Taxable Talk

I'll be, in general, out of the office until August 9th, enjoying some time away from the office. While I'm away, take a look at some of the other excellent tax blogs noted in the blogroll on the right.

As a member of the National Association of Enrolled Agents, every Friday I get an email with a summary of tax news. Today, I received the Ways & Means Committee's Version of the new Highway Bill. You can find this document here. On the good news front, the requirement of prepaying offers-in-compromise has been eliminated.

Did you know that there's up to a $10 excise tax on fishing rods? Yep, and it's mentioned in the summary. I have no idea what the funds are used for.

On the other hand, the energy bill is also about to pass Congress. As Roth Tax Updates notes, "Pork is Good." I know there are ethanol provisions in the legislation (ethanol mandates for gasoline), and who knows what other provisions are included in this mammoth, $14.5 billion legislation.

Hat tip: Roth Tax Updates

According to a wire service story, Senator Blanche Lincoln (D-AR) plans on introducing legislation this week that would add a 25% federal excise tax on pornography and additional requirements on adult websites. Lincoln's spokesman wouldn't comment on the bill's provisions, stating, "We prefer to wait until the bill is introduced to discuss it." As of this morning, the legislation has not been introduced.

I'm naturally skeptical about efforts to regulate sin. Sure, child pornography is bad, children viewing pornography is bad, etc.; however, if this legislation were to pass and it was effective, wouldn't pornographic websites just move across the borders away from the US?

The Orange County Register reports today (one time subscriprtion required) that the IRS cannot tell whether its 400 help centers help taxpayers. The report, from independent auditor J. Russell George, the Treasury Department's Inspector General for Tax Administration, was disputed by the IRS.

Of course, the telephone help has been plagued by possible incorrect answers—anywhere from 22% to 50% of the answers have been wrong, according to reports (see here, here, and here).

Today's Wall Street Journal also reports that Senators Grassley (R-IA) and Baucus (D-MT) have introduced a "technical corrections act" to fix errors in last year's tax law and other recent legislation. The Tax Technical Corrections Act of 2005 was also introduced in the House.

While this act, if passed, may fix problems, unfortunately these acts have, in the past, been used to add pork and other problems to the Tax Code. Time will tell.

Hat Tips: The TaxProf Blog

The Public Company Accounting Oversight Board announced new standards for tax shelters yesterday. The Wall Street Journal reported on this in today's editions.

The rules, which must be approved by the SEC, state that firms will be prohibited from auditing clients to which they sell aggressive tax shelters. Of course, there's an exception to this: if the firms reasonably believe they have at least a 50% chance of prevailing in an audit with the IRS.

This new regulation stems from the continuing KPMG scandal. The US Department of Justice has not yet announced whether they will pursue criminal charges against KPMG.

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.

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?

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

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.

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

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.

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

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.

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%.

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.

...and still has a $5 Billion deficit projected for next year. Oh, the Governator signed the budget.

Moody's Investment Services followed up by raising California's Debt Rating from A3 (bad) to A2 (not as bad). Perhaps I'm being a bit cynical about this; after all, Moody's says that both A3 and A2 ratings indicate "bonds with many positive investment qualities." California, though, has one of the worst ratings of any state.

On the good news side of the ledger, the Governator used the line-item veto to eliminate some egregious programs, such as the UC Berkeley Center for Labor Research and Education. He also vetoed hiring 14 new state tax investigators. While the veto "saved" $1.2 million, the investigators were budgeted to bring in $4 million in back tax payments and penalties annually. So tax cheatersprocrastinators, you can rejoice!

Again, the key for California will be the results of the November 8th special election, which will have numerous initiatives that could change our state government in many ways.

...You're stuck, and look fairly stupid.

At least once a week, the Tax Court tells a tax protester that, "Yes, Virginia, there is an income tax, and you must pay it." And your arguments that (a) it's unconstitutional, (b) you don't live in the United States but in the state of [fill in the blank], or (c) it was never approved, etc. (see the Tax Protester FAQ for a complete list of the reasons) won't work.

This week's case is Hodges v. Commissioner, TC Memo 2005-168. We won't bore you with the constitutional issues; rather, there's an interesting issue that develops because of the petitioner's claims regarding the unconstitutionality of the income tax. The amount of tax is dependent on when one of the petitioner's relatives passed away. The Court chooses to not believe the petitioner as to the date of death. As pointed out by the Court, "We need not accept self-serving testimony, even if unopposed." Would the Court have felt this way had their been no constitutional issues raised? We don't know, but making stupid arguments to a court and then trying to get them to rule in your favor isn't a good idea.

Oh, yes; the petitioners also received penalties for failing to file a return, for failing to make estimated payments, and for taking a frivolous petition.

So, Virginia, do you still want to claim there's no income tax?

As reported yesterday, California will soon have its' new 2005-06 budget. Dan Weintraub, a columnist with the Sacramento Bee, reports on more of the specifics (missing from yesterday's report).

Some highlights:

—Education funding increases, despite what you may hear from the teacher's unions;

—The state is repaying the $1.2 Billion it owes the cities one year earlier than scheduled. This will make local governments quite happy.

—The budget is balanced on paper. However, it's balanced by using one-time funds. Thus, next year's budget starts off $5 Billion in the hole.

So, let's take the good with the bad. Given the makeup of the legislature, this is probably as good as one could hope for. Just remember that we're still looking at a special election in November with a whole host of initiatives that have the potential to change the picture in Sacramento.

California's legislature and the Governator agreed on a budget last night that, supposedly, increases spending (a little) without increasing taxes (or implementing new taxes). That doesn't mean there won't be new fees, including new court filing costs, and who knows what else buried in the fine print.

Until we see the actual budget, and the analysts' reports on the budget, we're better off not speculating as to whether it's a good or bad deal. For now, look at it as a $117 Billion unknown.

Coverage: San Jose Mercury News (one-time registration required)

I'm amazed that some of my clients don't want to spend the $4.42 for certified mail (return receipt requested) when communicating with the IRS. Today the Tax Court released a case where a filing got misplaced in the mails; however, the petitioner's law firm could show that because the filing was mailed using certified mail, the case will go on.

In the case (Grossman v. Commissioner, T.C. Memo 2005-164) the filing went astray, and instead of arriving at the Tax Court in Washington, ended up in New Jersey. The petition was received late. The IRS argued that it should be disallowed; the petitioner said we can't be blamed for the Postal Service's error.

Because the petitioner (really, his attorney) spent the $4.42, the case will go on. So the next time you just mail the filing, think twice.

A Campbell, California attorney who advertises as Mr. Divorce was found guilty of tax evasion according to this story in the San Francisco Chronicle (one-time registration required). Demetrious Eugenios made the mistake of going through a divorce from his ex-wife, Willow Eugenios. Ms. Eugenios alerted the government that Mr. Eugenios hid ownership of automobiles and other assets from the IRS. Sentencing is scheduled for October.

This case does remind us of one fact: ex-spouses are the leading source of tips of tax evasion to the IRS. I guess that's something for Mr. Divorce to ponder....