Aloha, Professional Gamblers

Posted on January 4, 2011 by Russ

Aloha means a lot of different things. Per Wikipedia (and a conversation with a friend who was born in Hawaii) it means affection, love, peace, compassion, mercy, hello, and goodbye. I’ll focus on the latter two tonight.

There is no legal gambling in Hawaii; it’s one of two states with none, not even a lottery (the other, not surprisingly, is Utah). As you may remember, back in 2009 the state legislature passed a law that ended (for a short period) the ability to deduct gambling losses on state tax returns. That law was later reversed. Hawaii went on and then off my bad states for gamblers.

It’s back on the list, but only for professional gamblers.

Hawaii does not have a sales tax. Instead, there is the General Excise Tax:

Hawaii does not have a sales tax; instead, we have the general excise tax, which is assessed on all business activities. The tax rate is .15% for Insurance Commission, .50% for Wholesaling, Manufacturing, Producing, Wholesale Services, and Use Tax on Imports For Resale, and 4% for all others.

And it does apply to a professional gambler.

Hawaii is not a low tax state to begin with, so adding an extra 4% makes matters worse. Yes, it’s deductible on income tax returns for a professional, but when one considers the tax and the extra paperwork, maybe no tax Alaska sounds better in the end.

Here’s a complete list of the bad states for gamblers:

Connecticut*
Hawaii#
Illinois*
Indiana*
Massachusetts*
Michigan*
Minnesota#
Mississippi***
New Hampshire&
New York@
Ohio**
West Virginia*
Wisconsin*

Explanations:
* Gambling losses cannot be deducted as an itemized deduction on the state’s tax return.
** Ohio currently doesn’t allow gambling losses as an itemized deduction. Effective 1/1/2013, gambling losses will be allowed as an itemized deduction. Note that this change will likely not impact city and school district tax returns in Ohio.
***Mississippi only allows MS gambling losses as an itemized deduction for gambling losses
# Hawaii now does allow gambling losses as a deduction. However, Hawaii has an excise tax that impacts professional gamblers — 4% on gross receipts.
@ New York has a limitation on itemized deductions; if your AGI is over $500,000, you lose 50% of your itemized deductions. You begin to lose itemized deductions at an AGI of $100,000.
# Minnesota has a state AMT that impacts amateur gamblers, effectively eliminating the gambling loss deduction for amateurs.
& New Hampshire has a 10% tax on gambling. While it is currently not being widely enforced, it could be at any time. A literal reading of the law would make it applicable to all gambling.

Let’s just say that gamblers aren’t treated well by many states. It’s enough to want to escape, so here’s the best theme song from any television show ever:

Posted in Gambling, Hawaii | Comments Off on Aloha, Professional Gamblers

2010 Tax Offender of the Year

Posted on December 31, 2010 by Russ

Another year, and many, many worthy candidates for the 2010 Tax Offender of the Year. To be considered for the Tax Offender of the Year award, you must do more than cheat on your taxes. It has to be special; it really needs to be a Bozo-like action or actions.

Coming in second for the second straight year was the 111th Congress. I’m trying to think of something they did right, but I’m having trouble doing so. Yes, they passed an AMT patch, and yes, they finally addressed the Bush Tax Cuts, but there was no need to wait until December and cause at least one-third of individuals to be unable to file their tax returns until late February. As for the negative actions of the 111th, they are so numerous that I’m convinced this Congress will go down in history as one of the worst ever.

Coming in third was Wesley Snipes. Last year I wrote about how he showed remorse, and was now looking at paying his tax debts. However, in 2010 he went back to the ‘old’ Wesley Snipes, and began spouting off all sorts of vitriol. In any case, for the next 35 months he’ll be enjoying a stay at ClubFed.

Several years ago, some unknown taxpayer was audited. He had used a “pure trust” and was told by the seller of the trust that it magically allowed him to avoid paying income taxes. The IRS informed the unlucky taxpayer that such was not the case; the taxpayer paid his taxes and the file went into the bureaucracy.

It stayed there until the IRS discovered that these “pure trusts” were being used by multiple taxpayers. The IRS launched an investigation, and discovered they were being peddled by Tony and Micaela Dutson. The Dutsons were doing quite well selling these shams, especially since they, too, didn’t pay any income tax on their own profits. The Dutsons were selling these instruments from at least 2002; the IRS obtained an injunction in 2006 barring the Dutsons from further selling of these fraudulent trusts. (The Dutsons began their activities in Oregon, but moved to the Phoenix area in 2003.)

Meanwhile, the Oregon Department of Revenue notified the IRS that Mrs. Dutson, an attorney, had received money from the state for helping indigent clients; somehow she failed to file a state tax return. Mrs. Dutson resigned from the Oregon Bar in 2002.

Eventually, the IRS began criminal investigations of the Dutsons. And then the Bozo activities began. (Yes, trying to peddle sham trusts is a Bozo action, but that pales with respect to what the Dutsons then tried to do.)

First, they told their clients to file lawsuits against the IRS. They charged their clients $3,500 each for filing these frivolous lawsuits. The Dutsons neglected to tell their clients that these lawsuits were frivolous after the first of them was thrown out…for being frivolous.

Next, the Dutsons filed a lien against several IRS employees in California. Now, if you were going to file a baseless lien, would you file it for a reasonable amount or would you just shoot the moon and aim for a nice, Bozo sum of $1 Trillion ($1,000,000,000,000)? Yes, the Dutsons filed that $1 Trillion lien. Needless to say, that lien was soon thrown out as completely baseless.

Well, if you don’t succeed you should try, try again. And the Dutsons did file another lien, against one John Snow for only $108 Million. If you don’t remember the name John Snow, he was Secretary of the Treasury under President George W. Bush. That’s chutzpah, but the second lien soon met the same fate as the first.

The Dutsons also believed in filing tax returns…just not their own tax returns. They managed to file 30 bogus returns seeking $185 million in refunds.

Eventually, the Dutsons were accused and indicted on numerous tax charges. They were found guilty in June on nine counts, with the charges spanning ten years. As noted in the DOJ Press Release, the Dutsons made $1 million and paid no tax. Though the Dutsons were due to be sentenced in September, it appears there sentencing has been delayed. They are looking at lengthy terms at ClubFed plus restitution.

While I always hope that next year–2011–will bring a year free of Bozo Tax Offenders, it’s far more likely that I’ll again have several worthy candidates for the Tax Offender of the Year.

That’s a wrap on 2010. I wish everyone a Happy, Healthy, and Safe New Year.

Posted in Tax Fraud | Tagged | 1 Comment

Marchellettas Win on Appeal

Posted on December 31, 2010 by Russ

A commenter noted that an Appeals Court has reversed the convictions of Gerard Marchelletta Jr., Gerard Marchelletta, Sr., and Theresa Kottwitz. For those who don’t remember, I reported on the Marchellettas when they were convicted and sentenced for tax fraud in a case that featured strip clubs, personal expenses, and the Bahamas.

The commenter is mostly correct. The Appeals Court made two rulings. In the first, the Court upheld their convictions for defrauding the IRS, reversed an aiding and abetting charge for all three (with an order that the District Court–the trial court–enter a judgment of Acquittal), and remanded for a new trial on the other counts. The remand for the retrial was based on the denial of the defendants’ having a jury instruction noting that they relied on their accountant for suspect tax returns.

In the second ruling, the Court also remanded and ordered a retrial for all three defendants for defrauding the IRS. The Court felt that, “Even if it was not the only and not the most likely explanation of events leading to the guilty verdicts on Count One, an evidentiary basis existed for conviction under Count One that could have involved Defendants, in fact, relying on the advice of their accountant.”

The defendants will probably be retried on these counts, and I’ll report on the retrial when it occurs in 2011.

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Russ Fails Reading Comprehension: FTB Deadline Is April 18th

Posted on December 29, 2010 by Russ

My mother is a writer. My father was a writer. I’m the co-author of three books. My whole family are voracious readers. Yet I failed reading comprehension 101 when I looked at a set of instructions for a California tax form.

So I read the following: “You must pay 100% of the amount you owe by April 15, 2011, to avoid interest and underpayment penalties.” Well, I thought the FTB didn’t realize that the deadline for federal tax returns was three days later. Woe on me, as I might have been wiser if I read the whole paragraph:

You must pay 100% of the amount you owe by April 15, 2011, to avoid interest and underpayment penalties. Due to the federal Emancipation Day holiday on April 15, 2011, tax returns and payments received on April 18, 2011, will be considered timely. [Emphasis Added.]

My thanks to Susan Maples of the FTB for letting me know of my error.

Posted in California | 2 Comments

William Murray Follow-Up

Posted on December 26, 2010 by Russ

For those of you who may remember, just about one year ago I wrote about William Murray. Mr. Murray was the proprietor of a tax blog called April15.com. He was a CPA in Sacramento who had a large practice.

He also had the practice of embezzling money from his clients. He had clients pay taxes through him rather than directly to the IRS (and other tax agencies). Those funds ended up going towards a lavish lifestyle.

Mr. Murray pleaded guilty in March to mail fraud (two counts) and tax evasion. He was sentenced in May to 19 1/2 years at ClubFed; he must also make restitution of $10,375,118.31. That amount likely will never be paid back; the US Attorney could find only $130,000 of assets. Given that Mr. Murray was 56 when sentenced, this may also be effectively a life sentence.

“Mr. Murray intentionally jeopardized the financial well-being of his clients. He told them he would pay their taxes and invest their savings. Instead he spent millions on lavish gifts and a luxurious lifestyle,” said Scott O’Briant, Special Agent In Charge of the IRS Criminal Investigation on Mr. Murray.

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Three Extra Days: Federal Tax Day Will be April 18, 2011

Posted on December 25, 2010 by Russ

When Congress wrote the law giving the deadline for taxes, they stated that it would be the 15th day of the fourth month following year-end, unless that day is a holiday in the District of Columbia. Back when that law was written, holidays in the District matched federal holidays. However, that’s no longer the case.

A friend reminded me that District of Columbia Emancipation Day is April 16th, but that’s a Saturday this year. Per DC law, when a holiday falls on a Saturday, it’s celebrated on the previous Friday. Thus, April 15th is a holiday in the District of Columbia. That means taxes will be due on Monday, April 18, 2011 rather than Friday, April 15th.

When this last occurred, every state with an April 15th deadline adjusted their deadline. California tax forms state that they are due on April 18, 2011, so we will have to see if the Franchise Tax Board (and other state and local agencies will adjust their deadlines. They probably will to avoid confusion, but I’ll keep you updated.

[Update: I erred when I originally posted this; California’s income tax deadline is April 18th. See my new post here.]

Personally, I have mixed feelings over the delay. On the positive side, it means that I have three extra days to get through the returns. On the negative side, it means another weekend where I’ll be working every waking hour.

Posted in IRS | Tagged | 4 Comments

Many Tax Returns Won’t be Able to be Filed Until Late February

Posted on December 25, 2010 by Russ

Do you itemize your deductions? Do you take the Tuition and Fees Deduction? If you take those are several other deductions and credits you will not be able to file your tax return until mid to late February.

Why? Because Congress waited until the last minute to decide what to do with the Bush Tax Cuts, and the IRS computers have to be reprogrammed. As this IRS press release states, if you’re one of those impacted–and one-third of all taxpayers will be–you will need to wait to file your return.

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Raising Taxes Can be Hazardous to Being Mayor

Posted on December 24, 2010 by Russ

The City of Miami has had financial difficulties, and faced a large budget deficit. The economy in South Florida isn’t doing well, so raising taxes would be a last resort, right?

Of course not–it’s the first choice. Mayor Carlos Alvarez proposed a 14% property tax increase, and Dade County Commissioners approved the increase (Miami and Dade County share government). Voters were not amused.

Bankrolled by automobile dealer Norman Braman, citizens forged a recall effort. This terse announcement in the New York Times notes that there will be a recall vote early in 2011. People aren’t happy about tax increases, and that’s especially true when the economy is down.

The real villain in South Florida (and in California) are wages for public employees. I’ve said this before, but it bears repeating. When I was growing up, public employees didn’t make a lot of money but did have generous benefits and pensions (pension relative to their salaries). Today, many (most?) public employees make better salaries than comparable employees in private industries, have better pension, and better benefits. That’s not sustainable, and there’s no way this can continue–in South Florida or in California.

Jerry Brown is basically saying the same message as Mayor Alvarez did: Either raise taxes or I’ll have to cut what the state (of California) does. There’s an alternate solution, but that’s not what his constituency wants, and that’s to cut pay and benefits for state employees.

Meanwhile, Miami also has possible corruption problems. Mayor Alvarez may not be around to see the end of this investigation, though.

Posted in Florida, Legislation | Comments Off on Raising Taxes Can be Hazardous to Being Mayor

No Tranquility Here

Posted on December 21, 2010 by Russ

On a rainy night here in Irvine (but a happy night for Chicago Bears fans) I’m quite tranquil. However, somehow I missed a news story last week which is anything but tranquil.

John Gauruder of Trementon, Utah was a chiropractor. Indeed, he was a very successful chiropractor. Somehow, though, he failed to pay a penny in tax from 1995 to 2001. The trouble was he should have paid over $200,000 in tax for those years. What did Mr. Gauruder do?

Well, he transferred assets to The Order of Tranquility. That’s described as, “purportedly a religious organization operated by Rulon DeYoung.” Well, Mr. DeYoung is enjoying 36 months at ClubFed for, as the Department of Justice notes, “four counts of tax evasion and one count of corrupt interference with the due administration of the internal revenue laws.” But I digress….

Among the assets that Mr. Gauruder had transferred was his home…but he continued to live in it. He transferred funds into a bank account for The Order of Tranquility. The IRS showed a total tax loss of over $1.2 million, and that buys a lot of tranquility.

Mr. Gauruder had earlier been convicted of one count of tax evasion. He was sentenced last week to 42 months at ClubFed and must also make restitution of $408,685. Our usual line about tax evasion applies here: It’s a whole lot easier to just pay your tax in the first place…but if everyone did that I wouldn’t get to write these stories.

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Quellos Figure Gives Lecture; It Was a “House of Cards”

Posted on December 20, 2010 by Russ

There’s a rule that I’ve stated over and over in this blog: If it sounds too good to be true, it probably is. If you hear of an investment that pays 30% when the typical investment is paying 3%, there’s a problem. If you hear of a method of turning your lead into gold, it’s time to look again. And if someone tells you he has a “foolproof” method of turning your large capital gain into a non-event for taxes, it’s time to talk to someone else.

The last item is what got Quellos into trouble. There were parts of the firm that were very legitimate (those are now part of Black Rock, Inc.). However, their tax shelter business probably should have been renamed their tax fraud business because that’s what it was.

Eventually, the IRS and Department of Justice got word of the tax shelter tax fraud. With a huge loss to the government, two individuals–Jeff Greenstein and Charles Wilk–pleaded guilty to tax fraud. Besides agreeing to pay $7 million in fines, the two also agreed to give talks at their alma maters on tax fraud.

Mr. Greenstein spoke to the University of Washington business school last week. And the talk made people wonder how in the world people are so gullible. Bill Resler, who teaches tax research, is quoted by the Seattle Times, “The nature of the tax shelter was ridiculous; and even though they’d only been in graduate school for six weeks, they could tell that it stunk,” says Resler. “They could see that this so-called sophisticated tax shelter was a house of cards.”

Mr. Greenstein is the former CEO of Quellos; Mr. Wilk, who was a tax attorney for Quellos, won’t be talking to his alma mater, New York University. That school declined to have Mr. Wilk speak.

In any case, I was glad to see Mr. Resler noting that my truism applies in the real world: If it sounds too good to be true, it probably is. The sniff test is applied in the real world, too.

Posted in Tax Evasion | Comments Off on Quellos Figure Gives Lecture; It Was a “House of Cards”