Brown Cites California's "Day of Reckoning" in Support of Temp Tax Hikes

With California's budget deficit now exceeding $16 billion, Governor Brown has released a proposed budget which seeks, in part, to raise revenues through temporary sales and income taxes.

Brown is asking voters to temporarily raise the statewide sales tax, already the highest in the U.S., to 7.5 percent from 7.25 percent and would also increase rates on income starting at $250,000. Millionaires, now taxed at 10.3 percent, would pay 13.3 percent, the highest in the nation.

“California has been living beyond its means,” Brown told reporters in Sacramento yesterday. “The United States of America and its federal government is living beyond its means. A lot of corporations have. A lot of people spend more money than they take in. Well, there has to be a balance and a day of reckoning.”

California Ranks at the Bottom of Tax Friendliness Survey

The Kauffman Foundation has released its United States Small Business Friendliness survey.  California gets an "F" in half the categories measured. Here is the Tax Friendliness map comparing all States:


The highest grades California received were two "C-", in Training Programs and Hiring Costs.  

(Hat Tip: Tax Prof)

$4 Billion in Annual Tax Fraud From Undocumented Workers

This local news report from Indiana is startling and uncovers a growing trend. 

Word has spread amongst the undocumented workers how they can easily claim (albeit improperly) child tax credits for numerous children and relatives in Mexico, with some claiming as many as 12 dependents. 

"One of the workers, who was interviewed at his home in southern Indiana, admitted his address was used this year to file tax returns by four other undocumented workers who don't even live there. Those four workers claimed 20 children live inside the one residence and, as a result, the IRS sent the illegal immigrants tax refunds totaling $29,608."

The U.S. Inspector General is well aware of the abuse and released a new report showing the problem now costs American tax payers more than $4.2 billion a year.

Formula Value Gifts--How to Make a Gift That is Essentially Audit Proof

"I hereby make a gift of a portion of my LLC interests worth $X to my son, BUT, if the IRS audits me and says that this gift is worth much more than $X, than I really gave much less of my LLC interests so that this gift will not incur gift tax."

While the above headline and gifting statement is an oversimplification, a recent Tax Court case, Wandry v. Commissioner, has opened up a realm of possibilities for those interested in making gifts of business interests to their children.  Normally, a person can make a tax free gift of $13,000 annually (for 2012) to as many recipients as they wish.  Thus, a business owner could give away large portions of his business piece-by-piece ($13,000 each year) without suffering any adverse gift tax consequences.  However, the hardest thing to determine when dealing with family businesses is how much of that ownership interest actually equals the tax free gift amount of $13,000.  While appraisals are normally acquired, the IRS can always challenge the appraised value and argue that the gifts of interests you made were really worth much more than $13,000, leaving you with a potential gift tax liability.

The Wandry case is promising because the Tax Court allowed the use of a formula value clause in a gift agreement which means that if there were ever an audit and the appraised value of the business were increased, then the percentage of ownership interests deemed gifted would be changed to ensure no gift tax would be incurred.  In short, while the IRS could audit you and challenge the value of the gift, there would be no incentive to do so as if the value increased, there would still be no increase in gifts.  Understandably, the IRS has challenged formula value clauses on public policy grounds as it creates a situation where taxpayers can make aggressive low-ball valuations without any fear of audit consequences if those valuations are disregarded.

Prior to Wandry, the best advice was for a family to designate a charity to receive any excess value after audit adjustments--no extra tax would be due but the family would lose some control.  Wandry really opens up possibilities for strategic giving, particularly for those families using FLPs or FLLCs to make gifts to their children.

So CA Legislators Won't Have Their Pay Cut--Prop 25 Rendered Toothless

Anytime a ballot initiative is written and supported by the legislature and proposes to "cut" legislature pay if no balanced budget is reached, be skeptical.

Many of you may remember and likely voted for Proposition 25 back in 2010, which stated that if a balanced budget was not delivered on time, the legislature would not be paid.  Alas, this was the hook to convince the general public to vote for it.  The real meat of the proposition had to do with lowering the requirement to pass a budget from 2/3rds to a simple majority--in essence cutting out the already marginalized republicans.

In a classic case of bait-and-switch, a Superior Court Judge has ruled that it is up to the legislators themselves to determine whether the budget they passed was "balanced" or not.  When the legislature passed a phony budget last year just in time to get paid, state controller John Chiang stepped in and determined that the budget was not balanced and therefore, legislators would not get paid.  Chiang's actions were short-lived and now it appears the legislature can continue to pass unworkable budgets year after year.  Proposition 25 sounded nice, but again, voters were sold a bill of goods.

Family Limited Partnerships Video Presentation

So I've toyed with the idea of creating short videos discussing various estate and tax planning techniques for quite some time.  I'm more of a visual learner myself and so I tried to figure out if I could create a video that would visually convey some key aspects of the various planning opportunities that are available.  My first video discusses how family limited partnerships can be used to transfer value in a business to your children while still retaining control and how to reap some pretty generous gift and estate tax benefits along the way.  The video is below.  I realize the production quality is a little low-grade but considering it's my first in a series, I think it's not too bad.

California's Tax Takers Await Day-by-Day Updates of Tax Proceeds

There's an interesting article in the L.A. Times about the hundreds of workers in Sacramento who are busy during tax season opening and sorting taxpayer checks.  The article had this gem of a paragraph:

Every afternoon for a few weeks in April, as Californians pay their state taxes, a courier ferries them [taxpayer checks] to eight banks to nourish the money-hungry government.  Meanwhile, lobbyists, lawmakers and activists — people whose jobs hinge on this seemingly mundane process — huddle by their computers and wait for the daily tally, which they'll tweet and email like the play-by-play of a championship game. By the end of the month, state accountants will add up the money and hope there's enough to cover expenses.

So far, the legislative analyst's office predicts the state will be about $2 billion short of projected revenues.