The IRS mileage rate is increasing from 51 cents per mile to 55.5 cents permile effective July 1, 2011.  The rare midyear increase reflects the rising price of gasoline over the first half of the year.

At the same time, CNN reports that gas prices have dropped 11 cents/gallon over the last two weeks.

In 2008, the IRS flagged 8,000 employees who might not in compliance with tax laws. The IRS follow-up determined that about 2,800 were actually not in compliance -- but the Treasury Inspector General reportes that the IRS missed 133 additional employees with compliance issues.

After reviewing the 133 cases, the IRS discovered that 44% filed late returns were due refunds.  More than half the cases did not merit further review and were closed.

Federal law requires the sponsor of a plan to pay attention to how the plan works.  One important aspect of doing this is understanding and disclosing the fee structure, and being sure the fees are reasonable.

But how does the President of a manufacturing company know if the fees are reasonable?  Typically, he asks the financial advisor (i.e., the guy selling him the investments).  The 9th Circuit has now ruled that asking the financial advisor is an important step, but its not enough

In an unrelated story in Investor News, J.D. Power & Co. surveyed 4,200 full service investors and found out that 85% never heard of or don't understand the difference between fiduciary and suitability standards.  On the other hand, they want their telephone calls returned within 24 hours.

Scary.

Sen. Dick Durbin (D-IL), Chair of the Senate Appropriations Committee subcommittee that oversees the IRS, thinks the IRS should write its own version of TurboTax(c) and make it available free of charge on the IRS website.  Sen. Mark Kirk (R-IL) agrees.

Of course, neither Senator mentioned that IRS software will, of necessity, only allow the IRS interpretation of the tax laws.

And neither Intuit nor H&R Block have commented on the proposal.

Yet.

A subcommittee of the House Appropriations Committee voted to reduce the budget of the Internal Revenue Service, the Consumer Finance Protection Bureau and the Securities and Exchange Commission. 

If passed by by the House and Senate, the IRS would lose $1.8 billion in funding, nearly 10% of the requested budget.  The CFPB would lose as much as $300 million, or 60% of the anticipated budget under the Dodd Frank Act that created it in 2009. The SEC loses its request for a $222 million dollar budget increase, and stays flat.  The proposal also prohibits the IRS from using any funds to enforce the individual mandate under healthcare reform.

The Committee Chair, Rep. Jo Ann Emerson (R-MO) called the budget proposals "difficult decisions" to bring spending under control.

Gene Balas and Carlos Morales were married in California on August 20, 2008 while it was legal to do so in California.  2 1/2 years later, they filed a joint petition in Bankruptcy, which the U. S. Trust moved to dismiss the petition under the Defense of Marriage Act (DOMA), which prohibits the federal government from recognizing same sex marriages.  The Bankruptcy Court concluded, in a decision signed by more than 20 Bankruptcy Court judges, that DOMA violates the equal protection rights of Balas and Morales, and struck it down.

The decision references the Justice Departments February, 2011 announcement that the administration consideres DOMA unconstitutional and would not defend it in court.  The House of Representatives has engaged counsel to defend DOMA.

The Bankrupcy Court decision is here. The Wall Street Journal reports here.

Former Treasury Secretary Lawrence Summers proposes extending the current 2% cut in FICA withholding beyond 2011, and reducing the rate another 1%.  Summers thinks its the only way to avoid a "lost decade" similar to the one Japan suffered.

The IRS recently announced a Facebook page for tax professionals to join the Twitter page it opened last year..

The Facebook page is at http://facebook.com/IRStaxpros. The Twitter page is @IRStaxpros.

According to Karen Hube in the Washington Post, tax cheats reduce federal tax revenues by roughly $350 billion per year.  That means we can close about 1/3 of the annual federal deficit with better enforcement, which doesn't require increasing tax rates or reducing deductions and credits.  But, even though every dollar invested in IRS enforcment produces $4 in tax revenues, the Republican controlled House of Representatives killed a proposed increase in IRS funding, and unsuccessfully tried to cut funding to the agency.

Common cheats include identify theft using Social Security Numbers stolen from the Social Security Administration Master Death File, overreporting refundable tax credits and underreporting income.  In recent years, the IRS has targeted income from overseas.

According to the Wall Street Journal, world demand for US products is boosting profits at US manufacturers.  You would expect that to increase demand for - and the value of - the US Dollar.

But Reuters reports that the dollar is poised to reach an all time low as investors flee low interest rates, threats of a credit downgrade, and rumbles that the USD may lose its position as the world's reserve currency.  Investors seem to be ignoring that the threat to downgrade US Treasury Securities comes from the same people who gave AAA ratings to subprime mortgage securities only three years ago, and that the Euro remains under pressure because of economic problems in Ireland, Greece Spain and Portugal.

Twenty years after Republicans took over both houses of the New Jersey legislature by campaigning against hugely unpopular income and sales tax increases by Gov. James Florio and a state legislature controlled by Democrats, New Jersey still has the fourth highest sales tax rate in the country.

But we don't have a sales tax on toilet paper!

Identity theft starts with a Social Security Number.  All those forms you get for income and expenditures at the end of the year have your name, address, Social Security Number and the name of someone you do business with.  To reduce the risk of identify theft, the IRS allows the use of truncated identification numbers on the forms sent to taxpayers.

The IRS announced it is expanding this program to more forms in 2011.

Now that the new 1099 reporting requirements were repealsed for being too costly for small businesses, Sen Tom Cobun (R-OK) has introduced a bill to require any employer filing more than 5 W-2s to file them electronically.  Currently, electronic filing is only required for employers with more than 250 employees.

Sen Coburn says the measure could save the federal government $11 million a year in processing costs for paper W-2s.

In 2010, Congress increased the 1099 reporting requirements on businesses - operaters of rental real estate were brought into the fold for the first time, and 1099 reporting was expanded to all payments to vendors aggregating more than $600 in a year.

The complaints were immediate and loud.  Congress haggled for a year, agreeing the provisions had to be repealed but disagreeing on how to pay for repeal.  (The assumed added revenue from the additional reporting was used to offset the cost of health care reform and tax benefits for businesses.) -- Democrats in the Senate favored a vague mandate to the GAO to cut spending, while Republicans in the House wanted to improve collections of excess reimbursements under health care reform.  The Senate eventually went along with the Republican version, and President Obama signed the repeal law.

The House Government and Oversight Reform Committee passed by voice vote a bill that would allow the federal government to fire employees with outstanding tax liens, and bar taxpayers with outstanding liens from taking federal government jobs.  A second bill will prevent seriously delinquent taxpayers from getting government contracts.

The National Treasury Employees Union objected to the bill, and they may have a point.  Under IRS policy, the Service must file a lien if the amount owed exceeds a minimum amount and the payment plan extends beyond a maximum term. So if a federal employee makes a mistake on a return, mandatory liens could cost him his job even if he or she is making payments on the debt under an agreement with the IRS. If it seems like the rule should have exceptions for these circumstances, it does.

Similar legislation is working its way through the Senate.

When Tom Duffy died, his will left his "jewelery, personal effects, household goods, works of art and automobiles"to his friend, Diane.  If Diane died before Tom, the entire estate went to a veterinarian to pay for care for Tom's pets.  The problem was that when Tom died, he owned real estate.

Diane was still alive, so the veterinarian got nothing.  Now Tom's wife, from whom he had been separated for many years, and his estranged daughter stepped in and claimed the real estate Tom owned because the will didn't specify that it passed to Diane.

The Superior Court rules that Tom intended to pass the entire estate to Diane unless she died before Tom, and the Appellate Division just affirmed the lower court.  In the matter of the Estate of Thomas J. Duffy, App. Div. (per curiam).

If you have a complex family situation, you should review your will and estate plan to be sure your intentions are clearly stated.  You may not be as lucky as Tom.

Back in 1978, Montclair NJ inked an agreement with Union Montclair Housing Association under which the Association would,until 2028, pay a percentage of its gross revenues for township services instead of property taxes.

In 2006, Montclair created a sewerage authority, which charged residents for access to the town's sewer system. The authority billed directly for access, and the charges were removed from the tax bill.  Montclair billed the Association, claiming the agreement was for taxes and the authority's charges were not taxes. The Association sued the Township.

Trial court granted summary judgement to Montclair, but the Appellate Court just reversed.  There was no change in the services offered to the Association, just an additional cost which had the same effect as a tax increase.

A divided US Supreme Court ruled that plaintiffs in an Arizona case do not have standing to challenge an Arizona income tax credit for contributions to school tuition organizations.  The statute says the organizations can limit their scholarships to students of a particular religious affiliation.

The Courts decision did not say the credit itself is acceptable under the First Amendment, but that the plaintiffs did not have standing as mere taxpayers to challenge the credit.  The majority concluded that granting a tax credit is not the same thing as spending tax dollars.

The decision creates a hurdle in cases where taxpayers object to how tax money is spent, but the minority acknowledged that plaintiffs could bring cases under other theories of standing.

The Internal Revenue Code authorizes the IRS to issue liens against delinquent taxpayers to protect the governments interest in the taxpayer's assets.  This provision has been amended over and over since 1976, and the IRS has finally issued final regulations to reflect 35 years of changes.

Most federal tax liens contain self executing release dates.  If the Service does not refile in time, the lien is automatically released.  Under the new regulations, if the Service fails to refile a lien after it has begun litigation or levy procedings, the automatic release does not affect the Service's rights in the litigation or proceeding.

The new regulations also provided limited exceptions to federal tax liens for casual sales of personal property and some mechanic's liens.

The Internal Revenue Service operates an Information Reporting and Procedures Advisory Committee (IRPAC) which gives the IRS outside input on information reporting and procedural requirements.  IRPAC includes members from the public, tax professionals, educators, state tax administrators and other interested parties.

Members of IRPAC can be nominated by their employers, professional organizations or themselves.  All nominees have to submit an application.

The IRS has never before faced even the possibility of the government shutting down during filing season.  But that's exactly what they have to consider as the April 8 expiration date for the continuing resolution gets closer and the opposing sides dig in their heels.

Speaking to a House Ways and Means subcommittee, IRS Commissioner Douglas Shulman said in the last shutdown - which was in the fall of 1993 - the IRS deposited checks but did not process returns.  But this time the shutdown would come just 10 days before the primary filing date.  The IRS is discussing options with the General Accounting Office, but the administration has not made any decisions.

Commissioner Shulman also agreed that the Internal Revenue Code must be simplified, and pointed out that a proposed $600 million cut in the IRS budget could cost the government $4 billion in tax revenues.

The Public Company Accounting Oversight Board (PCAOB) may be considering an expansion of the auditor's role and responsibility.

A recent staff paper from the PCAOB seems to suggest that the huge increase in qualitative information in financial statements has increased the possibility for material misstatements.  While some academics welcome the reconsideration, others note that it could be considered an attempt to offload the user's responsiblities onto the auditors, and practicing CPAs worry about increased liability.

It sounds like the PCAOB is asking auditors to move away from the numeric audit concept, under which they test the numbers, to a more holistic approach that questions whether management is releasing numbers that are not only accurate but meaningful.  Using this concept 10 years ago might have stopped Arthur Andersen from giving Enron clean audit opinions on questionable transactions.

Expect this kind of change to increase the cost of audits as auditors increase their tests to accomodate new requirements.  At the same time, this approach could "de-commodify"audits of financial statements; with a value proposition to sell, auditing firms should be able to exercise more control over pricing.

This should be interesting.

Recent studies suggest that state budget woes are largely because of tax cuts taken over the last two or three decades (and the last five years) without concurrent cuts in spending.

Liberal analysts blame the tax cut side of the equation, and conservative's the failure to cut spending.  So far the conservatives are getting their way in states like Wisconsin, New Jersey, and Texas. 

But as the public getsa view of what budget cutting really means, its not clear if they have the stomach for what they started in last year's elections.  In Wisconsin, the fight over recent legislation to limit collective bargaining by public unions has changed an easy re=election bid for a Republican Supreme Court Justice into a competitive battle.

Lost in the high visibility fight in Wisconsin has been the death of two Arizonans who were denied organ transplants as part of budget cuts enacted last year amid allegations that the cuts were enacted based on faulty testimorny.

Republicans generally cast tax cuts for businesses and high income taxpayers as competitive advantages, drawing investment and jobs to their states.  This ignores the ability of neighboring states to cut their taxes to remain competitive, locking the states in a self-destructing race to the bottom.  So it begins to sound more like Grover Norquist's dream - a government so small you can drown it in a bathtub

Liberals and conservatives have an easy time with this question.  But it may not be the right question, as the public seems to be struggling more with the way Republicans are reining in spending than the cuts themselves. But the situations in Wisconsin and Arizona seem likely to spread to other states (a public union fight are already brewing in Ohio, and Alaska's legislature is considering one).  We already know how the public reacted to claims of "death panels" in the health care reform legislation, but how will they react when death panels become real, and established in their names?

Every year the Internal Revenue Service announces a high profile criminal tax fraud indictment in the last few weeks leading up to April 15, presumably to encourage taxpayers to file honest returns.  Previous examples include baseball players Pete Rose, Dwight "Doc" Gooden, and Leona Helmsley, the gift that keeps on giving.

This year, the IRS announced charges against fourteen people for making fraudulent claims for the first time home buyers credit.  Those charged include two men who, the IRS asserts, filed 50 false returns claiming $500,000 in refunds the pair pocketed.

And then there's Michael Doyle, of New Hampshire, who claimed the $8,000 credit on his 2008 return.  The IRS says Doyle purchased the property in 2007, before the credit was available.  Doyle is an IRS Supervisor.

The IRS couldn't tell the Boston Globe whether Doyle still worked for the Service.

Michael Mundaca (who?), Assistant Secretary of the Treasury for Tax Policy, rejected a proposal to lower the tax rate on repatriated earnings of foreign subsidiaries from 35% to 5% for a year as an incentive to multinationals to repatiate cash held overseas.  The proposal first surfaced in the run-up to the 2009 stimulus bill, but was left out of the final legislation.  Mundaca said Treasury would only consider the proposal as part of a broader tax reform deal.

Supporters, including Sens. Barbara Boxes (D-CA) and Jon Ensign (R-NV), argue that the multinationals will return as much as $1 trillion dollars for investment in US jobs and generate as much as $50billion of federal tax revenues.  Mundaca noted the same arguments were made for a similar tax holiday in 2004, and there is "no evidence it increased U.S. investment or jobs."

Boxer's state is home to the high tech industry, which is behind a massive lobbying effort for the tax holiday.  Ensign recently announced he will not seek re-election, as he chances declined in the face of Senate and Federal Election Committee ethics investigations.

Last week, Rep. Dave Camp (R-MI), Chairman of the House Ways and Means Committee, proposed lowering the top income tax rate on corporations and individuals to 25%, offsetting the revenue loss by tightening deductions and credits.

Now Rep. Jan Schakowsky (D-Ill) has introduced legislation to raise income tax rates on taxpayers whose incomes are more than $1 million per year.  If it passes, the rate on $1mm incomes would increase to 45%, rising as income rises to a maximum of 49% on incomes of more than $1 billion.

Rep. Schakowsky's proposal is, in one way, reminiscent of the rates under the first income tax law.  In 1913, the income tax applied only to high earning individuals, rising to as much as 7% of incomes greater than $500,000.  To put that in perspective, in 1913, Oregon passed one of the first minimum wage laws - $8.64 per week for a 50 hour week.

Back in December, a New Jersey judge  appointed Edward Dauber, a Newark attorney, to prepare arguments in favor of halting foreclosures in New Jersey.  Dauber has reached an agreement with Ally Financial, Inc., Bank of America, JP Morgan Chase & Co, Wells Fargo & Co., Citigroup Inc, and One West Bank calling for the appointment of a special master to oversea foreclosure procedures for a year.

The Special Master would review bank foreclosure procedures and documentation processes.  Dauber recommended retired New Jersey Superior Court Judge Richard Williams for the post.  Based on the agreement, Dauber recommended to the Court that foreclosures should be allowed to continue under the supervision of the Special Master.

It's Wal-Mart, Target, Best Buy, Home Depot and other large "bricks and sticks" retailers against Amazon.com.

Amazon is physically connected to few states, and is only required to collect sales taxes in those states where it is.  Even though the buyers are required to pay use tax if they don't pay sales tax, few do so, giving Amazon a price advantage.

Retailers present across the country are pushing for the states to force Amazon to collect sales taxes.  States, hungry for tax revenues, are eager to cooperate, and Amazon is fighting back.

When Texas went after Amazon for sales taxes because of a warehouse in the state, Amazon closed the warehouse.  When six states imposed sales taxes on Amazon sales made through affiliates with physical presence in those states, Amazon immediately cancelled thousand of affiliate contracts. Amazon is also lobbying for sales tax exemptions before building warehouses in new states.

The world has changed dramatically since the US Supreme Court required a physical presence before a state could force a retailer to collect sales tax.  That case, Quill, was about a catalog retailer, back when the internet was in its infancy.  It will be interesting to see if the US Supreme Court gets back into the issue to update its Quill opinion for the new reality.

And if the states win on the sales tax issue, look for the next battle to challenge the federal law that prevents them from imposing income taxes on companies that have no presence in the state.

I just tried to buy some software through Amazon because they offered a good price and free second day shipping.  But Amazon wouldn't complete the order unless I gave them permission to memorize my credit card information for future transactions.  (The website described memorization as an option, but wouldn't move to the next page.)

I contacted customer service who told me how to erase the data after I saved it.   They couldn't tell me how to not give it to them in the first place.  The service rep arranged for a higher level rep to call me back.

Surprisingly, I got that call in less than 10 minutes.  The new rep told me point blank they wouldn't sell me the product if I didn't let them memorize the credit card information.  So I thanked them for their time and told them I would buy the product elsewhere.

I found it at J&R for $10 more. They got the product out the same day and gave me free overnight shipping, so it ended up costing me less overall.

I may be old fashioned, but I am not a Luddite.  On this issue, I say "Good Luck" to "bricks and sticks".  Let's keep the playing field level.

Rep Dave Camp (R-MI), Chair of the House Ways and Means Committee, told the Wall Street Journal he wants to reduce the top corporate tax rate to 25% as part of a complete overhaul of the tax system. 

Interestingly, aides later told the WSJ that the overhaul would keep income taxes at about 18-19% of GDP, where they currently stand.  Aides later confirmed Camp is also looking at "broadening the tax base"--political speak for reducing deductions and credits - to cover the $2 trillion cost of lowering the rate to 25%.

One area that both House Republicans and Senate Democrats are reviewing is the tax treatment of debt and equity.  The Internal Revenue Code gave the IRS authority to write regulations on this thorny topic nearly 30 years ago.  After four failed attempts, the IRS gave up.

No one expects to resolve this debate quickly.  The most likely scenario is for Congress to spend the next year and a half setting up the terms of the battle, and hash it out in the 2012 elections.

Both the House and the Senate have passed bills to repeal the new 1099 requirements.  But while both bills agree on the goal, they differ in how to pay for it.

Democrats attached a $22 billion revenue number to the 1099 rules as part of 2010's health care reform.  To repeal it, the current Congress has to replace the lost revenues.

The Senate passed version authorizes the GAO to find $22 billion in cuts after the bill is passed.  The House version requires taxpayers who earn more than 400% of the poverty level to reimburse the government for health care subsidies.  Needless to say, this has evolved into a bit of a fight.

Last week, Senate Majority Leader Harry Reid (D-NV) said he preerred the House language to the Senate language.  Now, Senate Democrats are expected to offer alternate language as part of a small business bill working its way through committee.  Reid declined to give any details,and Senate Finance Committee Chair Max Baucus (D-MT) said he is looking for other offsets.

Round and round the mulberry bush, the monkey chased the weasel . . .

A Government Accountability Report issued in August, 2008 suggested that 53% of individual tax returns reporting income from real estate rentals in 2001 contained errors.  Now the Tax Inspector General for Tax Administration (TIGTA) has issued its own report, recommending increased examinations of individual returns with real estate rentals.

The IRS agrees with the recommendations, although it disagrees with the tax dollars that might be captured by such an effort.  This suggests that taxpayer's with rental real estate will face an increased risk of audit in the near future.

As if Gov. Christie hadn't generated enough controversy with his decisoin to not reappoint Associate Justice Wallace to the New Jersey Supreme Court. (That led the State Senate to defer considering his nominated replacement until Wallace would have reached his retirement date.  That forced the Chief Justice to appoint a temprary replacement.  That led Associate Justice Soto-Rivera to refuse to participate in cases where the replacement's vote affected the outcome."

Now the governor wants to nominate Assemblyman Michael Carroll (R-Morris) to the Superior Court.  He asked the New Jersey Bar Association to vet Carroll before he announced the nomination.

The NJBA responded this week that they weren't given enough time to perform due diligence on Carroll, and would not give an opinion on his qualifications.  Current and former lawmakers called the situation "unprecedented".  The governor hasn't commented yet.

Vetting by the NJBA is not a legal requirement.  In fact, former governor Christine Whitman (R) went ahead with her niomination of Peter Veniero to the Supreme Court after the the NJBA decided he was not qualified.

Prime Accounting Department, the owner of a property in Carney's Point according to the tax rolls, filed a tax appeal.  Once the appeal started, it turned out the owner was actually Boccelli, LLC.

In the past, the solution was to substitute the correct name and move ahead.  This time, Carney's Point filed a motion to dismiss the case because Prime Accounting Department doesn't own the property and has no right to appeal.  Presiding Judge Patrick DeAlmeida of the New Jersey Tax Court granted the dismissal, effectively ending the appeal.  The statute of limitations for the appeal has run against Boccelli, so the real owner can't file its own appeal.

The New Jersey Supreme Court has agreed to review the decision.  The State Bar Association filed an amicus brief on the case, noting that if the decision stands attorneys will have to order title searches on every tax appeal before filing the case.

The IRS is revamping its collection procedures to make it easier for taxpayers to qualify for help.

The dollar threshhold at which the IRS requires a lien will be signifcantly increased. The results will be evaluated in about a year, and the program adjusted appropriately.

The Service will now standardize withdrawing liens when taxes are paid in full, and will streamline procedures for withdrawing liens.

Taxpayers who enter "direct debit payment programs" may be able to have their liens withdrawn as long as the direct debits are honored.

The Service is increasing the availability of automatic payment plans to taxpayers who owe as much as $25,000, can pay within 2 years. and enroll in a direct debit payment program.

Finally, the streamlined Offer in Compromise program will be extended to taxpayers with annual incomes of up to $100,000 and tax liabilities of $50,000 or less.

In 2006, the Republican Congress passed and President Bush signed the Tax Increase Prevention and Reconciliation Act.  Part of that act required federal, state and local government to withhold 3% from payments to government contractors, and on Medicare, farm and other government payments.  The effective date was deferred to 2012.

Business and government groups are fighting the withholding requirement based on the cost of implementation and the negative impact on payee cashflow.

Sen. Scott Brown (R-MA) and Sen. Bill Nelson (D-FL) have introduced a bill under which the government will send each taxpayer a receipt showing how the taxpayer's income and payroll taxes were spent.  The spending will be "itemized" in broad categories, such as interest on debt, military, Social Security, Medicare, education, veteran's benefits, envrionmental protection, foreign aid and Congress.  The receipt would also show the taxpayer's share of the national debt.

It isn't clear how useful this data would be.  Will the allocation be based on last year's budget or the current year budget?  Would the national debt just be divided by the population or weighted for services provided to the particular taxpayer?  But some of the information might prove surprising.  For example, Americans tend to wildly overestimate the portion of the budget that goes to foreign aid.

Neither Mr. Brown nor Mr. Nelson suggested including the cost of the receipt on the receipt.

By the way, you can already find an analysis of the budget online, and Google and Eyebeam sponsor a contest for the best visual presentation of the federal budget. Which makes me wonder why the Senators want to spend the money on a printed receipt and postage!

It's a truism that the IRS is the only government agency that takes in more than it spends - as much as $10 in tax for every dollar spent on enforcement.

But House Republicans are trying to cut the IRS enforcement budget by $600 million.  They allege abusive enforcement. But because the IRS is charged with enforcing the individual mandate under health care reform, some Democrats think this is a back-door approach to defunding health care reform.

So who in Congress is going to stand up to defend the IRS?

The House of Representatives is expected to pass its version of repealing the new 1099 rules.

The rub is paying for it.  The Senate version relies on unspecificed cuts in the budget to be decided by the Executive Branch.  The House version tries to recapture a larger percentages of subsidiy overpayments to consumers under last year's health care reform.  Democrats call this a tax on the middle class.

To get budget neutrality, the House leadership took a spending offset in another bill and moved it to the 1099 repeal.

The Senate version is tied up in an appropriation bill for the Federal Aviation Administration, which could delay a Senate vote on repeal.  Once it does pass, the repeal will go to a conference committee to negotiate final language, including how to fund repeal.

It's a given in Congress that small business creates more jobs than big businesses.  So jobs legislation tends to focus on small businesses

But the small business impact on tax policy -- which is based on this assumption of jobs creation - may be out of proportion to reality.

But the real question is how to define a small business.  For example, an S Corporation is created by filing a Form 2553 - Election by a Small Business Corporation.  But a corporation with billions of dollars in revenues and thousands of employees can file this election.  It is only small in terms of the limitation to 100 shareholders.

With corporate tax reform on the table in Washington, the definition of a small business is front and center for the upcoming hearings.  The administration is suggesting that at some level a business should have to pay its own taxes - that is, it cannot pass its income through to its shareholders for them to pay taxes.  Republicans say this would -- wait for it! -- stifle jobs growth.

It isn't clear whether the same limits would, could or should be applied to limited liability companies and partnerships.

President Obama told governors they could apply for innovation waivers from the individual mandate in 2014. Each state could develop its own approach to health care reform, provided it offered equivalent benefits, equivalent affordability, equivalent coverage of the population, and budget neutrality (at least for the federal budget).

The President drew a line at complete repeal, saying he would not refight old battles.

FIRST SHOE -- Bank of America and Wells Fargo announced that they may face fines and other penalties from federal and state investigations into their mortgage foreclosure practices.  Bank of America also warned of as much as $230 million in increased legal costs related to the slowed down rate of foreclosures, and Wells Fargo said penalties are likely.

SECOND SHOE -- Anonymous sources say federal regulators may seek as much as $20 billion in penalties from banks that serviced flawed loans.  The proposal hasn't been presented to banks yet.

THE REST OF THE DRESS???:  Bank of America announced that a group of investors pressuring the bank to repurchase bad mortgages has doubled the number of mortgages in their claim.  The investors include Pacific Investment Management Co, Inc.(also known as PIMCO), the Federal Reserve Bank of New York, and BlackRock, Inc.

Interesting notes about the litigation.  BlackRock manages the New York Fed's portfolio of bad mortgage loans.  And Merrill Lynch Investment Managers, which is owned by Merrill Lynch, Inc., a wholly owned subsidiary of Bank of America, owns nearly half the stock of BlackRock.  So BlackRock appears to be suing a major shareholder of BlackRock on behalf of itself and a major regulator of both companies.

Gonna be interesting to see how THIS plays out!

According to statistics from the U.S. Administrative Office of the Courts, the 1,656,380 petitiona filed in 2010 are the hightest number since 2,078,415 petitions filed in 2005.  41,266 filings were in New Jersey, of which 31, 879 were Chapter 7 filings.

72% of the Texas Bar voted against a proposed ethics rule barring barring sex with clients unless the attorney and client are married, or the relationship is consensual and began before the client hired the attorney.

Despite the economic toll of the recession on law firms, an increasing number of attorneys at large firms are billing clients $1,000 or more per hour. The highest known rate is for a corporte law partner at Kirkland & Ellis -- $1,250 per hour.  Intrestingly, there are two bankruptcy lawyers on the list -- one billing $1,160 per hour and the other $1.045.  One of the bankruptcy lawyers told the Wall Street Journal:  "The underlying principal is if you can get it, get it."

Two days ago, Governor Christie announced his proposed budget for 2011-2012.  Since then he has begun to flesh out some of the ideas in the document.  Today he holds a town hall meeting in West Deptford, home to Senate President Steve Sweeney (D-Gloucester).

I'm taking a closer look as information becomes available, and next week I'll post some thoughts on what I think is in the budget.

The Senate Finance Committee announced hearings, starting on March 1, 2011 and continuing through the year, on overhauling the Internal Revenue Code.

Chairman Max Baucus (D-MT) said the March 1 hearing would feature testimony from five past tax oficials in the Treasury Department and review changes in the Code since 1986.  He seems to have already made up his mind, stating:  "We will hold a number of hearings to look at how this unbalanced tax code is a drag on the economy and what changes need to be made."

Ranking Republican Orrin Harch (R-UT) added:  "Our tax system is burdensome, overly complex and stifles American competitiveness.  It needs to be reformed."  Sounds like Sen Hatch, who may face Tea Party opposition in his relection campaign this year, has also made up his mind.

The schedule seems to "tee up" tax reform as a major issue in the 2012 Presidential and Congressional campaigns. Whether to extend the 2001 tax cuts beyond 2012 will be a big part of that debate.

Back in 2008, Congress adopted a requirement for corporations that issue stock, mutual funds and brokers to report stock splits, mergers, spinoffs and any other transactions that affect the basis of shares.  The report must be filed with the IRS within 45 days after the transaction, and to the shareholders by January 15 of the following year, starting in 2011.  In a nod to technology, the report can be posted tot he company's website instead of filed with the IRS.

The problem is that the IRS hasn't created the form yet, so companies don't know what information to provide or the format in which to provide it.

The IRS has extended the filing date for these reports to January 15, 2012, and will not impose penalties for failure to file the reports.

The legal maneuvering over the 2010 health care reform law has moved squarely into politics . . . if it was ever not political.

In an interview on Fox News, Sen Orrin Hatch (R-UT) wants Associate Justice Elena Kagan to recuse herself from the health care litigation if it makes it to the Supreme Court.  Sen. Hatch noted that the Associate Justice was Solicitor General in the Obama administration while the law was passed.

Apparently in response, 44 Democrats have called for Associate Justice Clarence Thomas to recuse himself from the case because of his wife's lobbying activities for Conservative groups opposed to the law.

It shold be noted that the health care reform litigation has not yet reached the Circuit Court of Appeals.  There are four decisions by U.S. District Courts, two in favor and two opposed, and all four are being appealed.

But Virginia Attorney General Ken Cuccinelli (R) is moving for expedited review by the Supreme Court. Mr. Cuccinelli wants the Court to hear the appeal directly from the District Court, without waiting for the Circuits to weigh in. In an interview at George Washington University, Associate Justice Ruth Bader Ginsberg noted the Court rarely steps in before the Circuit Courts do.

All of this seems to be about tweeking the Court for the health care decision.  Republicans think they stand the best chance if the case is heard by the existing Court with its convservative majority.  Democrats want to delay the hearing in the hope that the composition of the court might change.  Utlimately, everyone seems to believe that Judge Anthony Stevens, the most moderate judge in the conservative majority, is the swing vote in what is likely to be a 5-4 vote.

A small screen variation is playing out in New Jersey, where the Democratic controlled Senate voted 21-3 to to urge state Supreme Court Justice Roberto Rivera-Soto to resign if the Assembly doesn't impeach him. There are no plans in the Assembly (also controlled by Democrats) for impeachment, so the vote is largely symbolic.

The dispute grows out of Gov. Chris Christie's (R) decision to not reappoint Justice John Wallace to the Court.  The unusual move was widely interpreted by Democrats as an assault on the independence of the Court.  Observers also noted that  Judge Wallace is a Democrat and the only African-American Justice. Democrats were further incensed because Justice Wallace would have reached mandatory retirement age in March, 2012, so the Governor could have reappointed him and replaced him later in his first term.

Governor Christie nominated Ann Paterson to Justice Wallace's seat, but Senate President Steven Sweeney (D-Gloucester) refused to schedule confirmation hearings until after Justice Wallace's retirement date.  In the meanwhile, Chief Justice Stuart Rabner temporarily appointed Appellate Judge Edwin Stern to Justice Wallace's seat.

Justice Rivera-Soto believes the appointment of Judge Stern is unconstitutional.  He first announced he would not participate in any case in which Judge Stern participated.  He quickly changed his position to not participating in any case in which Judge Stern's vote affects the outcome.  Justice Rivera-Soto did not explain how he would determine whether that condition exists.

Justice Rivera-Soto - a Republican and the Court's first Hispanic Justice - recently announced he would not seek reappointment at the end of his first term later this year. He is widely considered the most conservative Justice on the Court, and was censured in 2007 for trying to use his influence in a case involving his son.

Governor Chris Christie (R) presents his 2011-2012 budget today. It's expected to include some $200 million in tax cuts, mostly for small businesses,  The budget proposal has to deal with a structural deficit of more than $10 billion - nearly 1/3 of the budget --and the loss of the last $1 billion in stimulus funding from the federal government.

Gov. Christie also promises to change how schools are funded.  Last year, he successfully pushed caps the salaries of district superintendants.  Parsippany-Troy Hills signed a new contract with their superintendant that exceeds the cap.  The Governor suggested he might punish the district in the new budget, saying:"I don't understand why they think they know better than the Department of Education on this issue."

The administration is defending its current year spending plan before the Supreme Court.

Congress couldn't reach agreement on legislation extending the 2001 tax cuts until December, and the IRS couldn't reprogram its computers for the changes in the December compromise until mid-February.  The Service was unable to process federal tax returns with itemized deductions and other items affected by the legislation until February 14, 2011.

Once the IRS started to process returns, they asked processors to limit the number of returns submitted while they catch up.    Even so, the IRS continues to have problems with the system which may delay refund checks.

Surprise!  It's the Internal Revenue Code.  According to this article in the Wall Street Journal, it seems like about half the more than $2 trillion dollars in cash sitting in corporations is from overseas profits, and would be subject to US tax if it were brought back to the US.  A survery of S&P 500 companies estimates 30% had invested in low return foreign assets rather than pay the US tax, and 56% including Microsoft borrowed in the US rather than pay the US tax hit.  Another 6% claim they had decllined to invest in US projects to avoid paying US taxes on repatriated cash balances.

But the article conveniently fails to mention another possibility.  During previous downturns, Congress has offered (or at least considered) "amnesty" for repatriated earnings, reducing the US tax to as little as 5% if the repatriated funds are invested in US operations.  There is evidence that this just doesn't happen, if for no other reason than that if half the cash hoard is overseas, then half is in the US.

So these companies may just be waiting out Congress for another amnesty program.  If that's the case, maybe its time to rethink how we tax overseas earnings and just make the 5% rate permanent?

In 2009, after a banker gave incriminating details to the Internal Revenue Service, Swiss bank UBSreached a settlement with the Department of Justice by paying a $780 million dollar fine and disclosing the names of US account holders to the Internal Revenue Service.  Because of possible violations of Swiss banking laws, the Swiss government had to participate in the settlement.

Earlier this year, a former banker in the Cayman Islands for Julius Baer Group, Ltd. gave stolen records about overseas accounts to Wikileaks.

Both bankers are expected to file claims for substantial rewards - possibly in the billions of dollars - under the federal whistleblower program.  The IRS is expected to promote this program, especially for foreign transactions, over the next few years.

Here's a good, short summary of the program - for both potential whistlebowers and potential "whistleblowees".

In 2008, the Supreme Court ruled that costs paid to an investment advisor by a nongrantor trust or estate are subject to the 2% floor for miscellaneous itemized deductions.  Since then, the IRS has issued an annual notice deferring implementation of that ruling while regulations work their way through the system.

On February 15, 2011, the AICPA reminded the Service that it has not issued that annual notice yet for 2010 returns, and suggested making the next notice effective until Regulations are issued.

The Society of the Holy Child Jesus operates a Roman Catholic church and religious school in Summit.  One of the buildings they own is used as an administrative headquarters.

The City of Summit discovered that the Society had never applied for the necessary zoning variances to operate a church in the city.  Without the zoning approvals, the city revoked their real estate tax exemption.  In 2007, the New Jersey Tax Court decided in favor of the city, citing previous cases under New Jersey's Farmland Assessment Act.

The Society appealed the ruling, and last week the Appellate Division reversed the Tax Court, ruling that the statute for tax exempt entities does not require compliance with zoning regulations.

The case is unusual.  This kind of issue usually comes up when the local government, desperate for money, looks for ways to tax otherwise exempt property.  In this case,the school's neighbors in a residential district started the litigation over zoning, and the city got involved in taxes afterwards.  The zoning issue is still being litigated.

On Thursday, the House Ways and Means Committee approved a bill to repeal new 1099 reporting requirements.  The Senate passed a repeal bill on February 2.  President Obama wants to sign a repeal bill.  So we're all set for the repeal of the much hated 1099 requirements?

Well, maybe not. There'sa revenue figure attached to the original legislation, and if Congress repeals the 1099 rules they have to make up the lost revenue.  The Senate - with a Democratic majority - paid for repeal by authorizing the Office of Management and Budget to cut up to $44 billion from the budget, without specifying what should be cut.  Oh, except that the OMB can't cut adminsitrative costs for Social Security.

Now the House - with a Republican majority - is paying for the repeal by increasing recapture penalties on the health care credit passed as part of Health Care Reform last year.  Since one of the 1099 rules the House is repealing came from the Health Care Reform law, its sort of a twofer for the House.

The repeal can't be signed into law with the two chambers wanting different ways to pay for it, so the House and Senate will have to negotiate a compromise.  If they can't, the repeal dies and the 1099 reporting requirements stay in place.

And you stay tuned!

Gov .Chris Christie (R-NJ) intentionally stepped on the third rail of American politics in front of a friendly audience at the American Enterprise Institute. Christie proposed raising the Social Security Retirement Age and drastically overhauling Medicare, although he didn't provide specifics.

Christie also warned candidates he campaigned for in 2010 to "put up or shut up" if they don't want to see him in the district in two years with his arm around a primary opponent.

Christie is a rising star in the Republican party only a year into his first term in office.  He came in third in the CPAC straw poll earlier this month.

Ron Paul won for the second straight year, prompting invited speaker Donald Trump to tell Paul's supporters:  "By the way, Ron Paul cannot get elected. I'm sorry."

Mitt Romney came in second.

Back on January 18 I posted about a takeover battle between Air Products and Airgas that hinged on whether Air Products could force the Airgas board to give up its poison pill provisions and let the shareholders vote on a takeover proposal.

The battle is now over.

The Delaware Supreme Court ruled in favor of the target, Airgas, and Air Products announced it was dropping its hostile takeover.

Observers expect this decision (which the judge admitted was required by law even though he disagreed with the law) will make hostile takeovers nearly impossible where the target company has a Board of Directors with staggered terms.

In a more or less stunning reversal of its long-standing position, the IRS announced that it now considers breast pumps and lactation aids deductible medical expenses.

Before this, the IRS position was that it didn't have the authority to allow breastfeeding equipment as a deduction in the absence of Congressional action.

The Service gave no reason for the change in its position.

Just before going into their February meeting, the Federal Reserve Board issued its revised estimate of GDP growth for 2011. The November estimate was 3.0 - 3.6%; the new estimate is 3.4 - 3.9%. The Fed's estimate is even more optimistic than the results of a Wall Street Journal Survey of 51 Economists released last week

On the other side of the economic question, the Fed is projecting unemployment will fall to between 8.8 - 9% by the end of the year.

The political implications of the new Fed figures do not bode well for Republicans.  If unemployment is down by the end of the year, and recent projections of better wage gains come to pass, voters will likely give credit to President Obama.  Deficit hawks also can't be all that happy with the improved forecast.  They've based their arguments on the deficit as a percentage of GDP.  If GDP grows, the deficit appears to shrink by comparison.

Of course, neither of these happens to be true.  But in politics, the perception is often more important than thereality.

Vertex, Inc. released its 2010 Tax Rate Report.  The report finds that combined sales tax rates reached an average of 9.64%, breaking the record of 8.63% reached in 2009.

California has the highest combined rate at 7.25%.  New Jersey tied with four other states - Indiana, Mississippi, Rhode Island and Tennessee - for second place, at 7%.

The ranking only considers rates, not the items to which the tax is applied.

Charities to set up so-called "supporting organizations".  These are tax exempt entities set up to solicit funding for other tax exempt organizations.  These kinds of organizations can also be set up by third parties.

The IRS has been investigating these third party organizations ("Friends of" groups), and has begun aggressively revoking their tax exempt status.  A number of the revocations were aimed at organizations involved with Merrill Scott & Associates. Ltd.  The firm is in receivership after being charged by the IRS for operating a Ponzi scheme.  The principals were charged with tax evasion and money laundering in 2008.

The most common abuse involved donations to the supporting organization, for which the client would claim a charitable deduction.  The organization would shift the funds -often through offshore entities - and eventually return the money to the donor or a relative through an interest free loan.

The 2006 Pension Protection Act requires mandatory minimum payouts for "Friends of" supporting organizations.  Treasury has proposed a 5% minimum (the same as for private foundations), but the American Bar Association objects that the rate is too high.

Because of the late changes to the Internal Revenue Code, the IRS has been playing catchup in its electronic filing program.  As a result, certain taxpayers, especially those who itemize deductions, could not e-file early.

They've finally made the necessary fixes and, as of February 14, the IRS is accepting e-filed 1040s from itemizers.

President Obama's budget proposal includes about $460 million for 5,100 new IRS agents. The new agents will be used for increased enforcement, such as the current effort to identify overseas bank accounts.

Republicans in the House are expected to call for cuts in the IRS budget.

You can find a Forbes Magazine article on this at the fascinating URL http://billionaires.forbes.com/article/093j1i56mi9LA.

The Internal Revenue Codes provides includes a "statute of limitations" which says the IRS typically has three years to audit a return.  If the taxpayer understates gross income by 20% or more, that time limit is extended to 6 years.

There has been an open question about whether overstating the basis of a partnership interest is the same as not reporting gross income.  Overstating the basis may allow the taxpayer to deduct additional losses in the current year.  Now two Ciruit Courts of Appeal have ruled that it is not always the same, and the 3 year statute applies.

In the most recent case, the 5th Circuit had to distinguish its ruling from prior case holding that the six year statute applied. In the earlier case, the Court felt the overstatement disguised the basic nature of the transaction. In the new decision (based on a "Son of BOSS" tax strategy), the Court concluded the underlying nature of the transaction was adequately explained in the return, so the 3 year statute applied.

A Wall Street Journal survey of 51 economists forecasts the economy will grow 3.5% in 2011.  The same survey expects unemployment to shrink to 8.6%, and the risk of a double-dip recession is cut almost in half to 112%.

The Society for Human Resources Management thinks wage increases could be as much as 3%.

Over the last two years, productivity has risen at an annual rate of 4%, and corporate profits at 30%.  Wage gains were held to 1.7%.  These surveys are the first sign of the recovery "trickling down" to workers.

The surveys were careful to note that the expected rates are averages over the entire economy.  The construction industry remains in bad shape and wage increases will be less.  Manufacturing has been boosted by increased exports, and should see greater increases.

President Obama is releasing his budget proposal for the 2012 fiscal year this morning.  It includes a revised estimate of the 2011 deficit, increasing the estimated annual loss from $1.48 trillion to $1.65 trillion, the largest federal budget deficit ever.

The report attributes the increase to the impact of the December, 2010 tax deal.  In particular, administration officials point to the extension of the 2001 tax cuts and the one year payroll tax holiday.  When these provisions expire in 2012, the deficit is expected to shrink to $1.1 trillion.

President Obama is planning to cut the annual deficit in half "by the middle of the decade" according to his televised remarks.  The budget proposal includes spending cuts, tax cuts and tax increases.  For example, the administration would pay for extending the exemptions from the Alternative Minimum Tax for the middle class by decreasing the value of itemized deductions for the wealthy.

The President has indicated he is ready to work with the Republican majority in the House of Representatives and the Democratic majority in the Senate to keep spending to more affordable levels.

Resorts Casino Hotel has  a new billboard on the Atlantic City Expressway above the rail station.  Advertising Resorts' "Moonshine Follies", a 1920s themed review, the billboard features "a woman's near naked buttocks".  After a flurry of complaints, NJ Transit threatened to take down the billboard, and Resorts went to court for an injunction.

The hearing on the injunction is scheduled for March 10, and Atlantic County Superior Court Judge Nelson Johnson ruled that the sign can stay up until then.  Judge Johnson is the author of Boardwalk Empire, which recounts the history of Atlantic and its roll in organized crime during the era featured in the show. That book became the basis for the HBO series of the same name.

In December, President Obama reached an agreement with House Republicans to extend the 2001 tax cuts for all taxpayers for two years - to 2012.  In exchange, the Republicans agreed to extend unemployment benefits and some stimulus spending.

On Monday, the White House should release its 2011-2012 budget proposal.  The budget is expected to revisit some proposals from last year that didn't make into this year's budget, including a proposal to limit the value of itemized deductions to 28% for taxpayers in the 33% and 35% tax brackets.

Under current law, if a taxpayer in the 33% bracket claims an itemized deduction, he saves 33 cents in federal income tax for every deductible dollar.  Under the proposal, that taxpayer would only save 28 cents for every deductible dollar.  This proposal died last year under intense lobbying pressure from the real estate industry and charitable organizations.  The real estate industry thought the reduction would make housing less affordable, while charities worried that donations would suffer if the federal government subsidized less of the cost.

This time around, though, the administration is expected to emphasize that the economy is starting to recover, that this change would raise as much as $300 billion dollars over the next ten years, and that the increased revenue would reduce the U.S. deficit.  However, conservatives can be expected to counter that this is a tax increase.  At which point the White House is likely to duck for cover behind the recent recommendations of the bipartisan Deficit Reduction Commission, which recommend cutting tax deductions.  The Commission also recommended cutting tax rates, but it was widely understood that the net result would be a tax increase.

The politics of this proposal are almost as complex as the economics.  The President was criticized by Democrats for moving the tax increase for the rich into the 2012 election cycle.  But increasing taxes on the rich has support among the larger population, and the White House may be looking to make the "fairness"issue a major part of the 2012 campaign.

And there's another 18 months of positioning to go until the 2012 conventions!

Reps. Brad Sherman (D-CA) and Michael Conaway (R-TX) may be from different parties, but they have two things in common:  both were elected to Congress, and both are CPAs. 

So Sherman and Conaway have formed the Bipartisan CPA Caucus for themselves and the six other CPAs in the 112th Congress.  The goal of the caucus is to develop inovative policies for issues affecting CPAs (including tax administration and compliance) and to educate other Congressmen on these issues.

Any bets on how long it will take to turn it into the Democratic CPA caucus and the Republican CPA caucus?

It doesn't look like anyone on the Hill wants to save state finances.

About two weeks ago, conservatives in Congress floated the idea of allowing states to file for bankruptcy. Although supporters focused on reorganizing state finances, there was a growing concern among Democrats that filing was seen as simply a way to void contracts with state employee unions.

Meanwhile, Republicans AND Democrats in the House are not likely to vote for bailing out state budgets, leaving states on their own in coping with $125 billion of aggregate budget deficits this year.

The White House is looking for other ways to help states, such as the recent proposal to change Federal Unemployment Taxes.

New Jersey residents have long complained about high property taxes (although they rarely discuss what they are willing to give up in government services to lower them).  Now a group of economists working with the Organization for Economic Cooperation and Development (OECD) have concluded that property taxes are the best option for raising taxes to pay down debt.

The economists reviewed 34 years of economic history in 21 developed economies, and concluded that recurring taxes on property (including homes). Property taxes were the least likely to hurt growth.

The group admits such taxes are politically unpopular.

Ya think?

Standard and Poor's lowered its rating on New Jersey bonds to AA- on Wednesday.  The change is expected to increase the state's cost to borrow.  S&P attributed the decrease to its underfunded pension and health benefits plans. The rating agency has changed its approach to give more weight to those issues.

AA- is S&P's fourth lowest rating.  Two states - California and Illinois --have lower ratings, and four others are also rated AA-. New York and Connecticut are rated AA.

Gov. Chris Christie (R) and Democrats traded blame for the situation. Last month, the governor mused publicly about the state filing bankruptcy -- while the state was marketing a bond issue. Christie had to walk back the comments ten days later after massive criticism from state Democrats who control the state legislature.  Christie claimed vindication from S&P's action Democrats, while  pointed out that Christie skipped a $3 billion dollar pension payment last year, while they had agreed to reduced pension and benefit costs for new state hires.

The truth is that both parties share the blame with the New Jersey electorate.  Gov. Jim Florio (D) raised taxes in 1991 to cover rising costs, and Republicans rode that to power for 10 years.  During those ten years, Republicans failed to control costs and covered deficits with borrowing, including $6 billion to partially fund the pension shortfall.  Democrats - stung from the 1992 rebuke- were returned to power in 2001 and followed the Republican play book.  It's been roughly 15 years (including Republican and Democratic administrations) since New Jersey last properly funded the state employee pension, and the state is reaping the results.

Sen Kent Conrad (D-ND), Chairman of the Senate Budget Commitee, is expected to address Senate Democrats on Wednesday about using the deficit reduction commission's recommendations -- including entitlement reform -- as the basis for a a compromise on reducing the federal deficit. Republican leaders in the Senate signalled a willingness to talk, although Minority Leader Mitch McConnell (R-TN) demanded leadership on the issue from the President, and warned against using any tax increases to fund the compromise.  (The commission proposed reducing rates, but also eliminated deductions and credits; the net result was expected to be a tax increase.)

At the same time, House Republicans are releasing details on their proposal to cut federal spending in the current year by $32 billion. However, that includes a $9 billion increase in defense spending which means non-defense spending is facing $41 billion in cuts.  Conrad called the House Republican proposal "small potatoes", and is looking for a long term deal that keeps spending at current levels until the economy recovers.

We have more details on the White House plan to deal with unemployment tax problems, and with more details we have more reactions.

The proposal will let states that borrowed money from the federal government to fund unemployment benefits skip principal and interest payments for two years.

In 2014, the federal wage base for unemployment tax would roughly double, and the rate would decrease enough to keep the total federal tax stable. So if the base is increased to $15,000, the rate would decrease from 6.2% to roughly 2.9%.  But under current law, states are required to use the federal wage base as the wage base for their own unemployment taxes.  (They can use a higher wage base, as does New Jersey.)

So, if the states that borrowed from the federal government leave their own unemployment tax rates the same as they are now, the amount of the tax per employee will increase.  This increase will provide the funds to repay the loans.

Republican reaction was cautious on Monday, but on Thursday opposition began to build.  Rep. Dave Camp (R-MI), Chairman of the House Ways and Means Committee, warned that "any plan that relies on more than doubling the wage base and then raising payroll taxes in perpetuity isn't going anywhere in the house."

Sen. Orrin Hatch (R-Utah), ranking Republican on the Senate Finance Commitee and facing a possible primary challenge from the Tea Party wing of his party, "strongly urge[d] the White to reconsider this job killing proposal."

But the reality is that if the states do not pay back the loans timely, current law will collect the debt directly from employers.  Employers do not actually pay a 6.2% rate, because they get a 5.4% credit for paying state unemployment taxes.  If a state borrows from the federal unemployment fund and cannot or does not repay the loan, the credit is reduced.  The increased Federal Unemployment Tax is used to repay the loan;when the loan is repaid, the credit is restored.

So in states that haven't repaid loans (including Rep. Camp's own state of Michigan), employers are already scheduled to face increases in their Federal Unemployment Taxes.  Indiana employers are also facing an increase in FUTA, and the Indiana Manufacturers Association thinks the idea is worth discussing (which may explain why Rep. Mike Pence (R-IN), known for vocally conservative views, hasn't commented yet.  The National Federation of Independent Business is against the propsal, callling it "a tax on labor".

States that have kept their unemployment funds solvent, by raising taxes or cutting benefits, are also miffed by the proposal. But there are estimates that more than 23 states will be borrowing from the federal unemployment fund by the end of 2011 and unable to repay those loans. 

It isn't clear if Rep. Camp has heard from the new Republican governor of Michigan about his opposition to the proposal.

The IRS is offering a second amnesty program for US taxpayers' undisclosed foreign bank accounts.

Last year, the IRS won a victory over Union Bank of Switzerland (UBS), forcing its US subsidiary to disclose the names of customers with secret accounts.  At the same time, the Service offered all taxpayers with foreign accounts an amnesty program under which taxpayers who voluntarily disclosed their accounts paid reduced penalties and avoided criminal prosecution.

In December, a former senior executive with Swiss bank Julius Baer released account records for secret accounts at that bank.  The IRS is also targeting banks in Hong Kong and Singapore, and is pushing for stronger information sharing provisions in US tax treaties.

Yesterday, the Service rolled out a second amnesty program, which will expire in August, 2011.  This follow up is not as generous as the first, but the biggest carrot is still there -- no criminal prosecution.  The amnesty is not available to taxpayers already under audit.

The amnesty requires substantial documentation, and it isn't likely the IRS will extend the August deadline. Anyone who wants to take advantage of this amnesty -- or is even thinking about it -- should start gathering documentation now.

The amnesty only applies to federal taxes.  Taxpayers who participate will still have to deal with delinquent state taxes, penalties and interest.

Unemployment insurance is, for the most part, a program run by each state.  The federal government helps the states programs by subsidizing administrative costs, job search programs, extended unemployment benefits, and a fund from which states can borrow if their own funds run low.

Under the Federal Unemployment Tax Act (FUTA), employers are charged 6.2% of employee wages up to $7,000 to fund the federal programs.  Employers qualify for a credit of up to 5.4% for state unemployment taxes paid, which reduces the effective FUTA rate to .8% - or a maximum of $56 per employee.

If a state borrows funds from the federal program and doesn't repay them, employers in that state lose some or all of the credit, paying a higher FUTA tax until the loan is repaid.  In 2010, this happened to employers in Michigan, Indiana and South Carolina.  With state unemployment borrowing up to $42.4 billion, employers in up to 23 states may face the same repayment terms.

The Wall Street Journal is reporting that the White House may propose replenishing unemployment funds by increasing the FUTA wage base from the current $7,000 to $15,000. The 6.2% rate would be reduced, so the federal take from FUTA would not change.

So why do this?  Expanding the wage base is seen as a way for states to replenish badly depleted unemployment funds without increasing their own unemployment taxes.

Any change in FUTA will require Congressional approval, and Republicans are reacting very cautiously to the Administration's proposal.

Taxpayers and the IRS have been arguing over capitalized costs for decades.  Taxpayers want to deduct costs as they are incurred, while the IRS wants the costs to be deducted over the period they provide value to the taxpayer.

In November, 2010 the IRS released its Capitalization v. Repairs Audit Technique Guide.  IRS auditors are now using this Guide for taxpayer audits.  It explains what the agents are supposed to look for in reviewing changes in accounting method and evaluating repair expenses for capitalzation.

In the wake of massive losses sufferred by investors with Bernard Madoff's firm, the IRS issued rulings explaining how victims could compute tax deductible losses. Califorinia, Connecticut, Hawaii, Idaho, Massachusetts, New Jersey, New York and Wisconsin have also issued guidance on how these losses should be treated on state income tax returns.  (In New Jersey, the loss is deductible only in the year the loss is claimed and only against investment gains in the same year.)

In the 18 months after the Madoff fraud was discovered, the SEC filed 31 complaints against alleged Ponzi schemes.  The largest was estimated to have caused losses of $8billion, and the ten largest aggregated some $13billion in losses.

Irving Picard, the SIPA Trustee of the Madoff firm has recently announced a number of lawsuits aimed at getting money for the estate - and possibly the victims. One recent suit was filed against the main owners of the New York Mets.  Earlier suits were filed against major wall street banks, including Madoff's main banking relationship - J.P. Morgan.  Picard recently revealed internal memoranda he thinks suggest that J.P. Morgan executives at least suspected Madoff was perpetrating a fraud.

The potential for recoveries in these suits means its possible investors will get some level of compensation for their losses.  IRS hasn't weighed in yet, but if it works out the investors may owe taxes on the recovery.

Stay tuned!

According to The Los Angeles Times, the Bureau of Labor Statistics added a new category to the weekly employment figures - incorporated self-employed workers.  That figure is up 50% - from 9mm to 14mm.

It's not easy to assess the implications of this statistic.  Some of the self-employed are working temporary gigs at large corporations.  In fact, its probable some are doing their old jobs as outside contractors without benefits. Others are starting real businesses with varied customer lists.

If the statistic is the leading edge of a trend to "outsourcing" work to temporary or permatemp workers, it may also mark the end of the employer/employee "social contract", with corporations no longer providing a system of benefits and retirement savings.  There is no current estimate of the cost of this change to the economy currently and in the future.

The New Jersey Division of Taxation announced it will no longer mail Form 1099-G to taxpayers who receive a state income tax refund.  Instead, the Division will make the form available online.  The Form is only issued to taxpayers who receive a New Jersey tax refund AND are identified by the IRS as itemizing deductions.

To access the forms, taxpayers will go to https://www1.state.nj.us/TYTR_Saver/jsp/TGI_1099/NJ1099Login.jsp. and enter their Social Security Number and date of birth.  For more details, the Division has posted FAQs at www.state.nj.us/treasury/taxation/faqs1099.shtml.

Three stories I can't reconcile.

1. The Wall Street Journal reports a 12% uptick in deriviatives hedging against default on US Treasury Securities. At the same time, the premium investors pay for a credit default swap on a Treasury Security has increased 25%.  Although US Treaury Securities still havea AAA rating, financial information company Markit says the conditions in the CDS market are more commonly associated with AA rated securities.

2. Also in The Wall Street Journal, the Treasury Department announced the U.S. won't hit the debt ceiling until April or May.  Earlier estimates had the US reaching the debt ceiling by the end of March. Opposition to raising the debt ceiling from Tea Party Republicans in Congress raised questions about whether the US would default on its debt.

3.  And The Wall Street Journal also reports that Wall Street bankers are encouraging the Treasury Department to "lock in current low rates" by issuing "ultra-lomg term" Notes.  Currently, the longest term Treasury Note is 30 years, and the bankers are suggesting 40, 50 and even "century notes" for 100 years.  The bankers noted recent sales of 100 year notes by the Mexican government, and 50 year notes by Goldman Sachs (one of the firms pushing the idea).  The Treasury Department shot down the idea of 100 year notes, but stayed open to longer maturities.  While the longer maturity locking in current rates has obvious advantages to the government, the political risk of passing debt down three generations has obvious political risk in the current environment.

Got any ideas?

Okay, that title isn't really fair.  The Democratic controlled Senate actually voted against repealing the entire Health Care Reform Act.

But separately, the Senate voted to repeal the new 1099-reporting rules that were enacted as part of health  care reform last year.  The repeal provision is a Democratic amendment to the FAA re-authorization bill; there was no vote on a similar proposal from Republicans.

The change in the 1099 rules was enacted as part of the funding for health care reform. The amendment is kind of vague on how the cost of repeal will be offset in the budget, merely authorizing the Office of Management and Budget to cut unnecessary and unobligated spending, with an exemption for administrative costs at the Social Security Administration.

House leadership and the White House have already indicated they favor repeal, and the FAA bill itself, with $6billion in new spending on airport construction, is itself popular among lawmakers.

A Federal judge in Florida has ruled that the individual mandate in the 2010 health care reform legislation goes beyond the powers of the Federal government, and ruled it unconstitutional.  That evens the score, with two federal judges appointed by Democrats ruling the provision is constitutional, and two appointed by Republicans ruling it is not.

The latest ruling goes a step further, concluding that the individual mandate is so integral to the rest of the legislation that it cannot be separated, and so the entire health care reform act is unconsitutional.  The previous ruling against the HRC severed the individual mandate and left the rest of the legislation intact.

Pundits and bloggers on the left are railing about the Democrats' error in not making the provisions of HRC severable.  But I'm not so sure it was a mistake.  It may have been a necessary part of the negotiation.

Even though I think the individual mandate is constitutional, I have to give the Florida judge props for seeing the HRC as indivisible.  Remember that this was a grand bargain -- the insurance companies got 32,000,000 new customers with federal subsidies in exchange for giving up limitations on pre-existing conditions and no longer terminating policies for ill customers.  If you take back the 32,000,000 customers (the practical effect of ruling against the mandate), the insurance companies will want to raise premiums to cover the additional costs to them.

The previoius three cases have all been appealed, and the Justice Department is expected to appeal the Florida decision.  One interesting note is that one decisoin in favor of HRC and one against are both appealed to the Fourth Circuit, generally considered the most conservative circuit.  However, recent appointments by President Obama may slightly shift that balance.

Assuming the expected divide in the Circuits, the Supreme Court will have to decide whether the individual mandate is constitutional and whether it is severable.  SCOTUS watchers expect Chief Justice Roberts and Associate Justices Scalia, Thomas and Alito to come down against HRC, and Associate Justices Breyer, Ginsburg, Sotomayor and Kagan to come down in favor.  If that read is accurate, Associate Justice Kennedy, a Reagan appointee viewed as a centrist, is the deciding vote.

41 states report a 6% increase in tax revenues for the fourth quarter of 2010, according to data compiled by The Nelson A. Rockefeller Institute of Government at the State University of New York at Albany.  Calling it the fastest rate of increase in state tax revenues since the second quarter of 2006, the Institute attributes the jump to both tax increases and the improving economy.

The increases still leave state revenues lower than they were pre-recession, and most states still face budget cuts in the coming fiscal year.

The name of this blog comes from a comment by Sen Russell Long (D-LA) when he was Chairman of the Senate Finance Committee.  He summarized tax reform as: "Don't  tax me.  Don't tax thee.  Tax that fella behind the tree!"

We are now getting our first look at tax reform in the current Congress, and it isn't pretty.

The 2009 stimulus bill included a provision temporarily eliminating capital gains taxes on the sale of certain small businesses. The Small Business and Jobs Act passed last September extended that break another year. On Monday, President Obama announced he wants to make that provision permanent. House Speaker John Boehner (R-OH) immediately said it wasn't enough, demanding more tax incentives for small businesses, protection from regulation and, of course, repeal of health care reform. One GOP proposal would cut taxes on small businesses by 20%. Neither side has given any indication of how they will pay for the lost revenue, and the Tea Party has not commented.

Despite brave rhetoric about taming the deficit, it seems Democrats and Republicans have decided to get into a bidding war for jobs growth without considering the costs.

It also helps to remember that everything hinges on the definition of a small business. Current law defines a qualifying small business to exclude, among other things, S Corporations and corporations with more than $50,000,000 of assets. As most privately owned companies are S Corporations, it isn't clear just who benefits from the provision, or how effective it is at generating jobs.

The U.S. accounting profession follows Generally Accepted Accounting Practices, or GAAP, which is administered by the Financial Accounting Standards Board (FASB).  Most of the rest of the world follows the International Financial Reporting System (IFRS).  Although there is a lot of overlap in the two, the primary difference is that GAAP is rules based, while IFRS is principle based.  So while it is easier to figure out how to apply GAAP, it is also easier to game the system.  For example, some observers note that the Enron fraud was enabled under GAAP, but would not have passed muster under IFRS.

So the US has been considering and debating and generally moving in the direction of IFRS.  A joint committee has been working for almost a decade on bringing the two systems together.

Now we can introduce another player - the Securities and Exchange Commission, which controls accounting for public companies in the US.  Ten months ago, the SEC issued a "workplan" to guide its determination of "whether, when and how" US accounting should be transitioned from GAAP to IFRS.  For how, the workplan is looking at convergence and different levels of endorsement.  According to the SEC, the difference is whether it will require or permit IFRS for US public companies.

Now SEC Deputy Chief Accountant Paul Beswick has injected a new word into the discussion -- "condorsement".  The word doesn't exist outside of Mr. Beswick's presentation, so what is "condorsement"?

Under condorsement, FASB continues to administer GAAP.  GAAP is amended to include the joint projects already underway for GAAP and IFRS.  When this is completed, GAAP is amended over a number of years for IFRS policies that were not included in the original amendments.  Finally, FASB would consider newly created IFRS standards for inclusion in GAAP.

Under condorsement, the US keeps GAAP, which means the US keeps control of accounting standards in the US.  But over time, the goal is to pick and choose parts of IFRS to be included in GAAP,either as originally written or in an amended form.  In other words, U.S. accounting standards are changed from a rules based game to a cherry picked "mish mosh" of GAAP and IFRS.

Go figure!

remember that President Obama delivered his State of the Union Address on Tuesday night.

Treasury Secretary Tim Geithner says corporate tax return will include simplification, closing loopholes and reducing corporate tax rates. He also said the Obama administration will not fund corporate tax reform by raising individual tax rates.  Geithner, a master of understatement, called it a "tricky" undertaking in an interview with the Wall Street Journal

Congress seems likely to go along with the President's SOTU proposal, spurred by an Japan's scheduled reduction of corporate rates April, 2011, reported here.

Republicans want to address individual and corporate tax reform at the same time - making Geithner's understatement sound incredibily optimistic by comparison, See here

Meanwhile, the Congressional Budget Office reports that the December tax deal between President Obama and Senate Republicans added $300 billion to this year's deficit (which was already at a record). See here.  And the  New York Times reported the Fed voted unanimously to continue quantitative easing.   Bloomberg caps this with a report that Standard & Poor's is downgrading Japan's debt from AA to AA- because the government lacks a "coherent strategy" for dealing with his huge debt. It's unclear if the Tea Party has not responded to all of this because they haven't had time or they're just too stunned for words.

The CBO also reported that Social Security will run out of money in 2037, and will only be able to pay out 78% of benefits after that.  Reporting here.

This is all less than48 hours after the SOTU...

The larger accounting and law firms have applied for and received "business process" patents on specific tax strategies, including some later declared illegal by the IRS and courts. The firms are looking for competitive advantages, but there is nothing to stop them from making infringement claims against taxpayers who find the same strategy on their own.

Two bills have been introduced in the Senate declaring tax strategies are "prior art" and cannot be patented.

Get details

The Financial Accounting Foundation (FAF), which supervises the Financial Accounting Standards Board (FASB), received a report that recommends a separate board to set accounting standards for private companies.  But rather than create an entirely new set of accounting rules, the report recommends that the board focus on creating exceptions to and modifications of existing accounting rules to better reflect the needs of private companies.  You can find more details here.

Now that the more breathless commentators have had their say, it's my turn.

As oratory, it was pretty good, though not great.  "Competing for the future" doesn't have quite the same ring as "ask not what your country can do for you", or "we will send a man to the moon".  In fact, there I didn't hear any stirring calls to action.  Perhaps we're in a time of diminished expectations, which is not surprising considering that we are still struggling with the worst recession in 80 years.  Even so, you could at least try . . ..

Obama made separate calls for corporate and individual tax reform.  The Republicans immediately upped the ante, calling for both at the same time.  But if we take a serious look at the situation, its most likely posturing on both sides. Why?

1.  Rewriting the entire tax code is hard work -- especially for lobbyists!

2.  Rewriting the entire tax code forces most of the states to at least consider rewriting their tax laws.

3.  One man's loophole is another company's justified economic incentive for the public good.

In all the sturm und drang, it's easy to forget that even if the tax laws do occupy 75,000 pages of statue and regulation, the average individual taxpayer needs less than 100 of those pages to finish his 1040.  If he doesn't itemize deductions, perhaps a quarter of that.  An awful lot of those pages Congress complains about are there because Congress tried to plug up holes that corporations and high end individuals try to exploit.

Anyway, I guess we're looking at study groups and posturing for the next two years.  Some small proposals (like repealing the new 1099 rules) might make it to a vote.  Fo the most part, though, both sides are going to sit back, stake out positions for the 2012 elections, and make the tax reform debate a major issue in the election.

So keep your eyes and mind open, but your expectations low.

On January 18 I noted litigation between Air Products and Airgas over Airgas' poison pill.  The case goes to court in Delaware this morning.  Watch for developments.  The New York Times article is here

A poll of 46 economists in USA today finds them predicted annualized growth of more than 3% for 2011, and unemployment might drop to 9% by the end of the year.  Marc Zandi, Chief Economist of Moody's Analytics, expects more than 4% growth as business invest and hire more in reaction to stronger sales.  http://www.usatoday.com/money/economy/2011-01-24-1Aecon24_ST_N.htm

Meanwhile, a survey from the Employee Benefit Research Instiitute concludes only 12% of workers 55 and older, and only 5% of younger workers think they will get the same Social Security benefits as current retirees.  Only 77% think they will receive any Social Security benefits at all. 

Surprisingly, although Medicare has more financial difficulties than Social Security only 65% of workers are not too confident or not confident at all that Medicare benefits will continue at their current levels.

You can find the EBRI survey results at http://www.ebri.org/pdf/surveys/rcs/2010/FS-06_RCS-10_SocSec-Med.pdf

The IRS announced yesterday it is releasing IRS2GO, a smartphone app available for IPhones at the Apple App Store, and for Android at the Android Marketplace.  IRS2GO is free.

With the app, taxpayers can easily check the status of their refund and subscribe to a daily tax tip from the IRS.  The refund app works for e-filed returns within 72 hours.  Paper returns need 3-4 weeks for processing.

The newly hip IRS is also running a Twitter feed at @IRSnews.

Because the tax bills were passed in late December, the IRS has been rushing to update its system to accomodate the changes.  One result is that the Service had to delay processing returns with itemized deductions and other issues until February 14.

The IRS just announced it will be ready for the February 14 deadline.

Everyone knows that tax reform is on the table, and is looking for hints in tomorrow's State of the Union address.

Rep. Dave Kamp (R-MI), chair of the House Ways and Means Committee cautions it is unlikely we'll see a major tax bill this year.  On the other side, former Rep. Dan Maffei (D-NY), who heads a think tank for moderate Democrats, thinks corporate tax reform is "low hanging fruit".

Business leaders are also staking out positions.  Jeff Immelt, CEO of GE and President Obama'snewly appointed chair of the Council of Jobs and Competitiveness, wrote an op-ed for the Washington Post on Friday, saying "a sound and competitive tax system and a partnership between business and government on education and innovation in areas where America can lead,such as clean energy, are essential to sustainable growth."  The CEO of Colgate Palmolive doesn't think tax reform needs to be revenue neutral.

Both sides agree that the White House will shape this debate.  It's less clear how far the President will stick his neck out in the SOTU.

Demographia, a consulting company in Illinois, released a survey of housing affordability for the third quarter of 2010.  Not suprisingly, US homes were the most affordable at 3x median income. 

Hong Kong's economy is growing based on China trade, and housing prices there have grown 50% in the last 24 months.  The former British colony has always been pricey, but at 11.4x median income it's now unchallenged as the least affordable housing market in the world.

Surprisingly, though, Australia has the least affordable housing among English speaking countries, at 6.1x median income.  That country also has a growing economy based on China trade, but some of the priciness may be attributable to the fact that 85% of Australians live within 50 miles of the coast. Coastal property tends to be more expensive worldwide.  (The survey was taken before the recent floods in Australia.)

While the U.S. is the most affordable overall (led by Atlanta at less than 3x), four markets in California (San Francisco, San Jose, San Diego and Los Angeles) are all at or above 5.9x.  New York, at 6.1x, is the fourth most unaffordable city in the U.S. and tied with Australia.   All five of the priciest markets in the U.S. are coastal.

The report considers 5.1x or greater severely unaffordable.

Chapter 9 of the Federal Bankruptcy Code lets city governments restucture their debt loads within the protections of the Bankruptcy Court. A few members of Congress are cautiously looking at extending the same option to states.

There is concern in Congress that a State might default on its debt, an unprecedented problem.  Of more immediate concern is that a state facing default will come to Congress for a bailout - something this Congress is unlikely to do.  The bankruptcy provision could provide an orderly alternative to a bailout.  A bankruptcy option might also give states more leverage in renegotiating contracts and pensions with state workers.

The idea surfaced in a speech by Newt Gingrich, a former Republican Speaker of the House and rumored presidential candidate in 2012.  Shortly after, David A. Skeel, a law professor at the University of Pennsylvania, published an article about state bankruptcy in The Weekly Standard.  Sen. Jon Cornyn (R-TX) asked Federal Reserve Chairman Ben Bernanke about State Bankruptcy in a hearing earlier this month.

But lawmakers are being very careful about this.  It is not clear what a state bankruptcy provision would do to the municipal bond market.  General Obligation bonds, now considered the safest municipal bond, would be unsecured creditors in a bankruptcy.

The discussions are also said to include a federal oversight panel -- similar to the Municipal Assistance Corporation used to fix New York City finances in 1975 -- instead of or in addition to bankruptcy.

Any proposal has to consider the Constitutinal issues.  Would a state bankruptcy interfere with a state's right to legislate?

Prof. Skeel's November 29, 2010 article is at http://www.weeklystandard.com/articles/give-states-way-go-bankrupt_518378.html.

Current reporting by the New York Times is at http://www.nytimes.com/2011/01/21/business/economy/21bankruptcy.html?pagewanted=1&_r=1&hp

There is a growing and bipartisan effort to repeal new 1099 reporting rules that are part of the health care reform legislation passed by Congress last year.  But the political question to be answered is whether Congress will be unable to pass something both Republicans and Democrats want to pass.  Bipartisan gridlock may have arrived!

Three Democratic Senators have signed on as cosponsors of a Republican proposal to repeal the new rules.  Three other Democratic senators have sent a letter to House Speaker John Boehner (R-OH) urging him to send a stand alone repeal measure to the Senate.

Boehner responded through a spokesman that he supports repealing the 1099 provision, but "it is far from the only job destroying provision in Washington Democrats law."  The spokesman did not explain which provisions of health care reform destory jobs, but added that the best course for the Senate would be to pass the complete repeal passed by the House this week.  Senate Majority Leader Harry Read (D-NV) has already said that bill will not be presented to the Senate, and President Obama has already promised to veto repeal if it does pass both houses.

There are now two things holding up repeal.  Under "pay as you go rules", lawmakers have to make up the projected revenue loss from repealing the new rules.  It remains to be seen whether House Republicans will play chicken with the 1099 repeal - offering it only in the context of complete repeal rather than a stand alone bill.

The Internal Revenue Service has begun visiting the offices of 10,000 tax prepares to review their tax preparation procedures.  The program is new, and there is not much information about it, but some details are leaking out.

One CPA reported the visit was occasioned by the high number of returns with high income or losses on Schedule E.  Another thinks she was selected because she prepared a lot of returns last year with net operating losses.

The visits do not appear to be audits, and so far do not include audits of returns prepared by the office.  Insted, the focus is on office procedures and documentation of procedures.  In a few cases, the  Service's Criminal Investigation Division has been involved.

About a week ago (Jan 13), I noted how a New Jersey Court permitted Bank of America to proceed with a foreclosure even though BoA couldn't produce the mortgage document.  The Court wanted to prevent unjust enrichment of the borrower.

It's not all good news for the banks, though.  The Appellate Divison has now ruled against Deutche Bank in another case where the lender couldn't produce the mortgage documents. Deutsche Bank submitted an affidavit confirming the assignment of the mortgage to the bank. This time court looked at the statutory requirements and determined that Deutsche Bank hadn't provided the required documentation with its affidavit, and that the borrower hadn't been given the opportunity for discovery.

The Appellate Divisoin didn't stop the foreclosure, though.  They sent the case back to the trial court with instructions to resolve the factual question of whether Deutsche Bank had received an assignment of the mortgage.

The case is Deutche Bank National Trust Co. v. Wilson (App. Div., 34-2-0170).  The case is not approved for publication.

There's a lot of handwringing about how the cost of state worker pensions is going to bankrupt the states.  But are state worker pensions really "too generous"?

Let's start with irresponsible funding.  If the state skips a $1 billion pension contribution in 1995 to balance the budget without raising taxes, that state has to put $2 billion into the plan in 2010 to even out for the lost earnings at 5%.  So the state government doubled the cost of the pension all by itself.

And over the last couple of years, state pension funds have taken huge hits on their investment base.  The states now have to make up those losses.  That isn't their fault either.

If we stop scapegoating state workers based on a few highly publicized scandals, perhaps we can figure out a way to solve the problem.

In a Wall Street Journal op-ed today, President Obama announced a review of federal regulations aimed at eliminating regulations that hinder business and job creation.

At the same time, the Commodities Futures Trading Corporation and the Securities and Exchange Commission have missed or postponed deadlines for writing regulations under the Dodd-Frank Act that reformed the financial industry.  And the Financial Stability Oversight Council is about the consider the "Volcker Rule", which would control risky trading by banks.

In his 1955 comic classic The Court Jester, Danny Kaye's enemy is trying to poison him.  His friends warn him not to drink from "the vessel with the pestle". Of course, someone breaks the vessel with the pestel, and now the pellet with the poison is in the flagon with the dragon.  Or is it?  You can watch the whole thing here: http://dagsrule.com/pestle.html.

The Delaware Courts are about to play out their own version of this classic bit.  Airproducts and Chemical's, Inc. launched a hostile takeover of Airgas, Inc. in February, 2010.  Airgas has a poison pill in place -- a stockholder rights plan that is designed to increase the cost of the acquisition to an unsustainable level.  The Airgas Board of Directors, which is controlled by the founder, is refusing to drop it.

Marty Lipton, a legendary corporate lawyer, invented the poison pill in 1982, when corporate raiders strode the land and management shivered at the first sound of their approach.  The Delaware court approved it three years later, buying Lipton's argument that it forced the buyer to negotiate with the Board, which represented all shareholders, instead of cutting individual deals with major shareholders.

Now the scenario is that the shareholders want to to sell, but the Board won't drop the poison pill so the sale can go through.  The shareholders are asking the Court to cancel the poison pill, arguing that it served its purpose and can't be used indefinitely to entrench management against the will of the shareholders.  Airgas claims it only takes 1/3 of the shareholders to call a special meeting to remove directors, so the shareholders haven't been harmed.

Marty Lipton, of course, is representing Airgas - and the poison pill he invented nearly thirty years ago.

Daniel "Tiger" Schulmann runs a chain of corporate owned and franchised karate schools.  His management company pays a commission to any instructor whose student opens a Tiger Schulmann school.

In 2000, 2001 and 2002, Schulmann paid the commissions himself, and deducted them on his New Jersey income tax return against his S Corporation income from the schools and management company.  The New Jersey Tax Court ruled that the commissions were corporate expenses that Schulmann could not claim personally.  Even if he could claim them personally, New Jersey law doesn't let him deduct his expenses against his S Corporation income.

Sculmann v. Dir., Div. of Taxation (NJ Tax Ct., 11/9/2010)

The new Chairman of the House Ways and Means Committee -- Dave Kamp (R-MI)-- has announced that his Committee will hold its first hearing on tax reform on January 20. Kamp said:  "The tax code should collect the revenue the government needs as efficiently as possible. It should not be a tool of industrial policy."

Fair enough.  But has Rep Kamp spoken to the new Republican Governor of Michigan - Rick Snyder - lately?  Michigan's tax on corporations starts with federal taxable income.  So if he re-writes the federal tax code, he is re-writing Michigan's tax code at the same time.  Is he sure Gov. Snyder and the Michigan legistature want to get into that? And Michigan is certainly interested in industrial policy.

I think this is the real reason why tax reform fails every time. As many as 37 states base their individual or corporate income taxes on the federal system.  They aren't interested in re-writing their own tax laws to deal with a federal re-write.

So we wish Rep. Kamp the best of luck.

Treasury is also working with ADP on a program to encourage taxpayers to choose direct deposit.

For more information on this program, go to myaccountcard.gov.

The IRS is going to invite 600,000 taxpayers to have their 2010 federal tax refund deposited onto a prepaid debit cards managed by Bonneville Bank.  The cards will be funded by Treasury and State governments under the direct deposit programs, so refunds will be made faster.  Taxpayers can access the cash without charge at VISA network ATMs, and enjoy the typical consumer protections for debit cards.

Treasury says the program is intended to help taxpayers who don't have access to traditional banking, and have to use expensive alternatives to cash tax refund checks (such as check cashing services).  Taxpayers will be offered cards that are or are not linked to savings accounts, and with or without a $4.95 monthly fee. Taxpayers will not be able to choose the card.  Treasury did not explain why a card with a $4.95 monthly fee  is a better alternative for taxpayers.

Treasury also didn't explain what will happen to balances taxpayer's don't access.  I've seen a statistic that suggests that up to 40% of debit cards are lost or otherwise not used for the full balance.

But it's not as bad as the prepaid Kardashian debit card, which was pulled from the market in its first week when business writers exposed just how bad that deal was.

Bank of America acquired Washington Mutual Savings Bank when WAMU collapsed under the weight of bad mortgage lending.  Now Bank of America is foreclosing on some of the properties securing those loans.

When BoA tried to foreclose against Alvarado, he discovered that WAMU (not BoA) had lost the mortgage note, which we have learned is not an uncommon set of facts.  Chancery Court in Bergen County held that BoA could enforce the note it didn't have to prevent the "unjust enrichment" of the borrower.

Meanwhile, probably the only group with worse press than mortgage lenders are the Wall Street firms who bought the mortgage securities and lost their shirt.  So far, they haven't had much success suing to recover losses.  Looking for another avenue of attack, The Washington Post reports that the Association of Mortgage Investors has released a white paper with its idea of an acceptable settlement to the investigations underway into the mortgage mess by the 50 state attorney's general. The Association wants improvements in procedures and transparancy by the servicing companies.(http://www.washingtonpost.com/wp-dyn/content/article/2011/01/12/AR2011011205564.html)

Investor lawsuits are considered to bigger threat to the banks, with claims against the banks estimated to be as much as $120 billion.

The Internal Revenue Service released Rev. Proc. 2011-14 on January 10, 2011, a 325 page document explaining the rules for making "automatic" accounting changes. 

Under the law, a taxpayer can't change its accounting method without consent (read "approval") from the IRS.  But, there are a non-controversial changes for which the IRS will automatically grant consent if the taxpayer follows specific rules.

The changes are effective January 10,2011, for years ending on or after January 10, 2011.  That's IRS speak for "immediately".

If you have the time, you can find a copy of Rev. Proc. 2011-14 on the IRS website, at http://www.irs.gov/pub/irs-drop/rp-11-14.pdf.

On December 20, 2010, Mercer County General Equity Judge Mary Jacobson issued an order to show cause why uncontested mortgage foreclosures in New Jersey should not be suspended.  Jacobson was named chief of the Office of Foreclosure by the Chief Justice.  The Office reviews all uncontested foreclosures in the state.

Six banks implicated in last year's "robo-signing"scandal responded last week, filing papers to show revised procedures and claiming that the suspension would be detrimental to the public.  An additional 24 banks must respond by February 3,2011.

Jacobson's order was accompanied by proposed rules requiring new affadavits of compliance to be submitted with foreclosure applications.

The order appointed Ed Dauber, of Greenberg, Dauber, Epstein and Tucker in Newark, to respond to the lenders and argue for the suspension.

I took a break from posting over the holiday season, but it's time to get back to work.

Perhaps the best indication of an almost overnight shift in the reactoins to the tax compromise is today's New York Times op-ed page.  At the top of the page, Paul Krugman (liberal) grudgingly acknowledges the good parts of the tax compromise,  He shifts his objections to the timing of the renewed tax cuts -- the 2012 election year.  At the bottom of the page, David Brooks (conservative) explains how the President has postioned himself for further compromises with the Republicans without sacrificing his primary principles.

Who's right?  Who knows!  What's important is that the discussion has changed. Yesterday, the House Democrats voted against the compromise, although there is no bill for the to vote against.  At the same time, a minor procedural vote related to the compromise passed the Senate 65-17, signalling broad support in that chamber.  Now the chattering class is beginning to move towards the center, and it seems likely the compromise will eventually pass.

And for all of the complaints about the President's negotiating style, while Congress and the pundits are catching up to him he seized control of the coming election year fight over the tax code for the next two years.  The front page of this morning's NYT reports that the White House is looking at an overhaul of the federal income tax system based on eliminating deductions (simplification) and reducing rates.  Any such "reform" necessarily picks winners and losers, so the question will be what's left after the lobbyist's get rhough with everything.

Interestingly, business lobbyists are once again pointing to the complexity of the tax code and the cost of compliance as competitive disadvantages. This position is disingenous, to say the least, as much of the complexity was introduced by Congress reacting to businesses shaping transactions to get around the tax code.

The real test will come when and if a bill picks winners and losers. When businesses are asked to give up specific tax advantages in the code, we'll see whether they still think complexity is a competitive disadvantage.

Reaction to the tax compromise was swift and all over the map.

The left wing of Congressional Democrats is in close to open revolt while moderates try to explain that extending the tax rates for high income taxpayers was the cost of getting a second stimulus bill.  It is by no means clear that Democrats have the votes to pass the compromise in the House or the Senate.

Republicans, meanwhile, are keeping their promise to block all legislation until the tax compromise passes.  At the same time, they are facing dissent from the right wing, and it is not clear if they can provide enough votes in the House or Senate to overcome likely Democratic defections.

Still, common wisdom is that the compromise will pass, but that getting there will be uglier than health care reform.

Why will it pass?  Because the Democrats need the stimulus aspects of the compromise to avoid a second sweep in the 2012 election.

Why are Democrats angry?  The shouting is about the President's negotiating style, which the left wing calls "caving".  They may have a point, but it misses reality.  The Democrats are victims of believing their own press.

The 2008 election did not give Democrats the much reported "filibuster proof" Senate.  To get to 60, the Democrats had to count Conservative Democrats from red states (the obvious example is Ben Nelson, D-NB), a Socialist from Vermont, and an idependent from Connecticut who was elected as an independent with Republican financial support after losing the Democratic primary to a left wing insurgent.  Then there were the Senators who traded votes for constituent benefits (Ben Nelson, again, and Mary Landrieu (D-LA) are the two best known).

Hardly filibuster proof.  But the left wing believed the press and, after eight years of the Bush administration, had developed a case of exuberant overexpectations.  Rather than deal with the facts, many liberals are blaming the President for what they see are lost opportunities.  There is even talk of a primary challenge to the President from the left - sort of like Teddy Kennedy and Jimmy Carter in 1980, but without any chance of success.

Not that the Republicans are much better off.

President Obama and the Republican leadership have agreed on a compromise which would extend the Bush era tax cuts for two years for all taxpayers.  Not getting as much publicity is that a number of Obama's tax cuts will also be extended, and there will be a 2% reduction in Social Security taxes for 1 year.

The compromise is for legislation to be submitted for a vote in both Houses.  We are already seeing some pushback from the liberal wing of the Democratic party, but it isn't clear if they have the votes to do anything.  The "Tea Party Wing" of the Republican party hasn't been heard from yet, although the entire cost of the compromise is unfunded.

This article by Kate Pickert in Time.com's Swampland blog makes an interesting point.  http://swampland.blogs.time.com/2010/11/30/what-the-1099-logjam-says-about-the-future-of-health-reform/#more-36117

Basically, Democrats and Republican's both want to repeal the increased 1099 reporting that is included in the Health Care Reform Act (HCRA).  But yesterday both a Democratic repeal proposal and a Republican repeal proposal.  Both apparantly failed because they didn't provide offsets for the estimated revenue loss from repeal.

The HCRA overall is projected to reduce the deficit. Many of the most reviled provisions are specifically deficit friendly (1099 reporting, Medicare cuts).  If Congress can't repeal a provision both sides want to repeal, can they modify provisions on which they do not agree?

The Tea Party opposition to HCRA has been a little disjointed (remember "Keep the government out of Medicare"?).  But the Tea Party is opposed.  Is it possible, though, that the far greater impact of the Tea Party on deficit reduction will make it impossible to change HCRA?

President Obama met with the Republican leadership at the White House to discuss legislative goals. The practical result was a working group to be led by Treasury Secretary Giethner to work with both sides.

Although everyone was trying to move away from the overheated campaign rhetoric, from their press statements you might think they attended different meetings.  Still, the smart money in Washington has concluded that Congress will pass and the President will sign a set of  two year tax extenders for everyone, including the high end taxpayers.  The working group is only providing political cover.

they actually get it.

A CNBC poll reported that roughly 2/3 of Americans think taxes will have to be raised to fix the deficit.  And nearly 80% think services will have to be cut.

But the devil is in the details.  Almost 6 out of 10 want services cut first, and 3 out of ten thinks taxes should be raised first.  54% think the burden should be shared equally, and 38% think the rich should pay more.

About half are willing to trade the mortgage interest deduction for lower tax rates, and there is broad support for reducing the fedeal workforce and freezing their salaries.

Perhaps the most interesting result is the central tax battle of the lame duck Congress.  Half of Americans think the Bush tax cuts should expire.  Another 14% think they should expire for those with higher incomes (more than $250K per year).  Only a third think the cuts should continue for everyone.

Both Republican and Democratic proposals to repeal the new 1099 rules came up for votes in the Senate yesterday.  Incredibly, with both parties agreeing that the rules change has to be repealed, neither proposal got enough votes to pass.

Democrats and Republicans are working on a compromise bill, and are expected to try again.

As Congress maneuvers to address tax laws that expire on December 31 (mostly in place since 2001, but some added in the last two years), the public relations battle has begun in earnest.

On the Sunday Warren Buffet weighed in on ABC in favor of letting the cuts expire for wealthier taxpayers http://www.bloomberg.com/news/2010-11-21/warren-buffett-tells-abc-rich-people-should-pay-more-in-taxes.html

A group calling themselves Patriotic Millionaires for Fiscal Strength have sent a letter to President Obama supporting letting the tax cuts expire for those with more than $1 million of taxable income. http://www.accountingtoday.com/news/Millionaires-Offer-Let-Bush-Tax-Cuts-Expire-56398-1.html

Meanwhile, without guidance from Congress on how this all ends up, the IRS is delaying issuing tax withholding tables for 2011.  These tables are normally published in mid-November, but now seem unlikely to see the light of day before mid-January if Congress acts in December.  http://www.smartbrief.com/news/cpa/storyDetails.jsp?issueid=181F0D14-B78E-42A4-AB10-935FFBA1F640©id=6D2DD24F-75A7-4A4C-8395-4B2048C6E594&sid=a7e96186-79a3-4fd9-8a52-4e605dfc0c41&brief=cpa

Common wisdom says Congress will act in December, but it's a high stakes game of "chicken" as Republicans hold out for making all of the "Bush" cuts (but, so far, not the "Obama" cuts passed in 2009 and 2010) permanent, and Democrats want to limit the extension to the middle-class (however that's defined).  The Democrats lose control of the House in January, and will have a much tougher time getting what they want if they don't act now.

One of the revenue raisers in the Health Care reform legislation was a new requirement that all business taxpayers send a Form 1099 to every vendor to whom they pay $600 or more for goods and services.  Before this change, Form 1099 was not required for sales of tangible property, and were only sent to certain kinds of taxpayers.

There's been a sustained outcry about the cost and administrative burden of this position.  A letter in this week's Acoounting Today points out that almost nobody reconciles the 1099's they receive to gross revenues, so the burden is only on sending them out.  Of course, there is also a potential burden on taxpayers who have not reported all of their income -- but it's kindof hard to have sympathy for this group.

Sen Max Buacus (D-MT), Chair of the Senate Finance Committee, announced on Friday that he would introduce legislation to repeal this requirement.  He did not say where he would find revenue offsets.

Form 1099 must be mailed to the payee by January 31, 2011, and filed with the IRS by February 28, 2011.  Given the short timeframe, taxpayers are well advised to continue making plans to comply with 1099 rules - primarily rounding up taxpayer identification numbers and mailing addresses from vendors.

During his campaign, President Obama promised to not raise taxes on Americans with less than $250,000 of taxable income.  Going into the 2010 midterms, he repeated that promise.  But the Republican message in the midterms was that the existing tax structure should be maintained for all taxpayers, not just those under $250,000.

Given the results of the 2010 midterms, a clash was inevitable.  Yesterday, David Axelrod, White House Senior Advisor, told the Huffington Post that the White House was open to negotiations on extending the existing tax laws for all taxpayers.  The White House is looking at a temporary extension as the less than perfect alternative to a permanent extension of the entire package.

For more details, go to: http://www.huffingtonpost.com/2010/11/10/white-house-gives-in-on-bush-tax-cuts_n_781992.html

For a list of the tax provisions expiring on December 31, 2010, go to my monthly newsletter at http://www.rgpcpa.com/page.jsp?content=Monthly-Newsletter&decider=rgprice

Some TV shows have picked up on the December 31, 2010 date to opine that Congress will have to act on extenders by that date.  Why is this important?  Until then, Democrats still have majority in the House and 60 seats in the Senate, so Democrats control whatever is going to happen.

Reality is a bit difference.  There is nothing to stop the 111th Congress from passing a retroactive extender bill in January.  It's already too late to print forms and instructions in time for the annual mailing to taxpayers. 

And the Democratic supermajority in the Senate was always a media invention (See Ben Nelson, D-NE).

The Democrats want to pass an extender while they are still in charge.  It's just not as easy as people think.

The election is over.  Republicans now have a majority in the House of Representatives, and the Democrats have less of a majority in the Senate. This seems like a good time to start blogging.

But both sides seem to be in disarray   Democrats are stunned by the level of loss. After spending the last two years talking about the civil war in the Republican Party, house Democrats now face a real possibility of a civil war of their own.

In the House, Nancy Pelosi has announced she is running for minority leader.  At least one conservative Democrat has announced he will run against her.  With Pelosi running for Minority Leader, Steny Hoyer and Jim Clyburn are fighting for Minority Whip, the only remaining leadership post.

Although the Democrats still control the Senate, the mid-term losses mean that more of them are Democratic Senators from Conservative states.  Two members of the Democratic majority are not even Democrats --Lieberman is an independent and Sanders is a Socialist.

And it remains to be seen how the 21 Democrats facing voters in 2012 will position themselves for the election.

In the Republican caucuses, the membership is now far more conservative.  But with only the House of Representatives in their hands, it will be very difficult for them to deliver on their campaign promises.  At the same time, it is not clear how the Tea Party wing of the Replican party will react if the Republicans try to work with the Democratic majority in the Senate.

It should be an interesting two years.

Welcome to "Behind the Tree"!

I've been reading political, financial and legal blogs for a number of years, and decided to try one myself.  Obviously, I'll be focusing on tax matters, but that will inevitably lead me into politics and business, so let's say I'll be writing about whatever interests me.

I'll try to post at least once a day, but we'll see how it goes.