Your Tax Dollars at Work: Did I Really Compliment the IRWD?

Posted on July 27, 2005 by Russ

As mentioned previously, my home and office are served the the Irvine Ranch Water District (IRWD). Unlike the neighboring Orange County Sanitation District, the IRWD hasn’t elected to spiritualize its’ sewage. But the IRWD has committed its own sin: Late payments on electricity bills to the tune of $22,427, according to a story in the Orange County Register.

The IRWD says that the payments were late so that the bills, from Southern California Edison could be checked to ensure that SCE didn’t overcharge the IRWD. The IRWD has now changed its policy so that if the checking of the bills will cause them to be paid after the due date, the bills will be timely paid and a credit (if appropriate) will then be asked for.

Yes, the double-checking of the bills has found errors (of more than $160,000). But shouldn’t this procedure have been implemented after the first late payment? Definitely this shouldn’t have had to wait for an audit; according to the Register story, that was the cause of the change of procedure.

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Uh Oh….

Posted on July 26, 2005 by Russ

I noticed a headline in today’s Orange County Register that grabbed my attention: “IRS Will Audit 5,000 Firms to Gauge Unpaid Taxes Nationwide” (one-time registration required). Then I read the article. If I hadn’t had heartburn before, now I did. After talking for several years about looking at S Corporations, the IRS has finally decided to see how bad the salary problem is. (You can find the IRS’ news release here.)

S Corporations are the most popular form of corporate ownership in the US because of their pass-through nature combined with liability protection. While S Corporations do not (generally) pay taxes, they must file returns; the owners of the S Corporations include their shares of the income on their individual (1040) returns.

Over the past few years, whenever I attended meetings with enforcement personnel from the IRS, they mentioned that (they believe) that many owners are not taking required salaries from their S Corporations and instead are taking all distributions as dividends (which allows them to avoid payroll taxes). Owners do need to take “reasonable” salaries. Of course, there is plenty of room for debate on what is reasonable. However, it’s unlikely that the Tax Court would find $0 reasonable.

In any case, the IRS now wants to quantify this problem (and any others they may find) by returning to…the audits from hell.

I’ve missed out on these (thankfully), but these audits were of people unlucky enough to be randomly selected and had to justify every line of their individual return, and usually had to state what every deposit in their bank accounts represented. Ugh.

Now, under the guise of “research,” these audits have returned to haunt us. A lucky 5,000 S Corporations will be selected out of the 3.3 million S Corporations (or one of every 660, or a 0.15% chance). I echo the thoughts of Roth & Company: Please, Mr. Taxman, go somewhere else; Clayton Financial & Tax’s returns are fine (and yes, we’re an S Corporation). Please?

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Once Burned ,Twice Shy

Posted on July 26, 2005 by Russ

The Tax Court was in a foul mood today, as they disposed of several frivolous taxpayer cases. In one case, they note, “We advised petitioner at the 2001 trial that his arguments were frivolous, and we admonished him against advancing them again. Our admonition at the 2001 trial was insufficient to deter petitioner from returning to the Court and advancing the same frivolous and groundless position in the instant case.” That’s one $5,000 penalty (under Section 6673(a)).

Then I read, “Despite warning petitioner at least six times at trial that his arguments were frivolous and groundless, petitioner persisted in making those arguments at trial and on brief.” There’s another $5,000.

In the third case, the Court stated, “Petitioner has advanced shopworn arguments characteristic of tax-protester rhetoric that has been universally rejected by this and other courts….We shall not painstakingly address petitioner’s assertions “with somber reasoning and copious citation of precedent; to do so might suggest that these arguments have some colorable merit.” Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984).” This taxpayer escaped with a warning.

Cases: Leggett v. Commissioner, Rhodes v. Commissioner, and Delgado v. Commissioner

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Your Tax Dollars at Work: Spiritual Counselor for Sewage

Posted on July 21, 2005 by Russ

Luckily, I’m not served by the Orange County Sanitation District (OCSD). That’s because the Orange County Register disclosed that the OCSD has been paying a “spiritual counselor” $15,000 per month (or $180,000 per year). The Register reported on July 12th that Dharma Consulting would have made $570,000 by the expiration of its’ contract.

That smells pretty bad: spiritual sewage?

The OCSD finally realized that Assemblyman Chuck DeVore (R-Irvine) might be right when he said, “What if a local government decided to bring in a representative of a nearby Catholic diocese to help coach their city employees on spirituality, teamwork and ethics? … The ACLU would sue more quickly than you could say, ‘Establishment Clause.'” The OCSD ended the contract; Dharma Consulting is left with its’ take to date ($400,000).

Blake Anderson, OCSD General Manager noted, speaking to the Register, that, “While I certainly understand and respect the concern raised about the cost and length of the contract, the intention and outcome has ALWAYS been directed toward one thing: making the Sanitation District a highly effective and efficient public agency.” The contract was cut on the 19th.

But that’s not the end of the story. The Register reported today that Anderson has offered to resign.

For the record, my home and office are served by the Irvine Ranch Water District, which, as far as I know, hasn’t jumped on this particular fadconsulting program.

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A Property that Dropped in Value in California

Posted on July 21, 2005 by Russ

Yes, it is possible for a piece of property to drop in value in California. The San Francisco Giants ballpark, SBC Park (formerly PacBell Park), has dropped in value by $88 million between 2001 and 2003, according to the Assessment Appeals Board of the City of San Francisco.

The Giants received a property tax refund of $3.6 million.

Source: San Francisco Examiner

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Tax Court Releases Clarifying Statements in Kanter Case

Posted on July 21, 2005 by Russ

According to Tax Analysts, the Tax Court has released clarifying statements in the Kanter and Ballard cases. However, the statements are not available on the Tax Court’s website.

Tax Analysts is reporting that Chief Judge Joel Gerber released statements outlining the procedures followed in the cases. The Supreme Court in March ordered the Tax Court to release the original findings of Special Trial Judge Couvillion.

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Tax Court: The AMT Is Unfair, But You’ve Got to Pay

Posted on July 19, 2005 by Russ

The Tax Court today decided a case where the petitioner’s complain that the Alternative Minimum Tax (AMT) shouldn’t apply to them because of “equitable grounds.” The petitioners did not have any tax preference items. They aren’t the high income millionaires that the AMT was originally intended for.

But they (and you and I) are stuck with the AMT. And they fell into its’ grasp. As the court notes, “Absent some constitutional defect, we are constrained to apply the law as written.” “The proper place for a consideration of petitioner’s complaint is the halls of Congress, not here.” Hays Corp. v. Commissioner, 40 T.C. 436, 443 (1963), affd. 331 F.2d 422 (7th Cir. 1964).

This isn’t the first such case, and it won’t be the last. The AMT is a convoluted beast destined to grasp more of the middle class each year. In general, everything you do to lower your regular tax raises (or causes you to fall into) your AMT.

Case: Wiese v. Commissioner, TC Summary 2005-91

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Frivolous Then, Frivolous Now

Posted on July 14, 2005 by Russ

The Fifth Circuit Court of Appeals recently ruled on the appeal of Leonard Gittinger of his case from the US Tax Court. In its’ unpublished ruling, the Court noted,

“…his arguments are completely and utterly frivolous, generally relating to the proposition that wage income is not taxable income. See I.R.C. §§ 1(a)(1), 61(a)(1), 7701(a)(1), (14). As we have previously noted, there is no need for us to refute “with somber reasoning and copious citation of precedent” the notion that wages are not income, lest by doing so we suggest that this argument has some colorable merit. Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984)…Because Gittinger did not even allege any irregularity in the assessment procedure and he did not raise a valid defense or offer an alternative means of collection, we have no difficulty whatsoever affirming the tax court’s judgment.”

And the petitioner was fined another $6,000 for continuing his frivolous arguments.

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The Incredible Shrinking Deficit

Posted on July 14, 2005 by Russ

As reported in Tax Analysts, the projected Federal deficit for 2005 has shrunk by nearly 25% from $424 billion to $333 billion. The reason? Tax collections (revenues) are up, across the board, by about 14%.

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Tax Court Lifts Veil

Posted on July 12, 2005 by Russ

As I previously noted, the Tax Court had a secrecy rule that prevented, in certain circumstances, litigants from knowing what the judge felt the ruling should be. This “star chamber” provision became clear when the Kantar case was decided by the US Supreme Court earlier this year.

Luckily, previously is also the place where that oderous rule has been placed—the junk yard of history. As noted in this article in the Chicago Tribune and this article in the International Herald-Tribune (likely appearing in tomorrow’s New York Times), the rule has been rescinded as a direct result of the Supreme Court’s ruling. However, its’ status as to past cases is unknown.

This is one rule change that is definitely for the better.

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