In February the IRS announced new rules easing, at least somewhat, the burden of its collection activities.
The change affecting the largest number of people concerns liens. The limit for automatic filing has increased from $5,000 to $10,000. Therefore, if your liability to the IRS is less than $10,000, you will not face the threat of a lien.
Why and how is this important? The three credit rating agencies pick-up and report these liens. As credit ratings become increasingly important in the hiring or rental process, a poor rating may cost you a job or a place to live. These liens can remain on a credit report for seven years.
The IRS will also change its procedures for removing liens. The IRS will now withdraw its lien once the debt is paid in full and the taxpayer requests it (although I question why the IRS was not doing this previously). The IRS will also remove a lien when a taxpayers enters into a direct debit installment agreement for $25,000 or less.
The small business version of an installment agreement will also be increased from $10,000 to $25,000. This program allows the business to pay tax over 24 months, if the tax liability is $25,000 or less.
For taxpayers with little hope of paying their tax debt, the offer-in-compromise program will now be expanded to taxpayers with incomes up to $100,000 and tax liabilities of $50,000 or less. This is twice the former limit.
Do not however interpret this to mean that offers will necessarily be easier to obtain. The number of accepted offers decreased from nearly 39,000 in fiscal 2001 to less than 11,000 in fiscal 2009, according to the Taxpayer Advocate. Let’s compare this to the number of liens, which have ballooned from 168,000 in 1999 to 1.1 million last year. Few, and very few, taxpayers get to settle their tax debt for “pennies on the dollar,” irrespective of the TV commercials.
Tuesday, June 21, 2011
Tucker v. Commissioner of Internal Revenue
I came across an interesting tax case: Tucker v Commissioner of Internal Revenue. This thing is virtually a case study in IRS procedure. It also involved a taxpayer that (a) owed monies to the IRS and (b) decided to day trade before remitting monies to the IRS. You can probably anticipate that things did not go as planned for Mr. Tucker.
Let’s go through some of the detail.
Tucker had filed returns for 2000, 2001 and 2002 but did not pay the tax. In 2003 he decided to pave his way to gold by day-trading. He owed the IRS approximately $15,000. He lost almost $23,000.
In May, 2004 the IRS sent him a Notice of Intent to Levy. He did not request a hearing.
In July, 2004 the IRS sent a Notice of Federal Tax Lien Filing (NTLF).
However, before he received the NTLF he submitted in July, 2004 a request for an Offer in Compromise. His total tax was approximately $24,000; with penalties and interest it was approximately $35,000. He proposed an OIC of $100 monthly for 60 months.
The OIC was rejected.
However, after he received the NTLF notice but before learning that the IRS rejected his OIC, Tucker filed in August, 2004 a Request for Collection Due Process (CDP) Hearing.
Note: The IRS generally notifies a taxpayer of a right to a hearing when it sends a levy. If the taxpayer requests the CDP hearing, the IRS may not file a levy until after the hearing. At that hearing the taxpayer may ask for an installment agreement, an offer in compromise or another collection alternative. The taxpayer may also dispute the amount of the tax liability.
With the request for a CDP, Tucker also requested an OIC.
Note: So Tucker requested an OIC in July and then again in August. This caused some confusion at the IRS. Tucker’s attorney withdrew the July OIC and offered instead an installment agreement.
Note: an OIC is not an alternative to the filing of an NFTL. It is an alternative to the filing of a levy. This tells me that Tucker missed the deadline for the May notice and was trying to catch up.
So now we are in May, 2005 and the CDP hearing was held over the telephone. Tucker’s attorney stated that Tucker no longer wanted the July, 2004 OIC with payments totaling $6,000. So, the following month (June, 2005) Tucker submitted new financials. The attorney proposed an installment payment arrangement of $326 a month.
The IRS reviewed the numbers, revised it to $316 and requested Tucker to sign and review a partial payment installment agreement (PPIA).
Hey, now we are getting somewhere.
Wait! The attorney now wanted to switch from a PPIA to an OIC.
Note: Why would he do this, you ask? There is a technical reason, as an OIC would (assuming Tucker adhered to all of the conditions) fix the liability to the IRS. A PPIA would be reexamined every two years for possible increases.
Tucker tried to sweeten the pot by proposing payments of $317 monthly. I guess he figured that that extra $1 per month would help his cause.
In November, 2005 the IRS rejected Tucker’s OIC.
Question: Why would the IRS do this? There can be several reasons, but one reason is that a lot of time was left on Tucker’s statute of limitations (SoL) period for collections. You may remember that there is a SoL of three years for the IRS to audit your return. There is a second, and less known, SoL on how long the IRS has to collect, assuming that it has audited or otherwise assessed your return. That second SoL is ten years. Tucker had more than five years left on this SoL, and the IRS was reluctant to give it up. Remember, under an OIC the IRS cannot revisit the numbers unless the taxpayer fails to comply.
In January, 2006 Tucker filed with the Tax Court. The Tax Court sent the case back to IRS Appeals to reconsider Tucker’s July, 2005 OIC. This second (supplemental) hearing was held September, 2006.
Here is the magic language by IRS Appeals:
Upon review, * * * [this settlement officer] believes that the stock sales are dissipated assets and believes the amounts dissipated should be included in a minimum offer calculation. As such, the minimum offer is actually full payment. These stock transactions in 2003 occurred * * * [after] the due dates of the 1999, 2000, and 2001 1040 returns. If you simply sold a little less than you bought, which was your option, you could have already paid the taxes in full.
So… the IRS is arguing that Tucker “dissipated” his assets and therefore refused his OIC.
In November, 2006 Tucker filed again with the Tax Court. He of course disagreed that he “dissipated” anything. The IRS responded in November, 2007. Tucker filed a motion in February, 2008.
Are we FINALLY getting to court?
Here is what the Tax Court had to say:
Mr. Tucker also argues that the Office of Appeals erred in determining that his day trading in 2003 constituted a dissipation of assets. We disagree in part.
Mr. Tucker was aware of his unpaid tax obligations for 1999 through 2001 when he transferred the $44,700 into his E*TRADE account. Despite having known tax obligations, Mr. Tucker still transferred the money and for nearly four months engaged in the highly speculative and volatile activity of day trading.
Mr. Tucker maintains that he did so in an effort to make enough money to pay off his delinquent taxes and other creditors, as well as pay his tax liability for 2002 that would be coming due.
The losses that Mr. Tucker sustained were not due to an unforeseeable event but rather were commonplace (especially for a neophyte) in such a highly volatile activity. Mr. Tucker knew he owed outstanding taxes; and he had the cash in hand that would have paid in full the taxes and accruals he owed as of early 2003 (i.e., for tax years 1999, 2000 and 2001); and yet he chose instead to devote that money to a risky investment. Mr. Tucker’s foray into day trading was purely speculative, and his already slim chances of success were undermined by his inexperience. In short, Mr. Tucker’s circumstances were of his own making.
Well, this is not going well for Tucker.
In the supplemental notice of determination, the settlement officer concluded that Mr. Tucker had dissipated $44,700 in assets, measured by his deposits into the E-Trade account. For purposes of summary judgment, we find that that conclusion was excessive. The mere act of depositing the money into the E-Trade account did not rise to the level of dissipation, but the day trading and the losing of the money in the account did. Because at the time in April 2003 that Mr. Tucker lost a total of $22,645 from his day trading activities, he had outstanding Federal tax liabilities of at least $14,975, we hold for purposes of summary judgment that Mr. Tucker dissipated assets of $14,975.
The parties agree that Mr. Tucker’s disposable income (i.e., monthly income over allowable monthly expenses) was $316 per month, and that there were 116 months remaining before his collection period expiration date.
As a result, Mr. Tucker’s future income subject to collection would be $316 x 116 months, or $36,656--an amount slightly less than the total of the payments he proposed in his OIC. However, as we determined above, the value of assets that Mr. Tucker dissipated through his day trading activities was $14,945. Under IRS guidelines, Mr. Tucker’s reasonable collection potential would therefore be $51,601--i.e., the sum of his future income stream ($36,656) plus the value of any dissipated assets (at least $14,945). Given that Mr. Tucker’s reasonable collection potential thus exceeded his outstanding tax liabilities, the settlement officer did not err in determining Mr. Tucker could fully pay his Federal income tax liabilities.
The part of this case that has attracted professional interest is the stern disapproval of the Tax Court (or, at least, of Judge Gustafson) of day trading while owing the IRS monies. Dissipated assets will not reduce the amount the IRS will accept in an installment agreement or offer. The risk therefore is one-sided: if you make money, you can pay the IRS sooner; if not, then you will owe the same as before, but with fewer assets at your disposal.
As For Tucker, he now owes the better part of $45,000 to the IRS. As too often happens, the taxpayer should have settled for the best available deal and carried on with his/her life.
Let’s go through some of the detail.
Tucker had filed returns for 2000, 2001 and 2002 but did not pay the tax. In 2003 he decided to pave his way to gold by day-trading. He owed the IRS approximately $15,000. He lost almost $23,000.
In May, 2004 the IRS sent him a Notice of Intent to Levy. He did not request a hearing.
In July, 2004 the IRS sent a Notice of Federal Tax Lien Filing (NTLF).
However, before he received the NTLF he submitted in July, 2004 a request for an Offer in Compromise. His total tax was approximately $24,000; with penalties and interest it was approximately $35,000. He proposed an OIC of $100 monthly for 60 months.
The OIC was rejected.
However, after he received the NTLF notice but before learning that the IRS rejected his OIC, Tucker filed in August, 2004 a Request for Collection Due Process (CDP) Hearing.
Note: The IRS generally notifies a taxpayer of a right to a hearing when it sends a levy. If the taxpayer requests the CDP hearing, the IRS may not file a levy until after the hearing. At that hearing the taxpayer may ask for an installment agreement, an offer in compromise or another collection alternative. The taxpayer may also dispute the amount of the tax liability.
With the request for a CDP, Tucker also requested an OIC.
Note: So Tucker requested an OIC in July and then again in August. This caused some confusion at the IRS. Tucker’s attorney withdrew the July OIC and offered instead an installment agreement.
Note: an OIC is not an alternative to the filing of an NFTL. It is an alternative to the filing of a levy. This tells me that Tucker missed the deadline for the May notice and was trying to catch up.
So now we are in May, 2005 and the CDP hearing was held over the telephone. Tucker’s attorney stated that Tucker no longer wanted the July, 2004 OIC with payments totaling $6,000. So, the following month (June, 2005) Tucker submitted new financials. The attorney proposed an installment payment arrangement of $326 a month.
The IRS reviewed the numbers, revised it to $316 and requested Tucker to sign and review a partial payment installment agreement (PPIA).
Hey, now we are getting somewhere.
Wait! The attorney now wanted to switch from a PPIA to an OIC.
Note: Why would he do this, you ask? There is a technical reason, as an OIC would (assuming Tucker adhered to all of the conditions) fix the liability to the IRS. A PPIA would be reexamined every two years for possible increases.
Tucker tried to sweeten the pot by proposing payments of $317 monthly. I guess he figured that that extra $1 per month would help his cause.
In November, 2005 the IRS rejected Tucker’s OIC.
Question: Why would the IRS do this? There can be several reasons, but one reason is that a lot of time was left on Tucker’s statute of limitations (SoL) period for collections. You may remember that there is a SoL of three years for the IRS to audit your return. There is a second, and less known, SoL on how long the IRS has to collect, assuming that it has audited or otherwise assessed your return. That second SoL is ten years. Tucker had more than five years left on this SoL, and the IRS was reluctant to give it up. Remember, under an OIC the IRS cannot revisit the numbers unless the taxpayer fails to comply.
In January, 2006 Tucker filed with the Tax Court. The Tax Court sent the case back to IRS Appeals to reconsider Tucker’s July, 2005 OIC. This second (supplemental) hearing was held September, 2006.
Here is the magic language by IRS Appeals:
Upon review, * * * [this settlement officer] believes that the stock sales are dissipated assets and believes the amounts dissipated should be included in a minimum offer calculation. As such, the minimum offer is actually full payment. These stock transactions in 2003 occurred * * * [after] the due dates of the 1999, 2000, and 2001 1040 returns. If you simply sold a little less than you bought, which was your option, you could have already paid the taxes in full.
So… the IRS is arguing that Tucker “dissipated” his assets and therefore refused his OIC.
In November, 2006 Tucker filed again with the Tax Court. He of course disagreed that he “dissipated” anything. The IRS responded in November, 2007. Tucker filed a motion in February, 2008.
Are we FINALLY getting to court?
Here is what the Tax Court had to say:
Mr. Tucker also argues that the Office of Appeals erred in determining that his day trading in 2003 constituted a dissipation of assets. We disagree in part.
Mr. Tucker was aware of his unpaid tax obligations for 1999 through 2001 when he transferred the $44,700 into his E*TRADE account. Despite having known tax obligations, Mr. Tucker still transferred the money and for nearly four months engaged in the highly speculative and volatile activity of day trading.
Mr. Tucker maintains that he did so in an effort to make enough money to pay off his delinquent taxes and other creditors, as well as pay his tax liability for 2002 that would be coming due.
The losses that Mr. Tucker sustained were not due to an unforeseeable event but rather were commonplace (especially for a neophyte) in such a highly volatile activity. Mr. Tucker knew he owed outstanding taxes; and he had the cash in hand that would have paid in full the taxes and accruals he owed as of early 2003 (i.e., for tax years 1999, 2000 and 2001); and yet he chose instead to devote that money to a risky investment. Mr. Tucker’s foray into day trading was purely speculative, and his already slim chances of success were undermined by his inexperience. In short, Mr. Tucker’s circumstances were of his own making.
Well, this is not going well for Tucker.
In the supplemental notice of determination, the settlement officer concluded that Mr. Tucker had dissipated $44,700 in assets, measured by his deposits into the E-Trade account. For purposes of summary judgment, we find that that conclusion was excessive. The mere act of depositing the money into the E-Trade account did not rise to the level of dissipation, but the day trading and the losing of the money in the account did. Because at the time in April 2003 that Mr. Tucker lost a total of $22,645 from his day trading activities, he had outstanding Federal tax liabilities of at least $14,975, we hold for purposes of summary judgment that Mr. Tucker dissipated assets of $14,975.
The parties agree that Mr. Tucker’s disposable income (i.e., monthly income over allowable monthly expenses) was $316 per month, and that there were 116 months remaining before his collection period expiration date.
As a result, Mr. Tucker’s future income subject to collection would be $316 x 116 months, or $36,656--an amount slightly less than the total of the payments he proposed in his OIC. However, as we determined above, the value of assets that Mr. Tucker dissipated through his day trading activities was $14,945. Under IRS guidelines, Mr. Tucker’s reasonable collection potential would therefore be $51,601--i.e., the sum of his future income stream ($36,656) plus the value of any dissipated assets (at least $14,945). Given that Mr. Tucker’s reasonable collection potential thus exceeded his outstanding tax liabilities, the settlement officer did not err in determining Mr. Tucker could fully pay his Federal income tax liabilities.
The part of this case that has attracted professional interest is the stern disapproval of the Tax Court (or, at least, of Judge Gustafson) of day trading while owing the IRS monies. Dissipated assets will not reduce the amount the IRS will accept in an installment agreement or offer. The risk therefore is one-sided: if you make money, you can pay the IRS sooner; if not, then you will owe the same as before, but with fewer assets at your disposal.
As For Tucker, he now owes the better part of $45,000 to the IRS. As too often happens, the taxpayer should have settled for the best available deal and carried on with his/her life.
High-Income Filers and the COBRA Subsidy
Do you remember the COBRA assistance payments available to workers laid-off between September, 2008 and May, 2010? The IRS is sending letters to remind them that some of the subsidy could be taxable.
The recapture is income-based. If the taxpayer is single, then recapture begins at $125,000 and phases-out at $145,000. For marrieds the range is $250,000 to $290,000. Income is defined as “Modified AGI,” which for most people will be AGI plus tax-exempt interest.
The recapture is income-based. If the taxpayer is single, then recapture begins at $125,000 and phases-out at $145,000. For marrieds the range is $250,000 to $290,000. Income is defined as “Modified AGI,” which for most people will be AGI plus tax-exempt interest.
Were You 70 1/2 in 2010?
An important date is coming up if you turned age 70 ½ last year and decided to defer your first IRA withdrawal.
Example: A taxpayer born February 9, 1940 attained 70 ½ in 2010. A taxpayer born August 1, 1940 will attain age 70 ½ in 2011.
By April 1, 2011 a taxpayer who reached age 70 ½ last year must begin minimum required distributions from his/her IRA.
The taxpayer does not have to begin MRD is he/she is still employed and has a 401(k) at work. The initial date is delayed until such taxpayer retires. This exception does not apply to a 5%-or-more owner, however. He/she must begin MRDs at age 70 ½ whether or not he/she continues working.
To calculate the MRD from an IRA or several IRAs, the taxpayer would combine the balances in all IRA(s) to make the calculation. The MRD can be made from one or a combination of IRAs, however. Each IRA does not have to have an MRD, as long as the total from all IRAs equal the MRD.
The rule is different for qualified plans, such as 401(k)s. Each qualified plan must have its own MRD, which is the opposite of the IRA rule.
There is a steep 50% penalty for failure to take out MRDs. The penalty fortunately can be waived for reasonable cause and reasonable steps are being taken to remedy the failure. Still, one would prefer not to go there.
Example: A taxpayer born February 9, 1940 attained 70 ½ in 2010. A taxpayer born August 1, 1940 will attain age 70 ½ in 2011.
By April 1, 2011 a taxpayer who reached age 70 ½ last year must begin minimum required distributions from his/her IRA.
The taxpayer does not have to begin MRD is he/she is still employed and has a 401(k) at work. The initial date is delayed until such taxpayer retires. This exception does not apply to a 5%-or-more owner, however. He/she must begin MRDs at age 70 ½ whether or not he/she continues working.
To calculate the MRD from an IRA or several IRAs, the taxpayer would combine the balances in all IRA(s) to make the calculation. The MRD can be made from one or a combination of IRAs, however. Each IRA does not have to have an MRD, as long as the total from all IRAs equal the MRD.
The rule is different for qualified plans, such as 401(k)s. Each qualified plan must have its own MRD, which is the opposite of the IRA rule.
There is a steep 50% penalty for failure to take out MRDs. The penalty fortunately can be waived for reasonable cause and reasonable steps are being taken to remedy the failure. Still, one would prefer not to go there.
Fuel Tax Credit
We are in corporate tax season. I was thinking about a somewhat offbeat tax credit that we claim for one of our business clients. They work primarily with roadways and infrastructure. They have to power their equipment on-site, which means that many times they have to bring their own generators. They claim the fuel tax credit.
For a fuel-intensive business, this can add up. The credit for gasoline is 18.3 cents per gallon, and for diesel it is 24.3 cents. You are to keep certain records to support the credit, as can be expected. The records should include the name and address of the seller, the dates and quantity of purchase. Also, if there are different fuels - such as both gasoline and diesel – the records should differentiate between the two.
The credit is claimed on Form 4136. If the claim exceeds $750, the taxpayer can expedite the refund by filing Form 8849.
By the way, recreational use of a boat does not count for purposes of this credit.
You may want to check your state also. There may be an additional refund opportunity there.
For a fuel-intensive business, this can add up. The credit for gasoline is 18.3 cents per gallon, and for diesel it is 24.3 cents. You are to keep certain records to support the credit, as can be expected. The records should include the name and address of the seller, the dates and quantity of purchase. Also, if there are different fuels - such as both gasoline and diesel – the records should differentiate between the two.
The credit is claimed on Form 4136. If the claim exceeds $750, the taxpayer can expedite the refund by filing Form 8849.
By the way, recreational use of a boat does not count for purposes of this credit.
You may want to check your state also. There may be an additional refund opportunity there.
Bonus Depreciation on Real Estate Construction
The question came up of whether any part of real estate construction would qualify for the bonus depreciation.
An asset qualifies for the bonus depreciation if:
(1) It has a MACRS recovery period of 20 years or less, is computer software or qualified leasehold improvement.
a. This generally excludes real estate as real estate has a MACRS period longer than 20 years.
(2) It is acquired after 9/8/2010 and before 1/1/2012
(3) Original use starts with the taxpayer
The bonus is not insignificant. The bonus for 1/1/2010 to 9/8/2010, for example, was 50%. This means that one could depreciate ½ the cost right off the top. Effective 9/9/10, that percentage was increased to 100%. That means that you can buy it and expense it – all of it – in the same year. One can elect out of the bonus if one does not need that much depreciation. It can happen. I saw an opt-out election today for a client.
The tax code therefore tries to exclude real property from bonus depreciation under Sec 168(k). That leaves us with personal property, and more specifically tangible personal property, as potentially qualifying. The tricky thing is that the tax code does not directly define the term “personal property” for purposes of depreciation. Instead the Code says that we should look at Regulation 1.48-1(c) for its definition of “tangible personal property.”
NOTE: Section 48 involves the now defunct investment tax credit (ITC).
We here have a loophole. We need to find something that looks like real property BUT is considered tangible personal property under Regulation 1.48-1(c). This could happen, as Section 48 was not concerned with depreciation; instead it was concerned with a tax credit. There has been ITC guidance from the IRS through field directives in diverse industries such as restaurants, dealerships and casinos.
Here are some common improvements that will qualify for the bonus depreciation:
(1) Landscaping, including a related irrigation system.
(2) Parking lots
(3) Perimeter fencing and sidewalks
(4) Clearing, grading and excavating directly related with the construction of sidewalks and parking lots
(5) Light poles
(6) Surveillance systems
(7) Signs
(8) Awnings
(9) Wall coverings
(10) Window treatments
(11) Decorative interior lighting
(12) Floor coverings, including carpets
(13) Certain exterior lighting
Heads up, therefore, if you are constructing a building. Make sure that your GC traps these costs for you, and you are well on your way to some significant tax write-offs.
An asset qualifies for the bonus depreciation if:
(1) It has a MACRS recovery period of 20 years or less, is computer software or qualified leasehold improvement.
a. This generally excludes real estate as real estate has a MACRS period longer than 20 years.
(2) It is acquired after 9/8/2010 and before 1/1/2012
(3) Original use starts with the taxpayer
The bonus is not insignificant. The bonus for 1/1/2010 to 9/8/2010, for example, was 50%. This means that one could depreciate ½ the cost right off the top. Effective 9/9/10, that percentage was increased to 100%. That means that you can buy it and expense it – all of it – in the same year. One can elect out of the bonus if one does not need that much depreciation. It can happen. I saw an opt-out election today for a client.
The tax code therefore tries to exclude real property from bonus depreciation under Sec 168(k). That leaves us with personal property, and more specifically tangible personal property, as potentially qualifying. The tricky thing is that the tax code does not directly define the term “personal property” for purposes of depreciation. Instead the Code says that we should look at Regulation 1.48-1(c) for its definition of “tangible personal property.”
NOTE: Section 48 involves the now defunct investment tax credit (ITC).
We here have a loophole. We need to find something that looks like real property BUT is considered tangible personal property under Regulation 1.48-1(c). This could happen, as Section 48 was not concerned with depreciation; instead it was concerned with a tax credit. There has been ITC guidance from the IRS through field directives in diverse industries such as restaurants, dealerships and casinos.
Here are some common improvements that will qualify for the bonus depreciation:
(1) Landscaping, including a related irrigation system.
(2) Parking lots
(3) Perimeter fencing and sidewalks
(4) Clearing, grading and excavating directly related with the construction of sidewalks and parking lots
(5) Light poles
(6) Surveillance systems
(7) Signs
(8) Awnings
(9) Wall coverings
(10) Window treatments
(11) Decorative interior lighting
(12) Floor coverings, including carpets
(13) Certain exterior lighting
Heads up, therefore, if you are constructing a building. Make sure that your GC traps these costs for you, and you are well on your way to some significant tax write-offs.
Do Passthroughs Cost the Treasury Money?
Treasury Secretary Timothy Geithner started a bit of firestorm on February 15 in testimony before the Senate Finance Committee. By way of context, the White House is seeking to overhaul the corporate tax code. There is much discussion about doing away with certain deductions (the domestic production activities deduction, LIFO) in order to reduce corporate rates. As I have commented before, the U.S. has the second-highest corporate tax rate in the world.
Well, an ancillary issue is the tax treatment of “small business.” You know, the businesses that make up the client list of almost all U.S. CPA firms except those that begin with the names “Deloitte,” “Ernst,” “KPMG,” and “PwC.”
Here is the Secretary:
“Congress has to revisit this basic question about whether it makes sense for us as a country to allow certain businesses to choose whether they’re treated as corporations for tax purposes or not.”
Let’s have a quick and rough review of selected statistics. Business tax collections in 2007 were approximately $2.2 trillion, of which $1.4 was from “traditional” corporations, the balance being from S corporations, partnerships, LLC’s and proprietorships. Let’s look at the number of returns: of approximately 13 million business returns, slightly less than half were from “traditional” corporations.
Here is the Secretary again:
“What’s a little unique about our system relative to other countries is we do give a lot of businesses the choice of how their income should be taxed.”
We have a certain amount of choice on how we are taxed. Isn’t that quaint?
Today I was reading an article in Tax Notes by Martin A. Sullivan titled “Passthroughs Shrink the Corporate Tax by $140 Billion.” He points out that…
“Nowhere is the inefficiency of the tax more apparent than in the porous border between one group of business that must pay the tax and the group that can escape it.”
I have a plea for Mr. Sullivan: please tell me how my clients can “escape it.” Apparently I have been giving out erroneous tax advice for two decades. My advice is to reduce and minimize, but that’s about all I can do. Unless minimizing constitutes “escaping it,” in which case I have wasted a career in public practice. I should have finished my PhD and lectured on what I had never done in a profit-making capacity. I could then go on to a government office, maybe even the Cabinet.
The issue here is the how a C corporation is taxed. If a C has profits and pays dividends, the dividends are taxed a second time to the shareholder. If a C liquidates, it has to pay tax on any profit inherent in its assets; the distribution is then taxed again to the shareholder. C corporations may have a higher tax rate. Passthroughs try to avoid much of this by having one level of tax. If I own an S corporation, for example, the profit will be taxed once – to me and on my personal return. There are exceptions, but let’s set them aside for the moment.
Mr. Sullivan goes on:
“But the rise of S corporations and LLCs has also taken a big bite out of the taxable corporate sector.
“If the corporate sector’s share of business stayed at the same level as it was in 1999, it (the corporate tax) would be about 10% larger.”
Well, yes. The way that - if I stayed the same as I was in 1999 - my knees would not hurt me occasionally and my energy level would be 20% higher. Things change. Business owners – and advisors like me – would have responded with change, and it is hard to say what the results would have been, much less that they would have been to the government’s liking.
One last quote:
"Many would like to keep tax reform confined to the corporate sector. But politics aside, isn’t it reasonable to suggest that passthrough businesses that are relatively lightly taxed pay more to reduce taxes on C corporations?”
Rick and I could poll ALL OF OUR CLIENTS and see if they consider themselves “lightly taxed.”Keep you informed on that.
Well, an ancillary issue is the tax treatment of “small business.” You know, the businesses that make up the client list of almost all U.S. CPA firms except those that begin with the names “Deloitte,” “Ernst,” “KPMG,” and “PwC.”
Here is the Secretary:
“Congress has to revisit this basic question about whether it makes sense for us as a country to allow certain businesses to choose whether they’re treated as corporations for tax purposes or not.”
Let’s have a quick and rough review of selected statistics. Business tax collections in 2007 were approximately $2.2 trillion, of which $1.4 was from “traditional” corporations, the balance being from S corporations, partnerships, LLC’s and proprietorships. Let’s look at the number of returns: of approximately 13 million business returns, slightly less than half were from “traditional” corporations.
Here is the Secretary again:
“What’s a little unique about our system relative to other countries is we do give a lot of businesses the choice of how their income should be taxed.”
We have a certain amount of choice on how we are taxed. Isn’t that quaint?
Today I was reading an article in Tax Notes by Martin A. Sullivan titled “Passthroughs Shrink the Corporate Tax by $140 Billion.” He points out that…
“Nowhere is the inefficiency of the tax more apparent than in the porous border between one group of business that must pay the tax and the group that can escape it.”
I have a plea for Mr. Sullivan: please tell me how my clients can “escape it.” Apparently I have been giving out erroneous tax advice for two decades. My advice is to reduce and minimize, but that’s about all I can do. Unless minimizing constitutes “escaping it,” in which case I have wasted a career in public practice. I should have finished my PhD and lectured on what I had never done in a profit-making capacity. I could then go on to a government office, maybe even the Cabinet.
The issue here is the how a C corporation is taxed. If a C has profits and pays dividends, the dividends are taxed a second time to the shareholder. If a C liquidates, it has to pay tax on any profit inherent in its assets; the distribution is then taxed again to the shareholder. C corporations may have a higher tax rate. Passthroughs try to avoid much of this by having one level of tax. If I own an S corporation, for example, the profit will be taxed once – to me and on my personal return. There are exceptions, but let’s set them aside for the moment.
Mr. Sullivan goes on:
“But the rise of S corporations and LLCs has also taken a big bite out of the taxable corporate sector.
“If the corporate sector’s share of business stayed at the same level as it was in 1999, it (the corporate tax) would be about 10% larger.”
Well, yes. The way that - if I stayed the same as I was in 1999 - my knees would not hurt me occasionally and my energy level would be 20% higher. Things change. Business owners – and advisors like me – would have responded with change, and it is hard to say what the results would have been, much less that they would have been to the government’s liking.
One last quote:
"Many would like to keep tax reform confined to the corporate sector. But politics aside, isn’t it reasonable to suggest that passthrough businesses that are relatively lightly taxed pay more to reduce taxes on C corporations?”
Rick and I could poll ALL OF OUR CLIENTS and see if they consider themselves “lightly taxed.”Keep you informed on that.
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