Taxable Talk

California isn’t the only state where the legislature is ignoring the current economic climate. In Minnesota, the Democrats who control that state’s legislature, have ignored Republican Governor Tim Pawlenty’s veto threat and passed a series of tax increases.

Two different packages passed: one in the Minnesota House and one in the Senate. Both contain a variety of tax increases, including increases in the income tax, cigarette taxes, alcohol tax, and an increase in what is covered by the sales tax. The mortgage interest deduction would be limited.

These measures are probably irrelevant, as no Republican voted for them and Governor Pawlenty guarantees they’ll be vetoed. There’s clearly not enough votes for the vetoes to be overridden.

What will be heading to Minnesota and California? Major cuts in government spending. And that’s as it should be.

One form of business entity that is coming into increasing use is the Limited Liability Company (LLC). But that may change in Minnesota based on a ruling from an administrative law judge in that state.

Generally an LLC is a disregarded entity for federal tax purposes. Most states follow the federal guidelines though a couple of state require reporting. An LLC in California must file Form 568 and pay a minimum tax and possibly a gross receipts tax.

Minnesota, though, is about to take this one step further. The Gopher State will soon charge sales tax on transactions between single member LLC owners and the LLC. Joe Kristan calls this “an awful idea.” He’s right—Minnesota is effectively imposing sales tax for LLC owners when they move an object from their left hand to their right hand.

Hopefully the Minnesota Department of Revenue or the Minnesota legislature will reconsider this. Otherwise single member LLCs may become dinosaurs in the Land of 10,000 Lakes.

Hat Tip: Roth Tax Updates

Apparently this blog has a wider circulation than I thought. Today I received an email from Tom Teale, the Assistant Director, Criminal Investigations of the Minnesota Department of Revenue (the state tax agency in Minnesota). While I generally focus (when I report on tax evaders) on IRS/Department of Justice prosecutions and California I’m happy to highlight the lowlights from other states.

And I do wish to point out that many states are suffering revenue shortfalls. If you file your federal tax return and skip your state tax return your state will find out. Every state but Nevada has an information sharing agreement with the IRS. Given that state income tax payments are generally deductible on your federal tax returns and are usually for far smaller amounts than your federal income tax doesn’t it make sense to ensure your compliance with state law?

In any case, Mr. Teale highlighted four cases in Minnesota. I’ve already covered Robert Beale, the tax evader who attempted to arrest the judge. He received eleven years of nonconsensual incarceration.

There were two cases I wasn’t aware of. In one, an attorney, John Hatling of Fergus, Falls, claimed that he could deduct his own wages using the “claim of right” deduction. If you’ve never heard of the deduction you’re not alone. It’s yet another tax protester argument and it doesn’t hold water. Mr. Hatling will plead guilty to one felony count and will be sentenced in state court next Friday.

In the other case, a judge didn’t file his Minnesota income tax returns. Donald Venne of Anoka County faces four gross misdemeanor charges. While the total unpaid tax is relatively small (about $3,200) a judge, of all people, should understand about compliance with the law. His attorney said that the problem was caused by a “traumatic family event that occurred over a period of years.”

Again, remember that you do need to pay your state income taxes. And my thanks to Mr. Teale for bringing these cases to my attention.

Al Franken, the likely Democrat-Farm Labor candidate for U.S. Senate in Minnesota, told the Minneapolis Star-Tribune that he has paid over $70,000 in back taxes to 17 states. That’s not just California, but includes Delaware, Kentucky, Massachusetts, Michigan, New York, and Wisconsin.

Among the revelations in the Star-Tribune article are that he did not pay workers’ compensation and disability insurance premiums for New York-based workers between 2002 and 2005, and that a default judgment was entered in New York last year for $25,000.

The Associated Press article states that Franken’s communications director, Andy Barr, told the AP that none of the 17 states attempted to contact Franken or his accountant about the unpaid taxes. That’s likely splitting hairs given that New York did attempt to collect the insurance premiums.

In any case, Republican Senator Norm Coleman (who Franken will likely be running against) made the obvious remark, “Paying taxes is an obligation that I think Minnesotans expect to be adhered to, and that Minnesotans do.”

Do I think this was deliberate evasion by Franken? No; the amounts are too small. Will this be political hay for his opponent? Definitely for now, and depending on how Franken handles this, it could derail his campaign.

Al Franken has had an interesting career. He’s been a comedian and a screenwriter, and now he’s running for the US Senate, hoping to get the nod of the Democrat-Farm Labor Party in Minnesota (and then, of course, in the general election).

However, Mr. Franken (or his accountant) has forgotten about California’s rules on corporations. A California corporation must make a minimum franchise/income tax payment of $800 a year, even if the corporation has no income (or lost money, for that matter). Mr. Franken has a California corporation, Alan Franken Inc., which the Secretary of State’s website shows as forfeited (it did not pay its state registration fees).

This is apparently becoming big news in Minnesota, as the Minneapolis Star-Tribune is covering this story. Andy Barr, a spokesman for the Franken campaign, is quoted by the Star-Tribune: “Al feels that because his name is at the top of the organization, he takes ultimate responsibility for everything that goes on. But if there’s a mistake that’s been made, he’s pretty insistent that the accountant fix it. He’s been pretty vocal with [the accountant] on this point.”

We’re not talking big bucks here. The tax owed (including penalties) is $5,800 for not making the required minimum payments from 2003 – 2008. The corporation will likely also the Secretary of State’s office $25/year plus a $250 penalty for each year that the required registration form wasn’t filed. Once all of that paperwork is filed, and the state income tax returns for 2003 – 2008 are filed, Mr. Franken can dissolve his corporation.

So is Mr. Franken the next celebrity tax scofflaw? Only if he allows this mess to percolate for several weeks rather than insisting to his accountant that he prepare the appropriate returns and file them. Otherwise, the DFL in Minnesota will likely have to find a different candidate to run against Republican Senator Norm Coleman.

Congratulations to Minnesota! No, they’re not in basketball’s Final Four. Rather, Minnesota’s State Senate passed a bill on Saturday to increase the top tax bracket in the state to 9.7%, the highest regular tax bracket in the country. You would need to make over $250,000 to be impacted by the new bracket ($141,250 if single).

The legislation was led by Minnesota’s Democrat-Farm Labor Party (DFL). Luckily for Minnesotans, Governor Tim Pawlenty promises a veto. And it appears that the DFL doesn’t have the votes to override it.

Hat Tip: Tax Prof Blog
News Story: AP