Taxable Talk

Proposition 89 increases corporate tax rates by 0.2% to fund political campaigns. Ignoring the issue of whether or not state-funded campaigns are good ideas, increasing California's corporate tax rate (already one of the highest in the United States) will do nothing to draw business to the Bronze Golden State.

In my view, anything that restricts freedom of speech is a bad idea. This measure does that. It's supported by Common Cause; it's opposed by the California Chamber of Commerce and the California Taxpayers Association.

Proposition 88 would increase education funding by taxing every real estate parcel $50. If you live on a 4,000 square foot parcel, you would pay an extra $50. If you live on a two-acre parcel, you would pay an extra $50.

A parcel tax would be an entirely new kind of property tax for California. Supporters of the measure state that the funds would be used to reduce class size; that the funds would be controlled locally; and that schools need the money. Opponents argue that the funds won't be spent where raised; that the funds raised would be controlled by the education establishment in Sacramento; and that this tax would start a slippery slope of new property taxes.

It's interesting to see who supports and opposes this measure. The supporters are the education establishment (government) in Sacramento. It's opposed by the Howard Jarvis Taxpayers Association and most Chambers of Commerce.

Proposition 87 is the next on the agenda. The proposition is titled, "Alternative Energy, Research, Production, Tax on California Oil Producers." The initiative would increase the tax on oil pumped from California (or, under the state) by at least 25%. The measure also bans oil producers from passing the tax on to consumers.

Allow me to make some points about basic economics. Assume that Joe has a barrel of oil that costs $50, but I have a barrel that costs $50 + $8 in taxes. BigOilCo is going to purchase a barrel; which barrel will they purchase? The $50 barrel, of course. And if they do buy the $58 barrel of oil, they have to pass that cost on to consumers, either directly or indirectly. You can't legislate gainst economics.

Looking at this logically, this measure, if passed, will decrease California oil production, increase the amount of imported oil into California, and will likely increase the cost of petroleum-based products in California. It's simple economics, something that those who wrote this initiative appear to have flunked.

And don't get me started on the new bureaucracy that this initiative, if passed, would thrust on the state.

Proposition 86 would impose a new cigarette tax of $0.13/cigarette sold in California. The funds raised would be used for everything from hospital trauma centers to funding for cancer research.

The argument for Proposition 86 is that smoking kills, and increasing the tax will (a) lessen the number of smokers, (b) allow funding for lots of needed programs, and (c) lead to research that might cure cancer and other diseases. The argument against Proposition 86 is that (a) we would create another bureaucracy, (b) most of the funding doesn't go towards stopping smoking but goes toward hospitals that don't need the money, and (c) increasing the tax on cigarettes to the nation's highest will lead to an increase in black market cigarettes and crime.

As always, read the initiative and make up your own mind.

You think you're an employee; your "employer" thinks you're an independent contractor. You decide to ask for a determination of status from the IRS using Form SS-8. Do you need to pay your federal income tax (through estimated payments and/or a payment on or before April 15th) or is your "employer" liable when the IRS determines that you really were an employee, not an independent contractor?

The Tax Court waded into this issue yesterday. There was no dispute that the individual in this situation owed the income tax. The question related to the penalties imposed by the IRS under Section 6651(a) for failure to file and Section 6654(a) for failure to make estimated tax payments: Is the fact that your employer goofed a good enough excuse to not file a tax return and not make estimated tax payments?

The Court dealt first with whether the failure to file penalty was justified. The petitioner noted that he didn't file because he didn't receive a W-2. That's no excuse; indeed, the IRS has a procedure that an employee can follow when he doesn't receive a W-2. As the Court noted, "On this point, petitioner’s reasoning is without merit...[I]t was petitioner’s obligation to pay the tax when due."

The Court then looked at the failure to make estimated tax payments. The petitioner felt that he shouldn't have had to make them, because the IRS ultimately determined that he was an employee and he had to wait until he received his W-2. The Court struck down that line of reasoning.

"During 2001, petitioner was treated by Compliance as an independent contractor. No Federal income tax was withheld from his wages. Accordingly, petitioner was under an obligation to remit estimated payments pursuant to section 6654(c) and (d). The fact that respondent ultimately determined petitioner was a Compliance employee does not negate petitioner’s failure to make these payments when they were due in 2001."

Thus, the petitioner ended up owing the penalties. So if you ever find yourself wondering whether you need to make a tax payment that your employer should have made but didn't, you probably do need to make that tax payment.

Case: Erwin v. Commissioner, T.C. Summary 2006-172

Our blog host has apparently moved us to a new server. This is causing you to get an error if you attempt to reach us using our url. There's no fix time, unfortunately, but we are working on it. Until it's fixed you can reach us at http://taxabletalk.powerblogs.com/

Update: The new server's IP location has been bouncing around the Internet; we should now be visible (again) to everyone.

Next up on the list of California ballot measures that impact taxes is Proposition 84. (We're not going to comment about Proposition 83, which deals with sex offenders, and Proposition 85, which deals with parental notification for a child's abortion, as they do not have direct tax impacts.)

Proposition 84 is another water quality bond measure. If passed, $5.388 billion in bonds would be issued, with repayments costing around $350 million per year for 30 years.

The measure funds a hodgepodge of water issues: some dealing with water safety, some with water purification, some with water habitat, and some with water conservation. Additionally, there's another water bond measure: Proposition 1E. If both pass, both will be implemented.

Those in favor of Proposition 84 state that the measure will help the economy, help with water purification and safety, and help with the levees. Those against it believe it only helps special interests with their pet projects. We'll find out in two weeks what the voters think.

If you're sentenced to 25 years in prison for murder, what's a little tax fraud? Indeed, there have been many reports that prisoners with lots of time on their hands have been trying to defraud the IRS and state tax agencies. Every so often, the IRS catches them.

In this case, an Akron, Ohio man serving 25 years in the Mansfield Correctional Institution, where the goal is "to provide offenders of felony convictions within the State of Ohio a safe, efficient, humane and appropriately secure correctional institution," found what he thought was a safe, humane way to make a little bit of money. According to this AP story, Michael Murdock used the names and social security numbers of other inmates to send in phony tax returns to the IRS. With the help of an accomplice, the returns were mailed in, and he received $5,277 before the IRS caught on.

The story notes that Mr. Murdock has been transferred to the Southern Ohio Correctional Facility near Lucasville. He's up for a parole hearing soon. I have a feeling his extracurricular activities may come up. No matter what, he'll have 22 months to think about what he did when he's done serving his murder conviction. And he's been ordered to pay back the $5277 to the IRS.

In other miscreant news, a Charlotte doctor forgot about filing his tax return. He pleaded guilty in May and will serve 12 months at ClubFed and will be on parole after his jail time and must also make restitution.

And closer to home, Trina Thi Jesson, of nearby Fountain Valley, pleaded guilty to three counts of misdemeanor tax fraud, and agreed to make restitution. These were state (California) charges, and Mrs. Jesson agreed to payback to the Franchise Tax Board her share of the $437,000 that's owed. As we reported earlier, her husband George "Nick" Jesson is serving concurrent federal and state charges for tax evasion. It's all in the family, I guess.

Well, Edwin Kanguatjivi told Reuters that Mr. Snipes is filming a movie in Namibia. "It is confirmed. He is definitely here." The United States does not have an extradition treaty with Namibia.

Meanwhile, a South African report states that Snipes is filming the movie Gallowwalker, and that its' producers have asked to delay Snipes' return to the United States until December, when filming has completed.

Snipes has been in trouble in the past: reckless driving on a motorcycle, a phony South African passport, and carrying a concealed weapon. Snipes faces up to sixteen years in prison if convicted on all of the tax charges.

Joe Kristan of Roth Tax Updates has a great summary of the Snipes charges. And the Los Angeles Times has a good background article, too.

That's the number of days in jail that Sunny Garcia will be facing. Mr. Garcia, the former surfing champion who was convicted of tax evasion for not paying $117,000 in taxes from 1996-2001, will report to prison in January. He'll also face seven months of house arrest and will need to perform 80 hours of community service when released.

Mr. Garcia, who already works with the Huntington Beach (CA) High School surf team, plan on working with disadvantaged youths, according to his attorney, Steve Toscher. As Mr. Toscher told the Daily Pilot, "He basically made some serious mistakes and didn't focus on his tax affairs."

Actor Wesley Snipes was indicted today on eight counts of tax fraud. Snipes is accused of not filing tax returns for the last six years and of filing false refund claims totaling $12 million.

Over the last six years Snipes appeared in at least eight films, including The Art of War, Blade 2, and Blade: Trinity. He also produced Blade 2 and Blade: Trinity.

The Associated Press report notes that Snipes used American Rights Litigators (ARL). ARL was sued by the Department of Justice in 2003. Among the charges in the indictment is that ARL takes 20% of the refund and that ARL has a history of filing false returns.

The indictment's main point is that Snipes and his preparers prepared returns that included only foreign income. If you're a regular reader of this blog, you know that the U.S. taxes the worldwide income of its citizens (and permanent residents).

Thanks to The Smoking Gun, we can see Snipes' 1997 Amended Return (Form 1040X). On page 1, we can see that Snipes' return has been amended to remove $19,238,192 of income, generating a refund of $7,360,755. The reason is shown on page 3: The income previously reported is "not from taxable sources per [IRS Regulation]1.861-8(f)(1)." The three pages that follow attempt to justify this position.

Did you notice the title of the form on page 3? It's Form 8275-R, used, "To disclose items or positions taken that are contrary to Treasury regulations." Not only is this position contrary to regulations, it's contrary to the Tax Code, which is law: Section 61(a) states that income is all income from whatever sources: "Thus, citizens of the United States generally also are taxed on income earned outside the geographical boundaries of the United States unless they prove that the income is specifically exempted. E.g., sec. 61(a); Cook v. Tait, 265 U.S. 47, 54, 56 (1924)." [From Specking, et. al., v. Commissioner, 117 T.C. No. 9]

Meanwhile, Snipes is nowhere to be found. Soon, though, he may be joining Richard Hatch in the Bozo Taxpayers Hall of Fame, and serve 16 years in ClubFed.

I will be out of town attending a funeral this week. Posting will resume next Monday, October 23rd.

1. Inflate other businesses' deductions by classifying wages and income as loan repayments.
2. Not filing your own tax return.

And if you do both, and get caught, you're likely going to be joining Brian Cox at ClubFed. Mr. Cox is a former Detroit-area accountant who did both of the above. He was found guilty earlier this year of 42 counts of filing false claims and 11 counts of preparing false tax documents. He'll be spending 33 months at ClubFed and will have to make restitution of $104,000.

News Stories: Detroit News, Detroit Free Press

Back in 2000, the IRS raided "Renaissance, The Tax People." The company was a multi-level marketing firm specializing in tax. Nothing wrong so far. However, the Department of Justice alleged in 2004 that the company told clients to add non-existant exemptions to their W-4 forms, decreasing the tax the clients had to pay. And it would be just enough money to buy the Renaissance tax package! Additionally, they were accused of having a pyramid scheme.

Michael Cooper, the former head of Renaissance, fled the United States in 2003, but was caught re-entering the U.S. near Laredo, Texas. Mr. Cooper will be tried next year.

Daniel Gleason, the former tax director for Renaissance, pleaded guilty today to defrauding the IRS. He'll face up to five years in prison when sentenced.

My usual advice still applies: when it sounds too good to be true, it probably is.

WIBW News Story

A bill to make "technical corrections" to recently enacted tax legislation was introduced in both the House and the Senate, according to this story from CCH. The bills, S. 4026 and H.R. 6264, should find their way to passage in the "rump session" that will begin after the November election.

The bill in the Senate is cosponsored by both the Chair of the Senate Finance Committee (Charles Grassley, R-IA) and the ranking Democrat, Max Baucus (D-MT). Don't be surprised if some non-technical corrections, like extension of the sales tax deduction, get thrown onto this bill.

We'll keep you informed.

Samuel Currin, the former chairman of the North Carolina Republican party, has agreed to plead guilty to conspiracy charges related to tax fraud, according to a published report.

Mr. Currin will, according to the report, admit to taking $1.45 million and laundering it through client trust accounts and an offshore debit account. In violation of federal law, Mr. Currin didn't report the offshore account. Another published report states that Mr. Currin used an offshore trust scheme to avoid taxes on $10 million used for Internet gambling rights.

Mr. Currin faces up to 43 years in prison.

The last of the five of the Governator's infrastructure initiatives deals with disaster preparedness and levee repairs. This measure would allow the issuance of $4.09 billion in bonds, with payback costing about $266 million per year for 30 years.

Most Californians are unaware of the huge levee system in the Central Valley. The levees are quite fragile and old; one article about the system can be found here. The Weather Channel also recently had a special on the fragile nature of the system.

As much as I hate bond measures, this is one that is vital for California. The failure of the levee system could endanger drinking water throughout the state and the huge farm crops from the Central Valley.

The fourth of five of the Governator's infrastructure initiatives is a school funding bond act. If approved, $10.416 billion of bonds would be issued, costing around $680 million a year for 30 years to payoff. Yikes!

Again, the goal of the act is laudable: repair and upgrade of old schools, increasing classrooms where needed due to growth, and seismic retrofitting. The question that I have is could this be done without the issuance of a huge new bond measure? Unfortunately, in California's political climate, the answer is likely no.

Proposition 1C is the third of five of the Governator's infrastructure bills on the November ballot. Titled "Housing and Emergency Trust Fund Act of 2006", it's yet another monstrous bond act. This measure would allow the issuance of $2.6 billion of bonds, used for housing for battered women, low-income seniors, and similar uses.

While the goals of the initiative are laudable, this bond would cost $204 million a year for the next 30 years (for repayment). As Assemblyman Chuck DeVore (R-Irvine) notes, "[it] grows bureaucracy with almost $3 billion in borrowed money, burdening everyone with debt to benefi t a small number of people selected by government, including financially eligible illegal immigrants."

As I mentioned previously, New Jersey increased its sales tax earlier this year. The Garden State also expanded what is covered by sales tax. Tattoos, massages, limousines, and data processing services are just some of the itmes that the state will now get a cut of, as of October 2nd. And ITunes downloads.

Yes, online music downloads are taxable in the swamplands. So if you want the latest song from Disturbed (my writing partner's favorite band) or the Red Hot Chili Peppers, Apple will be collecting sales tax. All to balance a budget by not cutting spending.

News Story: cnet

I wish I knew the answer—I could write a book on it! Perhaps it's the cash income. Maybe it's the borderline pornography. In any case, yet another strip club owner had his day in court.

James Andrew Yaeger, of Columbia, Missouri, owned two strip clubs: "Club Vogue" and "Show Girls." Today he pleaded guilty to underreporting his income from 1999 through 2001 from his clubs.

How did this cheating occur? Well, when the dancers were paid for their lap dances (in cash, of course), the cash was stuffed in envelopes behind the bar. Unfortunately for Mr. Yeager, someone tipped off state and federal authorities, and Mr. Yeager's clubs were raided.

It's unclear from this article whether or not Mr. Yeager faces further court proceedings. But Mr. Yeager is looking at up to 15 years in ClubFed, a fine of up to $750,000, and will likely have to make restitution. And I'm sure the Missouri state authorities are just waiting for their turn.

Very early Saturday morning, Congress passed the Safe Port Act. Appended at the end of the legislation is the "Unlawful Internet Gambling Enforcement Act of 2006." (The link takes you to the entire text of the act; go to page 213 to read the relevant portion.) Many of my clients have asked the question, will this change their tax situation?

No.

Whether or not an activity is legal generally does not change whether or not you report income from the activity. Indeed, this Act does not criminalize being an online gambler. (It does make it illegal to be in the business of operating an online gambling site.) Now, if I were a professional online gambler I'd leave out "online" from my profession on my Form 1040. But otherwise this new law changes nothing regarding the tax treatment of gambling winnings and losses.

If you want more information on the Unlawful Internet Gambling Enforcement Act of 2006, see:

Chuck Humphrey's Analysis
Nolan Dalla's Thoughts
Two Plus Two Legislation Forum (Lots of threads on the Act)