There’s a Good and a Bad Way to Change Your Address

Posted on December 26, 2007 by Russ

A partnership changes its address. What should it do to notify the IRS? Well, that’s fairly simple: Like any taxpayer it should send in Form 8822. Today, the Tax Court looked at a case where the partnership didn’t follow the normal procedure.

Partnerships are required to designate a “Tax Matters Partner” (TMP). When the IRS has questions/issues/needs to send a notice, it sends the same to the TMP. In this case, the IRS sent 14 final partnership administrative adjustment (FPAA) notices to three different addresses. As the Tax Court said, “By mailing FPAAs to multiple addressees at multiple addresses, respondent made a good faith effort to notify all affected parties of the partnership adjustments, thus satisfying the notice requirement of sec. 6223(a).” And one of the addresses was the last address of the Form 1065, thus making it a correct address to mail the FPAAs.

The partnership wanted to challenge the FPAAs. (Among other issues, the IRS believes the partnership is a sham.) From this case and two related cases the Tax Court ruled on, it’s unclear whether or not the partnership received the FPAAs timely. It’s quite clear that they didn’t respond timely (the Tax Court case was brought two years after mailing of the FPAAs). Because the IRS mailed the FPAAs to a correct address, the Tax Court dismissed the partnership’s petition.

Consider what would have happened to the case had the partnership correctly filed a change of address—there’s a good chance their case would be heard at the Tax Court. (Whether or not they would prevail is unknown, as the issues involved were never argued.) Certified mail costs under $5.00. I guarantee that the IRS asked the partnership for more than $5.00.

Case: Stone Canyon Partners v. Commissioner, T.C. Memo 2007-377

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Gamblers, Keep Those Logs

Posted on December 26, 2007 by Russ

The Tax Court looked at another gambler’s attempt to write off substantial gambling losses. She claimed a losing year, but the IRS felt otherwise. Did she really have gambling losses, or were they a mirage?

Gamblers, both professional or amateur, must keep a contemporaneous written log. If you do keep such a log, you’ll be able to substantiate your wins and losses. In today’s case, however, the gambler didn’t keep a log. She claimed $244,744 in losses, but the IRS only allowed $127,165 (after the gambler found casino ATM receipts, canceled checks made payable to casinos, carbon copies of checks made payable to casinos, and credit card statements stating that cash was advanced at the casinos). What about the remaining $117,579?

The court summarized the problem most ably:

“In order to establish entitlement to a deduction for gambling losses in this Court, the taxpayer must prove the losses sustained during the taxable year…Petitioner failed to present credible evidence of gambling losses beyond those respondent conceded. Petitioner did not maintain a diary or any other contemporaneous record reflecting either her winnings or her losses from gambling during 2002. Further, petitioner’s gambling income of $265,795 for 2002 was established only by an examination of her Forms W-2G, Certain Gambling Winnings, and petitioner appeared unaware of the specific figure until confronted by respondent. At trial, petitioner submitted no evidence to validate her claimed gambling losses, relying only on the theory that her losses must have equaled her earnings because she found herself in debt at the end of the year. We conclude that petitioner has failed to satisfy her burden of substantiating her losses.”

There are two problems. First, the Court is very suspicious of a gambler whose only winnings are those reported on the W-2Gs. It’s almost certain that the petitioner had other slot winnings which didn’t result in the issuance of a Form W-2G.

Second, and most importantly, she had no documentation to prove her losses. Telling the Court, “I’m broke, so I must have lost,” may be logical (and may indeed by factual), but it doesn’t show proof of the facts. She had no proof, and the petitioner got three lemons for her decision.

Case: Jackson v. Commissioner, T.C. Memo 2007-373

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Lumps of Coal for Christmas Tax Evaders

Posted on December 25, 2007 by Russ

There’s been lots of fraud over the past few days. People seem to be forgetting that cash sales are just as taxable as other sales.

Let’s start in New York City. The New York Yankees may be one of baseball’s most successful franchises, but one former employee has learned the hard way that tips are taxable income. David Szen is the Yankees’ former Traveling Secretary (he arranged for charter buses, hotel rooms, etc.), and, as is customary in baseball, received tips from players and coaches. All fine and good, until he forgot to note the tips on his tax return. Oops. He admitted his wrong-doing last week and pleaded guilty to tax evasion. He’ll make restitution of just over $10,000 and may face a short stay at ClubFed or a fine.

Staying in the Big Apple, an art gallery owner found out the hard way that sales tax laws apply to big ticket items, too. Michael Weisbrod owns the Weisbrod Chinese Art Gallery. They feature Chinese objects, such as the beautiful jade horse:

Unfortunately, the gallery forgot to collect sales tax on its purchases, and the owner pleaded guilty to both personal and corporate state tax fraud. The amount of the fraud could be as high as $1.1 million, so that’s a lot of fraud. Sentencing is scheduled for April.

Next, from Lansing, Michigan comes the story of a former nightclub owner who decided to double his work on how he kept his books. One set of books wasn’t enough for Thomas Donall—he kept two. One was accurate; the other didn’t show the cash that he skimmed off the top. He provided the inaccurate one to his tax preparer. All was fine until the IRS discovered the double books. Mr. Donall was sentenced to a fine of $25,000 and two years probation. He must also make restitution of $180,000.

Finally, we head south to Dawsonville, Georgia. Robert Merickle ran East Coast Marketing (aka Blue Haven Pools). He used to methods to lower his tax bill: cash sales didn’t make it onto the books and personal expenses did. Neither of those methods is legal, and when the government found out, trouble ensued. Mr. Merickle pleaded guilty to tax evasion, and faces up to three years at ClubFed plus restitution. As U.S. Attorney David Nahmias said, “Those who choose this criminal course of action [tax evasion] face federal prison time, which is far worse than paying the tax that was owed.”

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Wash Sales Go To IRAs, Too

Posted on December 25, 2007 by Russ

Last week the IRS announced in Revenue Rule 2008-05 that wash sale rules impact transactions into an IRA. This could have a major impact to the unaware.

A “wash sale” is when you sell shares of stock at a loss, and in the thirty day period before or after the sale you buy replacement shares. When that happens your capital loss is postponed; the disallowed loss increases your basis in the replacement shares (assuming the replacement shares are not purchased in an IRA).

In the ruling announced last week, the IRS determined that if one buys replacement shares in an IRA, the loss is lost forever. This ruling makes doing a wash sale into an IRA a very bad decision.

Other Coverage:
Roth Tax Update
TaxProf Blog

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California Not So Golden For Residents

Posted on December 25, 2007 by Russ

In California’s last fiscal year (July 1, 2006 to June 30, 2007), 89,000 more people moved out of California than moved into the state. This is according to the annual report of the California Department of Finance. The state still grew in populations, based on births and immigrants from abroad.

Why are families emigrating from the Golden State? Could it be California’s high individual income tax, which it makes it much less of a Golden State for retirees than neighboring states such as Nevada? Could it be that California’s abysmal business climate (the state ranks 47th) is driving businesses from the state? Perhaps it’s a combination of both.

The Los Angeles Times quotes Howard Roth, Chief Economist of the Department of Finance, as stating, “[The exodus] won’t be the lasting problem we had in the 1990s. It will go away.” Is he correct?

I have my doubts. The state has a $14 billion budget deficit. Democrats in the legislature are talking about cutting various tax deductions, such as the mortgage interest deduction, and are looking at other schemes to close the gap such as increased user fees and tax increases.

If and when Sacramento gets serious about cutting the state’s bureaucracy I’ll agree with Mr. Roth that the exodus is temporary. If not, it may be something that’s much longer lasting.

News Story: Los Angeles Times

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70 Pages of Non-Frivolity

Posted on December 23, 2007 by Russ

Heading into Christmas, I hope you’ve completed your shopping. The IRS gave out its list on Friday: A list debunking some of the most popular of the frivolous arguments used by tax protesters.

For example, some have contended that only foreign income is taxable. The IRS debunks this on page 19, noting that Section 61 of the Internal Revenue Code (which is a law, Title 26, U.S.C.) states, “‘Gross income’ means all income from whatever source derived and includes compensation for services.”

So while Santa may be checking his list to see if you’ve been naughty or nice the IRS will check its list to see if your argument is reasonable or not. It’s a shame that Richard Hatch and Wesley Snipes didn’t peruse the list before they got themselves in trouble.

Hat Tip: TaxProf Blog

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Domecq Gets 10 Years

Posted on December 19, 2007 by Russ

When we last saw Michael Domecq, former president and co-owner of Domecq Importers, he had just pleaded guilty to tax fraud and knew he would spend 10 years at ClubFed. However, he had to prepare 17 years of revised, accurate tax returns to determine what he owed the Treasury.

Well, the returns have been filed and the numbers have been added up, and the total is $4.5 million in restitution (tax, penalties, and interest). That’s a lot of bottles of liquor.

The moral is the same as what we said back in July: “It would have been much simpler to just pay the tax in the first place…but somehow that thought never enters the mind of the tax evader.”

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Wednesday the Rabbi Was Arrested

Posted on December 19, 2007 by Russ

Back in the 1960s Harry Kemelman began writing books about Rabbi David Small, including several bestsellers such as Friday the Rabbi Slept Late and Saturday the Rabbi Went Hungry. They’re cozy mysteries, and are worth your perusal.

However, that’s not what I’m writing about this evening. Naftali Tzi Weisz, head of an Orthodox Jewish group (he is “The Grand Rabbi of Spinka”), was indicted on charges of conspiracy to defraud the IRS, mail fraud, money laundering, and operating an illegal money remitting business. Weisz and other associates are accused of soliciting charitable contributions to Spinka charitable groups totaling in the millions by promising donors that they could take the tax deduction and that the charity allegedly would refund 95% of the donation. And that scheme is, if proved, definitely not kosher.

Weisz and his alleged co-conspirators are looking at several years at ClubFed if convicted on all counts.

CBS Story, San Jose Mercury Story

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AMT Bill Passes; Tax Season to Start on February 29th?

Posted on December 19, 2007 by Russ

In the no surprise department, the House passed the AMT patch bill that did not contain any offsets. It now goes to President Bush who will likely sign it tomorrow or Friday.

The IRS previously said that it would take ten weeks for their computers to be reprogrammed with the new AMT exemption amounts ($66,250 for joint filers and $44,350 for single filers). Assuming that’s the case, the IRS computers will be ready to process returns on February 29, 2008.

If your refund gets delayed, you will know who to blame: Congress—specifically the Democratic leaders in the House and the Senate. They waited to bring this measure up until late November knowing full well what the impact would be.

Finally, Joe Kristan ended his post on this with a wonderful thought: “As the patch only covers 2007, it kicks the problem into 2008 – an election year. More fun awaits.” Thanks, Joe. It’s the Holiday Season, a time for good cheer, not reasons for the rest of my hair turn to gray.

TaxProf Blog linkfest on the AMT patch passage
Roth Tax Update post

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AMT Bill to Likely Pass the House Today

Posted on December 19, 2007 by Russ

News reports state that the House will consider an AMT patch bill that has already passed the Senate. The Senate version of the AMT bill does not contain any tax offsets (or “paygo”) provisions. Earlier, the House had passed an AMT patch that contained such offsets.

Last night the Senate again considered the House bill and it again failed (48 – 46, with 60 votes needed). All but one of the Republicans present voted against the bill while all Democrats present voted for the measure.

Thus, the House was left with no option but to consider the Senate version of the AMT patch, or the Democrats would end up being blamed for a tax increase on the middle class. Unfortunately, due to the lateness of the bill, the IRS forms that millions of taxpayers will receive will have incorrect information, and it’s probable that the IRS will be unable to process individuals’ tax returns until sometime in March.

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