Archive for the ‘Minnesota’ Category

Minnesota Democrats Pass Tax Increases, Face Veto

Sunday, April 26th, 2009

California isn’t the only state where the legislature is ignoring the current economic climate. In Minnesota, the Democrats who control that state’s legislature, have ignored Republican Governor Tim Pawlenty’s veto threat and passed a series of tax increases.

Two different packages passed: one in the Minnesota House and one in the Senate. Both contain a variety of tax increases, including increases in the income tax, cigarette taxes, alcohol tax, and an increase in what is covered by the sales tax. The mortgage interest deduction would be limited.

These measures are probably irrelevant, as no Republican voted for them and Governor Pawlenty guarantees they’ll be vetoed. There’s clearly not enough votes for the vetoes to be overridden.

What will be heading to Minnesota and California? Major cuts in government spending. And that’s as it should be.

The Family That Defrauds Together…

Wednesday, January 21st, 2009

My writing partner and I have been trying to figure out the subject of our next book. We’re thinking about a mystery, and it appears we’ve just had a plot handed to us.

We’re going to open a home study program, catering to low income families. We’ll tell our clients that as a bonus for using our services we’ll prepare their tax returns. All we ask in return is that they assign their Minnesota Education Tax Credits to us. (That credit can’t be assigned, and could only be applied for after the money has been spent.) What could possibly go wrong? Oh, we’re violating a few laws but who will catch us? Anyway, it might make a good plot for a mystery.

I didn’t make this up, though, as the Department of Justice alleges that’s exactly what a Minnesota mother and son did. Carolyn Louper-Morris and William J. Morris, Jr., both of Minneapolis face a 22-count indictment. They’re charged with mail fraud, wire fraud, money laundering, and wire fraud conspiracy. The DOJ alleges that 1,800 took advantage of CyberSutdy 101’s program, and the couple supposedly received $2.4 million from the Minnesota Department of Revenue.

What did the couple do with the money? Well, they did provide over 2000 computers to low-income students…but they apparently forgot to pay K-Mart for the computers. The indictment alleges that the money was partially used for “…$300,000 payment on a home, $74,000 for a new Mercedes SUV and $8,600 for a mink coat, a cashmere and rabbit scarf, and a chinchilla-trimmed hat.” The Minnesota DOR canceled the tax credit for CyberStudy 101 in 2002.

The couple also is alleged to have lied to the Minnesota DOR; the Minnesota DOR asked where the $2.4 million came from and was supposedly told that it was “loan proceeds.”

There is one surprise for me: That this is a case in federal court rather than state court. I would think that if the allegations are true that fraud charges could certainly be filed in state court. But the defendants, like all defendants, are innocent until proven guilty.

By the way, CyberStudy’s website is still open. If you’re interested in their programs you’d better hurry; I suspect they won’t be available soon.

News Story: Pioneer Press, KARE

A Gotcha in Minnesota

Thursday, October 9th, 2008

One form of business entity that is coming into increasing use is the Limited Liability Company (LLC). But that may change in Minnesota based on a ruling from an administrative law judge in that state.

Generally an LLC is a disregarded entity for federal tax purposes. Most states follow the federal guidelines though a couple of state require reporting. An LLC in California must file Form 568 and pay a minimum tax and possibly a gross receipts tax.

Minnesota, though, is about to take this one step further. The Gopher State will soon charge sales tax on transactions between single member LLC owners and the LLC. Joe Kristan calls this “an awful idea.” He’s right—Minnesota is effectively imposing sales tax for LLC owners when they move an object from their left hand to their right hand.

Hopefully the Minnesota Department of Revenue or the Minnesota legislature will reconsider this. Otherwise single member LLCs may become dinosaurs in the Land of 10,000 Lakes.

Hat Tip: Roth Tax Updates

Minnesota Calling

Thursday, October 2nd, 2008

Apparently this blog has a wider circulation than I thought. Today I received an email from Tom Teale, the Assistant Director, Criminal Investigations of the Minnesota Department of Revenue (the state tax agency in Minnesota). While I generally focus (when I report on tax evaders) on IRS/Department of Justice prosecutions and California I’m happy to highlight the lowlights from other states.

And I do wish to point out that many states are suffering revenue shortfalls. If you file your federal tax return and skip your state tax return your state will find out. Every state but Nevada has an information sharing agreement with the IRS. Given that state income tax payments are generally deductible on your federal tax returns and are usually for far smaller amounts than your federal income tax doesn’t it make sense to ensure your compliance with state law?

In any case, Mr. Teale highlighted four cases in Minnesota. I’ve already covered Robert Beale, the tax evader who attempted to arrest the judge. He received eleven years of nonconsensual incarceration.

There were two cases I wasn’t aware of. In one, an attorney, John Hatling of Fergus, Falls, claimed that he could deduct his own wages using the “claim of right” deduction. If you’ve never heard of the deduction you’re not alone. It’s yet another tax protester argument and it doesn’t hold water. Mr. Hatling will plead guilty to one felony count and will be sentenced in state court next Friday.

In the other case, a judge didn’t file his Minnesota income tax returns. Donald Venne of Anoka County faces four gross misdemeanor charges. While the total unpaid tax is relatively small (about $3,200) a judge, of all people, should understand about compliance with the law. His attorney said that the problem was caused by a “traumatic family event that occurred over a period of years.”

Again, remember that you do need to pay your state income taxes. And my thanks to Mr. Teale for bringing these cases to my attention.

Franken’s Tax Troubles Continue

Tuesday, April 29th, 2008

Al Franken, the likely Democrat-Farm Labor candidate for U.S. Senate in Minnesota, told the Minneapolis Star-Tribune that he has paid over $70,000 in back taxes to 17 states. That’s not just California, but includes Delaware, Kentucky, Massachusetts, Michigan, New York, and Wisconsin.

Among the revelations in the Star-Tribune article are that he did not pay workers’ compensation and disability insurance premiums for New York-based workers between 2002 and 2005, and that a default judgment was entered in New York last year for $25,000.

The Associated Press article states that Franken’s communications director, Andy Barr, told the AP that none of the 17 states attempted to contact Franken or his accountant about the unpaid taxes. That’s likely splitting hairs given that New York did attempt to collect the insurance premiums.

In any case, Republican Senator Norm Coleman (who Franken will likely be running against) made the obvious remark, “Paying taxes is an obligation that I think Minnesotans expect to be adhered to, and that Minnesotans do.”

Do I think this was deliberate evasion by Franken? No; the amounts are too small. Will this be political hay for his opponent? Definitely for now, and depending on how Franken handles this, it could derail his campaign.

Is Al Franken the Next Celebrity Tax Scofflaw?

Friday, April 25th, 2008

Al Franken has had an interesting career. He’s been a comedian and a screenwriter, and now he’s running for the US Senate, hoping to get the nod of the Democrat-Farm Labor Party in Minnesota (and then, of course, in the general election).

However, Mr. Franken (or his accountant) has forgotten about California’s rules on corporations. A California corporation must make a minimum franchise/income tax payment of $800 a year, even if the corporation has no income (or lost money, for that matter). Mr. Franken has a California corporation, Alan Franken Inc., which the Secretary of State’s website shows as forfeited (it did not pay its state registration fees).

This is apparently becoming big news in Minnesota, as the Minneapolis Star-Tribune is covering this story. Andy Barr, a spokesman for the Franken campaign, is quoted by the Star-Tribune: “Al feels that because his name is at the top of the organization, he takes ultimate responsibility for everything that goes on. But if there’s a mistake that’s been made, he’s pretty insistent that the accountant fix it. He’s been pretty vocal with [the accountant] on this point.”

We’re not talking big bucks here. The tax owed (including penalties) is $5,800 for not making the required minimum payments from 2003 – 2008. The corporation will likely also the Secretary of State’s office $25/year plus a $250 penalty for each year that the required registration form wasn’t filed. Once all of that paperwork is filed, and the state income tax returns for 2003 – 2008 are filed, Mr. Franken can dissolve his corporation.

So is Mr. Franken the next celebrity tax scofflaw? Only if he allows this mess to percolate for several weeks rather than insisting to his accountant that he prepare the appropriate returns and file them. Otherwise, the DFL in Minnesota will likely have to find a different candidate to run against Republican Senator Norm Coleman.

Minnesota Tries for Number 1!

Sunday, April 1st, 2007

Congratulations to Minnesota! No, they’re not in basketball’s Final Four. Rather, Minnesota’s State Senate passed a bill on Saturday to increase the top tax bracket in the state to 9.7%, the highest regular tax bracket in the country. You would need to make over $250,000 to be impacted by the new bracket ($141,250 if single).

The legislation was led by Minnesota’s Democrat-Farm Labor Party (DFL). Luckily for Minnesotans, Governor Tim Pawlenty promises a veto. And it appears that the DFL doesn’t have the votes to override it.

Hat Tip: Tax Prof Blog
News Story: AP

Slots a Business, Says Minnesota Supreme Court

Thursday, May 18th, 2006

The always vexing question of whether or not a gambler is a professional or an amateur was looked at this week by the Minnesota Supreme Court. In Busch v. Commissioner of Revenue (A05-656), Estelle Busch fought the Minnesota Department of Revenue’s ruling that she was an amateur and had to pay Minnesota’s Alternative Minimum Tax (AMT) on her gambling winnings.

The facts of the case were not in dispute. Estelle Busch, a retiree, began playing slot machines at an Indian casino in Minnesota. She enjoyed herself, but lost. She played more and more, from 40 to 60 hours per week. Initially, she filed as an amateur, putting her winnings as Other Income (line 21 of her federal return) and her losses as an itemized deduction on Schedule A of her federal return.

In 2001, she decided that she met the standard of being a professional, and filed a Schedule C. She was not able to take her losses as a deduction against other income on her return; however, she was able to net out her income so she essentially reported $0 as the “net income” from her business.

The IRS apparently never audited her. (The record is not completely clear on this.) However, the Minnesota Department of Revenue did, and the Commissioner of Revenue fought her in Minnesota Tax Court. Minnesota has a very strict AMT. Minnesota AMT denies most deductions and forces a gambler to pay tax on the gross winnings rather than the net winnings. This is quite different from the federal AMT. Although in certain situations gambling winnings could conceivably cause a taxpayer to fall into the federal AMT, gambling losses are deductible on the federal AMT. The Commissioner won in Minnesota Tax Court, and Ms. Busch appealed to the Minnesota Supreme Court.

The Minnesota Supreme Court looked at four issues: (1) Was Minnesota prohibited from challenging the business vs. hobby status by the actions (or inactions) of the IRS; (2) Did the Groetzinger decision apply to Ms. Busch; and (3) Did Ms. Busch have a reasonable expectation of profit?

The first issue is a collateral estoppel argument. Is Minnesota precluded from acting because the IRS hasn’t acted? The court ruled that Minnesota can have a different ruling than the federal government, if the laws and circumstances justify it.

On the second issue, the Groetzinger decision states:

“[I]f one’s gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business within the meaning of the statutes with which we are here concerned. Respondent Groetzinger satisfied that test in 1978. Constant and large-scale effort on his part was made. Skill was required and was applied. He did what he did for a livelihood, though with a less-than-successful result. This was not a hobby or a passing fancy or an occasional bet for amusement.”

Ms. Busch was certainly gambling on a full-time basis. But did she have an expectation of profit?

Here, the fact that she kept scrupulous records aided her case immensely. That, and the fact that she did win a jackpot now and then helped out.

Still, the Commissioner argued that it was impossible for anyone to be a professional slots player because “it’s impossible to win.” (As a side note, there are slot machines in some casinos that are either beatable (100% payback with perfect play), or are so close to beatable that perfect play combined with slot club rewards can lead to a positive expectation. That was likely not the case where Ms. Busch gambled.) The court noted,

“[W]e disagree with the tax court’s conclusion that a reasonable expectation of profit is required for a given activity to qualify as a trade or business. We conclude that it is often too difficult and uncertain for courts to decide, from the safe position of hindsight, which business activities had a reasonable expectation of profit and which did not. Furthermore, if trade or business tax incentives hinged upon a court’s determination of whether an activity had a “realistic” expectation of profit, valuable innovation in our entrepreneurial society could be chilled. We conclude that the taxpayer’s expectation of profit from a given activity need not always be reasonable for the activity to qualify as a trade or business.”

So Ms. Busch wins the big gamble, fighting the Minnesota Department of Revenue, avoids AMT, and will be able to pursue her slot play as a business.