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Sunday, January 22, 2006

Weekend Tax News Roundup

New York Times:

Reality television met its match when it found Richard Hatch....

Now, six years later, Mr. Hatch is starring in a different kind of survival contest. He is on trial for failing to pay taxes on his million-dollar windfall, charged in a 10-count indictment with tax evasion, filing false income tax returns, wire fraud, bank fraud and mail fraud. He faces up to 30 years in prison and a $1 million fine. Federal prosecutors have put on a parade of accountants, tax men and others who say "Survivor's" first success story cheated on his taxes by filing a return that showed him entitled to a refund, instead of reflecting the hundreds of thousands of dollars he owed the government. He is also accused of failing to pay taxes on hundreds of thousands of dollars of other income, and of using money to renovate his houses when it was intended for a charity he formed....

Standing in the witness box for nearly five hours, frequently gesturing and looking at the jury, Mr. Hatch sought to portray his tax situation as complicated and confusing, especially for someone grappling with instant fame and stresses involving his adopted son....

Mr. Hatch testified that "Survivor's" producers at CBS had told him they would pay his taxes, even though he signed a contract saying he would pay taxes on any winnings. Mr. Hatch's lawyer, Michael Minns, a Texan who has built a career battling the Internal Revenue Service, wanted Mr. Hatch to be able to testify that the producers promised to pay the taxes because Mr. Hatch caught some people working for CBS trying to undermine his chances of winning by sneaking food to other contestants. But Judge Ernest C. Torres would not allow the jury to hear that testimony.

Wall Street Journal:

America is not competing for jobs with China. We are competing for capital. Double taxing dividend and capital gains income drives capital to China, where it earns higher after-tax returns. When that happens, American workers are left behind with falling productivity and uncompetitive companies.

Reducing or eliminating dividend and capital-gains tax rates keeps capital in America, where it makes workers productive and supports high incomes. Congress must act now to keep rates from increasing in 2008, by extending or eliminating dividend and capital gains taxes. The 2003 cuts in both dividend and capital-gains tax rates was a substantial boost for the stock market and corporate boardrooms. The Dow Jones Industrial Average is up 32% since Dec. 31, 2002, one week before President Bush announced the 2003 tax cuts. The S&P 500 large-cap index is up 47%. Mid-caps are up 79%, and small-caps up 81%. Overall, the value of U.S. equities increased $6 trillion (up 50% from $11.9 trillion to $17.9 trillion on Sept. 30, 2005) since the dividend tax cut first appeared in the headlines. Household net worth increased $12.1 trillion to $51.1 trillion over the same period, an increase of $40,631 for every person in America. These gains accrue to the 91 million Americans who own shares of stock directly or through mutual funds, and to more than 80 million private and government workers through their pension funds. Growth, profits, and investment spending also grew, and we have created 4.4 million jobs.

Tax cuts were a major factor in producing these gains. Dividend and capital-gains tax cuts are not trickle-down economics as claimed by opponents. They work by jolting asset markets, stock prices, and capital spending, and by altering business decisions about capital structure, dividend payout and capital deployment.

The last of the Clinton-era independent counsels, David Barrett, was finally allowed to release his report this week. And while the revelations aren't earth-shattering, the report reminds us why we don't miss the 1990s. The Barrett probe began because former HUD Secretary Henry Cisneros lied to the FBI during a background check about alleged hush payments to a mistress. Mr. Cisneros pleaded guilty to that offense in 1999, and President Clinton eventually pardoned him. But Mr. Barrett also gathered evidence that Mr. Cisneros didn't report the money for those payments as taxable income. Mr. Barrett alleges that his attempts to investigate tax evasion were obstructed by officials at the Justice Department and IRS. Some of the most interesting details in the Barrett Report were rumored to concern former IRS Commissioner Peggy Richardson. But they have been redacted....

We also get to see the whistleblower's memo that launched Mr. Barrett on his tax-evasion probe. John Filan, chief of the IRS Criminal Investigation Division in Texas, wrote to headquarters in March 1997 alleging that the Cisneros tax-fraud investigation had been pulled from his office and sent to Washington with the intent to "'kill' it, regardless of the evidence." Mr. Filan added, "I am not aware of any other criminal tax cases that have been pulled from experienced District Counsel attorneys to be reviewed in Washington." He had forwarded the case to the local District Counsel with a prosecution recommendation. But Washington intervened and declined to refer it to Justice....

Mr. Barrett says he found evidence suggesting Mr. Cisneros's unreported income "exceeded $300,000" and presented Ms. Reno with a "prima facie case of multi-year tax fraud by a public official." In the end Ms. Reno allowed Mr. Barrett to investigate only one year's worth of Mr. Cisneros's tax activities, "effectively preventing any prosecution for tax offenses" because one year was not enough to prove a pattern of misconduct. The Attorney General's decision, writes Mr. Barrett, "might have resulted from activities amounting to obstruction of justice."

President Bush is expected to propose sweetening the tax breaks associated with health savings accounts, part of an effort to persuade more people to save for their own medical expenses, administration officials said. The proposal under discussion would let people deposit more money into their tax-free HSAs each year and use that tax-free money to pay health-insurance premiums. The proposal is part of a broader array of changes in the health-care system that the president is expected to propose in his State of the Union address Jan. 31....

It is unclear how much the Bush proposal would raise the threshold. Currently, HSA deposits are limited to the amount of the deductible or a maximum set by law, whichever is lower. This year, the deductible -- the amount a person must spend out of pocket each year before the insurance kicks in -- is at least $1,050 for an individual or $2,100 for a family. The maximum set by law is $2,700 for an individual or $5,450 for a family. One idea under discussion would increase the deposit threshold to the annual out-of-pocket spending limit for HSA plans. This year, that limit is $5,250 for an individual and $10,500 for a family. In practical terms, this change would let people save a few thousand more dollars each year tax-free.

Washington Post:

Thinking of quitting your job and going back to school? Thousands of Americans do that every year, but for many, finding the necessary money is a stretch. So, as they run their hungry eyes across what assets they have, their gaze often alights on their 401(k) retirement savings accounts.But while Congress seems to have envisioned cases in which workers might need to tap retirement savings to pay for school, it provided only its usual haphazard, disjointed help.Thus, workers who want to tap their retirement accounts must be careful to do it the right way, or they may find themselves subject to early-withdrawal penalties that eat up 10 percent of the money they pulled out for school. The same thing can happen to workers who tap their accounts to buy a first home.

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