Archive for November, 2011

If You Fail Four Times, the Fifth Time Won’t be the Charm

Wednesday, November 23rd, 2011

As I’ve said, there is an income tax and you do need to pay it. Today’s petitioner in Tax Court didn’t like that idea and filed case after case in Tax Court citing frivolous arguments.

In 2006, the petitioner received just over $45,000 in military retirement. He didn’t file a tax return, so the IRS prepared a Substitute for Return. A notice of deficiency was sent and the petitioner timely filed a Tax Court petition. That was about the only thing that was done correctly — the timely filing.

Unfortunately for the petitioner,

At no time before or during trial did petitioner attempt to substantiate any deduction or dispute the receipt of income that was included in the statutory notice. At all times petitioner has relied solely on frivolous arguments about tax return filing requirements, preparation of substitutes for returns, and procedures for determination of tax deficiencies and additions to tax.

It’s not good when the Court can cite a case you brought up as a precedent against you:

Petitioner continues to take up this Court’s valuable time and resources with frivolous and irrelevant arguments. To expand upon his contentions is simply not necessary. As this Court stated recently in Wheeler v. Commissioner, T.C. Memo. 2010-188: “To do so would be to encourage the dilatory conduct that * * * [petitioner] has employed throughout the history of this case and would neither dissuade petitioner nor provide useful guidance to taxpayers with legitimate cases.”

Not only did the petitioner lose the case, but the maximum possible frivolous penalty was awarded — $25,000. The Court also noted that his appeals (to the 10th Circuit Court of Appeals) have also started to receive sanctions (penalties). He escaped without penalty on his first appeal, was sanctioned $4,000 on the second appeal, and $6,000 on the third.

The only good news out of this case is that the petitioner is helping to reduce the budget deficit.

Case: Wheeler v. Commissioner, T.C. Memo 2011-278

Paranomastically, Ecdysiasts Engaging in Deciduous Calisthenics (And Some Basis, too)

Wednesday, November 23rd, 2011

I need to thank Judge Mark Holmes of the Tax Court. Judge Holmes wrote an opinion today that is wonderful and has expanded my vocabulary. It’s also a great case.

Robert Willson bought a bar in Des Moines, Iowa. His bar burned down in 1994, but he persevered and rebuilt. However, Des Moines condemned his bar to expand the city’s airport. The IRS claimed that there was a large capital gain when the city condemned his bar. Mr. Willson disputed that, and the case ended up in Tax Court.

Mr. Willson’s bar catered to hair bands until one of the bands misused a smoke machine and caused the place to burn down. He rebuilt the bar, and rather than my paraphrasing the decision, here’s what Judge Holmes wrote:

He rented out the old house to a tenant who installed minor improvements (e.g., poles) and opened an establishment felicitously–and paronomastically–called the “Landing Strip,” in which young lady ecdysiasts engaged in the deciduous calisthenics of perhaps unwitting First Amendment expression…He also used $169,000 of his $200,000 insurance proceeds to rebuild the bar.

Two things happened around 1999: Des Moines condemned his property and the petitioner visited ClubFed. Mr. Willson did file his 2000 tax return, and the IRS did audit the return. The issue that had to be determined was Mr. Willson’s basis in the bar.

One key issue in the case is the fact that it is a small Tax Court case — an “S case.”

Rule 174(b) allows a taxpayer like Willson to introduce evidence in an S case that would otherwise not be admissible, and it lets us conduct the trial as informally as possible (consistent with orderly procedure) and to admit any evidence we decide has “probative value”–a fancy way of saying any evidence that helps or hurts Willson’s case. This looser rule is important here, because Willson presented his case quite credibly through his own testimony and that of others who worked at the bar or lived nearby during its heyday. Despite the raffish pasts of Willson and some of his witnesses, we found their testimony on his investment in the bar entirely credible.

Basis is always a troubling issue to explain, and this case is messy because of the fire. This case includes both ACRS and MACRS, boot, a fire, and other adjustments. The rest of the case goes into the formula that must be used to determine Mr. Willson’s capital gain. While “there are computations that still need to be made,” it appears that Mr. Willson will likely not owe as much as the IRS claimed.

Case: Willson v. Commissioner, T.C. Summary 2011-132

Dearest Commissioner Shulman…

Monday, November 21st, 2011

I prepare a lot of Schedule C (sole proprietor) returns. That comes with the nature of my practice: I have a lot of professional gamblers as clients, and they file Schedule C. The IRS knows that there are unscrupulous tax professionals out there; I’ve written about many of them in the past. The IRS has decided to send out letters to some tax professionals to help “educate” us.

I have not received one of the IRS’s notices. However, a CPA in Fremont (in the Bay Area) did receive a love letter from the IRS. Via Kelly Erb comes the letter he wrote back to Commissioner Shulman. Here’s an excerpt:

Your letter stating that due to “a high percentage of attributes associated with returns typically containing inaccuracies and misinterpretations of the tax law” you feel the need, in some blanket campaign, to accuse me of improperly preparing tax returns. You supply a review of the rules and the penalties that apply to Tax Return Preparers.

The threat is a possible visit to my office.

Let me coach you on how to write a letter.

“Dear Tax Return Preparer:

Based on a mindless computer analysis, we have determined the obvious; in that you prepare tax returns for many clients who have rental properties. We are too dim-witted to understand that taxpayers often seek out tax preparers because they have rental properties and become subject to the Cost Recovery, Passive Loss and At-Risk Rules.

If you’re a tax professional, Ms. Erb’s post is well worth your time. The good news is that if you haven’t received Notice 4809 from the IRS the NAEA has stated you missed out for this year.

South Dakota to Southern Californians: We’re Business Friendly

Monday, November 21st, 2011

An interesting story out of the San Jose Mercury-News: The governor of South Dakota, Dennis Daugaard, will make a recruiting trip to Southern California to recruit businesses to relocate. The article notes the advantages of South Dakota in taxes and business climate.

I can just see a response from one of California’s Democratic politicians. It would likely go something like, Yes, Governor Daugaard is correct that South Dakota doesn’t have an income tax, it’s government is business friendly, but boy is it chilly in the winter in Pierre.

But Governor Daugaard doesn’t consider the advantages California has. We have more bureaucrats than any state. We have more levels of permitting, so our projects take longer to get built. And…

Perhaps one day California will get back to being a business friendly state. But given that Governor Brown and Democrats in the state legislature are still talking about raising taxes it doesn’t appear today’s the day.

Is There Something in the Water In Seattle?

Monday, November 21st, 2011

First, it was Sharon Kukhahn and her ridiculous decoding strategy. Now, I get the joy of reporting about David Myrland.

Mr. Myrland will be sentenced on December 2nd after pleading guilty to a tax charge. Mr. Myrland is a believer that he is a sovereign citizen and thus immune from the IRS. At least, I think that’s the snake oil he’s trying to sell. But that’s just the beginning.

Mr. Myrland was unhappy about being arrested. So he decided to issue an arrest warrant himself, asking that Joan McBride, the Mayor of Kirkland, Washington, be arrested. Private citizens can make citizen’s arrests when there’s a crime being committed, but private citizens can’t issue arrest warrants.

The federal prosecutor isn’t as amused as I was when I read this. As reported in the Seattle Post-Intelligencer,

“He continues to this day to apparently believe that he was in the right, and everyone else is in the wrong,” Assistant U.S. Attorney Vince Lombardi told the court. “Despite his guilty plea, he continues to argue that he had a legal right to make the threats he made … and that he was in the right in virtually every respect.”

“Myrland’s arrogance, his anger and his inability to even consider the possibility that he is in the wrong in this matter come through in his various letters to the court,” Lombardi continued. “The evidence amply supports (the) conclusion that Mr. Myrland remains a danger to the community and is a virtual certainty to re-offend.”

Somehow, I suspect that the sentencing judge may tell Mr. Myrland something about threatening public officials when he’s sentenced on the 2nd.

Kukhahn Gets 7 Years

Monday, November 21st, 2011

Sharon Kukhahn found out what buying a yacht instead of paying her taxes would cost her: seven years at ClubFed. That was her sentence this past week; Joe Kristan has more.

Greenspan Sues California

Tuesday, November 15th, 2011

Last month I wrote about the Kafka-esque saga of Aaron Greenspan and California. I received an update this evening that Mr. Greenspan has filed a civil case against the state alleging that California’s actions violate the federal constitution (the interstate commerce clause) and that the state’s actions have been capricious in their administrative functions. Mr. Greenspan is asking for an injunction against the state and for monetary damages.

I probably won’t be covering this in the future. I first wrote about Mr. Greenspan’s trouble with the bureaucracy as an illustration of how bad the bureaucracy is in California. I’m an Enrolled Agent, not someone in the money transmittal business. This is definitely beyond my area of expertise.

Mr. Greenspan has filed his suit pro se (he is representing himself). I wish him the best of luck in putting a dent in the bureaucracy. Given the glacial pace of federal litigation, it’s likely going to be years before this is resolved.

“California — Toxic for Business”

Tuesday, November 15th, 2011

Wendell Cox and Steve Malanga penned an op-ed in the Los Angeles Times that’s worth your perusal. They argue what I’ve been saying for some time: “Unless Sacramento moves to improve the business climate, California’s reputation as one of the country’s most toxic business environments will make it hard for the Golden State to regain its luster.”

There’s a lot more in the article, and it’s well worth your time.

The Secret Decoder Ring Strikes Again!

Tuesday, November 15th, 2011

I’ve written about Sharon Kukhahn before. Ms. Kukhahn thought that there was some magical way to decode your IRS file and magically make your taxes disappear! Ms. Kukhahn sold her packages to the public and pocketed $2,000 – $3,000 per sale. As P.T. Barnum said, “There’s one born every minute.”

Back in 2008, the Department of Justice obtained an injunction against her from selling her worthless decoding scheme. (There is no secret IRS file to decode that will make your taxes disappear.) One would think that Ms. Kukhahn would fade into the sunset.

Nope.

In April 2010 Ms. Kukhahn was arrested, charged with conspiracy and tax evasion. Not only did Ms. Kukhahn allegedly promote phony tax schemes, she also supposedly orchestrated a letter writing campaign to stop the IRS from collecting taxes.

Ms. Kukhahn was found guilty back in May. Ms. Kukhahn supposedly used the proceeds from her scheme to buy a yacht and other worldly goods; meanwhile, many of her clients are suffering under tax debts they’ll never be able to repay.

Sentencing is set for Wednesday.

Now, if you really want a decoder ring, here’s an offer from nearly 60 years ago that (at the time) would get you one. It wouldn’t have removed your taxes, but it was a decoder ring:

California Revenues Continue Below Budget

Friday, November 11th, 2011

October is usually a good month for California collections (of taxes). After all, it’s the extension deadline and many residents send more money to Sacramento. This month, though, revenues were $810 million below budget; the deficit year to date is somewhere between $1.5 billion and $1.7 billion.

That deficit is just for four months. Projected for a full year, that’s a nearly $5 billion budget deficit.

As I’ve mentioned in the past, the solution is to make California a more business friendly state so that businesses have a reason to be in the Bronze Golden State. Instead, it’s state employees who get raises while the people are threatened by the Governor with higher taxes.

My budget ideas would have no chance of passing in Sacramento, but are simple and to the point:

1. End redundant state agencies.
2. Cut unnecessary state agencies.
3. End public employee unions.
4. Eliminate defined benefit pensions for state employees.
5. Have a two-year term of the Legislature where the legislature is required to cut 20% of state regulations and or laws.
6. Cut state tax rates by 5%. (I am not stating that California’s top income tax bracket should be reduced from 9.3% to 4.3%; rather, that it should be reduced by 5%: From 9.3% to 8.85%.)

I’ve written about the redundant and unnecessary state agencies in the past. I’ll be posting on the other ideas in the next couple of weeks.

California needs to face reality: The state is broke. Radical change is necessary. It won’t be pretty to many but the state can’t continue to spend money it doesn’t have.