Where did the “Prima Donna” Dock?

Posted on June 4, 2008 by Russ

If you’ve ever driven from Southern California to Las Vegas, the first exit on Interstate-15 when you cross into Nevada is for Primm, site of three casinos. These casinos used to be owned by the Primm family but were sold to MGM (now MGM/Mirage) in 1998. (I believe that the Primm Casinos were later divested to Herbst Gaming.)

The family patriarch, Gary Primm, bought a yacht, the Prima Donna. It’s a big yacht, 145 feet in length. The yacht is registered in the Cayman Islands and, according to Alexander Druft, attorney for Mr. Primm, was normally docked in Baja California.

The Orange County, California assessor believes that the yacht was docked part of the time during 2002 and 2006 in nearby Newport Beach, and Mr. Primm thus owes the county nearly $380,000 in property taxes (for 2003 and 2007, the years following the dockings). Mr. Primm has appealed the assessor’s office ruling; he previously won an appeal regarding 2006 (based on 2005 dockings).

So is this “harassment” as claimed by Mr. Druft or is Webster Guillory, Orange County Assessor, correct when he states, “If he owns a big boat, even if he lives in Nevada, he’s not docking it there.” Well, I know Mr. Guillory is correct in that an ocean-going vessel isn’t docked in Nevada. Still, given the precarious nature of California’s finances it’s not surprising that the assessor is looking under every rock (or at every dock) to find anything worth taxing.

News Story: Orange County Register

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Out Like a Lamb

Posted on June 4, 2008 by Russ

One of the surest methods I know to get the IRS upset with you is to withhold payroll taxes and not remit them. Payroll taxes are called trust fund taxes; I’ve yet to know of a time when the IRS hasn’t gone after a business that failed to remit those taxes. I’m also unaware of any case where the IRS hasn’t pursued a payroll service who failed to remit trust fund taxed on behalf of employers it serviced.

James McLamb, of Raleigh, North Carolina, was CFO of the Castleton Group. Castleton serviced about 100 employers in the Research Triangle area of North Carolina. Serviced, though, may be the wrong word to use for Castleton; scammed appears to be more apropos.

McLamb had a unique method of handling trust fund taxes. He’d calculate the correct amount of taxes, accept those remittances, and then change the numbers to much lower figures. He’d use the lower numbers to report payroll to the IRS and the North Carolina Department of Revenue. It’s unclear from the news story where the $8 million that was supposed to go to the IRS ended up; suffice to say it didn’t end up in the U.S. Treasury and likely lined McLamb’s pockets.

The fallout from this mess is what you’d expect. McLamb has pleaded guilty to defrauding the United States; he’ll likely be sentenced to a lengthy term at ClubFed later this year. Castleton is bankrupt; it’s owner blames McLamb for the company’s problems. The employers who trusted Castleton still have to remit the taxes to the IRS & North Carolina.

I strongly advise my corporate clients to use a reputable payroll service. This is not an area to skimp on—the penalties are high for mistakes and owners can and are held personally liable when mistakes occur. Finally, if you think that an idea like McLamb’s will work over the long term you’re badly mistaken. Trust fund taxes are heavily scrutinized and the government will come after you.

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Hatch Appeals to the Supreme Court

Posted on June 3, 2008 by Russ

Richard Hatch has appealed his guilty verdict to the US Supreme Court. Hatch’s attorney told the Associated Press, “He’s extremely optimistic about his appeal…He still believes the system should work.” Hatch is appealing alleging that the judge improperly limited his testimony and that the judge unfairly limited his cross-examination of the accountant who prepared his tax returns.

The Court of Appeals rejected Hatch’s appeal earlier this year. Indeed, the Court of Appeals summarily rejected each argument that Hatch is now making, noting, “Here, the district court’s limitations on cross-examination in this nine-day trial were thoughtful and far from being excessive” and

The court thus opened the door for defense counsel to ask Hatch whether Burnett or someone else at SEG had promised to pay the taxes on the money he won. Hatch’s counsel, however, did not follow up with questions of this sort.

Like Mr. Hatch and his attorney, I believe that the system should work. Unlike Mr. Hatch and his attorney, I think it has.

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Propositions 98 & 99

Posted on May 31, 2008 by Russ

For Californians it’s again time to vote. This coming Tuesday it’s the June primary. Normally, that’s when citizens of the Golden State get to vote in the presidential primary…but not this year (the presidential primary was back in February). However, votes in Congressional races and for the state legislature do occur on Tuesday.

There are two propositions on the ballot: propositions 98 & 99. Both deal with eminent domain, and based on the ballot title both would prevent eminent domain for taking private property for private uses.

However, the proponents of each initiative think that only their initiative gives the desired result. Proposition 98, according to its proponents, enacts real eminent domain reform while proposition 99 was passed by the legislature only to confuse the voters. If you believe proposition 99’s proponents, it’s the other way around: proposition 98 would cost local government too much while proposition 99 would bring real reform.

No matter what, come Tuesday exercise your right and vote. You can find your polling here.

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Shaolin Grand Master Arrested

Posted on May 29, 2008 by Russ

Earlier this month I reported on Qin Xiping, the 49th (or 34th) Grand Master of the Shaolin Temple. Qin had been accused by the Tokyo Regional Taxation Bureau of hiding about 130 million yen. Qin at the time was rumored to be back in China, safely away from the Japanese tax authorities.

Apparently, he wasn’t. He was arrested earlier this week, and both his home and the All Japan Shaolin Temple Qigong Association were raided by prosecutors. Qin is accused now of not paying 38 million yen in taxes. He has denied the charges. In the earlier article he was quoted as saying, “I’m only temporarily in charge of the money, on behalf of the head temple, so it’s not my money.” I know next to nothing about Japanese tax law, but I doubt that excuse will hold up.

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Emmigration Just Got More Costly

Posted on May 29, 2008 by Russ

If you want to give up your US citizenship, prepare to pay the IRS. As the Wall Street Journal reported on Tuesday, Congress has modified how individuals who renounce their citizenship will pay taxes. If you have a net worth of $2 million or more you will pay tax when you leave as if you sold all your assets.

The new rules do share a similarity with the old rules. The first $600,000 in gains aren’t taxed. However, the old “10-year rule” is gone. Additionally, if an individual who renounces his or her citizenship later gives a gift or an inheritance to a US resident, that gift or inheritance will be taxed at 45%.

If you plan on, or are considering renouncing your citizenship you absolutely need to discuss your situation with a tax accountant and an attorney. If you’re wealthy, just plan on leaving some of your money to the Internal Revenue Service whether you want to or not.

Other Coverage: Don’t Mess With Taxes

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Why California Has a Budget Problem

Posted on May 26, 2008 by Russ

Daniel Weintraub of the Sacramento Bee has an excellent article today on California’s budget problems, their cause, and why certain areas of the budget will likely have to be cut (and will benefit from increased funding). If you want to know why we’re in this situation, this article is a must-read.

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At SuperSeminar

Posted on May 21, 2008 by Russ

Every year I attend the California Society of Enrolled Agents SuperSeminar. I’ll be here through the weekend, and posting will be very light.

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Shot Down Deductions

Posted on May 21, 2008 by Russ

Today the Tax Court looked at the case of a police officer who used an unnamed Bozo tax preparer. The officer didn’t have receipts, records, or other documentation to back-up his itemized deductions, yet the tax preparer put down lots of itemized deductions: “[P]etitioner claimed deductions totaling $26,829 comprising $13,737 in unreimbursed job-related expenses, $6,545 of charitable contributions, $3,023 of medical and dental expenses, and $3,494 of State and local income taxes.”

The Court did allow some of the deductions: deductions for dry cleaning of the uniform at $20/week, ammunition of $65, and state and local taxes of $3,494.

The Court did not allow deductions for black Nike boots (these could be worn while off work), private target practice (not proven to be “necessary and ordinary”), commuting (commuting is never deductible), parking (no receipts/back-up records), charitable contributions (no documentation), and medical expenses (he admitted he had no medical expenses). Given that the standard deduction of $4,750 was greater than the itemized deductions (they total $4,559), the IRS was the winner.

But that wasn’t all. The IRS asked for an accuracy-related penalty of 20%. The Court noted:

Petitioner contends that he is not liable for the penalty because he relied on erroneous expert advice given by his tax preparer. However, petitioner did not take reasonable steps to report the correct tax liability. Petitioner did not provide the preparer with any documents or receipts to substantiate any of his claimed deductions, nor did he scrutinize any of the figures that the preparer reported on the return. Further, petitioner failed to question any of the inflated figures. Thus, petitioner did not exercise the due care of a reasonable and ordinarily prudent person. The understatement is due to negligence within the meaning of section 6662(c), and petitioner is liable for the accuracy-related penalty under section 6662(a).

Whether you’re a policeman or an insurance agent, there’s one rule to live by when figuring your itemized deductions: document, document, and document. This cop didn’t, and he paid the price.

Case: Snead v. Commissioner, T.C. Summary 2008-57

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States Can Give Preferential Treatment to Their Own Muni Bonds

Posted on May 19, 2008 by Russ

The Supreme Court ruled today in Dept. of Revenue v. Davis that states can give preferential treatment to their own municipal bonds (over those of other states). Thus, the practice of paying state income tax on out-of-state municipal bonds will continue. The Supreme Court ruling was fractured, with Justice Souter’s opinion, four concurring opinions, and two dissenting opinions.

The main impact of this decision is that municipal bonds will tend to be purchased by individuals who reside in that state, so that they can obtain the largest tax impact. The decision is good news for California, as a decision that would have invalidated preferential treatment would have likely cost the state millions of dollars in additional interest.

Link to previous coverage of this case on Taxable Talk

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