Johnnie owned a convenience store. As a cash and carry business and due to his laxadasical bookkeeping and long hours running the store Johnnie was unable to get his taxes done for 2007. Inertia set in and he didn’t get them done for 2008. In early 2009, he got a letter from the IRS asking for his tax return as did his wife Barbara. In order to fund the business, she closed down her 401(k) plan and took out $100,000 from which $20,000 was withheld. She is 35 years old. She also had income from her employer of $100,000 for which she had federal withholdings of $13,000. She and Johnnie had a mortgage on the house for which they paid $15,000 in interest in 2007 and real estate taxes of $3,000. They have a child together, Rhonda, age 10 who lives with them in their home. Johnnie sees the letters from IRS and takes them to his store, not wanting to disturb Barbara. A few months go by and a certified mail notice comes to the house from the IRS. They have computed he amount due from Barbara to be $50,000 and sent her a bill for $17,000 plus interest and non-filing penalties of another $12,000. They computed no tax for Johnnie since he had no income on the books. Barbara was livid. She and Johnnie went to an accountant and the accountant laid out what he needed from Johnnie and Barbara to prepare a return for 2007, knowing that 2008 still needed to be prepared as well. Johnnie pulled all the cash register receipts and pay stubs (luckily he had been paying the payroll and sales taxes) so he had those records to work from. After a couple of weeks a return was prepared. It showed that instead of owing $17,000 that they only owed $15,000, but with penalties and interest it would be another $11,000 or so. Of course they didn’t have the money. A joint amended return was filed for 2007. After a few months a bill was generated by the IRS showing the amount due to be $24,000. Their accountant had at that point prepared a joint 2008 return showing income tax due for them of $12,000 plus interest and late filing penalties of $6,000. So, they owed $42,000 total to IRS. Their house was under water. The got that bill and called IRS to see what they could do.
Collections
In a struggling economy it is not surprising that taxpayers get caught short sometimes regarding their taxes. We have already dealt at length in the past with “trust fund” penalties and the problems with those. We are now going to discuss the average taxpayer who finds himself or herself on the short end of straw in collections. The first step should always be to file all returns that are due regardless of whether you can pay. The IRS cannot entertain any collection alternatives until you are compliant. Further, if this gets to bankruptcy, dischargeability may focus on whether a return was filed or not. So, always file the return and then figure out how to pay. This reduces penalties assessed and allows for a meaningful discussion early on. The same goes for state income taxes. Further it is a crime to not file tax returns. If the IRS prepared a return for you (called a substitute for return), you’ll have to file an amended return (Form 1040X). What do you do next? Stay tuned.
$20 Billion and the Fishermen
A number of news sources are reporting that while BP has been trying to work with fishermen regarding their losses, lack of business records is a complication. And the most glaring complication is the lack of tax returns. There is a price for not complying with the law and one of them is getting caught short when you have a claim for loss of income. The easiest form to use would be a tax return. But when you don’t prepare one or file one, guess what, then you have to try and reconstruct your income after the fact from trip tickets and other pieces. Also, workers who might have claims but got paid under the table don’t have tax returns to justify their income. This points out a real problem in this Country. Compliance. People who are off the grid. This also complicates issues such as health care and social security, when these folks are not contributing to the system, but when they get old and sick, they will be funded by taxpayer dollars. While I feel for these folks and their families, I hope this points out the need to come in out of the cold. The other sad fact is that when they apply for benefits from the government fund, there is no doubt that information will be passed along to IRS who will probably be flocking with agents to the Gulf Coast. If its not, the Treasury Department which is handing out all these checks will find itself with a mild internal issue to say the least.
Following up on the Yankees
Let’s assume that the Steinbrenner estate was properly planned. What would that have entailed? (1) Delaware situs trusts. Delaware law permits unlimited term “dynasty trusts”. This would permit a Trust to be formed which would last forever. What would be the tax implications of that. No transfer tax until George Steinbrenner’s grandchildren die. That means that the Yankees would be in the family for two generations without estate or GST tax. That means that as long as the team is kept in the family, the team, the stadium, and the YES network all stay in the family. Further, suppose that the YES network gets spun off down the road, so long as the family gets stock from the takeover candidate that transaction is tax free until they cash in the stock. So, for example if FOX bought the YES network and gave NEWSCO stock to the trustees, the transaction would not be taxed. Further even if the team were sold, it could be sold in a tax deferred way to increase cash flow to the beneficiaries. This is a decision for the family, not constrained by taxes or charitable trustees. (2) The Trust would provide that family members serve on the mandatory investment advisory board or as investment trustees. This would avoid implication that the trust is a NY situs trust, while maintaining their control over investment decisions. (3) The trust would provide for sprinkling of income among generations in the Trustee’s discretion. This would permit spendthrift protection for the trust should one of the beneficiaries marry badly or get sued.
Two Owners Two Different Results
As reported in the news, the iconic owner of the New York Yankees, George Steinbrenner died on July 12, 2010. Because he died in 2010, his wealth and the New York Yankees get to stay in his family without the payment of any estate tax. On April 6, 1997, Jack Kent Cooke passed away. He was a very wealthy man, reputed to be in the billions of dollars. He also owned the Washington Redskins, who during his ownership won three Super Bowls. In order to avoid the crippling nature of the estate tax and in an attempt to keep the Washington Redskins under control of his son, John, Mr. Cooke placed the bulk of his estate in a charitable foundation. Because the team was worth a reported $800 Million dollars and needed an owner per the NFL rules, it had to be sold. John Cooke and Dan Snyder each bid on the team. Snyder’s bid was higher and the Trustees had to accept his bid despite their love for the Cooke family.
Let’s look at the facts, Jack Kent Cooke by all indications wanted his son to own the Redskins and used a tax advantaged method to get it to him. George Steinbrenner due to timing of his death will if his estate was properly planned be able to leave the New York Yankees in his family without estate tax or generation skipping tax for two generations. This means that there will probably be a Steinbrenner running the Yankees for the rest of my life and the lives of anyone reading this blog. The Redskins are now owned by Dan Snyder, not John Cooke. A simple twist of fate and tax.