Rosa Tax Law Blog

Tax law and accounting news and updates from Richard A. Rosa, CPA

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Chicago Imposes Tax on Electronically Delivered Tax Preparation Functions

The City of Chicago Finance Department has issued an Amusement Tax Ruling that imposes a nine percent amusement tax on electronically delivered amusements.

To be clear, that’s not a tax on online sales. The ruling pretty much explicitly states the following:

“The amusement tax does not apply to sales of shows, movies, videos, music or games (normally accomplished by a "permanent" download). It applies only to rentals (normally accomplished by streaming or a "temporary" download). The charges paid for such rentals maybe subscription fees, per-event fees or otherwise.“

What it does apply to is the following:

- charges paid for the privilege of listening to electronically delivered music or watching electronically delivered television shows, movies or videos delivered to a customer in the City; and

- charges paid for the privilege of participating in games, on-line or otherwise, delivered to a customer in the City.

It’s not just cloud-based streaming entertainment service providers who are facing a tax in Chicago. The City’s Finance Dept. also issued a Personal Property Lease Transaction Tax Ruling that imposes the tax on charges for a wide range of information and services accessed by professionals.

This includes charges incurred for:

- legal research or similar on-line database searches;

- to obtain consumer credit reports;

- to obtain real estate listings and prices, car prices, stock prices, economic statistics, weather statistics, job listings, resumes, company profiles, consumer profiles, marketing data, and similar information or data that has been compiled, entered and stored on the provider's computer; and

- to perform functions such as word processing, calculations, data processing, tax preparation, spreadsheet preparation, presentations and other applications available to a customer through access to a provider's computer and its software.

The rulings also address, to a degree, the issue of nexus by positing that there is no question that the tax applies since it is imposed on a patron in the city for an activity taking place in the city.

They leave open the question of whether the provider is obligated to collect the tax from their Chicago-based customers on behalf of the City, noting that that issue is beyond the scope of the ruling.

In any case, no one seems to be leaning towards challenging it. Netflix, one of the companies that faces a huge impact in Chicago due to this tax, has stated that they will be passing on the tax to their customers.

Photo credit – Victorgrigas/flickr

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Offshore Reinsurance Tax Fairness Act Aims to Plug PFIC Loophole

Sen. Ron Wyden (D-OR), ranking member of the Senate Finance Committee, has introduced legislation that seeks to prevent offshore tax avoidance by U.S. hedge fund reinsurers.

The bill (S.1687 - The Offshore Reinsurance Tax Fairness Act), if passed into tax law, will amend the Internal Revenue Code to restrict the insurance business exception to passive foreign investment company (PFIC) rules.

This PFIC reinsurance loophole has been deftly used by U.S. hedge funds and hedge fund investors to establish tax strategies that have allowed them to avoid paying hundreds of millions of dollars in U.S. taxes.

The way it works is that the hedge fund or its investors make capital investments in an offshore reinsurance company, which then turns around and reinvests it (and premiums) back into the hedge fund.

The PFIC rules are specifically designed to prevent U.S. taxpayers from delaying tax on investment income by holding investments through offshore corporations. But it has an exception for income derived from active conduct of an insurance business by a company predominantly engaged in an insurance business.

The law isn’t that clear on exactly what level of insurance activity is required to classify a corporation as an insurance or reinsurance business. This lack of clarity has lead to many companies simply fronting as insurance companies to take advantage of the loophole.

In April, the Treasury and IRS proposed regulations that provided a first step in addressing this issue. Sen. Wyden’s tax fix aims to provide even more clarity by providing a specific 25 percent test to determine whether a company qualifies as a insurance company that can take advantage of the exception to the PFIC rules.

The amendment to the tax code would classify insurance companies with insurance liabilities exceeding 25 percent of assets as eligible to take advantage of the PFIC exception. Companies with insurance liabilities of in between 10-25 percent may still qualify based on facts and circumstances. Those with insurance liabilities below 10 percent will not be considered an insurance company.

In a statement issued after introducing the bill, Sen. Wyden notes that “For over ten years now this loophole has allowed some hedge fund investors to avoid paying hundreds of millions of tax dollars. It’s time we shut it down for good.”

Photo credit – PaulSteinJC/flickr

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Florida Tax Collector Wants to Seize 200-Ft Ferris Wheel in Atlanta

Repossessing movable property over unpaid taxes is never easy even under normal circumstances, but this one case might be especially difficult. The 200-foot Skyview Atlanta Ferris wheel is at the center of a tax case that is currently set to be heard in the Fulton County Superior Court.

The case was filed by the Escambia County Tax Collector for Escambia County, FL, seeking $237,000 in delinquent tax debt. This includes $100,000 in penalties and interest.

The ferris wheel in question is actually owned by a company in Europe. They lease it out to companies that want to operate the wheel in different cities. A couple of years back, the 20-story tall wheel was located in Pensacola, FL.

The company that leased it during its stay in Florida failed to pay property taxes on it. Even so, the wheel eventually rolled out of Pensacola and is now located in Atlanta, operated by Skyview Atlanta. Meanwhile, the company in Pensacola that operated the wheel went out of business and no longer exists.

So the tax liability, to be collected by Escambia County, has been hitched to the wheel as per Florida law. Skyview Atlanta found out about it when they got notice of the lawsuit, and have already paid $50,000 towards the tax debt.

But the case is now in court, and due to be heard next month. The lawsuit claims the wheel should never have been moved out of the state without first clearing the unpaid taxes, interest and penalties.

Skyview Atlanta is apparently willing to pay if the court so decides. But they’re not in agreement about the penalties and interest and other charges that Escambia County has piled on to the original tax bill.

But a more interesting angle to the story is that this whole tax thing is just a case of sour grapes, and Pensacola is simply mad about losing the wheel, which has become a big tourist attraction in Atlanta.

Janet Holley, the tax collector for Escambia County, is up for re-election in Pensacola. No doubt it would make a big impression in Pensacola if she was able to seize that 200-foot wheel, sell it off at auction to clear the tax debt, and perhaps even have the new owners roll it out from under Atlanta’s nose.

Photo credit – frankieleon/flickr

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CBO-JCT Report on the Effects of Repealing the Affordable Care Act

A report published by the Congressional Budget Office (CBO) and the staff of the Joint Committee on Taxation takes a look at the economic impact of a repeal of the Affordable Care Act.

If you don’t factor in the effects of macroeconomic feedback, CBO and JCT estimate that if Obamacare was repealed, federal deficits would increase by $353 billion over the2016–2025 period.

But that would be balanced to a degree by a rise in economic output, mainly in the form of a boost in the supply of labor.

The resulting increase in GDP is projected to average about 0.7 percent over the 2021–2025 period, and this would reduce federal deficits by $216 billion over the 2016–2025 period due mainly to increased federal revenues.

Even so, that still leaves you with a $137 billion hole in the federal budget over the 2016–2025 period, if the ACA were to be repealed.

The report goes into a lot more detail about how these figures are reached. For instance, an end to ACA subsidies for health insurance coverage would generate gross savings for the government of $1,658 billion over the 2016–2025 period.

These savings would be partially offset by the effects of eliminating several ACA provisions related to insurance coverage that are projected to reduce federal deficits. All told, the effects of repealing the ACA would increase federal deficits by $502 billion over the 2016–2025 period, and the net savings from repealing the ACA’s coverage provisions would thus be $1,156 billion.

In terms of people, the report shows that about 14 million fewer people would be enrolled in Medicaid, and about 18 million fewer people would have nongroup coverage. About 24 million more nonelderly U.S. residents would be uninsured, and about eight million more people, on net, would have employment-based coverage.

This is the first comprehensive CBO analysis of Obamacare after the appointment of new CBO Director Keith Hall, following complaints about his predecessor Doug Elmendorf’s handling of the analysis of the Affordable Care Act.

Since the new report shows a far bigger federal budget deficit resulting from the repeal of the ACA, it’s fair to say that any new attempts at repealing the ACA will have to give a lot more attention to rewriting the related tax laws to balance the economic and budgetary impact, as opposed to simply killing the provisions.

Photo credit – cbo.gov

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National Society of Accountants Proposes Tax Practitioners Bill of Rights

Move over the NTA and its tax payer bill of rights. We now have a Tax Practitioners Bill of Rights that has been proposed by the National Society of Accountants.

The NSA came up with this Bill of Rights as a response to the proposed $838 million cut in IRS funding.

The idea is that this Bill of Rights will establish timely enactment of tax laws and regulations and reasonable levels of IRS service for tax practitioners who file 60 percent of the tax returns the IRS receives each year.

NSA President Marilyn Niwao, a CPA and attorney, said in a statement that the tax system is breaking down, and these funding cuts mandated by Congress are a big part of the problem. “IRS customer service is at an all-time low, and tax practitioners cannot get timely responses from the IRS for questions we pose on behalf of our clients because the IRS cannot afford the staff it needs to answer the phones,” said Niwao.

Niwao added that Congress has to enact tax legislation in a more timely manner. “Last year, a tax bill was enacted on December 19, giving no one – not taxpayers, tax return preparers or the IRS – sufficient time to learn about the changes in the tax law, or even get tax forms out in time for the beginning of the tax filing season,” said Niwao.

NSA Executive Vice President John Ams noted that the entire tax system is built on Congress passing tax law and appropriating funding, the IRS implementing the law, and tax practitioners and taxpayers complying with the law.

Ams added that two-thirds of the system is broken because Congress is not appropriating enough money for the IRS to function properly and so the IRS is not able to do its job. That, said Ams, is why this Tax Practitioners Bill of Rights is needed.

So  here’s what the NSA Tax Practitioners Bill of Rights includes:

1. The right to have tax laws and rules passed in a timely manner. They want tax laws affecting the current tax year enacted no later than September 1 of that year, and IRS forms reflecting changes or new tax laws for the current year available no later than October 1 of that year.

2. The right to quality service from the IRS. This includes, among other things, a practitioner-only hotline, staffed by competent/knowledgeable employees, to fulfill the right to have telephone calls answered within 15 minutes.

3. The right to practice without undue IRS demands during tax filing season.

You can get a copy of the full NSA Tax Practitioners Bill of Rights here.

Photo credit – efile.com/efile989@flickr

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US Converts Holy See Into FATCA Signatory

The U.S. is on a mission to convert the wild west of international tax law into a civilized world of nations that are all signatories to FATCA, aka the Foreign Account Tax Compliance Act.

The Treasury has already racked up a big list of nations who have signed on and agreed to comply, reluctantly or otherwise, with the reporting requirements of FATCA.

But the latest signatory carries a little more weight than your usual run-of-the-mill tiny city-state. 

The Holy See’s Secretary for Relations with States, Archbishop Paul Gallagher, and the U.S. Ambassador to the Holy See, Kenneth F. Hackett, have signed a historic agreement to improve international tax compliance and exchange of tax information as required under FATCA.

This IGA is historic not just because of the nature of the agreement that puts the stamp of the Vatican’s authority on FATCA, but also because it is the first formal inter-governmental agreement between the Holy See and the United States.

The joint press release issued by both parties notes that this agreement “underscores the commitment of both parties to promote and ensure ethical behavior in the financial and economic fields. In particular, this agreement will prevent tax evasion and facilitate the compliance of fiscal duties by those U.S. Citizens who conduct financial activities in Vatican City State.”

H.E. Arch. Paul Richard Gallagher pointed out in remarks at the IGA signing that paying your taxes is more than just about law. “As Pope Francis frequently reminds us, evading just taxes is stealing both from the State and from the poor (cfr. Homily at Domus Sanctae Marthae, 11 November 2013). Every person has in fact the duty to contribute, in charity and justice, to the common good, according to his own abilities and the needs of others, by promoting and assisting the public institutions dedicated to bettering the conditions of human life (cfr. Gaudium et Spes 30). We must then not forget the injunction of the Apostle: “Pay to all their dues, taxes to whom taxes are due, toll to whom toll is due, respect to whom respect is due, honor to whom honor is due” (Rm 13,7).”

Ambassador Hackett added that “Offshore tax evasion is a pressing concern. Of all the measures that could be taken to eliminate world poverty, stopping tax evasion may be one of the most effective options. Every year, tax evasion deprives governments of all sizes of much-needed resources to fund public services and investments.”

The actual agreement makes it a point to note that an intergovernmental approach to FATCA implementation would address legal impediments and reduce burdens for HS/VCS Financial Institutions, who may otherwise not be able to comply with certain aspects of FATCA due to domestic legal impediments.

The IGA also notes that “the Holy See, acting also in the name and on behalf of the Vatican City State, is supportive of the underlying policy goal of FATCA to improve tax compliance.”

With the Vatican in the bag and supportive of FATCA both in the legal sense and in the spirit of the law, it should be easier now for the U.S. to bring more countries from all over the globe into the FATCA fold.

Photo credit - vatican.va

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Carbon Tax Law Would Reduce Top Marginal Corporate Income Tax Rate

Sen. Sheldon Whitehouse (D-RI) and Sen. Brian Schatz (D-HI) have introduced The American Opportunity Carbon Fee Act that would tax carbon emissions and redirect the revenue generated to reduce the top marginal corporate income tax rate, among other things.

This is not the first carbon tax law introduced by Sen. Whitehouse in Congress, but this one is getting a little bit more attention than other previous attempts to impose some form of a carbon tax or create a federal U.S. carbon marketplace.

The bill (S.1548) sets the fee per ton of carbon at $45 for 2016. That’s the central range of the social cost of carbon as estimated by OMB. It would then increase each year at a real two percent. If and when emissions fall 80 percent below 2005 levels, the annual adjustment would fall to inflation.

An analysis of the bill by Resources for the Future suggests that it would reduce CO2 emissions in the U.S. by more than 40 percent by 2025, relative to 2005 levels.

The Joint Committee on Taxation estimates that this bill would generate more than $2 trillion over 10 years, and this revenue would be directed towards the following:

- Reduction of the top marginal corporate income tax to 29 percent. This would cut corporate taxes by almost $600 billion during that first decade;

- Provide an annual inflation-adjusted $500 refundable tax credit to offset payroll taxes ($1,000 for married couples filing jointly). These tax credits would return over $750 billion to taxpayers during that first decade;

- Inflation-adjusted benefit starting at $500 for Social Security and veterans’ program beneficiaries. This would add up to more than $400 billion during that first decade; and

-  Establish a block grant for states, totaling $20 billion in 2016 and growing with inflation, to help with low-income needs, rural households, and transitioning workers.

Senators Whitehouse and Schatz unveiled during an event at the American Enterprise Institute.

In his speech at AEI, Sen. Whitehouse said that “Climate change, of course is not our only national challenge.  The federal tax code, for example, is a mess, with one of the highest corporate rates in the developed world, while some businesses take advantage of loopholes to pay much less or nothing at all. We have an economic recovery that has left too many Americans behind and a job market that has still not fully rebounded. Well, what if our answer to climate change helped address those concerns?”

Photo credit – pblakez/flickr

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Monsanto Resurrects Corporate Inversions With Syngenta Bid

Corporate inversions had become a catchphrase and a heated issue in Congress until the Treasury stepped in with measures to curb the practice.

It seems that was just a breather, because inversions are back and bigger than ever. This time, it’s Monsanto Company (NYSE: MON) which is refusing to give up on the potential tax and synergy advantages of a merger with Syngenta (VTX: SYNN).

Back in May, Syngenta refused to entertain Monsanto’s cash and stock bid of $483 per share. That would have given Syngenta shareholders a 43 percent premium on the stock price on April 30.

Syngenta refused that offer citing concerns about anti-trust approvals. But Monsanto has now thrown in an “offer you can’t refuse” kind of deal, with a $2 billion reverse break-up fee should the proposed merger fail to obtain necessary global regulatory approvals.

Hugh Grant, Monsanto Chairman and CEO, said that “It is disappointing that Syngenta has not engaged in substantive discussions about the many benefits of this combination, including the benefits for farmers around the world. We remain committed to unlocking the opportunity of this combination and pursuing constructive conversation with Syngenta’s management and board.”

They’re positioning the proposed merger in terms of leveraging the different agricultural product and infrastructural capabilities that they say will create significant value, offering integrated solutions for farmers.

What’s not mentioned at all in the release is that the merged entity’s headquarters would in the U.K., even though neither the St. Louis, MO-based Monsanto nor the Basil, Switzerland-based Syngenta is headquartered in the U.K.

It would reduce Monsanto’s annual tax bill in the U.S. by about $500 million by bringing down their effective tax rate from 28 to 15 percent. It’s a classic inversion with the bulk of their management operations continuing to be located in the U.S.

Senator Dick Durbin (D-IL), who has introduced the Stop Corporate Inversions Act of 2015, issued a statement in which he says that “It’s clear that Monsanto – a company that has prospered and expanded in large part due to U.S. taxpayer-funded programs and services – intends to reincorporate overseas as part of its proposed acquisition of Syngenta in order to avoid paying U.S. taxes.”

“Congress can and should act now to close the loophole that allows corporations to avoid their tax responsibility,” added Sen. Durbin.

Sen. Durbin is also trying to push through legislation that expand the definition of an inverted corporation, and would ban inverted companies from being eligible to bid for federal contracts and sub-contracts. An amendment to the National Defense Authorization Act of Fiscal Year 2016 also seeks to ban inverted corporations from bidding for defense contracts.

Photo credit - Whitehouse.gov

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Nite Moves Tax Law Ruling Favors NY State Dept of Taxation

An NY State Department of Taxation Administrative Law Judge (ALJ) has ruled partially in favor of the tax department in the Nite Moves cases.

This tax law case is considered important because it could set the precedent on how entertainment and night clubs that earn income from paid dancers are taxed (or not).

The core issue is whether lap dances provided to clients in a night club are tax-exempt artistic performances or should be considered taxable income.

For the period from 2005-2010, a state audit showed $4.9 million in sales by Albany area club Nite Moves. This included $3 million from private lap dances for individual clients in rooms near the main stage.

The State is seeking $530,000 in unpaid taxes on the income from these private dances and the admission fees or cover charges paid by those clients.

Nite Moves challenged the tax bill on First Amendment grounds, on the basis that the private dances were artistic performances that were tax-exempt. What makes the case more confusing is that Nite Moves has pole dancers on the main stage, so patrons paying for private dances would also get to see what is widely accepted to be an artistic performance on the main stage.

This is the second time that Nite Moves has been through this routine. They did it for their 2002-2005 tax bill, and that case ultimately ended up in the State’s favor in the NY Court of Appeals in 2012. Nite Moves failed to get the U.S. Supreme Court to agree to hear the appeal against the NY Court of Appeals’ ruling.

This time, instead of handing the State a clear victory, ALJ Joseph Pinto Jr. has provided a split ruling that seems fairer to both sides and looks strong enough to survive appeals.

The ruling rejects Nite Moves’ contention that New York’s tax statutes be declared unconstitutional. The ruling says that the NY Department of Taxation doesn’t have the power to do that.

As for the private dances, the ruling rejects the claim that they are artistic performances, citing factors such as the dances being located in confined spaces, not being choreographed, and the music selection being made by the club (as opposed to the dancers).

At the same time, ALJ Pinto also ruled that the cover charges totaling nearly $1 million for the period in question should be exempt from taxation since it was payment for admissions to see an artistic performance.  

It’s unlikely that any subsequent legal process in the state courts is going to come up with a better solution for both parties. The State Dept. of Taxation will likely accept this as a victory and drop the matter if Nite Moves agrees to pay the tax bill.

For Nite Moves, it's a better outcome than the one they got last time, and they might also ditch plans for any further appeals.

Photo credit - find eric/flickr

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Drones to Catch Tax Evaders?

You may think that the IRS tends to exceed its brief every now and then. But the recent IRS scandals are pretty tame compared to the things that tax agencies of some other countries are resorting to.

Tax collectors in some Latin American countries and even in wildly unregulated places like some remote islands in Indonesia are making use of innovative and high-tech methods of tracking down tax evaders.

In Argentina, tax officials sent out drones to survey and take pictures of lots that were registered as being vacant.

The pictures of unregistered luxury mansions and swimming pools on what were supposed to be vacant lots ended up resulting in $2 million in tax payments.

Similarly, the South Sumatra and Bangka Belitung Taxation Directorate General in Indonesia decided to buy some Chinese-made drones and send them over to take a look at plantations and mines in the region.

It’s impossible for the Indonesian and regional government agencies to keep tabs in person or via manned flights on the palm oil and rubber plantations or tin mines on remote islands like Borneo or Sumatra.

Bloomberg reports that there are only about 900,000 tax payers in a country of 250 million people, and the mines and plantations in the South Sumatra and Bangka Belitung tax jurisdiction apparently pay only about 30 percent of the tax they should be paying.

So tax officials in the area have started sending out drones to survey plantations and mines and take pictures.  The drones map out about 1,700 acres in an hour, taking pictures once every five seconds. The tax officials can then compare the images with the tax returns associated with the properties.

They already have landed one big fish – an oil plantation that had to pay 250 million rupiah in taxes.

The plantation owners may actually have brought this down on themselves, because it was they who started using drones to keep an eye on the plantations and find out which trees needed more nourishment. The tax officials are simply following suit and making use of the same technology to do the exact same thing, but for different purposes.

Do you think the IRS should be allowed to use drones to catch tax evaders?

Photo credit - Lima Pix/flickr

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A 90% Top Marginal Tax Rate?

A 90 percent income tax rate on the top one-tenth of one percent of the wealthiest of the wealthy - Vermont Senator Bernie Sanders’ socialist agenda gone amok? Not so much, because America did have a 90 percent top income tax rate for a long time after WWII.

The top marginal tax rate was at a historically low 24 percent just before the Great Depression hit home in 1929. By 1932, it had been hiked to 63 percent, and continued rising all the way through to WWII, when it hit a historic high of 94 percent in 1945.

The top marginal tax rate stayed at 90 percent throughout the 50s following WWII, with the effective tax rate for the highest earners at 70 percent.

It was only in 1964 that Congress worked up the will to lower it to 70 percent. It took another two decades to bring it down to 50 percent.

So an abnormally high top tax rate is not unprecedented. Given the right circumstances, it’s possible for Congress to enact something like this for a short period to handle a severe crisis. The problem, of course, is that tax legislation is subsequently very hard to reverse once it becomes law.

Sen. Sanders is also leading the charge on the free tuition scheme. His College for All Act eliminates the $70 billion in annual undergrad tuition collected by 4-year public colleges and universities.

The federal government would cover $47 billion (67 percent) of this cost, while the states would be responsible for the remaining 33 percent. It also includes comprehensive reform of the student loans process, with interest rates dropping from 4.32 to just 2.32 percent.

“Countries like Germany, Denmark, Sweden and many more are providing free or inexpensive higher education for their young people.  They understand how important it is to be investing in their youth. We should be doing the same,” says Sen. Sanders.

All told, the cost to the taxpayer would be some $750 billion over ten years. How does the College for All Act pay for this? Through a Robin Hood Tax on Wall Street. The education spending is offset by a speculation fee on investment houses, hedge funds, and other speculators.

The fee of 0.5 percent on stock trades (50 cents for every $100 worth of stock), along with 0.1 percent fee on bonds, and a 0.005 percent fee on derivatives would generate up to $300 billion a year.

Photo credit - berkeley.edu

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Despite Veto Threat, House Passes Research Tax Credit Bill

A few days ago, the U.S. House of Representatives passed the American Research and Competitiveness Act of 2015 (HR 880) on a 274-145 vote.

This bill seeks to make permanent after 2014 the research tax credit, one of the 14 extenders that was retroactively extended in mid-December 2014 for the year of 2014, only to expire less than two weeks after it was passed.

This has been going on since 1981, when the research tax credit was first created. If it does become permanent (or is kept alive through extender bills passed every year), the tax credit will cost the government $181.6 billion over the next decade.

Congressman Kevin Brady (R-TX), issued a statement on the passage of the bill - “America’s future depends on innovation occurring here in the U.S. Without the right permanent research and development incentive, we will continue to fall behind our global competitors and watch good paying research jobs go overseas. A permanently strong economy requires a permanent research and development tax credit.”

The House passed HR 880 despite the threat of a White House veto hanging over their heads.  Rep. Brady’s statement on the President’s veto threat - “Why does the President want to ship America’s research jobs overseas? He knows both parties in Congress have supported this measure on a temporary basis without raising taxes. So stop making excuses and stand up for American jobs and American innovation, Mr. President.”

Even though the bill has plenty of support in the Senate, it’s unlikely to be under consideration in any tax reform bill the Senate takes up unless the tax breaks are offset by other tax increases or spending cuts.

Besides, it’s hard to see it going anywhere with a Presidential veto hanging around its neck. That said, the House passage of the American Research and Competitiveness Act does provide some clarity for companies looking to Congress for signs about whether they can expect to get the research tax credit passed retroactively for 2015 too.

The House’s support for HR 880 virtually ensures that if it comes to it, this bill will once again be passed as an extender at or before the end of the year as flawed and much-maligned but essential tax legislation.

Photo credit – senate.gov

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Yahoo Issues Statement Regarding IRS Comments

An IRS representative stated Tuesday that the IRS plans to study its rules for issuing private letter rulings regarding the active trade or business requirement in spin-off transactions and will hold off processing new ruling requests. Yahoo understands that the IRS’s statement is not specific to Yahoo’s planned Q4 2015 spin-off of its remaining stake in Alibaba Group and Yahoo Small Business, reflects no change in applicable law, and does not affect previously filed ruling requests. Yahoo filed its pending ruling request with the IRS in Q1 2015. Yahoo continues to work toward completing the planned spin-off in Q4 2015.

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This is about comments made by Isaac Zimbalist, senior technician reviewer at the IRS Office of Associate Chief Counsel.

Zimbalist is reported to have said at a D.C. Bar Association event that the IRS is considering a rule change regarding spinoffs, and is holding off on new requests for rulings while the issue is studied.

As the Yahoo statement notes, this does not affect their filing, which is already in the pipeline. But the thing is that what the IRS ultimately decides on the issue could still affect Yahoo.

What Yahoo! Inc. (NASDAQ:YHOO) did is explained in this previous post on the SpinCo tax-free spinoff of Yahoo’s remaining holdings in Alibaba Group (NYSE: BABA).

The summary of it is that Yahoo moved its remaining 384 million shares of Alibaba, valued at $40 billion based on the closing price on January 26, 2015, into SpinCo, along with a legacy, ancillary Yahoo business.

The latter was a necessity in order to facilitate a tax-free spin-off of what would be an active business, and not just a holding company packed with investments.

The end result is that SpinCo takes on no debt for all the holdings moved into it, and Yahoo shareholders get the proceeds of foreign holdings which would otherwise have been taxed heavily.

For example, Yahoo had previously brought in some $9.7 billion of proceeds from a partial sale of Alibaba holdings when the Chinese eCommerce giant went public with an IPO on the NYSE. Yahoo ended up with a tax bill of $3.3 billion for that $9.7 billion in foreign income being repatriated into the U.S.

So Yahoo engaged tax experts for over two years to considered a variety of alternatives for their remaining Alibaba holdings.

The tax experts came up with this SpinCo spin-off plan, and it does seem like a slam dunk of a tax strategy. It combines maximum returns for shareholders with absolute transparency, protecting Yahoo from being vilified as a greedy corporate entity avoiding taxes.

The only thing they didn’t plan for was that the IRS might step in and plug the spinoff loophole before Yahoo squeezed their $40 billion through.

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US Supreme Court's Landmark Tax Law Ruling in Maryland vs. Wynne

On May 18, 2015, the U.S. Supreme Court struck down a Maryland tax law that allows double taxation of income tax that has already been taxed by an out of state jurisdiction.

Perhaps more to the point is the fact that states and local governments will now be forced to pay back huge sums in taxes collected on income that has been subjected to double taxation.

The case is a landmark judgment that will lead to a rewrite a tax law in several thousand jurisdictions.

Here’s a full backgrounder on the facts of the case and how it landed up in front of the Supreme Court Justices, and here’s the U.S. Supreme Court opinion in the case (Maryland State Comptroller of the Treasury v. Wynne; No. 13–485).

The summary of it is that Brian Wynne, resident of Howard County, MD, was one of the owners of  Maxim Healthcare Services, Inc. The income generated by Maxim was shown on the Wynnes’ federal income tax returns and their Maryland state tax return in 2006.

Maxim had filed state income tax returns in 39 states, and the Wynnes were able to claim their pro rata share of the income taxes paid to other states as a credit against their 2006 Maryland individual income tax.

While Maryland allows this for state income tax, it doesn’t allow it for local taxes collected by the state on behalf of the counties. The Wynnes’ appeals that the county can’t tax income which has already been taxed out of state were rejected by the MD Comptroller as well as the Maryland Tax Court.

They filed suit in the Howard County Circuit Court, which reversed the Tax Court’s decision. It was the State that was appealing, but the Maryland Court of Appeals upheld the circuit court verdict that the Maryland tax statute in question was in violation of the Commerce Clause of the Federal Constitution.

This brought the case to the U.S. Supreme Court, which has now upheld the ruling of the Maryland Court of Appeals.

The opinion of the court notes that Maryland could now “cure the problem with its current system by granting a credit for taxes paid to other States, we do not foreclose the possibility that it could comply with the Commerce Clause in some other way…. Of course, we do not decide the constitutionality of a hypothetical tax scheme that Maryland might adopt be­cause such a scheme is not before us.”

The opinion goes on to state that “That Maryland’s existing tax unconstitutionally discriminates against interstate commerce is enough to decide this case.”

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Rep. Bob Goodlatte – The Tax Terminator

There’s no dearth of people who are hopping mad at the IRS or just plain don’t like they are being taxed. But Congressman Bob Goodlatte, who represents the 6th District of Virginia and is the chairman of the House Judiciary Committee, wants to do away with the entire tax code.

There won’t be much to do for the IRS if there’s no tax code left. Rep. Goodlatte has been trying to get the Tax Code Termination Act passed in the House year after year.

His latest attempt to terminate the tax code is H.R. 27. This bill, if passed into law, would terminate the Internal Revenue Code of 1986 after December 31, 2019.

The only thing left after the tax code termination would be self-employment taxes, FICA taxes, and railroad retirement taxes.

The bill also provides guidance for the new federal tax system that would follow. Tips for fellow lawmakers who would come up with the new taxation system include:

-  Apply a low rate to all Americans; - Provide tax relief for working Americans; - Protect the rights of taxpayers and reduces tax collection abuses; - Eliminate the bias against savings and investment; - Promote economic growth and job creation; and - Do not penalize marriage or families.

In a USA Today op-ed pushing the Tax Code Termination Act, Rep. Goodlatte and Rep. Kevin Brady, a member of the House Ways and Means Committee, they write that “Sunsetting — legislatively terminating — the tax code is a sure fire way to spur the reform the tax code needs.”

The idea is that if you eliminate the tax code for starters, then Congress will have no choice but to go after tax reform in a big way and write up a whole new tax code.

Of course, there’s the problem that this bill will never pass Congress or override a presidential veto, if it comes to that. Secondly, even if Congress got down to writing a whole new tax code, a big stack of the nearly 74,000 or so pages would go right back in.

But Rep. Goodlatte feels strongly that it might work. In a statement issued after introducing his latest attempt to terminate the tax code, he says that “We must force Congress to tackle tax reform head on. The best way forward is to scrap the current tax code and start fresh. That’s why I have introduced the Tax Code Termination Act.”

Photo credit – tolworthy/fllickr

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Tax Collection Shatters Records With $472B Haul in April

The federal government is raking in tax like never before, with a record haul of $472 billion in April. This month is obviously the best one for tax collection every year, but it’s significant that this year’s tax receipts in April outstripped last year’s $414 billion collection by $58 billion.

The Monthly Budget Review published by the Congressional Budget Office shows that this year’s $472 billion in tax receipts ensured a budget surplus of $155 billion for the month, since the federal government’s outlay for the month was pegged at $317 billion (up $10 billion from last year).

The 14 percent rise in tax receipts is mostly attributed to individual income taxes and payroll taxes, which together rose by $53 billion. Corporate income taxes rose by $2 billion.

The CBO budget review also provides a more optimistic snapshot of the first seven months of FY 2015.

Receipts for the first seven months of FY 2015 totaled $1,892 billion, which is $155 billion more than receipts in the same period last year. The increase is $40 billion more than what the CBO estimated.

Individual income taxes and payroll taxes together rose by $128 billion for the first seven months of FY 2015, and corporate income taxes rose by $17 billion.

Outlays for the first seven months of fiscal year 2015 were pegged at $2,177 billion, which is $133 billion more than what it was for the same period last year.

This means the federal government ran up a budget deficit of $285 billion in the first seven months of FY 2015. That’s sizable enough, but it’s still $22 billion smaller than the deficit for the same period last year.

The key takeaway here is that after a long period of being awash in red ink, the United States is edging closer to an annual budget surplus for a fiscal year. It won’t happen this year. But it looks very likely to happen in the next few years.

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IRS Handed Out $5.6B in Education Credits to Ineligible Recipients

A new report issued by the Treasury Inspector General for Tax Administration (TIGTA) claims that the IRS approved more than $5.6 billion in erroneous education tax credits to 3.6 million taxpayers on their 2012 returns.

This has to do with the American Recovery and Reinvestment Act of 2009, aka the Stimulus bill which replaced the Hope Credit with the refundable American Opportunity Tax Credit (AOTC) for offsetting higher education costs.

AOTC was set to expire at the end of 2010, but has since been extended through to 2017.

Based on its analysis Tax Year 2012 returns, TIGTA estimates that more than 3.6 million taxpayers filing for over 3.8 million students erroneously received a total of around $2.5 billion in refundable credits and $3.1 billion in nonrefundable credits.

Out of this, some $2.5 billion in education credits went to 1.6 million taxpayers for students attending ineligible institutions. Some 427,345 taxpayers received approximately $662 million in AOTCs for students who attended school less than half-time.

Oh, and the returns of more than 1.7 million (or 49 percent) of the 3.6 million taxpayers with questionable education credit claims were prepared by a tax return preparer. These erroneous claims prepared by tax preparers added up to $2.7 billion.

For the record, this is not the first audit undertaken by TIGTA on this matter. Prior audits have also shown that taxpayers claimed and received billions of dollars in erroneous education credits. This particular audit was initiated to assess the impact of the IRS’ efforts to improve the detection and prevention of questionable education credit claims.

Not much progress on that front either. J. Russell George, Treasury Inspector General for Tax Administration, says that "The IRS still does not have effective processes to identify erroneous claims for education credits.”

He adds that many of the deficiencies TIGTA previously identified still exist, and as a result, taxpayers continue to receive billions of dollars in potentially erroneous education credits.

TIGTA made five recommendations for the IRS, which rejected three of them and agreed to implement the other two. One of the recommendations (already implemented) is that the IRS should work with the Department of the Treasury on a legislative proposal to move the required filing date for Forms 1098-T to January 31.

This would enable the information in the forms to be used when tax returns are processed, so that it can help identify improper education credit claims. 

Read the full TIGTA report here.

Photo credit – treasury.gov