When Winning by 0.5% Is a Mandate

Posted on November 8, 2010 by Russ

Illinois is broke. While other states (such as California) have higher budget deficits, on a per capita basis Illinois leads the way. Illinois has a $13 billion deficit and some vendors haven’t been paid in nearly seven months.

In last week’s election, Democratic Governor Pat Quinn beat Republican Bill Brady by less than 20,000 votes (out of over 3.6 million cast). Mr. Quinn calls that a mandate to increase Illinois income tax rate by 1% (from 3% to 4%). We’ll see if the state legislature in Springfield agrees with Mr. Quinn or not. One way or another, it’s a mess in Illinois.

You may have noticed that its the “Blue” states which seem to have the biggest problems with state budgets. This includes high tax California and low tax Illinois. Perhaps both states are spending beyond their means though I suspect the public employee unions think that the spending is nowhere near their needs.

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Wellek Pleads Guilty, Admits Tax Evasions

Posted on November 8, 2010 by Russ

In October I noted that Michael Wellek, the owner of three strip clubs in the Chicago area, would soon plead guilty to tax evasion. He did so last week.

Mr. Wellek admitted he didn’t file a tax return for years where he made more than $2 million. Of course, he made that in cash, and we all know that cash isn’t taxable unless you get caught, right? Well, no, all income is taxable, even cash.

Mr. Wellek also admitted he paid $2.3 million in cash to employees of his strip clubs and didn’t issue reports (either 1099s or W-2s). The report notes that Mr. Wellek plans on cooperating with the IRS. If you were one of his employees, I hope you included that cash on your tax return or you might be getting a knock on your door from the IRS.

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Kritt Wins One

Posted on November 8, 2010 by Russ

Earlier this year I reported on Attorney Ira Kritt, and that he has been charged in a tax fraud case in South Dakota. I had noted that Mr. Kritt had also been charged in a West Virginia case. Mr. Kritt, and the West Virginia doctor accused of tax evasion in that case, were acquitted on all charges.

I’ll let you know how Mr. Kritt fares in South Dakota.

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Daylight Savings Time Ends

Posted on November 6, 2010 by Russ

It’s time to turn your clocks back an hour. Late tonight (2 am), clocks will be reset to end daylight savings time and return to standard time. So enjoy your extra hour of sleep.

Posted in Taxable Talk | 1 Comment

If I Win a Free Trip to the Bahamas, Do I Have to Pay Tax On It?

Posted on November 5, 2010 by Russ

About ten days ago, I noticed that a poker website was running a contest. Submit a fun poker game that can be run as a poker tournament; if your game is chosen we’ll send you the Bahamas. There were over 100 submissions, and eight were chosen to be voted on by listeners of the Two Plus Two Pokercast. My submission is one of the eight up for selection.

(If you would like to vote, you can do so by going here. Choose Russ Fox – Binglaha and you will have voted to send me to the Bahamas. If you are not registered on Two Plus Two, you will first need to register; you can do so by going to this link.)

So a friend asks me, “Russ, if you win this trip will you pay income tax on it?” The answer is easy: Yes, I will owe income tax on the trip.

The US Tax Code is very clear on this: All income is taxable unless Congress exempts it. Congress has not exempted sweepstakes and contests. It does not matter whether you receive a Form 1099-MISC or not; if you win a contest you are supposed to declare it as Other Income (Form 1040, Line 21) based on the fair market value of the prize you won.

If you don’t pay the tax, you’re committing tax evasion. Richard Hatch, the first winner of Survivor famously won $1 million and decided to ignore the 1099-MISC and advice from several accountants. After 51 months at ClubFed, he still proclaims that he wasn’t guilty. Unfortunately for Mr. Hatch, there were only 300 million witnesses….

As for myself, if I’m lucky enough to win the prize (with a value somewhere around $2000), it will go on my tax return. As for why I decided to try to win the trip, the week of the event in the Bahamas is the same time as a meeting of accountants in Sacramento. Let’s see, 85 F, fun in the sun, and beautiful people in the Bahamas versus 37 F, the Tule Fog, and fun accountants in Sacramento. Which would you choose?

Posted in Gambling, Taxable Talk | Tagged | 1 Comment

We Want It All But Don’t Tax Us To Get It

Posted on November 3, 2010 by Russ

Californians demonstrated their usual inimitable politics yesterday. Democrats won nearly every statewide office. The next Governor is Jerry Brown. Mr. Brown promised that there would be no tax increases without a vote of the people. (Barbara Boxer was reelected to the Senate.) How Mr. Brown assuages his union supporters and doesn’t make the drastic cuts that just have to happen without tax increases will be the story of next summer.

It will be easier for Democrats to pass a budget. They no longer need Republican votes as Proposition 25 passed (a majority can now enact a budget rather than a 2/3 vote). However, Californians also passed Proposition 26; most “user fees” will need a 2/3 vote to pass. Californians rejected Proposition 21, so there won’t be a tax to support state parks. Proposition 24 failed, so we’ll have conformity between federal and California law for some business NOLs and multi-state issues.

Voters don’t like gerrymandering, and they supported Proposition 20 (letting a non-partisan commission draw Congressional districts) and rejected Proposition 27 (which would have disbanded the non-partisan commission). Proposition 19, which would have legalized marijuana, failed; it’s almost certain had it passed that it would have been thrown out by the courts as being in violation of federal law.

Proposition 22 passed. The state can’t raid transportation funds and other local funds in the future.

I’m disappointed that Proposition 23 (the proposed suspension of the global warming/greenhouse gas measure) failed. California’s attempt to change the laws of thermodynamics is doomed to failure, and a lot of good money will be wasted here.

Overall, Governor-Elect Brown is looking at a Hobson’s choice for his first budget. He can cut funding to his supporters (public employee unions) or he can renege on his promise regarding tax increases. When the state finance office notes the likely $30 billion deficit, it will be interesting to see if he offends his supporters, the voters, or both.

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We Won’t Have Jim Traficant to Kick Around

Posted on November 3, 2010 by Russ

Well, Election Day has come and gone. Congressional races generally went to Republicans, and the GOP will be the majority party in the House next January. That means that John Boehner of Ohio will be the next Speaker.

Mr. Boehner had no trouble winning his district (he got over 65% of the vote). However, Jim Traficant will not be heading back to Congress. Mr. Traficant, who was convicted on tax and corruption charges a few years ago, lost his bid to be elected to Congress. He received just 16% of the vote in Ohio’s 17th District. The current Congressman, Tim Ryan, was reelected with nearly 54% of the vote.

It would have been fun for tax bloggers to have Mr. Traficant in Congress. Fortunately, Ohioans apparently were sane last night.

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You Will eFile in New York

Posted on October 31, 2010 by Russ

I have a few clients in New York (about 20). I have one client who strongly dislikes efiling. It appears he won’t have a choice for his 2010 tax return if I prepare his return. New York has implemented mandatory efiling for most tax professionals.

New York has removed the option of client’s opting out of efiling, and they’ve rescinded their form that allowed for this (Form TR-800 no longer exists). And most tax professionals will fall under the requirement that mandates efiling. If you prepared 100 or more returns for any jurisdiction in 2009 and prepare one or more New York returns for 2010 using tax software, you fall under this mandate for the 2010 tax year. Alternatively, if you fell under the New York efile rules in a prior year the mandate applies to you.

While Robert Flach won’t fall under this mandate (he doesn’t use tax software), almost every other tax professional will. And I don’t like it one bit. It’s not that I’m against efiling (I’m not, and believe it’s the best way of filing returns in most cases) there are situations where efiling is not the best choice. These usually involve complex returns where I want to include additional documentation with the return. (A few states allow pdf files to be submitted with an efiled tax return. It’s unclear whether this will be available for New York returns in 2010.)

Finally, it’s the client that should have the final say in this matter. Take my client who dislikes efiling. If he continues to utilize my services, I’m required to efile his returns. I could lose his business over this mandate and there’s nothing I can do about it (except violating the law). It may be that this law overreaches and is, in some way, unconstitutional. That said, most of my clients are outside of New York and the loss of one client won’t be a big deal for me. Still, possibly losing a client for this reason really irks me.

Posted in New York | 7 Comments

Taxes Are For The Other Party

Posted on October 30, 2010 by Russ

The Democratic National Committee has a private club (the National Democratic Club) in Washington, DC. I guess that’s not surprising–with so many politicians in Washington, a club makes sense. But even political parties (and their clubs) must pay their taxes.

In what must be described as an “Oops” moment (or moments), the DNC and the National Democratic Club missed paying their property taxes. Well, mistakes happen. But it turns out that this mistake repeated, and repeated: Pajamas Media reports that their have been 16 missed payments during the last seven years; this has caused fines, interest, and penalties that exceed $115,000.

Let’s cue Leona Helmsley: “Only the little people pay taxes.”

Posted in Property Taxes | 1 Comment

Proposition 26: Fees Require 2/3 Vote

Posted on October 29, 2010 by Russ

Proposition 26 on the California ballot would require many state and local fees to be approved by a 2/3 vote. Proponents of the measure argue that there are numerous hidden fees (taxes, in their view) that have been approved by the legislature and local governments and treats fees like taxes. Opponents argue that the measure would harm the environment.

The California Supreme Court has ruled that regulatory fees aren’t taxes. They may not be in name, but in effect they are. Still, the legislature does need some flexibility and this would definitely impact that.

No matter where you stand remember to vote on November 2nd.

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