The Sky Is Not Falling (Yet)

Posted on June 2, 2010 by Russ

For online gamblers, yesterday was the day that banking regulations relating to the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006 went into effect. The legislation itself passed in 2006 (it was attached to the Safe Ports Act). Kay Bell at her excellent blog, Don’t Mess With Taxes, stated, “Attention online gamblers. When you go to ante up today, your bet is likely to be refused.”

Not yet, anyway.

What changed yesterday is that banks are now required to have policies to prevent funds from flowing to purveyors of “unlawful internet gambling.” The law itself did not change what is unlawful internet gambling. Indeed, the UIGEA defines unlawful internet gambling as gambling that’s unlawful according to current state or federal laws. One of the complaints from financial institutions is that the law is vague as to what is or isn’t illegal.

The US Department of Justice considers all internet gambling to be unlawful. However, the courts haven’t agreed. In the only court case on point, the DOJ lost in Re: MasterCard that the Wire Act applies to non-sports betting. (Sports betting is clearly illegal under the Wire Act.) That doesn’t mean that a different US Circuit Court of Appeals won’t rule differently, or that the DOJ won’t attempt to apply some other law.

In any case, the sites offering sports betting are still offering those clearly illegal bets to Americans. For example, you can go to Bodog and make sports bets…and that’s definitely unlawful internet gambling.

Online poker operates in a gray area. Poker is a game of skill (in my opinion), though courts haven’t always agreed. That said, there’s a preponderance of evidence showing this to be the case. So whether or not poker is unlawful internet gambling today is debatable. (It is illegal in Washington state, though, where all online gambling is a Class C felony…the same as rape. The logic of that escapes me, but you’d have to ask Evergreen State politicians what they were thinking when they decided that.)

From a tax standpoint, though, nothing has changed. Illegal income is just as taxable as legal income. All gambling income is taxable, period. If you make money playing online poker you need to send some of that to the IRS and your state tax agency.

There is legislation circulating in Congress to legalize online gambling. The chance of passage this year is minimal as there is still significant opposition. While I do expect eventual legalization and regulation of online gambling, I suspect we are still a few years away from this happening. Until then, do remember to pay your taxes no matter if you operate in the gray or red areas of the law.

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Your Tax Return May Cost More

Posted on June 1, 2010 by Russ

Something that all economists know is that all tax increases on businesses are passed on to consumers. All of them. There is no such thing as a free lunch.

The Tax Extenders Bill, HR 4213, would impose a new tax on small S Corporations…like mine. If this bill becomes law, I will be forced to increase my rates. I’d guess the increase at somewhere around 10% (I’m in Las Vegas for the week, so I can’t run the numbers as well as I could in Irvine). Please call your Senators (you can find their phone numbers here) if you don’t like the idea of such a rate increase and a discriminatory tax against small S Corporations. For Californians, you can reach Barbara Boxer’s office at (202) 224-3553 and Dianne Feinstein’s office (202) 224-3841. You can also send emails to them through the contact page I linked to.

On the other hand, if you like the idea of only large tax firms and higher charges from small tax practices, do nothing. NASCAR, Iowa diesel biofuels, and other wonders are part of the tax extenders package. I’m sure they’re important (to those people) but I don’t think they need tax subsidies.

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Impure

Posted on May 29, 2010 by Russ

A couple of weeks ago I wrote about the coming crackdown on nightclubs, taxi drivers, and doormen in Las Vegas. One nightclub chain, Pure, yesterday took what they hope will be preventative action. Pure implemented a compliance program.

Of course, the cynic in me notes that (a) Pure’s corporate offices were raided two years ago by the IRS; (b) the IRS announced a few weeks ago that they would take action if the clubs didn’t clean up their act; and (c) Pure waited until after that announcement to implement their compliance program. It also remains to be seen if this will be a program that’s just down on paper or if Pure will actually start issuing 1099s to doormen and drivers delivering patrons to their nightclubs…not to mention the $100 bills that doormen receive so that individuals can avoid the lines.

In any case, I suspect the IRS may have some undercover investigators noting the payments made to drivers and others and then checking next year to see whether 1099s were sent. I think the IRS is serious about this, and if I were running nightclubs in Las Vegas I’d strive to be pure…in relation to the tax laws.

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Pop, Pop, Fizz, Fizz; Oh What a Relief It Isn’t!

Posted on May 27, 2010 by Russ

Only in California would Democrats in the Legislature get the “brilliant” idea of borrowing money from the deposits consumers make on plastic and glass soda bottles to balance the budget. The Democrats also want to increase oil taxes.

Of course, the idea of drastically cutting compensation and pension benefits to the public employee unions is far from Democrats’ minds. Of course, the public employee unions are the biggest supporters of Democrats, so perhaps I’m just adding two and two correctly….

In any case, there’s no doubt that this portion of the budget is DOA. Republicans won’t be voting for tax increases (especially in an election year). Meanwhile, the unstoppable force and the immovable object will soon collide….

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AB32 (California Cap & Trade) Is a Job Killer

Posted on May 27, 2010 by Russ

That’s not me talking (well, it is too); rather, it’s the non-partisan California Legislative Analyst that has called it that. The Wall Street Journal reports on the LAO’s study of the measure, noting:

“California’s economy at large will likely be adversely affected in the near term by implementing climate-related policies that are not adopted elsewhere.” While the long-term economic costs are “unknown,” the study finds that AB-32 will raise energy prices, “causing the prices of goods and services to rise; lowering business profits; and reducing production, income and jobs.”

Well, duh! California can’t change the laws of thermodynamics nor can they force business to pay above market rates. AB32, California’s cap & trade measure, significantly increases the cost of a business operating in the Bronze Golden State. There’s a solution, though: A ballot initiative on the November 2010 election would stop the implementation of AB32 until California’s unemployment rate falls to 5.5%. Given that California’s current unemployment rate is 12.6%, this initiative would effectively put AB32 on the ash heap of history.

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The Who Needs Small Tax Practices Act

Posted on May 27, 2010 by Russ

Call me bitter, but I’m unhappy with the new Extenders legislation. While it would extend several tax breaks, it would deal a blow to many entrepreneurs–myself included.

My practice is set up as an S Corporation. A 5% (or greater) S Corp owner must be paid a reasonable salary. He can take any additional profits as distributions. That’s exactly what I do, but perhaps not for long.

You see, the new Extenders bill would penalize businesses like me. Joe Kristan noted,

It would penalize the smallest personal service providers to the benefit of their larger competitors.. A sole proprietorship would pay taxes at a rate at least 2.9% higher than a competitor whose “principal asset” is the reputation of more than three employees.

The bill also will require businesses and the IRS to determine what the “principal asset” of a personal service corporation is. The bill obviously requires the valuation of intangible assets — reputation and skill — but in a way not elsewhere attempted in the tax law. How do you do this?

Joe notes that if I owned a building (through my business) that could be my largest asset, and that might make me exempt from this legislation.

I have a better idea: Dump this legislation. Why in the world does Congress want to penalize entrepreneurs such as myself? Could it be that larger service firms are annoyed that with the Internet smaller, more nimble competitors are driving away business? I saw that H&R Block’s business was down about 5% this past tax season.

Of course, Congress being what it is I doubt this legislation won’t pass as written. It’s stupid and penalizes people (remember the Health Care legislation?) so it’s passage is likely assured….

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California Election: Proposition 13

Posted on May 24, 2010 by Russ

Here’s the first of our series on the June 2010 propositions on the California ballot.

What?! Proposition 13 is on the ballot?! It’s not that Proposition 13. This Proposition 13 actually does impact property tax, but it has no opposition.

Proposition 13 would exempt building that are seismically retrofitted from reassessments. This impacts retrofits of unreinforced masonry buildings (these buildings are morel vulnerable to earthquake damage). Currently, these building are exempted from reassessment for 15 years. This would extend the exemption until the property is sold.

Don’t forget to vote on June 8th.

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That Individual Looking to Buy Your Business Might Be an Undercover IRS Agent

Posted on May 23, 2010 by Russ

I was at the annual SuperSeminar a couple of weeks ago. Bob McKenzie, one of the presenters, mentioned that the IRS has found that sending undercover agents to businesses that are for sale has been a very useful strategy. Mr. McKenzie told the story of the sale of a Chicago pub, where the owner maintained two sets of books. The pub owner told a prospective buyer not to worry that the pub had only been slightly profitable; the true books showed the real profits. That prospective buyer happened to be an undercover officer from the IRS criminal investigations unit. Oops….

I found the idea of this to be somewhat hard to believe. After all, would individuals be that foolish? Well, I should never underestimate the Bozo contingent.

Let’s head to Palo Alto, in the Bay Area. AJ’s Green Dry Cleaners and Laundromat was up for sale. An undercover IRS agent approached the manager of the business, Sung Ho Choi. Mr. Choi showed the undercover agent the computerized records that showed the true sales in the business. Unfortunately, Mr. Choi only provided his parents (who owned the business) and their accountant the bank statements. The IRS agent compared the computer records to the tax returns, and there was a $194,973 difference in the gross income. That’s a big oops, and Mr. Choi pleaded guilty to four counts of aiding or assisting in the preparation of a false tax return.

If you sell a business, one set of books is enough. The individual looking at your business might just be from the IRS.

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Straight From the Pages of a Cheap Novel

Posted on May 23, 2010 by Russ

Take one man, his wife, and his mistress, throw in a 30,000 square foot mansion, add a dose of federal charges (bank and wire fraud, tax conspiracy, money laundering, witness tampering, and obstruction of justice) and you get the latest novel from author—actually, you get the trial of Thomas Parenteau in Columbus, Ohio. The Department of Justice has obtained guilty pleas from 11 other individuals in this case; however, Mr. Parenteau is defending himself.

So far we’ve found out that the mistress, Pamela McCarty, is the mother of Mr. Parenteau’s two daughters; that all three lived in the same mansion; phony jobs and phony paychecks; allegations of $18 million in fraudulent loans…and the trial should last a couple more weeks.

Joe Kristan has more.

Posted in Ohio, Tax Evasion | Tagged | 1 Comment

Monaco or Denmark: A 16 Million Kroner Difference

Posted on May 23, 2010 by Russ

People do relocate because of taxes. I’ve represented individuals during residency audits, and when they really have relocated they’re fairly simple. However, when the individual has relocated in name only, it’s quite another story. Such is apparently the case for Danish golfer Soren Hansen.

Mr. Hansen is a professional golfer, and has played three events on the PGA tour (he mostly plays in Europe). He “moved” to Monaco in 1999 to take advantage of the principality’s low tax environment. However, his girlfriend is Danish, and he regularly visited her. He also apparently had a summer home in Hornbæk.

Denmark’s tax agency, SKAT, investigated Mr. Hansen. They believed he had moved in name only and that he had maintained many assets in Denmark. They also thought that Mr. Hansen was intentionally avoiding tax payments. The case went to trial in Copenhagen. The good news for Mr. Hansen is that he was found not guilty of intentionally avoiding tax payments. (Had he been found guilty, he was looking at a possible prison sentence.) However, he was found guilty of not paying back taxes of 8 million Kroner and given a fine of an additional 8 million kroner. At current exchange rates, that’s $2.7 million.

There’s a moral for this story, and it has to do with how expensive girlfriends can be…especially when they’re in another jurisdiction.

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