 |  | Home  |  | | About Us | | | Order Products | | | Press Center | | | Customer Service | | | Career Opportunities | |
|
CCH can assist you with stories, including interviews with CCH subject experts.
Also, the 2007
Link to special CCH Tax Briefings on key topics from 2006: | |
Politics, Schemers, Complexity Make Taxes a Quirky Field(RIVERWOODS, ILL., January 2007) – The world of taxes can be a weird one. Taxes deal with some of the most straightforward, basic human activities – making and spending money. But everyone agrees that taxes can sometimes be quirky, absurd and fiendishly complicated, according to CCH, a Wolters Kluwer business and a leading provider of tax and accounting law information, software and services (CCHGroup.com). The reasons for this are many – special interests seeking advantage through the political system, the complexity of our economy, ingenuity allied with greed to exploit loopholes in the law. “If life were truly simple, we wouldn’t need over 67,000 pages to contain federal income tax law in our Standard Federal Tax Reporter,” said Mark Luscombe, JD, LLM, CPA and CCH principal federal tax analyst. “But the world itself is complex and people are quirky, so that gets reflected in our laws.” Some of the oddities of the tax laws come from the complex tapestry of the national economy and the democratic lawmaking process. “Everyone looks at the national interest from their own unique vantage point,” Luscombe noted. “What looks to you like an odd kink or quirk in the tax code might make perfect sense from my point of view.” For Senator Chuck Grassley, until recently Chairman of the Finance Committee, the national road to energy independence leads through the windy wheat-filled plains and cornfields of his native Iowa. He is the major force behind tax breaks for wind energy and biomass projects, such as using wheat and corn stalks to produce fuel. Last year, Congress handed out a special perk to songwriters. Prior law treated the sale of a songwriter’s catalog – say, to a music publishing house – as ordinary income, just like royalty money. This is the same treatment given to other creative artists such as authors and sculptors. But the Nashville Songwriters Association International argued that songwriters ought to be able to claim capital gains treatment – and a lower tax rate – on those sales. Why did Congress decide that songwriters, and not others, deserved this treatment? “It’s simple. The songwriters were the ones who lobbied for it,” Luscombe said. The fact that Senate majority leader Bill Frist is from Tennessee probably didn’t hurt. The provision first appeared in a tax bill passed in May, 2006, but as written there, it was due to expire in 2011. It was made permanent in a year-end tax bill, at Frist’s urging. Taxes and TaxidermyTo encompass all the possibilities of our complex society, the tax laws touch on everything from illegal kickbacks (must be reported as income) to chinchillas (depreciable if kept as breeding stock by a chinchilla farmer and not included in inventory). But given all the nooks and crannies of the laws, it’s inevitable that inventive people will find possibilities that the legislature never quite anticipated. That’s why a mangy lion head at your local museum may have a tax tale to tell. The tax code generally allows people to take the value of property donated to a charitable institution as an itemized deduction. But for years it wasn’t quite clear how the value of, say, a mounted lion head should be determined. Should the rarity of the lion be considered? What about the money it would take to organize a safari to the African plains to shoot a replacement lion – the airfare, the cost of guides, wear-and-tear on hunting gear and so on? This looked like an opening, and people looking for financial and other advantages rushed in. According to the opinion in a U.S. Tax Court case, one Robert Bruce Duncan pioneered the field of appraising mounted game animals. He also offered a match service, connecting clients wishing to donate with tax-exempt museums. Duncan’s advertising touted the tax benefits of such donations, stressing that big game hunters could deduct the costs of their very expensive hunting trips and safaris that way. The case centered on a husband-and-wife pair of Illinois doctors who made more than $1,000,000 a year in their practice and who were also passionate big game hunters. They sought Duncan’s help in appraising and donating part of their extensive collection of mounted animals. Duncan arranged a donation to the North Carolina State Museum of Natural History and the doctors claimed a charitable deduction of $126,500. The Tax Court judge described the director of the North Carolina museum, one Dr. Funderburg, as “something of a minor monarch in his small domain” who had “some rather grandiose dreams” for the museum. In the words of the Court: “He wanted as many game mounts as possible to flow into his museum with the idea that he would then cull out the finest and the best for the Museum’s collection. Under the program devised by Dr. Funderburg and Duncan, thousands of game mounts flowed into this small State Museum, coming in by the sixteen-wheeler truckload toward the end of each year.” Having served the purpose of obtaining a tax deduction for their donor, however, the vast majority of the mounts were stored “in a damp, leaky basement storage area, where they would deteriorate rapidly from exposure to cold, dampness, and insects,” the Tax Court noted. The IRS challenged the size of the taxpayers’ deduction, claiming that the donations had a much lower value. The Court didn’t question Duncan’s qualifications as an appraiser, but it was “disturbed” by the appraiser’s advertising, which emphasized tax savings and “offsetting today’s terrible hunting costs” by donating the mounted animals. Duncan wrote articles pointing out that a hunter could offset “today’s astronomical hunt costs” by donating animals at their current replacement value, although the hunter may have collected the animals inexpensively years ago. The 1993 case saw a judgment against the hunters, but the practice of claiming large deductions for taxidermy donations continued. Finally, last year Congress tightened the rules considerably. Now, taxpayers are limited to deducting the “fair market value” of the specimens they donate, or what they paid for them, whichever is less. In cases where the donor was also the hunter, the deduction is limited to the actual cost of skinning, mounting and transporting the animal, with no allowance for the hunter’s travel and other hunting expenses. Frivolous, But No FunThe tax laws are strange enough that some people think it’s plausible to make them just a bit stranger – and profit in the process. Would you believe that the constitutional amendment that allowed the modern income tax wasn’t actually ratified? Would you believe that the income tax applies only to foreign income, or to income earned on federal land? Would you believe that you have a “basis” in your labor equal to your wages, making your income zero? Would you believe that by setting up a series of trusts you can legally pay no income tax? These propositions all sound just a bit odd and none of them will fly with the IRS or the courts, but after all, there are plenty of odd things in the tax laws already. “Somehow, when the result is a good reason for not paying taxes, some people find these propositions very plausible,” Luscombe noted. One of them was the actor Wesley Snipes. Snipes was indicted in Tampa, Fla. in October, 2006 on charges of conspiracy to defraud the IRS and submitting false estimated-tax payments worth $14 million. In denying that he owed tax, and requesting refunds of taxes he’s already paid, Snipes relied on what’s known as the “861 argument,” named after a section in the tax code. The argument claims that only certain kinds of foreign-based income are taxable, and it has been consistently rejected by the courts. In Snipes’s indictment, the U.S. Department of Justice characterizes the 861 argument as “an intentionally false, fictitious and fraudulent misapplication of Section 861 of the Internal Revenue Code and the regulations thereunder.” Snipes’s attorney has said that “evidence in the case will show he has been the victim of unscrupulous tax advice.” The 861 argument has been identified by the IRS as “frivolous,” a term that can be applied to tax returns and to positions taken in IRS hearings and court cases. “For someone who submits a frivolous return or makes a frivolous argument in court, the outcome is usually anything but funny,” Luscombe observed. A court can impose a penalty of up to $25,000 for making a frivolous argument. The maximum penalty for sending in a frivolous return has been recently increased to $5,000 and has been expanded to cover not just returns but all “submissions,” such as offers in compromise and installment agreements, for all kinds of federal taxes, as well as arguments made at certain IRS hearings. The new law, passed in December, 2006, requires the IRS to identify the frivolous positions that will merit the penalties, but searching for “frivolous” on the IRS web site locates a document dated November 30, 2006, “The Truth About Frivolous Tax Arguments” that discusses 24 “general” arguments and 17 additional contentions that have come up in collection due process hearings, when the IRS is trying to resolve a tax dispute without going to court. “This is a good indication of what the IRS will list as frivolous arguments in response to the new law,” Luscombe said. In addition, the IRS will normally inform a taxpayer when he or she advances a frivolous argument, allowing the taxpayer to retract it and avoid any penalty. “The people who actually get socked with a frivolous return or frivolous argument penalty have usually been warned many times about what they’re doing and what the consequences might be, but a lot of them stick to their guns to the bitter end,” Luscombe noted. Convicted By His FootwearWhile there are devious schemers who ferret out cracks in the tax code and hard-line tax protesters who refuse to admit that taxes apply to them, there are also folks like Brian Nicely, whose attempts to get the better of the tax system are more easily thwarted. Among other questionable deductions on his 2002 tax return, Nicely wrote off the cost of his Rocky Wolverine boots, claiming they were articles of work clothing required in his job as a welder. But to be deductible as work clothes, the articles in question cannot be “suitable for general or personal wear,” according to the tax laws. When questioned by a Tax Court judge, Nicely acknowledged that in fact he was wearing his Rocky Wolverine boots in the courtroom. “He made the judge’s job pretty easy that day,” Luscombe observed. About CCH, a Wolters Kluwer businessCCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax and accounting law information, software and services. It has served tax, accounting and business professionals and their clients since 1913. Among its market-leading products are The ProSystem fx® Office, CCH® Tax Research Network™, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill. Wolters Kluwer is a leading global information services and publishing company. The company provides products and services for professionals in the health, tax, accounting, corporate, financial services, legal and regulatory, and education sectors. Wolters Kluwer has annual revenues (2005) of €3.4 billion, employs approximately 18,400 people worldwide and maintains operations across Europe, North America, and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. Its shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. For more information, visit www.wolterskluwer.com. -- ### -- nb-07-23
|
© 2024, CCH INCORPORATED. All rights reserved. |
Back to Top | Print this Page |
|
|||||||||||||||||