Taxing Corporate Political Expenditures

Introduction

The Supreme Court decision Citizens United v. Federal Election Commission opened the floodgates for corporations to buy politicians and overwhelm our elections with campaign contributions.
Here are creative ways Congress might use the tax code to stymie the effort:

Expenditures

Political expenditures are never tax-deductible; therefore, after-tax dollars must be used. Although the Supreme Court’s decision treats corporations as individuals for First Amendment (free speech) purposes, corporations act through officers and directors.

Congress could treat political expenditures as either additional taxable compensation (salary) or dividends to those who authorize the expenditures.

Shareholders

Congress could require shareholder approval for political expenditures and if they agreed, the payments would be considered taxable shareholder dividends.

A separate box on Form 1099 DIV would state the amount, with a warning that these expenses are not tax-deductible.

Conclusion

The tax code can be an effective weapon against unlimited corporate campaign spending. By requiring a shareholder vote and treating any funds expended as taxable shareholder dividends, Congress will effectively create turmoil within the company, thereby scaling back a potential corporate take-over of our election process.

Kill Grandma? 2010 and Estate Tax Repeal

Introduction

Congress failed to renew the estate tax and, as of January 1st, it is repealed. Will greedy heirs pull the plug on their parents and grandparents?

Will the life insurance industry experience a sudden spike in claims? Will Congress retroactively reinstate the estate tax? Who knows?

Estate Tax Repeal

For 2010, the estate tax is eliminated. In 2009, it applied to estates of more than $3.5 million ($7.0 million for couples). The President supports the 2009 exemption, but so far, Congress has failed to act.

Watch out: In 2011, the tax comes back with a vengeance, hitting estates worth more than $1.0 million, a potential disaster for many taxpayers with modest estates.

Capital Gains Tax

The new law’s dirty secret: A capital gains tax has been substituted for the estate tax. For example, if a decedent purchased 1,000 shares of stock at $1.00/share now worth $125/share at death, a later sale for $125/share produces $124,000 in capital gains. Under the old rules, an heir inheriting stock at $125/share paid capital gains tax on gains above $125/share.

Note: Complicated procedures may provide some relief. See: my Hot Topics Article for details.

Conclusion

Repealing the estate tax and substituting a convoluted capital gains tax makes no sense. A permanent exemption of $3.5 million, indexed for inflation, with a maximum rate of 40-45%, should be enacted.

Let’s see if Congress will make it a reality and calm the fears of wealthy seniors with money-grubbing heirs.

Governator’s Tax Lien

Introduction

In May, IRS slapped California Governor Arnold Schwarzenegger with a $79,000 tax lien for failing to pay penalties assessed against him during 2004 and 2005.

Note: In October, IRS filed a lien against another politician, Oakland Mayor Ron Dellums, for $240,000 in delinquent income taxes during 2006 and 2007.

Tax Lien

An IRS tax lien attaches to all assets and usually ruins one’s credit score, since no rational lender will extend credit when the government has a blanket claim against all assets owned by a taxpayer. IRS may then levy (forcibly collect) and sell the assets to pay tax debts without first suing in court

Appeal

Once IRS files a tax lien, a taxpayer receives notice of appeal rights. If a taxpayer files an appeal within 30 days, IRS generally suspends collection until the process is completed
Evidently Schwarzenegger disregarded the appeal process, resulting in the tax lien.

Tax Penalty

Schwarzenegger was assessed penalties under IRC Sec. 6721, failure to file information returns (typically W-2 or Form 1099), a $50 penalty for each delinquency. Judging by the size of the fine, the failure must have involved thousands of employees or independent contractors

He probably was listed as the “responsible person” for several major business or investment ventures.

Conclusion:

While the Govenator’s spin-doctors claim that the tax lien did not involve income taxes, he must have ignored the series of escalating IRS warnings that preceded the filing.

Perhaps, Schwarzenegger was not legally responsible, but he should have appealed. Then, IRS would have to establish that he was indeed responsible. Instead, he chose to blow-off IRS, which is often a bad idea.