I See $25,000 In Your Future

Posted on June 8, 2017 by Russ

When I start reading a Tax Court decision and see the sentence, “Petitioner and her husband derived considerable income from peddling this scheme to gullible individuals,” you know it’s not going to be a good day for petitioners. But I’m getting ahead of myself.

Three years ago Ms. G had a Tax Court case on their 2004 income taxes which she lost. She appealed that decision and lost. The IRS wanted to collect the money, but the petitioner asked for a Collection Due Process (CDP) hearing with IRS Appeals. She had it, and lost that. She then appealed that result to the Tax Court. Based on income of $235,542 (of which no tax was paid), she owed $99,261 plus penalties and interest.

First, a little background on petitioner:

Petitioner and her husband are well-known tax shelter promoters with a lengthy history of litigation in this and other courts. Their speciality [sic] is the “corporation sole” tax shelter, whereby a taxpayer takes a fictitious “vow of poverty” in connection with a purported “church” and declares herself thenceforth immune from Federal income tax. Petitioner promoted this scheme by writing several books, including How to Protect Everything You Own in This Life and After and Corporation Sole vs. 501(c)(3) Corporation. Petitioner also practiced what she
preached: She and her husband established “Bethel Aram Ministries” in 1993, took fictitious “vows of poverty,” and have not filed a Federal income tax return since. [footnote omitted]

That’s not a good start. I’d like to pay no tax, but you need to be a real minister with a real vow of poverty to do so; imitations don’t work. At the CDP hearing, the IRS Appeals Officer noted that the law had been followed, and shockingly (not) that the taxpayer had still not submitted copies of 2005 to 2014 tax returns.

Well, her streak of non-filing is a bit more lengthy:

Petitioner did not request a collection alternative, and she did not supply the SO with the financial information necessary to enable him to consider one. Far from being in compliance with her ongoing tax filing obligations, she has not filed a Federal income tax return since 1993. The SO did not abuse his discretion in declining to consider a collection alternative under these circumstances…Finding no abuse of discretion in this or in any other respect, we will grant summary judgment for respondent and affirm the proposed collection action.

But the Tax Court wasn’t happy with the petitioner.

It is clear to us that petitioner has maintained this suit “primarily for delay” as part of her 25-year campaign to avoid or defer indefinitely the collection of her Federal income tax liabilities. Because our decision establishing her 2004 income tax liability became final more than three years ago, she had no plausible basis for challenging that liability through the CDP process. Her 30-page response to the motion for summary judgment includes only two paragraphs that bear any rational relationship to the issues this case presents. The vast bulk of that document is directed toward relitigation of the trial court and appellate decisions previously rendered against her. In that connection she advances numerous frivolous arguments, including assertions that the IRS “continues to lie and defame Petitioner” and that the Commissioner and the courts have conspired to deny her First Amendment rights to freedom of speech and religion.

The Tax Court assessed a Frivolous Position Penalty of $10,000.

Petitioner has wasted the resources of respondent’s counsel and this Court. We will accordingly require that she pay to the United States under section 6673(a) a penalty of $10,000. This opinion will serve as a warning that she risks a much larger penalty if she engages in similar tactics in the future.

Tax Court exists so that legitimate disputes between taxpayers and the IRS get resolved. The Tax Court has little sense of humor about frivolity. Given Ms. G’s consistent non-filing and delaying tactics, I suspect we will see her name in a future case with a section 6673(a) penalty of $25,000.

Case: Gardner v. Commissioner, T.C. Memo 2017-107

Posted in Tax Court | Comments Off on I See $25,000 In Your Future

Court Rules IRS Cannot Charge for PTINs

Posted on June 2, 2017 by Russ

Back in 2010 to 2011 the IRS ordered all tax professionals to obtain a PTIN–a Preparer Tax Identification Number. The IRS stated this was necessary to track tax professionals, and would help in regulating the tax professional community. There is a fee to obtain a PTIN (now $50 initially, with a renewal costing the same $50). A group of tax professionals challenged the PTIN regulation and the fee in a class action suit. Can the IRS force tax professionals to obtain a PTIN? And can the IRS charge for PTINs?

The PTIN regulations came about at the same time as the IRS’s ill-fated efforts to regulate tax professionals. The IRS was challenged on the ability to regulate tax preparation professionals (see Loving v. IRS); the IRS lost the ability to regulate tax preparers. These regulations happen to also contain the IRS’s justification for charging a user fee to obtain a PTIN: As the Court yesterday noted,

As authority for requiring these fees, the IRS relied on the Independent Offices Appropriations Act of 1952 (“IOAA”). The IOAA provides that agencies “may prescribe regulations establishing the charge for a service or thing of value provided by the agency.” The IRS stated that a PTIN is a “service or thing of value” because without a PTIN “a tax return preparer could not receive compensation for preparing all or substantially all of a federal tax return or claim for refund,” and “[b]ecause only attorneys, certified public accountants, enrolled agents, and registered tax return preparers are eligible to obtain a PTIN, only a subset of the general public is entitled to a PTIN and the special benefit of receiving compensation for the preparation of a return that it confers.” [citations omitted]

The first part of the case was whether the IRS can mandate tax preparers use a PTIN. The Court ruled that the IRS can do so.

[P]laintiffs’ arguments fail step one of Chevron. Chevron states that “if Congress has directly spoken to the precise question at issue … that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” The statute specifically says that the Secretary has the authority to specify the required identifying number to be used on prepared tax returns. (“The social security account number issued to an individual for purposes of section 205(c)(2)(A) of the Social Security Act shall, except as shall otherwise be specified under regulations of the Secretary, be used as the identifying number for such individual for purposes of this title.” (emphasis added)). The Court must give effect to the unambiguous intent of Congress that the Secretary may require the use of such a number. [citations omitted]

The second part of the case is whether the IRS has justification for charging a fee for obtaining PTINs. The plaintiffs had two arguments: That because of the decision in Loving the IRS no longer had a rationale for charging PTIN fees, and thus charging such fees was arbitrary and capricious. Second, because Congress did not grant the IRS licensing authority (confirmed by Loving), tax return preparers don’t receive a benefit in exchange for the fees; thus, they are unlawful under the IOAA. The government disagreed:

The government argues that the PTIN and user fee regulations are separate from the regulations imposing eligibility requirements on registered tax return preparers. It argues that the PTIN requirements are not arbitrary and capricious because they make it easier to identify tax return preparers and the returns they prepare, which is a critical step in tax administration, and because PTINs protect social security numbers from disclosure. In support of its position that it may charge fees for PTINs, the IRS states that PTINs are a service or thing of value because the ability to prepare tax returns for compensation is a special benefit provided only to those people who obtain PTINs, who are distinct from the general public. Individuals without PTINs cannot prepare tax returns for compensation. In addition, the IRS argues that PTINs protect the confidentiality of tax return preparers’ social security numbers, and that protection itself is a service or thing of value.

The court found that PTINs are not a “service or thing of value.”

First, the argument that the registered tax return preparer regulations regarding testing and eligibility requirements and the PTIN regulations are completely separate and distinct is a stretch at best. While it is true that they were issued separately and at different times, they are clearly interrelated. The RTRP regulations specifically mention the PTIN requirements and state that PTINs are part of the eligibility requirements for becoming a registered tax return preparer…Furthermore, the overarching objectives named in the PTIN regulations indicate a connection to the RTRP regulations. They were 1) “to provide some assurance to taxpayers that a tax return was prepared by an individual who has passed a minimum competency examination to practice before the IRS as a tax return preparer, has undergone certain suitability checks, and is subject to enforceable rules of practice;” and 2) “to further the interests of tax administration by improving the accuracy of tax returns and claims for refund and by increasing overall tax compliance.” The first objective clearly relates to the RTRP regulations regarding eligibility requirements for tax return preparers. The second objective is less explicit, but it does not stretch common sense to conclude that the accuracy of tax returns would be improved by requiring tax return preparers to meet certain education requirements. [citation omitted]

This results in a problem: What’s justifying the user fee?

The Loving court concluded that the IRS does not have the authority to regulate tax return preparers. It cannot impose a licensing regime with eligibility requirements on such people as it tried to do in the regulations at issue. Although the IRS may require the use of PTINs, it may not charge fees for PTINs because this would be equivalent to imposing a regulatory licensing scheme and the IRS does not have such regulatory authority. Granting the ability to prepare tax return for others for compensation—the IRS’s proposed special benefit—is functionally equivalent to ranting the ability to practice before the IRS. The D.C. Circuit has already held, however, that the IRS does not have the authority to regulate the practice of tax return preparers. In coming to its conclusion, the Circuit considered the statutory language that the Secretary may “regulate the practice of representatives of persons before the Department of the Treasury.” The court found that the IRS improperly expanded the definition of “practice . . . before the Department of Treasury” to include “preparing and signing tax returns” because to “practice before” an agency “ordinarily refers to practice during an investigation, adversarial hearing, or other adjudicative proceeding.” The Loving court concluded that “[t]hat is quite different from the process of filing a tax return” in which “the tax-return preparer is not invited to present any arguments or advocacy in support of the taxpayer’s position . . . [and] the IRS conducts its own ex parte, non-adversarial assessment of the taxpayer’s liability.” The ability to prepare tax returns is the “practice” identified by the IRS in Loving, but the court found that such an activity does not qualify as practicing before the IRS. Therefore, it appears to this Court that the IRS is attempting to grant a benefit that it is not allowed to grant, and charge fees for granting such a benefit.

This ruling disagrees with another case (Brannen v United States), but that was pre-Loving (as the Court notes). The Court also noted that if the IRS were allowed to regulate tax professionals, the ruling might be quite different. Additionally,

The Court is unaware of similar cases in which an agency has been allowed to charge fees under the IOAA for issuing some sort of identifier when that agency is not allowed to regulate those to whom the identifier is issued, and the government has not pointed to any.

Thus, the Court ruled that the IRS can require PTINs but cannot charge for them. I do expect the ruling to be appealed, so it’s likely nothing will change for several months.

Case: Steele v United States

UPDATE: The court also ordered that the IRS refund all PTIN fees to all class members.

Again, I expect this ruling to be appealed, so any refunds are many months in the future.

Posted in IRS, Tax Preparation | Tagged , | 2 Comments

Thank You, Joe Kristan

Posted on May 27, 2017 by Russ

Most mornings I begin my day by reading a few tax blogs. This has helped me learn what’s happening in the tax world. After all, there’s one of me so the more sets of eyes, the better. Joe Kristan had been publishing Roth Tax Updates for a long time–since 2002. Joe’s firm is merging into Eide Bailly in June, so, “As we begin a new adventure, I will need to spend extra time working to make our transition successful, so it’s time to bring the Tax Update to a close.”

Best of luck Joe, and perhaps there’s an Eide Bailly Tax Updates in the future. (I can always hope.)

Posted in Taxable Talk | Tagged | 1 Comment

Illinois and California Race for the Bottom

Posted on May 27, 2017 by Russ

It appears that Illinois and California are in a race to see which can impose the worst tax policies. The Illinois legislature is debating a “Privilege Tax;” California is debating single-payer health care. Neighboring states to each are likely envisioning plenty of businesses relocating if these measures pass.

The Illinois Privilege Tax is a proposed 20% tax on investment advisors. Let’s say I’m a hedge fund manager in Chicago and I have the Russ Fox Fund. I charge a fee for running this fund; under this proposal, 20% of the fee would be taxable to Illinois. What would prevent me from moving to Des Moines (Iowa), Indianapolis (Indiana), or Nashville (Tennessee) and running the same fund? Absolutely nothing. If this proposal passes, the financial services sector will join lots of others in fleeing the Land of Lincoln.

Meanwhile, the Bronze Golden State is debating single-payer health care. It passed a Senate Committee, but there’s a major issue: The plan would cost $400 billion (that’s “billion” with a b, not million), far more than the state’s current budget. While $200 billion of it could come from repurposing current expenditures, $200 billion would need to be raised. How about a 15% payroll tax and self-employment tax on the state level? That would make California’s tax rate 28.3% on the highest earners! The proposal would cover anyone and everyone living in California, including those here illegally.

If this passes, there’s no doubt in my mind that businesses that could would relocate to neighboring states while any freeloaders who could would move to California. The self-employed who could move would do so immediately: Live in California, pay an additional 28% in tax, or live in Las Vegas and pay 0%? Or Arizona and pay 4%? Or, well, I think you get the picture.

There aren’t many good answers on healthcare, but there are plenty of bad ones. California appears to have chosen one of those. (Yes, single-payer can work but it would have to be implemented nationally to work, not in one state.)

Posted in California, Illinois | Comments Off on Illinois and California Race for the Bottom

Exchanging One Cryptocurrency for Another Is a Taxable Event

Posted on May 27, 2017 by Russ

Let’s assume I own some Bitcoins and you own some Ethereum; these are two cryptocurrencies. We think they’re each worth $5,000 and we agree to swap them. Do we have a taxable event?

The IRS consideres cryptocurrencies to be akin to stocks and bonds. That means any time I sell or otherwise dispose of cryptocurrency I have a realized capital gain or loss. A client was told by a cryptocurrency trader that exchanging one cryptocurrency for another is not a taxable event. That individual is mistaken.

Let’s look at an analogous situation: You and I each own $5,000 worth of a stock (say General Motors and Ford). We swap stocks. I no longer own Ford, so I have a gain (or loss) on my Ford stock; you have a gain or loss on your General Motors stock. No one can successfully argue that this swap doesn’t result in a taxable event for each of us.

As I said swapping one cryptocurrency for another is analogous. Is a Bitcoin identical to an Ethereum? No; they’re each different cryptocurrencies. If you sell or dispose of a cryptocurrency, you have a taxable event. It’s very clear that such swaps absolutely must be reported on Schedule D.

Posted in Cryptocurrencies, IRS | Tagged | Comments Off on Exchanging One Cryptocurrency for Another Is a Taxable Event

WSOP and Taxes: 2017 Update

Posted on May 22, 2017 by Russ

The poker world is about to descend on Las Vegas for the World Series of Poker (WSOP) and a score of other tournament series. The tax environment has changed, so I’ve decided to do a thorough update of the tax situation. I’ll cover the basics of the tax situation, backing, foreign (non-US) backing, and non-American winners and what they will face with taxes. This post will be somewhat long, so I’m going to break this into sections that you can click on to open. The focus is on tournaments where tax paperwork is issued.

The Tax Basics

Backing by Americans of Americans

Backing: Non-Americans

Non-Americans and ITINs

[Note 1]: I recently became aware of a lawsuit in the Midwest where Caesars’ policy is being challenged. The lawsuit is scheduled for trial in late January 2018.

[Note 2]: It is likely the IRS would reject a Form 1040NR filed by Jon noting his extra withholding. The IRS won’t understand the issue given that there is no tax treaty issue (say, Jon is from Australia) and say, “Take it up with Caesars.” It’s a classic Catch-22.

[Note 3]: In prior years the WSOP has allowed winners to leave their money with the WSOP and obtain their winnings later. Anyone choosing this option should confirm with the WSOP that this can be done.

Posted in Gambling | Tagged , | 9 Comments

Do You Need a License to Sell Bitcoins?

Posted on May 15, 2017 by Russ

Let’s say I own some Bitcoins. I want to sell them to a friend. Do I need a license to do that? This question came up after I was informed that a Missouri man pleaded guilty to operating an illegal money transmitting business.

First, a disclaimer: I am not an attorney. For legal advice, go speak to an attorney specializing in money transmittal law. I am not that person.

If you are in the business of exchanging currency for currency, you need a money transmittal license. Let’s say you open a check cashing store; you may need that license. These licenses are generally on the state level and possibly also from FINCEN (the Financial Crimes Enforcement Network). So clearly Bitcoins, which are property for tax purposes, aren’t a currency, right?

Not so fast. Bitcoins are property in the world of the IRS, but in the view of FINCEN they’re a currency. Bitcoin advocates consider Bitcoins to be a digital currency (or a cyrptocurrency). So two different units of the same government agency (the IRS and FINCEN both fall under the Department of the Treasury) treat the same thing quite differently.

So let’s say I have lots of Bitcoins, and I trade them with a US Bitcoin exchange such as Coinbase. Do I need a money transmittal license? My thinking is no: Coinbase is a licensed money transmittal business, so my selling to them is part of their business.

Let’s say my Aunt Rose gave me five Bitcoins and I sell them to my friend Scott. It’s the only transaction I have in Bitcoins. It’s hard to see how I’m in the business of selling Bitcoins.

On the other hand, suppose I’m a poker player who does quite well on a poker site such as Ignition, and every month I receive some Bitcoins. Rather than selling them to an Exchange I decide to start selling them to others and make more money. That sounds like a business to me, and it might to the US government, too. In that case you should consider speaking with an attorney immediately to determine if what you’re thinking of doing complies with federal, state, and local laws.

Back in the days when Neteller was serving US poker players one of my clients considered going into business facilitating other poker players being able to move money from poker site to poker site. He had a lot of money on Neteller so he was able to deposit money onto (say) Absolute Poker and, in exchange, take money from PokerStars. When he spoke with me I mentioned to him that this might run afoul of the money transmittal laws and strongly suggested he speak with an attorney. The attorney he consulted advised him that my instincts were accurate. I suspect if someone were facilitating such Bitcoin transfers today this, too, would also run afoul of the money transmittal laws.

Getting back to my original question: Do I need a license to sell Bitcoins to a friend? The answer is likely no. But if I go into the business of selling Bitcoins the answer appears to be yes.

Posted in Cryptocurrencies, FINCEN, Gambling | Tagged | Comments Off on Do You Need a License to Sell Bitcoins?

The TurboTax Defense Fails Again

Posted on May 11, 2017 by Russ

A gentleman who is normally an expert witness in trials used TurboTax to prepare his returns. His returns ere reviewed by the IRS; the IRS claimed he took a few too many deductions. The taxpayer felt otherwise, and the dispute ended up in Tax Court. Judge Holmes wrote the opinion, so it’s very readable.

The first issue was alimony payments. Alimony is deductible for the payor but taxable to the recipient. However, one of the requirements is that there be a written order. The taxpayer and his ex-wife had an oral modification of the agreement. That may work for getting the ex-wife more money, but it fails for deducting those extra payments.

The second issue was interest. Interest that’s part of a business can be deducted, but you do have to show you made payments and those payments were interest and not principal. I’ll let Judge Holmes take this:

The evidence does show [he] made payments to his lender, but the amounts do not match those that he claimed on his tax returns, and he did not explain this discrepancy at trial. [He] also did not provide us with any business records regarding the loan, any loan statements, or any loan-repayment schedules. Without this type of documentation we are unable to tell whether these payments were made on the original 2007 loan. Remember that the note for that loan says it should have been paid in full by October 2008. We understand that it might have been his plan to pay the note with proceeds from the sale of his home, and that that sale didn’t happen. The problem is that we can’t figure out what happened to the note–was it refinanced? Was it extended? Without any paperwork (in a situation where there should have been lots of paperwork) we are left only with his testimony about the total amounts of the payments and the allocation of those payments between principal and interest. We do not find his testimony credible on this issue, and so sustain the Commissioner’s determination.

As I tell my clients, document, document, document (and save those records). A paper trail is a very good thing to have when you get to Tax Court.

The third issue was an apparent Net Operating Loss (NOL) carryforward.

A taxpayer substantiates his claim to such a deduction by filing with his return “a concise statement setting forth the amount of the net operating loss deduction claimed and all material and pertinent facts relative thereto, including a detailed schedule showing the computation of the net operating loss deduction.” During trial he did turn in a tax return for a previous year (though not the one that generated the net operating loss), but even with his testimony, that is not enough to substantiate his entitlement to a loss carryforward.

The taxpayer also received an accuracy-related penalty.

The burden then swings to [him] to show that his mistakes were reasonable and in good faith. See sec. 6664(c)(1). He cannot. He admitted during trial that he deducted items he shouldn’t have, and that he overstated certain losses. He tried to blame TurboTax for his mistakes, but “[t]ax preparation software is only as good as the information one inputs into it.” [citation omitted]

If your tax return has only W-2 income and, say, mortgage interest and property tax, TurboTax will likely do an excellent job. If you have a divroce settlement with a restatement of the amount of alimony due, interest tracing, and a Net Operating Loss carryforward, it might pay to get some expert help.


Case: Bulakites v. Commissioner, T.C. Memo 2017-79

Posted in Tax Court | Comments Off on The TurboTax Defense Fails Again

No, The Law Hasn’t Changed: Professional Gamblers Cannot Deduct Gambling Losses in Excess of Wins

Posted on May 7, 2017 by Russ

The Internal Revenue Code (IRC) is law. It was passed by Congress and signed into law by the President. One section of the law is IRC §165(d). It reads:

(d) Wagering losses
Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.

Courts have interpreted this the same for amateur and professional gamblers: You cannot take gambling losses in excess of wins. A few of my professional gambling clients have asked me if the law recently changed (they were told it had). It has not changed.

The Tax Court most recently looked at this in 2014. In Lakhani v. Commissioner (142 T.C. No. 8), a full precedential decision of the Tax Court, the Court wrote,

The basis for the enactment of section 23(g), as set forth in the last sentence of the foregoing committee report, still pertains to taxpayer reporting of gambling gains and losses. Therefore, it still constitutes a “rational basis” for the continued application of section 165(d) to the losses. There being no constitutional impediment to the continued application of section 165(d), we reiterate our admonition in Tschetschot that this Court “is not free to rewrite the Internal Revenue Code and regulations * * * [but is] bound by the law as it currently exists”. [footnote omitted]

(For those wondering, Section 23(g) is from the Revenue Code of 1934 and reads identically to Section 165(d) of the current IRC.)

Is it fair that a professional gambler is held to a different standard than anyone in a different profession? Definitely not. However, it’s the law; until Congress changes it I can take a Net Operating Loss if my business loses money but a professional gambler cannot.

Another client asked about running gambling through a business entity so that he can take losses that way. That, too, will not work. Put simply, until IRC §165(d) is repealed gamblers cannot take losses in excess of wins.

Posted in Gambling | Comments Off on No, The Law Hasn’t Changed: Professional Gamblers Cannot Deduct Gambling Losses in Excess of Wins

Trump’s Tax Plan

Posted on April 30, 2017 by Russ

President Trump released his tax “plan.” That’s an overstatement; the plan is really an outline. Gone would be the Alternative Minimum Tax, the Estate Tax, and most itemized deductions; there would be three tax brackets with the top tax bracket at 35%; the corporate tax rate would fall from 35% to 15%; and the top capital gain tax rate would be 20%.

The outline is one page, and is more a statement of goals than anything else. There are definite issues that I have with it in my area of expertise: gambling. And overall the results wouldn’t be good for most gamblers.

For professional gamblers, there would be no direct changes. Professional gamblers report their income on a Schedule C; there’s no change here. However, amateur gamblers could be devastated by the proposal. Consider an amateur gambler who correctly reports his $100,000 of winning sessions and $80,000 of losing sessions. Under current tax law, he pays tax on $20,000 of net winnings (his gambling losses are an itemized deduction on Schedule A). Under President Trump’s plan, he would pay tax on $100,000 of winning sessions; his gambling losses wouldn’t be deductible. This would have a devastating tax impact on gambling.

There is an easy fix for this, and it comes from a state not known for having a good tax system—New Jersey. Add in a Schedule G for gambling, where gambling wins and losses for an amateur gambler would be listed; the net would flow to Other Income where it would be taxed.

The final result of tax reform won’t be known for months, and it’s probable what emerges from Congress won’t look anything like what’s been proposed.

Posted in Legislation | Tagged | 1 Comment