“Please Tax Us,” Asks One Business

Posted on October 30, 2005 by Russ

You’re a successful business, with revenues over $1 million annually. Besides income taxes, your only regulatory fee is a $387 business license fee. The city you’re in proposes a 15% gross receipts tax (subject to voter approval on November 8th). What would you do?

That’s the situation facing the Player’s Club in Ventura. It’s a four-table poker club, legal under California law. (In California, gambling that doesn’t conflict with state law—poker and similar card games—are legal in an establishment that gets a license from the state and the local jurisdiction it’s in.) Almost every city that has legal gambling (in California) has a gross receipts tax. The City of Ventura doesn’t.

As Bill Kracht, Manager of the Players Club, told the Ventura County Star, “We are supporting it. It’s not that we want to pay more in taxes, but we recognize it’s part of the business. Other cities have been doing it for years.”

Coverage: Ventura County Star

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Berkshire Hathaway Wins One for the Big Guy

Posted on October 28, 2005 by Russ

Let’s say that your small corporation borrows some money. Let’s further suppose that you that that borrowed money and then purchased dividend paying stocks with that money. You can’t deduct those dividends. It’s considered a form of double-dipping, as you can deduct the interest you pay on the borrowed money and the interest.

However, let’s assume your a large corporation, like Berkshire Hathaway, the famous investment vehicle run by Warren Buffet. You borrow $750 million which you characterize as strengthening your financial situation. You also purchase some dividend paying stocks. The IRS audits you and denies your dividend deduction, claiming that you violated the tax rules.

Berkshire Hathaway paid the tax and then sued in US District Court in Omaha. In a decision delivered today (but not yet available on the Internet), the court ruled that, “[It is] virtually impossible for the [IRS] to trace debt proceeds and thus assess tax deficiencies … against companies like Berkshire who engage in numerous investment transactions.” Berkshire Hathaway will receive a refund of $23 million plus interest, subject to a possible appeal by the IRS.

News Coverage: Reuters.

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A Humdrum Tax Opinion by the Next Supreme Court Justice?

Posted on October 28, 2005 by Russ

With the withdrawal of Harriet Miers as a nominee for the Supreme Court, speculation has centered on several individuals as a possible nominee, including Judge Michael McConnell. In this unpublished opinion, which is a model of brevity, Judge McConnell rejects some tax protesters’ appeal of the dismissal of their case at the Tax Court. As I’ve said many times before, you’re not going to win in court saying that the US doesn’t have an income tax.

What I liked most about the opinion is that it is short, sweet, and to the point. As Judge McConnell wrote, “As with their other frivolous arguments, petitioners have failed to put forth any relevant legal authority to support their claim that respondent “defaulted” during the administrative proceedings in this case.”

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Saving Tax Returns, California-Style

Posted on October 25, 2005 by Russ

California currently has a four-year statute of limitations on income taxes, but no statute of limitations on collections of tax monies. As we previously noted, the Franchise Tax Board earlier this year sent out notices to taxpayers—asking for payments on returns as old as from the 1960s. I prepared a 1974 tax return for a client just to show the FTB that there was no money due to the FTB.

Needless to say, the people complained to their legislators. In an usual display of bipartisanship (especially in Sacramento), the legislature passed a law that goes into effect on January 1, 2006 limiting collection efforts by the FTB to 20 years. (The IRS is limited to 10 years.)

So, can you, on January 1, 2006, finally shred your 1980 tax returns?

No.

Unfortunately, nothing prevents the FTB from saying you never filed your return and still go after you. If you haven’t filed, there is no statute of limitations. But, you say, I did file back in [fill in the date]. The FTB says prove it. In order to do so, you’ll need either your electronic receipt (if you filed electronically), or your return receipt (if you filed using certified mail, return receipt requested).

Isn’t this ridiculous, you ask, because there’s no way the FTB would stoop so low as this?

I’m sorry, I do not trust the FTB on this issue. The bureaucrats within the FTB are not exactly known for their benevolance when it comes to collections. The FTB is the same agency that went dumpster diving (and was rebuked by the US Supreme Court) to prove that an ex-Californian didn’t really move to Nevada (he did). The only thing that works in dealing with the FTB is evidential proof. Until the culture of the FTB changes, save your returns forever.

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PayPal Record Subpeoned

Posted on October 22, 2005 by Russ

The IRS is attempting to find some foreign credit card holders who used PayPal to evade taxes. According to this story in the San Jose Mercury News, the IRS wants to find tax evaders who are using PayPal to illegally transfer money. The IRS estimates that $40 billion in tax revenues are lost because of foreign credit card schemes.

If you have a foreign bank account, and it has $10,000 at any time during the year, you must report the bank account on both your tax return (by checking a box on Schedule B) and by submitting a Form TD F 90-22.1 to the Treasury Department by June 30th of the following year. Be forewarned, the IRS is looking into this area.

The current IRS investigation covers 1999 through 2004.

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Lingerie Madam Gets Year for Tax Fraud

Posted on October 22, 2005 by Russ

The alleged Palos Park Madam (of suburban Chicago) successfully dodged prostitution charges. But she was less successful in avoiding tax fraud charges and will soon spend a year in jail.

Dawn Hansel had been accused in the past of everything from cocaine sales, attacking her mother-in-law, and running an upscale prostitution ring. She managed to beat all those charges. This week, though, she was sentenced to a year in prison and three years of probation for not paying $250,000 in taxes to the IRS. Ms. Hansel plead guilty to not reporting the income from cash sales in her lingerie business, “Vogue Fashions.” Well, Ms. Hansel said it’s a lingerie business but state prosecutors allege it’s a prostitution ring.

The judge put it best, “To say Miss Hansel has an unusual background understates all the characteristics she comes with.”

Coverage: Chicago Sun-Times, Daily Southtown.

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How to Imprison Yourself

Posted on October 22, 2005 by Russ

It’s simple. During sentencing for tax evasion, just question the judge’s credentials and the US government’s right to make you file a tax return. The judge involved, Walter Rice of Ohio, said it best, “Why are you doing this to yourself? You’re putting yourself in prison. Why?”

The defendant, Walter Maken, will have thirty months to think over his answer. And he’ll have to fork over $42,000 in taxes, plus penalties and interest.

Coverage: Dayton Daily News.

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The Tax Reform Panel Speaks

Posted on October 22, 2005 by Russ

While I was off this past week, the Tax Reform Panel came out with two proposals that are similar. The two proposals would:

1. Eliminate state and local tax deductions for individuals. Given that a large percentage of the US population lives in high-tax states (such as California), this isn’t going to pass.

2. Limitation on deducting health insurance. This is another non-starter given the high cost of health insurance. I do understand the panel’s reasoning (if taxpayers feel more pain, they will do more to lower health insurance costs) but I find a hard time seeing this passing.

3. Elimination of the Alternative Minimum Tax (AMT). This will be applauded by all.

4. Increasing charitable deductions; changing charitable deductions to excess of 1% of AGI. This makes both economic and political sense.

5. Changes to deductibility of mortgage interest; credit instead of deduction; limitation on amount. This is a political non-starter (see item #1 above). The proposed rules are complex, and will change the cap from $1 million of purchase-based interest (as a Schedule A deduction) to the maximum amount of FHA interest (will vary depending on location), to be taken as a credit. This will strike at higher-income taxpayers, and will, thus, be politically unpopular.

6. Change many deductions to credits. As best as I can tell, this will not change many taxpayers’ taxes, but could have a small positive impact to low-income taxpayers.

7. Lower the number of brackets from six to four; lowest individual bracket at 15%; highest at 32%. I believe that Democrats will not like the idea of lowering the top tax bracket. This proposal does not have a huge impact. Remember, the panel had to make these reforms “revenue neutral.” The big cut is the elimination of the AMT. This item is window dressing.

8. Changes to retirement plans, savings plans, etc. The changes, which will be difficult to pass, would change popular plans (such as IRAs) into refundable credits. This will aid low-impact taxpayers, but would disrupt an entire industry that has been built up around IRAs and similar programs. I doubt this will be implemented.

9. Two alternative individual plans: Either 8.25% on capital gains and interest taxed at regular tax rates or 15% on capital gains, interest, and divdends. The first plan exempts dividends (if I read it correctly) for individuals, ending double-taxation on dividends. The second plan continues the double-taxation on corporate investments but corporations can expense their investments. I need to read more about these plans to determine both their feasiblity and the chance of passage.

Overall, I think these plans will be buried in the political wastebasket. Perhaps the panel had good intent, but there’s too much in these plans that is political suicide for too many members of Congress.

There have been many comments about these plans. Roth Tax Updates posts about the first alternative individual plan here. Tax Professor Daniel Shivaro comments here. The New York Times comments here. Professor Maule has his comments, and they’re not positive.

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Vote Early and Often

Posted on October 15, 2005 by Russ

In just a few weeks, California voters will go to the polls to decide several key propositions. Among these are two that definitely could impact taxes: Propositions 76 and 77.

Proposition 76 would impact California budgeting system. State spending would be limited based on an average of recent revenue growth. Given that California has had a sustained budget deficit (our elected Democratic legislators haven’t met much spending that they would oppose), I feel that this ballot proposition should be carefully considered. You can find the arguments in favor here and the arguments against here.

Proposition 77 would change how the redistricting is done in the state. If you’ve ever looked at how district lines are drawn, you know that it’s gerrymandering to the max. Personally, I’d prefer our legislators to draw fair lines so that we would see a couple of incumbents actually have to fight for their jobs (almost every legislative district in the state is considered “safe” for the incumbent) but I think there’s no chance for this happening. Take a look at the arguments for and arguments against.

There are a number of other propositions on the ballot that you should examine; these impact prescription drugs, utility regulation, unions, and abortion. You can find information on these in your sample ballot or on the Secretary of State’s website here.

Finally, if you live in the 48th Congressional District (as I am) don’t forget that we will be voting to determine the successor to Christopher Cox as our Congressman on December 6th.

Also, I should note that I will be traveling this coming week so the next post may not be until Thursday.

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A Penny Saved Leads to Tax Court

Posted on October 11, 2005 by Russ

Well, 48 pennies.

Most tax software rounds off numbers to whole dollars. Indeed, the IRS suggests taxpayers do this in their instructions to Form 1040: “You may round off cents to whole dollars on your return and schedules. If you do round to whole dollars, you must round all amounts. To round, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar. For example, $1.39 becomes $1 and $2.50 becomes $3.” This seems fairly straightforward, no?

Well, most of the time it does. But what happens when a taxpayer makes an installment plan agreement, and pays what’s due, but rounds what he owes to whole dollars? In the case decided by the Tax Court, a taxpayer agreed to make two payments of $13,348.24. He made the payments on the dates agreed to, but rounded his payments to the nearest whole dollar (two payments of $13,348.00). The IRS sent a notice of delinquency—the taxpayer owed 48¢ in taxes plus a penalty of $175.44 and interest of $264.08. After a Collection Due Process Hearing that apparently went nowhere, the case ended up in Tax Court.

I am not making this up.

I wonder whether anyone at the IRS can explain why you would spend several hours attempting to collect 48¢. As the Tax Court notes, “We must decide this dispute even though the cost of the parties’ pursuit of their principles will far exceed the amount in dispute.” There are, after all, plenty of taxpayers who abuse the system, for amounts that are thoursands (and millions) of times larger than 48¢. If you get the feeling that I think the IRS made “a colossal blunder” (as the taxpayer in this case put it), you’re correct. But I digress.

The taxpayer had his records showing payment was made in the amount agreed to, and that he used a method that the IRS endorsed. The IRS, on the other hand, “…presented no evidence showing that penalties and interest accrued in excess of the amount petitioner paid.”

The Tax Court found that “…it was an abuse of discretion to proceed with collection activities.”

Case: Norris v. Commissioner, T.C. Memo 2005-237

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