

Still, until the Senate and the House agree on a bill, none of these provisions are in effect this year, so don’t spend your savings from these provisions just yet.

 

Jason Dinesen, HRAs and the Affordable Care Act:

An insurance agent recently asked me the following question: can a small business that currently offers insurance to its employees drop the insurance and instead form a Health Reimbursement Arrangement (HRA, sometimes called a “Section 105 plan”) to reimburse employees for medical expenses?

The short answer to the question is: NO.

This is an issue that came up a lot in our Farm and Urban Tax Schools last fall.

 

Jordan Yahiro, The Obamacare Cadillac Tax and its Mixed Bag of Consequences (Tax Policy Blog):

Roberton Williams, Good And Bad News About The ACA Penalty Tax (TaxVox). “So what’s the bad news? Of the 7 million people who will owe tax, CBO says more than 40 percent won’t pay.”  And of those who do pay, about 60 percent won’t qualify for subsidies.

billofrightsChristopher Bergin, Taxpayer Bill of Rights or Mission Statement? (Tax Analysts Blog):

Is the taxpayer bill of rights a “Bill of Rights”? I don’t think so. If it were, Congress would need to provide remedies. The best thing I can say is that the IRS’s statement this week may be a good start at articulating principles the IRS should plan to follow.

Exactly.  My clients have already received notices since it was issued that violate this “bill of rights” by assessing penalties without offering explanation or appeal — and which are erroneous.  If we could turn around and make IRS pay us penalties when they erroneously assess us, or otherwise violate our supposed rights, it might mean something.

Keith Fogg, The Taxpayer Rights the IRS Says We Have (Procedurally Taxing).  “I am ready to be pleasantly surprised by the results of IRS TBOR and see little downside in this administrative effort to set out its view of the rights and expectations citizens should have of their tax administrators.”

 

Joseph Thorndike, Congress Should Abolish All Tax Breaks for Higher Education (Tax Analysts Blog):

There are at least 12 tax preferences targeting higher education, Guzman notes. Many are complex in their own right. When combined, however, they became a hopeless nightmare of complexity.

And it’s probable that the colleges just hoover up the subsidies with higher tuitions.

 

Cara Griffith, Tax Analysts Files Suit to Demand Transparency in California (Tax Analysts Blog).  Sometimes the bureaucracy likes the dark best.

 

TaxGrrrl,  Seattle Area Biz Tacks ‘Living Wage Surcharge’ Onto Receipts In Response To $15/Hour Minimum Wage.  Price controls always fail, and minimum wages are price controls.

Anthony Kim, Curtis Dubay, FATCA Hurts Law-Abiding Americans Living Abroad.  Sometimes you have to sow chaos and despair on the innocent break a few eggs to score some cheap political points make an omelet.

Tax Justice Blog, Senate Democrats, Joined by Three Republicans, Come Up Short on Buffett Rule, Student Loan Bill.  Too bad, so sad.

 

20140613-1

Looking north on 6th Street.

The new Cavalcade of Risk is up!  This edition of the venerable roundup of insurance and risk-management posts comes from France, but is assembled from U.S.-made parts — like Hank Stern’s post on a Ballsy Insurance Carrier Trick.  Global warming is involved.

Peter Reilly, Will National Grid Try Dumping Its Electrons Into Boston Harbor? 

 

TaxProf, The IRS Scandal, Day 400

Robert D. Flach starts your weekend early with a Friday Buzz!

 

Going Concern, Listen to a Fake IRS Agent Try Telling Ex-Crazy Eddie CFO He’s About to Be Arrested.  It’s hard to scam a scammer.

 

 

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Tax Roundup, 4/9/14: Common K-1 problems. And: if the preparer doesn’t have a brain, give him a diploma!

Wednesday, April 9th, 2014 by Joe Kristan

S-SidewalkSo you read yesterday’s post and you’re still preparing your own return?  You’ve answered the questions you need to ask yourself before starting to put numbers from your S corporation/Partnership/Trust (collectively, “thing”) K-1 onto your 1040 schedules?  OK, if you are intrepid enough to be doing your own return here, you are mostly on your own.  Don’t shortcut it.  This is one chore where you really should read the instructions (S corporation, Partnership, Trust), rather than just opening the box and putting pieces together.

There’s no point in me trying to walk through the whole K-1 with you; that’s what the instructions are for.  I will point out a few items on the K-1 (or left out) that frequently cause errors and trigger questions.

On the partnership K-1 the ending capital account is probably not your “basis.” The capital account is frequently useless in measuring basis.  It might be the same as your basis if the “Tax basis” box is checked, but the only sure way to track your basis is to keep your own running basis schedule year-by-year.  S corporation shareholders can find their basis computation schedule here.

Don’t double-count your gains.  The “Unrecaptured Section 1250 gain” in Box 8c of your S corporation K-1  (9c of the partnership return) is a part of the “Net Section 1231 gain” (S corporation box 9, partnership box 10).  The total income is the Section 1231 gain, not the sum of the unrecaptured 1250 and 1231 amounts.  You use the “Unrecaptured 1250 gain” on your Schedule D worksheet to figure out how much of your Section 1231 gain is taxed at a 25% rate, rather than the normal 20% top capital gain rate.

Don’t double count “investment income.”  If you have interest, dividends or capital gains on your K-1, the partnerships is required to tell you how much of that is “investment income” with a code “A” in the “other information” box on the K-1.  You only need that number if you are computing an investment interest expense deduction on Form 4952.  You don’t add it as additional income on your return.

Beware the “net investment income” disclosure, code “Y” in the “other information” section.  The partnership and S corporation instructions for computing this came out late, and this number is likely to be wrong.  If you have to fill out Form 8960 to compute your Obamacare net investment income tax, you shouldn’t count on this number, especially for a K-1 with trade or business income.  Use instead the separate items from the K-1 that are investment income for Form 8960 purposes.

Be careful out there, and come back tomorrow for a new 2014 filing season tip!

 

20140307-1Russ Fox, Bozo Tax Tip #5: Procrastinate.  You mean waiting won’t solve my tax problems?

Tony Nitti, Tax Geek Tuesday: Are Those S Corporation Distributions Taxable?

 

William Perez, Tax Freedom Day 2014.  April 21.

Kay Bell, Being DIFferent could prompt a tax audit.  Kay points out things that can attract IRS attention on your 1040.

Jeremy Scott, Audit Electability (Tax Analysts Blog).  “However, a taxpayer’s choice of entity can have broad tax ramifications, including some consequences unintended even by the complicated U.S. tax regime.”

Stephen Olsen, Summary Opinions for 4/4/2014.  (Procedurally Taxing), A good roundup of some recent tax cases, including coverage of the Ohio accounting firm’s unpleasant breakup that we covered last week.

 

20140409-1The IRS Commissionerwho apparently can’t regulate his own employees sufficiently to provide subpoenaed documents to Congress, still wants to regulate tax preparers.

The idea is no more than what the Wizard of Oz told the scarecrow: regulated preparers wouldn’t be any smarter, but they would have a diploma.  An IRS-issued Doctorate in Thinkology doesn’t make an inept preparer competent, any more than granting a CPA or a JD makes somebody a good tax preparer.  I would much sooner have uncredentailed Robert D. Flach do my 1040 than any number of fully-credentialed CPAs and attorneys I know.   All regulation would accomplish would be to raise prices, lining the pockets of the big tax prep franchises while driving many taxpayers to self-prepare or stop filing.

TaxGrrrl, House Committee Gunning For Criminal Charges In IRS Scandal

TaxProf, The IRS Scandal, Day 335

 

Roberton Williams, If You Have High Income, Your Taxes Are Going Up (TaxVox)

Tax Justice Blog, “Tax Extenders” Would Mean Even Lower Revenue than the Ryan Plan

Jim Maule, How Shocking is Tax Evasion?

Radio Iowa, Senator Grassley says fouled up tax system is depressing.  He’s depressed?  As a senior taxwriter for most of the last three decades, he’s answerable for a lot of the depression.

 

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Tax Roundup, 2/24/14: WSJ highlights tax season ID theft. And: Shock! Film Tax Credit Corruption!

Monday, February 24th, 2014 by Joe Kristan
The "Chromaro" purchased with ID-theft frauds by a Florida thief.

The “Chromaro” purchased with ID-theft frauds by a Florida thief.

The Wall Street Journal covers identity theft today: “Identity Theft Triggers a Surge in Tax Fraud”   It seems to be designed to tell what a great job the authorities are doing to fight the problem.  It’s nice that they’re stepping up the efforts, but the time to do that was four years ago, when the problem started exploding.  But the IRS was too busy with its attempt to regulate practitioners to be bothered with keeping billions from going out the door to two-bit grifters.  The article refers delicately to the grifters:

The scam, which involves repeatedly filing fake tax returns electronically and receiving refunds within days, is so enticing it is attracting suspects not typically associated with white-collar crime. On Friday, two members of an alleged crack-dealing gang in Miami were indicted on charges they also ran a tax-refund scam on the side. Suspects typically steal lists of names and Social Security numbers. Then they file large numbers of electronic returns claiming refunds, and can start getting money before investigators spot the fraud.

The story notes that stealing from the taxpayers is only part of the damage caused:

The crime creates two victims—the U.S. Treasury and individual taxpayers, who only learn of the fraud when they try to file their legitimate returns. Those taxpayers are stuck with the hassle of proving to the IRS that the previous document was a phony claim.

And the process can drag over years, as an ID-theft victim who works with Jason Dinesen would attest.   It’s a disgrace that the IRS has done so poorly at preventing ID theft, and it is doubly disgraceful that they don’t do a better job helping the victims of IRS negligence.

For your part, don’t help the ID thieves.  Never disclose your social security number.  Keep your tax information secure.  Don’t transmit your social security number in an unencrypted email.  If you want to transmit tax documents electronically, don’t send them as an email attachment.  Use a secure file transfer site, like our FileDrop site.

 

haroldDon’t let the door hit you.  ‘House of Cards’ threatens to leave if Maryland comes up short on tax credits (Washington Post, via Politico):

A few weeks before Season 2 of “House of Cards” debuted online, the show’s production company sent Maryland Gov. Martin O’Malley a letter with this warning: Give us millions more dollars in tax credits, or we will “break down our stage, sets and offices and set up in another state.”

That’s the problem with paying people to be your friend.  The price only goes up. In California, the film credit scam industry may be losing a friend, according to Capital Public Radio: Calderon Indicted On Fraud, Bribery Charges:

The Department of Justice announced Friday that State Sen. Ron Calderon (D-Montebello) is facing 24 federal charges including bribery, wire fraud and money laundering. U.S. Attorney Andre Birotte said Calderon solicited and accepted $100,000.

“Ron Calderon, we allege, took the bribes in return for official acts. Such as, supporting legislation to those that would be favorable to those that paid him bribes and opposing legislation that would harmful to them. The indictment further alleges that Calderon attempted to convince other public officials to do the same.”

~Andre Birotte, U.S. Attorney

The legislation centered on a potential film tax credit and regulation of medical billing. Calderon is accused of accepting cash, trips, dinners and jobs for his children.

I think film tax credits, and all incentive tax credits, are fundamentally corrupt, as they provide better treatment for the well-connected at the expense of everyone else. In Iowa, though, they were able to rely on credulous legislators, without resorting to bribes.

Russ Fox, California State Senator Ron Calderon Indicted on Bribery & Tax Charges.  “Mr. Calderon is facing a maximum of 396 years at ClubFed if found guilty on all charges.”

 

premier.gov.ru [CC-BY-3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons

premier.gov.ru [CC-BY-3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons

A victim of politically motivated tax prosecution goes free in Ukraine: Freed Ukrainian ex-PM Tymoshenko rallies protesters (CBC).  She had been imprisoned on politically-convenient tax charges by the toppled would-be dictators there.   With the complexity of the tax law, it is way too easy to indict somebody.  That’s why IRS partisanship is so dangerous.

And yes, it can (and has) happened here.

 

 

 

William Perez has the scoop on Reporting Investment Income and Expenses

Jana Luttenegger, Taxing Olympic Winnings.  (Davis Brown Tax Law Blog) Not a problem for the hockey team.

Kay Bell is right when she says Report all your income even if you don’t get a 1099.  The 1099 is a useful reminder, but income doesn’t become tax free if you don’t get one.

TaxGrrrl, IRS Processing Returns, Refunds Faster Than In 2013.

Roberton Williams notes An Updated Marriage Bonus and Penalty Calculator at TaxVox.

 

 

William McBride, Empirical Evidence on Taxes and Growth: A Response to CBPP (Tax Policy Blog).  The Center for Budget and Policy Priorities has never met a tax increase it doesn’t like, as if there never is a point that giving the mule more to carry slows it down. The McBride post mentions an often-overlooked aspect of our government spending:

The thing is in reality the federal government spends only a small fraction of its budget on public investments, such as roads and airports, and instead spends most of the budget on transfer payments, such as social security and healthcare. Transfer payments are unproductive and even harmful to economic growth, according to most studies. So in practice, income taxes mainly go to transfer payments, and this deal is a clear economic loser, according to the IMF and most academic economists. 

Some folks, like Jim Maule, act like any complaint about the level of government spending and taxes means you are against roads, courts and public order — when most of what the government does is takes money from some people and gives it to other people.

 

Jack Townsend, U.S. Authorities Focus on Swiss Insurance Products Used to Hide U.S. Taxpayer Assets and Income

TaxProf, The IRS Scandal, Day 291

The Critical Question.  Sylvia Dion CPA Asks – Where Are The Women? (Peter Reilly)

Going Concern, The Ten Stages of Busy Season.  “You begin to hate every single human being in your office”

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Tax Roundup, 1/20/14: If it’s not a scandal, it hurts like one. And: S corporation ESOP play in WSJ.

Monday, January 20th, 2014 by Joe Kristan

The U.S. District Court for the Southern District of Iowa didn’t need my services as a juror this week, so  I will be participating in the Iowa Bar Association webinar this afternoon on new developments for 2014.  It starts at noon.  You can register here and find more information here.   I will join Roger McEowen of the ISU Center for Agricultural Law and Taxation, and Kristie Maitre, IRS Stakeholder Liason for Iowa.

 

20130419-1If the Tea Party scandal is not a scandal, why would it be so damaging to the IRS?  The TaxProf’s IRS Scandal Roundup for Day 255 has some eye-opening quotes from a high-powered panel from a Pepperdine/Tax Analysts Symposium last week:

Donald Korb (Partner, Sullivan & Cromwell; former IRS Chief Counsel):  I think it is incredibly damaging.  Frankly, I see it as one of the seeds of the next tax shelter era. … And in terms of scandal, I don’t think we really know. We have not been permitted to understand exactly what happened. So, who knows.

George Yin (Edwin S. Cohen Distinguished Professor of Law and Taxation, Virginia; former Chief of Staff, Joint Committee on Taxation):  I think there has been tremendous damage.  Almost without regard to what actually happened.  And I actually despair of finding out what actually happened. …

Donald Tobin (Frank E. and Virginia H. Bazler Designated Professor in Business Law, Ohio State):  I think it is awful. I agree with Don and George.  7 or 8.  I think this is ultimately going to have huge implications. …

Ellen Aprill (John E. Anderson Chair in Tax Law, Loyola-L.A.):  I agree with all of that.  I have myself avoided the word “scandal” because I just don’t know.  And some of the people I know personally.  I don’t think that was their political motivation.  So I’ve used “controversy” and “brouhaha” and everything but tried not to go all the way to scandal. …

Korb: … This is very, very damaging.  Maybe we are at a 9.5

You can already see effects in the reduction of the IRS funding request in the latest budget deal.  While Congress makes the IRS the Swiss Army Knife of tax policy, it continues to cut back its resources.  That can’t end well.  But the GOP sees that the IRS has acted as a tool for its political opponents, and it’s asking a lot for them to fund their opposition.

 

Robert D. Flach ponders whether the Registered Tax Return Preparer designation could be revived as a voluntary credential.  If any group of preparers can unite behind a voluntary credential with self-administered standards, great.  Just keep the IRS out of it.  It’s a poor use of their resources, and they aren’t to be trusted with that sort of power.

 

S imageS imageS-SidewalkESOP S corporation strategy.  The Wall Street Journal (Laura Saunders, via the TaxProf) reports on an S corporation that may have found a way to funnel all of its income to a tax-exempt ESOP via restricted stock for the non-ESOP owners.  Paul Neiffer suspects it may be too good to be true.

It would be a hard needle to thread, giving the severe 409(p) excise tax that can apply to allocations of ESOP shares to owners of closely-held S corporation.  If the strategy does win in the courts, I would expect to see legislation to change the result quickly.

 

Jack Townsend, Eighth Circuit Affirms Offshore Account Related Conviction

 

Joseph Henchman, What Same-Sex Couples Need to Know This Filing Season  (Tax Policy Blog).  He links to a nice Tax Foundation study that tells how each state is approaching same-sex marriage this filing season.

Roberton Williams, Utah Lets Same-Sex Couples File Joint Tax Returns (TaxVox)

Kay Bell, Girl Scout cookies might be tax deductible.  Unfortunately, only if you don’t eat them.

Russ Fox, The Trouble With Bitcoins: Taxation.  “If you make money with Bitcoins, it is absolutely taxable.”

Jason Dinesen, Issuing 1099s to an Incorporated Veterinarian.  So veterinary services are “medical services.”

So the IRS agrees with Corb Lund.

 

Tax Justice Blog, Oklahoma Shows How Not to Budget.  “The biggest offender here is one we’ve explained before: the growing trend of funneling general tax revenues toward transportation in order to delay having to enact a long-overdue gas tax increase.”

William Perez, In Honor of Martin Luther King, Jr.  “In 1960, Dr Martin Luther King, Jr., was found not guilty of filing fraudulent state tax returns for the years 1956 and 1958.”  That’s why you don’t want politicized tax enforcement.

TaxGrrrl, Why Justice Matters: The Indictment & Trial Of Dr. Martin Luther King Jr. On Tax Charges   

 

Annette Nellen, Real revenue sources for tax reform.  “Where can permanent tax increases be generated to offset the desired permanent tax decrease generated from permanent lower rates?”

Good, we need it.  Bloggers = Media for First Amendment Libel Law Purposes (Eugene Volokh).  “To be precise, the Ninth Circuit concludes that all who speak to the public, whether or not they are members of the institutional press, are equally protected by the First Amendment.”

That’s how it should be.

Peter Reilly, Soldier To Tax Accountant – Rachel Millios EA   

 

News from the Profession.  CPA Exam Pass Rates Basically Went Right Off the Cliff at the End of 2013 (Going Concern).  

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Tax Roundup, 1/16/14: Bill would widen Iowa 10-year gain break. And: Obamacare tax credits survive challenge.

Thursday, January 16th, 2014 by Joe Kristan


20130117-1
Iowa Capital Gains Exclusion for stock sales?  
The first income tax bill in the hopper in this session of the Iowa General Assembly is HSB 502, which would expand the current tax break for extra-long term capital gains to stock and partnership interest sales.

Iowa currently allows taxpayers to exclude some capital gains from income when the taxpayer meets each of two 10-year requirements:

- They have to have held the property for at least ten years, and

- They have to have materially participated in the business for at least ten years. Material participation is determined under the federal passive activity rules.

If those requirements are met, a taxpayer can exclude gain on the sale of “substantially all of the assets” of a business, or on the sale of real estate used in the business.  But unless the gain is recognized in a corporate liquidation following an asset sale, stock gains aren’t eligible for the break.  Gains on the sale of partnership interests are never excluded

HSB 502 would extend the break to a sales of “substantially all of the taxpayer’s stock or equity interest in the business, whether the business is held as a sole proprietorship, corporation, partnership, joint venture, trust, limited liability company, or another business entity.”

The provision makes sense to the extent that such a break shouldn’t be dependent on the way you organize your business.  What doesn’t make sense is the way the exclusion is limited by the ten-year material participation requirement.  There is a strong economic case to not tax capital gains at all, but I can’t think of any reason that case is affected by material participation.

The biggest argument against the exclusion is that it is a carve-out of the income tax base for a very limited class of taxpayers that adds to the complexity of the Iowa income tax.  I would favor a broader, or even complete, capital gain exclusion.  I would also be OK with taxing all capital gains in exchange for repeal of the corporation income tax and reduction of the individual rate to under 4% as part of the Quick and Dirty Iowa Tax Reform Plan.

The bill has been referred to a subcommittee of the Iowa House Ways and Means Committee.  While I expect no major tax legislation to move this year, limited provisions like this could advance.

Related: Iowa Capital Gain Deduction: an illustration

 

20121120-2TaxGrrrl, Another Legal Threat To Obamacare Shot Down In Federal Court:

When the Regulations were published, those refundable tax credits which were intended for participants in state exchanges were extended to those individuals under the federal exchanges. The plaintiffs filed suit, arguing that making the credits available to those on the federal exchanges was beyond the scope of the law. The plaintiffs sought, through the lawsuit, to prohibit the IRS from enforcing the Regulations as written.

The D.C. U.S. District Court upheld the regulations yesterday on summary judgement.  An appeal to the D.C. Circuit is likely.

 

 David Henderson quotes economist John Cochrane:

Our current tax code is a chaotic mess and an invitation to cronyism, lobbying, and special breaks. The right thing is to scrap it. Taxes should raise money for the government in the least distortionary way possible. Don’t try to mix the tax code with income transfers or support for alternative energy, farmers, mortgages, and the housing industry, and so on. Like roughly every other economist, I support a two-page tax code, something like a consumption tax. Do government transfers, subsidies, and redistribution in a politically accountable and economically efficient way, through on-budget spending.

But that isn’t going to happen anytime soon.

So wise, and, sadly, so true.  Mr. Cochran has a lot of wise things to say; read the whole thing.  Lynne Kiesling passes on more Cochrane wisdom in Cochrane on ACA’s unravelling: parallels to electricity.

 

Robert D. Flach, TWO RECENT TAX POSTS WORTH DISCUSSING.  “The idiots in Congress must understand that the purpose of the Tax Code is to raise the money needed to run the government – PERIOD.”

Trish McIntire talks about Choosing A Tax Pro.  “Just because your previous preparer did something a certain way doesn’t mean that another preparer will run their office the same.”

William Perez, Free Tax Preparation Services

 

HarvestHarvest
harvest
Paul Neiffer, Grain Gifts – How Are They Taxed?:

Since there is no cost allocated to the grain that is gifted, there is no charitable deduction to report.  Rather, since you are reducing your schedule F income by the amount of grain given, this essentially results in your charitable deduction.  You are not allowed to deduct both on schedule F and on schedule A.

Only one deduction counts.

 

Jason Dinesen, Got 1099s to Issue?:

A 1099 may need to be issued if:

  1. You paid $600 or more in total to any 1 person during the year for services provided to your business. This also applies to payments made to businesses organized as partnerships. However, a 1099 does NOT need issued for payments made to a corporation. Payments made to an LLC may or may not require a 1099, depending on how the LLC is taxed.

  2. You paid $600 or more in total to a law firm during the year, regardless of how the law firm is organized. In other words, even if the law firm is a corporation, you would need to issue it a 1099 if you paid the firm $600 or more.

  3. You paid $600 or more in rental or lease payments to an unincorporated person or partnership during the year (similar rules as listed under item #1).

And the deadline is looming.

 

Jack Townsend, Switzerland’s Quixotic Efforts to Close the Stable Door After the Horse Has Left the Barn.  Consider Swiss bank secrecy most sincerely dead.

 

20130419-1Kay Bell, IRS’ fiscal year 2014 budget takes a big hit

TaxProf, The IRS Scandal, Day 252

TaxTrials, Wesley Snipes, A Lesson in Listening to Bad Advice

Keith Fogg, Forum Shopping in the Tax Court – Small Tax Case Procedure and the Rand Decision. (Procedurally Taxing).  Issues when a tax deficiency results solely from refundable tax credits.

Tax Justice Blog, What to Watch for in 2014 State Tax Policy

Scott Drenkard, Open Sky Policy Institute: “Illinois is not an Example for Other States”.  Not exactly going out on a limb, but worth noting.

Roberton Williams, Tax Complications for Same-Sex Couples in Utah (and Elsewhere) (TaxVox)

Cara Griffith, Is Connecticut Ignoring Supreme Court Precedent? (Tax Analysts Blog).  Who do they think they are anyway — Iowa?

 

News from the Profession: How To Not Tick Off Your Public Accounting Colleagues Without Being a Clown About It (Going Concern)

 

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Tax Roundup, 12/13/13: Government by Connections edition. And how not to butter up your tax evasion judge.

Friday, December 13th, 2013 by Joe Kristan

20121220-120120906-1A Des Moines Register report on the introduction of the new ownership of the Iowa Speedway in Newton tells us how things work in Iowa:

No one needed super sleuth Sherlock Holmes to figure out one of the first priorities of NASCAR as the new owners of Iowa Speedway introduced themselves Thursday during a press conference.

Three Iowa legislators were parked front and center in a reserved seating area. Multiple times during the news conference, officials thanked Sen. Bill Dotzler and Representatives Dan Kelley and Rob Taylor.

When the event sprinted toward its own finish line, only the trio with desks at the statehouse were publicly asked to jump on stage for a photo with new track president Jimmy Small.

So why do our humble public servants get to hang with big NASCAR celebrities?   Because the ownership group that bought the speedway doesn’t qualify for the special corporate welfare that the legislature enacted just for the speedway a few years ago, and they want it re-enacted:

The law, as it stands, requires Iowa-based ownership. So the spigot that delivers that sales tax benefit, which Dotzler estimates at about $4 million to date, is being shut off as NASCAR grabs the steering wheel.

Dotzler promised to reintroduce the measure when the legislative session roars to life on Jan. 13, adding that he would support extending it beyond the original end date of 2016.

Government by special favor.  And who benefits?  NASCAR is a private company owned by a very wealthy family — one that evidently knows how to play the connections game.    Meanwhile the guy running the pizza joint, the real estate office, the implement dealership, he gets a horribly complicated Iowa tax system with high rates to pay for lots of loopholes for other people.  He gets automatic penalties for every honest mistake made in attempting to comply with this byzantine system.  But hey, NASCAR!

The legislature is just too darn busy to find a way to enact a simple tax system with low rates and low compliance costs for everybody.  But they have plenty of time to go to a press conference to sell a special tax break for a single wealthy out-of-state family.  Priorities.

 

William Perez has been cranking out lots of good stuff lately, including today’s Donating an IRA as a Year-End Tax Strategy.

Margaret Van Houten,  Do your Digital Assets have Value? Are they Important? (Davis Brown Tax Law Blog).  Don’t leave the heirs without the password to your Bitcoin vault.

 

20130419-1Christopher Bergin, Walk the Talk: The IRS Needs a Chief Who Supports Transparency (Tax Analysts Bl0g).  And by that, he means for the IRS, not just for us.

Tax Justice Blog,  New CTJ Report: Congress Should Offset the Cost of the “Tax Extenders,” or Not Enact Them At All.  I like the second alternative best.

Janet Novack,  Congressional Work Undone: Lapse Of Tax Credits Will Hit Job Creators 

Roberton Williams, Where Are Tax Rates Headed? (TaxVox)

 

If you like your kludge, you can keep it.  Obamacare’s Never-Ending Fix-a-Thon (Megan McArdle)

 

TaxProf, The IRS Scandal, Day 218.  “IRS Targeting: Round Two; The First Time Around, Targeting Conservatives Was a Secret. Now, Not So Much

Jack Townsend, Judge Rakoff, the Wegelin judge, Is Interviewed on the U.S. Initiative Against Swiss Banks

Phil HodgenRenunciation trends in Auckland “I received an email yesterday from a contact in New Zealand. Renunciations in the Auckland Consulate are apparently way, way up compared to last year.”

Stephen Olsen, Preparer Knappe(s) on the job: Delinquency Penalties, Advisors, and Reasonable Cause (Part 2 — I Finally Get to my point on Thouron). (Procedurally Taxing)

Get your friday Buzz! from Robert D. Flach!

 

ShockerGAO: IRS Lacks Adequate Internal Controls (TaxProf).  Maybe the $5 billion in annual refund fraud tipped them off.

Woo-hoo!  Tax and other fun at deductible office holiday parties (Kay Bell)

News from the Profession.  Aren’t You GLAD For This McGLADrey Holiday Card? (Going Concern)


OtterThe Otter legal strategy.  A tax protester in Texas decided that his already slim chances in federal court would be helped by a really stupid and futile gesture.  It went as you might expect, reports Courthouse News Service:

It took a federal jury just one hour of deliberation to convict a Texas man of hiring a hit man to try to murder the federal judge presiding over his tax-evasion case.

Phillip Monroe Ballard, 72, of Fort Worth, was convicted Wednesday of attempted murder-for-hire, after a two-day trial. He faces up to 20 years in prison.

It’s not the first time a tax protester has tried to improve his case by going after the judge.  If it worked, though, that would have been a first.

 

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Tax Roundup, 12/12/13: Take the $20 million edition. And: Grassley says extenders will pass in 2014.

Thursday, December 12th, 2013 by Joe Kristan

 

20131212-1Next time, take the cash.  A corporation decided a tax deduction from walking away from securities it had paid $98.6 million for would be worth more than the $20 million in cash it had been offered for them.  The Tax Court yesterday told them that they made a big mistake.

Gold Kist, Inc. bought the securities issued by Southern States Cooperative, Inc. and Southern States Capital Trust in 1999.  The issuers offered to redeem the securities from Gold Kist in 2004 for $20 million.  (Gold Kist was later acquired by Pilgrims Pride Corp, which inherited Gold Kist’s tax history.)

Gold Kist believed that it would get an ordinary loss deduction if it simply abandoned the securities, vs. a capital loss on the sale.  Ordinary losses are fully deductible, while corporate capital losses are only deductible against capital gains, and they expire after five years.    A $98.6 million ordinary loss would be worth about $34.5 million in tax savings, which would be worth more than $20 million cash and a capital loss, which can only offset capital gains, and only those incurred in the nine-year period beginning in the third tax year before the loss.

Unfortunately, the Tax Court found a flaw in the plan: Sec. 1234A.  It reads:

§ 1234A – Gains or losses from certain terminations
Gain or loss attributable to the cancellation, lapse, expiration, or other termination of—

(1) a right or obligation (other than a securities futures contract, as defined in section 1234B) with respect to property which is (or on acquisition would be) a capital asset in the hands of the taxpayer, or

(2) a section 1256 contract (as defined in section 1256) not described in paragraph (1) which is a capital asset in the hands of the taxpayer,

shall be treated as gain or loss from the sale of a capital asset. The preceding sentence shall not apply to the retirement of any debt instrument (whether or not through a trust or other participation arrangement).

The taxpayer said that Sec. 1234A didn’t apply, according to the court:

Petitioner’s primary position is that the phrase “right or obligation with respect to property” means a contractual and other derivative right or obligation with respect to property and not the inherent property rights and obligations arising from the ownership of the property. We disagree.

The taxpayer said the legislative history of the section supported their argument.  The Tax Court thought otherwise:

In our view Congress extended the application of section 1234A to terminations of all rights and obligations with respect to property that is a capital asset in the hands of the taxpayer or would be if acquired by the taxpayer, including not only derivative contract rights but also property rights arising from the ownership of the property. 

The taxpayer also said that if that’s what Congress meant, the IRS would have revised Rev. Rul. 93-80, which allows an ordinary loss on certain abandonments of partnership interests.  The Tax Court responded:

The ruling makes clear that, if a provision of the Code requires the transaction to be treated as a sale or exchange, such as when there is a deemed distribution attributable to the reduction in the partner’s share of partnership liabilities pursuant to section 752(b), the partner’s loss is capital. Rev. Rul. 93-80, supra, was issued four years before section 1234A was amended in 1997 to apply to all property that is (or would be if acquired) a capital asset in the hands of the taxpayer. As we previously stated, the Commissioner is not required to assert a particular position as soon as the statute authorizes such an interpretation, whether that position is taken in a regulation or in a revenue ruling. 

So it’s a capital loss only for the taxpayer.

Presumably the Gold Kist board didn’t decide to go for the ordinary loss on its own.  Somewhere along the way a tax advisor told them that this would work.  That person can’t be very happy today for advising the client to walk away from $20 million in cash.

Cite: Pilgrim’s Pride Corp, 141 TC No. 17.

 

Grassley-090507-18363- 0032Quad City Times reports Grassley predicts tax credits extensions, but not until 2014:

 There won’t be any extension before Christmas, Grassley predicted, but not because of political opposition to the credits. Based on past performance, he said, Congress will return after the New Year and approve four dozen or more tax credits.

“There are a lot of economic interests” represented in the tax credits, he said. Those interest groups collectively “put a lot of pressure on Congress to re-institute the credits.”

The delay, Grassley said, can be attributed to the ongoing discussion about “massive tax reform.”

Senator Grassley has more insight about what will happen than I do, but I can”t share his faith that the lobbyists will overcome Congressional dysfunction.  I had hoped any extenders would be included in the budget deal announced this week, and they weren’t.

Actually, I would prefer that the extenders not be extended at all rather than passed temporarily once again.   The whole process of passing temporary tax breaks is a brazen accounting lie.  Congressional budget rules score temporary provisions as if they will really expire, even when they have been extended every time they expire.  Once again, behavior that would lead to prison in the private sector is just another day in Congress.

 

Roberton Williams, Budget Deal Doesn’t Raise Taxes But Many Will Still Pay More:

The budget deal announced Tuesday wouldn’t raise taxes—members of Congress can vote for it without violating their no-tax pledges. But the plan will collect billions of dollars in new revenue by boosting fees and increasing workers’ contributions to the Federal Employee Retirement System (FERS). To people paying them, those higher fees and payments will feel a lot like tax hikes. 

 

David Brunori, States Should Just Say No to Boeing (Tax Analysts Blog):

Boeing is acting rationally — politicians are willing to give things away, and Boeing is willing to accept those things. But politicians should try saying no once in a while. Maybe we would respect them a little more.

Well, it would be hard to respect them less.

 

 

Source: The Tax Foundation

Source: The Tax Foundation

William McBride, Obama: Cut the Corporate Tax Rate to Help the Poor (Tax Policy Blog):

Indeed, cutting the corporate tax rate is probably the best way to increase hiring and grow wages. The President cited no studies to support this, because it is not really in dispute among economists. So why not cut the corporate rate, period, without any conditions or offsetting corporate tax increases elsewhere?

Corporate rate cuts would be a good thing, but don’t forget that most business income nowadays is reported on individual returns.

 

Joseph Thorndike, Congress Is Making a Bad Deal on the Budget, but One Republican Has a Better Idea (Tax Analysts Blog)

It’s amazing what passes for success in Washington these days. Budget negotiators on Capitol Hill have delivered a non-disaster, cobbling together a pathetic half-measure that pleases no one and accomplishes almost nothing.

True, it allows Democrats and Republicans to avoid abject failure, which is no small thing, given recent history. These days, just keeping the wheels from flying off qualifies as statesmanship.

Considering what happens when Congress “accomplishes” something (Obamacare, anyone?), let us praise them for doing as little as possible.

 

Robert D. Flach has wise counsel for clients:  PUT IT IN WRITING.

So if you have a tax question you want to ask your preparer, instead of picking up the phone submit the question in an email, with all the pertinent facts.  And if you receive a notice from the IRS or your state, mail it to your tax pro immediately.

Yes.

 

William Perez, Donating Appreciated Securities to Charity as a Year-End Tax Strategy

Paul Neiffer, Is it Time for an IC-DISC.  If you produce for export, an IC-DISC can turn some ordinary income into dividend income, taxed at a lower rate.

Tony Nitti, IRS The Latest To Send Manny Pacquiao To The Mat: Boxer Reportedly Owes $18 Million

Kyle Pomerleau, Senator Baucus’s Plan for Cost Recovery Heads in the Wrong Direction

TaxProf, The IRS Scandal, Day 217

Cara Griffith, Improving the Transparency of New York’s Tax Collection Process (Tax Analysts Blog)

Jack Townsend, Are Brady Violations Epidemic?  A federal appeals judge says prosecutors routinely withhold evidence that would help defendants.

 

News from the Profession: The PCAOB Is Grateful To The PCAOB For the PCAOB’s Work (Going Concern)

 

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Tax Roundup, 12/10/2013: Penalize everyone edition! And one for me, one from you.

Tuesday, December 10th, 2013 by Joe Kristan

 

20120511-2IRS: shoot first, let the Tax Court sort it out later.  One of the most annoying features of exams in recent years is the IRS habit of imposing penalties on almost every underpayment, regardless of the cause or the taxpayers’ history of good compliance.  It’s nice to see a case like one in the Tax Court yesterday that held the IRS went too far.

The taxpayer were a married couple with a 50-year unblemished compliance history.  The wife’s employer switched from issuing paper W-2s to downloadable versions for 2010.  She didn’t get the memo, if there was one, and left her wage income off the couple’s 1040.  The IRS computers noticed and issued a notice and penalty; the taxpayers double-checked with their preparer and immediately paid the extra taxes, but they balked at the 20% underpayment penalty.

The Tax Court pointed out (all emphasis mine):

     Petitioners regard their tax situation as fairly complex, as they receive income from multiple sources, including two subchapter S corporations that lease farmland out of State. Petitioners worry about their ability to prepare accurate tax returns; accordingly, for many years, including 2010, petitioners have hired a certified public accountant (C.P.A.) to assist them in the preparation of their returns.

Petitioners are aware of the importance of recordkeeping, and for many years they have maintained a system for keeping track of documents that will be needed to prepare their returns. Thus, when petitioners received in the mail a tax document such as a Form W-2, Wage and Tax Statement, Form 1098, Mortgage Interest Statement, Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., or Schedule K-1, Beneficiary’s Share of Income, Deductions, Credits, etc., they would briefly review it and then place it in a dedicated tax file, along with other tax-relevant documents that they collected throughout the year. In February or March petitioners would meet with their C.P.A. and furnish him with their tax file. Once the return had been prepared, petitioners would again meet with the C.P.A. to review the return.

So the taxpayers had a pretty good system in place to ensure compliance.  Yet the missing W-2 fell through the cracks — partly because their preparer thought the wife had retired.

     Petitioners’ failure to notice the absence of a Form W-2 for Mrs. Andersen was an oversight on their part. However, the oversight was at least partially understandable given both the number of petitioners’ tax documents and the fact that Mrs. Andersen never received from either her employer or her employer’s payroll agent a paper copy of a Form W-2, something that she had previously received throughout her career. Nor had Mrs. Andersen received notification from either of those parties that the payroll agent had discontinued issuing Forms W-2 in paper form in favor of making electronic copies available on the Internet.

Petitioners also failed to notice, when they reviewed their return with Mr. Trader, that Mrs. Andersen’s wages were not included on line 7. But when, as part of the review process, petitioners and Mr. Trader compared the 2010 return with the 2009 return, the parties noted the similarity of the amounts of income and the absence of any anomaly, thereby suggesting that no error had occurred. Indeed, the difference between the amounts of income reported on petitioners’ 2010 and 2009 returns was less than $1,000, or two-thirds of one percent of their 2009 income, a difference that would not ordinarily give rise to any suspicion that income had not been fully reported.

So the mistake was one a reasonable human would make.  But the IRS thinks no mistake is reasonable, apparently.  Fortunately the Tax Court held otherwise:

Clearly, petitioners made a mistake. But we think it was an honest mistake and not of a type that should justify the imposition of the accuracy-related penalty. In short, we think that petitioners’ diligent efforts to keep track of their tax information, hiring a C.P.A. to prepare their tax return, reviewing their return with the C.P.A. when it was completed, and prompt payment of the deficiency upon receipt of the notice of deficiency, together with the other facts and circumstances discussed above, represent a good-faith attempt to assess their proper tax liability. Accordingly, we hold that petitioners have carried their burden with respect to the reasonable cause and good faith exception under section 6664(c)(1) and that petitioners are therefore not liable for the accuracy-related penalty under section 6662(a).

So: good records, full cooperation with a reliable preparer, and prompt payment of any underpaid taxes on discovery of the underpayment were key.  It’s ridiculous that it took a trip to Tax Court to get what seems like the only appropriate and fair result.  The IRS should stop being so trigger-happy with penalties.  Maybe a sauce for the gander rule, where the IRS and IRS personnel are as liable for penalties on incorrect assessments as taxpayers are for those on underpayments, would get them to see reason.

Cite: Andersen, T.C. Summ. Op. 2013-100

 

Kyle Pomerleau, CBO Report Confirms that the Federal Government Redistributes a Substantial Amount of Income  (Tax Policy Blog, my emphasis):

They also break down taxes paid and spending received by income quintile. When looked at this way, the redistribution becomes very clear. According to their analysis, those in the lowest quintile received $22,000 in spending minus taxes. In contrast, taxes exceeded spending by $56,000 in the highest quintile.

Source: Congressional Budget Office

Source: Congressional Budget Office

 

When private think tanks like the Tax Foundation issue this sort of report, people favoring higher taxes on “the rich” dismiss it.  CBO numbers are harder to credibly attack as partisan.

But we can always find a dark side.   CBO Finds Growing U.S. Income Inequality (Roberton Williams, TaxVox)

 

William Perez, Selling Losing Investments as Part of a Year-End Tax Strategy.

Tony Nitti, IRS Addresses Deductibility Of Organizational And Startup Costs Upon Partnership Technical Termination.  By saying no.

TaxGrrrl, Tax Scammers Continue To Dial Up Trouble For America’s Seniors.  This is a big problem.  Unless they have contacted you by mail first, the tax folks aren’t going to phone you.  Just hang up.

Paul Neiffer, How $12,000 Becomes $6,000 or less.  By putting it in farmland, if crop prices stay where they are.

 

Stephen Olsen,  IRS says Hom Gonna Getcha on FBAR too.  “The Swiss government and banks are folding like a bunch of cheap patio chairs.”

Phil Hodgen, Voluntary Disclosure and Frozen Swiss Bank Accounts

Brian Mahany,  How To Respond When Your Foreign Bank Asks About Your IRS Compliance

Jeremy Scott, Will FATCA Ever Go Into Effect? (Tax Analysts Blog) “FATCA should be put into effect as soon as possible, and the administration should stop bending separation of powers rules by using delays to functionally repeal unpleasant parts of statutes.”

Nah, just repeal the whole mess.

 

 

20120510-1

Winter Carnival!  Tax Carnival #123: It’s Beginning to Look a Lot Like Tax Time (Kay Bell)

TaxProf, The IRS Scandal, Day 215

Um, no, was there one?  Remember the Tax Reform Act of 1995? (Clint Stretch, Tax Analysts Blog“What is certain is that the 1995 hope of creating a tax system that genuinely favors savings and investment is dead.”

It’s always a good Tuesday for a Robert D. Flach Buzz!

 

We hardly knew ye.  Farewell to Feel-Good Tax Reform (Martin Sullivan, Tax Analysts Blog)

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Tax Roundup, 11/7/2013: Cold comfort on 3.8% Investment Income Tax guidance. And how big a penalty for not buying unavailable insurance?

Thursday, November 7th, 2013 by Joe Kristan

20121120-2Well, that’s reassuring.  Tax Analysts reports ($link) that David Kirk, an IRS official involved in drafting the final rules on the 3.8% Obamacare “Net Investment Income Tax” that took effect January 1, says the rules are still “in flux” with filing season only two months away:

     As for additional NII tax guidance, Kirk said the final regs will contain “overflow valves, breakers” that will allow the IRS to issue subregulatory guidance to address problems that arise, given that opening a new regulatory project “is a very painful and long process.”

“We’re just going to have to roll this out. We’re going to see how these rules work . . . and there’s always fine-tuning,” Kirk said. 

They’ve had over three years to do this, and now “we’re going to see how these rules work”?  Sounds like another recent Obamacare roll-out.  It makes me really excited about the upcoming filing season.

 

Roberton Williams,  How Big is the Penalty if You Don’t Get Health Insurance? (TaxVox)

The basic penalty is $95 in 2014—if you’re unmarried with no dependents and your income is less than $19,500. If your income is higher, you’ll owe more: 1 percent of the amount by which your income exceeds the sum of a single person’s personal exemption and standard deduction in the federal income tax. That’s $10,000 in 2013. But be warned: Income equals adjusted gross income (AGI—that number on the last line on page 1 of your tax return) plus any tax-exempt interest and excluded income earned abroad. If you make $30,000, your penalty will be $200.

Still with me? Good, because it is about to get more confusing.

If you like the penalty you have, you can keep the penalty you have.  Until next year, anyway.

 

Christopher BerginACA + IRS = Perfect Storm (Tax Analysts Blog)

And what lies ahead? The perfect storm: The IRS and the ACA brought together by a hapless Congress that tasked the nation’s tax collector with administering portions of our new healthcare system.

I can see a day coming when a taxpayer gets a letter from her insurance provider canceling her healthcare coverage and then a letter from the IRS informing her that she owes additional taxes under the ACA. Apparently our government thinks that two nightmare bureaucracies must be better for us than one.

You think this is about “us,” friend?

 

200px-Isleys-mrbiggs-eternal.jpg

Ron Isley is a lot better at music than he is at taxes.  He has served time on federal tax charges, and yesterday he lost a Tax Court bid to get his back taxes reduced under an “offer of compromise” he agreed to, but which the IRS rejected before it became final.  The ruling turns on a lot of technicalities involving the rules for accepting compromises in criminal tax cases.

The Tax Court decision wasn’t a total loss, in that they are allowing Mr. Isley to argue against tax levies and to pursue a compromise of his 2009 and 2010 taxes.

Cite: Isley, 141 TC No. 11.

Prior coverage here.

 

Jason Dinesen,  Life After DOMA: Watch Your Withholding 

Annette Nellen, Many tax questions on same-sex federal tax filings

William Perez, The Additional Medicare Tax, Part 4

Tony Nitti,  On Eve Of Twitter IPO, Misguided Senators (Again) Attack Tax Deduction For Stock Option Compensation  Exercising stock options convert corporation income taxed at 35% to individual income taxed at 40.5%, plus payroll taxes.  And yet the congresscritters act like this is some kind of loophole.

 

Russ Fox congratulates The Real Winners of the 2013 World Series of Poker.  It’s not the guys with the cards in their hands.

Now there’s a business plan!  BlackBerry Pins Recovery Hopes On Rumored $1 Billion In Tax Refunds  (TaxGrrrl)

 

potleafpotleafpotleaf20090722-2.jpgWouldn’t you? Colorado Voters Reject $1 Billion Income Tax Increase (Elizabeth Malm, Tax Policy Blog).

But other taxes…  Coloradans agree to a high tax to get high (Kay Bell)

Tax Justice Blog,  Tax Policy Roundup for the 2013 Election

 

 

 

Phil Hodgen’s Exit Tax Book, Chapter 8 – Taxation of Nongrantor Trust Interests

 

The Critical Question.  Is There One ‘Right’ Apportionment Formula? (Cara Griffith, Tax Analysts Blog): 

It could almost be a case in which one state adopted it on the grounds that it would create jobs and increase investment in the state. Then other states followed suit, not because single-sales-factor apportionment produced more accurate results, but because it was perceived as making a state’s tax laws more competitive or business friendly. But while single-sales-factor apportionment may benefit some businesses, it is far from being universally beneficial for taxpayers. 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.

Iowa was the first state to adopt single-factor apportionment.  It applies to the highest tax rate in the nation, helping make Iowa’s corporation tax both onerous and useless.  A repeal of the corporation income tax would be the best way of making the corporation tax “less burdensome.”

 

Because they may one day make money?  Why Twitter May Have to Pay Income Taxes One Day (Victor Fleisher, via The TaxProf)

 

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Tax Roundup, 9/6/2013: The IRS is losing the S corporation comp war? And Tax Analysts has a history video!

Friday, September 6th, 2013 by Joe Kristan

S-SidewalkIf they’re losing the war, I’d hate to see how they’d act if they won. The TaxProf today offers Schwidetzky: The ‘John Edwards S Corp Tax Shelter’: Is the IRS Winning the Battles But Losing the War? :

 Arguably, that case has yet to be litigated. But there are two cases where the taxpayer either paid or was supposed to have paid a modest salary, curiously the same amount in both cases, $24,000 per year. The two cases are Watson v. Unied States, 107 AFTR2d 311 (IA DC 2010), aff’d 668 F.3d 1008 (8th Cir. 2012) and McAlary v. Commissioner, T.C. Summ. Op. 2013-62. Both cases rejected the $24,000 salary as too small. But neither case concluded that that the net income of the S corporation was wages. Instead, following John Edwards’ lead, the courts looked to what, essentially, the average similarly situated taxpayer earned instead of what the taxpayer earned from his services…

It is common for tax advisors to suggest that the taxpayer take a salary equal to the social security tax cap. Until the courts come to their senses, there is no reason for tax advisors not to continue to give that advice.

The tax law does not impose self-employment or employment taxes on S corporation K-1 income.  Most (but not necessarily all!) partnership income of active partners, and all Schedule C income, is subject to self-employment tax.  This encourages S corporation shareholders to take less in salary and more on their K-1s.

Mr. Schwidetzky, an academic, seems to think taxpayers are just having their way with the poor IRS, but for those of us in the wild trying to keep our clients out of trouble without wasting their money on excessive taxes, it hardly looks like the IRS is losing.

First, the IRS is auditing S corporations aggressively — way too aggressively.  Mr. Schidetzky fails to bring up the recent Glass Blocks case, where the Tax Court ruled that a struggling one-man S corporation had to pay a “reasonable salary” even doing so throws the corporation into a loss.  That’s a result far worse than the poor guy would have had filing as a Schedule C taxpayer.  It’s hard to see how such pointless and harsh treatment is good policy.

Second, there is still no clear statutory or regulatory guidance to determine minimum “reasonable” salaries.  There are many taxpayers who have interests in multiple businesses, and whose time spent in one of them may be very high early, or when the business may be struggling, but devoted to other businesses in other years.  The taxpayer may take all of his salary from one of his companies, inviting the IRS to say that he should be taking it from other companies instead.  Whatever you do, the IRS can second-guess it, while giving the taxpayer no guidance on what it should be doing.

Third, why is this just an S corporation issue?  The same thing can come up in C corporations.  Think of Warren Buffett’s famous $100,000 annual salary — one that is arguably tens of millions “too low.”  Why not hit him for more payroll taxes?  The same problem can also arise in an LLC with multiple classes of ownership interests in a partnership return.

The “problem,” such as it is, comes from the tax statutes that exempt some business income from self-employment tax, and from the IRS failure to provide clear guidance to either examiners or taxpayers — not from the courts’ attempts to prevent taxpayer abuse.

Related:

 ‘JOHN EDWARDS SHELTER’ TARGETED BY IRS

Eighth Circuit upholds ‘Watson’ decision requiring increased comp for CPA S corporation shareholder

Update: Don’t miss Tony Nitti’s long-form analysis, S Corporation Shareholder Compensation: How Much Is Enough?

 

Lois Lerner, IRS, FEC

Lois Lerner, IRS, FEC

This is why the IRS political scandal is such a big deal.  Who Will Audit the Auditors(Steven Malanga):

The Internal Revenue Service’s targeting of conservative groups has revived old fears about the agency’s vast taxing and auditing powers, so easy to abuse. But the IRS isn’t alone in holding those powers. Across the country, states and municipalities have endowed thousands of revenue and audit bureaucracies with similar capabilities. Critics complain that officials use these entities to harass enemies and help allies. The evidence makes clear just how well-founded those concerns are—especially since these agencies typically receive far less scrutiny than the IRS does.

Using tax laws to silence opposition is a standard part of the Russia and Ukraine dictator toolkit.  And it has happened here, too.   That’s why talk over whether one organization might have had it coming misses the point.  It’s clear that only the Administrations political opponents are getting that sort of examination.  And the IRS can make life difficult even if you are squeaky clean.

TaxProf, The IRS Scandal, Day 120

 

Wall Street Journal,  IRS Rule Leads Restaurants to Rethink Automatic Tips; Gratuities Added for Large Groups Will Be Taxed as Service Charges

 

Starting in January, the Internal Revenue Service will begin classifying those automatic gratuities as service charges—which it treats as regular wages, subject to payroll tax withholding—instead of tips, which restaurants leave up to the employees to report as income.

The change would mean more paperwork and added costs for the restaurants—and a potential financial hit for waiters and waitresses who live on their tips but don’t always report them fully.

Some big restaurants are reconsidering automatic tips on large parties.

 

Answer: the cost, especially when you are young and healthy.  What’s up with Insurance Premiums under Obamacare?  (Kyle Pomerleau, Tax Policy Blog)

 

Roberton Williams, A Closing Window for Some Same-Sex Couples to File 2012 Tax Returns:

But most reports on the ruling have missed an important detail: the IRS will begin applying the new rule on September 16. That gives same-sex couples who haven’t yet filed their 2012 tax returns just a few more days to file as individuals if they choose to do so.

Multiple-sex couples are unaffected.

 

TaxGrrrl, Back To School: Teacher & Educator Expenses 

Russ Fox,  IRS Interest Rates Unchanged for the Fourth Quarter

Kay Bell,  State taxes take a big bite out of most NFL players’ incomes

Paul Neiffer,  Notice to Employees of Coverage Options Due October 1st  More pointless government-mandated busywork for you!

Peter Reilly, Parent Booster Clubs – Raising Money For Your Own Kid Is Not Charity

Steven Olsen,  Tax Court Holds IRS Must Follow Corporation’s Designation on Tax Payment. (Procedurally Taxing):

To pay the restitution for their individual income tax, the Dixons paid the funds to Tryco, and then had Tryco submit payment with Form 941 and a cover letter stating the payment was “to be applied to the withheld income taxes of [the Dixons]” for the applicable years. Initially, the Service followed those directions, and then reversed course and applied the funds to the unpaid employment taxes.

The court held for the taxpayers.

 

Jack Townsend,  Outlier Foreign Investment Conviction

Robert D. Flach has his Friday Buzz on!

 

It’s comical.  Exclusive: Vintage Tax Reform Comic Book Now Online! (Tax Justice Blog)

Christopher Bergin, The Story of Tax AnalystsA little video that tells how this little non-profit has done so much to make the tax law less of an insider’s game.

It’s a little over three minutes, and it would be worth watching just for the old office technology pictured — but it’s especially valuable to see just how far back the IRS desire to hide what it does goes.

Accounting career news. Accounting Career Conundrums: How Soon Is Too Soon to Quit?   Anytime before tax season, if you work for me.  Otherwise, suit yourself.  (Going Concern)

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Tax Roundup, 9/3/2013: Iowa’s multi-talented revenue examiners. And social media dos and don’ts.

Tuesday, September 3rd, 2013 by Joe Kristan

 

The Hoover Office Building, the warm and cuddly home of the Iowa Department of Revenue.

The Hoover Office Building, the warm and cuddly home of the Iowa Department of Revenue.

Iowa income tax examiners don’t just deal with state issues.  In recent years the Iowa Department of Revenue has been examining hobby loss issues by itself.  This is a departure from past practice, where Iowa usually only examined state-specific issues, like residency and allocation of multistate income.

A new protest resolution released last week shows that while the Department may start an examination on hobby loss issues, it doesn’t have to stop there.  The department examined a couple’s horse operation and concluded that it wasn’t operated for profit, disallowing the resulting “hobby losses.”  That’s not a shocking result, as horse operations are often challenged on hobby loss grounds.   But the department wasn’t done (my emphasis):

In regards to the day care business, the Department explained in previous correspondence that the taxpayers cannot take a deduction for the business use of the home, except for real estate taxes and mortgage insurance which are allowable on Schedule A.  The taxpayers have already filed amended returns reducing the meal expense claimed on the original returns.  The Department accepts the amended meal expenses.  The Department also denies several other items because they are not ordinary and necessary business expenses, such as landscaping, auto repair, and picture frames.  All items denied are on the enclosed schedule. 

The final adjustment is to charitable contributions on Schedule A.  The Department denies the  “Haiti” contributions for all three years because there is no evidence the contributions were made to a qualified  charitable organization.  See IRC Sec. 170(c).  Contributions made directly to an individual or to groups of individuals are not deductible.  Also, the Department denies the contributions to Covenant House on the 2009 return.  There is not enough information to confirm that Covenant House is a qualified organization.

If the Department comes for the hobby losses, they just might stay for the whole return.

Cite: Van Veldhuizen, Document Reference: 13201028

 

Peter Reilly, $10,000,000 North Carolina Domicile Case Shows Importance Of Planning   If you want to move to low-tax Florida before selling a business, you need to do it early and do it right.

Greg Mankiw, Marginal Tax Rates under Obamacare.  He quotes a new paper: “Measured in percentage points, the Affordable Care Act will, by 2015, add about twelve times more to average marginal labor income tax rates nationwide than the Massachusetts health reform added to average rates in Massachusetts following its 2006 statewide health reform.”

What does that mean?  Tyler Cowen quotes the same paper:

The law increases marginal tax rates by an average of five percentage points (of employee compensation), on top of the marginal tax rates that were already present before the it went into effect. The ACA’s addition to labor tax wedges is roughly equivalent to doubling both employer and employee payroll tax rates for half of the population. 


I’m sure that half is all in the top 1%.


The great Ronald Coase has died at a still too-young 102.  An appreciation. (via Tyler Cowen)

Courtney Strutt-Todd, IRS Provides Answers to Filing Questions for Same-Sex Couples (Davis Brown Tax Law Blog) 







After a big three-Buzz week last week, Robert D. Flach Buzzes again!



20130903-1Finland follies.  Finns normally sensible and wonderful people.  Our Finnish exchange student is terrific.  But like everyone else, they have politicians who won’t mind their own business,  reports Lyman Stone (Tax Policy Blog):
The Wall Street Journal reports that Finland’s 2011 tax on sugary goods is driving ice cream trucks out of business, and that Mexico is considering implementing its own sugar and sweets tax under the auspices of curbing obesity. In 2014, Finland will add more products, like cookies and jam, to its list of taxed goods. These taxes are particularly notable because Mexico has the second highest per capita soda consumption in the world, while Finland has among the highest rates of ice cream consumption.

Finland has some of the worlds highest consumption rates of alcohol and coffee.  And there’s no sugar in vodka.

TaxGrrrl, Would ‘Very High Taxes’ Keep Unemployment Rates Low?  Ask the Finnish ice cream truck drivers.



Career Advice Department, Social Media Section.  In my recent interview, I answered the question “what advice would you offer to the new accountant concerning the role of social media in their profession.”   If I were answering the question today, I would just say don’t do this.

 

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Tax Roundup, 8/30/2013: Same-sex joint return frenzy edition.

Friday, August 30th, 2013 by Joe Kristan

Wed in Iowa, still married in Utah.  The IRS yesterday announced that same-sex couples married legally in any state will be treated as married for tax purposes, even if they reside in a state that does not recognize same-sex marriages.

The IRS also announced that couples that married in earlier years may amend their tax returns to claim joint filing status for open married tax years.  However, they will not be required to.  Couples who extended their 2009 returns have until October 15, 2013 to file amended 2009 returns.  Otherwise, 2010 is the earliest possible open year.

The announcement cuts both ways.  If the IRS says you are married, you no longer have the option of filing as a single taxpayer.  Many couples find that marital bliss comes at a tax price.  This chart from the Tax Foundation illustrates income situations where marriage can be more costly than single status:

Marriage penalty

The opportunity for same-sex couples to choose between single and joint status for open years is unique.   This only goes one way, though; joint filers cannot amend their open years to file as single taxpayers.

Couples who have legal status short of marriage, such as “registered domestic partners” recognized in some states, are not considered married by the IRS.

Other IRS releases on the issue:

Rev. Rul. 2013-17

Frequently Asked Questions For Legally Married Same-Sex Couples  and For Registered Domestic Partners, Civil Unions

Lot’s of coverage of this in the tax blog world.  Iowa’s own Jason Dinesen has long owned this issue, and he comes through with BREAKING: IRS Releases Guidance on Same-Sex Marriage The IRS’s DOMA Guidance: How are Iowa Returns Affected?What if One Spouse in a Same-Sex Marriage Hasn’t Filed Yet? and Will Same-Sex Married Couples Be Required to Amend? 

The Tax Policy Blog has also flooded the zone:

Elizabeth Malm,  Same-Sex Marriages Recognized for Federal Tax Purposes – What Does it Mean for the States?

Nick Kasprak, State of Celebration and Marriage Penalties and Bonuses (Families with Children Edition)

Other coverage:

TaxProf, IRS Recognizes Same-Sex Marriage, Regardless of State

Kay Bell, IRS grants same-sex married couples equal federal tax filing status regardless of where in the United States they live

Trish McIntire, The IRS and DOMA – part 1

Peter Reilly, IRS Recognizes All Marriages But Not Civil Unions

TaxGrrrl, IRS Rules All Legal Same Sex Marriages Will Be Recognized For Federal Tax Purposes   

Tax Trials, IRS Recognizes Same-Sex Marriages in All States

Althouse, “All Legal Same-Sex Marriages Will Be Recognized for Federal Tax Purposes.”

Going Concern, IRS to Recognize All Same-sex Marriages, Regardless of Resident State

Linda Beale,  Same-Sex Married Couples Will be Recognized for Federal Tax Purposes Even When Moving to Nonrecognition State

The Iowa angle: IRS will recognize marriage of same-sex Iowa couples (Des Moines Register)

 

There is a little other news today:

43 percent is the new 47 percent.  And Now for the Movie: Fewer Americans Pay No Federal Income Tax (Roberton Williams, TaxVox):

The percentage of Americans who pay no federal income tax is falling, thanks to an improving economy and the expiration of temporary Great Recession-era tax cuts. In 2009, the Tax Policy Center estimated that 47 percent of households paid no federal income tax. This year, just 43 percent will avoid the tax.
That is good news, as far as it goes.  It’s not healthy to have only a minority paying income tax, the primary funding source for big government.  It’s too tempting to order a double when someone else is picking up the tab.   Mr. Williams thinks that we should count payroll taxes like income taxes, but I agree with Robert D. Flach that they’re not the same thing.

 

Tony Nitti, Tax Aspects Of The NFL Settlement Payments  “Well, if you’re a retired NFL football player, the Blue Book value has been set: your cognitive capacity is worth a cool $150,000.”

Andrew Lundeen,  Why Eliminating Taxes on Capital Would Be Good for Workers (Tax Policy Blog)

Jack Townsend, Another Israeli Bank Depositor Plea to Conspiracy

Robert D. Flach tops off a heroic week with a third Buzz!

 

Perhaps this isn’t the best way to handle an IRS exam.  Tax Analysts reports ($link) on a taxpayer who alleged that an IRS agent coerced him into sex:

Burroughs had sex with Abrahamson in September 2011 when she arrived at his home “provocatively attired,” according to the suit. U.S. Magistrate Judge Thomas Coffin concluded in the July 31 decision that Abrahamson was not acting in her official capacity, because the encounter occurred at Burroughs’s home during nonwork hours and “not in respect to the performance of official duties of the federal employee.”

One survivor of an IRS exam told me that she felt the least the IRS owed her for the experience was drinks and dinner.

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Tax Roundup, 8/27/2013: This isn’t Butte edition. And: you’re not your mom!

Tuesday, August 27th, 2013 by Joe Kristan

Flickr image by Ellenm1 under Creative Commons licenseThe Great Iowa RV Roundup.  Iowa has caught on to recreational vehicle owners who have registered their units in Montana to save taxes and fees.  Now the Department of Revenue is giving these Iomontanans a chance to come clean and avoid harsh newly-enacted penalties for misregistration.

From the Des Moines Register:

State officials say the offer would require owners to pay a 5 percent vehicle registration fee, based on the purchase price. They also would pay a penalty of 10 percent of the fee.

So under the terms of the settlement, the owner of a $200,000 motor home registered in Montana would pay a $10,000 fee to properly register it in Iowa. On top of that, a $1,000 penalty would be assessed.

Violators who don’t accept the settlement could face fraud charges, ranging from a simple misdemeanor to a felony. They can also be hit with fines equal to 75 percent of the fee that was evaded. For example, if someone should have paid $25,000 on a plush $500,000 motor home, they could be slapped with total fees and penalties of $43,750.

I think you could buy a passable used camper for $43,750.

 

Richard Borean, Scott Drenkard, Monday Map: Combined State and Local Sales Tax Rates

c7ketyi3

 

Iowa’s just about in the middle.

 

You’re not your Momma.  While mothers love to help out their children, a St. Louis-area man seems to have expected too much of Mom when he filed his tax returns.  Stltoday.com reports:

To reduce his tax liability, he claimed $18.2 million in losses associated with a number of entities, including Morriss Holdings, MIC Aircraft, Tech Aircraft and MIC Real Estate, that were limited liability companies established for his mother. His mother had already claimed the losses for her own benefit in previous years, the U.S. Attorney’s Office said.

There are some things Mom just can’t do for you.  The man pleaded guilty to tax evasion charges yesterday.

 

Martin Sullivan, New Hampshire’s Value Added Tax (Tax Analysts Blog):

But where New Hampshire really shines is with its Business Enterprise Tax. Like the BPT, the BET applies to all business regardless of legal form. Newly-elected Republican Governor Steve Merrill was the driving force behind original passage of the tax in 1993. The original rate was 0.5 percent. It is now 0.75 percent. The tax base is the sum of: (1) compensation paid to employees; (2) interest paid on debt; and (3) distributions to shareholders and owners. Except for the exclusion of undistributed profits from the tax base, the sum of these components is a firm’s value-added tax.

I still prefer the Tax Update Quick and Dirty Iowa Tax Reform Plan.

 

Rapper “Fat Joe” reports to prison to serve a four-month tax crime sentence. (TMZ.com)

TaxProf,  The IRS Scandal, Day 110

Roberton Williams,  Honey, I Shrunk the AMT (But It’s Not Gone) (TaxVox):

So the AMT lives on, complicating the tax returns of more Americans every year. For many, it will come as a nasty surprise: new AMT taxpayers often learn about the bonus tax only when a letter from the IRS tells them they owe extra tax plus interest and possibly penalties. 

The AMT amounts to a big lie.  They pretend to give you a tax break, but then AMT makes it go away.

 

Jeremy Scott, Cruz’s Push to Defund Obamacare Could Derail Tax Reform (Tax Analysts Blog)

TaxGrrrl, IRS To Michael Jackson’s Estate: Who’s Bad?   A $700 million estate tax battle.

Paul Neiffer,  Installment Sale Update, clarifying the application of the Obamacare Net Investment Income Tax on active farmers.

Kay Bell, Spaniards hot under collar after government taxes the sun 

Me, Charity may begin at home, but not with the down payment.  A “down payment assistance” outfit comes to grief in Tax Court.

 

News you can use.  Open Atheists Already Collect Tax-Free Clergy Housing Allowances  (Peter Reilly)

Career tips: Partners Hate Nothing More Than Employees Skipping Training Because They’re Working, Nursing a Hangover (Going Concern)  It’s a good thing we don’t have national training at our firm!

 

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Tax Roundup, 8/14/2013: Tax Court Trifecta: IRS agent gets creative on her own 1040, Shareholder stuck, and not quite a real estate pro.

Wednesday, August 14th, 2013 by Joe Kristan

20130121-2More reasons we should trust the IRS to regulate preparers.  The Tax Court yesterday addressed the charitable deductions of a revenue agent with the IRS Manhattan office.   The Tax Court judge found the documentation for the claimed contributions to Living Stone Baptist Church  insufficient (my emphasis):

Petitioner was not a member of LSBC during the years in issue. Pastor Mobley was clear that he knew all his congregants by name and face and that he did not know petitioner. Pastor Mobley apparently first met petitioner in 2011 after the examination of petitioner’s tax returns commenced. It seems improbable that petitioner ever attended LSBC and even less probable that she made donations in any amount. It appears highly probable that petitioner, in concert with her longtime friend and fellow IRS employee, cut and pasted stationery from LSBC and provided the same to the IRS agent examining the returns in an attempt to support the claimed deductions. That attempt failed when the IRS agent attempted to verify the reported contributions with Pastor Mobley. The pastor made clear that he did not authorize the receipts to be prepared or issued on LSBC stationery, nor did he sign any such receipts. Even after these false documents were exposed by the examining revenue agent, petitioner continued to pursue her efforts to obtain documents in support of the reported contributions.

Surely we should all welcome folks like that having the power to control whether we can make a living filing returns.

Cite: Payne, T.C. Summ. OP. 2013-65.

 

The Tax Court released two other interesting decisions yesterday:

You may still be a shareholder!  In Kumar, a radiologist had a falling out with his fellow shareholders in his medical practice S corporation, and was frozen out of the business.  Yet he still owned shares in the company and still received his K-1, and was eventually redeemed out in a settlement.  He failed to report income from one of his K-1s, claiming he no longer really owned the shares.  The Court ruled otherwise:

Thus, Dr. Kumar retained the beneficial ownership of the PSLV shares. There was no agreement giving Dr. Woody any rights to Dr. Kumar’s stock during the year at issue, and Dr. Woody’s interference with Dr. Kumar’s participation in PSLV did not deprive Dr. Kumar of the economic benefit of his PSLV shares. Thus, we conclude that the beneficial ownership test does not relieve Dr. Kumar  from passthrough of PSLV profits and petitioners must report $215,920 of income and $2,344 of interest income from PSLV. 

If you get the K-1, you probably have to report the income.

 

If you want to prove your participation, log your time.  In Williamsa taxpayer tried to convince the Tax Court that he met the two tests for being a real estate professional under the passive loss rules, and could therefore deduct his rental losses as non-passive.  To meet the tests, you have to spend at least 750 hours during the tax year participating in a “real property trade or business,” and that has to exceed the time you spend in other activities.  It’s up to the taxpayer to show the time spent, and the judge wasn’t convinced:

Mr. Williams testified he spent over 800 hours and more than one-half of his time performing personal services in the rental property activity for each year at issue. Petitioners failed to introduce documentation or other credible evidence corroborating Mr. Williams’ testimony.

Moreover, respondent’s cross-examination of Mr. Williams revealed that his testimony was inconsistent with other credible evidence and unreliable. 

“Documentation or other credible evidence” means a log, calendar or spreadsheet prepared currently during the tax year.  For an example of a taxpayer who kept records sufficient to win his case, go here.

 

TaxGrrrl,  IRS Proposes To Permanently Ease Restrictions For Innocent Spouse Relief   

Kay Bell, Social Security same-sex benefits limited (for now)  to states where such marriages are legal. Will IRS follow suit?

TaxProf,  The IRS Scandal, Day 97

Lori Bullock,  Social Media, the Internal Revenue Service and You (Davis Brown Tax Law Blog).  Now IRS has a Tumblr.

Paul Neiffer discusses the legislative progress of  The New Farm Bill.  You’d think that 70 years after the Depression ended, Congress might allow anti-depression measures to expire.

 

Kyle Pomerleau,  Japan Further Discusses Lowering Their Corporate Rate (Tax Policy Blog)

Roberton Williams, Paying for Corporate Tax Rate Cuts is Hard (TaxVox)

David Brunori, I Like the Internet, Taxed or Not (Tax Analysts Blog). “But come on. We are still trying to give a special tax break to the Internet?”

Tax Justice Blog,  State News Quick Hits: Texas, New York and Hollywood:

Between 2003 and 2012 the average Hollywood movie earned a 452 (!) percent return on investment. Still, 40-some states offer generous film tax credits in a misguided effort to invite productions.

But, parties!

 

Me, The perils of an unorthodox approach to tax crime explained.

 

He won’t ride his dinosaur into the sunset.  Doctor Dino – Kent Hovind May Lose In Court But Will Never Give Up (Peter Reilly)

Tax Planning the hard way:  People Are Having Babies Earlier to Max Out Tax Benefits (Going Concern)

Answering the Critical Question:  ‘Little House’ Is Not a Big Libertarian Conspiracy (Megan McArdle)

 

Note to readers: Tax Update posts are cross-posted to the Tax Update Facebook page, My LinkedIn page, and my GooglePlus feed.  Also on Twitter at @joebwan!

 

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Tax Roundup, 4/12/2013: Friday frenzy edition

Friday, April 12th, 2013 by Joe Kristan

20130104-1We’re down to the wire, so we’re going with a bare-bones roundup today.  Filing deadline is Monday, kids!

 

Kay Bell, 3 ways to e-pay your tax bill

Peter Reilly,  April 15 What To Do If You Don’t Have The Dough

TaxGrrrl,  Last Minute Tax Filing Tips

Russ Fox,  Bozo Tax Tip #1: Don’t Be Suspicious!

Me: Does my share of partnership debt let me deduct K-1 losses?  Yesterday’s 2013 Filing Season Tip.  One-a-day through Monday.  Today’s goes up later this morning.  Collect them all!

 

Kyle Pomerleau, TPC, What About the “Pass-Throughs?”. (Tax Policy Blog). Measuring business taxes needs to look beyond corporation taxes when most businesses are taxed on 1040s.

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Nanette Byrnes,  Middle class tax hikes loom in Obama proposal despite pledge, and more (Tax Break)

Janet Novack, Could Obama’s Plan To Curb The Boss’ Tax Breaks Hurt Workers’ Retirements?   They want you to save, unless you are too good at it.

Roberton Williams,  Taxing Millionaires: Obama’s Buffett Rule (TaxVox)  “But it turns out that setting a floor on the taxes rich people pay is not so easy.”

David Cay Johnston, Promises, Promises (Tax.com).  “Candidate Obama promised in 2008 to reform the Alternative Minimum Tax, and President Obama promised at least an honest accounting in his first budget, but his proposed budget for Fiscal 2014 is silent on the issue.”

Tax Trials,  Can the IRS Read Your Email?

Jack Townsend,  Restitution, Relevant Conduct, Counts of Conviction.  What gets counted when a judge orders a tax criminal to pay restitution?

 

Unclear on the concept:  When you steal somebody’s identity and claim their tax refund, having the refund check mailed to the victim’s home defeats your purpose.

 

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Tax Roundup, 4/8/13: One week to go! And thinking out of the envelope

Monday, April 8th, 2013 by Joe Kristan
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Greg Mankiw,  The President’s Latest Bad Idea:

Apparently, President Obama’s budget is going to include some kind of penalty for people who have accumulated more than $3 million in retirement accounts.  The details are not yet known, but I think we know enough to say that this is a terrible idea.

A sizable body of work in public finance suggests that consumption taxes are preferable to income taxes.  Completely replacing our tax system with a better one is, however, hard.  Retirement accounts, such as IRAs and 401k plans, are one way our tax code has gradually evolved from an income tax toward a consumption tax.  The use of these accounts should be encouraged, not discouraged.   

Unlike some of his other bad ideas, this one isn’t going anywhere.

William McBride, President Obama’s New Tax Increases (Tax Policy Blog)

 

TaxProf,  NY Times: Former Baucus Staffers Cash in as Finance Committee Tees Up Tax Reform.  Ah, the sacrifices of public service.  I bet they aren’t proposing the Instapundit revolving door tax.  Related: Max Baucus and Dave Camp,  Tax Reform Is Very Much Alive and Doable.  (Wall Street Journal).

 

Paul Neiffer. 3%-6%-12%:

One of our last posts indicated that the IRS had issued a notice indicating they might not assess the late payment penalty for returns that are extended and paid after April 15, 2013 if the return included certain forms that were delayed by the new tax law.

However, when you read the fine print, it appears that you still need to accurately estimate your tax and pay in at least 90% of this extra tax to escape the penalty.

The IRS language is:

For each taxpayer who requests or has requested an extension to file a 2012 income tax return that includes one of the forms listed in Exhibit 1 of this Notice, the IRS will deem the taxpayer to have demonstrated reasonable cause and lack of willful neglect, provided a good faith effort was made to properly estimate the tax liability on the extension application, the estimated amount is paid by the original due date of the return, and any tax owed on the return is fully paid no later than the extended due date of the return.

I suspect that the IRS will not be very strict in making taxpayers demonstrate reasonable cause, but if you have the cash, you should  pay up.

 

William Perez,  Filing Protective Claims for 2009 Tax Returns for Same-Sex Married Couples

Kay Bell, 6 ways to prepare and e-file your federal taxes for free

TaxGrrrl, Ask The Taxgirl: Home Offices And Capital Improvements

Roberton Williams, How Much Will 2013’s Payroll Tax Hikes Cut Your Take-Home Pay?

 

Peter Reilly,  Wesley Snipes Almost Out – Kent Hovind Remains In Prison

Russ Fox, Bozo Tax Tip #5: Don’t Seal the Envelope!

One of her clients mailed his tax return to the IRS but forgot to seal the envelope.  The return did make it to the IRS, but without page two of Schedule C.  The first that the client found out there was a problem was when the IRS sent him a letter noting the omission.  The second time he knew that there was a problem was when she found she was a victim of identity theft.

E-filed returns never fall out of the envelope.

 

Jack Townsend,  Good Overview Article on Financial Issues for Americans Living Abroad

Phil Hodgen,  Form 1040NR Filing, Tax Payment Deadlines

 

The criminal masterminds that the IRS can’t stop.  Tampa exotic dancer sentenced for tax fraud (tbo.com)

The Critical Question.  News Analysis: Why Are Fee Waivers Like Deep-Fried Twinkies? (Lee Sheppard, Tax Analysts; gated).

 

Stay tuned for my first 2013 filing season tip going up later this morning!

 

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Tax Roundup, 3/27/2013: Iowa leads the nation! In high corporate tax rates. And: film scam? No prize for you!

Wednesday, March 27th, 2013 by Joe Kristan

We’re number one!  Weekly Map: Top State Corporate Income Tax Rates (Nick Kasprak, Tax Policy Blog):

Via Tax Policy Blog.

Just another dubious leadership role for Iowa.

 

 

Monday Open Thread: The Tax Man Cometh(The Other McCain).  If you were tax dictator, what would be the first bad tax law to go?  I would get rid of (in order) The AMT, Section 409A on deferred compensation, and the new net investment income tax.  But there are so many worthy candidates…

 

Philip Panitz, guest-posting at Janet Novack’s blog,  How Real Estate Investors Can Protect Themselves From The IRS:

So save all your expense receipts, try to keep a log, and try to stay friendly with—and maintain contact information for—workers and tenants. You might, for example, need to call as a witness a gardener who can say he got his instructions directly from you instead of a real estate company.  And maybe the guy who is always grousing about his plumbing needing fixing or the woman who wonders why the gardener missed a spot in his watering will be asked to testify that they kvetched to you —not a real estate agent–when the toilet needed fixing.

 

U.S. film festival cancels award to UK film after tax scamPerhaps the least of actress Aoife Madden’s problems, considering the 54 month prison sentence she got out of it.

 

Jason Dinesen,  Married Filing Separately, Iowa Tax Returns & Itemized Deductions — Am I Missing Something?  On the quirks of Iowa’s separate-combined filing status.

Roberton Williams, DOMA’s Tax Hassles for Same-Sex Couples

 

Clint Stretch,  Which Kind of Imbalanced Solution Do You Want?  (Tax.com).  Mr. Stretch is, or maybe was, a career lobbyist for a national accounting firm that I once worked for.  Considering that his career involved crafting loopholes, this is a fascinating observation (my emphasis):

I am no fan of spending through the tax code. Tax expenditures are government grants with the barest of qualification criteria administered by an agency with no subject matter expertise when it comes to the purpose of the incentive.  The incentives – from business tax credits to mortgage interest deductions – may influence behavior at the margins,
but many of the beneficiaries are rewarded for doing what they were going to do anyway.  Like direct spending; tax expenditures are spending and individuals do benefit.  Although a rate reduction or a fiscally sound government might cushion the blow, reducing tax expenditures will be another spending cut that takes resources away from affected taxpayers.  We should stop talking about spending versus taxes.  Instead, we should work on how to make reasonable, holistic reductions in major areas of government influence. 

That’s why I think he must have retired.  I don’t think he could say stuff like that if he were still lobbying.

 

Joseph Thorndike : Why the Tea Party Should Support Soda Taxes.  Because it would really annoy people, leading to a tax revolt.   It sounds like an underpants gnome approach to me.

Jack Townsend, IRS Identifies Its Dirty Dozen Tax Scams for 2013

Principles of the tax law.  Heads They Win – Tails You Lose (Paul Neiffer).  The Obamacare tax on wage income cannot be offset with farm losses.

TaxGrrrl,  All I Needed To Know About Taxes I Learned From My Kids

 

No, no, that’s not how it works, Senator.  You’re supposed to give them money.  Bored Politicians Taxing Strippers (David Brunori, Tax.com)

Group that stands to benefit from government spending calls for government spending.  (Radio Iowa)

Now the IRS is in trouble. William Shatner ‘appalled’ at IRS Star Trek video spoof (Kay Bell)

News you can use.  If You’re Failing the CPA Exam, You’re Not Making the Most of Bathroom Breaks (Going Concern)

 

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