Taxable Talk

The Tax Foundation released their 2012 State Business Tax Climate Index today. And it was no surprise to see the bottom three composed of California, New York and New Jersey. These states have high taxes overall (California adds high regulatory costs, too; however, the business climate index ignores this). Meanwhile, Wyoming, South Dakota, and Nevada are the top three states. No surprise: These states don’t have high taxes (they don’t have personal or corporate income taxes at all).

Here are the top ten:
1. Wyoming
2. South Dakota
3. Nevada
4. Alaska
5. Florida
6. New Hampshire
7. Washington
8. Montana
9. Texas
10. Utah

And the bottom 10:
41. Iowa
42. Maryland
43. Wisconsin
44. North Carolina
45. Minnesota
46. Rhode Island
47. Vermont
48. California
49. New York
50. New Jersey

For those who wonder if business pay attention to taxes, I can speak from experience: They do.

Arthur Laffer popularized the Laffer curve. The father of Supply Side Economics noted that in many cases, increasing the tax rate decreases the amount of tax revenues. It appears that Illinois is proving Dr. Laffer correct.

Moody’s just downgraded Illinois’ bond rating to A2 from A1. Illinois now has the worst rating of all 50 states–even worse than California. But wait: Didn’t Illinois pass a massive tax increase a year ago? Wasn’t that supposed to help Illinois’ financial condition? Here’s how the Wall Street Journal put it:

So much for that. In its downgrade statement, Moody’s panned Illinois lawmakers for “a legislative session in which the state took no steps to implement lasting solutions to its severe pension underfunding or to its chronic bill payment delays.” An analysis by Bloomberg finds that the assets in the pension fund will only cover “45% of projected liabilities, the least of any state.” And—no surprise—in part because the tax increases have caused companies to leave Illinois, the state budget office confesses that as of this month the state still has $6.8 billion in unpaid bills and unaddressed obligations.

There is some good news for Illinois. Governor Jerry Brown and other California Democrats are proposing a variety of tax increases for the Bronze Golden State (to be voted on in this fall’s election). It may well be that California will pass Illinois to the #1 spot.

Hat Tip: HotAir

My understanding is that we can’t take it with you: Our worldly possessions won’t be with us in the hereafter. One Florida man believes he is already a resident there, and is thus exempt from trivialities such as the income tax. The results are what you might expect.

That said, if you read the terse statement from the Department of Justice you wouldn’t know of the underlying issue. The statement does note that Russell Gentile of Melbourne is accused of:

[C]orruptly tried to obstruct and impede the IRS in performing its duties by sending a series of letters claiming that he was not a taxpayer, that he was an American National but not residing in Washington, D.C., that he was not subject to the tax laws, and by threatening individual IRS officers with lawsuits against them.

Mr. Gentile is correct that he is an American but not residing in Washington, DC. What the press release doesn’t tell you is where he thinks he resides: The Kingdom of Heaven.

Of course, I could add that Mr. Gentile’s threats are an especially good way to be sure that his case is referred to Criminal Investigations. I could also add that the idea that only citizens of Washington, DC are subject to the US income tax is as useful as a $3 bill.

Mr. Gentile is looking at another hearing in February. If he continues down the road of allegedly threatening federal officials and not paying income tax, he will likely soon be residing at ClubFed.

Tax protesters Edward and Elaine Brown were convicted in 2007 of tax evasion. They were sentenced to spend some time at ClubFed. Instead of reporting to prison, they decided to barricade themselves in their New Hampshire home. After a stand-off that ran many weeks, US Marshals arrested the Browns. They were tried and convicted on numerous weapons counts and received 37 and 35 additional years at ClubFed, respectively–effectively a life sentence (the Browns will be over 100 when their sentences are up). They appealed their sentences; yesterday, the 1st Circuit Court of Appeals upheld their sentences in a 48-page ruling.

I could go into a long discussion of their meritless claims, but the concluding paragraph of the opinion is enough: “After thorough consideration, we have found no merit in any of Edward’s or Elaine’s arguments. Their convictions are affirmed.”

The moral is simple: There is an income tax, and you must pay it. And armed resistance to a short term at ClubFed leads to a far, far longer term.

Today the Tax Court looked at whether a rental was passive or active. But there was a major difference from most such cases: The taxpayer claimed his lease was passive while the IRS thought it was not passive.

Most of the time, rental income is passive. There are some exceptions: The most common is a Realtor (who meets the time requirements). The petitioner in today’s case was a doctor, and in almost all cases the rental would be passive. However, the lessee was his business (a professional corporation), so the self-renting rules apply (unless there’s an exception).

The petitioner claimed he had a legal, binding contract (a lease) entered into in 1980. If there is a binding contract entered into on or before February 19, 1988, the exception applies. There was a problem, though. The lease called for payments that would increase by 5% per year (the lease had never been modified). The payments made as “rental expense” didn’t match what was required under the lease. That meant the lease was not a binding contract, and the taxpayer had non-passive income.

For the taxpayer, this could have been resolved had he (or his CPA) noted the terms of the lease and made payments based on the lease. Unfortunately for them, they didn’t read it.

Case: Samarasinghe v. Commissioner (T.C. Memo 2012-23)

If you want to paint a recipe for heading to ClubFed, Carolynne Tilga of Santa Fe, New Mexico couldn’t do it any better. First, begin by investing in a business that’s likely illegal: Distributing pornography over the Internet. Yes, the website she invested in was in Canada but the customers were in the United States.

Next, add not paying taxes on the income. As I’ve said numerous times, illegal income is just as taxable as legal income. Then add some conspicuous consumption: a $1.85 million house in Kilauea, a $1.38 million home in Las Campanas, and other property in Taos, Aspen, and Telluride.

She pleaded guilty to conspiracy, six counts of tax evasion, and filing false tax returns. She received eight months at ClubFed; her husband, who had pleaded guilty to one count of conspiracy, got probation. They must make restitution of $1.7 million to the IRS. If you’re looking for a nice house in Kilauea, I think I know of one that may soon be on the market.

Joseph Cook has been the mayor of Channahon, Illinois since 2003 (Channahon is southwest of Chicago). Given Illinois politics, he has likely helped his reelection campaign by admitting he committed a crime. He was sentenced yesterday to two years probation and must make restitution of $15,000 to the US Treasury.

According to the Chicago Tribune, this isn’t Mr. Cook’s first brush with financial trouble. He’s been sued by Illinois for child support, and faced four other lawsuits over financial issues. As I said, it’s just another day in politics in the Land of Lincoln.

Let’s assume you talk to your attorney, and he advises you that you should create a reserve fund for taxes. Usually, it’s a good idea to listen to your attorney. If you don’t like his opinion, perhaps get a second opinion.

Of course, there’s also the Bozo method. The Miccosukee Tribe runs a successful casino near Miami, Florida. The tribe is exempt from taxes (it’s a sovereign nation). However, its members must pay taxes. They decided that they knew better than their attorney, and didn’t report distributions to its members or create a reserve fund in case their opinion was wrong. The Miccosukees filed a malpractice suit against their longtime attorney in a Florida court. The attorney had copies of his advice which pretty much (to this layman’s eyes) throws the malpractice case in the trash can.

Taxdood has more. Hint: The Miccosukee Tribe is the first nominee for the Bozo Tax Offender of the Year.

When I read one report stating that California is looking at an $8 billion deficit (that’s Governor Brown’s projection), I was quite happy I’m now a resident of Nevada. And then I read Chriss Street’s report that says the deficit is really $21 billion!

Whatever the true number is–it most likely lies somewhere between the two numbers–there isn’t any doubt that California continues to spend its way to oblivion. The problems, according to the Left, include low taxes, Proposition 13, issues with the tax system, etc.

There seems to be a pattern, eh?

Here is a helpful hint for California: You must lower your expenses. This means cutting the size of state government, cutting pension costs, and cutting salaries. Additionally, California must make itself more attractive to people like me who have fled the Bronze Golden State. Regulations must be cut.

I had a thought, but dismissed it as too obvious. For every new regulation put on the books in California, two should be removed. If that were done California would likely solve its problems within a few years. Of course, my idea here is just wishful thinking. The Democratic Legislature in California thinks that the Golden State is truly golden, and these issues are because the tax rates are just too low. Well, California only has the second worst business climate of the 50 states, so there is room for improvement!

The first of the January deadlines is upon us. Estimated tax payments (Form 1040-ES) are due by Tuesday, January 17th. That’s a postmark deadline. As always, I strongly recommend certified mail, return receipt requested.