Taxable Talk

They're at it again.

The California Public Employees Unions are, according to this story in the San Jose Business Journal, gathering signatures on an initiative that would cause all non-residential property to be reassessed annually. While this would be a boom (temporarily) to local government—property taxes would increase—this would be devastating in the long-term to California.

If a business's property tax bill increases, what will they do? Basic economics gives us the answer: the price charged will increase. If prices increase, demand decreases. Fewer sales in California. Fewer businesses in California. Instead of calling the initiative the "Tax Fairness Act" (the current title), the initiative should be called the "Nevada Full-Employment Act."

This same proposal came to a vote a few years ago and was defeated by the voters. If it comes up again, it deserves the same fate.

After being gone over the weekend, I discover that the World's Greatest Newspaper (the Chicago Tribune) ran a story on the infamous Kanter case. In this case, the US Tax Court's Chief Judge apparently reversed the finding's of the trial court judge—for no apparent reason. Earlier this year the Supreme Court ruled that the trial court's ruling be made public. Under a 1984 Tax Court rule, the trial court's ruling is not made public.

The Tribune has had two articles about this ruling. The first, on June 24th, features the classic line from Julie Roin, a law professor at the University of Chicago, "How could the tax court judges essentially lie about what was in the report?" The second article, on June 25th, has the comment of the current Chief Judge of the Tax Court, Joel Gerber, that no judge on the Tax Court will comment on the case.

You can find the Supreme Court's decision here (the case is Ballard v. Commissioner).

Now, courts are supposed to have transparency in their actions. The Tax Court, today, doesn't. Hopefully this ruling, and the associated publicity, will impact the Tax Court's policies. I'm not holding my breath (again).

Thanks to the TaxProf Blog and Roth and Company's Tax Updates for the heads-up.

The above headline is not a joke. It seems that in Russia tax evasion may mean whatever the prosecutorgovernment wants it to mean. The recent Yukos case is a good example of this.

In any case, the Russian Presidential Administration is sponsoring a contest where the winner will receive 300,000 Rubles ($10,000) for defining tax evasion. The deadline for entry submission is apparently quite soon (and may have passed); the winner will be announced on July 1. Over 200 entries are expected.

Link: MosNews

When I was in graduate school, and being recruited to the Big Eight (no, not what is now the Big Twelve), I spurned them all. Can anyone name the big eight accounting firms from 1985? [Answer below]

We're currently at a Big Four; however, one of the four, KPMG is in deep trouble. KPMG set up tax shelters in the late 1990's. The IRS didn't think they were legal. KPMG has now acknowledged that they weren't legal. Oops.

I haven't been covering this story, because others are doing a great job. (Why reinvent the wheel?) Most newspapers have had stories, including this story from Reuters and this story from the New York Times. The blogosphere is also delving into this: The Tax Professor Blog has a roundup. Roth Tax Updates is also covering the subject.

I remember when Arthur Andersen went away. While I doubt the government is stupid enough to indict KPMG, it wouldn't surprise me. Is the entire firm guilty? Of course not—just a few partners. But if I were a new college graduate, I wouldn't want to work at KPMG.


Whither the Big Eight:
Arthur Andersen: Dead, 2002 (US "won" in court in a case that was recently overturned).
Arthur Young: Merged with Ernst & Whinney in 1989 to form Ernst & Young.
Coopers & Lybrand: Merged With Price Waterhouse in 1998 to form PriceWaterhouseCoopers.
Deloitte Haskins: Merged with Touche Ross in 1989 to form Deloitte Touche.
Ernst & Whinney: Merged with Arthur Young in 1989 to form Ernst & Young.
Peat, Marwick & Mitchell: Merged with KMG (Klynveld Main Goerdeler) Main Hurdman in 1986 to form KPMG Peat Marwick (since shortened to KPMG).
Price Waterhouse: Merged with Coopers & Lybrand in 1989 to form PriceWaterhouseCoopers.
Touche Ross: Merged with Deloitte Haskins in 1989 to form Deloitte Touche.

Almost everyone knows the text of the Fifth Amendment to the US Constitution:

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb, nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use without just compensation.
[emphasis added]

Thus, in a court case (including Tax Court), you cannot be forced to testify and/or incriminate yourself.

Today, the Tax Court released a number of opinions where plaintiff's asserted fifth amendment rights. But this doesn't mean that you can stand mute in Tax Court and win your case. The petitioners lost all the cases.

In a criminal case, the prosecution must prove its' case beyond a reasonable doubt. Tax Court is different. Tax Court has been set up to resolve tax disputes, not criminal matters. And, generally, the petitioner has the burden of proof, not the respondent (the IRS). "Petitioner contends that respondent generally bears the burden of proof. We disagree." There are exceptions to this standard, notably: "If a taxpayer asserts a reasonable dispute with respect to any item of income reported on a third-party information return and the taxpayer has fully cooperated with the Secretary, the Secretary has the burden of producing reasonable and probative information concerning that deficiency in addition to such information return." "Once there is evidence of actual receipt of funds by the taxpayer, the taxpayer has the burden of proving that all or part of those funds is not taxable." But if you don't assert anything, the petitioner (taxpayer) has the burden of proof.

Finally, as the Court notes, "Before trial, petitioner asserted Fifth Amendment rights against self-incrimination. However, even if petitioner’s claim were bona fide (which we need not decide), it would have no effect on petitioner’s burden of proof. See United States v. Rylander, 460 U.S. 752, 758 (1983); Petzoldt v. Commissioner, 92 T.C. 661, 684-685 (1989); Traficant v. Commissioner, 89 T.C. 501, 504 (1987), affd. 884 F.2d 258 (6th Cir. 1989)."

See:
Richardson v. Commissioner (TC Memo 2005-143);
Krohn v. Commissioner (TC Memo 2005-145);
and Howard v. Commissioner (TC Memo 2005-144)

I recently wrote a post about my company's receipt of a letter mandating participation in California's electronic tax payment program. Two weeks following receipt of that letter I received a call from someone at the FTB acknowledging that my company really shouldn't have to enroll in that program. Apparently someone (or some business) has been erroneously using the wrong corporation number. I was told that I would not receive an official "I don't have to enroll" letter but that I didn't.

End of story?

Not hardly. This past week I received another letter from the FTB again mandating my enrollment in the program. I was mildly amused, but I wrote a letter (sent certified mail) to the FTB. I'll keep you posted.

San Diego may be the city with the best climate in the world; however, its' pension system has driven the city to near bankruptcy. John Moorlach, Orange County's Treasurer-Tax Collector, wrote an op-ed piece in today's Register about the parallels. It's must reading for any resident of OC and, frankly, any Californian. (One-time registration required to read the article.)

Samuel Johnson put it well: Whatever you make, spend less. Mr. Moorlach believes that the Orange County Employees' Retirement System is doing a better job than San Diego; however, with an unfunded liability of somewhere between $1 and $2 billion, problems lurk in the future.

I should point out that San Diego's pension problems appear (allegedly) to also have causes from illegal activities by their pension oversight board—problems that do not exist in Orange County. As Mr. Moorlach put it, "...San Diego's retirement board has been caught with its hand in the cookie jar...."

With the Democratic legislature following in lock-step with the labor unions, a Democratic governor could cause further problems through mandated larger benefits. All-in-all, this is a situation to watch in the future.

In a comment to my post on real estate prices, Andrew asked if I had any backup for my statement that restrictions (environmental and otherwise) are increasing the costs of new homes. And there's plenty available in the literature.

This study shows that for a new home in Vancouver, WA, about 18% of the home's price is caused by regulations. This article talks about NIMBYism & Boston's housing market. This paper describes regulatory barriers and housing prices. Finally, this paper looks at environmental regulations and urges more academic looks at this issue.

However, I don't think you have to be an academic to come to the conclusion that NIMBY is impacting housing prices. Take Houston, TX. There is (famously) no zoning in Houston. Houston remains one of the most affordable cities in the United States. Contrast this with the Bay Area, where there's a lack of land to build (it's largely built out), numerous environmental regulations, strict zoning, and a large amount of land that can't be built on (mountains, earthquake faults, etc.).

The Franchise Tax Board and the Employment Development Department don't believe there is such a thing as an independent contractor. Indeed, California's rules and regulations on independent contractors are much stricter than the IRS's rules. So it should come as no surprise that the EDD is continuing its' war on contractors.

The latest battle is against "temporary" doctors. According to this article in the San Francisco Chronicle, the EDD is challenging Staff Care Inc.'s use of independent contractor doctors.

Registry of Physician Services, another temporary doctor staffing company, also received a bill from the EDD. Oh, who is Registry's client? The State of California (Department of Corrections).

Legislation is pending to correct this, at least for doctors. SB279, by Gil Cedillo, is pending and would make "locum tenens" doctors independent contractors by statute.

Real estate prices in Southern California (where I reside) continue on an upwards trajectory. The Los Angeles Times (one-time registration required) has an interesting article that speculates on why people are not selling their homes. The article notes property taxes and transaction costs as two of the main reasons why.

However, the article doesn't address the main "culprit." (I'm not even sure that culprit is the right word. On paper, this boom has made me a lot of money.) It's NIMBY.

Basic economics state that if supply is constant but demand increases, price increases. There is almost no land available to build new homes. What land there is has environmental restrictions, traffic restrictions, and other restrictions placed on it, decreasing the number of new homes built and increasing their cost.

You'll be happy to know that the IRS is closing 68 Taxpayer Assistance Centers (TACs) as "...part of the agency's continuing efforts to create efficiencies, modernize operations, and reduce costs while maintaining [our] commitment to public service."

Of course, as mentioned previously, the real reason is a 1% budget cutback. The IRS's criteria used to choose the 68 TACs to be closed can be found here.

...But the Tax Court does.

In a case released today, a man thinks he has some additional 1099s. He has not received copies of his statements on these accounts (they are education accounts for his children). He calls and writes his bank, and asks for copies. He calls and write his ex-spouse, asking for copies. His bank acknowledges the request, but never sends any 1099s (or statements). His ex won't give him the time of day. He assumes there aren't any additional 1099s and files his return.

However, the IRS examines his return and finds the "missing" 1099s. He immediately pays the additional tax, but he's also assessed an accuracy-related penalty because the amounts were large. He goes to Tax Court and challenges the penalty.

I don't think it's a close case. As the Court notes,

We note at the outset that we found petitioner to be a very conscientious taxpayer. In preparing to file his 2000 return, petitioner made concerted efforts to obtain any statements and Forms 1099 pertaining to the education accounts....Moreover, petitioner specifically requested that First Albany mail him copies of the Forms 1099 pertaining to the education accounts....Petitioner never received any Forms 1099 for 2000 from First Albany pertaining to the education accounts. It was not unreasonable for petitioner to assume that there were no Forms 1099 issued....

Upon a review of the record, we find that petitioner had reasonable cause to believe that there were no Forms 1099 pertaining to him, and that he acted in good faith with respect to the understatement attributable to the income reported on those forms.

One should note, though, that the Court notes, "Although this is a close case...." The taxpayer does all that he can do and it's close? Just a reminder of where the bar is in Tax Court.

Cite: Monte v. Commissioner, 7388-04S

...in jail.

After having been gone for just under a week, I must thank Roth Tax Updates for the first of a few gems. It seems that Lynne Meredith received 121 months (10 years and a month) for conspiring to defraud the IRS. The Los Angeles Times details the story here (one-time registration required). In her book, How to Cook a Vulture, she stated that she could show people how to get the IRS to write you a letter that you didn't have to pay taxes.

It didn't work.

But Ms. Meredith won't have to pay taxes in upcoming years. She'll be making sub-minimum wage in a Federal penitentiary.

Unless you've been hiding out, you've almost certainly heard the news that the US Supreme Court yesterday overturned the conviction of Arthur Andersen for destroying documents in the Enron fiasco. You can find news coverage here and here (one-time registration required). The opinion can be found here.

What does this mean? Arthur Andersen (the accounting firm) no longer exists; instead of a Big Five accounting firms we have a Big Four. Will Arthur Andersen rise from the dead? That's just not going to happen. Will the US retry Andersen? I have no idea, but it's irrelevant. Andersen is dead.

As the Wall Street Journal points out in an editorial today, going after the partners would have been a better idea. Most of the employees of Andersen had no idea of what was going on. Does anyone really believe that a tax partner in Seattle knew what the partners in Houston were doing? It was guilt by association. At least the US Justice Department has apparently learned from this. In recent white-collar cases, the Justice Department has gone after the principals.

Let's assume you (erroneously) believe that the US has no write to levy an income tax on you. You are a believer in one of the many frivolous or groundless schemes that say, in short, that the US can't levy an income tax. (For a good rejoinder on most of these, take a look at the Tax Protester FAQ.)

The Tax Court doesn't appreciate such arguments. They've heard them all (or almost all) and have said,

"...arguments that this Court has repeatedly found to be frivolous and/or groundless, see, e.g., Copeland v. Commissioner, T.C. Memo. 2003-46; Smith v. Commissioner, T.C. Memo. 2003-45, and we find this also to be true in this case. See also Holliday v. Commissioner, T.C. Memo. 2002-67, affd. 57 Fed. Appx. 774 (9th Cir. 2003)."

In this case, the petitioner filed returns with $0 income and $0 tax. The IRS filed substitute returns and then started action to place tax liens on various assets.

The conclusion? The Tax Court put it well,

"Petitioner’s meritless arguments support the conclusion that remanding this matter to respondent’s Appeals Office for recording would be neither necessary nor productive, and we so hold.

"We have considered all of petitioner’s contentions and arguments that we have not discussed, and we find them to be without merit and irrelevant.

"Further, we hold that respondent correctly determined that
collection efforts should proceed."

Ok, what does that have to do with tax?

That's what I was thinking when I read this article (one-time registration required). Restaurateur Neil Stein plead guilty yesterday to federal tax fraud charges and will likely receive a term of 12 to 30 months in prison.

Mr. Stein apparently skimmed upwards of $450,000 from his restaurants (including Rouge and Bleu) while reporting just over $100,000 in salary. Unfortunately, spending $65,000 on his daughter's wedding while earning just over $100,000 made his conspicuous consumption just a bit too visible.

As to the quote, that's right from the article. While Mr. Stein may now be clean from drugs and alcohol, he'll apparently have some free time on his hands to contemplate the past.