The Darkside of IRS Automation

In early 2000, the IRS underwent a drastic overhaul in response to tremendous congressional pressures. They started to adopt the language and organization of business and management.  Taxpayers were no longer just taxpayers, they were "customers".  Part of this shift focused on "efficiencies" and introducing automated processes.  The thinking at the time was that this would make it easier and efficient for both the IRS and its "customers".

I recent lecture by the National Taxpayer Advocate, Nina Olson, however, is chilling and paints a gloomy picture of what lies ahead.  It presents what may be one of the greatest threats to the IRS, and its customers, to date.  Her most poignant comments were as follows:

I believe that the IRS is at a turning point, and for a number of reasons, we are beginning the slide to a radically different IRS from that which many of us in the room today practiced before or worked in just a decade or two ago. I believe that unless we act to change that trend, the IRS of tomorrow will have little personal interaction with taxpayers. . . . It will relentlessly drive forward on a path of more automation mostly to make its own work more convenient and rarely more helpful or tailored to the taxpayer. . . . It enables the IRS to ignore the humanity of taxpayers. [Emphasis in original.]

I can attest from personal experience that the average John Q. Taxpayer can be absolutely be trapped in the IRS "system" and find it difficult, it not impossible, to get answers or guidance.  Often cases languish waiting for agents to be assigned or for appeals case officers to be assigned.  Frequently, all a taxpayer can do is call up the IRS hot-line, sit on hold for 30 minutes, and then talk to an IRS agent over the phone who can't assist them, let alone provide them with any helpful suggestions. 

How Apple Saved Billions By Issuing $17 Billion in Bonds

Recently, Apple made headlines by issuing a massive amount ($17 billion worth) of corporate bonds.  The main reason was to acquire sufficient funds to pay shareholders rather than having to bring back cash from Apple's overseas operations.  While Apple has around $45 billion in holdings in the U.S., it has $100 billion parked overseas.  Because it can be very expensive to repatriate these foreign funds, major corporations contort themselves to devise strategies to avoid paying this repatriation tax.

Below is a brief video highlighting the details of this strategy:

Income Earned by Tribal Members on Reservations Now CA Tax-Exempt

The Franchise Tax Board has recently announced that tribal members who live on reservations and who receive income from reservation sources are not subject to California state income tax on that income.  This position came as a response to several recent court cases where courts had to determine whether "reservation source income" should be interpreted broadly as income earned by a tribal member living and working on the reservation or more narrowly limited to income earned on the reservation and paid only by the tribe.

Thus, if a tribal member lives and works on the reservation, income earned by the tribal member, whether paid by the tribe or any other third party, is California tax-exempt. 

If tribal members have been paying California taxes on this income, they are entitled to refunds going back approximately four years.  

Why Mark Zuckerberg May Never Pay Taxes Again: Buy, Borrow & Die

CNN op-ed:  Zuck Never Has to Pay Taxes Again, by Edward J. McCaffery (USC):

So, you think you have it bad this tax season. Have you heard that Facebook founder Mark Zuckerberg will pay between $1 billion and $2 billion in taxes? That sounds like a tough pill for anyone to swallow.

But it is premature to start a pity party for Zuckerberg. The twenty-something billionaire reaped large financial gains from exercising the stock options that triggered his tax bill, and he has benefited from favorable tax rules along the way. Even better, Zuckerberg will survive his encounter with the tax man in a position to never have to pay taxes again for the rest of his life. ...

The truly rich do not have to pay any tax once they have their fortunes in hand. They can follow the simple tax planning advice to buy/borrow/die: Buy assets that appreciate in value without producing cash (like shares of Internet stocks), borrow to finance lifestyle, and die to pass on a "stepped up" basis to heirs wherein the tax gain miraculously disappears.

Zuckerberg now has $11 billion or more with which to play this game. He can live off money borrowed against that huge sum (rest assured, he can get good interest rates), never having to sell any asset at a gain, and never having to get an "ordinary" salary again.

(Hat tip: Tax Prof Blog)

The Unflappable Iron Lady

In honor of Margaret Thatcher's life I have attached a short clip of a British House of Commons debate with the Iron Lady taking on any who wished to step into the ring with her.  Too bad we don't have any similar forum here in the U.S.

Is My Fresno County CSA 51/283 Tax Assessment Deductible as a Property Tax? (Part I)

Most everyone knows that regular annual property taxes are deductible for federal income tax purposes (ignoring AMT issues).  However, what is often confusing to homeowners and tax preparers is the deductibility of certain extra one-time assessments used to fund public improvements (often called local benefit assessments).

For example, many homeowners that live in northern Fresno County live in an area referred to as County Service Area 51.  CSA 51 was established to try to figure out if there was a viable way to bring city water to the low water areas of northern Fresno.  CSA 51 ended up creating assessment district 283.  Back in 2008 or so, the then residents of CSA 51 voted to have certain engineering plans drawn up to determine the feasibility of bringing water to that area--as part of this, it was agreed that the cost of such plans would be assessed to each parcel in the area (around $3,000 per house).  Maps and plans were drawn up the final report indicated that it would cost each homeowner a whopping $50,000 or so to have water lines installed in the area.  The CSA 51 residents then voted again in July of 2012 to see if the project (and the massive $50,000 per parcel assessment) would move forward.  The measure ultimately failed.

The CSA 51 residents were left with engineering plans, a $3,000 per parcel assessment, but no water lines.  Half of this $3,000 assessment (or around $1,500) recently showed up on homeowners' 2012-13 property tax bill (referred to as CSA ID 283), with the other half to be assessed next year. 

The obvious question for the CSA 51 homeowners is "can I deduct this extra $1,500 in property taxes this year and again next?" 

Unfortunately, the answer is NOT easy. 

The deductibiliy of local benefit assessments really depends on the purpose of the assessment.  Taxes assessed against local benefits of a kind tending to increase the value of the property are deductible as taxes only to the extent taxes are properly allocable to repairs, maintenance or interest charges. (Reg. 1.164-4(b).) 

Thus, it has long been established that local assessments to build sewer or water lines, sidewalks, or irrigation lines benefiting a particular community, as opposed to the entire city or county, would be non-deductible.  The idea is that these assessments benefited a select group of people and increased the values of their property. 

However, the key fact in this case is that the project in CSA 51, never actually moved forward.  Had the lines been built, there is no question that the initial $3,000 assessment and the additional $50,000 assessment would not have been deductible, but here, the operative question is whether or not the residents of CSA 51 have enjoyed some type of increase in value, simply by virtue of the fact that the county has had expensive engineering maps and plans drawn up.

Believe it or not, there is an old tax case from 1941 which addresses a similar situation (Thatcher v. Commissioner (1941) 45 BTA 64).  In the Thatcher case a special assessment district was created to consider the installation of a sewer line in the neighborhood.  After its creation, expenses were incurred for engineering services, attorney fees, and other expenses related to the planned sewer construction.  As a result, general plans and maps were made, but the Court noted that there were no detailed plans for construction purposes.  Shortly after, it was determined that the plan was misguided and the assessment district was disbanded.  The question the court entertained was, what value did the residents get from these plans that had been drawn up.  The residents claimed that because the construction was not moving forward, the plans held no value for future use and that they were simply paying for a "mistake in judgment".  The IRS argued, however, that the plans and maps resulting from the expenditures had a value for future use and  constituted a benefit to the residents.

The court ultimately relied on the fact that the construction project was not moving forward and stated as follows:

We do not agree with respondent's contention that the mere fact of the determination that the construction of a sewage system in the district was not feasible or too costly is a benefit. It may be a benefit to the present owner personally, in the sense that it will deter him from ever taking part in such a project again, but we can conceive of no reason for an increase in the value of the land by reason of a determination that it is not subject to sewage development except at a prohibitive cost. The natural effect of this, we think, is to decrease values.

In other words, when the city determined that it was too expensive to feasibly construct sewer lines, this would actually have decreased the values of the home.  In short, the court decided that while there may be some value to having plans drawn up, if the plans actually show you that the end goal is prohibitively expensive and the project is ultimately dropped, there can be no "benefit" to the residents.  The residents won and were allowed to deduct the assessments
With respect to the residents of CSA 51, there is no clear answer.  While the facts and circumstances of CSA 51 are similar to the Thatcher case, they are not identical. 

California Out of Funds to Disarm 19,700 Felons and Mentally Ill People

I was surprised to find out that California already has laws in place that enable it to confiscate weapons from the mentally ill in addition to convicted felons.  Unfortunately, the State does not apparently have the funds to actually go out and seize the weapons.

From the LA Times:

SACRAMENTO — California authorities are empowered to seize weapons owned by convicted felons and people with mental illness, but staff shortages and funding cuts have left a backlog of more than 19,700 people to disarm, a law enforcement official said Tuesday.

Those gun owners have roughly 39,000 firearms, said Stephen Lindley, chief of the Bureau of Firearms for the state Department of Justice, testifying at a joint legislative hearing. His office lacks enough staff to confiscate all the weapons, which are recorded in the state's Armed Prohibited Persons database, he said.

The gun owners typically acquired the firearms legally, before being convicted of a felony or diagnosed with mental illness. Each year, the state investigates and seizes the guns of about 2,000 people on the Armed Prohibited Persons list, Lindley said, but each year about 3,000 names are added to the list.

"Despite our best efforts, the bureau does not have the funding or resources to keep up with this annual influx," he told the 15 assembled lawmakers.

The Unintended Consequences of Plastic Bag Bans: An Armful of Designer Clothes and Ecoli

Recently, I was visiting with my sister and her family who told me of San Louis Obispo County's "plastic bag ban".  I had heard of other counties and cities implementing such bans but always assumed that these bans only applied to plastic grocery bags and not any other vendors.  To my surprise, the SLO County ban applied to virtually all types of plastic bags provided by retailers to customers in which to carry purchased items.  So not only did it apply to grocery stores, but it also applied to clothing stores.  Of course, while most people had gotten used to bringing their own cloth tote bags into grocery stores--they were not accustomed to carrying their own bags into other stores.

My sister hilariously told me how shortly after the ban was implemented they visited a large mall.  Hundreds of mall shoppers were walking around the mall with their arms full clothes and other items because they did not bring their own cloth tote bags.  It looked like the shoppers had ransacked and looted the place, walking off with as much as they could carry. 

This unintended consequence, however, is a mere inconvenience when compared to the health concerns. As reason magazine points out, a recent study by my Alma Mater shows that in jurisdictions where plastic bags were banned, ER visits increased by about 25% compared with neighboring counties where the bags remained legal.  Essentially, people were carrying leaky packages of meat and other foods in their canvas tote bags, then wadding up the bags in the trunk of their cars for awhile, leaving bacteria to grow until the next trip, when they would fill the contaminated bags with fruit and vegetables.  

To Avoid 21% Sales Tax Theater Sells $16 Carrots--Gives Away Tickets

In what can be considered the most original method of avoiding (or evading) a draconian 21% sales tax, a Spanish theater has actually resorted to "selling" carrots for $16 a piece, and then giving away a theater ticket for free.

When the Spanish government hiked sales tax on theater tickets this past summer, Quim Marcé thought his theater was doomed. With one in four local residents unemployed, Marcé knew that even a modest hike in ticket prices might leave the 300-seat Bescanó municipal theater empty.
"We said, 'This is the end of our theater, and many others.' But then the next morning, I thought, we've got to do something, so that we don't pay this 21 percent, and we pay something more fair," says Marcé in Spanish.
He looked out his window at farmland that surrounds this village, two hours north of Barcelona, and suddenly had an idea: Instead of selling tickets to his shows, he'd sell carrots.
"We sell one carrot, which costs 13 euros [$16] -– very expensive for a carrot. But then we give away admission to our shows for free," he explains in Spanish. "So we end up paying 4 percent tax on the carrot, rather than 21 percent, which is the government's new tax rate for theater tickets."
Classified as a staple, carrots are taxed at a much lower rate and were spared new tax hikes that went into effect here on September 1.

Will Smith Discovers France's Top Marginal Tax Rates--Shrieks

The video speaks for itself.

So what would an artist's depiction of a tax cut look like?

Artist Chad Person has put together a series of collages made from U.S. currency he has entitled "TaxCut".   Of course he deducts as a business expense all the currency he destroys as part of his art.