Blog Migration

I’m about to transfer this WordPress.com blog to a self-hosted WordPress.org blog. The process may take several days to complete, so posting may not resume until next week.

Nevada Tax Commission Approves Comped Meals Tax

Last January the Nevada Tax Commission upheld a decision requiring a major casino company (Boyd Gaming) to collect and remit sales tax on the value of complementary meals provided to its gamblers. Boyd apparently plans to take the case to the Nevada Supreme Court.

In the meantime, the Nevada Tax Commission passed regulations on Monday requiring the state’s casinos and restaurants to pay sales tax on complementary meals provided to its employees and its patrons, reports the Las Vegas Review-Journal.

The Nevada Tax Department issued the regulations last February; casinos and restaurants must remit to the state, by July 15, taxes on meals comped as of February 15, 2012.

The tax base for comped employee meals is the cost of the food when purchased by the employer. The tax base for comped patron meals is the menu price.

Some implicated businesses may stop offering comped meals. Others may refuse to pay up awaiting a court decision and could face a possible 25 percent penalty, plus interest.

Tribal Manufactured Cigarettes Sold out of NYS Not Taxable

In the ongoing war over cigarette taxes between the State of New York and its federally recognized tribes, the latter scored a victory in the most recent battle.

Supreme Court Justice David Demarest issued an order last week requiring the State to return cigarettes seized last January by state police. The 26,160 cigarette cartons and 72 bags of tobacco were sold by the St. Regis Mohawk Tribe to HCI Distribution, Inc., a political division of the Winnebago Tribe of Nebraska.

Some of the State’s tribes began to manufacture and sell their own cigarettes after losing a court case requiring them to pay the $4.35 per pack cigarette tax on their purchase of name-brand cigarettes from wholesalers located off reservation.

NY Tax Law imposes a cigarette tax on on-reservation sales of cigarettes to non-members of an Indian tribe. The consumer bears the responsibility to pay the tax.

In this case, however, the cigarettes were sold to out-of-state purchasers, which, according to Justice Demarest, are not subject to the State’s cigarette tax. Therefore, the State had no authority to seize the cigarettes and loose tobacco en route to Nebraska.

A spokeswoman for NY Attorney General Eric T. Schneiderman confirmed the AG will appeal the decision.

The Indian Country Today Media Network has more.

NY Attorney’s License Suspended for Tax Fraud

Last January, former Sullivan and Cromwell partner John O’Brien was sentenced to two years and four months in prison for failing to pay taxes on over $10 million in partnership income earned between 2003 and 2008.

Earlier this week, his license to practice law in New York was suspended by the Appellate Division, First Department.

The Departmental Disciplinary Committee petitioned the court seeking suspension. Under NY law, any attorney convicted of a “serious crime” shall be suspended from the practice of law.

Although O’Brien did not plead guilty to any felonies, he pleaded guilty to willful failure to file income tax returns, which is considered a “serious crime.”

In a sentencing memorandum, O’Brien’s attorney Russel Neufeld indicated the tax problems initially arose when O’Brien invested $3 million in his domestic partner’s failed rare book business, according to the New York Law Journal.

Pure with Tax Fraud

Yesterday, Kelly Doll, a former employee at the popular Las Vegas nightclub Pure, pleaded guilty to one count of filing a false tax return, reports the Las Vegas Review-Journal.

Tip income is taxable. Over $220,000 in tips he received between 2005 and 2006 didn’t make its way onto his income tax returns.

You may think I sound like a broken record. That’s because this is the third time I’ve written about former Pure employees/owners committing tax fraud. See here and here. I think I’m running out of catchy headlines.

Doll’s sentencing date is September 24.

Offshore Tax Investigations: First Switzerland, Is Israel Next?

Maybe.

The strongest indication emerged last week when a superseding indictment was unsealed, charging three American tax preparers for assisting their clients with concealing assets and income in unidentified Israeli banks.

U.S. residents must report all income earned to the IRS. U.S. residents must report whether they have a financial interest in a foreign financial account worth more than $10,000 in a particular year.

According to the Department of Justice press release:

The superseding indictment alleges that the co-conspirators prepared false individual income tax returns which did not disclose the clients’ foreign financial accounts nor report the income earned from those accounts. In order to conceal the clients’ ownership and control of assets and conceal the clients’ income from the IRS, the co-conspirators incorporated offshore companies in Belize and elsewhere and helped clients open secret bank accounts at the Luxembourg locations of two Israeli banks, Bank A and Bank B. Bank A is a large financial institution headquartered in Tel-Aviv, Israel, with more than 300 branches across 18 countries worldwide. Bank B is a mid-size financial institution also headquartered in Tel-Aviv, with a worldwide presence on four continents.

The federal government has aggressively pursued offshore tax evaders since 2008, when Swiss-based financial firm UBS was accused of assisting U.S. residents with committing tax evasion by shielding assets in offshore accounts. In 2009, UBS agreed to pay $780 million to the U.S. in fines, penalties, interest and restitution.

Over the four years since then, the IRS has run three offshore voluntary disclosure programs (in 2009, 2011, and 2012) to encourage taxpayers with undisclosed financial accounts to come forward and pay stiff penalties.

A benefit to participating in the program, if eligible, is that criminal charges will not be pursued against taxpayers making complete and truthful disclosures. Read more about the pros and cons of a voluntary disclosure here.

Undoubtedly the IRS and DOJ have collected a lot of information from these programs. “Enablers” such as those indicted above have not been eligible for the programs, however. It’s very possible these enablers were discovered through disclosures of their own clients.

CNBC is reporting the recent indictment may be the first of a series involving U.S. tax evasion by shielding assets in Israeli banks via “cash-transfer banking,” by which an offshore banker is set up with an American taxpayer seeking to withdraw and deposit the same amount of cash with the foreign bank:

The bankers appear in the U.S., typically at a hotel, and arrange for couriers to bring the cash to the hotel from the depositing customer, and later turn it over to the withdrawing customer, only later crediting each account for the transaction back in the foreign bank offices.

In somewhat related news, yesterday Israeli authorities arrested nine individuals and questioned fifteen more in connection with the possibly largest tax fraud scheme in Israeli history. I don’t see any connections aside from the nature and location of the crimes, however.

Hat tip: Federal Tax Crimes

Trapped by the IRS

TMZ is reporting American singer-songwriter R. Kelly owes the IRS over $4.8 million in back taxes. The balances due:

via Wikipedia

2005 – $1,472,366.77
2006 – $710,520.51
2007 – $376,180.11
2008 – $1,122,694.90
2009 – $173,815.18
2010 – $992,495.24

Kelly is probably best known for his hit “I Believe I Can Fly,” which was featured on the soundtrack to the 1996 film Space Jam.

More recently, Kelly wrote and directed the popular hip hopera series “Trapped in the Closet.” Last March Kelly confirmed a new set of videos for the series will be released later this year.

Kelly’s representative said the artist “is in the process of working everything out with the government and is confident that all his obligations will be satisfied.”

A revenue-sharing agreement with the IRS on proceeds received from the new “Trapped in the Closet” videos would not be the first of its kind. See Willie Nelson.

Next Round of Tax Breaks for NY Brewers

Just over a month ago I wrote about the end of tax and fee exemptions for brewers located in New York. The benefits ceased because of a lawsuit brought by a Massachusetts brewer challenging the constitutionality of the exemptions.

Via the Wall Street Journal, the New York legislature fired back earlier today by introducing a new package of laws, which, among other things, restores the per-gallon tax exemption for in-state brewers.

Senate Majority Leader Dean Skelos assuaged any concerns that the measure would be funded by taxpayer dollars. Instead, he said, the per gallon exemption would be replaced by an equivalent tax credit.

I haven’t read the bills yet, but I suppose they were carefully drafted in order to withstand another possible challenge by out-of-state brewers.

The Brooklyn Brewery certainly applauds today’s news. Although I was left unsatisfied after taking a “tour” of their brewery (I stood in one room for 15 minutes and listened to the tour guide explain the beer making process), I am pleased to no longer expect a higher price the next time I order a pint of the Weisse or Summer Ale.

Bottoms up!

A Targeted Concentration

A short time ago Phil Hodgen responded to an e-mail from a third-year law student interested in international tax. Phil offers some great suggestions on ways to break into the field. One remark in particular caught my attention:

You have to dislodge something existing in that person’s life to create an opening for you.

Phil recommends finding a mentor. Someone willing to guide a young lawyer. Someone who has been around the block a few times. Someone who will keep a young attorney in check.

The challenge is catching a prospective mentor’s attention. Lawyers worth reaching out to may often receive similar requests and already have overbooked schedules. Why give you the time of day?

That’s where Phil’s comment above comes in. I offered one possible way to accomplish this.

Before I discuss the proposed steps in greater detail, we need to understand the current legal market to manage expectations.

It’s brutal.

Young attorneys know as well as anyone that the market is oversaturated with others like them. Today, attending a prestigious law school and performing well there probably isn’t enough to land that coveted first job:

Yikes.

You don’t advance a young career by looking back to lament about the decision to attend law school. Face the facts and look forward. Lacking in ideas? Here’s a suggestion:

Discover a promising nuanced area of the law and learn it. Then write about it.

Call it a targeted concentration. Think of it as way to separate yourself from the crowd. In a good way.

Any niche won’t do, of course. There are the too narrow, the too outdated, the too covered.

The ideal niche is underdeveloped and has significant room for growth. There should be little or at best mediocre legal commentary on a subject facing complex and unresolved legal issues. And those issues must or will matter to people.

Start with a general area of the law that interests you (e.g. intellectual property, insurance, real estate, tax) and then read respected periodicals, blogs, etc. What are some emerging issues? Who cares about them? Ask around.

This exercise could eventually lead to the dislodging and engaging. By demonstrating a genuine interest in a targeted area, you are far more likely to catch the attention of other practitioners with common interests.

This process takes time, patience, and persistence. Allow your efforts to develop organically. Don’t force the issue. People will begin to take notice and listen.

You have the ability to take significant control of your career’s direction. Only you stand in the way to seeing it through.

Inadequate Gambling Records Lead to Foreclosure

Time after time after time I have emphasized the importance of maintaining a diary of gambling activity for tax purposes.

In a recent case out of Minnesota, the failure to do so by taxpayers Eugene and Brenda Rivetts has resulted in a nightmarish result: Home foreclosure.

Over the years the taxpayers regularly played slots at casinos in Illinois, Indiana, Minnesota, and Wisconsin. When you play slots regularly for an extended period, chances are you will win some jackpots. A casino is required to issue to you (assuming you are a U.S. resident) and to the IRS a Form W-2G each time you win $1,200 or more from a slot machine.

In 2001 and 2002, the taxpayers had some big slot machine wins, but they failed to file their income tax returns. So, the IRS prepared for them substitute for returns, and then sent notices for the balances due. Interest and penalties continued to accrue, and as of January 31, 2012, the taxpayers owed $200,066.34 for 2001 and $2,197.15 for 2002.

In court the taxpayers argued, among other things, that they incurred gambling losses during these years, but they were not reported to the IRS. The burden of proof to demonstrate such losses exist is on the taxpayer. Unfortunately, the taxpayers admitted to not maintaining an accurate record of gambling winnings and losses for each of the years in question (1999, 2000, 2001, 2002, and 2005). Although the taxpayers offered to provide the court an estimate of the losses, the court said a request to discount five years of tax documents implies they were not candid in filing their taxes.

The Government commenced the action seeking to reduce the tax assessments to judgment and foreclose tax liens on the taxpayer’s property in Minnesota. The court granted the Government’s motion for summary judgment. In other words, the Government now may take steps to order a foreclosure sale of their home in order to collect on the outstanding liabilities.

It’s extreme for the government to seek foreclosure on a home to collect on a tax liability. In general, the IRS has 10 years to collect on outstanding liabilities. The IRS typically won’t strongly consider foreclosure unless the 10 year period is close to expiring. Before the IRS may proceed with foreclosure, a court will exercise judicial discretion on such efforts by taking into account “both the Government’s interest in collecting delinquent taxes and the possibility that innocent third parties will be unduly harmed by the collection effort.”

In this case, the taxpayers share their home with several family members, including a son, a daughter, a granddaughter, and a niece. In addition, the husband taxpayer’s parents live nearby, and the family regularly helps attend to his father’s health problems. Despite these circumstances, the court held in favor of the Government, noting that “being removed from one’s home can carry with it an inherent indignity and inequity,” but “[t]hat indignity and equity, though, is not sufficient to tip the scales in favor of Defendants and their family.”

It’s not clear from the opinion what efforts the taxpayers took to address their outstanding liabilities before the foreclosure action commenced. An Installment Agreement, Offer in Compromise, or other collection alternative could have prevented this unfortunate result.

Had the taxpayers kept good records as required, this outcome possibly could have been avoided.

Case: United States v. Rivetts, Civ. No. 11-556 (RHK/LIB) (D. Minn. 2012).