$89,000 or $5.79

Posted on August 10, 2011 by Russ

While on vacation I spoke with a good friend of mine from Illinois. A couple of years ago his firm had a sales tax issue with the Illinois Department of Revenue. The Illinois DOR accused his firm of not paying all his sales tax on a timely basis, and after audit accused him and his firm of owing hundreds of thousands of dollars.

The audit apparently lasted months, and in the end the DOR and my friend’s firm couldn’t come to an agreement. The case ended up in court with my friend eventually winning. It was something of a Pyrrhic victory, though: Fighting the case cost him $89,000 (that includes the cost of penalties and interest paid to the Illinois DOR and attorney’s fees).

My friend was noting that he had read my blog post on being penny wise and pound foolish. After this case occurred everything he sends to a government agency is sent via certified mail, return receipt requested. Yes, the original issue with the Illinois DOR came about because he couldn’t prove he had timely mailed a sales tax return. He noted that he learned this lesson the hard way.

It’s your choice, but my friend likes the idea of not paying $88,994.21 needlessly. I urge you to use certified mail, return receipt requested (or timely file electronically). It really is a no brainer.

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You Can’t Take It With You When You’ve Already Given It Away

Posted on August 10, 2011 by Russ

If I give my brother $100, do I still have that $100? Of course not: My brother has that. The same holds true for any gift I give him; that property is now his and I have to live with the consequences of that gift. Today, the Tax Court looked at a situation where an individual gave a gift but said he hadn’t done so.

The Tax Court noted the issue quite well: “The issue for decision is whether distributions petitioner received from an S corporation exceeded his adjusted basis in the corporation’s stock.” This is an issue of basis, and basis remains one of the most troubling concepts for the lay person in tax.

Basically, your basis in something is what you paid for it less whatever you’ve taken out of it. For an S Corporation, there are two bases: stock (capital) and loan. If you take distributions in excess of basis, you have a taxable distribution.

In this case, the taxpayer signed a purchase agreement with his son to sell his son some of the stock of the business in 2002. The business had two classes of stock, and some of each kind was sold to the son. However, the son didn’t pay for it; instead, it apparently was given to his son (with a Gift Tax Return being filed for the year in question).

The IRS examined the taxpayer’s return and found that the taxpayer had distributions in excess of basis in 2003. The Court had to determine whether there was or wasn’t basis and, therefore, whether or not there was or wasn’t a taxable distribution.

The Court began by noting the obvious:

[W]hile a taxpayer is free to organize his affairs as he chooses, nevertheless, once having done so, he must accept the tax consequences of his choice, whether contemplated or not.

The gift of the stock was noted on the 2002 Gift Tax Return, and that really was the case.

Today, I had a client call me wondering whether or not he could take a distribution from an S Corporation without having basis. I told him he could, but he’d have a taxable gain. Just ten minutes later, I read this case. Hopefully he’ll get the idea that if you don’t have basis, you do have a gain if you take a distribution.

Case: Milller v. Commissioner, T.C. Memo 2011-189

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No Longer a Bully, Now a Tax Evader

Posted on August 10, 2011 by Russ

As I’ve said before, I’m not a fan of rap. My best friend considers my musical taste to be quite boring. That said, we both pay our taxes. It appears that rappers are having problems remembering to do this.

Beanie Sigel (aka Dwight Grant) is a Philadelphia hip hop artist who, according to Wikipedia, has sold more than 2 million albums. That equates to a good income. In Mr. Sigel’s case, his after-tax income equaled his pre-tax income from 2003 to 2005. That’s a difficult feat when your income is about $1 million.

Unfortunately for Mr. Sigel, someone at the IRS or the Department of Justice apparently enjoys hip hop enough to realize that there should be a tax return filed for Mr. Sigel for each of those years. There weren’t, and that led to him pleading guilty today to three counts of not filing a tax return. Mr. Sigel is likely looking at a trip to ClubFed since the tax loss is estimated at over $340,000; he has served time before on a weapons charge and for a probation violation.

If you’re wondering why I used this title for the post: Mr. Sigel’s most recent album was The Broad Street Bully.

Posted in Tax Evasion | 1 Comment

While I Was Out…

Posted on August 10, 2011 by Russ

…Nothing much happened, right? (I’m ignoring that AAA/AA+ thing, of course.)

The IRS announced that Form 8939 for estates for 2010 will be due on November 15th. However, the form has yet to be released.

Joe Kristan noted that the Wesley Snipes strategy didn’t work (again), this time in nearby Bakersfield. A Mark DeVries didn’t like the results of his audit, and among his other brilliant ideas he sued the IRS Revenue Officer and Revenue Agent handling the case…for $50 million (plus punitive damages). As Joe noted,

Suing your IRS agent for “libel, slander, nuisance, intentional and negligent infliction of emotional distress, trespass, conspiracy and imposition of a constructive trust” hasn’t worked yet. Perhaps a less confrontational approach to IRS exams would have been wise.

Peter Pappas noted that low taxes lead to economic growth. Well, I knew that but a lot of people in Washington don’t.

Phil Hodgen is running a series on PFIC’s. If you deal with them, it’s a must read.

The Franchise Tax Board has a new amnesty program (aka “Voluntary Compliance Initiative 2”). This program is for taxpayers who avoided California tax through either Offshore Financial Arrangements or Abusive Tax Avoidance Transactions. Filing period for this amnesty runs through the end of October. Taxpayers who sign up for this amnesty must file amended returns, sign a participation agreement, and pay all tax, penalties and interest by the end of October. Note that the Noneconomic Substance Transaction Understatement Penalty, the Accuracy Related Penalty, the Interest Based Penalty, and the Fraud Penalty are removed with this amnesty; however, the Large Corporate Understatement Penalty (if applicable) and the Amnesty Penalty cannot be waived.

Finally, I feel relaxed and ready for ten days of tax work to be squashed into the rest of the week. Yes, I enjoyed my vacation.

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Vacation

Posted on July 28, 2011 by Russ

It’s time for my annual vacation. If something earth-shattering in the tax world happens while I’m relaxing, I’ll take time out to post on it. Otherwise, enjoy the fine bloggers listed in the blogroll on the right. I’ll be back on Tuesday, August 9th.

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Speaking of California’s Use Tax…

Posted on July 28, 2011 by Russ

A couple posts ago, I reported on the Board of Equalization having a Use Tax Table available for next year’s filing season. An article in today’s Orange County Register reminded me how California regulations hurt small businesses and bring in far fewer revenues than projected.

Back in 2009, the legislature passed a law that said that any business that would otherwise not have to file sales tax returns that had $100,000 or more of gross receipts would have to file Use Tax returns. Once you register for the program, you must file returns until your business closes. The law was projected to bring in $81 million in its first year, eventually rising to $651 million.

So how much has the new law brought in? A total of $56 million for all three years…at a cost of $23 million.

For small businesses, the cost to comply with the regulation continues forever (or until your business stops or leaves California).

Welcome to the Bronze State….

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The FTB Would Like Some Help from California Tax Professionals

Posted on July 28, 2011 by Russ

If you’re a tax professional in California, the Franchise Tax Board is asking for some help to improve their website.

We need tax professionals’ help to test webpages and online applications (such as MyFTB Account) and provide feedback to us. If you elect to help us, here’s what to expect:
• Testing generally takes 15 to 30 minutes.
• Sessions vary based on what we test.
• We contact you by email or phone and provide you information about the test.
• We plan to contact you only once or twice a year.
• We will not contact you during April or October.
If you would like to participate or have additional questions, respond to Donna Freeman with the following information at Donna [dot] Freeman [at] ftb.ca.gov:

Your name
Your email address
Your daytime phone
Your city

We appreciate your help!

It’s too every tax professional’s benefit to have the FTB website work well, so those of you who have a little extra time (and remember, the FTB will not contact you during April or October) should send Ms. Freeman an email.

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BOE Approves Use Tax Table for Indviduals

Posted on July 28, 2011 by Russ

The Board of Equalization approved a tax table that individuals can use (if they wish) to report Use Tax for their 2011 tax returns (filed in 2012). Use Tax is owed by individuals and businesses when they buy products where sales tax is not charged but would be charged if they purchased it in a local store.

The table is only for non-business purchases of $1,000 or less; businesses cannot use the table and must report their actual expenses. The table is:

Adjusted Gross Income Use Tax
Less than $20,000 $7
$20,000 – $39,999 $21
$40,000 – $59,999 $35
$60,000 – $79,999 $49
$80,000 – $99,999 $63
$100,000 – $149,999 $88
$150,000 – $199,999 $123
More than $199,999 AGI times 0.07% (0.0007)

Again, businesses must use actual expenses to calculate Use Tax.

Most individuals ignore Use Tax so it’s likely having the table will increase compliance with the law.

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I Spilled my Coffee Thanks to Joe Kristan

Posted on July 26, 2011 by Russ

This morning, Joe Kristan posted about an Iowa couple who had a unique method of preparing tax returns. I made the mistake of reading the actual court decision while drinking my morning coffee:

According to [the defendants], if you believe that looking successful helps make you successful, your clothes, hair care, and manicures are deductible. If your dog barks while you are away from your home based business, it’s deductible. If your child’s nanny ever answered the business phone, the nanny is deductible. If you visit a business associate while on vacation, it is deductible. If you pay rent to yourself, or even if you don’t, it’s deductible. If you have a six year old child, payments to the child are deductible employee expenses. If you have used your living room television in a business meeting, it’s deductible. And your hobbies, like scuba diving, pet cats and flying, easily deductible.

The trouble was that I was laughing so much that the coffee hit the carpet. As you hopefully know, none of the items noted by the Court are deductible; the defendants in this case absolutely deserve their permanent injunction.

On a more serious note, Joe noted,

The case is noteworthy in another respect: it shows how useless competency exams and CPE requirements are in stopping rogue preparers. One of the preparers — the one who signed all of the disputed returns — was an Enrolled Agent. That meant he had to pass a competency test that is certainly more difficult than any that will be imposed by the new IRS preparer regulation regime. He also had to take continuing education to maintain that status. [emphasis in original]

I disagree somewhat with Joe regarding competency exams, but agree with him regarding CPE.

Competency exams will weed out the lowest of the low hanging fruit. There are undoubtedly some preparers who are so incompetent that they have no chance of passing any exam. In that respect, the RTRP exams will have an impact.

However, CPE is what you make out of it. For most tax professionals, CPE gives us a chance to learn new material in tax. True tax professionals attend courses and want to learn.

That said, it’s relatively easy for an incompetent preparer to obtain CPE. Just go to courses, doodle on the materials presented, and go home still believing that petting your dog is deductible. As long as you attend the full course (typically, your badge is scanned upon entering and leaving) you will get CPE. Attend enough CPE and your license can be renewed.

Joe would prefer that the money being spent on building a new bureaucracy be used to spot rogue preparers. Originally, I was indifferent about the new PTIN and registration requirements. (For the record, the National Association of Enrolled Agents, of which I am a member, strongly supports both.) I am now moving more towards Joe’s opinion (that this is more or less a power grab by the IRS with no real benefits to taxpayers or tax professionals).

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Class Action Approved for Los Angeles Phone Tax Lawsuit

Posted on July 26, 2011 by Russ

The City of Los Angeles’ telephone tax used to be based on the Federal telephone excise tax. The federal tax, collection of which began to fund the Spanish-American War (Remember the Maine?), ended when almost every circuit Court of Appeal ruled the tax unconstitutional.

So a gentleman named Estuardo Ardon sued the City of Los Angeles claiming that its phone tax was just as unconstitutional; he asked that it be made a class action suit. The city objected, claiming that each resident must sue separately per the California constitution. Today, the California Supreme Court ruled unanimously that the case can proceed as a class action.

The case now reverts back to the Superior Court, where presumably the amount of damages (that is, the amount that must be refunded to residents) must be calculated. Eventually, residents of Los Angeles will likely get some money back. This impacts other California cities, too, as several other cities have been sued for similar reasons in class actions.

Hat Tip: The Tax Foundation

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