Category: Tax

Albany Risks Outright Anarchy Enforcing Taxes on Sliced Bagels

The battle between California and New York for the biggest fiscal shitshow has reached new heights as Albany seems to be going after New Yorkers where it really counts.

For many of you living in New York, grabbing a bagel at your local shop is part of the weekday morning routine. You walk in, wait in line, place the order, pay the total and get on with your day. It’s good to know that the one constant in your life is that the Ess-a-Bagel will charge you the same price for your sesame seed bagel with butter day after day after day.

Well! That constant, your rock, your consistently-priced doughy security blanket may soon be stripped away from you. The Journal reported yesterday that bagel chain Bruegger’s got the wrath of the New York Department of Taxation and Finance, demanding that owner Kenneth Greene start collecting “taxes on all bagels, except for those that remain intact and are consumed off premises,” and collected a ‘significant’ sum of taxes owed.

Why, you ask? Because an obscure law on the books says that a sales tax is to be charged on “sliced or prepared bagels (with cream cheese or other toppings).” OH! And if you eat your everything with cream cheese and tomato in the shop, you’ll also be charged the tax.


The Post has stretched the lengths of investigative journalism once again to find out that most of the vendors around the City haven’t been charging you the extra 9¢ for that carbolicious breakfast.

[T]he vast majority of the bagel vendors The Post visited yesterday didn’t tax sliced bagels with no toppings as they are supposed to.

“I don’t think it’s fair. Why would I put tax on a sliced bagel when you don’t want nothing on it?” said Basil Colon, a cashier at Daniel’s Bagels on Third Avenue in Murray Hill.

He served a cinnamon-raisin bagel, sliced with no spread, to a Post reporter for $1.10, which didn’t include the extra tax of about 9 cents.

Like many bagel-store workers throughout the city, he didn’t know about the slice tax.

We think we speak for everyone, when we say, “What. The. Fuck. Albany?” This is what it has come to? The dire fiscal needs of the Empire State have gotten to the point that you’re shaking down bagel shops for an extra 9¢ per bagel? Granted, that may be a lot – A LOT – of bagels but you’re applying the smallest bandage in the box to a gaping head wound. A head wound that has caused many to think that the next step is to put a tourniquet on the neck of the state government.

You really want to kill the will of the people? Just keep shit like this up. Next thing you know they’ll start slapping the tax on pizza unless you buy the whole pie…unsliced.

Sliced Bagels, Taxes on Top [WSJ]
NY’s cut of bagel ‘dough’ [NYP]

Is Philadelphia’s Tax on Bloggers That Big of a Deal?

Every state, municipality, township and hamlet is desperate to close their budget gaps. With such desperation comes a flood of bad ideas that include taxes on everything from juggling to hot air balloon rides.

The Philadelphia City Paper ran a story last week about the $300 Business Privilege Tax that the city is imposing on bloggers, freelancers and other contractors since they are engaged in the activity for profit. Seemingly, another stupid idea.


The City Paper speaks to a couple of bloggers – clearly doing it as a hobby – that are technically engaged in a for-profit activity because they have ads on their blogs. They were notified by the city that they owed the $300 for a lifetime business privilege license (you can also opt for a $50 annual license). The Philadelphia Department of Revenue argues that “simply choosing the option to make money from ads — regardless of how much or little money is actually generated — qualifies a blog as a business.”

Supposedly, changes to the city’s law are in the works to be introduced next month that would exempt the first $100k of a business’s profit.

However, there is a far simpler solution to this problem that is mentioned by Christina Warren over at Mashable which is, quit running ads on your blog. Maybe the city’s tax is excessive, annoying, desperate for reform or just plain stupid but if you don’t run ads on your blog – that wasn’t designed to make money – you avoid the business privilege license altogether. It’s as simple as clicking a mouse and the government is out of your life (at least this respect).

Or continue to be stubborn and fight the bureaucracy of the Philly City government. Your choice.

Pay Up [Philadelphia City Paper]
Philadelphia Tax Code Sparks Big Controversy with Small Bloggers [Mashable]

Three Important Filing Tips for Luddites

There is an immense body of law governing whether last-minute tax filings are timely. So often a cheap little postmark is all that stands between a taxpayer and tax catastrophe. With the IRS herding preparers and taxpayers towards e-filing, timely-mailed, timely-filed cases may seem like an arcane body of law, like piracy cases, but paper filing still has some proud hard-core holdouts, and sometimes only a paper filing will do. At the Tax Court, for example, where the website says “Initial filings, such as the petition, may be filed only in paper form.”

The tax law says that a tax return is considered timely-filed if it is mailed on the due date, but the shift to e-filing can make things awkward for paper filers. For example, few post offices still offer late April 15 hours for last-minute paper filers. Stepping into the last-minute filer void are authorized private carriers of tax documents, like FedEx and UPS. A proper shipping document by an authorized private carrier can document timely filing. That gives taxpayers new ways to meet disaster, as the Tax Court illustrated this week.


A California couple wanting to take the IRS to Tax Court had a July 20, 2009 deadline for filing their petition. They filed by FedEx, perhaps at a FedEx/Kinkos location. They generated a shipping label on their home computer with a July 20 date. But FedEx spoiled everything, as the Tax Court explains:

The petition, which was sent by FedEx Express (FedEx), was received and filed by the Court on Thursday, July 23, 2009. The envelope containing the petition bore two shipping labels. The first shipping label, which had been placed inside a clear plastic pouch adhered to the envelope, had been electronically generated by the sender using FedEx Ship Manager (customer generated label). The second shipping label, which had been affixed to the outside of the clear plastic pouch, had been electronically generated by FedEx (FedEx-generated label).

Of course the FedEx-generated label had a July 21 date. And that, says the Tax Court, is the date that counts, and our couple was out of luck.

So what does that mean to you?

• File electronically if you can. You get a nice electronic confirmation that you can beat up the IRS with, and you don’t have to worry about your valuable tax forms going awry.

• If you must paper-file, Registered Mail or Certified Mail, Return Receipt Requested, are still the best deal in town. They’ll generally be cheaper than a private carrier, and that hand-stamped certified mail postmark has the same effect on IRS agents as sunlight on Dracula.

• If you find yourself at FedEx/Kinkos late on April 15, make sure the clerk knows that you need them to stamp it before midnight. If you use private delivery, be sure to use the proper street address, as the private carriers can’t deliver to post office boxes.

Otherwise, you might find yourself trying to reach Jiffy Express.

Tax Reform Suggestions Will More or Less Encompass Every Idea, Ever

Despite other pressing issues out there, such as, whether a Muslim community center is too closeto Ground Zero or if it’s just a religious revival of an old Burlington Coat factory, the matter of tax reform managed to creep back into the news late last week.

The President’s Economic Recovery Advisory Board plans on dropping some suggestions on fixing our tax system on August 27th. This comes after the getting suggestions from the American people but then stalling a little bit on the issue.

Now that some recommendations are scheduled to be made public the Journal suggests that the timing isn’t ideal for an election year but also mentions that while there’s going to be plenty of idea put out there, no real solutions are going to be recommended:

But the timing of the release just before the Labor Day weekend suggests that the administration might be trying to downplay it. Many Democrats say tax hikes are inevitable if the government is to bring down the federal deficit, expected to total about $1.5 trillion this year, but that option remains politically sensitive, given the high jobless rate and ahead of November’s mid-term elections.

According to the Treasury Department, the report will offer “an almanac of options from a broad range of viewpoints,” but won’t make specific policy recommendations. It will discuss ideas related to simplifying the tax code, strengthening enforcement and overhauling the corporate tax system, the department said.

An ‘almanac of ideas’ will no doubt incorporate all ideas on tax reform floated by anyone, anywhere so that it can appear that people are trying really hard to come up with a solution without making anything too politically awkward. In other words, business as usual.

White House Panel to Issue Tax-Overhaul Report Aug. 27 [WSJ]

“Even liars and hucksters have First Amendment rights”

A horrible fate must await an attorney when a judge has these things to say about him:

“Just because other accountants and professionals were doing something wrong does not excuse Defendant’s misconduct.”

“Defendant’s reasoning is so specious that he should have known it was wrong.”

“Defendant has been quite adept at hiding his involvement in these activities in an effort to develop what he believes is plausible deniability. Ultimately, his denials are implausible.”

“As stated earlier, the Court believes that promotion of tax schemes and structures is now Defendant’s modus operandi. These were not isolated occurrences, and the nature of his preferred method of business indicates it will continue to ng business.”

“Defendant describes himself as a “rainmaker,” and the Court finds that practically everything he has done in that capacity has been improper. The Court has no reason to believe he would not concoct and promote some other scheme of doubtful validity.”

So this led to…maybe a referral to the local attorney disciplinary board? A broad and sweeping injunction against doing further tax work?

Well, a Kansas City judge barred defendant A. Blair Stover from promoting three “schemes” he no longer promotes anyway. The judge also required him to run any other tax planning ideas by the IRS before marketing them. No disbarment. No banishment. Just “sin no more.”

Why the seeming leniency?

An injunction prohibiting Defendant from providing tax advice raises serious First Amendment concerns. The Government has a strong and valid interest in preventing fraud, and the First Amendment does not protect fraudulent statements. However, the Government has no interest in preventing true statements, and even liars and hucksters have First Amendment rights. Conceivably, Defendant could provide lawful and accurate tax advice, and the Court is unwilling (and probably unable) to prevent him from doing so.

I like the First Amendment. Without it I might have been moved to an oubliette underneath IRS Headquarters long ago. Yet the first in line in the bill of rights hasn’t stopped other judges from shutting down tax scheme promoters. For example, a federal judge enjoined tax protest guru Bill Benson from:

promoting, organizing, or selling (or helping others to promote, organize, or sell) any other tax shelter, plan, or arrangement that incites or assists others to attempt to violate the internal revenue laws or unlawfully evade the assessment or collection of their federal tax liabilities or unlawfully claim improper tax refunds.

Benson appealed on First Amendment grounds. The Seventh Circuit turned him down:

Benson purported to be selling a way to avoid tax liability; what he was actually selling was a way to increase tax and criminal liability for failing to pay taxes. That is false advertising, which may be banned consistent with the First Amendment.

Some years back a Des Moines gentleman vigorously promoted Employee Stock Ownership Plans as a tax cure-all, which had a number of unfortunate consequences. The Eighth Circuit didn’t let the First Amendment get in the way from permanently enjoining him and his CPA practice “…from acting as a service provider to any ERISA plan.”

Perhaps there’s something in ERISA that overrides the First Amendment the same way “ERISA preemption” keeps states from regulating many features of pension plans. Maybe the Eighth Circuit was wrong. But if the Kansas City judge’s opinion gets it right, you can get away with a lot in tax practice before you are drummed out altogether.

Should Groceries Be Taxed?

An interesting idea from the Tax Foundation’s Blog today that comes by way of Nebraska State Senator Rich Pahls. TF reports that Senator Pahls plans on introducing legislation that would broaden the sales tax base that would, theoretically, lower income or property taxes. TF takes it slightly further than Senator Pahls and suggests that groceries should be included in this broadened base.

There are few states that already tax groceries: “Alabama, Arkansas (3%), Hawaii, Idaho, Illinois (1%), Kansas, Mississippi, Missouri (1.225%), Oklahoma, South Dakota, Tennessee (5.5%), Utah (1.75%), Virginia (1.5% + 1% local option tax), and West Virginia (5%),” and TF argues that more states could benefit from this policy:

Broadening the sales tax base and lowering the rate is a good idea and a move in the direction of sound tax policy. Services should be taxed. Groceries should be taxed. All end-user consumption should be taxed. There is no reason that entire sectors of the economy and swaths of consumption should go untaxed while others are singled out for taxation. Broadening the tax base allows the government to raise the same amount of revenue with a lower tax rate, which reduces distortions in the economy. Taxing all consumption at the same low rate keeps lawmakers from picking winners and losers in the market and ensures you will be taxed equally no matter what you choose to purchase.

Unless you’re one of those people that doesn’t want pay taxes period, this is a sensible solution for states looking to close their budget gaps (even just a little bit). BUT! As you might imagine, taxing groceries is a hot political spud that, for some, is simply not an option:

[T]his type of reform is seen as radical and a political non-starter. One reason is that people have concerns that changes such as applying the sales tax to groceries might unfairly or disproportionately impact the poor. Even Sen. Pahls seems reluctant to embrace this “emotional” reform.

First, remember that broadening the tax base allows us to lower the rate, so that everyone, poor and rich alike, will be paying a lower tax rate on their non-grocery purchases, offsetting some of the increased tax paid on groceries. Still, lower income people spend a disproportionate amount of their income on necessities like food, and they may very well come out behind even after accounting for the lower rate. Then I would recommend implementing or expanding food assistance programs (which provide free food, not just tax-free food) targeted at those who truly need it.

The bottom line is that most of us can afford to pay sales tax on our grocery purchases. Exempting groceries for everyone is a very costly and indirect way of providing assistance to the poor.

Forget for a second that most state politicians can’t entertain actual solutions to budget problems and taxing groceries is sound policy. Think about it. If a states settles on a 5% grocery tax and you purchase $100 worth, that’s an extra $5. That isn’t going to put anyone on the street and if it does, we recommend sticking to the produce section where food is considerably cheaper.

And from a more practical standpoint, it certainly makes more sense than taxing shoe shines and jugglers.

Broadening the Sales Tax Base in Nebraska is the Right Idea [Tax Foundation]

Sometimes Billionaires Get Bad Tax Advice, Just Like Us!

It’s probably safe to say that billionaire hedge fund manager Leon Cooperman doesn’t get poor service very often. As the founder of Omega Advisors and #655 by Forbes‘ last count, the man has arguably earned the right to demand only the best, especially when it comes to something as important as tax services.

Howthat Cooperman is just the latest billionaire to have tax issues (McCombs, Anschutz have had troubles recently) that might cause a less prudent mega-rich person to flip their lid (e.g. Ted Turner, Steve Jobs).

Cooperman recently received a letter from the IRS informing him that despite the generous gift of $43 million to his own foundation, the contribution could not be allowed because the donation was a non-marketable security made to a private foundation, which is not allowed by the IRS. Had he made the donation to say, NORML (he looks like he could get behind it, couldn’t he?), or some other public charity everything would have been hunky-dory.


Unfortunately for Mr Cooperman, this isn’t the case and the IRS sent him a bill for $14 million in back taxes and $5 million in penalties. Understandably, this aggression will not stand and the “plain-speaking” Coop has taken the case to court to insist that he relied on his accountants to get this shit right. It’s complicated, after all. It’s not about the money, it’s the principle. Coop would gladly schlep in suitcases of consecutively numbered hundos to settle this here and now but the penalties are uncalled for and he’s bound and determined to prove that. But who actually is to blame?

The lawsuit says Cooperman’s two personal returns claiming the deductions were prepared by his longtime accountant, Mark I. Gittelman, a CPA with Gittelman & Co., Clifton, N.J. The formal appraisals to support the claimed deductions were done by RSM Business Services and Duff & Phelps, Cooperman’s suit adds.

[…]

McGladrey does tax work for other Cooperman entities, including his hedge fund, Omega Advisors. Cooperman told Forbes that McGladrey knew he was planning to donate a nonmarketable security to his private foundation and take a deduction when the firm rendered its appraisal for a fee that Cooperman said was about $20,000.

Again, the money isn’t important but for crissakes, McGladrey, you just don’t half-ass your work for Leon Cooperman. Forbes was all over this issue back in ’04. Where were you in 2004? Stumping for John Kerry?

Of course we all know where this is eventually going – litigation! When rich people get wronged, someone inevitably pays and it sounds like LC is happy to sit tight and let the tax court do its thing. Once that’s resolved, he’ll turn his sights towards the responsible parties:

Cooperman clearly is thinking about malpractice litigation. He acknowledged McGladrey is likely to assert it didn’t prepare or sign the tax returns with the disallowed deductions, although the firm’s formal appraisal was attached.

Best of luck to everyone involved!

Billionaire Leon Cooperman: I Got Bad Tax Advice [Forbes]

TurboTax Jockey Tim Geithner Says Tax Increases Won’t Hurt Small Businesses a Bit

The top individual tax rate is scheduled to jump to 39.6% on January 1, 2011. To those of us who do private business tax returns for a living, one effect is obvious: this will raise the tax rate on LLC and S corporation income.

But now Treasury Secretary Tim Geithner says that all my small business clientsthy rich law partners and CEOs (my emphasis):

Ninety-seven percent of small businesses in this country would not pay a penny more due to letting these upper-income tax rates expire.

Now some have argued that even if only a few percent of small business owners make over $250,000, these few make up a vast amount of supposedly small business income.

This argument apparently counts anyone who receives any type of partnership or business income as if they were a small business.

By this standard, every partner in a major law firm and every principal in a major financial institution would count as a separate small business. A CEO who has board fees or speech fees would also count as a small business owner under this overly broad definition.

Well yes, Timmy, “some” have argued for that “overly broad definition” — your friends who say 97% of small businesses won’t be affected by the scheduled tax increase. A 2009 report by the Center on Budget and Policy Priorities is a source of the talking point that only a tiny fraction of businesses will be affected by the expiration of the tax increase. They define a small business 1040 as:

…any tax unit that receives any income (or loss) from a sole proprietorship, farm proprietorship, partnership, S corporation, or rental income.

So while a CEO who has board fees will count as a separate small business — as will President Obama, for that matter — so will every taxpayer that has a schedule C, schedule E or Schedule F. Your office Mary Kay girl or Shacklee dealer counts as a small business. Everybody who moonlights and reports their income is a small business. Everybody who rents out a duplex or vacation home counts, as does every taxpayer who holds, even briefly, an interest in a publicly-traded oil and gas partnership.

So how much small business economic activity will be hit by the increase in the top rate? A lot more than 3%. The center-left Tax Policy Center estimates that 44.3% of taxable income of these “small businesses” will be hit with next year’s scheduled tax increase (hat tip: Howard Gleckman). That seems low, if anything, based on what I see in practice.

It’s the successful, growing and profitable S corporations and partnerships that push their owners into the top tax brackets. Growing businesses typically distribute only enough income to owners to cover taxes — either by inclination or by agreements with lenders. Their remaining earnings go into growing the business or paying off the bank. If you increase their taxes, it either reduces growth and hiring or their ability to service their debt — neither of which does much for the economy.

When Tim Geithner says that the only people who will get hit by his tax increase are rich lawyers and director fee millionaires, it may tell us something about his social world. It tells us nothing about how the tax increase will hit business owners.

Those IRS Shotguns Are Seeing Some Action

When Young Buck woke up yesterday morning, he probably wasn’t expecting IRS agents armed to the teeth barging in and taking everything in sight.

But according to TMZ, that’s exactly what happened.

According to Young’s rep, IRS agents rolled up to the platinum-selling rapper’s house in Nashville this morning to go on a repossession rampage over the alleged tax debt — seizing assets like recording equipment, jewelry, furniture, his platinum wall plaques … and even his kids’ PlayStation.

Allegedly YB owes $300k in back taxes which isn’t the largest sum but it’s sizable enough. When TMZ asked Mr Buck how he got himself into such a pickle he responded, “This IRS situation came about because I trusted accountants, lawyers, and managers to handle my business for me while I focused on making music. From now on, I am going to stay on top of my own business.”

Hopefully this doesn’t mean that the music doesn’t suffer like the business did. We can’t imagine such a huge blow to the culture.

Here’s Why Nikki Haley’s Late Tax Returns Aren’t a Big Deal

Reportedly, South Carolina gubernatorial candidate Nikki Haley likes to cite her experience as an accountant on the campaign trail.

That’s all well and good but now there are reports all over the web that Ms Haley has a helluva time filing her taxes on time and that she and her husband racked up some fines because of their tardiness. This, of course, has people freaking out because A) she’s running for public office and B) because she’s an accountant.


The AP reports, “Tax records released Wednesday by Haley’s campaign show she and her husband have filed their taxes late since at least 2004. Haley is a fiscal conservative and tea party favorite who cites her experience as an accountant on the campaign trail. The state legislator and her husband have been fined nearly $4,500 over five years. Haley’s spokesman Rob Godfrey says the Haleys filed extensions when necessary and have paid what was required.”

What the AP doesn’t tell you, that everyone in the biz knows, is that accountants like Haley likely don’t know a damn thing about taxes. There’s nothing to indicate that she has work experience as a tax accountant. It’s a common misconception amongst non-beancounters that accountant = tax genius. Obviously this is bullshit and that the truth of the matter is that most non-tax accountants would rather chew broken glass than even consider picking up a Master Tax Guide.

Further, since Haley and her husband’s income has nearly tripled since the year she was elected to the SC house, they probably started using a CPA and got used to blowing off their taxes until October. Happens all the time.

Besides, since Ms Haley is endorsed by Sarah Palin and the Tea Party, this can only strengthen her base with these people. They only wish they had the money and the fortitude to blow off their tax responsibilities like Ms Haley.

Records: SC gov candidate Haley paid taxes late [AP]

Just So You’re Aware: The IRS Won’t Allow You to Deduct Your Pot as a Medical Expense

Apparently there’s been a bit of unnecessary confusion out there about the deductibility of marijuana for medical purposes. The Wall St. Journal article that we linked to this morning discusses the problems employers are encountering wie.g. can’t use HSA funds; they don’t care if you’ve got a card, if you test positive you’re fired).

But the question of deducting the cost of your White Widow et al. that you legally purchase in states like California and Colorado has been making the rounds. After a little discussion, it’s pretty clear that the IRS is not going allow you deduct your pot for tax purposes simply because it’s still illegal at the Federal level. Doctor’s note be damned.


The confusion arose due to the following letter that was sent to New York Senator Chuck Schumer, who had sent a letter to the IRS inquiring about a constituent using a “herb” to treat migraine headaches:

Pot

Talk about a vague response from the IRS. Tax Girl explains:

As with many facets of how to treat medical marijuana for tax and other purposes, it appears that those in charge are merely tiptoeing around the question. In the letter, the term “marijuana” is never used explicitly – the term used is “herb”. While it’s my understanding that the specifics of the case involved medical marijuana used for the treatment of migraines, that isn’t specifically stated in the sanitized version of the letter. No use of “marijuana”, just the term “herb.” That could be St. Johns Wort or milk thistle as far as the IRS is concerned.

Fortunately TaxProf Paul Caron clears up for us in a couple of updates from his latest post on this issue:

Update #2: Rev. Rul. 97-9, 1997-1 CB 77, specifically precludes a medical expense deduction for medical marijuana:

An amount paid to obtain a controlled substance (such as marijuana) for medical purposes, in violation of federal law, is not a deductible expense for medical care under § 213. This holding applies even if the state law requires a prescription of a physician to obtain and use the controlled substance and the taxpayer obtains a prescription.

So the IRS in Info. 2010-0080 either was (1) signalling a retreat from its position in Rev. Rul. 97-9 by not mentioning the federal legality of the substance; (2) implicitly referring only to legal herbs (and hence not covering marijuana).

Update #3: I am told by an enterprising reporter that the herb in question in Info. 2010-0080 is Petadolex, so it appears that interpretation #2 above controls and the conclusion in Rev. Rul. 97-9 denying a medical expense deduction for medicial marijuana still obtains.

So there you have it. Regardless if you have glaucoma, cancer, HIV, chronic pain, high anxiety or any ailment that marijuana can effectively alleviate, don’t bother trying to include it on Schedule A. We’d ask the IRS to implore a little common sense here but legally, as long as marijuana remains illegal at the federal level that’s not going to happen. And from a more practical standpoint, we’re still talking about the IRS.

Don’t Bogart That Deduction: Is Medical Marijuana a Medical Expense? [TaxProf Blog]
Just Say No: Pot Not Allowed as Medical Expense [Tax Girl]