Passage of the Tax Cuts and Jobs Act (TCJA) in December 2017 has led to confusion over some longstanding deductions. In response, the IRS recently issued a statement clarifying that the interest on home equity loans, home equity lines of credit and second mortgages will, in many cases, remain deductible.
How it used to be
Under prior tax law, a taxpayer could deduct “qualified residence interest” on a loan of up to $1 million secured by a qualified residence, plus interest on a home equity loan (other than debt used to acquire a home) up to $100,000. The home equity debt couldn’t exceed the fair market value of the home reduced by the debt used to acquire the home.
For tax purposes, a qualified residence is the taxpayer’s principal residence and a second residence, which can be a house, condominium, cooperative, mobile home, house trailer or boat. The principal residence is where the taxpayer resides most of the time; the second residence is any other residence the taxpayer owns and treats as a second home. Taxpayers aren’t required to use the second home during the year to claim the deduction. If the second home is rented to others, though, the taxpayer also must use it as a home during the year for the greater of 14 days or 10% of the number of days it’s rented.
In the past, interest on qualifying home equity debt was deductible regardless of how the loan proceeds were used. A taxpayer could, for example, use the proceeds to pay for medical bills, tuition, vacations, vehicles and other personal expenses and still claim the itemized interest deduction.
What’s deductible now
The TCJA limits the amount of the mortgage interest deduction for taxpayers who itemize through 2025. Beginning in 2018, for new home purchases, a taxpayer can deduct interest only on acquisition mortgage debt of $750,000.
On February 21, the IRS issued a release (IR 2018-32) explaining that the law suspends the deduction only for interest on home equity loans and lines of credit that aren’t used to buy, build or substantially improve the taxpayer’s home that secures the loan. In other words, the interest isn’t deductible if the loan proceeds are used for certain personal expenses, but it is deductible if the proceeds go toward, for example, a new roof on the home that secures the loan. The IRS further stated that the deduction limits apply to the combined amount of mortgage and home equity acquisition loans — home equity debt is no longer capped at $100,000 for purposes of the deduction.
As a relatively comprehensive new tax law, the TCJA will likely be subject to a variety of clarifications before it settles in. Please contact our firm for help better understanding this provision or any other.
Around this time of year, many people have filed and forgotten about their 2017 tax returns. But you could get an abrupt reminder in the form of an IRS penalty. Here are three common types and how you might seek relief:
1.Failure-to-file and failure-to-pay. The IRS will consider any reason that establishes that you were unable to meet your federal tax obligations despite using “all ordinary business care and prudence” to do so. Frequently cited reasons include fire, casualty, natural disaster or other disturbances. The agency may also accept death, serious illness, incapacitation or unavoidable absence of the taxpayer or an immediate family member.
If you don’t have a good reason for filing or paying late, you may be able to apply for a first-time penalty abatement (FTA) waiver. To qualify for relief, you must have: 1) received no penalties (other than estimated tax penalties) for the three tax years preceding the tax year in which you received a penalty, 2) filed all required returns or filed a valid extension of time to file, and 3) paid, or arranged to pay, any tax due. Despite the expression “first-time,” you can receive FTA relief more than once, so long as at least three years have elapsed.
2.Estimated tax miscalculation. It’s possible, but unlikely, to obtain relief from estimated tax penalties on grounds of casualty, disaster or other unusual circumstances. You’re more likely to get these penalties abated if you can prove that the IRS made an error, such as crediting a payment to the wrong tax period, or that calculating the penalty using a different method (such as the annualized income installment method) would reduce or eliminate the penalty.
3. Tax-filing inaccuracy. These penalties may be imposed, for example, if the IRS finds that your return was prepared negligently or that there’s a substantial understatement of tax. You can obtain relief from these penalties if you can demonstrate that you properly disclosed your tax position in your return and that you had a reasonable basis for taking that position.
Generally, you have a reasonable basis if your chances of withstanding an IRS challenge are greater than 50%. Reliance on a competent tax advisor greatly improves your odds of obtaining penalty relief. Other possible grounds for relief include computational errors and reliance on an inaccurate W-2, 1099 or other information statement.
Taxpayers should know the telltale signs of a scam
Many taxpayers recently filed their taxes and may be waiting for a response from the IRS. Because of this summertime tends to be a period when thieves increase their scam attempts. They try to get people to disclose personal information like Social Security numbers, account information and passwords.
To avoid becoming a victim, taxpayers should remember these telltale signs of a scam:
The IRS and its authorized private collection agencies will never:
· Call to demand immediate payment using a specific method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes. All tax payments should only be made payable to the U.S. Treasury. Taxpayers should never make checks out to third parties.
· Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
· Demand that taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.
· Ask for credit or debit card numbers over the phone.
· Use email, text messages or social media to discuss personal tax issues, such as those involving bills or refunds.
For anyone who doesn’t owe taxes and has no reason to think they do, they should:
· Not give out any information and hang up immediately.
· Report it to the Federal Trade Commission. They should add "IRS Telephone Scam" in the notes.
For anyone who owes tax or thinks they do, they can:
· Call the number on the billing notice.
· Call the IRS at 800-829-1040. IRS workers can help.
Long-time television personality Tori Spelling and her husband are among the headliners of the top 500 delinquent California taxpayers, according the latest list from the state’s Franchise Tax Board.
Spelling, 45, and her 51-year-old husband Dean McDermott owe $282,654.92 to the state in personal taxes, according to the latest list.
Spelling’s alleged debt is a laugh, however, compared with comedian Chris Tucker’s $1,245,858.25. Tucker settled tax troubles some time ago with the IRS.
Other owing celebs, according to the FTB: Motown songwriter Lamont Dozier ($3.6 million), singer Macy Gray (under her name Natalie Hinds, $240,990.74) and rapper Xzibit (under his name Alvin Joiner, $231,579.03).
The top 500 owed amounts ranging from $192,485.69 to some $266 million. The FTB says it is legally required to post this list at least twice annually.
By Michael Cohn
The Internal Revenue Service offered information Friday about changes from the Tax Cuts and Jobs Act on the rules for moving expenses, vehicle expenses and unreimbursed employee expenses, along with higher depreciation limits for some vehicles.
The TCJA, the tax overhaul that Congress passed last December, suspends the deduction for moving expenses for tax years beginning after Dec. 31, 2017, until Jan. 1, 2026. During that suspension period, the IRS won’t allow deductions for use of an automobile as part of a move using the mileage rate listed in Notice 2018-03. However, the suspension doesn’t apply to members of the armed forces on active duty who move because of a military order related to a permanent change of station.
Unreimbursed employee expense deduction
The new tax law also suspends all miscellaneous itemized deductions subject to the 2 percent of adjusted gross income floor. The change has an impact on expenses such as uniforms, union dues and the deduction for business-related meals, travel and entertainment that the employer isn’t reimbursing.
That means the business standard mileage rate listed in Notice 2018-03, which was issued before the tax overhaul passed, can’t be used to claim an itemized deduction for unreimbursed employee travel expenses in taxable years starting after Dec. 31, 2017, and before Jan. 1, 2026. The IRS issued revised guidance on the matter Friday in Notice 2018-42. It supersedes the earlier notice and includes info about the update to the standard mileage rates, along with details about the suspension of the deduction for operating a vehicle for moving purposes.
2018 standard mileage rates
In Notice 2018-03, which the IRS issued earlier this year, the standard mileage rates for use of a car, van, pickup or panel truck for 2018 remain:
• 54.5 cents for every mile of business travel driven, a 1 cent increase from 2017.
• 18 cents per mile driven for medical purposes, a 1 cent increase from 2017.
• 14 cents per mile driven in service of charitable organizations, which is set by statute and remains unchanged.
The standard mileage rate for business comes from a yearly study of fixed and variable costs of operating an automobile, while the rate for medical purposes depends on variable costs.
Taxpayers can opt to calculate the actual costs of using their vehicle instead of using the standard mileage rates.
A taxpayer can’t use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System or after claiming a Section 179 deduction for that vehicle, however. On top of that, the business standard mileage rate can’t be used for more than four vehicles simultaneously.
Increased depreciation limits
The new tax law ups the depreciation limitations for passenger automobiles that have been placed in service after Dec. 31, 2017, for purposes of calculating the allowance under a fixed and variable rate plan. The maximum standard automobile cost can’t exceed $50,000 for passenger automobiles, trucks and vans that have been placed in service after Dec. 31, 2017. Prior to the change, the maximum standard automobile cost was $27,300 for passenger automobiles and $31,000 for trucks and vans.
By Jeff Green and Sahil Kapur
Republicans are considering a fix to a provision in their new tax law that they acknowledge could inadvertently penalize victims of sexual harassment in the workplace.
But congressional gridlock before midterm elections in November means there’s no guarantee that the problem will be corrected quickly, if at all.
President Donald Trump’s tax overhaul eliminates the deduction companies used to be able to take when they settled sexual harassment cases and included nondisclosure agreements, which generally keep details secret as a condition of the payout. A misplaced word by Republican tax writers may mean that victims of accused sexual predators like Hollywood producer Harvey Weinstein also lose the ability to deduct their legal expenses.
A senior House Republican aide who works on tax policy acknowledged the provision has unintended outcomes and is being discussed as a so-called technical correction to the tax law. A senior Senate Republican aide said lawmakers are examining the issue. Both aides were granted anonymity to discuss private conversations.
In the meantime, plaintiffs’ attorneys are buzzing about how the law’s ambiguity is worrying their clients, who fear that coming forward about sexual harassment could come at a much greater cost.
“There’s this concern that because of the 2017 tax act, that somehow we’re going to get back to that original system which obviously penalizes, to an extraordinary extent, against the victim,” said Genie Harrison, who represents one of Weinstein’s formal personal assistants in a sexual harassment lawsuit.
That’s not what the law was supposed to do. Republican lawmakers on the Senate Finance Committee agreed in mid-November to include an amendment from Senator Bob Menendez, a New Jersey Democrat, to help make the use of NDAs less attractive following a flurry of sexual misconduct allegations.
The backlash against NDAs has been fueled by examples such as Weinstein and former Fox News anchor Bill O’Reilly where the contracts helped hide ongoing harassment. Alaska, California and Washington are among more than a dozen states considering laws that prohibit confidential settlements entirely or add new limits.
The original provision made clear that the deduction change only applied to the company, not the victim, according to Steven Sandberg, a spokesman for Menendez. Republican tax writers used the word “chapter” rather than “section” in the amendment, which could be interpreted as broadly applying the elimination to victims.
Senate Finance Chairman Orrin Hatch, a Utah Republican, is continuing to meet with members to address any concerns with the new law and examine potential technical corrections, should they be needed, said Julia Lawless, a spokeswoman for the panel.
Menendez is trying to get an amendment through the Finance Committee or a new law passed to make that clear, Sandberg said in an email. The proposed bill to clarify that victims’ write offs are exempt is called the “Repeal the Trump Tax Hike on Victims of Sexual Harassment Act of 2018.”
With the midterm elections looming, the prospects of a technical revision to the tax law — passed without a single Democratic vote — are far from certain. The Republicans control 51 seats in the Senate, and 60 votes would be required for a bill to correct any errors. Democrats have signaled they’re reluctant to approve any legislation that would fix a tax bill they never signed on for — much like Republicans did after Democrats tried to modify the Affordable Care Act. Or they may ask for something in return that Republicans are unwilling to provide.
Another option may be tacking a fix onto the government funding bill that has to pass by the end of September to avert a government shutdown. The previous funding bill, which Trump signed in March, included a correction to a measure in the tax law affecting farmers — so far, the only other time Republicans have highlighted a specific provision in need of a change. Some Democrats agreed to back the spending bill since it included other changes viewed as policy victories for both parties.
If the rule isn’t clarified soon, there’s a risk future victims will stay silent, said Harrison, who practices in Los Angeles. There’s less incentive if winning the case means an untenable tax burden, she added.
For example, in a $100,000 settlement, costs and fees might take $45,000 with $55,000 going to the victim. Without the deduction, the victim would pay taxes on the entire $100,000, which may mean a tax bill equal to or larger than their payout, she said. Defendants this year have said they aren’t willing to add additional money to compensate for the potential added tax penalty, she said.
It’s also unclear what happens in cases that include both sexual harassment and other claims, such as pay bias or gender discrimination, said Bruce Schwartz, a benefits and tax law attorney at Jackson Lewis in White Plains, New York. Legal costs associated with settlements for other forms of bias should still be tax deductible, but the ratio may be unclear, he said.
Trying to change behavior through tax law isn’t a new idea, nor is it usually very effective, said Schwartz. When voters were upset about the high salaries paid to chief executive officers, lawmakers limited the deductibility of CEO pay to the first $1 million. Companies then just shifted more of the compensation away from salary, he said.
“It’s what I would I would call Congress legislating in response to newspaper headlines and using the internal revenue code to enforce social policy,” Schwartz said. “To use the internal revenue code to do that is useless.”
Even if the non-disclosure ambiguity is fixed by Congress, the broader rule could still keep many victims quiet. That’s because it will be more expensive for a company to keep the details of the case confidential — an option some victims may actually prefer, said Elisa Lintemuth, an employment lawyer at Dykema Gossett in Grand Rapids, Michigan, who represents companies in cases.
“I do think it will change how cases are litigated and settled,” said Lintemuth, who discussed uncertainty on a recent conference call with company clients. “If a company can no longer deduct its settlement and attorney fees, they might be more likely to roll the dice and proceed with litigation even if attorney fees will be more expensive. They can have the option of being vindicated in court and deduct all their fees.”
— With assistance from Lynnley Browning
Practitioners whose clients haven’t gotten involved in bitcoin, litecoin, ethereum or other cryptocurrencies may end up considering themselves very lucky: Cryptocurrency investors must deal with unclear records, tangled blockchain addresses and – in the lightning age of virtual monies – ancient tax guidelines.
“I have one client who’s trading them,” said Brian Stoner, a CPA in Burbank, California. “Most people have heard of them, some are thinking about getting in on it, while many others are scared to death because of all the volatility. There’s a definite risk factor – like buying options on commodities.”
“Not sure if this is going to be an issue or not; it’s still a very sketchy area. Personally, I don’t advise clients to invest in this,” said Becky Neilson, at Neilson Bookkeeping & Tax Services Inc. in Sheridan, Calfornia. “I think it’s too risky.”
The Mahaney Law blog recently cited research from finder.com that now almost 8 percent of Americans have invested in a cryptocurrency or an initial coin offering. (More of those surveyed also see no need to invest in cryptocurrency; almost one in five see it as an outright scam.)
Lack of expertise
Bitcoin is the most common cryptocurrency investment, with an average holding of $3,450. Slightly more than 2 percent of baby boomers claim to have invested in cryptocurrency, compared with almost 18 percent of millennials.
The latter must love a Nantucket sleigh ride: Since bitcoin peaked at about $18,000 in December, it’s lost half its value. Bitcoins have roller-coastered in double-digit value in hours. Cryptocurrencies litecoin and ethereum have seen similar fast ups and downs.
Clients who “plugged their noses and jumped in were dismayed at how they seemed to be the only people who lost money,” said Enrolled Agent John Dundon, president of Taxpayer Advocacy Services in Englewood, Colorado. “A great deal of fraud at the retail investor level was manifested on the Schedule D. Even sophisticated investor groups are getting taken.”
Cryptocurrency tax expertise is still fairly thin on the ground, and IRS guidance on digital money is relatively ancient (2014) but the agency does generally treat cryptocurrencies like property – especially when it comes to taxing what it says are like-kind exchanges, a favorite tactic of cryptocurrency traders. Possible taxes include capital gains or even self-employment tax.
Laurie Ziegler, an EA at Sass Accounting, Saukville, Wisconsin, has only had a few clients familiar with or dealing in cryptocurrencies. “The biggest complaint is that if they obtained it by mining it, there’s no basis and any amount realized by the sale of same is all income,” she said.
Self-professed “early adopter and believer in the value of the blockchain-related technologies” Daniel Morris, a CPA and senior partner with Morris + D’Angelo in San Jose, California, has heard several questions about crypto. “First questions about what it is, why it’s used and its value. Lots of questions in this arena,” said Morris, who works with clients setting up token exchanges, foundations and global improvement enterprises using distributed ledger technology and related technologies.
Clients also want to know how to leverage the technology on- and off-shore, how to protect what they have – using hard or soft wallets, Morris said, or protecting against sudden incompatibility of different types of coins, a.k.a. “forking” – and when to move between and among the various coin offerings.
Other questions and concerns include ways to avoid taxable income from former and current conversions, challenges associated with regulatory drift, “overlap, confusion, jealousy and greed as it relates on how or why the government should be engaged.”
‘Understand the rules’
Morris Armstrong, an EA and registered investment advisor at Armstrong Financial Strategies in Cheshire, Connecticut, has gotten “a few clients who had the trading crazies. I explained how the IRS has issued guidance on how [cryptocurrencies] are handled and if they’re simply bought and sold, that they are very similar to a stock with long- and short-term gains, brokerage fees or ‘coin-base fees’ added into the price,” Armstrong said.
The client response, according to Armstrong? “‘My friends tell me that the only trades that they have to report are those in U.S. dollars.’ I politely explained that all trades are reportable and if they’re coin/coin the dollar price needs to be available. Ten-minute discussion,” Armstrong said.
The client then produced an Excel spreadsheet. “I was willing to take the sheet at face value because it had time and dates in the traded columns,” Armstrong recalled. “He traded in three coins and it was easier to import the Excel sheet into my tax software, which generated about 60 trades. The net result was a loss of $70.”
“Those trading would benefit from understanding the tax rules, which are not complicated for trading,” Armstrong said.
The variation in states’ use of economic presence in determining nexus for sales tax is one of the key takeaways from the 2018 Bloomberg Tax Survey of State Tax Departments. With the Supreme Court’s decision in South Dakota v. Wayfair in the offing, 16 states indicated that they have economic presence nexus standards for sales tax — despite the fact that they are currently disallowed under the court’s 1992 ruling in Quill v. North Dakota, which established that a physical presence test be met before states can require remote sellers to collect sales tax on sales into the state. While the Quill decision addressed only sales tax nexus, it left open the question of nexus for corporate income tax.
Nexus is the minimum amount of contact between a taxpayer and a state allowing the state to tax a business on its activities (income tax nexus) or require it to collect and remit sales tax (sales tax nexus). The requirement arises from two clauses in the Constitution: the Commerce Clause and the Due Process Clause. The Commerce Clause prohibits a state from unduly burdening interstate commerce, and the Due Process Clause requires a minimum connection between a state and the entity it seeks to tax.
In addition to questions on nexus, Bloomberg Tax asked questions of senior tax officials in each state on the tax treatment of pass-through entities and intangible holding companies, conformity to federal tax reform, methods of sourcing income, sales tax refund actions, requirements for reporting federal changes, enforcement, and collection policies. The survey also addressed the states’ general apportionment formula and sourcing method, and pass-through entity level nexus. “State variances in taxation create complexity and risk for businesses, which is magnified in today’s economy,” said Bloomberg Tax editorial director George Farrah.
“As the survey reveals, states continue to struggle in dealing with taxation of cloud computing and digital goods,” observed Richard Cram, director of the Multistate Tax Commission’s National Nexus Program.
Sales tax issues
“This year, two of the biggest topics discussed were about tax reform and the Wayfair sales tax nexus issue,” explained Chreasea Dickerson, tax law editor for Bloomberg Tax, who helped oversee the survey. “Sixteen states indicated that their policy was based on economic nexus, while five states said that they have an economic nexus that is not currently being enforced due to pending litigation or an effective date in the future.”
“This year we also asked about notice and reporting requirements,” she said. “Eleven states indicated that they require in-state retailers to report in-state sales to the Department of Revenue, and seven states said that they require out-of-state retailers to notify customers of their use-tax obligation.”
Many states are holding back on the issue of sales tax nexus and reporting requirements pending the outcome of the Supreme Court decision in Wayfair, she suggested.
One state that went ahead and jumped the gun is Georgia, which passed an economic nexus standard in early May. The legislation requires online retailers that make at least $250,000 or 200 sales a year in Georgia to either collect and remit sales taxes on purchases, or send “tax due” notices each year to customers who spend at least $500 on their sites.
“Some states are using use-tax notification requirements to strong arm out-of-state taxpayers into registering for sales tax purposes,” suggested Stephen Bradshaw, a senior manager at Atlanta-based Top 100 Firm Bennett Thrasher. “The tax notification reporting requirements are burdensome, and penalties for noncompliance are high,” he said.
The majority of states indicated that merely attending a trade show or attending a seminar was not enough to create sales tax nexus. However, a majority also said that holding at least two one-day seminars was sufficient to create nexus.
Regarding e-commerce, or click-through nexus, states are taking a closer look at whether arrangements with affiliates utilizing internet tools have the potential to create nexus, according to the survey.
Eighteen states said that using an internet link or entering into a linking arrangement with a third party in the state is sufficient to create nexus for sales under $10,000. The number of states imposing nexus increases to 26 when the relationship results in more than $10,000 in sales, the survey noted.
Overall, a majority of states said that selling remote access to digital products would not create nexus, the survey found. This year, nine states said that selling remote access to canned software would create sales tax nexus. When the software is considered to be “custom” software, only four states indicated that remote sales would create nexus.
“However, states almost unanimously agreed that nexus is created when a representative visits the state in order to customize canned software,” the survey reported.
Selling a digital version of a tangible magazine or newspaper would not create nexus in the majority of states.
The survey also asked states about “cookie” nexus, according to Dickerson. Cookie nexus would impose nexus on an out-of-state retailer if the retailer requires visitors to its website to download cookies. “Only two states indicated that requiring visitors to download internet cookies onto electronic devices would create nexus,” she said.
Two other states said that it depends, while 31 states said “No” to cookie nexus.
Eighteen states, one fewer than in 2017, indicated that entering the state solely for the purposes of providing disaster relief was enough to create sales tax nexus.
The survey breaks down income tax nexus into three categories: states that follow a physical presence standard based on the presence of employees or property within their borders; states that follow an economic presence test based on sales into their state; and states that have constructed a factor presence nexus standard based on taxpayers exceeding a specified threshold of physical or economic presence in the state.
“This year, an additional state indicated they have factor presence nexus,” Dickerson said. “Last year, 13 states indicated they had factor presence nexus, while this year 14 said they had factor presence nexus.”
“Any trend is toward broadening the state’s authority to get more revenue,” she explained.
The income tax side
“Most of the activity on the income tax side was related to tax reform over the last six months,” Dickerson said. “One aspect of tax reform has been enhanced expensing provisions. Because most states operate on a one- or two-year budget, 100 percent expect an impact in Year One on how much tax revenue they collect. Many states also have a balanced budget requirement, meaning they can’t run a deficit, so they’re doing a lot of analysis into figuring out whether they will conform to tax-reform provisions.”
“A large portion of this year’s survey was about sourcing,” said Dickerson. “This year we asked states about their general sourcing method used to source receipts from sales. As we expected, most indicated they follow a market-based sourcing approach. However, a few states indicated their sourcing method varies depending on the types of receipts. For example, sales of services would differ from the sales of intangibles.”
Market-based sourcing looks to the state where a service is received, rather than the state where the provider is located. In recent years, there has been some movement away from cost-of-performance sourcing to market-based sourcing. Specifically, 19 states indicated that they use market-based sourcing, nine states reported that they use cost-of-performance sourcing, and four states said that they use a sourcing method other than either cost-of-performance or market-based.
“There was not a lot of movement from cost-of-performance to market-based sourcing this year,” Dickerson said.
By Ben Steverman
As David Tepper can attest, buying a professional sports team is getting expensive. The hedge fund titan paid $2.3 billion to become the new owner of the Carolina Panthers, a record price for a National Football League franchise.
Ownership has its privileges, though. You get to hang out with the league’s best athletes. Everyone wants to be your friend when the season rolls around. And then there’s the tax perks.
The Republican tax overhaul, signed by President Donald Trump in December, tweaks some provisions affecting sports franchises, while leaving in place the most important one. Because of quirky rules, even profitable teams can generate paper losses that erase the tax bills on an owner’s other business interests.
Tepper, 60, founder of Appaloosa Management, will be able to write off his purchase over 15 years, giving him about $150 million annually to offset any team profits or his other business income.
Effectively, “he’ll get to own the team tax-free as long as he wants to hold it,” said Rodney Fort, a sports management professor at the University of Michigan. The windfall is based on a “wacky” provision in the tax code, Fort said, which treats the intangible assets of a sports team — like the player roster and TV deals — similarly to the tangible assets of other businesses. The Internal Revenue Service treats a player contract much like a piece of factory equipment that gradually wears out over time.
The new tax law does limit the amount of losses from one business that can be used to offset a wealthy taxpayers’ salary or investment income. The tax revamp also changes the rules on how losses can be carried over from year to year.
Overall, the tax law is “favorable for paying up for a sports team,” said James Cundiff, a partner at McDermott Will & Emery LLP in Chicago. “But some of these changes at the edges can be painful.”
The tax benefits are rarely the main motivation of someone buying a sports franchise, according to advisers who work with team owners. For one thing, teams often operate at a loss, Cundiff said, requiring regular cash infusions to pay for star players, for example.
Even with the best tax planning, most sports franchises don’t make sense as an investment based on traditional valuation metrics, said Eric Nemeth, a partner at law firm Varnum LLP in Detroit. Still, values of professional teams keep climbing, as an increasing number of wealthy people want to own a limited number of them.
Tepper, who moved his firm and residency to Florida from New Jersey, has a net worth of $10.2 billion, according to the Bloomberg Billionaires Index, a ranking of the world’s 500 richest people. Institutional Investor estimates he earned $1.5 billion in 2017. He also owns a minority stake in the NFL’s Pittsburgh Steelers, which league rules require him to sell.
A spokesman for Tepper declined to comment.
If he really wants to make money on the Carolina Panthers, Tepper should hope the value of NFL franchises keep rising. “You’ve got to find the next buyer who is willing to pay more,” Cundiff said.
—With assistance from Katia Porzecanski
By Michael Cohn
Business travel expense fraud is estimated to cost U.S. organizations $1.9 billion per year, based on a new survey.
The survey, of more than 1,000 business travelers in the U.S., U.K. and Australia by Chrome River Technologies, a provider of expense and supplier invoice processing software, found that travel expense fraud is typically perpetrated by younger employees, with 82.9 percent committed by workers under the age of 44. Managers and white-collar, non-managerial staff are more likely to commit expense fraud. Among the survey respondents, 58.1 percent of those who said they cheated were mid-level employees, while vice presidents and senior vice presidents had the lowest fraud rate at a combined 6.2 percent.
One-quarter of the survey respondents reported they have been caught committing expense fraud. Over one-third of those respondents who admitted to fraud reported padding each report by amounts ranging from $100 to $499, with men doing so at a rate 60.5 percent more than women. On the other hand, women were 30.8 percent more likely than men to misreport amounts of less than $100. Men were 62.2 percent more likely than women to think they wouldn’t get caught falsifying expenses.
Men are nearly twice as likely to commit expense fraud as women. Men are also over four times more likely than women to add over $1,000 to each expense report.
Over 75 percent of the respondents said a warning was the most serious consequence they suffered. Men reported receiving formal warnings at a rate 31.6 percent higher than females, who more frequently received informal warnings about their actions.
Companies using manual reporting procedures are more likely to suffer expense fraud, according to the expense reporting software vendor. Employees who submit expenses through hard-copy receipts and spreadsheets are more than twice as likely to commit fraud as employees who use automated expense management systems.
“Most people are inherently honest and they don’t intend on defrauding their employer of huge amounts of money,” said Chrome River CEO Alan Rich in a statement. “More often, they’re just committing small acts that they don’t even view as ‘fraud.’ And they do it because it’s possible and they don't think anyone will notice. The best thing a company can do to protect itself is make it easier for employees to do the right thing, such as an automated expense management solution which can, for example, alert employees if they are trying to submit the receipt twice. This type of gentle reminder can often be all that’s needed for employees to remain honest throughout the expense submission process.”
Chrome River extrapolated some of its estimates from the Association of Certified Fraud Examiners’ biannual report on fraud. According to the ACFE, expense reimbursement fraud makes up 17 percent of all business fraud. Based on the average reported dollar amounts added to each report. The ACFE found that smaller businesses, which usually have fewer internal controls, typically suffer double the losses compared to larger companies.
Dos and Don’ts for Taxpayers Who Get a Letter from the IRS
Every year the IRS mails millions of letters to taxpayers for many reasons. Here are some tips and suggestions for taxpayers who receive one:
Don’t ignore it. Most IRS letters and notices are about federal tax returns or tax accounts. Each notice deals with a specific issue and includes specific instructions on what to do.
Don’t panic. The IRS and its authorized private collection agencies do send letters by mail. Most of the time all the taxpayer needs to do is read the letter carefully and take the appropriate action.
Do take timely action. A notice may reference changes to a taxpayer’s account, taxes owed, a payment request or a specific issue on a tax return. Taking action timely could minimize additional interest and penalty charges.
Do review the information. If a letter is about a changed or corrected tax return, the taxpayer should review the information and compare it with the original return. If the taxpayer agrees, they should make notes about the corrections on their personal copy of the tax return, and keep it for their records.
Don’t reply unless instructed to do so. There is usually no need for a taxpayer to reply to a notice unless specifically instructed to do so. On the other hand, taxpayers who owe should reply with a payment. IRS.gov has information about payment options.
Do respond to a disputed notice. If a taxpayer does not agree with the IRS, they should mail a letter explaining why they dispute the notice. They should mail it to the address on the contact stub at the bottom of the notice. The taxpayer should include information and documents for the IRS to review when considering the dispute. The taxpayer should allow at least 30 days for the IRS to respond.
Do remember that there is usually no need to call the IRS. If a taxpayer must contact the IRS by phone, they should use the number in the upper right-hand corner of the notice. The taxpayer should have a copy of the tax return and letter when calling.
Do avoid scams. The IRS will never initiate contact using social media or text message. The first contact from the IRS usually comes in the mail. Taxpayers who are unsure if they owe money to the IRS can view their tax account information on IRS.gov.
Trump threatens ‘big tax’ on Harley-Davidson
By Justin Sink, Gabrielle Coppola and Terrence Dopp
President Donald Trump appeared to turn on an iconic American company he once embraced, accusing Harley-Davidson Inc. of using new tariffs on trade as cover to shift some production abroad as he threatened the motorcycle manufacturer with a “big tax” on bikes imported to the U.S.
“A Harley-Davidson should never be built in another country - never!” Trump tweeted Tuesday. “Their employees and customers are already very angry at them. If they move, watch, it will be the beginning of the end - they surrendered, they quit! The Aura will be gone and they will be taxed like never before!”
During his first month in office, Trump credited Harley-Davidson workers for having “supported us big league” during the election when he welcomed executives from the company to the White House. But that lovefest ended Monday when the company said in a government filing that it may move some production outside the U.S. in response to European retaliation for the president’s tariffs on imported metals.
Trump went on the attack and that continued Tuesday morning.
“Early this year Harley-Davidson said they would move much of their plant operations in Kansas City to Thailand. That was long before Tariffs were announced. Hence, they were just using Tariffs/Trade War as an excuse. Shows how unbalanced & unfair trade is, but we will fix it,” Trump tweeted.
The president followed up by warning the company that goods produced overseas and imported back into the U.S. could be taxed. “Harley must know that they won’t be able to sell back into U.S. without paying a big tax!” Trump said in another Twitter posting.
Harley’s Chief Executive Officer Matt Levatich said in April that the factory in Thailand was a “Plan B” that the company employed after the U.S. abandoned the 11-country Trans-Pacific Partnership free-trade agreement Trump withdrew from last year. He’d said they didn’t relish the investment, which he also said was needed to maintain access to a key market.
The high-profile spat pits the president against one of the best-known manufacturers in Wisconsin, a state of high political importance to Republicans. Trump won the state’s 10 electoral votes by a narrow margin of just over 22,000 votes in 2016, and has repeatedly focused his attention on bolstering the state’s economy while in office.
On Wednesday, Trump is expected to travel to Wisconsin to attend the ceremonial groundbreaking of a Foxconn Technology Group factory set to open by 2020 that proponents say could eventually result in 13,000 jobs. State leaders, including Republican Governor Scott Walker — who is facing a tough-reelection bid this fall — offered the LCD display manufacturer up to $3 billion in government assistance for locating the plant in the state.
The early-morning missive from the president marked the second consecutive day Trump took aim at the motorcycle maker, after the company said in an SEC filing on Monday that tariffs enacted by the European Union in response to Trump’s penalties on imported steel and aluminum would add as much as $100 million a year to its costs.
“To address the substantial cost of this tariff burden long-term, Harley-Davidson will be implementing a plan to shift production of motorcycles for EU destinations from the U.S. to its international facilities to avoid the tariff burden,” the company said.
Harley shares fell almost 1 percent in early trading Tuesday in New York after tumbling 6 percent Monday, the biggest drop in almost five months. The stock is down 18 percent this year.
On Monday, Trump said he was surprised the motorcycle manufacturer “would be the first to wave the White Flag.”
“I fought hard for them and ultimately they will not pay tariffs selling into the E.U., which has hurt us badly on trade, down $151 Billion,” Trump continued. “Taxes just a Harley excuse - be patient!”
In a subsequent tweet, Trump said the U.S. is managing to get other countries to lower existing tariffs and barriers that he said have been in place for years through bad deals. “We are opening up closed markets and expanding our footprint. They must play fair or they will pay tariffs!” he said in the post.
Michael Pflughoeft, a Harley spokesman, didn’t immediately respond to requests for comment on Trump’s tweets. The White House also didn’t immediately respond to questions about whether the president was seriously planning additional tariffs targeting motorcycles beyond the metals tariffs that have already been announced.
Jack Daniel’s Feels Pinch
European officials have said the U.S. metals tariffs violate international trading rules, and they have threatened to retaliate with levies on iconic American brands such as Harley Davidson motorcycles and Kentucky bourbon, with what appears to be a particular eye toward companies based in regions supportive of the president or represented by top Republican lawmakers. Orange juice levies are likely to impact growers in Florida, while taxes on peanut butter and playing cards could also hit southern regions that have provided Trump a base of support.
Tariffs have also forced the hand of the maker of another iconic American brand, Jack Daniel’s.
Brown-Forman Corp., which also produces Woodford Reserve and other bourbons, will have to raise prices for its whiskey sold in the European Union following the implementation of a 25 percent tariff, according to spokesman Phil Lynch. The higher prices, which he said would primarily affect Jack Daniel’s, would amount to about a 10 percent increase for consumers.
Lynch did not say what effect the expected price increases would have on European sales, noting that “we continue to invest behind the growth of American whiskey in the EU.”
Brown-Forman fell to its lowest level in almost seven months on Monday.
The EU’s levies are only the latest blowback Harley has faced from Trump’s trade policies. A year after Trump pulled the U.S. out of a 12-nation trade deal, the Trans-Pacific Partnership, in January 2017, Harley announced it would close its factory in Kansas City, Missouri, and consolidate production in York, Pennsylvania, eliminating about 260 jobs.
Trump hosted Levatich and other Harley executives and union leaders for a White House listening session in February 2017 and hailed the motorcycle manufacturer as “a true American icon” and “one of the greats.”
Ryan Weighs In
“Thank you, Harley-Davidson, for building things in America,” Trump said at the time. “I think you’re going to even expand. I know your business is now doing very well and there’s a lot of spirit right now in the country that you weren’t having so much in the last number of months that you have right now.”
Harley-Davidson’s headquarters are in Milwaukee, and on Monday the office of House Speaker Paul Ryan, a Wisconsin Republican who has opposed Trump’s move to impose tariffs, said the company’s announcement was evidence of the detrimental effect of the president’s trade policy.
“This is further proof of the harm from unilateral tariffs,” AshLee Strong, a Ryan spokeswoman, said Monday. “The best way to help American workers, consumers, and manufacturers is to open new markets for them, not to raise barriers to our own market.”
Lawmakers weighed in Tuesday on Trump’s latest tweets.
“What I’m worried about is that it’s just the first of many that we are going to see as a result of tariffs,” Senator Doug Jones, a Democrat from Alabama, told CNN in an interview to discuss Harley’s announcement that it would move some production abroad.
“I don’t know all the details but from what I saw was it would be a $2,200 increase on the final price per bike with these tariffs,” Congressman Adam Kinzinger, Republican of Illinois, told CNN in a separate interview. “That’s going to impact sales.”
“I don’t have a problem with the president taking on China,” Kinzinger added. “But when you also take on Canada and Mexico and Europe at the same time I feel it’s like it’s trying to toss grenades everywhere.”
— With assistance from Gabrielle Coppola and Janine Wolf
Schumer calls on IRS not to challenge New York tax law
By Michael Cohn
Senate Minority Leader Charles Schumer, D-N.Y., is urging the Internal Revenue Service to back down on threats to challenge New York State’s efforts to allow taxpayers to circumvent the limits on state and local tax deductions in the federal tax overhaul.
The Tax Cuts and Jobs Act that the Republican-led Congress passed last December included provisions limiting state and local tax deductions to no more than $10,000 a year, despite objections from Democrats that the restrictions would hurt taxpayers in so-called “blue states” where state and local taxes can be high. Several states, including New York, New Jersey and California, announced plans to provide taxpayers with workarounds, such as contributing money they would otherwise pay in state income taxes to state-run charities, where there is no limitation on charitable deductions, or to have more money withheld from their paychecks in the form of payroll taxes.
In April, New York State passed a fiscal 2019 budget containing provisions that allow taxpayers to pay taxes to either of two state-run charitable contribution funds or to opt in to a new voluntary payroll tax system known as the Employer Compensation Expense Program (see New York tax changes respond to federal tax law). However, last month the IRS and the Treasury Department announced that they plan to issue proposed regulations to prevent states from circumventing limits on the state and local tax deduction (see IRS and Treasury plan crackdown on SALT deduction workarounds).
Schumer complained Monday during a speech Monday in Westchester County that the IRS was treating New York unfairly after threatening taxpayers last year who tried to prepay their property taxes after the tax overhaul was passed. He called the IRS’s attempts to challenge New York’s new tax law shortsighted and a potential infringement of states’ rights.
“Put simply, the feds are going out of their way to raise taxes on hardworking middle-class homeowners in Westchester and Rockland Counties,” said Schumer. “First, it was the far right pushing a tax bill which was crafted to raise taxes on many middle-class families while lining the pockets of the ultra-wealthy. Then, New Yorkers had to deal with the IRS undermining taxpayers from prepaying taxes prior to January 1, 2018 to avoid steep tax increases. Now, the IRS is at it again, and is now attempting to undermine a New York law that lowers taxes for thousands of Hudson Valley residents. It couldn’t be more apparent the IRS is targeting middle-class homeowners in New York.”
Schumer said New York State’s new tax law would provide a charitable tax credit of 85 percent for donations to state funds that will go towards vital healthcare and public education programs. The donations could be treated as a charitable deduction under the federal tax code. New York State also authorized municipalities within New York to set up similar tax credit programs in an effort to ease the limits on state and local tax deductions to $10,000. Schumer pointed out that Westchester homeowners have the highest property taxes in the U.S.
He pointed out that similar state charitable tax credits exist in 32 states and have long been found by the IRS to be admissible. He wants the IRS to issue unbiased guidance to make it clear that donations to New York State’s charitable funds will be treated like charitable contributions to other state-operated charitable funds. Schumer said the IRS should reverse its plan and stop targeting states like New York directly or indirectly. He promised to hold to IRS accountable, and urged them to implement the new tax law as written.
“Let’s call this plan what it is — an attempt by the feds to undermine a state’s ability to provide tax relief to residents unfairly targeted by the Republican tax bill,” said Schumer. “Thirty-two states already provide tax incentives to donate to state charitable funds. The IRS has never weighed in on these state’s tax incentives, but the IRS is attempting to change the rules and hit hard-working Westchester families right between the eyes by potentially blocking New York’s new tax law. That is why I am calling on the IRS to stand down from attempts to undermine New York’s new law that provides Westchester and Rockland residents, the top two taxes counties in the country, with much needed tax relief from the tax bill’s most unfair and harmful laws.”
Schumer also wrote a letter to IRS acting commissioner David Kautter about the matter. "Any attempts by the IRS to alter the federal tax treatment of charitable contributions where the donation entitles the donee to a state or local tax credit would upend years of precedent, infringing on the rights of states and municipalities to provide local tax benefits for charitable contributions," Schumer wrote. "The new federal tax law, P.L 115-97, significantly raised taxes on many New Yorkers and diminished tax incentives for many to contribute to charitable causes. The cap on federal state and local tax deductions raised taxes on residents of states like New York, who were already net-contributors to federal coffers. After their residents were targeted for additional federal revenues, New York, and other states established programs to incentivize giving to state-operated charitable funds and mitigate the effects of the new tax increases."
"Unfortunately, the IRS’s recent notice appears to be an attempt to target state tax credit programs, like New York’s, developed after the new tax law," he added. "The donations to these new state-operated charitable funds should be fairly treated by the IRS as charitable donations, with no reduction in their value due to the states’ tax credits. Any attempts to undermine the value of donations made to New York State’s new charitable funds through the federal tax code would diverge from years of precedent. "
The long-term consequences of Wayfair
Physical presence may no longer be a necessary element of sales tax nexus, but that doesn’t mean issues in this area will be greatly simplified, according to Mark Friedlich, senior director of Tax & Accounting North America for Wolters Kluwer and a member of the Senate Finance Committee Chief Counsel’s Tax Advisory Committee on Tax Reform.
The effect of the Supreme Court’s recent decision in South Dakota v. Wayfair, which removed the physical presence test as a requirement to impose sales tax nexus, will have multiple implications for states and merchants alike, he suggested.
“The move from physical presence to an economic nexus standard is likely to generate $10 to $25 billion per year in additional revenue for the states,” he said. “It has an incredible impact, particularly on those states that don’t impose state and local income taxes, because it’s their primary source of tax revenue,” he said.
“And it will have incredible legs,” he added. “Once you eliminate the physical presence requirement, it opens up so many other things – such as corporate income tax, to which the new standard may eventually be extended to.”
“Right now there are 45 states that have various forms of sales tax laws,” Friedlich said. “Thirty-one of those have laws which will allow them to expand their tax collection beyond the physical presence standard. Sixteen of those states have laws similar to South Dakota. It’s a safe bet that if they follow the South Dakota model, they won’t be challenged by retailers or anybody else.”
“Those 16 states have very simple sales tax laws,” he observed. “They have single rates, they collect on only the state level, and they have a threshold that essentially protects the moms and pops from the imposition of sales tax obligation, which could effectively put them out of business. And of the states that don’t have a sales and use tax, virtually all of them have bills in their legislature which will be impacted by the Wayfair decision. For example, legislative leaders in Texas have told me that they are going to act quickly in passing legislation that is similar to South Dakota’s legislation.”
Many states already have these laws in place, according to Friedlich: “They haven’t been collecting because of Quill [the 1992 Supreme Court decision which set the physical presence test as a requirement for sales tax nexus]. It will take them months to get their collection systems up and running. This is not likely to take place until January 2019 for most jurisdictions.”
The potential retroactive application of the decision concerns Friedlich. “A key feature of the South Dakota law was that there would be no retroactive imposition of sales tax on ecommerce sellers,” he noted. “Justice Kennedy in the majority opinion did not deal directly with the issue of retroactivity, but did mention that retroactive application could presumably be dealt with by using existing tools and legal recourse. Theoretically, states can impose sales tax retroactively as far back as 10 years, but most states would not go in that direction, because it would be challenged.”
“It’s important to note that the Wayfair decision does not give states carte blanche by any means,” he said. “What they’ve done is eliminate the physical presence requirement and effectively authorized South Dakota’s economic presence standard. States that have an economic nexus standards law in place that are more complex than South Dakota’s, or that don’t provide protection for small businesses, are likely to simplify their statutes by following the South Dakota model. Doing so would effectively give them a free pass.”
“It’s a win for the states, particularly the smaller, less populous states with fewer brick-and-mortar retailers,” he said. “But states like New York and California, which have very complex statutes on the books, will have to make some significant changes to their laws. For example, there’s the requirement that sellers remit taxes to each and every locality as well as the state. That doesn’t meet the Wayfair standard, and retailers are likely to take the issue to court. There’s a lot more activity in this area which will have to take place in order to have the sales and use tax regimes in place that will meet the Wayfair standard and provide New York and California with that protection provided by the Wayfair holding to collect additional tax revenue in this area.”
Nevertheless, Friedlich foresees the possibility of congressional action to iron out the differences between the state and local taxing jurisdictions.
“The decision is a lightning rod. There will be a confusing hodgepodge of different state laws with which many retailers will need to comply. This will impose an undue burden on all sellers, large and small,” he said. “Congress will have to act, even though they haven’t done so for 26 years. It won’t happen before the November midterms, but there will be a lot of pressure for them to step in and simplify the sales tax collection and compliance process by providing one set of rates and standards that apply to all states that impose the sales tax.”
Gary Bingel, CPA, JD, partner-in-charge of state and local taxes at Top 100 Firm EisnerAmper, agreed.
“The court may have been trying to force congressional action, but it won’t happen until after midterms,” he said. “The impact of Wayfair could be greater than the Tax Cuts and Jobs Act, especially on small to medium-sized businesses that do interstate sales.”
“In theory there are impediments to the states running roughshod and saying, ‘Everyone has nexus everywhere,’ but the impediments are more theoretical than actual,” he said. “Smaller companies need money to fight in court, and may end up just giving in.”
Smaller companies will also take a big hit in technology expenses, according to Bingel: “A $20 million company with a 5 percent profit margin might have to pay several hundred thousand dollars to get their systems up and start complying. That’s a big hit.”
There could also be some consequences well beyond the sales tax arena, according to Bingel. “The decision solidifies economic nexus in the income tax area,” he said. “The decision may impact net worth and income type taxes.”
Retailers have one less excuse for woes with high court tax win
By Matt Townsend
Chalk up another victory for brick-and-mortar retailers.
Stores with physical locations like Walmart Inc. and Target Corp. are on a winning streak after the U.S. Supreme Court ruled that states can require the collection of sales tax on internet purchases, overturning a 1992 decision that traditional retailers said put them at a disadvantage with online competitors. National retailers with actual stores were already required to collect the taxes, while internet-only competitors and upstarts could sometimes skip the extra levies, making their goods look cheaper for online shoppers.
Good news is a welcome change for a sector that’s endured a brutal few years with surging bankruptcies, store closings and the liquidation of big-name chains like Sports Authority Inc. and Toys “R” Us Inc. This follows last year’s string of successes, when retailers helped to kill a levy on imported goods and saw their federal taxes slashed with a national overhaul.
Now, the retail survivors have one less excuse to blame for their woes.
“They have, in some ways, been hiding behind excuses like a tax differential,” said Edward Yruma, an analyst for KeyBanc Capital Markets. Their complaints have resonated less in recent years as shoppers’ migration online has been more rooted in convenience than price, he said.
“What’s driving the success of online players is this is how the consumer wants to shop today,” Yruma said. “It’s that simple.”
Shares of Wayfair Inc. initially plunged as much as 9.5 percent to $105.11 after the ruling was announced, before paring most of the loss after the company said it doesn’t expect “any noticeable impact.” Amazon.com Inc. dropped as much as 1.9 percent to $1,717.56, while Walmart — which only gets about 3 percent of its U.S. revenue online — reversed earlier declines to gain as much as 1.1 percent to $84.55. Best Buy Co. Inc. advanced as much as 2.5 percent.
The decision “finally brings sales tax collection into the internet age,” Best Buy said in a statement, “and reinforces the basic American notions of fairness and a level playing field for all who choose to compete in the marketplace.”
Industry representatives immediately hailed the decision. Matthew Shay, head of the National Retail Federation, said the Supreme Court ruling “clears the way for a fair and level playing field where all retailers compete under the same sales-tax rules.” Deborah White, general counsel for the Retail Industry Leaders Association, said her group “couldn’t be more pleased with the outcome.”
The long-term impact of the Supreme Court’s decision remains to be seen. States were already collecting about 75 percent of the potential taxes from online purchases, according to the Government Accountability Office. The portion not being taxed could total as much as $13 billion a year, the GAO said.
Many large online sellers were already collecting sales tax in states where they have a physical presence — a legal qualifier under the 1992 ruling in Quill Corp. v. North Dakota. Furniture-seller Wayfair, for example, collects the levy on about 80 percent of its sales — a reflection of its expansion as it opens more warehouses distribution centers across the country.
Amazon says it does collect state taxes on its online sales. But levies on sales from its online marketplace, where third parties offer goods, are collected at the seller’s discretion. These sales account for about half of online giant’s retail revenue. A handful of states already have laws requiring marketplace participants to collect state levies.
If the new state sales tax requirement does end up hurting some of the marketplace sellers, that may actually help Amazon, according to retail analysts at Loop Capital Markets. The company could benefit by selling more of those items directly, which would boost its revenue because Amazon would receive the full price of the transaction instead of just a commission, the research firm said in a note.
Smaller companies may be the most impacted by the decision, according to some of the big online retailers, who say they may lack the staff to follow the rules across thousands of U.S. tax jurisdictions.
“The burden now is reporting in over 9,000 jurisdictions, and will put many sellers in jeopardy,” said Robert Roque, managing director of Beautyvice, an online seller of health and beauty products based in Florida.
The decision may also create more legal questions, since states may begin passing their own statutes with the goal of raising revenue from online retailers, according to Bruce Ely, a tax attorney at Bradley Arant Boult Cummings LLP. Some may even try to collect levies from previous years, he said.
The ruling may also finally spur Congress to pass a law setting a federal standard for which companies have to collect the tax. The statute in South Dakota, which the court upheld, requires collection for retailers with more than $100,000 in annual sales.
Bills trying to address this matter have languished in Congress for years. The main issue is that elected officials didn’t want to be seen as administering a new tax on consumers or businesses. But now, they can act in the interest of bringing clarity to the marketplace, Ely said.
“Here’s a perfect time for Congress to save the business community from the big, bad taxing authorities,” Ely said. “They can look like the good guy, rather than the bad guy, which has a certain political appeal to it.”
— With assistance from Daniel Ralls (Global Data)
Supreme Court abandons physical presence standard in Wayfair
By Sarah Horn
The U.S. Supreme Court’s 5-4 decision in South Dakota v. Wayfair on Thursday overturned the physical presence standard espoused in Quill v. North Dakota and National Bellas Hess v. Department of Revenue of Ill.
In a strongly worded opinion, the court held that the physical presence rule in Quill is an "unsound and incorrect" interpretation of the Commerce Clause that has created unfair and unjust marketplace distortions favoring remote sellers and causing states to lose out on enormous amounts of tax revenue. The court ruled that the correct standard in determining the constitutionality of a state tax law is whether the tax applies to an activity that has "substantial nexus" with the taxing state.
The case involves South Dakota's economic nexus law, which imposes tax collection and remittance duties on out-of-state sellers meeting gross sales and transaction volume thresholds. In overturning its prior precedents, the court determined that physical presence is not required to meet the "substantial nexus" requirement laid out in Complete Auto Transit. The court held that the respondents had established substantial nexus in this case through "extensive virtual presence."
Since the U.S. Supreme Court's 1992 decision in Quill v. North Dakota, the standard for whether a state can require an out-of-state retailer to collect and remit sales tax has been physical presence. In Quill, the court affirmed and elaborated upon its prior decision in Bellas Hess. A seller had to have property, people or some other physical connection with a state to be required to collect and remit sales tax. As a complement to the sales tax, states impose use taxes that require the in-state purchaser to pay tax on taxable items on which no sales tax was paid. Very few consumers comply with use tax requirements. With the rise of the digital economy, states began to lose out on significant sales tax revenues because they were unable to tax online/internet sales under physical presence nexus standards.
Following Quill, states have engaged in various nexus expansion gambits. Over the past decade, assertions of click-through nexus (pioneered by New York) and affiliate nexus have become commonplace. When the U.S. Supreme Court denied certiorari in the appeal of the New York high court's Overstock ruling upholding click-through nexus, the states became emboldened. They grew bolder still following dicta by Justice Kennedy in Direct Marketing v. Brohl, suggesting, “There is a powerful case to be made that a retailer doing extensive business within a state has a sufficiently 'substantial nexus' to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet.”
He urged the court to revisit the physical presence standard, contending that "[T]he Internet has caused far-reaching systematic and structural changes in the economy, and ... it is unwise to delay any longer a reconsideration of the Court's holding in Quill." At the time, Justice Neil Gorsuch sat on the 10th Circuit, which ultimately decided that case and upheld Colorado's remote seller notice and reporting requirements irrespective of physical presence. He characterized the physical presence rule as an "analytical oddity" that "seems deliberately designed" to be overturned.
The Wayfair case examines the constitutionality of a 2016 South Dakota economic nexus law that imposes sales tax collection and remittance requirements on out-of-state sellers delivering more than $100,000 of goods or services into South Dakota or engaging in 200 or more separate transactions for the delivery of goods or services into South Dakota. The law was enacted by the South Dakota legislature as part of an emergency declaration to prevent erosion of the state's sales tax base. It followed the release of a suggested model economic nexus law from the National Conference of State Legislatures, though it did not conform to the model law entirely. South Dakota does not impose an income tax and therefore relies on sales and use tax revenue to fund essential state services. The state enforced the act by filing a declaratory judgment action against three major online retailers with no physical presence in the state: Wayfair, Newegg and Overstock. Following state court decisions in favor of the retailers, South Dakota appealed to the U.S. Supreme Court.
Noting that the issue of sales and use tax nexus turns on the interpretation of the Commerce Clause, the court began its analysis with a lengthy review of its Commerce Clause jurisprudence, going back as far as the early 19th century. The Commerce Clause grants Congress the authority to regulate interstate commerce. A negative corollary, often called the Dormant or Negative Commerce Clause, prohibits the states from passing laws that either facially discriminate against or place undue burdens on interstate commerce. In the context of state taxation, the court endorsed the four-prong test in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), which builds upon Commerce Clause principles, as the correct analytical framework. Complete Auto provides that a state tax will be upheld if it "(1) applies to an activity with substantial nexus with the taxing state, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services the state provides."
The question, then, is whether an activity must meet Quill's physical presence standard to have substantial nexus with a taxing state. The court ruled that it does not. Substantial nexus exists when a taxpayer "avails itself of the substantial privilege of carrying on a business in that jurisdiction." It can be established on the basis of both "economic and virtual contacts" with a state. In the case of South Dakota's economic nexus law, the law's sales volume and dollar amount thresholds were high enough for the court to find that a seller meeting those thresholds would have clearly availed itself of the privilege of doing business in South Dakota. Further, the court noted that the specific respondents (Wayfair, Newegg and Overstock) are large companies that "undoubtedly maintain an extensive virtual presence." The court also observed that targeted advertising and electronic sales may allow a business to have substantial virtual connections to a state without traditional physical presence. Interestingly, the court noted that other functions of e-commerce, such as websites leaving cookies on customer hard drives and apps that can be downloaded on customer phones, may be considered to create almost a physical presence in a taxing state. The court noted the Ohio law and Massachusetts regulation that assert cookie nexus; Iowa recently enacted a law asserting cookie nexus as well. These are discussed in a bit more detail below.
The court not only overruled the physical presence standards of both Quill and Bellas Hess, but eviscerated the rule that physical presence is required for sales tax nexus. Writing for the majority, Justice Kennedy's biting commentary on Quill likened the physical presence requirement to a "judicially created tax shelter" that has created marketplace distortions and unfair and unjust incentives to avoid physical presence in various states. Local businesses are put at a significant disadvantage compared to remote vendors. Justice Kennedy noted that the physical presence rule is "artificial in its entirety" and goes against modern Commerce Clause jurisprudence's emphasis on marketplace dynamics, not "anachronistic formalisms." Specifically discussing Wayfair, Justice Kennedy described the company's business model of advertising that it did not have to charge sales tax as a "subtle offer to assist in tax evasion." Justice Kennedy further mused that Wayfair's image of selling items for beautifully decorated dream homes would not be possible without solvent local and state governments.
According to Justice Kennedy, although the law passes the Complete Auto Transit test, the question remains "whether some other principle in the court's Commerce Clause doctrine might invalidate the act. Because the Quill physical presence rule was an obvious barrier to the act's validity, these issues have not yet been litigated or briefed, and so the court need not resolve them here. That said, South Dakota's tax system includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce."
The Quill standard has never been easy to implement. In the years since the court's 1992 decision, companies have structured themselves in creative ways and taken other steps to try to avoid setting a toe into more than one or two jurisdictions.
While Wayfair clearly overturns the physical presence requirement, it does not provide states carte blanche to enact or enforce all forms of economic nexus laws. South Dakota's law has several features that prevented it from running afoul of Commerce Clause protections:
Other states with economic nexus provisions will need to apply the same test in determining whether those provisions pass constitutional muster.
In recent years, a growing number of states have followed South Dakota and enacted economic nexus laws that intentionally flout the physical presence requirement by asserting nexus based on the number and/or dollar amount of sales into the state. Connecticut, the most recent state to enact an economic nexus law, targets out-of-state sellers making $250,000 in gross receipts and engaging in 200 or more retail sales into Connecticut during a 12-month period. The new nexus standard, which goes into effect on Dec. 1, 2018, also redefines retailers to include marketplace facilitators. Some states, such as Iowa, Ohio, and (through regulations adopted by its taxing agency) Massachusetts, assert the kind of cookie or app nexus discussed by the court in Wayfair. Each of these states will need to apply the Wayfair test in determining whether its standard is constitutional.
A number of states have also enacted detailed notice and reporting laws for out-of-state sellers. Often these are tied to a dollar threshold of taxable sales into the state. Many are cumbersome and impose stiff penalties for noncompliance. Colorado pioneered this approach, and its law was upheld in Direct Marketing Ass'n v. Brohl. A handful of states (Georgia, Oklahoma, Pennsylvania, Rhode Island and Washington) have notice and reporting requirements that are explicitly the default alternative to registering to collect and remit the tax under elective economic nexus provisions.
With the vast majority of states urging the court to overturn the physical presence rule, the states' appetite for asserting nexus against out-of-state retailers is not in question. It is important to bear in mind that many states have laws on the books that by their plain language exceed the physical presence standard and assert nexus based on remote solicitation and resulting in-state sales. Traditionally, taxing agencies in those states tended to accept the physical presence standard and have adopted regulations or issued guidance to that effect, but with the physical presence rule eradicated, those are likely to be repealed or rescinded in short order. A number of states have laws asserting nexus to the greatest extent permitted by the U.S. Constitution and federal law.
For example, Florida law broadly defines dealers having nexus with the state to include, among other things, every person who "solicits business either by direct representatives, indirect representatives, or manufacturer's agents; by distribution of catalogs or other advertising matter; or by any other means whatsoever," and because of these solicitations receives orders for tangible personal property from consumers for use, consumption, distribution and storage for use or consumption in the state. A ruling of Florida's high court limited the law, establishing that the substantial nexus requirements of the Commerce Clause require a dealer to have some type of physical presence in Florida, and more than insubstantial solicitation activities in the state, for the state to assert nexus against the dealer.
New York's nexus law defines an out-of-state vendor having nexus with the state to include a person who solicits business “by distribution of catalogs or other advertising matter, without regard to whether such distribution is the result of regular or systematic solicitation,” if the person has some additional connection with the state that satisfies the nexus requirements of the U.S. Constitution and if because of the solicitation the person makes taxable sales into New York.
Businesses can expect to see rapid expansion of nexus assertions in light of the Wayfairstandard. As discussed above, however, the Wayfair decision still places constraints on nexus. Although states like New York and Florida have laws the plain language of which might allow them to make broad assertions of nexus, those states are not members of the Streamlined Sales and Use Tax Agreement. Barring legislative action, taxing agencies in states like these will undoubtedly face challenges if they expand their assertions of nexus to include contacts that do not meet the physical presence rule. Out-of-state retailers lacking physical contacts could successfully argue, under the new Wayfair standard, that the burden of compliance is too high in states that do not conform to the SSUTA. Whether those challenges would succeed is uncertain but far from unlikely.
Given the court's conclusion that "physical presence is not necessary to create substantial nexus," this decision will impact other state taxes, such as corporate income taxes, which could apply to the income of an entity conducting significant business activities in a state without having a physical presence there. Economic nexus laws in the sales and use tax environment are an import from the corporate income tax realm. Most state and federal courts have taken the position that the physical presence standard does not apply in the corporate income tax environment, and many states have been emboldened to enact "factor presence" laws tied to sales, property or payroll in the state. The U.S. Supreme Court has consistently declined to hear challenges to those laws, and with the test announced in Wayfair more states may follow suit. Changes are likely to be especially pronounced in the handful of states that have taken the position that physical presence is necessary for the state to assert corporate income tax nexus against a corporation.
In overturning National Bellas Hess and Quill, the court has effectively overturned half a century of precedent. Dissenting Chief Justice John Roberts, joined by Justices Stephen Breyer, Sonia Sotomayor, and Elena Kagan, took particular note of this fact, observing that departing from the doctrine of stare decisis is "an 'exceptional action'" requiring a "'special justification,'" even more so when the court is ruling in matters where Congress has "'primary authority.'" The dissenting justices pointed out that this is the third time the court has addressed the physical presence standard and stated that "[w]hatever salience the adage 'third time's a charm' has in daily life, it is a poor guide to Supreme Court decisionmaking."
Although critical of the majority's overruling of those cases, Justice Roberts acknowledged that "Bellas Hess was wrongly decided." The dissent expressed concern, however, that discarding the physical-presence rule at a time when e-commerce is flourishing could be disruptive, and contended that any change to the established rules should come from Congress, as was stated in Quill.
In response to the majority's "inexplicable sense of urgency" in overturning established jurisprudence, Chief Justice Roberts also pointed out that many of the "behemoth" online retailers, such as Amazon, have already begun collecting and remitting the tax (regardless of whether they have a physical presence in a state) and that the revenue loss to states is "receding with time." As was the case in Quill, the dissent is concerned with the effect of the ruling on small businesses who will feel the full weight of the court's decision.
IRS ruling on U.S. credit an unexpected gift to solar developers
By Christopher Martin
The Internal Revenue Service is extending incentives for solar power and other clean energy sources by as long as four years.
Developers can claim a 30 percent tax credit for solar projects as long as they prove they’ve started construction by the end of 2019, according to an IRS notice Friday. That means breaking ground or investing at least 5 percent of the total expected costs of the installation, and they have until the end of 2023 to complete the power plants.
The guidance on the investment tax credit was better than the renewable energy industry had expected, according to analysts at Credit Suisse Group AG. For projects that begin construction after Jan. 1, 2020, the credit drops to 26 percent. The incentive also applies to fuel cell power plants, small wind turbines and a few other technologies.
“The news is positive for utility scale solar developers who can now avoid solar tariffs imposed on imports through 2021, procure majority of their solar panels in later years, and still qualify for the higher tax credits, analysts led by Michael Weinstein, said in the note.
Skimming and scamming: Detecting and preventing expense reimbursement fraud
It can be stated that fraud is the second oldest profession – I’m fond of saying “where there’s money, there’s money to steal.” Even after 15 years as a forensic accountant, it never ceases to amaze me that fraudsters think they can get away with their crimes. All in the name of securing additional cash.
According to the Association of Certified Fraud Examiners’ 2018 Report to the Nations, expense reimbursement fraud accounts for 21 percent of fraud in small businesses (those with less than 100 employees), and 11 percent in large businesses (those with 100 or more employees). In fraud investigations, this type of scheme is often considered the “low-hanging fruit,” because it is easy to detect. If you come across an expense reimbursement fraud, understand that it can also indicate a much larger problem. If someone is willing to perpetrate one scheme, they are often willing to perpetrate others. Cases can range from a few hundred dollars of padded receipts to millions in a systemic scheme that spans several years.
A client of mine recently discovered that their second-in-command and heir-apparent CEO had forged the company CEO’s signature on her expense reimbursements. The company initially wrote it off as poor judgment and an effort to be reimbursed more quickly. Unfortunately, it didn’t take more than a few hours of forensic investigation to discover an unbridled expense reimbursement fraud scheme that spanned nearly 10 years and totaled more than $1.4 million before it was detected. The promising young executive – a woman who had the world by the tail – traded it all for an orange jumpsuit and prison time in a federal penitentiary.
How does expense reimbursement fraud happen?
Expense reimbursement fraud can occur through various schemes. The most common are:
How can expense reimbursement fraud be prevented?
1. Set the tone at the top. No amount of internal control will deter fraud if management does not establish a culture of honesty. This means enforcing anti-fraud policies, ethically conducting the business, providing a safe way for whistleblowers to report suspicion, and rewarding tipsters. Leadership must lead by example and model the expected behavior.
2. Require original receipts for all purchases. It can be easy to manipulate an original receipt before scanning it or copying it, such as changing number 6 to number 8. Requiring original receipts reduces this potential.
3. Require double-review. Even in small businesses, at least one additional review and approval should occur before the expenses are paid. In the case study, had another employee reviewed the reports before a check was cut, the theft might have been deterred immediately.
4. Establish a travel reimbursement policy. These guidelines should detail prohibited activity (such as purchasing alcohol) and per diem limits (such as meals, hotel rates and airfare).
5. Conduct spot audits. Periodic, unannounced reviews of employee expense reports can help uncover anomalies and ensure that proper documentation exists that correlates the expense to the disbursement.
6. Prosecute fraudsters. Employees who violate policies or falsify expense reports should be reprimanded according to the severity of the error, up to and including termination. If they remain unpunished, others will view their actions as acceptable.
Proper oversight of expense reimbursements is as critical as internal controls over incoming cash and outgoing payments. When employees know that significant scrutiny is applied to their reimbursements, they will be less likely to manipulate them. If you suspect fraudulent business expenses in your company, or as a CPA, in your client’s company, a forensic accountant can help detect, quantify and potentially recover lost funds. In addition, he or she can help implement internal controls to reduce the likelihood of fraud occurring in the future.
Tax-cut pitches land with thud as voters fixate on immigration
By Laura Davison and Sahil Kapur
Republican leaders wanted to tout the six-month anniversary of their tax cuts this week. The rest of Washington was too busy to join the fanfare.
Instead, to GOP dismay, another issue dominated the headlines: immigration. It was the latest example of the struggle Republicans face in making the tax overhaul — their signature legislative achievement — resonate with voters.
“I haven’t had time to mark this important date,” Representative Carlos Curbelo, a vulnerable Florida Republican heavily involved in the negotiations over an immigration bill and a member of the tax-writing Ways and Means Committee, said Thursday.
With less than five months of campaigning to go until the November midterm elections that will determine control of Congress, taxes don’t rank among the top five most-pressing issues for voters, according to a recent Gallup poll. And some political consultants are even steering Republican candidates away from tax issues in their re-election campaigns.
Recent spats between President Donald Trump and GOP lawmakers — over immigration policies that separate parents and children illegally crossing the border and additional tariffs on U.S. trading partners — have deflated the legislative euphoria Republicans briefly felt after passing the tax cuts. It’s a common theme — last year, indictments and guilty pleas in Special Counsel Robert Mueller’s investigation into the Trump campaign competed with the rollout of the tax legislation.
House Speaker Paul Ryan used events this week to showcase the tax cuts, calling them a “game-changer for people in this economy.” On Wednesday, he put forth other top Republicans, who also tried to highlight the positive effects of the tax cuts. Almost every question the lawmakers received was about immigration.
Just a day earlier, Senator Orrin Hatch, the Utah Republican who led the Senate’s tax cut charge, gave a speech praising the law. At that moment, every network was focused on Trump, who was about to sign an executive order that ended the policy of separating undocumented immigrant children from their parents.
“I run campaigns all over the country and in every poll we run — in every district, no matter where it is — the No. 1 issue for Republicans is immigration. It’s not even close,” said Harlan Hill, a GOP consultant and adviser to Trump’s 2020 re-election campaign.
Immigration issues have even crept into the tax cut messaging. As lawmakers debate changing the laws for immigrants to legally obtain jobs in the U.S., they also say the economy is demanding more workers.
“We’ve gone from a country that asks ’where are the jobs’ to one that asks ‘where are the workers’,” House Ways and Means Chairman Kevin Brady, a Texas Republican, said in an interview.
Approval of the Republican tax law has slipped six points in the last two months, according to a Monmouth University poll released earlier this week. The survey found that 34 percent of Americans approve, while 41 percent disapprove.
Several surveys show approval of the law falling after increasing earlier in the year, following favorable coverage about companies using their corporate tax-cut windfalls to give raises and bonuses to workers. But those gains have since faded and Democrats have continued to hammer what they deride as a “Republican tax scam” that has disproportionately benefited executives and wealthy Americans.
Perceptions of the tax law aren’t positive even in Republican-dominated states — a Quinnipiac poll of Texas voters taken in April found that 43 percent of voters there approved while 45 percent disapproved of the law.
‘Hurricane of Issues’
Republican strategists who had hoped to focus their fall campaigns on the tax law are having second thoughts. One firm seeking to protect the party’s congressional majorities has seen a drop-off in the effectiveness of its ads touting the overhaul and is mulling a pivot to other issues amid doubts in the tax law’s ability to persuade or mobilize voters to back GOP candidates, according to a person familiar with the matter who was granted anonymity to discuss it.
“It’s not hard to run on taxes so long as the economy is doing well,” said Jason Fichtner, senior research fellow at the Mercatus Center at George Mason University. “But it’s hard to go out and talk about tax law changes when it’s drowned out by trade, immigration, detainments, malfeasance and potential abuses of power by officials.”
After trying different messaging tactics — such as the tax law leading to tax hikes — Democrats are now focused on Congressional Budget Office projections showing the law’s provision to scrap the Obamacare individual mandate tax penalty is causing higher health-care costs.
While taxes rank low among the issues motivating voters, several recent surveys have found that health care is the top issue for Americans nationally.
Debbie Mucarsel-Powell, the Democrat facing Curbelo in one of the most competitive races, released a statement Wednesday blasting the Republican for having voted for Trump’s “massive tax cut for corporations that will line the pockets of the wealthiest Americans, including his family and donors, and will raise health-care premiums for families everywhere.”
Republicans are hoping to revitalize interest in taxes by introducing legislation that would extend the tax cuts for individuals and streamline tax-favored retirement and education savings accounts.
“There are a hurricane of issues right now in Washington, which makes it harder,” Brady said. “I know this, if tax reform weren’t working there would be plenty of coverage of it. Every indicator is better than before.’”
Postcard-size 1040 tax form to be released next week
By Michael Cohn
Treasury Secretary Steven Mnuchin said his department will be releasing a postcard-size Form 1040 next week, fulfilling one of the promises of last December’s tax overhaul.
“Next week, we will be unveiling the new 1040, and it will be a postcard as we’ve promised, and hardworking taxpayers won’t have to spend nearly as much time filling out their taxes,” Mnuchin said at an event Wednesday marking the six-month anniversary of the passage of the Tax Cuts and Jobs Act, according to The Hill.
The tax overhaul doubled the standard deduction and eliminated a number of tax deductions, including the deduction for moving expenses that has been on the traditional two-page Form 1040. However, many tax deductions were only limited by the tax reform law, like the deduction for state and local taxes, and deductions are typically itemized on Schedule A, not on the Form 1040 itself. The doubling of the standard deduction and limitations on other deductions are expected to encourage a growing number of taxpayers to just opt for the standard deduction.
The tax code remains complex, and last December’s reforms still did not go very far in the way of tax simplification. In February, Congress actually renewed dozens of tax breaks that had expired at the end of 2016 and made them retroactive for 2017.
After the passage of last December’s tax law, skepticism abounded that a postcard-size Form 1040 was possible, even though the Internal Revenue Service has offered the shorter Form 1040A and 1040EZ versions for decades for taxpayers with relatively straightforward tax situations. During press conferences leading up to the passage of the Tax Cuts and Jobs Act, Republican lawmakers spearheading the effort like House Speaker Paul Ryam, R-Texas, and House Ways and Means Committee Chairman Kevin Brady, R-Texas, showed a mockup of what a postcard-size tax form might look like. But an actual draft of the Form 1040 for next tax season has not yet been posted by the Internal Revenue Service to IRS.gov. To fit it all on a postcard, the font size might have to be reduced.
Supreme Court’s Wayfair decision sidelines Quill
The Supreme Court, in a 5-4 decision penned by Associate Justice Anthony Kennedy, came down on the side of the states in the landmark case South Dakota v. Wayfair, granting them greater power to require out-of-state retailers to collect sales tax on sales to in-state residents. Chief Justice John Roberts wrote a dissenting opinion.
At issue was the court’s 1992 decision in Quill v. North Dakota, which established the physical presence test for sales and use tax nexus. That was before the surge of online sales, and states have been trying since then to find constitutional ways to collect tax revenue from remote sellers into their state.
“Prior to today, Quill required that, to force out-of-state retailers to collect tax on sales to residents of the state, the out-of-state retailer had to have a physical presence in the state,” said Jon Barooshian, a partner at law firm Bowditch. “Today’s decision makes a dramatic change.”
“The Supreme Court is saying that technology has changed so dramatically that Quill and National Bellas Hess [a 1962 case prohibiting a state from requiring a seller to collect use tax on sales by mail to customers in the state] are basically anachronisms,” he said.
“States like South Dakota will now be allowed to require sellers that are selling substantial amounts of product into the state to collect and remit sales tax,” he said.
Additional litigation might be in the offing, according to Barooshian. “Issues regarding smaller mom-and-pop retailers, and the amount of sales necessary to impose the collection obligation on them, would be decided on a case-by-case basis,” he said.
Prior to the decision, many states had already begun planning for the possible overturn of Quill (see “States plan for a post-Wayfair world”).
Former IRS agent convicted of filing false tax returns
By Michael Cohn
A former special agent in the Internal Revenue Service’s Criminal Investigation unit was convicted on charges of filing false tax returns, obstruction of justice, and stealing government money.
A jury in Sacramento, California, found Alena Aleykina guilty of the charges on June 15 after a two-week trial. She had been indicted in 2016 on the charges (see Former IRS special agent indicted on tax charges).
Aleykina, of Sacramento, is a CPA and holds a master’s degree in business administration. Prosecutors accused her of filing three false personal tax returns for 2009, 2010, and 2011 and three returns in the names of trusts she created for years 2010 and 2011. On her personal tax returns, prosecutors said she fraudulently claimed the head of household filing status, false dependents, and deductions for education expenses to which she was not entitled. She also falsely claimed on a trust tax return to be paying wages to her mother and her sister to care for her son and for her father, according to the charges.
Aleykina allegedly also stole government funds from the IRS’s Tuition Assistance Program by falsely claiming $4,000 in tuition reimbursement for classes that she didn’t take and obstructed justice during the investigation. When criminal investigators asked her to retrieve her government laptop, she allegedly lied to the agents about its location and started deleting files after the agents left. The total loss to the government from Aleykina’s conduct is estimated at more than $60,000.
Sentencing for Aleykina is scheduled for September. She faces up to three years in prison for each false tax return count, 10 years in prison for theft of government funds, and 20 years in prison for obstruction of justice. The court could also order her to serve extra time on supervised release, and pay restitution and monetary penalties.
Trump used charity as his checkbook, N.Y. says as it flags IRS
By Shahien Nasiripour, Chris Dolmetsch and Christie Smythe
President Donald Trump’s personal charity repeatedly and willfully broke state and federal laws by engaging in a decade-long pattern of self-dealing that culminated in illegal coordination with his political campaign, New York alleged in a scathing lawsuit.
The president is accused of rampant misconduct by using the charity as one of his personal checkbooks, directing funds meant for needy causes to settle business and personal debts, boost his political aspirations and benefit his namesake company, the Trump Organization. He also filed false statements with the Internal Revenue Service, according to the suit.
Barbara Underwood, the state’s attorney general, is seeking to dissolve the charity and personally penalize Trump and three of his children. She said she also sent referral letters to the IRS and the Federal Election Commission for further investigations of possible violations of federal law.
The lawsuit and referrals deepen the president’s extensive legal woes, adding to U.S. Special Counsel Robert Mueller’s investigation of his campaign; a federal investigation in New York of his longtime lawyer and fixer Michael Cohen; civil suits related to hush-money deals; and claims the president’s businesses illegally take money from U.S. and foreign governments.
Dissolution of a charity is “an extraordinarily rare remedy” sought only when “the lack of governance or the level of misconduct is so significant that the foundation is no longer capable of governing itself,” Jason Lilien, a former chief of the state attorney general’s charities bureau, said in a phone interview. “It must be crystal clear there’s no doubt there’s been a violation of the law to take this action against the President of the United States and his family.”
Underwood sued the Donald J. Trump Foundation, Trump, his daughter Ivanka and his sons Donald Jr. and Eric, seeking a court order forcing the immediate closure of the foundation and repayment of at least $2.8 million in charitable funds that Trump allegedly directed toward his 2016 campaign.
The Trump Foundation rejected the allegations, accusing Underwood and her predecessor, Eric Schneiderman, who started the investigation, of engaging in a political campaign to smear the president and his children.
For example, according to the foundation, Schneiderman often solicited campaign funds by citing his efforts to challenge Trump and his administration. Schneiderman also advised Trump’s opponent in the 2016 campaign, Hillary Clinton.
Trump’s charity donated more money than it received, according to the foundation, and should be celebrated for incurring virtually no expenses, “so that the maximum amount of money could be sent to incredibly worthwhile causes,” Eric Trump said in a phone interview. The foundation gave out more than $19 million over its roughly 30-year existence.
“These actions are truly sad, and exemplify the famous saying, ‘No good deed goes unpunished,’” Eric Trump said.
President Trump, who turned 72 on Thursday, wrote on Twitter that Schneiderman “never had the guts to bring this ridiculous case” and that Underwood and “sleazy New York Democrats” only sued after he made it clear he wouldn’t settle. Trump had made a similar vow about a fraud suit Schneiderman brought over Trump University, but ended paying $25 million to settle that case.
Trump said in December 2016 that he intended to dissolve the foundation amidst concerns about possible ethical conflicts, but the attorney general said at the time that it couldn’t shut down until its investigation was over.
In the foundation lawsuit, Trump and his family are accused of violating multiple laws, including making false statements in state and federal financial documents, wasting charitable assets, and violating the tax code by making expenditures to influence the outcome of an election.
“Mr. Trump’s wrongful use of the foundation to benefit his campaign was willful and knowing,” Underwood said in the lawsuit. “He repeatedly signed, under penalties of perjury, IRS Forms 990 in which he attested that the foundation did not engage in transactions with interested parties, and that the foundation did not carry out political activity.”
In early 2016, Trump’s presidential campaign allegedly directed where and when millions of dollars of charitable funds would go based on the Iowa caucuses, a crucial early primary that can make or break a nascent presidential campaign.
A spokeswoman for the Federal Election Commission said the agency doesn’t comment on potential enforcement matters.
Trump staff, including former campaign manager Corey Lewandowski, dictated the timing, amounts and recipients of the money to nonprofits, according to the lawsuit, which cited internal emails between the campaign and executives at the Trump Organization who also worked for the foundation.
“I think we should get the total collected and then put out a press release that we distributed the $$ to each of the groups,” Lewandowski wrote in a January 2016 email to Allen Weisselberg, a longtime Trump Organization executive who was the foundation’s treasurer.
Underwood also wants to temporarily block the Trumps from serving as a director of any New York nonprofits, an unusual rebuke of a sitting president that one former New York state official said is only sought for people deemed unfit for charitable service.
Underwood said the foundation entered into at least five transactions that were illegal because they benefited Trump or his businesses. They include a $100,000 payment to settle claims against his Mar-A-Lago resort and a $158,000 payment to resolve a suit against Trump National Golf Club over non-payment of a prize for a hole-in-one contest.
She accused Trump of running the charity “according to his whim, rather than the law.”
The case is People of the State of New York v. Donald J. Trump, 451130/2018, New York State Supreme Court, New York County (Manhattan.)
Cohn says trade disputes could wipe out tax cut benefits
By Margaret Talev
Gary Cohn, President Donald Trump’s former top economic adviser, said trade disputes could wipe out the benefits of the tax cuts Congress passed last year and may trigger an economic slowdown.
Companies are hesitating to make investments because they want to see how the trade negotiations play out, according to Cohn, who previously served as president of Goldman Sachs Group Inc. The tax overhaul slashed the corporate rate to 21 percent from 35 percent, and created other incentives for businesses, such as writing off capital expenditures right away.
“Businesses are very systematic,” Cohn said Thursday at an event sponsored by the Washington Post. “These are all parts of the equation that will have to be balanced out.”
The former Trump adviser added that an escalating conflict over trade could provoke a recession in the U.S. Tariffs feed inflation and raise consumer debt, which historically have been ingredients for an economic slowdown, he said. “You never know what leads you in ’til you’re in it,” Cohn said, referring to recessions.
He also suggested that Trump’s focus on the trade balance is unjustified. “I have always said a trade deficit doesn’t matter,” said Cohn.
The Trump administration plans to announce on Friday a final list of tariff targets in China, which will be imposed shortly thereafter. China is expected to retaliate with tariffs of its own if the U.S. goes ahead with its plans. In a preliminary list, the U.S. said it would levy an additional 25 percent duty on everything from TV components to dishwashers and snowblowers. Many companies have warned that the tariffs would increase their costs and raise prices for consumers.
Republican leaders including the heads of the tax-writing panels in the House and Senate have also warned of the effects a trade war could have on the tax overhaul.
“These tariffs are ultimately paid by American consumers and cause harm to American manufacturers, undermining the success of tax reform,” Senate Finance Chairman Orrin Hatch said in a statement Wednesday announcing an upcoming hearing on the steel and aluminum tariffs.
Cohn said there hasn’t yet been signs of the surge in capital expenditures that the administration predicted the corporate tax cuts would generate.
Still, he said he remained “pretty confident” the tax cuts would give companies incentive to build new factories and hire more people as soon as “maybe next quarter.” But he said it may take as long as three to five years for a boost in corporate capital expenditures to materialize.
First-quarter earnings reports from S&P 500 companies showed the country’s largest corporations haven’t stepped up the portion of profits they devote to job-producing investments since the tax cut, even though it added about $30 billion to their collective bottom line during the quarter.
Relative to cash flow, the corporations are spending about what they always spent on such things as employment-boosting capital expenditures and shareholder goodies in the form of dividends and stock buybacks.
In no small trick, Tony Hawk’s accountant keeps him grounded
By Danielle Lee
Professional skateboarder Tony Hawk has defined his career by taking risks so, unsurprisingly, he championed a similar business strategy during his keynote address at the American Institute of CPAs’ Engage event in Las Vegas Wednesday.
The fearlessness that led Hawk to become a pioneer in skateboarding -- a self-professed "uncool" activity when he started back in the 1970s but which he eventually brought to the mainstream -- has also been a guiding factor in his numerous business endeavors. Some of his entrepreneurial gambles have paid off big, in the form of his long-running skateboard and clothing company Birdhouse and popular video games, while others have been less successful, he shared with the audience.
One example was when he partnered with a fashion designer on expensive jeans.
“I didn’t know the cost incurred in building that brand,” Hawk said. “All the profits were eaten up by the high-end denim brand, and we realized the hard way that we couldn’t just get into any field. We finally sold it for what we owed the bank. It was a hard lesson, and we were lucky we got out of it. It wasn’t something I could necessarily learn that quickly — stay with your expertise, follow your passion, and you have to really believe in it, and follow through with it.”
Hawk’s passion has fueled his legendary career, and he continues to surround himself with a team of similarly passionate people who complement his talents with their own business expertise. In every new endeavor, Hawk also relies on his accountant, Sandy, to advise him.
“She’s heard all my crazy ideas. I call her the fun police in jest … . Thankfully she’s there as a voice of reason,” Hawk laughed, before addressing the crowd of CPAs: “Thank you for keeping us in check.”
At the AICPA conference, Hawk shared some of his productivity tips for small businesses, and by extension their accountants, in “Tony Hawk’s Tricks: Small Business Guide to Productivity,” which he created as part of his collaboration with Chase Ink.
In a later interview, when asked how he would advise accountants who serve creative and risk-embracing clients like himself, he explained that “the best thing is to show me the projections. It gives me a better indication of how risky things can be.”
One of Hawk’s accountants did just that when he launched a new extreme sports tour.
“I drew out a sketch for a ramp system with all of those sports,” Hawk recalled. “I had a sketch and a dream, and was talking to people familiar with doing tours, a band manager who knew arena tours, and he brought in his crew. We brought in the accountant, and he was mostly concerned with the timeline … [I thought], he’s not listening to me, fulfilling my dreams — who brought him?” The audience laughed as Hawk explained that he ended up being “thankful because we decided to push the whole tour back, and did a test show in Vegas.”
While accountants have successfully managed some of Hawk's more impulsive ideas, he still recommends taking new risks. He likened this business approach to the one he takes in perfecting new skateboarding tricks. For every 900 (the two-and-a-half-revolution aerial spin that Hawk was the very first to successfully complete), there are numerous other tricks he didn't land.
“I’m continually looking for challenges, and embracing adversity,” Hawk said. “If there’s a stumbling block, I see how to get around it … I’ve learned that through years of skating, and trying tricks. If I do try a trick, and it fails, but turns into something else by accident, those are usually the best moments, the most innovative. I do that in business as well.”
IRS private debt collectors target low-income taxpayers
By Michael Cohn
Private debt collection agencies that are collecting tax debts on behalf of the Internal Revenue Service have been forcing many taxpayers into payment plans they can’t afford.
National Taxpayer Advocate Nina Olson found that of the taxpayers put into payment plans by private collection agents, 43 percent had income lower than their allowable living expenses.
The IRS revived the private debt collection program last year after Congress passed legislation in 2015 requiring the agency to restart the program, even though it had been shut down twice over the years because it failed to pull in the anticipated tax revenue and cost more money to run than it collected (see IRS revives private debt collection program). Four private businesses were contracted to participate in the program: CBE Group of Cedar Falls, Iowa; Conserve of Fairport, N.Y.; Performant of Livermore, California; and Pioneer of Horseheads, N.Y.
Olson has long criticized the private debt collection program, which has long drawn complaints for harassing taxpayers. Her office, the Taxpayer Advocacy Service, examined the recent returns of approximately 4,100 taxpayers who made payments to the IRS after their debts were assigned to private collection agencies through Sept. 28, 2017. The data indicated that 28 percent had incomes below $20,000; 19 percent had incomes below the federal poverty level; and 44 percent had incomes below 250 percent of the federal poverty level. Olson pointed out that the IRS uses 250 percent of the federal poverty level as a proxy for economic hardship in several situations, such as in administering the Federal Payment Levy Program.
“This pattern of taxpayers whose debts are assigned to (private collection agencies) entering into (installment agreements) and making payments they appear to be unable to afford is continuing,” Olson wrote Wednesday on her blog.
In 2016, before the private debt collection program was revived, the IRS’s internal debt collection processes using IRS employees generated $4.7 billion in tax revenue. Under the private debt collection program, most of those internal procedures are bypassed in favor of referral to the outside collection agencies, which are able to keep up to 25 percent of what is collected. However, the program is already costing the U.S. Treasury more money than it brings in, according to the National Treasury Employees Union, which represents IRS employees and has long opposed the program.
“And now we learn that it is adding more financial hardship on American families already struggling to keep up with their bills,” NTEU national president Tony Reardon said in a statement Friday. “This is the third time Congress has steered public IRS business to private collection agents, and like the first two times, it should be canceled.”
Private collection agencies solicit full payment of the tax debt when they contact taxpayers, and if the taxpayer can’t immediately pay the debt, the private debt collector can offer an installment agreement, Olson noted.
Olson said her office is continuing to gather data about how taxpayers are faring in the hands of the private collection agencies. With the latest iteration of the program more than a year old now, her office plans to look into how often taxpayers default on the installment agreements they enter into while their debts are assigned to private collection agencies. Olson intends to include the results in a report to Congress that will be published later this month.
A little-known IRS agent exposed the biggest scandal in sports
By Eben Novy-Williams
There are two types of soccer executives, according to 2011 testimony given by Chuck Blazer, then the highest-ranking American in international soccer: those who take bribes, and those who pay them.
That, in a sentence, is the central theme running through Ken Bensinger’s new book, Red Card: How the U.S. Blew the Whistle on the World’s Biggest Sports Scandal. In it, the Buzzfeed investigative reporter details how the unlikeliest of countries—the one that cares the least about soccer—became the one that finally exposed its criminal underbelly.
International soccer, in Bensinger’s telling, became a hotbed for corruption in the early 1980s, when such tournaments as the World Cup and South America’s Copa America became viable commercial properties. A rush of money gave rise to a new kind of business: the sports marketing company, a middle agent that bought the media and sponsorship rights to a specific league or tournament, then turned around and sold segments of those rights to broadcasters and advertisers around the world.
Bribes are a principal part of those transactions. FIFA is made up of six regional bodies that, in turn, host more than 200 national associations. Each region has its own set of tournaments, World Cup qualifiers and league matches to sell. In order to gain the rights at a lower price, sports marketers often paid executives under the table. Many of those payments were processed by U.S. banks—Merrill Lynch, J.P. Morgan Chase, Wells Fargo.
That last point is critical. Because if you were looking for the perfect person to expose the widespread corruption within international soccer, a cubicle on the third floor of the IRS office in Laguna Niguel, California, might be the last place you’d have looked.
Yet that’s exactly where the U.S. government’s far-reaching investigation into soccer corruption took off, specifically in 2011, when an IRS agent named Steve Berryman got involved. An American who had grown up in England, Berryman’s expertise in tracking illicit payments and tax evasion, combined with his love of soccer (he even rightly calls it “football”), made him uniquely suited to link bribes among sports officials and the marketing companies that buy and sell their rights.
Using the same tactics that convict crime syndicates, the U.S. government was able to follow the money as it passed through American financial institutions. It helped agents build a web of crimes that included tax evasion and bribery, wire fraud and money laundering. In citing the case of Al Capone, Bensinger compares Berryman not to Eliot Ness, the dashing G-man with the team of “Untouchables,” but rather Frank J. Wilson, an agent for the Treasury Department’s Intelligence Unit who connected the tax dots that would ultimately bring down the mob boss.
Berryman was a similar breed. “We do the financial s--- nobody else wants to touch,” he often said. And like Capone, Blazer was eventually caught on tax evasion. In exchange for a lighter sentence, Blazer agreed to work with investigators. Sitting in a conference room in the U.S. Attorney’s Office in Brooklyn, he explained how he’d skimmed $20 million from North American soccer’s governing body, known by the acronym Concacaf, without paying a dime of taxes, and how illicit payments and back-room dealings represented the financial heart of international soccer.
Bensinger details Blazer’s infamous 10 percent commission—on everything—as general secretary of Concacaf. He once paid himself $300,000 of a $3 million FIFA grant to build a television production studio on the 17th floor of Trump Tower. (Blazer’s own apartment in the building consisted of two adjoining units on the 49th floor, which he rented for $18,000 a month.) Bensinger also notes that over a seven-year period, Concacaf paid $26 million to American Express to cover expenses, which Blazer then used to earn enough points for 200 round-trip, first-class tickets from the U.S. to Europe. In 2011 alone, Blazer allocated himself $4.2 million in commissions.
He had a $900,000 beachside condo in the Bahamas, as well as two South Beach apartments and a Hummer, all paid by Concacaf. He was a frequent guest at Elaine’s restaurant in New York. And when Berryman started looking into Blazer’s finances, he discovered that Blazer hadn’t paid any taxes in 17 years. In fact, he had never filed a W-2.
The six-year investigation culminated in a pair of 2015 raids at the Baur au Lac, one of Zurich’s fanciest hotels, in which rooms begin at $600 per night. The fallout eventually reached the highest levels of the sport. In total, 92 criminal counts were levied against 27 different defendants, not including subsequent investigations in other jurisdictions.
Blazer died in 2017 before being sentenced. His close friend and associate Jack Warner, former president of Concacaf, remains in his home country of Trinidad, fighting extradition on charges of taking tens of millions in bribes. Warner is one of three consecutive Concacaf presidents snared in the probe. It also indicted three consecutive presidents of Concacaf’s South American governing body Conmebol.
Jose Hawilla, a Brazilian businessman who founded a prominent sports marketing firm, agreed to forfeit $151 million to the United States when he began cooperating with investigators. An executive at another firm later admitted to paying $150 million in bribes to dozens of officials.
Soccer fans looking for a timely read will find little in Red Card’s pages about the bid process for the 2018 World Cup in Russia, which starts this week. (Accusations abound.) Instead, Bensinger chose to focus primarily where investigators did: on the Americas. Along the way, readers will likely spot some familiar names, including Christopher Steele, the former British intelligence officer who first tipped off the FBI to the corruption within global soccer—but who is now famous for his dossier on Donald Trump—and Vitaly Mutko, the Russian politician who recently received a lifetime ban from the Olympics for his role in the country’s doping conspiracy.
Red Card, like the investigation it follows, serves as an opening chapter in the quest to clean up international soccer. As far-reaching as the investigation became, it did not focus on FIFA’s central governance or on the other regional bodies. Bensinger ends his book much as he starts it: with Berryman, the IRS agent and lifetime Liverpool supporter.
For his next act, Berryman is setting his sights on a lesser-known part of the soccer landscape. In 2016, he delivered a three-hour Powerpoint presentation to prosecutors in Brooklyn to grant him the go-ahead to dig into Concacaf’s Asia counterpart, which was run by Mohamed bin Hammam from 2002 to 2011. The Qatar-based billionaire popped up a few times during Berryman’s original investigation, tracing envelopes of cash that bin Hammam delivered to Caribbean soccer bosses. His fingerprints are also all over the controversial decision to award the 2022 World Cup to Qatar.
Retailers and restaurants want fixes to new tax law
By Michael Cohn
Trade groups representing the retail and restaurant industries are asking Congress to make several technical corrections to the Tax Cuts and Jobs Act, warning that some of the mistakes in the hastily drafted legislation could cost the industries millions of dollars.
The technical corrections relate to provisions of last December’s tax overhaul involving depreciation and net operating loss carrybacks.
Under the Tax Cuts and Jobs Act, remodeling and other improvements to stores or restaurants were supposed to be fully depreciated in the first year the work is performed. Instead, a mistake in the legislative language requires the depreciation to be done over the course of 39 years. Congressional officials have conceded that the 39-year requirement is a drafting error but haven’t yet corrected the mistake.
“The delay in correcting these provisions has caused economic hardship for some retailers and restaurants and is also delaying investments across the economy,” the Retail Industry Leaders Association, the National Retail Federation, the NRF’s National Council of Chain Restaurants, and other trade groups wrote in a letter last week to members of the House and Senate tax-writing committees: the House Ways and Means Committee and the Senate Finance Committee.
“This very large difference in the after-tax cost of making improvements is causing a delay in some store and restaurant remodeling projects, as well as causing some retailers to decline opportunities to purchase or lease new store locations that would require substantial improvements,” said the letter. “These decisions not only deny communities the jobs associated with substantial construction projects but also deny our communities the opportunity to bring new, permanent jobs to an otherwise abandoned store or to revitalize a declining mall.”
A separate error in the far-reaching legislation got the effective date of carryback eligibility incorrect, leading to “a retroactive tax increase on businesses that are in loss positions and already facing liquidity issues,” according to the letter. “This timing difference is critical to cash-strapped businesses that were counting on the carryback to finance continuing operations as well as investments needed to revitalize their businesses.”
The staff of Congress’s Joint Committee on Taxation has been working on a set of technical corrections for the Tax Cuts and Jobs Act since its passage. Thomas Barthold, chief of staff of the Joint Committee said during a tax conference in New York in April he hopes to have it in legislative form by the end of this year (see Congressional staff aims to finish technical corrections to tax reform bill). However, the prospects for a technical corrections bill are uncertain and may hinge on the outcome of the midterm election in November. Democrats and Republicans alike in Congress agree that the bill needs to be fixed, but Democrats who were largely left out of the process of drafting the tax code overhaul last year want more far-reaching changes than Republicans are likely to agree on, in areas such as limitations on deductions for state and local taxes, for example. The two parties managed to agree on a fix earlier this year involving agricultural cooperatives and large agribusinesses known as the “grain glitch” and to insert it in an appropriations bill, which was a priority for Republicans in farm states, in exchange for strengthening of low-income housing tax credits, a priority for Democrats (see Congress to give IRS $320M funding boost to administer new tax law while fixing ‘grain glitch').
However, other technical corrections are also being sought in areas such as tax credits for bonded wine cellars, and tax deductions for charitable contributions and sexual harassment settlements, according to The Hill. More horse trading between lawmakers in both parties will probably be needed before those provisions get fixed.
Tori Spelling among California’s top tax delinquents
Long-time television personality Tori Spelling and her husband are among the headliners of the top 500 delinquent California taxpayers, according the latest list from the state’s Franchise Tax Board.
Spelling, 45, and her 51-year-old husband Dean McDermott owe $282,654.92 to the state in personal taxes, according to the latest list.
Spelling’s alleged debt is a laugh, however, compared with comedian Chris Tucker’s $1,245,858.25. Tucker settled tax troubles some time ago with the IRS.
Other owing celebs, according to the FTB: Motown songwriter Lamont Dozier ($3.6 million), singer Macy Gray (under her name Natalie Hinds, $240,990.74) and rapper Xzibit (under his name Alvin Joiner, $231,579.03).
The top 500 owed amounts ranging from $192,485.69 to some $266 million. The FTB says it is legally required to post this list at least twice annually.
When is a debt worthless – and tax deductible?
Just because a creditor thinks a debt has become worthless doesn’t mean they can deduct it, according to a recent Tax Court ruling.
A debt that becomes wholly worthless within the taxable year is deductible as a business bad debt. To deduct a business bad debt, the taxpayer must show the existence of a valid debtor-creditor relationship, that the debt was created or acquired in connection with a trade or business, the amount of the debt, the worthlessness of the debt, and the year that the debt became worthless.
The recent Tax Court case, Sarvak v. IRS, T.C. Memo 2018-68, illustrates the problem with determining just when a debt becomes worthless. It faulted the taxpayer for not providing objective proof that a bad debt became worthless in the year he claimed.
Bradford Sarvak was a real estate mortgage broker doing business as Emery Financial Inc., an S corporation of which he was president and sole shareholder. In 2011, Emery made a series of advances to William Boehringer and to others on Boehringer’s behalf totaling $362,122. The advances were made by checks, credit card payments, and wire transfers, and were recorded on Emery’s general ledger as a loan receivable from Boehringer.
Sarvak met Boehringer in 2003, when he purchased a lot in Aspen, Colorado, from him, which he developed and later sold. He was familiar with other projects of Boehringer’s over the years. The advances he made in 2011 were unsecured, and neither Emery nnor Sarvak made a public filing to record a debt in connection with the advances.
An adjusting entry in Emery’s general ledger for Dec. 31, 2011, reflects that Sarvak instructed that the loan receivable for the 2011 advances be written off.
A bad debt is deductible only for the year in which it becomes worthless. Worthlessness is determined by an objective standard, and is usually shown by identifiable events that form the basis of reasonable grounds for abandoning any hope of recovery, according to the court. “The subjective opinion of the taxpayer that the debt is uncollectible, without more, is not sufficient evidence that the debt is worthless,” the court said.
“[Sarvak] failed to present any evidence that the alleged debt was objectively worthless in 2011,” the court observed. “He testified only as to his subjective belief.”
Sarvak testified that Boehringer told him in early 2012 that he could not repay the 2011 advances, but Sarvak offered no reasoning as to why, in that case, the alleged debt should be treated as worthless on Dec. 31, 2011. Moreover, according to the court, even accepting Sarvak’s uncorroborated testimony, Boehringer’s 2012 statement would not be enough to establish that the alleged debt to Emery was objectively worthless.
“[Sarvak] did not describe any actions taken to try to collect the alleged debt, and he testified that he did not know whether Boehringer was actually insolvent in 2012,” it stated. “There is no reasonable explanation for advancing more funds to Boehringer in 2012, which [Sarvak] also described as a business loan, if the prior advances were deemed totally unrecoverable.”
“It’s not that easy to decide when a debt actually becomes worthless,” said Roger Harris, president of Padgett Business Services. “If someone dies or goes into bankruptcy, that makes it worthless. But if they don’t pay for 24 months, why is it a bad debt in the 25thmonth when it’s not a bad debt in the 12th or 18th month?”
“At some point it makes sense to decide, ‘I’ve had enough, I’ll write it off,’” he continued. “But you have to show the proper documentation, any attempts to collect, and the reason it’s worthless now. Sometimes you’re just tired of trying to collect it but you can’t point to a singular event – you just gave up.”
By Paul Caron
Republicans have quietly imposed a new tax on churches, synagogues and other nonprofits, a little-noticed and surprising change that could cost some groups tens of thousands of dollars.
Their recent tax-code rewrite requires churches, hospitals, colleges, orchestras and other historically tax-exempt organizations to begin paying a 21 percent tax on some types of fringe benefits they provide their employees.
That could force thousands of groups that have long had little contact with the IRS to suddenly begin filing returns and paying taxes for the first time.
Many organizations are stunned to learn of the tax — part of a broader Republican effort to strip the code of tax breaks for employee benefits like parking and meals — and say it will be a significant financial and administrative burden.
It also means political peril for lawmakers, many of whom were surely unaware of the provision when they approved the tax plan. Churches’ tax-exempt status, in particular, has long been considered sacrosanct and Republicans are relying on the faithful to back them in the November elections.
Though many organizations are still unaware of the tax, more than 600 churches and other groups have already signed a petition demanding it be repealed.