Taxable Talk

I'm definitely not an expert on oil and gas accounting. That's a very specialized niche, and I only know enough to be dangerous. But one thing I do know is that you can't inflate prices on joint ventures to allow partners to get tax credits. That's tax fraud.

And that's what one Ohio company and two individuals at that company are alleged to have done. The Justice Department has sued Mid-Con Petroleum of Heath, Ohio, and two principals of that firm, Daniel Weddington and James Earl.

Here's how the scheme allegedly worked, according to the indictment (as reported by the Newark Advocate). Mid-Con would sell the interests in wells to customers using a payment plan that would ask for just a little bit down. Customers would then promise to pay the rest from profits from the well. Mid-Con would allegedly cash the payment after the customers received the tax credit on their next year's tax return.

The DOJ news release alleges that Mid-Con inflated prices on the wells by having customers use "sham notes" to pay for most of the purchase price. The customers then allegedly used the inflated price to claim tax credits on intangible drilling costs.

But it gets better. The same intangible drilling costs were allegedly sold to multiple customers so that they could take the credit on the same drilling costs. Think of one oil well, but it got cloned into two or three or more. The DOJ suit alleges that Mid-Con has 200 customers so this is allegedly not a small-time fraud. Indeed, the DOJ believes that these alleged acts have cost the Treasury between $5.4 and $6.9 million.

The DOJ also alleges that Mid-Con has obstructed the IRS investigation into this matter. The DOJ is asking for this alleged scheme to stop. It appears that this "gusher," if there was one somewhere in Ohio, has been capped.

As an author (my third book is due out in late January), one problem that I have faced is coming up with a title. It must be something that attracts your target audience to your book. A Norristown, Pennsylvania attorney allegedly came up with a title to describe the tax fraud he was allegedly committing—Federal Tax Fraud: The Users Guide.

Bernard Bagdis and ten other indivduals were named in a 168-page indictment. Mr. Bagdis, who is accused of not filing a tax return between 1990 and 2006, faces 35 charges: one count of attempting to impede the IRS, seven conspiracy counts, 16 charges of aiding and assisting in the preparation of a false tax return, six counts of failing to file a tax return (I guess the IRS was generous with the other five years), and five counts of not filing a currency transaction report. Mr. Bagdis is facing a very lengthy stay at ClubFed if found guilty on all of these charges.

The indictment alleges that Mr. Bagdis used shell corporations, a phony foreign bank, and a waterproofing company to hide $23 million worth of income allegedly owed by the other defendants; the tax due on that amount would be $4.6 million.

I guess Mr. Bagdis' book may not see the light of day.

News Story: Philadelphia Business Journal

This afternoon I spoke to the Exchange Club of Irvine regarding tax law changes in 2007. One issue that came up that I couldn't give a complete answer to was the Alternative Minimum Tax (AMT). Would Congress pass another "patch" bill for 2007? Would Congressman Rangel's bill that included other tax increases pass? What would the impact be on the 2007 filing season?

Before I answer those questions, let me note that it's not just taxpayers who are concerned. The IRS Oversight Board is "gravely concerned" regarding possible delays in the filing season due to changes with the AMT. Paul Cherecwich, chair of the Board, sent a letter to the Senate Finance Committee noting the Board's concerns. The Oversight Board estimates that a late filing season start date of January 28, 2008 will result in $17 billion in delayed refunds, while a February 18, 2008 filing season start date will result in $87 billion of delayed refunds.

Other potential impacts of the delay include more taxpayers filing paper returns (the IRS can shut down electronic return processing but can't stop paper returns from being mailed) increasing expenses, increase errors, and generally make next tax season a nightmare. "In conclusion, the Oversight Board urges Congress to take quick action so as to mitigate the risks of AMT changes on taxpayers. Although it is difficult to quantify the exact impact with certainty, the risks are high and the effect on taxpayers is potentially very burdensome."

So, let me answer the questions that were posed today. Congress will pass an AMT patch that's acceptable to President Bush and Congressional Republicans because the AMT primarily impacts "Blue" states. Congressman Rangel's bill won't pass as currently written; House Democrats will have to live without their "paygo" rules. As to the impact on the tax season, let's just say that I think the rest of my hair will be gray by next April 15th.

Civil rights attorney Stephen Yagman was sentenced today to three years at ClubFed for his 19 convictions on bankruptcy fraud, tax fraud, and money laundering. The government had asked for nine years; Yagman had asked to teach a course on morals at UCLA.

Yagman admitted today in testimony that "he got sloppy...I was aware that I had painted a target on my own back and I tried to be scrupulously careful. I made mistakes."

Assistant US Attorney Alka Sagar told the Court on Monday, "He went shopping on Park Avenue hours after his bankruptcy was filed. This was brazen conduct."

Judge Stephen Wilson noted, "Like so many cases in modern history, it's always the cover-up that's worse than the crime. Frankly, I was shocked by his testimony because it was transparently untrue in many areas."

Yagman will appeal his conviction. He must surrender to authorities on January 15th.

News Story: San Jose Mercury News (via AP)

A sure way to know when the IRS will announce the standard mileage rates for the following year is to look at my schedule. At lunch today I spoke to the Exchange Club of Irvine on 2007 tax law changes. Naturally, this afternoon the IRS issues Revenue Procedure 2007-70 with the 2008 mileage rates.

Those rates are:

Business Miles: $0.505/mile (up from $0.485 in 2007)
Charity Miles: $0.14/mile (unchanged)
Medical or Moving: $0.19/mile (down from $0.20 in 2007)

I'm not sure how any mileage rate goes down from 2007 to 2008 given the price of gasoline. However, the IRS uses an independent contractor to determine these rates.

The sun'll come out
Tomorrow
So ya gotta hang on
'Til tomorrow
Come what may
Tomorrow! Tomorrow!
I love ya Tomorrow!
You're always
A day
A way!

Those lyrics, from the musical Annie, describe Stephen Yagman's fate. After a six-hour sentencing hearing today in Los Angeles, the attorney still does not know his fate. He was convicted earlier this year on 19 counts of tax fraud, bankruptcy fraud, and money laundering.

As I noted over the weekend, Yagman would like to teach morals at UCLA. The Department of Justice would like him to visit ClubFed for nine to eleven years.

The news report noted that Judge Stephen Wilson asked, "How do you reconcile his desire to continue to practice in one of the most stressful areas with his medical condition?" Yagman's attorney said that Yagman has been suffering from heart disease.

Yagman's fate will probably be set by the judge tomorrow. I suspect a visit to ClubFed is much more likely than an immediate trip to Westwood. As Chuck Gallagher, a business ethics speaker (and a former ClubFed resident for tax evasion) said, "Yagman has shown from his conviction that he has a disregard for the law through his actions related to hiding assets in bankruptcy and from the IRS (tax evasion). Hence, it would be far reaching to think that the government would consider him a likely candidate to teach morality."

Several months ago, I participated in a phone form on the FBAR program (Foreign Bank Account Rreporting); generally, if you have a foreign bank account with $10,000 or more in it you must file Form TD F90-22.1 with the Department of the Treasury by June 30th of each year. Today I received information on questions that were asked in that phone forum (the phone forum was in early June, so it took nearly six months for the answers to be distributed...).

Some of the answers are different than what I was led to believe during the conference call.

1. The due date of the FBAR is June 30th, but the form must be received by June 30th, not postmarked by June 30th. This is different from tax forms which have a postmark due date.



2. You must file a form if you have $10,000 in one or more foreign bank accounts. This is determined by adding the maximum balance in each account during the year, not the maximum balance of all the accounts at one point during the year. For example, the maximum you have in foreign accounts is $9,500 ($9,000 in account 1 and $5,000 in account 2 on June 15th). However, the maximum you had in account 2 was $4,000 on August 10th (the maximum in account 1 was $9,000). You are required to file Form TD F90-22.1.



3. A faxed signature is not acceptable for an FBAR.



4. Foreign life insurance can be considered a foreign financial account subject to reporting (by the policyholder) on an FBAR.



5. A line of credit does not have to be reported on an FBAR.

There were many other items listed in this email; I've only posted the highlights. Anyone who believes they are impacted by this should talk with their tax professional to get full information on their situation.

I've been asked if I am a supporter of the "Fair Tax." The Fair Tax is an idea of scrapping the current U.S. Tax Code and replacing it with a national sales tax. You can go to the Fair Tax website and get detailed information on the program. The site gives fundamentals behind the program here.

I hadn't seen an unbiased review of the Fair Tax program until this weekend. Hank Adler, a professor of business at Chapman University, has published a lengthy critique of the Fair Tax. You can read it here (it is best read using Internet Explorer rather than Firefox). Professor Adler comes to the conclusion that while our current Tax Code may need to be replaced, the Fair Tax isn't the way to go.

I agree that our current Tax Code is not a very good system. I'm still digesting material on the Fair Tax, and haven't reached Professor Adler's full conclusion, but I do have many reservations about the Fair Tax.

Back in August I reported on the case of La Crosse, Wisconsin dentist Frederick Kriemelmeyer. Dr. Kriemelmeyer is an adherent of the philosophy of David Wynn Miller's "In the Truth." And he doesn't believe in the US flag and the US Tax Code. He was found guilty on three counts of filing false tax returns.

On Monday he found out that he'll have time for remedial English—three years to relearn the language while at ClubFed. He'll also have time to repent for being "greedy," according to Judge Barbara Crabb who sentenced Dr. Kriemelmeyer. He also has to pay $8,000 to repay the government for his prosecution and make restitution of $135,000.

Back in June prominent Los Angeles attorney Stephen Yagman was found guilty of 19 counts of tax fraud, money laundering, and bankruptcy fraud. Yesterday at the sentencing hearing, Yagman's attorney, Barry Tarlow, asked that Yagman be sentenced to teaching morality to undergraduates at UCLA.

I'm not making this up.

UCLA professor Frances Olsen asked Yagman to teach the course. Ms. Olsen, according to her biography, specializes in "legal theory, social change, and feminism." The Wikipedia page on Ms. Olsen states that she is "...a noted member of the school of Feminist Legal Theory." Apparently ethics aren't part of that theory.

For the record, I'll note that Mr. Tarlow believes that the prosecution of Mr. Yagman was a "vindictive prosecution." And that Mr. Tarlow believes prison would be a bad choice for some other reasons: bad health and possibility of being attacked. Vindictive or not, when a person is convicted of 19 felonies he should expect to visit ClubFed rather than teach at UCLA.

Judge Stephen Wilson will likely sentence Mr. Yagman on Monday.

Hat Tip: Patterico's Pontifications

Wouldn't it be nice if you could conduct an audit of that conniving guy or gal that you have to deal with? You'd make his or her life a total pain.

Well, that's just no doable. Only the IRS (and various state tax agencies) conduct audits. Today, the Tax Court turned down Creed Pearson's request to audit The Organization:

Petitioner asks that we allow him to audit the Organization, which is not a party to this case, and that he be able to pay his taxes out of the proceeds of that audit. There is no provision in the Code that gives us the authority to allow one taxpayer to audit another taxpayer in order to reduce his tax deficiency. Therefore, we deny petitioner’s request."

Joe Kristan has lots more on this case.

Can a woman who owns and operates a trucking business also be considered a professional gambler? That's what the Tax Court had to decide.

Linda Myers operated a trucking business in the Twin Cities. The trucking business was substantial; there were 11 drivers using eight trucks. Ms. Myers earned a reasonable income (including both salary and nonemployee compensation) from the trucking business.

But that wasn't Ms. Myers' only activity. After she finished her daily activities with the trucking company, she headed to the casino to play the slot machines. And this wasn't a passing fancy; she spent about 40 hours per week at a casino.

The Court stated, "She considered herself a professional gambler by 2000. Petitioner viewed herself as a gambling expert but found no pleasure in gambling. Instead, she considered gambling stressful, tiring, and time consuming. She did not go to the casino with friends or companions and was focused on doing everything she could to win while she was there."

In 2003 she reported her gambling winnings as a professional gambler, deducting her gambling losses up to the amount of her winnings as an expense (on a Schedule C). The IRS examined her return, and issued her a deficiency notice which led to the Tax Court filing. The sole question the Court had to answer was whether Ms. Myers' gambling rose to the level of being a professional: Was she in the trade or business of gambling in 2003?

The key is the Groetzinger decision: "An activity must be conducted with continuity, regularity, and the primary purpose of earning a profit to be considered a trade or business under section 162. Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987)." Both Ms. Myers and the IRS agreed that she gambled with continuity and regularity. However, was she trying to earn a profit?

The Court used a nine-factor test:

"Sec. 1.183-2(b), Income Tax Regs. The nine factors are: (1) The manner in which the taxpayer carried on the activity; (2) the expertise of the taxpayer or his or her advisers; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that the assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer’s history of income or loss with respect to the activity; (7) the amount of occasional profits, if any, which are earned; (8) the financial status of the taxpayer; and (9) whether elements of personal pleasure or recreation are involved."

While the Court noted that she hadn't had profits, that was the only factor that favored the IRS. Ms. Myers used Slot Club records, was knowledgeable about gambling, spent considerable time and effort, was successful in other business operations (the trucking company), and testified credibly that she derived no pleasure from the gambling. So Ms. Myers was a professional gambler for 2003.

Do note that this decision is a memorandum decision of the Tax Court, and cannot be used as a precedent. It does, though, show the factors and issues that you will need to prevail in a case where you maintain multiple businesses and want to be considered as a professional gambler.

Case: Myers v. Commissioner, T.C. Memo 2007-194

Did you use Archie's Tax and Accounting Service in Jamaica (Queens), New York? If you did, you're likely to be getting a call from the IRS soon. The proprietors of Archie's, Archie and Theodore Pugh, have been permanently barred from preparing tax returns.

What did the Pughs do? They used the "Claim of Right" doctrine to zero out taxpayers' wages. The Claim of Right doctrine is an actual deduction. It occurs when you have income in one year and then find out that you must repay the income in a later year. In that case, you can deduct the income in that later year.

Of course, you're likely a couple of steps ahead of me. The Claim of Right doctrine only is applicable if you have to repay income. If you don't have to repay income then it doesn't apply. (Personally, I've never seen this situation.) The Pughs used the doctrine on most of the returns they prepared, costing the government over $2 million.

Yes, it sounds too good to be true, and it is. If you're ever told of a method to deduct all of your income, check with a reputable tax professional. You'll likely find it's as phony as a $3 bill. Another good resource is the Tax Protester FAQ, which does include the Claim or Right doctrine.

In any case, if you happened to use the Pughs, you will likely have the IRS examine your return to see if it is correct or not. The IRS doesn't know if the Pugh's clients knew of the fraud. Just remember, if it sounds too good to be true it probably is.

After all, Thanksgiving comes on Thursday, so we should thank these miscreants and alleged miscreants for helping make a blogger's life easy.

Let's start in Manhattan. James Ortenzio used to be the chairman of the New York County (Manhattan) Republican party. Now he's just another individual who has pleaded guilty to tax evasion. Mr. Ortenzio didn't disclose $180,000 he received in consulting income in 2004-2005. The investigation into Mr. Ortenzio grew out of an investigation into the Cipriani family restaurant business. Mr. Ortenzio is lucky in one respect; he'll serve no time at ClubFed. He has to file corrected tax returns (and pay the tax, penalties, and interest) and will be on probation for five years.

Let's move west to Helena, Montana. Rolan Becker worked as a forester for two Indian tribes in the state. However, he bought tapes and attended seminars that said he could declare himself "exempt" from income taxes. Mr. Becker also made the brilliant move of walking into an IRS office and telling the clerk that he wasn't going to file tax returns and that the only reason to file false W-4 forms is to evade taxes. Did I mention that Mr. Becker did exactly that? He was found guilty of tax evasion.

Judge Charles Lovell noted that Mr. Becker worked for a quasi-governmental agency for twelve years and wondered if he realize that it was taxes that paid for his salary. "You are probably the most flagrant protester and tax dodger that I have seen. It makes one wonder where the United States government would be in today’s world if everybody took the same attitude as this defendant."

The judge gave Mr. Becker 27 months at ClubFed, and ordered him to make restitution of $91,700. Additionally, Mr. Becker was ordered to pay $50,000 to cover the cost of his time at ClubFed and $1,700 to help pay for his prosecution. And that's not all. The judge urged the US Attorney to consider charging Mr. Becker with hiding his assets by transferring real estate back and forth to an LLC he created.

Finally, let's head to the heartland—Belleville, Illinois. A dentist there decided that he didn't need to report $347,000 of his income. He also decided to take $127,000 of withheld taxes and keep them. Gerald Dortch pleaded guilty to tax evasion; he'll likely be spending some time at ClubFed.

As I repeatedly say, there is an income tax and you do have to pay it. And it's a whole lot easier to pay it than to evade it and then pay the tax, penalties, and interest.

The Department of Justice filed a motion this past week in Ocala, Florida accusing Wesley Snipes of using overseas bank accounts in Switzerland, the Isle of Man, and Antigua to hide his funds. They've also accused Snipes of "selling" a business when he maintained full control and of sending frivolous correspondence to the IRS.

While the DOJ isn't charging Snipes with some of these acts, they want to introduce evidence of these acts in Snipes' upcoming trial on filing for a false income tax refund. Snipes has also been charged with conspiracy. The DOJ believes that evidence of these acts will help to persuade a jury of Snipes' illegal conduct.

Last week Snipes asked that his trial be moved from Ocala as the area is too "racist." Snipes may have a lot more to fear from the evidence. The trial is currently scheduled to begin in January.

Last week I reported that California's legislative analyst believed that the Bronze Golden State was looking at a $10 billion deficit. State Senator Tom McClintock (R-Thousand Oaks) thinks that's wrong. Unfortunately, he thinks California is looking at a $20 billion deficit. Ouch.

Senator McClintock notes that the legislative analyst deducted the $4 billion reserve when computing the $10 billion deficit number so we're really looking at a $14 billion deficit assuming the assumptions in the budget are correct.

The problem is that the budget assumes the status quo—that California's revenues continue in 2007 like they did in 2006. That's an unreasonable assumption. Senator McClintock put it well:

"Revenue growth last year was only 2.3 percent; the LAO admits that the economy will deteriorate in the fourth quarter of the fiscal year; and most ominously, our revenue receipts in the first four months of this fiscal year grew only 0.6 percent compared to the first four months of last year, according to the latest data from the state controller’s office. Even the Department of Finance reports only 1.7 percent growth through October 31st. If revenues continue to come within this range, the deficit will be in the $18 to $20 billion range by June."

Back in September, I reported that Cook County was looking at increasing its sales tax. That hasn't happened yet. However, the City of Chicago decided that one good tax increase deserves another. Chicago's City Council passed a $0.05/bottle water tax and an $86 million property tax increase. Beer, wine, and liquor taxes have also been increased. The tax increases all go into effect on January 1st.

I guess politicians in Chicago have very little to fear from voters. After all, Mayor Daley was just reelected for a sixth term as mayor. Eventually, though, Chicago residents may come to the conclusion that there's another way of balancing a budget—cutting some of the bureaucracy.

Pork has gotten ridiculous in Congress. My Congressman, John Campbell, is one of the few who has said he will not ask for any earmarks for his district. Meanwhile, David Obey (D-WI), the Chairman of the House Appropriations Committee, said it will be a cold day in Hades before there's real earmark reform. At least he's honest.

But there is something we can do. When individuals complain to Congress, results occur. You'll see below a form that you can fill out to complain about earmarks (aka pork). The elimination of pork and a streamlined tax system go hand and hand. Join me and sign the petition—it's free and easy.

One of the vexing matters for tax professionals are side businesses. If they're profitable, it's usually not an issue. It's another Schedule C for the return. However, when they are unprofitable problems can arise if the IRS scrutinizes the return.

The Tax Court looked at this again on Thursday when the decided the case of a Kansas couple who had an exotic animal breeding business. The husband is a successful physician, with a medical practice that brought in $750,000 or more annually. Starting in 1989, the began to breed exotic birds. They then expanded into all sorts of exotic animals, including (but not limited to) "Watusi cattle, miniature donkeys, miniature horses, elk, reindeer, zebras, African antelope, kangaroos, Clydesdale horses, and primates."

The Kansas couple did some things right: They did keep a separate set of books and a separate bank account. But they didn't bother with sales receipts to customers. They did treat the employees of their business as employees. They withheld taxes, offered health insurance, etc.

However, they never turned a profit. And when the IRS audited the couple's tax return for 2001 and 2002, the IRS ruled that the couple could not deduct the losses at the business. The case was then appealed to the Tax Court.

The Court looked at their records, and found them deficient.

"Although we are satisfied that petitioners kept financial records of their breeding activity, we are not convinced that petitioners’ record keeping represented anything other than an effort to substantiate expenses claimed on their return...Petitioners presented no evidence that their books and records were used to review profitability or to implement cost-saving measures. While a taxpayer need not maintain a sophisticated cost accounting system, the taxpayer should keep records that enable the taxpayer to make informed business decisions...Although petitioners kept extensive financial records, they were not used to review and reduce expenses or to enhance the possibility of generating income...Petitioners did not introduce any evidence that they used their financial and breeding records to determine whether a specific breed was profitable...Because petitioners failed to use the existing books and records to minimize their expenses or otherwise foster profitability, the fact that they maintained records does not indicate that the activity was carried on with a profit motive."

And that basically was the case. Yes, the couple kept records. But the records appeared incomplete, and were apparently not utilized completely. The couple couldn't show that they expanded breeding of profitable exotic animals because they couldn't show which animals were profitable. Add to that 16 years of large losses, and the case flew the coop.

Case: Knudsen v. Commissioner, T.C. Memo 2007-340

Barry Bonds was indicted this afternoon on charges of perjury and obstruction of justice. Bonds was not indicted on any tax charges.

I'm sure this indictment will gets lots of play in the media, and on sports websites such as espn. Given that I reported on Bonds' possible indictment on tax charges, I felt I should set the record straight. He won't be facing that issue. Frankly, though, his baseball career may have just ended.

News Story Here

It hasn't been a good year for Governor Eliot Spitzer (D-NY).

First, he's been accused of using state troopers to spy on political opponents. Next, he proposes to give illegal aliens drivers licenses—a measure that's overwhelmingly not supported by New York residents. Eventually he abandons the idea. Then he supports a stretching of the definition of "nexus" for state sales taxes to include affiliate programs. Yesterday, he dropped the idea—at least for the time being.

Republicans were going to paint Spitzer as the "Grinch who stole Christmas." Spitzer won't have to deal with that, for now.

However, New Yorkers should still watch what happens in Albany. The State Department of Taxation and Finance still believes they're right in their expansive view of nexus. This plan will likely reappear sometime in 2008.

Governor Eliot Spitzer (D-NY) is leading the way. But it's a taxing way. The New York Department of Taxation and Finance says that any company that has an affiliate program that has any affiliates in New York must charge sales tax on sales shipped to New York.

Currently, companies must charge sales tax when a business has a "nexus" in the state. That's usually caused by having a physical presence (an office) or employees in that state. Amazon.com doesn't have an office or employees in New York. Thus, they haven't charged New Yorkers sales tax.

However, New York now says that having an affiliate in the state is enough to give a company a nexus in New York. This is an interesting theory, but it could run into difficulties. Glenn Reynolds, the Instanpundit, thinks it wouldn't stand up in court.

In any case, Governor Spitzer is looking at a $4 billion deficit for next year and has pledged not to increase taxes. The Department of Taxation and Finance calls this a policy clarification. I hope they have a big budget for legal fees as that's likely where this is headed.

"A billion here, a billion there, and pretty soon you're talking about real money."—Senator Everett McKinley Dirksen

And that's the situation in the Bronze Golden State. The Legislative Analyst released her report, and the news is grim. California is looking at a $1.9 billion shortfall for the current fiscal year, and an $8 billion shortfall for 2008-2009. That's about $10 billion, and that's quite a bit more than a billion here and a billion there.

Of course, conditions could change. Perhaps the real estate market will have a miraculous comeback in the next few weeks. Perhaps consumers will overspend during the holiday season, leading to increased tax revenues. Perhaps there will be a federal capital gains tax cut, leading to increased state tax revenues. Perhaps there will be more stock options exercised in Silicon Valley than anyone expects. Perhaps the Cubs will win the World Series....

I think you get the idea. If anything, I think the LAO is too conservative about the shortfall. She discounts the possibility of a recession. I think there's a real possibility of one caused by the housing crisis and energy costs.

In any case, California's legislators will find themselves between a rock and a hard place soon. They are mandated to have a balanced budget. As the systemic deficit grows, they will be forced to make real reforms: either increasing revenues (taxes) or cutting programs. There aren't the votes to increase taxes. There haven't been the votes to cut programs. Soon, there may not be a choice.

Many years ago I remember seeing a Peanuts cartoon where Snoopy wrote to the IRS, "Please remove me from your mailing list." As much as you and I would like to not have to deal with the IRS, if you don't file when you should you're guilty of tax evasion. You can't opt out from your responsiblities. Yet for the Bozo wing of tax fraudsters opting out is fine...until they get caught.

Take David Struckman of Renton, Washington. Mr. Struckman co-founded Global Prosperity. Global Prosperity claimed that you could elect to not follow the Tax Code by just renouncing the US government's sovereignty. Global Prosperity sold lots of audiotapes for their purported scheme. Among other things that Global Prosperity suggested was to move your income to offshore accounts, and to hide funds in foreign trusts. Mr. Struckman followed his own advice.

The Seattle Times reported that Mr. Struckman attempted to renounce his Washington state citizenship in 1997, and filed papers in King County (Washington) stating that he was no longer going to follow US laws.

Unfortunately for Mr. Struckman and his other co-founders, the IRS and the Department of Justice wasn't pleased with the scheme. Indeed, all of the co-founders were indicted in May 2004 on multiple charges of tax evasion. And they were all either found guilty or pleaded guilty to various charges. Mr. Struckman fled to Panama to escape prosecution. He was extradidted in 2006 back to the US. He was found guilty of tax evasion and conspiracy to defraud the US government on Friday.

Mr. Struckman faces up to 20 years at ClubFed plus a possible fine of up to $1 million when he's sentenced next March. Mr. Struckman's claim that he acted in good faith and thought he wasn't violating the law doesn't hold water. If he asked any competent accountant he would have been laughed out of the room. Yet he and his other co-founders built a $40 million business selling these phony trusts and bad advice to individuals. The reality is that we all have to pay our taxes. As Richard Morrison, Acting Assitant Attorney General for Tax, said, "People who sell or use these scams can expect serious trouble."

I will be traveling over the next few days. Posts will be minimal to nonexistent until next Wednesday.

November 10th is Saturday. That's normally the day the IRS sends all of the forms and schedules to the printer. There's a problem, though: Will Congress enact an AMT patch for 2007?

The House is scheduled to vote on a patch tomorrow. The Senate will likely take up the bill next week. However, President Bush is threatening to veto the legislation. Besides the AMT relief the measure extends 38 expiring tax provisions.

There are reasons why the President is threatening a veto. First, the bill has revenue offsets that the President doesn't like. The measure would increase taxes on carried interest paid to financial managers and deferred compensation paid to some foreign hedge fund managers. Second, the bill would repeal the private debt collection efforts used by the IRS. President Bush is also upset that Congress has waited to the last minute to address AMT and other issues.

Remember how this year some deductions weren't noted on the tax forms (e.g. the sales tax deduction), and that the IRS sent out a supplemental mailing? This also delayed refunds to those impacted by these tax breaks because the IRS had to reprogram their computers. Expect a similar situation this year.

I expect that eventually we'll see an AMT patch that both Congress and the President can live with. The AMT impacts individuals in "Blue" states more than "Red" states. However, I expect some of the 38 tax breaks that need to be extended won't be and will expire. And I won't be shocked if President Bush does veto the initial legislation, and that Congress will then pass something the President would (and will) sign.

Hat Tip: TaxProf Blog

Back in September, Wesley Snipes, accused of filing a false claim for an income tax refund, asked for a change of venue for his trial. He preferred Manhattan to Ocala, Florida. He asked for the change because of travel time from nearby airports to Ocala and because he has a home in New York. Judge William Terrell Hodges denied the motion. Snipes had also earlier charged that his prosecution was racially motivated; the judge denied that and told snipes that it wasn't racial. Rather, he's being prosecuted because he's famous.

Since then, Snipes has gotten a new attorney. But it's back to the same old arguments; Snipes' new attorney, Robert Bernhoft has asked for a change of venue (or alternatively, dismissal of the charges). Mr. Bernhoft complains that Ocala was selected because "...[prosecutors] deliberately chose the most racially discriminatory venue available to the government with the best possibility of an all-white southern jury where Snipes has never resided."

Mr. Bernhoft's charge of inherent racism in Ocala was met by skepticism by both a local prosecutor and a public defender. "That's perhaps the most outrageous claim I've ever heard made in open court," said Chief Assistant State Attorney Ric Ridgway. Chief Assistant Public Defender Bill Miller echoed Mr. Ridgway's views, telling the Associated Press, "I've never filed such a motion in any of my cases. If I felt I needed to, I would have."

Mr. Bernhoft hired a public relations firm to survey citizens in New York and Ocala. The AP noted that one of the questions asked was the views on the confederate flag. Not surprisingly, people in Ocala viewed the flag with more pride than people in New York. Given that Florida was part of the Confederacy, that shouldn't be a shock.

Judge Hodges will eventually rule on the motion. Based on his previous decisions, I expect that the trial will open as scheduled early next year in Ocala.

AP story here

As I noted, yesterday the Supreme Court heard oral arguments in Kentucky Department of Revenue v. Davis. Today, the TaxProf Blog has the views of Professors Gregory Germain of Syracuse University and Bradley Joondeph of the University of Santa Clara. They both believe that Kentucky will prevail.

You can read their opinions here.

Back in August, I told you the sorry tale of Gene Haas, former CEO of Haas Automation, Inc. Mr. Haas lost a court case and decided to get back at the judge by committing tax fraud. He became a two-time loser when his tax fraud scheme collapsed. In the end, he had agreed to pay the taxes, interest, penalties, and a $5 million fine (the total is about $75 million). Today he was officially sentenced to two years at ClubFed.

Had he just paid the judgment he lost (roughly $30 million) he would still be the CEO of a successful machine tool company. Instead, he's out an additional $75 million and will serve two years at ClubFed.

Suppose you're an employee of a business in New York, and you reside in New York. You come to California on business for a convention and stay for ten days. Later, you visit relatives in California for a week. Did you realize that you owe California taxes?

Yes, that's the law. If you're not paying, you're not alone. Most employers ignore out-of-state tax issues, and it's very difficult for the Franchise Tax Board to go after employers in Nebraska (for example).

California's rule is 14 days. Other states have different rules. There's a bill in Congress to make the rule uniform throughout the United States and only allow states to tax out-of-state employees at 60 days. The AICPA has endorsed the bill; I like it, too. Unfortunately, the bill has only three co-sponsors and is unlikely to emerge from Congress quickly.

Hat tip: Tick Marks and Roth Tax Update

The Supreme Court heard arguments in Kentucky Department of Revenue v. Davis today. The Scotusblog has a good discussion of the arguments that were made today.

The case, as I've mentioned before, is on whether or not states can favor their own municipal bonds and grant them tax-exempt status while not granting tax-exempt status for out-of-state municipal bonds.

A decision will likely not be announced until early in 2008.

Robert Beale is the former CEO of a computer parts company. He believed that God, the US Constitution, and 'tyrannical political societies' were good reasons not to pay taxes. Tax authorities begged to differ, and alleged that he hid his salary from taxes by calling himself a "consultant." He was arrested on five counts of tax evasion (allegedly evading taxes on $5.6 million) and one count of conspiracy to defraud the United States. He was released on bail with a trial date set in Minneapolis for August 2006. The trial, though, didn't occur because of a difficulty: The accused didn't show up. When that happened he became a fugitive.

The US Marshal's Service tracked him down in Orlando, Florida. Mr. Beale was carrying a false passport and other phony identification. He's had one count of failure to appear for his trial added to the list of charges he faces. He'll have a bail hearing soon, though I suspect that the chance that he gets bail is zero. Eventually, he'll find his way back to Minneapolis for trial. An associate has already been tried an sentenced to 43 months at ClubFed for tax evasion and aiding and abetting Mr. Beale; Mr. Beale is likely looking at a lengthy stay at ClubFed if convicted on the charges.

News Story: MSNBC

Two similar cases made the news on Wednesday; two government officials involved in tax trouble because of other crimes they are alleged to have committed.

First, from Huntsville, Alabama, a former director at the Redstone Arsenal is accused of taking kickbacks and has been charged with fraud, bribery, and tax evasion. Michael Cantrell is charged with taking $1.6 million in kickbacks according to US Attorney Alice Martin. "Cantrell corrupted his leadership position by taking $1.6 million in kickbacks to allow certain contractors to perpetrate a massive procurement fraud scheme," according to Ms. Martin.

According to the AP report, Ms. Martin has said that Mr. Cantrell is cooperating with the investigation and that further arrests are expected. Mr. Cantrell faces one count of conspiracy to commit bribery, two counts of bribery and one count of personal income tax evasion. He faces up to 40 years at ClubFed plus fines and possible disgorgement of kickback proceeds.

Meanwhile, from Madison, Wisconsin comes the story of former Overture Center Director Robert D'Angelo. Mr. D'Angelo is accused of 15 charges of mail fraud, 15 charges of wire fraud, four charges of money laundering, and four charges of tax fraud. Trial has been set for February.

Mr. D'Angelo ran two side businesses while heading the Overture Center for the City of Madison. He allegedly ran the side businesses out of city offices (which would violate city policies), and allegedly ordered city employees to help him with his businesses. Additionally, he allegedly used the city's telecommunications equipment in his businesses, and allegedly had city employees send emails and faxes for his side businesses.

Adding potential insult to injury, Mr. D'Angelo also allegedly didn't report any of the income from his side businesses on his tax return (which would be tax fraud, if proven). Needless to say, he's looking at a lengthy stay at ClubFed if he's found guilty.

Here in Orange County we have our own fraud/kickback case making news. Sheriff Mike Carona has been accused of taking bribes and allegedly intimidating witnesses. No tax charges, though...at least for now.

In partnership with committed adult volunteers, girls develop qualities that will serve them all their lives, like leadership, strong values, social conscience, and conviction about their own potential and self-worth.

That's straight from the website of the Girl Scouts of the USA, and there's one former adult volunteer who will likely indeed be committed...to ClubFed.

Holly Barnes of Pace, Florida decided to commit tax fraud and claim some false tax refunds from the IRS. She needed some identities, and chose girls in her Girl Scout troop. She had them sign false medical release statements (which had a place for their social security numbers), and she had all she needed.

So she went on her Bozo scheme, and received $87,000 in tax refunds from the IRS. She continued to file false refund claims even after she was under investigation. Even being charged with 15 counts of identity theft and 19 counts of tax fraud didn't stop her from trying to cash a check two days before her original hearing date! And shoplifting at the local Navy Exchange. That's hubris, stupidity, or both.

Wednesday, Ms. Barnes pleaded guilty to all counts in a Pensacola, Florida courtroom. She asked to be released for a couple of days, but the judge had other ideas. "You received the benefit of the court's trust with the understanding that you would not violate the law," Judge Casey Rodgers told her. "It's unfathomable to me ... that what [the Assistant US Attorney] has represented to the court might have taken place."

Assistant US Attorney Stephen Preisser told the Pensacola News-Journal "The long and short of it is Miss Barnes has violated the conditions of her release." She also pleaded guilty to a new felony theft charge for shoplifting merchandise from the local Navy Exchange.

Ms. Barnes will be held until her sentencing in January. She faces up to 230 years at ClubFed.

News Stories: Pensacola News-Journal, Emerald Coast.com

How would you like to do business in a state where taxes are going up, yet your customers are leaving? And not only are tax rates rising, the state has implemented a tax on services. Welcome to Michigan.

Michigan's new budget has a myriad of tax increases. As I earlier reported, the state income tax increased from 3.9% to 4.35% and the sales tax will now be imposed on services—that's a 6% tax, plus the cost in time and money for businesses to comply with the tax.

The taxes were implemented to balance Michigan's budget. Apparently the legislature in Michigan (and the state's governor) haven't heard about the Laffer curve. When tax rates decrease, tax revenues tend to increase.

Meanwhile, business owners in Michigan are fuming. The Detroit Free Press is reporting that Michigan business owners have begun collecting signatures to have a vote on repealing the new sales tax next November. Oakland (Michigan) County Executive L. Brooks Patterson told the Free Press, "The governor is not in a position to dictate. She’s not entitled to revenue neutrality. Spending is going up. They don’t need that much money here."

Unfortunately, most state legislatures don't believe in cutting spending to balance the budget. Sometimes it takes the people to remind the legislature who they serve. Perhaps Michigan residents will awaken. After all, it's supposed to be government by the people, of the people, and for the people, not for the bureaucrats.

Food and food ingredients are defined as substances that are sold for ingestion or chewing by humans and are consumed for their taste or nutritional value.

So reads the Iowa Department of Revenue's policy on what is food. Why is this important? Because the Iowa Department of Revenue decided (apparently in 2006) that pumpkins are mainly sold for decoration, and that sales tax should apply on those pumpkins sold for decoration but not on those sold for food.

I can just imagine a conversation at a supermarket in Des Moines. "Mrs. Smith, are you buying that pumpkin to eat or for decorating your front porch on Halloween?"

And what would the Iowa Department of Revenue think about someone who bought a pumpkin for both decorating and for food? Tax only half the pumpkin?

Yesterday, stories about the tax began circulating on the Internet and mass media (Google News showed 287 stories on the topic).

Luckily, some sanity has hit Iowa. Governor Chet Culver announced, "It has come to my attention that a policy change made in December of 2006 - before I took office - is resulting in this ridiculous pumpkin tax. I have directed the Department of Revenue to do the common-sense thing and suspend collection of this tax and offer refunds to consumers or retailers who have been affected."