Visits Cost Parted Couples a Tax Break
By DAVID CAY JOHNSTON
The New York Times
Under a federal tax court ruling, older couples who stay married but live apart can face higher taxes if one spouse pays an extended visit to the other.
The ruling, on May 15, involved Thomas McAdams, 75, a retired Army colonel who once taught nuclear weapons tactics and race relations at an Army college for future generals. He listed himself as "married, filing separately" on his 1998 income tax return.
Mr. McAdams has been married since 1947, but for years has lived on his own, dividing his time between his home in Ninilchik, Alaska, and the Western states, which he roams in a truck with a trailer. His wife, Norma, lives in Boise, Idaho, as do the couple's children, grandchildren and great-grandchildren.
Congress recognizes such arrangements in a law that gives a tax break to older couples who stay married but live apart. A couple living together must pay taxes on their Social Security benefits if they make $32,000, but married people filing separately can make $25,000 each before the benefits are taxed, provided that they live apart.
Mr. McAdams reported his $11,182 of Social Security benefits but paid no taxes on that money, citing the $25,000 exemption.
Audits have become increasingly rare, but Mr. McAdams said he has been audited seven times since 1991. The most recent time, auditors decided he did not qualify for the exemption and billed him $1,106.
The Internal Revenue Service reasoned that Mr. McAdams did not qualify because he did not, as Congress requires, "live apart" from his wife "at all times during the taxable year." Mr. McAdams said that for more than 30 days, he parked his vehicle at his wife's Boise home and slept inside the home, though not in the same bedroom.
Mr. McAdams said he might appeal the ruling. "It's not the money," he said, but rather what he considers excessive auditing over insignificant sums. He said he offered to pay $1,000 to drop his case, but the I.R.S. preferred a court fight to giving up an extra $106.
Bob D. Scharin, the editor of Practical Tax Strategies, a monthly journal for tax professionals, said Mr. McAdams probably could keep his tax break in future years if he just altered his visits slightly.
Mr. McAdams should try "sleeping in the trailer while in Boise," Mr. Scharin said, adding that "then he probably could go into the house to take a shower without drowning his tax savings."
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MAY 28, 14:20 ET
Court to Settle Boeing's Tax Bill
WASHINGTON (AP) — The Supreme Court agreed Tuesday to resolve a tax dispute between Boeing Co. and the Internal Revenue Service over a $419 million refund.
The decision, likely sometime next year, will affect companies that export their products and spend heavily on research.
An appeals court ruled last year that Boeing's accounting practices led to a substantial understatement of the company's net income from 1979 to 1987.
At issue is the way the Chicago-headquartered company charged research- and-development costs to foreign-sales units.
Boeing sued in 1996 claiming the IRS overbilled the company for income taxes. A federal judge agreed and said the company was entitled to the $419 million. The 9th U.S. Circuit Court of Appeals overturned that decision.
The cases are Boeing Co. v. United States, 01-1209, and United States v. Boeing, 01-1382.
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May 29, 2002
Author of 'Voluntary' Income Tax Theories Sued for Millions
By Jason Pierce
CNSNews.com Staff Writer
(CNSNews.com) - Former Libertarian presidential candidate Irwin Schiff, who maintains the federal income tax is optional, is being sued by a New Hampshire man who says he lost his business after following Schiff's tax advice.
Steven Swan, a former real estate agent in Auburn, N.H., is suing Schiff for $1 million in compensation for the loss of earnings from his real estate business since 1997, $1 million for physical and emotional distress for the loss of his business and earning ability and $5 million in punitive damages.
The lawsuit was filed May 23 in U.S. District Court in Las Vegas, Nev., currently lives.
"If you do something where you encourage people to do something to their detriment, whether they believe it or not, it is called a tort, and so I filed a lawsuit for the torts I believe [Schiff] committed," Swan said.
Swan claims in his lawsuit that he first met Schiff at a Libertarian luncheon in New Hampshire in 1995 where Schiff was speaking. Afterwards, according to the suit, the two spent approximately three hours in the hotel lobby, during which time Schiff told Swan about his theories that the federal income tax was voluntary.
Swan says he then bought the books Schiff had authored on how to legally avoid paying income taxes, and even began teaching others about Schiff's theories at seminars.
In 1996, Swan's suit alleges, he used Schiff's theories to try to convince the Internal Revenue Service that he owed the government nothing and planned to pay nothing
Later, Swan was forced to close his business and IRS employees levied his bank accounts. When Swan used Schiff's theories to file two lawsuits against IRS employees, the U.S. District Court in New Hampshire dismissed both.
Last week, Swan directed his legal action at Schiff.
"He honestly believes what he is saying," Swan said. "But I think he is misconstrued. I don't think it is anything he is trying to do purposely, but he is guilty of misrepresentation, fraud and negligence."
Schiff, who ran unsuccessfully for the 1996 Libertarian Party presidential nomination, said Swann's lawsuit is "nonsense."
"My books point out that I went to jail for four years," Schiff said. "My books point out that I sued the government.
"There are disclaimers in all my books, but I stand by everything in my books," he said.
Schiff added that in teaching people about his theories, he gives those who listen the information necessary to avoid paying taxes, but has no control over what is done with the information.
"It can't take Steve six years to learn I am wrong," Schiff said. "Here's what I do: I bring them the law, the statutes and the code, but I tell them they are dealing with the federal government, which is a criminal government.
"If I told [Swan] to go rob a bank, would he do it? What is he, an idiot?" Schiff said.
Swan admitted Schiff did not force him to take any action.
"It's true that I didn't have to listen to him," Swan said. "I didn't have to listen to the guy, but he was so convincing that I did listen to him."
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May 30, 2002
TAX REPORT
By TOM HERMAN
The Wall Street Journal
Years After Scandal, Millions Continue to Avoid Nanny Tax
So much for all the angst about the nanny tax.
Newly obtained Internal Revenue Service statistics show the number of people paying Social Security and Medicare taxes on nannies, housekeepers and other household employees has been declining steadily for each of the past four years. Last year, the IRS received only about 263,000 nanny-tax forms. That was a fraction of 1% of all individual returns filed -- and down 16% from as recently as 1997.
While nobody knows precisely how many employers should be paying, tax lawyers agree the number should be many times more than those who are. "Millions of people are lying," says Sheldon Cohen, a Washington lawyer and former IRS commissioner.
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Nanny-tax scofflaws probably won't go to jail. IRS officials can't recall ever pursuing a criminal case against someone for not filing these taxes. But the IRS could hit them with back taxes, interest and penalties.
How do scofflaws get caught? Lawyers say trouble often starts when someone fires a household employee, and the worker turns in the employer to authorities.
Congress reacted to the nanny-tax outcry after the Zoe Baird flap by passing a new, streamlined law in 1994. Then-Sen. Daniel Patrick Moynihan (D., N.Y.) said that law finally had "decriminalized" baby sitting and other household jobs. The law not only raised the threshold for complying but also allowed employers to file and pay only once a year, instead of quarterly. But it still can be remarkably tricky.
Here are the basics: If you paid a household "employee" $1,300 or more last year, you generally were supposed to pay employment taxes and attach Schedule H to your federal income-tax return for 2001. The $1,300 threshold remains unchanged for 2002. There are key exceptions. For example, don't count wages you pay to your spouse or a child of yours age 20 or younger. Also don't count most employees age 17 or younger at any time during the year. But there's even an exception to the under-18 rule: You do have to count these wages if providing household services is that employee's "principal occupation," the IRS says. If the employee is a student, though, don't worry: In that case, "providing household services is not considered to be his or her principal occupation."
The Social Security and Medicare taxes amount to 15.3% of "cash" wages, which means not only cash but also checks or money orders. You can exclude the value of food, lodging, clothing and other noncash items you give your employee.
Your employee's share is half the total employment-tax amount, although you can choose to pay that portion plus your own. For more details, see IRS Publication 926, available free on the IRS Web site (www.irs.gov).
Explanations vary for why so few people comply: Many household employees insist on working off the books. Some employers argue their workers are "independent contractors," not "employees." Some employers turn to professional agencies to handle all the necessary taxes and paperwork. Some employers hire students to work part-time, and they thus don't have to be reported. And the reporting threshold has risen over the years.
Opposition persists to IRS plans to impose Social Security taxes on incentive stock options.
At a recent IRS hearing, major trade associations and employer groups urged the government to scuttle previously proposed regulations. Those regulations would impose Social Security, Medicare and unemployment taxes on the exercise of incentive stock options, as well as options under employee stock-purchase plans, starting next year.
Critics hope Congress will prevent the IRS from acting -- or that the IRS will either withdraw the proposed regulations or delay the effective date. "You haven't heard anything yet," warns Ms. Hevener of Baker & McKenzie. "Wait until people begin to have the taxes withheld from their paychecks. People are going to scream bloody murder. Here's the IRS stepping in and reversing 30 years of history."
Direct deposit wins more admirers for speed and safety.
About 38. 9 million taxpayers instructed the IRS to deposit their refund checks directly into their personal accounts through May 17. That was up 17% from the prior year. It also represented about 42% of all the refunds processed as of that date.
The dollar amount of direct-deposit refunds soared 29% to $90.7 billion. Advocates like the system because they don't have to worry about refund checks getting delayed, lost or destroyed in the mail. "I think it's a great idea," says Bruce Balsam, director of taxes at Most Horowitz & Co., LLP, a New York City accounting firm. "Nobody I know has had any problems with it." The average direct-deposit refund check this year is $2,333, up 10% from a year ago.
Write On: The IRS vows to issue more tax-law guidance. For years, lawyers and corporate tax executives have been pleading with Treasury and IRS officials to publish more guidance explaining murky tax laws. Now, a senior IRS official is promising action. "My highest priority is to increase issuance of public guidance," said B. John Williams, the IRS's new chief counsel, at a meeting of the American Bar Association tax section. The IRS recently said it is testing a pilot program to "streamline the process" for issuing technical advice in audit situations. During the pilot program, the IRS's new "Technical Expedited Advice Memorandum" will be limited to income-tax and accounting issues. Several lawyers at the bar-association meeting praised the new approach, saying it's long overdue. But others remained skeptical about IRS plans to publish more guidance. They say senior IRS officials have been making similar promises for years without delivering. A former IRS official says the main problem is the government's cumbersome editing and review process.
BRIEFS: Notable and Quotable: "Basic tax, as everyone knows, is the only genuinely funny subject in law school," says Washington lawyer Martin Ginsburg. ... Mr. Ginsburg's quip is part of a large collection of tax-related wit and wisdom compiled by Jeffery L. Yablon, a Washington lawyer at Shaw Pittman, and published in a recent issue of Tax Notes, a weekly publication based in Arlington, Va. ... The Yablon collection also includes this quote attributed to "anonymous": "A lottery is a tax on people who are bad at math."
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MAY 30, 08:46 ET
Japanese Planners Seek Tax Cuts
TOKYO (AP) — The government's top economic strategists agreed Thursday on the need for tax breaks to boost the economy, but also recognized that continued belt-tightening is necessary to rebuild the nation's finances.
"In principle, we agreed on the need to regain fiscal health, but also on the need to rejuvenate the economy through tax policy," Economy Minister Heizo Takenaka told reporters after a meeting of the Economic and Fiscal Policy Council.
The panel is expected to compile a set of tax proposals later next month.
Takenaka also said the council agreed on points to be included in its economic revival plan to be issued next month, ahead of the Group of Seven summit in Canada.
Government officials have been at odds on the best way to fix Japan's economy. Prime Minister Junichiro Koizumi has repeatedly preached fiscal austerity to rein in the ballooning government debt, the highest in the industrialized world.
But other senior officials, including Finance Minister Masajuro Shiokawa, have also been calling for additional stimulus measures like tax cuts.
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MAY 30, 15:58 ET
Venezuela Faces Higher Taxes
CARACAS, Venezuela (AP) — Venezuela's finance minister warned Thursday that the country's battered economy will not grow this year, and proposed tax increases to help offset a projected deficit.
"Obviously we will not grow this year. That's something that we have to admit with all responsibility," Tobias Nobrega told reporters at a news conference.
Nobrega unveiled a proposal to raise the value added tax to 15.5 percent from 14.5 percent. He also proposed increasing a tax on all banking transactions from 0.75 percent to 1 percent. Both measures must be approved by Congress.
Nobrega estimated the increases, which the government hopes will enter into effect July 1, could raise about $1 billion this year.
Venezuela faces a $9 billion deficit this year, or almost 9 percent of the country's $110 billion gross domestic product, he said.
Without providing details, Nobrega reiterated government hopes to bridge the remaining deficit gap by borrowing from multilateral lenders and international and domestic bond markets.
The deficit is partly due to an early year slump in oil prices that slashed Venezuela's projected petroleum revenue this year to $8 billion, compared to $13 billion last year.
With oil prices now on the rise, Nobrega said the government should base its budget on an average annual oil price of $19 per barrel, up from the current estimate of $16 per barrel.
Venezuela depends on oil for about half of its government income and 80 percent of its export revenue.
Although Venezuela sits on the Western Hemisphere's largest oil reserves, 80 percent of the population is poor.
Venezuela's economy suffered a 4.2 percent contraction in the first quarter, compared to the same period last year, ending two years of consecutive, moderate growth.
The country's economic woes were compounded by an April 12 failed coup that briefly ousted President Hugo Chavez.
Nobrega appealed to Venezuela's opposition to support the new taxes.
"Today, both political actors in the government and the opposition are responsible with what happens to the economy," Nobrega said.
Since surviving the coup, Chavez has tried to improve relations with the business community by replacing unpopular members of his economic team.
Nobrega took office shortly after the coup, which was triggered in part by a general strike and massive march organized by prominent business leaders and opposition politicians.
Business leaders have feuded with Chavez over a series of new laws that increased the government's role in the economy.
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MAY 30, 18:39 ET
Britain Suspends Online Tax Forms
LONDON (AP) — Britain's income tax service said Thursday it has suspended use of its online forms while it investigates reported security lapses.
Up to 70,000 people a year use the Inland Revenue's online service to return their confidential financial details for tax purposes.
"We were alerted to a potential security issue by a customer who got in touch with the help desk saying they'd seen some of somebody else's information" on the Self-Assessment Online electronic form, said Inland Revenue spokeswoman Beryl St. James.
She said full tax returns had not been seen, but "bits and pieces of information" from other taxpayers.
"Confidentiality is a major issue for us, so we suspended the SA Online forms," she said.
The tax service said the forms were made unavailable on Monday while the problem is investigated.
People who have commercial software can continue to file their tax returns, she said. The difficulty is only with the Inland Revenue's SA Online forms.
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MAY 31, 17:32 ET
Al Fayed Loses Income Tax Case
EDINBURGH, Scotland (AP) — Mohamed al Fayed, owner of Harrods department store, lost a legal battle Friday to retain a special tax status under which he paid a fixed $350,400 a year.
Al Fayed and his two brothers agreed with Inland Revenue department — Britain's tax agency — in 1997 to pay the fixed annual sum until 2003.
But in 2000, the revenue department told al Fayed it had never had the legal authority to enter into the agreement and canceled it.
Al Fayed and his brothers went to court to challenge that decision, but lost their case at the Court of Session in Edinburgh. It was not immediately clear why al Fayed made his challenge in a Scottish court.
The case was heard last year, but Lord Gill issued a written judgment on Friday.
Gill said the revenue department had been wrong to agree to the tax agreement with the tycoon.
"In a true sense the al Fayeds thereby became a privileged group who are not so much taxed by law as untaxed by agreement," said Lord Gill.
Al Fayed said he would appeal.
"I and my brothers are extremely disappointed by this judgment," he said. "We relied on the law and believed that we were doing the right thing."
The three men argued that the revenue department had always had the full power to enter into a legally binding agreement and it was "unfair and improper" for it to claim otherwise.
But Lord Gill said the agreement had not been based on any objective calculation of tax liability.
"It was little short of a random figure accepted as an alternative to the possibility of there being appropriate arrangements that would avoid any liability to tax at all," he said. "That, in my view, is an important reason why the agreement was invalid."
Following the ruling, the revenue department said the agreement had not been intended as a special privilege but for "sound practical reason." It wasn't immediately clear why the department had granted the special arrangement with Harrods.
"The Inland Revenue terminated his agreement because we received clear legal advice that we had gone beyond our powers in that particular agreement," said spokeswoman Beryl St. Jane.
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June 3, 2002
Think Globally, Skip Tax Locally
by Allan Sloan, NEWSWEEK’s Wall
Street editor
NEWSWEEK Getting accounting firms to change their ways is like trying to get teenagers to clean up their act in return for the keys to the family car
June 3 issue — Getting big accounting firms to change their willful ways is like trying to get teenagers to clean up their act in return for the keys to the family car. They’ll promise anything but will revert to form at every opportunity. Just look at the much-ballyhooed proposals to "reform" accounting by separating auditing business from consulting. That’s designed to remove temptation for firms to go easy on auditing clients in hope of attracting lucrative consulting work.
PRICEWATERHOUSECOOPERS, ONE OF the Final Four accounting firms, is doing just such a split. But don’t cheer yet. Because PwC is splitting up in an antisocial way. It’s pulling a maneuver reminiscent of companies like Stanley Works, which want to be considered American but also want to move offshore to avoid paying U.S. income taxes.
The new PwC Consulting will minimize—maybe even totally avoid—U.S. income taxes by swapping national identities at will. And get this. Even as the firm is adopting foreign nationalities of convenience, it has registered with the American government as a lobbyist on its own behalf to hustle consulting contracts with the Office of Homeland Security. You’ve got to love it. PwC Consulting doesn’t want to pay taxes to Uncle Sam, but it’s sure eager to take our tax money to help protect us from evildoers.
To be fair, PwC Consulting isn’t any more tacky than its rival Accenture, the former Andersen Consulting, which is also based in Bermuda. Among its contracts: running the Internal Revenue Service Web site. We should probably be grateful the IRS site doesn’t have a Bermudan tax-avoidance link.
PwC’s setup is undoubtedly legal. But is it right? When the United States is at war and President Bush is invoking patriotism, is it right to set up in Bermuda for tax purposes while keeping your headquarters in the United States and benefiting from a society you’ve decided you don’t want to pay taxes for?
Accenture says my take on its behavior is wrong, because the firm, created only recently, has never been a U.S.-based corporation. A spokeswoman says Accenture considers itself a worldwide company that’s based in Bermuda for convenience. PwC Consulting says it can’t talk to me about any of this because it’s in the process of registering a stock offering with the Securities and Exchange Commission. So my analysis of PwC Consulting’s strategy is based on its SEC filings, supplemented with background information.
Here’s the deal. PwC Consulting will be based in the United States, where it does more than half its business, and its stock will trade on the New York Stock Exchange. It will look like a U.S. corporation, but will actually be a Luxembourg corporation owned by a Bermuda corporation. Now, watch. Part of this game involves using tax treaties that the United States has negotiated with various countries. Under these deals, the countries provide favorable treatment to each other’s taxpayers. So, to give you an example, PwC Consulting will be American when it comes to paying Luxembourgian taxes, but will be Luxembourgian (or whatever nationality works best) when it comes to paying U.S. taxes.
Most American companies that have been moving their nominal headquarters offshore—or that, like Accenture or PwC Consulting, set up offshore when they separated from their corporate parent—say they want to avoid paying U.S. income tax on profits earned elsewhere. Sounds reasonable, doesn’t it? Call me suspicious, but PwC’s structure seems designed not only to solve that supposed problem, but also to let the firm suck taxable profits out of the United States into no-tax or low- tax places like Bermuda. As a bonus, this structure seems capable of foiling proposals by enraged senators and representatives to close the going-offshore loophole.
If you believe in efficiency, you have to admire how the consulting industry gets three bites at the going-offshore apple. First, it gets fees for helping American companies move offshore. Second, it gets paid for lobbying against congressional efforts to close this loophole. And third, it moves offshore itself.
The way PwC sticks its finger in our eye in the name of "reform" is an example of why we should be skeptical about any lasting good coming from New York Attorney General Eliot Spitzer’s attempts to reform Wall Street. He’s done a great job at shaming Merrill Lynch, which richly deserves it. Merrill has offered to pay states $100 million to buy its way out of all this embarrassment. Salomon Smith Barney will probably make a similar deal with Spitzer soon. And, like Merrill, it will likely begin reverting to form about one nanosecond after the pressure ceases. So when you hear companies promise "reform," hold onto your wallet. And your car keys.
© 2002 Newsweek, Inc.
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