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Archives: Taxation

IRS to Offer Free Tax Help to Small Businesses

In recognition of National Small Business Week, the Internal Revenue Service has announced an abundance of free resources available to assist the nation’s 45 million small business and self-employed taxpayers with their tax responsibilities. And, they are all just a mouse-click away.

The small business section of IRS.gov provides a one-stop resource for information on starting and operating a business. On this site taxpayers can:

• Learn about employment tax requirements.
• Make tax payments.
• Find out how to set up and distribute retirement plans.
• View a streaming video of a small business tax workshop.
• Order free products like a tax calendar or small business resource guide.

House Passes Energy Bill with $8 Billion in Tax Breaks

The House of Representatives passed a new bill yesterday with $8 Billion of targeted tax incentives. The Energy Policy Act of 2005 includes provisions that would shorten recovery periods for natural gas pipelines and air pollution control facilities, ease restrictions for deductible contributions to nuclear decommissioning funds, exempt from tax-exempt bond arbitrage rules some prepayments for natural gas, and increase the limitation for the oil depletion deduction for small refiners.

The Bill also would provide limited incentives for residential solar- powered water heating, photovoltaics, and fuel cells and would create a 15 percent business tax credit for the purchase of fuel cells. Both individuals and businesses would be allowed to use several new energy credits against the alternative minimum tax. The Senate is expected to begin working on an energy bill within the next two weeks.

The House vote was 249 to 183  to pass the comprehensive energy bill, but only after narrowly overcoming a Democratic objection.

No more tax breaks for Augusta National?

The NY Times is reporting that two members of Congress reintroduced a bill Wednesday that would cut off tax breaks for businesses that used clubs that discriminated and specifically named Augusta National, where the Master's golf tournament is hosted, as one such club. Congresswoman Carolyn Maloney (D-NY) and Congressman Brad Sherman (D-CA) stated that the bill was modeled after a California statute that states, "a discriminatory club must print receipts, 'Not Deductible for California Income Tax Purposes.' "

NY Court of Appeals rules that a telecommuter must pay NY state income tax

In a 4-3 decision, the NY Court of Appeals ruled yesterday that a telecommuter who lives and works in Tennessee but is employed by a New York-based company must pay New York taxes on 100 percent of his income even though he spends at most 25 percent of his working time in the Empire State.

In Matter of Huckaby, 8, the court rejected constitutional challenges to the so-called "convenience of the employer" test that enables New York to tap the income of people who live outside the state but work for an in-state firm.

Under the convenience of the employer test, if the employee works out of state due to the needs of the employer, he or she may apportion income between the days spent in and out of New York. But if the employee works out of state for his or her own convenience, New York claims the right to tax all of the earnings, no matter how much time was spent working here. The rationale for New York's convenience test was explained 31 years ago in Matter of Speno v. Gallman, 35 NY2d 256 (1974): "Since a New York resident would not be entitled to special tax benefits for work done at home, neither should a nonresident who performs services or maintains an office in New York State."

In Tuesday's opinion, the majority expressed some reservations over the fundamental fairness of taxing out-of-state residents who have only remote links to New York. But in the final analysis, Judge Susan Phillips Read, joined by Chief Judge Judith S. Kaye and Judges Albert M. Rosenblatt and Victoria A. Graffeo, concluded that the convenience of the employer test does not inherently offend either the Commerce Clause or the Due Process provision in the U.S. Constitution.

On Tuesday, the court majority said there may be some point at which the tax is so disproportionate -- for instance, if the taxpayer works only one day a year in New York -- that its application would violate due process. But it declined to draw any line and said that in the Huckaby case, spending 25 percent of one's time in New York is plenty to justify the tax and "satisfy any rough proportionality requirement called for by due process."

IRS collects $3.2 Billion in Son-Of-Boss Tax Shelter Scams

IRS Commissioner Mark Everson announced March 24, that it has collected over $3.2 Billion in from taxpayers participating in the Son of Boss tax shelter. IRS officials expect this number to grow to over $3.5 Billion once all the settlements are in. Son of Boss was an abusive transaction aggressively marketed in the late 1990s and 2000 primarily to wealthy individuals.

The settlement initiative required taxpayers to concede 100 percent of the claimed tax losses and pay a penalty of either 10 percent or 20 percent unless they previously disclosed the transactions to the IRS. So far, $3.2 billion in taxes, interest and penalties have been collected from the 1,165 taxpayers who are participating in the settlement initiative. The typical taxpayer payment was almost $1 million, with 18 taxpayers paying more than $20 million each and one paying over $100 million.

Participants not taking part in the settlement initiative have or will shortly receive a deficiency notice from the IRS disallowing all claimed tax losses and transaction costs. They will also be assessed the maximum applicable penalty –– 40 percent.

IRS to Consider Ebay Sales as Taxable Income

The Associated Press has an interesting article about whether sales on the online auction site Ebay are taxable income to the sellers. The IRS typically applies a list of nine factors that might prove whether a taxpayer's online auctions amount to a business including, evidence that the taxpayer depends on the income, acts in a businesslike manner, or puts enough time and effort into the activity to suggest a profit motive.

One key point to look at according to the article is the seller's intent. If someone is just selling their goods to create space in their house and selling it for less than they paid for it, then the taxpayer is not generating a profit. However, if the taxpayer is generating a profit from the goods sold, then the IRS might challenge it as taxable income.

The advice the article gives is when a taxpayer is not sure whether income from Ebay sales are taxable or not is to contact a tax professional for an opinion.

Budget Writers Reach Agreement on Tax Cuts

Tax analysts is reporting that Senate Budget Committee Chair Judd Gregg (R-NH) stated yesterday that congressional budget writers have reached a general agreement that would extend all tax cuts due to expire within the fiscal 2006 budget's five-year budget window.

IRS releases its redesigned Form 941

The IRS released a redesigned Form 941 yesterday which will reduce taxpayer compliance burden while decreasing common data-entry errors according to the agency. Form 941, Employer's Quarterly Federal Tax Return, is used by about 6.5 million taxpayers to report wages, tips and other compensation paid as well as Social Security, Medicare, and federal income taxes collected.

The IRS aims to provide taxpayers with simplified deposit reporting and paid preparer identification. Some of the changes include the addition of shading for easier reading, new check-off boxes, and the deletion of a horizontal grid of empty boxes intended for the IRS's use. The new forms also contains a decimal point on every box unlike its predecessor.

Presidential Tax Panel Begins Discussing Tax Code Reform

The tax reform panel created by President Bush met for the first time on Wednesday to begin exploring the complexities of the current US tax code according Tax-News. US Treasury Secretary John Snow was the first witness to speak at the hearing stating that the current Internal Revenue Code at over 1 million pages long, is more than doubled in page-length from a decade ago.

Honda Vehicles Certified for Clean-Fuel Deduction

The IRS has certified the model year 2005 Honda Insight, Civic Hybrid, and Accord Hybrid as being eligible for the clean-fuel vehicle deduction, meaning that taxpayers who purchased this car, can claim a tax deduction of up to $ 2,000 on Form 1040.

Tax Officials with a Sense of Humor?

The Associated Press is reporting that a tax official in Middletown, Ohio was suspended without pay for a week for putting humorous lines in tax filing instructions. The official inserted lines such as "if we can tax it we will" and "free advice: if you don't make a profit in a five-year period, you might want to consider another line of work." City Finance Director John Lyons estimated that the revised forms sent will cost taxpayers an additional $5,500.

Tax Panel Wants to Raise $400 Billion in Extra Tax

Tax News is reporting that the Congressional Joint Committee on Taxation has recommended tightening up of several tax areas in order to increase revenue by up to $400 Billion over the next ten years.

According to the report, some of the revenue will come from tackling non compliance, but more than half of the total will come from changes in treatment of certain types of income and expenses to close off loopholes. Some of the main recommendations include: changes to employment taxes, dependent care assistance, transportation and other employee fringe benefits which could yield an additional $164 Billion in the 10 years.

Other changes include changing the taxation of income earned overseas by US companies, repealing the deduction for interest on home equity loans, expanding telecommunication taxes to all voice and data communications. and tougher rules to prevent taxpayers from inflating their deductions by overvaluing charitable donations.

IRS releases Revenue Procedure 2005-14

The IRS released Revenue Procedure 2005-14 yesterday which allows nonrecognition of gain for like-kind exchanges of homes that have a business use. The revenue procedure provides guidance on application of Internal Revenue Sections 121 and 1031 to the exchange.

A Treasury Department news release said that the procedure clarifies that a homeowner, who may exclude gain upon a sale or exchange of a home, also may benefit from a deferral of gain for a like-kind exchange with respect to the same property. Generally, a homeowner may exclude up to $250,000 of gain upon the sale or exchange of a home if the homeowner owned and used the property as the principal residence for periods totaling 2 years or more in a 5-year period and did not use the exclusion during the 2-year period. When the property has a business use, a property owner generally would not recognize gain in an exchange of like-kind property.

The revenue procedure detailed 6 examples that include illustrations of the treatment of depreciation and boot in which both benefits (like-kind exchange and homeowner exclusion) could be used.

Senator Introduces a Bill to Make Sales Tax Deductions Permanent

Senator Kay Bailey Hutchinson, R-Texas, introduced a new Bill yesterday to amend the Internal Revenue Code to make permanent the deduction of State and local general sales taxes. The text of the bill appears below.

     109TH CONGRESS
                    1ST SESSION S._____

To amend the Internal Revenue Code of 1986 to make permanent the
         deduction of State and local general sales taxes.

                IN THE SENATE OF THE UNITED STATES

Mrs. HUTCHISON introduced the following bill; which was read twice
                 and referred to the Committee on

                          A BILL

To amend the Internal Revenue Code of 1986 to make permanent the deduction of State and local general sales taxes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. PERMANENT EXTENSION OF DEDUCTION OF STATE AND LOCAL GENERAL SALES TAXES.

Subparagraph (I) of section 164(b)(5) is amended by 6 striking", and before January 1, 2006".

Supreme Court Rules that Contingent Fees are Taxable to the Client

In a pair of cases, the Supreme Court, in an 8-0 decision (Chief Justice Rehnquist did not participate in the ruling since he was ill) ruled yesterday that the contingent fee portion of lawsuit settlements and awards is taxable to the client, even if the money goes directly to the attorney, Commissioner of Internal Revenue v. Banks (pdf). However, according to some experts, the decision will not doom the contingent fee system because of a law passed by Congress last fall.

The court agreed with the IRS and held that as a general rule, when a litigant's recovery constitutes income, the litigant's income includes the portion of the recovery paid to the attorney as a contingent fee. The court disagreed with the taxpayer's argument that the relationship was a joint venture or partnership, stating that relationship is a quintessential principal-agent relationship since the client has complete dominion and control over the attorney.

The reaction coming out of this ruling was mute however since last fall, while the case was pending, Congress passed a provision allowing taxpayers who win rewards in employment, whistleblower and civil rights litigation not to count attorney fees and court costs as taxable income.

Tax E-Filing Season Now Open

The Internal Revenue Service announced yesterday that electronic filing for the 2005 tax season is now open and announced that more taxpayers will have have access to free online filing this year than in past years according to BNA (registration required).

In general any taxpayer with access to a computer and the Internet will qualify for Free File as a reulst of the IRS and the Free File Alliance partnership. Free File is a consortium of tax software companies, that include companies that offer free filing without restrictions. Each company sets its own criteria for free filing but it generally is based on income, state residency an age.

Tax Deductions of Aid Sent to Tsunami Victims

The IRS stated that donations made to assist the victims of the tsunami in East Asia as well as other countries, could be tax-deductible as long as the contributions are made to domestic, tax-exempt organizations that help individuals in foreign lands. Publication 3833 (pdf file) explains how the public can use charitable organizations to help victims of disasters.

IRS to Post Publication 600 on it's website by 12/23

Bob Erickson, an IRS official predicted, that the service will post Publication 600 along with sales and use tax tables on it's website by the end of the week of December 20 while on "Tax Talk Today," a monthly webcast about current tax issues.

Publication 600 will provide the rules and tables for taxpayers electing to deduct state and local sales and use taxes instead of state income taxes on their federal income tax returns. The election should be of particular interest to states that do not impose an income tax such as Florida and Texas.

IRS Approves Tax Breaks for 2005 Ford Escapes

The IRS has certified the 2005 model year Ford Escape as being eligible for the clean-burning fuel deduction. As a result, taxpayers who purchase this vehicle may claim a tax deduction of $2,000 on Form 1040.

Current federal tax law allows individuals to deduct part of the cost of buying a vehicle that is propelled by a clean-burning fuel, which these types of vehicles have since they combine an electric motor with a gasoline engine. However, the current $2,000 tax deduction is reduced to $500 in 2006 and then no more tax deductions will be allowed after that under the Working Families Relief Act of 2004.

The one-time deduction must be taken in the year the vehicle was originally used and the individual taking the deduction must be the original owner of the vehicle. This is taken on as an amendment to an individual's income on Form 1040 and they do not have to itemize deductions on their tax returns to claim the benefit.

Do tax professionals need ethical guidelines?

Upset by the abusive use of tax shelters, the US Treasury Department and the Internal Revenue Service are planning to announce revised ethical standards for tax attorneys, accountants and other tax advisers according to the Wall Street Journal.

The new ethical standards are targeted at tax professionals because that's where tax payers go to have tax shelters designed solely for to avoid paying taxes. The rules specifically aim at vaguely worded opinion letters by attorneys since taxpayers falsely assume that the letter will protect them from financial penalties from the IRS if it chooses to challenge those specific tax shelters.

Officially known as Circular 230, the revised standards include detailed requirements for tax opinions issued by attorneys and accountants. The new rules aim at making clear what kinds of opinions letters work and what kind don't since a lot of times the author of the opinion letter has a financial stake in the proposed transaction.

President Bush signs an extension to the ban on Internet Taxation

Tax Analysts (subscription required) is reporting that President Bush on December 3, signed into law legislation an extension on the ban of internet taxation until November 7, 2007.

Surrounded by some of the bill's strongest proponets, Bush signed the bill after the initial extension expired in November 2003. The President has yet to release a statement about the bill.  The House cleared the way for the President's signature when it passed version of the moratorium on November 19 of this year.

The bill is an extension of the original Internet Tax Freedom Act of 1998 and it prohibits internet taxes as well as "multiple and discriminatory" taxes. The definition of "internet taxes" however, is narrower than in the original act which no longer includes sales over the telephone.

A New Way to Reduce Taxes

The Wall Street Journal reported on Wednesday that a number of states are following Wisconsin's lead in allowing living organ donors to deduct as much as $10,000 from their income for travel/lodging expenses and lost wages in the year the taxpayers donate an organ.

Legislators in Georgia, New York, New Jersey and others are planning to introduce tax legislation in the upcoming year to help increase the amount of living organ donors throughout the country. Wisconsin's law covers transplants for all or parts of the liver (which regenerates itself in the donor), pancreas, kidney, intestine, lung or bone marrow from living donors. Currently, the law allows donors to take the deduction once in the donor's life time

However, critics argue that government should not be encouraging organ donation from healty donors because of the health risks they face in undergoing surgical procedures and in giving up organs. The American Medical Association is voting next week on wether to adopt ethical guidelines for living donors which draws a careful line stating that living donors should not receive compensation for their organs other than travel reimbursement or lost wages. Currently there is not a federal income tax deduction for organ donation.

Is a National Sales Tax Looming?

Fox News is reporting that the White House officials plan to discuss a national sales tax with Republican leaders while House and Senate members huddle up in Virginia to chart the agenda for the upcoming Congress.

A number of Republicans, including President Bush, believe that the idea of a national sales tax deserves a serious look. Proponents of the bill have concluded that a national sales tax can replace the income, payroll, estate and corporate taxes. Proponents seek a 23-cent national sales tax on all retail goods ensuring that everyone pays the same tax.

Oponents argue that  if two people consume $40,000 a year they would pay the same amount in taxes regardless if they make $50,000/year or $250,000/year leaving the lesser compensated consumer feeling that this is unfair. In response to this argument, proponents argue that the rich consume more than the poor and it will tax wealth that currently is not taxed since the current system only taxes income. Lastly, critics also argue that two categories of Americans won't like the sales tax idea: millions who currently don't pay income taxes and workers about to retire who could see their retirement funds devoured by a large and unexpected sales tax.

5 Tax Moves to Make by Year-End

Money Magazine is offering 5 financial moves to make by December 31st to trim your taxes for 2004 and help prepare for the 2005 tax year. Money  suggests to: 1) Tally up your purchases for the year; 2) Spend down your flexible spending account (FSA); 3) Perform an alternative minimum tax (AMT) check; 4) Be charitable; and 5) Dump your loser stocks.

By tallying up your purchases, the article says, a taxpayer could save a lot in taxes due to new legislation in effect for 2004 and 2005 that lets the taxpayer choose between deducting state income taxes or sales taxes. Spending down your FSA is a tax benefit because these accounts allow a taxpayer to set aside pretax dollars for out-of-pocket medical costs and are a use it or lose it proposition (meaning a taxpayer will have to pay taxes on any unused amount left in the account. A taxpayer  should use an online calculator provided by H & R Block to check whether he/she will owe an AMT.

Next, a taxpayer should donate money to a charitable organization to reduce their taxable income amount and if donating a car to write off, the taxpayer should act this year since the IRS will limit the deductions on cars valued over $500 to the proceeds above that amount that the organization receives. Finally, a taxpayer should consider selling the underperforming stocks in his/her portfolio that have a weak slim recovery chance to offset any gains they might encounter from sale of profitable stocks.

Companies Join in the Fight Against a US Appeal Court Tax Ruling

The Wall Street Journal is reporting that business groups and state governments are joining in an appeal of a ruling that a key part of of a tax break plan that states put forth to induce companies to keep plants, corporate headquarter, etc, in those particular states is unconstitutional.

DaimlerChrysler sought to shut a Toledo plant that once produced the original Willys Jeep back in 1998. In order to keep the plant open Ohio, the state offered the auto maker a $280 million tax break in exchange for a plan to expand the plant. A group headed by Ralph Nader filed a lawsuit against the auto maker and the state challenging these types of tax breaks and lost at the District Court level. The US Court of Appeals for the 6th Circuit reversed, holding that that part of the plan violated the Constitution because it interfered with the free flow of trade among the states.

Affects of the court of appeals decision have been felt recently by the Kmart Holding Co.'s takeover of Sears, Roebuck & Co. Prior to the announcement of the takeover, Michigan had been negotiation with Kmart about replacing the headquarters in Detriot with similar tax-credit deals planned. However, several weeks ago, the retailer announced it wasn't ready to complete the tax-credit deal as a result of the ruling.

DaimlerChrysler is currently appealing to the full court of appeals and if that fails, it plans to appeal to the US Supreme Court.

Judge Rules for State in Software Sales Tax Case

In a case followed by companies throughout the state that modify off-the-shelf software before use, a Dane County Circuit Court judge overruled the Wisconsin Tax Appeals Commission, saying the Wisconsin Department of Revenue was correct to collect sales tax on a multi-million dollar software system purchased by Menasha Corp. from German software vendor SAP. Dane County Circuit Court Judge Steven Ebert ruled that the programs were off-the-shelf software, which makes them subject to sales tax. Last year the Tax Appeals Commission, an independent board set up to rule on disputes between the state and taxpayers, ruled in favor of Menasha Corp., which argued that the changes it made to the programs made them customized software, which is tax-exempt. Judge Ebert points out that who made the changes is more important than the fact that changes were made, and the more changes that were made by the vendor or with input from the vendor, the more likely the software is off-the-shelf, and thus taxable.

The case is being closely followed by other companies, some of whom contributed to Menasha's $70,000 legal bill. Menasha seeks a $500,000 refund including interest, but the Department of Revenue estimates that $260 million plus interest are at stake based on this ruling, which is a significant portion of the $3.9 billion in sales tax the state collects annually. Some are concerned this ruling will keep companies that purchase a lot of software from moving to Wisconsin and encourage companies already here to relocate their data processing deparments. Menasha is in the process of deciding if it will appeal. Read the Milwaukee Journal Sentinel story here.

Illegal Export Subsidies to End--US Hopes EU lifts Tariffs

Congress’ $145 billion tax bill passed this week sets out a schedule to eliminate the Foreign Sales Corporation rule tax break that the WTO called illegal nearly four years ago. Last year, the WTO authorized the EU to impose sanctions on a wide range of US goods. These tariffs started at 5 percent in March have now reached 11% after monthly hikes. This month’s bill will phase out the export subsidy over the next three years. Pascal Lamy, the EU trade commissioner, has yet to lift the tariffs and the Financial Times reports that Lamy has tied removal of the tariffs to other conditions namely settlement of the Boeing-Airbus dispute.

Entrepreneurs Who Pay Themselves Too Much or Too Little Will Find Tax Trouble

Related to my two earlier posts regarding the IRS's case against John Menard for taxes and penalties owed because he payed himself a salary that the IRS considered so high that much of it was actually a dividend (thus making the corporation as well as the individual taxable), the Milwaukee Journal Sentinel has a story describing the tax troubles entrepreneurs can find themselves in if they pay themselves too much or too little, and ways to avoid such problems.

Update: US Tax Court Judge Rules Menard Overpaid Self by $13 Million

Updating my September 13 post, US Tax Court Judge L. Paige Marvel ruled that John Menard overpaid himself by $13 million in 1998, that his salary should only have been around $7 million, and the rest should be considered a dividend, which cannot be written off by the corporation. Back taxes on the dividend, plus taxes on cash that Menard's gave to its race car company, plus interest and penalties put the total owed by Menard and his company to the IRS at $9.4 million. Marvel came up with Menard's "appropriate" salary based on the salaries of the CEOs of two other comparable publicly traded companies, Lowe's and Home Depot. A Menard's spokesperson said that the decision was "fine news" and that they would abide by it. Read more in the Milwaukee Journal Sentinel.

Wisconsin Banks Can Keep Out-of-State Subsidiaries

Despite the ongoing crackdown by the Wisconsin Department of Revenue on state banks using Nevada subsidiaries to avoid paying corporate income taxes (see my post on September 10), Department of Revenue executive assistant Jason Helgerson told Madison's Capital Times that banks will be able to contintue operating those subsidiaries as long as they are consistent with state law. Subsidiaries are allowed as long as they are used for legitimate business practices, rather than just as a tax shelter.

State officials estimate 80% of Wisconsin banks operate subsidiaries in states without corporate income taxes. Wisconsin began allowing its banks to form out-of-state subsidiaries in the 1980s, because other states didn't tax government bonds that banks are required to hold, putting Wisconsin banks at a competitive disadvantage. Later many banks began using the subsidiaries to hold other income-producing assets to avoid the state's 7.9% corporate income tax. One estimate by the Multistate Tax Commission estimated that Wisconsin lost $174 million in tax revenue in 2001 alone. While many banks have settled or seem headed toward settlement, some banks may fight the back tax charges with litigation, and the Wisconsin Bankers Association believes that the subsidiaries are legitimate and nobody has done anything wrong.

IRS Auditing Wisconsin Based Menard's

The IRS claims that Eau Claire, Wis. based Menard's, the nation's third largest home improvement chain, and its CEO, John Menard, owe $78 million in back taxes. With interest and penalties, the number could easily reach $100 million. At issue are funds paid by the company to Mr. Menard personally, and to Team Menard, a race car business whose cars and drivers promoted the Menard's stores. Corporations can deduct advertising and salaries, which Mr. Menard says these payments were. The IRS disagrees, and says that the money paid to Team Menard was not advertising and the money paid to Mr. Menard was not a salary, but that both were dividends, which are subject to taxation. While Mr. Menard paid taxes on the money he received, the IRS says that the corporation should have paid taxes on it also. Read more in the Journal Sentinel story.

Wisconsin Department of Revenue Cracks Down on State Banks Using Nevada Tax Shelters

Wisconsin banks were given until today to respond to a letter sent by the state Department of Revenue questioning them about back taxes owed due to the use of Nevada tax shelters, according to Madison's Capital Times. The Department sent out letters to all 320 state banks in July, which includes banks not suspected of setting up Nevada subsidiaries to avoid the state's 7.9 percent corporate income tax (Nevada has no corporate income tax). Over 200 Wisconsin banks have responded that they are willing to discuss potential back taxes, and 23 have already settled with the state, according to a Department spokesperson.

Ohio Investment Tax Credit Overturned

On Thursday September 2, 2004 a federal appeals court struck down a manufacturing tax credit that Ohio used in 1998 to help convince DaimlerChrysler to build its new Jeep assembly plant in Toledo. In Cuno v. Daimler-Chrysler, Inc., No. 00-07247 (6th Cir. Sept. 2, 2004) a three-judge panel found that the economic development incentives offered by the state violate the interstate Commerce Clause of the United States Constitution.

The justices unanimously overturned a significant part of the district court’s judgment, which had found that $280 million in state corporate franchise tax credits complied with the Commerce Clause.

The panel determined that Ohio’s investment tax credit “is to encourage further investment in-state at the expense of development in other states, and the result is to hinder free trade among states.” The justices went on to say “while we may be sympathetic to efforts by the City of Toledo to attract industry into its economically depressed areas, we conclude that Ohio’s investment tax credit cannot be upheld under the Commerce Clause of the United States Constitution."

In 1998 DaimlerChrysler agreed with Ohio and the City of Toledo to build a Jeep assembly plant near an existing facility in exchange for incentives, which included a 10-year, 100 percent property tax exemption and a tax credit of 13.5 percent against the state corporate franchise tax for certain investments. The total value of the tax incentives – usable against purchases of new manufacturing machinery and equipment installed in the state -- was estimated at $280 million.

The panel’s ruling requires that the incentives to be ceased immediately.

The plaintiffs’ lawyers also challenged property tax abatement incentives, but the appeals panel found that those complied with the Commerce Clause. The panel also ruled that the challenged tax incentives did not violate the Equal Protection Clause of the Ohio Constitution.

The decision, if followed in other circuits, would invalidate investment tax credits in 40 other states.

Charlie Hustle In Trouble With IRS Again

On Tuesday August 17, 2004 the Internal Revenue Service filed a federal tax lien in Broward County (FL) claiming that Pete Rose owes nearly $1 million in unpaid taxes. The lien specifically alleges that baseball’s all-time hits king owes $973,693.28 in back taxes from 1997 to 2002.

Rose’s manager, Warren Greene, declined comment, saying “it’s a private matter with Pete and his family.” Rose, 63, has already spent five months in prison in 1990 and 1991 for filing false tax returns.

IRS Wins Case Against Long-Term Capital Management

On Friday August 27, 2004 the U.S. District Court for the District of Connecticut issued an opinion in favor of the Internal Revenue Service in its case against Long-Term Capital Management, the hedge fund which collapsed in 1998.

The court upheld the IRS’s claim that Long-Term Capital improperly took $106 million of tax deductions in 1996 and 1997. This case resulted in $56 million in taxes and penalties owed to the IRS, perhaps the largest civil tax victory for the agency.

According to the New York Times, the judge, Janet Bond Arterton, effectively painted Long-Term Capital as an abusive tax shelter. She ruled that some of Long-Term Capital’s crucial transactions were conducted primarily to avoid paying taxes. She specifically pointed to Long-Term Capital’s nine cross-border lease-stripping transactions as lacking economic substance, another indication of an abusive tax shelter.