A Tax Carnival

Posted on December 6, 2006 by Russ

Don’t Mess With Taxes has the December Tax Carnival up. It’s well worth reading this compendium of posts.

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Travelling

Posted on December 1, 2006 by Russ

I’ll be on the road for the next few days, so posting will be light to nonexistent until next Wednesday.

While I’m gone you may want to catch Joe Kristan’s series on year-end tax planning. While his focus is on Iowa, his comments on the AMT are applicable to Californians.

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Tapping the Till

Posted on December 1, 2006 by Russ

This is a story that really speaks for itself. Reverend John Henry Walker of the Macedonia Baptist Church in Charlotte, North Carolina pleaded guilty to nine counts of tax evasion and bank fraud. The Associated Press reported that federal prosecutors told the judge in the case that Walker used a church credit card for, “erectile dysfunction medication and hotel visits with female parishioners.” Walker’s attorney told the AP that, “…the government’s allegations of socially irresponsible behavior regarding Pastor Walker’s private life were completely without merit and amounted to just plan dirty litigation.”

The story notes that the church congregation will be voting within the next two weeks on whether Walker will be keeping his job.

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Coming in 2007: Married but Single

Posted on December 1, 2006 by Russ

California’s Legislature passed domestic partners tax legislation earlier this year. For 2007 (not 2006), qualified domestic partners are required to file as Married, Filing Jointly on their California state tax returns. However, they must continue to file as single on their federal tax forms.

What can possibly go wrong?

Yesterday, a “Town Hall” meeting was held in Sacramento. Participating in it were tax practitioners, a software programmer from Intuit’s Lacerte division, gay and lesbian advocates, and staffers from the Franchise Tax Board. The San Jose Mercury covered the meeting.

Here is just one of the gems that the Mercury reported:

“This saga is only beginning rather than ending,” said FTB attorney Pat Kusiak. “This is an evolving issue. It will be many years before issues are resolved, and they may need to be resolved by litigation.”

As the Mercury noted, domestic partners will have to compute a California joint AGI that will be hypothetical. For domestic partners who have very simple returns this won’t be a problem. However, if you have complex returns, this is going to be a nightmare. Gregg Gamble of Lacerte is quoted as saying, “It’s the most ridiculous thing I’ve ever heard.”

It’s probably not the most ridiculous thing I’ve ever heard, but it’s close. And it’s not an issue that can be postponed—tax preparers will need to begin tackling this when we calculate estimated tax payments for 2007 for Californians impacted by this.

Additionally, it will likely be the domestic partners who will be paying for the additional work. Tax preparers charge based on the complexity of the returns—really, the amount of work (time) spent on the return. If I have to prepare two returns, it’s going to take me significantly longer than if I have to prepare one return.

Unfortunately, I don’t have high hopes for the California Legislature to address this issue. I hope I’m wrong, but don’t bet on it.

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The Twelve Blogs of Christmas

Posted on November 29, 2006 by Russ

Fellow tax blogger Dan Meyer of Tick Marks is listing out his twelve favorite blogs—the “Twelve Blogs of Christmas.” He started with tax blogs, and we’ve made the grade.

I’ve been somewhat remiss in noting that the other tax bloggers mentioned in Tick Marks are worth your time. And of course I recommend Tick Marks.

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Washington 2, Indians 0

Posted on November 29, 2006 by Russ

Municipal bonds are part of many investors portfolios. They’re tax advantaged, as most municipal bonds are tax free. Of course, the issuing agency must follow some rules: the bonds must be for an essential government function.

The Cabazon Band of Mission Indians operates a very successful casino on Interstate 10 just east of Palm Springs, in Indio, California. They used municipal bonds to help fund a new hotel and a convention center.

And then the IRS stepped in. The IRS usually rubber-stamps the tax-exempt status of municipal bonds. However, the IRS has tentatively ruled that these bonds are, “private activity bonds because [the East Valley Transportation Authority] and the Cabazon Band of Mission Indians should not be treated as states where they have not issued their obligations for essential governmental functions.” Reuters has the full details here.

Unless the IRS and the Cabazon Indians can come to an agreement within thirty days, some investors may have a rude surprise. And this is the second time this issue has come up–back in 2005 the IRS notified the Cabazon Indians and California that they would be investigating this issue.

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Professor Maule on Snipes

Posted on November 24, 2006 by Russ

Professor Maule of MauledAgain has a great column on the Wesley Snipes case. Among Professor Maule’s excellent points are,

“Snipes is a celebrity. People pay attention to him. Therefore, he has an obligation to set a good example. Although some celebrities do not want to be role models, the very fact that they are celebrities makes them so. I have advice for those who do not want to be role models: avoid the limelight, make a career in something obscure, and lay low. Yes, that course of action will cut your income by 90 percent or more. Such is the price that must be paid.”

and

“The only good thing that can come out of this [the Snipes case] is that the nation’s taxpayers will understand how much fraudulent garbage is being peddled. By that point, only those who truly wish to evade taxes will be signing up with the fraud merchants, as there would be even less reason to believe the “I didn’t know” excuse.”

Read the whole thing here; it’s well worth your time.

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Wesley Snipes: I’m a Scapegoat

Posted on November 21, 2006 by Russ

Wesley Snipes sent an email over the weekend to Scott Maxwell, a columnist at the Orlando Sentinel. Maxwell put the highlights of Snipes’ email in his column; the full, unedited email is in his blog. It makes interesting reading for a tax professional.

Snipes first notes, “Like the situation in New York, and Florida , I know this has more to do with a few individuals with access to power, making moves; trying to move up!; and less with some alleged crime against the whole population of the United States of America…It appears I’m to be the scapegoat….”

Given that Snipes is accused of fraudulently claiming refunds of $12 million, it would appear to my eyes that it’s a rather substantial alleged crime against the United States.

Snipes continues, “To be clear, I have no current relationship with Mr. Kahn and haven’t for more than four or five years. I never met Rosile and we never received the “refunds” requested. NOT ONE SINGLE DIME; did the IRS or the Treasury ever send ME.” [emphasis in original]

Well, there’s a problem with Snipes’ denial; he stands accused of fraudulently claiming refunds of $12 million. You don’t actually have to receive the refund in order to commit this crime.

Snipes goes on in his email to cite a website that has two links regarding the Snipes case. The first is to The Smoking Gun and his indictment; the second is to a website that purportedly shows that most income isn’t taxable.

It’s a pity that the truth is almost the exact opposite: almost all income is taxable in the United States. We wrote about this in a previous Snipes post, but we’ll reproduce it again:

“Thus, citizens of the United States generally also are taxed on income earned outside the geographical boundaries of the United States unless they prove that the income is specifically exempted. E.g., sec. 61(a); Cook v. Tait, 265 U.S. 47, 54, 56 (1924).” [From Specking, et. al., v. Commissioner, 117 T.C. No. 9]

The one piece of good news is that Snipes, according to the email, does plan on returning to face the charges. He also is planning on getting good counsel. That looks like a very good idea, as no deal has been done. “There is no deal that has been worked out,” U.S. Attorney’s Office spokesman Steve Cole told the Associated Press on Monday. “The only thing we have discussed is coming back to face the charges.”

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The Third Time Isn’t the Charm

Posted on November 21, 2006 by Russ

Today, the Tax Court looked at the case of a man who had appeared before the court twice previously. In 2001, “the Court explained to petitioner that taxable income includes money and other goods received in exchange for services and urged petitioner to file returns.” In 2005, he returned to the Court: “[T]he Court again rejected petitioner’s arguments and awarded the United States a penalty pursuant to section 6673 in the amount of $5,000. Leggett v. Commissioner, T.C. Memo. 2005-185.” In this case, the petitioner didn’t file a 2002 tax return but had income from installing air conditioners and from Social Security. Would the third time be the charm?

Hardly.

“The Court shall not further address petitioner’s repeated argument “with somber reasoning and copious citation of precedent; to do so might suggest that these arguments have some colorable merit.” Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984). Therefore, the Court sustains respondent’s determination of petitioner’s 2002 tax deficiency.”

To rub a little salt in his wounds, the petitioner also get penalized three times; a Section 6651(a)(1) penalty for failure to file a return (5% per month up to a 25% penalty); a Section 6654(a) penalty for failure to pay estimated taxes; and a Section 6673(a)(1) penalty for “proceedings instituted primarily for delay or in which the taxpayer’s position is frivolous or groundless. “A petition to the Tax Court, or a tax return, is frivolous if it is contrary to established law and unsupported by a reasoned, colorable argument for change in the law.” Coleman v. Commissioner, 791 F.2d 68, 71 (7th Cir. 1986).”

Actually, the petitioner got lucky. In 2005, the Court gave him a $5,000 penalty. In 2006, he gets $6,000. I suspect that if he has another case in 2007, he’ll get $7,000.

Case: Leggett v. Commissioner, T.C. Memo 2006-253

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Just a Pinch of Fraud

Posted on November 20, 2006 by Russ

Three stories today, all with a recurring theme: fraud. We’ll look at a new but not so good method to sell for less. Then we’ll take a peak at two accountants, and how they made money…for themselves.

Tommy James Hudgins owns Affordable Tires in Chattanooga, Tennessee. He found a way to make sure he beat his competitors’ prices: not remitting the sales tax he collected to the state of Tennessee. He did keep his prices down, but the Department of Revenue wasn’t happy with his methods. He’ll spend two years on probation, and must make restitution of $17,000. He may also face civil penalties, according to this story.

In Baltimore, a longtime accountant pleaded guilty to wire fraud, money laundering, and tax fraud charges. Wilkins McNair, Jr. faces up to 38 years in prison, but will likely serve a significantly shorter sentence through his plea bargain. McNair, in the indictment, was accused of avoiding paying $550,000 in taxes by delaying filing his returns and under-reporting his tax. The Baltimore Business Journal has more on this story.

Finally, a pair that were Washington state tax preparers are alleged to have found a not-so-legal method of earning a living. They made up phony tax returns using relatives’ names, and, according to this story, collected about $40,000 in refunds. The story has an interesting twist. The accused are Kandi Rose Roberts, formerly of Bellingham, Washington, and Ernest Roberts, of Everson, Washington. Ms. Roberts moved to Las Vegas and is now known as “Kandi Kroon.” She’s going to be sent to Seattle for trial, so this is one thing that happened in Las Vegas that won’t stay in Vegas….

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