Sugar, Sugar

Posted on September 19, 2010 by Russ

When I think of sugar, I think of the sweetener you put into a cup of coffee. Or perhaps this song:

But this is a tax blog, so we’re going to deal with something different…something very different. The Sugar House Lounge describes itself as “Denver’s most unique premium lounge and night club.” I’ll say that’s true.

It appears that the Sugar House Lounge was once a brothel, “where customers paid $300 for sex.” The former owner of the business, Scottie Ewing, sold the business back in 2005. Mr. Ewing received $150,000 plus a share of future revenues. Mr. Ewing then instructed the new owner for some time on how to run the business. That all seems normal (except for the prostitution).

I’m guessing, though, that Mr. Ewing left out to the new owners instructions on the necessity of filing tax returns. I say that because he didn’t. He did instruct the new owners on it being a good idea to use a “front company” to own the business.

In any case, last week Mr. Ewing pleaded guilty to one count of tax evasion in what appears to be a plea deal. (Both news stories emphasize the prostitution over the tax evasion.) He’ll be sentenced in late December.

News Stories: Here and Here

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One From the Police Blotter

Posted on September 19, 2010 by Russ

A rather obvious case of Bozo behavior showed up this past week. Let’s head to Newark, New Jersey. Leslie Wofford was a police communications officer with the Newark Police Department. Back in 2004 Officer Wofford wanted to increase her take-home pay, so she increased her withholding exemptions. Now, did she got to 4? Perhaps 7? Remember, I said Bozo behavior.

Officer Wofford elected 99 exemptions. That’s a lot of exemptions.

Officer Wofford did increase her pay, but at a cost. When she filed her tax return, she would owe a lot more income tax. But Officer Wofford had a solution for that, too. She didn’t file a tax return. This did not end up well for Officer Wofford.

When you file a Form W-4 with 10 or more exemptions, it’s sent to the IRS. Now there are legitimate reasons why you might have that many exemptions, and if you do there’s not a problem in claiming them. However, when you don’t and when you don’t file tax returns, trouble will likely happen. Add in repeating this for a few years (through 2008) and the trouble will likely lead to ClubFed. Officer Wofford pleaded guilty to tax evasion this week.

In any case, Officer Wofford’s behavior really was Bozo, and she’ll likely get a chance to find out what it’s like on the other side of the fence.

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Another Reason Not to be a Philadelphia Business

Posted on September 15, 2010 by Russ

I don’t think highly of California’s business climate. Still, things could be worse: I could be in Philadelphia. The City of Brotherly Love has sunk to a new low.

After going after penny-ante bloggers the city’s Revenue Department has been tasked with administering a new Tobacco Tax. All businesses with a business tax account were sent a form that must be completed by September 30th, or they’ll have a new Tobacco Tax Form filing requirement…and there’s a $5,000 penalty for not filing the form.

I have a couple of clients in Philadelphia (neither sell anything). I’ll be letting them know that they must complete this useless form and return it. It is, as noted by Kelly at Taxgirl.com, a waste of time and money.

Another reason that, on the whole, I’d rather not be in Philadelphia.

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“Hello, students. I defrauded the government.”

Posted on September 13, 2010 by Russ

Back in 2009, the Department of Justice indicted Jeff Greenstein and Charles Wilk, the former CEO and attorney for Quellos Group, LLC. The DOJ accused the pair of masterminding a tax scheme that turned capital gains into, well, dust.

The scheme included a phony investment fund on the Isle of Man. Investors with large gains could offset these gains with capital losses from the phony fund…for a price, of course. The scheme apparently allowed television producer Haim Saban (best known for bringing the Power Rangers to the United States) to avoid a large capital gain. The fund supposedly held over $9 billion in stock; however, it actually didn’t exist.

The DOJ noted that the individuals caught up in the scheme did not know it was fraudulent, and those individuals have voluntarily paid $240 million in back taxes. However, the DOJ believed that Mr. Greenstein and Mr. Wilk knew quite well of the phony nature of the fund. Also, the DOJ noted that a large portion of Quellos was legitimate (that portion was sold to BlackRock, Inc. in 2007).

And it appears that the DOJ was correct. The two pleaded guilty last week to tax fraud and will face at least two years and possibly as many as six when sentenced in January. They also agreed to pay $7 million in fines and $400,000 for the cost of prosecuting them.

There was one other item that the two men agreed to. They will each be addressing their graduate school giving a presentation on business ethics. Hopefully, this will not be a “how to” but will instead be a what not to do. Given that the head of criminal division of the US Attorney’s Office in Seattle plans on attending, I suspect that will be the case.

In the end, though, this case goes back to a recurring theme in this blog over the last several years. If it sounds too good to be true, it probably is. If someone tempts you with a foreign tax shelter or foreign investment fund, be very, very careful.

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New Math

Posted on September 8, 2010 by Russ

Hooray for new math,
New-hoo-hoo-math,
It won’t do you a bit of good to review math.
It’s so simple,
So very simple,
That only a child can do it!
–Tom Lehrer, “New Math”

That’s what I think of President Obama’s proposal for expensing of fixed assets. That was one part of his proposals to help the economy. Joe Kristan points out that it just speeds up depreciation from (say) five years to one year, but after five years the amount of income a company will have is identical. Of course, we’re also facing higher tax rates courtesy of the end of the Bush Tax Cuts…and that will wipe out any gains under this new plan.

But there’s a cost to this, too–and I’m not talking about whatever revenue ‘enhancements’ are proposed to balance the cost of this plan. Rather, many states will not conform to the new law (California is guaranteed not to). It will be yet another conformity issue for tax professionals and business owners to deal with.

If I were advising the President, I’d tell him there’s a simple fix to the economy. Just cut government spending and simplify the ridiculously complex Tax Code. Unfortunately, the chance of my advising the President is just about zero. Fortunately, that also appears to be the chance that this proposal becomes law.

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3% or 48%?

Posted on September 7, 2010 by Russ

What will the impact be of the elimination of the Bush Tax Cuts? Proponents of eliminating the cuts note that only 3% of small business owners will be impacted. Well, that’s true…but it’s anything but the whole story.

As Joe Kristan has noted, the real number is the amount of income that will be pushed up into higher tax brackets, and it’s a lot more than 3%. It’s 48%, as noted in a recent Wall Street Journal op-ed.

Joe has plenty more to say about it (here and here).

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Horse Racing About to be an Even Worse Bet in California

Posted on September 7, 2010 by Russ

I don’t think that I’m revealing a secret when I tell you that most gamblers lose. The casinos in Las Vegas and elsewhere weren’t built by having more people win than lose.

The horse racing industry has struggled in recent years. Ignoring the economics of the horses (I’m definitely not an expert on equine genetics and economics), race tracks take up a large space, and the glamorous sport of the 1920s and 1930s isn’t that glamorous to individuals right now. Sure, individual races like the Kentucky Derby still draw huge crowds and large purses and betting, but most race tracks are struggling to keep afloat.

And it’s far, far harder to win as one who bets on the horses. Let’s say that there are five horses running in a race, and each of them has an equal chance of winning (a 20% chance, or odds of 4 to 1). But that’s before the house cut, and the government’s cut.

Under a new California law that’s awaiting Governor Schwarzenegger’s signature, the government’s take on two-horse wagers (exactas and daily doubles) will increase from 20.68% to 22.68%; the take on three or more horse wagers will increase from 20.68% to 23.68%. While this won’t change the odds, the purse will be reduced by 2% or 3% (depending on the bet being made). Adding in the take from the house and the government, that five-horse race is really a six-horse race…and that’s before you have to pay income tax on your winnings. Yikes!

The feeling among the legislators is that they’re dealing with a captive audience, and they won’t notice that the purse on the $1.4 million Pick-Six is now $1.37 million…and they’re probably right. Still, this does emphasize that the house always wins…especially in horse racing.

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10 Months for Bozo Math

Posted on September 7, 2010 by Russ

Back in May I wrote about Sung Ho Choi. Mr. Choi was in the process of selling his business, AJ’s Green Dry Cleaners and Laundromat. He happened to show a prospective buyer the computerized sales records. Unfortunately for Mr. Choi, those quite accurate records showed sales that were $194,973 higher than on the tax returns for the business. It seems that Mr. Choi provided only the bank deposit records to his parents (who owned the business) and his accountant.

That prospective purchaser happened to be an undercover IRS investigator. Oops.

Mr. Choi was sentenced last week to ten months at ClubFed, and must also make restitution of $60,537 and pay a $5,000 fine. It would have been far, far easier to just provide accurate records…but that thought process rarely occurs to the Bozo contingent.

Posted in Tax Evasion | 1 Comment

At Least Here Our DMV Offices Aren’t Being Evicted…

Posted on September 6, 2010 by Russ

California certainly has a budget crisis. But it’s nothing compared to the crisis in Illinois, where the Land of Lincoln is a reported $4.3 billion behind in paying the bills. Meanwhile, the Libertyville Drivers Services Facility office may be closed permanently for failure to pay their bills.

Stephen Martin, whose family owns the Brookside shopping center on the 300 block of Peterson Road that houses the Secretary of State office, has sent a letter to state officials saying he wishes to terminate the lease agreement because of the long-overdue payments. Martin said the state owes him nearly $43,000 in back rent and expenses.

The news article in the Daily Herald notes that several state legislators’ officers were being closed for failure to pay the bills.

When I saw this story, I immediately thought of this:

It will be interesting to see how this turns out.

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The Annoying Ringtone Tax

Posted on September 5, 2010 by Russ

A friend sent me the following, asking me if I had heard about this new tax?

Any cell phone user having a ringtone other than Rrrring, Rrring, John Philip Sousa’s stirring “The Internal Revenue Service March,” or–in homage to Colbert–“La Marseillaise” would be subject to having their bank accounts confiscated, their cattle slaughtered, their lands put to the torch, and their rollover minutes forfeited.

Well, it’s not real. It’s from Christopher Buckley’s article in ForbesLife titled “But Enough About You IRS, Mon Amour.” It includes such gems as the Driving While Texting Tax, the Nonsmoking Tax, the 3-D Movie Glasses Tax, Aircraft Lavatory User Fees, and the Celebrity Tax. I’m actually annoyed that Mr. Buckley put in the Aircraft Lavatory User Fees; I would not be shocked to see that at some future date.

You can read Mr. Buckley’s article here.

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