Taxable Talk

...on the tax front.

Bjorn Ulvaeus, a member of the Swedish pop group ABBA, has been charged with tax evasion. He is accused of not paying 87 million kronor ($11.7 million) in taxes on royalties from ABBA's songs and musicals.

The Swedish government accuse Ulvaeus of setting up offshore entities to avoid paying taxes. Mr. Ulvaeus' attorney denies the charges.

Additionally, The Local reports that a second member of ABBA, Anni-Frid Reuss-Lyngstad, is accused of owing 12 million kronor in unpaid tax, interest, and penalties. She is accused of illegally moving her share of royalty income to a Panama based company.

ABBA's songs are featured in the musical "Mamma Mia," which is currently appearing on Broadway and in Las Vegas. Conveniently, two of ABBA's songs are Money, Money, Money and SOS.

UPI News Story Link

Is the Alternative Minimum Tax Unfair? Of course it is. But do you have to pay it? Certainly. And that's the crux of today's Tax Court case.

Our unlucky petitioners earned quite a bit of money, reporting wage income of $323,498. Among their itemized deductions were the following:

• State and local income taxes $39,189
  Real estate taxes 4,935
  Personal property taxes 230

After they submitted their tax return, the IRS notified them that they owed $7,364 of AMT.

The petitioners couldn't understand why they lost their tax deductions that they legitimately (and correctly) took. (The petitioners live in California, a very high tax state.) Unfortunately, the three tax items listed above are considered "preference items" and are one of the ways you can get thrown into the AMT nightmare.

The Tax Court noted that they were "not unsympathetic" with the petitioners, as the AMT has had some unintended consequences.

"The unfortunate consequences of the AMT in various circumstances have been litigated since shortly after the adoption of the AMT. In many different contexts, literal application of the AMT has led to a perceived hardship, but challenges based on equity have been uniformly rejected. [Citations omitted.]" Speltz v. Commissioner, 124 T.C. 165, 176 (2005)

But the Court must apply the law as written, and the petitioners owe the AMT.

Case: Schick v. Commissioner, T.C. Summary 2006-67

Today the Tax Court looked at a casualty loss case. Many times when casualty loss cases make their way to Tax Court, there's a dispute about whether or not there really was a loss. Not today.

A fire destroyed the victim's office on the university campus where he worked as a Professor of Economics. He lost a litany of belongings, which he detailed as follows:

Books on economics $2,000
Books by “famous authors” 1,000
Books on Africa 5,000
African journals & magazines 3,000
Book manuscript 15,000
Memorabilia (awards, plaques, etc.) 3,000
Briefcases, fans, etc. 2,000
Computer printer 250
Labor/inconvenience/distress 2,000

The unlucky victim did receive $12,000 in compensation from the university's insurance company. The IRS denied a portion of his casualty loss.

When you have a casualty loss, such as a fire, your loss for tax purposes is based on the lessor of your basis in the assets you lose, or the fair market value of the assets. As the Tax Court notes,

"Petitioner, however, has not produced any evidence as to what his bases or costs in the various items may have been. Indeed, while they may have had value to petitioner, it is clear that the memorabilia had no costs to petitioner, and petitioner would have no bases in these items. With respect to what petitioner describes as “Labor/Inconvenience/Distress”, as we understand petitioner’s testimony, the deduction was for mental upset, having to prepare new lecture notes, etc., and for teaching. These are not items of property the losses of which are deductible as casualty losses."

One point that the Tax Court made is that the petitioner did not avail himself of any professional advice. As Albert Einstein said, "The hardest thing in the world to understand is the income tax." When in any doubt, get professional tax advice. Any competent tax professional could have set this professor on the right track.

Case: Ayittey v. Commissioner, T.C. Summary 2006-65

It's still election season, and here in the Bronze Golden State, Democrats will vote on June 6th for their candidate for Governor to oppose the Governator. It's rare we see such frank honesty as that given by one candidate, Phil Angelides.

Mr. Angelides wants to increase taxes on all corporations, and all families making $500,000 a year or more. He also supports Proposition 82, so his proposed tax increases are on top of those tax increases. The economic development offices in Las Vegas, Phoenix, and Denver are thrilled with you, Mr. Angelides.

California is already among the worst states in the US for business. If Mr. Angelides is elected Governor, he's definitely aiming for the #50 spot. But at least he's honest about it.

News Story: Sacramento Bee

Yesterday, there were three interesting Tax Court decisions. Joe Kristan of Roth Tax Updates has an excellent post on the first case. In that case, Merlo v. Commissioner, the unlucky taxpayer found out the "gotcha" of incentive stock options. If you are the recipient of such options, take a look at Joe's post on this case now. ISO's have a wonderful tax advantage...but if the option tanks....

The second case has to do with something quite basic: a change of address. In Pragasm v. Commissioner, the taxpayer wanted to have a hearing on a collection (levy/lien) dispute. The IRS said that they weren't required to hold one because the taxpayer never responded to their notices. The Court sided with the IRS. Just a reminder, if you move, notify the IRS (and your state tax agency, if applicable); you can download Form 8822 here and mail it (certified mail, return receipt requested, of course) to the IRS.

The third case has to do with regulatory requirements. Last May, the Tax Court ruled in Zapara v. Commissioner that the IRS failed to comply with §6335(f) of the I.R.C. That section requires the IRS to sell seized property within sixty days following a request by the taxpayer (and have the proceeds of the sale credited against the tax, penalties, and interest owed). The taxpayers in that case had, the Court ruled, requested such a sale and the IRS did not sell the property (in this case, stock).

The IRS asked the Tax Court to reconsider their May 2005 decision. The IRS claimed that the taxpayers untimely raised a new issue, that the evidence doesn't support the decision, and that the Court doesn't hold the power to make the relief ordered in the earlier decision. The IRS lost on all three counts, and the motion for reconsideration was denied (decision here).

Why is this final case important? The Tax Court usually rules based on regulations and paperwork. If you can show paperwork/backup for your actions, and that you followed the regulations/Tax Code, you will usually win. This holds true for the IRS, too. The IRS's paperwork showed the request to sell the stock, and the stock wasn't sold. The moral is clear: document, document, document; and you have an excellent chance of winning your case.

The "Tax Gap" is difference between the amount of tax that the IRS should collect if everyone followed the law and the amount that it actually collects. There are three components of the gap: nonfiling, under-reporting, and underpayment. Of course, the ridiculous complexity of the Tax Code is also a contributing factor.

Last February, the IRS estimated the Tax Gap at $290 billion. This morning's Wall Street Journal reports that the IRS is likely underestimating the problem. The report, from the Department of the Treasury's Inspector General for Tax Administration (TIGTA), concludes that:

"...the IRS still does not have sufficient information to completely and accurately assess the overall tax gap and voluntary compliance. The IRS has significant challenges in both obtaining complete and timely data and developing the methods for interpreting the data...We concluded that, despite the significant efforts undertaken in conducting the individual taxpayer National Research Program (NRP) for under-reporting, the IRS still does not have sufficient information to completely and accurately assess the overall tax gap and the VCR."

The report is interesting and is available here. You can find the Wall Street Journal's article here (paid subscribers only).

It's Friday, and Tax Day has come and gone. But the memory lingers, so let's look at some scofflaws as the week ends:

Louis Ratfield of Lake Worth, FL has been in trouble with the government before. The IRS secured a restraining order against him for promoting a "constitutional common-law trust" to avoid paying taxes. There is no such trust, of course. He allegedly continued to promote the trust. He was arrested on Tuesday on 56 counts of preparing false income tax returns. Each count could net him three years in prison. Ratfield has also been in trouble with the SEC, apparently absconding with investors' money.

James Hubb of Clayton, MO used $25,000 of his business' money for plumbing at his house (it may have been for a bathtub—some bathtub!). Besides the bathtub, quite a bit more money was taken from his business and used for personal expenses. That's not necessarily illegal, as long as it is disclosed and reported as income. It wasn't, and Hubb has pled guilty. He faces up to eight years in prison and a fine of up to $350,000.

In Massachusetts, Laurence Greenburg and Russell Skidds sold partially defatted beef tissue as partially defatted chop beef. That violated the Federal Meat Inspection Act. Compounding their problems, they didn't report all the income, causing them to file false tax returns. They were convicted on Tuesday.

Finally, H&R Block settled a 1998 RAL (Return Anticipation Loan) lawsuit for $35 million. H&R Block still faces a lawsuit filed by the California Attorney General. Given the nature of class action lawsuits, it's likely that the lawyers will get most of the money from that settlement.

News Stories:
Lake Worth, FL, Clayton, MO, Malden, MA and H&R Block

The scene is the doctor's office, where the doctor is romancing his patient. Just a little problem: the patient is married to a policeman. The policeman finds out and vows to sue the doctor, or get paid a large sum. The doctor doesn't have it, so he makes a counteroffer. And then someone takes out a gun....Well, no, this is a tax blog. But this case does make its way into Tax Court, not a mystery novel.

The salient facts (above) are true (except for the gun). Throw in one more—the doctor eventually pays the policeman $25,000 as "free money" in the hopes that this affair blows over. As the Court noted,

"Petitioner then stated: “Now Doc, this isn’t blackmail money”, to which [the Doctor] replied: “No, I didn’t say it was blackmail money; I said I hope it helps you, both of you.” At the end of the meeting, petitioner warned [the doctor] that he should never again speak to or look at [his wife] or come to their home."

The petitioner and the doctor contacted his state medical board and reported the affair. The doctor apologized. The doctor's accountant then prepared a Form 1099-MISC reporting the $25,000 payment. The question before the court: is the payment a gift or income for the petitioner? The IRS held it was income; the petitioner believed it was a gift. (Gifts are tax-free to the recipient.)

Believe it or not, the Supreme Court has issued an opinion on point. In Commissioner v. Duberstein, 363 U.S. 278, 285-
286 (1960), the Court held, "And, importantly, if the payment proceeds primarily from “the constraining force of any moral or legal duty,” or from “the incentive of anticipated benefit” of an economic nature, Bogardus v. Commissioner, 302 U.S. 34, 41, it is not a gift."

The Tax Court concluded,

"the $25,000 payment by [the doctor] was not the result of detached and disinterested generosity or paid out of affection, respect, admiration, or charity. Instead it was paid to avoid a lawsuit, to avoid public and professional embarrassment, and to assuage his own feelings of guilt or moral obligation. Therefore, the $25,000 payment in 1999 is not a gift and is includable in petitioners’ gross income for that year."

Somehow, a moral for this story seems like an oxymoron.

Case: Peebles v. Commissioner, T.C. Summary 2006-61

Hat Tip: TaxProf Blog

Today is the deadline. You have until midnight tonight to file your taxes. The question were asked every year (usually around 9pm) is, "We just realized that we need to file our taxes...What do we do?"

The answer is to file an extension. If you are our client, we can file Form 4868 electronically for you. Otherwise, print the form up, and mail it, using certified mail, return receipt requested. Spend the extra $4.25. (For a story on what happens when you don't spend the money, see Joe Kristan's report on why you spend the money here.) Many post offices now have automated machines that can do certified mail; look for the "Automated Postal Center" (or similar verbiage).

Remember, an extension is an extension of time to file, not pay. So make an estimate of what you owe and send it with your extension. If you don't file an extension, you're subject to the failure to file penalty (5% a month up to 25%), so even if you don't pay anything with your extension it's well worth your time to file it.

Don't forget to file an extension for your state taxes, if your state requires it. California does not require an extension to be mailed (the extension is automatic); however, many states do require an extension to be filed.

This year, for both the IRS and California, an extension is for six months. You have until October 16th (the 15th falls on a Sunday) to file your taxes if you file an extension.

If you're out of the country working, you have an extra two months to file and pay your taxes to the IRS, until June 15th (not June 17th). You need to attach an explanation to your return stating that you were out of the country, and why (work).

Finally, if you call our office today wanting to schedule an appointment to do your taxes today, it's not going to happen. Like most tax preparers, we wouldn't be able to do an acceptable job on your return if we started it today.

Last October, I inched my way towards the 21st Century and bought an iPod. I find it wonderful, because when I'm at the gym I can listen to music that I like, not the techno-garbage that my gym plays.

iPods haven't been bad for Apple, either, as they've become a ubiquitous symbol of the 21st Century. Apple's iTunes store is doing a booming business, selling downloads of music.

And the Tax Man Cometh.

In California, music is not subject to sales tax because it is not considered tangible personal property (something you can hold). But that's not the case in many states. If you live in Washington, Texas, or Indiana, you need to pay either sales tax or use tax on your iTunes downloads. And as this CNET story states, many other states are looking at taxing the downloads.

Of course, you could live in Oregon—the state with no sales tax. If you don't, you may find that download costs an extra 5% to 10% as states continue to move forward in taxing the Internet.

The digital age has spawned numerous successful companies and industries. One industry that did not exist ten years ago is online auctions, such as those on eBay. A company that sprung up to facilitate payment transfers for eBay is PayPal. In fact, eBay bought PayPal a few years ago.

The benefits of using PayPal are obvious—buyers and sellers can easily transfer money to one another. The money flows readily. PayPal can also be used to transfer money from the US to anywhere. And the IRS wants to know about that.

The US has some very stringent money laundering laws. If you have a foreign bank account, and you have $10,000 or more in it at any time during the year, you must report it on Schedule B of Form 1040 and by filing Form TD F 90-22.1 with the Department of the Treasury. Now, do you really believe that all of the people who use PayPal to transfer money have been doing this?

I don't, and the IRS concurs. Indeed, the IRS announced last year that they were looking at PayPal payments. Yesterday, the IRS won approval in federal court to obtain information on Americans who sent money to bank accounts or credit cards in thirty foreign countries considered tax havens.

News Story: Silicon Valley.com

Tuesday, April 11th is election day in Orange County. If you live in the 35th State Senatorial district, you will vote on the replacement for John Campbell. You can find your polling place here. Remember to vote!

One of my clients today asked me about reporting of offshore (foreign) bank accounts. I reminded him that if you have $10,000 or more at any time in a foreign bank account or accounts, they must be reported by checking the boxes on Schedule B and by completing Form TD F 90-22.1 and mailing that form to the Department of the Treasury. The penalty for not reporting starts at $25,000. You can find yourself serving hard jail time if you don't report them. The anti-money laundering statute has real teeth.

My client wisely agreed that reporting his foreign bank account was the right thing to do.

Of course, when I get home and check my email, I see this:

Dear ColleagueGullible Victim,

Thank you for your interest in our offshore fund products. The [deleted] Fund (Cayman) is a product that is attracting attention worldwide.

Offshore advisers and consultants are attracted to the product because it offers their clients exposure to private equity and because it pays significant cash commissions and the opportunity to participate in the profits of the fund manager.

Scam Highlights
Class A private equity shares target 20% to 25% annual returns
Class B shares provide a guarantee of principal by a financial institution rated AA by Standard and Poor’s with a term of five years and a target return of 12% to 15% per annum
Commissions paid to consultants and advisers are from 4% to 6%
Trailer allows you to participate in the profits of the manager for five to ten years
Class “A” Private Equity Shares are designed to provide sophisticated investors the opportunity to invest in a private fund that invests in some of the most promising alternative asset managers using a high growth strategy. The minimum initial purchase for Class A Shares is US$50,000 with a target return of 20% to 25% per annum.

Class “B” Capital Guarantee Shares are designed to provide investors with exposure to private equity without risk to capital. The Class B Shares also have a defined redemption date with a specified return rate. The minimum initial purchase for Class B Shares is US$50,000. Class B Shares shall be redeemed by the Fund in year five at a redemption price of 175% (75% over the original price).

If offering this product is of interest to you, please review the materials that can be found on the following link: [deleted]

We believe once you have read our materials and understand our fund model you will see the economic possibilities are substantial.

We look forward to your response.

Sincerely, [deleted]

In case you're wondering, I didn't request information on these offshore funds. I love how they say they're targeting a 20% to 25% return. We all want a 20% to 25% annual ROR on our investments. The lack of comments such as, "Our Scam1 Fund returned 38% last year," shows that the operators are becoming more sophisticated.

Now, it's always possible that this fund is legitimate. Really....

As I perused this morning's Orange County Register, I was surprised to see the Nevada Development Authority advertising in the Register. You can find the ad on page 7 of the business section. It reads:

"California Business Profits After: Worker's Comp, Business Taxes, High Power Bills, Anti-Business Legislation = [hand shown holding some peanuts]. 5 Ways to lower your nut. Eliminate personal income tax, axe corporate income tax, don't pay inventory tax, lower workers' comp costs, relocate to Las Vegas."

A similar ad appears in today's Los Angeles Times. The NDA's website has links to some of their television commercials, which are quite humorous (and effective).

Meanwhile, in the "Am I Really This Stupid" side of the ledger, both the Los Angeles Chamber of Commerce and the San Francisco Chamber of Commerce are supporting Proposition 82, the Mandatory Pre-School/Income Tax Increase, Help Las Vegas, Phoenix, and Denver Initiative. Showing some sanity, The California Chamber of Commerce opposes Proposition 82. If Las Vegas really wants to see an increase in business relocations, they should hope that Rob Reiner's flawed initiative passes.

Tax Day is Monday, April 17th...except for some municipal taxes in Ohio that are still due on April 15th. So, at this late date, what can you do to lower your taxes?

1. Make a contribution to an IRA, if you're eligible. You're allowed to make a $4,000 contribution (up to the amount of your compensation); if you were 50 any time during 2005, you can make a $4,500 contribution. There are income restrictions to making an IRA contribution. For full details, see Publication 590. You have until April 17th (in most cases) to make a traditional IRA contribution.

2. Make a contribution to a SEP IRA, if you're eligible. SEP IRAs are for the self employed. You can contribute up to $42,000 or 25% of your compensation, whichever is less. However, there's an adjustment that must be made for the impact of self-employment tax. You can start a SEP (and contribute to a SEP) any time before you file your return, including extensions. (If you start a SEP after April 17th, you do need to have filed an extension. The final deadline is October 15th.) See Publication 560 for more information.

3. Consider the home office deduction. Many taxpayers have been scared to approach this deduction because of fear of IRS audits. Well, I strongly believe that if you're eligible for a deduction, you should take it. Now, there are some strict rules that you must meet in order to take the home office deduction:

"You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively:
- As your principal place of business for any trade or business;
- As a place to meet or deal with your patients, clients or customers in the normal course of your trade or business."

Still, many have avoided taking this deduction because of fear, and I don't think that's justified at all. You can find more information on this deduction in Publication 587.

4. Don't rush! Consider filing an extension. If you've just decided to use a professional tax preparer, and you're just now (one week before the deadline) going to him or her, he or she will most likely insist on an extension. (If not now, very, very, soon he'll insist.) Those who have been practicing for any length of time are extremely busy in the last week of tax season, and it's hard to squeeze a new client in before the deadline. It's not that we won't accept new clients; rather, we won't be able to do a professional quality job on your return if we took you on and agreed to finish your return before next Monday. We'll work with you to make an estimate of what you owe, generate the extension forms, and then prepare your return after the deadline.

5. Remember Your State and Local Tax Deadlines. These can differ. For example, municipalities in Ohio have deadlines of April 15th. Iowa has a deadline of April 30th. Massachusetts has a deadline of April 18th, because the 17th is a holiday. And if you send your IRS return to the Andover, MA service center, you have an extra day, too.

If you are one of the lucky few who have a scheduled appointment with your tax preparer this week, try and be organized. He'll appreciate it, because he's been swamped for several weeks. And it will help to get your return done quickly.

A man condemning the income tax because of the annoyance it gives him or the expense it puts him to is merely a dog baring its teeth, and he forfeits the privileges of civilized discourse. But it is permissible to criticize it on other and impersonal grounds. A government, like an individual, spends money for any or all of three reasons: because it needs to, because it wants to, or simply because it has it to spend. The last is much the shabbiest. It is arguable, if not manifest, that a substantial proportion of this great spring flood of billions pouring into the Treasury will in effect get spent for that last shabby reason.

Rex Stout wrote this in 1948 (And Be a Villain). It's arguable that little has changed.

The Congressional Pig Book was released yesterday by Citizens Against Government Waste. You can find this year's book here. Here are some of the lowlights (randomly pulled):

1. $150,000 for the Bulgarian-Macedonian National Educational and Cultural Center in Pittsburgh, PA. I have nothing against Bulgarians and Macedonians, but this smells like pork.



2. $600,000 for the Abraham Lincoln Bicentennial Commission. I have nothing against Abe (after all, I was born in Illinois), but I can see better uses of this money.



3. $100,000 for the South Carolina International Center for Automotive Research Park Innovation. This center will apparently be used for auto racing research. I think NASCAR could fund this themselves.



4. $500,000 for the Sparta Teapot Museum in Sparta, SC. Does the government need to support a teapot museum?



5. $273,000 for urban market development in New York. The goal of this program is "garden mosaics." I can think of better uses for that money.

I deliberately chose only items under $1,000,000. There are plenty over $1,000,000. Like $6,435,000 for wood utilization research. $1,000,000 for the Waterfree Urinal Conservation Initiative. Talk about money down the drain.

I urge you to read this list. Further, you should talk to your Congressional representatives so the amount of pork shrinks to a managable level. Go to Porkbusters and help with the cause. Remember, your tax dollars are at work!

Toys "R" Us operates in California and, of course, pays California taxes. California uses a three-part allocation formula based on unitary taxation to determine how much a corporation operating in multiple states must pay. Toys "R" Us came to the conclusion that if the sales portion of the formula included the principal amount of short-term notes, that their California tax would go down. So they filed an appeal, and took their case to court.

Toys 'R Us lost in district court, and they appealed their claim for $4.8 million plus interest to the Court of Appeals (Third Circuit, CA). In FTB v Toys "R" Us, the main issue was whether the California rule results in an equitable apportionment formula. The Franchise Tax Board (FTB) successfully argued that if Toys "R" Us could include the principal, they could move between 11% and 28% of their annual sales to a different state by just relocating their Treasury Department.

The FTB tends go too far in its regulatory tactics and enforcement actvities; however, I completely agree with them and the Court's decision. Perhaps principal could be included for a business that's a financial services corporation. For a retailer, though, this doesn't make sense.

Hat Tip: Central Valley Business Times

The IRS wants to place a levy or a lien against you. The IRS says they mailed the notice, but it ended up at the wrong prison (you were in Attica, but the letter was sent to Gowanda; both are New York prisons). You request a hearing. The IRS sets a date for a conference (two years later), but the IRS chooses a date while you're in solitary confinement and attending is out of the question. The IRS goes ahead with the levy. You go to Tax Court claiming you never had your fair hearing.

The Tax Court found that the petitioner had vigorously contested all his legal problems and it was likely he never received the original notice (it did, after all, go to the wrong prison). And the IRS should have rescheduled its conference; heading to New York City while you're in solitary confinement just isn't possible. The Tax Court ordered the IRS to give the petitioner a fair hearing.

Case: Butti v. Commissioner, T.C. Memo 2006-66

The IRS puts two liens against you. You fight the case, filing a lawsuit against the Commissioner of the IRS, claiming $4.5 million in damages for slander of title, inconvenience, aggravation, and generally annoying behavior. But you lose in District Court. You file an appeal to the Court of Appeals (here, the 10th Circuit). The IRS asks for the appeal to be summarily rejected, and that you pay a penalty for making a frivolous appeal.

If you're going to file a lawsuit against the IRS, you had better have legal grounds; being annoyed isn't enough according to the District Court that first ruled on this case. When the petitioner, Delbert Kyler, appealed, he told the Court that the IRS, "extorts money and property," "exploits the power of the United States for criminal thuggery," and that the U.S. Attorney was "obviously unschooled in the legal arts ... [and] expects this court to bend over backwards and kiss his ... allegedly royal ass."

You and I may be laughing. Unfortunately for Mr. Kyler, the Court just wasn't in a laughing mood, found his appeal frivolous, and ordered him to pay the "unschooled ... legal arts" practitioners of the United States Attorney's Office their legal fees of $8,000.

Case: Kyler v. Everson, 10th Circuit

Hat Tip: Tax Professor Blog

The Government Accountability Office (formerly known as the General Accounting Office) (GAO) released a study yesterday titled, "Paid Tax Return Preparers: In a Limited Study, Chain Preparers Made Serious Errors." The study was also mentioned in today's Wall Street Journal (paid subscription required).

The study showed that 10 out of 19 sample returns, side income that the preparer was told about wasn't reported. Many preparers missed opportunities to save taxes on returns. None of the firms surveyed were named. Other errors found included unwarranted refunds (of over $1500), and unwarranted extra tax (of over $1500). Only two states, California and Oregon, require licensing of paid tax preparers.

The National Association of Enrolled Agents has been pushing for mandatory registration and licensing of all paid tax preparers. Legislation to accomplish that is inching its way through Congress.

No joking, that's the argument a taxpayer used in Tax Court. Joe Kristan of Roth Tax Updates has the humorous details here. This Tax Court case is yet another entry in the "Don't Try This Yourself" log. When you're an adult, you get to make your own decisons; blaming your mother and father just doesn't work. Being disowned by your parents is not a valid excuse to not pay your taxes.

Case: Gillings v. Commissioner, T.C. Memo 2006-65

Many years ago, when I was running west coast operations for a telecommunications company, my office manger approached me with a problem. "There's a gentleman out here who's perfect for the in-house tech job, but he's handed me these sheets for his W-4." I looked at the sheets and realized that they were (what I now know as) typical tax protester stuff, claiming he wasn't a citizen of the United States but a citizen of California, and thus exempt from US taxes. My office manger continued, "He refuses to fill out the W-4."

That company had a policy that until all the employment paperwork had been completed, an employee couldn't start working. I went to the potential new hire and told him, after introducing myself, "You can either fill out a W-4 or we'll find someone else." He protested, and I cut him off, telling him that we were a business and didn't have time for tax shenanigans. He left and we found someone else.

Today the Tax Court looked at the case of a tax protestor. He submitted similar documentation in his job as a car salesman. He filled in his tax return for two years with all zeroes. The IRS didn't find this as humorous as you and I would. Neither did the Tax Court. After admonishing the protestor for the error of his ways (and warning that he faced a penalty if he advanced the same groundless arguments in the future), the Court found for the IRS.

You can find the Tax Protestor FAQ here.

Case: Paikowski v. Commissioner, T.C. Summary 2006-48

You're a business owner, and you've just won a nice contract with the State of California. Don't forget to add sales tax.

Yes, if you're selling to the State of California, you must charge California sales tax. Let's look at this logically, based on a $10,000 sale to a state agency.

We'll assume that the sale is made in Orange County (sales tax rate of 7.75%), resulting in sales tax of $775.00. You collect $10,775, keep $10,000, and then remit $775 back to California. The Board of Equalization collects the money, and then turns it over to the General Fund. The General Fund allocates the money to the appropriate state and local agencies, including the agency that you sold to.

Wouldn't life be simpler if the state were exempt from state sales tax? You could argue that local and state agencies wouldn't benefit from the sale. However, the real beneficiaries of California's policy are the bureaucrats administering sales tax. California's rules increase their workload and lead to more employees. If California were to exclude government sales from sales taxes, sales tax revenues would go down, of course. But so would expenses.

In the end it would be a wash (as far as direct revenues and expenses). However, because you would need fewer employees to administer the Board of Equalization, and a bit less time for companies to prepare their quarterly reports to the BOE, costs would decrease and productivity would increase.

What are the chance of this happening? Just about zero.