Did your client get a strange 1099G?

Several taxpayers received a 2016 1099G for 2014 returns that were timely filed in 2015. Normally, the 1099G would have reported the refund in 2015 because the return was timely filed and the refund processed in 2015. The problem involves returns filed at or before the extended due date of the 2014 individual return.

If your client had a 2014 overpayment applied to 2015 estimated tax and received a 1099G reporting the refund in 2016, contact the tax practitioner hotline at (916) 845-7057 and the 1099G can be manually corrected.

Check 1099G information using MyFTB if your client did not bring a 1099G but filed a 2014 return in October 2015 and applied the refund to 2015 estimated tax. If the problem is not corrected, you could receive a CP 2000 from the IRS if it’s not reported on the 2016 return.

We will have more information in the March 1 issue of Spidell's California Taxletter®.

One flew over the cuckoo's nest ... and into the nut factory

A tax protestor's criminal conviction was quickly, and hilariously, upheld by the Court of Appeals for the Seventh Circuit when it ended his "multi-year, obstreperous campaign to impede IRS collection efforts."1 Leading up to and during the course of Scott Bodley's case and appeal, he undertook the following:

  • Sent the IRS fake money orders totaling over $70 million;
  • Filed 58 fraudulent tax returns in a single year;
  • Claimed that then-Treasury Secretary Henry Paulson was his fiduciary;
  • Submitted $2.8 million in fake bonded promissory notes as "tax payments" for other delinquent taxpayers (whom he charges for his "services");
  • Filed false IRS forms purporting to document $70 million in unreported income received by IRS employees;
  • Threatened a federal judge, federal prosecutor, and IRS employees;
  • Represented himself in a three-day trial after firing two attorneys appointed to represent him after they refused to answer his 52-question "Voir Dire for Attorney";
  • Argued that the appellate court was required to overturn his 26 convictions because the trial court transcripts were lost, even though the court's official record contained the full transcripts;
  • Alleged federal judges and prosecutors collude to obtain convictions in tax prosecutions because they receive a $40,000 bounty for each person convicted;
  • Claimed that the district court judge erred by refusing his request for the personal financial records from each government employee involved in his prosecution in order to prove the collusion; and
  • Argued that the attorney that was appointed as his standby counsel provided ineffective assistance, requiring him "to do battle alone and unarmed," to which the court noted that when a defendant exercises his Sixth Amendment right to represent himself, he does not have the right to standby counsel, let alone effective standby counsel.

And, the tax protestor of the year award goes to ...

1 U.S. v. Bodley (February 3, 2017) United States Court of Appeals for the Seventh Circuit, Case No. 15-2052

Is a pot pie taxable?

This question was at the heart of a recent Board hearing involving the assessment of over $50,000 against a taxpayer for failing to collect and pay sales tax on sales of its hot pot pies.1 The taxpayer claimed she did her best to comply, including going to the BOE office twice to apply for a sales tax permit but was told by BOE staff that she didn't need one because the sale of the pot pies wasn't taxable.

At the hearing, the Board asked questions about the taxation of the pies — and here's where the absurdity of the law is obvious. BOE staff presented the following information on the taxability of pot pies. The italicized items are paraphrased questions the Board members raised.

  • Food items sold to go are not taxable unless they are hot items or there is seating in the establishment (There was no seating in the Pastry Shop, but customers were told that there was seating in the Yogurt Shop, owned by the same company next door .... Does this count?)
  • Bakery items are nontaxable even if hot when sold (Was the pot pie a bakery item?)
  • Whether an item is a nontaxable bakery item or a taxable hot meal depends on the taxpayer's intent, so that if meat and vegetables are added to the pot pie it can be presumed that the taxpayer presumed to sell a taxable hot meal rather than a nontaxable bakery item. (But what if just spinach is added? Or bacon bits with cheese?)

At this point, the majority of the Board members essentially said that they believed that the taxpayer made every effort to comply. In addition to her trips to the BOE office, she had faxed a written request to the BOE and received a written response (based on her sworn testimony) that she should be relieved from paying the tax and related interest.

1 Appeal of Green Apple, Inc. (January 25, 2017) Cal. St. Bd. of Equal., Case Nos. 669807 and 669808

Let's get QuizziCAL: Health insurance for S corporation shareholders

Here's a stumper for you … click below to reveal the answer.

Your client's S corporation, Clean Canines, sells their customers ultrasonic machines to clean the tartar off of dog teeth. Dogs love the spraying water and are so happy they're not under general anesthesia. Owners are gratified that their veterinarian bill, which can skyrocket for the pre-anesthetic blood workup, general cleaning, "complicated" extractions, pain killers, and antibiotics, goes from at least $500 to $0.

Your client is the sole shareholder in the corporation, which pays her health insurance premiums pursuant to the S corporation's plan. Which choice correctly reflects how the payments play out for state and federal tax purposes?

  1. The premiums may be excluded from a shareholder's gross income under IRC §106
  2. The payments are considered additional compensation and are reported on Schedule K-1
  3. Because the payments are made under a plan for S corporation employees, the amount is subject to income tax withholding and federal or California employment taxes
  4. The shareholder may offset the additional compensation by taking an above-the-line self- employed health insurance deduction on her personal tax return

A few fun facts about this week's writers:

Lynn Freer, EALynn Freer, EA, is a French literature major, so of course her favorite vacation destination is France. Here she is dining on mussels and fish stew near Nice.
My last meal would be: Steak frites

Diane FullerDiane Fuller is a woman of many talents which include writing children's poetry, taking unwitting challengers to town in poker, and whipping up Michelin-worthy dishes from scratch. Find her laughing with her two grandkids.
My last meal would be: Linguine and clams in a white wine sauce

Mike Giangrande, J.D., LL.M.Mike Giangrande, J.D., LL.M., is the newest member of our Tribune family. An Orange County native, find him doing some backyard gardening, playing with his 3 kids, or daydreaming about tee-time while he's answering Message Board questions.
My last meal would be: Breakfast burrito and ice cream

Sandy Weiner, J.D.Sandy Weiner, J.D., as California editor, loves all things California. Whether it's hiking at Big Sur or playing at the beach in San Diego where she lives, Sandy takes full advantage of all that California has to offer as a way to clear her head after trying to comprehend and explain California's Revenue & Taxation Code.
My last meal would be: Crab legs with a side of artichokes

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