MARK MUNTEAN LAW BLOG

"Last chance" estate planning may end soon

2012-02-23T10:20:00.003-08:00

"Last chance" estate planning may end soon

This article was first published in the Orange County Business Journal, February 13, 2012
Much has been written about the perfect storm of estate planning: the coincidence of low values, low interest rates, valuation discounts and the $5 million ($10 million for a married couple) gift and estate tax exemption. Unfortunately, the $5 million gift and estate tax exemption ends (reverting to $1 million) after December 31, 2012. Values of certain assets are increasing. However, most importantly, valuation discounts may be severely restricted at any time by IRS regulations. Thus, the best opportunities may close well before December 31, 2012. Don't wait for this "last chance" at once-in-a-generation estate planning.

Over the last three years of economic crisis and unfunded legislative spending, extraordinary deficits have been created and will continue for years to come. Congress and the Administration continue to examine all available means for raising new tax revenue, including additional gift and estate tax revenue. The Administration's revenue raising proposals for the last three budgets, include: (1) disregarding valuation discounts applicable to certain restrictions on transfer of interests in family-controlled entities; and (2) limiting grantor retained annuity trusts to a minimum 10-year term. In addition, the IRS has for several years maintained that it has the authority to restrict or eliminate valuation discounts by regulation. Several political and legal factors suggest that such regulations could be issued at any time, effective on the date of publication, without an opportunity for notice and comment. President Obama has promulgated the "We Can't Wait" doctrine to justify extensive regulatory actions and bypass Congress. If there is political concern regarding the potential outcome of the 2012 elections, there is strong incentive to implement more "can't wait" regulations, including eliminating family valuation discounts.

Many traditional planning techniques employ valuation discounts to enhance the transfer of wealth to heirs with little or no gift or estate tax consequences. For example, a Grantor Retained Annuity Trust ("GRAT") allows a person to transfer assets to a trust in exchange for payment from the trust of a yearly amount that includes an interest factor set by the IRS, which is 1.4% for February 2012. Valuation discounts effectively lower the required annual payment, thus increasing the amount that passes to the beneficiaries when the GRAT ends. This has been a favorite wealth transfer technique of the rich and famous, including the Gates, Buffet and Walton families, and numerous Google millionaires.

Elimination of family valuation discounts would impact many other conventional planning techniques. One is a sale to an intentionally defective grantor trust ("sale to a DGT"). A sale to a DGT has several advantages over a GRAT. Another technique that would be impacted is a transfer to a charitable lead annuity trust ("CLAT"). The CLAT is a Trust to which the grantor transfers assets and the Trust pays a yearly amount to a charity for a period of years, after which any remaining trust assets pass to the grantor's children or other beneficiaries. The annuity payment is a fixed percentage of the initial value of the assets transferred to the CLAT, including valuation discounts. The value of the gift to the remainder beneficiaries is measured by the initial discounted value of assets, value of the annuity payments, and term. There are many nuances applicable in considering these and other planning techniques that should be reviewed with a qualified estate planning professional.

Finally, the grand revenue raiser - rates and exemptions. No one would have predicted that 2010 would be the year with no estate tax or that the gift and estate tax exemptions would increase to $5 million with a maximum estate and gift tax rate of 35% in 2011 and 2012. Now, the specter of huge 2013 estate and gift tax increases looms. This window of opportunity, combined with the possible loss of valuation discounts, should create some urgency for those desiring to transfer wealth to children and grandchildren. Advisors and clients should act now.

Former Lynwood District Chief Business Officer Arrested on Misappropriation of Public Funds, State Income Tax Charges

2012-02-21T12:52:00.001-08:00

Former Lynwood District Chief Business OfficerArrested on Misappropriation of Public Funds, State Income Tax Charges

FTB 02.17.2012

Sacramento –A Santa Ana man was arrested on numerous counts ofmisappropriation of public funds, embezzlement, enhancements for excessivetaking, state income tax fraud and state income tax evasion, the Franchise TaxBoard (FTB) announced.

William D. Agopian, 60, was employedby the Lynwood Unified School District as its Chief Business Officer. Accordingto FTB investigators, Agopian allegedly failed to report the more than $600,000he defrauded from the school district in 2006 – 2010. Agopian allegedly usedfunds deposited into a school bank account opened for a District sponsoredstudent exchange trip for his own benefit. The scheme was discovered when theschool district hired an individual to review its books.

As a result, he owes the state morethan $60,000 in personal income tax. Penalties, interest, and the cost of theinvestigation will be added to this amount and sought as restitution.

Agopian was booked into the LosAngeles County Main Jail on Wednesday. His bail is set at $700,000 and his arraignmentis scheduled for February 17 in Department 30 of the Folz Criminal JusticeCenter.

This is a joint investigationbetween the Los Angeles County District Attorney’s Office and FTB.

FTB’s criminal investigation programidentifies and investigates cases of tax evasion and tax fraud to encouragecompliance with California income tax laws and maintain the public trust.

The charges and allegations contained in the criminal complaint are merelyallegations, and the defendant is presumed innocent unless and until provenguilty.

FTC Announces Revised Thresholds for HSR

2012-02-10T08:57:00.001-08:00

For Your Information: 01/24/2012

FTC Announces Revised Thresholds for Clayton Act Antitrust Reviews

The Federal Trade Commission announced it has revised the thresholds that determine whether companies are required to notify federal antitrust authorities about a transaction under the Hart-Scott-Rodino Antitrust Improvements Act. These filing thresholds are required to be adjusted annually to keep pace with inflation, unlike the pre-merger filing fees, which have not changed in more than a decade.
The HSR Act requires companies to notify authorities if – among other things – the value of a transaction exceeds the filing thresholds. The FTC is required to revise those thresholds annually, based on the change in gross national product. For 2012, the threshold for reporting proposed mergers and acquisitions subject to enforcement under Section 7 of the Clayton Act increased from $66.0 million to $68.2 million.
The FTC also announced revisions to the thresholds that trigger a prohibition preventing companies from having interlocking memberships on their corporate boards of directors under Section 8 of the Clayton Act. The Act requires that the Commission revise those thresholds annually, based on the change in the level of gross national product. The new thresholds for the Act's prohibition on interlocking directorates are $27,784,000 for Section 8(a)(1) and $2,778,400 for Section 8(a)(2)(A).
In the case of each type of threshold, the vote to approve Federal Register notices announcing the revisions was 4-0. The revised thresholds under Section 7A will apply to all transactions that close on or after the effective date of the notice, which is 30 days after its publication in the Federal Register. The thresholds for Section 8 will become effective upon publication in the Federal Register. (FTC File No. P859910; the staff contact for Section 7 is Michael Verne, Bureau of Competition, 202-326-3100; the staff contact for Section 8 is James F. Mongoven, Bureau of Competition, 202-326-2879.)
The FTC's Bureau of Competition works with the Bureau of Economics to investigate alleged anticompetitive business practices and, when appropriate, recommends that the Commission take law enforcement action. To inform the Bureau about particular business practices, call 202-326-3300, send an e-mail to antitrust@ftc.gov, or write to the Office of Policy and Coordination, Bureau of Competition, Federal Trade Commission, 601 New Jersey Ave., Room 7117, Washington, DC 20580. To learn more about the Bureau of Competition, read Competition Counts. Like the FTC on Facebook and follow us on Twitter.

IRS Offshore Programs Produce $4.4 Billion To Date for Nation’s Taxpayers; Offshore Voluntary Disclosure Program Reopens

2012-01-11T14:28:00.001-08:00

IR-2012-5, Jan. 9, 2012
WASHINGTON — The Internal Revenue Service today reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs.
The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.
“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”
The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.
“As we’ve said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”
The third offshore effort comes as Shulman also announced today the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.
In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program.
The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.
For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.
Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.
Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.
The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax. The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities.
More details will be available within the next month on IRS.gov. In addition, the IRS will be updating key Frequently Asked Questions and providing additional specifics on the offshore program.

Supreme Court Justices Grant Leeway to Churches in Job Bias Laws

2012-01-11T14:25:00.001-08:00

Supreme Court JusticesGrant Leeway to Churches in Job Bias Laws

ByADAM LIPTAK, NEW YORK TIMES

Published:January 11, 2012

WASHINGTON— In what may be its most significant religious liberty decision in twodecades, the Supreme Court on Wednesday for the first time recognized a“ministerial exception” to employment discrimination laws, saying that churchesand other religious groups must be free to choose and dismiss their leaderswithout government interference.

SupremeCourt Decision: Hosanna-Tabor Evangelical Lutheran Church and School v.E.E.O.C.

"Theformula affirmed by the Court is equality when it suits the purpose of thereligious organization, inequality when it does not."

“The interest of society in the enforcement ofemployment discrimination statutes is undoubtedly important,” Chief JusticeJohn G. Roberts Jr. wrote in a decision that was surprising in both its sweepand its unanimity. “But so, too, is the interest of religious groups inchoosing who will preach their beliefs, teach their faith and carry out theirmission.”

Thedecision gave only limited guidance about how courts should decide who countsas a minister, saying the court was “reluctant to adopt a rigid formula.” Twoconcurring opinions offered contrasting proposals.

Whateverits precise scope, the ruling will have concrete consequences for countlesspeople employed by religious groups to perform religious work. In addition toministers, priests, rabbis and other religious leaders, the decision appears toencompass, for instance, at least those teachers in religious schools withformal religious training who are charged with instructing students aboutreligious matters.

DouglasLaycock, a law professor at the University of Virginia who argued the case onbehalf of the school, said the upshot of the ruling was likely to be that“substantial religious instruction is going to be enough.”

Askedabout professors at Catholic universities like Notre Dame, Professor Laycocksaid: “If he teaches theology, he’s covered. If he teaches English or physicsor some clearly secular subjects, he is clearly not covered.”

Thecase, Hosanna-Tabor Church v. Equal Employment Opportunity Commission, No.10-553, was brought by Cheryl Perich, who had been a teacher at a school inRedford, Mich., that was part of the Lutheran-Church Missouri Synod, thesecond-largest Lutheran denomination in the United States. Ms. Perich said shewas fired for pursuing an employment-discrimination claim based on adisability, narcolepsy.

Ms.Perich had taught mostly secular subjects but also taught religion classes andattended chapel with her class.

“Itis true that her religious duties consumed only 45 minutes of each workday,”Chief Justice Roberts wrote, “and that the rest of her day was devoted toteaching secular subjects.”

“Theissue before us, however, is not one that can be resolved with a stopwatch,” hewrote.

Instead,the court looked to several factors. Ms. Perich was a “called” teacher who hadcompleted religious training and whom the school considered a minister. She wasfired, the school said, for violating religious doctrine by pursuing litigationrather than trying to resolve her dispute within the church.

TheRev. Barry W. Lynn, executive director of Americans United for Separation ofChurch and State, said Wednesday’s decision could have pernicious consequences,by, for instance, barring suits from pastors who are sexually harassed.

“Blatantdiscrimination is a social evil we have worked hard to eradicate in the UnitedStates,” he said in a statement. “I’m afraid the court’s ruling today will makeit harder to combat.”

Bishop William E. Lori, chairman of the UnitedStates Conference of Catholic Bishops’ ad hoc committee for religious liberty,called the ruling “a great day for the First Amendment.”

“Thisdecision,” he said in a statement, “makes resoundingly clear the historical andconstitutional importance of keeping internal church affairs off limits to thegovernment — because whoever chooses the minister chooses the message.”

ChiefJustice Roberts devoted several pages of his opinion to a history of religiousfreedom in Britain and the United States, concluding that an animatingprinciple behind the First Amendment’s religious liberty clauses was toprohibit government interference in the internal affairs of religious groupsgenerally and in their selection of their leaders in particular.

“The Establishment Clause preventsthe government from appointing ministers,” he wrote, “and the Free ExerciseClause prevents it from interfering with the freedom of religious groups toselect their own.”

Supreme Court Decision: Hosanna-Tabor Evangelical LutheranChurch and School v. E.E.O.C.

The decision was a major victory fora broad swath of national religious denominations who had warned that the casewas a threat to their First Amendment rights and their autonomy todecide whom to hire and fire. Some religious leaders had said theyconsidered it the most important religious freedom case to go to theSupreme Court in decades.

Many religious groups wereoutraged when the Obama administration argued in support of Ms. Perich, sayingthis was evidence that the administration was hostile tohistorically protected religious liberties.

The administration had toldthe justices that their analysis of Ms. Perich’s case should be essentially thesame whether she had been employed by a church, a labor union, a social club orany other group with free-association rights under the First Amendment. Thatposition received withering criticism when the case was argued in October, and it wassoundly rejected in Wednesday’s decision.

“That result is hard to square withthe text of the First Amendment itself, which gives special solicitude to therights of religious organizations,” Chief Justice Roberts wrote. “We cannotaccept the remarkable view that the religion clauses have nothing to say abouta religious organization’s freedom to select its own ministers.”

Requiring Ms. Perich to bereinstated “would have plainly violated the church’s freedom,” Chief JusticeRoberts wrote. And so would awarding her and her lawyers money, he went on, asthat “would operate as a penalty on the church for terminating an unwantedminister.”

In a concurrence, Justice ClarenceThomas wrote that the courts should get out of the business of trying to decidewho qualifies for the ministerial exception, leaving the determination toreligious groups.

“The question whether an employee isa minister is itself religious in nature, and the answer will vary widely,” hewrote. “Judicial attempts to fashion a civil definition of ‘minister’ through abright-line test or multifactor analysis risk disadvantaging those religiousgroups whose beliefs, practices and membership are outside of the ‘mainstream’or unpalatable to some.”

In a second concurrence, JusticeSamuel A. Alito Jr., joined by Justice Elena Kagan, wrote that it would be amistake to focus on ministers, a title he said was generally used by Protestantdenominations and “rarely if ever” by Catholics, Jews, Muslims, Hindus orBuddhists. Nor, Justice Alito added, should the concept of ordination be at thecenter of the analysis.

Rather, he wrote, the exception“should apply to any ‘employee’ who leads a religious organization, conductsworship services or important religious ceremonies or rituals, or serves as amessenger or teacher of its faith.”

At the argument in October, somejustices expressed concern that a sweeping ruling would protect religiousgroups from lawsuits by workers who said they were retaliated against for, say,reporting sexual abuse,

Chief Justice Roberts wrote thatWednesday’s decision left the possibility of criminal prosecution and otherprotections in place.

“There will be time enough toaddress the applicability of the exception to other circumstances,” he wrote,“if and when they arise.”

Laurie Goodstein contributedreporting from New York.

The Benefits of Incorporating Abroad in an Age of Globalization

2011-12-21T08:15:00.001-08:00

The Benefits of Incorporating Abroad in an Age ofGlobalization

By STEVEN M.DAVIDOFF

Michael Kors Holdings not only sellsfashion that people crave, it has also offered shares that were a hit withinvestors. The company’s shareholders, including the designer himself, soldabout $944 million worth of stock last week in an initial public offering thatvalued the company at about $4 billion.

Michael Korsis not just a successful I.P.O., however. The company is also a case study onhow globalization increasingly allows companies to avoid United States taxesand regulation.

Michael Kors gets about 95 percentof its revenue from sales in Canada and the United States. Like most clothingmanufacturers, the company makes its clothes largely in Asia. And Michael Korshas gone one step further. It has outsourced its corporate governance and taxesto the British Virgin Islands.

Because the company is organizedthere, it sidesteps higher taxes and substantial regulation in the UnitedStates.

The tax savings are likely in themillions and could end up being much more.

If Michael Kors were organized underthe laws of the United States, it would be subject to taxation on its worldwideincome instead of just the revenue it earned in the United States. The companycould defer these taxes on foreign income by keeping the money abroad inforeign subsidiaries. If it repatriated the money to the United States, itwould then be taxed at rates of up to 35 percent, offset by any foreign taxpaid.

Because of this tax regime, JPMorgan Chase estimates that American multinationalshave $1.375 trillion in cash sitting overseas. By keeping this cash abroad,these companies are not subject to United States tax until the money isreturned to America. These companies may be waiting for Congress to enact a taxholiday to allow the cash’s repatriation.

Since Michael Kors is organizedabroad, it never has to face this issue and will pay tax only on money earnedin the United States. Right now, Michael Kors does not have significant foreignrevenue, but this is bound to increase, as the company appears focused onbuilding international sales.

Michael Kors will also be able tododge much of the securities and corporate regulation applicable to Americanpublic companies, which are subject to scrutiny under the federal securitieslaws intended to protect investors. This requires an American company to filequarterly reports and publicly disclose material events promptly upon theiroccurrence. Executives also have to report all stock sales within two days, andcompanies are generally required to have a board comprising a majority ofindependent directors. As a foreign corporation, Michael Kors is under no suchrestrictions and instead is subject to bare-bones reporting requirements underUnited States securities law.

If a shareholder wants to sue aMichael Kors director for misconduct, good luck. The corporate laws of theBritish Virgin Islands are very different from those of United States. MichaelKors states in its I.P.O. prospectus that “minority shareholders will havelimited or no recourse if they are dissatisfied with the conduct of ouraffairs.” A shareholder would most likely have to sue in the British VirginIslands. While a few weeks’ visit there might be nice, I am not sure thatshareholders are prepared to spend years on the island locked up in litigation.

It is not just Michael Kors that istaking advantage of foreign incorporation. Privateequity firms have been buying American companies with significantforeign operations and reorganizing them as foreign corporations. The privateequity firms will then arrange for the company to make an initial publicoffering on an American exchange. Freescale Semiconductor Holdings, a companypurchased by a consortium of private equity firms in 2006, went public on the New York Stock Exchange in May, yet it wasorganized under the laws of Bermuda.

It is all seems so easy.

More American companies wouldprobably love to lower their taxes and leave for the Caribbean, if not forCongress. In 2002, Stanley Works, based in Connecticut, tried toreincorporate in Bermuda to save $30 million a year in taxes. But after apublic outcry, the company’s board abandoned the plan. Congress subsequentlypassed a law prohibiting companies from migrating out of the United States tolower their taxes unless the exit involved a sale of control. Private equityfirms take advantage of this loophole to send portfolio companies with largeoverseas operations abroad.

Michael Kors was reincorporated inthe British Virgin Islands and established its corporate headquarters in HongKong in connection with its acquisition by Sportswear Holdings in 2003.Sportswear Holdings is based in Hong Kong and controlled by Lawrence S. Strolland Silas K. F. Chou, both of whom reside outside the United States. MichaelKors’s foreign incorporation and headquarters was most likely put in place totake advantage of this foreign ownership and further ensure that the UnitedStates did not tax its owners.

Michael Kors and Freescale show yetagain that American corporate tax laws need to change as companies becomeincreasingly international. The United States is one of the few countries inthe world to tax worldwide income for companies based here.

In a world where companies have achoice about where to incorporate, enforcing these tax rules is going to getharder. Michael Kors stock may be listed on the Hong Kong Stock Exchange andthe company may have headquarters in Hong Kong, but this appears to be amailbox. The fashion designer’s largest office is in New York and its stock isalso listed on the New York Stock Exchange. But when it came time to set up thecompany’s place of organization, Michael Kors chose a third country where ithad no operations.

Congress can try to close thisloophole, but companies that want to lower their taxes will still find a way toincorporate abroad, something made easier by the ability to raise capitalthrough an I.P.O. anywhere in the world.

Perhaps it is time for the UnitedStates to adopt a tax system more in line with the rest of the world. This doesnot mean pandering to tax havens, but it should incentivize companies to bringtheir riches to the United States.

The regulatory concerns are alsohigh. American investors may be investing in Kors and other companiesincorporated outside the United States without appreciating that they are notsubject to the same United States laws that other publicly traded companiesare. The Securities and Exchange Commission set up thesedifferent regimes to attract foreign listings, but companies like Michael Korsare taking advantage of the loophole to lower their tax burden, possibly at theexpense of shareholders.

Welcome to globalization.

Steven M. Davidoff, writing as TheDeal Professor, is a commentator for DealBook on the world of mergers andacquisitions.

IRS ISSUES Information for U.S. Citizens or Dual Citizens Residing Outside the U.S.

2011-12-12T08:27:00.000-08:00

Information for U.S. Citizens or Dual Citizens Residing Outside the U.S.

FS-2011-13, December 2011
The IRS is aware that some taxpayers who are dual citizens of the United States and a foreign country may have failed to timely file United States federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), despite being required to do so. Some of those taxpayers are now aware of their filing obligations and seek to come into compliance with the law. This fact sheet summarizes information about federal income tax return and FBAR filing requirements, how to file a federal income tax return or FBAR, and potential penalties.

Note that penalties will not be imposed in all cases. As discussed in more detail below, taxpayers who owe no U.S. tax (e.g., due to the application of the foreign earned income exclusion or foreign tax credits) will owe no failure to file or failure to pay penalties. In addition, no FBAR penalty applies in the case of a violation that the IRS determines was due to reasonable cause.
This fact sheet is provided for information purposes only, and the topics discussed may or may not apply to a particular taxpayer’s situation. The IRS continues to consider the topics discussed in this fact sheet and will provide additional information as it becomes available.

1. U.S. income tax return filing requirement
As a United States citizen, you must file a federal income tax return for any tax year in which your gross income is equal to or greater than the applicable exemption amount and standard deduction. For information about whether you must file a federal income tax return for a particular tax year, including exemption amounts and standard deductions, see Publication 501 (Exemptions, Standard Deduction, and Filing Information) for that year. Generally, you are required to report your worldwide income on your federal income tax return. This means that you should report all income, regardless of which country is the source of the income. Generally, you only need to file returns going back six years.

2. Penalties imposed for failure to file income tax returns or to pay tax
If you are required to file a federal income tax return and fail to do so, or you fail to pay the amount of tax shown on your federal income tax return, you may be subject to a penalty under Internal Revenue Code (IRC) section 6651, unless you show that the failure is due to reasonable cause and not due to willful neglect. The penalty is 5 percent of the amount of tax required to be shown on the return. If the failure continues for more than one month, an additional 5 percent penalty may be imposed for each month or fraction thereof during which the failure continues. The total failure to file penalty cannot exceed 25 percent. Note that there is no penalty if no tax is due.

If you fail to pay the amount of tax shown on your federal income tax return, you may be subject to a penalty for failing to pay under IRC section 6651(a)(2), unless you show that the failure is due to reasonable cause and not due to willful neglect. The penalty begins running on the due date of the return (determined without regard to any extension of time for filing the return) and is 1/2 percent of the amount of tax shown on the return. If the failure continues for more than one month, an additional 1/2 percent penalty may be imposed for each additional month or fraction thereof that the amount remains unpaid. The total failure to pay penalty cannot exceed 25 percent. Note that there is no penalty if no tax is due.

Under IRC section 6651(c)(1), the failure to file penalty is reduced by the amount of the failure to pay penalty for any month in which both apply.

For more information regarding the failure to file penalty and the failure to pay penalty, see IRS Notice 746 (Information About Your Notice, Penalty and Interest).

Example 1: Taxpayer is a United States citizen who lived abroad in Country A for all of 2010, during which time Taxpayer worked as an English instructor. He maintained a checking account with a bank in Country A, and the highest balance in the account did not exceed $10,000 in 2010. Taxpayer complied with Country A’s tax laws and properly reported all his income on Country A tax returns. Although Taxpayer earned income in excess of the applicable exemption amount and standard deduction, he did not timely file a federal income tax return for tax year 2010. After learning of his U.S. filing obligations, Taxpayer filed an accurate, though late, federal income tax return showing no tax liability after taking into account the section 911 foreign earned income exclusion and the foreign tax credit for taxes paid to Country A. Taxpayer is not liable for a failure to file penalty, since the amount of tax required to be shown on the federal income tax return is zero. Similarly, Taxpayer is not liable for a failure to pay penalty, since the amount of tax shown on the return is zero.

Whether a failure to file or failure to pay is due to reasonable cause is based on a consideration of the facts and circumstances. Reasonable cause relief is generally granted by the IRS when you demonstrate that you exercised ordinary business care and prudence in meeting your tax obligations but nevertheless failed to meet them. In determining whether you exercised ordinary business care and prudence, the IRS will consider all available information, including:

The reasons given for not meeting your tax obligations;
Your compliance history;
The length of time between your failure to meet your tax obligations and your subsequent compliance; and
Circumstances beyond your control.

Reasonable cause may be established if you show that you were not aware of specific obligations to file returns or pay taxes, depending on the facts and circumstances. Among the facts and circumstances that will be considered are:

Your education;
Whether you have previously been subject to the tax;
Whether you have been penalized before;
Whether there were recent changes in the tax forms or law that you could not reasonably be expected to know; and
The level of complexity of a tax or compliance issue.

You may have reasonable cause for noncompliance due to ignorance of the law if a reasonable and good faith effort was made to comply with the law or you were unaware of the requirement and could not reasonably be expected to know of the requirement.

Example 2: Same facts as Example 1, except Taxpayer’s federal income tax return showed a tax liability of $2,100. Taxpayer is subject to the failure to file penalty, unless Taxpayer shows that the failure to file was due to reasonable cause and not due to willful neglect. Taxpayer is also subject to the failure to pay penalty, unless Taxpayer shows that the failure to pay was due to reasonable cause and not due to willful neglect. Since the failure to file penalty is reduced by the failure to pay penalty for any month during which both apply, the maximum failure to file penalty is $472.50 (22.5 percent of $2,100). The failure to pay penalty will accrue for 50 months before the 25 percent maximum is reached. The maximum failure to pay penalty is $525 (25 percent of $2,100). The penalties could be lower depending on when Taxpayer filed the return and paid the tax shown on the return. The penalties also could be lower, or there could be no penalties at all, to the extent Taxpayer is able to show that the failure to file or failure to pay was due to reasonable cause and not due to willful neglect.

3. Possible additional penalties that may apply in particular cases
In addition to the failure to file and failure to pay penalties, in some situations, you could be subject to other civil penalties, including the accuracy-related penalty, fraud penalty, and certain information reporting penalties. For information regarding the accuracy-related penalty and the fraud penalty, see IRS Notice 746 (Information About Your Notice, Penalty and Interest). For information regarding information reporting penalties, see the instructions for the specific information reporting form. For example, see the Instructions for Form 3520-A for information on the penalty for failure to file Form 3520-A.

4. FBAR filing requirement
As a United States citizen, you may be required to report your interest in certain foreign financial accounts on Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). For information about FBAR reporting requirements, including reporting exceptions, see Form TD F 90-22.1 and the IRS FBAR Frequently Asked Questions.

5. How to file an FBAR
For information about how and where to file an FBAR, see Form TD F 90-22.1 and the IRS FBAR Frequently Asked Questions.

If you learn you were required to file FBARs for earlier years, you should file the delinquent FBARs and attach a statement explaining why they are filed late. You do not need to file FBARs that were due more than six years ago, since the statute of limitations for assessing FBAR penalties is six years from the due date of the FBAR. As discussed below, no penalty will be asserted if IRS determines that the late filings were due to reasonable cause. Keep copies, for your record, of what you send.

6. Possible penalties for failure to file FBAR
If you fail to file an FBAR, in the absence of reasonable cause, you may be subject to either a willful or non-willful civil penalty. Generally, the civil penalty for willfully failing to file an FBAR can be up to the greater of $100,000 or 50 percent of the total balance of the foreign account at the time of the violation. See 31 U.S.C. § 5321(a)(5). Note that this penalty is applicable only in cases in which there is willful intent to avoid filing. Non-willful violations that the IRS determines are not due to reasonable cause are subject to a penalty of up to $10,000 per violation. There is no penalty in the case of a violation that IRS determines was due to reasonable cause. For more information about the FBAR penalty, see Form TD F 90-22.1. For information about the reasonable cause exception to the FBAR penalty, see IRM 4.26.16, Report of Foreign Bank and Financial Accounts (FBAR).

Example 3: Same facts as Example 1, except that the highest balance in Taxpayer’s checking account exceeded $10,000 and, after reading recent press and thus learning of his FBAR filing obligations, Taxpayer filed an accurate, though late, FBAR. The FBAR was accompanied by a written statement explaining why Taxpayer believed the failure to file the FBAR was due to reasonable cause. The IRS will determine whether the violation was due to reasonable cause based on all the facts and circumstances. Taxpayer’s explanation for why he failed to timely file an FBAR appears reasonable in view of the facts and circumstances of the case. Since the IRS determined that the FBAR violation was due to reasonable cause, no FBAR penalty will be asserted.

Factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause include reliance upon the advice of a professional tax advisor who was informed of the existence of the foreign financial account, that the unreported account was established for a legitimate purpose and there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and that there was no tax deficiency (or there was a tax deficiency but the amount was de minimis) related to the unreported foreign account. There may be factors in addition to those listed that weigh in favor of a determination that a violation was due to reasonable cause. No single factor is determinative.

Factors that might weigh against a determination that an FBAR violation was due to reasonable cause include whether the taxpayer’s background and education indicate that he should have known of the FBAR reporting requirements, whether there was a tax deficiency related to the unreported foreign account, and whether the taxpayer failed to disclose the existence of the account to the person preparing his tax return. As with factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause, there may be other factors that weigh against a determination that a violation was due to reasonable cause. No single factor is determinative.

Current IRS procedures state that an examiner may determine that the facts and circumstances of a particular case do not justify asserting a penalty and that instead an examiner should issue a warning letter. See IRM 4.26.16, Report of Foreign Bank and Financial Accounts (FBAR). The IRS has established penalty mitigation guidelines, but examiners may determine that a penalty is not appropriate or that a lesser (or greater) penalty amount than the guidelines would otherwise provide is appropriate. Examiners are instructed to consider whether compliance objectives would be achieved by issuance of a warning letter; whether the person who committed the violation had been previously issued a warning letter or has been assessed the FBAR penalty; the nature of the violation and the amounts involved; and the cooperation of the taxpayer during the examination.

Example 4: Taxpayer is a United States citizen who lives and works in Country B as a computer programmer. Taxpayer has checking and savings accounts with a bank that is located in the city where he lives. The aggregate balance of the checking and savings accounts is $50,000 during the tax year. Taxpayer complied with Country B’s tax laws and properly reported all his income on Country B tax returns. Taxpayer failed to file federal income tax returns and failed to file FBARs to report his financial interest in the checking and savings accounts. After reading recent press and thus learning of his federal income tax return and FBAR reporting obligations, Taxpayer filed delinquent FBARs, reporting both foreign accounts, and attached statements to the FBARs explaining that he was previously unaware of his obligation to report the accounts on an FBAR. Taxpayer also filed federal income tax returns properly reporting all income and no tax was due. The IRS will determine whether the FBAR violation was due to reasonable cause based on all the facts and circumstances. Taxpayer had a legitimate purpose for maintaining the foreign accounts, there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and no tax was due. Taxpayer’s explanation for why he failed to timely file an FBAR appears reasonable in view of the facts and circumstances of the case. Since the IRS determined that the FBAR violation was due to reasonable cause, no FBAR penalty will be asserted.

7. New reporting requirement for foreign financial assets
A new law requires U.S. taxpayers who have an interest in certain specified foreign financial assets with an aggregate value exceeding $50,000 to report those assets to the IRS. This reporting will be required beginning in 2012. Taxpayers who are required to report must submit Form 8938 with their tax return. See Notice 2011-55 for additional information about this reporting requirement under IRC section 6038D.

California's tax-hike advocates may setting up circular firing squad

2011-12-02T12:14:00.001-08:00

California'stax-hike advocates may setting up circular firing squad

ByDan Walters

Published:Friday, Dec. 2, 2011

Thosewho believe that California should raise taxes – including Gov. Jerry Brown –to close its budget deficit or increase spending may be forming a circular firing squad.

Fourmajor tax measures, all with well-heeled support and opposition, appear to beheaded for the November 2012 ballot, plus a few lesser tax proposals. Voterscould be subjected to weeks of confusing propaganda, and their response couldbe to reject everything.

TheThink Long Committee for California – a group of political and civic figuresand financed by billionaire Nicolas Berggruen – wants Californians to approve asweeping tax overhaul that would extend sales taxes to services, simplify the income taxand generate about $10 billion more year.

MollyMunger – the daughter of Charles Munger, Warren Buffet's chief business partner– wants a sliding scale increase in income taxes to raise $10 billion a year for K-12 and preschool education.

Hedgefund manager Tom Steyer would indirectly boost taxes on out-of-statecorporations doing business in California, by changing the way their taxableincomes are calculated, to boost spending on green energy by $1.1 billion ayear.

Finally,Brown and his union allies will soon unveil a temporary sales tax hike andincome tax surcharge on the affluent to raise about $7 billion a year to closethe state's chronic budget deficit.

Ifthey all make the ballot, not only will voters be bombarded by their advocatesand opponents, but they create intramural rivalries.

Brown'sallies in the public employee unions, especially the powerful California Teachers Association dislike theThink Long proposal because it would shift the tax burdenfrom higher-income taxpayers to those in the middle-income brackets – andbecause Think Long wants the schools to give up billions of dollars owed by thestate. The Brown and Munger plans would be direct competitors.

Itsets up a situation not unlike what happened in 2009, when then-Gov. ArnoldSchwarzenegger and the Legislature placed a package of several budget and taxmeasures on a special election ballot. Voters reacted angrily at its complexityand rejected everything.

The2009 package violated an unwritten rule of ballot measures, that they should beas simple – perhaps as simplistic – as possible because when voters areconfused and uncertain about something, they're more likely to reject it.

The2012 measures could create the same kind of confusion and play into the handsof anti-tax groups that would like to see everything die.

Obviously,the way to avoid that situation would be for Brown and others who want to raisetaxes to make some sort of deal to present one relatively straightforward,poll-tested tax measure.

However,given the big egos involved, it's doubtful anyone has the stature to make thathappen.

CallThe Bee's Dan Walters, (916) 321-1195.

Direct expensing for farm taxes

2011-11-15T10:31:00.001-08:00

Direct expensing for farm taxes

Warren Schauer, Michigan State University Extension | Updated: November 15, 2011

First-year Direct Expensing (Section 179) is anelection in IRS code that allows businesses like farms to deduct the cost ofcapital purchases as a tax deductible expense. In 2011 up to $500,000 ofpersonal property capital purchases may be direct expensed if placed in serviceby the end of the year.

In most cases the capital purchases that qualify arepersonal property used more than 50% of the time in the business. The propertymay be new or used. Examples of eligible property include farm machinery,breeding livestock, grain bins and other single purpose agriculture orhorticultural structures. In addition, off-the-shelf computer software iscurrently eligible property. Single purpose structures do not include farmshops or general purpose farm buildings.

There are several limitations that apply for directexpensing. If the farm business purchases and places into service over $2million dollars’ worth of qualifying property then the $500,000 limit isreduced dollar for dollar. For example if a farm buys $2,125,000 worth ofequipment then the amount of First-year Direct Expensing (Section 179) allowedis limited to $375,000. If the business purchases $2,500,000 or more in 2011then no direct expensing is allowed.

The amount is also limited to the combined taxableincome before the deduction derived from the active conduct of all trades orbusinesses. Section 1231 gains and losses reported on form 4797, such as salesof breeding livestock and machinery are taxable income as well as wages. Forexample, if a farm bought $300,000 of farm machinery and the net farm income is$125,000 the first-year direct expensing is limited to $125,000. The amountdisallowed by this business taxable income limitation can be carried forwardagainst future capital purchases.

Also keep in mind in any year that the asset ceasesto be used more than 50% in the active conduct of a trade or business, aportion of the expensed amount is recaptured.

The determination of whether the mid-quarterconvention applies due to purchases made in the fourth quarter of the tax yearis made after any direct expense deduction and reduction of depreciable basisfor credits.

The carryover basis from traded-in property is noteligible for direct expensing, only the extra or boot can be direct expensed.Boot is the cash and/or loans that are used to purchase the asset in addition tothe value of the equipment traded for another piece of equipment. If a farmertraded in an old tractor for a new tractor, only the amount paid to dealerbeyond the value of the trade-in would qualify for direct expensing. Inaddition, large SUVs more than 6,000 pounds Gross Vehicle Weight Rating or notmore than 14,000 pounds are limited to $25,000 in direct expensing. A businesscan direct expense a portion of an item and then use regular deprecation on theremaining amount.

Of course, if the taxpayer direct expenses 100% ofan item then there is no more depreciation left to expense in future years onthat piece even if it still is in use.

For tax years beginning in 2012, maximum directexpensing is $125,000 indexed for inflation with phase out starting at $500,000of qualified property placed in service. In 2013 maximum is $25,000 with phaseout starting at $200,000. It is possible that Congress could increase thisamount prior to 2013.

Remember it is always a good idea to review anyelections with your tax advisor.

This article was published on MSU Extension News for Agriculture. Formore information from MSU Extension,visit http://news.msue.msu.edu.

IRS: Oakland's Largest Pot Dispensary Owes Millions

2011-10-04T08:38:00.001-07:00

IRS:Oakland's Largest Pot Dispensary Owes Millions

HarborsideHealth Center loses high-stakes tax battle; advocates say ruling could cripplethe industry.-- By Zusha Elinson on October 3, 2011 - 4:36 p.m. PDT The Bay Citizen (http://s.tt/13qbg)

Oakland’s Harborside Health Center — the largestmedical marijuana dispensary on the West Coast — lost the first round in ahigh-stakes battle with the Internal Revenue Service that could spell troublefor the booming pot industry.

In a letter to Harborside late last week, the IRSruled that the dispensary cannot deduct standard business expenses such aspayroll and rent, because it is involved in what the agency terms "thetrafficking of controlled substances," said Luigi Zamarra, Harborside’s chieffinancial officer.

“We can't live with the conclusions that the IRS hascome to and neither can the industry,” Zamarra said in an interview Monday. Ifthe IRS ultimately prevails, “we would close our doors and go away because thebusiness model wouldn’t work,” he said.

Zamarra said Harborside would appeal the ruling. AnIRS spokesman declined to comment.

The ruling highlights the conflict between federaland state authorities over medical marijuana, which is legal under state lawbut illegal under federal law. As Oakland and other cities have looked todispensaries as sources for much-needed tax revenue, the federal government hastoughened its stance toward the state’s marijuana industry.

Harborside — which has more 83,000 members and rakedin $22 million at its Oakland dispensary last year — received a letter from theIRS late last week saying that the dispensary owed $2.5 million in taxes from2007 and 2008. That’s $2 million more than Harborside paid for those tax years,Zamarra said.

The difference: The IRS insists that medicalmarijuana dispensaries must obey a section of tax code that prohibits companiesfrom deducting most expenses if they are “trafficking in controlledsubstances.” [Section 280(e) of the Internal Revenue Code (“IRC”)] was designedas a tool for fighting drug trafficking.

Zamarra said that the IRS letter states thatHarborside can’t deduct rent, payroll, health insurance or worker’scompensation insurance — deductions that are standard for many otherindustries. The only two things the IRS says the dispensary can deduct are thecost of buying marijuana and the cost of alternative health care services suchas yoga, he said.

For instance, if Harborside bought marijuana for$60, sold it for $100 and used the entire $40 in income to pay salaries, rentand other expenses, the IRS would still demand that Harborside pay 35 percenttax on the $40, Zamarra said.

Richard Lee, who runs a downtown Oakland dispensaryand is president of Oaksterdam University, which provides training to buddingpotrepreneurs, said the ruling would be a serious blow to the industry whenadded to increased local taxes and regular state and federal taxes.

The IRS began auditing Harboriside two years ago, asThe Bay Citizen first reported. Last week's decision came after months ofapprehensive waiting, Zamarra said.

Although the IRS ruled against Harborside on the [IRCSection 280(e)] issue, Zamarra said that that the auditors aren’t questioningwhether the dispensary’s books are clean. Other dispensaries, like New AgeHealing Collective in San Jose, have landed in hot water for allegedly cookingtheir books to hide the rivers of cash flowing in.

“Harborside Health Center is very proud that theyare not questioning our gross income or the details of our expenses,” saidZamarra. “The IRS has accepted our accounting.”

On the same day that it announced its loss to theIRS, Harborside also announced that it had handed over the last installment ofits $1,081,450 tax bill to the city of Oakland, which now collects a 5 percenttax on marijuana dispensaries.

East Bay Congressman Pete Stark introduced a billthis spring that would change the federal tax code to allow medical marijuanadispensaries to make the same deductions as normal businesses.

"Our tax code undercuts legal medical marijuanadispensaries by preventing them from taking all the deductions allowed forother small businesses,” Stark said at the time.

But with the federal opposition to marijuanadispensaries, it’s unclear whether the president would sign the bill.

“The Obama administration is really on thecounterattack right now, so I’m not sure what will happen,” Oaksterdam's Leesaid.

Lee declined to comment on whether the IRS hadraised the same issues with his dispensary. But Lee said Harborside’s battlewith the IRS shows that the medical marijuana industry is making progress.

“At least it's better to be bankrupted thanincarcerated,” he said.

Source: The Bay Citizen (http://s.tt/13qbg)

Grand Jury Indicts 55 for $250 million in tax scams

2011-10-03T09:39:00.001-07:00

Grand Jury Indicts 55 for $250 million in tax scams

MonOct 3, 2011 11:57am EDT

(Reuters)- A grand jury has indicted 55 people for participating in scams that tried tobilk the government out of more than $250 million in undeserved tax refunds,prosecutors in California said on Monday.

Thirty-twoindictments were returned by the grand jury accusing the people of variousschemes to obtain the refunds. Millions of dollars were paid out, including acheck worth almost $1.2 million, the prosecutors said.

Theowners of one California company were accused of making presentations thatclaimed customers could get tax refunds from a "secret governmentaccount" after making payments to the company and agreeing to pay apercentage of any refunds they received, the prosecutors said.

Morethan 400 false tax returns were filed with the IRS as a result of the schemeallegedly run by a firm called Old Quest Foundation Inc. and another 35 werefiled in a scheme allegedly run by another group, De la Fuente and Ramirez andAssociates.

IRS Data Show Most Millionaires Pay Taxes at Higher Rate Than Middle Class

2011-10-02T13:55:00.001-07:00

IRSData Show Most Millionaires Pay Taxes at Higher Rate Than Middle Class

PublishedSeptember 20, 2011

FoxNews.com

PresidentObama and his advisers are presenting the "Buffett Rule" as the curefor an epidemic of millionaire tax scofflaws, but national statistics showmillionaires by and large are paying taxes at a much higher rate than middle-classfamilies.

Andtheir income taxes make up a significant portion of the federal budget pie.

Datacompiled by the nonpartisan Tax Policy Center show households pulling in morethan $1 million pay about 29.1 percent of their income in federal taxes. Bycontrast, households making between $50,000 and $75,000 pay about 15 percent.

Theso-called Buffett Rule has become the political centerpiece of the president'sdeficit-reduction program. Named after Warren Buffett, the provision wouldensure people making more than $1 million a year pay taxes at a higher ratethan the middle class.

Thepresident proposed the rule after Buffett complained he was paying taxes at alower rate than his secretary. Democrats said he's not the only one --according to Senate Democratic Leader Harry Reid's office, 22,000 people whomake over $1 million a year pay taxes at a rate of less than 15 percent.According to the IRS, nearly 1,500 households reporting more than $1 million inincome paid no federal income taxes in 2009.

That'sout of about 236,000 returns for income above $1 million, most of which belongto households paying taxes at a higher rate. And, as would be expected, theycontribute a disproportionate share of tax toward federal coffers.

IRSstatistics for tax year 2009 show the millionaires -- who make up a fraction ofa percent of all taxpayers -- contributed more than 20 percent of total federalincome tax revenue. That's about $180 billion in taxes from millionaires,according to number-crunching from the National Taxpayers Union.

TheNational Taxpayers Union also found that in 2008 the top 1 percent of Americantaxpayers paid 38 percent of collections for personal federal income tax whilethey represented 20 percent of all income.

Forthose wealthy Americans paying taxes at a seemingly low rate, it could bebecause they earn income overseas or because a large part of annual income isfrom investments. Though corporate profits are taxed at 35 percent, in the formof capital gains and dividends they are taxed at 15 percent. Senate testimonyin May from the Tax Foundation also showed that for taxpayers making more than$200,000 a year, their salary income made up just 20 percent of national salaryincome. Much more came from business income.

Intotal, the Obama deficit-reduction package would seek to raise taxes, mostly onhigh-income households, by $1.5 trillion over the next decade.

Abouthalf of that is from letting the Bush tax cuts expire for households makingmore than $250,000. Other changes would strip tax breaks for oil and gascompanies and other benefits.

TheWhite House would not say how much might be raised from the Buffett Rule or howit would be implemented.

Butthe Buffett Rule quickly became the rallying cry for the president's plan. In anemail to supporters sent Monday night, the campaign urged voters to get thepresident's back on the plan.

"Thisproposal makes sure millionaires and billionaires share the responsibility forreducing the deficit," the email said. "The other side is alreadysaying it's 'class warfare' -- that's their rhetorical smokescreen forproviding millionaires and billionaires special treatment."

ButRepublican Indiana Gov. Mitch Daniels told Fox News the president's proposalappeared to be "purposely divisive."

"Asa practical matter, it's a loser," he said, describing the plan as"hair-of-the-dog economics."

"Youknow people that have had way too much of something they shouldn't and there'salways somebody who says have another one, it'll make you feel better -- itjust doesn't work any better in this case," Daniels said.

LouisianaRepublican Gov. Bobby Jindal said the problem is spending and described thepresident's proposal as not serious.

"Hedoesn't get it," Jindal told Fox News.

Thepresident's plan was presented as a proposal to the bipartisan "supercommittee" trying to find at least $1.2 trillion in deficit savings byThanksgiving.

Theplan includes more than just tax hikes. It covers $580 billion in cuts toentitlement and other federal programs, including to Medicare and Medicaid. Thepresident also claimed $1.1 trillion in savings from winding down the wars inIraq and Afghanistan -- a claim that has been dismissed as a budgetary gimmickin the past. If the war savings are counted alongside interest savings and thecuts Congress enacted in August, the president's plan is worth than $4 trillionover the next decade.

WhileRepublicans slammed the proposal as divisive and unworkable, some Democratsapplauded the president for asking the wealthy to pay more while shieldingMedicare seniors and other entitlement program beneficiaries from more severecutbacks.

"Withthe wealthiest people in this country becoming wealthier and large corporationsenjoying huge profits, it is time that we end tax breaks for the wealthy andlarge corporations and have them pay their fair share," Sen. BernieSanders, I-Vt., said in a statement.

"Wecall on Congress to immediately pass the president's proposal for job-creatinginvestments, to ask the wealthy to start paying their fair share, to focus onthe true causes of our long-term deficits, to reject any cuts to Medicaid orSocial Security or Medicare benefits, and to stop scapegoating federal andpostal employees and retirees for problems they did not cause," AFL-CIOpresident Richard Trumka said.

TheAssociated Press contributed to this report.

California Governor Brown Signs Internet Sales Tax Settlement

2011-09-24T10:42:00.000-07:00

CaliforniaGovernor Brown Signs Internet Sales Tax Settlement

ByMark Muntean

OnFriday, September 23, 2011, California Governor Jerry Brown signed into law anegotiated settlement Amazon.com Inc., which postpones a new California law requiringAmazon to collect sales tax on online Internet transactions in California. Amazon, for its part, agreed to drop its initiativeeffort to repeal the online tax. The settlement is expected to cost California$200 million.

Amazonalso agreed to begin collection of California sales taxes in September 2012,unless Congress acts to establish a national standard in connection with the applicabilityof sales taxes to Internet sales. Amazon’s focus is not on Congress since legalexperts believe California’s Internet sales tax law violated the U.S. Constitution.

InQuill Corp. v. North Dakota, 504 U.S.298 (1992), a 1992 U.S. Supreme Court decision, the Supreme Court held thatsales were not subject to incidence of sales tax unless the seller had “nexus” withthe tax state. Previously, Amazon firedits affiliates in California to avoid any nexus with California. The Commerce Clause of the U.S. Constitution givesthe federal government power to regulate interstate commerce and prohibitscertain state actions, such as applying sales and use taxes that interfere withtrade among the states. In National Bellas Hess, Inc. v. Department ofRevenue of Illinois, 386 US 753 (1967), it was held that a business whoseonly contacts with the taxing state are by mail or by common carrier lacks the"substantial nexus" required under the Dormant Commerce Clause. The Commerce Clause is a frequent source of frustrationfor California as it reaches out to tax someone.

Thus,while the state cannot tax sales by businesses with no nexus with the state,Congress does have the power to regulate interstate sales. However, it is difficult to see how theparties expect Congress to enact a federal standard for Internet sales taxes ina presidential election year.

Amazonalso promised to hire 10,000 workers in California and spend $500 million on Californiadistribution centers. Several tradeassociations and retailers supported the bill since the new tax law results in asignificant loss in sales to over 10,000 merchants, many of which were small businesses.

Brentwood Couple Sentenced for State Income Tax Evasion and Concealing Property

2011-09-22T14:37:00.000-07:00

Brentwood, California Couple Sentenced for State Income Tax
by Mark Muntean

A Brentwood, California man pleaded no contestto one felony count of California state income tax evasion and one felony countof concealing property with intent to evade the collection of tax. His wife pleaded no contest to one misdemeanorcount of state income tax evasion.

John Meza, 37, was sentenced toserve 120 days in county jail; pay us nearly $163,000 restitution representingthe unpaid tax, interest, penalties, and cost of investigation; and serve threeyears formal probation. Jessica Meza, 40, was sentenced to serve two yearsprobation; 200 community service hours; and is jointly and severally liable forthe restitution with John Meza.

The couple immediately provided us acheck for $50,000 towards the restitution.

According to court documents, thecouple owned and operated seven sandwich shops and a newspaper distributionbusiness in the Bay Area. They failed to file state income tax returns for the2004 through 2007 tax years and failed to report more than $800,000 in taxableincome. The California Franchise Tax Board (“FTB”) initiated the investigationafter the couple failed to respond to numerous notices demanding they filetheir delinquent California personal income tax returns.

In addition, in 2006, the coupleopened a bank account using false social security numbers and deposited checksinto this account in order to evade or defeat collection of their personalincome tax due. This was a very bigmistake. Taxpayers that have not filedtax returns can come forward and working through an attorney can often resolve theirissues with the FTB. However, here thetaxpayer took an extra step to hide money from the FTB. Taxpayers should never ever under anycircumstances take that extra step to hide money. These are treated as badges of dishonesty andalways end up badly.

Contra Costa County Superior CourtJudge William Kolin handed down the sentence in Department 18 of the WalnutCreek Superior Court. The case was prosecuted by Contra Costa County DeputyDistrict Attorney Stacey Grassini.

The FTB criminal investigationprogram identifies and investigates cases of tax evasion and tax fraud toencourage compliance with California income tax laws and maintain the publictrust.

Amazon cuts deal on California sales taxes

2011-09-08T13:48:00.000-07:00

September 8, 2011

Reporting from Sacramento—

Amazon.com cut atentative deal with legislative leaders Wednesday night that would allow it topostpone collecting sales taxes from Californians for another year.

The company in turn would drop its battle to overturn the state's new law thatrequired it and many other out-of-state online retailers to collect the taxes.

Under the deal, Amazon would delay collecting taxes until September 2012,Assemblyman Charles Calderon (D-Whittier) said. The new law had mandated thatInternet retailers start collecting state taxes in July if they had offices,workers or other connections in California.

Amazon had refused to collect the taxes and poured $5 million into collectingsignatures for a ballot referendum challenging the law.

If Congress acts by next summer to settle the contentious issue of how onlineretailers should be taxed, that decision would override Amazon's deal withCalifornia.

"It's a safe harbor for up to a year," Calderon said of the agreementhe helped strike. "If they can't get Congress to act by next July, thenthey will start to collect the tax in September 2012. If by chance they getCongress to act, then that would trump the state law."

There was no word from Gov. Jerry Brown aboutwhether he would support the deal. Last week he rejected an olive branch fromAmazon that included the offer of opening two distribution centers in the statein exchange for being allowed to start collecting the tax in 2014.

"I'm concerned about anything that would reduce revenues going forwardbecause we're in a very uncertain economy," the governor said last week."We need more revenues unless we're going to keep curbing schools, courts,corrections."

Brown's office did not return calls for comment Wednesday night.

Calderon said he had not heard from the governor. "He hasn't indicated oneway or another," the legislator said. "Our hope and our guess is thathe will support this. It will do away with litigation that has seriousimplications for the state."

The tax was a key part of the state's $86-billion budget that Brown signed inlate June. It was forecast to bring in $200 million annually.

Big-box stores and other retailers had supported the new law, saying thatonline companies that didn't have to collect taxes had an unfair competitiveadvantage.

To prevent Amazon from challenging the law, legislators in the session's waningdays hit upon a parliamentary trick. They tried to get two-thirds approval fora bill reinstating the tax as an "urgency" measure, which would beimmune to a referendum.

On Tuesday, the measure fell five votes short of passing in the state Senate.Calderon said he was confident that with the deal in place, the measure wouldpass by the required margin. He credited Senate Minority Leader Bob Dutton(R-Rancho Cucamonga) with starting the talks that led to the deal.

IRS Publishes New Cost Basis Regulations

2011-09-01T11:53:00.000-07:00

New rules would address three concerns of 2010 regulations

By Marlene Y. Satter

September 1, 2011

The IRS is preparing to issue three regulations to address concerns created by its issuance of regulations last October surrounding reporting the cost basis of stocks (TD 9504).

In June, the IRS issued Notice 2011-56, which offers a favorable resolution to the issues, according to a commentary by Stevie D. Conlon, senior director & tax counsel, risk & compliance, securities tax solutions, for Wolters Kluwer Financial Services

The first matter concerned the ability of a customer to opt out of a broker’s default method of lot relief for determining cost basis on the sale of average basis eligible mutual fund and dividend reinvestment plan shares.

The final regulations had not provided for the customer to be able to undo the calculation of average basis of shares held and acquired prior to the opt-out, even if the customer had not sold any shares before opting out. However, the final regulations had included a way for customers to opt out of averaging if they had elected averaging and no shares had been sold.

It is now expected that customers will be able to opt out of averaging if it was the broker default choice, under appropriate conditions.

The second rule would clarify treatment of cash instead of fractional shares issued in dividend reinvestment plans. If a customer receives cash instead of fractional shares and that cash is not sufficient to reinvest 10% as is required for a dividend reinvestment plan, the plan would not be disqualified as a CDRP on that basis. The previous regulation had not been specific on that point.

The third would clarify that lot relief methods are applied on an account-by-account basis, since limitations imposed by both technology and systems and the lack of knowledge by a broker about a customer’s other holdings would make it impossible to apply otherwise.

Tax Break for Clergy Questioned

2011-08-23T09:01:00.000-07:00

Tax Break for Clergy Questioned

By LAURA SAUNDERS

For the Wall Street Journal

The U.S. Tax Court approved tax-free allowances of $408,638 for a minister's second home, including 'mortgage payments … lawn care, painting and repairs.'

As Congress scrutinizes every nook and cranny of the budget for possible revenue, a surprising court decision is allowing clergy members to buy or live in multiple homes tax-free.

The U.S. Tax Court ruled that Phil Driscoll, an ordained minister and Grammy Award-winning trumpeter who went to prison for tax evasion, didn't owe federal income taxes on $408,638 provided to him by his ministry to buy a second home on a lake near Cleveland, Tenn.

Under a provision of the tax code known as the parsonage allowance, first passed in 1921, an ordained clergy member may live tax-free in a home owned by his or her religious organization or receive a tax-free annual payment to buy or rent a home if the congregation approves.

The Tax Court ruling, made final in March, extends the parsonage allowance to an unlimited number of homes, which may be owned either by the religious organization or the clergy member.

In a 7-6 ruling, a panel of Tax Court judges sided with Mr. Driscoll's argument that the word "home" is equivalent to "homes," just as "child" is interpreted to mean "children" elsewhere in the tax code.

The Internal Revenue Service declined to comment on the decision. In May, the agency appealed it to a federal appeals court in Atlanta.

Experts say the parsonage allowance was originally included as a way to minimize taxes on clergy members, whose compensation was often meager. It still is widely used for that purpose, church officials said, although the IRS doesn't track usage of the benefit.

"For most of them the housing allowance is modest because their compensation is modest," says Daniel Gary, an attorney with the United Methodist Church in Nashville.

Similarly, D. August Boto, general counsel of the Executive Committee of the Southern Baptist Convention, says for leaders of the organization's 46,000 churches "the housing allowance is critically important for making ends meet—it is not a luxury."

Some members of the clergy are taking advantage of a little-known tax break that allows them to avoid the IRS when they are buying a "parsonage," even when it is a palatial mansion or their second home. Laura Saunders has details on The News Hub.

However, some experts are concerned that the new ruling opens the door for the allowance to be applied to multiple homes used by leaders of wealthier ministries.

John "Buck" Chapoton, a former assistant secretary of the Treasury for tax policy, said he believes the decision to broaden the parsonage allowance to include multiple homes "invites abuse." He is now a partner at investment-management firm Brown Advisory in Baltimore.

The issue also is receiving congressional scrutiny.

Sen. Charles Grassley (R., Iowa), a member of the Senate Finance Committee, said he wants to ensure that the spirit of the provision isn't violated.

"It's fair to question why a clergy member needs a tax-free allowance for more than one home, and whether tax-exempt churches should subsidize millionaire ministers," he says.

Before the Driscoll decision, most tax experts believed the parsonage allowance only applied to one home, says Ellen Aprill, a professor at Loyola Law School in Los Angeles who studies tax issues involving religious institutions.

There is no restriction on the value of the home that can be claimed under the exemption. The chief limit is that the annual payment to buy or rent the home may not exceed its rental value, Ms. Aprill says.

In January, the Senate committee released the results of an investigation into several high-profile ministries that raise money through radio, television and the Internet. It cited evidence of large parsonage allowances at several groups, although the groups declined to answer questions submitted by the committee, citing constitutional protections.

According to the report, Kenneth and Gloria Copeland, who lead Kenneth Copeland Ministries in Fort Worth, Texas, live in an 18,280 square-foot lakefront parsonage on 25 acres. The report said county officials valued the church-owned property at $6.2 million in 2008.

David Middlebrook, a lawyer for Mr. Copeland, says the house is "a wholly owned and appreciating asset of Kenneth Copeland Ministries.…The ownership and operation of the parsonage is completely in accordance with IRS rules and regulations."

Mr. Driscoll, who won the Tax Court ruling, leads Mighty Horn Ministries of Greensboro, Ga., which had income of more than $6 million from 2005 to 2009, according to tax filings.

Mr. Driscoll turned to the ministry after a popular music career that included playing a trumpet solo on the last "Ed Sullivan Show" in 1971 and composing for Joe Cocker and the band Blood, Sweat and Tears.

In 2005, a federal grand jury accused him of diverting ministry funds for personal expenses. Prosecutors said he used ministry funds from 1996 to 1999 for luxury cars, funeral bills for his mother and other personal items.

A Chattanooga, Tenn., jury convicted Mr. Driscoll in 2006 of conspiracy and tax evasion. He was sentenced to a year in prison and ordered to pay nearly $25,000 in court costs. He also paid $426,398 in extra tax and penalties.

Prosecutors alleged that he also evaded taxes related to his second home, since he already owned one residence bought with ministry funds.

Mr. Driscoll's lawyer argued the wording of the tax code was vague and could apply to more than one home. The judge in the criminal case agreed with Mr. Driscoll's argument, and the dispute wound up in U.S. Tax Court. Mr. Driscoll declined to comment.

Write to Laura Saunders at laura.saunders@wsj.com

Amazon debate: Is the Golden State just desperate for more gold?

2011-08-18T09:21:00.000-07:00

Opinion L.A.

Observations and provocations
from The Times' Opinion staff

Amazon debate: Is the Golden State just desperate for more gold?

July 28, 2011 California's sales tax rule for online retailers kicked in July 1, but Amazon isn't collecting the tax and instead cut ties with its affiliates in the state; now, it's working on a referendum to overturn the law in the next election.

A recent poll by USC and the Los Angeles Times showed that voters were divided on whether the company should collect sales taxes: 46% were in favor of using the tax revenue to help balance the budget, while 49% were opposed to the new law. And, not surprisingly, younger voters were more likely to be against the law than older voters. Commentators seem to be split as well.

An Op-Ed by Steve Forbes called the law both unconstitutional and desperate pickpocketing. The potential revenue to be gained from online retailers is small in comparison to the budget shortfall in the state, and could adversely affect the economy and consumers across the nation, he wrote. It is a desperate attempt to gain revenue when California legislators should really be trying to fix the dire fiscal situation of the state, Forbes said.

That California, where modern high-tech industry was born, should wage war against Internet-based entities is bizarre. It demonstrates the madness of its political class. California faces a budget shortfall of $10 billion.

This new tax might collect $200 million from Amazon and others. That's hardly a drop in the bucket. More fundamentally, it will force Amazon to sever its relationships with thousands of its affiliates. This new tax law will hurt other online retailers and their affiliates, which will damage the state economy by considerably more than that $200 million. Talk about being penny-wise and pound-foolish.

The Times' editorial board took the opposite position: Amazon has the unfair advantage of lower prices without sales tax that brick-and-mortar retailers don't have. Most consumers don't know they're required to pay sales tax regardless of whether it is collected for them, so the current debate will, at the very least, make them aware of that obligation.

Simple: The so-called Amazon-tax law isn't a tax at all. It doesn't impose any new obligation on Californians, who have been required for decades to pay sales taxes on goods purchased from out-of-state sellers. The law that has driven Amazon to such fits governs solely whether the tax gets added to the bill at checkout or, instead, the buyer bears the full legal burden of calculating and remitting the tax. Amazon and other online retailers may claim that it's just too hard and too expensive for them to figure out the different sales taxes levied by each state, but of course what they really don't want to lose is the tax-cheat business model that gives them a bottom-line advantage over their brick-and-mortar counterparts.

--Samantha Schaefer

Kansas, California scrutinize ATT/T-mobile deal

2011-08-18T09:10:00.001-07:00

By Greg Bensinger

NEW YORK -(MarketWatch)

Add Kansas, home of Sprint Nextel Corp. and California to the growing list of attorneys general investigating AT&T Inc.'s proposed $39 billion takeover of T-Mobile USA.

The offices of Kansas's and California's top prosecutors, Derek Schmidt and Kamala Harris, respectively, are seeking information related to the AT&T merger bid, according to a July letters to the Federal Communications Commission posted Mondy to the agency's website. Schmidt and Harris join attorneys general from New York, Minnesota, Arizona, Florida, Hawaii, Illinois, Texas, Pennsylvania and Washington in seeking additional information about the deal, proposed in March.

Sprint has been one of the most vocal opponents of the AT&T deal, saying it will stifle competition and damage smaller carriers' ability to keep prices down. The deal will expand AT&T's planned fourth-generation network offering to more Americans, the Dallas-based carrier has said.

AT&T was recently up 2.1%, or 59 cents, to $28.81. T-Mobile USA is a subsidiary of Deutsche Telekom AG.

California's Public Utilities Commission is conducting a formal review of the deal.

IRS: Woman claims 19 non-existent children

2011-08-16T10:43:00.000-07:00

The Associated Press

Published: Monday, Aug. 15, 2011 - 9:38 pm

Last Modified: Tuesday, Aug. 16, 2011 - 7:40 am

LOS ANGELES– The Internal Revenue Service says a 40-year-old Northern California woman is facing charges that she helped prepare false tax returns and obtained fraudulent Social Security numbers for at least 19 non-existent children.

Norma Coronel was indicted on 35 counts earlier this year in Los Angeles. She was arrested July 12 in Livermore and made her initial court appearance in Los Angeles on Monday.

The IRS says Coronel claimed that all the children had been born to her at a Los Angeles hospital on Dec. 11, 2002, then obtained fraudulent Social Security numbers for them and claimed them as dependents. Hospital records show she gave birth to one child, a boy, on that date.

Coronel faces up to 143 years in prison and $5.6 million in fines if convicted of all charges.

San Mateo County strikes 128 properties from Williamson Act list

2011-08-09T17:17:00.000-07:00

By Julia Scott

julia.scott@bayareanewsgroup.com

Posted: 08/09/2011 03:57:25 PM PDT

Updated: 08/09/2011 03:57:26 PM PDT

REDWOOD CITY -- Property tax discounts will no longer accrue to 128 rural San Mateo County landowners whose parcels were removed from a list of properties kept in agriculture under the state Williamson Act, though it's unclear what fiscal benefit the county will derive from the move.

The county Board of Supervisors voted 3-1 Tuesday, with one member absent, to annul the Williamson Act contracts of 128 out of 540 contract-holders, many of whom have been in the state program since 1967. Those cut from the rolls aren't farming their land and therefore don't qualify for the tax breaks, according to county staff.

The county lost its annual state Williamson Act reimbursements in 2007 when it became clear that too many landowners were unfairly taking advantage of a law aimed at conserving land from development through farming. A state audit called for sweeping changes to the program.

"We fell out of the compliant group and we need to get back in," said Planning Director Jim Eggemeyer.

Tuesday's vote will allow those cut from the program to appeal the decision within 60 days, at a cost of roughly $470. An appeal would automatically stay the county's action for three years.

But considering the list was drawn up based on surveys the landowners themselves returned to the county, Eggemeyer said his staff is confident the parcels in question simply do not meet the stringent -- and, some would say, anachronistic -- definitions of commercial farming under the Williamson Act.

For instance, cattle ranching is considered a legitimate agricultural use, but horse ranching is not. Timber harvesting falls outside the accepted definition, but farming that produces even the smallest amount of profit generally makes the cut. Meanwhile, multimillion-dollar properties like Martin's Beach in Half Moon Bay get massive tax breaks because part of one parcel is used to grow hay.

And then there are the gray areas. Half Moon Bay property owner Gilbert Gossett had two parcels that fell within the Williamson Act. Gossett grows apples on one 15-acre parcel, but Tuesday's vote struck his larger piece of land from the Williamson Act. He said he will likely appeal.

"There are in fact two English holly trees (on my land) from which I received $125 last December selling English holly at the farmers market," Half Moon Bay resident Gilbert Gossett told the supervisors Tuesday. "I need to know what's happening, because if I have to clear the upper parcel and put it back into agricultural use, that has to be done fairly soon."

County officials aren't sure how much property tax the county could reap from the 128 parcels, especially because Proposition 13 has kept the values of many of the same properties well below market rate.

There's also the fact that Gov. Jerry Brown cut all funding for the Williamson Act for the first time in state history this March, which means counties won't be reimbursed for the tax breaks they dole out, regardless of whether they reform their local programs to bring them into compliance. Roughly half of California's privately held farmland is under Williamson Act contracts.

The Williamson Act program is still on the books, but Supervisor Carole Groom wondered aloud about the merits of initiating a mass contract nonrenewal at a time when it might not bring value to the county.

"If we do all this work and the state decides to discontinue the Williamson Act, what will we have gained or lost?" she said before voting against Tuesday's action.

Amazon gathering anti-tax-law signatures outside retail stores

2011-08-09T11:44:00.000-07:00

August 6, 2011By Andrea Chang and Marc Lifsher, Los Angeles Times

Amazon.com Inc. is giving bricks-and-mortar retailers yet another reason to fume.

As the online giant begins its quest to overturn a new California law requiring it to collect sales taxes just like its Main Street competitors, its signature gatherers are heading to popular shopping areas to obtain the 500,000-plus signatures the company needs to get the measure on next June's ballot.

Petition workers are swarming popular commercial hubs including Larchmont Village in Los Angeles, Colorado Boulevard in Pasadena and the Gaslamp Quarter in San Diego as well as Ralphs, Trader Joe's, Target and other major retailers — many of which have lost sales to Amazon.

"It's a particularly clever shot across the bows" of the big-box stores, said Bill Whalen, a research fellow at the Hoover Institution at Stanford University and a former speechwriter for Republican politicians. "It says that not only do we intend to fight you in the court of public opinion but actually we're going to come onto your front porch."

Signature gatherers have long been a familiar presence in malls and outside grocery stores and big-box retailers. The law gives these workers generous access to potential voters in commercial centers.

But that Amazon is using the foot traffic generated by conventional stores to fuel an effort to maintain its price advantage over them strikes some retailers as particularly egregious.

Sarah Hrejsa, manager of women's clothing boutique Hardwear on Larchmont, said a signature gatherer recently entered the store with a petition and pitch defending Amazon's position. She quickly shooed him out.

Collecting sales taxes is "something that we have to do," she said. "So I don't understand why [Amazon] can get away with not."

Retailers nationwide have complained for years that Amazon undercuts them by selling identical merchandise free of state and local sales taxes that can amount to as much as 10% of the sales price.

The online giant has relied on a 1992 U.S. Supreme Court decision that said out-of-state companies were exempt from collecting taxes if they had no presence in the state, such as workers, stores or warehouses. Buyers are still responsible for paying equivalent taxes, but they rarely do.

Now several states have devised strategies to challenge Amazon's exemption.

California recently passed legislation aimed at requiring the Seattle retailer to collect sales taxes from its Golden State customers because the company had advertising affiliates and related operations here. Amazon so far has refused, choosing instead to take its case to California voters with a proposed referendum that would overturn the California law and preserve its tax-free sales model.

Amazon has hired a top California political campaign consultant, Goddard Claussen West in Sacramento, which brought on National Petition Management, a signature-harvesting firm. Its signature gatherers are independent contractors who typically earn $1 to $2 per name, though some are getting as much as $3, according to Bill Dombrowski, president of the California Retailers Assn., which favors Internet sales tax collection.

As of July 29, Amazon reported contributing $3 million to the More Jobs Not Taxes referendum campaign. Dombrowski predicted the company would spend between $10 million and $20 million on the referendum campaign, which urges voters to repeal the online sales tax collection law.

"They've taken every step imaginable to try to avoid complying with law," Dombrowski said of Amazon. "They appear to be going all out to preserve their business model."

Bricks-and-mortar retailers and their allies, meanwhile, are defending the law. They're waging a public relations blitz that's sending out frequent press releases critical of Amazon as it collects the signatures before a Sept. 27 deadline. But the really big-money battle is yet to come. If the referendum qualifies for the ballot, which many retail industry veterans believe will happen, they're prepared to spend millions for television, radio and direct mail advertising to counter Amazon.

Meanwhile, early electoral skirmishes are breaking out in places such as Colorado Boulevard in Pasadena. On a recent Saturday, the corridor was packed with shoppers when a signature gatherer made his way through the crowd, waving a petition in the air and shouting, "Stop the Amazon tax! Stop online sales tax!"

When approached by a reporter, the signature gatherer refused to give his name, saying he was afraid of getting in trouble. A glance at his petition showed he had collected 10 signatures in about three hours; he said his usual rate was 12 signatures per hour.

Amazon's political consultants said they expect their referendum to easily qualify for the ballot. Nevertheless, their top referendum specialist, Chip Nielsen, said he's troubled by a labor-union-sponsored effort to scare registered voters by telling them they could become victims of identity theft if they sign a petition.

Private Equity, Oil Breaks to Be Tax Targets for New Committee

2011-08-01T10:30:00.000-07:00

By Richard Rubin - Aug 1, 2011 9:37 AM PT

The private equity managers, oil companies and high-income earners that have been the Obama administration’s prime targets for tax increases will be in Democrats’ crosshairs in the next phase of deficit-reduction efforts.

The debt-limit bill being considered in Congress today would empower a 12-member joint committee of lawmakers to seek $1.5 trillion in deficit cuts with a Dec. 23 deadline for the House and Senate to act. Democrats, who didn’t include any upfront revenue increases in today’s bill, are likely to return to their previous targeted proposals, said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities, a Washington research group that favors programs to assist low-income individuals.

“Theoretically, you could have revenue included in this new committee, but obviously, I think the Republicans come into it against it,” said Marr, who was an economic policy adviser to former Senate Majority Leader Tom Daschle, a South Dakota Democrat. “So we’ll have to see how that plays out.”

Obama in his budget plans has recommended taxing the profit share -- or carried interest -- earned by private equity managers, venture capitalists and others at ordinary income tax rates and not the more lightly taxed capital gains rate. He has called for ending tax benefits for oil and gas companies and for capping the itemized deductions of upper-income Americans.

The biggest barrier to including revenue in the new committee’s bill this fall will be the same one that prevented Obama from capturing any new revenue for the deal to raise the debt ceiling: Republican opposition to tax increases of any kind, including curbing tax breaks.

‘No-Tax’ Votes

Senate Minority Leader Mitch McConnell of Kentucky and House Speaker John Boehner of Ohio will each appoint three fellow Republicans to the committee, giving them the ability to exclude members who may be willing to consider new revenue.

“You end up with six no-tax-increase votes, and it’s hard to see how you do business,” said Clint Stretch, managing principal of tax policy at Deloitte Tax LLP in Washington.

One potential difference is that Democrats have insisted that failure by the committee to act or to push its proposal through Congress would trigger automatic cuts in programs that both parties favor, including defense spending.

“It really just becomes an issue of defense vs. high- income,” Marr said.

Overhaul More Difficult

The rules governing the committee’s search for deficit reduction may make it tough for lawmakers to address a broader overhaul of the tax code as part of their work.

The Congressional Budget Office’s revenue baseline assumes that the Bush-era income tax cuts will expire at the end of 2012 as scheduled. Republicans want a future revenue level equal to extending all the cuts, while the administration wants to raise about $1.8 trillion above that level over the next decade. Measured against the CBO’s yardstick, either approach would be viewed as a tax cut, not deficit reduction.

As a result, any attempt to adjust tax rates would appear to be an impossible task for the joint committee to accomplish, because those actions would be considered tax cuts compared with the tax rates already scheduled to go into effect.

“I think they can’t mess with rates, because the rates are high in the baseline,” Stretch said.

Targeted Increases

In addition, the targeted tax increases favored by Democrats are provisions that lawmakers may want to use to finance rate reductions below current levels.

In a fact sheet released July 31, the White House said Obama could require action on revenue by vetoing an extension of the tax cuts for high earners when they expire in 2012.

The congressional emphasis on deficit reduction also could make it difficult for lawmakers to enact other deficit- increasing tax cuts before the election, Stretch said. Those include an extension of the payroll tax cut that expires at the end of the year and a tax holiday on repatriating offshore profit sought by companies such as Cisco Systems Inc. (CSCO) and Microsoft Corp. (MSFT).