The Tax Lawyer’s Blog

Bill is the author of the tax and financial blog April15.Com.

[Unenrolled tax preparer] Brian Symonette operated a tax preparation business [called The Tax Doctor].

 

Hopefully, he advised his clients to keep better records than he did himself.

 

In a Tax Court Opinion published yesterday, Brian lost $14,289 in deductions attributable to his Hummer for failure to keep adequate records of his mileage.

Bill quotes part of the Tax Court Judge’s opinion:

The necessity of keeping appropriate records — and the understanding of the sort of records that would be appropriate-to support so substantial a claim should have been reasonably clear to someone like Brian. After all, he held himself out as knowledgeable about tax matters, people paid him to do tax work for them or give tax advice to them, and he testified at trial as to why it was appropriate for him to insist on being called “Doctor”.

 

Brian testified he has a Ph.D. in education administration, a master’s degree in management information systems, and a bachelor’s degree in business administration. Yet on this major matter of dispute the major books and records item he offered — the Hummer log — was so much in conflict with what petitioners showed on their tax return that we doubted not only its reliability but even its existence at the time when, Brian testified, it was updated weekly. (Emphases Added)  

[The foregoing facts] lead us to conclude that petitioners failed to maintain books and records in accordance with the requirements of section 6001 and the regulations authorized (and not challenged by petitioners) thereunder. (Emphasis Added) 

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IN CONGRESS, JULY 4, 1776 

The unanimous Declaration of the thirteen united States of America 

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

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Joe Kristan provides a terrific brief of a summary judgment opinion issued this week by the Tax Court.

The issue involved Sec. 469(h)(2) which states,

Except as provided in regulations, no interest in a limited partnership as a limited partner shall be treated as an interest with respect to which a taxpayer materially participates.

The  IRS’s motion for Summary Judgment, in which it contended that Sec. 469(h)(2) operates to create an irrebuttable presumption that losses incurred by LLCs and LLLPs are passive losses regardless of the extent of the participation of  a stakeholder, was denied:

We do not believe that this rationale properly extends to interests in L.L.P.s and L.L.C.s. As previously discussed, members of L.L.P.s and L.L.C.s, unlike limited partners in State law limited partnerships, are not barred by State law from materially participating in the entities’ business.

Accordingly, it cannot be presumed that they do not materially participate.

For the full opinion see Garnett, 132 T.C. No. 19.

Joe thinks, and I agree, that the IRS wasn’t the sharpest shed in the knife on this one:

This is a stupid argument for the IRS to make. When Sec. 469(h) was written, LLCs and LLLPs barely existed.

The differences between these new entities and the old limited partnerships are profound, and it is common for LLC and LLLP members to work full time in roles analogous to general partners in limited partnerships.

The new entities just aren’t comparable to limited partnerships.

Read Joe’s post in it’s entirety.

In addition to his strong analysis of the Court’s ruling, he provides at the end of the post a nice and concise summary of the passive loss/material participation rules.

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Michael

Lost in a world unchosen - 

Alien, afraid, alone. 

Burned by a childhood frozen - 

Wrong hair, wrong skin, wrong bone.

Fifty Junes would not suffice – 

It seemed just twenty two. 

Being the One had a price - 

A you that wasn’t really you? 

Lesser Kings had felt this too - 

No brave new stage to rule. 

When all depart who worship you - 

Sans applause you play the Fool.

Freed by a death unchosen - 

High and bright upon a throne. 

Thawed from a childhood frozen - 

Sans hair, sans skin, sans bone.

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It’s that time of the year again in the world of taxation when two things occur:

1. The indefatigable Nina Olson, the National Taxpayer Advocate, tells Congress what the IRS must do to improve its service and comport with its stated mission; and
2. Congress yawns.

Ms. Olson delivered this year’s version of her mid-year report to Congress yesterday.

I have only perused the 131 page tome, but I suspect Ms. Olson was able to cobble it together rather quickly just by cutting and pasting large chunks of last year’s missive.

I have said it before, here, here and here, Nina Olson is a godsend for taxpayers.

Now if only we could get Congress to take her seriously.

Here are three key areas of this year’s report. I have emphasized in bold italics the language that indicates Ms. Olson has unsuccessfully made these same recommendations to Congress before:

Taxpayer Services

The Advocate’s report expresses concern that the momentum to implement and refine the TAB recommendations has abated. It recommends that the IRS reinvigorate its efforts to pursue cross-functional, research-driven service improvements.

Momentum has abated! IRS must reinvigorate its efforts!

Oversight of Tax Return Preparers

The Advocate reiterates her long-standing recommendationthat the government do more to protect taxpayers by regulating unenrolled federal tax return preparers, including by requiring initial testing and continuing professional education, and recommends that the IRS step up enforcement actions against preparers who fail to perform due diligence or consciously facilitate noncompliance.

Reiterates long-standing recommendation!

Offers in Compromise

For the past nine years, the Advocate has expressed concern about the effectiveness of the IRS’s offer in compromise (OIC) program, a program designed to enable financially struggling taxpayers to pay what they can afford and make a fresh start. The Advocate believes the IRS requires taxpayers to provide too much information with the initial application, thereby deterring taxpayers who legitimately qualify for the program from applying for it.

For the past nine years!

Can you blame taxpayers for thinking this is all just posturing?

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Professor Paul Caron reports that a federal judge has vacated the conviction of a CPA on the grounds that his counsel was ineffective.

The Court said that counsel’s failure to hire a tax expert was unreasonable under the circumstances.

The performance of Baxter’s criminal defense counsel, Mr. Keith Spielfogel and Mr. James Montgomery, fell below the Strickland objective standard of reasonableness because they did not analyze or present the mitigating facts and arguments a tax expert’s testimony would have assisted them in doing to reduce the tax-loss figure the court used in sentencing Baxter.

The evidence also establishes that Baxter was prejudiced by her criminal defense attorneys’ constitutionally deficient performance. It undermined the court’s confidence in the fairness of the plea negotiations, the sentencing proceeding, and the sentence imposed in Baxter’s case.

The court believes that had the facts and analysis that have now been presented by Baxter’s tax expert, who was retained by her new counsel after her sentencing, been presented to the court prior to Baxter’s 2006 sentencing, the court would have imposed a lower sentence

For the full opinion see  Baxter v. United States, No. 1:04-cr-00371 (N.D. Ill. June 25, 2009).

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We recently wrote in Death of Blogging and Death of Blogging II about a proposal by the highly revered libertarian, Judge Richard Posner, to eliminate the right of bloggers to include properly attributed quotes and excerpts from mainstream media outlets in their online posts.

Now here’s another shot across the blog-bow.

This one is from the ubiquitous and powerful Rupert Murdoch group.

A stinging attack by John Hartigan, the CEO of Rupert Murdoch’s News Limited, labels bloggers and alternative media outlets as “political extremists”. Hartigan implies that bloggers should be jailed as they are in oppressive police states like China and Burma.

In a speech to the National Press Club, Hartigan savagely dismissed blogs as, “Something of such little intellectual value as to be barely discernible from massive ignorance.”

“Bloggers don’t go to jail for their work. They simply aren’t held accountable like real reporters . . . . It could be said the blogosphere is all eyeballs and no insights,” barked Hartigan.

“In the blogosphere, of course, the mainstream media is always found wanting. It really is time this myth was blown apart.”

“Blogs, and a large number of comment sites, specialise in political extremism and personal vilification. Radical sweeping statements without evidence are common.”

No one should be shocked that mainstream media is launching an all-out attack against bloggers.

Frankly, I’m surprised it’s taken this long.

Let’s face it, print media is gravely ill and, like a wild animal that is sick and dying, it is now most lethal.

Here is my take on print media’s last stand.

Bad Print Journalism Created the Demand for Bloggers Not the Other Way Around

Hartigan completely misses the point.

Blogging hasn’t caused the widespread public mistrust of print media (”Print”), but, rather, Print’s often sloppy, agenda-driven reporting has created a hunger for alternative sources of news.

In other words, Print and not the blogosphere is the reason Print is dying.

There is, of course, more than a kernel of truth in Hartigan’s assertion that the blogosphere contains much nonsense.

But in America there have always been those who have negligently (or intentionally) disseminated false information to the public.

It’s the price we pay for a having a first amendment.

And, up until now at least, we’ve always been perfectly willing to pay that price.

By the way, have you wandered through a supermarket checkout counter lately?

Look at these Print headlines:

That’s Print, baby!

(Okay, I admit that last one might actually be true. Dennis Kucinich did endorse Bill Clinton)

Misinformation has Always Existed, the Internet has Merely Broadened its Scope

So is it really all that different today?

Has the Internet really changed everything?

Yes and no.

People are still making stuff up, attempting to defame, marginalize or belittle those with whom they disagree.

Only now they are able to reach more people, more quickly.

Lies have always been told, but today any Tom, Dick or Markos can geometrically distribute those lies at the mere click of a mouse.

And by the time you notice it, great damage has already been done.

What is the Answer? Do We Even Need an Answer?

So what should we do about it?

Should we amend the first amendment - change the copyright laws - as Judge Posner suggests?

Or should we make lying a criminal offense as the Murdoch folks suggest?

Bloggers should understand one thing: Newspapers are dying faster than a new idea out of Punch Sulzberger’s mouth. 

And the closer they get to their last breaths, the more stridently and desperately they’ll scream, scratch and claw at their perceived murderers.

That’s us folks.

We bloggers are killing Print media and we should screw are courage to the sticking place and gear up for a final showdown.

Call to Arms

It’s naive to expect newspapers as powerful as the New York Times once was to go gently into that good night.

Bloggers of all sizes and stripes should be able to come together on this issue.

The attacks are going to become more intense as we get closer to the end of Print.

So, bloggers of the world, unite!

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I never thought it would come to this, but it actually feels surreal to hear that a tax cut bill has been introduced in Congress.

Senator Chuck Grassley (R-IA) the ranking member of the Senate Finance Committee has introduced a bill he says will strengthen small businesses by lowering their tax burden TaxNews.com reports:

Noting that small businesses create 70% of all new jobs in the United States, Grassley lamented that the Obama administration has done little so far to alleviate the tax burden they face.

“My bill will leave more money in the hands of small business owners so they can hire more workers, keep paying the salaries of their employees, and make additional investments that will lead to new jobs,” Grassley said.

“Unfortunately, the White House seems to see a lot of small business owners as a cash cow for other priorities and wants to raise their taxes. My point is, if we raise taxes on the one segment of the economy that creates the majority of new jobs, we’ll be in even worse economic shape than we are now,” he added.

Citing new data from the Joint Committee on Taxation, Grassley said that 55% of the tax from the higher rates proposed by President Obama will be borne by small business owners with income over $250,000. This he called “a conservative number,” because it doesn’t include flow-through business owners making between $200,000 and $250,000 who will also be hit with the 2010 budget’s proposed tax hikes.

Grassley’s bill is called the Small Business Tax Relief Act of 2009.

Here are its key provisions:

• § 179 Deduction: Increase the amount of capital expenditures that small businesses could expense from $250,000 to $500,000. This would encourage businesses to invest in new equipment.
• Tax Rate Reduction: Allow more small C corporations to benefit from the lower tax rates for the smallest C corporations.
• AMT Fix: Take the general business credits out of the Alternative Minimum Tax for those sole proprietorships, flow-throughs and non-publicly-traded C corporations with $50 million or less in annual gross receipts.
• Extend Credit Carryback Period: Extend the 1-year carryback for general business credits to a 5-year carryback for small businesses.
• Small Business Flow Through Deduction: Provide a 20% deduction for flow-through business income for small businesses, which are defined as flow-through entities with $50m or less in annual gross receipts.
• Relax Built-In Gain Rules on S Conversions: Lower the potential tax burden when a C corporation becomes an S corporation. Under current law, there is no tax on built-in gains of assets within a C corporation that converts to an S corporation if those assets with built-in gain are held for 10 years by the S corporation. The stimulus bill reduced this 10-year period down to 7 years for sales of assets with built-in gain that occur within 2009 and 2010. The Grassley bill reduces this time period to 5 years for all S corporations that have converted from a C corporation.
• Expansion of NOL Carryback Thresholds: Expand the net operating loss provision contained in the stimulus bill. Current law provides that net operating losses from any size business may be carried back 2 taxable years before the year that the loss arises and carried forward twenty years. The stimulus bill amended the carryback provision by expanding the carryback from 2 years to 5 years if a small business had gross receipts of $15m or less. The Grassley bill expands this $15m or less requirement so that small businesses with $50m or less in gross receipts can get the benefit of the 5-year net operating loss carryback.

Nice bill, but will the comedian vote for it?

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Still more evidence that unenrolled preparers aren’t up to snuff.

In my opinion National Taxpayer Advocate, Nina Olson, does a terrific job of protecting U.S. taxpayers and their rights.

When she speaks, I listen.

Dan Meyer of Tick Marks blog reports on Ms. Olson’s annual report to Congress:

Taxpayer Advocate Nina Olson said that she would work with the Inspector General for Tax Administration to develop regulations for presently unregulated (commercial preparers who are not attorneys, CPAs or enrolled agents) tax preparers.

Olson scolded these preparers for inaccuracy, lack of sufficient diligence and even taking unreasonable positions. (Emphasis Added)

Does anyone still think the IRS doesn’t more closely scrutinize returns that are prepared by unenrolled preparers?

Ms. Olson made the following recommendations for a regulatory regime:

[U]nregulated preparers should be tested and required to take continuing education (in effect, requiring something comparable to enrolled agent status before being permitted to prepare tax returns commercially) and unregulated preparers who are regularly sloppy or overly aggressive should be pursued by IRS enforcement officials.

She also advocated a specific identification number, similar to an employer number, for commercial tax preparers. Additional priorities include additional study (and potentially increased access to) the offer-in-compromise program, better administration of refundable credits and better telephone service to taxpayers.

Observation: Joe Kristan might be right about one thing. The regulatory scheme isn’t even in place yet and it’s already growing.

Here’s what Joe wrote on his blog a few days ago:

When has any regulatory regime not expanded?  The next time a tax scam involves a lawyer or accountant — and it will happen — the IRS or some congresscritter will say the licensing regime should “at least apply the the minimum standards that apply to H&R Block” to lawyers and CPAs. Any new regulation scheme will eventually cover everyone.

Related Posts:

Study Finds that CPA Prepared Returns Result in Fewer Audit Adjustments than Returns Prepared by Non-CPAs

IRS to License and Regulate Tax Preparers

Tax Preparer Regulation: A Response to Joe Kristan

Tax Preparer Regulation: My Response to Joe Kristan’s Response to My Response of His Response

Other Links:

Tax Preparer Regulation - Bruce, The Tax Guy

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After the SCOTUS ruling in the Ricci firefighter case, I got to thinking.

What if the Supreme Court had ruled in favor of the city of New Haven?

What if Justice Ginsburg had been in the majority and had written an opinion that said that the white firefighters who outperformed the black firefighters could be replaced by the black firefighters just because the City wanted more black firefighters on its force?

The Fantasy

That thought nudged me into fantasy.

What would have been like had I been able to use the Ricci precedent in law school?

My daydream went something like this:

I will agree to take this Constitutional Law test only upon the following conditions:

1. If I pass the test, it is proof that the test is good and the results should be honored.

2. If I fail to pass the test, it is proof that the test is bad and the results should be discarded and the process begun anew with a new test.

Sublime!

But then it dawned on me.

Had a disparate-impact mulligan been available to me when I was a bright-eyed law school matriculant, I don’t think I would have studied for a single exam.

If I knew a priori that my failure to pass an examination would in no part be based on my own lack of effort, that knowledge would have made my studying or not studying moot.

I would have learned nothing.

Application of the Fantasy

Let’s apply the logical absurdity of disparate impact to a few other competitive arenas in modern day America:

The Tennis Match

I play Roger Federer.

If I win, the umpires were fair and I get the trophy.

If I lose, that means the umpires conspired against me and I get to play him again.

Rinse and repeat if necessary.

The Jury Trial

I am an attorney and I represent my client in a jury trial.

If the jury decides in my client’s favor, it is a fair and impartial jury and the verdict stands

If the jury decides against my client, it is a biased and partial jury and the verdict must be set aside.

The Construction Contract Bid

I am a General Contractor and I bid on a state job.

If I get the job, the bidding process was fair and is upheld.

If I don’t get the job, the bidding process was unfair and must be revised.

Crazy, huh?

The Wacky Logic

Here is the contorted and ridiculous logic of “disparate impact” in a nutshell.

The fact that I was not awarded the job is proof that the application process was biased, therefore the process must be altered until it has proven that it is unbiased.

The only way to prove that the process is unbiased is if I get the job.

Even crazier, huh?

The Absurdity of Assuming Across the Board Equality

The problem as I see it is that some people will never accept the idea that, for a variety of reasons, a particular ethnic group on the whole might not perform as well on an exam as another ethnic group.

But the fact alone that a specific ethnic group performed poorly on a test is not evidence of bias, impartiality or any other such abuse-excuse clap trap.

And to suggest that it is does two things, both of them bad:

1. It teaches the individual who failed to perform well to blame the poor performance on others; and
2. It forces employers to hire and promote based on quotas.

To illustrate the second effect consider this:

If the paucity of blacks on a particular job is irrebuttable evidence of discrimination, then the only way an employer can prove that he is not discriminating is by having the requisite number of blacks on the job.

That means quotas, people.

Undermining True Self-Esteem

If a person begins with the presumption that the only possible explanation for his failure is that he was cheated, then he is merely giving himself a convenient excuse never to embark on a course of self-improvement.

Why study more? Why work harder? Why even bother to shave in the morning?

I understand that self-esteem is important, but only self-esteem based on effort and accomplishment is worthy of the name.

People can’t be fooled into thinking highly of themselves. Positive self-regard comes from hard work, real sacrifice and substantive accomplishment not from warm and fuzzy bromides.

To tell a person he is fine exactly the way he is and that any mistake, error, poor performance or other apparent flaw in him is mere evidence of a racially biased society that’s hellbent on ensuring his failure, is to paralyze that person.

My God, if I felt that way, I’d never get out of bed in the morning.

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