Vested interest. Accountants of a certain age know well the name H.D. Vest. Back in the early 1990s every little accounting firm, including ours, regularly got letters from HD Vest telling us of the wonderful opportunities awaiting us as little stockbrokers. I was never sold, but lots of small practitioners signed up. Wikipedia tells the story:
HD Vest was founded by Herbie Darwin Vest in 1983.[2] Herb Vest, a Certified Public Accountant, had started his own public accounting firm in 1973. He started offering investment planning services and selling of securities on a commission basis in 1979. In 1983, he established the SEC-registered securities broker-dealer firm H.D. Vest Investment Securities, Inc. He established a network of accountant and brokers. H.D. Vest successfully challenged the AICPA code, which prohibited accountants from accepting commissions.[3]
In December 1986, Herb Vest established “H.D. Vest, Inc.”, which acquired the H.D. Vest Investment Securities, Inc.” in 1987. The company went public in July 1988.
So fame and fortune found this pioneer in expanding CPA business into investment advising. But amidst the success, a cloud of tragedy lurked. This story was told yesterday in Tax Court by Judge Lauber (“Petitioner” is Mr. Vest):
In 1946, when petitioner was two years old, his father was found hanging by the neck in the bathroom of his shop in Gainesville, Texas. The death was originally ruled a suicide. In 2003 petitioner received an anonymous letter asserting that unidentified residents of Gainesville had murdered his father and staged it to look like a suicide. Having realized a large gain on the sale of his business, petitioner had the means to devote significant time and resources to investigating the circumstances of his father’s death.
So how does this get to Tax Court?
Beginning in 2003 petitioner caused partnerships he controlled to pay at least $6.4 million to private investigators, forensic experts, morticians, and writers to assist him in solving this mystery and reporting the results.
Mr. Vest’s creativity didn’t end with his vision of turning CPAs into full-service financial professionals. He deducted the investigations as business expenses. Considering that the expenses helped lead him to bankruptcy court, according to the Tax Court, you can see why he’d give it a try to at least get a tax break out of it.
Long-time readers will see the problem that the IRS saw: you can only deduct business expenses if you are trying to make money. As the Tax Court explains (my emphasis, citations omitted):
To be entitled to deductions under this section, the taxpayer must show that he engaged in the activity with an actual and honest objective of making a profit. If an activity is not engaged in for profit, no deduction attributable to it is allowed except to the extent of gross income derived therefrom (reduced by deductions that would be allowable regardless of whether the activity was engaged in for profit). Thus, losses are not allowable for an activity that a taxpayer carries on primarily for sport, as a hobby, or for recreation.
Mr. Vest failed to convince the judge that this process had a profit motive:
Petitioner has never earned an annual profit from his homicide-related investigative activity. Indeed, petitioner did not generate a single dollar of revenue from this activity in any year from 2003 through 2010. Over that time, petitioner’s reported losses were continuous and substantial. This strongly suggests that he did not engage in this activity to make a profit.
…Before 2008 he engaged public relations professionals and hired a writer to produce a manuscript, but no further work on that manuscript was ever done. Although he devoted many hours to this project, he showed little interest in actually making it profitable. Rather, he pursued his investigation with no apparent concern about the magnitude of his losses or the future revenues he would have to generate in order to recoup those losses.
In considering whether there is a profit motive, the courts consider whether there are non-business motivations, and they found them here:
Petitioner had strong personal motives for conducting his activity, and the circumstances suggest that it was essentially a pastime…We conclude that petitioner’s investigative efforts were the product of a personal desire to uncover the cause of his father’s death, not an attempt to engage in a profitable business.
Decision for IRS. But how did the investigation come out?
In January 2006 one of his investigators wrote a report concluding that his father’s death had in fact been a homicide. The report found, however, that no plausible suspects among Gainesville residents could be identified; that no further leads existed; and that additional time spent investigating the homicide would not prove fruitful.
The moral? Few murders are solved four or five decades after they happen. And if you spend millions of dollars without coming close to generating revenue or making something to sell, convincing the IRS that you are trying to make money may be difficult.
Cite: Vest, T.C. Memo. 2016-187
Tony Nitti, Make A Loan, Don’t Get Repaid: What Are The Tax Consequences?:
It’s a story that’s as old as time itself: boy meets girl; girl loans boy $450K to fund the creation of a golf-themed comic strip; boy laughs his way all the way to the car dealership; boy loses girl, but keeps the cash.
Wait…what’s that you say? You’ve never heard story before? Well, trust me, it happens all the time, and it played out again this afternoon in Hatcher v. Commissioner, a case out of the Tax Court that reminds us of three undeniable truths:
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There’s nothing funny about a golf-themed comic strip,
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Never trust ANYONE who drives a Hummer, and
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Getting an ordinary bad debt deduction for a loan gone bad ain’t easy.
I don’t know about trusting Hummer drivers, but it is unwise to park next to them. Come for the tragic romance, stay for the lesson on non-business bad debts.
Lew Taishoff, LOVE OR MONEY. ” Though the $430K she parted with might have been for love, it wasn’t for business, and it didn’t go south in the right year, so Judge Lauber dumps her bad debt deduction…”
TaxGrrrl, Dozens Arrested In IRS Phone Scam Call Center Raids: “Reports from those involved in the latest arrests indicate that, with this particular network, the bogus calls had been made from as many as seven call centers outside of Mumbai for more than a year, netting around 10m rupees per day ($149,835.20 US), or nearly 700 times the average monthly wage for Indian workers.” We mentioned the raid yesterday.
Kay Bell, Indian officials raid U.S. telephone tax scam centers. “I’ve received six (so far) such IRS impersonator calls, although mine have been mechanical orders to pay up, not from a living, breathing crook.”
Jack Townsend, Creative But Unsuccessful 2255 Proceeding with Interesting, but Unproven, Allegations. “These proceedings are very common, particularly federal prisoners who have some time on their hands and can proceed pro se. Bertram proceeded pro se, but the petition reflects a lot of research and creativity.”
Donald Marron, Taxing carried interest just right (TaxVox):
If the fund generates $100 in long-term capital gains, managers get $20 and investors get $80. Under current practice, managers pay capital gains taxes, individual investors pay capital gains taxes, and endowments and other tax-exempt organizations pay nothing.
Many reformers, including President Obama, would tax carried interest as labor income while making no changes for investors. Under this partial reform, managers pay labor income rates on their $20, and investors pay capital gains taxes on their $80.
Under my full reform, managers would pay labor income taxes on their carry, as under the Obama plan. Investors, however, would pay capital gains taxes on all $100 of the fund’s gains and then deduct the $20 of carried interest from their ordinary income.
I’m unconvinced that this area needs any reform, but this is an important proposal that should improve the low quality of discussion of carried interest taxation.
The Hill, Iowa wind farm generates more tax credits than electricity:
The winners? Warren Buffett; MidAmerican Energy’s other investors; and Facebook, Microsoft, and Google—MidAmerican’s biggest customers, who will receive tax benefits of their own for using wind energy. The losers? Taxpayers and other ratepayers footing the bill.
Unfortunately, this is part of an ongoing trend in wind energy across the country. It’s not the demand for more electricity that’s driving construction, but rather the government’s preferential tax treatment and counterintuitive energy mandates.
It’s a terrific deal: mar the countryside with ugly and inefficient turbines so Warren can get taxpayer money. My thoughts here.
Joseph Henchman, Speaker Ryan Contemplates Procedural Tool to Push Tax Agenda and Repeal Obamacare; Nevada Governor Not Giving Up on Tax to Fund NFL-Ready Stadium; Massachusetts Legislators Say Marijuana Excise Tax Too Low. “Rep. Paul Ryan (R-WI) hinted that he maytry to push through a budget and tax agenda (and repeal of the Affordable Care Act) through the reconciliation process, which would bypass a threatened Senate filibuster but limit the duration of the law to ten years. (Politico)”
TaxProf, The IRS Scandal, Day 1247
Stuart Gibson, The Pound Is Going to the Dogs (Tax Analysts Blog). “No prudent business would invest millions of pounds building a facility or locating a company in Britain without a strong indication that it would have access to the European single market after a Brexit.”
Dylan Grundman, A Closer Look: New Jersey’s Tax Deal Increases Overall Taxes on Middle-Income New Jerseyans (Tax Justice Blog)
Career Corner. Negotiating Salary with one Big 4 to Another (“Jill,” Going Concern). “Taking the 9K pay cut would force me to adjust my budget slightly but I value my happiness over being miserable at my current position and I know I would enjoy this job.”
