Facing the Music

Posted on April 13, 2006 by Russ

Last October, I inched my way towards the 21st Century and bought an iPod. I find it wonderful, because when I’m at the gym I can listen to music that I like, not the techno-garbage that my gym plays.

iPods haven’t been bad for Apple, either, as they’ve become a ubiquitous symbol of the 21st Century. Apple’s iTunes store is doing a booming business, selling downloads of music.

And the Tax Man Cometh.

In California, music is not subject to sales tax because it is not considered tangible personal property (something you can hold). But that’s not the case in many states. If you live in Washington, Texas, or Indiana, you need to pay either sales tax or use tax on your iTunes downloads. And as this CNET story states, many other states are looking at taxing the downloads.

Of course, you could live in Oregon—the state with no sales tax. If you don’t, you may find that download costs an extra 5% to 10% as states continue to move forward in taxing the Internet.

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PayPal Users Better Watch Out

Posted on April 12, 2006 by Russ

The digital age has spawned numerous successful companies and industries. One industry that did not exist ten years ago is online auctions, such as those on eBay. A company that sprung up to facilitate payment transfers for eBay is PayPal. In fact, eBay bought PayPal a few years ago.

The benefits of using PayPal are obvious—buyers and sellers can easily transfer money to one another. The money flows readily. PayPal can also be used to transfer money from the US to anywhere. And the IRS wants to know about that.

The US has some very stringent money laundering laws. If you have a foreign bank account, and you have $10,000 or more in it at any time during the year, you must report it on Schedule B of Form 1040 and by filing Form TD F 90-22.1 with the Department of the Treasury. Now, do you really believe that all of the people who use PayPal to transfer money have been doing this?

I don’t, and the IRS concurs. Indeed, the IRS announced last year that they were looking at PayPal payments. Yesterday, the IRS won approval in federal court to obtain information on Americans who sent money to bank accounts or credit cards in thirty foreign countries considered tax havens.

News Story: Silicon Valley.com

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It’s Time To Vote (Again)

Posted on April 11, 2006 by Russ

Tuesday, April 11th is election day in Orange County. If you live in the 35th State Senatorial district, you will vote on the replacement for John Campbell. You can find your polling place here. Remember to vote!

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A Scam a Day Keeps the Doctor Away

Posted on April 10, 2006 by Russ

One of my clients today asked me about reporting of offshore (foreign) bank accounts. I reminded him that if you have $10,000 or more at any time in a foreign bank account or accounts, they must be reported by checking the boxes on Schedule B and by completing Form TD F 90-22.1 and mailing that form to the Department of the Treasury. The penalty for not reporting starts at $25,000. You can find yourself serving hard jail time if you don’t report them. The anti-money laundering statute has real teeth.

My client wisely agreed that reporting his foreign bank account was the right thing to do.

Of course, when I get home and check my email, I see this:

Dear ColleagueGullible Victim,

Thank you for your interest in our offshore fund products. The [deleted] Fund (Cayman) is a product that is attracting attention worldwide.

Offshore advisers and consultants are attracted to the product because it offers their clients exposure to private equity and because it pays significant cash commissions and the opportunity to participate in the profits of the fund manager.

Scam Highlights
Class A private equity shares target 20% to 25% annual returns
Class B shares provide a guarantee of principal by a financial institution rated AA by Standard and Poor’s with a term of five years and a target return of 12% to 15% per annum
Commissions paid to consultants and advisers are from 4% to 6%
Trailer allows you to participate in the profits of the manager for five to ten years
Class “A” Private Equity Shares are designed to provide sophisticated investors the opportunity to invest in a private fund that invests in some of the most promising alternative asset managers using a high growth strategy. The minimum initial purchase for Class A Shares is US$50,000 with a target return of 20% to 25% per annum.

Class “B” Capital Guarantee Shares are designed to provide investors with exposure to private equity without risk to capital. The Class B Shares also have a defined redemption date with a specified return rate. The minimum initial purchase for Class B Shares is US$50,000. Class B Shares shall be redeemed by the Fund in year five at a redemption price of 175% (75% over the original price).

If offering this product is of interest to you, please review the materials that can be found on the following link: [deleted]

We believe once you have read our materials and understand our fund model you will see the economic possibilities are substantial.

We look forward to your response.

Sincerely, [deleted]

In case you’re wondering, I didn’t request information on these offshore funds. I love how they say they’re targeting a 20% to 25% return. We all want a 20% to 25% annual ROR on our investments. The lack of comments such as, “Our Scam1 Fund returned 38% last year,” shows that the operators are becoming more sophisticated.

Now, it’s always possible that this fund is legitimate. Really….

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Nevada Ups the Ante

Posted on April 10, 2006 by Russ

As I perused this morning’s Orange County Register, I was surprised to see the Nevada Development Authority advertising in the Register. You can find the ad on page 7 of the business section. It reads:

“California Business Profits After: Worker’s Comp, Business Taxes, High Power Bills, Anti-Business Legislation = [hand shown holding some peanuts]. 5 Ways to lower your nut. Eliminate personal income tax, axe corporate income tax, don’t pay inventory tax, lower workers’ comp costs, relocate to Las Vegas.”

A similar ad appears in today’s Los Angeles Times. The NDA’s website has links to some of their television commercials, which are quite humorous (and effective).

Meanwhile, in the “Am I Really This Stupid” side of the ledger, both the Los Angeles Chamber of Commerce and the San Francisco Chamber of Commerce are supporting Proposition 82, the Mandatory Pre-School/Income Tax Increase, Help Las Vegas, Phoenix, and Denver Initiative. Showing some sanity, The California Chamber of Commerce opposes Proposition 82. If Las Vegas really wants to see an increase in business relocations, they should hope that Rob Reiner’s flawed initiative passes.

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One Week To T-Day

Posted on April 9, 2006 by Russ

Tax Day is Monday, April 17th…except for some municipal taxes in Ohio that are still due on April 15th. So, at this late date, what can you do to lower your taxes?

1. Make a contribution to an IRA, if you’re eligible. You’re allowed to make a $4,000 contribution (up to the amount of your compensation); if you were 50 any time during 2005, you can make a $4,500 contribution. There are income restrictions to making an IRA contribution. For full details, see Publication 590. You have until April 17th (in most cases) to make a traditional IRA contribution.

2. Make a contribution to a SEP IRA, if you’re eligible. SEP IRAs are for the self employed. You can contribute up to $42,000 or 25% of your compensation, whichever is less. However, there’s an adjustment that must be made for the impact of self-employment tax. You can start a SEP (and contribute to a SEP) any time before you file your return, including extensions. (If you start a SEP after April 17th, you do need to have filed an extension. The final deadline is October 15th.) See Publication 560 for more information.

3. Consider the home office deduction. Many taxpayers have been scared to approach this deduction because of fear of IRS audits. Well, I strongly believe that if you’re eligible for a deduction, you should take it. Now, there are some strict rules that you must meet in order to take the home office deduction:

“You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively:
– As your principal place of business for any trade or business;
– As a place to meet or deal with your patients, clients or customers in the normal course of your trade or business.”

Still, many have avoided taking this deduction because of fear, and I don’t think that’s justified at all. You can find more information on this deduction in Publication 587.

4. Don’t rush! Consider filing an extension. If you’ve just decided to use a professional tax preparer, and you’re just now (one week before the deadline) going to him or her, he or she will most likely insist on an extension. (If not now, very, very, soon he’ll insist.) Those who have been practicing for any length of time are extremely busy in the last week of tax season, and it’s hard to squeeze a new client in before the deadline. It’s not that we won’t accept new clients; rather, we won’t be able to do a professional quality job on your return if we took you on and agreed to finish your return before next Monday. We’ll work with you to make an estimate of what you owe, generate the extension forms, and then prepare your return after the deadline.

5. Remember Your State and Local Tax Deadlines. These can differ. For example, municipalities in Ohio have deadlines of April 15th. Iowa has a deadline of April 30th. Massachusetts has a deadline of April 18th, because the 17th is a holiday. And if you send your IRS return to the Andover, MA service center, you have an extra day, too.

If you are one of the lucky few who have a scheduled appointment with your tax preparer this week, try and be organized. He’ll appreciate it, because he’s been swamped for several weeks. And it will help to get your return done quickly.

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Pork

Posted on April 6, 2006 by Russ

A man condemning the income tax because of the annoyance it gives him or the expense it puts him to is merely a dog baring its teeth, and he forfeits the privileges of civilized discourse. But it is permissible to criticize it on other and impersonal grounds. A government, like an individual, spends money for any or all of three reasons: because it needs to, because it wants to, or simply because it has it to spend. The last is much the shabbiest. It is arguable, if not manifest, that a substantial proportion of this great spring flood of billions pouring into the Treasury will in effect get spent for that last shabby reason.

Rex Stout wrote this in 1948 (And Be a Villain). It’s arguable that little has changed.

The Congressional Pig Book was released yesterday by Citizens Against Government Waste. You can find this year’s book here. Here are some of the lowlights (randomly pulled):

  1. $150,000 for the Bulgarian-Macedonian National Educational and Cultural Center in Pittsburgh, PA. I have nothing against Bulgarians and Macedonians, but this smells like pork.
  2. $600,000 for the Abraham Lincoln Bicentennial Commission. I have nothing against Abe (after all, I was born in Illinois), but I can see better uses of this money.
  3. $100,000 for the South Carolina International Center for Automotive Research Park Innovation. This center will apparently be used for auto racing research. I think NASCAR could fund this themselves.
  4. $500,000 for the Sparta Teapot Museum in Sparta, SC. Does the government need to support a teapot museum?
  5. $273,000 for urban market development in New York. The goal of this program is “garden mosaics.” I can think of better uses for that money.

I deliberately chose only items under $1,000,000. There are plenty over $1,000,000. Like $6,435,000 for wood utilization research. $1,000,000 for the Waterfree Urinal Conservation Initiative. Talk about money down the drain.

I urge you to read this list. Further, you should talk to your Congressional representatives so the amount of pork shrinks to a managable level. Go to Porkbusters and help with the cause. Remember, your tax dollars are at work!

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No Joy In Toyland

Posted on April 6, 2006 by Russ

Toys “R” Us operates in California and, of course, pays California taxes. California uses a three-part allocation formula based on unitary taxation to determine how much a corporation operating in multiple states must pay. Toys “R” Us came to the conclusion that if the sales portion of the formula included the principal amount of short-term notes, that their California tax would go down. So they filed an appeal, and took their case to court.

Toys ‘R Us lost in district court, and they appealed their claim for $4.8 million plus interest to the Court of Appeals (Third Circuit, CA). In FTB v Toys “R” Us, the main issue was whether the California rule results in an equitable apportionment formula. The Franchise Tax Board (FTB) successfully argued that if Toys “R” Us could include the principal, they could move between 11% and 28% of their annual sales to a different state by just relocating their Treasury Department.

The FTB tends go too far in its regulatory tactics and enforcement actvities; however, I completely agree with them and the Court’s decision. Perhaps principal could be included for a business that’s a financial services corporation. For a retailer, though, this doesn’t make sense.

Hat Tip: Central Valley Business Times

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Being In Jail Is a Good Excuse

Posted on April 5, 2006 by Russ

The IRS wants to place a levy or a lien against you. The IRS says they mailed the notice, but it ended up at the wrong prison (you were in Attica, but the letter was sent to Gowanda; both are New York prisons). You request a hearing. The IRS sets a date for a conference (two years later), but the IRS chooses a date while you’re in solitary confinement and attending is out of the question. The IRS goes ahead with the levy. You go to Tax Court claiming you never had your fair hearing.

The Tax Court found that the petitioner had vigorously contested all his legal problems and it was likely he never received the original notice (it did, after all, go to the wrong prison). And the IRS should have rescheduled its conference; heading to New York City while you’re in solitary confinement just isn’t possible. The Tax Court ordered the IRS to give the petitioner a fair hearing.

Case: Butti v. Commissioner, T.C. Memo 2006-66

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Swearing at the Court Isn’t a Great Idea

Posted on April 5, 2006 by Russ

The IRS puts two liens against you. You fight the case, filing a lawsuit against the Commissioner of the IRS, claiming $4.5 million in damages for slander of title, inconvenience, aggravation, and generally annoying behavior. But you lose in District Court. You file an appeal to the Court of Appeals (here, the 10th Circuit). The IRS asks for the appeal to be summarily rejected, and that you pay a penalty for making a frivolous appeal.

If you’re going to file a lawsuit against the IRS, you had better have legal grounds; being annoyed isn’t enough according to the District Court that first ruled on this case. When the petitioner, Delbert Kyler, appealed, he told the Court that the IRS, “extorts money and property,” “exploits the power of the United States for criminal thuggery,” and that the U.S. Attorney was “obviously unschooled in the legal arts … [and] expects this court to bend over backwards and kiss his … allegedly royal ass.”

You and I may be laughing. Unfortunately for Mr. Kyler, the Court just wasn’t in a laughing mood, found his appeal frivolous, and ordered him to pay the “unschooled … legal arts” practitioners of the United States Attorney’s Office their legal fees of $8,000.

Case: Kyler v. Everson, 10th Circuit

Hat Tip: Tax Professor Blog

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