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Tax Roundup, 5/13/2013: Modified limited hangout edition. And a tax blog hijacking!

Monday, May 13th, 2013 by Joe Kristan

20130419-1If the IRS hoped Friday’s “apology” for giving extra special attention to tax-exemption applications of right-side groups would settle things, they’re very disappointed this weekend.  The Washington Post reports that the Treasury Inspector General for Tax Administration will soon issue a report saying Friday’s apologizer, IRS Director, Exempt Organizations, knew this was going on in 2011.  Meanwhile, in 2012 IRS Commissioner Doug Shulman was still testifying that IRS was not picking on the Tea Party.

So not only was the Shulman era at IRS grasping, incompetent and casually cruel, it was dishonest.

The Tax Prof has a fresh roundup, The Deepening IRS Scandal.

Another Washington Post story has this:

At various points over the past two years, Internal Revenue Service  officials singled out for scrutiny not only groups with “tea party” or “patriot” in their names but also nonprofit groups that criticized the government and sought to educate Americans about the U.S. Constitution, according to documents in an audit conducted by the agency’s inspector general.

The documents, obtained by The Washington Post from a congressional aide with knowledge of the findings, show that the IRS field office in charge of evaluating applications for tax-exempt status decided to focus on groups making statements that “criticize how the country is being run” and those that were involved in educating Americans “on the Constitution and Bill of Rights.”

Yes, we sure need to keep an eye on those wingnuts who want to educate people on the Constitution and Bill of Rights.  Dangerous lunatics, they are!

There is so much blog coverage of this that I won’t even try to round it all up.  A few links from our blogroll:

Megan McArdle,  Why Did the IRS Target Conservative Groups?

Going Concern, Footnotes: Tea Party Patriots to IRS: Drop Dead

TaxProf,  Schmalbeck on the IRS ‘Targeting’ of Conservative Groups, where an academic gives a “nothing to see here” take, one that is already largely overtaken by events.


And some other coverage:

Connor Simpson,  Why the IRS Abruptly Apologized to the Tea Party  (via Instapundit):

The report doesn’t shay whether or not Shulman was informed about the Tea Party questioning, but it does show the IRS’s chief counsel was. It’s standard procedure for the counsel and commissioner to discuss this  sort of thing before a Congressional hearing.

If so, The Worst Commissioner Ever can only plead incompetence instead of lying to Congress. has a bunch of posts at their Hit and Run blog, including  Matthew Feeney,  IRS Scrutiny Extended Beyond Tea Party Groups (; Jesse Walker,  A Brown Scare at the IRS?; Matt Welch,  NY Times: IRS Targeting of Tea Party Only Proves Republicans Are Desperate  “It’s the inability to see discrete news events for what they are, rather than what they might mean for the neverending scrum between Teams Red and Blue.”

Jonathan Adler,  IRS Scrutinized Teaching the Constitution (Volokh Conspiracy)

Professor Bainbridge, Wider Problems Found at IRS – Twisting slowly in the wind

William Jacobson,  IRS anti-Tea Party scandal gets real — senior IRS officials aware of targeting (Update – Chief Counsel knew and targets expanded to groups “educating on the Constitution and Bill of Rights”)

Katrina Trinko, Rubio: IRS Commissioner Should Resign Immediately (The Corner)

Ann Althouse has more.

And here’s my take from Friday, if you missed it:   Look at a celebrity return?  You’re fired!  Harass a Tea Party outfit?  Carry on.


In other news:

Nina Olson, IRS Taxpayer Advocate, has an article in Tax Analysts (via the TaxProf) affirming her support for taxpayer regulation.  Ms. Olson has done much good work as Taxpayer Advocate, but her support for increased preparer regulation is economically uninformed and hopelessly wrongheaded.


Russ Fox,  IRAs and Owning a Business Through an IRA and  What Can Go Wrong?  Nevada Democrats Want to Give Tax Breaks to Movie Industry

Peter Reilly,  Brooklyn Grandmother Wins On Dependency Exemption.   Just in time for Mothers Day!

TaxGrrrl,  IRS Set To Close Next Week.  Bad news: it’s only temporary.


Trish McIntire,  Max and Dave Looking for Reform

Nick Kasprak,  Do Tax Cuts Pay for Themselves?

Patrick Temple-West,  Falling deficit alters budget debate, and more

Linda Beale,  Orrin Hatch on tax reform at the ABA–a predictable right-wing rant


Andrew Mitchel,  Barnes Group – Structured Repatriation Was a Dividend.  In spite of the best efforts of national tax firms.

Phil Hodgen,  Decline of American Civilization, Form 8938 Edition.  “Let’s just bury the world in useless paperwork, shall we?”  That does appear to be the plan.


Kay Bell,  IRS reports gains in criminal tax, other financial investigations

Jack Townsend, Cheating is Cheating, Except When Offshore Accounts Are The Means, followed up with More on Conviction Rates in Tax Cases.

Janet Novack,  Independent Contractor Enforcement: There’s More Than The IRS To Fear.  Plenty of state rules and taxes also come into play.

Jim Maule,  The Complexities of Tax: Is This Really Necessary?  “A recent IRS private ruling, PLR 201318003, illustrates how the special low rates for capital gain adds layer upon layer of complexity to the tax law.”


I’d like to report a hijacking.  It looks like somebody at Tax Analysts forgot to renew their ownership of the domain name.  Going there this morning gets this:

20130512-1 is (has been?) home to the great group blog featuring, among others, David Brunori, Christopher Bergin, David Cay Johnston, Martin Sullivan, Cara Griffith and Clint Stretch.  I hope this is only a temporary hijacking.



Tax Roundup, 9/25/12: Pretty pictures of ugly truths. Plus: the most unlikely undecided ever.

Tuesday, September 25th, 2012 by Joe Kristan

The Tax Foundation has put together a wonderful “chartbook” of statistics on federal taxes.  Just flipping through the slideshow would increase the average congresscritter’s tax IQ by 100 points, to about 110.  It’s all great stuff, but I have favorites.  The charts and captions are by the Tax Foundation.

Chart 28. It is often said that raising top tax rates will have little effect on business activity because only 2% of taxpayers with business income will be impacted. However, the more economically meaningful statistic is how much overall business income will be taxed at the highest rates. In 2010, the vast majority (72%) of pass-through business income was reported by taxpayers earning more than $200,000. Millionaire tax returns earned 36% of all private business income while taxpayers with incomes below $100,000 earned just 12%.

Lesson: increasing the tax on “the rich” means increasing business taxes, reducing the ability of businesses to hire and grow.

And my favorite:

Chart 29. The federal deficit has grown so large that tax increases only on America’s millionaires will not be our silver bullet. Even if the government took all of the income earned by those who have an after-tax income of $1 million or more, the amount of revenue generated would fall far short of eliminating the deficit. The expected federal deficit for 2012 is about $1.2 trillion. The latest IRS data indicates that the total after-tax income for all millionaires is roughly $709 billion. If every penny of that after-tax income were taken by the government through a 100% tax rate, and we assume that no spending cuts are made to accompany the tax increase, this would account for only about 60% of the amount needed to erase the deficit. With numbers like this, one thing is clear: soaking the wealthy with increasingly higher tax rates simply cannot be the only answer to our nation’s fiscal problems.

Lesson: the rich guy isn’t buying.  Unless spending is reduced, the inevitable tax increase will fall on everyone, because the rich simply can’t cover the bill.  Politicians who pretend that our fiscal woes will be solved by taxing “the rich” just hope you are easily fooled.


Lawmaker questions incentives for Iowa fertilizer plant (Quad City Times).  Joe Bolkom (D, Iowa City), chairman of the Iowa Senate Ways and Means Committee, is not pleased with the incentive package for the Orascom fertilizer plant:

“We’d like to suggest that there was no reason to waste $250 million to convince this giant international corporation to essentially do what it was going to do any way. This is probably the worst economic development deal in the state’s history,” Bolkcom said. “We should have used this money to cut commercial property taxes for every Iowa business instead of giving this multi-national corporation this $250 million that we did not need to.”

I would suggest buying the Mercedes and Land Rover for the film producer might have been worse, dollar for dollar, but it’s debatable.   Naturally the Governor, who got the deal done, disagrees:

Branstad spokesman Tim Albrecht rebutted Bolkcom’s claims, saying the state needed to provide up to $110 million in tax credits to sway the company to bring the 165 permanent jobs, along with hundreds of construction jobs and other financial benefits — such as lower-cost fertilizer — to Iowa rather than seeing the project end up in Illinois.

I’m pretty sure the fertilizer will cost the same in Illinois.


TaxProf Paul Caron reports that Accounting Today has issued its list of the 100 Most Influential People in Tax and Accounting.  Once again I missed the cut, while the TaxProf, Max Baucus, Chuck Grassley and Doug Shulman all made the list.  I’m sure I remain one of the 100 most influential tax bloggers in Polk County.


Russ Fox,  Las Vegas Attorney Accused of Tax Evasion and Structuring:

Mr. Goldberg is accused of keeping two bank accounts.  There’s nothing wrong with that. However, he’s being accused of only including the deposits from one of the two accounts on his tax returns.   Adding to his troubles is that he’s being accused of “structuring” bank deposits.  Structuring is adjusting your bank deposits of cash deliberately so as to avoid currency transaction reports (CTR).  If you make a deposit of $10,000 or more of cash, the bank will file a CTR.  Mr. Goldberg is being accused of structuring bank deposits 147 times.

Bank employees are trained to spot “structuring” and are required to report it.  If you do it 147 times, the chances of not getting spotted become vanishingly small.


Janet Novack,  Judge Shoots Down Another Forbes 400 Member’s Tax Shelter

William McBride,  Is it True that “Just About Everyone” Eventually Pays Income Tax? (Tax Policy Blog)

Peter Reilly,  Dependency Exemptions – Divorce Court Orders Not Binding On Tax Court

Jason Dinesen, Should a Small Tax Firm (Or Any Small Business) Pretend to Be Bigger than They Are?

Anthony Nitti,  IRS Rules That State Law Doesn’t Dictate Whether Two Properties Are Like Kind

Kay Bell,  Payroll tax cut on its last legs

William Perez,  Year-End Tax Planning for College Expenses

Shock!  Robert D. Flach is undecided!  MY DILEMMA

Critical questions for $200, Alex.  Great unintentional juxtaposition at this morning:

That is indeed a critical question.  If “they” are Congress and the answer is “no,” be very afraid, because this is what they do sober.



Tax Roundup, 8/27/12: Verify, then trust. Plus the tenant-free landlord!

Monday, August 27th, 2012 by Joe Kristan taxes: Trust a little, verify a lot.   Sad stories all around in Binghampton, New York, after an executive at a payroll service provider admitted stealing tax deposits, rather than remitting them to the IRS and the state.  From WBNG.Com:

“It was almost like being kicked in the stomach because I had already paid the taxes and we were told we had to pay them again,” said President of Silo Restaurant Gary Kurz.

Kurz was another victim. He says he had to borrow money to pay the IRS a second time, in addition to cutting hours for employees, and working hard to save on electricity bills.

All of this in an effort to to fill a sudden $24,000 loss for the restaurant, a loss that’s still affecting his business.

Outsourcing payroll processing can be a good business decision, but it leaves a business horribly vulnerable if the processor has a thief on board.  That’s why even businesses that outsource their payroll should enroll in the Electronic Federal Tax Payment System.  EFTPS lets you go online to make sure that the payroll taxes you are sending to your payroll service provider are truly getting deposited on time.  It might seem like extra work, but it’s a lot easier than paying your payroll taxes twice.


Being a landlord is so much easier without tenants.  But it has its downsides, as a Connecticut attorney named Joseph Colbert has learned.  From the Wilton Patch:

According to court documents and statements made in court, Colbert  filed false federal tax returns in 2006, 2007 and 2008. In  each of the returns, Colbert falsely claimed that he had sustained  thousands of dollars in losses on a rental property in New Jersey when,  in fact, the New Jersey property was not a rental property, but was  exclusively for his personal use. In total, Colbert underpaid his federal tax obligation by more than $133,000.

Folks, this sort of thing isn’t hard for the IRS find.  If you have a Schedule E property that year after year shows little or no rental income and lots of expenses, the IRS computers are likely to notice.  That’s especially true if you find a way deduct those losses, which will normally be non-deductible “passive” losses absent other passive income.

Of course, there are times in real life when commercial properties go a long time without being rented.  Residential rental properties, though, aren’t likely to sit empty for three years in most markets.


Bad tax ideas of the northlands.  An Alaska couple apparently didn’t take their tax evasion conviction well.  From the Alaska Dispatch:

According to documents filed in court Thursday, Lonnie and Karen Vernon, of the so-called “241” militia trial, are planning to enter guilty pleas to some of the eight counts against them, the Fairbanks Daily News-Miner reports.

The couple faces charges related to tax evasion, weapons possession and conspiracy to commit murder.

Independent of the “241” militia trial, the Vernons are charged as a couple for allegedly plotting to kill an Internal Revenue Service agent and U.S. District Judge Ralph Beistline following the outcome of their tax evasion trial. Judge Beistline was allegedly targeted because he ruled against the Salcha, Alaska, couple.

Maybe this has something to do with long winters.  A few years ago Minnesotan Robert Beale got in trouble for similar reasons.

I’ll be the last person to discount the seriousness of tax convictions.  Nothing disrupts personal plans like a stretch in the federal can.  Yet, according to the story, this couple owed about $180,000 —  good for maybe a three year stretch before you can resume your previously-scheduled programming.  Conspiring to kill a federal judge will extend that time away considerably, without any chance of making the original sentence go away.  Poor move, north or south.



It’s Guest Post Week on Taxgirl!

Russ Fox ponders Jason Dinesen’s series on identity theft and asks, Why Is the Death Master File Still Available?  Why, indeed?

William McBride, Sweden’s Corporate Rate is 13 Points Lower than Ours, and Going Lower (Tax Policy Blog)

Jack Townsend,  Prominent Neurosurgeon Convicted for Offshore Accounts.  A Milwaukee case.

Janet Novack, Romney’s Taxes: It’s The Carried Interest, Stupid

Jim Maule, Using Taxes to Measure Generosity

Christopher Bergin,  Taxing With the Stars

Robert D. Flach has a new Buzz on.

Isn’t that what Hell is for anyway? Pennsylvania Court Gives No Relief To Investor In Tax Shelter From Hell (Peter Reilly)


Tax Roundup, 8/6/2012: Last Iowa film credit trial goes to jury. Also: Iowa ID theft and olympian branding problems.

Monday, August 6th, 2012 by Joe Kristan

Chad Witter

The last Iowa film tax credit trial went to the jury Friday, so we may see a verdict as soon as today.  Chad Witter, a Bettendorf accountant who brokered transferable film credits from the filmmakers to those seeking a discount on their Iowa taxes, is charged with Fraudulent Practice, Theft and Ongoing Criminal Conduct arising out of the disastrous Iowa film tax credit program.  The Quad City Times reports:

Defense attorney Richard McConville conceded that “some people did cheat” the state, but Witter was not one of them. He contended the charges against Witter were based on “guilt by association” with people previously convicted of wrongdoing by prosecutors who were under pressure to make state elected officials and policy-makers look good in the wake of the debacle.

However, prosecutor Robert Sand of the Iowa Attorney General’s Office said Witter played a key role in gaining the trust of former Iowa film office manager Tom Wheeler and reducing state scrutiny of invoices that included charges of $225 for a push broom, $900 for a ladder and other claims in connection with several projects where the defendant tried to minimize his involvement to appear to be “the low man on the totem pole” in schemes to defraud the state.

The stakes are very high for Mr. Witter.  Two of his filmmaker clients, Wendy Weiner-Runge and Dennis Brouse, have received 10-year sentences on charges of looting the film program.  The offenses he is charged with could carry an even longer sentence if he is found guilty.

While a jury will decide Mr. Witter’s guilt or innocence, those who bear the heaviest responsibility for the looting of taxpayer dollars have dodged accountability.  The Iowa legislators who approved the ridiculous subsidy for Hollywood with no built-in controls by a 143-3 margin will never be forced to answer for their negligence.  The Governor and his economic development director who turned the keys to the state treasury to a man whose training in managing a state agency consisted of a stint as a Walgreens photo desk clerk will never be called to explain why they left the safe open.  And the media cheerleaders who were so caught up in the excitement of having starlets in town that they missed the story until the program exploded in scandal and disgrace will never have to sit before a jury of their subscribers to explain why they failed to pay attention.

Jason Dinesen starts a series on how a young widow client became a victim of identity theft as a result of the government’s reckless policy of releasing publicly the Social Security numbers of the recently-deceased.

Peter Reilly, Some Zero Tax Romney Returns Would Be As Shocking As Gambling At Rick’s

Jack Townsend,  Does the Preparer’s Fraud Invoke the Unlimited Statute of Limitations?

Bruce from Missouri:  Plan For Next Years Taxes, Starting Now

William Perez, Republican Legislators Outline Tax Reform Goals

TaxGrrrl issues a Call for Guest Posts About Tax Policy.

Robert D. Flach, formerly of New Jersey, is now Buzzing in Pennsylvania.

It’s not what you think.  Tax Blogger Kay Bell discusses the branding problems of this year’s XXX Olympiad.

Regardless, You Can Safely Assume That Jenna Jameson Is a Fan of Tax Cuts (Going Concern)

After all, What Kind of a Meanie Taxes Olympic Medals? (Christopher Bergin,

The glamorous life of the public accountant:  Ernst & Young Tax Associate Forced to Deal with the Slobs Around Him  (Going Concern)


Where’s my tax break?

Thursday, March 15th, 2012 by Joe Kristan

20090617-2.jpgWhen you give out a “targeted” tax break, lots of folks hire lobbyists to put a target on their own backs. That seems to be happening with the misguided proposal to exempt some sales of stock to employee stock ownership plans from Iowa tax. From the Sioux City Journal:

However, Sen. Joe Bolkcom, D-Iowa City, chairman of the Senate Ways and Means Committee, said he is studying the capital gains piece of the legislation to determine whether it’s a necessary component, given there are other business groups, tax opponents and investment representatives who want to eliminate the capital gains tax altogether or expand the incentive provision beyond the ESOP application.
“Since that bill’s been filed, there have been a number of interests come forward that would like to have special capital gains tax treatment,” said Bolkcom, who worried House File 2284 could touch off a domino effect of unintended consequences. “There’s maybe sufficient incentive in the $1 million appropriation to assist companies to form ESOPS and the capital gains piece may not be as big of an issue.”
[Senator Bill] Dotzler said he believed the legislation is targeted and could be implemented in a measured way that would provide a benefit without opening it up too broadly.

When you have high tax rates — and Iowa has them — taxpayers have that much more incentive to hire lobbyists to carve them breaks. Once you start, it’s hard to stop. Senator Dotzler was a big supporter of film credits, and they sure failed to prevent “opening it up too broadly.”
Martin Sullivan at calls shenanigans on the whole “targeted” tax break game:

Worse still, they are continuously urged to move in the exact opposite direction and extend more tax benefits to targeted constituencies. They are told this will create jobs. This is true


Payroll tax extension looks like a done deal

Friday, February 17th, 2012 by Joe Kristan

Congressional leaders appear to have reached agreement to extend the 2 percentage-point reduction in the employee FICA and Self-employment tax rate through December 31. It had been slated to expire at month end. The agreement had been hung up on how it would be paid for, but our leaders bravely compromised by not bothering to pay for it.
More coverage:
Anthony Nitti
Christopher Bergin


More fun than Farmville!

Monday, February 6th, 2012 by Joe Kristan

Anthony Nitti discusses how the Facebook IPO could be a windfall for California’s tattered state budget, while Martin Sullivan at complains that Facebook Founder Mark Zuckerberg isn’t paying taxes at a high enough rate to suit Martin Sullivan because he isn’t paying taxes on unrealized gains. Fine — we should tax unrealized gains as soon as we can deduct unrealized losses and future expenses.
The TaxProf has more Facebook coverage. And remember to become a Tax Update fan at our Facebook page!


Is debt the villain?

Tuesday, January 24th, 2012 by Joe Kristan

The real devil in the details of Mitt Romney’s tax life is the tax code’s preference for debt financing, according to’s Martin Sullivan:

As Congress desperately searches for revenue to pay for a reduced corporate tax rate, it should consider limitations of interest deductions when there is excessive debt. Even if the Romney campaign convinces you that leveraged buyouts are totally benign, there is still no reason for the United States to maintain a tax system that favors them over venture capital.

His second sentence may well be true, but it doesn’t mean the solution in his first sentence is the way there. Instead of punishing borrowers by limiting their deductions, you can instead reward equity financing by making dividends deductible.
I still think a dividends-paid deduction is a promising but under-discussed solution to the problem of high corporate rates and double taxation. Such a system would tax revenue at the corporate level when it is earned, but it wouldn’t prefer debt over equity. The problem of deductible dividend payments to tax-exempt or foreign entities could be handled with a withheld excise tax on the payments to ensure the income is at least taxed once. It would eliminate the need for a preferential rate for dividends, perhaps quieting the smug and ignorant.
Related: Why not a dividends-paid deduction?


The nightmare is over

Wednesday, January 4th, 2012 by Joe Kristan

The politicians have left Iowa, and, the 2011 LexisNexis Top Tax Law Blog — silent since December 15 — has a new post! Christopher Bergin accurately pegs the two-month extension of the payroll tax cut:

Bar none, this is the stupidest tax policy idea I have ever seen


Resting on laurels?

Wednesday, December 28th, 2011 by Joe Kristan, the “LexisNexis Top Tax Law Blog for 2011,” hasn’t put up a new post since December 15.
Meanwhile, also-ran TaxProf Blog has run, by my unofficial count, 87 posts since December 15. Even the Tax Update has run 26 posts, not counting this one, since’s seven bloggers last spoke. Sure, there may be a trade-off between quantity and quality, but even infinite quality doesn’t help when the quantity is zero.


Payroll tax cut extension imminent?

Friday, December 16th, 2011 by Joe Kristan

The Wall Street Journal reports this morning that the Congresscritters are on the verge of a deal to extend the 2% cut in the employee portion of the Social Security tax (from 6.2% to 4.2%). The deal would also extend the reduction in the Self-employment Tax from 15.3% to 13.3% — so don’t be hasty about accelerating self-employment income into this year.
I see nothing yet on whether the deal will also extend 100% bonus depreciation or the $500,000 Section 179 deduction maximum one more year.
UPDATE, 12/18: Senate passes two-month extension of payroll tax cut.
More Coverage:
Kay Bell

Share voted ‘Top Tax Law Blog’

Wednesday, November 30th, 2011 by Joe Kristan

Congratulations to, the Tax Analysts group blog, for winning the vote as the “LexisNexis Top Tax Law Blog for 2011.” While my vote goes to the TaxProf Blog, with the Tax Update Blog as my second pick, has excellent contributors.
I hope the honor inspires the six(?) bloggers to post a little more. They have generated 10 whole posts so far in November. Maybe they feel they make it up in quality, but quantity is important in blogging. During the same period the one Tax Update contributor put up 71 posts, while the TaxProf generated 223 posts, by my count. Step it up, guys!
By the way, Barney is safe in an undisclosed location.


Will there be a Supercommittee deal?

Thursday, November 17th, 2011 by Joe Kristan

It’s not looking that way. Joe Thorndike of Tax Analysts:

The smart money isn’t always right, but when it comes to the so-called supercommittee, it’s made a safe bet. With a week to go, the panel seems unlikely to reach any sort of deal. But it’s even more unlikely to reach a meaningful one.

Why the pessimism (or optimism, depending on how you look at things)?

Real progress comes only when politicians actually want real progress. With the supercommittee, no such secret consensus exists. I think it’s safe to say that most politicians in both parties would prefer to continue the deficit fight, since that’s the route to holding/achieving power.

That sounds about right to me. That also seems to be the betting line; bettors give the Superdupercommittee only a 20% chance of making a deal on deadline.


Are state corporation income taxes worth the trouble?

Friday, October 7th, 2011 by Joe Kristan

South Carolina Governor Nicki Haley has called for a repeal of her state’s corporate income tax. David Brunori ponders:

Do we tax corporate income because we need the money? It does not raise a lot of money, particularly in South Carolina. Do we tax corporate income because we want to make corporations pay for services they use? If that were so, states like South Carolina would not use a double weighted sales factor formula. Do we impose the tax to skewer the rich? Some folks believe the tax helps alleviate the overall regressivity of the system. But that assumes that the burden falls on fat cat shareholders in the form of lower returns. There are people who believe that the burdens fall on consumers in the form of higher prices or labor in the form of lower wages. The surest way to ease regressivity is to increase personal income taxes on the wealthy and lower the tax on everyone else. But at the end of the day, no one seems to be able to say why we impose this tax. And maybe Governor Haley is on to something.

Everything he says is just as true for Iowa’s highest-rate-in-the-nation corporation tax, which raises a trivial amount of revenue. That’s why Item 1 in The Quick and Dirty Iowa Tax Reform Plan is a repeal of the corporate income tax in Iowa.


Why would you be a C corporation?

Wednesday, September 28th, 2011 by Joe Kristan

While most new businesses are set up as pass-throughs nowadays, C corporations still have a following. Martin Sullivan ponders why taxpayers voluntarily run a business in a way that they know will be subject to two taxes:

Graduated corporate rates, the low rate on corporate dividends, and an exemption from payroll taxes combine to make subchapter C the most advantageous choice for a lot of small business profits. If a business owner can afford to leave profits inside the corporation, the resulting deferral of individual tax only makes subchapter C more attractive.

Pass-throughs — S corporations and partnerships — don’t pay taxes on their income. It instead “passes through” to the personal returns of the owners. The top individual and corporate rates are both 35%, but C corporations are taxed at a 15% rate on their first $50,000 of income. If you are in a 35% personal bracket, having additional income taxed at 15% is attractive, even if you have to pay a second 15% tax to withdraw the earnings as as a dividend. C corporations also provide some fringe benefits unavailable to pass-through owners.
So what’s not to like about the C corporation?
– Your corporation can’t grow very big and still use the low rates. Once corporation taxable income exceeds $100,000, a “phase-out” rate of 39% starts to recapture the benefit of the lower brackets. Once taxable income hits $335,000, a flat 35% rate applies to all corporation income.
– You can only get that corporate 15% bracket once. You can’t set up multiple corporations to get multiple 15% brackets.
– Using the 15% rate requires an ability to monitor and control corporate taxable income. That requires time, effort and expense.
-“Personal service corporations,” including law, medical, accounting and consulting practices, don’t get the lower brackets. They pay a 35% rate starting with the first dollar of taxable income.
-Assets inside the corporation are trapped there. The tax law treats distributions of appreciated property as taxable sales, but losses on distributions are normally not allowed.
– If you sell the business, the C corporation can get very expensive. There is no capital gain break in computing C corporation taxes. Most business buyers prefer not to buy stock because they don’t want to inherit any unconfessed sins of the old corporation. If the assets have gone up in value, you probably have a 35% tax on the asset sale, and a 15% capital gain on the liquidation on top of that. In a pass-through, you will have just one tax, and likely it will mostly be at the 15% capital gain rate.
As long as there is a 15% corporate rate bracket and a 15% dividend rate, C corporations will remain tempting. Still, it is wise to ponder the words of tax sages Bittker and Eustice:

Decisions to embrace the corporate form of organization should be carefully considered, since a corporation is like a lobster pot: easy to enter, difficult to live in, and painful to get out of.

Flickr image of lobster pots courtesy easylocum under Creative Commons license
Related: Corporations: yea or nay?


Let’s exempt them from taxes in case some of them are poor

Wednesday, August 31st, 2011 by Joe Kristan

David Brunori at notes that Maine’s Governor proposes exempting all pension income from state income tax:

He says that he wants to prevent retirees from moving to Florida and Nevada. He also wants to alleviate the burden on senior citizens. But there is no evidence that anyone leaves Maine for Florida


‘Big idea’ doesn’t mean ‘bad idea’

Tuesday, August 16th, 2011 by Joe Kristan

Tax scholar Joseph Thorndike rightly mocks the “big ideas” coming out of Washington’s policy establishment:

Some wild White House advisers are just itching to trot out a bold new economic plan, according to the New York Times. The milquetoast crowd — led by David Plouffe and William Daley — support small bore initiatives, like free trade agreements and patent reform. By contrast, those wild radicals in the Democratic wing of the Democratic party want decisive action. As the Times reports:

others, including Gene Sperling, Mr. Obama


Corporations are people too!

Monday, August 15th, 2011 by Joe Kristan

Mitt Romney caught some grief for telling an Iowa State Fair heckler an obvious truth – corporations are people. They are a tool for people to organize their activities and cooperate to do things. That this is at all controversial is sad.

TaxVox explains:



The debt ceiling went up. Will taxes?

Wednesday, August 3rd, 2011 by Joe Kristan

The debt-ceiling show has gone on intermission, making the stock market so giddy that it accidentally dropped 265 points. The administration didn’t get the tax hikes it wanted, but it thinks it will get a mulligan when the committee of 12 congresscritters called for in the agreement gets together to negotiate $1.5 trillion in “deficit reductions” by November.
The agreement is apparently written to keep tax hikes from being part of the reductions by using current tax rates as the “baseline” for revenues. That means the 2013 increase in tax rates scheduled under current law wouldn’t count as “deficit reduction” under the deal. While Obama advisor Gene Sperling seems to think he has room to weasel, the Tax Foundation takes this rule as a given, and another economist calls Mr. Sperling’s argument “absurd.” At, Martin Sullivan says:

But I will say the Sperling interpretation that “anything goes” when it comes to baselines would render the whole Phase Two $1.2-$1.5 trillion of deficit reduction meaningless. In the extreme, the Committee could assume a baseline of government spending equal to 50 percent of GDP and avoid the triggers by proposing cuts to more normal levels.

That means income tax increases will only count to the extent they raise top rates over 39.6 percent — a political impossibility. It also seems unlikely that a new broad based tax, like a VAT, will be enacted. There might be some efforts to trim deductions and tax credits, but unless accompanied by rate reductions to sweeten the deal, those are hard to do.
The agreement calls for “fail safe” spending cuts absent an agreement by November. That may well be the way to bet.
UPDATE: A Sperling defender on the right.
The TaxProf rounds up commentary on the deal.
Debt ceiling deal: no new taxes (maybe)
If the government doesn’t restrain its spending, the rich guy isn’t picking up the tab


Is the income tax doomed?

Thursday, July 28th, 2011 by Joe Kristan

Christopehr Bergen thinks so:

The deadlock on the debt is perfect proof that we won