It’s Unfair, but Tough

Posted on June 27, 2006 by Russ

Today the Tax Court decided two cases where the Court basically said, you’re right, the law is unfair, but tough—you have to obey it.

The first case involves a gambler who wanted to net her wins and losses. If you’re a regular reader of this blog, you know that only professional gamblers can do this. In this case, both the IRS and the taxpayer agree that the wife lost more than she won. However, the amount she won—some $13,400—will have to be included as income (Other Income, line 21). As the taxpayer is retired, this caused some social security income to be taxable and that a credit for qualified retirement savings was eliminated. The taxpayer was allowed to deduct her gambling losses as an itemized deduction. The Court noted,

“Petitioners are [non-professional gamblers], and their only entitlement to the deduction for their gambling losses is the manner in which respondent determined it as an itemized deduction. Petitioners have cited no authority, and indeed there is no authority to support their argument that unrelated income and credits are immune from the effects of the manner in which respondent treated their gambling winnings and losses.”

The second case deals with a divorce decree, and which parent gets the tax exemption. The decree, granted in state court, gives the father the exemption as long as he has made child support payments. The father took the exemption, but so did the mother for the year in question. The IRS took away the father’s exemption, and he went to Tax Court.

The Tax Code states that if you’re the non-custodial parent (which the father was), in order to claim the exemption, you must have the other spouse sign and complete Form 8332. That apparently didn’t happen here, so the Tax Court ruled for the IRS and noted, “State courts, by their decisions, cannot determine issues of Federal tax law…His recourse, if any, lies in the State court for enforcement of the divorce decree.”

Cases:
Spencer and Egerton v. Commissioner, Colozza v. Commissioner

Posted in Tax Court | Comments Off on It’s Unfair, but Tough

Payroll Processing Follies

Posted on June 27, 2006 by Russ

There’s one task that I insist that my business clients do not perform themselves: payroll processing. Given the penalties and legal liability issues, I urge them to go with an extremely reputable company. There are several that do an excellent job; this post is not about which one is my favorite.

Rather, I was reminded by Joe Kristan’s post yesterday in Roth Tax Updates about the dangers of using certain companies. If an employee of a payroll company steals your tax deposits, what would happen? If you’re with a large, reputable firm, the deposit will be made, and the payroll company will go after the employees involved. If you’re with Fly-By-Night Payroll, expect the IRS and the FTB to knock on your door.

Here are three questions you should always ask of your payroll service company:

– Will they make all appropriate/required tax deposits in all the jurisdictions in which we operate? Will they be done on a timely basis?

– Assume that the deposit is not timely made. Who will be liable for the interest and/or penalties?

– Will you put this guarantee in writing?

Of course, you should get references, especially for small companies. Yes, cost is a factor you need to consider when choosing a payroll company. But so is the ability to handle the inevitable errors that will occur.

Posted in Payroll Taxes | Comments Off on Payroll Processing Follies

Into the Swamp (New Jersey Update)

Posted on June 26, 2006 by Russ

I joke with my writing partner about New Jersey being one giant swamp. At least the Garden State’s politics are fun to watch—at a distance. Today, the New York Times reports that a few Democrats are now supporting Governor Corzine’s proposal to increase the sales tax by one full percent, from 6% to 7%. However, the Speaker of the New Jersey Assembly, Joseph Roberts Jr. (D-Camden) opposes the increase. Given that Roberts has final say as to whether anything comes to a vote in the Assembly, the sales tax increase is in danger.

New Jersey’s constitution requires a balanced budget by July 1st; it’s unlikely that this will occur. Governor Corzine is, according to the Times article, making plans to “…close parks, historic sites, campgrounds and casino and halt highway construction and the lottery should the state miss the deadline.” That sounds particularly brilliant. Let’s stop the lottery and casinos, two of New Jersey’s biggest sources of revenues. Of course, given New Jersey’s politics, perhaps this is inevitable.

New York Times article

Posted in New Jersey | Comments Off on Into the Swamp (New Jersey Update)

Attorney and Activist in Tax Trouble

Posted on June 26, 2006 by Russ

Civil rights attorney Stephen Yagman has been indicted on tax evasion, fraud, and money laundering charges. The charges stem from Yagman not paying all the tax he owed in the mid-1990s and accruing significant interest charges and penalties. Additionally, he is also charged with not paying payroll taxes owed by his law firm, Yagman & Yagman P.C. (Thanks to the TaxProf Blog for the hat tip.)

Also potentially in trouble is Grover Norquist, head of Americans for Tax Reform. A story in the Washington Post indicates that disgraced lobbyist Jack Abramoff sent cash for lobbying through Americans for Tax Reform. The article states, “as the money passed through, Norquist’s organization kept a small cut, e-mails show.”

While I’m not an attorney, this certainly sounds like a potential conspiracy charge. As Roth Tax Updates notes, “ATR and Mr. Norquist may be vulnerable to some serious problems with the IRS.” I think that’s an understatement. (Thanks to Roth Tax Updates for the hat tip.)

News Story:

Yagman Indictment (Los Angeles Times)

Posted in Tax Evasion | Tagged | Comments Off on Attorney and Activist in Tax Trouble

Will They Ever Wise Up?

Posted on June 26, 2006 by Russ

States have seen tax revenues flourish this year, leading to budget surpluses of various sizes. So, if you have a budget surplus what do you do? Do you:

(a) Increase spending, to help the people who supported you or groups who may support you? (Think unions and other constituency groups.)

(b) Decrease taxes, because it’s our money that you’re spending?

(c) Vociferously announce that you’re going to decrease taxes, but do only a little bit of tax decreases while increasing spending as much as possible?

Never underestimate the cynical nature of politicians. Thus, (c) is almost always the correct answer, as this article in the Wall Street Journal notes (Pay $ Link).

Of course, we do need to point out that in Michigan, a state that is bleeding jobs with an industry in trouble (automobiles), a tax code that troubles business, and a dysfunctional state government, Governor Granholm, a Democrat, vetoed the Republican-led legislature’s move to eliminate the state’s business tax. Governor Granholm called the Wall Street Journal’s reporting that Michigan’s tax structure is anti-business “treasonous.” We call it honesty in reporting.

Here in the Golden Bronze State, Governor Schwarzenegger has proposed a $68 billion bond measure to pay for infrastructure improvements; this measure will be part of a very crowded November ballot. Of course, the state has again missed the June 15th deadline for passing a budget. The more things change….

Posted in Legislation | Comments Off on Will They Ever Wise Up?

When Is a Tax Increase Not a Tax Increase?

Posted on June 26, 2006 by Russ

My parents live in the San Fernando Valley, an area within the City of Los Angeles. The Los Angeles Daily News has an interesting story on how Los Angeles increased the trash pickup fee by 254% without having to take the measure to a vote.

Californians passed two propositions, Proposition 13 and Proposition 218, that mandate votes on tax increases. So how did Los Angeles get around this? Well, the 254% increase wasn’t an increase; rather, it was an elimination of the subsidy of trash pick-up fees.

Over the next few years Angelenos will see their trash fees increasing from $11/month to $28/month. Interestingly enough, here in Irvine we pay just under $36/quarter for trash service. And it is not subsidized, but it is privatized. Somehow, this is not surprising.

Posted in California | Comments Off on When Is a Tax Increase Not a Tax Increase?

Two Tax Increases for November Ballot

Posted on June 21, 2006 by Russ

Californians have signed enough petitions so that two tax measures will be on the November ballot. One would increase the cigarette tax to make it the most expensive in the state; the other would add an ‘oil severance’ tax, taxing oil production in the state.

The proposed cigarette tax increase would add $2.60 to a pack of cigarettes, making the total cost over $6.50 per pack. That’s a lot of quarters for the vending machine. The new tax would fund emergency rooms and health insurance for children. I expect this measure to pass easily.

The oil extraction tax would be used to fund alternative energy. Proponents also hope to decrease fossil fuel use by 25% in California. Given that the population in California continues to increase, their goal won’t be reached no matter what. In any case, this measure will face fairly determined opposition, especially when Californians discover that increasing oil taxes will increase what they pay at the pump.

News Stories: Cigarette Tax, Oil Extraction Tax

Posted in California | Comments Off on Two Tax Increases for November Ballot

Independent Contractor or Employee?

Posted on June 21, 2006 by Russ

That’s one of the most vexing questions for the business owner. Is your staff employees, or can they be classified as independent contractors? The IRS has a webpage devoted to helping taxpayers make the classification choice.

Employers must withhold payroll taxes from employees, and match some of those taxes (FICA) and pay additional taxes (FUTA & SUI). However, independent contractors are responsible for their own taxes. There’s a benefit to companies to have personnel as independent contractors rather than employees.

However, California has its own rules. And it’s harder to be considered an independent contractor in California. California has a 24-fact test to determine whether someone is an independent contractor or an employee (it’s available here).

FedEx has classified its ground delivery personnel in California as independent contractors. EDD ruled that they’re employees. FedEx has appealed the ruling. The potential liability is $7.8 million.

FedEx News Story

Posted in California | Comments Off on Independent Contractor or Employee?

End of Phone Tax Impacts California

Posted on June 18, 2006 by Russ

The end of the phone tax that funded the Spanish-American War may impact California. According to this story in the San Jose Mercury-News, many local entities in California tied their telecommunications tax to the federal tax. Some of the ordinances have a clause that states if the federal tax becomes invalid, then the local tax will end.

Nervous local budget directors are checking their ordinances and seeing if they contain that clause. Compounding the matter is that there are several lawsuits challenging the tax on different grounds. The lawsuits have been filed by telecommunication providers, such as Verizon and AT&T, and community activists. In general, the previous challenges have alleged that the tax has no legal justification.

We’ll keep you informed.

Posted in California | Tagged | Comments Off on End of Phone Tax Impacts California

Crime Blog

Posted on June 18, 2006 by Russ

There’s going to be a week when I won’t be able to find a tax cheat. That will be the week I’m on vacation….

We start in Tucson, Arizona, where a California man took elderly Tucson residents as clients of his tax preparation business. He had an interesting method of making money. He promised his clients very large refunds. He got them, too, by exaggerating deductions. The refunds went into his bank account, rather than the clients. The IRS wasn’t amused. He’s looking at up to ten years in prison and a fine of up to $250,000. (News story: here)

We move on to Durham, North Carolina. Here, Steven Edwards was convicted of fraud and tax evasion and sentenced to 12 1/2 years in jail, and must make restitution of $4.4 million. He collected millions of dollars of insurance premiums from clients…but didn’t buy the insurance. He must also forfeit the nearly $4 million he received from the scheme and pay a fine of $400,000.

Tax crime doesn’t pay….

Posted in Tax Evasion | Comments Off on Crime Blog