D
es Moines plans to sue to keep revenue camera revenue flowing. The Des Moines tax on unwary out-of-town motorists driving past Waveland Golf Course lost another battle yesterday. The Iowa Department of Transportation turned down the city’s appeal of the Departments order to shut down the city’s freeway speed cameras (Des Moines Register)
As seems to be the practice when it imposes an illegal tax, the City now plans to blow a bunch of money on lawyers rather than obey the law, reports the Register:
Des Moines will appeal the ruling to district court, officials said.
Iowa is the only state in the United States that has permanent speed enforcement cameras on its interstate highways, according to the DOT, which in late 2013 adopted new rules governing the use of the devices on or next to state highways.
A few years ago Des Moines was caught imposing an illegal franchise tax on its residents’ utility bills. Rather than apologizing abjectly and refunding the ill-gotten gains, it appealed all the way to the U.S. Supreme Court, losing every step of the way. In the end it had to repay the tax, the city lawyers, and the taxpayer lawyers for a bunch of pointless litigation. The city still seems to favor that approach.
Flickr image by Ano Lobb under Creative Commons license.
The cobbler’s children go barefoot. Mr. Hughes, a U.S. Citizen, had a successful career at one of international accounting firm KPMG. Tax Court Judge Wherry tells of an impressive career arc (my emphasis):
During his tenure at KPMG Mr. Hughes rose through the ranks and moved among KPMG’s international offices. Between September 1979 and 1994 he worked in the firm’s international tax group in Houston, Chicago, and Toronto, earning promotions from staff accountant to manager, from manager to senior manager, and finally, in 1986, to partner. During this period his duties shifted from preparing corporate and partnership Federal income tax returns to advising clients, particularly publicly traded corporations. Mr. Hughes also began to specialize in the international aspects of subchapter C of the Code and cross-border transactions, particularly mergers and acquisitions (M&A). He returned to the Chicago office and continued with his transactional work for publicly traded corporations.
A key aspect of M&A work is gain recognition and the basis consequences of transactions. Transactions like this:
During 1999 KPMG spun off its consulting business to a newly formed corporation, KCI. The firm retained a direct equity stake of approximately 20% of KCI’s outstanding shares, and these shares were specially allocated among KPMG’s partners, including Mr. Hughes (K-1 shares), in January 2000. KPMG caused KCI to issue shares representing the remaining 80% of its equity to KPMG’s partners, including Mr. Hughes, who received 95,467 shares of KCI stock (founders’ shares) on January 31, 2000. Mr. Hughes did not contribute funds to KPMG in connection with KCI’s formation. He took zero bases in the founders’ shares.
So far, so good. Mr. Hughes along the way married a U.K. national and gave shares to his wife. There things begin to get a little foggy. The shares were sold at a time the couple resided in the U.S. , and the taxpayers did not claim full proceeds in income, on the grounds that the recipient spouse received a tax-free step-up in basis when she received the shares in the U.K. After clearing away some fog, the Judge lays out the remaining issues:
The first two are: (1) whether Mr. Hughes transferred ownership of the KCI shares to Mrs. Hughes, and (2) if so, whether Mrs. Hughes took bases greater than zero in the KCI shares. For petitioners to prevail, we must answer both questions affirmatively.
When you give shares, or anything else, to a spouse who is a U.S. citizen, Sec. 1041 applies to provide that no gain is recognized and basis carries over. Sec. 1041 doesn’t apply to non-U.S. spouses. The Tax Court explains what happens:
Where, as here, an interspousal property transfer takes the form of a gift, no gain is realized, so regardless of whether section 1041(a) applies, there is no gain to be recognized…
The donee, on the other hand, realizes an economic gain upon receipt of a gift. His or her wealth increases by the value of the gift. But for tax purposes section 102(a) excludes this gain from the donee’s gross income. To preserve the U.S.’ ability to tax any unrecognized gain in property that is the subject of the gift, section 1015(a) sets the donee’s basis in the property equal to the lesser of the donor’s basis (or that of “the last preceding owner by whom it was not acquired by gift”) or if there is unrecognized loss, then for loss purposes, the property’s fair market value.
The taxpayer, who doubtless guided many clients through harrowing cross-border M&A deals unscathed, failed to achieve that on his own return. The court ruled that not only did he owe additional tax, but also a 40% “gross valuation misstatement penalty”:
Given his extensive knowledge of and experience with U.S. tax law, Mr. Hughes should have realized that the conclusion he reached — that the KCI shares’ bases would be stepped up to fair market value, such that the built-in gain in those shares would never be subject to tax in either the United States or the United Kingdom — was too good to be true.
Ouch.
Cite: Hughes, T.C. Memo 2014-89
Locust Street, Des Moines
Paul Neiffer, “Cost don’t Matter, Except When it Does”
Jason Dinesen, Marriage in the Tax Code, Part 8: 1920s Court Battles
TaxGrrrl, 11 Reasons Why I Never Want To Own A House Again
Calling Baton Rouge. Baton Rouge producer pleads guilty to film tax credit fraud (WAFB.com):
Baton Rouge producer pleads guilty to film tax credit fraud:
“Louisiana’s film tax credit program cannot function as intended when people are constantly defrauding it,” said Louisiana Inspector General Stephen Street. “We are continuing to do everything we can to make sure there are criminal consequences when that happens, and today’s guilty plea is the latest example of that.”
Au contraire, as the Cajuns might say. I think that’s pretty much exactly how these things are intended to function.
Kay Bell, Duck Dynasty’s Louisiana state tax credits could be winged
David Brunori, A Flat Income Tax is a Good Thing (Tax Analysts Blog). “Every — and I mean every — tax commission that has ever opined on good tax policy has called for a tax system built on a broad base and low rates.”
Howard Gleckman, Is the GOP’s Enthusiasm for Tax Cuts Going the Way of American Idol? A question answered “no” since at least 1981.
Andy Grewal, The Un-Precedented Tax Court: Part I (Procedurally Taxing) ” Although the court purportedly exercises the judicial power (more on that in a later post), most of its work product is not judge-like. That is, the Tax Court decides most of its cases as an administrative office would, without setting precedent.”
TaxProf, The IRS Scandal, Day 734, featuring Peter Reilly’s IRS Not Grossly Negligent In Disclosure Of Exempt Application. High standards, not.
Jeremy Scott, Unexpected Tory Victory Has Major Ramifications for Europe (Tax Analysts Blog). “Defying polls, pollsters, and the specter of a hopelessly fractured Parliament, the Conservatives won a resounding victory in the U.K. election last week.” Just note that I arrived in Scotland with Labour leading the Tories 41-1 in Scotland. By the time I landed in Des Moines, the Tories held the same number of Scottish seats as Labour. No wonder I felt so tired.
Graphic from BBC
News from the Profession. Grant Thornton Not Gonna Let Some Rich Guy Drag Its Good Name Through the Mud and Get Away With It (Caleb Newquist, Going Concern).
