For the next several days, I’ll be at the CSEA’s annual SuperSeminar; thus, updates will be infrequent at best. We’ll return next Wednesday or Thursday with more news and some information from what has in the past been an excellent seminar. Until then, take a look at some of the other tax bloggers listed in the blogroll on the right.
Happy Mother’s Day, too!
Perhaps the Governator reads Taxable Talk (though I doubt it). In any case, Governor Schwarzenegger will propose tomorrow to:
Of course, who know what the Democratically controlled legislature will do, and how active the Governator’s red pencil (line item veto) will have to be. Don’t be shocked if he needs multiple red pencils this year.
Meanwhile, speculation is that Google is the major cause of the extra revenue. Not through taxes on Google itself; rather, through taxes on the sale of stock by Google insiders. cnet believes that it could amount to 10% of the tax revenue, $450 million.
News Stories: Governor’s Budget Plans (Scripps-Howard); Google/cnet
You’d think that if you’re a psychic you’d be able to just will your way to violence—you wouldn’t have to throw any punches.
Sadly, our tax evading psychic apparently threw plenty of punches at his wife. David Guardino of Cary, NC has been free pending his tax evasion trial (which he also apparently didn’t see coming). Joe Kristan has more on our not-so-pyschic psychic.
Republican negotiators in Congress sent tax legislation out of conference committee. The highlights of this generally lackluster legislation:
– AMT Relief extended, with a new higher exclusion of $62,550 for 2006;
– 15% capital gains rate extended for two more years, through 2010;
– Section 179 depreciation at $100,000 extended to 2010, from 2008;
– Roth IRA conversions allowed for everyone. This, as Joe Kristan correctly notes, increases tax revenues today, but drastically impacts tax revenues in a few years. Roth IRAs are not tax deductible today. However, when you retire and starth withdrawing the funds, they are tax-free;
– The Section 199 Production Deduction (the deduction from hell) has been toughened. The deduction will now be limited to 50% of W-2 wages; and
– Mandatory payments for Offers in Compromise (OIC) of 20% of the OIC. This will discourage OICs.
There’s plenty more, but it’s mostly arcane stuff. There’s a lot of budget shenanigans. As Joe Kristan noted, corporate estimated tax payments are definitely being played around with:
“The 2006 estimated tax payment installments due in July, August or September (third quarter, for calendar year taxpayers) will be 105% of the amount otherwise due for the quarter. The same installment in 2012 will be 106.25% of the amount otherwise due; in 2013, the magic number will be 100.75% of the amount otherwise due.
-In 2010, 20.5% of the third quarter installment due September 15 will be payable October 1; in 2011, 27.5% of the third quarter installment is payable in October.
The government has a September 30 fiscal year, and these rules obviously shuffle income among the fiscal years to meet some arcane budget rule, at least on paper and in a laughably phony manner.”
Of course, the whole procedure is that way. Many of the delayed tax increases will never see the light of day. They’re only in the legislation so that it meets the $70 billion tax cut limitation; if the tax cut were larger than that, the bill would be subject to a fillibuster in the Senate. It cannot be fillibustered.
For more information:
Text of the Bill (HR 4297);
Los Angeles Times News Story;
Roth Tax Updates Post;
and TaxProf Roundup on the legislation.
Back in the 1996 tax year, Leonard Gittinger, an attorney, didn’t pay his taxes. He argued that wages weren’t income. If you’ve been reading this blog, you know that argument is a typical tax protester argument, and is baseless. The Tax Court rejected his argument then, and the 5th Circuit also rejected his first appeal, noting it was “completely and utterly frivolous.”
Well, Mr. Gittinger also didn’t file tax returns for 1997 through 2001, and he filed yet another Tax Court case. Unfortunately, both Tax Court cases aren’t available online. However, he also lost his second case. We do know, from reading his appeal of that decision, that he had 19 typical tax protester arguments. As the Appeals Court noted, only one of his 19 items merited comment: ““Whether the allegations in the petition and . . . instant proceeding are ‘frivolous and groundless?’” The answer is yes.”
The Appeals Court noted that Mr. Gittinger should have learned his lesson the first time. As a reminder of the frivolous nature of the appeal (and, frankly, of the whole case), he was also ordered to pay a $6,000 sanction. “A
party who continues to advance long-defunct arguments invites sanctions.” Tello v. Comm’r, 410 F.3d 743, 744 (5th Cir. 2005)
Case: Gittinger v. Commissioner, 04-611118 (5th Circuit)
My thanks to Decision of the Day for their link to this case.
Today the Tax Court looked at a §1031 Exchange case. The question before the court was whether a partnership (Peabody) could exchange gold mines for coal mines. The problem: the coal mines were encumbered with supply contracts that sent the coal to electric utilities. Does the encumbrances constitute “boot” that causes tax to be due?
Under a §1031 Exchange, like property is exchanged for like property. The exchanger avoids capital gains tax. Like property need not be exactly the same property. You can exchange a rental house for a rental duplex, for example. (There significant restrictions to &1031 exchanges; make sure you talk to your own tax advisor about your situation.)
When cash gets involved in the transaction, it’s considered “boot.” Boot is taxable. The IRS argued that the contracts weren’t real property, but were the equivalent of cash or personal property received along with like-kind property. (There’s no question that you can, in a § 1031 exchange, exchange one mine for another mine, even if each mines different substances, assuming the other provisions of § 1031 are followed.)
The court had to determine, (1) are supply contracts considered real property and, thus, can be part of a § 1031 exchange (the IRS argued that they are contracts to sell personal property); (2) are the servitudes created by the supply contracts real property; and (3) are the supply contracts boot or not?
The court noted that like-kind doesn’t mean exactly the same kind:
In determining whether the like-kind requirement of section 1031 had been met, we found it significant in Koch v. Commissioner, 71 T.C. at 65, that section 1031(a) refers to property of a like, not an identical, kind. The required comparison of the old and new exchanged properties, we reasoned, should be directed to whether the taxpayer, in making the exchange, has used its property to acquire a new kind of asset or has merely exchanged its property for an asset of like nature or character.
The court did note that not all real property exchanges are like-kind exchanges, though.
The idea behind a § 1031 exchange is that the taxpayer is exchanging one piece of property for another, and that his original investment has not been sold or liquidated. The court noted,
It is true Peabody is obligated to mine and supply coal to meet the operating needs of power stations and that Peabody is prohibited from impairing the contracted-for supply by selling coal to other buyers. In our view those contract obligations and restrictions constitute a distinction in the grade or quality of the old and new mining properties rather than a difference in their kind or class. The new coal mine property is of a like nature or character to the gold mining property Peabody exchanged. By exchanging the gold mining property for the coal mining property subject to the supply contracts, Peabody is essentially continuing the original investment which remains fully unliquidated.
The court concluded, “In the light of that holding and because the supply contracts cannot be separated from Peabody’s ownership of the Lee Ranch mine coal reserves, it follows that those contracts are not taxable as other property or boot under section 1031(b).”
So Peabody is allowed to turn gold into coal, tax-free.
Case: Peabody Natural Resources Company v. Commissioner, 126 T.C. No. 14
In April, Californians sent $11.3 billion in personal income tax payments to the state, $4 billion more than predicted in January, according to the Department of Finance. So, what should be done with this money?
The California Constitution requires a balanced budget, so there’s no such thing as deficits or surpluses—at least on paper. The reality is a bit different, of course. For the last few years, the state has borrowed funds from a variety of sources in order to balance the books. Funds tapped included payments to local governments, funds for education, and emergency funds.
H.D. Palmer, a spokesman for the Department of Finance, notes what happened the last time California had an unexpected surplus. “When the dot-com boom went spectacularly bust and those one-time revenues disappeared, that increased the structural deficit that we are still working to close.”
It even appears that Democrats in the state legislature know that California has fiscal issues. “We as Democrats need to be careful and focus on getting ourselves out of this hole so we don’t have a permanent structural deficit,” said Wes Chesbro (D-Arcata).
So will the money go to reducing the structural deficit and paying back the debt/borrowed funds, or will the Democrats in the legislature attempt to spend the money? The budget is supposed to be approved by June 30th (a deadline that’s rarely met), so we should have some idea on this soon.
…the state would probably be run much more efficiently than it is today. Their methods, though, might leave something to be desired.
However, the methods employed by Governor Jon Corzine leave a lot to be desired. Corzine wants to increase New Jersey’s sales tax rate by 16.67% (from 6% to 7%), and add a $1,424/month “bed tax” on hospitals. Certainly, it’s creative, but as Professor Maule notes this fee tax would just be passed on to users of hospitals. Health insurance premiums would rise, and hospitals will suffer. It’s likely that the number of available hospital beds would shrink. It is basic economics.
Luckily for residents of the “Garden State,” even his Democratic colleagues in the New Jersey Legislature aren’t happy with his proposals. The Newark Star-Ledger quotes Assemblywoman Joan Quigley as stating, “[this tax money would go into] a black hole…We are taxing hospitals to pay for roads and jails.”
Given the political climate in New Jersey (corruption and a very dysfunctional electorate) I won’t be surprised if Governor Corzine’s budget is implemented.
News Stories: Philadelphia Inquirer, Newark Star-Ledger
Today the Tax Court looked at an ambiguous section of the Tax Code. Suppose an S Corporation is owed a refund, with interest. What interest rate should be used? The general “corporate overpayment” rate, the “large corporation” overpayment rate, or the “non-corporate” rate?
All corporations start as C Corporations. Many corporations immediately become small business corporations, or S Corporations. Sometimes a corporation will convert to being an S Corporation during its life. Today’s case involves such a corporation. Corporations that convert from C to S can owe a “Built-In Gains Tax.”
Garwood Irrigation Company owed such a tax, and prepaid it. In fact, they overpaid the tax and were due a refund. Last year, the Tax Court decided the amount of the refund. The IRS computed the refund using §6621 (a)(1) of the Internal Revenue Code, and assumed that Garwood was a large corporation:
Section 6621(a)(1) provides:
SEC. 6621. DETERMINATION OF RATE OF INTEREST.
(a) General Rule.–
(1) Overpayment rate.–The overpayment rate established under this section shall be the sum of–-
(A) the Federal short-term rate determined under subsection (b), plus
(B) 3 percentage points (2 percentage points in the case of a corporation).
To the extent that an overpayment of tax by a corporation for any taxable period (as defined in subsection (c)(3), applied by substituting “overpayment” for “underpayment”) exceeds $10,000, subparagraph (B) shall be applied by substituting “0.5 percentage point” for “2 percentage points”.
As the Tax Court notes, the dispute is based on what a large corporate overpayment is. Subsection (c)(3) states,
(3) Large corporate underpayment.–For purposes of this subsection–
(A) In general.–The term “large corporate underpayment” means any underpayment of a tax by a C corporation for any taxable period if the amount of such underpayment for such period exceeds $100,000.
(B) Taxable period.–For purposes of subparagraph (A), the term “taxable period” means–
(i) in the case of any tax imposed by subtitle A, the
taxable year, or
(ii) in the case of any other tax, the period to which the underpayment relates.
Confused? Well, the Internal Revenue Code can confuse anyone, including Tax Court judges. As the Court notes, “This creates a question as to why Congress did not more artfully express the incongruity in dollar thresholds, if petitioner’s argument is assumed to be correct.”
Because the statutes are ambiguous, the Court looks at the legislative history to resolve the dispute. The Court discovers that the large overpayment statute was designed for C Corporation; the petitioner, Garwood Irrigation Corporation, is not one. So that rules out the 1/2% rate of interest. However, Garwood is a corporation, so the Court throws out the 3% that Garwood wanted. Garwood will have to settle for a measly 2% above the federal short-term rate. But that is 1 1/2% more than the IRS wanted to give.
…on the tax front.
Bjorn Ulvaeus, a member of the Swedish pop group ABBA, has been charged with tax evasion. He is accused of not paying 87 million kronor ($11.7 million) in taxes on royalties from ABBA’s songs and musicals.
The Swedish government accuse Ulvaeus of setting up offshore entities to avoid paying taxes. Mr. Ulvaeus’ attorney denies the charges.
Additionally, The Local reports that a second member of ABBA, Anni-Frid Reuss-Lyngstad, is accused of owing 12 million kronor in unpaid tax, interest, and penalties. She is accused of illegally moving her share of royalty income to a Panama based company.
ABBA’s songs are featured in the musical “Mamma Mia,” which is currently appearing on Broadway and in Las Vegas. Conveniently, two of ABBA’s songs are Money, Money, Money and SOS.
