Posts Tagged ‘Victor Fleischer’

Tax Roundup, 5/8/14: No, Virginian, there is no travel expense Santa Claus. And more!

Thursday, May 8th, 2014 by Joe Kristan

20120801-2News Flash: Tax Court Judges didn’t just fall off the turnip truck.  That insight might have occurred to a Virginian after yesterday’s Tax Court decision denying $64,775 in 2010  “car and truck expenses” for a “mobile advertising business” that grossed $7,200 in revenue.

The Virginian worked full-time for Verizon while traveling up a storm — 129,550 miles in 2010, by his own account.  Special Trial Judge Dean questioned The Virginian’s work ethic (my emphasis):

The number of hours petitioner worked for Verizon and purportedly drove for his mobile advertising business simply strains credulity. Petitioner’s monthly mileage for 2010 ranged from 7,419 miles to 17,864 miles. Petitioner testified that he drove at approximately 60 miles per hour. If it is possible that he could average 60 miles per hour in the month that he drove 17,864 miles, he spent at least 300 hours on the road that month or almost 10 hours a day. All this while working full time for Verizon.

The judge also has doubts about the business model:

Furthermore, petitioner’s extensive driving does not appear to be ordinary and necessary to his mobile advertising business. Petitioner claims that he drove all over the United States to post fliers and to advertise his own mobile advertising business, even though most of his clients were local clients except one online refinancing company. All the while, petitioner had very little income in relation to the excessive costs he incurred driving to put up flyers. Furthermore, the advertising for his own business appeared to be fruitless, as he never made a profit in any of the six years he engaged in the business, despite incurring great costs traveling to advertise mobile advertising business.

20140508-2But ultimately none of that mattered, because The Virginian failed to cross the initial threshold for deducting any sort of travel expenses — Section 274:

Notwithstanding whether petitioner’s excessive driving was ordinary and necessary for his mobile advertising business, he simply did not satisfy the strict substantiation requirements of section 274(d) for claiming car and truck expenses… Petitioner had no backup receipts and no beginning and ending mileage for the automobile he allegedly used. 

Section 274(d) requires taxpayers to document travel expenses “by adequate records or sufficient evidence”

-the amount of expense,

-the time and place of the travel, and

-the business purpose of the trip.

For travel, that means receipts where possible (e.g., hotels), and contemporaneous calendars or logs documenting mileage.  Without that, your work ethic and business model doesn’t even come into play.

Cite: Abelitis, T.C. Summ. Op. 2014-44.

 

20130114-1Roger McEowen, IRS Says Agents Acting Under Power of Attorney Subject to FBAR Reporting.  “The agent (along with the principal) is subject to the FBAR filing requirements if the POA gives the agent signature authority over a foreign account that exceeds the dollar threshold.” 

 

TaxProf, The IRS Scandal, Day 364.  Big day tomorrow.

TaxGrrrl, UPDATED: Timeline Of IRS Tax Exempt Organization Scandal.  It started with a planted question to try to blunt the impact of the impending TIGTA report that pointed out the targeting.

Kay Bell,  Lois Lerner held in contempt of Congress, ramping up next phase of midterm election year political posturing.  Yes, posturing is occurring — that’s what politicians do.  But Sam Ervin’s posturing — and he did his share — didn’t make Watergate less a scandal.

 

Cara Griffith, Transparency Versus Disclosure of Taxpayer Information (Tax Analysts Blog)  “…the disclosure of documents that contain taxpayer information, whether required by state law or the result of litigation, does not encourage transparency in tax administration.”  I agree; unfortunately, the IRS hides behind dubious assertions of confidentiality to cover up its own questionable behavior.

 

Jason Dinesen, Hold the Phone on the IRS E-file Outrage Machine.  No, don’t.  It’s still outrageous.

20140508-1Peter Reilly, Nonrecognition On Divorce Transfers Hurts Receiving Spouse .  It did in this case, when the recipient spouse had to pay tax.   Taxpayers receiving property in divorce receive the other spouse’s basis, and the other spouse doesn’t have a taxable sale.  But it’s still good policy.  Property settlements are contentious enough without hitting somebody giving up property with income tax on that dubious privilege.  Also, if the IRS got a cut, there would be less marital property to split in the first place.

Alan Cole, Failing by its Own Standard: What DC’s Insurance Tax Tells Us About its Obamacare Exchange (Tax Policy Blog)

Tax Justice Blog, What’s the Matter with Kansas (and Missouri, and …). “An anti-tax, Republican super majority in the Missouri Legislature claimed victory yesterday in a year-long battle with Gov. Jay Nixon over taxes by voting to override Nixon’s veto of a $620 million income tax cut.”

Do tell.  California Legislative Analyst’s Office Raises Concerns with Film Tax Credits (Lyman Stone, Tax Policy Blog).

Renu Zaretsky rounds up tax headlines for TaxVox with Contempt, Audits, Health Care, and Highways.

Janet Novack, Mansion Tax Kills Some Million Dollar Home Sales, Study Concludes.  Taxes always matter.

Jack Townsend, Another Foreign Account Sentencing.

 

Quotable:

The practice of regularly renewing the extenders package is unfortunate and should be stopped. It distorts the budget process, encourages legislative rent seeking, and invites highly particularistic legislative provisions that are better characterized as windfalls and wasteful government spending rather than well-targeted tax incentives.

Victor Fleischer,  Tax Legislation in the Contemporary U.S. Congress (Via the Taxprof)

News from the Profession: Grant Thornton Tries to Motivate With the Human Centipede, or Something (Going Concern)

 

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Tax Roundup, 11/22/13: Baucus proposes end of depreciation as we know it; also targets LIFO, cash-method farming.

Friday, November 22nd, 2013 by Joe Kristan
Max Baucus

Max Baucus

Baucus aims at LIFO, depreciation.  Senator Max Baucus has issued a tax reform proposal that slows depreciation and eliminates LIFO.  While it is a long way from becoming law — and certainly won’t become law in its current form — it will help shape the next round of tax reform.  Some key points:

-Depreciation for non-real estate assets would be computed not asset by assets, but in “pools,” with a set percentage of the amount of assets in each pool deducted during the year.  If the pool goes negative with dispositions, income is recognized.  There would be four “pools” with varying recovery percentages.

- Buildings would be depreciated under current rules, but over 43 years.

- The annual Section 179 limit would be $1 million, but with a phaseout starting at $2 million of assets placed in service.

- Research expenses would be capitalized and amortized over five years.

- LIFO would be repealed.

- Advertising costs would only be half deductible currently with the rest amortized over 5 years.

- Farmers would lose their exemption from accrual-basis accounting.

I think this goes the wrong way, adding complexity and lengthening lives.  I would prefer more immediate expensing.  LIFO repeal, and maybe the farm rule,  are the only proposals that seem to actually simplify anything.  The rest seem like high-toned revenue grabs.  If the revenue all goes to reduce rates, that wouldn’t be so bad, but I doubt that’s the idea.

 

Victor Fleischer, Tax Proposal for an Economy No Longer Rooted in Manufacturing:

The Baucus proposal aims to make the tax system match economic reality, removing the tax distortions from the equation. It would group tangible assets into just four different pools, with a fixed percentage of cost recovery applied to the tax basis of each pool each year, ranging from 38 percent for short-lived assets to 5 percent for certain long-lived assets.

It would be hard to make the case for giving the priority to tangible assets, and yet that is precisely what current law does by allowing rapid depreciation. At a minimum, the tax depreciation system should strive for neutrality and not discourage investment in intangibles and human capital.

That’s true.  Yet it’s hard to see how the Baucus proposal to require R&D costs to be amortized over five years, or the proposal to require 20-year amortization of intangibles instead of the current 15 years, encourages investments in intangibles and human capital.

Via Lynnley Browning’s Twitter feed.

The TaxProf has a roundup of the plan:  Senate Finance Committee Releases Depreciation and Accounting Tax Reform Plan 

William Perez, Draft Tax Reform Proposals from the Senate Finance Committee

Paul Neiffer, MAJOR Farm Tax Law Changes Proposed by Senate

Leslie Book, Senator Baucus Releases Proposals to Reform Administration of Tax Laws (Procedurally Taxing.

 

St. Louis loses another preparer.  From a Department of Justice Press Release:

A federal district judge in St. Louis has permanently barred defendants Joseph Burns, Joseph Thomas and International Tax Service Inc. from preparing federal tax returns for others, the Justice Department announced today…

According to the complaint, the defendants repeatedly fabricated expenses and deductions on customers’ returns and falsely claimed head of household status for customers who were married in order to illegally understate their customers’ federal tax liabilities and to obtain fraudulent tax refunds. The complaint also alleged that the defendants falsely claimed that some of their customers earned income from businesses that the defendants fabricated or increased the amount of business income their customers earned in order to illegally claim the maximum earned income tax credit on customers’ returns.

The IRS has certainly given their clients’ returns a good going over.  That’s the risk of going with a preparer whose results are too good to be true.

 

Scott Hodge, Andrew Lundeen, America Has Become a Nation of Dual-Income Working Couples (Tax Policy Blog)

20131122-1

Though its a brave man who tells the stay-at-home she’s not “working” after a day spent between taking care of an elderly parent and little kids.

 

Jason Dinesen,  Life After DOMA: What if You Amend One Year But Not the Next?

TaxGrrrl, When Mom and Dad Move In: The ‘Granny-Flat Tax Exemption’ For the Sandwich Generation 

Jana Luttenegger, Electronic Signatures, What’s Next? (Davis Brown Tax Law Blog).  E-filing of wills?

Phil Hodgen, U.S. brokerage accounts after you expatriate

Russ Fox, It’s All Greek to Me. Don’t gamble in Greece, seems to be the point.

 

20121120-2Kay Bell, Ways & Means’ tax plays in GOP anti-Obamacare game plan

Howard Gleckman,  How Washington May Turn June Into Fiscal February (TaxVox).  Yes they’ll be running out of our money again soon.

Christopher Bergin, The End of the Era of Multinationals (Tax Analysts Blog)

Tax Justice Blog, Scott Walker’s Tax Record Will Be on the Wisconsin Ballot Next Year.  Shockingly, TJB doesn’t like Walker.

Tony Nitti, International Tax Reform For Dummies 

Visit Robert D. Flach for fresh Friday Buzz!

 

News from the Profession: New Audit Associate Looking For Prank Ideas, Possibly a New Job in Near Future (Going Concern)

Oh, one more thing: Magnus!

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If taxes are charitable, why can’t I deduct them?

Thursday, May 23rd, 2013 by Joe Kristan

20130522-1Find the error in Victor Fleischer’s statement relating to Apple’s tax planning:

If you think about it, taxes are really just a form of charitable giving. Our goal is to reach a high level of participation from both American and Irish corporations, and your donation in any amount makes a difference. We also welcome any in-kind donations in the form of iPhones and iPads.  My daughter knows how to use them.

Um, no.  As any tax prof would tell you, a gift requires a donative intent, which in turn requires a voluntary transaction.  There is nothing voluntary about giving the government corporate taxes.

From a tax law standpoint, there are all sorts of problems with this analogy, aside from the lack of a charitable deduction for income tax payments.  Starting with:

- A 501(c)(3) charitable organization is not allowed to conduct overt political activity.  If a charity tried to pull the same sort of stunt IRS agents did with the Tea Parties, they’d lose their exemption.

- A charity can’t allow its activities to inure to the benefit of private individuals.  That’s the biggest single thing the government does anymore.    Taking money from struggling young folks to pay Social Security to wealthy Florida retirees wouldn’t cut it in any real charity.  Giving billions to Warren Buffett wouldn’t either.

You can argue some of that goes to deserving poor folks, but when 25% of the biggest income support program is stolen, even that is tough to swallow as a charitable activity.

Jonah Goldberg puts it well:

The fundamental insight of libertarianism is that the government is the government. It cannot be your mommy, your daddy, your big brother, your nanny, your friend, your buddy, your god, your salvation, your church or your conscience. It is the government. A big bureaucracy charged with certain  responsibilities, some of which it is qualified to carry out, many of which it is not.

The government isn’t a charity.  It’s at best a necessary evil, and is mostly a tool for politicians and their enablers to take money from you to buy votes and pass around to the politicians’ friends.

Related:  Should Apple just write a big check to the IRS?

 

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Tax Roundup, 12/19/2012: B is for Boehner. And Blizzard.

Wednesday, December 19th, 2012 by Joe Kristan

20121219-1Plan B.  House Speaker Boehner has proposed a “Plan B” that would increase the top rate to 39.6% for taxpayers with taxable income over $1 million.  Tax Analysts reports ($link):

Boehner’s Plan B would also permanently extend the alternative minimum  tax patch and the current-law estate and gift tax rules with a portable  $5 million individual exemption and a 35 percent top rate. Dividends and  long-term capital gains would be taxed at 15 percent for income below  $1 million and at 20 percent above that threshold. The bill would not  renew any tax extenders, emergency unemployment insurance, or the 2 percentage point payroll tax cut, and would not raise the federal debt limit.

It’s nice to see a permanent AMT fix in both the Boehner and Obama plans.  I like not renewing any of the “extenders,” but I suspect he plans to do that separately next year anyway.  An estate tax fix is also welcome.  It looks like there is no hope continuing the 15% rate for dividends or capital gains.

 

Meanwhile, a blizzard approaches.  From KCCI.com:

Six to 12 inches of snow is expected by Thursday morning. The heaviest snow axis will be along a line from near Des Moines to Tama. The lowest amounts are expected near the Missouri border. Snow drifts several feet deep will be possible given the strong winds.

Winds/visibility:

Winds will become very strong Wednesday night from the north northwest. Sustained winds of 25 to 35 mph are expected with gusts over 45 mph possible.

I know what I’m doing tomorrow morning.  Hello, shovel.

 

Fiscal Cliff Notes

Wall Street Journal,  Boehner Weighs ‘Cliff’ Backup Plan

Janet Novack,  Strange Bedfellows: Boehner, Buffett And Obama All Support Millionaires Only Taxes

Andrew Lundeen,  How Many Days of Christmas Could the Fiscal Cliff Buy? (Tax Policy Blog)

Joseph Thorndike,  Republicans Shouldn’t Pin Their Hopes on The Origination Clause.  “In practice, the Origination Clause is more a nuisance than an obstacle to tax-happy senators.”

Howard Gleckman, What Adjusting the Price Index Would Mean for Taxpayers (TaxVox)

Rudy Penner,  How to Control Entitlements: A Challenge Ike Did Not Face (TaxVox)

 

TaxProf,  Fleischer: How Local Tax Rates Affect High-Income Professionals:

The study finds that an increase in the marginal income tax rate leads to a decrease in the average skill of the NBA free agents that migrate to that team. Unlike in baseball, basketball teams in high-tax jurisdictions actually end up with a worse free-agent talent pool, all else equal. …

These papers do serve as a useful reminder that if the goal is to remedy income inequality, state and local taxes are a weak policy instrument. To the extent that tax policy is used to achieve redistribution, redistribution should take place at the federal level.

Despite what Warren Buffett, the President, and the Speaker of the House say, marginal rates matter.  That’s also true at the state level; when you have to bribe businesses to locate in your state, as Iowa likes to, you have a sick tax systemRelated: David Brunori, If the Shoe Fits: Oregon Lawmakers Get Rolled (Tax.com)

 

Kay Bell,  Cupid says note year-end marital status; Reindeer Year-end Tax Games Tip #6

Paul Neiffer,  Annual Exclusion Does Not Eat Into Lifetime Exclusion.

Trish McIntire,  Identity Theft PIN

Peter Reilly,  Tax Court Not Quick To Find Abuse In Innocent Spouse Case

TaxGrrrl,  Lawmakers, Guns and Money: Where Do We Go After Sandy Hook?

Robert Goulder,  Starbucks Pays More Tax Than It Owes (Tax.com).  That’s silly.

It’s Wednesday, so it’s time for a fresh Buzz.  Robert D. Flach obliges.

 

The world is saved from its most dangerous criminals.  Quebec Police Arrest 3 in Maple Syrup Heist

 

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Tax Roundup, 12/13/2012: Tax preparer deadline looms. Also: why some companies are happy with a bad tax law.

Thursday, December 13th, 2012 by Joe Kristan

As Year-End Deadline Looms, Independent Tax Preparers Continue Fight Against IRS Power Grab. (Institute for Justice).  IJ has prepared a two-minute video about their suit to stop the inane and futile preparer regulation program.

I wish IJ luck; if you are looking to make a last-minute charitable contribution, IJ is certainly a worthy cause.

 

TaxProf,   Fleischer: Not All Companies Would Welcome a Lower Tax Rate

Reaching an agreement to cut the corporate tax rate should be easy. Major figures from both political parties have expressed interest in reducing the tax from 35%, which is the highest rate among the country’s main trading partners. Corporations would generally benefit from paying less tax and having more cash to reinvest in new projects or pay in dividends to shareholders.

The 35% rate is more of a “sticker price” than a reflection of the average tax burden. Corporations can pay a lower rate by lobbying for special deductions and credits, employing aggressive transfer pricing strategies to shift profits offshore and structuring operations to minimize how much they pay in taxes in the United States.

You can see the same dynamic in Iowa, with its highest-in-the-nation corporation tax rate.  That’s just fine for the lucky and the well-lobbied, some of whom actually make money from the Iowa tax law through refundable tax credits, especially the Research Credit.  For a little guy without connections or lobbyists, it’s a great reason to set up in South Dakota.

Speaking of which:   Key Iowa senator questions tax-incentive programs (Quad City Times):

An influential state senator said lawmakers will have to take a harder look at the state’s tax-credit programs this session, including the economic development credits used to entice companies to build in Iowa.

Sen. Joe Bolkcom, D-Iowa City, who was reappointed to chair the Senate Appropriations Committee on Wednesday, held a Statehouse hearing on tax-credit programs Wednesday. He has been a vocal critic of the how the state uses incentive programs to compete against other states for economic development.

That will be a lot easier if it is accompanied by a drastic lowering of rates — or better yet, a repeal of the Iowa corporation income tax.  Yet there’s always a voice for breaks for those with connections — in this case Tom Sands (R-Wapello), Chairman of the Iowa House Appropriations Committee. From the story:

Sands said the people in Lee County and Woodbury County — for the most part — aren’t complaining about the incentives offered to the companies and are looking forward to the jobs they’ll bring.

That’s why it’s hard to get rid of these things.  Politicians point to the jobs they “create” by bribing companies to do what they would probably do anyway.  They don’t have to call press conferences for all of the anonymous businesses that never come to Iowa, or that never get started to begin with, because of Iowa’s expensive and byzantine tax law.

There is a better way:  The Tax Update’s Quick and Dirty Iowa Tax Reform Plan

 

Fiscal Cliff Notes:

Roberton Williams,  Paying 2013 Dividends in 2012 May Save on Taxes but Not for Everyone:

For instance, that extra dividend income could throw some shareholders onto the alternative minimum tax. Some retirees could see more of their Social Security benefits subject to income tax. Some families with children will pay more tax as their child credits phase out.

While some investors would be hurt by the accelerated dividend payouts, many low- and middle-income taxpayers could benefit.

Christopher Bergin,  More Cliffs (Tax.com)

Cara Griffith,  Despite Revenue Growth, States Must Plan for the Fiscal Cliff (Tax.com)

TaxGrrrl,  Senate Can’t Nail Down Budget, Does Have Time For Fruitcake

Patrick Temple-West,   Corporate taxes on table in cliff talks, and more.  I don’t get a good feeling about these guys trying to rewrite the corporate tax in two weeks.

Paul Neiffer,   How Much Would A Gas Tax Raise?

Anthony Nitti,   While The Fiscal Cliff Keeps You Distracted, The AMT Will Rob You Blind

 

Russ Fox,  Ref Fouls Out:  “As always, it’s far, far easier to just pay the tax you owe…but that thought rarely occurs to the Bozo mind.”

Joseph Henchman,  Study: Toll Collection Cheaper Than Conventionally Thought (Tax Policy Blog).  If electronic tolling is cheap enough to run, it could supplement or replace gas taxes.

Tax Trials:  Tax Question May Determine Supreme Court’s Position on Same-Sex Marriage

Missouri Tax Guy,   Some Easy & Effective Ways to manage Personal Finance

Trish McIntire,  Saving Electronic Records:

Download and save your electronic pay statement to your computer every payday. Save a copy of the invoice anytime you order online. The same goes for all credit card and bank statements that aren’t paper. Once you have a system started, you can start duplicating the paper documents. A home scanner can be inexpensive and a lifesaver.

Once you’ve created a tax documentation system that works for you, don’t forget to back it up and to safely get rid of the paper documents.

If it’s worth backing up, it’s worth backing up twice.

Jack Townsend,   Reasonable Doubt – Explaining It to a Jury.  Best not to have to.

Kay Bell,   French actor Gerard Depardieu moves to Belgian tax haven.  Belgium has a top income tax rate of 50%.  When that becomes a “tax haven,” that tells you how bad France is.

Ungentlemanly:  Fourth Circuit Upholds Conviction of Gentlemen’s Club Owner (Peter Reilly)

Russ Fox,  Ref Fouls Out.  A group of rec-league refs set up an identity theft-based tax fraud scheme.  It worked great, until suddenly it didn’t.    Russ wisely points out:

All told, the four individuals involved in the scheme must make restitution totaling $200,000.  As always, it’s far, far easier to just pay the tax you owe…but that thought rarely occurs to the Bozo mind.

These guys ran their scheme for 12 years before it blew up.  The longer you do something like this, the closer your chance of getting caught approaches 100%.

 

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Tax Roundup, 11/1/2012: IRS walks away from defined-value fight.

Thursday, November 1st, 2012 by Joe Kristan

IRS withdraws appeal of non-charitable defined value gift case.  The IRS hates “defined value” charitable gifts of property.  These gifts specify that a donee will receive a certain amount of property; if the IRS successfully challenges the gifts, the donor agrees to give more property to make up the difference, so the charitable deduction stays the same and the IRS gets nothing for its efforts.  This result has been upheld in three different circuits.

But what if you have a non-charitable donee?  Then you would want to make the donee pay back part of the gift if the IRS challenges the value to avoid an increased gift tax.  The Tax Court upheld the concept in the Wandry case.  Now the IRS has withdrawn its appeal, reports Tax Analysts ($link).  Does this mean you can use a defined-value clause to limit gift tax exposure safely?  The article says it may be premature to think so:

“Practitioners will not be comfortable with the Wandry clause until at least two circuits have approved it, or at least one circuit and the full Tax Court,” said estate planning consultant Howard M. Zaritsky. “I feel that a Petter-style defined value clause, with a charitable residuary gift, is very safe, after the Tax Court and three circuits have approved it. I simply do not have that same degree of comfort about Wandry,” he said.

Stay tuned.

Related:  IRS loses another ‘defined value’ gifting case

 

Who says you can’t make money in your vacation home in the off-season?  A North Carolina couple found a lucrative use for their cottage while the neighbors were away.  From the Asheville Citizen-Times:

A Western North Carolina couple pleaded guilty to an elaborate scheme in which they filed some 1,000 false tax returns, bilking the government out of more than $3.5 million.

 Senita Birt Dill and Ronald Jeremy Knowles used tax preparation software programs and fraudulently obtained personal identification information to obtain refunds, according to a criminal complaint.

They rented a home on a lake surrounded by vacation homes in Polk County and used neighboring addresses on the fraudulent tax returns, then surreptitiously collected government checks from mailboxes.

Sure, we’ll pick up your mail while you’re away!  There must have been a flaw in their cunning plan, as both face potentially long prison terms for tax fraud and identity theft.

 

Just another hard-working public servant.  If you ever think a municipal income tax would be a great idea, this story from the Washington Examiner might give you pause:

An employee at the District’s Office of Tax and Revenue pleaded guilty Wednesday to filing more than a thousand fraudulent tax returns that netted more than $4 million in unwarranted refunds from D.C. and the federal government.

Kimberle Y. Davis, a “control technician” at the OTR, pleaded guilty to conspiracy to defraud the government and first-degree theft through her part-time job at a District-based tax service. She’s at least the third employee in Chief Financial Officer Natwar Gandhi’s 12-year tenure to be caught stealing, prompting Mayor Vincent Gray to press Gandhi for plans to overhaul the tax office.

It is apparently against the rules at OTR to have a tax-prep job.  I can’t imagine why…

Sacrebleu — More French Taxes.  David Brunori notes that the barbarians have crashed the gates in Paris:

 It is bad enough that the French have a 75 percent top marginal tax rate. Now the Socialists in power want to raise the tax on beer.

Because beer is apparently a big problem in France?

 

Brutal Assault on Reason Watch: 

TaxProf, Fleischer: The Winners and Losers Under Romney’s Tax Plan

 

TaxGrrrl,  Helping Out After Hurricane Sandy

Daniel Shaviro,  Post-storm update.  He lives in Manhattan and remains without power.

Trish McIntire,  Sandy Adjustments

Andrew Mitchel,  Expatriates for the Third Quarter of 2012

Robert D. Flach,  A YEAR-END TAX PLANNING RERUN – AVOIDING AN UNDERPAYMENT PENALTY

Kay Bell,  Happy Halloween tax breaks!

RIP: Remembering the DECEASED Iowa Pumpkin Tax (Joseph Henchman, Tax Policy Blog)

Going Concern, Dumb: Iowa Once Tried to Implement a Pumpkin Tax

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Tax Roundup, 9/26/12: Romney vs. John Edwards; Also: low taxes, if you don’t count some taxes.

Wednesday, September 26th, 2012 by Joe Kristan

Not every S corporation is a “John Edwards” shelter.  The TaxProf highlights a New York Times piece by Colorado Tax Professor Victor Fleischer, who says that Mitt Romney may be using the “John Edwards Tax Shelter” to avoid Medicare taxes.

The “John Edwards shelter” got its name from the model husband and former Democratic vice-presidential nominee.  He ran his law practice in an S corporation, so much of his multi-million dollar income came to him on the K-1.  Unlike wage income or law partnership K-1 income, S corporation K-1 income is not subject to self-employment, Social Security or Medicare taxes.

Mr. Fleischer says:

Mr. Romney continues to receive cash payments from the companies that manage Bain Capital’s funds. A couple of weeks ago in this column, I described how private equity firms like Bain Capital convert management fees, which would normally generate ordinary income, into investments that yield capital gain.

R. Bradford Malt, the trustee who manages Mr. Romney’s Bain holdings, has stated that Mr. Romney did not participate in the fee conversion program. One might have logically inferred, then, that Mr. Romney’s share of the management fee income would be reported as wage income on Mr. Romney’s tax return.

Not so. Instead, the payments are reported on Schedule E of the return as distributions from S corporations — the largest being $1,961,325 from Bain Capital Inc. The distinction between wage income and an S corporation distribution is meaningless from a business standpoint, but it’s important for tax purposes.

Current law imposes a 2.9% Medicare tax on all wages and self-employment income. To avoid this tax, taxpayers have an incentive to characterize as much labor income as they can as investment income (like carried interest) or as a distribution from an S corporation.

Mr. Fleischer gets this badly wrong.  Wage income and S corporation income can be hugely different from a business standpoint.   For an obvious example, consider a second-generation family business S corporation — say, a farm.  One member of the second generation may continue the business, while the others may go do other things but remain owners.   As S corporation earnings must be allocated straight-up based on share ownership, the only way to compensate the sibling who runs the business is through additional salary.  The working sibling gets the only salary in the family, while all siblings get K-1 income.

While much is uncertain about how much S corporation income should go between K-1 income and W-2 income, it is certain that it usually isn’t all compensation when capital investments are involved.  To the extent that that Bain Capital Inc. owns passive interests in Bain Group investments, it certainly isn’t disguised wages.  As his termination deal largely involved receiving passive investment interests, it’s a stretch to say that this translates into an Edwards Shelter.

 Update: Victor Fleischer replies in the comments:

Hi Joe.  Thanks for the thoughtful post.  I’ve replied here: http://victorfleischer.com/archives/365

Bain Capital Inc. is the management company, and as far as I can tell receives nothing but fee income.  No passive investments, which are instead held by the GP.  You are right that I overstated the general point about S Corps, but in this particular case it’s hard to see how the S Corp income is related to passive investments or investment income of any kind.

 

Is Romney really paying the “lowest rate”?  From Joseph Thorndike at Tax Analysts (Subscriber link):

     So applying the Romney method to his actual returns, we get an average rate of 14.02 percent in 2010 and 2011. As many commentators have noted, that’s a lot lower than President Obama’s average effective tax rate of 26.45 percent during his presidency. (It’s also lower than the average rate Obama paid in the same two years covered by the Romney release: 23.4 percent.)

     But Romney’s rate isn’t low just by comparison with our current president. It’s also low compared with every president of the last 40 years.

That 14.02% rate is because of several factors.

  • Lots of dividend income, taxed at 15%.
  • Lots of capital gain deductions, taxed at 15%.
  • Huge itemized deductions for charitable gifts and state taxes.

Of course, this also ignores how dividends come from corporations, which pay their own 35% federal tax.  Capital gains are from the sale of corporate stock, which means accumulated and anticipated corporate earnings taxed at 35%.  Romney is only paying the second tax on that income.

Mr. Thorndike acts like Romney has done something shady:

If he wins his race for the White House — and continues to file tax returns that look like the ones released during the campaign — President Romney will have only Richard Nixon to keep him company at the bottom of the rate roster. Generally speaking, Nixon is not a happy point of comparison for presidents, and this is true for taxes as well as break-ins and cover-ups.

Joseph Thorndike, what is Romney supposed to do?  Dump his dividend paying investments and buy bonds so he only earns interest, taxable at the top rate?  Stop earning long-term capital gains?  Stop deducting his charitable contributions?  Oh, wait, he’s already done that.

 

Trish McIntire,  Shorting Deductions

Dear Client – I know what you’re thinking. Since Gov. Romney didn’t claim all his charitable deductions so that he could hit his target tax rate, you’re thinking about not taking all your business (farm) deductions so that you can manipulate your income tax. I’m sorry to break the news to you but you can’t do that. Business deductions are not the same as charitable deductions.

 

Daniel Shaviro,  Should Romney pay a lower tax rate than the rest of us?

Howard Gleckman,  Will Romney Scale Back Rate Cuts If Congress Won’t Curb Tax Breaks? (TaxVox)

TaxGrrrl,  The Most Tax Friendly Country In The World Is…. (Spoiler Alert: It’s Not the U.S.)

Paul Neiffer,  IRS Extends Drought Replacement Period for Ranchers

Joseph Henchman, D.C. Judge Rules Online Travel Companies Must Pay Hotel Tax on Their Services (Tax Policy Blog)

Jim Maule, Biting the Hand that Feeds the Tax Critic.

Peter Reilly weighs in on the Iowan who claimed to be a South Dakotan while sporting Iowa vanity plates:   State Residence For Income Tax – Pay Attention To The Basics

Martin Sullivan,  Capital Gains: The Missing Link toTax Reform?

Dan Meyer,  “Going Concern” Explanatory Does Not Always Mean that the Sky is Falling

Robert D. Flach has posted his Wednesday Buzz.

The Critical Question:  Who — Aside From the Rap Community — Doesn’t Pay Any Income Tax? (Anthony Nitti)

 

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