IRS Helps With Late S Corp Elections

The IRS announced a new Revenue Procedure 2007-62 yesterday, which will allow an S Corporation to make a late election–later than the 2.5 months currently allowed. Indeed, you’ll be able to make the late S Corporation election with your first S Corporation tax return. The IRS will be modifying Form 2553 for this new Revenue Procedure.

Hat Tip: Joe Kristan, Roth Tax Updates

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Snipes Fires Attorneys, Doesn’t Get Extension

Wesley Snipes fired his attorneys for his upcoming tax evasion trial. The Ocala Star-Banner reports that Snipes new attorney, Robert G. Bernhoft, told Judge Terrell Hodges, “The scope and prejudicial effect of this pervasive ineffective assistance of counsel only recently came to Snipes’ attention, causing an irreparable breach in the attorney-client relationship with his former attorneys, and precipitating their discharge by Snipes, and the hiring of new trial counsel.”

Hogwash, according to Judge Hodges. “This series of events would lead any reasonable person to suspect that the defendant’s dismissal of able counsel is nothing more than a ploy designed to force a continuance of the trial,” Hodges said, as reported by The Smoking Gun. The trial will start, as scheduled, on October 22nd.

Snipes’ former attorney was William Martin. Martin has represented many famous individuals, including Senator Larry Craig, Michael Vick, and Allen Iverson. Interestingly enough, The Smoking Gun notes that Snipes’ new attorney has represented several tax protesters in the past. And there’s more.

A quick search found that Mr. Bernhoft has faced the IRS before as a defendant in a tax protester case. Back in 1996, Mr. Bernhoft and Robert Raymond operated “Morningstar Consultants” in Milwaukee. They ran advertisements saying “Just Say No”: The IRS, according to Bernhoft and Raymond when they operated Morningstar Consultants, has no right to compel you to file a tax return, to require withholding, and a number of other tax protester arguments. The IRS filed suit against them for their “De-Taxing America” program and won at the District Court level; they were permanently enjoined from marketing this program. They appealed, and the District Court ruling was upheld.

The Appeals Court found plenty of problems with the “De-Taxing America” program. “The statements appellants made in the Just Say No advertisement are clearly false representations concerning the government’s authority to tax its citizens…We attribute to both appellants a basic knowledge of the law such that they should reasonably be aware that their personal belief that paying taxes is a voluntary activity does not represent the current state of the law.”

Anyway, Mr. Snipes appears to have found an attorney who believes—unless his views have changed in the past few years—that taxes are voluntary and that Mr. Snipes is right that only foreign income is taxable. These kinds of arguments have a batting average well below the Mendoza line in court. Of course, at this time Mr. Snipes is only alleged to have committed these acts. But tax protester arguments are extremely unlikely to be successful in this kind of case.

Based on this development, I think we’re going to have a lot of humorous moments during Mr. Snipes’ upcoming trial. But I have a feeling that Mr. Snipes won’t be laughing much at the end.

News Reports:

Ocala Star-Banner

The Smoking Gun

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Poker Tournaments: No Withholding Likely

The Las Vegas Sun reports today that the American Gaming Association and the IRS reached agreement that for poker tournaments if a casino/cardroom issues W-2Gs, then withholding at 25% will not be required on wins above $5,000.

>From the IRS’s point of view, poker tournaments have been seen as a part of the “Tax Gap.” Players win, but because few W-2Gs are issued, the IRS hasn’t been collecting its fair share. The goal in writing Revenue Procedure 2007-57 was to increase reporting.

It is my understanding that for a casino to not have to withhold, they will have to agree to abide by the Binion’s closing agreement. (Many years ago, Binion’s Horseshoe Casino and the IRS reached an agreement stating that they would issue W-2Gs on all gross wins of $600 or more, and that the IRS agreed not to require withholding except where the win was at least 300 times the buy-in.) However, casinos that do not agree to this rule will have to withhold 25% of payouts on wins of $5,000 or more.

Withholding will still be required on wins where the payout is 300 times (or more) of the buy-in (this impacts very few poker tournaments), and for non-US citizens where withholding is required either by tax treaty or by other regulations/rules.

While I still think that no withholding is required, and that Revenue Procedure 2007-57 is wrong, I do understand the IRS’ motivation. It is very clear that many poker players do not report gambling winnings correctly. (Of course, the fact that gamblers are not well treated under the US Tax Code has something to do with that, too.) Given that no casino wants to get into a battle with the IRS, this outcome was probably the best that could be hoped for.

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A Rather Large Case of Fraud

The bigger they come, the harder they fall. So goes the cliche, and so also go the owners of Circle Industries in Alpharetta, Georgia.

Gerald Marchelletta, Sr., and Gerald Marchelletta, Jr., own Circle Industries. They specialize in drywall construction, and worked on the Olympic Village in Atlanta and the Atlantis Hotel & Casino in the Bahamas. They and their bookkeeper, Theresa Kottwitz, decided that rules were unimportant and they would deduct personal expenses on their business tax returns.

Now, we’re not talking about a few pens and pencils here, or a couple of bags of cement. The news story states that testimony in their trial showed that the owners each built million dollar homes with this money. Other personal expenses charged to their business included clothing, landscaping at a New York home, and visits to Atlanta’s Gold Club.

Now, I don’t know if the trips to the Adult Entertainment club led to the investigation that resulted in the charges in this case. It wouldn’t surprise me, though, if that were the case. Somehow, strip clubs and tax evasion go together. But I digress….

US Attorney David Nahmias called this, “This was a case of pure greed, in which the defendants tried to defraud the United States Treasury of over $1 million.” Given federal sentencing guidelines, the trio, when sentenced early next year, will have plenty of time to reflect while at ClubFed.

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Snipes Loses Role; Passport Has Been Seized

Poor Wesley Snipes. As you may remember, Snipes will soon be on trial for allegedly filing a false claim for an income tax refund. As Joe Kristan of Roth Tax Updates reports, Mr. Snipes lost the lead in Spike Lee’s new World War II film. His passport has been seized pending the trial.

If found guilty, Snipes will likely lose a lot more roles as he’d probably be spending some time at ClubFed.

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War Tax Proposal DOA

Three Congressmen proposed on Monday a war surtax—a measure that would increase income tax rates from between 2% and 15% (the top tax bracket would become 50% if enacted). The move is a publicity stunt that has no chance of passage.

Even Speaker Nancy Pelosi (D-CA) is against the measure. In an election year, raising taxes is a sure way to raise your opponents’ vote totals. Democrats David R. Obey of Wisconsin, John P. Murtha of Pennsylvania and Jim McGovern of Massachusetts are very much in the anti-war section of the Democratic party, and would like to bring all the troops home immediately.

Along with Charlie Rangel’s proposals to increase taxes, measure like this will do much to help the Republicans in 2008. Don’t expect anything like this to become law until a Democrat is in the White House.

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Evade, and then Skip Out

Karen and Charles Petersen of Nowthen, Minnesota were indicted back in 2005 for tax evasion. The government alleged that they hid their income in a trust, and then used the trust to pay personal and business expenses. After they were convicted in March 2006, the couple decided to evade the sentence by becoming fugitives.

That worked for a while, but US Marshals caught the couple in December. Yesterday, Karen Petersen found out her sentence (her husband passed away before sentencing): 15 months, restitution of $181,500 in tax (plus penalties and interest), and a $7,500 fine.

When you become a fugitive, judges tend to be quite strict when sentencing. Ms. Petersen may have had a few months extra of freedom, but she paid with a tougher sentence.

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Bozo Fraud Gets Real Jail Time

I must admit that I laughed when I read this story. From Canton, Georgia comes the tale of Larry Black. Mr. Black decided to set up a booth at a check-cashing store in suburban Atlanta. He said he was a CPA. He then took the personal information he obtained, and filed phony tax returns where he got most of the refunds, and his clients got small amounts.

What was his take? A measly $46,000. Oh, and 15 months at ClubFed, plus likely restitution to the US Treasury. It hardly seems worthwhile….

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Dallas City Hall Scandal Features Tax Evasion

A 166-page indictment was unsealed today in Dallas charging 16 individuals with bribery, receiving kickbacks, and tax evasion. The individuals, including State Representative Terri Hodge (D-Dallas), former Mayor Pro-Tem Donald Hill, and others face long terms at ClubFed if convicted on all counts.

The investigation, according to this report in the Dallas Morning-News, began 27 months ago when Mr. Hill’s then City Hall office was raided by federal agents. US Attorney Richard Roper described the scheme as a “complex bribery and extortion scheme.”

Mr. Hill told the Morning-News that he, and the others, are innocent. “We’re not guilt of any of the things alleged here…We’re just going to prepare for the fight.”

The tax charges are listed in counts . Mr. Hill is accused of not timely filing tax returns from 2001-2004, and failing to file in 2005 & 2006. His evasion allegedly totals over $200,000. Darren Reagan is accused of evading over $100,000 in taxes. (The more serious charges are the bribery, extortion, and fraud charges.)

All-in-all, the Dallas political scene received a jolt today. It will be interesting to see what comes of this.

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Michigan: Jobs Leave, Taxes Rise

When an economy is having problems and jobs are leaving your state, the normal thing to do is to help businesses. Michigan has other ideas.

The Detroit Free Press’ headline screams, “Chaos averted with deal to raise income tax, add tax to services.” What does that mean for residents of Michigan?

Directly, your state income tax rate has just increased from 3.9% to 4.35%. Additionally, services will now be subject to the 6% state sales tax.

Indirectly, Michigan has just become an even less competitive state for businesses. Why would anyone in their right mind locate a business in the state where the only sure thing is big government?

“Chaos” may have been averted, but the people of Michigan will be long-term losers because of this budget. Interestingly (but not surprisingly), all but one of the Democrats in Michigan’s state senate voted for the tax increase, and all but three Republicans voted against it.

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