KevinCA

Wesley Snipes, perhaps best known for his role in the three Blade movies, was indicted by the U.S. Attorney for the Middle District of Florida on six counts of failure to file an income tax return, one count of conspiracy, and one count of making a false claim for refund. A copy of the indictment is posted at The Smoking Gun.

Perhaps what’s a little silly is that The Smoking Gun posted (as far as I can tell) May 21, 2002 a copy of a 1997 amended return submitted by Snipes, making the so-called 861 argument, and requesting a refund of all taxes paid.  Why did this take so long?

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This story is so sad. My heart bleeds for that poor man. It is far removed from the money, it’s the principal. He is being denied his rightful title and respect simply because he happens to be a man who loved another man. My biggest hope for our world is that before I die, I want love to be recognized for love and based and biased on no other reason. Until that happens, I implore all of you involved in a LTR to take legal matters into your own hands. Here are some simple steps to get you started:

1. No attorney is needed
2. Set up a living will and have it notarized.
3. Set up a joint account with both your names for retirement/death or hospitalization.
4. Take out separate life insurance from work/government or pension. Until same-sex relationships are recognized universally, we have no choice but to do for ourselves. If need be, annually cash in your insurance from work and place it into the separate insurance accounts regulated solely based on personally-expressed and/or direct wishes.
5. Personal property- IF you have ANY doubt about outside family trying to keep your partner from receiving any of it, you have legal steps to take. It is actually very simple, but often overlooked. Simply put into court record that you both own the property jointly and have it notarized. That makes it legal and binding. If need be you can always “Sell” the property to another (partner) for $1.00 and have receipts and proof of purchase.
6. If you have a large group of friends, when you have things notarized, have them present as witnesses on record.

It’s always a little irritating to me when uneducated people offer financial advice. I can tell that Doc.Feel.’s heart is in the right place here, but his advice is so ludicrous that I was compelled to write and gently offer that he may want to consult a financial professional about the advice he gave here. He wrote me back, stating that he’d checked everything with his attorney and s/he validated the advice. Assuming, arguendo, that his statement is true, then that attorney’s license should be revoked.

Let’s review:

No attorney is needed

Some people, maybe a lot of people, can reasonably draft either a holographic or statutory will and be fine.  A (straight) married couple with an uncomplicated estate is probably safe with one of those options, maybe with a some help from the Nolo press.  A gay couple in the same boat (i.e., about the same amount of assets) could probably also be okay with a little help from Nolo.  If the gay couple has a fair amount of assets, though, they probably ought to get some professional help.  As with many situations, saying that no attorney is needed (ever) oversimplifies the matter.

Set up a living will and have it notarized.

That’s really good advice for any adult.  Having it notarized is probably redundant, because in most jurisdictions it’s not valid unless it’s either notarized or witnessed, but that’s just a nit.

Set up a joint account with both your names for retirement/death or hospitalization.

So far, so good.

Take out separate life insurance from work/government or pension.

Not a bad idea.  Studds’ plan is a little unusual in that it’s a defined benefit plan (a pension) as opposed to the more typical defined contribution plan (like a 401(k) plan).  Participants in a 401(k) are generally free to designate the beneficiary or beneficiaries of his/her choice.  Evidently, that’s not the case for the Congressional Pension Plan.

Until same-sex relationships are recognized universally, we have no choice but to do for ourselves.

Can’t argue with that.

If need be, annually cash in your insurance from work and place it into the separate insurance accounts regulated solely based on personally-expressed and/or direct wishes.

Huh?  This makes no sense.  If you have employer-sponsored group term life insurance, you can’t “cash in” anything because your premium payments don’t go toward an investment feature in the policy.  (That’s a component of whole life insurance.)  So, you can’t so much cash in, as just not participate in the employer’s plan and use the money you would have spent on those premiums to pay for private insurance.

Personal property- IF you have ANY doubt about outside family trying to keep your partner from receiving any of it, you have legal steps to take. It is actually very simple, but often overlooked. Simply put into court record that you both own the property jointly and have it notarized. That makes it legal and binding. If need be you can always “Sell” the property to another (partner) for $1.00 and have receipts and proof of purchase.

I guess he doesn’t care about the house you bought?  (The quick-and-dirty way to ensure that the house you and your partner bought together will go to him on your death is to take title as joint tenants with right of survivorship.  Then, when you die, your half of the home becomes his property by operation of law, bypassing probate.)

The “sell it for $1″ idea also overlooks the income/gift tax consequences of a sale of property at less than fair market value. I pointed this out in an email to Doc with the following example:

Let’s say you paid $20,000 in cash for a car today. If you sell the car to your partner for $1 tomorrow, you have made a taxable gift to him of the fair market value of the car (presumably $20,000 but possibly something less) less the $1 he paid you. You probably also would have to pay state sales tax on the transaction.

Doc responds:

Not at all. ANYONE legally has the right to sell their property at ANY value they choose. Taxes are neither here nor there when it comes to ending up without anything. I don’t care if you purchase a $90, 000.00 Viper. If you choose to sell it for $9.00 that is your legal right. It goes without saying that whoever now owns this Viper has the right to then dispose of it for $$$ or pay the property tax.

Doc needs to go back to Property Transactions.  He’s conflating the right to dispose of property (which is not at issue) and the attendant tax consequences of the disposition.  The issue is not whether you are or are not permitted to sell property, nor the sales price you choose.  The sales/income/gift tax consequences will result from your choices.  If you dispose of property at less than fair market value, there will be income and/or gift tax consequences to the transfer.

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I used to be amazed by the number of dumb things that practitioners do. Maybe because I’m getting jaded, I’m just not fazed by this kind of thing any more. In a recent post by the (ahem) Guru, a reader wrote and asked:

I found your blog and web site trying to find via Google an answer to the following:

An S Corp business owner wants to establish a benefit plan for employees that have at least X years of service, and that benefit plan is available only to C Corps.

1. Can the S Corp owner establish a C Corp and use it to provide the benefit assuming all employees of the S Corp that qualify with X years of service are included?
2. If Yes to #1, could the S corp simply pay the C Corp for the premium cost of the benefit so that the C Corp’s income and expenses net to $0, with no tax liability?
3. If No to #1, as there any other way to accomplish the desired result and still allow the bulk of the business and taxable income to be in the S Corp?
4. Can a C Corp own an S Corp?
5. Can an S Corp own a C Corp?

How can I start here? First, a tax professional’s first stop for tax research should not be Google. Second, if the practitioner isn’t aware that IRC Section 1361 sets forth the shareholders permitted for an S corporation? (Hint: a C corporation isn’t one of them.) Also, it’s evident that the reader hasn’t heard of IRC Sections 269 or 482. I suppose it’s not that strange, though. The Guru hasn’t heard of Section 269 or 482, either.
Third, if he or she doesn’t know whether a C corporation is permitted to own an S corporation (it’s not, incidentally) then the answer is not to be found by emailing a random blogger!

The proposed new Sacramento arena is all over the local news. Here’s a summary of the terms of the deal:

The Sacramento County Board of Supervisors must vote and pass a resolution to put a measure on the November ballot in which Sacramento County voters will be asked to approve a 15-year, quarter-cent sales tax. The new tax is expected to yield about $1.2 billion over its term. Roughly one-half of the proceeds of the new tax would be earmarked for the construction costs of the new arena at the href=”http://www.cityofsacramento.org/dsd/current-projects/railyards/”>railyard. The construction of the arena is projected to be between $470 million and $542 million. A minimum of $594 million from the new tax levy would go to the county and its cities for as yet undisclosed uses. A joint powers authority, between the City and County of Sacramento would own the arena and sign a net lease with the Maloofs.

The proposal calls for the Maloofs to pay off an existing loan from the city of about $70 million, sign a 30 year lease, calling for rent of $4 million per year, and set aside $20 million for capital repairs to the new arena. They would also receive all proceeds from all events, parking and concessions. Further, they would be entitled to the proceeds from the naming rights of the new arena, expected to raise between $2 and $3 million per year.

So, that’s all fair enough. Here’s where the intellectual dishonesty creeps in. First, the pro-arena crowd is claiming that the Maloofs will kick in about $140 million over the 30 year lease term ($4 million in lease payments per year, over 30 years, plus $20 million for the capital repairs). which, by their math, amounts to about 30% of the total cost of the arena. Evidently, the pro-arena people haven’t heard of this newfangled concept in finance we refer to as “present value of money.”

The present value concept states that a dollar paid today is worth more than a dollar paid tomorrow. Thus, it’s not rational to compare the construction cost of the arena, which will be paid in the next couple of years, to the rent paid over 30 years. Another problem with the pro-arena people’s logic is that the capital repair fund isn’t a cost of the construction of the arena, so it doesn’t make sense to put it into the amount that the Maloofs are contributing to the construction. If the $20 million is included in their contribution, then it should also be included in the cost.

Applying present value to the Maloof’s contribution to the construction (if paying rent could be called that), at a 5 percent discount rate, their contribution if more like 17%, not 30%. Readers should also note that the Maloofs aren’t responsible for construction overruns.

Second, as I mentioned before, the lessor of a piece of property doesn’t contribute to its construction by paying rent. The lessor is paying for the forebearance (i.e., the use) of the property. Why anybody is considering the Maloofs payment of rent a contribution is really beyond me. Of course they’re paying rent! They’re being allowed to use an arena that will cost about $500 million dollars.

There are reasonable, rational arguments that can be made for this deal to get done on the stated terms. But lying to the voters about the terms and the real deal isn’t the way to start an honest debate.

Richard Hatch was convicted today (subscription required) by a Federal Court in Rhode Island of two counts of tax evasion and one count of filing a false return. For reasons not clear to me at the moment, the jury cleared him of the seven other counts, including wire and mail fraud charges. It’s interesting because the evidence was fairly straightforward.

Adding some (excellent) insult to injury, the court revoked Hatch’s bail and remanded him to Federal custody. One wonders how he likes those orange jumpsuits.

More coverage from The Providence Journal online:

Testifying last week, Hatch claimed that he always intended to pay taxes on his Survivor winnings, but he thought that at least some of the taxes had been paid by CBS, its corporate parent of the show’s producer.

He said he tried repeatedly without success to get an answer to that question.

“I just didn’t want to pay them if they had already been paid,” Hatch testified.

His lawyer’s got some big balls and apparently has no trouble keeping a straight face. As I blogged before, if CBS had covered his tax liability, then the funds used to cover such liability would also be income to Hatch. And they would have reported the withholdings to him on Form 1099-MISC.

(Slate covered this “gross-up” concept in detail here. Hat tips to Ben and Paul.)

Finally:

The maximum penalties for the charges on which he was convicted are five years in prison and a $250,000 fine for each of the two counts of tax evasion, plus a $100,000 fine for filing a false S-Corporation income tax return related to the radio program income.

He had faced three years in prison on each of the two counts of wire fraud and the four counts of mail fraud he was cleared of, as well as a maximum 30 years in prison and a $1-million fine for the bank fraud count.

If Hatch had gone through with his plea agreement, he would have faced a maximum penalty of five years in prison and a $250,000 fine on each of the two tax-evasion counts — somewhat less than he now faces.

Oops.

I’ve posted about Tian Tang, webmaster of HanziSmatter.com. Tang was recently interviewed on NPR’s Morning Edition about his site and what it’s all about.

Unfortunately, I missed the live-to-tape interview that morning…

I can’t believe how swamped I’ve been. I need to rethink having SEC registrant clients.

From Reality News Online:

Earlier this month, Hatch requested the court grant him access to a copy of the IRS’s master file about him and also a copy of a statement made by one of his accountants to the agency. The judge rejected that request.

Then, last week, he lost again when the court refused to delay his trial, as he had requested. In fact, Chief U.S. District Court Judge Ernest Torres denied all three motions Hatch had filed, including the above, one asking for a separation of the counts against Hatch, and one that would have forced the IRS to fully detail just how much Hatch supposedly owes.

It’s not clear to me how these motions were intended to advance Hatch’s defense. We’ll see soon enouh, though. Jury selection begins on January 10.

On NPR’s Morning Edition this morning, we listened to a an interview with gentleman who has (with some help) compiled a “cheat sheet” of ways to get around those annoying voicemail systems and get to a human representative.

Fortunately, I’ve not had to call a vendor recently, but they made some calls during the interview and the “cheats” seemed to work fairly well.

The newswires, including the Associated Press, are carrying the story. Her letter to the president is posted here. SCOTUSBlog commentary on what’s next here, from people who know a lot more about this than I do.

A few years ago, I was standing in line at a computer/electronics store behind a gentleman who was holding a copy of popular personal tax preparation software. He was gushing to his friend how much money he was going to save by preparing his own returns, rather than taking it to the “tax man.” I wondered, to myself, if he meant he would save on professional fees, or if he meant that the software would, for example, find additional deductions that his tax preparer might otherwise overlook. The gentleman went on to say that he was sure that this software would put tax preparers out of business “really soon!” I couldn’t resist, so I asked him who he used for tax preparation services. He answered, “H & R Block.” I asked further if he wouldn’t mind telling me what he had meant by saving lots of money. He responded that he paid H & R Block $120 to prepare his return last year, and the software was only $30. Also, the software had some nifty-neat “hidden deduction finder” to suss out ever last dollar of deductions. I thanked him for talking to me, and the clerk checked him out.

That was some time ago, and I’ve still got quite a few clients. And my hourly rate is substantially more than the $120 he was paying H & R Block for his return. The point of that story, though, is that for sophisticated business taxpayers, software doesn’t hold all of the answers. I don’t foresee a time when professional judgement will be replicated by tax preparation software. How does this all relate to the Guru?

Recently, the Guru posted about a question from a reader:

I am an equal partner of a 3 member LLC (taxed as a partnership). I purchased a large SUV (over 6000 lbs) in August, 2004. I made this purchase with my own money primarily for my business activities on a daily basis, but figured it would be a good vehicle to have for certain personal usage (family vacation). My question is this:

Can I deduct the 84% usage on this vehicle as a Section 179 deduction? If so, where do I make this deduction (what form)? Do I simply adjust line 17 on the 1040 or must I make this deduction on another line?

This is certainly a fair question, and one that arises from time to time in my own practice.

The Guru responds:

Unreimbursed expenses that you pay on behalf of your LLC, including Section 179 and other vehicle costs, can be claimed on Page 2 of Schedule E on a line right under where the LLC K-1 info is shown.

This has long been a very basic part of tax return preparation. If your personal tax advisor was unaware of this, it may be time to look for someone with a better understanding of how to handle pass-through entities.

It’s a good thing I keep a supply of Irony Meters around, because the Guru blew up one of them with that last part. “…[L]ook for someone with a better understanding of how to handle pass-through entities.” In that case, I would suggest looking for someone who is not the Guru.

The reader has a followup question:

I assume you were referring to Schedule E, Page 2, Line 28 (i) under Section 179 expense deduction from Form 4562. So even though I would list my LLC’s name, I would go ahead and list the K-1 info as well as my own section 179 deduction on the same line? That’s where the confusion lies and why no tax preparer (and I’ve asked plenty) here can seem to give me a straight answer. Some say that Unreimbursed expenses must fall under the condition: To be deductible, the partnership agreement must state in writing that the partner pay the expenses.

The problem is that I purchased this Large SUV at my own discretion, as I felt it would make my job easier as well as come in handy for the rare trips my wife and I make. Under these conditions, can I still claim this, even if it’s not in the partnership agreement?

The Guru responds:

I’m not sure why this is so confusing to tax pros. For as long as I can remember, my tax software has had an option to code business expenses, including depreciation and Section 179, to a K-1 activity. It then prepares the appropriate backup schedules, including the 4562 for depreciation and Sec. 179, and prints the total on page 2 of the Sch. E, on a separate line under the info from the K-1.

Ah, so now we understand. The Guru argues that if the software will let you do it, it must be proper. Going back to what I wrote before, the value of using a professional advisor isn’t in his having expensive software, it’s his (or her) knowledge and experience.

In truth, I could make GoSystem (the tax software we use) do just about anything. But just because I can get the software to produce a particular result, doesn’t make it proper. There are two particular things that make me sure he’s dead wrong here. The first is what we call “authority.” In this case, the U.S. Tax Court has already decided a case with similar facts, so that’s “authority.” Second, McKee, Nelson & Whitmire are pretty clear on the matter.

The Tax Court held in Frederick S. Klein, 25 TC 1045 (1956) held that if partnership agreement or partnership practice requires partner to bear certain types of partnership business expenses out of partner’s funds, partner is entitled to § 162 deductions for such expenses; not subject to § 67(a) floor; however, partner cannot deduct expenses for which he was entitled to, but failed to seek, reimbursement. The IRS has ruled the same, following Klein in Tech. Adv. Mem. 9316003 (Dec. 23, 1992) ; Tech. Adv. Mem. 9330004 (Apr. 14, 1993) Tech. Adv. Mem. 9330001 (Apr. 1, 1993).

Finally, McKee, Nelson & Whitmire tell us:

Similarly, partnership expenses are deductible only by the partnership, and not by the partners, even though one partner furnishes the cash to pay the expense, unless the partnership agreement specifically requires a partner to pay certain expenses from his own funds.

The base their analysis on Klein.

Now, reasonable people might counter that McKee, Nelson & Whitmire’s writings aren’t authority any more than the Guru’s. Their treatise, Federal Income Taxation of Partnerships and Partners is cited by the courts. I don’t think the Guru is.