And it’s a good one, too. I don’t know how I’ve missed adding Robert Flach’s The Wandering Tax Pro blog to the blogroll on the right, but that error has been rectified. Robert reports extensively on the tax situation out of the swamplands New Jersey, the Garden State.
In any case, his blog is well worth reading if you’re into taxes.
It’s now worthy of a soap opera. Republican Governor Arnold Schwarzenegger announced this afternoon that he would veto the budget bill that passed last night. He announced that if the budget veto is overridden that he would veto “hundreds of bills.”
The Flash Report is a bit less certain of what the Governator will do. I do know that California has a dysfunctional budget process and that there wasn’t real structural reform this year. I don’t know how the Governor can mandate 60% of the Legislature to change their world-views. I suspect we’re still seeing the unstoppable force meeting the immovable object.
I’ll be out of town over the next few days, but I’ll try to update the latest chapters of “As The Budget Churns.”
Both houses of the Legislature passed a budget late yesterday (possibly early this morning). The $110 billion budget does not include any new general taxes or tax increases (no increase in the sales tax or income tax).
The budget does include some new gimmicks, though. There’s borrowing from the state lottery, and a change in how state taxes are collected. The Los Angeles Times reports:
Some businesses and individuals would have to pay their taxes sooner, and some would have to pay more than they owe and would get the extra back later. State taxes withheld at the workplace would jump 10% for everyone.
Here are the tax changes being made:
– Estimated payments will be “front-loaded” (more must be paid earlier in the year);
– Estimated tax payments would be based only on 90% of current years’ income (66% for farmers) and on the annualized income method (aka “pay as you go”);
– LLCs must prepay the LLC fee rather than paying it the following April;
– There will be a new tax amnesty;
– The Net Operating Loss (NOL) carryforward and Research & Development credits would be temporarily suspended; and
– Beginning in 2010 businesses would be able to stockpile credits and use them (in future years) more liberally.
The devil is in the details, and I haven’t seen them yet. I probably won’t until next week, but when I do I’ll report on them.
There is one other detail: Governor Schwarzenegger is threatening a veto. The budget establishes a rainy day fund, but it’s weak in concept. The Governator wants a far stronger rainy day fund where transfers out are rare.
Additionally, the rainy day fund and the borrowing from the state lottery require voter approval. That can’t happen in November (the budget passed too late) so we’ll likely have another special election next year.
There are major problems with this budget:
1. What happens with the 2009-2010 budget? California’s economy likely won’t improve for another two years. The budget deficit next year figures to be worse than this year. Additionally, the money that made this budget “balanced” came from the following year’s budget.
2. This budget makes California even less of a business-friendly state. This will cause even more businesses to leave the Bronze Golden State resulting in lowered tax revenues.
3. How rosy are the assumptions in this budget? I can’t tell, but I suspect they’re very rosy. I suspect that next March we’ll be talking about a $5 billion budget deficit in the current fiscal year.
Sooner or later California will have to tackle these budget issues head-on. As usual, later appears to have won for now. Eventually, though, real solutions must be found or the train jumps the tracks.
I’m always interested in finding new tax bloggers. I received an email today from Bruce who has “the taxguy” tax blog. He has quite a bit of useful information on his blog, including the first of a series about choosing a tax professional.
I’ve added his blog to my blogroll, and I welcome him into the world of tax bloggers (though it appears he’s been around some time—it’s just been my fault for not noticing him).
An interesting week for tax fraud. There’s a typical case out of the San Joaquin Valley, a jailed promoter who may have to spend even longer at ClubFed, and an attorney who admitted that he lied under oath to the IRS and that he gave an incorrect legal opinion on a tax shelter.
First, Michael Gordon of Clovis, California (near Fresno) has had his own software company for several years. Between 2001 and 2004 he had his company pay over $339,000 of personal expenses as business expenses. That’s not a good idea, and it became a very bad idea when the IRS caught him. He pleaded guilty to tax fraud last week, and has agreed to make restitution of $211,000 and pay all the taxes, penalties, and interest he owes. He’s already paid over $570,000 toward his obligations. Note that appears to be far larger than the actual tax he owes which goes to show the impact of penalties and interest. As usual, it’s a lot better (and cheaper) to just pay the tax in the first place. Mr. Gordon will be sentenced in November.
Remember Eddie Ray Kahn? He was a co-defendant of Wesley Snipes. Mr. Kahn is already at ClubFed having been sentenced to ten years. Well, he may be spending even more time there. He was indicted this past week along with four others on counts of mail fraud and conspiracy to defraud the United States. What did these individuals do? They allegedly sold worthless “bills of exchange” and other schemes to promote tax fraud.
The indictment alleges that American Rights Litigators/Guiding Light of God Ministries sold more than 4,000 packages to customers in every state. Their “bills of exchange” were supposedly drawn on the US Treasury for payment of taxes. Unfortunately, there’s no such thing. Mr. Kahn allegedly was the ringleader of the group. In any case, no trial date has yet been set.
Finally, Peter Cinquegrani was a partner at Arnold & Porter, a law firm. He was instrumental in designing the PICO tax shelter (Personal Investment Corporation). Back in 2003 he testified under oath to the IRS that the shelter had not been designed to avoid taxes.
One of the issues with “tax shelters” is that they must have some economic substance. A basic rule of tax is that transactions that lack an economic substance are ignored for tax purposes. Well, Ernst & Young was looking to develop tax shelters (including the PICO). Mr. Cinquegrani was the primary drafter of opinions stating that the PICO had an economic purpose.
This past week Mr. Cinquegrani pleaded guilty to conspiracy to commit tax fraud, aiding and abetting tax evasion, and aiding in the submission of false and fraudulent documents to the IRS. He admitted that he lied to the IRS back in 2003. He also admitted drafting a phony consulting contract between Ernst & Young and Bricolage Capital. The North Country Gazette gets to the meat of the issue:
He stated that E&Y’s fee for the PICO transaction was calculated as a percentage of the tax loss the client wished to generate, but E&Y’s engagement letter with each client reflected a much smaller flat fee amount in order to conceal that the true fee was a percentage of the targeted tax loss. Cinquegrani admitted that together with individuals at E&Y and Bricolage, he helped arrange for the large balance of E&Y’s true tax shelter fee to be paid by the client to a Bricolage affiliate, and then for the affiliate to pay E&Y.
Mr. Cinquegrani will be sentenced in December. He may also have to make restitution and pay a fine. Arnold & Porter has settled with the IRS and paid a tax promoter penalty.
Remember what I’ve been saying for years: If it sounds too good to be true it probably is.
There’s still no budget in California. However, the Los Angeles Times reported that Senate President Don Perata (D-Oakland) sent an email to fellow Democratic Senators that he would attempt to work with Republicans to write a new budget that has no new taxes and no borrowing. We shall see if there’s a real budget or one full of gimmicks and if it actually passes this week.
Meanwhile, the Wall Street Journal noted in an editorial that California and New York, the states with the highest tax rates, are losing taxpayers. The Journal speculates that individuals who pay a lot of tax and can move do so. I don’t have to speculate about that—I know the Journal is correct. I’ve had corporate clients relocate from Southern California to low-tax states and their businesses suddenly became profitable.
The Laffer Curve dictates that decreasing tax rates can lead to increased tax collections. It also leads to businesses making more money which can lead to increased employment and a better economy. Do you think the politicians in Sacramento will realize this? I doubt it….
The IRS announced late this afternoon that filing deadlines for corporate taxes and estimated taxes due September 15th have been extended at least one week in impacted areas. The IRS announcement notes, “Affected taxpayers can mark paper tax returns with the words “Hurricane Ike.” Taxpayers who e-file their returns can use their software’s “disaster” feature, if available.” Although not specifically mentioned in the IRS notice, I assume this covers taxpayers in the Gulf Coast sections of Texas and Western Louisiana.
If you want to get on the bad side of a judge a very good way to do so is to file fake warrants and fraudulent leans and attempt to “arrest” the judge. It’s an especially Bozo thing to do when you’re going to be sentenced by that judge.
Never underestimate the stupidity of some of the tax protesters. Indeed, Robert Beale did all of those things as I wrote earlier. Today, when he was sentenced by Judge Ann Montgomery, he told the Court, “I do not consent to incarceration, fine or supervised release…,” he said. “I have not committed a crime.” Unfortunately for Mr. Beale, the judge and jury felt quite differently. And his remarks probably reinforced Judge Montgomery’s bad impression of him. He’ll have 11 years at ClubFed of nonconsensual incarceration. Additionally, he’s still facing charges over his attempt to sentence Judge Montgomery.
With a very competitive election race between Democrat Barack Obama and Republican John McCain, the innuendo, charges, and rhetoric have flown back and forth. Senators McCain and Obama hold different views on many issues. Since I write a tax blog I’m going to examine the differences on tax issues between the two Senators. I hope that this series will enlighten you on the candidates and this important issue as we head towards November and Election Day.
First, though, I’m going to give a general overview on taxes, the economy, and how legislation is (and isn’t) enacted.
Taxes
A man condemning the income tax because of the annoyance it gives him or the expense it puts him to is merely a dog baring its teeth, and he forfeits the privileges of civilized discourse. But it is permissible to criticize it on other and impersonal grounds. A government, like an individual, spends money for any or all of three reasons: because it needs to, because it wants to, or simply because it has it to spend. The last is much the shabbiest. It is arguable, if not manifest, that a substantial proportion of this great spring flood of billions pouring into the Treasury will in effect get spent for that last shabby reason. — Rex Stout (And Be A Villain, 1948)
Rex Stout’s words, penned sixty years ago, match my views on taxation. (If you’d like to read an excellent overview on taxes, I strongly recommend Charles Adams’ For Good and Evil.
The primary tax in the United States is the income tax, authorized by the 16th Amendment. But it is not the only tax that the federal government collects. There are excise taxes (primarily on fuel, trucks, and wagering), payroll taxes, and an estate tax. There are taxes on individuals and on businesses.
All taxes add a cost to the price of a good. If the cost of a good increases, and the supply of the good remains constant, fewer of the good is sold—that’s the law of supply and demand. Taxes always decrease overall economic performance.
Yet the government must have revenue in order to operate; some amount of taxation must occur. Well, why don’t we just tax businesses? Assume that the only tax was an income tax on businesses. We would still be paying the tax. Again, this is a result of basic economics. If a business is taxed, it will raise its prices in order for it to continue to make a normal profit. All taxes on businesses are passed on to customers. When laws have been passed “banning” businesses from passing on taxes most businesses respond by cutting production, which hurts consumers because not enough of a good is produced.
Consider, also, regulations. Economics teaches that businesses pass on their costs to their customers. The cost of complying with regulations is passed on to consumers. Of course, many regulations are necessary but it is important to remember who ultimately pays for regulations—you and I.
Tax Legislation
The Constitution requires that tax legislation be first introduced in the House of Representatives. Tax legislation normally is first heard by the Ways and Means Committee. Once legislation passes out of committee it is then heard by the full House. The Speaker of the House has tremendous control over what legislation is heard by the entire body. With the Democrats in control of the House, this means that Nancy Pelosi (D-CA) can in most circumstances determine what is and isn’t considered.
Once legislation passes the House, it is then heard by the Senate. Tax legislation is usually first reviewed by the Senate Finance Committee and is then considered by the full Senate. Before legislation is considered by the Senate, cloture must be achieved; it takes 60 votes for cloture. (A bill needs a majority, 51, to pass. If the vote is tied the Vice President, who serves as president of the Senate, can cast a tie-breaking vote.) If a measure is amended in the Senate a Conference Committee is appointed to mesh out the differences. Then the legislation must again pass the House and Senate. Then the bill is sent to the President who can sign the bill or veto it. If a measure is vetoed, Congress can override the veto by getting a two-thirds vote in both the House and Senate in favor of the measure.
Why did I bring up how the legislative process works for taxes? Because it is of vital importance when considering the impact of a President. When Congress is controlled by one party and the President is a member of the other party usually few measures will actually be enacted into law. That’s certainly been the case with the 110th Congress. But this isn’t just President Bush using his veto power. This particular Congress just hasn’t been able to agree on much of anything. Whether that’s good or bad I’ll leave for you to decide.
Part 1 Conclusion
It is important to understand how the legislative process works in order to evaluate what a President can and cannot do. Of course, if voters demand that a piece of legislation be passed Congress usually responds. However, America is divided, and there have been few times in recent years where the public has demanded a certain piece of tax legislation be passed. One example of legislation that is passed because of what the public would do is the annual AMT patch. The public would yell bloody murder if an AMT patch were not passed; Congress knows this and, thus, passes the patch annually.
In Part 2 I will examine the proposals of Senator Obama (D-Illinois). I will look at the totality of the legislation he proposes—not only tax legislation but spending legislation because if a new program is passed the money to fund it must come from somewhere. I’ll also look at earmarks and how this does or does not impact Senator Obama’s proposals.
There was quite a bit of tax fraud at week’s end. Indeed, I had to liberally weed out the stories so the ones below are the cream of the crop, so to speak.
First, we have another alleged Bozo tax preparer. Julius Nyamweya Kiage says he’s a certified public accountant. Mr. Kiage has had an accounting practice called J.K. Accounting & Co. PLLC in Brooklyn Park, Minnesota. Yet Mr. Kiage is not listed as a CPA in Minnesota, Iowa, or Wisconsin.
While the IRS is accusing Mr. Kiage of false advertising that’s not their biggest beef. Rather, the IRS noticed that the returns prepared by Mr. Kiage have “exaggerated or fraudulent claims related to education credits, individual retirement account deductions, education credits and charitable contributions.” Mr. Kiage has not been charged; the IRS at this point is investigating and has seized computer records and files from Mr. Kiage’s office. The IRS told a court (to obtain a subpoena) that Mr. Kiage prepared 1,843 returns over the last two years that resulted in refunds of $4.7 million. The investigation began as a result of a tip.
Robert P. Peebles of St. Helena, California had a problem that most of us would like to have. He was trustee of his 96-year old aunt’s $5 million trust. He allegedly decided to set up his own $4 million trust funded from his aunt’s trust, to be repaid with annual payments.
His attorney allegedly told him that he would have to report his trust to the IRS and Connecticut (his aunt was a Connecticut resident) on estate tax returns. So he fired his attorney.
He then hired two accountants to prepare the estate tax returns. But somehow he failed to tell the accountants about his trust (the IRS alleges it was deliberate; Mr. Peebles claims it was an oversight and the accountants didn’t ask about it).
The IRS accuses Mr. Peebles of lying to IRS investigators under oath, various tax laws, and mail fraud. He was arraigned in Connecticut and has been released on bail.
And yes, if you do transfer $4 million into your own trust from that of your late aunt you do need to report it on the estate tax returns.
