This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses another in a long line of bizarre Eighth Circuit ESOP decisions.
Another 8th Circuit ESOP debacle.
The Eighth Circuit Court of Appeals has seen more than its share of cases involving Employee Stock Ownership Plans. That’s because Iowa is in the Eight Circuit, and Iowa was the home of practitioners whose creative use of ESOPs often led to unfortunate tax results.
The Eighth Circuit yesterday upheld another bad ESOP, in a case involving a Kansas orthopedic surgeon. The ESOP had an Iowa address, so we can add it to the roster of bad Iowa ESOPs.
The Tax Court had disallowed the ESOP on the grounds that it allocated shares to an owner with no compensation — a violation of the plan document — and that it failed to get the required annual appraisals. Either item standing alone is enough to disqualify the ESOP.
The Eighth Circuit opinion is strange in that the ESOP cited documents that were not in the Tax Court record to show that the prohibited allocation to the no-compensation participant was not actually made. The Eighth Circuit ignored them:
In support of these assertions, the ESOP cites documents included in its Appendix that were not part of the parties’ stipulated administrative record in the Tax Court. Therefore, these documents are not part of the record we may consider on appeal to this court. ...
The ESOP was the party in control of the relevant documents, and it had failed to submit those documents in response to the IRS’s request at the start of its investigation. In these circumstances, the Tax Court did not clearly err in basing its findings of fact on the IRS’s uncontested Explanation of Items. Those facts established that DNA’s 2008 contribution to Dr. Prohaska’s ESOP account substantially exceeded the § 415 contribution limit for that year. Thus, the ESOP was not a § 401(a) qualified plan.
This seems very strange. If you have documents that might save your case, where were they all this time?
Even if the documents would have bailed out the ESOP, there was still the problem of the lack of appraisals. The appeals court didn’t consider that issue because the ESOP was already dead. The briefs did, though, and an Iowa practitioner involved in other disqualified ESOPs makes an appearance. The ESOP’s brief says that “Steven” Thielking actually did do appraisals and that they should be considered qualified. The government brief says that since the appraisals were never provided in Tax Court, they can’t be used in the appeal.
Stephen Thielking was indicted last year on charges of illegally using ESOPs to reduce client taxes. He died before trial and the charges were dismissed. I assume that this is the same person whose name is spelled “Steven” in the briefs.
The Moral? ESOPs are tricky, and one technical violation can blow the whole thing. While useful in the right circumstances, they require an expensive commitment to meticulous plan compliance. Avoid indicted ESOP service providers. And if your ESOP gets examined, don’t wait until you get to the appeals court to produce the documents that save your bacon.
Cite: DNA Pro Ventures Employee Stock Ownership Plan v. Commissioner, No. 16-1168 (8th Cir. May 9, 2017).
Monday, May 8, 2017
Jack Townsend, Lawyer, Alleged Offshore Account Enabler, Loses Motion to Dismiss Indictment. “I have previously written about Michael Little, a British and U.S. lawyer and U.S. permanent resident, who was indicted for enabling offshore evasion for U.S. taxpayers.”
Jason Dinesen, Basics of the Iowa Pension Exclusion, Part 1. “Tax law in Iowa allows some people who are receiving retirement benefits to avoid taxation on some or all of those benefits.”
Jim Maule, Judge Judy Tells Litigant to Contact the IRS.
Joseph Henchman, Budget Deal Includes IRS Changes (Tax Policy Blog):
Section 103 addresses an ongoing challenge for the IRS. After flimsy IRS website security allowed thieves to steal the identities and tax refunds of 100,000 taxpayers, they swung to the other extreme and slow-walked 1.8 million returns last year until identities were verified manually. The National Taxpayer Advocate praised the identity theft team for finally tackling the problem but suggested they be able to make suggestions beyond digital infrastructure, and that taxpayers flagged for further verification be assigned one case manager to work with (rather than getting someone new every time they call).
The ID theft problem was diminished this year. I’d rather my refund be “slow-walked” then stolen, with all of the paperwork nightmares that entails. That’s why I don’t mind this year’s Iowa refund delays. It will help more when we get past the idea that a big refund is a good thing, and when the tax law is less inclined to penalize taxpayers with a balance due.
Kay Bell, How does your state and local tax deduction compare? “If you’re like me, you’re probably spending your Sunday perusing the possibilities for tax code change under the Trump Administration’s recently announced plan.” Boy, am I ever not like Kay.
Leslie Book, Ways and Means Committee Hearing on 2017 Tax Season Highlights Progress and Challenges (Procedurally Taxing). “The GAO testimony, while also noting many of the IRS successes such as reduced telephone wait time, looked to the challenges, including the somewhat surprising statement that even with the PATH acceleration of W-2 filing deadlines, IRS did not verify the wage information on about 2/3 of the EITC returns it received.”
Lew Taishoff, NO GOOD DEED. “Remain vigilant. Especially when trying to do a good deed.”
News from the Profession. Cyber Espionage Is a Thing You Should Start Worrying About (Megan Lewczyk, Going Concern)
Peter Reilly, Spotlight On Charitable Foundation Abuse. “I was thinking of adding that to Reilly Laws Of Tax Planning, but it think it is probably covered well enough by the Thirteenth Law (When an idea makes you think of a Seinfeld episode, it is not going to end well).”
Roger McEowen, Special Use Valuation and Cash Leasing:
The only major exception to the willing buyer/willing seller test is special use valuation of land used in a farming or ranching business. I.R.C. § 2032A. Special use valuation allows the executor of an estate to make an election on the estate’s return to elect to value real property devoted to farming or ranching (or other closely-held businesses) at its special use or “use” value rather than its fair market value. This valuation provision, however, cannot reduce the gross estate by more than $1,120,000 (for 2017).
But “Cash leasing can cause problems.”
Russ Fox, No, The Law Hasn’t Changed: Professional Gamblers Cannot Deduct Gambling Losses in Excess of Wins. “Is it fair that a professional gambler is held to a different standard than anyone in a different profession? Definitely not. However, it’s the law; until Congress changes it I can take a Net Operating Loss if my business loses money but a professional gambler cannot.”
Sam Brunson, About the [Update: FFRF’s] Challenge to the Promoting Free Speech and Religious Liberty EO (Procedurally Taxing). “Leaving aside the question of whether this EO actually does anything substantive, it’s worth remembering that any judicial challenge to the executive order faces two significant hurdles: standing and administrative discretion.”
Steven M. Rosenthal, Is Tax Parity for Pass-through and Corporate Businesses Main Street Fairness? (TaxVox). “Could we limit the lower rate to actual Main Street businesses, like grocers, barbers, car dealers, and restauranteurs, and exclude large businesses, real estate developers, investment managers, lawyers, and lobbyists? Not really. There is no principled or practical way to separate ‘main street’ businesses from others.”
TaxGrrrl, Taxes, Not Tequila: What You Should Know About Cinco De Mayo
Tax Justice Blog, Key Resources for Digging into the Trump and GOP Tax Reform Agenda. A left-side roundup.
Tax Prof, Why Don’t White Supremacists Pay Taxes?.
Tuesday, May 9, 2017
Aidan Russell Davis, EITC Victories Await in Both Hawaii and Montana (Tax Justice Blog). “In the past two weeks, lawmakers in both Hawaii and Montana passed EITC legislation, which governors in both states are expected to sign.”
Career Corner. The State of Accounting Recruitment and Talent Shortages in 2017 (Adrienne Gonzalez, Going Concern). “If I were a high school student right now with a deep desire to feel needed and never run out of job prospects, I’d be seriously considering a career in accounting right now.”
Dianne Ring, Macron and the Potential Future of Tax Leaks (Surly Subgroup). “Apparently, two hours before the debate, documents were anonymously posted on an internet forum that purported to include Macron’s signature and to show that he had a Bahamas bank account.”
Jeremy Scott, The Clock Is Ticking for Tax Reform (Tax Analysts Blog):
The administration has now put some political capital on the line, and it’s reiterated to Congress the parts of tax reform that are most important to it (the 15 percent corporate rate and the doubled standard deduction, for example). Also, by not endorsing the destination-based cash flow tax, Trump sent a powerful message to House members who have pushed it. He’s given GOP opposition to the cash flow tax even more reason to force House Speaker Paul Ryan and Ways and Means Chair Kevin Brady to abandon the complicated plan in favor of a simpler rate cut.
It’s hard to see how the Ryan border adjustable cash flow tax can go anywhere unless the President signs on.
Joseph Henchman, Ted Olson Misses the Mark on Analysis of DBCFT Constitutionality (Tax Policy Blog). “In The Washington Post, former Solicitor General Theodore Olson argues that a border adjustment would be unconstitutional as a direct tax not apportioned by population and not categorized as an income tax.”
Kay Bell, Trump’s continued weekend travel, NYC home security costs raise more tax questions. “The consensus in this case is that, for many reasons, Trump wouldn’t get any tax benefit for picking up the tab for any of his added travel and family security costs.”
Lew Taishoff, FROM COAST TO COAST. “Apparently New Jersey’s real estate tax assessors fall short of the mark in Tax Court, but Los Angeles’ valuations are right on the money.”
Megan Randall, Massachusetts gave GE a “mega-deal” to move, but did it matter? (Tax Vox). “Tax incentives are alluring to policymakers because they usually have a higher short-term political return than long-term policies like investments in education or infrastructure. These latter investments and the Boston labor force, however, are likely part of what made Boston an attractive option for GE.”
Robert D. Flach serves up fresh Tuesday Buzz, rounding up items he finds worthwhile. Links include analysis of the House-passed AHCA bill and things non-spouse IRA beneficiaries should know.
Robert Wood, Reverse Immigration: How IRS Taxes Giving Up Green Cards. “Giving up a Green Card can involve an unpleasant tax surprise”
Stephen Olsen, New Estate Tax Lien Discharge Procedures — Give the IRS All the Monies (Procedurally Taxing). “The new provisions appear to force prepayment of tax, or at least handing over the funds, in exchange for the discharge of the lien in a broader range of situations, potentially creating a significant hardship for estates.”
TaxGrrrl, Tax Deadline Nearing For Many Tax-Exempt Organizations. “Small tax-exempt organizations with average annual receipts of $50,000 or less have the option of filing a form 990-N, or the e-Postcard.”
Wednesday, May 10, 2017
Career Corner. How to Get Ahead: Sorry Not Sorry (Adrienne Gonzalez, Going Concern). “If the goal is to be more confident and less wishy-washy in your communication, I’m not entirely sure asking someone to call you out for no-no words is the way to go about it.”
Chi Chi Wu, FDCPA’s Application to IRS’ New Private Debt Collectors (Procedurally Taxing)
Howard Gleckman, Trump Didn’t Disclose His Preferred Tax Brackets. Here’s Why It Matters. (Tax Vox) “And that feature can be enormously important to the cost of those rate cuts and their distribution among households of different incomes.” I believe distributional outcomes get way more attention than they should.
Jared Walczak, North Carolina Set to Post Another Large Budget Surplus (Tax Policy Blog). “North Carolina will post a substantial budget surplus for a third year in a row, at a time when an estimated thirty-one states are grappling with budget shortfalls.”
Opponents of Iowa tax reform efforts cite the Kansas fiscal trainwreck as reason to do nothing. North Carolina shows how to achieve tax reform with good fiscal results.
Jason Dinesen, Basics of the Iowa Pension Exclusion, Part 2. “When married taxpayers file separate tax returns, the $12,000 pension exclusion might need to be allocated.”
Kathie Obradovich, Reynolds could forge new path on taxes, worker training:
On tax reform, Reynolds seems increasingly prepared to stand up to anti-tax organizations that have long protected a popular but counterproductive tax exemption. That’s federal deductibility, or the deduction of taxpayers’ federal tax payments from their state income-tax returns.
“It’s come a long ways from where I started when I was county treasurer, where it was untouchable,” Reynolds said of the federal deduction.
I think the deduction will go away. The real question is whether the new governor will go after the big tax credits and other breaks that stand in the way of fiscally-sound rate reductions.
Kay Bell, A tax break gift for educators on National Teacher Day. But not on Iowa returns.
Peter Reilly, Marijuana Retailer Not Protected From IRS Summons. “Although you might read that Washington and Colorado have ‘legalized’ marijuana, that is not strictly true.”
Robert Wood, Contingent Fee Tax Advice: IRS Allows Some, Not All. “In regulations known as Circular 230, the IRS says that a practitioner cannot charge a contingent fee for services rendered in connection with any matter before the IRS, with three exceptions.”
Roger McEowen, The Necessity Defense To Criminal Liability. “Sometimes, however, conduct that would otherwise constitute a crime is not because it is deemed necessary. That’s an issue that sometimes arises in agriculture.”
TaxGrrrl, The EB-5 Visa: United States Citizenship For Sale?
Thursday, May 11, 2017
Andrew Mitchel, 2017 First Quarter Published Expatriates – A Total of 1,313
Image by Andrew Mitchel LLC.
That many fewer jaywalkers to shoot.
Carl Davis, Gas Taxes Increases Continue to Advance in the States (Tax Justice Blog).
Christie Johnston, 5 Considerations for CPA Firms When Prioritizing Work (Thomson Reuters Tax & Accounting Blog).
Jack Townsend, Government FBAR Willful Penalty Suit Survives Motion to Dismiss. “Apparently in the mix, however, was whether the FBAR willful penalty violated the 8th Amendment’s Excessive Fines prohibition.”
Kay Bell, Seattle’s mayor adds diet drinks to beverage tax proposal in response to demographic disparity concerns. Demographic disparity made me do it!
Leslie Book, District Court Grounds NetJets’ Refund Suit (Procedurally Taxing). “Being right on the merits is not enough.”
Lew Taishoff, CLOSING THE CASE. “Remember Eugenio, a former contestant in the Taishoff no-prize ‘best excuse’ competition?”
Morgan Scarboro, How High Are Cigarette Taxes in Your State? (Tax Policy Blog)
As the color gradient between states is bigger, expect a bigger smoke smuggling industry.
Peter Reilly, Chicago Loses $29 Million Appeal By Expedia And Other Online Travel Companies
TaxGrrrl, Buffett Says U.S. ‘Out Of Whack’ On Healthcare More Than On Taxes. Buffett-controlled utilities are big users of wind farm tax credits, so the system works just fine for him.
TaxProf, Hemel: How The States Can Make President Trump’s Taxes Public. Trump’s tax returns are this administration’s true birth certificate.
Friday, May 12, 2017
Gavin Ekins, Economic Growth and Cutting the Corporate Tax Rate (Tax Policy Blog). “Economic theory from the time of Adam Smith has shown that taxes stifle the incentive for individuals to work, take risks, and buy and sell goods and services. Rather than revisiting whether taxes affect economic behavior, research should focus on quantifying the tax burden on businesses and individuals, and the extent to which each type of tax affects economic incentives.”
Jim Maule, Taxes, Strip Clubs, and Creativity. “The club argued that its dancers were providing therapy to its customers, and thus the amounts charged fit within the sales tax exception that applies to amounts paid for massage therapy or sex therapy.”
Kay Bell, 5 moves — and 7 tax tips! — to make if you’re fired.
Leslie Book, ABA Tax Section Preview: Panels of Interest, Appeals Comments and Olson Wins Distinguished Service Award
Lew Taishoff, BELT, SUSPENDERS AND CRAZY GLUE. “These might get you into Tax Court, but once you’re there, you’d better have paper as well.”
Meg Wiehe, State Rundown 5/10: Spring Tax Debates at Different Stages in Different States (Tax Justice Blog). “This week saw a springtime mix of state tax debates in all stages of life. In West Virginia and Louisiana, debates over income tax reductions and comprehensive tax reform are full of vigor.”
News from the Profession. Former Deloitte Employee Sentenced for Attempted Murder (Caleb Newquist, Going Concern). “Deloitte fired Fowler in 2015 after discovering that he used his company credit card to ‘pay for family vacations and buy thousands of dollars’ worth of gift cards.'”
Roger McEowen, Like-Kind Exchanges, Reverse Exchanges, and the Safe Harbor. “Several years ago, the IRS established a ‘safe harbor’ for such exchanges, but recently the U.S. Tax Court said that a transaction that wasn’t within the confines of the safe harbor still qualified for tax deferral.”
Russ Fox, The TurboTax Defense Fails Again. “If your tax return has only W-2 income and, say, mortgage interest and property tax, TurboTax will likely do an excellent job. If you have a divorce settlement with a restatement of the amount of alimony due, interest tracing, and a Net Operating Loss carryforward, it might pay to get some expert help.”
TaxGrrrl, The Vegan Fugitive, Done In By Domino’s Pizza, Takes A Plea. “Sometimes you just want pizza.”
TaxProf, Tax Policy In The Trump Administration. A roundup.