Governator Warms Up to Tax Increase

Posted on February 17, 2006 by Russ

Global warming, that is.

According to this article in the San Francisco Chronicle, Governor Schwarzenegger appears ready to jump on the global warming trail for tax increases.

First, some science. There’s a big debate over whether or not global warming is happening. For example, you’ll hear about the US having a warm winter. Well, Asia and Eastern Europe have had a cold winter. We hear that the icepacks in the Arctic and Antarctic are melting. If so, why haven’t coastal cities had flooding problems?

Additionally, there have been numerous reports that Earth naturally has warm and cold cycles. Indeed, there was a recent report that Earth will soon have a mini-ice age. When I was growing up, I remember reading in Popular Science that the burning of fossil fuels would case an ice age. That was about 1970, btw.

Back to taxes. The Governator apparently will propose increasing taxes on fossil fuel to fund research into alternative fuels. Let’s assume such a measure passes. Here are the impacts:
– California will be at an additional competitive disadvantage to other states;
– California will drive business away from vital industries, such as its ports and manufacturing;
– Tax increases are passed on to consumers. Always. So this will ripple through other areas of the economy.

I could continue in this vain but I think you get the idea. This is a bad plan that deserves to be shelved immediately.

Hat Tip: GOP Bloggers

Posted in California | 2 Comments

Ask Mr. Schiff About That…

Posted on February 17, 2006 by Russ

Yesterday, we blogged about Irwin Schiff, who is going to be spending the rest of his life in an institution because he was convicted of defrauding the IRS by telling and selling clients various methods so they didn’t have to pay the IRS. Here is a link to the Tax Protestor FAQ, which debunks just about every tax protestor argument. Judges especially dislike tax protestor arguments.

In any case, today’s Tacoma News-Tribune has a story about a man who has been accused of tax fraud. Allegedly, he has sold over 400 sham trust packages, costing the IRS over $7 million in uncollected taxes. David Carroll Stephenson believe he’s done nothing wrong. Indeed, he argues that the court has no authority (I’m sure the judge will like that argument), the government has no authority (to collect income tax), and the IRS was never authorized. As an aside, all of these arguments are debunked in the Tax Protestor FAQ.

I’ll be shocked if Mr. Stephenson isn’t found guilty.

Posted in Tax Evasion | Tagged | 2 Comments

When In Doubt, Blame the Computer!

Posted on February 16, 2006 by Russ

You get what you pay for, or so the cliche goes. The Tax Court today looked at a case where a husband and wife had two “businesses” and used tax software to prepare their returns. As Joe Kristan of Roth Tax Updates reported, the businesses were probably just methods of spending their own money. The Tax Court didn’t like that. The Cost of Good Sold that they claimed were for mainly personal expenses. That didn’t sit well either. So they lost their case.

But the IRS also asked for a negligence penalty. As the Tax Court noted, “‘Negligence’ includes any failure to make a reasonable attempt to comply with the provisions…[of the Internal Revenue Code], and the term ‘disregard’ includes any careless, reckless, or intentional disregard.” So the taxpayers blamed the software they used. The negligence penalty stood up.

There’s a lesson here. Tax software does a great job putting what you enter on the correct lines. If you have a simple tax return, say just a W-2, a 1099-INT from your bank, and no other deductions, software will do a great job.

But software doesn’t do some things. It doesn’t ask you if the deductions you’re entering in are reasonable. It doesn’t ask you if that medical insurance premium you’re entering in as an Insurance expense for your S-Corporation should be entered in on that line. It probably won’t tell you where the best place is (on your return) to take a certain deduction, or why it might be better not to take that deduction. As Roth Tax Updates said, garbage in, garbage out.

Case: Maxfield v. Commissioner, T.C. Summary 2006-27

Posted in Tax Court | 2 Comments

Schiff Mentally Ill?

Posted on February 16, 2006 by Russ

ABC News is reporting that Irwin Schiff, convicted of numerous charges in Las Vegas and facing 43 years in prison and fines of over $3 million for telling clients that there is no such thing as an income tax, is mentally ill. That’s according to court documents. Psychiatrists apparently believe that mental illness—suicidal depression, bipolar mental disorder, paranoia and delusions—made him tell people that you didn’t have to pay income tax. Schiff is currently 77 years of age.

Of course, if the Court or the prosecution (the United States) looks at his website, they may get other ideas. For someone convicted to continue to say

“Since the income tax was repealed in 1954 when Congress adopted the 1954 Code, it is clear that for 50 years federal judges in conspiracy with U. S. Department of Injustice prosecutors have been illegally and criminally prosecuting people for crimes that do not exist in connection with a tax that nobody owes.”

And you can see what his website says about himself here.

Mentally ill or not, it’s likely we’ve heard the last from Mr. Schiff. He’s likely to spend the rest of his days in either a psychiatric hospital or the geriatric wing of a federal institution.

Coverage When Schiff Was Convicted: Here (Roth Tax Updates)

Posted in Tax Evasion | Tagged | 1 Comment

An Interesting Gambling Tax Court Case

Posted on February 13, 2006 by Russ

The Tax Court today decided Castagnetta v. Commissioner (T.C. Summary 2006-24). The petitioner claimed that while working as a part-time truck driver that he was also a professional gambler, gambling on horse races in New York. The IRS challenged that, and the case ended up in Tax Court.

The IRS does not like the idea of professional gamblers, and has consistently challenged individuals who claim that they are in that profession. Mr. Castagnetta, though, avoided many of the traps. He kept a detailed log of his bets. He kept detailed back-up information (“speed figures”) on horses. He made 4% on his bets (versus the “average” horse racing bettor losing 17% on his bets).

The interesting items that were in the case are:

– The Tax Court states, in a footnote, that not only can a non-professional gambler deduct gambling losses against winnings, he can deduct “other expenses incurred in connection with gambling transactions” (up to the amount of winnings). The Tax Court states that these expenses may include items such as transportation, meals, lodging, admission fees, office supplies, and ATM fees.

– The IRS has, in various appeals cases, stated that a professional gambler must “solely” be engaged in that as a profession. The Tax Court did not come to that conclusion. It noted, “It is clear that in a single taxable year, a taxpayer may be in engaged in more than one trade or business. Curphey v. Commissioner, 73 T.C. 766 (1980); Barrish v. Commissioner, T.C. Memo. 1984-602.” But the gambling must be engaged in as “the intended livelihood source” and “for income or profit.” Intended livelihood source means the activity that you use to support yourself.

Unfortunately, the case is a summary opinion and cannot be used as a precedent for other cases. But it does give an idea of how the Tax Court feels about gamblers, and is much more positive for gamblers, both professional and amateur, than the IRS’ viewpoint. Oh yes, Mr. Castagnetta won and he’s considered a professional for the year in question (see Joe Kristan’s analysis for more details on that).

Thanks to Joe Kristan and Roth Tax Updates for their plug of our site. Apparently, we both read the decision and posted about it at roughly the same time.

Case: Castagnetta v. Commissioner, T.C. Summary 2006-24

Posted in Gambling | 6 Comments

Crime Log: Nursing Homes Pay Well…

Posted on February 11, 2006 by Russ

…when you withhold taxes from employees and keep them.

Crime does pay, as long until you get caught. Take nursing home owner Jack Easterday, formerly of Alameda, CA, and soon to be residing in a federal penitentiary. Mr. Easterday was convicted on Friday of failing to pay over $3 million in payroll taxes. Evidence indicated that the scheme netted over $18 million.

It took the jury two days to find Easterday guilty of 47 counts; the maximum penalty on each count is five years and a $10,000 fine.

News Story: North County Gazette

Posted in Tax Fraud | 4 Comments

Dynamic Analysis Proposed by White House

Posted on February 11, 2006 by Russ

According to the Wall Street Journal, the 2007 budget has $513,000 allocated to set up a “dynamic analysis” unit within the Department of the Treasury. Currently, the Congressional Budget Office uses static analysis to determine the impact of proposed changes in the Tax Code. The idea behind dynamic analysis is that tax changes can impact behavior.

News Story: Wall Street Journal [Paid Subscription Required]

Posted in Legislation | 2 Comments

Crack Tax, Part Two

Posted on February 10, 2006 by Russ

The NAEA alerted me to a new act under consideration in my old home, Washington state. Acting on the success of the Tennessee Crack Tax, two legislators in Washington have introduced similar legislation. The act, if passed, would impose a stamp tax of $50.00/gram of cocaine, $200/gram of “other controlled substance or low street-value drug that is sold by weight,” $31.70/gallon (or fraction thereof) of illicit alcoholic beverages sold by the drink, and $12.80/gallon of illicit alcohoic beverages not sold by the drink.

You can find the text of the proposed legislation here.

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The Saga of Western Tax Service Draws to a Close

Posted on February 9, 2006 by Russ

Samuel Joseph DeAngelo headed Western Tax Service. It attracted tax clients quickly as it averaged $2,500 refunds for each customer.

It’s techniques were certainly interesting, and come from the Richard Hatch School of Tax Preparers:

– Making up false deductions for employee business expenses;
– Making up false charitable deductions (typically 10% of AGI);
– Phony depreciation deductions;
– Phony tax payment deductions; etc.

The IRS audited a taxpayer who used Western Tax Service and discovered the fraud. Most of the tax clients had no idea that Western was doing anything wrong. The IRS expanded their review of returns prepared by Western (Western prepared about 8,000 returns in 2001). Yes, Western charged large fees but they got large refunds; what could be the problem? (Hint: If it sounds too good to be true…)

The axe fell in 2004. Now, the story reaches its conclusion. Last Friday DeAngelo pled guilty to defrauding the IRS and helping people file false tax returns. He also pled guilty to using others to engage in currency transactions to avoid the $10,000 reporting requirement: he sent employees to the bank to make multiple $9,990 deposits (don’t try this at home!). DeAngelo faces a maximum of 24 years in jail.

I had a couple Western refugees come in to my office for help. They were rudely surprised that you do have to pay tax on your income….


Press Release: US Dept. of Justice
News Story: Orange County Register

Posted in Tax Fraud | Tagged | 3 Comments

Fast Food Litter Tax Passed in Oakland

Posted on February 9, 2006 by Russ

I have a few clients in Oakland. They’ll probably be paying a bit more for that Big Mac or other fast food; the Oakland City Council passed an ordinance Tuesday that imposes a fee of between $230 to $3,815 on fast-food businesses. The city plans to use the money to reduce fast-food litter; according to Councilwoman Jane Bruner the fee was imposed as a last resort. Before becoming law, the ordinance must be approved on a second reading (most likely on February 21st).

However, the tax may be illegal as different businesses will be charged differing amounts. Some fast-food restaurants will be exempt because they are in business improvement districts; others are exempt because they already have “litter control programs.” And the California Restaurant Association is considering a lawsuit to stop the ordinance from going into effect. Johnise Downs, of the CRA, is quoted by the Associated Press, stating, “[The businesses are] basically being penalized and targeted just for doing business in the city of Oakland.” A similar law was overturned in Chicago as being unconstitutionally vague.

News Stories: Contra Costa Times; Associated Press Story

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