Castroneves Not Guilty

Posted on April 26, 2009 by Russ

We had reported on Helio Castrovenes’ trial for tax evasion. The automobile race car driver and Dancing with the Stars contestant was found not guilty a week ago in Miami.

Attorney Roy Black noted, “Nobody wants to hear the excuse that ‘I didn’t know what I was signing; I didn’t know what my accountants were doing.’ But in a criminal context, the government has to prove you knew what you were signing and you intentionally, deliberately did it to evade taxes.”

Castroneves participated in last weekend’s Long Beach (California) Grand Prix. He finished seventh.

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Minnesota Democrats Pass Tax Increases, Face Veto

Posted on April 26, 2009 by Russ

California isn’t the only state where the legislature is ignoring the current economic climate. In Minnesota, the Democrats who control that state’s legislature, have ignored Republican Governor Tim Pawlenty’s veto threat and passed a series of tax increases.

Two different packages passed: one in the Minnesota House and one in the Senate. Both contain a variety of tax increases, including increases in the income tax, cigarette taxes, alcohol tax, and an increase in what is covered by the sales tax. The mortgage interest deduction would be limited.

These measures are probably irrelevant, as no Republican voted for them and Governor Pawlenty guarantees they’ll be vetoed. There’s clearly not enough votes for the vetoes to be overridden.

What will be heading to Minnesota and California? Major cuts in government spending. And that’s as it should be.

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We’re Back: A First Look at Propositions 1A – 1F

Posted on April 22, 2009 by Russ

After April 15th, and my mandatory cooling off vacation, I’ve returned and posting will now resume at the usual rate.

First up on the agenda is the May special election on Propositions 1A through 1F. These six ballot measures are designed to implement the bad budget that passed in Sacramento last February. I’ll have more about these measures in depth next week; for now, these measures look and feel just as bad as the budget. One of these is a tax increase (though you would have to go into the fine print to realize that), and none of them will go towards a long-term solution of California’s budgetary fiasco.

There still remains just one such solution: massive cuts to programs and spending. Sooner or later these cuts will occur.

Unfortunately, we are left with these ballot measures on the ballot on Tuesday, May 19th.

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Very Light Posting This Week

Posted on April 20, 2009 by Russ

I am out of town this week with extremely limited computer access. Posting will be light to non-existent until I return back to Irvine on Friday.

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New Hampshire Gambling Tax Not Yet Law

Posted on April 20, 2009 by Russ

Last week I wrote about New Hampshire’s proposed tax increases. Those taxes passed the lower house of New Hampshire’s state legislature. However, they still must pass the state senate in New Hampshire. If you live in New Hampshire you may want to let your legislators (especially those in the state senate) know of your opinion of the proposed tax increases.

For the moment, New Hampshire isn’t yet on my list of bad places for gamblers to reside. However, it’s really knocking on the door.

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New Hampshire Adds Gambling Tax

Posted on April 16, 2009 by Russ

Live Free or Die may be the motto of New Hampshire, but the formerly conservative state that believed in very low taxes elected a Democratic majority in the state legislature last year. Shock of shocks, tax increases are coming. And a particularly insidious tax increase will hit gamblers.

The New Hampshire House today passed a new budget that includes numerous new taxes and tax increases. As the Manchester Union-Leader reported:

The House, by a 182-165 vote, created or increased taxes on tobacco, rooms and meals, gambling winnings, estates and capital gains. The bill, HB 2, also raises the gasoline tax, with all those funds to go toward state and local road construction and improvements.

The gambling tax is particularly bad. The new tax is 10% on all gambling winnings above $600. While proponents noted that it would only impact big-time bingo games, what will be the impact on New Hampshire residents who head to a casino? The way the legislation is written it could impact professional gamblers residing in New Hampshire, and subject them to a 10% tax on their winnings. (Frankly, the legislation is so poorly written towards gambling that it will take court cases to determine what is or isn’t being taxed.) I for one don’t think it’s worth taking a chance and for the professional gamblers out there it’s definitely time to consider voting with your feet.

So what should a New Hampshire gambler do? For the amateur gambler, you may want to consider Maine or Vermont. Unfortunately, Connecticut and Massachusetts don’t allow gambling losses while New York tax rules will cause phase-outs of itemized deductions. Professional gamblers can also consider Connecticut and Massachusetts as both states have relatively low income taxes. (Professional gamblers are allowed to net their wins and losses, so they are not impacted by the inability to deduct losses in Connecticut and Massachusetts.)

Here’s the complete list of states for gamblers to avoid:

Connecticut*
Illinois*
Indiana*
Louisiana (itemized deduction limitation)
Massachusetts*
Michigan*
Minnesota (because of its AMT)
Mississippi (Only MS gambling deductions are allowed)
New Hampshire (10% gambling tax on winnings over $600)
New York (itemized deduction limitation)
Ohio*
West Virginia*
Wisconsin*

*Losses not allowed; impacts amateurs only

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Tea Party on Tax Day

Posted on April 15, 2009 by Russ

Today is Tax Day, so for the procrastinators out there it’s time to file your extension. For those of you who aren’t tax accountants, it’s time to let our politicians know whose money they spend.

There will be a series of tea parties protesting our tax system and the current increases in taxes. Locally, there will be a Tea Party from 12:00 noon to 2:00 pm at the Plaza of the Flags at the Santa Ana Civic Center. Later today, from 4:00 pm until 7:00 pm there will be a rally at the intersection of Marguerite Parkway and La Paz Road in Mission Viejo.

While I wish I could attend I will be otherwise occupied.

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Bozo Tax Tip #1: Don’t be Suspicious!

Posted on April 13, 2009 by Russ

Given my practice area, I deal with individuals who occasionally make large cash deposits. I tell them that they shouldn’t mind the completion of a Currency Transaction Report. The IRS gets so many of them that as long as you’re paying your taxes it’s not a big deal.

On the other hand, if you break up your $11,000 transaction into two $5,500 deposits, you can get in trouble. Big trouble. A suspicious activity report (SAR) might be issued. The IRS doesn’t get as many of these, and a lot of them are investigated. And that’s what leads into this tale of woe.

We’re focusing today on a public figure. He was a prosecutor, and he used the Bank Secrecy Act (among other laws) to help send many individuals—primarily in organized crime—to prison. He then became Attorney General of his state, serving two terms in that office. He was then elected Governor.

But our public figure had a problem. He enjoyed the world’s oldest profession. While traveling to Washington, D.C. he used a service called the Emperor’s Club. He funded his nighttime activities by making multiple wire transfers of just under $10,000.

Come on, could a politician who used to use the Bank Secrecy Act actually get blindsided by the Act? Yes. Eliot Spitzer’s wire transactions were duly reported by North Fork Bank. That led to an IRS investigation which led to an FBI investigation which led to a governor becoming an ex-governor.

So if you want to send money, go big-time. Send more than $10,000. But whatever you do, don’t break up your cash transactions into smaller pieces to evade the reporting requirements. One day you might find two armed federal agents at your door, reminding you, “You have the right to remain silent….”

I hope you enjoyed this series of humorous posts. I’ll be back with normal content later this week.

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Bozo Tax Tip #2: Trustless Trusts

Posted on April 12, 2009 by Russ

Just today someone sent me an email noting the following “truth”:

Hey Russ, [redacted] sent me this video on how I can put all my wages and other income into this investment vehicle and I’ll no longer have to pay taxes on any of this.

I know, it sounds too good to be true, but it is true. I’ve read all of these documents and it sure seems legal….

I won’t bore you with all of the other details. Suffice to say, I was being asked to invest in a Cayman Islands Trust. Somehow, after spending lots of money in fees my taxable income will become sheltered from US income taxes. There’s no reporting, no tax, and no trouble from the IRS!

If it sounds too good to be true it probably is.

This is. We start with the first problem, the economic substance rule. In order for any transaction to be meaningful in the Tax Code, there must be some economic substance to it. For example, I sell John $10 worth of paper. That has economic substance: I now have $10 and John has a bunch of paper. But what economic substance can there possibly be when I magically turn my earned income into vanished income?

In order for a Trust to be recognized under federal tax law, a trust must have some real economic effects.

Next, federal law requires the grantor of a foreign trust to report that. So if you decide to obtain a foreign trust, you had better be prepared to disclose it or face severe penalties including possible time at ClubFed.

I hope you get the idea. If you follow this Bozo path you will likely get in deep trouble. Consider what happened to Lorin Sloan, as noted in United States v. Sloan, 939 F.2d 499 (7th Cir. 1991), cert. den. 112 S.Ct. 940 (1992). (My thanks to Dan Evans’ Tax Protester FAQ for this.)

Like moths to a flame, some people find themselves irresistibly drawn to the tax protestor movement’s illusory claim that there is no legal requirement to pay federal income tax. And, like the moths, these people sometimes get burned. Lorin G. Sloan believed these claims and because he acted upon them now faces four months in a federal prison; there can be little doubt that he has been burned.

[. . . .]

The real tragedy of this case is the unconscionable waste of Mr. Sloan’s time, resources, and emotion in continuing to pursue these wholly defective and unsuccessful arguments about the validity of the income tax laws of the United States. Despite our rejection of Mr. Sloan’s legal analysis of the tax laws, we are not unmindful of the sincerity of his beliefs. On the other hand, we are less sure of the sincerity of the professional tax protestors who promote their views in literature and meetings to persons like Mr. Sloan, yet are unlikely ever to face the type of penalties incurred by him. It may be that our decision will not alter Mr. Sloan’s views regarding the tax laws of this country, for he has stated that if we affirm his conviction without applying the law as he understands it, our decision will be ‘a sham to which I WILL NOT SUBMIT.’ It may also be that serving his sentence in prison will not alter Mr. Sloan’s view. We hope this pessimistic assessment is incorrect.

Tomorrow we will bring you our #1 Bozo Tax Tip of the Year. And it’s brand new for this year!

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Bozo Tax Tip #3: 300 Million Witness Can’t Be Right

Posted on April 11, 2009 by Russ

I keep thinking that I’ll be able to drop this Bozo tax tip one year. Yet every time I think that’s going to happen Richard Hatch makes the news again. One tip I can give any celebrity: Be careful about your taxes. The IRS loves going after Bozo tax celebrities. So here’s the story that refuses to die.

For a tax blogger, people like Richard Hatch are wonderful. Hatch, for those who don’t remember, was the winner of the first Survivor and won $1 million. About 300 million individuals worldwide saw Hatch take down the $1 million.

Hatch received a Form 1099-MISC for his winnings. In the United States, winnings from contests are taxable. Hatch claims that CBS and/or the producers of Survivor promised him that they would pay his taxes. (Both CBS and the producers of Survivor deny this charge.)

Here’s what I wrote back in January 2006 when Hatch was convicted:

Mr. Hatch has cemented a place in the Bozo Tax Criminals Hall of Fame (a website I’ll create one day). Let’s look at his stupid not so good actions.

1. Hatch goes to accountant #1, find out that he owes over $300,000 in taxes. He goes to accountant #2, and the tax bill is around $240,000. (At his level of income, some differences in taxes owed is normal.) He then asks accountant #2 what his return would be if he didn’t declare the $1 million in Survivor winnings. Accountant #2 makes Hatch sign a statement that he won’t file that return (it showed Hatch getting a $4300 refund). He filed that return.

2. The IRS amazingly discovers his tax evasion. (With perhaps 300 million witnesses, even the most inept attorney could prove he won $1 million.) He’s offered a plea bargain: pay your taxes, and we’ll let you off fairly easily on the jail time. He accepts the plea initially, then changes his mind.

3. The case goes to trial. Hatch claims that CBS should have withheld taxes. His attorney might want to ask any seasoned accountant about what you should do if taxes aren’t withheld but should have been. (Answer: you pay the taxes.)

4. Hatch’s attorney can’t find the OJ Simpson jury. (Hat tip: Roth Tax Updates)

5. Hatch is found guilty. Roth Tax Updates speculates that his sentence will be around 3 years in jail. Oh, he’ll also have to pay those taxes, and interest and penalties. The maximum possible sentence is 13 years in prison and a fine of $600,000.

Hatch is now serving his prison sentence of 51 months. He recently appealed his conviction, though chances of it being overturned seem slim.

2008 Update: And they were slim. Last February, Hatch’s appeal was denied. As you might expect, 300 million witnesses can’t be wrong.

2009 Update: Richard Hatch continues to look for that needle in the haystack. He’s filed another appeal, though to this non-lawyer it’s more likely that he’ll be released after serving his 51 months at ClubFed than getting a favorable ruling.

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