Spare a thought for those who made it possible.

If you make a deal with your credit card companies to reduce your balances, you are also making a deal on behalf of the IRS. A Californian with staggering credit card debt learned this lesson earlier this week from the Tax Court.

Angela Bibb-Merritt ran up over $112,000 in credit card debt financing a business that failed. She hired a debt-relief outfit and got $10,888 of the balance forgiven. As required, the credit card companies issued her a Form 1099-C reporting the income to her.

The tax law normally requires you to pay tax on debt forgiveness income. The traditional loopholes out of this treatment are bankruptcy and insolvency. If you have the debt forgiven in a bankruptcy proceeding, it's not taxable. You are insolvent for purposes of the tax law if your debts exceed the fair market value of your assets; debt forgiveness is taxable to the extent of your insolvency.

Working out a deal with creditors outside of court is not a bankruptcy proceeding. Ms. Bibb-Merritt pleaded insolvency, but the Tax Court said she failed to prove her point:

Petitioner testified that she was insolvent in 2005 when these debts were canceled. The Court advised petitioner that consideration of whether she was insolvent required a review of her assets and liabilities at the time of the discharge. Petitioner provided some information about her debts in 2005, as described above, but she did not introduce documentary evidence or testimony sufficient to determine the fair market value of her assets.

The record does not demonstrate that petitioner was insolvent before the debt cancellation. Thus, petitioner failed to prove that she was insolvent at the time the debt was canceled.

I wouldn't be surprised if the taxaper really were insolvent. Unfortunately, she failed to put together the personal financial information she would need to prove it to the IRS and the Tax Court.

The Moral: If you are negotiating a debt settlement, talk to a tax pro, If you are insolvent, make the effort to document the case. Credit card debt can be tough enough without running up a tax bill, too.

Cite: Bibb-Merritt v. Commissioner; T.C. Summ. Op. 2009-78

From Steve Sink at IowaBiz.com:

Check with your accountant for the best way to structure the sale. Allocation of the sale price can produce major tax savings, C Corporations have the possibility of double taxes, stock or asset sale. Remember, it is not what you sell if for, it is what you get to keep!

Just one tip of many; read the whole thing.

Roger McEowen:

Times continue to be tough for the ethanol industry. Gasoline demand continues to fall and corn prices remain relatively high. In April, Aventine Renewable Energy Holdings, an Illinois-based ethanol producer, filed for Chapter 11 (reorganization) bankruptcy, and the largest West Coast ethanol producer, Pacific Ethanol, Inc., filed Chapter 11 on May 18.

Des Moines Register: Iowa farm values drop another 7%

Oh, and Ethanol Bankruptcies Continue Apace.

It's an economic development bonanza!

If they do this, maybe there is something to their reform government:

"Grievance Day scheduled for May 27 in Persia"

Congress seems dead set on doing for your health care what it is doing for the auto, banking and housing industries, but it needs more money to do it to you. Among the policy items up for consideration:

- Capping tax-free employer health benefits.

- Soft drink taxes.

- Tobacco taxes.

- Alcohol Taxes.

This will put the taxpayers in the perverse position of needing to risk their health to pay for health care. But there is one comforting thought: alcohol taxes are among those hardest for our elected officials to avoid:

And thank you in advance, Sens. Kennedy and Dodd, for personally raising enough tax money so that Little Jimmy can finally get that operation. Indeed, you probably raised enough just by the end of that closed-door (hic!) meeting.

A grand tradition going back to the days of Wilbur Mills!

Kay Bell has more.

Link: Senate Finance White Paper on health care tax increase options.

A new Cavalcade of Risk is up at The Sentinel Effect.

There's always lots of good stuff at this collection of insurance and risk-management blog posts. I like Bob Vineyard's discussion the the government's increasing dependence on nicotine and alcohol.

California voters have decided that they don't care to pay more taxes to bail out their feckless politicians. How feckless? This feckless:

It's not surprising that Californians feel a bit overtaxed:

Source: The Tax Foundation

Will it get any better? The TaxGrrrl thinks not:

Cuts are inevitable now. So are higher taxes. Just months after California cut billions in spending, raised the state sales tax by a penny, borrowed and yes, begged, from the federal government, the state is expected to once again raise taxes. This time, income taxes are the likely target.

Californian Russ Fox thinks the voters who rejected their tax increases meant what they said:

Voters told Sacramento in no uncertain words it's time to cut programs, and spend only the money you have. It will be interesting to see if the Democrats in control of both houses of California's legislature get the message.

Expect variants of the "Washington Monument Ploy," named after the trick of shutting down the most visible and popular programs to shelter the less visible wasteful spending. Look for Charles Manson to be put up for work release.

There's no such thing as bad free beer. Is there such a thing as a bad tax cut?

Surprisingly, yes. Not to the person who gets it, certainly, but to the person who doesn't.

If you had two widget makers in town and the city decided that ABC Widgets was tax-exempt, that would sure be a bad tax cut from XYZ Widgets point of view. The break would do for ABC all the good things tax cuts do, but it would stick it to competing XYZ and its employees.

This might seem like an extreme example, but it happens every time the Department of Economic Development allocates special tax credits to a company for building a new facility and "adding jobs." That break by definition hobbles competing companies and their workers; worse, the competitors have the privilege of paying extra taxes on behalf of the favored taxpayer.

A tax break doesn't have to be bad policy just because it goes to a business with direct in-state competitors. It's just as destructive if you tax one industry to subsidize another one. Iowa does that in a big way, taxing the rest of us to subsidize wind farms, ethanol plants, and, especially, movie makers.

There are always seductive arguments for any special tax break. Who doesn't want to have some big stars hanging out at the local A&W? Why not just throw some tax credits at them?

- It's a process that rewards industries with political clout, rather than potential profitability.

- It gives legislators and bureaucrats the power to allocate investment capital. Nobody who works with the legislators can possibly think that's a good idea.

- It drains funds from non-favored businesses, weakening them in favor of the ones with good lobbyists.

- The breaks often motivate taxpayers to find ways to get breaks from things they already do, rather than to do new things.

- Every tax break makes it that much harder to fix the broken tax system. Once somebody gets a tax break, they hate to give it up, even if doing so would make for a better tax world.

Backers of the tax breaks also ignore the opportunity costs involved. The tax credit transferred to filmmakers doesn't just come out of thin air. It comes out of taxes paid by somebody else who needs that money just as much as some carpetbagging production company from L.A.

Link: Film Tax Credits: Lower Taxes for Celebrities, Higher Taxes for You

The financial supergeniuses in the U.S. Senate have voted to make it harder for poor folks to get credit.

Here's what the politicians say they have done:

This effort requires new rules of the road that will protect consumers from predatory and unfair lending practices. Credit card reform is a key part of increasing those consumer protections– protections against deceptive and complex rules, from sudden rate hikes to hidden fees that have hurt millions of responsible borrowers.

Here's what they're really doing with the new law, and with new credit card regulations:

Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.

“It will be a different business,” said Edward L. Yingling, the chief executive of the American Bankers Association, which has been lobbying Congress for more lenient legislation on behalf of the nation’s biggest banks. “Those that manage their credit well will in some degree subsidize those that have credit problems.”

In other words, people who pay their bills on time will subsidize deadbeats. It's the Hope and Change economy!

Here are the unintended consequences:

I'm one of those people that pay the entire balance every month to avoid paying any interest, and being told I've been taking a free ride all these years does not soften me up to pay my supposed fair share to support the credit card system. I just won't use the card if that's the deal. I'll switch to a debit card or pay cash.

The new rules prevent banks from properly charging the high credit risks. When the good credits stop using credit cards, declining to subsidize the bad credits, the banks will just have to not issue cards to risky borrowers if they want to stay in business. That means more customers for the payday loan and car-title loan people. Everybody loses, except for the politicians who will talk about how much good they've done for you, and the loan sharks.

Update: Similar thoughts here.

Now here's an interesting defense to a tax evasion charge, from attorney Ed Hinson:

"The last time I checked it wasn't a crime to drive nice cars," Hinson said in a hallway of the federal courthouse uptown. "He's always made his car payments."

So making car payments is a defense against tax evasion charges? If you aren't paying taxes, it would make it easier to pay for your cars.

The defendant is Bishop Anthony Jinwright, a man of the cloth, but not of cloth seats. It doesn't appear that Rev. Jinwright is accused of having nice cars, which would be an easy charge to prove:

The indictment lists ownership in a BMW 530i, a Mercedes-Benz S550V, five (yes, five) Lexus vehicles, a Bentley GT and a Maybach 57 (worth $250,000). Leases during that same time included a Cadillac, an Acura, a Volkswagen, a Maxima, a Durango, a Neon and a Toyota.

Rev. Jinwright is accused of evading taxes for five years.

Another pastor rises to Rev. Jinwright's defense:

"The press told us of the cars, of the houses, of the perks, but told us nothing of the ministry that has occurred over a 28-year period," Woods told his congregation on May 3. "We heard nothing of the baptisms, the weddings, the funerals, the hospital visits, the Bible studies, the sermons or the new church that was built since Bishop Jinwright came to Salem."

I wonder if you feel more saved if you are baptized in a Bentley.

Flickr Creative Commons photo by jorbasa

The IRS has issued (Rev. Rul. 2009-16 the minimum required interest rates for loans made in June 2009:

-Short Term (demand loans and loans with terms of up to 3 years): 0.75%

-Mid-Term (loans from 3-9 years): 2.25%

-Long-Term (over 9 years): 3.88%

Historical AFRs are available at the "links" page at www.rothcpa.com. You can also click here for the rates for prior months as reported in the Tax Update. ]]> Wed, 20 May 2009 10:31:09 GMT http://www.rothcpa.com/archives/004809.phphttp://www.rothcpa.com/archives/004809.phpTax Updates