Taxing the Virtual World, Redux

Posted on December 6, 2006 by Russ

I’ve previously written about taxing the virtual world. Let’s say you’re playing an online game, one of those that have their own worlds, such as EverQuest or SecondLife. I own Russ’ Gold Depot, and you agree to purchase those 100 acres from me for $100 — not 100 gold pieces, but 100 real U.S. Dollars. What’s my income?

The U.S. Tax Code would subject me to tax on the gain. After all, my basis is $0, and now I have $100, right? Luckily, the IRS’ current opinion is “That’s so weird.”

Unfortunately for online enthusiasts, that opinion is unlikely to hold for long. Last Saturday a panel at New York University actually debated this issue. “Tax and Finance at the State of Play/Terra Nova Symposium had several speakers talking about this issue according to a CNet report.

“Given growth rates of 10 to 15 percent a month, the question is when, not if, Congress and IRS start paying attention to these issues,” said Dan Miller, a senior economist with the Congress’ Joint Economic Committee told CNet.

Another interesting issue might confront heirs of online real estate magnates. Suppose I own $1 million in virtual land. Does this virtual real estate factor into my estate?

Or what if I trade assets, going from a red paperclip to a house (like Kyle MacDonald of Canada)? Bartering is absolutely taxable, so wouldn’t I owe real tax on my gains?

Unfortunately for virtual world fans, it’s almost a certainty that the IRS and other government agencies will look into this eventually. So if I do sell my gold depot, I’m also likely to come into possession of a slip of paper: a 1099-MISC reporting the transaction to the IRS.

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Hot Air in More Ways than One

Posted on December 6, 2006 by Russ

VaporTech is a Livermore (California) company that uses steam, vapor, and high pressure to clean toxic soils or increase oil production from old wells. Its CEO used to be John Frances Griffin. I say ‘used to be’ because Mr. Griffin, already under indictment for mail fraud, has now been charged with two counts of tax evasion.

A federal grand jury in Oakland indicted Mr. Griffin on tax evasion charges last week. Griffin supposedly didn’t tell his CFO his social security number, and got paid in cash and cashier’s checks to avoid having his income shown. (I will only briefly note that the CFO, who was not identified in the news story, should have his head examined.)

Mr. Griffin is already in a halfway house awaiting trial. He’s likely going to be spending some significant time at ClubFed. Additionally, the government has begun forfeiture proceedings against him, and wishes to obtain a gold tennis racket, televisions, and over $17,000 in clothes from Nieman Marcus.

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Philanthropist, or Tax Evader?

Posted on December 6, 2006 by Russ

Joe Mammana owns the Yardley Egg Farm in Ohio. He’s pledged millions to crack down on criminals. There’s just one little problem, according to the U.S. Attorney’s Office: Mr. Mammana hasn’t paid his own taxes.

The Associated Press reports that Mammana hasn’t paid federal taxes since 2000. He’s accused of earning over $3 million, owning luxury cars and a luxurious home without paying taxes. He’s currently in jail after a search found an unregistered handgun. U.S. Magistrate L. Felipe Restrepo denied bail, calling Mammana a flight risk.

Meanwhile, Mammana is accused by an Ohio crime-fighting group of reneging on his promised reward. The head of that group, Kevin Miles, has sued Mammana after he was attacked with a baseball bat and told during the attack to drop the lawsuit.

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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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