Posts Tagged ‘tax court’

Tax Roundup, 4/22/15: Mileage logs don’t have to be perfect, but they have to be there. And: taxes and the rich guy.

Wednesday, April 22nd, 2015 by Joe Kristan

20150422-1Keep that logbook. It’s not always enough to incur a deductible expense to earn a documentation. For travel, meals and entertainment, you have to be able to prove it under strict standards. If you fail to properly document the amount, time and place, and business purpose of travel expense, your deduction is lost.

A Minnesota man whose job managing construction projects required substantial travel claimed employee business expense deductions. The IRS disallowed the deductions, and the Tax Court got involved. Judge Marvel explains (my emphasis, citations omitted):

Substantiation by adequate records requires the taxpayer to maintain an account book, a diary, a log, a statement of expense, trip sheets, or a similar record prepared contemporaneously with the use or expenditure and documentary evidence (e.g., receipts or bills) of certain expenditures.  A log that is kept on a weekly basis is considered contemporaneous for this purpose. 

The taxpayer, A Mr. Ressen, recorded business miles and kept a calendar showing his trips, and that carried the day:

With respect to the portion of the disallowed deduction attributable to their claimed use of the 2007 and 2008 Chevys, petitioners introduced copies of the calendar in which Mr. Ressen contemporaneously recorded his weekly mileage as an employee of ICS as well as some information regarding where he was working at various times. Petitioners also introduced copies of the pages in the logbook on which he contemporaneously recorded the beginning and ending miles for the 2007 and 2008 Chevys. Considering the facts and circumstances of Mr. Ressen’s employment arrangement with ICS and his business use of the 2007 and 2008 Chevys we conclude that the calendar is a credible, adequate record of the amount of the business use of the property, the dates of such use, and the business purpose of such use, and the logbook pages are an adequate record of the total use of the property.

It’s odd that the IRS disallowed the deduction and then litigated it. They apparently were trying to hold the taxpayer to some platonic ideal of a log book. The Tax Court was willing to combine the log book with the calendar to determine the time, place and business purpose of the trips — a sensible result.

The moral: Keep that mileage log, or use one of the smart-phone apps created for this purpose, and document your business purpose. Keep that calendar, too. It made the difference for our Minnesotan.

Cite: Ressen, T.C. Summ. Op. 2015-32.

 

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William Perez, Taxes When Hiring Household Help.

Robert Wood, What To Do When IRS Agents Call On You. “Talking to the IRS without a representative is often a mistake.”

Russ Fox, Of Deadlines and Taxes:

This definitely wasn’t the worst Tax Season I’ve gone through, but it was far from the best. For taxpayers, this likely was one of the worst. Unfortunately, I don’t see any improvements on the horizon. The light I see is the oncoming train not the end of the tunnel.

Agreed.

 

TaxProf, The IRS Scandal, Day 713

 

Greg Mankiw, Why I favor estate tax repeal. “The estate tax unfairly punishes frugality, undermines economic growth, reduces real wages, and raises little, if any, federal revenue. There are no principles of good tax policy that support this tax…”

 

Martin Sullivan, As Governor, Jeb Bush Catered Tax Cuts to the Wealthy (Tax Analysts Blog). The formulation “tax cuts for the wealthy” should disappear. The loot and pillage community can call almost any tax cut a “tax cut for the wealthy” simply because the wealthy pay almost all the taxes.

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Chart by Tax Foundation

 

 

When you consider government benefits, the rich guy pretty much covers the whole thing:

distribution tax spending all taxes

Chart by the Tax Foundation

 

For your penance, say three “Our Commissioners” and three “Hail Lois.” Santa Clara Co. Priest Indicted on Bank Fraud, Tax Evasion.

 

 

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Tax Roundup, 4/21/15: Loans aren’t taxable, until you don’t have to pay them. And: ACA, dope, and lots of other stuff.

Tuesday, April 21st, 2015 by Joe Kristan

20120511-2Pay me now, tax me later. A hospital in a poor county in Central Florida wanted to recruit an OB-GYN. Rural employers often have to do something extra to recruit good help, so the hospital offered him a $260,000 loan. It came with a sweetener: if certain goals were reached, the loan would be forgiven.

It’s well established that loans aren’t taxable income. That can be pretty sweet to have $260,000 to spend with no withholding and no tax bill. But there’s a catch. You either have to repay the loan (out of your after-tax income), or you have to pay tax on the loan amount if the debt is forgiven.

It’s natural to try to want to have your cake and eat it too — to not pay the loan, and not pay the taxes. That is the very trick behind the leveraged ESOP. But for the rest of us, it’s an elusive goal. It eluded the doctor in Tax Court yesterday.

The doctor met his goals, and $260,000 of debt was cancelled over four years. The doctor didn’t report the income, so the IRS assessed additional tax. The doctor objected. From the Tax Court opinion:

Although the amount that petitioner received from the hospital pursuant to the Revenue Guarantee/Repayment Forgiveness addendum represented a bona fide loan, petitioner contends that the loan was a nonrecourse loan, i.e., that he was not personally liable for its repayment, and that, as a consequence, he did not receive income when the loan was forgiven and canceled by the hospital. The Court disagrees with the premise of petitioner’s argument.

The court pointed out that the terms of the note did make the doctor liable, and added:

Further, although the Court does not accept the premise of petitioner’s contention regarding the nature of the loan, it bears mention that just because a taxpayer is not personally liable for a debt does not mean that cancellation of indebtedness cannot give rise to income…

Under these circumstances, forgiveness and cancellation of the loan gave rise to income.

The Court added in a footnote:

…petitioner argues that when debt is canceled, the creditor should issue a Form 1099-C, Cancellation of Debt, and not a Form 1099-MISC. Although this may be so, the fact of the matter is that a bookkeeping error does not serve to negate income arising from the forgiveness or cancellation of debt.

Apparently the hospital knew that there was income, but issued the wrong kind of 1099. But the 1099 doesn’t change the nature of the income.

The moral? Forgivable loans are nice — cash now, tax later. But later happens.

Cite: Wyatt, T.C. Summ. Op. 2015-31.

 

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Megan McArdle, Obamacare’s Tax Day Mystery:

Meanwhile, Louise Radnofsky of the Wall Street Journal offers an example of Effect 3, which I confess hadn’t occurred to me: folks who were covered in 2014, got their refund docked to cover subsidy overpayments, and therefore decided to cancel their insurance for this year.

At first blush, this seems irrational. You don’t need to cancel your insurance to make sure that your tax refund remains intact; you just need to do a better job of estimating your income when you go to buy your insurance so that you don’t end up with overpayments. Of course, the taxpayer in question might not have bought the insurance if she’d known what it was actually going to cost her.

Complex systems have unintended consequences.

Hank Stern, The 4% Solution (Insureblog). “Only 4% of people who signed up for ObamaCare got the correct subsidy”

Christine Speidel, Penalty Relief and Premium Tax Credit Reconciliation (Procedurally Taxing). “This post will describe the penalty relief available under Notice 2015-09 and some of the barriers that may prevent low-income taxpayers from accessing the relief.

 

William Perez, Taxes When Hiring Household Help

Tony Nitti, IRS Seeks Record $2 Billion In Back Taxes From Prominent Businessman And Philanthropist Sam Wyly. Offshore trusts are involved.

Peter Reilly, Superior Point Of Sale Software Does Not Mix Well With Skimming

Jason Dinesen, Breakeven Analysis for Small Businesses, Part 1

Kay Bell, IRS telephone tax help was a dismal 38.5% this filing season. Part of your Commissioner’s “Washington Monument Strategy” of making taxpayers suffer to boost his budget.

 

20130607-2TaxGrrrl, 4/20: The Blunt Truth About Marijuana & Taxes

James Kennedy, Marijuana Dispensary Settles Case after IRS Suggests It Engage in Money Laundering (Tax Policy Blog):

Imagine running a small business and being assessed a penalty by the IRS. Then imagine being told by the IRS that the only way to avoid the penalty is to commit a serious felony, laundering money. This Kafkaesque nightmare actually became reality for a Colorado marijuana dispensary called Allgreens when it tried to pay its federal payroll taxes.

At some point this decade or next, marijuana will become more or less legal. I wonder if the tax law will be the last bastion of prohibition.

 

TaxProf, The IRS Scandal, Day 712. “The IRS Assures an Atheist Group It Will Monitor Churches.” What could go wrong?

Robert Wood, Before IRS Targeting, Lois Lerner Targeted At Federal Election Commission

 

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Paul Neiffer, Senator Wyden Indicates Tax Reform Must Include Flow Through Entities

Joseph Thorndike, Republicans Want to Repeal the Estate Tax Because Too Much Is Never Enough (Tax Analysts Blog).

For my money – and admittedly, it’s not my money, since I don’t expect the tax to be an issue for my heirs – repeal is a bad idea under any circumstances. But it’s an especially bad idea when paired with a continuation of stepped-up basis.

If there is a good argument for the estate tax, it’s to allow basis step up. The “breaking up dynasties” thing is silly. From what I’ve seen in practice, all you need to break up inherited wealth is a second generation.

Eric Toder, Corporate Tax Reform and Small Business (TaxVox).

Sebastian Johnson, State Rundown 4/20: State Houses Consider Cuts (Tax Justice Blog).

 

Career Corner. The Non-Golfing Accountant’s Guide To Hitting the Links (Leona May, Going Concern)

 

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Tax Roundup, 4/9/15: April 15 is also a day-trader deadline. And: Grant 1, Lee 0.

Thursday, April 9th, 2015 by Joe Kristan

daydrinkersTechnology has made made sophisticated stock trading tools that exchange floor pros once could only dream of available to every home. It has democratized the ability to make, and lose, money playing the markets.

It can be tempting to chuck the desk job and run off with Maria Bartiromo and TD Ameritrade. Sadly, more than one trader has emerged from the relationship with nothing to show for it but a lifetime of capital loss carryforwards.

That’s where today’s filing season tip comes in. If you qualify as a “trader,” April 15 is your deadline for choosing whether to make the “mark-to-market election” on your trading positions for 2015. If you don’t qualify as a trader, you can’t make the election.

If you make the mark-to-market election, you are required to recognize all of your open positions at year-end on your tax return as if you had cashed them out. More importantly, all of your gains and losses are ordinary, rather than capital.

That may seem like an inherently bad idea. Aren’t capital gains taxed at a lower rate? Yes, they are, but only if they are long-term, on assets held for over one year. That’s not the kind of gain day-traders are going for. Short-term gains are taxed at the same rates as ordinary income.

Ordinary losses, on the other hand, are a good thing. Well, on your tax return, anyway, if not in any other way. While individual capital losses are deductible only against capital gains, plus $3,000 per year, ordinary losses are fully deductible, and can even generate loss carrybacks.

That makes the mark-to-market election useful for day traders. They give up capital gain treatment that they can’t use anyway, and if they have a bad year — and many beginners do — they at least get to deduct all of their losses. For example, a famous trial lawyer who left the bar for day trading used the mark-to-market election to deduct $25 million in losses.

It’s already too late to make the election, also known as the “Section 475(f) election, for 2014. But you have until April 15 to make the election for 2015. You make the election either with either an unextended 2014 1040 or with the Form 4868 extension for the 2014 return. You may not make the election on an extended 1040.

The election is made on a statement with the following information:

  1. That you are making an election under section 475(f);
  2. The first tax year for which the election is effective; and
  3. The trade or business for which you are making the election.

So if you are spending your days with CNBC and your trading program, you might want to hedge your tax risks by making a 2015 475(f) election by April 15.

Related: The lure of a Sec. 475 election (Journal of Accountancy)

This is another of our series of 2015 Filing Season Tips — one daily through April 15!

 

Russ Fox, Bozo Tax Tip #3: Just Don’t File

 

Flickr image courtesy Easa Shamih under Creative Commons license

Flickr image courtesy Easa Shamih under Creative Commons license

Tax Court judges can do math too.We talked last week about the need to properly document charitable deductions.  The Tax Court talked about it yesterday, disallowing claimed deductions of $37,315 for lack of substantiation — most of it for purported contributions of household goods. From the decision:

Petitioners did not provide to the IRS or the Court a “contemporaneous written acknowledgment” from any of the four charitable organizations. Petitioners produced no acknowledgment of any kind from the Church or Goodwill. And the doorknob hangers left by the truck drivers from Vietnam Veterans and Purple Heart clearly do not satisfy the regulatory requirements. These doorknob hangers are undated; they are not specific to petitioners; they do not describe the property contributed; and they contain none of the other required information.

So if you claim property deductions for gifts of $250 or more, you need to have something from the charity that, even if it doesn’t show the value, shows what you gave. So why not claim you just gave only gifts under $250? From the Tax Court (my emphasis):

Petitioners contend that they did not need to get written acknowledgments because they made all of their contributions in batches worth less than $250. We did not find this testimony credible. Petitioners allegedly donated property worth $13,115 to the Church; this donation occurred in conjunction with a single event, the Church’s annual flea market. Petitioners’ testimony that they intentionally made all other contributions in batches worth less than $250 requires the assumption that they made these donations, with an alleged value of $24,200, on 97 distinct occasions. This assumption is implausible and has no support in the record.

Hey, I drive a Smart car, it takes a lot of trips!

Cite: Kunkel, T.C. Memo 2015-71.

 

20140401-1Jana Luttenegger Weiler, Special Tax Deduction for Contributions to Support Families of Slain NY Officers. (Davis Brown Tax Law Blog). A 2014 deduction that you can still fund today.

TaxGrrrl, Taxes From A To Z (2015): Z Is For Zloty. On paying taxes while abroad and you need to use a foreign currency.

Robert Wood, Newest Tax Fraud Threat? Your Payroll Tax. A good reminder of the need to use EFTPS to monitor your payroll tax service, to make sure your company payroll taxes are getting deposited with the government.

Jason Dinesen, Marriage in the Tax Code, Part 6: Community Property Laws

Kay Bell, IRS headquarters hit by brief Washington, D.C., power outage. A reminder that even if you e-file, you don’t want to wait until the very last minute.

William Perez, Requesting Additional Time to File a State Tax Return

Jack Townsend, Tax Shelter Salesman Avoids Fraud Finding for Investment in Tax Shelter. You’ll have to follow the link for the more accurate, but less printable, version of the headline.

 

David Brunori, Greed, Piracy, and Cowardice (Tax Analsyts Blog):

I have written about 100 articles on tax incentives, all of them critical. I don’t blame the “greedy” corporations. State and local taxes are a relatively small part of the cost of doing business. Corporations are handed opportunities to minimize their tax burdens — legally. And rationally, they take advantage of those opportunities. The biggest factors in deciding where to invest are labor costs and broad access to markets. If we ended all tax incentives tomorrow, there would be virtually no effect on the economy. Corporations would still be investing where they are investing.

It’s politicians responding to the incentives. Those of us who want better tax policy, broad tax bases, and low rates for all don’t show up at the legislator’s golf fund raisers. Those looking for a special deal for their company or their industry have low handicaps for a reason.

 

TaxProf, The IRS Scandal, Day 700. 700 days, no scandal here, move along.

 

Bloomberg, An Emotional Audit: IRS Workers Are Miserable and Overwhelmed. A visit to one of the few places where they still offer on-site service. (Via the TaxProf)

 

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History alert. General Lee surrended to General Grant 150 years ago today at Appomatox Court House, Virginia. Fellow tax blogger Peter Reilly is there, and I am insanely jealous.  I am contenting myself by re-reading Lee’s Last Retreatthe best book I’ve seen about the last frantic days of the Army of Northern Virginia. It makes you feel like you are there with the crumbling confederate army as it tried to escape after shattering defeats around Richmond. It also punctures a lot of romantic myths around those events.

After tax season, I will be happy to bore you with my thoughts on why Grant is grievously underrated for his Civil War achievements, and why he is also an underappreciated president. Next week.

 

News from the Profession: CPA Firm Managing Partner Charged in Embezzlement Scheme (Accounting Today):

Patrick H. Oki, managing partner at the Honolulu-based firm was charged Monday with theft in the first degree, money laundering, use of a computer in the commission of a separate crime, and forgery in the second degree, according to the office of Prosecuting Attorney Keith M. Kaneshiro.

Mr. Oki is reported to be both a CPA and a Certified Fraud Examiner. I can only imagine the awkwardness at the next partner meeting.

 

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Tax Roundup, 3/26/15: Not every project is an “activity,” and why that’s a good thing. And: starting Iowa’s tax law fresh.

Thursday, March 26th, 2015 by Joe Kristan

What’s an activity? The tax law’s “passive loss” rules limit business losses when a taxpayer fails to “materially participate” in an “activity.” Whether an “activity” is “passive” is mostly 20150326-2based on the amount of time spent in the activity by the taxpayer. That can raise a tricky question: just what is an “activity?”

Many businesses do multiple things. Take a CPA firm that does tax and auditing. If those feckless auditors lose money, is that a separate “activity” from the hard-working tax side? Or consider a convenience store owner with two locations; is each a separate activity, or are they one big activity?

The Tax Court addressed this problem yesterday in a case involving a South Florida developer. Greatly simplifying a complex story of real estate backstabbing and inter-family rivalry, the problem was whether an S corporation was the same “activity” as a partnership with the same owners set up for s specific development project. If so, family patriarch Mr. Lamas could cross the basic 500-hour threshold for participation in the combined activity, making his losses deductible.

Judge Buch explains the IRS regulation (1.469-4(c)) governing this issue:

This regulation sets forth five factors that are “given the greatest weight in determining whether activities constitute an appropriate economic unit for the measurement of gain or loss for purposes of section 469″:

(i) Similarities and differences in types of trades or businesses;

(ii) The extent of common control;

(iii) The extent of common ownership;

(iv) Geographical location; and

(v) Interdependencies between or among the activities (for example, the extent to which the activities purchase or sell goods between or among themselves, involve products or services that are normally provided together, have the same customers, have the same employees, or are accounted for with a single set of books and records).

This regulation further instructs that taxpayers can “use any reasonable method of applying the relevant facts and circumstances” to group activities, and that not all of the five factors are “necessary for a taxpayer to treat more than more activity as a single activity”.

Equality in action in the Soviet Union on the Belomor Canal

The judge said that Shoma (the S corporation) and Greens (the partnership) met these requirements, considering they had the same control and both were in the same general business. Also:

Finally, Shoma and Greens were interdependent. Greens operated out of Shoma offices, used Shoma employees, and consolidated its financial reporting with Shoma’s. Greens was formed by Shoma as a condominium conversion project. The shareholders intended that Greens be dissolved after the project was completed and the capital returned to its shareholders.

Because Shoma and Greens meet these five factors, we find that they are an appropriate economic unit and should be grouped as a single activity.

The taxpayer was able to satisfy the court through witness testimony and phone records that he met the 500-hour requirement.

This case is good news for developers, as this structure is common in that business: a permanent S corporation sets up new LLCs for each development project. This case correctly concludes that they are all part of the same development business.

Cite: Lamas, T.C. Memo 2015-59.

 

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.

Me, What an Iowa income tax might look like with a fresh start. My new post at IowaBiz.com, the Des Moines Business Record Business Professionals’ Blog, on what Iowa’s tax system might look like if we could start over. A taste:

A system designed from scratch would apply the ultimate simplification to Iowa’s corporation income tax: it wouldn’t have one. Iowa’s corporation income tax is rated the very worst, with extreme complexity and the highest rate of any state. 
 
Eliminating the corporation income tax would eliminate the justification for almost all of the various state incentive tax credits, all of which violate the principles of neutrality and simplicity in the first place. For its astronomical rates and complexity, it generates a paltry portion of the state’s revenue, typically 4-7 percent of state receipts.
 
For S corporations, a from-the-ground-up tax reform might tax Iowa resident shareholders only on the greater of distributions of S corporation income, or interest, dividends, and other investment income earned by the S corporations. The investment income provision would prevent the use of an S corporation as a tax-deferred investment. The effect would be to put S corporations on about the same footing as C corporations.

I have little hope in the legislature actually doing something sensible, but we have to start somewhere. I’d love to hear any thoughts readers may have.

 

 

Roger McEowen addresses the Tax Consequences When Debt is Discharged (ISU-CALT): “There are several relief provisions that a debtor may be able to use to avoid the general rule that discharge of indebtedness amounts are income, but a big one for farmers is the rule for ‘qualified farm indebtedness.'”

Russ Fox, A Break in my Hiatus: Poker Chips and Tax Evasion. Russ lifts his head from his tax returns to tell of the tax problems of a poker chip maker that he has personal experience with. “A helpful hint to anyone wanting to emulate Mr. Kendall: Just pay employees in the normal way, on the books, and send the withholding where it belongs.”

TaxGrrrl, Taxes From A To Z (2015): N Is For Nonrefundable Tax Credits

Robert Wood, Tax Fraud Draws 6 1/2 Year Prison Term Despite Alzheimer’s. Specifically, a dubious claim of Alzheimer’s.

Peter Reilly, Did Andie MacDowell’s Mountain Hideaway Require Tax Incentives? To listen to some people, you’d believe nothing good ever happened until tax credits were invented.

 

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Jason Dinesen, Financing a Small Business, Part 5 of 5: Know When to Keep Quiet With the Banker. “Here are a couple of real-world examples I’ve seen where business owners got hung up with the bank because the owner wouldn’t stop talking.”

This has lessons for IRS exams, too.

Kay Bell, Obamacare, bitcoin add twists to 2014 tax filing checklist

Annette Nellen, Another Affordable Care Act Oddity. “Perhaps the problem is more tied to the “cliff” in the PTC that causes someone to completely lose the subsidy once their income crosses the 400% of the FPL (more on that here).”

William Perez, How Much Can You Deduct by Contributing to a Traditional IRA?

 

Alan Cole, Richard Borean, Tom VanAntwerpWhich Places Benefit Most from State and Local Tax Deductions? (Tax Policy Blog):

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The short answer? Places with high state tax rates and high-income earners. Note the purple spot right in the middle of Iowa.

 

TaxProf, The IRS Scandal, Day 686

Renu Zaretsky, Sense and Sensibilities. Today’s TaxVox headline roundup covers the House GOP budget, a Texas tax cut, and tax-delinquent federal employees.

 

Richard Phillips, How Presidential Candidate Ted Cruz Would Radically Increase Taxes on Everyone But the Rich (Tax Justice Blog). A taste:

On the flat tax, Cruz has not yet spelled out a specific plan that he would like to see enacted, but it’s unlikely that any plan he proposed will be significantly better than the extremely regressive flat tax proposals that have been offered in the past.

Or, “we don’t know what he will do, but it will be terrible!”

 

Caleb Newquist, Big 4 Gunning for Big Law. To steal a cheap line: who wins if the Big 4 and Big Law fight to the death? Everybody!

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Tax Roundup, 3/25/15: Why the casino may not be the place to invest those millions from that Chinese guy.

Wednesday, March 25th, 2015 by Joe Kristan

In the movies, an American who is entrusted with millions from a Chinese shipping magnate, but blows it at casinos, would face unimaginably dire consequences. In real life, he faces the IRS.

20120511-2That’s the story in a weird Tax Court case decided yesterday. The shipping magnate, a Mr Cheung, had fared poorly as an investor. He met a Mr. Sun from Texas and decided that he might be better at investing. He shipped the money to a C corporation and an e-Trade account owned by Mr. Sun, under a handshake deal with fuzzy terms. Judge Paris explains:

The only part of the arrangement that both Mr. Cheung and Mr. Sun consistently agreed on was the general structure of the investment. Mr. Cheung would transfer sums of money through his shipping companies’ bank accounts to Mr. Sun, who would then invest the money in the United States. Mr. Cheung would decide how much money he wished to send, and Mr. Sun had discretion on which investments to pursue with Mr. Cheung’s money.

The remaining terms of the verbal agreement were not memorialized and are unclear. Specifically, Mr. Sun and Mr. Cheung inconsistently described the investment term, the expected return, and enforcement provisions. Mr. Sun believed the term was a minimum of 5 years and did not give a maximum period, whereas Mr. Cheung believed the term was 7 to 10 years. The expected return is also unclear; Mr. Sun believed the return on investment would be a 50-50 split of the net profit with a minimum 10% gain annually, but the return might not be paid annually. Mr. Cheung believed the return would be 10% to 15%, but was uncertain whether that return was annual or total.

Not the sort of investment arrangement Suze Orman or Dave Ramsey would embrace. Nor would they embrace some of the “investments” described in the Tax Court case.

The funds sent to Mr. Sun’s C corporation went into an “officer loan account” for Mr. Sun. And then… well, again from Judge Paris (emphasis mine):

Mr. Sun would either pay his personal expenses directly from the officer loan account or he would remove money and use it at his discretion. For example, in 2008 Minchem paid $135,874.43 for home automation, $158,517.80 for a new Mercedes Benz, and $49,598.81 for personal real estate tax. In total, Minchem’s officer loan account was debited $4,116,414.43 in 2008 and $1,811,127.65 in 2009 for expenses that Mr. Sun identified as personal during his trial testimony.

Some of the personal expenditures included gambling expenses. In 2008 $4,800,100 was transferred to casinos from the officer loan account and $2,394,550 was returned. In 2009 $1 million was transferred to casinos and $1,300,000 was returned. Thus between 2008 and 2009 Mr. Sun transferred $5,800,100 from the officer loan account to casinos and received back $3,694,550; i.e., over the two years in issue Mr. Sun lost $2,105,550 from gambling from the officer loan account.

20120801-2Judge Paris said that the funds never belonged to the C corporation because it was a mere conduit for the cash; that meant the corporation was not taxable on the amounts.

Mr. Sun didn’t get off so easy. Judge Paris said that the funds became income to Mr. Sun when he began spending them for his own purposes (citations omitted):

Whether funds have been misappropriated is a question of fact, but facts beyond “dominion and control” must be considered. More specifically, an individual misappropriates funds when money has been entrusted to the individual for the sole purpose of investing and the individual instead uses the money for personal activities.

Mr. Sun undisputedly treated as his own money held for Mr. Cheung’s benefit and specifically earmarked for investment purposes. For example, Mr. Sun used some of the funds to purchase a personal automobile and a home automation system. Perhaps the most obvious example of Mr. Sun’s misappropriation of the funds is his gambling activities.

The opinion dismissed the idea that the funds were loans because there was no documentation of any sort of loan agreement or terms. The court said that the amounts weren’t gifts because no Form 3520, where U.S.  taxpayers report large foreign gifts, was filed, and because there was no evidence of an intent to make a gift.

While the Tax Court ruled that Mr. Sun misappropriated the money, it ruled that the IRS failed to prove fraud. That meant the penalties were only 25% of the roughly $4.7 million of additional tax, rather than the 75% under the civil fraud rules.

The Moral? Hard to say. Don’t squander millions of dollars entrusted to you for investment at casinos? You didn’t need the Tax Court to tell you that. Maybe it’s a handy reminder to file Form 3520 if you receive large foreign gifts, lest the IRS get the wrong idea (and lest they hit you with a $10,000 penalty for not filing it). And if you have had bad luck with your investments, maybe index funds are a better way to go than a handshake deal with some guy in Texas.

Cite: Minchem International, Inc., et. al., T.C. Memo 2015-56.

 

Kyle Pomerleau, U.S. Taxpayers Face the 6th Highest Top Marginal Capital Gains Tax Rate in the OECD (Tax Policy Blog):

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The United States currently places a heavy tax burden on saving and investment with its capital gains tax. The U.S.’s top marginal tax rate on capital gains, combined with state rates, far exceeds the average rates faced throughout the industrialized world. Increasing taxes on capital income, as suggested in the president’s recent budget proposal, would further the bias against saving, leading to lower levels of investment and slower economic growth. Lowering taxes on capital gains would have the reverse effect, increasing investment and leading to greater economic growth.

But, but, the rich!

 

IMG_1388William Perez covers Various Types of Individual Retirement Accounts.

Paul Neiffer, Tax Court Allows $11 Million Horse Loss to Stand. “Now, though this is a victory for the taxpayer in Tax Court, they are still out over $11 million in losses (or more).  I am not sure if it really is an overall win for the taxpayers.”

TaxGrrrl, Taxes From A To Z (2015): M Is For Municipal Bonds.

Jason Dinesen discusses Recordkeeping Considerations for a Startup Business.

Roger McEowen, USDA Releases Proposed Definition of “Actively Engaged in Farming” That Would Have Little Practical Application. Sounds useful.

Kay Bell, $42 million Montana mansion owner loses property tax fight. Looks like a nice place.

Jim Maule, When Social Security Benefits Aren’t Social Security Benefits: When They Meet Tax. “By reducing social security benefits on account of the state retirement system benefit payments, the Congress causes the portion of the taxpayer’s overall retirement receipts that is treated as taxable pension payments to increase, which in turn not only increases gross income on its own account but generates gross income from a portion of the social security benefits.”

Joni Larson, Proposal to Amend Section 7453 to Provide that the Tax Court Apply the Federal Rules of Evidence (Procedurally Taxing)

 

Tony Nitti, Ted Cruz To Run For President: Why His Plan For A Flat Tax May Doom His Candidacy:

Whether a move to a much more regressive system than the one currently in place is ultimately in the best interest of the economy and country is irrelevant; the Democrats will seize on the shift in the tax burden and continue to paint Republican candidates as seeking only to placate the rich.

I think Hillary Clinton, or whoever the nominee is, will do that to any Republican opponent, regardless of any actual policy positions. The question is whether they will be able to more successfully deal with the issue than Mr. Romney.

Robert Wood, Taxing Stephen King, Taylor Swift And Phil Mickelson

 

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Renu Zaretsky, Tax Struggles and Tax Sneaks. Today’s TaxVox headline roundup has stories about how Orrin Hatch wants tax reform and John Koskinen wants more money.

David Brunori, Louisiana Tax Reform: Some Smart Guys Worth Listening To (Tax Analysts Blog)

TaxProf, The IRS Scandal, Day 685.  Today’s post features Media Matters, living proof that the IRS concern over political activity was rather selective.

 

Career Corner. Confirmed: Golf More Difficult Than CPA Exam (Caleb Newquist, Going Concern). But almost as much fun!

 

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Tax Roundup, 3/24/15: Goldilocks and the medical practice. And: the spirit is willing, but the Tax Fairy is weak.

Tuesday, March 24th, 2015 by Joe Kristan

20120511-2Reasonable Compensation and the Goldilocks Rule. The IRS has been fighting taxpayers over how much compensation is “reasonable” since Great-grandpa realized he could reduce his corporate tax by taking it out as a salary. The agency historically fought this war over whether taxpayers were taking too much compensation. The IRS has since opened a second front, arguing that S corporation owner-employees were improperly reducing their employment taxes by taking too little salary out of the corporation. Employee owners now need to find a comp level that is “just right.”

As in any two-front war, a victory on one front might cause problems on the other. A Tax Court victory yesterday for the IRS over an eye doctor who took “too much” compensation may give ammunition to S corporation professional practices that take corporate earnings out via their K-1s and distributions — free of Medicare taxes — rather than as salary and bonus.

Judge Kerrigan says Dr. Ahmad, the owner and principal employee of Midwest Eye Center, took four $500,000 bonuses in November and Decemeber of 2007. This wiped out corporate income, which would likely have otherwise been taxed at a flat 35% rate under the “professional corporation” tax rules. They even overdid the bonus a little, carrying a net operating loss into 2008.

The taxpayer failed to convince the judge that the bonus was “reasonable”:

Petitioner produced no evidence of comparable salaries. Instead, petitioner argues that there are no “like enterprises” under “like circumstances” from which to draw comparisons. Petitioner argues that Dr. Ahmad’s large bonus was reasonable for several other reasons. Petitioner points to Dr. Ahmad’s increased workload during 2007 and the various roles that Dr. Ahmad performed, such as CEO, CFO, and COO, and the corresponding managerial duties of those positions. However, petitioner did not provide any methodology to show how Dr. Ahmad’s bonus was determined in relation to these responsibilities.

This tells us that when you have a C corporation owned by a single professional, you have to do more to determine how much bonus is “reasonable” than estimate what the pre-bonus taxable income is. If you are going to suck the income out of such a corporation through bonuses, it is wise to have written bonus criteria that make sense when compared to other practices.

It might be even better to make an S corporation election. The medical practice C corporation was hit with over $320,000 in tax on $1 million “excessive” compensation (and some other items), and another $62,000 in penalties — all of which would have been avoided in an S corporation, where all income is taxed on the 1040 regardless of whether it is “excessive.”

In fact, this case helps S corporation professional practices a little, in that it is evidence that it is not “reasonable” to assume that all income of the practice has to come out as compensation subject to employment taxes.

Cite: Midwest Eye Center, S.C., T.C. Memo 2015-53.

 

tax fairyIRS says “Rabbi” had a tax practice that wasn’t entirely orthodox. A Department of Justice Tax Press Release tells a story of a man who sought the Tax Fairy in the Torah:

The lawsuit, filed in the U.S. District Court for the Southern District of California, alleges that Lawrence Preston Siegel, aka Larry Lave, Yehuda Lave and Larry Easy, falsely represented that he is a licensed attorney and CPA in order to solicit business for his tax practice. 

According to the civil injunction suit, Siegel pleaded guilty to one count of tax evasion and two counts of subscribing false tax returns in 1994.  He subsequently resigned from the California bar in 1994, lost his CPA license in 1997, and never regained either accreditation, according to the suit.  The complaint alleges that following his release from federal prison in 2001 for additional convictions, Siegel established a tax practice and stated online that he is an “[i]interesting combination of a Tax Lawyer and CPA who is also a Rabbi trained in Spirituality.”  Siegel, the complaint alleges, claimed to others that his “goal as a spiritual Rabbi, Tax Attorney and CPA is to save people money without going to jail … Everybody wants to pay very little tax, I do it legally and morally under the Torah.” 

It never occurred to me that a Rabbi would require the qualifier “trained in Spirituality.” Isn’t that the whole idea? In any case, he isn’t well-trained in tax, if the Justice Department press release is to be believed (my emphasis):

According to the complaint, among his tax fraud schemes, Siegel falsely advised his customers, typically high earners who own profitable businesses, that they can establish companies in Nevada and treat their California home as an out-of-state corporate office.  Siegel falsely claimed that doing so would transform a vast array of non-deductible personal expenses into tax deductible business expenses, according to the suit.  According to the complaint, Siegel boasted about this tax fraud scheme in e-mails, including one where he falsely claimed that his customers are entitled to free housing as tax-free compensation from their out-of-state companies and that “[t]he housing can [b]e luxurious and cost thousands a [] month” because “[t]here is an assumption that corporations don’t waste money.”

What’s amazing to me is that (if the allegations are true) he had clients who actually believed this. Religious or secular, reform or orthodox, believer or non-believer, the desire to believe in the Tax Fairy is strong among all races, religions and belief systems. But there is no tax fairy.

 

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Kristine TidgrenExpanded Relief for Taxpayers Receiving Erroneous 1095-As:

On Friday, March 20, CMS announced that it had discovered additional 1095-A errors among those forms issued by both State-run exchanges and the federally-facilitated exchange. CMS is notifying taxpayers impacted by these errors with emails, phone calls, and messages in their Marketplace accounts. Because of these errors, Treasury is expanding the relief it offered in February.

Now, anyone who (1) enrolled in any type of marketplace coverage, (2) received an incorrect Form 1095-A, and (3) filed their return based upon that form, does not need to file an amended tax return. The IRS will not pursue the collection of any additional taxes based on updated information contained in the corrected forms. This relief applies to tax filers who enrolled through either the federally-facilitated marketplace or a state-based marketplace. As provided before, taxpayers who were harmed by the errors may file amended returns to collect the difference.

So the liability of a taxpayer for potentially thousands of dollars in taxes depends on two items:

1. Whether the exchange botched the 1095-A filing, and

2. Whether the taxpayer filed before the 1095-A was corrected.

These are whimsical criteria on which to stake thousands of dollars of tax credits.

 

Chicago Tribune, It’s Obamacare’s first tax season. Can the IRS handle it?Kristy Maitre of the ISU Center for Agricultural Law and Taxation is quoted: “Overall, I do not believe they’re as prepared as they could have been.”

Hank Stern, The Best Laid Plans [Updated]. “In other words, a lot of folks with even rudimentary math skills have figured out that paying the fine penalty tax and “going bare” is a much more cost-effective choice than buying coverage.”

Robert Wood, Happy Anniversary Obamacare Taxes, Many Happy Returns.

 

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Norton Francis, Bobby Jindal’s Revenue Enhancements (TaxVox). “His trick: Turn refundable business credits into non-refundable credits.”

Kay Bell, Downton Abbey’s new tax connection via Rep. Aaron Schock

Tyler Cowen presents New arguments on a carbon tax, including one that suggests a way in which “…a carbon tax could make global warming worse.”

Martin Sullivan, U.S. Effective CorporateTax Rate Higher Than Foreign Competitors? Not Really (Tax Analysts Blog)

 

TaxProf, The IRS Scandal, Day 684

 

News from the Profession. Conducting Tax Return Update Meetings at the Gym Maybe Not the Best Idea (Caleb Newquist, Going Concern). “If a client requests a meeting at a location where heavy objects are laying around, and there’s an off-chance that the news you have may be anything other than positive, may we suggest an alternative venue.”

 

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Tax Roundup, 2/27/15: Bartender beats barrister in Tax Court. And more!

Friday, February 27th, 2015 by Joe Kristan

20120511-2Bartender or barrister, you need to keep good records.  A Nevada bartender, arguing his own case against an IRS attorney, defeated the IRS in Tax Court yesterday. He did it by keeping records.

The IRS said the taxpayer understated his tip income, and it used a generic tip model to assess additional tax. The bartender argued that the IRS model didn’t reflect what happened at the casino where he worked, and that he had the records to prove it:

Petitioner testified about how his bar was set up and what a shift was like during the years at issue. He stated that his bar had only six stools and that customers would often sit at the stools playing poker for several hours and receive several comped drinks as a result. He testified that the only time his bar would be busy was when there was a big convention and then most of the drink sales tips would be on company credit cards rather than cash. He described the difficult [*15] economic times that Las Vegas faced during the years at issue and how his business had decreased as a result.

Petitioner also testified about the typical tipping behavior of his patrons. Most of his drinks served were comps, and he testified that customers rarely tipped on comp drinks and that if they did they might “throw [him] a buck or two” after several hours of sitting at his bar receiving the comped drinks. Petitioner additionally testified that college kids and foreigners rarely tipped.

And the records:

Petitioner argues that he has met his burden because he complied with the recordkeeping requirements of section 6001 and section 31.6053-4(a)(1), Employment Tax Regs., having kept detailed, contemporaneous daily logs which are substantially accurate. Petitioner routinely recorded the amounts of his cash and charge tips on slips of paper at the end of each shift. Petitioner kept these logs and produced them to respondent and at trial.

20130903-1The IRS tried to nit-pick the records, but Judge Kerrigan was satisfied:

Respondent argues that petitioner was not tipped in exact dollar amounts. Petitioner testified credibly that when he was tipped with change he would put the change in a glass jar to be mixed in with the other tips. When he would periodically cash out the change jar, he would give the change to the cashiers who cashed him out at the end of the shift. He also testified that when he cashed out daily his charged tips receipt, he would give the cashiers any change that was generated by those tips. We find petitioner’s explanation credible and do not find the logs inadequate merely because the amounts are recorded in whole numbers.

I think the important lesson here is that he generated the records every day, and that he was able to produce them to the judge. Contrast that with a recent decision involving a Mrs. Hall, an attorney deducting travel expenses:

Mrs. Hall did not maintain a contemporaneous mileage log. Mr. Katz testified that he based the number of miles driven on discussions with Mrs. Hall. Mr. Katz claimed that he reviewed documentation in order to determine the number of miles driven. The documentation that Mr. Hall and Mrs. Hall offered into evidence to substantiate the number of miles driven consisted of seven parking receipts, an equipment lease, a help wanted advertisement, a phone message slip, and a few other documents. The evidence they submitted does not demonstrate that Mrs. Hall incurred mileage expenses in amounts greater than those respondent allowed in the notice of deficiency.

Citations:

Sabolic, T.C. Memo 2015-32

Hall, T.C. Memo 2014-171

 

TaxGrrrl, Opting Out Of The Obamacare Tax: What Happens If You Don’t Pay?. Oddly, the IRS can’t use most of its collection tools to collect the individual mandate. The advance premium clawback is a different story.

Russ Fox, 10 = 2500 ?. “On Monday, I mailed a Tax Organizer to a client here in Las Vegas; she’s about ten miles from where I am. I also mailed a completed tax return to a client in South Carolina. Both will be received today.”

Annette Nellen talks about Taxes Around the World.

Kay Bell, Survey says tax refunds going into savings, paying off debt

Jack Townsend covers Key points of Article on ABA Webcast on Offshore Accounts

 

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Robert Wood, New IRS Scandal Hearings Reveal 32,000 More Emails, Possible Criminal Activity:

But in what was the most disturbing revelation, House Member attendees were told that the IRS had not even asked for the backup tapes when the ‘hard drive crash’ excuse was first used. That contradicted the prior testimony of IRS Commissioner John Koskinen. He had testified to the effect that recovery efforts had been thorough, and that the tapes couldn’t be accessed.

Do you believe the Commissioner when he says he needs more money?

TaxProf, The IRS Scandal, Day 659.

 

Don Boudreaux links: Dick Carpenter and Larry Salzman, in this new publication from the Institute for Justice, explain how the I.R.S. helps to fuel in the U.S. the uncivilized banana-republic terror that is civil asset forfeiture. (Cafe Hayek)

Jim Maule, Testing Tax Knowledge.

According to a report on a recent NerdWallet survey, “[m]ost American adults get an ‘F’ in understanding income tax basics.”

It would be fun to require members of Congress and candidates for that office to take this survey, or one like it. I cannot imagine the outcome would be any better than that achieved by the 1,015 survey takers.

Nor can I.

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Andrew Lundeen, Corporate Tax Cuts Increase Federal Revenue in the Long Run (Tax Policy Blog):

It’s important to note that this increase in revenue would be in the long run, after the economy has fully adjusted (probably about 10 years in the future). In the early years, federal revenue would fall before investment and growth pick up fully as the economy adjusts to a better tax system.

However, tax policy—all public policy, in fact—should be made with a focus on the long-term.

Unfortunately, politicians buy our votes with our money in the short-term.

 

Joseph Thorndike, Hey, It Could Happen! The Optimist’s Case for Tax Reform (Tax Analysts Blog). ” It will result from a transparent, flexible, and bipartisan bill drafting process; from strategic use of congressional staff to test the waters of controversial proposals; from skillful deployment of transition rules and other minor bill changes to win support from rank-and-file members of Congress; and from streamlined or fast-track debate procedures.”

 

Renu Zaretsky, The Internet, Drug Profits, and Sacrifice. The TaxVox headline roundup covers the uncertain tax effects of the “net neutrality” power grab.

Kristine Tidgren, Iowa Fuel Excise Tax Set to Increase 10 Cents on Sunday (ISU-CALT)

Matt Gardner, Is the Starz Network Series “Spartacus” a Jobs Creator? (Tax Justice Blog). I’m sure it helped create lots of work for film tax credit middlemen and fixers.

 

I bet the judge gave him a stern talking-to. Bow Man Sentenced for Fraud, Tax Evasion.(Concord Patch).

Caleb Newquist, Actually, Everyone Knows That Having Two Monitors Is Super Boss. (Going Concern).

Only two?

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Tax Roundup, 2/26/15: Fifth circuit bails out abandonment. And: gas up before Sunday, Iowa!

Thursday, February 26th, 2015 by Joe Kristan

Fill ’em up Saturday. Iowa’s Governor Branstad signed a 10-cent per gallon gas tax boost into law yesterday. It takes effect Sunday.

Somewhat related: Replacing the Gas Tax with a Mileage-Based Tax (Kyle Pomerleau, Tax Policy Blog).

 

20131212-1Taxpayer wins $20 million bet. Pilgrim’s Pride Corporation had an offer to sell securities for $20 million. It had a $98.6 million cost in the securities, so it wasn’t a great return, but $20 million is still better than nothing. Well, maybe not.

The taxpayer determined to abandon the securities in the belief that the result would be a $98.6 million ordinary loss — generating a tax savings of around $34.5 million. That seemed like a better deal than taking the cash, because the $78.6 million loss would then be a corporate capital loss — deductible only against capital gains, and expiring after five years.

In December 2012 the Tax Court said that Pilgrims Pride made a losing bet, ruling that Section 1234A made the loss a capital loss. Now the Fifth Circuit Court of Appeals has ruled that the taxpayer made the right bet, reversing the Tax Court:

The primary question in this case is whether § 1234A(1) applies to a taxpayer’s abandonment of a capital asset. The answer is no. By its plain terms, § 1234A(1) applies to the termination of rights or obligations with respect to capital assets (e.g. derivative or contractual rights to buy or sell capital assets). It does not apply to the termination of ownership of the capital asset itself. Applied to the facts of this case, Pilgrim’s Pride abandoned the Securities, not a “right or obligation . . . with respect to” the Securities.

Taxpayers outside the Fifth Circuit still need to be aware that the Tax Court says abandonment doesn’t turn capital losses into ordinary income, but in the right circumstances, it may still be worth a try. In the Fifth Circuit, abandon with, well, abandon.

I find this from the Fifth Circuit opinion interesting, if not necessarily true:

Congress does not legislate in logic puzzles, and we do not “tag Congress with an extravagant preference for the opaque when the use of a clear adjective or noun would have worked nicely.”

Logic puzzles seem to be pretty common in the tax law. Look at the ACA, which provides a $100 per-day, per-employee penalty for Section 105 plans, while Section 105 itself still rewards employees who participate in these plans with a tax benefit. That puzzles me. But I digress.

When the Tax Court first ruled in this case, I wrote:

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

That’s one tax advisor who had an excellent day yesterday.

Cite: Pilgrim’s Pride Corporation, CA-5, No. 14-60295

Other coverage: Fifth Circuit Reverses Tax Court, Allows $98 Million Deduction To Pilgrim’s Pride (Tony Nitti)

 

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Jason Dinesen ponders What to Do with a K-1 with a Fiscal Year End

Russ Fox, Taxes Impacting the Giants. “There’s an obvious implication here: the big spending Los Angeles Dodgers and New York Yankees have inflated their salaries to cover high state taxes.”

TaxGrrrl, Looking For Your Refund? Need To Ask A Question? Finding Answers At IRS.

Peter Reilly, IRS Denies 501(c)(3) Exemption To Booster Club Due To Inurement. Quoting the IRS denial letter:

However, the money that they make in your name does not go into your general budget. Rather, you keep an accounting of how much revenue each member brings in and permit each member to apply that revenue to the cost of athletic competitions for their children.

Peter explains why that doesn’t work.

 

Kay Bell, More forgiving IRS to waive some bad 1095-A tax penalties

 

TaxProf, The IRS Scandal, Day 658. Today’s big story is the $129,000 on bonuses paid to Lois Lerner while Tea Party applications for exemption languished. I’m sure there’s no connection.

Alan Cole, Putting the Puzzle Pieces Together on Corporate Integration (Tax Policy Blog):

The reason that the traditional American C corporation is in decline is that it has faces multi-part tax, with two successive rounds of taxation for the owners. In contrast, the pass-through structure faces only one. That is why American businesses, when possible, are choosing this tax structure. It is now the dominant legal structure for businesses in America. In that structure, the owners of the corporation simply pay ordinary income tax on all the corporation’s income.

The path ahead to fundamental tax reform almost necessarily must lead through corporate integration. Fortunately, my colleague Kyle Pomerleau has done the research that ties this all together. He has found out how some other countries – like Australia and Estonia – have gone about tying together their corporate taxes and their shareholder taxes into one neat single layer.

So simple it just might work!

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Matt Gardner asks whether Goldman Sachs is Too Big to Pay Its Fair Share of Taxes? (Tax Justice Blog).

 

Cara Griffith, The Pinnacle of Secret Law (Tax Analysts Blog). ” That the Colorado Court of Appeals would seek to shield from public view most of the opinions it issues is appalling.”

Richard Auxier, GOP Governors Flirt with Tax Hikes but Still Wedded to Income Tax Cuts (TaxVox). Governor Branstad went boldly beyond flirting yesterday. Does signing the gas tax boost make Governor Branstad an unfaithful husband?

 

Caleb Newquist, Supreme Court Unhooks Fisherman From Conviction Under SOX Anti-Shredding Provision (Going Concern). “Please practice catch and release.”

 

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Tax Roundup, 1/23/2015: Egg donor compensation taxable payment for services. Meanwhile, kidney donor compensation is a felony.

Friday, January 23rd, 2015 by Joe Kristan
"White-&-Brown-Eggs" by Evan-Amos - Own work. Licensed under Public Domain via Wikimedia Commons

“White-&-Brown-Eggs” by Evan-Amos – Own work. Licensed under Public Domain via Wikimedia Commons

The big news in the tax world today is a Tax Court case ruling that payments to an egg donor were compensation for services. The case turned on the language of the contract of between the egg donor and the agency that procured the eggs. Tax Court Judge Holmes ruled that the payments were not excludible as payments for physical damages because there was no tort claim involved.

There are plenty of places you can read more details on this case, including Russ Fox and Tony Nitti. The TaxProf has a roundup.

So there is an organized and legal market for donor eggs, which, if all goes well, turn into an entire new human. That’s a good thing. But if an agency paid you for one of your kidneys to save the life of an already-born child on the kidney donor list, they would face a $50,000 fine and five years in prison under the Gore-Hatch National Organ Transplant Act of 1984.

The National Kidney Foundation reports that 12 people die daily waiting for a donor kidney, and that 4,453 died waiting for a kidney transplant in 2013.  It’s a felony to save any of those lives by buying a kidney from a healthy, willing and fully-informed seller. Meanwhile, nobody dies waiting for a donated egg.

Cite: Perez, 144 T.C. No. 4

Related: The Case for Paying Organ Donors (Sally Satel)

 

Kyle Pomerleau, Richard Borean, More than Half of all Private Sector Workers are Employed by Pass-through Businesses:

53.7% of Iowans work for pass-through businesses taxed on 1040s.

53.7% of Iowans work for pass-through businesses taxed on 1040s.

“Pass-through” income is income earned by S corporations and partnerships, including LLCs. This income is taxed on 1040s. Those who favor ever-increasing individual taxation of “the rich” by definition favor increasing the tax on employment.

 

buzz20140923Robert D. Flach has your Friday Buzz, including thoughts on avoiding scammers claiming to be from IRS and on Wal-Mart’s cash tax refund program: “My advice – avoid this program.”

Kay Bell, IRS gets $1.3 million for Darryl Strawberry’s Mets annuity

Paul Neiffer, IRS Scammers Net $14 Million from 3,000 Victims. If the e-mail says it’s from the IRS, it’s not. If you aren’t expecting a call from the IRS, the caller isn’t from the IRS.

Jason Dinesen, Ridiculous IRS Situations I’ve Recently Dealt With. A continuing series.

Leslie Book, Tax Court Addresses Verification Requirement in Trust Fund CDP Case (Procedurally Taxing)

Robert Wood, Washington Nationals $210M Pitching Contract For Max Scherzer Is About Taxes. “The Home Rule Act prohibits the District from imposing a commuter tax on non-residents.”

Peter ReillyExclusive – Kent Hovind Claims Congressmen Are Looking Into His Case. All you could possibly want to know about the case of the guy who thinks the Flintstones was actually a documentary series.

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Robert Goulder, Reading the Tea Leaves: China’s Jurisdictional Tax Claims (Tax Analysts Blog). Contrary to some reports, even Communist China doesn’t plan to tax worldwide income of non-resident Chinese. The U.S. stands alone in doing that.

Howard Gleckman, A Look at the Territorial Tax Systems in Four Countries Finds No Magic Bullets (TaxVox). No magic beans, either, I’ll bet.

TaxProf, The IRS Scandal, Day 624

 

Career Corner. Here Are Just a Few Questions You’ll Be Asked in a Big 4 Interview (Adrienne Gonzalez, Going Concern).

 

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Tax Roundup, 1/21/15: The Peculiar Case of the Trucking Tax Turtle. And more SOTU reaction, oh boy.

Wednesday, January 21st, 2015 by Joe Kristan

tbtTurtles carry their home on their back. So do some taxpayers. The Tax Court yesterday ruled that a truck driver who claimed Minnesota residency was a tax turtle, carrying his tax home on his back.

It matters because you can only deduct meal and lodging expenses for travel “away from home.” When you’re a tax turtle, you’re never away from home — you live on the road.

Judge Holmes takes up the story.

Shalom Jacobs has been a truck driver since 2002. His trips were mainly long haul “over the road” — meaning he spent a significant number of weeks and months on the road and was paid by the mile…

When he wasn’t on the road, Jacobs considered his home to be in Cottage Grove, Minnesota, where he stayed in the guest room of his longtime friend and fellow expat, Shimon Casper. Casper and Jacobs were both born in Israel and reared on kibbutzim. According to Jacobs, the Caspers’ Cottage Grove home was an American-style kibbutz, where Casper, his wife and children, and Jacobs recreated the communal life of their homeland with everyone contributing everything they had and taking only what each needed.

I don’t think the kibbutz  life is the life for me, but if it were, I think I would stay in Israel, where the weather is better. But that doesn’t address our deduction issue. Judge Holmes, again (my emphasis, citations omitted):

Flickr image by USFWS Mountain Prairie under Creative Commons license

Flickr image by USFWS Mountain Prairie under Creative Commons license

The Code is a little peculiar in defining a person’s “home.” Normal people think of their home as the place where they spend their personal and family lives, but a “home” in tax law is usually where a taxpayer has his principal place of employment. Tax law defines a home as the permanent residence at which a taxpayer incurs substantial continuing living expenses only if he doesn’t have a principal place of employment But what if a taxpayer is constantly on the move? Cases decided over many decades give us the answer — a taxpayer who’s constantly in motion is a “tax turtle” — that is, someone with no fixed residence who carries his “home” with him.  Such a taxpayer is not entitled to business deductions for traveling expenses under section 162.  The burden of proof is on the taxpayer if he disagrees with the Commissioner, and that is a high hurdle for a tax turtle to clear.

Turtles aren’t typically seen in hurdle events, and this one failed to clear that high hurdle. Judge Holmes said the taxpayer failed to show that his friend’s home was, in fact, communal, that he actually paid household expenses, or that he used that address for voter registration. This is a good reminder of the importance of documentation in tax controversy; the judge is more likely to take your word if it agrees with a cancelled check.

The Moral: To deduct meals and lodging away from home, you need to leave your home behind. And Tax Turtles will clear a hurdle only if they have a ladder of good records to help them get over it.

Cite:  Jacobs, T.C. Summ. Op. 2015-3

 

buzz20140905Actually, that’s yesterday now. Reminder: Worst Tax Season Ever Starts Today (Adrienne Gonzalez, Going Concern)

Kay Bell, Tax filing season 2015 is here

William Perez, The Penalty for Not Having Health Insurance. “Here are details on how the individual shared responsibility payment is calculated.”

Jason Dinesen, Does Nebraska Recognize Same-Sex Marriages for Taxes?

Robert Wood, Why IRS Form 1099 Is So Dangerous To Your Tax Bill. “Failing to report one is asking for an audit.”

Tuesday Buzz is just as good on Wednesday. A belated Buzz from Robert D. Flach, including coverage of the recent Taxpayer Advocate’s report.

 

Stephen Olsen offers Summary Opinions for 12/19/14 to 1/05/15 at Procedurally Taxing. This rounds up tax procedure happenings.

Paul Neiffer, 2 Senators Work to Eliminate Capital Gains Tax on Chapter 12 Bankruptcies.

The US Supreme Court ruled in 2012 that the capital gains generated by these sales are subject to income tax.  The two senators do not believe this was the original intent of Congress when the wrote the original law during the 1980s farm debt crisis, so this new bill is designed to eliminate the imposition of capital gains or other taxes on the sale of property due to the Chapter 12 bankruptcy.

The two senators are Grassley and Franken.

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TaxGrrrl liveblogged the State of the Union address. I live-slept it

Howard Gleckman, The Tax Reform Gap Between Obama and the GOP is Widening (TaxVox):

But it isn’t hard to see where the two parties are headed. Obama does not want an anodyne debate over tax reform. Rather, he’s using reform rhetoric to support a “middle-class economics”agenda aimed at using the tax code to redistribute some income from the rich to working-class households. For their part, Republicans want to use reform talk as a framework for a business-oriented growth agenda leavened by some targeted breaks for working families. 

That should be “some more income.

Scott Hodge, Will Obama’s New Plan to Help the Middle-Class Succeed When $1.5 Trillion in Redistribution Has Not?. Spoiler: no.

Tony Nitti, Why Republicans Should Embrace A 28% Tax On Capital Gains. I’m not remotely convinced; the correct rate is zero, as that income is already after tax money. But if you can get the ordinary rate down to 28% too, I’ll listen.

 

TaxProf, The IRS Scandal, Day 622

Peter Reilly, Will Kent Hovind Become This Year’s Cliven Bundy? If I knew who Cliven Bundy is, I might have an opinon on that.

 

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Tax Roundup, 1/8/15: Tax shelter turned upside down: S Corp – ESOP structure produces pretend income. And: you are the 1%!

Thursday, January 8th, 2015 by Joe Kristan

tack shelterFlaky tax shelters are supposed to generate pretend losses. You know a shelter has gone very bad when it generates pretend income instead. Yet that’s how it worked out for an “S corporation ESOP management company” plan considered by the Tax Court yesterday.

The plan involved a partnership, a C corporation, an S corporation, and an Employee Stock Ownership Plan. The ESOP owned 100% of the S corporation. S corporation income is taxed to its owners. As a tax-exempt entity receiving special treatment from the tax law, ESOP-owned S corporations can achieve Tax Fairy-like results. The ESOP’s can earn non-taxed business income passing through from the S corporation (though this gets very tricky and dangerous when there are few ESOP beneficiaries).

The plan was hatched by A. Blair Stover, who has shown up in these pixels before. Mr. Stover started his tax career with a national firm in Nebraska, moving on from there to Kansas City and then to California, leaving questionable tax shelters in his wake. He was barred from promoting shelters like the one in this case in an injunction affirmed by the Eighth Circuit in 2011.

This plan involved the payment of “management fees” and other purported expenses by a partnership owned by the taxpayer and his spouse that ended up in his ESOP-owned S corporation. The partnership appears to have had no other purpose than to gin up deductions by paying pretend management fees and other expenses. The taxpayers deducted the “expenses” on their 1040, with the idea that they would avoid tax because they flowed through the S corporation to the ESOP.

tax fairyWhen the IRS went after Mr. Stover’s shelters, his clients received unpleasant IRS attention. In yesterday’s Tax Court case, the taxpayers signed a settlement agreeing to include in income on their 1040 the purported management fees paid to the ESOP.

So far, so good. But the agreement didn’t address the other side of the deal – the deduction for the payment of the purported fees by the partnership. The taxpayers claimed that if they had to pick up the pretend fees in income, they should get to deduct them too. Fair’s fair.

But if you want fairness, the tax law might not be the place to seek it.  The court held that while they agreed to pick up the extra income, their settlement said nothing about a deduction, and they were stuck with the results (my emphasis, citations omitted):

Generally, recognition of income does not inexorably prove a corresponding deductible expense. For example, payments to a promoter in furtherance of a tax avoidance scheme constitute income to the promoter, but they are not deductible under section 162 by the payor.  Furthermore, that petitioners might otherwise be obliged to recognize phantom income does not relieve them of their obligation to identify some legal authority for the deduction, nor does it permit the Court to manufacture such authority from whole cloth.

Petitioners’ phantom income argument amounts, in essence, to a plea for fairness. This Court strives to avoid unjust results, but “we are not a court of equity and cannot ignore the law to achieve an equitable end.” Moreover, the parties’ recent stipulation assuages our fairness concerns. In our order of July 1, 2014, we directed the parties to stipulate if possible, or to otherwise brief, the source of and factual and/or legal basis for the income inclusions required by the SOSI. The parties stipulated that the required income inclusions represent “the amount of taxable income petitioners avoided reporting” for tax years 2001 through 2003 because of their use of the management S corporation/ESOP structure. Taxable income is a term that is defined in the Code. Section 63 generally defines taxable income as gross income less allowable deductions. The parties’ chosen language thus implies that the $84,837 of income petitioners must include for 2003 pursuant to the SOSI represents not “phantom income” but bona fide, net taxable income that petitioners received and should have reported. So interpreted, the stipulation is difficult, if not impossible, to reconcile with petitioners’ theory for deducting the administration fee.

The result: a reverse tax shelter, generating only phantom income.

I’m not sure this too-bad-to-be-true result would hold up on appeal, but it does serve a warning. The Tax Fairy is a fickle sprite, and she can magically generate income for those seeking magical deductions. And if you agree to include phantom income when the IRS comes after you, make sure they allow the offsetting phantom deduction in writing.

Cite: Wakefield, T.C. Memo 2015-4.

 

IMG_0598Leslie Book, Bank of America on Hot Seat For Issuing Allegedly Incorrect 1099C to Disabled Veteran (Procedurally Taxing)

Robert D Flach explains WHAT’S NEW FOR THE 2014 FORM 1040?

Kay Bell, Daily Tax Tip #2: A tax quiz!

Robert Wood, The 1031 Exchange That Ate New York City. A lesson on the scalability of swaps.

TaxProf, The IRS Scandal, Day 609. The Worst Commissioner Ever comes out the other side of the revolving door.

 

The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.

The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.

Scott Sumner on low-income use of untraceable cash at Econlog:

College professors who advocate the elimination of currency are often unaware of how important currency is for those with low incomes, many of who lack bank accounts. For instance, consider someone getting government benefits that are conditional on income (food stamps, EITC, disability, welfare, Medicaid, etc.) This group often faces relatively high implicit marginal tax rates. However currency allows them to supplement their meager benefits with additional earned income, perhaps doing home repair for neighbors, or working as a nanny. Lots of those jobs are paid in cash. If we eliminate physical cash then all transactions will be easily traceable by the government… That’s bad for two reasons; low-income people would see reduced incomes (increasing inequality), and the rest of us will be denied the services that they might have produced in the underground economy. Economists who advocate the elimination of currency need to consider those side effects.

This highlights one of the dangers of the earned income tax credit: its phase-outs serve as a hidden high tax rate on low incomes, resulting in a poverty trap on those earning their way out of poverty.

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Russ Fox, The Tax Court Looks for $1,410 in Dividends. Sometimes you can fight a small injustice and win.

 

We are the 1% Admit It: You’re Rich (Megan McArdle):

The cutoff for the global 1 percent starts quite a bit lower than the parochial American version preferred by pundits. I’m on it. So is David Sirota. And if your personal income is higher than $32,500, so are you.  

It’s all a matter of perspective.

 

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Tax Roundup, 12/31/14: Last minute tax moves: losses, gifts, and… weddings? Timing is everything!

Wednesday, December 31st, 2014 by Joe Kristan

20140608_2So.  2014 is down to its last few hours. What can we do today to make April 15, 2015 a little happier? Well, maybe less bad. It’s asking too much of one day to fix a year’s worth of tax problems, but today might still make a difference. A few things you can do yet today:

– Sell stocks at a loss to offset capital gains. It’s the trade date that counts in determining when a loss is incurred (except on a short sale). That means if you have incurred capital gains in 2014, you can sell loss stocks today and reduce your taxable gains for the year. Most individuals can deduct capital losses on a 1040 to the extent of your gains, plus $3,000. To the extent you fail to offset capital gains with the losses sitting in your portfolio, you are paying taxes voluntarilyJust make sure you make the trade in a taxable account and don’t repurchase the losers for 30 days.

– Consider making your state 4th quarter estimated tax payment today (and your federal payment, if you are an Iowan). Don’t do this rashly, as alternative minimum tax can make this a bad move for some taxpayers. Also, time value considerations can make this a bad move. But in the right circumstances, you can save a lot in April by getting your payment in the mail today.

– Make a charitable gift today, if you are so inclined. Gifts (and other deductions) paid with a credit card today are deductible, even if the credit card isn’t paid off until next year. Checks postmarked today are deductible this year. If you don’t know where to make your gifts, I have some suggestions; if you don’t like those, TaxGrrrl has some others.

– And if you are fanatical about tax planning, and someone else, you can change your marital status today. Your marital status on December 31 is your status for the whole year, as far as the IRS is concerned. But if you are seriously considering this, you definitely need to bring someone else into the discussion.

 

20120511-2A Tax Court Case yesterday shows how important year-end timing can beA Minnesota couple paid $2,150.85 of community college tuition for their daughter’s Spring 2011 semester on December 28, 2010. That normally would have qualified for an American Opportunity Tax Credit of about $2,037 — a dollar-for-dollar reduction fo their 2011 taxes. But they were four days too soon.

Tax Court Judge Marvel explains (my emphasis):

Generally, the American opportunity credit is allowed only when payment is made in the same year that the academic period begins. Sec. 1.25A-5(e)(1), Income Tax Regs. For cash method taxpayers, such as petitioners, qualified education expenses are treated as paid in the year in which the expenses are actually paid.

Because the semester didn’t begin until 2011, the 2010 payment didn’t count. Judge Marvel explains that close isn’t close enough:

We realize that the statutory requirements may seem to work a harsh result in a case such as this where a four-day delay in making the December 28, 2010, payment would have engendered a different result. However, the Court must apply the statute as written and follow the accompanying regulations when consistent therewith.

The Moral? When it comes to tax planning, the difference between December 31 and January 1 is one year, not one day. If timing matters, be sure to get on the right side of the line, and be sure you can document your timing. If you are mailing a big check, go Certified mail, return receipt requested, and save that postmark.

Cite: Ferm, T.C. Summ. Op. 2014-115.

 

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.

Iowa rated 8th worst small business environment. The Small Business & Entrepreneurship Council has ranked the entrepreneurial environment of the 50 states. Iowa does poorly:

Iowa is the nation’s number one producer of corn. Unfortunately, it’s costly policy climate works against production from free enterprise and entrepreneurship in general. Iowa ranks 43rd in terms of its public policy climate for entrepreneurship and small business among the 50 states, according the 2014 “Small Business Policy Index.” While Iowa’s entrepreneurs, businesses, investors and workers benefit from fairly low crime rate and a low level of government debt, there are many negatives, such as high individual capital gains taxes; very high corporate income and capital gains taxes; high unemployment taxes; and a high level of government spending.

While I think overall Iowa is better than 43rd, our awful tax environment hurts. Our system of high rates with dozens of carve-out credits for the well-advised and well-connected works great for insiders, but not so well for the rest of us. Maybe 2015 will be the year Iowa considers serious tax reform, like The Tax Update’s Quick and Dirty Iowa Tax Reform Plan.

 

Kay Bell, Donating and deducting a car

Jack Townsend, Reasonable Doubt and Jury Nullification

Jason Dinesen lists his Top 5 Blog Posts of 2014. My favorite is his #5, Having a Side Business in Multi-Level Marketing Doesn’t Make Personal Expenses Deductible

Tony Nitti warns us of Five Traps To Avoid When Deducting Mortgage Interest

Robert D Flach shares: MY NEW YEAR’S EVE TRADITIONS: “I type W-2s and 1099s.” Don’t get too wild, Robert!

Me, IRS issues Applicable Federal Rates (AFR) for January 2015

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G. Brint Ryan, Who’s Afraid of the IRS? When Business Fights Back Against Government Overreach and Wins (Procedurally Taxing)

Annette Nellen,State taxes and bitcoin

Robert Wood, No Mickey Mouse Taxes On Jim Harbaugh’s $48M Michigan Deal And 49ers Exit. “Jim Harbaugh’s 49ers contract may be history, but his $48M Michigan deal has tax components that you might not expect.”

 

Howard Gleckman, Taxes, Charitable Gifts, the ACA, and Ineffective Deadlines (TaxVox).  “Scrambling to make a last-minute charitable donation to beat the New Year’s Eve deadline for a 2014 tax deduction? Take a deep breath and ask yourself, ‘Why am I going through this craziness now?'”

TaxProf, The IRS Scandal, Day 601

 

Post-sequester commuting.

Not excited about all the wild New Years Eve hoopla? Maybe you prefer a more low-key celebration, like the one Robert D. Flach relates in MY NEW YEAR’S EVE TRADITIONS:

Every year during the day on New Year’s Eve I do the same thing I do during the day on Christmas Eve – I type W-2s and 1099s.

Live it up, Robert!

 

And Happy New Year to all of you Tax Update readers! This is it for 2014 here.  See you next week, and next year.

 

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Tax Roundup, 12/10/14: Extender bill lives, permanent charitable extender bill doesn’t. And: don’t just buy it; install it!

Wednesday, December 10th, 2014 by Joe Kristan

lizard20140826Whither the extender bill? HR 5771, the bill to extend retroactively through the end of this month the 55 or so tax breaks that expired at the end of 2013, has been “placed on the Senate Legislative Calendar.” That means it appears to be proceeding to a vote, though I find nothing on when that will happen. Tax Analysts reports ($link) that outgoing Senate Majority Leader Reid says he will take up the extender bill ” after finishing work on a defense authorization bill and a government funding measure.”

Meanwhile, the President has threatened to veto a separate attempt to permanently extend three charitable breaks in the extender bill, including the break for IRA contributions. While that’s bad for those breaks, it implies that the White House will not oppose HR 5771’s one-year extension.

 

20130422-2Because it looks as though the “extender” bill will clear the Senate, taxpayers looking to add fixed assets have extra incentive to get it done this year. The bill extends through 2014 — and only through 2014 — the $500,000 limit on Section 179 deductions and 50% bonus depreciation. These breaks allow taxpayers to deduct over half (bonus depreciation) or all (Section 179) of the cost of fixed assets that are otherwise capitalized, with their deductions spread over 3 to 20 years.

Taxpayers should remember that it’s not enough to order or pay for a new asset by the end of 2014 to qualify for these breaks. The asset has to be “placed in service” by year end.

A Tax Court case from last December drives home the point, where a taxpayer lost an $11 million bonus depreciation deduction in 2003 because an asset bought at year-end wasn’t “placed in service” on time.  Judge Holmes takes up the story:

On December 30, 2003, an insurance salesman named Michael Brown1 took ownership of a $22 million plane in Portland, Oregon. He flew from there to Seattle to Chicago — he says for business meetings — and then back to Portland. Brown says these flights put the plane in service in 2003, and entitle him to a giant bonus-depreciation allowance. But a few days later he had the plane flown to a plant in Illinois where it underwent additional modifications that were completed about a month later.

The IRS argued that the need for modifications meant the airplane wasn’t “placed in service” before year end. The taxpayer argued that the airplane was “fully functional” as purchased, and therefore was “placed in service” when acquired and used for its first flight on December 30, 2003. The court agreed with the IRS:

While acknowledging in his briefs that those modifications made the Challenger “more valuable to him” and allowed him to “more comfortably conduct business” as a passenger, he says they have “nothing to do with the Challenger’s assigned function of transporting him for his business.” The problem is that this posttrial framing just doesn’t square with the trial testimony, in which Brown testified that those two modifications were “needed” and “required”. We therefore find that the Challenger simply was not available for its intended use on a regular basis until those modifications were installed in 2004. Brown thus didn’t place the Challenger in service in 2003 and can’t take bonus depreciation on it that year.

A new asset doesn’t actually have to be used during the year to be “placed in service,” but it has to be ready to go. A new machine should be on the floor and hooked up, not just in a crate on the dock, or in a trailer on the way in, if you want to depreciate it. If the new asset is a vehicle, you need to take delivery to get the deduction. If the asset is a farm building, it needs to be assembled and in place, not in boxes on the ground.

Cite: Brown, T.C. Memo 2013-275

 

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The TaxProf reports on a new Treasury Inspector General report, TIGTA: IRS Has 25-30% Error Rate In Refundable Child Tax Credits, Mistakenly Pays $6-7 Billion:

The IRS has continually rated the risk of improper ACTC payments as low. However, TIGTA’s assessment of the potential for ACTC improper payments indicates the ACTC improper payment rate is similar to that of the EITC. Using IRS data, TIGTA estimates the potential ACTC improper payment rate for Fiscal Year 2013 is between 25.2 percent and 30.5 percent, with potential ACTC improper payments totaling between $5.9 billion and $7.1 billion. In addition, IRS enforcement data show the root causes of improper ACTC payments are similar to those of the EITC.

So at least 1/4 of the credit is claimed fraudulently or illegally. This is one of the provisions the President insists be made permanent as a price for permanently extending business provisions. He killed the permanent extender compromise when it didn’t also make the child credit permanent.

 

Wind turbineIowa Public Radio reports Grassley Wants Wind Tax Credit to Go Further. He should read Bryan Caplan’s review, The Moral Case for Fossil Fuels: We Owe Civilization to Fossil Fuels. “And despite decades of government favoritism, alternative fuels have yet to deliver.”

 

Peter Reilly, Seventh Circuit Will Not Let Tax Protester Blame His Lawyer For Conviction:

James Stuart thought that Peter Hendrickson had “cracked the code” – the Internal Revenue Code, that is. Joe Kristan would characterize it as finding the tax fairy – that magical sprite who make your taxes go away painlessly while your sucker friends send checks to the tax man.   

It’s always fun to be named-checked by a Forbes blogger.

Jana Luttenegger Weiler, Tax Tips for Gifts to Charity (Davis Brown Tax Law Blog).

Robert D. Flach, DONOR ADVISED FUNDS. For at least 99.99% of taxpayers, these are far better than setting up a private foundation.

Kay Bell, Sen. Tom Coburn’s parting gift: a tax code decoder

Paul Neiffer, Watch Your Crop Insurance Form 1099s This Year

Jason Dinesen, 5 Things You Didn’t Know About EAs, #2: We Don’t Work for the IRS

Brad Ridlehoover, The Grinch That Stole Their Reasonable Cause… (Procedurally Taxing)

Tim Todd, IRS Erred in Making Notice of Tax Lien a Condition to Installment Agreement

 

TaxProf, The IRS Scandal, Day 580. Lois Lerner appears to have been scheming to sic the Justice Department on the Tea Partiers as early as 2010, according to newly-unearthed e-mails.

 

Howard Gleckman asks Why Does Congress Pay For Some Tax Cuts and Not Others? (TaxVox). “It can’t be the merits of the recipients. By now, TaxVox readers know that the expired tax breaks included such worthies as preferences for race horse owners, Puerto Rican rum manufacturers, and TV and film producers.”

Eric Cederwall asks What is the Simplest Tax System? (Tax Policy Blog). “Normative economics aside, a per-person tax is one of the most economically efficient taxes for raising revenue.”  Not happening, though.

 

Adrienne Gonzalez, Kids These Days Trust the IRS More Than Olds Do (Going Concern). Like Santa Claus and the Tooth Fairy, they’ll figure it out eventually.

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Tax Roundup, 10/31/14: Halloween! And: mortgage interest? Put it on the tab.

Friday, October 31st, 2014 by Joe Kristan

20140325-1The deduction for home mortgage interest is hugely popular among those with huge home mortgages. Taxpayers get to deduct all of the interest paid on loans used to buy a home, up to $1 million in principal; they also get to deduct interest paid on the first $100,000 in home equity debt.

But there is a technicality: the interest needs to be “paid.” That was a problem for a California couple in Tax Court yesterday.

The couple bought a home in 1991 for $300,000. They refinanced it for $600,000 in 2007. Then 2008 happened, and they got a loan modification in 2010. Tax Court Judge Lauber explains:

The modifications included a reduction of the interest rate, a change in the payment terms, and an increase in the loan balance. Immediately before the modifications, the outstanding loan balance was $579,275; after the modifications, the new balance was $623,953. The difference (equal to $44,678) resulted from adding the following amounts to the loan balance: past due interest of $30,273, servicing expense of $180, and charges for taxes and insurance of $14,225.

The taxpayers added the $30,273 to the $9,253 the bank put on their 1098 mortgage interest statement for 2010. The IRS noticed the difference and disallowed the $30,273.

20121031-2The Tax Court sided with the IRS:

Petitioners are cash basis taxpayers. It is well settled that “[a] cash-basis taxpayer ‘pays’ interest only when he pays cash or its equivalent to his lender.”

 Through the loan modification agreement, the $30,273 in past-due interest on petitioners’ mortgage loan was added to the principal. No money changed hands; petitioners simply promised to pay the past-due interest, along with the rest of the principal, at a later date. Because petitioners did not pay this interest during 2010 in cash or its equivalent, they cannot claim a deduction for it for 2010. They will be entitled to a deduction if and when they actually discharge this portion of their loan obligation in a future year. 

In short, you can’t just add interest to the loan balance and get a deduction. That has obvious implications for “reverse mortgages.”

As the taxpayers make the payments, they will have some additional factors to consider. Their original purchase price was $300,000 for the house. Unless the additional borrowing was used for renovation or expansion of the home, it is “home equity indebtedness.” Interest on only the first $100,000 of equity debt will be deductible — and only for regular tax, not AMT.

Cite: Copeland, T.C. Memo 2014-226.

 

mst3k-lanternWilliam Perez, The Tax Audit Success Story and Tips from Audit Experts

Jason Dinesen, Same-sex Marriage and State Taxes: 2014

Kay Bell, 2015 income tax rates, income brackets

TaxGrrrl, IRS Announces 2015 Tax Brackets, Standard Deduction Amounts And More

Robert D. Flach has A SCARY THOUGHT for Halloween. “What if the 114th Congress turns out to be made up of most of the same idiots as the 113th Congress!”  It will be.

 

Leslie Book, AICPA Suit Against IRS Voluntary Education and Testing Regime Thrown Out of Court (Procedurally Taxing)

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

 

Arnold Kling  on “middle class” tax credits:

Brooks endorses the reform conservative Room-to-Grow idea of showering middle-class families with tax credits. I see that as political posturing. If I could be in charge of tax reform, we would get rid of credits and deductions, and we also would move away from taxing income and instead toward taxing consumption. Note, however, that tax reform is not one of my top three priorities.

Except for the last sentence, I agree with it all.

 

6fpw32atDon Boudreax on the Arnolds Park IRS cash seizure:

I challenge anyone to justify, or even to excuse, such an abuse of power.  (HT a dear and wise and passionate friend.)

Words normally do not escape me, but I can find none that adequately convey the anger and sense of injustice that course through me when I read of seizures such as this one.  Best to let the matter speak for itself, which it surely does to anyone this side of Frank Underwood in decency and civility.  Fortunately, the great Institute for Justice is on the case.

Oh, I’m sure that things like that could never happen if the IRS had a bigger budget.

 

Andrew Lundeen, Tens of Thousands Protest Internet Tax in Hungary (Tax Policy Blog) Would-be dictators come up with wacky ideas.

20141027-2Matt Gardner, Obscure Law Allows Wealthy Professional Sports Team Owners to Reap Tax Windfalls (Tax Justice Blog) . He doesn’t care for intangibles amortization.

 

TaxProf, The IRS Scandal, Day 540

 

News from the Profession. Grant Thornton to Have Rat Problem for Foreseeable Future (Adrienne Gonzalez, Going Concern)

Tony Nitti, Want To Do Your Part To Help Fight Ebola? Skip Your Next Vacation. OK, I’m skipping my next vacation to Liberia.

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Tax Roundup, 10/30/14: Maquoketa! And: I was so upset, I only reported the loss items from my K-1.

Thursday, October 30th, 2014 by Joe Kristan

 

MCSD Cardinal LogoGreetings from Maquoketa, Iowa, home of the Cardinals and the largest cave complex in the state. Today is Day 1 of the second session of the Iowa State University Center for Agricultural Law and Taxation Farm and Urban Tax School. I’m on the Day 1 panel with Roger McEowen and Kristy Maitre, updating practitioners on 2014 developments and the upcoming ACA reporting nightmares. There is still time to register for the schools in Sheldon, Red Oak, Ottumwa, Mason City, Denison and Ames. Register today!

 

 

Emotional stress can have strange effects. But maybe not that strangeA married couple operated two LLCs as partnerships owned entirely between them. They paid a preparer to put together the 1065s and K-1s. But they apparently figured they could handle things from there, self-preparing the 1040s.

Their son took ill on a foreign trip, and they traveled overseas from October 4, 2011, to November 4. Perhaps as a result, they missed the extended return deadline for 2010 and filed late.  Better late, than never, of course.

There was a small problem with the self-prepared return. The K-1s showed about $129,000 in ordinary losses and $553,000 in long-term capital gains. The losses made it on to the self-prepared 1040s, but the capital gains somehow did not.

The IRS notices that sort of thing, and they assessed the additional tax on the gain, as well as a 20% “accuracy-related penalty” on the underpayment. The case ended up in Tax Court, where the taxpayer pleaded — well, I’m not sure how to describe this. From the Tax Court decision:

Petitioners reported in their 2010 return all of the information reflected in [Husband]’s K-1 and [Wife]’s K-1 except for the information relating to “[n]et long-term capital gain (loss)”. At trial, the Court attempted to focus [Husband] on petitioners’ inconsistent reporting in their 2010 return of the information that MMIT reflected in [Husband]’s K-1 and [Wife]’s K-1 by asking him about [the preparer’s} September 15, 2011 letters. The following exchange between the Court and [Husband] took place:
THE COURT: Now, what does it mean to you when a letter to you and to your wife says, this information reflects the amounts you need to complete your income tax return?

THE WITNESS: To be truthful, I never read it.

THE COURT: You never read it?

THE WITNESS: Yes.

THE WITNESS: Yes.

That sort of blew the “reliance on the preparer” defense. The taxpayer fell back on emotional trauma:

We consider now petitioners’ contention that [Husband] was so emotionally distraught about his son’s health at the time that he prepared petitioners’ 2010 return that he was unable to prepare that return properly. We are sympathetic that petitioners’ son was experiencing certain medical problems around the time petitioners’ 2010 return was due and that petitioners were seriously concerned about their son’s health. Nonetheless, on the record before us, we find that petitioners have failed to carry their burden…

 Indeed, petitioners reported in their 2010 return, which [Husband] prepared, all of the information reflected in [Husband]’s K-1 and [Wife]’s K-1 except for the information relating to “[n]et long-term capital gain (loss)”.

Adding the income lines to the 1040 after having to deal with a seriously ill son overseas would seem like emotional piling-on, but that means nothing to the tax law.

The Moral? As traumatic  as reporting a K-1 capital gain may be, you have to report what’s there. And maybe if your tax situation is complex enough to require hired help to prepare your pass-through returns, you might want to spring to have the preparer handle the 1040 too. The fee surely would have been less than the $12,000 penalty.

Cite: Singhal, T.C. Summ. Op. 2014-102

 

Kyle Pomerleau, Most of the Private Sector Workforce is Employed by Pass-through Businesses (Tax Policy Blog):

In the past three decades, the importance of “pass-through” businesses has grown substantially. The combined net income of sole proprietors, LLCs, Partnerships, and S corporations has increased fivefold and now accounts for more than 50 percent of all business income. C corporations now earn less than half of all business income.

Pass Through Employment by state

It you jack up taxes on “the rich,” you jack up taxes on employers. If you tax something more, you get less of it.

 

Friday is Thursday this week at Robert D. Flach’s place – with an early Buzz covering the AICPA’s loss on its suit against the “voluntary” IRS preparer program and on IRS cash seizures.

Kay Bell, Voters get their say Nov. 4 on myriad ballot initiatives

Peter Reilly, Government Coming Down Harder On Kent Hovind. Bad science isn’t a tax crime.

Joseph Thorndike, Can Jeb Bush Save Conservatism by Compromising It? (Tax Analysts Blog). If recent polls are any indication, having their opponents in power seems to be “saving” conservatism already.

Steve Warnhoff, Senator Rob Portman: Case Study in Radical, Rightwing Arguments for Slashing Corporate Taxes (Tax Justice Blog). Remember, TJB is part of Citizens for Tax Justice, a “non-partisan” exempt organization.

 

taxanalystslogoCara Griffith, Benefit Corporations: The Corporate Entity of the Future? (Tax Analysts Blog):

Those who shop at Patagonia or Etsy are likely aware of a new type of business entity that is growing in popularity. These companies and a thousand more have chosen to organize as either B corporations or benefit corporations…

 Still, the number of benefit corporations is relatively small. The reason for this is – ironically – a lack of benefits. Benefit corporations are not given tax, incentive, or procurement preferences by state or federal lawmakers. While nonprofits receive substantial benefits for their chosen entity type, benefit corporations receive no such benefits. They are taxed like c corporations – at least for now. 

This is new to me. A business structure built around moral vanity seems implausible to me, but I’ve never shopped Etsy.

 

TaxProf, The IRS Scandal, Day 539.

 

News from the Profession. Let’s Talk About Creative Accounting Themed Halloween Costumes (Adrienne Gonzalez, Going Concern)

 

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Tax Roundup, 10/23/14: Iowa Tax Crime Edition. And: USPS > Stamps.com, in Tax Court.

Thursday, October 23rd, 2014 by Joe Kristan

Tax crime happens in Iowa too. While Iowa doesn’t seem to get the same attention from tax prosecutors as some other places, tax evasion can get Iowans the same prison time as anyone else. Two Iowa entrepreneurs are learning that lesson now.

Via Wikipedia

Via Wikipedia

The operator of a venerable Des Moines pharmacy and soda fountain apparently will plead guilty to tax evasion on charges arising out of back-door sales of hydrocodone pills, according to reports.  The Des Moines Register article on the plea deal provides insight on how the charges against pharmacist Mark Graziano came about, and on the inherent dangers of tax crime:

The allegations came to light after admitted drug user Kirby Small called state regulators in 2011 and told them Graziano and Enloe were selling wholesale quantities of hydrocodone pills out of Bauder’s back door. State agents raided the business in 2012, and the Iowa Board of Pharmacy filed administrative charges against Graziano and the pharmacy. Federal officials filed criminal charges last spring.

Small, in an interview Tuesday, said that he called the pharmacy board because he was angry at Enloe, who had been a longtime friend. Enloe and Graziano had been selling Small pills, but cut him off over money issues, Small said. Then Enloe called Small’s probation officer and said that Small had been taking drugs, Small said. So Small decided to get back at them.

“You call the cops on an east-sider, what do you expect?” he said, chuckling.

The pharmacy is on the west side, for the record.

Tax crimes by businesses are almost impossible to commit without somebody besides the perpetrator finding out. Those who pay employees in cash to avoid payroll taxes create a potential informant with every new hire. Those who ask for cash payment for sales, as illegal drug sellers normally do, create a potential informant with every new customer. And if the customer falls behind on payments, it is unwise for someone committing crimes to summon the authorities.

The reports say Mr. Graziano is likely to receive a 24-37 month sentence.

 

20141023-1Stripped-down gross incomeA Northwest Iowa entrepreneur will go to prison for 33 months on charges of evading over $214,000 in taxes, reports the Sioux Falls Argus Leader:

Veronica Fairchild, 42, collected $1.1 million between 2005 and 2008, mostly from a wealthy client named David Karlen.

She declared only 45 percent of that money as income on her tax returns for those years, which she didn’t file until 2010. The remaining $643,648 was declared as a gift.

At her trial in June, Karlen testified that he’d paid Fairchild to dance, and later for sex. He claimed to have paid between $1,000 and $5,000 for a variety of sexual acts.

Ms. Fairchild, who reportedly owns a strip club in Okoboji, Iowa, denies sleeping with Mr. Karlen:

She said Karlen invented the stories about sexual encounters to cover for his failure to pay taxes on the monetary gifts.

The jury apparently concluded that that payments were for something other than disinterested generousity.

 

On the lighter sidethe usual suspects showed up at a Des Moines Burger King to protest the Kingdom’s proposed merger with Canadian donut empire Tim Hortons. The Des Moines Register reports:

About 15 Iowans rallied outside of a Des Moines Burger King Tuesday to protest the company’s plans to move its headquarters to Canada.

“About” 15? For a crowd that size, I think greater precision is possible. It would have been about 16 if Ed Fallon weren’t traveling. If you missed the rally, you can show your support by asking for large fries with your next Whopper.

 

20130415-1USPS > Stamps.comThe Tax Court ruled against a man who used Stamps.com on March 3 to buy postage to mail his Tax Court Petition on the March 3 filing deadline. The postal service postmark was March 4, and the court said that was the controlling date.  From the case:

In support of his argument petitioner provided a statement by the third party who prepared the petition for mailing and then delivered it to the post office. In her statement the third party describes how on Monday, March 3, 2014, after being “given documents to mail”, she printed postage using Stamps.com software, added extra postage for certified mail, and then took the petition to the U.S. Post Office in Bountiful, Utah, for deposit into the mail. The third party candidly states that in order to “avoid[ ] the long lines” at the post office, she dropped the petition off without having a certified mail receipt stamped by a Postal Service employee and that as a consequence “the sender has no documentation showing * * * [the post office] received the certified package” on March 3, 2014.

The moral? When your down to a mailing deadline, take no shortcuts. Go Certified Mail, Return Receipt Requested, and get the hand-stampted postmark — even if you have to wait in line.  If the line is really too long, use a Designated Private Delivery Service and get a timely shipping receipt. I bet the “third party” wishes she had done so.

Cite: Sanchez, T.C. Memo 2014-223.

 

Joseph Thorndike, What if Congress Raised Taxes and Nobody Cared – Or Even Noticed? (Tax Analysts Blog). I think Joseph is operating from a false premise:

In 2011 and 2012, Congress cut the Social Security payroll tax by two points. More specifically, lawmakers reduced the portion of the tax levied on employees from 6.2 percent of taxable wages to 4.2 percent. (The portion paid by employers remained at 6.2 percent; most economists believe that this other half of the tax is also ultimately borne by workers in the form of lower wages.)

The payroll tax cut was explicitly designed to be temporary – a one-year shot in the arm for the struggling economy. After a year, lawmakers agreed to extend the cut for another 12 months. But on January 1, 2013, the payroll cut expired, and workers began paying the full 6.2 percent again.

And hardly anybody noticed.

Trust me, people noticed. I got the phone calls.

 

20141023-2Robert D. Flach, THIS JUST IN – SOCIAL SECURITY COLA INCREASE FOR 2015

Me, FICA Max increases to $118,500 for 2015

Jason Dinesen, Meet Joe the Window Washer. Joe will be used for life lessons in small business tax compliance.

Jack Townsend, Blog on the Disqualification of Some Canadian “Snowbirds” from Streamlined Treatment

 

Cara Griffith, Drop Shipping Is Popular With Retailers, but Can Create Tax Challenges (Tax Analysts Blog). “From a sales and use tax perspective, if the retailer has nexus with a particular state or is voluntarily registered in the state where the sale took place, the retailer is required to collect sales tax on the transaction with the customer. Conversely, if neither the retailer nor the shipper has nexus with the state in which the sale took place, neither can be required to collect sales tax.”

Peter Reilly, National Organization For Marriage – No Recovery Of Attorney Fees In Case Against IRS

 

TaxProf, The IRS Scandal, Day 532

Richard Phillips, New Movie Aims to Scare Public by Depicting IRS as Jack-Booted Thugs (Tax Justice Blog) Not to defend the movie (which Peter Reilly watched so I don’t have to), but it’s not always easy to portray the IRS as, say, unicorn nurses.

Career Corner. Let’s End the Big 4 or Bust Myth Once and For All (Tony Nitti, Going Concern)

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Tax Roundup, 10/17/14: If they don’t want the money back, it’s not a loan. And: the state of your IRS “rights.”

Friday, October 17th, 2014 by Joe Kristan

20120511-2Loans aren’t income. But income isn’t loans either. A Tennessee woman struggled with the difference, but the Tax Court straightened her out yesterday.

The taxpayer did consulting work for the medical practice of a Dr. Quisling. Somehow linked to this, she got payments over an eight-year period from around $25,000 to $56,000 annually.  She didn’t file tax returns for any of these years.

The taxpayer took a strange approach to the payments. We’ll let Judge Kerrigan explain (my emphasis):

Petitioner sent Dr. Quisling a memorandum entitled “Memorandum of Understanding on Loan Terms and Conditions”. This memorandum states:

    It has been revealed to me that the action of Blue Cross Blue Shield of Tennessee, Inc., * * * has created a financial burden upon your medical practice, because the medical services rendered by your medical practice rely upon payment(s) received by BCBST. Therefore, I am willing to develop a loan package * * * for the short-range and long-range impact upon the delivery of medical services by the “in-network-provider” as well as the “out-of-network provider” * * *.

The memorandum further states “[a] reasonable expectation of this Memorandum of Understanding on Loan Terms and Conditions is that the loan proceedings will be based upon a) your ability to loan and b) the completion of the research which will result in profit to the undersigned in order that the loan can be repaid.”

This memorandum, dated April 1, 2003, includes the signature of petitioner but not the signature of Dr. Quisling. Petitioner sent Dr. Quisling a followup letter to the memorandum requesting a memorandum of acceptance. The memorandum of acceptance includes a signature alleged to be Dr. Quisling’s, but this signature is not his.

20120801-2See, loans aren’t income, so we don’t have to tell IRS! But Judge Kerrigan notes a flaw in this cunning plan:

Petitioner did not make payments to Dr. Quisling. Neither Dr. Quisling nor Mrs. Quisling demanded payment from petitioner.

Yes, repayment is a key part of a loan agreement. You give me money, I give it back later. Without the second part, it’s either a “gift” or “income.”

The doctor wisely did not play along, but unwisely failed to issue 1099s.. The doctor terminated the consulting relationship in 2011 when she refused belated requests for her Social Security number.

The taxpayer denied performing services. She said the money was given her for other things:

Petitioner contends that payments made by Quisling were loans. Petitioner testified that she needed the money to fund the research for a book that she was writing. However, petitioner produced no evidence of the book including the potential for publishing the book or any other evidence of her ability to repay. Dr. Quisling testified that the payments were not loans and that he did not expect to be repaid.

On February 5, 2011, petitioner faxed Dr. Quisling a letter referencing an alleged purchase of medical equipment that Quisling made from petitioner’s deceased husband. On February 25, 2011, Dr. Quisling’s attorney and the attorney for Quisling, Vincent Zuccaro, sent petitioner a letter stating that Quisling had not purchased any equipment from her husband or received a gift of property from her or her husband.

The Tax Court had little trouble finding that the taxpayer received income, rather than loans, upholding the tax assessment and various penalties.

The Moral? If you get income, calling it a “loan” doesn’t make it one. Especially when the “lender” doesn’t think it’s a loan and never asks for repayment.

Cite: Fisher, T.C. Memo 2014-219.

 

20130419-1Amber Athey, Is the IRS Upholding Your Taxpayer Rights? (Tax Policy Blog). Some better than others:

2. The Right to Quality Service:

While the opportunities for outreach seem robust, in 2012, only 66 percent of taxpayers trying to call the IRS reached a representative, and callers waited on average of 17 minutes, up from 12 minutes in 2011. An article from April of 2014 stated the wait time was up to 30 minutes, largely due to budget cuts.

And:

8. The Right to Confidentiality

Any information disclosed to the IRS may not be shared with anyone else unless authorized by the taxpayer or by law. The IRS struggles with protecting the confidentiality of taxpayers. Numerous information scandals have plagued the IRS, including the posting of 100,000 names and social security numbers on their website and an unencrypted thumb drive loaded with social security numbers being taken home by an employee.

In the first six months of 2013, 1.6 million taxpayers were affected by identity theft, compared to 271,000 in 2010. Thefts have resulted in billions of dollars in potentially fraudulent refunds, as the IRS issues refunds before they’re sure the filing was done by the person whose name is on the form. In 2011, fraudulent refunds totaled $3.6 billion.  Serious improvements in security measures need to occur in order for taxpayers to feel confident that the IRS can protect their information.

But Amber Athey still thinks the IRS “Taxpayer Bill of Rights” is a good thing:

The IRS has room to improve in protecting the rights of taxpayers, but the implementation of the Taxpayer Bill of Rights is a great first step in this process. A clear outline of rights is also highly beneficial to the IRS and taxpayers as a means setting expectations for the function of the IRS.

I suppose having something to aspire to is a good thing, but it would be a lot better if there was somebody who would actually enforce these rights and impose costs on the IRS for falling short.

 

buzz20141017buzz20141017Robert D. Flach has a friday “Buzz Light,” linking to tax things.

Jason Dinesen, Updated Wisconsin Tax Guidance for Same-Sex Married Couples

Kay Bell, Are you willing to pay more to cover Airbnb taxes?

Paul Neiffer invites you to an Ag Summit in Chicago on December 7 with Andy Biebl and Lance Woodbury on “Farm Retirement and Transition Planning.”

 

Kyle Pomerleau, The Pease Limitation on Itemized Deductions Is Really a Surtax (Tax Policy Blog). It’s also a lie. It works like a rate increase, but more complicated and without the honesty.

Howard Gleckman, Taxes and Spending Return To “Normal”– But Not For Long (TaxVox)

Robert Goulder, Early Results Are In: Inversions Aren’t Going Away (Tax Analysts Blog) “It’s too early to draw a definitive conclusion here, but it seems the world’s multinationals haven’t yet thrown in the towel on inverting to low-tax jurisdictions.”

Richard Phillips, Ireland’s Soft Pedaling Tax Avoidance Crack Down (Tax Justice Blog)

TaxProf, The IRS Scandal, Day 526

Me, IRS Issues Applicable Federal Rates (AFR) for November 2014

Career Corner. A Quick and Dirty Guide to Getting Away With Insider Trading (Leona May, Going Concern)

 

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Tax Roundup, 10/10/14: Tax Court: consolidated return, consolidated determination of professional corporation status. And more!

Friday, October 10th, 2014 by Joe Kristan

20120511-2

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

Professional Services Corporation in consolidated return not subjected to flat rate tax. When a professional business – law, medicine, consulting, engineering, architecture, actuarial science, performing arts, or accounting – is operated as a C corporation, the “professional service corporation” rules tax its income at a flat 35%. It is denied the use of the 15, 25 and 34% brackets otherwise available.

A corporation is a Qualified Personal Service Corporation (QPSC) subject to the flat 35% rate if it passes (or fails, depending on how you look at it) two tests:

– Substantially all of its activities involve the performance of personal services, and

– 95% of the shares are held by employees who performed such services.

An engineer and his wife operated an engineering practice in a C corporation. This C corporation owned 100% of the stock of a ranching business. The tax law allows C corporation parent corporations to file consolidated returns with their subsidiaries, reporting all of the income on one return. On a consolidated bases, the ranch activity caused the company to not have “substantially all” of its activities involve performing personal services.  As a result, it filed its return using the lower brackets.

The IRS came in with a novel argument. It said the QPSC tests had to be applied separately to each group member — not to the consolidated return as a whole. On that basis, the engineering business would have to pay up its taxes at a flat 35% rate. Tax Court Judge Jacobs explains:

Respondent asserts that where one member of an affiliated group is a qualified personal service corporation and another is not, the consolidated taxable income of the affiliated group must be broken up into two separate baskets. Respondent argues that section 448 requires that the determination as to whether a corporation is a qualified personal service corporation is to be made at the entity level, not at the level of the affiliated group. Further, respondent posits that the Code provides for treating qualified personal service corporate members of an affiliated group differently from other members.

The Tax Court decided that the tax law fails to support the IRS here:

Although section 448(d)(4) provides special rules by which members of an affiliated group may determine their status as a qualified personal service corporation in electing whether to use the cash method of accounting, it provides no illumination as to the rate of tax to be applied to the consolidated taxable income of the entire group. Nor does section 448(d)(4) provide support for the proposition that the consolidated taxable income of an affiliated group is to be broken up into separate baskets.

The court also found that the consolidated return regulations don’t provide for a breakout of QPSC income from other income:

In computing the proper tax liability of an affiliated group, we begin with section 1.1502-2, Income Tax Regs. Section 1.1502-2(a), Income Tax Regs., does not distinguish between taxable income under section 11(b)(1) and (2), and we find no authority to permit the breakup of an affiliated group’s consolidated taxable income into separate baskets. We look to the affiliated group as a whole, i.e., the entity which generated the consolidated taxable income, to determine the characterization of the consolidated taxable income. And in this regard, the parties agree that, when viewed as a whole, Applied Research’s affiliated group is not a qualified personal service corporation.

To conclude, we hold that in the situation involved herein, graduated rates set forth in section 11(b)(1) should be applied to the affiliated group’s consolidated taxable income. I

I’m surprised the IRS even made this argument. To me, it doesn’t even seem like a close issue. It’s the sort of assertion the IRS can make without risk, because it isn’t subject to the same penalties for taking unsupported positions that apply to taxpayers. A sauce for the gander rule, allowing taxpayers to collect the same penalties for bad positions asserted by IRS that they can assert against taxpayers, is overdue.

Cite: Applied Research Associates, Inc., 143 T.C. No. 17.

 

 

20120906-1Yes, Smith’s tax break does take money out of Jones’s pocketFans of corporate welfare tax credits sometimes argue that nobody gets hurt when a favored business gets a sweetheart deal. But their competitors who don’t get the sweet deal may not agree. An Iowa City grocer sure doesn’t:

New Pioneer Food Co-op is crying foul over the idea of the city of Iowa City providing $1.75 million in tax-increment financing assistance to attract a national grocery chain.

New Pioneer’s board of directors sent a letter to the Iowa City Council’s Economic Development Committee this week saying that using TIF money to bring an out-of-state company to Iowa City would hurt local grocers.

These tax breaks — like the state income tax credits the Governor likes to hand out — take money from existing taxpayers to lure and subsidize their competitors — a point not lost New Pioneer:

New Pioneer’s board said if the city were to approve the TIF assistance, it would be at the expense of existing local businesses that would lose customers and be essentially subsidizing a competitor with their tax dollars.

“The market for groceries in the Johnson County area is fixed, and already very competitive,” the board said in its letter. “Bringing in an additional competitor in this category will not drive economic development in the city. It will not increase the size of the market, nor will it increase employment in Johnson County since one or more other stores likely will be forced to eliminate jobs to match their reduced market shares.”

But that’s no concern of the politicians handing out the breaks:

[Iowa City Economic Development Administrator] Davidson said although he respects New Pioneer’s perspective, it’s appropriate for the city to get involved because the project would have a significant impact on the taxable value of the Iowa City Marketplace and properties in the surrounding commercial district.

In other words, screw you guys who are already here paying taxes. We want to give away your money because we think it will enable us to collect more somewhere else in town.

 

buzz20140905Fresh Friday Buzzfrom Robert D. Flach, including word on the upcoming extender train wreck.

Paul Neiffer, Time Running Out on Late Portability Elections. If a taxpayer wants to carry over a deceased spouse’s unused estate tax exclusion, they have to file an election by December 31 for deaths in 2012 or 2013.  This filing requirement is, of course, stupid.

Kay Bell, Tax extenders delay could delay 2015 filing season

Jason Dinesen, Move Up the W-2 Filing Deadline to Combat ID Theft? “Moving up the W-2 deadline should be done and it might be a partial fix to the problem of identity theft … but it’s one piece of a solution, not a cure-all.”

Peter Reilly, Teresa Giudice’s Surprise Sentence And Possible Better Ways To Motivate Compliance. “What I found interesting in this piece by Kelly Phillips Erb was that Ms. Giudice was surprised when she was sentenced to some prison time.”  Me too.

TaxGrrrl has more guest posts: “Tisha,” Giving Up Citizenship Because Of Taxes; and Matthew Litz, The Inverted Talk About Tax Inversions — They’ve Got it All Upside-Down.

Keith Fogg, Unrecorded Conveyances and the Attachment of the Federal Tax Lien or Innocent Spouse Once Removed (Procedurally Taxing)

 

A map of per-return Iowa Earned Income Credit by Iowa School District, courtesy  Iowa Taxpayers Association and the Legislative Services Agency:

Iowa EITC map

Click image for full-size map.

 

TaxProf, The IRS Scandal, Day 519

Andrew Lundeen, The Tax Code Isn’t Good at Fighting Inequality (Tax Policy Blog):

A recent article on Vox, How Sweden Fights Inequality—Without Soaking the Rich, notes that countries with the most success in fighting inequality do not have highly progressive tax systems, such as the United States’ tax code.

Inequality is just something our politicians use as a distraction from their own failure to improve the lot of the poor.

 

News from the Profession. Deloitte So Desperate to Populate Its LinkedIn Group They’ve Resorted to Bribery (Adrienne Gonzalez, Going Concern). So where’s my bribe?

 

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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:

20141009-1

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, October 3, 2014: A gold mine, or just a pile of old clothes? And: economic self-development!

Friday, October 3rd, 2014 by Joe Kristan
Flickr image courtesy Jen Waller under Creative Commons license.

Flickr image courtesy Jen Waller under Creative Commons license.

Is that basement full of clothes really a gold mine? Gold, if you believe the values a Maryland man used for donations of old clothes to charity. Unfortunately for him, the Tax Court yesterday ruled that sometimes all you get for your donation is a clean basement.

Many taxpayers use donations of clothing and household items as a gimme deduction.  They always write “$500 to Goodwill” on their tax information — or sometimes, a lot more.  While you can deduct the value of used clothes, the tax law imposes some limits, as Judge Lauber explains (citations omitted, emphasis added):

The nature of the required substantiation depends on the size of the contribution and on whether it is a gift of cash or property. For all contributions of $250 or more, the taxpayer must obtain a contemporaneous written acknowledgment from the donee.  Additional substantiation requirements are imposed for contributions of property with a claimed value exceeding $500. Still more rigorous substantiation requirements are imposed for contributions of property with a claimed value exceeding $5,000.


Section 170(f)(8)(A) provides that an individual may deduct a gift of $250 or more only if he substantiates the deduction with “a contemporaneous written acknowledgment of the contribution by the donee organization.” This acknowledgment must: (1) include “a description (but not value) of any property other than cash contributed”; (2) state whether the donee provided any goods or services in exchange for the gift; and (3) if the donee did provide goods or services, include a description and good-faith estimate of their value. . The acknowledgment is “contemporaneous” if the taxpayer obtains it from the donee on or before the earlier of: (1) the date the taxpayer files a return for the year of contribution; or (2) the due date, including extensions, for filing that return. Petitioner obtained blank signed forms from AMVETS and later filled them out himself by inserting supposed donation values. Because these forms were signed before the property was allegedly donated, we question whether they constitute an “acknowledgment” by AMVETS that it received anything.

 

20120511-2For contributions over $5,000,  a “qualified appraisal” is required unless the gift is of marketable securities.

The Marylander had cleaned out the house of his deceased mother, and he had a lot to give away:

These items allegedly included seven sofas, four televisions, five bedroom sets, six mattresses, a kitchen set, a dining room set, a china cabinet, and three rugs. For charitable contribution purposes, petitioner placed a value of $11,730 on these items.

Petitioner testified that he also donated to AMVETS during 2009 numerous items of clothing belonging to him and his children. These items allegedly included 180 shirts, 63 pairs of slacks, 153 pairs of jeans, 173 pairs of shoes, 51 dresses, 35 sweaters, nine overcoats, and seven suits. For charitable contribution purposes, petitioner placed a value of $14,487 on these items.

While no individual item exceeded $5,000, the appraisal rule still applied:

For contributions exceeding $500, “similar items of property” are aggregated in making this determination. Sec. 170(f)(11)(F) (“For purposes of determining thresholds under this paragraph, property and all similar items of property donated to 1 or more donees shall be treated as 1 property.”); . The term “similar items of property” is defined to mean “property of the same generic category or type,” such as clothing, jewelry, furniture, electronic equipment, household appliances, or kitchenware.

Because the value of the claimed contribution exceeds $500, we must aggregate “similar items of property” to determine what substantiation was required. Petitioner’s self-created spreadsheet shows three categories of similar items: clothing with an alleged value of $14,487; household furniture with an alleged value of $11,730; and electronic equipment with an alleged value of $1,550.

That knocked out the clothes and furniture right there, because there was no appraisal. It would be interesting to see if you could even find an appraiser to value old clothes like that. If you could, though, the appraisal expense would be a miscellaneous itemized deduction.

Who was the preparer? One odd twist is that the clothing deductions were claimed on an amended return prepared by a third party, after the IRS had already examined the taxpayer and assessed tax for unsubstantiated itemized deductions. I hope he didn’t pay that preparer too much.

The moral? 

When you have make a clothing donation (or any donation, for that matter) over $250, you need to get a written receipt meeting IRS rules to support your donation — a cancelled check or blank slip with detail of donation doesn’t cut it. If your donation goes over $5,000, and it’s not a traded security, you must have a qualified appraisal.  No appraisal, no deduction.

Oh, and the deduction for used clothing isn’t really just an additional standard deduction by another name.

Cite:  Smith, T.C. Memo 2014-203.

 

20140826-1Robert D. Flach has fresh Friday Buzz, including what he promises is a final reference to the Jersey Shore guy’s tax problems.

TaxGrrrl, Updated: ‘Real Housewives’ Reality Stars Joe & Teresa Giudice Sentenced To Jail. “Joe Giudice has been sentenced to 41 months in federal prison for financial and tax fraud. His wife, Teresa, will serve 15 months.”

William Perez, How to Calculate the Premium Assistance Tax Credit (With an Example). This will be a big deal on 2014 returns.

Jason Dinesen, Using a Line of Credit to Purchase Investments

Kay Bell, Tax moves to make during October 2014

Annette NellenLogical sales tax ruling on a web-based business

My fact check of a fact check is cited in a fact-check debunking.

 

Howard Gleckman, Pass-Through Firms Report $800 Billion in Net Income, Can’t Be Ignored in Business Tax Reform (TaxVox). “These firms have engaged in self-help tax reform by avoiding double taxation with the stroke of a pen.”  You’re welcome.

 

Jack Townsend, Penalties and Corporate America’s Shenanigans. “Instead of focusing the fire where far more revenue is involved and apply penalties in a way that will discourage misbehavior, the IRS goes after the small fish when there are bigger fish to fry.”

TaxProf, The IRS Scandal, Day 512

 

20141003-2Steve Warnhoff, Former CBO Director Holtz-Eakin on Dynamic Scoring: Revenue Estimating Is Already a Big Guessing Game So Why Stop Now? (Tax Justice Bl0g).

 

Career Corner. It’s Not All About the Big 4 (No Further Proc, a presumably pseudynomous Going Concern contributor). “So at your next recruiting event, when you witness the hordes amassing at the B4 tables, take a minute and visit other firms for a chat.”

Darn straight. Especially check out the Roth and Company table.

 

Economic development begins at home. Former Economic Development Director Charged With Tax Evasion:

 The one-time economic development director for the City of Columbia was arrested on multiple counts of income and property tax evasion.

Wayne Emerson Gregory, Jr. was arrested by investigators from the SC Department of Revenue on 3 counts of income tax evasion and 14 counts of property tax evasion.

Previously, Gregory was arrested in April of this year on embezzlement charges stemming from his time as Georgetown County’s Director of Economic Development from 2005 until September of 2013.

Silly rabbit.  When you’re an economic development director, you help other people loot the government.

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