Posts Tagged ‘Russ Fox’

Tax Roundup, 10/20/14: Extension season is over. Now what? And: do your part for Boeing!

Monday, October 20th, 2014 by Joe Kristan

We are now in the sweet spot of the tax year. We are done with extended 1040s, and it’s too early to get most people to do year-end tax planning. That’s why this is the continuing education season for most of us.

The Iowa State University Center for Agricultural Law and Taxation Farm and Urban Tax Schools begin next week. I will be speaking on the Day 1 program for all schools, starting October 28 in Waterloo, Iowa. Tour stops also include Maquoketa, Sheldon, Red Oak, Ottumwa, Mason City, Denison and Ames. Who said public accounting lacks glamour?

Now to get those slides prepared…

 

Government is just a word for things we do together. Like subsidizing big corporations. Using information from Good Jobs First, Veronique de Rugy of the Mercatus Institute provides a chart of the biggest known recipients of state subsidies:

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Meanwhile, everyone else pays a little higher tax rate to grease Boeing’s landing gear. I believe that the damage caused to the taxpayers who don’t get these subsidies makes losers out of the states that win tax incentive bidding wars.

 

20140805-3Kay Bell, 2014 tax planning starts with your tax bracket

Annette Nellen, Premium Tax Credit Problems, “This is a big deal because the PTC serves to help make health insurance affordable to individuals with income between 100% and 400% of the federal poverty line.”

TaxGrrrl, Apple Seeds Perk Wars, Adds Egg Freezing As Employee Benefit.  Is that a tax-free benefit? It makes me wonder about their work-life balance.

Peter Reilly, UnFair: Exposing The IRS – Does Not Make Strong Case Or Decent Documentary. Peter watched the movie so you don’t have to.

Tax Trials, Tax Court Preserves Taxpayer Protections against Arbitrary and Capricious Appeals Rulings

Russ Fox, Copying Steven Martinez’s Idea Is Not a Good Choice. If you think you need to murder nine witnesses to stay out of jail, you probably won’t stay out of jail.

 

 

The Tax Prof reports that Linda Beale will resume tax blogging after going off the air as a result of the death of her husband. My condolences to Linda and her family.

Jim Maule, Putting the Brakes on Tax Breaks. “Never do indirectly through taxes what can and should be done directly.”

 

Andrew Lundeen, Most Common Jobs by Income Bracket (Tax Policy Blog). The professions do well.

Richard Auxier, Ahead of the Midterms, State Economic Trends Present Mixed Signals (TaxVox). “A September Pew Research poll found that while Americans’ assessment of job opportunities had improved, 56 percent reported their family’s income was falling behind the cost of living.”

 

TaxProf, The IRS Scandal, Day 529

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Quotable. Tax Analysts David Brunori  on a proposed film credit for the music industry in New York ($link):

Like their film equivalents, tax breaks for musicians are bad tax policy. Even if music producers were swayed by taxes, those breaks would be bad policy. Why musicians? Why not cab drivers? Orthodontists? Flamenco dancers? New York lawmakers, many of whom wanted to be Billy Joel growing up, will probably say yes to this terrible idea.

While I have a rooting interest in the music industry, the tax credit idea is awful.

 

News from the Profession. Let’s Watch This Audit Senior Quit His Job in the Most Fabulous Way (Adrienne Gonzalez, Going Concern)

 

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

Monday, October 13th, 2014 by Joe Kristan

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

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

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

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

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

Cite: Morehouse, CA-8, No. 13-3110.

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

 

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

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

 

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

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

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

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

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

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

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

Jack Townsend, Bitcoins Update

Jason Dinesen, Glossary: Filing Status

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TaxProf, The IRS Scandal, Day 522

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

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

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

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

 

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

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

 

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Tax Roundup, 10/9/14: Tax-exempt now, tax-exempt forever! And: Real Housewife, real plea deal.

Thursday, October 9th, 2014 by Joe Kristan

 

Accounting Today visitors, click here for the pile of clothes.

 

20120511-2Maybe somebody has tried this before, but as far as I know, this is a new bad idea.  Mr. Lundy, a Florida man, received a non-taxable disability settlement. The IRS didn’t dispute that the settlement was exempt. But then things went to another level.  Tax Court Judge Armen explains (my emphasis):

Rather, petitioners contend that they invested Mr. Lundy’s disability retirement income (which respondent does not challenge as nontaxable) in Mrs. Lundy’s sole proprietorship and that, as a consequence, income generated by that proprietorship is nontaxable. Or, in petitioners’ words: “[A]ny thing we funded with those funds were completely tax free also.”

interesting argument. Once you get a tax-free dollar, anything that grows from that dollar is tax-free forever. That would be awesome. You could invest in municipal bonds, and then anything you buy with the exempt interest would be tax-free too!  If only it worked that way…

Alas, it doesn’t.  Judge Armen elaborates:

In arguing as they do, petitioners fail to distinguish between an item that is excludable from income and the income that such an item may produce once it is invested. Many items are statutorily excluded from gross income. For example, gross income does not include the value of property acquired by gift or inheritance. Sec. 102(a). In contrast, income generated from property acquired by gift or inheritance does not come within such statutory exclusion.

Dang.

Cite: Lundby, T.C. Memo 2014-209.

 

Russ Fox, It’s Not As If Anything Is Happening Right After This…:

And there is. For reasons that only the bureaucrats at the IRS can fathom, every year over Columbus Day weekend the IRS shuts down their computer systems. This includes processing of returns and IRS e-services.

Well, it’s not like there’s a deadline coming up or anything. Oh, wait…

 

The “Real Housewives” casting department apparently didn’t test reading comprehension. TaxGrrrl reports: Real Housewives’ Teresa Giudice Claims She Didn’t Know That Jail Was A Possibility:

The sentence came as a shock to Teresa who claimed, in the interview, that her lawyer did not tell her jail time was a possibility under the plea. She said about the plea, “I didn’t fully understand it. I thought my lawyer was going to fight for me. I mean, that’s what lawyers do. I don’t know. That’s why you hire an attorney. You put it in their hands.”

This shows the importance of reading legal documents before you sign them. She signed a plea agreement with the language excerpted here:

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I’m not sure how you can sign something that says “the sentencing judge may impose any reasonable sentence up to and including the statutory maximum term” and feel safe. But then again, I’m not a real housewife.

 

harvestPaul Neiffer, Taxable is Taxable -Whether a 1099 or not! “The bottom line is any income received on the farm is taxable income whether there is a form 1099 or not.”

Jack Townsend, IRS Grants Automatic Treaty Relief for Canadian RRSPs and RRIFs

Kay Bell, Don’t overlook tax breaks in your rush to file by Oct. 15

 

Liz Malm, How Does Your State Score on Property Tax Administration? Probably Not Very Well (Tax Policy Blog). Iowa gets a C.

 

Cara Griffith, Is the Maryland Tax Court Hiding Its Opinions? (Tax Analysts Blog)

Here’s the problem: The Maryland Tax Court publishes a small fraction of its decisions online. It published a single decision in 2013 and has yet to publish a decision in 2014. The court has, of course, issued far more decisions; it simply chooses not to make them publicly available. One would presume, then, that the court retains all decisions and that if a taxpayer or practitioner wanted to review those decisions, a copy could be requested. But it is not that simple in Maryland. 
According to the court’s most recent retention schedule, decisions are to be permanently retained and periodically transferred to the Maryland State Archives. In reality, however, the tax court retains them for three years, but then the decisions are “shredded.” They are not sent to the archives.

Strange. If decisions aren’t public, they are of no use for taxpayers and practitioners trying to follow an often uncertain tax law. The shredding can also provide cover for favoritism or incompetence on the bench. Outrageous.

 

Howard Gleckman, Ryan and Lew Both Object to JCT Scoring of Future Tax Reform (TaxVox). “Like a couple of baseball managers working the umpires before a big World Series game, Treasury Secretary Jack Lew and Representative Paul Ryan (R-WI), who wants to be the next chair of the House Ways & Means Committee, are looking to change the way Congress scores tax reform even before Congress begins a rewrite.”

TaxProf, The IRS Scandal, Day 519.

News from the Profession. Comcast: Let It Be Known That We Did Not Ask PwC to Fire That Guy (Caleb Newquist, Going Concern)

 

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Tax Roundup, 10/8/14: Koskinen warns of another hellish filing season. And: FATCA “tormenting” offshore taxpayers.

Wednesday, October 8th, 2014 by Joe Kristan
The Younkers Building ruins, morning, March 29, 2014.

The Younkers Building ruins, morning, March 29, 2014.

Here we go again. We know from bitter experience that Congress might cause tax season delays by passing an election-year “extenders” bill at the last minute. IRS Commissioner Koskinen gave official warning yesterday in a letter to the head of the Senate Finance Committee:

This uncertainty, if it persists into December or later, could force the IRS to postpone the opening of the 2015 filing season and delay the processing of tax refunds for millions of taxpayers. Moreover, if Congress enacts any policy changes to the existing extenders or adds new provisions, the IRS would have to reprogram systems and make processing changes, which would result in longer delays. If Congress waits until 2015 and then enacts retroactive tax law changes affecting 2014, the operational and compliance challenges would be even more severe — likely resulting in service disruptions, millions of taxpayers needing to file amended returns, and substantially delayed refunds.

It was just such retroactive changes that made the 2013 filing season so awful. Add the first go round for Obamacare penalty computations on tax returns, and we can look forward to an even more wonderful tax season in 2015.

I predict that we will get a last-minute passage of the Lazarus provisions that keep dying and being resurrected, sometime in December. Of course, it could drag into January again. I expect pretty much all of the expiring provisions, including bonus depreciation, to be included. But I never rule out Congress dropping the ball entirely.

Other coverage: Richard Rubin, IRS Warns of Tax-Filing Season Delays If Congress Stalls 

Joint Committee on Taxation, list of expiring provisions 2013-2024 (pdf).

 

20140815-2Taxpayer Advocate: FATCA “Tormenting” TaxpayersTaxpayer Advocate Nina Olson doesn’t seem to be a fan of FATCA. She spoke to the Financial Markets Association yesterday, and it sounds like she foresees bad things ($link, my emphasis.):

“This is a piece of legislation that is so big and so far-reaching, and [has] so many different moving pieces, and is rolling out in an incremental fashion . . . that you really won’t be able to know what its consequences are, intended or otherwise,” Olson said. “I don’t think we’ll know that for years. And by that point we’ll actually be a little too late to go, ‘Oops, my bad, we shouldn’t have done this,’ and then try to unwind it.”

Wait, this was passed by our duly elected representatives. What could possibly go wrong?

Olson also questioned the penalty regime underlying FATCA. The law provides for a $10,000 penalty for failing to disclose a foreign bank account, and up to $50,000 for failing to disclose after IRS notification, she said. For someone with a $51,000 unreported foreign bank account, that could be a $60,000 penalty.

IRS policy states that penalties should be objectively proportioned to the offense, Olson said. “Putting a $60,000 penalty on someone for failing to report a $51,000 account does not seem to me like a penalty that is proportioned objectively to the offense,” she said.

Olson observed that a similar disproportionality emerged in recent IRS offshore voluntary disclosure initiatives, when the highest proportionate fines fell on the smallest accounts. In 2009 the median unreported balance for the smallest accounts was $44,000, she said. The lowest-balance account holders paid an FBAR penalty almost six times the actual tax due, she said. Yet the top 10 percent, with a median unreported balance of $7 million, paid a penalty roughly half the amount of tax owed, she said.

This is actually in keeping with the longstanding IRS policy of shooting jaywalkers while slapping the real international tax evaders on the wrist.

How could our legislative supergeniuses have come up with such an insane and unfair system? Look at the name of the legislation — “FATCA.” For fat cats, get it? They passed it claiming to be going after fat cats, but drafted it in a way that beats up on everybody working or living abroad attempting to commit personal finance. But because they “intended” to go after fat cats, they absolve themselves of guilt for the collateral damage, the financial devastation of the innocent and unwary, the retirements ruined. And they smear the rare politician who points out the insanity of FATCA with accusations of being soft on tax evasion.

 

canada flagThere was some rare good news on the offshore tax compliance front yesterday when the IRS made it easier to get favored tax treatment on Canadian retirement accounts:  IRS Simplifies Procedures for Favorable Tax Treatment on Canadian Retirement Plans and Annual Reporting Requirements:

The change relates to a longstanding provision in the U.S.-Canada tax treaty that enables U.S. citizens and resident aliens to defer tax on income accruing in their RRSP or RRIF until it is distributed. Otherwise, U.S. tax is due each year on this income, even if it is not distributed.

In the past, however, taxpayers generally would get tax deferral by attaching Form 8891 to their return and choosing this tax treaty benefit, something many eligible taxpayers failed to do. Before today’s change, a primary way to correct this omission and retroactively obtain the treaty benefit was to request a private letter ruling from the IRS, a costly and often time-consuming process.

Many taxpayers also failed to comply with another requirement; namely that they file Form 8891 each year reporting details about each RRSP and RRIF, including contributions made, income earned and distributions made. This requirement applied regardless of whether they chose the special tax treatment. The IRS is eliminating Form 8891, and taxpayers are no longer required to file this form for any year, past or present.

But in case you think the risk of fiscal catastrophe related to Canadian accounts is past, the IRS warns:

The revenue procedure does not modify any other U.S. reporting requirements that may apply under the Bank Secrecy Act (BSA) and section 6038D. See FinCEN Form 114 due by June 30 of each year, and Form 8938 attached to a U.S. income tax return for more information about the reporting requirements under the BSA and section 6038D.

In other words, you can still be assessed a penalty of 50% of the account balance for not filing an FBAR report on the accounts, or a $10,000 penalty for not disclosing a balance on Form 8938 foreign financial asset form. But if you get ruined by these penalties, consider it a sacrifice on the altar of “an improved set of global rules,” you fat cat.

Russ Fox has more: IRS Simplifies Reporting for RRSPs and RRIFs.

 

20141008-1William Perez, Missed the Tax Deadline? Here’s what penalties might apply

Donnie Johnson, Liz Malm, What Does Yesterday’s Supreme Court Same-Sex Marriage Appeal Denial Mean for Same-Sex Couple Tax Filers? (Tax Policy Blog). Maybe taxpayers in Indiana, Oklahoma, Utah, Virginia and Wisconsin could learn from Jason Dinesen’s work here in Iowa.

Kay Bell, Gambling pays out a $38 billion bonus to tax collectors.

Jason Dinesen, Glossary of Tax Terms: IRA

KCCI, Pharmacist’s trial has been moved to next year. The owner of Bauder’s Pharmacy, facing tax and other charges arising out of alleged illegal sales of painkillers, is now set to go on trial in February.

 

Howard Gleckman, How Asset Building Tax Subsidies Miss Their Targets (TaxVox):

Nearly one-third of all federal tax expenditures–$384 billion in 2013 alone– is aimed at various forms of asset building, such as retirement savings, higher education, and home ownership. Yet, according to research by several of my Tax Policy Center and Urban Institute colleagues, these tax breaks do little to help low-and middle-income households build wealth.

Gee, you might conclude that maybe not every problem is a tax problem.

 

Two more TaxGrrrl Guest Posts: The IRS’s Uncharitable Treatment Of Charitable Contributions (Andrew VanSingel) and Roadways And Taxes (Charles Horn III).

David Brunori, Last Stand for Soda Taxes — Hopefully (Tax Analysts Blog). “If they can’t get folks in uber-liberal San Francisco and Berkeley to vote for soda taxes, they should just hang up their hats.”

Sebastian Johnson rounds up some more Tax Proposals on the Ballot this Election Season at Tax Justice Blog.


TaxProf, The IRS Scandal, Day 517

Jeremy Scott, Will the EU Commission Crack Down on Irish Tax Deals? (Tax Analysts Blog).

 

News from the Profession. Some Big 4 Alumni Just Can’t Quit Their Old Firms. (Caleb Newquist, Going Concern). No problem for me.

 

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Tax Roundup, 10/2/14: The IRS helps fulfill a vow of poverty. And: ACA – good in theory?

Thursday, October 2nd, 2014 by Joe Kristan

tack shelterWe should all face such poverty. A Mississippi orthopedic surgeon has been convicted of tax evasion through an unbelievably hokey dodge.  From a Department of Justice press release:

The evidence at trial showed that Dr. Jackson claimed he had taken a vow of poverty in 2003 with the “Church of Compassionate Service,” an entity located in Utah, claiming that he was therefore exempt from paying any income tax. The evidence proved that he made substantial income practicing medicine but had not filed a tax return or paid any income tax since 2003. It also showed that he used nominee accounts and other devices to conceal his income from the IRS through the “church,” but that in fact 90% of the income was returned to him.

The indictment said Dr. Jackson had taxable income of $823,000 in 2009, but failed to file a return.  He may have had a disturbing lack of faith in his faith-based tax planning, though, as he also was accused of hiding assets by using fake invoices to inflate expenses and by putting his vehicles in “Ministry Vehicle #1 Holdings Trust.”

While the failure of this scheme isn’t remarkable, it is remarkable that somebody smart enough to complete medical school and establish an evidently successful surgical practice would attempt such a ridiculous tax dodge.  After his likely prison term and the probable collection of back taxes and 75% civil fraud penalties, plus interest, the doctor may finally have a chance to fulfill his vow of poverty.

More from Robert Wood: Invent A Church, Skip Taxes, Enrage IRS, Go To Jail

 

train-wreckRobert D. Flach has published his monthly The Tax Professional newsletter for October.  Robert is always entertaining, always intelligent, even if I don’t think he’s always right.

His lead October item is “Obamacare – Good Concept but Bad Legislation:”

The basic concept of Obamacare is a good and valid one – attempting universal health insurance coverage for all Americans without having to resort to UK-like “socialized medicine”. 

He says this “good concept” was just badly executed:

However, for solely political reasons, the Democratic Party wanted a victory for President Obama early in his first term and rushed through poorly conceived legislation that turned out to be a total mess, instead of allowing for sufficient time to properly think through the correct and efficient application of the concept.

Nothing to disagree with in this sentence, but Robert misses the main point.  His flaw is his assumption that it is even possible for any Congress to enact well-conceived legislation to restructure 1/6 of the economy.  While I grant that this legislation is extraordinarily bad, there is no set of 535 humans born wise enough, and with enough information, to design a top-down system for 300 million people with 300 million different needs.  That’s why I can’t agree that this is a “good concept” to begin with.

It would have been far wiser to examine the barriers that the government itself has put in place to affordable health insurance. Obvious problems are the government-imposed restrictions on interstate sales of health insurance and the restriction of tax benefits for health coverage to employer plans. Remove the barriers to developing and marketing insurance, then leave it to consenting adults to decide whether to buy insurance, and to determine what policies they need and are willing to pay for. But because reforming these things would reduce govenment power, not expand it, these fixes don’t have much support among grasping politicians and bureaucrats.

Robert also gives an excellent example of a huge, whimsical inequity in how ACA works.  No doubt the upcoming tax season will teach practitioners everywhere what a “fess,” as Robert would say, we now have.

I will address some other topics in Robert’s October newsletter in future posts; he contains multitudes.

Update: Robert responds.

 

20140513-1Russ Fox, One Good Erasure Deserves Another:

Most of the time, I wouldn’t believe that the IRS would do this. As of 18 months ago, I wouldn’t believe that the IRS would lie to Congress, would target conservative applicants for nonprofit status, and that the hard drive of any computer (or other electronic device) touched by Lois Lerner would be magically erased.

It will take years, and a much better Commissioner, to repair the damage the IRS has done to its own reputation.

TaxGrrrl, Caroline Wozniacki Forgets Her Paycheck, Can’t Skip Out On Taxes. They don’t offer direct deposit for these things?

Roger McEowen, Counties Eligible for Extended Replacement Period for Livestock Sold Due to Drought  (ISU-CALT)

Peter Reilly, Seventh Circuit Allows Do-over On Tax Court Stipulations For Deceived Taxpayers. IRS doesn’t get to benefit from practitioner’s deceit.

Michael Desmond, Is There a Future Role for Circular 230 in the Internal Revenue Service’s Efforts to Improve Tax Compliance? (Tax Procedure Blog).  A good coverage of the flaws in Circular 230 as a regulation tool, but I can’t let this statement go:

The politics of that question extend beyond this posting, but they will have to be addressed if there is to be any comprehensive response, legislative or otherwise, to Loving and the largely unchallenged proposition that paid return preparers should be subject to broader oversight than current law appears to permit.

Don’t take that “largely unchallenged” thing for granted. I challenge it, as do many practitioners. I am unwilling to trust an organization that has shown such bad faith at the highest level to control the livelihood of those of us who have to deal with them.

 

Joseph Thorndike, Let’s Stop Talking About Tax Reform (Tax Analysts Blog) “Outside wonky policy circles, there is simply no appetite for the real work — and real pain — of genuine tax reform.”

TaxProf, The IRS Scandal, Day 511, Did the IRS leak the Koch Brothers’ returns to the White House? TIGTA ordered to disclose whether this is being investigated.

David Brunori, A Very Good Idea to Curb Incentive Abuse (Tax Analysts Blog). It’s a proposal to ban commissions for helping seek a tax credit. I think that’s inconsistent with the logic of corporate welfare — supposedly you want to spread this wonderful stuff like candy, if you think it works, and commission-collecting middlemen help.  It would be much better to eliminate their product, rather than going after their commissions for selling it.

Cara Griffith, Managing the Tax Consequences of Equity Compensation Awards (Tax Analysts Blog) “Although states have not historically been aggressive in going after nonresident individuals with equity-based compensation awards, that may change.”

Joshua D. McCaherty, Lyman Stone, A Year After $9 Billion Incentive, Boeing Employment in Washington to be Reduced (Tax Policy Blog).  Thanks, chumps!

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

Monday, September 29th, 2014 by Joe Kristan

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

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

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

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

 

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

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

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

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

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

 

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

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

Impossibility has never been an excuse with California.

 

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

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

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

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

 

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

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

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

So to recap:

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

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

But I’m sure preparer regulation would go smoothly…

 

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

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

And he’d be the Devil, for one year.

 

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

 

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

 

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

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

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

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

 

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Tax Roundup, 9/23/14: Lois Lerner interview goes over… not well. And: Inversion action!

Monday, September 22nd, 2014 by Joe Kristan

man-wichLois Lerner’s interview with Politico published yesterday got some reaction. The Tax Prof has a great roundup in The IRS Scandal, Day 502, including these wonderful headlines:

American Thinker:  Politico Does Weepy Story About Poor Lois Lerner

PJ Media:  Politico Disguises A Slobbering Love Letter To Lois Lerner As An Interview

Breitbart:  News Site Seeks Mutually Beneficial Exclusive with Former IRS Exec (Must Love Dogs)

And my favorite:

Daily Caller:  Lois Lerner Compares Herself To Jeffrey Dahmer

So Tea Party-friendly web sites were not won over, apparently.  Some other reaction:

 

Instapundit:

LOIS LERNER TOOK THE FIFTH, but now she’s telling Politico that she did nothing wrong, and that she’s the real victim here. And note the prominent play Politico gives to alleged anti-semitic epithets, and to Lerner’s brownie-baking. So why the media-rehab operation — and that’s what this is — and why now?

But it’s nice to hear that even the Washington revolving-door apparat finds her “untouchable.” Perhaps that’s because nothing much in this story suggests that she didn’t target Tea Party groups for partisan political reasons.

 

David Hirsanyi, Sorry, Politico, But Lois Lerner Is Not A Victim:

 She has already admitted and apologized for the practice of targeting conservatives groups with terms like “Tea Party” or “patriots” in their titles. She claims that it was done in an effort to deal with the surge in applications for tax-exempt status asking for permission to participate in the political process. Yet, she didn’t aim at groups with the “climate change” or “fairness” in their names to mitigate this alleged crush of work she was facing.

Peter Suderman, Unapologetic Lois Lerner Insists She’s Done Nothing Wrong (Reason.com):

Lerner thinks she did nothing wrong, and she won’t apologize. “Regardless of whatever else happens, I know I did the best I could under the circumstances and am not sorry for anything I did,” she said in an interview with the paper.

That’s basically all she says about her role in the scandal. Lerner, who, after reading a statement, exercised her Fifth Amendment right to avoid self-incrimination when called to testify before Congress last year, doesn’t really add anything to her defense with the statements in her piece. She declares that she stands by her work—and that’s it.

And James Taranto reports “Politico landed an exclusive interview with Lois Lerner, the former IRS official at the center of the still-unresolved scandal, and to call it a whitewash would be an insult to lime.”

I think we can safely say of this PR stunt, so far, not so good.

Prior Tax Update coverage: Lerner speaks, sort of. And: a federal tax amnesty?

 

No Walnut STTreasury “does something” about inversions.  The moral panic over inversion transactions took its next logical step when the Treasury announced it would issue regulations out of nowhere to “crack down” on corporations trying to escape our awful U.S. corporation income tax. Notice 2014-52 has the technical details.

The Treasury has previously issued such notices, generally describing future regulations, when it is in a hurry to stop some kind of transaction and doesn’t want to wait for the usual regulation comment period to “do something.”

The Wall Street Journal explains the rules in general terms:

The Treasury rules will make it harder for companies that invert to use cash accumulating abroad—a big draw in recent deals. In addition, the government has made it more difficult to complete these overseas mergers.

The tax changes took effect immediately, officials said, and applied to all deals that hadn’t closed by Monday.

The article addresses how the deal might affect pending deals: (I removed the WSJ’s obligatory stock price info):

The new guidelines could impact a number of pending mergers and acquisitions, including Medtronic Inc. s proposed acquisition of Irish medical-device maker Covidien PLC; Salix Pharmaceuticals Ltd.’s acquisition of a division of Italy’s Cosmo Pharmaceuticals SpA; and Mylan Inc.’s  pending deal for Abbott Laboratories overseas generics business. It could also interfere with the merger of fruit grower Chiquita Brands International Inc. and Fyffes PLC.

Less clear is how it would impact Burger King Worldwide Inc. BKW -0.48% ‘s proposed acquisition of Canadian coffee-and-doughnut chain Tim Hortons Inc., THI.T +1.92% a deal that was designed to move the new corporate headquarters to Canada. 

That deal is structured somewhat differently, and experts disagree whether it would be affected by the new government rules. Most agree the rule changes aren’t likely to end inversions altogether.

Of course it won’t. As long as the U.S. has an uncompetitive business tax climate — better only than France and Portugal in the developed world — corporations will be forced to seek self-help, like inversion deals.

Tax Analysts has a story about how the last round of inversion rules created dangers for corporations who aren’t even inverting ($link): “The existing anti-inversion rules under section 7874 create several traps for foreign companies and individuals that could cause transactions to be treated as inversions when no inversion has taken place.”

Unintended consequences result, traps are created for the unwary, and the awful U.S. corporation income tax gets a little worse. Well done, Jack Lew!

The TaxProf has a roundup.  Howard Gleckman asks Does Treasury Have the Legal Authority To Curb Tax Inversions? (TaxVox): “This issue is the subject of heated debate among tax lawyers.”

 

 

buzz20140923Robert D. Flach brings the Tuesday Buzz, including links to posts covering ground from tax holidays to How Does a Sole Proprietor Get Paid?

TaxGrrrl, Back To School 2014: Moving Expenses

Tony Nitti, Tax Court: Anxiety, Depression Are Not Physical Injuries

Russ Fox, They Both Begin With “E”. Embezzlement, evasion. Add another: eventually detected.

Kay Bell, Identity theft tax refund fraud is increasing, but ways to prevent the crime are not likely to be popular

Jason Dinesen, Entrepreneurial Maturity. “In other words, a business owner who has entrepreneurial maturity knows what they don’t know.”

Annette Nellen, Points from your bank. On the “frequent flyer miles” Tax Court case.

Steven Olsen, Summary Opinions for 9/12/14 (Procedurally Taxing). Rounding up recent developments in tax procedure.

Jack Townsend has some Comments on the Warner Sentencing Oral Argument: “The panel was also concerned that, if Warner’s conduct were so bad, why did the Government argue at sentencing for only a sentence of 1 year and 1 day when the Guidelines range was significantly higher.”

 

20140923-1Alan Cole, The U.S. Tax Code is its Worst Competitive Weakness (Tax Policy Blog). “Simply put, while assessments of the U.S. tax code – both at Tax Foundation and elsewhere – are bleak, there is much to be optimistic about in America.”

Martin Sullivan, Should We Give Up On Reagan Style Tax Reform? (Tax Analysts Blog) “The landmark 1986 Tax Reform Act is an inspiration to all would-be tax reformers. But reforms following that basic framework have gotten nowhere in Congress.”

Steve Warnhoff, The Estate Tax Is Not Doing Enough to Mitigate Inequality: State-by-State Figures (Tax Justice Blog). It’s not working, so lets do it more, harder!

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Tax Roundup, 9/22/14: Lerner speaks, sort of. And: a federal tax amnesty?

Monday, September 22nd, 2014 by Joe Kristan
Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner gives an interview. The former IRS officer at the center of the Tea Party disclosure scandal won’t testify under oath, but she sat down for a two-hour interview with Politico: Exclusive: Lois Lerner Breaks Silence:

And she’s a savvy lawyer: She studiously avoided answering fundamental questions about her role in the IRS scandal that could land her in deeper trouble with Congress. During her POLITICO interview, flanked by her husband, a partner at a national law firm, and two of her personal attorneys, she opened up about her life as a pariah, joked about horrible news photos and advice that she disguise herself with a blond wig, and cried when expressing gratitude for her legal team’s friendship.

It is, of course, a public-relations play, designed to make her look like a misunderstood victim of a partisan witch hunt. But it isn’t an especially impressive effort. From the Politico piece:

Several Lerner allies said she was so focused on enforcement that she failed to see the sensitivity of bringing cases against incumbents running for reelection.

But Republicans continue to point to emails in which Lerner inquired about Crossroads specifically, asking her colleagues why the group hadn’t been audited and suggesting the group’s application should be denied. And just weeks before the tea party news broke, after she had seen a draft of the damning inspector general report, she asked colleagues if internal IRS instant messages are tracked and could be requested by Congress.

A little history sheds some light on her “non-partisan” background:

– Before she worked at the IRS, she worked at the Federal Elections Commission, she attempted to get an Illinois GOP senate candidate to withdraw from public life as the price for ending an FEC investigation. The allegations were later dismissed.

– The IRS Commissioner, Doug Shulman, repeatedly denied there was any targeting before the report. Either he knew better, or as a subordinate, she didn’t pass the word up the chain.

– She was in the middle of the Tea Party efforts at an early date. When the Treasury Inspector General Report was about to open the scandal, she did a modified limited hangout, using a planted question to spin the story as just a Cincinnati rogue agent problem.

– She had a hang-up about the Citizens United decision, and her emails show that she was trying to use the tax law to accomplish what the Supreme Court had forbidden.

– The numbers are glaring, showing that conservative groups got much more scrutiny, and it took much longer for their applications to be approved than liberal groups:

targetingstats

Ms. Lerner has, of course, invoked the Fifth Amendment to avoid testifying before Congress about her role in the scandal.

Presumably this interview is the start of a P.R. campaign. I don’t think it will work, but it might get her some good press from outlets inclined to dismiss the scandal.

 

TaxProf, The IRS Scandal, Day 500. It features Stonewall Koskinen: The IRS Commissioner Was Supposed to Clean Up the Mess. Instead, He’s Running Interference from Kimberly Strassel of the Wall Street Journal:

 The only thing Mr. Koskinen has seemed remotely interested in turning around is his agency’s ugly story-line. He has yet to even accept his agency did anything wrong, spending a March hearing arguing that the IRS didn’t engage in “targeting” and claiming the Treasury inspector general agreed. This was so misleading the Washington Post gave Mr. Koskinen “three Pinocchios, ” noting the IG had testified to the exact opposite.

He seems intent on de-throning Doug Shulman as the Worst Commissioner Ever.

 

 

get-outRobert D. Flach asks WHAT ABOUT A FEDERAL TAX AMNESTY?

This would be a one-time only offer. The legislation creating the Federal Tax Amnesty Program could so state by forbidding any future Amnesty programs. Or it could state that the federal government would not be able to institute another Amnesty Program during the twenty years after the end of the current amnesty period.

I have my doubts. One Congress can’t bind another, and if it is popular, the pressure for another amnesty will start building as soon as the first one ends. I also worry about the chump effect – people will feel like chumps for complying, and will convince themselves that if they don’t comply, there will be another amnesty anyway. But I might be convinced otherwise, especially if it were combined with tax reforms that would help prevent the need for another one.

 

Russ Fox, “I’ve tried to tell you the truth every time I’ve been here”. “That quote is from IRS Commissioner John Koskinen during his testimony from earlier this week on Capitol Hill. I have a simple question for Commissioner Koskinen: Why doesn’t that quote read, ‘I’ve told you the truth every time I’ve been here?'”

TaxGrrrl, Back To School 2014: Childcare Expenses

Jack Townsend, Trial Management of the Cheek Good Faith Defense.  Or as an old lawyer I know calls it, the “good-faith fraud defense.”

Kay Bell, Getting old sucks. We can’t stop Father Time, but we can prepare physically, emotionally and financially. And it still beats the alternative.

 

David Brunori talks about Nevada’s Tesla giveaway in State Tax Notes ($link):

Nevada is giving $1.3 billion to a company that is essentially owned by a guy worth $12 billion. I don’t begrudge Elon Musk his money. On the contrary, I admire his ability to create and accumulate great wealth. I just don’t see the need to give him public money. Assuming you ascribe to the belief that horizontal equity requires that similarly situated taxpayers bear similar burdens, Nevada is giving away public money…

I know that the politics of incentives are impossible to overcome. And I have had numerous readers tell me to give my constant ranting a rest. But the political inevitability of tax incentives does not make them appropriate or good.

Tax credit corporate welfare doesn’t just hurt the states that “lose” the competition to bribe companies like Tesla. It hurts all of the businesses of the “winning” state that have to pay full-freight while brazen and well-connected companies like Tesla pay nothing.

 

20140922-1William Gale, Income Tax Changes and Economic Growth (TaxVox) “While there is no doubt that tax policy influences economic choices, it is by no means obvious on an ex ante basis that tax rate cuts will ultimately lead to a larger economy.”

Joshua McCaherty,  Senator Schumer’s Retroactive Tax Bill (Tax Policy Blog). Part of the inversion diversion.

Ajay Gupta, Renouncing the Dogma of Surrey’s Infallibility (Tax Analysts Blog). Sounds like something involving the Pope and Henry VIII, but it’s really about transfer pricing.

A new Cavalcade of Risk is up at Workers Comp Resource Center, with posts from around the insurance and risk-management world.

 

News from the Profession. 15 Reasons Why EY’s BuzzFeed Post Is a Bunch of Malarkey (Adrienne Gonzalez, Going Concern)

 

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

Friday, September 19th, 2014 by Joe Kristan

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

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

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

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

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

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

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

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

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

20140919-1

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

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

“This tax cut will pay for itself.”

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

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

“This tax credit created X jobs”

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

 

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

 

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

 

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

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

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

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

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

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

 

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

 

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

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

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

TaxProf, The IRS Scandal, Day 498

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

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

 

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

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

Flickr image courtesy Sascha Kohlmann under Creative Commons license

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

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

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

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

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

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

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

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

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

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

 

This Koskinen isn't the IRS commissioner

This Koskinen isn’t the IRS commissioner

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

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

 

TaxGrrrl, Back To School 2014: American Opportunity Credit

Kay Bell, Private and often untaxed home rentals under fire

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

 

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

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

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

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

 

 

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

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

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

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

 

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

Friday, September 12th, 2014 by Joe Kristan

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

 

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

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

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

Peter Reilly, Parsonage Supporters Encouraged By Seventh Circuit Oral Arguments

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

 

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

 

TaxProf, The IRS Scandal, Day 491

 

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

 

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

 

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

Thursday, September 11th, 2014 by Joe Kristan

20120531-2Just links today.

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

 

TaxGrrrl, Back To School 2014: Commuting Tax Benefits

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

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

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

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

 

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

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

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

 

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

TaxProf, The IRS Scandal, Day 490

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

It apparently involved a tax incentive.

 

Paul Neiffer, Will Tax Inversion Debate Yield Permanent Section 179

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

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

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

 

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

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

Kay Bell, Will Tax Inversion Debate Yield Permanent Section 179

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

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

 

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

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

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

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

 

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

 

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

Monday, September 8th, 2014 by Joe Kristan

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

 

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

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

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

If you’re the IRS, the answer is (c)

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

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

 

targetingstats

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

 

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

 

20120703-2Tyler Cowen, Civil forfeiture cash seizures:

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

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

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

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

 

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

Paul Neiffer, A Deduction of Zero is Still Zero:

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

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

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

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

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

 

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

Jack Townsend, Offshore Enabler Nabbed in Sting Operation Sentenced

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

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

 

 

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

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

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

 

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

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Tax Roundup, 9/5/14: Obamacare tax credits get a reprieve. And: what’s $14 billion waste for a good cause?

Friday, September 5th, 2014 by Joe Kristan

The U.S. Court of Appeals for the D.C. Circuit will re-hear Halbig.  The full court will re-decide the decision reached by a three-member court panel that limited tax credits under Obamacare to policies purchased through state-established exchanges.  As 36 states have not established exchanges, the decision would have undermined both the employer and employee mandates, which are largely dependent on the tax credits.  Jonathan Adler has more.  Michael Cannon explains the politics behind the decision to re-hear the case.

 

EITC error chartLeslie Book, IRS Issues New Report on EITC Overclaims (Title A).  Leslie covers the recent IRS report on how much of the cost of this welfare program run through tax returns is misspent:

“As a result of the EITC program growth the total overclaims in the study are higher in the 2006-08 Report than in the past 1999 study, with annual overclaim estimates for 2006-08 at $14 billion (lower estimate) or $19.3 billion (higher estimate), compared to 1999 figures of $12.3 billion (lower estimate) and $14 billion (higher estimate).”

The report shows that the errors arise largely from misreporting of income and claiming ineligible dependents.  While some of the errors are attributable to complexity, the skewing of the errors to extra refunds points to widespread cheating.  Complexity errors would tend to be more equally split between overpayments and underpayments, but the vast majority of errors resulted in EITC overpayments.

All of this makes Arnold Kling’s proposal to roll all means-tested welfare programs into a single voucher grant with a uniform phase-out rate look wise.

 

haroldMore on the Iowa Film Credit Settlement with a Rhode Island filmmaker from Maria Koklanaris at Tax Analysts ($link):

The state admits no liability in making the settlement, according to the agreement. An accompanying letter from Adam Humes, a state assistant attorney general, to Joseph Barry of the state Department of Management, says that “the agreement will resolve all claims related to these film projects, and all claims in . . . the civil case in exchange for a cash settlement. After the settlement becomes final, the civil case . . . will be dismissed with prejudice.”

Joe Kristan of Roth & Co. PC of Des Moines said several civil suits arose after the state “slammed the brakes on everything” to do with the film tax credit scandal, which resulted in seven criminal convictions amid revelations that the state had issued $26 million in improper credits.

You gotta like her sources.

 

Sebastian Johnson, Big Oil Wins In Alaska, Hollywood Wins in California.  Because California has plenty of cash to shower on filmmakers…

Russ Fox, $1.25 Billion Attracts Tesla to Nevada

 

Kyle Pomerleau, IRS Aims to Tax Silicon Valley Workers’ Fringe Benefits (Tax Policy Bl0g).

“The IRS and U.S. Treasury Department last week included taxation of “employer-provided meals” in their annual list of top tax priorities for the fiscal year ending next June. The agencies said they intend to issue new ‘guidance’ on the matter, but gave no specifics about timing or what the guidance would say.”

The IRS believes that the regular free meals provided to employees are a fringe benefit and should be taxed like compensation.

You can make a good theoretical argument that a lavish Silicon Valley cafeteria results in taxable income for the employees. It’s much harder to make a good practical arguemnt for taxing that benefit.  There are serious measurement problems, and the amount of revenue at stake hardly seems worth it.

 

buzz20140905It’s Friday!  That means it’s Buzz day for Robert D. Flach, who buzzes from taxing frequent flyer miles to taxing marijuana.  However you get high, there’s a tax for that.

William Perez, How to Deduct Car and Truck Expenses on Your Taxes.  “To prove you are eligible to deduct your car and truck expenses, you should keep a mileage log.”

Paul Neiffer, Partner Must Have Basis to Deduct Loss. “The bottom line is if you show a loss from a partnership, make sure you have enough “basis” to deduct the loss.”

Kay Bell, New NFL players ready for football, IRS ready for their taxes

Peter Reilly, IRS Shows Serious Meatspace Prejudice.  “You would think with all the pressure that it puts on people to file and pay electronically that the IRS would have a forward looking view and a preference for cyberspace.  It does not seem to be that way  in the tax exempt division, where meatspace seems to be much preferred.”

 

Jack Townsend discusses an Article on Swiss Banks in U.S. DOJ Program.  He quotes from the article:

Caught in the crossfire of these strategies, however, are thousands of bank clients who are either innocent of tax evasion offences or were unaware of their reporting responsibilities.

These include US citizens living and working in Switzerland who cannot open bank accounts or take out mortgage loans. In some cases they have been expelled by their banks as involving too much unwanted paperwork and risk.

Well done, Congress.  Your FATCA makes everyday personal finance a miserable challenge for Americans abroad.

Tax Trials, IRS Updates Internal Revenue Manual for Streamlined Offshore Compliance

 

horse 20140905Annette Nellen, Shakespeare, building your vocabulary … and taxes.  She summons up a “parade of horribles” — well, a judge she quotes does.

TaxProf, The IRS Scandal, Day 484

 

Should I show this to my high school junior?  What Every High School Junior Should Know About Going to College (Bryan Caplan).  “College is a good deal for good students, a mediocre deal for mediocre students, and a poor deal for poor students.”

News from the Profession: EY Is No Longer Blocking Sports Websites Just in Time for Football Season (Adrienne Gonzalez, Going Concern)

 

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Tax Roundup, 9/4/14: IOU? No basis for you! And: IRS may say TANSTAAFL.

Thursday, September 4th, 2014 by Joe Kristan

20120801-2Partner IOUs fail to increase basis.  Just like S corporation shareholders, partners in a partnership can only deduct their share of the entity’s losses to the extent they have basis.  Like S corporation owners, partner basis starts with the basis of property and the amount of cash contributed to the partnership; it is increased by the owner’s share of taxable and tax-exempt income, and is reduced by expenses and distributions.

In a Tax Court case yesterday, partners”contributed” IOU from themselves to the partnership, VisionMonitor Software LLC.; the partners then used the amounts of the IOUs as basis for deducting losses.

Unfortunately for the partners, that doesn’t work.  Judge Holmes explains (minor editing by me):

VisionMonitor argues that the notes in this case, like the assumption of debt in Gefen, were necessary to persuade a third party to kick in more funding to a cash-strapped partnership. But unlike the partner in Gefen, neither Mantor nor Smith were guaranteeing a preexisting partnership debt to a third party. And they did not directly assume any of VisionMonitor’s outside liabilities — these notes are their liability to VisionMonitor, not an assumption or guaranty of VisionMonitor’s debt to a third party…  And there’s also no evidence that Mantor or Smith were personally obliged under the VisionMonitor partnership agreement to contribute a fixed amount for a specific, preexisting partnership liability.

Unlike S corporation shareholders, partners can get basis for debt owed by a partnership to third parties — for example, by providing a guarantee to a third-party lender (watch out for the “at-risk” rules).  But the court held that writing an IOU, by itself, doesn’t rise to the level of creating debt basis for the partner:

 Here… the partners each have no adjusted basis in the notes, and until they are paid, the notes are only a contractual obligation to their partnership. Mantor made a payment under his notes only in 2010, and the record has no evidence that Smith ever did. We therefore find that Mantor’s and Smith’s bases in their promissory notes during the 2007 and 2008 tax years were zero and, accordingly, that VisionMonitor’s basis in the contributed notes was also zero.

As it always does, the IRS tried to stick the partners with a 20% “accuracy-related” penalty. Judge Holmes wisely declined, holding that they relied reasonably on oral advice from their tax man, a Mr. Sympson:

We have little problem in finding that VisionMonitor actually relied on Sympson’s advice — his conclusion that the notes were additions to VisionMonitor’s capital (and the capital accounts of Smith and Mantor) was set out on the company’s returns. And we have little trouble in finding that this reliance was in good faith. In a case like this one — where VisionMonitor secured Smith and Mantor’s promises to increase their personal risk alongside their promise to extend their personal credit to the firm’s vendors — advice from a longtime tax adviser that this increased Smith’s and Mantor’s bases would seem reasonable to Mantor.

This is the sort of standard that the Tax Court should apply.  Taxes are hard — that’s why people hire out their tax work.  If they are open with their tax advisor, and they don’t have reason to think the tax advisor is incompetent, they shouldn’t get hammered with penalties just because the advisor makes a mistake. After all, the IRS makes mistakes too.

The Moral: If you want to get basis in your partnership without putting in cash, you need to get third party debt allocated to you in a way that makes you at-risk.  And: when things get complicated, if you are open with your preparer and follow the advice given, IRS penalties are not automatic.

Cite: VisionMonitor Software LLC, T.C. Memo 2014-182.

Related: How much K-1 loss can I deduct? Start with your basis.

 

TANSTAAFL. (There Aint) No Such Thing As A Free Lunch: IRS Mulls Tax On Employee Meals. (TaxGrrrl)  Just because you can make a theoretical argument that something is taxable doesn’t mean you should tax it.

 

20130121-2So you think regulation of preparers by IRS will stop fraud?  IRS Employee Accused Of Tax Fraud.  If they can’t keep themselves honest, they aren’t likely to prevent preparer cheating. Of course, preparer regulation isn’t about stopping fraud or improving tax compliance. It’s about grabbing power and helping well-placed friends.  Russ Fox has more.

 

Jana Luttenegger, Tax Court Ruling on Frequent Flyer Miles as Income (Davis Brown Tax Law Blog)

Kay Bell, Tax differences between home repairs & home improvements.  It can make a big difference when you sell.

Robert D. Flach tells you WHAT TO ASK A TAX PRO

Jack Townsend, Proof Beyond a Reasonable Doubt – Ramblings

 

David Brunori, Business Pays a Lot of State and Local Taxes (Tax Analysts Blog):

COST recently released its 12th edition of the report. And it continues to influence the state tax debate as much today as it did in 2002. The new report says that businesses paid $671 billion in state and local taxes in 2013, up about 4 percent over the previous year. But business taxes accounted for 45 percent of all state and local taxes.

I note that the amount of tax paid by “business” is deceptive. Businesses do not pay taxes; people pay taxes. And every dime of the $671 billion was paid by some combination of shareholder, owner, employee, customer, or supplier. Those on the left desperately want the burden to fall on shareholders. But there is growing evidence that in a global economy, the burden falls on employees. 

And if it does fall on shareholders, remember that pension funds are also shareholders.

 

20140801-2Lyman Stone, Governor Rick Scott Offers Mixed Bag of Tax Proposals for Florida (Tax Policy Blog). “Governor Scott’s tax proposals offer meaningful improvements in some areas like cell phone and corporate income taxes. But on other issues like the property tax cap, it’s not clear whether or how the plan will work; on sales tax holidays, the proposed “tax cut” would actually make the tax code more complicated and distortionary, while creating little or no economic growth.”

Yes.  Next Question?  Is It Time to Repeal The Corporate Income Tax? (Howard Gleckman, TaxVox) “This view acknowledges that roughly 10 million businesses already have engaged in self-help tax reform by organizing themselves as pass-through firms (where owners at taxed as individuals but bypass the corporate tax entirely).”

 

TaxProf, The IRS Scandal, Day 483

 

News from the Profession.  Ladies Still Need Entire Panels Made Up of Dudes to Talk About Ladies in the Profession (Adrienne Gonzalez, Going Concern)  “Don’t worry, ladies, the guys are ON IT.”

 

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

Tuesday, August 26th, 2014 by Joe Kristan

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

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

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

But wait, there’s more:

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

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

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

 

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

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

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

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

 

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

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

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

 

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

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

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

 

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

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

 

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

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

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

 

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

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

Flickr Image courtesy Llima under Creative Commons license

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

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

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

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

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

Thanks to an alert reader for the tip.

Related: IF TRUTH IN ADVERTISING APPLIED TO ECONOMIC DEVELOPMENT AGENCIES

 

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

 

Does that make this a tax shelter?

Does that make this a tax shelter?

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

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

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

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

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

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

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

 

TaxProf, The IRS Scandal, Day 473

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

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

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

That argument has more than a whiff of reparations.

Frack away.

 

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

William McBride, More Jobs versus More Children:

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

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

Not every problem can be solved with a tax credit.

 

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

 

Donald Boudreax is not a happy taxpayer:

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

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

 

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

 

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

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

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

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

 

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

Thursday, August 21st, 2014 by Joe Kristan

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

 

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

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

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

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

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

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

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

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

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

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

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

Cite: Wade, T.C. Memo. 2014-169

Related:

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

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

Material participation basics.

 

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

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

 

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

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

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

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

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

TaxProf, The IRS Scandal, Day 469

 

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

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

 

Quotable:

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

Robert L. Williams in Tax Analysts ($link)

 

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

Wednesday, August 20th, 2014 by Joe Kristan

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

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

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

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

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

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

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

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

There were other problems:

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

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

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

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

 

20130426-1Russ Fox, FBAR Filing Follies:

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

Mild is right.

 

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

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

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

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

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

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

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

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

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

 

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

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

 

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

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

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

 

TaxProf, The IRS Scandal, Day 468

 

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

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

 

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