Taxable Talk

I can't, but Joe Kristan of Roth Tax Updates has the story of yet another interesting case from the Tax Court today. If your business is grossing $2.5 million to $3 million each year, and you're paying about $45,000 in federal and state taxes each year, and a new tax preparer says he can lower your taxes to almost nothing, be sure to ask how he's going to accomplish that magical feat. And if you later discover your tax preparer is in Leavenworth, well, perhaps you've figured out how the magic is done. You can find all the gory details here.

A few years ago, there were two Tax Court cases resolved by closing agreements (a closing agreement is a settlement agreement of the case): God’s Helping Hands Living Estate Plan Trust, John M. & Thelma Smoll, Trustees v. Commissioner, docket No. 8468-01, and John M. & Thelma Smoll, Trustees v. Commissioner, docket No. 8489-01. These cases looked at whether the Trust should be recognized for tax purposes. The closing agreements stated, among other things, that the Trust would not be recognized for tax purposes and that the taxpayers would report their taxes for those years and all future years.

You're way ahead of me. Of course they didn't do that, or I wouldn't be writing this. In 2000 and 2001 the taxpayers used the trust (after signing an agreement that said they wouldn't do that). In 1999, 2002, and 2003 they didn't file returns (at least they didn't use the trust).

So not only do the taxpayers owe the tax, and interest, the IRS asserted that they committed willful fraud. As the Court noted,

"At trial and by facts deemed stipulated, respondent established by clear and convincing evidence that petitioners understated their 2000 and 2001 Federal income tax with the intent to commit fraud and that petitioner failed to file his 1999, 2002, and 2003 returns with the same intent...Petitioners have a pattern of failing to file tax returns and understating their income when they do file income tax returns. Petitioners also failed to maintain adequate records or cooperate with respondent, and they consistently provided respondent’s representatives with implausible or inconsistent explanations for their behavior."

The Court went on, noting that the actions demonstrated that they deliberately and willfully committed fraud.

There's a moral to this story. If you sign a closing agreement with the IRS, you had better follow it, because they'll be watching you.

Case: Smoll v. Commissioner, T.C. Memo 2006-157

Assume that you're going on permanent disability. You and your employer reach an agreement, with payments structured as though they were from workers compensation (nontaxable to the recipient). Suddenly, your employer backs out and threatens litigation—litigation that would likely take years to resolve. But your employer offers you a "nonindustrial disability retirement," with payments that are based on age and length of service. Your employer and an IRS representative tell you that the payments aren't taxable, so you decide to take the settlement.

Just one problem: You get a notice from the IRS saying that the nonindustrial disability retirement money is taxable.

That's what brought Steven Diem to Tax Court today. He was employed as a fireman for San Francisco. He's retired, and on his Form 1040 he deducted the payments of $16,617 (for the year in question) as "nontaxable pension in lieu of workers comp."

Unfortunately for Mr. Diem, the law is settled in this area. As the Court noted, Section 1.104-1(b), Income Tax Regs., states, in part:

"Section 104(a)(1) excludes from gross income amounts which are received by an employee under a workmen’s compensation act * * * or under a statute in the nature of a workmen’s compensation act which provides compensation to employees for personal injuries or sickness incurred in the course of employment. * * * However, section 104(a)(1) does not apply to a retirement pension or annuity to the extent that it is determined by reference to the employee’s age or length of service, or the employee’s prior contributions, even though the employee’s retirement is occasioned by an occupational injury or sickness. * * * [Emphasis added.]"

So the law and many court decisions state that the income is taxable. But the petitioner noted that both the City of San Francisco and the IRS told him it wasn't taxable. Unfortunately,

"Whatever advice or representation that was made to petitioner has no bearing upon the Court’s decision here. The law is well settled that the Commissioner is not estopped and cannot be bound by erroneous acts or omissions of his agents or representations by other parties such as the employer. Authoritative tax law is contained in statutes, regulations, and judicial decisions. Zimmerman v. Commissioner, 71 T.C. 367, 371 (1978), affd. without published opinion 614 F.2d 1294 (2d Cir. 1979); Green v. Commissioner, 59 T.C. 456, 458 (1972). A taxpayer cannot prevail simply because he relied on incorrect advice from his attorney regarding the tax consequences of the settlement. Coats v. Commissioner, T.C. Memo. 1977-407, affd. without published opinion 626 F.2d 865 (9th Cir. 1980). The representations that were made by the city of San Francisco and an IRS agent do not carry the weight of law."

Yes, if you get advice from the IRS and it's wrong, you're out of luck, as the petitioner discovered.

Case: Diem v. Commissioner, T.C. Summary 2006-121

I promised that I wouldn't write about soccer anymore. Well, I'm going to try not to, but I can't help myself. Dutch soccer coach Guus Hiddink will be prosecuted for tax fraud according to this story. And many Americans will sympathize with his problem: residency.

According to the newspaper Het Financieele Dagblad the dispute centers on whether Hiddink lived in Belgium when he claimed residency there, or whether he was still in the Netherlands. The prosecutor, Valentine Hoen, said that Hiddink's accountant also faces charges. For the record, the Dutch team made the round of 16 in the World Cup.

Meanwhile, actor Crocodile Dundee is also looking at tax evasion charges in Australia. The Sydney Morning Herald reported that Dundee and his business partner have been accused of hiding millions in offshore trusts. Both Dundee and his partner are accused of participating in shelters run by Swiss accountant Philip Egglishaw according to this story.

Tax fraud isn't just an American crime, after all.

George "Nick" Jesson was sentenced to three years in prison yesterday for filing false state tax returns between 1997 and 1999. The former tax protester and gubernatorial candidate had earlier pleaded guilty.

Prosecutor Bill Overtoom, quoted in the Orange County Register, said, "He just put plain zeros everywhere [on his returns]." Jesson evaded about $238,000 in taxes.

Jesson is no stranger to prison; he's currently serving a 27-month sentence for not paying federal taxes of $215,000. The new sentence will be served concurrently with the federal sentence.

Jesson's wife Trina has also been charged with tax evasion. Her next court date is August 11.

As we've said before, putting all zeros on your return has zero chance of success (when you really owe tax).

News Story: Orange County Register

The Orange County Transportation Authority unanimously voted yesterday to ask the Board of Supervisors to put a 30-year extension of Measure M, Orange County's 0.5% sales tax that funds transportation improvements, on the November ballot. Given that all fives supervisors are on the OCTA board, approval seems certain today.

The current Measure M expires in 2010. About $4.2 billion will have been raised over the life of the measure. Improvements made under Measure M include the widening of the Santa Ana Freeway (Interstate 5) from three lanes in each direction to six from the El Toro Y to the Los Angeles County line, widening of the Garden Grove Freeway, and major improvements at the El Toro Y (the junction of the Santa Ana Freeway and the San Diego Freeway (Interstate 405)).

The extension targets specific transportation improvements. One target is widening of the Riverside Freeway (Route 91) through the Santa Ana Canyon. Local commuters know that this freeway is usually bumper to bumper every weekday despite previous widening of the road and the toll lanes that run down the middle of the freeway.

In order for the measure to pass, it must receive two-thirds of the vote in November. Supporters, besides the Board of Supervisors, include the Orange County Business Council and the Automobile Club of Southern California. The measure still faces a tough fight, given most voters anti-tax stance. We'll keep you updated as November approaches.

News Story: Orange County Register

Earlier this year I speculated that Richard Hatch, Survivor winner and now convicted tax cheat, might spend some of his 51 months in prison in beautiful Victorville (where it was 115 F yesterday). Well, Hatch has just been moved from Plymouth, MA to Oklahoma City's Federal Transfer Facility. Inmates rarely remain there, so perhaps Mr. Hatch will get to visit the wonderful California high desert after all.

Hat Tip: TaxGuru & Roth Tax Updates

Arco Arena is the home of the Sacramento Kings of the NBA. The 442,000 square foot arena opened in 1988. But the owners of the Kings, the Maloof brothers, want a brand new arena, so that they can have more revenue from the team.

And like most businessmen, they'd prefer others pay for it. So through a complex deal (reported here in the Sacramento Bee), the sales tax for Sacramento County would be increased from 7.75% to 8.00% for 15 years to pay for the arena.

But two groups must approve the measure. First, four of the five Supervisors on the Sacramento County Board of Supervisors must approve that the measure go before voters this November. Then, voters must approve the measure; through allocating some of the funds to general usage the measure requires just a majority vote rather than the state-mandated 2/3 vote for most tax measures.

The tax would raise over $1 billion; of that, a little less than half would be used to build a new arena. The Maloofs would pay $4 million in rent for 30 years and contribute $20 million to a capital improvements fund.

But there's opposition in California to publicly funded sports complexes. Sacramento Assemblyman Dave Jones is rushing home from a vacation to campaign against the project. It will be an interesting battle in Sacramento, with the Maloofs, their radio station (KHTK 1140 AM), and private developers eying the current Arena for redevelopment, versus an unusual combination of taxpayer organizations and liberals who don't like government funding of arenas.

Sometimes you just can't make this stuff up. If you're a proprietor in New York state of "Gentleman's Clubs," make sure you add sales tax on those lap dances, if they're in a private room at your establishment. That's definitely taxable because "...it's an admission fee to that particular room," according to Michael Bucci, a spokesman for the New York State Department of Taxation and Finance. And, as this news story notes, Bucci noted that lap dance in the public part of the club are not taxable.

Still, Richard Snowden and his "Tally-Ho Club" of Cheektowaga, NY (suburban Buffalo) are in trouble with the Department of Taxation. New York alleges that he owes $216,000 in sales taxes on private lap dances. Additionally, he has a residency dispute with New York. Snowden believes his primary residence was in Nevada in 2002 and 2003 (he owns a Las Vegas strip club, too); however, New York tax authorities disagree and want another $250,000 in income tax.

Still, the idea of a tax on lap dances is certainly intriguing...and different. Which is one reason I believe that the chances for uniform sales tax rules and regulations throughout the United States is essentially zero.

It appears that owning a strip club is an occupation more likely to lead to tax evasion; today's story is definitely not the first time we've seen this charge. In any case, Timothy Ray Cline of Justice, WV (the name of the town is somehow fitting) is charged with failing to pay $84,000 in taxes from his "Adult Entertainment Clubs" in West Virginia. Cline is also alleged to have inappropriately gotten $35,000 in disability benefits.

News Story Here

Pity the smokers in California, home of one of the US's top cigaratte tax rates. Why not buy the cigarettes over the Internet and save on the tax?

That's not a bad idea, except that the Board of Equalization, California's watchdog agency for cigarette taxes, is auditing out-of-state companies shipping cigarettes into California. (The Federal Jenkins Act allows California review online vendors' invoices.) And they're sending bills to Californians. The BOE estimates that it will collect $52 million from California smokers.

Hat Tip: Kerry Kerstetter (The Tax Guru)


News Story: Sacramento Bee

Today the Citizens Against Government Waste came out with their list of wasteful and not wasteful legislators. Given Congress' propensity to spend on pork, this is an interesting list, and you can find it here.

My Congressman, John Campbell, gets a 100% ranking from CAGW (100% is good in this poll). Our two Senators, Barbara Boxer and Dianne Feinstein get 22% and 35% rankings, respectively.

Thanks to the TaxProf Blog for the heads-up.

Kent Hovind, who we wrote about last week, has pled not guilty to 58 counts (mainly tax fraud). His trial was set for September 5th. Hovind claims he's employed by God; among the charges are violations of bank reporting requirements on the withdrawal of over $400,000.

We're also sad to report that the same news story reports that Dinosaur Adventure Land has gone the way of the dinosaurs. The web site is still working, though.

Almost everyone prefers to fly nonstop rather than changing planes. However, sometimes we just can't avoid it. Seasoned travelers have learned to avoid certain airports when changing planes because of delays. For one traveler, that delay may end up as 20 years.

David Carruthers, a UK citizen, needed to travel from London to San Jose, Costa Rica. You can't fly nonstop, so he ended up changing planes at DFW. That was a mistake. Unknown to Mr. Carruthers, a federal grand jury had handed down an indictment against him on June 1st. When the US government learned he was heading to DFW, the Marshals were waiting. (Lists of all travelers from overseas heading to the US are sent to the US government just after the plane departs.)

Carruthers is an executive at Betonsports.com, an Internet sportsbook. While Betonsports may be legal under UK and Costa Rican law, it's decidedly illegal under a wealth of US statutes, including the Wire Act. Carruthers is accused of being part of an alleged conspiracy in violation of the Wire Act, the Travailing Act, Mail Fraud, Wire Fraud, and RICO. And tax evasion, of course.

Tax evasion, you ask? If the enterprise is overseas (and there's no dispute about that), how can it owe US taxes? Well, when the government first went after bookmakers a new tax was passed—a federal excise tax on wagering. The tax is based on wagers accepted fromUS citizens. The tax is 2% of each illegal wager. The indictment alleges around $4 billion of wagering; the tax on that is $80,000,000.

Given that this case involves a foreign national, RICO allegations, and comes just after the House passed anti-online gambling legislation, you can expect to hear a lot more about it in the coming weeks. Meanwhile, the founder of bodog.com (another online sports wagering site), Calivn Ayre, is supposed to be headed to Las Vegas for a marketing conference next week. Any bets on that?

News Story Here

Italy may have won the World Cup, but it's soccer scandal continues. Three teams have been demoted from Italy's top league, Serie A, to Serie B. Juventus, of Turin, Fiorentina, and Lazio, of Rome, were all thrown into Italy's "Junior League." This is especially galling for Juventus, who won the last two Serie A titles. And those titles were also by the Italian sports tribunal that decided the case. AC Milan, another first division powerhouse, was penalized fifteen points and cannot compete in European matches during the next season.

Juventus was also penalized 30 points in the scandal. Points apparently have something to do with the rankings in soccer; if you get a lot of points you get promoted to a higher division and can earn more money.

I will be honest: I really don't care much for soccer. But I do find the idea of sports courts quite intriguing. The verdicts, by the way, can be appealed to a "higher" sports tribunal. Can you imagine the US Supreme Court for Sports?

News Story here

It's rare when we get to talk about the sports world on this blog. However, there are a couple of stories that are worth some discussion.

Barry Bonds, home run hitter extraordinaire, and alleged steroid/performance enhancing drug user, appears to be facing an imminent indictment on tax evasion and perjury according to his attorney. Laura Enos told this to the Associated Press, in a story appearing on Sports Illustrated's website. Apparently the term of the grand jury investigating Bonds expires on July 20th. The story does not detail how or why Bonds will be indicted for tax evasion (the alleged perjury charges appear to stem from Bonds' testimony to a different grand jury). The story also notes that money laundering charges could also be involved.

Luckily, I'm a Cubs fun and don't have to deal with such allegations. Or wins for that matter.

If you'd ask John Q. Public his opinion on taxes, the answer you would receive would probably be the title of this post. And politicians who forget this are usually in for a surprise.

This November Californians will vote for Governor. On one hand, current Governor Arnold Schwarzenegger has pledged no new taxes. Meanwhile, his Democratic opponent, Phil Angelides, pledges new taxes, or cuts in what his spokesman calls "corporate tax loopholes."

One of those loopholes is a 5% sales tax exemption on liquid petroleum gas (lpg), farm equipment, and diesel fuel. Angelides wants to close this loophole. And surprise, farmers aren't happy about this.

Benny Jefferson told the Monterey Herald, "Farming is good. Tax relief is good. Taxes are bad. Phil Angelides is disrespectful."

This isn't good news for Agnelides. Another farmer, Wayne Gularte, stated in the same story, "[This tax change] certainly could put me out of business."

Angelides may want to study California's election history. Close elections are invariably decided in the agriculturally rich, politically conservative Central Valley. And the major industry of the Valley is agriculture.

Contrast Angelides with the Governator, who told the Sacramento Bee, "I totally rule it out. I will not raise taxes." Polls currently show Schwarzenegger ahead 44% to 37%.

News Story Here

The IRS acknowledged that the system they use to detect digital fraud was not updated before the 2006 tax year. This failure may have led to $300 million being paid in bogus tax returns.

The "Electronic Fraud Detection System," or EFDS was supposed to have been updated before the filing system began. But it wasn't, and the IRS estimates that only about one-third of fraudulent returns were discovered. The Treasury Inspector General for Tax Administration (TIGTA) is conducting its own investigation into the mess.

Congressional response was predictable—anger. Senator Chuck Grassley (R-IA) noted, "I wonder if the IRS ever would have come clean if Congressional committees hadn't started looking into this issue."

In our opinion, the answer is easy—No.

News Story Here

According to this news story, California will soon unveil a $600,000 ad campaign to fight back at Nevada's attempt to lure California businesses. California, according to the new ads, is, "...the place where the smartest companies are located."

While this may be true—after all, Silicon Valley is in California—it's going to be a hard sell. Costs in California compared to neighboring states are noticably higher. Whether California can battle back remains to be seen.

While I scampered about on my recent trip, plenty of tax crooks were being led away. Here's the weekly update:

As reported last week, bad news is piling up for Kent Hovind. After his defeat in Tax Court, he found himself behind bars—he was arrested and charged with 58 charges, including tax evasion. His wife was indicted on 44 charges. Their indictment is set for Monday. (News story here.)

A Memphis man has been convicted of failing to file tax returns and tax evasion charges. Billy Severence didn't file his 1990 - 1993 taxes. For 1991 through 1993, he was convicted on felony tax evasion charges. Severence could face 19 years in prison, though a sentence of 3 to 5 years is more likely. (News Story here.)

James Hubb, who faced eight years in prison for his tax fraud conviction, was sentenced to 18 months and fined $10,000. He must also make restitution and pay back taxes. Hubb paid personal expenses from his business, and did not accurately report the transactions on his tax returns. We reported on Hubb's conviction here. You can read about Hubb's sentencing here.

Thankfully, the tax crime blog was fairly light this week. And that's a good thing.

Our blog host has switched servers, so it will take about 72 hours for this change to move through the Internet. If you've gotten a "403" error when you attempted to see us, we apologize for the inconvenience. Rest assured, we're still here.

If you ever have problems viewing our site at http://www.taxabletalk.com, you can go to http://taxabletalk.powerblogs.com

I will be traveling over the next few days on business, and postings will be limited until next Wednesday or Thursday. Take a look at some of the other excellent tax blogs noted in the blogroll to the right.

If all we had to do to avoid paying taxes was form our own church, with just our own family as the congregation, wouldn't we do it? And if we could just declare that John and Jane form a "trust" that is exempt from taxation, we'd do that too, right?

There's a problem with this, of course: such schemes are illegal. A church needs to be real; a trust needs to have a reason for existence. Purveyors of phony trusts are regular targets of IRS enforcement activities, and the Tax Court is not amused by their activities.

Today, the Tax Court looked at Kent Hovind, who allegedly formed a religious ministry in Florida. He also formed Dinosaur Adventure Land, a theme park in Florida. According to its website, "It is run by Creation Science Evangelism, the world-changing ministry of Dr. Kent Hovind who travels internationally speaking (and debating) on the Creation vs. Evolution controversy."

Mr. Hovind did not file or pay income tax in 1995, 1996, or 1997. His organizational structure is, according to the Tax Court, "...based on various questionable trust documents purchased from Glenn Stoll, a known promoter of tax avoidance schemes." Mr. Stoll was barred in 2005 from promoting his scheme.

In any case, the IRS sent demand notices to Mr. Hovind. They served him through certified mail, and even in person. The IRS made jeopardy assessments against Mr. Hovind. Mr. Hovind didn't contest them. The IRS served Mr. Hovind with a lien notice; Mr. Hovind didn't contest it. And when the IRS sent Mr. Hovind the notice of the filing of the tax lien, Mr. Hovind returned it, writing on the notice, "Refused for fraud." The Tax Court case decided today was whether the IRS's levy actions were appropriate given the jeopardy assessments.

Unfortunately for Mr. Hovind, he didn't contest either the original demand notice or the notice of the filing of a tax lien. And that's a big problem, because:

Petitioner actually had two opportunities (upon receipt of the Lien Notice -- which receipt petitioner does not dispute -- and upon receipt of the notice of deficiency) to challenge the existence and amount of his 1995, 1996, and 1997 Federal income tax liabilities. Under section 6330(c)(2)(B) petitioner may not now, in this proceeding involving respondent’s proposed levy action, dispute the amounts of his underlying Federal income taxes and additions to tax for 1995, 1996, and 1997.

So Mr. Hovind's trusts join the dinosaurs, relics of the past. But his tax liabilities aren't relics, as interest keeps accruing. And the levy goes forward.

Case: Hovind v. Commissioner, T.C. Memo 2006-143

New Jersey legislators and Governor Jon Corzine agreed on a budget deal today. The deal includes the sales tax increase from 6% to 7%, but with half the proceeds of the increase being used to reduce property taxes this year and all of the proceeds being used to reduce property taxes next year. Of course, what the legislature grants they can take away, so it will be interesting to see what happens in 2007. And in the election this fall.

It is expected that casinos will reopen either tomorrow or Saturday. The shutdown has already cost New Jersey coffers an estimated $2.6 million just from lost casino tax revenues.

News Story: AP

Assume you run an organization, and you discover that your revenues (income) are being exceeded by your expenses. What would you do? Would you, (a) Immediately close down your sixth largest source of income, (b) Close down your fourth and fifth largest sources of income, (c) Increase your budgeted expenditures by 9%, (d) Anger your customers by eliminating their recreational options, or (e) Increase your prices by 16.67% to cover the revenue shortfall (further angering your customers)?

If you're Democratic Governor Jon Corzine of New Jersey, you would do all of these. Already the New Jersey Lottery is closed; horse racing and casinos will close tomorrow morning at 8am EDT (the New Jersey Supreme Court rejected their appeals); state parks and beaches will close tomorrow; and the only option that Governor Corzine is offering the state legislature (controlled by Democrats, by the way) is a sales tax increase. The Speaker of the State Assembly, Joseph Roberts (D-Camden) has rejected the tax increase.

So Governor Corzine moves down a path where he has put thousands of state workers on unemployment. Tomorrow he hits the private sector, casting thousands in Atlantic City to the unemployment lines. He has exacerbated the problems dramatically. Governor Corzine even makes Gray Davis look good! Today, as we celebrate Independence Day, his actions stand in stark contrast to what our Founding Fathers wrought. Luckily, the voters in New Jersey will head to the polls in November to vote for Governor. I haven't seen any polls for New Jersey, but I'd expect that the Republicans in the Garden State won't have any shortage of issues to campaign on.

News Story: AP

Democratic Governor Jon Corzine ordered all nonessential New Jersey government offices to close, and road construction projects, motor vehicle offices, and the state lottery all went dark. Governor Corzine wants an increase in the state sales tax of 1%; the state legislature, which is controlled by the Democrats has refused to go along.

Already Corzine's shut-down order has stopped lottery sales, New Jersey's fourth largest source of revenue. A threatened closure of casinos (New Jersey casinos must have Casino Control Commission officers on their premises at all times) would deprive the state of about $1.3 million a day in tax revenue. Also closed are state beaches and parks during the long holiday weekend.

We heard yesterday that one of the reasons that the leaders of the State Assembly are opposing Corzine's proposed sales tax increase is not the increase in rate; rather, that it would also tax many additional items and services. For example, legal fees would be subject to sales tax. This has not been reported in the press, so we can't verify this.

We would be remiss to not comment on the political impact of tax increases and government shutdowns. Some of you may remember when the Republicans shut down US government in a dispute with the Clinton White House. It was not a political success for the G.O.P. And very few taxpayers enjoy tax increases while government spending rockets up. New Jersey Democrats, in control of all wings of government, may have major problems this election cycle.

News Stories: FoxNews, Home News Tribune, New York Times.

Editorial: Wall Street Journal