Best Structuring In a Supporting Role…

Posted on March 7, 2010 by Russ

With the Academy Awards being broadcast this evening, it’s appropriate to look at a case from the movies. Cindy Ondracek and her husband owned a drive-in movie theater in Port Orchard, Washington; they also owned another cinema in Bremerton, Washington. The businesses were successful: they generated over $2 million in gross revenues, most of this in cash.

But Mrs. Ondracek and her husband didn’t like the idea of the government getting the cash. So Mrs. Ondracek structured her deposits. She deliberately deposited less than $10,000 to avoid currency transaction reporting rules. That in itself is a felony.

Mrs. Ondracek, though, took this one better: She and her husband failed to file tax returns for the years in issue (2002 through 2005). And she can’t claim ignorance: Her bank sent her a warning letting her know about the currency reporting rules.

Mrs. Ondracek pleaded guilty to not paying tax on the more than $197,000 of income that came from the theaters. The government calculates the lost tax revenue at $68,000. Mrs. Ondracek is on the hook for that, and will likely get to visit ClubFed.

Here’s my helpful hint for any would be Structurers: If you bank sends you a notice warning you about currency transaction reporting, it’s time to either come clean or find a good attorney fast.

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Soon to be On the Street?

Posted on March 7, 2010 by Russ

Chriss Street is Orange County’s Treasurer-Tax Collector. He’s the person responsible for collecting the property tax bills for Irvine, and the rest of Orange County. Mr. Street is up for re-election this June, and he’ll likely face a tough fight. On Friday, he was ordered to pay $7,068,765 for breaching his fiduciary duty in liquidating a trust.

Judge Richard M. Neiter of the US Bankruptcy Court said, “The overwhelming evidence at trial showed that the Defendant willfully engaged in self-dealing to advance his personal interest ahead of that of the Trust’s beneficiaries.” The Orange County Register reports that Mr. Street also used the trust to pay personal expenses including a dinner at Spago, Botox treatments, and paying a traffic ticket.

Mr. Street’s attorney refused to comment on the case until he could study the verdict.

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The “B” Word

Posted on March 7, 2010 by Russ

Notwithstanding sections 109 (d) and 301 of this title, a case under this chapter concerning an unincorporated tax or special assessment district that does not have such district’s own officials is commenced by the filing under section 301 of this title of a petition under this chapter by such district’s governing authority or the board or body having authority to levy taxes or assessments to meet the obligations of such district.

Thus begins Section 921 of Title 11, Chapter 9, Subchapter II of the US Bankruptcy Code. I bring this up because I read over the weekend that the Bronze Golden State is in “de facto bankruptcy.”

Such is the title of Steven Greenhut’s OpEd. Unfortunately, it appears dead-on accurate. You can’t spend more than you take in yet the “solution” to those in Sacramento (especially Democrats) and Washington is to spend more. It’s sort of like what I learned in business school: If you’re losing money on a per-item basis, just increase your sales!

Oh, yes: If you lose money on a per-item basis, selling more will just make your problem worse.

The solution has been obvious from day one, but it’s anathema to public employees, public employee unions, and the people they contribute to (Democrats, generally): there needs to be fewer of them making a lot less per person. California has the 48th worst business climate in the country, yet Service Employees International Union California President Bill Lloyd said, “The only way to do that is to make sure that everyone in the state pays their share, including the corporations who keep getting a free pass from the governor and the Legislature.” I guess Mr. Lloyd would like us to be at number 50.

Unfortunately, Democrats in the Legislature continue to hope that tomorrow will bring good news. With a structural deficit, it won’t until the underlying problems are addressed. There really is no choice.

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Starting a Business? A Good Resource from the IRS.

Posted on March 4, 2010 by Russ

Tax agencies may be annoying to deal with, but the IRS has one of the best websites of any entity in the U.S. A client told me about the IRS’ Virtual Small-Business/Self-Employed Business Workshop. It’s an excellent resource on what you need to do to deal with tax agencies. It’s well organized, and it has a lot of useful information.

My client who told me about it said to me, “I wish I had seen this when I was first starting out.” The video has examples like keeping a written mileage log, and what you need to do with it. It’s well worth the time to watch it.

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Bad States for Amateur Gamblers

Posted on March 1, 2010 by Russ

All states are alike, right? That’s definitely not true in the world of tax. Some states don’t have an income tax. Other states have very high income tax rates. Amateur gamblers have a special concern: The ability (or lack thereof) to deduct gambling losses.

For an amateur gambler, gambling losses are an itemized deduction. On the federal tax return, an amateur gambler is allowed to deduct his losses up to the amount of his wins on Schedule A. However, some states do not allow any itemized deductions while some specifically do not allow gambling losses. Here is a list of the “bad” states for amateur gamblers:

  • Connecticut*
  • Hawaii*
  • Illinois*
  • Indiana*
  • Louisiana (Itemized Deduction Limitation)
  • Massachusetts*
  • Michigan*
  • Minnesota* (State AMT — Impacts Amateurs)
  • New Hampshire (10% Gambling Tax)
  • New York (Itemized Deduction Limitation)
  • Ohio*
  • West Virginia*
  • Wisconsin*

So while all men may be created equally, all gamblers are not taxed equally. Of course, you could reside in a state with no income tax and you’ll be more equal than others.

Posted in Gambling | 2 Comments

Hot Air Leads to Trouble

Posted on February 28, 2010 by Russ

When I was an undergraduate in college, I did research at the Lawrence Berkeley Laboratory on the catalyzed production of methane from graphite. I don’t believe that research led to commercial production of natural gas (which is methane, CH4.

The government likes the idea of obtaining methane from unconventional sources. There’s a tax credit available for recovering methane from landfills. Some enterprising individuals had the not-so-brilliant idea of just reporting that they recovered the methane from landfills without actually recovering any. They helped their clients obtain more than $30 million in phony tax credits.

Well, the government found out about 32 individuals. Twelve of them were permanently barred last week (23 of the 32 have now been barred). Additionally, four individuals pleaded guilty last year in a related criminal case.

If you were one of the lucky investors who bought some of the non-existent methane credits, you’re likely looking at a “Dear Valued Taxpayer” letter in your future. And if you knowingly participated in the scheme, it’s time to find an attorney. For if you’re going to take a tax credit based on methane, that methane has to be real.

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The Wyden/Gregg Tax Reform Bill: Interesting, but DOA

Posted on February 28, 2010 by Russ

Senators Ron Wyden (D-OR) and Judd Gregg (R-NH) introduced a bill, “To amend the Internal Revenue Code of 1986 to make the Federal income tax system simpler, fairer, and more fiscally responsible, and for other purposes.” The bill would have a major impact on the US tax system. Though there are many good points about the bill, they really don’t matter: This legislation has no chance of passing this Congress in an election year.

The bill would lower the number of individual tax brackets from six to three (15%, 25%, and 35%). It would eliminate the dreaded Alternative Minimum Tax (AMT). It would triple the standard deduction. All Miscellaneous Itemized Deductions would be eliminated. The first 35% of capital gains would not be taxed (the remainder would be taxed as ordinary income). And the corporate tax would become flat, with a single 24% bracket.

There’s another aspect of the legislation that got my attention. I received a call from one of my gambling clients; he told me that the legislation would lead to regulated Internet Gambling in the United States. My client is correct: Subtitle C of the legislation would allow for legalized Internet Gambling in the United States, with licensing and record-keeping requirements.

Speaking of gambling, the measure does have a huge negative for amateur gamblers. Gambling losses are a miscellaneous itemized deduction; this measure would eliminate all such deductions. Amateur gamblers would be taxed on their winning sessions and would pay income tax on phantom wins that would no longer be offset by gambling losses.

However, this is all irrelevant. This measure has no chance of passing this Congress. Democrats in Congress are, for the most part, talking about massive tax increases rather than tax simplification. It’s also an election year, with Democrats running the risk of losing one or both houses of Congress. Finally, if Democrats are serious about moving health care legislation forward this will likely cause the failure of any other substantive legislation this year. Simply put, this measure is DOA.

Overall, though, I (like most tax professionals) would love to see a simpler Tax Code. It’s just not happening in 2010.

Posted in Gambling, Legislation | Tagged | 1 Comment

Dumb Criminals, Tax Evading Style

Posted on February 28, 2010 by Russ

If you commit a crime, it’s definitely not a good idea to brag about it to others. It’s an especially bad idea to brag about it on the Internet. Yes, law enforcement and the IRS read the Internet. Joe Kristan has the news of how two women in Des Moines allegedly stole from their employer…and are now in deep trouble because they bragged about it on social media.

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It’s Unpopular, Unworkable, and Insane, So Naturally They’re in a Hurry to Pass It (Part 2)

Posted on February 22, 2010 by Russ

When I last wrote about the healthcare legislation, I noted the 17 taxes which would be in the plan. Let’s see what’s new in the “Unified Health Care Legislation” proposed by President Obama.

1. Individual Mandate Tax. For those who don’t purchase health insurance, this income tax surcharge continues to exist in this plan. I couldn’t determine the exact rate.

2. Employer Mandate Tax. On businesses with 50+ employees that do not offer health care, and at least one employee qualifies for a tax credit, $750/employee. This will cause many small businesses to stop growing once they reach 49 employees. Those figures come from the prior version. News reports indicate that this tax is still in the proposal.

It is unclear if a waiting period tax remains in the legislation.

3. Excise Tax on Health Insurance Plans. Beginning in 2013 2018, 40% tax (the percentage may be wrong) on plans costing $8500/$23,000 $10,200/$27,500. Is indexed to CPI. It is unclear whether exemptions in the Senate version have been continued in this proposal.

4. Health Insurance would be reported on W-2s. Another mandate that increases costs for business. It’s unclear whether this mandate survived. However, the White House release states that loopholes will be closed which implies this remains.

5. “Medicine Cabinet Tax.” Limitation on HSAs, FSAs, and MSAs to purchase non-prescription medication except insulin. Note that this is also in the House healthcare bill. This is definitely in the new proposal.

6. HSA Withdrawal Tax Increased. The tax would increase to 20% from 10%. This is also in the House legislation. This is definitely in the proposal.

7. FSAs capped at a maximum of $2500. They are now uncapped. This is definitely in the proposal.

8. 1099 Reporting for corporations. Requires businesses to send 1099-MISCs to corporations. This is another cost for businesses. This will begin in 2011 and will definitely increase my income. This is definitely in the proposal, but it’s unclear if this starts in 2011.

9. Tax on Charitable Hospitals. This excise tax of $50,000 per hospital impacts hospitals that don’t meet new Department of Health and Human Services regulations. It’s unclear whether this is in the proposal.

10. Tax on Drug Companies. The tax would be $2.3 billion based on sales percentage. There’s definitely a tax on drug companies, but the size and timing of the tax is unclear.

11. Tax on Medical Device Manufacturers. The $2 billion tax is also based on sales percentage. It rises to $3 billion in 2017. This tax is in the bill, but the size and timing of the tax is not clear.

12. Tax on Health Insurers. A $6.7 $10 billion tax based on percentage of health insurance premiums collected. It now phases in gradually until 2017. This tax is definitely in the bill, but the size and timing of the tax is unclear.

13. Elimination of tax deduction for employer provided retirement prescription drug coverage. It is unclear whether this tax is in the measure.

14. Increase of percentage of AGI required to deduct medical expenses from 7.5% to 10%. Few can deduct medical expenses today; fewer will be able to deduct them tomorrow. It is unclear whether this tax is in the proposal.

15. Compensation Limitation for Health Insurance Executives. If you work in that industry, you will be limited to a salary of $500,000. There’s no mention of this in the measure. However, given the Obama Administration’s stance on various pay-related measures, it’s likely included.

16. Medicare Payroll Tax Hikes. Once your income exceeds $200,000/$250,000 (MFJ), you will pay an additional 0.9% tax. Note that the employer will only collect (and be responsible for this tax) if you earn $200,000/$250,000 or more. This also impacts the self-employed. And the law is written so that the self-employed cannot deduct half of the new tax as a deduction to income tax. It appears this provision is dead. However, it’s been replaced with something worse (see below).

16. New Hospital Insurance Tax. “The Act will include an additional 0.9 percentage point Hospital Insurance tax for households with incomes exceeding $200,000 for singles and $250,000 for married couples filing jointly.” I remember then-candidate Obama stating that if you made under $250,000, he wouldn’t increase your taxes. Yeah, right.

17. New Unearned Income Tax. “[The Act] would add a 2.9 percent tax for households with incomes exceeding $200,000 for singles and $250,000 for married couples filing jointly to unearned income including interest, dividends, annuities, royalties and rents (excluding income from active participation in S corporations).” This is yet another measure which will stifle the economy in the United States. For my amateur gambling clients, this is particularly bad—it means your taxes will go up based on your gambling winnings, not your gambling net income.

18. Blue Cross Tax. There is a tax deduction available today for Blue Cross and Blue Shield companies; this tax deduction will vanish if they don’t spend 85% (or more) of premiums on clinical services. There’s no mention of this in the proposal. However, it was in both the House and Senate Democratic proposals and I expect it’s in this one, too.

19. Excise Tax on Cosmetic Medical Procedures. A new 5% excise tax on these procedures. This one is dead.

19. Tax on Indoor Tanning. A new 10% excise tax on indoor tanning salons. This one made the cut.

20. Paper Production and Cellulosic Biofuels. “[Close] the loophole that allows certain byproducts of paper production to be eligible for the cellulosic biofuels producer credit.” This new tax provision is in the measure.

21. Strengthen Economic Substance Rules. “[Help] prevent tax shelters by clarifying the definition of when activities have true “economic substance” beyond evading taxes.” While the details aren’t listed, it’s clear that this provision will strengthen the economic substance rules. This will increase costs for complex transactions, and will likely depress economic activity.

Obviously, the devil is in the details and all that’s been released is a framework. Unfortunately, the framework looks rotten to the core. The Congressional Budget Office can’t determine what the cost of the measure is. And until the actual legislation appears, line by line, who knows what’s in it. The House bill was a model of brevity at just under 2,000 pages. The Senate bill was just a wee bit longer, at around 2,800 pages. I suppose this measure (when we see it) will be about 3,500 pages. What appears certain is that there are more taxes in this measure.

The public doesn’t want this. They believe (rightly) it will add yet more bureaucracy to Washington, and that it reeks of socialized medicine. So who cares about the cost (estimated at just under $1 Trillion by the White House), public opinion, or that it will devastate the economy.

Posted in Legislation | Tagged | 6 Comments

Annualization Method for Estimated Taxes in California

Posted on February 21, 2010 by Russ

Many taxpayers, especially those with income streams that are inconsistent, use the Annualization Method to make their estimated tax payments. For federal tax purposes, it’s relatively easy. You take the year-to-date income through the period end (March 31st, May 31st, August 31st, or December 31st), annualize it, compute the annual tax, and then pro-rate it for the tax payment that’s due. But how do you work the Annuzliation Method in California, when the first payment (due April 15th) is for 30% of the tax?


The Franchise Tax Board has come out with an article with the answer. For those who do not use the Annualization Method, 30% of the tax is due on April 15th, 40% is due on June 15th, nothing is due on September 15th, and 30% is due on January 18, 2011. For taxpayers using the Annualization Method, 27% is due on April 15th, 63% is due on June 15th, 63% is due on September 15th, and 90% is due on January 18, 2011.

The Franchise Tax Board also had good news for taxpayers who made estimated payments using the old 25% rule for the first three estimated payments of 2009.

The good news is R&TC Section 19136(g) prevents the imposition of a penalty for underpayment of estimated tax if the underpayment was created or increased by a law chaptered during and operative for the same taxable year. Since the amendments to R&TC Section 19136.1 by ABX4 17 with respect to the percentages for the annualized method were enacted in 2009 and operative for the 2009 taxable year, no penalty for underpayment of estimated tax can be imposed if the underpayment was created or increased by the changes made by ABX4 17…If an underpayment of estimated tax exists due to the changes to the annualized percentages for the first three estimated tax payments, you may request a waiver or reduction of the underpayment of estimated tax penalty by completing Part I of Form 5805.

Do note that this exception, in existence for 2009, will not work for 2010. The law changing California’s estimated tax payments to 30%-40%-0%-30% passed in 2009. At the rate the Bronze Golden State is going, we’ll soon be required to pay 100% of our estimated tax in April.

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