Taxable Talk

Various tax agencies are giving relief to individuals, businesses, and organizations impacted by the brush fires in Southern California.

The IRS announced today that they will extend various deadlines for taxpayers impacted by the disaster:

Taxpayers in the Presidential Disaster Area –– consisting of Los Angeles, Orange, Riverside, San Bernardino, San Diego, Santa Barbara and Ventura counties –– will have until Jan. 31, 2008, to file returns, pay taxes and perform other time-sensitive acts.

The extended deadline applies to items due on or after Oct. 21, 2007, when the fires began, and on or before Jan. 31, 2008. This includes the federal withholding tax return, Form 941, normally due Oct. 31, and the estimated tax payment for the fourth quarter, normally due Jan. 15.

In addition, the IRS is waiving the failure to deposit penalty for employment and excise deposits due on or after Oct. 21, 2007, and on or before Nov. 5, 2007, as long as the deposits are made by Nov. 5, 2007.

The Franchise Tax Board is letting impacted taxpayers obtain free copies of their tax returns.

"If taxpayers impacted by the fires need copies of state tax returns to replace lost or damaged ones, they should complete Form FTB 3516, Request for Copy of Tax Return. Print “Southern California Wildfires 2007” in red at the top of the request. Disaster victims receive free copies of tax returns."

The FTB may issue other relief at a later date.

Any client impacted by the disaster should contact us when they have a chance. You may be eligible for a Casualty Loss deduction. The casualty loss can be taken by either amending your 2006 return or by taking it as part of your 2007 return. Which is right will depend on your tax situation.

And let me end this post with a heartfelt thanks to the firefighters and other emergency personnel who battled the fires. The Santiago fire burned just a few miles north of my home and office. Today, I drove to Foothill Ranch along the 241 Toll Road. The fire burned to the toll road...and even burned a little brush on the south side of the highway. A grove of avocado trees was damaged. The fire burned the hills all around the community of Foothill Ranch. Yet the homes and businesses of Foothill Ranch appeared to have escaped damage.

In March 2006, I wrote about Renato Medina, the principal owner of Lucky Chance's. Lucky Chance's is a cardroom located in Colma, just south of San Francisco. Mr. Medina and his niece and nephew were accused of tax evasion and conspiracy. At the time, they all stated their innocence. Mr. Medina's attorney (then) said, "This is a simple tax case...[and Mr. Medina] asserts his innocence."

Not anymore. As part of a plea agreement, Mr. Medina pleaded guilty to three counts of tax evasion (the remaining charges were dropped). He agreed to pay back the back taxes, penalties, and interest, which will likely total about $1 million.

Mr. Medina's arrest and the charges stem from a corruption probe of the small town of Colma. The first victims were two former mayors of Colma, Philip Lum and Ronald Maldonado. Both were accused of accepting free airline trips to the Philippines from Mr. Medina but not disclosing the gifts on required disclosure forms.

Mr. Medina has also agreed, as part of his plea deal, to serve between 15 and 21 months at ClubFed. Additionally, under California law he must give up his 100% ownership of Lucky Chance's. That had already been in the works, ostensibly for estate planning reasons, with the ownership transfer to his sons approved by both Colma and the California Gambling Control Commission.

Finally, Mr. Medina asked the government to drop the charges against his niece and nephew. The Department of Justice has yet to decide whether or not to do so.

News Story Here

Dan Meyer of the TickMarks blog made a request of me: "Present or past entertainers O. J. Simpson, Sinbad (Adkins) and Dionne Warwick are part of California's Delinquent Taxpayers List. Each owes over $1,000,000 in income taxes and each have had tax liens initiated prior to 2000...Meanwhile, Russ Fox of Taxable Tax is likely to have more on this story."

We covered this list a week ago, but we didn't highlight all the names. So here are some more famous names:

Dionne Warwick, S. Orange, NJ; $2.655 million
Sinbad Adkins, Oak Park, IL; $2.139 million
Orenthal Simpson, Miami, FL; $1.435 million
Brian Holland, Las Vegas, NV; $984,000

It's difficult for the FTB to impose judgments against out-of-state taxpayers. True, the rulings are on the books, and interest (and penalties) can continue to accrue. Dionne Warwick, though, lives in New Jersey. If she doesn't set foot in California, the FTB would have to fight in New Jersey courts to get any money. Luckily for the FTB, Dionne Warwick is "working with the FTB to resolve her tax problems," according to this article. She blames the problems on negligent business managers.

Similar situations exist for entertainer Sinbad, and composer Brian Holland. Nevada is an especially tough jurisdiction for California--because of various actions of the FTB, including the Hyatt case.

And then there's O.J. Yes, Mr. Simpson, who has his own current legal problems, probably doesn't care too much about the FTB. In any case, if he ever raises money--or finds the real killer--that money will be heading to the Goldman family.

I do think that listing these names is a good strategy. Some people will pay because they will be 'shamed' into it. Some, perhaps like Dionne Warwick, are shielded and had no idea that they owe money. Of course, some are scofflaws and no amount of posting names will have an impact. In a few months, I'll inquire with the FTB and see how much of an impact this listing has made.

California's Legislature approved AB198, and the Governor recently signed the legislation into law. The bill changes how California's LLC fee is calculated.

This legislation changes the LLC fee so that it is apportioned, in the same manner as the income tax is apportioned. This should make the fee constitutional for 2007 and onwards.

However, according to Spidell Publishing, the Franchise Tax Board is asserting that this legislation is retroactive to prior years. Two companies have successfully sued the FTB; courts ruled that the fee was unconstitutional. What the FTB will try to do in appeals court is to only have to refund the non-apportioned portions of the LLC fee.

I doubt this argument will hold up. This law was not in place in the years in question, and I don't believe any legislature can go back into the past and change the law for prior years. I expect the FTB will lose this argument, and the state will have to refund the fees sometime in the future.

By the way, AB1546, another bill that would have fixed the LLC fee, was moved into the inactive file at the end of this past year's term. This bill would have had many other deleterious impacts to California taxpayers, so I'm glad it's dead.

The Franchise Tax Board (California's Income Tax Agency) has published its list of the top 250 debtors to the FTB. You can find the list here.

Rapid America Corporation heads the list, with a debt of $26.8 Million. The largest individual debtor is Waheed U Begum who owes $10.6 Million. Some famous individuals are on the list; for example, Dionne Warwick owes $2.7 Million.

The list will be updated semi-annually. The goal is to shame people into paying their taxes. It will be interesting to see if it works.

In news that won't shock anyone who does business in California, the Bronze Golden State now ranks 47th out of 50 states in a business tax climate survey done by the Tax Foundation. Meanwhile, Nevada ranks 3rd in the Nation. I have a feeling this news will soon be on the website of the Nevada Development Corporation.

So what ten states have the worst tax climate?
41. Maine
42. Minnesota
43. Nebraska
44. Vermont
45. Iowa
46. Ohio
47. California
48. New York
49. New Jersey
50. Rhode Island

Meanwhile, the ten best states are:
1. Wyoming
2. South Dakota
3. Nevada
4. Alaska
5. Florida
6. Montana
7. New Hampshire
8. Texas
9. Delaware
10. Oregon

What do you think the California Legislature's reaction to this will be? My guess is more proposals for tax increases.

You can read the Executive Summary of the Tax Foundation's study here. The full study is here.

California is a great place to live. The climate in Orange County is wonderful. I like the people. But the taxes are high.

I'm in Connecticut for the rest of the week (there won't be many posts this week because of that), and when I tell people that California's maximum tax rate is 9.3% (it actually is 10.3% for millionaires), they look at me like I'm crazy.

I'm not. Yet our state has a structural budget deficit, conservatively estimated for next year at $6 billion.

There are only two ways to fix a budget deficit: increase revenues or decrease spending (or some combination of both). So what is our Governator proposing? A mandatory health care insurance program (government run, so that's an increase in spending), with it thrust on the back of businesses (who will pay more in taxes--but that will be passed on to customers, or the businesses will be much less likely to expand in California; all of these will lead to decreased revenues).

When I got my MBA, one of my instructors was Arthur Laffer, inventor of the Laffer Curve. Generally, the Laffer Curve holds that a decrease in tax rates can lead to an increase in tax revenues—there's a sweet spot for taxes (as far as tax rates). By whatever measure you use, California has exceeded that.

Do I expect our Legislature to look at cutting programs? Well, Stanford did beat USC last Saturday, so anything is possible...but I think this would be the equivalent of Youngstown State beating USC.