California Cap and Tax Hits a Snag

Posted on February 7, 2011 by Russ

Last November, California voters refused to overturn AB32. That misguided legislation imposed climate change as gospel and gave the California Air Resources Board a mandate to stop ‘global warming.’ Coincidentally, last fall CARB implemented a ‘cap and trade’ system for the state (what I call ‘cap and tax’).

But in what can only be described as schadenfreude, a judge in San Francisco made a tentative ruling that the plan violates California’s environmental laws. The judge stated that CARB didn’t investigate alternatives and did not comply with existing environmental law.

Unfortunately, the underlying law–one that stands to drive even more business out of the Bronze Golden State–is still on the books. However, it likely will be a couple of years before CARB will be able to implement anything on this bad piece of legislation.

Posted in California | Tagged , | Comments Off on California Cap and Tax Hits a Snag

California Disclosure Obligations

Posted on February 5, 2011 by Russ

There are rules regarding reporting a reportable transaction (including a listed transaction) to the IRS. The Franchise Tax Board wants to get the word out that there are rules about reporting such items to the FTB, too. This impacts both taxpayers involved in such transactions and material advisors.

For a California taxpayer, the FTB reminds us,

The general rule for California purposes is that Form 8886 must be attached to the taxpayer’s original or amended tax return for each taxable year for which the taxpayer participates in a reportable transaction, including listed transactions. Additionally, only for Form 8886s filed for the initial year of participation, the taxpayer must also mail a copy of that disclosure to FTB’s Abusive Tax Shelter Unit (ATSU) at the address shown below. It does not matter whether the taxpayer files a paper return or e-files. California listed transactions entered into prior to September 2, 2003, are not required to be disclosed unless the transaction meets one of the other categories of reportable transactions defined under Treasury Regulation 1.6011-4(b).

Full details on this are available on the FTB’s website.

Posted in California | Tagged | Comments Off on California Disclosure Obligations

How to be a Receptionist Without Trying at All

Posted on February 4, 2011 by Russ

I’m happy doing what I do. As my brother says, someone’s got to enjoy preparing tax returns. One thing that I’m not, though, is a receptionist.

Neither is one Bakersfield woman. However, Bakersfield tax preparer Bertha Vaughn listed her as a day care owner receptionist on her 2006 return. As she told Bakersfield Now, the unlucky Bakersfield woman had never been either a day care owner or a receptionist.

It seems that Ms. Vaughn allegedly wanted her clients to have refunds. The trouble is, you can’t make things up on tax returns. Telling the IRS that a client owns a business and is eligible for various deductions when they aren’t is a felony.

It took some time, but apparently the IRS caught on to what was happening. Ms. Vaughn was indicted on 29 counts of aiding and assisting in preparation of false tax returns to the IRS. Ms. Vaughn is looking at a stay in ClubFed and possible restitution if found guilty.

The alleged offenses occurred in California, a state that already regulates tax professionals. Unfortunately, if you want to be a bad preparer there’s not much to stop you from doing so…until you get caught.

If you go to a tax professional, make sure you review your return. If you see something on the return you don’t understand, ask your professional. He or she should be happy to explain why you qualify for a tax deduction or credit. And if you see from your tax return that you’ve suddenly become a receptionist in a day care facility (but you’re not), it’s time to run, not walk, to a different preparer.

Posted in California, IRS, Tax Preparation | Tagged | Comments Off on How to be a Receptionist Without Trying at All

ObamaCare Unconstitutional; Impact on Taxes?

Posted on February 1, 2011 by Russ

As most of you know, a second federal court judge has ruled the Health Care Law that passed last year is unconstitutional. Judge Rodger Vinson didn’t just rule that the mandate that health insurance must be bought is stricken; rather, he struck down the entire law. While the Obama Administration is publicly stating the law will continue to be enforced (and, in theory, either Judge Vinson or the 11th Circuit Court of Appeals could issue a stay to Judge Vinson’s ruling), as of now the law is void.

What next for the tanning tax? Or the numerous other tax provisions in the legislation that impact individuals? How about the business tax provisions?

I’m not an attorney, but the Volokh Conspiracy has some good posts up on this, though they aren’t really looking at the tax consequences (but do look at the constitutional issues in depth). As I was writing this, I noticed that Joe Kristan was asking the same questions.

My best guess is that the 11th Circuit will stay the decision until they review it. And it sure looks like this case is bound for the Supreme Court (perhaps in 2012 or 2013).

So if you’re a tanning salon should you stop collecting the 10% excise tax on tanning? I’ll probably have an answer in a couple of weeks but that answer could easily change between now and 2013.

Posted in Legislation | Tagged , | 2 Comments

Carpet Owner Gets a Year at ClubFed

Posted on February 1, 2011 by Russ

Leif Rozin is a former owner of Buddy’s Carpet in Cincinnati. Back in 2008 he was convicted on tax fraud charges. It took a while but he was finally sentenced last Friday; he received one year at ClubFed and must make restitution of $380,000 in tax.

The fraud scheme involved sham insurance policies purchased in the US Virgin Islands. The government isn’t appreciative of sham anythings used as tax deductions. The “Buddy” of Buddy’s Carpet & Flooring, Burton B. “Buddy” Kallick, died in 2007 before the case came to trial.

Posted in Ohio, Tax Fraud | Comments Off on Carpet Owner Gets a Year at ClubFed

Why EFTPS Is Necessary for Companies that Outsource their Payroll

Posted on January 26, 2011 by Russ

An executive at a San Antonio outsourcing company took the money and ran. “An employee leasing services executive was arrested Monday in one of San Antonio’s largest-ever tax fraud cases, accused of keeping $66 million in payroll taxes that should have gone to the IRS.”

As Joe Kristan correctly notes, with EFTPS you can verify that your payroll deposits are being made. Trust and verify….hmm, appropriate on the night of the State of the Union address.

Posted in Payroll | Comments Off on Why EFTPS Is Necessary for Companies that Outsource their Payroll

A Galloping Win for Gamblers in Tax Court (With a Loss on the Side)

Posted on January 25, 2011 by Russ

The Tax Court looked today at the case of a professional gambler who lost money both on his wagers and his expenses in 2001. The petitioner tried to deduct his gambling losses in excess of his wins and his business expenses.

Section 165(d) of the Internal Revenue Code limits gambling losses to the amount of winnings. The Tax Court held in Tschetschot v. Commissioner that Section 165(d) holds for both amateur and professional gamblers. The Tax Court hasn’t changed its view.

…[E]ven though the gambling losses of a professional gambler fall under both the section 162(a) allowance of deductions for trade or business expenses and the section 165(d) limitation on the deduction of losses from wagering, it is a well-settled principle that section 165(d), as the more specific statute, trumps the more general provisions of section 162(a). The former provision operates as a limitation on deductions otherwise allowable under the latter.

The Tax Court in the decision gives the history of the inclusion of Section 165(d) into the Tax Code.

The Tax Court then looked at whether or not the petitioner could deduct his business expenses. In Offutt v. Commissioner (16 T.C. 1214, 1215 (1951)), the Tax Court considered business expenses like gambling losses: They could only be deducted to the extent of gambling winnings.

The Tax Court rejected Offutt. The Court looked at what “gains from wagering transactions” means. It first examined Boyd v. United States (762 F.2d 1369 (9th Cir. 1985) at 1373):

The IRS argues that the phrase means gain from a wagering transaction entered into by the taxpayer. Boyd argues that it means gain flowing to the taxpayer from a wagering transaction, whether as a participant or as the house taking a table rental. While there is no controlling authority, the IRS position is more persuasive.

In Williams v. Commissioner (T.C. Memo. 1980-494), the Court held that a blackjack player’s toke bets are not gambling wagers.

In sum, to the extent this Court and the Courts of Appeals have considered the question, they have generally held that “gains” from “wagering transactions” within the meaning of section 165(d) must be the actual product of wagers entered by the taxpayer. Generally, it is not sufficient that the gain arise merely in connection with the conduct of wagering activities; the gain must be the direct result of a wager entered by the taxpayer…

The narrower interpretation that has been applied to gains from wagering transactions, requiring that they be the result of a wager entered by the taxpayer, more closely reflects the ordinary meaning of the words used in the statute, which is the applicable standard.

The Tax Court then looked at a case dealing with the expenses of an illegal bookmaker, Commissioner v. Sullivan, 356 U.S. 27 (1958). In that case, the Court (and this case went to the US Supreme Court) had to determine whether a bookmaker could deduct his rent.

The amounts paid as wages to employees and to the landlord as rent are ‘ordinary and necessary expenses’ in the accepted meaning of the words. That is enough to permit the deduction, unless it is clear that the allowance is a device to avoid the consequence of violations of a law * * * or otherwise contravenes the federal policy expressed in a statute or regulation * * * . [Id. at 29; emphasis added.]

The Court went back to Boyd and noted that the Appeals Court implied that business expenses are separate from poker losses:

In his claim, Boyd stated that he “incurred losses from participating in the [casino] poker games” and that “[t]his expense” was deductible under section 162(a). “This expense” plainly refers to the poker losses, and nowhere does the claim mention tipping or take-off fees. Taken at its face value, Boyd’s claim directed the IRS’ attention to losses incurred betting on poker hands, and nothing else. Moreover, the wording of Boyd’s alternative theory strengthens this impression. It refers to section 165(d), which provides that wagering losses may be deducted only up to the amount of wagering gains, reinforcing by implication the claim’s express statement that the losses for which deduction was sought were actual wagering losses, not other unspecified expenses incidental to gambling which would not be subject to the section 165(d) deduction limit. [Id.; fn. ref. omitted; emphasis added.]

The Tax Court then noted that the Commissioner would no longer follow Offutt and that the IRS Chief Counsel Attorney Memorandum AM2008-013 strongly suggested that deducting expenses (that are ordinary and necessary) should be allowed. The Court, thus, holds that the petitioner can deduct his ordinary and necessary business expenses.

This is a big victory for professional gamblers. First, this is a full decision of the Tax Court, so it is serves as precedent. (All of the Tax Court judges agreed with this portion of the opinion.) Second, given that gamblers can have losses, you can now take a Net Operating Loss based on those expenses without much fear of reprisal from the IRS. (While the IRS could appeal the decision, given that Chief Counsel Attorney Memorandum it is unlikely they will do so.)

Case: Mayo v. Commissioner, 136 T.C. No. 4

Posted in Gambling | Comments Off on A Galloping Win for Gamblers in Tax Court (With a Loss on the Side)

And I Thought Denmark Had High Taxes for Gamblers…

Posted on January 25, 2011 by Russ

The name “Isildur” may mean nothing to you. Perhaps you remember Isildur as a character in J.R.R. Tolkien’s classic The Lord of the Rings. For those who follow online poker, the name Isildur means screenname Isildur1.

Isildur1 played high-stakes poker online, and I mean really, really, high stakes. He won and lost millions of dollars. At the poker tournament I recently attended in the Bahamas, the man behind Isildur1 was revealed: Viktor Blom, a 20-year old poker professional from Sweden.

Mr. Blom signed a contract with PokerStars, the world’s largest online poker site. Mr. Blom has also apparently moved to the United Kingdom, a player (and tax friendly) environment for a poker player. However, his prior online poker play was on PokerStars’ rival, Full Tilt Poker, while he lived in Sweden.

In the story in Sweden’s The Local, Mr. Blom states that he turned $2,000 into $2,000,000 in just three weeks. He played high-stakes matches with well known professional players, winning and losing millions of dollars. And therein lies the problem.

Under Swedish law, you can play online poker on the Swedish site Svenska Spel or on sites in the European Union and not owe income tax. However, if you play on a site outside of the E.U., you owe tax based on every winning hand of poker. And the location of Full Tilt might (or might not) be within the E.U.

Consider a typical session of poker. You might win a hand for $5, fold the next hand, lose a hand for $5, etc. In an hour you might have won and lost $100 and be even overall. Mr. Blom played several screens (hands) at the same time, at very high stakes, so when he won and lost millions his total winnings might have been in the hundreds of millions of dollars…and that’s what Swedish tax agency Skatteverket may want to tax him on.

According to PokerNewsDaily, “Dag Hardyson from the Swedish Tax Authority told Dagens Industri that he believed Full Tilt Poker was considered to be outside of the European Union; therefore, Blom would have to pay taxes on his gambling.” And the amount of the tax due? Just $149 million. As to Mr. Blom’s career winnings from poker, let’s just say that they are less than 1% of that amount.

Erik Boman, a spokesman for Skatteverket, told the Swedish newspaper Dagens Nyheter, “Internet poker is something we’re looking into and I know this poker player, but I can’t comment on whether we’ve opened a case.”

So if you’re an aspiring poker player from Sweden, I’d check with Skatteverket to see if the online poker site you’re playing on is tax-free. If it isn’t, London has never looked so good.

Posted in Gambling | Tagged | Comments Off on And I Thought Denmark Had High Taxes for Gamblers…

Same Old Song and Dance

Posted on January 24, 2011 by Russ

Let’s assume you are the President of Acme, a business that makes all sorts of things. Your major customer suffers a financial reversal, and your sales are going to go down by 40%. Do you continue to spend at the same rate as before, or do you cut spending (likely cutting salaries across your company, too)? Of course you cut back — you can’t print money.

Let’s move to California. Citizens of the Bronze Golden State have been suffering financially for the last several years. That’s caused a marked decrease in revenue. Meanwhile, while some spending cut have been made, the sacred cow of personnel (and benefits thereto) have only slightly been touched. A quick perusal of benefits available to public employees in California show that almost all participate in defined benefit pension plans (rather than 401(k) type plans that those in private industry partake in).

Meanwhile, the state has one of the worst business climates in the country. If I can expand in (say) Nevada or Arizona rather than California, and that will help my bottom line, why won’t I? Senate President Pro Tem Darrell Steinberg says he’s looking to cut duplicative regulations (which is good), but it’s only a starting step. The reality is that deep and substantive cuts need to be made in the bureaucracy: Entire organizations should be eliminated or merged together to cut costs and help business.

Governor Jerry Brown, to his credit, is proposing eliminating redevelopment agencies throughout the state. That’s a good starting point. (I should mention that I expect lawsuits to be filed, and it’s likely the battle for cutting these agencies will take years. Still, you have to start somewhere.) State agencies should also be on the list. An obvious starting point is to merge the Board of Equalization (the agency manages all California taxes except income taxes and the Franchise Tax Board (the FTB manages income taxes). Sure, that would take legislation (possibly even a state constitutional amendment), but there’s no reason for two agencies.

Here’s a list of California state agencies. I challenge you to read through the entire list and not find ten agencies that should be either eliminated or merged into each other. (Yes, I realize that somewhere state law mandated these agencies come into existence. Well, nothing prevents the legislature from writing a new law (or constitutional amendment) to end these agencies.)

Here’s my list:

1. Board of Equalization / Franchise Tax Board (Merge)
2. Binational Border Health, California Office of (Elimination)
3. Boating and Waterways, California Dept. of / Boating and Waterways Commission, California (Merge)
4. Coastal Commission, California / Coastal Conservancy, State (Merge)
5. Consumer Affairs, Dept. of / Consumer Services Agency, State and (Merge)
6. Cool California (Elimination)
7. Corrections & Rehabilitation, Dept. of / Corrections Standards Authority (Merge)
8. Cyber Safety for Children (Elimination)
9. Apprenticeship Council / Apprenticeship Standards, Division of (Merge)
10. Arts Council (Elimination)

Government should be limited, and it should be focused. Yes, it’s a good idea for cyber safety for children, but that’s a parental responsibility not a responsibility for the state. I like museums, but it’s not the responsibility of the state to promote arts. Under the US constitution, the federal government is responsible for commerce with foreign governments, not individual states. It might be nice to have binational border health, but that’s clearly a federal responsibility. Cool California is an agency set up to battle Global Warming. Ignoring the fact that the theory of global warming is dubious, the laws of thermodynamics can’t be changed by a state; the idea that California can change the world’s climate is ridiculous. Finally, the merges within state organizations should be obvious.

And I only looked at the agencies in the A-C tab (and I likely missed some state agencies that should be eliminated or merged in the A-C tab). There are plenty of others in D-G, H-L, M-R, and S-Z.

I realize that this will be painful for California and for those who work are at these agencies. However, the residents of California have been the ones impacted by financial issues while the state blithely marches on using mainly accounting gimmicks. If Governor Brown and the legislature start proposing massive merging and elimination of state agencies, then I’ll know we’re no longer looking at the same old song and dance.

That said, I doubt real change is forthcoming.

Posted in California | 1 Comment

Online Gambling Addresses (Updated for 2011)

Posted on January 21, 2011 by Russ

The IRS and Department of the Treasury stated in January 2009 that online gambling websites are considered to be foreign financial accounts. If you have $10,000 or more in one or more foreign bank and/or financial accounts, you must report them on Form TD F 90-22.1.

There’s a problem, though. Most of these entities don’t broadcast their addresses. Some individuals sent email inquiries to one of these gambling sites and received politely worded responses (or not so politely worded) that said that it’s none of your business.

Well, not fully completing the Form TD F 90-22.1 can subject you to a substantial penalty. I’ve been compiling a list of the addresses of the online gambling sites. It’s presented below.

Note: This list is presented for informational purposes only. It is believed accurate as of January 1, 2011. However, I do not take responsibility for your use of this list or for the accuracy of any of the addresses presented on the list.

The list is in the cut text below.

If anyone has additions to the list feel free to email them to me.

Posted in Gambling | 4 Comments