M Madness

Posted on March 31, 2006 by Russ

I live and work in beautiful Orange County, California. Several years ago the voters of this county passed a 0.5% sales tax increase to fund transportation issues (such as the widening of Interstate 5 through Orange County). That sales tax increase expires at the end of 2011. The Orange County Transportation Authority (OCTA) administers the tax, and has been running a somewhat blatant advertising campaign in support of renewing Measure M. Just one little problem: that’s probably illegal.

No matter what your view is on Measure M, it’s irrelevant; it’s illegal (under California law) for a government agency to publicly campaign for a proposition. And as the Orange County Register noted in an editorial, the OCTA issued an 8-page campaign mailer an 8-page informational brochure praising the benefits of Measure M. Sort of sounds like the campaign for pre-schools that Rob Reiner ran. You can see the ad/brochure here.

While Rob Reiner has suffered the consequences of his actions, it’s uncertain whether the OCTA will. Hopefully, the Legislature and the Orange County Board of Supervisors will tell the OCTA to spend their money on improving the freeways and not on glitzy campaign literature informational brochures.

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CTEC: A Bit Behind The Times

Posted on March 30, 2006 by Russ

CTEC, the California Tax Education Council, released a press release reminding taxpayers of the automatic extension available (Form 4868). The press release noted that the extension, which is an extension of time to file, not pay, is for four months.

Well, that used to be correct.

This year the automatic extension is for six months, a rare case where the IRS is matching how California has handled extensions.

Somehow it seems appropriate that the agency that regulates some California tax preparers (CTEC regulates all preparers in California except EAs, CPAs, and attorneys) isn’t aware of the rules.

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States Where Gambling Is a Bigger Gamble

Posted on March 28, 2006 by Russ

Let’s say you went to the casino last April, and were lucky, and won $1,000. Last August, you went to the casino, and you weren’t so lucky, and you lost $1,000. What are the tax implications?

For federal taxes (IRS), you have $1,000 of other income (line 21 of Form 1040) and a $1,000 itemizable deduction on Schedule A (not subject to the 2% AGI limitation on itemized deductions). For federal tax purposes, this will likely have few implications for many Americans.

However, let’s suppose you live in Illinois. Illinois’ state income tax is more of a gross receipts tax—there is no deduction allowed for gambling losses. For the amateur gambler, you have $1,000 of gambling income in Illinois.

There are nine states that treat gambling in this manner. Here is a list of the nine states that gamblers should avoid residing in:

    Connecticut
    Illinois
    Indiana
    Massachusetts
    Michigan (first $300 exempt)
    Minnesota*
    Mississippi
    Ohio
    West Virginia

Interestingly enough, Connecticut, Illinois, Indiana, and Mississippi all have casino gambling.

Minnesota is unique (as far as I can tell). Minnesota’s standard income tax allows deductions for gambling losses. However, its’ AMT does not, causing anyone with significant gambling losses to fall into Minnesota AMT. If anyone knows of any other states that don’t allow gambling losses to be deducted on the state AMT, I’d love to know.

I’ll point out that there are several states that don’t have any state income tax (or just tax interest and dividends): Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. That’s one less form (or set of forms) to complete each year.

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Breast Tax

Posted on March 26, 2006 by Russ

If you’re a plastic surgeon, and you use breast implants as part of your work, do you have to pay sales tax on the implants you use?

Yes, in Alabama.

The Alabama Department of Revenue recently took a doctor to task for not paying use tax on the breast implants he was using in his surgery practice. (Use tax is when the user is required to pay the equivalent of sales tax when the seller doesn’t charge sales tax. Almost all states have use tax laws. For example, that book you bought on Amazon tax free—well, you’re probably supposed to pay use tax on it. Indeed, many states have added a “use tax” line on their income tax forms.)

Alabama considers “…doctors, as members of a learned profession, are not making retail sales when they provide or supply tangible property to their patients incidental to their professional services. Hamm v. Proctor, 198 So.2d 782 (Ala. 1967); Haden v. McCarty, 152 So.2d 141 (Ala. 1963). However, the use or consumption of the property by the doctors in providing the services in Alabama is clearly subject to Alabama use tax.” So those stitches, bandages, and, yes, those silicone implants are taxable.

California appears to be headed in the opposite direction. The Board of Equalization ruled on February 1st that cosmetic medical treatments, including Botox and silicone implants, should be exempt from sales tax.

But one state taxes cosmetic surgery—New Jersey. Specifically exempted from the New Jersey ordinance are reconstructive procedures. However, cosmetic dentistry is taxable. Teeth whitening is specifically cited as taxable. Would orthodontia be taxable? I can imagine a sales tax auditor peering into some childs’ mouth, seeing how bad the overbite is. “Your son only has a 40% overbite, so you must pay sales tax.” But I digress….

Of course, when I read the Alabama story, I remembered the wonderful Chesty Morgan. Humorously, Chesty tried to deduct the implant surgery as a medical deduction (subject to a 7.5% AGI limitation) and lost in Tax Court. But the judge allowed her to deduct the surgery as an unreimbursed business expense (subject to a 2.0% AGI limitation).

So, the moral of this tale is that if you’re a plastic surgeon in Alabama, you’d better charge sales tax on those silicone implants or you could be busted.

Thanks to the NAEA for alerting me to this story.
Link: Alabama Administrative Law Judge Ruling

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Vegas to CA: Humorous Ads Score

Posted on March 25, 2006 by Russ

I previously wrote about Las Vegas’ attempt to draw more businesses from California. A few days ago I saw one of the ads: A giant peanut crushed a Californian, akin to California’s huge tax burden crushing a business. One Los Angeles television station, KABC, has refused to run the ads, citing an anti-California theme and offensiveness.

KABC is correct. The ads are anti-California, but they’re hardly offensive. Accurate is a better statement, especially when you compare the extremely offensive (high) tax burden in California to the non-offensive (low) tax burden in Nevada.

I haven’t seen another ad that the Nevada Development Authority has run. It features a poker game between California business and Las Vegas business. According to the Las Vegas Review-Journal, the Las Vegas business gets three aces and a “No state personal income/corporate tax card” while California gets an anti-business card. Las Vegas moves all-in while California folds.

The Nevada Development Authority has $5.5 million in marketing dollars to spend. But their most important bit of marketing is out of their hands—the results in the California June primary on Proposition 82, which would increase California’s already offensive tax burden.

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I Wish the IRS Would Look At….

Posted on March 24, 2006 by Russ

Have you ever thought of an area where you’d like to see the IRS issue guidance? Now is your chance to send the IRS cogent tax items that need clarification.

Today the IRS issued Notice 2006-36 requesting recommendations for the 2006-2007 Guidance Priority List. While any taxpayer can submit anything, in order for your recommendation to be seriously considered, you should ask yourself whether the recommendation:

“1. Whether the recommended guidance resolves significant issues relevant to many taxpayers;
2. Whether the recommended guidance promotes sound tax administration;
3. Whether the recommended guidance can be drafted in a manner that will enable taxpayers to easily understand and apply the guidance;
4. Whether the Service can administer the recommended guidance on a uniform basis; and
5. Whether the recommended guidance reduces controversy and lessens the burden on taxpayers or the Service.”

If you have any ideas that do, submit them to the IRS by May 15th, to:

Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2006-36)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

Here’s the 2005-06 Guidance Priority List. Not everything on the list receives guidance, of course.

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“I Never Got It”

Posted on March 23, 2006 by Russ

Assume that you’re a conniving individual. The pesky IRS sends you a notice of non-payment. You decide to either (a) ignore it, or (b) move, but not give the IRS your new address. What will happen? Today, the Tax Court weighed in.

When the IRS sends you a notice, they send it to your last known address. If you move, the IRS has a form for you to file, Form 8822, that you can use to notify them of your new address. (Most state tax agencies have similar forms; California has Form 3533.) It’s your responsibility to notify the IRS. If you filed your tax return with a new mailing address, that also is sufficient notification. By the way, like anything else you send to the IRS (or FTB), you should send your change of address by certified mail, return receipt requested so that you have proof that you mailed the notice.

In the case at issue today the petitioners did none of those things. They claimed that they didn’t receive the IRS’s notices. In their case, they hand’t moved, and it may be that the PO Box they used had horrible service. Or it may be that they did receive the notices, and ignored them. Unfortunately for the petitioners, the Tax Court chose not to accept their testimony of non-receipt, and they lost their case.

Case: Prakasam v. Commissioner, T.C. Memo 2006-53

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Wide Right?

Posted on March 23, 2006 by Russ

Ray Wersching had an illustrious career in the NFL. After starting his career with the San Diego Chargers, he moved on to the San Francisco 49ers, and played in Super Bowls XVI and XIX. Wersching holds the career Super Bowl record for most field goals (5). After retiring from the NFL, Wersching started an insurance company, Ray Wersching Insurance Agency, in Redwood City, CA, south of San Francisco on the Peninsula.

On Wednesday, Wersching was indicted for allegedly misappropriating premiums that should have been paid to Farmers Insurance Group, and of evading taxes on $3.6 million of corporate income in 1999 and 2000. Last year, the company’s co-owner, Mary Ann Locke, was indicted on similar charges.

Wersching’s attorney told the San Francisco Chronicle, “The money that was stolen went to Mary Ann Locke. Ray got none of it…She spent $8 million on a lavish lifestyle and gambling in Nevada.”

Wersching, who is also a CPA, is due in court on Monday.

News Stories: San Francisco Chronicle, San Jose Mercury

Posted in Tax Evasion | 4 Comments

Almost Impossible to Trace

Posted on March 22, 2006 by Russ

Don’t try this at home.

Suppose you set up some offshore companies. You take investors’ money and buy gold coins (making the money harder to trace). Add a few shell companies, here and abroad, ignore those pesky IRS (and Treasury) regulations requiring you to disclose foreign bank accounts, mix it up, and you end up with a wonderful scheme to hide assets from the IRS.

Almost. The IRS found out. The perpetrators are finding their way to federal institutions. The Portland Oregonian reported today that the scam cost the IRS over $22 million in unpaid taxes. Terry Neal, of Gresham, OR, will have five years to consider his crimes (in prison) and was also fined $50,000. His co-conspirators received lesser sentences (but did get jail time). And the IRS ended up seizing most of the gold, and did collect over $176,000 from selling it.

The moral is the usual one: If it sounds too good to be true…

News Story: Portland Oregonian

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CA LLCs: Where to Send Refund Request

Posted on March 21, 2006 by Russ

Courtesy of Roth Tax Updates, and CCH, here’s how to request a refund:


Taxpayers should fax their protective claims to the FTB at 916-845-9796. In the fax, taxpayers should note that this is a protective claim and assert that the LLC fee is an unconstitutional tax. The following information should also be included: (1) the LLC’s name and identification number; (2) the tax years involved; (3) the amount of the claim; and (4) the name of a contact person and his or her phone number and fax number. The FTB will send an immediate fax confirmation.


The FTB is going to appeal, so don’t expect any money any time soon.

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