Re: IRS's Multi-Billion Flimflam: "Double or Nothing" Taxation of Tax Refunds

Richard Macdonald wrote:
> <KEBSCHULLW@xxxxxxx> wrote in message
> news:1125445961.566322.256380@xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
> >

> >> > Here are the relavent parts of 26 USC 56.
> >> >
> >> > (b) Adjustments applicable to individuals
> >> >
> >> > In determining the amount of the alternative minimum taxable income
> >> > of any taxpayer (other than a corporation), the following treatment
> >> > shall apply (in lieu of the treatment applicable for purposes of
> >> > computing the regular tax):
> >> >
> >> > (1) Limitation on deductions
> >> >
> >> > (A) In general
> >> >
> >> > No deduction shall be allowed--
> >> >
> >> > (ii) for any taxes described in paragraph (1),
> >> > (2), or (3) of section 164(a).
> >> >
> >> > Clause (ii) shall not apply to any amount allowable
> >> > in computing adjusted gross income.
>
> >> > (D) Treatment of certain recoveries
> >> >
> >> > No recovery of any tax to which subparagraph (A)(ii)
> >> > applied shall be included in gross income for purposes of
> >> > determining alternative minimum taxable income.
>

> >> > IRS's interpretations of 26 USC 111(a) and USC 56(b)(1)(D) result in
> >> > "DOUBLE OR NOTHING TAXATION" while my interpretations generally result
> >> > in a "zero sum game". Now what do you think Congress intended. Clue.
> >> > It is obvious when you examine the words in those sections of the IRC.
> >>
> > If you are saying that IRS's interpretations of 26 USC 111(a) and USC
> > 56(b)(1)(D) do not result in "DOUBLE OR NOTHING TAXATION" of tax
> > refunds under certain circumstances you are WRONG.

Lil' Richard:

Apparently I went a little too fast for you.

In addition to the above from 26 USC 56, here is 26 USC 111(a):

(a) Deductions - Gross income does not include income attributable to
the recovery during the taxable year of any amount deducted in any
prior taxable year to the extent such amount did not reduce the amount
of tax imposed by this chapter.

NOW HERE IS THE QUESTION FOR WHICH IRS HAS NO COHERENT RESPONSE:

Precisely what is it about the language in section 111(a) of the
Internal Revenue Code that permits the Internal Revenue Service to
issue instructions that can result in the gross income attributable to
an itemized deduction recovery exceeding the amount of the recovery?

Here are senarios that should help you understand the problems when
there is a tax overpayment and the AMT is in one or both years.

SCENARIO 1 - BASED ON IRS INSTRUCTIONS

AMT PAID IN TAX OVERPAYMENT YEAR AND IN THE YEAR THAT THE REFUND OF THE
OVERPAYMENT IS RECEIVED. NO lONG-TERM CAPITAL GAINS RATE BASED TAX
BENEFIT DERIVED FROM THE TAX OVERPAYMENT ENTERED ON SCHEDULE A

TAX OVERPAYMENT YEAR
Tax overpayment is not allowed as a deduction in determining AMTI.
Income used for tax overpayment is taxed because it is included in
AMTI.

REFUND YEAR
Tax refund in subsequent year not included in AGI or AMTI.

Under this scenario the result produced by IRS instructions comply with
the IRC.

UNDER THE SCENARIOS 2, 3 AND 4, IRS INSTRUCTIONS PRODUCE RESULTS THAT
ARE NOT CONSISTENT WITH THE INTERNAL REVENUE CODE.

SCENARIO 2

SAME AS SCENARIO 1 EXCEPT THER IS A LONG-TERM CAPITAL GAINS RATE BASED
TAX BENEFIT DERIVED FROM THE TAX OVERPAYMENT ENTERED ON SCHEDULE A
SHIFTING SOME CAPITAL GAINS FROM BEING TAXED AT 15 PERCENT TO BEING
TAXED AT 5 PERCENT WHEN DETERMINING THE AMT.

TAX OVERPAYMENT YEAR
Tax overpayment is not allowed as a deduction in determining AMTI.
Therefore, the income used for tax overpayment is taxed because it is
included in AMTI. However, the tax overpayment produces a tax benefit
as a result of the tax overpayment entered on Schedule A reducing the
amount of capital gains taxed at 15 percent and increasing the amount
taxed at 5 percent. Hence there is a tax benefit equal to 10 percent
of amount of capital gains shifted from being taxed at 15 percent to
being taxed at 5 percent. See page 2 of Form 6251.

TAX REFUND YEAR
Per instructions in Publication 525, the portion of the tax overpayment
that shifted capital gains from being taxed at 15 percent to being
taxed at 5 percent is included in gross income on Line 10 or 21 of Form
1040.

The amount included in gross income on Line 10 or 21 of Form 1040 is
subtracted on Line 7 of Form 6251 in determining AMTI.

This complies with the IRC.

HOWEVER, IRS INSTRUCTIONS VIOLATE SECTION 111(A) OF THE IRC BY
INCLUDING THE REFUND INCLUDED IN GROSS INCOME IN THE CALCULATION OF THE
MEDICAL EXPENSE DEDUCTION ALLOWED UNDER THE AMT. THE TAX OVERPAYMENT
DID NOT INCREASE THE MEDICAL EXPENSE DEDUCTION IN THE OVERPAYMENT YEAR,
THEREFORE THE REFUND SHOULD NOT REDUCE THE MEDICAL EXPENSE DEDUCTION.
IRS INSTRUCTIONS THAT THAT USE REFUNDS TO REDUCE MEDICAL EXPENSE
DEDUCTIONS VIOLATE SECTION 111(A) OF THE IRC. THIS MAY NOT BE THE ONLY
EXCEPTION.

SCENARIO 3

AMT IS PAID IN TAX OVERPAYMENT YEAR AND THERE IS A LONG-TERM CAPITAL
GAINS RATE BASED TAX BENEFIT AS DESCRIBED IN SCENARIO 2. REGULAR TAX IS
PAID IN THE YEAR THE REFUND IS RECEIVED.

TAX OVERPAYMENT YEAR
Tax overpayment is not allowed as a deduction in determining AMTI.
Therefore, the income used for tax overpayment is taxed at the AMT
rate.

However, the tax overpayment produces a tax benefit as a result of the
tax overpayment entered on Schedule A reducing the amount of capital
gains taxed at 15 percent and increasing the amount taxed at 5 percent.
Hence there is a tax benefit equal to 10 percent of amount of capital
gains shifted from being taxed at 15 percent to being taxed at 5
percent. See Page 2 of Form 6251.

TAX REFUND YEAR
Because of IRS instructions in Publication 525, the portion of the
refund of the tax overpayment that produced the long-term capital gains
rate based tax benefit when the AMT is paid is included in gross income
by its entry on Line 10 or 21 on Form 1040 and is taxed at the regular
tax rate.

Additionally, the refund entered in gross income under this scenario
can also increase taxable Social Security benefits, reduce deductions
and exemptions, and reduce tax credits allowed.

Under this scenario, the income used to pay the tax overpayment is
taxed at the AMT rate and the refund of the overpayment and any
additional taxable income attributable to the refund is taxed at the
regular tax rate. SO THE INCOME/REFUND CAN BE "DOUBLE (OR EVEN TRIPLE)
TAXED (OR MORE).

THE IRS INSTRUCTIONS THAT TAX REFUNDS UNDER THIS SCENARIO AS DESCRIBED
ABOVE ARE FRAUDULENT.

LEGALLY UNDER THIS SCENARIO, THE REFUNDS CAN ONLY PRODUCE ADDITIONAL
TAXES AS A RESULT OF SHIFTING LONG-TERM CAPITAL GAINS FROM BEING TAXED
AT THE 5 PERCENT RATE TO BEING TAXED AT THE 15 PERCENT RATE.

SCENARIO 4

REGULAR TAX IS PAID IN THE TAX OVERPAYMENT YEAR
AMT IS PAID IN THE REFUND YEAR

TAX OVERPAYMENT YEAR
Income used for a tax overpayment is allowed as a deduction for regular
tax purposes and as a consequence the income used for the overpayment
is not taxed directly. However, the income could reduce, for example,
medical expense deductions.

TAX REFUND YEAR
The tax refund is included in gross income by its entry on Lines 10 or
21 of Form 1040. THE IRS INSTRUCTIONS FRAUDULENTLY EXCLUDE TAX REFUNDS
UNDER THIS SCENARIO FROM ALTERNATIVE MINIMUM TAXABLE INCOME BY THE
NEGATIVE ENTRY OF THE AMOUNTS ON LINE 10 AND 21 OF FORM 1040 ON LINE 7
OF FORM 6251.

THE REFUND CAN FRAUDULENTLY REDUCE THE MEDICAL EXPENSE DEDUCTION
ALLOWED UNDER THE AMT.

QUESTION: IF INCOME USED FOR A TAX OVERPAYMENT IS NOT INCLUDE IN
REGULAR TAXABLE INCOME IN THE YEAR THE REGULAR TAX IS PAID AND THE
REFUND IS EXCLUDED FROM ALTERNATIVE MINIMUM TAXABLE INCOME IN A YEAR
THE AMT IS PAID, JUST WHEN IS THE INCOME/REFUND DIRECTLY?

CLUE: IT ISN'T. UNDER THIS SCENARIO IRS HAS DEFRAUDED THE UNITED
STATES TREASURY SINCE 1988 WITH THE INSTRUCTION THAT EXCLUDES REFUNDS
OF TAX OVERPAYMENTS THAT PRODUCED A TAX BENEFIT IN THE PRIOR YEAR WHEN
THE REGULAR TAX WAS PAID FROM AMTI. THE FRAUD TOTALS IN THE BILLIONS
OF DOLLARS.

Note: An article in the March 10, 2004, edition of Newsday reported
that IRS Commissioner Mark Everson paid the AMT for the first time.
Did Commissioner Everson report a tax benefit on his 2003 tax return
and benefit from a fraudulent IRS instruction? Maybe he will tell us!

Cheers,

WDK


THE FOLLOWING NONSENSE BY RICHARD MCDONALD IS QUARANTINED.

McDONALD OBVIOUSLY HAS NO CLUE.

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>
> It cannot possibly result in double taxation of the TAX REFUND as
> the refund was deducted in the prior year and the tax benefit realized
> from the prior years deduction is added to AGI per 26 USC 111
> and then SUBTRACTED from Taxable Income for the computation
> of AMTI. The CURRENT YEAR state taxes are added to Taxable
> Income for AMTI as they are not deductible for AMT and there is
> no standard deduction for AMT either; this is why the refund of prior
> year taxes is not subject to AMT as it was not allowed in the prior year.
>
> The IRS's instructions properly follow 26 USC 111 for the addition
> of Prior Year Tax Recovery's in excess of standard deduction to Gross
> Income in the Current Year. And the instructions for AMT properly
> add Current Year State Taxes deducted to Taxable Income for AMTI
> per 26 USC 56(b)(1)(A) and subtract Prior Year State Tax recoveries
> that were included in Current Year AGI and were subject to AMT in
> the Prior Year per 26 USC 56(b)(1)(D).
>
> Your problem seems to be that you cannot tell what parts are for the
> deductions for the Current Year and what parts apply to recapture of
> amounts deducted in the Prior Year.

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