Taxable Talk

Thanks to Paul Caron of the TaxProf Blog for letting us know that the D.C. Circuit has vacated the Murphy decision. The Murphy case was the one that said that the 16th Amendment made unconstitutional taxes on the recovery of a non-physical personal injury not related to lost wages or earnings (§104(a)(2) of the Internal Revenue Code). That decision was generally criticized at the time it was issued.

So the same panel will look at the issue again in early 2007. We'll see if they come up with the same answer or not. In the meantime, the government's request for an en banc panel of the entire D.C. Circuit was thrown out as moot. However, expect appeals no matter which side wins at next year's rehearing.

There's a complete set of links available at the TaxProf Blog.

The Tax Court today once again had to look at the case of Raymond Wright. Back in 2002 Mr. Wright's case had been reviewed by the Tax Court; the case was then appealed to the Second Circuit and remanded back to the Tax Court. Back in 2003 Mr. Wright thought he paid off his tax debt when he sent the IRS $15,550; the payoff amount came from the IRS.

The Appeals Court asked the Tax Court to review:

"(a)Whether petitioner’s 1993 tax refund was sent to him by the Internal Revenue Service (IRS) in 1994; (b) if not, whether petitioner timely received notice from the IRS that his refund had not been applied to his 1987 and 1989 tax deficiencies; (c) if not, whether petitioner’s current tax liability should be consequently adjusted by, inter alia, an abatement of interest pursuant to section 6404(e); and (d) in any case, whether the current interest abatement that petitioner had already received was correct in the light of (1) the IRS’s failure to give petitioner the appropriate withholding credits for 1987 and 1989, and (2) his June 21, 1994, payment of $6,681.22."

The Tax Court then goes into detail about the actions of the two parties. It's difficult to fight the government. As I've commented on before, the burden of proof in Tax Court is generally with the petitioner, not the IRS. Indeed, Mr. Wright was representing himself.

Yet throughout the discussion of the case, the IRS comes off as inept, deceiving, and potentially, evading the Court. Some examples from the opinion: "On December 6, 2005, despite the Court’s statement in the November 7, 2005, order that we would not be inclined to grant any continuances in this case, respondent filed a motion for continuance of trial." "The extended proceedings of this case recounted supra have brought to light the numerous misstatements and errors made by respondent through the handling of petitioner’s 1987 and 1989 tax years." And:

"During the appeal and remand, respondent and respondent’s witnesses recounted numerous errors regarding the handling of petitioner’s 1987 and 1989 tax years--and oftentimes neither respondent nor the witness could account for how those errors occurred. As recently as his August 28, 2006, status report, respondent essentially admitted that the IRS made mistakes regarding the computation of petitioner’s interest, including, but not limited to, quoting petitioner an incorrect payoff figure and sending petitioner an allegedly “erroneous” refund on account of respondent’s erroneous calculations and a keystroke error by an IRS employee."

There's plenty more in this opinion that damning towards the IRS. Suffice to say,

"Petitioner’s testimony (at both trials) was credible. He consistently testified and averred that he did not receive his 1993 refund. Respondent contended, however, that petitioner received his 1993 refund in 1995. The documentary and testimonial evidence respondent offered was contradictory, contained numerous errors, and lacked credibility. Furthermore, this contention is a concession by respondent that petitioner was correct and that respondent did not send the 1993 refund to petitioner in 1994.

There's much, much more in this opinion. Most of the time when I read a Tax Court case, the petitioner comes off as someone who has deliberately evaded the law. In this case it appears that it's the IRS that has had problems with the truth.

Case: Wright v. Commissioner, T.C. Memo 2006-273

State Senator Don Perata would like all Californians to have health insurance. Having everyone covered isn't a bad idea. Senator Perata would do this by mandating that all businesses provide health insurance for their employees (with minimum coverage guarantees), or they would have employees and employers pay into a state fund that would purchase health insurance, with the hope that the state would be able to negotiate low rates. Oh yes, and everyone would have to submit proof of coverage on their tax returns, turning the Franchise Tax Board into the policeman in this effort.

Hmmm, this looks like a tax on employers. And if it walks like a duck, talks like a duck, and looks like a duck, it probably is a duck.

The Orange County Register editorializes on this misguided measure today. And Jon Coupal, head of the Howard Jarvis Taxpayers Association, has an op-ed piece in the Metropolitan News-Enterprise today.

Read them both, and let your legislators and the Governator know your view.

If you're going to submit phony tax returns, it's a good idea to vary the names you use. Even poorly run tax agencies might catch on if they receive several hundred refund checks from the same address.

That bring us to the present, in the swamplands (aka New Jersey). Three individuals were arrested today for allegedly committing the largest tax fraud in the state's history. The three defendants cashed $826,974 in refund checks, having submitted 540 allegedly fraudulent tax returns. New Jersey officials were able to stop payment on over $1,000,000 in other checks.

What made New Jersey officials suspicious? This news story indicates that the defendants used similar names and employers and common addresses. When arrested, the three defendants were found with $200,000 in cash, blank social security cards, and tax forms (including W-2 forms).

Two months ago I wrote about the owner of Club Vogue (a strip club) in Columbia, Missouri. James Andrew Yaeger, the owner, paid his lap dancers in cash, and didn't report the income. He got caught, and is looking at a term at ClubFed. Yesterday, the General Manager of Club Vogue admitted his part in the scheme.

Dan Marcum earned about $82,000 from Club Vogue in 1999, but didn't file a tax return according to this story. The US Attorney noted he didn't file in 2000 and 2001 either. If you're paid in cash, it's just as much income as if you're paid by a check. Although Marcum faces up to $250,000 in fines and five years in prison, he'll likely receive a short prison term at ClubFed.

While I was in Palm Springs there was more fraud and evasion. In New York, an operator of a trucking company pleaded guilty to evading federal taxes to the tune of $2.5 million. Anthony Guido, of Pelham, New York, took his salary in cash (along with some relatives) for eight years. He'll be spending a bit of time at ClubFed after he's sentenced in 2007. (News story here)

Back in May, we reported on the indictment of the owners of the La Shish restaurants in Michigan. Earlier this week the wife of the owner pleaded guilty to tax evasion. Under her plea agreement, she'll be spending about three years at ClubFed. Her husband is still a fugitive from justice. Elfat El Aouar admitted that she helped to evade about $1.5 million in taxes. (News story here)

Finally, from Pennsylvania comes another story of someone who says that you don't have to pay the income tax. Yeah, right. Arthur Farnsworth of West Rockhill, Pennsylvania was found guilty in Philadelphia of tax evasion after admitting he hadn't filed a tax return. The former Libertarian candidate for Bucks County Commissioner has a web site where he notes his views. Unfortunately for Mr. Farnsworth, the Supreme Court (and all the courts of appeals) has held that you must pay the income tax. Mr. Farnsworth faces up to 15 years at ClubFed and a $750,000 fine when sentenced next year. (News story here)

So the government has taken yet another bite out of crime.

Mike Finneran was the head diving coach for North Carolina State University. College athletics pays reasonably well, even for a "minor" sport such as diving; Mr. Finneran made between $60,000 and $180,000 a year.

However, that's not what he allegedly put down as his income on his state tax returns. Apparently Mr. Finneran is a disciple of the Wesley Snipes school; the North Carolina Revenue Department says that Mr. Finneran wrote $0 as his income.

Not surprisingly, Mr. Finneran has been fired as head diving coach of NC State. Whether he'll end up at another state institution -- a North Carolina prison -- will be determined in 2007.

News Story: Associated Press

Just a reminder that the first installment of property taxes for Californians must be postmarked today. Alternatively, most County Assessor/Treasurer offices will remain open late for you to make payments.

I'm hitting the road again tomorrow, heading to Valencia and then to Palm Springs. Posting will be light to nonexistent until Thursday.

This morning's New York Times has a brief piece on taxing income producing transactions of virtual worlds. The Times notes that a precedent does exist for taxing such activities: barter. Indeed, back in the 1970s the IRS implemented regulations on the taxation of barter (thus, today's Form 1099-B).

Luckily for participants in the virtual worlds, it will probably take the IRS some time to determine what they'll do (besides saying, "That's so weird.").

Richard Hatch, the Survivor winner who is now a convicted tax offender, has formally appealed his conviction from earlier this year. The Associated Press reports that Hatch caught the producers of Survivor cheating (they allegedly gave food to other contestants); CBS denies the charges.

In any case, Hatch is now at the Morgantown, West Virginia Federal Correctional Institute, serving a four-year term. Hatch's appeal was filed with the 1st District Court of Appeals in Boston.

Perhaps Hatch is jealous of Wesley Snipes stealing the tax offender spotlight.

The Seventh Circuit Court of Appeals today ruled on the appeal of Glen Murphy, a Wisconsin Chiropractor, who had earlier been convicted of seven counts of filing false tax returns and three counts of not filing tax returns. After being sentenced to 41 months at ClubFed, Mr. Murphy appealed.

Judge Easterbrook gave the unanimous opinion of the Court. Here are some excerpts:

"After being charged, he tried to game the system and drag out the proceeding as long as possible."

"AAA, from what we can tell, offered no legitimate services; it instead specialized in international-scale tax fraud. Murphy, himself no fan of taxes, turned to AAA in 1997 in an effort to dramatically lower his past and future income tax liability. AAA obliged, helping Murphy set up a sham, zero-income partnership that took on huge, predetermined losses in sums perfectly tailored to eliminate Murphy’s present and past tax liability. AAA also served as a conduit for Murphy to direct money to offshore bank accounts under the guise of advertising expenses. As a grand finale, Murphy did not even file income tax returns from 2001-2003, despite telling his bank that he had done so (and even producing a completed 2001 form) as part of a home refinancing application."

"During the 10 months leading up to and including his trial, he employed a pattern of delay and misdirection that would make an NFL offensive coordinator jealous."

"Information not available to the district court at the time, but highly revealing now, is Murphy’s sudden ability to quickly secure paid private counsel within weeks of his convictions."

If you get the idea that Mr. Murphy lost his appeal, you're correct. The ruling by Judge Easterbrook is quite revealing of someone who tried to evade justice, but lost.

Hat Tip: Decision of the Day

Wesley Snipes is a fugitive no longer. According to the Associated Press, Snipes surrendered to federal authorities in Florida today. He was later released on a $1 million bond.

Snipes will be allowed to return to Namibia to finish the film he's working on. However, he won't be heading overseas in 2007 (at least until after his trial); he must return to the U.S. by January 10th and will then be restricted to traveling within the continental United States.

Joe Kristan speculates that if Snipes is convicted he'll be looking at around six years at ClubFed. A pre-trial conference is scheduled for February 22nd.

I really believe that I have lifetime employment. I just can't see Congress implementing meaningful tax reform in my lifetime (as much as I'd like to see it).

But every so often a ray of sunshine is seen. The Captain's Quarters blog reported today that Senators Ron Wyden (D-OR) and Larry Craig (R-ID) are involved in "Cleanse the Code," an effort to simplify the Tax Code and the regulations that have been promulgated to implement the Code.

Senator Wyden would like to see a one-page Form 1040, and noted that the last meaningful reform took place during the second term of a Republican President with a Democratic controlled Congress. Senator Craig noted that while his plan is different from Senator Wyden's, it's not that different. Additionally, Senator Craig would like to see a flat tax.

Joe Kristan noted today about the creep towards AMT hell for everyone. If Congress does nothing on that score, the voting public will demand meaningful tax reform. Until that day, I suspect we'll see bandages being applied.

I'm not worried about my job security, unfortunately.

I've previously written about taxing the virtual world. Let's say you're playing an online game, one of those that have their own worlds, such as EverQuest or SecondLife. I own Russ' Gold Depot, and you agree to purchase those 100 acres from me for $100 — not 100 gold pieces, but 100 real U.S. Dollars. What's my income?

The U.S. Tax Code would subject me to tax on the gain. After all, my basis is $0, and now I have $100, right? Luckily, the IRS' current opinion is "That's so weird."

Unfortunately for online enthusiasts, that opinion is unlikely to hold for long. Last Saturday a panel at New York University actually debated this issue. "Tax and Finance at the State of Play/Terra Nova Symposium had several speakers talking about this issue according to a CNet report.

"Given growth rates of 10 to 15 percent a month, the question is when, not if, Congress and IRS start paying attention to these issues," said Dan Miller, a senior economist with the Congress' Joint Economic Committee told CNet.

Another interesting issue might confront heirs of online real estate magnates. Suppose I own $1 million in virtual land. Does this virtual real estate factor into my estate?

Or what if I trade assets, going from a red paperclip to a house (like Kyle MacDonald of Canada)? Bartering is absolutely taxable, so wouldn't I owe real tax on my gains?

Unfortunately for virtual world fans, it's almost a certainty that the IRS and other government agencies will look into this eventually. So if I do sell my gold depot, I'm also likely to come into possession of a slip of paper: a 1099-MISC reporting the transaction to the IRS.

VaporTech is a Livermore (California) company that uses steam, vapor, and high pressure to clean toxic soils or increase oil production from old wells. Its CEO used to be John Frances Griffin. I say 'used to be' because Mr. Griffin, already under indictment for mail fraud, has now been charged with two counts of tax evasion.

A federal grand jury in Oakland indicted Mr. Griffin on tax evasion charges last week. Griffin supposedly didn't tell his CFO his social security number, and got paid in cash and cashier's checks to avoid having his income shown. (I will only briefly note that the CFO, who was not identified in the news story, should have his head examined.)

Mr. Griffin is already in a halfway house awaiting trial. He's likely going to be spending some significant time at ClubFed. Additionally, the government has begun forfeiture proceedings against him, and wishes to obtain a gold tennis racket, televisions, and over $17,000 in clothes from Nieman Marcus.

Joe Mammana owns the Yardley Egg Farm in Ohio. He's pledged millions to crack down on criminals. There's just one little problem, according to the U.S. Attorney's Office: Mr. Mammana hasn't paid his own taxes.

The Associated Press reports that Mammana hasn't paid federal taxes since 2000. He's accused of earning over $3 million, owning luxury cars and a luxurious home without paying taxes. He's currently in jail after a search found an unregistered handgun. U.S. Magistrate L. Felipe Restrepo denied bail, calling Mammana a flight risk.

Meanwhile, Mammana is accused by an Ohio crime-fighting group of reneging on his promised reward. The head of that group, Kevin Miles, has sued Mammana after he was attacked with a baseball bat and told during the attack to drop the lawsuit.

Don't Mess With Taxes has the December Tax Carnival up. It's well worth reading this compendium of posts.

I'll be on the road for the next few days, so posting will be light to nonexistent until next Wednesday.

While I'm gone you may want to catch Joe Kristan's series on year-end tax planning. While his focus is on Iowa, his comments on the AMT are applicable to Californians.

This is a story that really speaks for itself. Reverend John Henry Walker of the Macedonia Baptist Church in Charlotte, North Carolina pleaded guilty to nine counts of tax evasion and bank fraud. The Associated Press reported that federal prosecutors told the judge in the case that Walker used a church credit card for, "erectile dysfunction medication and hotel visits with female parishioners." Walker's attorney told the AP that, "...the government's allegations of socially irresponsible behavior regarding Pastor Walker's private life were completely without merit and amounted to just plan dirty litigation."

The story notes that the church congregation will be voting within the next two weeks on whether Walker will be keeping his job.

California's Legislature passed domestic partners tax legislation earlier this year. For 2007 (not 2006), qualified domestic partners are required to file as Married, Filing Jointly on their California state tax returns. However, they must continue to file as single on their federal tax forms.

What can possibly go wrong?

Yesterday, a "Town Hall" meeting was held in Sacramento. Participating in it were tax practitioners, a software programmer from Intuit's Lacerte division, gay and lesbian advocates, and staffers from the Franchise Tax Board. The San Jose Mercury covered the meeting.

Here is just one of the gems that the Mercury reported:

"This saga is only beginning rather than ending," said FTB attorney Pat Kusiak. "This is an evolving issue. It will be many years before issues are resolved, and they may need to be resolved by litigation."

As the Mercury noted, domestic partners will have to compute a California joint AGI that will be hypothetical. For domestic partners who have very simple returns this won't be a problem. However, if you have complex returns, this is going to be a nightmare. Gregg Gamble of Lacerte is quoted as saying, "It's the most ridiculous thing I've ever heard."

It's probably not the most ridiculous thing I've ever heard, but it's close. And it's not an issue that can be postponed—tax preparers will need to begin tackling this when we calculate estimated tax payments for 2007 for Californians impacted by this.

Additionally, it will likely be the domestic partners who will be paying for the additional work. Tax preparers charge based on the complexity of the returns—really, the amount of work (time) spent on the return. If I have to prepare two returns, it's going to take me significantly longer than if I have to prepare one return.

Unfortunately, I don't have high hopes for the California Legislature to address this issue. I hope I'm wrong, but don't bet on it.