Taxable Talk

When last I reported on the Gilbert Hyatt case, Mr. Hyatt had won nearly $400,000,000 (yes, that’s $400 million) in a lawsuit from the Franchise Tax Board. This case began when Mr. Hyatt moved from California to Nevada in 1992, but the Franchise Tax Board didn’t think so. So agents of the FTB rummaged through Mr. Hyatt’s garbage in Nevada, and in the view of a Las Vegas court, committed torts against Mr. Hyatt. Including legal fees and continued interest, the tab is now around $500 million.

This case went to the US Supreme Court before it was tried; the FTB attempted to hold that California couldn’t be sued. The Supreme Court ruled against the FTB, and the case was tried in 2008…ten years after it was filed.

Not surprisingly, the FTB has appealed the decision. I’ve been trying for a while to discover the status of the case, and this evening finally found a blurb noting that the case is awaiting a date for oral arguments at the Nevada Supreme Court. [Go to page 12 of the link to see the status.] (Nevada does not have intermediate courts of appeal.) So sometime in the next year or so we’ll likely get a final verdict on how much the Golden State will be out in this case. Of course, the FTB could appeal this case to the US Supreme Court if they lose at the Nevada Supreme Court.

Meanwhile, the underlying alleged liability that triggered the whole fiasco–whether Mr. Hyatt was a California resident when he earned money off a semiconductor patent–is trickling through the California administrative hearing process.

The Nevada Development Authority is once again looking to move businesses in Southern California to Las Vegas. A series of new advertisements will feature talking primates; here’s one of the ads:

Personally, I liked the lipstick pig advertisements better. No matter what the ad, though, the case that Las Vegas makes is real. California is high tax, and high regulations. Nevada isn’t. What I’d like to see is the California legislature looking toward small business. Unfortunately, for that we might need one of these:

A couple of weeks ago I wrote about the coming crackdown on nightclubs, taxi drivers, and doormen in Las Vegas. One nightclub chain, Pure, yesterday took what they hope will be preventative action. Pure implemented a compliance program.

Of course, the cynic in me notes that (a) Pure’s corporate offices were raided two years ago by the IRS; (b) the IRS announced a few weeks ago that they would take action if the clubs didn’t clean up their act; and (c) Pure waited until after that announcement to implement their compliance program. It also remains to be seen if this will be a program that’s just down on paper or if Pure will actually start issuing 1099s to doormen and drivers delivering patrons to their nightclubs…not to mention the $100 bills that doormen receive so that individuals can avoid the lines.

In any case, I suspect the IRS may have some undercover investigators noting the payments made to drivers and others and then checking next year to see whether 1099s were sent. I think the IRS is serious about this, and if I were running nightclubs in Las Vegas I’d strive to be pure…in relation to the tax laws.

I’ve made plenty of posts on strip clubs and how some owners of these clubs manage to “forget” to report all of their cash income. Well, I’m heading to Las Vegas next week for the annual California Society of Enrolled Agents’ SuperSeminar. There’s a battle shaping up in Las Vegas: the IRS versus strip clubs, doormen, and taxi drivers.

There are many strip clubs in Las Vegas. Suppose you own one of these clubs; how could you draw more customers? While advertising, signage, and word-of-mouth will clearly help, there are obvious limits to this given the nature of your business. So strip clubs pay out “finders’ fees” to doormen and taxi drivers.

Of course, that cash being paid out is taxable (all income is taxable unless exempted by Congress). But how much of it actually gets reported? If you guessed “about zero,” you’d be correct. And the IRS isn’t happy about this.

Doug Elfman of the Las Vegas Review-Journal reported on this last week. The IRS discovered how much cash was being thrown around (at least $100 per person brought to a club) and read club owners the riot act: Start following the law and issue 1099s or find yourselves at ClubFed.

Mr. Elfman noted that there’s one industry in Nevada that scrupulously follows the law: brothels. The oldest profession in the world knows to be smart with the IRS. We’ll see if the clubs follow suit or end up in trouble with the IRS.

While California has been on center stage with its budget troubles, Nevada, too, has had problems. The Silver State is facing an $887 million budget deficit (by comparison, California is facing a $19.9 billion deficit). Unemployment is high, and revenues in the gaming industry fell by the largest percentage ever in 2009.

Governor Jim Gibbons (R) has proposed two tax increases (mining and sales) but in his view they’re not tax increases. “That is not a tax increase if you look at it carefully,” Gibbons said about the mining-tax proposal. “That is simply clarifying the deductions that they are allowed to take.” Well, when taxes go up it’s an increase. I’ll ignore the semantics and say that’s what’s happening.

Meanwhile, Democrats in the Nevada legislature also want to increase taxes according to a story in the Las Vegas Review Journal. Since it appears that the only people who don’t want taxes to increase in Nevada are Republicans in the legislature taxes are going up in Nevada.

As I’ve been saying about California, what must happen everywhere is that spending needs to be cut to revenues. Pension benefits will need to be cut. Public employees salaries will be decreasing in the future. That’s the reality: The public (voters) don’t want tax increases. If you’re running for office, ignoring the voters is a way to head to a new career.

A California State Assemblyman is upset with the ads that the Nevada Development Corporation is running. California is golden, and Nevada is silver. Why would any business leave? Here’s Assemblyman Jose Solorio’s (D-Anaheim) response:

Before I comment on that, there’s also a great op-ed piece in the Dallas News about the difference between California and Texas. One state is gaining business and one is, well, issuing IOUs. Hint: California isn’t the golden state in comparison to Texas.

As for Assemblyman Solorio, he may want to watch these two short spots.

It’s one thing to say, “California is great.” Can Assemblyman Solorio deny that it costs far more for a business to operate in the Golden State than it does in the Silver State? Unfortunately, everything in the Nevada Development Authority’s advertisements is true.

The Nevada Development Authority is Southern Nevada’s government agency that attempts to draw new businesses to the Las Vegas area. They’ve got a new campaign aimed at California.

Why? Well, the California Legislature is making the NDA’s job easy. Here’s one advertisement:

Interestingly enough, KABC-TV (Channel 7 here) will not air the television advertisements developed by the NDA. As this article notes, KABC’s decision will likely draw more publicity to the campaign.

There’s an easy way for California to fight this, though. Lower taxes, cut regulations, and make businesses want to be in the Golden State. Unfortunately, I suspect that will happen when pigs can actually fly.

Nevada has its own budget crisis. The Silver State budgets biennially. The Nevada Legislature voted an $8 billion budget late last year. However, it appears that only $5.5 billion in revenue will be raised during 2010 and 2011.

Republican Governor Jim Gibbons says he’ll veto any tax increases. “I don’t know of too many businesses around Nevada today who are looking at reduced revenues that cannot find some way to balance their budget…Sometimes it has been reducing salary levels, reducing benefits, retirements, eliminating 401(k)s. Across the board, these are tough choices.”

Meanwhile, Democratic Senate Majority Leader Steven Horsford asked Nevadans to prepare for tax increases. “Today, I am asking hard-working Nevadans to make a sacrifice for their children’s education and our state’s future…I am also asking corporations, casinos and other interests to share in the revenue solution.”

Nevada’s legislature, which is far more evenly split between Republicans and Democrats than in California, has worked together in the past. It will be interesting to see if a compromise can be reached.

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. But thinking you’re going to avoid California taxes just because you’re a Nevada corporation is, well, bozo.

Three questions of interest this weekend. The first deals with moving to Nevada, the second with the requirement to report foreign financial accounts, and the third deals with deducting clothing.

First, a reader asks: I want to move to Nevada. I will move my busines there also. However, most of my business will still be done in California. Will I still have to pay income taxes on my business profit and income from other investments?

If you truly move from California to Nevada, and are a Nevada resident, you will no longer owe California income tax. Similarly, if your business reincorporates (if it is a corporation) or otherwise changes its domicile to Nevada, and no longer is present in California, then it, too, will no longer be taxed by California.

This being tax, there are several caveats to be aware of. Among these are the following:

• In the year you move, you will need to file a partial year California tax return. California will tax you on all California source income for that year.
• Be aware that California, like many other states, will attempt to tax you if you spend two weeks (or more) in the Golden State on business.

There are several other “gotchas” that you should discuss with your tax professional.

Next, I’ve gotten several questions relating to the filing of the report of Foreign Bank and Financial Accounts. Here’s one of many: I read on your blog of the need to file the Report of Foreign Accounts. But I don’t want to because it will increase my risk of audits, and I don’t think it’s required. I read on 2+2 that online poker accounts are ‘transfer accounts’ and not foreign bank accounts. I’m not a big gambler, so why should I file this form?

First, Congress wrote this law. The IRS and the Department of the Treasury have the thankless task of interpreting this law.

And this law is fairly clear: Foreign financial accounts must be reported if an individual has $10,000 or more in one or more foreign financial accounts. Casinos in the United States fall under financial institution reporting requirements; why shouldn’t casinos in other countries be considered foreign financial institutions?

Additionally, many of these online casinos offered “echecks” and would take money directly from patrons’ checking accounts. Those are activities that banks perform.

As to why you should file this form, it’s simple: It’s required. If you don’t, and you are caught, you can face up to a $10,000 fine for non-willful non-reporting and a minimum $100,000 fine for willful non-reporting. You can also find yourself sent to ClubFed. If you think that the defense “I didn’t know about this” or “I was a small time player” will work, I’ll tell you now that neither will.

If you’re such a small-time gambler, you’re not a likely target for an audit (the IRS goes where the money is; generally, the more you make the higher your risk of audit). While the TwoPlusTwo poker forums have excellent poker information, you have to be very careful when you read legal and tax threads. The defense, “I relied on Joe Schmoe from TwoPlusTwo” will likely result in the judge asking you if he was your paid professional preparer.

Yes, you’re not likely to get caught. The odds are definitely in your favor. But it’s the law to report these accounts. You may not like the idea that the same people who enforce this law (the IRS and the Department of the Treasury) get to interpret this law. Unfortunately, that’s the way it is, and you will get no sympathy from the IRS, the Department of the Treasury, or a judge. I’m advising all my clients who have these accounts and meet the reporting requirements ($10,000 or more at one or more foreign financial accounts) to report them.

Here’s the third question. I’m a personal trainer, and I can’t believe the answers I’ve gotton [sic] from my accountant. I can’t believe that gym shoes aren’t deductible for me, and that gym memberships aren’t deductible for my clients. Tell me he’s wrong.

Sorry, your accountant is generally correct. For most individuals, health club memberships are not deductible. I’d probably go insane during tax season if I didn’t go to the gym but Congress says I can’t deduct that. Congress makes the laws, and that’s the way it is. (A few people who have to go to the gym for medical reasons may be able to take a gym membership as a deductible medical expense. Of course, that’s subject to a 7.5% Adjusted Gross Income limitation so not many will be able to deduct it that way, either.)

As for clothing, to be deductible it must not be usable outside of work. A policeman’s uniform, for example, is clearly deductible. However, his black socks wouldn’t be. Gym shoes aren’t deductible as they can be used outside of a health club.

Well, perhaps I made one of the three individuals who wrote me happy. As usual, I suggest you consult your own tax professional on any issues that you have.