Antarctica Is Not a Country

Posted on July 5, 2007 by Russ

There are lots of foreign countries in the world, but Antarctica is not one of them. It is a continent. The question arose last year on whether you can take the Foreign Earned Income Exclusion (§911 of the Tax Code) if you happen to be working in Antarctica; today, the issue reappeared at the Tax Court.

The Foreign Earned Income Exclusion allows a taxpayer who is working abroad to exclude a portion of their earned income. But there are caveats–the income excluded must be earned, and it must be earned in a foreign country (there are other restrictions, too). Last year, in Arnett v. Commissioner (126 T.C. No. 5), the Tax Court ruled that §911 doesn’t apply. Earlier this year, the 7th Circuit Court of Appeals upheld that decision. Unsurprisingly, the Tax Court tersely noted, “We follow our analysis and holding in Arnett I and the analysis and holding of the Court of Appeals in Arnett II.”

Deductions and exclusions are narrowly constructed; that’s a basic rule of the US Tax Code. Unfortunately, for today’s petitioner, Antarctica doesn’t fall within the scope of Section 911.

Case: Kunze v. Commissioner, T.C. Memo 2007-179

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“We Made a Slight Mistake…”

Posted on July 5, 2007 by Russ

When I see that phrase, I just know that a whopper of an error is about to be seen. Well, those words weren’t used, but the DC Circuit realized that they did just that–made a whopper of a mistake. On Tuesday, they reversed themselves in the Murphy case.

If you remember the Murphy decision, the DC circuit ruled (in September 2006), “that §104(a)(2) of the Internal Revenue Code (Title 26, U.S.C.) is ‘…unconstitutional insofar as it permits the taxation of an award of damages for mental distress and loss of reputation.'” The same panel of judges reheard the case earlier this year, and the decision came out on Tuesday—probably, as Joe Kristan of Roth Tax Updates said, “…Courts are hip to the public relations technique of issuing embarrassing news at holiday times, when it is least likely to attract attention.”

The ruling itself is very ordinary, which tells you how off-base the original Murphy decision was. The Court now notes that even if “[Murphy’s award] is not income within the meaning of the Sixteenth Amendment, is within the reach of the congressional power to tax under Article I, Section 8 of the Constitution.”

Other Coverage:
AP
New York Times/Bloomberg
Roth Tax Updates
The TaxProf Blog

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On Wisconsin!

Posted on July 1, 2007 by Russ

The Wisconsin State Senate approved a $66 billion (two-year) budget last week that includes $15.2 billion in new taxes. The budget includes new or increased taxes on oil companies, cigarette sales, hospitals, vehicle registrations, and real estate transfers. The proposed budget does include universal health care (a $15 billion proposal that may violate Federal ERISA rules) and over 150 other changes.

As I read the story in the Milwaukee Journal-Sentinal, I wasn’t surprised to find that the Democrats control the State Senate in Wisconsin. Luckily for taxpayers, Republicans control the Wisconsin State Assembly. It’s certain that the budget in its current form won’t be approved.

Wisconsin already has the 7th worst tax burden in the United States (according to the Tax Foundation). Apparently that’s not good enough for the Democrats in the Dairy State.

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California Developing New K-1s

Posted on July 1, 2007 by Russ

A few years ago, the IRS introduced new Schedule K-1s. The Franchise Tax Board plans on introducing new K-1s for the 2007 filing season, so that “[t]ransferring amounts from federal K-1s to California Schedule K-1s will soon be easier.”

You can see the draft K-1s here.

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Off the Deep End

Posted on July 1, 2007 by Russ

Now that it’s summer, you may be considering a trip to the pool. Swimming is a great summer activity, but you do have to be careful when you dive into a pool. One diving coach jumped into some hot water last week.

Michael Finneran was the head woman’s diving coach at North Carolina State University in Raleigh, North Carolina. But Mr. Finneran didn’t consider himself an employee of N.C. State. On his North Carolina tax returns, he allegedly included phony W-2 forms showing no state income. That’s a problem, especially when you’re listed in the Athletic Department’s web page.

As reported here, Mr. Finneran was convicted of evading state income tax and was sentenced to 25 to 30 months in prison. According to the news story, he plans on appealing the conviction.

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Another Offshore Scheme Goes Down the Drain

Posted on July 1, 2007 by Russ

I’m not a big drinker. The former President and co-owner of Domecq Importers will have 10 years at ClubFed of being a teetotaler after pleading guilty to fraud and tax fraud charges. Domecq Importers was a large liquor importer based in Connecticut.

Michael Domecq had a not-so-good idea. Have some outside vendors (primarily advertising agencies) send in invoices for work that was never done. Then have his company pay the vendors. That’s fraud against his own company.

But Mr. Domecq went a step further. He had the vendors then issue checks to shell corporations controlled by him and his accomplices: Chief Financial Officer Alfredo Valdes, Vice President of Marketing Gabriel Sagaz, and Vice President of Sales Thomas Kaminsky. Those three individuals had already pleaded guilty to various charges.

Did I mention those shell corporations used offshore bank accounts? And that the shell corporations didn’t pay any income tax? That’s tax fraud.

This isn’t Mr. Domecq’s first trouble with the law. He was convicted in the United Kingdom in 2006 of possessing a false Spanish passport and of illegally getting a U.K. drivers license.

Mr. Domecq, as part of his plea agreement, will submit corrected tax returns for 1989 through 2006, and will pay all of the taxes, penalties, and interest. Given that the unreported income is over $7.6 million, Mr. Domecq will be writing out some big checks to the United States Treasury.

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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What Is It About Strip Club Owners & Tax Evasion?

Posted on July 1, 2007 by Russ

I’ve reported several times about strip club owners evading taxes (and getting caught). I guess there are a lot of temptations out there…and if you’re going to offer one, you get to thinking about another.

In any case, yet another ex-strip club owner has been convicted of tax evasion. From Jackson, Mississippi comes the story of Jon Adams. Adams used to own the Stardust Cabaret. Back in 1999 Adams attempted to get the zoning changed for his club. And the (then) Jackson City Council President, Louis Armstrong, found his way to prison for accepting a $25,000 bribe.

Adams’ troubles related to understating his income on his tax returns. The government alleged that Adams earned over $500,000 in 1999 and $466,000 in 2000 but that he reported $344,000 less. Oops. And allegedly making a $75,000 down-payment on some property while in bankruptcy didn’t sit well with the jury either.

While Adams faces six years at ClubFed and a maximum of $200,000 in fines, his stay will likely be significantly less. His sentencing is scheduled for October 9th.

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Will the IRS Re-Open Dinosaur Adventure Land?

Posted on July 1, 2007 by Russ

Jo Hovind fared much better than her husband when she was sentenced last week for 45 tax related charges. Her husband, Kent Hovind, received ten years in prison. Mrs. Hovind was sentenced to one year and a day, and will begin serving her sentence on August 31st. Mrs. Hovind will likely appeal both the convictions and the sentence.

The government got some other items as part of the conviction. Judge Casey Rodgers ordered that the property owned by the Hovinds was forfeited to the government. That includes the now defunct Dinosaur Adventure Land. Will the government reopen it? Will it join other intriguing government owned properties such as the Mustang Ranch and the Bicycle Casino? (For the record, the government sold off the buildings and other physical assets of the Mustang Ranch. The Bicycle Casino was owned by the government for a few years but was sold to private owners.)

Judge Rodgers delivered the moral of the story: “No one can violate the law and then say that they were doing so for the will of God.”

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Neteller Founder Pleads Guilty

Posted on July 1, 2007 by Russ

One of the two Neteller founders pleaded guilty on Friday to one count of conspiracy. Stephen Lawrence told the Associated Press, “I came to understand that providing payment services to online gambling Web sites serving customers in the United States was wrong.” Lawrence faces up to five years in prison when sentenced on October 29th.

What does this mean for Neteller’s future and its ex-customers in the United States? Almost nothing. Neteller is scheduled to announce its plan for returning millions of dollars in held funds on July 13th. As to Neteller’s future, I said months ago,

“Indeed, it’s clear what’s likely to happen. Neteller and the DOJ will likely come to an agreement. Neteller will announce that they will no longer do business with Americans, and they may have to pay a fine; the DOJ won’t indict the company, or any of its current stockholders. The DOJ might even accept some sort of plea bargain for the two founders who were arrested. It’s also certain that as part of such a deal Neteller will agree to release details of all transactions between American customers and Neteller.”

Nothing that has happened to date in this saga has caused me to change my opinion.

As a reminder, July 2nd is the deadline for filing Form TD F 90-22.1. Remember, mail the form to the Department of the Treasury, not the IRS. If you had more than $10,000 at Neteller (or any combination of foreign bank accounts), you are required to report it. Willful non-reporting is punishable by a fine of $100,000, or 50% of the funds in the foreign accounts, whichever is greater, and can also result in criminal penalties.

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$63,000 Is a Lot Less than $5 Million

Posted on June 29, 2007 by Russ

Back in February I reported on Mark Kaushansky, the Soviet emigre who admitted evading taxes. At the time, Fred Theiman, Mr. Kaushansky’s attorney, noted, “A lot of assumptions made by the government are perfectly rational, perfectly logical and perfectly wrong.” The IRS said otherwise, and it was up to the judge to decide.

In this case, Mr. Theiman was correct. At least Judge Maurice Cohill determined that the tax evasion was a lot less than the $5 million he had been accused of. The total ended up as $63,000. Mr. Kaushansky also admitted that he was guilty, telling AP, “I was given an opportunity to help hundreds of Russian scientists and their families in dire need…I think I did a lot of good, but in the process I made some mistakes. I admit to those mistakes. I am guilty.” Mr. Kaushansky will also have to pay a $20,000 fine.

Also accused in the scheme was Yevgeny Adamov. Mr. Adamov is the former Russian Energy Minister. Mr. Adamov was arrested in Switzerland in 2005. Although the US requested that he be extradited here, the Swiss government extradited Mr. Adamov to Russia. He’s accused in Russia of abuse of power and fraud. Judge Cohill believes he’ll never be back in the United States to answer those charges.

AP Story: Pravda, Houston Chronicle

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