Archive for the ‘California’ Category

California State Senator Ron Calderon Indicted on Bribery & Tax Charges

Sunday, February 23rd, 2014

This hasn’t been a good year for Democratic state senators in California. Back in January State Senator Roderick White of Inglewood was convicted of five counts of voter fraud, two counts of perjury, and one count of filing a false declaration of candidacy. His sentencing is scheduled for March. This past week State Senator Ron Calderon of Montebello was indicted in a bribery scandal.

Senator Calderon is accused of 24 counts, including mail fraud, wire fraud, honest services fraud, bribery, money laundering and conspiracy to commit money laundering, and aiding in the filing of a false tax return. From the Department of Justice press release:

The indictment describes a scheme in which Ron Calderon allegedly solicited and accepted approximately $100,000 in cash bribes – as well as plane trips, gourmet dinners and trips to golf resorts – in exchange for official acts, such as supporting legislation that would be favorable to those who paid the bribes and opposing legislation that would be harmful to them. The indictment further alleges that Ron Calderon attempted to convince other public officials to support and oppose legislation.

Another part of the press release states that Senator Calderon took bribes from Michael Drobot. Mr. Drobot used to own Pacific Hospital in Long Beach. The press release goes on to note,

Drobot allegedly bribed Ron Calderon so that he would use his public office to preserve this law that helped Drobot maintain a long-running and lucrative health care fraud scheme…

In another case filed this morning in United States District Court, Drobot has agreed to plead guilty to charges of conspiracy and paying illegal kickbacks. In his plea agreement, Drobot admits paying bribes to Ron Calderon.

We also have the wonder of film credits coming into the picture. Film credits have been a magnet for corruption; such was allegedly the case here:

In another part of the bribery scheme, Ron Calderon allegedly solicited and accepted bribes from people he thought were associated with an independent film studio, but who were in fact undercover FBI agents. Ron Calderon solicited and accepted bribes in exchange for supporting an expansion of a state law that gave tax credits to studios that produced independent films in California.

Mr. Calderon is facing a maximum of 396 years at ClubFed if found guilty on all charges.

Texas’s Gain Is California’s Loss

Sunday, February 16th, 2014

Today a client asked me about where to relocate her company headquarters. Her computer engineers aren’t thrilled with the current location, and would like to move to either California or Texas. I explained the decision has a cost difference of $165,000.

Currently, there’s a small office in California with one employee. The business, which is an S-Corporation, is taxed on the personal level (as almost all S-Corporations are). The business is profitable.

California uses a one-factor sales test to determine the percentage of income attributable to the state. Most of the sales of the company are not to California; she only owes a small amount of tax to California based on the income. Her California tax bill today is more of an annoyance than anything else.

However, if the company’s headquarters moved to California, then all sales not attributable to a state the company does business in would be attributable to California. In running an estimate for 2014, that amounts to an additional $170,000 she would owe in California tax.

On the other hand, Texas doesn’t have a state income tax. If the company’s headquarters moves to Dallas, her tax bill won’t change. Her engineers may like the Bronze Golden State slightly more than the Lone Star State; however, my client is a businesswoman who understands math.


This is a true story, and there’s no doubt in my mind that what I told my client has been duplicated by hundreds of accountants throughout the country. Taxes matter, as always.

Bring Me the Usual Suspects: Small Business Policy Index 2013

Sunday, December 29th, 2013

The 18th annual Small Business Policy Index was released almost three weeks ago by the Small Business & Entrepreneurship Council. Congratulations are in order for my home state of Nevada; the Silver State ranked second (behind only South Dakota). Bringing up the rear are the usual suspects.

Here are the top ten states:

1. South Dakota
2. Nevada
3. Texas
4. Wyoming
5. Florida
6. Washington
7. Alabama
8. Indiana
9. Ohio
10. Utah

And the bottom ten:

41. Connecticut
42. Oregon
43. Iowa
44. Maine
45. Minnesota
46. Hawaii
47. New York
48. Vermont
49. New Jersey
50. California

The rankings include a variety of factors, and the Bronze Golden state ranked last in quite a few: personal income tax rates, individual capital gains tax rates, individual dividends and interest tax rates, and state gas taxes. California also has an added S-Corporation tax rate, and both an individual and corporate Alternative Minimum Tax (AMT). California ended up with a relative ranking of 113.637; the top state, South Dakota, has a ranking of 34.627. Yes, you’d have to deal with the South Dakota winters, but climate isn’t everything.

As noted in the introduction,

Of the 47 measures included in the 2013 edition of the Index, 22 are taxes or tax related, 14 relate to regulations, five deal with government spending and debt issues, with the rest gauging the effectiveness of various important government undertakings.

It is a comprehensive review. The states that did the best are those with low tax rates, low regulations, and lower spending and government debt.

The conclusion of the report is really presented in the introduction:

Political fantasies involving higher taxes, increased regulation, and much higher levels of government spending and debt, as we have learned at the federal level over the past nearly seven years, do not serve our economy well. The same goes, of course, at the state and local levels.

“Unabomber” (Poker Player) Phil Laak Reportedly Hit With Tax Liens from California

Thursday, December 19th, 2013

Phil Laak is a very successful poker player. According to the Hendon Mob database, he’s won more than $3,136,000 in poker tournaments. He’s also a successful cash game player. The web site TMZ has stated that Phil Laak left out paying one interested party: California’s Franchise Tax Board.

Mr. Laak allegedly owes the FTB $24,874 for his 2010 and 2011 California taxes. Mr. Laak was (and I believe still is) a California resident; assuming that’s the case, he would owe California income tax on all of his earnings anywhere in the world. Hopefully Mr. Laak will be able to quickly resolve his California tax troubles.

Tax and Insurance Administration Are Different

Wednesday, December 18th, 2013

Jason Dinesen tweeted tonight about the insurance regulation report card issued by RStreet.org. On Monday, the Tax Foundation posted about the Council on State Taxation (COST) grading states on taxpayer administration. I thought it would be interesting to compare the top states and bottom states in each.

First, the top ten:

Rank Tax Administration Insurance Administration
1. Maine Virginia
2. Ohio Vermont
3. Alaska Illinois
4. Arizona South Carolina
5. Kansas Tennessee
6. Montana Minnesota
7. Pennsylvania Missouri
8. Indiana Nebraska
9. Iowa Wisconsin
10. MA/NC/OK/UT/VA Nevada

Now, the bottom ten:

Rank Tax Administration Insurance Administration
50. California New York
49. Louisiana Hawaii
48. Alabama West Virginia
47. Colorado Florida
46. Arkansas California
45. Nevada Texas
44. Florida Washington
43. Kentucky North Dakota
42. North Dakota Montana
41. NC/VT/WA/DC Massachusetts

One conclusion that I draw is that a state appearing on both bottom ten lists is a state with a bad regulatory environment. California, Florida, North Dakota, and Washington share that dubious distinction. Indeed, California ranks the worst for tax administration and is 46th for insurance administration. It’s no wonder that business executives believe that California’s regulatory climate has miles to go before it becomes average (in ranking).

Only one state makes the top ten in both lists: Virginia. A state with a favorable regulatory climate will attract business, and that’s something that Virginia is doing.

Finally, I do need to point out that states that rate poorly in tax administration but do not have a personal income tax lead to some interesting scores on the COST list. The states without a corporate tax return (such as Nevada) should have a negative score in the Corporate Return Filing Burden column imho–these are states where life is easy for tax administrators.

My thanks to the Tax Foundation, RStreet.org for publishing these charts and to Jason Dinesen for pointing out the insurance information.

Health Care Fraud Leads to Tax Charge

Sunday, December 15th, 2013

I’ve mentioned previously that if you fail to report illegal income on your tax return, you’re guilty of tax evasion. Yes, illegal income is just as taxable as legal income. This came into play with an ongoing investigation in Southern California.

It seems some medical practitioners came up with the idea of getting denizens of Skid Row into hospitals for unnecessary medical procedures. Dr. Ovid Mercene of La Mirada was one of the individuals involved in the practice. I’ll let the DOJ press release take it from here:

From 2008 and 2012, while Mercene worked at a Los Angeles-area hospital, he admitted patients, the vast majority of whom were homeless, who had been referred from a purported “care consortium.” The patients, many of whom did not require hospitalization, were admitted for the purpose of defrauding taxpayer-funded health programs such as Medicare, Mercene admitted in court today.

Mercene admitted the “patients” after watching them being transported by van from Skid Row to the hospital, where they were often kept on a special floor away from the hospital’s “regular” patients. These “patients” also were given smoking breaks while in the hospital, even though many of them supposedly suffered from respiratory diseases. After a short hospital stay where numerous unnecessary tests were typically performed, Mercene discharged the “patients” to skilled nursing facilities, even though they did not require such care.

Dr. Mercene received almost $700,000 in kickbacks. Somehow that income didn’t make it onto his tax returns. While I suspect the alleged health care fraud can be prosecuted under various statutes, the government had an easier charge (to prosecute) to make against Dr. Mercene: tax evasion. That’s what he pleaded guilty to last week. He’ll be sentenced next July.

Former Bell Administrator Pleads Guilty to Tax Fraud; That’s the Least of His Problems

Friday, December 13th, 2013

Former Bell (California) City Administrator Robert Rizzo pleaded guilty yesterday to two counts of tax fraud (conspiracy and filing a false income tax return). Mr. Rizzo, though, will likely never directly serve any time at ClubFed for those counts. Why?

Well, Mr. Rizzo pleaded no contest to 69 state counts of corruption. In what is (and was) a huge scandal, Mr. Rizzo and his cronies basically used the City of Bell as their own personal piggy bank. He’s going to be going to state prison for 10 to 12 years (his sentencing will be in March). The scandal allegedly included salaries of up to $800,000; gas tax money being used for these salaries; and falsifying city documents to hide the salaries. The city council members from that time period are awaiting trial.

It is very likely that Mr. Rizzo’s sentence will be served concurrently with his state sentence. However, Mr. Rizzo will owe restitution to the IRS (along with to the state and city).

Gilbert Hyatt In New York

Wednesday, November 27th, 2013

The decision on the Gilbert Hyatt appeal here in Nevada has still not come out. However, when I did my weekly check I discovered that the Gilbert Hyatt case has now reached New York State.

The entire Gilbert Hyatt case revolves around when Mr. Hyatt moved from California to Nevada. Mr. Hyatt said he became a Nevada resident in September 1991; the Franchise Tax Board said he left California in April 1992. Usually, seven months don’t make much difference. Here, though, that’s not the case. Mr. Hyatt is a successful investor and received a substantial payment in late 1991 (after September).

The Franchise Tax Board (California’s state income tax agency) audited Mr. Hyatt and assessed taxes and penalties. In 1996, Mr. Hyatt protested the audit. The Protest Division did not complete its review until 2007; Mr. Hyatt then appealed the FTB’s decision to the Board of Equalization. (The BOE hears appeals from the FTB).

Meanwhile, Mr. Hyatt filed a lawsuit against the FTB in Nevada (back in 1998). Before the case was tried, the FTB asked the Nevada courts to throw out the case based on sovereign immunity. That went up to the US Supreme Court; the Supreme Court ruled unanimously that Nevada does not have to immunize the FTB for intentional torts. The case was decided in 2009, and the FTB lost. The Appeal of that was heard in May 2012, and the decision has not yet been announced. The judgment to Mr. Hyatt totals $490 million.

So what is the litigation in New York? It stems from the appeal to the BOE by Mr. Hyatt. The FTB served a subpoena duces tecum on attorneys for U.S. Philips Corporation in New York, asking for information on Mr. Hyatt’s patents, income received in 1991 and 1992, his relationship to Philips, licensing of patents, and related items; they also asked for depositions of individuals. Mr. Hyatt asked the New York court to stop the subpoenas and depositions; the FTB contended that Mr. Hyatt did not have standing to challenge the subpoenas.

At the lower court (the New York Supreme Court), the Court ruled that Mr. Hyatt did have standing, that the FTB couldn’t asks for information on a patent infringement case, but that it could ask for information related to his residency and income in 1991 and 1992 (and related items). The Supreme Court modified the subpoena duces tecum to just that information. Both Mr. Hyatt and the FTB appealed; the appellate court upheld in all respects the original order. This decision came out in March.

The New York case relates to the BOE appeal. Presumably, the subpoenas have been served and the depositions have been taken (or soon will be taken). Sometime in 2014 the actual BOE appeal would occur…only 18 years after the protest was made!

That’s the key takeaway from this post. If you fight the FTB, the FTB will delay, delay, and delay some more in the hope that you can’t afford the litigation. Mr. Hyatt has deep pockets and can afford to litigate; many (most) individual and entities fighting the FTB don’t have the deep pockets to do so.

Dan Walters with Another Example of California Dreamin’

Tuesday, November 12th, 2013

When I resided in California, I always read Dan Walters’ columns in the Sacramento Bee. He knows his California politics very well. Yesterday he expounded on why California’s Senate Bill 30 (SB 30) ended up failing.

SB 30 would have conformed California tax law to federal tax law (mostly) with regards to homeowners with canceled debt income from their primary residences. As part of the massive tax measure that passed Congress on January 1st of this year, the exemption for canceled debt income from a primary residence was extended for 2013. SB 30 would have conformed. And the measure easily passed the California Senate 36-0. So why didn’t it become law? I’ll let Mr. Walters take over:

SB 30 had no opposition and sailed through the Senate 36-0, but only after the Senate’s leadership inserted a “poison pill” into the measure. It declared that SB 30 could take effect only if another measure, Senate Bill 391, was enacted.

SB 391 did have opposition, principally from the California Association of Realtors. It would impose fees on real estate transactions to raise money for low-income housing…

Ultimately, playing political games was more important than doing the right thing by families that had lost their homes, and that’s shameful.

If a Californian has a short sale or foreclosure in 2013 on his principal residence, it’s likely he won’t owe federal income tax. However, he likely will owe California income tax (unless he is insolvent or bankrupt). This will definitely come as a surprise for many Californians (and tax professionals).

California (rightly) has a miserable reputation for the business climate. While this issue has no impact on the business climate, it does show yet another reason why the Golden State has become, imho, the Bronze State.

Another Film Tax Credit Scandal

Sunday, November 10th, 2013

There have been plenty of scandals regarding tax credits for the film industry in recent years (see, for example, Iowa). A new one has just arisen, this time in California.

The Los Angeles Times reported back on Halloween that State Senator Ron Calderon (D-Montebello) has been accused of bribery in relation to California’s film credits:

The [state] Capitol was roiling over comments attributed to Calderon in a report by the Al Jazeera cable network, based on what it identified as a sealed FBI affidavit, that he had enlisted other lawmakers to help him influence policy. In exchange, the affidavit alleges, the senator accepted $88,000.

State Senator Calderon has not been charged. Meanwhile, the FBI is investigating the leak of the affidavit to Al Jazeera.