Category: Tax

Who Wants to Buy John Daly’s House (Sans Kegerator)?

If you feel like nothing in life is ever certain, know this – John Daly will always be a weight fluctuating, chain-smoking, boozehound. And every once in awhile, he’ll have some serious money trouble or just go completely broke.

This is usually followed up with a major win which is then followed up by a total blow-up at the next tournament that may or may not involve Big John ending up passed out pantless on the 18th green in the middle of the night.


The guy has managed to make $9 million throughout his career yet still owes the IRS over a $1 million in back taxes for ’07 and ’08, according to a lien filed with filed by the Service with Shelby County.

His house in Memphis is apparently for sale, for just a smidge under $700k. So if you’re in the market, help the guy out.

Judging by the pics, you’ll have to schlep in your own kegerator and you’ll likely have to replace the carpet due to the ubiquitous cigarette burns but it still looks like a pretty nice pad.

IRS grips, rips golfer John Daly [Tax Watchdog]

Don’t Get Too Anxious to Stuff Just Anything into Your IRA

Individual Retirement Accounts are a taxpayer’s dream, with constraints. The income they earn isn’t taxed until you distribute it; with a Roth IRA, it may never be taxed. It’s only natural for taxpayers to stuff anything they can that might generate income into an IRA.

That can be a terrible mistake.


Not everything is tax free in an IRA. Interest, dividends, capital gains – that stuff is fine. But beyond that things can get ugly.

Most problems arise when taxpayers try to use their IRAs to finance business ventures. Because IRAs are shirttail relatives of qualified pension and profit sharing plans, many pension plan rules, like those for prohibited transactions, bedevil IRAs, with taxes that can exceed 100%.

When an IRA owns an interest in a “passthrough” entity – usually a partnership, because most S corporations can’t have IRA shareholders – another complication arises. The tax law frowns on tax-exempt competition for taxable business. The frown takes the form of the “unrelated business income tax,” or UBIT. The UBIT hits otherwise tax-exempt entities with an income tax on their “unrelated business income.”

If an IRA owns an interest in a partnership (most LLCs are taxed as partnerships) that operates a trade or business, the IRA’s LLC income may be subject to UBIT, which applies at corporate tax rates. UBIT can also apply to an IRA if it owns an interest in mortgaged rental real estate. Some IRAs even run into UBIT by investing in publicly-traded energy partnerships, like Buckeye Partners, LP. Many states also have unrelated business income taxes.

The partnership is required to break out unrelated business taxable income and report it to the IRA. The IRA in turn must provide a tax identification number to the partnership to make it easier for the IRS to follow the UBIT to the IRA.

When an IRA is subject to UBIT, it can cause some awkward moments between the IRA investor and the trustee. Most IRA trustees want nothing to do with filing Form 990-T, the UBIT return. Of course the IRA owner doesn’t like the idea either, but it needs to be done. Having income tax in an IRA is especially ugly when it’s a Roth IRA, which normally would otherwise be tax-exempt forever, inside and out.

The threshold for filing a 990-T is “gross income” of $1,000 or more. Gross income is normally higher than taxable income – it is the IRA’s share of gross receipts less cost of goods sold, not reduced for any other expenses.

So be careful what you stuff into your IRA. Just because you can put something in there doesn’t mean you should.

Joe Kristan is a shareholder of Roth & Company, P.C. in Des Moines, Iowa, author of the Tax Update Blog and Going Concern contributor. You can see all of his posts for GC here.

Getting Regular Sex in Denmark May Have Cost Søren Hansen About $2.6 Million

Back in March we told you about non-Phil/Tiger golfer Søren Hansen, who was looking at jail time for dodging about 10 million kroner in taxes.

He managed to avoid the Danish joint but a judge did order him to pay 8 million in back taxes and an additional 8 million in fines. This works out to $2.6 million which is around what Tiger Woods spends on hookers in a weekend. So in other words – a chunk.


Hansen maintained throughout the ordeal that he was not a resident of Denmark because he changed his residence to Monaco in 1999 (it’s on his Wikipedia page for crissakes! What’s it going to take?!?) and thus not subject to the tax. The judge didn’t buy it because “he used his summerhouse in Hornbæk for residential purposes, as well as stayed over in his girlfriend’s Copenhagen apartment regularly.”

Obviously Hansen could have moved his g/f to Monaco to avoid all the trips back but that would have put a serious damper on the Monaco tail situation.

Golfer hit for 16 million kroner [Copenhagen Post]

You Can Forget That Deal on the Estate Tax

Yes, the brain trust known as the U.S. Senate has managed to prolong the agony on the estate tax. There was a deal on the table as of yesterday but you can forget it! Hard to believe this could happen. Was it a fundamental disagreement on the proposal? Was it because everyone was broken up that Arlen Specter?


No, it’s mostly because some people (the R’s) don’t like that other people (the D’s) are being fraidy cats about not having enough votes:

Senate Minority Whip Jon Kyl (R-Ariz.) said the accord, which was all but forged a week ago, began to dissolve Monday night and broke down Tuesday after talks between leaders in both parties.

After talks with Senate Finance Chairman Max Baucus (D-Mont.) and Senate Minority Leader Mitch McConnell (R-Ky.), they scrapped a plan to move forward with the tax that expired at the end of 2009.

The reasoning, Kyl said, is that Senate Democrats aren’t allowing any legislation to reach the floor that doesn’t have support from the majority of its members.

“We no longer have an agreement because the Democratic side has decided that unless a matter has a guaranteed majority of Democratic votes going in, they’re not going to allow it on the floor, at least not voluntarily,” he said. “So we have to find a way to get a reasonable permanent estate tax reform to the floor where members can vote on it.”

For crissakes. This is this biggest case of “I’m taking my ball and GOING HOME” we’ve seen this week.

Joe Kristan does put the whole thing in perspective however, “Congress has been botching the estate tax for almost ten years now; why should they start getting anything right now?”

Kyl: Senate deal off on estate tax [On the Money/The Hill via TaxProf]
Estate Tax Deal? Not so Fast [Tax Update Blog]

Imprisoned Russian Billionaire Shows Americans How To Protest Tax Injustices

If you’re formerly the richest man in Russia and you’ve been wrongfully imprisoned (sayeth he) you’re not going to take this shit lightly. Flying a plane into a building is cowardly; shooting at another person – what does that accomplish?; Bulldozer? That guy is an idiot.

No, if you’re seriously going to show these tax happy bastards that you mean business, only explicit self-loathing will suffice.


Mikhail Khodorkovsky is serving an eight year prison sentence for tax evasion and fraud and he was recently dealt a blow in his attempt to land a new trial:

Mikhail Khodorkovsky has gone on hunger strike in protest at an order extending his detention ahead of a new trial. In a statement quoted by his lawyer, Khodorkovsky said the order violated legal amendments that had been approved by President Dmitry Medvedev. He has vowed to continue his protest until President Medvedev confirms that he is “fully aware” of the situation.

All he wants an acknowledgment from the President of the country and then he’ll get back to eating with a spork.

Russian oil tycoon Khodorkovsky on hunger strike [BBC]

In Washington State, a Kit-Kat Bar is Not Considered Candy for Sales Tax Purposes

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Listen up people. Since many of you regularly get either your breakfast, mid-morning snack, lunch, pre-midafternoon snack, afternoon snack, pre-leaving work snack or – during busy season – your dinner out of a vending machine this could be cause for concern.

States are strapped for cash so t��������������������ve you joy is a logical and effective conclusion. Accordingly, sweets, sodas, booze, cigarettes, strippers are all fair game. Some of these are old hat (e.g. booze, cigs) and some are becoming more popular (e.g. candy, soda). Washington state is rolling out its candy tax on June 1, 2010 and as you might have guessed, it’s not nearly as simple as you would think. There are many questions.


First off, candy needs a definition, so Department of Revenue de Washington presents its version:

“Candy” means a preparation of sugar, honey, or other natural or artificial sweeteners in combination with chocolate, fruits, nuts, or other ingredients or flavorings in the form of bars, drops, or pieces. Candy does not include any preparation containing flour. Candy does not require refrigeration.

OFTLOG. Couldn’t it just boil down to: “Anything handed out on Halloween”? But wait, the questions get better:

Are bags of trail mix containing small amounts of candy subject to sales tax?
No, trail mix is not considered to be candy if it contains only small amounts of chocolate chips or other candy.

Are sweetened breakfast cereals considered candy if they do not list flour as an ingredient?
No. Breakfast cereals are non-taxable food, even if they are sweetened and do not list flour as an ingredient.

What about prepackaged combination packs of candy? I sell bags of mixed candy bars for one, non-itemized price. Some of the bars contain flour, while others meet the definition of candy. Do I collect sales tax on the bags of candy?
The sale of the bags of candy represents a bundled transaction. See RCW 82.08.190 for more information on bundled transactions. Because one of the items in this bundled transaction is subject to sales tax, the entire bundle of products is subject to sales tax. See RCW 82.08.195 for more information.

However, you can exempt the bundled transaction from sales tax if you demonstrate that the purchase price or sales price for the taxable candy is 50% percent or less of the total purchase price or sales price of the bundled food products. See RCW 82.08.190(4) for information about how this 50% exception works.

Are nicotine gum and analgesic gum candy?
They are not candy, but they are subject to sales tax because they are over-the-counter drugs. Over-the-counter drugs refer to any drug sold with a label that identifies the product as a drug and includes either of the following:

A “drug facts” panel; or
A statement of the “active ingredient(s)” with a list of those ingredients contained in the compound, substance, or preparation.

Nicotine gum and analgesic gum (gums containing aspirin) meet the description above and should be treated as taxable over-the-counter drugs unless purchased with a prescription. See RCW 82.08.0281 for more information regarding over-the-counter drugs.

How are products in the baking aisle treated?
Below is information on selected baking aisle products [we’re skipping the table but fact that there is a table to explain the candy/non-candieness of the baking aisle is ridiculous]

Are fruit snacks such as fruit roll-ups and fruit leathers subject to sales tax as candy?
Fruit roll-ups and fruit leathers are subject to sales tax if they contain any sugar, honey, or other natural or artificial sweeteners and do not contain flour or require refrigeration. The fruit added to such item is not considered a sweetener (fruit is not intended to refer to concentrated fruit juices).

Are sweetened dried fruits candy?
Yes, dried fruits are candy when they are sweetened with natural or artificial sweeteners. This is true whether the product is sold prepackaged or in a bulk bin, by weight. Unsweetened fruits are not candy.

Is halvah candy?
Halvah is a confection usually made from crushed sesame seeds and honey, but in some instances may be made with grain based ingredients. It has been a traditional dessert in India, the Mediterranean, and the Balkans. Halvah that is based on nut butters (or seeds) and contains no flour is candy. Halvah that is flour-based is not candy. You should read the ingredient label if you are unsure.

Are energy bars and protein bars candy?
Energy bars and protein bars that contain no flour and require no refrigeration are taxable as candy. Bars that contain flour or require refrigeration are not candy.

Are cough drops subject to sales tax as candy?
Cough drops are not taxable as candy if they have either:

A “drug facts” panel; or
A statement of the “active ingredient(s)” with a list of those ingredients contained in the compound, substance, or preparation.

In such situation, the cough drops represent over-the-counter drugs. These cough drops are subject to sales tax unless purchased with a prescription. See RCW 82.08.0281 for more information regarding over-the-counter drugs.

Cough drops that do not have either of the above are candy.

Some takeaways: 1) Careful with the trail mix that has lots of M&Ms, it could possibly be taxable 2) Lucky Charms, et al. are safe 3) If anything has the word “gum” in it, it’s up for debate (e.g. Nicotine gum). Strangely enough, condom gum, edible undies, etc. is not mentioned 4) Fruit Roll-ups, energy bars, halvah and cough drops are all in the gray area.

And in case that doesn’t clear it up, there’s an entire spreadsheet that you can refer to (file below) but no, a Kit-Kat bar is not considered candy. Neither is a Milky Way. Got it?

Quick Tax Quiz: When Is a Candy Bar Not a Candy Bar? [Tax Policy Blog]
Washington State Candy List

Just to Be on the Safe Side, the Dayton, Ohio H&R Block Should Be Prepared for More Trouble

If you figure one H&R Block employee was nearly gunned down because they were being audited, God knows what an indictment would mean for the safety of their employees:

A federal grand jury has indicted West Carrollton club owner and Brookville resident Stanley W. Combs III on the charges of one count of operating an illegal gambling business and four counts of making false statements on federal income tax returns…

…The indictment alleges Combs substantially under-reported the income he received as the owner and operator of Fraternal Order of Orioles, Nest 293 at 842 Watertower Lane in West Carrollton and a related entity at 10955 Lower Valley Pike in Medway, Ohio.

There’s no indication that an H&R Block employee advised this particular alleged tax dodger but better to be prepared.

Related: Did anyone tell these crazies in Ohio that they can get help FOR FREE tomorrow? For crissakes, there’s even one in Dayton at 200 W. Second St. Pull yourself together Buckeye State.

Club owner indicted for illegal gambling, income tax fraud [Dayton Daily News]

One Diligent CPA Forced the IRS to Use a ‘Staggering’ Amount of Resources

Sure, NYU has produced lots of fancy-pants tax lawyers. And many high-powered big-school tax accountants haunt the cubicles of the Final Four accounting firms. But if driving the IRS to distraction is a mark of tax distinction, an obscure Kansas City attorney/CPA, formerly of Grant Thornton and Coopers and Lybrand, is a true tax all-star.


Or was. A federal judge this week made it inconvenient for GT alum Allen R. Davison to pursue his tax practice by enjoining him from marketing some of his most creative ideas:

Davison is hereby enjoined from organizing, establishing, promoting, selling, offering for sale or helping to organize, establish, promote, se any tax plan, as addressed herein, involving sham parallel C management companies, sham 412(i) plans, sham flock contracts or any other illegal tax scheme, plan, or device, even if not specifically addressed herein. Additionally, Davison shall not organize, establish, promote, sell, offer for sale or assist in any financial or tax related arrangement without submitting in writing to an IRS designee, a detailed plan explaining the financial or tax arrangement and all steps necessary for the arrangement to be legal under the tax code.

That would all be rather inconvenient for a practitioner. Why are the feds so down on Mr. Davison? From the injunction order:

Davison’s numerous, complex, ever-changing, tax-fraud schemes and his deliberate efforts to disguise his true involvement in the promotion of these tax-fraud schemes have required the IRS to expend a “staggering” amount of resources on discovering and combating these schemes. If this outlay of resources continues – and it almost certainly will continue in the absence of an injunction barring Davison from offering tax advice without significant restraint, then these resources will not be available to service honest tax paying Americans. Nor will these resources be available to investigate other promoters of tax-fraud schemes.

What were these “schemes”? Some of them used “management fees” to shift income from taxable businesses to sham S corporations owned by tax-exempt ESOPs or Roth IRAs. Others involved improper pension plans. But good old Midwestern farm ingenuity was behind what may be his most creative plan:

Davison drafts purported flock contracts for his clients. (Tr. 398:21-399:4). He argues that by executing these agreements, his clients become farmers, who are eligible to claim deductions for the cost of purchasing a flock of layer hens during the tax year in which that cost is incurred, pursuant to Revenue Ruling 60-191. (Tr. 412:10-20; PX 165). That revenue ruling provides “that farmers employing the cash method of accounting may deduct the cost of baby chicks and egg laying hens in the year of payment therefor, provided such method is consistently followed and clearly reflects income.”

The judge found that Mr. Davison has an overly-inclusive view of what “farming” means. The judge said that a guy with dirty boots who actually fed and raised chicks might be a farmer, but a “self-employed insurance salesman,” for example, who loaned money to a real farmer, did not.

There are many fascinating threads here, but let’s just hit three for now:

• Mr. Davison began selling many of these ideas while working for Grant Thornton, and according to the court order, marketed them through a network of CPA firms set up by GT alums. Networking pays!

• The elaborate system of preparer registration, testing and continuing education that IRS Commissioner Shulman is ramming through will spend enormous resources making honest and competent preparers jump through hoops; they would have done nothing to stop Mr. Davison. Shulman’s plan will spend money on driving honest preparers crazy with paperwork rather than chasing scammers.

• The cash-basis chicken flock technique that is outrageous for an insurance salesman is hunky-dory when done by a wealthy farmer. Because America Needs Farmers!

Joe Kristan is a shareholder of Roth & Company, P.C. in Des Moines, Iowa, author of the Tax Update Blog and Going Concern contributor. You can see all of his posts for GC here.

Today in Tax-Related Violence: Man Shoots at H&R Block Employee for a Mistake on His Tax Return

It’s been far too long since we’ve heard about violent and/or completely irrational behavior as it relates to taxes, hasn’t it?

Thank God for Ohio, where bulldozers are commonly used to show disdain for pretty much anything. This time it’s firearms.

Police said a man opened fire on a woman after she apparently made a mistake on his taxes. Officers said the man threatened to get revenge on the H & R Block employee because he was audited by the IRS. Dayton police said they [sic] shooter fired several shots into the tax worker’s car. However, she managed to dodge the bullets.

There are lots of things that might conjure up murderous rage but a mistake on a tax return prepared by a H&R Block employee? The good news is that this lunatic is still on the loose somewhere.

Police: Shots Fired At Tax Worker [WHIOTV]

For Everyone in North Jersey, Mass and Rhode Island That Squandered the Last Four Weeks Away, Your Tax Deadline Is Tomorrow

If you were (un)lucky enough to live in one of the flood ravaged counties in North Jersey, Mass, or the entire Ocean State, hopefully you remembered that your extended period of procrastination ends tomorrow.


Yes, unfortunately the last four weeks have flown by and we’re sure that some of you have managed to piss away this time not preparing your tax return. Do yourself a favor and file the extension. You’re hopeless.

Relax, here’s the form.

Closely-Held Corporations May Want to Take a Bullet Over the Pending Dividend Tax Hike

As a role model, Andrew Jackson has serious shortcomings, not least his penchant for genocide. But some of his policies are back in vogue, like the casual destruction of the national banking system. Taxpayers may be choosing to be like Andy in another way before the end of t had the bad fortune to get crossways with Charles Dickinson, one of the best pistol shots in Tennessee, when dueling was still fashionable. He met his antagonist across the state line in Kentucky, where duels were legal. Jackson was serious about this one, so he decided to take all the time he needed to do Dickinson in. Given Dickinson’s marksmanship, that meant accepting a bullet. Sure enough, Dickinson’s shot hit home:

The bullet struck him in the chest, where it shattered two ribs and settled in to stay, festering, for the next 39 years. Slowly he lifted his left arm and placed it across his coat front, teeth clenched. “Great God! Have I missed him?” cried Dickinson. Dismayed, he stepped back a pace and was ordered to return to stand on his mark.

Blood ran into our hero’s shoes. He raised his pistol and took aim. The hammer stuck at half cock. Coolly he drew it back, aimed again, and fired. Dickinson fell, the bullet having passed clear through him, and died shortly afterward.

Taxpayers owning C corporation stock might also want to take a bullet, figuratively speaking, this year. That’s because the tax rate on dividends will either leap or soar in 2011.

The increase in the dividend rate is a consequence of the scheduled expiration of the 2001 Bush tax cuts after this year. Prior to the Bush administration, dividends were taxed as ordinary income. As dividends are distributions of corporate income already taxed at a corporate rate as high as 35%, that meant a combined rate of 57.75%. The Bush tax cuts tied the dividend rate to the capital gain rate, now 15%.

When the Bush tax cuts expire, the capital gain rate is set to return to 20%. But without Congressional action, dividends will again be taxed as ordinary income. Given the size of the deficit, the poisonous election-year political atmosphere, and that the President promised to hold the dividend rate to 20%, it’s likely that dividends will be taxed as ordinary income in 2011. That would means a 164% increase the top dividend rate.

But wait, there’s more! Starting in 2013, Obamacare will tack another 3.8% to the top rate on investment income, resulting in a top dividend rate of of 43.4%, making the total tax increase over 189%.

This makes it tempting to take the bullet – a big 2010 dividend out of a closely-held C corporation. It will be especially attractive for shareholders who lack the ability to suck out corporate cash using the usual tricks of shareholder bonuses or rent payments.

Yes, it means taking a bullet. Taking dividends out of closely-held corporations breaks the rules of the C corporation tax planning crib book. Taxpayers go to elaborate lengths to avoid taking income before they have to. But a 189% tax increase might be enough to make some taxpayers take the bullet, like Andy, for the greater good.

Houston Tax Prep Shop Duped Homeless People into Taking Free Cash

If somebody is handing out free money, why would you ask questions?


Some favorite moments:

Homeless dude: “Here’s a stack of cash. It’s yours.”

Homeless dude: “Boom, it sounds good, so you’re going to jump on it.”

Tax worker: “Your return is $1,266.”
Homeless person: “How can that be?”
Tax worker: “Um, uh, for housekeeping.”
Homeless person: “This isn’t going to get me in trouble or anything?”
Tax worker: “Nuh uh (no), because it was cash, you know, you could have done housekeeping at your friends, family.”

Reporter: “You had no idea this was going on?
Dubious businessman: “No sir.”
Reporter: “And you expect us to believe that?”
Dubious businessman: “Yes.”
Reporter: “And you expect our viewers to believe that?
Dubious businessman: “Yes.”

Houston tax office filing bogus returns for homeless people to make big bucks [KHOU.com]