The Darkside of IRS Automation

In early 2000, the IRS underwent a drastic overhaul in response to tremendous congressional pressures. They started to adopt the language and organization of business and management.  Taxpayers were no longer just taxpayers, they were "customers".  Part of this shift focused on "efficiencies" and introducing automated processes.  The thinking at the time was that this would make it easier and efficient for both the IRS and its "customers".

I recent lecture by the National Taxpayer Advocate, Nina Olson, however, is chilling and paints a gloomy picture of what lies ahead.  It presents what may be one of the greatest threats to the IRS, and its customers, to date.  Her most poignant comments were as follows:

I believe that the IRS is at a turning point, and for a number of reasons, we are beginning the slide to a radically different IRS from that which many of us in the room today practiced before or worked in just a decade or two ago. I believe that unless we act to change that trend, the IRS of tomorrow will have little personal interaction with taxpayers. . . . It will relentlessly drive forward on a path of more automation mostly to make its own work more convenient and rarely more helpful or tailored to the taxpayer. . . . It enables the IRS to ignore the humanity of taxpayers. [Emphasis in original.]

I can attest from personal experience that the average John Q. Taxpayer can be absolutely be trapped in the IRS "system" and find it difficult, it not impossible, to get answers or guidance.  Often cases languish waiting for agents to be assigned or for appeals case officers to be assigned.  Frequently, all a taxpayer can do is call up the IRS hot-line, sit on hold for 30 minutes, and then talk to an IRS agent over the phone who can't assist them, let alone provide them with any helpful suggestions. 

How Apple Saved Billions By Issuing $17 Billion in Bonds

Recently, Apple made headlines by issuing a massive amount ($17 billion worth) of corporate bonds.  The main reason was to acquire sufficient funds to pay shareholders rather than having to bring back cash from Apple's overseas operations.  While Apple has around $45 billion in holdings in the U.S., it has $100 billion parked overseas.  Because it can be very expensive to repatriate these foreign funds, major corporations contort themselves to devise strategies to avoid paying this repatriation tax.

Below is a brief video highlighting the details of this strategy:

Why Mark Zuckerberg May Never Pay Taxes Again: Buy, Borrow & Die

CNN op-ed:  Zuck Never Has to Pay Taxes Again, by Edward J. McCaffery (USC):

So, you think you have it bad this tax season. Have you heard that Facebook founder Mark Zuckerberg will pay between $1 billion and $2 billion in taxes? That sounds like a tough pill for anyone to swallow.
But it is premature to start a pity party for Zuckerberg. The twenty-something billionaire reaped large financial gains from exercising the stock options that triggered his tax bill, and he has benefited from favorable tax rules along the way. Even better, Zuckerberg will survive his encounter with the tax man in a position to never have to pay taxes again for the rest of his life. ...
The truly rich do not have to pay any tax once they have their fortunes in hand. They can follow the simple tax planning advice to buy/borrow/die: Buy assets that appreciate in value without producing cash (like shares of Internet stocks), borrow to finance lifestyle, and die to pass on a "stepped up" basis to heirs wherein the tax gain miraculously disappears.
Zuckerberg now has $11 billion or more with which to play this game. He can live off money borrowed against that huge sum (rest assured, he can get good interest rates), never having to sell any asset at a gain, and never having to get an "ordinary" salary again.

(Hat tip: Tax Prof Blog)

The Unflappable Iron Lady

In honor of Margaret Thatcher's life I have attached a short clip of a British House of Commons debate with the Iron Lady taking on any who wished to step into the ring with her.  Too bad we don't have any similar forum here in the U.S.

Is My Fresno County CSA 51/283 Tax Assessment Deductible as a Property Tax? (Part I)

Most everyone knows that regular annual property taxes are deductible for federal income tax purposes (ignoring AMT issues).  However, what is often confusing to homeowners and tax preparers is the deductibility of certain extra one-time assessments used to fund public improvements (often called local benefit assessments).

For example, many homeowners that live in northern Fresno County live in an area referred to as County Service Area 51.  CSA 51 was established to try to figure out if there was a viable way to bring city water to the low water areas of northern Fresno.  CSA 51 ended up creating assessment district 283.  Back in 2008 or so, the then residents of CSA 51 voted to have certain engineering plans drawn up to determine the feasibility of bringing water to that area--as part of this, it was agreed that the cost of such plans would be assessed to each parcel in the area (around $3,000 per house).  Maps and plans were drawn up the final report indicated that it would cost each homeowner a whopping $50,000 or so to have water lines installed in the area.  The CSA 51 residents then voted again in July of 2012 to see if the project (and the massive $50,000 per parcel assessment) would move forward.  The measure ultimately failed.

The CSA 51 residents were left with engineering plans, a $3,000 per parcel assessment, but no water lines.  Half of this $3,000 assessment (or around $1,500) recently showed up on homeowners' 2012-13 property tax bill (referred to as CSA ID 283), with the other half to be assessed next year. 

The obvious question for the CSA 51 homeowners is "can I deduct this extra $1,500 in property taxes this year and again next?" 

Unfortunately, the answer is NOT easy. 

The deductibiliy of local benefit assessments really depends on the purpose of the assessment.  Taxes assessed against local benefits of a kind tending to increase the value of the property are deductible as taxes only to the extent taxes are properly allocable to repairs, maintenance or interest charges. (Reg. 1.164-4(b).) 

Thus, it has long been established that local assessments to build sewer or water lines, sidewalks, or irrigation lines benefiting a particular community, as opposed to the entire city or county, would be non-deductible.  The idea is that these assessments benefited a select group of people and increased the values of their property. 

However, the key fact in this case is that the project in CSA 51, never actually moved forward.  Had the lines been built, there is no question that the initial $3,000 assessment and the additional $50,000 assessment would not have been deductible, but here, the operative question is whether or not the residents of CSA 51 have enjoyed some type of increase in value, simply by virtue of the fact that the county has had expensive engineering maps and plans drawn up.

Believe it or not, there is an old tax case from 1941 which addresses a similar situation (Thatcher v. Commissioner (1941) 45 BTA 64).  In the Thatcher case a special assessment district was created to consider the installation of a sewer line in the neighborhood.  After its creation, expenses were incurred for engineering services, attorney fees, and other expenses related to the planned sewer construction.  As a result, general plans and maps were made, but the Court noted that there were no detailed plans for construction purposes.  Shortly after, it was determined that the plan was misguided and the assessment district was disbanded.  The question the court entertained was, what value did the residents get from these plans that had been drawn up.  The residents claimed that because the construction was not moving forward, the plans held no value for future use and that they were simply paying for a "mistake in judgment".  The IRS argued, however, that the plans and maps resulting from the expenditures had a value for future use and  constituted a benefit to the residents.

The court ultimately relied on the fact that the construction project was not moving forward and stated as follows:

We do not agree with respondent's contention that the mere fact of the determination that the construction of a sewage system in the district was not feasible or too costly is a benefit. It may be a benefit to the present owner personally, in the sense that it will deter him from ever taking part in such a project again, but we can conceive of no reason for an increase in the value of the land by reason of a determination that it is not subject to sewage development except at a prohibitive cost. The natural effect of this, we think, is to decrease values.

In other words, when the city determined that it was too expensive to feasibly construct sewer lines, this would actually have decreased the values of the home.  In short, the court decided that while there may be some value to having plans drawn up, if the plans actually show you that the end goal is prohibitively expensive and the project is ultimately dropped, there can be no "benefit" to the residents.  The residents won and were allowed to deduct the assessments
With respect to the residents of CSA 51, there is no clear answer.  While the facts and circumstances of CSA 51 are similar to the Thatcher case, they are not identical. 

So what would an artist's depiction of a tax cut look like?

Artist Chad Person has put together a series of collages made from U.S. currency he has entitled "TaxCut".   Of course he deducts as a business expense all the currency he destroys as part of his art.

Reconfigured Currency Collages by Chad Person paper currency collage art