UNITED STATES OF AMERICA v. KIM is a great case to show people that mishaps and blunders happen all the time, many times at great expense and effort to the people involved.
This was a case where H. Kim, owed the government over $800,000 in taxes. In order to get its money, the government filed a motion to foreclose upon a piece of property that H. Kim owned, along with S. Kim (his son).
The government served them in June of 2006, and the Kim’s did not respond. The government then filed for an entry of default on Aug 14, 2006 with prompted both the Kim’s to answer. The court gave the Kim’s until November 14 to file answers, wth S Kim having until November 28 to respond to an action by the government.
Funniest thing happened on November 9th, 5 days before the deadline for the Kim’s, the district court granted the govts. motion for a default against S Kim, and ordered the marshals service to sell the property.
Don’t get me wrong, H. Kim owned the government the money, also he missed a number of deadlines himself, but the district court basically trampled any rights that S Kim had in the property. They told him he had until November 14th to respond, and yet entered a judgment against him on the 7th. Great justice system isn’t it.
Now, S Kim is forced to incur all sorts of attorney fees to appeal a ruling that was flawed to begin with. This brings to light an important truth of our legal system, if you don’t money, you don't have justice.
Sunday, July 29, 2007
Don’t count on those Depreciation Deductions
I can't tell you how many events/meetings/sales pitches I've attended, where the speaker is talking about the wonders of depreciation deductions. Typically they'll show you that you will be upside down on your monthly payments, but that is a good thing because. . . tadah, you get to take the depreciation write off on the property.
Being a tax dweeb, I always scratch my head and wonder, what about the passive activity loss limitations?
The taxpayers in HARMON v. COMMISSIONER are probably scratching their heads as well.
In 2001, the Harmon's incurred a 68K loss on their rental property. Logically enough, they fully deducted that loss on their return. One small problem though.
Under something called the passive activity loss rules, losses from a passive activity are not allowed unless some conditions are met. The one that a lot of us are famaliar with is that $25,000 of the losses are allowed each year, with that amount dropping by 50 cents for every dollar of adjusted gross income over $100,000.
A more favorable status is something called a real estate professional. Under the code someone could be a professional if they meet a 2 prong test:
(i) more than one-half of the personal services performed in trades or businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which the taxpayer materially participates, and
(ii) such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates.
The above time requirements really show that it isn't just attorneys who to tend to work 48 hour days, with full documentation, but high net worth types as well.
The reason I say that is the taxpayer must ultimately show that not only did they devote 750 hours to real estate work, but also that greater than 50% of the services provided by the taxpayer must be in the field of real estate. This really strains the credibility when the taxpayer is alreading working for someone else 40 hours a week.
That is exactly what happened in this case, not ony that, but the taxpayer already had 2 other jobs; one was a typical 40 hour work week job, the other was an adjunct professor at a business school. Hopefully she wasn't teaching ethics at the business school, as she testified that she only worked 8 hours a week, even though her payroll records showed she put in 2,080 hours.
You kind of have to wonder if she let her bosses know she was only working 8 hours a week.
I'll let you guess how this case turned out.
Bottom line, do not count on those real estate losses actually helping you lower your taxes unless you aren't making enough to really need the deductions, or you are legitimately devoting a lot of your time to your real estate investments.
Thursday, July 26, 2007
How the best of Plans Fail
Everyone knows about the absolute privacy that Nevada corps and offshore planning provide right?
Marketers go on to paint wonderful pictures of no one ever knowing what you are doing and you being able to have all your money grow perfectly protected, no taxes, no lawsuits, just good times sipping pina coladas on the beach!
Unfortunatly most of these privacy based plans typically come to light and rain financial chaos and destruction upon their creators.
Case in point, SPOTTS v. UNITED STATES OF AMERICA, in this case Mr. and Mrs Spotts implented what they thought was a great tax and asset protection scheme.
In 1994, they created a Nevada LLC to have their wages/commissions assigned to, then had that money flow offshore, all presumably without paying a dime in taxes. Then when they wanted to purchase a home, they had $180K of their money wired from an offshore bank to help purchase their home. They then filed a lien against their home for that amount so as to provide asset protection. Life was dreamy.
Unfortunatly maritial woes hit in 1998 and they got a divorce. Mr. Spotts divorce atty. recomended that he come clean with the IRS, and so Mr. Spotts filed amended tax returns for the years that he somehow overlooked certain amounts of income. The amount of back taxes he owed came out to be a paltry $375,000.
Our friends at the IRS, the understanding souls that they are waited until 2002 for Mr. Spotts to pay off his taxes. When they hadn't received their money, they placed a lien upon his home, and currently their is a court case to determine what portion of the home the IRS gets to take, and what portion Mrs. Spotts gets to keep (My guess is that Mrs. Spotts will probably try to file for innocent spouse relief).
What's the moral to this story? Do not use privacy as the basis of your asset protection and tax planning, there are a number of ways to use legitimate, code based, structures to help save taxes and provide asset protection. Otherwise, a spouse, significant other, partner invariably are going to get made at you and decide to reveal all to the proper authorities.
Marketers go on to paint wonderful pictures of no one ever knowing what you are doing and you being able to have all your money grow perfectly protected, no taxes, no lawsuits, just good times sipping pina coladas on the beach!
Unfortunatly most of these privacy based plans typically come to light and rain financial chaos and destruction upon their creators.
Case in point, SPOTTS v. UNITED STATES OF AMERICA, in this case Mr. and Mrs Spotts implented what they thought was a great tax and asset protection scheme.
In 1994, they created a Nevada LLC to have their wages/commissions assigned to, then had that money flow offshore, all presumably without paying a dime in taxes. Then when they wanted to purchase a home, they had $180K of their money wired from an offshore bank to help purchase their home. They then filed a lien against their home for that amount so as to provide asset protection. Life was dreamy.
Unfortunatly maritial woes hit in 1998 and they got a divorce. Mr. Spotts divorce atty. recomended that he come clean with the IRS, and so Mr. Spotts filed amended tax returns for the years that he somehow overlooked certain amounts of income. The amount of back taxes he owed came out to be a paltry $375,000.
Our friends at the IRS, the understanding souls that they are waited until 2002 for Mr. Spotts to pay off his taxes. When they hadn't received their money, they placed a lien upon his home, and currently their is a court case to determine what portion of the home the IRS gets to take, and what portion Mrs. Spotts gets to keep (My guess is that Mrs. Spotts will probably try to file for innocent spouse relief).
What's the moral to this story? Do not use privacy as the basis of your asset protection and tax planning, there are a number of ways to use legitimate, code based, structures to help save taxes and provide asset protection. Otherwise, a spouse, significant other, partner invariably are going to get made at you and decide to reveal all to the proper authorities.
Beltway Accounting
Other than a boy scout adventure over 38 years ago, I've never been to Washington D.C.
One of the more memorable individuals I've met in my life was a professional diner. His job was to invite "friends" out to dinner. Invariably the meal would be at a fairly nice resteraunt, also invariably, an industry rep, who was also a friend, would coincidentally be at the next table, and a lovely pitchfest, oops, conversation would ensue.
Just look at the following title, "In a July 25 report on the Children's Health and Medicare Protection Act, the Center on Budget and Policy Priorities found that"
Don't you just love the tite of this legislation, "Children's Health and Medicare Protection Act"? What is next, the "Fuzzy Puppy that Licks you in the face for Freedom Terrorist Torture Act"?
Then we get down to how this legislation is going to be paid for,
"The costs of the House bill are financed in part through a reduction in overpayments that Congress' expert advisory body on Medicare and the Congressional Budget Office have found are being made to private insurance companies participating in Medicare"
Did they actually put that in print?
This program is going to be financed by actually not overpaying insurance companies that are charging us too much? I think that if you asked people in Peoria about the above statement they would say that overcharging the government for Medicare payments is medicare fraud.
Can't say it enough no one cared about your money more than you do.
One of the more memorable individuals I've met in my life was a professional diner. His job was to invite "friends" out to dinner. Invariably the meal would be at a fairly nice resteraunt, also invariably, an industry rep, who was also a friend, would coincidentally be at the next table, and a lovely pitchfest, oops, conversation would ensue.
Just look at the following title, "In a July 25 report on the Children's Health and Medicare Protection Act, the Center on Budget and Policy Priorities found that"
Don't you just love the tite of this legislation, "Children's Health and Medicare Protection Act"? What is next, the "Fuzzy Puppy that Licks you in the face for Freedom Terrorist Torture Act"?
Then we get down to how this legislation is going to be paid for,
"The costs of the House bill are financed in part through a reduction in overpayments that Congress' expert advisory body on Medicare and the Congressional Budget Office have found are being made to private insurance companies participating in Medicare"
Did they actually put that in print?
This program is going to be financed by actually not overpaying insurance companies that are charging us too much? I think that if you asked people in Peoria about the above statement they would say that overcharging the government for Medicare payments is medicare fraud.
Can't say it enough no one cared about your money more than you do.
Wednesday, July 25, 2007
Tax Court Excitement
Currently playing to packed crowds in a Boston court house is the drama as to whether a sex change operation is a medical expense that can be deducted. Here is a link to a MSNBC article on the subject, picture included http://www.msnbc.msn.com/id/19793815/
Yep, tax wonks lead an exciting life.
During examination, the taxpayer (I use that term as I have no clue if I should say he or she) testified that they saw, "light at the end of the tunnel" when they had their male genitalia removed and breast implants inserted.
Ouch.
IRS cross generated compelling testimony such as that it could not have been medically necessary as the taxpayer put off the surgery until their youngest son went off to college.
Will keep you abrest of the latest details of this important case.
Yep, tax wonks lead an exciting life.
During examination, the taxpayer (I use that term as I have no clue if I should say he or she) testified that they saw, "light at the end of the tunnel" when they had their male genitalia removed and breast implants inserted.
Ouch.
IRS cross generated compelling testimony such as that it could not have been medically necessary as the taxpayer put off the surgery until their youngest son went off to college.
Will keep you abrest of the latest details of this important case.
Death of Common Sense?
When reading my updates this morning, saw that the Ways and Means Committee had a Hearing on Tax-Exempt Charitable Organizations.
When perusing this exciting testimony I cam across the following statement by the President of the Council of Foundations, in testimony to Congress:
"Let me be clear, the Council on Foundations is steadfastly opposed to the use of charitable vehicles for the support of terrorist activities at any time in any place."
Have things gone so far that we have to state the painfully obvious? What exactly caused the the CEO of the Council on Foundations to have to make such a statement?
You guessed it, in response to bureaucratic guidelines. In particular something that those in the know call U.S. D T A -T F G V B P U.S.-B C. . . seriously, Google it and laugh.
One of the better quotes from these guidelines is,
"List-checking alone (as described throughout this section) does not guarantee the safe and secure delivery of charitable funds and services in high-risk areas. For this reason, the Guidelines encourage charities to employ all reasonably available resources both when determining the level of risk in a particular charitable operation and when engaging in appropriate vetting procedures. One example of publicly available information of which charities should be aware is the Terrorist Exclusion List"
Uhhh, the govt. says list checking isn't good enough so to increase effectiveness check another list? With authors like this, is it any wonder no one really understands the rules?
When perusing this exciting testimony I cam across the following statement by the President of the Council of Foundations, in testimony to Congress:
"Let me be clear, the Council on Foundations is steadfastly opposed to the use of charitable vehicles for the support of terrorist activities at any time in any place."
Have things gone so far that we have to state the painfully obvious? What exactly caused the the CEO of the Council on Foundations to have to make such a statement?
You guessed it, in response to bureaucratic guidelines. In particular something that those in the know call U.S. D T A -T F G V B P U.S.-B C. . . seriously, Google it and laugh.
One of the better quotes from these guidelines is,
"List-checking alone (as described throughout this section) does not guarantee the safe and secure delivery of charitable funds and services in high-risk areas. For this reason, the Guidelines encourage charities to employ all reasonably available resources both when determining the level of risk in a particular charitable operation and when engaging in appropriate vetting procedures. One example of publicly available information of which charities should be aware is the Terrorist Exclusion List"
Uhhh, the govt. says list checking isn't good enough so to increase effectiveness check another list? With authors like this, is it any wonder no one really understands the rules?
Tuesday, July 24, 2007
Not so Innocent Spouse
Funny case came out today. Victoria K.M. Freulich v. Commissioner.
In this case, the wife won $5,000 at a casino. For some reason or another she didn't repor the income on her tax return (she had a memory lapse on income interest of $ 27 and dividends of $ 17 as well).
Fast forward a few years, and the death of her husband, what does she try to do? She tried to claim innocent spouse status. Basically this is where one spouse didn't know about the other spouse's tax sheningans and thus it would be unjust to make the "innocent spouse" liable for the actions of the offending spouse.
Slight problem with her defense, she was the offending spouse.
Truth is stranger than fiction.
In this case, the wife won $5,000 at a casino. For some reason or another she didn't repor the income on her tax return (she had a memory lapse on income interest of $ 27 and dividends of $ 17 as well).
Fast forward a few years, and the death of her husband, what does she try to do? She tried to claim innocent spouse status. Basically this is where one spouse didn't know about the other spouse's tax sheningans and thus it would be unjust to make the "innocent spouse" liable for the actions of the offending spouse.
Slight problem with her defense, she was the offending spouse.
Truth is stranger than fiction.
Hidden Taxes
Recently there was an article about the House passing legislation to defer a 3 percent withholding requirement for payments made by any federal, state or local governments for goods and services was about to be delayed.
Huh?
Now I like to think that I know a thing or two about taxes, but I had never heard of any such tax. Upon further investigation, the law is as simple as it is stupid. In order to raise revenue, Congress implemented the law that would impose a 3% withholding on the gross amount of any payments from a government entity to a taxpayer.
One example on the internet pretty much showed the incredible unfairness of the rule,
"For example, a small business contractor may hold one government contract which is estimated to be completed in one year for $1 million. Section 511 would require the government entity to withhold 3 percent, or $30,000, of the $1 million payment. For argument's sake, let's assume the contractor earns a 3 percent profit — which approximates the national average in construction contracts — on the project. That means the contractor would expect a profit of $30,000, or 100 percent of the amount withheld. Let's further assume that the contractor is taxed at the top corporate income tax rate — currently 35 percent. Because businesses are taxed only on their profits, the tax liability on this $1 million project would be $10,500. So in effect, the contractor would float the Federal government an interest-free loan for $19,500 on this particular project." http://www.abc.org/wmspage.cfm?parm1=6941
This is a law that needs to be wiped out.
Huh?
Now I like to think that I know a thing or two about taxes, but I had never heard of any such tax. Upon further investigation, the law is as simple as it is stupid. In order to raise revenue, Congress implemented the law that would impose a 3% withholding on the gross amount of any payments from a government entity to a taxpayer.
One example on the internet pretty much showed the incredible unfairness of the rule,
"For example, a small business contractor may hold one government contract which is estimated to be completed in one year for $1 million. Section 511 would require the government entity to withhold 3 percent, or $30,000, of the $1 million payment. For argument's sake, let's assume the contractor earns a 3 percent profit — which approximates the national average in construction contracts — on the project. That means the contractor would expect a profit of $30,000, or 100 percent of the amount withheld. Let's further assume that the contractor is taxed at the top corporate income tax rate — currently 35 percent. Because businesses are taxed only on their profits, the tax liability on this $1 million project would be $10,500. So in effect, the contractor would float the Federal government an interest-free loan for $19,500 on this particular project." http://www.abc.org/wmspage.cfm?parm1=6941
This is a law that needs to be wiped out.
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