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A few things you may have missed this weekend while watching Spain put on a clinic.

New Jersey Governor Chris Christie wanted a 10% tax cut included in the latest state budget, but didn’t get one. So as punishment, all state lawmakers are required to spend a 100-degree afternoon in downtown Trenton so Christie can give them a talking to. Good times.

Dwight Howard wants the Orlando Magic to trade him to the Brooklyn Nets. So to clarify: not only is he demanding to be sent to a team that won all of 22 games last season, but assuming he relocates from Florida to New York, he’s also insisting on a 8.82% salary cut in the form of increased state income taxes. Smart fella’.

How to protect yourself against tax identity theft.

Robert Wood over at Forbes discusses the tax implications of the Katie Holmes – Tom Cruise divorce. As an aside, many people are using the divorce as an opportunity to renew their attack on Scientology —  the new-age religion of which Cruise is a devote —  blaming Cruise’s faith for the split. These critics call Scientology a farce, pointing out its spurious genesis and  “outrageous” belief system, with some high-profile people going so far as to call the religion “evil.”

I, for one, find these types of attacks on any religion — fringe as it may be — to be rather narrow-minded.  When I was a kid, my parents taught me all about another so-called “wicked” guy, who had long hair and some wild ideas, and who didn’t always do what was right, but today he has countless followers who love and worship him. I’m drawing a blank on the guy’s name right now, but I remember he used to drive a blue car.

As an aside to my aside, I had dinner with some clients/friends on Friday night, and a spirited debate broke out over what I always thought was a no-brainer of a question: What is the most homoerotic movie scene in cinematic history?

Now, I’d been of the belief that this was an open-and-shut case, with the “Apollo Creed/Rocky Balboa frolicking in the shore break” scene from Rocky III as the only acceptable answer:

My client, however, insisted that the famous Tom Cruise volleyball scene from Top Gun took the prize:


 

Decide for yourself, but I hope Mike and I can come to an agreement on this soon, as this is the type of argument that can irreversibly damage the CPA-client relationship.

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 [Ed note: What follows is a letter penned by renowned horror writer Stephen King to The Daily Beast, reprinted here in its entirety, in which King pleads for tax rates on the rich to be raised. Regardless of what side of the political fence you reside on, the letter is worth a read, as King provides some poignant commentary concerning the growing dissension towards America’s wealthiest 1%. Plus, the guy did write The Shining, and that book kicks ass. Be warned: if you don’t like strong language, don’t get mad at me. Take it up with King.]

Chris Christie may be fat, but he ain’t Santa Claus. In fact, he seems unable to decide if he is New Jersey’s governor or its caporegime, and it may be a comment on the coarsening of American discourse that his brash rudeness is often taken for charm. In February, while discussing New Jersey’s newly amended income-tax law, which allows the rich to pay less (proportionally) than the middle class, Christie was asked about Warren Buffett’s observation that he paid less federal income taxes than his personal secretary, and that wasn’t fair. “He should just write a check and shut up,” Christie responded, with his typical verve. “I’m tired of hearing about it. If he wants to give the government more money, he’s got the ability to write a check—go ahead and write it.”

Heard it all before. At a rally in Florida (to support collective bargaining and to express the socialist view that firing teachers with experience was sort of a bad idea), I pointed out that I was paying taxes of roughly 28 percent on my income. My question was, “How come I’m not paying 50?” The governor of New Jersey did not respond to this radical idea, possibly being too busy at the all-you-can-eat cheese buffet at Applebee’s in Jersey City, but plenty of other people of the Christie persuasion did.

Lobbyist Grover Norquist responds to King and begs to differ, ‘for f@%&’s sake!’

Cut a check and shut up, they said.

If you want to pay more, pay more, they said.

Tired of hearing about it, they said.

Tough shit for you guys, because I’m not tired of talking about it. I’ve known rich people, and why not, since I’m one of them? The majority would rather douse their dicks with lighter fluid, strike a match, and dance around singing “Disco Inferno” than pay one more cent in taxes to Uncle Sugar. It’s true that some rich folks put at least some of their tax savings into charitable contributions. My wife and I give away roughly $4 million a year to libraries, local fire departments that need updated lifesaving equipment (Jaws of Life tools are always a popular request), schools, and a scattering of organizations that underwrite the arts. Warren Buffett does the same; so does Bill Gates; so does Steven Spielberg; so do the Koch brothers; so did the late Steve Jobs. All fine as far as it goes, but it doesn’t go far enough.

What charitable 1 percenters can’t do is assume responsibility—America’s national responsibilities: the care of its sick and its poor, the education of its young, the repair of its failing infrastructure, the repayment of its staggering war debts. Charity from the rich can’t fix global warming or lower the price of gasoline by one single red penny. That kind of salvation does not come from Mark Zuckerberg or Steve Ballmer saying, “OK, I’ll write a $2 million bonus check to the IRS.” That annoying responsibility stuff comes from three words that are anathema to the Tea Partiers: United American citizenry.

And hey, why don’t we get real about this? Most rich folks paying 28 percent taxes do not give out another 28 percent of their income to charity. Most rich folks like to keep their dough. They don’t strip their bank accounts and investment portfolios. They keep them and then pass them on to their children, their children’s children. And what they do give away is—like the monies my wife and I donate—totally at their own discretion. That’s the rich-guy philosophy in a nutshell: don’t tell us how to use our money; we’ll tell you.

The Koch brothers are right-wing creepazoids, but they’re giving right-wing creepazoids. Here’s an example: 68 million fine American dollars to Deerfield Academy. Which is great for Deerfield Academy. But it won’t do squat for cleaning up the oil spill in the Gulf of Mexico, where food fish are now showing up with black lesions. It won’t pay for stronger regulations to keep BP (or some other bunch of dipshit oil drillers) from doing it again. It won’t repair the levees surrounding New Orleans. It won’t improve education in Mississippi or Alabama. But what the hell—them li’l crackers ain’t never going to go to Deerfield Academy anyway. Fuck ’em if they can’t take a joke.

Here’s another crock of fresh bullshit delivered by the right wing of the Republican Party (which has become, so far as I can see, the only wing of the Republican Party): the richer rich people get, the more jobs they create. Really? I have a total payroll of about 60 people, most of them working for the two radio stations I own in Bangor, Maine. If I hit the movie jackpot—as I have, from time to time—and own a piece of a film that grosses $200 million, what am I going to do with it? Buy another radio station? I don’t think so, since I’m losing my shirt on the ones I own already. But suppose I did, and hired on an additional dozen folks. Good for them. Whoopee-ding for the rest of the economy.

Tired of hearing about it, they said. Tough shit for you guys, because I’m not tired of talking about it. I’ve known rich people, and why not, since I’m one of them?

At the risk of repeating myself, here’s what rich folks do when they get richer: they invest. A lot of those investments are overseas, thanks to the anti-American business policies of the last four administrations. Don’t think so? Check the tag on that T-shirt or gimme cap you’re wearing. If it says MADE IN AMERICA, I’ll … well, I won’t say I’ll eat your shorts, because some of that stuff is made here, but not much of it. And what does get made here doesn’t get made by America’s small cadre of pluted bloatocrats; it’s made, for the most part, in barely-gittin’-by factories in the Deep South, where the only unions people believe in are those solemnized at the altar of the local church (as long as they’re from different sexes, that is).

The U.S. senators and representatives who refuse even to consider raising taxes on the rich—they squall like scalded babies (usually on Fox News) every time the subject comes up—are not, by and large, superrich themselves, although many are millionaires and all have had the equivalent of Obamacare for years. They simply idolize the rich. Don’t ask me why; I don’t get it either, since most rich people are as boring as old, dead dog shit. The Mitch McConnells and John Boehners and Eric Cantors just can’t seem to help themselves. These guys and their right-wing supporters regard deep pockets like Christy Walton and Sheldon Adelson the way little girls regard Justin Bieber … which is to say, with wide eyes, slack jaws, and the drool of adoration dripping from their chins. I’ve gotten the same reaction myself, even though I’m only “baby rich” compared with some of these guys, who float serenely over the lives of the struggling middle class like blimps made of thousand-dollar bills.

In America, the rich are hallowed. Even Warren Buffett, who has largely been drummed out of the club for his radical ideas about putting his money where his mouth is when it comes to patriotism, made the front pages when he announced that he had stage-1 prostate cancer. Stage 1, for God’s sake! A hundred clinics can fix him up, and he can put the bill on his American Express black card! But the press made it sound like the pope’s balls had just dropped off and shattered! Because it was cancer? No! Because it was Warren Buffett, he of Berkshire-Hathaway!

I guess some of this mad right-wing love comes from the idea that in America, anyone can become a Rich Guy if he just works hard and saves his pennies. Mitt Romney has said, in effect, “I’m rich and I don’t apologize for it.” Nobody wants you to, Mitt. What some of us want—those who aren’t blinded by a lot of bullshit persiflage thrown up to mask the idea that rich folks want to keep their damn money—is for you to acknowledge that you couldn’t have made it in America without America. That you were fortunate enough to be born in a country where upward mobility is possible (a subject upon which Barack Obama can speak with the authority of experience), but where the channels making such upward mobility possible are being increasingly clogged. That it’s not fair to ask the middle class to assume a disproportionate amount of the tax burden. Not fair? It’s un-fucking-American is what it is. I don’t want you to apologize for being rich; I want you to acknowledge that in America, we all should have to pay our fair share. That our civics classes never taught us that being American means that—sorry, kiddies—you’re on your own. That those who have received much must be obligated to pay—not to give, not to “cut a check and shut up,” in Governor Christie’s words, but to pay—in the same proportion. That’s called stepping up and not whining about it. That’s called patriotism, a word the Tea Partiers love to throw around as long as it doesn’t cost their beloved rich folks any money.

This has to happen if America is to remain strong and true to its ideals. It’s a practical necessity and a moral imperative. Last year during the Occupy movement, the conservatives who oppose tax equality saw the first real ripples of discontent. Their response was either Marie Antoinette (“Let them eat cake”) or Ebenezer Scrooge (“Are there no prisons? Are there no workhouses?”). Short-sighted, gentlemen. Very short-sighted. If this situation isn’t fairly addressed, last year’s protests will just be the beginning. Scrooge changed his tune after the ghosts visited him. Marie Antoinette, on the other hand, lost her head.

Think about it.

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My sophomore year in college, I shared a door room with this guy, Greg. Greg was the best roommate a 19-year old could ask for, for the simple fact that he was never around. Greg had a serious girlfriend, and whether out of affection for her or a distaste for Busch Light and Italian League soccer, he chose to spend all of his time at her dorm.

So which dorm room was Greg’s? The one he was assigned pursuant to school records, or the one where he brushed his teeth, kept his stuff, and slept 99 days out of 100?

Hell if I know; but then, it’s not my job to know. The same can’t be said for the members of the Tax Court, however, who recently had to determine which of a taxpayers’ two houses was their home. And all that was at stake was a $140,000 tax deficiency.

Marylou Stromme (Marylou) was a kind soul, this much is not open for debate. Marylou’s developmentally disabled older brother had spent much of his life institutionalized, motivating her to find a way to provide a better life for those similarly challenged. Her first step was to open a group home where patients could get better care than that found in congregate institutions.

The Stromme’s owned two homes, one on Lacasse Drive (Lacasse) and one on Emil Ave (Emil). For various reasons, the Strommes chose to convert the Emil property into the group home, performing extensive renovations and eventually housing up to six “clients.”

Marylou spent so much time at the Emil home, most of the surrounding neighbors assumed she lived there. She would often spend the night, recieve mail there, and perform basic upkeep. She would, however, return to the Lacasse home to be with her family and enjoyed the trappings of suburbia:

It was at the LaCasse Drive house that the Strommes held family get togethers and celebrated the safe return of another son from service in Iraq. LaCasse Drive house was also where they celebrated Thanksgiving and Christmas. Ms. Stromme found it a more restful place to recover from foot surgery.

In exchange for providing foster care, the State of Minnesota paid the Strommes $556,000 over 2005 and 2006. The Strommes excluded the payments from income. The IRS disagreed with this treatment, assessing over $140,000 in tax due, interest, and penalties.

Law

Section 131 provides an exclusion from income for qualified foster care payments. To qualify for the exclusion, the payments must be:

1. Made pursuant to a foster care program of a state;

2. Paid by a State or political subdivision thereof, or a qualified agency; and;

3. Paid to a foster care provider for the care of a qualified foster individual in the foster care provider’s home.

Discussion

At issue was the third requirement; specifically, the interpretation of the phrase “in the foster care provider’s home.” With no regulations and minimal relevant case law to reference, the Tax Court was left to determine what Congress intended with the use of the word “home.” Ultimately, the court concluded that mere ownership of the Emil foster house was not enough; the Strommes were required to provide foster care at the house at which they reside.

We interpret the Code’s use of the word “home” to mean the house where a person regularly performs the routines of his private life–for example, shared meals and holidays with his family, or family time with children or grandchildren.

Ultimately, the Strommes were sold out by their Lacasse neighbors — with whom they seemed to have engaged in previous altercations — who testified that the Lacasse home was indeed where the Strommes resided:

The LaCasse Drive neighbors also knew the Strommes owned two houses, and those neighbors understood that the Strommes worked at the Emil Avenue house. They frequently saw Ms. Stromme leave in the morning to go to work at the Emil Avenue house and then return in the evening. They often saw Mr. Stromme working in the yard or on his cars; they saw both Strommes bringing in groceries and noted Ms. Stromme’s car was reliably in the driveway around dinnertime. They also credibly recounted scenes of the Strommes having ordinary suburban American fun, like returning from a Minnesota Wild hockey game [Ed note: there’s nothing fun about a hockey game] or throwing a lively pool party–

Based in part on this damning testimony, the court was forced to conclude that while the Strommes owned two houses, only the Lacasse property was their home. And since the Strommes did not provide foster care in their home, the full amount of the payments were taxable, as the Strommes’ failed to meet the requirements of Section 131.

The decision was not without its controversy. While both Judges Holmes and Gustafson concurred with the opinion, they disagreed on the precedent being established.

Judge Holmes believed that a foster care provider could have more than one home; the exclusion is not limited to payments received for providing care at the taxpayer’s primary residence. For example, a taxpayer could own and reside in a primary residence as well as a vacation home, with foster care provided in either one qualifying for exclusion. The issue in Strommes — according to Judge Holmes — was that the Emil house was not even a vacation home, it was simply a place of business. But in other situations, where a taxpayer provided foster care services in one of several homes owned and used by the taxpayer as a residence, the taxpayer should be entitled to the Section 131 exclusion.

Judge Gustafson disagreed, arguing that exclusions must be narrowly construed, and thus a taxpayer’s home had to follow the singular language written into the statute.

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While New Jersey residents wait with breathless anticipation for the Snooki-LaValle lovechild to arrive and lead them to a new age of prosperity, the State’s leadership is left to try and salvage the present by enacting sweeping tax cuts.

What remains to be determined, however, is what shape the cuts will take. On Wednesday, Governor Christie announced that he was “pretty close” to a deal on a tax-cut plan with Senate President Stephen Sweeney. To recap, here were the proposals by each side:

Christie: A 10% across-the-board reduction in the individual income tax rates to be phased in over a three-year period beginning in 2013. The plan would cost the state $183 million in 2013 and $1.1 billion by the fourth year.

Sweeny: Senate Democratic leaders, criticizing Christie’s plan as favoring the wealthy, have called for a 10% tax credit on the first $10,000 of property taxes paid. The credit would only be permitted for residents with income below $250,000, shifting the benefit of the tax cuts to the lower and middle class. The plan would cost the state $175 million in 2013 and $1.4 billion by the fourth year.

A third proposal had been pitched by state Assembly Democrats that would have doubled the tax credit to 20% of the first $10,000 of taxes paid while using the same income limits. As opposed to the Senate’s plan, the Assembly tax credits would have been paid for by implementing a “millionaires tax;” raising the top personal rate from 8.97% to 10.75%. Christie, as expected, rejected this idea as “dead.”

The sticking point will likely continue to be where to focus the tax cuts: Democrats don’t want the state’s millionaires to receive any additional benefit, while Governor Christie has been adamant about not raising taxes on the wealthy, having twice vetoed measures that would previously implemented a “millionaire’s tax.”

From Christie:

We’re pretty close, so now let’s see if we can find an area of compromise,” Christie said of Sweeney’s proposal. “I think everyone should get tax relief and he limits it at $250,000 — there’s a boulevard there between them. Lets see if we can get the car onto that boulevard and move it down the road.”

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In a case with damaging implications for wealthy gay and unmarried couples, the Tax Court held yesterday that the $1,100,000 limitation on mortgage debt for purposes of determining deductible interest expense must be applied on a per-residence, rather than a per-taxpayer basis.

As we discussed in a previous post, I.R.C. § 163(h)(3) allows a deduction for qualified residence interest  on up to $1,000,000 of acquisition indebtedness and $100,000 of home equity indebtedness. Should your mortgage balance (or balances, since the mortgage interest deduction is permitted on up to two homes) exceed the statutory limitations, your mortgage interest deduction is limited to the amount applicable to only $1,100,000 worth of debt.

Now assume for a moment that you and your unmarried girlfriend/lifemate/Japanese body pillow go halfsies on your dream house, owning the home as joint tenants. And assume the total mortgage debt — including a home equity loan of $200,000 –is $2,200,000, with each of you paying interest on only your $1,100,000 share of the debt.

Are each of you entitled to a full mortgage deduction — since you each paid interest on only $1,100,000 of debt, the maximum allowable under Section 163 — or is your mortgage deduction limited because the total debt on the house exceeds the $1,100,000 statutory limitation?

The answer, according to the Tax Court, is the latter. In Sophy v. Commissioner, this issue was surprisingly addressed for the first time in the courts (it had previously been addressed with a similar conclusion in CCA 200911007), with the Tax Court holding that the $1,100,000 limitation must be applied on a per-residence basis.

Thus, in the above example, even though the joint tenants each paid mortgage interest on only the maximum allowable $1,100,000 of debt, each owner’s mortgage interest deduction is limited because the maximum amount of qualified residence debt on the house — regardless of the number of owners — is limited to $1,100,000. Assuming the joint tenants each paid $70,000 in interest, each owner’s limitation would be determined as follows:

$70,000 *  $1,100,000 (statutory limitation) = $35,000

                 $2,200,000 (total mortgage balance)

Instead of each owner being entitled to a full $70,000 interest deduction, the mortgage interest deduction is limited for both because the total debt on the house exceeds the statutory limits. The court reached this conclusion after examining the structure of the statute and determining that the plain language required the applicable debt limitation to be applied on a per-residence basis:

Qualified residence interest is defined as “any interest which is paid or accrued during the taxable year on acquisition indebtedness with respect to any qualified residence of the taxpayer, or home equity indebtedness with respect to any qualified residence of the taxpayer.” Sec. 163(h)(3)(A) (emphasis added).

The definitions of the terms “acquisition indebtedness” and “home equity indebtedness” establish that the indebtedness must be related to a qualified residence, and the repeated use of the phrases “with respect to a qualified residence” and “with respect to such residence” in the provisions discussed above focuses on the residence rather than the taxpayer.

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Earlier this week, I posted a link to an article detailing the desire of the IRS to hire a marketing firm to improve its image among the taxpaying public. Buried within the depths of the article was the reason for the Service’s PR push:

The IRS ranked last among 13 federal agencies in a 2010 survey by the Pew Research Center, which asked respondents if they had a favorable opinion of each agency.

This ranking should come as no surprise, as the IRS is the object of more scorn, derision and lazy Leno monologues than the entire Kardashian clan. But lest you start to think the public’s view of the IRS is unduly harsh, I encourage you to read this article authored by Janet Novack over at Forbes, which offers a stern reminder of just how illogical, oppressive and unyielding the Service can be.

As Novack explains:

After legendary modern art dealer Ileana Sonnabend died in 2007 at the age of 92, her heirs sold off some of her collection to pay a whopping estate tax bill: $331 million to Uncle Sam and $140 million to New York State….But they couldn’t sell Sonnabend’s most famous holding—Rauschenberg’s collage “Canyon”—because it includes a stuffed bald eagle, and two federal laws bar possessing or trafficking in the bird, dead or alive. [Ed note: Rauschenberg’s “Canyon” is widely considered to be the world’s second most sought-after piece of art, trailing only the Gummi Venus de Milo.]

Since “Canyon” couldn’t be sold without landing Sonnabend or her heirs in prison, the estate concluded that the work was worthless, and did not ascribe a value to it on the estate’s tax return. The IRS, however, had other ideas. After auditing the estate’s return, the Service set the value of  “Canyon” at $65 million, and assessed the estate a tax deficiency of $29 million, tacking on a $11.7 million gross valuation misstatement penalty under I.R.C. § 6662 just for giggles.

When estate attorney Ralph E. Lerner — who is suing the IRS on behalf of the Sonnabend estate — reached out to the IRS for their rationale, this is what he got:

When he called the chairman of the IRS art panel to complain, Lerner reports, “He told me there could be a market. For example, a recluse billionaire in China might want to buy it and hide it.” [Ed note: I’m looking at you, Chou Kuang Piu]

If that’s the approach the IRS is going to take with taxpayers, I’d advise them to go ahead and double that PR budget. Come to think of it, they may want to allocate some additional funds to smoothing things over with the Chinese while they’re at it.

It’s exactly this type of ridiculousness that makes the IRS the most reviled of all the government agencies. The Service is taxing  the estate on the hypothetical purchase price a piece of art could fetch on the black market, even though such a sale would constitute a federal crime. This basically leaves the estate with two options: 1) hold on to “Canyon” and risk having to pay the tax, or 2) sell the work of art in order to pay the tax and go to rich-white-people-prison.

Scarier still, the IRS has put the Sonnabend estate in this predicament based solely on the contrived notion that somewhere in the Far East exists a wealthy eccentric with $65 million burning a hole in his pocket who’s been longing for a stuffed bird to tie his den together. Illogical, yes. Egregious? Definitely. But, sadly, not unprecedented:

So just how creative is the IRS being here? California art law attorney Joy Berus says she’s not surprised by the IRS’ position in this case. The government has long asserted (with some support from case law) that contraband items in an estate (drugs, stolen art, stolen jewels or a purchased artwork that turns out to be a protected antiquity, say belonging to foreign government or a Native American tribe) can be valued for estate tax purposes at their  black or “illicit market” value.

Joy Berus speaks the truth. See PLR 9152005 (stolen War World II art included in estate at black market value) and PLR 9207004 (weed included in drug dealer’s estate at retail street value). Needless to say, we’ll be keeping an eye on this case and will provide updates on any future developments.

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It’s going to be a busy day in the tax world, as President Obama will be unveiling  his long-awaited  proposal for corporate tax reform in a few hours. Expected to be included among the proposals are the following:

  • A reduction in the corporate tax rate from 35% to 28%;
  • A modification to Section 199 to ensure that U.S. manufacturers pay no more than a 25% effective tax rate;
  • Elimination of up to a dozen tax deductions currently available;
  • Renewal of the R&D credit under Section 41; and
  • The addition of a “worldwide minimum tax” to ensure that U.S. corporations that move operations offshore pay tax on its overseas profits.

It’s important to note, while the 7% reduction in the corporate tax rate may look universally appetizing, for those corporations that currently take advantage of many of the tax preferences on the chopping block, they may actually see their effective tax rate increase as a result of the lost deductions. Those corporations — typically in the technology and pharmaceutical fields — likely will not be on board with the proposed changes.

In general, however, corporate tax reform is one of the few areas where Republicans and Democrats may be able to find some common ground, as it is widely recognized that the current corporate tax regime is putting the U.S. at a competitive disadvantage with other nations.

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