Taxable Talk

Yes, it's time for my annual vacation. I'll be back on August 6th; however, I'm heading out of town on August 7th for the remainder of that week on a business trip so posting will likely be light until August 13th.

If you need a fix on the California budget mess, I urge you to go to the Flash Report. They'll keep you up to date on the budget.

If you need a tax fix, try any of the tax bloggers listed on the blogroll on the right.

I'm leaving tomorrow for a ten-day vacation. Will California's legislature have a budget by the time I return?

Republicans in the State Senate want a balanced budget. State Senator Tom Harman (R-Huntington Beach) told the Flash Report, "Senate Republicans have placed on the table for consideration by the Democrats a plan that reduces the operating deficit to zero." That's what the Republicans want.

The GOP budget proposal has cuts—cuts in welfare spending, cuts in unfilled positions in state government, and cuts that do not impact education, public safety, and environmental programs.

However, the Democrats don't like these cuts. They hit Democratic constituencies, so they oppose them. However, for any budget to pass the legislature, it must have a 2/3 vote in each house. Though the Democrats have a majority in each house, they must get Republican votes to pass a budget.

The GOP is united, and part of this stems from a silly stunt that State Senate President Pro Tem, Don Perata, did. He locked the entire State Senate in the chamber for 30 hours, figuring that by doing so he would force two Republicans (the number needed to defect to pass the budget) to join with the Democrats.

It backfired.

Meanwhile, in coming days we will see more impacts in California. I don't know if we will see a state government shutdown (such as occurred earlier this year for a few days in Pennsylvania or last year in New Jersey). This will hurt government workers.

California does need to look at the budget and view it honestly. A balanced budget is required under the state constitution. It would be nice if our legislators in Sacramento actually obeyed the law.

As to the chance there's a budget on August 6th (when I return), I think the odds are still even money.

Following in your father's footsteps can be a very good thing. However, when you're following your father into (potentially) prison for tax evasion, that's not a good thing at all.

Let's first talk about the father, David Pflum. The elder Mr. Pflum thought he found two very useful books, "The Great Income Tax Hoax" and "How Anyone Can Stop Paying Income Taxes." Then the IRS got involved. They issued summonses and subpoenas, seeking records showing that Mr. Pflum earned an income and owed income tax. Mr. Pflum was indicted for not filing a federal income tax return (three counts) and not paying federal employment taxes (eight counts). He admitted in court that he didn't file the taxes. He was found guilty on all 11 counts. He appealed, and lost. Oh, Did I mention that Mr. Pflum followed the advice of Irwin Schiff, who (like Mr. Pflum) is now residing at ClubFed? And, yes, the tax evasion involved the usual suspects—trusts set up specifically to avoid taxes. (Hint: They don't work.)

We now turn to the son, Gregory Pflum. Mr. Pflum the younger was indicted last year. He was warned by the IRS that not paying taxes doesn't work. Unfortunately for him, from 1998 through 2003, he didn't pay taxes. He had the opportunity to file those returns (albeit late, with penalties and interest). Instead, when he was contacted by the IRS he gave the agents tax protester materials.

Mr. Gregory Pflum pleaded guilty to one count of attempting to evade taxes by not filing a return. Though he faces up to five years at ClubFed, he will probably receive a shorter term.

Sometimes, you shouldn't follow your father's advice.

An interesting article this morning in the Wall Street Journal: What are the tax implications of catching Barry Bonds' 756th home run? Sometime in the next few weeks some lucky fan will likely catch the ball. (There's always the chance, albeit slight, that the ball will ricochet back onto the field, say, off a foul pole, and this issue will be moot.)

Tom Herman in today's Tax Report in the Journal (Note: Pay Link) ponders that question, and gets different answers from different experts. The IRS prefers not to answer the question. Alice Abreu, a professor at Temple University Law School, believes its taxable income the moment its caught. Other unnamed law professors disagree. And Don Korb, Chief Counsel of the IRS (and a baseball fan), told the journal, "Please, whatever you do, don't ask me that question."

My view is that a fan, having purchased a ticket, has the right to take with him from the game anything thrown or hit from the field of play (such as a baseball). If he is lucky enough to catch the ball, he's paid for it by the ticket.

However, if (or should that be "when") he sells the baseball—and estimates of the worth of Bonds' 756th home run baseball start at $400,000—that lucky fan will owe tax on the proceeds.

Of course, we're dealing with the IRS and it wouldn't shock me for them to interpret this completely differently.

We received an email regarding the post we did on Ace Tire & Parts. The owners of Ace are accused of violating federal employment laws and have each pleaded guilty to one count of tax fraud.

In any case, we were asked the following:

"just read your article. where did you get your information for bozo scheme failed? what makes you think these guys are going to club fed? what do you know about pa tax laws with regard to this case? isn't this a rather common practice among small businessmen across the country? give me your thoughts."

Well, as to where I got the information, it was published in multiple places, including the Pittsburgh Post-Gazette. I think they're going to prison because of the nature of their crime. These individuals robbed what are called "Trust Fund" accounts. When I wrote, "And the DOJ and IRS really, really don't like violators of employment tax laws." And that's what they did, to the tune of somewhere between $400,000 and $1,000,000.

As to whether this is a common practice, definitely not. Anyone who thinks that most small business owners steal from employment tax trust fund accounts needs to think that through. Do you really believe that most small business owners are tax cheats? Thankfully, most Americans do pay their taxes, and most business owners correctly forward the employment taxes they collect to the government.

Barry Bonds is moving towards career home run #756, which would exceed Hank Aaron's career mark of 755. Bonds did not play in today's game at Milwaukee. He currently has 753 homers, and will face Atlanta in San Francisco Monday evening.

Unfortunately for Bonds, the grand jury that has been investigating possible tax evasion and/or perjury charges against the Giants' slugger has been extended for another six months, according to this story in the New York Daily News. A source told the Daily News, "They seem to feel they [the US Attorney's Office] have a strong case." Since the grand jury will not reconvene until September, Bonds will likely break the record long before then. Bonds told the Los Angeles Times, when asked if he was concerned about the possible indictment, "No."

It should be an interesting September, both at the ballparks and in the corridors of the Federal Courthouse in New York.

California is still without a budget, and the battle will not end until Wednesday at the earliest. The State Senate recessed Saturday with Republicans refusing to budge.

California requires a 2/3 vote in each house of its legislature to pass the budget. While Democrats have a sizable majority, they must get some Republican votes in each house. The Assembly approved the budget with a few Republicans crossing over. However, the State Senate has not.

To date, legislative aides and state contractors have felt the biggest sting from the battle in Sacramento. However, it will likely start impacting more as the days go on. A good source for the Republican viewpoint is the Flash Report Blog.

State Senator Bob Dutton (R-San Bernardino) told the Flash Report Blog, "This budget must have a zero-deficit." Given that the budget has a $5 Billion operational deficit, it looks like when I head on vacation next Saturday there won't be a budget.

Please don't try this yourselves.

You have a successful business (in this case, Ace Tire & Parts of Coraoplis, Pennsylvania). You decide that you don't have to pay payroll taxes; instead, you'll make your employees checks payable to "Cash" and as reimbursements for nonexistent expenses. Your controller agrees to this highly illegal scheme. You save on payroll taxes and your employees avoid income taxes.

And then the IRS finds out.

The two owners of Ace Tire & Parts, Richard & John Schwartz, and the controller, Richard Connell, all pleaded guilty to one count of tax fraud. Given that the tax loss to the IRS was between $400,000 and $1 million, the three are looking at about three years at Club Fed and, I assume, restitution to the IRS. And I wouldn't be shocked if the Commonwealth of Pennsylvania looks at this crime, too.

For the record, this kind of fraud rarely goes undetected. And the DOJ and IRS really, really don't like violators of employment tax laws.

The Western Tax Service method of preparing tax returns is different. Customers love the high refunds. Of course, the deductions claimed on Schedule A were almost all either false or overinflated. Did I mention that Western's proprietor is at ClubFed and will also have to serve time in California?

The Department of Justice is alleging that a Washington, D.C. tax preparer followed the Western Tax Service method. Donald Roberts ran X-Press Refund Tax Service and has been indicted on one count of conspiracy and 22 counts of assisting in the preparation of false tax returns. Mr. Roberts allegedly overstated Schedule A deductions such as charitable contributions and unreimbursed employee business expenses. He's also accused of using incorrect filing statuses and phony education credits on returns.

Mr. Roberts is looking at an extended stay at ClubFed if he's found guilty on all charges. By the way, if you happen to have used X-Press Refund Tax Service, you will likely be audited as the IRS will undoubtedly be looking to have the bad returns corrected.

DOJ Press Release

I used to reside in Tulare County, located in California's Central Valley. It's prime agricultural land. It's also one of the poorest counties in California. And the county will need to find $327,000.

The Dinuba Redevelopment Agency is funded through property taxes paid by various businesses in Dinuba. Unfortunately, the Tulare County Assessor misclassified some businesses in 1998. The error was discovered in 2004, and corrected. The Dinuba Redevelopment Agency asked that the error be fixed retroactively (so that the agency would receive $327,000); the county refused.

Dinuba took the case to court, and lost in Tulare County Superior Court. They appealed, and won at the 5th District Court of Appeals. Tulare County then appealed to the California Supreme Court; that court upheld the appeals court decision.

So it is important to check your property tax bills...both for the counties sending them to taxpayers and for taxpayers receiving them.

News Story: Tulare Advance-Register

In nine days I go on vacation. I think it's even money as to whether or not California has a budget before I leave.

Of course, California is supposed to have a budget signed by June 30th, but that deadline is rarely met. However, it appears that progress is being made...lubricated by wine.

The Sacramento Bee reports that Assembly Speaker Fabian Nunez has used wine to help Democratic and Republican leaders to come to an agreement. Even though the Democrats control both houses of California's legislature, they must get Republican votes in order to pass a budget—the budget must pass by a 2/3 vote. Republican leaders want an end (or, at a minimum, a drastic cut) to California's $1.5 billion operating deficit.

Democrats don't want to forgo cost-of-living increases in social programs. Republicans want a balanced budget and cuts in spending. Something has got to give eventually. Already, staff workers in Sacramento have missed a paycheck.

There's one other factor that figures into the budget stalemate: California's revenues are $800 million under projections. The housing slump and the Central Valley freeze (which greatly impacts agriculture) are probably the two biggest culprits here. In any case, this also doesn't bode well for the future. California will likely face a $5 billion budget shortfall next year.

Congress is actually doing something smart. According to the TaxProf Blog, the House Judiciary Committee approved a proposal prohibiting patents of tax planning methods.

I'm amazed that Congress is actually doing something intelligent.

Somehow it's fitting on the day that the World Series of Poker champion is crowned that we find out that Neteller, the beleaguered Internet payment processor, has settled with the U.S. Department of Justice. According to the press release that Neteller issued:

• Neteller will forfeit $136 million to the US (inclusive of $60 million that the US seized from Neteller transactions earlier);
  
• US customers will be able to request withdrawals of their funds no later than July 30th;
  
• Neteller agrees to cooperate fully with the USAO [U.S. Attorney's Office/DOJ] in all matters relating to the ongoing investigation;
  
• Neteller agrees to fully implement procedures and controls to prevent illegal transactions between internet gambling merchants and persons located in the US; and
  
• The DOJ will dismiss a criminal information against Neteller in two years as long as Neteller fully implements this agreement and fully cooperates with the DOJ.

So what does this mean? US gamblers will get their money back, likely in August. Neteller's founders will get off with a slap on their wrist (a monetary fine). Neteller won't be operating in the United States any more. And the DOJ gets a big boost in its investigation of online gambling firms because Neteller will cooperate with the DOJ (including testifying in court against online gambling firms).

What's not in the agreement—but is almost certain to be happening—is any mention of taxes. However, anyone who thinks that the DOJ (and the IRS, by extension) will not be getting records of Neteller transactions should think again. Almost certainly that information will be finding its way to the IRS by year-end.

It's interesting to compare what happened with what I predicted back in January.

"Indeed, it's clear what's likely to happen. Neteller and the DOJ will likely come to an agreement. Neteller will announce that they will no longer do business with Americans, and they may have to pay a fine; the DOJ won't indict the company, or any of its current stockholders. The DOJ might even accept some sort of plea bargain for the two founders who were arrested. It's also certain that as part of such a deal Neteller will agree to release details of all transactions between American customers and Neteller."

And that's basically exactly what occurred.

Congratulations to this year's winners at the World Series of Poker, run by Harrah's, and hosted at the Rio Hotel & Casino in Las Vegas. The Main Event, the World Championship of Poker, has just been completed. This year, 6,358 contestants ponied up $10,000 each to enter the event. The total prize pool was $59,784,954 and is the largest prize pool in a sporting event held in the United States.

Jerry Yang, of Temecula, California won $8,250,000. That's what you will read on the Internet and in tomorrow's newspapers. But did he really win all of that money?

Well, that was his gross win. However, there's the matter of taxes. Tournament poker falls under other gambling in the tax regulations, so withholding is required if the win is both more than $600 and at least 300 times the entry fee. So first through third place must have 25% of the prize withheld for US taxes (unless a tax treaty overrides this provision).

Mr. Yang, hailing from California, had $2,062,500 withheld to the IRS right off the top of his prize. Given the marginal tax rate he will likely face, he will probably owe another $825,000 in federal taxes (a total of $2,887,500 to the IRS). He will also California tax, so the Franchise Tax Board figures to rake in $849,750 of the win. Mr. Yang's actual win is probably $4,512,750 or so. The Franchise Tax Board is especially grateful. This is the second year in a row that a Californian has won, and given California's budget issues, any and all revenues will be quickly spent.

Tuan Lam of Mississauga, Ontario finished second. He won $4,840,981 for his efforts. Under the US-Canada tax treaty, he had $1,452,294 withheld. He may be able to get some of that back, if he can show other gambling losses. He also faces Canadian tax on his win--as a professional gambler, his winnings are taxable under Canadian law. Luckily for Mr. Lam, he will likely not owe any Canadian tax because he will probably get a credit for the US tax paid (at 30%) on his Candian tax return (a tax rate of 29%).

Raymond Rahme of Johannesburg, South Africa, finished 3rd and earned $3,047,025. He's the luckiest winner. He faces no US withholding per the US-South Africa tax treaty. He's also an amateur, and it appears he does not owe any tax under South African law.

Alex Kravchenko of Moscow, Russia, finished 4th and walked away with $1,852,721. Like Mr. Rahme, the US-Russia tax treaty allows him to head home with all of his funds. Russia has a 13% flat tax, so he will probably owe about $240,854.

The other final table participants owe tax to Inland Revenue (United Kingdom), the IRS, and two state tax agencies (Virginia Department of Taxation and the New York Department of Tax & Finance). Here are the totals for the various agencies:

Amount won at Final Table	$22,019,901
US Tax Withheld to IRS	$3,514,794
Add'l Tax Owed to IRS	$1,611,510
Total Tax to IRS	$5,126,304
Tax to California FTB	$849,750
Tax to Inland Revenue (UK)	$712,402
Tax to State Taxation Service (Russia)	$240,854
Tax to NY Dept of Tax & Finance	$65,503
Tax to VA Dept of Tax	$40,198
Total Taxes	$7,035,011

That's a total tax bite of 31.95%.

So congratulations to the winners. Just remember that a big winner—perhaps the biggest winner of all—is Uncle Sam. Because we all know, the house always wins.

I've been saying for some time that offshore trusts and bank accounts set up with no purpose at all (except to avoid US income taxes) are definitely in the cross-hairs of the IRS. Another user of this scheme will be paying with five years at ClubFed.

George Schussel founded Digital Consulting Inc. in 1982. The company was successful—successful enough that Mr. Schussel allegedly looked for a means to avoid income taxes.

The government alleged that Mr. Schussel used an offshore account at the Bank of Bermuda to hide $8.5 million. The account was in the name of an alleged sham company. Given corporate tax rates, that's a loss of about $2.75 million in taxes.

Unfortunately for Mr. Schussel, the IRS audited his 1995 tax returns in 1997-1998. The government alleged that Mr. Schussel obstructed the audit and evaded taxes. The jury agreed, and he was sentenced to five years at ClubFed, a $125,000 fine, and must meet with the IRS to resolve his outstanding tax liabilities.

Sometimes it's much, much easier to just pay your taxes in the first place.

News Story: Boston Business Journal

Yeah, right. I'm a native of the Windy City and am anything but shocked. A former Alderman (city councilperson) is now facing 13 federal charges, including tax evasion.

Arenda Troutman is accused of using a political committee to hide money that was raised for projects she supported in her political district. Ms. Troutman is accused of starting the "20th Ward Women's Auxiliary" and using it to hide money and disguise payments. Additionally, the Auxiliary didn't file for non-profit status and never filed Illinois or federal tax returns.

Troutman had earlier been accused of bribery (she pleaded not guilty last month to that charge); she now has an additional 12 charges of bribery, extortion, mail fraud, and tax evasion to face. Two former staff member's of Troutman's office also face charges.

News Story: FoxChicago

The title of this post is a quote from the 11th Circuit Court of Appeals. Former Atlanta Mayor Bill Campbell had appealed his conviction and his sentence on tax fraud charges. The Appeals Court found his conviction and sentence to be entirely appropriate.

The Court ruling wasn't kind to Campbell. Here are two excerpts that ran in the Atlanta Journal-Constitution:

"[Campbell is]...a first offender with an exceptional personal history who cannot be considered unlikely to commit further crimes."

"The fact that Campbell, a lawyer and former federal prosecutor, committed his crimes while mayor of a major metropolitan city, knowing as he must have that his action would be publicly and deeply scrutinized, belies his assertion that he 'cannot be considered likely to commit further crimes.'"

Needless to say, Campbell will not be leaving ClubFed until, at the earliest, October 2008.

Remember the Conrad Black trial? Verdicts have come out, and it's a mixed bag. All of the defendants (along with Black, there were three co-defendants) were found not guilty of not filing corporate tax returns. However, Black was found guilty of criminal fraud and obstruction of justice. An appeal is expected.

Columnist Mark Steyn has been blogging this trial for Macleans, the Canadian news magazine. Steyn notes,

"[Black] has been found GUILTY in just two narrow areas - "obstruction of justice" re the security camera footage of him removing boxes from 10 Toronto Street, and three "mail fraud" counts relating to the APC non-compete agreement, in which (as the government argued) Black and Radler paid Black and Radler not to compete with Black and Radler."

When you fight the government, you face a tough battle. As Steyn noted, "The US Attorney's office might usefully adopt as its motto the IRA's message to Mrs. Thatcher after the Brighton bombing, 'You have to be lucky every time. We only have to be lucky once.'"

Given Black's age (62), he could be looking at life. Sentencing will be in November.

Quite a bit of tax evasion to report on tonight. We have fuel for the fire (literally), embezzlement, and even a connection to one of my favorites: Wesley Snipes.

Starting in Houston, three men decided to make money the third oldest way: cheating on taxes. They allegedly bought kerosene from Calcasieu Refining Co. in Lake Charles, Louisiana, stating that they would export the kerosene. If you export kerosene, you don't have to pay the fuel excise tax on it. You're already a couple steps ahead of me, right? The kerosene didn't make it across the border. Instead, the kerosene was mixed with other petroleum byproducts and sold at service stations in the Houston area. Adding just a bit more fraud, the three alleged culprits ordered their staff to prepare false backdated invoices. The three face both federal tax evasion charges and state charges according to this story in the Houston Chronicle.

In Brighton, Michigan, an electrician found out the hard way that Eddie Kahn's methods of avoiding taxes are not guaranteed to succeed. Mr. Kahn used to have a company called American Rights Litigators; he transformed the business into "Guiding Light of God Ministries." Unfortunately for Kahn, the IRS didn't take to the name change. He's been indicted on tax fraud charges; the business was raided in 2004. Kahn is facing more charges in the Wesley Snipes case.

Oh, our electrician, Brent Gross, in Michigan who followed Mr. Kahn's strategy of claiming he had zero income while earning around $80,000 a year for several years? It didn't work. He's been convicted of three counts of tax evasion, three counts of filing a false tax return, and one count of presenting a fictitious financial instrument. He's looking at a stay at ClubFed.

From Anderson, South Carolina comes the story of a couple who filed 86 tax returns seeking refunds of about $500,000. Just a few problems: the returns were false, and they got the information from prison inmates. Randall Pardue, and his wife, Kelly, each received a stay at Club: Randall got a little over 4 years while Kelly received 2. They'll also have to make restitution of $102,000. It will be a while before Randall visits ClubFed, though—he's currently enjoying a stay at one of South Carolina's facilities for burglary (unrelated to the current crime) and won't be out of that prison until 2011.

Finally, from Clarksville, Tennessee comes the story of a bookkeeper who I hope you never hired. Mary Barber pleaded guilty to bank fraud and tax evasion charges. Ms. Barber admitted embezzling $63,667 from clients using a phony company with checks made payable to phony payees. The checks were then deposited into her accounts or accounts of relatives. She also admitted committing bank fraud totaling $224,947. That resulted in a tax loss to the U.S. of about $64,000—thus, the tax evasion charges. She'll be spending some time at ClubFed.

That's a bunch of winners—well, they sure make writing these articles easier.

How did I miss this story from the Orange County Register?

"ANAHEIM - The former director of UCLA's Willed Body Program pleaded guilty to federal tax charges after admitting he never paid taxes on tens of thousands of dollars he made while overseeing the university's program."

Read more at Roth Tax Updates.

Spidell is reporting that California's Franchise Tax Board (FTB) has sent notices to 1,400 tax preparers who are not registered, and threatened each with a $2,500 fine. Only one problem: EAs, CPAs, and attorneys aren't required to be registered (all hold other professional licenses). The FTB has lists of CPAs & attorneys (they must register with other state agencies) but has no list of EAs, so many EAs likely got the notices.

Any EA "lucky" enough to get one of these notices should reply back to the FTB with their license information and the FTB shouldn't continue with the fine.

And let me end this with a plug for Spidell. Spidell has excellent continuing education offerings, and provides a lot of quality materials.

Democrats in Sacramento lack nothing in chutzpah. Democratic Assemblyman Charles Calderon is proposing an 8% tax on sexually explicit nightclub acts, sexually explicit pay-per-view movies, X-rated acts in public locations, and sales of sex toys.

Forgetting the dubious constitutionality of the proposed legislation, it is unlikely to go anywhere in Sacramento. Assembly Republicans, according to the story in the Sacramento Bee, vow to kill any new tax increase. Given the 2/3 vote required for an increase, this measure will die.

It would be nice to see our legislators in Sacramento looking at killing various government programs, so that instead of increasing revenues to cover a budget shortfall, they would be decreasing expenses. But that idea is, I think, over the head of the Democrats in Sacramento.

"Billy, Billy don't you lose my number
Cos you're not anywhere
That I can find you
Oh now Billy, Billy don't you lose my number
Cos you're not anywhere that I can find you, oh no"
(Don't Lose My Number, by Phil Collins)

There are a lot of people hoping that one person did lose their phone number. Remember Deborah Palfrey, the alleged D.C. madam who wanted to sell her phone list of clients? Well, her phone records have now been released to the public. You can go to this website and attempt to get the records. I say "attempt" because so many people have gone to the site that the website is currently down! A judge last week lifted the injunction against Ms. Palfrey posting her list.

Already, one Senator has found his name on the list. Senator David Vitter (R-LA) said in a statement, "This was a very serious sin in my past for which I am, of course, completely responsible." His name won't be the only one found on the list.

Meanwhile, Congress continues to look more like a "do-nothing" Congress as far as tax legislation and pressing issues such as AMT relief. Perhaps our representatives will look at fixing real problems rather than covering their past transgressions...though I doubt that's going to happen.

Last week I wrote a post about a Tax Court ruling that said that for purposes of §911 of the Internal Revenue Code (the Foreign Earned Income Exclusion) that Antarctica is not a foreign country. Well, one reader wrote me back, noting:

Two separate courts (US Supreme and US District in MA) have ruled that in the case of other statutes (FTCA and FLSA), Antarctica IS a foreign country. The rulings in questions by the Tax Court, supported by the 7th Circuit of Appeals, only mean that for the purposes of the interpretation of this particular section of the Tax Code, Antarctica does not fall within the IRS's regulatory definition of the term "foreign country."

Quite true. Antarctica is definitely not part of the United States. I will point out, for the record, that I do not see a "Republic of Antarctica" among the world's countries.

The reader then goes on to note that he thinks the Kunzes may appeal the Tax Court decision to the 10th Circuit. I have no idea if they will, but I am very doubtful of them winning this battle. Section 911 of the Code is quite specific, and I think that the Courts got this issue correct. Now whether the law should be written this way is another question. Unfortunately for our reader and the Kunzes, there just aren't a lot of Americans in Antarctica, so I don't expect Congress to change the law any time soon.

Finally, it's nice to know that we have a reader on Antarctica. For those of you wondering, it's cold at the Amundsen-Scott South Pole Station. Here are the current conditions (courtesy of NOAA):

Wind from the NNE (020 degrees) at 17 MPH (15 KT)
Visibility 1 mile(s)
Sky conditions mostly cloudy
Weather: Ice crystals, Blowing snow
Temperature -79 F (-62 C)
Windchill -122 F (-86 C)
Pressure (altimeter) 28.31 in. Hg (958 hPa)

To contrast, here are the current conditions in Irvine:

Wind from the ENE (070 degrees) at 3 MPH (3 KT)
Visibility 9 mile(s)
Sky conditions overcast
Temperature 64.9 F (18.3 C)
Windchill None
Relative Humidity 75%
Pressure (altimeter) 29.96 in. Hg (1014 hPa)

So we're 144° F warmer than at the South Pole...

It's stuck in the legislature.

The California Constitution requires a 2/3 vote in each house of the legislature for the budget to be approved. While the Democrats have a majority in both houses, they do not have a "super-majority" and they must get Republican support in order for the budget to pass. So far, the G.O.P. is holding firm on, in their view, "a fiscally prudent budget."

Whether or not we see furloughs of state workers on August 1st is an open question. With the legislature back in session this week it's possible we will see some movement...but I expect this to drag on for some time.

The Keystone State is having a budget crisis. Governor Ed Rendell (D) has ordered a shutdown of all non-essential state services in Pennsylvania. The problem? There's no approved state budget, and with the fiscal year having begun the state has no authority to spend money.

Pennsylvania, like many states, has a divided (politically) government. Governor Rendell is a Democrat, the state's lower house is controlled by Democrats, but the state senate is controlled by Republicans.

Governor Rendell's proposed budget features an energy charge that would cost residents an estimated $5.40 a year. That's one of the reasons Republicans are holding up the budget. Other issues include a new hockey arena for the Pittsburgh Penguins and a new convention center in Philadelphia—issues that Governor Rendell wants considered before the budget but issues that the Republicans want considered after the budget. Republicans also want to cut $300 million from the state's $27.3 billion budget according to Bloomberg.

Gamblers, though, got "lucky." A state court judge has allowed the five racinos in Pennsylvania to remain open pending a hearing tomorrow.

That's probably one of the thoughts going through Timothy Heffner's mind right now. Mr. Heffner, of Pittsburgh, pleaded guilty to fraud, conspiracy and tax evasion charges on Tuesday.

Mr. Heffner, according to the story in the Pittsburgh Post-Gazette, "entertained on a private yacht [and] arrived at parties in a personal helicopter." The Pittsburgh Tribune-Review noted, "Heffner long has been a mainstay at gala events for Pittsburgh's social elite."

So what did Mr. Heffner do? He started his own chemical supply company, BioTechnology Corporation of America. Their website looks formidable, with divisions in synthetic organic chemistry, custom synthesis, etc. (five total divisions). However, the company was run out of Mr. Heffner's basement (according to the Tribune-Review). Still, being an entrepreneur is admirable.

But Mr. Heffner listed himself as a medical doctor (which he isn't). Still, lots of Americans embellish their resumes. He also claimed (at one point) he had a Ph.D. (which he doesn't). He tried to get his local township to approve a helipad because he was part of the University of Pittsburgh's transplant team (which obviously he wasn't). And the public record shows that Mr. Heffner had his boating license suspended for one year in 2006 because of his refusal to submit to chemical testing.

How did he afford his nice house in the upscale community of Pine, Pennsylvania, his boat, his helicopter, and his partying lifestyle? His business had something to do with that. He bought rare chemicals from Sigma-Aldrich on the cheap. Very cheap. You see, he had an "in" at Sigma-Aldrich—Robert Wandler, head of Sigma-Aldrich's rare chemical laboratory. Mr. Wandler "sold" the rare chemicals to Mr. Heffner at artificially low prices (as low as nothing) and Mr. Heffner sold them back to Sigma-Aldrich at high prices. The total fraud to Sigma-Aldrich is, according to prosecutors, more than $2.1 million. Mr. Wandler, by the way, appears to be working on his own plea deal.

But one fraud wasn't enough for Mr. Heffner. He decided that tax evasion was a good sideline business. His $2,000 veterinary bill ended up being $2,000 in veterinary research, and a deductible business expense. (Hint—don't do that at home.) Other "business" expenses included an associate's season tickets for the Steelers, his girlfriend's cellphone bill, and many similar expenses. The total of his tax evasion is a cool $1.2 million.

The Post-Gazette quoted a former business partner of his, Tommy Kehoe, as saying, "All I can say is the guy's a fraud. It's that simple. He lied to me about everything for 10 years...By God, he should get 10 years in prison." Based on federal sentencing guidelines, he will likely receive 3 to 4 years at ClubFed for just the tax charges, so Mr. Kehoe may get his wish.

Finally, I'll answer Mr. Heffner's burning question: the party scene just isn't that good at ClubFed.

As I mentioned in May, the Supreme Court will be looking at the taxing of municipal bonds later this year (Department of Revenue v. Davis). There's an interesting article that I found that analyzes what the Supreme Court will likely do; "Muni Bonds and the Commerce Clause After United Haulers."

The law professors who wrote this article, Ethan Yale and Brian Galle, conclude that the Supreme Court will not overturn the Kentucky Court of Appeals ruling that taxing out-of-state municipal bonds while not taxing in-state municipal bonds is unconstitutional. The article is quite interesting; those with an interest in the case should read it.

Of course there's a huge caveat—trying to guess what the Supreme Court will do is very difficult.

There are lots of foreign countries in the world, but Antarctica is not one of them. It is a continent. The question arose last year on whether you can take the Foreign Earned Income Exclusion (§911 of the Tax Code) if you happen to be working in Antarctica; today, the issue reappeared at the Tax Court.

The Foreign Earned Income Exclusion allows a taxpayer who is working abroad to exclude a portion of their earned income. But there are caveats--the income excluded must be earned, and it must be earned in a foreign country (there are other restrictions, too). Last year, in Arnett v. Commissioner (126 T.C. No. 5), the Tax Court ruled that §911 doesn't apply. Earlier this year, the 7th Circuit Court of Appeals upheld that decision. Unsurprisingly, the Tax Court tersely noted, "We follow our analysis and holding in Arnett I and the analysis and holding of the Court of Appeals in Arnett II."

Deductions and exclusions are narrowly constructed; that's a basic rule of the US Tax Code. Unfortunately, for today's petitioner, Antarctica doesn't fall within the scope of Section 911.

Case: Kunze v. Commissioner, T.C. Memo 2007-179

When I see that phrase, I just know that a whopper of an error is about to be seen. Well, those words weren't used, but the DC Circuit realized that they did just that--made a whopper of a mistake. On Tuesday, they reversed themselves in the Murphy case.

If you remember the Murphy decision, the DC circuit ruled (in September 2006), "that §104(a)(2) of the Internal Revenue Code (Title 26, U.S.C.) is '...unconstitutional insofar as it permits the taxation of an award of damages for mental distress and loss of reputation.'" The same panel of judges reheard the case earlier this year, and the decision came out on Tuesday—probably, as Joe Kristan of Roth Tax Updates said, "...Courts are hip to the public relations technique of issuing embarrassing news at holiday times, when it is least likely to attract attention."

The ruling itself is very ordinary, which tells you how off-base the original Murphy decision was. The Court now notes that even if "[Murphy's award] is not income within the meaning of the Sixteenth Amendment, is within the reach of the congressional power to tax under Article I, Section 8 of the Constitution."

Other Coverage:
AP
New York Times/Bloomberg
Roth Tax Updates
The TaxProf Blog

The Wisconsin State Senate approved a $66 billion (two-year) budget last week that includes $15.2 billion in new taxes. The budget includes new or increased taxes on oil companies, cigarette sales, hospitals, vehicle registrations, and real estate transfers. The proposed budget does include universal health care (a $15 billion proposal that may violate Federal ERISA rules) and over 150 other changes.

As I read the story in the Milwaukee Journal-Sentinal, I wasn't surprised to find that the Democrats control the State Senate in Wisconsin. Luckily for taxpayers, Republicans control the Wisconsin State Assembly. It's certain that the budget in its current form won't be approved.

Wisconsin already has the 7th worst tax burden in the United States (according to the Tax Foundation). Apparently that's not good enough for the Democrats in the Dairy State.

A few years ago, the IRS introduced new Schedule K-1s. The Franchise Tax Board plans on introducing new K-1s for the 2007 filing season, so that "[t]ransferring amounts from federal K-1s to California Schedule K-1s will soon be easier."

You can see the draft K-1s here.

Now that it's summer, you may be considering a trip to the pool. Swimming is a great summer activity, but you do have to be careful when you dive into a pool. One diving coach jumped into some hot water last week.

Michael Finneran was the head woman's diving coach at North Carolina State University in Raleigh, North Carolina. But Mr. Finneran didn't consider himself an employee of N.C. State. On his North Carolina tax returns, he allegedly included phony W-2 forms showing no state income. That's a problem, especially when you're listed in the Athletic Department's web page.

As reported here, Mr. Finneran was convicted of evading state income tax and was sentenced to 25 to 30 months in prison. According to the news story, he plans on appealing the conviction.

I'm not a big drinker. The former President and co-owner of Domecq Importers will have 10 years at ClubFed of being a teetotaler after pleading guilty to fraud and tax fraud charges. Domecq Importers was a large liquor importer based in Connecticut.

Michael Domecq had a not-so-good idea. Have some outside vendors (primarily advertising agencies) send in invoices for work that was never done. Then have his company pay the vendors. That's fraud against his own company.

But Mr. Domecq went a step further. He had the vendors then issue checks to shell corporations controlled by him and his accomplices: Chief Financial Officer Alfredo Valdes, Vice President of Marketing Gabriel Sagaz, and Vice President of Sales Thomas Kaminsky. Those three individuals had already pleaded guilty to various charges.

Did I mention those shell corporations used offshore bank accounts? And that the shell corporations didn't pay any income tax? That's tax fraud.

This isn't Mr. Domecq's first trouble with the law. He was convicted in the United Kingdom in 2006 of possessing a false Spanish passport and of illegally getting a U.K. drivers license.

Mr. Domecq, as part of his plea agreement, will submit corrected tax returns for 1989 through 2006, and will pay all of the taxes, penalties, and interest. Given that the unreported income is over $7.6 million, Mr. Domecq will be writing out some big checks to the United States Treasury.

It would have been much simpler to just pay the tax in the first place...but somehow that thought never enters the mind of the tax evader.

I've reported several times about strip club owners evading taxes (and getting caught). I guess there are a lot of temptations out there...and if you're going to offer one, you get to thinking about another.

In any case, yet another ex-strip club owner has been convicted of tax evasion. From Jackson, Mississippi comes the story of Jon Adams. Adams used to own the Stardust Cabaret. Back in 1999 Adams attempted to get the zoning changed for his club. And the (then) Jackson City Council President, Louis Armstrong, found his way to prison for accepting a $25,000 bribe.

Adams' troubles related to understating his income on his tax returns. The government alleged that Adams earned over $500,000 in 1999 and $466,000 in 2000 but that he reported $344,000 less. Oops. And allegedly making a $75,000 down-payment on some property while in bankruptcy didn't sit well with the jury either.

While Adams faces six years at ClubFed and a maximum of $200,000 in fines, his stay will likely be significantly less. His sentencing is scheduled for October 9th.

Jo Hovind fared much better than her husband when she was sentenced last week for 45 tax related charges. Her husband, Kent Hovind, received ten years in prison. Mrs. Hovind was sentenced to one year and a day, and will begin serving her sentence on August 31st. Mrs. Hovind will likely appeal both the convictions and the sentence.

The government got some other items as part of the conviction. Judge Casey Rodgers ordered that the property owned by the Hovinds was forfeited to the government. That includes the now defunct Dinosaur Adventure Land. Will the government reopen it? Will it join other intriguing government owned properties such as the Mustang Ranch and the Bicycle Casino? (For the record, the government sold off the buildings and other physical assets of the Mustang Ranch. The Bicycle Casino was owned by the government for a few years but was sold to private owners.)

Judge Rodgers delivered the moral of the story: "No one can violate the law and then say that they were doing so for the will of God."

One of the two Neteller founders pleaded guilty on Friday to one count of conspiracy. Stephen Lawrence told the Associated Press, "I came to understand that providing payment services to online gambling Web sites serving customers in the United States was wrong." Lawrence faces up to five years in prison when sentenced on October 29th.

What does this mean for Neteller's future and its ex-customers in the United States? Almost nothing. Neteller is scheduled to announce its plan for returning millions of dollars in held funds on July 13th. As to Neteller's future, I said months ago,

"Indeed, it's clear what's likely to happen. Neteller and the DOJ will likely come to an agreement. Neteller will announce that they will no longer do business with Americans, and they may have to pay a fine; the DOJ won't indict the company, or any of its current stockholders. The DOJ might even accept some sort of plea bargain for the two founders who were arrested. It's also certain that as part of such a deal Neteller will agree to release details of all transactions between American customers and Neteller."

Nothing that has happened to date in this saga has caused me to change my opinion.

As a reminder, July 2nd is the deadline for filing Form TD F 90-22.1. Remember, mail the form to the Department of the Treasury, not the IRS. If you had more than $10,000 at Neteller (or any combination of foreign bank accounts), you are required to report it. Willful non-reporting is punishable by a fine of $100,000, or 50% of the funds in the foreign accounts, whichever is greater, and can also result in criminal penalties.