Vote Early but Not Often

Posted on November 8, 2005 by Russ

…unless you live in Chicago (well, there’s no election in Illinois on Tuesday).

Californians will go to the polls on Tuesday to decide several propositions. There are also some local ballot initiatives. Here in Orange County, we have Propositions B, C, D & E. These take part of the $0.005 sales tax approved by the voters (Proposition 172) and reallocate it (except for Proposition B, which leaves the allocation alone).

If you’re confused by these propositions, you’re not alone. The firefighters gathered signatures to put Proposition D on the ballot (this increases the allocation to firefighters and decreases the allocation to the Sheriff). Guess who is against Proposition D?

The supervisors apparently didn’t like Proposition D, either, so they added B, C and E to the ballot, in an effort to confuse the voters (it’s working, too). One note about the OCFA (Orange County Fire Authority)–the firefighters of Orange County are among the highest paid in the country.

But whatever you do, exercise your right and vote in tomorrow’s election. Make sure your voice is heard—take a few minutes and vote.

Posted in California | Comments Off on Vote Early but Not Often

The Tax Reform Panel’s Report: Why It’s Irrelevant

Posted on November 2, 2005 by Russ

Yesterday, the Tax Reform Panel issued its final report (available here). I have come to the conclusion that no matter the merits of the reforms mentioned (which I previously commented on), this plan (really, plans) are dead-on-arrival in Congress.

A quick search of Google news shows the following:
—Senior US Senator From Iowa Opposed to Panel’s Recommendations
—Realtors Upset With Tax Reform Panel
—LA Times: Popular Tax Breaks Put on Chopping Block
—New York Congresswoman: Unfair Tax Increase

You get the idea.

Now, the merits of the proposals are quite different than the rhetoric. But given that this proposal will be opposed by the delegations in New York, California, and other high-tax states, and is apparently opposed by Senator Grassley of Iowa, it has no chance of passage.

If you want to read more about the reaction to the panel’s report, the TaxProfBlog has a series of links to think tank reactions to the report.

Posted in Legislation | Comments Off on The Tax Reform Panel’s Report: Why It’s Irrelevant

Supreme Court: NY Can Tax Worker in TN

Posted on November 1, 2005 by Russ

Suppose you work as a telecommuter in one state, but your corporate headquarters is in another state. To which state must you pay state income taxes? The obvious answer is the state you live in. Of course, if you visit your corporate headquarters, you will owe state taxes to that state based on the number of days you are at the corporate headquarters.

However, in a case decided earlier this year, the New York Court of Appeals (the highest state court in New York) ruled that a telecommuter who works outside of New York State but works for a New York based company must pay New York state income taxes. The 4-3 decision in Huckaby v. New York State Division of Tax Appeals may have aided New York’s coffers, but it certainly made New York less attractive to corporations that encourage telecommuting. New York has a rule that allows the state to tax out-of-state employees if they work out of state “for the convenience of the employer.” Luckily, California doesn’t have that rule—yet.

The Supreme Court yesterday refused to review the case. This means that if you work for a New York based employer but telecommute, you owe New York state income tax.

Posted in New York | 2 Comments

No Treat for Them

Posted on October 31, 2005 by Russ

The Tax Court delivered a trick on Halloween to these taxpayers. They operated a timber operation (perhaps), accounting services (although the husband was “…suspended from practice before the Internal Revenue Service since 1981”), real estate (although the wife asked, “[please] don’t issue me a 1099”), and they sort of used leased employees. It was ugly….

The taxpayers formed an S Corporation, or tried to. They filed the paperwork, but they specified that their “natural business year” ended in January. The IRS didn’t approve, so the S Corporation was never really formed. Although I’m only slightly cynical, might the taxpayers involved tried January so that they could defer tax payments for eleven months? But I digress.

As the Tax Court noted, “An election of a corporation to be an S corporation under sections 1361(a) and 1362(a)(1) must be complete, properly filed, and made in accordance with regulations….” The taxpayers took flow-through losses which the IRS challenged. They didn’t substantiate them in court. Strike one.

The taxpayers claimed they weren’t subject to the self-employment tax. But they weren’t employees and received payments for services. Strike two.

Finally, they claimed that they paid out about $18,000 for “leased employees.” But the Tax Court noted that the money came from the taxpayers personal services. That doesn’t sound like leased employees to me, and it didn’t to the Tax Court. Strike three.

We could throw in strike four and more for labor expenses that paperwork shows happened in 2000 but were deducted in 2001, and interest expenses without backup, and repair expenses without backup. The Tax Court threw in accuracy related penalties for the taxpayers’ strike-out. (“Petitioners make no argument and offered no evidence to show that they had reasonable cause.”)

Case: Arnold, et. al., v. Commissioner

Posted in Tax Court | Comments Off on No Treat for Them

“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

Posted in Gambling | Comments Off on “Please Tax Us,” Asks One Business

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.

Posted in IRS | Comments Off on Berkshire Hathaway Wins One for the Big Guy

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.”

Posted in Tax Evasion | Comments Off on A Humdrum Tax Opinion by the Next Supreme Court Justice?

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.

Posted in California | Tagged | Comments Off on Saving Tax Returns, California-Style

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.

Posted in IRS | Comments Off on PayPal Record Subpeoned

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.

Posted in Tax Fraud | Tagged | Comments Off on Lingerie Madam Gets Year for Tax Fraud