Archive for the ‘California’ Category

Bozo Tax Tip #7: Ignoring California

Thursday, April 3rd, 2014

Yesterday I looked at the idea of forming a Nevada Corporation while in California and being able to avoid California taxes. It doesn’t work. Today’s focus is on something that comes up now and then and applies to trusts.

Let’s assume John and Jane, two California residents, form a trust to benefit their children, Ann and Bob. Ann lives in Florida; Bob resides in California. The trust is an irrevocable trust, so it files its own tax return (a Form 1041). The income to the beneficiaries is reported on Schedule K-1s. Ann is surprised and calls her accountant when she receives both a federal K-1 and a California K-1.

The issue is simple: The trust is a California trust, so the income is California-source. California requires that a Schedule K-1 for Form 541 (California’s trust tax return) be included. Yes, Ann must pay California tax on the income. Ann’s CPA called me and asked me why I included the K-1 from California. My response was succinct: I have to and Ann has to pay the tax.

California’s desire to have anyone and everyone pay California tax has led to many trusts relocating to Nevada (which has no state income tax) and other trust-friendly states. California isn’t one of those states. Ann’s parents, John and Jane, could have formed the trust in Nevada but because they didn’t Ann is stuck in the Hotel California. You can check out any time but you can never leave.

Ignoring the California K-1 is a Bozo idea. Instead of just paying tax, you will get the joy of paying tax, penalties, and interest. If your parents are in California and thinking of forming a trust to benefit you, it may be worth your time to talk about Nevada to them. Otherwise, welcome to the Hotel California.

Bozo Tax Tip #8: Nevada Corporations

Wednesday, April 2nd, 2014

A repeat follows, but it’s one again getting a lot of play due to business conditions in California. While I’m focusing on California and Nevada, the principle applies to any pair of states.

Nevada is doing everything it can to draw businesses from California. Frankly, California is doing a lot to draw businesses away from the Bronze Golden State. But just like last year you need to beware if you’re going to incorporate in Nevada.

If the corporation operates in California it will need to file a California tax return. Period. It doesn’t matter if the corporation is a California corporation, a Delaware corporation, or a Nevada corporation.

Now, if you’re planning on moving to Nevada incorporating in the Silver State can be a very good idea (as I know). But thinking you’re going to avoid California taxes just because you’re a Nevada corporation is, well, bozo.

An Update on the BOE’s Fixer-Upper

Wednesday, March 12th, 2014

When I last wrote about the home of California’s Board of Equalization–one of two tax collecting agencies in California–I called it a fixer-upper. That might have been kind.

It does have a good location (right in downtown Sacramento). It is 24-stories tall. Of course, there are a few problems. Like the windows that pop out randomly and take the wings of gravity down to the ground. There’s the mold that’s been found in many areas of the building…toxic mold. If you ever have to go above the ground floor you might want to use the stairs: The elevator doors periodically don’t open.

The most recent issues relate to water pipe issues. It seems that the waste lines tend to leak. Now it’s been determined that the entire drain system wasn’t built to code. Oops….

The California state auditor is now going to conduct a five-month long study about what to do with the BOE headquarters. Hopefully the auditor will be able to find some solutions before any more problems pop up.

Your Check Might Not be in the Mail

Thursday, March 6th, 2014

I used to live in Orange County, California. Earlier this week a US Postal Service caught fire as it was heading toward an airport after leaving the Santa Ana mail sorting center. So if you mailed something on Monday, March 3rd from ZIP Codes starting with 926, 927, 928, 906, 917 and 918, it might have been burnt to a crisp. All the mail the truck was carrying was destroyed (an estimated 120,000 pieces). (No one was hurt in the accident.)

If you happen to have mailed a tax payment or tax form hopefully you used certified mail. When your payment doesn’t show up–and you should check to see if the check cleared–tax agencies will normally consider the certified mail receipt as proof of filing. The USPS is offering documentation of the fire (if the news stories aren’t enough).

This is the third incident like this in recent years that I can remember. Back in 2005 a truck carrying payments leaving the San Francisco Post Office Box where IRS payments go made a right turn on the Hayward Bridge (across the San Francisco Bay). There’s a reason why there’s a bridge and you don’t make right turns while on a bridge. Those payments went to the fishes. In 2012, a truck carrying mail to New Jersey government offices went up in flames.

Most likely, this incident will have minimal impact on taxes as it is early in Tax Season. Still, this is a good reminder why if you do mail a tax form or tax payment that you use certified mail, return receipt requested. That way should there be a problem it’s an inconvenience rather than one leading to costly penalties.

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 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, 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.