Not So Fast, New York

Posted on December 28, 2008 by Russ

New York’s attempt to tax cigarettes sold on Indian reservations in the Empire State hit a roadblock last week. Judge Rose Sconiers issued a temporary restraining order against New York and barred collection of the sales tax. A hearing on a permanent injunction will be held in Buffalo on January 27th.

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Let’s Party Like It’s 1999

Posted on December 28, 2008 by Russ

I think that phrase comes from a song by the artist formally known as Prince. It’s also another way of looking at how dysfunctional California’s government has become. Meanwhile, nothing appears to be stopping the budget train from falling over a cliff in two months.

Nothing happened this week in negotiations between Democratic leaders in the legislature and Republican Governor Arnold Schwarzenegger. I suppose that eventually they’ll come up with a way to make the Democrats’ previous User Fee Tax Hike palatable to the Governator. But will happen when a court rules—and this will head to court—that these aren’t user fees, they’re tax hikes, and a 2/3 vote is required. That’s a vote that includes Republicans. There is no doubt in my mind this is how the present scenario will play out.

Someone sent me an email stating that California will go into Chapter 9 Bankruptcy. That’s definitely not going to happen. Only municipalities (and other subdivisions of states) can go into Chapter 9. I don’t know what would happen if California actually runs out of money but that won’t.

Meanwhile, the California Teachers Association has decided that they’ll try for a 1% additional sales tax for education. They need to obtain about 800,000 signatures in the next few months to qualify the initiative (which will take a 2/3 vote to pass) for the next general election (likely in June 2010).

Given that we’re now between Christmas and New Year’s Day nothing is going to happen on the budget front for another week. I’ll keep you advised As the Budget Churns.

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Two Gambling Cases at the Tax Court

Posted on December 23, 2008 by Russ

The Tax Court looked at two gambling related tax cases today. In the first case the petitioners thought there was discrimination; in the second case the question was whether or not the petitioners were professionals or amateurs.

In the first case (Sjoberg v. Commissioner, T.C. Summary Opinion 2008-162), the petitioners knew they were recreational gamblers (they stipulated to that). They had won a $4,000 jackpot; they had gambling losses that would allow them to write off that amount so they didn’t include the income (noted on a W-2G) on their tax return. If they had included the income they would have had an additional $660 in tax (from additional tax on social security benefits). The IRS audited them, assessed the tax and a $132 accuracy-related penalty.

The petitioners didn’t dispute the IRS’ calculations. Instead they,

“…contend that this treatment of gambling winnings and losses is discriminatory against the elderly and should not be enforced. Petitioners note that today’s casinos are like “Disneyland” to the elderly, offering all sorts of freebies to entice the elderly into casinos to gamble. Petitioners contend that respondent needs to update the tax rules to take into account today’s casino operators, casino operations, and customers…Lastly, petitioners allege that some types of gambling winnings are not required to be reported to respondent by the casinos (generally poker and blackjack), and petitioners claim that such differences in the reporting of gambling winnings constitute discrimination.”

But the court doesn’t make policy decisions (Congress does) and they owe the additional tax and the penalty.

In the second case (Freese v. Commissioner, T.C. Summary Opinion 2008-161), petitioners recorded their gambling as a business. Given that they resided in Minnesota that’s a good idea. Under Minnesota’s state income tax AMT the petitioners would likely have faced high taxation. There was a problem, though: Were the petitioners conducting their gambling as a business?

Petitioners were employed and gambled one or two nights a week. They did not keep a log of their gambling, they didn’t keep a separate bank account, and didn’t keep track of their gambling income and expenses. If you’re going to be a professional, you need to treat your business as such. “Petitioners did not maintain any meaningful records relating to their gambling activity.”

Unfortunately for petitioners, their CPA didn’t ask some rather basic questions. Though the CPA asked for any W-2Gs they received, he didn’t ask for the income from their slot play that didn’t cause a W-2G to be issued. (W-2Gs are only issued for slot machine jackpots of $1,200 or more.)

The court concluded,

Petitioners’ gambling activity in 2005 clearly did not qualify as a trade or business. Petitioners did not gamble with continuity and regularity. Petitioners regarded their gambling activity as recreation they shared, and petitioners did not expect to earn a profit from gambling. Petitioners did not maintain books and records relating to their gambling activity. They did not conduct their gambling activity in a businesslike manner. See Commissioner v. Groetzinger, 480 U.S. 23 (1987); sec. 1.183-2(b), Income Tax Regs. Petitioners’ gambling activity did not rise to the level of a trade or business, and petitioners are not allowed to deduct gambling expenses in excess of gambling income.

So if you’re going to be considered a professional gambler, treat your gambling as a business. Keep good records. Know your income and expenses. Consider a separate bank account for your gambling. And keep good records. Yes, I said that twice but the importance of a gambling log cannot be overstated for the professional gambler.

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Not Vital In Vitro

Posted on December 23, 2008 by Russ

The Tax Court today looked at the case of a man who deducted in vitro fertilization (IVF) expenses. There was just a few problems: he wasn’t married, had no medical conditions, and the IRS objected.

So why did the petitioner want to deduct IVF expenses? And why did the IRS object?

“Petitioner argues that it was his civil right to reproduce, that he should have the freedom to choose the method of reproduction, and that it is sex discrimination to allow women but not men to choose how they will reproduce…“Although respondent believes that amounts paid for procedures to mitigate infertility may qualify as deductible medical care”, respondent argues that “Petitioner had no physical or mental defect or illness which prohibited him from procreating naturally”, as he in fact has, and that “the procedures were not medically indicated.” Respondent’s position is that the expenses at issue are nondeductible under section 262 because “Petitioner’s choice to undertake these procedures was an entirely personal/nonmedical decision.”

The court first examined whether the expenses were medical expenses or nondeductible personal expenses.

None of the expenses at issue was “incurred primarily for the prevention or alleviation of a physical or mental defect or illness.” Sec. 1.213-1(e)(1)(ii), Income Tax Regs. In other words, petitioner had no medical condition or defect, such as, for example, infertility, that required treatment or mitigation through IVF procedures.

The petitioner also alleged constitutional questions (discrimination) based on him being a man. He had used IVF to father children through unrelated surrogate mothers and alleged that to not allow him the ‘choice’ of doing so was discriminatory. The court’s conclusion answers that issue:

Although petitioner at times attempts to frame the deductibility of the relevant expenses as an issue of constitutional dimensions, under the facts and circumstances of his case, it does not rise to that level. Petitioner’s gender, marital status, and sexual orientation do not bear on whether he can deduct the expenses at issue. He cannot deduct those expenses because he has no medical condition or defect to which those expenses relate and because they did not affect a structure or function of his body. Expenses incurred in the absence of the requisite underlying medical condition or defect and that do not affect a structure or function of the taxpayer’s body are nondeductible personal expenses within the meaning of section 262.

Can a couple having trouble conceiving use IVF and deduct those expenses? If it’s medically indicated, almost certainly. Can a man deduct IVF just to have more children? No.

Case: Magdalin v. Commissioner, T.C. Memo 2008-293

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Custer’s Last Stand

Posted on December 22, 2008 by Russ

No, not that Custer.

Earlier this month the Tax Court looked at the case of Richard Custer. Mr. Custer, a pilot, hadn’t filed his 2004 tax return. The IRS sent him a notice of deficiency. Mr. Custer then filed a petition with the Tax Court, “…containing numerous frivolous and groundless “tax defier” arguments.” And this wasn’t Mr. Custer’s first appearance before the Tax Court. As the IRS noted, “Petitioner has made frivolous arguments in a past Tax Court case and continues to maintain these arguments in the current case. In his previous Tax Court Case, Docket No. 21335-05L, the Court imposed a § 6673 penalty in the amount of $5,000.”

The Tax Court doesn’t look kindly at “…shopworn arguments characteristic of tax-protester/tax defier rhetoric that has been universally rejected by this and other courts.” And the court has a stick they can use against petitioners who make such arguments. “Section 6673(a)(1) authorizes this Court to penalize up to $25,000 a taxpayer who institutes or maintains a proceeding primarily for delay or pursues a position in this Court which is frivolous or groundless.” Mr. Custer was penalized $10,000 for his frivolity.

So if you think that you don’t have to pay the income tax it’s time to change your view. Those frivolous arguments aren’t worth the paper they’re printed on.

Case: Custer v. Commissioner, T.C. Memo 2008-266

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Two Entrants for Tax Offender of the Year

Posted on December 22, 2008 by Russ

Joe Kristan has two stories today which show Bozo-sized stupidity. That’s definitely a prerequisite to being proclaimed the Tax Offender of the Year.

First, from Tampa, Florida comes the case of Randy Nowak. Mr. Nowak was going through an IRS audit and it wasn’t going well. He was worried that the IRS would find his foreign financial account (which had somewhere around $3 to $4 million in it). So, did he disclose the account, and throw himself on the mercy of the IRS? Did he hire a tax attorney to help him clear up this mess? Did he hire an Enrolled Agent or a CPA to represent him in the audit, so that a negotiated settlement could be made with the IRS? Or did he hire a hit man to kill the IRS agent?

No one could be that dumb, right? Even if the IRS agent were to die of natural causes certainly someone would replace him. But to expect a Bozo to be thinking, well, that’s an oxymoron. Mr. Nowak will likely soon be residing at ClubFed after his conviction for attempted murder. As Joe Kristan said, “I suspect the penalties for trying to murder a federal agent will dwarf anything he would have gotten for having unreported bank accounts.”

The second case involves a Tax Court decision rendered today. And it is perhaps the shortest opinion I’ve ever seen from that court. A woman claims casualty losses of $10,012,633, $9,997,469, and $9,994,315 in three respective years. The IRS gets suspicious, and audits her return and denies the deduction. From the opinion:

Petitioner contends that her savings bonds, stamp collection, and other personal valuables were stolen and that her home was damaged by a flood. There is no credible evidence, however, supporting petitioner’s contentions and claimed deductions. In fact, petitioner acknowledged that “My putting $10 million dollars each year from 2003-2205 [sic] was just an estimated amount”. Accordingly, we sustain respondent’s determinations.

You are allowed to use estimates, but if you estimate $10 million you’d better have some back-up evidence (appraisals would be a good start). And there are reasons why banks offer safety deposit boxes.

My brother asked me last year if I thought I’d ever run out of stories like these. I told him that I wasn’t worried at all.

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Nominations for Tax Offender of the Year

Posted on December 22, 2008 by Russ

Yesterday was the first day of winter. For those of you suffering in the cold, I should point out that it is a little cold this morning in Orange County. As I write this it’s 53 F, with light rain. Of course, that’s nothing compared to my hometown of Chicago (-3 F, but it is sunny) or Joe Kristan in Des Moines (-6 F). Brrrr…

But what does the end of the year really mean? It’s nearing the time for award season. I saw an advertisement last night for the Golden Globe Awards. Tax bloggers give out awards, too. I give out the Tax Offender of the Year award.

Over the past twelve months I’ve noted many fraudsters and other miscreants in the blog. You may have come across someone especially deserving. There are some prerequisites for this award: The offensive behavior and/or trial (and conviction) must have taken place in 2008. And the offense must be especially noteworthy.

If you have any nominations feel free to email them to me at rcfox at claytontax dot com. I’ll announce the winner on New Year’s Eve.

Here are the posts on the two previous winners:
2005 Tax Offender of the Year
2007 Tax Offender of the Year

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Pre-Holiday Fraud

Posted on December 21, 2008 by Russ

Lots of new tax evasion reported this week. I’m going to focus on a psychologist, contractors, a restaurant owner, a skydiver, and instant cameras.

A psychologist finds herself in trouble rather than her patients. Dr. Linda Luther-Starbird is a psychologist in Grand Junction, Colorado. The Colorado Department of Revenue alleges that she owes nearly $27,000 in tax, penalties, and interest. Ms. Luther-Starbird wrote to Colorado and told the state, according to the affidavit obtained by the Colorado DOR and printed in the Grand Junction Free Press, “American citizens have absolutely no obligation to file individual income tax returns…I am not willfully ‘failing to file’ as the IRS likes to call it, but that I have a reasonable and ethical responsibility NOT to file because there is no constitutional and legitimate reason to do so.” Hint: If you have income and don’t file a tax return it’s called tax evasion, and there’s no judge in the United States who will accept tax protester arguments.

It was a bad week for contractors. Jeffrey Sarris, a Bethesda, Maryland contractor will spend 366 days at ClubFed. Mr. Sarris owned Bethesda Home Improvement Corporation. Instead of showing his revenues on his income statement he cashed the checks at a restaurant, put the proceeds in a safe deposit box, and paid his contractors and employees using cash. What could go wrong? Mr. Sarris pleaded guilty for evading tax on $1.4 million of income. There’s no word in the article about whether Mr. Sarris will have to make restitution of $981,549.

Meanwhile, just up the road in Philadelphia comes the story of Donald Dougherty, Jr. Mr. Dougherty may have done a lot of good deeds in his neighborhood but a judge thought that 99 guilty pleas meant a trip to ClubFed was warranted. Mr. Dougherty’s crimes started by doing free electrical work for the head of Local 98 of the International Brotherhood of Electrical Workers, John Dougherty (no relation). He compounded this by deliberately paying his employees in cash to avoid paying taxes. Besides the time at ClubFed Mr. Dougherty must make restitution to the IRS of $1.6 million and pay the union $673,070 for its health and welfare fund.

Next, we head to North Chicago, Illinois. John Psihos allegedly used one of the oldest methods around to hide income. The IRS alleges he kept two sets of books for Flanagan’s Restaurant. And we’re not talking peanuts as far as the amount of the alleged evasion; Mr. Psihos allegedly he didn’t pay $1.18 million of tax on $3.19 million of unreported income.

I’ve never been skydiving (and I probably never will), but I have a friend who loves it. Richard Davis owned Skydive Houston. He told the IRS that the ownership was through various partnerships. Madison Oden was an automobile salesman in Houston who used Mr. Davis to prepare his tax returns. That wasn’t a good decision.

Mr. Oden purchased tax write-offs from Mr. Davis as “partnership investments.” Mr. Oden somehow was able to write off fraudulent skydiving partnership losses along with a fictitious auto finance business and phony losses in a family partnership. That trifecta led to both being indicted and tried on tax evasion charges. They were found guilty in June and were sentenced this past week. Mr. Oden will be spending 15 months at ClubFed and Mr. Davis got 36 months. What’s interesting is that Mr. Oden was audited back in the 1990s for doing similar things on his tax return and had to pay $73,000 then. I guess Bozos don’t learn from experience.

Finally, I remember the first camera I ever used. It was a Polaroid instant camera. I still have some pictures taken during my childhood with that camera. Polaroid eventually became a unit of Petters Group Worldwide LLC in 2005.

That wasn’t a good thing for Polaroid as the company appears to have become entrenched in a fraud case. The founder of Petters Group, Tom Petters, was arrested in October. He was indicted on 20 counts earlier this month; allegedly Mr. Petters is the mastermind of a $3.5 billion Ponzi scheme.

The government did get some help in their case against Mr. Petters this week. James Wehmhoff pleaded guilty on Friday to one count of assisting tax fraud and one count of conspiracy. US Attorney Frank Magill says Mr. Wehmhoff is responsible for $20 million in tax losses to the IRS. Although not mentioned in the article one has to assume that Mr. Wehmhoff may be testifying in any trial against Mr. Petters.

That’s a lot of fraud for just one week. Let’s hope that the fraudsters get in the Holiday spirit and take the next couple of weeks off…or at least make it a light week.

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Man Who “Confused” a Lincoln Town Car With Sewing Machine Sentenced

Posted on December 21, 2008 by Russ

Earlier this year I wrote how it would be difficult to confuse a Lincoln Town Car with a Singer Sewing Machine. Yet Charles Edkins managed to do it. Of course, he was committing tax evasion by deducting personal expenses as business expenses. Unfortunately, he got caught. Then he skipped town and headed to the Bahamas. He was arrested in Miami this past February.

Mr. Edkins pleaded guilty and has agreed to make restitution. He was sentenced this past week to four years at ClubFed and must make restitution of $285,711.

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Two Fewer Bozo Tax Preparer Schemes

Posted on December 21, 2008 by Russ

A few fewer Bozo tax preparers are on the loose. From Greenville, South Carolina comes the first story. Appropriately named Brian Bobo and his wife Latoya thought they had a foolproof scheme. Latoya would take identification information from her job at the South Carolina Department of Social Services and the Bobos and five others would create income tax returns for these individuals. They pocketed $86,000 in refunds before the IRS found out. The Bobos and the other conspirators pleaded guilty to conspiracy to file false tax returns and will be sentenced next year.

Bozo tax preparers aren’t just an American phenomenon. From Mississauga, Ontario, Canada comes the story of Ambrose Dapaah. Mr. Dapaah was the owner of ADD Accounting Services and he also was president of the CanAfrica International Foundation. Mr. Dapaah was a helpful source, and he helped his clients by taking $21 million in charitable donations to his foundation. His clients gained $6 million in tax credits, and his foundation gained some money. Did I mention that those donations were falsified, and that he sold donation receipts? Mr. Dapaah will be spending 51 months in prison.

Yes, no matter if you’re in Canada or the United States your charitable donations must be real in order for you to get a tax break. Remember, if it sounds too good to be true it probably is.

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