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The muckracking professor whose research lead to the whole stock option backdating scandal (albeit, a decade later) is back at it again. Apparently, he’s now looking to see whether insiders backdated stock donations to their charitable foundations to “maximize tax benefits”.

As Portfolio points out, there are two ways that insiders could get this lucky: one legal and one not. The legal way is that donations to family foundations are exempt from insider trading rules as the stock isn’t really being sold. The stock could be donated the day before an earnings announcement reporting a big drop in earnings and the executive would get the higher value of the stock as a tax writeoff.

The not so legal way is to backdate the donation to a high point in the stock during the period in which insider donations have to be reported, which is much longer than the time to report sales. This would take some collusion between the foundation and the executive, but most foundations are run by either the executive or his family, so it is not exactly difficult to pull this off.

The professor did not find definitive proof of backdating, but the longer the time between the donation and the report of the donation, the better timed the donation seemed to be. He estimated that, at most, 20% of the donations seemed suspicious.

All this for people that are already wealthy beyond belief. It’s amazing what people will do for money. As King Solomon reminds us “Whoever loves money never has money enough; whoever loves wealth is never satisfied with his income“. It doesn’t seem to matter to some people what they have to do to gain wealth they could never possibly spend, whether it’s cheating investors or the IRS.

Hopefully, this will lead to convictions. Unchecked greed will only lead us down a dark and dangerous path and we seem to be stuck in the eternal downward spiral that Gordon Gekko thrived on.

The State of New Jersey has a certain, shall we say, reputation with tax folks. Not only are they one of the most taxpayer-unfriendly states, but the bureaucracy to fix one of their many mistakes makes you want to jump out the window.

New Jersey is one of the states (along with West Virginia) leading the charge to change (read: expand) the kinds of companies that the state can legally tax. I won’t bore you with the details, but the US Supreme Court ruled twenty years ago that a business had to have a physical presence in a state (employees, buildings, etc…) before a state could make the business remit sales taxes. This is why you don’t pay sales taxes when you make purchases at Amazon.com, though you should be paying what’s called a use tax to the state. This case was generally seen as mandating a physical presence standard for all state taxes until about five years ago when several states decided that they didn’t really like the ruling and were going to begin ignoring it for everything but sales taxes.

Part of the pushback was due to companies setting up various tax structures to generate deductions in states and shift income to states like Delaware and Nevada, which either don’t tax corporate income or make it easy to avoid corporate income taxes. This idea that states can tax companies that are “exploiting local markets” without a physical presence started out attacking these structures, but some states have gotten a lot more aggressive.

In this case, under sworn testimony in Congress, the State of New Jersey threatened to impound a truck from a company that it claimed owed taxes under this economic nexus theory. The company was delivering boats into the state both via common carrier and via its own fleet of trucks. The company thought that it was protected under Federal law (ed: they probably aren’t due to the deliveries from their own trucks) from having to file returns in states other than South Carolina, where all manufacturing and back office functions are performed. The State of New Jersey believed otherwise and seized the vehicle and driver. I’ll let Mr. Godwin pick up the story from there (warning: pdf link).

On July 23rd, 2007 I received a call transferred over from our truck fleet dispatcher at 10:15 am. The person on the other end was Ms. Kostak, a revenue agent for the State of New Jersey. I was immediately told that our truck had been pulled over at the weigh station on the interstate highway and could not move until we paid New Jersey for jeopardy assessment taxes. I asked Ms. Kostak why they were doing this. I was told that we had a dealer in the state of New Jersey. This incident was becoming unbelievable, so I asked her to fax me proof that she was who she said she was. I asked what I could do to let the driver go and I was told to pay the New Jersey Division of Revenue money. I asked how much and I was told it depended upon our sales into New Jersey. I looked up the sales for the past seven years as requested and Ms. Kostak quoted me a price of $46,200 to release the truck. I then told her I would need to discuss the issue with our company president. Ms. Kostak told me I had until 1pm that day to get them the money or the truck would be impounded and we would need to make arrangements to retrieve the driver. I asked her, “Can I not send you a check or work something out to let the truck pass through New Jersey?” and I was told to wire them the money.

I first talked to our truck driver and asked him what had happened. Our driver was passing through the State of New Jersey carrying a load of boats for delivery into Massachusetts. Our driver told me that the agent pulled his rig over at the weigh station and asked him if we had a boat dealer in New Jersey. The driver had
never delivered into New Jersey and told the agent, Ms. Kostak, that he did not know. (Our driver told me that there were ten other trucks stopped at the weigh station for the same interrogation.) Because he did not know whether we have a New Jersey dealer, he gave Ms. Kostak our home office number and the dispatcher’s name. Ms. Kostak called our dispatcher and found out that we have a dealer in New Jersey, asked more probing questions and then was passed over to me.

After talking to Ms. Kostak, I discussed the situation with our company president. We decided to call another boat manufacturer who also had been stopped by a New Jersey revenue agent while transporting boats through New Jersey. Their company president of told us that his boat company had spent over $140,000 in legal fees and the issue was not yet resolved after two years. We were also given contact information for the company’s attorney. I contacted the attorney to find out our options. The attorney was not encouraging and did not feel we could win against the State of New Jersey. The attorney told me that it was very likely that unless we paid the amount requested, our trucks would be stopped each time thereafter in New Jersey. The attorney suggested that we pay the amount demanded and then appeal in the tax courts of New Jersey. After consultation with our company’s president, we decided to pay what Ms. Kostak demanded so that we could free our load of boats to be delivered and let our driver go.

…

When our truck crossed the New Jersey state line, Stingray did not have an outstanding issue, warrant or any other legal matter or business activity with New Jersey. If fact, the State of New Jersey did not know we had an independent dealer in the state. Ms. Kostak gathered “evidence” along the way to invoke a jeopardy assessment against Stingray. The manner in which the State of New Jersey acted is commonly defined as extortion. Fortunately, I have never been the victim of a crime in my life. But, that day in July, I believe I was strong-armed by a state of the United States of America.

I know it’s long, but the story really is unbelievable. Instead of simply getting the information from the driver and sending an audit notification, the State believed that it could impound the truck without determining guilt or innocence first. While I don’t believe that the company was protected from filing in New Jersey, it doesn’t excuse the fact that the State of New Jersey threatened to break the company’s legs take the company’s property unless it paid a certain amount of money within several hours. It really does boil down to extortion and the State should be ashamed of itself (though I’d imagine the agent was probably promoted).

Aggressive tactics such as these is really the reason that the relationship between company tax departments and state auditors have gotten so strained.  Yes, there are companies that bend the rules beyond recognition, but auditors are making no distinction between them and the companies that believe they are doing right and assuming that all companies are cheaters. Pressure from politicians to find more money (especially from out of state companies) is only aggravating the problem.

Now, Congress wants to get involved in the whole mess after the US Supreme Court denied cert. to two tax cases that would have solved this whole mess. Unfortunately for Stingray, the fix from Congress wouldn’t help them (even though this testimony came out of a hearing for the bill).

I believe that requiring a physical presence is a nice bright line, but it ignores reality. In a digital world there is no reason that companies that have sales in states without physical presence shouldn’t be taxed on those sales. Is Amazon.com using the Missouri market to make money? Yes, so they should be paying taxes here. The physical presence requirement worked well in a manufacturing economy, but like so many things in the tax and law realms it has become a golden rule that simply no longer makes sense. Strongarm tactics from the states aren’t the answer either, we still have to follow Constitutional procedures. This wasn’t a coke dealer taking a shipment, it was a well known boat manufacturer trying to deliver something to Massachusetts.

I’m not sure of the answer. Maybe economic nexus is the way to go. Maybe we still need the physical presence standard to avoid situations where states resort to measures such as these to get money it thinks it is owed. Maybe we need to scrap Federalism in the tax concept and go the way of many foreign countries where the Federal government administers the tax programs for the states and allocates the money appropriately. Who knows, but there has to be a better way than this.

In what must be the quickest agreement in the history of Congress, Democrats and Republicans agreed on a stimulus plan. It includes business and personal tax incentives.

That scream you hear? It’s state tax departments all over the country. The business stimulus includes bonus depreciation, similar to what was done after 9.11. The problem is that about 30 states didn’t follow the Federal rules the first time. Some states simply said “pretend that bonus never existed”. Those states are okay. Some states said “add back X percent of your bonus depreciation and deduct it over X years beginning in year X”. Okay, that’s easy enough. But then you had states like Illinois and Pennsylvania that had this massively complicated system to reverse the bonus depreciation and take it during the life of the asset (apparently they didn’t think of the first way). Then, there were states like Iowa, Missouri, and New York that didn’t follow the Federal rules for certain years but did for other years. Oh, and New York City didn’t follow the Federal rules except for assets that were physically located in New York City.

Oh, the humanity! I’d like to think that given a second bite at the apple that states would get it right this time. I’m guessing we’ll get a second round of adjustments that are a mish-mash similar to the first time around.

I think we’ll be okay if Congress simply adjusts the Tax Code to reuse the same paragraph as the original bonus depreciation. Most states referenced that specific paragraph in the Code and said “we don’t like it” (which is why most states didn’t bother to adjust for the Hurricane Zone bonus depreciation, it’s in another section of the Code). But, now I’m betting that state legislatures *and* Congress get it right. I might as well be betting on the Cubs to win the World Series next year.

It’s job security, right? Right?

You know the joke about the difference between an audit and a colonoscopy? Well, Google apparently didn’t hear it. This post on Roth and Co. cracked me up (not the least because Des Moines is nowhere near Ottumwa).

BADLY MISLED BY GOOGLE

January 17, 2008

Note to whoever got to our site with the Google search “who performs colonoscopy near ottumwa, iowa?” — Sorry, I can’t help you.

Bwahahaha! I’d love to see the link that led to *that* Google result.

That should be the new motto for the Democratic Party (well, really both but my particular ire is with the Democrats on this one). When running in 2006, the Democrats promised “cross my heart and hope to die” to offset any new spending or tax cuts with a counterbalance in order to hold back the deficit. I guess they only meant in non-election years.

From BNA:

House Lawmakers Edge Toward Waiving Pay-Go for Stimulus Package

A bipartisan consensus to avoid applying pay-as-you-go budget rules to a possible economic stimulus package begins to bubble to the surface as House Majority Whip Clyburn says he does not believe offsets would be appropriate. Avoiding pay-go would eliminate a key barrier in Congress to quick passage of new tax cuts or potential spending increases meant to breathe new life into the economy, economic advisers say. Clyburn also says he expects the House Blue Dog Coalition-a group of roughly 40 fiscally conservative Democrats-to accept waiving pay-go for something as important as a stimulus package. …

I figured that when the AMT patch passed with offsets (even with the bs promise to counterbalance it this year after everyone forgot about it) that was the end of PAYGO. Well, get out the Kleenex and eulogies, ’cause it’s dead and gone. It had a nice, long run of 11 months.

As always, re-election trumps principles. And that’s reason #1 why I don’t think I’d ever get into politics despite my interest in it. I’m way too principled, even when the election comes.

The IRS has issued Notice 2008-14 (pdf link) that lists tax return arguments that the IRS has deemed to be frivolous. This is important because taking one of these positions on your return may subject you to a $5,000 penalty and another $10,000 penalty if you insist on taking your case to court and waste the court’s time as well.

The IRS has issued various Revenue Rulings in the past few years detailing many of the positions and why they are bunk. Each of the RRs are cited in the Notice so that you can look them up for more detail on what each position entails. This Notice is a yearly reminder that the IRS does not tolerate such tomfoolery.

As I’ve advised before, if a tax return preparer or midnight huckster claims that they have a secret formula that keeps you from paying taxes run the other way. There is no legal way for you to not pay your income taxes, just ask Wesley Snipes.

TaxProf passed along a link to a new paper released by the Treasury’s Office of Tax Analysis authored by William Gentry of Williams College. The title of the paper is titled “A Review of the Evidence on the Incidence of the Corporate Income Tax” (pdf link) and discusses the evidence that corporate taxes falls disproportionately on labor rather than capital. That’s a fancy way of saying that workers, rather than investors, bear the brunt of corporate taxes.

As I discussed in my article “Who Pays Business Taxes?” a corporation cannot possibly be the person that is economically harmed by corporate taxes because the corporation doesn’t really exist. The cost of the tax is passed on to either customers, employees, or investors. In this case, Mr. Gentry believes that employees are the ones mostly paying the tax.

The Treasury’s Office of Tax Analysis is a political office and the Administration is pushing a corporate tax cut, so I would keep that in mind when reading the paper. However, I don’t think I can fault his methods (I’m not an economist) and the conclusion seems reasonable given my earlier analysis.

It’s more evidence that when you see politicians ramp up the rhetoric about making corporations “pay their fair share of taxes”, as they undoubtedly will during the election season, remember that you may well be the one that pays in the end.

From BNA

House Votes to Waive Pay-Go, Send AMT Relief to 21 Million Taxpayers

Posted Dec. 19, 2007, 4:50 PM ET

The protracted debate over whether to pay for a one-year patch for the alternative minimum tax ended Dec. 19 when the House voted 352-64 to clear the measure for President Bush’s signature.The House passed the bill (H.R. 3996) containing a one-year AMT patch without offsets after agreeing to set aside a rule and consider the measure under a suspension of the rules, which includes the pay-as-you-go rule. While no Republicans voted against the measure, 64 Democrats-mostly Blue Dog budget hawks opposed to adding to the national debt-voted against it.

Democrats criticized Republicans for painting them in a corner by steadfastly opposing offsetting the $50 billion cost of the patch, while Republicans criticized Democrats for violating their commitment to pay-go budget rules and for trying to prevent a tax increase with increases elsewhere in the Internal Revenue Code.

“In this process of governing you often times reach a difficult intersection. Sometimes you do not have the luxury of either supporting a bill you like or opposing a bill that you don’t like,” said House Ways and Means Select Revenue Measures Subcommittee Chairman Richard Neal (D-Mass.). “Sometimes you have to support a bill that you do not like simply because it has to be done. That is the crossroads where we find ourselves today.”

So, the GOP criticized Democrats for abandoning PAYGO when it was they that demanded it for supporting the bill? And they criticized them for both trying to offset and then abandoning the offset? It’s times like this that I’m glad I’m not in politics. Once again, I am proud of the Blue Dogs for fighting until the end to get the patch paid for. While they ultimately lost the battle (ironically to those that will claim to be the fiscally responsible party), they showed that they are serious about PAYGO and will even vote to keep it on “must pass” legislation.

Just a quick post that I’m excited that the Blue Dogs haven’t backed down in the fight over the AMT patch. While I’m squarely in the crosshairs if this doesn’t get fixed (and I’ve chastised Congress for not fixing it two months ago) I love that they have not backed down in their demands to have the patch paid for under the PAYGO rules. I also love that they have refused Pelosi’s bait-and-switch (”I’ll gladly pay you Tuesday for a hamburger today”) and have refused to let the House adjourn until this is fixed. It’s about time somebody stood up for what they believe and I’d gladly vote for any of them if I could.

I also marvel at the brazen hypocrisy of the GOP, which refuses to go along with offsets because they don’t want to raise taxes to fix “a tax that never should have happened” despite the fact that they both could have fixed it during their years in total control and caused the problem with Bush’s tax cuts. I guess they’re hoping voters won’t grasp this and they can pin it all on the Democrats in 2008, which is probably true. Oh, how I love gotcha politics!

Presidential candidate Fred Thompson has released his tax “and economic” proposal. The reason for the quotations is that the proposal has nary a mention of actual economic proposals other than “cut taxes good, Democrats bad”.

The proposal would extend President Bush’s tax cuts, repeal the Estate Tax, repeal the Alternative Minimum Tax, reduce the Corporate tax rate, permanently extend the IRC §179 election, “simplify and expand” depreciation, and allow individuals to either pay the current tax or a new simplified tax.

How will he pay for it? By cutting government waste, of course! He doesn’t have any actual proposals for what departments and programs to cut, but I’m sure they are there somewhere. Half the budget is entitlements, so he can’t cut there. Another 25% is defense, and we know no Republican will cut there. I’m sure the other 25% of the Federal government just isn’t that important and can be entirely eliminated, right?

Anyway, the proposal to simplify the individual income tax is a step in the right direction, as is permanently eliminating the AMT (see my prior AMT coverage here, here, and here). I would keep the Estate Tax around, but make the exemption much higher. The depreciation rules are not really all that complex and I don’t see why they need to be simplified very much (I’m guessing “simplify” means further acceleration).

I guess the tax “and economic” plan has passed through all of the focus groups and can now be put out there for public consumption. But like all of the tax cut plans that the candidates have put forth they have not said how they will pay for the cuts beyond eliminating “government waste”. Without some measure of how to pay for the cuts other than pushing more debt onto future generations, I certainly won’t be giving a second thought to any of their tax plans as I try to navigate who I should vote for next year.